PITNEY BOWES INC. Forward-Looking Statements This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains statements that are forward-looking. We want to caution readers that any forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (Securities Act) and Section 21E of the Securities Exchange Act of 1934 (Exchange Act) may change based on various factors. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, and actual results could differ materially. Words such as "estimate," "target," "project," "plan," "believe," "expect," "anticipate," "intend" and similar expressions may identify such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Forward-looking statements in this Form 10-Q speak only as of the date hereof, and forward-looking statements in documents attached that are incorporated by reference speak only as of the date of those documents. Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed or incorporated by reference in our filings with theSecurities and Exchange Commission . In particular, the uncertainty around the severity, magnitude and duration of the COVID-19 pandemic (COVID-19), including governments' responses to COVID-19, its continuing impact on our operations, employees, the availability and cost of labor, global supply chain and demand across our and our clients' businesses, as well as any deterioration or instability in global macroeconomic conditions, could cause our actual results to differ than those expressed in any forward-looking statement. Other factors which could cause future financial performance to differ materially from the expectations, and which may also be exacerbated by COVID-19 or a negative change in the economy, include, without limitation: • declining physical mail volumes
• changes in postal regulations, or the financial health of posts, in the
contractual relationship with the
• expenses and potential impacts resulting from a breach of security,
including cyber-attacks or other comparable events
• our ability to continue to grow volumes, gain additional economies of
scale and improve profitability within our Commerce Services group
• the loss of some of our larger clients in our Commerce Services group
• our success at managing customer credit risk
• third-party suppliers' ability to provide products and services required
by our clients
• changes in labor conditions and transportation costs
• capital market disruptions or credit rating downgrades that adversely
impact our ability to access capital markets at reasonable costs
• our success in developing and marketing new products and services and
obtaining regulatory approvals, if required
• competitive factors, including pricing pressures, technological
developments and the introduction of new products and services by
competitors
• the continued availability and security of key information technology
systems and the cost to comply with information security requirements and
privacy laws
• changes in global political conditions and international trade policies,
including the imposition or expansion of trade tariffs
• our success at managing relationships and costs with outsource providers
of certain functions and operations
• changes in banking regulations or the loss of our
or changes in foreign currency exchange rates and interest rates
• the
• intellectual property infringement claims
• the use of the postal system for transmitting harmful biological agents,
illegal substances or other terrorist attacks
• acts of nature
Further information about factors that could materially affect us, including our
results of operations and financial condition, is contained in Item 1A. "Risk
Factors" in our 2019 Annual Report, as supplemented by Part II, Item 1A in this
Quarterly Report on Form 10-Q.
31
--------------------------------------------------------------------------------Overview
Financial Results Summary - Three and Six Months Ended
Revenue
Three Months Ended June 30, Six Months Ended June 30,
Constant Constant
Currency % Currency %
2020 2019 Actual % change Change 2020 2019 Actual % change change
Business services $ 528,990 $ 417,963 27 % 27 % $ 973,369 $ 824,508 18 % 18 %
Support services 113,786 127,705 (11 )% (10 )% 235,801 256,304 (8 )% (8 )%
Financing 85,462 92,419 (8 )% (7 )% 174,540 189,462 (8 )% (7 )%
Equipment sales 57,837 85,551 (32 )% (32 )% 134,110 175,338 (24 )% (23 )%
Supplies 32,773 46,490 (30 )% (29 )% 78,482 97,443 (19 )% (19 )%
Rentals 18,644 18,445 1 % 2 % 37,458 40,602 (8 )% (7 )%
Total revenue $ 837,492 $ 788,573 6 % 7 % $ 1,633,760 $ 1,583,657 3 % 3 %
Revenue
Three Months Ended June 30, Six Months Ended June 30,
Constant Constant
currency % currency %
2020 2019 Actual % change change 2020 2019 Actual % change change
Global Ecommerce $ 398,453 $ 282,319 41 % 41 % $ 690,776 $ 548,573 26 % 26 %
Presort Services 118,127 128,138 (8 )% (8 )% 258,847 262,985 (2 )% (2 )%
Commerce Services 516,580 410,457 26 % 26 % 949,623 811,558 17 % 17 %
SendTech Solutions 320,912 378,116 (15 )% (15 )% 684,137 772,099 (11 )% (11 )%
Total $ 837,492 $ 788,573 6 % 7 % $ 1,633,760 $ 1,583,657 3 % 3 %
EBIT
Three Months Ended June 30, Six
Months Ended
2020 2019 % change 2020 2019 % change
Global Ecommerce $ (18,894 ) $ (15,576 ) (21 )% $ (48,369 ) $ (30,176 ) (60 )%
Presort Services 12,582 15,462 (19 )% 28,277 30,528 (7 )%
Commerce Services (6,312 ) (114 ) >(100%) (20,092 ) 352 >(100%)
SendTech Solutions 104,268 124,738 (16 )% 210,830 247,141 (15 )%
Total Segment EBIT $ 97,956 $ 124,624 (21 )% $ 190,738 $ 247,493 (23 )%
Revenue increased 6% as reported and 7% at constant currency for the quarter
compared to the prior year. Business services revenue increased 27% driven by
significantly higher volumes in our Global Ecommerce business, which more than
offset double digit declines in equipment sales, supplies and support services
driven in part by the continuing impacts of COVID-19. In our business segments,
Global Ecommerce revenue grew 41% due to increased volumes, Presort Services
revenue declined 8% due to lower First Class and Marketing Mail volumes and
SendTech Solutions revenue declined 15%, primarily due to lower equipment sales
and supplies revenue. Segment EBIT decreased 21%, primarily due to lower revenue
in SendTech Solutions, higher credit losses in Global Ecommerce and increased
costs attributed to COVID-19.
Revenue increased 3% for the first half of 2020 compared to the prior year.
Business services revenue increased 18% due to higher Global Ecommerce volumes
but was partially offset by declines in other revenue line items. In our
business segments, Global Ecommerce revenue grew 26% due to increased volumes,
Presort Services revenue declined 2% and SendTech Solutions revenue declined
11%. Segment EBIT decreased 23%, primarily due to lower revenue in SendTech
Solutions, higher credit losses and the mix of business in Global Ecommerce and
increased costs attributed to COVID-19. Refer to Results of Operations section
for further information.
Commerce Services EBIT margins in the quarter and year-to-date periods were
adversely impacted by increased labor and postal costs at Global Ecommerce due
to the sudden and significant increase in volumes, higher credit losses at
Global Ecommerce, lower volumes at Presort Services and increased costs and
reduced productivity driven by COVID-19. However, the Global Ecommerce EBIT
margin
32
--------------------------------------------------------------------------------
in the second quarter was improved from the first quarter 2020 and prior year
period reflecting scale-related benefits in per unit transportation and
warehousing costs. SendTech Solutions EBIT margins in the quarter and
year-to-date periods were relatively unchanged compared to the prior year
periods despite double-digit declines in revenue, primarily due to lower
operating expenses from cost savings initiatives.
Second Quarter Highlights
We drew down $100 million under our revolving credit facility as a precautionary
measure and invested these proceeds in highly liquid, short-term investments.
We surrendered certain company owned life insurance (COLI) policies and sold our
interest in an equity investment for aggregate proceeds of $58 million . We
recognized a gain of $12 million on the sale of the equity investment and while
the surrender of the COLI policies did not result in a pre-tax gain or loss, the
surrender resulted in a $12 million tax charge.
We also received insurance proceeds of $5 million related to the October 2019
malware attack that temporarily disrupted customer access to some services.
In May 2020 , we were affected by a Maze ransomware attack. Although the Maze
attackers were able to exfiltrate a small amount of our confidential data,
working with our third-party security consultants, we were able to successfully
thwart the attack before any of our operations could be disrupted or any data
encrypted. The attempted attack did not have any impact on our financial
results, and we satisfied all regulatory obligations arising out of the attack.
Impacts of COVID-19
The global spread of COVID-19 and the efforts to contain it adversely affected
the U.S. and international economies, impacting demand for a broad variety of
goods and services, creating disruptions and shortages in global supply chains
and causing significant volatility in financial markets. Our employees worldwide
that have the ability to work remotely are doing so. Our facilities continue to
operate, and many employees continue to report to work at these facilities. We
have implemented additional measures to protect the health and safety of our
employees and contractors, including staggering shifts and breaks to enhance
social distancing, providing personal protection equipment, conducting
temperature checks and sanitizing equipment and facilities multiple times a day.
COVID-19 has impacted our financial results in different ways in each of our
businesses. In Global Ecommerce, we saw significantly higher volumes in the
quarter due to the demand for ecommerce solutions in the current environment. In
Presort Services, First Class and Marketing Mail volumes have declined due to
lower market demand and changing client behaviors in the current environment. As
a result of the additional health and safety measures implemented in all our
Commerce Services facilities, we have incurred, and will continue to incur,
additional costs and reduced productivity.
In SendTech Solutions, the global shut-down of businesses and increase in the
number of clients working remotely significantly adversely impacted demand for
and usage of our mailing equipment and supplies, as well as our ability to
contact and service clients and perform on-site installations. Despite the
negative impacts of COVID-19, we saw improving trends in equipment sales and
supplies revenues as we exited the quarter. Also, as businesses continue to
operate remotely, we are seeing improvement in our cloud-enabled shipping and
mailing solutions.
In March 2020 , the Coronavirus Aid, Relief and Economic Security (CARES) Act was
passed into law in response to market volatility and instability resulting from
COVID-19. The CARES Act includes provisions relating to the deferment of the
employer portion of certain payroll taxes, net operating loss carryback periods
and modifications to the net interest deduction limitations. We continue to
assess the impact of these provisions; which we believe could affect the timing
of certain cash payments but not materially impact our financial position or
results of operations.
Outlook
The severity, duration and governmental responses of COVID-19 are uncertain, and
we are not able to reasonably estimate the full extent of the impact on our
operating results, liquidity, cash flows or financial position for the remainder
of the year. As COVID-19 continues to affect global economies and how businesses
operate, we will continue to take proactive measures to protect the health and
safety of our employees, clients, partners and suppliers. These additional
safety measures will result in additional expenses and reduced productivity.
Corporate and local management will continue to assess conditions to determine
when, or how, employees currently working remotely should return to office
locations.
Our Commerce Services businesses are more demand-driven and it is difficult to
predict how demand and volumes will trend and the impact to productivity
throughout the duration of COVID-19. Within Global Ecommerce, domestic parcel
delivery volumes have increased significantly due to a global market shift to
ecommerce solutions. While we cannot predict the magnitude of volume increases,
we expect
33
--------------------------------------------------------------------------------
this shift to continue throughout the remainder of the year. We signed on over
100 new clients in the second quarter and volumes from these clients will
benefit the second half of the year. Cross-border volumes are still experiencing
declines and we expect this to continue as long as there are restrictions on
international shipments. The sudden and significant increase in volumes resulted
in higher labor and postal costs in the second quarter as we needed to react
quickly to process and deliver these parcels. However, the higher volumes
resulted in scale-related benefits in per unit transportation and warehousing
costs. We expect continued improvements in per unit transportation and
warehousing costs as volumes increase and improvements in per unit labor costs
as the business sizes itself to handle the higher volumes.
In Presort Services, approximately 80% of mail volumes processed are First Class
Mail with the remaining 20% primarily Marketing Mail. There were declines in
mail volumes from the onset of COVID-19; however, these volume declines started
to moderate as we exited the second quarter. For the remainder of the year, we
expect volumes of First Class Mail and Marketing Mail to be lower compared to
the prior year. As businesses begin to re-open and clients return to their
normal behaviors, we expect volumes to improve from current levels; however, the
timing and magnitude of this improvement would be contingent on the severity and
duration of COVID-19. While currently a small part of total volumes, volumes in
Marketing Mail Flats and Bound Printed Matter grew over 30% in the second
quarter and we anticipate these volumes will continue to grow throughout the
remainder of the year.
Within SendTech Solutions, approximately two-thirds of revenue is recurring in
nature and materially contributes to our cash flows. Nonrecurring revenues,
primarily equipment sales and to a lesser extent, supplies, will continue to be
adversely impacted by COVID-19 due to declining demand and usage. We are unable
to predict the duration and magnitude of these declines or determine when, or
if, demand and usage will return to normal levels; however, we would expect to
see improving trends as more businesses start to re-open. As a result of clients
working remotely and the necessity of alternate solutions, we saw an improvement
in our cloud-enabled shipping and mailing solutions during the second quarter
and expect this shift in market preference to continue as clients realize the
value of our digital capabilities. We continue to monitor cash collections from
our recurring revenue streams. There was an increase in delinquency rates during
the second quarter that was in-line with our expectations, but we are starting
to see an improvement in delinquency rates and positive changes in customer
payment behaviors. There are no assurances that this improvement in delinquency
rates and payment behaviors will continue, or that the impacts of COVID-19 will
not result in higher client bankruptcies or account write-offs.
Before the onset of COVID-19 and the resulting economic decline, we had taken
steps to reduce and refinance debt, improve liquidity and strengthen our balance
sheet that we believe will enable us to manage through the current economic
downturn. We are taking further actions to manage cash flows and maintain
liquidity, including, but not limited to, prioritizing our capital expenditures
to essential and necessary investments and reducing targeted loan originations
at Wheeler Financial. We estimate that these actions alone will benefit annual
cash flows by approximately $75 million . Refer to the Liquidity and Capital
Resources section for further information.
34
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
In our Results of Operations discussion, we present and discuss revenue and cost
of revenue at the segment level since our revenue and related costs of revenue
sources are predominantly specific to the segments. Operating and other expenses
are presented and discussed on a consolidated basis as this basis provides a
better understanding of the underlying drivers of change in these expense line
items or they are not allocated to a specific segment.
In our revenue discussion, we may refer to revenue growth on a constant currency
basis. Constant currency measures exclude the impact of changes in currency
exchange rates since the prior period under comparison. We believe that
excluding the impacts of currency exchange rates provides a better understanding
of the underlying revenue performance. Constant currency change is calculated by
converting the current period non-U.S. dollar denominated revenue using the
prior year's exchange rate. Where constant currency measures are not provided,
the actual change and constant currency change are the same.
Management measures segment profitability and performance using segment earnings
before interest and taxes (EBIT). Segment EBIT is calculated by deducting from
segment revenue the related costs and expenses attributable to the segment.
Segment EBIT excludes interest, taxes, general corporate expenses, restructuring
charges, asset impairment charges, goodwill impairment charges and other items
not allocated to a particular business segment. Management believes that it
provides investors a useful measure of operating performance and underlying
trends of the business. Segment EBIT may not be indicative of our overall
consolidated performance and therefore, should be read in conjunction with our
consolidated results of operations.
REVENUE AND SEGMENT EBIT
Global Ecommerce
Global Ecommerce includes the revenue and related expenses from products and
services that enable domestic and cross-border ecommerce transactions, including
shipping, fulfillment and returns.
Revenue Cost of Revenue Gross Margin
Three Months Ended June
Three Months Ended June 30, Three Months Ended June 30, 30,
Constant
Currency %
2020 2019 Actual % change change 2020 2019 2020 2019
Business services $ 398,453 $ 282,319 41 % 41 % $ 355,861 $ 238,854 10.7 % 15.4 %
Segment EBIT
Three Months Ended June 30,
2020 2019 Actual % change
Segment EBIT $ (18,894 ) $ (15,576 ) (21 )%
Global Ecommerce revenue increased 41% in the second quarter of 2020 due to
significant growth in domestic parcel delivery volumes driven in part, by the
market shift to ecommerce solutions as a result of COVID-19, and higher digital
domestic and fulfillment services volumes. This volume growth contributed
revenue growth of 47%, while a decline in domestic returns and cross-border
volumes contributed a 6% decline in revenue.
Gross margin decreased to 10.7% from 15.4% in the prior year primarily due to
higher labor, postage and other incremental costs driven by COVID-19.
Segment EBIT for the second quarter of 2020 was a loss of $19 million compared
to a loss of $16 million in the prior year period. The increased loss was
primarily driven by incremental costs associated with COVID-19 including higher
credit loss expense of $6 million , higher labor and postal costs of $3 million
due to the rapid increase in volumes and incremental costs of $1 million related
to sanitizing and safety measures. Segment EBIT margin of (4.7)% improved from
the prior year period reflecting scale-related benefits in transportation and
warehouse costs offset by increased labor and postal costs driven by COVID-19.
35
--------------------------------------------------------------------------------
Revenue Cost of Revenue Gross Margin
Six Months Ended June
Six Months Ended June 30, Six Months Ended June 30, 30,
Constant
Currency %
2020 2019 Actual % change change 2020 2019 2020 2019
Business services $ 690,776 $ 548,573 26 % 26 % $ 621,082 $ 461,312 10.1 % 15.9 %
Segment EBIT
Six Months Ended June 30,
2020 2019 Actual % change
Segment EBIT $ (48,369 ) $ (30,176 ) (60 )%
Global Ecommerce revenue increased 26% in the first half of 2020 with higher
domestic parcel delivery volumes driven in part, by the market shift to
ecommerce solutions as a result of COVID-19, and higher digital domestic and
fulfillment services volumes contributing revenue growth of 30%, partially
offset by domestic returns volumes contributing a revenue decline of 4%.
Gross margin decreased to 10.1% from 15.9% in the prior year primarily due to a
shift in the mix of business and incremental costs driven by COVID-19.
Segment EBIT for the first half of 2020 was a loss of $48 million compared to a
loss of $30 million in the prior year period. The increased loss was primarily
driven by higher credit loss expense of $8 million , higher labor and postal
costs, incremental costs related to sanitizing and safety measures, the shift in
the mix of business and incremental costs associated with new facilities that
opened during the fourth quarter of 2019.
Presort Services
Presort Services includes revenue and related expenses from sortation services
to qualify large volumes of First Class Mail, Marketing Mail, Marketing Mail
Flats and Bound Printed Matter for postal worksharing discounts.
Revenue Cost of Revenue Gross Margin
Three Months Ended June
Three Months Ended June 30, Three Months Ended June 30, 30,
Constant
Currency %
2020 2019 Actual % change change 2020 2019 2020 2019
Business services $ 118,127 $ 128,138 (8 )% (8 )% $ 93,542 $ 97,040 20.8 % 24.3 %
Segment EBIT
Three Months Ended June 30,
2020 2019 Actual % change
Segment EBIT $ 12,582 $ 15,462 (19 )%
Presort Services revenue decreased 8% in the second quarter of 2020 compared to
the prior year period due to a reduction in volumes. Volumes decreased in the
second quarter compared to the prior year primarily due to lower Marketing Mail
and First Class Mail, driven by COVID-19, partially offset by higher volumes of
Marketing Mail Flats and Bound Printed Matter. Revenue declined 11% due to lower
organic volumes but benefited 3% from acquisitions.
Gross margin decreased to 20.8% from 24.3% and segment EBIT declined 19% in the
second quarter of 2020. The decrease in gross margin was primarily due to the
decline in revenue and increased costs associated with COVID-19, including $2
million for sanitizing and safety measures and quarantine payments. The
increased costs were partially offset by improvements in transportation due to
ongoing productivity initiatives. Segment EBIT includes $3 million from
insurance proceeds related to the malware attack in late 2019. Segment EBIT
margin of 10.7% was down 1 percentage point from the prior year period largely
driven by reduced volumes and increased labor costs driven by COVID-19.
36
--------------------------------------------------------------------------------
Revenue Cost of Revenue Gross Margin
Six Months Ended June 30, Six Months Ended June 30, Six Months Ended June 30,
Constant
Currency %
2020 2019 Actual % change change 2020 2019 2020 2019
Business services $ 258,847 $ 262,985 (2 )% (2 )% $ 198,781 $ 199,002 23.2 % 24.3 %
Segment EBIT
Six Months Ended June 30,
2020 2019 Actual % change
Segment EBIT $ 28,277 $ 30,528 (7 )%
Presort Services revenue decreased 2% in the first half of 2020 compared to the
prior year period due to lower volumes of Marketing Mail and First Class Mail,
driven by COVID-19. Revenue declined 5% due to lower organic volumes but
benefited 3% from acquisitions.
Gross margin decreased to 23.2% from 24.3% and segment EBIT declined $2 million ,
or 7%, in the first half of 2020. Gross margins were adversely impacted by lower
revenue and the incremental costs associated with COVID-19. The decline in
segment EBIT was driven by lower revenue and a $2 million charge for losses on
certain investment securities driven by market conditions, partially offset by
$3 million of insurance proceeds related to the malware attack in late 2019.
SendTech Solutions
SendTech Solutions includes the revenue and related expenses from physical and
digital mailing and shipping technology solutions, financing, services, supplies
and other applications to help simplify and save on the sending, tracking and
receiving of letters, parcels and flats.
Revenue Cost of Revenue Gross Margin
Three Months Ended June
Three Months Ended June 30, Three Months Ended June 30, 30,
Constant
Currency %
2020 2019 Actual % change change 2020 2019 2020 2019
Business services $ 12,410 $ 7,506 65 % 68 % $ 4,856 $ 1,803 60.9 % 76.0 %
Support services 113,786 127,705 (11 )% (10 )% 36,196 40,637 68.2 % 68.2 %
Financing 85,462 92,419 (8 )% (7 )% 11,939 11,043 86.0 % 88.1 %
Equipment sales 57,837 85,551 (32 )% (32 )% 47,866 58,486 17.2 % 31.6 %
Supplies 32,773 46,490 (30 )% (29 )% 8,377 11,758 74.4 % 74.7 %
Rentals 18,644 18,445 1 % 2 % 6,021 8,418 67.7 % 54.4 %
Total revenue $ 320,912 $ 378,116 (15 )% (15 )% $ 115,255 $ 132,145 64.1 % 65.1 %
Segment EBIT
Three Months Ended June 30,
2020 2019 Actual % change
Segment EBIT $ 104,268 $ 124,738 (16 )%
SendTech Solutions revenue decreased 15% in the second quarter of 2020 compared
to the prior year. Equipment sales and supplies decreased 32% and 29% at
constant currency, respectively, as the impacts of COVID-19 impacted our ability
to contact and service clients and perform on-site installations and reduced
usage and demand for supplies. Support services revenue decreased 10% at
constant currency driven by a declining meter population and financing revenue
decreased 7% at constant currency primarily driven by a declining lease
portfolio. Business services revenue increased $5 million , or 68% at constant
currency, primarily due to an overall increase in our shipping offerings.
The total gross margin decreased 1 percentage point compared to the prior year.
Business services gross margin decreased to 60.9% from 76.0% primarily driven by
an increase in sales of lower margin solutions. Equipment sales gross margin
decreased 14 percentage points
37
--------------------------------------------------------------------------------
to 17.2%, primarily due to lower revenue and the mix of product sales due to
delays in scheduling and performing on-site installations of our higher end
products. Rentals gross margin increased to 67.7% from 54.4% primarily due to
lower scrap costs.
We allocate a portion of our total cost of borrowing to financing interest
expense. In computing financing interest expense, we assume an 8:1 debt to
equity leverage ratio and apply our overall effective interest rate to the
average outstanding finance receivables. The financing gross margin decreased to
86.0% from 88.1% compared to the prior year primarily due to a higher effective
interest rate.
Segment EBIT decreased 16% in the second quarter of 2020 compared to the prior
year, driven by the decline in revenue partially offset by lower expenses of $15
million from cost savings initiatives, including professional fees of $3
million , marketing and advertising costs of $3 million , travel related expenses
of $2 million and research and development costs of $4 million . Segment EBIT
margin of 32.5% was flat compared to the prior year period as lower costs offset
the decline in revenue.
Revenue Cost of Revenue Gross Margin
Six Months Ended June 30, Six Months Ended June 30, Six Months Ended June 30,
Constant
Currency %
2020 2019 Actual % change change 2020 2019 2020 2019
Business services $ 23,746 $ 12,950 83 % 86 % $ 9,042 $ 3,992 61.9 % 69.2 %
Support services 235,801 256,304 (8 )% (8 )% 75,823 82,400 67.8 % 67.9 %
Financing 174,540 189,462 (8 )% (7 )% 24,428 22,407 86.0 % 88.2 %
Equipment sales 134,110 175,338 (24 )% (23 )% 105,214 121,893 21.5 % 30.5 %
Supplies 78,482 97,443 (19 )% (19 )% 20,619 25,308 73.7 % 74.0 %
Rentals 37,458 40,602 (8 )% (7 )% 12,400 18,133 66.9 % 55.3 %
Total revenue $ 684,137 $ 772,099 (11 )% (11 )% $ 247,526 $ 274,133 63.8 % 64.5 %
Segment EBIT
Six Months Ended June 30,
2020 2019 Actual % change
Segment EBIT $ 210,830 $ 247,141 (15 )%
SendTech Solutions revenue decreased 11% in the first half of 2020 compared to
the prior year. Equipment sales and supplies decreased 23% and 19% at constant
currency, respectively, as the impacts of COVID-19 impacted our ability to
contact and service clients and perform on-site installations and reduced usage
and demand for supplies. Financing revenue decreased 7% at constant currency,
primarily driven by a declining lease portfolio. Support services and rentals
revenue decreased 8% and 7% at constant currency, respectively, primarily driven
by a declining meter population. Business services revenue increased $11
million , or 86% at constant currency, primarily due to an increase in our
shipping offerings, including the SendPro Online product.
The total gross margin remained relatively flat compared to the prior year.
Business services gross margin decreased to 61.9% from 69.2%, primarily driven
by higher sales of lower margin solutions. Equipment sales gross margin
decreased 9 percentage points to 21.5%, primarily due to lower revenue and the
mix of product sales. Equipment sales margin in the prior year period was
impacted by a $9 million charge related to a SendPro C tablet replacement
program. Rentals gross margin increased to 66.9% from 55.3%, primarily due to
lower scrap costs in the current year and a $2 million favorable inventory
provision adjustment. Financing gross margin decreased to 86.0% from 88.2%
compared to the prior year primarily due to a higher effective interest rate.
Segment EBIT decreased 15% in first half of 2020 compared to the prior year,
primarily due to the decline in revenue and higher credit loss provision of $10
million due to the current economic recessionary conditions and outlook caused
by COVID-19, partially offset by lower expenses of $33 million from cost savings
initiatives, including lower professional fees of $8 million , lower research and
development costs of $6 million and lower marketing expenses of $5 million .
38-------------------------------------------------------------------------------- CONSOLIDATED OPERATING AND OTHER EXPENSES Selling, general and administrative (SG&A) SG&A expense of$234 million in the quarter decreased 3% compared to the prior period, primarily due to lower travel related expenses of$7 million as we imposed travel restrictions in response to COVID-19, lower professional fees of$5 million due to contract renegotiations and lower marketing expenses of$3 million , partially offset by higher credit loss provision of$8 million . SG&A expense of$482 million in the first half of 2020 decreased 4% compared to the prior period, primarily due to lower professional fees of$15 million , lower employee costs of$8 million and lower travel related expenses of$7 million , partially offset by higher credit loss provision of$13 million . Research and development (R&D) R&D expense decreased 45%, or$6 million , in the second quarter of 2020 and decreased 25%, or$7 million , in the first half of 2020 primarily due to lower project spending. Restructuring charges and asset impairments Restructuring charges and asset impairments for the three months endedJune 30, 2020 and 2019 were$5 million and$6 million , respectively, and restructuring charges and asset impairments for the six months endedJune 30, 2020 and 2019 were$9 million and$10 million , respectively. See Note 10 to the Condensed Consolidated Financial Statements for further information.
Other (income) expense Other (income) expense for the three months endedJune 30, 2020 includes a$12 million gain on the sale of an equity investment and insurance proceeds of$5 million related to the 2019 malware attack. Other (income) expense for the six months endedJune 30, 2020 includes a$37 million loss on the early extinguishment of debt, partially offset by the$12 million gain on the sale of an equity investment and$9 million of insurance proceeds related to the 2019 malware attack. Other (income) expense for the six months endedJune 30, 2019 includes a loss of$18 million , primarily from the write-off of cumulative translation adjustments, in connection with the disposition of operations in certain international markets. Income taxes Provision for income taxes for the three and six months endedJune 30, 2020 includes a tax charge of$12 million in connection with the surrender of company owned life insurance policies for which no pre-tax income or loss was recognized. The provision for income taxes for the six months endedJune 30, 2020 also includes a benefit of$2 million on the$198 million goodwill impairment charge as most of this charge is nondeductible. See Note 13 to the Condensed Consolidated Financial Statements for further information. Discontinued Operations Loss from discontinued operations for the three months endedJune 30, 2020 primarily includes a pension settlement charge related to the Software Solutions sale. Income from discontinued operations for the six months endedJune 30, 2020 primarily includes the gain on the sale of theAustralia software business, which closed inJanuary 2020 , and the pension settlement charge related to the Software Solutions sale. See Note 4 to the Condensed Consolidated Financial Statements for further information. 39 -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES AtJune 30, 2020 , we had cash and cash equivalents and short-term investments of$1 billion , of which$182 million was held by our foreign subsidiaries. Cash held by our foreign subsidiaries is generally used to support the liquidity needs of those subsidiaries. Our ability to maintain adequate liquidity for our operations is dependent upon a number of factors, including our revenue and earnings, our clients ability to pay their balances on a timely basis, the length and severity of COVID-19 and its impact on macroeconomic conditions and our ability to take further cost-savings and cash conservation measures if necessary. At this time, we believe that existing cash and investments, cash generated from operations and borrowing capacity under our$500 million revolving credit facility will be sufficient to fund our cash needs for the next 12 months. We continuously review our credit profile through published credit ratings and the credit default swap market. We also monitor the creditworthiness of those banks acting as derivative counterparties, depository banks or credit providers. Cash Flow Summary Changes in cash and cash equivalents were as follows: 2020 2019 Change Net cash provided by operating activities$ 86,809 $ 86,782 $ 27 Net cash used in investing activities (54,545 ) (36,151 ) (18,394 ) Net cash used in financing activities (84,598 ) (146,770 ) 62,172 Effect of exchange rate changes on cash and cash equivalents (9,211 ) (81 ) (9,130 ) Change in cash and cash equivalents$ (61,545 ) $
(96,220 )
Operating Activities Cash provided by operating activities of$87 million in the first half of 2020 was flat compared to the prior year. Cash flows from continuing operations increased$44 million , primarily due to working capital changes including the timing of payments of accounts payable. Cash flows from discontinued operations declined due to taxes related to the gain on the sale of our Software Solutions business. Investing Activities Cash used in investing activities in the first half of 2020 of$55 million includes$65 million of net investment activity and$60 million in capital expenditures, partially offset by$46 million in proceeds from the surrender of COLI policies, higher customer deposits at thePB Bank of$22 million and proceeds of$12 million from the sale of an equity investment. Cash used in investing activities in the first half of 2019 was$36 million , consisting primarily of capital expenditures of$59 million and lower customer deposits at thePB Bank of$8 million , partially offset by net proceeds of$47 million from investment activities. Financing Activities Cash used in financing activities in the first half of 2020 was$85 million , and includes payments of$33 million for premiums and fees associated with the early extinguishment of debt, net cash of$32 million used for debt activities, including$21 million of scheduled term loan repayments and$17 million of dividend payments. See Financings and Capitalization below for additional information. In the first half of 2019, cash used in financing activities included$100 million to repurchase 17.4 million shares of common stock,$25 million to repay term loan debt and$18 million of dividend payments. Financings and Capitalization In the first quarter of 2020, we secured a five-year,$850 million term loan scheduled to matureJanuary 2025 (the 2025 Term Loan). The 2025 Term Loan bears interest at LIBOR plus 5.5% and resets monthly. We used the net proceeds plus available cash to purchase under a tender offer$428 million of theOctober 2021 notes,$250 million of theMay 2022 notes,$125 million of theApril 2023 notes and$125 million of theMarch 2024 notes. We incurred a loss of a$37 million on the early redemption of debt. We have a$500 million secured revolving credit facility that expires inNovember 2024 and contains financial and non-financial covenants. InApril 2020 , in light of the current macroeconomic environment, we drew down$100 million under the credit facility as a precautionary measure. AtJune 30, 2020 , we were in compliance with all covenants. Interest rates on certain notes are subject to adjustment based on changes in our credit ratings. As a result of credit rating downgrades inNovember 2019 andMay 2020 , the interest rates on theOctober 2021 notes andApril 2023 notes increased 0.50% and the interest rate on theMay 2022 notes increased 0.75%. Further, the interest rates on theOctober 2021 notes andApril 2023 notes will increase an additional 0.25% in the fourth quarter of 2020. 40 -------------------------------------------------------------------------------- Dividends and Share Repurchases Each quarter, our Board of Directors considers our recent and projected earnings and other capital needs and priorities in deciding whether to approve the payment, as well as the amount, of a dividend. There are no material restrictions on our ability to declare dividends. We expect to continue to pay a quarterly dividend, however; in light of COVID-19 and the current macroeconomic conditions, no assurances can be given. We did not repurchase any shares of our common stock during the first half of 2020. We have remaining authorization to repurchase up to$16 million of our common stock. Contractual Obligations and Off-Balance Sheet Arrangements We have entered into three equipment leases for our Commerce Services operations that will commence in the fourth quarter with terms ranging from seven to nine years. Aggregate lease payments for the three leases will approximate$30 million . AtJune 30, 2020 , we had no off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on our financial condition, results of operations or liquidity. Critical Accounting EstimatesGoodwill impairment review During the first quarter of 2020, our Global Ecommerce reporting unit experienced weaker than expected performance, in part due to the macroeconomic conditions resulting from COVID-19. AtDecember 31, 2019 , the fair value of our Global Ecommerce business exceeded its carrying value by less than 20% and the deteriorating macroeconomic conditions and uncertainty brought on by COVID-19 caused us to evaluate the Global Ecommerce goodwill for impairment. To test the Global Ecommerce goodwill for impairment, we determined the fair value of the Global Ecommerce reporting unit and compared it to the reporting unit's carrying value, including goodwill. We engaged a third-party to assist in the determination of the fair value of the reporting unit. The determination of fair value, and the resulting impairment charge, relied on internal projections developed using numerous estimates and assumptions that are inherently subject to significant uncertainties. These estimates and assumptions included revenue growth, profitability, cash flows, capital spending and other available information. The determination of fair value also incorporated a risk-adjusted discount rate, terminal growth rates and other assumptions that market participants may use. Changes in any of these estimates or assumptions could materially affect the determination of fair value and the associated goodwill impairment charge and could result in an additional impairment charge to be recorded in the future. These estimates and assumptions are considered Level 3 inputs under the fair value hierarchy. We determined that the reporting unit's estimated fair value was less than its carrying value and recorded a non-cash, pre-tax goodwill impairment charge of$198 million in the first quarter to reduce the carrying value of the Global Ecommerce reporting unit to its estimated fair value. Regulatory Matters There have been no significant changes to the regulatory matters disclosed in our 2019 Annual Report. 41
--------------------------------------------------------------------------------
© Edgar Online, source
