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, global supply chain and consumer 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 United States Postal Service (USPS)
• 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
• a breach of security, including a future cyber-attack or other comparable
event
• 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
• expenses and potential impact on client relationships resulting from the
• 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 the
Quarterly Report on Form 10-Q.
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--------------------------------------------------------------------------------Overview
Financial Results Summary - Three Months Ended
Revenue
Three Months Ended March 31,
2020 2019 Actual % change Constant Currency % Change
Business services $ 444,379 $ 406,545 9 % 9 %
Support services 122,015 128,599 (5 )% (5 )%
Financing 89,078 97,043 (8 )% (8 )%
Equipment sales 76,273 89,787 (15 )% (15 )%
Supplies 45,709 50,953 (10 )% (10 )%
Rentals 18,814 22,157 (15 )% (14 )%
Total revenue $ 796,268 $ 795,084 - % - %
Revenue
Three Months Ended March 31,
Constant
currency %
2020 2019 Actual % change change
Global Ecommerce $ 292,323 $ 266,254 10 % 10 %
Presort Services 140,720 134,847 4 % 4 %
Commerce Services 433,043 401,101 8 % 8 %
SendTech Solutions 363,225 393,983 (8 )% (7 )%
Total $ 796,268 $ 795,084 - % - %
EBIT
Three Months Ended March 31,
2020 2019 % change
Global Ecommerce
4 %
Commerce Services (13,780 ) 466 >(100%)
SendTech Solutions 106,562 122,403 (13 )%
Total Segment EBIT
Revenue for the quarter was$796 million and flat compared to the prior year. Business services revenue for the quarter increased over the prior year, but was offset by declines in other revenue line items. Commerce Services revenue grew 8% as Global Ecommerce revenue increased 10% due to increased volumes and Presort revenue increased 4% primarily due to volume growth driven by acquisitions. These revenue increases were offset by a decline in SendTech Solutions revenue of 8%. Segment EBIT decreased 24% primarily due to the mix of business in Global Ecommerce and lower revenue in SendTech Solutions. Refer to Results of Operations section for further information. The global spread of COVID-19 and the efforts to contain it have negatively impacted theU.S. and international economies, decreased demand for a broad variety of goods and services, created disruptions and shortages in global supply chains and caused significant volatility in financial markets. Businesses engaged in mailing and shipping have been designated as an essential service. Accordingly, our facilities continue to operate and many of our employees continue to report to work at these facilities. We have taken additional measures to protect the health and safety of our employees, contractors and the communities in which we operate. Within our facilities, we are enforcing social distancing and sanitizing equipment and facilities multiple times a day. COVID-19 impacted our first quarter financial results in different ways in each of our businesses. In our SendTech Solutions operations, the global shut-down of businesses and increase in the number of clients working remotely significantly impacted our ability to contact and service clients and perform on-site installations. Through the end of February, global shipments were down slightly from the prior year. In March, global shipments declined significantly due to COVID-19, resulting in a significant decrease in equipment sales revenue 29 -------------------------------------------------------------------------------- compared to the prior year. In Global Ecommerce, we experienced low double-digit revenue growth through February; however, that growth rate declined to mid-single-digits in the month of March. The impact on Presort Services revenue was minimal in the quarter partly due to the timing of volumes already scheduled to be processed; however, we began to experience declines in mail volumes in late March. Commerce Services margins were impacted by lower productivity due to social distancing and higher costs related to sanitizing the equipment and facilities. During the quarter, we secured a new five-year$850 million term loan scheduled to mature inJanuary 2025 . The net proceeds from the term loan along with existing cash were used to purchase under a tender offer$928 million in principal of certain notes scheduled to mature between 2021 and 2024. We recognized in other expense a loss of$37 million from the early extinguishment of debt. 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, and we recorded a non-cash, pre-tax goodwill impairment charge of$198 million . See Critical Accounting Estimates for further details. EffectiveJanuary 1, 2020 , we adopted the new accounting standard for credit losses. The new standard requires companies to consider, among other factors, current and future economic factors. As a result of the current economic recessionary conditions and outlook caused by COVID-19, we recorded an additional$11 million credit loss provision. During the quarter, we received an advance of$4 million against our insurance claim related to theOctober 2019 ransomware attack that temporarily disrupted customer access to some services. These proceeds were recognized as income within other expense.
Outlook
COVID-19 and the resulting significantly weaker global economic conditions have negatively impacted our results of operations and are expected to continue to impact our business, results of operations, cash flows and liquidity; however, the severity and duration of this pandemic is uncertain. Accordingly, we are not able to reasonably estimate the full extent of the impact on our operating results, cash flows or financial position for the remainder of the year. From the onset of COVID-19, we have taken, and will continue to take, proactive steps to protect the health and safety of our employees, clients, partners and suppliers. We have business continuity plans in place that are designed to address various threats and vulnerabilities, including a response to pandemics. Employees worldwide that have the ability to work remotely are doing so and will continue to do so until it is no longer required by government authorities. We have also implemented travel restrictions as appropriate. Within our facilities, we are enforcing social distancing and sanitizing equipment and facilities multiple times a day, including during and between shifts. We will continue to incur additional expenses in connection with our response to COVID-19, including costs related to the cleaning of equipment and facilities and redirecting mail and parcels to different facilities within our network. The distancing and safety measures we are taking will also affect productivity in our facilities. 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, the mix of our business is resulting in varying impacts on demand. Early in the second quarter, we are seeing volume growth in domestic delivery and fulfillment as well as digital volumes. We are experiencing declines in cross-border volumes and expect the business to be further impacted by higher transportation costs due to the restrictions on international shipments. 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 as clients reacted to market demand and looked to reduce costs. We expect lower volumes of First Class and Marketing Mail, with a more significant decrease in Marketing Mail volumes; however, we cannot predict the duration and magnitude of these declines or determine when, or if, volumes will return to normal levels. Within Global Ecommerce and Presort Services, we are consolidating facilities in certain markets to reduce costs and improve productivity. Productivity will be impacted throughout the COVID-19 crisis as we continue to enforce social distancing measures and follow safety guidelines. 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 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. We are also monitoring cash collections from our recurring revenue streams; however, at this point it is too early to determine the impact of any delinquency rates. Before the onset of COVID-19 and the resulting economic decline, we had taken steps to reduce and refinance debt and improve liquidity 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 cash flows by approximately$85 million to$95 million . Refer to the Liquidity and Capital Resources section for further information. 30 -------------------------------------------------------------------------------- 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 and cost 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 March 31,
Three Months Ended
Constant
Actual % Currency %
2020 2019 change change 2020 2019 2020 2019
Business services
265,221$ 222,635 9.3 % 16.4 % Segment EBIT Three Months Ended March 31, Actual % 2020 2019 change Segment EBIT$ (29,475 ) $ (14,600 ) >(100%) Global Ecommerce revenue increased 10% in the first quarter of 2020 with higher delivery volumes contributing revenue growth of 9 percentage points and fulfillment services contributing revenue growth of 1 percentage point. Gross margin decreased to 9.3% from 16.4% in the prior year primarily due to the continuing shift in the mix of business to lighter weight, lower margin services and reduced productivity driven by COVID-19. Segment EBIT for the first quarter of 2020 was a loss of$29 million compared to a loss of$15 million in the prior year period. The higher loss was primarily driven by the shift in the mix of business to lighter weight, lower margin services, incremental costs associated with new facilities that opened during the fourth quarter of 2019 and lower labor productivity related to social distancing and safety measures taken in response to COVID-19. 31
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Presort Services
Presort Services includes revenue and related expenses from sortation services
to qualify large volumes of First Class Mail, Marketing Mail and Bound and
Packet Mail (Marketing Mail Flats and Bound Printed Matter) for postal
worksharing discounts.
Revenue Cost of Revenue Gross Margin
Three Months Ended March
Three Months Ended March 31, Three Months Ended March 31, 31,
Constant
Currency %
2020 2019 Actual % change change 2020 2019 2020 2019
Business services $ 140,720 $ 134,847 4 % 4 % $ 105,238 $ 101,962 25.2 % 24.4 %
Segment EBIT
Three Months Ended March 31,
2020 2019 Actual % change
Segment EBIT $ 15,695 $ 15,066 4 %
Presort Services revenue increased 4% in the first quarter of 2020. Acquisitions
contributed a 3% increase while higher revenue per piece contributed a 1%
increase. Volumes increased in the first quarter compared to prior year driven
by higher First Class Mail, Marketing Mail Flats and Bound Printed Matter
volumes from existing clients and from acquisitions, partially offset by lower
Marketing Mail volumes, primarily driven by COVID-19.
Gross margin increased to 25.2% from 24.4% and EBIT increased $0.6 million , or
4%, in the first quarter of 2020. The improvement in gross margin was primarily
due to ongoing productivity actions, which increased Segment EBIT by $3 million .
Segment EBIT also improved $2 million due to lower bad debt expense but was
adversely impacted by $4 million from unrealized losses on certain investment
securities driven by market conditions.
SendTech Solutions
SendTech Solutions includes the revenue and related expenses from sending
technology solutions for physical mailing, digital mailing and shipping,
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 March
Three Months Ended March 31,
Three Months Ended March 31, 31,
Constant
Actual % Currency
2020 2019 change % change 2020 2019 2020 2019
Business services $ 11,336 $ 5,444 >100% >100% $ 4,185 $ 2,189 63.1 % 59.8 %
Support services 122,015 128,599 (5 )% (5 )% 39,628 41,764 67.5 % 67.5 %
Financing 89,078 97,043 (8 )% (8 )% 12,489 11,364 86.0 % 88.3 %
Equipment sales 76,273 89,787 (15 )% (15 )% 57,348 63,407 24.8 % 29.4 %
Supplies 45,709 50,953 (10 )% (10 )% 12,240 13,550 73.2 % 73.4 %
Rentals 18,814 22,157 (15 )% (14 )% 6,378 9,715 66.1 % 56.2 %
Total revenue $ 363,225 $ 393,983 (8 )% (7 )% $ 132,268 $ 141,989 63.6 % 64.0 %
Segment EBIT
Three Months Ended March 31,
Actual %
2020 2019 change
Segment EBIT $ 106,562 $ 122,403 (13 )%
32-------------------------------------------------------------------------------- SendTech Solutions revenue decreased 8% as reported and 7% at constant currency in the first quarter of 2020 compared to the prior year. Equipment sales and supplies decreased 15% and 10%, respectively, as the outbreak of COVID-19 significantly impacted our ability to deliver equipment and supplies and perform on-site installations. Financing revenue decreased 8% primarily driven by a declining lease portfolio and lower late fees of$1 million . Support services revenue decreased 5% and rentals revenue decreased 14% at constant currency primarily driven by a declining meter population. Slightly offsetting these revenue declines, business services revenue increased$6 million primarily due to higher revenue from the SendPro Online product. Gross margin remained relatively flat compared to the prior year. Equipment sales gross margin for the first quarter 2020 decreased 5 percentage points to 24.8%. Current year margins were adversely impacted approximately 11 percentage points due to changing mix of product sales and 3 percentage points due to higher engineering costs. Equipment sales margins in the prior year quarter were adversely impacted 10 percentage points due to a$9 million charge related to a SendPro C tablet replacement program. Rentals gross margin increased to 66.1% from 56.2% primarily due to a$2 million favorable inventory provision adjustment. Business services increased to 63.1% from 59.8%, primarily driven by lower 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 88.3% compared to the prior year primarily due to a higher effective interest rate. Segment EBIT decreased 13% in first quarter of 2020 compared to the prior year, primarily due to the decline in revenue and higher current year credit loss provisions of$10 million due to the current economic recessionary conditions and outlook caused by COVID-19, partially offset by lower expenses of$10 million from cost savings initiatives.
CONSOLIDATED OPERATING AND OTHER EXPENSES
Selling, general and administrative (SG&A) SG&A expense of$249 million in the quarter decreased 5% compared to the prior period, primarily due to lower employee-related costs of$7 million , lower professional fees of$10 million due to contract renegotiations and lower marketing expenses of$2 million , partially offset by an increase in the provision for credit losses of$5 million driven in part by the adoption of a new accounting standard and the current economic recessionary conditions and outlook caused by COVID-19. Research and development (R&D) R&D expense decreased 4% or$0.5 million in the quarter primarily due to lower spending. Restructuring charges Restructuring charges for the each of the three months endedMarch 31, 2020 and 2019 were$4 million . See Note 10 to the Condensed Consolidated Financial Statements for further information.Goodwill impairment In the three months endedMarch 31, 2020 , we recorded a non-cash pre-tax goodwill impairment charge of$198 million associated with our Global Ecommerce reporting unit. See Critical Accounting Estimates for further information. Other expense, net Other expense, net for the three months endedMarch 31, 2020 includes a$37 million loss on the early extinguishment of debt, partially offset by an advance of$4 million against our insurance claim related to theOctober 2019 ransomware attack. Other expense for the three months endedMarch 31, 2019 includes the loss on Market Exits of$18 million , primarily from the write-off of cumulative translation adjustments.
Income taxes See Note 13 to the Condensed Consolidated Financial Statements for further information.
Discontinued Operations Income from discontinued operations for the three months endedMarch 31, 2020 includes the gain on the sale of theAustralia software business, which closed inJanuary 2020 . See Note 4 to the Condensed Consolidated Financial Statements for further information. 33
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LIQUIDITY AND CAPITAL RESOURCES
We are a "Well-Known Seasoned Issuer" within the meaning of Rule 405 under the
Securities Act, which allows us to issue debt securities, preferred stock,
preference stock, common stock, purchase contracts, depositary shares, warrants
and units in an expedited fashion.
At March 31, 2020 , we had cash and cash equivalents and short-term investments
of $730 million , of which $144 million was held by our foreign subsidiaries.
Cash held by our foreign subsidiaries is generally used to support the liquidity
needs of those subsidiaries. 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 support our current cash needs.
Our ability to maintain adequate liquidity for our operations in the future is
dependent upon a number of factors, including our revenue and earnings,
macroeconomic conditions, the length and severity of business disruptions caused
by COVID-19, and our ability to take further cost-savings and cash conservation
measures. At this time, based on our expected impact of COVID-19, we continue to
believe we have the ability to fund our cash needs for the next 12 months. In
April 2020 , in light of the current macroeconomic environment, we drew down $100
million under the credit facility as a precautionary measure. At March 31, 2020 ,
we were in compliance with all covenants. 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 (used in) provided by operating activities $ (66,284 ) $ 69,728 $ (136,012 )
Net cash used in investing activities (25,458 ) (34,887 ) 9,429
Net cash used in financing activities (159,596 ) (63,992 ) (95,604 )
Effect of exchange rate changes on cash and cash
equivalents (10,032 ) 794 (10,826 )
Change in cash and cash equivalents $ (261,370 ) $
(28,357 )
Operating Activities Cash used in operating activities in the first quarter of 2020 was$66 million compared to cash provided by operating activities of$70 million in the prior year. Cash flows from continuing operations decreased$97 million , primarily due to the timing of payments of accounts payable and interest and lower collections of accounts and finance receivables. 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 quarter of 2020 of$25 million consisted primarily of capital expenditures. Cash used in investing activities in the first quarter of 2019 was$35 million , consisting primarily of capital expenditures of$28 million and a decline in customer deposits at thePB Bank of$23 million partially offset by net proceeds of$30 million from investment activities. Financing Activities In the first quarter of 2020, we entered into an$850 million term loan and received net proceeds of$817 million . We used these proceeds and available cash to purchase under a tender offer$928 million of certain of our senior notes scheduled to mature between 2021 and 2024. Cash used in financing activities also include payments of$33 million for premiums and fees associated with the tender offer,$9 million of dividend payments and$5 million of scheduled term loan repayments. In the first quarter of 2019, cash used in financing activities included$39 million to repurchase 5.6 million shares of common stock,$9 million of dividends and$13 million to repay term loan debt. Financings and Capitalization Interest rates on certain notes are subject to adjustment based on changes in our credit ratings. InNovember 2019 , Moody's and Standard and Poor's (S&P) lowered the credit rating of our unsecured notes. As a result, the interest rates on theOctober 2021 notes,May 2022 notes andApril 2023 notes will increase 0.50% in the second quarter of 2020. During the quarter, 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. 34 -------------------------------------------------------------------------------- Dividends and Share Repurchases We paid dividends of$9 million in the quarter. 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. In light of COVID-19 and the current macroeconomic conditions, we expect to continue to pay a quarterly dividend; however, no assurances can be given. We did not repurchase any shares of our common stock during the quarter and have remaining authorization to repurchase up to$16 million of our common shares. Off-Balance Sheet Arrangements AtMarch 31, 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 AtDecember 31, 2019 , the fair value of our Global Ecommerce business exceeded its carrying value by less than 20%. 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 the COVID-19 pandemic. Based on this, 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 and are inherently subject to significant uncertainties. These estimates and assumptions used 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 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. 35
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