UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20192020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number: 1-03579
PITNEY BOWES INC.
(Exact name of registrant as specified in its charter)
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| | | | |
State of incorporation: | Delaware | | I.R.S. Employer Identification No. | 06-0495050 |
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Address: | 3001 Summer Street, | Stamford, | Connecticut | 06926 | |
Telephone Number: | (203) | 356-5000 | | | | |
Securities registered pursuant to Section 12(b) of the Act: |
| | | | |
Title of Each Class | | Trading Symbol(s) | | Name of Each Exchange on Which Registered |
Common Stock, $1 par value per share | | PBI | | New York Stock Exchange |
6.7% Notes due 2043 | | PBI.PRB | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| | | | | |
Large accelerated filer | þ | Accelerated filer | o | Non-accelerated filer | o |
Smaller reporting company | ☐ | Emerging growth company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
As of OctoberJuly 31, 20192020, 170,848,234173,082,121 shares of common stock, par value $1 per share, of the registrant were outstanding.
PITNEY BOWES INC.
INDEX
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| Condensed Consolidated Statements of Income (Loss) for the Three and NineSix Months Ended SeptemberJune 30, 20192020 and 20182019 | |
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| Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and NineSix Months Ended SeptemberJune 30, 20192020 and 20182019 | |
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| Condensed Consolidated Balance Sheets at SeptemberJune 30, 20192020 and December 31, 20182019 | |
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| Condensed Consolidated Statements of Cash Flows for the NineSix Months Ended SeptemberJune 30, 20192020 and 20182019 | |
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PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
PITNEY BOWES INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited; in thousands, except per share amounts)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | 2020 | | 2019 |
Revenue: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Business services | | $ | 528,990 |
| | $ | 417,963 |
| | $ | 973,369 |
| | $ | 824,508 |
|
Support services | | 113,786 |
| | 127,705 |
| | 235,801 |
| | 256,304 |
|
Financing | | 85,462 |
| | 92,419 |
| | 174,540 |
| | 189,462 |
|
Equipment sales | $ | 89,618 |
| | $ | 88,799 |
| | $ | 264,956 |
| | $ | 289,318 |
| 57,837 |
| | 85,551 |
| | 134,110 |
| | 175,338 |
|
Supplies | 44,818 |
| | 50,403 |
| | 142,261 |
| | 165,853 |
| 32,773 |
| | 46,490 |
| | 78,482 |
| | 97,443 |
|
Rentals | 19,737 |
| | 21,432 |
| | 60,339 |
| | 65,852 |
| 18,644 |
| | 18,445 |
| | 37,458 |
| | 40,602 |
|
Financing | 90,577 |
| | 96,799 |
| | 280,039 |
| | 294,277 |
| |
Support services | 126,274 |
| | 138,055 |
| | 382,578 |
| | 417,303 |
| |
Business services | 419,101 |
| | 364,793 |
| | 1,243,609 |
| | 1,121,505 |
| |
Total revenue | 790,125 |
| | 760,281 |
| | 2,373,782 |
| | 2,354,108 |
| 837,492 |
| | 788,573 |
| | 1,633,760 |
| | 1,583,657 |
|
Costs and expenses: | | | | | | | | | | | | | | |
Cost of business services | | 454,311 |
| | 337,918 |
| | 828,976 |
| | 664,964 |
|
Cost of support services | | 36,725 |
| | 40,520 |
| | 76,485 |
| | 82,367 |
|
Financing interest expense | | 11,939 |
| | 11,043 |
| | 24,428 |
| | 22,407 |
|
Cost of equipment sales | 59,859 |
| | 52,209 |
| | 182,094 |
| | 173,626 |
| 47,920 |
| | 58,570 |
| | 105,279 |
| | 122,235 |
|
Cost of supplies | 12,225 |
| | 13,967 |
| | 37,533 |
| | 46,652 |
| 8,379 |
| | 11,758 |
| | 20,619 |
| | 25,308 |
|
Cost of rentals | 5,090 |
| | 9,174 |
| | 23,223 |
| | 30,386 |
| 6,022 |
| | 8,418 |
| | 12,400 |
| | 18,133 |
|
Financing interest expense | 11,026 |
| | 10,849 |
| | 33,433 |
| | 33,107 |
| |
Cost of support services | 41,086 |
| | 45,872 |
| | 123,453 |
| | 134,204 |
| |
Cost of business services | 338,519 |
| | 287,237 |
| | 1,003,483 |
| | 872,183 |
| |
Selling, general and administrative | 254,092 |
| | 241,350 |
| | 757,228 |
| | 759,469 |
| 233,631 |
| | 241,467 |
| | 482,264 |
| | 503,136 |
|
Research and development | 12,272 |
| | 15,636 |
| | 38,421 |
| | 44,651 |
| 7,467 |
| | 13,572 |
| | 19,583 |
| | 26,149 |
|
Restructuring charges and asset impairments, net | 47,017 |
| | 6,099 |
| | 56,616 |
| | 18,771 |
| |
Restructuring charges and asset impairments | | 4,922 |
| | 5,899 |
| | 8,739 |
| | 9,599 |
|
Goodwill impairment | | — |
| | — |
| | 198,169 |
| | — |
|
Interest expense, net | 28,704 |
| | 26,588 |
| | 84,325 |
| | 89,377 |
| 26,446 |
| | 28,019 |
| | 52,329 |
| | 55,621 |
|
Other components of net pension and postretirement cost | (882 | ) | | (1,852 | ) | | (3,138 | ) | | (6,070 | ) | |
Other expense | 667 |
| | 7,964 |
| | 18,350 |
| | 7,964 |
| |
Other components of net pension and postretirement cost (income) | | 386 |
| | (1,618 | ) | | 235 |
| | (2,256 | ) |
Other (income) expense | | (17,375 | ) | | (27 | ) | | 16,112 |
| | 17,683 |
|
Total costs and expenses | 809,675 |
| | 715,093 |
| | 2,355,021 |
| | 2,204,320 |
| 820,773 |
| | 755,539 |
| | 1,845,618 |
| | 1,545,346 |
|
(Loss) income from continuing operations before taxes | (19,550 | ) | | 45,188 |
| | 18,761 |
| | 149,788 |
| |
(Benefit) provision for income taxes | (24,895 | ) | | (2,468 | ) | | (13,351 | ) | | 17,235 |
| |
Income from continuing operations | 5,345 |
| | 47,656 |
| | 32,112 |
| | 132,553 |
| |
Income (loss) from continuing operations before taxes | | 16,719 |
| | 33,034 |
| | (211,858 | ) | | 38,311 |
|
Provision for income taxes | | 17,016 |
| | 3,724 |
| | 6,986 |
| | 11,544 |
|
(Loss) income from continuing operations | | (297 | ) | | 29,310 |
| | (218,844 | ) | | 26,767 |
|
(Loss) income from discontinued operations, net of tax | (8,470 | ) | | 32,621 |
| | (14,199 | ) | | 59,289 |
| (3,032 | ) | | (5,613 | ) | | 7,032 |
| | (5,729 | ) |
Net (loss) income | $ | (3,125 | ) | | $ | 80,277 |
| | $ | 17,913 |
| | $ | 191,842 |
| $ | (3,329 | ) | | $ | 23,697 |
| | $ | (211,812 | ) | | $ | 21,038 |
|
Basic earnings (loss) per share (1): | | | | | | | | |
Basic (loss) earnings per share (1): | | | | | | | | |
Continuing operations | $ | 0.03 |
| | $ | 0.25 |
| | $ | 0.18 |
| | $ | 0.71 |
| $ | — |
| | $ | 0.17 |
| | $ | (1.28 | ) | | $ | 0.15 |
|
Discontinued operations | (0.05 | ) | | 0.17 |
| | (0.08 | ) | | 0.32 |
| (0.02 | ) | | (0.03 | ) | | 0.04 |
| | (0.03 | ) |
Net (loss) income | $ | (0.02 | ) | | $ | 0.43 |
| | $ | 0.10 |
| | $ | 1.02 |
| $ | (0.02 | ) | | $ | 0.13 |
| | $ | (1.24 | ) | | $ | 0.12 |
|
Diluted earnings (loss) per share (1): | | | | | | | | |
Diluted (loss) earnings per share (1): | | | | | | | | |
Continuing operations | $ | 0.03 |
| | $ | 0.25 |
| | $ | 0.18 |
| | $ | 0.70 |
| $ | — |
| | $ | 0.16 |
| | $ | (1.28 | ) | | $ | 0.15 |
|
Discontinued operations | (0.05 | ) | | 0.17 |
| | (0.08 | ) | | 0.32 |
| (0.02 | ) | | (0.03 | ) | | 0.04 |
| | (0.03 | ) |
Net (loss) income | $ | (0.02 | ) | | $ | 0.43 |
| | $ | 0.10 |
| | $ | 1.02 |
| $ | (0.02 | ) | | $ | 0.13 |
| | $ | (1.24 | ) | | $ | 0.12 |
|
(1) The sum of the earnings per share amounts may not equal the totals due to rounding.
See Notes to Condensed Consolidated Financial Statements
PITNEY BOWES INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited; in thousands)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net (loss) income | $ | (3,125 | ) | | $ | 80,277 |
| | $ | 17,913 |
| | $ | 191,842 |
|
Other comprehensive (loss) income, net of tax: | | | | | | | |
Foreign currency translation, net of tax of $(655), $(3,474), $(1,078) and $(3,474), respectively | (27,962 | ) | | (2,475 | ) | | (6,584 | ) | | (30,334 | ) |
Net unrealized gain on cash flow hedges, net of tax of $51, $174, $27 and $474, respectively | 149 |
| | 522 |
| | 78 |
| | 773 |
|
Net unrealized gain (loss) on investment securities, net of tax of $509, $(417), $2,573 and $(2,230), respectively | 1,487 |
| | (1,218 | ) | | 7,516 |
| | (6,514 | ) |
Amortization of pension and postretirement costs, net of tax benefits of $2,633, $2,399, $7,406 and $7,766, respectively | 7,552 |
| | 8,810 |
| | 21,499 |
| | 24,850 |
|
Other comprehensive (loss) income, net of tax | (18,774 | ) | | 5,639 |
| | 22,509 |
| | (11,225 | ) |
Comprehensive (loss) income | $ | (21,899 | ) | | $ | 85,916 |
| | $ | 40,422 |
| | $ | 180,617 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Net (loss) income | $ | (3,329 | ) | | $ | 23,697 |
| | $ | (211,812 | ) | | $ | 21,038 |
|
Other comprehensive income, net of tax: | | | | | | | |
Foreign currency translation, net of tax of $1,105, $(1,347), $(1,712) and $(423), respectively | 10,099 |
| | 10 |
| | (17,636 | ) | | 21,378 |
|
Net unrealized loss on cash flow hedges, net of tax of $(421), $(80), $(479) and $(24), respectively | (1,271 | ) | | (234 | ) | | (1,445 | ) | | (71 | ) |
Net unrealized gain on investment securities, net of tax of $467, $1,100, $900 and $2,064, respectively | 1,407 |
| | 3,213 |
| | 2,715 |
| | 6,029 |
|
Amortization of pension and postretirement costs, net of tax benefits of $3,502, $2,124, $6,152 and $4,773, respectively | 11,377 |
| | 7,311 |
| | 20,247 |
| | 13,947 |
|
Other comprehensive income, net of tax | 21,612 |
| | 10,300 |
| | 3,881 |
| | 41,283 |
|
Comprehensive income (loss) | $ | 18,283 |
| | $ | 33,997 |
| | $ | (207,931 | ) | | $ | 62,321 |
|
See Notes to Condensed Consolidated Financial Statements
PITNEY BOWES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except share and per share amounts)
| | | September 30, 2019 | | December 31, 2018 | June 30, 2020 | | December 31, 2019 |
ASSETS | |
| | |
| |
| | |
|
Current assets: | |
| | |
| |
| | |
|
Cash and cash equivalents | $ | 514,851 |
| | $ | 867,262 |
| $ | 862,897 |
| | $ | 924,442 |
|
Short-term investments | 137,032 |
| | 59,391 |
| |
Accounts and other receivables (net of allowance of $20,971 and $17,443, respectively) | 365,522 |
| | 371,797 |
| |
Short-term finance receivables (net of allowance of $12,819 and $12,418, respectively) | 617,178 |
| | 653,236 |
| |
Short-term investments (includes $28,221 and $35,879, respectively, reported at fair value) | | 153,221 |
| | 115,879 |
|
Accounts and other receivables (net of allowance of $32,474 and $17,830, respectively) | | 391,748 |
| | 373,471 |
|
Short-term finance receivables (net of allowance of $20,999 and $12,556, respectively) | | 555,196 |
| | 629,643 |
|
Inventories | 76,339 |
| | 62,279 |
| 73,653 |
| | 68,251 |
|
Current income taxes | 25,598 |
| | 5,947 |
| 1,893 |
| | 5,565 |
|
Other current assets and prepayments | 101,829 |
| | 74,782 |
| 121,924 |
| | 101,601 |
|
Assets of discontinued operations | 568,413 |
| | 602,823 |
| — |
| | 17,229 |
|
Total current assets | 2,406,762 |
| | 2,697,517 |
| 2,160,532 |
| | 2,236,081 |
|
Property, plant and equipment, net | 371,666 |
| | 398,501 |
| 375,465 |
| | 376,177 |
|
Rental property and equipment, net | 39,400 |
| | 46,228 |
| 40,875 |
| | 41,225 |
|
Long-term finance receivables (net of allowance of $7,305 and $7,804 respectively) | 616,746 |
| | 635,908 |
| |
Long-term finance receivables (net of allowance of $17,115 and $7,095 respectively) | | 583,839 |
| | 625,487 |
|
Goodwill | 1,317,037 |
| | 1,332,351 |
| 1,132,785 |
| | 1,324,179 |
|
Intangible assets, net | 199,715 |
| | 213,200 |
| 175,460 |
| | 190,640 |
|
Operating lease assets | 172,617 |
| | 152,554 |
| 199,162 |
| | 200,752 |
|
Noncurrent income taxes | 80,561 |
| | 65,001 |
| 68,449 |
| | 71,903 |
|
Other assets | 392,720 |
| | 397,159 |
| |
Other assets (includes $264,500 and $230,442, respectively, reported at fair value) | | 379,611 |
| | 400,456 |
|
Total assets | $ | 5,597,224 |
| | $ | 5,938,419 |
| $ | 5,116,178 |
| | $ | 5,466,900 |
|
| | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| | | |
|
Current liabilities: | |
| | |
| |
| | |
|
Accounts payable and accrued liabilities | $ | 1,337,214 |
| | $ | 1,348,127 |
| $ | 732,048 |
| | $ | 793,690 |
|
Customer deposits at Pitney Bowes Bank | | 613,449 |
| | 591,118 |
|
Current operating lease liabilities | 34,091 |
| | 35,208 |
| 35,432 |
| | 36,060 |
|
Current portion of long-term debt | 501,728 |
| | 199,535 |
| 163,257 |
| | 20,108 |
|
Advance billings | 106,968 |
| | 116,862 |
| 122,606 |
| | 101,920 |
|
Current income taxes | 8,525 |
| | 15,284 |
| 11,723 |
| | 17,083 |
|
Liabilities of discontinued operations | 157,034 |
| | 174,798 |
| — |
| | 9,713 |
|
Total current liabilities | 2,145,560 |
| | 1,889,814 |
| 1,678,515 |
| | 1,569,692 |
|
Long-term debt | 2,567,363 |
| | 3,066,073 |
| 2,553,490 |
| | 2,719,614 |
|
Deferred taxes on income | 253,151 |
| | 253,560 |
| 270,376 |
| | 274,435 |
|
Tax uncertainties and other income tax liabilities | 45,179 |
| | 39,548 |
| 35,928 |
| | 38,834 |
|
Noncurrent operating lease liabilities | 148,125 |
| | 125,294 |
| 177,901 |
| | 177,711 |
|
Other noncurrent liabilities | 412,434 |
| | 462,288 |
| 355,388 |
| | 400,518 |
|
Total liabilities | 5,571,812 |
| | 5,836,577 |
| 5,071,598 |
| | 5,180,804 |
|
| | | | | | |
Commitments and contingencies (See Note 14) |
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| | | | | | |
Stockholders’ equity: | | | | | | |
Cumulative preferred stock, $50 par value, 4% convertible | — |
| | 1 |
| |
Cumulative preference stock, no par value, $2.12 convertible | — |
| | 396 |
| |
Common stock, $1 par value (480,000,000 shares authorized; 323,337,912 shares issued) | 323,338 |
| | 323,338 |
| 323,338 |
| | 323,338 |
|
Additional paid-in capital | 101,651 |
| | 121,475 |
| 68,498 |
| | 98,748 |
|
Retained earnings | 5,270,741 |
| | 5,279,682 |
| 5,188,119 |
| | 5,438,930 |
|
Accumulated other comprehensive loss | (926,452 | ) | | (948,961 | ) | (836,262 | ) | | (840,143 | ) |
Treasury stock, at cost (153,182,446 and 135,662,830 shares, respectively) | (4,743,866 | ) | | (4,674,089 | ) | |
Treasury stock, at cost (151,737,399 and 152,888,969 shares, respectively) | | (4,699,113 | ) | | (4,734,777 | ) |
Total stockholders’ equity | 25,412 |
| | 101,842 |
| 44,580 |
| | 286,096 |
|
Total liabilities and stockholders’ equity | $ | 5,597,224 |
| | $ | 5,938,419 |
| $ | 5,116,178 |
| | $ | 5,466,900 |
|
See Notes to Condensed Consolidated Financial Statements
PITNEY BOWES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
| | | Nine Months Ended September 30, | Six Months Ended June 30, |
| 2019 | | 2018 | 2020 | | 2019 |
Cash flows from operating activities: | |
| | |
| |
| | |
|
Net income | $ | 17,913 |
| | $ | 191,842 |
| |
Loss (income) from discontinued operations, net of tax | 14,199 |
| | (59,289 | ) | |
Net (loss) income | | $ | (211,812 | ) | | $ | 21,038 |
|
(Income) loss from discontinued operations, net of tax | | (7,032 | ) | | 5,729 |
|
Restructuring payments | (18,845 | ) | | (39,242 | ) | (11,365 | ) | | (13,005 | ) |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| |
Adjustments to reconcile net loss to net cash provided by operating activities: | | |
| | |
|
Restructuring charges and asset impairments | | 8,739 |
| | 9,599 |
|
Loss on disposition of businesses | | — |
| | 17,683 |
|
Gain on sale of equity investment | | (11,908 | ) | | — |
|
Loss on extinguishment of debt | | 36,987 |
| | — |
|
Depreciation and amortization | 118,514 |
| | 112,155 |
| 81,787 |
| | 77,977 |
|
Goodwill impairment | | 198,169 |
| | — |
|
Stock-based compensation | 15,867 |
| | 15,771 |
| 6,950 |
| | 9,165 |
|
Restructuring charges and asset impairments, net | 56,616 |
| | 18,771 |
| |
Loss on disposition of businesses | 17,683 |
| | — |
| |
Allowance for credit losses | | 27,941 |
| | 14,707 |
|
Amortization of debt fees | | 5,054 |
| | 4,924 |
|
Changes in operating assets and liabilities, net of acquisitions/divestitures: | |
| | |
| |
| | |
|
Decrease in accounts receivable | 12,509 |
| | 1,655 |
| |
(Increase) decrease in accounts receivable | | (49,403 | ) | | 18,565 |
|
Decrease in finance receivables | 34,674 |
| | 63,128 |
| 84,342 |
| | 34,984 |
|
Increase in inventories | (14,559 | ) | | (1,889 | ) | (6,306 | ) | | (10,881 | ) |
Increase in other current assets and prepayments | (30,546 | ) | | (10,585 | ) | (24,067 | ) | | (33,476 | ) |
Decrease in accounts payable and accrued liabilities | (17,526 | ) | | (80,905 | ) | (25,168 | ) | | (53,885 | ) |
(Decrease) increase in current and noncurrent income taxes | (30,401 | ) | | 194 |
| |
Decrease in advance billings | (3,802 | ) | | (12,403 | ) | |
Increase in current and noncurrent income taxes | | 29,959 |
| | 663 |
|
Increase (decrease) in advance billings | | 21,402 |
| | (941 | ) |
Decrease in pension and retiree medical liabilities | | (24,164 | ) | | (22,772 | ) |
Other, net | (5,870 | ) | | (9,061 | ) | (4,873 | ) | | 1,174 |
|
Net cash provided by operating activities - continuing operations | 166,426 |
| | 190,142 |
| 125,232 |
| | 81,248 |
|
Net cash provided by operating activities - discontinued operations | 15,858 |
| | 68,428 |
| |
Net cash (used in) provided by operating activities - discontinued operations | | (38,423 | ) | | 5,534 |
|
Net cash provided by operating activities | 182,284 |
| | 258,570 |
| 86,809 |
| | 86,782 |
|
Cash flows from investing activities: | |
| | |
| |
| | |
|
Purchases of available-for-sale securities | (45,178 | ) | | (74,270 | ) | (115,565 | ) | | (6,391 | ) |
Proceeds from sales/maturities of available-for-sale securities | 78,024 |
| | 67,354 |
| 94,425 |
| | 54,964 |
|
Net activity from short-term and other investments | (92,418 | ) | | 8,479 |
| (44,035 | ) | | (1,608 | ) |
Capital expenditures | (95,221 | ) | | (105,295 | ) | (59,954 | ) | | (59,187 | ) |
Acquisitions, net of cash acquired | (22,100 | ) | | (2,407 | ) | (6,608 | ) | | (4,882 | ) |
Change in reserve account deposits | 3,125 |
| | 6,864 |
| |
Sale of other investments (See Note 8) | | 58,248 |
| | — |
|
Increase (decrease) in customer deposits at Pitney Bowes Bank | | 22,331 |
| | (8,316 | ) |
Other investing activities | (9,341 | ) | | (2,500 | ) | (885 | ) | | (8,591 | ) |
Net cash used in investing activities - continuing operations | (183,109 | ) | | (101,775 | ) | (52,043 | ) | | (34,011 | ) |
Net cash (used in) provided by investing activities - discontinued operations | (18,572 | ) | | 336,016 |
| |
Net cash (used in) provided by investing activities | (201,681 | ) | | 234,241 |
| |
Net cash used in investing activities - discontinued operations | | (2,502 | ) | | (2,140 | ) |
Net cash used in investing activities | | (54,545 | ) | | (36,151 | ) |
Cash flows from financing activities: | |
| | |
| |
| | |
|
Increase in short-term borrowings | | 100,000 |
| | — |
|
Proceeds from the issuance of long-term debt | | 816,544 |
| | — |
|
Principal payments of long-term debt | (202,640 | ) | | (565,141 | ) | (948,224 | ) | | (25,087 | ) |
Premiums and fees paid to extinguish debt | | (32,645 | ) | | — |
|
Dividends paid to stockholders | (26,854 | ) | | (105,296 | ) | (17,099 | ) | | (18,346 | ) |
Common stock repurchases | (105,000 | ) | | — |
| — |
| | (100,000 | ) |
Other financing activities | 7,302 |
| | (55,485 | ) | (3,174 | ) | | (3,337 | ) |
Net cash used in financing activities | (327,192 | ) | | (725,922 | ) | (84,598 | ) | | (146,770 | ) |
Effect of exchange rate changes on cash and cash equivalents | (5,822 | ) | | (15,653 | ) | (9,211 | ) | | (81 | ) |
Change in cash and cash equivalents | (352,411 | ) | | (248,764 | ) | (61,545 | ) | | (96,220 | ) |
Cash and cash equivalents at beginning of period | 867,262 |
| | 1,009,021 |
| 924,442 |
| | 867,262 |
|
Cash and cash equivalents at end of period | 514,851 |
| | 760,257 |
| $ | 862,897 |
| | $ | 771,042 |
|
Less: Cash and cash equivalents of discontinued operations | — |
| | 1,026 |
| |
Cash and cash equivalents of continuing operations at end of period | $ | 514,851 |
| | $ | 759,231 |
| |
| | | | | | |
Cash interest paid | $ | 110,943 |
| | $ | 127,624 |
| $ | 82,732 |
| | $ | 78,280 |
|
Cash income tax payments, net of refunds | $ | 25,527 |
| | $ | 17,168 |
| $ | 12,176 |
| | $ | 17,348 |
|
See Notes to Condensed Consolidated Financial Statements
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
1. Description of Business and Basis of Presentation
Description of Business
Pitney Bowes Inc. (we, us, our, or the company) is a global technology company providing innovative products and commerce solutions that power billions of transactions and help our clients navigate the complex world of commerce. We offer shipping, mailing, fulfillment, returns and cross-border ecommerce products and solutions that enable the sending of parcels and packages across the globe.transactions. Clients around the world rely on the accuracy and precision delivered by Pitney Bowes solutions.our equipment, solutions, analytics, and application programming interface technology in the areas of ecommerce fulfillment, shipping and returns, cross-border ecommerce, office mailing and shipping, presort services and financing. Pitney Bowes Inc. was incorporated in the state of Delaware in 1920. For more information about us, our products, services and solutions, visit www.pb.comwww.pitneybowes.com.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In addition, the December 31, 20182019 Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In management's opinion, all adjustments, consisting only of normal recurring adjustments, considered necessary to fairly state our financial position, results of operations and cash flows for the periods presented have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 20192020., particularly in light of the novel coronavirus pandemic (COVID-19) and its effects on domestic and global businesses and economies. These statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report to Stockholders on Form 10-K for the year ended December 31, 2018 (20182019 (2019 Annual Report).
In Certain prior year amounts have been reclassified to conform to the quarter, we recast our segment reporting to combine North America Mailing and International Mailing into the Sending Technology Solutions (SendTech Solutions) segment to reflect how we manage these operations and the products and services provided to our clients.current year presentation.
In August 2019, we entered into a definitive agreement to sell our Software Solutions business. Software Solutions offers customer information management, location intelligencebusiness and customer engagement products and solutionsrecast prior periods to help clients market to their customers. Thereflect the operating results of the Software Solutions business is now reported as a discontinued operationoperations. The sale was completed in our Condensed Consolidated Financial Statements and prior periods have been recast to conform toDecember 2019, with the current period presentation.exception of the software business in Australia, which closed in January 2020. See Note 4 for further details.additional information.
Accounts and other receivables includes other receivables of $61 million at June 30, 2020 and $91 million at December 31, 2019. In January 2019, we sold the direct operations and moved to a dealer model in 6 smaller international markets within the SendTechSending Technology Solutions segment (Market Exits) and recognized a pre-tax loss of $18 million in other expense.
Accounts and other(SendTech Solutions). Other receivables includes othergross receivables of $102$24 million at September 30, 2019related to these direct operations.
Risks and $75 million at December 31, 2018.Uncertainties
BasedThe effects of COVID-19 on their nature,global economies and businesses continues to impact how we determined that certain costs previously classifiedconduct business and our operating results, financial position and cash flows. There still remains uncertainty around the severity, duration and governments' responses to COVID-19, particularly in the United States as researchparts of the country are experiencing a resurgence in COVID-19 cases and developmenttaking actions to modify re-opening plans. Accordingly, we are not able to reasonably estimate the full extent of the impact of the pandemic on our operating results, financial position and cost of business services should be classified in other line items within costs and expenses. Accordingly, the income statementliquidity for the three months ended September 30, 2018 has been revised to correctremainder of the classificationyear. Actual results could differ significantly from our estimates and assumptions, possibly resulting in additional impairments or other charges in future reporting periods.
We assessed certain accounting matters that require the use of these costs by reducing researchestimates, assumptions and development expenseconsideration of forecasted financial information in context with the known and costprojected future impacts of business services by $8 million and $4 million, respectively, and increasing selling, general and administrative expense and cost of equipment sales by $9 million and $3 million, respectively.COVID-19. The income statement for the nine months ended September 30, 2018 has been revised to correct the classification of these costs by reducing research and development expense and cost of business services by $20 million and $10 million, respectively, and increasing selling, general and administrative expense and cost of equipment sales by $22 million and $8 million, respectively.most significant impacts are included below.
The classificationdetermination of certain prior year costs of revenue have been revised to correct and conform to the current year presentation. Accordingly,our provision for the three months ended September 30, 2018, both cost of equipment sales and cost of rentals were reducedcredit losses is now impacted by $1 million and cost of support services was increased by $2 million. For the nine months ended September 30, 2018, cost of equipment sales and cost of rentals were reduced by $4 million and $3 million, respectively, and cost of support services increased by $7 million.
The December 31, 2018 balance sheet has been revised to correct the classification of assets and liabilities by reducing short-term finance receivables and advance billings by $106 million and $6 million, respectively, and increasing long-term finance receivables by $100 million.
New Accounting Pronouncements
changes in forecasted economic conditions (see Accounting Pronouncements Adopted in 2019
On January 1, 2019, we adopted Accounting Standards Codification (ASC) 842, Leases (ASC 842), using2020 below). The impact of COVID-19 on global economies and businesses resulted in an increased probability of recessionary conditions, delinquency rates and business bankruptcy. As a result, our credit loss provision for the modified retrospective transition approach of applying the standard at the beginning of the earliest comparative period presented in the financial statements. We
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
recognized a cumulative effect adjustment at January 1, 2017 to reduce retained earnings by $137three and six months ended June 30, 2020 was $12 million and recast prior period financial statements. See Notes 7$28 million compared to $4 million and 15$15 million for more information.the three and six months ended June 30, 2019.
From a lessor perspective,At December 31, 2019, the standard simplifies the accounting for lease modifications and aligns accountingfair value of lease contracts with revenue recognition guidance. We continue to classify leases as sales-type or operating, with the determination affecting both the pattern and classification of income recognition. There were changes in the timing and classification of revenue related to contract modifications. There were also changes related to the definition of a leased asset, which requires us to account for two lease components as a single lease component. Under prior guidance, one of the components was generally accounted for as a sales-type lease and the second as an operating lease. Under ASC 842, the two components are generally accounted for as sales-type leases and certain income and costs previously recognized over the life of the lease are now accelerated.
From a lessee perspective, the standard requires us to recognize right-of-use assets and lease liabilities for real estate and equipment operating leases and to provide new disclosures about our leasing activities. We elected the short-term lease recognition exemption and did not recognize right-of-use assets or lease liabilities for leases with a termGlobal Ecommerce business exceeded its carrying value by less than 12 months. We also elected the practical expedient to not separate lease and non-lease components for our lessee portfolio.
Updates to significant accounting policies disclosed in our 2018 Annual Report due to the adoption20%. The determination of ASC 842 are discussed below.
Equipment sales: We sell and lease equipment directly to customers and to distributors (re-sellers) throughout the world. The amount of revenue allocated to the equipmentfair value is based on a rangenumber of observable selling pricesestimates and assumptions, including, but not limed to, projected revenue growth, profitability and cash flows. During the first quarter of 2020, our Global Ecommerce business experienced weaker than expected performance in standalone transactions. Revenue from the sale of equipment under sales-type leases is recognized as equipment sales revenue when control of the equipment transferspart due to the customer, which is upon shipmentmacroeconomic conditions resulting from COVID-19. As a result, we evaluated the Global Ecommerce goodwill for self-installed productsimpairment and upon installation or customer acceptance for other products. We do not typically offer any rightsrecorded a non-cash, pre-tax goodwill impairment charge of return.
Rentals: Rentals revenue includes revenue from mailing equipment that does not meet the criteria to be accounted for as a sales-type lease. We may invoice in advance for rentals according to the terms of the agreement. We initially defer these advanced billings and recognize rentals revenue on a straight-line basis over the rental period. Revenue generated from financing clients for the continued use of equipment subsequent to the expiration of the original lease is recognized as rentals revenue.
Financing: We provide financing for our products primarily through sales-type leases. We also provide revolving lines of credit for the purchase of postage and supplies. We record financing income over the lease term using the effective interest method. Financing revenue also includes amounts related to sales-type leases that customers have extended or renewed for an additional term. Revenue for these contracts is recognized over the term of the modified lease using the effective interest method. We believe that our sales-type lease portfolio contains only normal collection risk.
Equipment residual values are determined at the inception of the lease using estimates of fair value at the end of the lease term. Fair value estimates are based primarily on historical experience. We also consider forecasted supply and demand for products, product retirement and launch plans, client behavior, regulatory changes, remanufacturing strategies, used equipment markets, competition and technological changes. We evaluate residual values on an annual basis or sooner if circumstances warrant. Declines in estimated residual values considered "other-than-temporary" are recognized immediately. Estimated increases in future residual values are not recognized until the equipment is remarketed.
Support services: Support services revenue includes revenue from equipment service contracts, subscriptions and meter services. Revenue is allocated to these services using selling prices charged in standalone replacement and renewal transactions. Since we have a stand-ready obligation to provide these services over the entire contract term, revenue is recognized on a straight-line basis over the term of the agreement.
Business services: Business services revenue includes revenue from mail processing services and ecommerce solutions. These services represent a series of distinct services that are similar in nature and revenue is recognized as the services are provided. We review third party relationships and record revenue on a gross basis when we act as a principal in a transaction and on a net basis when we act as an agent between a client and vendor. In determining whether we are acting as principal or agent, we consider several factors such as whether we are the primary obligor to the client, have control over pricing or have inventory risk.
On January 1, 2019, we also adopted Accounting Standards Update (ASU) 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which shortens the amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. The adoption of this standard did not have a material impact on our consolidated financial statements.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
In July 2019, we prospectively adopted ASU 2018-15, Intangibles - Goodwill and Other-Internal-Use Software. The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The early adoption of this standard did not have a material impact on our consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. The ASU sets forth a current expected credit loss model, which requires companies to measure expected credit losses for all financial instruments held at the reporting date based on historical experience, current conditions and reasonably supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This standard is effective beginning January 1, 2020. We have completed the scoping of financial assets that will be impacted by the standard and are$198 million in the processfirst quarter of finalizing models to measure expected credit losses.
2. Revenue
Disaggregated Revenue
The following tables disaggregate our revenue by major source and timing of recognition:
|
| | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Global Ecommerce | Presort Services | SendTech Solutions | Revenue from products and services | Revenue from leasing transactions and financing | Total consolidated revenue |
Major products/service lines | | | | | | |
Equipment sales | $ | — |
| $ | — |
| $ | 19,062 |
| $ | 19,062 |
| $ | 70,556 |
| $ | 89,618 |
|
Supplies | — |
| — |
| 44,818 |
| 44,818 |
| — |
| 44,818 |
|
Rentals | — |
| — |
| — |
| — |
| 19,737 |
| 19,737 |
|
Financing | — |
| — |
| — |
| — |
| 90,577 |
| 90,577 |
|
Support services | — |
| — |
| 126,274 |
| 126,274 |
| — |
| 126,274 |
|
Business services | 278,995 |
| 131,483 |
| 8,623 |
| 419,101 |
| — |
| 419,101 |
|
Subtotal | 278,995 |
| 131,483 |
| 198,777 |
| 609,255 |
| $ | 180,870 |
| $ | 790,125 |
|
| | | | | | |
Revenue from leasing transactions and financing | | | | | | |
Equipment sales | — |
| — |
| 70,556 |
| 70,556 |
| | |
Rentals | — |
| — |
| 19,737 |
| 19,737 |
| | |
Financing | — |
| — |
| 90,577 |
| 90,577 |
| | |
Total revenue | $ | 278,995 |
| $ | 131,483 |
| $ | 379,647 |
| $ | 790,125 |
| | |
| | | | | | |
Timing of revenue recognition from products and services | | | | |
Products/services transferred at a point in time | $ | — |
| $ | — |
| $ | 63,880 |
| $ | 63,880 |
| | |
Products/services transferred over time | 278,995 |
| 131,483 |
| 134,897 |
| 545,375 |
| | |
Total | $ | 278,995 |
| $ | 131,483 |
| $ | 198,777 |
| $ | 609,255 |
| | |
|
| | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 |
| Global Ecommerce | Presort Services | SendTech Solutions | Revenue from products and services | Revenue from leasing transactions and financing | Total consolidated revenue |
Major products/service lines | | | | | | |
Equipment sales | $ | — |
| $ | — |
| $ | 20,428 |
| $ | 20,428 |
| $ | 68,371 |
| $ | 88,799 |
|
Supplies | — |
| — |
| 50,403 |
| 50,403 |
| — |
| 50,403 |
|
Rentals | — |
| — |
| — |
| — |
| 21,432 |
| 21,432 |
|
Financing | — |
| — |
| — |
| — |
| 96,799 |
| 96,799 |
|
Support services | — |
| — |
| 138,055 |
| 138,055 |
| — |
| 138,055 |
|
Business services | 232,845 |
| 125,334 |
| 6,614 |
| 364,793 |
| — |
| 364,793 |
|
Subtotal | 232,845 |
| 125,334 |
| 215,500 |
| 573,679 |
| $ | 186,602 |
| $ | 760,281 |
|
| | | | | | |
Revenue from leasing transactions and financing | | | | | | |
Equipment sales | — |
| — |
| 68,371 |
| 68,371 |
| | |
Rentals | — |
| — |
| 21,432 |
| 21,432 |
| | |
Financing | — |
| — |
| 96,799 |
| 96,799 |
| | |
Total revenue | $ | 232,845 |
| $ | 125,334 |
| $ | 402,102 |
| $ | 760,281 |
| | |
| | | | | | |
Timing of revenue recognition from products and services | | | | |
Products/services transferred at a point in time | $ | — |
| $ | — |
| $ | 70,831 |
| $ | 70,831 |
| | |
Products/services transferred over time | 232,845 |
| 125,334 |
| 144,669 |
| 502,848 |
| | |
Total | $ | 232,845 |
| $ | 125,334 |
| $ | 215,500 |
| $ | 573,679 |
| | |
2020 (see Note 8 for additional information).
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
Accounting Pronouncements Adopted in 2020
Effective January 1, 2020, we adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses. We adopted this standard using the modified retrospective transition approach with a cumulative effect adjustment to retained earnings. The adoption of the standard resulted in an increase in the opening reserve balance for Accounts and other receivables of $15 million and the opening reserve balance for finance receivables of $10 million and a net reduction to retained earnings of $22 million. The ASU applies to financial assets measured at amortized cost, including finance receivables, trade and other receivables and investments in debt securities classified as available-for-sale and held-to-maturity. The ASU replaces the current incurred loss impairment model that recognizes losses when a probable threshold is met with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The models to estimate credit losses are required to be based on historical loss experience, current conditions, reasonable and supportable forecasts and current economic outlook.
Activity in the allowance for credit losses for accounts and other receivables for the six months ended June 30, 2020 is presented below. See Note 7 for additional information pertaining to our finance receivables.
|
| | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2019 | | Cumulative effect of accounting change | | Amounts charged to expense | | Write-offs, recoveries and currency impact | | Balance at June 30, 2020 |
Allowance for credit losses | $ | 17,830 |
| | $ | 15,336 |
| | $ | 12,692 |
| | $ | (13,384 | ) | | $ | 32,474 |
|
Accounts receivable greater than 365 days past due, subject to certain exceptions, are written off against the allowance, although collection efforts may continue.
Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles and also clarifies and amends existing guidance. This standard is effective beginning January 1, 2021, with early adoption permitted. We do not expect this standard to have a material impact on our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU is intended to provide temporary optional expedients and exceptions to U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The transition to new reference interest rates will require certain contracts to be modified and the ASU is intended to mitigate the effects of this transition. The accommodations provided by the ASU are effective as of March 12, 2020 through December 31, 2022 and may be applied at the beginning of any interim period within that time frame. We are currently assessing the impact this standard will have on our consolidated financial statements.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
2. Revenue
Disaggregated Revenue
The following tables disaggregate our revenue by source and timing of recognition:
| | | Nine Months Ended September 30, 2019 | Three Months Ended June 30, 2020 |
| Global Ecommerce | Presort Services | SendTech Solutions | Revenue from products and services | Revenue from leasing transactions and financing | Total consolidated revenue | Global Ecommerce | Presort Services | SendTech Solutions | Revenue from products and services | Revenue from leasing transactions and financing | Total consolidated revenue |
Major products/service lines | | |
Business services | | $ | 398,453 |
| $ | 118,127 |
| $ | 12,410 |
| $ | 528,990 |
| $ | — |
| $ | 528,990 |
|
Support services | | — |
| — |
| 113,786 |
| 113,786 |
| — |
| 113,786 |
|
Financing | | — |
| — |
| — |
| — |
| 85,462 |
| 85,462 |
|
Equipment sales | $ | — |
| $ | — |
| $ | 59,739 |
| $ | 59,739 |
| $ | 205,217 |
| $ | 264,956 |
| — |
| — |
| 14,492 |
| 14,492 |
| 43,345 |
| 57,837 |
|
Supplies | — |
| — |
| 142,261 |
| 142,261 |
| — |
| 142,261 |
| — |
| — |
| 32,773 |
| 32,773 |
| — |
| 32,773 |
|
Rentals | — |
| — |
| — |
| — |
| 60,339 |
| 60,339 |
| — |
| — |
| — |
| — |
| 18,644 |
| 18,644 |
|
Financing | — |
| — |
| — |
| — |
| 280,039 |
| 280,039 |
| |
Support services | — |
| — |
| 382,578 |
| 382,578 |
| — |
| 382,578 |
| |
Business services | 827,568 |
| 394,468 |
| 21,573 |
| 1,243,609 |
| — |
| 1,243,609 |
| |
Subtotal | 827,568 |
| 394,468 |
| 606,151 |
| 1,828,187 |
| $ | 545,595 |
| $ | 2,373,782 |
| 398,453 |
| 118,127 |
| 173,461 |
| 690,041 |
| $ | 147,451 |
| $ | 837,492 |
|
| | | | |
Revenue from leasing transactions and financing | | |
Financing | | — |
| — |
| 85,462 |
| 85,462 |
| |
Equipment sales | — |
| — |
| 205,217 |
| 205,217 |
| | — |
| — |
| 43,345 |
| 43,345 |
| |
Rentals | — |
| — |
| 60,339 |
| 60,339 |
| | — |
| — |
| 18,644 |
| 18,644 |
| |
Financing | — |
| — |
| 280,039 |
| 280,039 |
| | |
Total revenue | $ | 827,568 |
| $ | 394,468 |
| $ | 1,151,746 |
| $ | 2,373,782 |
| | $ | 398,453 |
| $ | 118,127 |
| $ | 320,912 |
| $ | 837,492 |
| |
| | | | |
Timing of revenue recognition from products and services | Timing of revenue recognition from products and services | | Timing of revenue recognition from products and services | |
Products/services transferred at a point in time | $ | — |
| $ | — |
| $ | 202,000 |
| $ | 202,000 |
| | $ | — |
| $ | — |
| $ | 58,750 |
| $ | 58,750 |
| |
Products/services transferred over time | 827,568 |
| 394,468 |
| 404,151 |
| 1,626,187 |
| | 398,453 |
| 118,127 |
| 114,711 |
| 631,291 |
| |
Total | $ | 827,568 |
| $ | 394,468 |
| $ | 606,151 |
| $ | 1,828,187 |
| | $ | 398,453 |
| $ | 118,127 |
| $ | 173,461 |
| $ | 690,041 |
| |
|
| | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 |
| Global Ecommerce | Presort Services | SendTech Solutions | Revenue from products and services | Revenue from leasing transactions and financing | Total consolidated revenue |
Major products/service lines | | | | | | |
Business services | $ | 282,319 |
| $ | 128,138 |
| $ | 7,506 |
| $ | 417,963 |
| $ | — |
| $ | 417,963 |
|
Support services | — |
| — |
| 127,705 |
| 127,705 |
| — |
| 127,705 |
|
Financing | — |
| — |
| — |
| — |
| 92,419 |
| 92,419 |
|
Equipment sales | — |
| — |
| 19,384 |
| 19,384 |
| 66,167 |
| 85,551 |
|
Supplies | — |
| — |
| 46,490 |
| 46,490 |
| — |
| 46,490 |
|
Rentals | — |
| — |
| — |
| — |
| 18,445 |
| 18,445 |
|
Subtotal | 282,319 |
| 128,138 |
| 201,085 |
| 611,542 |
| $ | 177,031 |
| $ | 788,573 |
|
| | | | | | |
Revenue from leasing transactions and financing | | | | | | |
Financing | — |
| — |
| 92,419 |
| 92,419 |
| | |
Equipment sales | — |
| — |
| 66,167 |
| 66,167 |
| | |
Rentals | — |
| — |
| 18,445 |
| 18,445 |
| | |
Total revenue | $ | 282,319 |
| $ | 128,138 |
| $ | 378,116 |
| $ | 788,573 |
| | |
| | | | | | |
Timing of revenue recognition from products and services | | | | |
Products/services transferred at a point in time | $ | — |
| $ | — |
| $ | 82,790 |
| $ | 82,790 |
| | |
Products/services transferred over time | 282,319 |
| 128,138 |
| 118,295 |
| 528,752 |
| | |
Total | $ | 282,319 |
| $ | 128,138 |
| $ | 201,085 |
| $ | 611,542 |
| | |
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
| | | Nine Months Ended September 30, 2018 | Six Months Ended June 30, 2020 |
| Global Ecommerce | Presort Services | SendTech Solutions | Revenue from products and services | Revenue from leasing transactions and financing | Total consolidated revenue | Global Ecommerce | Presort Services | SendTech Solutions | Revenue from products and services | Revenue from leasing transactions and financing | Total consolidated revenue |
Major products/service lines | | |
Business services | | $ | 690,776 |
| $ | 258,847 |
| $ | 23,746 |
| $ | 973,369 |
| $ | — |
| $ | 973,369 |
|
Support services | | — |
| — |
| 235,801 |
| 235,801 |
| — |
| 235,801 |
|
Financing | | — |
| — |
| — |
| — |
| 174,540 |
| 174,540 |
|
Equipment sales | $ | — |
| $ | — |
| $ | 64,482 |
| $ | 64,482 |
| $ | 224,836 |
| $ | 289,318 |
| — |
| — |
| 31,621 |
| 31,621 |
| 102,489 |
| 134,110 |
|
Supplies | — |
| — |
| 165,853 |
| 165,853 |
| — |
| 165,853 |
| — |
| — |
| 78,482 |
| 78,482 |
| — |
| 78,482 |
|
Rentals | — |
| — |
| — |
| — |
| 65,852 |
| 65,852 |
| — |
| — |
| — |
| — |
| 37,458 |
| 37,458 |
|
Financing | — |
| — |
| — |
| — |
| 294,277 |
| 294,277 |
| |
Support services | — |
| — |
| 417,303 |
| 417,303 |
| — |
| 417,303 |
| |
Business services | 718,535 |
| 382,522 |
| 20,448 |
| 1,121,505 |
| — |
| 1,121,505 |
| |
Subtotal | 718,535 |
| 382,522 |
| 668,086 |
| 1,769,143 |
| $ | 584,965 |
| $ | 2,354,108 |
| 690,776 |
| 258,847 |
| 369,650 |
| 1,319,273 |
| $ | 314,487 |
| $ | 1,633,760 |
|
| | | | |
Revenue from leasing transactions and financing | | |
Financing | | — |
| — |
| 174,540 |
| 174,540 |
| |
Equipment sales | — |
| — |
| 224,836 |
| 224,836 |
| | — |
| — |
| 102,489 |
| 102,489 |
| |
Rentals | — |
| — |
| 65,852 |
| 65,852 |
| | — |
| — |
| 37,458 |
| 37,458 |
| |
Financing | — |
| — |
| 294,277 |
| 294,277 |
| | |
Total revenue | $ | 718,535 |
| $ | 382,522 |
| $ | 1,253,051 |
| $ | 2,354,108 |
| | $ | 690,776 |
| $ | 258,847 |
| $ | 684,137 |
| $ | 1,633,760 |
| |
| | | | |
Timing of revenue recognition from products and services | Timing of revenue recognition from products and services | | Timing of revenue recognition from products and services | |
Products/services transferred at a point in time | $ | — |
| $ | — |
| $ | 230,335 |
| $ | 230,335 |
| | $ | — |
| $ | — |
| $ | 137,124 |
| $ | 137,124 |
| |
Products/services transferred over time | 718,535 |
| 382,522 |
| 437,751 |
| 1,538,808 |
| | 690,776 |
| 258,847 |
| 232,526 |
| 1,182,149 |
| |
Total | $ | 718,535 |
| $ | 382,522 |
| $ | 668,086 |
| $ | 1,769,143 |
| | $ | 690,776 |
| $ | 258,847 |
| $ | 369,650 |
| $ | 1,319,273 |
| |
|
| | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 |
| Global Ecommerce | Presort Services | SendTech Solutions | Revenue from products and services | Revenue from leasing transactions and financing | Total consolidated revenue |
Major products/service lines | | | | | | |
Business services | $ | 548,573 |
| $ | 262,985 |
| $ | 12,950 |
| $ | 824,508 |
| $ | — |
| $ | 824,508 |
|
Support services | — |
| — |
| 256,304 |
| 256,304 |
| — |
| 256,304 |
|
Financing | — |
| — |
| — |
| — |
| 189,462 |
| 189,462 |
|
Equipment sales | — |
| — |
| 40,677 |
| 40,677 |
| 134,661 |
| 175,338 |
|
Supplies | — |
| — |
| 97,443 |
| 97,443 |
| — |
| 97,443 |
|
Rentals | — |
| — |
| — |
| — |
| 40,602 |
| 40,602 |
|
Subtotal | 548,573 |
| 262,985 |
| 407,374 |
| 1,218,932 |
| $ | 364,725 |
| $ | 1,583,657 |
|
| | | | | | |
Revenue from leasing transactions and financing | | | | | | |
Financing | — |
| — |
| 189,462 |
| 189,462 |
| | |
Equipment sales | — |
| — |
| 134,661 |
| 134,661 |
| | |
Rentals | — |
| — |
| 40,602 |
| 40,602 |
| | |
Total revenue | $ | 548,573 |
| $ | 262,985 |
| $ | 772,099 |
| $ | 1,583,657 |
| | |
| | | | | | |
Timing of revenue recognition from products and services | | | | |
Products/services transferred at a point in time | $ | — |
| $ | — |
| $ | 169,666 |
| $ | 169,666 |
| | |
Products/services transferred over time | 548,573 |
| 262,985 |
| 237,708 |
| 1,049,266 |
| | |
Total | $ | 548,573 |
| $ | 262,985 |
| $ | 407,374 |
| $ | 1,218,932 |
| | |
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
Our performance obligations for revenue from products and services are as follows:
Business services includes providing mail processing services, shipping subscription solutions, fulfillment, delivery and return services and cross-border solutions. Revenue for mail processing services, fulfillment, delivery and return services and cross-border solutions is recognized over time as the services are provided and revenue for shipping subscription solutions is recognized ratably over the contract period. Contract terms for these services range from one to five years followed by annual renewal periods.
Support services includes providing maintenance, professional and subscription services for our mailing equipment and professional services for our shipping solutions. Contract terms range from one to five years, depending on the term of the lease contract for the related equipment. Revenue for maintenance and subscription services is recognized ratably over the contract period and revenue for professional services is recognized when services are provided.
Equipment sales and supplies: Performance obligations generally includeincludes the sale of mailing and shipping equipment, excluding sales-type leases, and supplies.leases. We recognize revenue upon delivery for self-install equipment and supplies and upon acceptance or installation for other equipment. We provide a warranty that our equipment is free of defects and meets stated specifications. The warranty is not considered a separate performance obligation.
Support services: Performance obligations include providing maintenance, professional services, and subscription and meter services for our mailing equipment. Contract terms range from one year to five years, depending on the term of the lease contract for the related equipment. Revenue for maintenance, subscription and meter servicesSupplies revenue is recognized ratably over the contract period and revenue for professional services is recognized when services are provided.
Business services: Performance obligations include providing mail processing services and ecommerce solutions. Revenue is recognized over time as the services are provided. The contract terms for these services vary, with the initial contracts in the range of one to five years, followed by annual renewal periods.upon delivery.
Revenue from leasing transactions and financing includes revenue from equipment accounted for as sales-type leases, and operating leases, finance income and late fees.
Advance Billings from Contracts with Customers | | | Balance sheet location | | September 30, 2019 | | December 31, 2018 | | Increase (decrease) | Balance sheet location | | June 30, 2020 | | December 31, 2019 | | Increase/ (decrease) |
Advance billings, current | Advance billings | | $ | 97,666 |
| | $ | 111,829 |
| | $ | (14,163 | ) | Advance billings | | $ | 113,799 |
| | $ | 92,464 |
| | $ | 21,335 |
|
Advance billings, noncurrent | Other noncurrent liabilities | | $ | 1,413 |
| | $ | 1,985 |
| | $ | (572 | ) | Other noncurrent liabilities | | $ | 1,102 |
| | $ | 1,245 |
| | $ | (143 | ) |
Advance billings are recorded when cash payments are due in advance of our performance. Revenue is recognized ratably over the contract term. Items in advance billings primarily relate to support services on equipmentmailing equipment. Advance billings at both June 30, 2020 and subscription services. Revenue is recognized ratably over the contract term.December 31, 2019 also includes $9 million from leasing transactions.
The net decreaseincrease in advance billings at SeptemberJune 30, 20192020 is due to revenuenew advance billings recognized during the period in excess of advance billings.revenue recognized. Revenue recognized during the period includes $114$75 million of advance billings at the beginning of the period, partially offset by advance billings in the quarter.period.
Future Performance Obligations
Future performance obligations include revenue streams bundled with our leasing contracts, primarily maintenance meter services and other subscription services. The transaction prices allocated to future performance obligations will be recognized as follows: |
| | | | | | | | | | | | | | | | |
| | Remainder of 2019 | | 2020 | | 2021-2024 | | Total |
SendTech Solutions | | $ | 77,171 |
| | $ | 272,621 |
| | $ | 421,746 |
| | $ | 771,538 |
|
|
| | | | | | | | | | | | | | | | |
| | Remainder of 2020 | | 2021 | | 2022-2025 | | Total |
SendTech Solutions | | $ | 146,357 |
| | $ | 252,289 |
| | $ | 346,874 |
| | $ | 745,520 |
|
The table above does not include revenue related to performance obligations for contracts with terms less than 12 months and expected consideration for those performance obligations where revenue is recognized based on the amount billable to the customer.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
3. Segment Information
Our reportable segments are Global Ecommerce, Presort Services and SendTech Solutions. Global Ecommerce and Presort Services comprise the Commerce Services reporting group. The principal products and services of each reportable segment are as follows:
Global Ecommerce: Includes the revenue and related expenses from products and services that enablefacilitate domestic retail and ecommerce shipping solutions, including fulfillment and returns, and global cross-border ecommerce transactions, including shipping, fulfillment and returns.transactions.
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 (MarketingMarketing Mail Flats and Bound Printed Matter)Matter for postal worksharing discounts.
SendTech Solutions: Includes the revenue and related expenses from sending technology solutions for physical mailing,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.
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. The following tables provide information about our reportable segments and reconciliation of segment EBIT to net (loss) income.
Revenue and EBIT by business segment is presented below:
|
| | | | | | | | | | | | | | | |
| Revenue |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Global Ecommerce | $ | 278,995 |
| | $ | 232,845 |
| | $ | 827,568 |
| | $ | 718,535 |
|
Presort Services | 131,483 |
| | 125,334 |
| | 394,468 |
| | 382,522 |
|
Commerce Services | 410,478 |
| | 358,179 |
| | 1,222,036 |
| | 1,101,057 |
|
SendTech Solutions | 379,647 |
| | 402,102 |
| | 1,151,746 |
| | 1,253,051 |
|
Total revenue | $ | 790,125 |
| | $ | 760,281 |
| | $ | 2,373,782 |
| | $ | 2,354,108 |
|
|
| | | | | | | | | | | | | | | |
| EBIT |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Global Ecommerce | $ | (21,793 | ) | | $ | (14,330 | ) | | $ | (51,969 | ) | | $ | (28,034 | ) |
Presort Services | 17,687 |
| | 17,435 |
| | 48,215 |
| | 57,026 |
|
Commerce Services | (4,106 | ) | | 3,105 |
| | (3,754 | ) | | 28,992 |
|
SendTech Solutions | 130,954 |
| | 134,607 |
| | 378,095 |
| | 412,427 |
|
Total segment EBIT | 126,848 |
| | 137,712 |
| | 374,341 |
| | 441,419 |
|
Reconciliation of Segment EBIT to net income: | | | | | |
| | |
|
Unallocated corporate expenses | (58,277 | ) | | (40,988 | ) | | (160,283 | ) | | (141,321 | ) |
Restructuring charges and asset impairments, net | (47,017 | ) | | (6,099 | ) | | (56,616 | ) | | (18,771 | ) |
Interest, net | (39,730 | ) | | (37,437 | ) | | (117,758 | ) | | (122,484 | ) |
Other expense | (667 | ) | | (7,964 | ) | | (18,350 | ) | | (7,964 | ) |
Transaction costs | (707 | ) | | (36 | ) | | (2,573 | ) | | (1,091 | ) |
Benefit (provision) for income taxes | 24,895 |
| | 2,468 |
| | 13,351 |
| | (17,235 | ) |
Income from continuing operations | 5,345 |
| | 47,656 |
| | 32,112 |
| | 132,553 |
|
(Loss) income from discontinued operations, net of tax | (8,470 | ) | | 32,621 |
| | (14,199 | ) | | 59,289 |
|
Net (loss) income | $ | (3,125 | ) | | $ | 80,277 |
| | $ | 17,913 |
| | $ | 191,842 |
|
|
| | | | | | | | | | | | | | | |
| Revenue |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Global Ecommerce | $ | 398,453 |
| | $ | 282,319 |
| | $ | 690,776 |
| | $ | 548,573 |
|
Presort Services | 118,127 |
| | 128,138 |
| | 258,847 |
| | 262,985 |
|
Commerce Services | 516,580 |
| | 410,457 |
| | 949,623 |
| | 811,558 |
|
SendTech Solutions | 320,912 |
| | 378,116 |
| | 684,137 |
| | 772,099 |
|
Total revenue | $ | 837,492 |
| | $ | 788,573 |
| | $ | 1,633,760 |
| | $ | 1,583,657 |
|
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
4. Discontinued Operations
In August 2019, we entered into a definitive agreement to sell our Software Solutions business for $700 million, subject to certain adjustments. The transaction is subject to customary closing conditions, and we expect it to be completed by the end of 2019.
The operating results of the Software Solutions business are now reported as discontinued operations. Discontinued operations also includes our Document Messaging Technology production mail business and supporting software (Production Mail Business) that was sold in July 2018.
Selected financial information of discontinued operations is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 | | Three Months Ended September 30, 2018 |
| Software Solutions | | Production Mail | | Total | | Software Solutions | | Production Mail | | Total |
Revenue | $ | 73,620 |
| | $ | — |
| | $ | 73,620 |
| | $ | 75,743 |
| | $ | 19,557 |
| | $ | 95,300 |
|
| | | | | | | | | | | |
Earnings (loss) from discontinued operations | $ | 8,633 |
| | $ | — |
| | $ | 8,633 |
| | $ | 4,533 |
| | $ | (1,316 | ) | | $ | 3,217 |
|
(Loss) gain on sale (including transaction costs) | (12,447 | ) | | (5,710 | ) | | (18,157 | ) | | — |
| | 86,640 |
| | 86,640 |
|
(Loss) income from discontinued operations before taxes | $ | (3,814 | ) | | $ | (5,710 | ) | | (9,524 | ) | | $ | 4,533 |
| | $ | 85,324 |
| | 89,857 |
|
Tax (benefit) provision | | | | | (1,054 | ) | | | | | | 57,236 |
|
(Loss) income from discontinued operations, net of tax | | | | | $ | (8,470 | ) | | | | | | $ | 32,621 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 | | Nine Months Ended September 30, 2018 |
| Software Solutions | | Production Mail | | Total | | Software Solutions | | Production Mail | | Total |
Revenue | $ | 219,144 |
| | $ | — |
| | $ | 219,144 |
| | $ | 243,738 |
| | $ | 211,000 |
| | $ | 454,738 |
|
| | | | | | | | | | | |
Earnings (loss) from discontinued operations | $ | 13,334 |
| | $ | (663 | ) | | $ | 12,671 |
| | $ | 28,497 |
| | $ | 20,304 |
| | $ | 48,801 |
|
(Loss) gain on sale (including transaction costs) | (14,211 | ) | | (14,967 | ) | | (29,178 | ) | | — |
| | 77,863 |
| | 77,863 |
|
(Loss) income from discontinued operations before taxes | $ | (877 | ) | | $ | (15,630 | ) | | (16,507 | ) | | $ | 28,497 |
| | $ | 98,167 |
| | 126,664 |
|
Tax (benefit) provision | | | | | (2,308 | ) | | | | | | 67,375 |
|
(Loss) income from discontinued operations, net of tax | | | | | $ | (14,199 | ) | | | | | | $ | 59,289 |
|
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
The major categories |
| | | | | | | | | | | | | | | |
| EBIT |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Global Ecommerce | $ | (18,894 | ) | | $ | (15,576 | ) | | $ | (48,369 | ) | | $ | (30,176 | ) |
Presort Services | 12,582 |
| | 15,462 |
| | 28,277 |
| | 30,528 |
|
Commerce Services | (6,312 | ) | | (114 | ) | | (20,092 | ) | | 352 |
|
SendTech Solutions | 104,268 |
| | 124,738 |
| | 210,830 |
| | 247,141 |
|
Total segment EBIT | 97,956 |
| | 124,624 |
| | 190,738 |
| | 247,493 |
|
Reconciliation of Segment EBIT to net (loss) income: | | | | | |
| | |
|
Unallocated corporate expenses | (49,489 | ) | | (45,048 | ) | | (93,211 | ) | | (102,006 | ) |
Restructuring charges and asset impairments | (4,922 | ) | | (5,899 | ) | | (8,739 | ) | | (9,599 | ) |
Interest expense, net | (38,385 | ) | | (39,062 | ) | | (76,757 | ) | | (78,028 | ) |
Gain on sale of equity investment | 11,908 |
| | — |
| | 11,908 |
| | — |
|
Goodwill impairment | — |
| | — |
| | (198,169 | ) | | — |
|
Loss on extinguishment of debt | — |
| | — |
| | (36,987 | ) | | — |
|
Loss on dispositions and transaction costs | (349 | ) | | (1,581 | ) | | (641 | ) | | (19,549 | ) |
Provision for income taxes | (17,016 | ) | | (3,724 | ) | | (6,986 | ) | | (11,544 | ) |
(Loss) income from continuing operations | (297 | ) | | 29,310 |
| | (218,844 | ) | | 26,767 |
|
(Loss) income from discontinued operations, net of tax | (3,032 | ) | | (5,613 | ) | | 7,032 |
| | (5,729 | ) |
Net (loss) income | $ | (3,329 | ) | | $ | 23,697 |
| | $ | (211,812 | ) | | $ | 21,038 |
|
During the three and six months ended June 30, 2020, we received insurance proceeds of assets$5 million and liabilities included$9 million, respectively, related to the October 2019 malware attack, a portion of which has been allocated to the business segments.
4. Discontinued Operations
Discontinued operations includes the Software Solutions business, sold in assetsDecember 2019, with the exception of the software business in Australia, which closed in January 2020, and the Production Mail business, sold in July 2018. Selected financial information of discontinued operations is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | Three Months Ended June 30, 2019 |
| Software Solutions | | Production Mail | | Total | | Software Solutions | | Production Mail | | Total |
Revenue | $ | — |
| | $ | — |
| | $ | — |
| | $ | 72,206 |
| | $ | — |
| | $ | 72,206 |
|
| | | | | | | | | | | |
Earnings from discontinued operations | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,342 |
| | $ | — |
| | $ | 1,342 |
|
(Loss) gain on sale | (3,416 | ) | | 245 |
| | (3,171 | ) | | — |
| | (8,589 | ) | | (8,589 | ) |
(Loss) income from discontinued operations before taxes | $ | (3,416 | ) | | $ | 245 |
| | (3,171 | ) | | $ | 1,342 |
| | $ | (8,589 | ) | | (7,247 | ) |
Tax benefit | | | | | (139 | ) | | | | | | (1,634 | ) |
Loss from discontinued operations, net of tax | | | | | $ | (3,032 | ) | | | | | | $ | (5,613 | ) |
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2020 | | Six Months Ended June 30, 2019 |
| Software Solutions | | Production Mail | | Total | | Software Solutions | | Production Mail | | Total |
Revenue | $ | — |
| | $ | — |
| | $ | — |
| | $ | 145,524 |
| | $ | — |
| | $ | 145,524 |
|
| | | | | | | | | | | |
Earnings (loss) from discontinued operations | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,938 |
| | $ | (663 | ) | | $ | 2,275 |
|
Gain (loss) on sale | 6,869 |
| | (167 | ) | | 6,702 |
| | — |
| | (9,257 | ) | | (9,257 | ) |
Income (loss) from discontinued operations before taxes | $ | 6,869 |
| | $ | (167 | ) | | 6,702 |
| | $ | 2,938 |
| | $ | (9,920 | ) | | (6,982 | ) |
Tax benefit | | | | | (330 | ) | | | | | | (1,253 | ) |
Income (loss) from discontinued operations, net of tax | | | | | $ | 7,032 |
| | | | | | $ | (5,729 | ) |
Assets of discontinued operations and liabilities of discontinued operations are as follows:at December 31, 2019 includes the assets and liabilities of the software business in Australia.
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Cash and cash equivalents | $ | — |
| | $ | 1,965 |
|
Accounts and other receivables, net | 55,077 |
| | 85,399 |
|
Inventories | — |
| | 855 |
|
Other current assets and prepayments | 29,801 |
| | 26,121 |
|
Property, plant and equipment, net | 11,495 |
| | 12,140 |
|
Rental property and equipment, net | — |
| | 179 |
|
Goodwill | 430,995 |
| | 434,160 |
|
Intangible assets | 10,379 |
| | 13,937 |
|
Operating lease asset | 3,587 |
| | 4,234 |
|
Other assets | 27,079 |
| | 23,833 |
|
Assets of discontinued operations | $ | 568,413 |
| | $ | 602,823 |
|
| | | |
Accounts payable and accrued liabilities | $ | 38,163 |
| | $ | 42,896 |
|
Current operating lease liabilities | 1,441 |
| | 2,000 |
|
Advance billings | 98,699 |
| | 113,110 |
|
Other current liabilities | — |
| | 2,021 |
|
Noncurrent operating lease liabilities | 1,823 |
| | 1,943 |
|
Other noncurrent liabilities | 16,908 |
| | 12,828 |
|
Liabilities of discontinued operations | $ | 157,034 |
| | $ | 174,798 |
|
5. Earnings per Share (EPS) |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Numerator: | |
| | |
| | |
| | |
|
(Loss) income from continuing operations | $ | (297 | ) | | $ | 29,310 |
| | $ | (218,844 | ) | | $ | 26,767 |
|
(Loss) income from discontinued operations, net of tax | (3,032 | ) | | (5,613 | ) | | 7,032 |
| | (5,729 | ) |
Net (loss) income (numerator for diluted EPS) | (3,329 | ) | | 23,697 |
| | (211,812 | ) | | 21,038 |
|
Less: Preference stock dividend | — |
| | — |
| | — |
| | 8 |
|
(Loss) income attributable to common stockholders (numerator for basic EPS) | $ | (3,329 | ) | | $ | 23,697 |
| | $ | (211,812 | ) | | $ | 21,030 |
|
Denominator: | |
| | |
| | |
| | |
|
Weighted-average shares used in basic EPS | 171,478 |
| | 177,192 |
| | 171,167 |
| | 181,446 |
|
Dilutive effect of common stock equivalents (1) | — |
| | 1,089 |
| | — |
| | 1,192 |
|
Weighted-average shares used in diluted EPS | 171,478 |
| | 178,281 |
| | 171,167 |
| | 182,638 |
|
Basic earnings (loss) per share (2): | |
| | |
| | |
| | |
|
Continuing operations | $ | — |
| | $ | 0.17 |
| | $ | (1.28 | ) | | $ | 0.15 |
|
Discontinued operations | (0.02 | ) | | (0.03 | ) | | 0.04 |
| | (0.03 | ) |
Net (loss) income | $ | (0.02 | ) | | $ | 0.13 |
| | $ | (1.24 | ) | | $ | 0.12 |
|
Diluted earnings (loss) per share (2): | | | | | | | |
Continuing operations | $ | — |
| | $ | 0.16 |
| | $ | (1.28 | ) | | $ | 0.15 |
|
Discontinued operations | (0.02 | ) | | (0.03 | ) | | 0.04 |
| | (0.03 | ) |
Net (loss) income | $ | (0.02 | ) | | $ | 0.13 |
| | $ | (1.24 | ) | | $ | 0.12 |
|
| | | | | | | |
Common stock equivalents excluded from calculation of diluted earnings per share because their impact would be anti-dilutive: | 19,963 |
| | 16,297 |
| | 18,297 |
| | 16,077 |
|
| |
(1) | Dilutive effect of common stock equivalents for the three and six months ended June 30, 2020 was 1,019 and 1,190, respectively; however, is not included in the calculation of diluted earnings per share as the Company is reporting a net loss for both periods. |
| |
(2) | The sum of the earnings per share amounts may not equal the totals due to rounding. |
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
5. Earnings per Share (EPS) |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Numerator: | |
| | |
| | |
| | |
|
Income from continuing operations | $ | 5,345 |
| | $ | 47,656 |
| | $ | 32,112 |
| | $ | 132,553 |
|
(Loss) income from discontinued operations, net of tax | (8,470 | ) | | 32,621 |
| | (14,199 | ) | | 59,289 |
|
Net (loss) income (numerator for diluted EPS) | (3,125 | ) | | 80,277 |
| | 17,913 |
| | 191,842 |
|
Less: Preference stock dividend | — |
| | 8 |
| | 8 |
| | 24 |
|
(Loss) income attributable to common stockholders (numerator for basic EPS) | $ | (3,125 | ) | | $ | 80,269 |
| | $ | 17,905 |
| | $ | 191,818 |
|
Denominator: | |
| | |
| | |
| | |
|
Weighted-average shares used in basic EPS | 170,326 |
| | 187,470 |
| | 178,048 |
| | 187,167 |
|
Dilutive effect of common stock equivalents | 875 |
| | 945 |
| | 1,048 |
| | 1,023 |
|
Weighted-average shares used in diluted EPS | 171,201 |
| | 188,415 |
| | 179,096 |
| | 188,190 |
|
Basic earnings (loss) per share (1): | |
| | |
| | |
| | |
|
Continuing operations | $ | 0.03 |
| | $ | 0.25 |
| | $ | 0.18 |
| | $ | 0.71 |
|
Discontinued operations | (0.05 | ) | | 0.17 |
| | (0.08 | ) | | 0.32 |
|
Net (loss) income | $ | (0.02 | ) | | $ | 0.43 |
| | $ | 0.10 |
| | $ | 1.02 |
|
Diluted earnings (loss) per share (1): | | | | | | | |
Continuing operations | $ | 0.03 |
| | $ | 0.25 |
| | $ | 0.18 |
| | $ | 0.70 |
|
Discontinued operations | (0.05 | ) | | 0.17 |
| | (0.08 | ) | | 0.32 |
|
Net (loss) income | $ | (0.02 | ) | | $ | 0.43 |
| | $ | 0.10 |
| | $ | 1.02 |
|
| | | | | | | |
Anti-dilutive options excluded from diluted earnings per share: | 16,182 |
| | 12,195 |
| | 16,166 |
| | 12,097 |
|
| |
(1)
| The sum of the earnings per share amounts may not equal the totals due to rounding. |
6. Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined on the last-in, first-out (LIFO) basis for most U.S. inventories and the first-in, first-out (FIFO) basis for most non-U.S. inventories. Inventories at September 30, 2019 and December 31, 2018 consisted of the following:
| | | September 30, 2019 | | December 31, 2018 | June 30, 2020 | | December 31, 2019 |
Raw materials | $ | 18,683 |
| | $ | 8,229 |
| $ | 20,021 |
| | $ | 13,514 |
|
Supplies and service parts | 24,283 |
| | 21,841 |
| 22,787 |
| | 21,840 |
|
Finished products | 37,856 |
| | 36,692 |
| 34,681 |
| | 36,969 |
|
Inventory at FIFO cost | 80,822 |
| | 66,762 |
| 77,489 |
| | 72,323 |
|
Excess of FIFO cost over LIFO cost | (4,483 | ) | | (4,483 | ) | (3,836 | ) | | (4,072 | ) |
Total inventory, net | $ | 76,339 |
| | $ | 62,279 |
| $ | 73,653 |
| | $ | 68,251 |
|
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
7. Finance Assets and Lessor Operating Leases
Finance Assets
Finance receivables are comprised of sales-type lease receivables and unsecured revolving loan receivables. Sales-type lease receivables are generally due in monthly, quarterly or semi-annual installments over periods ranging from three to five years. Loan receivables arise primarily from financing services offered to our clients for postage and supplies. Most loan receivables are generally due each month; however, clients may rollover outstanding balances. Interest is recognized on loan receivables using the effective interest method and related annual fees are initially deferred and recognized ratably over the annual period covered. Client acquisition costs are expensed as incurred.
Finance receivables at September 30, 2019 and December 31, 2018 consisted of the following:
| | | September 30, 2019 | | December 31, 2018 | June 30, 2020 | | December 31, 2019 |
| North America | | International | | Total | | North America | | International | | Total | North America | | International | | Total | | North America | | International | | Total |
Sales-type lease receivables | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Gross finance receivables | $ | 1,064,996 |
| | $ | 215,110 |
| | $ | 1,280,106 |
| | $ | 1,110,898 |
| | $ | 242,036 |
| | $ | 1,352,934 |
| $ | 998,450 |
| | $ | 196,767 |
| | $ | 1,195,217 |
| | $ | 1,055,852 |
| | $ | 224,202 |
| | $ | 1,280,054 |
|
Unguaranteed residual values | 43,621 |
| | 11,264 |
| | 54,885 |
| | 52,637 |
| | 12,772 |
| | 65,409 |
| 37,742 |
| | 11,283 |
| | 49,025 |
| | 41,934 |
| | 11,789 |
| | 53,723 |
|
Unearned income | (331,085 | ) | | (63,121 | ) | | (394,206 | ) | | (383,453 | ) | | (55,113 | ) | | (438,566 | ) | (282,027 | ) | | (58,487 | ) | | (340,514 | ) | | (319,281 | ) | | (65,888 | ) | | (385,169 | ) |
Allowance for credit losses | (11,172 | ) | | (2,217 | ) | | (13,389 | ) | | (10,252 | ) | | (2,356 | ) | | (12,608 | ) | (26,603 | ) | | (4,743 | ) | | (31,346 | ) | | (10,920 | ) | | (2,085 | ) | | (13,005 | ) |
Net investment in sales-type lease receivables | 766,360 |
| | 161,036 |
| | 927,396 |
| | 769,830 |
| | 197,339 |
| | 967,169 |
| 727,562 |
| | 144,820 |
| | 872,382 |
| | 767,585 |
| | 168,018 |
| | 935,603 |
|
Loan receivables | | | |
| | |
| | |
| | |
| | |
| | | |
| | |
| | |
| | |
| | |
|
Loan receivables | 285,163 |
| | 28,100 |
| | 313,263 |
| | 300,319 |
| | 29,270 |
| | 329,589 |
| 254,786 |
| | 18,635 |
| | 273,421 |
| | 298,247 |
| | 27,926 |
| | 326,173 |
|
Allowance for credit losses | (6,016 | ) | | (719 | ) | | (6,735 | ) | | (6,777 | ) | | (837 | ) | | (7,614 | ) | (6,482 | ) | | (286 | ) | | (6,768 | ) | | (5,906 | ) | | (740 | ) | | (6,646 | ) |
Net investment in loan receivables | 279,147 |
| | 27,381 |
| | 306,528 |
| | 293,542 |
| | 28,433 |
| | 321,975 |
| 248,304 |
| | 18,349 |
| | 266,653 |
| | 292,341 |
| | 27,186 |
| | 319,527 |
|
Net investment in finance receivables | $ | 1,045,507 |
| | $ | 188,417 |
| | $ | 1,233,924 |
| | $ | 1,063,372 |
| | $ | 225,772 |
| | $ | 1,289,144 |
| $ | 975,866 |
| | $ | 163,169 |
| | $ | 1,139,035 |
| | $ | 1,059,926 |
| | $ | 195,204 |
| | $ | 1,255,130 |
|
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
Maturities of gross loansales-type lease receivables and gross sales-type leaseloan receivables at SeptemberJune 30, 20192020 were as follows:
| | | Sales-type Lease Receivables | | Loan Receivables | Sales-type Lease Receivables | | Loan Receivables |
| North America | | International | | Total | | North America | | International | | Total | North America | | International | | Total | | North America | | International | | Total |
Remaining for year ending December 31, 2019 | $ | 132,964 |
| | $ | 25,592 |
| | $ | 158,556 |
| | $ | 245,197 |
| | $ | 28,100 |
| | $ | 273,297 |
| |
Year ending December 31, 2020 | 383,029 |
| | 74,364 |
| | 457,393 |
| | 12,927 |
| | — |
| | 12,927 |
| |
Remaining for year ending December 31, 2020 | | $ | 220,405 |
| | $ | 41,451 |
| | $ | 261,856 |
| | $ | 216,777 |
| | $ | 18,635 |
| | $ | 235,412 |
|
Year ending December 31, 2021 | 276,009 |
| | 55,152 |
| | 331,161 |
| | 10,463 |
| | — |
| | 10,463 |
| 336,863 |
| | 68,465 |
| | 405,328 |
| | 12,032 |
| | — |
| | 12,032 |
|
Year ending December 31, 2022 | 171,049 |
| | 35,937 |
| | 206,986 |
| | 8,990 |
| | — |
| | 8,990 |
| 234,552 |
| | 47,971 |
| | 282,523 |
| | 10,414 |
| | — |
| | 10,414 |
|
Year ending December 31, 2023 | 83,306 |
| | 18,521 |
| | 101,827 |
| | 3,782 |
| | — |
| | 3,782 |
| 138,308 |
| | 26,324 |
| | 164,632 |
| | 5,582 |
| | — |
| | 5,582 |
|
Year ending December 31, 2024 | | 58,803 |
| | 10,403 |
| | 69,206 |
| | 6,807 |
| | — |
| | 6,807 |
|
Thereafter | 18,639 |
| | 5,544 |
| | 24,183 |
| | 3,804 |
| | — |
| | 3,804 |
| 9,519 |
| | 2,153 |
| | 11,672 |
| | 3,174 |
| | — |
| | 3,174 |
|
Total | $ | 1,064,996 |
| | $ | 215,110 |
| | $ | 1,280,106 |
| | $ | 285,163 |
| | $ | 28,100 |
| | $ | 313,263 |
| $ | 998,450 |
| | $ | 196,767 |
| | $ | 1,195,217 |
| | $ | 254,786 |
| | $ | 18,635 |
| | $ | 273,421 |
|
Aging of Receivables
The aging of gross finance receivables was as follows:
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 2020 |
| Sales-type Lease Receivables | | Loan Receivables | | |
| North America | | International | | North America | | International | | Total |
Past due amounts 0 - 90 days | $ | 974,864 |
| | $ | 194,055 |
| | $ | 246,491 |
| | $ | 18,288 |
| | $ | 1,433,698 |
|
Past due amounts > 90 days | 23,586 |
| | 2,712 |
| | 8,295 |
| | 347 |
| | 34,940 |
|
Total | $ | 998,450 |
| | $ | 196,767 |
| | $ | 254,786 |
| | $ | 18,635 |
| | $ | 1,468,638 |
|
Past due amounts > 90 days | |
| | |
| | |
| | |
| | |
|
Still accruing interest | $ | 4,982 |
| | $ | 1,091 |
| | $ | 5,205 |
| | $ | 191 |
| | $ | 11,469 |
|
Not accruing interest | 18,604 |
| | 1,621 |
| | 3,090 |
| | 156 |
| | 23,471 |
|
Total | $ | 23,586 |
| | $ | 2,712 |
| | $ | 8,295 |
| | $ | 347 |
| | $ | 34,940 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| Sales-type Lease Receivables | | Loan Receivables | | |
| North America | | International | | North America | | International | | Total |
Past due amounts 0 - 90 days | $ | 1,032,912 |
| | $ | 220,819 |
| | $ | 294,001 |
| | $ | 27,697 |
| | $ | 1,575,429 |
|
Past due amounts > 90 days | 22,940 |
| | 3,383 |
| | 4,246 |
| | 229 |
| | 30,798 |
|
Total | $ | 1,055,852 |
| | $ | 224,202 |
| | $ | 298,247 |
| | $ | 27,926 |
| | $ | 1,606,227 |
|
Past due amounts > 90 days | |
| | |
| | |
| | |
| | |
|
Still accruing interest | $ | 4,835 |
| | $ | 1,081 |
| | $ | 2,094 |
| | $ | 121 |
| | $ | 8,131 |
|
Not accruing interest | 18,105 |
| | 2,302 |
| | 2,152 |
| | 108 |
| | 22,667 |
|
Total | $ | 22,940 |
| | $ | 3,383 |
| | $ | 4,246 |
| | $ | 229 |
| | $ | 30,798 |
|
Allowance for Credit Losses
We provideestimate an allowance for probable credit losses based on historical loss experience, the nature and volume of our portfolios, adverse situations that may affect a client's ability to pay, prevailingcurrent conditions, reasonable and supportable forecasts and current economic outlook. Credit losses are estimated at the portfolio level based on asset type and geographic market. Historical loss experience was based on actual loss rates over the average term of the asset of five years for sales-type lease receivables and three years for loan receivables (including accrued interest). Additionally, we evaluate current conditions and our abilityreview third-party economic forecasts on a quarterly basis to managedetermine the collateral. We continually evaluate the adequacy ofimpact on the allowance for credit losses and make adjustments as necessary.losses. The assumptions used in determining an estimate of credit losses are inherently subjective and actual results may differ significantly from estimated reserves. The allowance for credit losses for the six months ended June 30, 2020 considers the current economic conditions and resulting impact on a client's future ability to pay amounts due.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
We establish credit approval limits based on the credit quality of the client and the type of equipment financed. Our policy is to discontinue revenue recognition for lease receivables that are more than 120 days past due and for loan receivables that are more than 90 days past due. We resume revenue recognition when the client's payments reduce the account aging to less than 60 days past due. Finance receivables deemed uncollectible are written off against the allowance after all collection efforts have been exhausted and management deems the account to be uncollectible. As of September 30, 2019,We monitor delinquency rates and have experienced a slight increase in our delinquencies during this current economic situation. However, we believe that our finance receivable credit risk is low because of the geographic and industry diversification of our clients and small account balances for most of our clients.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
Activity in the allowance for credit losses for the nine months ended September 30, 2019 and 2018finance receivables was as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Sales-type Lease Receivables | | Loan Receivables | | |
| North America | | International | | North America | | International | | Total |
Balance at January 1, 2019 | $ | 10,252 |
| | $ | 2,356 |
| | $ | 6,777 |
| | $ | 837 |
| | $ | 20,222 |
|
Amounts charged to expense | 4,587 |
| | 801 |
| | 3,547 |
| | 440 |
| | 9,375 |
|
Write-offs and other | (3,667 | ) | | (940 | ) | | (4,308 | ) | | (558 | ) | | (9,473 | ) |
Balance at September 30, 2019 | $ | 11,172 |
| | $ | 2,217 |
| | $ | 6,016 |
| | $ | 719 |
| | $ | 20,124 |
|
| | | | | | | | | |
| Sales-type Lease Receivables | | Loan Receivables | | |
| North America | | International | | North America | | International | | Total |
Balance at January 1, 2018 | $ | 7,721 |
| | $ | 2,794 |
| | $ | 7,098 |
| | $ | 1,020 |
| | $ | 18,633 |
|
Amounts charged to expense | 7,037 |
| | 829 |
| | 4,896 |
| | 331 |
| | 13,093 |
|
Write-offs and other | (3,979 | ) | | (1,359 | ) | | (5,282 | ) | | (466 | ) | | (11,086 | ) |
Balance at September 30, 2018 | $ | 10,779 |
| | $ | 2,264 |
| | $ | 6,712 |
| | $ | 885 |
| | $ | 20,640 |
|
Aging of Receivables
The aging of gross finance receivables at September 30, 2019 and December 31, 2018 was as follows:
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2019 |
| Sales-type Lease Receivables | | Loan Receivables | | |
| North America | | International | | North America | | International | | Total |
1 - 90 days | $ | 1,032,400 |
| | $ | 211,442 |
| | $ | 280,114 |
| | $ | 27,722 |
| | $ | 1,551,678 |
|
> 90 days | 32,596 |
| | 3,668 |
| | 5,049 |
| | 378 |
| | 41,691 |
|
Total | $ | 1,064,996 |
| | $ | 215,110 |
| | $ | 285,163 |
| | $ | 28,100 |
| | $ | 1,593,369 |
|
Past due amounts > 90 days | |
| | |
| | |
| | |
| | |
|
Still accruing interest | $ | 4,751 |
| | $ | 1,074 |
| | $ | 1,797 |
| | $ | 53 |
| | $ | 7,675 |
|
Not accruing interest | 27,845 |
| | 2,594 |
| | 3,252 |
| | 325 |
| | 34,016 |
|
Total | $ | 32,596 |
| | $ | 3,668 |
| | $ | 5,049 |
| | $ | 378 |
| | $ | 41,691 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
| Sales-type Lease Receivables | | Loan Receivables | | |
| North America | | International | | North America | | International | | Total |
1 - 90 days | $ | 1,069,290 |
| | $ | 238,114 |
| | $ | 294,126 |
| | $ | 29,079 |
| | $ | 1,630,609 |
|
> 90 days | 41,608 |
| | 3,922 |
| | 6,193 |
| | 191 |
| | 51,914 |
|
Total | $ | 1,110,898 |
| | $ | 242,036 |
| | $ | 300,319 |
| | $ | 29,270 |
| | $ | 1,682,523 |
|
Past due amounts > 90 days | |
| | |
| | |
| | |
| | |
|
Still accruing interest | $ | 7,917 |
| | $ | 1,111 |
| | $ | 1,769 |
| | $ | 72 |
| | $ | 10,869 |
|
Not accruing interest | 33,691 |
| | 2,811 |
| | 4,424 |
| | 119 |
| | 41,045 |
|
Total | $ | 41,608 |
| | $ | 3,922 |
| | $ | 6,193 |
| | $ | 191 |
| | $ | 51,914 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Sales-type Lease Receivables | | Loan Receivables | | |
| North America | | International | | North America | | International | | Total |
Balance at December 31, 2019 | $ | 10,920 |
| | $ | 2,085 |
| | $ | 5,906 |
| | $ | 740 |
| | $ | 19,651 |
|
Cumulative effect of accounting change | 9,271 |
| | 1,750 |
| | (1,116 | ) | | (402 | ) | | 9,503 |
|
Amounts charged to expense | 9,025 |
| | 1,257 |
| | 4,758 |
| | 208 |
| | 15,248 |
|
Write-offs | (3,536 | ) | | (386 | ) | | (4,542 | ) | | (297 | ) | | (8,761 | ) |
Recoveries | 946 |
| | 44 |
| | 1,386 |
| | 1 |
| | 2,377 |
|
Other | (23 | ) | | (7 | ) | | 90 |
| | 36 |
| | 96 |
|
Balance at June 30, 2020 | $ | 26,603 |
| | $ | 4,743 |
| | $ | 6,482 |
| | $ | 286 |
| | $ | 38,114 |
|
| | | | | | | | | |
| Sales-type Lease Receivables | | Loan Receivables | | |
| North America | | International | | North America | | International | | Total |
Balance at January 1, 2019 | $ | 10,253 |
| | $ | 2,355 |
| | $ | 6,777 |
| | $ | 837 |
| | $ | 20,222 |
|
Amounts charged to expense | 3,660 |
| | 455 |
| | 2,329 |
| | 315 |
| | 6,759 |
|
Write-offs | (3,452 | ) | | (533 | ) | | (4,649 | ) | | (451 | ) | | (9,085 | ) |
Recoveries | 813 |
| | 167 |
| | 1,909 |
| | 4 |
| | 2,893 |
|
Other | 48 |
| | (182 | ) | | 8 |
| | 54 |
| | (72 | ) |
Balance at June 30, 2019 | $ | 11,322 |
| | $ | 2,262 |
| | $ | 6,374 |
| | $ | 759 |
| | $ | 20,717 |
|
Credit Quality
The extension of credit and management of credit lines to new and existing clients uses a combination of an automateda client's credit score, where available, and a detailed manual review of the client'stheir financial condition and when applicable, payment history.history or an automated process for certain small dollar applications. Once credit is granted, the payment performance of the client is managed through automated collections processes and is supplemented with direct
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
follow up should an account become delinquent. We have robust automated collections and extensive portfolio management processes. The portfolio management processes are in place to track that our global strategy is executed, collection resources are allocated appropriately and enhanced tools and processes are implemented as needed.
We use a third party to score the majority of the North America portfolio on a quarterly basis using a commercial credit score. We do not use a third party to score our International portfolio because the cost to do so is prohibitive, given that it is a localized process, and there is no single credit score model that covers all countries.
The table below shows the North America portfolio at September 30, 2019 and December 31, 2018 by relative risk class based on the relative scores of the accounts within each class. The relative scores are determined based on a number of factors, including thefinancial information, payment history, company type and ownership structure, payment history and financial information.structure. A fourth class is shown for accounts that are not scored. Absence of a score is not indicative of the credit quality of the account. The degree of risk (low, medium, high), as defined by the third party, refers to the relative risk that an account may become delinquent in the next 12 months.
Low risk accounts are companies with very good credit scores and are considered to approximate the top 30% of all commercial borrowers.
Medium risk accounts are companies with average to good credit scores and are considered to approximate the middle 40% of all commercial borrowers.
High risk accounts are companies with poor credit scores, are delinquent or are at risk of becoming delinquent and are considered to approximate the bottom 30% of all commercial borrowers.
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Sales-type lease receivables | |
| | |
|
Low | $ | 853,156 |
| | $ | 922,414 |
|
Medium | 160,969 |
| | 131,650 |
|
High | 22,315 |
| | 22,110 |
|
Not Scored | 28,556 |
| | 34,724 |
|
Total | $ | 1,064,996 |
| | $ | 1,110,898 |
|
Loan receivables | |
| | |
|
Low | $ | 215,319 |
| | $ | 238,620 |
|
Medium | 53,176 |
| | 43,952 |
|
High | 5,379 |
| | 5,947 |
|
Not Scored | 11,289 |
| | 11,800 |
|
Total | $ | 285,163 |
| | $ | 300,319 |
|
Lease Income
Lease income from sales-type leases for the three and nine months ended September 30, 2019 and 2018 was as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Profit recognized at commencement (1) | $ | 38,086 |
| | $ | 38,204 |
| | $ | 108,743 |
| | $ | 125,133 |
|
Interest income | 56,522 |
| | 60,653 |
| | 174,045 |
| | 183,340 |
|
Total lease income from sales-type leases | $ | 94,608 |
| | $ | 98,857 |
| | $ | 282,788 |
| | $ | 308,473 |
|
(1) Lease contracts do not include variable lease payments.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
The table below shows the gross sales-type lease receivable and loan receivable balances by relative risk class and year of origination based on the relative scores of the accounts within each class.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales Type Lease Receivables | | Loan Receivables | | Total |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | |
Low | $ | 136,197 |
| | $ | 252,315 |
| | $ | 199,078 |
| | $ | 118,201 |
| | $ | 49,013 |
| | $ | 19,906 |
| | $ | 187,311 |
| | $ | 962,021 |
|
Medium | 25,754 |
| | 57,452 |
| | 45,269 |
| | 28,693 |
| | 10,886 |
| | 5,688 |
| | 53,748 |
| | 227,490 |
|
High | 3,249 |
| | 6,342 |
| | 5,295 |
| | 3,380 |
| | 1,802 |
| | 323 |
| | 4,210 |
| | 24,601 |
|
Not Scored | 35,880 |
| | 82,099 |
| | 56,596 |
| | 33,466 |
| | 15,450 |
| | 2,883 |
| | 28,152 |
| | 254,526 |
|
Total | $ | 201,080 |
| | $ | 398,208 |
| | $ | 306,238 |
| | $ | 183,740 |
| | $ | 77,151 |
| | $ | 28,800 |
| | $ | 273,421 |
| | $ | 1,468,638 |
|
The majority of the Not Scored amounts above is within our International portfolio. We do not use a third party to score our International portfolio because the cost to do so is prohibitive, given that it is a localized process, and there is no single credit score model that covers all countries. International credit applications below $50 thousand are subjected to an automated review process. All other credit applications are manually reviewed. A manual review includes obtaining client financial information, credit reports and other available financial information. Approximately 80% of credit applications are approved or denied through the automated review process.
Lease Income
Lease income from sales-type leases was as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Profit recognized at commencement (1) | $ | 21,271 |
| | $ | 36,508 |
| | $ | 51,166 |
| | $ | 73,112 |
|
Interest income | 34,055 |
| | 58,045 |
| | 68,315 |
| | 117,523 |
|
Total lease income from sales-type leases | $ | 55,326 |
| | $ | 94,553 |
| | $ | 119,481 |
| | $ | 190,635 |
|
(1) Lease contracts do not include variable lease payments.
Lessor Operating Leases
We also lease mailing equipment under operating leases with terms of one to five years. Maturities of these operating leases are as follows:
| | Remaining for year ending December 31, 2019 | $ | 9,092 |
| |
Year ending December 31, 2020 | 30,986 |
| |
Remaining for year ending December 31, 2020 | | $ | 20,222 |
|
Year ending December 31, 2021 | 15,600 |
| 27,899 |
|
Year ending December 31, 2022 | 6,886 |
| 10,881 |
|
Year ending December 31, 2023 | 3,154 |
| 4,899 |
|
Year ending December 31, 2024 | | 1,528 |
|
Thereafter | 412 |
| 200 |
|
Total | $ | 66,130 |
| $ | 65,629 |
|
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
8. Intangible Assets, Goodwill and GoodwillOther Assets
Intangible Assets
Intangible assets at September 30, 2019 and December 31, 2018 consisted of the following:
| | | September 30, 2019 | | December 31, 2018 | June 30, 2020 | | December 31, 2019 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Customer relationships | $ | 347,515 |
| | $ | (164,336 | ) | | $ | 183,179 |
| | $ | 338,320 |
| | $ | (149,539 | ) | | $ | 188,781 |
| $ | 268,178 |
| | $ | (101,688 | ) | | $ | 166,490 |
| | $ | 265,665 |
| | $ | (88,550 | ) | | $ | 177,115 |
|
Software & technology | 52,309 |
| | (38,517 | ) | | 13,792 |
| | 54,297 |
| | (35,325 | ) | | 18,972 |
| 31,600 |
| | (23,012 | ) | | 8,588 |
| | 31,600 |
| | (19,999 | ) | | 11,601 |
|
Trademarks & other | 21,365 |
| | (18,621 | ) | | 2,744 |
| | 22,305 |
| | (16,858 | ) | | 5,447 |
| 13,324 |
| | (12,942 | ) | | 382 |
| | 13,324 |
| | (11,400 | ) | | 1,924 |
|
Total intangible assets | $ | 421,189 |
| | $ | (221,474 | ) | | $ | 199,715 |
| | $ | 414,922 |
| | $ | (201,722 | ) | | $ | 213,200 |
| $ | 313,102 |
| | $ | (137,642 | ) | | $ | 175,460 |
| | $ | 310,589 |
| | $ | (119,949 | ) | | $ | 190,640 |
|
Amortization expense was $9 million and $10 million for both the three months ended SeptemberJune 30, 2020 and 2019, and 2018, respectively, and $27 million and $29$18 million for both the ninesix months ended SeptemberJune 30, 20192020 and 2018, respectively.2019.
Future amortization expense as of SeptemberJune 30, 20192020 is shown in the table below. Actual amortization expense may differ due to, among other things, fluctuations in foreign currency exchange rates, impairments, acquisitions and accelerated amortization.
| | Remaining for year ending December 31, 2019 | $ | 9,171 |
| |
Year ending December 31, 2020 | 33,368 |
| |
Remaining for year ending December 31, 2020 | | $ | 15,699 |
|
Year ending December 31, 2021 | 29,972 |
| 30,227 |
|
Year ending December 31, 2022 | 29,026 |
| 29,281 |
|
Year ending December 31, 2023 | 26,188 |
| 26,443 |
|
Year ending December 31, 2024 | | 26,443 |
|
Thereafter | 71,990 |
| 47,367 |
|
Total | $ | 199,715 |
| $ | 175,460 |
|
Goodwill
Changes in the carrying value of goodwill, by reporting segment, are shown in the table below.
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | Impairment | | Acquisition | | Currency impact | | June 30, 2020 |
Global Ecommerce | $ | 609,431 |
| | $ | (198,169 | ) | | $ | — |
| | $ | — |
| | $ | 411,262 |
|
Presort Services | 212,529 |
| | — |
| | 8,463 |
| | — |
| | 220,992 |
|
Commerce Services | 821,960 |
| | (198,169 | ) | | 8,463 |
| | — |
| | 632,254 |
|
SendTech Solutions | 502,219 |
| | — |
| | — |
| | (1,688 | ) | | 500,531 |
|
Total goodwill | $ | 1,324,179 |
| | $ | (198,169 | ) | | $ | 8,463 |
| | $ | (1,688 | ) | | $ | 1,132,785 |
|
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. At December 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 in the future. These estimates and assumptions are considered Level 3 inputs under the fair value hierarchy.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
Goodwill
ChangesWe 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 goodwill, bythe Global Ecommerce reporting segment, for the nine months ended September 30, 2019 are shown in the table below.
|
| | | | | | | | | | | | | | | |
| December 31, 2018 | | Acquisition/(divestiture) | | Currency impact | | September 30, 2019 |
Global Ecommerce | $ | 609,431 |
| | $ | — |
| | $ | — |
| | $ | 609,431 |
|
Presort Services | 207,465 |
| | 5,064 |
| | — |
| | 212,529 |
|
Commerce Services | 816,896 |
| | 5,064 |
| | — |
| | 821,960 |
|
SendTech Solutions | 515,455 |
| | (10,490 | ) | | (9,888 | ) | | 495,077 |
|
Total goodwill | $ | 1,332,351 |
| | $ | (5,426 | ) | | $ | (9,888 | ) | | $ | 1,317,037 |
|
unit to its estimated fair value.
In January 2019,Other Assets
During the second quarter of 2020, we wrote off $10surrendered certain company owned life insurance policies and received proceeds of $46 million. We did not record a gain or loss on the surrender; however, the surrender resulted in a tax expense of $12 million (see Note 13 for further information). Also, during the second quarter of goodwill associated with Market Exits.2020, we sold our interest in an equity investment for $12 million and recognized a gain of $12 million.
9. Fair Value Measurements and Derivative Instruments
We measure certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. An entity is required to classify certain assets and liabilities measured at fair value based on the following fair value hierarchy that prioritizes the inputs used to measure fair value:
| |
Level 1 – | Unadjusted quoted prices in active markets for identical assets and liabilities. |
| |
Level 2 – | Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| |
Level 3 – | Unobservable inputs that are supported by little or no market activity, may be derived from internally developed methodologies based on management’s best estimate of fair value and that are significant to the fair value of the asset or liability. |
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect its placement within the fair value hierarchy. The following tables show, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis at September 30, 2019 and December 31, 2018.basis.
| | | September 30, 2019 | June 30, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Investment securities | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Money market funds / certificates of deposit | $ | 157,114 |
| | $ | 260,383 |
| | $ | — |
| | $ | 417,497 |
| |
Money market funds | | $ | 85,243 |
| | $ | 441,600 |
| | $ | — |
| | $ | 526,843 |
|
Equity securities | — |
| | 21,814 |
| | — |
| | 21,814 |
| — |
| | 20,822 |
| | — |
| | 20,822 |
|
Commingled fixed income securities | 1,655 |
| | 20,819 |
| | — |
| | 22,474 |
| 1,713 |
| | 19,376 |
| | — |
| | 21,089 |
|
Government and related securities | 71,908 |
| | 18,079 |
| | — |
| | 89,987 |
| 39,525 |
| | 18,583 |
| | — |
| | 58,108 |
|
Corporate debt securities | — |
| | 73,332 |
| | — |
| | 73,332 |
| — |
| | 75,557 |
| | — |
| | 75,557 |
|
Mortgage-backed / asset-backed securities | — |
| | 74,718 |
| | — |
| | 74,718 |
| — |
| | 115,742 |
| | — |
| | 115,742 |
|
Derivatives | | | | | |
| |
|
| | | | | |
| |
|
|
Foreign exchange contracts | — |
| | 729 |
| | — |
| | 729 |
| — |
| | 308 |
| | — |
| | 308 |
|
Total assets | $ | 230,677 |
| | $ | 469,874 |
| | $ | — |
| | $ | 700,551 |
| $ | 126,481 |
| | $ | 691,988 |
| | $ | — |
| | $ | 818,469 |
|
Liabilities: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Derivatives | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Interest rate swaps | | $ | — |
| | $ | (1,605 | ) | | $ | — |
| | $ | (1,605 | ) |
Foreign exchange contracts | $ | — |
| | $ | (5,454 | ) | | $ | — |
| | $ | (5,454 | ) | — |
| | (1,106 | ) | | — |
| | (1,106 | ) |
Total liabilities | $ | — |
| | $ | (5,454 | ) | | $ | — |
| | $ | (5,454 | ) | $ | — |
| | $ | (2,711 | ) | | $ | — |
| | $ | (2,711 | ) |
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
| | | December 31, 2018 | December 31, 2019 |
| Level 1 | | Level 2 | | Level 3 | | Total | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Investment securities | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Money market funds / certificates of deposit | $ | 220,756 |
| | $ | 391,891 |
| | $ | — |
| | $ | 612,647 |
| |
Money market funds | | $ | 161,441 |
| | $ | 240,364 |
| | $ | — |
| | $ | 401,805 |
|
Equity securities | — |
| | 19,133 |
| | — |
| | 19,133 |
| — |
| | 21,979 |
| | — |
| | 21,979 |
|
Commingled fixed income securities | 1,570 |
| | 20,141 |
| | — |
| | 21,711 |
| 1,656 |
| | 18,404 |
| | — |
| | 20,060 |
|
Government and related securities | 98,790 |
| | 9,787 |
| | — |
| | 108,577 |
| 64,572 |
| | 17,478 |
| | — |
| | 82,050 |
|
Corporate debt securities | — |
| | 56,938 |
| | — |
| | 56,938 |
| — |
| | 72,149 |
| | — |
| | 72,149 |
|
Mortgage-backed / asset-backed securities | — |
| | 98,334 |
| | — |
| | 98,334 |
| — |
| | 66,339 |
| | — |
| | 66,339 |
|
Derivatives | |
| | |
| | |
| |
|
| |
| | |
| | |
| |
|
|
Foreign exchange contracts | — |
| | 2,031 |
| | — |
| | 2,031 |
| — |
| | 3,256 |
| | — |
| | 3,256 |
|
Total assets | $ | 321,116 |
| | $ | 598,255 |
| | $ | — |
| | $ | 919,371 |
| $ | 227,669 |
| | $ | 439,969 |
| | $ | — |
| | $ | 667,638 |
|
Liabilities: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Derivatives | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Foreign exchange contracts | $ | — |
| | $ | (735 | ) | | $ | — |
| | $ | (735 | ) | $ | — |
| | $ | (1,402 | ) | | $ | — |
| | $ | (1,402 | ) |
Total liabilities | $ | — |
| | $ | (735 | ) | | $ | — |
| | $ | (735 | ) | $ | — |
| | $ | (1,402 | ) | | $ | — |
| | $ | (1,402 | ) |
Investment Securities
The valuation of investment securities is based on the market approach using inputs that are observable, or can be corroborated by observable data, in an active marketplace. The following information relates to our classification into the fair value hierarchy:
| |
• | Money Market Funds / Certificates of Deposit:Funds: Money market funds typically invest in government securities, certificates of deposit, commercial paper and other highly liquid, low risk securities. Money market funds are principally used for overnight deposits and are classified as Level 1 when unadjusted quoted prices in active markets are available and as Level 2 when they are not actively traded on an exchange. Certificates of deposit typically invest with financial institutions and have specific maturity dates and a fixed rate of return, and are classified as Level 2. Direct investments in commercial paper, classified as Level 2, comprised 3% of the December 2018 balance. |
| |
• | Equity Securities: Equity securities are comprised of mutual funds investing in U.S. and foreign stocks. These mutual funds are classified as Level 2. |
| |
• | Commingled Fixed Income Securities: Commingled fixed income securities are comprised of mutual funds that invest in a variety of fixed income securities, including securities of the U.S. government and its agencies, corporate debt, mortgage-backed securities and asset-backed securities. Fair value is based on the value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding, as reported by the fund manager. These mutual funds are classified as Level 1 when unadjusted quoted prices in active markets are available and as Level 2 when they are not actively traded on an exchange. |
| |
• | Government and Related Securities: Debt securities are classified as Level 1 where active, high volume trades for identical securities exist. Valuation adjustments are not applied to these securities. Debt securities are classified as Level 2 where fair value is determined using quoted market prices for similar securities or benchmarking model derived prices to quoted market prices and trade data for identical or comparable securities. |
| |
• | Corporate Debt Securities: Corporate debt securities are valued using recently executed comparable transactions, market price quotations or bond spreads for the same maturity as the security. These securities are classified as Level 2. |
| |
• | Mortgage-Backed Securities / Asset-Backed Securities: These securities are valued based on external pricing indices or external price/spread data. These securities are classified as Level 2. |
Available-For-SaleDerivative Securities
| |
• | Foreign Exchange Contracts: The valuation of foreign exchange derivatives is based on the market approach using observable market inputs, such as foreign currency spot and forward rates and yield curves. We have not seen a material change in the creditworthiness of those banks acting as derivative counterparties. These securities are classified as Level 2. |
| |
• | Interest Rate Swaps: The valuation of interest rate swaps is based on an income approach using inputs that are observable or that can be derived from, or corroborated by, observable market data. These securities are classified as Level 2. |
Investment securities classified as available-for-sale are recorded at fair value with unrealized holding gains and losses, net of tax, recorded in accumulated other comprehensive income (AOCI). Available-for-sale investment securities are predominantly held at the Pitney Bowes Bank, whose primary business is to provide financing solutions to clients that rent postage meters and purchase supplies.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
Available-For-Sale Securities
Available-for-sale securities are predominantly held at September 30, 2019the Pitney Bowes Bank, whose primary business is to provide financing solutions to clients that rent postage meters and December 31, 2018purchase supplies. Investment securities classified as available-for-sale are recorded at fair value with changes in fair value due to market conditions (i.e. interest rates) recorded in accumulated other comprehensive income (AOCI) and changes in fair value due to credit conditions recorded in earnings. Individual securities are considered impaired when the fair value declines below amortized cost. We use a discounted cash flow model to determine the amount of unrealized losses due to credit losses. Unrealized losses recorded during the period due to credit conditions were immaterial.
Available-for-sale securities consisted of the following:
| | | September 30, 2019 | June 30, 2020 |
| Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Estimated fair value | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Estimated fair value |
Government and related securities | $ | 88,050 |
| | $ | 1,946 |
| | $ | (47 | ) | | $ | 89,949 |
| $ | 55,576 |
| | $ | 1,289 |
| | $ | (338 | ) | | $ | 56,527 |
|
Corporate debt securities | 71,763 |
| | 1,907 |
| | (338 | ) | | 73,332 |
| 71,689 |
| | 4,558 |
| | (690 | ) | | 75,557 |
|
Commingled fixed income securities | 1,666 |
| | — |
| | (11 | ) | | 1,655 |
| 1,692 |
| | 21 |
| | — |
| | 1,713 |
|
Mortgage-backed / asset-backed securities | 73,777 |
| | 1,269 |
| | (328 | ) | | 74,718 |
| 113,497 |
| | 2,520 |
| | (275 | ) | | 115,742 |
|
Total | $ | 235,256 |
| | $ | 5,122 |
| | $ | (724 | ) | | $ | 239,654 |
| $ | 242,454 |
| | $ | 8,388 |
| | $ | (1,303 | ) | | $ | 249,539 |
|
| | | December 31, 2018 | December 31, 2019 |
| Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Estimated fair value | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Estimated fair value |
Government and related securities | $ | 109,776 |
| | $ | 47 |
| | $ | (1,336 | ) | | $ | 108,487 |
| $ | 80,732 |
| | $ | 1,358 |
| | $ | (114 | ) | | $ | 81,976 |
|
Corporate debt securities | 58,714 |
| | 4 |
| | (1,780 | ) | | 56,938 |
| 70,426 |
| | 2,009 |
| | (286 | ) | | 72,149 |
|
Commingled fixed income securities | 1,637 |
| | — |
| | (67 | ) | | 1,570 |
| 1,675 |
| | — |
| | (19 | ) | | 1,656 |
|
Mortgage-backed / asset-backed securities | 100,186 |
| | 167 |
| | (2,019 | ) | | 98,334 |
| 65,679 |
| | 960 |
| | (300 | ) | | 66,339 |
|
Total | $ | 270,313 |
| | $ | 218 |
| | $ | (5,202 | ) | | $ | 265,329 |
| $ | 218,512 |
| | $ | 4,327 |
| | $ | (719 | ) | | $ | 222,120 |
|
The aggregate unrealized holding losses of investmentInvestment securities in a loss position at September 30, 2019 and December 31, 2018 were as follows:
| | | September 30, 2019 | | December 31, 2018 | June 30, 2020 | | December 31, 2019 |
| Fair Value | | Gross unrealized losses | | Fair Value | | Gross unrealized losses | Fair Value | | Gross unrealized losses | | Fair Value | | Gross unrealized losses |
Less than 12 continuous months | $ | 35,784 |
| | $ | 360 |
| | $ | 48,318 |
| | $ | 847 |
| $ | 46,650 |
| | $ | 1,192 |
| | $ | 52,521 |
| | $ | 583 |
|
Greater than 12 continuous months | 28,235 |
| | 364 |
| | 177,331 |
| | 4,355 |
| 4,441 |
| | 111 |
| | 9,227 |
| | 136 |
|
Total | $ | 64,019 |
| | $ | 724 |
| | $ | 225,649 |
| | $ | 5,202 |
| $ | 51,091 |
| | $ | 1,303 |
| | $ | 61,748 |
| | $ | 719 |
|
Our allowance for credit losses on available-for-sale investment securities was not significant at June 30, 2020. At June 30, 2020, approximately 10% of total securities in the investment portfolio were in a net loss position. We believe our allowance for credit losses on available-for-sale investment securities is adequate as the majority of our investments are in short-term, highly liquid investments, high grade corporate securities and U.S. government securities. We have not recognized an other-than-temporary impairment on any of the investment securities in an unrealized loss position because we have the ability and intent to hold these securities until recovery of the unrealized losses or expect to receive the stated principal and interest at maturity.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
Scheduled maturities of available-for-sale securities at SeptemberJune 30, 20192020 were as follows:
| | | Amortized cost | | Estimated fair value | Amortized cost | | Estimated fair value |
Within 1 year | $ | 39,047 |
| | $ | 39,133 |
| $ | 26,274 |
| | $ | 26,407 |
|
After 1 year through 5 years | 58,494 |
| | 59,246 |
| 56,027 |
| | 58,709 |
|
After 5 years through 10 years | 69,077 |
| | 70,267 |
| 47,838 |
| | 49,663 |
|
After 10 years | 68,638 |
| | 71,008 |
| 112,315 |
| | 114,760 |
|
Total | $ | 235,256 |
| | $ | 239,654 |
| $ | 242,454 |
| | $ | 249,539 |
|
The scheduled maturities of mortgage-backed and asset-backed securities may not coincide with the actual payment, as borrowers have the right to prepay obligations.
We have not experienced any significant write-offs in our investment portfolio. The majority of our mortgage-backed securities are either guaranteed or supported by the U.S. Government. We have no investments in inactive markets that would warrant a possible change in our pricing methods or classification within the fair value hierarchy.
Held-to-Maturity Securities
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
Held-to-maturity securities at June 30, 2020 and December 31, 2019, include $257 million and $383 million, respectively, of short-term, highly liquid time deposits. Due to the short-term nature of these securities, the carrying value approximates fair value.
Derivative Instruments
In the normal course of business, we are exposed to the impact of changes in foreign currency exchange rates and interest rates. We mitigate these exposures by following established risk management policies and procedures, including the use of derivatives. We use derivative instruments to limit the effects of exchange rate fluctuations on financial results and manage the cost of debt. We do not use derivatives for trading or speculative purposes. We record derivative instruments at fair value and the accounting for changes in the fair value depends on the intended use of the derivative, the resulting designation and the effectiveness of the instrument in offsetting the risk exposure it is designed to hedge.
Foreign Exchange Contracts
We enter into foreign exchange contracts to mitigate the currency risk associated with the anticipated purchase of inventory between affiliates and from third parties. These contracts are designated as cash flow hedges. The effective portion of the gain or loss on cash flow hedges is included in AOCI in the period that the change in fair value occurs and is reclassified to earnings in the period that the hedged item is recorded in earnings. No amount of ineffectiveness was recorded in earnings for these designated cash flow hedges. At both SeptemberJune 30, 20192020 and December 31, 2018,2019, we had outstanding contracts associated with these anticipated transactions with notional amounts of $8$7 million.
The valuation of foreign exchange derivatives is based on the market approach using observable market inputs, such as foreign currency spot and forward rates and yield curves. We have not seen a material change in the creditworthiness of those banks acting as derivative counterparties in the three months ended September 30, 2019.
Interest Rate Swap
We had an interest rate swap with a notional amount of $300 million to mitigate the interest rate risk associated with $300 million of variable-rate term loans. This swap matured in September 2018. While outstanding, the swap was designated as a cash flow hedge and the effective portion of the gain or loss on the cash flow hedge was included in AOCI in the period that the change in fair value occurred and reclassified to earnings in the period that the hedged item was recorded in earnings.
The fair value of derivative instruments at September 30, 2019 and December 31, 2018 was as follows:
|
| | | | | | | | | | |
Designation of Derivatives | | Balance Sheet Location | | September 30, 2019 | | December 31, 2018 |
Derivatives designated as hedging instruments | | | | |
| | |
|
Foreign exchange contracts | | Other current assets and prepayments | | $ | 113 |
| | $ | 61 |
|
| | Accounts payable and accrued liabilities | | (52 | ) | | (104 | ) |
| | | | | | |
Derivatives not designated as hedging instruments | | | | |
| | |
|
Foreign exchange contracts | | Other current assets and prepayments | | 616 |
| | 1,970 |
|
| | Accounts payable and accrued liabilities | | (5,402 | ) | | (631 | ) |
| | | | | | |
| | Total derivative assets | | $ | 729 |
| | $ | 2,031 |
|
| | Total derivative liabilities | | (5,454 | ) | | (735 | ) |
| | Total net derivative (liability) asset | | $ | (4,725 | ) | | $ | 1,296 |
|
Amounts included in AOCI at SeptemberJune 30, 2019 related to derivative instruments2020 will be recognized in earnings within the next 12 months.
Interest Rate Swaps
During the quarter, we entered into interest rate swap agreements with an aggregate notional amount of $500 million that are designated as cash flow hedges. The fair value of the interest rate swaps is recorded as a derivative asset or liability at the end of each reporting period with the change in fair value reflected in AOCI.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
The following represents the resultsfair value of derivative instruments was as follows:
|
| | | | | | | | | | |
Designation of Derivatives | | Balance Sheet Location | | June 30, 2020 | | December 31, 2019 |
Derivatives designated as hedging instruments | | | | |
| | |
|
Foreign exchange contracts | | Other current assets and prepayments | | $ | 46 |
| | $ | 207 |
|
| | Accounts payable and accrued liabilities | | (214 | ) | | (56 | ) |
| | | | | | |
Interest rate swaps | | Other noncurrent liabilities | | (1,605 | ) | | — |
|
| | | | | | |
Derivatives not designated as hedging instruments | | | | |
| | |
|
Foreign exchange contracts | | Other current assets and prepayments | | 262 |
| | 3,049 |
|
| | Accounts payable and accrued liabilities | | (892 | ) | | (1,346 | ) |
| | | | | | |
| | Total derivative assets | | $ | 308 |
| | $ | 3,256 |
|
| | Total derivative liabilities | | (2,711 | ) | | (1,402 | ) |
| | Total net derivative (liability) asset | | $ | (2,403 | ) | | $ | 1,854 |
|
Results of cash flow hedging relationships for the three and nine months ended September 30, 2019 and 2018:were as follows:
| | | | Three Months Ended September 30, | | Three Months Ended June 30, |
| | Derivative Gain (Loss) Recognized in AOCI (Effective Portion) | | Location of Gain (Loss) (Effective Portion) | | Gain (Loss) Reclassified from AOCI to Earnings (Effective Portion) | | Derivative Gain (Loss) Recognized in AOCI (Effective Portion) | | Location of Gain (Loss) (Effective Portion) | | Gain (Loss) Reclassified from AOCI to Earnings (Effective Portion) |
Derivative Instrument | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Foreign exchange contracts | | $ | 156 |
| | $ | (42 | ) | | Revenue | | $ | (98 | ) | | $ | (38 | ) | | $ | (121 | ) | | $ | (320 | ) | | Revenue | | $ | (64 | ) | | $ | (36 | ) |
| | |
| | |
| | Cost of sales | | 54 |
| | 52 |
| | |
| | |
| | Cost of sales | | 32 |
| | 29 |
|
Interest rate swap | | — |
| | (824 | ) | | Interest Expense | | — |
| | — |
| | (1,605 | ) | | — |
| | Interest expense | | — |
| | — |
|
| | $ | 156 |
| | $ | (866 | ) | | | | $ | (44 | ) | | $ | 14 |
| | $ | (1,726 | ) | | $ | (320 | ) | | | | $ | (32 | ) | | $ | (7 | ) |
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | Derivative Gain (Loss) Recognized in AOCI (Effective Portion) | | Location of Gain (Loss) (Effective Portion) | | Gain (Loss) Reclassified from AOCI to Earnings (Effective Portion) | | Derivative Gain (Loss) Recognized in AOCI (Effective Portion) | | Location of Gain (Loss) (Effective Portion) | | Gain (Loss) Reclassified from AOCI to Earnings (Effective Portion) |
Derivative Instrument | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Foreign exchange contracts | | $ | 181 |
| | $ | 111 |
| | Revenue | | $ | (23 | ) | | $ | 38 |
| | $ | (281 | ) | | $ | 25 |
| | Revenue | | $ | (3 | ) | | $ | 75 |
|
| | |
| | |
| | Cost of sales | | 99 |
| | (33 | ) | | |
| | |
| | Cost of sales | | 42 |
| | 45 |
|
Interest rate swap | | — |
| | (1,776 | ) | | Interest Expense | | — |
| | — |
| | (1,605 | ) | | — |
| | Interest expense | | — |
| | — |
|
| | $ | 181 |
| | $ | (1,665 | ) | | | | $ | 76 |
| | $ | 5 |
| | $ | (1,886 | ) | | $ | 25 |
| | | | $ | 39 |
| | $ | 120 |
|
We enter into foreign exchange contracts to minimize the impact of exchange rate fluctuations on short-term intercompany loans and related interest that are denominated in a foreign currency. The revaluation of intercompany loans and interest and the corresponding mark-to-market adjustment on derivatives are recorded in earnings. The table below represents the mark-to-market adjustments of non-designated derivative instruments for the three and nine months ended September 30, 2019 and 2018. All outstanding contracts at SeptemberJune 30, 20192020 mature within 12 months.
|
| | | | | | | | | | |
| | | | Three Months Ended September 30, |
| | | | Derivative Gain (Loss) Recognized in Earnings |
Derivatives Instrument | | Location of Derivative Gain (Loss) | | 2019 | | 2018 |
Foreign exchange contracts | | Selling, general and administrative expense | | $ | (11,385 | ) | | $ | (1,948 | ) |
| | | | | | |
| | | | Nine Months Ended September 30, |
| | | | Derivative Gain (Loss) Recognized in Earnings |
Derivatives Instrument | | Location of Derivative Gain (Loss) | | 2019 | | 2018 |
Foreign exchange contracts | | Selling, general and administrative expense | | $ | (6,181 | ) | | $ | (20,344 | ) |
Credit-Risk-Related Contingent Features
Certain derivative instruments contain credit-risk-related contingent features that require us to post collateral based on a combination of our long-term senior unsecured debt ratings and the net fair value of our derivatives. At September 30, 2019, we had 0 cash collateral posted.
Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, investment securities, accounts receivable, loan receivables, derivative instruments, accounts payable and debt. The carrying value for cash and cash equivalents, accounts receivable, loans receivable and accounts payable approximate fair value because of the short maturity of these instruments.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
The mark-to-market adjustments of non-designated derivative instruments were as follows:
|
| | | | | | | | | | |
| | | | Three Months Ended June 30, |
| | | | Derivative Gain (Loss) Recognized in Earnings |
Derivatives Instrument | | Location of Derivative Gain (Loss) | | 2020 | | 2019 |
Foreign exchange contracts | | Selling, general and administrative expense | | $ | 1,200 |
| | $ | (65 | ) |
| | | | | | |
| | | | Six Months Ended June 30, |
| | | | Derivative Gain (Loss) Recognized in Earnings |
Derivatives Instrument | | Location of Derivative Gain (Loss) | | 2020 | | 2019 |
Foreign exchange contracts | | Selling, general and administrative expense | | $ | (3,667 | ) | | $ | 5,205 |
|
Fair Value of Financial Instruments
Financial instruments not reported at fair value on a recurring basis include cash and cash equivalents, accounts receivable, loan receivables, accounts payable and debt. The carrying value for cash and cash equivalents, accounts receivable, loans receivable and accounts payable approximate fair value. The fair value of debt is estimated based on recently executed transactions and market price quotations. The inputs used to determine the fair value of debt are classified as Level 2 in the fair value hierarchy. The carrying value and estimated fair value of our debt at September 30, 2019 and December 31, 2018 werewas as follows:
| | | September 30, 2019 | | December 31, 2018 | June 30, 2020 | | December 31, 2019 |
Carrying value | $ | 3,069,091 |
| | $ | 3,265,608 |
| $ | 2,716,747 |
| | $ | 2,739,722 |
|
Fair value | $ | 2,953,853 |
| | $ | 3,003,678 |
| $ | 2,156,837 |
| | $ | 2,572,794 |
|
10. Restructuring Charges and Asset Impairments
Restructuring Charges
Activity in our restructuring reserves for the nine months ended September 30, 2019 and 2018 was as follows:
| | | | Severance and benefits costs | | Other exit costs | | Total |
Balance at January 1, 2020 | | $ | 11,937 |
| | $ | 69 |
| | $ | 12,006 |
|
Expenses, net | | 6,357 |
| | 546 |
| | 6,903 |
|
Cash payments | | (10,772 | ) | | (593 | ) | | (11,365 | ) |
Balance at June 30, 2020 | | $ | 7,522 |
| | $ | 22 |
| | $ | 7,544 |
|
| Severance and benefits costs | | Other exit costs | | Total | | | | | |
Balance at January 1, 2019 | $ | 13,641 |
| | $ | 1,808 |
| | $ | 15,449 |
| $ | 13,641 |
| | $ | 1,808 |
| | $ | 15,449 |
|
Expenses, net | 12,498 |
| | 845 |
| | 13,343 |
| 7,101 |
| | 707 |
| | 7,808 |
|
Cash payments | (16,362 | ) | | (2,483 | ) | | (18,845 | ) | (10,786 | ) | | (2,219 | ) | | (13,005 | ) |
Balance at September 30, 2019 | $ | 9,777 |
| | $ | 170 |
| | $ | 9,947 |
| |
| | | | | | |
Balance at January 1, 2018 | $ | 42,151 |
| | $ | 1,569 |
| | $ | 43,720 |
| |
Expenses, net | 13,637 |
| | 5,134 |
| | 18,771 |
| |
Cash payments | (37,492 | ) | | (1,750 | ) | | (39,242 | ) | |
Balance at September 30, 2018 | $ | 18,296 |
| | $ | 4,953 |
| | $ | 23,249 |
| |
Balance at June 30, 2019 | | $ | 9,956 |
| | $ | 296 |
| | $ | 10,252 |
|
The majority of the remaining restructuring reserves are expected to be paid over the next 12 to 24 months.
Asset Impairments
Asset impairmentOther Charges
Restructuring charges were $42 millionand asset impairments for the ninesix months ended SeptemberJune 30, 2020 and 2019 and primarily include the impairmentalso includes $2 million of capitalized software costsnon-cash charges related to the development of a new enterprise resource planning (ERP) system in our international markets. asset impairments, pension settlements and facilities abandonment.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
11. Debt
Total debt at September 30, 2019 and December 31, 2018 consisted of the following:
| |
| Interest rate | | September 30, 2019 | | December 31, 2018 | Interest rate | | June 30, 2020 | | December 31, 2019 |
Notes due September 2020 | 4.125% | | $ | 300,000 |
| | $ | 300,000 |
| |
Notes due October 2021 | 3.875% | | 600,000 |
| | 600,000 |
| 4.625% | | $ | 172,456 |
| | $ | 600,000 |
|
Notes due May 2022 | 4.625% | | 400,000 |
| | 400,000 |
| 5.375% | | 150,000 |
| | 400,000 |
|
Notes due April 2023 | 4.95% | | 400,000 |
| | 400,000 |
| 5.70% | | 275,000 |
| | 400,000 |
|
Notes due March 2024 | 4.625% | | 500,000 |
| | 500,000 |
| 4.625% | | 375,000 |
| | 500,000 |
|
Notes due January 2037 | 5.25% | | 35,841 |
| | 35,841 |
| 5.25% | | 35,841 |
| | 35,841 |
|
Notes due March 2043 | 6.7% | | 425,000 |
| | 425,000 |
| 6.70% | | 425,000 |
| | 425,000 |
|
Term loans | Variable | | 427,500 |
| | 630,000 |
| |
Term loan due November 2024 | | Variable | | 390,000 |
| | 400,000 |
|
Term loan due January 2025 | | Variable | | 839,375 |
| | — |
|
Credit Facility | | Variable | | 100,000 |
| | — |
|
Other debt | | 5,158 |
| | 5,297 |
| | 5,052 |
| | 5,108 |
|
Principal amount | | 3,093,499 |
| | 3,296,138 |
| | 2,767,724 |
| | 2,765,949 |
|
Less: unamortized costs, net | | 24,408 |
| | 30,530 |
| | 50,977 |
| | 26,227 |
|
Total debt | | 3,069,091 |
| | 3,265,608 |
| | 2,716,747 |
| | 2,739,722 |
|
Less: current portion long-term debt | | 501,728 |
| | 199,535 |
| | 163,257 |
| | 20,108 |
|
Long-term debt | | $ | 2,567,363 |
| | $ | 3,066,073 |
| | $ | 2,553,490 |
| | $ | 2,719,614 |
|
Interest rates on certain notes are subject to adjustment based on changes in our credit ratings. In April 2019, Moody's lowered our corporate credit rating from Ba1 to Ba2. As a result the interest rates on theof credit rating downgrades in November 2019 and May 2022 notes and September 2020, notes increased 0.25% since December 31, 2018, and the interest rates on the October 2021 notes and April 2023 notes increased 0.50% and the interest rate on the May 2022 notes increased 0.75%. Further, the interest rates on the October 2021 notes and April 2023 notes will increase an additional 0.25% in the fourth quarter of 2020.
In February 2020, we secured a five-year $850 million term loan maturing January 2025 (the 2025 Term Loan). The 2025 Term Loan bears interest at LIBOR plus 5.5% and resets monthly. In May 2020, we entered into interest rate swap agreements with an aggregate notional amount of $500 million to mitigate the interest rate risk associated with $500 million of our variable-rate term loans. Under the terms of the swap agreements, we pay fixed-rate interest of 0.4443% and receive variable-rate interest based on one-month LIBOR. The variable interest rate under the term loans and the swaps reset monthly.
In March 2020, we purchased under a tender offer $428 million of the October 1, 2019.2021 notes, $250 million of the May 2022 notes, $125 million of the April 2023 notes and $125 million of the March 2024 notes. A $37 million loss was incurred on the early redemption of debt.
During 2019,the first half of 2020, we repaid $38$21 million of principal related to our term loans. In September 2019, we repaid the remaining $165
We have a $500 million of our $200 million term loan and recorded a loss of $1 million on the early redemption of debt.
In November 2019, we repaid the $150 million term loan due November 2019 and the remaining balance of the $300 million term loan due December 2020, secured a new five-year $400 million term loan and replaced our revolving credit facility scheduled to maturethat expires in January 2021 for $500 million.
November 2024 and contains financial and non-financial covenants. In April 2020, in light of the current macroeconomic environment, we drew down $100 million under the credit facility as a precautionary measure. This borrowing is considered short-term as the amount is due and interest resets monthly. At June 30, 2020, we were in compliance with all covenants.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
12. Pensions and Other Benefit Programs
The components of net periodic benefit cost (income) cost were as follows:
| | | Defined Benefit Pension Plans | | Nonpension Postretirement Benefit Plans | Defined Benefit Pension Plans | | Nonpension Postretirement Benefit Plans |
| United States | | Foreign | | | United States | | Foreign | | |
| Three Months Ended | | Three Months Ended | | Three Months Ended | Three Months Ended | | Three Months Ended | | Three Months Ended |
| September 30, | | September 30, | | September 30, | June 30, | | June 30, | | June 30, |
| 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
Service cost | $ | 20 |
| | $ | 23 |
| | $ | 385 |
| | $ | 567 |
| | $ | 242 |
| | $ | 298 |
| $ | 27 |
| | $ | 21 |
| | $ | 399 |
| | $ | 388 |
| | $ | 217 |
| | $ | 228 |
|
Interest cost | 15,792 |
| | 15,363 |
| | 4,435 |
| | 4,434 |
| | 1,646 |
| | 1,676 |
| 13,179 |
| | 15,708 |
| | 3,407 |
| | 4,308 |
| | 1,242 |
| | 1,637 |
|
Expected return on plan assets | (23,182 | ) | | (25,281 | ) | | (8,340 | ) | | (8,730 | ) | | — |
| | — |
| (21,303 | ) | | (23,184 | ) | | (7,969 | ) | | (8,505 | ) | | — |
| | — |
|
Amortization of transition credit | — |
| | — |
| | (2 | ) | | (2 | ) | | — |
| | — |
| — |
| | — |
| | (1 | ) | | (1 | ) | | — |
| | — |
|
Amortization of prior service (credit) cost | (15 | ) | | (15 | ) | | 58 |
| | (18 | ) | | 80 |
| | 112 |
| (15 | ) | | (15 | ) | | 59 |
| | 60 |
| | 94 |
| | 81 |
|
Amortization of net actuarial loss | 6,537 |
| | 7,851 |
| | 1,543 |
| | 1,807 |
| | 507 |
| | 338 |
| 8,197 |
| | 6,037 |
| | 2,005 |
| | 1,572 |
| | 738 |
| | 503 |
|
Settlement | 1,477 |
| | 796 |
| | — |
| | — |
| | — |
| | 339 |
| |
Settlement (1) | | 612 |
| | 801 |
| | 3,190 |
| | 397 |
| | — |
| | — |
|
Net periodic benefit cost (income) | $ | 629 |
| | $ | (1,263 | ) | | $ | (1,921 | ) | | $ | (1,942 | ) | | $ | 2,475 |
| | $ | 2,763 |
| $ | 697 |
| | $ | (632 | ) | | $ | 1,090 |
| | $ | (1,781 | ) | | $ | 2,291 |
| | $ | 2,449 |
|
Contributions to benefit plans | $ | 3,350 |
| | $ | 2,479 |
| | $ | 652 |
| | $ | 661 |
| | $ | 4,628 |
| | $ | 4,442 |
| $ | 1,969 |
| | $ | 2,423 |
| | $ | 580 |
| | $ | 878 |
| | $ | 3,616 |
| | $ | 4,457 |
|
| | | | | | | | | | | | | | | | | | | | | | |
| Defined Benefit Pension Plans | | Nonpension Postretirement Benefit Plans | Defined Benefit Pension Plans | | Nonpension Postretirement Benefit Plans |
| United States | | Foreign | | | United States | | Foreign | | |
| Nine Months Ended | | Nine Months Ended | | Nine Months Ended | Six Months Ended | | Six Months Ended | | Six Months Ended |
| September 30, | | September 30, | | September 30, | June 30, | | June 30, | | June 30, |
| 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
Service cost | $ | 62 |
| | $ | 69 |
| | $ | 1,157 |
| | $ | 1,731 |
| | $ | 725 |
| | $ | 1,109 |
| $ | 53 |
| | $ | 42 |
| | $ | 798 |
| | $ | 772 |
| | $ | 434 |
| | $ | 483 |
|
Interest cost | 47,378 |
| | 46,087 |
| | 13,231 |
| | 13,721 |
| | 4,937 |
| | 4,888 |
| 26,358 |
| | 31,586 |
| | 6,925 |
| | 8,796 |
| | 2,487 |
| | 3,291 |
|
Expected return on plan assets | (69,545 | ) | | (75,815 | ) | | (25,609 | ) | | (27,045 | ) | | — |
| | — |
| (42,607 | ) | | (46,363 | ) | | (16,177 | ) | | (17,269 | ) | | — |
| | — |
|
Amortization of transition credit | — |
| | — |
| | (5 | ) | | (5 | ) | | — |
| | — |
| — |
| | — |
| | (2 | ) | | (3 | ) | | — |
| | — |
|
Amortization of prior service (credit) cost | (45 | ) | | (45 | ) | | 181 |
| | (54 | ) | | 241 |
| | 287 |
| (30 | ) | | (30 | ) | | 120 |
| | 123 |
| | 187 |
| | 161 |
|
Amortization of net actuarial loss | 19,610 |
| | 23,555 |
| | 4,727 |
| | 5,590 |
| | 1,521 |
| | 2,153 |
| 16,395 |
| | 13,073 |
| | 4,064 |
| | 3,184 |
| | 1,474 |
| | 1,014 |
|
Settlement (1) | 2,278 |
| | 796 |
| | 397 |
| | — |
| | — |
| | 339 |
| 1,001 |
| | 801 |
| | 3,190 |
| | 397 |
| | — |
| | — |
|
Net periodic benefit (income) cost | $ | (262 | ) | | $ | (5,353 | ) | | $ | (5,921 | ) | | $ | (6,062 | ) | | $ | 7,424 |
| | $ | 8,776 |
| |
Net periodic benefit cost (income) | | $ | 1,170 |
| | $ | (891 | ) | | $ | (1,082 | ) | | $ | (4,000 | ) | | $ | 4,582 |
| | $ | 4,949 |
|
Contributions to benefit plans | $ | 7,401 |
| | $ | 5,674 |
| | $ | 9,740 |
| | $ | 10,640 |
| | $ | 13,841 |
| | $ | 13,552 |
| $ | 3,898 |
| | $ | 4,051 |
| | $ | 8,568 |
| | $ | 9,088 |
| | $ | 8,071 |
| | $ | 9,213 |
|
(1) Approximately $1.4$2.6 million and $1.0$0.5 million of total settlement charges were recorded in discontinued operations and restructuring charges, and discontinued operations, respectively, for the ninethree and six months ended SeptemberJune 30, 2019.
13. Income Taxes
The effective tax rate2020 and approximately $0.3 million and $0.7 million of total settlement charges were recorded in discontinued operations and restructuring charges, respectively, for the three and six months ended SeptemberJune 30, 2019 and 2018 was 127.3% and (5.5)%, respectively. The effective tax rate for the three months ended September 30, 2019 includes a benefit of $23 million from the release of a foreign valuation allowance. The effective tax rate for the three months ended September 30, 2018 includes a benefit from the resolution of certain tax examinations of $7 million and a benefit of $8 million related to the re-measurement of deferred tax assets and liabilities and revisions of the U.S. tax on unremitted earnings of our foreign subsidiaries.2019.
The effective tax rate for the nine months ended September 30, 2019 and 2018 was (71.2)% and 11.5%, respectively. The effective tax rate for the nine months ended September 30, 2019 includes a benefit of $23 million from the release of a foreign valuation allowance as well as a $2 million tax on the $18 million book loss from Market Exits, primarily due to nondeductible basis differences. The effective tax rate for the nine months ended September 30, 2019 and 2018 includes a benefit of $6 million and $13 million, respectively, from the resolution of certain tax examinations. The effective tax rate for the nine months ended September 30, 2018 also includes a benefit of
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
$1713. Income Taxes
The effective tax rate for the three and six months ended June 30, 2020 was 101.8% and (3.3)%, respectively and includes a $12 million related tocharge for the re-measurementsurrender of company owned life insurance policies (see Note 8). The effective tax rate for the six months ended June 30, 2020 also includes a benefit of $2 million on the $198 million goodwill impairment charge as the majority of this charge is nondeductible, a benefit of $2 million from the resolution of certain tax examinations and a charge of $3 million for the write-off of deferred tax assets associated with the expiration of out-of-money vested stock options and liabilitiesthe vesting of restricted stock.
The effective tax rate for the three and revisionssix months ended June 30, 2019 was 11.3% and 30.1%, respectively, and includes benefits from the resolution of certain tax examinations of $3 million and $6 million, respectively. The effective tax rate for the U.S.six months ended June 30, 2019 also includes a $2 million tax on unremitted earningsthe $18 million book loss incurred from the disposition of our foreign subsidiaries.operations in certain international markets, primarily due to nondeductible basis differences and a charge of $2 million for the write-off of deferred tax assets associated with the expiration of out-of-money vested stock options and the vesting of restricted stock.
As is the case with other large corporations, our tax returns are examined by tax authorities in the U.S. and other global taxing jurisdictions in which we have operations. As a result, it is reasonably possible that the amount of unrecognized tax benefits will decrease in the next 12 months, and this decrease could be up to 30%10% of our unrecognized tax benefits.
The Internal Revenue Service (IRS) examinations of our consolidated U.S. income tax returns for tax years prior to 2017 are closed to audit; however, various post-2011 U.S. state and local tax returns are still subject to examination. In Canada, the examination of our tax filings prior to 2015 are closed to audit. Other significant jurisdictions include France (closed through 2014)2016), Germany (closed through 2016) and the U.K. (except for an item under appeal, closed(closed through 2016)2017). We also have other less significant tax filings currently subject to examination.
14. Commitments and Contingencies
In the ordinary course of business, we are routinely defendants in, or party to, a number of pending and threatened legal actions. These may involve litigation by or against us relating to, among other things, contractual rights under vendor, insurance or other contracts; intellectual property or patent rights; equipment, service, payment or other disputes with clients; or disputes with employees. Some of these actions may be brought as a purported class action on behalf of a purported class of employees, customers or others. In management's opinion, the potential liability, if any, that may result from these actions, either individually or collectively, is not reasonably expected to have a material effect on our financial position, results of operations or cash flows as of SeptemberJune 30, 2019.2020. However, as litigation is inherently unpredictable, there can be no assurances in this regard.
In August 2018, the Company, certain of its directors, officers and several banks who served as underwriters, were named as defendants in City of Livonia Retiree Health and Disability Benefits Plan v. Pitney Bowes Inc. et al., a putative class action lawsuit filed in Connecticut state court. The complaint asserts claims under the Securities Act of 1933, as amended, on behalf of those who purchased notes issued by the Company in connection with a September 13, 2017 offering, alleging, among other things, that the Company failed to make certain disclosures relating to components of its third quarter 2017 performance at the time of the notes offering. The complaint seeks compensatory damages and other relief. On October 24, 2019, the court granted the defendants' motions to strike the complaint for failure to state a claim.
In addition, in December 2018 and then in February 2019, certain of the Company’s officers and directors were named as defendants in two2 virtually identical derivative actions purportedly brought on behalf of the Company, Clem v. Lautenbach et al. and Devolin v. Lautenbach et al. These two actions, both filed by the same counsel in Connecticut state court, allege, among other things, breaches of fiduciary duty relating to these same disclosures, and seek compensatory damages and other relief derivatively for the benefit of the Company. Although litigation outcomesBoth of these are inherently unpredictable, we believe these matters are without meritderivative claims related to a prior action filed in Connecticut state court, City of Livonia Retiree Health and intendDisability Benefits Plan v. Pitney Bowes Inc. et al. (“Livonia”). On October 24, 2019, the court had granted the defendants’ motions to defend them vigorously. A reasonable estimate ofdismiss the amount of any possible loss or range of loss cannot be made at this time.Livonia case, and that judgment is now final. Given that the defendants prevailed in the Livonia action, the plaintiffs in the Clem and Devolin actions moved to withdraw their complaints, and on February 20, 2020 the court granted the motions. Both cases have now been dismissed.
Beginning on October 12, 2019, we were affected by a malware attack ("the attack") that encrypted information on some systems and disrupted client access to our services. Upon discovering the unauthorized access, we took immediate actions to contain and remediate the malware attack. We engaged third-party cybersecurity experts and informed various law enforcement agencies. We have identifiedentered into 3 equipment leases for our Commerce Services operations that will commence in the malware that affected our systems asfourth quarter with terms ranging from seven to nine years. Aggregate lease payments for the Ryuk virus, which specifically targets Microsoft Windows based operating systems. Our financial information is not stored on a Microsoft Windows operating system, and was therefore not affected. Additionally, the backup data storage systems for virtually all our client, employee and other business data was not impacted by the attack. Based on the work performed to date, we do not believe that any sensitive or confidential client or employee data has been improperly accessed or extracted from our network. We have made substantial progress in bringing critical systems back online, re-enabling client access to our services and restoring access to data that was encrypted. We maintain insurance coverage for these types of incidents and have been working with our carriers throughout the attack. It is not yet possible to reasonably estimate the impact on our financial results or the extent to which wethree leases will receive reimbursement from our insurers.
approximate $30 million.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
15. Leased Assets and LiabilitiesStockholders’ Equity
We lease real estate and equipment under operating and finance lease agreements. Our leases have terms of up to 15 years, some of which include the option to extend the lease for up to 5 years. At lease commencement, a lease liability and corresponding right-of-use asset is recognized. Lease liabilities represent the present value of future lease payments over the expected lease term, which includes options to extend or terminate the lease when it is reasonably certain those options will be exercised. Lease payments include all fixed payments and variable payments tied to an index. Variable payments excluded from the right-of-use asset and lease liability primarily include common area maintenance charges, property taxes, insurance and mileage. The present value of our lease liability is determined using our incremental borrowing rate at lease inception. Information regarding our operating and financing leases are
Changes in stockholders’ equity were as follows:
|
| | | | | | | | | | |
Leases | | Balance Sheet Location | | September 30, 2019 | | December 31, 2018 |
Assets | | | | | | |
Operating | | Operating lease assets | | $ | 172,617 |
| | $ | 152,554 |
|
Finance | | Property, plant and equipment, net | | 11,250 |
| | 10,683 |
|
Total leased assets | | | | $ | 183,867 |
| | $ | 163,237 |
|
| | | | | | |
Liabilities | | | | | | |
Operating | | Current operating lease liabilities | | $ | 34,091 |
| | $ | 35,208 |
|
| | Noncurrent operating lease liabilities | | 148,125 |
| | 125,294 |
|
Finance | | Accounts payable and accrued liabilities | | 2,773 |
| | 2,708 |
|
| | Other noncurrent liabilities | | 7,589 |
| | 7,054 |
|
Total lease liabilities | | | | $ | 192,578 |
| | $ | 170,264 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Treasury stock | | Total equity |
Balance at April 1, 2020 | $ | 323,338 |
| | $ | 69,553 |
| | $ | 5,200,024 |
| | $ | (857,874 | ) | | $ | (4,705,611 | ) | | $ | 29,430 |
|
Net loss | — |
| | — |
| | (3,329 | ) | | — |
| | — |
| | (3,329 | ) |
Other comprehensive income | — |
| | — |
| | — |
| | 21,612 |
| | — |
| | 21,612 |
|
Dividends paid ($0.05 per common share) | — |
| | — |
| | (8,576 | ) | | — |
| | — |
| | (8,576 | ) |
Issuance of common stock | — |
| | (6,484 | ) | | — |
| | — |
| | 6,498 |
| | 14 |
|
Stock-based compensation expense | — |
| | 5,429 |
| | — |
| | — |
| | — |
| | 5,429 |
|
Balance at June 30, 2020 | $ | 323,338 |
| | $ | 68,498 |
| | $ | 5,188,119 |
| | $ | (836,262 | ) | | $ | (4,699,113 | ) | | $ | 44,580 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
Lease Cost | 2019 | | 2018 | | 2019 | | 2018 |
Operating lease expense | $ | 12,347 |
| | $ | 12,395 |
| | $ | 34,750 |
| | $ | 33,835 |
|
Finance lease expense | | | | | | | |
Amortization of leased assets | 838 |
| | 692 |
| | 2,529 |
| | 1,934 |
|
Interest on lease liabilities | 172 |
| | 135 |
| | 520 |
| | 378 |
|
Variable lease expense | 4,969 |
| | 4,272 |
| | 18,821 |
| | 16,486 |
|
Sublease income | (381 | ) | | (680 | ) | | (1,726 | ) | | (1,132 | ) |
Total expense | $ | 17,945 |
| | $ | 16,814 |
| | $ | 54,894 |
| | $ | 51,501 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred stock | | Preference stock | | Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Treasury stock | | Total equity |
Balance at April 1, 2019 | $ | 1 |
| | $ | 388 |
| | $ | 323,338 |
| | $ | 109,166 |
| | $ | 5,267,615 |
| | $ | (917,978 | ) | | $ | (4,696,080 | ) | | $ | 86,450 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 23,697 |
| | — |
| | — |
| | 23,697 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | 10,300 |
| | — |
| | 10,300 |
|
Dividends paid ($0.05 per common share) | — |
| | — |
| | — |
| | — |
| | (8,938 | ) | | — |
| | — |
| | (8,938 | ) |
Issuance of common stock | — |
| | — |
| | — |
| | (3,807 | ) | | — |
| | — |
| | 4,024 |
| | 217 |
|
Conversion to common stock | — |
| | (122 | ) | | — |
| | (2,389 | ) | | — |
| | — |
| | 2,511 |
| | — |
|
Redemption of preferred/preference stock | (1 | ) | | (266 | ) | | — |
| | (10 | ) | | — |
| | — |
| | — |
| | (277 | ) |
Stock-based compensation expense | — |
| | — |
| | — |
| | 2,381 |
| | — |
| | — |
| | — |
| | 2,381 |
|
Repurchase of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (60,858 | ) | | (60,858 | ) |
Balance at June 30, 2019 | $ | — |
| | $ | — |
| | $ | 323,338 |
| | $ | 105,341 |
| | $ | 5,282,374 |
| | $ | (907,678 | ) | | $ | (4,750,403 | ) | | $ | 52,972 |
|
Operating lease expense includes immaterial amounts related to leases with terms of 12 months or less.
|
| | | | | | | | | | | |
Future Lease Payments | Operating Leases | | Finance Leases | | Total |
Remaining for year ending December 31, 2019 | $ | 11,233 |
| | $ | 907 |
| | $ | 12,140 |
|
Year ending December 31, 2020 | 42,292 |
| | 3,242 |
| | 45,534 |
|
Year ending December 31, 2021 | 35,970 |
| | 2,850 |
| | 38,820 |
|
Year ending December 31, 2022 | 27,799 |
| | 2,278 |
| | 30,077 |
|
Year ending December 31, 2023 | 21,392 |
| | 1,626 |
| | 23,018 |
|
Thereafter | 88,779 |
| | 983 |
| | 89,762 |
|
Total | 227,465 |
| | 11,886 |
| | 239,351 |
|
Less: present value discount | 45,249 |
| | 1,524 |
| | 46,773 |
|
Lease liability | $ | 182,216 |
| | $ | 10,362 |
| | $ | 192,578 |
|
Operating leases exclude $28 million of minimum lease payments for leases signed but not yet commenced at September 30, 2019.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Treasury stock | | Total equity |
Balance at January 1, 2020 | $ | 323,338 |
| | $ | 98,748 |
| | $ | 5,438,930 |
| | $ | (840,143 | ) | | $ | (4,734,777 | ) | | $ | 286,096 |
|
Cumulative effect of accounting changes | — |
| | — |
| | (21,900 | ) | | — |
| | — |
| | (21,900 | ) |
Net loss | — |
| | — |
| | (211,812 | ) | | — |
| | — |
| | (211,812 | ) |
Other comprehensive income | — |
| | — |
| | — |
| | 3,881 |
| | — |
| | 3,881 |
|
Dividends paid ($0.10 per common share) | — |
| | — |
| | (17,099 | ) | | — |
| | — |
| | (17,099 | ) |
Issuance of common stock | — |
| | (37,200 | ) | | — |
| | — |
| | 35,664 |
| | (1,536 | ) |
Stock-based compensation expense | — |
| | 6,950 |
| | — |
| | — |
| | — |
| | 6,950 |
|
Balance at June 30, 2020 | $ | 323,338 |
| | $ | 68,498 |
| | $ | 5,188,119 |
| | $ | (836,262 | ) | | $ | (4,699,113 | ) | | $ | 44,580 |
|
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
|
| | | |
Lease Term and Discount Rate | September 30, 2019 | | December 31, 2018 |
Weighted-average remaining lease term | | | |
Operating leases | 7.5 years | | 7.2 years |
Finance leases | 4.0 years | | 4.1 years |
Weighted-average discount rate | | | |
Operating leases | 5.9% | | 4.5% |
Finance leases | 6.7% | | 6.2% |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
Cash Flow Information | 2019 | | 2018 | | 2019 | | 2018 |
Operating cash outflows - operating leases | $ | 10,440 |
| | $ | 12,319 |
| | $ | 32,041 |
| | $ | 33,075 |
|
Operating cash outflows - finance leases | $ | 172 |
| | $ | 135 |
| | $ | 520 |
| | $ | 378 |
|
Financing cash outflows - finance leases | $ | 758 |
| | $ | 630 |
| | $ | 2,278 |
| | $ | 1,786 |
|
| | | | | | | |
Leased assets obtained in exchange for new lease obligations | | | | | | | |
Operating leases | $ | 3,123 |
| | $ | 26,134 |
| | $ | 51,504 |
| | $ | 33,128 |
|
Finance leases | $ | 1,124 |
| | $ | 2,983 |
| | $ | 3,227 |
| | $ | 4,143 |
|
16. Stockholders’ Equity
Changes in stockholders’ equity for the three months ended September 30, 2019 and 2018 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred stock | | Preference stock | | Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Treasury stock | | Total equity |
Balance at July 1, 2019 | $ | — |
| | $ | — |
| | $ | 323,338 |
| | $ | 105,341 |
| | $ | 5,282,374 |
| | $ | (907,678 | ) | | $ | (4,750,403 | ) | | $ | 52,972 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | (3,125 | ) | | — |
| | — |
| | (3,125 | ) |
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | (18,774 | ) | | — |
| | (18,774 | ) |
Dividends paid ($0.05 per common share) | — |
| | — |
| | — |
| | — |
| | (8,508 | ) | | — |
| | — |
| | (8,508 | ) |
Issuance of common stock | — |
| | — |
| | — |
| | (10,146 | ) | | — |
| | — |
| | 11,291 |
| | 1,145 |
|
Conversion to common stock | — |
| | — |
| | — |
| | (246 | ) | | — |
| | — |
| | 246 |
| | — |
|
Stock-based compensation expense | — |
| | — |
| | — |
| | 6,702 |
| | — |
| | — |
| | — |
| | 6,702 |
|
Repurchase of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,000 | ) | | (5,000 | ) |
Balance at September 30, 2019 | $ | — |
| | $ | — |
| | $ | 323,338 |
| | $ | 101,651 |
| | $ | 5,270,741 |
| | $ | (926,452 | ) | | $ | (4,743,866 | ) | | $ | 25,412 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred stock | | Preference stock | | Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Treasury stock | | Total equity |
Balance at January 1, 2019 | $ | 1 |
| | $ | 396 |
| | $ | 323,338 |
| | $ | 121,475 |
| | $ | 5,279,682 |
| | $ | (948,961 | ) | | $ | (4,674,089 | ) | | $ | 101,842 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 21,038 |
| | — |
| | — |
| | 21,038 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | 41,283 |
| | — |
| | 41,283 |
|
Dividends paid ($0.10 per common share) | — |
| | — |
| | — |
| | — |
| | (18,346 | ) | | — |
| | — |
| | (18,346 | ) |
Issuance of common stock | — |
| | — |
| | — |
| | (22,731 | ) | | — |
| | — |
| | 20,998 |
| | (1,733 | ) |
Conversion to common stock | — |
| | (130 | ) | | — |
| | (2,558 | ) | | — |
| | — |
| | 2,688 |
| | — |
|
Redemption of preferred/preference stock | (1 | ) | | (266 | ) | | — |
| | (10 | ) | | — |
| | — |
| | — |
| | (277 | ) |
Stock-based compensation expense | — |
| | — |
| | — |
| | 9,165 |
| | — |
| | — |
| | — |
| | 9,165 |
|
Repurchase of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (100,000 | ) | | (100,000 | ) |
Balance at June 30, 2019 | $ | — |
| | $ | — |
| | $ | 323,338 |
| | $ | 105,341 |
| | $ | 5,282,374 |
| | $ | (907,678 | ) | | $ | (4,750,403 | ) | | $ | 52,972 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred stock | | Preference stock | | Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Treasury stock | | Total equity |
Balance at July 1, 2018 | $ | 1 |
| | $ | 415 |
| | $ | 323,338 |
| | $ | 122,732 |
| | $ | 5,103,588 |
| | $ | (811,804 | ) | | $ | (4,689,309 | ) | | $ | 48,961 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 80,277 |
| | — |
| | — |
| | 80,277 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | 5,639 |
| | — |
| | 5,639 |
|
Dividends paid ($0.1875 per common share) | — |
| | — |
| | — |
| | — |
| | (35,183 | ) | | — |
| | — |
| | (35,183 | ) |
Issuance of common stock | — |
| | — |
| | — |
| | (11,190 | ) | | — |
| | — |
| | 12,909 |
| | 1,719 |
|
Conversion to common stock | — |
| | (12 | ) | | — |
| | (242 | ) | | — |
| | — |
| | 254 |
| | — |
|
Stock-based compensation expense | — |
| | — |
| | — |
| | 6,618 |
| | — |
| | — |
| | — |
| | 6,618 |
|
Balance at September 30, 2018 | $ | 1 |
| | $ | 403 |
| | $ | 323,338 |
| | $ | 117,918 |
| | $ | 5,148,682 |
| | $ | (806,165 | ) | | $ | (4,676,146 | ) | | $ | 108,031 |
|
16. Accumulated Other Comprehensive Loss (AOCL)Reclassifications out of AOCL were as follows:
|
| | | | | | | | | | | | | | | |
| Gain (Loss) Reclassified from AOCL |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Cash flow hedges | | | | | | | |
Revenue | $ | (64 | ) | | $ | (36 | ) | | $ | (3 | ) | | $ | 75 |
|
Cost of sales | 32 |
| | 29 |
| | 42 |
| | 45 |
|
Total before tax | (32 | ) | | (7 | ) | | 39 |
| | 120 |
|
Income tax (benefit) provision | (8 | ) | | (1 | ) | | 10 |
| | 31 |
|
Net of tax | $ | (24 | ) | | $ | (6 | ) | | $ | 29 |
| | $ | 89 |
|
| | | | | | | |
Available-for-sale securities | | | | | | | |
Interest expense, net | $ | 3,233 |
| | $ | (81 | ) | | $ | 3,517 |
| | $ | (104 | ) |
Income tax provision (benefit) | 805 |
| | (21 | ) | | 876 |
| | (27 | ) |
Net of tax | $ | 2,428 |
| | $ | (60 | ) | | $ | 2,641 |
| | $ | (77 | ) |
| | | | | | | |
Pension and postretirement benefit plans | | | | | | | |
Transition credit | $ | 1 |
| | $ | 1 |
| | $ | 2 |
| | $ | 3 |
|
Prior service costs | (138 | ) | | (126 | ) | | (277 | ) | | (254 | ) |
Actuarial losses | (10,940 | ) | | (8,112 | ) | | (21,933 | ) | | (17,271 | ) |
Settlement | (3,802 | ) | | (1,198 | ) | | (4,191 | ) | | (1,198 | ) |
Total before tax | (14,879 | ) | | (9,435 | ) | | (26,399 | ) | | (18,720 | ) |
Income tax benefit | (3,502 | ) | | (2,124 | ) | | (6,152 | ) | | (4,773 | ) |
Net of tax | $ | (11,377 | ) | | $ | (7,311 | ) | | $ | (20,247 | ) | | $ | (13,947 | ) |
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
Changes in stockholders’ equity for the nine months ended September 30, 2019 and 2018AOCL were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred stock | | Preference stock | | Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Treasury stock | | Total equity |
Balance at January 1, 2019 | $ | 1 |
| | $ | 396 |
| | $ | 323,338 |
| | $ | 121,475 |
| | $ | 5,279,682 |
| | $ | (948,961 | ) | | $ | (4,674,089 | ) | | $ | 101,842 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 17,913 |
| | — |
| | — |
| | 17,913 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | 22,509 |
| | — |
| | 22,509 |
|
Dividends paid ($0.15 per common share) | — |
| | — |
| | — |
| | — |
| | (26,854 | ) | | — |
| | — |
| | (26,854 | ) |
Issuance of common stock | — |
| | — |
| | — |
| | (32,877 | ) | | — |
| | — |
| | 32,289 |
| | (588 | ) |
Conversion to common stock | — |
| | (130 | ) | | — |
| | (2,804 | ) | | — |
| | — |
| | 2,934 |
| | — |
|
Redemption of preferred/preference stock | (1 | ) | | (266 | ) | | — |
| | (10 | ) | | — |
| | — |
| | — |
| | (277 | ) |
Stock-based compensation expense | — |
| | — |
| | — |
| | 15,867 |
| | — |
| | — |
| | — |
| | 15,867 |
|
Repurchase of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (105,000 | ) | | (105,000 | ) |
Balance at September 30, 2019 | $ | — |
| | $ | — |
| | $ | 323,338 |
| | $ | 101,651 |
| | $ | 5,270,741 |
| | $ | (926,452 | ) | | $ | (4,743,866 | ) | | $ | 25,412 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred stock | | Preference stock | | Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Treasury stock | | Total equity |
Balance at January 1, 2018 | $ | 1 |
| | $ | 441 |
| | $ | 323,338 |
| | $ | 138,367 |
| | $ | 5,074,343 |
| | $ | (794,940 | ) | | $ | (4,710,997 | ) | | $ | 30,553 |
|
Cumulative effect of accounting change | — |
| | — |
| | — |
| | — |
| | (12,207 | ) | | — |
| | — |
| | (12,207 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | 191,842 |
| | — |
| | — |
| | 191,842 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | (11,225 | ) | | — |
| | (11,225 | ) |
Dividends paid ($0.5625 per common share) | — |
| | — |
| | — |
| | — |
| | (105,296 | ) | | — |
| | — |
| | (105,296 | ) |
Issuance of common stock | — |
| | — |
| | — |
| | (35,457 | ) | | — |
| | — |
| | 34,050 |
| | (1,407 | ) |
Conversion to common stock | — |
| | (38 | ) | | — |
| | (763 | ) | | — |
| | — |
| | 801 |
| | — |
|
Stock-based compensation expense | — |
| | — |
| | — |
| | 15,771 |
| | — |
| | — |
| | — |
| | 15,771 |
|
Balance at September 30, 2018 | $ | 1 |
| | $ | 403 |
| | $ | 323,338 |
| | $ | 117,918 |
| | $ | 5,148,682 |
| | $ | (806,165 | ) | | $ | (4,676,146 | ) | | $ | 108,031 |
|
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
17. Accumulated Other Comprehensive Income
Reclassifications out of AOCI for the three and nine months ended September 30, 2019 and 2018 were as follows:
|
| | | | | | | | | | | | | | | |
| Amount Reclassified from AOCI (1) |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
(Losses) gains on cash flow hedges | | | | | | | |
Revenue | $ | (98 | ) | | $ | (38 | ) | | $ | (23 | ) | | $ | 38 |
|
Cost of sales | 54 |
| | 52 |
| | 99 |
| | (33 | ) |
Interest expense, net | — |
| | (825 | ) | | — |
| | (1,839 | ) |
Total before tax | (44 | ) | | (811 | ) | | 76 |
| | (1,834 | ) |
Income tax benefit (provision) | 11 |
| | 206 |
| | (19 | ) | | 468 |
|
Net of tax | $ | (33 | ) | | $ | (605 | ) | | $ | 57 |
| | $ | (1,366 | ) |
| | | | | | | |
Gains (losses) on available for sale securities | | | | | | | |
Interest expense, net | $ | 146 |
| | $ | (40 | ) | | $ | 42 |
| | $ | 150 |
|
Income tax (provision) benefit | (37 | ) | | 10 |
| | (11 | ) | | (38 | ) |
Net of tax | $ | 109 |
| | $ | (30 | ) | | $ | 31 |
| | $ | 112 |
|
| | | | | | | |
Pension and Postretirement Benefit Plans (2) | | | | | | | |
Transition credit | $ | 2 |
| | $ | 2 |
| | $ | 5 |
| | $ | 5 |
|
Prior service costs | (123 | ) | | (79 | ) | | (377 | ) | | (188 | ) |
Actuarial losses | (8,587 | ) | | (9,996 | ) | | (25,858 | ) | | (31,298 | ) |
Settlements | (1,477 | ) | | (1,135 | ) | | (2,675 | ) | | (1,135 | ) |
Total before tax | (10,185 | ) | | (11,208 | ) | | (28,905 | ) | | (32,616 | ) |
Income tax benefit | 2,633 |
| | 2,399 |
| | 7,406 |
| | 7,766 |
|
Net of tax | $ | (7,552 | ) | | $ | (8,809 | ) | | $ | (21,499 | ) | | $ | (24,850 | ) |
| |
(1)
| Amounts in parentheses indicate reductions to income and increases to other comprehensive income. |
| |
(2)
| Reclassified from AOCI into other components of net pension and postretirement cost (see Note 12 for additional details). |
Changes in AOCI for the nine months ended September 30, 2019 and 2018 were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Cash flow hedges | | Available for sale securities | | Pension and postretirement benefit plans | | Foreign currency adjustments | | Total |
Balance at January 1, 2019 | $ | 191 |
| | $ | (3,061 | ) | | $ | (846,461 | ) | | $ | (99,630 | ) | | $ | (948,961 | ) |
Other comprehensive income (loss) before reclassifications (1) | 135 |
| | 7,547 |
| | — |
| | (6,584 | ) | | 1,098 |
|
Reclassifications into earnings (1), (2) | (57 | ) | | (31 | ) | | 21,499 |
| | — |
| | 21,411 |
|
Net other comprehensive income (loss) | 78 |
| | 7,516 |
| | 21,499 |
| | (6,584 | ) | | 22,509 |
|
Balance at September 30, 2019 | $ | 269 |
| | $ | 4,455 |
| | $ | (824,962 | ) | | $ | (106,214 | ) | | $ | (926,452 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| Cash flow hedges | | Available for sale securities | | Pension and postretirement benefit plans | | Foreign currency adjustments | | Total |
Balance at January 1, 2020 | $ | 337 |
| | $ | 2,849 |
| | $ | (819,018 | ) | | $ | (24,311 | ) | | $ | (840,143 | ) |
Other comprehensive (loss) income before reclassifications (1) | (1,416 | ) | | 5,356 |
| | — |
| | (17,636 | ) | | (13,696 | ) |
(Gain) loss reclassified into earnings (1) | (29 | ) | | (2,641 | ) | | 20,247 |
| | — |
| | 17,577 |
|
Net other comprehensive (loss) income | (1,445 | ) | | 2,715 |
| | 20,247 |
| | (17,636 | ) | | 3,881 |
|
Balance at June 30, 2020 | $ | (1,108 | ) | | $ | 5,564 |
| | $ | (798,771 | ) | | $ | (41,947 | ) | | $ | (836,262 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| Cash flow hedges | | Available for sale securities | | Pension and postretirement benefit plans | | Foreign currency adjustments | | Total |
Balance at January 1, 2018 | $ | (406 | ) | | $ | 1,597 |
| | $ | (748,800 | ) | | $ | (47,331 | ) | | $ | (794,940 | ) |
Other comprehensive loss before reclassifications (1) | (593 | ) | | (6,402 | ) | | — |
| | (30,334 | ) | | (37,329 | ) |
Reclassifications into earnings (1), (2) | 1,366 |
| | (112 | ) | | 24,850 |
| | — |
| | 26,104 |
|
Net other comprehensive income (loss) | 773 |
| | (6,514 | ) | | 24,850 |
| | (30,334 | ) | | (11,225 | ) |
Balance at September 30, 2018 | $ | 367 |
| | $ | (4,917 | ) | | $ | (723,950 | ) | | $ | (77,665 | ) | | $ | (806,165 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| Cash flow hedges | | Available for sale securities | | Pension and postretirement benefit plans | | Foreign currency adjustments | | Total |
Balance at January 1, 2019 | $ | 191 |
| | $ | (3,061 | ) | | $ | (846,461 | ) | | $ | (99,630 | ) | | $ | (948,961 | ) |
Other comprehensive income before reclassifications (1) | 18 |
| | 5,952 |
| | — |
| | 21,378 |
| | 27,348 |
|
(Gain) loss reclassified into earnings (1) | (89 | ) | | 77 |
| | 13,947 |
| | — |
| | 13,935 |
|
Net other comprehensive (loss) income | (71 | ) | | 6,029 |
| | 13,947 |
| | 21,378 |
| | 41,283 |
|
Balance at June 30, 2019 | $ | 120 |
| | $ | 2,968 |
| | $ | (832,514 | ) | | $ | (78,252 | ) | | $ | (907,678 | ) |
(1) Amounts are net of tax. Amounts in parentheses indicate debits to AOCI.
(2) See table above for additional details of these reclassifications.
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 the Securities and Exchange Commission. FactorsIn 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, as expressedand which may also be exacerbated by COVID-19 or a negative change in any forward-looking statement made by or on our behalfthe economy, include, without limitation:
declining physical mail volumes
changes in postal regulations, or the financial health of posts, in the U.S. or other major markets or the loss of, or significant changes to, our contractual relationship with the United States Postal Service (USPS)
expenses and potential impact on client relationshipsimpacts resulting from the October 2019 malware attack that affected the Company's operations
a breach of security, including a future cyber-attackcyber-attacks or other comparable eventevents
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 or loss of, our contractual relationships with the U.S. Postal Service (USPS) or posts in other major markets
changes in postal regulations
competitive factors, including pricing pressures, technological developments and the introduction of new products and services by competitors
the United Kingdom's potential exit from the European Union (Brexit)
our success in developing and marketing new products and services and obtaining regulatory approvals, if required
changes in banking regulations or the loss of our Industrial Bank charter
changes in labor conditions and transportation costs
macroeconomic factors, including global and regional business conditions that adversely impact customer demand, foreign currency exchange rates and interest rates
changes in global political conditions and international trade policies, including the imposition or expansion of trade tariffs
third-party suppliers' ability to provide products and services required by our clients
our success at managing the relationships and costs with outsource providers including the costs of outsourcingcertain functions and operations
capital market disruptionschanges in banking regulations or credit rating downgrades that adversely impact our ability to access capital markets at reasonable costs
our success at managing customer credit risk
integrating newly acquired businesses, including operations and product and service offerings
our ability to continue to grow volumes to gain additional economies of scale
the loss of some of our larger clientsIndustrial Bank charter or changes in our Commerce Services groupforeign currency exchange rates and interest rates
the United Kingdom's exit from the European Union
intellectual property infringement claims
| |
• | significant changes in pension, health care and retiree medical costs
|
income tax adjustments or other regulatory levies from tax audits and changes in tax laws, rulings or regulations
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.
Overview
Effective January 1, 2019, we adopted Accounting Standards Codification 842, Leases, using the modified retrospective transition approach of applying the standard at the beginning of the earliest comparative period presented in the financial statements. Accordingly, prior period financial results have been recast. In January 2019, we also sold the direct operations and moved to a dealer model in six smaller markets within the SendTech Solutions segment (Market Exits).
In the quarter, we recast our segment reporting to combine North America Mailing and International Mailing into the Sending Technology Solutions (SendTech Solutions) segment to reflect how we manage these operations and the products and services provided to our clients.
In August 2019, we entered into a definitive agreement to sell our Software Solutions business for $700 million, subject to certain adjustments. We anticipate net proceeds from the sale, after closing costs, transaction fees and taxes, to be approximately $625 million and will use a majority of these proceeds to repay debt. The transaction is expected to be completed by the end of the year. The Software Solutions business is now reported as a discontinued operation in our Condensed Consolidated Financial Statements and prior periods have been recast to conform to the current period presentation.
Financial Results Summary - Three and Six Months Ended SeptemberJune 30:
|
| | | | | | | |
| 2019 | 2018 | Change |
Revenue | $ | 790,125 |
| $ | 760,281 |
| 4% |
Segment earnings before interest and taxes (EBIT) | $ | 126,848 |
| $ | 137,712 |
| (8)% |
Income from continuing operations | $ | 5,345 |
| $ | 47,656 |
| (89)% |
Diluted earnings per share - continuing operations | $ | 0.03 |
| $ | 0.25 |
| (88)% |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | Actual % change | | Constant Currency % Change | | 2020 | | 2019 | | Actual % change | | Constant Currency % 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, |
| 2020 | | 2019 | | Actual % change | | Constant currency % change | | 2020 | | 2019 | | Actual % change | | Constant currency % 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 June 30, |
| 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 4% from the prior year period,6% as reported and 6% excluding the impact from Market Exits. The increase was driven by a 15% increase in Business services revenue due to growth in Commerce Services partially offset by an 11% decrease in Supplies revenue, a 9% decrease in Support services revenue and a 6% decrease in Financing revenue, driven by overall declines in our SendTech Solutions shipping and mailing business.
On a segment basis, Global Ecommerce revenue increased 20% and Presort Services revenue increased 5%, partially offset by a decline in SendTech Solutions revenue of 6%. Excluding7% at constant currency and Market Exits, SendTech Solutions revenue decreased 3%. Commerce Services was the largest contributor of revenue and accounted for 52% of revenue for the current quarter compared to 47% from the prior year period.
Segment EBIT declined 8% from the prior year period. Global Ecommerce reported an EBIT loss of $22 million compared to a loss of $14 million in the prior year, primarily driven by a decline in margins as the mix of business continues to shift to faster growing, but lower margin services. Presort Services EBIT was relatively flat compared to the prior year period, primarily due to higher volumes and labor cost per unit improvement, offset by higher costs. SendTech Solutions EBIT declined 3% due to the decline in revenue and impact of Market Exits.
Income from continuing operations declined in the quarter, primarily due to higher restructuring and asset impairment charges and a decline in gross margins, partially offset by a tax benefit from the release of a foreign valuation allowance.
Financial Results Summary - Nine Months Ended September 30:
|
| | | | | | | |
| 2019 | 2018 | Change |
Revenue | $ | 2,373,782 |
| $ | 2,354,108 |
| 1% |
Segment earnings before interest and taxes (EBIT) | $ | 374,341 |
| $ | 441,419 |
| (15)% |
Income from continuing operations | $ | 32,112 |
| $ | 132,553 |
| (76)% |
Diluted earnings per share - continuing operations | $ | 0.18 |
| $ | 0.70 |
| (74)% |
Net cash provided by operations | $ | 182,284 |
| $ | 258,570 |
| (30)% |
Revenue increased 1% from the prior year period, and 3% excluding the unfavorable impact from Market Exits.year. Business services revenue increased 11%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 growthincreased 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 Commerce Services,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 all other revenue lines driven by a decline inline items. In our SendTech Solutions shipping and mailing business.
On a segment basis,business segments, Global Ecommerce revenue grew 26% due to increased 15% andvolumes, Presort Services revenue increased 3%declined 2% and SendTech Solutions revenue declined 11%. Segment EBIT decreased 23%, which was partially offset by a declineprimarily due to lower revenue in SendTech Solutions, revenuehigher credit losses and the mix of 8%business in totalGlobal Ecommerce and 5% excludingincreased costs attributed to COVID-19. Refer to Results of Operations section for further information.
Commerce Services EBIT margins in the impact of Market Exitsquarter and currency.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
Segment EBIT declined 15%in the second quarter was improved from the first quarter 2020 and prior year period. Global Ecommerce reported anperiod reflecting scale-related benefits in per unit transportation and warehousing costs. SendTech Solutions EBIT loss of $52 million compared to a loss of $28 millionmargins in the prior year,quarter and Presort Services EBIT declined 15%. The decline in Global Ecommerce was primarily driven by a decline in margins resulting from a shift in the mix of business to faster growing, but lower margin services. The decline in Presort Services was primarily due to higher consulting fees, transportation costs and bad debt expense, partially offset by labor cost per unit improvement. SendTech EBIT declined 8% due to the decline in revenue, lower margins attributable in part to increased costs from tariffs and a charge related to a SendPro C tablet replacement program to address an underlying battery longevity issue.
Income from continuing operations declinedyear-to-date periods were relatively unchanged compared to the prior year period,periods despite double-digit declines in revenue, primarily due to higher restructuringlower operating expenses from cost savings initiatives.
Second Quarter Highlights
We drew down $100 million under our revolving credit facility as a precautionary measure and asset impairment charges, lower margins,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 $18$5 million from Market Exits, primarily duerelated to the write-off of cumulative translation adjustments and a tax benefit from the release of a foreign valuation allowance.October 2019 malware attack that temporarily disrupted customer access to some services.
Outlook
We are creating a more focused and streamlined portfolio that is shifting to higher growth markets. We continue to invest in market opportunities and new services and solutions across all our businesses and optimize our cost structure to drive long-term value. We expect revenue to continue to grow as we transform our portfolio and margins to improve as we build scale and realize the full benefits of our investments.
Within Global Ecommerce, we expect continued revenue growth from the expansion of our domestic parcel business and shipping solutions. We anticipate higher shipping volumes in the fourth quarter as we enter the holiday season. We are implementing organizational changes designed to reduce costs and improve margins and profitability. With Presort Services, we expect revenue and EBIT growth from higher volumes, improving margins and operational efficiencies.
Within SendTech Solutions, we expect the magnitude of the revenue decline to be mitigated by the introduction of new services and products, opportunities through natural adjacencies in the business, sales of our SendPro C product and expanded third-party equipment financing alternatives. We expect trade tariffs to continue to adversely impact EBIT and equipment sales margins.
Beginning on October 12, 2019,In May 2020, we were affected by a malwareMaze 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") that encrypted information on some systemsattack.
Impacts of COVID-19
The global spread of COVID-19 and disrupted client access to our services. Upon discovering the unauthorized access, we took immediate actionsefforts to contain it adversely affected the U.S. and remediateinternational 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 malware attack. We engaged third-party cybersecurity expertsability to work remotely are doing so. Our facilities continue to operate, and informed various law enforcement agencies.many employees continue to report to work at these facilities. We have identifiedimplemented additional measures to protect the malware that affectedhealth and safety of our systems asemployees 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 Ryuk virus, which specifically targets Microsoft Windows based operating systems. Our financial information is not stored onquarter 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 Microsoft Windows operating system,result of the additional health and was therefore not affected. Additionally, the backup data storage systems for virtuallysafety measures implemented in all our client, employee and other business data was not impacted by the attack. Based on the work performed to date,Commerce Services facilities, we do not believe that any sensitive or confidential client or employee data has been improperly accessed or extracted from our network. We have made substantial progress in bringing critical systems back online, re-enabling client access to our services and restoring access to data that was encrypted.
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 remediate 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
this attack, determine how unauthorized users gained accessshift 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 systemscash flows. Nonrecurring revenues, primarily equipment sales and implement enhanced security features and monitoring procedures. Our fourth quarter operating resultsto a lesser extent, supplies, will continue to be adversely affected as we wereimpacted by COVID-19 due to declining demand and usage. We are unable to provide revenue-generating servicespredict the duration and magnitude of these declines or determine when, or if, demand and usage will return to somenormal 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 clients for a few daysdigital 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 incur additional costsenable 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, costsprioritizing our capital expenditures to meet client service level agreements, consulting feesessential and hardware replacement costs.necessary investments and reducing targeted loan originations at Wheeler Financial. We maintain insurance coverageestimate that these actions alone will benefit annual cash flows by approximately $75 million. Refer to the Liquidity and Capital Resources section for these types of incidents and have been working with our carriers throughout the attack. It is not yet possible to reasonably estimate the impact on our financial results or the extent to which we will receive reimbursement from our insurers.
further information.
RESULTS OF OPERATIONS
Revenue by sourceIn our Results of Operations discussion, we present and the relateddiscuss revenue and cost of revenue at the segment level since our revenue and related costs of revenue sources are shownpredominantly 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 the following tables:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | Actual % change | | Constant Currency % change | | 2019 | | 2018 | | Actual % change | | Constant currency % change |
Equipment sales | $ | 89,618 |
| | $ | 88,799 |
| | 1 | % | | 2 | % | | $ | 264,956 |
| | $ | 289,318 |
| | (8 | )% | | (7 | )% |
Supplies | 44,818 |
| | 50,403 |
| | (11 | )% | | (10 | )% | | 142,261 |
| | 165,853 |
| | (14 | )% | | (13 | )% |
Rentals | 19,737 |
| | 21,432 |
| | (8 | )% | | (7 | )% | | 60,339 |
| | 65,852 |
| | (8 | )% | | (7 | )% |
Financing | 90,577 |
| | 96,799 |
| | (6 | )% | | (6 | )% | | 280,039 |
| | 294,277 |
| | (5 | )% | | (4 | )% |
Support services | 126,274 |
| | 138,055 |
| | (9 | )% | | (8 | )% | | 382,578 |
| | 417,303 |
| | (8 | )% | | (7 | )% |
Business services | 419,101 |
| | 364,793 |
| | 15 | % | | 15 | % | | 1,243,609 |
| | 1,121,505 |
| | 11 | % | | 11 | % |
Total revenue | $ | 790,125 |
| | $ | 760,281 |
| | 4 | % | | 4 | % | | $ | 2,373,782 |
| | $ | 2,354,108 |
| | 1 | % | | 2 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | | | Percentage of Revenue | | | | | | Percentage of Revenue |
| 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
Cost of equipment sales | $ | 59,859 |
| | $ | 52,209 |
| | 66.8 | % | | 58.8 | % | | $ | 182,094 |
| | $ | 173,626 |
| | 68.7 | % | | 60.0 | % |
Cost of supplies | 12,225 |
| | 13,967 |
| | 27.3 | % | | 27.7 | % | | 37,533 |
| | 46,652 |
| | 26.4 | % | | 28.1 | % |
Cost of rentals | 5,090 |
| | 9,174 |
| | 25.8 | % | | 42.8 | % | | 23,223 |
| | 30,386 |
| | 38.5 | % | | 46.1 | % |
Financing interest expense | 11,026 |
| | 10,849 |
| | 12.2 | % | | 11.2 | % | | 33,433 |
| | 33,107 |
| | 11.9 | % | | 11.3 | % |
Cost of support services | 41,086 |
| | 45,872 |
| | 32.5 | % | | 33.2 | % | | 123,453 |
| | 134,204 |
| | 32.3 | % | | 32.2 | % |
Cost of business services | 338,519 |
| | 287,237 |
| | 80.8 | % | | 78.7 | % | | 1,003,483 |
| | 872,183 |
| | 80.7 | % | | 77.8 | % |
Total cost of revenue | $ | 467,805 |
| | $ | 419,308 |
| | 59.2 | % | | 55.2 | % | | $ | 1,403,219 |
| | $ | 1,290,158 |
| | 59.1 | % | | 54.8 | % |
Revenue - 2019 comparedthese expense line items or they are not allocated to 2018a specific segment.
In thisour 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.
Equipment sales in the quarter increased 1% as reported and 2% at constant currency, primarily due to a large deal in France. Equipment sales in the first nine months of 2019 decreased 8% as reported and 7% at constant currency, primarily due to lower sales of our bottom-of-the-line products. Market Exits had an adverse effect on equipment sales of 2% in both the quarter and year-to-date periods.
Supplies revenue decreased 11% as reported and 10% at constant currency in the quarter and 14% as reported and 13% at constant currency in the first nine months of 2019. Market Exits accounted for 4% of the decline in both the quarter and year-to-date periods, and the remainder of the decrease was due to a worldwide decline in our shipping and mailing business.
Rentals revenue decreased 8% as reported and 7% at constant currency both in the quarter and year-to-date periods, primarily due to a worldwide decline in our meter population.
Financing revenue decreased 6% in the quarter and 5% as reported and 4% at constant currency in the first nine months of 2019, primarily due to a declining portfolio. Market Exits accounted for 1% of the decline in both the quarter and year-to-date periods.
Support services revenue decreased 9% as reported and 8% at constant currency in the quarter and 8% as reported and 7% at constant currency in the first nine months of 2019, primarily due to a worldwide decline in our meter population.
Business services revenue increased 15% in the quarter and 11% in the first nine months of 2019, primarily due to growth in domestic parcel and shipping solutions volumes and mail volumes at Presort Services.
Cost of Revenue - 2019 compared to 2018
Cost of revenue as a percent of revenue in the quarter increased to 59.2% from 55.2% in the prior year period. Cost of equipment sales as a percent of equipment revenue increased to 66.8% from 58.8%. Trade tariffs and higher engineering costs impacted equipment sales margins by 3 percentage points and 2 percentage points, respectively. The decline in equipment sales revenue primarily contributed to the remaining decline in margin. Cost of rentals as a percent of rentals revenue decreased to 25.8% from 42.8%, primarily due to a favorable adjustment to cost of rentals recorded in the current quarter. Cost of business services as a percent of business service revenue increased to 80.8% from 78.7% in the prior year period primarily due to a shift in the mix of business to faster growing, but lower-margin services, investments in market growth opportunities and higher fulfillment costs to bring on new clients.
Cost of revenue as a percent of revenue in the first nine months of 2019 increased to 59.1% from 54.8% in the prior year period. Cost of equipment sales as a percent of equipment revenue increased to 68.7% from 60.0%. A charge related to a SendPro C tablet replacement program to address an underlying battery longevity issue recorded in the first quarter adversely impacted equipment sales margins by 3 percentage points, trade tariffs reduced equipment sales margins 2 percentage points and higher engineering costs adversely impacted equipment sales margins by one percentage point. The remaining decline in margin was due to the decrease in revenue. Costs of rentals as a percent of rentals revenue decreased to 38.5% from 46.1%, primarily due to the favorable adjustment to cost of rentals recorded in the third quarter. Cost of business services as a percent of business service revenue increased to 80.7% from 77.8% in the prior year period primarily due to higher labor, transportation and postage costs, a shift in the mix of business to faster growing, but lower-margin services and investments in market growth opportunities.
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. Cost of financing expense as a percentage of finance revenue was relatively consistent in the quarter and year-to-date periods compared to the prior year periods.
Selling, general and administrative (SG&A)
SG&A expense of $254 million in the quarter increased 5% compared to the prior period, primarily due to higher employee-related costs of $10 million and higher bad debt expense of $2 million. SG&A expense of $757 million for the first nine months of 2019, was flat compared to the prior period.
Research and development (R&D)
R&D expense decreased 22% in the quarter primarily due to lower spending of $3 million in SendTech Solutions. R&D expense decreased 14% in the year-to-date period, primarily due to lower spending of $3 million in both Global Ecommerce and SendTech Solutions.
Restructuring charges and asset impairments, net
Restructuring charges and asset impairments, net in the three and nine months ended September 30, 2019 were $47 million and $57 million, respectively. Restructuring related charges for the three and nine months ended September 30, 2019 were $6 million and $15 million, respectively.
Asset impairment charges for the three and nine months ended September 30, 2019 were $41 million and $42 million, respectively, and primarily include the write-off of capitalized software costs related to the development of a new enterprise resource planning (ERP) system in our international markets. As a result of the sale of our Production Mail business in 2018, the January 2019 Market Exits and the pending sale of our Software Solutions business, our international footprint has been significantly reduced. Accordingly, we re-evaluated our international strategy. In the third quarter, we decided to permanently cease the development and implementation of this ERP system and recorded an impairment charge to write-off the investment.
Restructuring charges and asset impairments, net in the three and nine months ended September 30, 2018 were $6 million and $19 million, respectively, and consisted of restructuring related charges. See Note 10 to the Condensed Consolidated Financial Statements for further information.
Other expense
Other expense for the current quarter in 2019 represents a loss on the early extinguishment of debt. Other expense for the nine months ended September 30, 2019 also includes the loss on Market Exits of $18 million, primarily from the write-off of cumulative translation adjustments. Other expense for 2018 represents a loss on the early extinguishment of debt.
Income taxes
See Note 13 to the Condensed Consolidated Financial Statements for further information.
Discontinued Operations
Discontinued operations includes the our Software Solutions business and Document Messaging Technology production mail business and supporting software (Production Mail Business), which was sold in July 2018. See Note 4 to the Condensed Consolidated Financial Statements for further information.
Business Segment Results
Our reportable segments are Global Ecommerce, Presort Services and SendTech Solutions. Global Ecommerce and Presort Services comprise the Commerce Services reporting group. The principal products and services of each reportable segment are as follows:
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.
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.
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.
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.
Segment information forREVENUE AND SEGMENT EBIT
Global Ecommerce
Global Ecommerce includes the threerevenue and nine months ended September 30, 2019related expenses from products and 2018 is presented below:services that enable domestic and cross-border ecommerce transactions, including shipping, fulfillment and returns.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | Actual % change | | Constant currency % change | | 2019 | | 2018 | | Actual % change | | Constant currency % change |
Global Ecommerce | $ | 278,995 |
| | $ | 232,845 |
| | 20 | % | | 20 | % | | $ | 827,568 |
| | $ | 718,535 |
| | 15 | % | | 16 | % |
Presort Services | 131,483 |
| | 125,334 |
| | 5 | % | | 5 | % | | 394,468 |
| | 382,522 |
| | 3 | % | | 3 | % |
Commerce Services | 410,478 |
| | 358,179 |
| | 15 | % | | 15 | % | | 1,222,036 |
| | 1,101,057 |
| | 11 | % | | 11 | % |
SendTech Solutions | 379,647 |
| | 402,102 |
| | (6 | )% | | (5 | )% | | 1,151,746 |
| | 1,253,051 |
| | (8 | )% | | (7 | )% |
Total | $ | 790,125 |
| | $ | 760,281 |
| | 4 | % | | 4 | % | | $ | 2,373,782 |
| | $ | 2,354,108 |
| | 1 | % | | 2 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | Cost of Revenue | | Gross Margin |
| Three Months Ended June 30, | | Three Months Ended June 30, | | Three Months Ended June 30, |
| 2020 | | 2019 | | Actual % change | | Constant Currency % 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.
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| | | | | | | | | | | | | | | | | | | | | |
| EBIT |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
Global Ecommerce | $ | (21,793 | ) | | $ | (14,330 | ) | | (52 | )% | | $ | (51,969 | ) | | $ | (28,034 | ) | | (85 | )% |
Presort Services | 17,687 |
| | 17,435 |
| | 1 | % | | 48,215 |
| | 57,026 |
| | (15 | )% |
Commerce Services | (4,106 | ) | | 3,105 |
| | >(100%) |
| | (3,754 | ) | | 28,992 |
| | >(100%) |
|
SendTech Solutions | 130,954 |
| | 134,607 |
| | (3 | )% | | 378,095 |
| | 412,427 |
| | (8 | )% |
Total Segment EBIT | $ | 126,848 |
| | $ | 137,712 |
| | (8 | )% | | $ | 374,341 |
| | $ | 441,419 |
| | (15 | )% |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | Cost of Revenue | | Gross Margin |
| Six Months Ended June 30, | | Six Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | Actual % change | | Constant Currency % 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.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | Cost of Revenue | | Gross Margin |
| Three Months Ended June 30, | | Three Months Ended June 30, | | Three Months Ended June 30, |
| 2020 | | 2019 | | Actual % change | | Constant Currency % 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.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | Cost of Revenue | | Gross Margin |
| Six Months Ended June 30, | | Six Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | Actual % change | | Constant Currency % 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.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | Cost of Revenue | | Gross Margin |
| Three Months Ended June 30, | | Three Months Ended June 30, | | Three Months Ended June 30, |
| 2020 | | 2019 | | Actual % change | | Constant Currency % 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
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.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | Cost of Revenue | | Gross Margin |
| Six Months Ended June 30, | | Six Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | Actual % change | | Constant Currency % 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.
Global Ecommerce
Global Ecommerce revenue increased 20%CONSOLIDATED OPERATING AND OTHER EXPENSES
Selling, general and administrative (SG&A)
SG&A expense of $234 million in the quarter across all platforms, but primarily due to 11% growth in domestic parcel and fulfillment volumes and 9% growth in shipping solutions volumes. EBIT loss for the quarter increased to $22 million compared to a loss of $14 million in the prior year period primarily driven by a decline in margins resulting from a shift in the mix of business to faster growing, but lower margin services, facility investments and higher incremental fulfillment costs to bring on new clients. The EBIT loss was partially offset by volume growth in shipping API labels.
Global Ecommerce revenue increased 15% as reported and 16% at constant currency in the first nine months of 2019 primarily due to growth in domestic parcel and shipping solutions volumes of 12% and 6%, respectively, partially offset by a decline of 2% in cross border volumes. EBIT for the first nine months of 2019 was a loss of $52 million compared to a loss of $28 million in the prior year period. The higher loss was primarily driven by a decline in margins resulting from a shift in the mix of business to fast growing, but lower margin services, investments in new facilities and marketing programs and higher transportation, fulfillment and labor costs.
Presort Services
Presort Services revenue increased 5% in the quarter. Volumes processed increased 6% primarily due to First Class and Marketing Mail; however, lower revenue per piece adversely impacted revenue by 1%. EBIT was relatively flatdecreased 3% compared to the prior year period, driven by higher revenue and $4 million in lower labor costs per unit resulting from implemented productivity actions, offset by higher consulting fees of $1 million and higher investments in the business of $1 million.
Presort Services revenue increased 3% in the first nine months of 2019. Higher volumes of mail processed increased revenue 4%; however, lower revenue per piece adversely impacted revenue by 1%. EBIT decreased 15% in the first nine months of 2019. Higher consulting fees of $4 million, higher transportation costs of $3 million and higher bad debt expense of $2 million were partially offset by lower labor costs per unit of $4 million resulting from implemented productivity actions.
SendTech Solutions
SendTech Solutions revenue decreased 6% as reported and 5% at constant currency in the quarter, primarily due to:
2% from Market Exits;
2% from lower support services and 1% from lower supplies due to a declining meter population; and
1% from lower financing fees; offset by
1% from higher equipment sales primarily due to a large deal in France.
EBIT decreased 3% in the quarter, primarily due to a 7% decline in gross profit, driven by the decline in revenue, partially offset by lower operating expenses of $15 million.
SendTech Solutions revenue decreased 8% as reported and 7% at constant currency in the first nine months of 2019, primarily due to:
2% from Market Exits;
2% from lower support services and 1% from lower supplies due to a declining meter population;
1% from lower financing fees; and
1% from lower equipment sales primarily due to lower salestravel related expenses of our bottom-of-the-line products.
EBIT decreased 8%$7 million as we imposed travel restrictions in first nine monthsresponse to COVID-19, lower professional fees of 2019, primarily$5 million due to a 10% decline in gross profit, primarily due to the decline in revenue, a chargecontract renegotiations and lower marketing expenses of $9 million related to a SendPro C tablet replacement program to address an underlying battery longevity issue and higher costs from trade tariffs of $6$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 operatingprofessional fees of $15 million, lower employee costs of $8 million and lower travel related expenses of $47$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 ended June 30, 2020 and 2019 were $5 million and $6 million, respectively, and restructuring charges and asset impairments for the six months ended June 30, 2020 and 2019 were $9 million and $10 million, respectively. See Note 10 to the Condensed Consolidated Financial Statements for further information.
Goodwill impairment
We recorded a non-cash, pre-tax goodwill impairment charge of $198 million associated with our Global Ecommerce reporting unit in the first quarter of 2020. See Critical Accounting Estimates for further information.
Other (income) expense
Other (income) expense for the three months ended June 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 ended June 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 ended June 30, 2019 includes a loss of $18 million, primarily from cost savings initiatives.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 ended June 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 ended June 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 ended June 30, 2020 primarily includes a pension settlement charge related to the Software Solutions sale. Income from discontinued operations for the six months ended June 30, 2020 primarily includes the gain on the sale of the Australia software business, which closed in January 2020, and the pension settlement charge related to the Software Solutions sale. See Note 4 to the Condensed Consolidated Financial Statements for further information.
LIQUIDITY AND CAPITAL RESOURCES
WeAt June 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 through the capital marketsunder our $500 million revolving credit facility will be sufficient to supportfund our current cash needs including discretionary uses such as capital investments, dividends, strategic acquisitions and share repurchases. Cash and cash equivalents and short-term investments were $652 million at September 30, 2019 and $927 million at December 31, 2018.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 and cash equivalents held by our foreign subsidiaries were $154 million at September 30, 2019 and $189 million at December 31, 2018, and are generally used to support the liquidity needs of these subsidiaries.
Cash Flow Summary
Changes in cash and cash equivalents for the nine months ended September 30, 2019 and 2018 were as follows: | | | 2019 | | 2018 | | Change | 2020 | | 2019 | | Change |
Net cash provided by operating activities | $ | 182,284 |
| | $ | 258,570 |
| | $ | (76,286 | ) | $ | 86,809 |
| | $ | 86,782 |
| | $ | 27 |
|
Net cash (used in) provided by investing activities | (201,681 | ) | | 234,241 |
| | (435,922 | ) | |
Net cash used in investing activities | | (54,545 | ) | | (36,151 | ) | | (18,394 | ) |
Net cash used in financing activities | (327,192 | ) | | (725,922 | ) | | 398,730 |
| (84,598 | ) | | (146,770 | ) | | 62,172 |
|
Effect of exchange rate changes on cash and cash equivalents | (5,822 | ) | | (15,653 | ) | | 9,831 |
| (9,211 | ) | | (81 | ) | | (9,130 | ) |
Change in cash and cash equivalents | $ | (352,411 | ) | | $ | (248,764 | ) | | $ | (103,647 | ) | $ | (61,545 | ) | | $ | (96,220 | ) | | $ | 34,675 |
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Operating Activities
Cash provided by operating activities of $87 million in the first nine monthshalf of 2019 declined $76 million2020 was flat compared to the prior year period.year. Cash flows from continuing operations decreased $24increased $44 million, primarily due to lower income from continuing operations of $100 million, partially offset by higher asset impairment charges of $38 million, lower restructuring payments of $20 million, a non-cash loss on Market Exits of $18 million, and working capital changes of $6 million, primarily related toincluding the timing of payments of accounts payable and accrued liabilities.payable. Cash flows from discontinued operations declined $53 million as we entered into an agreementdue to selltaxes related to the gain on the sale of our Software Solutions business in August 2019 and sold the Production Mail Business in July 2018.
business.
Investing Activities
Cash used in investing activities in the first nine monthshalf 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 the PB 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 $202$36 million, consisting primarily of capital expenditures of $95$59 million a $22and lower customer deposits at the PB Bank of $8 million, usepartially offset by net proceeds of cash for a Presort acquisition, and net purchases of $60$47 million from investment activities.
Financing Activities
Cash provided by investingused in financing activities in the first nine monthshalf of 20182020 was $234$85 million, consisting primarilyand includes payments of proceeds$33 million for premiums and fees associated with the early extinguishment of $340debt, net cash of $32 million from the saleused for debt activities, including $21 million of the Production Mail Business, partially offset by capital expendituresscheduled term loan repayments and $17 million of $105 million.
Financing Activities
dividend payments. See Financings and Capitalization below for additional information. In the first nine monthshalf of 2019, cash used in financing activities included $105$100 million to repurchase 18.617.4 million shares of common stock, $25 million to repay term loan debt repayments of $203 million and $27$18 million of common stock dividend payments.
In the first nine months of 2018, cash was used to repay $565 million of debt and pay dividends of $105 million. Cash used in financing activities was also impacted by the settlement of $46 million related to a timing difference between our investing excess cash at the subsidiary level and our funding of an intercompany transfer at year end.
Financings and Capitalization
Through September 30, 2019,In the first quarter of 2020, we repaid the remaining $165 million of our $200secured a five-year, $850 million term loan scheduled to mature January 2025 (the 2025 Term Loan). The 2025 Term Loan bears interest at LIBOR plus 5.5% and made $38resets monthly. We used the net proceeds plus available cash to purchase under a tender offer $428 million of scheduled payments under other term loans. In April 2019, Moody's lowered our corporate credit rating from Ba1 to Ba2. As a result, the interest rates onOctober 2021 notes, $250 million of the May 2022 notes, $125 million of the April 2023 notes and September$125 million of the March 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 in November 2024 and contains financial and non-financial covenants. In April 2020, in light of the current macroeconomic environment, we drew down $100 million under the credit facility as a precautionary measure. At June 30, 2020, we were in compliance with all covenants.
Interest rates on certain notes increased 0.25% since December 31, 2018,are subject to adjustment based on changes in our credit ratings. As a result of credit rating downgrades in November 2019 and May 2020, the interest rates on the October 2021 notes and April 2023 notes increased 0.25% on October 1, 2019.
In November 2019, we repaid the $150 million term loan due November 20190.50% and the remaining balanceinterest rate on the May 2022 notes increased 0.75%. Further, the interest rates on the October 2021 notes and April 2023 notes will increase an additional 0.25% in the fourth quarter of the $300 million term loan due December 2020, secured a new five-year $400 million term loan and replaced our revolving credit facility scheduled to mature in January 2021 for $500 million.
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.2020.
Dividends and Share Repurchases
In February 2019, our Board of Directors approved an incremental $100 million for share repurchases, raising our authorization level to $121 million. During the first nine months of 2019, we repurchased 18.6 million shares at an aggregate cost of $105 million. At September 30, 2019, we had remaining authorization to repurchase up to $16 million of our common shares. Also, during the first nine months of the year, we paid dividends of $27 million. 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.
In June 2019, we redeemed of all of the outstandingWe did not repurchase any shares of 4% Convertible Cumulative Preferred Stock (Preferred Stock) and $2.12 Convertible Preference Stock (Preference Stock). The redemptionour common stock during the first half of these shares did not2020. We have a material impact onremaining authorization to repurchase up to $16 million of our consolidated financial statements.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.
At SeptemberJune 30, 2019,2020, 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 Estimates
Goodwill impairment review
Based onDuring the year-to-date operating resultsfirst quarter of 2020, our Global Ecommerce reporting unit we performed a goodwill impairment testexperienced weaker than expected performance, in part due to assess the adequacy ofmacroeconomic conditions resulting from COVID-19. At December 31, 2019, the carrying value of goodwill. As a result of our test, we determined that the estimated fair value of the reporting unitour Global Ecommerce business exceeded its carrying value by less than 20%. The assumptions used and the deteriorating macroeconomic conditions and uncertainty brought on by COVID-19 caused us to estimateevaluate the Global Ecommerce goodwill for impairment.
To test the Global Ecommerce goodwill for impairment, we determined the fair value were based on projections incorporated in our current operating plans as well as other available information. By their nature, projections are uncertain. Potential events and circumstances, such as declining revenue, loss of client contracts and inability to acquire new clients could have an adverse effect on our assumptions.
The goodwill balance related to the Global Ecommerce reporting unit at September 30, 2019and 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 $609 million. We will continueless than its carrying value and recorded a non-cash, pre-tax goodwill impairment charge of $198 million in the first quarter to monitor and evaluatereduce the carrying value of goodwill for thisthe Global Ecommerce reporting unit and should facts and circumstances change, a non-cash impairment charge could be recorded in the future.
to its estimated fair value.
Regulatory Matters
There have been no significant changes to the regulatory matters disclosed in our 20182019 Annual Report.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
There were no material changes to the disclosures made in our 20182019 Annual Report.
Item 4: Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures are also designed to reasonably ensure that such information is accumulated and communicated to management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), to allow timely decisions regarding disclosures.
With the participation of our CEO and CFO, management evaluated our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) and internal controls over financial reporting. Our CEO and CFO concluded that, as of the end of the period covered by this report, such disclosure controls and procedures were effective to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the required time periods. In addition, no changes in internal control over financial reporting occurred during the quarter covered by this report that materially affected, or are reasonably likely to materially affect, such internal control over financial reporting. Further, we have not experienced any material impact to our internal controls over financial reporting given that most of our employees are working remotely due to COVID-19. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact to their design and operating effectiveness.
It should be noted that any system of controls is based in part upon certain assumptions designed to obtain reasonable (and not absolute) assurance as to its effectiveness, and there can be no assurance that any design will succeed in achieving its stated goals. Notwithstanding this caution, the CEO and CFO have reasonable assurance that the disclosure controls and procedures were effective as of SeptemberJune 30, 2019.
2020.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
See Note 14 to the Condensed Consolidated Financial Statements.
Item 1A: Risk Factors
There were no material changes to the risk factors identified in our 20182019 Annual Report. However, we are supplementing the risk factors described in Item 1A of our 2019 Annual Report with the following additional risk factor:
Our operations and financial performance are being affected and will continue to be affected by the global coronavirus outbreak. The duration and severity of the COVID-19 crisis is unknown and constantly changing, and a prolonged duration of this crisis or a reoccurrence of COVID-19 or other similar virus in the future could have a significantly material effect on our operations, financial condition and liquidity
The COVID-19 pandemic is negatively impacting, and is expected to continue to negatively impact, our business, operations and financial performance. Given the unpredictability of the severity, magnitude and duration of the COVID-19 pandemic, including various governments’ responses to the pandemic, and its effect on the global economy, the ultimate impact of the pandemic on our business, operations and financial performance remains uncertain. There are many factors, not within our control, which could affect the pandemic’s ultimate outcome on our business and our ability to execute our business strategies and initiatives in the expected time frame. These include, but are not limited to: government, businesses and individuals’ actions in response to the pandemic; an acceleration of the decline on the use of physical mail; the impact of the pandemic on the global economy and economic activity; the changing spending habits of consumers and businesses; disruptions in global supply chains; and significant volatility and disruption of financial markets. A prolonged duration of this crisis or a reoccurrence of the COVID-19 pandemic could exacerbate the impact on our business, operations and financial performance. It is also uncertain the extent to which the COVID-19 will permanently affect aspects of the economy to the detriment of our business, including:
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• | The dramatic acceleration in the decline of physical mail volume in the geographies in which we operate, which adversely affects both our Presort Services and SendTech Solutions businesses. We cannot yet assess the extent to which these declines in mail volumes, and resulting impact to our business, are permanent or temporary. Further detail on the risk of physical mail volume decline, including an acceleration of that decline, is described in the risk factor in our Annual Report on Form 10-K for the year ended December 31, 2019 (the 2019 Annual Report) relating to the “The Continuing Decline in the Volume of Physical Mail Delivered via Traditional Postal Services”. |
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• | The adverse effect that declines in physical mail are having on the financial health of posts around the world, especially that of the United States Postal Service. If these financial difficulties are not resolved, or if any resolution requires them to operate differently, price in a manner that hurts their competitiveness or reduces postal volume, or causes them to change their contractual relationships with their partners or vendors, these changes could have a material adverse effect on our business. Further detail on this risk is described in the risk factor in our 2019 Annual Report related to “Significant Disruptions to Postal Operations”. |
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• | Significant declines in the retail industry caused by the pandemic. Although our Global Ecommerce business has seen an increase in volume of packages in the short-term, should there be a long-term change in consumer sentiment or purchasing habits it could have a material effect on our retail clients, including some of our largest clients, which could have an adverse impact on our financial performance. Further detail on this risk is described in the risk factor in our 2019 Annual Report related to “Material Change in Consumer Sentiment or Spending Habits”. |
The decline in frequency of long-distance airplane flights has increased the costs of, and therefore the demand for, products purchased in our Global Ecommerce service’s cross-border business.
The effect that social distancing rules and heightened security policies have inhibited, and will continue to inhibit, our ability to sell products and provide services to our clients, fulfill orders and install equipment on a timely basis and market to prospective new clients.
Increased costs and reduced labor productivity associated with extended safety protocols, including sanitizing facilities and equipment multiple times a day, implemented in our facilities and incremental costs that may be required to hire temporary labor or redirect volumes to other facilities.
We could experience further increases in delinquencies in collections and bankruptcies in our clients, which could affect our cash flow. Client requests for potential payment deferrals or other contract modifications could also reduce the profitability or ongoing cash flow from some of our current customers.
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• | Given the severity of the pandemic, the business continuity plans of our suppliers and third-party service providers may not be sufficient to enable them to satisfy their obligations to us. If they are unable to satisfy these obligations, it could affect our ability to satisfy service or sales obligations to our clients, or it may affect other aspects of our internal operations. Further detail on this risk is described in the risk factor in our 2019 Annual Report related to “Third-party Suppliers and Outsource Providers”. |
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• | A prolonged period of generating lower earnings or cash from operations could result in additional credit rating downgrades, higher costs of borrowing, or limit our access to additional debt. Further detail on this risk is described in the risk factor in our 2019 Annual Report related to “Future Credit Rating Downgrades or Capital Market Disruptions”. |
As the COVID-19 pandemic continues to adversely affect our business, operations and financial performance, it may also have the effect of heightening many of the other risks described in the risk factors in our 2019 Annual Report, including the risks described above. Further, the COVID-19 pandemic may also affect our business, operations and financial performance in a manner that is not presently known to us.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Repurchases of Equity Securities
We periodically repurchase shares of our common stock in the open market to manage the dilution created by shares issued under employee stock plans and for other purposes. In February 2019,We did not repurchase any shares during the six months ended June 30, 2020 and maintain Board of Directors approved an additional $100 million for share repurchases giving us the abilityauthorization to repurchase up to $121$16 million of our shares.
The following table provides information about purchases of our common stock during the three months ended September 30, 2019:stock.
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| | | | | | | | | | | |
| Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs | | Approximate dollar value of shares that may yet be purchased under the plans or programs (in thousands) |
Beginning balance | | | | | | | $21,022 |
July 1, 2019 - July 31, 2019 | 1,160,123 |
| | $ | 4.31 |
| | 1,160,123 |
| | $16,022 |
August 1, 2019 - August 31, 2019 | — |
| | $ | — |
| | — |
| | $16,022 |
September 1, 2019 - September 30, 2019 | — |
| | $ | — |
| | — |
| | $16,022 |
| 1,160,123 |
| | $ | — |
| | 1,160,123 |
| | |
Item 6: Exhibits
| | Exhibit Number | Description | | Exhibit Number in this Form 10-Q | Description | | Exhibit Number in this Form 10-Q |
2.1 | | | 2.1 | |
3(i)(a) | | | | 3(i)(a) |
3(a) | | | 3(i)(a) | | | 3 |
3 | | | 3 | |
10(a) | | | 10(a) | |
31.1 | | | 31.1 | | | 31.1 |
31.2 | | | 31.2 | | | 31.2 |
32.1 | | | 32.1 | | | 32.1 |
32.2 | | | 32.2 | | | 32.2 |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | | | Inline XBRL Taxonomy Extension Schema Document | | |
101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document | | | Inline XBRL Taxonomy Calculation Linkbase Document | | |
101.DEF | Inline XBRL Taxonomy Definition Linkbase Document | | | Inline XBRL Taxonomy Definition Linkbase Document | | |
101.LAB | Inline XBRL Taxonomy Label Linkbase Document | | | Inline XBRL Taxonomy Label Linkbase Document | | |
101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document | | | Inline XBRL Taxonomy Presentation Linkbase Document | | |
104 | The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Inline XBRL. (included as Exhibit 101). | | The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline XBRL. (included as Exhibit 101). | |
* Pursuant to Item 601(a)(5) of Regulation S-K, certain exhibits and schedules have been omitted. The registrant hereby agrees to furnish
supplementally a copy of any omitted attachment to the SEC upon request.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | |
| | PITNEY BOWES INC. |
| | |
Date: | November 5, 2019August 3, 2020 | |
| | |
| | /s/ Stanley J. Sutula III |
| | |
| | Stanley J. Sutula III |
| | Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
| | |
| | /s/ Joseph R. Catapano |
| | |
| | Joseph R. Catapano |
| | Vice President, Chief Accounting Officer |
| | (Principal Accounting Officer) |