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Income (Loss)
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Income (Loss) (Parenthetical)
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(Exact name of registrant as specified in its charter)
State of incorporation:
iDelaware
I.R.S.
Employer Identification No.
i06-0495050
Address of Principal Executive Offices:
i3001
Summer Street,
iStamford,
iConnecticut
i06926
Telephone
Number:
i(203)
i356-5000
Securities registered pursuant to Section 12(b) of the Act:
Title
of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
iCommon Stock, $1 par value per share
iPBI
iNew
York Stock Exchange
i6.7% Notes due 2043
iPBI.PRB
iNew
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. iYesþ
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). iYesþ 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.
iLarge
accelerated filer
þ
Accelerated filer
☐
Non-accelerated filer
o
Smaller reporting company
i☐
Emerging growth company
i☐
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 iþ
As
of July 29, 2022, i173,876,935 shares of common stock, par value $1 per share, of the registrant were outstanding.
Adjustments
to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization
i85,472
i79,416
Allowance
for credit losses
i7,092
i4,988
Stock-based
compensation
i9,866
i12,278
Amortization
of debt fees
i2,985
i4,103
Loss
on debt redemption/refinancing
i4,993
i52,383
Restructuring
charges
i8,408
i7,733
Restructuring
payments
(i8,255)
(i8,825)
Pension
contributions and retiree medical payments
(i18,559)
(i18,784)
Gain
on sale of assets
(i14,372)
(i1,434)
Gain
on sale of business
(i2,522)
(i10,201)
Changes
in operating assets and liabilities, net of acquisitions/divestitures:
Accounts and other receivables
i50,340
i72,791
Finance
receivables
i1,260
i30,620
Inventories
(i4,078)
(i1,884)
Other
current assets and prepayments
(i33,833)
i1,567
Accounts
payable and accrued liabilities
(i72,101)
(i56,038)
Current
and noncurrent income taxes
(i14,069)
(i11,807)
Advance
billings
(i285)
i5,271
Other,
net
i18,195
(i10,669)
Net
cash from operating activities
i45,694
i144,729
Cash
flows from investing activities:
Capital expenditures
(i64,174)
(i83,703)
Purchases
of investment securities
(i3,988)
(i68,143)
Proceeds
from sales/maturities of investment securities
i18,601
i58,870
Net
investment in loan receivables
(i22,537)
(i2,964)
Proceeds
from asset sales
i50,766
i1,840
Proceeds
from sale of business
i3,284
i27,573
Other
investing activities
(i9,470)
i—
Net
cash from investing activities - continuing operations
(i27,518)
(i66,527)
Net
cash from investing activities - discontinued operations
i—
(i1,507)
Net
cash from investing activities
(i27,518)
(i68,034)
Cash
flows from financing activities:
Proceeds from the issuance of debt, net of discount
i—
i1,195,500
Principal
payments of debt
(i106,779)
(i1,339,568)
Premiums
and fees paid to redeem/refinance debt
(i4,759)
(i46,937)
Dividends
paid to stockholders
(i17,313)
(i17,325)
Customer
deposits at Pitney Bowes Bank
(i15,912)
i15,633
Common
stock repurchases
(i13,446)
i—
Other
financing activities
(i8,295)
(i6,327)
Net
cash from financing activities
(i166,504)
(i199,024)
Effect
of exchange rate changes on cash and cash equivalents
(i13,455)
i349
Change
in cash and cash equivalents
(i161,783)
(i121,980)
Cash
and cash equivalents at beginning of period
i732,480
i921,450
Cash
and cash equivalents at end of period
$
i570,697
$
i799,470
See
Notes to Condensed Consolidated Financial Statements
6
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
1. iDescription
of Business and Basis of Presentation
Description of Business
Pitney Bowes Inc. (we, us, our, or the company) is a global shipping and mailing company that provides technology, logistics, and financial services to small and medium sized businesses, large enterprises, including more than i90 percent of the Fortune 500, retailers and government clients around the world. These clients
rely on us to remove the complexity and increase the efficiency in their sending of mail and parcels. For additional information, visit www.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, 2021 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, 2022. 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, 2021 (2021 Annual Report).
Net income for the six months ended June
30, 2022 benefited by approximately $i3 million from adjustments related to prior years. The impact of this adjustment was not material to the consolidated financial statements for any prior quarterly or annual periods, and is not expected to be material to the current annual period.
Risks and Uncertainties
The effects of COVID-19 and the risk of a global recession continues to impact how we and our clients conduct business. The impacts on our business remain unpredictable
and accordingly, we are not able to reasonably estimate the full extent of their impact on our operating results, financial position and cash flows.
i
Accounting Pronouncements Not Yet Adopted
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 transition to new reference
interest rates will require certain contracts to be modified and 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 accommodations provided by the ASU are effective through December 31, 2022, and may be applied at the beginning of any interim period within that time frame.
We have matched LIBOR-based debt with LIBOR-based interest rate swaps and have elected to apply the practical expedient related to probability
and the assessment of the effectiveness for future LIBOR-indexed cash flows, which assumes that the debt instrument will use the same index rate as its corresponding interest rate swap once a new reference rate is established to replace LIBOR. We may apply other expedients as additional reference rate changes occur. We continue to assess the impact of this standard on our consolidated financial statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which requires disclosure of gross write-offs and recoveries of financing receivables by year of origination. The standard is effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted. We
are currently assessing the impact this standard will have on our financial statement disclosures.
7
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
2. iRevenue
Disaggregated Revenue
i
The following tables disaggregate our revenue by source and timing of recognition:
Timing
of revenue recognition from products and services
Products/services transferred at a point in time
$
i—
$
i—
$
i154,811
$
i154,811
Products/services
transferred over time
i831,515
i277,745
i229,648
i1,338,908
Total
$
i831,515
$
i277,745
$
i384,459
$
i1,493,719
9
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 fulfillment, delivery and return services, cross-border solutions, mail processing services and shipping subscription solutions. Revenue for fulfillment, delivery and return services and cross-border solutions and mail processing services is recognized over time using an output method based on the number of parcels or mail pieces either processed or delivered, depending on the service type, since that measure best depicts the value of goods and services transferred to the client over the contract
period. Contract terms for these services initially range from one to ifive years and contain annual renewal options. Revenue for shipping subscription solutions revenue is recognized ratably over the contract period as the client obtains equal benefit from these services through the period.
Support services includes providing maintenance, professional
and subscription services for our equipment and digital mailing and shipping technology solutions. Contract terms range from one to ifive 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 generally includes the sale of mailing and shipping equipment, excluding sales-type leases. We recognize revenue upon delivery for self-install equipment and upon acceptance or installation for other equipment. We provide a warranty that the equipment is free of defects and meets stated specifications. The warranty is not considered a separate performance obligation.
Supplies revenue includes revenue from supplies for our mailing equipment and is recognized upon delivery.
Revenue from leasing transactions and financing includes revenue from sales-type and operating leases, finance income, late fees and investment income, gains and losses at the Bank.
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 mailing equipment. Revenue recognized during the period includes $i73 million of advance billings at the beginning of the period. Advance billings, current reported on the condensed consolidated balance sheets at June 30,
2022 and December 31, 2021 also includes $i8 million and $i6 million, respectively, from leasing transactions.
Future Performance Obligations
Future performance obligations include revenue streams bundled with our leasing contracts, primarily maintenance and subscription services. iThe transaction prices allocated to future performance obligations will be recognized as follows:
Remainder
of 2022
2023
2024-2027
Total
SendTech Solutions
$
i139,124
$
i229,620
$
i308,281
$
i677,025
The
amounts above do not include revenue for performance obligations under contracts with terms less than i12 months or revenue for performance obligations where revenue is recognized based on the amount billable to the customer.
10
PITNEY
BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
3. iSegment Information
Our reportable segments are Global Ecommerce, Presort Services and SendTech Solutions. The principal products and services of each reportable segment are as follows:
Global Ecommerce:
Includes the revenue and related expenses from business to consumer logistics services for domestic and cross-border delivery, returns and fulfillment.
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.
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.
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, unallocated corporate expenses, restructuring charges, asset and goodwill impairment charges and other items not allocated to a business segment. Costs related to shared assets are allocated to the relevant segments. Management believes that segment EBIT 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. iThe
following tables provide information about our reportable segments and a reconciliation of segment EBIT to net income (loss).
Reconciliation
of Segment EBIT to net income (loss):
Unallocated corporate expenses
(i40,761)
(i56,316)
(i98,595)
(i113,781)
Restructuring
charges
(i4,224)
(i4,844)
(i8,408)
(i7,733)
Interest
expense, net
(i33,540)
(i36,119)
(i67,266)
(i73,163)
Loss
on debt redemption/refinancing
i—
(i989)
(i4,993)
(i52,383)
Gain
on sale of business
i—
i10,201
i2,522
i10,201
Gain
on sale of assets
i—
i1,434
i14,372
i1,434
Transaction
costs
(i3,756)
i—
(i5,400)
i—
Benefit
(provision) for income taxes
i7,026
(i4,915)
i2,823
i9,077
Income
(loss) from continuing operations
i4,336
i20,876
i25,157
(i6,779)
Loss
from discontinued operations, net of tax
i—
(i1,020)
i—
(i4,906)
Net
income (loss)
$
i4,336
$
i19,856
$
i25,157
$
(i11,685)
/
11
PITNEY
BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
Effective for 2022, we refined our methodology for allocating transportation costs between Global Ecommerce and Presort Services, resulting in an increase to Global Ecommerce EBIT and a corresponding decrease to Presort Services EBIT of approximately $ii3/ million
and $ii7/ million
for the three and six months ended June 30, 2022, respectively.
4. iEarnings per Share (EPS)
i
The
calculation of basic and diluted earnings per share is presented below. The sum of the earnings per share amounts may not equal the totals due to rounding.
Common
stock equivalents excluded from calculation of diluted earnings per share because their impact would be anti-dilutive:
i9,602
i6,451
i9,602
i6,451
/
(1)
Due to the net loss for the six months ended June 30, 2021, common stock equivalents of i5,382 were also excluded from the calculation of diluted earnings per share.
5. iInventories
Inventories
are stated at the lower of cost, determined on the first-in, first-out (FIFO) basis, or net realizable value. iInventories consisted of the following:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
6. iFinance Assets and Lessor Operating Leases
Finance Assets
Finance receivables are comprised of sales-type lease receivables, secured loans and unsecured loans. Sales-type leases and secured loans are from financing
options provided to clients for Pitney Bowes equipment or leasing of other manufacturers' equipment and are generally due in installments over periods ranging from three to ifive years. Unsecured loans comprise revolving credit lines offered to our clients for postage, supplies and working capital purposes. These revolving credit lines are generally due monthly; however, clients may rollover outstanding balances. Interest is recognized on finance receivables using the effective interest method. Annual fees are recognized ratably over the annual period covered
and client acquisition costs are expensed as incurred. All finance receivables are in our SendTech Solutions segment and we segregate finance receivables into a North America portfolio and an International portfolio.
We provide an allowance for credit losses based on historical loss experience, the nature of our portfolios, adverse situations that may affect a client's ability to pay and current economic conditions and outlook based on reasonable and supportable forecasts. We continually evaluate the adequacy of the allowance for credit losses and adjust as necessary. The assumptions used in determining an estimate of credit losses are inherently subjective and actual results may differ significantly from estimated reserves.
We established credit approval limits based on the credit quality of the client and the type of equipment financed. We cease recognition of financing revenue for lease receivables greater than i120
days past due and for unsecured loan receivables greater than i90 days past due. Revenue recognition is resumed when the client's payments reduce the account aging to less than i60 days past
due. Finance receivables are written off against the allowance after all collection efforts have been exhausted and management deems the account to be uncollectible. We believe that our credit risk is low because of the geographic and industry diversification of our clients and small account balances for most of our clients.
14
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited;
table amounts in thousands unless otherwise noted, except per share amounts)
i
Activity in the allowance for credit losses for finance receivables was as follows:
The extension of credit and management of credit lines to new and existing clients uses a combination of a client's credit score, where available, a detailed manual review of their financial condition and payment history, or an automated process. Once credit is granted, the payment performance of the client is managed through automated collections processes and is supplemented with direct follow up should an account become delinquent. We have robust automated collections and extensive portfolio management processes to ensure that our global strategy is executed, collection resources are allocated and enhanced tools and processes are implemented as needed.
Over i85%
of our finance receivables are within the North American portfolio. We use a third party to score the majority of this portfolio on a quarterly basis using a proprietary commercial credit score. The relative scores are determined based on a number of factors, including financial information, payment history, company type and ownership structure. We stratify the third party's credit scores of our clients into low, medium and high-risk accounts. Due to timing and other issues, our entire portfolio may not be scored at period end. We report these amounts as "Not Scored"; however, absence of a score is not indicative of the credit quality of the account. The third-party credit score is used to predict the payment behaviors of our clients and the probability that an account will become greater than 90 days past due during the subsequent 12-month period.
•Low risk accounts are companies with very good
credit scores and a predicted delinquency rate of less than i5%.
•Medium risk accounts are companies with average to good credit scores and a predicted delinquency rate between i5%
and i10%.
•High risk accounts are companies with poor credit scores, are delinquent or are at risk of becoming delinquent. The predicted delinquency rate would be greater than i10%.
We
do not use a third party to score our International portfolio because the cost to do so is prohibitive as there is no single credit score model that covers all countries. Accordingly, the entire International portfolio is reported in the Not Scored category. This portfolio comprises less than i15% of total finance receivables. Most of the International credit applications are small dollar applications (i.e. below $i50
thousand) and are subjected to an automated review process. Larger credit applications are manually reviewed, which includes obtaining client financial information, credit reports and other available financial information.
15
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
i
The
table below shows gross finance receivables by relative risk class and year of origination based on the relative scores of the accounts within each class as of June 30, 2022 and December 31, 2021.
We also lease mailing equipment under operating leases with terms of one to ifive years. iMaturities
of these operating leases are as follows:
Remainder 2022
$
i12,021
2023
i17,793
2024
i16,087
2025
i7,914
2026
i2,177
Thereafter
i453
Total
$
i56,445
16
PITNEY
BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
7. iDivestiture, Intangible Assets and Goodwill
Divestiture
On June 20, 2022, we entered into a definitive agreement to sell our
Borderfree cross-border ecommerce solutions business (Borderfree) for $i100 million. This transaction closed on July 1, 2022.
As of June 30, 2022, the assets and liabilities of Borderfree were classified as assets held for sale and liabilities held for sale. iThe
major categories of assets and liabilities of Borderfree included in assets held for sale and liabilities held for sale is shown in the table below.
Amortization
expense for both the three months ended June 30, 2022 and 2021 was $ii8/
million and amortization expense for both the six months ended June 30, 2022 and 2021 was $ii15/ million.
17
PITNEY
BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
i
Future amortization expense as of June 30, 2022 is shown in the table below. Actual amortization expense may differ due to, among other things, fluctuations in foreign currency exchange rates, acquisitions, divestitures
and impairment charges.
Remainder 2022
$
i8,614
2023
i15,327
2024
i15,327
2025
i15,123
2026
i14,134
Thereafter
i14,245
Total
$
i82,770
/
Goodwill
Goodwill
is tested annually for impairment at the reporting unit level during the fourth quarter or sooner if circumstances indicate an impairment may exist. The impairment test for goodwill determines the fair value of each reporting unit and compares it to the reporting unit's carrying value, including goodwill. If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired and no further testing is required. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, the goodwill impairment loss is calculated as the difference between these amounts, limited to the amount of goodwill allocated to the reporting unit.
We determined that the agreement to sell Borderfree was a triggering event that indicated an impairment may exist. Accordingly, we performed a goodwill impairment test of the Global Ecommerce
reporting unit to assess the recoverability of the carrying value of remaining goodwill. We engaged a third-party to assist in the determination of the fair value of the reporting unit.
The results of our test indicated that no impairment existed; however, the estimated fair value of the Global Ecommerce reporting unit exceeded its carrying value by less than i20%. The determination of fair value 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 potentially result in an impairment charge in the future. These estimates and assumptions are considered Level 3 inputs under the fair value hierarchy.
i
Changes
in the carrying value of goodwill by reporting segment are shown in the table below.
Global
Ecommerce goodwill is net of accumulated goodwill impairment charges of $ii198/ million
at June 30, 2022 and December 31, 2021.
18
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
8.
iFair 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. iThe 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.
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 within the fair value hierarchy:
•Money Market 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.
•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 when unadjusted
quoted prices in active markets are available. 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.
Derivative
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. 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.
20
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
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 loss (AOCL), and changes in fair value due to credit conditions recorded in earnings. There were no unrealized losses due to credit losses charged to earnings through the six months ended June 30, 2022.
i
Available-for-sale
securities consisted of the following:
At
June 30, 2022, i92% of the securities were in a loss position. We believe our allowance for credit losses on available-for-sale investment securities is adequate as our investments are primarily in highly liquid U.S. government and agency securities, high grade corporate bonds and municipal bonds. We have not recognized an impairment on 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.
21
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
i
Scheduled maturities of available-for-sale securities
at June 30, 2022 were as follows:
Amortized cost
Estimated fair value
Within 1 year
$
i2,449
$
i2,281
After
1 year through 5 years
i14,501
i13,366
After
5 years through 10 years
i74,801
i62,502
After
10 years
i176,561
i147,105
Total
$
i268,312
$
i225,254
/
The
actual maturities may not coincide with the scheduled maturities as certain securities contain early redemption features and/or allow for the prepayment of obligations.
In the normal course of business, we are exposed to the impact of changes in foreign currency exchange rates and interest rates. We limit these risks by following established risk management policies and procedures, including the use of derivatives. We use derivative instruments to limit the effects of currency exchange rate fluctuations on financial results and manage the cost of debt. We do not use derivatives for trading or speculative purposes. Derivative instruments are recorded at fair value and the accounting for changes in 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.
We enter into foreign exchange contracts to mitigate the currency risk associated with anticipated inventory purchases 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 AOCL 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. At June 30, 2022 and December 31, 2021, outstanding contracts
associated with these anticipated transactions had a notional value of $i2 million and $i1 million, respectively. Amounts included in AOCL at June 30,
2022 will be recognized in earnings within the next 12 months. No amount of ineffectiveness was recorded in earnings for these designated cash flow hedges.
Interest Rate Swaps
We have interest rate swap agreements with an aggregate notional value of $i200 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 AOCL.
22
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
i
The
fair value of derivative instruments was as follows:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
Nondesignated Derivative Instruments
We also 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. These foreign exchange contracts are not designated as hedging instruments. Accordingly, the revaluation of intercompany loans and interest and the mark-to-market adjustment on these derivatives are recorded in earnings. All outstanding
contracts at June 30, 2022 mature within i3 months.
i
The
mark-to-market adjustments of non-designated derivative instruments were as follows:
Our financial instruments include cash and cash equivalents, available-for-sale and held-to-maturity investment securities, accounts receivable, loan receivables, derivative instruments, accounts payable and debt. The carrying value of cash and cash equivalents, held-to-maturity investment securities, accounts receivable, loans receivable, and accounts payable approximate fair value. The fair value of available-for-sale investment securities and derivative instruments are presented above. 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 were classified as Level 2 in the fair value hierarchy. iThe
carrying value and estimated fair value of debt was as follows:
During
2022, we redeemed the April 2023 notes and recorded a $i5 million pre-tax loss in connection with this redemption. We also made scheduled principal repayments of $i12 million
on our term loans. At June 30, 2022, the interest rate on the 2026 Term Loan was i3.4% and the interest rate of the 2028 Term Loan was i5.7%.
We have outstanding interest rate swaps that effectively convert $i200 million of our variable rate debt to fixed rates. Under the terms of these interest rate swap agreements, we pay fixed-rate interest of i0.56%
and receive variable-rate interest based on one-month LIBOR. The variable interest rates under the term loans and the swaps reset monthly.
The credit agreement that governs our $i500 million secured revolving credit facility and term loans contains financial and non-financial covenants. At June 30, 2022, we were in compliance with all covenants and there were ino
outstanding borrowings under the revolving credit facility.
25
PITNEY
BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
11. iPensions and Other Benefit Programs
i
The
components of net periodic benefit cost were as follows:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
12. iIncome Taxes
For the three months ended June 30, 2022, we reported a tax benefit of $i7 million
on a pre-tax loss of $i3 million primarily due to the recognition of a tax benefit from a tax basis adjustment related to the sale of Borderfree. This benefit is a one-time tax benefit that was recorded as a result of the Borderfree business classified as assets held for sale. For the six months ended June 30, 2022, we reported a tax benefit of $i3 million
on pre-tax income of $i22 million primarily due to the benefit related to the sale of Borderfree and a $i1 million
benefit associated with the 2019 sale of a business.
The effective tax rate for the three and six months ended June 30, 2021 was i19.1% and i57.2%,
respectively, and includes a tax benefit of $i5 million due to tax legislation in the U.K. and a tax charge of $i6 million
on the pre-tax gain of $i10 million from the sale of Tacit as the tax basis was lower than the book basis. The effective tax rate for the six months ended June 30, 2021 also includes benefits of $i3 million
from an affiliate reorganization.
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 i15% of our unrecognized tax benefits.
The Internal Revenue Service examinations of our consolidated U.S.
income tax returns for tax years prior to 2018 are closed to audit; however, various post-2016 U.S. state and local tax returns are still subject to examination, with some states in appeals from 2011. For our significant non-U.S. jurisdictions, Canada is closed to examination through 2016 except for a specific issue arising in earlier years, France is closed through 2019, Germany is closed through 2016 and the U.K. is closed through 2019. We also have other less significant tax filings currently subject to examination.
13. iCommitments
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, it is not reasonably possible that the potential liability, if any, that may result from these actions, either individually or collectively, will have a material effect on our financial position, results of operations or cash flows. However, as litigation is inherently
unpredictable, there can be no assurances in this regard.
As of June 30, 2022, we have entered into real estate and equipment leases with aggregate payments of $i124 million and terms ranging from four to ieight
years that have not commenced.
27
PITNEY BOWES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
16. iSupplemental Financial Statement Information
i
Activity
in the allowance for credit losses on accounts receivables and other assets for the six months ended June 30, 2022 and 2021 is presented below. See Note 7 for additional information regarding finance receivables.
During
the first quarter of 2022, we recognized a pre-tax loss of $i5 million on the early redemption of debt (see Note 10). During the first quarter, we also received proceeds of $i9 million
related to the 2019 sale of isix smaller international businesses and recognized a pre-tax gain of $i3 million and closed on the
sale and leaseback of our Shelton, Connecticut office building, receiving net proceeds of $i51 million and recognizing a pre-tax gain of $i14 million.
Capital assets obtained under capital lease obligations
$
i14,017
$
i19,568
/
30
Item
2: Management’s Discussion and Analysis ofFinancial 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 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. Forward-looking statements are based on current expectations and assumptions, which we believe are reasonable; however, such statements are subject to risks and uncertainties, and actual results could differ materially from those projected or assumed in any of our forward-looking statements. 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 that are incorporated by reference speak only as of the date of those documents.
Our results of operations, financial condition and 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. In particular, we continue
to navigate the impacts of the COVID-19 pandemic as well as the risk of a global recession, and the effects that they may have on our, and our clients' businesses. Other factors which could cause future financial performance to differ materially from expectations, and which may also be exacerbated by COVID-19 or the risk of a global recession or negative change in the economy, include, without limitation:
•declining physical mail volumes
•changes in postal regulations or the operations and financial health of posts in the U.S. or other major markets, or changes to the broader postal or shipping markets
•the loss of, or significant changes to, United States Postal Service (USPS) commercial programs or our contractual relationships with the USPS or USPS' performance under
those contracts
•our ability to continue to grow and manage unexpected fluctuations in volumes, gain additional economies of scale and improve profitability within our Global Ecommerce segment
•changes in labor and transportation availability and costs
•global supply chain issues adversely impacting our third-party suppliers' ability to provide us products and services
•declines in demand for our ecommerce services resulting from supply chain delays or interruptions affecting our retail clients, or changes in retail consumer behavior or spending patterns
•the
impacts of inflation and rising prices on our costs and expenses, and to our clients and retail consumers
•competitive factors, including pricing pressures, technological developments and the introduction of new products and services by competitors
•the loss of some of our larger clients in our Global Ecommerce and Presort Services segments
•expenses and potential impacts resulting from a breach of security, including cyber-attacks or other comparable events
•the potential impacts on our cost of debt due to potential interest rate increases
•our success at managing customer credit risk
•changes
in foreign currency exchange rates, especially the impact a strengthening U.S. dollar could have on our global operations
•changes in tax laws, rulings or regulations
•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
•the continued availability and security of key information technology systems and the cost to comply with information security requirements and privacy laws
•changes in international trade policies, including the imposition
or expansion of trade tariffs, and other geopolitical risks
•our success at managing relationships and costs with outsource providers of certain functions and operations
•changes in banking regulations or the loss of our Industrial Bank charter
•increased environmental and climate change requirements or other developments in these areas
•intellectual property infringement claims
•the use of the postal system for transmitting harmful biological agents, illegal substances or other terrorist attacks
•impact of acts of nature on the services and solutions we offer
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 2021 Annual Report, as supplemented by Part II, Item 1A in this Quarterly Report on Form 10-Q.
31
Overview
Financial Results Summary - Three and Six Months Ended June 30:
Revenue
decreased 3% (2% at constant currency) in the second quarter of 2022 compared to the prior year primarily driven by a decrease in business services revenue due to lower cross-border volumes, lower support services revenue driven by a declining meter population and a shift to cloud-enabled products and lower financing revenue due to a declining lease portfolio. Global Ecommerce revenue decreased 6% (5% at constant currency), SendTech Solutions revenue declined 2% (flat at constant currency) and Presort Services revenue increased 3%.
Segment EBIT in the quarter decreased 29% compared to the prior year period. Global Ecommerce EBIT decreased $18 million primarily due to the decline in revenue and increased operating expenses. Presort Services EBIT decreased 20% primarily due to increased transportation and labor costs and SendTech Solutions EBIT decreased 11% primarily driven by the decline in revenue. Refer to Results of Operations
section for further information.
32
Outlook
We see market opportunities for our businesses and are making investments in new solutions and
services. This includes investments in our physical networks in Global Ecommerce and Presort Services for greater efficiency and economies of scale and upgrading our technologies across all three segments. We are also executing against initiatives to improve efficiencies in each business and in Corporate shared services. Our mix of business continues to shift to higher growth, lower margin markets, and while the investments we are making today may put further near-term downward pressure on our margins, we expect these investments to provide a platform for long-term growth and margin improvements.
On a consolidated basis, we expect revenue growth in 2022 compared to 2021 from a low-single digit percentage decline to low-single digit percentage growth. Although we expect some continued growth in the demand and costs for transportation services and labor, we expect margin improvements in the second half of the year from increased
productivity and pricing initiatives. Supply chain delays are slowing our receipt and installation of equipment and technologies designed to increase automation and drive productivity in Global Ecommerce and Presort Services. Supply chain delays are also affecting our ability to receive required parts and components for our SendTech Solutions products on a timely basis. We will continue to take proactive steps to manage our operations and mitigate the financial impacts of these higher costs and supply chain issues; however, some of the factors are not within our control, and the duration and severity of supply chain issues is unknown and unpredictable.
Expectations for the remainder of the year are dependent on several external factors, including no further weakening of the global economy or additional shut-downs related to COVID-19, continued improvement in labor availability, changes in fuel price expectations, and no additional
adverse geopolitical developments.
33
RESULTS OF OPERATIONS
In our revenue discussion, we may refer to revenue growth on a constant currency basis. Constant currency measures exclude the impact of changes in currency exchange rates from the prior period under comparison. We believe that excluding the impacts of currency exchange rates provides investors with a better understanding of the underlying revenue performance. Constant currency change is calculated by converting
the current period non-U.S. dollar denominated revenue using the prior year’s exchange rate. Where constant currency measures are not provided, the actual change and constant currency change are the same.
Management measures segment profitability and performance using segment earnings before interest and taxes (EBIT), which is calculated by deducting from segment revenue the related costs and expenses attributable to the segment. Segment EBIT excludes interest, taxes, unallocated corporate expenses, restructuring charges, asset and goodwill impairment charges and other items not allocated to a business segment. Management believes that Segment EBIT 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 should be read in conjunction with our consolidated results of operations.
Effective
for 2022, we refined our methodology for allocating transportation costs between Global Ecommerce and Presort Services, resulting in an increase to Global Ecommerce EBIT and a corresponding decrease to Presort Services EBIT of approximately $3 million and $7 million for the three and six months ended June 30, 2022, respectively.
REVENUE AND SEGMENT EBIT
Global Ecommerce
Global Ecommerce includes the revenue and related expenses from business to consumer logistics services for domestic and cross-border delivery, returns and fulfillment.
Global
Ecommerce revenue decreased 6% (5% at constant currency) in the second quarter of 2022 compared to the prior year period primarily due to cross-border volume declines due in part, to a strengthening U.S. dollar and weakening global economic factors.
Gross margin decreased $7 million and gross margin percentage decreased to 9.6% from 10.8% compared to the prior year period, primarily due to the decline in revenue and higher postal costs of $3 million, partially offset by margin improvements in domestic parcel delivery services and $3 million favorability from the revised transportation cost allocation methodology.
Segment EBIT for the second quarter of 2022 was a loss of $29 million compared to a loss of $11 million in the prior year period. The EBIT degradation was driven by the decline in gross margin of $7 million as well as increased operating expenses of $11 million, driven primarily
by higher credit card fees and higher credit loss provision of $4 million and $3 million, respectively.
Global
Ecommerce revenue decreased 2% in the first half of 2022 compared to the prior year period due primarily to lower volumes, partially offset by pricing actions. Cross-border and digital delivery volumes contributed revenue declines of 5% and 2%, respectively, which were partially offset by domestic parcel delivery volumes contributing revenue growth of 6%.
Gross margin increased $14 million and gross margin percentage increased to 10.8% from 8.9% compared to the prior year period. The increase was primarily due to pricing actions, improved warehouse productivity, margin improvements in domestic parcel delivery and fulfillment services and a decrease in transportation costs of $7 million, primarily driven by the revised transportation cost allocation methodology. Partially offsetting these increases were lower revenue from cross-border and digital delivery services and higher postal costs of $12 million.
Segment
EBIT for the first half of 2022 was a loss of $43 million compared to a loss of $37 million in the prior year period. The EBIT decline was driven primarily by increased operating expenses of $19 million primarily driven by higher credit card fees of $9 million, higher employee-related expenses of $6 million and higher credit loss provision of $4 million, partially offset by the increase in gross margin of $14 million.
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.
Presort
Services revenue increased 3% in the second quarter of 2022 compared to the prior year period. The processing of First Class Mail and Marketing Mail contributed revenue growth of 2% and 1%, respectively, primarily due to the impact of pricing actions and product mix.
Gross margin decreased $4 million and gross margin percentage declined to 19.9% from 23.4%. Segment EBIT decreased $3 million, or 20% compared to the prior year period. In the second quarter of 2022, gross margin and segment EBIT were impacted by higher transportation costs of $7 million primarily driven by the revised transportation cost allocation methodology of $3 million and higher fuel costs of $2 million, and increased labor costs of $4 million, primarily due to wage increases. The impact of these higher costs has been partially offset through productivity gains and pricing actions.
Presort
Services revenue increased 8% in the first half of 2022 compared to the prior year period. The processing of First Class Mail, Marketing Mail and Marketing Mail Flats and Bound Printed Matter contributed revenue growth of 5%, 2% and 1%, respectively, primarily due to the impact of pricing actions.
Gross margin decreased $2 million and gross margin percentage declined to 21.2% from 23.6%. Segment EBIT decreased $3 million, or 8% in the first half of 2022 compared to the prior year period. During the first half of the year, gross margin and segment EBIT were impacted by higher transportation costs of $15 million primarily driven by tight demand for these services, higher fuel costs and the revised transportation cost allocation methodology, and higher labor costs of $12 million due to higher demand for labor and wage increases. The impact of these higher costs has been partially offset through pricing actions and productivity
improvements.
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.
SendTech
Solutions revenue decreased 2% (flat at constant currency) in the second quarter of 2022 compared to the prior year period. Support services revenue declined 7% (5% at constant currency) primarily due to a declining meter population and shift to cloud-enabled products, which generally require less service. Financing revenue declined 8% (7% at constant currency) primarily due to lower lease extensions as more clients opted to lease new equipment rather than extend leases on existing equipment. Partially offsetting these decreases, business services revenue increased 34% (35% at constant currency) primarily due to growth in subscription services and equipment sales revenue increased 4% (7% at constant currency), due in part, to customers upgrading equipment to comply with new security requirements.
36
Gross
margin decreased $16 million, gross margin percentage decreased to 58.3% from 61.5% and segment EBIT decreased $12 million, or 11%. In the second quarter of 2022, gross margin and segment EBIT were impacted by the decrease in higher margin support services revenue and financing revenue. Segment EBIT in the quarter benefited from lower operating expenses of $4 million, primarily due to cost management.
SendTech
Solutions revenue decreased 3% (1% at constant currency) in the second half of 2022 compared to the prior year period. Support services revenue declined 7% (5% at constant currency) primarily due to a declining meter population and shift to cloud-enabled products. Financing revenue declined 8% (7% at constant currency) primarily due to lower lease extensions as more clients opted to lease new equipment rather than extend leases on existing equipment. Partially offsetting these decreases, business services revenue increased 31% (32% at constant currency) primarily due to growth in subscription services and equipment sales revenue increased 4% (6% at constant currency).
Gross margin for the second half of 2022 decreased $31 million and gross margin percentage decreased to 59.2% from 62.2%. Segment EBIT decreased $21 million, or 10%. For the first half of 2022, gross margin and segment
EBIT were impacted by the declines in higher margin support services revenue and financing revenue. Segment EBIT for the first half of 2022 benefited from lower operating expenses of $10 million, due in part, to lower employee-related expenses and other cost savings.
37
UNALLOCATED
CORPORATE EXPENSES
The majority of selling, general and administrative (SG&A) expenses are recorded directly or allocated to our reportable segments. SG&A expenses not recorded directly, or allocated to our reportable segments, are reported as unallocated corporate expenses. Unallocated corporate expenses primarily represents corporate administrative functions such as finance, marketing, human resources, legal, information technology and innovation.
Unallocated
corporate expenses decreased $16 million and $15 million in the second quarter and first half of 2022, respectively, compared to the prior year periods, primarily due to lower employee-related variable expenses.
CONSOLIDATED EXPENSES
Selling, general and administrative
SG&A expense for the second quarter of 2022 declined $10 million compared to the prior year period, primarily due to lower variable compensation expense of $18 million, partially offset by higher credit loss provision of $4 million and higher professional fees of $2 million. SG&A expense for the first half of 2022 declined $5 million compared to the prior year period, primarily due to lower variable compensation expense of $16 million, partially offset by higher travel costs of $4 million,
credit loss provision of $2 million and professional fees of $1 million.
Research and development (R&D)
R&D expense for the second quarter and first half of 2022 was $11 million and $23 million, respectively, and flat compared to the prior year periods.
Restructuring charges
Restructuring charges, consisting of costs for employee severance and facility closures, were $4 million for the second quarter and $8 million for the first half of 2022. See Note 9 to the Condensed Consolidated Financial Statements for further information.
Other (income) expense
Other (income) expense for the first six months of 2022 includes a $14 million gain on the sale of our Shelton, Connecticut office building, a $3 million
gain from the 2019 sale of a business and a charge of $5 million from the early redemption of debt. See Notes 10 and 16 to the Condensed Consolidated Financial Statements for further information.
Income taxes
The effective tax rate for the three and six months ended June 30, 2022 was 261.2% and a benefit of 12.6%, respectively. See Note 12 to the Condensed Consolidated Financial Statements for further information.
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LIQUIDITY
AND CAPITAL RESOURCES
At June 30, 2022, we had cash, cash equivalents and short-term investments of $582 million, which includes $153 million held at our foreign subsidiaries 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 impacts of changing macroeconomic and geopolitical conditions and our ability to manage costs and improve productivity. At this time, we believe that existing cash and investments, cash generated from operations and borrowing capacity under our $500 million revolving credit
facility will be sufficient to fund our cash needs for the next 12 months.
Cash Flow Summary
Changes in cash and cash equivalents were as follows:
2022
2021
Change
Net
cash from operating activities
$
45,694
$
144,729
$
(99,035)
Net cash from investing activities
(27,518)
(68,034)
40,516
Net cash from financing activities
(166,504)
(199,024)
32,520
Effect
of exchange rate changes on cash and cash equivalents
(13,455)
349
(13,804)
Change in cash and cash equivalents
$
(161,783)
$
(121,980)
$
(39,803)
Operating Activities
Cash
flows from operating activities in 2022 declined $99 million compared to the prior year period primarily due to the timing of collections of receivables, lower customer deposits, the timing of insurance premium payments and other working capital changes.
Investing Activities
Cash flows from investing activities for 2022 increased $41 million compared to the prior year, primarily due to higher proceeds from the sale of businesses and assets of $25 million, lower capital expenditures of $20 million and net proceeds of $4 million from other investment activities.
Cash flows from investing activities in 2022 include proceeds of $51 million from the sale of our Shelton facility and $9 million related to the 2019 sale of a business. Cash flows from investing activities in 2021 include net proceeds of $28 million from the sale of Tacit and
$2 million for other asset sales.
Financing Activities
Cash flows from financing activities for 2022 improved $33 million compared to the prior year primarily due to lower net repayments of debt of $37 million and lower premiums and fees paid to refinance debt of $42 million. These improvements were partially offset by lower cash flow from changes in customer deposits at the PB Bank of $32 million and $13 million of common stock repurchases.
Financings and Capitalization
In March 2022, we redeemed the April 2023 notes and recorded a $5 million pre-tax loss in connection with this redemption.
The credit agreement that governs our $500 million secured revolving credit facility and term loans contains financial
and non-financial covenants. At June 30, 2022, we were in compliance with all covenants and there were no outstanding borrowings under the revolving credit facility.
Each quarter, our Board of Directors considers 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, no assurances can be given.
Contractual Obligations and Off-Balance Sheet Arrangements
As of June 30, 2022, we have entered into real estate and equipment leases with aggregate payments of $124 million and terms ranging from four to eight years that have not commenced. Most of these leases are
expected to commence throughout the second half of 2022 and some into 2023.
At June 30, 2022, there are 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.
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Critical Accounting Estimates
Goodwill
Goodwill is tested annually for impairment at the reporting unit level during the fourth quarter or sooner if circumstances indicate an
impairment may exist. The impairment test for goodwill determines the fair value of each reporting unit and compares it to the reporting unit's carrying value, including goodwill. If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired and no further testing is required. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, the goodwill impairment loss is calculated as the difference between these amounts, limited to the amount of goodwill allocated to the reporting unit.
We determined that the agreement to sell Borderfree was a triggering event that indicated an impairment may exist. Accordingly, we performed a goodwill impairment test of the Global Ecommerce reporting unit to assess the recoverability of the carrying value of remaining goodwill. We engaged a third-party to assist
in the determination of the fair value of the reporting unit.
The results of our test indicated that no impairment existed; however, the estimated fair value of the Global Ecommerce reporting unit exceeded its carrying value by less than 20%. The determination of fair value 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 assessment. Potential events and circumstances that could have an adverse effect on our
estimates and assumptions include, but are not limited to, declining revenue, our inability to grow volumes, gain additional economies of scale and improve profitability, continued increases in costs and rising interest rates.
The goodwill balance related to the Global Ecommerce reporting unit at June 30, 2022 was $339 million. We will continue to monitor and evaluate the carrying value of goodwill for this reporting unit, and should facts and circumstances change, a non-cash impairment charge could be recorded in the future.
Regulatory Matters
There have been no significant changes to the regulatory matters disclosed in our 2021 Annual Report.
Item
3: Quantitative and Qualitative Disclosures About Market Risk
There were no material changes to the disclosures made in our 2021 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 as of the end of the period covered by this report. 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.
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 June 30, 2022.
40
PART
II. OTHER INFORMATION
Item 1: Legal Proceedings
See Note 13 to the Condensed Consolidated Financial Statements.
Item 1A: Risk Factors
There were no material changes to the risk factors identified in our 2021 Annual Report.
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. There were no purchases of our common stock during the three months ended June 30, 2022. We have remaining authorization to purchase up to $3 million of our common stock.
The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, 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.
42
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.