ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of our financial condition and analysisoperating results should be read in conjunction with our risk factors, consolidated financial statements and related notes. This discussion and analysis containsincludes forward-looking statements based on management's current expectations, estimates and projections and involves risks and uncertainties. Actual results may differ significantly from those currently expressed in ourexpressed. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements as a result of various factors, including those factors describedis outlined under "Forward-Looking Statements" and "Risk"Item 1A. Risk Factors" contained elsewhere in this Annual Report.Form 10-K. All table amounts are presented in thousands of dollars, except per share data.dollars.
OverviewThroughout this 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 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.
In 2019, we:
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• | Adopted ASC 842using 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.
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CompletedManagement measures segment profitability and performance using segment earnings before interest and taxes (EBIT). Segment EBIT is calculated by deducting from segment revenue the salerelated 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 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 Software Solutions business,overall consolidated performance and therefore, should be read in conjunction with the exception of the software business in Australia, which closed in January 2020, for approximately $700 million. The Software Solutions business is reported as a discontinued operation in our consolidated financial statements.results of operations.
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.
Sold the direct operations and moved to a dealer model in six smaller international markets within SendTech Solutions (Market Exits).
On October 12, 2019, we were affected by a ransomware attack that temporarily disrupted customer access to some services. Our financial information was not affected and there is no evidence that any sensitive or confidential company, client, consumer or employee data was improperly accessed or extracted from our network. The backup data storage systems for virtually all our client, employee and other business data were also not affected, which accelerated our ability to bring affected systems back online. We have implemented enhanced security features and monitoring procedures to mitigate the likelihood of future events.
Overview
Financial Results Summary - Twelve Months Ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| Revenue |
| Years Ended December 31, |
| 2020 | | 2019 | | Actual % change | | Constant Currency % Change |
Business services | $ | 2,191,306 | | | $ | 1,710,801 | | | 28 | % | | 28 | % |
Support services | 473,292 | | | 506,187 | | | (6) | % | | (7) | % |
Financing | 341,034 | | | 368,090 | | | (7) | % | | (7) | % |
Equipment sales | 314,882 | | | 352,104 | | | (11) | % | | (11) | % |
Supplies | 159,282 | | | 187,287 | | | (15) | % | | (15) | % |
Rentals | 74,279 | | | 80,656 | | | (8) | % | | (8) | % |
Total revenue | $ | 3,554,075 | | | $ | 3,205,125 | | | 11 | % | | 11 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Revenue |
| Years Ended December 31, |
| 2020 | | 2019 | | Actual % change | | Constant currency % change |
Global Ecommerce | $ | 1,618,897 | | | $ | 1,151,510 | | | 41 | % | | 41 | % |
Presort Services | 521,212 | | | 529,588 | | | (2) | % | | (2) | % |
Commerce Services | 2,140,109 | | | 1,681,098 | | | 27 | % | | 27 | % |
SendTech Solutions | 1,413,966 | | | 1,524,027 | | | (7) | % | | (7) | % |
Total | $ | 3,554,075 | | | $ | 3,205,125 | | | 11 | % | | 11 | % |
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| | | | | | | | |
| 2019 | 2018 | Change |
Revenue | $ | 3,205,125 |
| $ | 3,211,522 |
| — | % |
Segment earnings before interest and taxes (EBIT) | $ | 490,869 |
| $ | 600,348 |
| (18 | )% |
Income from continuing operations | $ | 40,149 |
| $ | 181,705 |
| (78 | )% |
Net income | $ | 194,609 |
| $ | 241,811 |
| (20 | )% |
Earnings per share from continuing operations - diluted | $ | 0.23 |
| $ | 0.96 |
| (76 | )% |
Net cash provided by operations | $ | 252,207 |
| $ | 342,879 |
| (26 | )% |
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| EBIT |
| Years Ended December 31, |
| 2020 | | 2019 | | % change |
Global Ecommerce | $ | (82,894) | | | $ | (70,146) | | | (18) | % |
Presort Services | 55,799 | | | 70,693 | | | (21) | % |
Commerce Services | (27,095) | | | 547 | | | >(100%) |
SendTech Solutions | 441,085 | | | 490,322 | | | (10) | % |
Total Segment EBIT | $ | 413,990 | | | $ | 490,869 | | | (16) | % |
Revenue was flatincreased 11% in 2020 compared to 2019, driven by a 28% increase in business services revenue, primarily due to significantly higher volumes in our Global Ecommerce segment. This growth more than offset declines in all other revenue line items driven in part from the prior year; however, currencycontinuing impacts of COVID-19. Within our business segments, Global Ecommerce revenue grew 41% due to increased domestic parcel delivery and Market Exits unfavorably impacted revenue growth by 2%. Commercecross-border volumes, Presort Services revenue grew 9% but was offset by an overall decline in the SendTech Solutions shipping and mailing business. We estimate that the ransomware attack adversely impacted full year revenue by $18 million.
Segment EBIT declined 18%2% due to a decline inlower First Class Mail and Marketing Mail volumes and SendTech Solutions revenue partially offsetdeclined 7%, primarily due to lower equipment sales and supplies revenue. Global Ecommerce EBIT decreased 18% and Presort Services EBIT decreased 21% from the prior year primarily driven by cost savings initiativeshigher labor and a shifting portfoliotransportation costs caused by increased demand and competition for these resources and increased costs and reduced productivity due to faster growing, butCOVID-19. SendTech Solutions EBIT declined 10% primarily due to lower margin services in Global Ecommerce. We estimate that the ransomware attackrevenue and higher credit loss provisions. Prior year segment EBIT was adversely impacted EBIT by $19 million primarilyrelated to a ransomware attack and current year segment EBIT includes $13 million of insurance proceeds related to this attack. Refer to Results of Operations section for further information.
Impacts of COVID-19
The global spread of COVID-19 and the efforts to contain it are adversely affecting global economies, impacting demand for a broad variety of goods and services and creating disruptions and shortages in supply chains. We implemented measures in our facilities to protect the health and safety of our employees and contractors, including staggering shifts and breaks to enhance social distancing, providing personal protection equipment, conducting temperature checks and sanitizing equipment and facilities multiple times a day. Employees that have the ability to work remotely are doing so and corporate and local management continue to assess conditions to determine when, and how, these employees should return to their office locations.
COVID-19 has impacted our financial results in different ways in each of our businesses. Global Ecommerce has seen a significant increase in volumes due to the demand for ecommerce solutions in the current environment. However, this increase in volumes has resulted in higher postal costs driven by capacity constraints and higher labor and transportation costs as many companies are competing for these resources. At the start of the pandemic, Presort Services experienced a significant decline in both First Class and Marketing Mail. However, while volumes for the full year 2020 were down from the prior year, we did see quarter over quarter improvement throughout the year. Presort Services was also impacted by higher labor costs. As a result of the business interruption, incrementalhealth and safety measures implemented in all our Commerce Services facilities, we also incurred additional costs relatedand reduced productivity.
In SendTech Solutions, the global shut-down of businesses and increase in the number of clients working remotely at the onset of COVID-19 had a significantly adverse impact on demand for and usage of our mailing equipment and supplies, and our ability to the attackperform on-site service and costsinstallations. We saw improving trends in equipment sales and supplies revenues quarter over quarter throughout 2020. As businesses continue to enhance our cybersecurity protection.
Income from continuing operations declined 78% from the prior year driven primarily by the decline in segment EBIT, a $39 million pre-tax asset impairment charge related to the development of an enterprise resource planning (ERP) systemoperate remotely, we are also seeing improvement in our international marketscloud-enabled shipping and an $18 million pre-tax loss from Market Exits. Income from continuing operations included a tax benefit of $23 million from the release of a foreign valuation allowance. We estimate that the ransomware attack adversely impacted earnings per share from continuing operations by $0.08.mailing solutions.
During the year, we received proceeds of approximately $700 million from the sale of the Software Solutions business and $400 million from a new five-year term loan. Cash was used to repay $930 million of debt, invest $137 million in capital expenditures, repurchase $105 million of shares of our common stock, pay dividends of $35 million and fund acquisitions of $22 million. We estimate that the ransomware attack adversely impacted cash flows by $29 million.
Outlook
We continue to transform and position ourselves for long-term success as a streamlined global technology company focused on shipping, mailing and related financial services. We are investing in market opportunities and new solutions and services across all our businesses, optimizing our operations and implementing cost savings initiatives to drive long-term value. Our portfolio is shifting to higher growth markets and we expect margins to improve as we build scale and realize the full benefits of our investments and optimizations.
Within Global Ecommerce, we expect continuedthe accelerated market growth of ecommerce brought on by COVID-19 to continue and anticipate revenue growth in 2021. We expect margin and profit improvements in 2021 from the expansion of our domestic parcel business and shipping solutions, slightly offset by lower cross-border solutions volumes and margin improvements from continued growth in volumes to get to scale, bundling of offerings, pricing actions and organizationalinitiatives and operational efficienciesimprovements within our network.
Infacilities and network designed to drive efficiencies and increased productivity. Within Presort Services, we expect higher volumesthe improving volume trends in the second half of Bound2020 to continue throughout 2021 through organic volume growth and Packet Mailacquisitions. Margins are expected to improve in 2021 from productivity initiatives, increased automation and Marketing Mail to drive revenue growth. We expect margin improvement in 2020 from pricing initiatives, labor, transportationfacilities consolidation and other cost optimization initiatives and process efficiencies implemented in 2019.
optimization. Within SendTech Solutions, we expect recurring revenue from our mailing businessstreams to continue to decline; however,decline, but growth in our cloud-
enabled shipping solutions and sales of our multi-purpose devices to partially offset these declines. On a consolidated basis, we believe thisexpect modest revenue decline will be mitigated by expanding shipping capabilities, an overall product refresh, third-party equipment financing alternativesgrowth in 2021 compared to 2020.
The COVID-19 pandemic is expected to continue to 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, its effect on the global economy, and the shift inefficacy and availability of a vaccine, the mix of business from mailing to solutions-based offerings.
We continue to assess the financialultimate impact of the ransomware attackpandemic on our business, operations and it is probablefinancial performance remains uncertain. Accordingly, there are many factors not within our control that additional costscould affect the pandemic's ultimate impact on our business and claims will be incurred in 2020. We have insurance related to this event and expect a portion of any profit impact, including the profit associated with any loss of revenue, to ultimately be covered by insurance. We are working closely with our carriers; however,current outlook for 2021. However, we believe we are currently not ablewell positioned to reasonably estimatemanage through the amount of proceeds wecurrent conditions and will receive.continue to take proactive steps to manage our cash flows and liquidity.
RESULTS OF OPERATIONSBusiness Segments
RevenueCommerce Services
The Commerce Services group includes domestic parcel services, cross-border solutions, digital delivery services and mail sortation services. The Commerce Services group includes the Global Ecommerce and Presort Services segments.
Global Ecommerce
Domestic parcel services offers retailers a cost-effective parcel delivery and returns network for end consumers. We operate numerous domestic parcel sortation centers connected by sourcea nationwide transportation network, enabling us to pick up parcels from retailer distribution centers and move them through our physical network. We also offer fulfillment services, providing pick, pack and ship services for clients through four fulfillment centers. These centers are located within our parcel sortation centers to facilitate same-day entry into our parcel delivery network.
Cross-border solutions manages all aspects of the international shopping and shipping experience. Our proprietary technology enables global tracking and logistics services; calculates duty, tax and shipping costs at checkout; enables multi-currency pricing, payment processing and fraud management; ensures compliance with product restrictions and produces all documentation requirements to meet export complexities and customs clearance. Our proprietary technology is utilized by direct merchants and major online marketplaces facilitating millions of parcels to be shipped worldwide.
Digital delivery services enables clients to reduce transportation and logistics costs, select the best carrier based on need and cost, improve delivery times and track packages in real-time. Powered by our shipping APIs, clients can purchase postage, print shipping labels and access shipping and tracking services from multiple carriers that can be easily integrated into any web application such as online shopping carts or ecommerce sites and provide guaranteed delivery times and flexible payment options.
Presort Services
We are a workshare partner of the USPS and national outsource provider of mail sortation services that allow clients to qualify large volumes of First-Class Mail, Marketing Mail and Marketing Mail Flats and Bound Printed Matter for postal workshare discounts. Our network of operating centers throughout the United States and fully-customized proprietary technology provides clients with end-to-end solutions from pick up at their location to delivery into the postal system network, expedited mail delivery and optimal postage savings.
Sending Technology Solutions
We offer our clients physical and digital mailing and shipping technology solutions, supplies and other applications to help simplify and save on the sending, tracking and receiving of letters, parcels and flats. Our cloud enabled infrastructure provides software-as-a-service (SaaS) offerings delivered online and via connected or mobile devices. Our latest offerings are designed on an open platform architecture that have the capabilities to leverage partnerships with other innovative companies, including partnerships with carriers, and developers to deliver new value to our clients.
Through our wholly owned subsidiary, The Pitney Bowes Bank (the Bank), we offer our clients in the United States a revolving credit solution that enables clients to make meter rental payments and purchase postage, services and supplies and an interest-bearing deposit solution to clients who prefer to prepay postage. Additionally, we offer financing alternatives that enable clients to finance equipment and product purchases, finance or lease other manufacturers’ equipment and provide working capital.
We also provide revolving credit solutions to clients in Canada and the U.K.
We establish credit approval limits and procedures based on the credit quality of the client and the type of product or service provided to control credit risk. We closely monitor the portfolio by analyzing industry sectors and delinquency trends by product line, industry and client to ensure reserve levels and credit policies reflect current trends. Management continuously monitors credit lines and collection resources and revises credit policies as necessary to be more selective in managing the portfolio.
Seasonality
A larger percentage of our revenue is earned in the fourth quarter relative to the other quarters, driven primarily by an increase in shipping volumes during the holiday season.
Sales and Services
We market our products, solutions and services through a direct and inside sales force, global and regional partner channels, direct mailings and digital channels. We provide call-center, online and on-site support services for our products and solutions. Support services are primarily provided under maintenance contracts.
Competition
Our businesses face competition from large, multinational companies and smaller, more narrowly focused regional and local firms. We compete on the basis of technology and innovation, breadth of product offerings, our ability to design and tailor targeted solutions to meet client needs, performance, service and support, price, quality and brand.
We must continue to invest in our current technologies, products and solutions, and in the development of new technologies, products and solutions in order to maintain and improve our competitive position. We frequently encounter new competitors as the markets in which we participate evolve and newer businesses enter our existing markets.
A summary of the competitive environment for each of our segments is as follows:
Global Ecommerce
The domestic parcel services and cross-border solutions market includes competitors of various sizes, including companies with greater financial resources than us. Some of these competitors specialize in point solutions or freight forwarding services, are full-service ecommerce business process outsourcers and online marketplaces with international logistic support, or major global delivery services companies. We also face competition from companies that can offer both domestic and cross-border solutions in a single package which creates pricing leverage. The principal competitive factors include speed of delivery, reliability, functionality, ease of integration and use, scalability, innovation, support services and price. We compete based on the accuracy, reliability and scalability of our platform and logistics services, our ability to provide clients and their customers a one-stop full-service ecommerce experience and the ability to provide a more customized shipping solution than some of the larger competitors in the industry.
Within digital delivery services, we compete with a wide range of technology providers who help make shipping easier and more cost-effective. These technology providers range from large, established companies to smaller companies offering negotiated carrier rates. The principal competitive factors include technology stability and reliability, innovation, access to preferred shipping rates and ease of integration with existing systems.
Presort Services
We face competition from regional and local presort providers, cooperatives of multiple local presort providers, consolidators and service bureaus that offer presort solutions as part of a larger bundle of outsourcing services. While not necessarily competitors in the traditional sense, large mail owners have the capability to presort their own mailings in-house, and could use excess capacity to offer presort services to others. The principal competitive factors include price, innovative service, delivery speed, tracking and reporting, industry expertise and economies of scale. Our competitive advantages include our extensive network of presort facilities capable of processing significant volumes and our innovative proprietary technology that provides clients with reliable, secure and precise services and maximum postage discounts.
Sending Technology Solutions
We face competition from other mail equipment and solutions providers, companies that offer products and services as alternative means of message communications and those that offer on-line shipping and mailing products and services solutions. Additionally, as alternative communication methods in comparison to physical mail grow, our operations could be affected. We differentiate ourselves from our competitors through our breadth of physical and digital offerings, including cloud enabled SaaS and open platform architecture offerings; pricing; available financing and payment offerings; product reliability; support services; and our extensive knowledge of the shipping and mailing industry.
Our financing operations face competition, in varying degrees, from large, diversified financial institutions, including leasing companies, commercial finance companies and commercial banks, as well as small, specialized firms. Not all our competitors are able to offer the same or similar financing and payment solutions that we offer, and we believe this is a source of competitive advantage that differentiates us from our competitors.
Research, Development and Intellectual Property
We invest in research and development activities to develop new products and solutions, enhance the effectiveness and functionality of existing products and solutions and deliver high value technology and differentiated services in high value segments of the market.
Third-Party Suppliers
We depend on third-party suppliers and outsource providers for a variety of services and product components, the hosting of our SaaS offerings, the logistics portion of our ecommerce business, and some non-core functions and operations. In certain instances, we rely on single-sourced or limited-sourced suppliers and outsourcing vendors around the world because doing so is advantageous due to quality, price or lack of alternative sources. We have risk mitigation programs to monitor conditions affecting our suppliers' ability to fulfill expected commitments. We believe that our available sources for services, components, supplies and manufacturing are adequate.
Regulatory Matters
We are subject to the regulations of postal authorities worldwide related to product specifications of our postage meters. Our Presort Services segment is also subject to regulations of the USPS. The Bank is chartered as an Industrial Bank under the laws of the State of Utah. The Bank and certain company affiliates that provide services to the Bank are subject to the regulations of the Utah Department of Financial Institutions and the Federal Deposit Insurance Corporation. We are also subject to transportation regulations for various parts of our business, customs and trade regulations worldwide related to our cross-border shipping services and regulations concerning data privacy and security for our businesses that use, process and store certain personal, confidential or proprietary data.
Human Capital
We have more than 11,500 employees, with approximately 80% located in the United States and approximately 20% located outside the United States. We also rely on a contingent hourly workforce to supplement our full-time workforce to meet fluctuating demand. We seek to create a high-performance culture that will drive and sustain enhanced value for all our stakeholders. To attract, retain and engage the talent needed, we strive to maintain a diverse, inclusive and safe workplace, with equitable opportunities for growth and development, supported by strong compensation, benefits and health and wellness programs, and by programs that build connections between our employees and their communities.
Diversity and Inclusion
We believe that a diverse workforce is critical to our success. We celebrate a rich mix of countries, cultures, ages, races, ethnicities, gender identities, sexual orientation, abilities and perspectives that showcase our humanity, differentiate us as individuals and enhance our businesses. We have received numerous external acknowledgments of our progress in diversity and inclusion over the years.
Employee Engagement and Development
We emphasize employee development and training and provide professional development initiatives, training, experiential learning and inclusion networks to our employees to enable them to advance their skills and achieve career goals. We also believe employee engagement is important to the company's success and conduct a survey annually that has had historically high participation rates as well as increasing engagement scores overall.
Health, Safety and Wellness
We are committed to the health, safety and wellness of our employees. We provide our employees and their families with access to a variety of flexible and convenient health and wellness programs.
In response to COVID-19, we implemented significant changes that we determined were in the best interest of our employees, as well as the communities in which we operate, and which comply with government regulations. These changes included adjusting processes to enable social distancing, providing personal protective equipment, ongoing monitoring of the health of our employees, and contact tracing when an employee is diagnosed with COVID-19. We encourage employees capable of working remotely to do so and limit the number of employees who can be in any of our offices at any given time.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto filed with, or furnished to, the SEC, are available, free of charge, through the Investor Relations section of our website at www.investorrelations.pitneybowes.com or from the SEC's website at www.sec.gov, as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC. The other information found on our website is not part of this or any other report we file with or furnish to the SEC.
Information About Our Executive Officers
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Name | | Age | | Title | | Executive Officer Since |
Marc B. Lautenbach | | 59 | | President and Chief Executive Officer | | 2012 |
Johnna G. Torsone | | 70 | | Executive Vice President and Chief Human Resources Officer | | 1993 |
Daniel J. Goldstein | | 59 | | Executive Vice President and Chief Legal Officer and Corporate Secretary | | 2010 |
Christoph Stehmann | | 58 | | Executive Vice President, International Sending Technology Solutions | | 2016 |
Jason C. Dies | | 51 | | Executive Vice President and President, Sending Technology Solutions | | 2017 |
Gregg Zegras | | 53 | | Executive Vice President and President, Global Ecommerce | | 2020 |
Ana Maria Chadwick | | 49 | | Executive Vice President and Chief Financial Officer (1) | | 2021 |
(1) Effective January 29, 2021, Ms. Chadwick assumed the responsibilities of Executive Vice President and Chief Financial Officer.
There are no family relationships among the above officers. The above officers have served in various executive positions with the company for at least the past five years except as follows:
Mr. Dies was appointed Executive Vice President and President, Sending Technology Solutions in October 2017. He joined the company in 2015 as President, Document Messaging Technologies (DMT). Prior to joining the company, Mr. Dies was employed at IBM where he held several leadership positions in North America, Europe, and Asia across diverse business units.
Mr. Zegras was appointed Executive Vice President and President, Global Ecommerce in July 2020. He joined the company in 2013 as President, Imagitas. Prior to joining the company, Mr. Zegras held several executive leadership positions, including at NBC Universal, Sharecare and Hearst Entertainment.
Ms. Chadwick joined the company as Executive Vice President and Chief Financial Officer on January 29, 2021. Prior to joining the company, Ms. Chadwick was employed at GE Capital as President and CEO of GE Capital Global Legacy Solutions. Ms. Chadwick spent over 20 years at GEC Capital, where she held several executive positions, including Controller of GE Capital Americas and CFO at GE Capital Energy Financial Services.
ITEM 1A. RISK FACTORS
Our operations face certain risks that should be considered in evaluating our business. We manage and mitigate these risks on a proactive basis, using an enterprise risk management program. Nevertheless, the following risk factors, some of which may be beyond our control, could materially affect our business, financial condition, results of operations, brand and reputation, and may cause future results to be materially different than our current expectations. These risk factors are not intended to be all inclusive.
COVID-19 Pandemic Risks
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 the emergence of another similar virus in the future could have a significantly material effect on our operations, financial condition and liquidity.
The COVID-19 pandemic is impacting, and is expected to continue to 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, its effect on the global economy, and the efficacy and availability of a vaccine, 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: the response of the government, businesses and individuals to the pandemic; an acceleration of the decline in 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. In addition to having the effect of potentially heightening many of our other risk factors in this section, the COVID-19 pandemic may, or may continue to, adversely affect the following to the detriment of our business, including:
•Accelerate the decline of physical mail volume in the geographies in which we operate, which adversely affects both our Presort Services and SendTech Solutions segments. We cannot yet assess the extent to which these declines in mail volumes, and resulting impact to our business, are permanent or temporary.
•The adverse effect that declines in physical mail are having on the financial health of posts around the world, especially that of the USPS. 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 further 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.
•Social distancing rules and heightened security policies have inhibited, and may 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.
•The increased costs and reduced labor productivity associated with extended safety protocols, including sanitizing facilities and equipment multiple times a day and incremental costs that may be required to hire temporary labor or redirect volumes to other facilities.
•Our Global Ecommerce segment could experience further capacity and cost issues due to further sudden and significant increases in volumes resulting from COVID-19, including costs and capacity issues relating to postage, transportation, labor, and warehouse space.
•Significant declines in the retail industry caused by the pandemic. Although our Global Ecommerce segment 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.
•A decline in the frequency of long-distance airplane flights may continue to result in higher costs and at times, reduced demand for our Global Ecommerce cross-border offerings.
•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.
•Our suppliers and third-party service providers may not be able 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.
•A prolonged duration or resurgence of COVID-19 could adversely impact our earnings or cash flows, which could result in additional credit rating downgrades, higher costs of borrowing, or limit our access to additional debt.
The COVID-19 pandemic may also have the effect of heightening many other risks, including the risks listed below and may also affect our business, operations and financial performance in a manner that is not presently known to us.
Mailing and Shipping Industry Risks
Further significant deterioration in the financial condition of the USPS, or the national posts in our other major markets could affect the ability of those posts to provide services to us or our clients, which could adversely affect client demand for our offerings and thus our financial performance.
We are dependent on financially viable national posts in the geographic markets where we operate, particularly in the United States. A significant portion of our revenue depends upon the ability of these posts, especially the USPS to provide competitive mail and package delivery services to our clients and the quality of the services they provide. Their ability to provide high quality service at affordable rates in turn depends upon their ongoing financial strength. If the posts are unable to continue to provide these services into the future, our financial performance will be adversely affected.
Our ability to compete in the package shipping market in the United States depends upon certain contractual relationships we have with the USPS and the successful performance of those services.
The USPS is our primary provider for the “last mile” component of our parcel delivery services in the United States. This represents a significant component of our cost in offering these services. If we are unable to receive competitive pricing from the USPS or take advantage of lower cost USPS options, our ability to compete with private carriers and to achieve profitable revenue growth will be adversely affected. The quality of service we provide to our clients also depends upon the quality of delivery services received from the USPS. The dramatic increase in parcel volumes due to the COVID-19 pandemic, especially during the peak holiday season, as well as the broader effects of the pandemic on the USPS' operations, has adversely impacted the quality of delivery performance from the USPS and some of our costs with them increased. If its performance does not revert to prior levels, or becomes materially worse than that of the private carriers, we may lose clients to competition and our financial performance will be adversely affected.
We are subject to postal regulations and processes, which could adversely affect our financial performance.
A significant portion of our business is subject to regulation and oversight by the USPS and posts in other major markets. These postal authorities have the power to regulate some of our current products and services. They also must approve many of our new or future product and service offerings before we can bring them to market. If our new or future product and service offerings are not approved, there are significant conditions to approval, regulations on our existing products or services are changed or, we fall out of compliance with those regulations, our financial performance could be adversely affected.
If we are not able to respond to the continuing decline in the volume of physical mail delivered via traditional postal services, our financial performance could be adversely affected.
Traditional mail volumes continue to decline and impact our current and future financial results, primarily within our SendTech Solutions and Presort Services segments. This rate of decline has been exacerbated by the COVID-19 pandemic, but we cannot yet assess the extent to which this decline, and resulting impact to our business, is permanent or temporary. Any further accelerated or sudden decline in physical mail volumes could have an adverse effect on these segments. An accelerated or sudden decline could result from changes in communication behavior or available communication technologies, reductions to the Universal Service Obligation (USO) under which the USPS and other national posts are required to deliver to every address in a country with similar pricing and frequency, pandemics, and legislation or regulations that mandate electronic substitution for communication by mail, prohibit certain types of mailings, increase the difficulty of using information or materials in the mail, or impose higher taxes or fees on postal services. If we are not successful at meeting the continuing challenges faced in our mailing business, or if physical mail volumes were to experience an accelerated or sudden decline, our financial performance could be adversely affected.
Business Operational Risks
The transformation of our businesses to more digital and package related services will result in a decline in our overall profit margins. If we cannot increase our volumes while at the same time reduce our costs, our overall profitability could be adversely affected.
As we transform our business to more digital and package related delivery services, the relative revenue contribution from our package delivery offerings now exceeds that of the revenue from our mailing-related offerings. We expect the portion of our revenue derived from package delivery offerings to continue to grow. The profit margins in these package-related offerings are generally lower than those for our mailing-related offerings. If we are unable to obtain sufficient scale, or are unable to lower per package costs as we achieve scale, our overall profitability could be adversely affected.
The loss of any of our largest clients in our Global Ecommerce segment could adversely affect the financial performance of that segment.
The Global Ecommerce segment receives a large portion of its revenue from a relatively small number of clients and business partners. The loss of any of these larger clients or business partners, or a substantial reduction in their use of our products or services, could have a material adverse effect on the revenue and profitability of the segment. There can be no assurance that our larger clients and business partners will continue to utilize our products or services at current levels, or that we would be able to replace any of these clients or business partners with others who can generate revenue at current levels.
A material change in consumer sentiment or spending habits that negatively impacts our retail clients could adversely affect the financial performance of our Global Ecommerce segment.
Our Global Ecommerce segment derives the majority of its revenue from retail clients. The retail industry is subject to cyclical trends in consumer sentiment and spending habits that are affected by many factors, including prevailing economic conditions (including those caused by the impact of the ongoing COVID-19 pandemic), recession or fears of recession and unemployment levels. If consumer sentiment and spending habits deteriorate such that the demand for our retail clients’ products are negatively impacted, it could potentially have an adverse impact on our financial performance.
If we fail to effectively manage our third-party suppliers and outsource providers, our business, financial performance and reputation could be adversely affected.
We depend on third-party suppliers and outsource providers for a variety of services and product components, the hosting of our SaaS offerings, the logistics portion of our ecommerce segment, the provision of temporary labor and some non-core functions and operations. Some of our suppliers may also be our competitors in other contexts. In certain instances, we rely on single-sourced or limited-sourced suppliers and outsourcing vendors around the world because doing so is advantageous due to quality, price or lack of alternative sources. To a certain extent in 2020, the performance of our outsourced service providers, due largely to circumstances associated with the COVID-19 pandemic, negatively impacted our ability to timely execute transactions with our clients, consumers and other constituents. If production or services were interrupted for any reason, the quality of those offerings were to degrade as a result of poor supplier performance, these suppliers chose to terminate their relationship with us, or if the costs of using these third parties were to increase and we were not able to find alternate suppliers, we could experience loss of clients, significant disruptions in manufacturing and operations (including product shortages, higher freight costs and re-engineering costs) as well as increased costs in the logistics portion of our Global Ecommerce segment.
Fluctuations in transportation costs or disruptions to transportation services in our Global Ecommerce or Presort Services segments could adversely affect client satisfaction or our financial performance.
In addition to our reliance on the USPS, our Global Ecommerce and Presort Services segments rely upon independent third-party transportation service providers to transport a significant portion of our parcel and mail volumes. The use of these providers is subject to risks, including our ability to negotiate acceptable terms, increased competition during peak periods, capacity issues, performance problems, extreme weather, natural or man-made disasters, pandemics, increased fuel costs, labor shortages or disputes or other unforeseen difficulties. Any disruption to the timely supply of these services for any reason or any dramatic increase in the cost of revenue are shownthese services could adversely affect client satisfaction or our financial performance. The dramatic increase in demand for shipping services, especially in the following tables:fourth quarter of the year, caused us to incur higher costs and declines in performance and client satisfaction. Although we proactively manage our volumes, especially during the peak holiday season, given our reliance upon these providers, any future unforeseen disruptions affecting these providers could similarly adversely affect client satisfaction and our financial performance.
Our business depends on the availability of, and our ability to attract and retain, employees at a reasonable cost to meet the needs of our business and to consistently deliver highly differentiated, competitive offerings.
The rapid growth of the ecommerce industry has resulted in intense competition for employees in the shipping, transportation and logistics industry, including drivers and warehouse employees. The COVID-19 pandemic has accelerated this industry growth resulting in our Global Ecommerce segment experiencing a higher demand, and increased competition, for labor, especially in our warehouses. This demand and increased competition for workers has also impacted our Presort Services segment, which has experienced staffing shortages. Although we supplement our workforce with contingent hourly workers from staffing agencies on an as-needed basis, due to the accelerated demand and competition, concern over exposure to COVID-19 and other factors, we could continue to experience a decrease in the pool of available qualified talent. There is also significant competition for the talent needed to develop our other products. Increased competition for employees may result in increased wages and costs of other benefits necessary to attract and retain high quality employees with the right skill sets. Additional labor costs which may also impact our business include those triggered by regulatory actions; increased health care and workers’ compensation insurance expenses; and, those costs associated
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| | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | % change |
| Years Ended December 31, | | Actual | | Constant Currency |
| 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Business services | $ | 1,710,801 |
| | $ | 1,566,470 |
| | $ | 1,071,021 |
| | 9 | % | | 46 | % | | 9 | % | | 46 | % |
Support services | 506,187 |
| | 552,472 |
| | 581,474 |
| | (8 | )% | | (5 | )% | | (8 | )% | | (6 | )% |
Financing | 368,090 |
| | 394,557 |
| | 406,395 |
| | (7 | )% | | (3 | )% | | (6 | )% | | (3 | )% |
Equipment sales | 352,104 |
| | 395,652 |
| | 400,704 |
| | (11 | )% | | (1 | )% | | (10 | )% | | (2 | )% |
Supplies | 187,287 |
| | 218,304 |
| | 231,412 |
| | (14 | )% | | (6 | )% | | (13 | )% | | (7 | )% |
Rentals | 80,656 |
| | 84,067 |
| | 93,001 |
| | (4 | )% | | (10 | )% | | (3 | )% | | (10 | )% |
Total revenue | $ | 3,205,125 |
| | $ | 3,211,522 |
| | $ | 2,784,007 |
| | — | % | | 15 | % | | — | % | | 15 | % |
with the COVID-19 pandemic, which in our Global Ecommerce and Presort Services segments, continues to include costs resulting from reduced productively (staggering shifts and breaks to enhance social distancing), costs for extended safety protocols in our warehouses (sanitizing equipment multiple times a day and providing personal protection equipment) and incremental costs required to hire temporary labor.
Our inability to obtain and protect our intellectual property and defend against claims of infringement by others may negatively impact our financial performance.
Our businesses are not materially dependent on any one patent or license or group of related patents and licenses; however, our business success depends in part upon protecting our intellectual property rights, including proprietary technology developed or obtained through acquisitions. We rely on copyrights, patents, trademarks and trade secrets and other intellectual property laws to establish and protect our proprietary rights. If we are unable to protect our intellectual property rights, our competitive position may suffer, which could adversely affect our revenue and profitability. The continued evolution of patent law and the nature of our innovation work may affect the number of patents we are able to receive for our development efforts. As we continue to transition our business to more software and service-based offerings, patent protection of these innovations will be more difficult to obtain. In addition, from time to time, third-parties may claim that we, our clients, or our suppliers, have infringed their intellectual property rights. These claims, if successful, may require us to redesign affected products, enter into costly settlement or license agreements, pay damage awards, or face a temporary or permanent injunction prohibiting us from marketing or selling certain products.
If we fail to comply with government contracting regulations, our financial performance, brand name and reputation could suffer.
We have a significant number of contracts with governmental entities. Government contracts are subject to extensive and complex procurement laws and regulations, along with regular audits and investigations by government agencies. If one or more government agencies discovers contractual noncompliance by us or one of our subcontractors in the course of an audit or investigation, we may be subject to various civil or criminal penalties and administrative sanctions, which could include the termination of the contract, reimbursement of payments received, fines and debarment from doing business with one or more governments. Any of these events could not only affect our financial performance, but also adversely affect our brand and reputation.
We may not fully realize the anticipated benefits of strategic acquisitions and divestitures which may harm our financial performance.
As we transition our business to sustainable long-term growth, we may make strategic acquisitions or divest certain businesses. These actions may involve significant risks and uncertainties, which could have an adverse effect on our financial performance, including:
•difficulties in achieving anticipated benefits or synergies;
•difficulties in integrating newly acquired businesses and operations, including combining product and service offerings and entering new markets, or reducing fixed costs previously associated with divested businesses;
•the loss of key employees or clients of businesses acquired or divested;
•significant charges for employee severance and other restructuring costs, legal, accounting and financial advisory fees; and
•possible goodwill and asset impairment charges as divestitures and changes in our business model may adversely affect the recoverability of certain long- lived assets and valuation of our operating segments.
Our capital investments to develop new products and offerings or expand our current operations may not yield the anticipated benefits.
We are making significant capital investments in new products, services, and facilities. If we are not successful in these new product or service introductions at the levels anticipated when making the investments, there may be an adverse effect on our financial performance.
Cybersecurity and Technology Risks
Our financial performance and our reputation could be adversely affected, and we could be subject to legal liability or regulatory enforcement actions, if we or our suppliers are unable to protect against, or effectively respond to, cyberattacks or other cyber incidents.
We depend on the security of our and our suppliers' information technology systems to support numerous business processes and activities, to service our clients and to enable consumer transactions and postal services. There are numerous cybersecurity risks to these systems, including individual and group criminal hackers, industrial espionage, denial of service attacks, malware attacks, computer viruses, vandalism and employee errors and/or malfeasance. These cyber threats are constantly evolving, thereby increasing the difficulty of preventing, detecting and successfully defending against them. Successful breaches could, among other things, disrupt our operations, result in the unauthorized disclosure, theft and misuse of company, client, consumer and employee sensitive and confidential information, all of which could adversely affect our financial performance. Cybersecurity breaches could result in
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| Cost of Revenue |
| Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
| $ | | % of revenue | | $ | | % of revenue | | $ | | % of revenue |
Cost of business services | $ | 1,389,569 |
| | 81.2 | % | | $ | 1,233,105 |
| | 78.7 | % | | $ | 770,018 |
| | 71.9 | % |
Cost of support services | 162,300 |
| | 32.1 | % | | 178,495 |
| | 32.3 | % | | 173,555 |
| | 29.8 | % |
Financing interest expense | 44,648 |
| | 12.1 | % | | 44,376 |
| | 11.2 | % | | 46,178 |
| | 11.4 | % |
Cost of equipment sales | 244,210 |
| | 69.4 | % | | 236,160 |
| | 59.7 | % | | 238,062 |
| | 59.4 | % |
Cost of supplies | 49,882 |
| | 26.6 | % | | 60,960 |
| | 27.9 | % | | 66,302 |
| | 28.7 | % |
Cost of rentals | 31,530 |
| | 39.1 | % | | 37,178 |
| | 44.2 | % | | 33,741 |
| | 36.3 | % |
Total cost of revenue | $ | 1,922,139 |
| | 60.0 | % | | $ | 1,790,274 |
| | 55.7 | % | | $ | 1,327,856 |
| | 47.7 | % |
financial liability to other parties, governmental investigations, regulatory enforcement actions, and penalties, and our brand and reputation could be damaged. Although we maintain insurance coverage relating to cybersecurity incidents, we may incur costs or financial losses that are either not insured against or not fully covered through our insurance.
We have security systems, procedures and business continuity plans in place-and require our suppliers to have them as well-that are designed to ensure the continuous and uninterrupted performance of our information technology systems, to protect against unauthorized access to information or disruption to our services, and to minimize the time to detect, respond or minimize the impact of a breach should one occur. None of those systems, however, are fool proof but, our goal is to prevent meaningful incursions and minimize the time to detect and respond, as well as the overall impact of those that occur, and like all companies, intrusions will occur, and have occurred, from time to time.
Despite the protections we have in place, we have suffered two significant cyber-events, one in October 2019 and another in May 2020. In 2019, we were affected by a ransomware attack, known as RYUK, that temporarily disrupted customer access to some of our services. Our financial information was not affected and there is no evidence that any sensitive or confidential data was improperly accessed or extracted from our network. Although this attack adversely impacted 2019 revenue by $18 million and earnings per share from continuing operations by $0.08, primarily as a result of the business interruption, incremental costs related to the attack and costs to enhance our cybersecurity protection, we were able to recover $17 million from our insurers in 2020. In addition, in May 2020, we were affected by a Maze ransomware attack. The Maze attackers were able to exfiltrate a small amount of our confidential data, which did not include any client confidential information, but we were able to successfully thwart the attack before any of our ongoing operations could be disrupted. The attempted attack did not have any impact on our financial results, and we satisfied all regulatory obligations arising out of the attack. In response to these attacks, we implemented a variety of measures to further enhance our cybersecurity protections and minimize the impact of any future attack. Cyber threats are constantly evolving and will require us to continually assess and improve our protections; however, there can be no guarantee that a future cyber event will not occur.
Failure to comply with data privacy and protection laws and regulations could subject us to legal liability and adversely affect our reputation and our financial performance.
Our businesses use, process and store proprietary information and personal, sensitive or confidential data relating to our business, clients, and employees. Privacy laws and similar regulations in many jurisdictions where we do business require that we take significant steps to safeguard that information, and these laws and regulations continue to evolve. The scope of the laws that may be applicable to us is often uncertain and may be conflicting. In addition, new laws may add a broad array of requirements on how we handle or use information and increase our compliance obligations. For example, the European Union greatly increased the jurisdictional reach of European Law by enacting the General Data Protection Regulation (GDPR), which, among other things, enhanced an individual’s rights with respect to their information and ongoing litigation in the European Union continues to create uncertainty in how to demonstrate compliance. In the United States, several states have enacted different laws regarding personal information, including recent changes to privacy laws in California, that impose significant new requirements. Other countries or states may enact laws or regulations in the future that have similar or additional requirements. Although we continually monitor and assess the impact of these laws and regulations, their interpretation and enforcement are uncertain, subject to change and may require substantial costs to monitor and implement. Failure to comply with data privacy and protection laws and regulations could also result in government enforcement actions (which could include substantial civil and/or criminal penalties), private litigation, and adversely affect our reputation and the results of our operations.
If we or our suppliers encounter unforeseen interruptions or difficulties in the operation of our cloud-based applications, our business could be disrupted, our reputation and relationships may be harmed and our financial performance could be adversely affected.
Our business relies upon the continuous and uninterrupted performance of our and our suppliers' cloud-based applications and systems to support numerous business processes, to service our clients and to support their transactions with their customers and postal services. Our applications and systems, and those of our partners, may be subject to interruptions due to technological errors, system capacity constraints, software errors or defects, human errors, computer or communications failures, power loss, adverse acts of nature and other unexpected events. We have business continuity and disaster recovery plans in place to protect our business operations in case of such events and we also require our suppliers to have the same. Nonetheless, there can be no guarantee that these plans will function as designed. If we are unable to limit interruptions or successfully correct them in a timely manner or at all, it could result in lost revenue, loss of critical data, significant expenditures of capital, a delay or loss in market acceptance of our services and damage to our reputation, brand and relationships, any of which could have an adverse effect on our business and our financial performance.
Macroeconomic and General Regulatory Risks
Future credit rating downgrades or capital market disruptions could adversely affect our ability to maintain adequate liquidity to provide competitive financing services to our clients and to fund various discretionary priorities.
We provide competitive finance offerings to our clients and fund discretionary priorities, such as business investments, strategic acquisitions, dividend payments and share repurchases through a combination of cash generated from operations, deposits held at the Bank and access to capital markets. Our ability to access U.S. capital markets and the associated cost of borrowing is dependent upon our credit ratings and is subject to capital market volatility. Given our current credit rating, we may experience reduced financial or strategic flexibility and higher costs when we do access the U.S. capital markets. We maintain a $500 million revolving credit facility that requires we maintain certain financial and nonfinancial covenants.
A significant decline in cash flows, noncompliance with any of the covenants under the revolving credit facility, further credit rating downgrades, material capital market disruptions, significant withdrawals by depositors at the Bank, adverse changes to our industrial loan charter or an increase in our credit default swap spread could impact our ability to maintain adequate liquidity to provide competitive finance offerings to our clients, refinance maturing debt and fund other financing activities, which in turn, could adversely affect our financial performance.
Our Global Ecommerce segment is exposed to increased foreign exchange rate fluctuations.
The sales generated from many of our clients’ internationally focused websites running on our cross-border platform are exposed to foreign exchange rate fluctuations. Currently, our platforms are located in the U.S. and the U.K. and a majority of consumers making purchases through these platforms are in a limited number of foreign countries. A strengthening of the U.S. Dollar or British Pound relative to currencies in the countries where we do the most business impacts our ability to compete internationally as the cost of similar international products improves relative to the cost of U.S. and U.K. retailers' products. A strong U.S. Dollar or British Pound would likely result in a decrease in international sales volumes, which would adversely affect the segment's revenue and profitability.
Our operations and financial performance may be negatively affected by changes in trade policies, tariffs and regulations.
Our Global Ecommerce segment is subject to significant trade regulations, taxes, and duties throughout the world. Any changes to these regulations could potentially impose increased documentation and delivery requirements, increase costs, delay delivery times, subject us to additional liabilities, and could adversely affect our financial performance. Over the past three years, the United States increased tariffs for certain goods while also raising the possibility of additional tariffs. These actions triggered other nations to also increase tariffs on certain of their goods. For our Global Ecommerce segment, tariff increases, or even the political environment surrounding trade issues, could reduce demand and adversely affect our financial performance. For our SendTech Solutions segment, the increased tariffs resulted in additional costs on certain components used in some of our products. Although we have been taking actions to mitigate these costs by changing where we source certain parts, these added costs and the potential for further tariffs could affect demand for our products or the amount of profitability in some of our products and adversely affect our financial performance.
Our operational costs could increase from changes in environmental regulations, or we could be subject to significant liabilities.
We are subject to various federal, state, local and foreign environmental protection laws and regulations around the world, including without limitation, those related to the manufacture, distribution, use, packaging, labeling, recycling or disposal of our products or the products of our clients for whom we perform services. Environmental rules concerning products and packaging can have a significant impact on the cost of operations or affect our ability to do business in certain countries. We are also subject to laws concerning use, discharge or disposal of materials. These laws are complex, change frequently and have tended to become more stringent over time. Additionally, the change in the Presidential administration may increase the uncertainty with regard to potential changes in these laws and regulations and the enforcement of any new legislation or directives by government authorities. If we are found to have violated these laws, we could be fined, criminally charged, otherwise sanctioned by regulators, or we could be subject to liability and clean-up costs. These risks can apply to both current and legacy operations and sites. From time to time, we may be involved in litigation over these issues. The amount and timing of costs under environmental laws are difficult to predict and there can be no assurance that these costs will not have an adverse effect on our financial performance.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We lease numerous facilities worldwide, including our corporate headquarters located in Stamford, Connecticut, sales offices, service locations, data centers and call centers.
Our Global Ecommerce segment leases four fulfillment centers that comprise the majority of our fulfillment operations. Our Global Ecommerce and Presort Services segments conduct parcel operations and mail sortation operations through a network of over 50 operating centers throughout the United States. Our SendTech Solutions segment leases a manufacturing and distribution facility in Indianapolis. This facility is significant as it stores a majority of the SendTech Solutions products, supplies and inventories.
Should any facility be unable to function as intended for an extended period of time, our ability to service our clients and operating results could be impacted.
We conduct most of our research and development activities in facilities located in Noida and Pune, India and Shelton, Connecticut. Management believes that our facilities are in good operating condition, materially utilized and adequate for our current business needs.
ITEM 3. LEGAL PROCEEDINGS
See Note 16 Commitments and Contingencies for additional information.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is principally traded on the New York Stock Exchange (NYSE) under the symbol "PBI". At January 31, 2021, we had 13,436 common stockholders of record.
Share Repurchases
We periodically repurchase shares of our common stock to manage the dilution created by shares issued under employee stock plans and for other purposes. During 2020, we did not repurchase any additional shares of our common stock and in 2019, we repurchased 18.6 million shares of our common stock at an aggregate price of $105 million. At December 31, 2020, we have authorization to repurchase up to of $16 million of our common stock.
Stock Performance Graph
Our peer group is comprised of: ACCO Brands Corporation, Alliance Data Systems Corporation, Deluxe Corporation, Diebold Nixdorf, Incorporated, Echo Global Logistics, Inc., Fidelity National Information Services, Inc., Fiserv, Inc., Hub Group, Inc., NCR Corporation, R.R. Donnelley & Sons Company, Rockwell Automation, Inc., Stamps.com Inc., The Western Union Company and Xerox Holdings Corporation.
The accompanying graph shows the annual change in the value of a $100 investment in Pitney Bowes Inc., the Standard and Poor's (S&P) 500 Composite Index, the S&P SmallCap 600 Composite Index and our peer group over a five-year period assuming the reinvestment of dividends. On a total return basis, a $100 investment on December 31, 2015 in Pitney Bowes Inc., the S&P 500 Composite Index, the S&P SmallCap 600 Composite Index and our peer group would have been worth $39, $203, $179 and $175, respectively, on December 31, 2020.
All information is based upon data independently provided to us by Standard & Poor's Corporation and is derived from their official total return calculation. Total return for the S&P 500 and S&P SmallCap 600 Composite Indexes and our peer group is based on market capitalization, weighted for each year. The stock price performance is not necessarily indicative of future stock price performance.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the more detailed consolidated financial statements and related notes included in this Annual Report. Effective January 1, 2020, we adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses using the modified retrospective transition approach with a cumulative effect adjustment at the date of initial application. Accordingly, periods prior to January 1, 2020, have not been restated for this standard and are presented under the prior guidance. Effective January 1, 2019, we adopted Accounting Standards Codification (ASC) 842, Leases (ASC 842) using the modified retrospective transition approach of applying the standard at the beginning of the earliest comparative period presented in the financial statements and recorded a cumulative effect adjustment at the date of initial application. Accordingly, periods prior to January 1, 2017, have not been restated for this standard and are presented under the prior guidance. Effective January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers on a modified retrospective basis with a cumulative effect adjustment at the date of initial application. Accordingly, periods prior to January 1, 2018, have not been restated for this standard and are presented under the prior guidance. Discontinued operations includes our Software Solutions and Production Mail businesses.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Total revenue | $ | 3,554,075 | | | $ | 3,205,125 | | | $ | 3,211,522 | | | $ | 2,784,007 | | | $ | 2,656,172 | |
| | | | | | | | | |
Amounts attributable to common stockholders: | | | | | | | | | |
(Loss) income from continuing operations | $ | (191,659) | | | $ | 40,149 | | | $ | 181,705 | | | $ | 180,039 | | | $ | 210,861 | |
Income (loss) from discontinued operations | 10,115 | | | 154,460 | | | 60,106 | | | 63,489 | | | (118,056) | |
Net (loss) income | $ | (181,544) | | | $ | 194,609 | | | $ | 241,811 | | | $ | 243,528 | | | $ | 92,805 | |
| | | | | | | | | |
Basic (loss) earnings per share attributable to common stockholders (1): | | | | | | |
Continuing operations | $ | (1.12) | | | $ | 0.23 | | | $ | 0.97 | | | $ | 0.97 | | | $ | 1.12 | |
Discontinued operations | 0.06 | | | 0.88 | | | 0.32 | | | 0.34 | | | (0.63) | |
Net (loss) income | $ | (1.06) | | | $ | 1.10 | | | $ | 1.29 | | | $ | 1.31 | | | $ | 0.49 | |
| | | | | | | | | |
Diluted (loss) earnings per share attributable to common stockholders (1): | | | | | | |
Continuing operations | $ | (1.12) | | | $ | 0.23 | | | $ | 0.96 | | | $ | 0.96 | | | $ | 1.12 | |
Discontinued operations | 0.06 | | | 0.87 | | | 0.32 | | | 0.34 | | | (0.62) | |
Net (loss) income | $ | (1.06) | | | $ | 1.10 | | | $ | 1.28 | | | $ | 1.30 | | | $ | 0.49 | |
| | | | | | | | | |
Cash dividends paid per share of common stock | $ | 0.20 | | | $ | 0.20 | | | $ | 0.75 | | | $ | 0.75 | | | $ | 0.75 | |
| | | | | | | | | |
Balance sheet data: | | | | | | | | | |
| December 31, |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Total assets | $ | 5,220,137 | | | $ | 5,466,900 | | | $ | 5,938,419 | | | $ | 6,634,606 | | | $ | 5,837,133 | |
Long-term debt | $ | 2,348,361 | | | $ | 2,719,614 | | | $ | 3,066,073 | | | $ | 3,559,278 | | | $ | 2,750,405 | |
Total debt | $ | 2,564,393 | | | $ | 2,739,722 | | | $ | 3,265,608 | | | $ | 3,830,335 | | | $ | 3,364,890 | |
| | | | | | | | | |
(1) The sum of earnings per share may not equal the totals due to rounding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of our financial condition and operating results should be read in conjunction with our risk factors, consolidated financial statements and related notes. This discussion includes forward-looking statements based on management's current expectations, estimates and projections and involves risks and uncertainties. Actual results may differ significantly from those currently expressed. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is outlined under "Forward-Looking Statements" and "Item 1A. Risk Factors" in this Form 10-K. All table amounts are presented in thousands of dollars.
Throughout this discussion, we may refer to revenue growth on a constant currency basis. Constant currency measures exclude the impact of changes in currency exchange rates sincefrom the prior period under comparison. We believe that excluding the impacts of currency exchange rates provides investors 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.
Business services
Business servicesManagement 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 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.
Overview
Financial Results Summary - Twelve Months Ended December 31:
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| Revenue |
| Years Ended December 31, |
| 2020 | | 2019 | | Actual % change | | Constant Currency % Change |
Business services | $ | 2,191,306 | | | $ | 1,710,801 | | | 28 | % | | 28 | % |
Support services | 473,292 | | | 506,187 | | | (6) | % | | (7) | % |
Financing | 341,034 | | | 368,090 | | | (7) | % | | (7) | % |
Equipment sales | 314,882 | | | 352,104 | | | (11) | % | | (11) | % |
Supplies | 159,282 | | | 187,287 | | | (15) | % | | (15) | % |
Rentals | 74,279 | | | 80,656 | | | (8) | % | | (8) | % |
Total revenue | $ | 3,554,075 | | | $ | 3,205,125 | | | 11 | % | | 11 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Revenue |
| Years Ended December 31, |
| 2020 | | 2019 | | Actual % change | | Constant currency % change |
Global Ecommerce | $ | 1,618,897 | | | $ | 1,151,510 | | | 41 | % | | 41 | % |
Presort Services | 521,212 | | | 529,588 | | | (2) | % | | (2) | % |
Commerce Services | 2,140,109 | | | 1,681,098 | | | 27 | % | | 27 | % |
SendTech Solutions | 1,413,966 | | | 1,524,027 | | | (7) | % | | (7) | % |
Total | $ | 3,554,075 | | | $ | 3,205,125 | | | 11 | % | | 11 | % |
| | | | | | | | | | | | | | | | | |
| EBIT |
| Years Ended December 31, |
| 2020 | | 2019 | | % change |
Global Ecommerce | $ | (82,894) | | | $ | (70,146) | | | (18) | % |
Presort Services | 55,799 | | | 70,693 | | | (21) | % |
Commerce Services | (27,095) | | | 547 | | | >(100%) |
SendTech Solutions | 441,085 | | | 490,322 | | | (10) | % |
Total Segment EBIT | $ | 413,990 | | | $ | 490,869 | | | (16) | % |
Revenue increased 9%11% in 20192020 compared to 2018. Growth2019, driven by a 28% increase in domestic parcel and shipping solutions volumes contributed 8% of revenue growth and higher volumes at Presort Services contributed 1% of revenue growth.
Cost of business services as a percentage of business services revenue, increased to 81.2% in 2019 primarily due to significantly higher incremental fulfillment costs, investments forvolumes in our Global Ecommerce segment. This growth including new facilities, engineering, and marketing programs and a shiftmore than offset declines in the mix of business to fast growing, but lower margin services, partially offset by lower labor costs resulting from productivity actions.
Business servicesall other revenue increased 46%line items driven in 2018 compared to 2017 primarily due to:
39%part from the acquisitioncontinuing impacts of Newgistics;
5% from growth inCOVID-19. Within our business segments, Global Ecommerce driven by higher revenue from shipping solutions, partially offset by lowergrew 41% due to increased domestic parcel delivery and cross-border volumes, Presort Services revenue declined 2% due to lower volumes;First Class Mail and
2% from higher Marketing Mail volumes of mail processed in Presort Services.
Cost of business services as a percentage of business servicesand SendTech Solutions revenue increased to 78.7% in 2018declined 7%, primarily due to continued investment inlower equipment sales and supplies revenue. Global Ecommerce EBIT decreased 18% and Presort Services EBIT decreased 21% from the prior year primarily driven by higher labor and transportation costs in Commerce Services of $40 million drivencaused by increased demand and competition for laborthese resources and transportation resourcesincreased costs and reduced productivity due to the rapid growth in Ecommerce and $8 million from the launch of a marketing mail pilot program in Presort Services.
Support services
Support services revenue decreased 8% in 2019 compared to 2018 and 5% as reported and 6% at constant currency in 2018 compared to 2017 primarily due to a worldwide decline in our meter population. Cost of support services as a percentage of support services revenue of 32.1% in 2019 was flat compared to the prior year period. Cost of support services as a percentage of support services revenue increased
to 32.3% in 2018 primarily due to the decline in support services revenue.
Financing
Financing revenue decreased 7% as reported and 6% at constant currency in 2019 compared to 2018 and 3% in 2018 compared to 2017 primarily due to a declining portfolio and lower fees.
We allocate a portion of our total cost of borrowing to financing interest expense based on an 8:1 debt to equity leverage ratio, our overall effective interest rate and the average outstanding finance receivables. Financing interest expense as a percentage of financing revenue increased to 12.1% in 2019 compared to 11.2% in 2018 due to a higher effective interest rate. Financing interest expense as a percentage of financing revenue in 2018 of 11.2% was consistent with the prior year period.
Equipment sales
Equipment sales decreased 11% as reported andCOVID-19. SendTech Solutions EBIT declined 10% at constant currency in 2019 compared to 2018, primarily due to lower salesrevenue and higher credit loss provisions. Prior year segment EBIT was adversely impacted by $19 million related to a ransomware attack and current year segment EBIT includes $13 million of insurance proceeds related to this attack. Refer to Results of Operations section for further information.
Impacts of COVID-19
The global spread of COVID-19 and the efforts to contain it are adversely affecting global economies, impacting demand for a broad variety of goods and services and creating disruptions and shortages in mailing finishing productssupply chains. We implemented measures in our facilities to protect the health and safety of our employees and contractors, including staggering shifts and breaks to enhance social distancing, providing personal protection equipment, conducting temperature checks and sanitizing equipment and facilities multiple times a longer installation periodday. Employees that have the ability to work remotely are doing so and corporate and local management continue to assess conditions to determine when, and how, these employees should return to their office locations.
COVID-19 has impacted our financial results in different ways in each of our businesses. Global Ecommerce has seen a significant increase in volumes due to athe demand for ecommerce solutions in the current environment. However, this increase in volumes has resulted in higher mix of solutions sold with our equipment relative topostal costs driven by capacity constraints and higher labor and transportation costs as many companies are competing for these resources. At the prior year. Market Exits accounted for 2%start of the decline.
Cost of equipment sales aspandemic, Presort Services experienced a percentage of equipment sales revenue increased to 69.4%significant decline in both First Class and Marketing Mail. However, while volumes for the full year 2020 were down from 59.7% in the prior year, period. A charge related to a SendPro C tablet replacement program, trade tariffs and engineering costs adverselywe did see quarter over quarter improvement throughout the year. Presort Services was also impacted equipment sales margins by 2 percentage points, 2 percentage points and 1 percentage point, respectively.
Equipment sales in 2018 were down slightly compared to 2017. Lower sales in the U.S. and U.K. each contributed a 1% decline in revenue. Cost of equipment sales as a percentage of equipment sales revenue of 59.7% was consistent with the prior year.
Supplies
Supplies revenue decreased 14% as reported and 13% at constant currency in 2019 compared to 2018, primarily due to a declining meter population. Market Exits accounted for 4% of the decline. Cost of supplies as a percentage of supplies revenue of 26.6% in 2019 was consistent with the prior year.
Supplies revenue decreased 6% as reported and 7% at constant currency in 2018 compared to 2017, driven by a global decline in installed mailing equipment and postage volumes. Cost of supplies as a percentage of supplies revenue improved to 27.9% in 2018 compared to 28.7% due to a favorable mix of sales.
Rentals
Rentals revenue decreased 4% as reported and 3% at constant currency in 2019 compared to 2018 and 10% in 2018 compared to 2017 primarily due to a declining meter population.
Cost of rentals as a percentage of rentals revenue decreased to 39.1% in 2019 compared to 2018 primarily due to a favorable adjustment to cost of rentals recorded in the third quarter. Cost of rentals as a percentage of rentals revenue increased to 44.2% in 2018 compared to 2017 primarily due to higher scrapping costs associated with retiring aging meters.
Selling, general and administrative (SG&A)
SG&A expense was flat in 2019 compared to 2018. SG&A expense decreased 3%, or $27 million, in 2018 compared to 2017, despite $51 million of incremental expenses from the acquisition of Newgistics. The underlying decrease in SG&A was primarily due to lower employee related expenses of $36 million, lower marketing and advertising spend of $34 million, and other operating expense cost reductions as a result of our cost savings initiatives.
Restructuring charges and asset impairments, net
In 2019, restructuring charges and asset impairments, net of $70 million consisted of $24 million of restructuring related charges and $46 million of asset impairment charges. Asset impairment charges primarily includes the write-off of capitalized software costs related to the development of an ERP system in our international markets resulting from changes in our international footprint.
In 2018, restructuring charges and asset impairments, net of $26 million consisted of $25 million of restructuring related charges and $1 million of asset impairment charges. In 2017, restructuring charges and asset impairments, net of $45 million consisted of $41 million of restructuring related charges and $4 million of asset impairment charges.
Other components of net pension and postretirement cost
labor costs. As a result of the funded statushealth and safety measures implemented in all our Commerce Services facilities, we also incurred additional costs and reduced productivity.
In SendTech Solutions, the global shut-down of businesses and increase in the number of clients working remotely at the onset of COVID-19 had a significantly adverse impact on demand for and usage of our pension plansmailing equipment and supplies, and our ability to perform on-site service and installations. We saw improving trends in equipment sales and supplies revenues quarter over quarter throughout 2020. As businesses continue to operate remotely, we are also seeing improvement in our cloud-enabled shipping and mailing solutions.
Outlook
We continue to position ourselves for long-term success as a global technology company focused on shipping, mailing and related financial services. We are investing in market opportunities and new solutions and services across all our businesses, optimizing our operations and implementing cost savings initiatives to drive long-term value. Our portfolio is shifting to higher growth markets and we expect margins to improve as we build scale and realize the full benefits of our investments and optimizations.
Within Global Ecommerce, we expect the accelerated market growth of ecommerce brought on by COVID-19 to continue and anticipate revenue growth in 2021. We expect margin and profit improvements in 2021 from pricing initiatives and operational improvements within our facilities and network designed to drive efficiencies and increased productivity. Within Presort Services, we expect the improving volume trends in the second half of 2020 to continue throughout 2021 through organic volume growth and acquisitions. Margins are expected to improve in 2021 from productivity initiatives, increased automation and facilities consolidation and optimization. Within SendTech Solutions, we expect recurring revenue streams to continue to decline, but growth in our cloud-
enabled shipping solutions and sales of our multi-purpose devices to partially offset these declines. On a consolidated basis, we expect modest revenue growth in 2021 compared to 2020.
The COVID-19 pandemic is expected to continue to 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, its effect on the global economy, and the fact that most plans have been frozen, we recognized income in 2019. The 2018 amount includesefficacy and availability of a $32 million charge in connection withvaccine, the dispositionultimate impact of the Production Mail Businesspandemic on our business, operations and certain other actions. The amount of other components of net pensionfinancial performance remains uncertain. Accordingly, there are many factors not within our control that could affect the pandemic's ultimate impact on our business and postretirement cost recognized each yearcurrent outlook for 2021. However, we believe we are well positioned to manage through the current conditions and will vary based on actuarial assumptionscontinue to take proactive steps to manage our cash flows and actual results of our pension plans.liquidity.
Other expense
Other expense for 2019 includes a loss of $18 million from Market Exits, primarily from the write-off of cumulative translation adjustments and a $6 million loss on the early extinguishment of debt. Other expense for 2018 and 2017 represents a loss on the early extinguishment of debt.
Income taxes
The effective tax rate for 2019 includes benefits of $23 million from the release of a foreign valuation allowance and $9 million from the resolution of certain tax examinations. The effective tax rate for 2019 also includes a tax of $3 million on the $18 million book loss from Market Exits, primarily due to nondeductible basis differences. The effective tax rate for 2018 includes tax benefits of $37 million related to true-ups from the Tax Cuts and Jobs Act of 2017 and $17 million from the resolution of certain tax examinations. The effective tax rate for 2017 includes provisional tax benefits of $39 million from the Tax Cuts and Jobs Act of 2017 and $30 million from the resolution of tax examinations.
See Note 15 to the Consolidated Financial Statements for further information.
Income from discontinued operations
Discontinued operations includes the Software Solutions business, sold in December 2019 and the Production Mail Business, sold in July 2018. See Note 4 to the Consolidated Financial Statements for further information.
Business Segments
Our reportable segments are Global Ecommerce, PresortCommerce Services and SendTech Solutions.
The Commerce Services reporting group comprisesincludes domestic parcel services, cross-border solutions, digital delivery services and mail sortation services. The Commerce Services group includes the Global Ecommerce and Presort Services. The principal products and services of each reportable segment are as follows:Services segments.
Global Ecommerce:
Includes the revenue and related expenses from products and services that facilitate domestic retail and ecommerce shipping solutions, including fulfillment and returns, and global cross-border ecommerce 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 (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 solutions, financing, services, supplies and other applications to help simplify and save on the sending, tracking and receiving of letters and packages.
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 and other items not allocated to a particular business segment. Management believes that it provides investors a useful measure of operating performance and underlying trends of the business. Segment EBIT may not be indicative of our overall consolidated performance and therefore, should be read in conjunction with our consolidated results of operations.
Revenue and EBIT by business segment are presented in the tables below.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | % change |
| Years Ended December 31, | | Actual | | Constant Currency |
| 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Global Ecommerce | $ | 1,151,510 |
| | $ | 1,022,862 |
| | $ | 552,242 |
| | 13 | % | | 85 | % | | 13 | % | | 85 | % |
Presort Services | 529,588 |
| | 515,795 |
| | 497,901 |
| | 3 | % | | 4 | % | | 3 | % | | 4 | % |
Commerce Services | 1,681,098 |
| | 1,538,657 |
| | 1,050,143 |
| | 9 | % | | 47 | % | | 10 | % | | 46 | % |
SendTech Solutions | 1,524,027 |
| | 1,672,865 |
| | 1,733,864 |
| | (9 | )% | | (4 | )% | | (8 | )% | | (4 | )% |
Total revenue | $ | 3,205,125 |
| | $ | 3,211,522 |
| | $ | 2,784,007 |
| | — | % | | 15 | % | | — | % | | 15 | % |
|
| | | | | | | | | | | | | | | | | |
| EBIT |
| Years Ended December 31, | | % change |
| 2019 | | 2018 | | 2017 | | 2019 | | 2018 |
Global Ecommerce | $ | (70,146 | ) | | $ | (32,379 | ) | | $ | (17,899 | ) | | >(100)% |
| | (81 | )% |
Presort Services | 70,693 |
| | 73,768 |
| | 97,506 |
| | (4 | )% | | (24 | )% |
Commerce Services | 547 |
| | 41,389 |
| | 79,607 |
| | (99 | )% | | (48 | )% |
SendTech Solutions | 490,322 |
| | 558,959 |
| | 553,266 |
| | (12 | )% | | 1 | % |
Total segment EBIT | $ | 490,869 |
| | $ | 600,348 |
| | $ | 632,873 |
| | (18 | )% | | (5 | )% |
Global Ecommerce
Global Ecommerce revenue increased 13% in 2019 compared to 2018. Growth inDomestic parcel services offers retailers a cost-effective parcel delivery and returns network for end consumers. We operate numerous domestic parcel volumessortation centers connected by a nationwide transportation network, enabling us to pick up parcels from retailer distribution centers and move them through our physical network. We also offer fulfillment services, providing pick, pack and ship services for clients through four fulfillment centers. These centers are located within our parcel sortation centers to facilitate same-day entry into our parcel delivery network.
Cross-border solutions manages all aspects of the international shopping and shipping solutions volumes contributed 9 pointsexperience. Our proprietary technology enables global tracking and 5 points, respectively; partially offsetlogistics services; calculates duty, tax and shipping costs at checkout; enables multi-currency pricing, payment processing and fraud management; ensures compliance with product restrictions and produces all documentation requirements to meet export complexities and customs clearance. Our proprietary technology is utilized by a 1 point decline duedirect merchants and major online marketplaces facilitating millions of parcels to lower cross border volumes. EBIT loss in 2019 increasedbe shipped worldwide.
Digital delivery services enables clients to $70 million from a loss of $32 million in 2018 primarily driven by higher incremental fulfillment costs, investments for growth including new facilities, engineering, and marketing programs and a shift in the mix of business to fast growing, but lower margin services. We also estimate that EBIT was adversely impacted by $6 million as a result of the ransomware attack.
Global Ecommerce revenue increased 85% in 2018 compared to 2017. Excluding Newgistics, Global Ecommerce revenue increased 13% driven by higher revenue from shipping solutions, partially offset by lower cross-border revenue due to lower volumes. EBIT loss in 2018 increased to $32 million compared to a loss of $18 million in 2017 primarily due to higher amortization expense of $12 million due to a full year of amortization related to Newgistics and higherreduce transportation and laborlogistics costs, of $6 million due to increased competition for laborselect the best carrier based on need and transportation resourcescost, improve delivery times and track packages in real-time. Powered by our shipping APIs, clients can purchase postage, print shipping labels and access shipping and tracking services from multiple carriers that can be easily integrated into any web application such as a result of the rapid growth in Ecommerce, partially offset by higher revenue.online shopping carts or ecommerce sites and provide guaranteed delivery times and flexible payment options.
Presort Services
We are a workshare partner of the USPS and national outsource provider of mail sortation services that allow clients to qualify large volumes of First-Class Mail, Marketing Mail and Marketing Mail Flats and Bound Printed Matter for postal workshare discounts. Our network of operating centers throughout the United States and fully-customized proprietary technology provides clients with end-to-end solutions from pick up at their location to delivery into the postal system network, expedited mail delivery and optimal postage savings.
Sending Technology Solutions
We offer our clients physical and digital mailing and shipping technology solutions, supplies and other applications to help simplify and save on the sending, tracking and receiving of letters, parcels and flats. Our cloud enabled infrastructure provides software-as-a-service (SaaS) offerings delivered online and via connected or mobile devices. Our latest offerings are designed on an open platform architecture that have the capabilities to leverage partnerships with other innovative companies, including partnerships with carriers, and developers to deliver new value to our clients.
Through our wholly owned subsidiary, The Pitney Bowes Bank (the Bank), we offer our clients in the United States a revolving credit solution that enables clients to make meter rental payments and purchase postage, services and supplies and an interest-bearing deposit solution to clients who prefer to prepay postage. Additionally, we offer financing alternatives that enable clients to finance equipment and product purchases, finance or lease other manufacturers’ equipment and provide working capital.
We also provide revolving credit solutions to clients in Canada and the U.K.
We establish credit approval limits and procedures based on the credit quality of the client and the type of product or service provided to control credit risk. We closely monitor the portfolio by analyzing industry sectors and delinquency trends by product line, industry and client to ensure reserve levels and credit policies reflect current trends. Management continuously monitors credit lines and collection resources and revises credit policies as necessary to be more selective in managing the portfolio.
Seasonality
A larger percentage of our revenue is earned in the fourth quarter relative to the other quarters, driven primarily by an increase in shipping volumes during the holiday season.
Sales and Services
We market our products, solutions and services through a direct and inside sales force, global and regional partner channels, direct mailings and digital channels. We provide call-center, online and on-site support services for our products and solutions. Support services are primarily provided under maintenance contracts.
Competition
Our businesses face competition from large, multinational companies and smaller, more narrowly focused regional and local firms. We compete on the basis of technology and innovation, breadth of product offerings, our ability to design and tailor targeted solutions to meet client needs, performance, service and support, price, quality and brand.
We must continue to invest in our current technologies, products and solutions, and in the development of new technologies, products and solutions in order to maintain and improve our competitive position. We frequently encounter new competitors as the markets in which we participate evolve and newer businesses enter our existing markets.
A summary of the competitive environment for each of our segments is as follows:
Global Ecommerce
The domestic parcel services and cross-border solutions market includes competitors of various sizes, including companies with greater financial resources than us. Some of these competitors specialize in point solutions or freight forwarding services, are full-service ecommerce business process outsourcers and online marketplaces with international logistic support, or major global delivery services companies. We also face competition from companies that can offer both domestic and cross-border solutions in a single package which creates pricing leverage. The principal competitive factors include speed of delivery, reliability, functionality, ease of integration and use, scalability, innovation, support services and price. We compete based on the accuracy, reliability and scalability of our platform and logistics services, our ability to provide clients and their customers a one-stop full-service ecommerce experience and the ability to provide a more customized shipping solution than some of the larger competitors in the industry.
Within digital delivery services, we compete with a wide range of technology providers who help make shipping easier and more cost-effective. These technology providers range from large, established companies to smaller companies offering negotiated carrier rates. The principal competitive factors include technology stability and reliability, innovation, access to preferred shipping rates and ease of integration with existing systems.
Presort Services
We face competition from regional and local presort providers, cooperatives of multiple local presort providers, consolidators and service bureaus that offer presort solutions as part of a larger bundle of outsourcing services. While not necessarily competitors in the traditional sense, large mail owners have the capability to presort their own mailings in-house, and could use excess capacity to offer presort services to others. The principal competitive factors include price, innovative service, delivery speed, tracking and reporting, industry expertise and economies of scale. Our competitive advantages include our extensive network of presort facilities capable of processing significant volumes and our innovative proprietary technology that provides clients with reliable, secure and precise services and maximum postage discounts.
Sending Technology Solutions
We face competition from other mail equipment and solutions providers, companies that offer products and services as alternative means of message communications and those that offer on-line shipping and mailing products and services solutions. Additionally, as alternative communication methods in comparison to physical mail grow, our operations could be affected. We differentiate ourselves from our competitors through our breadth of physical and digital offerings, including cloud enabled SaaS and open platform architecture offerings; pricing; available financing and payment offerings; product reliability; support services; and our extensive knowledge of the shipping and mailing industry.
Our financing operations face competition, in varying degrees, from large, diversified financial institutions, including leasing companies, commercial finance companies and commercial banks, as well as small, specialized firms. Not all our competitors are able to offer the same or similar financing and payment solutions that we offer, and we believe this is a source of competitive advantage that differentiates us from our competitors.
Research, Development and Intellectual Property
We invest in research and development activities to develop new products and solutions, enhance the effectiveness and functionality of existing products and solutions and deliver high value technology and differentiated services in high value segments of the market.
Third-Party Suppliers
We depend on third-party suppliers and outsource providers for a variety of services and product components, the hosting of our SaaS offerings, the logistics portion of our ecommerce business, and some non-core functions and operations. In certain instances, we rely on single-sourced or limited-sourced suppliers and outsourcing vendors around the world because doing so is advantageous due to quality, price or lack of alternative sources. We have risk mitigation programs to monitor conditions affecting our suppliers' ability to fulfill expected commitments. We believe that our available sources for services, components, supplies and manufacturing are adequate.
Regulatory Matters
We are subject to the regulations of postal authorities worldwide related to product specifications of our postage meters. Our Presort Services segment is also subject to regulations of the USPS. The Bank is chartered as an Industrial Bank under the laws of the State of Utah. The Bank and certain company affiliates that provide services to the Bank are subject to the regulations of the Utah Department of Financial Institutions and the Federal Deposit Insurance Corporation. We are also subject to transportation regulations for various parts of our business, customs and trade regulations worldwide related to our cross-border shipping services and regulations concerning data privacy and security for our businesses that use, process and store certain personal, confidential or proprietary data.
Human Capital
We have more than 11,500 employees, with approximately 80% located in the United States and approximately 20% located outside the United States. We also rely on a contingent hourly workforce to supplement our full-time workforce to meet fluctuating demand. We seek to create a high-performance culture that will drive and sustain enhanced value for all our stakeholders. To attract, retain and engage the talent needed, we strive to maintain a diverse, inclusive and safe workplace, with equitable opportunities for growth and development, supported by strong compensation, benefits and health and wellness programs, and by programs that build connections between our employees and their communities.
Diversity and Inclusion
We believe that a diverse workforce is critical to our success. We celebrate a rich mix of countries, cultures, ages, races, ethnicities, gender identities, sexual orientation, abilities and perspectives that showcase our humanity, differentiate us as individuals and enhance our businesses. We have received numerous external acknowledgments of our progress in diversity and inclusion over the years.
Employee Engagement and Development
We emphasize employee development and training and provide professional development initiatives, training, experiential learning and inclusion networks to our employees to enable them to advance their skills and achieve career goals. We also believe employee engagement is important to the company's success and conduct a survey annually that has had historically high participation rates as well as increasing engagement scores overall.
Health, Safety and Wellness
We are committed to the health, safety and wellness of our employees. We provide our employees and their families with access to a variety of flexible and convenient health and wellness programs.
In response to COVID-19, we implemented significant changes that we determined were in the best interest of our employees, as well as the communities in which we operate, and which comply with government regulations. These changes included adjusting processes to enable social distancing, providing personal protective equipment, ongoing monitoring of the health of our employees, and contact tracing when an employee is diagnosed with COVID-19. We encourage employees capable of working remotely to do so and limit the number of employees who can be in any of our offices at any given time.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto filed with, or furnished to, the SEC, are available, free of charge, through the Investor Relations section of our website at www.investorrelations.pitneybowes.com or from the SEC's website at www.sec.gov, as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC. The other information found on our website is not part of this or any other report we file with or furnish to the SEC.
Information About Our Executive Officers
| | | | | | | | | | | | | | | | | | | | |
Name | | Age | | Title | | Executive Officer Since |
Marc B. Lautenbach | | 59 | | President and Chief Executive Officer | | 2012 |
Johnna G. Torsone | | 70 | | Executive Vice President and Chief Human Resources Officer | | 1993 |
Daniel J. Goldstein | | 59 | | Executive Vice President and Chief Legal Officer and Corporate Secretary | | 2010 |
Christoph Stehmann | | 58 | | Executive Vice President, International Sending Technology Solutions | | 2016 |
Jason C. Dies | | 51 | | Executive Vice President and President, Sending Technology Solutions | | 2017 |
Gregg Zegras | | 53 | | Executive Vice President and President, Global Ecommerce | | 2020 |
Ana Maria Chadwick | | 49 | | Executive Vice President and Chief Financial Officer (1) | | 2021 |
(1) Effective January 29, 2021, Ms. Chadwick assumed the responsibilities of Executive Vice President and Chief Financial Officer.
There are no family relationships among the above officers. The above officers have served in various executive positions with the company for at least the past five years except as follows:
Mr. Dies was appointed Executive Vice President and President, Sending Technology Solutions in October 2017. He joined the company in 2015 as President, Document Messaging Technologies (DMT). Prior to joining the company, Mr. Dies was employed at IBM where he held several leadership positions in North America, Europe, and Asia across diverse business units.
Mr. Zegras was appointed Executive Vice President and President, Global Ecommerce in July 2020. He joined the company in 2013 as President, Imagitas. Prior to joining the company, Mr. Zegras held several executive leadership positions, including at NBC Universal, Sharecare and Hearst Entertainment.
Ms. Chadwick joined the company as Executive Vice President and Chief Financial Officer on January 29, 2021. Prior to joining the company, Ms. Chadwick was employed at GE Capital as President and CEO of GE Capital Global Legacy Solutions. Ms. Chadwick spent over 20 years at GEC Capital, where she held several executive positions, including Controller of GE Capital Americas and CFO at GE Capital Energy Financial Services.
ITEM 1A. RISK FACTORS
Our operations face certain risks that should be considered in evaluating our business. We manage and mitigate these risks on a proactive basis, using an enterprise risk management program. Nevertheless, the following risk factors, some of which may be beyond our control, could materially affect our business, financial condition, results of operations, brand and reputation, and may cause future results to be materially different than our current expectations. These risk factors are not intended to be all inclusive.
COVID-19 Pandemic Risks
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 the emergence of another similar virus in the future could have a significantly material effect on our operations, financial condition and liquidity.
The COVID-19 pandemic is impacting, and is expected to continue to 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, its effect on the global economy, and the efficacy and availability of a vaccine, 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: the response of the government, businesses and individuals to the pandemic; an acceleration of the decline in 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. In addition to having the effect of potentially heightening many of our other risk factors in this section, the COVID-19 pandemic may, or may continue to, adversely affect the following to the detriment of our business, including:
•Accelerate the decline of physical mail volume in the geographies in which we operate, which adversely affects both our Presort Services and SendTech Solutions segments. We cannot yet assess the extent to which these declines in mail volumes, and resulting impact to our business, are permanent or temporary.
•The adverse effect that declines in physical mail are having on the financial health of posts around the world, especially that of the USPS. 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 further 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.
•Social distancing rules and heightened security policies have inhibited, and may 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.
•The increased costs and reduced labor productivity associated with extended safety protocols, including sanitizing facilities and equipment multiple times a day and incremental costs that may be required to hire temporary labor or redirect volumes to other facilities.
•Our Global Ecommerce segment could experience further capacity and cost issues due to further sudden and significant increases in volumes resulting from COVID-19, including costs and capacity issues relating to postage, transportation, labor, and warehouse space.
•Significant declines in the retail industry caused by the pandemic. Although our Global Ecommerce segment 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.
•A decline in the frequency of long-distance airplane flights may continue to result in higher costs and at times, reduced demand for our Global Ecommerce cross-border offerings.
•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.
•Our suppliers and third-party service providers may not be able 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.
•A prolonged duration or resurgence of COVID-19 could adversely impact our earnings or cash flows, which could result in additional credit rating downgrades, higher costs of borrowing, or limit our access to additional debt.
The COVID-19 pandemic may also have the effect of heightening many other risks, including the risks listed below and may also affect our business, operations and financial performance in a manner that is not presently known to us.
Mailing and Shipping Industry Risks
Further significant deterioration in the financial condition of the USPS, or the national posts in our other major markets could affect the ability of those posts to provide services to us or our clients, which could adversely affect client demand for our offerings and thus our financial performance.
We are dependent on financially viable national posts in the geographic markets where we operate, particularly in the United States. A significant portion of our revenue depends upon the ability of these posts, especially the USPS to provide competitive mail and package delivery services to our clients and the quality of the services they provide. Their ability to provide high quality service at affordable rates in turn depends upon their ongoing financial strength. If the posts are unable to continue to provide these services into the future, our financial performance will be adversely affected.
Our ability to compete in the package shipping market in the United States depends upon certain contractual relationships we have with the USPS and the successful performance of those services.
The USPS is our primary provider for the “last mile” component of our parcel delivery services in the United States. This represents a significant component of our cost in offering these services. If we are unable to receive competitive pricing from the USPS or take advantage of lower cost USPS options, our ability to compete with private carriers and to achieve profitable revenue growth will be adversely affected. The quality of service we provide to our clients also depends upon the quality of delivery services received from the USPS. The dramatic increase in parcel volumes due to the COVID-19 pandemic, especially during the peak holiday season, as well as the broader effects of the pandemic on the USPS' operations, has adversely impacted the quality of delivery performance from the USPS and some of our costs with them increased. If its performance does not revert to prior levels, or becomes materially worse than that of the private carriers, we may lose clients to competition and our financial performance will be adversely affected.
We are subject to postal regulations and processes, which could adversely affect our financial performance.
A significant portion of our business is subject to regulation and oversight by the USPS and posts in other major markets. These postal authorities have the power to regulate some of our current products and services. They also must approve many of our new or future product and service offerings before we can bring them to market. If our new or future product and service offerings are not approved, there are significant conditions to approval, regulations on our existing products or services are changed or, we fall out of compliance with those regulations, our financial performance could be adversely affected.
If we are not able to respond to the continuing decline in the volume of physical mail delivered via traditional postal services, our financial performance could be adversely affected.
Traditional mail volumes continue to decline and impact our current and future financial results, primarily within our SendTech Solutions and Presort Services segments. This rate of decline has been exacerbated by the COVID-19 pandemic, but we cannot yet assess the extent to which this decline, and resulting impact to our business, is permanent or temporary. Any further accelerated or sudden decline in physical mail volumes could have an adverse effect on these segments. An accelerated or sudden decline could result from changes in communication behavior or available communication technologies, reductions to the Universal Service Obligation (USO) under which the USPS and other national posts are required to deliver to every address in a country with similar pricing and frequency, pandemics, and legislation or regulations that mandate electronic substitution for communication by mail, prohibit certain types of mailings, increase the difficulty of using information or materials in the mail, or impose higher taxes or fees on postal services. If we are not successful at meeting the continuing challenges faced in our mailing business, or if physical mail volumes were to experience an accelerated or sudden decline, our financial performance could be adversely affected.
Business Operational Risks
The transformation of our businesses to more digital and package related services will result in a decline in our overall profit margins. If we cannot increase our volumes while at the same time reduce our costs, our overall profitability could be adversely affected.
As we transform our business to more digital and package related delivery services, the relative revenue contribution from our package delivery offerings now exceeds that of the revenue from our mailing-related offerings. We expect the portion of our revenue derived from package delivery offerings to continue to grow. The profit margins in these package-related offerings are generally lower than those for our mailing-related offerings. If we are unable to obtain sufficient scale, or are unable to lower per package costs as we achieve scale, our overall profitability could be adversely affected.
The loss of any of our largest clients in our Global Ecommerce segment could adversely affect the financial performance of that segment.
The Global Ecommerce segment receives a large portion of its revenue from a relatively small number of clients and business partners. The loss of any of these larger clients or business partners, or a substantial reduction in their use of our products or services, could have a material adverse effect on the revenue and profitability of the segment. There can be no assurance that our larger clients and business partners will continue to utilize our products or services at current levels, or that we would be able to replace any of these clients or business partners with others who can generate revenue at current levels.
A material change in consumer sentiment or spending habits that negatively impacts our retail clients could adversely affect the financial performance of our Global Ecommerce segment.
Our Global Ecommerce segment derives the majority of its revenue from retail clients. The retail industry is subject to cyclical trends in consumer sentiment and spending habits that are affected by many factors, including prevailing economic conditions (including those caused by the impact of the ongoing COVID-19 pandemic), recession or fears of recession and unemployment levels. If consumer sentiment and spending habits deteriorate such that the demand for our retail clients’ products are negatively impacted, it could potentially have an adverse impact on our financial performance.
If we fail to effectively manage our third-party suppliers and outsource providers, our business, financial performance and reputation could be adversely affected.
We depend on third-party suppliers and outsource providers for a variety of services and product components, the hosting of our SaaS offerings, the logistics portion of our ecommerce segment, the provision of temporary labor and some non-core functions and operations. Some of our suppliers may also be our competitors in other contexts. In certain instances, we rely on single-sourced or limited-sourced suppliers and outsourcing vendors around the world because doing so is advantageous due to quality, price or lack of alternative sources. To a certain extent in 2020, the performance of our outsourced service providers, due largely to circumstances associated with the COVID-19 pandemic, negatively impacted our ability to timely execute transactions with our clients, consumers and other constituents. If production or services were interrupted for any reason, the quality of those offerings were to degrade as a result of poor supplier performance, these suppliers chose to terminate their relationship with us, or if the costs of using these third parties were to increase and we were not able to find alternate suppliers, we could experience loss of clients, significant disruptions in manufacturing and operations (including product shortages, higher freight costs and re-engineering costs) as well as increased costs in the logistics portion of our Global Ecommerce segment.
Fluctuations in transportation costs or disruptions to transportation services in our Global Ecommerce or Presort Services segments could adversely affect client satisfaction or our financial performance.
In addition to our reliance on the USPS, our Global Ecommerce and Presort Services segments rely upon independent third-party transportation service providers to transport a significant portion of our parcel and mail volumes. The use of these providers is subject to risks, including our ability to negotiate acceptable terms, increased competition during peak periods, capacity issues, performance problems, extreme weather, natural or man-made disasters, pandemics, increased fuel costs, labor shortages or disputes or other unforeseen difficulties. Any disruption to the timely supply of these services for any reason or any dramatic increase in the cost of these services could adversely affect client satisfaction or our financial performance. The dramatic increase in demand for shipping services, especially in the fourth quarter of the year, caused us to incur higher costs and declines in performance and client satisfaction. Although we proactively manage our volumes, especially during the peak holiday season, given our reliance upon these providers, any future unforeseen disruptions affecting these providers could similarly adversely affect client satisfaction and our financial performance.
Our business depends on the availability of, and our ability to attract and retain, employees at a reasonable cost to meet the needs of our business and to consistently deliver highly differentiated, competitive offerings.
The rapid growth of the ecommerce industry has resulted in intense competition for employees in the shipping, transportation and logistics industry, including drivers and warehouse employees. The COVID-19 pandemic has accelerated this industry growth resulting in our Global Ecommerce segment experiencing a higher demand, and increased competition, for labor, especially in our warehouses. This demand and increased competition for workers has also impacted our Presort Services segment, which has experienced staffing shortages. Although we supplement our workforce with contingent hourly workers from staffing agencies on an as-needed basis, due to the accelerated demand and competition, concern over exposure to COVID-19 and other factors, we could continue to experience a decrease in the pool of available qualified talent. There is also significant competition for the talent needed to develop our other products. Increased competition for employees may result in increased wages and costs of other benefits necessary to attract and retain high quality employees with the right skill sets. Additional labor costs which may also impact our business include those triggered by regulatory actions; increased health care and workers’ compensation insurance expenses; and, those costs associated
with the COVID-19 pandemic, which in our Global Ecommerce and Presort Services segments, continues to include costs resulting from reduced productively (staggering shifts and breaks to enhance social distancing), costs for extended safety protocols in our warehouses (sanitizing equipment multiple times a day and providing personal protection equipment) and incremental costs required to hire temporary labor.
Our inability to obtain and protect our intellectual property and defend against claims of infringement by others may negatively impact our financial performance.
Our businesses are not materially dependent on any one patent or license or group of related patents and licenses; however, our business success depends in part upon protecting our intellectual property rights, including proprietary technology developed or obtained through acquisitions. We rely on copyrights, patents, trademarks and trade secrets and other intellectual property laws to establish and protect our proprietary rights. If we are unable to protect our intellectual property rights, our competitive position may suffer, which could adversely affect our revenue and profitability. The continued evolution of patent law and the nature of our innovation work may affect the number of patents we are able to receive for our development efforts. As we continue to transition our business to more software and service-based offerings, patent protection of these innovations will be more difficult to obtain. In addition, from time to time, third-parties may claim that we, our clients, or our suppliers, have infringed their intellectual property rights. These claims, if successful, may require us to redesign affected products, enter into costly settlement or license agreements, pay damage awards, or face a temporary or permanent injunction prohibiting us from marketing or selling certain products.
If we fail to comply with government contracting regulations, our financial performance, brand name and reputation could suffer.
We have a significant number of contracts with governmental entities. Government contracts are subject to extensive and complex procurement laws and regulations, along with regular audits and investigations by government agencies. If one or more government agencies discovers contractual noncompliance by us or one of our subcontractors in the course of an audit or investigation, we may be subject to various civil or criminal penalties and administrative sanctions, which could include the termination of the contract, reimbursement of payments received, fines and debarment from doing business with one or more governments. Any of these events could not only affect our financial performance, but also adversely affect our brand and reputation.
We may not fully realize the anticipated benefits of strategic acquisitions and divestitures which may harm our financial performance.
As we transition our business to sustainable long-term growth, we may make strategic acquisitions or divest certain businesses. These actions may involve significant risks and uncertainties, which could have an adverse effect on our financial performance, including:
•difficulties in achieving anticipated benefits or synergies;
•difficulties in integrating newly acquired businesses and operations, including combining product and service offerings and entering new markets, or reducing fixed costs previously associated with divested businesses;
•the loss of key employees or clients of businesses acquired or divested;
•significant charges for employee severance and other restructuring costs, legal, accounting and financial advisory fees; and
•possible goodwill and asset impairment charges as divestitures and changes in our business model may adversely affect the recoverability of certain long- lived assets and valuation of our operating segments.
Our capital investments to develop new products and offerings or expand our current operations may not yield the anticipated benefits.
We are making significant capital investments in new products, services, and facilities. If we are not successful in these new product or service introductions at the levels anticipated when making the investments, there may be an adverse effect on our financial performance.
Cybersecurity and Technology Risks
Our financial performance and our reputation could be adversely affected, and we could be subject to legal liability or regulatory enforcement actions, if we or our suppliers are unable to protect against, or effectively respond to, cyberattacks or other cyber incidents.
We depend on the security of our and our suppliers' information technology systems to support numerous business processes and activities, to service our clients and to enable consumer transactions and postal services. There are numerous cybersecurity risks to these systems, including individual and group criminal hackers, industrial espionage, denial of service attacks, malware attacks, computer viruses, vandalism and employee errors and/or malfeasance. These cyber threats are constantly evolving, thereby increasing the difficulty of preventing, detecting and successfully defending against them. Successful breaches could, among other things, disrupt our operations, result in the unauthorized disclosure, theft and misuse of company, client, consumer and employee sensitive and confidential information, all of which could adversely affect our financial performance. Cybersecurity breaches could result in
financial liability to other parties, governmental investigations, regulatory enforcement actions, and penalties, and our brand and reputation could be damaged. Although we maintain insurance coverage relating to cybersecurity incidents, we may incur costs or financial losses that are either not insured against or not fully covered through our insurance.
We have security systems, procedures and business continuity plans in place-and require our suppliers to have them as well-that are designed to ensure the continuous and uninterrupted performance of our information technology systems, to protect against unauthorized access to information or disruption to our services, and to minimize the time to detect, respond or minimize the impact of a breach should one occur. None of those systems, however, are fool proof but, our goal is to prevent meaningful incursions and minimize the time to detect and respond, as well as the overall impact of those that occur, and like all companies, intrusions will occur, and have occurred, from time to time.
Despite the protections we have in place, we have suffered two significant cyber-events, one in October 2019 and another in May 2020. In 2019, we were affected by a ransomware attack, known as RYUK, that temporarily disrupted customer access to some of our services. Our financial information was not affected and there is no evidence that any sensitive or confidential data was improperly accessed or extracted from our network. Although this attack adversely impacted 2019 revenue by $18 million and earnings per share from continuing operations by $0.08, primarily as a result of the business interruption, incremental costs related to the attack and costs to enhance our cybersecurity protection, we were able to recover $17 million from our insurers in 2020. In addition, in May 2020, we were affected by a Maze ransomware attack. The Maze attackers were able to exfiltrate a small amount of our confidential data, which did not include any client confidential information, but we were able to successfully thwart the attack before any of our ongoing operations could be disrupted. The attempted attack did not have any impact on our financial results, and we satisfied all regulatory obligations arising out of the attack. In response to these attacks, we implemented a variety of measures to further enhance our cybersecurity protections and minimize the impact of any future attack. Cyber threats are constantly evolving and will require us to continually assess and improve our protections; however, there can be no guarantee that a future cyber event will not occur.
Failure to comply with data privacy and protection laws and regulations could subject us to legal liability and adversely affect our reputation and our financial performance.
Our businesses use, process and store proprietary information and personal, sensitive or confidential data relating to our business, clients, and employees. Privacy laws and similar regulations in many jurisdictions where we do business require that we take significant steps to safeguard that information, and these laws and regulations continue to evolve. The scope of the laws that may be applicable to us is often uncertain and may be conflicting. In addition, new laws may add a broad array of requirements on how we handle or use information and increase our compliance obligations. For example, the European Union greatly increased the jurisdictional reach of European Law by enacting the General Data Protection Regulation (GDPR), which, among other things, enhanced an individual’s rights with respect to their information and ongoing litigation in the European Union continues to create uncertainty in how to demonstrate compliance. In the United States, several states have enacted different laws regarding personal information, including recent changes to privacy laws in California, that impose significant new requirements. Other countries or states may enact laws or regulations in the future that have similar or additional requirements. Although we continually monitor and assess the impact of these laws and regulations, their interpretation and enforcement are uncertain, subject to change and may require substantial costs to monitor and implement. Failure to comply with data privacy and protection laws and regulations could also result in government enforcement actions (which could include substantial civil and/or criminal penalties), private litigation, and adversely affect our reputation and the results of our operations.
If we or our suppliers encounter unforeseen interruptions or difficulties in the operation of our cloud-based applications, our business could be disrupted, our reputation and relationships may be harmed and our financial performance could be adversely affected.
Our business relies upon the continuous and uninterrupted performance of our and our suppliers' cloud-based applications and systems to support numerous business processes, to service our clients and to support their transactions with their customers and postal services. Our applications and systems, and those of our partners, may be subject to interruptions due to technological errors, system capacity constraints, software errors or defects, human errors, computer or communications failures, power loss, adverse acts of nature and other unexpected events. We have business continuity and disaster recovery plans in place to protect our business operations in case of such events and we also require our suppliers to have the same. Nonetheless, there can be no guarantee that these plans will function as designed. If we are unable to limit interruptions or successfully correct them in a timely manner or at all, it could result in lost revenue, loss of critical data, significant expenditures of capital, a delay or loss in market acceptance of our services and damage to our reputation, brand and relationships, any of which could have an adverse effect on our business and our financial performance.
Macroeconomic and General Regulatory Risks
Future credit rating downgrades or capital market disruptions could adversely affect our ability to maintain adequate liquidity to provide competitive financing services to our clients and to fund various discretionary priorities.
We provide competitive finance offerings to our clients and fund discretionary priorities, such as business investments, strategic acquisitions, dividend payments and share repurchases through a combination of cash generated from operations, deposits held at the Bank and access to capital markets. Our ability to access U.S. capital markets and the associated cost of borrowing is dependent upon our credit ratings and is subject to capital market volatility. Given our current credit rating, we may experience reduced financial or strategic flexibility and higher costs when we do access the U.S. capital markets. We maintain a $500 million revolving credit facility that requires we maintain certain financial and nonfinancial covenants.
A significant decline in cash flows, noncompliance with any of the covenants under the revolving credit facility, further credit rating downgrades, material capital market disruptions, significant withdrawals by depositors at the Bank, adverse changes to our industrial loan charter or an increase in our credit default swap spread could impact our ability to maintain adequate liquidity to provide competitive finance offerings to our clients, refinance maturing debt and fund other financing activities, which in turn, could adversely affect our financial performance.
Our Global Ecommerce segment is exposed to increased foreign exchange rate fluctuations.
The sales generated from many of our clients’ internationally focused websites running on our cross-border platform are exposed to foreign exchange rate fluctuations. Currently, our platforms are located in the U.S. and the U.K. and a majority of consumers making purchases through these platforms are in a limited number of foreign countries. A strengthening of the U.S. Dollar or British Pound relative to currencies in the countries where we do the most business impacts our ability to compete internationally as the cost of similar international products improves relative to the cost of U.S. and U.K. retailers' products. A strong U.S. Dollar or British Pound would likely result in a decrease in international sales volumes, which would adversely affect the segment's revenue and profitability.
Our operations and financial performance may be negatively affected by changes in trade policies, tariffs and regulations.
Our Global Ecommerce segment is subject to significant trade regulations, taxes, and duties throughout the world. Any changes to these regulations could potentially impose increased documentation and delivery requirements, increase costs, delay delivery times, subject us to additional liabilities, and could adversely affect our financial performance. Over the past three years, the United States increased tariffs for certain goods while also raising the possibility of additional tariffs. These actions triggered other nations to also increase tariffs on certain of their goods. For our Global Ecommerce segment, tariff increases, or even the political environment surrounding trade issues, could reduce demand and adversely affect our financial performance. For our SendTech Solutions segment, the increased tariffs resulted in additional costs on certain components used in some of our products. Although we have been taking actions to mitigate these costs by changing where we source certain parts, these added costs and the potential for further tariffs could affect demand for our products or the amount of profitability in some of our products and adversely affect our financial performance.
Our operational costs could increase from changes in environmental regulations, or we could be subject to significant liabilities.
We are subject to various federal, state, local and foreign environmental protection laws and regulations around the world, including without limitation, those related to the manufacture, distribution, use, packaging, labeling, recycling or disposal of our products or the products of our clients for whom we perform services. Environmental rules concerning products and packaging can have a significant impact on the cost of operations or affect our ability to do business in certain countries. We are also subject to laws concerning use, discharge or disposal of materials. These laws are complex, change frequently and have tended to become more stringent over time. Additionally, the change in the Presidential administration may increase the uncertainty with regard to potential changes in these laws and regulations and the enforcement of any new legislation or directives by government authorities. If we are found to have violated these laws, we could be fined, criminally charged, otherwise sanctioned by regulators, or we could be subject to liability and clean-up costs. These risks can apply to both current and legacy operations and sites. From time to time, we may be involved in litigation over these issues. The amount and timing of costs under environmental laws are difficult to predict and there can be no assurance that these costs will not have an adverse effect on our financial performance.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We lease numerous facilities worldwide, including our corporate headquarters located in Stamford, Connecticut, sales offices, service locations, data centers and call centers.
Our Global Ecommerce segment leases four fulfillment centers that comprise the majority of our fulfillment operations. Our Global Ecommerce and Presort Services segments conduct parcel operations and mail sortation operations through a network of over 50 operating centers throughout the United States. Our SendTech Solutions segment leases a manufacturing and distribution facility in Indianapolis. This facility is significant as it stores a majority of the SendTech Solutions products, supplies and inventories.
Should any facility be unable to function as intended for an extended period of time, our ability to service our clients and operating results could be impacted.
We conduct most of our research and development activities in facilities located in Noida and Pune, India and Shelton, Connecticut. Management believes that our facilities are in good operating condition, materially utilized and adequate for our current business needs.
ITEM 3. LEGAL PROCEEDINGS
See Note 16 Commitments and Contingencies for additional information.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is principally traded on the New York Stock Exchange (NYSE) under the symbol "PBI". At January 31, 2021, we had 13,436 common stockholders of record.
Share Repurchases
We periodically repurchase shares of our common stock to manage the dilution created by shares issued under employee stock plans and for other purposes. During 2020, we did not repurchase any additional shares of our common stock and in 2019, we repurchased 18.6 million shares of our common stock at an aggregate price of $105 million. At December 31, 2020, we have authorization to repurchase up to of $16 million of our common stock.
Stock Performance Graph
Our peer group is comprised of: ACCO Brands Corporation, Alliance Data Systems Corporation, Deluxe Corporation, Diebold Nixdorf, Incorporated, Echo Global Logistics, Inc., Fidelity National Information Services, Inc., Fiserv, Inc., Hub Group, Inc., NCR Corporation, R.R. Donnelley & Sons Company, Rockwell Automation, Inc., Stamps.com Inc., The Western Union Company and Xerox Holdings Corporation.
The accompanying graph shows the annual change in the value of a $100 investment in Pitney Bowes Inc., the Standard and Poor's (S&P) 500 Composite Index, the S&P SmallCap 600 Composite Index and our peer group over a five-year period assuming the reinvestment of dividends. On a total return basis, a $100 investment on December 31, 2015 in Pitney Bowes Inc., the S&P 500 Composite Index, the S&P SmallCap 600 Composite Index and our peer group would have been worth $39, $203, $179 and $175, respectively, on December 31, 2020.
All information is based upon data independently provided to us by Standard & Poor's Corporation and is derived from their official total return calculation. Total return for the S&P 500 and S&P SmallCap 600 Composite Indexes and our peer group is based on market capitalization, weighted for each year. The stock price performance is not necessarily indicative of future stock price performance.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the more detailed consolidated financial statements and related notes included in this Annual Report. Effective January 1, 2020, we adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses using the modified retrospective transition approach with a cumulative effect adjustment at the date of initial application. Accordingly, periods prior to January 1, 2020, have not been restated for this standard and are presented under the prior guidance. Effective January 1, 2019, we adopted Accounting Standards Codification (ASC) 842, Leases (ASC 842) using the modified retrospective transition approach of applying the standard at the beginning of the earliest comparative period presented in the financial statements and recorded a cumulative effect adjustment at the date of initial application. Accordingly, periods prior to January 1, 2017, have not been restated for this standard and are presented under the prior guidance. Effective January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers on a modified retrospective basis with a cumulative effect adjustment at the date of initial application. Accordingly, periods prior to January 1, 2018, have not been restated for this standard and are presented under the prior guidance. Discontinued operations includes our Software Solutions and Production Mail businesses.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Total revenue | $ | 3,554,075 | | | $ | 3,205,125 | | | $ | 3,211,522 | | | $ | 2,784,007 | | | $ | 2,656,172 | |
| | | | | | | | | |
Amounts attributable to common stockholders: | | | | | | | | | |
(Loss) income from continuing operations | $ | (191,659) | | | $ | 40,149 | | | $ | 181,705 | | | $ | 180,039 | | | $ | 210,861 | |
Income (loss) from discontinued operations | 10,115 | | | 154,460 | | | 60,106 | | | 63,489 | | | (118,056) | |
Net (loss) income | $ | (181,544) | | | $ | 194,609 | | | $ | 241,811 | | | $ | 243,528 | | | $ | 92,805 | |
| | | | | | | | | |
Basic (loss) earnings per share attributable to common stockholders (1): | | | | | | |
Continuing operations | $ | (1.12) | | | $ | 0.23 | | | $ | 0.97 | | | $ | 0.97 | | | $ | 1.12 | |
Discontinued operations | 0.06 | | | 0.88 | | | 0.32 | | | 0.34 | | | (0.63) | |
Net (loss) income | $ | (1.06) | | | $ | 1.10 | | | $ | 1.29 | | | $ | 1.31 | | | $ | 0.49 | |
| | | | | | | | | |
Diluted (loss) earnings per share attributable to common stockholders (1): | | | | | | |
Continuing operations | $ | (1.12) | | | $ | 0.23 | | | $ | 0.96 | | | $ | 0.96 | | | $ | 1.12 | |
Discontinued operations | 0.06 | | | 0.87 | | | 0.32 | | | 0.34 | | | (0.62) | |
Net (loss) income | $ | (1.06) | | | $ | 1.10 | | | $ | 1.28 | | | $ | 1.30 | | | $ | 0.49 | |
| | | | | | | | | |
Cash dividends paid per share of common stock | $ | 0.20 | | | $ | 0.20 | | | $ | 0.75 | | | $ | 0.75 | | | $ | 0.75 | |
| | | | | | | | | |
Balance sheet data: | | | | | | | | | |
| December 31, |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Total assets | $ | 5,220,137 | | | $ | 5,466,900 | | | $ | 5,938,419 | | | $ | 6,634,606 | | | $ | 5,837,133 | |
Long-term debt | $ | 2,348,361 | | | $ | 2,719,614 | | | $ | 3,066,073 | | | $ | 3,559,278 | | | $ | 2,750,405 | |
Total debt | $ | 2,564,393 | | | $ | 2,739,722 | | | $ | 3,265,608 | | | $ | 3,830,335 | | | $ | 3,364,890 | |
| | | | | | | | | |
(1) The sum of earnings per share may not equal the totals due to rounding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of our financial condition and operating results should be read in conjunction with our risk factors, consolidated financial statements and related notes. This discussion includes forward-looking statements based on management's current expectations, estimates and projections and involves risks and uncertainties. Actual results may differ significantly from those currently expressed. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is outlined under "Forward-Looking Statements" and "Item 1A. Risk Factors" in this Form 10-K. All table amounts are presented in thousands of dollars.
Throughout this 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 a better understanding of the underlying revenue performance. Constant currency change is calculated by converting the current period non-U.S. dollar denominated revenue using the prior year’s exchange rate. Where constant currency measures are not provided, the actual change and constant currency change are the same.
Management measures segment profitability and performance using segment earnings before interest and taxes (EBIT). Segment EBIT is calculated by deducting from segment revenue the related costs and expenses attributable to the segment. Segment EBIT excludes interest, taxes, general corporate expenses, restructuring charges, asset impairment charges, goodwill impairment charges and other items not allocated to a 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.
Overview
Financial Results Summary - Twelve Months Ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| Revenue |
| Years Ended December 31, |
| 2020 | | 2019 | | Actual % change | | Constant Currency % Change |
Business services | $ | 2,191,306 | | | $ | 1,710,801 | | | 28 | % | | 28 | % |
Support services | 473,292 | | | 506,187 | | | (6) | % | | (7) | % |
Financing | 341,034 | | | 368,090 | | | (7) | % | | (7) | % |
Equipment sales | 314,882 | | | 352,104 | | | (11) | % | | (11) | % |
Supplies | 159,282 | | | 187,287 | | | (15) | % | | (15) | % |
Rentals | 74,279 | | | 80,656 | | | (8) | % | | (8) | % |
Total revenue | $ | 3,554,075 | | | $ | 3,205,125 | | | 11 | % | | 11 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Revenue |
| Years Ended December 31, |
| 2020 | | 2019 | | Actual % change | | Constant currency % change |
Global Ecommerce | $ | 1,618,897 | | | $ | 1,151,510 | | | 41 | % | | 41 | % |
Presort Services | 521,212 | | | 529,588 | | | (2) | % | | (2) | % |
Commerce Services | 2,140,109 | | | 1,681,098 | | | 27 | % | | 27 | % |
SendTech Solutions | 1,413,966 | | | 1,524,027 | | | (7) | % | | (7) | % |
Total | $ | 3,554,075 | | | $ | 3,205,125 | | | 11 | % | | 11 | % |
| | | | | | | | | | | | | | | | | |
| EBIT |
| Years Ended December 31, |
| 2020 | | 2019 | | % change |
Global Ecommerce | $ | (82,894) | | | $ | (70,146) | | | (18) | % |
Presort Services | 55,799 | | | 70,693 | | | (21) | % |
Commerce Services | (27,095) | | | 547 | | | >(100%) |
SendTech Solutions | 441,085 | | | 490,322 | | | (10) | % |
Total Segment EBIT | $ | 413,990 | | | $ | 490,869 | | | (16) | % |
Revenue increased 11% in 2020 compared to 2019, driven by a 28% increase in business services revenue, primarily due to significantly higher volumes in our Global Ecommerce segment. This growth more than offset declines in all other revenue line items driven in part from the continuing impacts of COVID-19. Within our business segments, Global Ecommerce revenue grew 41% due to increased domestic parcel delivery and cross-border volumes, Presort Services revenue declined 2% due to lower First Class Mail and Marketing Mail volumes and SendTech Solutions revenue declined 7%, primarily due to lower equipment sales and supplies revenue. Global Ecommerce EBIT decreased 18% and Presort Services EBIT decreased 21% from the prior year primarily driven by higher labor and transportation costs caused by increased demand and competition for these resources and increased costs and reduced productivity due to COVID-19. SendTech Solutions EBIT declined 10% primarily due to lower revenue and higher credit loss provisions. Prior year segment EBIT was adversely impacted by $19 million related to a ransomware attack and current year segment EBIT includes $13 million of insurance proceeds related to this attack. Refer to Results of Operations section for further information.
Impacts of COVID-19
The global spread of COVID-19 and the efforts to contain it are adversely affecting global economies, impacting demand for a broad variety of goods and services and creating disruptions and shortages in supply chains. We implemented measures in our facilities to protect the health and safety of our employees and contractors, including staggering shifts and breaks to enhance social distancing, providing personal protection equipment, conducting temperature checks and sanitizing equipment and facilities multiple times a day. Employees that have the ability to work remotely are doing so and corporate and local management continue to assess conditions to determine when, and how, these employees should return to their office locations.
COVID-19 has impacted our financial results in different ways in each of our businesses. Global Ecommerce has seen a significant increase in volumes due to the demand for ecommerce solutions in the current environment. However, this increase in volumes has resulted in higher postal costs driven by capacity constraints and higher labor and transportation costs as many companies are competing for these resources. At the start of the pandemic, Presort Services experienced a significant decline in both First Class and Marketing Mail. However, while volumes for the full year 2020 were down from the prior year, we did see quarter over quarter improvement throughout the year. Presort Services was also impacted by higher labor costs. As a result of the health and safety measures implemented in all our Commerce Services facilities, we also incurred additional costs and reduced productivity.
In SendTech Solutions, the global shut-down of businesses and increase in the number of clients working remotely at the onset of COVID-19 had a significantly adverse impact on demand for and usage of our mailing equipment and supplies, and our ability to perform on-site service and installations. We saw improving trends in equipment sales and supplies revenues quarter over quarter throughout 2020. As businesses continue to operate remotely, we are also seeing improvement in our cloud-enabled shipping and mailing solutions.
Outlook
We continue to position ourselves for long-term success as a global technology company focused on shipping, mailing and related financial services. We are investing in market opportunities and new solutions and services across all our businesses, optimizing our operations and implementing cost savings initiatives to drive long-term value. Our portfolio is shifting to higher growth markets and we expect margins to improve as we build scale and realize the full benefits of our investments and optimizations.
Within Global Ecommerce, we expect the accelerated market growth of ecommerce brought on by COVID-19 to continue and anticipate revenue growth in 2021. We expect margin and profit improvements in 2021 from pricing initiatives and operational improvements within our facilities and network designed to drive efficiencies and increased productivity. Within Presort Services, we expect the improving volume trends in the second half of 2020 to continue throughout 2021 through organic volume growth and acquisitions. Margins are expected to improve in 2021 from productivity initiatives, increased automation and facilities consolidation and optimization. Within SendTech Solutions, we expect recurring revenue streams to continue to decline, but growth in our cloud-
enabled shipping solutions and sales of our multi-purpose devices to partially offset these declines. On a consolidated basis, we expect modest revenue growth in 2021 compared to 2020.
The COVID-19 pandemic is expected to continue to 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, its effect on the global economy, and the efficacy and availability of a vaccine, the ultimate impact of the pandemic on our business, operations and financial performance remains uncertain. Accordingly, there are many factors not within our control that could affect the pandemic's ultimate impact on our business and current outlook for 2021. However, we believe we are well positioned to manage through the current conditions and will continue to take proactive steps to manage our cash flows and liquidity.
RESULTS OF OPERATIONS
REVENUE AND SEGMENT EBIT
Global Ecommerce
Global Ecommerce includes the revenue and related expenses from domestic parcel services, cross-border solutions and digital delivery services.
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| Revenue | | Cost of Revenue | | Gross Margin |
| Years Ended December 31, | | Years Ended December 31, | | Years Ended December 31, |
| 2020 | | 2019 | | Actual % change | | Constant Currency % change | | 2020 | | 2019 | | 2020 | | 2019 |
Business services | $ | 1,618,897 | | | $ | 1,151,510 | | | 41 | % | | 41 | % | | $ | 1,480,612 | | | $ | 988,747 | | | 8.5 | % | | 14.1 | % |
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| Segment EBIT | | | | | | | | | | |
| Years Ended December 31, | | | | | | | | | | |
| 2020 | | 2019 | | Actual % change | | | | | | | | | | |
Segment EBIT | $ | (82,894) | | | $ | (70,146) | | | (18) | % | | | | | | | | | | |
Global Ecommerce revenue increased 41% in 2020 due to significantly higher volumes primarily attributable to a market shift to ecommerce solutions brought on by COVID-19. Domestic parcel delivery volumes contributed revenue growth of 36% and increased cross-border volumes contributed revenue growth of 5%.
Gross margin decreased to 8.5% from 14.1% in the prior year due primarily to increased postal, transportation and labor costs resulting from capacity restraints and increased competition for transportation and labor resources due to the accelerated and sudden market growth in ecommerce solutions, investments to support this growth and incremental COVID-19 related costs.
Segment EBIT in 2020 was a loss of $83 million compared to a loss of $70 million in 2019 primarily due to the decline in gross margin, which reduced EBIT by $30 million, partially offset by lower operating expenses of $5 million. Prior year segment EBIT was adversely impacted by $6 million as a result of a ransomware attack and current year segment EBIT benefited from $6 million in net insurance proceeds received related to this attack.
Presort Services
Presort Services includes revenue increased 3%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 |
| Years Ended December 31, | | Years Ended December 31, | | Years Ended December 31, |
| 2020 | | 2019 | | Actual % change | | Constant Currency % change | | 2020 | | 2019 | | 2020 | | 2019 |
Business services | $ | 521,212 | | | $ | 529,588 | | | (2) | % | | (2) | % | | $ | 402,599 | | | $ | 392,716 | | | 22.8 | % | | 25.8 | % |
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| Segment EBIT | | | | | | | | | | |
| Years Ended December 31, | | | | | | | | | | |
| 2020 | | 2019 | | Actual % change | | | | | | | | | | |
Segment EBIT | $ | 55,799 | | | $ | 70,693 | | | (21) | % | | | | | | | | | | |
Presort Services revenue decreased 2% in 20192020 compared to 2018,2019 due to lower volumes of First Class Mail and Marketing Mail, driven primarily by COVID-19. Incremental volumes from acquisitions as well asduring the year contributed revenue growth in existing clients' volumes. EBIT decreased 4%, or $3 million, in 2019 comparedof 3%.
Gross margin declined to the prior year primarily22.8% from 25.8% due to investments of $10 million to improve profitability and higher bad debt expense of $2 million, partially offset by lower labor costs of $13 million resulting from productivity actions. We also estimate thatand incremental costs associated with COVID-19. Segment EBIT declined 21% in 2020. Prior year segment EBIT was adversely impacted by $4 million as a result of thea ransomware attack and current year segment EBIT benefited from $4 million of insurance proceeds received related to this attack.
Presort Services revenue increased 4% in 2018 compared to 2017 primarily due to higher volumes of First Class, Standard Class and Bound and Packet Mail processed. EBIT decreased 24% in 2018 compared to 2017 primarily due to higher labor and transportation costs of $34 million due to increased competition for labor and transportation resources and $8 million from the launch of a marketing mail pilot program.
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 |
| Years Ended December 31, | | Years Ended December 31, | | Years Ended December 31, |
| 2020 | | 2019 | | Actual % change | | Constant Currency % change | | 2020 | | 2019 | | 2020 | | 2019 |
Business services | $ | 51,197 | | | $ | 29,703 | | | 72 | % | | 75 | % | | $ | 20,694 | | | $ | 7,289 | | | 59.6 | % | | 75.5 | % |
Support services | 473,292 | | | 506,187 | | | (6) | % | | (7) | % | | 148,293 | | | 161,648 | | | 68.7 | % | | 68.1 | % |
Financing | 341,034 | | | 368,090 | | | (7) | % | | (7) | % | | 48,162 | | | 44,648 | | | 85.9 | % | | 87.9 | % |
Equipment sales | 314,882 | | | 352,104 | | | (11) | % | | (11) | % | | 236,550 | | | 243,393 | | | 24.9 | % | | 30.9 | % |
Supplies | 159,282 | | | 187,287 | | | (15) | % | | (15) | % | | 41,679 | | | 49,882 | | | 73.8 | % | | 73.4 | % |
Rentals | 74,279 | | | 80,656 | | | (8) | % | | (8) | % | | 25,600 | | | 31,530 | | | 65.5 | % | | 60.9 | % |
Total revenue | $ | 1,413,966 | | | $ | 1,524,027 | | | (7) | % | | (7) | % | | $ | 520,978 | | | $ | 538,390 | | | 63.2 | % | | 64.7 | % |
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| Segment EBIT | | | | | | | | | | |
| Years Ended December 31, | | | | | | | | | | |
| 2020 | | 2019 | | Actual % change | | | | | | | | | | |
Segment EBIT | $ | 441,085 | | | $ | 490,322 | | | (10) | % | | | | | | | | | | |
SendTech Solutions revenue decreased 9%7% in 2020 compared to 2019. Supplies and equipment sales decreased 15% and 11%, respectively, as reportedthe effects of COVID-19 hindered our ability to perform on-site sales calls and installations and reduced usage and demand for supplies. Rentals and support services revenue decreased 8% and 7% at constant currency, in 2019 compared to 2018,respectively, primarily due to:
2%driven by a declining meter population and reduced service calls from Market Exits;
2%COVID-19. Financing revenue decreased 7%, primarily driven by a declining lease portfolio and was partially offset by $10 million of gains from lower equipment salesthe sale of investment securities. Business services revenue increased $21 million, or 75% at constant currency, primarily due to lower salesan increased use of our shipping products.
Gross margin in mailing finishing products and a longer installation period2020 was 63.2% compared to 64.7% in 2019. The slight decrease in gross margin was primarily due to a higherthe decline in revenue as well as the mix of solutions sold withequipment sales due in part to delays in scheduling and performing on-site installations of our equipment relativehigher end products.
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 prior year;average outstanding finance receivables.
2% from lower support services and 1% from lower supplies due to a declining meter population; and
1% from lower financing fees.
Segment EBIT decreased 12%10% in 20192020 compared to 2018,2019, primarily due to the decline in revenue and gross profit margins. The decline in margins was primarilyhigher credit loss provision of $10 million due to a chargethe current economic recessionary conditions and outlook caused by COVID-19, partially offset by lower expenses of $47 million from cost savings initiatives, including lower professional fees of $14 million, lower marketing expenses of $11 million, lower research and development costs of $9 million related to a SendPro C tablet replacement program and higher costslower travel expenses of $8 million from trade tariffs. We also estimate that$4 million. Prior year segment EBIT was adversely impacted by $8 million as a result of thea ransomware attack and current year segment EBIT benefited from $3 million of insurance proceeds received related to this attack.
UNALLOCATED CORPORATE EXPENSES
The EBIT decreasemajority of our SG&A expense is recorded directly or allocated to our reportable segments. Those 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.
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| Years Ended December 31, |
| 2020 | | 2019 | | Actual % change |
Unallocated corporate expenses | $ | 200,406 | | | $ | 211,529 | | | (5) | % |
The decline in unallocated corporate expenses of $11 million in 2020 compared to 2019 was primarily driven by lower employee-related expenses of $15 million, lower professional fees of $6 million and insurance proceeds of $4 million received in connection with a ransomware attack partially offset by lower operatingan increase in marketing expenses of $55$8 million.
CONSOLIDATED EXPENSES
Selling, general and administrative (SG&A)
SG&A expense of $963 million from cost savings initiatives.
SendTech Solutions revenuein 2020 decreased 4% in 2018, or $41 million, compared to 2017 primarily due to:
2% from a decline in support services revenue related to a worldwide decline in our meter population;
1% from lower supplies; and
1% from lower financing revenue.
EBIT increased 1%2019, primarily due to lower professional and consulting fees of $19 million, lower employee-related expenses from cost savings initiatives,of $12 million and lower travel related expenses of $11 million partially offset by higher credit loss provision of $14 million.
Research and development (R&D)
R&D expense decreased 25%, or $13 million in 2020 compared to 2019, primarily due to lower project spending and cost savings initiatives.
Restructuring charges and asset impairments
Restructuring charges and asset impairments for the declineyear ended December 31, 2020 was $21 million. See Note 12 to the 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 revenue.the first quarter of 2020. See Note 9 to the Consolidated Financial Statements for further information.
Other components of net pension and postretirement (income) cost
Other components of net pension and postretirement income for the year ended December 31, 2020 was $2 million. The amount of other components of net pension and postretirement (income) cost recognized each year will vary based on actuarial assumptions and actual results of our pension plans. See Note 14 to the Consolidated Financial Statements for further information.
Other expense, net
Other expense for the year ended December 31, 2020 includes a $37 million loss on the early extinguishment of debt, partially offset by $17 million of insurance proceeds and a $12 million gain on the sale of an equity investment.