UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0 - Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission File Number: 1-3579
PITNEY BOWES INC.
State of Incorporation IRS Employer Identification No.
Delaware 06-0495050
World Headquarters
Stamford, Connecticut 06926-0700
Telephone Number: (203) 356-5000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes X No
--- ---
Number of shares of common stock, $1 par value, outstanding as of October 31,
2003 is 233,595,539.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 2
Pitney Bowes Inc.
Index
-----------------
Page Number
-----------
Part I - Financial Information:
Item 1: Financial Statements
Consolidated Statements of Income (Unaudited) - Three and
Nine Months Ended September 30, 2003 and 2002............... 3
Consolidated Balance Sheets - September 30, 2003 (Unaudited)
and December 31, 2002....................................... 4
Consolidated Statements of Cash Flows (Unaudited) - Nine
Months Ended September 30, 2003 and 2002.................... 5
Notes to Consolidated Financial Statements....................... 6 - 14
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 15 - 26
Item 3: Quantitative and Qualitative Disclosures about
Market Risk............................................ 26
Item 4: Controls and Procedures.................................... 26
Part II - Other Information:
Item 1: Legal Proceedings.......................................... 26 - 27
Item 6: Exhibits and Reports on Form 8-K........................... 27
Signatures............................................................. 28
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 3
Part I - Financial Information
Pitney Bowes Inc.
Item 1. Financial Statements Consolidated Statements of Income
(Unaudited)
---------------------------------
(Dollars in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Revenue from:
Sales..................................... $ 322,123 $ 332,298 $ 940,777 $ 966,566
Rentals................................... 214,720 208,182 640,424 615,839
Core financing............................ 134,611 134,271 404,903 395,236
Non-core financing........................ 30,557 31,930 86,962 102,926
Business services......................... 275,809 260,183 827,729 735,802
Support services.......................... 159,329 147,207 461,041 428,535
------------- ------------- ------------- -------------
Total revenue......................... 1,137,149 1,114,071 3,361,836 3,244,904
------------- ------------- ------------- -------------
Costs and expenses:
Cost of sales............................. 143,792 146,651 431,268 439,018
Cost of rentals........................... 42,595 43,294 127,995 129,547
Cost of core financing.................... 34,943 37,510 106,940 110,152
Cost of non-core financing................ 11,869 10,278 32,109 32,055
Cost of business services................. 227,821 210,102 680,143 591,659
Cost of support services.................. 82,701 77,163 241,863 221,992
Selling, general and administrative....... 302,420 300,173 899,693 873,942
Research and development.................. 35,004 33,925 109,763 104,089
Restructuring charges (Note 9)............ 43,109 - 96,465 -
Interest, net............................. 41,101 41,190 124,560 131,815
------------- ------------- ------------- -------------
Total costs and expenses.............. 965,355 900,286 2,850,799 2,634,269
------------- ------------- ------------- -------------
Income before income taxes..................... 171,794 213,785 511,037 610,635
Provision for income taxes..................... 53,340 66,899 159,784 191,129
------------- ------------- ------------- -------------
Net income..................................... $ 118,454 $ 146,886 $ 351,253 $ 419,506
============= ============= ============= =============
Basic earnings per share....................... $ .51 $ .62 $ 1.50 $ 1.75
============= ============= ============= =============
Diluted earnings per share..................... $ .50 $ .61 $ 1.49 $ 1.73
============= ============= ============= =============
Dividends declared per share of common stock... $ .30 $ .295 $ .90 $ .885
============= ============= ============= =============
Ratio of earnings to fixed charges............. 4.19 4.69 4.11 4.40
============= ============= ============= =============
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 4
Pitney Bowes Inc.
Consolidated Balance Sheets
---------------------------
September 30, December 31,
(Dollars in thousands, except share data) 2003 2002
----------------- ----------------
(Unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents............................................. $ 285,254 $ 315,156
Short-term investments, at cost which
approximates market............................................... 5,677 3,491
Accounts receivable, less allowances:
9/03, $36,791; 12/02, $35,139..................................... 420,100 404,366
Finance receivables, less allowances:
9/03, $60,897; 12/02, $71,373..................................... 1,357,041 1,446,460
Inventories (Note 3).................................................. 228,513 210,888
Other current assets and prepayments.................................. 194,043 172,264
----------------- ----------------
Total current assets.............................................. 2,490,628 2,552,625
Property, plant and equipment, net (Note 4)................................ 631,320 622,244
Rental equipment and related inventories, net (Note 4)..................... 419,008 422,717
Property leased under capital leases, net (Note 4)......................... 2,191 1,974
Long-term finance receivables, less allowances:
9/03, $80,202; 12/02, $82,635......................................... 1,608,752 1,686,168
Investment in leveraged leases............................................. 1,499,123 1,559,915
Goodwill (Note 11)......................................................... 899,023 827,241
Other assets............................................................... 1,101,664 1,059,430
----------------- ----------------
Total assets............................................................... $ 8,651,709 $ 8,732,314
================= ================
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities.............................. $ 1,338,237 $ 1,248,337
Income taxes payable.................................................. 195,428 98,897
Notes payable and current portion of
long-term obligations............................................. 565,124 1,647,338
Advance billings...................................................... 369,504 355,737
----------------- ----------------
Total current liabilities......................................... 2,468,293 3,350,309
Deferred taxes on income................................................... 1,569,744 1,535,618
Long-term debt (Note 5).................................................... 3,004,287 2,316,844
Other noncurrent liabilities............................................... 342,081 366,216
----------------- ----------------
Total liabilities................................................. 7,384,405 7,568,987
----------------- ----------------
Preferred stockholders' equity in a subsidiary company..................... 310,000 310,000
Stockholders' equity:
Cumulative preferred stock, $50 par
value, 4% convertible............................................. 19 24
Cumulative preference stock, no par
value, $2.12 convertible.......................................... 1,344 1,432
Common stock, $1 par value............................................ 323,338 323,338
Capital in excess of par value........................................ - -
Retained earnings..................................................... 3,977,074 3,848,562
Accumulated other comprehensive income (Note 8)....................... (57,737) (121,615)
Treasury stock, at cost............................................... (3,286,734) (3,198,414)
----------------- ----------------
Total stockholders' equity........................................ 957,304 853,327
----------------- ----------------
Total liabilities and stockholders' equity................................. $ 8,651,709 $ 8,732,314
================= ================
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 5
Pitney Bowes Inc.
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
(Dollars in thousands)
Nine Months Ended
September 30,
--------------------------------
2003 2002
------------- -------------
Cash flows from operating activities:
Net income...................................................... $ 351,253 $ 419,506
Restructuring charges, net...................................... 61,738 -
Restructuring and other special payments........................ (41,754) (49,429)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization.......................... 212,883 195,937
Increase in deferred taxes on income................... 60,749 77,445
Change in assets and liabilities, net
of effects of acquisitions:
Accounts receivable................................ (4,085) (7,931)
Net investment in internal finance receivables..... (1,105) (62,522)
Inventories........................................ (7,838) (24,229)
Other current assets and prepayments............... (11,366) (12,799)
Accounts payable and accrued liabilities........... (26,428) (21,286)
Income taxes payable............................... 89,324 (13,741)
Advance billings................................... 3,311 (2,105)
Other, net......................................... (10,839) 2,984
------------- -------------
Net cash provided by operating activities.......... 675,843 501,830
------------- -------------
Cash flows from investing activities:
Short-term investments.......................................... (1,781) (8,055)
Net investment in fixed assets.................................. (214,138) (154,771)
Net investment in finance receivables........................... (2,904) (7,931)
Net investment in capital services.............................. 211,359 14,458
Investment in leveraged leases.................................. 78,800 (97,648)
Acquisitions, net of cash acquired.............................. - (127,039)
Reserve account deposits........................................ 32,139 30,547
Other investing activities...................................... (70,713) (10,516)
------------- -------------
Net cash provided by (used in)
investing activities............................ 32,762 (360,955)
------------- -------------
Cash flows from financing activities:
Decrease in notes payable, net.................................. (598,651) (84,226)
Proceeds from long-term obligations............................. 1,025,985 613,150
Principal payments on long-term obligations..................... (860,016) (207,052)
Proceeds from issuance of stock................................. 39,836 33,521
Stock repurchases............................................... (140,016) (250,085)
Dividends paid.................................................. (210,974) (212,424)
------------- -------------
Net cash used in financing activities.............. (743,836) (107,116)
------------- -------------
Effect of exchange rate changes on cash.............................. 5,329 3,140
------------- -------------
(Decrease) increase in cash and cash equivalents..................... (29,902) 36,899
Cash and cash equivalents at beginning of period..................... 315,156 231,588
------------- -------------
Cash and cash equivalents at end of period........................... $ 285,254 $ 268,487
============= =============
Interest paid........................................................ $ 144,634 $ 146,264
============= =============
Income taxes paid, net............................................... $ 39,910 $ 107,529
============= =============
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 6
Pitney Bowes Inc.
Notes to Consolidated Financial Statements
------------------------------------------
Note 1:
- ------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting principles
(GAAP) for complete financial statements. In the opinion of the management of
Pitney Bowes Inc. (the company), all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of the
company at September 30, 2003 and December 31, 2002, the results of its
operations for the three and nine months ended September 30, 2003 and 2002 and
its cash flows for the nine months ended September 30, 2003 and 2002 have been
included. Operating results for the three and nine months ended September 30,
2003 are not necessarily indicative of the results that may be expected for any
other interim period or the year ending December 31, 2003. These statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in the company's 2002 Annual Report to Stockholders
on Form 10-K. Certain prior year amounts in the consolidated financial
statements have been reclassified to conform with the current year presentation.
Note 2:
- ------
In 2001, Statement of Financial Accounting Standards (FAS) No. 141, "Business
Combinations" and FAS No. 142, "Goodwill and Other Intangible Assets" were
issued requiring business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting, and refining the criteria
for recording intangible assets separate from goodwill. Recorded goodwill and
intangibles have been evaluated against this new criterion and resulted in
certain intangibles being included in goodwill, or alternatively, amounts
initially recorded as goodwill being separately identified and recognized apart
from goodwill. FAS No. 142 requires the use of a nonamortization approach to
account for purchased goodwill and indefinite-lived intangibles. Under a
nonamortization approach, goodwill and indefinite-lived intangibles have not
been amortized into results of operations, but instead will be reviewed for
impairment and charged against results of operations only in the periods in
which the recorded value of goodwill and indefinite-lived intangibles is more
than its fair value. In 2001, the company adopted the provisions of each
statement, which apply to business combinations completed after June 30, 2001.
On January 1, 2002, the company adopted the provisions of each statement, which
apply to goodwill and intangible assets acquired prior to June 30, 2001. The
adoption of these standards reduced the annual amortization of intangible assets
commencing January 1, 2002 by approximately 2 cents per diluted share. Goodwill
is reviewed for impairment on an annual basis or as circumstances warrant.
In 2001, FAS No. 143, "Accounting for Asset Retirement Obligations" was issued,
amending FAS No. 19, "Financial Accounting and Reporting by Oil and Gas
Producing Companies," and applies to all entities. FAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. FAS No. 143 is effective January 1, 2003 for the company. The adoption of
this statement did not impact the company's financial position, results of
operations or cash flows.
In 2001, FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," was issued, replacing FAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and portions of
Accounting Principles Board (APB) Opinion No. 30, "Reporting the Results of
Operations." FAS No. 144 provides a single accounting model for long-lived
assets to be disposed of and changes the criteria that would have to be met to
classify an asset as held-for-sale. FAS No. 144 retains the requirement of APB
Opinion No. 30, to report discontinued operations separately from continuing
operations and extends that reporting to separate components of an entity. FAS
No. 144 is effective January 1, 2002 for the company. The adoption of this
statement on January 1, 2002 did not impact the company's financial position,
results of operations or cash flows.
In 2002, FAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," was issued.
Under FAS No. 145, gains and losses related to the extinguishment of debt should
no longer be segregated on the income statement as extraordinary items. Instead,
such gains and losses should be included as a component of income from
continuing operations. FAS No. 145 is effective January 1, 2003 for the company.
The adoption of this statement did not impact the company's financial position,
results of operations or cash flows.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 7
In 2002, FAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued. This statement nullifies the Financial Accounting
Standards Board's Emerging Issues Task Force (EITF) No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." FAS No. 146
requires that a liability for costs associated with an exit or disposal activity
be recognized when the liability is incurred. The company adopted the provisions
of FAS No. 146, which are effective for one-time benefit arrangements and exit
or disposal activities initiated after December 31, 2002. The company accounts
for ongoing benefit arrangements under FAS No. 112 "Employers' Accounting for
Postemployment Benefits", which requires that a liability be recognized when the
costs are probable and reasonably estimable. See Note 9 to the consolidated
financial statements.
In 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN
No. 45 clarifies the requirements of FAS No. 5, "Accounting for Contingencies,"
relating to a guarantor's accounting for and disclosure of, the issuance of
certain types of guarantees. FIN No. 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair value,
or market value, of the obligations it assumes under the guarantee and must
disclose that information in its interim and annual financial statements. The
provisions related to recognizing a liability at inception of the guarantee for
the fair value of the guarantor's obligations does not apply to product
warranties or to guarantees accounted for as derivatives. The recognition
provisions of FIN No. 45 are effective for the company beginning January 1,
2003. The adoption of this interpretation did not impact the company's financial
position, results of operations or cash flows. See Note 12 to the consolidated
financial statements.
In 2002, FAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," which amends FAS No. 123, "Accounting for Stock-Based
Compensation," was issued. FAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation and requires more prominent and more
frequent disclosures in the financial statements of the effects of stock-based
compensation. FAS No. 148 is effective January 1, 2003 for the company. The
company adopted the disclosure-only provisions of this statement.
The company adopted FAS No. 123, "Accounting for Stock-Based Compensation," on
January 1, 1996. Under FAS No. 123, companies can, but are not required to,
elect to recognize compensation expense for all stock-based awards using a fair
value methodology. The company adopted the disclosure-only provisions, as
permitted by FAS No. 123. The company applies APB Opinion No. 25 and related
interpretations in accounting for its stock-based plans. Accordingly, no
compensation expense has been recognized for its U.S. and U.K. Stock Option
Plans (ESP) or its U.S. and U.K. Employee Stock Purchase Plans (ESPP), except
for the compensation expense recorded for its performance-based awards under the
ESP and the Directors' Stock Plan. If the company had elected to recognize
compensation expense based on the fair value method as prescribed by FAS No.
123, net income and earnings per share for the three and nine months ended
September 30, 2003 and 2002 would have been reduced to the following pro forma
amounts:
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net Income
As reported........................................... $ 118,454 $ 146,886 $ 351,253 $ 419,506
Deduct: Stock-based employee compensation expense
determined under fair value method for all awards,
net of related tax effects......................... (5,317) (5,628) (15,330) (16,499)
----------- ----------- ----------- -----------
Pro forma............................................. $ 113,137 $ 141,258 $ 335,923 $ 403,007
=========== =========== =========== ===========
Basic earnings per share
As reported........................................... $ .51 $ .62 $ 1.50 $ 1.75
Pro forma............................................. $ .49 $ .59 $ 1.43 $ 1.68
Diluted earnings per share
As reported........................................... $ .50 $ .61 $ 1.49 $ 1.73
Pro forma............................................. $ .48 $ .59 $ 1.42 $ 1.66
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 8
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
Three and Nine Months
Ended September 30,
-----------------------------
2003 2002
----------- -----------
Expected dividend yield....................... 3.4% 3.1%
Expected stock price volatility............... 30% 30%
Risk-free interest rate....................... 3% 4%
Expected life (years)......................... 5 5
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." FIN No. 46 requires a variable interest entity to be consolidated by
a company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of FIN No. 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to pre-existing entities in the first
fiscal year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued after January
31, 2003, regardless of when the variable interest entity was established. In
October 2003, the FASB issued FASB Staff Position No. FIN 46-6 (FSP FIN 46-6),
"Effective Date of FASB Interpretation No. 46, Consolidation of Variable
Interest Entities." FSP FIN 46-6 defers the effective date for applying the
provisions of FIN No. 46 until December 31, 2003 for the company. The company
has an equity investment in PBG Capital Partners LLC (PBG) that currently
qualifies as a variable interest entity under FIN No. 46. PBG was formed with
GATX Corporation in 1997 for the purpose of financing and managing certain
leasing related assets. Based on the terms of the partnership agreement, the
company is the primary beneficiary and as a result the company will consolidate
its equity investment in PBG effective December 31, 2003. At September 30, 2003,
PBG's total assets and liabilities were $331 million and $203 million,
respectively. The consolidation of PBG will not have a material impact on the
company's results of operations or cash flows.
In March 2003, the EITF reached a consensus on Issue No. 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables." EITF No. 00-21 addresses
certain aspects of the accounting by a vendor for arrangements under which it
performs multiple revenue generating activities and how to determine whether
such an arrangement involving multiple deliverables contains more than one unit
of accounting for purposes of revenue recognition. EITF No. 00-21 is effective
July 1, 2003 for the company. The transition provision allows either prospective
application or a cumulative effect adjustment upon adoption. The company
believes it is in compliance with the provisions of EITF No. 00-21. The adoption
of these provisions did not impact the company's financial position, results of
operations or cash flows.
In April 2003, FAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued. FAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under FAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The provisions of FAS No. 149 are generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The adoption of this statement did not impact
the company's financial position, results of operations or cash flows.
In May 2003, FAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" was issued. FAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. The
provisions of FAS No. 150 are effective for financial instruments entered into
or modified after May 31, 2003, and are effective July 1, 2003 for the company.
The adoption of this statement did not impact the company's financial position,
results of operations or cash flows.
Note 3:
- ------
Inventories are composed of the following:
(Dollars in thousands) September 30, December 31,
2003 2002
------------- ------------
Raw materials and work in process..................... $ 86,550 $ 80,075
Supplies and service parts............................ 63,034 54,849
Finished products..................................... 78,929 75,964
------------- ------------
Total................................................. $ 228,513 $ 210,888
============= ============
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 9
Note 4:
- ------
Fixed assets are composed of the following:
(Dollars in thousands) September 30, December 31,
2003 2002
------------- ------------
Property, plant and equipment......................... $ 1,560,478 $ 1,426,522
Accumulated depreciation.............................. (929,158) (804,278)
------------- ------------
Property, plant and equipment, net.................... $ 631,320 $ 622,244
============= ============
Rental equipment and related inventories.............. $ 1,098,019 $ 1,095,345
Accumulated depreciation.............................. (679,011) (672,628)
------------- ------------
Rental equipment and related inventories, net......... $ 419,008 $ 422,717
============= ============
Property leased under capital leases.................. $ 14,520 $ 14,513
Accumulated amortization.............................. (12,329) (12,539)
------------- ------------
Property leased under capital leases, net............. $ 2,191 $ 1,974
============= ============
Depreciation expense was $193.1 million and $175.2 million for the nine months
ended September 30, 2003 and 2002, respectively. In connection with the
company's meter transition plan, the company wrote off fully depreciated rental
equipment in the third quarter of 2003.
Note 5:
- ------
In September 2003, the company sold its remaining interest in a lease
transaction that was issued in July 2001 and transferred the obligation on the
remaining non-recourse promissory note with a total principal balance of
approximately $26 million. The transfer of this obligation is reflected as a
reduction of long-term debt in the consolidated balance sheets.
At September 30, 2003, $456 million remained available under the shelf
registration statement filed in October 2001 with the Securities and Exchange
Commission (SEC), permitting issuances of up to $2 billion in debt securities,
preferred stock and depositary shares. In April 2003, as part of this shelf
registration statement, the company established a medium-term note program for
the issuance of up to $1.38 billion in aggregate principal, representing the
remaining amount available on the shelf at that time.
In June 2003, the company issued $375 million of unsecured fixed rate notes
maturing in June 2013. These notes bear interest at an annual rate of 3.875% and
pay interest semi-annually beginning December 2003. The proceeds from these
notes were used for general corporate purposes, including the repayment of
commercial paper and the repurchase of company stock.
In June 2003, the company issued $200 million of unsecured floating rate notes
maturing in June 2005. These notes bear interest at a floating rate of LIBOR
minus 3 basis points, set two business days preceding the quarterly interest
payment dates. The proceeds from these notes were used for general corporate
purposes, including the repayment of commercial paper and the repurchase of
company stock.
In April 2003, the company issued $350 million of unsecured fixed rate notes
maturing in May 2018. These notes bear interest at an annual rate of 4.75% and
pay interest semi-annually beginning November 2003. In connection with this
issuance, the company entered into a $350 million swap maturing in May 2018,
converting this obligation to a floating rate note. The proceeds from these
notes were used for general corporate purposes, including the repayment of
commercial paper and the repurchase of company stock.
In February 2003, the company sold 6.45% Preferred Stock in a subsidiary of
Pitney Bowes Credit Corporation to an outside institutional investor for
approximately A$191 million ($110 million). As part of this transaction, the
company agreed to repurchase the stock in 10 years. Additionally, the company
entered into a cross currency interest rate swap with the same institutional
investor, effectively converting the obligation to a $110 million note that
bears interest at a floating rate of approximately LIBOR minus 50 basis points.
This note was recorded as long-term debt in the consolidated balance sheets. The
proceeds from this transaction were used for general corporate purposes,
including the repayment of commercial paper and the repurchase of company stock.
In September 2002, the company issued $400 million of unsecured fixed rate notes
maturing in October 2012. These notes bear interest at an annual rate of 4.625%
and pay interest semi-annually beginning April 2003. The proceeds from these
notes were used for general corporate purposes, including the repayment of
commercial paper in anticipation of 2003 debt maturities.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 10
In February 2002, the company completed an offering of Euros 250 million of
senior unsecured notes. These notes bore interest at a floating rate of EURIBOR
plus 20 basis points, set two business days preceding the quarterly interest
payment dates and matured in August 2003. The notes were listed on the
Luxembourg Stock Exchange and were designated as a hedge of Euro denominated net
investments held by the company. The proceeds from these notes were used for
general corporate purposes, including the repayment of commercial paper, the
financing of acquisitions and the repurchase of company stock.
Note 6:
- ------
A reconciliation of the basic and diluted earnings per share computations for
the three months ended September 30, 2003 and 2002 is as follows (in thousands,
except per share data):
2003 2002
-------------------------------------------- -----------------------------------------
Per Per
Income Shares Share Income Shares Share
- -------------------------------------------------------------------------------- -----------------------------------------
Net income $ 118,454 $ 146,886
Less:
Preferred stock
dividends (1) (1)
Preference stock
dividends (26) (29)
- -------------------------------------------------------------------------------- -----------------------------------------
Basic earnings per
share $ 118,427 233,408 $ .51 $ 146,856 237,923 $ .62
- -------------------------------------------------------------------------------- -----------------------------------------
Effect of dilutive
securities:
Preferred stock 1 9 1 12
Preference stock 26 828 29 911
Stock options 1,737 1,410
Other 102 67
- -------------------------------------------------------------------------------- -----------------------------------------
Diluted earnings per
share $ 118,454 236,084 $ .50 $ 146,886 240,323 $ .61
================================================================================ =========================================
A reconciliation of the basic and diluted earnings per share computations for
the nine months ended September 30, 2003 and 2002 is as follows (in thousands,
except per share data):
2003 2002
-------------------------------------------- -----------------------------------------
Per Per
Income Shares Share Income Shares Share
- -------------------------------------------------------------------------------- -----------------------------------------
Net income $ 351,253 $ 419,506
Less:
Preferred stock
dividends (1) (1)
Preference stock
dividends (81) (90)
- -------------------------------------------------------------------------------- -----------------------------------------
Basic earnings per
share $ 351,171 234,138 $ 1.50 $ 419,415 239,818 $ 1.75
- -------------------------------------------------------------------------------- -----------------------------------------
Effect of dilutive
securities:
Preferred stock 1 11 1 12
Preference stock 81 846 90 934
Stock options 1,270 1,695
Other 47 86
- -------------------------------------------------------------------------------- -----------------------------------------
Diluted earnings per
share $ 351,253 236,312 $ 1.49 $ 419,506 242,545 $ 1.73
================================================================================ =========================================
In accordance with FAS No. 128, "Earnings per Share," 2.8 million and 3.4
million common stock equivalent shares for the three months ended September 30,
2003 and 2002, respectively, and 4.0 million and 4.9 million common stock
equivalent shares for the nine months ended September 30, 2003 and 2002,
respectively, issuable upon the exercise of stock options were excluded from the
above computations because the exercise prices of such options were greater than
the average market price of the common stock and therefore the impact of these
shares would be antidilutive.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 11
Note 7:
- ------
Revenue and operating profit by business segment for the three and nine months
ended September 30, 2003 and 2002 were as follows:
(Dollars in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenue:
Global Mailing.................................... $ 788,135 $ 762,630 $ 2,321,961 $ 2,211,924
Enterprise Solutions.............................. 307,803 309,797 921,653 900,318
----------- ----------- ----------- -----------
Total Messaging Solutions......................... 1,095,938 1,072,427 3,243,614 3,112,242
Non-core.......................................... 30,557 31,930 86,962 102,926
Core.............................................. 10,654 9,714 31,260 29,736
----------- ----------- ----------- -----------
Capital Services.................................. 41,211 41,644 118,222 132,662
----------- ----------- ----------- -----------
Total revenue........................................ $ 1,137,149 $ 1,114,071 $ 3,361,836 $ 3,244,904
=========== =========== =========== ===========
Operating Profit: (1)
Global Mailing.................................... $ 236,268 $ 226,121 $ 692,939 $ 652,789
Enterprise Solutions.............................. 19,056 18,914 46,729 58,849
----------- ----------- ----------- -----------
Total Messaging Solutions......................... 255,324 245,035 739,668 711,638
Non-core.......................................... 13,365 13,820 37,721 45,323
Core.............................................. 5,443 4,409 15,941 12,472
----------- ----------- ----------- -----------
Capital Services.................................. 18,808 18,229 53,662 57,795
----------- ----------- ----------- -----------
Total operating profit............................... 274,132 263,264 793,330 769,433
Unallocated amounts:
Net interest (corporate interest expense,
net of intercompany transactions)................ (27,248) (20,227) (79,803) (63,386)
Corporate expense................................. (31,981) (29,252) (106,025) (95,412)
Restructuring charges............................. (43,109) - (96,465) -
----------- ----------- ----------- -----------
Income before income taxes........................... $ 171,794 $ 213,785 $ 511,037 $ 610,635
=========== =========== =========== ===========
(1) Operating profit excludes general corporate expenses, income taxes and net
interest other than that related to finance operations.
Net interest expense included in business segment operating profit was as
follows:
(Dollars in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Global Mailing.................................... $ 6,196 $ 11,382 $ 20,747 $ 36,504
Enterprise Solutions.............................. 295 186 883 603
----------- ----------- ----------- -----------
Total Messaging Solutions......................... 6,491 11,568 21,630 37,107
Non-core.......................................... 5,323 7,832 17,132 25,547
Core.............................................. 2,039 1,563 5,995 5,775
----------- ----------- ----------- -----------
Capital Services.................................. 7,362 9,395 23,127 31,322
----------- ----------- ----------- -----------
Total net interest expense for reportable
segments............................................ 13,853 20,963 44,757 68,429
Net interest (corporate interest expense,
net of intercompany transactions)................... 27,248 20,227 79,803 63,386
----------- ----------- ----------- -----------
Consolidated net interest expense.................... $ 41,101 $ 41,190 $ 124,560 $ 131,815
=========== =========== =========== ===========
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 12
Note 8:
- ------
Comprehensive income for the three and nine months ended September 30, 2003 and
2002 was as follows:
Three Months Ended Nine Months Ended
(Dollars in thousands) September 30, September 30,
------------------------------ ----------------------------------
2003 2002 2003 2002
-------------- ------------- --------------- ---------------
Net income.............................................. $ 118,454 $ 146,886 $ 351,253 $ 419,506
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments............. (21,065) 14,872 65,878 36,737
Net unrealized gains/(losses) on derivative
instruments........................................ 3,802 (1,479) (2,000) (760)
-------------- ------------- --------------- ---------------
Comprehensive income.................................... $ 101,191 $ 160,279 $ 415,131 $ 455,483
============== ============= =============== ===============
Note 9:
- ------
In January 2003, the company announced that it would undertake restructuring
initiatives related to realigned infrastructure requirements and reduced
manufacturing needs for digital equipment. At that time, the company expected
the pre-tax cost of these restructuring initiatives to be about $160 million
($100 million net of tax). The company continues to review the anticipated cost
of these restructuring initiatives, which may differ from its initial estimates.
The charges related to these restructuring initiatives are expected to be
recorded over a two-year period as the various initiatives take effect. See note
2 to the consolidated financial statements for the company's accounting policy
related to costs associated with exit or disposal activities.
In connection with this plan, the company recorded a pre-tax restructuring
charge of $43.1 million during the third quarter of 2003. For the nine months
ended September 30, 2003, pre-tax restructuring charges were $96.5 million. The
pre-tax restructuring charges are composed of:
(Dollars in millions) Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2003
------------------ ------------------
Severance and benefit costs........ $ 17.8 $ 65.4
Asset impairments.................. 23.8 24.5
Other exit costs................... 1.5 6.6
------------------ ------------------
Total............................ $ 43.1 $ 96.5
================== ==================
Accrued restructuring charges at September 30, 2003 are composed of the
following:
(Dollars in millions)
Total
restructuring Cash Non-cash Ending balance at
charges payments charges September 30, 2003
-------------- ---------- --------- ------------------
Severance and benefit costs.............. $ 65.4 $ 34.9 $ - $ 30.5
Asset impairments........................ 24.5 - 24.5 -
Other exit costs......................... 6.6 2.0 - 4.6
-------------- ---------- --------- ------------------
$ 96.5 $ 36.9 $ 24.5 $ 35.1
============== ========== ========= ==================
All restructuring charges, except for the asset impairments, will result in cash
outflows. The severance and benefit costs recorded for the nine months ended
September 30, 2003 relate to a reduction in workforce of approximately 1,250
employees worldwide as of September 30, 2003 and expected future workforce
reductions of approximately 1,000 employees. The workforce reductions relate to
actions across several of the company's businesses resulting from infrastructure
and process improvements and its continuing efforts to streamline operations,
and include managerial, professional, clerical and technical roles.
Approximately 65% of the workforce reductions are in the U.S. The majority of
the international workforce reductions are in Europe and Canada. Asset
impairments relate primarily to the write-down of property, plant and equipment,
resulting from the closure or streamlining of certain facilities. The asset
impairments recorded during the third quarter of 2003 relate to the company's
decision to exit its Main Plant facility in Connecticut in connection with its
product sourcing and real estate optimization strategy. The fair values of the
impaired assets were determined primarily using anticipated cash flows in
accordance with FAS No. 144. Other exit costs relate primarily to lease
termination costs, non-cancelable lease payments, consolidation of excess
facilities and other costs associated with exiting business activities.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 13
Note 10:
- -------
On August 1, 2002, the company completed the acquisition of PSI, the nation's
largest mail presort company, for approximately $127 million in cash and $39
million in debt assumed. The results of PSI's operations have been included in
the consolidated financial statements since the date of acquisition. PSI
prepares, sorts and aggregates mail to earn postal discounts and expedite
delivery for its customers. As a wholly owned subsidiary of the company, PSI
will operate under its current management and continue to focus on providing
presort mail services.
The following table summarizes the estimated fair values of the major assets
acquired and liabilities assumed at the date of acquisition:
(Dollars in thousands)
Intangible assets................................................ $ 42,286
Goodwill......................................................... 113,247
Other, net....................................................... 10,967
Debt............................................................. (39,445)
----------
Purchase price................................................ $ 127,055
==========
Intangible assets relate primarily to customer relationships and have a
weighted-average useful life of approximately 15 years. The goodwill was
assigned to the Global Mailing segment.
Consolidated impact of acquisitions
- -----------------------------------
The acquisition of PSI increased the company's operating profit, but including
related financing costs, did not materially impact earnings either on a per
share or aggregate basis.
The following unaudited pro forma consolidated results have been prepared as if
the acquisition of PSI had occurred on January 1, 2002:
(Dollars in thousands) Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Total revenue............... $ 1,137,149 $ 1,120,071 $ 3,361,836 $ 3,290,904
The pro forma consolidated results do not purport to be indicative of results
that would have occurred had the acquisition been completed on January 1, 2002,
nor do they purport to be indicative of the results that will be obtained in the
future. The pro forma earning results of this acquisition were not material to
earnings on either a per share or an aggregate basis.
During 2003 and 2002, the company also completed several smaller acquisitions.
During 2003, the company acquired one of its address printing suppliers and two
of its international dealerships. During 2002, the company acquired the
remaining 43% ownership interest of MailCode Inc., some of its international
dealerships and presort businesses. The cost of these acquisitions was in the
aggregate less than $50 million in each year. These acquisitions did not have a
material impact on the company's financial results either individually or on an
aggregate basis.
Note 11:
- -------
Acquired intangible assets, net of accumulated amortization, are included in
other assets in the consolidated balance sheets and are composed of the
following:
(Dollars in thousands) September 30, 2003 December 31, 2002
------------------------------ ------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized intangible assets:
Customer relationships................... $ 139,560 $ 14,944 $ 133,414 $ 7,177
Mailing technology....................... 61,765 7,713 38,100 3,645
Trademark and trade names................ 8,046 3,512 6,900 1,805
Non-compete agreements................... 3,301 1,584 2,986 707
-------------- ------------ -------------- ------------
$ 212,672 $ 27,753 $ 181,400 $ 13,334
============== ============ ============== ============
In May 2003, the company acquired intangible assets associated with its inserter
technology for $17.4 million in cash. The intangible assets will be amortized
over 12 years.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 14
The aggregate intangible asset amortization expense for the three and nine
months ended September 30, 2003 was $4.4 million and $12.0 million,
respectively. Estimated intangible amortization expense for 2003 and the five
succeeding years is as follows:
(Dollars in thousands)
For year ending 12/31/03......................................... $ 16,401
For year ending 12/31/04......................................... $ 17,313
For year ending 12/31/05......................................... $ 17,144
For year ending 12/31/06......................................... $ 16,477
For year ending 12/31/07......................................... $ 14,961
For year ending 12/31/08......................................... $ 14,397
Changes in the carrying amount of goodwill by business segment for the nine
months ended September 30, 2003 are as follows:
Global Enterprise
(Dollars in thousands) Mailing Solutions Total
--------- ---------- ---------
Balance at January 1, 2003................. $ 405,291 $ 421,950 $ 827,241
Goodwill acquired during the period........ 39,028 - 39,028
Other...................................... 27,224 5,530 32,754
--------- ---------- ---------
Balance at September 30, 2003.............. $ 471,543 $ 427,480 $ 899,023
========= ========== =========
Other primarily includes the impact of foreign currency translation adjustments.
Note 12:
- -------
In connection with its Capital Services programs, the company has sold finance
receivables and entered into guarantee contracts with varying amounts of
recourse in privately-placed transactions with unrelated third-party investors.
The uncollected principal balance of receivables sold and guarantee contracts
totaled $129.7 million and $183.0 million at September 30, 2003 and December 31,
2002, respectively. In accordance with GAAP, the company does not record these
amounts as liabilities on its consolidated balance sheets. The company's maximum
risk of loss on these finance receivables and guarantee contracts arises from
the possible non-performance of lessees to meet the terms of their contracts and
from changes in the value of the underlying equipment. These contracts are
secured by the underlying equipment value, and supported by the creditworthiness
of its customers. At September 30, 2003 and December 31, 2002, the underlying
equipment value exceeded the sum of the uncollected principal balance of
receivables sold and the guarantee contracts.
In connection with the sale of certain businesses, the company has agreed to
indemnify the buyer for certain losses related to assets acquired by the buyer.
The company's consolidated balance sheets includes a liability of approximately
$9 million, at September 30, 2003 and December 31, 2002, respectively, for these
indemnifications, which reflects the company's estimated probable exposure.
The company provides product warranties in conjunction with certain product
sales, generally for a period of 90 days from the date of installation. The
company's product warranty liability reflects management's best estimate of
probable liability under its product warranties based on historical claims
experience, which has not been significant, and other currently available
evidence. Accordingly, the company's product warranty liability at September 30,
2003 and December 31, 2002, respectively, was not material.
Note 13:
- -------
In June 2002, the company received an examination report from the Internal
Revenue Service (IRS) showing proposed income tax adjustments for the 1992 to
1994 tax years. The total additional tax proposed by the IRS for the 1992
through 1994 tax years is about $24 million. In August 2002, the company filed a
protest with the IRS to challenge most of the proposed deficiencies asserted by
the IRS. The company believes that it has meritorious defenses to those
deficiencies and that the ultimate outcome will not result in a material effect
on its results of operations, financial position or cash flows. However, if the
IRS prevails on its asserted deficiencies, additional tax may be due for 1995
and future tax years, which could materially affect its future results of
operations, financial position or cash flows. At any time, the company's
provision for taxes could be affected by changes in tax law and interpretations
by governments or courts.
Note 14:
- -------
On October 23, 2003, the company completed its acquisition of DDD Company (DDD)
for a net purchase price of $49.5 million. DDD offers a broad array of services
including, fulfillment services, secure mail processing, messenger services,
logistics support, and record and information management.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
Results of Continuing Operations - third quarter of 2003 vs. third quarter of
- -----------------------------------------------------------------------------
2002
- ----
Revenue increased 2 percent in the third quarter of 2003 to $1.14 billion
compared with $1.11 billion in the third quarter of 2002 driven primarily by the
favorable impact of foreign currency and the acquisition of PSI, which was
acquired on August 1, 2002.
Net income decreased to $118.5 million in the third quarter of 2003 compared
with $146.9 million in the third quarter of 2002. Diluted earnings per share
decreased to 50 cents in the third quarter of 2003 from 61 cents in the third
quarter of 2002. During the third quarter of 2003, we took further actions
related to our previously announced restructuring initiatives to support our
long-term growth strategies. Net income for the third quarter of 2003 was
reduced by a pre-tax restructuring charge of $43.1 million ($27.6 million net of
tax) or 12 cents per diluted share relating to these actions.
Third quarter 2003 revenue included $322.1 million from sales, down 3 percent
from $332.3 million in the third quarter of 2002 due to the impact of delayed
decision-making for upgrades and new equipment purchases at the high-end of our
product lines partially offset by strong supplies sales and the favorable impact
of foreign currency; $214.7 million from rentals, up 3 percent from $208.2
million due to the favorable impact of foreign currency and strong placements of
our standalone meters and new digital meters in the U.S.; $134.6 million from
core financing, up from $134.3 million; $30.6 million from non-core financing,
down 4 percent from $31.9 million due to our previously announced decision to
cease originating large-ticket, structured, third-party financing of non-core
assets; $275.8 million from business services, up 6 percent from $260.2 million
due primarily to higher revenue from PSI, which was acquired on August 1, 2002,
and the favorable impact of foreign currency; and $159.3 million from support
services, up 8 percent from $147.2 million due primarily to an increased service
contract base and the favorable impact of foreign currency.
Our Global Mailing segment includes worldwide revenue and related expenses from
the rental of postage meters and the sale, rental and financing of mailing
equipment, including mail finishing, software-based mail creation equipment, and
production mail equipment in our non-U.S. businesses. We also include in this
segment software-based shipping, transportation and logistics systems, related
supplies and services, presort mail services, postal payment and supply chain
solutions such as order management and fulfillment support. During the third
quarter of 2003, Global Mailing revenue increased 3 percent and operating profit
increased 4 percent. Revenue growth was driven by the favorable impact of
foreign currency and higher revenue from PSI, which more than offset the
negative impact of some delayed decision-making for upgrades and new equipment
purchases at the high-end of the product line as a result of lingering economic
sluggishness. Operating profit was favorably impacted by foreign currency and
lower interest expense. Non-U.S. revenue grew at a double-digit rate as a result
of the favorable impact of foreign currency, but was flat on a local currency
basis. Canada continued to have good revenue and operating profit growth driven
by increased leasing of equipment, improved service revenue and strong
placements of new digital meter systems and high-end production mail systems.
France experienced another quarter of strong operating profit growth on a local
currency basis due to continued success in the integration of the Secap
organization. In contrast, some European countries, such as Germany, and Asia
experienced declining revenue on a local currency basis due to deteriorating
economic conditions.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 16
Our Enterprise Solutions segment includes Pitney Bowes Management Services
(PBMS) and Document Messaging Technologies (DMT). PBMS includes revenue and
related expenses from facilities management contracts for advanced mailing,
secure mail services, reprographic, document management and other value-added
services to large enterprises. DMT includes revenue and related expenses from
the sale, service and financing of high speed, software-enabled production mail
systems, sorting equipment, incoming mail systems, electronic statement, billing
and payment solutions, and mailing software. During the third quarter of 2003,
revenue declined 1 percent while operating profit grew 1 percent. PBMS reported
flat revenue growth of $248 million compared with the prior year while operating
profit grew 1 percent. Contraction in the telecommunications, financial services
and transaction-based legal services industries continued to have an adverse
impact on PBMS's revenue growth and operating profit margins. However, during
the quarter, PBMS continued its actions to offset economic sensitivity by
reducing general and administrative expenses and diversifying into other market
segments such as federal and state governments. The acquisition of DDD Company
(DDD), which was completed on October 23, 2003, demonstrates PBMS' strategy to
accelerate diversification into the government sector as well as to expand
cross-selling opportunities. DMT revenue decreased 4 percent to $60 million
while operating profit increased 1 percent compared with the prior year. Even
though orders for inserter equipment have been strong over the last several
months, realization of these sales has been delayed due to the long lead times
required to manufacture and deliver this customized equipment to customers.
Total Messaging Solutions, the combined results of the Global Mailing segment
and Enterprise Solutions segment, reported 2 percent revenue growth and 4
percent operating profit growth.
Our Capital Services segment consists of external financing of third-party
equipment. It comprises primarily asset- and fee-based income generated by
financing or arranging transactions of critical large-ticket customer assets.
During the third quarter of 2003, revenue decreased 1 percent and operating
profit increased 3 percent, consistent with our previously announced decision to
cease originating large-ticket, structured, third-party financing of non-core
assets. Operating profit was favorably impacted by lower interest expense
compared to the prior year. Core revenue increased 10 percent in the third
quarter of 2003 and operating profit increased 24 percent. Non-core revenue
decreased 4 percent in the third quarter of 2003 and operating profit decreased
3 percent. During the third quarter of 2003, we liquidated approximately $45
million of our assets held for sale, and continued to pursue the sale of other
non-core lease assets on an economically advantageous basis, which resulted in
the sale of an additional $58 million of assets from the portfolio.
Cost of sales increased to 44.6 percent of sales revenue in the third quarter of
2003 compared with 44.1 percent in the third quarter of 2002. The increase was
mainly driven by the increase in mix of lower margin international revenue and
the initial costs associated with the transition to outsourcing of parts for
digital equipment.
Cost of rentals decreased to 19.8 percent of rentals revenue in the third
quarter of 2003 compared with 20.8 percent in the third quarter of 2002 due
primarily to lower depreciation costs associated with standalone meters and
lower repair costs resulting from the shift from electronic to digital meters.
Cost of core financing decreased to 26.0 percent of related revenue in the third
quarter of 2003 compared with 27.9 percent in the third quarter of 2002 due to
cost reduction initiatives in our financial services business.
Cost of non-core financing increased to 38.8 percent of related revenue in the
third quarter of 2003 compared with 32.2 percent in the third quarter of 2002
due to our decision to cease originating large-ticket, structured, third-party
financing of non-core assets and sell non-core lease assets on an economically
advantageous basis.
Cost of business services increased to 82.6 percent of related revenue in the
third quarter of 2003 compared with 80.8 percent in the third quarter of 2002
due to initial lower margins, higher start-up costs and delayed implementation
associated with new accounts and sites, the loss of higher margin business with
long-term customers as they continue to downsize and higher employee benefit
costs.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 17
Cost of support services decreased to 51.9 percent of related revenue in the
third quarter of 2003 compared with 52.4 percent in the third quarter of 2002
partly due to our emphasis on controlling operating expenses, partially offset
by the increase in mix of lower margin international support services revenue.
Selling, general and administrative expenses were 26.6 percent of revenue in the
third quarter of 2003 compared with 26.9 percent in the third quarter of 2002
reflecting our emphasis on controlling operating expenses, partially offset by
our continuing investment in infrastructure improvements and organizational
transformation.
Research and development expenses increased 3 percent to $35.0 million in the
third quarter of 2003 compared with $33.9 million in the third quarter of 2002.
The increase reflects our continued commitment to develop new technologies and
enhanced mailing and software products.
Net interest expense decreased to $41.1 million in the third quarter of 2003
from $41.2 million in the third quarter of 2002.
The effective tax rate decreased to 31.0 percent in the third quarter of 2003
from 31.3 percent in the third quarter of 2002. The effective tax rate for the
third quarter of 2003 includes a 1 percent tax benefit from the restructuring
charge recorded in the third quarter of 2003. Our effective tax rate was
negatively impacted by our strategy to cease originating large-ticket,
structured, third-party financing of non-core assets.
Results of Continuing Operations - nine months of 2003 vs. nine months of 2002
- ------------------------------------------------------------------------------
For the first nine months of 2003 compared with the same period of 2002, revenue
increased 4 percent to $3.36 billion, and net income decreased 16 percent to
$351.3 million. Net income for the first nine months of 2003 was reduced by a
pre-tax restructuring charge of $96.5 million ($61.7 million net of tax) or 26
cents per diluted share. The factors that affected revenue and operating profit
for the nine months ended September 30, 2003 compared with the same period of
2002 included those cited for the third quarter of 2003 versus 2002.
On October 23, 2003, we advised investors that we are still finalizing our 2004
budget, but wanted to reiterate that we believe that the challenges of 2004 will
be very similar to 2003. We also advised that the headwinds of lower earnings
from our Capital Services business will continue into 2004 and that we
anticipate benefit costs will remain a challenge.
Accounting Pronouncements
- -------------------------
In 2001, Statement of Financial Accounting Standards (FAS) No. 141, "Business
Combinations" and FAS No. 142, "Goodwill and Other Intangible Assets" were
issued requiring business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting, and refining the criteria
for recording intangible assets separate from goodwill. Recorded goodwill and
intangibles have been evaluated against this new criterion and resulted in
certain intangibles being included in goodwill, or alternatively, amounts
initially recorded as goodwill being separately identified and recognized apart
from goodwill. FAS No. 142 requires the use of a nonamortization approach to
account for purchased goodwill and indefinite-lived intangibles. Under a
nonamortization approach, goodwill and indefinite-lived intangibles have not
been amortized into results of operations, but instead will be reviewed for
impairment and charged against results of operations only in the periods in
which the recorded value of goodwill and indefinite-lived intangibles is more
than its fair value. In 2001, we adopted the provisions of each statement, which
apply to business combinations completed after June 30, 2001. On January 1,
2002, we adopted the provisions of each statement, which apply to goodwill and
intangible assets acquired prior to June 30, 2001. The adoption of these
standards reduced the annual amortization of intangible assets commencing
January 1, 2002 by approximately 2 cents per diluted share. Goodwill is reviewed
for impairment on an annual basis or as circumstances warrant.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 18
In 2001, FAS No. 143, "Accounting for Asset Retirement Obligations" was issued,
amending FAS No. 19, "Financial Accounting and Reporting by Oil and Gas
Producing Companies," and applies to all entities. FAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. FAS No. 143 is effective January 1, 2003. The adoption of this statement
did not impact our financial position, results of operations or cash flows.
In 2001, FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," was issued, replacing FAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and portions of
Accounting Principles Board (APB) Opinion No. 30, "Reporting the Results of
Operations." FAS No. 144 provides a single accounting model for long-lived
assets to be disposed of and changes the criteria that would have to be met to
classify an asset as held-for-sale. FAS No. 144 retains the requirement of APB
Opinion No. 30, to report discontinued operations separately from continuing
operations and extends that reporting to separate components of an entity. FAS
No. 144 is effective January 1, 2002. The adoption of this statement on January
1, 2002 did not impact our financial position, results of operations or cash
flows.
In 2002, FAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," was issued.
Under FAS No. 145, gains and losses related to the extinguishment of debt should
no longer be segregated on the income statement as extraordinary items. Instead,
such gains and losses should be included as a component of income from
continuing operations. FAS No. 145 is effective January 1, 2003. The adoption of
this statement did not impact our financial position, results of operations or
cash flows.
In 2002, FAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued. This statement nullifies the Financial Accounting
Standards Board's Emerging Issues Task Force (EITF) No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." FAS No. 146
requires that a liability for costs associated with an exit or disposal activity
be recognized when the liability is incurred. We adopted the provisions of FAS
No. 146, which are effective for one-time benefit arrangements and exit or
disposal activities initiated after December 31, 2002. We account for ongoing
benefit arrangements under FAS No. 112 "Employers' Accounting for Postemployment
Benefits", which requires that a liability be recognized when the costs are
probable and reasonably estimable. See Note 9 to the consolidated financial
statements.
In 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN
No. 45 clarifies the requirements of FAS No. 5, "Accounting for Contingencies,"
relating to a guarantor's accounting for and disclosure of, the issuance of
certain types of guarantees. FIN No. 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair value,
or market value, of the obligations it assumes under the guarantee and must
disclose that information in its interim and annual financial statements. The
provisions related to recognizing a liability at inception of the guarantee for
the fair value of the guarantor's obligations does not apply to product
warranties or to guarantees accounted for as derivatives. The recognition
provisions of FIN No. 45 are effective January 1, 2003. The adoption of this
interpretation did not impact our financial position, results of operations or
cash flows. See Note 12 to the consolidated financial statements.
In 2002, FAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," which amends FAS No. 123, "Accounting for Stock-Based
Compensation," was issued. FAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation and requires more prominent and more
frequent disclosures in the financial statements of the effects of stock-based
compensation. FAS No. 148 is effective January 1, 2003. We adopted the
disclosure-only provisions of this statement. See Note 2 to the consolidated
financial statements.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 19
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." FIN No. 46 requires a variable interest entity to be consolidated by
a company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of FIN No. 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to pre-existing entities in the first
fiscal year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued after January
31, 2003, regardless of when the variable interest entity was established. In
October 2003, the FASB issued FASB Staff Position No. FIN 46-6 (FSP FIN 46-6),
"Effective Date of FASB Interpretation No. 46, Consolidation of Variable
Interest Entities." FSP FIN 46-6 defers the effective date for applying the
provisions of FIN No. 46 until December 31, 2003. We have an equity investment
in PBG Capital Partners LLC (PBG) that currently qualifies as a variable
interest entity under FIN No. 46. PBG was formed with GATX Corporation in 1997
for the purpose of financing and managing certain leasing related assets. Based
on the terms of the partnership agreement, we are the primary beneficiary and as
a result we will consolidate our equity investment in PBG effective December 31,
2003. At September 30, 2003, PBG's total assets and liabilities were $331
million and $203 million, respectively. The consolidation of PBG will not have a
material impact on our results of operations or cash flows.
In March 2003, the EITF reached a consensus on Issue No. 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables." EITF No. 00-21 addresses
certain aspects of the accounting by a vendor for arrangements under which it
performs multiple revenue generating activities and how to determine whether
such an arrangement involving multiple deliverables contains more than one unit
of accounting for purposes of revenue recognition. EITF No. 00-21 is effective
July 1, 2003. The transition provision allows either prospective application or
a cumulative effect adjustment upon adoption. We believe we are in compliance
with the provisions of EITF No. 00-21. The adoption of this statement did not
impact our financial position, results of operations or cash flows.
In April 2003, FAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued. FAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under FAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The provisions of FAS No. 149 are generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The adoption of this statement did not impact
our financial position, results of operations or cash flows.
In May 2003, FAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" was issued. FAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. The
provisions of FAS No. 150 are effective for financial instruments entered into
or modified after May 31, 2003, and are effective July 1, 2003. The adoption of
this statement did not impact our financial position, results of operations or
cash flows.
Restructuring Charges
- ---------------------
In January 2003, we announced that we would undertake restructuring initiatives
related to realigned infrastructure requirements and reduced manufacturing needs
for digital equipment. At that time, we expected the pre-tax cost of these
restructuring initiatives would be about $160 million ($100 million net of tax).
We continue to review the anticipated cost of these restructuring initiatives,
which may ultimately differ from our initial estimates. The charges related to
these restructuring initiatives are expected to be recorded over a two-year
period as the various initiatives take effect. The cash outflows related to
restructuring charges will be funded primarily by cash from operating
activities. The restructuring charges are expected to increase our operating
efficiency and effectiveness in 2003 and beyond while enhancing growth,
primarily as a result of reduced personnel related expenses. See Note 2 to the
consolidated financial statements for our accounting policy related to costs
associated with exit or disposal activities.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 20
In connection with this plan, we recorded a pre-tax restructuring charge of
$43.1 million during the third quarter of 2003. For the nine months ended
September 30, 2003, pre-tax restructuring charges were $96.5 million.
The pre-tax restructuring charges are composed of:
(Dollars in millions) Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2003
------------------ ------------------
Severance and benefit costs.......... $ 17.8 $ 65.4
Asset impairments.................... 23.8 24.5
Other exit costs..................... 1.5 6.6
------------------ ------------------
Total............................. $ 43.1 $ 96.5
================== ==================
Accrued restructuring charges at September 30, 2003 are composed of the
following:
(Dollars in millions)
Total Ending balance
restructuring Cash Non-cash at September 30,
charges payments charges 2003
-------------- ---------- ---------- ----------------
Severance and benefit
costs........................ $ 65.4 $ 34.9 $ - $ 30.5
Asset impairments............ 24.5 - 24.5 -
Other exit costs............. 6.6 2.0 - 4.6
-------------- ---------- ---------- ----------------
$ 96.5 $ 36.9 $ 24.5 $ 35.1
============== ========== ========== ================
All restructuring charges, except for the asset impairments, will result in cash
outflows. The severance and benefit costs recorded for the nine months ended
September 30, 2003 relate to a reduction in workforce of approximately 1,250
employees worldwide as of September 30, 2003 and expected future workforce
reductions of approximately 1,000 employees. The workforce reductions relate to
actions across several of our businesses resulting from infrastructure and
process improvements and our continuing efforts to streamline operations, and
include managerial, professional, clerical and technical roles. Approximately
65% of the workforce reductions are in the U.S. The majority of the
international workforce reductions are in Europe and Canada. Asset impairments
relate primarily to the write-down of property, plant and equipment, resulting
from the closure or streamlining of certain facilities. The asset impairments
recorded during the third quarter of 2003 relate to our decision to exit the
Main Plant facility in Connecticut in connection with our product sourcing and
real estate optimization strategy. The fair values of the impaired assets were
determined primarily using anticipated cash flows in accordance with FAS No.
144. Other exit costs relate primarily to lease termination costs,
non-cancelable lease payments, consolidation of excess facilities and other
costs associated with exiting business activities.
Acquisitions
- ------------
In August 2002, we completed the acquisition of PSI, the nation's largest mail
presort company, for approximately $127 million in cash and $39 million debt
assumed. PSI prepares, sorts and aggregates mail to earn postal discounts and
expedite delivery for its customers.
We accounted for the acquisition of PSI under the purchase method and
accordingly, the operating results of PSI have been included in our consolidated
financial statements since the date of acquisition. The acquisition of PSI did
not materially affect net income for the three and nine months ended September
30, 2003 and 2002, respectively.
During 2003 and 2002, we also completed several smaller acquisitions. During
2003, we acquired one of our address printing suppliers and two of our
international dealerships. During 2002, we acquired the remaining 43% ownership
interest of MailCode Inc., some of our international dealerships and presort
businesses. The cost of these acquisitions was in the aggregate less than $50
million in each year. These acquisitions did not have a material impact on our
financial results either individually or on an aggregate basis.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 21
Liquidity and Capital Resources
- -------------------------------
Our ratio of current assets to current liabilities increased to 1.01 to 1 at
September 30, 2003 compared with .76 to 1 at December 31, 2002. The increase in
this ratio was due primarily to the $1.1 billion decrease in notes payable and
current portion of long-term obligations as a result of the exchange of
short-term debt for long-term debt during the nine months ended September 30,
2003.
Our cash and cash equivalents decreased to $285.3 million at September 30, 2003,
from $315.2 million at December 31, 2002. The decrease resulted from $743.8
million used in financing activities, offset in part by $675.8 million and $32.8
million provided by operating and investing activities, respectively. Net cash
of $675.8 million provided by operating activities consisted primarily of net
income adjusted for non-cash items and changes in working capital. Net cash of
$32.8 million provided by investing activities consisted primarily of cash
generated from asset sales at capital services, partially offset by investments
in fixed assets and other investing activities. Other investing activities
included the acquisitions of one of our address printing suppliers and two of
our international dealerships. Net cash of $743.8 million used in financing
activities consisted primarily of a net decrease in total debt, stock
repurchases and dividends paid to stockholders.
The ratio of total debt to total debt and stockholders' equity was 78.9% and
82.3% at September 30, 2003 and December 31, 2002, respectively. Including the
preferred stockholders' equity in a subsidiary company as debt, the ratio of
total debt to total debt and stockholders' equity was 80.2% and 83.4% at
September 30, 2003 and December 31, 2002, respectively. The decrease in this
ratio was driven by a net reduction of total debt and favorable foreign currency
translation adjustments for the nine months ended September 30, 2003.
We generated $461.7 million of free cash flow (defined as net cash provided by
operating activities less net investment in fixed assets) for the nine months
ended September 30, 2003. Free cash flow for the nine months ended September 30,
2003 was reduced by approximately $41.8 million of payments associated with
restructuring initiatives. Free cash flow is not presented as an alternative
measure of operating results or cash flow from operations, as determined in
accordance with GAAP, but is presented because we believe it is a widely
accepted indicator of our ability to incur and service debt.
The following table reconciles the reported consolidated results to adjusted
results for the nine months ended September 30, 2003:
(Dollars in thousands) Nine months ended
September 30, 2003
------------------
GAAP net cash provided by operating activities, as reported...... $ 675,843
Net investment in fixed assets................................ (214,138)
------------------
Free cash flow................................................... $ 461,705
==================
Financings and Capitalization
- -----------------------------
In September 2003, we sold our remaining interest in a lease transaction that
was issued in July 2001 and transferred the obligation on the remaining
non-recourse promissory note with a total principal balance of approximately $26
million. The transfer of this obligation is reflected as a reduction of
long-term debt in the consolidated balance sheets.
At September 30, 2003, $456 million remained available under the shelf
registration statement filed in October 2001 with the SEC, permitting issuances
of up to $2 billion in debt securities, preferred stock and depositary shares.
In April 2003, as part of this shelf registration statement, we established a
medium-term note program for the issuance of up to $1.38 billion in aggregate
principal, representing the remaining amount available on the shelf at that
time.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 22
In June 2003, we issued $375 million of unsecured fixed rate notes maturing in
June 2013. These notes bear interest at an annual rate of 3.875% and pay
interest semi-annually beginning December 2003. The proceeds from these notes
were used for general corporate purposes, including the repayment of commercial
paper and the repurchase of company stock.
In June 2003, we issued $200 million of unsecured floating rate notes maturing
in June 2005. These notes bear interest at a floating rate of LIBOR minus 3
basis points, set two business days preceding the quarterly interest payment
dates. The proceeds from these notes were used for general corporate purposes,
including the repayment of commercial paper and the repurchase of company stock.
In April 2003, we issued $350 million of unsecured fixed rate notes maturing in
May 2018. These notes bear interest at an annual rate of 4.75% and pay interest
semi-annually beginning November 2003. In connection with this issuance, we
entered into a $350 million swap maturing in May 2018, converting this
obligation to a floating rate note. The proceeds from these notes were used for
general corporate purposes, including the repayment of commercial paper and the
repurchase of company stock.
In February 2003, we sold 6.45% Preferred Stock in a subsidiary of Pitney Bowes
Credit Corporation (PBCC) to an outside institutional investor for approximately
A$191 million ($110 million). As part of this transaction, we agreed to
repurchase the stock in 10 years. Additionally, we entered into a cross currency
interest rate swap with the same institutional investor, effectively converting
the obligation to a $110 million note that bears interest at a floating rate of
approximately LIBOR minus 50 basis points. This note was recorded as long-term
debt in our consolidated balance sheets. The proceeds from this transaction were
used for general corporate purposes, including the repayment of commercial paper
and the repurchase of company stock.
In September 2002, we issued $400 million of unsecured fixed rate notes maturing
in October 2012. These notes bear interest at an annual rate of 4.625% and pay
interest semi-annually beginning April 2003. The proceeds from these notes were
used for general corporate purposes, including the repayment of commercial paper
in anticipation of 2003 debt maturities.
In February 2002, we completed an offering of Euros 250 million of senior
unsecured notes. These notes bore interest at a floating rate of EURIBOR plus 20
basis points, set two business days preceding the quarterly interest payment
dates and matured in August 2003. The notes were listed on the Luxembourg Stock
Exchange and were designated as a hedge of Euro denominated net investments held
by the company. The proceeds from these notes were used for general corporate
purposes, including the repayment of commercial paper, the financing of
acquisitions and the repurchase of company stock.
We believe that our financing needs for the next 12 months can be met with cash
generated internally, money from existing credit agreements, debt issued under
new and existing shelf registration statements and our existing commercial paper
program.
Capital Investments
- -------------------
During the first nine months of 2003, net investments in fixed assets included
$136.1 million in net additions to property, plant and equipment and $78.0
million in net additions to rental equipment and related inventories compared
with $104.9 million and $49.9 million, respectively, in the same period in 2002.
These additions include expenditures for plant and manufacturing equipment and
infrastructure improvements as well as increased investments associated with new
accounts at PBMS. In the case of rental equipment, the additions included the
production of postage meters. The increase in our investment in fixed assets
over the prior year was driven by our continued investments in infrastructure
improvements, digital equipment for PBMS sites and new digital meters.
We expect net investments in fixed assets for the remainder of 2003 to continue
to be higher than the prior year. These investments will also be affected by the
timing of our customers' transition to digital meters. At September 30, 2003,
commitments for the acquisition of property, plant and equipment as well as
rental equipment reflected the items discussed above.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 23
Investment in commercial passenger and cargo aircraft leasing transactions
- --------------------------------------------------------------------------
At September 30, 2003, our net investment in commercial passenger and cargo
aircraft leasing transactions was $298.2 million, which is composed of
transactions with U.S. and foreign airlines of $42.0 million and $256.2 million,
respectively. This portfolio is diversified across 12 airlines and 29 aircraft
and is financed through investments in leveraged lease transactions, direct
financing lease transactions and through our equity investment in PBG. Risk of
loss under these transactions is primarily related to: (1) the inability of the
airline to make underlying lease payments; (2) our inability to generate
sufficient cash flows either through the sale of the aircraft or secondary lease
transactions to recover our net investment; and/or (3) in the case of the
leveraged lease portfolio, the absence of an equity defeasance or other
third-party credit arrangements. Approximately 42 percent of our remaining net
investment in commercial passenger and cargo aircraft leasing investments is
further secured by approximately $124.7 million of equity defeasance accounts or
third-party credit arrangements.
At September 30, 2003, our net investment in commercial passenger and cargo
aircraft leasing transactions was composed of the following:
(Dollars in thousands)
% of total Net investment
Aircraft investment September 30, 2003
-------- ---------- ------------------
Airline
U.S.
- ----
United and subsidiary............ 5 5.2 $ 15,648
Delta............................ 5 12.3 36,674
America West..................... 1 7.0 20,934
American......................... 6 0.9 2,652
Southwest........................ 2 2.8 8,448
Northwest........................ 1 0.6 1,770
Alaska........................... 1 0.4 1,095
Federal Express.................. 1 7.2 21,480
Credit loss reserves............. (66,740)
-------- ---------- ------------------
22 14.1 41,961
-------- ---------- ------------------
Foreign
- -------
KLM.............................. 2 36.2 108,077
Qantas........................... 2 22.2 66,205
Japan............................ 2 16.2 48,305
Air France....................... 1 11.3 33,635
-------- ---------- ------------------
7 85.9 256,222
-------- ---------- ------------------
Total............................ 29 100.0 $ 298,183
======== ========== ==================
During the second quarter of 2003, Lufthansa exercised its early buy-out option.
We received approximately $22 million from this transaction, reflecting the net
investment at that time.
Capital Services portfolio
- --------------------------
Our investment in Capital Services lease related assets included in our
consolidated balance sheets was composed of the following:
(Dollars in millions)
September 30, 2003
------------------
Leveraged leases......................................... $ 1,499
Finance receivables...................................... 481
Other assets............................................. 57
Rental equipment......................................... 22
------------------
Total.................................................... $ 2,059
==================
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 24
The $1.5 billion investment in leveraged leases on our consolidated balance
sheets is diversified across the following types of assets:
o $333 million related to locomotives and railcars
o $332 million for postal equipment with international postal authorities
o $278 million related to commercial passenger and cargo aircraft
o $237 million related to commercial real estate facilities
o $138 million for telecommunications equipment
o $132 million for rail and bus facilities
o $49 million for shipping and handling equipment
Our leveraged lease investment in telecommunications equipment represents leases
to three highly rated international telecommunication entities. Approximately 86
percent of this portfolio is further secured by equity defeasance accounts or
other third-party credit arrangements. Additionally, our leveraged lease
investment in commercial real estate facilities includes approximately $87
million related to leases of corporate facilities to four U.S. telecommunication
entities, of which $72 million is with lessees that are highly rated.
Overall, approximately 52 percent of our $1.5 billion leveraged lease portfolio
is further secured by equity defeasance accounts or other third-party credit
arrangements. In addition, approximately 20 percent of the remaining leveraged
lease portfolio represents leases to highly rated government related
organizations which have guarantees or supplemental credit enhancements upon the
occurrence of certain events.
Finance receivables are composed of the following:
(Dollars in millions)
September 30, 2003
------------------
Assets held for sale........................ $ 51
Single investor leases:
Non-core................................... 165
Core....................................... 265
------------------
Total....................................... $ 481
==================
Other assets represent our 50% equity interest in PBG. We formed PBG with GATX
Corporation during 1997 for the purpose of financing and managing certain
leasing related assets. We account for our investment in PBG under the equity
method. See Note 2 to the consolidated financial statements.
In the third quarter 2003, we liquidated approximately $103 million of non-core
assets, including $45 million of our assets held for sale, and continued to
pursue the sale of other non-core lease assets on an economically advantageous
basis, which resulted in the sale of an additional $58 million of assets from
the portfolio. For the nine months ended September 30, 2003, we liquidated
approximately $306 million of non-core assets, including $145 million of our
assets held for sale and $161 million of our other non-core lease assets.
Subsequent Events
- -----------------
On October 23, 2003, we completed the acquisition of DDD for a net purchase
price of $49.5 million. DDD offers a broad array of services including,
fulfillment services, secure mail processing, messenger services, logistics
support, and record and information management.
Regulatory Matters
- ------------------
In 2000, the U.S. Postal Service (USPS) issued a schedule for the phaseout of
manually reset electronic meters in the U.S. as follows:
o As of February 1, 2000, new placements of manually reset electronic meters
were no longer permitted.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 25
o The current users of manually reset electronic meters could continue to use
these meters for the term of their rental and lease agreements. Leases or
rentals due to expire in 2000 could be extended to December 31, 2001.
On November 15, 2001, the USPS issued a rule as follows:
o New placements of non-digital meters without the "timeout" feature that
enables the meters to be automatically disabled, if not reset within a
specified time period are no longer permitted after December 31, 2002.
These meters must be off the market by December 31, 2006.
o New placements of non-digital meters with a "timeout" feature are no longer
permitted after June 30, 2004. These meters must be off the market by
December 31, 2008.
We adopted a formal meter transition plan in the second quarter of 2001 to
transition to the next generation of networked mailing technology.
USPS Information Based Indicia Program (IBIP)
In May 1995, the USPS publicly announced its concept of its IBIP for future
postage evidencing devices. As initially stated by the USPS, the purpose of the
program was to develop a new standard for future digital postage evidencing
devices which would significantly enhance postal revenue security and support
expanded USPS value-added services to mailers. The program would consist of the
development of four separate specifications: (i) the Indicium specification;
(ii) a Postal Security Device specification; (iii) a Host specification; and
(iv) a Vendor Infrastructure specification. During the period from May 1995
through December 31, 2001, we submitted extensive comments to a series of
proposed IBIP specifications issued by the USPS, including comments on the IBI
Performance Criteria.
Other regulatory matters
- ------------------------
In June 2002, we received an examination report from the Internal Revenue
Service (IRS) showing proposed income tax adjustments for the 1992 to 1994 tax
years. The total additional tax proposed by the IRS for the 1992 through 1994
tax years is about $24 million. In August 2002, we filed a protest with the IRS
to challenge most of the proposed deficiencies asserted by the IRS. We believe
that we have meritorious defenses to those deficiencies and that the ultimate
outcome will not result in a material effect on our results of operations,
financial position or cash flows. However, if the IRS prevails on its asserted
deficiencies, additional tax may be due for 1995 and future tax years, which
could materially affect our future results of operations, financial position or
cash flows. At any time, our provision for taxes could be affected by changes in
tax law and interpretations by governments or courts.
Forward-Looking Statements
- --------------------------
We want to caution readers that any forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 in this Form 10-Q, other reports or press
releases or made by our management involve risks and uncertainties which may
change based on various important factors. These forward-looking statements are
those which talk about the company's or management's current expectations as to
the future and include, but are not limited to, statements about the amounts,
timing and results of possible restructuring charges and future earnings. Words
such as "estimate," "project," "plan," "believe," "expect," "anticipate,"
"intend," and similar expressions may identify such forward-looking statements.
Some of the factors which could cause future financial performance to differ
materially from the expectations as expressed in any forward-looking statement
made by or on our behalf include:
o changes in international or national political conditions, including any
terrorist attacks
o negative developments in economic conditions, including adverse impacts on
customer demand
o changes in postal regulations
o timely development and acceptance of new products
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 26
o success in gaining product approval in new markets where regulatory approval
is required
o successful entry into new markets
o mailers' utilization of alternative means of communication or competitors'
products
o the company's success at managing customer credit risk, including risks
associated with commercial passenger and cargo aircraft leasing transactions
o changes in interest rates
o foreign currency fluctuations
o cost, timing and execution of the restructuring plan
o timing and execution of the meter transition plan
o regulatory approvals and satisfaction of other conditions to consummation of
any acquisitions and integration of recent acquisitions
o impact on mail volume resulting from current concerns over the use of the
mail for transmitting harmful biological agents
o third-party suppliers' ability to provide product components
o negative income tax adjustments for prior audit years and changes in tax laws
or regulations
o terms and timing of actions to reduce exposures and disposal of assets in
Capital Services segment
o continuing developments in the U.S. and foreign airline industry
o changes in pension and retiree medical costs.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There were no material changes to the disclosures made in the Annual Report on
Form 10-K for the year ended December 31, 2002 regarding this matter.
Item 4. Controls and Procedures
Explanation of Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer, after evaluating
the effectiveness of the company's "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 ("Exchange Act") Rules 13a-15(e)
and 15d-15(e)) as of the end of the period covered by this quarterly report,
have concluded that our disclosure controls and procedures are effective based
on their evaluation of these controls and procedures required by paragraph (b)
of Exchange Act Rules 13a-15 or 15d-15.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of
Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Part II - Other Information
---------------------------
Item 1: Legal Proceedings
In the ordinary course of normal business, we are routinely defendants in or
parties to a number of pending and threatened legal actions including
proceedings purportedly brought on behalf of classes of claimants. These may
involve litigation by or against us relating to, among other things:
o contractual rights under vendor, insurance or other contracts
o intellectual property or patent rights
o equipment, service, payment or other disputes with customers
o disputes with employees
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 27
Included among these cases are two patent actions, one with Stamps.com and one
with Ricoh Company, Ltd. in which allegations of infringement have been made
against our DM SeriesTM of products. In addition we are defendants in several
actions relating to a program PBCC offers to some of its leasing customers to
replace the leased equipment if it is lost, stolen or destroyed. In the last
quarter, the plaintiffs in Texas amended their complaint to expand its scope
from a purported class action limited to customers in Texas to include customers
in every state except California and Alabama. Already pending in California and
Alabama, as well as Louisiana, are purported class actions limited to customers
of those particular states. No court has ruled on whether or not any of these
four cases may proceed on a class basis. There are also several actions brought
on behalf of individual customers in Mississippi. We have previously prevailed
at the summary judgment stage in two similar litigations, including one federal
court decision affirmed by the United States Court of Appeals for the Fifth
Circuit.
In those cases where we are the defendant, plaintiffs may seek to recover large
and sometimes unspecified amounts of damages or other types of relief and some
matters may remain unresolved for several years. Although we cannot predict the
outcome of such matters, based on current knowledge, management does not believe
that the ultimate outcome of the litigations referred to in this section will
have a material adverse effect on our financial position, results of operations
or cash flows. However, if the plaintiffs do prevail, the result may have a
material effect on our financial position, future results of operations or cash
flows, including, for example, our ability to offer certain types of goods or
services in the future.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Reg. S-K
Exhibits Description
-------- ---------------------------------------------------------
(12) Computation of ratio of earnings to fixed charges
(31.1) Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(31.2) Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(32.1) Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(32.2) Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On August 25, 2003, the company filed a current report on Form 8-K
pursuant to Item 5 thereof, reporting the Press Release dated August 25,
2003 regarding its announcement to acquire DDD Company.
On July 21, 2003, the company filed a current report on Form 8-K pursuant
to Items 9 and 12 thereof, reporting the Press Release dated July 21,
2003 for the quarter ended June 30, 2003.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2003
Page 28
Signatures
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PITNEY BOWES INC.
November 12, 2003
/s/ B. P. Nolop
-----------------------------
B. P. Nolop
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ J. R. Catapano
------------------------------
J. R. Catapano
Controller
(Principal Accounting Officer)
Exhibit Index
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Reg. S-K
Exhibits Description
- -------- -------------------------------------------------------------------
(12) Computation of ratio of earnings to fixed charges
(31.1) Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
(31.2) Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
(32.1) Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
(32.2) Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002