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 March 31, 2004
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
1 Elmcroft Road
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes 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 April 23, 2004
was 231,127,806.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 2004
Page 2
Pitney Bowes Inc.
Index
-----------------
Page Number
-----------
Part I - Financial Information:
Item 1: Financial Statements
Consolidated Statements of Income (Unaudited) - Three Months
Ended March 31, 2004 and 2003............................... 3
Consolidated Balance Sheets - March 31, 2004 (Unaudited)
and December 31, 2003....................................... 4
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2004 and 2003.................. 5
Notes to Consolidated Financial Statements..................... 6 - 12
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 13 - 19
Item 3: Quantitative and Qualitative Disclosures about
Market Risk............................................ 19
Item 4: Controls and Procedures.................................. 20
Part II - Other Information:
Item 1: Legal Proceedings........................................ 20
Item 2: Changes in Securities and Use of Proceeds................ 20
Item 6: Exhibits and Reports on Form 8-K......................... 21
Signatures......................................................... 22
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 2004
Page 3
Part I - Financial Information
Item 1. Financial Statements.
Pitney Bowes Inc.
Consolidated Statements of Income
(Unaudited)
---------------------------------
(Dollars in thousands, except per share data)
Three Months Ended March 31,
----------------------------
2004 2003
------------ ------------
Revenue from:
Sales....................................... $ 331,360 $ 290,850
Rentals..................................... 201,438 196,288
Business services........................... 300,705 272,620
Support services............................ 160,499 148,921
Core financing.............................. 158,389 151,669
Non-core financing.......................... 19,531 30,461
------------ ------------
Total revenue............................. 1,171,922 1,090,809
------------ ------------
Costs and expenses:
Cost of sales............................... 159,375 139,927
Cost of rentals............................. 41,700 41,465
Cost of business services................... 245,892 222,793
Cost of support services.................... 85,623 78,299
Selling, general and administrative......... 361,728 341,753
Research and development.................... 36,004 35,751
Restructuring charges (Note 9).............. 15,043 21,265
Interest, net............................... 40,536 43,281
------------ ------------
Total costs and expenses.................. 985,901 924,534
------------ ------------
Income before income taxes.................... 186,021 166,275
Provision for income taxes.................... 59,427 52,372
------------ ------------
Net income.................................... $ 126,594 $ 113,903
============ ============
Basic earnings per share...................... $ .55 $ .48
============ ============
Diluted earnings per share.................... $ .54 $ .48
============ ============
Dividends declared per share of
common stock................................ $ .305 $ .300
============ ============
Ratio of earnings to fixed charges............ 4.32 3.91
============ ============
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 2004
Page 4
Pitney Bowes Inc.
Consolidated Balance Sheets
---------------------------
March 31, December 31,
(Dollars in thousands, except share data) 2004 2003
-------------- ---------------
(Unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents........................... $ 298,711 $ 293,812
Short-term investments, at cost which
approximates market............................. 2,180 28
Accounts receivable, less allowances:
3/04, $41,165; 12/03, $39,778................... 478,905 459,106
Finance receivables, less allowances:
3/04, $69,160; 12/03, $62,269................... 1,374,784 1,358,691
Inventories (Note 3)................................ 215,036 209,527
Other current assets and prepayments................ 204,487 192,011
-------------- ---------------
Total current assets............................ 2,574,103 2,513,175
Property, plant and equipment, net (Note 4).............. 667,887 653,661
Rental equipment and related inventories, net (Note 4)... 480,520 414,341
Property leased under capital leases, net (Note 4)....... 2,171 2,230
Long-term finance receivables, less allowances:
3/04, $106,027; 12/03, $78,915...................... 1,819,967 1,654,419
Investment in leveraged leases........................... 1,534,570 1,534,864
Goodwill (Note 11)....................................... 995,029 956,284
Intangible assets, net (Note 11)......................... 206,145 203,606
Other assets............................................. 901,540 958,808
-------------- ---------------
Total assets............................................. $ 9,181,932 $ 8,891,388
============== ===============
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities............ $ 1,350,379 $ 1,392,597
Income taxes payable................................ 191,296 154,799
Notes payable and current portion of
long-term obligations........................... 995,156 728,658
Advance billings.................................... 398,129 370,915
-------------- ---------------
Total current liabilities....................... 2,934,960 2,646,969
Deferred taxes on income................................. 1,686,223 1,659,226
Long-term debt (Note 5).................................. 2,691,094 2,840,943
Other noncurrent liabilities............................. 415,301 346,888
-------------- ---------------
Total liabilities............................... 7,727,578 7,494,026
-------------- ---------------
Preferred stockholders' equity in a subsidiary company... 310,000 310,000
Stockholders' equity:
Cumulative preferred stock, $50 par
value, 4% convertible........................... 19 19
Cumulative preference stock, no par
value, $2.12 convertible........................ 1,292 1,315
Common stock, $1 par value.......................... 323,338 323,338
Retained earnings................................... 4,103,860 4,057,654
Accumulated other comprehensive income (Note 8)..... 94,732 18,063
Treasury stock, at cost............................. (3,378,887) (3,313,027)
-------------- ---------------
Total stockholders' equity...................... 1,144,354 1,087,362
-------------- ---------------
Total liabilities and stockholders' equity............... $ 9,181,932 $ 8,891,388
============== ===============
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 2004
Page 5
Pitney Bowes Inc.
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
(Dollars in thousands) Three Months Ended March 31,
----------------------------
2004 2003
------------ ------------
Cash flows from operating activities:
Net income............................................. $ 126,594 $ 113,903
Nonrecurring charges, net.............................. 9,628 13,610
Nonrecurring payments.................................. (16,552) (12,835)
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization...................... 73,393 67,482
Increase in deferred taxes on income............... 30,698 24,430
Change in assets and liabilities, net of
effects of acquisitions:
Accounts receivable.............................. (5,894) (13,789)
Net investment in internal finance receivable.... 33,187 23,933
Inventories...................................... 1,095 (11,814)
Other current assets and prepayments............. (2,966) (3,226)
Accounts payable and accrued liabilities......... (20,814) (22,333)
Income taxes payable............................. 28,647 24,549
Advanced billings................................ 20,647 14,178
Other, net....................................... (2,685) (1,240)
------------ ------------
Net cash provided by operating activities........ 274,978 216,848
------------ ------------
Cash flows from investing activities:
Short-term investments................................. (2,176) (4,655)
Capital expenditures................................... (74,469) (68,342)
Net investment in capital services..................... 16,103 52,714
Investment in leveraged leases......................... (14,069) 34,353
Reserve account deposits............................... (2,443) 12,828
Other investing activities............................. (7,578) (42,123)
------------ ------------
Net cash used in investing activities............ (84,632) (15,225)
------------ ------------
Cash flows from financing activities:
(Decrease) increase in notes payable, net.............. (76,206) 267,699
Proceeds from long-term obligations.................... 2,222 110,358
Principal payments on long-term obligations............ (7,891) (411,700)
Proceeds from issuance of stock........................ 20,675 8,983
Stock repurchases...................................... (96,000) (50,016)
Dividends paid......................................... (70,946) (70,467)
------------ ------------
Net cash used in financing activities............ (228,146) (145,143)
------------ ------------
Effect of exchange rate changes on cash.................. 6,079 4,017
------------ ------------
(Decrease) increase in cash and cash equivalents......... (31,721) 60,497
Cash from consolidation of PBG Capital Partners LLC...... 36,620 -
Cash and equivalents at beginning of period.............. 293,812 315,156
------------ ------------
Cash and cash equivalents at end of period............... $ 298,711 $ 375,653
============ ============
Interest paid............................................ $ 43,943 $ 51,840
============ ============
Income taxes paid (refunded), net........................ $ 8,861 $ (2,356)
============ ============
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 2004
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 accounting principles generally accepted
in the United States of America (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 March 31, 2004 and December 31, 2003,
and the results of its operations and cash flows for the three months ended
March 31, 2004 and 2003 have been included. Operating results for the three
months ended March 31, 2004 are not necessarily indicative of the results that
may be expected for any other interim period or the year ending December 31,
2004. These statements should be read in conjunction with the financial
statements and notes thereto included in the company's 2003 Annual Report to
Stockholders on Form 10-K. Certain prior year amounts in the consolidated
financial statements have been reclassified to conform to the current year
presentation.
Note 2:
- -------
In December 2002, Statement of Financial Accounting Standards (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 was 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 Accounting Principles Board (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 months ended
March 31, 2004 and 2003 would have been reduced to the following pro forma
amounts:
(Dollars in thousands, except per share data) Three Months Ended March 31,
----------------------------
2004 2003
------------ ------------
Net Income
As reported........................................... $ 126,594 $ 113,903
Deduct: Stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects.................. (4,290) (5,152)
------------ ------------
Pro forma............................................. $ 122,304 $ 108,751
============ ============
Basic earnings per share
As reported........................................... $ .55 $ .48
Pro forma............................................. $ .53 $ .46
Diluted earnings per share
As reported........................................... $ .54 $ .48
Pro forma............................................. $ .52 $ .46
The fair value of each stock option and employee stock purchase right grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
Three Months Ended March 31,
----------------------------
2004 2003
------------ ------------
Expected dividend yield................................ 3.1% 3.4%
Expected stock price volatility........................ 25% 31%
Risk-free interest rate................................ 3% 3%
Expected life (years).................................. 5 5
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 2004
Page 7
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (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 is entitled to receive a majority of the
entity's residual returns or both. The company's ownership of the equity of PBG
Capital Partners LLC (PBG) 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. The company adopted the provisions
of FIN No. 46 effective March 31, 2004 and consolidated the assets and
liabilities of PBG on March 31, 2004. Prior to March 31, 2004, the company
accounted for PBG under the equity method of accounting. PBG's minority interest
of $70 million is included in other noncurrent liabilities in the Consolidated
Balance Sheets at March 31, 2004. The consolidation of PBG did not impact the
company's 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 were effective July 1, 2003 for the company.
The company has evaluated the preferred securities previously issued by a
subsidiary company and concluded that the $310 million of preferred securities
are outside the scope of FAS No. 150. As a result, 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) March 31, December 31,
2004 2003
------------ ------------
Raw materials and work in process............... $ 95,008 $ 86,822
Supplies and service parts...................... 60,014 55,159
Finished products............................... 60,014 67,546
------------ ------------
Total........................................... $ 215,036 $ 209,527
============ ============
Note 4:
- ------
Fixed assets are composed of the following:
(Dollars in thousands) March 31, December 31,
2004 2003
------------ ------------
Property, plant and equipment................... $ 1,646,507 $ 1,617,479
Accumulated depreciation........................ (978,620) (963,818)
------------ ------------
Property, plant and equipment, net.............. $ 667,887 $ 653,661
============ ============
Rental equipment and related inventories........ $ 1,167,937 $ 1,103,474
Accumulated depreciation........................ (687,417) (689,133)
------------ ------------
Rental equipment and related inventories, net... $ 480,520 $ 414,341
============ ============
Property leased under capital leases............ $ 8,818 $ 14,942
Accumulated amortization........................ (6,647) (12,712)
------------ ------------
Property leased under capital leases, net....... $ 2,171 $ 2,230
============ ============
Depreciation expense was $66.3 million and $61.2 million for the three months
ended March 31, 2004 and 2003, respectively.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 2004
Page 8
Note 5:
- ------
On March 31, 2004, $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 accordance with the provisions of FIN No. 46, the company consolidated $178
million of nonrecourse debt of PBG, including $138 million of long-term
nonrecourse debt at March 31, 2004.
Note 6:
- ------
A reconciliation of the basic and diluted earnings per share computations for
the three months ended March 31, 2004 and 2003 is as follows (in thousands,
except per share data):
2004 2003
---------------------------------------- ----------------------------------------
Per Per
Income Shares Share Income Shares Share
------------ ------------ ------------ ------------ ------------ ------------
Net Income............................ $ 126,594 $ 113,903
Less:
Preferred stock dividends.......... - -
Preference stock dividends......... (25) (28)
------------ ------------ ------------ ------------ ------------ ------------
Basic earnings per share.............. $ 126,569 231,895 $.55 $ 113,875 234,795 $.48
============ ============ ============ ============ ============ ============
Effect of dilutive securities:
Preferred stock.................... - 9 - 12
Preference stock................... 25 797 28 869
Stock options...................... 1,904 843
Other.............................. 142 3
------------ ------------ ------------ ------------ ------------ ------------
Diluted earnings per share............ $ 126,594 234,747 $.54 $ 113,903 236,522 $.48
============ ============ ============ ============ ============ ============
In accordance with FAS No. 128, "Earnings per Share," 2.1 million and 5.2
million common stock equivalent shares for the three months ended March 31, 2004
and 2003, respectively, issuable upon the exercise of stock options were
excluded from the above computation 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 was antidilutive.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 2004
Page 9
Note 7:
- ------
Revenue and earnings before interest and taxes (EBIT) by business segment for
the three months ended March 31, 2004 and 2003 were as follows:
Three Months Ended March 31,
----------------------------
(Dollars in thousands) 2004 2003
------------ ------------
Revenue:
Global Mailstream Solutions................... $ 813,613 $ 744,795
Global Enterprise Solutions................... 328,618 305,650
Capital Services.............................. 29,691 40,364
------------ ------------
Total revenue................................... $ 1,171,922 $ 1,090,809
============ ============
EBIT: (1)
Global Mailstream Solutions................... $ 249,877 $ 233,337
Global Enterprise Solutions................... 14,960 14,673
Capital Services.............................. 19,210 25,396
------------ ------------
Total EBIT...................................... 284,047 273,406
Unallocated amounts:
Interest, net................................. (40,536) (43,281)
Corporate expense............................. (42,447) (42,585)
Restructuring charges......................... (15,043) (21,265)
------------ ------------
Income before income taxes...................... $ 186,021 $ 166,275
============ ============
(1) EBIT excludes general corporate expenses.
Note 8:
- ------
Comprehensive income for the three months ended March 31, 2004 and 2003 was as
follows:
(Dollars in thousands) Three Months Ended March 31,
----------------------------
2004 2003
------------ ------------
Net income...................................... $ 126,594 $ 113,903
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments...... 82,224 42,467
Net unrealized loss on derivative instruments. (5,555) (2,588)
------------ ------------
Comprehensive income............................ $ 203,263 $ 153,782
============ ============
Note 9:
- ------
The company accounts for one-time benefit arrangements and exit or disposal
activities primarily in accordance with FAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which requires that a liability be
recognized when the costs are incurred. 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. The fair values of impaired long-lived assets
are determined primarily using probability weighted expected cash flows in
accordance with FAS No. 144, "Accounting for the Impairment of Long-Lived
Assets."
In January 2003, the company announced that it would undertake restructuring
initiatives related to realigned infrastructure requirements and reduced
manufacturing needs for digital equipment. The charges related to these
restructuring initiatives will be recorded as the various initiatives take
effect.
In connection with this plan, the company recorded pre-tax restructuring charges
of $15.0 million and $21.3 million for the three months ended March 31, 2004 and
2003, respectively. The pre-tax restructuring charges are composed of:
(Dollars in millions) Three Months Ended March 31,
----------------------------
2004 2003
------------ ------------
Severance and benefit costs..................... $ 12.8 $ 18.4
Asset impairments............................... 1.3 0.5
Other exit costs................................ 0.9 2.4
------------ ------------
$ 15.0 $ 21.3
============ ============
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 2004
Page 10
All restructuring charges, except for the asset impairments, will result in cash
outflows. The severance and benefit costs relate to a reduction in workforce of
approximately 1,700 employees worldwide from the inception of this plan through
March 31, 2004 and expected future workforce reductions of approximately 700
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 66% of the workforce
reductions are in the U.S. The majority of the international workforce
reductions are in Europe and Canada. 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.
Accrued restructuring charges at March 31, 2004 are composed of the following:
(Dollars in millions) Balance at Ending balance
January 1, Restructuring Cash Non-cash at March 31,
2004 charges payments charges 2004
--------------- ----------------- ------------- ------------ ------------------
Severance and
benefit costs................... $ 27.5 $ 12.8 $ (16.0) $ - $ 24.3
Asset impairments................ - 1.3 - (1.3) -
Other exit costs................. 4.7 0.9 (0.6) - 5.0
--------------- ----------------- ------------- ------------ ------------------
$ 32.2 $ 15.0 $ (16.6) $ (1.3) $ 29.3
=============== ================= ============= ============ ==================
Note 10:
- -------
On October 23, 2003, the company completed the acquisition of DDD Company (DDD)
for a net purchase price of $49.5 million, which consisted of approximately
$24.8 million of cash and the issuance of 595,485 shares of common stock valued
at $24.7 million. The value of common shares was determined based on the average
market price of common shares over a period of time prior to the completion of
the acquisition. The results of DDD's operations have been included in the
consolidated financial statements since the date of acquisition. DDD offers a
broad array of services, including fulfillment services, secure mail processing,
messenger services, logistics support, and record and information management.
Allocation of the purchase price to the assets acquired and liabilities assumed
has not been finalized for this acquisition. Final determination of fair values
to be assigned may result in adjustments to the preliminary estimated values
assigned at the date of acquisition. The following table summarizes the
preliminary estimated fair values of the major assets acquired and liabilities
assumed at the date of acquisition:
(Dollars in thousands)
Intangible assets........................................ $ 13,900
Goodwill................................................. 31,187
Other, net............................................... 4,452
----------------
Purchase price.......................................... $ 49,539
================
Intangible assets relate primarily to customer relationships and have a
weighted-average useful life of approximately 10 years. The goodwill was
assigned to the Global Enterprise Solutions segment. No research and development
assets were acquired.
Consolidated impact of acquisitions
- -----------------------------------
The acquisition of DDD increased the company's earnings, 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 DDD had occurred on January 1, 2003:
(Dollars in thousands) Three Months Ended March 31,
----------------------------
2004 2003
------------- -----------
Total revenue................................ $ 1,171,922 $ 1,108,309
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, 2003,
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 2004 and 2003, the company also completed several smaller acquisitions.
During 2004 and 2003, the company acquired some of its presort businesses and
international dealerships. During 2003, the company also acquired one of its
address printing suppliers. The cost of these acquisitions was in the aggregate
less than $70 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.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 2004
Page 11
Note 11:
- -------
Intangible assets are composed of the following:
(Dollars in thousands) March 31, 2004 December 31, 2003
--------------------------- -----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------------ ------------ ------------ ------------
Customer relationships......................... $ 167,313 $ 21,607 $ 161,655 $ 18,002
Mailing technology............................. 66,286 11,468 63,603 9,519
Trademark and trade names...................... 8,901 4,778 8,357 4,067
Non-compete agreements......................... 3,729 2,231 3,496 1,917
------------ ------------ ------------ ------------
$ 246,229 $ 40,084 $ 237,111 $ 33,505
============ ============ ============ ============
Amortization expense for intangible assets was $5.0 million and $3.7 million for
the three months ended March 31, 2004 and 2003, respectively. Estimated
intangible amortization expense for each of the next five years is as follows:
(Dollars in thousands)
For the year ending 12/31/04................... $20,000
For the year ending 12/31/05................... $19,900
For the year ending 12/31/06................... $19,100
For the year ending 12/31/07................... $17,400
For the year ending 12/31/08................... $16,800
For the year ending 12/31/09................... $16,300
Changes in the carrying amount of goodwill by business segment for the three
months ended March 31, 2004 are as follows:
(Dollars in thousands) Global Global
Mailstream Enterprise
Solutions Solutions Total
------------ ------------ ------------
Balance at January 1, 2004..................... $ 492,445 $ 463,839 $ 956,284
Goodwill acquired during the period............ 8,448 - 8,448
Other.......................................... 21,582 8,715 30,297
------------ ------------ ------------
Balance at March 31, 2004...................... $ 522,475 $ 472,554 $ 995,029
============ ============ ============
"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 $124.5 million and $125.9 million at March 31, 2004 and December 31,
2003, respectively. In accordance with GAAP, the company does not record these
amounts as liabilities in its Consolidated Balance Sheets. The company's maximum
risk of loss on these financing 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/or supported by the
creditworthiness of its customers. At March 31, 2004 and December 31, 2003, the
underlying equipment value exceeded the sum of the uncollected principal balance
of receivables sold and the guarantee contracts.
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 March 31,
2004 and December 31, 2003, respectively, was not material.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 2004
Page 12
Note 13:
- -------
In December 2003, the company received accepted closing agreements with the
Internal Revenue Service (IRS) showing income tax adjustments for the 1992 to
1994 tax years. The total additional tax for these years is approximately $5.0
million. Additional tax due for 1995 and future tax years in connection with
these closing agreements will not materially affect the company's future results
of operations, financial position or cash flows. In addition to the accepted
income tax adjustments, one 1994 proposed adjustment remains in dispute, which
could result in additional tax of approximately $4.3 million. The company
believes that it has meritorious defenses to this deficiency and that the
ultimate outcome will not result in a material effect on its results of
operations, financial position or cash flows. The company believes that its
accruals for tax liabilities are adequate for all open years. However, if the
IRS prevails on this deficiency, additional tax may be due for 1995 and future
tax years, which could materially affect its results of operations, financial
position or cash flows. At any time, the company's provision for taxes could be
affected by changes in tax laws and interpretations by governments or courts.
Note 14:
- -------
Defined Benefit Pension Plans
The components of net periodic cost for defined benefit pension plans for the
three months ended March 31, 2004 and 2003 are as follows:
(Dollars in thousands) United States Foreign
---------------------------- ----------------------------
Three Months Ended March 31, Three Months Ended March 31,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Service cost................................... $ 8,260 $ 6,959 $ 2,346 $ 2,001
Interest cost.................................. 22,052 23,667 5,240 4,564
Expected return on plan assets................. (31,983) (29,458) (6,284) (5,635)
Amortization of transition cost................ - - (134) 36
Amortization of prior service cost............. (682) (647) 138 118
Amortization of net loss....................... 2,928 486 1,618 1,408
Curtailment.................................... - - - 389
------------ ------------ ------------ ------------
Net periodic benefit cost...................... $ 575 $ 1,007 $ 2,924 $ 2,881
============ ============ ============ ============
The company previously disclosed in its consolidated financial statements for
the year ended December 31, 2003 that it expects to contribute up to $5 million
and up to $10 million, respectively, to its U.S. and foreign pension plans
during 2004. At March 31, 2004, $1.3 million and $1.4 million of contributions
have been made to the U.S. and foreign pension plans, respectively.
Nonpension Postretirement Benefit Plans
The components of net periodic cost for nonpension postretirement benefit plans
for the three months ended March 31, 2004 and 2003 are as follows:
(Dollars in thousands) Three Months Ended March 31,
----------------------------
2004 2003
------------ ------------
Service cost................................... $ 1,060 $ 797
Interest cost.................................. 4,884 4,375
Amortization of prior service cost............. (2,049) (1,918)
Amortization of net loss....................... 1,787 930
------------ ------------
Net periodic benefit cost...................... $ 5,682 $ 4,184
============ ============
The company previously disclosed in its consolidated financial statements for
the year ended December 31, 2003 that it expects to contribute $34 million,
which represents its expected benefit payments, to its postretirement benefits
plans during 2004. At March 31, 2004, $7.7 million of contributions have been
made.
Note 15:
- -------
On April 13, 2004, the company signed a definitive agreement to acquire all of
the outstanding shares of Group 1 Software, Inc. (Group 1) for $23 per share,
which net of cash on Group 1's balance sheet, will cost the company
approximately $321 million. Group 1 is an industry leader in software that
enhances mailing efficiency, data quality and customer communications. Subject
to approval by Group 1's stockholders and completion of other conditions, the
transaction is expected to close in the third quarter of 2004.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 2004
Page 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) contains statements that are forward-looking. These statements
are based on current expectations and assumptions that are subject to risks and
uncertainties. Actual results could differ materially because of factors
discussed in Forward-Looking Statements on page 19 and elsewhere in this report.
Overview
- --------
In the first quarter of 2004, we grew our existing businesses and continued to
execute our long-term growth strategies. The quarter featured good organic
growth largely driven by increased global demand for our mailing solutions and
services by customers of all sizes. We expanded our participation in the
mailstream and diversified our customer base with the continued growth in our
small business solutions, the expansion of our pre-sort network, and the growing
use of our advanced technologies to process consumer originated mail. Our
international presence grew as a result of strong customer acceptance of our new
digital mailing solutions. Additionally, we positioned ourselves to provide
higher value document management solutions with our definitive agreement to
acquire Group 1 Software, Inc. (Group 1) and build our customer communication
management capability.
Revenue increased 7% in the first quarter of 2004 to $1,172 million compared
with the first quarter of 2003 driven by strong organic growth in our Global
Mailstream Solutions segment, the favorable impact of foreign currency and the
acquisition of DDD Company (DDD). Net income increased 11% in the first quarter
of 2004 to $126.6 million compared with the first quarter of 2003. Diluted
earnings per share increased to 54 cents in the first quarter of 2004 from 48
cents in the first quarter of 2003. During the first quarter of 2004, we took
several actions as part of our previously announced restructuring program. Net
income for the first quarter of 2004 and 2003, was reduced by pre-tax
restructuring charges of $15 million and $21 million, respectively, or 4 cents
and 6 cents, respectively, per diluted share relating to these actions. First
quarter 2004 diluted earnings per share included 2 cents per diluted share from
non-core Capital Services operations compared with 4 cents per diluted share in
the first quarter of 2003.
See Results of Continuing Operations - first quarter of 2004 vs. first quarter
of 2003 below for a more detailed discussion of our results of operations.
Results of Continuing Operations - first quarter of 2004 vs. first quarter of
- -----------------------------------------------------------------------------
2003
- ----
Business segment results
The following table shows revenue and earnings before interest and taxes (EBIT)
by business segment for the three months ended March 31, 2004 and 2003:
(Dollars in millions) Revenue EBIT
----------------------------------------- ------------------------------------------
Three months ended March 31, Three months ended March 31,
----------------------------------------- ------------------------------------------
2004 2003 % change 2004 2003 % change
----------- ----------- ----------- ------------ ----------- -----------
Global Mailstream Solutions........ $ 813 $ 745 9% $ 250 $ 233 7%
Global Enterprise Solutions........ 329 306 8% 15 15 2%
Capital Services................... 30 40 (26%) 19 25 (24%)
----------- ----------- ----------- ------------ ----------- -----------
Total.............................. $ 1,172 $ 1,091 7% $ 284 $ 273 4%
=========== =========== =========== ============ =========== ===========
During the first quarter of 2004, Global Mailstream Solutions revenue increased
9% and EBIT increased 7%. Global Mailstream Solutions continued to experience
good customer demand worldwide for its revolutionary digital mailing systems,
mail creation products and distribution solutions applications. The segment also
benefited from strong growth in its small business operations and in its
supplies revenue. Additionally, our pre-sort operations continued to expand
during the quarter and again grew revenue at a double-digit pace. Non-U.S.
revenue experienced strong organic growth and favorable foreign currency
exchange rates. The UK, Canada and Japan all had double-digit revenue growth in
local currency, helped by the recent introduction of new digital mailing
systems. Germany was the only European country in which revenue did not grow on
a local currency basis.
During the first quarter of 2004, revenue grew 8% and EBIT grew 2% in the Global
Enterprise Solutions segment. Pitney Bowes Management Services (PBMS) reported
revenue of $265 million, an 8% increase over the prior year and margins
consistent with the prior year. The increase in revenue was driven primarily by
the acquisition of DDD in 2003. The Government Solutions operations continued to
grow as the integration of DDD progressed. PBMS continues to focus on strategies
for enhancing value to its customers and working more efficiently and
cost-effectively. Document Messaging Technologies (DMT) reported revenue of $64
million for the quarter, an increase of 4% versus the prior year. Overall
business trends are positive with a good backlog and ongoing success with the
APSTM Series Advanced Productivity System platform. Margins declined slightly
because of a lower level of customer financing during the quarter.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 2004
Page 14
During the first quarter of 2004, revenue decreased 26% and EBIT decreased 24%
in the Capital Services segment which is consistent with our ongoing planned
strategy to reduce exposure to non-core, long-term financing. First quarter 2004
diluted earnings per share included 2 cents per diluted share from non-core
Capital Services operations compared with 4 cents per diluted share in the first
quarter of 2003.
Revenue by source
First quarter 2004 revenue included $331.4 million from sales, up 14% from
$290.9 million in the first quarter of 2003 due primarily to increased equipment
sales, strong supplies sales and the favorable impact of foreign currency;
$201.4 million from rentals, up 3% from $196.3 million due primarily to the
favorable impact of foreign currency; $300.7 million from business services, up
10% from $272.6 million due primarily to the acquisition of DDD and the
expansion of our presort operations; $160.5 million from support services, up 8%
from $148.9 million due primarily to an increased service contract base
worldwide and the favorable impact of foreign currency; $158.4 million from core
financing, up 4% from $151.7 million due to strong growth in our postal payment
products and the favorable impact of foreign currency; and $19.5 million from
non-core financing, down 36% from $30.5 million due to our ongoing planned
strategy to reduce our exposure to non-core, long-term financing.
Costs and expenses
Cost of sales as a percentage of sales revenue was 48.1% in the first quarter of
2004 and 2003.
Cost of rentals decreased to 20.7% of related revenues in the first quarter of
2004 compared with 21.1% in the first quarter of 2003 due primarily to lower
repair costs resulting from the shift from electronic to digital meters.
Cost of business services was 81.8% of related revenues in the first quarter of
2004 compared with 81.7% in the first quarter of 2003.
Cost of support services increased to 53.3% of related revenues in the first
quarter of 2004 compared with 52.6% in the first quarter of 2003 due to the
increase in mix of lower margin international support services revenue.
Selling, general and administrative expenses decreased to 30.9% of revenue in
the first quarter of 2004 compared with 31.3% in the first quarter of 2003
reflecting our continuing emphasis on controlling operating expenses, partially
offset by costs associated with investments in infrastructure improvements,
organizational transformation programs and growth initiatives.
Research and development expenses increased 1% to $36.0 million in the first
quarter of 2004 compared with $35.8 million in the first quarter of 2003. The
increase reflects our continued commitment to develop new technologies and
enhanced mailing and software products.
Net interest expense decreased to $40.5 million in the first quarter of 2004
from $43.3 million in the first quarter of 2003. The decrease was due to lower
average borrowings during the first quarter of 2004 compared with the first
quarter of 2003.
The effective tax rate for the first quarter of 2004 was 31.9% compared with
31.5% in the first quarter of 2003. The effective tax rates for the first
quarter of 2004 and 2003 included tax benefits of .3% and .5%, respectively,
from restructuring charges. The increase in the 2004 effective tax rate also
reflects the impact of our strategy to cease originating large-ticket,
structured, third-party financing of non-core assets.
Accounting Pronouncements
- -------------------------
In December 2002, Statement of Financial Accounting Standards (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
Three Months Ended March 31, 2004
Page 15
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (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 is entitled to receive a majority of the
entity's residual returns or both. Our ownership of the equity of PBG Capital
Partners LLC (PBG) 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. We adopted the provisions of FIN No. 46
effective March 31, 2004 and consolidated the assets and liabilities of PBG on
March 31, 2004. Prior to March 31, 2004, we accounted for our investment in PBG
under the equity method of accounting. PBG's minority interest of $70 million
is included in other noncurrent liabilities in the Consolidated Balance Sheets
at March 31, 2004. The consolidation of PBG did not impact our 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 were effective July 1, 2003. We have
evaluated the preferred securities previously issued by a subsidiary company and
concluded that the $310 million of preferred securities are outside the scope of
FAS No. 150. As a result, 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. We continue to review the anticipated cost of these
restructuring initiatives and currently estimate the total pre-tax cost of these
restructuring initiatives during the two years will be about $200 million ($125
million after tax). As we continue to finalize our 2004 restructuring plans, the
ultimate amount of the restructuring charges may differ from our current
estimates. The charges related to these restructuring initiatives will be
recorded as the various initiatives take effect.
The cash outflows related to restructuring charges will be funded primarily by
cash from operating activities. The restructuring initiatives are expected to
continue to increase our operating efficiency and effectiveness in 2004 and
beyond while enhancing growth, primarily as a result of reduced personnel
related expenses. See Note 9 to the consolidated financial statements for our
accounting policy related to restructuring charges.
In connection with this plan, we recorded pre-tax restructuring charges of $15.0
million and $21.3 million for the three months ended March 31, 2004 and 2003,
respectively. The pre-tax restructuring charges are composed of:
(Dollars in millions) Three Months Ended March 31,
----------------------------
2004 2003
------------ ------------
Severance and benefit costs..................... $ 12.8 $ 18.4
Asset impairments............................... 1.3 0.5
Other exit costs................................ 0.9 2.4
------------ ------------
$ 15.0 $ 21.3
============ ============
All restructuring charges, except for the asset impairments, will result in cash
outflows. The severance and benefit costs relate to a reduction in workforce of
approximately 1,700 employees worldwide from the inception of this plan through
March 31, 2004 and expected future workforce reductions of approximately 700
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 66% of the workforce
reductions are in the U.S. The majority of the international workforce
reductions are in Europe and Canada. 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
Three Months Ended March 31, 2004
Page 16
Accrued restructuring charges at March 31, 2004 are composed of the following:
(Dollars in millions) Balance at Ending balance
January 1, Restructuring Cash Non-cash at March 31,
2004 charges payments charges 2004
--------------- ----------------- ------------- ------------ ------------------
Severance and
benefit costs................... $ 27.5 $ 12.8 $ (16.0) $ - $ 24.3
Asset impairments................ - 1.3 - (1.3) -
Other exit costs................. 4.7 0.9 (0.6) - 5.0
--------------- ----------------- ------------- ------------ ------------------
$ 32.2 $ 15.0 $ (16.6) $ (1.3) $ 29.3
=============== ================= ============= ============ ==================
Acquisitions
- ------------
In October 2003, we acquired DDD for a net purchase price of $49.5 million,
which consisted of approximately $24.8 million of cash and the issuance of
common stock valued at $24.7 million. DDD offers a broad array of services
including, fulfillment services, secure mail processing, manager services,
logistics support, and record and information management.
We accounted for the acquisition of DDD under the purchase method and
accordingly, the operating results of DDD have been included in our consolidated
financial statements since the date of acquisition. The acquisition of DDD did
not materially impact net income for the three months ended March 31, 2004.
During 2004 and 2003, we also completed several smaller acquisitions. During
2004 and 2003, we acquired some of our presort businesses and international
dealerships. During 2003, we also acquired one of our address printing
suppliers. The cost of these acquisitions was in the aggregate less than $70
million in each year. These acquisitions did not have a material impact on our
financial results either individually or on an aggregate basis.
Liquidity and Capital Resources
- -------------------------------
Our ratio of current assets to current liabilities decreased to .88 to 1 at
March 31, 2004 compared with .95 to 1 at December 31, 2003. The decrease in this
ratio was due primarily to the reclassification of $300 million of notes from
long-term debt to short-term debt partially offset by lower commercial paper
borrowings at March 31, 2004.
The following table summarizes our cash flows for the three months ended March
31, 2004 and 2003:
(Dollars in thousands) Three Months Ended March 31,
----------------------------
2004 2003
------------ ------------
Cash provided by (used in):
Operating activities............................. $ 274,978 $ 216,848
Investing activities............................. (84,632) (15,225)
Financing activities............................. (228,146) (145,143)
Effect of exchange rate changes on cash.......... 6,079 4,017
------------ ------------
Net change in cash and cash equivalents.......... $ (31,721) $ 60,497
============ ============
Net cash provided by operating activities consisted primarily of net income
adjusted for non-cash items and changes in working capital. Net cash used in
investing activities consisted primarily of capital expenditures. Net cash used
in financing activities consisted primarily of stock repurchases, dividends paid
to stockholders and a decrease in total debt.
The ratio of total debt to total debt and stockholders' equity was 76.3% and
76.7% at March 31, 2004 and December 31, 2003, respectively. Including the
preferred stockholders' equity in a subsidiary company as debt, the ratio of
total debt to total debt and stockholders' equity was 77.8% and 78.1% at March
31, 2004 and December 31, 2003, respectively. The decrease in this ratio was
driven by a reduction of total recourse debt, favorable foreign currency
translation adjustments and income, offset by the $96 million repurchase of
2.3 million shares of common stock in the first quarter of 2004 and the
consolidation of PBG's nonrecourse debt of $178 million at March 31, 2004.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 2004
Page 17
Financings and Capitalization
- -----------------------------
At March 31, 2004, $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, 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.
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 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.
We believe our financing needs for the next 12 months can be met with cash
generated internally, debt issued under new and existing shelf registration
statements and our existing commercial paper programs. In addition, we maintain
a back-up credit facility for our commercial paper program.
In accordance with the provisions of FIN No. 46, we consolidated $178 million of
nonrecourse debt of PBG, including $138 million of long-term nonrecourse debt at
March 31, 2004.
Capital Expenditures
- --------------------
In the first quarter of 2004, capital expenditures included $43.5 million in net
additions to property, plant and equipment and $31.0 million in net additions to
rental equipment and related inventories compared with $41.8 million and $26.5
million, respectively, in the same period in 2003.
We expect capital expenditures for the remainder of 2004 to be approximately the
same as the prior year. These investments will also be affected by the timing of
our customers' transition to digital meters.
Investment in commercial passenger and cargo aircraft leasing transactions
- --------------------------------------------------------------------------
At March 31, 2004 and December 31, 2003, our net investment in commercial
passenger and cargo aircraft leasing transactions was $293 million and $298
million, respectively, which is composed of transactions with U.S. airlines of
$35 million and $41 million, respectively, and foreign airlines of $257 million
for both periods. There have been no significant changes to the net investment
in commercial passenger and cargo aircraft leasing transactions disclosure from
our 2003 Annual Report on Form 10-K. Our net investment in commercial passenger
and cargo aircraft leasing portfolio is composed of investments in leveraged
lease transactions, direct financing lease transactions and a portion of our
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 default of an equity
defeasance or other third party credit arrangements. At March 31, 2004 and
December 31, 2003, approximately 43% and 42%, respectively, of our remaining net
investment in commercial passenger and cargo aircraft leasing investments is
further secured by approximately $126 million and $125 million, respectively, of
equity defeasance accounts or third party credit arrangements.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 2004
Page 18
Capital Services portfolio
- --------------------------
Our investment in Capital Services lease related assets included in our
Consolidated Balance Sheets is composed of the following:
(Dollars in millions) March 31, December 31,
2004 2003
------------ ------------
Leveraged leases............................. $ 1,535 $ 1,535
Finance receivables (1)...................... 704 450
Other assets (1)............................. - 51
Rental equipment (1)......................... 71 18
------------ ------------
Total........................................ $ 2,310 $ 2,054
============ ============
(1) On March 31, 2004 we adopted the provisions of FIN No. 46 and consolidated
the assets and liabilities of PBG. Accordingly, the increase in finance
receivables and rental equipment at March 31, 2004 reflects the
consolidated assets of PBG. Other assets at December 31, 2003 represented
our investment in PBG, which at that time was accounted for under the
equity method of accounting. See Note 2 to the consolidated financial
statements for further details on the impact of adopting FIN No. 46.
The investment in leveraged leases included in our Consolidated Balance Sheets
is diversified across the following types of assets:
(Dollars in millions) March 31, December 31,
2004 2003
------------ ------------
Locomotives and rail cars.................... $ 349 $ 360
Postal equipment............................. 344 338
Commercial aircraft.......................... 280 279
Commercial real estate....................... 237 236
Telecommunications........................... 140 139
Rail and bus................................. 132 132
Shipping and handling........................ 53 51
------------ ------------
Total leveraged leases....................... $ 1,535 $ 1,535
============ ============
At March 31, 2004 and December 31, 2003, our leveraged lease investment in
commercial real estate facilities included approximately $89 million and $88
million, respectively, related to leases of corporate facilities to four U.S.
telecommunication entities, of which $73 million, for both periods, is with
lessees that are highly rated. Additionally, our leveraged lease investment in
telecommunications equipment represents leases to three highly rated
international telecommunication entities. At March 31, 2004 and December 31,
2003, approximately 84% of this portfolio is further secured by equity
defeasance accounts or other third party credit arrangements.
At March 31, 2004 and December 31, 2003, approximately 52% and 51%,
respectively, of our total leveraged lease portfolio is further secured by
equity defeasance accounts or other third party credit arrangements. In
addition, at March 31, 2004 and December 31, 2003, approximately 20% 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) March 31, December 31,
2004 2003
------------ ------------
Assets held for sale......................... $ 21 $ 21
Single investor leases:
Large ticket single investor leases......... 409 157
Imagistics lease portfolio.................. 274 272
------------ ------------
Total........................................ $ 704 $ 450
============ ============
Subsequent Events
- -----------------
On April 13, 2004, we signed a definitive agreement to acquire all of the
outstanding shares of Group 1 for $23 per share, which net of cash on Group 1's
balance sheet, will cost us approximately $321 million. Group 1 is an industry
leader in software that enhances mailing efficiency, data quality and customer
communications. Subject to approval by Group 1's stockholders and completion of
other conditions, the transaction is expected to close in the third quarter of
2004.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 2004
Page 19
Regulatory Matters
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There have been no significant changes to the regulatory matters disclosed in
our 2003 Annual Report on Form 10-K.
Other Regulatory Matters
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In December 2003, we received accepted closing agreements with the Internal
Revenue Service (IRS) showing income tax adjustments for the 1992 to 1994 tax
years. The total additional tax for these years is approximately $5.0 million.
Additional tax due for 1995 and future tax years in connection with these
closing agreements will not materially affect our future results of operations,
financial position or cash flows. In addition to the accepted income tax
adjustments, one 1994 proposed adjustment remains in dispute, which could result
in additional tax of approximately $4.3 million. We believe that we have
meritorious defenses to this deficiency and that the ultimate outcome will not
result in a material effect on our results of operations, financial position or
cash flows. We believe that our accruals for tax liabilities are adequate for
all open years. However, if the IRS prevails on this deficiency, 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 laws and interpretations
by governments or courts.
Forward-Looking Statements
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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 us 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
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
o changes in interest rates
o foreign currency fluctuations
o cost, timing and execution of the restructuring plan, including any potential
asset impairments
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 our
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, 2003 regarding this matter.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 2004
Page 20
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") Rule 13a-15(e)
or 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 Rule 13a-15 or 15d-15.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting 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
This Item updates the legal proceedings more fully described in our 2003 Annual
Report on Form 10-K, dated March 9, 2004. On April 9, 2004, in Boston Reed v.
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Pitney Bowes, et al. (Superior Court of California, County of Napa, filed
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January 16, 2002), the California court granted our motion for summary judgment,
resulting in the dismissal of all the plaintiff's claims. The plaintiff has the
right to appeal that decision. On April 8, 2004, in Harbin, et al. v. Pitney
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Bowes, et al. (Montgomery, Alabama Circuit Court, filed March 19, 2002), the
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Alabama Supreme Court denied our petition for an interlocutory appeal of some
portions of the lower court's denial of our motion for summary judgment; we will
have an opportunity to appeal at a later date. On April 12, 2004, counsel for
the plaintiffs advised us that they intend to dismiss voluntarily each of the
individual actions filed in Mississippi.
Item 2: Changes in Securities and Use of Proceeds
Share Repurchases
We repurchase shares of our common stock under a systematic program to manage
the dilution created by shares issued under employee stock plans and for other
purposes. This program authorizes repurchases in the open market. In
November 2002, the Board of Directors of Pitney Bowes authorized $300 million
for future repurchases of its outstanding shares of common stock on the open
market during the subsequent 12 to 24 months. We repurchased 5.4 million shares
during the year ended December 31, 2003 for a total price of $200 million under
the November 2002 program leaving $100 million remaining for future repurchases
under this program. We repurchased 2.3 million shares during the three months
ended March 31, 2004 for a total price of $96 million under the November 2002
program leaving $4 million remaining for future repurchases under this program.
Company Purchases of Equity Securities
The following table summarizes our share repurchase activity for the three
months ended March 31, 2004:
Total number of Approximate dollar value
Total number Average price shares purchased as of shares that may yet
of shares paid per part of a publicly be purchased under the
Period purchased share announced plan plan (in thousands)
--------------- ---------------- ---------------------- -------------------------
January 2004........... - $ - - $ 100,000
February 2004.......... 736,100 $ 41.12 736,100 $ 70,000
March 2004............. 1,575,143 $ 41.73 1,575,143 $ 4,000
--------------- ---------------------
2,311,243 2,311,243
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Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 2004
Page 21
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Reg. S-K
Exhibits Description
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(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
(32.2) Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350
(b) Reports on Form 8-K
On February 2, 2004, the company filed a current report on Form 8-K
pursuant to Items 9 and 12 thereof, reporting the Press Release dated
February 2, 2004 regarding its financial results for the quarter and year
ended December 31, 2003.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 2004
Page 22
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.
May 7, 2004
/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
(32.2) Certification of Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350