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SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549-1004

FORM 10-K

For the year ended December 31, 2002

OR

For the transition period from ________ to ________

Commission file number 1-3579

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

          4% Convertible Cumulative Preferred Stock ($50 par value)

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.)

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

As of February 28, 2003, the number of shares of common stock, $1 par value, outstanding was 234,522,527. The aggregate market value of voting stock (common stock and $2.12 convertible cumulative preference stock) held by non-affiliates of the registrant (based on the closing price of these securities on the New York Stock Exchange at June 30, 2002) is $9,349,722,497.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement for the 2003 Annual Meeting of Shareholders are incorporated by reference in Part III.

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PITNEY BOWES INC.

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PITNEY BOWES INC.
PART I

ITEM 1 - BUSINESS

Our company was incorporated in the state of Delaware on April 23, 1920, as the Pitney Bowes Postage Meter Company.  Today, we are a provider of leading-edge global, integrated mail and document management solutions for organizations of all sizes. 

Pitney Bowes Inc. and its subsidiaries (which we refer to in this Form 10-K as us, we, our or the company) operate in three reportable segments: Global Mailing, Enterprise Solutions and Capital Services. We operate both inside and outside the United States. Our financial information concerning revenue, operating profit and identifiable assets, by reportable segment and geographic area, appears on pages 71 to 73 of this Form 10-K.

For more information about us, our products, services and solutions, visit www.pitneybowes.com. Also, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K will be made available free of charge through the Investor Relations section of our website as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.

Global Mailing

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 and software-based mail creation equipment. We also include in this segment, software-based shipping, transportation and logistics systems, related supplies and services, presort mail services, postal payment solutions and supply chain solutions such as order management and fulfillment support. We sell, rent or finance our products. We sell our supplies and services.  Some of our products are sold through dealers outside the United States.

Products in this segment include postage meters, mailing machines, address hygiene software, manifest systems, letter and parcel scales, mail openers, mailroom furniture, folders, paper handling equipment, shipping equipment, software-based shipping and logistics systems, presort machines and postal payment solutions.

Enterprise Solutions

Our Enterprise Solutions segment comprises two divisions - Pitney Bowes Management Services (PBMS) and Document Messaging Technologies (DMT).  In this segment, we sell, rent or finance our products, while we sell supplies and services.

PBMS includes revenue and related expenses from facilities management contracts for advanced mailing, secure mail services, reprographic, document management and other high-value services. PBMS offers a variety of business support services to our customers to manage copy, reprographic and mail centers, facsimile, electronic printing and imaging services, and records management. PBMS is a major provider of on- and off-site services which helps our customers manage the creation, processing, storage, retrieval, distribution and tracking of documents and messages in both paper and digital form.

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. 

We include our internal financial services operations in both the Global Mailing and Enterprise Solutions segments. The internal financial services operations provide lease financing for our products in the U.S., Canada, the United Kingdom, Germany, France, Norway, Ireland, Australia, Austria, Spain, Italy, Switzerland and Sweden.

Capital Services

Our Capital Services segment consists of external financing for non-Pitney Bowes equipment, including the strategic 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.

In January 2003, we announced that we would stop active pursuit of, and growth in, long-term Capital Services financing transactions, including long-term financing of postal and related equipment. We will continue to provide lease financing for our products through our internal financing operations.

In the past, we have directly financed or arranged financing for commercial and non-commercial aircraft, real estate, over-the-road trucks and trailers, locomotives, railcars, rail and bus facilities, office equipment and high-technology equipment such as data processing and communications equipment.

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Support Services

We maintain extensive field service organizations in the U.S. and some other countries to provide support services to customers who have rented, leased or purchased equipment.  These support services, which are usually in the form of annual maintenance contracts, accounted for approximately 13 percent of revenue in 2002, 2001 and 2000.

Marketing

Our products and services are marketed through an extensive network of offices in the U.S. and through a number of our subsidiaries and independent distributors and dealers in many countries throughout the world. We also use direct marketing, outbound telemarketing and the Internet. We sell to a variety of business, governmental, institutional and other organizations. We believe we have a broad base of customers, and we are not dependent upon any one customer or type of customer for a significant part of our business. We do not have significant backlog or seasonality relating to our businesses.

Credit Policies

We establish credit approval limits and procedures at regional, divisional, subsidiary and corporate levels based on the credit quality of the customer and the type of product or service provided. In addition, we utilize an Automatic Approval Program (“AAP”) for certain leases within the internal financing divisions. The AAP program is designed to facilitate low dollar transactions by utilizing historical payment patterns and losses realized for customers with common credit characteristics.  The program dictates the criteria under which we will accept a customer without performing a more detailed credit investigation. The AAP considers criteria such as maximum equipment cost, a customer’s time in business and current payment experience with our internal financing division.

We base our credit decisions primarily on a customer’s financial strength, and, in the case of our Capital Services programs, we also consider collateral values.

Credit Experience

In 2002, the U.S. airline industry experienced a rapid deterioration in business conditions. For a further discussion of our aircraft leasing investments, please refer to Capital Services on page 23.

Excluding aircraft leasing investments, the percentage of receivables over 30 days delinquent was 7.4 percent at December 31, 2002, 8.1 percent at December 31, 2001 and 7.5 percent at December 31, 2000 of which the percentage relating to financial services was 53 percent, 58 percent and 60 percent at December 31, 2002, 2001 and 2000, respectively.

We have charged against the allowance for doubtful accounts losses of $13.7 million, $10.3 million and $11.6 million in 2002, 2001 and 2000, respectively. Charges against the allowance for credit losses on finance receivables were $66.3 million, $50.4 million and $65.8 million in 2002, 2001 and 2000, respectively.

Operations Outside the United States

Our manufacturing operations outside the U.S. are in the United Kingdom, France and Germany.

Competition

Historically, we have been a leading supplier of products and services in our business segments, particularly postage meters and mailing machines. Our meter base and our continued ability to place meters in key markets is a significant contributor to our current and future revenue and profitability. However, all of our segments face strong competition from a number of companies. In particular, we face competition in many countries for new placements from several postage meter and mailing machine suppliers, and our mailing systems products face competition from products and services offered as alternative means of message communications. PBMS, a major provider of business support services and document management to the corporate, financial services, and professional services markets, competes against national, regional and local firms specializing in facilities and document management. We believe that our long experience and reputation for product quality, and our sales and support service organizations are important factors in influencing customer choices with respect to our products and services.

The financing business is highly competitive with aggressive rate competition. Leasing companies, commercial finance companies, commercial banks and other financial institutions compete, in varying degrees, in the several markets in which our finance operations do business. Our competitors range from very large, diversified financial institutions to many small, specialized firms. In view of the market fragmentation and absence of any dominant competitors, we believe that it is not possible to provide a meaningful description of our finance operations’ competitive position in these markets.

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Research and Development/Patents

We have research and development programs that are directed toward developing new products and service methods.  Our expenditures on research and development totaled $141.3 million, $133.1 million and $120.5 million in 2002, 2001 and 2000, respectively.

As a result of our research and development efforts, we have been awarded a number of patents with respect to several of our existing and planned products.  However, we believe our businesses are not materially dependent on any one patent or any group of related patents. We also believe our businesses are not materially dependent on any one license or any group of related licenses.

Material Supplies

We believe we have adequate sources for most parts and materials for our products that we manufacture. However, these products rely to an increasing extent on microelectronic components, and temporary shortages of these components have occurred from time to time due to the demands by many users of such components. However, we do not expect these temporary shortages to have a material adverse impact on our business.

Regulatory Matters

We are subject to the U.S. Postal Service’s regulations and those of foreign postal authorities, related to product specifications and business practices. From time to time, we will work with these governing bodies to help in the enhancement and growth of mail and the mail channel. See Legal and Regulatory Matters in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K.

Employee Relations

At December 31, 2002, we employed 25,188 persons in the U.S. and 7,942 persons outside the U.S. We believe that employee relations are satisfactory. The large majority of our employees are not represented by any labor union. Our management follows the policy of keeping employees informed of decisions, and encourages and implements employee suggestions whenever practicable.

ITEM 2 - PROPERTIES

Our World Headquarters and certain other office and manufacturing facilities are located in Stamford, Connecticut.  We have additional office facilities located in Shelton, Connecticut. We maintain research and development operations at a corporate engineering and technology center in Shelton, Connecticut. A sales and service training center is located near Atlanta, Georgia. We believe that our current manufacturing, administrative and sales office properties are adequate for the needs of all of our operations.

In 2002, we announced that we are reviewing options for real estate realignment, including alternative sites for our World Headquarters office, in order to better meet our long-term needs. We are continuing to review the alternatives and have made no decisions to date.

Global Mailing

Global Mailing products are manufactured in a number of plants principally in Connecticut, as well as in Harlow, England; Friedberg, Germany; Lyon, France and St. Denis, France. Most of these facilities are owned by the company. At December 31, 2002, there were 151 sales, support services and finance offices, substantially all of which are leased, located throughout the U.S. and in a number of other countries.

Enterprise Solutions

Our Document Messaging Technologies business is headquartered in Danbury, Connecticut. We lease twelve facilities located throughout the U.S. Our Management Services business is headquartered in Stamford, Connecticut and leases 40 facilities located throughout the U.S. and in Canada, England, Belgium, Denmark, France, Germany, Norway, Netherlands and Sweden.

Our headquarters of our financing operations within the U.S. is located in Shelton, Connecticut. Offices of our financing operations outside the U.S. are maintained in Mississauga, Ontario, Canada; Harlow, England; Heppenheim, Germany; Paris, France; Oslo, Norway; Dublin, Ireland; French’s Forest, Australia; Vienna, Austria; Effretikon, Switzerland; Milan, Italy; Barcelona, Spain; and Stockholm, Sweden.

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Capital Services

Our wholly-owned subsidiary, Pitney Bowes Credit Corporation (PBCC), leases an executive and administrative office in Shelton, Connecticut, which is owned by Pitney Bowes Inc. There are eight leased regional and district sales offices located throughout the U.S.

ITEM 3 – 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:

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 Series^TM of products. In addition, we are defendants in several state court 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. Of the current actions, three are purportedly brought on behalf of state-based classes of customers and the others are brought on behalf of individual customers. No court has ruled on whether or not the cases may proceed on a class basis. 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. See Legal and Regulatory Matters in Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Legal Settlements, net section under Special Items in Item 7 of this Form 10-K.

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ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We did not submit any matters to a vote of our shareholders during the three months ended December 31, 2002.

Executive Officers of the Registrant 

* Ms. Moss resigned her position for family related reasons, effective February 2003. Michele Coleman Mayes joined the company effective February 2003 as Senior Vice President and General Counsel. Prior to joining the company, Ms. Mayes was Vice President - Legal, Assistant Secretary and Corporate Officer of Colgate-Palmolive Company. Ms. Mayes also served as Vice President and Deputy General Counsel - International and Corporate as well as Vice President of Human Resources and Legal for Colgate North America. Prior to joining Colgate-Palmolive Company, Ms. Mayes also held various legal positions at Unisys Corporation.

There is no family relationship among the above officers, all of whom have served in various corporate, division or subsidiary positions with the company for at least the past five years except G.E. Buoncontri, L.A. Jimenez, M. Mayes and B.P. Nolop.

Mr. Buoncontri was formerly the Vice President, Information Technology and Chief Information Officer of Novartis Pharmaceuticals Corp. (merger of Sandoz and Ciba Geigy). Prior to the merger, he also served as the Vice President, Information Systems and Chief Information Officer for Sandoz Pharmaceuticals Company. Mr. Buoncontri also served as Vice President, Information Management Services and Chief Information Officer of Asea Brown Boveri, Inc.

Mr. Jimenez joined the company from Arthur D. Little, an international management consulting company, with over 25 years of experience. Mr. Jimenez was appointed worldwide practice leader for postal organizations in 1990, Corporate Vice President in 1991, and served most recently on the firm’s global board for telecommunications and media and as Manager of the Latin American practice. 

Mr. Nolop joined the company from Wasserstein Perella & Co., an investment bank and one of Pitney Bowes’ financial advisors, where he had served as managing director since 1993. Prior to joining Wasserstein Perella & Co., Mr. Nolop held senior positions with Goldman Sachs & Co., Kimberly-Clark Corporation and Morgan Stanley & Co.

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PART II

ITEM 5 – MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDERS’ MATTERS

Pitney Bowes common stock is traded under the symbol “PBI”. The principal market is the New York Stock Exchange. The stock is also traded on the Chicago, Philadelphia, Boston, Pacific and Cincinnati stock exchanges.  At December 31, 2002, the company had 27,418 common stockholders of record. 

Stock Information

Dividends per common share

Quarterly price ranges of common stock

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ITEM 6 – SELECTED FINANCIAL DATA

The following tables summarize selected financial data for the company, and should be read in conjunction with the more detailed consolidated financial statements and related notes thereto included under Item 8 of this Form 10-K.

Summary of Selected Financial Data
(Dollars in thousands, except per share amounts)

Note: The sum of the earnings per share amounts may not equal the totals due to rounding.

Free cash flow is defined as net cash provided by operating activities less net investment in fixed assets. See reconciliation on page 32. Free cash flow, earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation and amortization (EBITDA) are not presented as an alternative measure of operating results or cash flow from operations, as determined in accordance with generally accepted accounting principles, but are presented because we believe they are widely accepted indicators of our ability to incur and service debt. EBIT and EBITDA do not give effect to cash used for debt service requirements and capital expenditures and thus do not reflect funds available for reinvestment, dividends or other discretionary uses. In addition, free cash flow, EBIT and EBITDA as presented in this summary schedule may not be comparable to similarly titled measures reported by other companies.

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ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We continue to build on the core activities that support our strong competitive position in integrated mail and document management solutions.

We operate in three reportable segments: Global Mailing, Enterprise Solutions and Capital Services.

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 and software-based mail creation equipment. We also include in this segment software-based shipping, transportation and logistics systems, related supplies and services, presort mail services, postal payment solutions and supply chain solutions such as order management and fulfillment support.

Our Enterprise Solutions segment comprises Pitney Bowes Management Services (PBMS) and Document Messaging Technologies (DMT). PBMS includes revenue and related expenses from facilities management contracts for advanced mailing, reprographic, document management and other high-value services. DMT includes revenue and related expenses from the sale, service and financing of high speed, software-enabled production mail systems, sortation equipment, incoming mail systems, electronic statement, billing and payment solutions, and mailing software.

Our Capital Services segment consists of external financing for non-Pitney Bowes equipment, including the strategic 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. In January 2003, we announced that we would stop active pursuit of, and growth in, long-term Capital Services financing transactions, including long-term financing for postal and related equipment. We will continue to provide lease financing for our products through our internal financing operations.

During 2002, we completed the acquisition of PSI Group, Inc. (PSI), the nation’s largest mail presort company with operating centers across the U.S.  This increased our presence in the domestic market for mail-related services.

During 2001, we completed several acquisitions that increased our presence in both domestic and international markets and that we believe will better position the company for long-term growth and enhanced shareholder value. These acquisitions included the following: 

On December 3, 2001, we completed the spin-off of our office systems business to stockholders as an independent, publicly-traded company under the name of Imagistics International Inc. (IGI). On that date, we paid a special stock dividend of IGI common stock to our common shareholders. Through this special dividend, we distributed 100% of the shares of IGI stock to common shareholders of the company. The historical carrying amount of the IGI net assets distributed to our shareholders on the spin-off date has been recorded as a stock dividend of $311.7 million. We have segregated the operating results of IGI and reported them as discontinued operations in the Consolidated Statements of Income.  In connection with the spin-off, we recorded a loss of approximately $26.0 million (net of taxes of $12.2 million) for the year ended December 31, 2001. See Note 12 to the consolidated financial statements.

On January 14, 2000, we sold Atlantic Mortgage & Investment Corporation (AMIC), a wholly-owned subsidiary of the company, to ABN AMRO North America. In connection with this transaction, we recorded a gain of $12.5 million (net of taxes of $7.4 million) for the year ended December 31, 2002. This gain resulted from the favorable resolution of certain contingent liabilities recorded at the time of sale. See Note 12 to the consolidated financial statements.

On October 30, 1998, Colonial Pacific Leasing Corporation (CPLC), a wholly-owned subsidiary of the company, transferred the operations, employees and substantially all assets related to its broker-oriented external financing business to General Electric Capital Corporation, a subsidiary of the General Electric Company. In connection with this transaction, we recorded a gain of $25.5 million (net of taxes of $15.0 million) for the year ended December 31, 2002. This gain resulted from the favorable resolution of certain contingent liabilities recorded at the time of sale. See Note 12 to the consolidated financial statements.

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Critical Accounting Policies

We have identified the policies below as critical to our business operations and to the understanding of our results of operations.  We discuss the impact and any associated risks on our results of operations related to these policies throughout Management’s Discussion and Analysis of Financial Conditions and Results of Operations. For a detailed discussion on the application of these and other accounting policies, see Note 1 to the consolidated financial statements.

The preparation of our financial statements in conformity with generally accepted accounting principles requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates include, but are not limited to customer cancellations, bad debts, inventories, investments, useful lives of long-lived assets, intangible assets, income taxes, financing operations, warranty obligations, restructuring, pensions and other postretirement benefits, and contingencies and litigation. Our actual results could differ from those estimates.

Revenue recognition

We derive our revenue from the following sources:

In accordance with generally accepted accounting principles, we recognize revenue from these sources as follows:

Sales revenue

Sales of equipment

We sell equipment to our customers, as well as to distributors and dealers (re-sellers) throughout the world. Revenue from these sales is recognized upon the transfer of title, which is at the point of shipment. We do not offer any rights of return or stock balancing rights.  

Our sales revenue from customized equipment and software-enabled mail creation equipment and shipping products is generally recognized when installed.

Sales of supplies

Revenue related to supplies is recognized at the point of title transfer, which is upon shipment.

Software licenses and integration services

We recognize revenue related to off-the-shelf software licenses upon transfer of title, which is upon shipment. We recognize revenue from software requiring integration services at the point of customer acceptance.

Business services revenue

Business services

Business services revenue includes revenue from PBMS and PSI.

Management services, which includes outsourcing of mailrooms, copy centers, or other document management functions, are typically annual or longer contracts that contain a monthly service fee and in many cases a “click” charge based on the number of copies made, machines in use, etc. Revenue is recognized over the term of the agreement, based on monthly service charges, with the exception of the “click” charges, which are recognized as incurred.

Presort mail services include the preparation, sortation and aggregation of mail to earn postal discounts and expedite delivery for our customers. Revenue is recognized over the term of the agreement as earned.

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Rentals revenue

Product rentals

We rent equipment to our customers, primarily postage meters, mailing equipment and shipping systems under short-term rental agreements, generally for periods of three months to three years. We invoice in advance the charges for equipment rental. We defer the billed revenue and include it initially in advance billings. Rental revenue is recognized on a straight-line basis over the term of the rental agreement.

Financing revenue

Product financing arrangements

We provide lease financing of our products in the U.S. and outside the U.S. through sales-type leases.

When a sales-type lease is consummated, we record the gross finance receivable, unearned income and the estimated residual value of the leased equipment. Unearned income represents the excess of the gross finance receivable plus the estimated residual value over the sales price of the equipment. We recognize the equipment sale at the inception of the lease. We recognize unearned income as earned using the interest method over the term of the transaction. Earned income is included in rentals and financing revenue in the Consolidated Statements of Income.

Capital Services revenue

We provide financing for non-Pitney Bowes equipment through direct financing leases and leveraged leases.

When a direct financing lease is consummated, we record the gross finance receivable, unearned income and the estimated residual value of the leased equipment. Unearned income represents the excess of the gross receivable plus the estimated residual value over the cost of the equipment. We account for initial direct costs incurred in consummating a transaction as part of the investment in the lease and appropriately amortize these costs using the interest method over the term of the lease. We recognize unearned income as earned using the interest method over the term of the transaction. Earned income is included in financing revenue in the Consolidated Statements of Income.

From time to time, we sell selected finance assets. We follow Statement of Financial Accounting Standards (FAS) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” when accounting for our sale of finance assets. We recognize all assets obtained or liabilities incurred in consideration as proceeds of the sale and recognize any gain or loss on the sale in earnings.

Our investment in leveraged leases consists of rentals receivable net of principal and interest on the related nonrecourse debt, estimated residual value of the leased property and unearned income. We recognize the unearned income as leveraged lease revenue over the lease term. Earned income is included in financing revenue in the Consolidated Statement of Income.

Support services revenue

Equipment maintenance agreements

We provide support services to our customers primarily through extended maintenance contracts. Revenue related to these agreements is recognized on a straight-line basis over the term of the agreement.

Multiple element arrangements

Certain of our transactions are consummated at the same time. The usual form of this transaction involves the sale or lease of equipment, a cancelable meter rental and/or a cancelable equipment maintenance agreement.

In these cases, fair value of the various elements is determined by using the “residual method.” In applying this method, the fair values of any meter rental or equipment maintenance agreement are determined to be equivalent to the price charged in a standalone or renewal transaction. Any remaining consideration is allocated to the value of the equipment.

Allowance for doubtful accounts

We estimate our accounts receivable risks and provide allowances for doubtful accounts accordingly. We believe that our credit risk for accounts receivable is limited because of the large number of our customers and the relatively small account balances for most of our customers.  Also, our customers are dispersed across different businesses and geographic areas.  We believe that our allowance for doubtful accounts is sufficient.

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We evaluate the adequacy of the allowance for doubtful accounts on a periodic basis. Our evaluation includes historical loss experience, adverse situations that may affect a customer’s ability to repay, and prevailing economic conditions. We make adjustments to our allowance if the evaluation of allowance requirements differs from the actual aggregate reserve. This evaluation is inherently subjective because our estimates may be revised as more information becomes available. 

Allowance for credit losses

We estimate our finance receivables risks and provide allowances for credit losses accordingly. Our financial services businesses establish credit approval limits based on the credit quality of the customer and the type of equipment financed. We charge finance receivables through the allowance for credit losses after collection efforts are exhausted and we deem the account uncollectible. Our financial services businesses base credit decisions primarily on a customer’s financial strength. We believe that our concentration of credit risk for finance receivables in our internal financing division is limited because of our large number of customers, small account balances and customer geographic and industry diversification. In addition, in our Capital Services programs, we may also consider collateral values.

Our general policy for finance receivables contractually past due for over 90 to 120 days is to discontinue revenue recognition. We resume revenue recognition when payments reduce the account to 60 days or less past due. In our Capital Services programs, we discontinue revenue recognition as soon as it is apparent that the obligor will not be making payments in accordance with lease terms, such as in the event of bankruptcy. Otherwise, we discontinue revenue recognition when accounts are over 90 days past due.

We evaluate the adequacy of allowance for credit losses on a periodic basis.  Our evaluation includes historical loss experience, the nature and volume of our portfolios, adverse situations that may affect a customer’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. We make adjustments to our allowance for credit losses if the evaluation of reserve requirements differs from the actual aggregate reserve. This evaluation is inherently subjective because our estimates may be revised as more information becomes available.

Accounting for income taxes

When we prepare our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. We record this amount as a provision for our taxes in accordance with FAS No. 109, “Accounting for Income Taxes.”  This process requires us to make the following assessments: 

At any time, our provision for taxes could be impacted by changes in tax law and interpretations by governments or courts.

Long-lived assets

Long-lived assets include:

Property, plant and equipment

We state property, plant and equipment at cost. We depreciate property, plant and equipment principally using the straight-line method over estimated useful lives: machinery and equipment principally three to 15 years and buildings up to 50 years. We capitalize major improvements which add to productive capacity or extend the life of an asset and we charge to expense as incurred repairs and maintenance. We depreciate rental equipment on the straight-line method over appropriate periods, principally three to ten years. Changes in regulatory provisions or technology may impact the useful lives of these assets. We depreciate other depreciable assets using either the straight-line method or accelerated methods. We amortize properties leased under capital leases on a straight-line basis over the primary lease terms.

We capitalize certain costs of internally developed software. These costs include purchased materials and services, payroll and payroll related costs and interest costs. We amortize internally developed software on a straight-line basis over the estimated useful life, which is principally three to ten years.

We do not capitalize software development costs related to software to be sold, leased, or otherwise marketed due to the fact that the period between establishment and testing of a working model and the general availability of our software has historically been short and the related software development costs qualifying for capitalization in accordance with FAS No. 86 “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed” have been insignificant.

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Goodwill

Goodwill represents the excess of cost over the value of net tangible and other intangible assets acquired in business combinations. Goodwill acquired under business combinations completed prior to June 30, 2001 has been amortized, through December 31, 2001, using the straight-line method over its estimated useful life, principally 40 years. Goodwill acquired under business combinations completed after June 30, 2001 has not been amortized.

Other intangible assets

Intangible assets with finite lives, acquired under business combinations, are amortized using the straight-line method over estimated useful lives, principally five to 15 years.

Impairment review

Periodically, we assess the carrying value of our long-lived and intangible assets. Our assessment involves comparing the carrying value of the asset on our Consolidated Balance Sheet to the cash flows we expect to generate in the future by that asset. We forecast the cash flows based on our assessment of our business. If the expected cash flows are less than the asset’s carrying value, we record an impairment charge on that asset. 

We believe that we have no impairment to our assets as of December 31, 2002. However, future events and circumstances, some of which are described below, may result in an impairment charge: 

Special Items

Diluted earnings per share from continuing operations were $1.81, $2.08 and $2.18 for the years ended December 31, 2002, 2001 and 2000, respectively. Diluted earnings per share in 2002 included Capital Services charges of 56 cents per diluted share, related to a write-down of our investments in commercial passenger aircraft leasing and to increase our provision for credit losses primarily related to the rapid deterioration of the U.S. airline industry. Diluted earnings per share in 2001 included a charge of 68 cents per diluted share related to assets associated with our non-networked mailing technology, a charge of 30 cents per diluted share related to restructuring initiatives and a net gain of 82 cents per diluted share from legal settlements. Diluted earnings per share in 2000 includes a charge of 4 cents per diluted share related to restructuring initiatives and a gain of 5 cents per diluted share related to state tax law changes. Excluding the impact of these special items, diluted earnings per share from continuing operations was $2.37, $2.25 and $2.17 for the years ended December 31, 2002, 2001 and 2000, respectively.

A discussion of these items is as follows:

Capital Services charges

In 2002, we recorded a non-cash pre-tax charge of approximately $213 million, to write down our investments in commercial passenger aircraft leases primarily with US Airways Group, Inc. (US Airways) and United Air Lines (United) and to increase our provision for credit losses primarily related to commercial passenger aircraft leasing investments in the U.S. The charge was composed of the following:

The decision of US Airways and United to file for bankruptcy exacerbated an already difficult environment in the airline industry. As a result of the rapid deterioration of the U.S. airline industry as well as our revised Capital Services strategy, we recorded a charge of

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approximately $82 million to increase our provision for credit losses related to our aircraft leasing investments in the U.S. As a result of these events, combined with both the deteriorating financial condition in various other industries and the change in our Capital Services strategy, we also recorded a charge of approximately $20 million to increase our provision for credit losses related to non-aircraft leasing investments, including investments in the telecommunications industry. 

A further breakdown of the charge related to aircraft lease investments by individual airline is presented on page 24.

Meter transition

In 2001, we adopted a formal plan to transition to the next generation of networked mailing technology.  The information capture and exchange, made possible by advanced technology, turns the postage meter into an “intelligent” terminal that networks the mailer to postal and carrier information and systems. This two-way information architecture, in turn, enables convenient access to and delivery of value-added services such as tracking, delivery confirmation and rate information. The adoption of this plan was facilitated by our expanded access to technology and our ability to move to networked products combined with our expectations that the U.S. and postal services around the world will continue to encourage the migration of mailing systems to networked digital technologies.  In connection with this plan, we recorded non-cash pre-tax charges of $268.3 million for the year ended December 31, 2001, related to assets associated with our non-networked mailing technology. We have segregated these charges in the Consolidated Statement of Income for the year ended December 31, 2001. In November 2001, postal regulations were issued, consistent with our meter transition plan, defining the meter migration process and timing.  See Regulatory Matters. 

Restructuring charges

In 2001, we adopted a formal restructuring plan to implement a common, streamlined business infrastructure across the corporation as a result of our decisions to spin off our office systems business and align our mailing business on a global basis, as well as cost saving opportunities resulting from strategic acquisitions and partnerships, and additional benefits attained from the consolidation of our information technology organization and enterprise-wide resource planning initiatives. In connection with this plan, we recorded pre-tax restructuring charges of $149.3 million in 2001, of which $116.1 million was related to continuing operations and the remaining $33.2 million was related to discontinued operations. We have segregated the restructuring charges related to continuing operations in the Consolidated Statement of Income for the year ended December 31, 2001. The restructuring charges related to discontinued operations are included in discontinued operations in the Consolidated Statement of Income for the year ended December 31, 2001.

In 2000, we recorded a pre-tax charge of approximately $19 million related to the consolidation of information technology staff and infrastructure. We have segregated this charge in the Consolidated Statement of Income for the year ended December 31, 2000.

Legal settlements, net

In 2001, the company and Hewlett-Packard announced that they had reached an agreement resolving a lawsuit filed by us in 1995. The lawsuit arose out of a dispute over print technology patents.  Under the terms of the agreement, the companies resolved all pending patent litigation without admission of infringement and we received $400 million in cash and ten year supply and technology agreements. We recorded the cash payment, net of legal fees and related expenses of $37.8 million, as other income in the Consolidated Statement of Income for the year ended December 31, 2001.

In 2001, we recorded a pre-tax charge of approximately $24 million associated with the settlement of a lawsuit related to lease upgrade pricing in the early to mid-1990s.  The $24 million charge relates to the following settlement costs: award certificates to be provided to members of the class for purchase of office products through the Pitney Bowes supply line and the cost of legal fees and related expenses of $8.3 million. We included this charge in other income in the Consolidated Statement of Income for the year ended December 31, 2001.

State tax benefits

In 2000, we recorded a one-time tax benefit of $12 million related primarily to state tax law changes.

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The following table reconciles GAAP to Proforma income from continuing operations for the years ended December 31, 2002, 2001 and 2000, respectively:

Results of Continuing Operations 2002 Compared to 2001

In 2002, our revenue increased 7%, income from continuing operations decreased 15% and diluted earnings per share from continuing operations decreased 13% to $1.81 compared with $2.08 for 2001. Excluding special items in both periods, as identified on page 14, income from continuing operations increased 3% and diluted earnings per share from continuing operations increased 5% to $2.37 compared with $2.25 for 2001. Excluding the acquisitions of PSI, Secap, DSI, and MMT, our revenue increased 1%. These acquisitions increased our operating profit, but including related financing costs, did not materially affect earnings either on a per share or aggregate basis.

Revenue

The following table shows revenue in 2002 and 2001 by segment:

Total Messaging Solutions revenue grew 8% over the prior year. The revenue increase came from growth in the Global Mailing and Enterprise Solutions segments of 6% and 12%, respectively, over 2001. Approximately 77% of our total revenue in 2002 is recurring revenue, which we believe is a continuing good indicator of potential repeat business.

Excluding the acquisitions of PSI, Secap and MMT, Global Mailing revenue increased 2%. Global Mailing revenue in the U.S. benefited from the placement of new digital mailing systems and the demand for our mail creation and distribution solutions products. Our new DM Series™ of digital mailing systems featuring Intellilink^TM technology has experienced strong customer satisfaction. Within the Global Mailing segment, international mailing revenue grew 17 percent, driven by revenue from the acquisition of Secap, improved revenue trends in the U.K. and Canada and the favorable impact of foreign currency. Excluding revenue from the acquisition of Secap and the favorable impact of foreign currency, international mailing revenue grew 2%. This revenue growth was achieved despite lower revenue in Germany and several other European countries, where demand has been slower for mailing equipment in a post meter migration environment, and where the company has not yet launched its new DM Series^TM.

Enterprise Solutions revenue growth of 12% over the prior year was driven by a 19% increase at PBMS primarily as a result of the acquisition of DSI. Excluding the acquisition of DSI, PBMS revenue grew 4%. PBMS continues to improve its competitive position and generate strong growth in new written business, particularly in the higher value document management services, but this growth was partially offset by the continued contraction of large enterprise accounts, especially in the financial services and legal sectors. DMT revenue decreased 7% over the prior year as businesses continue to delay large capital spending decisions, which in turn slowed worldwide demand for our high speed, software-enabled production mail equipment and mail processing software.

Capital Services revenue decreased 6% due to our previously stated strategy to concentrate on fee-based income opportunities.

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Operating profit

The following table shows operating profit in 2002 and 2001:

Operating profit grew 4% over the prior year which reflected contributions from the acquisitions, as well as our continuing emphasis on reducing costs and controlling operating expenses. Operating profit grew 4% in the Global Mailing segment and 7% in the Enterprise Solutions segment. 

Global Mailing operating profit grew 4% supported by revenue growth and the effect of our continued emphasis on reducing costs and controlling operating expenses. Operating profit was adversely affected by moderating customer orders and upgrades due to the continuing weak economy and a shift to lower margin products and services.

The operating profit growth in our Enterprise Solutions segment came from 11% operating profit growth at PBMS offset by a 5% operating profit decrease at DMT. The operating profit growth at PBMS was supported by strong revenue growth. Operating profit was adversely affected by costs associated with acquiring new accounts, and investments in product technology and infrastructure, especially in Europe. DMT’s operating profit decline was driven by slower placements of high margin equipment, an increase in lower margin service revenue and continued investment in new product development.

Operating profit increased 4% in the Capital Services segment due primarily to the decline in interest rates.

The following table shows revenue in 2002 and 2001 by source of revenue:

Sales revenue remained flat in 2002. Sales growth was adversely affected by the continued slowdown of the global economy which has resulted in moderating customer orders and upgrades at Global Mailing and DMT. Additionally, sales growth was adversely affected by our focus on rentals revenue, which should provide a more stable revenue stream over time.

Business services revenue includes revenue from PBMS and PSI. Business Services revenue increased 23% due mainly to the acquisitions of DSI and PSI. Excluding the acquisition, business services revenue grew 3% due to growth in new written business. Revenue growth at PBMS was adversely affected by the continued contraction of large enterprise accounts, especially in the financial services and legal sectors.

Rentals revenue increased 6% primarily due to strong placements of our stand-alone meters and new digital meters. At December 31, 2002, digital meters represented approximately 58% of our U.S. meter base, up from 50% in 2001 and electronic meters represented approximately 42% of our U.S. meter base. We no longer place mechanical meters, which is in line with USPS guidelines. As previously mentioned, in 2001 we adopted a formal plan to transition to the next generation of networked mailing technology. See Legal and Regulatory Matters. We do not expect this transition to have a material adverse impact on rentals revenue.

Financing revenue remained flat. Financing revenue growth was adversely affected by our strategies to reduce our exposure to our Capital Services segment. In total, we financed 52% and 54% of all sales in 2002 and 2001, respectively.

Support services revenue increased 9% in 2002. Despite competitive pricing pressures, Global Mailing achieved a strong increase in support services revenue due to a larger population of equipment maintenance agreements and the impact of acquisitions in 2002. DMT had growth in support services revenue due to an increased service contract base and on-site contracts. Ongoing support services revenue continues to be partially dependent on equipment sales levels.

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Costs and Expenses

The following table shows cost of sales as a percentage of sales revenue in 2002 and 2001:

Cost of sales, as a percentage of sales revenue, decreased primarily due to a favorable product mix at our U.S. and international mailing businesses including margin improvements from the launch of our DM series^TM of digital mailing systems.

The following table shows cost of business services as a percentage of business services revenue in 2002 and 2001:

Cost of business services revenue, as a percentage of business services revenue, increased slightly, primarily due to costs associated with acquiring new management services accounts that have not yet generated a full year of revenue.

The following table shows cost of rentals as a percentage of rentals revenue in 2002 and 2001:

Cost of rentals, as a percentage of rentals revenue, increased compared with 2001, as a result of higher depreciation costs. We expect this ratio to continue to increase in 2003 due to the timing of our customers’ transition to digital meters.

The following table shows cost of financing as a percentage of financing revenue in 2002 and 2001:

Cost of financing, as a percentage of financing revenue, decreased compared with 2001, due primarily to the lower mix of Capital Services revenue.

Selling, service and administrative expenses

The following table shows selling, service and administrative expenses as a percentage of total revenue in 2002 and 2001:

Selling, service and administrative expenses were 33.6% of total revenue in 2002 compared with 33.2% in 2001. The increase in this ratio was primarily due to the higher mix of support services revenue and costs associated with investments in infrastructure and growth initiatives.

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Research and development expenses

The following table shows our research and development expenses in 2002 and 2001:

Research and development expenses increased 6% in 2002 to $141 million, reflecting continued investment in developing new technologies and enhancing features for all our products. The 2002 increase represents expenditures for digital document delivery systems, new digital meters and mailing machines, billing and statement software, distribution and logistics software, advanced inserting equipment and mail sorting equipment. We expect similar levels of investment in research and development in 2003.

Net interest expense

The following table shows our net interest expense in 2002 and 2001:

Net interest expense decreased due to lower average interest rates during 2002 compared with 2001. This decrease was partially offset by higher average borrowings associated with our investment in leasing and rental products, acquisitions, dividends, and our stock repurchase program. Our variable and fixed rate debt mix, after adjusting for the effect of interest rate swaps, was 32% and 68%, respectively, at December 31, 2002. Based on current borrowing levels, a 25 basis point change in interest rates would impact annual interest expense by approximately $3 million to $4 million.

Effective tax rate

The following table shows the effective tax rate in 2002 and 2001:

Excluding special items, the effective tax rate was 31.3% in 2002 compared with 31.6% in 2001, reflecting continued tax benefits from leasing and financing activities. The tax rate is also favorably affected by our international expansion and our continued investment in developing new technologies. Our provision for taxes could be affected by tax law changes and interpretations by governments or courts. We expect our effective tax rate to increase as we implement our Capital Services strategy outlined on page 23.

Income from continuing operations decreased 15% and diluted earnings per share from continuing operations decreased 13% in 2002. Excluding special items in 2002 and 2001, income from continuing operations increased 3% and diluted earnings per share from continuing operations increased 5% in 2002. The increase in diluted earnings per share outperformed the increase in income from continuing operations due to the company’s share repurchase program. During the year, we repurchased 7.9 million shares, approximately 3% of the average common and potential common shares outstanding at the end of 2001. Excluding special items in 2002 and 2001, income from continuing operations as a percentage of revenue decreased to 13.0% in 2002 from 13.5% in 2001 due primarily to the higher mix of lower-margin revenue.

Results of Continuing Operations 2001 Compared to 2000

In 2001, revenue increased 6%, income from continuing operations decreased 9% and diluted earnings per share from continuing operations decreased 5% to $2.08 compared with $2.18 for 2000. Excluding special items in both periods, income from continuing operations decreased 1% and diluted earnings per share from continuing operations increased 3% to $2.25 compared with $2.17 for 2000. Excluding the acquisitions of Secap, DSI, and MMT, revenue increased 1%. These acquisitions did not materially affect earnings either on a per share or an aggregate basis.

Revenue

The  following table shows revenue in 2001 and 2000 by segment:

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Total Messaging Solutions revenue grew 6% over the prior year. The revenue increase came from growth in the Global Mailing and Enterprise Solutions segments of 1% and 26%, respectively, over 2000. Approximately 75% of our total revenue in 2001 is recurring revenue, which we believe is a continuing good indicator of potential repeat business.

Excluding the acquisitions of Secap and MMT, Global Mailing revenue decreased 2%. Global Mailing revenue growth, particularly in the U.S. was adversely affected by moderating customer orders and upgrades due to the slow economic environment, especially for shipping and system related products.  Within the Global Mailing segment, international mailing revenue grew at a strong pace, fueled by revenue from the recent acquisitions of Secap and MMT plus continued strong demand for mailing products in Europe. However, revenue was also adversely impacted by weaker performance in the U.K. and Canada, as both countries were affected by slowing economic activity and a lull in those countries’ meter migration programs.

Enterprise Solutions revenue growth was driven by a 34% increase at PBMS as a result of higher volume in the core business and the acquisition of DSI. Excluding the acquisition of DSI, Enterprise Solutions revenue grew 11%. DMT revenue increased 5% over the prior year; however, our performance continues to be affected by a worldwide slowdown in capital spending, which has caused many of our customers to delay purchases of higher-margin customized inserting systems.

Capital Services revenue increased 2% primarily due to higher revenue associated with the strategic financing of equipment for posts around the world.

Operating profit

The following table shows operating profit in 2001 and 2000: