The effective tax rate was 34.5% for both the first quarter of 2007 and the prior year.
The following table details minority interest for the three months ended March 31, 2007 and 2006:
Minority interest includes dividends paid to preferred stockholders in subsidiary companies. Minority interest increased by $1.8 million or 62.7% in the first quarter of 2007 compared with the prior year due to higher average rates and a higher average balance during the quarter.
The following table details the components of discontinued operations for the three months ended March 31, 2007 and 2006:
See Note 4 in the Condensed Consolidated Financial Statements for further discussion and details of the discontinued operations.
Net cash provided by operating activities consisted primarily of net income adjusted for non-cash items and changes in operating assets and liabilities. The net increase in our deferred taxes on income and income taxes payable contributed $60 million to cash from operations resulting from the timing of tax payments. The decrease in accounts payable and accrued liabilities reduced our cash from operations by $131 million primarily due to the payment of year-end incentive compensation and commissions and the timing of accounts payable payments following the strong fourth quarter of 2006.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net cash used in investing activities consisted of capital expenditures, acquisitions and a reduction in our reserve account deposits.
Net cash used in financing activities consisted primarily of dividends paid to stockholders and stock repurchases, partially offset by proceeds from issuance of stock.
2006 Cash Flows
Net cash provided by operating activities consisted primarily of net income adjusted for non-cash items and changes in operating assets and liabilities. The net increase in our deferred taxes on income and income taxes payable contributed $70 million to cash from operations resulting from the timing of tax payments. The increase in our internal finance receivables balances decreased cash from operations by $24 million reflecting growth in equipment placements and our payment solutions business during the quarter.
Net cash used in investing activities consisted primarily of capital expenditures.
Net cash used in financing activities consisted primarily of dividends paid to stockholders and stock repurchases, partially offset by proceeds from issuance of stock.
Capital Expenditures
During the first three months of 2007, capital expenditures included $31.6 million in net additions to property, plant and equipment and $36.0 million in net additions to rental equipment and related inventories compared with $33.5 million and $49.5 million, respectively, in the same period in 2006.
We expect capital expenditures for the full year of 2007 to be approximately the same as 2006. These investments will also continue to be affected by the timing of our customers’ transition to digital meters.
Financings and Capitalization
We have a commercial paper program that is a significant source of liquidity. As of March 31, 2007, we had approximately $479 million of outstanding commercial paper issuances and an unused credit facility of $1.5 billion which supports commercial paper issuances.
In addition to our borrowing capability under the unused credit facilities described above, we have $1.1 billion available under the shelf registration statement filed in February 2005 with the SEC, permitting issuances of up to $2.5 billion in debt securities, preferred stock, preference stock, common stock, purchase contracts, depositary shares, warrants and units.
We funded our acquisition of MapInfo on April 19, 2007 for approximately $408 million in cash, net of cash acquired, primarily through the issuance of commercial paper.
We believe our financing needs in the short and long term can be met with cash generated internally, borrowing capacity from existing credit agreements, available debt issuances under existing shelf registration statements and our existing commercial paper program.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48,Accounting for Uncertainty in Income Taxes, which supplements Statement of Financial Accounting Standard No. 109,Accounting for Income Taxes, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 requires the tax effect of a position to be recognized only if it is “more-likely-than-not” to be sustained based solely on its technical merits as of the reporting date. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are recognized. This is a different standard for recognition than was previously required. The more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. At adoption, companies must adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any necessary adjustment is recorded directly to opening retained earnings in the period of adoption and reported as a change in accounting principle. We adopted the provisions of FIN 48 on January 1, 2007 which resulted in a decrease to opening retained earnings of $84.4 million, with a corresponding increase in our tax liabilities.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157,Fair Value Measurements(SFAS 157),to define how the fair value of assets and liabilities should be measured in more than 40 other accounting standards where it is allowed or required. In addition to defining fair value, the statement establishes a framework within GAAP for measuring fair value and expands required disclosures surrounding fair-value measurements. While it will change the way companies currently measure fair value, it does not establish any new instances where fair-value measurement is required. SFAS 157 defines fair value as an amount that a company would receive if it sold an asset or paid to transfer a liability in a normal transaction between market participants in the same market where the company does business. It emphasizes that the value is based on assumptions that market participants would use, not necessarily only the company that might buy or sell the asset. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption allowed. We are currently evaluating the impact of adopting this Statement.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of adopting this Statement.
Regulatory Matters
There have been no significant changes to the regulatory matters disclosed in our 2006 Annual Report on Form 10-K.
Forward-Looking Statements
We want to caution readers that any forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 in this Form 10-Q, other reports or press releases or made by our management involve risks and uncertainties which may change based on various important factors. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. These forward-looking statements are those which talk about our or management’s current expectations as to the future and include, but are not limited to, statements about the amounts, timing and results of possible restructuring charges and future earnings. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” and similar expressions may identify such forward-looking statements. Some of the factors which could cause future financial performance to differ materially from the expectations as expressed in any forward-looking statement made by or on our behalf include:
- changes in international or national political conditions, including any terrorist attacks
- negative developments in economic conditions, including adverse impacts on customer demand
- changes in postal regulations
- timely development and acceptance of new products
- success in gaining product approval in new markets where regulatory approval is required
- successful entry into new markets
- mailers’ utilization of alternative means of communication or competitors’ products
- our success at managing customer credit risk
- our success at managing costs associated with our strategy of outsourcing functions and operations not central to ourbusiness
- changes in interest rates
- foreign currency fluctuations
- cost, timing and execution of the restructuring plans including any potential asset impairments
- regulatory approvals and satisfaction of other conditions to consummation of any acquisitions and integration of recentacquisitions
- interrupted use of key information systems
- changes in privacy laws
- intellectual property infringement claims
- impact on mail volume resulting from current concerns over the use of the mail for transmitting harmful biological agents
- third-party suppliers’ ability to provide product components
- negative income tax adjustments for prior audit years and changes in tax laws or regulations
- changes in pension and retiree medical costs
- acts of nature
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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, 2006 regarding this matter.
Item 4: Controls and Procedures
Disclosure controls and procedures are designed to reasonably assure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed to reasonably assure that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate to allow timely decisions regarding required disclosure.
Under the direction of our CEO and CFO, we evaluated our disclosure controls and procedures and internal control over financial reporting. The CEO and CFO concluded that our disclosure controls and procedures were effective as of March 31, 2007. In addition, no change in internal control over financial reporting occurred during the quarter ended March 31, 2007, that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting. It should be noted that any system of controls is based in part upon certain assumptions designed to obtain reasonable (and not absolute) assurance as to its effectiveness, and there can be no assurance that any design will succeed in achieving its stated goals. Notwithstanding this caution, the disclosure controls and procedures are designed to provide reasonable assurance of achieving their stated objectives, and the CEO and CFO have concluded that the disclosure controls and procedures are effective at that reasonable assurance level.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
This item updates the legal proceedings more fully described in our 2006 Annual Report on Form 10-K, dated March 1, 2007.
There have been no material developments inRicoh Corporation et al. v. Pitney Bowes Inc. (United States District Court, District of New Jersey, filed November 26, 2002), the patent litigation where the company prevailed at trial. Post-trial motions are currently pending before the trial court.
During the first quarter of 2007, an additional purported national class action was filed against our subsidiary, Imagitas, Inc. alleging that the Imagitas DriverSource program violates the federal Drivers Privacy Protection Act (DPPA),Gentile v. Imagitas,Inc. (U.S. District Court, Southern District of Florida, filed March 8, 2007). The federal panel on multi-district litigation held a hearing on our motion to consolidate the ten purported class actions that have now been filed against Imagitas. During the first quarter, there have also been lawsuits filed against officials of the departments of motor vehicles in four of the states where the DriverSource program is active, Florida, Missouri, Minnesota and Ohio. Imagitas is not a defendant in those cases but these may be consolidated into the same multi-district litigation if consolidation is granted.
We expect to prevail in both the Ricoh litigation and the lawsuits against Imagitas; however, as litigation is inherently unpredictable, there can be no assurance in this regard. If the plaintiffs do prevail, the results may have a material effect on our financial position, future results of operations or cash flows, including, for example, our ability to offer certain types of goods or services in the future.
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Item 1A: Risk Factors
There were no material changes to the risk factors identified in the Annual Report on Form 10-K for the year ended December 31, 2006 regarding this matter.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Repurchases of Equity Securities
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. We have not repurchased or acquired any other shares of our common stock during 2007 in any other manner.
In March 2006, our Board of Directors authorized the repurchase of up to $300 million of our common stock in the open market of which $141.2 million remained for future purchases at December 31, 2006. We repurchased 1.9 million shares during the three months ended March 31, 2007 under this program for a total price of $90.0 million, leaving $51.2 million remaining for future repurchases under this program.
In March 2007, our Board of Directors authorized the repurchase of up to an additional $300 million of our common stock in the open market.
The following table summarizes our share repurchase activity under active programs during the first three months of 2007:
| | | | | | | | Total number of | | Approximate dollar value |
| | | Total number | | | Average price | | shares purchased as | | of shares that may yet be |
| | | of shares | | | paid per | | part of a publicly | | purchased under the plan |
| Period | | purchased | | | share | | announced plan | | (in thousands) |
| March 2006 Program | | | | | | | | | | |
| Balance carried forward | | | | | | | | | $ | 141,199 |
| January 2007 | | 866,300 | | | $47.88 | | 866,300 | | $ | 99,721 |
| February 2007 | | 451,850 | | | $47.99 | | 451,850 | | $ | 78,035 |
| March 2007 | | 586,100 | | | $45.78 | | 586,100 | | $ | 51,203 |
| | | 1,904,250 | | | | | 1,904,250 | | | |
| March 2007 Program | | | | | | | | | | |
| March 2007 | | - | | | - | | - | | $ | 300,000 |
| | | 1,904,250 | | | | | 1,904,250 | | $ | 351,203 |
Item 6: Exhibits
See Index of Exhibits.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | PITNEY BOWES INC. |
| |
| |
| |
| |
| May 4, 2007 | | |
| |
| |
| |
| |
| | | /s/ B. P. Nolop |
| | | B. P. Nolop |
| | | Executive Vice President and |
| | | Chief Financial Officer |
| | | (Principal Financial Officer) |
| |
| |
| |
| | | /s/ S. J. Green |
| | | S. J. Green |
| | | Vice President – Finance and |
| | | Chief Accounting Officer |
| | | (Principal Accounting Officer) |
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Index of Exhibits
| Reg. S-K | | |
| Exhibits | | Description |
| (12) | | Computation of ratio of earnings to fixed charges. |
| (31.1) | | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| (31.2) | | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| (32.1) | | Section 1350 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley |
| | | Act of 2002. |
| (32.2) | | Section 1350 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley |
| | | Act of 2002. |
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