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 June 30, 2001
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission File Number: 1-3579
PITNEY BOWES INC.
State of Incorporation IRS Employer Identification No.
Delaware 06-0495050
World Headquarters
Stamford, Connecticut 06926-0700
Telephone Number: (203) 356-5000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
Number of shares of common stock, $1 par value, outstanding as of July 31, 2001
is 245,647,809.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 2
Pitney Bowes Inc.
Index
-----------------
Page Number
-----------
Part I - Financial Information:
Item 1: Financial Statements
Consolidated Statements of Income (unaudited) - Three and
Six Months Ended June 30, 2001 and 2000.................... 3
Consolidated Balance Sheets - June 30, 2001 (unaudited)
and December 31, 2000...................................... 4
Consolidated Statements of Cash Flows (unaudited) - Six
Months Ended June 30, 2001 and 2000........................ 5
Notes to Consolidated Financial Statements..................... 6 - 11
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations..... 12 - 21
Part II - Other Information:
Item 1: Legal Proceedings....................................... 22
Item 4: Submission of Matters to a Vote of
Security Holders .............................. 22
Item 6: Exhibits and Reports on Form 8-K........................ 23
Signatures.......................................................... 24
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
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 June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- ---------------
Revenue from:
Sales................................................ $ 522,434 $ 488,301 $ 993,906 $ 929,495
Rentals and financing................................ 365,098 386,648 733,090 767,319
Support services..................................... 133,332 122,676 260,191 245,576
-------------- -------------- -------------- ---------------
Total revenue.................................... 1,020,864 997,625 1,987,187 1,942,390
-------------- -------------- -------------- ---------------
Costs and expenses:
Cost of sales........................................ 303,961 280,211 582,311 538,305
Cost of rentals and financing........................ 90,227 95,644 181,060 195,560
Cost of meter transition - impairment (Note 12)...... 227,300 - 227,300 -
Cost of meter transition - additional
depreciation (Note 12).............................. 20,400 - 20,400 -
Selling, service and administrative.................. 336,137 327,326 659,040 645,195
Research and development............................. 34,865 30,528 66,467 60,039
Other income (Note 13)............................... (362,172) - (362,172) -
Interest, net........................................ 44,301 50,411 94,886 95,095
Restructuring charges (Note 11)...................... 27,609 - 70,760 -
-------------- -------------- -------------- ---------------
Total costs and expenses......................... 722,628 784,120 1,540,052 1,534,194
-------------- -------------- -------------- ---------------
Income from continuing operations before income taxes.... 298,236 213,505 447,135 408,196
Provision for income taxes............................... 110,380 67,172 155,342 128,410
-------------- -------------- -------------- ---------------
Income from continuing operations........................ 187,856 146,333 291,793 279,786
Income from discontinued operations (Note 2)............. - 19,624 - 37,724
Loss on disposal of discontinued operations (Note 2) .... (10,827) - (10,827) -
Cumulative effect of accounting change................... - - - (4,683)
-------------- -------------- -------------- ---------------
Net income............................................... $ 177,029 $ 165,957 $ 280,966 $ 312,827
============== ============== ============== ===============
Basic earnings per share:
Continuing operations.................................. $ .76 $ .57 $ 1.18 $ 1.08
Discontinued operations................................ (.04) .07 (.04) .14
Cumulative effect of accounting change................. - - - (.02)
-------------- -------------- -------------- ---------------
Net income............................................. $ .72 $ .64 $ 1.14 $ 1.20
============== ============== ============== ===============
Diluted earnings per share:
Continuing operations.................................. $ .76 $ .56 $ 1.17 $ 1.07
Discontinued operations................................ (.05) .08 (.04) .14
Cumulative effect of accounting change................. - - - (.02)
-------------- -------------- -------------- ---------------
Net income............................................. $ .71 $ .64 $ 1.13 $ 1.19
============== ============== ============== ===============
Dividends declared per share of common stock............. $ .29 $ .285 $ .58 $ .57
============== ============== ============== ===============
Ratio of earnings to fixed charges....................... 5.82 4.05 4.43 4.07
============== ============== ============== ===============
Ratio of earnings to fixed charges
excluding minority interest.......................... 6.20 4.32 4.72 4.34
============== ============== ============== ===============
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 4
Pitney Bowes Inc.
Consolidated Balance Sheets
---------------------------
June 30, December 31,
(Dollars in thousands, except share data) 2001 2000
------------- ------------
(Unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents................................. $ 199,609 $ 198,255
Short-term investments, at cost which
approximates market................................... 3,472 15,250
Accounts receivable, less allowances:
6/01, $30,356; 12/00, $26,468......................... 385,799 313,510
Finance receivables, less allowances:
6/01, $56,779; 12/00, $44,129......................... 1,463,061 1,592,920
Inventories (Note 3)...................................... 166,917 167,969
Other current assets and prepayments...................... 157,086 145,786
Net current assets of discontinued operations............. 223,578 193,018
------------- ------------
Total current assets.................................. 2,599,522 2,626,708
Property, plant and equipment, net (Note 4)................... 516,943 491,312
Rental equipment and related inventories, net (Note 4)........ 477,230 620,841
Property leased under capital leases, net (Note 4)............ 2,121 2,303
Long-term finance receivables, less allowances:
6/01, $67,491; 12/00, $53,222............................. 1,849,533 1,980,876
Investment in leveraged leases................................ 1,221,143 1,150,656
Goodwill, net of amortization:
6/01, $62,177; 12/00, $58,658............................. 568,258 203,447
Other assets.................................................. 652,192 612,760
Net long-term assets of discontinued operations............... 216,802 212,363
------------- ------------
Total assets.................................................. $ 8,103,744 $ 7,901,266
============= ============
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities.................. $ 1,171,173 $ 995,283
Income taxes payable...................................... 386,201 262,125
Notes payable and current portion of
long-term obligations ................................ 1,109,459 1,277,941
Advance billings.......................................... 343,218 346,228
------------- ------------
Total current liabilities............................. 3,010,051 2,881,577
Deferred taxes on income...................................... 1,159,810 1,226,597
Long-term debt (Note 5)....................................... 2,006,964 1,881,947
Other noncurrent liabilities.................................. 325,015 316,170
------------- ------------
Total liabilities..................................... 6,501,840 6,306,291
------------- ------------
Preferred stockholders' equity in a subsidiary company........ 310,000 310,000
Stockholders' equity:
Cumulative preferred stock, $50 par
value, 4% convertible................................. 24 29
Cumulative preference stock, no par
value, $2.12 convertible.............................. 1,632 1,737
Common stock, $1 par value................................ 323,338 323,338
Capital in excess of par value............................ 5,033 10,298
Retained earnings......................................... 3,904,437 3,766,995
Accumulated other comprehensive income (Note 8)........... (146,917) (139,434)
Treasury stock, at cost................................... (2,795,643) (2,677,988)
------------- ------------
Total stockholders' equity............................ 1,291,904 1,284,975
------------- ------------
Total liabilities and stockholders' equity.................... $ 8,103,744 $ 7,901,266
============= ============
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 5
Pitney Bowes Inc.
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
(Dollars in thousands)
Six Months Ended June 30,
--------------------------
2001 2000
----------- ----------
Cash flows from operating activities:
Net income ................................................. $ 280,966 $ 312,827
Nonrecurring charges, net................................... 210,126 -
Nonrecurring payments....................................... (20,571) -
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization........................ 160,685 161,090
Increase in deferred taxes on income................. 74,629 98,526
Change in assets and liabilities:
Accounts receivable.............................. 9,004 (999)
Net investment in internal finance receivables... 25,355 2,651
Inventories...................................... 14,091 (7,303)
Other current assets and prepayments............. 5,785 (5,483)
Accounts payable and accrued liabilities......... (116,258) (67,184)
Income taxes payable............................. 123,348 (37,333)
Advance billings................................. (20,546) (2,602)
Other, net....................................... (17,207) (4,367)
----------- ----------
Net cash provided by operating activities........ 729,407 449,823
----------- ----------
Cash flows from investing activities:
Short-term investments...................................... 11,806 (42,915)
Net investment in fixed assets.............................. (116,136) (126,069)
Net investment in finance receivables....................... 17,340 (69,664)
Net investment in capital and mortgage services............. 74,296 (20,580)
Investment in leveraged leases.............................. (66,470) (73,320)
Proceeds and cash receipts from the sale of
discontinued operations.................................... - 512,780
Net proceeds from the sale of credit card portfolio......... - 321,746
Net investment in insurance contracts....................... 1,591 (130,049)
Acquisitions, net of cash acquired.......................... (372,520) -
Other investing activities.................................. 66,849 (26,915)
----------- ----------
Net cash (used in) provided by investing
activities....................................... (383,244) 345,014
----------- ----------
Cash flows from financing activities:
Decrease in notes payable, net.............................. (92,262) (300,688)
Proceeds from long-term obligations......................... 301,165 181,102
Principal payments on long-term obligations................. (287,352) (69,243)
Proceeds from issuance of stock............................. 20,505 21,582
Stock repurchases........................................... (143,535) (432,363)
Dividends paid.............................................. (143,524) (148,265)
----------- ----------
Net cash used in financing activities............ (345,003) (747,875)
----------- ----------
Effect of exchange rate changes on cash......................... 194 (4,537)
----------- ----------
Increase in cash and cash equivalents........................... 1,354 42,425
Cash and cash equivalents at beginning of period................ 198,255 254,270
----------- ----------
Cash and cash equivalents at end of period...................... $ 199,609 $ 296,695
=========== ==========
Interest paid................................................... $ 102,343 $ 132,022
=========== ==========
Income taxes paid, net.......................................... $ 71,167 $ 79,044
=========== ==========
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 6
Pitney Bowes Inc.
Notes to Consolidated Financial Statements
------------------------------------------
Note 1:
- ------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion 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 June 30,
2001 and December 31, 2000, the results of its operations for the three months
and six months ended June 30, 2001 and 2000 and its cash flows for the six
months ended June 30, 2001 and 2000 have been included. Operating results for
the three and six months ended June 30, 2001 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2001. These
statements should be read in conjunction with the financial statements and notes
thereto included in the company's 2000 Annual Report to Stockholders on Form
10-K.
Note 2:
- ------
On December 11, 2000, the company announced that its Board of Directors approved
a formal plan to spin off the company's Office Systems business to stockholders
as an independent, publicly-traded company. The Internal Revenue Service has
notified the company that the spin-off will be tax free as provided for under
the Internal Revenue Code. The transaction is expected to be completed by the
end of the third quarter of 2001. Revenue of Office Systems was $155.2 million
and $163.4 million for the quarters ended June 30, 2001 and 2000, respectively.
For the six months ended June 30, 2001 and 2000, revenue was $307.1 million and
$320.6 million, respectively. Net interest expense allocated to Office Systems
was $3.0 million and $2.9 million for the quarters ended June 30, 2001 and 2000,
respectively. For the six months ended June 30, 2001 and 2000, net interest
expense allocated to Office Systems was $5.9 million and $5.4 million,
respectively. Interest has been allocated based on the net assets of Office
Systems charged at the company's weighted average borrowing rate. Operating
results of Office Systems have been segregated and reported as discontinued
operations in the Consolidated Statements of Income. Prior year results have
been reclassified to conform to the current year presentation. Income from
Office Systems for the three and six months ended June 30, 2001 was $.4 million
(net of taxes of $.6 million), and $8.0 million (net of taxes of $5.4 million),
respectively, offset by costs, expenses and restructuring charges directly
associated with the spin-off. The company now expects the total amount of costs,
expenses and restructuring charges related to the spin-off to exceed the income
from the discontinued operations of Office Systems between the measurement date
(December 11, 2000) and the spin-off date, by $10.8 million (net of taxes of
$4.6 million), primarily as a result of continuing weakness in the copier
business. This amount has been reflected as a loss on disposal of discontinued
operations in the Consolidated Statements of Income for the three and six months
ended June 30, 2001. Income from the discontinued operations of Office Systems
for the three and six months ended June 30, 2000 was $18.9 million (net of taxes
of $12.4 million) and $37.0 million (net of taxes of $24.1 million),
respectively. Net assets of Office Systems have been separately classified in
the Consolidated Balance Sheets. Cash flow impacts of Office Systems have not
been segregated in the Consolidated Statements of Cash Flows.
On January 14, 2000, the company sold its mortgage servicing business, Atlantic
Mortgage & Investment Corporation, a wholly-owned subsidiary of the company to
ABN AMRO North America. The company received approximately $484 million in cash
at closing. The transaction is subject to post-closing adjustments.
Note 3:
- ------
Inventories are comprised of the following:
(Dollars in thousands) June 30, December 31,
2001 2000
-------------- --------------
Raw materials and work in process......... $ 71,034 $ 67,990
Supplies and service parts................ 43,316 38,708
Finished products......................... 52,567 61,271
-------------- --------------
Total .................................... $ 166,917 $ 167,969
============== ==============
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 7
Note 4:
- ------
Fixed assets are comprised of the following:
(Dollars in thousands) June 30, December 31,
2001 2000
-------------- --------------
Property, plant and equipment....................... $ 1,239,367 $ 1,195,319
Accumulated depreciation............................ (722,424) (704,007)
-------------- --------------
Property, plant and equipment, net.................. $ 516,943 $ 491,312
============== ==============
Rental equipment and related inventories............ $ 1,197,579 $ 1,218,251
Accumulated depreciation............................ (720,349) (597,410)
-------------- --------------
Rental equipment and related inventories, net....... $ 477,230 $ 620,841
============== ==============
Property leased under capital leases................ $ 19,381 $ 19,059
Accumulated amortization............................ (17,260) (16,756)
-------------- --------------
Property leased under capital leases, net........... $ 2,121 $ 2,303
============== ==============
<FN>
In connection with the company's meter transition, the company wrote down rental
equipment in the second quarter of 2001. See Note 12 to the Consolidated
Financial Statements.
</FN>
Note 5:
- ------
The company has a shelf registration, permitting issuances of up to $500 million
in debt securities (including medium-term notes) with a minimum maturity of nine
months. In April 2001, the company issued the remaining $300 million of notes
available under its shelf registration. These unsecured notes bear annual
interest at 5.875% and mature in May 2006. The proceeds were used for general
corporate purposes including the repayment of commercial paper, financing
acquisitions and the repurchase of the company's stock.
PBCC has $425 million of unissued debt securities available at June 30, 2001
from a shelf registration statement filed with the Securities and Exchange
Commission (SEC) in July 1998. As part of this shelf registration statement, in
August 1999, PBCC established a medium-term note program for the issuance from
time to time of up to $500 million aggregate principal amount of Medium-Term
Notes, Series D, of which $175 million remained available at June 30, 2001.
Note 6:
- ------
A reconciliation of the basic and diluted earnings per share computations for
the three months ended June 30, 2001 and 2000 is as follows (in thousands,
except per share data):
2001 2000
------------------------------------ ------------------------------------
Per Per
Income Shares Share Income Shares Share
- ----------------------------------------------------------------- ------------------------------------
Income from continuing
operations $ 187,856 $ 146,333
Less:
Preferred stock
dividends (1) -
Preference stock
dividends (33) (36)
- ----------------------------------------------------------------- ------------------------------------
Basic earnings per
share $ 187,822 246,433 $ .76 $ 146,297 257,605 $ .57
- ----------------------------------------------------------------- ------------------------------------
Effect of dilutive
securities:
Preferred stock 1 13 - 14
Preference stock 33 984 36 1,065
Stock options 828 892
Other 162 126
- ----------------------------------------------------------------- ------------------------------------
Diluted earnings per
share $ 187,856 248,420 $ .76 $ 146,333 259,702 $ .56
================================================================= ====================================
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 8
A reconciliation of the basic and diluted earnings per share computations for
the six months ended June 30, 2001 and 2000 is as follows (in thousands, except
per share data):
2001 2000
------------------------------------ ------------------------------------
Per Per
Income Shares Share Income Shares Share
- ----------------------------------------------------------------- ------------------------------------
Income from continuing
operations $ 291,793 $ 279,786
Less:
Preferred stock
dividends (2) -
Preference stock
dividends (66) (71)
- ----------------------------------------------------------------- ------------------------------------
Basic earnings per
share $ 291,725 247,328 $ 1.18 $ 279,715 260,323 $ 1.08
- ----------------------------------------------------------------- ------------------------------------
Effect of dilutive
securities:
Preferred stock 2 14 - 14
Preference stock 66 998 71 1,072
Stock options 678 1,081
Other 129 134
- ----------------------------------------------------------------- ------------------------------------
Diluted earnings per
share $ 291,793 249,147 $ 1.17 $ 279,786 262,624 $ 1.07
================================================================= ====================================
Note 7:
- ------
Revenue and operating profit by business segment for the three and six months
ended June 30, 2001 and 2000 were as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ----------------------------
(Dollars in thousands) 2001 2000 2001 2000
----------- ------------ ------------ -----------
Revenue:
Global Mailing............................. $ 731,264 $ 732,488 $ 1,424,000 $ 1,430,539
Enterprise Solutions....................... 246,882 217,830 477,472 419,367
----------- ------------ ------------ -----------
Total Messaging Solutions.................. 978,146 950,318 1,901,472 1,849,906
Capital Services........................... 42,718 47,307 85,715 92,484
----------- ------------ ------------ -----------
Total revenue................................. $ 1,020,864 $ 997,625 $ 1,987,187 $ 1,942,390
=========== ============ ============ ===========
Operating Profit: (1)
Global Mailing............................. $ 229,418 $ 221,157 $ 436,589 $ 418,334
Enterprise Solutions....................... 19,405 19,786 38,224 34,481
----------- ------------ ------------ -----------
Total Messaging Solutions.................. 248,823 240,943 474,813 452,815
Capital Services........................... 15,446 15,997 30,151 29,118
----------- ------------ ------------ -----------
Total operating profit....................... $ 264,269 $ 256,940 $ 504,964 $ 481,933
Unallocated amounts:
Net interest (corporate interest expense,
net of intercompany transactions)......... (16,248) (15,524) (36,007) (27,841)
Corporate expense.......................... (36,648) (27,911) (65,534) (45,896)
Other income............................... 362,172 - 362,172 -
Cost of meter transition................... (247,700) - (247,700) -
Restructuring charges...................... (27,609) - (70,760) -
----------- ------------ ------------ -----------
Income from continuing operations before
income taxes................................. $ 298,236 $ 213,505 $ 447,135 $ 408,196
=========== ============ ============ ===========
<FN>
(1) Operating profit excludes general corporate expenses, income taxes and net
interest other than that related to finance operations.
</FN>
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 9
Note 8:
- ------
Comprehensive income for the three and six months ended June 30, 2001 and 2000
was as follows:
(Dollars in thousands)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ------------ ------------
Net income................................... $ 177,029 $ 165,957 $ 280,966 $ 312,827
Other comprehensive income:
Foreign currency translation adjustments... (12,469) (22,993) (873) (21,783)
Cumulative effect of accounting change..... - - (9,152) -
Net unrealized gains on derivative
instruments.............................. 1,367 - 2,542 -
----------- ----------- ------------ ------------
Comprehensive income......................... $ 165,927 $ 142,964 $ 273,483 $ 291,044
=========== =========== ============ ============
Note 9:
- ------
In 1998, Statement of Financial Accounting Standards (FAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," amended in 2000 by FAS No.
138, was issued. FAS No. 133 requires that an entity recognize all derivative
instruments as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Changes in the fair value
of those instruments will be reflected as gains or losses. The accounting for
the gains or losses depends on the intended use of the derivative and the
resulting designation. The company adopted the provisions of FAS No. 133 in the
first quarter of 2001. The company uses derivatives to reduce the volatility in
earnings and cash flows associated with the impact of interest rate changes and
foreign currency fluctuations due to its investing and funding activities and
its operations in different foreign currencies. Derivatives designated as cash
flow hedges include primarily foreign exchange contracts and interest rate swaps
related to variable-rate debt. Derivatives designated as fair value hedges
include primarily interest rate swaps related to fixed-rate debt. The adoption
of FAS No. 133 has resulted in an after-tax reduction to accumulated other
comprehensive income of $6.6 million, including a one-time cumulative effect of
accounting change which reduced accumulated other comprehensive income by
approximately $9.2 million in the first quarter of 2001. The adoption of FAS No.
133 has also impacted assets and liabilities recorded on the Consolidated
Balance Sheet. The adoption of FAS No. 133 did not materially impact results of
operations in the three and six months ended June 30, 2001.
In 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements,"
summarizing certain guidance in applying generally accepted accounting
principles to revenue recognition in financial statements. The company adopted
the provisions of SAB No. 101 in the fourth quarter of 2000, retroactive to
January 1, 2000. The adoption of SAB No. 101 resulted in a one-time cumulative
after-tax reduction in net income of $4.7 million (net of taxes of approximately
$3.1 million) in the first quarter of 2000. The reduction to net income is
primarily attributable to the deferral of sales recognition of software-enabled
mail creation equipment and shipping products until installation.
In 2000, FAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" was issued, replacing FAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." FAS No. 140 revises the standards for accounting for
securitizations and other transfers of financial assets and collateral, as well
as requiring certain additional disclosures. However, it carries over most of
the provisions contained in FAS No. 125. FAS No. 140 is effective for transfers
and servicing of financial assets and extinguishment of liabilities occurring
after March 31, 2001. However, it is effective for the recognition and
reclassification of collateral and for disclosures relating to those
transactions for the year ended December 31, 2000. The company believes it is in
compliance with these standards in all material respects.
In July 2001, FAS No. 141, "Business Combinations" and FAS No. 142, "Goodwill
and Other Intangible Assets" were issued requiring business combinations
initiated after June 30, 2001 to be accounted for using the purchase method of
accounting, and refining the criteria for recording intangible assets separate
from goodwill. Recorded goodwill and intangibles will be evaluated against this
new criterion and may result in certain intangibles being included in goodwill,
or alternatively, amounts initially recorded as goodwill may be separately
identified and recognized apart from goodwill. FAS No. 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be reviewed
for impairment and charged against results of operations only in the periods in
which the recorded value of goodwill and certain intangibles is more than its
fair value. The provisions of each statement which apply to goodwill and
intangible assets acquired prior to June 30, 2001 will be adopted by the company
on January 1, 2002. The adoption of these accounting standards is expected to
reduce the amortization of intangible assets commencing January 1, 2002;
however, impairment reviews may result in future periodic write-downs.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 10
Note 10:
- -------
On June 29, 2001, the company completed its acquisition of Danka Services
International (DSI) from Danka Business Systems PLC for $290 million in cash.
DSI provides on- and off-site document management services, including the
management of central reprographic departments, the placement and maintenance of
photocopiers, print-on-demand operations and document archiving and retrieval
services. The acquisition has been accounted for under the purchase method and
accordingly, the operating results of DSI have been included in the company's
consolidated financial statements since the date of acquisition. The balance
sheet reflects the preliminary allocation of the purchase price based on the
initially estimated fair values of assets and liabilities acquired.
On June 5, 2001, the company completed the acquisition of Bell & Howell's
International Mail and Messaging Technologies (MMT) business in Europe, Africa,
the Middle East and Asia, for $51 million in cash. MMT markets and services
high-end mail processing, sorting and service-related products through a network
of distributors and direct operations. The acquisition has been accounted for
under the purchase method and accordingly, the operating results of the
acquisition have been included in the company's consolidated financial
statements since the date of acquisition. The balance sheet reflects the
preliminary allocation of the purchase price based on the initially estimated
fair values of assets and liabilities acquired.
The acquisitions of DSI and MMT did not materially impact the results of
operations for the three and six months ended June 30, 2001.
The following unaudited pro forma consolidated results of operations have been
prepared as if the acquisitions of DSI and MMT had occurred on January 1, 2000:
(Dollars in thousands)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Total revenue $ 1,102,930 $ 1,085,449 $ 2,164,779 $ 2,120,088
The pro forma consolidated results do not purport to be indicative of results
that would have occurred had the acquisitions been completed on January 1, 2000,
nor do they purport to be indicative of the results that will be obtained in the
future. The pro forma earnings results of these acquisitions were not material
to earnings on either a per share or an aggregate basis.
Note 11:
- -------
As previously announced, the company adopted a formal restructuring plan in the
first quarter of 2001, 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 IT
organization and ERP initiatives. In connection with this plan, the company
recorded a pretax restructuring charge of $28.9 million during the second
quarter of 2001, of which $27.6 million was related to continuing operations,
and the remaining $1.3 million related to discontinued operations. For the six
months ended June 30, 2001, pretax restructuring charges were $103.9 million, of
which $70.8 million was related to continuing operations and the remaining $33.1
million was related to discontinued operations. The restructuring charges
related to continuing operations have been segregated in the Consolidated
Statements of Income for the three and six months ended June 30, 2001. The
restructuring charges related to discontinued operations have been reported in
discontinued operations in the Consolidated Statements of Income for the three
and six months ended June 30, 2001. See Note 2 to the Consolidated Financial
Statements.
The restructuring charges related to continuing operations are comprised of:
(Dollars in millions) Three Six
Months Ended Months Ended
June 30, 2001 June 30, 2001
------------- -------------
Severance and benefit costs............... $ 12.4 $ 47.6
Asset impairments......................... 14.1 16.3
Other exit costs.......................... 1.1 6.9
------------- -------------
$ 27.6 $ 70.8
============= =============
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 1,100 employees worldwide to be completed over the next 12 months.
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 85% of the workforce reductions are in the
U.S. The majority of the international workforce reductions are in Europe. None
of the reductions will impact sales coverage. As of June 30, 2001, 360 employees
were separated under these initiatives and approximately $15 million of
severance and benefit costs were paid. Asset impairments relate primarily to the
write down of capitalized hardware and software, resulting from the alignment of
our mailing business on a global basis and our ERP initiatives.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 11
The restructuring charges related to discontinued operations are comprised of:
(Dollars in millions)
Three Six
Months Ended Months Ended
June 30, 2001 June 30, 2001
-------------- -------------
Severance and benefit costs............. $ .4 $ 1.9
Asset impairments....................... .9 17.4
Other exit costs........................ - 13.8
-------------- -------------
$ 1.3 $ 33.1
============== =============
The severance and benefit costs relate to a reduction in workforce of
approximately 25 employees. The asset impairments relate primarily to a
write-down of residual values in connection with leases of copier equipment and
the write-down of facsimile and copier equipment, resulting from the spin-off of
our office systems business. Other exit costs relate primarily to incremental
costs associated with cancellation and separation of facility occupancy leases
that are shared between the company and Office Systems.
Note 12:
- -------
As previously announced, the company adopted a formal meter transition plan in
the second quarter of 2001, 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 the recent settlement
agreement with Hewlett-Packard that expanded our 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, the company recorded a non-cash pretax charge of $247.7 million
during the second quarter of 2001, related to assets associated with our
non-networked mailing technology, of which $128.4 million related to the
impairment of lease residuals, $71.3 million related to the impairment of meter
rental assets, $27.6 million related to reduced inventory valuation and $20.4
million related to additional depreciation costs on meter rental assets.
Note 13:
- -------
In June 2001, the company and Hewlett-Packard announced that they had reached an
agreement resolving a lawsuit filed by the company 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 the company received $400 million in cash. This
payment, net of legal fees and related expenses of $37.8 million was recorded as
other income in the Consolidated Statements of Income in the second quarter of
2001.
Note 14:
- -------
In July 2001, the company announced that it is in discussions with Fimalac, the
French diversified services group, for the acquisition of Secap SA, Fimalac's
mailing subsidiary. Secap SA provides a range of mail processing equipment,
supplies and technology for low- to mid-volume mailers. The parties have
discussed a purchase price of approximately FF 1.45 billion. In accordance with
French labor law, the proposed transaction has been submitted to the companies'
respective employee representatives for review and opinion, and is subject to
the execution of definitive documentation, completion of due diligence, and
receipt of approvals by the appropriate regulatory authorities and the boards of
directors of Pitney Bowes and Fimalac.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
--------------------------------------------------
Results of Continuing Operations - second quarter of 2001 vs. second quarter of
- --------------------------------------------------------------------------------
2000
- ----
Revenue increased two percent in the second quarter of 2001 to $1,020.9 million
compared with $997.6 million in the second quarter of 2000. Income from
continuing operations increased 28 percent to $187.9 million from $146.3 million
for the same period in 2000. Diluted earnings per share from continuing
operations increased 34 percent to 76 cents in the second quarter of 2001,
compared with 56 cents in the second quarter of 2000. Excluding special gains
and charges in the second quarter of 2001, income from continuing operations
decreased one percent to $144.6 million from $146.3 million for the same period
in 2000 while diluted earnings per share from continuing operations increased 3
percent to 58 cents in the second quarter of 2001. Included as special gains and
charges in the second quarter of 2001 are a $29 million pre-tax restructuring
charge related to changes in infrastructure, process improvements and the
planned spin-off of Office Systems, of which $28 million was related to
continuing operations and $1 million to discontinued operations, a $248 million
non-cash pre-tax charge associated with the company's transition to the next
generation of networked mailing technology, and a net pretax gain of $362
million resulting from the settlement of a lawsuit with Hewlett-Packard.
Second quarter 2001 revenue included $522.4 million from sales, up seven percent
from $488.3 million in the second quarter of 2000; $365.1 million from rentals
and financing, down six percent from $386.6 million; and $133.3 million from
support services, up nine percent from $122.7 million. Rentals and financing
revenue was negatively impacted in the second quarter of 2001 by the prior year
sale of the credit card portfolio. Excluding the impact of the prior year sale
of the credit card portfolio, rentals and financing revenue was flat in the
second quarter of 2001 compared with the same period in 2000.
The Global Mailing segment includes worldwide revenues 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,
software-based shipping, transportation and logistics systems, and related
supplies and services. During the second quarter of 2001, revenue was flat and
operating profit increased four percent. Revenue growth was negatively impacted
by the sale of the credit card portfolio at the end of the second quarter of
2000 and the negative impact of foreign currency, principally related to the
British Pound, Canadian Dollar and the Euro. Excluding the impact of these two
factors, Global Mailing revenues increased four percent. Core metering and mail
finishing applications performed in line with the second quarter of 2000 despite
the impact of the slowing economy. Global Mailing's operating profit benefited
from lower administrative costs due to continuous process improvements.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 13
The Enterprise Solutions segment includes Pitney Bowes Management Services and
Document Messaging Technologies. Pitney Bowes Management Services includes
facilities management contracts for advanced mailing, reprographic, document
management and other value-added services to large enterprises. Document
Messaging Technologies includes sales, service and financing of high speed,
software-enabled production mail systems, sorting equipment, incoming mail
systems, electronic statement, billing and payment solutions, and mailing
software. During the second quarter of 2001, revenue grew 13 percent and
operating profit decreased two percent. Revenue growth was driven by a 14
percent increase at Pitney Bowes Management Services and an 11 percent increase
at Document Messaging Technologies resulting from higher volume in both
businesses. Operating profit comparisons, particularly for Document Messaging
Technologies were adversely impacted by a previously reported settlement
received from Bell & Howell in the second quarter of 2000 and costs associated
with the investments in acquisition and growth initiatives during the second
quarter of 2001. Excluding these items, operating profit for the segment would
have increased at a double- digit rate.
Total Messaging Solutions, the combined results of the Global Mailing segment
and Enterprise Solutions segment, reported three percent revenue and operating
profit growth.
The Capital Services segment includes primarily asset- and fee-based income
generated by large-ticket, non-core asset transactions. During the quarter,
revenue decreased ten percent and operating profit decreased three percent. This
performance is consistent with the company's previously stated strategy to
concentrate on fee-based income opportunities.
Cost of sales increased to 58.2 percent of sales revenue in the second quarter
of 2001 compared with 57.4 percent in the second quarter of 2000. The increase
was due primarily to the increasing mix of lower margin Pitney Bowes Management
Services sales revenue.
Cost of rentals and financing was flat at 24.7 percent of related revenues in
both the second quarter of 2001 and 2000, respectively.
Selling, service and administrative expenses were 32.9 percent of revenue in the
second quarter of 2001 compared with 32.8 percent in the second quarter of 2000.
The increase is a result of costs associated with investments in acquisition and
growth initiatives, partially offset by the company's continued emphasis on
controlling operating expenses.
Research and development expenses increased 14.2 percent to $34.9 million in the
second quarter of 2001 compared with $30.5 million in the second quarter of
2000. The increase reflects the company's continued commitment to developing new
technologies and other mailing and software products.
Net interest expense decreased to $44.3 million in the second quarter of 2001
from $50.4 million in the second quarter of 2000. The decrease is due mainly to
lower average interest rates in 2001.
The effective tax rate for the second quarter of 2001 was 37 percent. Excluding
special gains and charges, the effective tax rate for the second quarter of 2001
was 31.6 percent compared with 31.5 percent in 2000.
Excluding special gains and charges, income from continuing operations decreased
1.2 percent while diluted earnings per share from continuing operations
increased 3.4 percent. The reason for the increase in diluted earnings per share
outperforming income from continuing operations was the company's share
repurchase program.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 14
Results of Continuing Operations - six months of 2001 vs. six months of 2000
- ----------------------------------------------------------------------------
For the first six months of 2001 compared with the same period of 2000, revenue
increased two percent to $1,987.2 million, and income from continuing
operations, excluding special gains and charges decreased one percent to $276.1
million. The factors that affected revenue and earnings performance included
those cited for the second quarter of 2001 versus 2000.
Discontinued Operations
- -----------------------
On December 11, 2000, the company announced that its Board of Directors approved
a formal plan to spin off the company's office systems business to stockholders
as an independent, publicly-traded company. The transaction is expected to be
completed by the end of the third quarter of 2001. Operating results of Office
Systems have been segregated and reported as discontinued operations in the
Consolidated Statements of Income. Prior year results have been reclassified to
conform to the current year presentation. See Note 2 to the Consolidated
Financial Statements.
On January 14, 2000, the company sold its mortgage servicing business, Atlantic
Mortgage & Investment Corporation, a wholly-owned subsidiary of the company, to
ABN AMRO North America. The company received approximately $484 million in cash
at closing. The transaction is subject to post-closing adjustments.
Accounting Pronouncements
- -------------------------
In 1998, Statement of Financial Accounting Standards (FAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," amended in 2000 by FAS No.
138, was issued. FAS No. 133 requires that an entity recognize all derivative
instruments as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Changes in the fair value
of those instruments will be reflected as gains or losses. The accounting for
the gains or losses depends on the intended use of the derivative and the
resulting designation. The company adopted the provisions of FAS No. 133 in the
first quarter of 2001. The company uses derivatives to reduce the volatility in
earnings and cash flows associated with the impact of interest rate changes and
foreign currency fluctuations due to its investing and funding activities and
its operations in different foreign currencies. Derivatives designated as cash
flow hedges include primarily foreign exchange contracts and interest rate swaps
related to variable-rate debt. Derivatives designated as fair value hedges
include primarily interest rate swaps related to fixed-rate debt. The adoption
of FAS No. 133 has resulted in an after-tax reduction to accumulated other
comprehensive income of $6.6 million, including a one-time cumulative effect of
accounting change which reduced accumulated other comprehensive income by
approximately $9.2 million in the first quarter of 2001. The adoption of FAS No.
133 has also impacted assets and liabilities recorded on the Consolidated
Balance Sheet. The adoption of FAS No. 133 did not materially impact results of
operations in the three and six months ended June 30, 2001.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 15
In 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements,"
summarizing certain guidance in applying generally accepted accounting
principles to revenue recognition in financial statements. The company adopted
the provisions of SAB No. 101 in the fourth quarter of 2000, retroactive to
January 1, 2000. The adoption of SAB No. 101 resulted in a one-time cumulative
after-tax reduction in net income of $4.7 million (net of taxes of approximately
$3.1 million) in the first quarter of 2000. The reduction to net income is
primarily attributable to the deferral of sales recognition of software-enabled
mail creation equipment and shipping products until installation.
In 2000, FAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" was issued, replacing FAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." FAS No. 140 revises the standards for accounting for
securitizations and other transfers of financial assets and collateral, as well
as requiring certain additional disclosures. However, it carries over most of
the provisions contained in FAS No. 125. FAS No. 140 is effective for transfers
and servicing of financial assets and extinguishment of liabilities occurring
after March 31, 2001. However, it is effective for the recognition and
reclassification of collateral and for disclosures relating to those
transactions for the year ended December 31, 2000. The company believes it is in
compliance with these standards in all material respects.
In July 2001, FAS No. 141, "Business Combinations" and FAS No. 142, "Goodwill
and Other Intangible Assets" were issued requiring business combinations
initiated after June 30, 2001 to be accounted for using the purchase method of
accounting, and refining the criteria for recording intangible assets separate
from goodwill. Recorded goodwill and intangibles will be evaluated against this
new criterion and may result in certain intangibles being included in goodwill,
or alternatively, amounts initially recorded as goodwill may be separately
identified and recognized apart from goodwill. FAS No. 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be reviewed
for impairment and charged against results of operations only in the periods in
which the recorded value of goodwill and certain intangibles is more than its
fair value. The provisions of each statement which apply to goodwill and
intangible assets acquired prior to June 30, 2001 will be adopted by the company
on January 1, 2002. The adoption of these accounting standards is expected to
reduce the amortization of intangible assets commencing January 1, 2002;
however, impairment reviews may result in future periodic write-downs.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 16
Restructuring Charges
- ---------------------
As previously announced, the company adopted a formal restructuring plan in the
first quarter of 2001, 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 IT
organization and ERP initiatives. In connection with this plan, the company
recorded a pretax restructuring charge of $28.9 million during the second
quarter of 2001, of which $27.6 million was related to continuing operations,
and the remaining $1.3 million related to discontinued operations. For the six
months ended June 30, 2001, pretax restructuring charges were $103.9 million, of
which $70.8 million was related to continuing operations and the remaining $33.1
million was related to discontinued operations. The company expects to record an
additional pretax restructuring charge of approximately $10 million to $15
million in the third quarter of 2001 to complete this restructuring plan. The
restructuring charges related to continuing operations have been segregated in
the Consolidated Statements of Income for the three and six months ended June
30, 2001. The restructuring charges related to discontinued operations have been
reported in discontinued operations in the Consolidated Statements of Income for
the three and six months ended June 30, 2001. See Note 2 to the Consolidated
Financial Statements.
The restructuring charges related to continuing operations are comprised of:
(Dollars in millions) Three Six
Months Ended Months Ended
June 30, 2001 June 30, 2001
------------- -------------
Severance and benefit costs............. $ 12.4 $ 47.6
Asset impairments....................... 14.1 16.3
Other exit costs........................ 1.1 6.9
------------- -------------
$ 27.6 $ 70.8
============= =============
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 1,100 employees worldwide to be completed over the next 12 months.
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 85% of the workforce reductions are in the
U.S. The majority of the international workforce reductions are in Europe. None
of the reductions will impact sales coverage. As of June 30, 2001, 360 employees
were separated under these initiatives and approximately $15 million of
severance and benefit costs were paid. Asset impairments relate primarily to the
write down of capitalized hardware and software, resulting from the alignment of
our mailing business on a global basis and ERP initiatives.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 17
The restructuring charges related to discontinued operations are comprised of:
(Dollars in millions) Three Six
Months Ended Months Ended
June 30, 2001 June 30, 2001
------------- -------------
Severance and benefit costs............. $ .4 $ 1.9
Asset impairments....................... .9 17.4
Other exit costs........................ - 13.8
------------- -------------
$ 1.3 $ 33.1
============= =============
The severance and benefit costs relate to a reduction in workforce of
approximately 25 employees. The asset impairments relate primarily to a
write-down of residual values in connection with leases of copier equipment and
the write-down of facsimile and copier equipment, resulting from the spin-off of
our office systems business. Other exit costs relate primarily to incremental
costs associated with cancellation and separation of facility occupancy leases
that are shared between the company and Office Systems.
Total cash payments resulting from the restructuring charges for the six months
ended June 30, 2001 were approximately $17 million. We expect that the majority
of the remaining cash outflows related to restructuring charges will take place
over the next nine months, funded primarily by cash provided by operating
activities. The restructuring charges are expected to increase our operating
efficiency and effectiveness in 2002 and beyond while enhancing growth,
primarily as a result of reduced personnel-related expenses.
Meter Transition
- ----------------
As previously announced, the company adopted a formal meter transition plan in
the second quarter of 2001, 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 the recent settlement
agreement with Hewlett-Packard that expanded our 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, the company recorded a non-cash pretax charge of $247.7 million
during the second quarter of 2001, related to assets associated with our
non-networked mailing technology, of which $128.4 million related to the
impairment of lease residuals, $71.3 million related to the impairment of meter
rental assets, $27.6 million related to reduced inventory valuation and $20.4
million related to additional depreciation costs on meter rental assets.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 18
Other Matters
- -------------
In June 2001, the company and Hewlett-Packard announced that they had reached an
agreement resolving a lawsuit filed by the company 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 the company received $400 million in cash. This
payment, net of legal fees and related expenses of $37.8 million was recorded as
other income in the Consolidated Statements of Income in the second quarter of
2001.
Liquidity and Capital Resources
- -------------------------------
The ratio of current assets to current liabilities decreased to .86 to 1 at June
30, 2001 compared with .91 to 1 at December 31, 2000 primarily as a result of
costs associated with the restructuring and meter transition plans.
The company has a shelf registration, permitting issuances of up to $500 million
in debt securities (including medium-term notes) with a minimum maturity of nine
months. In April 2001, the company issued the remaining $300 million of notes
available under its shelf registration. These unsecured notes bear annual
interest at 5.875% and mature in May 2006. The proceeds were used for general
corporate purposes including the repayment of commercial paper, financing
acquisitions and the repurchase of company stock.
PBCC has $425 million of unissued debt securities available at June 30, 2001
from a shelf registration statement filed with the Securities and Exchange
Commission (SEC) in July 1998. As part of this shelf registration statement in
August 1999, PBCC established a medium-term note program for the issuance from
time to time of up to $500 million aggregate principal amount of Medium-Term
Notes, Series D, of which $175 million remained available at June 30, 2001.
The company believes that its financing needs for the next 12 months can be met
with cash generated internally, money from existing credit agreements, debt
issued under new and existing shelf registration statements and existing
commercial paper and medium-term note programs.
The ratio of total debt to total debt and stockholders' equity including the
preferred stockholders' equity in a subsidiary company was 72.6 percent at June
30, 2001 compared with 73.0 percent at December 31, 2000. Book value per common
share increased to $5.25 at June 30, 2001 from $5.16 at December 31, 2000 driven
primarily by income from continuing operations, partially offset by the
repurchase of common shares. During the second quarter of 2001, the company
repurchased 1.8 million common shares for $71.7 million.
To control the impact of interest rate risk on its business, the company uses a
balanced mix of debt maturities, variable and fixed rate debt and interest rate
swap agreements. The company enters into interest rate swap agreements primarily
through its financial services business.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 19
Capital Investments
- -------------------
In the first six months of 2001, net investments in fixed assets included $56.3
million in net additions to property, plant and equipment and $59.8 million in
net additions to rental equipment and related inventories compared with $47.2
million and $78.8 million, respectively, in the same period in 2000. These
additions include expenditures for normal plant and manufacturing equipment. In
the case of rental equipment, the additions included the production of postage
meters and the purchase of facsimile and copier equipment related to the
discontinued operations of Office Systems.
Expenditures for property, plant and equipment, and rental equipment and related
inventories are expected to be lower than historical levels as a result of the
spin-off of the company's Office Systems business.
Acquisitions
- ------------
On June 29, 2001, the company completed its acquisition of Danka Services
International (DSI) from Danka Business Systems PLC for $290 million in cash.
DSI provides on- and off-site document management services, including the
management of central reprographic departments, the placement and maintenance of
photocopiers, print-on-demand operations and document archiving and retrieval
services. The acquisition has been accounted for under the purchase method and
accordingly, the operating results of DSI have been included in the company's
consolidated financial statements since the date of acquisition. The balance
sheet reflects the preliminary allocation of the purchase price based on the
initially estimated fair values of assets and liabilities acquired.
On June 5, 2001, the company completed the acquisition of Bell & Howell's
International Mail and Messaging Technologies (MMT) business in Europe, Africa,
the Middle East and Asia, for $51 million in cash. MMT markets and services
high-end mail processing, sorting and service-related products through a network
of distributors and direct operations. The acquisition has been accounted for
under the purchase method and accordingly, the operating results of the
acquisition have been included in the company's consolidated financial
statements since the date of acquisition. The balance sheet reflects the
preliminary allocation of the purchase price based on the initially estimated
fair values of assets and liabilities acquired.
The acquisitions of DSI and MMT did not materially impact the results of
operations for the three and six months ended June 30, 2001. See Note 10 to the
Consolidated Financial Statements.
Subsequent Events
- -----------------
In July 2001 the company announced that it is in discussions with Fimalac, the
French diversified services group, for the acquisition of Secap SA, Fimalac's
mailing subsidiary. Secap provides a range of mail processing equipment,
supplies and technology for low- to mid-volume mailers. The parties have
discussed a purchase price of approximately FF 1.45 billion. In accordance with
French labor law, the proposed transaction has been submitted to the companies'
respective employee representatives for review and opinion, and is subject to
the execution of definitive documentation, completion of due diligence, and
receipt of approvals by the appropriate regulatory authorities and the boards of
directors of Pitney Bowes and Fimalac.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 20
Regulatory Matters
- ------------------
In 2000, the U.S. Postal Service (USPS) issued a proposed schedule for the
phaseout of manually reset electronic meters in the U.S. as follows:
o As of February 1, 2000, new placements of manually reset electronic meters
are no longer permitted.
o Current users of manually reset electronic meters can continue to use these
meters for the term of their current rental and lease agreements. Leases or
rentals due to expire in 2000 can be extended to December 31, 2001.
In 2000, the USPS also issued a proposal to cease placements of non-digital, or
letterpress, meters as follows:
o New placements of non-digital meters with a "timeout" feature that enables
the meters to be automatically disabled, if not reset within a specified
time period are no longer permitted after December 2003.
o New placements of non-digital meters without the "timeout" feature are no
longer permitted after June 2001.
The company has submitted comments to the USPS's proposed schedules described
above. The company adopted a formal meter transition plan in the second quarter
of 2001, to transition to the next generation of networked mailing technology.
See Note 12 to the Consolidated Financial Statements.
As a result of the company's aggressive efforts to meet the USPS's mechanical
meter migration phaseout schedule combined with the company's ongoing and
continuing investment in advanced postage evidencing technologies, mechanical
meters represented less than 1% of the company's installed meter base at June
30, 2001 and December 31, 2000. The company continues to work, in close
cooperation with the USPS, to convert those mechanical meter customers who have
not migrated to digital or electronic meters.
In May 1995, the USPS publicly announced its concept of its Information Based
Indicia Program (IBIP) for future postage evidencing devices. As initially
stated by the USPS, the purpose of the program was to develop a new standard for
future digital postage evidencing devices which would significantly enhance
postal revenue security and support expanded USPS value-added services to
mailers. The program would consist of the development of four separate
specifications:
o the Indicium specification - the technical specifications for the indicium to
be printed
o a Postal Security Device specification - the technical specification for the
device that would contain the accounting and security features of the system
o a Host specification
o a Vendor Infrastructure specification
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 21
During the period from May 1995 through December 2000, the company submitted
extensive comments to a series of proposed IBIP specifications issued by the
USPS. In March 2000, the USPS issued the latest set of proposed specifications,
entitled "Performance Criteria for Information-Based Indicia and Security
Architecture for Open IBI Postage Evidencing Systems" (the IBI Performance
Criteria). The company has submitted comments to the IBI Performance Criteria.
In September and October 2000, the USPS issued further proposed regulations
regarding postage evidencing systems using Information Based Indicia, titled
"Refunds and Exchanges" and "Production, Distribution and Use of Postal Security
Devices and Information-Based Indicia." The Company has submitted comments
regarding those proposed regulations.
In March 2000, the company received approval from the USPS for the commercial
launch of the Internet version of a product which satisfies the proposed IBI
Performance Criteria, ClickStampTM Online.
In June 1999, the company was served with a Civil Investigative Demand (CID)
from the U.S. Justice Department's Antitrust Division. A CID is a tool used by
the Antitrust Division for gathering information and documents. The company
believes that the Justice Department may be reviewing the company's efforts to
protect its intellectual property rights. The company believes it has complied
fully with the antitrust laws and is cooperating fully with the department's
investigation.
Forward-Looking Statements
- --------------------------
The company wants to caution readers that any forward-looking statements with
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 the company's management involve risks and uncertainties
which may change based on various important factors. These forward-looking
statements are those which talk about the company's or management's current
expectations as to the future and include, but are not limited to, statements
about the amounts, timing and results of possible restructuring charges and
future earnings. Words such as "estimate," "project," "plan," "believe,"
"expect," "anticipate," "intend," and similar expressions may identify such
forward-looking statements. Some of the factors which could cause future
financial performance to differ materially from the expectations as expressed in
any forward-looking statement made by or on behalf of the company include:
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 terms and timing of the spin-off of Office Systems
o terms and timing of the restructuring plan
o regulatory approvals and satisfaction of other conditions to consummation of
any acquisitions
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 22
Part II - Other Information
---------------------------
Item 1: Legal Proceedings
In the course of normal business, the company is occasionally party to lawsuits.
These may involve litigation by or against the company relating to, among other
things:
o contractual rights under vendor, insurance or other contracts
o intellectual property or patent rights
o equipment, service or payment disputes with customers
o disputes with employees
The company is currently a plaintiff or defendant in a number of lawsuits, none
of which should have, in the opinion of management and legal counsel, a material
adverse effect on the company's financial position or results of operations.
Item 4: Submission of Matters to a Vote of Security Holders
Below are the final results of the voting at the annual meeting of stockholders
held on May 14, 2001:
Proposal 1 - Election of Directors
Nominee For Withheld
----------------- ----------- ----------
Linda G. Alvarado 213,151,915 1,838,736
Ernie Green 213,220,397 1,770,254
John S. McFarlane 213,263,620 1,727,031
Proposal 2 - Appointment of PricewaterhouseCoopers LLP as Independent
Accountants
For Against Abstain
----------- ----------- ---------
208,725,278 5,316,265 949,108
Proposal 3 - Approve the performance goals under the Key Employee's Incentive
Plan
For Against Abstain
----------- ----------- ---------
208,051,759 5,469,371 1,469,521
Proposal 4 - Stockholder proposal relating to the Stockholder Rights Plan
For Against Abstain
----------- ----------- ---------
100,847,798 88,689,411 2,797,643
The following other directors continued their term of office after the Annual
Meeting:
Colin G. Campbell Herbert L. Henkel
Michael J. Critelli James H. Keyes
Jessica P. Einhorn Michael I. Roth
In July 2001, the board of directors elected Eduardo R. Menasce, David L.
Shedlarz and Robert E. Weissman to the board, effective September 1, 2001.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 23
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
Reg. S-K
Exhibits Description
-------- -----------------------------
(12) Computation of ratio of
earnings to fixed charges
(b) Reports on Form 8-K
On June 15, 2001, the company filed a current report on Form 8-K pursuant
to Item 5 thereof, reporting the Press Release dated June 14, 2000
regarding its plan to transform the global mailing industry by developing
a networked platform for its mailing systems.
On June 5, 2001, the company filed a current report on Form 8-K pursuant
to Item 5 thereof, reporting the Press Release dated June 5, 2001
regarding its completed acquisition of Bell & Howell's International Mail
and Messaging Technologies business.
On June 5, 2001, the company filed a current report on Form 8-K pursuant
to Item 5 thereof, reporting the Press Release dated June 4, 2001
regarding its announcement of agreements which settle litigation between
the company and Hewlett-Packard Company.
On May 17, 2001, the company filed a current report on Form 8-K pursuant
to Item 5 thereof, reporting votes received on the agenda items at the
company's Annual Meeting of Stockholder's, held on May 14, 2001.
On April 19, 2001, the company filed a current report on Form 8-K pursuant
to Item 5 thereof, reporting the Press Release dated April 17, 2001 for
the quarter ended March 31, 2001.
On April 19, 2001, the company filed a current report on Form 8-K pursuant
to Item 5 thereof, reporting the Press Release dated April 18, 2001
regarding its announcement to acquire Bell & Howell's International Mail
and Messaging Technologies.
On April 18, 2001, the company filed a current report on Form 8-K pursuant
to Item 5 thereof, correcting the data that appears in Table III of the
company's Notice of 2001 Annual Meeting and Proxy Statement.
On April 13, 2001, the company filed a current report on Form 8-K pursuant
to Item 5 thereof, reporting the Press Release dated April 9, 2001
regarding its announcement to acquire Danka Services International.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2001
Page 24
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.
August 13, 2001
/s/ B. P. Nolop
------------------------------------------------
B. P. Nolop
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ A. F. Henock
------------------------------------------------
A. F. Henock
Vice President - Finance
(Principal Accounting Officer)
Exhibit Index
-------------
Reg. S-K
Exhibits Description
-------- ---------------------------------
(12) Computation of ratio of
earnings to fixed charges
Exhibit (12)
Pitney Bowes Inc.
Computation of Ratio of Earnings to Fixed Charges (1)
-----------------------------------------------------
(Dollars in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2001 2000(2) 2001 2000(2)
------------ ------------ ------------ -----------
Income from continuing operations
before income taxes........................... $ 298,236 $ 213,505 $ 447,135 $ 408,196
Add:
Interest expense............................. 46,338 52,459 99,126 98,967
Portion of rents
representative of the
interest factor........................... 11,079 10,731 21,345 21,339
Amortization of capitalized
interest.................................. 243 243 486 486
Minority interest in the
income of subsidiary
with fixed charges........................ 2,648 3,543 6,009 6,825
------------ ------------ ------------ -----------
Income as adjusted.............................. $ 358,544 $ 280,481 $ 574,101 $ 535,813
============ ============ ============ ===========
Fixed charges:
Interest expense............................. $ 46,338 $ 52,459 $ 99,126 $ 98,967
Capitalized interest......................... - 974 - 1,513
Portion of rents
representative of the
interest factor........................... 11,079 10,731 21,345 21,339
Minority interest, excluding
taxes, in the income of
subsidiary with fixed charges............. 4,204 5,169 9,208 9,958
------------ ------------ ------------ -----------
Total fixed charges...................... $ 61,621 $ 69,333 $ 129,679 $ 131,777
============ ============ ============ ===========
Ratio of earnings to
fixed charges................................ 5.82 4.05 4.43 4.07
============ ============ ============ ===========
Ratio of earnings to fixed
charges excluding minority
interest..................................... 6.20 4.32 4.72 4.34
============ ============ ============ ===========
<FN>
(1) The computation of the ratio of earnings to fixed charges has been
computed by dividing income from continuing operations before income
taxes as adjusted by fixed charges. Included in fixed charges is
one-third of rental expense as the representative portion of interest.
(2) Interest expense and the portion of rents representative of the interest
factor of the discontinued operations of Office Systems have been
excluded from fixed charges in the computation.
Including these amounts in fixed charges, the ratio of earnings to fixed
charges would be 5.59 and 4.27 for the three and six months ended June
30, 2001 and 3.94 and 3.96 for the three and six months ended June 30,
2000, respectively. The ratio of earnings to fixed charges excluding
minority interest would be 5.93 and 4.54 for the three and six months
ended June 30, 2001, respectively and 4.19 and 4.21 for the three and
six months ended June 30, 2000, respectively.
</FN>