UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0 - Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31,
2001 is 243,848,538.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 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
Nine Months Ended September 30, 2001 and 2000............... 3
Consolidated Balance Sheets - September 30, 2001 (unaudited)
and December 31, 2000....................................... 4
Consolidated Statements of Cash Flows (unaudited) - Nine
Months Ended September 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 - 22
Part II - Other Information:
Item 1: Legal Proceedings......................................... 23
Item 6: Exhibits and Reports on Form 8-K.......................... 23
Signatures ............................................................ 24
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 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 Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ------------ ------------
Revenue from:
Sales.......................................................... $ 541,947 $ 469,838 $ 1,535,853 $ 1,399,333
Rentals and financing.......................................... 365,684 366,763 1,098,774 1,134,082
Support services............................................... 136,849 123,393 397,040 368,969
----------- ----------- ------------ ------------
Total revenue.............................................. 1,044,480 959,994 3,031,667 2,902,384
----------- ----------- ------------ ------------
Costs and expenses:
Cost of sales.................................................. 332,909 264,320 915,220 802,625
Cost of rentals and financing.................................. 85,169 86,608 266,229 282,168
Cost of meter transition - impairment (Note 12)................ - - 227,300 -
Cost of meter transition - additional depreciation (Note 12)... 10,300 - 30,700 -
Selling, service and administrative............................ 344,850 320,515 1,003,890 965,710
Research and development....................................... 31,554 27,640 98,021 87,679
Other income (Note 13)......................................... - - (362,172) -
Interest, net.................................................. 45,315 49,021 140,201 144,116
Restructuring charges (Note 11)................................ 17,879 18,667 88,639 18,667
----------- ----------- ------------ ------------
Total costs and expenses................................... 867,976 766,771 2,408,028 2,300,965
----------- ----------- ------------ ------------
Income from continuing operations before income taxes............... 176,504 193,223 623,639 601,419
Provision for income taxes.......................................... 54,406 47,538 209,748 175,948
----------- ----------- ------------ ------------
Income from continuing operations................................... 122,098 145,685 413,891 425,471
Income from discontinued operations (Note 2)........................ - 15,748 - 53,472
Loss on disposal of discontinued operations (Note 2) ............... (4,884) - (15,711) -
Cumulative effect of accounting change.............................. - - - (4,683)
----------- ----------- ------------ ------------
Net income.......................................................... $ 117,214 $ 161,433 $ 398,180 $ 474,260
=========== =========== ============ ============
Basic earnings per share:
Continuing operations............................................. $ .50 $ .57 $ 1.68 $ 1.65
Discontinued operations........................................... (.02) .06 (.06) .21
Cumulative effect of accounting change............................ - - - (.02)
----------- ----------- ------------ ------------
Net income........................................................ $ .48 $ .63 $ 1.61 $ 1.84
=========== =========== ============ ============
Diluted earnings per share:
Continuing operations............................................. $ .49 $ .57 $ 1.67 $ 1.63
Discontinued operations........................................... (.02) .06 (.06) .21
Cumulative effect of accounting change............................ - - - (.02)
----------- ----------- ------------ ------------
Net income........................................................ $ .47 $ .63 $ 1.60 $ 1.82
=========== =========== ============ ============
Dividends declared per share of common stock........................ $ .29 $ .285 $ .87 $ .855
=========== =========== ============ ============
Ratio of earnings to fixed charges.................................. 3.81 3.84 4.23 3.99
=========== =========== ============ ============
Ratio of earnings to fixed charges
excluding minority interest.................................... 3.98 4.08 4.47 4.25
=========== =========== ============ ============
See Notes to Consolidated Financial Statements
Note: The sum of the earnings per share amounts may not equal the totals above
due to rounding.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2001
Page 4
Pitney Bowes Inc.
Consolidated Balance Sheets
---------------------------
September 30, December 31,
(Dollars in thousands, except share data) 2001 2000
--------------- ----------------
(Unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents............................................. $ 292,312 $ 198,255
Short-term investments, at cost which
approximates market............................................... 8,107 15,250
Accounts receivable, less allowances:
9/01, $30,349; 12/00, $26,468..................................... 386,885 313,510
Finance receivables, less allowances:
9/01, $57,825; 12/00, $44,129..................................... 1,486,910 1,592,920
Inventories (Note 3).................................................. 164,630 167,969
Other current assets and prepayments.................................. 151,398 145,786
Net current assets of discontinued operations......................... 230,789 193,018
--------------- ----------------
Total current assets.............................................. 2,721,031 2,626,708
Property, plant and equipment, net (Note 4)................................ 509,850 491,312
Rental equipment and related inventories, net (Note 4)..................... 469,387 620,841
Property leased under capital leases, net (Note 4)......................... 1,691 2,303
Long-term finance receivables, less allowances:
9/01, $67,879; 12/00, $53,222......................................... 1,790,647 1,980,876
Investment in leveraged leases............................................. 1,260,955 1,150,656
Goodwill, net of amortization:
9/01, $66,451; 12/00, $58,658......................................... 566,075 203,447
Other assets ............................................................. 691,149 612,760
Net long-term assets of discontinued operations............................ 219,121 212,363
--------------- ----------------
Total assets ............................................................ $ 8,229,906 $ 7,901,266
=============== ================
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities.............................. $ 1,191,435 $ 995,283
Income taxes payable.................................................. 378,926 262,125
Notes payable and current portion of
long-term obligations ............................................ 756,579 1,277,941
Advance billings...................................................... 333,532 346,228
--------------- ----------------
Total current liabilities......................................... 2,660,472 2,881,577
Deferred taxes on income................................................... 1,218,881 1,226,597
Long-term debt (Note 5).................................................... 2,436,358 1,881,947
Other noncurrent liabilities............................................... 338,076 316,170
--------------- ----------------
Total liabilities................................................. 6,653,787 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.......................................... 1,609 1,737
Common stock, $1 par value............................................ 323,338 323,338
Capital in excess of par value........................................ 3,471 10,298
Retained earnings..................................................... 3,950,435 3,766,995
Accumulated other comprehensive income (Note 8)....................... (148,132) (139,434)
Treasury stock, at cost............................................... (2,864,626) (2,677,988)
--------------- ----------------
Total stockholders' equity........................................ 1,266,119 1,284,975
--------------- ----------------
Total liabilities and stockholders' equity ............................ $ 8,229,906 $ 7,901,266
=============== ================
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2001
Page 5
Pitney Bowes Inc.
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------------
(Dollars in thousands)
Nine Months Ended
September 30,
--------------------------------
2001 2000
------------- -------------
Cash flows from operating activities:
Net income .............................................................. $ 398,180 $ 474,260
Nonrecurring charges, net................................................ 240,336 -
Nonrecurring payments.................................................... (35,454) -
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization................................... 243,617 236,384
Increase in deferred taxes on income............................ 143,501 87,102
Change in assets and liabilities:
Accounts receivable......................................... 103 (4,100)
Net investment in internal finance receivables.............. 7,531 (65,823)
Inventories................................................. 41,148 (34,097)
Other current assets and prepayments........................ (6,086) (13,153)
Accounts payable and accrued liabilities.................... (124,798) (13,373)
Income taxes payable........................................ 120,726 12,554
Advance billings............................................ (28,723) 2,127
Other, net.................................................. (15,384) (9,048)
------------- -------------
Net cash provided by operating activities................... 984,697 672,833
------------- -------------
Cash flows from investing activities:
Short-term investments................................................... 7,168 (1,498)
Net investment in fixed assets........................................... (188,026) (189,156)
Net investment in finance receivables.................................... 17,428 (64,466)
Net investment in capital and mortgage services.......................... 117,949 34,611
Investment in leveraged leases........................................... (108,492) (120,821)
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.................................... 1,396 (126,262)
Acquisitions, net of cash acquired....................................... (372,520) -
Reserve Account deposits................................................. 124,216 47,995
Other investing activities............................................... (13,873) (47,637)
------------- -------------
Net cash (used in) provided by investing activities......... (414,754) 367,292
------------- -------------
Cash flows from financing activities:
Decrease in notes payable, net........................................... (346,934) (276,760)
Proceeds from long-term obligations...................................... 762,641 182,092
Principal payments on long-term obligations.............................. (444,806) (196,271)
Proceeds from issuance of stock.......................................... 22,595 25,229
Stock repurchases........................................................ (216,193) (538,141)
Dividends paid........................................................... (214,740) (221,188)
------------- -------------
Net cash used in financing activities....................... (437,437) (1,025,039)
------------- -------------
Effect of exchange rate changes on cash....................................... 463 (3,953)
------------- -------------
Increase in cash and cash equivalents......................................... 132,969 11,133
Cash and cash equivalents at beginning of period.............................. 198,255 254,270
Cash included in net assets of discontinued operations........................ (38,912) -
------------- -------------
Cash and cash equivalents at end of period.................................... $ 292,312 $ 265,403
============= =============
Interest paid ............................................................... $ 149,659 $ 192,770
============= =============
Income taxes paid, net........................................................ $ 77,354 $ 99,614
============= =============
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 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 September
30, 2001 and December 31, 2000, the results of its operations for the three
months and nine months ended September 30, 2001 and 2000 and its cash flows for
the nine months ended September 30, 2001 and 2000 have been included. Operating
results for the three and nine months ended September 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. Certain prior year amounts in the
consolidated financial statements have been reclassified to conform with the
current year presentation.
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. On November 12, 2001, the Board of
Directors designated December 3, 2001 as the date for the spin-off of Office
Systems, under the name Imagistics International Inc. On that date, the company
will pay a special stock dividend of Imagistics common stock to Pitney Bowes
common stockholders. Through this special dividend, Pitney Bowes will distribute
100% of the shares of Imagistics stock. Each eligible Pitney Bowes common
stockholder of record on November 19, 2001 will receive 0.08 shares of
Imagistics stock for each share of Pitney Bowes stock. The Internal Revenue
Service has notified the company that the spin-off will be tax free as provided
for under the Internal Revenue Code. Revenue of Office Systems was $156.2
million and $161.3 million for the three months ended September 30, 2001 and
2000, respectively. For the nine months ended September 30, 2001 and 2000,
revenue was $463.3 million and $481.9 million, respectively. Net interest
expense allocated to Office Systems was $2.6 million and $2.9 million for the
three months ended September 30, 2001 and 2000, respectively. For the nine
months ended September 30, 2001 and 2000, net interest expense allocated to
Office Systems was $8.5 million and $8.3 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 nine
months ended September 30, 2001 was $.1 million (net of taxes of $.06 million),
and $8.1 million (net of taxes of $5.5 million), respectively, offset by costs,
expenses and restructuring charges directly associated with the spin-off. The
company 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 $15.7 million (net of taxes of $8.2 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 nine months ended September 30, 2001. Income from the
discontinued operations of Office Systems for the three and nine months ended
September 30, 2000 was $15.7 million (net of taxes of $10.4 million) and $53.5
million (net of taxes of $35.3 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) September 30, December 31,
2001 2000
----------------- -----------------
Raw materials and work in process..... $ 57,316 $ 67,990
Supplies and service parts............ 45,448 38,708
Finished products..................... 61,866 61,271
----------------- -----------------
Total ............................... $ 164,630 $ 167,969
================= =================
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2001
Page 7
Note 4:
- ------
Fixed assets are comprised of the following:
September 30, December 31,
(Dollars in thousands) 2001 2000
----------------- -----------------
Property, plant and equipment.................. $ 1,297,552 $ 1,195,319
Accumulated depreciation....................... (787,702) (704,007)
----------------- -----------------
Property, plant and equipment, net............. $ 509,850 $ 491,312
================= =================
Rental equipment and related inventories....... $ 1,065,570 $ 1,218,251
Accumulated depreciation....................... (596,183) (597,410)
----------------- -----------------
Rental equipment and related inventories, net.. $ 469,387 $ 620,841
================= =================
Property leased under capital leases........... $ 19,203 $ 19,059
Accumulated amortization....................... (17,512) (16,756)
----------------- -----------------
Property leased under capital leases, net...... $ 1,691 $ 2,303
================= =================
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.
Note 5:
- ------
In October 2001, Pitney Bowes Inc. filed a shelf registration statement with the
Securities and Exchange Commission (SEC) permitting issuances of up to $2
billion in debt securities, preferred stock and depositary shares.
In April 2001, the company issued the remaining $300 million of notes available
under a prior shelf registration, permitting issuances of up to $500 million in
debt securities (including medium-term notes) with a minimum maturity of nine
months. 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 $75 million of unissued debt securities available at September 30, 2001
from a shelf registration statement filed with the 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 $75
million remained available at September 30, 2001. In August 2001, PBCC issued
$350 million of unsecured fixed rate notes maturing in August 2008. These notes
bear interest at an annual rate of 5.75% and pay interest semi-annually
beginning February 15, 2002. The proceeds from these notes were used for general
corporate purposes, including the repayment of commercial paper.
In July 2001, PBCC issued four non-recourse promissory notes totaling $111.5
million in connection with four lease transactions. The promissory notes are all
due in installments over 234 months at an interest rate of 7.24%. In September
2001, PBCC sold its interest in two of the lease transactions and transferred
the obligation on two of the non-recourse promissory notes totaling $55.3
million in principal balance. Two non-recourse promissory notes remain
outstanding at September 30, 2001 with a total principal balance of $55.3
million. These notes are serviced by the underlying lease transaction payments.
Note 6:
- ------
A reconciliation of the basic and diluted earnings per share computations for
the three months ended September 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 $ 122,098 $ 145,685
Less:
Preferred stock
dividends (1) -
Preference stock
dividends (33) (34)
- -------------------------------------------------------------------------------- --------------------------------------------
Basic earnings per
share $ 122,064 245,008 $ .50 $ 145,651 254,253 $ .57
- -------------------------------------------------------------------------------- --------------------------------------------
Effect of dilutive
securities:
Preferred stock 1 12 - 14
Preference stock 33 958 34 1,058
Stock options 978 669
Other 324 120
- -------------------------------------------------------------------------------- --------------------------------------------
Diluted earnings per
share $ 122,098 247,280 $ .49 $ 145,685 256,114 $ .57
================================================================================ ============================================
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2001
Page 8
A reconciliation of the basic and diluted earnings per share computations for
the nine months ended September 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 $ 413,891 $ 425,471
Less:
Preferred stock
dividends (3) -
Preference stock
dividends (99) (105)
- -------------------------------------------------------------------------------- --------------------------------------------
Basic earnings per
share $ 413,789 246,564 $ 1.68 $ 425,366 258,380 $ 1.65
- -------------------------------------------------------------------------------- --------------------------------------------
Effect of dilutive
securities:
Preferred stock 3 13 - 14
Preference stock 99 985 105 1,068
Stock options 767 983
Other 198 129
- -------------------------------------------------------------------------------- --------------------------------------------
Diluted earnings per
share $ 413,891 248,527 $ 1.67 $ 425,471 260,574 $ 1.63
================================================================================ ============================================
Note 7:
- ------
Revenue and operating profit by business segment for the three and nine months
ended September 30, 2001 and 2000 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -------------------------------
(Dollars in thousands) 2001 2000 2001 2000
----------- ---------- -------------- ------------
Revenue:
Global Mailing............................. $ 698,416 $ 700,448 $2,122,416 $2,130,987
Enterprise Solutions....................... 294,881 212,080 772,353 631,447
----------- ---------- ------------ ------------
Total Messaging Solutions.................. 993,297 912,528 2,894,769 2,762,434
Capital Services........................... 51,183 47,466 136,898 139,950
----------- ---------- ------------ ------------
Total revenue................................. $1,044,480 $ 959,994 $3,031,667 $2,902,384
=========== ========== ============ ============
Operating Profit: (1)
Global Mailing............................. $ 208,430 $ 217,542 $ 645,019 $ 635,876
Enterprise Solutions....................... 18,332 14,903 56,556 49,384
----------- ---------- ------------ ------------
Total Messaging Solutions.................. 226,762 232,445 701,575 685,260
Capital Services........................... 20,018 17,517 50,169 46,635
----------- ---------- ------------ ------------
Total operating profit........................ $ 246,780 $ 249,962 $ 751,744 $ 731,895
Unallocated amounts:
Net interest (corporate interest expense,
net of intercompany transactions)......... (16,648) (17,727) (52,655) (45,568)
Corporate expense.......................... (25,449) (20,345) (90,983) (66,241)
Other income - - 362,172 -
Cost of meter transition................... (10,300) - (258,000) -
Restructuring charges...................... (17,879) (18,667) (88,639) (18,667)
----------- ---------- ------------ ------------
Income from continuing operations before
income taxes................................. $ 176,504 $ 193,223 $ 623,639 $ 601,419
=========== ========== ============ ============
(1)Operating profit excludes general corporate expenses, income taxes and net
interest other than that related to finance operations.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2001
Page 9
Note 8:
- ------
Comprehensive income for the three and nine months ended September 30, 2001 and
2000 was as follows:
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net income............................................. $ 117,214 $ 161,433 $ 398,180 $ 474,260
Other comprehensive income:
Foreign currency translation adjustments............ 4,737 1,111 3,864 (20,672)
Cumulative effect of accounting change.............. - - (9,152) -
Net unrealized loss on derivative
instruments....................................... (5,952) - (3,410) -
--------- --------- --------- ---------
Comprehensive income................................... $ 115,999 $ 162,544 $ 389,482 $ 453,588
========= ========= ========= =========
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 $12.6 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 nine months ended September 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 adoption of this standard
did not have a material impact on the company.
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.
In August 2001, FAS No. 143, "Accounting for Asset Retirement Obligations" was
issued, amending FAS No. 19, "Financial Accounting and Reporting by Oil and Gas
Producing Companies," and applies to all entities. FAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. FAS No. 143 is effective January 1, 2003 for the company. The company is
currently evaluating the impact of this statement.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2001
Page 10
In August 2001, FAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," was issued, replacing FAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and portions of APB Opinion 30, "Reporting the Results of Operations." FAS No.
144 provides a single accounting model for long-lived assets to be disposed of
and changes the criteria that would have to be met to classify an asset as
held-for-sale. FAS No. 144 retains the requirement of APB Opinion 30, to report
discontinued operations separately from continuing operations and extends that
reporting to a component of an entity that either has been disposed of or is
classified as held-for-sale. FAS No. 144 is effective January 1, 2002 for the
company. The company is currently evaluating the impact of this statement.
In September 2001, the Financial Accounting Standards Board's Emerging Issues
Task Force ("EITF") reached a consensus on Issue 01-10, "Accounting for the
Impact of the Terrorist Attacks of September 11, 2001." EITF 01-10 provides
guidance for accounting for the effects of the events of September 11, 2001 in
financial statements. The company believes it is in compliance with these
standards in all material respects.
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.
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 acquisitions of DSI and MMT did not materially impact income from continuing
operations for the three and nine months ended September 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 September 30, Nine Months Ended September 30,
--------------------------------- ----------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- ---------------
Total revenue.............. $ 1,044,480 $ 1,057,319 $ 3,209,259 $ 3,177,407
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 $17.9 million during the third quarter
of 2001, all of which was related to continuing operations. For the nine months
ended September 30, 2001, pretax restructuring charges were $121.7 million, of
which $88.6 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 nine months ended September 30, 2001. The
restructuring charges related to discontinued operations have been reported in
discontinued operations in the Consolidated Statements of Income for the nine
months ended September 30, 2001. See Note 2 to the Consolidated Financial
Statements.
The restructuring charges related to continuing operations are comprised of:
(Dollars in millions) Three Months Nine Months
Ended September Ended September
30, 2001 30, 2001
--------------- ---------------
Severance and benefit costs....... $ 6.1 $ 53.7
Asset impairments................. 4.0 20.2
Other exit costs.................. 7.8 14.7
--------------- ---------------
$ 17.9 $ 88.6
=============== ===============
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2001
Page 11
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 nine
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 September 30, 2001, 488 employees were separated under these initiatives and
approximately $25 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.
The restructuring charges related to discontinued operations are comprised of:
(Dollars in millions) Nine Months
Ended September
30, 2001
---------------
Severance and benefit costs............... $ 1.9
Asset impairments......................... 17.4
Other exit costs.......................... 13.8
---------------
$ 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.
The three and nine months ended September 30, 2000 included a pre-tax charge of
$18.7 million, related to the consolidation of information technology staff and
infrastructure.
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 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 non-cash pretax charges of $10.3 million
and $258.0 million for the three and nine months ended September 30, 2001,
respectively, related to assets associated with our non-networked mailing
technology.
The charges related to the meter transition plan are comprised of:
(Dollars in millions) Three Months Nine Months
Ended September Ended September
30, 2001 30, 2001
--------------- ---------------
Impairment of lease residuals........................... $ - $ 128.4
Impairment of meter rental assets....................... - 71.3
Reduced inventory valuation............................. - 27.6
Additional depreciation costs on meter rental assets.... 10.3 30.7
---------------- ---------------
$ 10.3 $ 258.0
================ ===============
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 October 2001, the company announced it has completed the acquisition of Secap
SA, the France-based mailing systems subsidiary of Fimalac, for approximately
Euros 220 million in cash. Secap offers a range of mail processing and paper
handling equipment, supplies and technology for low- to mid-volume mailers.
Secap holds more than 30% of the postage meter market share in France.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2001
Page 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-----------------------------------------------------
Results of Continuing Operations - third quarter of 2001 vs. third quarter of
- --------------------------------------------------------------------------------
2000
- ----
Revenue increased nine percent in the third quarter of 2001 to $1,044.5 million
compared with $960.0 million in the third quarter of 2000. Income from
continuing operations for the third quarter of 2001 was $122.1 million, or 49
cents per diluted share. Excluding special items, income from continuing
operations decreased three percent to $140.2 million in the third quarter of
2001 compared with $144.9 million for the same period in 2000, while diluted
earnings per share from continuing operations was flat at 57 cents per share in
both periods. Included as special items in the third quarter of 2001 are an $18
million pre-tax restructuring charge related to changes in infrastructure and
process improvements, and a $10 million non-cash pre-tax charge associated with
the company's transition to the next generation of networked mailing technology.
Included as special items in the third quarter of 2000 are an after-tax charge
of approximately $11 million related to the consolidation of information
technology staff and infrastructure, as well as a $12 million tax benefit
related to state tax law changes.
Third quarter 2001 revenue included $541.9 million from sales, up 15 percent
from $469.8 million in the third quarter of 2000; $365.7 million from rentals
and financing, flat from $366.8 million; and $136.8 million from support
services, up 11 percent from $123.4 million.
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 third quarter of 2001, revenue was flat and
operating profit decreased four percent. Revenue growth was negatively impacted
by the impact of foreign currency, principally related to the British Pound,
Canadian Dollar and the Euro. Excluding the impact of foreign currency, Global
Mailing revenues increased one percent. Revenue and operating profit were also
negatively impacted by the events of September 11, 2001 and the continued
slowdown of the economy, resulting in many customers delaying purchasing or
upgrade decisions. This was particularly true for higher value mail creation and
shipping products.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 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 third quarter of 2001, revenue grew 39 percent and
operating profit increased 23 percent. Revenue growth includes a full quarter of
contribution from the recently completed Danka Services International (DSI)
acquisition. Excluding DSI, Pitney Bowes Management Services revenues grew 12
percent while operating profit grew at an even faster pace. Document Messaging
Technologies revenues grew one percent during the quarter. Revenue growth was
negatively impacted by the slowdown in worldwide business capital spending.
Operating profit for Document Messaging Technologies was adversely impacted by
expenses associated with the introduction and marketing of new products and
lower placements of higher margin customized production mail equipment.
Total Messaging Solutions, the combined results of the Global Mailing segment
and Enterprise Solutions segment, reported nine percent revenue growth and two
percent operating profit decrease.
The Capital Services segment includes primarily asset- and fee-based income
generated by large-ticket, non-core asset transactions. During the quarter,
revenue increased eight percent and operating profit increased 14 percent. The
increase in revenue and operating profit were driven by higher asset sales and
related fee income compared to the prior year.
Cost of sales increased to 61.4 percent of sales revenue in the third quarter of
2001 compared with 56.3 percent in the third 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 decreased from 23.3 percent in the third quarter
of 2001 compared with 23.6 percent of related revenues in the third quarter of
2000.
Selling, service and administrative expenses were 33.0 percent of revenue in the
third quarter of 2001 compared with 33.4 percent in the third quarter of 2000.
The decrease is a result of the company's continued emphasis on controlling
operating expenses, partially offset by costs associated with investments in
acquisition and growth initiatives.
Research and development expenses increased 14.2 percent to $31.6 million in the
third quarter of 2001 compared with $27.6 million in the third 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 $45.3 million in the third quarter of 2001
from $49.0 million in the third quarter of 2000. The decrease is due mainly to
lower average interest rates in 2001.
The effective tax rates for the third quarter of 2001 and 2000 were 30.8 and
24.6 percent, respectively. Excluding special items, the effective tax rate for
the third quarter of 2001 was 31.5 percent compared with 31.6 percent for the
third quarter of 2000.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2001
Page 14
Excluding special items, income from continuing operations decreased 3.2 percent
while diluted earnings per share from continuing operations was flat. The reason
for the diluted earnings per share outperforming income from continuing
operations was the company's share repurchase program.
Results of Continuing Operations - nine months of 2001 vs. nine months of 2000
- ------------------------------------------------------------------------------
For the first nine months of 2001 compared with the same period of 2000, revenue
increased four percent to $3,031.7 million, and income from continuing
operations, excluding special items decreased two percent to $416.3 million. The
factors that affected revenue and earnings performance included those cited for
the third 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. On November 12, 2001, the Board of
Directors designated December 3, 2001 as the date for the spin-off of Office
Systems, under the name Imagistics International Inc. On that date, the company
will pay a special stock dividend of Imagistics common stock to Pitney Bowes
common stockholders. Through this special dividend, Pitney Bowes will distribute
100% of the shares of Imagistics stock. Each eligible Pitney Bowes common
stockholder of record on November 19, 2001 will receive 0.08 shares of
Imagistics stock for each share of Pitney Bowes stock. 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 $12.6 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 nine months ended September 30, 2001.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 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 adoption of this standard
did not have a material impact on the company.
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.
In August 2001, FAS No. 143, "Accounting for Asset Retirement Obligations" was
issued, amending FAS No. 19, "Financial Accounting and Reporting by Oil and Gas
Producing Companies," and applies to all entities. FAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. FAS No. 143 is effective January 1, 2003 for the company. The company is
currently evaluating the impact of this statement.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2001
Page 16
In August 2001, FAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," was issued, replacing FAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and portions of APB Opinion 30, "Reporting the Results of Operations." FAS No.
144 provides a single accounting model for long-lived assets to be disposed of
and changes the criteria that would have to be met to classify an asset as
held-for-sale. FAS No. 144 retains the requirement of APB Opinion 30, to report
discontinued operations separately from continuing operations and extends that
reporting to a component of an entity that either has been disposed of or is
classified as held-for-sale. FAS No. 144 is effective January 1, 2002 for the
company. The company is currently evaluating the impact of this statement.
In September 2001, the Financial Accounting Standards Board's Emerging Issues
Task Force ("EITF") reached a consensus on Issue 01-10, "Accounting for the
Impact of the Terrorist Attacks of September 11, 2001." EITF 01-10 provides
guidance for accounting for the effects of the events of September 11, 2001 in
financial statements. The company believes it is in compliance with these
standards in all material respects.
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 $17.9 million during the third quarter
of 2001, all of which was related to continuing operations. For the nine months
ended September 30, 2001, pretax restructuring charges were $121.7 million, of
which $88.6 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 $20
million in the fourth 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 nine months ended
September 30, 2001. The restructuring charges related to discontinued operations
have been reported in discontinued operations in the Consolidated Statements of
Income for the nine months ended September 30, 2001. See Note 2 to the
Consolidated Financial Statements.
The restructuring charges related to continuing operations are comprised of:
(Dollars in millions) Three Months Nine Months
Ended September Ended September
30, 2001 30, 2001
--------------- ---------------
Severance and benefit costs......... $ 6.1 $ 53.7
Asset impairments................... 4.0 20.2
Other exit costs.................... 7.8 14.7
--------------- ---------------
$ 17.9 $ 88.6
=============== ================
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2001
Page 17
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 nine
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 September 30, 2001, 488 employees were separated under these initiatives and
approximately $25 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.
The restructuring charges related to discontinued operations are comprised of:
(Dollars in millions) Nine Months
Ended September
30, 2001
---------------
Severance and benefit costs...... $ 1.9
Asset impairments................ 17.4
Other exit costs................. 13.8
---------------
$ 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 nine months
ended September 30, 2001 were approximately $34 million. We expect that the
majority of the remaining cash outflows related to restructuring charges will
take place over the next six 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.
The three and nine months ended September 30, 2000 included a pre-tax charge of
$18.7 million, related to the consolidation of information technology staff and
infrastructure.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2001
Page 18
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 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 $10.3 million
and $258.0 million for the three and nine months ended September 30, 2001,
respectively, related to assets associated with our non-networked mailing
technology.
The charges related to the meter transition plan are comprised of:
(Dollars in millions) Three Months Nine Months
Ended September Ended September
30, 2001 30, 2001
--------------- ---------------
Impairment of lease residuals............................. $ - $ 128.4
Impairment of meter rental assets......................... - 71.3
Reduced inventory valuation............................... - 27.6
Additional depreciation costs on meter rental assets...... 10.3 30.7
--------------- ---------------
$ 10.3 $ 258.0
=============== ===============
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 increased to 1.02 to 1 at
September 30, 2001 compared with .91 to 1 at December 31, 2000 primarily as a
result of the repayment of commercial paper.
In October 2001, Pitney Bowes Inc. filed a shelf registration statement with the
Securities and Exchange Commission (SEC) which permits issuance of up to $2
billion in debt securities, preferred stock and depositary shares.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2001
Page 19
In April 2001, the company issued the remaining $300 million of notes available
under a prior shelf registration, permitting issuances of up to $500 million in
debt securities (including medium-term notes) with a minimum maturity of nine
months. 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 $75 million of unissued debt securities available at September 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 $75 million remained available at September 30, 2001.
In August 2001, PBCC issued $350 million of unsecured fixed rate notes maturing
in August 2008. These notes bear interest at an annual rate of 5.75 percent and
pay interest semi-annually beginning February 15, 2002. The proceeds from these
notes were used for general corporate purposes, including the repayment of
commercial paper.
In July 2001, PBCC issued four non-recourse promissory notes totaling $111.5
million in connection with four lease transactions. The promissory notes are all
due in installments over 234 months at an interest rate of 7.24 percent. In
September 2001, PBCC sold its interest in two of the lease transactions and
transferred the obligation on two of the non-recourse promissory notes totaling
$55.3 million in principal balance. Two non-recourse promissory notes remain
outstanding at September 30, 2001 with a total principal balance of $55.3
million. These notes are serviced by the underlying lease transaction payments.
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 73.5 percent at
September 30, 2001 compared with 73.0 percent at December 31, 2000. Book value
per common share increased to $5.18 at September 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 third quarter of 2001, the
company repurchased 1.7 million common shares for $72.7 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.
Capital Investments
- -------------------
In the first nine months of 2001, net investments in fixed assets included $86.6
million in net additions to property, plant and equipment and $101.4 million in
net additions to rental equipment and related inventories compared with $75.5
million and $113.7 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.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2001
Page 20
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.
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 acquisitions of DSI and MMT did not materially impact income from continuing
operations for the three and nine months ended September 30, 2001. See Note 10
to the Consolidated Financial Statements.
Subsequent Events
- -----------------
In October 2001, the company announced it has completed the acquisition of Secap
SA, the France-based mailing systems subsidiary of Fimalac, for approximately
Euros 220 million in cash. Secap offers a range of mail processing and paper
handling equipment, supplies and technology for low- to mid-volume mailers.
Secap holds more than 30% of the postage meter market share in France.
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.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2001
Page 21
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
September 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
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," and submitted revised versions of those
proposed regulations in August 2001. The company has submitted comments
regarding each of 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.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2001
Page 22
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 international or national political or economic conditions
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
o impact on mail volume resulting from current concerns over the use of the
mail for transmitting harmful biological agents
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2001
Page 23
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 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 July 2, 2001, the company filed a current report on Form 8-K pursuant
to Item 5 thereof, reporting the Press Release dated June 29, 2001
regarding its completion of the acquisition of Danka Services
International.
On July 3, 2001, the company filed a current report on Form 8-K pursuant
to Item 5 thereof, reporting the Press Release dated July 2, 2001
regarding its negotiations with Fimalac to acquire its subsidiary Secap
SA.
On July 19, 2001, the company filed a current report on Form 8-K pursuant
to Item 5 thereof, reporting the Press Release dated July 17, 2001
regarding its financial results for the quarter ended June 30, 2001.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 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.
November 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 Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
2001 2000(2) 2001 2000(2)
-------------- -------------- --------------- --------------
Income from continuing operations
before income taxes........................... $ 176,504 $ 193,223 $ 623,639 $ 601,419
Add:
Interest expense............................ 46,977 50,903 146,103 149,870
Portion of rents
representative of the
interest factor.......................... 12,326 10,754 33,671 32,093
Amortization of capitalized
interest................................. 244 244 730 730
Minority interest in the
income of subsidiary
with fixed charges....................... 2,259 3,712 8,268 10,537
-------------- -------------- --------------- --------------
Income as adjusted.............................. $ 238,310 $ 258,836 $ 812,411 $ 794,649
============== ============== =============== ==============
Fixed charges:
Interest expense............................ $ 46,977 $ 50,903 $ 146,103 $ 149,870
Capitalized interest........................ - 870 - 2,383
Portion of rents
representative of the
interest factor.......................... 12,326 10,754 33,671 32,093
Minority interest, excluding
taxes, in the income of
subsidiary with fixed charges............ 3,265 4,923 12,457 14,895
-------------- -------------- --------------- --------------
Total fixed charges...................... $ 62,568 $ 67,450 $ 192,231 $ 199,241
============== ============== =============== ==============
Ratio of earnings to
fixed charges............................... 3.81 3.84 4.23 3.99
============== ============== =============== ==============
Ratio of earnings to fixed
charges excluding minority
interest.................................... 3.98 4.08 4.47 4.25
============== ============== =============== ==============
<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 3.69 and 4.08 for the three and nine months ended
September 30, 2001 and 3.72 and 3.86 for the three and nine months ended
September 30, 2000, respectively. The ratio of earnings to fixed charges
excluding minority interest would be 3.85 and 4.31 for the three and nine
months ended September 30, 2001, respectively and 3.94 and 4.11 for the
three and nine months ended September 30, 2000, respectively.
</FN>