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, 2002
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,
2002 is 236,537,774.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
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, 2002 and 2001............ 3
Consolidated Balance Sheets - September 30, 2002 (unaudited)
and December 31, 2001.................................... 4
Consolidated Statements of Cash Flows (unaudited) - Nine
Months Ended September 30, 2002 and 2001................. 5
Notes to Consolidated Financial Statements.................... 6 - 14
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations.. 15 - 26
Item 3: Quantitative and Qualitative Disclosures about
Market Risk.................................... 26
Item 4: Controls and Procedures................................. 26
Part II - Other Information:
Item 1: Legal Proceedings...................................... 26
Item 6: Exhibits and Reports on Form 8-K....................... 27
Signatures ......................................................... 28
Certification pursuant to Section 302 of the Sarbanes-Oxley Act..... 29 - 30
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 3
Part I - Financial Information
Pitney Bowes Inc.
Item 1. Financial Statements. Consolidated Statements of Income
(Unaudited)
---------------------------------
(Dollars in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------- ----------------------------------
2002 2001 2002 2001
--------------- -------------- -------------- -------------
Revenue from:
Sales and management services.............. $ 592,481 $ 541,947 $ 1,702,368 $ 1,535,853
Rentals and financing...................... 374,383 365,684 1,114,001 1,098,774
Support services........................... 147,207 136,849 428,535 397,040
--------------- -------------- -------------- -------------
Total revenue.......................... 1,114,071 1,044,480 3,244,904 3,031,667
--------------- -------------- -------------- -------------
Costs and expenses:
Cost of sales and management services...... 356,753 332,909 1,030,677 915,220
Cost of rentals and financing.............. 91,082 85,169 271,754 266,229
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........ 377,336 344,850 1,095,934 1,003,890
Research and development................... 33,925 31,554 104,089 98,021
Other income (Note 13)..................... - - - (362,172)
Interest, net.............................. 41,190 45,315 131,815 140,201
Restructuring charges (Note 11)............ - 17,879 - 88,639
--------------- -------------- -------------- -------------
Total costs and expenses............... 900,286 867,976 2,634,269 2,408,028
--------------- -------------- -------------- -------------
Income from continuing operations before income taxes 213,785 176,504 610,635 623,639
Provision for income taxes...................... 66,899 54,406 191,129 209,748
--------------- -------------- -------------- -------------
Income from continuing operations............... 146,886 122,098 419,506 413,891
Loss on disposal of discontinued operations (Note 2) - (4,884) - (15,711)
--------------- -------------- -------------- -------------
Net income...................................... $ 146,886 $ 117,214 $ 419,506 $ 398,180
=============== ============== ============== =============
Basic earnings per share:
Continuing operations......................... $ .62 $ .50 $ 1.75 $ 1.68
Discontinued operations....................... - (.02) - (.06)
--------------- -------------- -------------- -------------
Net income................................... $ .62 $ .48 $ 1.75 $ 1.61
=============== ============== ============== =============
Diluted earnings per share:
Continuing operations....................... $ .61 $ .49 $ 1.73 $ 1.67
Discontinued operations..................... - (.02) - (.06)
--------------- -------------- --------------- -------------
Net income.................................. $ .61 $ .47 $ 1.73 $ 1.60
=============== ============== ============== =============
Dividends declared per share of common stock.. $ .295 $ .29 $ .885 $ .87
=============== ============== ============== =============
Ratio of earnings to fixed charges............ 4.69 3.81 4.40 4.23
=============== ============== ============== =============
Ratio of earnings to fixed charges
excluding minority interest............... 4.83 3.98 4.52 4.47
=============== ============== ============== =============
<FN>
Note: The sum of the earnings per share amounts may not equal the totals above due to rounding.
See Notes to Consolidated Financial Statements
</FN>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 4
Pitney Bowes Inc.
Consolidated Balance Sheets
---------------------------
September 30, December 31,
(Dollars in thousands, except share data) 2002 2001
--------------- ----------------
(Unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents............................................. $ 268,487 $ 231,588
Short-term investments, at cost which
approximates market............................................... 12,631 1,790
Accounts receivable, less allowances:
9/02, $34,064 12/01, $32,448...................................... 423,160 408,414
Finance receivables, less allowances:
9/02, $68,228 12/01, $61,451...................................... 1,675,731 1,601,189
Inventories (Note 3).................................................. 206,498 163,012
Other current assets and prepayments.................................. 172,568 150,615
--------------- ----------------
Total current assets.............................................. 2,759,075 2,556,608
Property, plant and equipment, net (Note 4)................................ 595,875 534,595
Rental equipment and related inventories, net (Note 4)..................... 428,934 472,186
Property leased under capital leases, net (Note 4)......................... 1,719 1,489
Long-term finance receivables, less allowances:
9/02, $66,395 12/01, $65,967.......................................... 1,799,052 1,898,976
Investment in leveraged leases............................................. 1,438,484 1,337,282
Goodwill .................................................................. 809,690 635,873
Other assets, net of amortization.......................................... 923,622 881,462
--------------- ----------------
Total assets ............................................................ $ 8,756,451 $ 8,318,471
=============== ================
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities.............................. $ 1,313,603 $ 1,425,809
Income taxes payable.................................................. 231,115 250,895
Notes payable and current portion of
long-term obligations ............................................ 1,568,571 1,072,057
Advance billings...................................................... 336,598 334,281
--------------- ----------------
Total current liabilities......................................... 3,449,887 3,083,042
Deferred taxes on income................................................... 1,340,809 1,273,593
Long-term debt (Note 5).................................................... 2,379,565 2,419,150
Other noncurrent liabilities............................................... 358,340 341,331
--------------- ----------------
Total liabilities................................................. 7,528,601 7,117,116
--------------- ----------------
Preferred stockholders' equity in a subsidiary company..................... 310,000 310,000
Stockholders' equity:
Cumulative preferred stock, $50 par
value, 4% convertible............................................. 24 24
Cumulative preference stock, no par
value, $2.12 convertible.......................................... 1,475 1,603
Common stock, $1 par value............................................ 323,338 323,338
Capital in excess of par value........................................ - 6,979
Retained earnings..................................................... 3,864,245 3,658,481
Accumulated other comprehensive income (Note 8)....................... (119,403) (155,380)
Treasury stock, at cost............................................... (3,151,829) (2,943,690)
--------------- ----------------
Total stockholders' equity........................................ 917,850 891,355
--------------- ----------------
Total liabilities and stockholders' equity................................. $ 8,756,451 $ 8,318,471
=============== ================
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 5
Pitney Bowes Inc.
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
(Dollars in thousands)
Nine Months Ended September 30,
--------------------------------
2002 2001
------------- -------------
Cash flows from operating activities:
Net income .............................................................. $ 419,506 $ 398,180
Nonrecurring charges, net................................................ - 240,336
Nonrecurring payments.................................................... (49,429) (35,454)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization................................... 195,937 243,617
Increase in deferred taxes on income............................ 77,445 143,501
Change in assets and liabilities, net of
effects of acquisitions:
Accounts receivable......................................... (7,931) 103
Net investment in internal finance receivables.............. (62,522) 7,531
Inventories................................................. (24,229) 41,148
Other current assets and prepayments........................ (12,799) (6,086)
Accounts payable and accrued liabilities.................... (21,286) (124,798)
Income taxes payable........................................ (13,741) 120,726
Advance billings............................................ (2,105) (28,723)
Other, net.................................................. 2,984 (15,384)
------------- -------------
Net cash provided by operating activities................... 501,830 984,697
------------- -------------
Cash flows from investing activities:
Short-term investments................................................... (8,055) 7,168
Net investment in fixed assets........................................... (154,771) (188,026)
Net investment in finance receivables.................................... (7,931) 17,428
Net investment in capital services....................................... 14,458 117,949
Investment in leveraged leases........................................... (97,648) (108,492)
Net investment in insurance contracts.................................... - 1,396
Acquisitions, net of cash acquired....................................... (127,039) (372,520)
Reserve account deposits................................................. 30,547 124,216
Other investing activities............................................... (10,516) (13,873)
------------- -------------
Net cash used in investing activities....................... (360,955) (414,754)
------------- -------------
Cash flows from financing activities:
Decrease in notes payable, net........................................... (84,226) (346,934)
Proceeds from long-term obligations...................................... 613,150 762,641
Principal payments on long-term obligations.............................. (207,052) (444,806)
Proceeds from issuance of stock.......................................... 33,521 22,595
Stock repurchases........................................................ (250,085) (216,193)
Dividends paid........................................................... (212,424) (214,740)
------------- -------------
Net cash used in financing activities....................... (107,116) (437,437)
------------- -------------
Effect of exchange rate changes on cash....................................... 3,140 463
------------- -------------
Increase in cash and cash equivalents......................................... 36,899 132,969
Cash and cash equivalents at beginning of period.............................. 231,588 198,255
Cash included in net assets of discontinued operations........................ - (38,912)
------------- -------------
Cash and cash equivalents at end of period.................................... $ 268,487 $ 292,312
============= =============
Interest paid ............................................................... $ 146,264 $ 149,659
============= =============
Income taxes paid, net........................................................ $ 107,529 $ 77,354
============= =============
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
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 the management of Pitney
Bowes Inc. (the company), all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position of the company
at September 30, 2002 and December 31, 2001, the results of its operations for
the three and nine months ended September 30, 2002 and 2001 and its cash flows
for the nine months ended September 30, 2002 and 2001 have been included.
Operating results for the three and nine months ended September 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. These statements should be read in conjunction with the
financial statements and notes thereto included in the company's 2001 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 3, 2001, the company completed the spin off of its office systems
business to stockholders as an independent, publicly-traded company under the
name of Imagistics International Inc. (IGI).
Revenue of IGI was $156.2 million and $463.3 million for the three and nine
months ended September 30, 2001, respectively. Net interest expense allocated to
IGI's discontinued operations was $2.6 million and $8.5 million for the three
and nine months ended September 30, 2001, respectively. Interest has been
allocated based on the net assets of IGI charged at the company's weighted
average borrowing rate. Operating results of IGI have been segregated and
reported as discontinued operations in the Consolidated Statements of Income for
the three and nine months ended September 30, 2001. Income from IGI's
discontinued operations 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. Cash flow impacts of IGI's
discontinued operations have not been segregated in the Consolidated Statement
of Cash Flows for the nine months ended September 30, 2001.
Note 3:
- ------
Inventories are composed of the following:
(Dollars in thousands) September 30, December 31,
2002 2001
----------------- -----------------
Raw materials and work in process......................... $ 72,703 $ 55,679
Supplies and service parts................................ 57,524 48,498
Finished products......................................... 76,271 58,835
----------------- -----------------
Total ................................................... $ 206,498 $ 163,012
================= =================
The increase in inventories was mainly due to the launch of the new DM line of
digital, networked mailing systems and new production mail systems.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 7
Note 4:
- ------
Fixed assets are composed of the following:
(Dollars in thousands) September 30, December 31,
2002 2001
----------------- -----------------
Property, plant and equipment............................. $ 1,387,785 $ 1,261,102
Accumulated depreciation.................................. (791,910) (726,507)
----------------- -----------------
Property, plant and equipment, net........................ $ 595,875 $ 534,595
================= =================
Rental equipment and related inventories.................. $ 1,102,589 $ 1,079,260
Accumulated depreciation.................................. (673,655) (607,074)
----------------- -----------------
Rental equipment and related inventories, net............. $ 428,934 $ 472,186
================= =================
Property leased under capital leases...................... $ 20,856 $ 19,240
Accumulated amortization.................................. (19,137) (17,751)
----------------- -----------------
Property leased under capital leases, net................. $ 1,719 $ 1,489
================= =================
Depreciation expense from continuing operations was $175.2 million and $168.4
million for the nine months ended September 30, 2002 and 2001, respectively.
Note 5:
- ------
In September 2002, the company issued $400 million of unsecured fixed rate notes
maturing in October 2012. These notes bear interest at an annual rate of 4.625%
and pay interest semi-annually beginning April 2003. The proceeds from these
notes were used for general corporate purposes, including the repayment of
commercial paper in anticipation of 2003 debt maturities.
In February 2002, the company issued Euros 250 million of senior unsecured
notes. These notes bear interest at a floating rate of EURIBOR plus 20 basis
points, set two Euro business days preceding the quarterly interest payment
dates and mature in August 2003. The notes are listed on the Luxembourg Stock
Exchange and have been designated as a hedge of Euro denominated assets held by
the company. The proceeds from these notes were used for general corporate
purposes, including the repayment of commercial paper, financing acquisitions
and the repurchase of company stock.
On September 30, 2002, $1.4 billion remained available under the shelf
registration statement filed in October 2001 with the SEC, permitting issuances
of up to $2 billion in debt securities, preferred stock and depositary shares.
Pitney Bowes Credit Corporation (PBCC) has $75 million of unissued debt
securities available at September 30, 2002 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.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 8
Note 6:
- ------
A reconciliation of the basic and diluted earnings per share computations for
the three months ended September 30, 2002 and 2001 is as follows (in thousands,
except per share data):
2002 2001
-------------------------------------------- --------------------------------------------
Per Per
Income Shares Share Income Shares Share
- -------------------------------------------------------------------------------- --------------------------------------------
Income from continuing
operations $ 146,886 $ 122,098
Less:
Preferred stock
dividends (1) -
Preference stock
dividends (29) (33)
- -------------------------------------------------------------------------------- --------------------------------------------
Basic earnings per
share $ 146,856 237,923 $ .62 $ 122,065 245,008 $ .50
- -------------------------------------------------------------------------------- --------------------------------------------
Effect of dilutive
securities:
Preferred stock 1 12 - 12
Preference stock 29 911 33 958
Stock options 1,410 978
Other 67 324
- -------------------------------------------------------------------------------- --------------------------------------------
Diluted earnings per
share $ 146,886 240,323 $ .61 $ 122,098 247,280 $ .49
================================================================================ ============================================
A reconciliation of the basic and diluted earnings per share computations for
the nine months ended September 30, 2002 and 2001 is as follows (in thousands,
except per share data):
2002 2001
-------------------------------------------- --------------------------------------------
Per Per
Income Shares Share Income Shares Share
- -------------------------------------------------------------------------------- --------------------------------------------
Income from continuing
operations $ 419,506 $ 413,891
Less:
Preferred stock
dividends (1) (1)
Preference stock
dividends (90) (99)
- -------------------------------------------------------------------------------- --------------------------------------------
Basic earnings per
share $ 419,415 239,818 $ 1.75 $ 413,791 246,564 $ 1.68
- -------------------------------------------------------------------------------- --------------------------------------------
Effect of dilutive
securities:
Preferred stock 1 12 1 13
Preference stock 90 934 99 985
Stock options 1,695 767
Other 86 198
- -------------------------------------------------------------------------------- --------------------------------------------
Diluted earnings per
share $ 419,506 242,545 $ 1.73 $ 413,891 248,527 $ 1.67
================================================================================ ============================================
<FN>
In accordance with Statement of Financial Accounting Standards (FAS) No. 128,
"Earnings per Share," 4.9 million and 2.4 million common stock equivalent shares
were excluded from the above computation, for the nine months ended September
30, 2002 and 2001, respectively, because the exercise prices of such options
were greater than the average market price of the common stock and therefore the
impact of these shares would be antidilutive.
</FN>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 9
Note 7:
- ------
Revenue and operating profit by business segment for the three and nine months
ended September 30, 2002 and 2001 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -----------------------------
(Dollars in thousands) 2002 2001(2) 2002 2001(2)
----------- ------------ ------------- ------------
Revenue:
Global Mailing....................................... $ 762,630 $ 694,805 $ 2,211,924 $ 2,110,294
Enterprise Solutions................................. 309,797 294,881 900,318 772,353
----------- ------------ ------------- ------------
Total Messaging Solutions............................ 1,072,427 989,686 3,112,242 2,882,647
Capital Services..................................... 41,644 54,794 132,662 149,020
----------- ------------ ------------- ------------
Total revenue........................................... $ 1,114,071 $ 1,044,480 $ 3,244,904 $ 3,031,667
=========== ============ ============= ============
Operating Profit: (1)
Global Mailing....................................... $ 226,121 $ 206,403 $ 652,789 $ 637,939
Enterprise Solutions................................. 18,914 18,332 58,849 56,556
----------- ------------ ------------- ------------
Total Messaging Solutions............................ 245,035 224,735 711,638 694,495
Capital Services..................................... 18,229 22,045 57,795 57,249
----------- ------------ ------------- ------------
Total operating profit................................. $ 263,264 $ 246,780 $ 769,433 $ 751,744
Unallocated amounts:
Net interest (corporate interest expense,
net of intercompany transactions)................... (20,227) (16,648) (63,386) (52,655)
Corporate expense.................................... (29,252) (25,449) (95,412) (90,983)
Other income - - - 362,172
Cost of meter transition............................. - (10,300) - (258,000)
Restructuring charges................................ - (17,879) - (88,639)
----------- ------------ ------------- ------------
Income from continuing operations before
income taxes........................................... $ 213,785 $ 176,504 $ 610,635 $ 623,639
=========== ============ ============= ============
<FN>
(1) Operating profit excludes general corporate expenses, income taxes and net
interest other than that related to finance operations.
(2) Prior year amounts have been reclassified to conform with the current year
presentation.
</FN>
Net interest expense included in business segment operating profit was as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ------------------------------
(Dollars in thousands) 2002 2001 2002 2001
---------- ------------ ------------- ------------
Global Mailing....................................... $ 11,382 $ 13,550 $ 36,504 $ 41,629
Enterprise Solutions................................. 186 223 603 690
---------- ------------ ------------- ------------
Total Messaging Solutions............................ 11,568 13,773 37,107 42,319
Capital Services..................................... 9,395 14,894 31,322 45,227
---------- ------------ ------------- ------------
Total net interest expense for reportable
segments 20,963 28,667 68,429 87,546
Net interest (corporate interest expense,
net of intercompany transactions)...................... 20,227 16,648 63,386 52,655
---------- ------------ ------------- ------------
Consolidated net interest expense....................... $ 41,190 $ 45,315 $ 131,815 $ 140,201
========== ============ ============= ============
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 10
Note 8:
- ------
Comprehensive income for the three and nine months ended September 30, 2002 and
2001 was as follows:
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
---------- ------------ ------------- ------------
Net income............................................. $ 146,886 $ 117,214 $ 419,506 $ 398,180
Other comprehensive income:
Foreign currency translation adjustments............ 14,872 4,737 36,737 3,864
Cumulative effect of accounting change.............. - - - (9,152)
Net unrealized losses on derivative
instruments....................................... (1,479) (5,952) (760) (3,410)
---------- ------------ ------------- ------------
Comprehensive income................................... $ 160,279 $ 115,999 $ 455,483 $ 389,482
========== ============ ============= ============
Note 9:
- ------
In 1998, 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 resulted in 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.
In 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 were evaluated against this new
criterion and resulted in certain intangibles being included in goodwill, or
alternatively, amounts initially recorded as goodwill being separately
identified and recognized apart from goodwill. FAS No. 142 requires the use of a
nonamortization approach to account for purchased goodwill and indefinite lived
intangibles. Under a nonamortization approach, goodwill and indefinite lived
intangibles are not amortized into results of operations, but are instead
reviewed for impairment and charged against results of operations only in the
periods in which the recorded value of goodwill and indefinite lived intangibles
is more than its fair value. In 2001, we adopted the provisions of each
statement, which apply to business combinations completed after June 30, 2001.
The provisions of each statement, which apply to goodwill and intangible assets
acquired prior to June 30, 2001 were adopted on January 1, 2002. The adoption of
these accounting standards did not materially impact results of operations for
the three and nine months ended September 30, 2002. The company has completed
the transitional impairment test as required by FAS No. 142. Based upon the
results of this analysis, no impairment loss resulted from the adoption of this
standard. Goodwill will be reviewed for impairment on a periodic basis.
In 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. The company does not believe
that this statement will have a material impact on its financial position,
results of operations or cash flows.
In 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
Accounting Principles Board (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 separate components of an entity. The
provisions of FAS No. 144 have been adopted effective January 1, 2002. The
adoption of these accounting standards did not materially impact results of
operations for the three and nine months ended September 30, 2002.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 11
In April 2002, FAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Correction," was issued. Under
FAS No. 145, gains and losses related to the extinguishment of debt should no
longer be segregated on the income statement as extraordinary items. Instead,
such gains and losses should be included as a component of income from
continuing operations. The provisions of FAS No. 145 are effective for fiscal
years beginning after May 15, 2002 with early adoption encouraged. The company
does not believe that this statement will have a material impact on its
financial position, results of operations or cash flows.
In July 2002, FAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," was issued. This statement nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs incurred in a Restructuring)." FAS No. 146 requires that a liability for
costs associated with an exit or disposal activity be recognized when the
liability is incurred. The provisions of FAS No. 146 are effective for exit or
disposal activities initiated after December 31, 2002. Early adoption is
encouraged. The company is currently evaluating the impact of this statement.
Note 10:
- -------
PSI Group, Inc. (PSI)
On August 1, 2002, the company completed the acquisition of PSI, the nation's
largest mail presort company, for approximately $127 million in cash and $39
million in debt assumed. The results of PSI's operations have been included in
the consolidated financial statements since the date of acquisition. PSI
prepares, sorts and aggregates mail to earn postal discounts and expedite
delivery for its customers. As a wholly owned subsidiary of the company, PSI
will operate under its current management and continue to focus on providing
presort mail services.
The following table summarizes the preliminary estimated fair values of the
major assets acquired and liabilities assumed at the date of acquisition:
(Dollars in thousands)
Intangible assets $ 37,786
Goodwill 115,702
Other, net 13,012
Debt (39,445)
-----------
Purchase price $ 127,055
===========
Intangible assets relate primarily to customer relationships and have a
weighted-average useful life of approximately 15 years. The goodwill was
assigned to the Global Mailing segment.
Secap SA (Secap)
On October 31, 2001, the company announced it had completed the acquisition of
Secap, the France-based mailing systems subsidiary of Fimalac, for approximately
Euros 220 million ($206 million) in cash. The results of Secap's operations have
been included in the consolidated financial statements since the date of
acquisition. 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.
The following table summarizes the preliminary estimated fair values of the
major assets acquired and liabilities assumed at the date of acquisition:
(Dollars in thousands)
Intangible assets $ 62,200
Goodwill 169,334
Other, net (25,107)
-----------
Purchase price $ 206,427
===========
Intangible assets are composed of customer relationships valued at $33.9
million, and paper handling and meter technology valued at $22.9 million, and a
trade name valued at $5.4 million. These intangible assets have a
weighted-average useful life of approximately 15 years. The goodwill was
assigned to the Global Mailing segment.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 12
Danka Services International (DSI)
On June 29, 2001, the company completed its acquisition of DSI from Danka
Business Systems PLC. The final purchase price, following post closing
adjustments, was $285.5 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 following table summarizes the estimated fair values of the major assets
acquired and liabilities assumed at the date of acquisition:
(Dollars in thousands)
Intangible assets $ 43,800
Goodwill 207,758
Other, net 33,942
-----------
Purchase price $ 285,500
===========
The intangible assets relate to customer relationships and have a useful life of
approximately 15 years. The goodwill was assigned to the Enterprise Solutions
segment.
Bell & Howell International Mail and Messaging Technologies (MMT)
On June 5, 2001, the company completed the acquisition of MMT in Europe, Africa,
the Middle East and Asia. The final purchase price, following post closing
adjustments, was $44 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 following table summarizes the estimated fair values of the major assets
acquired and liabilities assumed at the date of acquisition:
(Dollars in thousands)
Intangible assets $ 10,900
Goodwill 36,225
Other, net (3,125)
----------
Purchase price $ 44,000
==========
The intangible assets relate primarily to customer relationships and inserting
technology. These intangibles have a weighted-average useful life of
approximately 10 years. The goodwill was assigned to the Global Mailing segment.
Consolidated impact of acquisitions
Excluding the acquisitions of Secap and PSI, revenue increased three percent for
the three months ended September 30, 2002. Excluding the acquisitions of Secap,
PSI, DSI and MMT, revenue was flat for the nine months ended September 30, 2002.
These acquisitions increased our operating profit, but including related
financing costs, did not materially impact earnings either on a per share or
aggregate basis.
The following unaudited pro forma consolidated results have been prepared as if
the acquisitions of Secap, PSI, DSI, and MMT had occurred on January 1, 2001:
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
----------- ------------ -------------- ------------
Total revenue $ 1,120,571 $ 1,085,625 $ 3,289,904 $ 3,332,650
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, 2001,
nor do they purport to be indicative of the results that will be obtained in the
future. The pro forma earning results of these acquisitions were not material to
earnings on either a per share or an aggregate basis.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 13
During 2001, the company also completed several smaller acquisitions including,
the acquisition of a majority ownership in MailCode Inc., a mail processing
company, and the acquisition of Alysis Technologies Inc., a leading provider of
digital document delivery solutions. During 2002 and 2001, the company also
completed the acquisition of some of its international dealerships. The cost of
these acquisitions was in the aggregate less than $50 million. These
acquisitions did not have a material impact on the company's financial results
either individually or on an aggregate basis.
Note 11:
- -------
In 2001, the company adopted a formal restructuring plan to implement a common,
streamlined business infrastructure 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 pretax restructuring charges of $17.9 million during the third quarter
of 2001, all of which are 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. For the year ended December 31,
2001, pretax restructuring charges were $149.3 million, of which $116.1 million
was related to continuing operations, and the remaining $33.2 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 three and nine
months ended September 30, 2001.
The restructuring charges related to continuing operations are composed of:
(Dollars in millions)
Three Nine
Months Ended Months Ended Year Ended
September 30, 2001 September 30, 2001 December 31, 2001
------------------ ------------------ -----------------
Severance and benefit costs........................ $ 6.1 $ 53.7 $ 74.3
Asset impairments.................................. 4.0 20.2 28.0
Other exit costs................................... 7.8 14.7 13.8
------------------ ------------------ -----------------
$ 17.9 $ 88.6 $ 116.1
================== ================== =================
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 1,200 employees worldwide which was initiated in 2001 and will be
substantially completed over the next three 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 80% 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, 2002, 1,218 employees were
separated under these initiatives and approximately $65.2 million of severance
and benefit costs were paid. Asset impairments relate primarily to the disposal
or abandonment of certain hardware and software applications, resulting from the
alignment of our mailing business on a global basis and ERP initiatives. Other
exit costs relate primarily to lease termination costs, non-cancelable lease
payments, other costs associated with business activities that have been exited
and the consolidation of excess facilities.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 14
Accrued restructuring charges at September 30, 2002 consist of the following:
(Dollars in millions)
Ending Ending
Total balance at balance at
restructuring 2001 cash Non-cash December 31, 2002 cash September 30,
charges payments charges 2001 payments 2002
------------- --------- -------- ------------ --------- -------------
Severance and
benefit costs $ 76.2 $ 34.5 $ - $ 41.7 $ 31.0 $ 10.7
Asset
impairments 45.5 - 45.5 - - -
Other exit
costs 27.6 14.5 - 13.1 3.9 9.2
------------- --------- -------- ------------ ---------- -------------
$ 149.3 $ 49.0 $ 45.5 $ 54.8 $ 34.9 $ 19.9
============= ========= ======== ============ ========== =============
The company expects that the majority of the remaining cash outflows related to
restructuring charges will take place over the next three 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.
Note 12:
- -------
In 2001, the company adopted a formal plan to transition to the next generation
of networked mailing technology. The information capture and exchange made
possible by advanced technology, turns the postage meter into an "intelligent"
terminal that networks the mailer to postal and carrier information and systems.
This two-way information architecture, in turn, enables convenient access to and
delivery of value-added services such as tracking, delivery confirmation and
rate information. The adoption of this plan was facilitated by the company's
expanded access to technology and ability to move to networked products combined
with expectations that the U.S. and postal services around the world will
continue to encourage the migration of mailing systems to networked digital
technologies. As a result of this plan, certain electronic meter rental assets
and related equipment will not be placed back in service. In addition, certain
leased equipment will either not be remarketed or will result in lower
realization at end of lease as a result of the introduction of new technology.
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, and $268.3 million for the year ended December 31, 2001,
related to assets associated with our non-networked mailing technology. In
November 2001, postal regulations were issued, consistent with our meter
transition plan, defining the meter migration process and timing.
The charges related to the meter transition plan are composed of:
(Dollars in millions)
Three Nine
Months Ended Months Ended Year Ended
September 30, 2001 September 30, 2001 December 31, 2001
------------------ ------------------ -----------------
Impairment of lease residual values $ - $ 128.4 $ 128.4
Impairment of meter rental assets - 71.3 71.3
Inventory writedowns - 27.6 27.6
Additional depreciation costs on meter rental assets 10.3 30.7 41.0
------------------ ------------------ -----------------
$ 10.3 $ 258.0 $ 268.3
================== ================== =================
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 and ten
year supply and technology agreements. 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.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
Results of Continuing Operations - third quarter of 2002 vs. third quarter
- --------------------------------------------------------------------------
of 2001
- -------
Our revenue increased seven percent in the third quarter of 2002 to $1.11
billion compared with $1.04 billion in the third quarter of 2001. Income from
continuing operations of $146.9 million in the third quarter of 2002, compares
with $140.2 million in the third quarter of 2001 excluding special items, and
$122.1 million including special items. Diluted earnings per share from
continuing operations increased eight percent to 61 cents in the third quarter
of 2002 compared to 57 cents in the third quarter of 2001 excluding special
items. Including special items, diluted earnings per share from continuing
operations was 49 cents in the third quarter of 2001. Included as special items
in the third quarter of 2001 were an $18 million pretax charge related to
initiatives associated with a restructuring plan and a $10 million non-cash
pretax charge associated with our transition to the next generation of networked
technology. Excluding the acquisitions of Secap SA (Secap) and PSI Group, Inc.
(PSI), revenue increased three percent during the third quarter. These
acquisitions increased our operating profit, but including related financing
costs, did not materially impact earnings either on a per share or aggregate
basis.
Our third quarter 2002 revenue included $592.5 million from sales, up nine
percent from $541.9 million in the third quarter of 2001; $374.4 million from
rentals and financing, up two percent from $365.7 million; and $147.2 million
from support services, up eight percent from $136.8 million. Sales revenue
includes all revenues from Pitney Bowes Management Services (PBMS) which were
$247.4 million and $234.1 million for the quarters ended September 30, 2002 and
2001, respectively. Excluding the acquisitions of Secap and PSI, sales revenue
increased six percent.
Our Global Mailing segment includes worldwide revenue and related expenses from
the sale, rental and financing of mail finishing, mail creation and shipping
equipment, related supplies and services, presort mail services, postal payment
solutions, small business solutions and software. During the third quarter of
2002, revenue and operating profit increased ten percent. Excluding the
acquisitions of Secap and PSI, Global Mailing revenues increased five percent
compared to the prior year. Global Mailing in the U.S. benefited from the
placement of new digital mailing systems and improved demand for its mail
creation and distribution solutions products. International mailing's
double-digit revenue growth was supported by acquisition revenue from Secap and
improved business trends in the UK and Canada. Excluding revenue from the
acquisition of Secap and the favorable impact of foreign currency, international
Global Mailing revenue grew two percent. This revenue growth was achieved
despite lower revenue in Germany, where demand has slowed for mailing equipment
in a post meter migration environment.
Our Enterprise Solutions segment includes PBMS and Document Messaging
Technologies (DMT). PBMS includes facilities management contracts for advanced
mailing, reprographic, document management and other value-added services to
large enterprises. DMT 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 2002, revenue grew five percent and
operating profit grew three percent. PBMS revenue grew six percent to $247.4
million compared with the prior year while operating profit declined 20 percent.
PBMS continues to generate strong growth in new written business, but this
growth is being partially offset by the continued contraction of large
enterprise accounts, especially in the financial services and legal sectors.
Operating profit was adversely impacted by the costs associated with acquiring
new accounts that have not yet generated a full quarter of revenue as well as
investments in product technology and infrastructure, especially in Europe. DMT
reported revenue of $62.4 million for the quarter, an increase of three percent
from the prior year, with a greater improvement in operating profit. Worldwide
demand for high-speed, software enabled production mail equipment and mail
processing software has remained slow, but appears to be stabilizing. Cost
reduction programs initiated earlier in the year resulted in an increase in
operating profit over the prior year.
Total Messaging Solutions, the combined results of the Global Mailing and
Enterprise Solutions segments, reported eight percent revenue growth and nine
percent operating profit growth.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 16
Our Capital Services segment includes primarily asset- and fee-based income
generated by financing or arranging transactions of critical large-ticket
customer assets. Revenue for the quarter decreased 24 percent and operating
profit decreased 17 percent. Operating margins improved due to the decline in
interest rate levels.
Cost of sales decreased to 60.2 percent of sales revenue in the third quarter of
2002 compared with 61.4 percent in the third quarter of 2001. The decrease was
mainly driven by favorable product mix in our Global Mailing segment. Cost of
sales attributable to PBMS was $203.6 million and $187.2 million for the
quarters ended September 30, 2002 and 2001, respectively.
Cost of rentals and financing increased to 24.3 percent of related revenue in
the third quarter of 2002 compared with 23.3 percent in the third quarter of
2001. The increase was primarily due to higher depreciation costs attributable
to our meter transition plan.
Selling, service and administrative expenses were 33.9 percent of revenue in the
third quarter of 2002 compared with 33.0 percent in the third quarter of 2001.
The increase was due primarily to the higher mix of support services revenue and
costs associated with growth initiatives.
Research and development expenses increased 7.5 percent to $33.9 million in the
third quarter of 2002 compared with $31.6 million in the third quarter of 2001.
The increase reflects our continued commitment to developing new technologies
and enhanced mailing and software products.
Net interest expense decreased to $41.2 million in the third quarter of 2002
from $45.3 million in the third quarter of 2001. The decrease is due mainly to
lower interest rates.
The effective tax rate for the third quarter of 2002 was 31.3 percent. Excluding
special items in the third quarter of 2001, the effective tax rate was 31.5
percent. The tax rate was favorably impacted by the nonamortization approach to
goodwill beginning in 2002.
Excluding special items, income from continuing operations increased five
percent while diluted earnings per share from continuing operations increased
eight percent. The diluted earnings per share increased more than income from
continuing operations due primarily to our share repurchase program.
Results of Continuing Operations - nine months of 2002 vs. nine months of 2001
- ------------------------------------------------------------------------------
For the first nine months of 2002 compared with the same period of 2001, revenue
increased seven percent to $3.24 billion, and income from continuing operations,
excluding special items, increased one percent to $419.5 million. Excluding the
acquisitions of PSI, Secap, DSI and MMT, revenue remained flat during the nine
months of 2002. These acquisitions increased our operating profit, but including
related financing costs, did not materially impact earnings either on a per
share or aggregate basis for the nine months ended September 30, 2002. The
factors that affected revenue and earnings performance included those cited for
the third quarter of 2002 versus 2001.
Accounting Pronouncements
- -------------------------
In 1998, 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 the impact of interest
rate changes and foreign currency fluctuations due to our investing 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. We
adopted the provisions of FAS No. 133 in the first quarter of 2001. We use
derivatives to reduce the volatility in earnings and cash flows associated with
and funding activities and our 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 resulted in 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.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 17
In 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 were evaluated against this new
criterion and resulted in certain intangibles being included in goodwill, or
alternatively, amounts initially recorded as goodwill being separately
identified and recognized apart from goodwill. FAS No. 142 requires the use of a
nonamortization approach to account for purchased goodwill and indefinite lived
intangibles. Under a nonamortization approach, goodwill and indefinite lived
intangibles are not amortized into results of operations, but are instead
reviewed for impairment and charged against results of operations only in the
periods in which the recorded value of goodwill and indefinite lived intangibles
is more than its fair value. In 2001, we adopted the provisions of each
statement, which apply to business combinations completed after June 30, 2001.
The provisions of each statement, which apply to goodwill and intangible assets
acquired prior to June 30, 2001 were adopted on January 1, 2002. The adoption of
these accounting standards did not materially impact results of operations for
the three and nine months ended September 30, 2002. We completed the
transitional impairment test as required by FAS No. 142. Based upon the results
of this analysis, no impairment loss resulted from the adoption of this
standard. Goodwill will be reviewed for impairment on an annual basis or as
circumstances warrant.
In 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. We do not believe that this
statement will have a material impact on its financial position, results of
operations or cash flows.
In 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
Accounting Principles Board (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 separate components of an entity. The
provisions of FAS No. 144 have been adopted effective January 1, 2002. The
adoption of these accounting standards did not materially impact results of
operations for the three and nine months ended September 30, 2002.
In April 2002, FAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Correction," was issued. Under
FAS No. 145, gains and losses related to the extinguishment of debt should no
longer be segregated on the income statement as extraordinary items. Instead,
such gains and losses should be included as a component of income from
continuing operations. The provisions of FAS No. 145 are effective for fiscal
years beginning after May 15, 2002 with early adoption encouraged. We do not
believe that this statement will have a material impact on its financial
position, results of operations or cash flows.
In July 2002, FAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," was issued. This statement nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." FAS No. 146 requires that a liability for
costs associated with an exit or disposal activity be recognized when the
liability is incurred. The provisions of FAS No. 146 are effective for exit or
disposal activities initiated after December 31, 2002. Early adoption is
encouraged. We are currently evaluating the impact of this statement.
Discontinued Operations
- -----------------------
On December 3, 2001, we completed the spin off of our office systems business to
stockholders as an independent, publicly-traded company under the name of
Imagistics International Inc. (IGI). Operating results of IGI have been
segregated and reported as discontinued operations in the Consolidated
Statements of Income for the three and nine months ended September 30, 2001.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 18
Restructuring Charges
- ---------------------
In 2001, we adopted a formal restructuring plan to implement a common,
streamlined business infrastructure 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, we recorded
pretax restructuring charges of $17.9 million during the third quarter of 2001,
all of which are 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. For the year ended December 31,
2001, pretax restructuring charges were $149.3 million, of which $116.1 million
was related to continuing operations, and the remaining $33.2 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 three and nine
months ended September 30, 2001.
The restructuring charges related to continuing operations are composed of:
(Dollars in millions)
Three Nine
Months Ended Months Ended Year Ended
September 30, 2001 September 30, 2001 December 31, 2001
------------------ ------------------ -----------------
Severance and benefit costs........................ $ 6.1 $ 53.7 $ 74.3
Asset impairments.................................. 4.0 20.2 28.0
Other exit costs................................... 7.8 14.7 13.8
------------------ ------------------ -----------------
$ 17.9 $ 88.6 $ 116.1
================== ================== =================
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 1,200 employees worldwide which was initiated in 2001 and will be
substantially completed over the next three 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 80% 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, 2002, 1,218 employees were
separated under these initiatives and approximately $65.2 million of severance
and benefit costs were paid. Asset impairments relate primarily to the disposal
or abandonment of certain hardware and software applications, resulting from the
alignment of our mailing business on a global basis and ERP initiatives. Other
exit costs relate primarily to lease termination costs, non-cancelable lease
payments, other costs associated with business activities that have been exited
and the consolidation of excess facilities.
Accrued restructuring charges at September 30, 2002 consist of the following:
(Dollars in millions)
Ending Ending
Total balance at balance at
restructuring 2001 cash Non-cash December 31, 2002 cash September 30,
charges payments charges 2001 payments 2002
------------- --------- -------- ------------ --------- -------------
Severance and
benefit costs $ 76.2 $ 34.5 $ - $ 41.7 $ 31.0 $ 10.7
Asset
impairments 45.5 - 45.5 - - -
Other exit
costs 27.6 14.5 - 13.1 3.9 9.2
------------- --------- -------- ------------ --------- -------------
$ 149.3 $ 49.0 $ 45.5 $ 54.8 $ 34.9 $ 19.9
============= ========= ======== ============ ========= =============
We expect that the majority of the remaining cash outflows related to
restructuring charges will take place over the next three months, funded
primarily by cash provided by
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 19
operating activities. We believe that restructuring charges will increase our
operating efficiency and effectiveness in 2002 and beyond while enhancing
growth, primarily as a result of reduced personnel-related expenses. We expect
pretax savings in operating expenses of approximately $50 million for the year
ending December 31, 2002.
We operate in very competitive industries and we are continually evaluating our
cost structure. Economic or competitive events in the future may necessitate
that we formulate additional plans to reduce our existing cost structure.
Meter Transition
- ----------------
In 2001, we adopted a formal plan to transition to the next generation of
networked mailing technology. The information capture and exchange made possible
by advanced technology, turns the postage meter into an "intelligent" terminal
that networks the mailer to postal and carrier information and systems. This
two-way information architecture, in turn, enables convenient access to and
delivery of value-added services such as tracking, delivery confirmation and
rate information. The adoption of this plan was facilitated by our expanded
access to technology and ability to move to networked products combined with
expectations that the U.S. and postal services around the world will continue to
encourage the migration of mailing systems to networked digital technologies. As
a result of this plan, certain electronic meter rental assets and related
equipment will not be placed back in service. In addition, certain leased
equipment will either not be remarketed or will result in lower realization at
end of lease as a result of the introduction of new technology. In connection
with this plan, we recorded non-cash pretax charges of $10.3 million and $258.0
million for the three and nine months ended September 30, 2001, respectively,
and $268.3 million for the year ended December 31, 2001, related to assets
associated with our non-networked mailing technology. In November 2001, postal
regulations were issued, consistent with our meter transition plan, defining the
meter migration process and timing.
The charges related to the meter transition plan are composed of:
(Dollars in millions)
Three Nine
Months Ended Months Ended Year Ended
September 30, 2001 September 30, 2001 December 31, 2001
------------------ ------------------ -----------------
Impairment of lease residual values $ - $ 128.4 $ 128.4
Impairment of meter rental assets - 71.3 71.3
Inventory writedowns - 27.6 27.6
Additional depreciation costs on meter rental assets 10.3 30.7 41.0
------------------ ------------------ -----------------
$ 10.3 $ 258.0 $ 268.3
================== ================== =================
Acquisitions
- ------------
In August 2002, we completed the acquisition of PSI, the nation's largest mail
pre-sort company, for approximately $127 million in cash and $39 million debt
assumed. PSI prepares, sorts and aggregates mail to earn postal discounts and
expedite delivery for its customers.
In October 2001, we acquired Secap, a company based in France, for approximately
Euros 220 million ($206 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.
In June 2001, we acquired DSI from Danka Business Systems PLC. The final
purchase price, following post closing adjustments was $285.5 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.
In June 2001, we acquired the MMT business in Europe, Africa, the Middle East
and Asia. The final purchase price, following post closing adjustments, was $44
million in cash. MMT markets and services high-end mail processing, sorting and
service-related products through a network of distributors and direct
operations.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 20
We accounted for the acquisitions of PSI, Secap, DSI and MMT under the purchase
method and accordingly, the operating results of these acquisitions have been
included in our consolidated financial statements since the date of acquisition.
The acquisitions of PSI, Secap, DSI and MMT did not materially affect income
from continuing operations for the three and nine months ended September 30,
2002 and 2001, respectively.
Legal Settlements, net
- ----------------------
In June 2001, the company and Hewlett-Packard announced they had reached an
agreement resolving a lawsuit filed by us in 1995. The lawsuit arose out of a
dispute over print technology patents. Under the terms of the agreement, we
resolved all pending patent litigation without admission of infringement and we
received $400 million in cash and ten year supply and technology agreements. We
recorded the cash payment, net of legal fees and related expenses of $37.8
million, as other income in the Consolidated Statements of Income in the second
quarter of 2001.
Liquidity and Capital Resources
- -------------------------------
Our ratio of current assets to current liabilities declined to .80 to 1 at
September 30, 2002 compared with .83 to 1 at December 31, 2001. The decrease in
this ratio was primarily due to the reclassification of long-term debt to
short-term.
Our cash and cash equivalents increased to $268.5 million at September 30, 2002,
from $231.6 million at December 31, 2001. The increase resulted primarily from
$501.8 million provided by operating activities, offset in part by $361.0
million and $107.1 million used in investing and financing activities,
respectively. Net cash provided by operating activities of $501.8 million
consisted primarily of net income adjusted for non-cash items and changes in
working capital. Net cash used in investing activities of $361.0 million
consisted primarily of the acquisition of PSI and investments in fixed assets
and leveraged leases, partially offset by cash generated from reserve account
deposits. Net cash used in financing activities of $107.1 million consisted
primarily of stock repurchases, dividends paid to stockholders and payments on
long-term obligations and commercial paper partially offset by proceeds from a
new debt issuance.
Excluding special items and discontinued operations in 2001, the ratio of
earnings before interest and taxes (EBIT) to interest was 6.2x and 5.5x and the
ratio of earnings before interest, taxes, depreciation and amortization (EBITDA)
to interest was 7.8x and 6.9x for the quarters ended September 30, 2002 and
2001, respectively. The ratio of total debt to total debt and stockholders'
equity was 81.2% and 79.7% at September 30, 2002 and December 31, 2001.
Including the preferred stockholders' equity in a subsidiary company as debt,
the ratio of total debt to total debt and stockholders' equity was 82.3% and
81.0% at September 30, 2002 and December 31, 2001. During the third quarter of
2002, we repurchased 2.5 million shares for $88.9 million. Excluding the cash
flow effects of special items, free cash flow was $396.5 million for the nine
months ended September 30, 2002.
Financings and Capitalization
- -----------------------------
In September 2002, we issued $400 million of unsecured fixed rate notes maturing
in October 2012. These notes bear interest at an annual rate of 4.625% and pay
interest semi-annually beginning April 2003. The proceeds from these notes were
for general corporate purposes, including the repayment of commercial paper in
anticipation of 2003 debt maturities.
In February 2002, we issued Euros 250 million of senior unsecured notes. These
notes bear interest at a floating rate of EURIBOR plus 20 basis points, set two
Euro business days preceding the quarterly interest payment dates and mature in
August 2003. The notes are listed on the Luxembourg Stock Exchange and have been
designated as a hedge of Euro denominated assets held by the company. The
proceeds from these notes were used for general corporate purposes, including
the repayment of commercial paper, financing acquisitions and the repurchase of
company stock. On September 30, 2002, $1.4 billion remained available under the
shelf registration statement filed in October 2001 with the SEC, permitting
issuances of up to $2 billion in debt securities, preferred stock and depositary
shares.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 21
Pitney Bowes Credit Corporation (PBCC) has $75 million of unissued debt
securities available at September 30, 2002 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.
We believe that our financing needs for the next 12 months can be met with cash
generated internally, availability under existing credit agreements, debt issued
under new and existing shelf registration statements and existing commercial
paper and medium-term note programs.
Capital Investments
- -------------------
In the first nine months of 2002, net investments in fixed assets included
$104.9 million in net additions to property, plant and equipment and $49.9
million in net additions to rental equipment and related inventories compared
with $86.6 million and $101.4 million, respectively, in the same period in 2001.
These additions include expenditures for normal plant and manufacturing
equipment. In the case of rental equipment, the additions included the
production of postage meters. In 2001, additions to rental assets also included
the purchase of facsimile and copier equipment related to the discontinued
operations of IGI. Excluding capital investments for IGI, net additions to
property, plant and equipment and rental equipment were $79.3 million and $53.5
million, respectively, for the nine months ended September 30, 2001.
We expect net investments in fixed assets for the remainder of 2002, relating to
continuing operations, to be slightly higher than the prior year. These
investments will also be affected by the timing of our customers' transition to
digital meters. At September 30, 2002, commitments for the acquisition of
property, plant and equipment reflected plant and manufacturing equipment
improvements as well as rental equipment for new and replacement programs.
Investment in Commercial Aircraft Leasing Transactions
- ------------------------------------------------------
At September 30, 2002, our total investment in commercial aircraft leasing
transactions was $507.3 million, which is composed of transactions with U.S. and
foreign airlines of 44 percent and 56 percent, respectively. This portfolio is
diversified across 14 airlines and 33 aircraft. The commercial aircraft
transactions are financed through investments in leveraged lease transactions of
$301.3 million, direct financing lease transactions of $124.1 million, and
through our equity interest in PBG Capital Partners LLC, in which our
proportional equity share of commercial airline leasing transactions is $81.9
million. Risk of loss under these transactions is primarily related to: (1) the
inability of the airline to make underlying lease payments; (2) our inability to
generate sufficient cash flows either through the sale of the aircraft or
secondary lease transactions to recover our net investment; and/or (3) in the
case of the leveraged lease portfolio, the absence of an equity defeasance or
other third party credit arrangements. Approximately 40 percent of our aircraft
leveraged lease portfolio is further secured by equity defeasance accounts or
third party credit arrangements.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 22
A further breakdown of our portfolio is as follows:
# of % of total
Airline aircraft investment
------- -------- ----------
U.S.
---
United and subsidiary 5 12.8
US Airways 4 11.8
Delta 5 9.6
America West 1 3.8
American 6 3.7
Southwest 2 1.9
Northwest 1 .6
Alaska Air 1 .2
-- ----
25 44.4
-- ----
Foreign
-------
KLM 2 21.2
Qantas 2 14.6
Japan 2 8.9
Air France 1 6.5
Lufthansa 1 4.4
-- ----
8 55.6
-- ----
Total 33 100.0
== =====
We continue to monitor our investment in commercial aircraft leasing
transactions given the current status of the airline industry. In particular,
we are closely monitoring recent developments related to US Airways Group, Inc.
(US Airways) and United Air Lines, Inc. (United).
Our investment in commercial aircraft leasing transactions includes four
aircraft with US Airways for a total investment of $59.8 million. With respect
to our aircraft, US Airways failed to make scheduled leveraged lease payments
totaling $1.3 million that were due on July 1, 2002. As a result, we have
suspended the recognition of financing income on all aircraft leases with US
Airways. On August 11, 2002, US Airways filed for protection under Chapter 11 of
the U.S. Bankruptcy Code. US Airways has publicly stated that its restructuring
plan is predicated upon delivering cost reductions and concessions from its
unions, aircraft lessors and financiers and other parties. US Airways has also
publicly stated that it has received conditional approval from the Air
Transportation Stabilization Board for a $1 billion collateralized loan backed
by a federal guarantee that may be available to US Airways upon the successful
ratification of its plan for reorganization and emergence from Chapter 11
protection.
We continue to be uncertain as to the outcome of the US Airways bankruptcy
proceeding and the impact on our investment in aircraft leases with US Airways.
Under the Bankruptcy Code, US Airways may cure any defaults under the lease
agreements and agree to fulfill its future obligations under those leases to
prevent the repossession of the aircraft. However, other actions that may be
taken by either US Airways (including the rejection of our leases) or by others
during the bankruptcy proceeding may cause a negative impact on our cash flow
and could result in material charges related to a write-down of our investment
in these transactions.
We are currently in discussions with US Airways as to whether we will continue
leasing these aircraft to them post bankruptcy at reduced lease rates. We have
also extended the time for rejection of the aircraft by 60 days to allow us time
to negotiate a mutually acceptable arrangement to continue leasing these
aircraft to US Airways. Depending on the amount of the reduction to the lease
rates, we may have to record additional charges for uncollectible lease
receivables, which are not already covered by our existing allowance for credit
losses. If we are unable to reach agreement on acceptable lease rates, we may
repossess the aircraft which could result in material charges related to the
write-down of our investment in these transactions.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 23
Our investment in commercial aircraft leasing transactions also includes four
aircraft with United and one aircraft with a wholly-owned regional carrier
subsidiary of United, for a total investment of $65.0 million. To date, United
has made all contractual payments on the above transactions. We have begun
discussions with United concerning its leased aircraft and we continue to
monitor the airline's public disclosure of its discussions with its unions and
with government officials. Continued deterioration of this situation or in the
airline industry in general may cause a negative impact on our cash flow and
could result in material charges related to a write-down of our investment in
these or other airline transactions.
The potential range of pretax write-downs associated with US Airways and United
combined could be between zero and $100 million. Accordingly, due to the wide
range of outcomes, no write-down has been recorded at this time. We will
reevaluate our position in subsequent quarters as the US Airways bankruptcy
proceeding continues and more information is disclosed about United's ability to
fulfill its obligations under its leases.
Other Matters
- -------------
Capital Services
In October 2002, we announced that we are reviewing possible actions to reduce
our overall exposure in our Capital Services segment to focus exclusively on
transactions related to our postal and document-related financing business. At
September 30, 2002, our total investment in Capital Services lease related
assets included in our Consolidated Balance Sheet was composed of the following:
(Dollars in millions) September 30,2002
-----------------
Leveraged leases $ 1,438
Finance receivables 1,053
Other assets 162
Rental equipment 21
-----------------
Total $ 2,674
=================
Leveraged leases are diversified across the following types of assets:
o $336 million related to commercial real estate facilities.
o $301 million for aircraft transactions with major commercial airlines.
o $300 million related to locomotives and railcars.
o $240 million for postal equipment with international postal authorities.
o $131 million for rail and bus facilities.
o $130 million for telecommunications equipment.
Our leveraged lease investment in telecommunications equipment represents leases
to three highly rated international telecommunication entities. Approximately,
87 percent of this portfolio is further secured by equity defeasance accounts
or other third party credit arrangements. Additionally, our leveraged lease
investment in commercial real estate facilities includes approximately
$84 million related to leases of corporate facilities to four U.S.
telecommunication entities, of which $69 million is with lessees that are highly
rated.
Overall, approximately 46 percent of our $1.4 billion leveraged lease portfolio
is further secured by equity defeasance accounts or other third party credit
arrangements. In addition, approximately 33 percent of the remaining leveraged
lease portfolio represents leases to highly rated government related
organizations which have guarantees or supplemental credit enhancements upon the
occurrence of certain events.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 24
Capital Services finance receivables are composed of the following:
Assets held for sale $ 420
Single investor leases:
Large ticket single investor leases 405
Imagistics lease portfolio 228
----------
Total $ 1,053
==========
Other assets represents our 50% equity interest in PBG Capital Partners LLC
(PBG). PBG was formed by Pitney Bowes Credit Corporation and GATX Corporation
during 1997 for the purposes of financing and managing certain leasing related
assets. We account for our investment in PBG under the equity method.
We expect to phase out our assets held for sale portfolio by the end of next
year. Our Consolidated Statement of Income includes financing revenue of $5.2
million and $16.4 million for the quarters ended September 30, 2002 and 2001,
respectively, and $21.5 million and $28.4 million for the nine months ended
September 30, 2002 and 2001, respectively, attributable to our assets held for
sale portfolio.
We are reviewing our other capital services investments and will be determining
the optimum time for divesting those assets, other than postal and document
related assets, including timing the disposal of these assets, to maximize
shareholder value. At September 30, 2002, Capital Services postal and document
related assets consist of leveraged leases of $240 million for postal equipment
with international postal authorities and our Imagistics lease portfolio of $228
million. We plan to continue to originate postal and document related assets,
which we may hold as investments or sell to third parties.
Due to the wide range of possible actions and outcomes which we are currently
reviewing, we are uncertain at this time as to the potential impact of these
actions on our financial position, results of operations and cash flows.
Pension and retiree medical costs
In October 2002, we also announced that we have preliminarily estimated that our
incremental pension and retiree medical costs for 2003, attributable to
anticipated changes in actuarial assumptions and loss experience, will be
approximately 12 cents per share.
Regulatory Matters
- ------------------
In 2000, the U.S. Postal Service (USPS) issued a 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
were no longer permitted.
o The current users of manually reset electronic meters could continue to use
these meters for the term of their rental and lease agreements. Leases or
rentals due to expire in 2000 could be extended to December 31, 2001.
On November 15, 2001, the USPS issued a rule as follows:
o New placements of non-digital meters without the "timeout" feature that
enables the meters to be automatically disabled, if not reset within a
specified time period are no longer permitted after December 31, 2002.
These meters must be off the market by December 31, 2006.
o New placements of non-digital meters with a "timeout" feature are no longer
permitted after June 2004. These meters must be off the market by December
31, 2008.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 25
We adopted a formal plan in the third quarter of 2001 to transition to the next
generation of networked mailing technology.
USPS Information Based Indicia Program (IBIP)
In May 1995, the USPS publicly announced its concept of its 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: (i) the Indicium specification;
(ii) a Postal Security Device specification; (iii) a Host specification; and
(iv) a Vendor Infrastructure specification. During the period from May 1995
through September 30, 2002, we submitted extensive comments to a series of
proposed IBIP specifications issued by the USPS, including comments on the IBI
Performance Criteria.
Other Regulatory Matters
- ------------------------
In June 2002, we received an examination report from the Internal Revenue
Service (IRS) showing proposed income tax adjustments for the 1992 to 1994 tax
years. The total additional tax proposed by the IRS for the 1992 through 1994
tax years is about $24 million. In August 2002, we filed a protest with the IRS
to challenge most of the proposed deficiencies asserted by the IRS. We believe
that we have meritorious defenses to those deficiencies and that the ultimate
outcome will not result in a material effect on our results of operations,
financial position or cash flows. However, if the IRS prevails on its asserted
deficiencies, additional tax may be due for 1995 and future tax years, which
could materially impact our results of operations, financial position or cash
flows. At any time, our provision for taxes could be impacted by changes in tax
law and interpretations by governments or courts.
Forward-Looking Statements
- --------------------------
We want 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 conditions, including any
terrorist attacks
o negative developments in economic conditions, including adverse impacts on
customer demand
o changes in postal regulations
o timely development and acceptance of new products
o success in gaining product approval in new markets where regulatory approval
is required
o successful entry into new markets
o mailers' utilization of alternative means of communication or competitors'
products
o the company's success at managing customer credit risk, including risks
associated with commercial aircraft leasing transactions
o changes in interest rates
o foreign currency fluctuations
o timing and execution of the restructuring plan
o timing and execution of the meter transition plan
o regulatory approvals and satisfaction of other conditions to consummation
of any acquisitions and integration of recent acquisitions
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 26
o impact on mail volume resulting from current concerns over the use of the
mail for transmitting harmful biological agents
o third-party suppliers ability to provide product components
o negative income tax adjustments for prior audit years and changes in tax
laws or regulations
o terms and timing of actions to reduce exposures in Capital Services segment
o changes in pension and retiree medical costs.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There were no material changes to the disclosures made in the Annual Report on
Form 10-K for the year ended December 31, 2001 regarding this matter.
Item 4. Controls and Procedures
(a) Explanation of Disclosure Controls and Procedures
Our chief executive officer and our chief financial officer, after evaluating
the effectiveness of the Company's "disclosure controls and procedures" (as
defined in Exchange Act Rules 13a-14(c) and 15d-14 (c)) as of a date (the
"Evaluation Date") within 90 days of the filing date of this quarterly report,
have concluded that as of the Evaluation Date, our disclosure controls and
procedures were adequate and effective and designed to ensure that material
information relating to us and our consolidated subsidiaries would be made known
to them by others within those entities.
(b) Changes in Internal Controls
There were no significant changes in our internal controls or in other factors
that could significantly affect our internal controls subsequent to the
Evaluation Date, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Part II - Other Information
---------------------------
Item 1: Legal Proceedings
In the ordinary course of business, the Company and its subsidiaries are
routinely defendants in or parties to a number of pending and threatened legal
actions and proceedings, including actions purportedly brought on behalf of
classes of claimants. These may involve litigation by or against us relating to,
among other things:
o contractual rights under vendor, insurance or other contracts
o intellectual property or patent rights
o equipment, service, payment or other disputes with customers
o disputes with employees
In those cases where we are the defendant, plaintiffs may seek to recover large
and sometimes unspecified amounts or other types of relief and some matters may
remain unresolved for several years. Although we cannot predict the outcome of
such matters, based on current knowledge, management does not believe that the
ultimate outcome of these litigations will have a material adverse effect on our
financial position, results of operations or cash flows.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 27
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
(99.1) Certification of Chief Executive Officer
(99.2) Certification of Chief Financial Officer
(b) Reports on Form 8-K
On August 13, 2002, the company furnished a current report on Form 8-K
pursuant to Item 9 thereof, reporting the filings of the Statement Under
Oath of the Principal Executive Officer and Principal Financial Officer
dated August 13, 2002, regarding facts and circumstances relating to
exchange act filings.
On August 2, 2002, the company filed a current report on Form 8-K
pursuant to Item 5 thereof, reporting the Press Release dated August 1,
2002 regarding its completion of the acquisition of PSI Group, Inc.
On July 19, 2002, the company filed a current report on Form 8-K pursuant
to Item 5 thereof, reporting the Press Release dated July 18, 2002
regarding its financial results for the quarter ended June 30, 2002.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 28
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 12, 2002
/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)
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 29
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael J. Critelli, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pitney Bowes Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002
/s/ Michael J. Critelli
- -----------------------
Michael J. Critelli
Chief Executive Officer
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2002
Page 30
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Bruce P. Nolop, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pitney Bowes Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002
/s/ Bruce P. Nolop
- ------------------
Bruce P. Nolop
Chief Financial Officer
Exhibit Index
-------------
Reg. S-K
Exhibits Description
-------- -------------------------------------------------
(12) Computation of ratio of
earnings to fixed charges
(99.1) Certification of Chief Executive Officer
(99.2) Certification of Chief Financial Officer
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,
--------------------------------- ---------------------------------
2002 2001(2) 2002 2001(2)
-------------- -------------- --------------- --------------
Income from continuing operations
before income taxes...................................... $ 213,785 $ 176,504 $ 610,635 $ 623,639
Add:
Interest expense....................................... 45,005 46,977 142,150 146,103
Portion of rents
representative of the interest factor............... 10,878 12,326 31,408 33,671
Amortization of capitalized interest................... 368 244 979 730
Minority interest in the
income of subsidiary with fixed charges............. 1,377 2,259 4,006 8,268
-------------- -------------- --------------- --------------
Income as adjusted......................................... $ 271,413 $ 238,310 $ 789,178 $ 812,411
============== ============== =============== ==============
Fixed charges:
Interest expense....................................... $ 45,005 $ 46,977 $ 142,150 $ 146,103
Capitalized interest................................... - - - -
Portion of rents
representative of the interest factor............... 10,878 12,326 31,408 33,671
Minority interest, excluding
taxes, in the income of subsidiary
with fixed charges.................................. 2,004 3,265 5,831 12,457
-------------- -------------- --------------- --------------
Total fixed charges................................. $ 57,887 $ 62,568 $ 179,389 $ 192,231
============== ============== =============== ==============
Ratio of earnings to fixed charges......................... 4.69 3.81 4.40 4.23
============== ============== =============== ==============
Ratio of earnings to fixed
charges excluding minority interest.................... 4.83 3.98 4.52 4.47
============== ============== =============== ==============
<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 IGI 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. 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.
</FN>
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Pitney Bowes Inc. (the "company") on
Form 10-Q for the period ending September 30, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002, I, Michael J. Critelli, Chief Executive Officer of the company, certify
that, to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
company.
/s/ Michael J. Critelli
- -----------------------
Michael J. Critelli
Chief Executive Officer
November 12, 2002
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Pitney Bowes Inc. (the "company") on
Form 10-Q for the period ending September 30, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002, I, Bruce P. Nolop, Chief Financial Officer of the company, certify that,
to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
company.
/s/ Bruce P. Nolop
- ------------------
Bruce P. Nolop
Chief Financial Officer
November 12, 2002