UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0 - Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
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
---- ---
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act.) Yes X No
--- ---
Number of shares of common stock, $1 par value, outstanding as of July 31, 2003
is 233,995,163.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 2
Pitney Bowes Inc.
Index
-----------------
Page Number
-----------
Part I - Financial Information:
Item 1: Financial Statements
Consolidated Statements of Income (Unaudited) - Three and
Six Months Ended June 30, 2003 and 2002................ 3
Consolidated Balance Sheets - June 30, 2003 (Unaudited)
and December 31, 2002.................................. 4
Consolidated Statements of Cash Flows (Unaudited) - Six
Months Ended June 30, 2003 and 2002.................... 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 4: Submission of Matters to a Vote of
Security Holders.................................. 27
Item 6: Exhibits and Reports on Form 8-K...................... 27
Signatures ....................................................... 28
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
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 June 30, Six Months Ended June 30,
----------------------------- -------------------------------
2003 2002 2003 2002
------------ ------------ ------------ -------------
Revenue from:
Sales ...................................... $ 327,804 $ 327,466 $ 618,654 $ 634,268
Rentals..................................... 211,403 203,874 425,704 407,657
Core financing.............................. 135,931 130,264 270,292 260,965
Non-core financing.......................... 26,649 35,328 56,405 70,996
Business services........................... 279,300 241,222 551,920 475,619
Support services............................ 152,791 143,171 301,712 281,328
------------ ------------ ------------ -------------
Total revenue........................... 1,133,878 1,081,325 2,224,687 2,130,833
------------ ------------ ------------ -------------
Costs and expenses:
Cost of sales .............................. 147,549 145,948 287,476 292,367
Cost of rentals............................. 43,792 43,148 85,400 86,253
Cost of core financing...................... 36,804 36,156 71,997 72,642
Cost of non-core financing.................. 8,973 10,701 20,240 21,777
Cost of business services................... 229,529 193,706 452,322 381,557
Cost of support services.................... 80,863 73,226 159,162 144,829
Selling, general and administrative......... 302,123 288,704 597,273 573,769
Research and development.................... 39,008 36,095 74,759 70,164
Restructuring charges (Note 9).............. 32,091 - 53,356 -
Interest, net............................... 40,178 45,327 83,459 90,625
------------ ------------ ------------ -------------
Total costs and expenses................ 960,910 873,011 1,885,444 1,733,983
------------ ------------ ------------ -------------
Income before income taxes....................... 172,968 208,314 339,243 396,850
Provision for income taxes....................... 54,072 65,211 106,444 124,230
------------ ------------ ------------ -------------
Net income....................................... $ 118,896 $ 143,103 $ 232,799 $ 272,620
============ ============ ============ =============
Basic earnings per share......................... $ .51 $ .60 $ .99 $ 1.13
============ ============ ============ =============
Diluted earnings per share....................... $ .50 $ .59 $ .98 $ 1.12
============ ============ ============ =============
Dividends declared per share of common stock..... $ .30 $ .295 $ .60 $ .59
============ ============ ============ =============
Ratio of earnings to fixed charges............... 4.25 4.41 4.07 4.26
============ ============ ============ =============
<FN>
See Notes to Consolidated Financial Statements
</FN>
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 4
Pitney Bowes Inc.
Consolidated Balance Sheets
---------------------------
June 30, December 31,
(Dollars in thousands, except share data) 2003 2002
--------------- ----------------
(Unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents.............................. $ 358,167 $ 315,156
Short-term investments, at cost which
approximates market................................ 7,464 3,491
Accounts receivable, less allowances:
6/03, $37,560; 12/02, $35,139...................... 417,157 404,366
Finance receivables, less allowances:
6/03, $65,939; 12/02, $71,373...................... 1,388,248 1,446,460
Inventories (Note 3)................................... 231,425 210,888
Other current assets and prepayments................... 192,679 172,264
--------------- ----------------
Total current assets............................... 2,595,140 2,552,625
Property, plant and equipment, net (Note 4)................. 647,682 622,244
Rental equipment and related inventories, net (Note 4)...... 426,996 422,717
Property leased under capital leases, net (Note 4).......... 2,245 1,974
Long-term finance receivables, less allowances:
6/03, $77,131; 12/02, $82,635.......................... 1,637,674 1,686,168
Investment in leveraged leases.............................. 1,542,640 1,559,915
Goodwill (Note 11).......................................... 911,347 827,241
Other assets................................................ 1,108,596 1,059,430
--------------- ----------------
Total assets................................................ $ 8,872,320 $ 8,732,314
=============== ================
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities............... $ 1,319,719 $ 1,248,337
Income taxes payable................................... 170,863 98,897
Notes payable and current portion of
long-term obligations ............................. 582,203 1,647,338
Advance billings....................................... 373,697 355,737
--------------- ----------------
Total current liabilities.......................... 2,446,482 3,350,309
Deferred taxes on income.................................... 1,556,269 1,535,618
Long-term debt (Note 5)..................................... 3,240,110 2,316,844
Other noncurrent liabilities................................ 349,487 366,216
--------------- ----------------
Total liabilities.................................. 7,592,348 7,568,987
--------------- ----------------
Preferred stockholders' equity in a subsidiary company...... 310,000 310,000
Stockholders' equity:
Cumulative preferred stock, $50 par
value, 4% convertible.............................. 19 24
Cumulative preference stock, no par
value, $2.12 convertible........................... 1,368 1,432
Common stock, $1 par value............................. 323,338 323,338
Capital in excess of par value......................... - -
Retained earnings...................................... 3,930,970 3,848,562
Accumulated other comprehensive income (Note 8)........ (40,474) (121,615)
Treasury stock, at cost................................ (3,245,249) (3,198,414)
--------------- ----------------
Total stockholders' equity......................... 969,972 853,327
--------------- ----------------
Total liabilities and stockholders' equity.................. $ 8,872,320 $ 8,732,314
=============== ================
<FN>
See Notes to Consolidated Financial Statements
</FN>
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 5
Pitney Bowes Inc.
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
(Dollars in thousands)
Six Months Ended June 30,
--------------------------------
2003 2002
------------- --------------
Cash flows from operating activities:
Net income ..................................................... $ 232,799 $ 272,620
Restructuring charges, net...................................... 34,148 -
Restructuring and other special payments........................ (23,722) (38,790)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization.......................... 138,506 129,095
Increase in deferred taxes on income................... 48,385 25,654
Change in assets and liabilities:
Accounts receivable................................ 3,653 (12,185)
Net investment in internal finance receivables..... (1,433) (20,244)
Inventories........................................ (7,949) (28,682)
Other current assets and prepayments............... (8,176) (3,865)
Accounts payable and accrued liabilities........... (37,930) 1,341
Income taxes payable............................... 49,328 (9,327)
Advance billings................................... 4,871 3,157
Other, net......................................... (6,644) 8,489
------------- --------------
Net cash provided by operating activities.......... 425,836 327,263
------------- --------------
Cash flows from investing activities:
Short-term investments.......................................... (3,369) (10,115)
Net investment in fixed assets.................................. (138,355) (96,939)
Net investment in finance receivables........................... (4,350) (1,645)
Net investment in capital services.............................. 160,256 40,703
Investment in leveraged leases.................................. 36,642 (48,251)
Reserve account deposits........................................ 16,636 675
Other investing activities...................................... (69,441) (4,373)
------------- --------------
Net cash used in investing activities.............. (1,981) (119,945)
------------- --------------
Cash flows from financing activities:
(Decrease) increase in notes payable, net....................... (664,198) 58,087
Proceeds from long-term obligations............................. 1,025,985 217,938
Principal payments on long-term obligations..................... (554,528) (202,415)
Proceeds from issuance of stock................................. 33,499 29,671
Stock repurchases............................................... (90,016) (161,137)
Dividends paid.................................................. (140,778) (142,185)
------------- --------------
Net cash used in financing activities.............. (390,036) (200,041)
------------- --------------
Effect of exchange rate changes on cash.............................. 9,192 1,778
------------- --------------
Increase in cash and cash equivalents................................ 43,011 9,055
Cash and cash equivalents at beginning of period..................... 315,156 231,588
------------- --------------
Cash and cash equivalents at end of period........................... $ 358,167 $ 240,643
============= ==============
Interest paid........................................................ $ 96,908 $ 94,303
============= ==============
Income taxes paid, net............................................... $ 18,306 $ 88,769
============= ==============
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
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
(GAAP) 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 June 30, 2003 and December 31, 2002, the results of its operations
for the three and six months ended June 30, 2003 and 2002 and its cash flows for
the six months ended June 30, 2003 and 2002 have been included. Operating
results for the three and six months ended June 30, 2003 are not necessarily
indicative of the results that may be expected for any other interim period or
the year ending December 31, 2003. These statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the company's 2002 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:
- ------
In 2001, Statement of Financial Accounting Standards (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 have been 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 have not
been amortized into results of operations, but instead will be 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, the company adopted the provisions of each
statement, which apply to business combinations completed after June 30, 2001.
On January 1, 2002, the company adopted the provisions of each statement, which
apply to goodwill and intangible assets acquired prior to June 30, 2001. The
adoption of these standards reduced the annual amortization of intangible assets
commencing January 1, 2002 by approximately 2 cents per diluted share. Goodwill
is 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 for the company. The adoption of
this statement did not impact the company's 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 No. 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 No. 30, to report discontinued operations separately from continuing
operations and extends that reporting to separate components of an entity. FAS
No. 144 is effective January 1, 2002 for the company. The adoption of this
statement did not impact the company's financial position, results of operations
or cash flows.
In 2002, FAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," 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. FAS No. 145 is effective January 1, 2003 for the company.
The adoption of this statement did not impact the company's financial position,
results of operations or cash flows.
In 2002, FAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued. This statement nullifies the Financial Accounting
Standards Board's Emerging Issues Task Force (EITF) 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 one-time benefit arrangements and exit or disposal activities
initiated after December 31, 2002. The company accounts for ongoing benefit
arrangements under FAS No. 112 "Employers' Accounting for Postemployment
Benefits", which requires that a liability be recognized when the costs are
probable and estimable. See Note 9 to the consolidated financial statements.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 7
In 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN
No. 45 clarifies the requirements of FAS No. 5, "Accounting for Contingencies,"
relating to a guarantor's accounting for and disclosure of, the issuance of
certain types of guarantees. FIN No. 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair value,
or market value, of the obligations it assumes under the guarantee and must
disclose that information in its interim and annual financial statements. The
provisions related to recognizing a liability at inception of the guarantee for
the fair value of the guarantor's obligations does not apply to product
warranties or to guarantees accounted for as derivatives. The recognition
provisions of FIN No. 45 are effective for the company beginning January 1,
2003. The adoption of this interpretation did not impact the company's financial
position, results of operations or cash flows. See Note 12 to the consolidated
financial statements.
In 2002, FAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," which amends FAS No. 123, "Accounting for Stock-Based
Compensation," was issued. FAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation and requires more prominent and more
frequent disclosures in the financial statements of the effects of stock-based
compensation. FAS No. 148 is effective January 1, 2003 for the company. The
company adopted the disclosure-only provisions of this statement.
The company adopted FAS No. 123, "Accounting for Stock-Based Compensation," on
January 1, 1996. Under FAS No. 123, companies can, but are not required to,
elect to recognize compensation expense for all stock-based awards using a fair
value methodology. The company adopted the disclosure-only provisions, as
permitted by FAS No. 123. The company applies APB Opinion No. 25 and related
interpretations in accounting for its stock-based plans. Accordingly, no
compensation expense has been recognized for its U.S. and U.K. Stock Option
Plans (ESP) or its U.S. and U.K. Employee Stock Purchase Plans (ESPP), except
for the compensation expense recorded for its performance-based awards under the
ESP and the Directors' Stock Plan. If the company had elected to recognize
compensation expense based on the fair value method as prescribed by FAS No.
123, net income and earnings per share for the three and six months ended June
30, 2003 and 2002 would have been reduced to the following pro forma amounts:
(Dollars in thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
------------ ----------- ---------- ---------
Net Income
As reported........................................... $ 118,896 $ 143,103 $ 232,799 $ 272,620
Deduct: Stock-based employee compensation expense
determined under fair value method for all awards,
net of related tax effects......................... (4,861) (5,243) (10,013) (10,871)
------------ ----------- ---------- ---------
Pro forma............................................. $ 114,035 $ 137,860 $ 222,786 $ 261,749
============ =========== ========== =========
Basic earnings per share
As reported........................................... $ .51 $ .60 $ .99 $ 1.13
Pro forma............................................. $ .49 $ .57 $ .95 $ 1.09
Diluted earnings per share
As reported........................................... $ .50 $ .59 $ .98 $ 1.12
Pro forma............................................. $ .48 $ .57 $ .94 $ 1.07
In accordance with FAS No. 123, the fair value method of accounting has not been
applied to awards granted prior to January 1, 1995. Therefore, the resulting pro
forma impact may not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
Three and Six Months Ended June 30,
2003 2002
---------------- ---------------
Expected dividend yield................................. 3.5% 3.1%
Expected stock price volatility......................... 32% 30%
Risk-free interest rate................................. 3% 4%
Expected life (years)................................... 5 5
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 8
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." FIN No. 46 requires a variable interest entity to be consolidated by
a company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of FIN No. 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to pre-existing entities in the first
fiscal year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued after January
31, 2003, regardless of when the variable interest entity was established.
Effective July 1, 2003, the company will consolidate its equity investment in
PBG Capital Partners LLC (PBG). At June 30, 2003, PBG's total assets and
liabilities were $341 million and $212 million, respectively. The consolidation
of PBG will not have a material impact on the company's results of operations or
cash flows.
In March 2003, the EITF reached a consensus on Issue 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables." EITF No. 00-21 addresses
certain aspects of the accounting by a vendor for arrangements under which it
performs multiple revenue generating activities and how to determine whether
such an arrangement involving multiple deliverables contains more than one unit
of accounting for purposes of revenue recognition. The guidance for EITF No.
00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. Accordingly, the company will adopt EITF No.
00-21 on July 1, 2003. The transition provision allows either prospective
application or a cumulative effect adjustment upon adoption. The company
believes it is in compliance with the provisions of EITF No. 00-21.
In April 2003, FAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued. FAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under FAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The provisions of FAS No. 149 are generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The company does not expect that the adoption of
these provisions will have a material impact on its financial position, results
of operations or cash flows.
In May 2003, FAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" was issued. FAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. The
provisions of FAS No. 150 are effective for financial instruments entered into
or modified after May 31, 2003, and are effective July 1, 2003 for the company.
The adoption of this statement will not impact the company's financial position,
results of operations or cash flows.
Note 3:
- -------
Inventories are composed of the following:
(Dollars in thousands) June 30, December 31,
2003 2002
------------- ------------
Raw materials and work in process................ $ 95,050 $ 80,075
Supplies and service parts....................... 57,444 54,849
Finished products................................ 78,931 75,964
------------- ------------
Total .......................................... $ 231,425 $ 210,888
============= ============
Note 4:
- ------
Fixed assets are composed of the following:
(Dollars in thousands) June 30, December 31,
2003 2002
------------- ------------
Property, plant and equipment.................... $ 1,516,560 $ 1,426,522
Accumulated depreciation......................... (868,878) (804,278)
------------- ------------
Property, plant and equipment, net............... $ 647,682 $ 622,244
============= ============
Rental equipment and related inventories......... $ 1,148,613 $ 1,095,345
Accumulated depreciation......................... (721,617) (672,628)
------------- ------------
Rental equipment and related inventories, net.... $ 426,996 $ 422,717
============= ============
Property leased under capital leases............. $ 14,530 $ 14,513
Accumulated amortization......................... (12,285) (12,539)
------------- ------------
Property leased under capital leases, net........ $ 2,245 $ 1,974
============= ============
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 9
Depreciation expense was $125.8 million and $115.3 million for the six months
ended June 30, 2003 and 2002, respectively.
Note 5:
- ------
At June 30, 2003, $456 million 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. In April
2003, as part of this shelf registration statement, the company established a
medium-term note program for the issuance of up to $1.4 billion in aggregate
principal, representing the remaining amount available on the shelf at that
time.
In June 2003, the company issued $375 million of unsecured fixed rate notes
maturing in June 2013. These notes bear interest at an annual rate of 3.875% and
pay interest semi-annually beginning December 2003. The proceeds from these
notes were used for general corporate purposes, including the repayment of
commercial paper and the repurchase of company stock.
In June 2003, the company issued $200 million of unsecured floating rate notes
maturing in June 2005. These notes bear interest at a floating rate of LIBOR
minus 3 basis points, set two business days preceding the quarterly interest
payment dates. The proceeds from these notes were used for general corporate
purposes, including the repayment of commercial paper and the repurchase of
company stock.
In April 2003, the company issued $350 million of unsecured fixed rate notes
maturing in May 2018. These notes bear interest at an annual rate of 4.75% and
pay interest semi-annually beginning November 2003. In connection with this
issuance, the company entered into a $350 million swap maturing in May 2018,
converting this obligation to a floating rate note. The proceeds from these
notes were used for general corporate purposes, including the repayment of
commercial paper and the repurchase of company stock.
In February 2003, the company sold 6.45% Preferred Stock in a subsidiary of
Pitney Bowes Credit Corporation to an outside institutional investor for
approximately A$191 million ($110 million). As part of this transaction, the
company agreed to repurchase the stock in 10 years. Additionally, the company
entered into a cross currency interest rate swap with the same institutional
investor, effectively converting the obligation to a $110 million note that
bears interest at a floating rate of approximately LIBOR minus 50 basis points.
This note was recorded as long-term debt in the Consolidated Balance Sheets. The
proceeds from this transaction were used for general corporate purposes,
including the repayment of commercial paper and the repurchase of company stock.
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 completed an offering of 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 net investments held by the company. The proceeds from these notes
were used for general corporate purposes, including the repayment of commercial
paper, the financing of acquisitions and the repurchase of company stock.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 10
Note 6:
- ------
A reconciliation of the basic and diluted earnings per share computations for
the three months ended June 30, 2003 and 2002 is as follows (in thousands,
except per share data):
2003 2002
-------------------------------------------- --------------------------------------------
Per Per
Income Shares Share Income Shares Share
- -------------------------------------------------------------------------- --------------------------------------------
Net income $ 118,896 $ 143,103
Less:
Preferred stock
dividends - -
Preference stock
dividends (27) (31)
- -------------------------------------------------------------------------- --------------------------------------------
Basic earnings per
share $ 118,869 234,043 $ .51 $ 143,072 239,948 $ .60
- -------------------------------------------------------------------------- --------------------------------------------
Effect of dilutive
securities:
Preferred stock - 11 - 12
Preference stock 27 844 31 944
Stock options 1,204 1,951
Other 34 113
- -------------------------------------------------------------------------- --------------------------------------------
Diluted earnings per
share $ 118,896 236,136 $ .50 $ 143,103 242,968 $ .59
========================================================================== ============================================
A reconciliation of the basic and diluted earnings per share computations for
the six months ended June 30, 2003 and 2002 is as follows (in thousands, except
per share data):
2003 2002
-------------------------------------------- --------------------------------------------
Per Per
Income Shares Share Income Shares Share
- -------------------------------------------------------------------------- --------------------------------------------
Net income $ 232,799 $ 272,620
Less:
Preferred stock
dividends - -
Preference stock
dividends (55) (61)
- -------------------------------------------------------------------------- --------------------------------------------
Basic earnings per
share $ 232,744 234,462 $ .99 $ 272,559 240,799 $ 1.13
- -------------------------------------------------------------------------- --------------------------------------------
Effect of dilutive
securities:
Preferred stock - 11 - 12
Preference stock 55 855 61 947
Stock options 1,072 1,876
Other 21 100
- -------------------------------------------------------------------------- --------------------------------------------
Diluted earnings per
share $ 232,799 236,421 $ .98 $ 272,620 243,734 $ 1.12
========================================================================== ============================================
<FN>
In accordance with FAS No. 128, "Earnings per Share," 4.3 million and 1.9
million common stock equivalent shares for the three months ended June 30, 2003
and 2002, respectively, and 4.6 million and 2.1 million common stock equivalent
shares for the six months ended June 30, 2003 and 2002, respectively, issuable
upon the exercise of stock options were excluded from the above computations
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
Six Months Ended June 30, 2003
Page 11
Note 7:
- ------
Revenue and operating profit by business segment for the three and six months ended June 30, 2003 and 2002 were as follows:
(Dollars in thousands) Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenue:
Global Mailing.............................. $ 785,885 $ 737,203 $ 1,533,826 $ 1,449,294
Enterprise Solutions........................ 310,641 299,131 613,850 590,521
----------- ----------- ----------- ----------
Total Messaging Solutions................... 1,096,526 1,036,334 2,147,676 2,039,815
Non-core.................................... 26,649 35,328 56,405 70,996
Core........................................ 10,703 9,663 20,606 20,022
----------- ---------- ----------- ----------
Capital Services............................ 37,352 44,991 77,011 91,018
----------- ---------- ----------- ----------
Total revenue.................................. $ 1,133,878 $ 1,081,325 $ 2,224,687 $ 2,130,833
=========== =========== =========== ===========
Operating Profit: (1)
Global Mailing.............................. $ 236,094 $ 225,087 $ 456,671 $ 426,668
Enterprise Solutions........................ 16,309 22,354 27,673 39,935
----------- ----------- ----------- -----------
Total Messaging Solutions................... 252,403 247,441 484,344 466,603
Non-core.................................... 12,331 16,123 24,356 31,503
Core........................................ 5,427 3,736 10,498 8,063
----------- ----------- ----------- -----------
Capital Services............................ 17,758 19,859 34,854 39,566
----------- ----------- ----------- -----------
Total operating profit......................... 270,161 267,300 519,198 506,169
Unallocated amounts:
Net interest (corporate interest expense,
net of intercompany transactions).......... (26,362) (22,914) (52,555) (43,159)
Corporate expense........................... (38,740) (36,072) (74,044) (66,160)
Restructuring charges....................... (32,091) - (53,356) -
----------- ----------- ----------- -----------
Income before income taxes..................... $ 172,968 $ 208,314 $ 339,243 $ 396,850
=========== =========== =========== ===========
<FN>
(1) Operating profit excludes general corporate expenses, income taxes and net interest other than that related to finance
operations.
</FN>
Net interest expense included in business segment operating profit was as follows:
(Dollars in thousands) Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
----------- ----------- ----------- ---------
Global Mailing.............................. $ 6,177 $ 11,631 $ 14,551 $ 25,123
Enterprise Solutions........................ 306 191 588 416
----------- ----------- ----------- ---------
Total Messaging Solutions................... 6,483 11,822 15,139 25,539
Non-core.................................... 5,346 8,503 11,809 17,715
Core........................................ 1,987 2,088 3,956 4,212
----------- ----------- ----------- ---------
Capital Services............................ 7,333 10,591 15,765 21,927
----------- ----------- ----------- ---------
Total net interest expense for reportable
segments ..................................... 13,816 22,413 30,904 47,466
Net interest (corporate interest expense,
net of intercompany transactions)............. 26,362 22,914 52,555 43,159
----------- ----------- ----------- ---------
Consolidated net interest expense.............. $ 40,178 $ 45,327 $ 83,459 $ 90,625
=========== =========== =========== =========
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 12
Note 8:
- ------
Comprehensive income for the three and six months ended June 30, 2003 and 2002
was as follows:
(Dollars in thousands) Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income........................................ $ 118,896 $ 143,103 $ 232,799 $ 272,620
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments....... 44,476 23,759 86,943 21,865
Net unrealized (losses)/gains on derivative
instruments.................................. (3,214) (2,251) (5,802) 719
----------- ----------- ----------- -----------
Comprehensive income.............................. $ 160,158 $ 164,611 $ 313,940 $ 295,204
=========== =========== =========== ===========
Note 9:
- ------
In January 2003, the company announced that it would undertake restructuring
initiatives related to realigned infrastructure requirements and reduced
manufacturing needs for digital equipment. The company expects that the pre-tax
cost of these restructuring initiatives will be about $160 million ($100 million
after tax) over a two-year period as the various initiatives take effect. See
note 2 to the consolidated financial statements for the company's accounting
policy related to costs associated with exit or disposal activities.
In connection with this plan, the company recorded a pre-tax restructuring
charge of $32.1 million during the second quarter of 2003. For the six months
ended June 30, 2003, pre-tax restructuring charges were $53.4 million. The
pre-tax restructuring charge was composed of:
(Dollars in millions) Three Months Six Months
Ended Ended
June 30, 2003 June 30, 2003
------------- -------------
Severance and benefit costs....................... $ 29.2 $ 47.6
Asset impairments................................. 0.2 0.7
Other exit costs.................................. 2.7 5.1
------------- ------------
Total........................................ $ 32.1 $ 53.4
============= ============
Accrued restructuring charges at June 30, 2003 are composed of the following:
(Dollars in millions)
Total
restructuring Cash Non-cash Ending balance
charges payments charges at June 30, 2003
------------- -------- -------- ----------------
Severance and
benefit costs $ 47.6 $ 17.9 $ - $ 29.7
Asset impairments 0.7 - 0.7 -
Other exit costs 5.1 1.0 - 4.1
------------- -------- -------- ----------------
$ 53.4 $ 18.9 $ 0.7 $ 33.8
============= ======== ======== ================
All restructuring charges, except for the asset impairments, will result in cash
outflows. The severance and benefit costs recorded for the six months ended June
30, 2003 relate to a reduction in workforce of approximately 850 employees
worldwide as of June 30, 2003 and expected future workforce reductions of
approximately 1,000 employees. The workforce reductions relate to actions across
several of the company's businesses resulting from infrastructure and process
improvements and its continuing efforts to streamline operations, and include
managerial, professional, clerical and technical roles. Approximately 73% of the
workforce reductions are in the U.S. The majority of the international workforce
reductions are in Europe and Canada. Asset impairments relate primarily to the
write-off of property, plant and equipment, resulting from the closure or
streamlining of certain facilities. Other exit costs relate primarily to lease
termination costs, non-cancelable lease payments, consolidation of excess
facilities and other costs associated with exiting business activities.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 13
Note 10:
- -------
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 estimated fair values of the major assets
acquired and liabilities assumed at the date of acquisition:
(Dollars in thousands)
Intangible assets.................. $ 42,286
Goodwill........................... 113,247
Other, net......................... 10,967
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.
Consolidated impact of acquisitions
- -----------------------------------
The acquisition of PSI increased the company's 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 acquisition of PSI had occurred on January 1, 2002:
(Dollars in thousands) Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
------------ ------------- ----------- -----------
Total revenue...................... $ 1,133,878 $ 1,101,325 $ 2,224,687 $ 2,170,833
The pro forma consolidated results do not purport to be indicative of results
that would have occurred had the acquisition been completed on January 1, 2002,
nor do they purport to be indicative of the results that will be obtained in the
future. The pro forma earning results of this acquisition was not material to
earnings on either a per share or an aggregate basis.
During 2003 and 2002, the company also completed several smaller acquisitions.
During 2003, the company acquired one of its address printing suppliers and two
of its international dealerships. During 2002, the company acquired the
remaining 43% ownership interest of MailCode Inc., some of its international
dealerships and presort businesses. The cost of these acquisitions was in the
aggregate less than $50 million in each year. These acquisitions did not have a
material impact on the company's financial results either individually or on an
aggregate basis.
Note 11:
- -------
Acquired intangible assets, net of accumulated amortization, are included in
other assets in the Consolidated Balance Sheets and are composed of the
following:
(Dollars in thousands) June 30, 2003 December 31, 2002
--------------------------------- ----------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized intangible assets:
Customer relationships............. $ 141,350 $ 12,799 $ 133,414 $ 7,177
Mailing technology................. 62,953 6,487 38,100 3,645
Trademark and trade names.......... 8,274 3,201 6,900 1,805
Non-compete agreements............. 3,363 1,334 2,986 707
-------------- ------------ -------------- ------------
$ 215,940 $ 23,821 $ 181,400 $ 13,334
============== ============ ============== ============
In May 2003, the company acquired intangible assets associated with its inserter
technology for $17.4 million in cash. The intangible assets will be amortized
over 12 years.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 14
The aggregate intangible asset amortization expense for the three and six months
ended June 30, 2003 was $3.9 million and $7.6 million, respectively. Estimated
intangible amortization expense for 2003 and the five succeeding years is as
follows:
(Dollars in thousands)
For year ending 12/31/03.................... $ 16,294
For year ending 12/31/04.................... $ 17,098
For year ending 12/31/05.................... $ 16,929
For year ending 12/31/06.................... $ 16,272
For year ending 12/31/07.................... $ 14,789
For year ending 12/31/08.................... $ 14,237
Changes in the carrying amount of goodwill by business segment for the six
months ended June 30, 2003 are as follows:
(Dollars in thousands) Global Enterprise
Mailing Solutions Total
--------- ---------- ---------
Balance at January 1, 2003.................. $ 405,291 $ 421,950 $ 827,241
Goodwill acquired during the period......... 37,756 - 37,756
Other....................................... 38,254 8,096 46,350
--------- ---------- ---------
Balance at June 30, 2003.................... $ 481,301 $ 430,046 $ 911,347
========= ========== =========
Other primarily includes the impact of foreign currency translation adjustments.
Note 12:
- -------
In connection with its Capital Services programs, the company has sold finance
receivables and entered into guarantee contracts with varying amounts of
recourse in privately-placed transactions with unrelated third-party investors.
The uncollected principal balance of receivables sold and guarantee contracts
totaled $133.6 million and $183.0 million at June 30, 2003 and December 31,
2002, respectively. In accordance with GAAP, the company does not record these
amounts as liabilities on its Consolidated Balance Sheets.
The company's maximum risk of loss on these finance receivables and guarantee
contracts arises from the possible non-performance of lessees to meet the terms
of their contracts and from changes in the value of the underlying equipment.
These contracts are secured by the underlying equipment value, and supported by
the creditworthiness of its customers. At June 30, 2003 and December 31, 2002,
the underlying equipment value exceeded the sum of the uncollected principal
balance of receivables sold and the guarantee contracts.
In connection with the sale of certain businesses, the company has agreed to
indemnify the buyer for certain losses related to assets acquired by the buyer.
The company's Consolidated Balance Sheets included a liability of approximately
$9 million, at June 30, 2003 and December 31, 2002, respectively, for these
indemnifications, which reflects the company's maximum probable exposure.
The company provides product warranties in conjunction with certain product
sales, generally for a period of 90 days from the date of installation. The
company's product warranty liability reflects management's best estimate of
probable liability under its product warranties based on historical claims
experience, which has not been significant, and other currently available
evidence. Accordingly, the company's product warranty liability at June 30, 2003
and December 31, 2002, respectively, was not material.
Note 13:
- -------
In June 2002, the company 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, the company filed a
protest with the IRS to challenge most of the proposed deficiencies asserted by
the IRS. The company believes that it has meritorious defenses to those
deficiencies and that the ultimate outcome will not result in a material effect
on its 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 affect its future results of
operations, financial position or cash flows. At any time, the company's
provision for taxes could be affected by changes in tax law and interpretations
by governments or courts.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
Results of Continuing Operations - second quarter of 2003 vs.
- -------------------------------------------------------------
second quarter of 2002
- ----------------------
Revenue increased 5 percent in the second quarter of 2003 to $1.13 billion
compared with $1.08 billion in the second quarter of 2002 driven primarily by
the acquisition of PSI and the favorable impact of foreign currency.
Net income decreased to $118.9 million in the second quarter of 2003 compared
with $143.1 million in the second quarter of 2002. Diluted earnings per share
decreased to 50 cents in the second quarter of 2003 from 59 cents in the second
quarter of 2002. During the second quarter of 2003, we took further actions
related to our previously announced restructuring initiatives to support our
long-term growth strategies. Net income for the second quarter of 2003 was
reduced by a pre-tax restructuring charge of $32 million ($21 million net of
tax) or 9 cents per diluted share relating to these actions. As previously
announced, we expect to record approximately $160 million of pre-tax ($100
million net of tax) restructuring charges over the next two years.
Second quarter 2003 revenue included $327.8 million from sales compared with
$327.5 million in the second quarter of 2002 due to strong supplies sales and
the favorable impact of foreign currency partially offset by the impact of
delayed decision-making for upgrades and new equipment purchases at the high end
of our product line; $211.4 million from rentals, up 4 percent from $203.9
million due to the favorable impact of foreign currency and strong placements of
our standalone meters in the U.S. and new digital meters in the U.S. and France;
$135.9 million from core financing, up 4 percent from $130.3 million; $26.6
million from non-core financing, down 25 percent from $35.3 million due to our
previously announced decision to cease originating large-ticket, structured,
third-party financing of non-core assets; $279.3 million from business services,
up 16 percent from $241.2 million due primarily to our acquisition of PSI and
the favorable impact of foreign currency; and $152.8 million from support
services, up 7 percent from $143.2 million due primarily to an increased service
contract base and the favorable impact of foreign currency.
Our Global Mailing segment includes worldwide revenue and related expenses from
the rental of postage meters and the sale, rental and financing of mailing
equipment, including mail finishing, software-based mail creation equipment, and
production mail equipment in our non-U.S. businesses. We also include in this
segment software-based shipping, transportation and logistics systems, related
supplies and services, presort mail services, postal payment and supply chain
solutions such as order management and fulfillment support. During the second
quarter of 2003, Global Mailing revenue increased 7 percent and operating profit
increased 5 percent. Revenue growth was driven by the acquisition of PSI and the
favorable impact of foreign currency, which more than offset the negative impact
of some delayed decision-making for upgrades and new equipment purchases at the
high end of the product line as a result of business and economic uncertainty.
Operating profit was favorably impacted by foreign currency and lower interest
expense, partially offset by higher research and development costs attributable
to spending for the next generation of low-end digital meters and incremental
costs to integrate new PSI Group processing sites. Non-U.S. revenue grew at a
double-digit rate as a result primarily of the favorable impact of foreign
currency. On a local currency basis, Canada again had good revenue and operating
profit growth driven by placements of new digital meter systems and high-end
production mailing systems. France also experienced another quarter of strong
revenue and operating profit growth on a local currency basis due to the
integration and success of the Secap organization. Some European countries
experienced declining revenue on a local currency basis due to weak economic
conditions. Japan and Australia also experienced declining revenue on a local
currency basis.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 16
Our Enterprise Solutions segment includes Pitney Bowes Management Services
(PBMS) and Document Messaging Technologies (DMT). PBMS includes revenue and
related expenses from facilities management contracts for advanced mailing,
secure mail services, reprographic, document management and other value-added
services to large enterprises. DMT includes revenue and related expenses from
the sale, service and financing of high speed, software-enabled production mail
systems, sorting equipment, incoming mail systems, electronic statement, billing
and payment solutions, and mailing software. During the second quarter of 2003,
revenue grew 4 percent while operating profit declined 27 percent. PBMS revenue
grew 5 percent to $252 million compared with the prior year, while operating
profit declined 26 percent. Contraction in the telecommunications, financial
services and transaction-based legal services industries had an adverse impact
on PBMS's revenue growth and operating profit margins. However, PBMS improved
its operating profit margin during the second quarter of 2003 compared with the
first quarter of 2003. PBMS continues to remain focused on diversifying its
customer base and providing higher value services to its existing customers,
while enacting cost reduction and containment measures to address margin
pressures. DMT revenue increased 1 percent to $58 million while operating profit
declined 32 percent compared with the prior year. However, compared with the
first quarter of 2003, operating profit margins improved and customer demand for
DMT solutions appears to be improving. DMT continued to be adversely impacted by
reduced capital spending by businesses resulting in slower placements of high
margin equipment and an increase in lower margin service revenue.
Total Messaging Solutions, the combined results of the Global Mailing segment
and Enterprise Solutions segment, reported 6 percent revenue growth and 2
percent operating profit growth.
Our Capital Services segment consists of external financing of third-party
equipment. It comprises primarily asset- and fee-based income generated by
financing or arranging transactions of critical large-ticket customer assets.
During the second quarter of 2003, revenue decreased 17 percent and operating
profit decreased 11 percent, consistent with our previously announced decision
to cease originating large-ticket, structured, third-party financing of non-core
assets. Operating profit was favorably impacted by lower interest expense
compared to the prior year. Core revenue increased 11 percent in the second
quarter and operating profit increased 45 percent. Non-core revenue decreased 25
percent in the second quarter and operating profit decreased 24 percent. During
the second quarter of 2003, we liquidated approximately $71 million of our
assets held for sale, and continued to pursue the sale of other non-core lease
assets on an economically advantageous basis, which resulted in the sale of an
additional $52 million of assets from the portfolio. The proceeds from these
sales approximated our net investment at that time.
Cost of sales increased to 45.0 percent of sales revenue in the second quarter
of 2003 compared with 44.6 percent in the second quarter of 2002. The increase
was mainly driven by the increase in mix of lower margin international revenue
and the initial costs associated with the transition to outsourcing of parts for
digital equipment.
Cost of rentals decreased to 20.7 percent of rentals revenue in the second
quarter of 2003 compared with 21.2 percent in the second quarter of 2002 due
primarily to lower depreciation costs associated with standalone meters and
lower repair costs resulting from the shift from electronic to digital meters.
Cost of core financing decreased to 27.1 percent of related revenue in the
second quarter of 2003 compared with 27.8 percent in the second quarter of 2002
due to cost reduction initiatives in our financial services business.
Cost of non-core financing increased to 33.7 percent of related revenue in the
second quarter of 2003 compared with 30.3 percent in the second quarter of 2002
due to our decision to cease originating large-ticket, structured, third-party
financing of non-core assets and sell non-core lease assets on an economically
advantageous basis.
Cost of business services increased to 82.2 percent of related revenue in the
second quarter of 2003 compared with 80.3 percent in the second quarter of 2002
due to initial lower margins, higher start-up costs and delayed implementation
associated with new accounts, and the loss of higher margin business with
long-term customers as they continue to downsize.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 17
Cost of support services increased to 52.9 percent of related revenue in the
second quarter of 2003 compared with 51.1 percent in the second quarter of 2002
partly due to the increase in the mix of lower margin international support
services revenue.
Selling, general and administrative expenses were 26.6 percent of revenue in the
second quarter of 2003 compared with 26.7 percent in the second quarter of 2002
reflecting our emphasis on controlling operating expenses, partially offset by
our continuing investment in infrastructure improvements and the effects of
foreign currency.
Research and development expenses increased 8 percent to $39.0 million in the
second quarter of 2003 compared with $36.1 million in the second quarter of
2002. The increase reflects our continued commitment to develop new technologies
and enhanced mailing and software products.
Net interest expense decreased to $40.2 million in the second quarter of 2003
from $45.3 million in the second quarter of 2002. The decrease was due to lower
average interest rates during 2003 compared to 2002 associated with borrowings
to fund our investment in leasing and rental products, acquisitions, dividends
and the stock repurchase program.
The effective tax rate was 31.3 percent for the second quarter of 2003 and 2002.
The effective tax rate for the second quarter of 2003 includes a .7 percent tax
benefit from the restructuring charge recorded in the second quarter of 2003.
Our effective tax rate was negatively impacted by our strategy to cease
originating large-ticket, structured, third-party financing of non-core assets.
Results of Continuing Operations - six months of 2003 vs. six months of 2002
- ----------------------------------------------------------------------------
For the first six months of 2003 compared with the same period of 2002, revenue
increased 4 percent to $2.22 billion, and net income decreased 15 percent to
$232.8 million. Net income for the first six months of 2003 was reduced by a
pre-tax restructuring charge of $53 million ($34 million net of tax) or 14 cents
per diluted share. The factors that affected revenue and operating profit for
the six months ended June 30, 2003 compared with the same period of 2002
included those cited for the second quarter of 2003 versus 2002.
Accounting Pronouncements
- -------------------------
In 2001, Statement of Financial Accounting Standards (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 have been 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 have not
been amortized into results of operations, but instead will be 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. On January 1,
2002, we adopted the provisions of each statement, which apply to goodwill and
intangible assets acquired prior to June 30, 2001. The adoption of these
standards reduced the annual amortization of intangible assets commencing
January 1, 2002 by approximately 2 cents per diluted share. Goodwill is 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. The adoption of this statement
did not impact our financial position, results of operations or cash flows.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 18
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 No. 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 No. 30, to report discontinued operations separately from continuing
operations and extends that reporting to separate components of an entity. FAS
No. 144 is effective January 1, 2002. The adoption of this statement did not
impact our financial position, results of operations or cash flows.
In 2002, FAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," 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. FAS No. 145 is effective January 1, 2003. The adoption of
this statement did not impact our financial position, results of operations or
cash flows.
In 2002, FAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued. This statement nullifies the Financial Accounting
Standards Board's Emerging Issues Task Force (EITF) 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 one-time benefit arrangements and exit or disposal activities
initiated after December 31, 2002. We account for ongoing benefit arrangements
under FAS No. 112 "Employers' Accounting for Postemployment Benefits", which
requires that a liability be recognized when the costs are probable and
estimable. See Note 9 to the consolidated financial statements.
In 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN
No. 45 clarifies the requirements of FAS No. 5, "Accounting for Contingencies,"
relating to a guarantor's accounting for and disclosure of, the issuance of
certain types of guarantees. FIN No. 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair value,
or market value, of the obligations it assumes under the guarantee and must
disclose that information in its interim and annual financial statements. The
provisions related to recognizing a liability at inception of the guarantee for
the fair value of the guarantor's obligations does not apply to product
warranties or to guarantees accounted for as derivatives. The recognition
provisions of FIN No. 45 are effective January 1, 2003. The adoption of this
interpretation did not impact our financial position, results of operations or
cash flows. See Note 12 to the consolidated financial statements.
In 2002, FAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," which amends FAS No. 123, "Accounting for Stock-Based
Compensation," was issued. FAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation and requires more prominent and more
frequent disclosures in the financial statements of the effects of stock-based
compensation. FAS No. 148 is effective January 1, 2003. We adopted the
disclosure-only provisions of this statement. See Note 2 to the consolidated
financial statements.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 19
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." FIN No. 46 requires a variable interest entity to be consolidated by
a company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of FIN No. 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to pre-existing entities in the first
fiscal year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued after January
31, 2003, regardless of when the variable interest entity was established.
Effective July 1, 2003, we will consolidate our equity investment in PBG Capital
Partners LLC (PBG). At June 30, 2003, PBG's total assets and liabilities were
$341 million and $212 million, respectively. The consolidation of PBG will not
have a material impact on our results of operations or cash flows.
In March 2003, the EITF reached a consensus on Issue No. 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables." EITF No. 00-21 addresses
certain aspects of the accounting by a vendor for arrangements under which it
performs multiple revenue generating activities and how to determine whether
such an arrangement involving multiple deliverables contains more than one unit
of accounting for purposes of revenue recognition. The guidance for EITF No.
00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. Accordingly, we will adopt EITF No. 00-21 on July
1, 2003. The transition provision allows either prospective application or a
cumulative effect adjustment upon adoption. We believe we are in compliance with
the provisions of EITF No. 00-21.
In April 2003, FAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued. FAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under FAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The provisions of FAS No. 149 are generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. We do not expect that the adoption of these
provisions will have a material impact on our financial position, results of
operations or cash flows.
In May 2003, FAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" was issued. FAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. The
provisions of FAS No. 150 are effective for financial instruments entered into
or modified after May 31, 2003, and are effective July 1, 2003. The adoption of
this statement will not impact our financial position, results of operations or
cash flows.
Restructuring Charges
- ---------------------
In January 2003, we announced that we would undertake restructuring initiatives
related to realigned infrastructure requirements and reduced manufacturing needs
for digital equipment. We expect that the pre-tax cost of these restructuring
initiatives will be about $160 million ($100 million net of tax) over a two-year
period as the various initiatives take effect. The cash outflows related to
restructuring charges will be funded primarily by cash from operating
activities. The restructuring charges are expected to increase our operating
efficiency and effectiveness in 2003 and beyond while enhancing growth,
primarily as a result of reduced personnel related expenses. See note 2 to the
consolidated financial statements for our accounting policy related to costs
associated with exit or disposal activities.
In connection with this plan, we recorded a pre-tax restructuring charge of
$32.1 million during the second quarter of 2003. For the six months ended June
30, 2003, pre-tax restructuring charges were $53.4 million.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 20
The pre-tax restructuring charge was composed of:
(Dollars in millions) Three Months Six Months
Ended Ended
June 30, 2003 June 30, 2003
------------- -------------
Severance and benefit costs............... $ 29.2 $ 47.6
Asset impairments......................... 0.2 0.7
Other exit costs.......................... 2.7 5.1
-------------- -------------
Total ............................ $ 32.1 $ 53.4
============== =============
Accrued restructuring charges at June 30, 2003 are composed of the following:
(Dollars in millions)
Total
restructuring Cash Non-cash Ending balance
charges payments charges at June 30, 2003
------------- -------- -------- ----------------
Severance and
benefit costs $ 47.6 $ 17.9 $ - $ 29.7
Asset impairments 0.7 - 0.7 -
Other exit costs 5.1 1.0 - 4.1
------------- -------- -------- ----------------
$ 53.4 $ 18.9 $ 0.7 $ 33.8
============= ======== ======== ================
All restructuring charges, except for the asset impairments, will result in cash
outflows. The severance and benefit costs recorded for the six months ended June
30, 2003 relate to a reduction in workforce of approximately 850 employees
worldwide as of June 30, 2003 and expected future workforce reductions of
approximately 1,000 employees. 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 73% of the workforce
reductions are in the U.S. The majority of the international workforce
reductions are in Europe and Canada. Asset impairments relate primarily to the
write-off of property, plant and equipment, resulting from the closure or
streamlining of certain facilities. Other exit costs relate primarily to lease
termination costs, non-cancelable lease payments, consolidation of excess
facilities and other costs associated with exiting business activities.
Acquisitions
- ------------
In August 2002, we completed the acquisition of PSI, the nation's largest mail
presort 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.
We accounted for the acquisition of PSI under the purchase method and
accordingly, the operating results of PSI have been included in our consolidated
financial statements since the date of acquisition. The acquisition of PSI did
not materially affect net income for the three and six months ended June 30,
2003 and 2002, respectively.
During 2003 and 2002, we also completed several smaller acquisitions. During
2003, we acquired one of our address printing suppliers and two of our
international dealerships. During 2002, we acquired the remaining 43% ownership
interest of MailCode Inc., some of our international dealerships and presort
businesses. The cost of these acquisitions was in the aggregate less than $50
million in each year. These acquisitions did not have a material impact on our
financial results either individually or on an aggregate basis.
Liquidity and Capital Resources
- -------------------------------
Our ratio of current assets to current liabilities increased to 1.06 to 1 at
June 30, 2003 compared with .76 to 1 at December 31, 2002. The increase in this
ratio was due primarily to the $1.1 billion decrease in notes payable and
current portion of long-term obligations as a result of the exchange of
short-term debt for long-term debt during the six months ended June 30, 2003.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 21
Our cash and cash equivalents increased to $358.2 million at June 30, 2003, from
$315.2 million at December 31, 2002. The increase resulted from $425.8 million
provided by operating activities, offset in part by $2.0 million and $390.0
million used in investing and financing activities, respectively. Net cash of
$425.8 million provided by operating activities consisted primarily of net
income adjusted for non-cash items and changes in working capital. Net cash of
$2.0 million used in investing activities consisted primarily of investments in
fixed assets and other investing activities, partially offset by cash generated
from asset sales at capital services. Other investing activities included the
acquisitions of one of our address printing suppliers and two of our
international dealerships. Net cash of $390.0 million used in financing
activities consisted primarily of a net decrease in total debt, stock
repurchases and dividends paid to stockholders.
The ratio of total debt to total debt and stockholders' equity was 79.8% and
82.3% at June 30, 2003 and December 31, 2002, respectively. Including the
preferred stockholders' equity in a subsidiary company as debt, the ratio of
total debt to total debt and stockholders' equity was 81.0% and 83.4% at June
30, 2003 and December 31, 2002, respectively. The decrease in this ratio was
driven by favorable foreign currency translation adjustments and a net reduction
of total debt for the six months ended June 30, 2003.
We generated $287 million of free cash flow (defined as net cash provided by
operating activities less net investment in fixed assets) for the six months
ended June 30, 2003. Free cash flow for the six months ended June 30, 2003 was
reduced by approximately $24 million of payments associated with restructuring
initiatives. Free cash flow is not presented as an alternative measure of
operating results or cash flow from operations, as determined in accordance with
GAAP, but is presented because we believe it is a widely accepted indicator of
our ability to incur and service debt.
The following table reconciles the reported consolidated results to adjusted
results for the six months ended June 30, 2003:
(Dollars in thousands) Six months ended
June 30, 2003
----------------
GAAP net cash provided by operating activities, as reported......... $ 425,836
Net investment in fixed assets................................... (138,355)
----------------
Free cash flow...................................................... $ 287,481
================
Financings and Capitalization
- -----------------------------
At June 30, 2003, $456 million 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. In April
2003, as part of this shelf registration statement, we established a medium-term
note program for the issuance of up to $1.4 billion in aggregate principal,
representing the remaining amount available on the shelf at that time.
In June 2003, we issued $375 million of unsecured fixed rate notes maturing in
June 2013. These notes bear interest at an annual rate of 3.875% and pay
interest semi-annually beginning December 2003. The proceeds from these notes
were used for general corporate purposes, including the repayment of commercial
paper and the repurchase of company stock.
In June 2003, we issued $200 million of unsecured floating rate notes maturing
in June 2005. These notes bear interest at a floating rate of LIBOR minus 3
basis points, set two business days preceding the quarterly interest payment
dates. The proceeds from these notes were used for general corporate purposes,
including the repayment of commercial paper and the repurchase of company stock.
In April 2003, we issued $350 million of unsecured fixed rate notes maturing in
May 2018. These notes bear interest at an annual rate of 4.75% and pay interest
semi-annually beginning November 2003. In connection with this issuance, we
entered into a $350 million swap maturing in May 2018, converting this
obligation to a floating rate note. The proceeds from these notes were used for
general corporate purposes, including the repayment of commercial paper and the
repurchase of company stock.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 22
In February 2003, we sold 6.45% Preferred Stock in a subsidiary of Pitney Bowes
Credit Corporation (PBCC) to an outside institutional investor for approximately
A$191 million ($110 million). As part of this transaction, we agreed to
repurchase the stock in 10 years. Additionally, we entered into a cross currency
interest rate swap with the same institutional investor, effectively converting
the obligation to a $110 million note that bears interest at a floating rate of
approximately LIBOR minus 50 basis points. This note was recorded as long-term
debt in our Consolidated Balance Sheets. The proceeds from this transaction were
used for general corporate purposes, including the repayment of commercial paper
and the repurchase of company stock.
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
used for general corporate purposes, including the repayment of commercial paper
in anticipation of 2003 debt maturities.
In February 2002, we completed an offering of 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 net
investments held by the company. The proceeds from these notes were used for
general corporate purposes, including the repayment of commercial paper, the
financing of acquisitions and the repurchase of company stock.
We believe that our financing needs for the next 12 months can be met with cash
generated internally, money from existing credit agreements, debt issued under
new and existing shelf registration statements and existing commercial paper and
medium-term note programs.
Capital Investments
- -------------------
In the first six months of 2003, net investments in fixed assets included $82.4
million in net additions to property, plant and equipment and $56.0 million in
net additions to rental equipment and related inventories compared with $65.1
million and $31.8 million, respectively, in the same period in 2002. These
additions include expenditures for plant and manufacturing equipment and
infrastructure improvements as well as increased investments associated with new
accounts at PBMS. In the case of rental equipment, the additions included the
production of postage meters. The increase in our investment in fixed assets
over the prior year was driven by our continued investments in infrastructure
improvements, digital equipment for PBMS sites and new digital meters.
We expect net investments in fixed assets for the remainder of 2003 to continue
to be higher than the prior year. These investments will also be affected by the
timing of our customers' transition to digital meters. At June 30, 2003,
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 passenger and cargo aircraft leasing transactions
- --------------------------------------------------------------------------
At June 30, 2003, our net investment in commercial passenger and cargo aircraft
leasing transactions was $303.9 million, which is composed of transactions with
U.S. and foreign airlines of $45.9 million and $258.0 million, respectively.
This portfolio is diversified across 12 airlines and 29 aircraft and is financed
through investments in leveraged lease transactions, direct financing lease
transactions and through our equity investment in PBG. 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 41 percent of our remaining net investment in
commercial passenger and cargo aircraft leasing investments is further secured
by approximately $123.4 million of equity defeasance accounts or third-party
credit arrangements.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 23
At June 30, 2003, our net investment in commercial passenger and cargo aircraft
leasing transactions was composed of the following:
(Dollars in thousands)
% of total Net investment
Aircraft investment June 30, 2003
-------- ---------- --------------
Airline
U.S.
- ---
United and subsidiary 5 5.2 $ 15,804
Delta 5 12.4 37,574
America West 1 6.9 20,934
American 6 0.9 2,652
Southwest 2 3.1 9,421
Northwest 1 1.4 4,158
Alaska 1 0.4 1,095
Federal Express 1 6.9 21,029
Credit loss reserves (66,740)
-------- ---------- --------------
22 15.1 45,927
-------- ---------- --------------
Foreign
- -------
KLM 2 35.5 107,867
Qantas 2 21.7 66,074
Japan 2 16.6 50,539
Air France 1 11.0 33,472
-------- ---------- --------------
7 84.9 257,952
-------- ---------- --------------
29 100.0 $ 303,879
======== ========== ==============
During the second quarter of 2003, Lufthansa exercised its early buy-out option.
We received approximately $22 million from this transaction, reflecting the net
investment at that time.
Capital Services portfolio
- --------------------------
Our investment in Capital Services lease related assets included in our
Consolidated Balance Sheets was composed of the following:
(Dollars in millions)
June 30, 2003
-------------
Leveraged leases.................................. $ 1,543
Finance receivables............................... 532
Other assets...................................... 57
Rental equipment.................................. 20
-------------
Total............................................. $ 2,152
=============
The $1.5 billion investment in leveraged leases on our Consolidated Balance
Sheets is diversified across the following types of assets:
o $331 million related to locomotives and railcars
o $325 million for postal equipment with international postal authorities
o $292 million related to commercial real estate facilities
o $279 million related to commercial passenger and cargo aircraft
o $136 million for telecommunications equipment
o $132 million for rail and bus facilities
o $48 million for shipping and handling equipment
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 24
Our leveraged lease investment in telecommunications equipment represents leases
to three highly rated international telecommunication entities. Approximately 86
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 $86
million related to leases of corporate facilities to four U.S. telecommunication
entities, of which $71 million is with lessees that are highly rated.
Overall, approximately 50 percent of our $1.5 billion leveraged lease portfolio
is further secured by equity defeasance accounts or other third-party credit
arrangements. In addition, approximately 19 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.
Finance receivables are composed of the following:
(Dollars in millions)
June 30, 2003
-------------
Assets held for sale.............. $ 95
Single investor leases:
Non-core......................... 179
Core............................. 258
-------------
Total............................. $ 532
=============
In the second quarter 2003, we liquidated approximately $123 million of non-core
assets, including $71 million of our assets held for sale, and continued to
pursue the sale of other non-core lease assets on an economically advantageous
basis, which resulted in the sale of an additional $52 million of assets from
the portfolio. For the six months ended June 30, 2003, we liquidated
approximately $203 million of non-core assets, including $100 million of our
assets held for sale and $103 million of our other non-core lease assets. As
previously disclosed, we expect to phase out the majority of our assets held for
sale portfolio by the end of 2003. Our Consolidated Statements of Income include
financing revenue of $2.0 million and $10.0 million for the three months ended
June 30, 2003 and 2002, respectively, and $3.5 million and $16.3 million for the
six months ended June 30, 2003 and 2002, respectively, attributable to our
assets held for sale portfolio. The proceeds from these sales approximated our
net investment at that time.
Other assets represent our 50% equity interest in PBG. We formed PBG with 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. See note 2 to the consolidated financial statements.
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 30, 2004. These meters must be off the market by
December 31, 2008.
We adopted a formal meter transition plan in the second quarter of 2001 to
transition to the next generation of networked mailing technology.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 25
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 December 31, 2001, 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 affect our future results of operations, financial position or
cash flows. At any time, our provision for taxes could be affected by changes in
tax law and interpretations by governments or courts.
Forward-Looking Statements
- --------------------------
We want to caution readers that any forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 in this Form 10-Q, other reports or press
releases or made by our management involve risks and uncertainties which may
change based on various important factors. 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 our behalf 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 passenger and cargo 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
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
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 26
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 and disposal of assets in
Capital Services segment
o continuing developments in the U.S. and foreign airline industry
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, 2002 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 the Securities Exchange Act of 1934 ("Exchange Act") Rules 13a-15(e)
and 15d-15(e)) as of the end of the period covered by this quarterly report,
have concluded that our disclosure controls and procedures are effective based
on their evaluation of these controls and procedures required by paragraph (b)
of Exchange Act Rules 13a-15 or 15d-15.
(b) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of
Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Part II - Other Information
---------------------------
Item 1: Legal Proceedings
In the ordinary course of normal business, we are routinely defendants in or
parties to a number of pending and threatened legal actions including
proceedings purportedly brought on behalf of classes of claimants. These may
involve litigation by or against us relating to, among other things:
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
Included among these cases are two patent actions, one with Stamps.com and one
with Ricoh Company, Ltd. in which allegations of infringement have been made
against our DM SeriesTM of products. In addition we are defendants in several
actions relating to a program PBCC offers to some of its leasing customers to
replace the leased equipment if it is lost, stolen or destroyed. Of the current
actions, four are purportedly brought on behalf of state-based classes of
customers and the others are brought on behalf of individual customers. No court
has ruled on whether or not the cases may proceed on a class basis. We have
previously prevailed at the summary judgment stage in two similar litigations,
including one federal court decision affirmed by the United States Court of
Appeals for the Fifth Circuit.
In those cases where we are the defendant, plaintiffs may seek to recover large
and sometimes unspecified amounts of damages or other types of relief and some
matters may remain unresolved for several years. Although we cannot predict the
outcome of such matters, based on current knowledge, management does not believe
that the ultimate outcome of the litigations referred to in this section will
have a material adverse effect on our financial position, results of operations
or cash flows. However, if the plaintiffs do prevail, the result may have a
material effect on our financial position, future results of operations or cash
flows, including, for example, our ability to offer certain types of goods or
services in the future.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
Page 27
Item 4: Submission of Matters to a Vote of Security Holders
Below are the final results of the voting at the annual meeting of stockholders
held on May 12, 2003:
Proposal 1 - Election of Directors
Nominee For Withheld
------------------ ----------- ----------
Colin G. Campbell 202,567,242 5,983,266
Jessica P. Einhorn 202,625,501 5,925,007
James H. Keyes 197,826,090 10,724,418
David L. Shedlarz 197,990,617 10,559,891
Proposal 2 - Ratification of Independent Accountants for 2003
For Against Abstain
----------- ----------- ---------
194,335,925 12,674,349 1,540,234
Proposal 3 - Stockholder Proposal relating to the Stockholder Rights Plan
For Against Abstain
----------- ----------- ---------
113,985,903 65,963,064 3,203,764
The following other directors continued their term of office after the annual
meeting:
Linda G. Alvarado John S. McFarlane
Michael J. Critelli Eduardo R. Menasce
Ernie Green Michael I. Roth
Herbert L. Henkel Robert E. Weissman
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Reg. S-K
Exhibits Description
-------- ------------------------------------------------------------
(10) Amendment to Pitney Bowes Inc. Directors' Stock Plan
(12) Computation of ratio of earnings to fixed charges
(31.1) Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(31.2) Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(32.1) Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(32.2) Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On April 17, 2003, the company filed a current report on Form 8-K
pursuant to Item 5 thereof, reporting the Press Release dated April 17,
2003 for the quarter ended March 31, 2003.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2003
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.
August 11, 2003
/s/ B. P. Nolop
-----------------------------
B. P. Nolop
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ J. R. Catapano
------------------------------
J. R. Catapano
Controller
(Principal Accounting Officer)
Exhibit Index
-------------
Reg. S-K
Exhibits Description
-------- ----------------------------------------------------------
(10) Amendment to Pitney Bowes Inc. Directors' Stock Plan
(12) Computation of ratio of earnings to fixed charges
(31.1) Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(31.2) Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(32.1) Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(32.2) Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002