UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended September 30, 2004
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
1 Elmcroft Road
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 (or for such shorter period that the registrant was
required to file such reports), 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 October 22,
2004 was 230,619,759.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
Page 2
Pitney Bowes Inc.
Index
-----------------
Page Number
-----------
Part I - Financial Information:
Item 1: Financial Statements
Consolidated Statements of Income (Unaudited) - Three and
Nine Months Ended September 30, 2004 and 2003................. 3
Consolidated Balance Sheets - September 30, 2004 (Unaudited)
and December 31, 2003......................................... 4
Consolidated Statements of Cash Flows (Unaudited) - Nine
Months Ended September 30, 2004 and 2003...................... 5
Notes to Consolidated Financial Statements........................ 6 - 15
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 16 - 23
Item 3: Quantitative and Qualitative Disclosures about
Market Risk............................................... 23
Item 4: Controls and Procedures..................................... 23
Part II - Other Information:
Item 1: Legal Proceedings........................................... 23 - 24
Item 2: Unregistered Sales of Equity Securities
and Use of Proceeds....................................... 24
Item 6: Exhibits.................................................... 24
Signatures ........................................................... 25
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
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 Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2004 2003 2004 2003
------------- ------------- ------------- ------------
Revenue from:
Sales....................................... $ 346,397 $ 322,123 $ 1,016,199 $ 940,777
Rentals..................................... 199,768 196,442 601,841 586,423
Business services........................... 316,462 275,809 924,743 827,729
Support services............................ 177,480 159,329 497,925 461,041
Core financing.............................. 158,181 152,134 475,197 456,691
Non-core financing.......................... 19,234 31,312 79,440 89,175
------------- ------------- ------------- ------------
Total revenue........................... 1,217,522 1,137,149 3,595,345 3,361,836
------------- ------------- ------------- ------------
Costs and expenses:
Cost of sales............................... 152,255 143,792 463,548 431,268
Cost of rentals............................. 39,193 42,459 123,970 127,567
Cost of business services................... 262,843 227,821 761,425 680,143
Cost of support services.................... 89,923 82,701 260,660 241,863
Cost of non-core financing.................. - - 13,017 -
Selling, general and administrative......... 372,424 349,368 1,099,474 1,039,170
Research and development.................... 42,629 35,004 117,563 109,763
Restructuring charges (Note 9).............. 15,582 43,109 46,854 96,465
Interest, net............................... 42,035 41,101 124,227 124,560
------------- ------------- ------------- ------------
Total costs and expenses................ 1,016,884 965,355 3,010,738 2,850,799
------------- ------------- ------------- ------------
Income before income taxes..................... 200,638 171,794 584,607 511,037
Provision for income taxes..................... 64,122 53,340 186,779 159,784
------------- ------------- ------------- ------------
Net income..................................... $ 136,516 $ 118,454 $ 397,828 $ 351,253
============= ============= ============= ============
Basic earnings per share....................... $ .59 $ .51 $ 1.72 $ 1.50
============= ============= ============= ============
Diluted earnings per share..................... $ .58 $ .50 $ 1.70 $ 1.49
============= ============= ============= ============
Dividends declared per share of common stock... $ .305 $ .30 $ .915 $ .90
============= ============= ============= ============
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
Page 4
Pitney Bowes Inc.
Consolidated Balance Sheets
---------------------------
September 30, December 31,
(Dollars in thousands, except share data) 2004 2003
--------------- ---------------
(Unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents................................ $ 346,522 $ 293,812
Short-term investments, at cost which
approximates market.................................. 3,758 28
Accounts receivable, less allowances:
9/04, $37,632; 12/03, $39,778........................ 495,414 459,106
Finance receivables, less allowances:
9/04, $69,382; 12/03, $62,269........................ 1,355,727 1,358,691
Inventories (Note 3)..................................... 214,396 209,527
Other current assets and prepayments..................... 199,912 192,011
--------------- ----------------
Total current assets................................. 2,615,729 2,513,175
Property, plant and equipment, net (Note 4)................... 680,048 653,661
Rental equipment and related inventories, net (Note 4)........ 458,604 414,341
Property leased under capital leases, net (Note 4)............ 2,243 2,230
Long-term finance receivables, less allowances:
9/04, $105,089; 12/03, $78,915........................... 1,794,556 1,654,419
Investment in leveraged leases................................ 1,554,844 1,534,864
Goodwill (Note 11)............................................ 1,298,944 956,284
Intangible assets, net (Note 11).............................. 289,776 203,606
Other assets.................................................. 850,267 958,808
--------------- ---------------
Total assets.................................................. $ 9,545,011 $ 8,891,388
=============== ===============
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities................. $ 1,320,799 $ 1,392,597
Income taxes payable..................................... 205,363 154,799
Notes payable and current portion of
long-term obligations................................ 1,097,551 728,658
Advance billings......................................... 404,012 370,915
--------------- ---------------
Total current liabilities............................ 3,027,725 2,646,969
Deferred taxes on income...................................... 1,760,054 1,659,226
Long-term debt (Note 5)....................................... 2,823,286 2,840,943
Other noncurrent liabilities.................................. 405,784 346,888
--------------- ---------------
Total liabilities.................................... 8,016,849 7,494,026
--------------- ---------------
Preferred stockholders' equity in a subsidiary company........ 310,000 310,000
Stockholders' equity:
Cumulative preferred stock, $50 par
value, 4% convertible................................ 19 19
Cumulative preference stock, no par
value, $2.12 convertible............................. 1,255 1,315
Common stock, $1 par value............................... 323,338 323,338
Retained earnings........................................ 4,223,052 4,057,654
Accumulated other comprehensive income (Note 8).......... 72,674 18,063
Treasury stock, at cost.................................. (3,402,176) (3,313,027)
--------------- ---------------
Total stockholders' equity........................... 1,218,162 1,087,362
--------------- ---------------
Total liabilities and stockholders' equity.................... $ 9,545,011 $ 8,891,388
=============== ===============
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
Page 5
Pitney Bowes Inc.
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
(Dollars in thousands) Nine Months Ended September 30,
----------------------------------
2004 2003
--------------- ---------------
Cash flows from operating activities:
Net income.................................................... $ 397,828 $ 351,253
Nonrecurring charges, net..................................... 29,991 61,738
Nonrecurring payments......................................... (44,848) (41,754)
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization............................ 225,737 212,883
Increase in deferred taxes on income..................... 104,200 60,749
Change in assets and liabilities, net
of effects of acquisitions:
Accounts receivable.................................. (519) (4,085)
Net investment in internal finance receivables....... 10,656 (1,105)
Inventories.......................................... (621) (7,838)
Other current assets and prepayments................. (4,192) (11,366)
Accounts payable and accrued liabilities............. (31,418) (26,428)
Income taxes payable................................. 53,574 89,324
Advanced billings.................................... (2,392) 3,311
Other, net........................................... (10,178) (10,839)
--------------- ---------------
Net cash provided by operating activities............ 727,818 675,843
--------------- ---------------
Cash flows from investing activities:
Short-term investments........................................ (1,711) (1,781)
Capital expenditures.......................................... (226,225) (214,138)
Net investment in capital services............................ 76,650 208,455
Investment in leveraged leases................................ (31,938) 78,800
Reserve account deposits...................................... 23,115 32,139
Acquisitions, net of cash acquired............................ (358,361) -
Other investing activities.................................... (21,049) (70,713)
--------------- ---------------
Net cash (used in) provided by investing activities.. (539,519) 32,762
--------------- ---------------
Cash flows from financing activities:
Increase (decrease) in notes payable, net..................... 139,610 (598,651)
Proceeds from long-term obligations........................... 348,869 1,025,985
Principal payments on long-term obligations................... (328,961) (860,016)
Proceeds from issuance of stock............................... 51,591 39,836
Stock repurchases............................................. (175,004) (140,016)
Dividends paid................................................ (211,903) (210,974)
--------------- ---------------
Net cash used in financing activities................ (175,798) (743,836)
--------------- ---------------
Effect of exchange rate changes on cash........................... 3,589 5,329
--------------- ---------------
Increase (decrease) in cash and cash equivalents.................. 16,090 (29,902)
Cash from consolidation of PBG Capital Partners LLC............... 36,620 -
Cash and cash equivalents at beginning of period.................. 293,812 315,156
--------------- ---------------
Cash and cash equivalents at end of period........................ $ 346,522 $ 285,254
=============== ===============
Interest paid..................................................... $ 130,921 $ 144,634
=============== ===============
Income taxes paid, net............................................ $ 56,578 $ 39,910
=============== ===============
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
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 accounting principles generally accepted
in the United States of America (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 September 30, 2004 and December 31,
2003, the results of its operations for the three and nine months ended
September 30, 2004 and 2003 and its cash flows for the nine months ended
September 30, 2004 and 2003 have been included. Operating results for the three
and nine months ended September 30, 2004 are not necessarily indicative of the
results that may be expected for any other interim period or the year ending
December 31, 2004. These statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included in the
company's 2003 Annual Report to Stockholders on Form 10-K. Certain prior year
amounts in the consolidated financial statements have been reclassified to
conform to the current year presentation.
Note 2:
- -------
In December 2002, Statement of Financial Accounting Standards (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 was effective
January 1, 2003 for the company. The company adopted the disclosure-only
provisions of this statement.
The company applies Accounting Principles Board (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 nine months ended
September 30, 2004 and 2003 would have been reduced to the following pro forma
amounts:
(Dollars in thousands, except per share data) Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net Income
As reported.......................................... $ 136,516 $ 118,454 $ 397,828 $ 351,253
Deduct: Stock-based employee compensation
expense determined under fair value method for
all awards, net of related tax effects............... (4,440) (5,317) (13,033) (15,330)
------------- ------------- ------------- -------------
Pro forma............................................ $ 132,076 $ 113,137 $ 384,795 $ 335,923
============= ============= ============= =============
Basic earnings per share
As reported.......................................... $ .59 $ .51 $ 1.72 $ 1.50
Pro forma............................................ $ .57 $ .49 $ 1.66 $ 1.43
Diluted earnings per share
As reported.......................................... $ .58 $ .50 $ 1.70 $ 1.49
Pro forma............................................ $ .56 $ .48 $ 1.64 $ 1.42
The fair value of each stock option and employee stock purchase right grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
Three and Nine Months Ended
September 30,
------------------------------
2004 2003
------------- -------------
Expected dividend yield................................ 2.9% 3.4%
Expected stock price volatility........................ 23% 30%
Risk-free interest rate................................ 3% 3%
Expected life (years).................................. 5 5
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
Page 7
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (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 is entitled to receive a majority of the
entity's residual returns or both. The company's ownership of the equity of PBG
Capital Partners LLC (PBG) qualifies as a variable interest entity under FIN No.
46. PBG was formed with GATX Corporation in 1997 for the purpose of financing
and managing certain leasing related assets. The company adopted the provisions
of FIN No. 46 effective March 31, 2004. As a result, the company consolidated
the operations of PBG on March 31, 2004. Prior to March 31, 2004, the company
accounted for PBG under the equity method of accounting. PBG's minority interest
of $70 million is included in other noncurrent liabilities in the Consolidated
Balance Sheet at September 30, 2004. PBG's nonrecourse debt of $167 million is
included in long-term debt and notes payable and current portion of long-term
obligations in the Consolidated Balance Sheet at September 30, 2004. The
consolidation of PBG did not have a material impact on the company's results of
operations or cash flows.
In December 2003, FAS No. 132 (Revised), "Employer's Disclosure about Pensions
and Other Postretirement Benefits," was issued. FAS No. 132 (Revised) retains
the disclosure requirements of the original pronouncement and requires
additional disclosures relating to assets, obligations, cash flows and net
periodic benefit cost. The provisions of FAS No. 132 (Revised) were effective
for fiscal years ending after December 15, 2003, except for certain disclosures
which are effective for fiscal years ending after June 15, 2004. See Note 14 to
the consolidated financial statements.
In May 2004, the FASB issued FASB Staff Position (FSP) No. 106-2, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003." The FSP provides accounting guidance
for the effects of the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the "Act") to a sponsor of a postretirement health care plan that
has concluded that prescription drug benefits available under the plan are
actuarially equivalent and thus qualify for the subsidy under the Act. The
provisions of FSP No. 106-2 were effective July 1, 2004 for the company. The
company has concluded that the prescription drug benefits provided under its
nonpension postretirement benefit plans are actuarially equivalent to the
prescription drug benefits offered under Medicare Part D. The company adopted
the provisions of FSP No. 106-2 on a prospective basis on July 1, 2004. See Note
14 to the consolidated financial statements.
Note 3:
- -------
Inventories are composed of the following:
(Dollars in thousands) September 30, December 31,
2004 2003
------------- -------------
Raw materials and work in process.............. $ 92,511 $ 86,822
Supplies and service parts..................... 64,435 55,159
Finished products.............................. 57,450 67,546
------------- -------------
Total.......................................... $ 214,396 $ 209,527
============= =============
Note 4:
- -------
Fixed assets are composed of the following:
(Dollars in thousands) September 30, December 31,
2004 2003
------------- -------------
Property, plant and equipment.................. $ 1,682,966 $ 1,617,479
Accumulated depreciation....................... (1,002,918) (963,818)
------------- -------------
Property, plant and equipment, net............. $ 680,048 $ 653,661
============= =============
Rental equipment and related inventories....... $ 1,129,190 $ 1,103,474
Accumulated depreciation....................... (670,586) (689,133)
------------- -------------
Rental equipment and related inventories, net.. $ 458,604 $ 414,341
============= =============
Property leased under capital leases........... $ 7,614 $ 14,942
Accumulated amortization....................... (5,371) (12,712)
------------- -------------
Property leased under capital leases, net...... $ 2,243 $ 2,230
============= =============
Depreciation expense was $205.2 million and $193.1 million for the nine months
ended September 30, 2004 and 2003, respectively. During the nine months ended
September 30, 2004, the company wrote off fully depreciated rental equipment.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
Page 8
Note 5:
- -------
In November 2004, the company issued $100 million of unsecured fixed rate notes
maturing in August 2014. These notes bear interest at an annual rate of 4.875%
and pay interest semi-annually beginning February 2005. This issuance is a
reopening of the 4.875% notes due August 2014, originally issued in August 2004.
The proceeds from these notes will be used for general corporate purposes,
including the repayment of commercial paper and the repurchase of company stock.
At September 30, 2004, $105.8 million remained available under the shelf
registration statement filed in October 2001 with the Securities and Exchange
Commission, 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 $1.38 billion in aggregate principal, representing the
remaining amount available on the shelf at that time.
In August 2004, the company issued $350 million of unsecured fixed rate notes
maturing in August 2014. These notes bear interest at an annual rate of 4.875%
and pay interest semi-annually beginning February 2005. The proceeds from these
notes were used for general corporate purposes, including the repayment of
commercial paper, financing of acquisitions and the repurchase of company stock.
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.
Note 6:
- -------
A reconciliation of the basic and diluted earnings per share computations for
the three months ended September 30, 2004 and 2003 is as follows (in thousands,
except per share data):
2004 2003
------------------------------------- -------------------------------------
Per Per
Income Shares Share Income Shares Share
----------- ----------- ----------- ----------- ----------- -----------
Net income.................................. $ 136,516 $ 118,454
Less:
Preferred stock dividends............ - (1)
Preference stock dividends........... (25) (26)
----------- ----------- ----------- ----------- ----------- -----------
Basic earnings per share.................... $ 136,491 230,768 $ .59 $ 118,427 233,408 $.51
=========== =========== =========== =========== =========== ===========
Effect of dilutive securities:
Preferred stock...................... - 9 1 9
Preference stock..................... 25 773 26 828
Stock options........................ 2,117 1,737
Other................................ 130 102
----------- ----------- ----------- ----------- ----------- -----------
Diluted earnings per share.................. $ 136,516 233,797 $ .58 $ 118,454 236,084 $.50
=========== =========== =========== =========== =========== ===========
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
Page 9
A reconciliation of the basic and diluted earnings per share computations for
the nine months ended September 30, 2004 and 2003 is as follows (in thousands,
except per share data):
2004 2003
------------------------------------- -------------------------------------
Per Per
Income Shares Share Income Shares Share
----------- ----------- ----------- ----------- ----------- -----------
Net income.................................. $ 397,828 $ 351,253
Less:
Preferred stock dividends............ - (1)
Preference stock dividends........... (75) (81)
----------- ----------- ----------- ----------- ----------- -----------
Basic earnings per share.................... $ 397,753 231,293 $1.72 $ 351,171 234,138 $1.50
=========== =========== =========== =========== =========== ===========
Effect of dilutive securities:
Preferred stock...................... - 9 1 11
Preference stock..................... 75 784 81 846
Stock options........................ 2,059 1,270
Other................................ 144 47
----------- ----------- ----------- ----------- ----------- -----------
Diluted earnings per share.................. $ 397,828 234,289 $1.70 $ 351,253 236,312 $1.49
=========== =========== =========== =========== =========== ===========
In accordance with FAS No. 128, "Earnings per Share," 1.4 million and 2.8
million common stock equivalent shares for the three months ended September 30,
2004 and 2003, respectively, and 1.7 million and 4.0 million common stock
equivalent shares for the nine months ended September 30, 2004 and 2003,
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 was antidilutive.
Note 7:
- -------
Revenue and earnings before interest and taxes (EBIT) by business segment for
the three and nine months ended September 30, 2004 and 2003 were as follows:
(Dollars in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- -------------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ----------------
Revenue:
Global Mailstream Solutions............... $ 827,708 $ 784,888 $ 2,461,730 $ 2,312,431
Global Enterprise Solutions............... 359,998 310,295 1,022,799 928,970
Capital Services.......................... 29,816 41,966 110,816 120,435
---------------- ---------------- ---------------- ----------------
Total revenue............................... $ 1,217,522 $ 1,137,149 $ 3,595,345 $ 3,361,836
================ ================ ================ ================
EBIT: (1)
Global Mailstream Solutions............... $ 259,396 $ 247,218 $ 765,631 $ 726,871
Global Enterprise Solutions............... 20,084 19,903 56,306 53,132
Capital Services.......................... 20,457 25,864 64,899 76,271
---------------- ---------------- ---------------- ----------------
Total EBIT.................................. 299,937 292,985 886,836 856,274
Unallocated amounts:
Interest, net............................. (42,035) (41,101) (124,227) (124,560)
Corporate expense......................... (41,682) (36,981) (131,148) (124,212)
Restructuring charges..................... (15,582) (43,109) (46,854) (96,465)
---------------- ---------------- ---------------- ----------------
Income before income taxes.................. $ 200,638 $ 171,794 $ 584,607 $ 511,037
================ ================ ================ ================
(1) EBIT excludes general corporate expenses.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
Page 10
Note 8:
- -------
Comprehensive income for the three and nine months ended September 30, 2004 and
2003 was as follows:
(Dollars in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- -------------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ----------------
Net income.................................. $ 136,516 $ 118,454 $ 397,828 $ 351,253
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustments............................ 36,666 (21,065) 57,545 65,878
Net unrealized (loss) gain on
derivative instruments................. (2,580) 3,802 (2,934) (2,000)
---------------- ---------------- ---------------- ----------------
Comprehensive income........................ $ 170,602 $ 101,191 $ 452,439 $ 415,131
================ ================ ================ ================
Note 9:
- -------
The company accounts for one-time benefit arrangements and exit or disposal
activities primarily in accordance with FAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which requires that a liability be
recognized when the costs are incurred. 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 reasonably estimable. The fair values of impaired long-lived assets
are determined primarily using probability weighted expected cash flows in
accordance with FAS No. 144, "Accounting for the Impairment of Long-Lived
Assets."
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 charges related to these
restructuring initiatives will be recorded as the various initiatives take
effect.
In connection with this plan, the company recorded pre-tax restructuring charges
of $15.6 million and $43.1 million for the three months ended September 30, 2004
and 2003, respectively. For the nine months ended September 30, 2004 and 2003,
pre-tax restructuring charges were $46.9 million and $96.5 million,
respectively. The pre-tax restructuring charges are composed of:
(Dollars in millions) Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- -------------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ----------------
Severance and benefit costs................. $ 12.4 $ 17.8 $ 30.5 $ 65.4
Asset impairments........................... 1.6 23.8 11.0 24.5
Other exit costs............................ 1.6 1.5 5.4 6.6
---------------- ---------------- ---------------- ----------------
Total..................................... $ 15.6 $ 43.1 $ 46.9 $ 96.5
================ ================ ================ ================
All restructuring charges, except for the asset impairments, will result in cash
outflows. The severance and benefit costs relate to a reduction in workforce of
approximately 2,000 employees worldwide from the inception of this plan through
September 30, 2004 and expected future workforce reductions of approximately 400
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 62% of the workforce
reductions are in the U.S. The majority of the international workforce
reductions are in Europe and Canada. Asset impairments for the nine months ended
September 30, 2004 relate primarily to the write-down of capitalized
pre-implementation system costs. Asset impairments for the nine months ended
September 30, 2003 relate primarily to the company's decision to exit its main
plant manufacturing facility in Connecticut in connection with its product
sourcing and real estate optimization strategy. The fair values of the impaired
long-lived assets were determined primarily using probability weighted expected
cash flows in accordance with FAS No. 144. 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
Nine Months Ended September 30, 2004
Page 11
Accrued restructuring charges at September 30, 2004 are composed of the
following:
(Dollars in millions) Balance at Ending balance
January 1, Restructuring Cash Non-cash at September 30,
2004 charges payments charges 2004
-------------- -------------- ------------ ------------ ----------------
Severance and
benefit costs.................. $ 27.5 $ 30.5 $ (37.1) $ - $ 20.9
Asset impairments............... - 11.0 - (11.0) -
Other exit costs................ 4.7 5.4 (7.7) - 2.4
-------------- -------------- ------------ ------------ ----------------
$ 32.2 $ 46.9 $ (44.8) $ (11.0) $ 23.3
============== ============== ============ ============ ================
Note 10:
- --------
Group 1 Software, Inc. (Group 1)
On July 20, 2004, the company completed its acquisition of Group 1 for a net
purchase price of $329 million of cash. The results of Group 1's operations have
been included in the consolidated financial statements since the date of
acquisition. Group 1 is an industry leader in software that enhances mailing
efficiency, data quality and customer communications.
Allocation of the purchase price to the assets acquired and liabilities assumed
has not been finalized for this acquisition. Final determination of fair values
to be assigned may result in adjustments to the preliminary estimated values
assigned at the date of acquisition. The following table summarizes the
preliminary estimated fair values of the major assets acquired and liabilities
assumed at the date of acquisition:
(Dollars in thousands)
Intangible assets....................................... $ 84,100
Goodwill................................................ 292,303
Other, net.............................................. (47,282)
-----------------
Purchase price......................................... $ 329,121
=================
Intangible assets relate primarily to customer relationships, software and
trademarks and have a weighted-average useful life of approximately 12 years.
The goodwill was assigned to the Global Enterprise Solutions segment. No
research and development assets were acquired.
International Mail Express, Inc. (IMEX)
On May 21, 2004, the company completed the acquisition of substantially all of
the assets of IMEX for a net purchase price of $29 million of cash. The results
of IMEX's operations have been included in the consolidated financial statements
since the date of acquisition. IMEX consolidates letters and flat-sized mail
headed to international addresses to reduce postage costs and expedite delivery.
Allocation of the purchase price to the assets acquired and liabilities assumed
has not been finalized for this acquisition. Final determination of fair values
to be assigned may result in adjustments to the preliminary estimated values
assigned at the date of acquisition. The following table summarizes the
preliminary estimated fair values of the major assets acquired and liabilities
assumed at the date of acquisition:
(Dollars in thousands)
Intangible assets....................................... $ 9,600
Goodwill................................................ 20,078
Other, net.............................................. (593)
-----------------
Purchase price......................................... $ 29,085
=================
Intangible assets relate primarily to customer relationships and have a
weighted-average useful life of approximately 13 years. The goodwill was
assigned to the Global Mailstream Solutions segment. No research and development
assets were acquired.
DDD Company (DDD)
On October 23, 2003, the company completed the acquisition of DDD for a net
purchase price, following post-closing adjustments, of $48.6 million, which
consisted of approximately $24.3 million of cash and the issuance of 585,204
shares of common stock valued at $24.3 million. The value of common shares was
determined based on the average market price of common shares over a period of
time prior to the completion of the acquisition. The results of DDD's operations
have been included in the consolidated financial statements since the date of
acquisition. DDD offers a broad array of services, including fulfillment
services, secure mail processing, messenger services, logistics support, and
record and information management.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
Page 12
Allocation of the purchase price to the assets acquired and liabilities assumed
has not been finalized for this acquisition. Final determination of fair values
to be assigned may result in adjustments to the preliminary estimated values
assigned at the date of acquisition. The following table summarizes the
preliminary estimated fair values of the major assets acquired and liabilities
assumed at the date of acquisition:
(Dollars in thousands)
Intangible assets....................................... $ 13,900
Goodwill................................................ 30,287
Other, net.............................................. 4,452
-----------------
Purchase price......................................... $ 48,639
=================
Intangible assets relate primarily to customer relationships and have a
weighted-average useful life of approximately 10 years. The goodwill was
assigned to the Global Enterprise Solutions segment. No research and development
assets were acquired.
Consolidated impact of acquisitions
- -----------------------------------
The acquisitions of Group 1, IMEX and DDD increased the company's earnings, but
including related financing costs, did not materially impact earnings either on
a per share or aggregate basis.
The following unaudited pro forma consolidated results have been prepared as if
the acquisitions of Group 1, IMEX and DDD had occurred on January 1, 2003:
(Dollars in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- -------------------------------------
2004 2003 2004 2003
----------------- ---------------- ----------------- ----------------
Total revenue............................... $ 1,224,886 $ 1,203,649 $ 3,696,507 $ 3,561,336
The pro forma consolidated results do not purport to be indicative of results
that would have occurred had the acquisitions been completed on January 1, 2003,
nor do they purport to be indicative of the results that will be obtained in the
future. The pro forma earning results of these acquisitions were not material to
earnings on either a per share or an aggregate basis.
During 2004 and 2003, the company also completed several smaller acquisitions,
including some of its presort businesses and international dealerships. During
2003, the company also acquired one of its address printing suppliers. The cost
of these acquisitions was in the aggregate less than $70 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:
- --------
Intangible assets are composed of the following:
(Dollars in thousands) September 30, 2004 December 31, 2003
------------------------------------- -------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
----------------- ---------------- ----------------- ----------------
Customer relationships....................... $ 212,190 $ 27,774 $ 161,655 $ 18,002
Mailing software and technology.............. 109,523 15,183 63,603 9,519
Trademark and trade names.................... 15,452 5,713 8,357 4,067
Non-compete agreements....................... 3,805 2,524 3,496 1,917
----------------- ---------------- ----------------- ----------------
Total $ 340,970 $ 51,194 $ 237,111 $ 33,505
================= ================ ================= ================
Amortization expense for intangible assets for the three months ended September
30, 2004 and 2003 was $6.9 million and $4.4 million, respectively. Amortization
expense for intangible assets for the nine months ended September 30, 2004 and
2003 was $16.9 million and $12.0 million, respectively. Estimated intangible
asset amortization expense for 2004 and the five succeeding years is as follows:
(Dollars in thousands)
For year ending 12/31/04......................... $ 24,200
For year ending 12/31/05......................... $ 29,000
For year ending 12/31/06......................... $ 28,100
For year ending 12/31/07......................... $ 26,300
For year ending 12/31/08......................... $ 25,700
For year ending 12/31/09......................... $ 24,400
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
Page 13
Intangible assets acquired during the nine months ended September 30, 2004 are
as follows:
(Dollars in thousands) Amortization Acquisition
Period Cost
-------------- --------------
Customer relationships.................... 15 years $ 47,831
Mailing software and technology........... 9 years 44,500
Trademark and trade names................. 9 years 6,800
Non-compete agreements.................... 5 years 159
-------------- --------------
Weighted average/total.................. 12 years $ 99,290
==============
Changes in the carrying amount of goodwill by business segment for the nine
months ended September 30, 2004 are as follows:
(Dollars in thousands) Global Global
Mailstream Enterprise
Solutions Solutions Total
-------------- -------------- --------------
Balance at January 1, 2004................. $ 492,445 $ 463,839 $ 956,284
Goodwill acquired during the period........ 33,810 292,303 326,113
Other...................................... 13,129 3,418 16,547
-------------- -------------- --------------
Balance at September 30, 2004.............. $ 539,384 $ 759,560 $ 1,298,944
============== ============== ==============
"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 $116.8 million and $125.9 million at September 30, 2004 and December 31,
2003, 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/or supported by the
creditworthiness of its customers. At September 30, 2004 and December 31, 2003,
the underlying equipment value exceeded the sum of the uncollected principal
balance of receivables sold and the guarantee contracts.
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 September 30,
2004 and December 31, 2003, respectively, was not material.
Note 13:
- --------
In December 2003, the company received accepted closing agreements with the
Internal Revenue Service (IRS) showing income tax adjustments for the 1992 to
1994 tax years. The total additional tax for these years is approximately $5.0
million. Additional tax due for 1995 and future tax years in connection with
these closing agreements will not materially affect the company's future results
of operations, financial position or cash flows. In addition to the accepted
income tax adjustments, one 1994 proposed adjustment remains in dispute, which
could result in additional tax of approximately $4.3 million. The company
believes that it has meritorious defenses to this deficiency and that the
ultimate outcome will not result in a material effect on its results of
operations, financial position or cash flows. The company believes that its
accruals for tax liabilities are adequate for all open years. However, if the
IRS prevails on this deficiency, additional tax may be due for 1995 and future
tax years, which could materially affect the company's results of operations,
financial position or cash flows. At any time, the company's provision for taxes
could be affected by changes in tax laws and interpretations by governments or
courts.
The IRS is in the process of completing its examination of the company's tax
returns for the 1995 to 2000 tax years and has issued notices of proposed
adjustment with respect to a Capital Services leasing transaction entered into
in 1998 and 1999. Specifically, the IRS is proposing to disallow certain
expenses claimed as deductions on the 1998 through 2000 tax returns. The company
anticipates receiving similar notices for other leasing transactions entered
into during the audit period. The IRS will likely make similar claims for years
subsequent to 2000 in future audits with respect to these transactions. The IRS
may propose penalties on the company with respect to all periods that have been
examined.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
Page 14
In addition, in June 2004, the Canada Revenue Agency (CRA) proposed an
adjustment for the 1996 to 1999 tax years, relating to intercompany loan
transactions. The CRA may propose penalties on the company with respect to all
periods that have been examined.
The company vigorously disagrees with the proposed adjustments and intends to
aggressively contest these matters through applicable IRS, CRA and judicial
procedures, as appropriate. Although the final resolution of the proposed
adjustments is uncertain and involves unsettled areas of the law, based on
currently available information, the company has provided for its best estimate
of the probable tax liability for these matters and believes that the resolution
of these matters will not have a material effect on the company's results of
operations, financial position or cash flows. However, an unfavorable resolution
could have a material effect on the company's results of operations, financial
position or cash flows.
Note 14:
- --------
Defined Benefit Pension Plans
The components of net periodic benefit cost for defined benefit pension plans
for the three months ended September 30, 2004 and 2003 are as follows:
(Dollars in thousands) United States Foreign
------------------------------------- -------------------------------------
Three Months Ended Three Months Ended
September 30, September 30,
------------------------------------- -------------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ----------------
Service cost................................ $ 7,447 $ 6,282 $ 2,706 $ 2,282
Interest cost............................... 21,934 21,363 6,242 5,064
Expected return on plan assets.............. (32,486) (32,700) (7,517) (6,322)
Amortization of transition cost............. - - (130) (136)
Amortization of prior service cost.......... (696) (719) 164 152
Amortization of net loss.................... 3,601 440 1,983 658
Curtailment................................. - - - 332
---------------- ---------------- ---------------- ----------------
Net periodic benefit cost................... $ (200) $ (5,334) $ 3,448 $ 2,030
================ ================ ================ ================
The components of net periodic benefit cost for defined benefit pension plans
for the nine months ended September 30, 2004 and 2003 are as follows:
(Dollars in thousands) United States Foreign
------------------------------------- -------------------------------------
Nine Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- -------------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ----------------
Service cost................................ $ 24,074 $ 19,877 $ 7,788 $ 7,186
Interest cost............................... 66,321 67,594 17,817 16,039
Expected return on plan assets.............. (96,033) (93,168) (21,431) (20,273)
Amortization of transition cost............. - - (392) (454)
Amortization of prior service cost.......... (2,052) (2,048) 467 494
Amortization of net loss.................... 9,495 (1,077) 5,621 3,308
Curtailment................................. - - - 1,065
---------------- ---------------- ---------------- ----------------
Net periodic benefit cost................... $ 1,805 $ (8,822) $ 9,870 $ 7,365
================ ================ ================ ================
The company previously disclosed in its consolidated financial statements for
the year ended December 31, 2003 that it expects to contribute up to $5 million
and up to $10 million, respectively, to its U.S. and foreign pension plans
during 2004. At September 30, 2004, $2.8 million and $3.7 million of
contributions have been made to the U.S. and foreign pension plans,
respectively.
Nonpension Postretirement Benefit Plans
On July 1, 2004 the company adopted the provisions of FSP No. 106-2 on a
prospective basis. The adoption of FSP No. 106-2 reduced the company's
nonpension postretirement accumulated benefit obligation by approximately $21
million, which has been recognized as a reduction in the company's unrecognized
actuarial loss. The adoption of FSP No. 106-2 reduced the net periodic
postretirement benefit cost by approximately $0.9 million during the three and
nine months ended September 30, 2004.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
Page 15
The components of net periodic benefit cost for nonpension postretirement
benefit plans for the three and nine months ended September 30, 2004 and 2003
are as follows:
(Dollars in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- -------------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ----------------
Service cost................................ $ 546 $ 691 $ 2,610 $ 2,702
Interest cost............................... 2,948 3,781 13,296 14,837
Amortization of prior service cost.......... (1,304) (1,647) (5,819) (6,514)
Amortization of net loss.................... 905 804 4,367 3,155
---------------- ---------------- ---------------- ----------------
Net periodic benefit cost................... $ 3,095 $ 3,629 $ 14,454 $ 14,180
================ ================ ================ ================
The company previously disclosed in its consolidated financial statements for
the year ended December 31, 2003 that it expects to contribute $34 million,
which represents its expected benefit payments, to its postretirement benefits
plans during 2004. At September 30, 2004, $26.6 million of benefit payments have
been made.
Note 15:
- --------
On November 1, 2004, the company completed its acquisition of a substantial
portion of the assets of Ancora Capital & Management Group LLC (Ancora) for
approximately $35 million net of cash and assumed liabilities. Ancora is a
provider of first class, standard letter and international mail processing and
presort services with five operations in southern California, Pennsylvania and
Maryland. Ancora will become part of the company's PSI operation and its
national presort network.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
Page 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) contains statements that are forward-looking. These statements
are based on current expectations and assumptions that are subject to risks and
uncertainties. Actual results could differ materially because of factors
discussed in Forward-Looking Statements and elsewhere in this report.
Overview
- --------
In the third quarter of 2004, we continued to leverage near-term opportunities,
while executing our longer-term strategies for sustained growth. We continued to
see good market acceptance of new products by small business, supplies, payment
solutions, software, mail services and international customers. At the same
time, we laid the foundation for future growth with the ongoing integration of
Group 1 Software, Inc.'s (Group 1) customer communication and address management
software suite into our existing software and service capabilities, and the
continued expansion of our national presort network with the announced
acquisition of Ancora Capital & Management Group LLC (Ancora).
Revenue increased 7% in the third quarter of 2004 to $1.22 billion compared with
the third quarter of 2003 driven by organic growth in our Global Mailstream
Solutions and Global Enterprise Solutions segments, the favorable impact of
foreign currency and the acquisitions of Group 1, International Mail Express,
Inc. (IMEX) and DDD Company (DDD). Net income increased 15% in the third quarter
of 2004 to $136.5 million compared with the third quarter of 2003. Diluted
earnings per share increased to 58 cents in the third quarter of 2004 from 50
cents in the third quarter of 2003. During the third quarter of 2004, we took
several actions as part of our previously announced restructuring program. Net
income for the third quarter of 2004 and 2003, was reduced by pre-tax
restructuring charges of $16 million and $43 million, respectively, or 4 cents
and 13 cents, respectively, per diluted share relating to these actions. Third
quarter 2004 results included 2 cents per diluted share from non-core Capital
Services operations compared with 4 cents per diluted share in the third quarter
of 2003.
See Results of Continuing Operations - third quarter of 2004 vs. third quarter
of 2003 below for a more detailed discussion of our results of operations.
Results of Continuing Operations - third quarter of 2004 vs. third quarter of
- -----------------------------------------------------------------------------
2003
- ----
Business segment results
The following table shows revenue and earnings before interest and taxes (EBIT)
by business segment for the three months ended September 30, 2004 and 2003:
(Dollars in millions) Revenue EBIT
----------------------------------------- -----------------------------------------
Three months ended September 30, Three months ended September 30,
----------------------------------------- -----------------------------------------
2004 2003 % change 2004 2003 % change
----------- ----------- ----------- ----------- ----------- -----------
Global Mailstream Solutions....... $ 828 $ 785 5% $ 259 $ 247 5%
Global Enterprise Solutions....... 360 310 16% 20 20 1%
Capital Services.................. 30 42 (29%) 21 26 (21%)
----------- ----------- ----------- ----------- ----------- -----------
Total............................. $ 1,218 $ 1,137 7% $ 300 $ 293 2%
=========== =========== =========== =========== =========== ===========
During the third quarter of 2004, Global Mailstream Solutions revenue and EBIT
grew 5%. Similar to previous quarters, revenue trends reflect the ongoing
changing mix of the product line, where a greater percentage of the revenue is
coming from more fully featured smaller systems, supplies, payment solutions,
software and mail services and less from larger system sales. Non-U.S. revenue
grew at a double-digit rate as a result of both organic growth throughout most
of Europe and favorable foreign currency exchange rates. In particular, revenue
in the U.K. increased at a double-digit rate on a local currency basis because
of positive customer reception to our new product lines.
During the third quarter of 2004, Global Enterprise Solutions revenue grew 16%
and EBIT grew 1%. Pitney Bowes Management Services (PBMS) reported revenue of
$264 million, a 6% increase over the prior year driven primarily by the
acquisition of DDD in 2003. Organic revenue was flat compared with the prior
year as we continued to position the business to provide higher value services.
EBIT and operating margins were comparable with the prior quarter and prior
year. Document Messaging Technologies (DMT) reported revenue growth of 54% to
$96 million for the quarter and EBIT grew 2%. The acquisition of Group 1
contributed 43% to revenue growth. DMT's organic revenue growth of 11% was
driven by continued solid placements and orders for its inserting equipment. As
expected, the integration costs of the Group 1 acquisition had a negative impact
on reported margins during the quarter.
During the third quarter of 2004, revenue decreased 29% and EBIT decreased 21%
in the Capital Services segment, which is consistent with our ongoing planned
strategy to reduce our exposure to non-core, long-term financing on an
economically advantageous basis.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
Page 17
Revenue by source
Third quarter 2004 revenue included $346.4 million from sales, up 8% from $322.1
million in the third quarter of 2003 due primarily to strong supplies sales, the
acquisition of Group 1 and the favorable impact of foreign currency; $199.8
million from rentals, up 2% from $196.4 million due primarily to the favorable
impact of foreign currency; $316.5 million from business services, up 15% from
$275.8 million due primarily to the acquisitions of DDD and IMEX and strong
growth in presort operations; $177.5 million from support services, up 11% from
$159.3 million due primarily to the acquisition of Group 1 and the favorable
impact of foreign currency; $158.2 million from core financing, up 4% from
$152.1 million due primarily to growth in postal payment solutions; and $19.2
million from non-core financing, down 39% from $31.3 million due to our ongoing
planned strategy to reduce our exposure to non-core, long-term financing.
Costs and expenses
Cost of sales decreased to 44.0% of sales revenue in the third quarter of 2004
compared with 44.6% in the third quarter of 2003. The decrease was due primarily
to lower costs resulting from our transition to outsourcing of parts for digital
equipment and an increase in mix of higher margin equipment, software and
supplies revenue.
Cost of rentals decreased to 19.6% of rentals revenue in the third quarter of
2004 compared with 21.6% in the third quarter of 2003 due primarily to lower
repair costs resulting from the shift from electronic to digital meters.
Cost of business services increased to 83.1% of business services revenue in the
third quarter of 2004 compared with 82.6% in the third quarter of 2003 due to
initial higher costs associated with new sites in our mail services operations.
Cost of support services decreased to 50.7% of support services revenue in the
third quarter of 2004 compared with 51.9% in the third quarter of 2003 due
primarily to the acquisition of Group 1.
Selling, general and administrative expenses decreased to 30.6% of total revenue
in the third quarter of 2004 compared with 30.7% in the third quarter of 2003
reflecting our continuing emphasis on controlling operating expenses, partially
offset by costs associated with investments in infrastructure improvements and
growth initiatives.
Research and development expenses increased to $42.6 million in the third
quarter of 2004 from $35.0 million in the third quarter of 2003 due primarily to
the acquisition of Group 1. Our investment in research and development reflects
our continued commitment to developing new technologies and enhanced mailing and
software products.
Net interest expense increased to $42.0 million in the third quarter of 2004
from $41.1 million in the third quarter of 2003. The increase was due to higher
average borrowings during the third quarter of 2004 compared with the third
quarter of 2003.
The effective tax rate for the third quarter of 2004 was 32.0% compared with
31.0% in the third quarter of 2003. The effective tax rates for the third
quarter of 2004 and 2003 included tax benefits of .3% and 1.0%, respectively,
from restructuring charges. The increase in the 2004 effective tax rate also
reflects the impact of our strategy to cease originating large-ticket,
structured, third-party financing of non-core assets.
Results of Continuing Operations - nine months of 2004 vs. nine months of 2003
- ------------------------------------------------------------------------------
For the first nine months of 2004 compared with the same period of 2003, revenue
increased 7% to $3.6 billion, and net income increased 13% to $397.8 million.
Net income for the first nine months of 2004 and 2003 was reduced by pre-tax
restructuring charges of $46.9 million (13 cents per diluted share) and $96.5
million (26 cents per diluted share). Diluted earnings per share for the first
nine months of 2004 and 2003 included 7 cents and 12 cents from non-core Capital
Services operations. The factors that affected revenue and EBIT for the nine
months ended September 30, 2004 compared with the same period of 2003 included
those cited for the third quarter of 2004 versus 2003.
Accounting Pronouncements
- -------------------------
In December 2002, Statement of Financial Accounting Standards (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 was 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
Nine Months Ended September 30, 2004
Page 18
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (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 is entitled to receive a majority of the
entity's residual returns or both. Our ownership of the equity of PBG Capital
Partners LLC (PBG) qualifies as a variable interest entity under FIN No. 46. PBG
was formed with GATX Corporation in 1997 for the purpose of financing and
managing certain leasing related assets. We adopted the provisions of FIN No. 46
effective March 31, 2004. As a result, we consolidated the operations of PBG on
March 31, 2004. Prior to March 31, 2004, we accounted for PBG under the equity
method of accounting. PBG's minority interest of $70 million is included in
other noncurrent liabilities in the Consolidated Balance Sheet at September 30,
2004. PBG's nonrecourse debt of $167 million is included in long-term debt and
notes payable and current portion of long-term obligations in the Consolidated
Balance Sheet at September 30, 2004. The consolidation of PBG did not have a
material impact on our results of operations or cash flows.
In December 2003, FAS No. 132 (Revised), "Employer's Disclosure about Pensions
and Other Postretirement Benefits," was issued. FAS No. 132 (Revised) retains
the disclosure requirements of the original pronouncement and requires
additional disclosures relating to assets, obligations, cash flows and net
periodic benefit cost. The provisions of FAS No. 132 (Revised) were effective
for fiscal years ending after December 15, 2003, except for certain disclosures
which are effective for fiscal years ending after June 15, 2004. See Note 14 to
the consolidated financial statements.
In May 2004, the FASB issued FASB Staff Position (FSP) No. 106-2, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003." The FSP provides accounting guidance
for the effects of the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the "Act") to a sponsor of a postretirement health care plan that
has concluded that prescription drug benefits available under the plan are
actuarially equivalent and thus qualify for the subsidy under the Act. The
provisions of FSP No. 106-2 were effective July 1, 2004. We have concluded that
the prescription drug benefits provided under our nonpension postretirement
benefit plans are actuarially equivalent to the prescription drug benefits
offered under Medicare Part D. We adopted the provisions of FSP No. 106-2 on a
prospective basis on July 1, 2004. See Note 14 to the consolidated financial
statements.
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. At that time we estimated the total pre-tax cost of these
restructuring initiatives to be about $200 million ($125 million after tax). As
we continue to finalize our restructuring plans, the ultimate amount and timing
of the restructuring charges may differ from our previous estimates. The charges
related to these restructuring initiatives will be recorded as the various
initiatives take effect.
The cash outflows related to restructuring charges will be funded primarily by
cash from operating activities. The restructuring initiatives are expected to
continue to increase our operating efficiency and effectiveness in 2004 and
beyond while enhancing growth, primarily as a result of reduced personnel
related expenses. See Note 9 to the consolidated financial statements for our
accounting policy related to restructuring charges.
In connection with this plan, we recorded pre-tax restructuring charges of $15.6
million and $43.1 million for the three months ended September 30, 2004 and
2003, respectively. For the nine months ended September 30, 2004 and 2003,
pre-tax restructuring charges were $46.9 million and $96.5 million,
respectively. The pre-tax restructuring charges are composed of:
(Dollars in millions) Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- -------------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ----------------
Severance and benefit costs................. $ 12.4 $ 17.8 $ 30.5 $ 65.4
Asset impairments........................... 1.6 23.8 11.0 24.5
Other exit costs............................ 1.6 1.5 5.4 6.6
---------------- ---------------- ---------------- ----------------
Total..................................... $ 15.6 $ 43.1 $ 46.9 $ 96.5
================ ================ ================ ================
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
Page 19
All restructuring charges, except for the asset impairments, will result in cash
outflows. The severance and benefit costs relate to a reduction in workforce of
approximately 2,000 employees worldwide from the inception of this plan through
September 30, 2004 and expected future workforce reductions of approximately 400
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 62% of the workforce
reductions are in the U.S. The majority of the international workforce
reductions are in Europe and Canada. Asset impairments for the nine months ended
September 30, 2004 relate primarily to the write-down of capitalized
pre-implementation system costs. Asset impairments for the nine months ended
September 30, 2003 relate primarily to our decision to exit our main plant
manufacturing facility in Connecticut in connection with our product sourcing
and real estate optimization strategy. The fair values of the impaired
long-lived assets were determined primarily using probability weighted expected
cash flows in accordance with FAS No. 144. 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.
Accrued restructuring charges at September 30, 2004 are composed of the
following:
(Dollars in millions) Balance at Ending balance
January 1, Restructuring Cash Non-cash at September 30,
2004 charges payments charges 2004
-------------- -------------- ------------ ------------ ----------------
Severance and
benefit costs.................. $ 27.5 $ 30.5 $ (37.1) $ - $ 20.9
Asset impairments............... - 11.0 - (11.0) -
Other exit costs................ 4.7 5.4 (7.7) - 2.4
-------------- -------------- ------------ ------------ ----------------
$ 32.2 $ 46.9 $ (44.8) $ (11.0) $ 23.3
============== ============== ============ ============ ================
Acquisitions
- ------------
On July 20, 2004, we completed the acquisition of Group 1 for a net purchase
price of $329 million of cash. The results of Group 1's operations have been
included in the consolidated financial statements since the date of acquisition.
Group 1 is an industry leader in software that enhances mailing efficiency, data
quality and customer communications.
On May 21, 2004, we acquired substantially all of the assets of IMEX for a net
purchase price of $29 million of cash. The results of IMEX's operations have
been included in the consolidated financial statements since the date of
acquisition. IMEX consolidates letters and flat-sized mail headed to
international addresses to reduce postage costs and expedite delivery.
In October 2003, we acquired DDD for a net purchase price, following
post-closing adjustments, of $48.6 million, which consisted of approximately
$24.3 million of cash and the issuance of common stock valued at $24.3 million.
DDD offers a broad array of services including, fulfillment services, secure
mail processing, manager services, logistics support, and record and information
management.
We accounted for the acquisitions of Group 1, IMEX and DDD under the purchase
method and accordingly, the operating results of Group 1, IMEX and DDD have been
included in our consolidated financial statements since the date of acquisition.
The acquisitions of Group 1, IMEX and DDD did not materially impact net income
for the three and nine months ended September 30, 2004.
During 2004 and 2003, we also completed several smaller acquisitions, including
some of our presort businesses and international dealerships. During 2003, we
also acquired one of our address printing suppliers. The cost of these
acquisitions was in the aggregate less than $70 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 decreased to .86 to 1 at
September 30, 2004 compared with .95 to 1 at December 31, 2003. The decrease in
this ratio was due primarily to the reclassification of long-term debt to
short-term debt.
The following table summarizes our cash flows for the nine months ended
September 30, 2004 and 2003:
(Dollars in thousands) Nine Months Ended September 30,
----------------------------------
2004 2003
--------------- ---------------
Cash provided by (used in):
Operating activities............................. $ 727,818 $ 675,843
Investing activities............................. (539,519) 32,762
Financing activities............................. (175,798) (743,836)
Effect of exchange rate changes on cash.......... 3,589 5,329
--------------- ---------------
Net change in cash and cash equivalents.......... $ 16,090 $ (29,902)
=============== ===============
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
Page 20
For the nine months ended September 30, 2004, net cash provided by operating
activities consisted primarily of net income adjusted for non-cash items, the
increase in deferred taxes on income and changes in working capital. Net cash
used in investing activities consisted primarily of acquisitions and capital
expenditures net of proceeds from the sale of non-core Capital Services assets.
Net cash used in financing activities consisted primarily of stock repurchases
and dividends paid to stockholders partially offset by an increase in debt.
The ratio of total debt to total debt and stockholders' equity was 76.3% and
76.7% at September 30, 2004 and December 31, 2003, respectively. Including the
preferred stockholders' equity in a subsidiary company as debt, the ratio of
total debt to total debt and stockholders' equity was 77.7% and 78.1% at
September 30, 2004 and December 31, 2003, respectively. The decrease in this
ratio was driven by net income and favorable foreign currency translation
adjustments, offset by an increase in total recourse debt, the consolidation of
PBG's nonrecourse debt, the $175 million repurchase of 4.1 million shares of
common stock during the nine months ended September 30, 2004 and the payment of
common stock dividends.
Financings and Capitalization
- -----------------------------
In November 2004, we issued $100 million of unsecured fixed rate notes maturing
in August 2014. These notes bear interest at an annual rate of 4.875% and pay
interest semi-annually beginning February 2005. This issuance is a reopening of
the 4.875% notes due August 2014, originally issued in August 2004. The
proceeds from these notes will be used for general corporate purposes, including
the repayment of commercial paper and the repurchase of company stock.
At September 30, 2004, $105.8 million remained available under the shelf
registration statement filed in October 2001 with the Securities and Exchange
Commission, 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 $1.38 billion in aggregate principal, representing the
remaining amount available on the shelf at that time.
In August 2004, we issued $350 million of unsecured fixed rate notes maturing in
August 2014. These notes bear interest at an annual rate of 4.875% and pay
interest semi-annually beginning February 2005. The proceeds from these notes
were used for general corporate purposes, including the repayment of commercial
paper, financing of acquisitions and the repurchase of company stock.
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.
In February 2003, we 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, 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 accordance with the provisions of FIN No. 46, we consolidated PBG's
nonrecourse debt on March 31, 2004.
We believe our financing needs for the next 12 months can be met with cash
generated internally, debt issued under new and existing shelf registration
statements and our existing commercial paper programs. In addition, we maintain
a back-up credit facility for our commercial paper program.
Capital Expenditures
- --------------------
During the first nine months of 2004, capital expenditures included $136.5
million in net additions to property, plant and equipment and $89.7 million in
net additions to rental equipment and related
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
Page 21
inventories compared with $136.1 million and $78.0 million, respectively, in the
same period in 2003.
We expect capital expenditures for the remainder of 2004 to be approximately the
same as the prior year. These investments will also be affected by the timing of
our customers' transition to digital meters.
Capital Services portfolio
- --------------------------
Our investment in Capital Services lease related assets included in our
Consolidated Balance Sheets is composed of the following:
(Dollars in millions) September 30, December 31,
2004 2003
--------------- ---------------
Leveraged leases.............................. $ 1,555 $ 1,535
Finance receivables (1)....................... 649 450
Other assets (1).............................. - 51
Rental equipment (1).......................... 55 18
--------------- ---------------
Total......................................... $ 2,259 $ 2,054
=============== ===============
(1) On March 31, 2004 we adopted the provisions of FIN No. 46 and consolidated
the assets and liabilities of PBG. Accordingly, the increase in finance
receivables and rental equipment at September 30, 2004 reflects the
consolidated assets of PBG. Other assets at December 31, 2003 represented
our investment in PBG, which at that time was accounted for under the
equity method of accounting. See Note 2 to the consolidated financial
statements for further details on the impact of adopting FIN No. 46.
The investment in leveraged leases included in our Consolidated Balance Sheets
is diversified across the following types of assets:
(Dollars in millions) September 30, December 31,
2004 2003
--------------- ---------------
Locomotives and rail cars..................... $ 358 $ 360
Postal equipment.............................. 353 338
Commercial aircraft........................... 274 279
Commercial real estate........................ 241 236
Telecommunications............................ 141 139
Rail and bus.................................. 133 132
Shipping and handling......................... 55 51
--------------- ---------------
Total leveraged leases........................ $ 1,555 $ 1,535
=============== ===============
At September 30, 2004 and December 31, 2003, our leveraged lease investment in
commercial real estate facilities included approximately $91 million and $88
million, respectively, related to leases of corporate facilities to four U.S.
telecommunication entities, of which $75 million and $73 million, respectively,
is with lessees that are highly rated.
Additionally, our leveraged lease investment in telecommunications equipment
represents leases to three highly rated international telecommunication
entities. At September 30, 2004 and December 31, 2003, approximately 95% and
84%, respectively, of this portfolio is further secured by equity defeasance
accounts or other third party credit arrangements.
At September 30, 2004 and December 31, 2003, approximately 53% and 51%,
respectively, of our total leveraged lease portfolio is further secured by
equity defeasance accounts or other third party credit arrangements. In
addition, at September 30, 2004 and December 31, 2003, approximately 19% and 20%
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) September 30, December 31,
2004 2003
--------------- ---------------
Assets held for sale.......................... $ 18 $ 21
Single investor leases:
Large ticket single investor leases (1)...... 339 157
Imagistics lease portfolio................... 292 272
--------------- ---------------
Total......................................... $ 649 $ 450
=============== ===============
<FN>
(1) The increase in large ticket single investor leases at September 30, 2004
reflects the consolidated assets of PBG. See Note 2 to the consolidated
financial statements for further details on the impact of adopting
FIN No. 46.
</FN>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
Page 22
At September 30, 2004 and December 31, 2003, our net investment in commercial
passenger and cargo aircraft leasing transactions was $276 million and $298
million, respectively, which is composed of transactions with U.S. airlines of
$25 million and $41 million, respectively, and with foreign airlines of $251
million and $257 million, respectively. Our net investment in commercial
passenger and cargo aircraft leasing portfolio is composed of investments in
leveraged lease transactions, direct financing lease transactions and a portion
of our 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 default of an
equity defeasance or other third party credit arrangements. At September 30,
2004 and December 31, 2003, approximately 45% and 42%, respectively, of our
remaining net investment in commercial passenger and cargo aircraft leasing
investments is further secured by approximately $124 million and $125 million,
respectively, of equity defeasance accounts or third party credit arrangements.
During the third quarter of 2004, we generated $16 million from non-core asset
sales, including the sale of two commercial aircraft leased to United Air Lines
for approximately $8 million. These sales had no material effect on our revenue
or earnings during the quarter.
Subsequent Events
- -----------------
On November 1, 2004, we completed our acquisition of a substantial portion of
the assets of Ancora for approximately $35 million net of cash and assumed
liabilities. Ancora is a provider of first class, standard letter and
international mail processing and presort services with five operations in
southern California, Pennsylvania and Maryland. Ancora will become part of our
PSI operations and its national presort network.
Regulatory Matters
- ------------------
There have been no significant changes to the regulatory matters disclosed in
our 2003 Annual Report to Stockholders on Form 10-K.
Other Regulatory Matters
- ------------------------
In December 2003, we received accepted closing agreements with the Internal
Revenue Service (IRS) showing income tax adjustments for the 1992 to 1994 tax
years. The total additional tax for these years is approximately $5.0 million.
Additional tax due for 1995 and future tax years in connection with these
closing agreements will not materially affect our future results of operations,
financial position or cash flows. In addition to the accepted income tax
adjustments, one 1994 proposed adjustment remains in dispute, which could result
in additional tax of approximately $4.3 million. We believe that we have
meritorious defenses to this deficiency and that the ultimate outcome will not
result in a material effect on our results of operations, financial position or
cash flows. We believe that our accruals for tax liabilities are adequate for
all open years. However, if the IRS prevails on this deficiency, 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 laws and interpretations
by governments or courts.
The IRS is in the process of completing its examination of our tax returns for
the 1995 to 2000 tax years and has issued notices of proposed adjustment with
respect to a Capital Services leasing transaction entered into in 1998 and 1999.
Specifically, the IRS is proposing to disallow certain expenses claimed as
deductions on the 1998 through 2000 tax returns. We anticipate receiving similar
notices for other leasing transactions entered into during the audit period. The
IRS will likely make similar claims for years subsequent to 2000 in future
audits with respect to these transactions. The IRS may propose penalties on us
with respect to all periods that have been examined.
In addition, in June 2004, the Canada Revenue Agency (CRA) proposed an
adjustment for the 1996 to 1999 tax years, relating to intercompany loan
transactions. The CRA may propose penalties on us with respect to all periods
that have been examined.
We vigorously disagree with the proposed adjustments and intend to aggressively
contest these matters through applicable IRS, CRA and judicial procedures, as
appropriate. Although the final resolution of the proposed adjustments is
uncertain and involves unsettled areas of the law, based on currently available
information, we have provided for our best estimate of the probable tax
liability for these matters and believe that the resolution of these matters
will not have a material effect on our results of operations, financial position
or cash flows. However, an unfavorable resolution could have a material effect
on our results of operations, financial position or cash flows.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
Page 23
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 us 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
o changes in interest rates
o foreign currency fluctuations
o cost, timing and execution of the restructuring plan, including any potential
asset impairments
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
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 our
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 have been no material changes to the quantitative and qualitative
disclosures about market risk disclosed in our 2003 Annual Report to
Stockholders on Form 10-K.
Item 4. Controls and Procedures
Under the direction of our Chief Executive Officer and Chief Financial Officer,
we evaluated our disclosure controls and procedures and internal control over
financial reporting. The CEO and CFO concluded that our disclosure controls and
procedures were effective as of September 30, 2004. In addition, no change in
internal control over financial reporting occurred during the quarter ended
September 30, 2004, that has materially affected, or is reasonably likely to
materially affect, such internal control over financial reporting. It should be
noted that any system of controls is based in part upon certain assumptions
designed to obtain reasonable (and not absolute) assurance as to its
effectiveness, and there can be no assurance that any design will succeed in
achieving its stated goals. Notwithstanding this caution, the CEO and CFO have
reasonable assurance that the disclosure controls and procedures were effective
as of September 30, 2004.
Part II - Other Information
---------------------------
Item 1. Legal Proceedings
This Item updates the legal proceedings more fully described in our 2003 Annual
Report on Form 10-K, dated March 9, 2004, as updated by our Quarterly Reports on
Form 10-Q for the first and second quarters of 2004, dated May 7, 2004 and
August 5, 2004, respectively. On September 27, 2004, the Court dismissed with
prejudice, Comsentech, Inc. v. Pitney Bowes Credit Corporation (United States
---------------------------------------------------
District Court, Western District of Louisiana, filed March 21, 2003). The
Court's order followed on the parties' filing of a stipulation of dismissal with
prejudice, which resulted from the plaintiff's decision to voluntarily dismiss
its case.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
Page 24
In the third quarter of 2004, the company entered into a mediation process with
counsel for the plaintiffs in the remaining putative class action litigations
arising out of the equipment replacement program PBCC offers to certain of its
leasing customers (Boston Reed v. Pitney Bowes, et al.; Ann Harbin, et al. v.
------------------------------------ ---------------------
Pitney Bowes, et al.; McFerrin Insurance v. Pitney Bowes, et al.; and Cred-X,
- -------------------- ------------------------------------------ -----------
Inc. v. Pitney Bowes, et al.). These negotiations are ongoing.
- ----------------------------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchases
We repurchase shares of our common stock under a systematic program to manage
the dilution created by shares issued under employee stock plans and for other
purposes. This program authorizes repurchases in the open market.
On May 10, 2004, the Board of Directors of Pitney Bowes authorized $300 million
for repurchases of its outstanding shares of common stock on the open market
during the subsequent 12 to 24 months. During the three months ended September
30, 2004, we repurchased 0.9 million shares for a total price of $40 million
under the May 2004 program, leaving $225 million remaining for future
repurchases under this program.
Company Purchases of Equity Securities
The following table summarizes our share repurchase activity for the three
months ended September 30, 2004:
Total number of Approximate dollar value
Total number Average price shares purchased as of shares that may yet
of shares paid per part of a publicly be purchased under the
Period purchased share announced plan plan (in thousands)
- ------ ---------------- ---------------- ---------------------- ---------------------------
July 2004................. 22,900 $41.93 22,900 $264,039
August 2004............... 493,400 $41.89 493,400 $243,371
September 2004............ 419,250 $43.82 419,250 $224,999
---------------- ----------------------
Total repurchases....... 935,550 935,550
================ ======================
Item 6. Exhibits
Reg. S-K
Exhibits Description
-------- ----------------------------------------------------
(3)(a) Restated Certificate of Incorporation, as amended.
Incorporated by reference to Exhibit (3a) to Form
10-K as filed with the Commission on March 30, 1993.
(3)(a.1) Certificate of Amendment to the Restated Certificate
of Incorporation (as amended May 29, 1996).
Incorporated by reference to Exhibit (a.1) to Form
10-K as filed with the Commission on March 27, 1998.
(3)(b) By-laws, as amended. Incorporated by reference to
Exhibit (3b) to Form 10-K as filed with the
Commission on April 1, 1996.
(3)(c) By-laws, as amended. Incorporated by reference to
Exhibit (3)(ii) to Form 10-Q as filed with the
Commission on November 16, 1998.
(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
(32.2) Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2004
Page 25
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PITNEY BOWES INC.
November 8, 2004
/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
-------- -------------------------------------------------
(3)(a) Restated Certificate of Incorporation, as amended.
Incorporated by reference to Exhibit (3a) to
Form 10-K as filed with the Commission on March 30,
1993.
(3)(a.1) Certificate of Amendment to the Restated Certificate
of Incorporation (as amended May 29, 1996)
Incorporated by reference to Exhibit (a.1) to Form
10-K as filed with the Commission on March 27, 1998.
(3)(b) By-laws, as amended. Incorporated by reference to
Exhibit (3b) to Form 10-K as filed with the
Commission on April 1, 1996.
(3)(c) By-laws, as amended. Incorporated by reference to
Exhibit (3)(ii) to Form 10-Q as filed with the
Commission on November 16, 1998.
(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
(32.2) Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350