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 June 30, 2005
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- 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 July 22, 2005
is 228,856,583.
Pitney Bowes Inc.
Index
-----------------
Page Number
-----------
Part I - Financial Information:
Item 1: Financial Statements
Consolidated Statements of Income (Unaudited) - Three and
Six Months Ended June 30, 2005 and 2004....................... 3
Consolidated Balance Sheets - June 30, 2005 (Unaudited)
and December 31, 2004......................................... 4
Consolidated Statements of Cash Flows (Unaudited) - Six
Months Ended June 30, 2005 and 2004........................... 5
Notes to Consolidated Financial Statements........................ 6 - 16
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 17 - 26
Item 3: Quantitative and Qualitative Disclosures about
Market Risk............................................... 26
Item 4: Controls and Procedures..................................... 26
Part II - Other Information:
Item 1: Legal Proceedings........................................... 27
Item 2: Unregistered Sales of Equity Securities
and Use of Proceeds....................................... 27
Item 4: Submission of Matters to a Vote of
Security Holders.......................................... 27
Item 6: Exhibits.................................................... 28
Signatures ........................................................... 29
2
Part I - Financial Information
------------------------------
Pitney Bowes Inc.
Item 1: Financial Statements Consolidated Statements of Income
(Unaudited)
---------------------------------
(Dollars in thousands, except per share data) Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- -------------------------------
2005 2004 2005 2004
-------------- -------------- ------------- -------------
Revenue from:
Sales.................................................. $ 386,587 $ 338,442 $ 768,014 $ 669,802
Rentals................................................ 205,494 200,635 407,135 402,073
Financing.............................................. 161,387 147,993 318,662 296,222
Support services....................................... 197,297 159,946 392,231 318,359
Business services...................................... 368,529 307,576 717,632 610,367
Capital Services....................................... 40,880 51,309 74,288 81,000
-------------- -------------- ------------- -------------
Total revenue...................................... 1,360,174 1,205,901 2,677,962 2,377,823
-------------- -------------- ------------- -------------
Costs and expenses:
Cost of sales.......................................... 171,289 151,918 339,066 311,293
Cost of rentals........................................ 43,969 43,077 86,286 84,777
Cost of support services............................... 102,997 85,114 203,171 170,737
Cost of business services.............................. 299,297 252,690 588,139 498,582
Cost of Capital Services............................... - 13,017 - 13,017
Selling, general and administrative.................... 415,659 364,440 824,043 725,259
Research and development............................... 40,295 38,930 81,844 74,934
Restructuring.......................................... 26,402 16,229 10,562 31,272
Charitable contribution................................ - - 10,000 -
Interest, net.......................................... 50,414 42,538 97,230 83,983
-------------- -------------- ------------- -------------
Total costs and expenses........................... 1,150,322 1,007,953 2,240,341 1,993,854
-------------- -------------- ------------- -------------
Income before income taxes................................ 209,852 197,948 437,621 383,969
Provision for income taxes................................ 70,821 63,230 148,986 122,657
-------------- -------------- ------------- -------------
Net income................................................ $ 139,031 $ 134,718 $ 288,635 $ 261,312
============== ============== ============= =============
Basic earnings per share.................................. $ .61 $ .58 $ 1.25 $ 1.13
============== ============== ============= =============
Diluted earnings per share................................ $ .60 $ .58 $ 1.24 $ 1.11
============== ============== ============= =============
Dividends declared per share of common stock.............. $ .31 $ .305 $ .62 $ .61
============== ============== ============= =============
See Notes to Consolidated Financial Statements
3
Pitney Bowes Inc.
Consolidated Balance Sheets
---------------------------
June 30, December 31,
(Dollars in thousands, except share data) 2005 2004
------------------- -------------------
(Unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents......................................................... $ 276,884 $ 316,217
Short-term investments............................................................ 72,836 3,933
Accounts receivable, less allowances:
6/05, $50,977; 12/04, $50,254................................................. 617,066 567,772
Finance receivables, less allowances:
6/05, $66,837; 12/04, $71,001................................................. 1,342,058 1,400,593
Inventories (Note 3).............................................................. 237,146 206,697
Other current assets and prepayments.............................................. 210,791 197,874
------------------- -------------------
Total current assets.......................................................... 2,756,781 2,693,086
Property, plant and equipment, net (Note 4)............................................ 633,991 644,495
Rental equipment and related inventories, net (Note 4)................................. 481,852 475,905
Property leased under capital leases, net (Note 4)..................................... 2,572 3,081
Long-term finance receivables, less allowances:
6/05, $86,360; 12/04, $102,074.................................................... 1,803,482 1,820,733
Investment in leveraged leases......................................................... 1,558,000 1,585,030
Goodwill (Note 11)..................................................................... 1,609,849 1,411,381
Intangible assets, net (Note 11)....................................................... 409,112 323,737
Other assets........................................................................... 906,828 863,132
------------------- -------------------
Total assets........................................................................... $ 10,162,467 $ 9,820,580
=================== ===================
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities.......................................... $ 1,478,953 $ 1,475,107
Income taxes payable.............................................................. 116,290 218,605
Notes payable and current portion of
long-term obligations......................................................... 1,459,078 1,178,946
Advance billings.................................................................. 483,344 421,819
------------------- -------------------
Total current liabilities..................................................... 3,537,665 3,294,477
Deferred taxes on income............................................................... 1,750,902 1,771,825
Long-term debt (Note 5)................................................................ 2,881,637 2,798,894
Other noncurrent liabilities........................................................... 347,233 355,303
------------------- -------------------
Total liabilities............................................................. 8,517,437 8,220,499
------------------- -------------------
Preferred stockholders' equity in a subsidiary company................................. 310,000 310,000
Stockholders' equity:
Cumulative preferred stock, $50 par
value, 4% convertible......................................................... 17 19
Cumulative preference stock, no par
value, $2.12 convertible...................................................... 1,173 1,252
Common stock, $1 par value........................................................ 323,338 323,338
Retained earnings................................................................. 4,381,273 4,243,404
Accumulated other comprehensive income (Note 8)................................... 123,156 135,526
Treasury stock, at cost........................................................... (3,493,927) (3,413,458)
------------------- -------------------
Total stockholders' equity.................................................... 1,335,030 1,290,081
------------------- -------------------
Total liabilities and stockholders' equity............................................ $ 10,162,467 $ 9,820,580
=================== ===================
See Notes to Consolidated Financial Statements
4
Pitney Bowes Inc.
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
(Dollars in thousands) Six Months Ended June 30,
-----------------------------------------
2005 2004
------------------ ------------------
Cash flows from operating activities:
Net income......................................................................... $ 288,635 $ 261,312
Nonrecurring charges, net of taxes................................................. 13,766 20,015
Nonrecurring payments.............................................................. (44,526) (30,164)
Bond posted with the Internal Revenue Service...................................... (200,000) -
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization................................................. 164,621 148,744
Change in assets and liabilities, net
of effects of acquisitions:
Accounts receivable....................................................... (40,132) (8,327)
Net investment in internal finance receivables............................ (4,290) 45,910
Inventories............................................................... (23,526) 2,865
Other current assets and prepayments...................................... (4,944) (967)
Accounts payable and accrued liabilities.................................. (28,713) (25,253)
Deferred taxes on income and income taxes payable......................... 54,193 92,770
Advanced billings......................................................... 44,697 12,245
Other, net................................................................ (5,672) (5,188)
------------------ ------------------
Net cash provided by operating activities................................. 214,109 513,962
------------------ ------------------
Cash flows from investing activities:
Capital expenditures............................................................... (147,680) (146,847)
Investments........................................................................ (56,532) (1,998)
Net proceeds from sale of main plant............................................... 30,238 -
Net investment in Capital Services................................................. 90,618 21,303
Reserve account deposits........................................................... (9,200) 10,754
Acquisitions, net of cash acquired................................................. (276,864) (47,200)
------------------ ------------------
Net cash used in investing activities..................................... (369,420) (163,988)
------------------ ------------------
Cash flows from financing activities:
Increase in notes payable, net..................................................... 610,469 190,690
Proceeds from long-term obligations................................................ 399,998 2,222
Principal payments on long-term obligations........................................ (655,410) (314,236)
Proceeds from issuance of stock.................................................... 53,253 43,018
Stock repurchases.................................................................. (148,848) (135,000)
Dividends paid..................................................................... (142,835) (141,482)
------------------ ------------------
Net cash provided by (used in) financing activities....................... 116,627 (354,788)
------------------ ------------------
Effect of exchange rate changes on cash................................................ (649) 2,664
------------------ ------------------
Decrease in cash and cash equivalents.................................................. (39,333) (2,150)
Cash from consolidation of PBG Capital Partners LLC.................................... - 36,620
Cash and cash equivalents at beginning of period....................................... 316,217 293,812
------------------ ------------------
Cash and cash equivalents at end of period............................................. $ 276,884 $ 328,282
================== ==================
Interest paid.......................................................................... $ 92,587 $ 86,766
================== ==================
Income taxes paid, net................................................................. $ 93,878 $ 43,151
================== ==================
See Notes to Consolidated Financial Statements
5
Pitney Bowes Inc.
Notes to Consolidated Financial Statements
------------------------------------------
Note 1: Description of Business and Principles of Consolidation
- ----------------------------------------------------------------
Pitney Bowes is a provider of leading edge, global, integrated mail and document
management solutions for organizations of all sizes. Pitney Bowes Inc. and all
of its subsidiaries (the company) operate in the following groups of segments:
Global Mailstream Solutions, Global Business Services and Capital Services. The
company operates both inside and outside the United States. See Note 7 to the
consolidated financial statements for financial information concerning revenue
and earnings before interest and taxes (EBIT) by segment.
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 management, all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position of the company
at June 30, 2005, the results of its operations for the three and six months
ended June 30, 2005 and 2004 and its cash flows for the six months ended June
30, 2005 and 2004 have been included. Operating results for the three and six
months ended June 30, 2005 are not necessarily indicative of the results that
may be expected for any other interim period or the year ending December 31,
2005. These statements should be read in conjunction with the financial
statements and notes thereto included in the company's 2004 Annual Report to
Stockholders on Form 10-K. Certain prior year amounts in the consolidated
financial statements have been reclassified to conform with the current year
presentation.
Note 2: New Accounting Pronouncements
- --------------------------------------
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 and consolidated the assets and
liabilities 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 $51 million and $41 million, respectively, is included in other noncurrent
liabilities in the Consolidated Balance Sheets at June 30, 2005 and December 31,
2004. The consolidation of PBG did not have a material impact on the company's
results of operations or cash flows.
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
company 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 provisions of FSP
No. 106-2 were adopted on a prospective basis on July 1, 2004.
In November 2004, Statement of Financial Accounting Standards (FAS) No. 151,
"Inventory Costs," was issued. FAS No. 151 amends and clarifies the accounting
for abnormal amounts of idle facility expense, freight, handling costs and
wasted material (spoilage). The provisions of FAS No. 151 are effective for
fiscal years beginning after June 15, 2005. The company is currently evaluating
the provisions of FAS No. 151.
In December 2004, the FASB issued FSP No. 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004." The FSP provides guidance under FAS No. 109,
"Accounting for Income Taxes," with respect to recording the potential impact of
the repatriation provisions of the American Jobs Creation Act of 2004 (the "Jobs
Act") on enterprises' income tax expense and deferred tax liability. The Jobs
Act was enacted on October 22, 2004. FSP No. 109-2 states that companies are
allowed time beyond the financial reporting period of enactment to evaluate the
effect of the Jobs Act on its plan for reinvestment or repatriation of foreign
earnings for purposes of applying FAS No. 109. The company is currently
evaluating the effects of the repatriation provision and does not expect to
complete this evaluation until after Congress or the Treasury Department
provides clarification on key elements of the repatriation provision. The
company does not expect the adoption of these provisions to have a material
impact on its financial position, results of operations or cash flows.
6
Accounting for stock-based compensation
In April 2005, the Securities and Exchange Commission (SEC) approved a new rule
delaying the effective date of FAS No. 123 (revised 2004), "Share-Based
Payment," to January 1, 2006. In light of this delay, the company will adopt the
provisions of FAS No. 123R when it becomes effective. FAS No. 123R supercedes
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees." The revised statement addresses the accounting for share-based
payment transactions with employees and other third parties, eliminates the
ability to account for share-based transactions using APB No. 25 and requires
that the compensation costs relating to such transactions be recognized in the
consolidated financial statements. FAS No. 123R requires compensation cost to be
recognized immediately for awards granted to retirement eligible employees or
over the period from the grant date to the date retirement eligibility is
achieved, if that is expected to occur during the nominal vesting period. The
company currently uses the nominal vesting period approach to determine the pro
forma stock based compensation expense for all awards. FAS No. 123R requires
additional disclosures relating to the income tax and cash flow effects
resulting from share-based payments. The company is currently evaluating the
impact of adopting FAS No. 123R, which was issued in December 2004.
The company adopted the disclosure-only provisions of FAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," which amends FAS No.
123 and requires more prominent and more frequent disclosures in the financial
statements of the effects of stock-based compensation.
The company applies APB No. 25 and related interpretations in accounting for its
stock-based plans. Accordingly, no compensation expense has been recognized for
its U.S. and U.K. Stock Option Plans (ESP) or its U.S. and U.K. Employee Stock
Purchase Plans (ESPP), except for the compensation expense recorded for its
performance-based awards under the ESP and the Directors' Stock Plan.
If the company had elected to recognize compensation expense based on the fair
value method as prescribed by FAS No. 123, net income and earnings per share for
the three and six months ended June 30, 2005 and 2004 would have been reduced to
the following pro forma amounts:
(Dollars in thousands, except per share data) Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -------------------------------
2005 2004 2005 2004
------------- ------------- -------------- -------------
Net Income
As reported............................................. $ 139,031 $ 134,718 $ 288,635 $ 261,312
Deduct: Stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects............................................ (3,826) (4,304) (7,892) (8,594)
------------- ------------- -------------- -------------
Pro forma............................................... $ 135,205 $ 130,414 $ 280,743 $ 252,718
============= ============= ============== =============
Basic earnings per share
As reported............................................. $ .61 $ .58 $ 1.25 $ 1.13
Pro forma............................................... $ .59 $ .56 $ 1.22 $ 1.09
Diluted earnings per share
As reported............................................. $ .60 $ .58 $ 1.24 $ 1.11
Pro forma............................................... $ .58 $ .56 $ 1.21 $ 1.08
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
using the following weighted average assumptions:
Three and Six Months Ended
June 30,
------------------------------
2005 2004
------------- -------------
Expected dividend yield.................................. 2.8% 3.0%
Expected stock price volatility.......................... 19% 24%
Risk-free interest rate.................................. 3.5% 3%
Expected life (years).................................... 5 5
7
Note 3: Inventories
- --------------------
Inventories are composed of the following:
(Dollars in thousands) June 30, December 31,
2005 2004
--------------- ---------------
Raw materials and work in process.............. $ 91,512 $ 75,508
Supplies and service parts..................... 69,425 67,666
Finished products.............................. 76,209 63,523
--------------- ---------------
Total.......................................... $ 237,146 $ 206,697
=============== ===============
If all inventories valued at last-in, first-out had been stated at current
costs, inventories would have been $25.6 million and $20.2 million higher than
reported at June 30, 2005 and December 31, 2004, respectively.
Note 4: Fixed Assets
- ---------------------
Fixed assets are composed of the following:
(Dollars in thousands) June 30, December 31,
2005 2004
--------------- ---------------
Property, plant and equipment.................. $ 1,844,532 $ 1,756,480
Accumulated depreciation....................... (1,210,541) (1,111,985)
--------------- ---------------
Property, plant and equipment, net............. $ 633,991 $ 644,495
=============== ===============
Rental equipment and related inventories....... $ 1,151,448 $ 1,150,931
Accumulated depreciation....................... (669,596) (675,026)
--------------- ---------------
Rental equipment and related inventories, net.. $ 481,852 $ 475,905
=============== ===============
Property leased under capital leases........... $ 7,863 $ 8,662
Accumulated amortization....................... (5,291) (5,581)
--------------- ---------------
Property leased under capital leases, net...... $ 2,572 $ 3,081
=============== ===============
Depreciation expense was $142.8 million and $135.9 million for the six months
ended June 30, 2005 and 2004, respectively.
Note 5: Debt
- -------------
On July 13, 2005, the company issued $500 million of unsecured fixed rate notes
maturing in January 2016. These notes bear interest at an annual rate of 4.75%
and pay interest semi-annually beginning January 2006. The proceeds from these
notes will be used for general corporate purposes, including the repayment of
commercial paper, the financing of acquisitions and the repurchase of company
stock.
On June 30, 2005, $2.1 billion remained available under the shelf registration
statement filed in February 2005 with the SEC, permitting issuances of up to
$2.5 billion in debt securities, preferred stock, preference stock, common
stock, purchase contracts, depositary shares, warrants and units.
In March 2005, the company issued $400 million of unsecured fixed rate notes
maturing in March 2015. These notes bear interest at an annual rate of 5.0% and
pay interest semi-annually beginning September 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.
8
Note 6: Earnings Per Share
- ---------------------------
A reconciliation of the basic and diluted earnings per share computations for
the three months ended June 30, 2005 and 2004 is as follows (in thousands,
except per share data):
2005 2004
------------------------------------- -------------------------------------
Per Per
Income Shares Share Income Shares Share
----------- ----------- ----------- ----------- ----------- -----------
Net income.................................... $ 139,031 $ 134,718
Less:
Preferred stock dividends................... (1) -
Preference stock dividends.................. (23) (25)
----------- ----------- ----------- ----------- ----------- -----------
Basic earnings per share...................... $ 139,007 229,642 $.61 $ 134,693 230,942 $.58
=========== =========== =========== =========== =========== ===========
Effect of dilutive securities:
Preferred stock............................. 1 8 - 9
Preference stock............................ 23 739 25 782
Stock options............................... 2,017 2,214
Other....................................... 94 176
----------- ----------- ----------- ----------- ----------- -----------
Diluted earnings per share.................... $ 139,031 232,500 $.60 $ 134,718 234,123 $.58
=========== =========== =========== =========== =========== ===========
A reconciliation of the basic and diluted earnings per share computations for
the six months ended June 30, 2005 and 2004 is as follows (in thousands, except
per share data):
2005 2004
------------------------------------- -------------------------------------
Per Per
Income Shares Share Income Shares Share
----------- ----------- ----------- ----------- ----------- -----------
Net income.................................... $ 288,635 $ 261,312
Less:
Preferred stock dividends................... (1) -
Preference stock dividends.................. (47) (50)
----------- ----------- ----------- ----------- ----------- -----------
Basic earnings per share...................... $ 288,587 229,983 $1.25 $ 261,262 231,505 $1.13
=========== =========== =========== =========== =========== ===========
Effect of dilutive securities:
Preferred stock............................. 1 8 - 9
Preference stock............................ 47 750 50 789
Stock options............................... 2,137 2,059
Other....................................... 116 159
----------- ----------- ----------- ----------- ----------- -----------
Diluted earnings per share.................... $ 288,635 232,994 $1.24 $ 261,312 234,521 $1.11
=========== =========== =========== =========== =========== ===========
In accordance with FAS No. 128, "Earnings per Share," 1.3 million and 1.4
million common stock equivalent shares for the three months ended June 30, 2005
and 2004, respectively, and 1.2 million and 1.7 million common stock equivalent
shares for the six months ended June 30, 2005 and 2004, respectively, issuable
upon the exercise of stock options were excluded from the 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: Business Segment Information
- -------------------------------------
In light of the company's recent organizational realignment, effective January
1, 2005, the company revised its segments to reflect its product-based
businesses separately from its service-based businesses. Prior year amounts have
been reclassified to conform with the current year presentation. The Global
Mailstream Solutions group of segments includes worldwide revenue and related
expenses from the sale, rental and financing of Document Messaging Technology's
(DMT) production mail and inserting equipment for large enterprises, mail
finishing, mail creation and shipping equipment, related supplies and
maintenance services, mailing and customer communication software and postal
payment solutions. The Global Business Services group of segments includes
worldwide revenue and related expenses from facilities management contracts,
reprographics, document management, and other value-added services to key
vertical markets, and mail services operations, which include presort mail
services, international outbound mail services and direct mail marketing
services. The Capital Services segment includes financing of third-party
equipment.
9
Revenue and EBIT by business segment for the three and six months ended June 30,
2005 and 2004 were as follows:
(Dollars in thousands) Three Months Ended June 30, Six Months Ended June 30,
------------------------------------- ---------------------------------
2005 2004 2005 2004
----------------- ----------------- --------------- ---------------
Revenue:
Inside the U.S. - Mailing......................... $ 567,310 $ 542,183 $ 1,120,010 $ 1,076,572
- DMT............................. 96,847 69,826 187,965 133,747
Outside the U.S................................... 286,608 235,007 578,067 476,137
----------------- ----------------- --------------- ---------------
Global Mailstream Solutions (1)................... 950,765 847,016 1,886,042 1,686,456
Global Management Services........................ 275,568 267,440 543,473 534,223
Mail Services..................................... 92,961 40,136 174,159 76,144
----------------- ----------------- --------------- ---------------
Global Business Services.......................... 368,529 307,576 717,632 610,367
Capital Services.................................. 40,880 51,309 74,288 81,000
----------------- ----------------- --------------- ---------------
Total revenue....................................... $ 1,360,174 $ 1,205,901 $ 2,677,962 $ 2,377,823
================= ================= =============== ===============
EBIT: (2)
Inside the U.S. - Mailing......................... $ 223,860 $ 214,086 $ 441,439 $ 421,310
- DMT............................. 12,369 7,379 16,307 10,019
Outside the U.S................................... 48,581 39,697 100,746 77,908
----------------- ----------------- --------------- ---------------
Global Mailstream Solutions....................... 284,810 261,162 558,492 509,237
Global Management Services........................ 18,775 13,883 33,585 26,203
Mail Services..................................... 4,358 1,946 7,776 5,453
----------------- ----------------- --------------- ---------------
Global Business Services.......................... 23,133 15,829 41,361 31,656
Capital Services.................................. 26,024 26,535 45,528 47,717
----------------- ----------------- --------------- ---------------
Total EBIT.......................................... 333,967 303,526 645,381 588,610
Unallocated amounts:
Interest, net..................................... (50,414) (42,538) (97,230) (83,983)
Corporate expense................................. (47,299) (46,811) (89,968) (89,386)
Charitable contribution........................... - - (10,000) -
Restructuring..................................... (26,402) (16,229) (10,562) (31,272)
----------------- ----------------- --------------- ---------------
Income before income taxes.......................... $ 209,852 $ 197,948 $ 437,621 $ 383,969
================= ================= =============== ===============
<FN>
(1) Financing revenue reported in the Consolidated Statements of Income is
included in Global Mailstream Solutions.
(2) EBIT excludes general corporate expenses.
</FN>
Note 8: Comprehensive Income
- -----------------------------
Comprehensive income for the three and six months ended June 30, 2005 and 2004
was as follows:
(Dollars in thousands) Three Months Ended June 30, Six Months Ended June 30,
------------------------------------- ---------------------------------
2005 2004 2005 2004
----------------- ----------------- --------------- ---------------
Net income.......................................... $ 139,031 $ 134,718 $ 288,635 $ 261,312
Other comprehensive (loss) income,
net of tax:
Foreign currency translation
adjustments.................................. (1,507) (61,345) (15,829) 20,879
Net unrealized gain (loss) on
derivative instruments....................... 3,123 5,201 3,459 (354)
----------------- ----------------- --------------- ---------------
Comprehensive income............................... $ 140,647 $ 78,574 $ 276,265 $ 281,837
================= ================= =============== ===============
10
Note 9: Restructuring Charges
- ------------------------------
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 connection with our previously announced restructuring initiatives, the
company recorded pre-tax restructuring charges of $26.4 million and $16.2
million for the three months ended June 30, 2005 and 2004, respectively. For the
six months ended June 30, 2005 and 2004, pre-tax restructuring charges were
$10.6 million and $31.3 million, respectively.
The pre-tax restructuring charges are composed of:
(Dollars in millions) Three Months Ended June 30, Six Months Ended June 30,
------------------------------------- ---------------------------------
2005 2004 2005 2004
----------------- ----------------- --------------- ---------------
Severance and benefit costs...................... $ 24.7 $ 5.2 $ 37.8 $ 18.1
Asset impairments................................ 0.3 8.1 1.0 9.4
Other exit costs................................. 1.4 2.9 2.0 3.8
Gain on sale of main plant....................... - - (30.2) -
----------------- ----------------- --------------- ---------------
Total.......................................... $ 26.4 $ 16.2 $ 10.6 $ 31.3
================= ================= =============== ===============
All restructuring charges, except for asset impairments, will result in cash
outflows. The severance and benefit costs relate to a reduction in workforce of
approximately 2,600 employees worldwide from the inception of this plan through
June 30, 2005 and expected future workforce reductions of approximately 1,000
employees. The workforce reductions relate to actions across several of the
company's businesses resulting from infrastructure and process improvements and
its continuing efforts to streamline operations, and include managerial,
professional, clerical and technical roles. Approximately 60% of the workforce
reductions are in the U.S. The majority of the international workforce
reductions are in Europe and Canada. Asset impairments relate primarily to the
write-down of property, plant and equipment resulting from the closure or
streamlining of certain facilities and systems. 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. During the three months ended March 31, 2005, the company
recorded a pre-tax gain of $30.2 million related to the sale of its main plant
manufacturing facility in Connecticut.
Accrued restructuring charges at June 30, 2005 are composed of the following:
(Dollars in millions) Balance at Cash Ending balance
January 1, Restructuring (payments) Non-cash at June 30,
2005 charges (gain) receipts charges 2005
--------------- --------------- --------------- --------------- -----------------
Severance and
benefit costs................... $ 48.4 $ 37.8 $ (31.3) $ - $ 54.9
Asset impairments................ - 1.0 - (1.0) -
Other exit costs................. 3.1 2.0 (3.2) - 1.9
Gain on sale of
main plant...................... - (30.2) 30.2 - -
--------------- --------------- --------------- --------------- -----------------
$ 51.5 $ 10.6 $ (4.3) $ (1.0) $ 56.8
=============== =============== =============== =============== =================
Note 10: Acquisitions
- ----------------------
On June 30, 2005, the company completed the acquisition of Danka Canada Inc.
(Danka), a subsidiary of Danka Business Systems PLC, for a net purchase price of
$14 million in cash. Danka is a leading provider of office systems services,
supplies and equipment in Canada. This acquisition strengthens the company's
Canadian operations by enhancing its geographic coverage and extending its
offerings. The goodwill was assigned to Outside the U.S. in the Global
Mailstream Solutions group of segments.
On May 26, 2005, the company completed the acquisition of Imagitas, Inc.
(Imagitas) for a net purchase price of $230 million in cash, net of unrestricted
cash. Imagitas is a marketing services company that specializes in using mail to
help companies connect with hard to reach consumers. This acquisition expands
the company's presence in the mailstream and adds to the array of valuable
services that it currently delivers to its customers. The goodwill was assigned
to Mail Services in the Global Business Services group of segments.
11
On March 24, 2005, the company completed the acquisition of Compulit, Inc.
(Compulit) for a net purchase price of $25 million in cash. Compulit is a
leading provider of litigation support services to law firms and corporate
clients. This acquisition expands the company's ability to provide a broader
range of high value services to its legal vertical. The goodwill was assigned to
Global Management Services in the Global Business Services group of segments.
On December 16, 2004, the company completed the acquisition of Groupe MAG for a
net purchase price of $43 million in cash. Groupe MAG is a distributor of
production mail equipment, software and services in France, Belgium and
Luxembourg. This acquisition extended the company's distribution capabilities
internationally. The goodwill was assigned to Outside the U.S. in the Global
Mailstream Solutions group of segments.
On November 1, 2004, the company completed the acquisition of a substantial
portion of the assets of Ancora Capital & Management Group LLC (Ancora) for a
net purchase price of $37 million in cash. 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. This acquisition
expanded the company's mail services operations. The goodwill was assigned to
Mail Services in the Global Business Services group of segments.
On July 20, 2004, the company completed the acquisition of Group 1 Software,
Inc. (Group 1) for a net purchase price of $329 million in cash. Group 1 is an
industry leader in software that enhances mailing efficiency, data quality and
customer communications. The goodwill was assigned to Inside the U.S. - DMT and
Outside the U.S. in the Global Mailstream Solutions group of segments.
On May 21, 2004, the company completed the acquisition of substantially all of
the assets of International Mail Express, Inc. (IMEX) for a net purchase price
of $30 million in cash. IMEX consolidates letters and flat-sized mail headed to
international addresses to reduce postage costs and expedite delivery. This
acquisition expanded the company's mail services operations. The goodwill was
assigned to Mail Services in the Global Business Services group of segments.
The following table summarizes selected financial data for these acquisitions:
(Dollars in thousands) Groupe
Danka Imagitas Compulit MAG Ancora Group 1 IMEX
----------- ----------- ----------- ----------- ----------- ----------- -----------
Purchase price allocation
Intangible assets.................. $ 4,203 $ 101,427 $ 2,797 $ 10,356 $ 13,923 $ 82,067 $ 9,600
Goodwill........................... 8,358 170,442 18,062 27,127 20,791 293,593 20,180
Other, net......................... 1,439 (41,869) 4,141 5,775 2,248 (46,539) 347
----------- ----------- ----------- ----------- ----------- ----------- -----------
Purchase price.................... $ 14,000 $ 230,000 $ 25,000 $ 43,258 $ 36,962 $ 329,121 $ 30,127
=========== =========== =========== =========== =========== =========== ===========
Intangible assets
Customer relationships............. $ 3,327 $ 24,630 $ 2,366 $ 10,356 $ 13,923 $ 32,267 $ 8,100
Supplier relationships (1)......... - 68,797 - - - - -
Mailing software
and technology.................... - 4,100 - - - 43,600 900
Trademarks and trade
names............................. 876 3,900 431 - - 6,200 600
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total intangible assets........... $ 4,203 $ 101,427 $ 2,797 $ 10,356 $ 13,923 $ 82,067 $ 9,600
=========== =========== =========== =========== =========== =========== ===========
Intangible assets amortization
period
Customer relationships............. 15 years 5 years 4 years 15 years 15 years 15 years 15 years
Supplier relationships (1)......... - - - - - - -
Mailing software
and technology.................... - 5 years - - - 9 years 5 years
Trademarks and trade
names............................. 4 years 5 years 5 years - - 9 years 2 years
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total weighted average............ 13 years 5 years 4 years 15 years 15 years 12 years 13 years
=========== =========== =========== =========== =========== =========== ===========
(1) Based on the preliminary valuation of the assets acquired and liabilities
assumed for its recent acquisition of Imagitas, the company has allocated
approximately $69 million to certain supplier relationships. The company is
continuing to evaluate this allocation as well as the appropriate
amortization period, if any, for these supplier relationships. The company
expects to finalize this allocation by year-end.
12
Allocation of the purchase price to the assets acquired and liabilities assumed
has not been finalized for all of these acquisitions. Final determination of the
purchase price and fair values to be assigned may result in adjustments to the
preliminary estimated values assigned at the date of acquisition.
Consolidated impact of acquisitions
The consolidated financial statements include the results of operations of the
acquired businesses from their respective dates of acquisition. These
acquisitions 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 of operations have been
prepared as if the acquisitions of Danka, Imagitas, Compulit, Groupe MAG,
Ancora, Group 1 and IMEX had occurred on January 1, 2004:
(Dollars in thousands) Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------- -------------------------------------
2005 2004 2005 2004
------------------ ------------------ ----------------- -----------------
Total revenue................................. $ 1,378,924 $ 1,298,776 $ 2,724,587 $ 2,567,573
The pro forma consolidated results do not purport to be indicative of actual
results that would have occurred had the acquisitions been completed on January
1, 2004, 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 2005 and 2004, the company also completed several smaller acquisitions,
including additional sites for its mail services operations and some of its
international dealerships. The company also acquired the hardware equipment
services business of Standard Register Inc. at the end of 2004. The cost of
these acquisitions was in the aggregate less than $75 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 and Goodwill
- ----------------------------------------
Intangible assets are composed of the following:
(Dollars in thousands) June 30, 2005 December 31, 2004
--------------------------------------- -------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------------------ ------------------ ----------------- -----------------
Customer relationships........................ $ 280,988 $ 42,984 $ 255,512 $ 33,168
Supplier relationships (1).................... 68,797 660 - -
Mailing software and technology............... 115,057 25,772 111,876 20,730
Trademarks and trade names.................... 20,934 8,043 15,897 6,685
Non-compete agreements........................ 3,970 3,175 3,922 2,887
------------------ ------------------ ----------------- -----------------
$ 489,746 $ 80,634 $ 387,207 $ 63,470
================== ================== ================= =================
Intangible assets acquired during the six months ended June 30, 2005 are as
follows:
(Dollars in thousands) Amortization Acquisition
Period Cost
------------------ ------------------
Customer relationships........................ 6 years $ 31,196
Supplier relationships (1).................... - 68,797
Mailing software and technology............... 5 years 4,100
Trademarks and trade names.................... 5 years 5,207
Non-compete agreements........................ 5 years 87
------------------ ------------------
6 years $ 109,387
==================
(1) Based on the preliminary valuation of the assets acquired and liabilities
assumed for its recent acquisition of Imagitas, the company has allocated
approximately $69 million to certain supplier relationships. The company is
continuing to evaluate this allocation as well as the appropriate
amortization period, if any, for these supplier relationships. The company
expects to finalize this allocation by year-end.
13
Amortization expense for intangible assets for the three months ended June 30,
2005 and 2004 was $10.0 million and $5.0 million, respectively. Amortization
expense for intangible assets for the six months ended June 30, 2005 and 2004
was $18.0 million and $10.0 million, respectively. Estimated intangible assets
amortization expense for 2005 and the next five years is as follows:
(Dollars in thousands)
For the year ending 12/31/05................. $ 39,100
For the year ending 12/31/06................. $ 41,200
For the year ending 12/31/07................. $ 39,200
For the year ending 12/31/08................. $ 38,000
For the year ending 12/31/09................. $ 36,600
For the year ending 12/31/10................. $ 30,300
Changes in the carrying amount of goodwill by business segment for the six
months ended June 30, 2005 are as follows:
(Dollars in thousands) Balance at Acquired Balance at
January 1, during the June 30,
2005 period Other 2005
----------------- ---------------- ----------------- ----------------
Inside the U.S. -Mailing..................... $ 63,259 $ - $ 2,347 $ 65,606
-DMT......................... 291,686 - 1,026 292,712
Outside the United States.................... 423,536 8,358 (8,709) 423,185
----------------- ---------------- ----------------- ----------------
Global Mailstream Solutions.................. 778,481 8,358 (5,336) 781,503
Global Management Services................... 427,574 18,062 (2,590) 443,046
Mail Services................................ 205,326 175,850 4,124 385,300
----------------- ---------------- ----------------- ----------------
Global Business Services..................... 632,900 193,912 1,534 828,346
Capital Services............................. - - - -
----------------- ---------------- ----------------- ----------------
Total........................................ $ 1,411,381 $ 202,270 $ (3,802) $ 1,609,849
================= ================ ================= ================
"Other" includes the impact of post closing acquisition and foreign currency
translation adjustments.
Note 12: Retirement Plans and Nonpension Postretirement Benefits
- -----------------------------------------------------------------
Defined Benefit Pension Plans
The components of net periodic benefit cost for defined benefit pension plans
for the three months ended June 30, 2005 and 2004 are as follows:
(Dollars in thousands) United States Foreign
------------------------------------- -------------------------------------
Three Months Ended June 30, Three Months Ended June 30,
------------------------------------- -------------------------------------
2005 2004 2005 2004
----------------- ---------------- ----------------- ----------------
Service cost................................. $ 8,536 $ 8,314 $ 2,536 $ 2,736
Interest cost................................ 22,845 22,194 5,346 6,335
Expected return on plan assets............... (32,090) (31,771) (6,771) (7,630)
Amortization of transition cost.............. - - (146) (128)
Amortization of prior service cost........... (723) (678) 142 165
Amortization of net loss..................... 6,157 2,947 2,642 2,020
----------------- ---------------- ----------------- ----------------
Net periodic benefit cost..................... $ 4,725 $ 1,006 $ 3,749 $ 3,498
================= ================ ================= ================
The components of net periodic benefit cost for defined benefit pension plans
for the six months ended June 30, 2005 and 2004 are as follows:
(Dollars in thousands) United States Foreign
------------------------------------- -------------------------------------
Six Months Ended June 30, Six Months Ended June 30,
------------------------------------- -------------------------------------
2005 2004 2005 2004
----------------- ---------------- ----------------- ----------------
Service cost................................. $ 17,072 $ 16,627 $ 5,150 $ 5,082
Interest cost................................ 45,690 44,387 10,789 11,575
Expected return on plan assets............... (64,180) (63,547) (13,592) (13,914)
Amortization of transition cost.............. - - (292) (262)
Amortization of prior service cost........... (1,446) (1,356) 283 303
Amortization of net loss..................... 12,314 5,894 5,271 3,638
----------------- ---------------- ----------------- ----------------
Net periodic benefit cost.................... $ 9,450 $ 2,005 $ 7,609 $ 6,422
================= ================ ================= ================
14
The company previously disclosed in its consolidated financial statements for
the year ended December 31, 2004 that it expects to contribute up to $5 million
and up to $10 million, respectively, to its U.S. and foreign pension plans
during 2005. At June 30, 2005, $2.0 million and $3.0 million of contributions
have been made to the U.S. and foreign pension plans, respectively.
Nonpension Postretirement Benefit Plans
The components of net periodic benefit cost for nonpension postretirement
benefit plans for the three and six months ended June 30, 2005 and 2004 are as
follows:
(Dollars in thousands) Three Months Ended June 30, Six Months Ended June 30,
------------------------------------- -------------------------------------
2005 2004 2005 2004
----------------- ----------------- ----------------- -----------------
Service cost................................. $ 789 $ 1,004 $ 1,670 $ 2,064
Interest cost................................ 3,200 5,464 7,511 10,348
Amortization of prior service cost........... (478) (2,466) (1,011) (4,515)
Amortization of net loss..................... 304 1,675 1,512 3,462
----------------- ----------------- ----------------- -----------------
Net periodic benefit cost.................... $ 3,815 $ 5,677 $ 9,682 $ 11,359
================= ================= ================= =================
The company previously disclosed in its consolidated financial statements for
the year ended December 31, 2004 that it expects to contribute $36 million,
which represents its expected benefit payments, to its nonpension postretirement
benefit plans during 2005. At June 30, 2005, $20.3 million of benefit payments
have been made.
Note 13: Guarantees
- --------------------
In connection with its Capital Services programs, the company has sold net
finance receivables and in selective cases 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 $79 million and $99 million at June 30, 2005 and
December 31, 2004, respectively. In accordance with GAAP, the company does not
record these amounts as liabilities in its Consolidated Balance Sheets. The
company's maximum risk of loss on these net financing receivables and guarantee
contracts arises from the possible non-performance of lessees to meet the terms
of their contracts and from changes in the value of the underlying equipment.
These contracts are secured by the underlying equipment value and supported by
the creditworthiness of its customers. At June 30, 2005 and December 31, 2004,
the underlying equipment value exceeded the sum of the uncollected principal
balance of receivables sold and the guarantee contracts. As part of the
company's review of its risk exposure, the company believes it has made adequate
provision for sold receivables and guarantee contracts that may not be
collectible.
The company provides product warranties in conjunction with certain product
sales, generally for a period of 90 days from the date of installation. The
company's product warranty liability reflects management's best estimate of
probable liability under its product warranties based on historical claims
experience, which has not been significant, and other currently available
evidence. Accordingly, the company's product warranty liability at June 30, 2005
and December 31, 2004, respectively, was not material.
Note 14: Income Taxes
- ----------------------
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
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 discussed above, a proposed
adjustment related to the 1994 tax year remains in dispute, which could result
in additional tax of approximately $4 million for that year. The IRS also is
proposing similar adjustments for the 1995 and future tax years relating to this
deficiency. These adjustments could result in additional tax expense in the
range of $0 to $40 million. The company believes that it has meritorious
defenses to these proposed adjustments. The IRS may propose penalties on the
company with respect to all periods that have been examined.
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 Capital Services leasing transactions entered into in
1997 through 2000. Specifically, the IRS is proposing to disallow certain
expenses claimed as deductions on the 1997 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.
15
In addition, in 2005, the Canada Revenue Agency (CRA) issued an adjustment for
the 1996 to 1999 tax years, relating to intercompany loan transactions. The
company paid approximately $24 million in the first quarter of 2005 and plans to
protest the adjustment.
The company vigorously disagrees with the proposed adjustments and intends to
aggressively contest these matters through applicable IRS, CRA and judicial
procedures, as appropriate. The company has provided for its best estimate of
the probable tax liability for these matters and believes that its accruals for
tax liabilities are adequate for all open years. However, if the taxing
authority prevails, an unfavorable resolution of these matters could have a
material effect on the company's results of operations.
In April 2005, the company posted a $200 million tax bond with the IRS to
mitigate IRS interest rate risk.
At any time, the company's provision for taxes could be affected by changes in
tax law and interpretations by governments or courts.
Note 15: Capital Services Spin-off
- -----------------------------------
In December 2004, the company's Board of Directors approved a plan to pursue a
sponsored spin-off of its Capital Services external financing business. The new
entity will be an independent publicly traded company consisting of most of the
assets in the Capital Services segment, including assets related to Imagistics
International, Inc. (IGI). On March 31, 2005, Pitney Bowes Credit Corporation, a
wholly-owned subsidiary of the company, entered into a Subscription Agreement
with Cerberus Capital Management, L.P. through its investment vehicle, JCC
Management LLC (Investor). Under the terms of the Subscription Agreement, the
Investor is expected to invest in excess of $100 million for common and
preferred stock representing up to 19.9% of the voting interest and up to 48%
economic interest in the spun-off entity. The Subscription Agreement anticipates
that Pitney Bowes stockholders will receive 80.1% of the common stock of the new
public company in a tax-free distribution. At the time of the spin-off, most of
the assets in the Capital Services segment will become a separate entity
(Spinco) from the company and become a publicly traded company.
In July 2005, the company received notice of termination of our agreement to
provide future lease financing to IGI. The termination of this agreement would
become effective in October 2005, if not rescinded or renegotiated prior to that
date.
The spin-off is not subject to a vote of Pitney Bowes shareholders. The
transaction is subject to a favorable ruling from the IRS that the transaction
will be tax-free, regulatory review and other customary conditions. The goal of
the company is to complete the spin-off by year-end, but it could take longer.
The company estimates that it will incur after-tax transaction costs of about
$20 million to $35 million in connection with the spin-off. The majority of
these costs will be incurred at the time of the spin-off. These costs are
composed primarily of professional fees, taxes on asset transfers and lease
contract termination fees.
In addition, in accordance with current accounting guidelines, at the time of
spin-off the company will be required to compare the book and fair market values
of the assets and liabilities spun-off and record any resulting deficit as a
charge in discontinued operations. The company currently estimates this
potential non-cash after-tax charge to be in the range of $150 million to $250
million. The ultimate amount of this charge, if any, will be determined by the
fair market value of Spinco at the time of spin-off and the resolution of
related tax liabilities.
The Subscription Agreement was filed as Exhibit 10 to the Quarterly Report on
Form 10-Q for the three months ended March 31, 2005.
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
- --------
We again achieved very positive results in the second quarter of 2005, as the
momentum in our core businesses continued this quarter. We are realizing the
benefits of our actions to strengthen revenue growth, expand into new market
spaces and enhance our operating efficiency.
Revenue grew 13% in the second quarter of 2005 to $1.36 billion compared with
the second quarter of 2004 driven by ongoing strong worldwide demand for our
mailing systems, mail services and supplies for our broader base of digital
products; acquisitions, which contributed 6%; and the favorable impact of
foreign currency, which contributed 2%. Revenue was adversely impacted 1% by the
year-over-year decline in earnings from Capital Services.
Net income increased 3% in the second quarter of 2005 to $139 million compared
with the second quarter of 2004. Diluted earnings per share increased to 60
cents in the second quarter of 2005 from 58 cents in the second quarter of 2004.
Net income for the second quarter of 2005 was reduced by after-tax restructuring
charges of $17 million or 7 cents per diluted share. Net income for the second
quarter of 2004 was reduced by after-tax restructuring charges of $10 million or
4 cents per diluted share.
During the second quarter of 2005 we continued to execute our strategy to expand
in existing or adjacent growth markets. The recent acquisition of Imagitas, Inc.
(Imagitas) is a good example.
See Results of Operations - second quarter of 2005 vs. second quarter of 2004
for a more detailed discussion of our quarterly results of operations.
Outlook
- -------
We anticipate that we will experience continued strength in our financial
results in the second half of 2005. We expect that revenue growth will be driven
by small business, mail services, international, supplies, payments solutions
and software offerings. In addition, we expect to continue our market expansion
and derive further operating synergies from our recent acquisitions. We expect
to experience a continuation in the ongoing changing mix of our product line,
where a greater percentage of revenue is coming from diversified revenue streams
associated with fully featured smaller systems and less from larger system
sales.
As we have previously stated, we expect to record additional restructuring
charges during the year in connection with the continued realignment and
streamlining of our worldwide infrastructure. We remain focused on disciplined
expense control initiatives and will continue to allocate capital to optimize
our returns.
We expect our effective tax rate to be in line with the first half of 2005, and
while it is always difficult to predict future economic and interest trends, we
expect interest and pension costs will continue to increase. We will also
continue to be constrained by the year-over-year decline in earnings from our
Capital Services business in anticipation of our previously announced plans to
spin-off the majority of the assets in this segment.
17
Results of Operations - second quarter of 2005 vs. second quarter of 2004
- --------------------------------------------------------------------------
Business segment results
In light of our recent organizational realignment, effective January 1, 2005, we
revised our segments to reflect our product-based businesses separately from our
service-based businesses. The following table shows revenue and earnings before
interest and taxes (EBIT) by segment for the three months ended June 30, 2005
and 2004:
(Dollars in millions) Revenue EBIT
----------------------------------------- -----------------------------------------
Three months ended June 30, Three months ended June 30,
----------------------------------------- -----------------------------------------
2005 2004 % change 2005 2004 % change
----------- ----------- ----------- ----------- ----------- -----------
Inside the U.S. -Mailing................ $ 567 $ 542 5% $ 224 $ 214 5%
-DMT.................... 97 70 39% 12 7 68%
Outside the United States............... 287 235 22% 49 40 22%
----------- ----------- ----------- ----------- ----------- -----------
Global Mailstream Solutions............. 951 847 12% 285 261 9%
Global Management Services.............. 275 268 3% 19 14 35%
Mail Services........................... 93 40 132% 4 2 124%
----------- ----------- ----------- ----------- ----------- -----------
Global Business Services................ 368 308 20% 23 16 46%
Capital Services........................ 41 51 (20%) 26 27 (2%)
----------- ----------- ----------- ----------- ----------- -----------
Total................................... $ 1,360 $ 1,206 13% $ 334 $ 304 10%
=========== =========== =========== =========== =========== ===========
During the second quarter of 2005, Global Mailstream Solutions revenue increased
12% and EBIT increased 9%. Inside the U.S., the quarter's revenue growth was
favorably impacted by continued strong demand for networked digital mailing
systems, especially for small and mid-sized systems, and for supplies for
digital products. The quarter's results also included higher revenue from DMT
that was driven by the contribution of Group 1 Software, Inc. (Group 1), which
was acquired in July 2004. Outside of the U.S., revenue again grew at a
double-digit rate. This reflected good revenue growth in virtually all markets,
with the UK, Canada and Germany as significant contributors to revenue growth.
These results were based on strong demand for digital mailing systems, which are
continuing to be introduced outside of the U.S., good growth in mailing
equipment placements with small businesses, and increased supplies for digital
products. In addition, revenue growth for the quarter benefited from the fourth
quarter 2004 acquisition of Groupe MAG and the favorable impact of foreign
currency.
During the second quarter of 2005, Global Business Services revenue increased
20% and EBIT increased 46%. Our management services operation reported 3%
revenue growth and double-digit EBIT growth for the quarter consistent with the
ongoing focus on higher value service offerings and administrative cost
reduction. Mail services revenue more than doubled versus the prior year as a
result of continued expansion into additional sites, growth in its customer base
and the acquisition of Imagitas during the quarter. EBIT margins improved versus
the prior quarter and were comparable to the prior year as we continued to
invest in the expansion of our presort and international mail network and
integrate recently acquired sites.
During the second quarter of 2005, Capital Services revenue decreased 20% and
EBIT decreased 2%. The quarter's EBIT was favorably impacted by the sale of
assets in the portfolio. During the first quarter of 2005 we signed a definitive
agreement with a third party investor for a sponsored spin-off of most of the
assets in our Capital Services segment. These assets contributed approximately 4
cents per diluted share in the second quarter of 2005, about equal to the
contribution in the prior year.
Revenue by source
The following table shows revenue by source for the three months ended June 30,
2005 and 2004:
(Dollars in thousands) Three Months Ended June 30,
-----------------------------------------------------------
2005 2004 % change
----------------- ----------------- -----------------
Sales.............................................................. $ 386,587 $ 338,442 14%
Rentals............................................................ 205,494 200,635 2%
Financing.......................................................... 161,387 147,993 9%
Support services................................................... 197,297 159,946 23%
Business services.................................................. 368,529 307,576 20%
Capital Services................................................... 40,880 51,309 (20%)
----------------- ----------------- -----------------
Total revenue...................................................... $ 1,360,174 $ 1,205,901 13%
================= ================= =================
Sales revenue increased 14% due to strong growth in worldwide sales of digital
mailing equipment and related supplies; the acquisitions of Group 1 and Groupe
MAG, which contributed 6%; and the favorable impact of foreign currency, which
contributed 3%.
18
Rentals revenue increased 2%, helped by the favorable impact of foreign
currency, which contributed 1%.
Financing revenue increased 9% due primarily to growth in our worldwide
equipment leasing volumes and the favorable impact of foreign currency, which
contributed 2%.
Support services revenue increased 23% due primarily to the acquisitions of
Group 1 and Groupe MAG, which contributed 15%; the favorable impact of foreign
currency, which contributed 2%; a larger population of international and DMT
equipment maintenance agreements; and revenue from the hardware equipment
services contracts of Standard Register Inc.
Business services revenue increased 20% due primarily to strong growth at our
existing mail services sites and the acquisitions of International Mail Express,
Inc. (IMEX), Ancora Capital & Management Group LLC (Ancora), Compulit, Inc.
(Compulit) and Imagitas, which contributed 10%, and the addition of two new
sites in our IMEX business.
Capital Services revenue decreased 20% consistent with our ongoing strategy to
reduce our exposure to this business.
Costs and expenses
Cost of sales decreased to 44.3% of related revenues in the second quarter of
2005 compared with 44.9% in the second quarter of 2004 primarily due to the
increase in mix of higher margin software and supplies revenue and benefits from
our transition to outsourcing of parts for digital equipment.
Cost of rentals was 21.4% of related revenues in the second quarter of 2005
compared with 21.5% in the second quarter of 2004.
Cost of support services decreased to 52.2% of related revenues in the second
quarter of 2005 compared with 53.2% in the second quarter of 2004 primarily due
to higher margin software support services revenue at Group 1, partially offset
by the increase in mix of lower margin international support services revenue.
Cost of business services decreased to 81.2% of related revenues in the second
quarter of 2005 compared with 82.2% in the second quarter of 2004 primarily due
to our ongoing focus on higher value service offerings, productivity and
efficiency improvements in our management services operations.
Cost of Capital Services in the second quarter of 2004 relates to the sale of a
non-core operating lease.
Selling, general and administrative expenses increased to 30.6% of revenue in
the second quarter of 2005 compared with 30.2% of revenue in the second quarter
of 2004 primarily due to the impact of strategic transactions partially offset
by our continued focus on controlling operating expenses and benefits from our
transformation programs.
Research and development expenses increased 3.5% to $40.3 million in the second
quarter of 2005 compared with $38.9 million in the second quarter of 2004
primarily due to research and development at Group 1. Our investment in research
and development also reflects our continued investment in developing new
technologies and enhancing features for all our products.
Net interest expense increased to $50.4 million in the second quarter of 2005
from $42.5 million in the second quarter of 2004. The increase was due to higher
average interest rates and borrowings during the second quarter of 2005 compared
with the second quarter of 2004.
The effective tax rate for the second quarter of 2005 was 33.7% compared with
31.9% in the second quarter of 2004. The effective tax rates for the second
quarter of 2005 and 2004 included tax benefits of .3%, for both periods, from
restructuring initiatives. The increase in the 2005 effective tax rate reflects
the impact of our strategy to cease originating large-ticket, structured, third
party financing of non-core assets.
Results of Operations - six months of 2005 vs. six months of 2004
- -----------------------------------------------------------------
For the first six months of 2005 compared with the same period of 2004, revenue
increased 13% to $2.7 billion, and net income increased 10% to $288.6 million.
Net income for the first six months of 2005 and 2004 was reduced by after-tax
restructuring charges of $7.7 million (3 cents per diluted share) and $20.0
million (9 cents per diluted share). The factors that affected revenue and EBIT
for the six months ended June 30, 2005 compared with the same period of 2004
included those cited for the second quarter of 2005 versus 2004.
19
Charitable Contribution
- -----------------------
During the first quarter of 2005, we contributed $10 million ($6 million
after-tax) to the Pitney Bowes Literacy and Education Fund and the Pitney Bowes
Involvement Fund.
Restructuring
- -------------
In connection with our previously announced restructuring initiatives, we
recorded pre-tax restructuring charges of $26.4 million and $16.2 million for
the three months ended June 30, 2005 and 2004, respectively. For the six months
ended June 30, 2005 and 2004, pre-tax restructuring charges were $10.6 million
and $31.3 million, respectively. We expect these restructuring initiatives to be
substantially completed by the end of 2005 and currently estimate 2005 pre-tax
restructuring charges to be in the range of $20 million to $40 million, net of
the $30 million gain on the sale of our main plant manufacturing facility. As we
continue to finalize our restructuring plans, the ultimate amount and timing of
the restructuring charges may differ from our current 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 2005 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.
The pre-tax restructuring charges are composed of:
(Dollars in millions) Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2005 2004 2005 2004
----------- ------------ ----------- ------------
Severance and benefit costs..................... $ 24.7 $ 5.2 $ 37.8 $ 18.1
Asset impairments............................... 0.3 8.1 1.0 9.4
Other exit costs................................ 1.4 2.9 2.0 3.8
Gain on sale of main plant...................... - - (30.2) -
----------- ------------ ----------- ------------
Total......................................... $ 26.4 $ 16.2 $ 10.6 $ 31.3
=========== ============ =========== ============
All restructuring charges, except for asset impairments, will result in cash
outflows. The severance and benefit costs relate to a reduction in workforce of
approximately 2,600 employees worldwide from the inception of this plan through
June 30, 2005 and expected future workforce reductions of approximately 1,000
employees. The workforce reductions relate to actions across several of our
businesses resulting from infrastructure and process improvements and our
continuing efforts to streamline operations, and include managerial,
professional, clerical and technical roles. Approximately 60% of the workforce
reductions are in the U.S. The majority of the international workforce
reductions are in Europe and Canada. Asset impairments relate primarily to the
write-down of property, plant and equipment resulting from the closure or
streamlining of certain facilities and systems. 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. During the three months ended March 31, 2005, we recorded a
pre-tax gain of $30.2 million related to the sale of our main plant
manufacturing facility in Connecticut.
Accrued restructuring charges at June 30, 2005 are composed of the following:
(Dollars in millions) Balance at Cash Ending balance
January 1, Restructuring (payments) Non-cash at June 30,
2005 charges (gain) receipts charges 2005
--------------- --------------- --------------- --------------- ---------------
Severance and
benefit costs................... $ 48.4 $ 37.8 $ (31.3) $ - $ 54.9
Asset impairments................ - 1.0 - (1.0) -
Other exit costs................. 3.1 2.0 (3.2) - 1.9
Gain on sale of
main plant...................... - (30.2) 30.2 - -
--------------- --------------- --------------- --------------- ---------------
$ 51.5 $ 10.6 $ (4.3) $ (1.0) $ 56.8
=============== =============== =============== =============== ===============
Acquisitions
- ------------
On June 30, 2005, we acquired Danka Canada Inc. (Danka), a subsidiary of Danka
Business Systems PLC, for a net purchase price of $14 million in cash. Danka is
a leading provider of office systems services, supplies and equipment in Canada.
This acquisition strengthens our Canadian operations by enhancing our geographic
coverage and extending our offerings.
20
On May 26, 2005, we acquired Imagitas for a net purchase price of $230 million
in cash, net of unrestricted cash. Imagitas is a marketing services company that
specializes in using mail to help companies connect with hard to reach
consumers. This acquisition expands our presence in the mailstream and adds to
the array of valuable services that we currently deliver to our customers.
On March 24, 2005, we acquired Compulit for a net purchase price of $25 million
in cash. Compulit is a leading provider of litigation support services to law
firms and corporate clients. This acquisition expands our ability to provide a
broader range of high value services for our legal vertical.
In December 2004, we acquired Groupe MAG for a net purchase price of $43 million
in cash. Groupe MAG is a distributor of production mail equipment, software and
services in France, Belgium and Luxembourg. This acquisition extended our
distribution capabilities internationally.
In November 2004, we acquired a substantial portion of the assets of Ancora for
a net purchase price of $37 million in cash. 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. This
acquisition expanded our mail services operations.
In July 2004, we acquired Group 1 for a net purchase price of $329 million in
cash. Group 1 is an industry leader in software that enhances mailing
efficiency, data quality and customer communications.
In May 2004, we acquired substantially all of the assets of IMEX for a net
purchase price of $30 million in cash. IMEX consolidates letters and flat-sized
mail headed to international addresses to reduce postage costs and expedite
delivery. This acquisition expanded our mail services operations.
We accounted for these acquisitions using the purchase method of accounting and
accordingly, the operating results of these acquisitions have been included in
our consolidated financial statements since the date of acquisition. These
acquisitions did not materially impact net income for the three and six months
ended June 30, 2005 or 2004, respectively.
During 2005 and 2004, we also completed several smaller acquisitions, including
additional sites for our mail services operations and some of our international
dealerships. We also acquired the hardware equipment services business of
Standard Register Inc. at the end of 2004. The cost of these acquisitions was in
the aggregate less than $75 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 .78 to 1 at June
30, 2005 compared with .82 to 1 at December 31, 2004. The decrease in this ratio
was due primarily to the increase in notes payable and current portion of
long-term debt during the six months ended June 30, 2005.
The ratio of total debt to total debt and stockholders' equity was 76.5% at June
30, 2005 compared with 75.5% at December 31, 2004. 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% at June 30, 2005 compared with
76.9% at December 31, 2004. The increase in these ratios was driven primarily by
an increase in debt, stock repurchases and the payment of dividends, offset by
net income.
Cash Flows for the Six Months Ended June 30, 2005
Net cash provided by operating activities consisted primarily of net income
adjusted for non-cash items, changes in operating assets and liabilities, and
the $200 million tax bond posted with the IRS in April 2005 (see Other
Regulatory Matters). The increase in our deferred taxes on income and income
taxes payable balances contributed $54 million to cash from operations,
resulting primarily from continued tax benefits from our internal financing and
the run-off of Capital Services leasing activities. Other operating assets and
liabilities reduced our cash from operations by $58 million due primarily to
higher accounts receivable balances resulting from strong growth in our
businesses.
Net cash used in investing activities consisted primarily of acquisitions,
capital expenditures for digital meters and other investing activities,
partially offset by cash generated from Capital Services asset sales and net
proceeds from the sale of the main plant.
Net cash provided by financing activities consisted primarily of proceeds from
issuance of debt and stock, partially offset by dividends paid to stockholders
and stock repurchases.
21
Cash Flows for the Six Months Ended June 30, 2004
Net cash provided by operating activities consisted primarily of net income
adjusted for non-cash items and changes in operating assets and liabilities. The
increase in our deferred taxes on income and income taxes payable balances
contributed $93 million to cash from operations, resulting from continued tax
benefits from our internal financing and Capital Services leasing activities.
The decrease in our internal finance receivables balances increased cash from
operations by $46 million. Other operating assets and liabilities reduced our
cash from operations by $25 million primarily due to the timing of accounts
payable and accrued liabilities payments.
Net cash used in investing activities consisted primarily of capital
expenditures, acquisitions and other investing activities, partially offset by
cash generated from Capital Services asset sales.
Net cash used in financing activities consisted primarily of dividends paid to
stockholders, stock repurchases and net debt payments, partially offset by
proceeds from issuance of stock.
Financings and Capitalization
- -----------------------------
On July 13, 2005, we issued $500 million of unsecured fixed rate notes maturing
in January 2016. These notes bear interest at an annual rate of 4.75% and pay
interest semi-annually beginning January 2006. The proceeds from these notes
will be used for general corporate purposes, including the repayment of
commercial paper, the financing of acquisitions and the repurchase of company
stock.
At June 30, 2005, $2.1 billion remained available under the shelf registration
statement filed in February 2005 with the Securities and Exchange Commission
(SEC), permitting issuances of up to $2.5 billion in debt securities, preferred
stock, preference stock, common stock, purchase contracts, depositary shares,
warrants and units.
In March 2005, we issued $400 million of unsecured fixed rate notes maturing in
March 2015. These notes bear interest at an annual rate of 5.0% and pay interest
semi-annually beginning September 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.
We believe our financing needs in the short and long-term can be met with cash
generated internally, money from existing credit agreements, 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 six months of 2005, capital expenditures included $69.0 million
in net additions to property, plant and equipment and $78.7 million in net
additions to rental equipment and related inventories compared with $87.3
million and $59.5 million, respectively, in the same period in 2004. The
addition of rental equipment relates primarily to postage meters and increased
over the prior year due to higher placements of our digital meters during the
six months ended June 30, 2005.
We expect capital expenditures for the remainder of 2005 to be approximately the
same as the prior year.
Capital Services
- ----------------
Capital Services strategy
In December 2004, our Board of Directors approved a plan to pursue a sponsored
spin-off of our Capital Services external financing business. The new entity
will be an independent publicly traded company consisting of most of the assets
in our Capital Services segment, including assets related to Imagistics
International, Inc. (IGI). On March 31, 2005, Pitney Bowes Credit Corporation, a
wholly-owned subsidiary of the company, entered into a Subscription Agreement
with Cerberus Capital Management, L.P. through its investment vehicle, JCC
Management LLC (Investor). Under the terms of the Subscription Agreement, the
Investor is expected to invest in excess of $100 million for common and
preferred stock representing up to 19.9% of the voting interest and up to 48%
economic interest in the spun-off entity. The Subscription Agreement anticipates
that Pitney Bowes stockholders will receive 80.1% of the common stock of the new
public company in a tax-free distribution. At the time of the spin-off, most of
the assets in our Capital Services segment will become a separate entity
(Spinco) from the company and become a publicly traded company.
In July 2005, we received notice of termination of our agreement to provide
future lease financing to IGI. The termination of this agreement would become
effective in October 2005, if not rescinded or renegotiated prior to that date.
22
The spin-off is not subject to a vote of Pitney Bowes shareholders. The
transaction is subject to a favorable ruling from the Internal Revenue Service
(IRS) that the transaction will be tax-free, regulatory review and other
customary conditions. Our goal is to complete the spin-off by year-end, but it
could take longer.
We estimate that we will incur after-tax transaction costs of about $20 million
to $35 million in connection with the spin-off. The majority of these costs will
be incurred at the time of the spin-off. These costs are composed primarily of
professional fees, taxes on asset transfers and lease contract termination fees.
In addition, in accordance with current accounting guidelines, at the time of
spin-off we will be required to compare the book and fair market values of the
assets and liabilities spun-off and record any resulting deficit as a charge in
discontinued operations. We currently estimate this potential non-cash after-tax
charge to be in the range of $150 million to $250 million. The ultimate amount
of this charge, if any, will be determined by the fair market value of Spinco at
the time of spin-off and the resolution of related tax liabilities.
The Subscription Agreement was filed as Exhibit 10 to the Quarterly Report on
Form 10-Q for the three months ended March 31, 2005.
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) June 30, December 31,
2005 2004
---------------- ----------------
Leveraged leases..................... $ 1,558 $ 1,585
Finance receivables.................. 563 633
Rental equipment..................... 50 54
---------------- ----------------
Total................................ $ 2,171 $ 2,272
================ ================
The investment in leveraged leases included in our Consolidated Balance Sheets
is diversified across the following types of assets:
(Dollars in millions) June 30, December 31,
2005 2004
---------------- ----------------
Locomotives and rail cars............ $ 378 $ 382
Postal equipment..................... 361 356
Commercial real estate............... 251 242
Commercial aircraft.................. 236 275
Telecommunications................... 141 141
Rail and bus......................... 133 133
Shipping and handling................ 58 56
---------------- ----------------
Total leveraged leases............... $ 1,558 $ 1,585
================ ================
At June 30, 2005 and December 31, 2004, our leveraged lease investment in
commercial real estate facilities included approximately $93 million and $92
million, respectively, related to leases of corporate facilities to four U.S.
telecommunication entities, of which $78 million and $76 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 June 30, 2005, substantially
all of this portfolio is further secured by equity defeasance accounts or other
third party credit arrangements.
At June 30, 2005, approximately 54% of our total leveraged lease portfolio is
further secured by equity defeasance accounts or other third party credit
arrangements. In addition, at June 30, 2005, approximately 19% of the remaining
leveraged lease portfolio represents leases to highly rated government related
organizations that have guarantees or supplemental credit enhancements upon the
occurrence of certain events.
Finance receivables are composed of the following:
(Dollars in millions) June 30, December 31,
2005 2004
---------------- ----------------
Large ticket single investor leases.. $ 297 $ 350
Imagistics lease portfolio........... 266 283
---------------- ----------------
Total................................ $ 563 $ 633
================ ================
23
Investment in commercial passenger and cargo aircraft leasing transactions
At June 30, 2005 and December 31, 2004, our net investment in commercial
passenger and cargo aircraft leasing transactions, net of related debt and
minority interest, was $236 million and $276 million, respectively, which is
composed of transactions with U.S. airlines of $24 million, for both periods,
and foreign airlines of $212 million and $252 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 Capital Partners LLC (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 June 30, 2005, approximately 44% of our remaining
net investment in commercial passenger and cargo aircraft leasing investments
was further secured by approximately $103 million of equity defeasance accounts
or third party credit arrangements.
During the first quarter of 2005, Japan Airlines exercised its early buy-out
option. We received approximately $47 million from this transaction, reflecting
the net investment at that time.
During the second quarter of 2005, we sold the aircraft associated with our
remaining leases with United Air Lines. We received approximately $14 million
and recorded a net pre-tax gain of approximately $7 million from this
transaction.
Beginning January 1, 2005, we resumed recognition of financing income on certain
aircraft leases held through our investment in PBG.
New Accounting Pronouncements
- -----------------------------
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 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
and consolidated the assets and liabilities 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 $51 million and $41 million, respectively, is
included in other noncurrent liabilities in the Consolidated Balance Sheets at
June 30, 2005 and December 31, 2004. The consolidation of PBG did not have a
material impact on our results of operations or cash flows.
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. We
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. The provisions of FSP No. 106-2 were
adopted on a prospective basis on July 1, 2004.
In November 2004, Statement of Financial Accounting Standards (FAS) No. 151,
"Inventory Costs," was issued. FAS No. 151 amends and clarifies the accounting
for abnormal amounts of idle facility expense, freight, handling costs and
wasted material (spoilage). The provisions of FAS No. 151 are effective for
fiscal years beginning after June 15, 2005. We are currently evaluating the
provisions of FAS No. 151.
In December 2004, the FASB issued FSP No. 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004." The FSP provides guidance under FAS No. 109,
"Accounting for Income Taxes," with respect to recording the potential impact of
the repatriation provisions of the American Jobs Creation Act of 2004 (the "Jobs
Act") on enterprises' income tax expense and deferred tax liability. The Jobs
Act was enacted on October 22, 2004. FSP No. 109-2 states that companies are
allowed time beyond the financial reporting period of enactment to evaluate the
effect of the Jobs Act on its plan for reinvestment or repatriation of foreign
earnings for purposes of applying FAS No. 109. We are currently evaluating the
effects of the repatriation provision and do not expect to complete this
evaluation until after Congress or the Treasury Department provides
clarification on key elements of the repatriation provision. We do not expect
the adoption of these provisions to have a material impact on our financial
position, results of operations or cash flows.
24
In April 2005, the SEC approved a new rule delaying the effective date of FAS
No. 123 (revised 2004), "Share-Based Payment," to January 1, 2006. In light of
this delay, we will adopt the provisions of FAS No. 123R when it becomes
effective. FAS No. 123R supercedes Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees." The revised statement addresses
the accounting for share-based payment transactions with employees and other
third parties, eliminates the ability to account for share-based transactions
using APB No. 25 and requires that the compensation costs relating to such
transactions be recognized in the consolidated financial statements. FAS No.
123R requires compensation cost to be recognized immediately for awards granted
to retirement eligible employees or over the period from the grant date to the
date retirement eligibility is achieved, if that is expected to occur during the
nominal vesting period. We currently use the nominal vesting period approach to
determine the pro forma stock based compensation expense for all awards. FAS No.
123R requires additional disclosures relating to the income tax and cash flow
effects resulting from share-based payments. We are currently evaluating the
impact of adopting FAS No. 123R, which was issued in December 2004. See Note 2
to the consolidated financial statements.
Regulatory Matters
- ------------------
There have been no significant changes to the regulatory matters disclosed in
our 2004 Annual Report on Form 10-K.
Other Regulatory Matters
- ------------------------
In December 2003, we received accepted closing agreements with the IRS showing
income tax adjustments for the 1992 to 1994 tax years. The total additional tax
for these years is approximately $5 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 discussed above, a proposed
adjustment related to the 1994 tax year remains in dispute, which could result
in additional tax of approximately $4 million for that year. The IRS also is
proposing similar adjustments for the 1995 and future tax years relating to this
deficiency. These adjustments could result in additional tax expense in the
range of $0 to $40 million. We believe that we have meritorious defenses to
these proposed adjustments. The IRS may propose penalties on us with respect to
all periods that have been examined.
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 Capital Services leasing transactions entered into in 1997 through
2000. Specifically, the IRS is proposing to disallow certain expenses claimed as
deductions on the 1997 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 2005, the Canada Revenue Agency (CRA) issued an adjustment for
the 1996 to 1999 tax years, relating to intercompany loan transactions. We paid
approximately $24 million in the first quarter of 2005 and plan to protest the
adjustment.
We vigorously disagree with the proposed adjustments and intend to aggressively
contest these matters through applicable IRS, CRA and judicial procedures, as
appropriate. We have provided for our best estimate of the probable tax
liability for these matters and believe that our accruals for tax liabilities
are adequate for all open years. However, if the taxing authority prevails, an
unfavorable resolution of these matters could have a material effect on our
results of operations.
In April 2005, we posted a $200 million tax bond with the IRS to mitigate IRS
interest rate risk.
At any time, our provision for taxes could be affected by changes in tax law and
interpretations by governments or courts.
25
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. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. 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, including risks
associated with commercial passenger and cargo aircraft leasing transactions
o the company's success at managing costs associated with its strategy of
outsourcing functions and operations not central to its business
o changes in interest rates
o foreign currency fluctuations
o cost, timing and execution of the restructuring plan, including any potential
asset impairments
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, including the anticipated plan to spin-off the
majority of the assets in this segment
o continuing developments in the U.S. and foreign airline industry
o changes in pension and retiree medical costs.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
There were no material changes to the disclosures made in the Annual Report on
Form 10-K for the year ended December 31, 2004 regarding this matter.
Item 4: Controls and Procedures
Disclosure controls and procedures are designed to reasonably assure that
information required to be disclosed in reports filed under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures are also
designed to reasonably assure that such information is accumulated and
communicated to our management, including our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), as appropriate to allow timely decisions
regarding required disclosure.
Under the direction of our CEO and CFO, 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 June
30, 2005. In addition, no change in internal control over financial reporting
occurred during the quarter ended June 30, 2005, 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
disclosure controls and procedures are designed to provide reasonable assurance
of achieving their stated objectives, and the CEO and CFO have concluded that
the disclosure controls and procedures are effective at that reasonable
assurance level.
26
Part II - Other Information
---------------------------
Item 1: Legal Proceedings
This Item updates the legal proceedings more fully described in our 2004 Annual
Report on Form 10-K, dated March 8, 2005, as updated by our Quarterly Report on
Form 10-Q for the first quarter of 2005, dated May 6, 2005. On June 3, 2005, the
Montgomery, Alabama Circuit Court granted final approval of the settlement we
entered into on December 31, 2004 to resolve several purported class actions
relating to a program our wholly owned subsidiary, Pitney Bowes Credit
Corporation (PBCC), offers to some of its leasing customers to replace the
leased equipment if it is lost, stolen or destroyed. The actions settled or
dismissed as a result are the following: Boston Reed v. Pitney Bowes, et al.
-----------------------------------
(Superior Court of California, County of Napa, filed January 16, 2002); Harbin,
-------
et al. v. Pitney Bowes, et al. (Montgomery, Alabama Circuit Court, filed March
- ------------------------------
19, 2002); McFerrin Insurance v. Pitney Bowes, et al. (District Court, Jefferson
------------------------------------------
County, Texas, filed May 29, 2002); and Cred-X v. Pitney Bowes, et al. (Circuit
------------------------------
Court, Kanawha County, West Virginia, filed November 19, 2003).
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.
In May 2004, the Board of Directors of Pitney Bowes authorized $300 million for
repurchases of outstanding shares of our common stock in the open market during
the subsequent 12 to 24 months. We repurchased 2.3 million shares in 2004 under
this program for a total price of $100 million, leaving $200 million remaining
for future repurchases under this program. We repurchased 3.3 million shares
during the six months ended June 30, 2005 under this program for a total price
of $149 million leaving $51 million remaining for future repurchases under this
program.
Company Purchases of Equity Securities
The following table summarizes our share repurchase activity:
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)
- --------------------------- ----------------- ----------------- ------------------------ ------------------------------
January 2005............... - - - $200,002
February 2005.............. 663,400 $46.50 663,400 $169,153
March 2005................. 718,800 $45.74 718,800 $136,277
April 2005................. - - - $136,277
May 2005................... 504,250 $45.05 504,250 $113,559
June 2005.................. 1,447,500 $43.11 1,447,500 $ 51,154
----------------- ------------------------
3,333,950 3,333,950
================= ========================
Item 4: Submission of Matters to a Vote of Security Holders
Below are the final results of the voting at the annual meeting of Stockholders
held on May 9, 2005:
Proposal 1 - Election of Directors
Nominee For Withheld
--------------------- ------------------- ------------------
Michael J. Critelli 198,472,913 5,440,710
Michael I. Roth 201,022,558 2,891,065
Robert E. Weissman 201,653,595 2,260,028
Proposal 2 - Ratification of Independent Registered Public Accounting Firm
for 2005:
For Against Abstain
-------------- ------------------- -------------------
197,869,720 4,530,594 1,513,309
The following other directors continued their term of office after the annual
meeting:
Linda G. Alvarado James H. Keyes David L. Shedlarz
Colin G. Campbell John S. McFarlane
Ernie Green Eduardo R. Menasce
27
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
28
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PITNEY BOWES INC.
August 8, 2005
/s/ B. P. Nolop
-----------------------------
B. P. Nolop
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ S. J. Green
------------------------------
S. J. Green
Vice President - Finance and
Chief Accounting Officer
(Principal Accounting Officer)
29
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