UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 1-3579
PITNEY BOWES INC.
(Exact name of registrant as specified in its charter)
Delaware 06-0495050
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1 Elmcroft Road
Stamford, Connecticut 06926-0700
(Address of principal executive offices) (Zip Code)
(203) 356-5000
(Registrant's telephone number, including area code)
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, or a
non-accelerated filer. See definition of "accelerated filer and large
accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell Company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Number of shares of common stock, $1 par value, outstanding as of April 14,
2006: 221,976,882 shares.
Pitney Bowes Inc.
Index
-----------------
Page Number
-----------
Part I - Financial Information:
Item 1: Financial Statements
Condensed Consolidated Statements of Income (Unaudited)
Three Months Ended March 31, 2006 and 2005..........................3
Condensed Consolidated Balance Sheets (Unaudited)
March 31, 2006 and December 31, 2005................................4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2006 and 2005..........................5
Notes to Condensed Consolidated Financial Statements..................6 - 18
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................19 - 27
Item 3: Quantitative and Qualitative Disclosures about Market Risk...........28
Item 4: Controls and Procedures..............................................28
Part II - Other Information:
Item 1: Legal Proceedings................................................. 29
Item 1A: Risk Factors..................................................... .29
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds........29
Item 6: Exhibits...........................................................30
Signatures....................................................................31
Part I - Financial Information
------------------------------
Item 1: Financial Statements
Pitney Bowes Inc.
Condensed Consolidated Statements of Income
(Unaudited)
-------------------------------------------
(Dollars in thousands, except per share data) Three Months Ended March 31,
----------------------------------------
2006 2005 (1)
------------------- ------------------
Revenue from:
Sales............................................ $ 405,778 $ 381,427
Rentals.......................................... 196,812 201,641
Financing........................................ 174,996 157,275
Support services................................. 194,543 194,934
Business services................................ 386,368 349,103
Capital Services................................. 45,607 33,408
------------------ ------------------
Total revenue.................................. 1,404,104 1,317,788
------------------ ------------------
Costs and expenses:
Cost of sales.................................... 177,446 168,221
Cost of rentals.................................. 43,539 42,317
Cost of support services......................... 102,615 100,366
Cost of business services........................ 306,326 289,110
Selling, general and administrative.............. 439,865 413,810
Research and development......................... 41,536 41,778
Restructuring charge (gain)...................... 5,597 (15,840)
Other (income) expense........................... (10,599) 10,000
Interest, net.................................... 65,330 46,816
------------------ -------------------
Total costs and expenses....................... 1,171,655 1,096,578
------------------ -------------------
Income before income taxes......................... 232,449 221,210
Provision for income taxes......................... 78,921 75,935
------------------ -------------------
Net income......................................... $ 153,528 $ 145,275
================== ===================
Basic earnings per share........................... $ 0.68 $ 0.63
================== ===================
Diluted earnings per share......................... $ 0.67 $ 0.62
================== ===================
Dividends declared per share of common stock....... $ 0.32 $ 0.31
================== ===================
<FN>
(1) As adjusted for SFAS 123(R). See Note 16 to these statements.
</FN>
See Notes to condensed consolidated financial statements
Pitney Bowes Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
-------------------------------------
(Dollars in thousands, except share data) March 31, December 31,
2006 2005(1)
------------------- -----------------
Assets
- ------
Current assets:
Cash and cash equivalents........................................................ $ 195,341 $ 243,509
Short-term investments........................................................... 70,795 56,193
Accounts receivables, less allowances: 3/06, $46,646; 12/05, $46,261............. 660,270 658,198
Finance receivables, less allowances: 3/06, $56,488; 12/05, $52,622.............. 1,425,953 1,342,446
Inventories...................................................................... 225,870 220,918
Other current assets and prepayments............................................. 215,225 221,051
------------------ -----------------
Total current assets......................................................... 2,793,454 2,742,315
Property, plant and equipment, net.................................................... 615,544 621,954
Rental property and equipment, net.................................................... 1,006,466 1,022,031
Property leased under capital leases, net............................................. 2,673 2,611
Long-term finance receivables, less allowances: 3/06, $70,133; 12/05, $76,240......... 1,831,442 1,841,673
Investment in leveraged leases........................................................ 1,413,717 1,470,025
Goodwill.............................................................................. 1,646,883 1,611,786
Intangible assets, net................................................................ 349,564 347,414
Other assets.......................................................................... 928,719 961,573
------------------ -----------------
Total assets.......................................................................... $ 10,588,462 $ 10,621,382
================== =================
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities......................................... $ 1,453,641 $ 1,538,860
Income taxes payable............................................................. 85,806 55,903
Notes payable and current portion of long-term obligations....................... 894,232 857,742
Advance billings................................................................. 496,534 458,392
------------------ -----------------
Total current liabilities.................................................... 2,930,213 2,910,897
Deferred taxes on income.............................................................. 1,907,769 1,859,950
Long-term debt........................................................................ 3,778,208 3,849,623
Other noncurrent liabilities.......................................................... 313,673 326,663
------------------ -----------------
Total liabilities............................................................ 8,929,863 8,947,133
------------------ -----------------
Preferred stockholders' equity in a subsidiary company................................ 310,000 310,000
Stockholders' equity:
Cumulative preferred stock, $50 par value, 4% convertible........................ 17 17
Cumulative preference stock, no par value, $2.12 convertible..................... 1,140 1,158
Common stock, $1 par value....................................................... 323,338 323,338
Capital in excess of par value................................................... 224,624 222,908
Retained earnings................................................................ 4,405,405 4,324,451
Accumulated other comprehensive income........................................... 97,125 76,917
Treasury stock, at cost.......................................................... (3,703,050) (3,584,540)
------------------ -----------------
Total stockholders' equity................................................... 1,348,599 1,364,249
------------------ -----------------
Total liabilities and stockholders' equity............................................ $ 10,588,462 $ 10,621,382
================== =================
<FN>
(1) As adjusted for SFAS 123(R). See Note 16 to these statements.
</FN>
See Notes to condensed consolidated financial statements
Pitney Bowes Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
-----------------------------------------------
(Dollars in thousands) Three Months Ended March 31,
----------------------------------------
2006 2005(1)
------------------- ------------------
Cash flows from operating activities:
Net income........................................................................ $ 153,528 $ 145,275
Restructuring and other charges, net.............................................. 3,582 (3,131)
Restructuring and other payments.................................................. (19,250) (31,292)
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization................................................ 89,359 82,538
Stock-based compensation..................................................... 6,690 6,559
Change in assets and liabilities, net of effects of acquisitions:
Accounts receivable...................................................... 8,562 (24,579)
Net investment in internal finance receivables.......................... (23,811) 10,650
Inventories.............................................................. (2,930) (12,099)
Other current assets and prepayments..................................... 4,684 (5,174)
Accounts payable and accrued liabilities................................. (57,362) (43,196)
Deferred taxes on income and income taxes payable........................ 69,910 22,605
Advanced billings........................................................ 31,343 46,205
Other, net............................................................... 21,929 (4,290)
------------------ -----------------
Net cash provided by operating activities................................ 286,234 190,071
------------------ -----------------
Cash flows from investing activities:
Short-term investments............................................................ (9,888) (9,779)
Net proceeds from sale of main plant.............................................. - 30,238
Capital expenditures.............................................................. (83,015) (79,539)
Net investment in capital services................................................ 35,752 79,766
Acquisitions, net of cash acquired................................................ (38,010) (25,000)
Reserve account deposits.......................................................... (23,300) (18,700)
------------------ -----------------
Net cash used in investing activities.................................... (118,461) (23,014)
------------------ ------------------
Cash flows from financing activities:
Decrease in notes payable, net.................................................... 29,248 (22,357)
Proceeds from long-term obligations............................................... - 398,029
Principal payments on long-term obligations....................................... (50,667) (435,786)
Proceeds from issuance of stock................................................... 29,596 34,409
Stock repurchases................................................................. (152,024) (63,725)
Dividends paid.................................................................... (72,574) (71,523)
------------------ -----------------
Net cash used in financing activities.................................... (216,421) (160,953)
------------------ -----------------
Effect of exchange rate changes on cash............................................... 480 223
------------------ -----------------
(Decrease) increase in cash and cash equivalents...................................... (48,168) 6,327
Cash and equivalents at beginning of period........................................... 243,509 316,217
------------------ -----------------
Cash and cash equivalents at end of period............................................ $ 195,341 $ 322,544
================== =================
Interest paid......................................................................... $ 66,104 $ 52,548
================== =================
Income taxes paid, net................................................................ $ 1,493 $ 37,232
================== =================
<FN>
(1) As adjusted for SFAS 123(R). See Note 16 to these statements.
</FN>
See Notes to condensed consolidated financial statements
Pitney Bowes Inc.
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
Note 1: Description of business and summary of significant accounting policies
- ------------------------------------------------------------------------------
Pitney Bowes is a provider of leading-edge, global, integrated mail and document
management solutions for organizations of all sizes. The Company operates in the
following business groups: Global Mailstream Solutions, Global Business Services
and Capital Services. The Company operates both inside and outside the United
States. See Note 7 to the condensed consolidated financial statements for
financial information concerning revenue, earnings before interest and taxes
(EBIT) and identifiable assets, by reportable segment and geographic area.
The accompanying unaudited condensed 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 March 31, 2006 and December 31, 2005, and the results of its
operations and cash flows for the three months ended March 31, 2006 and 2005
have been included. Operating results for the three months ended March 31, 2006
are not necessarily indicative of the results that may be expected for any other
interim period or the year ending December 31, 2006. These statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's 2005 Annual Report to Stockholders on Form 10-K. Prior year
amounts have been reclassified to conform with the current period presentation.
Note 2: New accounting pronouncements
- -------------------------------------
In December 2004, Statement of Financial Accounting Standards (SFAS) No. 123(R)
(revised 2004), "Share-Based Payment," was issued. SFAS No. 123(R) supersedes
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
condensed consolidated financial statements. SFAS No. 123(R) 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. Prior to our adoption of SFAS No. 123(R), the Company used the nominal
vesting period approach to determine the pro forma stock based compensation
expense for all awards. SFAS No. 123(R) also requires additional disclosures
relating to the income tax and cash flow effects resulting from share-based
payments. The Company adopted the provisions of SFAS No. 123(R) on
January 1, 2006 using the modified retrospective application. See Note 16 to the
condensed consolidated financial statements.
In June 2005, the FASB issued FASB Staff Position (FSP) No. SFAS 143-1,
"Accounting for Electronic Equipment Waste Obligations," that provides guidance
on how commercial users and producers of electronic equipment should recognize
and measure asset retirement obligations associated with the European Directive
2002/96/EC on Waste Electrical and Electronic Equipment (the "Directive"). The
adoption of this FSP did not have a material effect on the Company's financial
position, results of operations or cash flows for those European Union (EU)
countries that enacted the Directive into country-specific laws. The Company is
currently evaluating the impact of applying this FSP in the remaining countries
in future periods and does not expect the adoption of this provision to have a
material effect on its financial position, results of operations or cash flows.
Note 3: Inventories
- -------------------
Inventories are composed of the following:
(Dollars in thousands) March 31, December 31,
2006 2005
------------------ -------------------
Raw materials and work in process.................. $ 96,735 $ 96,669
Supplies and service parts......................... 69,785 63,441
Finished products.................................. 59,350 60,808
------------------ -------------------
Total.............................................. $ 225,870 $ 220,918
================== ===================
Note 4: Fixed assets
- --------------------
(Dollars in thousands) March 31, December 31,
2006 2005
------------------ -------------------
Property, plant and equipment...................... $ 1,760,977 $ 1,737,908
Accumulated depreciation........................... (1,145,433) (1,115,954)
------------------ -------------------
Property, plant and equipment, net................. $ 615,544 $ 621,954
================== ===================
Rental property and equipment...................... $ 1,825,768 $ 1,840,221
Accumulated depreciation........................... (819,302) (818,190)
------------------ -------------------
Rental property and equipment, net................. $ 1,006,466 $ 1,022,031
================== ===================
Property leased under capital leases............... $ 8,890 $ 8,662
Accumulated amortization........................... (6,217) (6,051)
------------------ -------------------
Property leased under capital leases, net.......... $ 2,673 $ 2,611
================== ===================
Depreciation expense was $77.4 million and $73.2 million for the three months
ended March 31, 2006 and 2005, respectively.
Note 5: Long-term debt
- ----------------------
On March 31, 2006, $1.6 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.
Note 6: Earnings per share
- --------------------------
A reconciliation of the basic and diluted earnings per share computations for
the three months ended March 31, 2006 and 2005 is as follows (in thousands,
except per share data):
2006 2005
------------------------------------------ ----------------------------------------
Per Per
Income Shares Share Income Shares Share
-------------- --------------- ----------- ------------- -------------- -----------
Net Income............................. $ 153,528 $ 145,275
Less:
Preferred stock dividends........ - -
Preference stock dividends....... (23) (24)
-------------- --------------- ----------- ------------- -------------- -----------
Basic earnings per share............... $ 153,505 226,028 $0.68 $ 145,251 230,098 $0.63
============== =============== =========== ============= ============== ===========
Effect of dilutive securities:
Preferred stock.................. - 8 - 9
Preference stock................. 23 706 24 761
Stock options.................... 2,100 2,805
Other............................ 79 66
-------------- --------------- ----------- ------------- -------------- -----------
Diluted earnings per share............. $ 153,528 228,921 $0.67 $ 145,275 233,739 $0.62
============== =============== =========== ============= ============== ===========
In accordance with SFAS No. 128, "Earnings per Share," 1.8 million and 1.1
million common stock equivalent shares for the three months ended March 31, 2006
and 2005, respectively, issuable upon the exercise of stock options were
excluded from the above computations because the exercise prices of such options
were greater than the average market price of the common stock and therefore the
impact of these shares was anti-dilutive.
Note 7: Business segment information
- ------------------------------------
Revenue and EBIT by business segment for the three months ended March 31, 2006
and 2005 were as follows:
(Dollars in thousands) Three Months Ended March 31,
2006 2005(2)
----------------- -----------------
Revenue:
Inside the United States - Mailing $ 578,364 $ 552,700
- DMT 98,010 91,118
Outside the United States.......... 295,755 291,459
----------------- -----------------
Global Mailstream Solutions........... 972,129 935,277
Global Management Services......... 267,503 267,905
Mail Services...................... 118,865 81,198
----------------- -----------------
Global Business Services.............. 386,368 349,103
Capital Services...................... 45,607 33,408
----------------- -----------------
Total revenue........................... $ 1,404,104 $ 1,317,788
================= =================
EBIT: (1)
Inside the United States - Mailing $ 228,138 $ 215,876
- DMT 6,432 3,541
Outside the United States.......... 49,805 51,484
----------------- -----------------
Global Mailstream Solutions........... 284,375 270,901
Global Management Services......... 20,531 13,991
Mail Services...................... 11,807 3,323
----------------- -----------------
Global Business Services.............. 32,338 17,314
Capital Services...................... 33,376 19,454
----------------- -----------------
Total EBIT.............................. $ 350,089 $ 307,669
================= =================
Unallocated amounts:
Interest, net......................... $ (65,330) $ (46,816)
Corporate expense..................... (46,713) (45,483)
Charitable contribution............... - (10,000)
Restructuring charges................. (5,597) 15,840
----------------- -----------------
Income before income taxes.............. $ 232,449 $ 221,210
================= =================
<FN>
(1) EBIT excludes general corporate expenses
(2) As adjusted for SFAS 123(R). See Note 16 to these statements.
</FN>
Note 8: Comprehensive income
- ----------------------------
Comprehensive income for the three months ended March 31, 2006 and 2005 was as
follows:
(Dollars in thousands) Three Months Ended March 31,
-----------------------------------------
2006 2005
------------------ --------------------
Net income............................................. $ 153,528 $ 145,275
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments............. 18,434 (14,322)
Net unrealized gain on derivative instruments........ 1,774 336
------------------ --------------------
Comprehensive income................................... $ 173,736 $ 131,289
================== ====================
Note 9: Restructuring charges
- -----------------------------
The Company accounts for one-time benefit arrangements and exit or disposal
activities primarily in accordance with SFAS 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 SFAS 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 SFAS No. 144, "Accounting for the Impairment of Long-Lived
Assets."
In connection with our previously announced restructuring initiatives, the
Company recorded a pre-tax restructuring charge (gain) of $5.6 million and
($15.8) million for the three months ended March 31, 2006 and 2005,
respectively.
The pre-tax restructuring charges (gain) are composed of:
(Dollars in millions) Three Months Ended March 31,
----------------------------------------
2006 2005
----------------- ------------------
Severance and benefit costs..... $ 4.5 $ 13.1
Asset impairments............... 0.5 0.7
Other exit costs................ 0.6 0.6
Gain on sale of main plant...... - (30.2)
------------------ -----------------
$ 5.6 $ (15.8)
================= =================
All restructuring charges, except for the asset impairments, will result in cash
outflows. The severance and benefit costs relate to a reduction in workforce of
approximately 3,600 employees worldwide from the inception of this plan through
March 31, 2006 and expected future workforce reductions of approximately 700
employees. The workforce reductions relate to actions across several of the
Company's businesses resulting from infrastructure and process improvements and
its continuing efforts to streamline operations, and include managerial,
professional, clerical and technical roles. Approximately 62% of the workforce
reductions are in the U.S. The international workforce reductions are
concentrated in Europe and Canada. During the three months ended March 31, 2005,
the Company recorded a pre-tax gain of $30 million related to the sale of its
main plant manufacturing facility in Connecticut.
Accrued restructuring charges at March 31, 2006 are composed of the following:
(Dollars in millions) Balance at Balance
January 1, Restructuring Cash Non-cash at March 31,
2006 charges payments charges 2006
---------------- --------------- ---------------- ---------------- ----------------
Severance and
benefit costs................ $ 44.6 $ 4.5 $ (17.7) $ - $ 31.4
Asset impairments............. - 0.5 - (0.5) -
Other exit costs.............. 5.2 0.6 (1.6) - 4.2
---------------- --------------- ---------------- ---------------- ----------------
$ 49.8 $ 5.6 $ (19.3) $ (0.5) $ 35.6
================ =============== ================ ================ ================
Note 10: Acquisitions
- ---------------------
On February 8, 2006, the Company completed the acquisition of Emtex Ltd. (Emtex)
for a net purchase price of $36.5 million in cash. Emtex is a software and
services company that allows large-volume mailers to simplify document
production and centrally manage complex multi-vendor and multi-site print
operations. The goodwill was assigned to Inside the U.S. - DMT and Outside the
U.S. segments.
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 the Outside the U.S. segment.
On May 26, 2005, the Company completed the acquisition of Imagitas, Inc.
(Imagitas) for a net purchase price of $231 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 the Mail Services segment.
On March 24, 2005, the Company completed the acquisition of Compulit, Inc.
(Compulit) for a net purchase price of $24 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
the Global Management Services segment.
The following table summarizes selected financial data for these acquisitions:
(Dollars in thousands) Emtex Danka Imagitas Compulit
---------------- --------------- ----------------- ---------------
Purchase price allocation
Current assets................................ $ 7,644 $ 12,502 $ 40,577 $ 4,462
Other non-current assets...................... 1,101 5,627 3,267 656
Intangible assets............................. 12,300 4,203 59,600 2,797
Goodwill...................................... 26,465 8,358 195,234 17,541
Current liabilities........................... (10,607) (16,690) (42,600) (1,130)
Non-current liabilities....................... (412) - (25,216) -
---------------- --------------- ----------------- ---------------
Purchase price.............................. $ 36,491 $ 14,000 $ 230,862 $ 24,326
================ =============== ================= ===============
Intangible assets
Customer relationships........................ $ 4,100 $ 3,327 $ 18,300 $ 2,366
Supplier relationships........................ - - 33,300 -
Mailing software and technology............... 6,150 - 4,000 -
Trademarks and trade names.................... 2,050 876 4,000 431
---------------- --------------- ----------------- ---------------
Total intangible assets..................... $ 12,300 $ 4,203 $ 59,600 $ 2,797
================ =============== ================= ===============
Intangible assets amortization period
Customer relationships........................ 10 years 15 years 5 years 4 years
Supplier relationships........................ - - 9 years -
Mailing software and technology............... 5 years - 5 years -
Trademarks and trade names.................... 5 years 4 years 5 years 5 years
---------------- --------------- ----------------- ---------------
Total weighted average...................... 7 years 13 years 8 years 4 years
================ =============== ================= ===============
Allocation of the purchase price to the assets acquired and liabilities assumed
has not been finalized for Emtex, Danka and Imagitas. 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 condensed 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 revenue has been prepared as if
the acquisitions of Emtex, Danka, Imagitas and Compulit had occurred at the
beginning of each period presented:
(Dollars in thousands) Three Months Ended March 31,
--------------------------------------
2006 2005
---------------- -----------------
Total revenue................... $ 1,407,304 $ 1,357,088
The pro forma earnings results of these acquisitions were not material to net
income or earnings per share. 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, 2005, and 2006, nor do they purport to be
indicative of the results that will be obtained in the future.
During the first quarter of 2006 and during 2005, the Company also completed
several smaller acquisitions. The cost of these acquisitions in the aggregate
was less than $30 million. These acquisitions did not have a material impact on
the Company's financial results.
On April 24, 2006, the Company completed the acquisition of Ibis Consulting,
Inc. (Ibis) for approximately $67 million in cash. Ibis is a leading provider of
electronic discovery (eDiscovery) services to law firms and corporate clients.
Ibis's technology and offerings complement those of Compulit, which the Company
acquired last year, and expand the Company's range of solutions and services for
the complex litigation support needs of law firms and corporate legal
departments.
Note 11: Intangible assets and goodwill
- ---------------------------------------
Intangible assets are composed of the following:
(Dollars in thousands) March 31, 2006 December 31, 2005
--------------------------------------- ---------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
----------------- ------------------ ----------------- ------------------
Customer relationships................ $ 278,294 $ 59,954 $ 273,674 $ 53,966
Supplier relationships................ 33,300 3,134 33,300 2,194
Mailing software and technology....... 116,317 29,877 113,475 30,525
Trademarks and trade names............ 23,966 10,681 21,841 9,702
Non-compete agreements................ 4,825 3,492 5,122 3,611
----------------- ------------------ ----------------- ------------------
$ 456,702 $ 107,138 $ 447,412 $ 99,998
================= ================== ================= ==================
Amortization expense for intangible assets was $12 million and $8 million for
the three months ended March 31, 2006 and 2005, respectively. Estimated
intangible assets amortization expense for 2006 and the next five years is as
follows:
(Dollars in thousands)
For the year ending 12/31/06.................. $ 45,800
For the year ending 12/31/07.................. $ 43,300
For the year ending 12/31/08.................. $ 41,900
For the year ending 12/31/09.................. $ 40,300
For the year ending 12/31/10.................. $ 34,500
For the year ending 12/31/11.................. $ 29,300
Changes in the carrying amount of goodwill by business segment for the three
months ended March 31, 2006 and 2005 are as follows:
(Dollars in thousands) Balance at Balance at
January 1, Acquired during March 31,
2006 the period Other 2006
------------------ ------------------ ------------------ -------------------
Inside the U.S. - Mailing................ $ 66,222 $ 1,658 $ 3,507 $ 71,387
- DMT.................... 336,400 12,869 - 349,269
Outside the United States................ 361,785 13,596 2,893 378,274
------------------ ------------------ ------------------ -------------------
Global Mailstream Solutions............... 764,407 28,123 6,400 798,930
Global Management Services............... 435,306 - 728 436,034
Mail Services............................ 412,073 - (154) 411,919
------------------ ------------------ ------------------ -------------------
Global Business Services.................. 847,379 - 574 847,953
------------------ ------------------ ------------------ -------------------
Total..................................... $ 1,611,786 $ 28,123 $ 6,974 $ 1,646,883
================== ================== ================== ===================
(Dollars in thousands) Balance at Balance at
January 1, Acquired during March 31,
2005 the period Other 2005
------------------ ------------------ ------------------ -------------------
Inside the U.S. - Mailing $ 63,259 $ - $ 2,826 $ 66,085
- DMT 291,686 - 1,047 292,733
Outside the United States................ 423,536 - (344) 423,192
------------------ ------------------ ------------------ -------------------
Global Mailstream Solutions............... 778,481 - 3,529 782,010
Global Management Services............... 427,574 18,286 616 446,476
Mail Services............................ 205,326 - 3,867 209,193
------------------ ------------------ ------------------ -------------------
Global Business Services.................. 632,900 18,286 4,483 655,669
------------------ ------------------ ------------------ -------------------
Total..................................... $ 1,411,381 $ 18,286 $ 8,012 $ 1,437,679
================== ================== ================== ===================
"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 March 31, 2006 and 2005 are as follows:
(Dollars in thousands) United States Foreign
--------------------------------------- ----------------------------------------
Three Months Ended March 31, Three Months Ended March 31,
--------------------------------------- ----------------------------------------
2006 2005 2006 2005
------------------ ------------------ ------------------ -------------------
Service cost................................ $ 7,871 $ 8,536 $ 2,664 $ 2,614
Interest cost............................... 23,517 22,845 5,430 5,443
Expected return on plan assets.............. (32,500) (32,090) (7,564) (6,821)
Amortization of transition cost............. - - (162) (146)
Amortization of prior service cost.......... (548) (723) 150 141
Amortization of net loss.................... 7,791 6,157 2,568 2,629
------------------ ------------------ ------------------ -------------------
Net periodic benefit cost................... $ 6,131 $ 4,725 $ 3,086 $ 3,860
================== ================== ================== ===================
The Company previously disclosed in its condensed consolidated financial
statements for the year ended December 31, 2005 that it expects to contribute up
to $7 million and up to $15 million, respectively, to its U.S. and foreign
pension plans during 2006. At March 31, 2006, $3.0 million and $2.7 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 months ended March 31, 2006 and 2005 are as follows:
(Dollars in thousands) Three Months Ended March 31,
---------------------------------------
2006 2005
------------------ ------------------
Service cost................................ $ 902 $ 881
Interest cost............................... 3,659 4,311
Amortization of prior service cost.......... (475) (533)
Amortization of net loss.................... 909 1,208
------------------ ------------------
Net periodic benefit cost................... $ 4,995 $ 5,867
================== ==================
At March 31, 2006, $9 million of contributions have been made representing
benefit payments.
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 $31 million and $32 million at March 31, 2006 and
December 31, 2005, respectively. In accordance with GAAP, the Company does not
record these amounts as liabilities in its Condensed 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 March 31, 2006
and December 31, 2005, 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 March 31,
2006 and December 31, 2005, respectively, was not material.
Note 14: Income taxes
- ---------------------
The effective tax rate for the first quarter of 2006 was 34.0% compared with
34.3% in the first quarter of 2005. The effective tax rate for the first quarter
of 2005 included an incremental increase of 0.3% from restructuring initiatives.
In December 2003, the Internal Revenue Service (IRS) issued a closing agreement
reflecting additional U.S. tax, interest and penalties related to 1992 through
1994. In January 2006, the IRS proposed adjustments that may result in the
assessment of additional U.S. tax, interest and penalties related to 1995
through 2000. The Company is not disputing certain of these adjustments and the
impact of these adjustments has been reflected in the Company's financial
statements.
The Company is disputing other adjustments the IRS has proposed that may result
in the assessment of additional U.S. tax, interest and penalties related to 1994
through 2000. These disputed adjustments relate primarily to the tax treatment
of Corporate Owned Life Insurance (COLI) and related interest expense, the tax
effect of the sale of certain preferred share holdings and the tax treatment of
certain lease transactions. The IRS will likely make similar adjustments to
lease transactions when examining years subsequent to 2000. The Company has
requested a review of these adjustments by the IRS. If attempts to negotiate
these items with the IRS are not successful, the Company intends to file for
judicial review of the disputed adjustments.
These disputed adjustments from 1994 through 2000 could result in the assessment
of additional tax of up to $390 million plus penalties of up to $65 million, a
significant portion of which has already been accrued. Certain of these
adjustments would result in future tax deductions and, therefore, are only
temporary in nature. The Company has posted bonds of $342 million with the IRS
to mitigate interest assessments on any otherwise underpaid tax that would
result from a final settlement.
The Company has accrued its estimate of the probable tax, interest and penalties
that may result from these disputed matters as it relates to 1992 through 2006
and the Company believes that the accrual for tax liabilities is appropriate.
However, the resolution of such matters could have a material impact on the
Company's results of operations, financial position and cash flow.
Note 15: Capital Services
- -------------------------
As previously disclosed, the Company is assessing a broader range of asset and
business disposition options for its Capital Services business, including
spin-off, a sale of the business, or sale of all or a portion of the assets.
Several factors, including improved economic conditions, make this range of
options more attractive now, than when the Company first announced its intention
to look at options for exiting this business in January 2003. The Company
intends to reach a conclusion in the near future on the best alternative to
pursue. Depending on the conclusion reached by the Company, and the possible
resolution of related tax matters, the Company could possibly incur after-tax
charges of up to $550 million. The Company believes that its ultimate
disposition strategy will not have a material impact on its total cash position.
In accordance with the previously announced Subscription Agreement with Cerberus
Capital Management, L.P., related to a potential spin-off, both parties have had
the right to terminate this agreement since March 31, 2006. Neither party has
terminated the agreement at this time.
In July 2005, the Company received notice of termination of its agreement to
provide future lease financing to Imagistics International, Inc. On April 28,
2006, the Company completed the sale of its Imagistics lease portfolio to De
Lage Landen Operational Services, LLC, a subsidiary of Rabobank Group, for
approximately $288 million. As a result, the Company will report the results of
the Imagistics lease portfolio in discontinued operations in the second quarter
of 2006 including an after-tax gain of about $10 million from the sale of this
portfolio. This lease portfolio was part of the external financing assets
initially included in the proposed spin-off.
During the first quarter of 2006, the Company sold shares and bankruptcy claims
related to its investment in United Airlines. This transaction resulted in a
pre-tax gain of $10.6 million which is included in other income in the Condensed
Consolidated Statement of Income for the three months ended March 31, 2006.
Selling, general and administrative expenses in the Company's condensed
consolidated financial statements for the quarters ended March 31, 2006 and 2005
includes $6.2 million and $0.8 million, respectively, of depreciation of rental
property and equipment related to Capital Services.
Note 16: Stock-based compensation
- ---------------------------------
Effective January 1, 2006, the Company adopted the provisions of SFAS No.
123(R), "Share-Based Payment." SFAS 123(R) establishes accounting for
stock-based awards exchanged for employee services. Accordingly, stock-based
compensation cost is measured at the grant date, based on the fair value of the
award, and is recognized as expense over the employee requisite service period.
The Company previously applied Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations and
provided the required pro forma disclosures of SFAS No. 123, "Accounting for
Stock-Based Compensation." The Company elected to adopt the modified
retrospective application method as provided by SFAS 123(R), and, accordingly,
financial statement amounts for the prior periods presented in this Form 10-Q
have been restated to reflect the fair value method of expensing prescribed by
SFAS 123(R). The methodology and application of expensing of stock-based
compensation is consistent with that used in the pro forma amounts disclosed in
the Company's prior filings.
The following table shows total stock-based compensation expense included in the
Condensed Consolidated Statements of Income:
(Dollars in thousands, except per share data) Three Months Ended March 31,
-----------------------------------------
2006 2005
------------------ ------------------
Cost of sales.................................. $ 468 $ 444
Cost of support services....................... 201 192
Cost of business services...................... 267 268
Selling, general and administrative............ 5,553 5,427
Research and development....................... 201 228
------------------ ------------------
Pre-tax stock-based compensation............... 6,690 6,559
Income tax..................................... (2,274) (2,230)
------------------ ------------------
Stock-based compensation expense, net.......... $ 4,416 $ 4,329
================== ==================
Basic earnings per share impact................ $ 0.02 $ 0.02
================== ==================
Diluted earnings per share impact.............. $ 0.02 $ 0.02
================== ==================
At March 31, 2006, $51 million of unrecognized compensation cost related to
non-vested awards is expected to be recognized over a weighted average period of
three years. The total intrinsic value of options exercised during the
three-months ended March 31, 2006 and 2005, was approximately $9.3 million and
$10.7 million, respectively. There were no capitalized stock-based compensation
costs at March 31, 2006 and 2005. Proceeds from issuance of stock in the
Company's Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2006 and 2005 includes $1.1 million and $2.3 million of windfall
tax benefits from stock option exercises, respectively.
The Company settles employee stock options and restricted stock with treasury
shares. Restricted stock units will be settled primarily in shares except for
the related minimum tax withholding which will be settled in cash.
In 2006, the Company modified its new stock-based compensation awards requiring
a minimum requisite service period of one year for retirement eligible
employees.
The following table details the retroactive application impact of SFAS 123(R) on
previously reported results:
(Dollars in thousands, except per share data) As previously
For the quarter ended March 31, 2005 Restated reported
----------------- ------------------
Income from continuing operations before taxes......................... $ 221,210 $ 227,769
Net income............................................................. $ 145,275 $ 149,604
Earnings per share of common stock:
Basic earnings per share from continuing operations.................. $ 0.63 $ 0.65
Diluted earnings per share from continuing operations................ $ 0.62 $ 0.64
Net cash provided by operating activities from continuing operations... $ 190,071 $ 192,359
Net cash used in financing activities from continuing operations....... $ (160,953) $ (163,241)
At December 31, 2005
Deferred taxes......................................................... $ 1,859,950 $ 1,922,258
Total liabilities...................................................... $ 8,947,133 $ 9,009,441
Capital in excess of par value......................................... $ 222,908 $ -
Retained earnings...................................................... $ 4,324,451 $ 4,485,051
Total stockholders' equity............................................. $ 1,364,249 $ 1,301,941
Incentive Awards
Long-term incentive awards are provided to employees under the terms of the
Company's plans. The Executive Compensation Committee of the Board of Directors
administers these plans. Awards granted under these plans may include stock
options, restricted stock (units), other stock based awards, cash or any
combination thereof.
Effective in 2006, the Company changed the components of its long-term incentive
compensation structure. This change will increase the amount of restricted stock
units and cash incentive awards issued to employees and will reduce the number
of stock options granted.
Stock Options
- -------------
Under the Company's stock plan, certain officers and employees of the Company
are granted options at prices equal to the market value of the Company's common
shares at the date of grant. Options granted in 2004 and prior generally become
exercisable in three equal installments during the first three years following
their grant and expire after ten years. Options granted in 2005 and thereafter
generally become exercisable in four equal installments during the first four
years following their grant and expire ten years from the date of grant. At
March 31, 2006, there were 9,954,941 options available for future grants under
this plan.
The following table summarizes information about stock option transactions:
Per share weighted
Shares average exercise price
------------------------ ------------------------
Options outstanding at December 31, 2005........ 22,037,808 $41
Granted....................................... 1,933,059 $43
Exercised..................................... (856,080) $32
Canceled...................................... (722,044) $45
Forfeited..................................... (109,218) $44
------------------------ ------------------------
Options outstanding at March 31, 2006........... 22,283,525 $42
======================== ========================
Options exercisable at March 31, 2006........... 17,012,853 $41
======================== ========================
The following table summarizes information about stock options outstanding and
exercisable at March 31, 2006:
Options Outstanding
- -------------------------------------------------------------------------------------------------------------------
Range of Weighted Per share Aggregate
per share average remaining weighted average intrinsic
Exercise prices Number contractual life exercise price value $'000
- ------------------- ----------------- -------------------- -------------------- -------------------
$23.73 - $35.99 6,476,058 6.1 years $30 83,874
$36.00 - $45.99 8,170,640 7.8 years $41 12,944
$46.00 - $56.99 5,446,104 7.8 years $47 -
$57.00 - $65.72 2,190,723 4.0 years $64 -
----------------- -------------------- -------------------
22,283,525 6.9 years 96,818
================= ==================== ===================
Options Exercisable
- -------------------------------------------------------------------------------------------------------------------
Range of Weighted Per share Aggregate
per share average remaining weighted average intrinsic
Exercise prices Number contractual life exercise price value $'000
- ------------------- ----------------- -------------------- -------------------- -------------------
$23.73 - $35.99 6,475,808 6.0 years $30 83,874
$36.00 - $45.99 5,183,444 3.8 years $41 9,502
$46.00 - $56.99 3,162,878 3.6 years $47 -
$57.00 - $65.72 2,190,723 4.0 years $64 -
----------------- -------------------- -------------------
17,012,853 4.4 years 93,376
================= ==================== ===================
Beginning in 1997, certain employees eligible for performance-based compensation
may defer up to 100% of their annual awards, subject to the terms and conditions
of the Pitney Bowes Deferred Incentive Savings Plan. Participants may allocate
deferred compensation among specified investment choices. Previously the
investment choices offered included stock options under the U.S. stock option
plan. Stock options acquired under this plan were generally exercisable three
years following their grant and expired after a period not to exceed ten years
from the date of grant. There were 281,524 options outstanding under this plan
at March 31, 2006, which are included in outstanding options under the Company's
U.S. stock option plan.
The Company estimates the fair value of stock options using a Black-Scholes
valuation model, consistent with the provisions of SFAS 123(R), Securities and
Exchange Commission (SEC) Staff Accounting Bulletin No. 107 and the Company's
prior period pro forma disclosures of net earnings, including stock-based
compensation (determined under a fair value method as prescribed by SFAS 123).
Key input assumptions used to estimate the fair value of stock options include
the volatility of the Company's stock, the risk-free interest rate and the
Company's dividend yield. The Company believes that the valuation technique and
the approach utilized to develop the underlying assumptions are appropriate in
estimating the fair value of its stock option grants. Estimates of fair value
are not intended to predict actual future events or the value ultimately
realized by employees who receive equity awards, and subsequent events are not
indicative of the reasonableness of the original estimates of fair value made by
the Company under SFAS 123(R).
The fair value of stock options granted during the three months ended March 31,
2006 and 2005 respectively, and related assumptions were as follows:
Three Months Ended March 31,
-----------------------------------------
2006 2005
------------------ ------------------
Expected dividend yield.............................. 2.9% 2.8%
Expected stock price volatility (1).................. 17.6% 18.5%
Risk-free interest rate (2).......................... 4.6% 3.5%
Expected life - years (3)............................ 5 5
Weighted-average fair value per option granted....... $7.13 $7.30
1 - The Company's estimates of expected stock price volatility are based on
historical price changes of the Company's stock.
2 - The risk-free interest rate is based on U.S. Treasuries with a term equal to
the expected option term.
3 - The expected life is based on historical experience.
Restricted Stock and Restricted Stock Units
- -------------------------------------------
The Company's stock plan permits the issuance of restricted stock and restricted
stock units. Restricted stock (units) are stock awards that are granted to
employees and entitle the holder to shares of common stock as the award vests,
typically over a four year period. The fair value of the awards is determined on
the grant date based on the Company's stock price at that date. Restricted stock
awards are subject to one or more restrictions, which may include continued
employment over a specified period or the attainment of specified financial
performance goals. Where a restricted stock award is subject to both tenure and
attainment of financial performance goals, the restrictions would be released,
in total or in part, only if the executive is still employed by the Company at
the end of the performance period and if the performance objectives are
achieved. Where the sole restriction of a restricted stock award is continued
employment over a specified period, such period may not be less than three
years. The compensation expense for each award is recognized over the
performance period.
The following table summarizes information about restricted stock (units)
transactions:
Weighted
average grant date
Shares / Units fair value
------------------- --------------------
Restricted stock / units outstanding at December 31, 2005.......... 208,350 $38
Granted.......................................................... 253,759 $43
Vested........................................................... (12,825) $43
Forfeited........................................................ (930) $43
------------------- --------------------
Restricted stock / units outstanding at March 31, 2006............. 448,354 $40
=================== ====================
Employee Stock Purchase Plans
- -----------------------------
The U.S. Employee Stock Purchase Plan enables substantially all U.S. and
Canadian employees to purchase shares of the Company's common stock at a
discounted offering price and are considered compensatory plans in accordance
with SFAS 123(R). In 2006, the offering price was 85% of the average price of
the Company's common stock on the New York Stock Exchange on the offering date.
At no time will the exercise price be less than the lowest price permitted under
Section 423 of the Internal Revenue Code. The U.K. ESPP also enables eligible
employees of the Company's participating U.K. subsidiaries to purchase shares of
the Company's stock at a discounted offering price which, in 2005, was 90% of
the average closing price of the Company's common stock on the New York Stock
Exchange for the three business days preceding the offering date. The Company
may grant rights to purchase up to 7,540,937 common shares to its regular
employees under these plans.
Directors' Stock Plan
- ---------------------
Under this plan, each non-employee director is granted 1,400 shares of
restricted common stock annually. There were no shares granted for the quarters
ended March 31, 2006, and 2005. Compensation expense, net of taxes, recorded by
the Company was $0.1 million for the quarters ended March 31, 2006, and 2005.
The shares carry full voting and dividend rights but, except as provided herein,
may not be transferred or alienated until the later of (1) termination of
service as a director, or, if earlier, the date of a change of control, or (2)
the expiration of the six-month period following the grant of such shares. If a
director terminates service as a director prior to the expiration of the
six-month period following a grant of restricted stock, that award would be
forfeited. The Directors' Stock Plan permits certain limited dispositions of
restricted common stock to family members, family trusts or partnerships, as
well as donations to charity after the expiration of the six-month holding
period, provided the director retain a minimum of 7,500 shares of restricted
common stock.
Beginning in 1997, non-employee directors may defer up to 100% of their eligible
compensation, subject to the terms and conditions of the Pitney Bowes Deferred
Incentive Savings Plan for directors. Participants may allocate deferred
compensation among specified investment choices. Previously the investment
choices offered included stock options under the Directors' Stock Plan. Stock
options acquired under this plan were generally exercisable three years
following their grant and expired after a period not to exceed ten years. There
were 46,420 and 62,504 options outstanding under this plan at March 31, 2006,
and 2005, respectively. Beginning with the 2004 plan year, options were not
offered as an investment choice and therefore there were no options granted in
2004 and thereafter.
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 were pleased that we started the year with a well-diversified base of revenue
and earnings growth and significant cash flow. Our performance this quarter was
driven by our expanded presence in the mailstream and our ability to provide a
wide variety of innovative solutions for managing the physical and electronic
mail and document flows for customers of all sizes.
For the first quarter, revenue increased seven percent driven by financing,
supplies, software, management services, mail services, and ongoing demand for
our digital mailing equipment worldwide and acquisitions, which contributed 3%.
Revenue was negatively impacted by foreign currency, which lowered revenue
growth by 1%. Strategic transactions in 2006 included the acquisitions of Emtex
Ltd. and Ibis Consulting Inc. We also continued actions to reduce our investment
in Capital Services.
Net income for the quarter was $154 million or $0.67 per diluted share as
compared with $0.62 per diluted share in the first quarter of 2005. As a result
of our revenue growth and an improved ratio of earnings before interest and
taxes to revenue, we were able to grow our earnings despite increases in
interest rates. Diluted earnings per share in the quarter included an after-tax
restructuring charge of two cents. In the first quarter of 2005, diluted
earnings per share included an after-tax restructuring gain of four cents and a
charge for charitable contributions of three cents.
See Results of Operations - first quarter of 2006 vs. first quarter of 2005 for
a more detailed discussion of our results of operations.
Outlook
- -------
We anticipate that we will experience continued strength in our financial
results in 2006. However, we expect that we will continue to experience a
changing mix of our product line, where a greater percentage of the revenue will
come from diversified revenue streams associated with fully featured smaller
systems and less from larger system sales. We expect to continue our market
expansion in mailstream solutions and services and derive further synergies from
our recent acquisitions.
During 2006, we will continue to record additional restructuring charges related
primarily to the completion of programs initiated in 2005. We remain focused on
disciplined expense control initiatives and will continue to allocate capital to
optimize our returns. While it is always difficult to predict future economic
and interest rate trends, we expect that our interest costs will increase
further in 2006 due, in part, to an increase in rates compared with the prior
year.
We are continuing to review various disposition alternatives for our Capital
Services business. In the meantime, we will continue to manage the Capital
Services business to maximize value for shareholders, as evidenced by the sale
of the Imagistics lease portfolio.
Results of Operations - first quarter of 2006 vs. first quarter of 2005
- -----------------------------------------------------------------------
Business segment results
The following table shows revenue and earnings before interest and taxes (EBIT)
by segment for the three months ended March 31, 2006 and 2005. Prior year
results have been adjusted for SFAS 123(R).
(Dollars in millions) Revenue EBIT
------------------------------------------ -----------------------------------------
Three months ended March 31, Three months ended March 31,
------------------------------------------ -----------------------------------------
2006 2005 % change 2006 2005 % change
----------- ------------ ----------- ----------- ----------- -----------
Inside the U.S.- Mailing $ 578 $ 553 5% $ 228 $ 216 6%
- DMT 98 91 8% 6 4 82%
Outside the United States............ 296 291 1% 50 51 (3%)
----------- ------------ ----------- ----------- ----------- -----------
Global Mailstream Solutions........... 972 935 4% 284 271 5%
Global Management Services........... 267 268 -% 20 14 47%
Mail Services........................ 119 81 46% 12 3 255%
----------- ------------ ----------- ----------- ----------- -----------
Global Business Services.............. 386 349 11% 32 17 87%
Capital Services...................... 46 34 37% 34 20 72%
----------- ------------ ----------- ----------- ----------- -----------
Total................................. $ 1,404 $ 1,318 7% $ 350 $ 308 14%
=========== ============ =========== =========== =========== ===========
During the first quarter of 2006, Global Mailstream Solutions revenue increased
4% and earnings before interest and taxes (EBIT) increased 5%. Inside the U.S.,
the quarter's revenue growth was favorably impacted by continued demand for
networked digital mailing systems and related financing and supplies. The
quarter's results also included higher revenue from DMT that was driven by
growth from increased placements of high-speed inserters and growth at Group 1
Software. Outside the U.S. revenue was adversely affected by foreign currency
translation which decreased our growth by 5%, weakness in the DMT business in
Europe; and sluggish performance in Canada. However, we experienced continued
growth with small business customers, financing and supplies for digital mailing
systems. Outside the U.S. EBIT was negatively impacted during the quarter by
foreign currency translation which decreased EBIT by 4% and greater than
expected transitional expenses related to European and Canadian restructuring.
During the first quarter of 2006, revenue grew 11% and EBIT grew 87% in Global
Business Services. Our management services operation reported flat revenue and
47% EBIT growth, reflecting our strategy to exit unprofitable accounts and focus
on offering higher value services and reducing administrative costs. During the
quarter we experienced stronger than expected performance in the U.S. that was
partially offset by lower revenue in Europe. Mail services revenue benefited
from the continued growth in presort and international mail services and the
acquisition of Imagitas in the second quarter of 2005, which contributed 28% to
revenue growth. EBIT improved as a result of the successful integration of
recently acquired sites and the consolidation of lower margin locations.
During the first quarter of 2006, revenue increased 37% and EBIT increased 72%
in the Capital Services segment. The quarter's results included asset sales that
added an incremental $0.03 per diluted share. The results also included higher
revenue, EBIT and interest expense due to the revision of the accounting for
certain leveraged leases to operating leases that took effect at the end of
2005.
Revenue by source
The following table shows revenue by source for the three months ended March 31,
2006 and 2005:
(Dollars in thousands) Three Months Ended March 31,
--------------------------------------------------------------
2006 2005 % change
------------------- ----------------- ------------------
Sales.......................... $ 405,778 $ 381,427 6%
Rentals........................ 196,812 201,641 (2%)
Financing...................... 174,996 157,275 11%
Support services............... 194,543 194,934 -%
Business services.............. 386,368 349,103 11%
Capital Services............... 45,607 33,408 37%
------------------- ----------------- ------------------
Total revenue.................. $ 1,404,104 $ 1,317,788 7%
=================== ================= ==================
Sales revenue increased 6% due to growth in sales of networked digital mailing
systems, supplies, and software.
Rentals revenue was negatively impacted by downsizing to smaller machines.
Financing revenue increased 11% due primarily to growth in our worldwide
equipment leasing volumes and higher revenue from payment solutions.
Support services revenue remained flat compared with the prior year as a result
of downsizing to smaller machines.
Business services revenue increased 11% due primarily to growth in presort and
international mail services, direct marketing services, and management services
in the U.S. The acquisition of Imagitas contributed 8%.
Capital Services revenue increased 37% due primarily to the revision of
accounting for certain lease transactions that took effect at the end of the
fourth quarter of 2005 and asset sales during the first quarter of 2006.
Costs and expenses
Cost of sales decreased to 43.7% of sales revenue in the first quarter of 2006
compared with 44.1% in the first quarter of 2005 primarily due to the increase
in mix of higher margin software and supplies revenue and the benefits derived
from our transition to outsourcing of parts for digital equipment.
Cost of rentals increased to 22.1% of rentals revenue in the first quarter of
2006 compared with 21.0% in the first quarter of 2005, as a result of higher
depreciation costs from new placements of digital meters.
Cost of support services increased to 52.7% of support services revenue in the
first quarter of 2006 compared with 51.5% in the first quarter of 2005,
primarily due to increase in mix of lower margin DMT and international revenue.
Cost of business services decreased to 79.3% of business services revenue in the
first quarter of 2006 compared with 82.8% in the first quarter of 2005,
primarily due to our ongoing focus on cost containment and efficiency in our
management services operations, and the improved integration of new sites in our
mail services operations.
Selling, general and administrative expenses decreased to 31.3% of total revenue
in the first quarter of 2006 compared with 31.4% in the first quarter of 2005,
due to our continued focus on controlling operating expenses and benefits from
our transformation programs, partially offset by the impact of our acquisitions
and costs associated with our Capital Services strategy.
Research and development expenses decreased to 3.0% in the first quarter of 2006
compared with 3.2% in the first quarter of 2005. Our investment in research and
development reflects our continued focus on developing new technologies and
enhancing features for all our products.
Net interest expense increased to $65.3 million in the first quarter of 2006
compared with $46.8 million in the first quarter of 2005, due to the revision of
accounting for certain lease transactions that took effect at the end of the
fourth quarter of 2005, higher average interest rates and higher average
borrowings during the quarter.
The effective tax rate for the first quarter of 2006 was 34.0% compared with
34.3% in the first quarter of 2005. The effective tax rate for the first quarter
of 2005 included an incremental increase of 0.3% from restructuring initiatives.
Restructuring
- -------------
In connection with our previously announced restructuring initiatives, we
recorded a pre-tax restructuring charge (gain) of $5.6 million and ($15.8)
million for the three months ended March 31, 2006 and 2005, respectively. We
expect these restructuring initiatives to be substantially completed by the end
of 2006 and currently estimate 2006 pre-tax restructuring charges to be in the
range of $20 million to $35 million. As we continue to finalize our 2006
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 majority of the cash outflows related to restructuring charges will be
funded primarily by cash from operating activities over the next 12 months. The
restructuring initiatives are expected to continue to increase our operating
efficiency and effectiveness in 2006 and beyond while enhancing growth,
primarily as a result of reduced personnel-related expenses. See Note 9 to the
condensed consolidated financial statements for our accounting policy related to
restructuring charges.
The pre-tax restructuring charges (gain) are composed of:
(Dollars in millions) Three Months Ended March 31,
-----------------------------------------
2006 2005
------------------ ------------------
Severance and benefit costs................. $ 4.5 $ 13.1
Asset impairments........................... 0.5 0.7
Other exit costs............................ 0.6 0.6
Gain on sale of main plant.................. - (30.2)
------------------ ------------------
$ 5.6 $ (15.8)
================== ==================
All restructuring charges, except for the asset impairments, will result in cash
outflows. The severance and benefit costs relate to a reduction in workforce of
approximately 3,600 employees worldwide from the inception of this plan through
March 31, 2006 and expected future workforce reductions of approximately 700
employees. The workforce reductions relate to actions across several of our
businesses resulting from infrastructure and process improvements and our
continuing efforts to streamline operations, and include managerial,
professional, clerical and technical roles. Approximately 62% of the workforce
reductions are in the U.S. The majority of the international workforce
reductions are in Europe and Canada. During the three months ended March 31,
2005, we recorded a pre-tax gain of $30 million related to the sale of our main
plant manufacturing facility in Connecticut.
Accrued restructuring charges at March 31, 2006 are composed of the following:
(Dollars in millions) Balance at Balance
January 1, Restructuring Cash Non-cash at March 31,
2006 charges payments charges 2006
---------------- ---------------- ---------------- ---------------- -----------------
Severance and
benefit costs................ $ 44.6 $ 4.5 $ (17.7) $ - $ 31.4
Asset impairments............. - 0.5 - (0.5) -
Other exit costs.............. 5.2 0.6 (1.6) - 4.2
---------------- ---------------- ---------------- ---------------- -----------------
$ 49.8 $ 5.6 $ (19.3) $ (0.5) $ 35.6
================ ================ ================ ================ =================
Acquisitions
- ------------
On April 24, 2006, we completed the acquisition of Ibis Consulting, Inc. (Ibis)
for approximately $67 million in cash. Ibis is a leading provider of electronic
discovery (eDiscovery) services to law firms and corporate clients. Ibis's
technology and offerings complement those of Compulit, which we acquired last
year, and expand our range of solutions and services for the complex litigation
support needs of law firms and corporate legal departments.
On February 8, 2006, we completed the acquisition of Emtex Ltd. (Emtex) for a
net purchase price of $36.5 million in cash. Emtex is a software and services
company that allows large-volume mailers to simplify document production and
centrally manage complex multi-vendor and multi-site print operations. The
goodwill was assigned to Inside the U.S. - DMT and Outside the U.S. segments.
On June 30, 2005, we 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 our Canadian
operations by enhancing its geographic coverage and extending its offerings. The
goodwill was assigned to the Outside the U.S. segment.
On May 26, 2005, we completed the acquisition of Imagitas, Inc. (Imagitas) for a
net purchase price of $231 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 it currently
delivers to its customers. The goodwill was assigned to the Mail Services
segment.
On March 24, 2005, we completed the acquisition of Compulit, Inc. (Compulit) for
a net purchase price of $24 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 to its
legal vertical. The goodwill was assigned to the Global Management Services
segment.
Liquidity and Capital Resources
- -------------------------------
Our ratio of current assets to current liabilities increased slightly to 0.95 to
1 at March 31, 2006 compared with 0.94 to 1 at December 31, 2005.
The ratio of total debt to total debt and stockholders' equity was 77.6% at
March 31, 2006 and 77.5% at December 31, 2005. Including the preferred
stockholders' equity in our subsidiary as debt, the ratio of total debt to total
debt and stockholders' equity was 78.7% at March 31, 2006 compared with 78.6% at
December 31, 2005.
First Quarter 2006 Cash Flows
Net cash provided by operating activities consisted primarily of net income
adjusted for non-cash items and changes in operating assets and liabilities. The
net increase in our deferred taxes on income and income taxes payable
contributed $70 million to cash from operations, resulting from the timing of
tax payments and the benefits from our leasing activities. The increase in our
internal finance receivables balances decreased cash from operations by $24
million, reflecting growth in equipment placements and our payment solutions
business during the quarter. Other operating assets and liabilities increased
our cash from operations by $6 million primarily due to the timing of accounts
payable and accrued liabilities payments.
Net cash used in investing activities consisted primarily of capital
expenditures for digital meters and acquisitions, 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.
First Quarter 2005 Cash Flows
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 $23 million to cash from operations, resulting from continued tax
benefits from our leasing activities. Other operating assets and liabilities
reduced our cash from operations by $43 million primarily due to the timing of
accounts payable and accrued liabilities payments.
Net cash used in investing activities consisted primarily of capital
expenditures for digital meters and acquisitions, 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
- -----------------------------
At March 31, 2006, $1.6 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.
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
- --------------------
In the first quarter of 2006, capital expenditures included $33.5 million in net
additions to property, plant and equipment and $49.5 million in net additions to
rental equipment and related inventories compared with $37.0 million and $42.6
million, respectively, in the same period in 2005. 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 three months ended
March 31, 2006.
We expect capital expenditures for the remainder of 2006 to be approximately the
same as the prior year. These investments will also be affected by the timing of
our customers' transition to digital meters.
Capital Services
- ----------------
Capital Services strategy
As previously disclosed, we are assessing a broader range of asset and business
disposition options for our Capital Services business, including spin-off, a
sale of the business, or sale of all or a portion of the assets. Several
factors, including improved economic conditions, make this range of options more
attractive now, than when we first announced its intention to look at options
for exiting this business in January 2003. We intend to reach a conclusion in
the near future on the best alternative to pursue. Depending on the conclusion
reached by us, and the possible resolution of related tax matters, we could
possibly incur after-tax charges of up to $550 million. We believe that our
ultimate disposition strategy will not have a material impact on our total cash
position.
In accordance with the previously announced Subscription Agreement with Cerberus
Capital Management, L.P., related to a potential spin-off, both parties have had
the right to terminate this agreement since March 31, 2006. Neither party has
terminated the agreement at this time.
In July 2005, we received notice of termination of its agreement to provide
future lease financing to Imagistics International, Inc. On April 28, 2006, we
completed the sale of our Imagistics lease portfolio to De Lage Landen
Operational Services, LLC, a subsidiary of Rabobank Group, for approximately
$288 million. As a result, we will report the results of the Imagistics lease
portfolio in discontinued operations in the second quarter of 2006 including an
after-tax gain of about $10 million from the sale of this portfolio. This lease
portfolio was part of the external financing assets initially included in the
proposed spin-off.
Selling, general and administrative expenses in our condensed consolidated
financial statements for the quarters ended March 31, 2006 and 2005 includes
$6.2 million and $0.8 million, respectively, of depreciation of rental property
and equipment related to Capital Services.
Capital Services portfolio
Our investment in Capital Services lease related assets included in our
Condensed Consolidated Balance Sheets is composed of the following:
(Dollars in millions) March 31, December 31,
2006 2005
------------------ -------------------
Leveraged leases.................. $ 1,414 $ 1,470
Finance receivables............... 561 520
Rental equipment.................. 551 585
------------------ -------------------
Total............................. $ 2,526 $ 2,575
================== ===================
The investment in leveraged leases included in our Condensed Consolidated
Balance Sheets is diversified across the following types of assets:
(Dollars in millions) March 31, December 31,
2006 2005
------------------ ------------------
Locomotives and rail cars................ $ 410 $ 399
Postal equipment......................... 366 365
Commercial real estate................... 141 142
Commercial aircraft...................... 163 230
Telecommunications....................... 141 141
Rail and bus............................. 133 133
Shipping and handling.................... 60 60
------------------ ------------------
Total leveraged leases................... $ 1,414 $ 1,470
================== ==================
Finance receivables are composed of the following:
(Dollars in millions) March 31, December 31,
2006 2005
------------------ ------------------
Large ticket single investor leases...... $ 308 $ 267
Imagistics lease portfolio............... 253 253
------------------ ------------------
Total.................................... $ 561 $ 520
================== ==================
Investment in commercial passenger and cargo aircraft leasing transactions
At March 31, 2006 and December 31, 2005, our net investment in commercial
passenger and cargo aircraft leasing transactions, net of related debt and
minority interest, was $218 million and $231 million, respectively, which is
composed of transactions with U.S. airlines of $22 million and foreign airlines
of $197 million and $209 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. 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.
During the first quarter of 2006, Qantas Airways exercised its early buy-out
option. We will receive $68 million from this transaction, which is
approximately equal to the book value of this asset, of which $12 million was
received in the first quarter of 2006.
During the first quarter of 2006, we sold shares and bankruptcy claims related
to our investment in United Airlines. This transaction resulted in a pre-tax
gain of $10.6 million which is included in other income in the Condensed
Consolidated Statement of Income for the three months ended March 31, 2006.
New Accounting Pronouncements
- -----------------------------
In December 2004, SFAS No. 123(R) (revised 2004), "Share-Based Payment," was
issued. SFAS No. 123(R) supersedes 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 condensed consolidated financial statements.
SFAS No. 123(R) 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. SFAS No. 123(R) also requires
additional disclosures relating to the income tax and cash flow effects
resulting from share-based payments. We adopted the provisions of SFAS No.
123(R) on January 1, 2006 using the modified retrospective application. See Note
16 to the condensed consolidated financial statements for further details.
In June 2005, the FASB issued FASB Staff Position (FSP) No. SFAS 143-1,
"Accounting for Electronic Equipment Waste Obligations," that provides guidance
on how commercial users and producers of electronic equipment should recognize
and measure asset retirement obligations associated with the European Directive
2002/96/EC on Waste Electrical and Electronic Equipment (the "Directive"). The
adoption of this FSP did not have a material effect on our financial position,
results of operations or cash flows for those European Union (EU) countries that
enacted the Directive into country-specific laws. We are currently evaluating
the impact of applying this FSP in the remaining countries in future periods and
do not expect the adoption of this provision to have a material effect on our
financial position, results of operations or cash flows.
Regulatory Matters
- ------------------
There have been no significant changes to the regulatory matters disclosed in
our 2005 Annual Report on Form 10-K.
Other Regulatory Matters
- ------------------------
In December 2003, the IRS issued a closing agreement reflecting additional U.S.
tax, interest and penalties related to 1992 through 1994. In January 2006, the
IRS proposed adjustments that may result in the assessment of additional U.S.
tax, interest and penalties related to 1995 through 2000. We are not disputing
certain of these adjustments and the impact of these adjustments has been
reflected in our financial statements.
We are disputing other adjustments the IRS has proposed that may result in the
assessment of additional U.S. tax, interest and penalties related to 1994
through 2000. These disputed adjustments relate primarily to the tax treatment
of COLI and related interest expense, the tax effect of the sale of certain
preferred share holdings and the tax treatment of certain lease transactions.
The IRS will likely make similar adjustments to lease transactions when
examining years subsequent to 2000. We have requested a review of these
adjustments by the IRS. If attempts to negotiate these items with the IRS are
not successful, we intend to file for judicial review of the disputed
adjustments.
The disputed adjustments from 1994 through 2000 could result in the assessment
of additional tax of up to $390 million plus penalties of up to $65 million, a
significant portion of which has already been accrued. Certain of these
adjustments would result in future tax deductions and, therefore, are only
temporary in nature. We have bonds posted with the IRS of $342 million to
mitigate interest assessments on any otherwise underpaid tax that would result
from a final settlement.
We have accrued for our best estimate of the probable tax, interest and
penalties that may result from these disputed matters as it relates to 1992
through 2006 and we believe that the accrual for tax liabilities is appropriate.
However, the resolution of such matters could have a material impact on our
results of operations, financial position and cash flow.
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 our or management's current expectations as to the
future and include, but are not limited to, statements about the amounts, timing
and results of possible restructuring charges and future earnings. Words such as
"estimate," "project," "plan," "believe," "expect," "anticipate," "intend," and
similar expressions may identify such forward-looking statements. Some of the
factors which could cause future financial performance to differ materially from
the expectations as expressed in any forward-looking statement made by or on our
behalf include:
o changes in international or national political conditions, including any
terrorist attacks
o negative developments in economic conditions, including adverse impacts on
customer demand
o changes in postal regulations
o timely development and acceptance of new products
o success in gaining product approval in new markets where regulatory approval
is required
o successful entry into new markets
o mailers' utilization of alternative means of communication or competitors'
products
o our success at managing customer credit risk, including risks associated with
commercial passenger and cargo aircraft leasing transactions
o our 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 interrupted use of key information systems
o changes in privacy laws
o intellectual property infringement claims
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 spin-off or other disposition of the
majority of the assets in this segment
o changes in pension and retiree medical costs
o acts of nature
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, 2005 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 March
31, 2006. In addition, no change in internal control over financial reporting
occurred during the quarter ended March 31, 2006, 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.
Part II - Other Information
---------------------------
Item 1: Legal Proceedings
This item updates the legal proceedings more fully described in our 2005 Annual
Report on Form 10-K, dated March 13, 2006. We are a defendant in a patent action
brought by Ricoh Company, Ltd. in which there are allegations of infringement
against certain of our important mailing products, including the DM SeriesTM.
The plaintiff seeks both large and unspecified damages and injunctive relief.
Ricoh Corporation et al. v. Pitney Bowes Inc. (United States District Court,
District of New Jersey, filed November 26, 2002). The parties' respective
motions on the issue of inequitable conduct during the patent application
process were denied, leaving this issue for trial. On April 20, 2006, the court
issued a claims construction ruling on the interpretation of the proper scope of
the patents. A tentative trial date has been set for August 15, 2006.
We expect to prevail in this matter; however, as litigation is inherently
unpredictable there can be no assurance in this regard, and if Ricoh does
prevail, the result may have a material effect on our financial position, future
results of operations or cash flows, including, for example, our ability to
offer certain types of goods or services in the future.
There were no other material changes to the legal proceedings disclosures made
in the Annual Report on Form 10-K for the year ended December 31, 2005 regarding
legal proceedings.
Item 1A: Risk Factors
There were no material changes to the risk factors identified in the Annual
Report on Form 10-K for the year ended December 31, 2005 regarding this matter.
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 September 2005, our Board of Directors authorized $300 million for
repurchases of outstanding shares of our common stock in the open market during
the subsequent 12 to 24 months of which $241 million remained for future
purchases at December 31, 2005. We repurchased 3.6 million shares during the
first quarter of 2006 under this program for a total price of $152 million,
leaving $89 million remaining for future repurchases under this program.
In March 2006, our Board of Directors authorized the repurchase of up to an
additional $300 million of our common stock in the open market during the
subsequent 12 to 24 months.
Company Purchases of Equity Securities
The following table summarizes our share repurchase activity:
Approximate dollar
Total number of value of shares that
shares purchased as may yet be purchased
Total number of Average price part of a publicly under the plan
Period shares purchased paid per share announced plan (in thousands)
--------------------- --------------------- ---------------------- ---------------------
September 2005 Program
- ----------------------
Balance carried forward.... - - - $241,199
January 2006............... 124,900 $42.84 124,900 $235,853
February 2006.............. 725,400 $42.81 725,400 $204,795
March 2006................. 2,731,500 $42.33 2,731,500 $ 89,175
--------------------- ----------------------
3,581,800 3,581,800
March 2006 Program
- ------------------
March 2006................. - - - $300,000
--------------------- ---------------------- ---------------------
3,581,800 3,581,800 $389,175
===================== ====================== =====================
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
(10)(n) Form of Equity Compensation Grant Letter
(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
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.
May 4, 2006
/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)
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
(10)(n) Form of Equity Compensation Grant Letter
(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
Exhibit (12)
------------
Pitney Bowes Inc.
Computation of Ratio of Earnings to Fixed Charges (1)
-----------------------------------------------------
(Dollars in thousands)
Three Months Ended March 31,
-----------------------------------------
2006 2005
------------------ -----------------
Income before income taxes..................................... $ 232,449 $ 221,210
Add:
Interest expense............................................. 67,121 48,267
Portion of rents representative
of the interest factor..................................... 13,058 13,930
Amortization of capitalized
interest................................................... 243 369
Minority interest in the income of
subsidiary with fixed charges.............................. 2,690 1,758
------------------ -----------------
Income as adjusted............................................. $ 315,561 $ 285,534
================== =================
Fixed charges:
Interest expense............................................. $ 67,121 $ 48,267
Portion of rents representative
of the interest factor..................................... 13,058 13,930
Minority interest, excluding taxes, in the
income of subsidiary with fixed charges.................... 4,073 2,677
------------------ -----------------
Total fixed charges............................................ $ 84,252 $ 64,874
================== =================
Ratio of earnings to fixed charges............................. 3.75 4.40
================== =================
<FN>
(1) The computation of the ratio of earnings to fixed charges has been
computed by dividing income before income taxes as adjusted by fixed
charges. Included in fixed charges is one-third of rental expense as the
representative portion of interest.
</FN>
Exhibit (31.1)
--------------
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael J. Critelli, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pitney Bowes
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b. Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this quarterly report based on such
evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 4, 2006
/s/ Michael J. Critelli
- -----------------------
Michael J. Critelli
Chief Executive Officer
Exhibit (31.2)
--------------
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Bruce P. Nolop, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pitney Bowes
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b. Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this quarterly report based on such
evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 4, 2006
/s/ Bruce P. Nolop
- ------------------
Bruce P. Nolop
Chief Financial Officer
Exhibit (32.1)
--------------
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
The certification set forth below is being submitted in connection with the
Quarterly Report of Pitney Bowes Inc. (the "Company") on Form 10-Q for the
period ended March 31, 2006 as filed with the Securities and Exchange Commission
on the date hereof (the "Report"), for the purpose of complying with Rule
13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the
"Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States
Code.
I, Michael J. Critelli, Chief Executive Officer of the Company, certify that, to
the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Exchange Act; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ Michael J. Critelli
- -----------------------
Michael J. Critelli
Chief Executive Officer
May 4, 2006
Exhibit (32.2)
--------------
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
The certification set forth below is being submitted in connection with the
Quarterly Report of Pitney Bowes Inc. (the "Company") on Form 10-Q for the
period ended March 31, 2006 as filed with the Securities and Exchange Commission
on the date hereof (the "Report"), for the purpose of complying with Rule
13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the
"Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States
Code.
I, Bruce P. Nolop, Chief Financial Officer of the Company, certify that, to the
best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Exchange Act; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ Bruce P. Nolop
- ------------------
Bruce P. Nolop
Chief Financial Officer
May 4, 2006
DATE: [ ]
TO: [ ]
RE: NOTICE OF CASH INCENTIVE UNIT AND
PITNEY BOWES STOCK PLAN
INCENTIVE AND NONQUALIFED STOCK OPTION AWARD
- --------------------------------------------------------------------------------
Congratulations on your [insert year] long-term incentive award! This is to
certify that your long-term incentive award, determined based on your
performance and in recognition of your past and expected future efforts and
contributions to the company, is [insert dollar amount]. In accordance with the
plan design, 50% of your award has been converted to [insert number of CIUs]
cash incentive units (CIUs). The remaining 50% of your award has been converted
to [insert number of stock options] stock options granted under the Pitney Bowes
Stock Plan ("Plan") based on the Black-Scholes value of $[insert Black-Scholes
value] per option on the date of grant. The details of your award are described
on the following pages.
Cash Incentive Units (CIUs)
- ---------------------------
CIUs pay out in cash at the end of a three-year performance cycle. Each CIU unit
is worth $1.00 at target performance levels. The [insert three-year period] CIU
performance cycle will have payouts that are based on PBI performance against
three-year cumulative Earnings Per Share (EPS) and three-year cumulative
Adjusted Free Cash Flow (AFCF) targets.
[Insert three-year period] CIU Cycle Financial Performance Metrics
[Performance Targets deleted]
Termination Provisions
- ----------------------
The cash incentive unit award will be subject to the following provisions
depending upon the type of termination:
- --------------------------------------------------------------------------------
TREATMENT OF CASH INCENTIVE UNIT
TERMINATION EVENT CYCLES IN PROGRESS
- --------------------------------------------------------------------------------
Death, Disability or Prorated based on full months of service
Retirement / bridged to through date of death, disability, or
retirement retirement / or last day actually worked
- --------------------------------------------------------------------------------
Involuntary termination other Prorated - provided that the award has
than for cause (with a signed been outstanding for at least one year as
separation agreement and NOT of the last day actually worked
retirement eligible or bridged
to retirement)
- --------------------------------------------------------------------------------
Voluntary resignation Forfeited
- --------------------------------------------------------------------------------
Termination For Cause, Forfeited
Gross misconduct
- --------------------------------------------------------------------------------
Stock Options
- -------------
You have been granted an option to purchase shares of Pitney Bowes Inc. common
stock under the Pitney Bowes Stock Plan ("Plan"). The date of grant, the number
of shares on which the option has been granted, the option exercise price, the
vesting provisions and the expiration of the option grant term are specified
below.
Incentive Stock Options(1)
- --------------------------
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Grant Date Stock Option Shares Option Exercise Price Vesting Period Expiration Date
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
100% vesting on
[ ] [ ] $[ ] [fourth anniversary], [Ten year anniversary
$100,000 maximum of grant date]
vesting per year
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) - This stock option award is intended to meet the requirements of Section
422 of the Internal Revenue Code.
</FN>
A disposition of option shares sooner than one year after the purchase of these
shares generally will result in their no longer being qualified as incentive
stock options; an exception may apply to exercises after death. If an ISO is not
exercised within three months of termination (including retirement), it will
become disqualified as an ISO. The three-month period may extend to one year in
certain circumstances involving disability.
Nonqualified Stock Options
- --------------------------
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Grant Date Stock Option Amount Option Exercise Price Vesting Period / Date Expiration Date
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
4 year pro-rata / [Ten year anniversary
[ ] [ ] $[ ] 25% vests annually of grant date]
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Please note that the vesting provisions are different than grant vesting
provisions prior to 2005. Your stock option grant will vest in four equal
installments commencing on each of the first four anniversary dates of the Grant
Date.
Termination Provisions
- ----------------------
The option grant will be subject to the following provisions depending upon the
type of termination:
- ------------------------------------- ----------------------------------- ------------------------------------
POST-EMPLOYMENT EXERCISABILITY OF
TERMINATION EVENT VESTING TREATMENT OF OPTIONS VESTED OPTIONS
- ------------------------------------- ----------------------------------- ------------------------------------
Death or Disability Accelerated Remainder of original term
- ------------------------------------- ----------------------------------- ------------------------------------
Retirement / bridged to retirement Accelerated
at Retirement(provided Remainder of
original term that the grant is
partially vested as of the last day
actually worked)
- ------------------------------------- ----------------------------------- ------------------------------------
Involuntary termination other than Vesting continues according to plan Exercise according to Plan terms
for cause (with a signed separation provisions for involuntary
agreement and NOT retirement eligible terminations (provided that the
or bridged to retirement) grant is partially vested as of the
last day actually worked)
- ---------------------------------------- ----------------------------------- ------------------------------------
Voluntary resignation Forfeited 3 months
- ---------------------------------------- ----------------------------------- ------------------------------------
Gross misconduct Forfeited Forfeited
- ---------------------------------------- ----------------------------------- ------------------------------------
This award is granted solely on a discretionary basis considering past and
expected future performance and is not intended to create a right or entitlement
in the awardee. Any actual or unrealized gain related to the award will not be
considered regular compensation for purposes of severance, resignation,
termination, redundancy, end of service payments, bonuses, long-service awards,
pension or retirement benefits or similar payments, whether under statutory or
common law. In addition, no awardee is entitled to have any vested right to
continue to receive future awards, nor shall any awards granted to an awardee
become a benefit or entitlement of employment. You will have no rights, claim or
entitlement to compensation or damages as a result of the your termination of
employment for any reason whatsoever (whether or not in breach of contract or
local law), insofar as these rights, claim or entitlement arise or may arise
from (i) your ceasing to have rights under or be entitled to exercise this stock
option as a result of such termination or (ii) loss or diminution in value of
the stock option or any of the shares purchased through exercise of the stock
option as a result of such termination, and you irrevocably release your
employer, the Company and its affiliates, as applicable, from any such rights,
entitlement or claim that may arise. If, notwithstanding the foregoing, any such
right or claim is found by a court of competent jurisdiction to have arisen,
then, by accepting this award, you will be deemed to have irrevocably waived
your entitlement to pursue such rights or claim. By accepting this award, you
authorize the company to withhold appropriate taxes if and when it determines
the award becomes taxable to you. If you engage in "Gross Misconduct", as
defined in the Plan, all of your outstanding option shares and cash incentive
units as of your date of termination shall be forfeited immediately. The plan
and programs under which future stock options and cash incentive units are
awarded are subject to amendment, modification or termination by the company at
any time.
In order for Pitney Bowes to perform its administrative and legal requirements
under the Plan, you agree to allow the company to process personal data about
you, as described below. Such data includes, without limitation, the information
provided in the award materials and other personal data such as your name, work
address, work telephone, employment status, and any other personal data required
and relevant to the administration of the stock plan, tax compliance and
reporting purposes. Because Pitney Bowes is a multinational company, in the case
of non-U.S. residents, such personal data will be transferred to the United
States of America and possibly to other locations where plan administration
information collection and processing may occur. Your explicit consent to
collect, use, store and transfer any such personal data extends to Pitney Bowes
Inc. and any of its subsidiaries, any outside third-party plan administrators as
selected by the company and any other person that the company may engage in the
administration of the Plan. You may exercise your right to access and correct
your personal data at any time by contacting your local human resources
representative or by accessing SAP, where available. By accepting the award, you
give your explicit and voluntary consent to the collection, use, and storage of
your personal data for purposes described in this award. Your consent is purely
voluntarily and freely given and valid as long as it is needed for the
administration of the Plan and to comply with applicable legal requirements. If
you do not consent, indicate "No Consent Given" below, sign this document and
return it to the address noted below. By signing this document you will forfeit
this award. You may withdraw your consent at any time. If you do not consent or
you withdraw your prior consent, your participation in the Stock Plan may be
restricted or terminated.
This option is subject in all respects to the detailed terms and conditions of
the Pitney Bowes Stock Plan Amended and Restated as of January 1, 2002. Further
information concerning the Plan appears in the Plan Summary available online at
www.equiserve.com. This document, dated [insert date] constitutes part of a
prospectus covering securities that have been registered under the Securities
Act of 1933. Printed copies of the Prospectus covering this award are available
upon request by calling Investor Relations at (203) 351-6858. You should read
all of these documents to understand important information about this program,
the Company and its stock, the terms of your participation in the program and
the tax implications of the program.
IN WITNESS WHEREOF, this Stock Option Award and Cash Incentive Unit Award have
been duly executed as of [insert date].
Pitney Bowes Inc.
By: /s/Johnna G. Torsone
--------------------
Senior Vice President and
Chief Human Resources Officer
By accepting this stock option, you relinquish participation in the Pitney Bowes
Employee Stock Purchase Plan for the [insert year] offering. To retain your
right to participate in the Pitney Bowes Employee Stock Purchase Plan and to
decline this stock option offer, please sign below and return this award within
one month of receipt to:
Corporate Compensation, MSC 52-07, Pitney Bowes Inc., One Elmcroft Road,
Stamford, CT 06926-0700, USA
Only sign below if you wish to indicate "NO CONSENT GIVEN:"
I hereby decline the stock options granted to me on [insert grant date]. I
understand that this option grant will be forfeited.
- ------------------------------------------------- Please indicate the reason for your declination:
Employee's Signature Date ESPP Tax Privacy Other (specify below)