UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10 - Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number: 1-3579
PITNEY BOWES INC.
State of Incorporation IRS Employer Identification No.
Delaware 06-0495050
World Headquarters
Stamford, Connecticut 06926-0700
Telephone Number: (203) 356-5000
The Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No_____
Number of shares of common stock, $2 par value, outstanding as of March
31, 1997 is 145,753,938.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1997
Page 2
Pitney Bowes Inc.
Index
Page Number
Part I - Financial Information:
Consolidated Statement of Income - Three Months
Ended March 31, 1997 and 1996 3
Consolidated Balance Sheet - March 31, 1997
and December 31, 1996 4
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6 - 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 14
Part II - Other Information:
Item 1: Legal Proceedings 15
Item 6: Exhibits and Reports on Form 8-K 15
Signatures 16
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1997
Page 3
Part I - Financial Information
Pitney Bowes Inc.
Consolidated Statement of Income
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended March 31,
1997 1996
Revenue from:
Sales $ 417,822 $ 384,004
Rentals and financing 424,562 409,078
Support services 118,986 113,183
Total revenue 961,370 906,265
Costs and expenses:
Cost of sales 253,808 238,764
Cost of rentals and financing 127,674 125,752
Selling, service and administrative 326,109 311,016
Research and development 20,648 18,710
Interest, net 49,496 48,584
Total costs and expenses 777,735 742,826
Income before income taxes 183,635 163,439
Provision for income taxes 63,690 56,930
Net income $ 119,945 $ 106,509
Income per common and common equivalent share:
Net income $ .81 $ .70
Average common and common equivalents shares
outstanding 148,975,517 151,416,081
Dividends declared per share of
common stock $ .40 $ .345
Ratio of earnings to fixed charges 3.83 3.56
Ratio of earnings to fixed
charges excluding minority interest 3.92 3.65
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1997
Page 4
Pitney Bowes Inc.
Consolidated Balance Sheet
(Unaudited)
(Dollars in thousands) March 31, December 31,
1997 1996
Assets
Current assets:
Cash and cash equivalents $ 142,718 $ 135,271
Short-term investments, at cost which
approximates market 12,336 1,500
Accounts receivable, less allowances:
3/97, $15,952; 12/96, $16,160 326,709 340,730
Finance receivables, less allowances:
3/97, $42,597; 12/96, $40,176 1,402,870 1,339,286
Inventories (Note 2) 263,947 281,942
Other current assets and prepayments 135,244 123,337
Total current assets 2,283,824 2,222,066
Property, plant and equipment, net (Note 3) 482,703 486,029
Rental equipment and related
inventories, net (Note 3) 809,752 815,306
Property leased under capital
leases, net (Note 3) 5,037 5,848
Long-term finance receivables, less
allowances:
3/97, $73,910; 12/96, $73,561 3,396,834 3,450,231
Investment in leveraged leases 640,113 633,682
Goodwill, net of amortization:
3/97, $36,001; 12/96, $34,372 204,188 205,802
Other assets 362,343 336,758
Total assets $8,184,794 $8,155,722
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and
accrued liabilities $ 850,954 $ 849,789
Income taxes payable 182,599 212,155
Notes payable and current portion of
long-term obligations 1,986,193 1,911,481
Advance billings 343,369 331,864
Total current liabilities 3,363,115 3,305,289
Deferred taxes on income 800,653 720,840
Long-term debt 1,299,155 1,300,434
Other noncurrent liabilities 385,358 389,113
Total liabilities 5,848,281 5,716,676
Preferred stockholders' equity in a
subsidiary company 200,000 200,000
Stockholders' equity:
Cumulative preferred stock, $50 par
value, 4% convertible 46 46
Cumulative preference stock, no par
value, $2.12 convertible 2,329 2,369
Common stock, $2 par value 323,338 323,338
Capital in excess of par value 29,504 30,260
Retained earnings 2,511,055 2,450,294
Cumulative translation adjustments (54,088) (31,297)
Treasury stock, at cost (675,671) (535,964)
Total stockholders' equity 2,136,513 2,239,046
Total liabilities and stockholders' equity $ 8,184,794 $ 8,155,722
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1997
Page 5
Pitney Bowes Inc.
Consolidated Statement of Cash Flows
(Unaudited)
(Dollars in thousands) Three Months Ended March 31,
1997 1996
Cash flows from operating activities:
Net income $ 119,945 $ 106,509
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 73,905 65,524
Net change in the strategic focus
initiative - (6,421)
Increase(decrease) in deferred taxes
on income 80,599 (3,316)
Change in assets and liabilities:
Accounts receivable 12,222 5,908
Sales-type lease receivables (23,640) (3,575)
Inventories 15,447 7,151
Other current assets and
prepayments (12,243) (29,588)
Accounts payable and accrued
liabilities 3,844 (42,374)
Income taxes payable (29,099) 31,885
Advance billings 12,549 11,518
Other, net (53,913) (28,902)
Net cash provided by operating
activities 199,616 114,319
Cash flows from investing activities:
Short-term investments (3,516) 1,041
Net investment in fixed assets (60,251) (69,763)
Net investment in direct-finance lease
receivables 5,400 52,931
Investment in leveraged leases (8,219) (14,021)
Net cash used in investing
activities (66,586) (29,812)
Cash flows from financing activities:
Increase(decrease) in notes payable 280,101 (9,268)
Principal payments on long-term
obligations (204,507) (1,809)
Proceeds from issuance of stock 5,004 6,298
Stock repurchases (145,507) (24,500)
Dividends paid (59,184) (51,855)
Net cash used in financing
activities (124,093) (81,134)
Effect of exchange rate changes on cash (1,490) (214)
Increase in cash and cash
equivalents 7,447 3,159
Cash and cash equivalents at beginning
of period 135,271 85,352
Cash and cash equivalents at end of
period $ 142,718 $ 88,511
Interest paid $ 49,766 $ 53,894
Income taxes paid $ 15,609 $ 26,477
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1997
Page 6
Pitney Bowes Inc.
Notes to Consolidated Financial Statements
Note 1:
The accompanying unaudited consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and
do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of Pitney Bowes Inc. ("the company"),
all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position of the company as
of March 31, 1997 and the results of its operations and cash flows
for the three months ended March 31, 1997 and 1996 have been
included. Operating results for the three months ended March 31,
1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997. These statements
should be read in conjunction with the financial statements and
notes thereto included in the company's Annual Report to
Stockholders and Form 10-K Annual Report for the year ended December
31, 1996.
Note 2:
Inventories are comprised of the following:
(Dollars in thousands) March 31, December 31,
1997 1996
Raw materials and work in process $ 54,674 $ 58,536
Supplies and service parts 94,683 103,182
Finished products 114,590 120,224
Total $ 263,947 $ 281,942
Note 3:
Fixed assets are comprised of the following:
(Dollars in thousands) March 31, December 31,
1997 1996
Property, plant and equipment $1,102,196 $1,093,501
Accumulated depreciation (619,493) (607,472)
Property, plant and equipment, net $ 482,703 $ 486,029
Rental equipment and related
inventories $1,649,075 $1,634,111
Accumulated depreciation (839,323) (818,805)
Rental equipment and related
inventories, net $ 809,752 $ 815,306
Property leased under capital
leases $ 21,435 $ 24,124
Accumulated amortization (16,398) (18,276)
Property leased under capital
leases, net $ 5,037 $ 5,848
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1997
Page 7
Note 4:
Revenue and operating profit by business segment for the three months
ended March 31, 1997 and 1996 were as follows:
(Dollars in thousands) 1997 1996
Revenue
Business Equipment $ 745,120 $ 700,937
Business Services 128,990 111,890
Commercial and Industrial Financing
Large-Ticket External 49,551 54,423
Small-Ticket External 37,709 39,015
Total 87,260 93,438
Total Revenue $ 961,370 $ 906,265
Operating Profit (1)
Business Equipment $ 169,411 $ 150,686
Business Services 10,488 8,839
Commercial and Industrial Financing 16,511 18,327
Total Operating Profit $ 196,410 $ 177,852
[FN]
(1) Operating profit excludes general corporate expenses, income
taxes, and net interest other than that related to finance
operations.
Note 5:
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 125 "Accounting for
Transactions and Servicing of Financial Assets and Extinguishments of
Liabilities" (FAS 125) for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996.
In December 1996, the FASB issued Statement of Accounting Standards
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125". The company adopted FAS 125 on January 1, 1997.
As of March 31, 1997 there was no material impact on the financial
statements of the company due to the adoption of this statement.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1997
Page 8
Pitney Bowes Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Continuing Operations - first quarter of 1997 vs. first
quarter of 1996
Revenue increased six percent in the first quarter of 1997 to $961.4
million compared to $906.3 million in the first quarter of 1996. Net
income increased 13 percent to $119.9 million from $106.5 million in
the same period in 1996. Per share earnings grew to 81 cents, a 14.5
percent increase from first quarter 1996. Revenue growth was eight
percent excluding revenue from large ticket external financing and
prior-year revenue from businesses in Australia, from which the
company made the strategic decision to exit in 1996.
First quarter 1997 revenue included $417.8 million from sales, up nine
percent from $384.0 million in the first quarter of 1996; $424.6
million from rentals and financing, up four percent from $409.1
million; and $119.0 million for support services, up five percent from
$113.2 million.
To facilitate a better understanding, the following discussion on
revenue and operating profit is based on the company's business
segments. Revenue for each segment includes all sources - sales,
rentals and financing, and support services.
In the Business Equipment Segment, which includes mailing, facsimile
and copier operations, revenue grew six percent and operating profit
increased 12 percent during the first quarter. Mailing Systems' six
percent revenue increase during the quarter was driven by strong
equipment sales in the U.S. Mailing and Production Mail markets. The
company continues to see strong market acceptance of products such as
the Personal Post Office meter. The company also continues to see
excellent growth in Europe in Paragon(r) mail processor and PostPerfect(r)
digital meter placements. Growth in revenue for the quarter has been
partially offset by last year's strategic decision to exit non-
profitable businesses in Australia.
Revenue from Facsimile Systems grew 10 percent in first quarter 1997
driven by customer acceptance of its advanced money-saving systems,
such as the Model 9830, and increased revenue from consumable
supplies.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1997
Page 9
Copier Systems revenue increased seven percent in the first quarter
driven by solid equipment sales. This sales increase was notable
because it was generated while six new products were introduced and
the phased rollout of the color and digital copier systems continued.
Copier Systems also strengthened its ability to profitably grow by
strategically broadening its distribution network in selected
geographic areas.
In the Business Services Segment first-quarter revenue grew 15 percent
and operating profit grew 19 percent. The segment includes Pitney
Bowes Management Services and Atlantic Mortgage and Investment
Corporation. These service businesses have maintained profitable
double-digit growth by bringing Pitney Bowes innovation and expertise
to key market segments.
In line with management's previously announced strategy to concentrate
on fee-based rather than asset-based income, the Commercial and
Industrial Financing Segment had a decline in revenue and operating
profit of seven percent and 10 percent, respectively. The segment
includes large-ticket and small-ticket external financing. The large-
ticket external financing revenue declined nine percent and the small-
ticket revenue declined three percent in the first quarter. The
segment continued to benefit from growth in service-based revenue
sources such as syndication fees. The overall reduction in revenue
and operating profit was driven by previous asset sales resulting in
the planned decrease in runoff income from both portfolios.
The ratio of cost of sales to sales revenue decreased from 62.2
percent in first quarter 1996 to 60.7 percent in 1997. The
improvement was due to the product mix at U.S. Mailing towards higher-
margin products and exiting from non-profitable businesses in
Australia. The improvement was offset, in part, by the continued
growth of the facilities management business which includes most of
its expenses in cost of sales.
The ratio of cost of rentals and financing to rentals and financing
revenue improved to 30.1 percent from 30.7 percent. Margin gains in
the company's mortgage servicing business and in U.S. Mailing
contributed to this improvement.
Selling, service and administrative expenses as a percentage of
revenue improved to 33.9 percent in 1997 from 34.3 percent in the same
period in 1996, continuing the improving trend in this ratio. Exiting
from non-profitable businesses in Australia and efforts to control
operating expenditures contributed to this improvement.
Research and development expenses increased 10 percent to $20.6
million. The current year increase reflects the company's increased
investment in developing new digital meters and other mailing and
software products.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1997
Page 10
Net interest expense increased just under two percent to $49.5 million
principally as a result of a change in mix of debt maturities and
related interest rates.
The effective tax rate in 1997 was 34.7 percent versus 34.8 percent in
1996.
Liquidity and Capital Resources
The current ratio remained essentially unchanged at March 31, 1997 and
December 31, 1996 at .68 to 1 and .67 to 1, respectively. Working
capital at March 31, 1997 and December 31, 1996 remained at comparable
levels.
As part of the company's non-financial services shelf registrations, a
medium-term note facility exists permitting issuance of up to $100
million in debt securities with maturities ranging from more than one
year up to 30 years of which $32 million remain available at March 31,
1997. The company also has an additional $300 million remaining on
its non-financial services shelf registrations filed with the
Securities and Exchange Commission (SEC). Amounts available under
credit agreements, shelf registrations and commercial paper and medium-
term note programs, in addition to cash generated internally are
expected to be sufficient to provide for financing needs in the next
several years.
Pitney Bowes Credit Corporation (PBCC) has $250 million of unissued
debt securities available from a shelf registration statement filed
with the SEC in September 1995. Up to $250 million of medium-term
notes may be offered under this registration statement. The $250
million available under this shelf registration statement should meet
PBCC's financing needs for the next year. PBCC also had unused lines
of credit and revolving credit facilities totaling $1.5 billion at
March 31, 1997, largely supporting its commercial paper borrowings.
The ratio of total debt to total debt and stockholders' equity
including the preferred stockholders' equity in a subsidiary company
in total debt was 62.1% at March 31, 1997 compared to 60.5% at
December 31, 1996. Book value per common share was $14.64 at March
31, 1997 and $15.11 at year-end 1996 principally as a result of the
repurchase of common shares. During the quarter ended March 31, 1997,
the company repurchased 2,372,000 common shares for approximately
$145.5 million. During the period April 28, 1997 to May 8, 1997 the
company repurchased an additional 211,100 shares for approximately
$13.6 million.
In April 1997, Pitney Bowes International Holding, Inc., a subsidiary
of the company, issued an additional $100 million of variable term
voting preferred stock to outside institutional investors in a private
placement transaction. The preferred stock, $.01 par value, is
entitled to cumulative dividends at rates set at auction, generally
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1997
Page 11
for 49 day intervals. The proceeds of the issuance were used to pay
down short-term borrowings.
The company enters into interest rate swap agreements principally
through its financial services businesses. It has been the practice
and objective of the company to use a balanced mix of debt maturities,
variable- and fixed-rate debt and interest rate swap agreements to
control the company's sensitivity to interest rate volatility. The
company utilizes interest rate swap agreements when it considers the
economic benefits to be favorable. Swap agreements, have been
principally utilized to fix interest rates on commercial paper and/or
obtain a lower cost on debt than would otherwise be available absent
the swap.
Capital Investments
In the first quarter of 1997, net investments in fixed assets included
$18.9 million in net additions to property, plant and equipment and
$36.8 million in net additions to rental equipment and related
inventories compared with $21.7 million and $47.9 million,
respectively, in the same period in 1996. In the case of rental
equipment, the additions included the production of postage meters and
the purchase of facsimile and copier equipment for both new placements
and upgrade programs.
As of March 31, 1997, commitments for the acquisition of property,
plant and equipment included plant and manufacturing equipment
improvements as well as rental equipment for new and replacement
programs.
Regulatory Matters
In June 1995, the United States Postal Service (U.S.P.S.) issued final
regulations on the manufacture, distribution and use of postage
meters. The regulations cover four general categories: meter
security, administrative controls, Computerized Meter Resetting
Systems (C.M.R.S.) and other issues.
In general, the regulations put reporting and performance obligations
on meter manufacturers, outline potential administrative sanctions for
failure to meet these obligations and require changes in the fund
management system of C.M.R.S. (such as the company's Postage by Phone (r)
System) to give the U.S.P.S. more direct control over meter licensee
deposits.
The company is working with the U.S.P.S. to ensure that these
regulations provide mailing customers and the U.S.P.S. with the
intended benefits, and that the company also benefits. The company
continues to implement these changes, including modifying our Postage
by Phone (r) system so that customers deposit prepayments of postage
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1997
Page 12
into a U.S.P.S. account rather than a trust account. Resetting meters
through Postage by Phone (r) still requires the customer to request an
authorization and a reset code from the company, a service for which
it charges a fee. The company continues to believe that the financial
impact implementing these regulations will not be material to the
company.
In May 1996, the U.S.P.S. issued a proposed schedule for the phase out
of mechanical meters in the United States marketplace. The schedule
proposed that:
- - as of June 1, 1996, placements of mechanical meters will be
available only as replacements for existing licensed mechanical meters
- - as of March 1, 1997, mechanical meters may not be used by persons
or firms who process mail for a fee (subsequently revised to March 31,
1997).
- - as of December 31, 1997, mechanical meters that interface with
mail machines or processors will no longer be approved
- - as of March 1, 1999, all other mechanical meters (stand-alone
meters) will no longer be approved.
The company has voluntarily halted new placements of mechanical meters
in the United States as of June 1, 1996. The company also has been
actively and voluntarily pursuing removal from the market by March
1997, of mechanical meters used by persons or firms who process mail
for a fee as set forth in the U.S.P.S. proposed schedule for that
segment of meter users. Further, the company agreed, in March 1997,
to use its best efforts to remove from the market mechanical systems
meters (meters that interface with mail machines or processors), by a
revised target date of December 31, 1998, in lieu of the December 31,
1997 date specified in the U.S.P.S. proposed schedule.
The company continues to work with the U.S.P.S. to reach agreement on
all aspects of a mechanical meter migration schedule that reflects the
interests of its customers while minimizing any negative impact on the
company. The company's constant focus on bringing new technologies
into the mailing market has already resulted in a significant shift in
the makeup of the company's meter base. As of March 31, 1997
electronic and digital meters represent 63% of the company's US
installed base, up from 60 percent in December 1996. Until a
mechanical meter migration plan is finalized, the financial impact, if
any, on the company cannot be determined with certainty. However,
based on the proposed schedule and agreements reached to date the
company believes that the plan will not cause a material adverse
financial impact on the company.
The May 1996 U.S.P.S. proposed document also discusses a change in
metering technology that would include use of a digital, information-
based indicia standard. This standard has not yet been developed,
although initial specifications were proposed by the U.S.P.S. in July
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1997
Page 13
1996. At some undetermined date in the future, the U.S.P.S. believes
that digital metering will eventually replace electronic metering in
the United States. The company supports a digital product migration
strategy, and the company anticipates working with the U.S.P.S. to
achieve a timely and effective substitution plan. However, until the
U.S.P.S. finalizes standards for a digital information-based indicia
program (and clarifies transition to the new standard), the impact of
this proposal, if any, on the company cannot be determined. The
company has taken the lead in deploying digital meters in the
marketplace.
Forward-looking Statements
The company cautions readers that any forward-looking statements
(those which talk about the company's or management's current
expectations as to the future) in this Form 10-Q or made by company
management involve risks and uncertainties which may change based on
various important factors. Some of the factors which could cause
future financial performance to differ materially from the
expectations as expressed in any forward-looking statement made by or
on behalf of the company include:
- - changes in postal regulations
- - timely development and acceptance of new products
- - success in gaining product approval in new markets where
regulatory approval is required
- - successful entry into new markets
- - mailer's utilization of alternative means of communication or
competitor's products
- - the company's success at managing customer credit risk
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1997
Page 14
Part II - Other Information
Item 1: Legal Proceedings
In the course of normal business, the company is occasionally party to
lawsuits. These may involve litigation by or against the company
relating to, among other things:
- - contractual rights under vendor, insurance or other contracts
- - intellectual property or patent rights
- - equipment, service or payment disputes with customers
- - disputes with employees
The company is currently a defendant in a number of lawsuits, none of
which should have, in the opinion of management and legal counsel, a
material adverse effect on the company's financial position or results
of operations.
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits (numbered in accordance with Item 601 of
Regulation S-K)
Reg. S-K Status or Incorporation
Exhibits Description by Reference
(10) Pitney Bowes Inc. Deferred
Incentive Savings Plan for
the Board of Directors See Exhibit (i)
(11) Computation of earnings See Exhibit (ii)
per share.
(12) Computation of ratio of See Exhibit (iii)
earnings to fixed charges.
(27) Financial Data Schedule See Exhibit (iv)
(b) Reports on Form 8-K
No reports on Form 8-K wre filed for the three months ended March
31, 1997.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1997
Page 15
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 15, 1997
/s/ M. L. Reichenstein
M. L. Reichenstein
Vice President - Chief Financial Officer
(Principal Financial Officer)
/s/ A. F. Henock
A. F. Henock
Vice President - Controller
and Chief Tax Counsel
(Principal Accounting Officer)