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 September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- - --- EXCHANGE ACT OF 1934
For the transition period from to
--------------- -----------------
Commission File Number: 1-3579
PITNEY BOWES INC.
State of Incorporation IRS Employer Identification No.
Delaware 06-0495050
World Headquarters
Stamford, Connecticut 06926-0700
Telephone Number: (203) 356-5000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
Number of shares of common stock, $1 par value, outstanding as of October 31,
1998 is 272,640,700.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1998
Page 2
Pitney Bowes Inc.
Index
-----------------
Page Number
-----------
Part I - Financial Information:
Item 1: Financial Statements
Consolidated Statements of Income - Three and Nine
Months Ended September 30, 1998 and 1997............... 3
Consolidated Balance Sheets - September 30, 1998
and December 31, 1997.................................. 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997.......... 5
Notes to Consolidated Financial Statements.................. 6 - 8
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations.... 9 - 15
Part II - Other Information:
Item 1: Legal Proceedings.................................. 16
Item 2: Changes in Securities.............................. 16
Item 5: Other Information.................................. 16
Item 6: Exhibits and Reports on Form 8-K................... 16
Signatures ....................................................... 17
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1998
Page 3
Part I - Financial Information
Item 1. Financial Statements
Pitney Bowes Inc.
Consolidated Statements of Income
(Unaudited)
---------------------------------
(Dollars in thousands, except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- ---------------------------------
1998 1997* 1998 1997*
--------------- --------------- --------------- ---------------
Revenue from:
Sales ................................................ $ 488,575 $ 449,904 $ 1,431,310 $ 1,317,483
Rentals and financing ................................ 435,557 404,049 1,262,371 1,192,407
Support services ..................................... 128,271 120,671 379,715 359,870
--------------- --------------- --------------- ---------------
Total revenue ...................................... 1,052,403 974,624 3,073,396 2,869,760
--------------- --------------- --------------- ---------------
Costs and expenses:
Cost of sales ........................................ 282,503 265,563 847,486 788,861
Cost of rentals and financing ........................ 133,237 119,528 377,154 334,882
Selling, service and administrative .................. 362,921 339,717 1,046,819 1,001,508
Research and development ............................. 24,699 21,578 73,395 64,061
Interest, net ........................................ 36,704 38,935 110,076 117,520
--------------- --------------- --------------- ---------------
Total costs and expenses ........................... 840,064 785,321 2,454,930 2,306,832
--------------- --------------- --------------- ---------------
Income from continuing operations before income taxes .. 212,339 189,303 618,466 562,928
Provision for income taxes ............................. 73,120 65,121 212,929 193,979
--------------- --------------- --------------- ---------------
Income from continuing operations ...................... 139,219 124,182 405,537 368,949
Discontinued operations (Note 2) ....................... 2,367 3,623 7,753 9,872
--------------- --------------- --------------- ---------------
Net income ............................................. $ 141,586 $ 127,805 $ 413,290 $ 378,821
=============== =============== =============== ===============
Basic earnings per share:
Continuing operations .................................. $ .51 $ .43 $ 1.47 $ 1.27
Discontinued operations ................................ .01 .01 .03 .03
--------------- --------------- --------------- ---------------
Net income ............................................. $ .52 $ .44 $ 1.50 $ 1.30
=============== =============== =============== ===============
Diluted earnings per share:
Continuing operations .................................. $ .50 $ .43 $ 1.44 $ 1.26
Discontinued operations ................................ .01 .01 .03 .03
--------------- --------------- --------------- ---------------
Net income ............................................. $ .51 $ .44 $ 1.47 $ 1.29
=============== =============== =============== ===============
Dividends declared per share of common stock ........... $ .225 $ .20 $ .675 $ .60
=============== =============== =============== ===============
Ratio of earnings to fixed charges ..................... 4.72 4.31 4.61 4.29
=============== =============== =============== ===============
Ratio of earnings to fixed charges
excluding minority interest .......................... 5.09 4.65 4.97 4.58
=============== =============== =============== ===============
<FN>
*Reclassified to reflect discontinued operations.
</FN>
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1998
Page 4
Pitney Bowes Inc.
Consolidated Balance Sheets
---------------------------
September 30, December 31,
(Dollars in thousands, except share data) 1998 1997
--------------- ---------------
(unaudited)
Assets
- - ------
Current assets:
Cash and cash equivalents............................................. $ 144,974 $ 137,073
Short-term investments, at cost which
approximates market............................................... 1,930 1,722
Accounts receivable, less allowances:
9/98, $22,513; 12/97, $21,129..................................... 346,475 348,792
Finance receivables, less allowances:
9/98, $43,348; 12/97, $54,170..................................... 1,435,795 1,546,542
Inventories (Note 3).................................................. 235,568 249,207
Other current assets and prepayments.................................. 173,458 180,179
Net assets of discontinued operations................................. 776,941 --
--------------- ---------------
Total current assets.............................................. 3,115,141 2,463,515
Property, plant and equipment, net (Note 4)................................ 470,110 497,261
Rental equipment and related inventories, net (Note 4)..................... 803,738 788,035
Property leased under capital leases, net (Note 4)......................... 3,909 4,396
Long-term finance receivables, less allowances:
9/98, $49,479; 12/97, $78,138......................................... 1,938,581 2,581,349
Investment in leveraged leases............................................. 817,144 727,783
Goodwill, net of amortization:
9/98, $45,902; 12/97, $40,912......................................... 213,778 203,419
Other assets ............................................................. 869,944 627,631
--------------- ---------------
Total assets ............................................................ $ 8,232,345 $ 7,893,389
=============== ===============
Liabilities and stockholders' equity
- - ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities.............................. $ 842,511 $ 878,759
Income taxes payable.................................................. 165,414 147,921
Notes payable and current portion of
long-term obligations ............................................ 1,844,077 1,982,988
Advance billings...................................................... 362,801 363,565
--------------- ---------------
Total current liabilities......................................... 3,214,803 3,373,233
Deferred taxes on income................................................... 929,199 905,768
Long-term debt (Note 5).................................................... 1,710,533 1,068,395
Other noncurrent liabilities............................................... 366,799 373,416
--------------- ---------------
Total liabilities................................................. 6,221,334 5,720,812
--------------- ---------------
Preferred stockholders' equity in a subsidiary company..................... 300,000 300,000
Stockholders' equity:
Cumulative preferred stock, $50 par
value, 4% convertible............................................. 34 39
Cumulative preference stock, no par
value, $2.12 convertible.......................................... 2,076 2,220
Common stock, $1 par value............................................ 323,338 323,338
Capital in excess of par value........................................ 18,198 28,028
Retained earnings..................................................... 2,971,883 2,744,929
Accumulated other comprehensive income (Note 8)....................... (90,548) (63,348)
Treasury stock, at cost............................................... (1,513,970) (1,162,629)
--------------- ---------------
Total stockholders' equity........................................ 1,711,011 1,872,577
--------------- ---------------
Total liabilities and stockholders' equity................................. $ 8,232,345 $ 7,893,389
=============== ===============
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1998
Page 5
Pitney Bowes Inc.
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
(Dollars in thousands)
Nine Months Ended September 30,
-----------------------------------
1998 1997*
--------------- ---------------
Cash flows from operating activities:
Income from continuing operations ........................ $ 405,537 $ 368,949
Discontinued operations .................................. 7,753 9,872
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ........................ 266,127 222,699
Increase in deferred taxes on income ................. 72,909 171,277
Change in assets and liabilities:
Accounts receivable ................................ (490) 7,564
Net investment in internal finance receivables ..... (103,061) (87,666)
Inventories ........................................ 13,683 25,951
Other current assets and prepayments ............... 4,838 (22,474)
Accounts payable and accrued liabilities ........... (12,267) 23,837
Income taxes payable ............................... 17,659 (83,801)
Advance billings ................................... 2,584 13,542
Other, net ........................................... (17,033) (68,595)
--------------- ---------------
Net cash provided by operating activities ............ 658,239 581,155
--------------- ---------------
Cash flows from investing activities:
Short-term investments ................................... (310) (713)
Net investment in fixed assets ........................... (219,896) (202,579)
Net investment in external finance receivables ........... (72,105) 95,255
Investment in leveraged leases ........................... (95,534) (47,086)
Investment in mortgage servicing rights .................. (189,252) (71,589)
Other investing activities ............................... (16,471) (3,025)
--------------- ---------------
Net cash used in investing activities ................ (593,568) (229,737)
--------------- ---------------
Cash flows from financing activities:
(Decrease)increase in notes payable, net ................. (109,532) 387,937
Proceeds from issuance of long-term obligations .......... 836,123 --
Principal payments on long-term obligations .............. (231,805) (252,794)
Proceeds from issuance of stock .......................... 32,424 27,964
Stock repurchases ........................................ (394,716) (447,759)
Proceeds from preferred stock issued by a subsidiary...... -- 100,000
Dividends paid ........................................... (186,336) (174,993)
--------------- ---------------
Net cash used in financing activities ................ (53,842) (359,645)
--------------- ---------------
Effect of exchange rate changes on cash .................... (2,928) (1,904)
--------------- ---------------
Increase (decrease) in cash and cash equivalents ........... 7,901 (10,131)
Cash and cash equivalents at beginning of period ........... 137,073 135,271
--------------- ---------------
Cash and cash equivalents at end of period ................. $ 144,974 $ 125,140
=============== ===============
Interest paid .............................................. $ 141,191 $ 154,165
=============== ===============
Income taxes paid, net ..................................... $ 128,850 $ 112,180
=============== ===============
<FN>
* Certain prior year amounts have been reclassified to conform with the 1998
presentation and to reflect discontinued operations.
</FN>
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1998
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 at September
30, 1998 and December 31, 1997, the results of its operations for the three
months and nine months ended September 30, 1998 and 1997 and its cash flows for
the nine months ended September 30, 1998 and 1997 have been included. Operating
results for the three and nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. These statements should be read in conjunction with the
financial statements and notes thereto included in the company's 1997 Annual
Report to Stockholders on Form 10-K.
Note 2:
- - -------
On October 30, 1998, Colonial Pacific Leasing Corporation (CPLC), a wholly owned
subsidiary of the company, transferred the operations, employees and
substantially all assets related to its broker-oriented external financing
business to General Electric Capital Corporation (GECC), a subsidiary of the
General Electric Company. The company received approximately $790 million at
closing, which approximates the book value of the net assets sold or otherwise
disposed of and related transaction costs. The transaction is subject to post
closing adjustments pursuant to the terms of the purchase agreement with GECC
entered into on October 12, 1998.
Operating results of CPLC have been segregated and reported as discontinued
operations for the three and nine months ended September 30, 1998. Prior year
results have been reclassified to conform to the current year presentation. Net
assets of discontinued operations have been separately classified in the
Consolidated Balance Sheet at September 30, 1998. Cash flow impacts of
discontinued operations have not been segregated in the Consolidated Statements
of Cash Flows. Revenue of CPLC was $32.0 million and $38.1 million for the three
months ended September 30, 1998 and 1997, respectively, and $102.1 million and
$110.4 million for the nine months ended September 30, 1998 and 1997,
respectively. Income from discontinued operations includes allocated interest
expense of $9.6 million and $12.1 million for the three months ended September
30, 1998 and 1997, respectively, and $30.6 million and $34.0 million for the
nine months ended September 30, 1998 and 1997, respectively. Interest expense
has been allocated based on CPLC's intercompany borrowing levels with Pitney
Bowes Credit Corporation (PBCC), charged at PBCC's weighted average borrowing
rate.
Note 3:
- - -------
Inventories are comprised of the following:
(Dollars in thousands) September 30, December 31,
1998 1997
--------------- ---------------
Raw materials and work in process .......................................... $ 54,671 $ 51,429
Supplies and service parts ................................................. 93,096 93,064
Finished products .......................................................... 87,801 104,714
--------------- ---------------
Total ...................................................................... $ 235,568 $ 249,207
=============== ===============
Note 4:
- - -------
Fixed assets are comprised of the following:
(Dollars in thousands) September 30, December 31,
1998 1997
--------------- ---------------
Property, plant and equipment .............................................. $ 1,133,112 $ 1,120,325
Accumulated depreciation ................................................... (663,002) (623,064)
--------------- ---------------
Property, plant and equipment, net ......................................... $ 470,110 $ 497,261
=============== ===============
Rental equipment and related inventories ................................... $ 1,674,693 $ 1,577,370
Accumulated depreciation ................................................... (870,955) (789,335)
--------------- ---------------
Rental equipment and related inventories, net .............................. $ 803,738 $ 788,035
=============== ===============
Property leased under capital leases ....................................... $ 19,382 $ 20,507
Accumulated amortization ................................................... (15,473) (16,111)
--------------- ---------------
Property leased under capital leases, net .................................. $ 3,909 $ 4,396
=============== ===============
Note 5:
- - -------
On September 30, 1998, certain partnerships controlled by affiliates of PBCC, a
wholly owned subsidiary of the company, issued a total of $282 million of Series
A and Series B Secured Floating Rate Senior Notes (the Notes). The Notes are due
in 2001 and bear interest at a floating rate of LIBOR plus 0.65 percent, set as
of the quarterly interest payment dates. The proceeds from the Notes were used
to purchase subordinated debt obligations from the company (PBI Obligations).
The PBI Obligations have a principal amount of $282 million and bear interest at
a floating rate of LIBOR plus 1.0 percent, set as of the Notes' quarterly
interest payment dates.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1998
Page 7
On July 15, 1998, PBCC filed a shelf registration with the Securities and
Exchange Commission (SEC) which permits issuance of up to $750 million in debt
securities.
On April 29, 1998, the company filed a non-financial services shelf registration
with the SEC which combined with $32 million remaining under a previous shelf
registration statement permits issuance of up to $500 million in debt
securities. On September 25, 1998, the company established a medium-term note
facility (MTN facility) under this shelf registration. The MTN facility permits
issuance from time to time of up to $500 million of medium-term notes with
maturities of nine months or more from the date of issuance. At September 30,
1998, the entire $500 million remained available.
On January 22, 1998, the company issued notes amounting to $300 million
remaining under a non-financial services shelf registration filed with the SEC.
These unsecured notes bear annual interest at 5.95% and mature in February 2005.
The net proceeds from these notes were used for general corporate purposes,
including the repayment of short-term debt.
On January 16, 1998, PBCC issued notes amounting to $250 million remaining under
a shelf registration filed with the SEC. These unsecured notes bear annual
interest at 5.65% and mature in January 2003. The proceeds from these notes are
being used for PBCC's financing needs during 1998.
Note 6:
- - -------
A reconciliation of the basic and diluted earnings per share computations for the three months ended September 30, 1998 and 1997
is as follows (in thousands, except per share data):
1998 1997*
-------------------------------------------- --------------------------------------------
Per Per
Income Shares Share Income Shares Share
- - ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing
operations $ 139,219 $ 124,182
Less:
Preferred stock
dividends - (1)
Preference stock
dividends (40) (44)
- - -------------------------------------------------------------------------------- --------------------------------------------
Basic earnings per
share $ 139,179 273,868 $ .51 $ 124,137 287,282 $ .43
- - -------------------------------------------------------------------------------- --------------------------------------------
Effect of dilutive
securities:
Preferred stock - 17 1 22
Preference stock 40 1,236 44 1,342
Stock options 2,897 2,280
Other 695 263
- - -------------------------------------------------------------------------------- --------------------------------------------
Diluted earnings per
share $ 139,219 278,713 $ .50 $ 124,182 291,189 $ .43
================================================================================ ============================================
A reconciliation of the basic and diluted earnings per share computations for the nine months ended September 30, 1998 and 1997
is as follows (in thousands, except per share data):
1998 1997*
-------------------------------------------- --------------------------------------------
Per Per
Income Shares Share Income Shares Share
- - -------------------------------------------------------------------------------- --------------------------------------------
Income from continuing
operations $ 405,537 $ 368,949
Less:
Preferred stock
dividends - (1)
Preference stock
dividends (124) (135)
- - -------------------------------------------------------------------------------- --------------------------------------------
Basic earnings per
share $ 405,413 276,028 $ 1.47 $ 368,813 290,929 $ 1.27
- - -------------------------------------------------------------------------------- --------------------------------------------
Effect of dilutive
securities:
Preferred stock - 17 1 22
Preference stock 124 1,263 135 1,365
Stock options 2,812 1,938
Other 547 268
- - -------------------------------------------------------------------------------- --------------------------------------------
Diluted earnings per
share $ 405,537 280,667 $ 1.44 $ 368,949 294,522 $ 1.26
================================================================================ ============================================
<FN>
* Adjusted to reflect discontinued operations.
</FN>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1998
Page 8
Note 7:
- - -------
Revenue and operating profit by business segment for the three and nine months
ended September 30, 1998 and 1997 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
(Dollars in thousands) 1998 1997* 1998 1997*
--------------- --------------- --------------- ---------------
Revenue
Business equipment ................................... $ 830,450 $ 779,672 $ 2,446,692 $ 2,304,156
Business services .................................... 181,635 142,270 507,396 408,721
Commercial and industrial financing .................. 40,318 52,682 119,308 156,883
--------------- --------------- --------------- ---------------
Total revenue .......................................... $ 1,052,403 $ 974,624 $ 3,073,396 $ 2,869,760
=============== =============== =============== ===============
Operating Profit(1):
Business equipment ................................... $ 213,162 $ 186,436 $ 615,945 $ 542,464
Business services .................................... 20,657 13,413 53,497 35,692
Commercial and industrial financing .................. 11,482 7,455 32,029 32,569
--------------- --------------- --------------- ---------------
Total operating profit ................................. $ 245,301 $ 207,304 $ 701,471 $ 610,725
=============== =============== =============== ===============
<FN>
<F1>*Reclassified to reflect discontinued operations.
<F2>(1) Operating profit excludes general corporate expenses, income taxes, and
net interest other than that related to finance operations.
</FN>
Note 8:
- - -------
Comprehensive income for the three and nine months ended September 30, 1998 and
1997 was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
(Dollars in thousands) 1998 1997 1998 1997
--------------- --------------- --------------- ---------------
Net income ............................................. $ 141,586 $ 127,805 $ 413,290 $ 378,821
Other comprehensive income:
Foreign currency translation
adjustments ........................................ (15,918) (13,413) (27,200) (34,593)
--------------- --------------- --------------- ---------------
Comprehensive income ................................... $ 125,668 $ 114,392 $ 386,090 $ 344,228
=============== =============== =============== ===============
Note 9:
- - -------
In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities", was issued. This statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999 (January 1, 2000 for the company) and requires that an entity recognize all
derivative instruments as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Changes in the
fair value of those instruments will be reflected as gains or losses. The
accounting for the gains and losses depends on the intended use of the
derivative and the resulting designation. The company is currently evaluating
the impact of this statement.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1998
Page 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
Results of Operations - third quarter of 1998 vs. third quarter of 1997
- - ------------------------------------------------------------------------
On October 30, 1998, Colonial Pacific Leasing Corporation (CPLC), a wholly owned
subsidiary of the company, transferred the operations, employees and
substantially all assets related to its broker-oriented external financing
business to General Electric Capital Corporation (GECC), a subsidiary of the
General Electric Company. As a result, CPLC's results have been excluded from
continuing operations. The company received approximately $790 million at
closing, which approximates the book value of the net assets sold or otherwise
disposed of and related transaction costs. The transaction is subject to post
closing adjustments pursuant to the terms of the purchase agreement with GECC
entered into on October 12, 1998. Proceeds from the sale will be used to
reinvest in core businesses around the world, pay down consolidated debt and
repurchase shares of the company's stock.
Revenue increased eight percent in the third quarter of 1998 to $1,052.4 million
compared with $974.6 million in the third quarter of 1997. Income from
continuing operations increased 12.1 percent to $139.2 million from $124.2
million for the same period in 1997. Diluted earnings per share from continuing
operations grew to 50 cents, a 17.4 percent increase from the third quarter of
1997. Revenue growth was 10 percent, excluding revenue from the Commercial and
Industrial Financing segment. The decrease in Commercial and Industrial
Financing revenue resulted from the planned reductions in the external lease
financing portfolio.
Third quarter 1998 revenue included $488.6 million from sales, up nine percent
from $449.9 million in the third quarter of 1997; $435.6 million from rentals
and financing, up eight percent from $404.0 million; and $128.3 million from
support services, up six percent from $120.7 million.
In the Business Equipment segment, which includes Mailing Systems and Office
Systems operations, revenue grew seven percent and operating profit increased 14
percent during the third quarter.
Mailing Systems' revenue grew six percent during the quarter; excluding the
impact of foreign currency exchange rates primarily in Canada, Australia and
Japan, revenue grew seven percent. This growth was driven by strong customer
demand for advanced mailing equipment and systems, particularly at the high end,
and ongoing migration to advanced electronic and digital metering technology.
The company continued to lead the market conversion to more advanced technology,
with electronic and digital meters comprising 85 percent of the company's
installed U.S. meter base at September 30, 1998 compared with 70 percent at
September 30, 1997.
Office Systems' revenue grew nine percent, which was driven by growth in both
the facsimile and copier product lines. The company strengthened its solid
positioning as the preeminent provider of advanced office systems with
placements of the "Smart Image Plus" line of copiers, the addition of the
high-volume, 62-copy-per-minute DL620 copier to the digital product line, and
the latest 33.6 kbps facsimile--Model 9930.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1998
Page 10
In the Business Services segment, third quarter revenue grew 28 percent and
operating profit grew 54 percent. The segment includes Pitney Bowes Management
Services and Atlantic Mortgage and Investment Corporation. Both businesses in
this segment continued to successfully broaden service offerings to existing
customers and add new customers to their respective bases. Operating profit also
continued to benefit from leveraging operating efficiencies. Operating profit
improvements were partially offset by a revaluation of the company's assets due
to a projected rise in future mortgage prepayments attributable to recent
declines in interest rates.
As planned, revenue in the Commercial and Industrial Financing segment was down
23 percent as compared with the third quarter of 1997. Operating profit for the
quarter declined eight percent after excluding a one-time charge associated with
the asset sales to GATX Capital Corporation during the third quarter of 1997. On
a reported basis, operating profit increased 54 percent compared to the third
quarter of last year. The strategic disposition of earning assets during 1997
and continued reduction in 1998 resulted in the anticipated declines in revenue
and operating profit. These reductions are part of the company's ongoing
strategy to reduce the level of capital committed to asset financing while
maintaining the ability to provide a full range of financial services to
customers.
Cost of sales decreased to 57.8% of sales revenue in the third quarter of 1998
compared with 59.0% in the third quarter of 1997. This was due primarily to
lower product costs at U.S. Mailing Systems and increased sales of high margin
supplies at Office Systems. The improvement was achieved despite the offsetting
effect of growth in the lower-margin management services business, which
includes most of its expenses in cost of sales.
Cost of rentals and financing increased to 30.6% of related revenues in the
third quarter of 1998 compared with 29.6% in the third quarter of 1997. This was
due mainly to reduced revenues from the Commercial and Industrial Financing
segment, the impact of increased revenues from the relatively lower-margin
mortgage servicing business, and higher depreciation expense from increased
placements of digital and electronic meters.
Selling, service and administrative expenses were 34.5% of revenues in the third
quarter of 1998 compared with 34.9% in the third quarter of 1997. This
improvement was due primarily to the company's continued emphasis on controlling
operating expenses.
Research and development expenses increased 14.5 percent to $24.7 million in the
third quarter of 1998 compared with $21.6 million in the third quarter of 1997.
The increase reflects the company's continued commitment to developing new
technologies for its digital meters and other mailing and software products.
Net interest expense decreased to $36.7 million in the third quarter of 1998
from $38.9 million in the third quarter of 1997. The decrease is due mainly to
lower average borrowings in 1998 compared with 1997 resulting from the
transaction with GATX Capital Corporation during 1997, and lower interest rates.
The effective tax rate for the third quarter of 1998 and 1997 was 34.4 percent.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1998
Page 11
Net income and diluted earnings per share increased 10.8 percent and 15.7
percent, respectively, in the third quarter of 1998 due to the factors discussed
above. The reason for the increase in diluted earnings per share outpacing the
increase in net income was the company's continuing share repurchase program.
Results of Operations - nine months of 1998 vs. nine months of 1997
- - -------------------------------------------------------------------
For the first nine months of 1998 compared with the same period of 1997, revenue
increased seven percent to $3,073.4 million while income from continuing
operations increased 10 percent to $405.5 million. The factors that affected
revenue and earnings performance included those cited for the third quarter of
1998 versus 1997.
New Pronouncements
- - ------------------
In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities", was issued. This statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999 (January 1, 2000 for the company) and requires that an entity recognize all
derivative instruments as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Changes in the
fair value of those instruments will be reflected as gains or losses. The
accounting for the gains and losses depends on the intended use of the
derivative and the resulting designation. The company is currently evaluating
the impact of this statement.
Liquidity and Capital Resources
- - -------------------------------
The ratio of current assets to current liabilities improved to .97 to 1 at
September 30, 1998 compared with .73 to 1 at December 31, 1997. Excluding the
impact of reclassifying the balance sheet to reflect net assets of discontinued
operations in current assets, the ratio at September 30, 1998 is .82 to 1. The
improvement was due primarily to an increase in short-term finance receivables
and from the repayment of short-term debt.
On September 30, 1998, certain partnerships controlled by affiliates of Pitney
Bowes Credit Corporation (PBCC), a wholly owned subsidiary of the company,
issued a total of $282 million of Series A and Series B Secured Floating Rate
Senior Notes (the Notes). The Notes are due in 2001 and bear interest at a
floating rate of LIBOR plus 0.65 percent, set as of the quarterly interest
payment dates. The proceeds from the Notes were used to purchase subordinated
debt obligations from the company (PBI Obligations). The PBI Obligations have a
principal amount of $282 million and bear interest at a floating rate of LIBOR
plus 1.0 percent, set as of the Notes' quarterly interest payment dates.
On July 15, 1998, PBCC filed a shelf registration with the Securities and
Exchange Commission (SEC) which permits issuance of up to $750 million in debt
securities.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1998
Page 12
On April 29, 1998, the company filed a non-financial services shelf registration
with the SEC which combined with $32 million remaining under a previous shelf
registration statement permits issuance of up to $500 million in debt
securities. On September 25, 1998, the company established a medium-term note
facility (MTN facility) under this shelf registration. The MTN facility permits
issuance from time to time of up to $500 million of medium-term notes with
maturities of nine months or more from the date of issuance. At September 30,
1998, the entire $500 million remained available.
On January 22, 1998, the company issued notes amounting to $300 million
remaining under a non-financial services shelf registration filed with the SEC.
These unsecured notes bear annual interest at 5.95% and mature in February 2005.
The net proceeds from these notes were used for general corporate purposes,
including the repayment of short-term debt.
On January 16, 1998, PBCC issued notes amounting to $250 million remaining under
a shelf registration filed with the SEC. These unsecured notes bear annual
interest at 5.65% and mature in January 2003. The proceeds from these notes are
being used for PBCC's financing needs during 1998.
The company believes that its financing needs for the next few years can be met
with cash generated internally, money from existing credit agreements, debt
issued under new shelf registration statements and existing commercial and
medium-term note programs.
The ratio of total debt to total debt and stockholders' equity including the
preferred stockholders' equity in a subsidiary company in total debt was 69.3
percent at September 30, 1998 compared with 64.2 percent at December 31, 1997.
Book value per common share decreased to $6.26 at September 30, 1998 from $6.69
at December 31, 1997 driven primarily by the repurchase of common shares. During
the quarter ended September 30, 1998, the company repurchased 1.6 million common
shares for $87.3 million.
To control the impact of interest rate swings on its business, the company uses
a balanced mix of debt maturities, variable and fixed rate debt and interest
rate swap agreements. The company enters into interest rate swap agreements
primarily through its financial services business. Swap agreements are used to
fix interest rates on commercial paper and/or obtain a lower interest cost on
debt than the company otherwise would have been able to get without the swap.
Year 2000
- - ---------
In 1997, the company established a formal worldwide program to identify and
resolve the impact of the Year 2000 date processing issue on the company's
business systems, products and supporting infrastructure. This included a
comprehensive review of the company's information technology (IT) and non-IT
systems, software, and embedded processors. The program structure has strong
executive sponsorship and consists of a Year 2000 steering committee of senior
business and technology management, a Year 2000 program office of full-time
project management, and subject matter experts and dedicated business unit
project teams. The company has also engaged independent consultants to perform
periodic program reviews and assist in systems assessment and test plan
development.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1998
Page 13
The program encompasses the following phases: an inventory of affected
technology and critical third party suppliers, an assessment of Year 2000
readiness, resolution, unit and integrated testing and contingency planning. The
company completed its worldwide inventory and assessment of all business
systems, products, and supporting infrastructure. Required modifications are in
progress and will be substantially complete by year-end 1998. Tests are
performed as software is remediated, upgraded, or replaced. Integrated testing
is expected to be complete by mid-1999.
As part of ongoing product development efforts, the company's recently
introduced products are Year 2000 compliant. Over 95 percent of our installed
product base, including all postage meters and copier and facsimile systems are
already Year 2000 compliant. For products not yet compliant, upgrades or
replacements will be available by mid-1999. Detailed product compliance
information is available on the company's website(www.pitneybowes.com/year2000).
The company relies on third parties for many systems, products and services. The
company could be adversely impacted if third parties do not make necessary
changes to their own systems and products successfully and in a timely manner.
We have established a formal process to identify, assess and monitor the Year
2000 readiness of critical third parties. This process includes regular meetings
with critical suppliers, including telecommunication carriers and utilities, as
well as business partners, including postal authorities. Although, there are no
known problems at this time, the company is unable to predict with certainty
whether such third parties will be able to address their Year 2000 problems on a
timely basis.
The company estimates the total cost of the worldwide program from inception in
1997 through the Year 2000 to be approximately $41-46 million, of which
approximately $22 million is expected to be incurred through December 31, 1998.
These costs, which are funded through the company's cash flows, include both
internal labor costs as well as consulting and other external costs. These costs
are incorporated in the company's budgets and current forecasts and are being
expensed as incurred.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from
uncertainty about the Year 2000 readiness of third parties, the company is
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on the company's results of operations, liquidity or
financial condition. However, the company continues to evaluate its Year 2000
risks and is developing contingency plans to mitigate the impact of any
potential Year 2000 disruptions. We expect to complete our contingency plans by
the second quarter of 1999.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1998
Page 14
Capital Investments
- - -------------------
In the first nine months of 1998, net investments in fixed assets included $62.4
million in net additions to property, plant and equipment and $157.5 million in
net additions to rental equipment and related inventories compared with $66.7
million and $135.9 million, respectively, in the same period in 1997. 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 September 30, 1998, commitments for the acquisition of property, plant and
equipment reflected plant and manufacturing equipment improvements as well as
rental equipment for new and replacement programs.
Regulatory Matters
- - ------------------
In May 1996, the United States Postal Service (USPS) issued a proposed schedule
for the phaseout of mechanical meters in the United States. In accordance with
the schedule, the company voluntarily halted new placements of mechanical meters
in the U.S. as of June 1, 1996. As a result of the company's aggressive efforts
to meet the USPS mechanical meter migration schedule combined with the company's
ongoing and continuing investment in advanced postage evidencing technologies,
at September 30, 1998, electronic and digital meters represented approximately
85 percent of the company's U.S. installed base, up from 75 percent at December
31, 1997 and 70 percent at September 30, 1997. Based on the announced USPS
mechanical meter migration schedule, the company believes that the phaseout of
mechanical meters will not cause a material adverse financial impact on the
company.
In May 1995, the USPS publicly announced its concept of its Information Based
Indicia Program (IBIP), the purpose of which was to develop a new standard for
future digital postage evidencing devices. In July 1996, the USPS published for
public comment draft specifications for the Indicium, Postal Security Device and
Host specifications. The company submitted extensive comments to these
specifications in November 1996. Revised specifications were then published in
1997 which incorporated many of the changes recommended by the company in its
prior comments. The company submitted comments to these revised specifications.
Also, in March 1997 the USPS published for public comment the Vendor
Infrastructure specification to which the company responded on June 27, 1997. On
August 26, 1998, the USPS published for public comment a consolidated and
revised set of IBIP specifications entitled "Performance Criteria for
Information Based Indicia and Security Architecture for IBI Postage Metering
Systems" (the IBI Performance Criteria). The IBI Performance Criteria
consolidated the four aforementioned IBIP specifications and incorporated many
of the comments previously submitted by the company. The company is in the
process of drafting comments to the IBI Performance Criteria for submission to
the USPS on November 30, 1998.
As of September 30, 1998, the company is in the process of finalizing the
development of a PC product which satisfies the proposed IBIP specifications.
This product is currently undergoing testing by the USPS and is expected to be
ready for market upon final approval from the USPS.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1998
Page 15
Forward-looking Statements
- - --------------------------
The company wants to caution 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 the 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:
o changes in postal regulations
o timely development and acceptance of new products
o success in gaining product approval in new markets where regulatory
approval is required
o successful entry into new markets
o mailers' utilization of alternative means of communication or
competitors' products
o the company's success at managing customer credit risk
o changes in interest rates
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1998
Page 16
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:
o contractual rights under vendor, insurance or other contracts
o intellectual property or patent rights
o equipment, service or payment disputes with customers
o 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 2: Changes in Securities
On October 22, 1998, the company issued 418,165 shares of its common stock to a
financial institution in a transaction exempt from registration under the
Securities Act of 1933, as amended, in reliance on Section 4(2) of the
Securities Act. The company granted an option to repurchase these shares at an
exercise price of $55.7577 per share on November 25, 1998.
Item 5: Other Information
The Board of Directors have amended and restated the company's by-laws to, among
other things, clarify the advance notice procedures for stockholders wishing to
bring a matter to a vote before a stockholders' meeting.
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
Reg. S-K
Exhibits Description
----------- -----------------------------
(3)(ii) Amended By-Laws
(12) Computation of ratio of
earnings to fixed charges
(27) Financial Data Schedule
(b) Reports on Form 8-K
On September 25, 1998, the company filed a Form 8-K relating to the
establishment of a medium-term note program for the issuance from time to
time of up to $500 million aggregated principal amount of medium-term
Notes.
On October 19, 1998, PBCC filed a Form 8-K relating to the definitive
agreement entered into with General Electric Capital Corporation (GECC), a
subsidiary of General Electric Company, to sell its broker-oriented
external financing business, Colonial Pacific Leasing Corporation (CPLC).
In this transaction, the operations, employees and substantially all
assets related to CPLC will be transferred to GECC.
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1998
Page 17
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PITNEY BOWES INC.
November 16, 1998
/s/ M. L. Reichenstein
-------------------------------------------
M. L. Reichenstein
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ A. F. Henock
-------------------------------------------
A. F. Henock
Vice President - Controller
and Chief Tax Counsel
(Principal Accounting Officer)
Exhibit Index
-------------
Reg. S-K
Exhibits Description
---------- --------------------------------
(3)(ii) Amended By-Laws
(12) Computation of ratio of
earnings to fixed charges
(27) Financial Data Schedule