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, 1999
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,
1999 is 265,256,152.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1999
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, 1999 and 1998...................... 3
Consolidated Balance Sheets - September 30, 1999
and December 31, 1998......................................... 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998................. 5
Notes to Consolidated Financial Statements........................ 6 - 9
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 10 - 16
Part II - Other Information:
Item 1: Legal Proceedings........................................ 17
Item 6: Exhibits and Reports on Form 8-K......................... 17
Signatures............................................................. 18
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1999
Page 3
Part I - Financial Information
Item 1. Financial Statements
<TABLE>
Pitney Bowes Inc.
Consolidated Statements of Income
(Unaudited)
---------------------------------
(Dollars in thousands, except per share data)
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998* 1999 1998*
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenue from:
Sales............................................ $ 529,550 $ 488,575 $ 1,586,302 $ 1,431,310
Rentals and financing............................ 420,836 396,329 1,245,334 1,170,525
Support services................................. 139,439 128,271 412,945 379,715
-------------- --------------- -------------- --------------
Total revenue................................ 1,089,825 1,013,175 3,244,581 2,981,550
-------------- --------------- -------------- --------------
Costs and expenses:
Cost of sales.................................... 300,490 282,503 903,560 847,486
Cost of rentals and financing.................... 118,049 102,767 346,425 309,743
Selling, service and administrative.............. 375,462 362,921 1,109,622 1,046,819
Research and development......................... 25,105 24,699 78,707 73,395
Other income (Note 10)........................... (49,574) - (49,574) -
Interest, net.................................... 41,256 39,261 133,694 115,209
-------------- --------------- -------------- --------------
Total costs and expenses..................... 810,788 812,151 2,522,434 2,392,652
-------------- --------------- -------------- --------------
Income from continuing operations before income taxes 279,037 201,024 722,147 588,898
Provision for income taxes........................... 92,960 68,201 240,091 200,971
-------------- --------------- -------------- --------------
Income from continuing operations.................... 186,077 132,823 482,056 387,927
Income from discontinued operations (Note 2)......... - 8,763 971 25,363
Loss on disposal of discontinued operations (Note 2). - - (24,938) -
-------------- --------------- -------------- --------------
Net income........................................... $ 186,077 $ 141,586 $ 458,089 $ 413,290
============== =============== ============== ==============
Basic earnings per share:
Continuing operations.............................. $ .70 $ .49 $ 1.80 $ 1.41
Discontinued operations............................ - .03 (.09) .09
-------------- --------------- -------------- --------------
Net income......................................... $ .70 $ .52 $ 1.71 $ 1.50
============== =============== ============== ==============
Diluted earnings per share:
Continuing operations.............................. $ .69 $ .48 $ 1.77 $ 1.38
Discontinued operations............................ - .03 (.09) .09
-------------- --------------- -------------- --------------
Net income......................................... $ .69 $ .51 $ 1.68 $ 1.47
============== =============== ============== ==============
Dividends declared per share of common stock......... $ .255 $ .225 $ .765 $ .675
============== =============== ============== ==============
Ratio of earnings to fixed charges................... 5.83 4.59 4.96 4.53
============== ============== ============== ==============
Ratio of earnings to fixed charges
excluding minority interest...................... 6.27 4.95 5.29 4.88
============== ============== ============== ==============
</TABLE>
* Reclassified to reflect discontinued operations.
See Notes to Consolidated Financial Statements
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1999
Page 4
<TABLE>
Pitney Bowes Inc.
Consolidated Balance Sheets
---------------------------
<CAPTION>
September 30, December 31,
(Dollars in thousands, except share data) 1999 1998
------------- ------------
(unaudited)
Assets
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 152,057 $ 125,684
Short-term investments, at cost which
approximates market................................... 873 3,302
Accounts receivable, less allowances:
9/99, $25,493; 12/98, $24,665......................... 404,720 382,406
Finance receivables, less allowances:
9/99, $43,147; 12/98, $51,232......................... 1,560,641 1,400,786
Inventories (Note 3)...................................... 242,678 266,734
Other current assets and prepayments...................... 131,433 330,051
Net assets of discontinued operations..................... 137,869 -
------------- ------------
Total current assets.................................. 2,630,271 2,508,963
Property, plant and equipment, net (Note 4)................... 473,558 477,476
Rental equipment and related inventories, net (Note 4)........ 825,946 806,585
Property leased under capital leases, net (Note 4)............ 3,097 3,743
Long-term finance receivables, less allowances:
9/99, $57,197; 12/98, $79,543............................. 1,925,891 1,999,339
Investment in leveraged leases................................ 979,910 827,579
Goodwill, net of amortization:
9/99, $53,057; 12/98, $47,514............................. 227,507 222,980
Other assets.................................................. 495,998 814,374
Net assets of discontinued operations......................... 319,248 -
------------- ------------
Total assets.................................................. $ 7,881,426 $ 7,661,039
============= ============
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities.................. $ 825,622 $ 898,548
Income taxes payable...................................... 230,347 194,443
Notes payable and current portion of
long-term obligations ................................ 1,315,316 1,259,193
Advance billings.......................................... 374,512 369,628
------------- ------------
Total current liabilities............................. 2,745,797 2,721,812
Deferred taxes on income...................................... 1,061,686 920,521
Long-term debt (Note 5)....................................... 1,847,808 1,712,937
Other noncurrent liabilities.................................. 348,292 347,670
------------- ------------
Total liabilities..................................... 6,003,583 5,702,940
------------- ------------
Preferred stockholders' equity in a subsidiary company........ 310,000 310,097
Stockholders' equity:
Cumulative preferred stock, $50 par
value, 4% convertible................................. 29 34
Cumulative preference stock, no par
value, $2.12 convertible.............................. 1,901 2,031
Common stock, $1 par value................................ 323,338 323,338
Capital in excess of par value............................ 10,330 16,173
Retained earnings......................................... 3,326,639 3,073,839
Accumulated other comprehensive income (Note 8)........... (93,456) (88,217)
Treasury stock, at cost................................... (2,000,938) (1,679,196)
------------- ------------
Total stockholders' equity............................ 1,567,843 1,648,002
------------- ------------
Total liabilities and stockholders' equity.................... $ 7,881,426 $ 7,661,039
============= ============
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1999
Page 5
<TABLE>
Pitney Bowes Inc.
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
<CAPTION>
(Dollars in thousands)
Nine Months Ended
September 30,
--------------------------
1999 1998*
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 458,089 $ 413,290
Loss on disposal of discontinued operations................. 24,938 -
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization........................ 302,084 266,127
Increase in deferred taxes on income................. 139,750 72,909
Pension plan investment.............................. (67,000) -
Change in assets and liabilities:
Accounts receivable.............................. (23,380) (490)
Net investment in internal finance receivables... (58,506) (103,061)
Inventories...................................... 24,228 13,683
Other current assets and prepayments............. (19,327) 4,838
Accounts payable and accrued liabilities......... (35,306) (29,913)
Income taxes payable............................. 52,126 17,659
Advance billings................................. 4,866 2,584
Other, net........................................... (38,835) (8,559)
----------- ----------
Net cash provided by operating activities........ 763,727 649,067
----------- ----------
Cash flows from investing activities:
Short-term investments...................................... 2,320 (310)
Net investment in fixed assets.............................. (234,305) (219,896)
Net investment in external finance receivables.............. 35,958 (72,105)
Investment in leveraged leases.............................. (147,566) (95,534)
Investment in mortgage servicing rights..................... (21,800) (180,080)
Other investing activities.................................. (23,301) (16,471)
----------- ----------
Net cash used in investing activities............ (388,694) (584,396)
----------- ----------
Cash flows from financing activities:
Increase(decrease) in notes payable, net.................... 70,017 (109,532)
Proceeds from long-term obligations......................... 208,106 836,123
Principal payments on long-term obligations................. (91,181) (231,805)
Proceeds from issuance of stock............................. 40,702 32,424
Stock repurchases........................................... (369,343) (394,716)
Dividends paid.............................................. (205,289) (186,336)
----------- ----------
Net cash used in financing activities............ (346,988) (53,842)
----------- ----------
Effect of exchange rate changes on cash......................... (1,672) (2,928)
----------- ----------
Increase in cash and cash equivalents........................... 26,373 7,901
Cash and cash equivalents at beginning of period................ 125,684 137,073
----------- ----------
Cash and cash equivalents at end of period...................... $ 152,057 $ 144,974
=========== ==========
Interest paid................................................... $ 171,234 $ 141,191
=========== ==========
Income taxes paid, net.......................................... $ 67,393 $ 128,850
=========== ==========
<FN>
* Certain prior year amounts have been reclassified to conform with the 1999
presentation.
</FN>
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1999
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, 1999 and December 31, 1998, the results of its operations for the three
months and nine months ended September 30, 1999 and 1998 and its cash flows for
the nine months ended September 30, 1999 and 1998 have been included. Operating
results for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. These statements should be read in conjunction with the
financial statements and notes thereto included in the company's 1998 Annual
Report to Stockholders on Form 10-K.
Note 2:
- -------
On June 30, 1999, the company committed itself to a formal plan to dispose of
Atlantic Mortgage & Investment Corporation (AMIC), a wholly-owned subsidiary of
the company, in a manner that maximizes long-term shareholder value. The company
recorded an expected loss of approximately $34.2 million (net of taxes of $22.8
million) on the disposal of AMIC in the second quarter of 1999.
AMIC's revenue was $26.3 million and $39.2 million for the three months ended
September 30, 1999 and 1998, respectively, and $88.8 million and $91.8 million
for the nine months ended September 30, 1999 and 1998, respectively. Net
interest expense allocated to AMIC's discontinued operations was $.8 million and
$.5 million for the three months ended September 30, 1999 and 1998,
respectively, and $4.5 million and $3.4 million for the nine months ended
September 30, 1999 and 1998, respectively. Interest has been allocated based on
AMIC's net intercompany borrowing levels with Pitney Bowes Credit Corporation
(PBCC), a wholly-owned subsidiary of the company, charged at PBCC's weighted
average borrowing rate, offset by the interest savings PBCC realizes due to
borrowings against AMIC's escrow deposits as opposed to regular commercial paper
borrowings.
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, a subsidiary of the General
Electric Company. The company received approximately $790 million at closing. In
connection with this transaction, the company recorded a gain of approximately
$9.3 million (net of taxes of $5.7 million) in the second quarter of 1999.
CPLC's revenue was $32.0 million and $102.1 million for the three and nine
months ended September 30, 1998, respectively. Interest expense allocated to
CPLC's discontinued operations was $9.6 million and $30.6 million for the three
and nine months ended September 30, 1998, respectively. Interest expense has
been allocated based on CPLC's intercompany borrowing levels with PBCC, charged
at PBCC's weighted average borrowing rate.
Operating results of AMIC and CPLC have been segregated and reported as
discontinued operations in the Consolidated Statements of Income. Prior year
results have been reclassified to conform to the current year presentation. Net
assets of AMIC's discontinued operations have been separately classified in the
Consolidated Balance Sheet at September 30, 1999. Cash flow impacts of
discontinued operations have not been segregated in the Consolidated Statements
of Cash Flows. Details of the income from discontinued operations are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(Dollars in thousands) September 30, September 30,
----------------------- --------------------
1999 1998 1999 1998
------- ------ ------ -------
<S> <C> <C> <C> <C>
AMIC....................................... $ - $6,396 $ 971 $17,610
CPLC....................................... - 2,367 - 7,753
------- ------ ------ -------
Income from discontinued operations........ $ - $8,763 $ 971 $25,363
======= ====== ====== =======
</TABLE>
Note 3:
- -------
<TABLE>
Inventories are comprised of the following:
(Dollars in thousands)
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Raw materials and work in process............................. $ 39,260 $ 54,001
Supplies and service parts.................................... 106,527 106,864
Finished products............................................. 96,891 105,869
-------------- --------------
Total ........................................................ $ 242,678 $ 266,734
============== ==============
</TABLE>
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1999
Page 7
Note 4:
- -------
<TABLE>
Fixed assets are comprised of the following:
<CAPTION>
(Dollars in thousands) September 30, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Property, plant and equipment................................. $ 1,182,547 $ 1,153,573
Accumulated depreciation...................................... (708,989) (676,097)
-------------- --------------
Property, plant and equipment, net............................ $ 473,558 $ 477,476
============== ==============
Rental equipment and related inventories...................... $ 1,695,850 $ 1,706,995
Accumulated depreciation...................................... (869,904) (900,410)
-------------- --------------
Rental equipment and related inventories, net................. $ 825,946 $ 806,585
============== ==============
Property leased under capital leases.......................... $ 18,957 $ 19,430
Accumulated amortization...................................... (15,860) (15,687)
-------------- --------------
Property leased under capital leases, net..................... $ 3,097 $ 3,743
============== ==============
</TABLE>
Note 5:
- -------
In August 1999, PBCC established a medium-term note program as part of PBCC's
shelf registration statement filed with the SEC in July 1998, which permits
issuance of up to $500 million in debt securities. In September 1999, PBCC
issued $125 million of 5.95% unsecured notes under this program, due in
September 2000, with interest payable in March 2000 and at maturity. The net
proceeds from these notes are being used for general corporate purposes,
including the repayment of short-term debt.
In April 1999, the company issued notes amounting to $200 million from its shelf
registration filed with the SEC in April 1998. These unsecured notes bear annual
interest at 5.5% and mature in April 2004. The net proceeds from these notes are
being used for general corporate purposes, including the repayment of commercial
paper.
The company has a medium-term note facility which was established as part of the
company's shelf registrations, which currently permits issuance of up to $300
million in debt securities with a minimum maturity of nine months.
PBCC has $625 million of unissued debt securities available from the shelf
registration statement filed with the SEC in July 1998.
Note 6:
- -------
Revenue and operating profit by business segment for the three and nine months
ended September 30, 1999 and 1998 were as follows:
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
<CAPTION>
(Dollars in thousands) 1999 1998* 1999 1998*
----------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Revenue:
Mailing and Integrated Logistics........... $ 736,945 $ 666,141 $ 2,182,526 $ 1,960,662
Office Solutions........................... 312,063 306,716 943,396 901,580
Capital Services........................... 40,817 40,318 118,659 119,308
----------- ------------ ------------- -----------
Total revenue................................. $ 1,089,825 $ 1,013,175 $ 3,244,581 $ 2,981,550
=========== ============ ============= ===========
Operating Profit: (1)
Mailing and Integrated Logistics........... $ 198,213 $ 163,702 $ 573,252 $ 472,332
Office Solutions........................... 60,526 59,461 179,727 169,530
Capital Services........................... 11,908 11,482 32,874 32,029
----------- ------------ ------------- -----------
Total operating profit........................ $ 270,647 $ 234,645 $ 785,853 $ 673,891
Unallocated amounts:
Net interest (corporate interest expense,
net of intercompany transactions)......... (11,717) (4,263) (33,921) (9,755)
Corporate expense.......................... (29,467) (29,358) (79,359) (75,238)
U.S.P.S. Settlement........................ 49,574 - 49,574 -
----------- ------------ ------------- -----------
Income from continuing operations before
income taxes................................. $ 279,037 $ 201,024 $ 722,147 $ 588,898
=========== ============ ============= ===========
* Reclassified to reflect discontinued operations.
<FN>
(1) Operating profit excludes general corporate expenses, income taxes and net
interest other than that related to finance operations.
</FN>
</TABLE>
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1999
Page 8
Note 7:
- -------
<TABLE>
A reconciliation of the basic and diluted earnings per share computations for
the three months ended September 30, 1999 and 1998 is as follows (in thousands,
except per share data):
<CAPTION>
1999 1998*
------------------------------------ ------------------------------------
Per Per
Income Shares Share Income Shares Share
- ----------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing
operations $ 186,077 $ 132,823
Less:
Preferred stock
dividends - -
Preference stock
dividends (37) (40)
- ----------------------------------------------------------------- ------------------------------------
Basic earnings per
share $ 186,040 266,728 $ .70 $ 132,783 273,868 $ .49
- ----------------------------------------------------------------- ------------------------------------
Effect of dilutive
securities:
Preferred stock - 14 - 17
Preference stock 37 1,133 40 1,236
Stock options 3,024 2,897
Other 298 695
- ----------------------------------------------------------------- ------------------------------------
Diluted earnings per
share $ 186,077 271,197 $ .69 $ 132,823 278,713 $ .48
================================================================= ====================================
</TABLE>
<TABLE>
A reconciliation of the basic and diluted earnings per share computations for
the nine months ended September 30, 1999 and 1998 is as follows (in thousands,
except per share data):
1999 1998*
------------------------------------ ------------------------------------
Per Per
Income Shares Share Income Shares Share
- ----------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing
operations $ 482,056 $ 387,927
Less:
Preferred stock
dividends - -
Preference stock
dividends (114) (124)
- ----------------------------------------------------------------- ------------------------------------
Basic earnings per
share $ 481,942 268,247 $ 1.80 $ 387,803 276,028 $ 1.41
- ----------------------------------------------------------------- ------------------------------------
Effect of dilutive
securities:
Preferred stock - 15 - 17
Preference stock 114 1,157 124 1,263
Stock options 3,321 2,812
Other 384 547
- ----------------------------------------------------------------- ------------------------------------
Diluted earnings per
share $ 482,056 273,124 $ 1.77 $ 387,927 280,667 $ 1.38
================================================================= ====================================
* Adjusted to reflect discontinued operations.
</TABLE>
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1999
Page 9
Note 8:
- -------
<TABLE>
Comprehensive income for the three and nine months ended September 30, 1999 and
1998 was as follows:
<CAPTION>
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
1999 1998 1999 1998
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net income................................... $ 186,077 $ 141,586 $ 458,089 $ 413,290
Other comprehensive income:
Foreign currency translation
adjustments.............................. (7,605) (15,918) (5,239) (27,200)
----------- ------------ ----------- ------------
Comprehensive income......................... $ 178,472 $ 125,668 $ 452,850 $ 386,090
=========== ============ =========== ============
</TABLE>
Note 9:
- -------
In June 1999, Statement of Financial Accounting Standards (SFAS) No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - an amendment of FASB Statement No.
133", was issued. This statement defers the effective date of SFAS No. 133 one
year (January 1, 2001 for the company). SFAS No. 133 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.
Note 10:
- --------
In August 1999, the U.S. Postal Service (U.S.P.S.) and the company announced
that they had reached agreement (U.S.P.S. Settlement) resolving a lawsuit filed
by the company in 1997. The lawsuit arose out of a dispute over a 1978 Statement
of Understanding authorizing the company to offer Postage by PhoneR, its
proprietary version of the Computerized Meter Resetting System (CMRS). Under the
terms of the agreement, the company received $51.8 million, representing a
portion of the financial benefit that the U.S.P.S. obtained as a result of the
revised regulations. This payment, net of related legal expenses of $2.2
million, was recorded as other income in the third quarter of 1999.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1999
Page 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
Results of Continuing Operations - third quarter of 1999 vs. third
- ------------------------------------------------------------------
quarter of 1998
- ---------------
Revenue increased eight percent in the third quarter of 1999 to $1,089.8 million
compared with $1,013.2 million in the third quarter of 1998. Income from
continuing operations increased 40 percent to $186.1 million, or 18 percent to
$156.6 million excluding the impact of the U.S.P.S. Settlement, from $132.8
million for the same period in 1998. Diluted earnings per share from continuing
operations grew to 69 cents, a 43.8 percent increase from the third quarter of
1998. Excluding the impact of the U.S.P.S. Settlement, diluted earnings per
share from continuing operations grew to 58 cents, a 21 percent increase from
the third quarter of 1998.
Third quarter 1999 revenue included $529.6 million from sales, up eight percent
from $488.6 million in the third quarter of 1998; $420.8 million from rentals
and financing, up six percent from $396.3 million; and $139.4 million from
support services, up nine percent from $128.3 million.
The Mailing and Integrated Logistics segment includes revenues and related
expenses from the rental, sale and financing of mailing and shipping equipment,
related supplies and service, and software. During the third quarter of 1999,
revenue grew 11 percent and operating profit increased 21 percent. Contributors
to growth included:
o Sophisticated, productivity-enhancing Automated Document Factory Solutions,
featuring customized, high-speed production mail equipment, software and
systems integration services.
o Multi-functional mail finishing systems such as the Paragon(R) and the
GalaxyTM digital system, with their range of mail processing applications
for all types of mail such as the patented Weigh-on-the-WayTM (W-O-WTM)
feature.
o Ongoing robustness in demand for advanced shipping and logistics systems,
for managing the fulfillment and logistics of orders from the Internet and
other channels.
o The continued need for mail creation hardware, software, and hybrid
solutions as businesses use mail for one-to-one marketing to acquire and
retain customers.
In addition, international operations enhanced the quarter's performance through
strong revenue and operating profit growth.
The Office Solutions Segment includes Pitney Bowes Office Systems and Pitney
Bowes Management Services. During the third quarter of 1999, both revenue and
operating profit grew two percent. Excluding the impact of currency, operating
profit growth would have been six percent.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1999
Page 11
During the quarter, Pitney Bowes Management Services' revenue remained flat as
new management continues to focus on programs to improve the profitability of
customer contracts while increasing service levels. The focus on profitability
resulted in double-digit operating profit growth.
Office Systems, featuring Copier and Facsimile, grew revenues three percent for
the quarter. Copier Systems posted good sales growth even as the business
continued the transition to digital, networked solutions and the focus on
training to sell to national and major accounts. Facsimile revenues were
impacted by ongoing price pressures in the market and lower supplies revenues.
The Capital Services Segment includes primarily asset- and fee-based income
generated by large ticket external assets. During the quarter, revenue grew one
percent and operating profit increased four percent. This performance is
consistent with the company's previously announced strategy to shift from
asset-based income by lowering the asset base and concentrating on fee-based
income opportunities.
Cost of sales decreased to 56.7 percent of sales revenue in the third quarter of
1999 compared with 57.8 percent in the third quarter of 1998. This was due
primarily to improved contributions from high and mid volume equipment sales at
U.S. Mailing Systems.
Cost of rentals and financing increased to 28.1 percent of related revenues in
the third quarter of 1999 compared with 25.9 percent in the third quarter of
1998. This was due to higher depreciation at both U.S. Mailing and Copier, and
costs associated with new products such as Pitney WorksSM Reserve Account,
Pitney WorksSM Capital Line and Pitney WorksSM Purchase PowerSM at Financial
Services.
Selling, service and administrative expenses were 34.5 percent of revenue in the
third quarter of 1999 compared with 35.8 percent in the third quarter of 1998.
This improvement was due primarily to the company's continued emphasis on
controlling operating expenses.
Research and development expenses increased two percent to $25.1 million in the
third quarter of 1999 compared with $24.7 million in the third quarter of 1998.
The increase reflects the company's continued commitment to developing new
technologies for its digital meters and other mailing and software products.
Growth in research and development expenses was moderated by the movement of
newly developed products such as PulsarTM and GalaxyTM to active product status.
Net interest expense increased to $41.3 million in the third quarter of 1999
from $39.3 million in the third quarter of 1998. The increase is due mainly to
interest associated with borrowings to fund the share repurchase program, offset
by a $3.6 million gain from the termination of an interest rate swap in
September 1999.
The effective tax rate for the third quarter of 1999 was 33.3 percent compared
with 33.9 percent in 1998. The decrease is due to increased income from
international operations, certain capital services external financing
transactions entered into in the quarter and lower state taxes.
Net income and diluted earnings per share increased 31.4 percent and 35 percent,
respectively, in the third quarter of 1999 compared to the same period in 1998.
Excluding the impact of the U.S.P.S. Settlement, net income and diluted earnings
per share increased 10.6 percent and 13.6 percent, respectively, during the
quarter.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1999
Page 12
Results of Continuing Operations - nine months of 1999 vs. nine months of 1998
- ------------------------------------------------------------------------------
For the first nine months of 1999 compared with the same period of 1998, revenue
increased nine percent to $3,244.6 million while income from continuing
operations increased 24.3 percent to $482.1 million. Excluding the U.S.P.S.
Settlement, income from continuing operations increased 16.7 percent to $452.6
million. The factors that affected revenue and earnings performance included
those cited for the third quarter of 1999 versus 1998.
Discontinued Operations
- -----------------------
On June 30, 1999, the company committed itself to a formal plan to dispose of
Atlantic Mortgage and Investment Corporation (AMIC), a wholly-owned subsidiary
of the company, in a manner that maximizes long-term shareholder value. The
company recorded an expected loss of approximately $34.2 million (net of taxes
of $22.8 million) on the disposal of AMIC in the second quarter of 1999.
Operating results of AMIC have been segregated and reported as discontinued
operations in the Consolidated Statements of Income for the three and nine
months ended September 30, 1999. Prior year results have been reclassified to
conform to the current year presentation. See Note 2 to the consolidated
financial statements.
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, a subsidiary of General
Electric Company. The company received approximately $790 million at closing. In
connection with this transaction, the company recorded a gain of approximately
$9.3 million (net of taxes of $5.7 million) in the second quarter of 1999.
Operating results of CPLC have been segregated and reported as discontinued
operations in the Consolidated Statements of Income for the three and nine
months ended September 30, 1998. See Note 2 to the consolidated financial
statements.
Accounting Pronouncements
- -------------------------
In June 1999, Statement of Financial Accounting Standards (SFAS) No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - an amendment of FASB Statement No.
133", was issued. This statement defers the effective date of SFAS No. 133 one
year (January 1, 2001 for the company). SFAS No. 133 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.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1999
Page 13
Other Matters
- -------------
In August 1999, the U.S. Postal Service (U.S.P.S.) and the company announced
that they had reached agreement (U.S.P.S. Settlement) resolving a lawsuit filed
by the company in 1997. The lawsuit arose out of a dispute over a 1978 Statement
of Understanding authorizing the company to offer Postage by PhoneR, its
proprietary version of the Computerized Meter Resetting System (CMRS). Under the
terms of the agreement, the company received $51.8 million, representing a
portion of the financial benefit that the U.S.P.S. obtained as a result of the
revised regulations. This payment, net of related legal expenses of $2.2
million, was recorded as other income of $49.6 million in the third quarter of
1999.
Liquidity and Capital Resources
- -------------------------------
The ratio of current assets to current liabilities improved to .96 to 1 at
September 30, 1999 compared with .92 to 1 at December 31, 1998. The improvement
was due primarily to an increase in short-term finance receivables.
In August 1999, Pitney Bowes Credit Corporation (PBCC), a wholly-owned
subsidiary of the company, established a medium-term note program as part of
PBCC's shelf registration statement filed with the SEC in July 1998, which
permits issuance of up to $500 million in debt securities. In September 1999,
PBCC issued $125 million of 5.95% unsecured notes under this program, due in
September 2000, with interest payable in March 2000 and at maturity. The net
proceeds from these notes are being used for general corporate purposes,
including the repayment of short-term debt.
In April 1999, the company issued notes amounting to $200 million from its shelf
registration filed with the SEC in April 1998. These unsecured notes bear annual
interest at 5.5% and mature in April 2004. The net proceeds from these notes are
being used for general corporate purposes, including the repayment of commercial
paper.
The company has a medium-term note facility which was established as part of the
company's shelf registrations, which currently permits issuance of up to $300
million in debt securities with a minimum maturity of nine months.
PBCC has $625 million of unissued debt securities available from the shelf
registration statement filed with the SEC in July 1998.
The company believes that its financing needs for the next 12 months 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 68.9
percent at September 30, 1999 compared with 66.6 percent at December 31, 1998.
Book value per common share decreased to $5.89 at September 30, 1999 from $6.09
at December 31, 1998 driven primarily by the repurchase of common shares. During
the quarter ended September 30, 1999, the company repurchased 1.7 million common
shares for $103.3 million.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1999
Page 14
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
obtain lower interest rates on commercial loans than the company would otherwise
have been able to get without the swap.
During August 1999, PBCC entered into three interest rate swaps for an aggregate
notional amount of $350 million. The floating rates for each swap are based on
six month LIBOR plus a spread, equal to the difference between the fixed rate of
the debt and the fixed rate currently available for similar debt. Under the
terms of the swap agreements, PBCC is the floating rate payer.
Year 2000
- ---------
General
In 1997, the company established a formal worldwide program to identify and
resolve the impact of the Year 2000 (Y2K) date processing issue on the company's
business systems, products and supporting infrastructure. The program structure
has strong executive sponsorship consisting of a global Y2K steering committee
of senior business and technology management, a Y2K program office of full-time
program management, and subject matter experts and dedicated business unit
project teams. The company also engaged independent consultants to perform
periodic independent program reviews and assist in systems assessment and
testing reviews.
State of Readiness
The program encompasses the following phases: an inventory of affected
technology and critical third party suppliers, an assessment of Y2K readiness,
resolution, unit and integrated testing, and contingency planning. As of
September 1999, the company has substantially completed these phases across all
aspects of its businesses. Specific project status in our more critical process
areas is summarized below:
Computer Systems and Infrastructure:
These include computer networks, systems and applications supporting worldwide
business operations, including sales order processing, manufacturing,
distribution, billing, collections, leasing, financial management, and human
resources. All core systems have been remediated, tested, and reinstalled into
the production environment. Unit and integration testing have been successfully
completed.
Manufacturing/Logistics:
In 1998, we completed an inventory and assessment of our worldwide manufacturing
plants and warehouses. This included over 750 distinct pieces of plant floor
equipment, technology workstations, quality control systems, and safety and
security systems. All required upgrades and testing have been completed.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1999
Page 15
Products/Customers:
In 1997 and early 1998, we inventoried and tested over 2,350 product versions.
Over 95 percent of installed products, including postage meters, mailing
systems, copiers, and facsimile systems, were already Y2K compliant. All
inventoried products are either compliant or have available solutions or
replacements. Detailed product compliance information has been communicated to
customers through direct mail and through our website at www.pitneybowes.com.
Suppliers & Critical Vendors:
The company established a program to identify and assess the Y2K readiness of
critical vendors and suppliers of its worldwide businesses. The company has
assessed and monitored the Y2K readiness of over 250 critical vendors worldwide.
As of September 1999, all of our critical vendors have reported that they are
Y2K compliant.
Y2K Costs
The company estimates the total cost of the worldwide program from inception in
1997 through the Year 2000 to be approximately $36 million, of which
approximately $32 million has been incurred through September 30, 1999. These
costs, which are funded through the company's cash flows, include internal labor
costs as well as consulting and other external costs. These costs are
incorporated in the company's budgets and are being expensed as incurred.
Y2K Risks
The most reasonably likely worst case scenario with respect to a Y2K problem is
a failure of a supplier, including a utility or telecommunications supplier, to
be Y2K compliant causing a disruption in our operations. A widespread utility
failure could temporarily disrupt our product supply and impact customer
communications. We are monitoring over 250 critical vendors, including utility
suppliers, and have developed appropriate contingency plans to ensure
uninterrupted service.
Y2K Contingency Plans
A Y2K business resumption plan has been developed which identifies and evaluates
potential Y2K failure scenarios and establishes both preemptive and reactive
measures. These measures, including plans to address failures of critical
vendors, internal systems and processes, have been finalized.
Capital Investments
- -------------------
In the first nine months of 1999, net investments in fixed assets included $70.6
million in net additions to property, plant and equipment and $163.7 million in
net additions to rental equipment and related inventories compared with $62.4
million and $157.5 million, respectively, in the same period in 1998. These
additions include expenditures for normal plant and manufacturing equipment. 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, 1999, 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.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1999
Page 16
Regulatory Matters
- ------------------
In May 1995, the U.S.P.S. 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.
During the period from May 1995 through September 30, 1999, the company has
submitted extensive comments to a series of proposed IBIP specifications issued
by the U.S.P.S. The latest set of proposed specifications, entitled "Performance
Criteria for Information-Based Indicia and Security Architecture for Open IBI
Postage Evidencing Systems" (the IBI Performance Criteria), was issued in July
1999. The company has submitted comments to the IBI Performance Criteria.
As of September 30, 1999, the company is in the process of finalizing the
development of both PC and Internet versions of a product, which satisfies the
proposed IBI Performance Criteria. Both versions of this product are currently
undergoing phase II beta testing and are expected to be ready for market upon
final approval from the U.S.P.S.
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 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 the impact of the year 2000 issue, including the effects of third parties'
inabilities to address the Year 2000 problem as well as the company's own
readiness
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1999
Page 17
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 plaintiff or 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.
In June 1999, the company was served with a Civil Investigative Demand (CID)
from the Justice Department's Antitrust Division. A CID is a tool used by the
Antitrust Division for gathering information and documents. The company believes
that the Justice Department may be reviewing the company's efforts to protect
its intellectual property rights. The company believes it has complied fully
with the antitrust laws and is cooperating fully with the department's
investigation.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Reg. S-K
Exhibits Description
-------- -----------------------------
(12) Computation of ratio of
earnings to fixed charges
(27) Financial Data Schedule
(b) Reports on Form 8-K
On October 22, 1999, the company filed a current report on Form 8-K
pursuant to Item 5 thereof, reporting the Press Release dated October 19,
1999 for the quarter ended September 30, 1999, consolidated statements of
income and selected segment data.
On September 3, 1999, PBCC filed a current report on Form 8-K pursuant to
Items 5 and 7 thereof, relating to the establishment of PBCC's medium-term
note program.
On August 30, 1999, PBCC filed a current report on Form 8-K pursuant to
Items 5 and 7 thereof, restating certain items filed in PBCC's Annual
Report on Form 10-K for the year ended December 31, 1998 and Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
On August 2, 1999, the company filed a current report on Form 8-K pursuant
to Item 5 thereof, announcing a settlement with the U.S.P.S.
On July 26, 1999, PBCC filed a current report on Form 8-K pursuant to Item
5 thereof, reporting the Press Release of Pitney Bowes Inc. (parent
company) dated July 20, 1999 for the quarter ended June 30, 1999,
consolidated statements of income and selected segment data.
On July 23, 1999, the company filed a current report on Form 8-K pursuant
to Item 5 thereof, reporting the Press Release dated July 20, 1999 for the
quarter ended June 30, 1999, consolidated statements of income and
selected segment data.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 1999
Page 18
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 15, 1999
/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)
<PAGE>
Exhibit Index
-------------
Reg. S-K
Exhibits Description
-------- --------------------------
(12) Computation of ratio of
earnings to fixed charges
(27) Financial Data Schedule
<TABLE>
Exhibit (12)
Pitney Bowes Inc.
Computation of Ratio of Earnings to Fixed Charges (1)
----------------------------------------------------
(Dollars in thousands)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998(2) 1999 1998(2)
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Income from continuing operations
before income taxes........................... $ 279,037 $ 201,024 $ 722,147 $ 588,898
Add:
Interest expense............................. 42,917 39,991 137,084 118,687
Portion of rents
representative of the
interest factor........................... 10,029 10,935 31,223 33,216
Amortization of capitalized
interest.................................. 244 244 730 730
Minority interest in the
income of subsidiary
with fixed charges........................ 3,061 3,074 8,726 9,203
------------ ------------ ------------ -----------
Income as adjusted.............................. $ 335,288 $ 255,268 $ 899,910 $ 750,734
============ ============ ============ ===========
Fixed charges:
Interest expense............................. $ 42,917 $ 39,991 $ 137,084 $ 118,687
Portion of rents
representative of the
interest factor........................... 10,029 10,935 31,223 33,216
Minority interest, excluding
taxes, in the income of
subsidiary with fixed charges............. 4,592 4,652 13,073 13,967
------------ ------------ ------------ -----------
Total fixed charges.......................... $ 57,538 $ 55,578 $ 181,380 $ 165,870
============ ============ ============ ===========
Ratio of earnings to
fixed charges................................ 5.83 4.59 4.96 4.53
============ ============ ============ ===========
Ratio of earnings to fixed
charges excluding minority
interest..................................... 6.27 4.95 5.29 4.88
============ ============ ============ ===========
<FN>
(1) The computation of the ratio of earnings to fixed charges has been
computed by dividing income from continuing operations before income
taxes as adjusted by fixed charges. Included in fixed charges is
one-third of rental expense as the representative portion of interest.
(2) Amounts recomputed to reflect discontinued operations.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM PITNEY BOWES INC.
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF INCOME, CORRESPONDING
FOOTNOTE #4 FIXED ASSETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 152,057
<SECURITIES> 873
<RECEIVABLES> <F1> 2,034,001
<ALLOWANCES> <F1> 68,640
<INVENTORY> 242,678
<CURRENT-ASSETS> 2,630,271
<PP&E> <F2> 2,878,397
<DEPRECIATION> <F2> 1,578,893
<TOTAL-ASSETS> 7,881,426
<CURRENT-LIABILITIES> 2,745,797
<BONDS> 1,847,808
<COMMON> 323,338
310,000
1,930
<OTHER-SE> 1,242,575
<TOTAL-LIABILITY-AND-EQUITY> 7,881,426
<SALES> 1,586,302
<TOTAL-REVENUES> 3,244,581
<CGS> 903,560
<TOTAL-COSTS> 1,249,985
<OTHER-EXPENSES> 78,707
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 137,084
<INCOME-PRETAX> 722,147
<INCOME-TAX> 240,091
<INCOME-CONTINUING> 482,056
<DISCONTINUED> (23,967)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 458,089
<EPS-BASIC> 1.71
<EPS-DILUTED> 1.68
<FN>
<F1> Receivables are comprised of gross trade receivables of $430,213 and
short-term finance receivables of $1,603,788. Allowances are comprised of
allowances for trade receivables of $25,493 and for short-term finance
receivables of $43,147.
<F2> Property, plant and equipment are comprised of gross fixed assets of
$1,182,547 and rental equipment and related inventories of $1,695,850.
Depreciation is comprised of depreciation on fixed assets of $708,989 and on
rental equipment and related inventories of $869,904.
</FN>
</TABLE>
