UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 1999
is 267,575,341.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 1999
Page 2
Pitney Bowes Inc.
Index
-----------------
Page Number
-----------
Part I - Financial Information:
Item 1: Financial Statements
Consolidated Statements of Income - Three and Six
Months Ended June 30, 1999 and 1998.................. 3
Consolidated Balance Sheets - June 30, 1999
and December 31, 1998................................ 4
Consolidated Statements of Cash Flows -
Six Months Ended June 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 4: Submission of Matters to a Vote of
Security Holders.......................... 17
Item 6: Exhibits and Reports on Form 8-K................. 18
Signatures..................................................... 19
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 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 June 30, Six Months Ended June 30,
--------------------------- ---------------------------
1999 1998* 1999 1998*
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue from:
Sales..................................................... $ 546,370 $ 492,310 $ 1,056,752 $ 942,735
Rentals and financing..................................... 418,773 393,825 824,498 774,196
Support services.......................................... 140,289 128,455 273,506 251,444
----------- ----------- ----------- -----------
Total revenue......................................... 1,105,432 1,014,590 2,154,756 1,968,375
----------- ----------- ----------- -----------
Costs and expenses:
Cost of sales............................................. 306,351 289,983 603,070 564,983
Cost of rentals and financing............................. 117,443 104,355 228,376 206,976
Selling, service and administrative....................... 373,132 352,916 734,160 683,898
Research and development.................................. 27,698 25,065 53,602 48,696
Interest, net............................................. 46,938 40,451 92,438 75,948
----------- ----------- ----------- ----------
Total costs and expenses.............................. 871,562 812,770 1,711,646 1,580,501
----------- ----------- ----------- ----------
Income from continuing operations before income taxes......... 233,870 201,820 443,110 387,874
Provision for income taxes.................................... 76,462 69,051 147,131 132,770
----------- ----------- ----------- ----------
Income from continuing operations............................. 157,408 132,769 295,979 255,104
(Loss) income from discontinued operations (Note 2)........... (2,729) 9,248 971 16,600
Loss on disposal of discontinued operations (Note 2).......... (24,938) - (24,938) -
----------- ----------- ----------- ----------
Net income.................................................... $ 129,741 $ 142,017 $ 272,012 $ 271,704
=========== =========== =========== ===========
Basic earnings per share:.....................................
Continuing operations....................................... $ .58 $ .49 $ 1.10 $ .92
Discontinued operations..................................... (.10) .03 (.09) .06
----------- ----------- ----------- -----------
Net income.................................................. $ .48 $ .52 $ 1.01 $ .98
=========== =========== =========== ===========
Diluted earnings per share:...................................
Continuing operations....................................... $ .58 $ .48 $ 1.08 $ .91
Discontinued operations..................................... (.10) .03 (.09) .06
----------- ----------- ----------- -----------
Net income.................................................. $ .48 $ .51 $ .99 $ .97
========= =========== =========== ===========
Dividends declared per share of common stock.................. $ .255 $ .225 $ .51 $ .45
=========== =========== =========== ===========
Ratio of earnings to fixed charges............................ 4.71 4.40 4.56 4.49
=========== =========== =========== ===========
Ratio of earnings to fixed charges
excluding minority interest............................... 5.00 4.72 4.85 4.85
=========== =========== =========== ===========
</TABLE>
* Reclassified to reflect discontinued operations.
See Notes to Consolidated Financial Statements
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 1999
Page 4
<TABLE>
Pitney Bowes Inc.
Consolidated Balance Sheets
---------------------------
<CAPTION>
June 30, December 31,
(Dollars in thousands, except share data) 1999 1998
------------- ------------
(unaudited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 132,693 $ 125,684
Short-term investments, at cost which
approximates market................................... 949 3,302
Accounts receivable, less allowances:
6/99, $24,983; 12/98, $24,665......................... 416,302 382,406
Finance receivables, less allowances:
6/99, $48,642; 12/98, $51,232......................... 1,498,531 1,400,786
Inventories (Note 3)...................................... 259,858 266,734
Other current assets and prepayments...................... 83,173 330,051
Net assets of discontinued operations..................... 156,507 -
------------- ------------
Total current assets.................................. 2,548,013 2,508,963
Property, plant and equipment, net (Note 4)................... 467,013 477,476
Rental equipment and related inventories, net (Note 4)........ 842,176 806,585
Property leased under capital leases, net (Note 4)............ 3,269 3,743
Long-term finance receivables, less allowances:
6/99, $76,291; 12/98, $79,543............................. 1,954,990 1,999,339
Investment in leveraged leases................................ 962,531 827,579
Goodwill, net of amortization:
6/99, $51,425; 12/98, $47,514............................. 227,874 222,980
Other assets.................................................. 454,198 814,374
Net assets of discontinued operations......................... 313,063 -
------------- ------------
Total assets.................................................. $ 7,773,127 $ 7,661,039
============= ============
Liabilities and stockholders' equity Current liabilities:
Accounts payable and accrued liabilities.................. $ 776,665 $ 898,548
Income taxes payable...................................... 186,279 194,443
Notes payable and current portion of
long-term obligations ................................ 1,273,197 1,259,193
Advance billings.......................................... 391,103 369,628
------------- ------------
Total current liabilities............................. 2,627,244 2,721,812
Deferred taxes on income...................................... 1,029,923 920,521
Long-term debt (Note 5)....................................... 1,898,942 1,712,937
Other noncurrent liabilities.................................. 352,911 347,670
------------- ------------
Total liabilities..................................... 5,909,020 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.............................. 1,945 2,031
Common stock, $1 par value................................ 323,338 323,338
Capital in excess of par value............................ 11,927 16,173
Retained earnings......................................... 3,208,052 3,073,839
Accumulated other comprehensive income (Note 8)........... (85,851) (88,217)
Treasury stock, at cost................................... (1,905,333) (1,679,196)
------------- ------------
Total stockholders' equity............................ 1,554,107 1,648,002
------------- ------------
Total liabilities and stockholders' equity.................... $ 7,773,127 $ 7,661,039
============= ============
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 1999
Page 5
<TABLE>
Pitney Bowes Inc.
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
<CAPTION>
(Dollars in thousands)
Six Months Ended June 30,
--------------------------
1999 1998*
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 272,012 $ 271,704
Loss on sale of discontinued operations..................... 24,938 -
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization........................ 206,304 166,446
Increase in deferred taxes on income................. 106,823 66,949
Pension plan investment.............................. (67,000) -
Change in assets and liabilities:
Accounts receivable.............................. (35,000) (20,439)
Net investment in internal finance receivables... (53,206) (52,390)
Inventories...................................... 7,590 9,850
Other current assets and prepayments............. 13,868 (5,426)
Accounts payable and accrued liabilities......... (45,595) (19,235)
Income taxes payable............................. 8,030 (8,097)
Advance billings................................. 20,648 14,942
Other, net........................................... (17,790) (11,130)
----------- -----------
Net cash provided by operating activities........ 441,622 413,174
----------- -----------
Cash flows from investing activities:
Short-term investments...................................... 2,192 (257)
Net investment in fixed assets.............................. (173,318) (169,504)
Net investment in external finance receivables.............. 73,225 34,963
Investment in leveraged leases.............................. (123,393) (52,272)
Investment in mortgage servicing rights..................... (9,719) (170,882)
Other investing activities.................................. (28,604) (793)
----------- -----------
Net cash used in investing activities............ (259,617) (358,745)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in notes payable, net................... 2,948 (92,698)
Proceeds from long-term obligations......................... 208,106 554,123
Principal payments on long-term obligations................. (14,385) (130,993)
Proceeds from issuance of stock............................. 34,695 26,666
Stock repurchases........................................... (266,090) (307,377)
Dividends paid.............................................. (137,799) (124,553)
----------- ----------
Net cash used in financing activities............ (172,525) (74,832)
----------- ----------
Effect of exchange rate changes on cash......................... (2,471) (1,348)
----------- ----------
Increase (decrease) in cash and cash equivalents................ 7,009 (21,751)
Cash and cash equivalents at beginning of period................ 125,684 137,073
----------- ----------
Cash and cash equivalents at end of period...................... $ 132,693 $ 115,322
=========== ==========
Interest paid................................................... $ 92,728 $ 86,830
=========== ==========
Income taxes paid, net.......................................... $ 36,163 $ 85,386
=========== ==========
<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
Six Months Ended June 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 June 30,
1999 and December 31, 1998, the results of its operations for the three months
and six months ended June 30, 1999 and 1998 and its cash flows for the six
months ended June 30, 1999 and 1998 have been included. Operating results for
the three and six months ended June 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.
AMIC's revenue was $30.0 million and $29.3 million for the three months ended
June 30, 1999 and 1998, respectively, and $62.5 and $52.6 million for the six
months ended June 30, 1999 and 1998, respectively. Net interest expense
allocated to AMIC's discontinued operations was $1.8 million and $1.6 million
for the three months ended June 30, 1999 and 1998, respectively, and $3.7
million and $2.9 million for the six months ended June 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 $35.6 million and $70.1 million for the three and six months
ended June 30, 1998, respectively. Interest expense allocated to CPLC's
discontinued operations was $10.6 million and $21.1 million for the three and
six months ended June 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 June 30, 1999. Cash flow impacts of discontinued
operations have not been segregated in the Consolidated Statements of Cash
Flows. Details of the (loss) income from discontinued operations are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
------- ------ ---- -------
<S> <C> <C> <C> <C>
AMIC....................................... $(2,729) $6,615 $971 $11,214
CPLC....................................... - 2,633 - 5,386
------- ------ ---- -------
(Loss) income from discontinued operations $(2,729) $9,248 $971 $16,600
======= ====== ==== =======
</TABLE>
Note 3:
- -------
<TABLE>
Inventories are comprised of the following:
(Dollars in thousands)
<CAPTION>
June 30, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Raw materials and work in process............................. $ 36,569 $ 54,001
Supplies and service parts.................................... 105,583 106,864
Finished products............................................. 117,706 105,869
-------------- --------------
Total ........................................................ $ 259,858 $ 266,734
============== ==============
</TABLE>
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 1999
Page 7
Note 4:
- -------
<TABLE>
Fixed assets are comprised of the following:
<CAPTION>
(Dollars in thousands) June 30, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Property, plant and equipment................................. $ 1,164,718 $ 1,153,573
Accumulated depreciation...................................... (697,705) (676,097)
-------------- --------------
Property, plant and equipment, net............................ $ 467,013 $ 477,476
============== ==============
Rental equipment and related inventories...................... $ 1,755,080 $ 1,706,995
Accumulated depreciation...................................... (912,904) (900,410)
-------------- --------------
Rental equipment and related inventories, net................. $ 842,176 $ 806,585
============== ==============
Property leased under capital leases.......................... $ 18,918 $ 19,430
Accumulated amortization...................................... (15,649) (15,687)
-------------- --------------
Property leased under capital leases, net..................... $ 3,269 $ 3,743
============== ==============
</TABLE>
Note 5:
- -------
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 $750 million of unissued debt securities available from a shelf
registration statement filed with the SEC in July 1998.
Note 6:
- -------
<TABLE>
Revenue and operating profit by business segment for the three and six months ended June 30, 1999 and 1998
were as follows:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ---------------------------
<CAPTION>
(Dollars in thousands) 1999 1998* 1999 1998*
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue:
Mailing and Integrated Logistics........... $ 746,952 $ 668,281 $ 1,445,581 $ 1,294,521
Office Solutions........................... 316,753 303,682 631,333 594,864
Capital Services........................... 41,727 42,627 77,842 78,990
----------- ---------- ----------- -----------
Total revenue................................. $ 1,105,432 $1,014,590 $ 2,154,756 $ 1,968,375
=========== ========== =========== ===========
Operating Profit: (1)
Mailing and Integrated Logistics........... $ 200,654 $ 164,223 $ 375,039 $ 308,630
Office Solutions........................... 60,656 57,610 119,201 110,069
Capital Services........................... 12,784 12,202 20,966 20,547
----------- ---------- ----------- -----------
Total operating profit........................ $ 274,094 $ 234,035 $ 515,206 $ 439,246
Unallocated amounts:
Net interest (corporate interest expense,
net of intercompany transactions)......... (11,443) (4,208) (22,204) (5,492)
Corporate expense.......................... (28,781) (28,007) (49,892) (45,880)
----------- ---------- ----------- -----------
Income from continuing operations before
income taxes................................. $ 233,870 $ 201,820 $ 443,110 $ 387,874
=========== ========== =========== ===========
* 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
Six Months Ended June 30, 1999
Page 8
Note 7:
- -------
<TABLE>
A reconciliation of the basic and diluted earnings per share computations for
the three months ended June 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 $ 157,408 $ 132,769
Less:
Preferred stock
dividends - -
Preference stock
dividends (38) (42)
- ----------------------------------------------------------------- ------------------------------------
Basic earnings per
share $ 157,370 268,088 $ .58 $ 132,727 274,924 $ .49
- ----------------------------------------------------------------- ------------------------------------
Effect of dilutive
securities:
Preferred stock - 15 - 17
Preference stock 38 1,160 42 1,259
Stock options 3,365 2,822
Other 389 473
- ----------------------------------------------------------------- ------------------------------------
Diluted earnings per
share $ 157,408 273,017 $ .58 $ 132,769 279,495 $ .48
================================================================= ====================================
</TABLE>
<TABLE>
A reconciliation of the basic and diluted earnings per share computations for
the six months ended June 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 $ 295,979 $ 255,104
Less:
Preferred stock
dividends - -
Preference stock
dividends (77) (84)
- ----------------------------------------------------------------- ------------------------------------
Basic earnings per
share $ 295,902 269,007 $ 1.10 $ 255,020 276,930 $ .92
- ----------------------------------------------------------------- ------------------------------------
Effect of dilutive
securities:
Preferred stock - 16 - 17
Preference stock 77 1,169 84 1,276
Stock options 3,463 2,740
Other 419 450
- ----------------------------------------------------------------- ------------------------------------
Diluted earnings per
share $ 295,979 274,074 $ 1.08 $ 255,104 281,413 $ .91
================================================================= ====================================
* Adjusted to reflect discontinued operations.
</TABLE>
Note 8:
- -------
<TABLE>
Comprehensive income for the three and six months ended June 30, 1999 and 1998
was as follows:
<CAPTION>
(Dollars in thousands)
Three Months Ended June 30, Six Months Ended June 30,
------------------------- ----------------------------
1999 1998 1999 1998
---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net income................................... $ 129,741 $ 142,017 $ 272,012 $ 271,704
Other comprehensive income:
Foreign currency translation
adjustments.............................. 2,814 (1,243) 2,366 (11,282)
---------- ------------ ----------- ------------
Comprehensive income......................... $ 132,555 $ 140,774 $ 274,378 $ 260,422
========== ============ =========== ============
</TABLE>
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 1999
Page 9
Note 9:
- -------
In August 1999, the U.S. Postal Service (U.S.P.S.) and the company announced
that they had reached agreement 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 $51.75 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, will be reflected in
the consolidated financial statements in the third quarter of 1999.
In July 1999, Statement of Financial Accounting Standards (SFAS) No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS 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 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
Six Months Ended June 30, 1999
Page 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
Results of Operations - second quarter of 1999 vs. second quarter of 1998
- -------------------------------------------------------------------------
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. Operating results of AMIC have been
segregated and reported as discontinued operations in the Consolidated
Statements of Income for the three and six months ended June 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 six months
ended June 30, 1998. See Note 2 to the consolidated financial statements.
Revenue increased nine percent in the second quarter of 1999 to $1,105.4 million
compared with $1,014.6 million in the second quarter of 1998. Income from
continuing operations increased 19 percent to $157.4 million from $132.8 million
for the same period in 1998. Diluted earnings per share from continuing
operations grew to 58 cents, a 21.5 percent increase from the second quarter of
1998.
Second quarter 1999 revenue included $546.4 million from sales, up 11 percent
from $492.3 million in the second quarter of 1998; $418.8 million from rentals
and financing, up six percent from $393.8 million; and $140.3 million from
support services, up nine percent from $128.5 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 second quarter of 1999,
revenue grew 12 percent and operating profit increased 22 percent. Contributors
to growth included:
o The Internet's positive impact on package delivery and direct mail volumes.
o Customized, high-speed production mail equipment used in Automated Document
Factories and high-volume mailrooms.
o Advanced, multi-functional mailing systems, such as ParagonTM and the
recently introduced digital GalaxyTM system.
o Demand for Mail Creation solutions, led by DocuMatchTM.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 1999
Page 11
The Office Solutions Segment includes Pitney Bowes Office Systems and Pitney
Bowes Management Services. During the second quarter of 1999, revenue grew four
percent and operating profit increased five percent.
During the quarter, Pitney Bowes Management Services' revenue grew four percent
as the company continues to focus on profitable growth through providing high
value services, such as business recovery, to both new and existing customers.
The focus on profitability resulted in double-digit operating profit growth.
Office Systems, featuring Copier and Facsimile, grew revenues five percent and
increased operating profit four percent for the quarter. Copier Systems
continues the transition from stand-alone analog copiers, to digital, networked
solutions while strengthening the ability to sell to national and major
accounts. Facsimile revenues were helped by strong unit placements partially
offset by ongoing price pressures in the market.
The Capital Services Segment includes primarily asset- and fee-based income
generated by large ticket external assets. During the quarter, revenue decreased
two percent while operating profit improved five 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 56.1 percent of sales revenue in the second quarter
of 1999 compared with 58.9 percent in the second quarter of 1998. This was due
primarily to higher equipment and supply sales at U.S. Mailing Systems.
Cost of rentals and financing increased to 28.0 percent of related revenues in
the second quarter of 1999 compared with 26.5 percent in the second quarter of
1998. This was due primarily to higher depreciation at both U.S. Mailing and
Copier and other rental costs at U.S. Mailing.
Selling, service and administrative expenses were 33.8 percent of revenue in the
second quarter of 1999 compared with 34.8 percent in the second quarter of 1998.
This improvement was due primarily to the company's continued emphasis on
controlling operating expenses.
Research and development expenses increased 11 percent to $27.7 million in the
second quarter of 1999 compared with $25.1 million in the second 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.
Net interest expense increased to $46.9 million in the second quarter of 1999
from $40.5 million in the second quarter of 1998. The increase is due mainly to
increased debt to fund the share repurchase program.
The effective tax rate for the second quarter of 1999 was 32.7 percent compared
with 34.2 percent in 1998. The decrease is due primarily to research and
development tax credits and other tax benefits.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 1999
Page 12
Net income and diluted earnings per share decreased 8.6 percent and 6.5 percent,
respectively, in the second quarter of 1999 compared to the same period in 1998.
Second quarter 1999 net income included a $27.7 million charge, or 10 cents per
diluted share related to discontinued operations, compared to $9.2 million of
income, or three cents per diluted share, in 1998.
Results of Operations - six months of 1999 vs. six months of 1998
- -----------------------------------------------------------------
For the first six months of 1999 compared with the same period of 1998, revenue
increased nine percent to $2,154.8 million while income from continuing
operations increased 16 percent to $296.0 million. The factors that affected
revenue and earnings performance included those cited for the second 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. 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. See
Note 2 to the consolidated financial statements.
Subsequent Events
- -----------------
In August 1999, the U.S. Postal Service (U.S.P.S.) and the company announced
that they had reached agreement 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 $51.75 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, will be reflected in
the consolidated financial statements in the third quarter of 1999.
In July 1999, Statement of Financial Accounting Standards (SFAS) No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS 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 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
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 1999
Page 13
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 June
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 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.
Pitney Bowes Credit Corporation (PBCC), a wholly-owned subsidiary of the
company, has $750 million of unissued debt securities available from a 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 69.2
percent at June 30, 1999 compared with 66.6 percent at December 31, 1998. Book
value per common share decreased to $5.80 at June 30, 1999 from $6.09 at
December 31, 1998 driven primarily by the repurchase of common shares. During
the quarter ended June 30, 1999, the company repurchased 1.9 million common
shares for $123.7 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 or obtain lower interest rates on commercial loans than the company would
otherwise have been able to get without the swap.
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
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 1999
Page 14
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 June
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 in North America and 95 percent of international
systems have been remediated, tested, and reinstalled into the production
environment. Unit and integration testing was successfully completed in June
1999. Five small stand-alone systems, which are part of the international
operations and not yet fully compliant, are expected to be compliant in
September 1999.
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. As of June 1999, we completed 99 percent of all required
upgrades and testing and are finalizing repairs on the remaining three
non-critical items.
Products/Customers:
In 1997 and early 1998, we inventoried and tested over 2,350 product versions.
Over 95 percent of installed products, including all postage meters, mailing
systems, copiers, and facsimile systems, were already Y2K compliant. As of June
1999, 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 June 1999, 14 percent of our critical vendors, primarily utility and
telecommunication vendors, are not yet complete with their Y2K compliance
programs. We are continuing to work with these vendors to ensure that they have
plans in place for uninterrupted service.
Y2K Costs
The company estimates the total cost of the worldwide program from inception in
1997 through the Year 2000 to be approximately $37 million, down from our March
31, 1999 estimate of $38 to $42 million, of which approximately $30 million has
been incurred through June 30, 1999. These costs, which are funded through the
company's cash flows, include internal labor costs as well as consulting and
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 1999
Page 15
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 developing 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, are expected to be finalized by
September 1999.
Capital Investments
- -------------------
In the first six months of 1999, net investments in fixed assets included $43.0
million in net additions to property, plant and equipment and $130.3 million in
net additions to rental equipment and related inventories compared with $42.2
million and $127.3 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 June 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.
Regulatory Matters
- ------------------
In May 1996, the United States Postal Service (U.S.P.S.) issued a proposed
schedule for the phaseout of mechanical meters in the U.S. 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 U.S.P.S. mechanical
meter migration schedule combined with the company's ongoing and continuing
investment in advanced postage evidencing technologies, mechanical meters
represent approximately 2 percent of the company's installed U.S. meter base at
June 30, 1999, compared with approximately 10 percent at December 31, 1998. At
June 30, 1999, approximately 98 percent of the company's installed U.S. meter
base was electronic or digital, as compared to 90 percent at December 31, 1998
and 81 percent at June 30, 1998. The company continues to work in close
cooperation with the U.S.P.S. to convert those mechanical meter customers who
have not migrated to digital or electronic meters by the applicable U.S.P.S.
deadline.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 1999
Page 16
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 June 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 is in the process of drafting and submitting comments to the
IBI Performance Criteria.
As of June 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. The PC version of this product is currently undergoing
phase II beta testing. The Internet version of this product is currently
undergoing phase I beta testing. Both versions 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
Six Months Ended June 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 intends to cooperate fully with the department's
investigation.
Item 4: Submission of Matters to a Vote of Security Holders
Below are the final results of the voting at the Annual Meeting of shareholders
held on May 10, 1999:
Proposal 1 - Election of Directors
Nominee For Withheld
------------------- ----------- ---------
Michael J. Critelli 233,061,011 1,162,814
Jessica P. Einhorn 232,888,363 1,335,462
Herbert L. Henkel 233,103,902 1,119,923
Michael I. Roth 233,129,325 1,094,500
Phyllis Shapiro Sewell 232,997,624 1,226,201
Proposal 2 - Appointment of PricewaterhouseCoopers LLP as Independent
Accountants
For Against Abstain
----------- ------- -------
233,140,794 299,810 783,221
The following other directors continued their term of office after the Annual
Meeting:
Linda G. Alvarado Colin G. Campbell
Marc C. Breslawsky Ernie Green
William E. Butler James H. Keyes
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 1999
Page 18
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 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.
On April 26, 1999, the company filed a current report on Form 8-K pursuant
to Item 5 thereof, reporting the Press Release dated April 20, 1999 for
the quarter ended March 31, 1999.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 1999
Page 19
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PITNEY BOWES INC.
August 13, 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
Exhibit (12)
<TABLE>
Pitney Bowes Inc.
Computation of Ratio of Earnings to Fixed Charges (1)
-----------------------------------------------------
(Dollars in thousands)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1999 1998(2) 1999 1998(2)
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Income from continuing operations
before income taxes........................... $ 233,870 $ 201,820 $ 443,110 $ 387,874
Add:
Interest expense............................. 48,108 42,188 94,167 78,696
Portion of rents
representative of the
interest factor........................... 10,412 12,165 21,194 22,281
Amortization of capitalized
interest.................................. 243 243 486 486
Minority interest in the
income of subsidiary
with fixed charges........................ 2,792 3,070 5,665 6,129
------------ ------------ ------------ -----------
Income as adjusted.............................. $ 295,425 $ 259,486 $ 564,622 $ 495,466
============ ============ ============ ===========
Fixed charges:
Interest expense............................. $ 48,108 $ 42,188 $ 94,167 $ 78,696
Portion of rents
representative of the
interest factor........................... 10,412 12,165 21,194 22,281
Minority interest, excluding
taxes, in the income of
subsidiary with fixed charges............. 4,149 4,666 8,481 9,315
------------ ------------ ------------ -----------
Total fixed charges....................... $ 62,669 $ 59,019 $ 123,842 $ 110,292
============ ============ ============ ===========
Ratio of earnings to
fixed charges................................ 4.71 4.40 4.56 4.49
============ ============ ============ ===========
Ratio of earnings to fixed
charges excluding minority
interest..................................... 5.00 4.72 4.85 4.85
============ ============ ============ ===========
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 132,693
<SECURITIES> 949
<RECEIVABLES> <F1> 1,988,458
<ALLOWANCES> <F1> 73,625
<INVENTORY> 259,858
<CURRENT-ASSETS> 2,548,013
<PP&E> <F2> 2,919,798
<DEPRECIATION> <F2> 1,610,609
<TOTAL-ASSETS> 7,773,127
<CURRENT-LIABILITIES> 2,627,244
<BONDS> 1,898,942
<COMMON> 323,338
310,000
1,974
<OTHER-SE> 1,228,795
<TOTAL-LIABILITY-AND-EQUITY> 7,773,127
<SALES> 1,056,752
<TOTAL-REVENUES> 2,154,756
<CGS> 603,070
<TOTAL-COSTS> 831,446
<OTHER-EXPENSES> 53,602
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 94,167
<INCOME-PRETAX> 443,110
<INCOME-TAX> 147,131
<INCOME-CONTINUING> 295,979
<DISCONTINUED> (23,967)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 272,012
<EPS-BASIC> 1.01
<EPS-DILUTED> 0.99
<FN>
<F1> Receivables are comprised of gross trade receivables of $441,285 and
short-term finance receivables of $1,547,173. Allowances are comprised of
allowances for trade receivables of $24,983 and for short-term finance
receivables of $48,642.
<F2> Property, plant and equipment are comprised of gross fixed assets of
$1,164,718 and rental equipment and related inventories of $1,755,080.
Depreciation is comprised of depreciation on fixed assets of $697,705 and on
rental equipment and related inventories of $912,904.
</FN>
</TABLE>
