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, 2000
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,
2000 is 252,137,450.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2000
Page 2
Pitney Bowes Inc.
Index
-----------------
Page Number
-----------
Part I - Financial Information:
Item 1: Financial Statements
Consolidated Statements of Income (unaudited) - Three and
Nine Months Ended September 30, 2000 and 1999.............. 3
Consolidated Balance Sheets - September 30, 2000 (unaudited)
and December 31, 1999...................................... 4
Consolidated Statements of Cash Flows (unaudited) -
Nine Months Ended September 30, 2000 and 1999.............. 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....................................... 16
Item 5: Other Information....................................... 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, 2000
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,
-------------------------------- --------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue from:
Sales.............................................. $ 551,931 $ 529,550 $ 1,643,511 $ 1,586,302
Rentals and financing.............................. 423,982 420,836 1,303,949 1,245,334
Support services................................... 145,399 139,439 436,853 412,945
-------------- -------------- -------------- --------------
Total revenue.................................. 1,121,312 1,089,825 3,384,313 3,244,581
-------------- -------------- -------------- --------------
Costs and expenses:
Cost of sales...................................... 310,385 300,490 933,032 903,560
Cost of rentals and financing...................... 109,902 118,049 351,111 346,425
Selling, service and administrative................ 402,234 375,462 1,170,310 1,109,622
Research and development........................... 27,640 25,105 87,679 78,707
Other income (Note 11)............................. - (49,574) - (49,574)
Interest, net...................................... 51,917 41,256 152,440 133,694
-------------- -------------- -------------- --------------
Total costs and expenses....................... 902,078 810,788 2,694,572 2,522,434
-------------- -------------- -------------- --------------
Income from continuing operations before income taxes.. 219,234 279,037 689,741 722,147
Provision for income taxes............................. 57,801 92,960 210,798 240,091
-------------- -------------- -------------- --------------
Income from continuing operations...................... 161,433 186,077 478,943 482,056
Income from discontinued operations (Note 2)........... - - - 971
Loss on disposal of discontinued operations (Note 2)... - - - (24,938)
-------------- -------------- -------------- --------------
Net income............................................. $ 161,433 $ 186,077 $ 478,943 $ 458,089
============== ============== ============== ==============
Basic earnings per share:
Continuing operations................................ $ .63 $ .70 $ 1.85 $ 1.80
Discontinued operations.............................. - - - (.09)
-------------- -------------- -------------- --------------
Net income........................................... $ .63 $ .70 $ 1.85 $ 1.71
============== ============== ============== ==============
Diluted earnings per share:
Continuing operations................................ $ .63 $ .69 $ 1.84 $ 1.77
Discontinued operations.............................. - - - (.09)
-------------- -------------- -------------- --------------
Net income........................................... $ .63 $ .69 $ 1.84 $ 1.68
============== ============== ============== ==============
Dividends declared per share of common stock........... $ .285 $ .255 $ .855 $ .765
============== ============== ============== ==============
Ratio of earnings to fixed charges..................... 4.08 5.83 4.28 4.96
============== ============== ============== ==============
Ratio of earnings to fixed charges
excluding minority interest........................ 4.34 6.27 4.57 5.29
============== ============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2000
Page 4
<TABLE>
Pitney Bowes Inc.
Consolidated Balance Sheets
---------------------------
<CAPTION>
September 30, December 31,
(Dollars in thousands, except share data) 2000 1999
------------- ------------
(unaudited)
Assets
------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 265,403 $ 254,270
Short-term investments, at cost which
approximates market................................... 3,740 2,414
Accounts receivable, less allowances:
9/00, $25,629; 12/99, $28,716......................... 438,657 432,224
Finance receivables, less allowances:
9/00, $38,773; 12/99, $48,056......................... 1,406,638 1,779,696
Inventories (Note 3)...................................... 287,451 257,452
Other current assets and prepayments...................... 138,740 128,662
Net assets of discontinued operations..................... - 487,856
------------- ------------
Total current assets.................................. 2,540,629 3,342,574
Property, plant and equipment, net (Note 4)................... 491,661 484,181
Rental equipment and related inventories, net (Note 4)........ 777,360 810,788
Property leased under capital leases, net (Note 4)............ 2,498 11,140
Long-term finance receivables, less allowances:
9/00, $55,394; 12/99, $56,665............................. 2,027,359 1,907,431
Investment in leveraged leases................................ 1,086,556 969,589
Goodwill, net of amortization:
9/00, $60,239; 12/99, $54,848............................. 227,557 226,764
Other assets.................................................. 615,280 470,205
------------- ------------
Total assets.................................................. $ 7,768,900 $ 8,222,672
============= ============
Liabilities and stockholders' equity
------------------------------------
Current liabilities:
Accounts payable and accrued liabilities.................. $ 937,159 $ 915,826
Income taxes payable...................................... 267,723 255,201
Notes payable and current portion of
long-term obligations ................................ 955,707 1,320,332
Advance billings.......................................... 380,899 381,405
------------- ------------
Total current liabilities............................. 2,541,488 2,872,764
Deferred taxes on income...................................... 1,171,575 1,082,019
Long-term debt (Note 5)....................................... 2,070,058 1,997,856
Other noncurrent liabilities.................................. 325,998 334,423
------------- ------------
Total liabilities..................................... 6,109,119 6,287,062
------------- ------------
Preferred stockholders' equity in a subsidiary company........ 310,000 310,000
Stockholders' equity:
Cumulative preferred stock, $50 par
value, 4% convertible................................. 29 29
Cumulative preference stock, no par
value, $2.12 convertible.............................. 1,776 1,841
Common stock, $1 par value................................ 323,338 323,338
Capital in excess of par value............................ 9,936 17,382
Retained earnings......................................... 3,694,940 3,437,185
Accumulated other comprehensive income (Note 8)........... (113,687) (93,015)
Treasury stock, at cost................................... (2,566,551) (2,061,150)
------------- ------------
Total stockholders' equity............................ 1,349,781 1,625,610
------------- ------------
Total liabilities and stockholders' equity.................... $ 7,768,900 $ 8,222,672
============= ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2000
Page 5
<TABLE>
Pitney Bowes Inc.
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
<CAPTION>
(Dollars in thousands)
Nine Months Ended
September 30,
--------------------------
2000 1999*
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 478,943 $ 458,089
Loss on disposal of discontinued operations................. - 24,938
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization........................ 236,384 302,084
Increase in deferred taxes on income................. 87,102 139,750
Pension plan investment.............................. - (67,000)
Change in assets and liabilities:
Accounts receivable.............................. (11,905) (23,380)
Net investment in internal finance receivables... (65,823) (58,506)
Inventories...................................... (34,097) 24,228
Other current assets and prepayments............. (13,153) (19,327)
Accounts payable and accrued liabilities......... (13,373) (35,306)
Income taxes payable............................. 15,676 52,126
Advance billings................................. 2,127 4,866
Other, net....................................... (9,048) (38,835)
----------- ----------
Net cash provided by operating activities........ 672,833 763,727
----------- ----------
Cash flows from investing activities:
Short-term investments...................................... (1,498) 2,320
Net investment in fixed assets.............................. (189,156) (234,305)
Net investment in finance receivables....................... (64,466) (138,580)
Net investment in capital and mortgage services............. 34,611 174,538
Investment in leveraged leases.............................. (120,821) (147,566)
Investment in mortgage servicing rights..................... - (21,800)
Proceeds and cash receipts from the sale of
discontinued operations.................................... 512,780 -
Net proceeds from the sale of credit card portfolio......... 321,746 -
Net investment in insurance contracts....................... (126,262) (36,341)
Other investing activities.................................. 358 13,040
----------- ----------
Net cash provided by (used in) investing activities 367,292 (388,694)
------------ ----------
Cash flows from financing activities:
(Decrease) increase in notes payable, net................... (276,760) 70,017
Proceeds from long-term obligations......................... 182,092 208,106
Principal payments on long-term obligations................. (196,271) (91,181)
Proceeds from issuance of stock............................. 25,229 40,702
Stock repurchases........................................... (538,141) (369,343)
Dividends paid.............................................. (221,188) (205,289)
----------- ----------
Net cash used in financing activities............ (1,025,039) (346,988)
----------- ----------
Effect of exchange rate changes on cash......................... (3,953) (1,672)
----------- ----------
Increase in cash and cash equivalents........................... 11,133 26,373
Cash and cash equivalents at beginning of period................ 254,270 125,684
----------- ----------
Cash and cash equivalents at end of period...................... $ 265,403 $ 152,057
=========== ==========
Interest paid................................................... $ 192,770 $ 171,234
=========== ==========
Income taxes paid, net.......................................... $ 99,614 $ 67,393
=========== ==========
<FN>
* Certain prior year amounts have been reclassified to conform with the 2000
presentation.
</FN>
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2000
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, 2000 and December 31, 1999, the results of its operations for the three
months and nine months ended September 30, 2000 and 1999 and its cash flows for
the nine months ended September 30, 2000 and 1999 have been included. Operating
results for the three and nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. These statements should be read in conjunction with the
financial statements and notes thereto included in the company's 1999 Annual
Report to Stockholders on Form 10-K.
Note 2:
-------
On January 14, 2000, the company sold its mortgage servicing business, Atlantic
Mortgage & Investment Corporation (AMIC), a wholly-owned subsidiary of the
company to, ABN AMRO North America. The company received approximately $484
million in cash at closing. The transaction is subject to post-closing
adjustments.
Revenue of AMIC was $26.3 million and $88.8 million for the three and nine
months ended September 30, 1999, respectively. Net interest expense allocated to
AMIC's discontinued operations was $.8 million and $4.5 million for the three
and nine months ended September 30, 1999, 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
realized due to borrowings against AMIC's escrow deposits as opposed to regular
commercial paper borrowings. On June 30, 1999, 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, the company recorded a gain of approximately $9.3
million (net of taxes of $5.7 million) representing the excess proceeds received
over the book value of the net Colonial Pacific Leasing Corporation assets sold
to General Electric Capital Corporation, net of related transaction costs.
Operating results of AMIC have been segregated and reported as discontinued
operations in the Consolidated Statements of Income for the nine months ended
September 30, 1999. Net assets of discontinued operations have been separately
classified in the Consolidated Balance Sheet at December 31, 1999. Cash flow
impacts of discontinued operations have not been segregated in the Consolidated
Statements of Cash Flows for the nine months ended September 30, 1999. Income
from discontinued operations related to AMIC for the nine months ended September
30, 1999 was approximately $1.0 million.
<TABLE>
<CAPTION>
Note 3:
-------
Inventories are comprised of the following:
(Dollars in thousands) September 30, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
Raw materials and work in process...................... $ 48,684 $ 41,149
Supplies and service parts............................. 122,559 122,726
Finished products...................................... 116,208 93,577
-------------- --------------
Total ................................................. $ 287,451 $ 257,452
============== ==============
</TABLE>
<TABLE>
<CAPTION>
Note 4:
-------
Fixed assets are comprised of the following:
(Dollars in thousands) September 30, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
Property, plant and equipment.......................... $ 1,180,016 $ 1,187,198
Accumulated depreciation............................... (688,355) (703,017)
-------------- --------------
Property, plant and equipment, net..................... $ 491,661 $ 484,181
============== ==============
Rental equipment and related inventories............... $ 1,610,355 $ 1,706,306
Accumulated depreciation............................... (832,995) (895,518)
-------------- --------------
Rental equipment and related inventories, net.......... $ 777,360 $ 810,788
============== ==============
Property leased under capital leases................... $ 19,082 $ 27,217
Accumulated amortization............................... (16,584) (16,077)
-------------- --------------
Property leased under capital leases, net.............. $ 2,498 $ 11,140
============== ==============
<FN>
In connection with the U.S.P.S meter migration, the company wrote off fully
depreciated rental equipment in the first quarter of 2000.
</FN>
</TABLE>
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2000
Page 7
Note 5:
-------
The company has a medium-term note facility, which was established as part of
the company's shelf registrations, permitting issuances of up to $500 million in
debt securities with a minimum maturity of nine months, of which $300 million
remained available at September 30, 2000.
On April 19, 2000, certain partnerships controlled by affiliates of PBCC issued
a total of $134 million of Series A and Series B Secured Fixed Rate Senior Notes
(the notes). The notes are due in 2003 and bear interest at 7.443 percent. The
proceeds from the notes were used to purchase subordinated debt obligations from
the company (PBI Obligations). The PBI Obligations have a principal amount of
$134 million and are due in 2010. The PBI Obligations bear interest at 8.073
percent for the first three years and reset in May 2003 and each third
anniversary of the first reset date.
On March 31, 2000, PBCC issued $43.3 million of 7.515 percent Senior Notes to
various holders maturing on January 10, 2012.
PBCC has $625 million of unissued debt securities available at September 30,
2000 from a shelf registration statement filed with the Securities and Exchange
Commission (SEC) in July 1998. As part of this shelf registration statement in
August 1999, PBCC established a medium-term note program for the issuance from
time to time of up to $500 million aggregate principal amount of Medium-Term
Notes, Series D, of which $375 million remained available at September 30, 2000.
Note 6:
-------
<TABLE>
A reconciliation of the basic and diluted earnings per share computations for
the three months ended September 30, 2000 and 1999 is as follows (in thousands,
except per share data):
2000 1999
------------------------------------ ------------------------------------
Per Per
Income Shares Share Income Shares Share
----------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing
operations $ 161,433 $ 186,077
Less:
Preferred stock
dividends - -
Preference stock
dividends (34) (37)
----------------------------------------------------------------- ------------------------------------
Basic earnings per
share $ 161,399 254,253 $ .63 $ 186,040 266,728 $ .70
----------------------------------------------------------------- ------------------------------------
Effect of dilutive
securities:
Preferred stock - 14 - 14
Preference stock 34 1,058 37 1,133
Stock options 669 3,024
Other 120 298
----------------------------------------------------------------- ------------------------------------
Diluted earnings per
share $ 161,433 256,114 $ .63 $ 186,077 271,197 $ .69
================================================================= ====================================
</TABLE>
<TABLE>
A reconciliation of the basic and diluted earnings per share computations for
the nine months ended September 30, 2000 and 1999 is as follows (in thousands,
except per share data):
2000 1999
------------------------------------ ------------------------------------
Per Per
Income Shares Share Income Shares Share
----------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing
operations $ 478,943 $ 482,056
Less:
Preferred stock
dividends - -
Preference stock
dividends (105) (114)
----------------------------------------------------------------- ------------------------------------
Basic earnings per
share $ 478,838 258,380 $ 1.85 $ 481,942 268,247 $ 1.80
----------------------------------------------------------------- ------------------------------------
Effect of dilutive
securities:
Preferred stock - 14 - 15
Preference stock 105 1,068 114 1,157
Stock options 983 3,321
Other 129 384
----------------------------------------------------------------- ------------------------------------
Diluted earnings per
share $ 478,943 260,574 $ 1.84 $ 482,056 273,124 $ 1.77
================================================================= ====================================
</TABLE>
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2000
Page 8
Note 7:
-------
Revenue and operating profit by business segment for the three and nine months
ended September 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
(Dollars in thousands) 2000 1999 2000 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Mailing and Integrated Logistics........... $ 752,298 $ 736,945 $ 2,283,357 $ 2,182,526
Office Solutions........................... 330,763 312,063 988,367 943,396
----------- ----------- ------------ ------------
Total Messaging Solutions.................. 1,083,061 1,049,008 3,271,724 3,125,922
Capital Services........................... 38,251 40,817 112,589 118,659
----------- ----------- ------------ ------------
Total revenue................................. $ 1,121,312 $ 1,089,825 $ 3,384,313 $ 3,244,581
=========== =========== ============ ============
Operating Profit: (1)
Mailing and Integrated Logistics........... $ 218,389 $ 194,928(2) $ 640,430 $ 563,565(2)
Office Solutions........................... 46,801 60,526 155,080 179,727
----------- ----------- ------------ ------------
Total Messaging Solutions.................. 265,190 255,454 795,510 743,292
Capital Services........................... 13,679 11,908 33,371 32,874
----------- ----------- ------------ ------------
Total operating profit........................ $ 278,869 $ 267,362 $ 828,881 $ 776,166
Unallocated amounts:
Net interest (corporate interest expense,
net of intercompany transactions)......... (20,623) (11,717) (53,892) (33,921)
Corporate expense.......................... (39,012) (26,182)(2) (85,248) (69,672)(2)
U.S.P.S. Settlement........................ - 49,574 - 49,574
----------- ----------- ------------ ------------
Income from continuing operations before
Income taxes................................. $ 219,234 $ 279,037 $ 689,741 $ 722,147
=========== =========== ============ ============
<FN>
(1) Operating profit excludes general corporate expenses, income taxes and net
interest other than that related to finance operations.
(2) Prior year amounts have been reclassified to conform with current year
presentation.
</FN>
</TABLE>
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2000
Page 9
Note 8:
-------
<TABLE>
Comprehensive income for the three and nine months ended September 30, 2000 and
1999 was as follows:
<CAPTION>
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income................................... $ 161,433 $ 186,077 $ 478,943 $ 458,089
Other comprehensive income:
Foreign currency translation
adjustments.............................. 1,111 (7,605) (20,672) (5,239)
----------- ----------- ----------- -----------
Comprehensive income......................... $ 162,544 $ 178,472 $ 458,271 $ 452,850
=========== =========== =========== ===========
</TABLE>
Note 9:
-------
In September 2000, Statement of Financial Accounting Standards (SFAS) No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" was issued, replacing SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No.
140 revises the standards for accounting for securitizations and other transfers
of financial assets and collateral, as well as requiring certain additional
disclosures. However, it carries over most of SFAS No. 125's provisions. SFAS
No. 140 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after March 31, 2001. However, it is
effective for the recognition and reclassification of collateral and for
disclosures relating to those transactions for the year ending December 31,
2000. The company is currently evaluating the impact, if any, of adopting the
statement.
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities", amended in June
2000 by SFAS No. 138, was issued. 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 or losses depends on the intended use of the derivative
and the resulting designation. The company is currently evaluating the impact of
this statement. SFAS No. 133, as amended, is effective January 1, 2001 for the
company.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," summarizing guidance in applying
generally accepted accounting principles to revenue recognition in financial
statements. Although the company believes it is in compliance with this guidance
in all material respects, the company is currently evaluating its current
revenue recognition policies to determine the impact of SAB No. 101. SAB No. 101
is effective for the fourth quarter of 2000.
Note 10:
--------
As part of a strategic alliance with U.S. Bank, a division of U.S. Bancorp, on
June 30, 2000 the company, through its PBCC subsidiary, sold its PitneyWorksSM
Business RewardsSM Visa(R) and Business Visa(R) card operations, including
credit card receivables of approximately $322 million. The company expects to
earn fees in connection with the strategic alliance with U.S. Bank. However, the
company will no longer originate credit card receivables and as a result will
not earn finance income on those balances. This alliance expands the company's
capabilities to capture a greater share of the growing small business market.
The new alliance will allow PitneyWorks.com, a division of the company which
focuses on small business solutions, to continue to market the credit card to
small business owners, while providing cardholders with full access to U.S.
Bank's respected network of financial resources. The transaction is subject to
post-closing adjustments.
Note 11:
--------
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, 2000
Page 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
Results of Continuing Operations - third quarter of 2000 vs. third quarter of
--------------------------------------------------------------------------------
1999
----
Revenue increased three percent in the third quarter of 2000 to $1,121.3 million
compared with $1,089.8 million in the third quarter of 1999. Income from
continuing operations decreased 13 percent to $161.4 million from $186.1 million
for the same period in 1999. Excluding one-time items from both periods, income
from continuing operations increased three percent to $160.6 million from $156.6
million for the same period in 1999. Included as one-time items in the third
quarter of 2000 are an after-tax charge of approximately $11 million related to
the consolidation of information technology staff and infrastructure, as well as
a $12 million tax benefit related to state tax law changes. The third quarter of
1999 included a one-time, net after-tax settlement of $29.5 million received
from the U.S. Postal Service. Excluding one-time items from both periods,
diluted earnings per share from continuing operations grew to 63 cents, an 8.7
percent increase from the third quarter of 1999.
Third quarter 2000 revenue included $551.9 million from sales, up four percent
from $529.6 million in the third quarter of 1999; $424.0 million from rentals
and financing, up one percent from $420.8 million; and $145.4 million from
support services, up four percent from $139.4 million.
Total Messaging Solutions, the combined results of the Mailing and Integrated
Logistics segment and Office Solutions segment, reported three percent revenue
growth and four percent operating profit growth.
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 2000,
revenue grew two percent and operating profit increased 12 percent. Core
metering and mail finishing applications performed in line with expectations
during the quarter, however these results were offset by softer than anticipated
results in mail creation and logistics product lines as the weakening economic
environment and slower customer decision-making for the higher-value, more
complex products adversely impacted revenue. Revenue growth was also negatively
impacted by the sale of the credit card portfolio at the end of the second
quarter 2000 and the negative impact of foreign currency, principally related to
the British Pound and the Euro. Operating profit benefited from improving rental
and financing margins in the core mail finishing business.
The Office Solutions segment includes Pitney Bowes Office Systems and Pitney
Bowes Management Services. During the third quarter of 2000, revenue grew six
percent and operating profit declined 23 percent.
Office Systems, comprised of Copier and Facsimile, grew revenues six percent for
the quarter, while operating profit declined due in part to significant pricing
pressure in the copier and facsimile market. Margin impacts associated with the
ongoing transition to a rental revenue model for large national accounts in the
copier business and the relative value of the yen also negatively impacted
operating profit.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2000
Page 11
Pitney Bowes Management Services' revenue grew seven percent as the company
continues to pursue disciplined, profitable growth through providing higher
value services, to both new and existing customers.
The Capital Services segment includes primarily asset- and fee-based income
generated by large ticket non-core asset transactions. During the quarter,
revenue decreased six percent and operating profit increased 15 percent. This
performance is consistent with the company's previously stated strategy to
concentrate on fee-based income opportunities.
Cost of sales decreased to 56.2 percent of sales revenue in the third quarter of
2000 compared with 56.7 percent in the third quarter of 1999. This was due
primarily to lower product costs resulting from productivity improvements.
Cost of rentals and financing decreased to 25.9 percent of related revenues in
the third quarter of 2000 compared with 28.1 percent in the third quarter of
1999. This was due primarily to lower depreciation of rental equipment.
Excluding the one-time charge related to the consolidation of information
technology staff and infrastructure, selling, service and administrative
expenses were 34.2 percent of revenue in the third quarter of 2000 compared with
34.5 percent in the third quarter of 1999. This was due primarily to the
company's continued emphasis on controlling operating expenses.
Research and development expenses increased 10.1 percent to $27.6 million in the
third quarter of 2000 compared with $25.1 million in the third quarter of 1999.
The increase reflects the company's continued commitment to developing new
technologies and other mailing and software products.
Net interest expense increased to $51.9 million in the third quarter of 2000
from $41.3 million in the third quarter of 1999. The increase is due mainly to
higher interest rates associated with borrowings to fund the share repurchase
program.
The effective tax rate for the third quarter of 2000 was 26.4 percent compared
with 33.3 percent in 1999. The decrease in the effective tax rate was primarily
due to a one-time tax benefit related to recent state tax law changes.
Excluding one-time items from both periods, income from continuing operations
and diluted earnings per share from continuing operations increased 2.6 percent
and 8.7 percent, respectively. The reason for the increase in diluted earnings
per share outpacing the increase in income from continuing operations was the
company's share repurchase program.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2000
Page 12
Results of Continuing Operations - nine months of 2000 vs. nine months of 1999
------------------------------------------------------------------------------
For the first nine months of 2000 compared with the same period of 1999, revenue
increased four percent to $3,384.3 million while income from continuing
operations decreased one percent to $478.9 million. Excluding one-time items
from both periods, income from continuing operations increased 5.7 percent to
$478.1 million. The factors that affected revenue and earnings performance
included those cited for the third quarter of 2000 versus 1999.
On October 4, 2000 the Company advised that it expected full-year 2000 earnings
per share to be in the $2.44 to $2.48 range before one-time items. Two factors
drove this change in guidance:
o Increased margin pressure in the highly competitive office products markets
is having an adverse impact on operating profit in the Office Solutions
segment.
o Foreign currency weakness, and softer than anticipated results, particularly
in certain segments of the mail creation and logistics product lines of the
Mailing and Integrated Logistics segment, are expected to result in reduced
revenue growth rates in the fourth quarter.
Consolidated revenue growth in the fourth quarter 2000 is estimated to be flat
to slightly down, due principally to flat to slightly down revenue growth in the
Mailing and Integrated Logistics segment, which will be negatively impacted by
currency, the lack of Credit Card revenues and lower growth in certain systems
based mail creation and logistics product lines. Additionally, there are
expected to be less favorable comparisons in the Capital Services segment
because of higher asset sales revenue in the fourth quarter 1999.
Discontinued Operations
-----------------------
On January 14, 2000, the company sold Atlantic Mortgage & Investment Corporation
(AMIC), a wholly-owned subsidiary of the company to, ABN AMRO North America. The
company received approximately $484 million in cash at closing. The transaction
is subject to post-closing adjustments. See Note 2 to the consolidated financial
statements.
Accounting Pronouncements
-------------------------
In September 2000, Statement of Financial Accounting Standards (SFAS) No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" was issued, replacing SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No.
140 revises the standards for accounting for securitizations and other transfers
of financial assets and collateral, as well as requiring certain additional
disclosures. However, it carries over most of SFAS No. 125's provisions. SFAS
No. 140 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after March 31, 2001. However, it is
effective for the recognition and reclassification of collateral and for
disclosures relating to those transactions for the year ending December 31,
2000. The company is currently evaluating the impact, if any, of adopting the
statement.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2000
Page 13
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities", amended in June
2000 by SFAS No. 138, was issued. 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 or losses depends on the intended use of the derivative
and the resulting designation. The company is currently evaluating the impact of
this statement. SFAS No. 133, as amended, is effective January 1, 2001 for the
company.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," summarizing guidance in applying generally accepted accounting
principles to revenue recognition in financial statements. Although the company
believes it is in compliance with this guidance in all material respects, the
company is currently evaluating its current revenue recognition policies to
determine the impact of SAB No. 101. SAB No. 101 is effective for the fourth
quarter of 2000.
Other Matters
-------------
Included in selling, service and administrative expenses in the third quarter of
2000 is a one-time pre-tax charge of approximately $19 million (approximately
$11 million after-tax) related to the consolidation of information technology
staff and infrastructure. This initiative is focused on creating an efficient
global organization and technology platform to leverage the benefits of our
current Enterprise-wide Resource Planning (ERP) and e-business initiatives. The
third quarter of 2000 also includes a one-time tax benefit of $12 million
related to recent state tax law changes.
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 is 1 to 1 at September 30,
2000 compared with 1.16 to 1 at December 31, 1999. The decrease was due
primarily to the sale of AMIC's net assets in January 2000.
As part of a strategic alliance with U.S. Bank, a division of U.S. Bancorp, on
June 30, 2000 the company, through Pitney Bowes Credit Corporation (PBCC), its
wholly-owned subsidiary, sold its PitneyWorksSM Business RewardsSM Visa(R) and
Business Visa(R) card operations, including credit card receivables of
approximately $322 million. The company expects to earn fees in connection with
the strategic alliance with U.S. Bank. However, the company will no longer
originate credit card receivables and as a result will not earn finance income
on those balances. This alliance expands the company's capabilities to capture a
greater share of the growing small business market. The new alliance will allow
PitneyWorks.com, a division of the company which focuses on small business
solutions, to continue to market the credit card to small business owners, while
providing cardholders with full access to U.S. Bank's respected network of
financial resources. The transaction is subject to post-closing adjustments.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2000
Page 14
The company has a medium-term note facility which was established as part of the
company's shelf registrations, permitting issuances of up to $500 million in
debt securities with a minimum maturity of nine months, of which $300 million
remained available at September 30, 2000.
On April 19, 2000, certain partnerships controlled by affiliates of PBCC issued
a total of $134 million of Series A and Series B Secured Fixed Rate Senior Notes
(the notes). The notes are due in 2003 and bear interest at 7.443 percent. The
proceeds from the notes were used to purchase subordinated debt obligations from
the company (PBI Obligations). The PBI Obligations have a principal amount of
$134 million and are due in 2010. The PBI Obligations bear interest at 8.073
percent for the first three years and reset in May 2003 and each third
anniversary of the first reset date. The proceeds from the PBI Obligations were
used for general corporate purposes, including the repayment of commercial
paper.
On March 31, 2000, PBCC issued $43.3 million of 7.515 percent Senior Notes to
various holders maturing on January 10, 2012. The proceeds from these notes were
used to pay down commercial paper.
PBCC has $625 million of unissued debt securities available at September 30,
2000 from a shelf registration statement filed with the SEC in July 1998. As
part of this shelf registration statement in August 1999, PBCC established a
medium-term note program for the issuance from time to time of up to $500
million aggregate principal amount of Medium-Term Notes, Series D, of which $375
million remained available at September 30, 2000.
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 and existing shelf registration statements and existing
commercial paper 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 71.2
percent at September 30, 2000 compared with 69.1 percent at December 31, 1999.
Book value per common share decreased to $5.33 at September 30, 2000 from $6.13
at December 31, 1999 driven primarily by the repurchase of common shares. During
the third quarter of 2000 , the company repurchased 2.9 million common shares
for $105.8 million.
To control the impact of interest rate risk 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.
Capital Investments
-------------------
In the first nine months of 2000, net investments in fixed assets included $75.5
million in net additions to property, plant and equipment and $113.7 million in
net additions to rental equipment and related inventories compared with $70.6
million and $163.7 million, respectively, in the same period in 1999. 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, 2000, 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, 2000
Page 15
Regulatory Matters
------------------
In 2000, the U.S.P.S. issued a proposed schedule for the phaseout of manually
reset electronic meters in the U.S. as follows:
o As of February 1, 2000, new placements of manually reset electronic meters
are no longer permitted.
o Current users of manually reset electronic meters can continue to use these
meters for the term of their current rental and lease agreements. Leases or
rentals due to expire in the year 2000 can be extended to December 31, 2001.
In August 2000, the U.S.P.S. also issued a proposal to cease placements of
non-digital, or letterpress, meters as follows:
o New placements of non-digital meters with a "timeout" feature that enables
the meters to be automatically disabled, if not reset within a specified
time period are no longer permitted after December 2003.
o New placements of non-digital meters without the "timeout" feature are no
longer permitted after June 2001.
The company has submitted comments to the U.S.P.S. proposed schedules described
above. Based on the proposed schedules, the company believes that the phaseout
of manually reset electronic meters or non-digital meters will not cause a
material adverse financial impact on the company.
In May 1995, the U.S.P.S. publicly announced its concept of its Information
Based Indicia Program (IBIP) for future postage evidencing devices. As initially
stated by the U.S.P.S., the purpose of the program was to develop a new standard
for future digital postage evidencing devices which would significantly enhance
postal revenue security and support expanded U.S.P.S. value-added services to
mailers.
During the period from May 1995 through May 2000, the company submitted
extensive comments to a series of proposed IBIP specifications issued by the
U.S.P.S. In March 2000, the U.S.P.S. issued 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). The company has submitted comments to the IBI Performance
Criteria. In September and October 2000, the U.S.P.S. issued further proposed
regulations regarding postage evidencing systems using Information Based
Indicia, titled "Refunds and Exchanges" and "Production, Distribution and Use of
Postal Security Devices and Information-Based Indicia." The Company will be
submitting comments regarding those proposed regulations.
In March 2000, the company received approval from the U.S.P.S. for the
commercial launch of the Internet version of a product which satisfies the
proposed IBI Performance Criteria, ClickStampTM Online.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2000
Page 16
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. Words such as
"estimate," "project," "plan," "believe," "expect," and similar expressions may
identify such forward-looking statements. Some of the factors which could cause
future financial performance to differ materially from the expectations as
expressed in any forward-looking statement made by or on behalf of the company
include:
o changes in postal regulations
o timely development and acceptance of new products
o success in gaining product approval in new markets where regulatory approval
is required
o successful entry into new markets
o mailers' utilization of alternative means of communication or competitors'
products
o the company's success at managing customer credit risk
o changes in interest rates
o foreign currency fluctuations
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 U.S. 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.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2000
Page 17
Item 5: Other Information
PricewaterhouseCoopers LLP (PwC) has informed the company and the Board of
Directors that it has notified the SEC that there was a delay in the transfer
from PwC's control of certain retirement and other benefits which were due to
the chair of the Audit Committee of the Board of Directors of the company, as a
former partner of Coopers & Lybrand, a predecessor of PwC. PwC has informed the
company that these transfers should have occurred in May 1999, but were
completed on March 23, 2000. The SEC has advised the company that because of
this delay, PwC was not in compliance with its auditor independence regulations.
The SEC has further advised the company that it does not intend to take any
action against the company with respect to the company's financial statements as
a result of PwC's noncompliance. The Board of Directors, which is currently
composed of nine non-employee and two employee members, has reviewed this
situation and has concluded, based on its examination and review, that the
delayed transfer of these benefits did not affect the quality or integrity of
PwC's audit of the company's financial statements.
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 19, 2000, the company filed a current report on Form 8-K pursuant to
Item 5 thereof, reporting the Press Release dated October 17, 2000 for the
quarter ended September 30, 2000.
On October 5, 2000, the company filed a current report on Form 8-K pursuant to
Item 5 thereof, reporting the Press Release dated October 4, 2000 for the
revised financial outlook for the periods ended September 30, 2000 and December
31, 2000.
On July 21, 2000, the company filed a current report on Form 8-K pursuant to
Item 5 thereof, reporting the Press Release dated July 18, 2000 for the quarter
ended June 30, 2000.
<PAGE>
Pitney Bowes Inc. - Form 10-Q
Nine Months Ended September 30, 2000
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 14, 2000
/s/ B. P. Nolop
-----------------------------------
B. P. Nolop
Executive 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
