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 March 31, 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 April
30, 1999 is 268,611,404.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1999
Page 2
Pitney Bowes Inc.
Index
-----------------
Page Number
-----------
Part I - Financial Information
Item 1: Financial Statements
Consolidated Statements of Income - Three Months
Ended March 31, 1999 and 1998........................... 3
Consolidated Balance Sheets - March 31, 1999
and December 31, 1998................................... 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998.............. 5
Notes to Consolidated Financial Statements................. 6 - 9
Item 2: Management's Discussion and Analysis of
Financial Condition and
Results of Operations............................ 10 - 16
Part II - Other Information
Item 1: Legal Proceedings.................................. 17
Item 6: Exhibits and Reports on Form 8-K................... 17
Signatures ...................................................... 18
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1999
Page 3
Part I - Financial Information
Item 1. Financial Statements.
Pitney Bowes Inc.
Consolidated Statements of Income
(Unaudited)
---------------------------------
(Dollars in thousands, except per share data)
Three Months Ended March 31,
-------------------------------
1999 1998*
--------------- -------------
Revenue from:
Sales........................................................... $ 510,382 $ 450,425
Rentals and financing........................................... 438,223 403,683
Support services................................................ 133,217 122,989
--------------- -------------
Total revenue................................................. 1,081,822 977,097
--------------- -------------
Costs and expenses:
Cost of sales................................................... 296,719 275,000
Cost of rentals and financing................................... 139,481 118,889
Selling, service and administrative............................. 361,028 330,982
Research and development........................................ 25,904 23,631
Interest, net................................................... 43,610 35,056
--------------- -------------
Total costs and expenses...................................... 866,742 783,558
--------------- -------------
Income from continuing operations before
income taxes.................................................... 215,080 193,539
Provision for income taxes........................................ 72,809 66,605
--------------- -------------
Income from continuing operations................................. 142,271 126,934
Discontinued operations (Note 2).................................. - 2,753
--------------- -------------
Net income........................................................ $ 142,271 $ 129,687
=============== =============
Basic earnings per share: ........................................
Continuing operations........................................... $ .53 $ .45
Discontinued operations......................................... - .01
--------------- -------------
Net income...................................................... $ .53 $ .46
=============== =============
Diluted earnings per share: ......................................
Continuing operations........................................... $ .52 $ .45
Discontinued operations......................................... - .01
--------------- -------------
Net income...................................................... $ .52 $ .46
=============== =============
Dividends declared per share of
common stock.................................................... $ .255 $ .225
=============== =============
Ratio of earnings to fixed charges................................ 4.37 4.68
=============== =============
Ratio of earnings to fixed
charges excluding minority interest............................. 4.64 5.07
=============== =============
* Reclassified to reflect discontinued operations.
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1999
Page 4
Pitney Bowes Inc.
Consolidated Balance Sheets
---------------------------
(Dollars in thousands, except share data) March 31, December 31,
1999 1998
----------- ------------
Assets (unaudited)
- ------
Current assets:
Cash and cash equivalents......................................... $ 129,687 $ 125,684
Short-term investments, at cost which
approximates market............................................. 1,654 3,302
Accounts receivable, less allowances:
3/99, $25,667; 12/98, $24,665................................... 419,002 382,406
Finance receivables, less allowances:
3/99, $51,114; 12/98, $51,232................................... 1,543,328 1,400,786
Inventories (Note 3).............................................. 260,727 266,734
Other current assets and prepayments.............................. 350,659 330,051
----------- -----------
Total current assets............................................ 2,705,057 2,508,963
Property, plant and equipment, net (Note 4)......................... 474,985 477,476
Rental equipment and related
inventories, net (Note 4)......................................... 829,470 806,585
Property leased under capital
leases, net (Note 4).............................................. 3,418 3,743
Long-term finance receivables, less allowances:
3/99, $78,816; 12/98, $79,543..................................... 1,941,355 1,999,339
Investment in leveraged leases...................................... 841,780 827,579
Goodwill, net of amortization:
3/99, $49,588; 12/98, $47,514..................................... 223,213 222,980
Other assets (Note 5)............................................... 823,025 814,374
----------- -----------
Total assets........................................................ $ 7,842,303 $ 7,661,039
=========== ===========
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities:
Accounts payable and
accrued liabilities............................................. $ 830,084 $ 898,548
Income taxes payable.............................................. 224,865 194,443
Notes payable and current portion of
long-term obligations........................................... 1,483,599 1,259,193
Advance billings.................................................. 393,829 369,628
----------- -----------
Total current liabilities....................................... 2,932,377 2,721,812
Deferred taxes on income............................................ 949,322 920,521
Long-term debt (Note 6)............................................. 1,710,427 1,712,937
Other noncurrent liabilities........................................ 354,801 347,670
----------- -----------
Total liabilities............................................... 5,946,927 5,702,940
Preferred stockholders' equity in a
subsidiary company................................................ 310,000 310,097
Stockholders' equity:
Cumulative preferred stock, $50 par
value, 4% convertible........................................... 34 34
Cumulative preference stock, no par
value, $2.12 convertible........................................ 1,976 2,031
Common stock, $1 par value........................................ 323,338 323,338
Capital in excess of par value.................................... 13,807 16,173
Retained earnings................................................. 3,146,946 3,073,839
Accumulated other comprehensive income (Note 8)................... (88,665) (88,217)
Treasury stock, at cost........................................... (1,812,060) (1,679,196)
----------- -----------
Total stockholders' equity...................................... 1,585,376 1,648,002
----------- -----------
Total liabilities and stockholders' equity.......................... $ 7,842,303 $ 7,661,039
=========== ===========
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1999
Page 5
Pitney Bowes Inc.
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
(Dollars in thousands) Three Months Ended March 31,
-----------------------------
1999 1998*
----------- ------------
Cash flows from operating activities:
Net income........................................................ $ 142,271 $ 129,687
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization................................. 99,418 79,916
Increase in deferred taxes on income.......................... 27,417 32,864
Pension plan investment....................................... (67,000) -
Change in assets and liabilities:
Accounts receivable......................................... (37,868) (671)
Net investment in internal finance receivables.............. 6,962 (14,607)
Inventories................................................. 5,816 6,641
Other current assets and prepayments........................ (1,237) (4,534)
Accounts payable and accrued liabilities.................... 3,350 (9,999)
Income taxes payable........................................ 30,016 21,743
Advance billings............................................ 24,243 15,590
Other, net.................................................... (22,858) (5,503)
----------- -----------
Net cash provided by operating activities................... 210,530 251,127
----------- -----------
Cash flows from investing activities:
Short-term investments............................................ 1,636 (33,314)
Net investment in fixed assets.................................... (91,797) (79,074)
Net investment in external finance receivables.................... (109,472) (214,507)
Investment in leveraged leases.................................... (12,950) (34,151)
Investment in mortgage servicing rights........................... (7,380) (86,611)
Other investing activities........................................ (1,476) 378
----------- -----------
Net cash used in investing activities....................... (221,439) (447,279)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in notes payable, net......................... 225,011 (258,098)
Proceeds from long-term obligations............................... 1,633 554,123
Principal payments on long-term obligations....................... (6,008) (4,205)
Proceeds from issuance of stock................................... 7,105 5,546
Stock repurchases................................................. (142,437) (56,452)
Dividends paid.................................................... (69,164) (62,941)
----------- -----------
Net cash provided by financing activities................... 16,140 177,973
----------- -----------
Effect of exchange rate changes on cash............................. (1,228) (1,694)
----------- -----------
Increase (decrease) in cash and cash equivalents.................... 4,003 (19,873)
Cash and cash equivalents at beginning of period.................... 125,684 137,073
----------- -----------
Cash and cash equivalents at end of period.......................... $ 129,687 $ 117,200
=========== ===========
Interest paid....................................................... $ 54,483 $ 34,869
=========== ===========
Income taxes paid, net.............................................. $ 18,567 $ 14,922
=========== ===========
* Certain prior year amounts have been reclassified to conform with the 1999
presentation.
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 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 March 31, 1999 and December 31, 1998, and the results of its
operations and cash flows for the three months ended March 31, 1999 and 1998
have been included. Operating results for the three months ended March 31,
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 October 30, 1998, Colonial Pacific Leasing Corporation (CPLC), a
wholly-owned subsidiary of the company, transferred the operations,
employees and substantially all assets related to its broker-oriented
external financing business to General Electric Capital Corporation (GECC),
a subsidiary of the General Electric Company. The company received
approximately $790 million at closing, which approximates the book value of
the net assets sold or otherwise disposed of and related transaction costs.
The transaction is subject to post-closing adjustments pursuant to the terms
of the purchase agreement with GECC entered into on October 12, 1998. The
company does not expect the effect of any adjustments to be significant.
Operating results of CPLC have been segregated and reported as discontinued
operations for the three months ended March 31, 1998. Cash flow impacts of
discontinued operations have not been segregated in the Consolidated
Statements of Cash Flows for the three months ended March 31, 1998. Revenue
of CPLC was $34.5 million for the three months ended March 31, 1998. Income
from discontinued operations includes allocated interest expense of $10.5
million for the three months ended March 31, 1998. Interest expense has been
allocated based on CPLC's intercompany borrowing levels with Pitney Bowes
Credit Corporation (PBCC), charged at PBCC's weighted average borrowing
rate.
Note 3:
- ------
Inventories are comprised of the following:
(Dollars in thousands) March 31, December 31,
1999 1998
---------- ------------
Raw materials and work in process..................................... $ 42,985 $ 54,001
Supplies and service parts............................................ 105,276 106,864
Finished products..................................................... 112,466 105,869
---------- ------------
Total................................................................. $ 260,727 $ 266,734
========== ============
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1999
Page 7
Note 4:
- ------
Fixed assets are comprised of the following:
(Dollars in thousands) March 31, December 31,
1999 1998
---------- ------------
Property, plant and equipment................................. $1,160,064 $ 1,153,573
Accumulated depreciation...................................... (685,079) (676,097)
---------- ------------
Property, plant and equipment, net............................ $ 474,985 $ 477,476
========== ============
Rental equipment and related inventories...................... $1,727,337 $ 1,706,995
Accumulated depreciation...................................... (897,867) (900,410)
---------- ------------
Rental equipment and related inventories, net................. $ 829,470 $ 806,585
========== ============
Property leased under capital leases.......................... $ 18,862 $ 19,430
Accumulated amortization...................................... (15,444) (15,687)
---------- ------------
Property leased under capital leases, net..................... $ 3,418 $ 3,743
========== ============
Note 5:
- ------
The cost of rights to service mortgage loans, whether those servicing rights are
originated or purchased, are capitalized and included in other assets in the
Consolidated Balance Sheets. These costs are amortized in proportion to and over
the period of estimated net servicing income. The company assesses impairment of
Mortgage Servicing Rights (MSRs) based on the fair value of those rights. The
company estimates the fair value of MSRs based on estimated future net servicing
income, using a valuation model which considers such factors as market discount
rates, consensus loan prepayment predictions, servicing costs and other economic
factors. For purposes of impairment valuation, the company stratifies MSRs based
on predominant risk characteristics of the underlying loans, including loan
type, amortization type (fixed or adjustable) and note rate. To the extent that
the carrying value of MSRs exceeds the fair value by individual stratum, a
valuation reserve is established, which is adjusted as the value of MSRs
increases or decreases. Based on an evaluation performed as of March 31, 1999,
no additional impairment was recognized in the company's MSRs portfolio.
Note 6:
- ------
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.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1999
Page 8
Note 7:
- ------
A reconciliation of the basic and diluted earnings per share computations for
income from continuing operations for the three months ended March 31, 1999 and
1998 is as follows (in thousands, except per share data):
1999 1998
-------------------------------------- ----------------------------------------
Per Per
Income Shares Share Income Shares Share
------------------------------------------------------------------------- ----------------------------------------
Income from continuing
operations $142,271 $ 126,934
Less:
Preferred stock
dividends - -
Preference stock
dividends (39) (42)
------------------------------------------------------------------------- ----------------------------------------
Basic earnings per
share $142,232 269,789 $ .53 $ 126,892 279,408 $ .45
------------------------------------------------------------------------- ----------------------------------------
Effect of dilutive
securities:
Preferred stock - 17 - 17
Preference stock 39 1,179 42 1,292
Stock options 3,533 2,718
Other 444 436
========================================================================= ========================================
Diluted earnings per
share $142,271 274,962 $ .52 $ 126,934 283,871 $ .45
========================================================================= ========================================
Note 8:
- -------
Comprehensive income for the three months ended March 31, 1999 and 1998 was as
follows:
(Dollars in thousands)
1999 1998
-------- --------
Net income.................................. $142,271 $129,687
Other comprehensive income:
Foreign currency translation adjustments.... (448) (10,039)
-------- --------
Comprehensive income........................ $141,823 $119,648
======== ========
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1999
Page 9
Note 9:
- ------
Revenue and operating profit by business segment for the three months ended
March 31, 1999 and 1998 were as follows:
(Dollars in thousands) 1999 1998
----------- ----------
Revenue:
Mailing and Integrated Logistics.................... $ 698,629 $ 626,240
Office Solutions.................................... 314,580 291,182
Mortgage Servicing.................................. 32,498 23,312
Capital Services.................................... 36,115 36,363
----------- ---------
Total revenue $ 1,081,822 $ 977,097
=========== =========
Operating Profit:
Mailing and Integrated Logistics.................... $ 174,525 $ 144,979
Office Solutions.................................... 58,545 52,459
Mortgage Servicing.................................. 5,700 6,913
Capital Services.................................... 8,182 8,345
----------- ---------
Total operating profit................................. $ 246,952 $ 212,696
Unallocated amounts:
Net interest (corporate interest expense,
net of intercompany transactions).................. (10,761) (1,284)
Corporate expense................................... (21,111) (17,873)
----------- --------
Income from continuing operations before
income taxes.......................................... $ 215,080 $ 193,539
=========== =========
Note 10:
- -------
In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities", was issued. This statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999 (January 1, 2000 for the company) and requires that an entity recognize all
derivative instruments as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Changes in the
fair value of those instruments will be reflected as gains or losses. The
accounting for the gains and losses depends on the intended use of the
derivative and the resulting designation. The company is currently evaluating
the impact of this statement.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1999
Page 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
Results of Operations - first quarter of 1999 vs. first quarter of 1998
- -----------------------------------------------------------------------
Revenue increased 11 percent in the first quarter of 1999 to $1,081.8 million
compared with $977.1 million in the first quarter of 1998. Revenue for the first
quarter of 1999 includes $10 million from the sale of PROM (memory) chips and
scale charts associated with the United States Postal Service rate increase.
Income from continuing operations increased 12 percent to $142.3 million from
$126.9 million for the same period in 1998. Diluted earnings per share from
continuing operations grew to 52 cents, a 15.7 percent increase from the first
quarter of 1998.
First quarter 1999 revenue included $510.4 million from sales, up 13 percent
from $450.4 million in the first quarter of 1998; $438.2 million from rentals
and financing, up nine percent from $403.7 million; and $133.2 million from
support services, up eight percent from $123.0 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 first quarter of 1999,
revenue grew 12 percent and operating profit increased 20 percent, which
included significant improvements in operating profit from international
operations. Excluding the sales of memory chips and scale charts related to the
U.S. postal rate increase, revenue grew 10 percent.
The Office Solutions Segment includes Pitney Bowes Office Systems and Pitney
Bowes Management Services. During the first quarter of 1999, revenue grew eight
percent and operating profit increased 12 percent.
Pitney Bowes Management Services' revenue grew nine percent as the company
pursued its strategy of disciplined, profitable expansion, while providing
superior customer service. These efforts, in conjunction with improved operating
efficiencies, continued to drive operating profit growth at a faster pace than
revenue growth.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1999
Page 11
The Mortgage Servicing Segment represents the operations of Atlantic Mortgage
and Investment Corporation (AMIC). During the first quarter of 1999, revenue
grew 39 percent while operating profit decreased 18 percent. This quarter's
performance reflects industry-wide conditions which resulted in higher rates of
mortgage pre-payments and associated additional amortization costs compared to
the first quarter of 1998. As announced last quarter, the company continues to
explore a range of strategic options to address the changing profile of this
business in a way that maximizes shareholder value.
The Capital Services Segment includes primarily asset- and fee-based income
generated by large ticket external assets. During the quarter, revenue decreased
by one percent and operating profit decreased two percent. The anticipated
revenue and operating profit declines relative to first quarter 1998 are
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 58.1 percent of sales revenue in the first quarter of
1999 compared with 61.1 percent in the first quarter of 1998. This was due
primarily to higher PROM revenue and increased sales of higher margin products
at U.S. Mailing Systems.
Cost of rentals and financing increased to 31.8 percent of related revenues in
the first quarter of 1999 compared with 29.5 percent in the first quarter of
1998. This was due mainly to higher depreciation expense from increased
placements of digital and electronic meters and increased expenses relating to
purchased mortgage servicing rights.
Selling, service and administrative expenses were 33.4 percent of revenue in the
first quarter of 1999 compared with 33.9 percent in the first quarter of 1998.
This improvement was due primarily to the company's continued emphasis on
controlling operating expenses.
Research and development expenses increased 9.6 percent to $25.9 million in the
first quarter of 1999 compared with $23.6 million in 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 $43.6 million in the first quarter of 1999
from $35.1 million in the first quarter of 1998. The increase is due mainly to
increased debt to fund the share repurchase program.
The effective tax rate for the first quarter of 1999 was 33.9 percent compared
with 34.4 percent in the first quarter of 1998.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1999
Page 12
Income from continuing operations and diluted earnings per share from continuing
operations increased 12.1 percent and 15.7 percent, respectively, compared to
the first quarter of 1998 due to the factors discussed above. 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.
Other Matters
- -------------
On October 30, 1998, Pitney Bowes Inc. (the company) sold its broker-oriented
small-ticket leasing business to General Electric Capital Corporation (GECC), a
subsidiary of General Electric Company. As part of the sale, the operations,
employees and substantially all the assets of Colonial Pacific Leasing
Corporation (CPLC) were transferred to GECC. The company received approximately
$790 million at closing, which approximates the book value of the net assets
sold or otherwise disposed of and related transaction costs. The transaction is
subject to post-closing adjustments. The company does not expect the effect of
any adjustments to be significant. Operating results of CPLC have been reported
separately as discontinued operations in the Consolidated Statements of Income.
New Pronouncements
- ------------------
In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities", was issued. This statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999 (January 1, 2000 for the company) and requires that an entity recognize all
derivative instruments as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Changes in the
fair value of those instruments will be reflected as gains or losses. The
accounting for the gains and losses depends on the intended use of the
derivative and the resulting designation. The company is currently evaluating
the impact of this statement.
Liquidity and Capital Resources
- -------------------------------
The ratio of current assets to current liabilities of .92 to 1 at March 31, 1999
remained the same as at December 31, 1998.
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 Inc. - Form 10-Q
Three Months Ended March 31, 1999
Page 13
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 and existing shelf registration statements and existing
commercial and medium-term note programs.
The ratio of total debt to total debt and stockholders' equity including the
preferred stockholders' equity in a subsidiary company in total debt was 68.9
percent at March 31, 1999 compared with 66.6 percent at December 31, 1998. Book
value per common share decreased to $5.90 at March 31, 1999 from $6.09 at
December 31, 1998 driven primarily by the repurchase of common shares. During
the quarter ended March 31, 1999, the company repurchased approximately 2.2
million common shares for $142.4 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
- ---------
In 1997, the company established a formal worldwide program to identify and
resolve the impact of the Year 2000 date processing issue on the company's
business systems, products and supporting infrastructure. This includes a
comprehensive review of the company's information technology (IT) and non-IT
systems, software, and embedded processors. The program structure has strong
executive sponsorship and consists of a Year 2000 steering committee of senior
business and technology management, a Year 2000 program office of full-time
project management, and subject matter experts and dedicated business unit
project teams. The company has also engaged independent consultants to perform
periodic program reviews and assist in systems assessment and test plan
development.
The program encompasses the following phases: an inventory of affected
technology and critical third party suppliers, an assessment of Year 2000
readiness, resolution, unit and integrated testing and contingency planning. The
company completed its worldwide inventory and assessment of all business
systems, products, and supporting infrastructure. Required modifications were
substantially completed, tested and moved to production by year-end 1998. Final
system integration testing is underway and expected to be complete by mid-1999.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1999
Page 14
As part of ongoing product development efforts, the company's recently
introduced products are Year 2000 compliant. Over 95 percent of our installed
product base, including all postage meters and copier and facsimile systems, are
already Year 2000 compliant. For products not compliant, upgrades or
replacements are available. Detailed product compliance information is available
on the company's Web site (www.pitneybowes.com/year2000).
The company relies on third parties for many systems, products and services. The
company could be adversely impacted if third parties do not make necessary
changes to their own systems and products successfully and in a timely manner.
We have established a formal process to identify, assess and monitor the year
2000 readiness of critical third parties. This process includes regular meetings
with critical suppliers, including telecommunication carriers and utilities, as
well as business partners, including postal authorities. Although there are no
known problems at this time, the company is unable to predict with certainty
whether such third parties will be able to address their Year 2000 problems on a
timely basis.
The company estimates the total cost of the worldwide program from inception in
1997 through the Year 2000 to be approximately $38 million to $42 million, of
which approximately $25 million was incurred through March 31, 1999. These
costs, which are funded through the company's cash flows, include both internal
labor costs as well as consulting and other external costs. These costs are
incorporated in the company's budgets and are being expensed as incurred.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from
uncertainty about the Year 2000 readiness of third parties, the company is
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on the company's results of operations, liquidity or
financial condition. However, the company continues to evaluate its Year 2000
risks and is finalizing contingency plans to mitigate the impact of any
potential Year 2000 disruptions. We expect to complete our contingency plans by
the second quarter of 1999.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1999
Page 15
Capital Investments
- -------------------
In the first quarter of 1999, net investments in fixed assets included $22.1
million in net additions to property, plant and equipment and $69.7 million in
net additions to rental equipment and related inventories compared with $22.3
million and $56.8 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.
At March 31, 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 5% of the company's installed U.S. meter base at March
31, 1999, compared with approximately 10% at December 31, 1998. At March 31,
1999, approximately 95% of the company's installed U.S. meter base was
electronic or digital, as compared to 90% at December 31, 1998 and 78% at March
31, 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.
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.
In July 1996, the U.S.P.S. published for public comment draft specifications for
the Indicum, Postal Security Device and Host specifications. The company
submitted extensive comments to these specifications. In March 1997, the
U.S.P.S. published for public comment the Vendor Infrastructure specification.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1999
Page 16
In August 1998, the U.S.P.S. published for public comment a consolidated and
revised set of IBIP specifications entitled "Performance Criteria for
Information Based Indicia and Security Architecture for IBI Postage Metering
Systems" (the IBI Performance Criteria). The IBI Performance Criteria
consolidated the four aforementioned IBIP specifications and incorporated many
of the comments previously submitted by the company. The company submitted
comments to the IBI Performance Criteria on November 30, 1998.
As of March 31, 1999, the company is in the process of finalizing the
development of a PC product which satisfies the proposed IBI Performance
Criteria. This product is currently undergoing phase II beta testing and is
expected to be ready for market upon final approval from the U.S.P.S.
Forward-looking Statements
- --------------------------
The company wants to caution readers that any forward-looking statements (those
which talk about the company's or management's current expectations as to the
future) in this Form 10-Q or made by the company management involve risks and
uncertainties which may change based on various important factors. Some of the
factors which could cause future financial performance to differ materially from
the expectations as expressed in any forward-looking statement made by or on
behalf of the company include:
o changes in postal regulations
o timely development and acceptance of new products
o success in gaining product approval in new markets where regulatory approval
is required
o successful entry into new markets
o mailers' utilization of alternative means of communication or competitors'
products
o the company's success at managing customer credit risk
o changes in interest rates
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
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 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.
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 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.
On February 26, 1999, the company filed a current report on Form 8-K
pursuant to Item 5 thereof, reporting the Press Release dated January 28,
1999 and selected segment data.
Pitney Bowes Inc. - Form 10-Q
Three Months Ended March 31, 1999
Page 18
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PITNEY BOWES INC.
May 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)
Exhibit Index
Reg. S-K
Exhibits Description
-------- -------------------------
(12) Computation of ratio of
earnings to fixed charges
(27) Financial Data Schedule
Exhibit (12)
Pitney Bowes Inc.
Computation of Ratio of Earnings to Fixed Charges (1)
-----------------------------------------------------
(Dollars in thousands)
Three Months Ended March 31,
----------------------------
1999 1998 (2)
--------- ---------
Income from continuing
operations before income taxes... $215,080 $193,539
Add:
Interest expense...................................... 48,151 37,370
Portion of rents
representative of the
interest factor..................................... 10,935 10,207
Amortization of capitalized
interest............................................ 243 243
Minority interest
in the income of
subsidiary with
fixed charges....................................... 2,873 3,059
----- -----
Income as adjusted...................................... $ 277,282 $244,418
========= ========
Fixed charges:
Interest expense...................................... $ 48,151 $ 37,370
Portion of rents
representative of the
interest factor..................................... 10,935 10,207
Minority interest, excluding
taxes, in the income of
subsidiary with fixed
charges............................................. 4,343 4,664
----- -----
Total fixed charges..................................... $ 63,429 $ 52,241
======== ========
Ratio of earnings to fixed
charges............................................... 4.37 4.68
==== ====
Ratio of earnings to fixed
charges excluding minority
interest........................................... 4.64 5.07
==== ====
(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 CPLC in discontinued operations.
5
1,000
3-MOS
DEC-31-1999
MAR-31-1999
129,687
1,654
2,039,111
76,781
260,727
2,705,057
2,887,401
1,582,946
7,842,303
2,932,377
1,710,427
323,338
310,000
2,010
1,260,028
7,842,303
510,382
1,081,822
296,719
436,200
25,904
0
48,151
215,080
72,809
142,271
0
0
0
142,271
0.53
0.52
Receivables are comprised of gross trade receivables of $444,669 and
short-term finance receivables of $1,594,442. Allowances are comprised of
allowances for trade receivables of $25,667 and for short-term finance
receivables of $51,114. Property, plant and equipment are comprised of
gross fixed assets of $1,160,064 and rental equipment and related inventories of
$1,727,337. Depreciation is comprised of depreciation on fixed assets of
$685,079 and on rental equipment and related inventories of $897,867.
