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 June 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 July 31, 2000
is 255,279,513.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2000
Page 2
Pitney Bowes Inc.
Index
-----------------
Page Number
-----------
Part I - Financial Information:
Item 1: Financial Statements
Consolidated Statements of Income - Three and Six
Months Ended June 30, 2000 and 1999...................... 3
Consolidated Balance Sheets - June 30, 2000
and December 31, 1999.................................... 4
Consolidated Statements of Cash Flows -
Six Months Ended June 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 - 15
Part II - Other Information:
Item 1: Legal Proceedings..................................... 16
Item 4: Submission of Matters to a Vote of
Security Holders ............................ 16
Item 5: Other Information..................................... 17
Item 6: Exhibits and Reports on Form 8-K...................... 17
Signatures........................................................ 18
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2000
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 June 30, Six Months Ended June 30,
--------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Revenue from:
Sales..................................................... $ 571,538 $ 546,370 $ 1,091,580 $ 1,056,752
Rentals and financing..................................... 443,801 418,773 879,967 824,498
Support services.......................................... 145,695 140,289 291,454 273,506
----------- ----------- ----------- -----------
Total revenue......................................... 1,161,034 1,105,432 2,263,001 2,154,756
----------- ----------- ----------- -----------
Costs and expenses:
Cost of sales............................................. 321,814 306,351 622,647 603,070
Cost of rentals and financing............................. 119,598 117,443 241,209 228,376
Selling, service and administrative....................... 389,763 373,132 768,076 734,160
Research and development.................................. 30,528 27,698 60,039 53,602
Interest, net............................................. 53,361 46,938 100,523 92,438
----------- ----------- ----------- -----------
Total costs and expenses.............................. 915,064 871,562 1,792,494 1,711,646
----------- ----------- ----------- -----------
Income from continuing operations before income taxes......... 245,970 233,870 470,507 443,110
Provision for income taxes.................................... 80,013 76,462 152,997 147,131
----------- ----------- ----------- -----------
Income from continuing operations............................. 165,957 157,408 317,510 295,979
(Loss) income from discontinued operations (Note 2)........... - (2,729) - 971
Loss on disposal of discontinued operations (Note 2).......... - (24,938) - (24,938)
----------- ----------- ----------- -----------
Net income.................................................... $ 165,957 $ 129,741 $ 317,510 $ 272,012
=========== =========== =========== ===========
Basic earnings per share:.....................................
Continuing operations....................................... $ .64 $ .58 $ 1.22 $ 1.10
Discontinued operations..................................... - (.10) - (.09)
----------- ----------- ----------- -----------
Net income.................................................. $ .64 $ .48 $ 1.22 $ 1.01
Diluted earnings per share:...................................
Continuing operations....................................... $ .64 $ .58 $ 1.21 $ 1.08
Discontinued operations..................................... - (.10) - (.09)
----------- ----------- ----------- -----------
Net income.................................................. $ .64 $ .48 $ 1.21 $ .99
=========== =========== =========== ===========
Dividends declared per share of common stock.................. $ .285 $ .255 $ .57 $ .51
=========== =========== =========== ===========
Ratio of earnings to fixed charges............................ 4.37 4.71 4.39 4.56
=========== =========== =========== ===========
Ratio of earnings to fixed charges
excluding minority interest............................... 4.65 5.00 4.68 4.85
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2000
Page 4
Pitney Bowes Inc.
Consolidated Balance Sheets
---------------------------
June 30, December 31,
(Dollars in thousands, except share data) 2000 1999
------------- ------------
(unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents................................. $ 296,695 $ 254,270
Short-term investments, at cost which
approximates market................................... 2,811 2,414
Accounts receivable, less allowances:
6/00, $25,767; 12/99, $28,716......................... 435,749 432,224
Finance receivables, less allowances:
6/00, $40,927; 12/99, $48,056......................... 1,431,588 1,779,696
Inventories (Note 3)...................................... 260,668 257,452
Other current assets and prepayments...................... 173,013 128,662
Net assets of discontinued operations..................... - 487,856
------------- ------------
Total current assets.................................. 2,600,524 3,342,574
Property, plant and equipment, net (Note 4)................... 486,140 484,181
Rental equipment and related inventories, net (Note 4)........ 789,369 810,788
Property leased under capital leases, net (Note 4)............ 2,640 11,140
Long-term finance receivables, less allowances:
6/00, $58,777; 12/99, $56,665............................. 1,983,529 1,907,431
Investment in leveraged leases................................ 1,043,118 969,589
Goodwill, net of amortization:
6/00, $58,426; 12/99, $54,848............................. 229,039 226,764
Other assets.................................................. 624,830 470,205
------------- ------------
Total assets.................................................. $ 7,759,189 $ 8,222,672
============= ============
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities.................. $ 825,341 $ 915,826
Income taxes payable...................................... 217,665 255,201
Notes payable and current portion of
long-term obligations ................................ 956,925 1,320,332
Advance billings.......................................... 376,022 381,405
------------- ------------
Total current liabilities............................. 2,375,953 2,872,764
Deferred taxes on income...................................... 1,182,766 1,082,019
Long-term debt (Note 5)....................................... 2,201,591 1,997,856
Other noncurrent liabilities.................................. 326,588 334,423
------------- ------------
Total liabilities..................................... 6,086,898 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.............................. 1,796 1,841
Common stock, $1 par value................................ 323,338 323,338
Capital in excess of par value............................ 11,067 17,382
Retained earnings......................................... 3,606,430 3,437,185
Accumulated other comprehensive income (Note 8)........... (114,798) (93,015)
Treasury stock, at cost................................... (2,465,571) (2,061,150)
------------- ------------
Total stockholders' equity............................ 1,362,291 1,625,610
------------- ------------
Total liabilities and stockholders' equity.................... $ 7,759,189 $ 8,222,672
============= ============
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2000
Page 5
Pitney Bowes Inc.
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
(Dollars in thousands)
Six Months Ended June 30,
2000 1999*
----------- -----------
Cash flows from operating activities:
Net income ................................................. $ 317,510 $ 272,012
Loss on sale of discontinued operations..................... - 24,938
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization........................ 161,090 206,304
Increase in deferred taxes on income................. 98,526 106,823
Pension plan investment.............................. - (67,000)
Change in assets and liabilities:
Accounts receivable.............................. (8,804) (35,000)
Net investment in internal finance receivables... 2,651 (53,206)
Inventories...................................... (7,303) 7,590
Other current assets and prepayments............. (5,483) 13,868
Accounts payable and accrued liabilities......... (67,184) (45,595)
Income taxes payable............................. (34,211) 8,030
Advance billings................................. (2,602) 20,648
Other, net....................................... (4,367) (17,790)
------------ -----------
Net cash provided by operating activities........ 449,823 441,622
------------ -----------
Cash flows from investing activities:
Short-term investments...................................... (42,915) 2,192
Net investment in fixed assets.............................. (126,069) (173,318)
Net investment in finance receivables....................... (69,664) (99,196)
Net investment in capital and mortgage services............. (20,580) 172,421
Investment in leveraged leases.............................. (73,320) (123,393)
Investment in mortgage servicing rights..................... - (9,719)
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....................... (130,049) 4,782
Other investing activities.................................. (26,915) (33,386)
------------ -----------
Net cash provided by (used in) investing activities 345,014 (259,617)
------------ -----------
Cash flows from financing activities:
(Decrease) increase in notes payable, net................... (300,688) 2,948
Proceeds from long-term obligations......................... 181,102 208,106
Principal payments on long-term obligations................. (69,243) (14,385)
Proceeds from issuance of stock............................. 21,582 34,695
Stock repurchases........................................... (432,363) (266,090)
Dividends paid.............................................. (148,265) (137,799)
------------ -----------
Net cash used in financing activities............ (747,875) (172,525)
------------ -----------
Effect of exchange rate changes on cash......................... (4,537) (2,471)
------------ -----------
Increase in cash and cash equivalents........................... 42,425 7,009
Cash and cash equivalents at beginning of period................ 254,270 125,684
----------- -----------
Cash and cash equivalents at end of period...................... $ 296,695 $ 132,693
=========== ===========
Interest paid................................................... $ 132,022 $ 92,728
=========== ===========
Income taxes paid, net.......................................... $ 79,044 $ 36,163
=========== ===========
* Certain prior year amounts have been reclassified to conform with the 2000
presentation.
See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 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 June 30,
2000 and December 31, 1999, the results of its operations for the three months
and six months ended June 30, 2000 and 1999 and its cash flows for the six
months ended June 30, 2000 and 1999 have been included. Operating results for
the three and six months ended June 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 $30.0 million and $62.5 million for the three and six months
ended June 30, 1999, respectively. Net interest expense allocated to AMIC's
discontinued operations was $1.8 million and $3.7 million for the three and six
months ended June 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 three and six months
ended June 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
Statement of Cash Flows for the six months ended June 30, 1999. (Loss) income
from discontinued operations, related to AMIC for the three and six months ended
June 30, 1999 was approximately $(2.7) million and $1.0 million, respectively.
Note 3:
- -------
Inventories are comprised of the following:
(Dollars in thousands) June 30, December 31,
2000 1999
-------------- --------------
Raw materials and work in process............................. $ 39,051 $ 41,149
Supplies and service parts.................................... 123,120 122,726
Finished products............................................. 98,497 93,577
-------------- --------------
Total ........................................................ $ 260,668 $ 257,452
============== ==============
Note 4:
- -------
Fixed assets are comprised of the following:
(Dollars in thousands) June 30, December 31,
2000 1999
-------------- --------------
Property, plant and equipment................................. $ 1,182,351 $ 1,187,198
Accumulated depreciation...................................... (696,211) (703,017)
-------------- --------------
Property, plant and equipment, net............................ $ 486,140 $ 484,181
============== ==============
Rental equipment and related inventories...................... $ 1,598,315 $ 1,706,306
Accumulated depreciation...................................... (808,946) (895,518)
-------------- --------------
Rental equipment and related inventories, net................. $ 789,369 $ 810,788
============== ==============
Property leased under capital leases.......................... $ 19,087 $ 27,217
Accumulated amortization...................................... (16,447) (16,077)
-------------- --------------
Property leased under capital leases, net..................... $ 2,640 $ 11,140
============== ==============
In connection with the U.S.P.S. meter migration, the company wrote off fully
depreciated rental equipment in the first quarter of 2000.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 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 June 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 June 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 June 30, 2000.
Note 6:
- -------
A reconciliation of the basic and diluted earnings per share computations for
the three months ended June 30, 2000 and 1999 is as follows (in thousands,
except per share data):
2000 1999
------------------------------------ ------------------------------------
Per Per
Income Shares Share Income Shares Share
- ----------------------------------------------------------------- ------------------------------------
Income from continuing
operations $ 165,957 $ 157,408
Less:
Preferred stock
dividends - -
Preference stock
dividends (36) (38)
- ----------------------------------------------------------------- ------------------------------------
Basic earnings per
share $ 165,921 257,605 $ .64 $ 157,370 268,088 $ .58
- ----------------------------------------------------------------- ------------------------------------
Effect of dilutive
securities:
Preferred stock - 14 - 15
Preference stock 36 1,065 38 1,160
Stock options 892 3,365
Other 126 389
- ----------------------------------------------------------------- ------------------------------------
Diluted earnings per
share $ 165,957 259,702 $ .64 $ 157,408 273,017 $ .58
================================================================= ====================================
A reconciliation of the basic and diluted earnings per share computations for
the six months ended June 30, 2000 and 1999 is as follows (in thousands, except
per share data):
2000 1999
------------------------------------ ------------------------------------
Per Per
Income Shares Share Income Shares Share
- ----------------------------------------------------------------- ------------------------------------
Income from continuing
operations $ 317,510 $ 295,979
Less:
Preferred stock
dividends - -
Preference stock
dividends (71) (77)
- ----------------------------------------------------------------- ------------------------------------
Basic earnings per
share $ 317,439 260,323 $ 1.22 $ 295,902 269,007 $ 1.10
- ----------------------------------------------------------------- ------------------------------------
Effect of dilutive
securities:
Preferred stock - 14 - 16
Preference stock 71 1,072 77 1,169
Stock options 1,081 3,463
Other 134 419
- ----------------------------------------------------------------- ------------------------------------
Diluted earnings per
share $ 317,510 262,624 $ 1.21 $ 295,979 274,074 $ 1.08
================================================================= ====================================
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2000
Page 8
Note 7:
- -------
Revenue and operating profit by business segment for the three and six months
ended June 30, 2000 and 1999 were as follows:
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in thousands) 2000 1999 2000 1999
------------ ------------ ----------- -----------
Revenue:
Mailing and Integrated Logistics........... $ 789,218 $ 746,952 $1,531,059 $1,445,581
Office Solutions........................... 333,615 316,753 657,604 631,333
------------ ------------ ----------- -----------
Total Messaging Solutions.................. 1,122,833 1,063,705 2,188,663 2,076,914
Capital Services........................... 38,201 41,727 74,338 77,842
------------ ------------ ----------- -----------
Total revenue................................. $ 1,161,034 $ 1,105,432 $2,263,001 $2,154,756
============ ============ =========== ===========
Operating Profit: (1)
Mailing and Integrated Logistics........... $ 225,937 $ 197,294(2) $ 422,041 $ 368,638(2)
Office Solutions........................... 55,287 60,656 108,279 119,201
------------ ------------ ----------- -----------
Total Messaging Solutions.................. 281,224 257,950 530,320 487,839
Capital Services........................... 11,131 12,784 19,692 20,966
------------ ------------ ----------- -----------
Total operating profit....................... $ 292,355 $ 270,734 $ 550,012 $ 508,805
Unallocated amounts:
Net interest (corporate interest expense,
net of intercompany transactions)......... (18,474) (11,443) (33,269) (22,204)
Corporate expense....................... (27,911) (25,421)(2) (46,236) (43,491)(2)
------------ ------------ ----------- -----------
Income from continuing operations before
Income taxes................................. $ 245,970 $ 233,870 $ 470,507 $ 443,110
============ ============ =========== ===========
(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.
Note 8:
- -------
Comprehensive income for the three and six months ended June 30, 2000 and 1999
was as follows:
(Dollars in thousands)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -----------------------------
2000 1999 2000 1999
---------- ------------ ------------ ------------
Net income................................... $ 165,957 $ 129,741 $ 317,510 $ 272,012
Other comprehensive income:
Foreign currency translation
adjustments.............................. (22,993) 2,814 (21,783) 2,366
----------- ------------ ------------ ------------
Comprehensive income......................... $ 142,964 $ 132,555 $ 295,727 $ 274,378
========== ============ =========== ============
Note 9:
- -------
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.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2000
Page 9
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. The 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.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2000
Page 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
Results of Continuing Operations - second quarter of 2000 vs. second quarter of
- --------------------------------------------------------------------------------
1999
- ----
Revenue increased five percent in the second quarter of 2000 to $1,161.0 million
compared with $1,105.4 million in the second quarter of 1999. Income from
continuing operations increased five percent to $166.0 million from $157.4
million for the same period in 1999. Diluted earnings per share from continuing
operations grew to 64 cents, a 10.7 percent increase from the second quarter of
1999.
Second quarter 2000 revenue included $571.5 million from sales, up five percent
from $546.4 million in the second quarter of 1999; $443.8 million from rentals
and financing, up six percent from $418.8 million; and $145.7 million from
support services, up four percent from $140.3 million.
Total Messaging Solutions, the combined results of the Mailing and Integrated
Logistics segment and Office Solutions segment, reported six percent revenue
growth and nine 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 second quarter of 2000,
revenue grew six percent and operating profit increased 15 percent. Contributors
to growth included: improving rental and financing margins in our core mail
finishing business, double-digit revenue and operating profit growth at our
international operations driven by increasing market share, developing existing
and new markets, increasing the value of business per customer and expanding the
customer base and strong demand for worldwide production mail as large volume
mailers turned to Pitney Bowes software-based solutions for enhanced
functionality, speed and accuracy.
The Office Solutions segment includes Pitney Bowes Office Systems and Pitney
Bowes Management Services. During the second quarter of 2000, revenue grew five
percent while operating profit declined nine percent.
Office Systems, comprised of Copier and Facsimile, grew revenues six percent
while operating profit declined due to adverse currency impacts and ongoing
strategic business initiatives. Strong copier rental revenue growth demonstrates
the success of the company's strategy to place copier fleets in national
accounts. The relative value of the yen and margin impacts associated with the
ongoing transition to a rental revenue model for large national accounts in the
copier business negatively impacted operating profit.
Pitney Bowes Management Services' revenue grew five percent as the company
continues to pursue disciplined, profitable growth through providing high value
services, to both new and existing customers. This strategy resulted in
substantially higher operating profit growth.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2000
Page 11
The Capital Services segment includes primarily asset- and fee-based income
generated by large ticket non-core asset transactions. During the quarter,
revenue decreased eight percent and operating profit decreased 13 percent. This
performance is consistent with the company's previously stated strategy to
concentrate on fee-based income opportunities.
Cost of sales increased to 56.3 percent of sales revenue in the second quarter
of 2000 compared with 56.1 percent in the second quarter of 1999. This was due
primarily to the impact of the stronger yen.
Cost of rentals and financing decreased to 26.9 percent of related revenues in
the second quarter of 2000 compared with 28.0 percent in the second quarter of
1999. This was due primarily to lower depreciation of rental equipment.
Selling, service and administrative expenses were 33.6 percent of revenue in the
second quarter of 2000 compared with 33.8 percent in the second quarter of 1999.
This improvement was due primarily to the company's continued emphasis on
controlling operating expenses, partially offset by costs for Internet,
enterprise-wide resource planning and other new business initiatives.
Research and development expenses increased 10.2 percent to $30.5 million in the
second quarter of 2000 compared with $27.7 million in the second 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 $53.4 million in the second quarter of 2000
from $46.9 million in the second quarter of 1999. The increase is due mainly to
increased interest associated with borrowings to fund the share repurchase
program.
The effective tax rate for the second quarter of 2000 was 32.5 percent compared
with 32.7 percent in 1999. The decrease in the effective tax rate reflects
continued tax benefits from partnership leasing transactions, lower state taxes
and lower taxes attributable to international sourced income.
Income from continuing operations and diluted earnings per share from continuing
operations increased 5.4 percent and 10.7 percent, respectively, in the second
quarter of 2000 compared to the same period in 1999 due to the factors discussed
above. The reason for the increase in diluted earnings per share outpacing the
increase from continuing operations was the company's share repurchase program.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2000
Page 12
Results of Continuing Operations - six months of 2000 vs. six months of 1999
- ----------------------------------------------------------------------------
For the first six months of 2000 compared with the same period of 1999, revenue
increased five percent to $2,263.0 million, and income from continuing
operations increased 7.3 percent to $317.5 million. The factors that affected
revenue and earnings performance included those cited for the second quarter of
2000 versus 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 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.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2000
Page 13
Liquidity and Capital Resources
- -------------------------------
The ratio of current assets to current liabilities is 1.09 to 1 at June 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 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. The 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.
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 June 30, 2000.
On April 19, 2000, certain partnerships controlled by affiliates of Pitney Bowes
Credit Corporation (PBCC), a wholly-owned subsidiary of the company, 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 June 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 June 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 and medium-term note programs.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2000
Page 14
The ratio of total debt to total debt and stockholders' equity including the
preferred stockholders' equity in a subsidiary company in total debt was 71.8
percent at June 30, 2000 compared with 69.1 percent at December 31, 1999. Book
value per common share decreased to $5.33 at June 30, 2000 from $6.13 at
December 31, 1999 driven primarily by the repurchase of common shares. During
the quarter ended June 30, 2000, the company repurchased approximately 5.4
million common shares for $214.1 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 six months of 2000, net investments in fixed assets included $47.2
million in net additions to property, plant and equipment and $78.8 million in
net additions to rental equipment and related inventories compared with $43.0
million and $130.3 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 June 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.
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.
Based on the proposed schedule, the company believes that the phaseout of
manually reset electronic 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 significantly
enhanced postal revenue security and supported expanded U.S.P.S. value-added
services to mailers.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2000
Page 15
During the period from May 1995 through May 2000, the company has 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 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. The PC version of this
product is currently in the final phase of 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. 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
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 30, 2000
Page 16
Part II - Other Information
---------------------------
Item 1: Legal Proceedings
In the course of normal business, the company is occasionally party to lawsuits.
These may involve litigation by or against the company relating to, among other
things:
o contractual rights under vendor, insurance or other contracts
o intellectual property or patent rights
o equipment, service or payment disputes with customers
o disputes with employees
The company is currently a 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.
Item 4: Submission of Matters to a Vote of Security Holders
Below are the final results of the voting at the Annual Meeting of shareholders
held on May 8, 2000:
Proposal 1 - Election of Directors
Nominee For Withheld
----------------- ----------- -----------
William E. Butler 218,521,014 6,567,337
Colin G. Campbell 223,468,745 1,619,606
Jessica P. Einhorn 218,529,925 6,558,426
James H. Keyes 223,562,157 1,526,194
Proposal 2 - Appointment of PricewaterhouseCoopers LLP as Independent
Accountants
For Against Abstain
----------- ---------- ----------
223,831,163 415,260 841,928
The following other directors continued their term of office after the Annual
Meeting:
Linda G. Alvarado Herbert L. Henkel
Marc C. Breslawsky Michael I. Roth
Michael J. Critelli Phyllis Shapiro Sewell
Ernie Green
In July 2000, the board of directors elected John S. McFarlane to the board,
effective October 1, 2000.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 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 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.
On April 26, 2000, the company filed a current report on Form 8-K pursuant
to Item 5 thereof, correcting the data that appears in Table III of the
company's Notice of 2000 Annual Meeting and Proxy Statement.
On April 20, 2000, the company filed a current report on Form 8-K pursuant
to Item 5 thereof, reporting the Press Release dated April 18, 2000 for
the quarter ended March 31, 2000.
Pitney Bowes Inc. - Form 10-Q
Six Months Ended June 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.
August 14, 2000
/s/ B. P. Nolop
------------------------------------------
B. P. Nolop
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 Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999(2) 2000 1999(2)
------------ ------------ ------------ -----------
Income from continuing operations
before income taxes........................... $ 245,970 $ 233,870 $ 470,507 $ 443,110
Add:
Interest expense............................. 55,415 48,108 104,408 94,167
Portion of rents
representative of the
interest factor........................... 10,714 10,412 21,517 21,194
Amortization of capitalized
interest.................................. 243 243 486 486
Minority interest in the
income of subsidiary
with fixed charges........................ 3,543 2,792 6,825 5,665
------------ ------------ ------------ -----------
Income as adjusted.............................. $ 315,885 $ 295,425 $ 603,743 $ 564,622
============ ============ ============ ===========
Fixed charges:
Interest expense............................. $ 55,415 $ 48,108 $ 104,408 $ 94,167
Capitalized interest......................... 974 - 1,513 -
Portion of rents
representative of the
interest factor........................... 10,714 10,412 21,517 21,194
Minority interest, excluding
taxes, in the income of
subsidiary with fixed charges............. 5,252 4,149 10,114 8,481
------------ ------------ ------------ -----------
Total fixed charges...................... $ 72,355 $ 62,669 $ 137,552 $ 123,842
============ ============ ============ ===========
Ratio of earnings to
fixed charges................................ 4.37 4.71 4.39 4.56
============ ============ ============ ===========
Ratio of earnings to fixed
charges excluding minority
interest..................................... 4.65 5.00 4.68 4.85
============ ============ ============ ===========
(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) Interest expense and the portion of rents representative of the interest
factor of the discontinued operations of AMIC have been excluded from
fixed charges in the computation for the three and six months ended June
30, 1999.
Including these amounts in fixed charges, the ratio of earnings to fixed
charges would be 4.61 and 4.45 for the three and six months ended June
30, 1999, respectively. The ratio of earnings to fixed charges excluding
minority interest would be 4.88 and 4.72 for the three and six months
ended June 30, 1999, respectively.
5
1,000
6-MOS
DEC-31-2000
JUN-30-2000
296,695
2,811
1,934,031
66,694
260,668
2,600,524
2,780,666
1,505,157
7,759,189
2,375,953
2,201,591
323,338
310,000
1,825
1,037,128
7,759,189
1,091,580
2,263,001
622,647
863,856
60,039
0
104,408
470,507
152,997
317,510
0
0
0
317,510
1.22
1.21
Receivables are comprised of gross trade receivables of $461,516 and
short-term finance receivables of $1,472,515. Allowances are comprised of
allowances for trade receivables of $25,767 and for short-term finance
receivables of $40,927.
Property, plant and equipment are comprised of
gross fixed assets of $1,182,351 and rental equipment and related inventories of
$1,598,315. Depreciation is comprised of depreciation on fixed assets of
$696,211 and on rental equipment and related inventories of $808,946.
