UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549-1004 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, 1997 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 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, $2 par value, outstanding as of March 31, 1997 is 145,753,938.
Pitney Bowes Inc. - Form 10-Q Three Months Ended March 31, 1997 Page 2 Pitney Bowes Inc. Index Page Number Part I - Financial Information: Consolidated Statement of Income - Three Months Ended March 31, 1997 and 1996 3 Consolidated Balance Sheet - March 31, 1997 and December 31, 1996 4 Consolidated Statement of Cash Flows - Three Months Ended March 31, 1997 and 1996 5 Notes to Consolidated Financial Statements 6 - 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 14 Part II - Other Information: Item 1: Legal Proceedings 15 Item 6: Exhibits and Reports on Form 8-K 15 Signatures 16
Pitney Bowes Inc. - Form 10-Q Three Months Ended March 31, 1997 Page 3 Part I - Financial Information Pitney Bowes Inc. Consolidated Statement of Income (Unaudited) <TABLE> (Dollars in thousands, except per share data) <CAPTION> Three Months Ended March 31, <S> 1997 1996 Revenue from: <C> <C> Sales $ 417,822 $ 384,004 Rentals and financing 424,562 409,078 Support services 118,986 113,183 Total revenue 961,370 906,265 Costs and expenses: Cost of sales 253,808 238,764 Cost of rentals and financing 127,674 125,752 Selling, service and administrative 326,109 311,016 Research and development 20,648 18,710 Interest, net 49,496 48,584 Total costs and expenses 777,735 742,826 Income before income taxes 183,635 163,439 Provision for income taxes 63,690 56,930 Net income $ 119,945 $ 106,509 Income per common and common equivalent share: Net income $ .81 $ .70 Average common and common equivalents shares outstanding 148,975,517 151,416,081 Dividends declared per share of common stock $ .40 $ .345 Ratio of earnings to fixed charges 3.83 3.56 Ratio of earnings to fixed charges excluding minority interest 3.92 3.65
Pitney Bowes Inc. - Form 10-Q Three Months Ended March 31, 1997 Page 4 Pitney Bowes Inc. Consolidated Balance Sheet (Unaudited) </TABLE> <TABLE> (Dollars in thousands) March 31, December 31, <CAPTION> 1997 1996 <S> <C> <C> Assets Current assets: Cash and cash equivalents $ 142,718 $ 135,271 Short-term investments, at cost which approximates market 12,336 1,500 Accounts receivable, less allowances: 3/97, $15,952; 12/96, $16,160 326,709 340,730 Finance receivables, less allowances: 3/97, $42,597; 12/96, $40,176 1,402,870 1,339,286 Inventories (Note 2) 263,947 281,942 Other current assets and prepayments 135,244 123,337 Total current assets 2,283,824 2,222,066 Property, plant and equipment, net (Note 3) 482,703 486,029 Rental equipment and related inventories, net (Note 3) 809,752 815,306 Property leased under capital leases, net (Note 3) 5,037 5,848 Long-term finance receivables, less allowances: 3/97, $73,910; 12/96, $73,561 3,396,834 3,450,231 Investment in leveraged leases 640,113 633,682 Goodwill, net of amortization: 3/97, $36,001; 12/96, $34,372 204,188 205,802 Other assets 362,343 336,758 Total assets $8,184,794 $8,155,722 Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued liabilities $ 850,954 $ 849,789 Income taxes payable 182,599 212,155 Notes payable and current portion of long-term obligations 1,986,193 1,911,481 Advance billings 343,369 331,864 Total current liabilities 3,363,115 3,305,289 Deferred taxes on income 800,653 720,840 Long-term debt 1,299,155 1,300,434 Other noncurrent liabilities 385,358 389,113 Total liabilities 5,848,281 5,716,676 Preferred stockholders' equity in a subsidiary company 200,000 200,000 Stockholders' equity: Cumulative preferred stock, $50 par value, 4% convertible 46 46 Cumulative preference stock, no par value, $2.12 convertible 2,329 2,369 Common stock, $2 par value 323,338 323,338 Capital in excess of par value 29,504 30,260 Retained earnings 2,511,055 2,450,294 Cumulative translation adjustments (54,088) (31,297) Treasury stock, at cost (675,671) (535,964) Total stockholders' equity 2,136,513 2,239,046 Total liabilities and stockholders' equity $ 8,184,794 $ 8,155,722 </TABLE>
Pitney Bowes Inc. - Form 10-Q Three Months Ended March 31, 1997 Page 5 Pitney Bowes Inc. Consolidated Statement of Cash Flows (Unaudited) <TABLE> (Dollars in thousands) Three Months Ended March 31, <CAPTION> 1997 1996 <S> <C> <C> Cash flows from operating activities: Net income $ 119,945 $ 106,509 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 73,905 65,524 Net change in the strategic focus initiative - (6,421) Increase(decrease) in deferred taxes on income 80,599 (3,316) Change in assets and liabilities: Accounts receivable 12,222 5,908 Sales-type lease receivables (23,640) (3,575) Inventories 15,447 7,151 Other current assets and prepayments (12,243) (29,588) Accounts payable and accrued liabilities 3,844 (42,374) Income taxes payable (29,099) 31,885 Advance billings 12,549 11,518 Other, net (53,913) (28,902) Net cash provided by operating activities 199,616 114,319 Cash flows from investing activities: Short-term investments (3,516) 1,041 Net investment in fixed assets (60,251) (69,763) Net investment in direct-finance lease receivables 5,400 52,931 Investment in leveraged leases (8,219) (14,021) Net cash used in investing activities (66,586) (29,812) Cash flows from financing activities: Increase(decrease) in notes payable 280,101 (9,268) Principal payments on long-term obligations (204,507) (1,809) Proceeds from issuance of stock 5,004 6,298 Stock repurchases (145,507) (24,500) Dividends paid (59,184) (51,855) Net cash used in financing activities (124,093) (81,134) Effect of exchange rate changes on cash (1,490) (214) Increase in cash and cash equivalents 7,447 3,159 Cash and cash equivalents at beginning of period 135,271 85,352 Cash and cash equivalents at end of period $ 142,718 $ 88,511 Interest paid $ 49,766 $ 53,894 Income taxes paid $ 15,609 $ 26,477 </TABLE>
Pitney Bowes Inc. - Form 10-Q Three Months Ended March 31, 1997 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 as of March 31, 1997 and the results of its operations and cash flows for the three months ended March 31, 1997 and 1996 have been included. Operating results for the three months ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. These statements should be read in conjunction with the financial statements and notes thereto included in the company's Annual Report to Stockholders and Form 10-K Annual Report for the year ended December 31, 1996. Note 2: <TABLE> Inventories are comprised of the following: <CAPTION> (Dollars in thousands) March 31, December 31, 1997 1996 <S> <C> <C> Raw materials and work in process $ 54,674 $ 58,536 Supplies and service parts 94,683 103,182 Finished products 114,590 120,224 Total $ 263,947 $ 281,942 </TABLE> Note 3: <TABLE> Fixed assets are comprised of the following: <CAPTION> (Dollars in thousands) March 31, December 31, 1997 1996 <S> <C> <C> Property, plant and equipment $1,102,196 $1,093,501 Accumulated depreciation (619,493) (607,472) Property, plant and equipment, net $ 482,703 $ 486,029 Rental equipment and related inventories $1,649,075 $1,634,111 Accumulated depreciation (839,323) (818,805) Rental equipment and related inventories, net $ 809,752 $ 815,306 Property leased under capital leases $ 21,435 $ 24,124 Accumulated amortization (16,398) (18,276) Property leased under capital leases, net $ 5,037 $ 5,848 </TABLE>
Pitney Bowes Inc. - Form 10-Q Three Months Ended March 31, 1997 Page 7 Note 4: <TABLE> Revenue and operating profit by business segment for the three months ended March 31, 1997 and 1996 were as follows: <CAPTION> (Dollars in thousands) 1997 1996 <S> <C> <C> Revenue Business Equipment $ 745,120 $ 700,937 Business Services 128,990 111,890 Commercial and Industrial Financing Large-Ticket External 49,551 54,423 Small-Ticket External 37,709 39,015 Total 87,260 93,438 Total Revenue $ 961,370 $ 906,265 Operating Profit (1) Business Equipment $ 169,411 $ 150,686 Business Services 10,488 8,839 Commercial and Industrial Financing 16,511 18,327 Total Operating Profit $ 196,410 $ 177,852 </TABLE> [FN] (1) Operating profit excludes general corporate expenses, income taxes, and net interest other than that related to finance operations. Note 5: In June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 125 "Accounting for Transactions and Servicing of Financial Assets and Extinguishments of Liabilities" (FAS 125) for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. In December 1996, the FASB issued Statement of Accounting Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125". The company adopted FAS 125 on January 1, 1997. As of March 31, 1997 there was no material impact on the financial statements of the company due to the adoption of this statement.
Pitney Bowes Inc. - Form 10-Q Three Months Ended March 31, 1997 Page 8 Pitney Bowes Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Continuing Operations - first quarter of 1997 vs. first quarter of 1996 Revenue increased six percent in the first quarter of 1997 to $961.4 million compared to $906.3 million in the first quarter of 1996. Net income increased 13 percent to $119.9 million from $106.5 million in the same period in 1996. Per share earnings grew to 81 cents, a 14.5 percent increase from first quarter 1996. Revenue growth was eight percent excluding revenue from large ticket external financing and prior-year revenue from businesses in Australia, from which the company made the strategic decision to exit in 1996. First quarter 1997 revenue included $417.8 million from sales, up nine percent from $384.0 million in the first quarter of 1996; $424.6 million from rentals and financing, up four percent from $409.1 million; and $119.0 million for support services, up five percent from $113.2 million. To facilitate a better understanding, the following discussion on revenue and operating profit is based on the company's business segments. Revenue for each segment includes all sources - sales, rentals and financing, and support services. In the Business Equipment Segment, which includes mailing, facsimile and copier operations, revenue grew six percent and operating profit increased 12 percent during the first quarter. Mailing Systems' six percent revenue increase during the quarter was driven by strong equipment sales in the U.S. Mailing and Production Mail markets. The company continues to see strong market acceptance of products such as the Personal Post Office meter. The company also continues to see excellent growth in Europe in Paragon(r) mail processor and PostPerfect(r) digital meter placements. Growth in revenue for the quarter has been partially offset by last year's strategic decision to exit non- profitable businesses in Australia. Revenue from Facsimile Systems grew 10 percent in first quarter 1997 driven by customer acceptance of its advanced money-saving systems, such as the Model 9830, and increased revenue from consumable supplies.
Pitney Bowes Inc. - Form 10-Q Three Months Ended March 31, 1997 Page 9 Copier Systems revenue increased seven percent in the first quarter driven by solid equipment sales. This sales increase was notable because it was generated while six new products were introduced and the phased rollout of the color and digital copier systems continued. Copier Systems also strengthened its ability to profitably grow by strategically broadening its distribution network in selected geographic areas. In the Business Services Segment first-quarter revenue grew 15 percent and operating profit grew 19 percent. The segment includes Pitney Bowes Management Services and Atlantic Mortgage and Investment Corporation. These service businesses have maintained profitable double-digit growth by bringing Pitney Bowes innovation and expertise to key market segments. In line with management's previously announced strategy to concentrate on fee-based rather than asset-based income, the Commercial and Industrial Financing Segment had a decline in revenue and operating profit of seven percent and 10 percent, respectively. The segment includes large-ticket and small-ticket external financing. The large- ticket external financing revenue declined nine percent and the small- ticket revenue declined three percent in the first quarter. The segment continued to benefit from growth in service-based revenue sources such as syndication fees. The overall reduction in revenue and operating profit was driven by previous asset sales resulting in the planned decrease in runoff income from both portfolios. The ratio of cost of sales to sales revenue decreased from 62.2 percent in first quarter 1996 to 60.7 percent in 1997. The improvement was due to the product mix at U.S. Mailing towards higher- margin products and exiting from non-profitable businesses in Australia. The improvement was offset, in part, by the continued growth of the facilities management business which includes most of its expenses in cost of sales. The ratio of cost of rentals and financing to rentals and financing revenue improved to 30.1 percent from 30.7 percent. Margin gains in the company's mortgage servicing business and in U.S. Mailing contributed to this improvement. Selling, service and administrative expenses as a percentage of revenue improved to 33.9 percent in 1997 from 34.3 percent in the same period in 1996, continuing the improving trend in this ratio. Exiting from non-profitable businesses in Australia and efforts to control operating expenditures contributed to this improvement. Research and development expenses increased 10 percent to $20.6 million. The current year increase reflects the company's increased investment in developing new digital meters and other mailing and software products.
Pitney Bowes Inc. - Form 10-Q Three Months Ended March 31, 1997 Page 10 Net interest expense increased just under two percent to $49.5 million principally as a result of a change in mix of debt maturities and related interest rates. The effective tax rate in 1997 was 34.7 percent versus 34.8 percent in 1996. Liquidity and Capital Resources The current ratio remained essentially unchanged at March 31, 1997 and December 31, 1996 at .68 to 1 and .67 to 1, respectively. Working capital at March 31, 1997 and December 31, 1996 remained at comparable levels. As part of the company's non-financial services shelf registrations, a medium-term note facility exists permitting issuance of up to $100 million in debt securities with maturities ranging from more than one year up to 30 years of which $32 million remain available at March 31, 1997. The company also has an additional $300 million remaining on its non-financial services shelf registrations filed with the Securities and Exchange Commission (SEC). Amounts available under credit agreements, shelf registrations and commercial paper and medium- term note programs, in addition to cash generated internally are expected to be sufficient to provide for financing needs in the next several years. Pitney Bowes Credit Corporation (PBCC) has $250 million of unissued debt securities available from a shelf registration statement filed with the SEC in September 1995. Up to $250 million of medium-term notes may be offered under this registration statement. The $250 million available under this shelf registration statement should meet PBCC's financing needs for the next year. PBCC also had unused lines of credit and revolving credit facilities totaling $1.5 billion at March 31, 1997, largely supporting its commercial paper borrowings. The ratio of total debt to total debt and stockholders' equity including the preferred stockholders' equity in a subsidiary company in total debt was 62.1% at March 31, 1997 compared to 60.5% at December 31, 1996. Book value per common share was $14.64 at March 31, 1997 and $15.11 at year-end 1996 principally as a result of the repurchase of common shares. During the quarter ended March 31, 1997, the company repurchased 2,372,000 common shares for approximately $145.5 million. During the period April 28, 1997 to May 8, 1997 the company repurchased an additional 211,100 shares for approximately $13.6 million. In April 1997, Pitney Bowes International Holding, Inc., a subsidiary of the company, issued an additional $100 million of variable term voting preferred stock to outside institutional investors in a private placement transaction. The preferred stock, $.01 par value, is entitled to cumulative dividends at rates set at auction, generally
Pitney Bowes Inc. - Form 10-Q Three Months Ended March 31, 1997 Page 11 for 49 day intervals. The proceeds of the issuance were used to pay down short-term borrowings. The company enters into interest rate swap agreements principally through its financial services businesses. It has been the practice and objective of the company to use a balanced mix of debt maturities, variable- and fixed-rate debt and interest rate swap agreements to control the company's sensitivity to interest rate volatility. The company utilizes interest rate swap agreements when it considers the economic benefits to be favorable. Swap agreements, have been principally utilized to fix interest rates on commercial paper and/or obtain a lower cost on debt than would otherwise be available absent the swap. Capital Investments In the first quarter of 1997, net investments in fixed assets included $18.9 million in net additions to property, plant and equipment and $36.8 million in net additions to rental equipment and related inventories compared with $21.7 million and $47.9 million, respectively, in the same period in 1996. 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 March 31, 1997, commitments for the acquisition of property, plant and equipment included plant and manufacturing equipment improvements as well as rental equipment for new and replacement programs. Regulatory Matters In June 1995, the United States Postal Service (U.S.P.S.) issued final regulations on the manufacture, distribution and use of postage meters. The regulations cover four general categories: meter security, administrative controls, Computerized Meter Resetting Systems (C.M.R.S.) and other issues. In general, the regulations put reporting and performance obligations on meter manufacturers, outline potential administrative sanctions for failure to meet these obligations and require changes in the fund management system of C.M.R.S. (such as the company's Postage by Phone (r) System) to give the U.S.P.S. more direct control over meter licensee deposits. The company is working with the U.S.P.S. to ensure that these regulations provide mailing customers and the U.S.P.S. with the intended benefits, and that the company also benefits. The company continues to implement these changes, including modifying our Postage by Phone (r) system so that customers deposit prepayments of postage
Pitney Bowes Inc. - Form 10-Q Three Months Ended March 31, 1997 Page 12 into a U.S.P.S. account rather than a trust account. Resetting meters through Postage by Phone (r) still requires the customer to request an authorization and a reset code from the company, a service for which it charges a fee. The company continues to believe that the financial impact implementing these regulations will not be material to the company. In May 1996, the U.S.P.S. issued a proposed schedule for the phase out of mechanical meters in the United States marketplace. The schedule proposed that: - - as of June 1, 1996, placements of mechanical meters will be available only as replacements for existing licensed mechanical meters - - as of March 1, 1997, mechanical meters may not be used by persons or firms who process mail for a fee (subsequently revised to March 31, 1997). - - as of December 31, 1997, mechanical meters that interface with mail machines or processors will no longer be approved - - as of March 1, 1999, all other mechanical meters (stand-alone meters) will no longer be approved. The company has voluntarily halted new placements of mechanical meters in the United States as of June 1, 1996. The company also has been actively and voluntarily pursuing removal from the market by March 1997, of mechanical meters used by persons or firms who process mail for a fee as set forth in the U.S.P.S. proposed schedule for that segment of meter users. Further, the company agreed, in March 1997, to use its best efforts to remove from the market mechanical systems meters (meters that interface with mail machines or processors), by a revised target date of December 31, 1998, in lieu of the December 31, 1997 date specified in the U.S.P.S. proposed schedule. The company continues to work with the U.S.P.S. to reach agreement on all aspects of a mechanical meter migration schedule that reflects the interests of its customers while minimizing any negative impact on the company. The company's constant focus on bringing new technologies into the mailing market has already resulted in a significant shift in the makeup of the company's meter base. As of March 31, 1997 electronic and digital meters represent 63% of the company's US installed base, up from 60 percent in December 1996. Until a mechanical meter migration plan is finalized, the financial impact, if any, on the company cannot be determined with certainty. However, based on the proposed schedule and agreements reached to date the company believes that the plan will not cause a material adverse financial impact on the company. The May 1996 U.S.P.S. proposed document also discusses a change in metering technology that would include use of a digital, information- based indicia standard. This standard has not yet been developed, although initial specifications were proposed by the U.S.P.S. in July
Pitney Bowes Inc. - Form 10-Q Three Months Ended March 31, 1997 Page 13 1996. At some undetermined date in the future, the U.S.P.S. believes that digital metering will eventually replace electronic metering in the United States. The company supports a digital product migration strategy, and the company anticipates working with the U.S.P.S. to achieve a timely and effective substitution plan. However, until the U.S.P.S. finalizes standards for a digital information-based indicia program (and clarifies transition to the new standard), the impact of this proposal, if any, on the company cannot be determined. The company has taken the lead in deploying digital meters in the marketplace. Forward-looking Statements The company cautions readers that any forward-looking statements (those which talk about the company's or management's current expectations as to the future) in this Form 10-Q or made by 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: - - changes in postal regulations - - timely development and acceptance of new products - - success in gaining product approval in new markets where regulatory approval is required - - successful entry into new markets - - mailer's utilization of alternative means of communication or competitor's products - - the company's success at managing customer credit risk
Pitney Bowes Inc. - Form 10-Q Three Months Ended March 31, 1997 Page 14 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: - - contractual rights under vendor, insurance or other contracts - - intellectual property or patent rights - - equipment, service or payment disputes with customers - - disputes with employees The company is currently a 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 (numbered in accordance with Item 601 of Regulation S-K) Reg. S-K Status or Incorporation Exhibits Description by Reference (10) Pitney Bowes Inc. Deferred Incentive Savings Plan for the Board of Directors See Exhibit (i) (11) Computation of earnings See Exhibit (ii) per share. (12) Computation of ratio of See Exhibit (iii) earnings to fixed charges. (27) Financial Data Schedule See Exhibit (iv) (b) Reports on Form 8-K No reports on Form 8-K wre filed for the three months ended March 31, 1997.
Pitney Bowes Inc. - Form 10-Q Three Months Ended March 31, 1997 Page 15 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 15, 1997 /s/ M. L. Reichenstein M. L. Reichenstein Vice President - Chief Financial Officer (Principal Financial Officer) /s/ A. F. Henock A. F. Henock Vice President - Controller and Chief Tax Counsel (Principal Accounting Officer)