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, 2001 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, 2001 is 245,647,809.
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 2 Pitney Bowes Inc. Index ----------------- Page Number ----------- Part I - Financial Information: Item 1: Financial Statements Consolidated Statements of Income (unaudited) - Three and Six Months Ended June 30, 2001 and 2000.................... 3 Consolidated Balance Sheets - June 30, 2001 (unaudited) and December 31, 2000...................................... 4 Consolidated Statements of Cash Flows (unaudited) - Six Months Ended June 30, 2001 and 2000........................ 5 Notes to Consolidated Financial Statements..................... 6 - 11 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations..... 12 - 21 Part II - Other Information: Item 1: Legal Proceedings....................................... 22 Item 4: Submission of Matters to a Vote of Security Holders .............................. 22 Item 6: Exhibits and Reports on Form 8-K........................ 23 Signatures.......................................................... 24
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 3 Part I - Financial Information Item 1. Financial Statements. <TABLE> Pitney Bowes Inc. Consolidated Statements of Income (Unaudited) --------------------------------- (Dollars in thousands, except per share data) <CAPTION> Three Months Ended June 30, Six Months Ended June 30, -------------------------------- -------------------------------- 2001 2000 2001 2000 -------------- -------------- -------------- --------------- <S> <C> <C> <C> <C> Revenue from: Sales................................................ $ 522,434 $ 488,301 $ 993,906 $ 929,495 Rentals and financing................................ 365,098 386,648 733,090 767,319 Support services..................................... 133,332 122,676 260,191 245,576 -------------- -------------- -------------- --------------- Total revenue.................................... 1,020,864 997,625 1,987,187 1,942,390 -------------- -------------- -------------- --------------- Costs and expenses: Cost of sales........................................ 303,961 280,211 582,311 538,305 Cost of rentals and financing........................ 90,227 95,644 181,060 195,560 Cost of meter transition - impairment (Note 12)...... 227,300 - 227,300 - Cost of meter transition - additional depreciation (Note 12).............................. 20,400 - 20,400 - Selling, service and administrative.................. 336,137 327,326 659,040 645,195 Research and development............................. 34,865 30,528 66,467 60,039 Other income (Note 13)............................... (362,172) - (362,172) - Interest, net........................................ 44,301 50,411 94,886 95,095 Restructuring charges (Note 11)...................... 27,609 - 70,760 - -------------- -------------- -------------- --------------- Total costs and expenses......................... 722,628 784,120 1,540,052 1,534,194 -------------- -------------- -------------- --------------- Income from continuing operations before income taxes.... 298,236 213,505 447,135 408,196 Provision for income taxes............................... 110,380 67,172 155,342 128,410 -------------- -------------- -------------- --------------- Income from continuing operations........................ 187,856 146,333 291,793 279,786 Income from discontinued operations (Note 2)............. - 19,624 - 37,724 Loss on disposal of discontinued operations (Note 2) .... (10,827) - (10,827) - Cumulative effect of accounting change................... - - - (4,683) -------------- -------------- -------------- --------------- Net income............................................... $ 177,029 $ 165,957 $ 280,966 $ 312,827 ============== ============== ============== =============== Basic earnings per share: Continuing operations.................................. $ .76 $ .57 $ 1.18 $ 1.08 Discontinued operations................................ (.04) .07 (.04) .14 Cumulative effect of accounting change................. - - - (.02) -------------- -------------- -------------- --------------- Net income............................................. $ .72 $ .64 $ 1.14 $ 1.20 ============== ============== ============== =============== Diluted earnings per share: Continuing operations.................................. $ .76 $ .56 $ 1.17 $ 1.07 Discontinued operations................................ (.05) .08 (.04) .14 Cumulative effect of accounting change................. - - - (.02) -------------- -------------- -------------- --------------- Net income............................................. $ .71 $ .64 $ 1.13 $ 1.19 ============== ============== ============== =============== Dividends declared per share of common stock............. $ .29 $ .285 $ .58 $ .57 ============== ============== ============== =============== Ratio of earnings to fixed charges....................... 5.82 4.05 4.43 4.07 ============== ============== ============== =============== Ratio of earnings to fixed charges excluding minority interest.......................... 6.20 4.32 4.72 4.34 ============== ============== ============== =============== </TABLE> See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 4 <TABLE> Pitney Bowes Inc. Consolidated Balance Sheets --------------------------- <CAPTION> June 30, December 31, (Dollars in thousands, except share data) 2001 2000 ------------- ------------ (Unaudited) <S> <C> <C> Assets - ------ Current assets: Cash and cash equivalents................................. $ 199,609 $ 198,255 Short-term investments, at cost which approximates market................................... 3,472 15,250 Accounts receivable, less allowances: 6/01, $30,356; 12/00, $26,468......................... 385,799 313,510 Finance receivables, less allowances: 6/01, $56,779; 12/00, $44,129......................... 1,463,061 1,592,920 Inventories (Note 3)...................................... 166,917 167,969 Other current assets and prepayments...................... 157,086 145,786 Net current assets of discontinued operations............. 223,578 193,018 ------------- ------------ Total current assets.................................. 2,599,522 2,626,708 Property, plant and equipment, net (Note 4)................... 516,943 491,312 Rental equipment and related inventories, net (Note 4)........ 477,230 620,841 Property leased under capital leases, net (Note 4)............ 2,121 2,303 Long-term finance receivables, less allowances: 6/01, $67,491; 12/00, $53,222............................. 1,849,533 1,980,876 Investment in leveraged leases................................ 1,221,143 1,150,656 Goodwill, net of amortization: 6/01, $62,177; 12/00, $58,658............................. 568,258 203,447 Other assets.................................................. 652,192 612,760 Net long-term assets of discontinued operations............... 216,802 212,363 ------------- ------------ Total assets.................................................. $ 8,103,744 $ 7,901,266 ============= ============ Liabilities and stockholders' equity - ------------------------------------ Current liabilities: Accounts payable and accrued liabilities.................. $ 1,171,173 $ 995,283 Income taxes payable...................................... 386,201 262,125 Notes payable and current portion of long-term obligations ................................ 1,109,459 1,277,941 Advance billings.......................................... 343,218 346,228 ------------- ------------ Total current liabilities............................. 3,010,051 2,881,577 Deferred taxes on income...................................... 1,159,810 1,226,597 Long-term debt (Note 5)....................................... 2,006,964 1,881,947 Other noncurrent liabilities.................................. 325,015 316,170 ------------- ------------ Total liabilities..................................... 6,501,840 6,306,291 ------------- ------------ Preferred stockholders' equity in a subsidiary company........ 310,000 310,000 Stockholders' equity: Cumulative preferred stock, $50 par value, 4% convertible................................. 24 29 Cumulative preference stock, no par value, $2.12 convertible.............................. 1,632 1,737 Common stock, $1 par value................................ 323,338 323,338 Capital in excess of par value............................ 5,033 10,298 Retained earnings......................................... 3,904,437 3,766,995 Accumulated other comprehensive income (Note 8)........... (146,917) (139,434) Treasury stock, at cost................................... (2,795,643) (2,677,988) ------------- ------------ Total stockholders' equity............................ 1,291,904 1,284,975 ------------- ------------ Total liabilities and stockholders' equity.................... $ 8,103,744 $ 7,901,266 ============= ============ </TABLE> See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 5 <TABLE> Pitney Bowes Inc. Consolidated Statements of Cash Flows (Unaudited) ------------------------------------- (Dollars in thousands) <CAPTION> Six Months Ended June 30, -------------------------- 2001 2000 ----------- ---------- <S> <C> <C> Cash flows from operating activities: Net income ................................................. $ 280,966 $ 312,827 Nonrecurring charges, net................................... 210,126 - Nonrecurring payments....................................... (20,571) - Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................ 160,685 161,090 Increase in deferred taxes on income................. 74,629 98,526 Change in assets and liabilities: Accounts receivable.............................. 9,004 (999) Net investment in internal finance receivables... 25,355 2,651 Inventories...................................... 14,091 (7,303) Other current assets and prepayments............. 5,785 (5,483) Accounts payable and accrued liabilities......... (116,258) (67,184) Income taxes payable............................. 123,348 (37,333) Advance billings................................. (20,546) (2,602) Other, net....................................... (17,207) (4,367) ----------- ---------- Net cash provided by operating activities........ 729,407 449,823 ----------- ---------- Cash flows from investing activities: Short-term investments...................................... 11,806 (42,915) Net investment in fixed assets.............................. (116,136) (126,069) Net investment in finance receivables....................... 17,340 (69,664) Net investment in capital and mortgage services............. 74,296 (20,580) Investment in leveraged leases.............................. (66,470) (73,320) 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....................... 1,591 (130,049) Acquisitions, net of cash acquired.......................... (372,520) - Other investing activities.................................. 66,849 (26,915) ----------- ---------- Net cash (used in) provided by investing activities....................................... (383,244) 345,014 ----------- ---------- Cash flows from financing activities: Decrease in notes payable, net.............................. (92,262) (300,688) Proceeds from long-term obligations......................... 301,165 181,102 Principal payments on long-term obligations................. (287,352) (69,243) Proceeds from issuance of stock............................. 20,505 21,582 Stock repurchases........................................... (143,535) (432,363) Dividends paid.............................................. (143,524) (148,265) ----------- ---------- Net cash used in financing activities............ (345,003) (747,875) ----------- ---------- Effect of exchange rate changes on cash......................... 194 (4,537) ----------- ---------- Increase in cash and cash equivalents........................... 1,354 42,425 Cash and cash equivalents at beginning of period................ 198,255 254,270 ----------- ---------- Cash and cash equivalents at end of period...................... $ 199,609 $ 296,695 =========== ========== Interest paid................................................... $ 102,343 $ 132,022 =========== ========== Income taxes paid, net.......................................... $ 71,167 $ 79,044 =========== ========== </TABLE> See Notes to Consolidated Financial Statements
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 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, 2001 and December 31, 2000, the results of its operations for the three months and six months ended June 30, 2001 and 2000 and its cash flows for the six months ended June 30, 2001 and 2000 have been included. Operating results for the three and six months ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. These statements should be read in conjunction with the financial statements and notes thereto included in the company's 2000 Annual Report to Stockholders on Form 10-K. Note 2: - ------ On December 11, 2000, the company announced that its Board of Directors approved a formal plan to spin off the company's Office Systems business to stockholders as an independent, publicly-traded company. The Internal Revenue Service has notified the company that the spin-off will be tax free as provided for under the Internal Revenue Code. The transaction is expected to be completed by the end of the third quarter of 2001. Revenue of Office Systems was $155.2 million and $163.4 million for the quarters ended June 30, 2001 and 2000, respectively. For the six months ended June 30, 2001 and 2000, revenue was $307.1 million and $320.6 million, respectively. Net interest expense allocated to Office Systems was $3.0 million and $2.9 million for the quarters ended June 30, 2001 and 2000, respectively. For the six months ended June 30, 2001 and 2000, net interest expense allocated to Office Systems was $5.9 million and $5.4 million, respectively. Interest has been allocated based on the net assets of Office Systems charged at the company's weighted average borrowing rate. Operating results of Office Systems have been segregated and reported as discontinued operations in the Consolidated Statements of Income. Prior year results have been reclassified to conform to the current year presentation. Income from Office Systems for the three and six months ended June 30, 2001 was $.4 million (net of taxes of $.6 million), and $8.0 million (net of taxes of $5.4 million), respectively, offset by costs, expenses and restructuring charges directly associated with the spin-off. The company now expects the total amount of costs, expenses and restructuring charges related to the spin-off to exceed the income from the discontinued operations of Office Systems between the measurement date (December 11, 2000) and the spin-off date, by $10.8 million (net of taxes of $4.6 million), primarily as a result of continuing weakness in the copier business. This amount has been reflected as a loss on disposal of discontinued operations in the Consolidated Statements of Income for the three and six months ended June 30, 2001. Income from the discontinued operations of Office Systems for the three and six months ended June 30, 2000 was $18.9 million (net of taxes of $12.4 million) and $37.0 million (net of taxes of $24.1 million), respectively. Net assets of Office Systems have been separately classified in the Consolidated Balance Sheets. Cash flow impacts of Office Systems have not been segregated in the Consolidated Statements of Cash Flows. On January 14, 2000, the company sold its mortgage servicing business, Atlantic Mortgage & Investment Corporation, 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. Note 3: - ------ Inventories are comprised of the following: (Dollars in thousands) June 30, December 31, 2001 2000 -------------- -------------- Raw materials and work in process......... $ 71,034 $ 67,990 Supplies and service parts................ 43,316 38,708 Finished products......................... 52,567 61,271 -------------- -------------- Total .................................... $ 166,917 $ 167,969 ============== ==============
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 7 Note 4: - ------ Fixed assets are comprised of the following: <TABLE> (Dollars in thousands) June 30, December 31, 2001 2000 -------------- -------------- <S> <C> <C> Property, plant and equipment....................... $ 1,239,367 $ 1,195,319 Accumulated depreciation............................ (722,424) (704,007) -------------- -------------- Property, plant and equipment, net.................. $ 516,943 $ 491,312 ============== ============== Rental equipment and related inventories............ $ 1,197,579 $ 1,218,251 Accumulated depreciation............................ (720,349) (597,410) -------------- -------------- Rental equipment and related inventories, net....... $ 477,230 $ 620,841 ============== ============== Property leased under capital leases................ $ 19,381 $ 19,059 Accumulated amortization............................ (17,260) (16,756) -------------- -------------- Property leased under capital leases, net........... $ 2,121 $ 2,303 ============== ============== <FN> In connection with the company's meter transition, the company wrote down rental equipment in the second quarter of 2001. See Note 12 to the Consolidated Financial Statements. </FN> </TABLE> Note 5: - ------ The company has a shelf registration, permitting issuances of up to $500 million in debt securities (including medium-term notes) with a minimum maturity of nine months. In April 2001, the company issued the remaining $300 million of notes available under its shelf registration. These unsecured notes bear annual interest at 5.875% and mature in May 2006. The proceeds were used for general corporate purposes including the repayment of commercial paper, financing acquisitions and the repurchase of the company's stock. PBCC has $425 million of unissued debt securities available at June 30, 2001 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 $175 million remained available at June 30, 2001. Note 6: - ------ A reconciliation of the basic and diluted earnings per share computations for the three months ended June 30, 2001 and 2000 is as follows (in thousands, except per share data): <TABLE> 2001 2000 ------------------------------------ ------------------------------------ Per Per Income Shares Share Income Shares Share - ----------------------------------------------------------------- ------------------------------------ <S> <C> <C> <C> <C> <C> <C> Income from continuing operations $ 187,856 $ 146,333 Less: Preferred stock dividends (1) - Preference stock dividends (33) (36) - ----------------------------------------------------------------- ------------------------------------ Basic earnings per share $ 187,822 246,433 $ .76 $ 146,297 257,605 $ .57 - ----------------------------------------------------------------- ------------------------------------ Effect of dilutive securities: Preferred stock 1 13 - 14 Preference stock 33 984 36 1,065 Stock options 828 892 Other 162 126 - ----------------------------------------------------------------- ------------------------------------ Diluted earnings per share $ 187,856 248,420 $ .76 $ 146,333 259,702 $ .56 ================================================================= ==================================== </TABLE>
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 8 <TABLE> A reconciliation of the basic and diluted earnings per share computations for the six months ended June 30, 2001 and 2000 is as follows (in thousands, except per share data): 2001 2000 ------------------------------------ ------------------------------------ Per Per Income Shares Share Income Shares Share - ----------------------------------------------------------------- ------------------------------------ <S> <C> <C> <C> <C> <C> <C> Income from continuing operations $ 291,793 $ 279,786 Less: Preferred stock dividends (2) - Preference stock dividends (66) (71) - ----------------------------------------------------------------- ------------------------------------ Basic earnings per share $ 291,725 247,328 $ 1.18 $ 279,715 260,323 $ 1.08 - ----------------------------------------------------------------- ------------------------------------ Effect of dilutive securities: Preferred stock 2 14 - 14 Preference stock 66 998 71 1,072 Stock options 678 1,081 Other 129 134 - ----------------------------------------------------------------- ------------------------------------ Diluted earnings per share $ 291,793 249,147 $ 1.17 $ 279,786 262,624 $ 1.07 ================================================================= ==================================== </TABLE> Note 7: - ------ Revenue and operating profit by business segment for the three and six months ended June 30, 2001 and 2000 were as follows: <TABLE> <CAPTION> Three Months Ended June 30, Six Months Ended June 30, --------------------------- ---------------------------- (Dollars in thousands) 2001 2000 2001 2000 ----------- ------------ ------------ ----------- <S> <C> <C> <C> <C> Revenue: Global Mailing............................. $ 731,264 $ 732,488 $ 1,424,000 $ 1,430,539 Enterprise Solutions....................... 246,882 217,830 477,472 419,367 ----------- ------------ ------------ ----------- Total Messaging Solutions.................. 978,146 950,318 1,901,472 1,849,906 Capital Services........................... 42,718 47,307 85,715 92,484 ----------- ------------ ------------ ----------- Total revenue................................. $ 1,020,864 $ 997,625 $ 1,987,187 $ 1,942,390 =========== ============ ============ =========== Operating Profit: (1) Global Mailing............................. $ 229,418 $ 221,157 $ 436,589 $ 418,334 Enterprise Solutions....................... 19,405 19,786 38,224 34,481 ----------- ------------ ------------ ----------- Total Messaging Solutions.................. 248,823 240,943 474,813 452,815 Capital Services........................... 15,446 15,997 30,151 29,118 ----------- ------------ ------------ ----------- Total operating profit....................... $ 264,269 $ 256,940 $ 504,964 $ 481,933 Unallocated amounts: Net interest (corporate interest expense, net of intercompany transactions)......... (16,248) (15,524) (36,007) (27,841) Corporate expense.......................... (36,648) (27,911) (65,534) (45,896) Other income............................... 362,172 - 362,172 - Cost of meter transition................... (247,700) - (247,700) - Restructuring charges...................... (27,609) - (70,760) - ----------- ------------ ------------ ----------- Income from continuing operations before income taxes................................. $ 298,236 $ 213,505 $ 447,135 $ 408,196 =========== ============ ============ =========== <FN> (1) Operating profit excludes general corporate expenses, income taxes and net interest other than that related to finance operations. </FN> </TABLE>
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 9 Note 8: - ------ Comprehensive income for the three and six months ended June 30, 2001 and 2000 was as follows: (Dollars in thousands) <TABLE> Three Months Ended June 30, Six Months Ended June 30, --------------------------- ---------------------------- 2001 2000 2001 2000 ----------- ----------- ------------ ------------ <S> <C> <C> <C> <C> Net income................................... $ 177,029 $ 165,957 $ 280,966 $ 312,827 Other comprehensive income: Foreign currency translation adjustments... (12,469) (22,993) (873) (21,783) Cumulative effect of accounting change..... - - (9,152) - Net unrealized gains on derivative instruments.............................. 1,367 - 2,542 - ----------- ----------- ------------ ------------ Comprehensive income......................... $ 165,927 $ 142,964 $ 273,483 $ 291,044 =========== =========== ============ ============ </TABLE> Note 9: - ------ In 1998, Statement of Financial Accounting Standards (FAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," amended in 2000 by FAS No. 138, was issued. FAS 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 adopted the provisions of FAS No. 133 in the first quarter of 2001. The company uses derivatives to reduce the volatility in earnings and cash flows associated with the impact of interest rate changes and foreign currency fluctuations due to its investing and funding activities and its operations in different foreign currencies. Derivatives designated as cash flow hedges include primarily foreign exchange contracts and interest rate swaps related to variable-rate debt. Derivatives designated as fair value hedges include primarily interest rate swaps related to fixed-rate debt. The adoption of FAS No. 133 has resulted in an after-tax reduction to accumulated other comprehensive income of $6.6 million, including a one-time cumulative effect of accounting change which reduced accumulated other comprehensive income by approximately $9.2 million in the first quarter of 2001. The adoption of FAS No. 133 has also impacted assets and liabilities recorded on the Consolidated Balance Sheet. The adoption of FAS No. 133 did not materially impact results of operations in the three and six months ended June 30, 2001. In 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," summarizing certain guidance in applying generally accepted accounting principles to revenue recognition in financial statements. The company adopted the provisions of SAB No. 101 in the fourth quarter of 2000, retroactive to January 1, 2000. The adoption of SAB No. 101 resulted in a one-time cumulative after-tax reduction in net income of $4.7 million (net of taxes of approximately $3.1 million) in the first quarter of 2000. The reduction to net income is primarily attributable to the deferral of sales recognition of software-enabled mail creation equipment and shipping products until installation. In 2000, FAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" was issued, replacing FAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." FAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral, as well as requiring certain additional disclosures. However, it carries over most of the provisions contained in FAS No. 125. FAS No. 140 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001. However, it is effective for the recognition and reclassification of collateral and for disclosures relating to those transactions for the year ended December 31, 2000. The company believes it is in compliance with these standards in all material respects. In July 2001, FAS No. 141, "Business Combinations" and FAS No. 142, "Goodwill and Other Intangible Assets" were issued requiring business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and refining the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against this new criterion and may result in certain intangibles being included in goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. FAS No. 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead would be reviewed for impairment and charged against results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The provisions of each statement which apply to goodwill and intangible assets acquired prior to June 30, 2001 will be adopted by the company on January 1, 2002. The adoption of these accounting standards is expected to reduce the amortization of intangible assets commencing January 1, 2002; however, impairment reviews may result in future periodic write-downs.
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 10 Note 10: - ------- On June 29, 2001, the company completed its acquisition of Danka Services International (DSI) from Danka Business Systems PLC for $290 million in cash. DSI provides on- and off-site document management services, including the management of central reprographic departments, the placement and maintenance of photocopiers, print-on-demand operations and document archiving and retrieval services. The acquisition has been accounted for under the purchase method and accordingly, the operating results of DSI have been included in the company's consolidated financial statements since the date of acquisition. The balance sheet reflects the preliminary allocation of the purchase price based on the initially estimated fair values of assets and liabilities acquired. On June 5, 2001, the company completed the acquisition of Bell & Howell's International Mail and Messaging Technologies (MMT) business in Europe, Africa, the Middle East and Asia, for $51 million in cash. MMT markets and services high-end mail processing, sorting and service-related products through a network of distributors and direct operations. The acquisition has been accounted for under the purchase method and accordingly, the operating results of the acquisition have been included in the company's consolidated financial statements since the date of acquisition. The balance sheet reflects the preliminary allocation of the purchase price based on the initially estimated fair values of assets and liabilities acquired. The acquisitions of DSI and MMT did not materially impact the results of operations for the three and six months ended June 30, 2001. The following unaudited pro forma consolidated results of operations have been prepared as if the acquisitions of DSI and MMT had occurred on January 1, 2000: (Dollars in thousands) Three Months Ended June 30, Six Months Ended June 30, --------------------------- -------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Total revenue $ 1,102,930 $ 1,085,449 $ 2,164,779 $ 2,120,088 The pro forma consolidated results do not purport to be indicative of results that would have occurred had the acquisitions been completed on January 1, 2000, nor do they purport to be indicative of the results that will be obtained in the future. The pro forma earnings results of these acquisitions were not material to earnings on either a per share or an aggregate basis. Note 11: - ------- As previously announced, the company adopted a formal restructuring plan in the first quarter of 2001, to implement a common, streamlined business infrastructure across the corporation as a result of our decisions to spin off our office systems business and align our mailing business on a global basis, as well as cost saving opportunities resulting from strategic acquisitions and partnerships and additional benefits attained from the consolidation of our IT organization and ERP initiatives. In connection with this plan, the company recorded a pretax restructuring charge of $28.9 million during the second quarter of 2001, of which $27.6 million was related to continuing operations, and the remaining $1.3 million related to discontinued operations. For the six months ended June 30, 2001, pretax restructuring charges were $103.9 million, of which $70.8 million was related to continuing operations and the remaining $33.1 million was related to discontinued operations. The restructuring charges related to continuing operations have been segregated in the Consolidated Statements of Income for the three and six months ended June 30, 2001. The restructuring charges related to discontinued operations have been reported in discontinued operations in the Consolidated Statements of Income for the three and six months ended June 30, 2001. See Note 2 to the Consolidated Financial Statements. The restructuring charges related to continuing operations are comprised of: (Dollars in millions) Three Six Months Ended Months Ended June 30, 2001 June 30, 2001 ------------- ------------- Severance and benefit costs............... $ 12.4 $ 47.6 Asset impairments......................... 14.1 16.3 Other exit costs.......................... 1.1 6.9 ------------- ------------- $ 27.6 $ 70.8 ============= ============= All restructuring charges, except for the asset impairments will result in cash outflows. The severance and benefit costs relate to a reduction in workforce of approximately 1,100 employees worldwide to be completed over the next 12 months. The workforce reductions relate to actions across several of our businesses resulting from infrastructure and process improvements and our continuing efforts to streamline operations, and include managerial, professional, clerical and technical roles. Approximately 85% of the workforce reductions are in the U.S. The majority of the international workforce reductions are in Europe. None of the reductions will impact sales coverage. As of June 30, 2001, 360 employees were separated under these initiatives and approximately $15 million of severance and benefit costs were paid. Asset impairments relate primarily to the write down of capitalized hardware and software, resulting from the alignment of our mailing business on a global basis and our ERP initiatives.
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 11 The restructuring charges related to discontinued operations are comprised of: (Dollars in millions) Three Six Months Ended Months Ended June 30, 2001 June 30, 2001 -------------- ------------- Severance and benefit costs............. $ .4 $ 1.9 Asset impairments....................... .9 17.4 Other exit costs........................ - 13.8 -------------- ------------- $ 1.3 $ 33.1 ============== ============= The severance and benefit costs relate to a reduction in workforce of approximately 25 employees. The asset impairments relate primarily to a write-down of residual values in connection with leases of copier equipment and the write-down of facsimile and copier equipment, resulting from the spin-off of our office systems business. Other exit costs relate primarily to incremental costs associated with cancellation and separation of facility occupancy leases that are shared between the company and Office Systems. Note 12: - ------- As previously announced, the company adopted a formal meter transition plan in the second quarter of 2001, to transition to the next generation of networked mailing technology. The information capture and exchange made possible by advanced technology, turns the postage meter into an "intelligent" terminal that networks the mailer to postal and carrier information and systems. This two-way information architecture, in turn, enables convenient access to and delivery of value-added services such as tracking, delivery confirmation and rate information. The adoption of this plan was facilitated by the recent settlement agreement with Hewlett-Packard that expanded our access to technology and our ability to move to networked products combined with our expectations that the U.S. and postal services around the world will continue to encourage the migration of mailing systems to networked digital technologies. In connection with this plan, the company recorded a non-cash pretax charge of $247.7 million during the second quarter of 2001, related to assets associated with our non-networked mailing technology, of which $128.4 million related to the impairment of lease residuals, $71.3 million related to the impairment of meter rental assets, $27.6 million related to reduced inventory valuation and $20.4 million related to additional depreciation costs on meter rental assets. Note 13: - ------- In June 2001, the company and Hewlett-Packard announced that they had reached an agreement resolving a lawsuit filed by the company in 1995. The lawsuit arose out of a dispute over print technology patents. Under the terms of the agreement, the companies resolved all pending patent litigation without admission of infringement and the company received $400 million in cash. This payment, net of legal fees and related expenses of $37.8 million was recorded as other income in the Consolidated Statements of Income in the second quarter of 2001. Note 14: - ------- In July 2001, the company announced that it is in discussions with Fimalac, the French diversified services group, for the acquisition of Secap SA, Fimalac's mailing subsidiary. Secap SA provides a range of mail processing equipment, supplies and technology for low- to mid-volume mailers. The parties have discussed a purchase price of approximately FF 1.45 billion. In accordance with French labor law, the proposed transaction has been submitted to the companies' respective employee representatives for review and opinion, and is subject to the execution of definitive documentation, completion of due diligence, and receipt of approvals by the appropriate regulatory authorities and the boards of directors of Pitney Bowes and Fimalac.
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------- Results of Continuing Operations - second quarter of 2001 vs. second quarter of - -------------------------------------------------------------------------------- 2000 - ---- Revenue increased two percent in the second quarter of 2001 to $1,020.9 million compared with $997.6 million in the second quarter of 2000. Income from continuing operations increased 28 percent to $187.9 million from $146.3 million for the same period in 2000. Diluted earnings per share from continuing operations increased 34 percent to 76 cents in the second quarter of 2001, compared with 56 cents in the second quarter of 2000. Excluding special gains and charges in the second quarter of 2001, income from continuing operations decreased one percent to $144.6 million from $146.3 million for the same period in 2000 while diluted earnings per share from continuing operations increased 3 percent to 58 cents in the second quarter of 2001. Included as special gains and charges in the second quarter of 2001 are a $29 million pre-tax restructuring charge related to changes in infrastructure, process improvements and the planned spin-off of Office Systems, of which $28 million was related to continuing operations and $1 million to discontinued operations, a $248 million non-cash pre-tax charge associated with the company's transition to the next generation of networked mailing technology, and a net pretax gain of $362 million resulting from the settlement of a lawsuit with Hewlett-Packard. Second quarter 2001 revenue included $522.4 million from sales, up seven percent from $488.3 million in the second quarter of 2000; $365.1 million from rentals and financing, down six percent from $386.6 million; and $133.3 million from support services, up nine percent from $122.7 million. Rentals and financing revenue was negatively impacted in the second quarter of 2001 by the prior year sale of the credit card portfolio. Excluding the impact of the prior year sale of the credit card portfolio, rentals and financing revenue was flat in the second quarter of 2001 compared with the same period in 2000. The Global Mailing segment includes worldwide revenues and related expenses from the rental of postage meters and the sale, rental and financing of mailing equipment, including mail finishing and software-based mail creation equipment, software-based shipping, transportation and logistics systems, and related supplies and services. During the second quarter of 2001, revenue was flat and operating profit increased four percent. Revenue growth was negatively impacted by the sale of the credit card portfolio at the end of the second quarter of 2000 and the negative impact of foreign currency, principally related to the British Pound, Canadian Dollar and the Euro. Excluding the impact of these two factors, Global Mailing revenues increased four percent. Core metering and mail finishing applications performed in line with the second quarter of 2000 despite the impact of the slowing economy. Global Mailing's operating profit benefited from lower administrative costs due to continuous process improvements.
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 13 The Enterprise Solutions segment includes Pitney Bowes Management Services and Document Messaging Technologies. Pitney Bowes Management Services includes facilities management contracts for advanced mailing, reprographic, document management and other value-added services to large enterprises. Document Messaging Technologies includes sales, service and financing of high speed, software-enabled production mail systems, sorting equipment, incoming mail systems, electronic statement, billing and payment solutions, and mailing software. During the second quarter of 2001, revenue grew 13 percent and operating profit decreased two percent. Revenue growth was driven by a 14 percent increase at Pitney Bowes Management Services and an 11 percent increase at Document Messaging Technologies resulting from higher volume in both businesses. Operating profit comparisons, particularly for Document Messaging Technologies were adversely impacted by a previously reported settlement received from Bell & Howell in the second quarter of 2000 and costs associated with the investments in acquisition and growth initiatives during the second quarter of 2001. Excluding these items, operating profit for the segment would have increased at a double- digit rate. Total Messaging Solutions, the combined results of the Global Mailing segment and Enterprise Solutions segment, reported three percent revenue and operating profit growth. The Capital Services segment includes primarily asset- and fee-based income generated by large-ticket, non-core asset transactions. During the quarter, revenue decreased ten percent and operating profit decreased three percent. This performance is consistent with the company's previously stated strategy to concentrate on fee-based income opportunities. Cost of sales increased to 58.2 percent of sales revenue in the second quarter of 2001 compared with 57.4 percent in the second quarter of 2000. The increase was due primarily to the increasing mix of lower margin Pitney Bowes Management Services sales revenue. Cost of rentals and financing was flat at 24.7 percent of related revenues in both the second quarter of 2001 and 2000, respectively. Selling, service and administrative expenses were 32.9 percent of revenue in the second quarter of 2001 compared with 32.8 percent in the second quarter of 2000. The increase is a result of costs associated with investments in acquisition and growth initiatives, partially offset by the company's continued emphasis on controlling operating expenses. Research and development expenses increased 14.2 percent to $34.9 million in the second quarter of 2001 compared with $30.5 million in the second quarter of 2000. The increase reflects the company's continued commitment to developing new technologies and other mailing and software products. Net interest expense decreased to $44.3 million in the second quarter of 2001 from $50.4 million in the second quarter of 2000. The decrease is due mainly to lower average interest rates in 2001. The effective tax rate for the second quarter of 2001 was 37 percent. Excluding special gains and charges, the effective tax rate for the second quarter of 2001 was 31.6 percent compared with 31.5 percent in 2000. Excluding special gains and charges, income from continuing operations decreased 1.2 percent while diluted earnings per share from continuing operations increased 3.4 percent. The reason for the increase in diluted earnings per share outperforming income from continuing operations was the company's share repurchase program.
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 14 Results of Continuing Operations - six months of 2001 vs. six months of 2000 - ---------------------------------------------------------------------------- For the first six months of 2001 compared with the same period of 2000, revenue increased two percent to $1,987.2 million, and income from continuing operations, excluding special gains and charges decreased one percent to $276.1 million. The factors that affected revenue and earnings performance included those cited for the second quarter of 2001 versus 2000. Discontinued Operations - ----------------------- On December 11, 2000, the company announced that its Board of Directors approved a formal plan to spin off the company's office systems business to stockholders as an independent, publicly-traded company. The transaction is expected to be completed by the end of the third quarter of 2001. Operating results of Office Systems have been segregated and reported as discontinued operations in the Consolidated Statements of Income. Prior year results have been reclassified to conform to the current year presentation. See Note 2 to the Consolidated Financial Statements. On January 14, 2000, the company sold its mortgage servicing business, Atlantic Mortgage & Investment Corporation, 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. Accounting Pronouncements - ------------------------- In 1998, Statement of Financial Accounting Standards (FAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," amended in 2000 by FAS No. 138, was issued. FAS 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 adopted the provisions of FAS No. 133 in the first quarter of 2001. The company uses derivatives to reduce the volatility in earnings and cash flows associated with the impact of interest rate changes and foreign currency fluctuations due to its investing and funding activities and its operations in different foreign currencies. Derivatives designated as cash flow hedges include primarily foreign exchange contracts and interest rate swaps related to variable-rate debt. Derivatives designated as fair value hedges include primarily interest rate swaps related to fixed-rate debt. The adoption of FAS No. 133 has resulted in an after-tax reduction to accumulated other comprehensive income of $6.6 million, including a one-time cumulative effect of accounting change which reduced accumulated other comprehensive income by approximately $9.2 million in the first quarter of 2001. The adoption of FAS No. 133 has also impacted assets and liabilities recorded on the Consolidated Balance Sheet. The adoption of FAS No. 133 did not materially impact results of operations in the three and six months ended June 30, 2001.
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 15 In 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," summarizing certain guidance in applying generally accepted accounting principles to revenue recognition in financial statements. The company adopted the provisions of SAB No. 101 in the fourth quarter of 2000, retroactive to January 1, 2000. The adoption of SAB No. 101 resulted in a one-time cumulative after-tax reduction in net income of $4.7 million (net of taxes of approximately $3.1 million) in the first quarter of 2000. The reduction to net income is primarily attributable to the deferral of sales recognition of software-enabled mail creation equipment and shipping products until installation. In 2000, FAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" was issued, replacing FAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." FAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral, as well as requiring certain additional disclosures. However, it carries over most of the provisions contained in FAS No. 125. FAS No. 140 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001. However, it is effective for the recognition and reclassification of collateral and for disclosures relating to those transactions for the year ended December 31, 2000. The company believes it is in compliance with these standards in all material respects. In July 2001, FAS No. 141, "Business Combinations" and FAS No. 142, "Goodwill and Other Intangible Assets" were issued requiring business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and refining the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against this new criterion and may result in certain intangibles being included in goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. FAS No. 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead would be reviewed for impairment and charged against results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The provisions of each statement which apply to goodwill and intangible assets acquired prior to June 30, 2001 will be adopted by the company on January 1, 2002. The adoption of these accounting standards is expected to reduce the amortization of intangible assets commencing January 1, 2002; however, impairment reviews may result in future periodic write-downs.
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 16 Restructuring Charges - --------------------- As previously announced, the company adopted a formal restructuring plan in the first quarter of 2001, to implement a common, streamlined business infrastructure across the corporation as a result of our decisions to spin off our office systems business and align our mailing business on a global basis, as well as cost saving opportunities resulting from strategic acquisitions and partnerships and additional benefits attained from the consolidation of our IT organization and ERP initiatives. In connection with this plan, the company recorded a pretax restructuring charge of $28.9 million during the second quarter of 2001, of which $27.6 million was related to continuing operations, and the remaining $1.3 million related to discontinued operations. For the six months ended June 30, 2001, pretax restructuring charges were $103.9 million, of which $70.8 million was related to continuing operations and the remaining $33.1 million was related to discontinued operations. The company expects to record an additional pretax restructuring charge of approximately $10 million to $15 million in the third quarter of 2001 to complete this restructuring plan. The restructuring charges related to continuing operations have been segregated in the Consolidated Statements of Income for the three and six months ended June 30, 2001. The restructuring charges related to discontinued operations have been reported in discontinued operations in the Consolidated Statements of Income for the three and six months ended June 30, 2001. See Note 2 to the Consolidated Financial Statements. The restructuring charges related to continuing operations are comprised of: (Dollars in millions) Three Six Months Ended Months Ended June 30, 2001 June 30, 2001 ------------- ------------- Severance and benefit costs............. $ 12.4 $ 47.6 Asset impairments....................... 14.1 16.3 Other exit costs........................ 1.1 6.9 ------------- ------------- $ 27.6 $ 70.8 ============= ============= All restructuring charges, except for the asset impairments will result in cash outflows. The severance and benefit costs relate to a reduction in workforce of approximately 1,100 employees worldwide to be completed over the next 12 months. The workforce reductions relate to actions across several of our businesses resulting from infrastructure and process improvements and our continuing efforts to streamline operations, and include managerial, professional, clerical and technical roles. Approximately 85% of the workforce reductions are in the U.S. The majority of the international workforce reductions are in Europe. None of the reductions will impact sales coverage. As of June 30, 2001, 360 employees were separated under these initiatives and approximately $15 million of severance and benefit costs were paid. Asset impairments relate primarily to the write down of capitalized hardware and software, resulting from the alignment of our mailing business on a global basis and ERP initiatives.
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 17 The restructuring charges related to discontinued operations are comprised of: (Dollars in millions) Three Six Months Ended Months Ended June 30, 2001 June 30, 2001 ------------- ------------- Severance and benefit costs............. $ .4 $ 1.9 Asset impairments....................... .9 17.4 Other exit costs........................ - 13.8 ------------- ------------- $ 1.3 $ 33.1 ============= ============= The severance and benefit costs relate to a reduction in workforce of approximately 25 employees. The asset impairments relate primarily to a write-down of residual values in connection with leases of copier equipment and the write-down of facsimile and copier equipment, resulting from the spin-off of our office systems business. Other exit costs relate primarily to incremental costs associated with cancellation and separation of facility occupancy leases that are shared between the company and Office Systems. Total cash payments resulting from the restructuring charges for the six months ended June 30, 2001 were approximately $17 million. We expect that the majority of the remaining cash outflows related to restructuring charges will take place over the next nine months, funded primarily by cash provided by operating activities. The restructuring charges are expected to increase our operating efficiency and effectiveness in 2002 and beyond while enhancing growth, primarily as a result of reduced personnel-related expenses. Meter Transition - ---------------- As previously announced, the company adopted a formal meter transition plan in the second quarter of 2001, to transition to the next generation of networked mailing technology. The information capture and exchange made possible by advanced technology, turns the postage meter into an "intelligent" terminal that networks the mailer to postal and carrier information and systems. This two-way information architecture, in turn, enables convenient access to and delivery of value-added services such as tracking, delivery confirmation and rate information. The adoption of this plan was facilitated by the recent settlement agreement with Hewlett-Packard that expanded our access to technology and our ability to move to networked products combined with our expectations that the U.S. and postal services around the world will continue to encourage the migration of mailing systems to networked digital technologies. In connection with this plan, the company recorded a non-cash pretax charge of $247.7 million during the second quarter of 2001, related to assets associated with our non-networked mailing technology, of which $128.4 million related to the impairment of lease residuals, $71.3 million related to the impairment of meter rental assets, $27.6 million related to reduced inventory valuation and $20.4 million related to additional depreciation costs on meter rental assets.
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 18 Other Matters - ------------- In June 2001, the company and Hewlett-Packard announced that they had reached an agreement resolving a lawsuit filed by the company in 1995. The lawsuit arose out of a dispute over print technology patents. Under the terms of the agreement, the companies resolved all pending patent litigation without admission of infringement and the company received $400 million in cash. This payment, net of legal fees and related expenses of $37.8 million was recorded as other income in the Consolidated Statements of Income in the second quarter of 2001. Liquidity and Capital Resources - ------------------------------- The ratio of current assets to current liabilities decreased to .86 to 1 at June 30, 2001 compared with .91 to 1 at December 31, 2000 primarily as a result of costs associated with the restructuring and meter transition plans. The company has a shelf registration, permitting issuances of up to $500 million in debt securities (including medium-term notes) with a minimum maturity of nine months. In April 2001, the company issued the remaining $300 million of notes available under its shelf registration. These unsecured notes bear annual interest at 5.875% and mature in May 2006. The proceeds were used for general corporate purposes including the repayment of commercial paper, financing acquisitions and the repurchase of company stock. PBCC has $425 million of unissued debt securities available at June 30, 2001 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 $175 million remained available at June 30, 2001. The company believes that its financing needs for the next 12 months can be met with cash generated internally, money from existing credit agreements, debt issued under new and existing shelf registration statements and existing commercial paper and medium-term note programs. The ratio of total debt to total debt and stockholders' equity including the preferred stockholders' equity in a subsidiary company was 72.6 percent at June 30, 2001 compared with 73.0 percent at December 31, 2000. Book value per common share increased to $5.25 at June 30, 2001 from $5.16 at December 31, 2000 driven primarily by income from continuing operations, partially offset by the repurchase of common shares. During the second quarter of 2001, the company repurchased 1.8 million common shares for $71.7 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.
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 19 Capital Investments - ------------------- In the first six months of 2001, net investments in fixed assets included $56.3 million in net additions to property, plant and equipment and $59.8 million in net additions to rental equipment and related inventories compared with $47.2 million and $78.8 million, respectively, in the same period in 2000. 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 related to the discontinued operations of Office Systems. Expenditures for property, plant and equipment, and rental equipment and related inventories are expected to be lower than historical levels as a result of the spin-off of the company's Office Systems business. Acquisitions - ------------ On June 29, 2001, the company completed its acquisition of Danka Services International (DSI) from Danka Business Systems PLC for $290 million in cash. DSI provides on- and off-site document management services, including the management of central reprographic departments, the placement and maintenance of photocopiers, print-on-demand operations and document archiving and retrieval services. The acquisition has been accounted for under the purchase method and accordingly, the operating results of DSI have been included in the company's consolidated financial statements since the date of acquisition. The balance sheet reflects the preliminary allocation of the purchase price based on the initially estimated fair values of assets and liabilities acquired. On June 5, 2001, the company completed the acquisition of Bell & Howell's International Mail and Messaging Technologies (MMT) business in Europe, Africa, the Middle East and Asia, for $51 million in cash. MMT markets and services high-end mail processing, sorting and service-related products through a network of distributors and direct operations. The acquisition has been accounted for under the purchase method and accordingly, the operating results of the acquisition have been included in the company's consolidated financial statements since the date of acquisition. The balance sheet reflects the preliminary allocation of the purchase price based on the initially estimated fair values of assets and liabilities acquired. The acquisitions of DSI and MMT did not materially impact the results of operations for the three and six months ended June 30, 2001. See Note 10 to the Consolidated Financial Statements. Subsequent Events - ----------------- In July 2001 the company announced that it is in discussions with Fimalac, the French diversified services group, for the acquisition of Secap SA, Fimalac's mailing subsidiary. Secap provides a range of mail processing equipment, supplies and technology for low- to mid-volume mailers. The parties have discussed a purchase price of approximately FF 1.45 billion. In accordance with French labor law, the proposed transaction has been submitted to the companies' respective employee representatives for review and opinion, and is subject to the execution of definitive documentation, completion of due diligence, and receipt of approvals by the appropriate regulatory authorities and the boards of directors of Pitney Bowes and Fimalac.
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 20 Regulatory Matters - ------------------ In 2000, the U.S. Postal Service (USPS) 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 2000 can be extended to December 31, 2001. In 2000, the USPS also issued a proposal to cease placements of non-digital, or letterpress, meters as follows: o New placements of non-digital meters with a "timeout" feature that enables the meters to be automatically disabled, if not reset within a specified time period are no longer permitted after December 2003. o New placements of non-digital meters without the "timeout" feature are no longer permitted after June 2001. The company has submitted comments to the USPS's proposed schedules described above. The company adopted a formal meter transition plan in the second quarter of 2001, to transition to the next generation of networked mailing technology. See Note 12 to the Consolidated Financial Statements. As a result of the company's aggressive efforts to meet the USPS's mechanical meter migration phaseout schedule combined with the company's ongoing and continuing investment in advanced postage evidencing technologies, mechanical meters represented less than 1% of the company's installed meter base at June 30, 2001 and December 31, 2000. The company continues to work, in close cooperation with the USPS, to convert those mechanical meter customers who have not migrated to digital or electronic meters. In May 1995, the USPS publicly announced its concept of its Information Based Indicia Program (IBIP) for future postage evidencing devices. As initially stated by the USPS, the purpose of the program was to develop a new standard for future digital postage evidencing devices which would significantly enhance postal revenue security and support expanded USPS value-added services to mailers. The program would consist of the development of four separate specifications: o the Indicium specification - the technical specifications for the indicium to be printed o a Postal Security Device specification - the technical specification for the device that would contain the accounting and security features of the system o a Host specification o a Vendor Infrastructure specification
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 21 During the period from May 1995 through December 2000, the company submitted extensive comments to a series of proposed IBIP specifications issued by the USPS. In March 2000, the USPS issued the latest set of proposed specifications, entitled "Performance Criteria for Information-Based Indicia and Security Architecture for Open IBI Postage Evidencing Systems" (the IBI Performance Criteria). The company has submitted comments to the IBI Performance Criteria. In September and October 2000, the USPS issued further proposed regulations regarding postage evidencing systems using Information Based Indicia, titled "Refunds and Exchanges" and "Production, Distribution and Use of Postal Security Devices and Information-Based Indicia." The Company has submitted comments regarding those proposed regulations. In March 2000, the company received approval from the USPS for the commercial launch of the Internet version of a product which satisfies the proposed IBI Performance Criteria, ClickStampTM Online. 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. Forward-Looking Statements - -------------------------- The company wants to caution readers that any forward-looking statements with the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 in this Form 10-Q, other reports or press releases or made by the company's management involve risks and uncertainties which may change based on various important factors. These forward-looking statements are those which talk about the company's or management's current expectations as to the future and include, but are not limited to, statements about the amounts, timing and results of possible restructuring charges and future earnings. Words such as "estimate," "project," "plan," "believe," "expect," "anticipate," "intend," and similar expressions may identify such forward-looking statements. Some of the factors which could cause future financial performance to differ materially from the expectations as expressed in any forward-looking statement made by or on behalf of the company include: o changes in postal regulations o timely development and acceptance of new products o success in gaining product approval in new markets where regulatory approval is required o successful entry into new markets o mailers' utilization of alternative means of communication or competitors' products o the company's success at managing customer credit risk o changes in interest rates o foreign currency fluctuations o terms and timing of the spin-off of Office Systems o terms and timing of the restructuring plan o regulatory approvals and satisfaction of other conditions to consummation of any acquisitions
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 22 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 4: Submission of Matters to a Vote of Security Holders Below are the final results of the voting at the annual meeting of stockholders held on May 14, 2001: Proposal 1 - Election of Directors Nominee For Withheld ----------------- ----------- ---------- Linda G. Alvarado 213,151,915 1,838,736 Ernie Green 213,220,397 1,770,254 John S. McFarlane 213,263,620 1,727,031 Proposal 2 - Appointment of PricewaterhouseCoopers LLP as Independent Accountants For Against Abstain ----------- ----------- --------- 208,725,278 5,316,265 949,108 Proposal 3 - Approve the performance goals under the Key Employee's Incentive Plan For Against Abstain ----------- ----------- --------- 208,051,759 5,469,371 1,469,521 Proposal 4 - Stockholder proposal relating to the Stockholder Rights Plan For Against Abstain ----------- ----------- --------- 100,847,798 88,689,411 2,797,643 The following other directors continued their term of office after the Annual Meeting: Colin G. Campbell Herbert L. Henkel Michael J. Critelli James H. Keyes Jessica P. Einhorn Michael I. Roth In July 2001, the board of directors elected Eduardo R. Menasce, David L. Shedlarz and Robert E. Weissman to the board, effective September 1, 2001.
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 23 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 (b) Reports on Form 8-K On June 15, 2001, the company filed a current report on Form 8-K pursuant to Item 5 thereof, reporting the Press Release dated June 14, 2000 regarding its plan to transform the global mailing industry by developing a networked platform for its mailing systems. On June 5, 2001, the company filed a current report on Form 8-K pursuant to Item 5 thereof, reporting the Press Release dated June 5, 2001 regarding its completed acquisition of Bell & Howell's International Mail and Messaging Technologies business. On June 5, 2001, the company filed a current report on Form 8-K pursuant to Item 5 thereof, reporting the Press Release dated June 4, 2001 regarding its announcement of agreements which settle litigation between the company and Hewlett-Packard Company. On May 17, 2001, the company filed a current report on Form 8-K pursuant to Item 5 thereof, reporting votes received on the agenda items at the company's Annual Meeting of Stockholder's, held on May 14, 2001. On April 19, 2001, the company filed a current report on Form 8-K pursuant to Item 5 thereof, reporting the Press Release dated April 17, 2001 for the quarter ended March 31, 2001. On April 19, 2001, the company filed a current report on Form 8-K pursuant to Item 5 thereof, reporting the Press Release dated April 18, 2001 regarding its announcement to acquire Bell & Howell's International Mail and Messaging Technologies. On April 18, 2001, 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 2001 Annual Meeting and Proxy Statement. On April 13, 2001, the company filed a current report on Form 8-K pursuant to Item 5 thereof, reporting the Press Release dated April 9, 2001 regarding its announcement to acquire Danka Services International.
Pitney Bowes Inc. - Form 10-Q Six Months Ended June 30, 2001 Page 24 Signatures ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PITNEY BOWES INC. August 13, 2001 /s/ B. P. Nolop ------------------------------------------------ B. P. Nolop Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ A. F. Henock ------------------------------------------------ A. F. Henock Vice President - Finance (Principal Accounting Officer)
Exhibit Index ------------- Reg. S-K Exhibits Description -------- --------------------------------- (12) Computation of ratio of earnings to fixed charges
<TABLE> Exhibit (12) Pitney Bowes Inc. Computation of Ratio of Earnings to Fixed Charges (1) ----------------------------------------------------- (Dollars in thousands) <CAPTION> Three Months Ended Six Months Ended June 30, June 30, --------------------------- --------------------------- 2001 2000(2) 2001 2000(2) ------------ ------------ ------------ ----------- <S> <C> <C> <C> <C> Income from continuing operations before income taxes........................... $ 298,236 $ 213,505 $ 447,135 $ 408,196 Add: Interest expense............................. 46,338 52,459 99,126 98,967 Portion of rents representative of the interest factor........................... 11,079 10,731 21,345 21,339 Amortization of capitalized interest.................................. 243 243 486 486 Minority interest in the income of subsidiary with fixed charges........................ 2,648 3,543 6,009 6,825 ------------ ------------ ------------ ----------- Income as adjusted.............................. $ 358,544 $ 280,481 $ 574,101 $ 535,813 ============ ============ ============ =========== Fixed charges: Interest expense............................. $ 46,338 $ 52,459 $ 99,126 $ 98,967 Capitalized interest......................... - 974 - 1,513 Portion of rents representative of the interest factor........................... 11,079 10,731 21,345 21,339 Minority interest, excluding taxes, in the income of subsidiary with fixed charges............. 4,204 5,169 9,208 9,958 ------------ ------------ ------------ ----------- Total fixed charges...................... $ 61,621 $ 69,333 $ 129,679 $ 131,777 ============ ============ ============ =========== Ratio of earnings to fixed charges................................ 5.82 4.05 4.43 4.07 ============ ============ ============ =========== Ratio of earnings to fixed charges excluding minority interest..................................... 6.20 4.32 4.72 4.34 ============ ============ ============ =========== <FN> (1) The computation of the ratio of earnings to fixed charges has been computed by dividing income from continuing operations before income taxes as adjusted by fixed charges. Included in fixed charges is one-third of rental expense as the representative portion of interest. (2) Interest expense and the portion of rents representative of the interest factor of the discontinued operations of Office Systems have been excluded from fixed charges in the computation. Including these amounts in fixed charges, the ratio of earnings to fixed charges would be 5.59 and 4.27 for the three and six months ended June 30, 2001 and 3.94 and 3.96 for the three and six months ended June 30, 2000, respectively. The ratio of earnings to fixed charges excluding minority interest would be 5.93 and 4.54 for the three and six months ended June 30, 2001, respectively and 4.19 and 4.21 for the three and six months ended June 30, 2000, respectively. </FN> </TABLE>