UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number: 1-3579
PITNEY BOWES INC.(Exact name of registrant as specified in its charter)
Delaware
06-0495050
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1 Elmcroft Road, Stamford, Connecticut
06926-0700
(Address of principal executive offices)
(Zip Code)
(203) 356-5000(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Yes þ
No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Yes o
No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of November 3, 2009.
Class
Outstanding
Common Stock, $1 par value per share
207,138,862 shares
1
PITNEY BOWES INC.INDEX
Page Number
Part I - Financial Information:
Item 1:
Financial Statements (Unaudited)
Condensed Consolidated Statements of IncomeThree and Nine Months Ended September 30, 2009 and 2008
3
Condensed Consolidated Balance SheetsSeptember 30, 2009 and December 31, 2008
4
Condensed Consolidated Statements of Cash FlowsNine Months Ended September 30, 2009 and 2008
5
Notes to Condensed Consolidated Financial Statements
6
Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
Item 3:
Quantitative and Qualitative Disclosures about Market Risk
39
Item 4:
Controls and Procedures
Part II - Other Information:
Legal Proceedings
Item 1A:
Risk Factors
40
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Submission of Matters to a Vote of Security Holders
Item 5:
Other Information
Item 6:
Exhibits
Signatures
41
2
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
PITNEY BOWES INC.CONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited; in thousands, except per share data)
Three Months Ended September 30,
Nine Months Ended September 30,
2009
2008
Revenue:
Equipment sales
$
225,759
296,520
714,780
910,883
Supplies
83,464
96,864
253,466
305,750
Software
87,295
100,092
254,401
314,617
Rentals
163,711
182,850
487,992
553,658
Financing
171,228
195,632
528,534
591,834
Support services
177,607
193,516
531,200
579,996
Business services
447,756
482,199
1,344,493
1,452,978
Total revenue
1,356,820
1,547,673
4,114,866
4,709,716
Costs and expenses:
Cost of equipment sales
124,819
157,593
387,674
484,988
Cost of supplies
23,785
26,382
68,495
80,673
Cost of software
19,413
25,917
60,480
80,107
Cost of rentals
40,508
36,252
114,372
114,227
Financing interest expense
23,975
27,702
73,865
85,630
Cost of support services
100,541
113,581
300,090
343,507
Cost of business services
335,406
370,213
1,033,933
1,120,193
Selling, general and administrative
435,931
484,650
1,317,410
1,491,154
Research and development
45,052
53,008
138,623
156,176
Restructuring charges and asset impairments
12,845
49,229
85,137
Other interest expense
27,244
30,037
84,548
91,565
Interest income
(668
)
(3,179
(3,153
(9,731
Total costs and expenses
1,188,851
1,371,385
3,589,182
4,123,626
Income from continuing operations before income taxes
167,969
176,288
525,684
586,090
Provision for income taxes
57,691
69,456
192,375
215,389
Income from continuing operations
110,278
106,832
333,309
370,701
(Loss) gain from discontinued operations, net of income tax
(2,429
(2,063
5,296
(8,726
Net income before attribution of noncontrolling interests
107,849
104,769
338,605
361,975
Less: Preferred stock dividends of subsidiaries attributable to noncontrolling interests
4,622
6,540
13,714
16,134
Pitney Bowes Inc. net income
103,227
98,229
324,891
345,841
Amounts attributable to Pitney Bowes Inc. common stockholders:
105,656
100,292
319,595
354,567
(Loss) gain from discontinued operations
Basic earnings per share of common stock attributable to Pitney Bowes Inc. common stockholders (1):
Continuing operations
0.51
0.48
1.55
1.70
Discontinued operations
(0.01
0.03
(0.04
Net income
0.50
0.47
1.57
1.65
Diluted earnings per share of common stock attributable to Pitney Bowes Inc. common stockholders (1):
1.54
1.68
1.64
Dividends declared per share of common stock
0.36
0.35
1.08
1.05
(1) The sum of the earnings per share amounts may not equal the totals above due to rounding.
See Notes to Condensed Consolidated Financial Statements
PITNEY BOWES INC.CONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited; in thousands, except share and per share data)
September 30, 2009
December 31, 2008
ASSETS
Current assets:
Cash and cash equivalents
441,128
376,671
Short-term investments
17,660
21,551
Accounts receivables, gross
818,389
924,886
Allowance for doubtful accounts receivables
(46,312
(45,264
Accounts receivables, net
772,077
879,622
Finance receivables
1,408,964
1,501,678
Allowance for credit losses
(43,333
(45,932
Finance receivables, net
1,365,631
1,455,746
Inventories
176,626
161,321
Current income taxes
73,386
59,594
Other current assets and prepayments
98,736
78,108
Total current assets
2,945,244
3,032,613
Property, plant and equipment, net
529,079
574,260
Rental property and equipment, net
374,021
397,949
1,396,007
1,445,822
(25,547
(25,858
1,370,460
1,419,964
Investment in leveraged leases
231,088
201,921
Goodwill
2,294,594
2,251,830
Intangible assets, net
319,040
375,822
Non-current income taxes
66,280
64,387
Other assets
414,215
417,685
Total assets
8,544,021
8,736,431
LIABILITIES, NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities
1,693,697
1,922,399
112,908
108,662
Notes payable and current portion of long-term obligations
170,783
770,501
Advance billings
452,380
441,556
Total current liabilities
2,429,768
3,243,118
Deferred taxes on income
366,721
254,353
Tax uncertainties and other income tax liabilities
293,476
294,487
Long-term debt
4,218,646
3,934,865
Other non-current liabilities
783,750
823,322
Total liabilities
8,092,361
8,550,145
Noncontrolling interests (Preferred stockholders’ equity in subsidiaries)
374,165
Commitments and contingencies (See Note 18)
Stockholders’ equity (deficit):
Cumulative preferred stock, $50 par value, 4% convertible
7
Cumulative preference stock, no par value, $2.12 convertible
876
976
Common stock, $1 par value (480,000,000 shares authorized; 323,337,912 shares issued)
323,338
Additional paid-in capital
251,273
259,306
Retained earnings
4,380,513
4,278,804
Accumulated other comprehensive loss
(461,550
(596,341
Treasury stock, at cost (116,174,612 and 117,156,719 shares, respectively)
(4,416,959
(4,453,969
Total Pitney Bowes Inc. stockholders’ equity (deficit)
77,495
(187,879
Total liabilities, noncontrolling interests and stockholders’ equity (deficit)
PITNEY BOWES INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited; in thousands)
Cash flows from operating activities:
Restructuring charges, net of tax
8,300
61,864
Restructuring payments
(66,757
(65,858
Payments for settlement of derivative instruments
(20,281
—
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
262,683
288,589
Stock-based compensation
16,964
19,563
Changes in operating assets and liabilities, excluding effects of acquisitions:
(Increase) decrease in accounts receivables
134,789
(2,390
(Increase) decrease in finance receivables
203,588
74,288
(Increase) decrease in inventories
(6,844
(17,035
(Increase) decrease in prepaid, deferred expense and other assets
(14,787
(3,433
Increase (decrease) in accounts payable and accrued liabilities
(195,842
(94,858
Increase (decrease) in current and non-current income taxes
73,457
93,471
Increase (decrease) in advance billings
1,002
21,831
Increase (decrease) in other operating capital, net
(2,453
18,052
Net cash provided by operating activities
732,424
756,059
Cash flows from investing activities:
Short-term and other investments
(19,616
21,682
Capital expenditures
(126,509
(169,978
Net investment in external financing
(1,216
(831
Acquisitions, net of cash acquired
(68,976
Reserve account deposits
(6,236
16,617
Net cash used in investing activities
(153,577
(201,486
Cash flows from financing activities:
Increase (decrease) in notes payable, net
(445,460
423,899
Proceeds from long-term obligations
297,513
245,582
Principal payments on long-term obligations
(150,000
(574,585
Proceeds from issuance of common stock
8,984
16,561
Payments to redeem preferred stock issued by a subsidiary
(10,000
Stock repurchases
(333,231
Dividends paid to common stockholders
(223,182
(219,447
Dividends paid to noncontrolling interests
(13,714
(16,134
Net cash used in financing activities
(525,859
(467,355
Effect of exchange rate changes on cash and cash equivalents
11,469
(5,608
Increase in cash and cash equivalents
64,457
81,610
Cash and cash equivalents at beginning of period
377,176
Cash and cash equivalents at end of period
458,786
Cash interest paid
169,219
209,601
Cash income taxes paid, net
133,808
125,745
PITNEY BOWES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited; tabular dollars in thousands, except for per share data)
1. Basis of Presentation
The terms “we”, “us”, and “our” are used in this report to refer collectively to Pitney Bowes Inc. and its subsidiaries.
The accompanying unaudited Condensed Consolidated Financial Statements of Pitney Bowes Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In addition, the December 31, 2008 condensed consolidated balance sheet data was derived from audited financial statements, which were revised in the current period to reflect presentation changes for the new noncontrolling interests accounting guidance, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In our opinion, all adjustments (consisting of only normal recurring adjustments) considered necessary to present fairly our financial position at September 30, 2009 and December 31, 2008, our results of operations for the three and nine months ended September 30, 2009 and 2008 and our cash flows for the three and nine months ended September 30, 2009 and 2008 have been included. Operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for any other interim period or the year ending December 31, 2009.
These statements should be read in conjunction with the financial statements and notes thereto included in our 2008 Annual Report to Stockholders on Form 10-K.
Certain prior year amounts have been reclassified to conform with the current period presentation. Beginning in the second quarter of 2009, we have separately presented a financing interest expense line item, which represents our estimated cost of borrowing associated with the generation of financing revenues, in the Condensed Consolidated Statements of Income. In computing our financing interest expense, we assumed a 10:1 leveraging ratio of debt to equity and applied our overall effective interest rate to the average outstanding finance receivables.
We have evaluated subsequent events through November 6, 2009, the date of issuance of the unaudited condensed consolidated financial statements. During this period we did not have any material recognizable subsequent events. We did, however, have non-recognizable subsequent events due to the issuance of perpetual voting preferred stock and the redemption of variable term voting preferred stock by a subsidiary of the Company. See Note 12 to the Condensed Consolidated Financial Statements for additional information. In addition, we had a non-recognizable subsequent event for a legal matter. See Note 18 to the Condensed Consolidated Financial Statements for additional information.
2. Nature of Operations
We are a provider of leading-edge, global, integrated mail and document management solutions for organizations of all sizes. We operate in two business groups: Mailstream Solutions and Mailstream Services. Mailstream Solutions includes worldwide revenue and related expenses from the sale, rental, and financing of mail finishing, mail creation, shipping equipment and software; production mail equipment; supplies; mailing support and other professional services; payment solutions; and mailing, customer communication and location intelligence software. Mailstream Services includes worldwide revenue and related expenses from facilities management services; secure mail services; reprographics, document management, and other value-added services for targeted customer markets; mail services operations, which include presort mail services and international mail services; and marketing services. See Note 7 to the Condensed Consolidated Financial Statements for details of our reporting segments and a description of their activities.
3. Recent Accounting Pronouncements
FAIR VALUE MEASUREMENTSOn January 1, 2008, we adopted new accounting guidance on fair value measurements. The new guidance defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. It was effective for certain financial assets and liabilities on January 1, 2008 and for all nonfinancial assets and liabilities recognized or disclosed at fair value on a nonrecurring basis on January 1, 2009. The adoption of this guidance has not had a material impact on our financial position, results of operations, or cash flows. See Note 17 to the Condensed Consolidated Financial Statements for additional discussion on fair value measurements.
DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES On January 1, 2009, we adopted new accounting guidance on disclosures about derivative instruments and hedging activities. The new guidance impacts disclosures only and requires additional qualitative and quantitative information on the use of derivatives and their impact on an entity’s financial position, results of operations and cash flows. See Note 17 to the Condensed Consolidated Financial Statements for additional information regarding our derivative instruments and hedging activities.
BUSINESS COMBINATIONS On January 1, 2009, we adopted new accounting guidance on business combinations. The new guidance revises principles and requirements for how a company (a) recognizes and measures in their financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest (previously referred to as minority interest); (b) recognizes and measures the goodwill acquired in a business combination or a gain from a bargain purchase; and (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of a business combination. Some of the major impacts of this new guidance include expense recognition for transaction costs and restructuring costs. The adoption of this guidance has not had a material impact on our financial position, results of operations, or cash flows.
NONCONTROLLING INTERESTS On January 1, 2009, we adopted new accounting guidance on noncontrolling interests. The new guidance addresses the accounting and reporting for the outstanding noncontrolling interest (previously referred to as minority interest) in a subsidiary and for the deconsolidation of a subsidiary. It also establishes additional disclosures in the consolidated financial statements that identify and distinguish between the interests of the parent’s owners and of the noncontrolling owners of a subsidiary. The guidance requires retroactive adoption of the presentation and disclosure requirements for existing minority interests while all other requirements of the guidance are applied prospectively.
REVENUE RECOGNITION In September 2009, new guidance was introduced addressing the accounting for revenue arrangements with multiple elements and certain revenue arrangements that include software elements. The new literature will allow companies to allocate arrangement consideration in a multiple element arrangement in a way that better reflects the economics of the transaction. This will result in the elimination of the residual method model. In addition, tangible products that have software components that are “essential to the functionality” of the tangible product will be scoped out of the software revenue guidance. The new guidance will also result in more expansive disclosures. The new guidance will be effective on January 1, 2011, with early adoption permitted. We are currently evaluating the impact of adopting the new guidance.
4. Discontinued Operations
The following table shows selected financial information included in discontinued operations for the three and nine months ended September 30, 2009 and 2008, respectively:
Pre-tax income
20,624
Tax provision
(15,328
(Loss) gain from discontinued operations, net of tax
Net losses for the three months ended September 30, 2009 and September 30, 2008 relate to the accrual of interest on uncertain tax positions.
Pre-tax income for the nine months ended September 30, 2009 includes $9.8 million of pre-tax income ($6.0 million net of tax) for a bankruptcy settlement received during the first quarter of 2009 pertaining to the leasing of certain aircraft from our former Capital Services business which was sold in 2006, and $10.9 million of pre-tax income ($6.7 million net of tax) representing the release of reserves during the second quarter of 2009 related to the expiration of an indemnity agreement in April 2009 also associated with the sale of Capital Services. This income was partly offset by the accrual of interest on uncertain tax positions. The net loss for the nine months ended September 30, 2008 relates to the accrual of interest on uncertain tax positions.
5. Acquisitions
On April 21, 2008, we acquired Zipsort, Inc. for $40 million in cash, net of cash acquired. Zipsort, Inc. acts as an intermediary between customers and the U.S. Postal Service. Zipsort, Inc. offers mailing services that include presorting of first class, standard class, flats, permit and international mail as well as metering services. We assigned the goodwill to the Mail Services segment.
The following table summarizes selected financial data for the opening balance sheet of the Zipsort, Inc. acquisition in 2008:
Zipsort, Inc.
Purchase price allocation:
Current assets
708
Other non-current assets
11,707
Intangible assets
7,942
25,294
Current liabilities
(2,975
Non-current liabilities
(2,885
Purchase price, net of cash acquired
39,791
Intangible assets:
Customer relationships
7,658
Non-compete agreements
284
Total intangible assets
Intangible assets amortization period:
15 years
4 years
Total weighted average
There were no acquisitions during the nine months ended September 30, 2009.
During the nine months ended September 30, 2008, we also completed five smaller acquisitions with an aggregate cost of $29.7 million. These acquisitions did not have a material impact on our financial results.
No tax deductible goodwill was added during the nine months ended September 30, 2009. The amount of tax deductible goodwill added from acquisitions for the nine months ended September 30, 2008 was $27.4 million.
Consolidated impact of acquisitions
The Condensed Consolidated Financial Statements include the results of operations of the acquired businesses from their respective dates of acquisition. These acquisitions increased our revenue and earnings but, including related financing costs, did not materially impact earnings either on an aggregate or per share basis.
8
The following table provides unaudited pro forma consolidated revenue for the three and nine months ended September 30, 2009 and 2008 as if our acquisitions had been acquired on January 1 of each year:
4,730,176
The pro forma earnings results of these acquisitions were not material to net income or earnings per share. The pro forma consolidated results do not purport to be indicative of actual results that would have occurred had the acquisitions been completed on January 1, 2009 and 2008, nor do they purport to be indicative of the results that will be obtained in the future.
6. Earnings per Share
A reconciliation of the basic and diluted earnings per share computations for the three months ended September 30, 2009 and 2008 is as follows:
Income
WeightedAverageShares
PerShare
Less:
Preferred stock dividends
Preference stock dividends
(17
(19
Basic earnings per share
103,210
207,076
98,210
207,309
Effect of dilutive securities:
Data for basic earnings per share
Preferred stock
Preference stock
17
554
19
598
Stock options and stock purchase plans
648
Other stock plans
98
Diluted earnings per share
207,644
208,656
Basic earnings per share of common stock attributable to Pitney Bowes Inc. common stockholders:
Diluted earnings per share of common stock attributable to Pitney Bowes Inc. common stockholders:
Note: The sum of the earnings per share amounts may not equal the totals above due to rounding.
9
A reconciliation of the basic and diluted earnings per share computations for the nine months ended September 30, 2009 and 2008 is as follows:
(55
(58
324,836
206,610
345,783
209,113
55
578
58
602
784
85
207,198
210,587
Approximately 6.2 million and 2.5 million common stock equivalent shares for the three months ended September 30, 2009 and 2008, respectively, and 6.4 million and 2.1 million common stock equivalent shares for the nine months ended September 30, 2009 and 2008, respectively, issuable upon the exercise of stock options were excluded from the above computations because the exercise prices of such options were greater than the average market price of the common stock and therefore the impact of these shares was anti-dilutive.
On February 9, 2009, we made our annual stock compensation grant which consisted of approximately 1.6 million stock options and 0.8 million restricted stock units.
10
PITNEY BOWES INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited; tabular dollars in thousands, except for per share data)
7. Segment Information
We conduct our business activities in seven business segments within the Mailstream Solutions and Mailstream Services business groups. We calculate earnings before interest and taxes (“EBIT”) by deducting from revenue the related costs and expenses attributable to the segment. EBIT, a non-GAAP measure, is useful to management in demonstrating the operational profitability of the segments by excluding interest and taxes, which are generally managed across the entire company on a consolidated basis. Segment EBIT also excludes general corporate expenses, restructuring charges and asset impairments.
As a result of certain organizational changes made during the third quarter of 2009, we have reclassified certain prior year amounts to conform to the current year presentation. The amounts reclassified did not have a material impact to our segment disclosures.
Mailstream Solutions:
U.S. Mailing: Includes the U.S. revenue and related expenses from the sale, rental and financing of our mail finishing, mail creation, shipping equipment and software; supplies; support and other professional services; and payment solutions.
International Mailing: Includes the non-U.S. revenue and related expenses from the sale, rental and financing of our mail finishing, mail creation, shipping equipment and software; supplies; support and other professional services; and payment solutions.
Production Mail: Includes the worldwide revenue and related expenses from the sale, financing, support and other professional services of our high-speed, production mail systems and sorting equipment.
Software: Includes the worldwide revenue and related expenses from the sale and support services of non-equipment-based mailing, customer communication and location intelligence software.
Mailstream Services:
Management Services: Includes worldwide facilities management services; secure mail services; reprographic, document management services; and litigation support and eDiscovery services.
Mail Services: Includes presort mail services and cross-border mail services.
Marketing Services: Includes direct marketing services for targeted customers.
11
Revenue and EBIT by business segment for the three and nine months ended September 30, 2009 and 2008 are as follows:
U.S. Mailing
491,036
558,038
1,517,377
1,687,229
International Mailing
224,681
271,727
679,893
882,145
Production Mail
126,434
154,554
366,000
439,358
82,361
94,221
240,559
296,134
Mailstream Solutions
924,512
1,078,540
2,803,829
3,304,866
Management Services
259,370
287,989
789,635
891,078
Mail Services
134,042
139,689
413,891
399,875
Marketing Services
38,896
41,455
107,511
113,897
Mailstream Services
432,308
469,133
1,311,037
1,404,850
EBIT: (1)
178,066
221,179
561,232
663,469
29,193
41,123
87,201
142,520
11,494
23,183
26,974
47,116
8,241
3,167
16,064
15,962
226,994
288,652
691,471
869,067
19,517
49,294
52,931
23,024
15,467
63,322
49,836
7,448
8,088
17,323
15,558
49,989
39,619
129,939
118,325
Total EBIT
276,983
328,271
821,410
987,392
Unallocated amounts:
Interest, net (2)
(50,551
(54,560
(155,260
(167,464
Corporate expenses
(45,618
(48,194
(127,621
(148,701
(12,845
(49,229
(85,137
(1)
Earnings before interest and taxes excludes general corporate expenses, restructuring charges, and asset impairments.
(2)
Interest, net includes financing interest expense, other interest expense and interest income.
12
8. Inventories
Inventories are composed of the following:
September 30,2009
Raw materials and work in process
43,803
41,171
Supplies and service parts
81,734
78,018
Finished products
51,089
42,132
Total
9. Fixed Assets
December 31,2008
Property, plant and equipment
1,810,482
1,880,422
Accumulated depreciation
(1,281,403
(1,306,162
Rental property and equipment
745,089
932,389
(371,068
(534,440
Depreciation expense was $70.1 million and $76.3 million for the three months ended September 30, 2009 and 2008, respectively. Depreciation expense was $209.7 million and $235.2 million for the nine months ended September 30, 2009 and 2008, respectively.
10. Intangible Assets and Goodwill
Intangible assets are composed of the following:
GrossCarryingAmount
AccumulatedAmortization
NetCarryingAmount
429,895
(188,019
241,876
423,169
(154,619
268,550
Supplier relationships
29,000
(12,567
16,433
(10,392
18,608
Software & technology
145,276
(93,144
52,132
155,035
(78,982
76,053
Trademarks & trade names
23,744
(15,578
8,166
25,071
(13,310
11,761
2,238
(1,805
433
2,652
(1,802
850
630,153
(311,113
634,927
(259,105
Amortization expense for intangible assets for the three months ended September 30, 2009 and 2008 was $17.4 million and $18.4 million, respectively. Amortization expense for intangible assets for the nine months ended September 30, 2009 and 2008 was $53.0 million and $53.4 million, respectively.
13
The estimated future amortization expense related to intangible assets is as follows:
Amount
Remaining for year ended December 31, 2009
18,000
Year ended December 31, 2010
61,000
Year ended December 31, 2011
49,000
Year ended December 31, 2012
44,000
Year ended December 31, 2013
37,000
Thereafter
110,040
Changes in the carrying amount of goodwill by business segment for the nine months ended September 30, 2009 are as follows:
Balance atDecember 31, 2008 (1)
Acquiredduringthe period
Other (2)
Balance at September 30,2009
221,315
(2,210
219,105
322,230
29,867
352,097
137,067
3,044
140,111
623,995
9,236
633,231
1,304,607
39,937
1,344,544
491,633
4,068
495,701
260,793
(1,241
259,552
194,797
947,223
2,827
950,050
42,764
We have reclassified certain prior year amounts to conform to the current year presentation. See Note 7 for further details.
“Other” includes post closing acquisition and foreign currency translation adjustments.
11. Long-term Debt
On September 15, 2009, we repaid the 8.55% notes with a $150 million face value. The repayment of these notes was funded through cash generated from operations and issuance of commercial paper. The notes were reported in current portion of long-term debt at December 31, 2008.
On June 29, 2009, we entered into an interest rate swap for an aggregate notional amount of $100 million to effectively convert our interest payments on a portion of the $400 million, 4.625% fixed rate notes due in 2012, into variable interest rates. The variable rates payable are based on one month LIBOR plus 249 basis points. In July 2009, we entered into three additional interest rate swaps for an aggregate notional amount of $300 million to effectively convert our interest payments on the remainder of the $400 million, 4.625% fixed rate notes due in 2012, into variable interest rates. The variable rates payable are based on one month LIBOR plus 248 basis points for $100 million notional amount and one month LIBOR plus 250 basis points for $200 million notional amount.
On March 2, 2009, we issued $300 million of 10-year fixed-rate notes with a coupon rate of 6.25%. The interest is paid semi-annually beginning September 15, 2009. The notes mature on March 15, 2019. We simultaneously unwound four forward starting swap agreements (forward swaps) used to hedge the interest rate risk associated with the forecasted issuance of the fixed-rate debt. The unwind of the derivatives resulted in a loss (and cash payment) of $20.3 million which was recorded to other comprehensive income, net of tax, and will be amortized to net interest expense over the 10-year term of the notes. The proceeds from these notes were used for general corporate purposes, including the repayment of commercial paper.
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On March 4, 2008, we issued $250 million of 10-year fixed-rate notes with a coupon rate of 5.60%. The interest is paid semi-annually beginning September 15, 2008. The notes mature on March 15, 2018. We simultaneously entered into two interest rate swaps for a total notional amount of $250 million to convert the fixed-rate notes to a floating rate obligation bearing interest at 6 month LIBOR plus 111.5 basis points. The proceeds from these notes were used for general corporate purposes, including the repayment of commercial paper and repurchase of our stock.
12. Noncontrolling Interests (Preferred Stockholders’ Equity in Subsidiaries)
Pitney Bowes International Holdings, Inc. (“PBIH”), a subsidiary of the Company, has 3,750,000 shares outstanding or $375 million of variable term voting preferred stock owned by certain outside institutional investors. These preferred shares are entitled to 25% of the combined voting power of all classes of capital stock of PBIH. All outstanding common stock of PBIH, representing the remaining 75% of the combined voting power of all classes of capital stock, is owned directly or indirectly by Pitney Bowes Inc. The preferred stock, $.01 par value, is entitled to cumulative dividends at rates set at auction. The weighted average dividend rate was 4.8% for the three months and nine months ended September 30, 2009 and 2008, respectively. Preferred dividends are included in noncontrolling interests (preferred stock dividends of subsidiaries) in the Condensed Consolidated Statements of Income. The preferred stock is subject to mandatory redemption based on certain events, at a redemption price not less than $100 per share, plus the amount of any dividends accrued or in arrears. No dividends were in arrears at September 30, 2009, December 31, 2008 or September 30, 2008. A rollforward of noncontrolling interests is as follows:
Beginning balance, January 1, 2008
384,165
Movements:
Share redemptions (1)
Ending balance, December 31, 2008 and September 30, 2009
At December 31, 2007, a subsidiary of the Company had 100 shares or $10 million of 9.11% Cumulative Preferred Stock, mandatorily redeemable in 20 years, owned by an institutional investor. In August 2008, we redeemed 100% of this Preferred Stock resulting in a net loss of $1.8 million.
In October 2009, PBIH issued $300 million of perpetual voting preferred stock to certain outside institutional investors. These preferred shares are entitled to 25% of the combined voting power of all classes of capital stock of PBIH. All outstanding common stock of PBIH, representing the remaining 75% of the combined voting power of all classes of capital stock, is owned directly or indirectly by Pitney Bowes Inc. The preferred stock is entitled to cumulative dividends at a rate of 6.125% for a period of 7 years after which they become callable and, if remain outstanding, will yield a dividend that increases by 150% every six months thereafter.
In October 2009, PBIH redeemed $344 million of its existing variable term preferred stock. The redemption was funded by a combination of the issuance of the $300 million perpetual voting preferred stock and commercial paper.
15
13. Comprehensive Income
Comprehensive income for the three and nine months ended September 30, 2009 and 2008 are as follows:
Other comprehensive income, net of tax:
Foreign currency translation adjustments (1)
67,778
(144,453
115,512
(106,340
Net unrealized (loss) gain on derivatives
(319
(614
6,195
189
Net unrealized gain (loss) on investment securities
139
(178
(91
(253
Amortization of pension and postretirement costs
4,423
3,505
13,175
10,636
Comprehensive income
175,248
(43,511
459,682
250,073
Includes a net deferred translation gain of $3.4 million and a net deferred translation loss of $13.7 million for the three months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, a net deferred translation loss of $8.6 million and $3.7 million, respectively, were recorded. These amounts are associated with intercompany loans denominated in a foreign currency that have been designated as a hedge of net investment.
14. Restructuring Charges and Asset Impairments
During the third quarter of 2009, we have undertaken a strategic transformation process designed to create long-term flexibility to invest in future growth. We are currently completing the diagnostic phase of this project and are analyzing a wide range of opportunities for process and operational improvements in areas such as our global customer interactions and product development processes. The restructuring charge in the current quarter represents costs associated with initial actions identified as part of the diagnostic phase of this project. The future benefits and related costs, which could be significant, will be recognized as actions are approved and implemented.
During the third quarter of 2009, we recorded pre-tax restructuring charges of $12.8 million, of which $10.0 million relates to severance and benefit costs and $2.8 million relates to other exit costs. As of September 30, 2009, 158 employee terminations have occurred under this strategic transformation project. The majority of the liability at September 30, 2009 is expected to be paid during the next twelve months from cash generated from operations.
Pre-tax restructuring reserves at September 30, 2009 for the restructuring actions taken in the third quarter of 2009 are composed of the following:
Balance atJuly 1,2009
Expenses
Cashpayments
Non-cashcharges
Balance atSeptember 30, 2009
Severance and benefit costs
10,040
(801
9,239
Other exit costs
2,805
(1,232
1,573
(2,033
10,812
We recorded pre-tax restructuring charges and asset impairments during 2008 and 2007. These charges primarily related to a program we announced in November 2007 to lower our cost structure, accelerate efforts to improve operational efficiencies, and transition our product line.
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As of September 30, 2009, 2,904 terminations have occurred under this program and approximately 300 additional positions have been eliminated since the inception of the program. The majority of the liability at September 30, 2009 is expected to be paid during the next twelve months from cash generated from operations.
Pre-tax restructuring reserves at September 30, 2009 for the restructuring program announced in 2007 are composed of the following:
Balance atDecember 31,2008
Balance atSeptember 30,2009
108,431
(55,454
52,977
32,678
(9,270
23,408
141,109
(64,724
76,385
15. Pensions and Other Benefit Programs
Defined Benefit Pension Plans
The components of net periodic benefit cost for defined benefit pension plans for the three months ended September 30, 2009 and 2008 are as follows:
United States
Foreign
Service cost
6,128
7,662
1,772
2,688
Interest cost
23,745
24,050
6,567
7,436
Expected return on plan assets
(30,009
(33,175
(7,107
(9,362
Amortization of transition (credit) cost
(2
31
Amortization of prior service (credit) cost
(637
(616
119
164
Amortization of net loss
6,593
4,652
644
1,015
Net periodic benefit cost
5,820
2,573
1,993
1,972
The components of net periodic benefit cost for defined benefit pension plans for the nine months ended September 30, 2009 and 2008 are as follows:
18,384
21,724
5,047
8,266
71,231
72,430
18,576
22,915
(90,021
(99,567
(20,090
(28,864
(6
95
(1,911
(1,886
334
504
19,779
14,418
1,835
3,129
17,462
7,119
5,696
6,045
We are revising our expected 2009 pension plan contributions. We now expect to contribute up to $18 million each to the U.S. and foreign plans for the year. However, we will continue to reassess our funding alternatives as the year progresses. At September 30, 2009, $13.2 million and $10.4 million of contributions have been made to the U.S. and foreign pension plans, respectively.
Our pension funds’ actual asset returns have been in line with our portfolio benchmark indices. Our funded status will be highly dependent on the market returns and the prevailing discount rate used to value our year-end obligations.
Nonpension Postretirement Benefit Plans
The components of net periodic benefit cost for nonpension postretirement benefit plans for the three and nine months ended September 30, 2009 and 2008 are as follows:
918
919
2,730
2,703
3,669
3,704
10,959
10,619
Amortization of prior service credit
(618
(1,858
(1,854
1,035
911
3,103
2,388
5,004
4,916
14,934
13,856
For the three months ended September 30, 2009 and 2008, we made $7.9 million and $6.6 million of contributions representing benefit payments, respectively. For the nine months ended September 30, 2009 and 2008, we made $21.3 million and $23.7 million of contributions representing benefit payments, respectively.
16. Income Taxes
The effective tax rate for the three months ended September 30, 2009 and 2008 was 34.3% and 39.4%, respectively. The effective tax rate for the nine months ended September 30, 2009 and 2008 was 36.6% and 36.8%, respectively. The year-to-date 2009 tax rate was increased by a $12.2 million write-off of deferred tax assets associated with the expiration of out-of-the-money vested stock options and the vesting of stock units previously granted to our employees. This write-off of deferred tax assets will not require us to pay any taxes. The year-to-date 2008 tax rate was increased by a tax accrual associated with lease refunds in the U.K. and Ireland of $6.5 million and the impact of a low tax benefit associated with restructuring expenses recorded during 2008.
We regularly assess the likelihood of tax adjustments in each of the tax jurisdictions in which we have operations and account for the related financial statement implications. Tax reserves have been established which we believe to be appropriate given the possibility of tax adjustments. Determining the appropriate level of tax reserves requires us to exercise judgment regarding the uncertain application of tax law. The amount of reserves is adjusted when information becomes available or when an event occurs indicating a change in the reserve is appropriate. Future changes in tax reserve requirements could have a material impact on our results of operations.
We are continually under examination by tax authorities in the United States, other countries and local jurisdictions in which we have operations. The years under examination vary by jurisdiction. The current IRS exam of tax years 2001-2004 is estimated to be completed within the next two years and the examination of years 2005-2007 has commenced. In connection with the 2001-2004 exam, we have received notices of proposed adjustments to our filed returns. We have accrued our best estimate of the tax, interest and penalties that may result from these proposed adjustments. We are disputing a formal request from the IRS in the form of a civil summons to provide certain company workpapers. We believe that certain documents being sought should not be produced because they are privileged. A decision by the Rhode Island U.S. District Court in a similar case that supported our position was overturned on appeal, and the judicial circuits are now divided on this issue. Also in connection with the 2001-2004 audit, we have entered into a settlement with the IRS regarding the tax treatment of certain lease transactions related to the Capital Services business that we sold in 2006. Prior to 2007, we accrued and paid the IRS the additional tax and interest associated with this settlement. A variety of post-1999 tax years remain subject to examination by other tax authorities, including the U.K., Canada, France, Germany and various U.S. states. We have accrued our best estimate of the tax, interest and penalties that may result from these tax uncertainties in these and other jurisdictions. However, the resolution of such matters could have a material impact on our results of operations, financial position and cash flows.
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17. Fair Value Measurements
Effective January 1, 2008, we adopted the fair value measurements guidance for financial assets and liabilities. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. The guidance emphasizes that an entity’s valuation technique for measuring fair value should maximize observable inputs and minimize unobservable inputs.
Non-recurring nonfinancial assets and nonfinancial liabilities include those measured at fair value in goodwill and indefinite lived intangible asset impairment testing, and those non-recurring nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination. The new fair value definition and disclosure requirements for these specific nonfinancial assets and nonfinancial liabilities were effective January 1, 2009.
The fair value measurement guidance established a fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of the fair value hierarchy are as follows:
Level 1 – Unadjusted quoted prices in active markets for identical assets and liabilities. Examples of Level 1 assets include money market securities and U.S. Treasury securities.
Level 2 – Observable inputs other than Level 1 inputs such as quoted prices for similar assets or liabilities; quoted prices in markets that trade infrequently; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Examples of Level 2 assets and liabilities include derivative contracts whose values are determined using a model with inputs that are observable in the market or can be derived from or corroborated by observable market data, such as mortgage-backed securities, asset backed securities, U.S. agency securities, and corporate notes and bonds.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liability. These inputs may be derived with internally developed methodologies that result in management’s best estimate of fair value. During the nine months ended September 30, 2009 and for the year ended December 31, 2008, we had no Level 3 recurring measurements.
The following tables show, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis as of nine months ended September 30, 2009, respectively. As required by the fair value measurements guidance, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect their placement within the fair value hierarchy levels.
Recurring Fair Value Measurements at September 30, 2009 by Level
Level 1
Level 2
Level 3
Assets:
Investment securities
Money market funds
254,114
U.S. Government and agency issued debt
56,619
10,822
67,441
Corporate notes and bonds
8,564
Asset backed securities
1,198
Mortgage-backed securities
12,712
Derivatives
Interest rate swaps
18,054
Foreign exchange contracts
1,246
310,733
52,596
363,329
Liabilities:
28,235
Recurring Fair Value Measurements at December 31, 2008 by Level
181,664
30,583
11,433
42,016
4,725
2,658
21,713
32,486
212,247
73,015
285,262
286
Treasury lock and forward starting swaps
31,326
31,612
20
Investment Securities
For our investments, we use the market approach for recurring fair value measurements and the valuation techniques use inputs that are observable, or can be corroborated by observable data, in an active marketplace.
The following information relates to our classification into the fair value hierarchy:
• Money Market Funds: Money market funds typically invest in government securities, certificates of deposit, commercial paper of companies and other highly liquid and low-risk securities. Money market funds are principally used for overnight deposits and are classified in Level 1 of the fair value hierarchy.
• U.S. Government Issued Debt: U.S. Governmental securities are valued using active, high volume trades for identical securities. Valuation adjustments are not applied so these securities are classified in Level 1 of the fair value hierarchy.
• U.S. Agency Issued Debt: U.S. Agency issued debt is based on active, high volume trades for identical or comparable securities. Non-callable agency issued debt securities are generally valued using quoted market prices. To the extent that the securities are actively traded, they are categorized in Level 1 of the fair value hierarchy. Callable agency issued debt securities are valued through benchmarking model derived prices to quoted market prices and trade data for identical or comparable securities. Callable agency issued debt securities are categorized in Level 2 of the fair value hierarchy.
• Corporate Notes and Bonds: The fair value of corporate securities is estimated using recently executed transactions, market price quotations where observable, or bond spreads. The spread data used are for the same maturity as the security. These securities are classified in Level 2 of the fair value hierarchy.
• Asset Backed Securities (“ABS”) and Mortgage-Backed Securities (“MBS”): These securities are valued based on external pricing indices. When external index pricing is not observable, ABS and MBS are valued based on external price/spread data. If neither pricing method is available, we then utilize broker quotes. We verify that the unadjusted indices or broker quotes are reasonable and that the market is active by comparing prices across multiple (three or more) dealers. When inputs are observable and supported by an active market, asset backed securities and mortgage-backed securities are classified as Level 2 of the fair value hierarchy.
Investment securities are primarily composed of investments by The Pitney Bowes Bank (PBB). PBB, our wholly-owned subsidiary, is a Utah-chartered Industrial Loan Company (ILC). The bank’s investments at September 30, 2009 were $242.7 million. We reported these investments in the Condensed Consolidated Balance Sheet as cash and cash equivalents of $170.8 million, short-term investments of $13.2 million and long-term investments of $58.7 million. The bank’s investments at December 31, 2008 were $196.9 million. We reported these investments in the Condensed Consolidated Balance Sheet as cash and cash equivalents of $125.8 million, short-term investments of $18.3 million and long-term investments of $52.8 million.
The fair value measurements of PBB’s investments are determined by third party service providers (Zions - Liquid Asset Management and Utendahl Capital Management). To validate the accuracy of the portfolio valuation, we utilize independent third parties to price monthly a minimum of 20% of the portfolio balance, ensuring our sample includes all types of securities held in the portfolio. We review the results of the pricing sample to ensure that the initial fair value valuations are accurate. If the pricing can not be validated reasonably (plus or minus 3% for each security and plus or minus 1% for the entire sample), we take action to investigate the differences. We have not adjusted the initial values as variances have either been within these tolerance limits or confirmed through additional procedures. Additionally, we ensure that the fair value measurements are in accordance with the fair value measurements guidance and that we have properly classified our assets in the fair value hierarchy.
We have no investments either directly or indirectly in the sub-prime mortgage market. We have not experienced any write-offs in our investment portfolio. The majority of our mortgage-backed securities are either guaranteed or supported by the U.S. government. Market events have not caused our money market funds to experience declines in their net asset value below $1.00 dollar per share or to incur imposed limits on redemptions.
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We have no investments in inactive markets which would warrant a possible change in our pricing methods or classification within the fair value hierarchy. Further, we have no investments in auction rate securities.
Derivative Instruments
In the normal course of business, we are exposed to the impact of interest rate changes and foreign currency fluctuations. The company limits these risks by following established risk management policies and procedures, including the use of derivatives. We use derivatives to manage the related cost of debt and to limit the effects of foreign exchange rate fluctuations on financial results. We do not use derivatives for trading or speculative purposes.
As required by the fair value measurements guidance, we have incorporated counterparty risk into the fair value of our derivative assets and our credit risk into the value of our derivative liabilities. We derive credit risk from observable data related to credit default swaps. We have not seen a material change in the creditworthiness of those banks acting as derivative counterparties.
The valuation of our interest rate swaps is based on the income approach using a model with inputs that are observable or that can be derived from or corroborated by observable market data. Our foreign exchange derivatives are measured at fair value using observable market inputs, such as forward rates.
The following is a summary of our derivative fair values at September 30, 2009:
Designation of Derivatives
Balance Sheet Location
Fair Value
Derivatives designated as hedging instruments
Other current assets and prepayments:
Other assets:
Accounts payable and accrued liabilities:
1,848
Derivatives not designated as hedging instruments
1,229
26,387
Total Derivative Assets
19,300
Total Derivative Liabilities
Total Net Derivative Liabilities
8,935
22
Interest Rate SwapsDerivatives designated as fair value hedges include interest rate swaps related to fixed rate debt. Changes in the fair value of both the derivative and item being hedged are recognized in income.
In June 2009, we entered into an interest rate swap for an aggregate notional amount of $100 million to effectively convert our interest payments on a portion of the $400 million, 4.625% fixed rate notes due in 2012, into variable interest rates. The variable rates payable are based on one month LIBOR plus 249 basis points. In July 2009, we entered into three additional interest rate swaps for an aggregate notional amount of $300 million to effectively convert our interest payments on the remainder of the $400 million, 4.625% fixed rate notes due in 2012, into variable interest rates. The variable rates payable are based on one month LIBOR plus 248 basis points for $100 million notional amount and one month LIBOR plus 250 basis points for $200 million notional amount. At September 30, 2009, the fair value of the derivative was an asset of $3.3 million. Long-term debt was increased by $3.3 million at September 30, 2009.
In March 2008, we entered into two interest rate swaps for an aggregate notional amount of $250 million to effectively convert the fixed rate of 5.60% on $250 million of our notes, due 2018, into variable interest rates. The variable rates payable by us are based on six month LIBOR plus 111.5 basis points. At September 30, 2009, the fair value of the derivatives was an asset of $14.8 million. Long-term debt was increased by $14.8 million at September 30, 2009. At December 31, 2008, the fair value of the derivatives was an asset of $32.5 million. Long-term debt was increased by $32.5 million at December 31, 2008.
The following represents the results of our derivatives in fair value hedging relationships for the three months ended September 30, 2009:
Derivative Instrument
Location of Gain (Loss)Recognized in Income
Derivative Gain (Loss)Recognized in Income
Hedged Item Income (Expense)Recognized in Income
Interest expense
4,615
(8,125
The following represents the results of our derivatives in fair value hedging relationships for the nine months ended September 30, 2009:
7,871
(15,125
Foreign Exchange ContractsWe enter into foreign currency exchange contracts arising from the anticipated purchase of inventory between affiliates. These contracts are designated as cash flow hedges. The effective portion of the gain or loss on the cash flow hedges is included in other comprehensive income in the period that the change in fair value occurs and is reclassified to income in the same period that the hedged item is recorded in income. At September 30, 2009, we had 126 outstanding contracts with a notional amount of $31.1 million associated with these anticipated transactions and a derivative net liability position of $1.8 million. We had no outstanding contracts at December 31, 2008.
The following represents the results of cash flow hedging relationships for the three months ended September 30, 2009:
Derivative Gain (Loss)Recognized in OCI(Effective Portion) (1)
Location of DerivativeGain (Loss)Reclassified fromAOCI into Income(Effective Portion)
Gain (Loss) Reclassifiedfrom AOCI to Income(Effective Portion)
(1,236
Revenue
(9
197
Cost of sales
(549
(1,039
(558
23
The following represents the results of cash flow hedging relationships for the nine months ended September 30, 2009:
(662
(56
(1,168
(857
(1,830
(913
At December 31, 2008, there were no outstanding cash flow hedges and, therefore, the opening AOCI balance related to these types of hedges was $0. For the three months ended September 30, 2009, there were 6 derivatives that were entered into and settled within the quarter. For the nine months ended September 30, 2009, there were 22 derivatives that were entered into and settled within each respective quarter. Thus, these amounts were not recorded to AOCI but were recorded directly to income. For the three months ended September 30, these derivatives reduced revenue in the amount of $0.1 million and increased cost of sales in the amount of $0.1 million. For the nine months ended September 30, these derivatives reduced revenue in the amount of $0.2 million and increased cost of sales in the amount of $0.3 million.
As of September 30, 2009, $1.5 million of the $1.8 million derivative loss recognized in OCI will be recognized in income within the next 12 months.
No amount of ineffectiveness was recorded in the Condensed Consolidated Statements of Income for these designated cash flow hedges.
We also enter into foreign exchange contracts to minimize the impact of exchange rate fluctuations on intercompany loans and related interest that are denominated in a foreign currency. The revaluation of the short-term intercompany loans and interest and the mark-to-market on the derivatives are both recorded to income. At September 30, 2009, we had 21 outstanding foreign exchange contracts to buy or sell various currencies with a net liability value of $25.1 million. The contracts will expire by December 31, 2009. At December 31, 2008, the liability value of these derivatives was $0.3 million.
The following represents the results of our non-designated derivative instruments for the three months ended September 30, 2009:
Derivatives Not Designatedas Hedging Instruments
Location of Derivative Gain (Loss)
Selling, general and administrative expense
10,081
The following represents the results of our non-designated derivative instruments for the nine months ended September 30, 2009:
(25,483
24
Net Investment HedgesOne of our intercompany loans denominated in a foreign currency is designated as a hedge of a net investment. The revaluation of this loan is reflected as a deferred translation gain or loss and thereby offsets a portion of the translation adjustment of the applicable foreign subsidiaries’ net assets. At September 30, 2009 and December 31, 2008, we had one intercompany loan with an outstanding value of $87.7 million and $119.2 million, respectively, designated as a net investment hedge. Deferred translation gains of $33.4 million and $41.7 million at September 30, 2009 and December 31, 2008, respectively, were included in accumulated other comprehensive loss in stockholders’ deficit on the Condensed Consolidated Balance Sheets. The following represents our net investment hedge at September 30, 2009:
Net Investment HedgingRelationships
Loan Balance
Location of DeferredTranslation Gain (Loss)
DeferredTranslationGain (Loss)
Non-derivative intercompany loan
87,714
Accumulated other comprehensive (loss) income
33,387
Credit-Risk-Related Contingent FeaturesAt September 30, 2009, Pitney Bowes maintained investment grade ratings of A / A1. Certain of our derivative instruments contain provisions that would require us to post collateral upon a significant downgrade in our long-term senior unsecured debt ratings. Based on derivative values at September 30, 2009, we would have been required to post $27.6 million in collateral had our long-term senior unsecured debt ratings fallen below BB- / Ba3.
Fair Value of Financial InstrumentsThe estimated fair value of our financial instruments follows:
Carryingvalue (1)
Fair value
342,682
344,029
251,298
252,776
Loans receivable
474,662
528,800
(4,253,529
(4,414,818
(3,990,134
(3,880,418
Derivatives, net
(8,935
874
Carrying value includes accrued interest and deferred fee income, where applicable.
The fair value of long-term debt is estimated based on quoted dealer prices for the same or similar issues. The carrying value for cash, cash equivalents, accounts receivable, loans receivable, accounts payable and notes payable approximate fair value because of the short maturity of these instruments.
18. Commitments and Contingencies
In the ordinary course of business, we are routinely defendants in or party to a number of pending and threatened legal actions. These may involve litigation by or against us relating to, among other things, contractual rights under vendor, insurance or other contracts; intellectual property or patent rights; equipment, service, payment or other disputes with customers; or disputes with employees. Some of these actions may be brought as a purported class action on behalf of a purported class of employees, customers or others.
Our wholly-owned subsidiary, Imagitas, Inc., is a defendant in ten purported class actions filed in six different states. These lawsuits have been coordinated in the United States District Court for the Middle District of Florida, In re: Imagitas, Driver’s Privacy Protection Act Litigation (Coordinated, May 28, 2007). Each of these lawsuits alleges that the Imagitas DriverSource program violated the federal Drivers Privacy Protection Act (DPPA). Under the DriverSource program, Imagitas entered into contracts with state governments to mail out automobile registration renewal materials along with third party advertisements, without revealing the personal information of any state resident to any advertiser. The DriverSource program assisted the state in performing its governmental function of delivering these mailings and funding the costs of them. Imagitas has discontinued its DriverSource program. The plaintiffs in these actions are seeking statutory damages under the DPPA. On April 9, 2008, the District Court granted
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Imagitas’ motion for summary judgment in one of the coordinated cases, Rine, et al. v. Imagitas, Inc. (United States District Court, Middle District of Florida, filed August 1, 2006). On July 30, 2008, the District Court issued a final judgment in the Rine lawsuit and stayed all of the other cases filed against Imagitas pending an appellate decision in Rine. On August 27, 2008, the Rine plaintiffs filed an appeal of the District Court’s decision in the United States Court of Appeals, Eleventh Judicial Circuit. The appellate process in this case is proceeding.
We expect to prevail in the lawsuits against Imagitas; however, as litigation is inherently unpredictable, there can be no assurance in this regard. If the plaintiffs do prevail, the results may have a material effect on our financial position, future results of operations or cash flows, including, for example, our ability to offer certain types of goods or services in the future.
On October 28, 2009, the Company and certain of our current and former officers, were named as defendants in NECA-IBEW Health & Welfare Fund v. Pitney Bowes Inc. et al., a class action lawsuit filed in the U.S. District Court for the District of Connecticut. The complaint asserts claims under the Securities Exchange Act of 1934 on behalf of those who purchased the common stock of the Company during the period between July 30, 2007 and October 29, 2007. We believe this case is without merit and intend to defend it vigorously.
Product Warranties
We provide product warranties in conjunction with certain product sales, generally for a period of 90 days from the date of installation. Our product warranty liability reflects our best estimate of probable liability for product warranties based on historical claims experience, which has not been significant, and other currently available evidence. Accordingly, our product warranty liability at September 30, 2009 and December 31, 2008, respectively, was not material.
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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in “Forward-Looking Statements” and elsewhere in this report.
The following analysis of our financial condition and results of operations should be read in conjunction with Pitney Bowes’ Condensed Consolidated Financial Statements contained in this report and Pitney Bowes’ Form 10-K for the year ended December 31, 2008.
Overview
For the third quarter, revenue decreased 12% to $1.36 billion due to continuing challenging global economic conditions and the negative impact of foreign currency translation, which negatively impacted revenue by 2%.
Income from continuing operations attributable to Pitney Bowes Inc. common stockholders was $105.7 million or $0.51 per diluted share as compared with $0.48 earnings per diluted share in the third quarter of 2008. Income from continuing operations in the third quarter of 2009 included a non-cash after-tax restructuring charge of $8.3 million, or 4 cents per diluted share. Income from continuing operations in the third quarter of 2008 included restructuring charges and asset impairments of 19 cents per diluted share.
A continued global economic downturn resulted in a decline in revenue for the quarter in all of our business segments. EBIT margins, however, were up in three of our segments from 2008, and also increased in six of our seven segments when compared to the second quarter of 2009. We reduced our selling, general and administrative expense by over $173.7 million during the nine months ended September 30, 2009, despite increased pension costs when compared to the prior year. We also reduced our debt by $297.9 million during the nine months ended September 30, 2009.
See “Results of Operations – Third Quarter of 2009 Compared to Third Quarter of 2008” for a more detailed discussion of our results of operations.
Outlook
Economic and business conditions in mail-intensive industries have continued to be weak during the quarter. Sales cycles for most capital purchase decisions by customers remain long. These factors have impacted our financial results, as the sustained economic downturn has had a negative effect on high-margin financing, rental, and supplies revenue streams. While the company has been successful in reducing its cost structure across its entire business and is shifting to a more variable cost structure, these actions have not been enough to date to offset the impact of lower revenue.
We continue to expect our mix of revenue to change, with a greater percentage of revenue coming from diversified revenue streams associated with fully featured smaller systems and a smaller percentage from larger system sales. We expect that our 2009 reported results will continue to be negatively impacted by challenging economic conditions and by the increase in pension costs related to recent changes in capital markets and assumptions used to calculate pension liabilities.
To enhance our responsiveness to changing market conditions, we have undertaken a strategic transformation process designed to create long-term flexibility to invest in future growth. We are currently completing the diagnostic phase of this project and are analyzing a wide range of opportunities for process and operational improvements in areas such as our global customer interactions and product development processes. Currently, we are targeting annualized benefits, net of investments, from our strategic transformation initiatives in the range of at least $150 to $200 million on a pre-tax basis. These benefits and the related costs, which could be significant, will be recognized as different actions are approved and implemented, with the goal of reaching the full benefit run rate by 2012.
Results of Operations – Third Quarter of 2009 compared to Third Quarter of 2008
Business segment results
The following table shows revenue and earnings before interest and taxes (“EBIT”) by segment for the three months ended September 30, 2009 and 2008. Prior year results have been reclassified to conform to the current year presentation. Refer to Note 7 to the Condensed Consolidated Financial Statements for further detail on these changes.
(Dollars in thousands)
EBIT (1)
% change
(12)%
)%
(17)%
(29
(18)%
(50
(13)%
160
%
(14)%
(21
(10)%
(4)%
49
(6)%
(8
(8)%
(16
See reconciliation of segment amounts to Income from continuing operations before income taxes in Note 7 to the Condensed Consolidated Financial Statements.
During the third quarter of 2009, Mailstream Solutions revenue decreased 14% to $925 million and EBIT decreased 21% to $227 million, compared to the prior year. Within Mailstream Solutions:
U.S. Mailing’s revenue decreased 12% primarily due to fewer placements of mailing equipment as customers continued to delay purchases of new equipment and extend leases on existing equipment due to the economic conditions. Revenue continues to be adversely affected by the ongoing changing mix to more fully featured smaller systems. Lease extensions have a positive impact on profit margins longer-term but negatively impact revenue in the current period. U.S. Mailing’s EBIT decreased 19% principally due to lower financing revenue, meter rentals, and supplies sales because of lower business activity levels over the prior year.
International Mailing revenue decreased 17%, with 6% of this decline driven by the unfavorable impact of foreign currency translation. The international economic environment continued to create weaker demand for our products and services. As a result, many customers delayed making purchase decisions for new mailing systems and lower mail volume reduced supplies revenue. International Mailing’s EBIT declined 29% to $29.2 million, primarily driven by lower levels of equipment, financing and supplies sales.
Revenue for Production Mail decreased 18% primarily as a result of lower equipment sales in the U.S., France, and Asia Pacific as economic uncertainty continues to delay large-ticket capital expenditures for many large enterprises worldwide. Foreign currency translation had an unfavorable impact of 2%. Production Mail’s EBIT decreased 50% driven by lower revenues and a shift in product mix to lower margin products.
Software’s revenue decreased 13%, with 4% of this decline driven by the unfavorable impact of foreign currency translation. Worldwide consolidation in the financial services industry and slowness in the retail sector continued to adversely impact the sales and renewal of software licenses. Uncertainty surrounding the economy has resulted in many large multi-national organizations changing their approval policies for capital expenditures, which has lengthened the sales cycle. Software’s EBIT increased to $8.2 million compare to $3.2 million in the prior year due to business integration and productivity initiatives which resulted in substantial EBIT margin improvements. This helped offset the pressure on margin due to lower revenue and a higher mix of some lower margin software sales.
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During the third quarter of 2009, Mailstream Services revenue decreased 8% to $432 million. However, EBIT increased 26% to $50 million, compared to the prior year. Within Mailstream Services:
Management Services revenue decreased 10%, of which 2% was driven by the unfavorable impact of foreign currency translation. The segment’s revenue was also adversely affected by lower business activity and decreased print and transaction volumes throughout the U.S. and Europe. Management Services EBIT, however, increased by 21% primarily due to productivity enhancements that have improved the profitability of the operations in both the U.S. and internationally.
Mail Services revenue decreased 4%, of which 1% was driven by the unfavorable impact of foreign currency translation. Declines in mail volumes processed for some customers were partly offset by the significant expansion of the customer base and increases in both standard mail and flats. Mail Services EBIT increased by 49% driven by the integration of Mail Services sites acquired last year and ongoing automation and productivity initiatives taken by the business.
Marketing Services revenue decreased 6%, mostly due to the impact of fewer household moves during the quarter and the resulting decline in the volume of required change of address kits. Marketing Services EBIT decreased 8% due to the lower transaction volumes.
Revenue by source
The following table shows revenue by source for the three months ended September 30, 2009 and 2008:
(24)%
(7)%
Equipment sales revenue decreased 24% compared to the prior year mostly due to fewer placements of mailing equipment as customers in the U.S. and internationally have delayed purchases of new equipment and extended leases on existing equipment due to the economic conditions. Revenue also continues to be adversely affected by the ongoing changing mix in equipment placements to more fully featured smaller systems. Foreign currency translation had an unfavorable impact of 2%.
Supplies revenue decreased 14% compared to the prior year due to lower supplies usage resulting from lower mail volumes and fewer installed meters due to customer consolidations in the U.S. and internationally. Foreign currency translation had an unfavorable impact of 3%.
Software revenue decreased 13% compared to the prior year due to the impact of the global economic slowdown which has caused many businesses to delay their capital spending worldwide, thus negatively impacting software revenues. Foreign currency translation had an unfavorable impact of 4%.
Rentals revenue decreased 10% compared to the prior year. In the U.S., customers continue to downsize to smaller, fully featured machines. The weak economic conditions also have had a negative impact on our international rental markets in France and Canada. Foreign currency translation had an unfavorable impact of 1%.
Financing revenue decreased 12% compared to the prior year. Lower equipment sales over the past year have resulted in a decline in our lease portfolios. Foreign currency translation had an unfavorable impact of 2%.
Support services revenue decreased 8% compared to the prior year principally driven by lower new equipment placements. Foreign currency translation had an unfavorable impact of 3%.
Business services revenue decreased 7% compared to the prior year primarily due to lower transaction volumes at Management Services. Foreign currency translation had an unfavorable impact of 1%.
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Costs and expenses
Cost of equipment sales as a percentage of revenue was 55.3% in the third quarter of 2009 compared with 53.1% in the prior year, primarily due to the unfavorable mix of lower margin equipment sales in International Mailing and Production Mail.
Cost of supplies as a percentage of revenue was 28.5% in the third quarter of 2009 compared with 27.2% in the prior year primarily due to an unfavorable mix of lower margin product sales in U.S. Mailing.
Cost of software as a percentage of revenue was 22.2% in the third quarter of 2009 compared with 25.9% in the prior year due to the impact of business integration measures and productivity investments, which more than offset lower revenue levels.
Cost of rentals as a percentage of revenue was 24.7% in the third quarter of 2009 compared with 19.8% in the prior year primarily due to the fixed costs associated with meter depreciation on lower revenues in both the U.S. Mailing and International Mailing segments.
Financing interest expense as a percentage of revenue was 14.0% in the third quarter of 2009 compared with 14.2% in the prior year primarily due to lower interest rates. In computing our financing interest expense, which represents our cost of borrowing associated with the generation of financing revenues, we assumed a 10:1 leveraging ratio of debt to equity and applied our overall effective interest rate to the average outstanding finance receivables.
Cost of support services as a percentage of revenue was 56.6% in the third quarter of 2009 compared with 58.7% in the prior year. Improvements in our U.S. Mailing, International Mailing and Production Mail segments are driven by the positive impacts of ongoing productivity investments as well as price increases on longer-service contracts in our Production Mail segment.
Cost of business services as a percentage of revenue was 74.9% in the third quarter of 2009 compared with 76.8% in the prior year. This improvement is due to the positive impacts of cost reduction programs in our Management Services and Mail Services businesses, partly offset by lower transaction volumes in our Management Services business.
Selling, general and administrative (“SG&A”) expenses as a percentage of revenue was 32.1% in the third quarter of 2009 compared with 31.3% in the prior year. SG&A expense declined $48.7 million or 10%, primarily as a result of our cost reduction initiatives and the positive impact of foreign currency translation of 2%. Lower revenues and increased pension costs more than offset these benefits on a percentage of revenue basis.
Research and development expenses decreased $8.0 million from the prior year, $1.2 million of which related to foreign currency translation. The decline in overall spending is due to the wind-down of redundant costs related to our transition to offshore development capabilities.
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Balance atJune 30,2009
66,167
(13,190
25,832
(2,424
91,999
(15,614
Other interest expense for the three months ended September 30, 2009 and 2008:
(9)%
Other interest expense decreased by $2.8 million or 9% in the third quarter of 2009 compared to the prior year. This is driven primarily by lower interest rates and lower average borrowings.
Income taxes
The effective tax rate for the third quarter of 2009 was 34.3% compared with 39.4% in the prior year. The 2008 effective tax rate was increased principally due to a low tax benefit associated with restructuring expenses recorded in the three months ended September 30, 2008.
The following table shows selected financial information included in discontinued operations for the three months ended September 30, 2009 and 2008, respectively:
Loss from discontinued operations, net of tax
2,429
2,063
The losses for the three months ended September 30, 2009 and September 30, 2008 relate to the accrual of interest on uncertain tax positions.
Noncontrolling interests (Preferred stock dividends of subsidiaries)
The following table details dividends paid to preferred stockholders for the three months ended September 30, 2009 and 2008:
Preferred stock dividends of subsidiaries
The three months ended September 30, 2008 included a net expense of $1.8 million associated with the redemption of $10 million of 9.11% Cumulative Preferred Stock in August 2008.
Results of Operations – Nine Months Ended September 30, 2009 compared to Nine Months Ended September 30, 2008
(22)%
(19)%
(11)%
Equipment sales revenue decreased 22% compared to the prior year due to lower placements of mailing equipment as more customers have delayed purchases of new equipment and extended their leases on existing equipment due to the economic conditions. Revenue also continues to be adversely affected by the ongoing changing mix in equipment placements to more fully featured smaller systems. Foreign currency translation had an unfavorable impact of 6%.
Supplies revenue decreased 17% compared to the prior year due to lower supplies usage resulting from lower mail volumes and fewer installed meters due to customer consolidations in the U.S. and internationally. Foreign currency translation had an unfavorable impact of 5%.
Software revenue decreased 19% compared to the prior year primarily due to the impact of the global economic slowdown which has caused many businesses to delay their capital spending worldwide. Worldwide consolidation in the financial services industry and slowness in the retail sector have also adversely impacted sales and renewals of software licenses. Foreign currency translation had an unfavorable impact of 7%.
Rentals revenue decreased 12% compared to the prior year as customers in the U.S. continue to downsize to smaller, fully featured machines. The weak economic conditions have also impacted our international rental markets, specifically in Canada and France. Foreign currency translation had an unfavorable impact of 3%.
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Financing revenue decreased 11% compared to the prior year. Lower equipment sales over the past year have resulted in a decline in both our U.S. and international lease portfolios. Foreign currency translation had an unfavorable impact of 4%.
Support services revenue decreased 8% compared to the prior year, principally due to the unfavorable impact of foreign currency translation of 5%, and lower revenues in Canada, the U.S. and the U.K. due to lower new equipment placements.
Business services revenue decreased 7% compared to the prior year. Lower volumes at Management Services and Marketing Services more than offset the increase in mail volumes processed at Mail Services. The unfavorable impact of foreign currency translation of 3% was partly offset by the positive impact of acquisitions which contributed 1%.
Cost of equipment sales as a percentage of revenue was 54.2% in the first nine months of 2009 compared with 53.2% in the prior year, primarily due to an unfavorable mix of lower margin equipment sales in Production Mail.
Cost of supplies as a percentage of revenue was 27.0% in the first nine months of 2009 compared with 26.4% in the prior year due to an unfavorable mix of products in U.S Mailing.
Cost of software as a percentage of revenue was 23.8% in the first nine months of 2009 compared with 25.5% in the prior year due to business integration measures and productivity investments, which more than offset lower revenue levels.
Cost of rentals as a percentage of revenue was 23.4% in the first nine months of 2009 compared with 20.6% in the prior year primarily due to the fixed costs associated with meter depreciation on lower revenues.
Financing interest expense as a percentage of revenue was 14.0% in the first nine months of 2009 compared with 14.5% in the prior year due to lower interest rates. In computing our financing interest expense, which represents our cost of borrowing associated with the generation of financing revenues, we assumed a 10:1 leveraging ratio of debt to equity and applied our overall effective interest rate to the average outstanding finance receivables.
Cost of support services as a percentage of revenue was 56.5% in the first nine months of 2009 compared with 59.2% in the prior year due to margin improvements in U.S. Mailing, International Mailing and Production Mail driven by the positive impacts of ongoing productivity investments and price increases on longer-service equipment in Production Mail.
Cost of business services as a percentage of revenue was 76.9% in the first nine months of 2009 compared with 77.1% in the prior year. This is due to the positive impacts of cost reduction programs at our Management Services and Mail Services businesses, partly offset by lower volumes of higher margin print and transaction activity which has negatively impacted Management Services.
Selling, general and administrative (“SG&A”) expenses as a percentage of revenue was 32.0% in the first nine months of 2009 compared with 31.7% in the prior year. SG&A expense declined $173.7 million or 12%, primarily as a result of our cost reduction initiatives and the positive impact of foreign currency translation of 5%. However, the impact of the lower revenues and increased pension costs more than offset these benefits on a percentage of revenue basis.
Research and development expenses decreased $17.6 million in the first nine months of 2009 from the prior year, of which $6.6 million related to foreign currency translation. As a percentage of revenue, research and development expenses were slightly higher
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than the prior year as we continue to invest in developing new technologies, enhancing our products, and expanding our offshore development capabilities.
Other interest expense for the nine months ended September 30, 2009 and 2008:
Other interest expense decreased $7.0 million or 8% in the first nine months of 2009 compared to the prior year due to lower interest rates and lower average borrowings.
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The effective tax rate for the nine months ended September 30, 2009 and 2008 was 36.6% and 36.8%, respectively. The year-to-date 2009 tax rate was increased by a $12.2 million write-off of deferred tax assets associated with the expiration of out-of-the-money vested stock options and the vesting of stock units previously granted to our employees. This write-off of deferred tax assets will not require us to pay any taxes. The year-to-date 2008 tax rate was increased by a tax accrual associated with lease refunds in the U.K. and Ireland of $6.5 million and the impact of a low tax benefit associated with restructuring expenses recorded during 2008.
The following table shows selected financial information included in discontinued operations for the nine months ended September 30, 2009 and 2008, respectively:
Net gain (loss) from discontinued operations, net of tax
The following table details dividends paid to preferred stockholders for the nine months ended September 30, 2009 and 2008:
The nine months ended September 30, 2008 included a net expense of $1.8 million associated with the redemption of $10 million of 9.11% Cumulative Preferred Stock in August 2008.
Liquidity and Capital Resources
We believe that cash flow from operations, existing cash and liquid investments, as well as borrowing capacity under our commercial paper program, the existing credit facility and debt capital markets should be sufficient to finance our capital requirements and to cover our customer deposits. Our potential uses of cash include but are not limited to the following: growth and expansion opportunities; internal investments; customer financing; restructuring payments; tax payments; interest and dividend payments; pension and other benefit plan funding; acquisitions; and share repurchase program.
We continue to review our liquidity profile. We have carefully monitored for material changes in the creditworthiness of those banks acting as derivative counterparties, depository banks or credit providers to us through credit ratings and the credit default swap market. We have determined that there has not been a material variation in the underlying sources of cash flows currently used to finance the operations of the company. To date, we have had consistent access to the commercial paper market.
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Cash Flow Summary
The change in cash and cash equivalents is as follows:
Cash provided by operating activities
Cash used in investing activities
Cash used in financing activities
Effect of exchange rate changes on cash
2009 Cash Flows
Net cash provided by operating activities consists primarily of net income adjusted for non-cash items and changes in operating assets and liabilities. Cash provided by operating activities included lower investments in finance receivables and lower accounts receivable balances of $203.6 million and $134.8 million, respectively, resulting from lower levels of new business and strong collections as well as an increase in current and non-current income taxes of $73.5 million primarily due to the timing of tax payments. Partially offsetting these positive cash flow impacts was a reduction in accounts payable and accrued liabilities of $195.8 million, primarily due to lower compensation accruals as well as $66.8 million in restructuring payments associated with cost reduction initiatives and a $20.3 million payment for the unwinding of derivatives related to the March 2009 debt issuance. See Note 14 to the Condensed Consolidated Financial Statements for additional discussion of the restructuring payments.
Net cash used in investing activities consisted principally of capital expenditures of $126.5 million.
Net cash used in financing activities consisted primarily of a decrease in notes payable of $445.5 million due to the repayment of commercial paper and the $150.0 million repayment of notes in September 2009. These were partially offset by the proceeds from long term obligations of $297.5 million related to the March 2009 debt issuance. Dividends paid to common stockholders were $223.2 million for the nine months ended September 30, 2009.
2008 Cash Flows
Net cash provided by operating activities consists primarily of net income adjusted for non-cash items and changes in operating assets and liabilities. A lower investment in finance receivables of $74.3 million and an increase in advanced billings of $21.8 million contributed to this increase in cash. In addition, the timing of tax payments favorably contributed $93.5 million. Partially offsetting these positive impacts was a reduction in accounts payable and accrued liabilities of $94.9 million, primarily due to timing of payments.
Net cash used in investing activities consisted principally of capital expenditures of $170.0 million combined with acquisitions of $69.0 million partially offset by increased reserve account balances for customer deposits of $16.6 million and a reduction in investments of $21.7 million.
Net cash used in financing activities consisted primarily of dividends paid to common stockholders of $219.4 million and stock repurchases of $333.2 million, partially offset by proceeds from issuance of stock of $16.6 million and a net increase in notes payable and long-term obligations of $94.9 million. We also paid $11.8 million associated with the redemption of 100% of the outstanding Cumulative Preferred Stock issued previously by a subsidiary company.
Capital Expenditures
During the first nine months of 2009, capital expenditures included $66.0 million in net additions to property, plant and equipment and $60.5 million in net additions to rental equipment and related inventories compared with $86.3 million and $83.7 million, respectively, in the same period in 2008. The decrease in property, plant and equipment compared to the prior year is due primarily to higher 2008 spending at our Mail Services business associated with the integration of acquisitions as well as lower investment spending across all of our segments. The decrease in rental equipment and related inventories compared to the prior year is due to lower equipment placements due to the weak economic conditions.
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Financings and Capitalization
We have a commercial paper program that is a significant source of liquidity for the Company. During 2009, we have continued to have consistent access to the commercial paper market. As of September 30, 2009, we had $165 million of outstanding commercial paper issuances. We also have a committed line of credit of $1.5 billion which supports commercial papers issuance and is provided by a syndicate of 15 banks until 2011. As of September 30, 2009, this line of credit had not been drawn down. In addition, we filed a Well-Known Seasoned Issuer registration statement with the SEC in June 2008 which permits the issuance of debt securities, preferred stock, preference stock, common stock, purchase contracts, depositary shares, warrants and units.
On September 15, 2009, we repaid the 8.55% notes with a $150 million face value. The repayment of these notes was funded through cash generated from operations and issuance of commercial paper. No additional long-term notes will mature until 2012.
On March 4, 2008, we issued $250 million of 10-year fixed-rate notes with a coupon rate of 5.60%. The interest is paid semi-annually beginning September 15, 2008. The notes mature on March 15, 2018. We simultaneously entered into two interest rate swaps for a total notional amount of $250 million to convert the fixed rate debt to a floating rate obligation bearing interest at 6 month LIBOR plus 111.5 basis points. The proceeds from these notes were used for general corporate purposes, including the repayment of commercial paper and repurchase of our stock.
We believe our financing needs in the short and long-term can be met from cash generated internally, the issuance of commercial paper, debt issuance under our effective shelf registration statement and borrowing capacity under our existing credit agreements.
Recent Accounting Pronouncements
DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIESOn January 1, 2009, we adopted new accounting guidance on disclosures about derivative instruments and hedging activities. The new guidance impacts disclosures only and requires additional qualitative and quantitative information on the use of derivatives and their impact on an entity’s financial position, results of operations and cash flows. See Note 17 to the Condensed Consolidated Financial Statements for additional information regarding our derivative instruments and hedging activities.
BUSINESS COMBINATIONSOn January 1, 2009, we adopted new accounting guidance on business combinations. The new guidance revises principles and requirements for how a company (a) recognizes and measures in their financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest (previously referred to as minority interest); (b) recognizes and measures the goodwill acquired in a business combination or a gain from a bargain purchase; and (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of a business combination. Some of the major impacts of this new guidance include expense recognition for transaction costs and restructuring costs. The adoption of this guidance has not had a material impact on our financial position, results of operations, or cash flows.
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NONCONTROLLING INTERESTSOn January 1, 2009, we adopted new accounting guidance on noncontrolling interests. The new guidance addresses the accounting and reporting for the outstanding noncontrolling interest (previously referred to as minority interest) in a subsidiary and for the deconsolidation of a subsidiary. It also establishes additional disclosures in the consolidated financial statements that identify and distinguish between the interests of the parent’s owners and of the noncontrolling owners of a subsidiary. The guidance requires retroactive adoption of the presentation and disclosure requirements for existing minority interests while all other requirements of the guidance are applied prospectively.
REVENUE RECOGNITIONIn September 2009, new guidance was introduced addressing the accounting for revenue arrangements with multiple elements and certain revenue arrangements that include software elements. The new literature will allow companies to allocate arrangement consideration in a multiple element arrangement in a way that better reflects the economics of the transaction. This will result in the elimination of the residual method model. In addition, tangible products that have software components that are “essential to the functionality” of the tangible product will be scoped out of the software revenue guidance. The new guidance will also result in more expansive disclosures. The new guidance will be effective on January 1, 2011, with early adoption permitted. We are currently evaluating the impact of adopting the new guidance.
Regulatory Matters
There have been no significant changes to the regulatory matters disclosed in our 2008 Annual Report on Form 10-K.
Forward-Looking Statements
We want to caution readers that any forward-looking statements within 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-K, other reports or press releases or made by our management involve risks and uncertainties which may change based on various important factors. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. These forward-looking statements are those which talk about our 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 our behalf include:
•
changes in international or national political conditions, including any terrorist attacks
negative developments in economic conditions, including adverse impacts on customer demand
changes in postal or banking 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
mailers’ utilization of alternative means of communication or competitors’ products
our success at managing customer credit risk
our success at managing costs associated with our strategy of outsourcing functions and operations not central to our business
changes in interest rates
foreign currency fluctuations
cost, timing and execution of our transition plans including any potential asset impairments
regulatory approvals and satisfaction of other conditions to consummation of any acquisitions and integration of recent acquisitions
interrupted use of key information systems
changes in privacy laws
intellectual property infringement claims
impact on mail volume resulting from current concerns over the use of the mail for transmitting harmful biological agents
third-party suppliers’ ability to provide product components, assemblies or inventories
negative income tax adjustments for prior audit years and changes in tax laws or regulations
changes in pension and retiree medical costs
acts of nature
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Item 3: Quantitative and Qualitative Disclosures about Market Risk
There were no material changes to the disclosures made in the Annual Report on Form 10-K for the year ended December 31, 2008 regarding this matter.
Item 4: Controls and Procedures
Disclosure controls and procedures are designed to reasonably assure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed to reasonably assure that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate to allow timely decisions regarding required disclosure.
Under the direction of our CEO and CFO, we evaluated the effectiveness of our disclosure controls and procedures and internal control over financial reporting. The CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2009. In addition, no change in internal control over financial reporting occurred during the quarter ended September 30, 2009, that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting. It should be noted that any system of controls is based in part upon certain assumptions designed to obtain reasonable (and not absolute) assurance as to its effectiveness, and there can be no assurance that any design will succeed in achieving its stated goals. Notwithstanding this caution, the disclosure controls and procedures are designed to provide reasonable assurance of achieving their stated objectives, and the CEO and CFO have concluded that the disclosure controls and procedures are effective at that reasonable assurance level.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
Our wholly-owned subsidiary, Imagitas, Inc., is a defendant in ten purported class actions filed in six different states. These lawsuits have been coordinated in the United States District Court for the Middle District of Florida, In re: Imagitas, Driver’s Privacy Protection Act Litigation (Coordinated, May 28, 2007). Each of these lawsuits alleges that the Imagitas DriverSource program violated the federal Drivers Privacy Protection Act (DPPA). Under the DriverSource program, Imagitas entered into contracts with state governments to mail out automobile registration renewal materials along with third party advertisements, without revealing the personal information of any state resident to any advertiser. The DriverSource program assisted the state in performing its governmental function of delivering these mailings and funding the costs of them. Imagitas has discontinued its DriverSource program. The plaintiffs in these actions are seeking statutory damages under the DPPA. On April 9, 2008, the District Court granted Imagitas’ motion for summary judgment in one of the coordinated cases, Rine, et al. v. Imagitas, Inc. (United States District Court, Middle District of Florida, filed August 1, 2006). On July 30, 2008, the District Court issued a final judgment in the Rine lawsuit and stayed all of the other cases filed against Imagitas pending an appellate decision in Rine. On August 27, 2008, the Rine plaintiffs filed an appeal of the District Court’s decision in the United States Court of Appeals, Eleventh Judicial Circuit. The appellate process in this case is proceeding.
Item 1A: Risk Factors
There were no material changes to the risk factors identified in the Annual Report on Form 10-K for the year ended December 31, 2008.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Repurchases of Equity Securities
We repurchase shares of our common stock under a systematic program to manage the dilution created by shares issued under employee stock plans and for other purposes. This program authorizes repurchases in the open market. We have not repurchased or acquired any other shares of our common stock during 2009 in any other manner.
No shares were purchased during the third quarter of 2009, leaving approximately $73.4 million available for future repurchases under this program at September 30, 2009.
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
Item 5: Other Information
Attached hereto as Exhibit 10 is the form of Notice of Cash Incentive Unit Award, Nonqualified Stock Option and Restricted Stock Unit Award (the “Notice”), to be used to set forth the terms of grants, including grants to the Company’s named executive officers, of cash incentive units (“CIUs”), nonqualified stock options (“Options”) and restricted stock units (“RSUs”) pursuant to the Pitney Bowes 2007 Stock Plan (the “2007 Plan”), in the case of Options and RSUs and pursuant to the Pitney Bowes Inc. Key Employees Incentive Plan (the “KEIP,” and together with the 2007 Plan, the “Plans”) in the case of CIUs. The form of Notice of Cash Incentive Unit Award and Nonqualified Stock Option were previously filed as Exhibit (10)(n) to Form 10-Q, filed May 4, 2006. The terms of this Notice were approved by the Executive Compensation Committee of the Board of Directors of Company at the time of the grant of each applicable award.
The Notice contemplates that awards will vest pursuant to the vesting schedules set forth in the Notice, subject to the continued employment of the participant, the terms and conditions of the Notice and the Plans. Pursuant to the Notice, a participant will forfeit any unvested portion of their awards upon a voluntary resignation or a termination by the Company due to Gross Misconduct (as defined in the applicable Plan). CIUs will be prorated upon a termination due to death, Disability (as defined in the KEIP), Retirement (as defined in the KEIP) or upon an involuntary termination, provided that a prorated payment upon an involuntary termination will only be available if the termination is pursuant to the terms of a written severance agreement, the recipient is not Retirement eligible and if the award has been outstanding for at least one year as of the last day the employee actually worked. Pursuant to the terms of the Notice, Options and RSUs will be subject to immediate vesting upon a termination due to death, Disability (as defined in the 2007 Plan) or Retirement (as defined in the 2007 Plan). Options and RSUs will continue to vest upon an involuntary termination, if a written severance agreement is entered into in connection with such termination, according to the terms of such written severance agreement. Upon the settlement of RSUs, the Company will withhold the number of RSUs having the fair market value sufficient to satisfy the statutory minimum withholding tax.
The foregoing description of the terms of the Notice is qualified in its entirety by reference to the actual terms of the Notice, which are attached hereto as Exhibits 10.
Item 6: Exhibits
See Index of Exhibits.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PITNEY BOWES INC.
November 6, 2009
/s/ Michael Monahan
Michael Monahan
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ S. J. Green
S. J. Green
Vice President – Finance and
Chief Accounting Officer
(Principal Accounting Officer)
Exhibit Index
Exhibit Number
Description
(3)(i)(a)*
Restated Certificate of Incorporation, as amended, incorporated by reference to Exhibit (3) to Form 10-Q as filed with the Commission on August 14, 1996. (Commission file number 1-3579)
Not applicable
(3)(i)(b)*
Certificate of Amendment to the Restated Certificate of Incorporation (as amended May 29, 1996), incorporated by reference to Exhibit (a.1) to Form 10-K as filed with the Commission on March 27, 1998. (Commission file number 1-3579)
(3)(ii)*
Pitney Bowes Inc. Amended and Restated By-laws, incorporated by reference to Exhibit (3)(ii) to Form 10-Q as filed with the Commission on August 6, 2007. (Commission file number 1-3579)
(10)
Form of Long-Term Incentive Award
Page 43
(12)
Computation of ratio of earnings to fixed charges
Page 48
(31.1)
Certification of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended
Page 49
(31.2)
Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended
Page 50
(32.1)
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
Page 51
(32.2)
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
Page 52
101.INS
XBRL Report Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Calculation Linkbase Document
101.LAB
XBRL Taxonomy Label Linkbase Document
101.PRE
XBRL Taxonomy Presentation Linkbase Document
*
Incorporated by reference
42