PITNEY
BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)
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., was 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, Drivers Privacy Protection Act Litigation
(Coordinated, May
28, 2007). Each of these lawsuits alleged 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. The plaintiffs in these actions were 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 Courts
decision in the United States Court of Appeals, Eleventh Judicial Circuit (the
Circuit Court). On December 21, 2009, the Circuit Court affirmed
the District Court decision. On February 22, 2010, the Circuit Court denied the
Rine plaintiffs petition for rehearing en banc. The Rine plaintiffs ability
to pursue further review of this decision has expired. With respect to the
remaining stayed cases, Imagitas filed its motion to dismiss these cases on
October 8, 2010.
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 alleging that the
company, in essence, missed two financial projections. Plaintiffs filed an
amended complaint on September 20, 2010. We believe this case is without merit
and intend to defend it vigorously.
We expect to prevail in the legal actions above; 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.
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, 2010 and December 31, 2009, respectively,
was not material.
22
I
tem 2: Managements Discussion and Analysis of
Financial
Condition and Results of Operations
Managements 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 our
Condensed Consolidated Financial Statements contained in this report and our
2009 Annual Report.
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-Q may change based on various
factors. The future is difficult to predict. 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 transformation
initiatives, and amounts, timing and results of possible restructuring charges
and future earnings or risks. Words such as estimate, target, 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,
without limitation:
|
|
|
|
|
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 transformation plans including any potential asset
impairments
|
|
|
regulatory
approvals and satisfaction of other conditions to consummation and
integration of any acquisitions
|
|
|
interrupted
use of key information systems
|
|
|
changes in
international or national political conditions, including any terrorist
attacks
|
|
|
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 or other regulatory levies for prior audit years and
changes in tax laws or regulations
|
|
|
changes in
pension, healthcare and retiree medical costs
|
Overview
Third Quarter
For the third quarter 2010, revenue decreased 1% to
$1.35 billion compared to the prior year. Foreign currency translation had a 1%
unfavorable impact on revenue and acquisitions had a 1% favorable impact on
revenue.
During
the quarter, equipment sales and software revenue worldwide increased 10%
compared to the prior year. The improvement in equipment sales was offset
however, by declines in rentals and financing revenue, supplies revenue and
business services revenue. The company had revenue growth in five of its seven
business segments compared to the prior year.
Earnings before interest and taxes (EBIT) increased
in four of our seven business segments when compared to the third quarter of
2009 primarily due to our ongoing productivity investments and cost reduction
initiatives.
Pitney
Bowes net income from continuing
operations was $91 million, or $0.44 per diluted share in the third quarter of
2010 compared to $106 million or $0.51 per diluted share in the prior year.
Diluted earnings per share from continuing operations for the third quarter
2010 included $0.10 for restructuring charges and less than $0.01 for
out-of-the money stock options that expired during the quarter.
23
Cash flow from operating activities was $243
million for the third quarter 2010 compared to $249 million for the same period
in the prior year. Cash flow from operations included proceeds from the
unwinding of interest rate swap agreements of $32 million and restructuring
payments of $24 million.
During the quarter, we completed the acquisition of
Portrait Software plc (Portrait) for $65.2 million, net of cash acquired.
Portrait provides software to enhance existing customer relationship management
systems, enabling clients to achieve improved customer retention and
profitability.
Year-to-Date
For the nine months ended September 30, 2010,
revenue was $4.0 billion, a decrease of 3% compared to revenue of $4.1 billion
for the nine months ended September 30, 2009. Foreign currency translation had
a 1% favorable impact on revenue.
Net income from continuing operations for the nine
months ended September 30, 2010 was $238 million, or $1.15 per diluted share,
compared to $320 million, or $1.54 per diluted share for the prior year.
Diluted earnings per share for the nine months ended September 30, 2010 was
reduced by $0.32 for restructuring charges and asset impairments, $0.04 for
recently enacted health care legislation and $0.07 for tax charges primarily
related to out-of-the-money stock options that expired during the period.
Cash flow from operating activities was $667
million for the year-to-date 2010 period compared to $732 million for the same
period in the prior year. Cash flow from operations was negatively impacted by
lower net income and higher restructuring and tax payments.
Outlook
We
have begun to see some positive signs in our business this quarter. However,
the worldwide economy and business environment continues to be uncertain,
especially among small businesses. This uncertain economic environment has impacted
our financial results and in particular our recurring revenue streams,
including our high-margin financing, rental and supplies revenue streams.
Recovery of these recurring revenue streams will lag a recovery in equipment
sales. While we have been successful in reducing our cost structure across the
entire business and shifting to a more variable cost structure, these actions
have not been sufficient to offset the impact of lower revenues. We remain
focused on streamlining our business operations and creating more flexibility
in our cost structure.
We continue to expect our mix of revenue to change, with a greater
percentage of revenue coming from service-based sources and diversified revenue
streams associated with fully featured smaller mailing systems. We expect that
our future results will continue to be impacted by changes in global economic
conditions and their impact on mail intensive industries. It is not expected
that total mail volumes will rebound to prior peak levels in an economic
recovery, and future mail volume trends will continue to be a factor for our
businesses.
24
RESULTS OF
OPERATIONS
Third
Quarter of
2010 compared to Third Quarter of 2009
Business segment
results
The following table shows revenue and EBIT for
the three months ended September 30, 2010 and 2009 by
business segment. We use EBIT, a non-GAAP measure, to determine our
segment profitability. Refer to the reconciliation of segment amounts to income
from continuing operations before income taxes in Note 7 to the Condensed Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
thousands)
|
|
Revenue
|
|
EBIT
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
% change
|
|
2010
|
|
2009
|
|
% change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Mailing
|
|
$
|
461,787
|
|
|
$
|
491,036
|
|
|
|
(6
|
)%
|
|
$
|
169,871
|
|
|
$
|
178,066
|
|
|
|
(5
|
)%
|
|
International Mailing
|
|
|
227,844
|
|
|
|
224,681
|
|
|
|
1
|
%
|
|
|
38,931
|
|
|
|
29,193
|
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small & Medium Business Solutions
|
|
|
689,631
|
|
|
|
715,717
|
|
|
|
(4
|
)%
|
|
|
208,802
|
|
|
|
207,259
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production Mail
|
|
|
134,943
|
|
|
|
126,434
|
|
|
|
7
|
%
|
|
|
15,243
|
|
|
|
11,494
|
|
|
|
33
|
%
|
|
Software
|
|
|
91,544
|
|
|
|
82,361
|
|
|
|
11
|
%
|
|
|
7,996
|
|
|
|
8,241
|
|
|
|
(3
|
)%
|
|
Management Services
|
|
|
245,113
|
|
|
|
259,370
|
|
|
|
(5
|
)%
|
|
|
23,508
|
|
|
|
19,517
|
|
|
|
20
|
%
|
|
Mail Services
|
|
|
144,988
|
|
|
|
134,042
|
|
|
|
8
|
%
|
|
|
15,139
|
|
|
|
23,024
|
|
|
|
(34
|
)%
|
|
Marketing Services
|
|
|
39,523
|
|
|
|
38,896
|
|
|
|
2
|
%
|
|
|
8,571
|
|
|
|
7,448
|
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise Business Solutions
|
|
|
656,111
|
|
|
|
641,103
|
|
|
|
2
|
%
|
|
|
70,457
|
|
|
|
69,724
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,345,742
|
|
|
$
|
1,356,820
|
|
|
|
(1
|
)%
|
|
$
|
279,259
|
|
|
$
|
276,983
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small
& Medium Business Solutions
During
the third quarter of 2010, Small & Medium Business Solutions revenue
decreased 4% to $690 million and EBIT increased 1% to $209 million, compared to
prior year. Within Small & Medium Business Solutions:
U.S.
Mailing revenue decreased 6% to $462 million and EBIT decreased 5% to $170
million, compared to the prior year. While equipment sales improved over the
prior year, lower financing, rental, and supplies revenue more than offset the
improvement in equipment sales. The decrease in financing revenue is due to a
decline in our leasing portfolio from reduced equipment sales in prior periods.
International Mailing revenue increased 1% to $228 million compared to
the prior year, with foreign currency translation having an unfavorable impact
of 2%. Revenue growth was driven by postal rate increases in France and
stronger sales in certain parts of Europe and Latin America, and Canada, as
compared to prior year. The increase was partially offset by continued declines
in financing and rentals revenue due to reduced equipment sales in prior
periods. International Mailing EBIT increased 33% to $39 million compared to
the prior year, and was favorably impacted by a $0.03 per diluted share
adjustment related to certain leveraged lease transactions in Canada as well as
our initiatives to improve productivity and consolidate administrative
functions globally.
Enterprise Business Solutions
During the third quarter of 2010, Enterprise
Business Solutions revenue increased 2% to $656 million and EBIT increased 1% to $70 million, compared to prior year. Within Enterprise Business Solutions:
Production Mail revenue increased 7% over the prior
year to $135 million due to increased demand in the U.S. for inserting equipment
and our first installation of production print equipment. Demand for inserting
equipment continued to experience a delayed recovery in certain countries
outside North America as many large enterprises in these regions continue to
delay capital expenditures due to economic uncertainty. Production Mail EBIT
increased 33% to $15 million compared to the prior year due to the increase in
revenue over the prior year and our initiatives to improve productivity and
consolidate administrative functions.
Software revenue increased 11% over the prior year to $92 million, and
includes an unfavorable impact from foreign currency translation of 1% and a favorable
impact of 9% from the acquisition of Portrait. We continue to expand our
software-as-a-service
25
license offerings and recurring revenue streams
from term licenses. Software EBIT decreased 3% to $8 million, and was negatively
impacted by transaction-related fees of $2.2 million associated with the
Portrait acquisition, partly offset by our efforts to integrate our operations
and focus our product offerings.
Management Services revenue decreased 5% to $245 million compared to
the prior year, which included the unfavorable impact of foreign currency
translation of 1%. Revenue was adversely impacted by lower business activity in
prior periods and decreased print volumes. Management Services EBIT however,
increased 20% to $24 million primarily due to our actions to align costs with
changing volumes through a more variable cost infrastructure, ongoing
productivity initiatives and a focus on more profitable contracts.
Mail Services revenue increased 8% to $145 million compared to the
prior year, and included the favorable impact of 4% from an acquisition
completed in the second quarter of 2010, while EBIT decreased 34% to $15
million. The increase in revenue is driven by an expanding customer base and
higher volumes of Standard Class mail processed in our Presort business. EBIT
was negatively impacted by lower margins in our International Mail Services
business due to higher shipping rates charged by international carriers for our
International Mail Services business, which more than offset the favorable EBIT
margin impacts in our Presort business.
Marketing Services revenue increased 2% to $40 million compared to the
prior year period primarily due to increased vendor advertising for the Movers
Source kits despite a decline in the household moves compared to the prior
year. EBIT increased 15% to $9 million due to the increased revenue and ongoing
productivity initiatives.
Revenue by source
The following table shows revenue by source for the three months ended
September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
thousands)
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
% change
|
|
|
|
|
|
|
|
|
Equipment
sales
|
|
$
|
248,228
|
|
|
$
|
225,759
|
|
|
|
10
|
%
|
|
Supplies
|
|
|
77,304
|
|
|
|
83,464
|
|
|
|
(7
|
)%
|
|
Software
|
|
|
95,850
|
|
|
|
87,295
|
|
|
|
10
|
%
|
|
Rentals
|
|
|
151,399
|
|
|
|
163,711
|
|
|
|
(8
|
)%
|
|
Financing
|
|
|
157,333
|
|
|
|
171,228
|
|
|
|
(8
|
)%
|
|
Support
services
|
|
|
175,844
|
|
|
|
177,607
|
|
|
|
(1
|
)%
|
|
Business
services
|
|
|
439,784
|
|
|
|
447,756
|
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,345,742
|
|
|
$
|
1,356,820
|
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment sales revenue increased 10% compared
to the prior year and was negatively impacted by foreign currency translation
of 1%. This growth was driven by higher sales of mailing and production mail
equipment in the U.S. and revenue from the postal rate increases in France.
Supplies revenue decreased 7% compared to the prior year. This decline
was due to lower supplies usage resulting from lower mail volumes and fewer
installed meters in the U.S. and internationally. Foreign currency translation
had a 1% negative impact.
Software revenue increased 10% compared to the
prior year. Foreign currency translation had less than 1% negative impact
and the Portrait acquisition had a positive 8% impact. Revenue has
been negatively impacted as many businesses continued to delay certain capital
spending worldwide as well as the impacts of expansion of our
software-as-a-service offerings.
Rentals revenue decreased 8% as a result of fewer equipment sales and
meter rental placements in prior periods. Foreign currency translation had an
unfavorable impact of 1%.
Financing revenue decreased 8% compared to the
prior year. Lower equipment sales in prior periods have resulted in a decline
in our U.S. and international lease portfolios. Foreign currency translation
had less than a 1% negative impact.
Support services revenue decreased 1% compared to the prior year as
lower new equipment placements in prior periods have slowed growth. Foreign
currency translation had a 1% negative impact.
Business services revenue decreased 2% compared to the prior year
primarily due to lower net new business and print volumes at Management
Services. Foreign currency translation had a 1% negative impact.
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
thousands)
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
equipment sales
|
|
$
|
115,721
|
|
|
$
|
106,326
|
|
|
|
46.6
|
%
|
|
|
47.1
|
%
|
|
Cost of
supplies
|
|
$
|
23,843
|
|
|
$
|
23,785
|
|
|
|
30.8
|
%
|
|
|
28.5
|
%
|
|
Cost of
software
|
|
$
|
21,191
|
|
|
$
|
19,413
|
|
|
|
22.1
|
%
|
|
|
22.2
|
%
|
|
Cost of
rentals
|
|
$
|
36,277
|
|
|
$
|
40,508
|
|
|
|
24.0
|
%
|
|
|
24.7
|
%
|
|
Financing
interest expense
|
|
$
|
22,189
|
|
|
$
|
23,975
|
|
|
|
14.1
|
%
|
|
|
14.0
|
%
|
|
Cost of
support services
|
|
$
|
111,521
|
|
|
$
|
119,034
|
|
|
|
63.4
|
%
|
|
|
67.0
|
%
|
|
Cost of
business services
|
|
$
|
335,588
|
|
|
$
|
335,406
|
|
|
|
76.3
|
%
|
|
|
74.9
|
%
|
|
Selling,
general and administrative
|
|
$
|
435,292
|
|
|
$
|
435,931
|
|
|
|
32.3
|
%
|
|
|
32.1
|
%
|
|
Research and
development
|
|
$
|
38,454
|
|
|
$
|
45,052
|
|
|
|
2.9
|
%
|
|
|
3.3
|
%
|
|
Cost of equipment sales as a percentage of
revenue improved to 46.6% in the third quarter of 2010 compared with 47.1% in
the prior year primarily due to high-margin sales related to scale upgrades due
to postal rate increases in France and the benefits from our productivity initiatives.
Cost of supplies as a percentage of revenue
was 30.8% in the third quarter of 2010 compared with 28.5% in the prior year
primarily due to the increasing mix of lower margin product sales worldwide.
Cost of software as a percentage of revenue
was 22.1% in the third quarter of 2010, relatively unchanged compared with
22.2% in the prior year.
Cost of rentals as a percentage of revenue
was 24.0% in the third quarter of 2010 compared with 24.7% in the prior year.
Rental margins have been positively impacted by a higher level of lease
extensions.
Financing interest expense as a percentage of
revenue was 14.1% in the third quarter of 2010, comparable to 14.0% in the
prior year. 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
improved to 63.4% in the third quarter of 2010 compared with 67.0% in the prior
year driven by the impacts of our ongoing productivity initiatives and cost
reduction programs in our U.S. Production Mail and International Mailing
businesses.
Cost of business services as a percentage of
revenue was 76.3% in the third quarter of 2010 compared with 74.9% in the prior
year. Positive impacts of cost reduction programs in our Management Services
and Presort businesses were more than offset by higher shipping costs in our
International Mail Services businesses.
Selling, general and administrative (SG&A) expense as a percentage
of revenue was 32.3% for the
third quarter of 2010 compared with 32.1%
in the prior year. SG&A expense was negatively impacted by transaction
related costs associated with the acquisition of Portrait and includes the
negative impacts of foreign currency translation of $4.6 million.
Research
and development expenses for the third quarter of 2010 decreased $6.6 million from the prior year. The
decline in overall spending is due to the wind-down of redundant costs related
to our transition to offshore development capabilities and the launch of the
new Connect+
TM
mailing system. Research and
development expenses as a percentage of revenue was 2.9% in the third quarter of 2010 compared with 3.3% in the prior year.
Restructuring
charges and asset impairments
See Note 14 to the Condensed Consolidated
Financial Statements.
27
Other interest
expense
Other interest expense increased $2.1 million or 8%, to $29.3 million
in the third quarter of 2010 compared to $27.2 million in the prior year period
due to higher average borrowings during the quarter.
Income taxes /
effective tax rate
The effective tax rate for the three months ended September 30, 2010
and 2009 was 32.8% and 34.3%, respectively. The 2010 rate includes benefits
associated with previously unrecognized deferred taxes on outside basis
differences and alternative tax return filing elections, and charges associated
with previously unrecognized deferred taxes on unremitted earnings.
Discontinued
operations
See Note 5 to the Condensed Consolidated Financial Statements.
Noncontrolling
interests (Preferred stock dividends of subsidiaries)
See Note 12 to the Condensed Consolidated Financial Statements.
Nine Months Ended September 30, 2010 compared to Nine Months Ended
September 30, 2009
Revenue by source
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
%
change
|
|
|
|
|
|
|
|
|
Equipment sales
|
|
$
|
718,399
|
|
|
$
|
714,780
|
|
|
|
1
|
%
|
|
Supplies
|
|
|
239,635
|
|
|
|
253,466
|
|
|
|
(5
|
)%
|
|
Software
|
|
|
265,130
|
|
|
|
254,401
|
|
|
|
4
|
%
|
|
Rentals
|
|
|
456,977
|
|
|
|
487,992
|
|
|
|
(6
|
)%
|
|
Financing
|
|
|
476,712
|
|
|
|
528,534
|
|
|
|
(10
|
)%
|
|
Support services
|
|
|
531,176
|
|
|
|
531,200
|
|
|
|
-
|
%
|
|
Business services
|
|
|
1,303,183
|
|
|
|
1,344,493
|
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
3,991,212
|
|
|
$
|
4,114,866
|
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment sales revenue increased 1% compared to the prior year.
Foreign currency translation had a positive impact of 1%. Despite the
improvement in equipment sales during the third quarter, equipment sales growth
year-to-date has been negatively impacted by lower placements of mailing
equipment earlier in the year as customers 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.
Supplies revenue decreased 5% compared to the prior year due to lower
supplies usage resulting from lower mail volumes and fewer installed meters due
to customer consolidations worldwide. Foreign currency translation had a
favorable impact of 1%.
Software revenue increased 4% compared to the prior year. The increase
is driven by the positive impact of the Portrait acquisition of 3%. Foreign
currency translation had a favorable impact of 2%. Revenue growth is also
impacted by the expansion of our software-as-a-service offerings and recurring
revenue streams from term leases.
Rentals revenue decreased 6% 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 a less than
1% positive impact.
Financing revenue decreased 10% 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 a 1%
positive impact.
Support services revenue was flat compared to the prior year. Growth
has been negatively impacted by lower placements of mailing equipment. Foreign
currency translation had a positive impact of 1%.
28
Business services revenue decreased 3% compared to the prior year due
to lower volumes at Management Services and the impact of the one-time out of
period adjustment recorded in the second quarter of 2010 of $21 million
associated with our International Mail Services business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
Percentage of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
equipment sales
|
|
$
|
325,120
|
|
|
$
|
331,144
|
|
|
|
45.3
|
%
|
|
|
46.3
|
%
|
|
Cost of
supplies
|
|
$
|
73,381
|
|
|
$
|
68,495
|
|
|
|
30.6
|
%
|
|
|
27.0
|
%
|
|
Cost of
software
|
|
$
|
61,064
|
|
|
$
|
60,480
|
|
|
|
23.0
|
%
|
|
|
23.8
|
%
|
|
Cost of
rentals
|
|
$
|
107,658
|
|
|
$
|
114,372
|
|
|
|
23.6
|
%
|
|
|
23.4
|
%
|
|
Financing
interest expense
|
|
$
|
65,948
|
|
|
$
|
73,865
|
|
|
|
13.8
|
%
|
|
|
14.0
|
%
|
|
Cost of
support services
|
|
$
|
337,822
|
|
|
$
|
356,620
|
|
|
|
63.6
|
%
|
|
|
67.1
|
%
|
|
Cost of
business services
|
|
$
|
1,003,712
|
|
|
$
|
1,033,933
|
|
|
|
77.0
|
%
|
|
|
76.9
|
%
|
|
Selling,
general and administrative
|
|
$
|
1,304,941
|
|
|
$
|
1,317,410
|
|
|
|
32.7
|
%
|
|
|
32.0
|
%
|
|
Research and
development
|
|
$
|
117,487
|
|
|
$
|
138,623
|
|
|
|
2.9
|
%
|
|
|
3.4
|
%
|
|
Cost of equipment sales as a percentage of
revenue was 45.3% in the first nine months of 2010 compared with 46.3% in the
prior year, primarily due to a favorable mix of higher margin mailing equipment
worldwide.
Cost of supplies as a percentage of revenue
was 30.6% in the first nine months of 2010 compared with 27.0% in the prior
year due the increasing mix of lower margin products sales worldwide.
Cost of software as a percentage of revenue
improved to 23.0% in the first nine months of 2010 compared with 23.8% for the
first nine months of 2009 due to business integration measures and productivity
investments.
Cost of rentals as a percentage of revenue
was 23.6% in the first nine months of 2010, compared to 23.4% in the prior
year due to the fixed costs associated with meter depreciation and lower
revenues.
Financing interest expense as a percentage of
revenue was 13.8% for the first nine months of 2010 compared with 14.0% in the
prior year primarily due to lower borrowing costs.
Cost of support services as a percentage of
revenue improved to 63.6% in the first nine months of 2010 compared with 67.1%
in the prior year due to margin improvements from our ongoing productivity
investments in U.S. and International mailing and production mail businesses.
Cost of business services as a percentage of
revenue was 77.0% in the first nine months of 2010 compared with 76.9% in the
prior year. Positive impacts of cost reduction programs in our Management
Services and Mail Services businesses were offset by higher shipping costs in
our International Mail Services business and the one-time out-of-period
adjustment recorded in the second quarter of 2010 associated with our
International Mail Services business.
SG&A expense as a percentage of revenue was
32.7% in the first nine months of 2010 compared to 32.0%
in the prior year. SG&A expense declined $12.5 million and was negatively
impacted by foreign currency translation of 1% and transaction costs associated
with the acquisition of Portrait.
Research
and development expenses decreased
$21.1 million in the first nine
months of 2010 compared to the
prior year, primarily due to the wind down of redundant costs related to
our transition to offshore development capabilities and the launch of the new
Connect+
TM
mailing
system. Research and development expenses as a percentage of revenue was 2.9%
for the first nine months of 2010 compared to 3.4% in the prior year.
Restructuring
charges and asset impairments
See Note 14 to the Condensed Consolidated
Financial Statements.
29
Other interest
expense
Other interest expense decreased $1.6 million or 2%, to $86.2 million
for the nine months ended
September 30, 2010 compared to $84.5 million for the prior year.
Income taxes
The effective tax rate for the nine months ended September 30, 2010 and
2009 was 38.2% and 36.6%, respectively. The year-to-date 2010 rate includes a
$9.1 million charge for the write-off of deferred tax assets related to the
recent U.S. health care reform legislation signed in March 2010. This
legislation includes a provision eliminating the tax deduction for retiree
health care costs to the extent of federal subsidies received by companies that
provide retiree prescription drug benefits equivalent to Medicare Part D
coverage. The year-to-date tax rates for 2010 and 2009 also include a charge of
$9.7 million and $12.2 million, respectively, related to the write-off of
deferred tax assets associated with the expiration of out-of-the-money vested
stock options and the vesting of restricted stock units previously granted to
our employees. These write-offs of deferred tax assets will not require us to
pay any additional taxes. The 2010 year-to-date rate also includes benefits
associated with previously unrecognized deferred taxes on outside basis
differences and alternative tax return filing elections, and charges associated
with previously unrecognized deferred taxes on unremitted earnings.
Discontinued operations
See Note 5 to the Condensed Consolidated
Financial Statements.
Noncontrolling
interests (Preferred stock dividends of subsidiaries)
See Note 12 to the Condensed Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
We believe that cash flow from operations,
existing cash and liquid investments, borrowing capacity under our commercial
paper program and our existing credit facility, as well as access to the debt
and equity 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 repurchases.
We continue to review our liquidity profile. We carefully monitor 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 our operations and we have had consistent access to the
commercial paper market.
Cash Flow Summary
The change in cash and cash equivalents is as
follows:
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
666,887
|
|
|
$
|
732,424
|
|
|
Net cash used in investing activities
|
|
|
(276,291
|
)
|
|
|
(153,577
|
)
|
|
Net cash used in financing activities
|
|
|
(417,697
|
)
|
|
|
(525,859
|
)
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
410
|
|
|
|
11,469
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
$
|
(26,691
|
)
|
|
$
|
64,457
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 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 decreases in finance receivable and
accounts receivable balances of $168.7 million and $109.6 million,
respectively. Due to declining equipment sales since 2008, our finance
receivables portfolio has declined as strong cash collections exceed new
business. Similarly, the decrease in accounts receivable is primarily due to
strong cash collections in excess of new billings. Cash flow also benefited
from the proceeds of $31.8 million from the unwinding of interest rate
30
swaps
related to a March 2008 debt issuance. Partially offsetting these factors was
an increase in inventory of $31.3 million, payments of accounts payable and
accrued liabilities of $68.0 million and restructuring payments of $90.7
million.
Net
cash used in investing activities consisted of the net purchase of investment
securities of $112.9 million, acquisitions of $75.5 million and capital
expenditures of $90.2 million.
Net
cash used in financing activities included net payments on commercial paper
borrowings of $89.2 million, dividends paid to common stockholders and
noncontrolling interests of $237.2 million and the repurchase of our common
stock of $100.0 million.
2009 Cash
Flows
Net
cash provided by operating activities included decreases in finance receivable
and accounts receivable balances of $203.6 million and $134.8 million,
respectively, resulting from lower levels of new business and strong
collections and an increase in current and non-current income taxes of $73.5
million primarily due to the timing of tax payments. Partially offsetting these
sources of cash were a reduction in accounts payable and accrued liabilities of
$195.8 million, primarily due to lower compensation accruals, restructuring
payments of $66.8 million and a $20.3 million payment for the unwinding of
derivatives related to the March 2009 debt issuance.
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, $150.0
million principal repayment on long-term obligations and dividends paid to
common stockholders and noncontrolling interests of $236.9 million. These were
partially offset by proceeds of $297.5 million from the issuance of long term
debt in March 2009.
Capital Expenditures
During
the first nine months of 2010, capital expenditures included $44.5
million in net additions to property, plant and equipment and $45.7 million in
net additions to rental equipment and related inventories compared with $66.0
million and $60.5 million, respectively, in the same period in 2009. The
decrease in capital expenditures is due to lower placement of new postage
meters and tighter control over capital spending.
Financings and
Capitalization
We have a commercial paper program that is a significant
source of liquidity for the company. During 2010, we continued to have consistent
access to the commercial paper market. As of September 30, 2010, we had $132
million of outstanding commercial paper issuances. We also have a committed
line of credit which supports commercial paper issuance and is provided by
a syndicate of 15 banks. The line of credit expires in 2013. In May 2010,
we renewed our line of credit for $1.25 billion. As of September 30, 2010,
this line of credit had not been drawn down. We are a Well-Known Seasoned
Issuer with the SEC which allows us to issue debt securities, preferred stock,
preference stock, common stock, purchase contracts, depositary shares, warrants
and units in an expedited fashion.
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
See Note 3 to the Condensed Consolidated Financial Statements.
Regulatory Matters
With exception of the impact of the U.S. health care reform legislation
disclosed in Note 16 to the Condensed Consolidated Financial Statements, there
have been no significant changes to the regulatory matters disclosed in our
2009 Annual Report.
31
I
tem 3:
Quantitative and Qualitative Disclosures about Market Risk
There were no material changes to the disclosures made in the 2009
Annual Report regarding this matter.
I
tem 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 SECs 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, 2010. In addition, no changes in
internal control over financial reporting occurred during the three months
ended September 30, 2010, that have materially affected, or are 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.
32
P
ART II. OTHER INFORMATION
I
tem 1: Legal Proceedings
See Note 18 to the Condensed
Consolidated Financial Statements.
I
tem 1A: Risk Factors
There were no material
changes to the risk factors identified in the 2009 Annual Report.
I
tem 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. In May 2010, the Board of Directors approved an expansion of our
share repurchase authorization to $150 million. This program authorizes
repurchases in the open market. We have not repurchased or acquired any other
shares of our common stock during 2010 in any other manner.
The
following table summarizes our share repurchase activity under active programs
during the third quarter of 2010. There were no share repurchases during the
first six months of 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
number of
shares purchased
|
|
Average
price paid
per share
|
|
Total
number of
shares purchased as
part of a publicly
announced plan
|
|
Approximate
dollar
value of shares that may
yet be purchased under
the plan (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
150,000
|
|
July
2010
|
|
|
1,248,943
|
|
|
$
|
23.39
|
|
|
|
1,248,943
|
|
|
$
|
120,786
|
|
August
2010
|
|
|
1,770,826
|
|
|
$
|
20.21
|
|
|
|
1,770,826
|
|
|
$
|
85,000
|
|
September
2010
|
|
|
1,667,535
|
|
|
$
|
20.99
|
|
|
|
1,667,535
|
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,687,304
|
|
|
$
|
21.33
|
|
|
|
4,687,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
I
tem 3: Defaults Upon Senior
Securities
None.
I
tem 4: Removed and Reserved
I
tem 5: Other Information
None.
I
tem 6: Exhibits
See Index of Exhibits.
33
S
ignatures
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.
|
|
|
Date: November 5, 2010
|
|
|
|
|
/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)
|
34
Exhibit
Index
|
|
|
|
|
Exhibit
Number
|
|
Description
|
|
Status or incorporation by reference
|
|
|
|
|
|
|
3
(a.2)
|
|
Certificate of Amendment of
Restated Certificate of Incorporation of Pitney Bowes Inc.
|
|
Incorporated by reference
to Exhibit (3) (a.2) to Form 8-K as filed with the Commission on May 12,
2010. (Commission file number 1-3579)
|
|
|
|
|
|
3
(b.1)
|
|
Amendment to the Pitney
Bowes Inc. Amended and Restated By-laws (effective May 10, 2010)
|
|
Incorporated by reference
to Exhibit (3)(b.1) to Form 8-K as filed with the Commission on May 12, 2010.
(Commission file number 1-3579)
|
|
|
|
|
|
(12)
|
|
Computation of ratio of
earnings to fixed charges
|
|
Page
36
|
|
|
|
|
|
(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
37
|
|
|
|
|
|
(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
38
|
|
|
|
|
|
(32.1)
|
|
Certification of Chief
Executive Officer Pursuant to 18 U.S.C. Section 1350
|
|
Page
39
|
|
|
|
|
|
(32.2)
|
|
Certification of Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350
|
|
Page
40
|
|
|
|
|
|
101.INS
|
|
XBRL Report Instance
Document
|
|
|
|
|
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension
Schema Document
|
|
|
|
|
|
|
|
101.CAL
|
|
XBRL Taxonomy Calculation
Linkbase Document
|
|
|
|
|
|
|
|
101.DEF
|
|
XBRL Taxonomy Definition
Linkbase Document
|
|
|
|
|
|
|
|
101.LAB
|
|
XBRL Taxonomy Label
Linkbase Document
|
|
|
|
|
|
|
|
101.PRE
|
|
XBRL Taxonomy Presentation
Linkbase Document
|
|
|
35
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