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PITNEY BOWES INC /DE/ - Quarter Report: 2009 March (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

 

 

 

þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended March 31, 2009

 

 

 

OR

 

 

 

o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from ________________ to ________________

Commission file number: 1-3579

PITNEY BOWES INC.
(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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

 

 

 

Yes þ

No o


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

 

 

 

Yes o

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


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

 

 

Yes o

No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of May 5, 2009.

 

 

 

Class

 

Outstanding


 


Common Stock, $1 par value per share

 

206,388,687 shares

1


PITNEY BOWES INC.
INDEX

 

 

 

 

 

 

 

 

Page Number

 

 

 


Part I - Financial Information:

 

 

 

 

 

 

 

 

Item 1:

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income Three Months Ended March 31, 2009 and 2008

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets March 31, 2009 and December 31, 2008

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 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

 

24

 

 

 

 

 

 

Item 3:

Quantitative and Qualitative Disclosures about Market Risk

 

33

 

 

 

 

 

 

Item 4:

Controls and Procedures

 

33

 

 

 

 

 

 

Part II - Other Information:

 

 

 

 

 

 

 

 

Item 1:

Legal Proceedings

 

34

 

 

 

 

 

 

Item 1A:

Risk Factors

 

34

 

 

 

 

 

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

 

34

 

 

 

 

 

 

Item 3:

Defaults Upon Senior Securities

 

35

 

 

 

 

 

 

Item 4:

Submission of Matters to a Vote of Security Holders

 

35

 

 

 

 

 

 

Item 5:

Other Information

 

35

 

 

 

 

 

 

Item 6:

Exhibits

 

35

 

 

 

 

 

 

Signatures

 

 

36

 

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 March 31,

 

 

 


 

 

 

2009

 

2008

 

 

 


 


 

Revenue:

 

 

 

 

 

 

 

Equipment sales

 

$

231,825

 

$

302,713

 

Supplies

 

 

88,029

 

 

107,600

 

Software

 

 

79,726

 

 

105,405

 

Rentals

 

 

168,130

 

 

184,953

 

Financing

 

 

182,798

 

 

198,939

 

Support services

 

 

174,347

 

 

191,525

 

Business services

 

 

454,729

 

 

482,822

 

 

 



 



 

Total revenue

 

 

1,379,584

 

 

1,573,957

 

 

 



 



 

Costs and expenses:

 

 

 

 

 

 

 

Cost of equipment sales

 

 

123,085

 

 

161,113

 

Cost of supplies

 

 

23,341

 

 

27,872

 

Cost of software

 

 

19,497

 

 

27,737

 

Cost of rentals

 

 

35,851

 

 

38,304

 

Cost of support services

 

 

98,326

 

 

113,995

 

Cost of business services

 

 

359,907

 

 

379,291

 

Selling, general and administrative

 

 

443,528

 

 

496,495

 

Research and development

 

 

46,949

 

 

50,000

 

Restructuring charges and asset impairments

 

 

 

 

17,093

 

Interest expense

 

 

52,203

 

 

61,767

 

Interest income

 

 

(1,552

)

 

(2,990

)

 

 



 



 

Total costs and expenses

 

 

1,201,135

 

 

1,370,677

 

 

 



 



 

 

Income from continuing operations before income taxes

 

 

178,449

 

 

203,280

 

Provision for income taxes

 

 

72,149

 

 

75,547

 

 

 



 



 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

106,300

 

 

127,733

 

Gain (loss) from discontinued operations, net of income tax

 

 

2,623

 

 

(3,832

)

 

 



 



 

 

 

 

 

 

 

 

 

Net income before attribution of noncontrolling interests

 

 

108,923

 

 

123,901

 

 

 

 

 

 

 

 

 

Less: Preferred stock dividends of subsidiaries attributable to noncontrolling interests

 

 

4,521

 

 

4,798

 

 

 



 



 

 

 

 

 

 

 

 

 

Pitney Bowes Inc. net income

 

$

104,402

 

$

119,103

 

 

 



 



 

 

Amounts attributable to Pitney Bowes Inc. common stockholders:

 

 

 

 

 

 

 

Income from continuing operations

 

$

101,779

 

$

122,935

 

Gain (loss) from discontinued operations

 

 

2,623

 

 

(3,832

)

 

 



 



 

Pitney Bowes Inc. net income

 

$

104,402

 

$

119,103

 

 

 



 



 

 

Basic earnings per share of common stock attributable to Pitney Bowes Inc. common stockholders (1):

 

 

 

 

 

 

 

Continuing operations

 

$

0.49

 

$

0.58

 

Discontinued operations

 

 

0.01

 

 

(0.02

)

 

 



 



 

Net income

 

$

0.51

 

$

0.56

 

 

 



 



 

 

Diluted earnings per share of common stock attributable to Pitney Bowes Inc. common stockholders (1):

 

 

 

 

 

 

 

Continuing operations

 

$

0.49

 

$

0.58

 

Discontinued operations

 

 

0.01

 

 

(0.02

)

 

 



 



 

Net income

 

$

0.50

 

$

0.56

 

 

 



 



 

 

 

 

 

 

 

 

 

Dividends declared per share of common stock

 

$

0.36

 

$

0.35

 

 

 



 



 

(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

3


PITNEY BOWES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

March 31, 2009

 

December 31, 2008

 

 

 


 


 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

423,217

 

$

376,671

 

Short-term investments

 

 

19,717

 

 

21,551

 

 

 

 

 

 

 

 

 

Accounts receivables, gross

 

 

837,608

 

 

924,886

 

Allowance for doubtful accounts receivables

 

 

(42,336

)

 

(45,264

)

 

 



 



 

Accounts receivables, net

 

 

795,272

 

 

879,622

 

 

 

 

 

 

 

 

 

Finance receivables

 

 

1,428,249

 

 

1,501,678

 

Allowance for credit losses

 

 

(43,592

)

 

(45,932

)

 

 



 



 

Finance receivables, net

 

 

1,384,657

 

 

1,455,746

 

 

 

 

 

 

 

 

 

Inventories

 

 

170,228

 

 

161,321

 

Current income taxes

 

 

53,018

 

 

59,594

 

Other current assets and prepayments

 

 

79,458

 

 

78,108

 

 

 



 



 

Total current assets

 

 

2,925,567

 

 

3,032,613

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

555,963

 

 

574,260

 

Rental property and equipment, net

 

 

385,680

 

 

397,949

 

 

 

 

 

 

 

 

 

Finance receivables

 

 

1,396,195

 

 

1,445,822

 

Allowance for credit losses

 

 

(24,877

)

 

(25,858

)

 

 



 



 

Finance receivables, net

 

 

1,371,318

 

 

1,419,964

 

 

 

 

 

 

 

 

 

Investment in leveraged leases

 

 

195,340

 

 

201,921

 

Goodwill

 

 

2,209,599

 

 

2,251,830

 

Intangible assets, net

 

 

353,603

 

 

375,822

 

Non-current income taxes

 

 

62,283

 

 

64,387

 

Other assets

 

 

425,769

 

 

417,685

 

 

 



 



 

Total assets

 

$

8,485,122

 

$

8,736,431

 

 

 



 



 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

1,684,080

 

$

1,922,399

 

Current income taxes

 

 

138,895

 

 

108,662

 

Notes payable and current portion of long-term obligations

 

 

384,382

 

 

770,501

 

Advance billings

 

 

482,215

 

 

441,556

 

 

 



 



 

Total current liabilities

 

 

2,689,572

 

 

3,243,118

 

 

 

 

 

 

 

 

 

Deferred taxes on income

 

 

270,630

 

 

254,353

 

FIN 48 uncertainties and other income tax liabilities

 

 

305,077

 

 

294,487

 

Long-term debt

 

 

4,227,697

 

 

3,934,865

 

Other non-current liabilities

 

 

820,310

 

 

823,322

 

 

 



 



 

Total liabilities

 

 

8,313,286

 

 

8,550,145

 

 

 



 



 

 

 

 

 

 

 

 

 

Noncontrolling interests (Preferred stockholders’ equity in subsidiaries)

 

 

374,165

 

 

374,165

 

Commitments and contingencies (See Note 18)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

Cumulative preferred stock, $50 par value, 4% convertible

 

 

7

 

 

7

 

Cumulative preference stock, no par value, $2.12 convertible

 

 

972

 

 

976

 

Common stock, $1 par value (480,000,000 shares authorized; 323,337,912 shares issued)

 

 

323,338

 

 

323,338

 

Additional paid-in capital

 

 

255,535

 

 

259,306

 

Retained earnings

 

 

4,308,909

 

 

4,278,804

 

Accumulated other comprehensive loss

 

 

(644,905

)

 

(596,341

)

Treasury stock, at cost (117,083,391 and 117,156,719 shares, respectively)

 

 

(4,446,185

)

 

(4,453,969

)

 

 



 



 

Total Pitney Bowes Inc. stockholders’ deficit

 

 

(202,329

)

 

(187,879

)

 

 



 



 

Total liabilities and stockholders’ deficit

 

$

8,485,122

 

$

8,736,431

 

 

 



 



 

See Notes to Condensed Consolidated Financial Statements

4


PITNEY BOWES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 


 

 

 

2009 

 

2008 

 

 

 


 


 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income before attribution of noncontrolling interests

 

$

108,923

 

$

123,901

 

Restructuring charges, net of tax

 

 

 

 

10,353

 

Restructuring payments

 

 

(32,701

)

 

(12,398

)

Payments for settlement of derivative instruments

 

 

(20,281

)

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

87,386

 

 

97,527

 

Stock-based compensation

 

 

5,270

 

 

5,959

 

Changes in operating assets and liabilities, excluding effects of acquisitions:

 

 

 

 

 

 

 

(Increase) decrease in accounts receivables

 

 

72,768

 

 

(5,206

)

(Increase) decrease in finance receivables

 

 

102,248

 

 

30,827

 

(Increase) decrease in inventories

 

 

(11,499

)

 

(17,682

)

(Increase) decrease in prepaid, deferred expense and other assets

 

 

(2,540

)

 

(11,531

)

Increase (decrease) in accounts payable and accrued liabilities

 

 

(141,542

)

 

(85,485

)

Increase (decrease) in current and non-current income taxes

 

 

58,561

 

 

49,231

 

Increase (decrease) in advance billings

 

 

44,192

 

 

57,553

 

Increase (decrease) in other operating capital, net

 

 

5,686

 

 

10,086

 

 

 



 



 

Net cash provided by operating activities

 

 

276,471

 

 

253,135

 

 

 



 



 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Short-term and other investments

 

 

6,397

 

 

(6,767

)

Capital expenditures

 

 

(47,776

)

 

(56,933

)

Net investment in external financing

 

 

764

 

 

4,674

 

Acquisitions, net of cash acquired

 

 

 

 

(5,100

)

Reserve account deposits

 

 

(21,675

)

 

(7,233

)

 

 



 



 

Net cash used in investing activities

 

 

(62,290

)

 

(71,359

)

 

 



 



 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Increase (decrease) in notes payable, net

 

 

(384,650

)

 

(37,349

)

Proceeds from long-term obligations

 

 

297,513

 

 

245,582

 

Principal payments on long-term obligations

 

 

 

 

(119,679

)

Proceeds from issuance of common stock

 

 

2,279

 

 

6,108

 

Stock repurchases

 

 

 

 

(179,997

)

Dividends paid to stockholders

 

 

(74,297

)

 

(74,134

)

Dividends paid to noncontrolling interests

 

 

(4,521

)

 

(4,798

)

 

 



 



 

Net cash used in financing activities

 

 

(163,676

)

 

(164,267

)

 

 



 



 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(3,959

)

 

3,101

 

 

 



 



 

 

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

 

46,546

 

 

20,610

 

Cash and cash equivalents at beginning of period

 

 

376,671

 

 

377,176

 

 

 



 



 

Cash and cash equivalents at end of period

 

$

423,217

 

$

397,786

 

 

 



 



 

 

 

 

 

 

 

 

 

Cash interest paid

 

$

72,749

 

$

90,134

 

 

 



 



 

Cash income taxes paid, net

 

$

9,374

 

$

22,767

 

 

 



 



 

See Notes to Condensed Consolidated Financial Statements

5


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 adoption of SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, 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 March 31, 2009 and December 31, 2008, our results of operations for the three months ended March 31, 2009 and 2008 and our cash flows for the three months ended March 31, 2009 and 2008 have been included. Operating results for the three months ended March 31, 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.

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

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”), to define how the fair value of assets and liabilities should be measured in accounting standards where it is allowed or required. In addition to defining fair value, the Statement established a framework within GAAP for measuring fair value and expanded required disclosures surrounding fair value measurements. In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date by one year for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, to clarify the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP was effective immediately. In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, to provide additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This FSP will be effective for interim and annual reporting periods ending after June 15, 2009. We adopted SFAS 157 for financial assets and financial liabilities on January 1, 2008, and the adoption did not have a material impact on our financial position, results of operations, or cash flows. We adopted SFAS 157 for nonfinancial items on January 1, 2009, and the adoption did not have a material impact on our financial position, results of operations, or cash flows. We currently do not have any financial assets that are valued using inactive markets, and as such are not impacted by the issuances of FSP 157-3 and FSP 157-4. See Note 17 to the Condensed Consolidated Financial Statements for additional discussion on fair value measurements.

6


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”). SFAS 141(R) establishes 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. SFAS 141(R) requires fair value measurements at the date of acquisition, with limited exceptions specified in the Statement. Some of the major impacts of this new standard include expense recognition for transaction costs and restructuring costs. SFAS 141(R) was effective for fiscal years beginning on or after December 15, 2008 and is applied prospectively. The adoption of this Statement has not had a material impact on our financial position, results of operations, or cash flows during the first quarter of 2009.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 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. This Statement is effective for fiscal years beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 are applied prospectively. We adopted the presentation and disclosure requirements of SFAS 160 on a retrospective basis in the first quarter of 2009.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). SFAS 161 requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of this Statement requires us to present currently disclosed information in a tabular format and also expands our disclosures concerning where derivatives are reported on the balance sheet and where gains/losses are recognized in the results of operations. The Company has complied with the disclosure requirements of this Statement in the first quarter of 2009. See Note 17 to the Condensed Consolidated Financial Statements for the additional disclosures.

In April 2008, the FASB issued FASB FSP No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 removed the requirement of SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), for an entity to consider, when determining the useful life of an acquired intangible asset, whether the intangible asset can be renewed without substantial cost or material modification to the existing terms and conditions associated with the intangible asset. FSP FAS 142-3 replaces the previous useful life assessment criteria with a requirement that an entity considers its own experience in renewing similar arrangements. If the entity has no relevant experience, it would consider market participant assumptions regarding renewal. This should lead to greater consistency between the useful life of recognized intangibles under SFAS 142 and the period of expected cash flows used to measure fair value of such assets under SFAS No. 141(R), Business Combinations. FSP FAS 142-3 is being applied prospectively beginning January 1, 2009. The adoption of this Statement has not had a material impact on our financial position, results of operations, or cash flows during the first quarter 2009.

In November 2008, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 08-7, Accounting for Defensive Intangible Assets. EITF Issue No. 08-7 clarifies the accounting for certain separately identifiable assets, which an acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. EITF Issue No. 08-7 requires an acquirer to account for a defensive intangible asset as a separate unit of accounting, which should be amortized to expense over the period the asset diminishes in value. The provisions of EITF Issue No. 08-7 were adopted prospectively on January 1, 2009. This EITF Issue did not impact our financial position, results of operations, or cash flows during the first quarter 2009.

In December 2008, the FASB issued FSP FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets, which amends Statement No. 132(R) to require more detailed disclosures about employer’s plan assets, including investment strategies, major categories of assets, concentrations of risk within plan assets and valuation techniques used to measure the fair value of assets. The FSP is effective for fiscal years ending after December 15, 2009. The Company will comply with the additional disclosure requirements.

7


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. This FSP shall be effective for interim reporting periods ending after June 15, 2009. The Company will comply with the additional disclosure requirements beginning in the second quarter of 2009.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. This FSP amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The FSP shall be effective for interim and annual reporting periods ending after June 15, 2009. The Company currently does not have any financial assets that are other-than-temporary impaired.

In April 2009, the SEC released Staff Accounting Bulletin No. 111 (“SAB 111”), which amends SAB Topic 5-M. SAB 111 notes that FSP No. 115-2 and FAS 124-2 were scoped to debt securities only, and the FSP referred readers to SEC SAB Topic 5-M for factors to consider with respect to other-than-temporary impairments for equity securities. With the amendments in SAB 111, debt securities are excluded from the scope of Topic 5-M, but the SEC staff’s views on equity securities are still included within the topic. The Company currently does not have any financial assets that are other-than-temporary impaired.

In April 2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, to address some of the application issues under SFAS 141(R). The FSP deals with the initial recognition and measurement of an asset acquired or a liability assumed in a business combination that arises from a contingency provided the asset or liability’s fair value on the date of acquisition can be determined. When the fair value can’t be determined, the FSP requires using the guidance under SFAS No. 5, Accounting for Contingencies, and FASB Interpretation (FIN) No. 14, Reasonable Estimation of the Amount of a Loss. This FSP was effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after January 1, 2009. The adoption of this FSP has not had a material impact on our financial position, results of operations, or cash flows during the first quarter of 2009.

4. Discontinued Operations

The following table shows selected financial information included in discontinued operations for the three months ended March 31, 2009 and 2008, respectively:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 


 

 

 

2009

 

2008

 

 

 


 


 

Discontinued Operations

 

 

 

 

 

 

 

Pre-tax income

 

$

9,773

 

$

 

Tax provision

 

 

(7,150

)

 

(3,832

)

 

 



 



 

Gain (loss) from discontinued operations, net of tax

 

$

2,623

 

$

(3,832

)

 

 



 



 

The net gain for the three months ended March 31, 2009 relates to $9.8 million pre-tax income, less tax of $3.8 million, for a bankruptcy settlement, which was partially offset by the accrual of interest on uncertain tax positions. We received a bankruptcy settlement for unsecured claims pertaining to the leasing of certain aircraft. These leasing transactions were originally executed by our former Capital Services business, which was sold in 2006. At the time of the Capital Services sale, we retained the rights to the bankruptcy claims. Since these claims were attributable to our former Capital Services business, we recorded the gain on this settlement in discontinued operations. The net loss for the three months ended 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.

8


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

There were no acquisitions during the three months ended March 31, 2009. The following table summarizes selected financial data for the opening balance sheet of the Zipsort, Inc. acquisition in 2008:

 

 

 

 

 

 

 

2008

 

 

 


 

 

 

Zipsort, Inc.

 

 

 


 

Purchase price allocation:

 

 

 

 

Current assets

 

$

708

 

Other non-current assets

 

 

11,707

 

Intangible assets

 

 

7,942

 

Goodwill

 

 

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

 

$

7,942

 

 

 



 

 

Intangible assets amortization period:

 

 

 

 

Customer relationships

 

 

15 years

 

Non-compete agreements

 

 

4 years

 

 

 



 

Total weighted average

 

 

15 years

 

 

 



 

No tax deductible goodwill was added during the three months ended March 31, 2009.

During the three months ended March 31, 2008, we completed one acquisition with an aggregate cost of $5.1 million. This acquisition did not have a material impact on our financial results. The amount of tax deductible goodwill added from this acquisition was $3.6 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.

The following table provides unaudited pro forma consolidated revenue for the three months ended March 31, 2009 and 2008 as if our acquisitions had been acquired on January 1 of each year:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 


 

 

 

2009

 

2008

 

 

 


 


 

Total revenue

 

$

1,379,584

 

$

1,589,527

 

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.

9


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

6. Earnings per Share

A reconciliation of the basic and diluted earnings per share computations for the three months ended March 31, 2009 and 2008 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

 

 


 


 

 

 

Income

 

Weighted
Average
Shares

 

Per
Share

 

Income

 

Weighted
Average
Shares

 

Per
Share

 

 

 


 


 


 


 


 


 

Pitney Bowes Inc. net income

 

$

104,402

 

 

 

 

 

 

 

$

119,103

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preference stock dividends

 

 

(19

)

 

 

 

 

 

 

 

(20

)

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Basic earnings per share

 

$

104,383

 

 

206,255

 

$

0.51

 

$

119,083

 

 

211,783

 

$

0.56

 

 

 



 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Data for basic earnings per share

 

$

104,383

 

 

206,255

 

 

 

 

$

119,083

 

 

211,783

 

 

 

 

Preferred stock

 

 

 

 

3

 

 

 

 

 

 

 

3

 

 

 

 

Preference stock

 

 

19

 

 

596

 

 

 

 

 

20

 

 

607

 

 

 

 

Stock options and stock purchase plans

 

 

 

 

 

 

 

 

 

 

 

809

 

 

 

 

Other stock plans

 

 

 

 

4

 

 

 

 

 

 

 

80

 

 

 

 

 

 



 



 

 

 

 



 



 

 

 

 

Diluted earnings per share

 

$

104,402

 

 

206,858

 

$

0.50

 

$

119,103

 

 

213,282

 

$

0.56

 

 

 



 



 



 



 



 



 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per
Share

 

 

 

 

 

Per
Share

 

 

 

 

 

 

 


 

 

 

 

 


 

Basic earnings per share of common stock attributable to Pitney Bowes Inc. common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

 

 

 

 

 

 

$

0.49

 

 

 

 

 

 

 

$

0.58

 

Discontinued operations

 

 

 

 

 

 

 

 

0.01

 

 

 

 

 

 

 

 

(0.02

)

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

Net income

 

 

 

 

 

 

 

$

0.51

 

 

 

 

 

 

 

$

0.56

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per
Share

 

 

 

 

 

 

 

Per
Share

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 


 

Diluted earnings per share of common stock attributable to Pitney Bowes Inc. common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

 

 

 

 

 

 

$

0.49

 

 

 

 

 

 

 

$

0.58

 

Discontinued operations

 

 

 

 

 

 

 

 

0.01

 

 

 

 

 

 

 

 

(0.02

)

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

Net income

 

 

 

 

 

 

 

$

0.50

 

 

 

 

 

 

 

$

0.56

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

Note: The sum of the earnings per share amounts may not equal the totals above due to rounding.

In accordance with SFAS No. 128, Earnings per Share, approximately 6.9 million and 1.8 million common stock equivalent shares for the three months ended March 31, 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. Segment EBIT excludes general corporate expenses, restructuring charges and asset impairments.

 

 

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; web-tools for the customization of promotional mail and marketing collateral; and other marketing consulting services.

11


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

Revenue and EBIT by business segment for the three months ended March 31, 2009 and 2008 are as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 


 

 

 

2009

 

2008

 

 

 


 


 

Revenue:

 

 

 

 

 

 

 

U.S. Mailing

 

$

508,523

 

$

552,585

 

International Mailing

 

 

237,312

 

 

308,333

 

Production Mail

 

 

109,429

 

 

135,404

 

Software

 

 

75,375

 

 

99,663

 

 

 



 



 

Mailstream Solutions

 

 

930,639

 

 

1,095,985

 

 

 



 



 

 

 

 

 

 

 

 

 

Management Services

 

 

266,502

 

 

302,635

 

Mail Services

 

 

141,251

 

 

125,422

 

Marketing Services

 

 

41,192

 

 

49,915

 

 

 



 



 

Mailstream Services

 

 

448,945

 

 

477,972

 

 

 



 



 

 

 

 

 

 

 

 

 

Total revenue

 

$

1,379,584

 

$

1,573,957

 

 

 



 



 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 


 

 

 

 

2009

 

 

2008

 

 

 


 


 

EBIT: (1)

 

 

 

 

 

 

 

U.S. Mailing

 

$

192,834

 

$

223,955

 

International Mailing

 

 

30,939

 

 

49,935

 

Production Mail

 

 

5,067

 

 

8,583

 

Software

 

 

2,604

 

 

6,478

 

 

 



 



 

Mailstream Solutions

 

 

231,444

 

 

288,951

 

 

 



 



 

 

 

 

 

 

 

 

 

Management Services

 

 

13,637

 

 

18,637

 

Mail Services

 

 

18,575

 

 

18,389

 

Marketing Services

 

 

2,016

 

 

1,752

 

 

 



 



 

Mailstream Services

 

 

34,228

 

 

38,778

 

 

 



 



 

 

 

 

 

 

 

 

 

Total EBIT

 

 

265,672

 

 

327,729

 

 

 

 

 

 

 

 

 

Unallocated amounts:

 

 

 

 

 

 

 

Interest, net

 

 

(50,651

)

 

(58,777

)

Corporate expenses

 

 

(36,572

)

 

(48,579

)

Restructuring charges and asset impairments

 

 

 

 

(17,093

)

 

 



 



 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

$

178,449

 

$

203,280

 

 

 



 



 


 

 

(1)

EBIT excludes general corporate expenses, restructuring charges, and asset impairments.

12


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

8. Inventories

Inventories are composed of the following:

 

 

 

 

 

 

 

 

 

 

March 31,
2009

 

December 31,
2008

 

 

 


 


 

Raw materials and work in process

 

$

51,838

 

$

41,171

 

Supplies and service parts

 

 

74,499

 

 

78,018

 

Finished products

 

 

43,891

 

 

42,132

 

 

 



 



 

Total

 

$

170,228

 

$

161,321

 

 

 



 



 

9. Fixed Assets

 

 

 

 

 

 

 

 

 

 

March 31,
2009

 

December 31,
2008

 

 

 


 


 

Property, plant and equipment

 

$

1,849,869

 

$

1,880,422

 

Accumulated depreciation

 

 

(1,293,906

)

 

(1,306,162

)

 

 



 



 

Property, plant and equipment, net

 

$

555,963

 

$

574,260

 

 

 



 



 

 

 

 

 

 

 

 

 

Rental property and equipment

 

$

892,440

 

$

932,389

 

Accumulated depreciation

 

 

(506,760

)

 

(534,440

)

 

 



 



 

Rental property and equipment, net

 

$

385,680

 

$

397,949

 

 

 



 



 

Depreciation expense was $70.0 million and $80.4 million for the three months ended March 31, 2009 and 2008, respectively.

10. Intangible Assets and Goodwill

Intangible assets are composed of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2009

 

December 31, 2008

 

 

 


 


 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

 

 


 


 


 


 


 


 

Customer relationships

 

$

416,730

 

$

(162,731

)

$

253,999

 

$

423,169

 

$

(154,619

)

$

268,550

 

Supplier relationships

 

 

29,000

 

 

(11,117

)

 

17,883

 

 

29,000

 

 

(10,392

)

 

18,608

 

Software & technology

 

 

149,259

 

 

(78,916

)

 

70,343

 

 

155,035

 

 

(78,982

)

 

76,053

 

Trademarks & trade names

 

 

25,072

 

 

(14,347

)

 

10,725

 

 

25,071

 

 

(13,310

)

 

11,761

 

Non-compete agreements

 

 

2,172

 

 

(1,519

)

 

653

 

 

2,652

 

 

(1,802

)

 

850

 

 

 



 



 



 



 



 



 

Total intangible assets

 

$

622,233

 

$

(268,630

)

$

353,603

 

$

634,927

 

$

(259,105

)

$

375,822

 

 

 



 



 



 



 



 



 

Amortization expense for intangible assets for the three months ended March 31, 2009 and 2008 was $17.4 million and $17.1 million, respectively.

13


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

The estimated future amortization expense related to intangible assets is as follows:

 

 

 

 

 

 

 

Amount

 

 

 


 

Remaining for year ended December 31, 2009

 

$

43,000

 

Year ended December 31, 2010

 

 

58,000

 

Year ended December 31, 2011

 

 

52,000

 

Year ended December 31, 2012

 

 

46,000

 

Year ended December 31, 2013

 

 

43,000

 

Thereafter

 

 

111,603

 

 

 



 

Total

 

$

353,603

 

 

 



 

Changes in the carrying amount of goodwill by business segment for the three months ended March 31, 2009 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at
December 31,
2008

 

Acquired during
the period

 

Other (1)

 

Balance at
March 31,
2009

 

 

 


 


 


 


 

U.S. Mailing

 

$

142,365

 

$

 

$

246

 

$

142,611

 

International Mailing

 

 

322,230

 

 

 

 

(13,825

)

 

308,405

 

Production Mail

 

 

137,067

 

 

 

 

(1,579

)

 

135,488

 

Software

 

 

623,995

 

 

 

 

1,083

 

 

625,078

 

 

 



 



 



 



 

Mailstream Solutions

 

 

1,225,657

 

 

 

 

(14,075

)

 

1,211,582

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management Services

 

 

491,633

 

 

 

 

(3,783

)

 

487,850

 

Mail Services

 

 

260,793

 

 

 

 

(24,441

)

 

236,352

 

Marketing Services

 

 

273,747

 

 

 

 

68

 

 

273,815

 

 

 



 



 



 



 

Mailstream Services

 

 

1,026,173

 

 

 

 

(28,156

)

 

998,017

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,251,830

 

$

 

$

(42,231

)

$

2,209,599

 

 

 



 



 



 



 


 

 

(1)

“Other” includes post closing acquisition and foreign currency translation adjustments.

11. Long-term Debt

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.

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 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.

14


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

12. Noncontrolling Interests (Preferred Stockholders’ Equity in Subsidiary Companies)

Pitney Bowes International Holdings, Inc., 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. All outstanding common stock of Pitney Bowes International Holdings, Inc., 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 ended March 31, 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 March 31, 2009, December 31, 2008 or March 31, 2008. A rollforward of noncontrolling interests is as follows:

 

 

 

 

 

Beginning balance, January 1, 2008

 

$

384,165

 

Movements:

 

 

 

 

Share redemptions (1)

 

 

(10,000

)

 

 



 

Ending balance, December 31, 2008

 

$

374,165

 

 

 



 

 

 

 

 

 

Beginning balance, January 1, 2009

 

$

374,165

 

Movements:

 

 

 

 

No activity

 

 

 

 

 



 

Ending balance, March 31, 2009

 

$

374,165

 

 

 



 


 

 

(1)

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.

13. Comprehensive Income

Comprehensive income for the three months ended March 31, 2009 and 2008 are as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 


 

 

 

2009

 

2008

 

 

 


 


 

Pitney Bowes Inc. net income

 

$

104,402

 

$

119,103

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

Foreign currency translation adjustments (1)

 

 

(59,430

)

 

36,701

 

Net unrealized gain on derivatives

 

 

6,350

 

 

1,028

 

Net unrealized (loss) gain on investment securities

 

 

(79

)

 

209

 

Amortization of pension and postretirement costs

 

 

4,595

 

 

3,569

 

 

 



 



 

Comprehensive income

 

$

55,838

 

$

160,610

 

 

 



 



 


 

 

(1)

Includes a net deferred translation loss of $5.6 million and a net deferred translation gain of $10.4 million for the three months ended March 31, 2009 and 2008, respectively. These amounts are associated with inter-company loans denominated in a foreign currency that have been designated as a hedge of net investment.

15


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

14. Restructuring Charges and Asset Impairments

Pre-tax restructuring reserves at March 31, 2009 are composed of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at
December 31,
2008

 

Expenses

 

Cash
payments

 

Non-cash
charges

 

Balance at
March 31,
2009

 

 

 


 


 


 


 


 

Severance and benefit costs

 

$

108,431

 

$

 

$

(28,316

)

$

 

$

80,115

 

Other exit costs

 

 

32,678

 

 

 

 

(4,385

)

 

 

 

28,293

 

 

 



 



 



 



 



 

Total

 

$

141,109

 

$

 

$

(32,701

)

$

 

$

108,408

 

 

 



 



 



 



 



 

We recorded pre-tax restructuring charges and asset impairments during 2008 and 2007. These charges primarily relate to a program we announced in November 2007 to lower our cost structure, accelerate efforts to improve operational efficiencies, and transition our product line.

As of March 31, 2009, 2,278 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 March 31, 2009 is expected to be paid by the end of 2009 from cash generated from operations.

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 March 31, 2009 and 2008 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

Foreign

 

 

 


 


 

 

 

Three Months Ended March 31,

 

Three Months Ended March 31,

 

 

 


 


 

 

 

2009

 

2008

 

2009

 

2008

 

 

 


 


 


 


 

Service cost

 

$

7,340

 

$

7,031

 

$

1,592

 

$

2,691

 

Interest cost

 

 

24,224

 

 

24,190

 

 

5,792

 

 

7,731

 

Expected return on plan assets

 

 

(30,151

)

 

(33,196

)

 

(6,256

)

 

(9,754

)

Amortization of transition cost (credit)

 

 

 

 

 

 

(2

)

 

32

 

Amortization of prior service cost (credit)

 

 

(596

)

 

(635

)

 

103

 

 

170

 

Amortization of net loss

 

 

7,027

 

 

4,883

 

 

580

 

 

1,059

 

 

 



 



 



 



 

Net periodic benefit cost

 

$

7,844

 

$

2,273

 

$

1,809

 

$

1,929

 

 

 



 



 



 



 

As we previously disclosed in our Consolidated Financial Statements for the year ended December 31, 2008, we expect to contribute up to $10 million to each of our U.S. and foreign pension plans during 2009. We will reassess our funding alternatives as the year progresses. At March 31, 2009, $2.4 million and $3.4 million of contributions have been made to the U.S. and foreign pension plans, respectively.

Our pension funds’ actual asset returns have performed 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.

16


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

Nonpension Postretirement Benefit Plans

The components of net periodic benefit cost for nonpension postretirement benefit plans for the three months ended March 31, 2009 and 2008 are as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 


 

 

 

2009

 

2008

 

 

 


 


 

Service cost

 

$

802

 

$

892

 

Interest cost

 

 

3,562

 

 

3,456

 

Amortization of prior service credit

 

 

(620

)

 

(618

)

Amortization of net loss

 

 

946

 

 

739

 

 

 



 



 

Net periodic benefit cost

 

$

4,690

 

$

4,469

 

 

 



 



 

For the three months ended March 31, 2009 and 2008, we made $8.0 million and $8.8 million of contributions representing benefit payments, respectively.

16. Income Taxes

The effective tax rate for the three months ended March 31, 2009 and 2008 was 40.4% and 37.2%, respectively. The 2009 tax rate was increased by an $11.1 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 tax charge will not require us to pay any taxes. The 2008 tax rate was increased by a $6.5 million tax accrual associated with lease refunds in the U.K. and Ireland.

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 just begun. 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 in accordance with FIN 48. 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. In a similar case, the U.S. District Court in Rhode Island ruled that certain company workpapers were privileged. The IRS has appealed that decision. 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 in accordance with FIN 48. However, the resolution of such matters could have a material impact on our results of operations, financial position and cash flows.

17. Fair Value Measurements

Effective January 1, 2008, we adopted SFAS 157 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. SFAS 157 emphasizes that an entity’s valuation technique for measuring fair value should maximize observable inputs and minimize unobservable inputs.

17


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

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.

SFAS 157 established a fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of the fair value hierarchy as defined by SFAS 157 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 three months ended March 31, 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 March 31, 2009 and December 31, 2008, respectively. As required by SFAS 157, 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 March 31, 2009 By Level

 

 

 


 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 


 


 


 


 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

217,571

 

$

 

$

 

$

217,571

 

U.S. Government and agency issued debt

 

 

31,018

 

 

15,841

 

 

 

 

46,859

 

Corporate notes and bonds

 

 

 

 

6,910

 

 

 

 

6,910

 

Asset backed securities

 

 

 

 

1,878

 

 

 

 

1,878

 

Mortgage-backed securities

 

 

 

 

13,076

 

 

 

 

13,076

 

Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

 

 

26,270

 

 

 

 

26,270

 

Foreign exchange contracts

 

 

 

 

595

 

 

 

 

595

 

 

 



 



 



 



 

Total assets

 

$

248,589

 

$

64,570

 

$

 

$

313,159

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

 

$

1,949

 

$

 

$

1,949

 

 

 



 



 



 



 

Total liabilities

 

$

 

$

1,949

 

$

 

$

1,949

 

 

 



 



 



 



 

18


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring Fair Value Measurements at December 31, 2008 by Level

 

 

 


 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 


 


 


 


 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

181,664

 

$

 

$

 

$

181,664

 

U.S. Government and agency issued debt

 

 

30,583

 

 

11,433

 

 

 

 

42,016

 

Corporate notes and bonds

 

 

 

 

4,725

 

 

 

 

4,725

 

Asset backed securities

 

 

 

 

2,658

 

 

 

 

2,658

 

Mortgage-backed securities

 

 

 

 

21,713

 

 

 

 

21,713

 

Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

 

 

32,486

 

 

 

 

32,486

 

 

 



 



 



 



 

Total assets

 

$

212,247

 

$

73,015

 

$

 

$

285,262

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

 

$

286

 

$

 

$

286

 

Treasury lock and forward starting swaps

 

 

 

 

31,326

 

 

 

 

31,326

 

 

 



 



 



 



 

Total liabilities

 

$

 

$

31,612

 

$

 

$

31,612

 

 

 



 



 



 



 

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 Debts: 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.

19


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

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 March 31, 2009 were $217.1 million. We reported these investments in the Condensed Consolidated Balance Sheet as cash and cash equivalents of $148.4 million, short-term investments of $16.4 million and long-term investments of $52.3 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 been within these tolerance limits. Additionally, we ensure that the fair value measurements are in accordance with SFAS 157 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. The recent 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.

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 SFAS 157, 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. In light of the current market events, 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.

20


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

The following is a summary of our derivative fair values at March 31, 2009:

 

 

 

 

 

 

 

Designation of Derivatives

 

Balance Sheet Location

 

Fair Value

 


 


 


 

Derivatives designated as hedging instruments

 

Other current assets and prepayments:

 

 

 

 

 

 

Foreign exchange contracts

 

$

127

 

 

 

Other assets:

 

 

 

 

 

 

Interest rate swaps

 

 

26,270

 

 

 

Accounts payable and accrued liabilities:

 

 

 

 

 

 

Foreign exchange contracts

 

 

679

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

Other current assets and prepayments:

 

 

 

 

 

 

Foreign exchange contracts

 

 

468

 

 

 

Accounts payable and accrued liabilities:

 

 

 

 

 

 

Foreign exchange contracts

 

 

1,270

 

 

 

 

 

 

 

 

 

 

Total Derivative Assets

 

$

26,865

 

 

 

Total Derivative Liabilities

 

$

1,949

 

 

 

 

 



 

 

 

Total Net Derivative Assets

 

$

24,916

 

 

 

 

 



 

Interest Rate Swaps

Derivatives 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 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 March 31, 2009, the fair value of the derivatives was an asset of $26.3 million. Long-term debt was reduced by $26.3 million at March 31, 2009. At December 31, 2008, the fair value of the derivatives was an asset of $32.5 million. Long-term debt was reduced 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 March 31, 2009:

 

 

 

 

 

 

 

 

 

 

Derivative Instrument

 

Location of Gain (Loss)
Recognized In Income

 

Derivative Gain (Loss)
Recognized In Income

 

Hedged Item Income (Expense)
Recognized in Income

 


 


 


 


 

Interest rate swaps

 

Interest expense

 

$

1,540

 

$

(3,500

)

Foreign Exchange Contracts

We 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 March 31, 2009, we had 51 outstanding contracts with a notional amount of $19.5 million associated with these anticipated transactions and a derivative liability of $0.6 million. We had no outstanding contracts at December 31, 2008.

21


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

The following represents the results of cash flow hedging relationships for the three months ended March 31, 2009:

 

 

 

 

 

 

 

 

 

 

Derivative Instrument

 

Derivative Gain (Loss)
Recognized in OCI
(Effective Portion) (1)

 

Location of Derivative
Gain (Loss)
Reclassified From
AOCI into Income
(Effective Portion)

 

Gain (Loss) Reclassified
from AOCI to Income
(Effective Portion)

 


 


 


 


 

Foreign exchange contracts

 

$

(664

)

Revenue

 

$

 

Foreign exchange contracts

 

 

112

 

Cost of sales

 

 

 

 

 



 

 

 



 

 

 

$

(552

)

 

 

$

 

 

 



 

 

 



 


 

 

 

 

(1) 

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 2009, there were 7 derivatives that were entered into and settled within the three months ended March 31. Thus, these amounts were not recorded to AOCI but were recorded directly to income as reductions of both revenue and cost of sales in the amounts of $0.3 million and $0.03 million, respectively.

 

 

 

 

 

As of March 31, 2009, $0.5 million of the $0.6 million derivative loss recognized in OCI will be released to 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 inter-company loans and related interest that are denominated in a foreign currency. The revaluation of the short-term inter-company loans and interest and the mark-to-market on the derivatives are both recorded to income. At March 31, 2009, we had 32 outstanding foreign exchange contracts to buy or sell various currencies with a liability value of $0.8 million. The contracts will expire by September 4, 2009. At December 31, 2008, the liability value of these derivatives was $0.1 million. The following represents the results of our non-designated derivative instruments for the three months ended March 31, 2009:

 

 

 

 

 

 

 

Derivatives not designated
as hedging instruments

 

Location of Derivative Gain (Loss)

 

Derivative Gain (Loss)
Recognized in Income

 


 


 


 

Foreign exchange contracts

 

Selling, general and administrative expense

 

$

(1,030

)

Net Investment Hedges

One 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 March 31, 2009 and December 31, 2008, we had one intercompany loan with an outstanding value of $113.6 million and $119.2 million, respectively, designated as a net investment hedge. Deferred translation gains of $36.1 million and $41.7 million for March 31, 2009 and December 31, 2008, respectively, were included in accumulated other comprehensive loss in stockholders’ deficit on the Condensed Consolidated Balance Sheets.

 

 

 

 

 

 

 

 

 

 

Net Investment Hedging
Relationships

 

Loan Balance

 

Location of Deferred
Translation Gain (Loss)

 

Deferred
Translation
Gain (Loss)

 


 


 


 


 

Non-derivative intercompany loan

 

$

113,614

 

Accumulated other comprehensive (loss) income

 

$

36,057

 

22


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; tabular dollars in thousands, except for per share data)

Treasury Lock & Forward Starting Swap Agreements

We utilized forward starting swap agreements (forward swaps) in order to hedge the interest rate risk on the forecasted issuance of fixed-rate debt. On March 2, 2009, we unwound these derivatives at a loss (and cash payment) of $20.3 million in connection with the $300 million debt issuance that took place on the same date. The loss 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. No amount of ineffectiveness was recorded in the Condensed Consolidated Statements of Income for this cash flow hedge.

Credit-Risk-Related Contingent Features

At March 31, 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 March 31, 2009, we would have been required to post $1.6 million in collateral had our long-term senior unsecured debt ratings fallen below BB- / Ba3.

18. Commitment 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. The plaintiffs in these actions are seeking both statutory damages under the DPPA and an injunction against the continuation of the program. 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.

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.

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 March 31, 2009 and December 31, 2008, respectively, was not material.

23


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 first quarter, revenue decreased 12% to $1.38 billion due to challenging global economic conditions and the negative impact of foreign currency translation, which negatively impacted revenue growth by 6%. Acquisitions positively impacted revenue growth by 1%.

Income from continuing operations attributable to Pitney Bowes Inc. common stockholders was $101.8 million or $0.49 per diluted share as compared with $0.58 earnings per diluted share in the first quarter of 2008. Income from continuing operations in the first quarter of 2009 included a 5 cent per diluted share non-cash tax charge associated with out-of-the-money stock options that expired during the quarter. Income from continuing operations in the first quarter of 2008 included restructuring charges and asset impairments of 5 cents per diluted share and a tax adjustment of 3 cents per diluted share related to additional tax accrued associated with lease refunds in the U.K. and Ireland.

Despite volatile and difficult global economic conditions which resulted in a decline in revenue growth for the quarter in the majority of our business segments, we were able to grow our net cash provided by operating activities by 9 percent to $276.5 million for the first quarter of 2009 and further reduce our debt.

We remain focused on cost controls and reduced our SG&A expense by over $50 million, despite significant headwinds from the negative impacts of both foreign currencies and increased pension costs when compared to the prior year.

See “Results of Operations – First Quarter of 2009 Compared to First Quarter of 2008” for a more detailed discussion of our results of operations.

Outlook

The ongoing economic slowdown has continued to delay or change customer buying decisions worldwide. Our business model and the actions we have taken to significantly reduce costs and streamline our operations have and will continue to help mitigate, but do not eliminate, the effects of prolonged global economic weakness and unanticipated currency fluctuations. We expect that our 2009 reported results will continue to be negatively impacted by the strengthening of the U.S. dollar and the Japanese yen and by the significant increase in pension costs related to recent changes in capital markets and assumptions used to calculate pension liabilities.

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 to derive further synergies from our acquisitions. We will continue to remain focused on enhancing our productivity and to allocate capital in order to optimize our returns.

24


Results of Operations – First Quarter of 2009 compared to First 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 March 31, 2009 and 2008.

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

EBIT (1)

 

 

 


 


 

 

 

Three Months Ended March 31,

 

Three Months Ended March 31,

 

 

 


 


 

 

 

2009

 

2008

 

% change

 

2009

 

2008

 

% change

 

 

 


 


 


 


 


 


 

U.S. Mailing

 

$

508,523

 

$

552,585

 

 

(8

)%

$

192,834

 

$

223,955

 

 

(14

)%

International Mailing

 

 

237,312

 

 

308,333

 

 

(23

)%

 

30,939

 

 

49,935

 

 

(38

)%

Production Mail

 

 

109,429

 

 

135,404

 

 

(19

)%

 

5,067

 

 

8,583

 

 

(41

)%

Software

 

 

75,375

 

 

99,663

 

 

(24

)%

 

2,604

 

 

6,478

 

 

(60

)%

 

 



 



 



 



 



 



 

Mailstream Solutions

 

 

930,639

 

 

1,095,985

 

 

(15

)%

 

231,444

 

 

288,951

 

 

(20

)%

 

 



 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management Services

 

 

266,502

 

 

302,635

 

 

(12

)%

 

13,637

 

 

18,637

 

 

(27

)%

Mail Services

 

 

141,251

 

 

125,422

 

 

13

%

 

18,575

 

 

18,389

 

 

1

%

Marketing Services

 

 

41,192

 

 

49,915

 

 

(17

)%

 

2,016

 

 

1,752

 

 

15

%

 

 



 



 



 



 



 



 

Mailstream Services

 

 

448,945

 

 

477,972

 

 

(6

) %

 

34,228

 

 

38,778

 

 

(12

)%

 

 



 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,379,584

 

$

1,573,957

 

 

(12

)%

$

265,672

 

$

327,729

 

 

(19

)%

 

 



 



 



 



 



 



 


 

 

(1)

See reconciliation of segment amounts to Income from continuing operations before income taxes and preferred dividends in Note 7 to the Condensed Consolidated Financial Statements.

During the first quarter of 2009, Mailstream Solutions revenue decreased 15% to $931 million and EBIT decreased 20% to $231 million, compared to the prior year. Within Mailstream Solutions:

U.S. Mailing’s revenue decreased 8% primarily due to fewer placements of mailing equipment as customers delayed purchases of new equipment and extended 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. Additionally, revenue was impacted by an increase in lease renewals, which has a positive impact on profit margins but negatively impacts revenue in the current period. U.S. Mailing’s EBIT decreased 14% principally due to lower financing revenue, meter rentals, and supplies sales because of lower business activity levels over the last year. International Mailing revenue decreased 23%, with 18% of this decline driven by the unfavorable impact of foreign currency translation. The remaining decrease was due to delayed customer purchase decisions for mailing equipment, particularly in France, Canada and Asia Pacific. EBIT declined 38% to $30.9 million. International Mailing’s EBIT margin declined to 13% for the quarter, primarily driven by our UK, Canada and Asia Pacific operations and partly due to changes in currency which increased product costs. Revenue for Production Mail decreased 19%, partly due to the unfavorable impact of foreign currency translation of 7%, and also 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. However, the segment’s revenue benefited from increased service revenue as customers are keeping their equipment for longer periods of time. Production Mail’s EBIT decreased 41% driven by lower revenues and a shift in product mix to lower margin products. This was partially offset by an improved service margin due to prior year cost reduction initiatives and price increases on longer-service equipment. Software’s revenue decreased 24%, principally due to economic uncertainties and the unfavorable impact of foreign currency translation of 11%. The economic uncertainty has resulted in fewer large-ticket licensing deals than in the prior year as customers continue to assess the overall business environment. Software’s EBIT decreased 60% principally due to the lower revenues and continued investments in new product development and integration of the global software engineering organization.

During the first quarter of 2009, Mailstream Services revenue decreased 6% to $449 million and EBIT decreased 12% to $34 million, compared to the prior year. Within Mailstream Services:

Management Services revenue decreased 12%, of which 5% was driven by the unfavorable impact of foreign currency translation. The segment’s revenue was also adversely affected by lower print and transaction volumes worldwide. Management Services EBIT decreased by 27% primarily due to lower revenue worldwide. Outside the U.S., lower print and transaction volumes, especially in Europe, resulted in an overall decline in the segment’s EBIT margin. In the U.S., despite declining transaction volumes, EBIT margin improved 80 basis points to 10% when compared with the prior year. This was a result of actions taken in 2008 to reduce the fixed cost structure of the

25


business. Mail Services revenue grew 13% mostly due to acquisitions which contributed 12% of this growth but was partly offset by the unfavorable impact of foreign currency translation of 2%. Solid growth in the volume of mail processed contributed to underlying revenue growth. Mail Services EBIT increased by 1%. EBIT margin was negatively impacted by integration costs associated with site acquisitions in the U.S. and UK in 2008. Marketing Services revenue decreased 17% due to the loss of revenue from the exit of the motor vehicle registration services program and the delay by customers starting new marketing programs, which offset the strong performance of the postal change of address marketing program. Marketing Services EBIT increased 15% due to an improving cost structure and the exit from the motor vehicle registration services program.

Revenue by source

The following table shows revenue by source for the three months ended March 31, 2009 and 2008:

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 


 

 

 

2009

 

2008

 

% change

 

 

 


 


 


 

Equipment sales

 

$

231,825

 

$

302,713

 

 

(23

)%

Supplies

 

 

88,029

 

 

107,600

 

 

(18

)%

Software

 

 

79,726

 

 

105,405

 

 

(24

)%

Rentals

 

 

168,130

 

 

184,953

 

 

(9

)%

Financing

 

 

182,798

 

 

198,939

 

 

(8

)%

Support services

 

 

174,347

 

 

191,525

 

 

(9

)%

Business services

 

 

454,729

 

 

482,822

 

 

(6

)%

 

 



 



 



 

Total revenue

 

$

1,379,584

 

$

1,573,957

 

 

(12

)%

 

 



 



 



 

Equipment sales revenue decreased 23% compared to the prior year due to lower placements of mailing equipment as more customers 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 8%.

Supplies revenue decreased 18% compared to the prior year due to lower supplies usage resulting from lower mail volumes and fewer installed meters due to customer consolidations. Foreign currency translation had an unfavorable impact of 7%.

Software revenue decreased 24% compared to the prior year primarily due to challenging comparisons to the 2008 first quarter when there were several large-ticket licensing deals. The impact of the global economic slowdown has caused many businesses to delay their capital spending worldwide, thus impacting our software revenues. Foreign currency translation had an unfavorable impact of 11%.

Rentals revenue decreased 9% compared to the prior year as customers in the U.S. continue to downsize to smaller, fully featured machines. Foreign currency translation had an unfavorable impact of 4%.

Financing revenue decreased 8% compared to the prior year, mostly due to the unfavorable impact of foreign currency translation of 5%. In addition, lower equipment sales have resulted in a corresponding decline in our lease portfolios.

Support services revenue decreased 9% compared to the prior year, principally due to the unfavorable impact of foreign currency translation of 8%.

Business services revenue decreased 6% 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 positive impact of acquisitions which contributed 3% was offset by the unfavorable impact of foreign currency translation of 4%.

26


Costs and expenses

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 


 

 

 

2009

 

2008

 

 

 


 


 

Cost of equipment sales

 

$

123,085

 

$

161,113

 

Cost of supplies

 

$

23,341

 

$

27,872

 

Cost of software

 

$

19,497

 

$

27,737

 

Cost of rentals

 

$

35,851

 

$

38,304

 

Cost of support services

 

$

98,326

 

$

113,995

 

Cost of business services

 

$

359,907

 

$

379,291

 

Selling, general and administrative

 

$

443,528

 

$

496,495

 

Research and development

 

$

46,949

 

$

50,000

 

Cost of equipment sales as a percentage of revenue was 53.1% in the first quarter of 2009 compared with 53.2% in the prior year, primarily due to a favorable mix of higher margin equipment sales in International Mailing.

Cost of supplies as a percentage of revenue was 26.5% in the first quarter of 2009 compared with 25.9% in the prior year due to the lower sales volume and product mix.

Cost of software as a percentage of revenue was 24.5% in the first quarter of 2009 compared with 26.3% in the prior year due to a favorable mix.

Cost of rentals as a percentage of revenue was 21.3% in the first quarter of 2009 compared with 20.7% in the prior year primarily due to the fixed costs associated with meter depreciation on lower revenues.

Cost of support services as a percentage of revenue was 56.4% in the first quarter of 2009 compared with 59.5% in the prior year due to margin improvements in U.S. Mailing, International Mailing and Production Mail driven by the positive impacts of prior year cost reduction initiatives and price increases on longer-service equipment in Production Mail.

Cost of business services as a percentage of revenue was 79.1% in the first quarter of 2009 compared with 78.6% in the prior year. This is due to lower volumes of higher margin print and transaction activity which has negatively impacted International Management Services.

Selling, general and administrative (“SG&A”) expenses as a percentage of revenue was 32.1% in the first quarter of 2009 compared with 31.5% in the prior year. Excluding the effect of foreign exchange, SG&A expense declined $17.8 million as a result of our cost reduction initiatives. However, the impact of the lower revenues and increased pension costs more than offset the benefits associated with our prior year cost reduction initiatives.

Research and development expenses decreased $3.1 million from the prior year. On a constant currency basis, research and development expenses were equal to the prior year as we continue to invest in developing new technologies, enhancing our products, and expanding our offshore development capabilities. Research and development expenses as a percentage of sales increased to 3.4% in the first quarter of 2009 from 3.2% in the first quarter of 2008.

Restructuring charges and asset impairments

Pre-tax restructuring reserves at March 31, 2009 are composed of the following:

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at
December 31,
2008

 

Expenses

 

Cash
payments

 

Non-cash
charges

 

Balance at
March 31,
2009

 

 

 


 


 


 


 


 

Severance and benefit costs

 

$

108,431

 

$

 

$

(28,316

)

$

 

$

80,115

 

Other exit costs

 

 

32,678

 

 

 

 

(4,385

)

 

 

 

28,293

 

 

 



 



 



 



 



 

Total

 

$

141,109

 

$

 

$

(32,701

)

$

 

$

108,408

 

 

 



 



 



 



 



 

27


We recorded pre-tax restructuring charges and asset impairments during 2008 and 2007. These charges primarily relate to a program we announced in November 2007 to lower our cost structure, accelerate efforts to improve operational efficiencies, and transition our product line.

As of March 31, 2009, 2,278 terminations have occurred under this program and approximately 300 additional positions have been eliminated. The majority of the liability at March 31, 2009 is expected to be paid by the end of 2009 from cash generated from operations.

Net interest expense

Interest expense for the three months ended March 31, 2009 and 2008:

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 


 

 

 

2009

 

2008

 

% change

 

 

 


 


 


 

Interest expense, net

 

$

50,651

 

$

58,777

 

 

(14

)%

Net interest expense decreased by $8.1 million or 14% in the first quarter of 2009 compared to the prior year due to lower average borrowings of $125 million and a lower average interest rate of approximately 67 basis points.

Income taxes

The effective tax rate for the first quarter of 2009 was 40.4% compared with 37.2% in the prior year. The 2009 tax rate was increased by an $11.1 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. The 2008 effective tax rate was negatively impacted by a $6.5 million tax accrual associated with lease refunds in the U.K. and Ireland.

Discontinued operations

The following table shows selected financial information included in discontinued operations for the three months ended March 31, 2009 and 2008, respectively:

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 


 

 

 

2009

 

2008

 

 

 


 


 

Net gain (loss) from discontinued operations, net of tax

 

$

2,623

 

$

(3,832

)

The net gain for the three months ended March 31, 2009 relates to $9.8 million pre-tax income, less tax of $3.8 million, for a bankruptcy settlement, which was partially offset by the accrual of interest on uncertain tax positions. We received a bankruptcy settlement for unsecured claims pertaining to the leasing of certain aircraft. These leasing transactions were originally executed by our former Capital Services business, which was sold in 2006. At the time of the Capital Services sale, we retained the rights to the bankruptcy claims. Since these claims were attributable to our former Capital Services business, we recorded the gain on this settlement in discontinued operations. The net loss for the three months ended 2008 relates 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 March 31, 2009 and 2008:

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 


 

 

 

2009

 

2008

 

 

 


 


 

Preferred stock dividends of subsidiaries

 

$

4,521

 

$

4,798

 

28


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; tax payments; interest and dividend payments; pension and other benefit plan funding; acquisitions; and share repurchase program.

In light of recent market events, we have conducted an extensive review of our liquidity provisions. 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.

Cash Flow Summary

The change in cash and cash equivalents is as follows:

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 


 

 

 

2009

 

2008 

 

 

 


 


 

Cash provided by operating activities

 

$

276,471

 

$

253,135

 

Cash used in investing activities

 

 

(62,290

)

 

(71,359

)

Cash used in financing activities

 

 

(163,676

)

 

(164,267

)

Effect of exchange rate changes on cash

 

 

(3,959

)

 

3,101

 

 

 



 



 

Increase in cash and cash equivalents

 

$

46,546

 

$

20,610

 

 

 



 



 

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. The increase in cash provided by operating activities was due to decreases in finance receivable and accounts receivable balances of $102.2 million and $72.8 million, respectively, resulting from lower billings and strong collections. In addition, the timing of tax payments favorably contributed $58.6 million. Partially offsetting these positive impacts was a reduction in accounts payable and accrued liabilities of $141.5 million, primarily due to the timing of payments such as year-end incentive compensation and commissions as well as $32.7 million in restructuring payments associated with the prior year cost reduction initiatives and a $20.3 million payment for the unwinding of derivatives related to the March 2009 debt issuance. See Notes 14 and 17 to the Condensed Consolidated Financial Statements for additional discussions of the restructuring payments and unwinding of the derivatives, respectively.

Net cash used in investing activities consisted principally of capital expenditures of $47.8 million combined with a decrease in reserve account balances of $21.7 million which is due to the timing of customer deposits as well as increased cash preservation by customers.

Net cash used in financing activities consisted primarily of a decrease in notes payable of $384.7 million due to the repayment of commercial paper, which was partially offset by the proceeds from long term obligations of $297.5 million related to the March 2009 debt issuance. Dividends paid to stockholders were $74.3 million for the first quarter of 2009.

2008 Cash Flows

Net cash provided by operating activities consisted primarily of net income adjusted for non-cash items and changes in operating assets and liabilities. The net increase in our current and non-current income taxes contributed $49.2 million to cash from operations resulting from the timing of tax payments. Lower investments in finance receivables of $30.8 million and an increase in advance billings of $57.6 million also contributed to the increase in operating cash flow. The decrease in accounts payable and accrued liabilities of $85.5 million, primarily due to the payment of year-end incentive compensation and commissions partially offset by additional restructuring reserves, and an increase in inventory of $17.7 million, partly due to the required build of new fully digital, networked, and remotely-downloadable equipment and the U.S. postal rate change in the second quarter of 2008, which reduced our cash flow from operations. The increase in accounts receivable of $5.2 million is driven by contracts that are billed annually in International Mailing partly offset by lower balances in Software due to collections related to the strong fourth quarter 2007 business.

29


Net cash used in investing activities consisted principally of capital expenditures of $56.9 million, a reduction in our reserve account deposits of $7.2 million, and additional short-term investments of $6.8 million.

Net cash used in financing activities consisted primarily of dividends paid to stockholders of $74.1 million and stock repurchases of $180.0 million, partially offset by proceeds from issuance of stock of $6.1 million and a net increase in notes payable and long-term obligations of $88.5 million.

Capital Expenditures

During the first three months of 2009, capital expenditures included $24.6 million in net additions to property, plant and equipment and $23.2 million in net additions to rental equipment and related inventories compared with $29.4 million and $27.5 million, respectively, in the same period in 2008.

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 March 31, 2009, we had $226 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 14 banks until 2011. As of March 31, 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 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.

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 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.

The 8.55% notes with a $150 million face value are due to be repaid on September 15, 2009. The repayment of these notes will be funded through cash generated from operations and issuance of commercial paper. The notes are reported in current portion of long-term debt at March 31, 2009. No additional long-term notes will mature until 2012.

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 statements and borrowing capacity under our existing credit agreements.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”), to define how the fair value of assets and liabilities should be measured in accounting standards where it is allowed or required. In addition to defining fair value, the Statement established a framework within GAAP for measuring fair value and expanded required disclosures surrounding fair value measurements. In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date by one year for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, to clarify the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP was effective immediately. In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, to provide additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This FSP will be effective for interim and annual reporting periods ending after June 15, 2009. We adopted SFAS 157 for financial assets and financial liabilities on January 1, 2008, and the adoption did not have a material impact on our financial position, results of operations, or cash flows. We adopted SFAS 157 for nonfinancial items on January 1, 2009, and the adoption did not have a

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material impact on our financial position, results of operations, or cash flows. We currently do not have any financial assets that are valued using inactive markets, and as such are not impacted by the issuances of FSP 157-3 and FSP 157-4. See Note 17 to the Condensed Consolidated Financial Statements for additional discussion on fair value measurements.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”). SFAS 141(R) establishes 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. SFAS 141(R) requires fair value measurements at the date of acquisition, with limited exceptions specified in the Statement. Some of the major impacts of this new standard include expense recognition for transaction costs and restructuring costs. SFAS 141(R) was effective for fiscal years beginning on or after December 15, 2008 and is applied prospectively. The adoption of this Statement has not had a material impact on our financial position, results of operations, or cash flows during the first quarter of 2009.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 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. This Statement is effective for fiscal years beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 are applied prospectively. We adopted the presentation and disclosure requirements of SFAS 160 on a retrospective basis in the first quarter of 2009.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). SFAS 161 requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of this Statement requires us to present currently disclosed information in a tabular format and also expands our disclosures concerning where derivatives are reported on the balance sheet and where gains/losses are recognized in the results of operations. The Company has complied with the disclosure requirements of this Statement in the first quarter of 2009. See Note 17 to the Condensed Consolidated Financial Statements for the additional disclosures.

In April 2008, the FASB issued FASB FSP No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 removed the requirement of SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), for an entity to consider, when determining the useful life of an acquired intangible asset, whether the intangible asset can be renewed without substantial cost or material modification to the existing terms and conditions associated with the intangible asset. FSP FAS 142-3 replaces the previous useful life assessment criteria with a requirement that an entity considers its own experience in renewing similar arrangements. If the entity has no relevant experience, it would consider market participant assumptions regarding renewal. This should lead to greater consistency between the useful life of recognized intangibles under SFAS 142 and the period of expected cash flows used to measure fair value of such assets under SFAS No. 141(R), Business Combinations. FSP FAS 142-3 is being applied prospectively beginning January 1, 2009. The adoption of this Statement has not had a material impact on our financial position, results of operations, or cash flows during the first quarter 2009.

In November 2008, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 08-7, Accounting for Defensive Intangible Assets. EITF Issue No. 08-7 clarifies the accounting for certain separately identifiable assets, which an acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. EITF Issue No. 08-7 requires an acquirer to account for a defensive intangible asset as a separate unit of accounting, which should be amortized to expense over the period the asset diminishes in value. The provisions of EITF Issue No. 08-7 were adopted prospectively on January 1, 2009. This EITF Issue did not impact our financial position, results of operations, or cash flows during the first quarter 2009.

In December 2008, the FASB issued FSP FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets, which amends Statement No. 132(R) to require more detailed disclosures about employer’s plan assets, including investment strategies, major categories of assets, concentrations of risk within plan assets and valuation techniques used to measure the fair value of assets. The FSP is effective for fiscal years ending after December 15, 2009. The Company will comply with the additional disclosure requirements.

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In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. This FSP shall be effective for interim reporting periods ending after June 15, 2009. The Company will comply with the additional disclosure requirements beginning in the second quarter of 2009.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. This FSP amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The FSP shall be effective for interim and annual reporting periods ending after June 15, 2009. The Company currently does not have any financial assets that are other-than-temporary impaired.

In April 2009, the SEC released Staff Accounting Bulletin No. 111 (“SAB 111”), which amends SAB Topic 5-M. SAB 111 notes that FSP No. 115-2 and FAS 124-2 were scoped to debt securities only, and the FSP referred readers to SEC SAB Topic 5-M for factors to consider with respect to other-than-temporary impairments for equity securities. With the amendments in SAB 111, debt securities are excluded from the scope of Topic 5-M, but the SEC staff’s views on equity securities are still included within the topic. The Company currently does not have any financial assets that are other-than-temporary impaired.

In April 2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, to address some of the application issues under SFAS 141(R). The FSP deals with the initial recognition and measurement of an asset acquired or a liability assumed in a business combination that arises from a contingency provided the asset or liability’s fair value on the date of acquisition can be determined. When the fair value can’t be determined, the FSP requires using the guidance under SFAS No. 5, Accounting for Contingencies, and FASB Interpretation (FIN) No. 14, Reasonable Estimation of the Amount of a Loss. This FSP was effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after January 1, 2009. The adoption of this FSP has not had a material impact on our financial position, results of operations, or cash flows during the first quarter of 2009.

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 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

32


 

 

 

 

 

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

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 March 31, 2009. In addition, no change in internal control over financial reporting occurred during the quarter ended March 31, 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.

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PART II. OTHER INFORMATION

Item 1: Legal Proceedings

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. The plaintiffs in these actions are seeking both statutory damages under the DPPA and an injunction against the continuation of the program. 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.

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.

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 first quarter of 2009, leaving approximately $73.4 million available for future repurchases under this program at March 31, 2009.

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Item 3: Defaults Upon Senior Securities

None

Item 4: Submission of Matters to a Vote of Security Holders

None

Item 5: Other Information

None

Item 6: Exhibits

See Index of Exhibits.

35


Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

PITNEY BOWES INC.

 

 

May 7, 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)

36


Exhibit Index

 

 

 

 

 

Reg. S-K Exhibits

 

Description

 

Page Number






(12)

 

Computation of ratio of earnings to fixed charges

 

Page 38

 

 

 

 

 

(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 39

 

 

 

 

 

(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 40

 

 

 

 

 

(32.1)

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

 

Page 41

 

 

 

 

 

(32.2)

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

 

Page 42

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