PBI

Business Context and Reporting Period

Company: Pitney Bowes Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: Pitney Bowes provides global, integrated mail and document management solutions. Operations are divided into three reportable segments: Global Mailing (postage meters, mailing equipment, software), Enterprise Solutions (management services and document messaging technologies), and Capital Services (external financing for non-Pitney Bowes equipment). In January 2003, the company announced it would cease active pursuit of long-term Capital Services financing transactions.

Key Financial Metrics (Year Ended Dec 31, 2002)

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 7% to $4.41 billion, driven by 6% growth in Global Mailing and 12% growth in Enterprise Solutions. Capital Services revenue declined 6% due to a strategic shift toward fee-based income.
• Profitability Decline: Income from continuing operations decreased 15% to $437.7 million. This decline was primarily due to a non-cash pre-tax charge of approximately $213 million related to Capital Services (aircraft leasing write-downs and credit loss provisions).
• Pro Forma Performance: Excluding special items, income from continuing operations increased 3% and diluted EPS increased 5% compared to 2001.
• Cash Flow: Operating cash flow dropped significantly to $502.6 million from $1.04 billion in 2001, largely due to a $338.6 million pension plan investment and changes in working capital.
• Acquisitions: The company acquired PSI Group, Inc. (mail presort) in August 2002 for approximately $127 million in cash and $39 million in assumed debt.

Guidance, Outlook, Risks, and Unusual Items

Unusual Items

• Capital Services Charges: A $213 million pre-tax charge was recorded in 2002. This included a $110 million write-down of U.S. aircraft lease receivables and residuals (primarily United and US Airways) and $82 million in additional credit loss reserves due to the deterioration of the U.S. airline industry.
• Discontinued Operations: Gains of $38 million were recorded from the favorable resolution of contingent liabilities related to the prior sale of Atlantic Mortgage & Investment Corporation and Colonial Pacific Leasing Corporation.

Outlook and Strategy

• Capital Services Restructuring: The company announced it will stop active pursuit of long-term Capital Services financing. Management estimates this strategy change will reduce 2003 earnings by approximately 6 cents per diluted share, with an additional 2-3 cents reduction due to a higher effective tax rate.
• Restructuring Initiatives: In January 2003, the company announced new restructuring initiatives related to realigned infrastructure and reduced manufacturing needs, with expected pre-tax costs of about $160 million over two years.
• Pension Costs: Management expects 2003 incremental pension costs attributable to assumption changes to be approximately 2 cents per diluted share.

Risks and Contingencies

• Aircraft Leasing Exposure: Significant exposure remains in commercial passenger aircraft leasing ($344.4 million net investment), with risks related to airline bankruptcies (United, US Airways) and the ability to recover investments via sale or secondary leases.
• Legal Proceedings: The company is a defendant in various actions, including patent infringement suits (Stamps.com, Ricoh) and class actions regarding lease upgrade pricing. Management does not believe these will have a material adverse effect, though outcomes are uncertain.
• Regulatory Matters: The company is subject to USPS regulations regarding the phase-out of non-digital meters. An IRS examination for 1992-1994 tax years proposed $24 million in additional taxes, which the company is contesting.

Key Facts for Investor Verification

• Aircraft Lease Recovery: Verify the status of negotiations with United Airlines post-bankruptcy and the valuation of remaining aircraft assets in the Capital Services portfolio.
• Capital Services Wind-down: Monitor the execution of the strategy to exit long-term external financing and the associated impact on future earnings and tax rates.
• Restructuring Costs: Track the $160 million in announced restructuring costs and the timeline for achieving the associated operating efficiencies.
• Recurring Revenue Mix: Confirm the stability of the 77% recurring revenue base, which is a key indicator of future cash flow stability.
• IRS Dispute: Follow the resolution of the $24 million proposed tax adjustment for the 1992-1994 period.