必能寶 (PBI) 2005 Q4 法說會逐字稿

Good afternoon and welcome to the Pitney Bowes fourth quarter 2005 earnings conference call. Your lines have been placed in a listen-only mode during the conference call until the question-and-answer segment. Today's call is also being recorded. If you have any objections, please disconnect your line at this time.

I would now like to introduce your speakers for today's conference call; Mr. Michael J. Critelli, Chairman and Chief Executive Officer; Mr. Bruce P. Nolop, Executive Vice President and Chief Financial Officer; and Mr. Charles F. McBride, Vice President of Investor Relations. Mr. McBride will begin the call with the Safe Harbor overview. Please go ahead.

Thank you very much. Good afternoon. Let me remind you that you can find today's earnings press release and the attached schedules on our website at www.pb.com/investorrelations. The forward-looking statements contained in this presentation involve risks and uncertainties and are subject to change based on various important factors including; changes in international or national political or economic conditions, timely development and acceptance of new products, timing of potential acquisitions, mergers, or restructurings, gaining product approval, successful entry to new markets, changes in interest rates and changes in postal regulations as more fully outlined in the Company's Form 10-K annual report filed with the Securities and Exchange Commission.

Additionally, if there any non-GAAP measures discussed during the call such as adjusted earnings per share, earnings before interest or taxes, or EBIT, free cash flow and organic revenue; there will be a reconciliation of those measures to GAAP measures located on our website, again, at www.pb.com/investorrelations.

And now, our Chairman and Chief Executive Officer, Mike Critelli will review with you the results for the quarter. Mike?

Thanks, Charlie. Good afternoon. I'm pleased with our solid fourth quarter performance, which included strong growth in revenue EBIT and earnings per share. The quarter continued the momentum we exhibited throughout 2005 as we delivered enhanced value for customers and shareholders.

There are four things I'd like to highlight about the quarter. First, we enjoyed excellent growth in our organic revenue and our earnings before interest and taxes. Second, we invested our strong cash flow in several ways to enhance shareholder value. Third, we continued to make progress toward executing a tax-free spin-off of our Capital Services business. And fourth, we're optimistic about the passage of U.S. postal reform in 2006.

We believe that organic revenue growth is essential to delivering long-term shareholder value. During the fourth quarter, we increased revenue by 7%, of which 5% was organic. This was the fifth consecutive quarter that organic revenue growth met our target of 4 to 6%. On a full-year basis, revenue increased 11%, of which 6% was organic. Our fourth quarter EBIT grew by 11% and our EBIT margin improved from 20.6% to 21.3%, excluding special items and the result of Capital Services.

We generated $137 million in free cash flow during the quarter. Free cash flow is equal to $107 million in cash from operations less $76 million of capital expenditures, and excludes contribution of $77 million to our pension funds and $30 million in restructuring payments.

During the quarter, we also invested $69 million to repurchase 1.7 million of our common shares of stock outstanding. Our higher level of stock repurchase in the quarter was based on our belief that our stock is undervalued. These purchases brought our full-year share repurchase total to $259 million for 5.9 million shares, at an average price of $43.53 per share for the year.

Based on our confidence in the ongoing strength of our business, our Board of Directors authorized an increase of our common stock dividend to an annualized rate of $1.28 per common share. A dividend of $0.32 per share will be paid in the first quarter, a $0.01 per share increase from -- per quarter increase from the prior year. This is the 24th consecutive year that our dividend has increased.

Another way that we invested our strong cash flow throughout the year was in acquisitions that strategically expanded our presence throughout the mailstream. Yesterday, you may have seen we signed a definitive agreement to acquire Emtex Ltd. for approximately $41 million. It's software and services allow large-volume mailers to simplify document production and centrally manage complex multi-vender and multi-site print operations. By combining Emtex's capabilities with those of our Document Messaging Technologies division, which includes Group 1, we can now deliver an end-to-end solution from document creation to mail finishing in large production mail environments.

We continued to move forward in spinning-off our Capital Services business. In January, we received a favorable ruling from the I.R.S. that the spin-off would be tax-free to our shareholders. As we stated at the beginning of this process, we want to manage our exit from the Capital Services business in a way that maximizes shareholder value. The $0.02 per share contribution from asset sales during the quarter is evidence of our actions to create that value.

Similarly, in light of the acquisition of Imagistics by Océ, we're analyzing our existing Imagistics lease portfolio. We're considering various options for this portfolio, including a sale, which we believe would be an effective way to maximize the value of this portfolio for our shareholders. Of course, any sale or other disposition of the Imagistics portfolio would be subject to a supplemental I.R.S. ruling.

In the process of preparing for regulatory filings related to the spin-off, we determined the need to adjust the accounting for certain lease transactions and to adjust some the Capital Services tax provisions. Primarily as a result of these adjustments, we recorded a $0.02 per diluted share charge and grossed up the related leased assets and non-recourse debt on the consolidated balance sheet. This had the effect of increasing our rental asset balances by $535 million, reducing our leverage lease balances by $118 million, reducing our long-term receivables and other assets by $61 million, and adding about $354 million of non-recourse debt.

Just a note concerning our income statement, we believed as did many other corporations, that investments in corporate-owned life insurance were an appropriate vehicle to help reduce benefit costs. A recent court ruling involving another company has put a significant risk our previous assessment of the tax treatment of these investments. As a result, during the quarter, we also increased our tax reserves by $56 million related to these [Coley] investments.

Another highlight during the quarter is that we believe postal reform is closer to becoming a reality than ever before. We expect full Senate passage of the legislation soon and the beginning of the Joint House Senate Conference Committee deliberations. Once this process begins, we believe there will be significant progress and possible completion of the Conference Committee work over the next 90 days. Postal reform continues to have broad-based industry and bi-partisan congressional and White House support. However, you are seeing and may continue to see a variety of contrasting opinions in the media about the value of the legislation and its prospects for passage, including some contrary views by the U.S. Postal Service. To us this is evident that the bill is close to passage and that the various stakeholders are seeking to clarify and affect its ultimate implementation. We believe that the bill that ultimately gets passed will benefit mailers and the entire mailing industry, including the Postal Service. We remain on the optimistic about the passage of the bill in 2006.

As we look out to 2006, we're excited about the opportunities we have to grow customer and shareholder value throughout the large diverse and growing mailstream. Based on these opportunities, we expect revenue growth for 2006 in the range of 4 to 6%, both for the first quarter and full year.

Our revenue guidance includes the impact of strategic transactions announced to date and the expected negative impact from currency translation. We expect earnings per share for the first quarter 2006 in the range of $0.57 to $0.64. Excluding earnings from Capital Services and potential restructuring charges, we anticipate first quarter earnings per share in the range of $0.61 to $0.63. You should note that we began expensing the cost of stock option plans on a retroactive basis in January 2006. Thus, the earnings per share range I've just given you for first quarter 2006 includes $0.02 per share in stock option expense.

For the full year 2006, we expect earnings per share in the range of $2.64 to $2.79, also inclusive of the impact of stock options expensing. Excluding earnings from Capital Services and potential restructuring charges, we estimate full-year 2006 earnings per share in the range of $2.69 to $2.77. On this number, we expect full-year 2006 stock option expense of about $0.08 to $0.09, compared to $0.08 for 2005. The 2006 stock option expense estimate does include an approximate increase of $2 million after-tax expense from the prospective accounting treatment for retirement-eligible employees this year. We have included tables within our press release that provide further details on our first quarter and full-year 2006 guidance.

In closing, we were very pleased with our progress and results in 2005, and are excited about the opportunities ahead in 2006 and beyond. Thank you. Now we will be happy to answer your questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Matthew Troy with Citigroup. Please go ahead.

Good evening, guys. Wanted to touch base on the reform issues, specifically -- been an interesting couple of days to say the at least on the Hill. And while the Senate Majority Leader is behind and will push this through, once we get to committee, I'm still a bit concerned about the -- the pension liability and some of the other issues which would impact the deficit and the White House reluctance to take that back. I was wondering if you could put some color on why you're confident that won't be an impediment.

And then two, more importantly -- the question I most commonly is how specifically postal reform will benefit Pitney Bowes over the next year to three or four. If you could just give some greater specificity there, that would be extremely helpful. Thanks.

On the pension issue, just for the benefit of the people not as familiar with it. In the bill is a provision that would provide relief for the Postal Service, which has in fact, overpaid into the pension. There are two separate issues, one of which has a budget deficit impact and one which does not. The one which does not is a relief for the Postal Services -- Postal Service accountability for the military service, pre-dating Postal Service for postal employees. The other has to do with what's called the Escrow Provision. There is, in our judgment, sufficient overwhelming support in the House and Senate including the leadership, that I do not believe that the White House will either veto the bill or be successful in watering it down.

I should note that the Senate bill in particular, has a formulation that makes the budget deficit increase relatively small. At the time the White House issued its statement, it did so believing that the deficit increase would be in the several billion dollar range. I believe that the Senate bill takes it down to somewhere in the half a billion dollar range, give or take a little bit. But it's a much smaller issue today. There's overwhelming bi-partisan support to give the postal service and the rate payers this relief. And I believe the White House will get enough else in the bill that it wants, including a strong regulator, a hard-priced cap on rate increases, and more operational flexibility from the Postal Service to do what it needs to do, that I do not think that this will end up being a show stopper.

Relative to the benefits to Pitney Bowes, obviously, we benefit as does the industry work with more predictable and smaller rate increases and the absence of heavy rate litigation for even small changes and rates. So giving the Postal Service the freedom to move up and down below the consumer price index band annually is going to give us a great deal more ability to respond to customer and marketplace needs.

There's also, I think, a strong set of objectives to the Postal Service that will lead to more focus on private sector partnerships, both in the technology space and in the -- work-sharing discounts. The constraints on work-sharing will have an affect on others, but we believe Pitney Bowes will actually benefit from the way the work-sharing provisions are written, because we -- we provide a lot of cost savings for the Postal Service. And there is an awful lot in the bill that touches upon secure technology and Pitney Bowes, obviously, is a leader in that space.

I think it's a good bill. I think the Postal Service would like something that we would all like, which is a high degree of pre-bill passage clarity before it gets to the Senate floor. Frankly, it's -- that's not going to happen. It will get worked out in Conference Committee. It will get worked out in the process of the Regulator writing the rules of engagement for the industry over the next two years. We think that, given what the bill says and given our credibility with all the stakeholders, that this should be very good for Pitney Bowes. We think it's good for the industry. By the way, also good for the Postal Service when all of the dust settles.

Thanks for the detail, Michael

Thank you. Our next question comes from Jay Vleeschhouwer with Merrill Lynch. Please go ahead.

Good evening. This is [Wu-Chin Ho] for Jay. Michael, U.S. economic growth is expected to moderate this year. At least by our economists. If so, how might that affect the volume or services-sensitive parts of your domestic business?

I'm sorry, services sent through what part of the business?

Services-sensitive parts of your domestic businesses.

I don't think there's anything we see that is going to dramatically affect our outlook for any of our services business, including PBMS. I do want to remind everybody that in buying both the DDD business in 2003, which is now called Pitney Bowes Government Solutions, and in the acquisition of Compulit last year, which gives us greater positioning and litigation support, we have made ourselves less sensitive to economic conditions. As I've joked many times, our -- death and taxes are certain and the other thing that's certain is litigation. And we've given ourselves a platform for growth even if transactional activity should slow down in the legal vertical as a result of an economic downturn.

Okay. Do you have an update on how you are doing with multi-product sales? How is it the profitability of those compare with stand alone or a la carte product sales?

If you're talking about pull-through and an enterprise environment, it's -- it was more than double in 2005 and in the fourth quarter what it was a year ago. It's still a very small number. It's a very profitable business.

Okay. And lastly, we keep hearing from the high-end imaging and printing equipment companies about new approaches such as variable data printing or print on-demand. Is there anything to suggest that those new practices are having an impact on your downstream or mailstream businesses as a complement to print production and distribution?

The print on-demand ultimately -- still requires the products to get into the mailstream. And by mailstream we mean either get delivered by the Postal Service, U.P.S., FedEx, DHL, third party messenger service, and unless they're handed off from a person -- hand carried by the person that prints them, almost never is the case when it's going across geographies, we have the potential to participate. And those fullfillment-type activities, we're actually seeing some opportunities ourselves. I'm not -- I'm not at liberty to identify some of the customers. But we've gotten some very good business at Pitney Bowes Management Services. In fact, the off-site part of our business had a very good year in 2005 at PBMS. Even as we're focusing on profitability and had declining revenues on the on-site business in 2005. So we're very pleased by variable digital print on-demand. We think it's a tremendous growth opportunity for us.

Thank you.

Thank you. Our next question comes from Carol Sabbagha with Lehman Brothers. Please go ahead.

Thank you very much. Just a couple of questions. If I look at your segments, it looked like the services part was a little -- Business Solutions, sorry, a little bit light on revenues. Can you talk about what was going on at PBMS? How much the Shell contract had an impact? What that business would have done ex-PBMS? And then a little bit more detail about PSI's performance in the quarter, if you don't mind?

I'll ask Bruce to give you the color on the PBMS and particularly the Shell numbers. And I'll speak to PSI.

Right. The reason why PBMS shows a revenue decline is just what you said, Carol. It was our exit from the facilities management contract with Shell. For those on the phone, it meant that we had looked at doing overall services for buildings and that was a business we entered into in 2000. And we determined that this was not a good business for us. The margins were not attractive. And so we exited.

Were it not for that, PBMS would have an organic growth of 2%. That's probably a better way to look at the revenue for the business. And as you can see at the same time, substantially improved margins. So the growth was curtailed by the real focus on improving margins in the business and we're very successfully pursuing that strategy.

On the EBIT -- on the PSI side, very strong quarter for revenue growth. It was in the high teens. If you add in IMEX, it goes well over 20%. Imagitas, of course we have no prior year comparison. But it's very, very strong performance there. And we launched the catalog request form, which we -- is going to be a very nice revenue producer as we move forward. I think I might have talked about it on the last call, but one of the opportunities when people relocate is, that since catalogs are only forwarded I think for a 60-day period, catalog companies will pay a fee to us and the Postal Service to get customers that they would otherwise lose to agree to have catalogs sent to the new address. So that was launched.

That, along with other things, contributed to a strong performance. Now what I'm particularly pleased about in the PSI situation is that significant improvement in EBIT margin -- we still had a little bit of clean-up on the Ancora acquisition, but that's largely behind us. And we expect the PSI and IMEX margins to improve because of the wider spreads from the rate case that went into effect in January. If you just look at the spread between old and new maximum discount for first class, it went from $0.09.2 to $0.09.7. Although our customers get the vast majority of that spread, we will get some margin improvement because of that. So we're very pleased with both -- with really all of the Services businesses -- the Mailing Services businesses.

Question on cash flow, Bruce. While you made your $600 million roughly on free cash flow target for the year -- that you had to adjust that for restructuring and pension plan contribution to get there. What is your outlook next year on those two line items that are running through cash flow?

Right. Just for cash flow for next year -- let me answer first, more general. This year, free cash flow as you mentioned, Carol, was $613. And for next year, we say -- we think it will be roughly $600 million. We get there excluding any considerations for Capital Services -- so ex-Capital Services, $600 million is free cash flow goal.

In terms of restructuring, the cash payments, we estimate roughly -- $75 million would be a number. And in terms of pension fund, at this point, we do not believe that we will need to put any more in. We didn't need to even this year. We thought it was prudent. We are fully funded on a accumulated benefit obligation. And as you know, we don't have any more pension for new employees. But the only risk on that, Carol, is interest rates that affect the liability calculation is just beyond our control.

Bruce, does the $600 million include or exclude the $75 million expected -- ?

Excludes.

Excludes it.

So other way to say it, it'll be $525 after the restructuring payments.

After the restructuring. That's helpful.

Yes.

One last question going back to Global Mailing. You typically give us numbers for that -- what that business would have been like organically, ex FX and I don't think many acquisitions in there for U.S., international, supply and DMT on revenue side.

Sure. And happy. So if you go for the global mailstream, inside the U.S. organic would be $4.1.

Okay.

DMT is $1.2 inside the U.S., and then outside is $3.8.

Great. And what was the Supplies business like?

Supplies was very strong. Organically it grew by 11%.

Terrific. Thank you very much.

Thank you. Our next question comes from from [Lloyd Zeitman] with Bernstein Investment Research. Please go ahead.

Hi, folks. Let's see. It's been a long day. Maybe it's an extended senior moment on my -- [ Laughter] I'm having a bit of a hard time with your 2006 outlook chart.

Yes.

I was just wondering if -- to lead it off, I could maybe put my foot in my mouth. Try doing this a different way, and you can tell me where I'm wrong. What I'm looking at here is $2.70 in adjusted earnings for '05. If we deduct the cost of options, that brings it down to $2.62 on an adjusted basis. Then if we remove the Capital Services piece, that takes it down to $2.51.

Correct.

If we were to do the same thing in '06, starting from a pre-options expense number, that I would imagine would gross up the $2.69 to $2.77 that you have to about $2.77 to $2.86.

That's right. But -- but --

Wait. Well -- Bruce -- .

The simple way to think about it, though, is just the $2.51 grows to the $2.67 -- $2.77. That's right there. In other words, $2.51 is the comparable prior-year number.

He took out $0.08 per options. So $2.77 to $2.86. Okay.

Then, of course -- all right. We take out options, which you have here the $2.69 to $2.77.

Right.

Just as we did in '05. Then we take out the Capital Services, another $0.05 to $0.07. Which brings us down to $2.62 to $2.72, roughly.

Yes.

Therefore, the comparison is $2.62 to $2.72 versus $2.51 or 4 to 8% increase.

No. No. That -- the proper comparison would be $2.51 to $2.69 to $2.77.

Now the thing is, I can get from the $2.19 and -- I can see the GAAP EPS for '05, $2.19 is the $2.27 minus the $0.08 options, correct?

Correct.

If you follow the chart up, you can get to the $2.51. The $2.64 to $2.79 -- I don't seem to be able to get to the $2.69 to $2.77 from there.

The key is you subtract the higher number from the lower number.

We were talking about this yesterday about going -- instead of putting it minus 5 to minus 10, we said maybe we should put it minus 10 to minus five.

Yes.

In other words, go $2.69 and then -- it's -- unfortunately, you got to a negative right above a positive.

Yes, and one way to do it, just go up and use the mid-point in all of your ranges and you'll get there pretty easily.

The thing is going from the $2.70 to the $2.51 adjusted EPS --

Yes.

I'm having -- I don't know. I'm a little lost with that. Essentially, then it's the elimination of the Capital Services contribution for the full year of $0.11.

Yes.

The $0.08 in options expense.

That's right.

Okay. All right.

Use the mid-point if you could and -- so the mid-point on adjusted EPS is $2.73. And the GAAP mid-point is obviously -- it's what, about $2.71, $2.72. The other two things are roughly equivalent. There's a couple pennies difference in them.

Okay. Let's see. The Coley situation. The $56 million. Are we talking what you see as a maximum exposure here?

It's an appropriate exposure. We don't want to talk about the exact number, not because we -- it's an awkward -- it's an awkward thing to talk about when we're not in a situation where we've resolved the issue, the decision that caused the action on our part effect was another company's court case. Let's just say that it's our estimate -- best estimate of the exposure. But we don't see a -- if you're concerned with we're going to come back with a much bigger number on Coley, the answer is no. We don't expect that.

Okay. And, Mike, could you run through the adjustments that were made to the balance sheet one more time for the Capital Services situation?

Yes. The balance sheet adjustments largely -- let me just talk conceptually about them and then I'll let Bruce run through them. They largely resulted from a reclassification from either finance or leverage-lease treatment to operating lease treatment. They do not involve any adjustments in the cash received relative to these transactions or the total economics over their life. It's just a rescheduling of the timing, both on the income statement and the timing of when things -- when values get reduced off the balance sheet. Keep in mind, that these were timing reclassifications. Bruce can maybe go back through the numbers.

Sure. Lloyd, I'm going to give you the actual numbers and there are quite a few. So -- but just in the spirit of full disclosure. So as of 12/31/2005, the following adjustments occurred; finance receivables reduced by $41, rental equipment increased by $535, leverage leases declined by $118, and deferred charges and other assets went down by $25. So the net change in assets was $352. Then on the other side of the balance sheet; accrued liabilities went up by $12, notes payable went up by $18, long-term debt went up by $336, other liabilities went down by $10, and retained earnings, which is the income statement charge that we referenced in the press release, was $5. So as you expect, change was $352 on that side, as well.

Okay. Thanks very much.

Sure.

Thank you. We'll go to the line of Josh Golden with JP Morgan Asset Management. Please go ahead.

Hi, good evening. Congratulations on a good year of growth.

Thank you.

Quick question. You made mention about your stock repurchase program. Would you be willing to sacrifice the credit ratings at all to enhance that share repurchase program?

I would say that we think that the credit rating, in general, is important to us because we do a lot of financing for our customers and we want to give them comfort that we'll always have liquidity. In particular, the commercial paper rating is an important asset for the Company. Having said that, we're always looking at the best way to maximize shareholder values. I would never say never never in terms of credit rating. We'll always make that assessment. And our best solution, of course, would be to have the stock price higher. We'd prefer that as the answer.

To remind everybody how our decision process works, of course, we have the dividend which is a given. We'll do repurchase to prevent dilution. At that point, we look at really three different alternative uses beyond and that would be share repurchase, rental and leased assets that produce future revenues and acquisitions. So we're always making that trade-off beyond that floor of making sure we do enough share repurchase to prevent dilution. We're always going to be making a continuous trade-off relative to shareholder value in those three buckets.

Let me ask this question touching on the acquisition front. What type of acquisitions do you see - small or medium acquisitions? Shall we look potentially do make larger acquisitions throughout the year?

We're always looking at both platforms and what we call tuck-in or bolt-on within the mailstream. We -- I don't know how one defines a large acquisition, but we do not intend to do acquisitions that are going to fundamentally alter the lines of business that we're in for or add a new line of business outside the mailstream. We're also going to -- if we look at acquisitions of any size, we want acquisitions that are generally going to be purer place in a space. But I don't know, again, how you define small, medium, or large. Our history has been to do small to medium. That's our preference. Obviously, we get presented with a lot of different acquisitions. And we always have a robust pipeline. Generally, we have executed predominantly on small to medium.

Let me ask this question. Go back to the prior conference call you had. Analysts had asked the question about what's stopping you from repurchasing more shares in the open market? I think the response was that you were balancing the rating agency relationships with the share repurchase. Would you say that that statement has materially changed?

I would not. That, as I mentioned that -- rating is a very important consideration for us. And we continue to regularly have a dialog with the agencies. And that's a certainly a very important factor in making any decision would affect our repurchase program or anything -- our dividends or acquisitions. That's something we take into consideration.

Let me ask this question. Michael had a recent interview where there was some comments about maybe future debt issuance, instead of issuing fixed rate debt, it would go to a floating rate debt. What would be the rational behind changing from the fixed rate issuance into a floating rate issuance on a going-forward basis?

This is Bruce. I'll answer that. What you're referring to is, we have a much higher amount of fixed-rate debt than normal for the Company. Historically, Pitney Bowes has had roughly half of its debt as fixed rate and half floating. At the present time, we're roughly 4/5 fixed and 1/5 floating. So what we've said is we're in a very good position. We have a total of $300 million of debt coming due this year. No debt coming due in '07. So that we have the flexibility, should we choose to do so, to increase the rate of floating rate debt, which may produce an interest rate savings compared to going out fixed rate. It was emphasize the flexibility, not to emphasize the intention -- as it was almost the opposite of what you concluded.

Yes. Yes, that's what I wanted -- that's what I intended.

Okay. Great. Thank you, gentlemen. And congratulations on a good year.

Thank you.

[OPERATOR INSTRUCTIONS] We'll go to the line of Matthew Troy with Citigroup. Please go ahead.

Just a follow-up on the lease spin. I just wanted to be clear with the reclasses on a pro forma basis, what would be leaving Pitney? Historically, you said roughly $2 billion of assets come off the balance sheet, about $1.3 billion or so of the associate deferred taxes, a few hundred million in nonrecourse debt. If you could just maybe update -- tell me if those are still accurate or if they are all accurate.

Then,two; in 2005, what were the revenues, EBIT and free cash associated with the business? Thanks.

Sure. First on the assets -- with these reclasses, you would have, as of December '05, $2.3 billion of assets that are in what we call [spinkle].

Okay.

That would include $500 million of non-recourse debt. And $1.3 billion -- I should say, that includes minority interest well, so $500 million in non-recourse debt, minority interest. And then 1.3 billion of deferred taxes. So that has a net equity of $500 million [inaudible].

Right.

Okay? That's that. In terms of what the business did in '05, let me access these numbers. Let me pull those out. Bear with me. You can till we have a lot of numbers this quarter. Okay. For the year, revenue was $3 million. Net income was $10 million -- that's the lease portfolio. I'm sorry.

Yes.

Do I have that? Where do I have that? That's in --

I think --

Matt, rather than spend time on the call, here. What we'll do is we'll post the results for the spinkles on the web and give that to everyone. Rather than -- I don't want to take a chance of giving you bad numbers because -- there are a lot of things swirling around with the reclass and going through the income statements -- and let's do it that way.

I appreciate it.

Thank you. We'll go to the line of Carol Sabbagha with Lehman Brothers. Please go ahead.

Thanks. Just a couple of follow-up questions. One on Capital Services. Is the spin-off still expected by mid-'06 or has that timing accelerated at all?

I don't think it's accelerated. And given -- the reason we were more vague and said just during 2006 rather than mid-2006 is -- our estimate, for example, on the I.R.S. is 4 to 6 months, it took nine. And we have to go through an S1 approval or registration state approval with the SEC. We will be submitting that late first, early second quarter. And we do not -- we don't have control over the timing or the length of the review process with the SEC. So we don't see any fundamental issues. We don't have any -- we don't have as much confidence in a -- in the -- in certainty of timing on the the review process. So that's why we have been a little bit more flexible in saying during 2006 rather than mid-2006.

Okay.

If I can interrupt on just -- this is Bruce, on the question that Matt Troy asked. I have summary numbers which I'll give on the Capital Services spin-off. Revenue of $126 million for '05. EPS, as I've mentioned, $0.11. Free cash flow was $69 million. And those will be the headlines. And Charlie can fill you in on any more details that might be helpful. Sorry to interrupt.

No problem. Just a quick follow-up. When you were trying to -- in the back of the press release, bring us down to an operating number ex-restructuring. There was $19 million in other -- I think expenses that typically you would have added back -- or $23 million. Sorry. You didn't add back this quarter. What was that? Did that have something to do with the Capital Services business?

That's correct. That was in connection with the reclass.

Okay. All right. I got. Thank you very much.

Thank you. At this time, we have no further questions. Please continue.

Just one other point we wanted to make is -- a question came up related to accounts receivable after the last call. And just wanted to make sure that we gave some color because we do have an increase in accounts receivable year-over-year. And the point is that roughly two-thirds of the increase would be what could be considered good stuff. Which is that we have had strong sales at the end of the quarter and that produced it. And also, we've added businesses that do advance billings. They often would bill their customers for as much as a year out. That gets offset in the advanced billing line.

Having said that, there is roughly one-third of the receivables area are issues. Just want you to know they relate to two international locations, France and Canada. And we also have related to international mail express, which is our international consolidation business. We've got plans and one of our targets is to reduce them. There are causes for each one, which we can elaborate on at another time. Just want to reassure everyone that we're focused on these issues. And have plans to reduce receivables outstanding.

Yes. We don't expect that either of those -- or any of those issues are going to -- are going to lead to a significant spike in write-offs. They have more to do with improving our collections and getting money in the door sooner.

We also want to just note, because sometimes questions -- we did have the unusual tax rate was a result of the special items. We expected the tax rate on our regular business was 34%. We expect comparable tax rate in 2006.

So those are just a couple clarifying items. If there are any other questions people have, we'd be -- I guess we will try to address them now or if not, we'll see you all on Analyst Day, March 1st.

[OPERATOR INSTRUCTIONS] And speakers, I'll turn it back to you. We have no questions.

Okay. Thank you all very much. We appreciate your patience. This is a complex report adjusting to all of the new reporting requirements, particularly the stock options and all. We look forward to seeing -- or having you participate at our Analyst Day, which will be in New York on March 1st and will also be webcast. Thank you very much.

Thank you. Ladies and gentlemen, this conference will be available for replay after 8:30 pm Eastern time today through midnight February 8, 2006. You may access the AT&T teleconference replay system at anytime by dialing 1-800-475-6701 and entering the access code 813711. International participants dial 1-320-365-3844. Those numbers again are 1-800-475-6701 and 1-320-365-3844 and enter the access code, 813711.

That does conclude our conference for today. Thank you for your participation and using AT&T executive teleconference. [OPERATOR INSTRUCTIONS]