Edgar Filing: PITNEY BOWES INC /DE/

Rev PBI 2012.06.30 10Q

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 June 30, 2012

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 þ	No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



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 July 31, 2012.



Class		Outstanding
Common Stock, $1 par value per share		200,638,510 shares

PITNEY BOWES INC.

INDEX



		Page Number

Part I - Financial Information:

Item 1:	Financial Statements (Unaudited)

	Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2012 and 2011	3

	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011	3

	Condensed Consolidated Balance Sheets at June 30, 2012 and December 31, 2011	3

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011	3

	Notes to Condensed Consolidated Financial Statements	4

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3:	Quantitative and Qualitative Disclosures about Market Risk	27

Item 4:	Controls and Procedures	27

Part II - Other Information:

Item 1:	Legal Proceedings	28

Item 1A:	Risk Factors	28

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 6:	Exhibits	28

Signatures		29

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 June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Revenue:
Equipment sales	$	224,235		$	242,921		$	444,414		$	484,552
Supplies	70,522			78,587			146,887			161,457
Software	104,551			105,516			208,901			205,081
Rentals	145,497			156,162			285,886			312,854
Financing	122,948			136,369			249,696			276,958
Support services	171,254			176,807			344,772			355,421
Business services	406,811			418,112			820,918			841,220
Total revenue	1,245,818			1,314,474			2,501,474			2,637,543
Costs and expenses:
Cost of equipment sales	106,718			104,385			203,634			219,138
Cost of supplies	20,863			25,562			44,734			51,754
Cost of software	24,404			24,898			45,497			50,110
Cost of rentals	31,850			36,109			62,075			72,016
Financing interest expense	20,642			22,192			41,781			45,485
Cost of support services	112,122			115,417			227,209			230,693
Cost of business services	313,553			325,250			632,529			658,817
Selling, general and administrative	391,606			432,715			802,791			859,326
Research and development	33,776			37,441			67,849			72,199
Restructuring charges and asset impairments	1,074			4,994			1,074			31,018
Other interest expense	30,353			28,550			59,720			57,074
Interest income	(2,003		)	(2,215		)	(3,736		)	(3,437		)
Other expense, net	4,372			—			1,138			—
Total costs and expenses	1,089,330			1,155,298			2,186,295			2,344,193
Income from continuing operations before income taxes	156,488			159,176			315,179			293,350
Provision for income taxes	52,271			53,012			67,030			94,406
Income from continuing operations	104,217			106,164			248,149			198,944
(Loss) income from discontinued operations, net of tax	—			(635		)	19,332			(2,517		)
Net income before attribution of noncontrolling interests	104,217			105,529			267,481			196,427
Less: Preferred stock dividends of subsidiaries attributable to noncontrolling interests	4,594			4,594			9,188			9,188
Net income - Pitney Bowes Inc.	$	99,623		$	100,935		$	258,293		$	187,239
Amounts attributable to common stockholders:
Income from continuing operations	$	99,623		$	101,570		$	238,961		$	189,756
(Loss) income from discontinued operations	—			(635		)	19,332			(2,517		)
Net income - Pitney Bowes Inc.	$	99,623		$	100,935		$	258,293		$	187,239
Basic earnings per share attributable to common stockholders (1):
Continuing operations	$	0.50		$	0.50		$	1.19		$	0.93
Discontinued operations	—			—			0.10			(0.01		)
Net income - Pitney Bowes Inc.	$	0.50		$	0.50		$	1.29		$	0.92
Diluted earnings per share attributable to common stockholders (1):
Continuing operations	$	0.50		$	0.50		$	1.19		$	0.93
Discontinued operations	—			—			0.10			(0.01		)
Net income - Pitney Bowes Inc.	$	0.50		$	0.49		$	1.29		$	0.92


(1)	The sum of the earnings per share amounts may not equal the totals due to rounding.

See Notes to Condensed Consolidated Financial Statements

PITNEY BOWES INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited; in thousands, except per share data)



	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012			2011

Net income - Pitney Bowes Inc.	$	99,623		$	100,935	$	258,293		$	187,239
Other comprehensive income, net of tax:
Foreign currency translations	(53,267		)	25,164		(19,908		)	75,981
Net unrealized gain on cash flow hedges, net of tax of $321, $273, $353 and $245, respectively	504			438		553			387
Net unrealized gain on investment securities, net of tax of $790, $790, $242 and $710, respectively	1,235			1,236		378			1,111
Amortization of pension and postretirement costs, net of tax of $6,580, $4,856, $13,466 and $9,833, respectively	10,976			8,496		22,964			17,165
Other comprehensive income	(40,552		)	35,334		3,987			94,644
Comprehensive income - Pitney Bowes Inc.	59,071			136,269		262,280			281,883
Preferred stock dividends of subsidiaries attributable to noncontrolling interests	4,594			4,594		9,188			9,188
Total comprehensive income	$	63,665		$	140,863	$	271,468		$	291,071

See Notes to Condensed Consolidated Financial Statements

PITNEY BOWES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands, except share and per share data)



	June 30, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	499,772		$	856,238
Short-term investments	38,549			12,971
Accounts receivable, gross	691,332			755,485
Allowance for doubtful accounts receivables	(30,233		)	(31,855		)
Accounts receivable, net	661,099			723,630
Finance receivables	1,221,086			1,296,673
Allowance for credit losses	(31,781		)	(45,583		)
Finance receivables, net	1,189,305			1,251,090
Inventories	187,562			178,599
Current income taxes	20,107			102,556
Other current assets and prepayments	124,922			134,774
Total current assets	2,721,316			3,259,858
Property, plant and equipment, net	391,651			404,146
Rental property and equipment, net	251,495			258,711
Finance receivables	1,072,641			1,123,638
Allowance for credit losses	(19,960		)	(17,847		)
Finance receivables, net	1,052,681			1,105,791
Investment in leveraged leases	32,725			138,271
Goodwill	2,133,559			2,147,088
Intangible assets, net	188,657			212,603
Non-current income taxes	44,299			89,992
Other assets	528,614			530,644
Total assets	$	7,344,997		$	8,147,104
LIABILITIES, NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities	$	1,701,135		$	1,840,465
Current income taxes	230,242			242,972
Notes payable and current portion of long-term obligations	375,000			550,000
Advance billings	466,926			458,425
Total current liabilities	2,773,303			3,091,862
Deferred taxes on income	30,472			175,944
Tax uncertainties and other income tax liabilities	223,603			194,840
Long-term debt	3,306,473			3,683,909
Other non-current liabilities	633,510			743,165
Total liabilities	6,967,361			7,889,720
Noncontrolling interests (Preferred stockholders’ equity in subsidiaries)	296,370			296,370
Commitments and contingencies (See Note 11)
Stockholders’ equity (deficit):
Cumulative preferred stock, $50 par value, 4% convertible	4			4
Cumulative preference stock, no par value, $2.12 convertible	653			659
Common stock, $1 par value (480,000,000 shares authorized; 323,337,912 shares issued)	323,338			323,338
Additional paid-in capital	227,136			240,584
Retained earnings	4,708,485			4,600,217
Accumulated other comprehensive loss	(657,658		)	(661,645		)
Treasury stock, at cost (122,995,133 and 123,586,842 shares, respectively)	(4,520,692		)	(4,542,143		)
Total Pitney Bowes Inc. stockholders’ equity (deficit)	81,266			(38,986		)
Total liabilities, noncontrolling interests and stockholders’ equity (deficit)	$	7,344,997		$	8,147,104

See Notes to Condensed Consolidated Financial Statements

PITNEY BOWES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)



	Six Months Ended June 30,
	2012			2011
Cash flows from operating activities:
Net income before attribution of noncontrolling interests	$	267,481		$	196,427
Restructuring payments	(47,875		)	(51,968		)
Special pension plan contributions	(95,000		)	(123,000		)
Tax payments related to sale of leveraged lease assets	(84,904		)	—
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of leveraged lease assets, net of tax	(12,886		)	—
Depreciation and amortization	131,607			137,635
Stock-based compensation	8,852			8,656
Restructuring charges and asset impairments	1,074			31,018
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable	60,176			82,030
(Increase) decrease in finance receivables	113,034			139,793
(Increase) decrease in inventories	(9,428		)	(7,435		)
(Increase) decrease in other current assets and prepayments	3,161			4,466
Increase (decrease) in accounts payable and accrued liabilities	(87,468		)	(85,361		)
Increase (decrease) in current and non-current income taxes	86,555			105,235
Increase (decrease) in advance billings	17,178			885
Increase (decrease) in other operating capital, net	18,610			11,020
Net cash provided by operating activities	370,167			449,401
Cash flows from investing activities:
Short-term and other investments	(30,966		)	(36,236		)
Capital expenditures	(88,751		)	(88,017		)
Proceeds from sale of leveraged lease assets	105,506			—
Net investment in external financing	(3,464		)	(3,132		)
Reserve account deposits	2,334			18,088
Net cash used in investing activities	(15,341		)	(109,297		)
Cash flows from financing activities:
Decrease in notes payable, net	—			(50,000		)
Principal payments of long-term obligations	(550,000		)	—
Proceeds from issuance of common stock	4,274			7,170
Stock repurchases	—			(49,998		)
Dividends paid to stockholders	(150,025		)	(150,863		)
Dividends paid to noncontrolling interests	(9,188		)	(9,188		)
Net cash used in financing activities	(704,939		)	(252,879		)
Effect of exchange rate changes on cash and cash equivalents	(6,353		)	6,860
(Decrease) increase in cash and cash equivalents	(356,466		)	94,085
Cash and cash equivalents at beginning of period	856,238			484,363
Cash and cash equivalents at end of period	$	499,772		$	578,448
Cash interest paid	$	99,477		$	100,131
Cash income tax payments (refund), net	$	63,998		$	(7,859	)

See Notes to Condensed Consolidated Financial Statements

PITNEY BOWES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; table amounts in thousands of dollars, unless otherwise noted)

1. Description of Business and Basis of Presentation

Pitney Bowes Inc. and its subsidiaries (PBI, the company, we, us, and our) is a global provider of software, hardware and services that enables both physical and digital communications and that integrates those physical and digital communications channels. We offer a full suite of equipment, supplies, software, services and solutions for managing and integrating physical and digital communication channels. We conduct our business activities in seven reporting segments within two business groups: Small & Medium Business Solutions and Enterprise Business Solutions. See Note 12 for information regarding our reportable segments.

The accompanying unaudited Condensed Consolidated Financial Statements 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, 2011 Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In management's opinion, all adjustments, consisting of normal recurring adjustments, considered necessary to present fairly our financial position, results of operations and cash flows for the periods presented have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for any other interim period or the year ending December 31, 2012.

These statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report to Stockholders on Form 10-K for the year ended December 31, 2011 (the 2011 Annual Report). Certain prior year amounts have been reclassified to conform to the current period presentation.

2. Inventories

Inventories at June 30, 2012 and December 31, 2011 consisted of the following:



	June 30, 2012			December 31, 2011
Raw materials and work in process	$	68,456		$	63,216
Supplies and service parts	72,552			68,600
Finished products	72,535			71,958
Inventory at FIFO cost	213,543			203,774
Excess of FIFO cost over LIFO cost	(25,981		)	(25,175		)
Total inventory, net	$	187,562		$	178,599

PITNEY BOWES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; table amounts in thousands of dollars, unless otherwise noted)

3. Finance Assets

Finance Receivables

Finance receivables are comprised of sales-type lease receivables and unsecured revolving loan receivables. Sales-type leases are generally due in monthly, quarterly or semi-annual installments over periods ranging from three to five years. Loan receivables arise primarily from financing services offered to our customers for postage and related supplies. Loan receivables are generally due each month; however, customers may rollover outstanding balances.

Finance receivables at June 30, 2012 and December 31, 2011 consisted of the following:



	June 30, 2012
	North America			International			Total
Sales-type lease receivables
Gross finance receivables	$	1,638,414		$	447,317		$	2,085,731
Unguaranteed residual values	163,736			20,336			184,072
Unearned income	(325,882		)	(103,142		)	(429,024		)
Allowance for credit losses	(23,881		)	(9,041		)	(32,922		)
Net investment in sales-type lease receivables	1,452,387			355,470			1,807,857
Loan receivables
Loan receivables	407,327			45,621			452,948
Allowance for credit losses	(16,530		)	(2,289		)	(18,819		)
Net investment in loan receivables	390,797			43,332			434,129
Net investment in finance receivables	$	1,843,184		$	398,802		$	2,241,986

	December 31, 2011
	North America			International			Total
Sales-type lease receivables
Gross finance receivables	$	1,727,653		$	460,101		$	2,187,754
Unguaranteed residual values	185,450			20,443			205,893
Unearned income	(348,286		)	(102,618		)	(450,904		)
Allowance for credit losses	(28,661		)	(12,039		)	(40,700		)
Net investment in sales-type lease receivables	1,536,156			365,887			1,902,043
Loan receivables
Loan receivables	436,631			40,937			477,568
Allowance for credit losses	(20,272		)	(2,458		)	(22,730		)
Net investment in loan receivables	416,359			38,479			454,838
Net investment in finance receivables	$	1,952,515		$	404,366		$	2,356,881

Allowance for Credit Losses and Aging of Receivables

We estimate our finance receivable risks and provide allowances for credit losses accordingly. We establish credit approval limits based on the credit quality of the customer and the type of equipment financed. We believe that our concentration of credit risk is limited because of our large number of customers, small account balances for most of our customers, and customer geographic and industry diversification.

Our policy is to discontinue revenue recognition for lease receivables that are more than 120 days past due and for unsecured loan receivables that are more than 90 days past due. We resume revenue recognition when customer payments reduce the account balance aging to 60 days or less past due. We evaluate the adequacy of the allowance for credit losses based on historical loss experience, the nature and volume of our portfolios, adverse situations that may affect a customer's ability to pay and prevailing economic conditions, and make adjustments to the reserves as necessary. This evaluation is inherently subjective and actual results may differ significantly from estimated reserves.

PITNEY BOWES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; table amounts in thousands of dollars, unless otherwise noted)

We maintain a program for U.S. borrowers in our North America loan portfolio who are experiencing financial difficulties, but are able to make reduced payments over an extended period of time. Upon acceptance into the program, the borrower’s credit line is closed, interest accrual is suspended, the borrower’s minimum required payment is reduced and the account is re-aged and classified as current. There is generally no forgiveness of debt or reduction of balances owed. The loans in the program are considered to be troubled debt restructurings because of the concessions granted to the borrower. At June 30, 2012 and December 31, 2011, loans in this program had a balance of $5 million and $7 million, respectively.

The allowance for credit losses for these modified loans is determined by the difference between cash flows expected to be received from the borrower discounted at the original effective rate and the carrying value of the loan. The allowance for credit losses related to such loans was $1 million at June 30, 2012 and $2 million at December 31, 2011 and is included in the allowance for credit losses of North America loans in the table below. Management believes that the allowance for credit losses is adequate for these loans and all other loans in the portfolio. Write-offs of loans in the program for the past twelve months were less than $1 million.

Activity in the allowance for credit losses for finance receivables for the six months ended June 30, June 30, 2012 was as follows:



	Sales-type Lease Receivables						Loan Receivables
	North America			International			North America			International			Total
Balance at January 1, 2012	$	28,661		$	12,039		$	20,272		$	2,458		$	63,430
Amounts charged to expense	288			53			2,284			422			3,047
Accounts written off	(5,068		)	(3,051		)	(6,026		)	(591		)	(14,736		)
Balance at June 30, 2012	$	23,881		$	9,041		$	16,530		$	2,289		$	51,741

The aging of finance receivables at June 30, 2012 and December 31, 2011 was as follows:



	Sales-type Lease Receivables				Loan Receivables
	North America		International		North America		International		Total
June 30, 2012
< 31 days	$	1,556,971	$	419,905	$	387,285	$	43,646	$	2,407,807
> 30 days and < 61 days	32,991		11,043		11,372		1,291		56,697
> 60 days and < 91 days	22,348		4,893		3,660		327		31,228
> 90 days and < 121 days	8,044		3,809		2,404		147		14,404
> 120 days	18,060		7,667		2,606		210		28,543
Total	$	1,638,414	$	447,317	$	407,327	$	45,621	$	2,538,679
Past due amounts > 90 days
Still accruing interest	$	8,044	$	3,809	$	—	$	—	$	11,853
Not accruing interest	18,060		7,667		5,010		357		31,094
Total	$	26,104	$	11,476	$	5,010	$	357	$	42,947

PITNEY BOWES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; table amounts in thousands of dollars, unless otherwise noted)



	Sales-type Lease Receivables				Loan Receivables
	North America		International		North America		International		Total
December 31, 2011
< 31 days	$	1,641,706	$	434,811	$	414,434	$	38,841	$	2,529,792
> 30 days and < 61 days	41,018		10,152		12,399		1,066		64,635
> 60 days and < 91 days	24,309		5,666		4,362		425		34,762
> 90 days and < 121 days	4,912		3,207		2,328		186		10,633
> 120 days	15,708		6,265		3,108		419		25,500
Total	$	1,727,653	$	460,101	$	436,631	$	40,937	$	2,665,322
Past due amounts > 90 days
Still accruing interest	$	4,912	$	3,207	$	—	$	—	$	8,119
Not accruing interest	15,708		6,265		5,436		605		28,014
Total	$	20,620	$	9,472	$	5,436	$	605	$	36,133

Credit Quality

The extension of credit and management of credit lines to new and existing customers uses a combination of an automated credit score, where available, and a detailed manual review of the customer’s financial condition and, when applicable, the customer’s payment history. Once credit is granted, the payment performance of the customer is managed through automated collections processes and is supplemented with direct follow up should an account become delinquent. We have robust automated collections and extensive portfolio management processes. The portfolio management processes ensure that our global strategy is executed, collection resources are allocated appropriately and enhanced tools and processes are implemented as needed.

We use a third party to score the majority of the North American portfolio on a quarterly basis using a commercial credit score. We do not use a third party to score our International portfolios because the cost to do so is prohibitive, it is a localized process and there is no single credit score model that covers all countries.

The table below shows the North American portfolio at June 30, 2012 and December 31, 2011 by relative risk class (low, medium, high) based on the relative scores of the accounts within each class. The relative scores are determined based on a number of factors, including the company type, ownership structure, payment history and financial information. A fourth class is shown for accounts that are not scored. Absence of a score is not indicative of the credit quality of the account. The degree of risk, as defined by the third party, refers to the relative risk that an account in the next 12 month period may become delinquent.


•	Low risk accounts are companies with very good credit scores and are considered to approximate the top 30% of all commercial borrowers.


•	Medium risk accounts are companies with average to good credit scores and are considered to approximate the middle 40% of all commercial borrowers.


•	High risk accounts are companies with poor credit scores, are delinquent or are at risk of becoming delinquent and are considered to approximate the bottom 30% of all commercial borrowers.

PITNEY BOWES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; table amounts in thousands of dollars, unless otherwise noted)



	June 30, 2012		December 31, 2011
Sales-type lease receivables
Risk Level
Low	$	1,041,255	$	1,096,676
Medium	470,064		473,394
High	49,313		58,177
Not Scored	77,782		99,406
Total	$	1,638,414	$	1,727,653
Loan receivables
Risk Level
Low	$	243,419	$	269,547
Medium	145,053		115,490
High	13,720		21,081
Not Scored	5,135		30,513
Total	$	407,327	$	436,631

Although the relative score of accounts within each class is used as a factor in determining a customer credit limit, it is not indicative of our actual history of losses due to the business essential nature of our products and services. The aging schedule included above, showing approximately 1.7% of the portfolio as greater than 90 days past due, and the roll-forward schedule of the allowance for credit losses, showing the actual losses for the six months ended June 30, 2012 are more representative of the potential loss performance of our portfolio than relative risk based on scores, as defined by the third party.

Leveraged Leases

Our investment in leveraged lease assets consisted of the following:



	June 30, 2012			December 31, 2011
Rental receivables	$	88,942		$	810,306
Unguaranteed residual values	13,816			13,784
Principal and interest on non-recourse loans	(61,497		)	(606,708		)
Unearned income	(8,536		)	(79,111		)
Investment in leveraged leases	32,725			138,271
Less: deferred taxes related to leveraged leases	(20,117		)	(101,255		)
Net investment in leveraged leases	$	12,608		$	37,016

The following is a summary of the components of income from leveraged leases:



	Three Months Ended June 30,					Six Months Ended June 30,
	2012		2011			2012		2011
Pre-tax leveraged lease income	$	432	$	1,558		$	1,225	$	3,094
Income tax effect	7		(81		)	26		(163		)
Income from leveraged leases	$	439	$	1,477		$	1,251	$	2,931

During 2012, we sold certain non-U.S. leveraged lease assets for cash. The investment in the leveraged lease assets at the date of sale was $109 million and an after-tax gain of $13 million was recognized. The effects of the sale are not included in the table above.

4. Intangible Assets and Goodwill

Intangible assets

Intangible assets at June 30, 2012 and December 31, 2011 consisted of the following:



	June 30, 2012							December 31, 2011
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	408,401	$	(253,404	)	$	154,997	$	409,489	$	(237,536	)	$	171,953
Supplier relationships	29,000		(20,662		)	8,338		29,000		(19,213		)	9,787
Software & technology	169,998		(147,759		)	22,239		170,286		(143,456		)	26,830
Trademarks & trade names	34,560		(31,575		)	2,985		33,908		(30,076		)	3,832
Non-compete agreements	7,381		(7,283		)	98		7,564		(7,363		)	201
Total intangible assets	$	649,340	$	(460,683	)	$	188,657	$	650,247	$	(437,644	)	$	212,603

Amortization expense for intangible assets was $11 million and $14 million for the three months ended June 30, 2012 and 2011, respectively, and $23 million and $29 million for the six months ended June 30, 2012 and 2011, respectively. The future amortization expense for intangible assets as of June 30, 2012 was as follows:



Remaining for year ended December 31, 2012	$	21,622
Year ended December 31, 2013	41,849
Year ended December 31, 2014	36,496
Year ended December 31, 2015	32,541
Year ended December 31, 2016	23,997
Thereafter	32,152
Total	$	188,657

Actual amortization expense may differ from the amounts above due to, among other things, fluctuations in foreign currency exchange rates, impairments, future acquisitions and accelerated amortization.

Goodwill

The changes in the carrying amount of goodwill, by reporting segment, for the six months ended June 30, 2012 were as follows:



	December 31, 2011		Other (1)			June 30, 2012
North America Mailing	$	352,897	$	(2,787	)	$	350,110
International Mailing	189,067		(11,698		)	177,369
Small & Medium Business Solutions	541,964		(14,485		)	527,479
Production Mail	127,589		640			128,229
Software	667,124		650			667,774
Management Services	402,723		(333		)	402,390
Mail Services	213,455		(1		)	213,454
Marketing Services	194,233		—			194,233
Enterprise Business Solutions	1,605,124		956			1,606,080
Total	$	2,147,088	$	(13,529	)	$	2,133,559


(1)	Primarily foreign currency translation adjustments.

PITNEY BOWES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; table amounts in thousands of dollars, unless otherwise noted)

5. Debt

On June 30, 2012, we redeemed our $400 million, 4.625% notes (the 2012 Notes) that were due in October 2012. As a result of the early redemption of the 2012 Notes, we recorded a net charge of $2 million in other expense, net as a loss on the extinguishment of debt. The charge is comprised of a make-whole payment and a gain recognized upon the termination of interest rate swap contracts related to the 2012 Notes.

In April 2012, we entered into forward starting swap agreements with an aggregate notional value of $150 million to hedge interest rate risk associated with the planned issuance of long-term debt before the end of the second quarter. We chose not to issue debt within the planned time period, and on June 29, 2012, the swap agreements expired and we recorded a loss of $6 million in other expense, net during the quarter ended June 30, 2012.

In March 2012, we redeemed, at par plus accrued interest, a $150 million term loan that was scheduled to mature in the fourth quarter of 2012.

During the quarter, commercial paper borrowings averaged $142 million at a weighted-average interest rate of 0.38% and the maximum amount outstanding at any time was $343 million. At June 30, 2012, there was no outstanding commercial paper borrowings.

6. Noncontrolling Interests (Preferred Stockholders’ Equity in Subsidiaries)

Pitney Bowes International Holdings, Inc. (PBIH), a subsidiary, has 300,000 shares, or $300 million, of outstanding perpetual voting preferred stock (the Preferred Stock) held by certain institutional investors. The holders of the Preferred Stock are entitled as a group to 25% of the combined voting power of all classes of capital stock of PBIH. All outstanding common stock of PBIH, representing the remaining 75% of the combined voting power of all classes of capital stock, is owned directly or indirectly by the company. The Preferred Stock is entitled to cumulative dividends at a rate of 6.125% through 2016 after which it becomes callable and, if it remains outstanding, will yield a dividend that increases by 50% every six months thereafter. No dividends were in arrears at June 30, 2012 or December 31, 2011. There was no change in the carrying value of noncontrolling interests during the period ended June 30, 2012 or the year ended December 31, 2011.

7. Income Taxes

The effective tax rate for the three months ended June 30, 2012 and 2011 was 33.4% and 33.3%, respectively. The effective tax rate for the six months ended June 30, 2012 and 2011 was 21.3% and 32.2%, respectively. The effective tax rate for the six months ended June 30, 2012 includes a $17 million tax benefit from the sale of non-U.S. leveraged lease assets and tax benefits of $22 million arising from the conclusion of tax examinations. The effective tax rate for the six months ended June 30, 2011 includes a $9 million tax benefit arising from a favorable conclusion of a foreign tax examination.

As is the case with other large corporations, our tax returns are examined each year by tax authorities in the United States, other countries and local jurisdictions in which we have operations. Except for issues arising out of certain partnership investments, the IRS examination of tax years 2001-2004 is closed to audit and the examination of years 2005-2008 is expected to be closed to audit by the end of 2012. Other significant tax filings subject to examination include various post-2000 U.S. state and local, post 2007 Canadian and German, and post-2008 French and U.K. tax filings. We have other less significant tax filings currently under examination or subject to examination.

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. We believe we have established tax reserves that are appropriate given the possibility of tax adjustments. However, determining the appropriate level of tax reserves requires judgment regarding the uncertain application of tax law and the possibility of tax adjustments. Future changes in tax reserve requirements could have a material impact, positive or negative, on our results of operations, financial position and cash flows.

PITNEY BOWES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; table amounts in thousands of dollars, unless otherwise noted)

8. Stockholders’ Equity

Changes in stockholders’ equity for the six months ended June 30, 2012 and 2011 were as follows:



	Preferred stock		Preference stock			Common Stock		Additional Paid-in Capital			Retained earnings			Accumulated other comprehensive loss			Treasury stock			Total equity
Balances at December 31, 2011	$	4	$	659		$	323,338	$	240,584		$	4,600,217		$	(661,645	)	$	(4,542,143	)	$	(38,986	)
Net income	—		—			—		—			258,293			—			—			258,293
Other comprehensive income	—		—			—		—			—			3,987			—			3,987
Cash dividends
Common ($0.75 per share)	—		—			—		—			(149,999		)	—			—			(149,999		)
Preference	—		—			—		—			(26		)	—			—			(26		)
Issuances of common stock	—		—			—		(22,176		)	—			—			21,321			(855		)
Conversions to common stock	—		(6		)	—		(124		)	—			—			130			—
Stock-based compensation expense	—		—			—		8,852			—			—			—			8,852
Balance at June 30, 2012	$	4	$	653		$	323,338	$	227,136		$	4,708,485		$	(657,658	)	$	(4,520,692	)	$	81,266



	Preferred stock		Preference stock			Common Stock		Additional Paid-in Capital			Retained earnings			Accumulated other comprehensive loss			Treasury stock			Total equity
Balances at December 31, 2010	$	4	$	752		$	323,338	$	250,928		$	4,282,316		$	(473,806	)	$	(4,480,113	)	$	(96,581	)
Net income	—		—			—		—			187,239			—			—			187,239
Other comprehensive income	—		—			—		—			—			94,644			—			94,644
Cash dividends
Common ($0.74 per share)	—		—			—		—			(150,834		)	—			—			(150,834		)
Preference	—		—			—		—			(29		)	—			—			(29		)
Issuances of common stock	—		—			—		(23,836		)	—			—			29,570			5,734
Conversions to common stock	—		(11		)	—		(244		)	—			—			255			—
Stock-based compensation expense	—		—			—		8,656			—			—			—			8,656
Repurchase of common stock	—		—			—					—			—			(49,998		)	(49,998		)
Balance at June 30, 2011	$	4	$	741		$	323,338	$	235,504		$	4,318,692		$	(379,162	)	$	(4,500,286	)	$	(1,169	)

The components of accumulated other comprehensive loss at June 30, 2012 and 2011 were as follows:



	January 1, 2012			Other comprehensive income			June 30, 2012			January 1, 2011			Other comprehensive income		June 30, 2011
Foreign currency translation adjustments	$	83,952		$	(19,908	)	$	64,044		$	137,521		$	75,981	$	213,502
Net unrealized (loss) gain on derivatives	(8,438		)	553			(7,885		)	(10,445		)	387		(10,058		)
Net unrealized gain on investment securities	4,387			378			4,765			1,439			1,111		2,550
Net unamortized (loss) gain on pension and postretirement plans	(741,546		)	22,964			(718,582		)	(602,321		)	17,165		(585,156		)
Accumulated other comprehensive loss	$	(661,645	)	$	3,987		$	(657,658	)	$	(473,806	)	$	94,644	$	(379,162	)

9. Fair Value Measurements and Derivative Instruments

We measure certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. An entity is required to classify certain assets and liabilities measured at fair value based on the following fair value hierarchy that prioritizes the inputs used to measure fair value:

Level 1 – Unadjusted quoted prices in active markets for identical assets and liabilities.

Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity, may be derived from internally developed methodologies based on management’s best estimate of fair value and that are significant to the fair value of the asset or liability.

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 at June 30, 2012 and December 31, 2011. 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.



	June 30, 2012
	Level 1		Level 2			Level 3		Total
Assets:
Investment securities
Money market funds / commercial paper	$	244,403	$	25,345		$	—	$	269,748
Equity securities	—		23,605			—		23,605
Commingled fixed income securities	—		28,660			—		28,660
Debt securities - U.S. and foreign governments, agencies and municipalities	115,387		20,890			—		136,277
Debt securities - corporate	—		34,834			—		34,834
Mortgage-backed / asset-backed securities	—		139,808			—		139,808
Derivatives
Interest rate swaps	—		11,036			—		11,036
Foreign exchange contracts	—		5,810			—		5,810
Total assets	$	359,790	$	289,988		$	—	$	649,778
Liabilities:
Derivatives
Foreign exchange contracts	$	—	$	(4,950	)	$	—	$	(4,950	)
Total liabilities	$	—	$	(4,950	)	$	—	$	(4,950	)

PITNEY BOWES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; table amounts in thousands of dollars, unless otherwise noted)



	December 31, 2011
	Level 1		Level 2			Level 3		Total
Assets:
Investment securities
Money market funds / commercial paper	$	239,157	$	300,702		$	—	$	539,859
Equity securities	—		22,097			—		22,097
Commingled fixed income securities	—		27,747			—		27,747
Debt securities - U.S. and foreign governments, agencies and municipalities	93,175		19,042			—		112,217
Debt securities - corporate	—		31,467			—		31,467
Mortgage-backed / asset-backed securities	—		134,262			—		134,262
Derivatives
Interest rate swaps	—		15,465			—		15,465
Foreign exchange contracts	—		4,230			—		4,230
Total assets	$	332,332	$	555,012		$	—	$	887,344
Liabilities:
Derivatives
Foreign exchange contracts	$	—	$	(1,439	)	$	—	$	(1,439	)
Total liabilities	$	—	$	(1,439	)	$	—	$	(1,439	)

Investment Securities

The valuation of investment securities is based on the market approach using 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 / Commercial Paper: Money market funds typically invest in government securities, certificates of deposit, commercial paper and other highly liquid and low-risk securities. Money market funds are principally used for overnight deposits and are classified as Level 1 when unadjusted quoted prices in active markets are available and as Level 2 when they are not actively traded on an exchange. Direct investments in commercial paper are not listed on an exchange in an active market and are classified as Level 2.


•	Equity Securities: Equity securities are comprised of mutual funds investing in U.S. and foreign common stock. These mutual funds are classified as Level 2 as they are not separately listed on an exchange.

•

Commingled Fixed Income Securities: Mutual funds that invest in a variety of fixed income securities including securities of the U.S. government and its agencies, corporate debt, mortgage-backed securities and asset-backed securities. The value of the funds is based on the market value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding, as reported by the fund manager. These commingled funds are not listed on an exchange in an active market and are classified as Level 2.

•

Debt Securities – U.S. and Foreign Governments, Agencies and Municipalities: Debt securities are classified as Level 1 where active, high volume trades for identical securities exist. Valuation adjustments are not applied to these securities. Debt securities valued using quoted market prices for similar securities or benchmarking model derived prices to quoted market prices and trade data for identical or comparable securities are classified as Level 2.


•	Debt Securities – Corporate: Corporate debt securities are valued 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 as Level 2.


•	Mortgage-Backed Securities (MBS) / Asset-Backed Securities (ABS): These securities are valued based on external pricing indices. When external index pricing is not observable, MBS and ABS are valued based on external price/spread data. These securities are classified as Level 2.

The carrying value of our investment securities at June 30, 2012 and December 31, 2011 was $625 million and $861 million, respectively.

Investment securities include investments held by The Pitney Bowes Bank, a wholly-owned subsidiary and a Utah-chartered

PITNEY BOWES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; table amounts in thousands of dollars, unless otherwise noted)

Industrial Loan Company. The bank’s investments at June 30, 2012 and December 31, 2011 were $343 million and $282 million, respectively. These investments are reported on the Condensed Consolidated Balance Sheets as cash and cash equivalents, short-term investments and other assets depending on the type of investment and maturity.

We have not experienced any write-offs in our investment portfolio. The majority of our MBS are either guaranteed or supported by the U.S. government. Market events have not caused our money market funds to experience declines in their net asset value below $1.00 per share or to incur imposed limits on redemptions. We have no investments in inactive markets that 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. We limit 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. We record our derivative instruments at fair value, and the accounting for changes in the fair value of the derivatives depends on the intended use of the derivative, the resulting designation, and the effectiveness of the instrument in offsetting the risk exposure it is designed to hedge.

As required by the fair value measurements guidance, we have incorporated counterparty credit risk and our credit risk into the fair value measurement of our derivative assets and liabilities, respectively. We derive credit risk from observable data related to credit default swaps. We have not seen a material change in the creditworthiness of those banks acting as derivative counterparties.

The valuation of our interest rate swaps is based on the income approach using a model with inputs that are observable or that can be derived from or corroborated by observable market data. The valuation of our foreign exchange derivatives is based on the market approach using observable market inputs, such as forward rates.

The fair value of our derivative instruments at June 30, 2012 and December 31, 2011 was as follows:



Designation of Derivatives	Balance Sheet Location	June 30, 2012			December 31, 2011
Derivatives designated as hedging instruments	Other current assets and prepayments:
	Foreign exchange contracts	$	597		$	780
	Other assets:
	Interest rate swaps	11,036			15,465
	Accounts payable and accrued liabilities:
	Foreign exchange contracts	(5		)	(79		)
Derivatives not designated as hedging instruments	Other current assets and prepayments:
	Foreign exchange contracts	5,213			3,450
	Accounts payable and accrued liabilities:
	Foreign exchange contracts	(4,945		)	(1,360		)

	Total Derivative Assets	$	16,846		$	19,695
	Total Derivative Liabilities	(4,950		)	(1,439		)
	Total Net Derivative Assets	$	11,896		$	18,256

PITNEY BOWES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; table amounts in thousands of dollars, unless otherwise noted)

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 earnings. The following represents the results of fair value hedging relationships for the three and six months ended June 30, 2012 and 2011:



		Three Months Ended June 30,
		Derivative Gain Recognized in Earnings				Hedged Item Expense Recognized in Earnings
Derivative Instrument	Location of Gain (Loss)	2012		2011		2012			2011
Interest rate swaps	Interest expense	$	3,446	$	3,133	$	(10,059	)	$	(8,281	)

		Six Months Ended June 30,
		Derivative Gain Recognized in Earnings				Hedged Item Expense Recognized in Earnings
Derivative Instrument	Location of Gain (Loss)	2012		2011		2012			2011
Interest rate swaps	Interest expense	$	6,773	$	4,866	$	(20,168	)	$	(12,906	)

Foreign Exchange Contracts

We enter into foreign currency exchange contracts to mitigate the currency risk associated with the anticipated purchase of inventory between affiliates and from third parties. These contracts are designated as cash flow hedges. The effective portion of the gain or loss on cash flow hedges is included in accumulated other comprehensive income (AOCI) in the period that the change in fair value occurs and is reclassified to earnings in the period that the hedged item is recorded in earnings. At June 30, 2012 and December 31, 2011, we had outstanding contracts associated with these anticipated transactions with a notional amount of $21 million and $19 million, respectively. These contracts had a net asset value of approximately $1 million at June 30, 2012 and December 31, 2011.

The amounts included in AOCI at June 30, 2012 will be recognized in earnings within the next 12 months. No amount of ineffectiveness was recorded in earnings for these designated cash flow hedges.

The following represents the results of cash flow hedging relationships for the three and six months ended June 30, 2012 and 2011:



	Three Months Ended June 30,
	Derivative Gain (Loss) Recognized in AOCI (Effective Portion)					Location of Gain (Loss) (Effective Portion)	Gain (Loss) Reclassified from AOCI to Earnings (Effective Portion)
Derivative Instrument	2012			2011		Location of Gain (Loss) (Effective Portion)	2012			2011
Foreign exchange contracts	$	(150	)	$	618	Revenue	$	473		$	(122	)
						Cost of sales	(7		)	(292		)
							$	466		$