Edgar Filing: PITNEY BOWES INC /DE/

PBI 2012.09.30 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 September 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 November 1, 2012.



Class		Outstanding
Common Stock, $1 par value per share		200,751,672 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 Nine Months Ended September 30, 2012 and 2011	3

	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011	4

	Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011	5

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3:	Quantitative and Qualitative Disclosures about Market Risk	35

Item 4:	Controls and Procedures	35

Part II - Other Information:

Item 1:	Legal Proceedings	36

Item 1A:	Risk Factors	36

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 6:	Exhibits	36

Signatures		37

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						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Revenue:
Equipment sales	$	212,103		$	221,475		$	656,517		$	706,027
Supplies	66,902			74,271			213,789			235,728
Software	93,476			113,224			302,377			318,305
Rentals	142,288			154,210			428,174			467,064
Financing	123,999			136,000			373,695			412,958
Support services	171,652			175,286			516,424			530,707
Business services	405,257			425,258			1,226,175			1,266,478
Total revenue	1,215,677			1,299,724			3,717,151			3,937,267
Costs and expenses:
Cost of equipment sales	105,556			97,559			309,190			316,697
Cost of supplies	20,694			22,611			65,428			74,365
Cost of software	22,784			23,431			68,281			73,541
Cost of rentals	25,182			35,819			87,257			107,834
Financing interest expense	19,604			21,430			61,385			66,915
Cost of support services	107,095			114,074			334,304			344,767
Cost of business services	315,830			326,415			948,359			985,232
Selling, general and administrative	400,862			427,412			1,203,653			1,286,739
Research and development	36,669			35,573			104,518			107,772
Restructuring charges and asset impairments	9,986			32,956			11,060			63,974
Goodwill impairment	18,315			45,650			18,315			45,650
Other interest expense	27,541			28,932			87,261			86,006
Interest income	(2,057		)	(1,265		)	(5,793		)	(4,702		)
Other expense (income), net	—			(10,718		)	1,138			(10,718		)
Total costs and expenses	1,108,061			1,199,879			3,294,356			3,544,072
Income from continuing operations before income taxes	107,616			99,845			422,795			393,195
Provision (benefit) for income taxes	26,489			(17,087		)	93,519			77,319
Income from continuing operations	81,127			116,932			329,276			315,876
Income from discontinued operations, net of tax	—			60,428			19,332			57,911
Net income before attribution of noncontrolling interests	81,127			177,360			348,608			373,787
Less: Preferred stock dividends of subsidiaries attributable to noncontrolling interests	4,594			4,593			13,782			13,781
Net income - Pitney Bowes Inc.	$	76,533		$	172,767		$	334,826		$	360,006
Amounts attributable to common stockholders:
Net income from continuing operations	$	76,533		$	112,339		$	315,494		$	302,095
Income from discontinued operations, net of tax	—			60,428			19,332			57,911
Net income - Pitney Bowes Inc.	$	76,533		$	172,767		$	334,826		$	360,006
Basic earnings per share attributable to common stockholders (1):
Continuing operations	$	0.38		$	0.56		$	1.58		$	1.49
Discontinued operations	—			0.30			0.10			0.29
Net income - Pitney Bowes Inc.	$	0.38		$	0.86		$	1.67		$	1.78
Diluted earnings per share attributable to common stockholders (1):
Continuing operations	$	0.38		$	0.56		$	1.57		$	1.48
Discontinued operations	—			0.30			0.10			0.28
Net income - Pitney Bowes Inc.	$	0.38		$	0.85		$	1.66		$	1.77


(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)



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2012		2011			2012			2011

Net income - Pitney Bowes Inc.	$	76,533	$	172,767		$	334,826		$	360,006
Other comprehensive income, net of tax:
Foreign currency translations	19,025		(111,317		)	(883		)	(35,336		)
Net unrealized gain on cash flow hedges, net of tax of $21, $773, $374 and $1,018, respectively	25		1,209			578			1,596
Net unrealized gain on investment securities, net of tax of $377, $2,012, $618 and $2,722, respectively	589		3,147			967			4,258
Amortization of pension and postretirement costs, net of tax of $6,755, $4,825, $20,221 and $14,658, respectively	12,151		8,692			35,115			25,857
Other comprehensive income (loss)	31,790		(98,269		)	35,777			(3,625		)
Comprehensive income - Pitney Bowes Inc.	108,323		74,498			370,603			356,381
Preferred stock dividends of subsidiaries attributable to noncontrolling interests	4,594		4,593			13,782			13,781
Total comprehensive income	$	112,917	$	79,091		$	384,385		$	370,162

See Notes to Condensed Consolidated Financial Statements

PITNEY BOWES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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



	September 30, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	424,789		$	856,238
Short-term investments	36,238			12,971
Accounts receivable, gross	695,575			755,485
Allowance for doubtful accounts receivables	(28,355		)	(31,855		)
Accounts receivable, net	667,220			723,630
Finance receivables	1,218,080			1,296,673
Allowance for credit losses	(26,368		)	(45,583		)
Finance receivables, net	1,191,712			1,251,090
Inventories	187,082			178,599
Current income taxes	22,044			102,556
Other current assets and prepayments	144,987			134,774
Total current assets	2,674,072			3,259,858
Property, plant and equipment, net	382,850			404,146
Rental property and equipment, net	249,310			258,711
Finance receivables	1,047,411			1,123,638
Allowance for credit losses	(18,235		)	(17,847		)
Finance receivables, net	1,029,176			1,105,791
Investment in leveraged leases	34,373			138,271
Goodwill	2,127,114			2,147,088
Intangible assets, net	175,995			212,603
Non-current income taxes	45,615			89,992
Other assets	555,661			530,644
Total assets	$	7,274,166		$	8,147,104
LIABILITIES, NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities	$	1,643,395		$	1,840,465
Current income taxes	220,236			242,972
Notes payable and current portion of long-term obligations	375,000			550,000
Advance billings	449,051			458,425
Total current liabilities	2,687,682			3,091,862
Deferred taxes on income	25,017			175,944
Tax uncertainties and other income tax liabilities	193,867			194,840
Long-term debt	3,305,504			3,683,909
Other non-current liabilities	641,093			743,165
Total liabilities	6,853,163			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	222,620			240,584
Retained earnings	4,709,761			4,600,217
Accumulated other comprehensive loss	(625,868		)	(661,645		)
Treasury stock, at cost (122,592,062 and 123,586,842 shares, respectively)	(4,505,875		)	(4,542,143		)
Total Pitney Bowes Inc. stockholders’ equity (deficit)	124,633			(38,986		)
Total liabilities, noncontrolling interests and stockholders’ equity (deficit)	$	7,274,166		$	8,147,104

See Notes to Condensed Consolidated Financial Statements

PITNEY BOWES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)



	Nine Months Ended September 30,
	2012			2011
Cash flows from operating activities:
Net income before attribution of noncontrolling interests	$	348,608		$	373,787
Restructuring payments	(60,746		)	(78,379		)
Special pension plan contributions	(95,000		)	(123,000		)
Tax payments related to sale of leveraged lease assets	(99,249		)	—
Adjustments to reconcile net income to net cash provided by operating activities:
Goodwill impairment	18,315			45,650
Gain on sale of leveraged lease assets, net of tax	(12,886		)	(26,689		)
Depreciation and amortization	191,507			205,001
Stock-based compensation	13,505			13,393
Restructuring charges and asset impairments	11,060			63,974
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable	58,135			113,422
(Increase) decrease in finance receivables	144,442			169,109
(Increase) decrease in inventories	(7,620		)	(12,731		)
(Increase) decrease in other current assets and prepayments	(18,018		)	(3,707		)
Increase (decrease) in accounts payable and accrued liabilities	(124,559		)	(102,092		)
Increase (decrease) in current and non-current income taxes	38,761			133,893
Increase (decrease) in advance billings	(1,551		)	(22,392		)
Increase (decrease) in other operating capital, net	34,929			1,217
Net cash provided by operating activities	439,633			750,456
Cash flows from investing activities:
Short-term and other investments	(58,255		)	(100,268		)
Capital expenditures	(127,816		)	(123,029		)
Proceeds from sale of leveraged lease assets	105,506			101,784
Net investment in external financing	(134		)	(4,458		)
Reserve account deposits	(15,373		)	(14,528		)
Net cash used in investing activities	(96,072		)	(140,499		)
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	6,989			10,436
Stock repurchases	—			(99,997		)
Dividends paid to stockholders	(225,282		)	(225,676		)
Dividends paid to noncontrolling interests	(9,188		)	(9,188		)
Net cash used in financing activities	(777,481		)	(374,425		)
Effect of exchange rate changes on cash and cash equivalents	2,471			(4,701		)
(Decrease) increase in cash and cash equivalents	(431,449		)	230,831
Cash and cash equivalents at beginning of period	856,238			484,363
Cash and cash equivalents at end of period	$	424,789		$	715,194
Cash interest paid	$	170,119		$	177,682
Cash income tax payments (refund), net	$	145,090		$	(68,659	)

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 (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 September 30, 2012 and December 31, 2011 consisted of the following:



	September 30, 2012			December 31, 2011
Raw materials and work in process	$	64,333		$	63,216
Supplies and service parts	75,053			68,600
Finished products	74,653			71,958
Inventory at FIFO cost	214,039			203,774
Excess of FIFO cost over LIFO cost	(26,957		)	(25,175		)
Total inventory, net	$	187,082		$	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 lease receivables 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 September 30, 2012 and December 31, 2011 consisted of the following:



	September 30, 2012
	North America			International			Total
Sales-type lease receivables
Gross finance receivables	$	1,603,444		$	456,370		$	2,059,814
Unguaranteed residual values	155,999			20,733			176,732
Unearned income	(317,457		)	(105,525		)	(422,982		)
Allowance for credit losses	(17,138		)	(9,820		)	(26,958		)
Net investment in sales-type lease receivables	1,424,848			361,758			1,786,606
Loan receivables
Loan receivables	404,099			47,848			451,947
Allowance for credit losses	(15,477		)	(2,188		)	(17,665		)
Net investment in loan receivables	388,622			45,660			434,282
Net investment in finance receivables	$	1,813,470		$	407,418		$	2,220,888

	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 September 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 the 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 September 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 nine months ended September 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	1,171			1,489			4,069			703			7,432
Accounts written off	(12,694		)	(3,708		)	(8,864		)	(973		)	(26,239		)
Balance at September 30, 2012	$	17,138		$	9,820		$	15,477		$	2,188		$	44,623

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



	Sales-type Lease Receivables				Loan Receivables
	North America		International		North America		International		Total
September 30, 2012
< 31 days	$	1,520,139	$	429,389	$	382,897	$	42,549	$	2,374,974
> 30 days and < 61 days	30,160		8,996		11,268		3,451		53,875
> 60 days and < 91 days	29,187		5,444		4,302		1,211		40,144
> 90 days and < 121 days	6,441		3,118		2,280		347		12,186
> 120 days	17,517		9,423		3,352		290		30,582
Total	$	1,603,444	$	456,370	$	404,099	$	47,848	$	2,511,761
Past due amounts > 90 days
Still accruing interest	$	6,441	$	3,118	$	—	$	—	$	9,559
Not accruing interest	17,517		9,423		5,632		637		33,209
Total	$	23,958	$	12,541	$	5,632	$	637	$	42,768

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 America 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 America portfolio at September 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)



	September 30, 2012		December 31, 2011
Sales-type lease receivables
Risk Level
Low	$	1,070,643	$	1,096,676
Medium	416,138		473,394
High	50,222		58,177
Not Scored	66,441		99,406
Total	$	1,603,444	$	1,727,653
Loan receivables
Risk Level
Low	$	258,849	$	269,547
Medium	126,984		115,490
High	15,114		21,081
Not Scored	3,152		30,513
Total	$	404,099	$	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 nine months ended September 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:



	September 30, 2012			December 31, 2011
Rental receivables	$	89,193		$	810,306
Unguaranteed residual values	14,312			13,784
Principal and interest on non-recourse loans	(60,762		)	(606,708		)
Unearned income	(8,370		)	(79,111		)
Investment in leveraged leases	34,373			138,271
Less: deferred taxes related to leveraged leases	(20,199		)	(101,255		)
Net investment in leveraged leases	$	14,174		$	37,016

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



	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012		2011
Pretax leveraged lease income	$	467	$	1,457		$	1,692	$	4,551
Income tax effect	8		(641		)	33		(804		)
Income from leveraged leases	$	475	$	816		$	1,725	$	3,747

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. In the third quarter 2011, we also 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 $27 million was recognized. The effects of these sales are not included in the table above.

PITNEY BOWES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

4. Intangible Assets and Goodwill

Intangible assets

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



	September 30, 2012							December 31, 2011
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	406,746	$	(260,737	)	$	146,009	$	409,489	$	(237,536	)	$	171,953
Supplier relationships	29,000		(21,387		)	7,613		29,000		(19,213		)	9,787
Software & technology	168,912		(149,360		)	19,552		170,286		(143,456		)	26,830
Trademarks & trade names	34,844		(32,101		)	2,743		33,908		(30,076		)	3,832
Non-compete agreements	7,487		(7,409		)	78		7,564		(7,363		)	201
Total intangible assets	$	646,989	$	(470,994	)	$	175,995	$	650,247	$	(437,644	)	$	212,603

Amortization expense for intangible assets was $10 million and $14 million for the three months ended September 30, 2012 and 2011, respectively, and $35 million and $43 million for the nine months ended September 30, 2012 and 2011, respectively. We also recorded impairment charges of $3 million to write-down the carrying values of certain intangible assets associated with our International Mail Services business to their respective fair values. See Goodwill section below for further details of the impairment charge and method of determining fair value.

The future amortization expense for intangible assets as of September 30, 2012 was as follows:



Remaining for year ended December 31, 2012	$	10,222
Year ended December 31, 2013	39,429
Year ended December 31, 2014	36,774
Year ended December 31, 2015	32,812
Year ended December 31, 2016	24,182
Thereafter	32,576
Total	$	175,995

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

We perform our annual goodwill impairment test during the fourth quarter of each year, or sooner, if circumstances indicate an impairment may exist. Based on the recent performance of our International Mail Services (IMS) business and to enable us to better focus on higher growth cross-border ecommerce parcel opportunities, in the third quarter of 2012, we began exploring strategic alternatives for the IMS business. In October 2012, we made a strategic decision to exit the IMS business related to the international delivery of mail and catalogs. We are engaged in negotiations with potential buyers and have received preliminary indications of interest and written offers. As a result of these factors, we concluded that it was more likely than not that the fair value of the IMS reporting unit was below its book value and an interim impairment test was performed. The fair value of the reporting unit was determined in combination of the written offers received as well as applying an income approach with revised cash flow projections. The inputs used to determine the fair value of the IMS business are classified as Level 3 in the fair value hierarchy. Based on the results of our impairment test, a non-cash goodwill impairment charge of $18 million was recorded in the third quarter of 2012 to write-down the carrying value of goodwill associated with the IMS business to its implied fair value.

PITNEY BOWES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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



	Gross value before accumulated impairment		Accumulated impairment			December 31, 2011		Impairment			Other (1)			September 30, 2012
North America Mailing	$	352,897	$	—		$	352,897	$	—		$	(178	)	$	352,719
International Mailing	189,067		—			189,067		—			(8,105		)	180,962
Small & Medium Business Solutions	541,964		—			541,964		—			(8,283		)	533,681
Production Mail	127,589		—			127,589		—			2,603			130,192
Software	667,124		—			667,124		—			3,479			670,603
Management Services	487,223		(84,500		)	402,723		—			542			403,265
Mail Services	259,105		(45,650		)	213,455		(18,315		)	—			195,140
Marketing Services	194,233		—			194,233		—			—			194,233
Enterprise Business Solutions	1,735,274		(130,150		)	1,605,124		(18,315		)	6,624			1,593,433
Total	$	2,277,238	$	(130,150	)	$	2,147,088	$	(18,315	)	$	(1,659	)	$	2,127,114


(1)	Primarily foreign currency translation adjustments.

5. Debt

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.

In April 2012, we entered into forward starting swap agreements with an aggregate notional value of $150 million to hedge the interest rate risk associated with the forecasted issuance of long-term debt. The anticipated debt issuance did not occur prior to the expiration of these swap agreements and a loss of $6 million was recognized in the second quarter of 2012.

In June 2012, we redeemed our $400 million, 4.625% notes (the 2012 Notes) that were scheduled to mature in October 2012. As a result of the early redemption of the 2012 Notes, we recorded a net loss of $2 million on the extinguishment of debt.

At September 30, 2012, there were no outstanding commercial paper borrowings. During the quarter, commercial paper borrowings averaged $418 million at a weighted-average interest rate of 0.48% and the maximum amount outstanding at any time was $709 million.

In October 2012, we borrowed $220 million under term loan agreements. The loans bear interest at the applicable London Interbank Offered Rate (LIBOR) plus 2.25% or Prime Rate plus 1.25%, at our option. Interest is payable quarterly and the loans mature in 2015 and 2016. The proceeds from the loans will be used for general corporate purposes, including the repayment of commercial paper and 2013 debt maturities.

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 September 30, 2012 or December 31, 2011. There was no change in the carrying value of noncontrolling interests during the period ended September 30, 2012 or the year ended December 31, 2011.

PITNEY BOWES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

7. Income Taxes

The effective tax rate for the three months ended September 30, 2012 and 2011 was 24.6% and (17.1)%, respectively. The effective tax rate for the three months ended September 30, 2012 includes tax benefits of $36 million from the resolution of tax examinations and tax accruals of $28 million for the repatriation of non-U.S. earnings. The effective tax rate for the three months ended September 30, 2011 includes tax benefits of $34 million from the sale of non-U.S. leveraged lease assets and $18 million from the resolution of tax examinations.

The effective tax rate for the nine months ended September 30, 2012 and 2011 was 22.1% and 19.7%, respectively. The effective tax rate for the nine months ended September 30, 2012 include tax benefits of $17 million from the sale of non-U.S. leveraged lease assets (net of $15 million of tax accrued to repatriate these earnings), $58 million from the resolution of tax examinations, and tax accruals of $28 million for the repatriation of additional non-U.S. earnings. The effective tax rate for the nine months ended September 30, 2011 includes the tax benefit of $34 million from the sale of non-U.S. leveraged lease assets and $27 million from the resolution of tax examinations.

With the exception of the impact of unusual sales of leveraged lease assets and the one-time restructuring of our Canadian operations that led us to accrue taxes for the repatriation of certain earnings, it is our intention to permanently reinvest substantially all of our foreign cash in our foreign operations.

On August 27, 2012, the Third Circuit Court of Appeals overturned a prior Tax Court decision and ruled in favor of the IRS and adverse to the Historic Boardwalk Hall LLC, a partnership in which we had made an investment in 2000. The judgment is not yet final. Based on our partnership contractual relationship, we do not expect this matter to have a material effect on our financial position or results of operations.

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 nine months ended September 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

Balance at January 1, 2012	$	4	$	659		$	323,338	$	240,584		$	4,600,217		$	(661,645	)	$	(4,542,143	)	$	(38,986	)
Net income	—		—			—		—			334,826			—			—			334,826
Other comprehensive income	—		—			—		—			—			35,777			—			35,777
Cash dividends
Common ($1.125 per share)	—		—			—		—			(225,244		)	—			—			(225,244		)
Preference	—		—			—		—			(38		)	—			—			(38		)
Issuances of common stock	—		—			—		(31,306		)	—			—			36,138			4,832
Conversions to common stock	—		(6		)	—		(124		)	—			—			130			—
Stock-based compensation expense	—		—			—		13,466			—			—			—			13,466
Balance at September 30, 2012	$	4	$	653		$	323,338	$	222,620		$	4,709,761		$	(625,868	)	$	(4,505,875	)	$	124,633



	Preferred stock		Preference stock			Common Stock		Additional Paid-in Capital			Retained earnings			Accumulated other comprehensive loss			Treasury stock			Total equity
Balance at January 1, 2011	$	4	$	752		$	323,338	$	250,928		$	4,282,316		$	(473,806	)	$	(4,480,113	)	$	(96,581	)
Net income	—		—			—		—			360,006			—			—			360,006
Other comprehensive income	—		—			—		—			—			(3,625		)	—			(3,625		)
Cash dividends
Common ($1.11 per share)	—		—			—		—			(225,632		)	—			—			(225,632		)
Preference	—		—			—		—			(44		)	—			—			(44		)
Issuances of common stock	—		—			—		(25,387		)	—			—			32,584			7,197
Conversions to common stock	—		(28		)	—		(621		)	—			—			649			—
Stock-based compensation expense	—		—			—		13,393			—			—			—			13,393
Repurchase of common stock	—		—			—					—			—			(99,997		)	(99,997		)
Balance at September 30, 2011	$	4	$	724		$	323,338	$	238,313		$	4,416,646		$	(477,431	)	$	(4,546,877	)	$	(45,283	)

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



	January 1, 2012			Other comprehensive income			September 30, 2012			January 1, 2011			Other comprehensive income			September 30, 2011
Foreign currency translation adjustments	$	83,952		$	(883	)	$	83,069		$	137,521		$	(35,336	)	$	102,185
Net unrealized (loss) gain on derivatives	(8,438		)	578			(7,860		)	(10,445		)	1,596			(8,849		)
Net unrealized gain on investment securities	4,387			967			5,354			1,439			4,258			5,697
Net unamortized (loss) gain on pension and postretirement plans	(741,546		)	35,115			(706,431		)	(602,321		)	25,857			(576,464		)
Accumulated other comprehensive loss	$	(661,645	)	$	35,777		$	(625,868	)	$	(473,806	)	$	(3,625	)	$	(477,431	)

PITNEY BOWES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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 September 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.



	September 30, 2012
	Level 1		Level 2			Level 3		Total
Assets:
Investment securities
Money market funds / commercial paper	$	198,431	$	20,717		$	—	$	219,148
Equity securities	—		24,891			—		24,891
Commingled fixed income securities	—		29,286			—		29,286
Debt securities - U.S. and foreign governments, agencies and municipalities	119,858		21,322			—		141,180
Debt securities - corporate	—		40,134			—		40,134
Mortgage-backed / asset-backed securities	—		143,631			—		143,631
Derivatives
Interest rate swaps	—		11,643			—		11,643
Foreign exchange contracts	—		1,187			—		1,187
Total assets	$	318,289	$	292,811		$	—	$	611,100
Liabilities:
Derivatives
Foreign exchange contracts	$	—	$	(5,434	)	$	—	$	(5,434	)
Total liabilities	$	—	$	(5,434	)	$	—	$	(5,434	)

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 September 30, 2012 and December 31, 2011 was $590 million and $861 million, respectively.

PITNEY BOWES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Investment securities include investments held by The Pitney Bowes Bank, a wholly owned subsidiary and a Utah-chartered Industrial Loan Company. The bank’s investments at September 30, 2012 and December 31, 2011 were $348 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 September 30, 2012 and December 31, 2011 was as follows:



Designation of Derivatives	Balance Sheet Location	September 30, 2012			December 31, 2011
Derivatives designated as hedging instruments	Other current assets and prepayments:
	Foreign exchange contracts	$	369		$	780
	Other assets:
	Interest rate swaps	11,643			15,465
	Accounts payable and accrued liabilities:
	Foreign exchange contracts	(240		)	(79		)
Derivatives not designated as hedging instruments	Other current assets and prepayments:
	Foreign exchange contracts	818			3,450
	Accounts payable and accrued liabilities:
	Foreign exchange contracts	(5,194		)	(1,360		)

	Total derivative assets	$	12,830		$	19,695
	Total derivative liabilities	(5,434		)	(1,439		)
	Total net derivative assets	$	7,396		$	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 nine months ended September 30, 2012 and 2011:

Three Months Ended September 30,

Derivative Gain

Recognized in Earnings

Hedged Item Expense

Recognized in Earnings

Derivative Instrument

Location of Gain (Loss)

2012