PBI 2013.06.30 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, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number: 1-3579
PITNEY BOWES INC.
(Exact name of registrant as specified in its charter)

Delaware
 
06-0495050
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1 Elmcroft Road, Stamford, Connecticut
 
06926-0700
(Address of principal executive offices)
 
(Zip Code)
(203) 356-5000
(Registrant’s telephone number, including area code)
 
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
 
 
As of July 23, 2013, 201,812,523 shares of common stock, par value $1 per share, of the registrant were outstanding.
 
 
 




PITNEY BOWES INC.
INDEX

 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2




PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
PITNEY BOWES INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited; in thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Revenue:
 

 
 

 
 

 
 

Equipment sales
$
243,644

 
$
224,235

 
$
458,643

 
$
444,414

Supplies
72,337

 
70,522

 
146,624

 
146,887

Software
100,482

 
104,551

 
187,494

 
208,901

Rentals
136,775

 
145,497

 
273,154

 
285,886

Financing
115,929

 
122,948

 
232,691

 
249,696

Support services
163,178

 
171,254

 
328,664

 
344,772

Business services
325,862

 
327,350

 
649,207

 
655,447

Total revenue
1,158,207

 
1,166,357

 
2,276,477

 
2,336,003

Costs and expenses:
 

 
 

 
 

 
 

Cost of equipment sales
128,426

 
106,718

 
237,763

 
203,634

Cost of supplies
22,692

 
20,863

 
45,954

 
44,734

Cost of software
21,435

 
24,404

 
42,141

 
45,497

Cost of rentals
26,424

 
31,851

 
54,179

 
62,076

Financing interest expense
19,798

 
20,642

 
39,673

 
41,781

Cost of support services
104,282

 
112,123

 
212,291

 
227,210

Cost of business services
248,715

 
242,010

 
495,611

 
485,952

Selling, general and administrative
376,559

 
380,656

 
748,014

 
779,852

Research and development
31,501

 
33,811

 
64,836

 
67,884

Restructuring charges and asset impairments
19,955

 
(585
)
 
19,955

 
(585
)
Goodwill impairment
97,787

 
—

 
97,787

 
—

Other interest expense
31,347

 
30,353

 
62,086

 
59,720

Interest income
(1,302
)
 
(2,003
)
 
(3,050
)
 
(3,736
)
Other expense, net
—

 
4,372

 
25,121

 
1,138

Total costs and expenses
1,127,619

 
1,005,215

 
2,142,361

 
2,015,157

Income from continuing operations before income taxes
30,588

 
161,142

 
134,116

 
320,846

Provision for income taxes
15,160

 
53,113

 
42,899

 
68,211

Income from continuing operations
15,428

 
108,029

 
91,217

 
252,635

(Loss) income from discontinued operations, net of tax
(20,067
)
 
(3,812
)
 
(23,756
)
 
14,846

Net (loss) income before attribution of noncontrolling interests
(4,639
)
 
104,217

 
67,461

 
267,481

Less: Preferred stock dividends attributable to noncontrolling interests
4,594

 
4,594

 
9,188

 
9,188

Net (loss) income - Pitney Bowes Inc.
$
(9,233
)
 
$
99,623

 
$
58,273

 
$
258,293

Amounts attributable to common stockholders:
 

 
 

 
 

 
 

Net income from continuing operations
$
10,834

 
$
103,435

 
$
82,029

 
$
243,447

(Loss) income from discontinued operations, net of tax
(20,067
)
 
(3,812
)
 
(23,756
)
 
14,846

Net (loss) income - Pitney Bowes Inc.
$
(9,233
)
 
$
99,623

 
$
58,273

 
$
258,293

Basic earnings per share attributable to common stockholders:
 

 
 

 
 

 
 

Continuing operations
$
0.05

 
$
0.52

 
$
0.41

 
$
1.22

Discontinued operations
(0.10
)
 
(0.02
)
 
(0.12
)
 
0.07

Net (loss) income - Pitney Bowes Inc.
$
(0.05
)
 
$
0.50

 
$
0.29

 
$
1.29

Diluted earnings per share attributable to common stockholders:
 

 
 

 
 

 
 

Continuing operations
$
0.05

 
$
0.51

 
$
0.41

 
$
1.21

Discontinued operations
(0.10
)
 
(0.02
)
 
(0.12
)
 
0.07

Net (loss) income - Pitney Bowes Inc.
$
(0.05
)
 
$
0.50

 
$
0.29

 
$
1.29

Dividends declared per share of common stock
$
0.1875

 
$
0.375

 
$
0.5625

 
$
0.750

See Notes to Condensed Consolidated Financial Statements

3

PITNEY BOWES INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited; in thousands)



 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Net (loss) income
$
(4,639
)
 
$
104,217

 
$
67,461

 
$
267,481

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Net unrealized gain on cash flow hedges, net of tax of $230, $321, $574 and $353, respectively
362

 
504

 
900

 
553

Net unrealized (loss) gain on investment securities, net of tax of $(3,017), $790, $(2,842) and $242, respectively
(4,719
)
 
1,235

 
(4,445
)
 
378

Amortization of pension and postretirement costs, net of tax of $4,926, $7,070, $11,266 and $13,967, respectively
9,391

 
10,976

 
20,993

 
22,964

Foreign currency translations
(17,554
)
 
(53,267
)
 
(59,758
)
 
(19,908
)
Other comprehensive (loss) income
(12,520
)
 
(40,552
)
 
(42,310
)
 
3,987

Comprehensive (loss) income
(17,159
)
 
63,665

 
25,151

 
271,468

Less: Preferred stock dividends attributable to noncontrolling interests
4,594

 
4,594

 
9,188

 
9,188

Total comprehensive (loss) income - Pitney Bowes Inc.
$
(21,753
)
 
$
59,071

 
$
15,963

 
$
262,280




































See Notes to Condensed Consolidated Financial Statements

4

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


 
June 30, 2013
 
December 31, 2012
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
608,568

 
$
913,276

Short-term investments
22,898

 
36,611

Accounts receivable (net of allowance of $15,528 and $20,219, respectively)
588,540

 
728,250

Finance receivables (net of allowance of $26,277 and $25,484, respectively)
1,132,518

 
1,188,292

Inventories
141,061

 
179,678

Current income taxes
30,578

 
51,836

Other current assets and prepayments
158,812

 
114,184

Assets held for sale
71,052

 
—

Total current assets
2,754,027

 
3,212,127

Property, plant and equipment, net
351,606

 
385,377

Rental property and equipment, net
230,759

 
241,192

Finance receivables (net of allowance of $9,824 and $14,610, respectively)
950,656

 
1,026,489

Investment in leveraged leases
33,606

 
34,546

Goodwill
2,012,752

 
2,136,138

Intangible assets, net
143,451

 
166,214

Non-current income taxes
93,318

 
94,434

Other assets
563,027

 
563,374

Total assets
$
7,133,202

 
$
7,859,891

LIABILITIES, NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY
 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
1,563,069

 
$
1,809,226

Current income taxes
208,063

 
240,681

Notes payable and current portion of long-term obligations
—

 
375,000

Advance billings
448,129

 
452,130

Liabilities related to assets held for sale
67,476

 
—

Total current liabilities
2,286,737

 
2,877,037

Deferred taxes on income
44,460

 
69,222

Tax uncertainties and other income tax liabilities
144,260

 
145,881

Long-term debt
3,654,032

 
3,642,375

Other non-current liabilities
685,002

 
718,375

Total liabilities
6,814,491

 
7,452,890

Noncontrolling interests (Preferred stockholders’ equity in subsidiaries)
296,370

 
296,370

Commitments and contingencies (See Note 14)


 


Stockholders’ equity:
 
 
 
Cumulative preferred stock, $50 par value, 4% convertible
4

 
4

Cumulative preference stock, no par value, $2.12 convertible
613

 
648

Common stock, $1 par value (480,000,000 shares authorized; 323,337,912 shares issued)
323,338

 
323,338

Additional paid-in capital
198,938

 
223,847

Retained earnings
4,689,969

 
4,744,802

Accumulated other comprehensive loss
(723,523
)
 
(681,213
)
Treasury stock, at cost (121,534,452 and 122,453,865 shares, respectively)
(4,466,998
)
 
(4,500,795
)
Total Pitney Bowes Inc. stockholders’ equity
22,341

 
110,631

Total liabilities, noncontrolling interests and stockholders’ equity
$
7,133,202

 
$
7,859,891




See Notes to Condensed Consolidated Financial Statements

5

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


 
Six Months Ended June 30,
 
2013
 
2012
Cash flows from operating activities:
 

 
 

Net income before attribution of noncontrolling interests
$
67,461

 
$
267,481

Restructuring payments
(27,255
)
 
(47,875
)
Special pension plan contributions
—

 
(95,000
)
Tax payments related to sale of leveraged lease assets
—

 
(84,904
)
Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Goodwill impairment
97,787

 
—

Estimated loss on disposal of business
31,751

 
—

Gain on sale of leveraged lease assets, net of tax
—

 
(12,886
)
Proceeds from settlement of derivative instruments
4,838

 
—

Depreciation and amortization
113,702

 
131,607

Stock-based compensation
7,241

 
8,852

Restructuring charges and asset impairments
19,955

 
1,074

Changes in operating assets and liabilities:
 

 
 

(Increase) decrease in accounts receivable
67,420

 
60,176

(Increase) decrease in finance receivables
96,928

 
113,034

(Increase) decrease in inventories
29,863

 
(9,428
)
(Increase) decrease in other current assets and prepayments
(4,810
)
 
(13,745
)
Increase (decrease) in accounts payable and accrued liabilities
(173,479
)
 
(100,897
)
Increase (decrease) in current and non-current income taxes
(89,478
)
 
86,555

Increase (decrease) in advance billings
6,051

 
17,178

Increase (decrease) in other operating capital, net
31,060

 
18,610

Net cash provided by operating activities
279,035

 
339,832

Cash flows from investing activities:
 

 
 

Short-term and other investments
14,633

 
(631
)
Capital expenditures
(73,441
)
 
(88,751
)
Proceeds from sale of leveraged lease assets
—

 
105,506

Net investment in external financing
(1,021
)
 
(3,464
)
Reserve account deposits
(26,189
)
 
2,334

Net cash (used in) provided by investing activities
(86,018
)
 
14,994

Cash flows from financing activities:
 

 
 

Proceeds from the issuance of long-term obligations, net of fees and discounts of $13,387
411,613

 
—

Principal payments of long-term obligations
(779,637
)
 
(550,000
)
Proceeds from the issuance of common stock under employee stock-based compensation plans
3,621

 
4,274

Dividends paid to stockholders
(113,106
)
 
(150,025
)
Dividends paid to noncontrolling interests
(9,188
)
 
(9,188
)
Net cash used in financing activities
(486,697
)
 
(704,939
)
Effect of exchange rate changes on cash and cash equivalents
(11,028
)
 
(6,353
)
Decrease in cash and cash equivalents
(304,708
)
 
(356,466
)
Cash and cash equivalents at beginning of period
913,276

 
856,238

Cash and cash equivalents at end of period
$
608,568

 
$
499,772

Cash interest paid
$
95,791

 
$
99,477

Cash income tax payments, net of refunds
$
111,318

 
$
63,998



See Notes to Condensed Consolidated Financial Statements

6

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 (we, us, our or the company) is a global provider of software, hardware and services that enables and integrates both physical and digital communications. 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 2 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, 2012 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 only of normal recurring adjustments, considered necessary to state 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 for the year ending December 31, 2013.
In January 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (ASU 2013-01). ASU 2013-01 requires an entity to disclose gross and net information about transactions that are (1) offset in the financial statements or (2) subject to an enforceable master netting arrangement or similar agreement, regardless of whether the transactions are actually offset in the statement of financial position. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The amounts impacting our disclosure were immaterial at June 30, 2013 and December 31, 2012.

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02). ASU 2013-02 requires an entity to present either parenthetically on the face of the financial statements, or in the notes, significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification. The new standard is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this standard resulted in additional disclosures, but did not impact our financial condition, results of operations or cash flows.
During the fourth quarter of 2012, we determined that changes in certain investment-related working capital accounts that were classified as cash flows from operating activities in the Condensed Consolidated Statement of Cash Flows should have been classified as cash flows from investing activities. Accordingly, the Condensed Consolidated Statement of Cash Flows for the period ended June 30, 2012 has been revised to reflect the correct classification of cash flows, resulting in a decrease in cash provided by operating activities and a corresponding increase in cash provided by investing activities of $30 million.
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, 2012 (the 2012 Annual Report). Certain prior year amounts have been reclassified to conform to the current period presentation.

7

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)

2. Segment Information
We conduct our business activities in seven reporting segments within two business groups, Small & Medium Business Solutions and Enterprise Business Solutions. The principal products and services of each of our reporting segments are as follows:
Small & Medium Business Solutions:
North America Mailing: Includes the U.S. and Canadian revenue and related expenses from the sale, rental and financing of our mail finishing, mail creation, shipping equipment and software; supplies; support and other professional services; and payment solutions.
International Mailing: Includes the revenue and related expenses from the sale, rental and financing of our mail finishing, mail creation, shipping equipment and software; supplies; support and other professional services; and payment solutions outside North America.
Enterprise Business Solutions:
Production Mail: Includes the worldwide revenue and related expenses from the sale, support and other professional services of our high-speed, production mail systems, sorting and production print equipment and related software.
Software: Includes the worldwide revenue and related expenses from the sale and support services of non-equipment-based mailing, client relationship, and communication and location intelligence software.
Management Services: Includes primarily the U.S. and Canadian revenue and related expenses from facilities management services; secure mail services; reprographic, document management services; print outsourcing services; and litigation support and eDiscovery services.
Mail Services: Includes worldwide revenue and related expenses from presort mail services and cross-border ecommerce solutions.
Marketing Services: Includes revenue and related expenses from direct marketing services for targeted clients.
Segment earnings before interest and taxes (EBIT), a non-GAAP measure, is determined by deducting from segment revenue the related costs and expenses attributable to the segment. Segment EBIT excludes interest, taxes, general corporate expenses, restructuring charges and impairment charges, which are not allocated to a particular business segment. Management uses segment EBIT to measure profitability and performance at the segment level. Management presents segment EBIT because it believes segment EBIT provides investors with an analysis of the company's operating performance and underlying trends of the businesses. Segment EBIT may not be indicative of our overall consolidated performance and therefore, should be read in conjunction with our condensed consolidated results of operations.
Prior period segment information in the tables below have been revised to reflect the International Management Services (PBMSi) business and International Mailing Services (IMS) operations as discontinued operations (see Note 4).


8

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)

Revenue and EBIT by business segment was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Revenue:
 

 
 

 
 

 
 

North America Mailing
$
432,889

 
$
453,484

 
$
863,264

 
$
914,789

International Mailing
164,556

 
165,480

 
332,011

 
333,494

Small & Medium Business Solutions
597,445

 
618,964

 
1,195,275

 
1,248,283

Production Mail
144,986

 
123,067

 
263,788

 
238,083

Software
92,242

 
99,874

 
172,963

 
200,201

Management Services
174,708

 
180,562

 
351,278

 
360,702

Mail Services
119,058

 
108,045

 
237,913

 
222,681

Marketing Services
29,768

 
35,845

 
55,260

 
66,053

Enterprise Business Solutions
560,762

 
547,393

 
1,081,202

 
1,087,720

Total revenue
$
1,158,207

 
$
1,166,357

 
$
2,276,477

 
$
2,336,003


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
EBIT:
 

 
 

 
 

 
 

North America Mailing
$
166,363

 
$
167,870

 
$
320,868

 
$
346,041

International Mailing
19,285

 
21,758

 
37,034

 
41,755

Small & Medium Business Solutions
185,648

 
189,628

 
357,902

 
387,796

Production Mail
13,617

 
5,594

 
16,672

 
8,373

Software
15,729

 
8,487

 
20,619

 
19,179

Management Services
14,735

 
14,222

 
29,097

 
26,210

Mail Services
15,484

 
28,464

 
34,833

 
62,709

Marketing Services
4,181

 
7,503

 
6,167

 
12,320

Enterprise Business Solutions
63,746

 
64,270

 
107,388

 
128,791

Total EBIT
249,394

 
253,898

 
465,290

 
516,587

Reconciling items:
 

 
 

 
 

 
 

Interest, net (1)
(49,843
)
 
(48,992
)
 
(98,709
)
 
(97,765
)
Unallocated corporate and other expenses
(51,221
)
 
(44,349
)
 
(114,723
)
 
(98,561
)
Restructuring charges and asset impairments
(19,955
)
 
585

 
(19,955
)
 
585

Goodwill impairment
(97,787
)
 
—

 
(97,787
)
 
—

Income from continuing operations before income taxes
$
30,588

 
$
161,142

 
$
134,116

 
$
320,846

(1) Includes financing interest expense, other interest expense and interest income.

9

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 consisted of the following:
 
June 30, 2013
 
North America
 
International
 
Total
Sales-type lease receivables
 

 
 

 
 

Gross finance receivables
$
1,494,818

 
$
427,386

 
$
1,922,204

Unguaranteed residual values
132,817

 
20,202

 
153,019

Unearned income
(302,533
)
 
(97,076
)
 
(399,609
)
Allowance for credit losses
(15,604
)
 
(7,178
)
 
(22,782
)
Net investment in sales-type lease receivables
1,309,498

 
343,334

 
1,652,832

Loan receivables
 

 
 

 
 

Loan receivables
395,292

 
48,369

 
443,661

Allowance for credit losses
(11,559
)
 
(1,760
)
 
(13,319
)
Net investment in loan receivables
383,733

 
46,609

 
430,342

Net investment in finance receivables
$
1,693,231

 
$
389,943

 
$
2,083,174

 
 
 
 
 
 
 
December 31, 2012
 
North America
 
International
 
Total
Sales-type lease receivables
 

 
 

 
 

Gross finance receivables
$
1,581,711

 
$
461,510

 
$
2,043,221

Unguaranteed residual values
148,664

 
21,025

 
169,689

Unearned income
(316,030
)
 
(104,258
)
 
(420,288
)
Allowance for credit losses
(16,979
)
 
(8,662
)
 
(25,641
)
Net investment in sales-type lease receivables
1,397,366

 
369,615

 
1,766,981

Loan receivables
 

 
 

 
 

Loan receivables
414,960

 
47,293

 
462,253

Allowance for credit losses
(12,322
)
 
(2,131
)
 
(14,453
)
Net investment in loan receivables
402,638

 
45,162

 
447,800

Net investment in finance receivables
$
1,800,004

 
$
414,777

 
$
2,214,781

Allowance for Credit Losses and Aging of Receivables
We estimate our finance receivable risks and provide an allowance for credit losses accordingly. 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 client's ability to pay, prevailing economic conditions and our ability to manage the collateral and make adjustments to the allowance as necessary. This evaluation is inherently subjective and actual results may differ significantly from estimated reserves.

We establish credit approval limits based on the credit quality of the client and the type of equipment financed. 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 payments reduce the account balance aging to 60 days or less past due. Finance receivables deemed uncollectible are written off against the allowance after all collection efforts have been exhausted and management

10

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)

deems the account to be uncollectible. We believe that our finance receivable credit risk is limited because of our large number of clients, small account balances for most of our clients, and geographic and industry diversification.

Activity in the allowance for credit losses for finance receivables for the six months ended June 30, 2013 and 2012 was as follows:
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
Balance at January 1, 2013
$
16,979

 
$
8,662

 
$
12,322

 
$
2,131

 
$
40,094

Amounts charged to expense
3,022

 
784

 
4,625

 
524

 
8,955

Accounts written off
(4,397
)
 
(2,268
)
 
(5,388
)
 
(895
)
 
(12,948
)
Balance at June 30, 2013
$
15,604

 
$
7,178

 
$
11,559

 
$
1,760

 
$
36,101

 
 
 
 
 
 
 
 
 
 
 
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


Aging of Receivables
The aging of gross finance receivables at June 30, 2013 and December 31, 2012 was as follows:
 
June 30, 2013
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
< 31 days
$
1,421,203

 
$
398,398

 
$
377,122

 
$
46,341

 
$
2,243,064

> 30 days and < 61 days
31,153

 
8,074

 
10,826

 
1,390

 
51,443

> 60 days and < 91 days
20,903

 
5,304

 
3,071

 
295

 
29,573

> 90 days and < 121 days
6,159

 
4,310

 
1,760

 
197

 
12,426

> 120 days
15,400

 
11,300

 
2,513

 
146

 
29,359

Total
$
1,494,818

 
$
427,386

 
$
395,292

 
$
48,369

 
$
2,365,865

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
6,159

 
$
4,310

 
$
—

 
$
—

 
$
10,469

Not accruing interest
15,400

 
11,300

 
4,273

 
343

 
31,316

Total
$
21,559

 
$
15,610

 
$
4,273

 
$
343

 
$
41,785



11

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)

 
December 31, 2012
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
< 31 days
$
1,497,797

 
$
435,780

 
$
392,108

 
$
45,324

 
$
2,371,009

> 30 days and < 61 days
37,348

 
9,994

 
12,666

 
1,368

 
61,376

> 60 days and < 91 days
24,059

 
5,198

 
4,577

 
285

 
34,119

> 90 days and < 121 days
6,665

 
3,327

 
2,319

 
179

 
12,490

> 120 days
15,842

 
7,211

 
3,290

 
137

 
26,480

Total
$
1,581,711

 
$
461,510

 
$
414,960

 
$
47,293

 
$
2,505,474

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
6,665

 
$
3,327

 
$
—

 
$
—

 
$
9,992

Not accruing interest
15,842

 
7,211

 
5,609

 
316

 
28,978

Total
$
22,507

 
$
10,538

 
$
5,609

 
$
316

 
$
38,970

Credit Quality
The extension of credit and management of credit lines to new and existing clients uses a combination of an automated credit score, where available, and a detailed manual review of the client’s financial condition and, when applicable, payment history. Once credit is granted, the payment performance of the client 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 June 30, 2013 and December 31, 2012 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.

12

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)

 
June 30,
2013
 
December 31,
2012
Sales-type lease receivables
 

 
 

Low
$
1,145,454

 
$
1,016,413

Medium
235,243

 
450,432

High
59,112

 
43,658

Not Scored
55,009

 
71,208

Total
$
1,494,818

 
$
1,581,711

Loan receivables
 

 
 

Low
$
287,172

 
$
254,567

Medium
90,956

 
136,069

High
12,426

 
14,624

Not Scored
4,738

 
9,700

Total
$
395,292

 
$
414,960

Troubled Debt
We maintain a program for U.S. clients 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 client’s credit line is closed and interest accrual is suspended. There is generally no forgiveness of debt or reduction of balances owed. The balance of loans in this program, related loan loss allowance and write-offs are insignificant to the overall portfolio.
Leveraged Leases
Our investment in leveraged lease assets at June 30, 2013 and December 31, 2012 consisted of the following:
 
June 30,
2013
 
December 31,
2012
Rental receivables
$
70,585

 
$
83,254

Unguaranteed residual values
13,371

 
14,177

Principal and interest on non-recourse loans
(44,033
)
 
(55,092
)
Unearned income
(6,317
)
 
(7,793
)
Investment in leveraged leases
33,606

 
34,546

Less: deferred taxes related to leveraged leases
(16,754
)
 
(19,372
)
Net investment in leveraged leases
$
16,852

 
$
15,174


13

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)

4. Discontinued Operations and Assets Held for Sale
During the quarter, we entered into two separate agreements to sell PBMSi. The assets and liabilities of PBMSi met held-for-sale classification and all historical amounts are presented as discontinued operations for all periods presented in the Condensed Consolidated Statements of Income. We closed on one of the agreements on July 5, 2013 and expect to close on the second agreement by the end of the third quarter. Total proceeds from these sales will not be material.
In connection with the disposal of PBMSi, amounts in the table below for the three and six months ended June 30, 2013 include an impairment charge of $15 million to write-off the total carrying value of long-lived assets, a goodwill impairment charge of $2 million to write-off the total carrying value of goodwill and an estimated loss on disposal of $15 million. The inputs used to determine the fair value of the long-lived assets and goodwill were classified as Level 3 in the fair value hierarchy.
During the fourth quarter of 2012, we made a strategic decision to exit our IMS operations related to the international delivery of mail and catalogs. All historical amounts related to IMS are presented as discontinued operations in the Condensed Consolidated Statements of Income. As of June 30, 2013, we have sold all of our IMS operations. Total proceeds from these sales were not material.
Discontinued operations also include our Capital Services business that was sold in 2006. For the six months ended June 30, 2012, we recognized $19 million of tax benefits arising from the resolution of tax examinations.
The following table shows selected financial information included in discontinued operations:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Revenue
$
47,727

 
$
79,460

 
$
116,481

 
$
165,470

Pretax loss
$
(35,948
)
 
$
(4,653
)
 
$
(39,367
)
 
$
(5,667
)
 
 
 
 
 
 
 
 
Net loss
$
(17,731
)
 
$
(3,812
)
 
$
(20,414
)
 
$
(4,486
)
Loss on sale of IMS, net of tax
(2,336
)
 
—

 
(3,342
)
 
—

Capital Services
—

 
—

 
—

 
19,332

(Loss) income from discontinued operations, net of tax
$
(20,067
)
 
$
(3,812
)
 
$
(23,756
)
 
$
14,846

 
 
 
 
 
 
 
 
The assets and liabilities held for sale at June 30, 2013 consist of the following:
Accounts receivables
$
58,382

Inventories
2,988

Other current assets and prepayments
8,606

Total current assets
69,976

Property, plant and equipment, net
598

Other assets
478

Assets held for sale
$
71,052

 
 
Accounts payable and accrued liabilities
$
52,573

Advance billings
955

Total current liabilities
53,528

Other non current liabilities
13,948

Liabilities related to assets held for sale
$
67,476



14

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)

5. 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, 2013 and December 31, 2012. 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, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
209,007

 
$
34,398

 
$
—

 
$
243,405

Equity securities
—

 
25,682

 
—

 
25,682

Commingled fixed income securities
—

 
27,487

 
—

 
27,487

Debt securities - U.S. and foreign governments, agencies and municipalities
112,060

 
22,758

 
—

 
134,818

Debt securities - corporate
—

 
40,849

 
—

 
40,849

Mortgage-backed / asset-backed securities
—

 
179,097

 
—

 
179,097

Derivatives
 
 
 
 
 

 


Interest rate swaps
—

 
3,230

 
—

 
3,230

Foreign exchange contracts
—

 
6,547

 
—

 
6,547

Total assets
$
321,067

 
$
340,048

 
$
—

 
$
661,115

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$
—

 
$
(3,306
)
 
$
—

 
$
(3,306
)
Total liabilities
$
—

 
$
(3,306
)
 
$
—

 
$
(3,306
)


15

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)

 
December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
581,648

 
$
34,369

 
$
—

 
$
616,017

Equity securities
—

 
25,106

 
—

 
25,106

Commingled fixed income securities
—

 
29,359

 
—

 
29,359

Debt securities - U.S. and foreign governments, agencies and municipalities
124,221

 
18,908

 
—

 
143,129

Debt securities - corporate
—

 
43,926

 
—

 
43,926

Mortgage-backed / asset-backed securities
—

 
162,375

 
—

 
162,375

Derivatives
 

 
 

 
 

 


Interest rate swaps
—

 
10,117

 
—

 
10,117

Foreign exchange contracts
—

 
2,582

 
—

 
2,582

Total assets
$
705,869

 
$
326,742

 
$
—

 
$
1,032,611

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$
—

 
$
(1,174
)
 
$
—

 
$
(1,174
)
Total liabilities
$
—

 
$
(1,174
)
 
$
—

 
$
(1,174
)
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, 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.
Investment securities include investments held by The Pitney Bowes Bank (the Bank), an indirect wholly owned subsidiary whose primary business is to provide financing solutions to clients that rent or lease postage meters. The Bank's key product offering, Purchase Power, is a revolving credit solution, which enables clients to finance their postage costs when they refill their meter. The Bank also provides a

16

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)

deposit solution to those clients that prefer to prepay postage and earn interest on their deposits. When a client refills their postage meter, the funds are withdrawn from the savings account to pay for the postage. The Bank's assets and liabilities consist primarily of cash, finance receivables, short and long-term investments and deposit accounts.
The Bank's investment securities are classified as available-for-sale and recorded at fair value 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. Unrealized holding gains and losses are recorded, net of tax, in accumulated other comprehensive income.
Available-for-sale securities at June 30, 2013 and December 31, 2012 consisted of the following:
 
June 30, 2013
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
Money market funds / commercial paper
$
26,616

 
$
—

 
$
(6
)
 
$
26,610

Debt securities - U.S. and foreign governments, agencies and municipalities
116,570

 
2,045

 
(3,773
)
 
114,842

Debt securities - corporate
39,793

 
1,505

 
(449
)
 
40,849

Mortgage-backed / asset-backed securities
179,016

 
2,163

 
(2,082
)
 
179,097

Total
$
361,995

 
$
5,713

 
$
(6,310
)
 
$
361,398

 
December 31, 2012
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
Money market funds / commercial paper
$
44,611

 
$
53

 
$
—

 
$
44,664

Debt securities - U.S. and foreign governments, agencies and municipalities
127,807

 
3,972

 
(56
)
 
131,723

Debt securities - corporate
41,095

 
2,851

 
(20
)
 
43,926

Mortgage-backed / asset-backed securities
162,180

 
3,340

 
(3,145
)
 
162,375

Total
$
375,693

 
$
10,216

 
$
(3,221
)
 
$
382,688


Scheduled maturities of investment securities at June 30, 2013 were as follows:
 
Amortized cost
 
Estimated fair value
Within 1 year
$
54,032

 
$
54,085

After 1 year through 5 years
38,948

 
40,028

After 5 years through 10 years
83,026

 
81,492

After 10 years
185,989

 
185,793

Total
$
361,995

 
$
361,398

We have not experienced any significant write-offs in our investment portfolio. The majority of our MBS are either guaranteed or supported by the U.S. government. 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.

17

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)

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, 2013 and December 31, 2012 was as follows:
Designation of Derivatives
 
Balance Sheet Location
 
June 30,
2013
 
December 31,
2012
Derivatives designated as
hedging instruments
 
Other current assets and prepayments:
 
 

 
 

 
 
Foreign exchange contracts
 
$
455

 
$
78

 
 
Other assets:
 
 

 
 

 
 
Interest rate swaps
 
3,230

 
10,117

 
 
Accounts payable and accrued liabilities:
 
 

 
 

 
 
Foreign exchange contracts
 
(238
)
 
(320
)
Derivatives not designated as
hedging instruments
 
Other current assets and prepayments:
 
 

 
 

 
 
Foreign exchange contracts
 
6,092

 
2,504

 
 
Accounts payable and accrued liabilities:
 
 

 
 

 
 
Foreign exchange contracts
 
(3,068
)
 
(854
)
 
 
 
 
 
 
 
 
 
Total derivative assets
 
$
9,777

 
$
12,699

 
 
Total derivative liabilities
 
(3,306
)
 
(1,174
)
 
 
Total net derivative assets
 
$
6,471

 
$
11,525


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, 2013 and 2012:
 
 
 
 
Three Months Ended June 30,
 
 
 
 
Derivative Gain
Recognized in Earnings
 
Hedged Item Expense
Recognized in Earnings
Derivative Instrument
 
Location of Gain (Loss)
 
2013
 
2012
 
2013
 
2012
Interest rate swaps
 
Interest expense
 
$
774

 
$
3,446

 
$
(2,742
)
 
$
(10,059
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
Derivative Gain
Recognized in Earnings
 
Hedged Item Expense
Recognized in Earnings
Derivative Instrument
 
Location of Gain (Loss)
 
2013
 
2012
 
2013
 
2012
Interest rate swaps
 
Interest expense
 
$
2,768

 
$
6,773

 
$
(8,227
)
 
$
(20,168
)

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 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, 2013 and December 31, 2012, we had outstanding contracts associated with these

18

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)

anticipated transactions with a notional amount of $30 million and $25 million, respectively. The value of these contracts at June 30, 2013 and December 31, 2012 was less than $1 million.
The amounts included in AOCI at June 30, 2013 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, 2013 and 2012:
 
 
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
 
2013
 
2012
 
 
2013
 
2012
Foreign exchange contracts
 
$
170

 
$
(150
)
 
Revenue
 
$
(371
)
 
$
473

 
 
 

 
 

 
Cost of sales
 
286

 
(7
)
 
 
 

 
 

 
 
 
$
(85
)
 
$
466

 
 
 
 
 
 
 
 
 
 
 
 
 
Six 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
 
2013
 
2012
 
 
2013
 
2012
Foreign exchange contracts
 
$
800

 
$
(809
)
 
Revenue
 
$
(753
)
 
$
774

 
 
 

 
 

 
Cost of sales
 
412

 
(73
)
 
 
 

 
 

 
 
 
$
(341
)
 
$
701

We also enter into foreign exchange contracts to minimize the impact of exchange rate fluctuations on short-term intercompany loans and related interest that are denominated in a foreign currency. The revaluation of the intercompany loans and interest and the mark-to-market adjustment on the derivatives are both recorded in earnings. Outstanding foreign exchange contracts to buy or sell various currencies had a net asset value of $3 million at June 30, 2013 and $2 million at December 31, 2012. All outstanding contracts at June 30, 2013 mature by the end of the year.
The following represents the results of our non-designated derivative instruments for the three and six months ended June 30, 2013 and 2012:
 
 
 
 
Three Months Ended June 30,
 
 
 
 
Derivative Gain (Loss)
Recognized in Earnings
Derivatives Instrument
 
Location of Derivative Gain (Loss)
 
2013
 
2012
Foreign exchange contracts
 
Selling, general and administrative expense
 
$
(1,644
)
 
$
1,157

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
Derivative Gain (Loss)
Recognized in Earnings
Derivatives Instrument
 
Location of Derivative Gain (Loss)
 
2013
 
2012
Foreign exchange contracts
 
Selling, general and administrative expense
 
$
(5,995
)
 
$
(3,067
)

Credit-Risk-Related Contingent Features
Certain derivative instruments contain credit-risk-related contingent features that would require us to post collateral based on a combination of our long-term senior unsecured debt ratings and the net fair value of our derivatives. At June 30, 2013, we were not required to post any collateral. The maximum amount of collateral that we would have been required to post at June 30, 2013, had the credit-risk-related contingent features been triggered, was less than $1 million.

Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, investment securities, accounts receivable, loan receivables, derivative instruments, accounts payable and debt. The carrying value for cash and cash equivalents, accounts receivable, loans receivable, and accounts payable approximate fair value because of the short maturity of these instruments.

19

PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)

The fair value of our debt is estimated based on recently executed transactions and market price quotations.  We classify our debt as Level 2 in the fair value hierarchy. The carrying value and estimated fair value of our debt at June 30, 2013 and December 31, 2012 was as follows:
 
June 30, 2013
 
December 31, 2012
Carrying value
$
3,654,032

 
$
4,017,375

Fair value
$
3,826,593

 
$
4,200,970


6. Restructuring Charges and Asset Impairments
In order to enhance our responsiveness to changing market conditions, further streamline our business operations, reduce our cost structure and create long-term flexibility to invest in growth, we have identified certain actions that we believe will provide both process and operational improvements. We anticipate that these actions will result in restructuring charges in the range of $75 to $125 million and will be recognized as specific initiatives are approved and implemented.
During the quarter, we began implementing certain actions, consisting primarily of workforce reductions, and recorded restructuring charges of $23 million in connection with the above actions. Restructuring charges for the period also include the reversal of $3 million for changes in reserves under prior restructuring programs.
Activity in our restructuring reserves for the six months ended June 30, 2013 was as follows:
 
Severance and benefits costs
 
Pension and
Retiree
Medical
 
Other exit
costs
 
Total
Balance at January 1, 2013
$
62,540

 
$
—

 
$
5,218

 
$
67,758

Expenses, net
17,672

 
1,964

 
319

 
19,955

Cash payments
(25,155
)