PBI 2014.09.30 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, 2014
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.)
 
 
 
3001 Summer Street, Stamford, Connecticut
 
06926
(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 October 29, 2014, 200,989,991 shares of common stock, par value $1 per share, of the registrant were outstanding.
 
 
 




PITNEY BOWES INC.
INDEX

 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Income (Loss) for the Three and Nine Months Ended September 30, 2014 and 2013
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013
 
 
 
 
Condensed Consolidated Balance Sheets at September 30, 2014 and December 31, 2013
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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 September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenue:
 

 
 

 
 

 
 

Equipment sales
$
177,458

 
$
197,044

 
$
558,032

 
$
619,035

Supplies
72,548

 
68,692

 
228,349

 
213,185

Software
112,271

 
98,164

 
312,891

 
285,658

Rentals
119,047

 
125,918

 
365,069

 
384,436

Financing
107,835

 
111,032

 
325,529

 
337,739

Support services
154,321

 
159,508

 
470,763

 
482,400

Business services
198,164

 
160,131

 
576,958

 
458,061

Total revenue
941,644

 
920,489

 
2,837,591

 
2,780,514

Costs and expenses:
 

 
 

 
 

 
 

Cost of equipment sales
90,984

 
88,945

 
262,336

 
295,567

Cost of supplies
22,470

 
21,444

 
70,129

 
66,536

Cost of software
29,775

 
29,698

 
93,423

 
80,093

Cost of rentals
23,636

 
24,434

 
74,273

 
75,946

Financing interest expense
19,667

 
19,468

 
59,733

 
57,438

Cost of support services
92,500

 
98,425

 
288,203

 
300,291

Cost of business services
142,512

 
112,447

 
406,472

 
322,970

Selling, general and administrative
341,738

 
352,299

 
1,031,497

 
1,057,876

Research and development
26,060

 
24,769

 
80,901

 
81,351

Restructuring charges and asset impairments
4,526

 
34,909

 
22,666

 
53,940

Interest expense, net
22,158

 
26,051

 
67,704

 
85,087

Other (income) expense
(15,919
)
 
—

 
45,738

 
25,121

Total costs and expenses
800,107

 
832,889

 
2,503,075

 
2,502,216

Income from continuing operations before income taxes
141,537

 
87,600

 
334,516

 
278,298

Provision for income taxes
25,310

 
10,032

 
79,681

 
52,045

Income from continuing operations
116,227

 
77,568

 
254,835

 
226,253

Income (loss) from discontinued operations, net of tax
20,655

 
(78,501
)
 
30,173

 
(159,725
)
Net income (loss)
136,882

 
(933
)
 
285,008

 
66,528

Less: Preferred stock dividends attributable to noncontrolling interests
4,593

 
4,594

 
13,781

 
13,782

Net income (loss) attributable to Pitney Bowes Inc.
$
132,289

 
$
(5,527
)
 
$
271,227

 
$
52,746

Amounts attributable to common stockholders:
 

 
 

 
 

 
 

Net income from continuing operations
$
111,634

 
$
72,974

 
$
241,054

 
$
212,471

Income (loss) from discontinued operations, net of tax
20,655

 
(78,501
)
 
30,173

 
(159,725
)
Net income (loss) attributable to Pitney Bowes Inc.
$
132,289

 
$
(5,527
)
 
$
271,227

 
$
52,746

Basic earnings per share attributable to common stockholders:
 

 
 

 
 

 
 

Continuing operations
$
0.55

 
$
0.36

 
$
1.19

 
$
1.05

Discontinued operations
0.10

 
(0.39
)
 
0.15

 
(0.79
)
Net income (loss) attributable to Pitney Bowes Inc.
$
0.65

 
$
(0.03
)
 
$
1.34

 
$
0.26

Diluted earnings per share attributable to common stockholders:
 

 
 

 
 

 
 

Continuing operations
$
0.55

 
$
0.36

 
$
1.18

 
$
1.05

Discontinued operations
0.10

 
(0.39
)
 
0.15

 
(0.79
)
Net income (loss) attributable to Pitney Bowes Inc.
$
0.65

 
$
(0.03
)
 
$
1.33

 
$
0.26

Dividends declared per share of common stock
$
0.1875

 
$
0.1875

 
$
0.5625

 
$
0.75



See Notes to Condensed Consolidated Financial Statements

3

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



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net income (loss)
$
136,882

 
$
(933
)
 
$
285,008

 
$
66,528

Less: Preferred stock dividends attributable to noncontrolling interests
4,593

 
4,594

 
13,781

 
13,782

Net income (loss) attributable to Pitney Bowes Inc.
132,289

 
(5,527
)
 
271,227

 
52,746

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Net unrealized gain on cash flow hedges, net of tax of $420, $41, $925 and $615, respectively
658

 
62

 
1,448

 
962

Net unrealized (loss) gain on investment securities, net of tax of $(546), $(142), $1,908 and $(2,984), respectively
(933
)
 
(222
)
 
3,262

 
(4,667
)
Amortization of pension and postretirement costs, net of tax of $3,355, $4,347, $10,609 and $15,613, respectively
6,694

 
7,950

 
19,116

 
28,943

Foreign currency translations
(61,809
)
 
19,140

 
(64,011
)
 
(40,618
)
Other comprehensive (loss) income
(55,390
)
 
26,930

 
(40,185
)
 
(15,380
)
Comprehensive income attributable to Pitney Bowes Inc.
$
76,899

 
$
21,403

 
$
231,042

 
$
37,366





































See Notes to Condensed Consolidated Financial Statements

4

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


 
September 30, 2014
 
December 31, 2013
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
923,676

 
$
907,806

Short-term investments
35,348

 
31,128

Accounts receivable (net of allowance of $13,651 and $13,149, respectively)
399,051

 
469,800

Finance receivables (net of allowance of $21,914 and $24,340, respectively)
1,018,242

 
1,102,921

Inventories
94,879

 
103,580

Current income taxes
29,815

 
28,934

Other current assets and prepayments
135,973

 
147,067

Assets held for sale
55,118

 
46,976

Total current assets
2,692,102

 
2,838,212

Property, plant and equipment, net
266,520

 
245,171

Rental property and equipment, net
206,394

 
226,146

Finance receivables (net of allowance of $9,323 and $12,609, respectively)
830,589

 
962,363

Investment in leveraged leases
32,465

 
34,410

Goodwill
1,694,987

 
1,734,871

Intangible assets, net
91,797

 
120,387

Non-current income taxes
65,092

 
73,751

Other assets
544,091

 
537,397

Total assets
$
6,424,037

 
$
6,772,708

LIABILITIES, NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY
 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
1,428,690

 
$
1,644,582

Current income taxes
153,809

 
157,340

Current portion of long-term debt
274,879

 
—

Advance billings
399,016

 
425,833

Total current liabilities
2,256,394

 
2,227,755

Deferred taxes on income
57,830

 
39,701

Tax uncertainties and other income tax liabilities
148,119

 
190,645

Long-term debt
2,962,997

 
3,346,295

Other non-current liabilities
423,981

 
466,766

Total liabilities
5,849,321

 
6,271,162

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

 
296,370

Commitments and contingencies (See Note 10)


 


Stockholders’ equity:
 
 
 
Cumulative preferred stock, $50 par value, 4% convertible
1

 
4

Cumulative preference stock, no par value, $2.12 convertible
559

 
591

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

 
323,338

Additional paid-in capital
174,783

 
196,977

Retained earnings
4,872,875

 
4,715,564

Accumulated other comprehensive loss
(614,741
)
 
(574,556
)
Treasury stock, at cost (122,349,213 and 121,255,390 shares, respectively)
(4,478,469
)
 
(4,456,742
)
Total stockholders’ equity
278,346

 
205,176

Total liabilities, noncontrolling interests and stockholders’ equity
$
6,424,037

 
$
6,772,708




See Notes to Condensed Consolidated Financial Statements

5

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


 
Nine Months Ended September 30,
 
2014
 
2013
Cash flows from operating activities:
 

 
 

Net income
$
285,008

 
$
66,528

Restructuring payments
(42,151
)
 
(41,353
)
Tax payments related to other investments
(53,738
)
 
—

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

(Gain) loss on disposal of businesses
(29,104
)
 
35,315

Proceeds from settlement of derivative instruments
—

 
4,838

Depreciation and amortization
143,360

 
167,377

Stock-based compensation
12,658

 
12,061

Restructuring charges and asset impairments
21,572

 
55,771

Goodwill impairment
—

 
101,415

Changes in operating assets and liabilities:
 

 
 

Decrease in accounts receivable
68,140

 
111,549

Decrease in finance receivables
107,027

 
128,812

Decrease in inventories
854

 
36,967

Increase in other current assets and prepayments
(30,914
)
 
(13,588
)
Decrease in accounts payable and accrued liabilities
(120,329
)
 
(192,373
)
Increase in current and non-current income taxes
24,218

 
11,861

Decrease in advance billings
(15,793
)
 
(23,179
)
Other, net
26,624

 
31,559

Net cash provided by operating activities
397,432

 
493,560

Cash flows from investing activities:
 

 
 

Purchases of available-for-sale securities
(218,157
)
 
(262,794
)
Proceeds from sales/maturities of available-for-sale securities
175,057

 
258,104

Capital expenditures
(121,270
)
 
(103,392
)
Net proceeds from the sale of businesses
101,179

 
2,627

Change in reserve account deposits
(15,919
)
 
(16,962
)
Other investing activities
(2,539
)
 
5,243

Net cash used in investing activities
(81,649
)
 
(117,174
)
Cash flows from financing activities:
 

 
 

Proceeds from the issuance of debt, net of fees and discounts of $7,475 and $13,387, respectively
492,525

 
411,613

Principal payments of long-term debt
(599,850
)
 
(779,637
)
Proceeds from the issuance of common stock under employee stock-based compensation plans
5,869

 
6,499

Purchase of subsidiary shares from noncontrolling interest
(7,718
)
 
—

Stock repurchases
(50,003
)
 
—

Dividends paid to stockholders
(113,963
)
 
(150,955
)
Dividends paid to noncontrolling interests
(9,188
)
 
(9,188
)
Net cash used in financing activities
(282,328
)
 
(521,668
)
Effect of exchange rate changes on cash and cash equivalents
(17,585
)
 
(8,358
)
Increase (decrease) in cash and cash equivalents
15,870

 
(153,640
)
Cash and cash equivalents at beginning of period
907,806

 
913,276

Cash and cash equivalents at end of period
$
923,676

 
$
759,636

Cash interest paid
$
161,628

 
$
162,938

Cash income tax payments, net of refunds
$
116,682

 
$
110,396


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 technology solutions helping small, mid-sized and large firms connect to customers to facilitate and simplify commerce, build loyalty and grow revenue. We deliver our solutions on open platforms to best organize, analyze and apply public and proprietary data to two-way customer communications. We offer solutions for direct mail, transactional mail, customer engagement management and analytics and ecommerce parcel management, along with digital channel messaging for the Web, email and mobile applications. We conduct our business activities in five reportable segments. See Note 2 for information regarding our reportable segments.
We have prepared the accompanying unaudited Condensed Consolidated Financial Statements 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, 2013 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 fairly state 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, 2014.
In April 2014, Pitney Bowes of Canada Ltd. (PB Canada), a wholly owned subsidiary, completed the sale of its Document Imaging Solutions (DIS) business, which consisted of hardware (copiers and printers) and document management software solutions to Konica Minolta Business Solutions (Canada) Ltd. (Konica Minolta) and the related lease portfolio to a business equipment leasing services provider in two separate transactions. The operating results for DIS, originally included as part of the North America Mailing segment, have been classified as discontinued operations for all periods presented. The cash flows from discontinued operations are not separately stated or reclassified in the accompanying unaudited Condensed Consolidated Statements of Cash Flows.
These statements should be read in conjunction with the financial statements and notes thereto included in our Current Report on Form 8-K filed on September 15, 2014.
New Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements — Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This standard requires management to evaluate the entity's ability to continue as a going concern for 12 months following the issuance of the financial statements and provide related footnote disclosures. This standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods thereafter. Early adoption is permitted. We do not believe this standard will have a significant impact on our consolidated financial statements or disclosures.
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. The new standard requires companies to recognize revenue for the transfer of goods and services to customers in amounts that reflect the consideration the company expects to receive in exchange for those goods and services. The new standard will also result in enhanced disclosures about revenue. This standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and can be adopted either retrospectively or as a cumulative-effect adjustment. Early adoption is prohibited. We are assessing the impact the adoption of this standard will have on our consolidated financial statements and disclosures.
In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. The standard is effective on January 1, 2015, but early adoption is permitted for disposals or classifications of assets held for sale that have not been reported in financial statements previously issued or available for issuance. We elected to adopt this standard effective April 1, 2014. The adoption of this standard did not have a significant impact on our unaudited Condensed Consolidated Financial Statements.

7

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

2. Segment Information
In the first quarter of 2014, we reclassified our shipping solutions operations from the Small & Medium Business Solutions segment group to the Digital Commerce Solutions segment. Prior year segment reporting has been recast to conform to our current segment presentation. The principal products and services of each of our reportable segments are as follows:

Small & Medium Business Solutions:
North America Mailing: Includes the revenue and related expenses from the sale, rental, financing and servicing of mailing equipment and supplies for small and medium sized businesses to efficiently create mail and evidence postage in the U.S. and Canada.
International Mailing: Includes the revenue and related expenses from the sale, rental, financing and servicing of mailing equipment and supplies for small and medium sized businesses to efficiently create mail and evidence postage in areas outside North America.

Enterprise Business Solutions:
Production Mail: Includes the worldwide revenue and related expenses from the sale of production mail inserting and sortation equipment, high-speed production print systems, supplies and related support services to large enterprise clients to process inbound and outbound mail.
Presort Services: Includes revenue and related expenses from presort mail services for our large enterprise clients to qualify large mail volumes for postal worksharing discounts.

Digital Commerce Solutions:
Digital Commerce Solutions: Includes the worldwide revenue and related expenses from (i) the sale of non-equipment-based mailing, customer engagement, geocoding and location intelligence software and related support services; (ii) shipping and cross-border ecommerce solutions; and (iii) direct marketing services for targeted clients.
We determine segment earnings before interest and taxes (EBIT) 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 other items, which are not allocated to a particular business segment. Management uses segment EBIT to measure profitability and performance at the segment level. Management believes segment EBIT provides an analysis of our operating performance and underlying trends of the businesses. Segment EBIT may not be indicative of our overall consolidated performance and should be read in conjunction with our consolidated results of operations.

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 is presented below.
 
Revenue
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
North America Mailing
$
363,285

 
$
381,685

 
$
1,115,507

 
$
1,162,718

International Mailing
132,291

 
141,332

 
438,819

 
444,665

Small & Medium Business Solutions
495,576

 
523,017

 
1,554,326

 
1,607,383

Production Mail
113,497

 
116,477

 
330,469

 
360,352

Presort Services
111,434

 
105,093

 
339,205

 
322,954

Enterprise Business Solutions
224,931

 
221,570

 
669,674

 
683,306

Digital Commerce Solutions
221,137

 
175,902

 
613,591

 
489,825

Total revenue
$
941,644

 
$
920,489

 
$
2,837,591

 
$
2,780,514

 
EBIT
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
North America Mailing
$
159,638

 
$
158,692

 
$
476,757

 
$
464,668

International Mailing
16,079

 
15,627

 
67,347

 
53,092

Small & Medium Business Solutions
175,717

 
174,319

 
544,104

 
517,760

Production Mail
9,570

 
10,620

 
27,865

 
34,239

Presort Services
21,927

 
20,398

 
68,235

 
65,132

Enterprise Business Solutions
31,497

 
31,018

 
96,100

 
99,371

Digital Commerce Solutions
24,534

 
12,885

 
51,994

 
27,969

Total EBIT
231,748

 
218,222

 
692,198

 
645,100

Reconciling items:
 

 
 

 
 

 
 

Interest, net
(41,825
)
 
(45,519
)
 
(127,437
)
 
(142,525
)
Unallocated corporate expenses
(59,779
)
 
(50,194
)
 
(161,841
)
 
(145,216
)
Restructuring charges and asset impairments
(4,526
)
 
(34,909
)
 
(22,666
)
 
(53,940
)
Other income (expense)
15,919

 
—

 
(45,738
)
 
(25,121
)
Income from continuing operations before income taxes
$
141,537

 
$
87,600

 
$
334,516

 
$
278,298

 
 
 
 

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. Interest is recognized on loan receivables using the effective interest method and related annual fees are initially deferred and recognized ratably over the annual period covered. Customer acquisition costs are expensed as incurred.
Finance receivables at September 30, 2014 and December 31, 2013 consisted of the following:
 
September 30, 2014
 
North America
 
International
 
Total
Sales-type lease receivables
 

 
 

 
 

Gross finance receivables
$
1,291,312

 
$
385,037

 
$
1,676,349

Unguaranteed residual values
106,940

 
19,324

 
126,264

Unearned income
(272,035
)
 
(87,954
)
 
(359,989
)
Allowance for credit losses
(12,906
)
 
(5,486
)
 
(18,392
)
Net investment in sales-type lease receivables
1,113,311

 
310,921

 
1,424,232

Loan receivables
 

 
 

 
 

Loan receivables
385,919

 
51,525

 
437,444

Allowance for credit losses
(10,944
)
 
(1,901
)
 
(12,845
)
Net investment in loan receivables
374,975

 
49,624

 
424,599

Net investment in finance receivables
$
1,488,286

 
$
360,545

 
$
1,848,831

 
 
 
 
 
 
 
December 31, 2013
 
North America
 
International
 
Total
Sales-type lease receivables
 

 
 

 
 

Gross finance receivables
$
1,456,420

 
$
456,759

 
$
1,913,179

Unguaranteed residual values
121,339

 
21,553

 
142,892

Unearned income
(299,396
)
 
(101,311
)
 
(400,707
)
Allowance for credit losses
(14,165
)
 
(9,703
)
 
(23,868
)
Net investment in sales-type lease receivables
1,264,198

 
367,298

 
1,631,496

Loan receivables
 

 
 

 
 

Loan receivables
397,815

 
49,054

 
446,869

Allowance for credit losses
(11,165
)
 
(1,916
)
 
(13,081
)
Net investment in loan receivables
386,650

 
47,138

 
433,788

Net investment in finance receivables
$
1,650,848

 
$
414,436

 
$
2,065,284

Finance receivables with a net investment of $62 million were included in the sale of DIS in April 2014.
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

10

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

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 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 the nine months ended September 30, 2014 and 2013 was as follows:
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
Balance at January 1, 2014
$
14,165

 
$
9,703

 
$
11,165

 
$
1,916

 
$
36,949

Amounts charged to expense
3,232

 
35

 
7,759

 
1,366

 
12,392

Write-offs and other
(4,491
)
 
(4,252
)
 
(7,980
)
 
(1,381
)
 
(18,104
)
Balance at September 30, 2014
$
12,906

 
$
5,486

 
$
10,944

 
$
1,901

 
$
31,237

 
 
 
 
 
 
 
 
 
 
 
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
4,617

 
2,031

 
7,265

 
793

 
14,706

Write-offs and other
(6,270
)
 
(2,870
)
 
(8,089
)
 
(1,075
)
 
(18,304
)
Balance at September 30, 2013
$
15,326

 
$
7,823

 
$
11,498

 
$
1,849

 
$
36,496


Aging of Receivables
The aging of gross finance receivables at September 30, 2014 and December 31, 2013 was as follows:
 
September 30, 2014
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
1 - 30 days
$
1,226,023

 
$
362,131

 
$
369,148

 
$
49,688

 
$
2,006,990

31 - 60 days
25,851

 
6,045

 
9,079

 
1,077

 
42,052

61 - 90 days
16,857

 
4,866

 
3,410

 
425

 
25,558

> 90 days
22,581

 
11,995

 
4,282

 
335

 
39,193

Total
$
1,291,312

 
$
385,037

 
$
385,919

 
$
51,525

 
$
2,113,793

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
5,541

 
$
3,501

 
$
—

 
$
—

 
$
9,042

Not accruing interest
17,040

 
8,494

 
4,282

 
335

 
30,151

Total
$
22,581

 
$
11,995

 
$
4,282

 
$
335

 
$
39,193



11

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

 
December 31, 2013
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
1 - 30 days
$
1,383,253

 
$
425,923

 
$
379,502

 
$
42,573

 
$
2,231,251

31 - 60 days
32,102

 
11,760

 
10,464

 
4,391

 
58,717

61 - 90 days
20,830

 
5,724

 
3,330

 
1,363

 
31,247

> 90 days
20,235

 
13,352

 
4,519

 
727

 
38,833

Total
$
1,456,420

 
$
456,759

 
$
397,815

 
$
49,054

 
$
2,360,048

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
6,413

 
$
3,979

 
$
—

 
$
—

 
$
10,392

Not accruing interest
13,822

 
9,373

 
4,519

 
727

 
28,441

Total
$
20,235

 
$
13,352

 
$
4,519

 
$
727

 
$
38,833

Credit Quality
In extending and managing credit lines to new and existing clients, we use 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 portfolio 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, 2014 and December 31, 2013 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)

 
September 30,
2014
 
December 31,
2013
Sales-type lease receivables
 

 
 

Low
$
976,711

 
$
1,081,853

Medium
212,695

 
244,379

High
45,206

 
51,851

Not Scored
56,700

 
78,337

Total
$
1,291,312

 
$
1,456,420

Loan receivables
 

 
 

Low
$
267,394

 
$
279,607

Medium
92,497

 
95,524

High
11,565

 
11,511

Not Scored
14,463

 
11,173

Total
$
385,919

 
$
397,815


Leveraged Leases
Our investment in leveraged lease assets at September 30, 2014 and December 31, 2013 consisted of the following:
 
September 30,
2014
 
December 31,
2013
Rental receivables
$
50,544

 
$
61,721

Unguaranteed residual values
12,561

 
13,235

Principal and interest on non-recourse loans
(27,658
)
 
(35,449
)
Unearned income
(2,982
)
 
(5,097
)
Investment in leveraged leases
32,465

 
34,410

Less: deferred taxes related to leveraged leases
(12,621
)
 
(15,078
)
Net investment in leveraged leases
$
19,844

 
$
19,332


4. Inventories
Inventories consisted of the following:
 
September 30,
2014
 
December 31,
2013
Raw materials and work in process
$
41,338

 
$
33,920

Supplies and service parts
37,472

 
48,165

Finished products
31,037

 
38,515

Inventory at FIFO cost
109,847

 
120,600

Excess of FIFO cost over LIFO cost
(14,968
)
 
(17,020
)
Total inventory, net
$
94,879

 
$
103,580



13

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

5. Discontinued Operations and Assets Held For Sale
Discontinued Operations
Discontinued operations includes the worldwide Management Services business (PBMS), International Mailing Services business (IMS) and Nordic furniture business, which were sold during 2013 and DIS, which was sold in April 2014. The following tables show selected financial information for discontinued operations:
 
Three Months Ended September 30, 2014
 
PBMS
 
IMS
 
Nordic furniture business
 
DIS
 
Total
Revenue
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
Loss from operations before taxes
$
(858
)
 
$
—

 
$
—

 
$
(297
)
 
$
(1,155
)
Gain (loss) on sale
2,971

 
—

 
—

 
(19
)
 
2,952

Income (loss) before taxes
2,113

 
—

 
—

 
(316
)
 
1,797

Tax (benefit) provision
(5,149
)
 
—

 
—

 
85

 
(5,064
)
Net income (loss)
$
7,262

 
$
—

 
$
—

 
$
(401
)
 
$
6,861

Capital Services, net of tax
 
 
 
 
 
 
 
 
13,794

Income from discontinued operations
 
 
 
 
 
 
 
 
$
20,655

 
Three Months Ended September 30, 2013
 
PBMS
 
IMS
 
Nordic furniture business
 
DIS
 
Total
Revenue
$
194,511

 
$
4

 
$
12,014

 
$
18,297

 
$
224,826

 
 
 
 
 
 
 
 
 
 
(Loss) income from operations before taxes
$
(14,438
)
 
$
(1,072
)
 
$
(4,381
)
 
$
5,041

 
$
(14,850
)
Gain on sale
13,269

 
1,196

 
4,465

 
—

 
18,930

(Loss) income before taxes
(1,169
)
 
124

 
84

 
5,041

 
4,080

Tax provision (benefit)
81,084

 
168

 
(9
)
 
1,338

 
82,581

(Loss) income from discontinued operations
$
(82,253
)
 
$
(44
)
 
$
93

 
$
3,703

 
$
(78,501
)
 
Nine Months Ended September 30, 2014
 
PBMS
 
IMS
 
Nordic furniture business
 
DIS
 
Total
Revenue
$
—

 
$
—

 
$
—

 
$
19,858

 
$
19,858

 
 
 
 
 
 
 
 
 
 
(Loss) income from operations before taxes
$
(524
)
 
$
308

 
$
345

 
$
3,132

 
$
3,261

Gain on sale
3,101

 
1,994

 
—

 
25,179

 
30,274

Income before taxes
2,577

 
2,302

 
345

 
28,311

 
33,535

Tax (benefit) provision
(4,953
)
 
851

 
97

 
21,161

 
17,156

Net income
$
7,530

 
$
1,451

 
$
248

 
$
7,150

 
$
16,379

Capital Services, net of tax
 
 
 
 
 
 
 
 
13,794

Income from discontinued operations
 
 
 
 
 
 
 
 
$
30,173


14

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

 
Nine Months Ended September 30, 2013
 
PBMS
 
IMS
 
Nordic furniture business
 
DIS
 
Total
Revenue
$
639,237

 
$
23,036

 
$
37,785

 
$
57,702

 
$
757,760

 
 
 
 
 
 
 
 
 
 
(Loss) income before taxes
$
(116,018
)
 
$
(3,050
)
 
$
(4,859
)
 
$
13,129

 
$
(110,798
)
Gain (loss) on sale
13,269

 
(2,717
)
 
4,465

 
—

 
15,017

(Loss) income before taxes
(102,749
)
 
(5,767
)
 
(394
)
 
13,129

 
(95,781
)
Tax provision (benefit)
61,679

 
(1,076
)
 
(144
)
 
3,485

 
63,944

(Loss) income from discontinued operations
$
(164,428
)
 
$
(4,691
)
 
$
(250
)
 
$
9,644

 
$
(159,725
)

During the quarter, we recognized tax benefits of $14 million related to tax planning initiatives associated with our Capital Services business sold in 2006.
The loss before income taxes for the nine months ended September 30, 2013 for PBMS includes goodwill impairment charges of $100 million and asset impairment charges 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.
Assets Held for Sale
Assets held for sale at September 30, 2014 and December 31, 2013 include the carrying value of our corporate headquarters building and surrounding land, which we expect to sell by the end of the year. Assets held for sale at September 30, 2014 also includes the value of a lease portfolio.
 
 

6. Intangible Assets and Goodwill
Intangible Assets
Intangible assets consisted of the following:
 
September 30, 2014
 
December 31, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships
$
342,136

 
$
(260,478
)
 
$
81,658

 
$
354,373

 
$
(251,388
)
 
$
102,985

Supplier relationships
29,000

 
(27,188
)
 
1,812

 
29,000

 
(25,013
)
 
3,987

Software & technology
164,557

 
(156,920
)
 
7,637

 
167,009

 
(155,009
)
 
12,000

Trademarks & trade names
33,523

 
(32,839
)
 
684

 
35,366

 
(33,985
)
 
1,381

Non-compete agreements
7,216

 
(7,210
)
 
6

 
7,407

 
(7,373
)
 
34

Total intangible assets
$
576,432

 
$
(484,635
)
 
$
91,797

 
$
593,155

 
$
(472,768
)
 
$
120,387


Amortization expense for intangible assets was $9 million and $8 million for the three months ended September 30, 2014 and 2013, respectively, and $26 million for each of the nine months ended September 30, 2014 and 2013.








15

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

Future amortization expense for intangible assets as of September 30, 2014 was as follows:
Remaining for year ending December 31, 2014
$
8,219

Year ending December 31, 2015
29,357

Year ending December 31, 2016
22,278

Year ending December 31, 2017
11,134

Year ending December 31, 2018
8,494

Thereafter
12,315

Total
$
91,797

Actual amortization expense may differ from the amounts above due to, among other things, fluctuations in foreign currency exchange rates, impairments, acquisitions and accelerated amortization.
Goodwill
As a result of the reclassification of our shipping solutions operations from the Small & Medium Business Solutions segment group to the Digital Commerce Solutions segment, we reallocated goodwill on a relative fair value basis and performed the required goodwill impairment test during the first quarter of 2014. Based on the results of the impairment tests, we determined that the estimated fair values of the affected reporting units exceeded the carrying values.

The changes in the carrying value of goodwill for the nine months ended September 30, 2014 were as follows:
 
Gross value before accumulated impairment (1)
 
Accumulated impairment
 
December 31, 2013
 
Other (2)
 
September 30,
2014
North America Mailing
$
326,665

 
$
—

 
$
326,665

 
$
(11,737
)
 
$
314,928

International Mailing
182,261

 
—

 
182,261

 
(11,136
)
 
171,125

Small & Medium Business Solutions
508,926

 
—

 
508,926

 
(22,873
)
 
486,053

Production Mail
118,060

 
—

 
118,060

 
(4,430
)
 
113,630

Presort Services
195,140

 
—

 
195,140

 
—

 
195,140

Enterprise Business Solutions
313,200

 
—

 
313,200

 
(4,430
)
 
308,770

Digital Commerce Solutions
903,392

 
—

 
903,392

 
(3,228
)
 
900,164

Discontinued operations
9,353

 
—

 
9,353

 
(9,353
)
 
—

Balance at September 30, 2014
$
1,734,871

 
$
—

 
$
1,734,871

 
$
(39,884
)
 
$
1,694,987

(1)
Includes the reallocation of certain goodwill from the Small & Medium Business Solutions segment group to the Digital Commerce Solutions segment and discontinued operations.
(2)
Primarily represents the impact of foreign currency translation and the sale of DIS.

7. 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.

16

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

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, 2014 and December 31, 2013. 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 its placement within the fair value hierarchy.
 
September 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
238,103

 
$
220,814

 
$
—

 
$
458,917

Equity securities
—

 
26,419

 
—

 
26,419

Commingled fixed income securities
—

 
23,853

 
—

 
23,853

Debt securities - U.S. and foreign governments, agencies and municipalities
112,511

 
21,781

 
—

 
134,292

Debt securities - corporate
—

 
65,813

 
—

 
65,813

Mortgage-backed / asset-backed securities
—

 
150,974

 
—

 
150,974

Derivatives
 
 
 
 
 

 


Foreign exchange contracts
—

 
3,090

 
—

 
3,090

Total assets
$
350,614

 
$
512,744

 
$
—

 
$
863,358

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$
—

 
$
(377
)
 
$
—

 
$
(377
)
Total liabilities
$
—

 
$
(377
)
 
$
—

 
$
(377
)

 
December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
403,706

 
$
224,440

 
$
—

 
$
628,146

Equity securities
—

 
26,536

 
—

 
26,536

Commingled fixed income securities
—

 
24,695

 
—

 
24,695

Debt securities - U.S. and foreign governments, agencies and municipalities
122,783

 
17,653

 
—

 
140,436

Debt securities - corporate
—

 
38,264

 
—

 
38,264

Mortgage-backed / asset-backed securities
—

 
164,598

 
—

 
164,598

Derivatives
 

 
 

 
 

 


Foreign exchange contracts
—

 
1,358

 
—

 
1,358

Total assets
$
526,489

 
$
497,544

 
$
—

 
$
1,024,033

Liabilities:
 

 
 

 
 

 
 

Investment securities
 
 
 
 
 
 
 
Mortgage-backed securities
$
—

 
$
(4,445
)
 
$
—

 
$
(4,445
)
Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
—

 
(3,009
)
 
—

 
(3,009
)
Total liabilities
$
—

 
$
(7,454
)
 
$
—

 
$
(7,454
)



17

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

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 highly liquid and low-risk securities, including government securities, certificates of deposit and commercial paper. 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 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 in the unaudited 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 (AOCI).

18

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

Available-for-sale securities at September 30, 2014 and December 31, 2013 consisted of the following:
 
September 30, 2014
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
Debt securities - U.S. and foreign governments, agencies and municipalities
$
133,573

 
$
1,813

 
$
(1,094
)
 
$
134,292

Debt securities - corporate
64,761

 
1,354

 
(302
)
 
65,813

Mortgage-backed / asset-backed securities
150,363

 
1,942

 
(1,331
)
 
150,974

Total
$
348,697

 
$
5,109

 
$
(2,727
)
 
$
351,079

 
December 31, 2013
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
Debt securities - U.S. and foreign governments, agencies and municipalities
$
121,803

 
$
999

 
$
(3,372
)
 
$
119,430

Debt securities - corporate
37,901

 
935

 
(572
)
 
38,264

Mortgage-backed / asset-backed securities
165,664

 
1,570

 
(2,636
)
 
164,598

Total
$