XNYS:PBI Pitney Bowes Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
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)
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ
No o          
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ
No o          
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o
No þ          
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of July 31, 2012.
Class
 
Outstanding
Common Stock, $1 par value per share
 
200,638,510 shares

1




PITNEY BOWES INC.
INDEX

 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2





PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
PITNEY BOWES INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; in thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Revenue:
 

 
 

 
 

 
 

Equipment sales
$
224,235

 
$
242,921

 
$
444,414

 
$
484,552

Supplies
70,522

 
78,587

 
146,887

 
161,457

Software
104,551

 
105,516

 
208,901

 
205,081

Rentals
145,497

 
156,162

 
285,886

 
312,854

Financing
122,948

 
136,369

 
249,696

 
276,958

Support services
171,254

 
176,807

 
344,772

 
355,421

Business services
406,811

 
418,112

 
820,918

 
841,220

Total revenue
1,245,818

 
1,314,474

 
2,501,474

 
2,637,543

Costs and expenses:
 

 
 

 
 

 
 

Cost of equipment sales
106,718

 
104,385

 
203,634

 
219,138

Cost of supplies
20,863

 
25,562

 
44,734

 
51,754

Cost of software
24,404

 
24,898

 
45,497

 
50,110

Cost of rentals
31,850

 
36,109

 
62,075

 
72,016

Financing interest expense
20,642

 
22,192

 
41,781

 
45,485

Cost of support services
112,122

 
115,417

 
227,209

 
230,693

Cost of business services
313,553

 
325,250

 
632,529

 
658,817

Selling, general and administrative
391,606

 
432,715

 
802,791

 
859,326

Research and development
33,776

 
37,441

 
67,849

 
72,199

Restructuring charges and asset impairments
1,074

 
4,994

 
1,074

 
31,018

Other interest expense
30,353

 
28,550

 
59,720

 
57,074

Interest income
(2,003
)
 
(2,215
)
 
(3,736
)
 
(3,437
)
Other expense, net
4,372

 

 
1,138

 

Total costs and expenses
1,089,330

 
1,155,298

 
2,186,295

 
2,344,193

Income from continuing operations before income taxes
156,488

 
159,176

 
315,179

 
293,350

Provision for income taxes
52,271

 
53,012

 
67,030

 
94,406

Income from continuing operations
104,217

 
106,164

 
248,149

 
198,944

(Loss) income from discontinued operations, net of tax

 
(635
)
 
19,332

 
(2,517
)
Net income before attribution of noncontrolling interests
104,217

 
105,529

 
267,481

 
196,427

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

 
4,594

 
9,188

 
9,188

Net income - Pitney Bowes Inc.
$
99,623

 
$
100,935

 
$
258,293

 
$
187,239

Amounts attributable to common stockholders:
 

 
 

 
 

 
 

Income from continuing operations
$
99,623

 
$
101,570

 
$
238,961

 
$
189,756

(Loss) income from discontinued operations

 
(635
)
 
19,332

 
(2,517
)
Net income - Pitney Bowes Inc.
$
99,623

 
$
100,935

 
$
258,293

 
$
187,239

Basic earnings per share attributable to common stockholders (1):
 

 
 

 
 

 
 

Continuing operations
$
0.50

 
$
0.50

 
$
1.19

 
$
0.93

Discontinued operations

 

 
0.10

 
(0.01
)
Net income - Pitney Bowes Inc.
$
0.50

 
$
0.50

 
$
1.29

 
$
0.92

Diluted earnings per share attributable to common stockholders (1):
 

 
 

 
 

 
 

Continuing operations
$
0.50

 
$
0.50

 
$
1.19

 
$
0.93

Discontinued operations

 

 
0.10

 
(0.01
)
Net income - Pitney Bowes Inc.
$
0.50

 
$
0.49

 
$
1.29

 
$
0.92


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

See Notes to Condensed Consolidated Financial Statements
PITNEY BOWES INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; in thousands, except per share data)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
 
Net income - Pitney Bowes Inc.
 
$
99,623

 
$
100,935

 
$
258,293

 
$
187,239

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
Foreign currency translations
 
(53,267
)
 
25,164

 
(19,908
)
 
75,981

Net unrealized gain on cash flow hedges, net of tax of $321, $273, $353 and $245, respectively
 
504

 
438

 
553

 
387

Net unrealized gain on investment securities, net of tax of $790, $790, $242 and $710, respectively
 
1,235

 
1,236

 
378

 
1,111

Amortization of pension and postretirement costs, net of tax of $6,580, $4,856, $13,466 and $9,833, respectively
 
10,976

 
8,496

 
22,964

 
17,165

Other comprehensive income
 
(40,552
)
 
35,334

 
3,987

 
94,644

Comprehensive income - Pitney Bowes Inc.
 
59,071

 
136,269

 
262,280

 
281,883

Preferred stock dividends of subsidiaries attributable to noncontrolling interests
 
4,594

 
4,594

 
9,188

 
9,188

Total comprehensive income
 
$
63,665

 
$
140,863

 
$
271,468

 
$
291,071



































See Notes to Condensed Consolidated Financial Statements

PITNEY BOWES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except share and per share data)
 
June 30, 2012
 
December 31, 2011
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
499,772

 
$
856,238

Short-term investments
38,549

 
12,971

Accounts receivable, gross
691,332

 
755,485

Allowance for doubtful accounts receivables
(30,233
)
 
(31,855
)
Accounts receivable, net
661,099

 
723,630

Finance receivables
1,221,086

 
1,296,673

Allowance for credit losses
(31,781
)
 
(45,583
)
Finance receivables, net
1,189,305

 
1,251,090

Inventories
187,562

 
178,599

Current income taxes
20,107

 
102,556

Other current assets and prepayments
124,922

 
134,774

Total current assets
2,721,316

 
3,259,858

Property, plant and equipment, net
391,651

 
404,146

Rental property and equipment, net
251,495

 
258,711

Finance receivables
1,072,641

 
1,123,638

Allowance for credit losses
(19,960
)
 
(17,847
)
Finance receivables, net
1,052,681

 
1,105,791

Investment in leveraged leases
32,725

 
138,271

Goodwill
2,133,559

 
2,147,088

Intangible assets, net
188,657

 
212,603

Non-current income taxes
44,299

 
89,992

Other assets
528,614

 
530,644

Total assets
$
7,344,997

 
$
8,147,104

LIABILITIES, NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
1,701,135

 
$
1,840,465

Current income taxes
230,242

 
242,972

Notes payable and current portion of long-term obligations
375,000

 
550,000

Advance billings
466,926

 
458,425

Total current liabilities
2,773,303

 
3,091,862

Deferred taxes on income
30,472

 
175,944

Tax uncertainties and other income tax liabilities
223,603

 
194,840

Long-term debt
3,306,473

 
3,683,909

Other non-current liabilities
633,510

 
743,165

Total liabilities
6,967,361

 
7,889,720

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

 
296,370

Commitments and contingencies (See Note 11)


 


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

 
4

Cumulative preference stock, no par value, $2.12 convertible
653

 
659

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

 
323,338

Additional paid-in capital
227,136

 
240,584

Retained earnings
4,708,485

 
4,600,217

Accumulated other comprehensive loss
(657,658
)
 
(661,645
)
Treasury stock, at cost (122,995,133 and 123,586,842 shares, respectively)
(4,520,692
)
 
(4,542,143
)
Total Pitney Bowes Inc. stockholders’ equity (deficit)
81,266

 
(38,986
)
Total liabilities, noncontrolling interests and stockholders’ equity (deficit)
$
7,344,997

 
$
8,147,104

See Notes to Condensed Consolidated Financial Statements
PITNEY BOWES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
 
Six Months Ended June 30,
 
2012
 
2011
Cash flows from operating activities:
 

 
 

Net income before attribution of noncontrolling interests
$
267,481

 
$
196,427

Restructuring payments
(47,875
)
 
(51,968
)
Special pension plan contributions
(95,000
)
 
(123,000
)
Tax payments related to sale of leveraged lease assets
(84,904
)
 

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

 
 

Gain on sale of leveraged lease assets, net of tax
(12,886
)
 

Depreciation and amortization
131,607

 
137,635

Stock-based compensation
8,852

 
8,656

Restructuring charges and asset impairments
1,074

 
31,018

Changes in operating assets and liabilities:
 

 
 

(Increase) decrease in accounts receivable
60,176

 
82,030

(Increase) decrease in finance receivables
113,034

 
139,793

(Increase) decrease in inventories
(9,428
)
 
(7,435
)
(Increase) decrease in other current assets and prepayments
3,161

 
4,466

Increase (decrease) in accounts payable and accrued liabilities
(87,468
)
 
(85,361
)
Increase (decrease) in current and non-current income taxes
86,555

 
105,235

Increase (decrease) in advance billings
17,178

 
885

Increase (decrease) in other operating capital, net
18,610

 
11,020

Net cash provided by operating activities
370,167

 
449,401

Cash flows from investing activities:
 

 
 

Short-term and other investments
(30,966
)
 
(36,236
)
Capital expenditures
(88,751
)
 
(88,017
)
Proceeds from sale of leveraged lease assets
105,506

 

Net investment in external financing
(3,464
)
 
(3,132
)
Reserve account deposits
2,334

 
18,088

Net cash used in investing activities
(15,341
)
 
(109,297
)
Cash flows from financing activities:
 

 
 

Decrease in notes payable, net

 
(50,000
)
Principal payments of long-term obligations
(550,000
)
 

Proceeds from issuance of common stock
4,274

 
7,170

Stock repurchases

 
(49,998
)
Dividends paid to stockholders
(150,025
)
 
(150,863
)
Dividends paid to noncontrolling interests
(9,188
)
 
(9,188
)
Net cash used in financing activities
(704,939
)
 
(252,879
)
Effect of exchange rate changes on cash and cash equivalents
(6,353
)
 
6,860

(Decrease) increase in cash and cash equivalents
(356,466
)
 
94,085

Cash and cash equivalents at beginning of period
856,238

 
484,363

Cash and cash equivalents at end of period
$
499,772

 
$
578,448

Cash interest paid
$
99,477

 
$
100,131

Cash income tax payments (refund), net
$
63,998

 
$
(7,859
)




See Notes to Condensed Consolidated Financial Statements

3




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

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

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In addition, the December 31, 2011 Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In management's opinion, all adjustments, consisting of normal recurring adjustments, considered necessary to present fairly our financial position, results of operations and cash flows for the periods presented have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for any other interim period or the year ending December 31, 2012.
These statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report to Stockholders on Form 10-K for the year ended December 31, 2011 (the 2011 Annual Report). Certain prior year amounts have been reclassified to conform to the current period presentation.
2. Inventories
Inventories at June 30, 2012 and December 31, 2011 consisted of the following:
 
June 30,
2012
 
December 31,
2011
Raw materials and work in process
$
68,456

 
$
63,216

Supplies and service parts
72,552

 
68,600

Finished products
72,535

 
71,958

Inventory at FIFO cost
213,543

 
203,774

Excess of FIFO cost over LIFO cost
(25,981
)
 
(25,175
)
Total inventory, net
$
187,562

 
$
178,599



4

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

3. Finance Assets
Finance Receivables
Finance receivables are comprised of sales-type lease receivables and unsecured revolving loan receivables. Sales-type leases are generally due in monthly, quarterly or semi-annual installments over periods ranging from three to five years. Loan receivables arise primarily from financing services offered to our customers for postage and related supplies. Loan receivables are generally due each month; however, customers may rollover outstanding balances.
Finance receivables at June 30, 2012 and December 31, 2011 consisted of the following:
 
June 30, 2012
 
North America
 
International
 
Total
Sales-type lease receivables
 

 
 

 
 

Gross finance receivables
$
1,638,414

 
$
447,317

 
$
2,085,731

Unguaranteed residual values
163,736

 
20,336

 
184,072

Unearned income
(325,882
)
 
(103,142
)
 
(429,024
)
Allowance for credit losses
(23,881
)
 
(9,041
)
 
(32,922
)
Net investment in sales-type lease receivables
1,452,387

 
355,470

 
1,807,857

Loan receivables
 

 
 

 
 

Loan receivables
407,327

 
45,621

 
452,948

Allowance for credit losses
(16,530
)
 
(2,289
)
 
(18,819
)
Net investment in loan receivables
390,797

 
43,332

 
434,129

Net investment in finance receivables
$
1,843,184

 
$
398,802

 
$
2,241,986

 
 
 
 
 
 
 
December 31, 2011
 
North America
 
International
 
Total
Sales-type lease receivables
 

 
 

 
 

Gross finance receivables
$
1,727,653

 
$
460,101

 
$
2,187,754

Unguaranteed residual values
185,450

 
20,443

 
205,893

Unearned income
(348,286
)
 
(102,618
)
 
(450,904
)
Allowance for credit losses
(28,661
)
 
(12,039
)
 
(40,700
)
Net investment in sales-type lease receivables
1,536,156

 
365,887

 
1,902,043

Loan receivables
 

 
 

 
 

Loan receivables
436,631

 
40,937

 
477,568

Allowance for credit losses
(20,272
)
 
(2,458
)
 
(22,730
)
Net investment in loan receivables
416,359

 
38,479

 
454,838

Net investment in finance receivables
$
1,952,515

 
$
404,366

 
$
2,356,881

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

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


5

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

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

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

Activity in the allowance for credit losses for finance receivables for the six months ended June 30, June 30, 2012 was as follows:
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
Balance at January 1, 2012
$
28,661

 
$
12,039

 
$
20,272

 
$
2,458

 
$
63,430

Amounts charged to expense
288

 
53

 
2,284

 
422

 
3,047

Accounts written off
(5,068
)
 
(3,051
)
 
(6,026
)
 
(591
)
 
(14,736
)
Balance at June 30, 2012
$
23,881

 
$
9,041

 
$
16,530

 
$
2,289

 
$
51,741


The aging of finance receivables at June 30, 2012 and December 31, 2011 was as follows:
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
June 30, 2012
 

 
 

 
 

 
 

 
 

< 31 days
$
1,556,971

 
$
419,905

 
$
387,285

 
$
43,646

 
$
2,407,807

> 30 days and < 61 days
32,991

 
11,043

 
11,372

 
1,291

 
56,697

> 60 days and < 91 days
22,348

 
4,893

 
3,660

 
327

 
31,228

> 90 days and < 121 days
8,044

 
3,809

 
2,404

 
147

 
14,404

> 120 days
18,060

 
7,667

 
2,606

 
210

 
28,543

Total
$
1,638,414

 
$
447,317

 
$
407,327

 
$
45,621

 
$
2,538,679

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
8,044

 
$
3,809

 
$

 
$

 
$
11,853

Not accruing interest
18,060

 
7,667

 
5,010

 
357

 
31,094

Total
$
26,104

 
$
11,476

 
$
5,010

 
$
357

 
$
42,947


6

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

 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
December 31, 2011
 

 
 

 
 

 
 

 
 

< 31 days
$
1,641,706

 
$
434,811

 
$
414,434

 
$
38,841

 
$
2,529,792

> 30 days and < 61 days
41,018

 
10,152

 
12,399

 
1,066

 
64,635

> 60 days and < 91 days
24,309

 
5,666

 
4,362

 
425

 
34,762

> 90 days and < 121 days
4,912

 
3,207

 
2,328

 
186

 
10,633

> 120 days
15,708

 
6,265

 
3,108

 
419

 
25,500

Total
$
1,727,653

 
$
460,101

 
$
436,631

 
$
40,937

 
$
2,665,322

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
4,912

 
$
3,207

 
$

 
$

 
$
8,119

Not accruing interest
15,708

 
6,265

 
5,436

 
605

 
28,014

Total
$
20,620

 
$
9,472

 
$
5,436

 
$
605

 
$
36,133

Credit Quality
The extension of credit and management of credit lines to new and existing customers uses a combination of an automated credit score, where available, and a detailed manual review of the customer’s financial condition and, when applicable, the customer’s payment history. Once credit is granted, the payment performance of the customer is managed through automated collections processes and is supplemented with direct follow up should an account become delinquent. We have robust automated collections and extensive portfolio management processes. The portfolio management processes ensure that our global strategy is executed, collection resources are allocated appropriately and enhanced tools and processes are implemented as needed.
We use a third party to score the majority of the North American portfolio on a quarterly basis using a commercial credit score. We do not use a third party to score our International portfolios because the cost to do so is prohibitive, it is a localized process and there is no single credit score model that covers all countries.
The table below shows the North American portfolio at June 30, 2012 and December 31, 2011 by relative risk class (low, medium, high) based on the relative scores of the accounts within each class. The relative scores are determined based on a number of factors, including the company type, ownership structure, payment history and financial information. A fourth class is shown for accounts that are not scored. Absence of a score is not indicative of the credit quality of the account. The degree of risk, as defined by the third party, refers to the relative risk that an account in the next 12 month period may become delinquent.
Low risk accounts are companies with very good credit scores and are considered to approximate the top 30% of all commercial borrowers.
Medium risk accounts are companies with average to good credit scores and are considered to approximate the middle 40% of all commercial borrowers.
High risk accounts are companies with poor credit scores, are delinquent or are at risk of becoming delinquent and are considered to approximate the bottom 30% of all commercial borrowers.


7

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

 
June 30,
2012
 
December 31,
2011
Sales-type lease receivables
 

 
 

Risk Level
 

 
 

Low
$
1,041,255

 
$
1,096,676

Medium
470,064

 
473,394

High
49,313

 
58,177

Not Scored
77,782

 
99,406

Total
$
1,638,414

 
$
1,727,653

Loan receivables
 

 
 

Risk Level
 

 
 

Low
$
243,419

 
$
269,547

Medium
145,053

 
115,490

High
13,720

 
21,081

Not Scored
5,135

 
30,513

Total
$
407,327

 
$
436,631

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

Leveraged Leases
Our investment in leveraged lease assets consisted of the following:
 
June 30,
2012
 
December 31,
2011
Rental receivables
$
88,942

 
$
810,306

Unguaranteed residual values
13,816

 
13,784

Principal and interest on non-recourse loans
(61,497
)
 
(606,708
)
Unearned income
(8,536
)
 
(79,111
)
Investment in leveraged leases
32,725

 
138,271

Less: deferred taxes related to leveraged leases
(20,117
)
 
(101,255
)
Net investment in leveraged leases
$
12,608

 
$
37,016

The following is a summary of the components of income from leveraged leases:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Pre-tax leveraged lease income
$
432

 
$
1,558

 
$
1,225

 
$
3,094

Income tax effect
7

 
(81
)
 
26

 
(163
)
Income from leveraged leases
$
439

 
$
1,477

 
$
1,251

 
$
2,931

During 2012, we sold certain non-U.S. leveraged lease assets for cash. The investment in the leveraged lease assets at the date of sale was $109 million and an after-tax gain of $13 million was recognized. The effects of the sale are not included in the table above.
4. Intangible Assets and Goodwill
Intangible assets
Intangible assets at June 30, 2012 and December 31, 2011 consisted of the following:
 
June 30, 2012
 
December 31, 2011
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships
$
408,401

 
$
(253,404
)
 
$
154,997

 
$
409,489

 
$
(237,536
)
 
$
171,953

Supplier relationships
29,000

 
(20,662
)
 
8,338

 
29,000

 
(19,213
)
 
9,787

Software & technology
169,998

 
(147,759
)
 
22,239

 
170,286

 
(143,456
)
 
26,830

Trademarks & trade names
34,560

 
(31,575
)
 
2,985

 
33,908

 
(30,076
)
 
3,832

Non-compete agreements
7,381

 
(7,283
)
 
98

 
7,564

 
(7,363
)
 
201

Total intangible assets
$
649,340

 
$
(460,683
)
 
$
188,657

 
$
650,247

 
$
(437,644
)
 
$
212,603


Amortization expense for intangible assets was $11 million and $14 million for the three months ended June 30, 2012 and 2011, respectively, and $23 million and $29 million for the six months ended June 30, 2012 and 2011, respectively. The future amortization expense for intangible assets as of June 30, 2012 was as follows:
Remaining for year ended December 31, 2012
$
21,622

Year ended December 31, 2013
41,849

Year ended December 31, 2014
36,496

Year ended December 31, 2015
32,541

Year ended December 31, 2016
23,997

Thereafter
32,152

Total
$
188,657

Actual amortization expense may differ from the amounts above due to, among other things, fluctuations in foreign currency exchange rates, impairments, future acquisitions and accelerated amortization.
Goodwill
The changes in the carrying amount of goodwill, by reporting segment, for the six months ended June 30, 2012 were as follows:
 
 
December 31, 2011
 
Other (1)
 
June 30, 2012
North America Mailing
 
$
352,897

 
$
(2,787
)
 
$
350,110

International Mailing
 
189,067

 
(11,698
)
 
177,369

Small & Medium Business Solutions
 
541,964

 
(14,485
)
 
527,479

Production Mail
 
127,589

 
640

 
128,229

Software
 
667,124

 
650

 
667,774

Management Services
 
402,723

 
(333
)
 
402,390

Mail Services
 
213,455

 
(1
)
 
213,454

Marketing Services
 
194,233

 

 
194,233

Enterprise Business Solutions
 
1,605,124

 
956

 
1,606,080

Total
 
$
2,147,088

 
$
(13,529
)
 
$
2,133,559

(1)
Primarily foreign currency translation adjustments.


8

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

5. Debt
On June 30, 2012, we redeemed our $400 million, 4.625% notes (the 2012 Notes) that were due in October 2012. As a result of the early redemption of the 2012 Notes, we recorded a net charge of $2 million in other expense, net as a loss on the extinguishment of debt. The charge is comprised of a make-whole payment and a gain recognized upon the termination of interest rate swap contracts related to the 2012 Notes.
In April 2012, we entered into forward starting swap agreements with an aggregate notional value of $150 million to hedge interest rate risk associated with the planned issuance of long-term debt before the end of the second quarter. We chose not to issue debt within the planned time period, and on June 29, 2012, the swap agreements expired and we recorded a loss of $6 million in other expense, net during the quarter ended June 30, 2012.
In March 2012, we redeemed, at par plus accrued interest, a $150 million term loan that was scheduled to mature in the fourth quarter of 2012.
During the quarter, commercial paper borrowings averaged $142 million at a weighted-average interest rate of 0.38% and the maximum amount outstanding at any time was $343 million. At June 30, 2012, there was no outstanding commercial paper borrowings.
6. Noncontrolling Interests (Preferred Stockholders’ Equity in Subsidiaries)
Pitney Bowes International Holdings, Inc. (PBIH), a subsidiary, has 300,000 shares, or $300 million, of outstanding perpetual voting preferred stock (the Preferred Stock) held by certain institutional investors. The holders of the Preferred Stock are entitled as a group to 25% of the combined voting power of all classes of capital stock of PBIH. All outstanding common stock of PBIH, representing the remaining 75% of the combined voting power of all classes of capital stock, is owned directly or indirectly by the company. The Preferred Stock is entitled to cumulative dividends at a rate of 6.125% through 2016 after which it becomes callable and, if it remains outstanding, will yield a dividend that increases by 50% every six months thereafter. No dividends were in arrears at June 30, 2012 or December 31, 2011. There was no change in the carrying value of noncontrolling interests during the period ended June 30, 2012 or the year ended December 31, 2011.
7. Income Taxes
The effective tax rate for the three months ended June 30, 2012 and 2011 was 33.4% and 33.3%, respectively. The effective tax rate for the six months ended June 30, 2012 and 2011 was 21.3% and 32.2%, respectively. The effective tax rate for the six months ended June 30, 2012 includes a $17 million tax benefit from the sale of non-U.S. leveraged lease assets and tax benefits of $22 million arising from the conclusion of tax examinations. The effective tax rate for the six months ended June 30, 2011 includes a $9 million tax benefit arising from a favorable conclusion of a foreign tax examination.
As is the case with other large corporations, our tax returns are examined each year by tax authorities in the United States, other countries and local jurisdictions in which we have operations. Except for issues arising out of certain partnership investments, the IRS examination of tax years 2001-2004 is closed to audit and the examination of years 2005-2008 is expected to be closed to audit by the end of 2012. Other significant tax filings subject to examination include various post-2000 U.S. state and local, post 2007 Canadian and German, and post-2008 French and U.K. tax filings. We have other less significant tax filings currently under examination or subject to examination. 
We regularly assess the likelihood of tax adjustments in each of the tax jurisdictions in which we have operations and account for the related financial statement implications.  We believe we have established tax reserves that are appropriate given the possibility of tax adjustments.  However, determining the appropriate level of tax reserves requires judgment regarding the uncertain application of tax law and the possibility of tax adjustments. Future changes in tax reserve requirements could have a material impact, positive or negative, on our results of operations, financial position and cash flows.


9

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


8. Stockholders Equity

Changes in stockholders’ equity for the six months ended June 30, 2012 and 2011 were as follows:
 
Preferred
stock
 
Preference
stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Treasury stock
 
Total equity
Balances at December 31, 2011
$
4

 
$
659

 
$
323,338

 
$
240,584

 
$
4,600,217

 
$
(661,645
)
 
$
(4,542,143
)
 
$
(38,986
)
Net income

 

 

 

 
258,293

 

 

 
258,293

Other comprehensive income

 

 

 

 

 
3,987

 

 
3,987

Cash dividends
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common ($0.75 per share)

 

 

 

 
(149,999
)
 

 

 
(149,999
)
Preference

 

 

 

 
(26
)
 

 

 
(26
)
Issuances of common stock

 

 

 
(22,176
)
 

 

 
21,321

 
(855
)
Conversions to common stock

 
(6
)
 

 
(124
)
 

 

 
130

 

Stock-based compensation expense

 

 

 
8,852

 

 

 

 
8,852

Balance at June 30, 2012
$
4

 
$
653

 
$
323,338

 
$
227,136

 
$
4,708,485

 
$
(657,658
)
 
$
(4,520,692
)
 
$
81,266


 
Preferred
stock
 
Preference
stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Treasury stock
 
Total equity
Balances at December 31, 2010
$
4

 
$
752

 
$
323,338

 
$
250,928

 
$
4,282,316

 
$
(473,806
)
 
$
(4,480,113
)
 
$
(96,581
)
Net income

 

 

 

 
187,239

 

 

 
187,239

Other comprehensive income

 

 

 

 

 
94,644

 

 
94,644

Cash dividends
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common ($0.74 per share)

 

 

 

 
(150,834
)
 

 

 
(150,834
)
Preference

 

 

 

 
(29
)
 

 

 
(29
)
Issuances of common stock

 

 

 
(23,836
)
 

 

 
29,570

 
5,734

Conversions to common stock

 
(11
)
 

 
(244
)
 

 

 
255

 

Stock-based compensation expense

 

 

 
8,656

 

 

 

 
8,656

Repurchase of common stock

 

 

 
 
 

 

 
(49,998
)
 
(49,998
)
Balance at June 30, 2011
$
4

 
$
741

 
$
323,338

 
$
235,504

 
$
4,318,692

 
$
(379,162
)
 
$
(4,500,286
)
 
$
(1,169
)

The components of accumulated other comprehensive loss at June 30, 2012 and 2011 were as follows:
 
January 1, 2012
 
Other comprehensive income
 
June 30, 2012
 
January 1, 2011
 
Other comprehensive income
 
June 30, 2011
Foreign currency translation adjustments
$
83,952

 
$
(19,908
)
 
$
64,044

 
$
137,521

 
$
75,981

 
$
213,502

Net unrealized (loss) gain on derivatives
(8,438
)
 
553

 
(7,885
)
 
(10,445
)
 
387

 
(10,058
)
Net unrealized gain on investment securities
4,387

 
378

 
4,765

 
1,439

 
1,111

 
2,550

Net unamortized (loss) gain on pension and postretirement plans
(741,546
)
 
22,964

 
(718,582
)
 
(602,321
)
 
17,165

 
(585,156
)
Accumulated other comprehensive loss
$
(661,645
)
 
$
3,987

 
$
(657,658
)
 
$
(473,806
)
 
$
94,644

 
$
(379,162
)

9. Fair Value Measurements and Derivative Instruments
We measure certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. An entity is required to classify certain assets and liabilities measured at fair value based on the following fair value hierarchy that prioritizes the inputs used to measure fair value:
Level 1 – Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity, may be derived from internally developed methodologies based on management’s best estimate of fair value and that are significant to the fair value of the asset or liability.
The following tables show, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis at June 30, 2012 and December 31, 2011. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect their placement within the fair value hierarchy.
 
June 30, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
244,403

 
$
25,345

 
$

 
$
269,748

Equity securities

 
23,605

 

 
23,605

Commingled fixed income securities

 
28,660

 

 
28,660

Debt securities - U.S. and foreign governments, agencies and municipalities
115,387

 
20,890

 

 
136,277

Debt securities - corporate

 
34,834

 

 
34,834

Mortgage-backed / asset-backed securities

 
139,808

 

 
139,808

Derivatives
 
 
 
 
 

 


Interest rate swaps

 
11,036

 

 
11,036

Foreign exchange contracts

 
5,810

 

 
5,810

Total assets
$
359,790

 
$
289,988

 
$

 
$
649,778

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$

 
$
(4,950
)
 
$

 
$
(4,950
)
Total liabilities
$

 
$
(4,950
)
 
$

 
$
(4,950
)


10

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

 
December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
239,157

 
$
300,702

 
$

 
$
539,859

Equity securities

 
22,097

 

 
22,097

Commingled fixed income securities

 
27,747

 

 
27,747

Debt securities - U.S. and foreign governments, agencies and municipalities
93,175

 
19,042

 

 
112,217

Debt securities - corporate

 
31,467

 

 
31,467

Mortgage-backed / asset-backed securities

 
134,262

 

 
134,262

Derivatives
 

 
 

 
 

 


Interest rate swaps

 
15,465

 

 
15,465

Foreign exchange contracts

 
4,230

 

 
4,230

Total assets
$
332,332

 
$
555,012

 
$

 
$
887,344

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$

 
$
(1,439
)
 
$

 
$
(1,439
)
Total liabilities
$

 
$
(1,439
)
 
$

 
$
(1,439
)
Investment Securities
The valuation of investment securities is based on the market approach using inputs that are observable, or can be corroborated by observable data, in an active marketplace. The following information relates to our classification into the fair value hierarchy:
Money Market Funds / Commercial Paper: Money market funds typically invest in government securities, certificates of deposit, commercial paper and other highly liquid and low-risk securities. Money market funds are principally used for overnight deposits and are classified as Level 1 when unadjusted quoted prices in active markets are available and as Level 2 when they are not actively traded on an exchange. Direct investments in commercial paper are not listed on an exchange in an active market and are classified as Level 2.
Equity Securities: Equity securities are comprised of mutual funds investing in U.S. and foreign common stock. These mutual funds are classified as Level 2 as they are not separately listed on an exchange.
Commingled Fixed Income Securities: Mutual funds that invest in a variety of fixed income securities including securities of the U.S. government and its agencies, corporate debt, mortgage-backed securities and asset-backed securities. The value of the funds is based on the market value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding, as reported by the fund manager. These commingled funds are not listed on an exchange in an active market and are classified as Level 2.
Debt Securities – U.S. and Foreign Governments, Agencies and Municipalities: Debt securities are classified as Level 1 where active, high volume trades for identical securities exist. Valuation adjustments are not applied to these securities. Debt securities valued using quoted market prices for similar securities or benchmarking model derived prices to quoted market prices and trade data for identical or comparable securities are classified as Level 2.
Debt Securities – Corporate: Corporate debt securities are valued using recently executed transactions, market price quotations where observable, or bond spreads. The spread data used are for the same maturity as the security. These securities are classified as Level 2.
Mortgage-Backed Securities (MBS) / Asset-Backed Securities (ABS): These securities are valued based on external pricing indices. When external index pricing is not observable, MBS and ABS are valued based on external price/spread data. These securities are classified as Level 2.
The carrying value of our investment securities at June 30, 2012 and December 31, 2011 was $625 million and $861 million, respectively.
Investment securities include investments held by The Pitney Bowes Bank, a wholly-owned subsidiary and a Utah-chartered

11

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

Industrial Loan Company. The bank’s investments at June 30, 2012 and December 31, 2011 were $343 million and $282 million, respectively. These investments are reported on the Condensed Consolidated Balance Sheets as cash and cash equivalents, short-term investments and other assets depending on the type of investment and maturity.
We have not experienced any write-offs in our investment portfolio. The majority of our MBS are either guaranteed or supported by the U.S. government. Market events have not caused our money market funds to experience declines in their net asset value below $1.00 per share or to incur imposed limits on redemptions. We have no investments in inactive markets that would warrant a possible change in our pricing methods or classification within the fair value hierarchy. Further, we have no investments in auction rate securities.
Derivative Instruments
In the normal course of business, we are exposed to the impact of interest rate changes and foreign currency fluctuations. We limit these risks by following established risk management policies and procedures, including the use of derivatives. We use derivatives to manage the related cost of debt and to limit the effects of foreign exchange rate fluctuations on financial results. We do not use derivatives for trading or speculative purposes. We record our derivative instruments at fair value, and the accounting for changes in the fair value of the derivatives depends on the intended use of the derivative, the resulting designation, and the effectiveness of the instrument in offsetting the risk exposure it is designed to hedge.
As required by the fair value measurements guidance, we have incorporated counterparty credit risk and our credit risk into the fair value measurement of our derivative assets and liabilities, respectively. We derive credit risk from observable data related to credit default swaps. We have not seen a material change in the creditworthiness of those banks acting as derivative counterparties.
The valuation of our interest rate swaps is based on the income approach using a model with inputs that are observable or that can be derived from or corroborated by observable market data. The valuation of our foreign exchange derivatives is based on the market approach using observable market inputs, such as forward rates.

The fair value of our derivative instruments at June 30, 2012 and December 31, 2011 was as follows:
Designation of Derivatives
 
Balance Sheet Location
 
June 30,
2012
 
December 31,
2011
Derivatives designated as
hedging instruments
 
Other current assets and prepayments:
 
 

 
 

 
 
Foreign exchange contracts
 
$
597

 
$
780

 
 
Other assets:
 
 

 
 

 
 
Interest rate swaps
 
11,036

 
15,465

 
 
Accounts payable and accrued liabilities:
 
 

 
 

 
 
Foreign exchange contracts
 
(5
)
 
(79
)
Derivatives not designated as
hedging instruments
 
Other current assets and prepayments:
 
 

 
 

 
 
Foreign exchange contracts
 
5,213

 
3,450

 
 
Accounts payable and accrued liabilities:
 
 

 
 

 
 
Foreign exchange contracts
 
(4,945
)
 
(1,360
)
 
 
 
 
 
 
 
 
 
Total Derivative Assets
 
$
16,846

 
$
19,695

 
 
Total Derivative Liabilities
 
(4,950
)
 
(1,439
)
 
 
Total Net Derivative Assets
 
$
11,896

 
$
18,256



12

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

Interest Rate Swaps
Derivatives designated as fair value hedges include interest rate swaps related to fixed rate debt. Changes in the fair value of both the derivative and item being hedged are recognized in earnings. The following represents the results of fair value hedging relationships for the three and six months ended June 30, 2012 and 2011:
 
 
 
 
Three Months Ended June 30,
 
 
 
 
Derivative Gain
Recognized in Earnings
 
Hedged Item Expense
Recognized in Earnings
Derivative Instrument
 
Location of Gain (Loss)
 
2012
 
2011
 
2012
 
2011
Interest rate swaps
 
Interest expense
 
$
3,446

 
$
3,133

 
$
(10,059
)
 
$
(8,281
)