NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)
1. Description of Business and Basis of Presentation
Pitney Bowes Inc. and its subsidiaries (the company, we, us, and our) is a global provider of software, hardware and services that enables both physical and digital communications and that integrates those physical and digital communications channels. We offer a full suite of equipment, supplies, software, services and solutions for managing and integrating physical and digital communication channels. We conduct our business activities in seven reporting segments within two business groups: Small & Medium Business Solutions and Enterprise Business Solutions. See Note 12 for information regarding our reportable segments.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In addition, the
December 31, 2011
Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In management's opinion, all adjustments, consisting of normal recurring adjustments, considered necessary to present fairly our financial position, results of operations and cash flows for the periods presented have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for any other interim period or the year ending
December 31, 2012
.
These statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report to Stockholders on Form 10-K for the year ended
December 31, 2011
(the 2011 Annual Report). Certain prior year amounts have been reclassified to conform to the current period presentation.
2. Inventories
Inventories at
September 30, 2012
and
December 31, 2011
consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
December 31,
2011
|
Raw materials and work in process
|
$
|
64,333
|
|
|
$
|
63,216
|
|
Supplies and service parts
|
75,053
|
|
|
68,600
|
|
Finished products
|
74,653
|
|
|
71,958
|
|
Inventory at FIFO cost
|
214,039
|
|
|
203,774
|
|
Excess of FIFO cost over LIFO cost
|
(26,957
|
)
|
|
(25,175
|
)
|
Total inventory, net
|
$
|
187,082
|
|
|
$
|
178,599
|
|
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)
3. Finance Assets
Finance Receivables
Finance receivables are comprised of sales-type lease receivables and unsecured revolving loan receivables. Sales-type lease receivables are generally due in monthly, quarterly or semi-annual installments over periods ranging from three to five years. Loan receivables arise primarily from financing services offered to our customers for postage and related supplies. Loan receivables are generally due each month; however, customers may rollover outstanding balances.
Finance receivables at
September 30, 2012
and
December 31, 2011
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
North America
|
|
International
|
|
Total
|
Sales-type lease receivables
|
|
|
|
|
|
|
|
|
Gross finance receivables
|
$
|
1,603,444
|
|
|
$
|
456,370
|
|
|
$
|
2,059,814
|
|
Unguaranteed residual values
|
155,999
|
|
|
20,733
|
|
|
176,732
|
|
Unearned income
|
(317,457
|
)
|
|
(105,525
|
)
|
|
(422,982
|
)
|
Allowance for credit losses
|
(17,138
|
)
|
|
(9,820
|
)
|
|
(26,958
|
)
|
Net investment in sales-type lease receivables
|
1,424,848
|
|
|
361,758
|
|
|
1,786,606
|
|
Loan receivables
|
|
|
|
|
|
|
|
|
Loan receivables
|
404,099
|
|
|
47,848
|
|
|
451,947
|
|
Allowance for credit losses
|
(15,477
|
)
|
|
(2,188
|
)
|
|
(17,665
|
)
|
Net investment in loan receivables
|
388,622
|
|
|
45,660
|
|
|
434,282
|
|
Net investment in finance receivables
|
$
|
1,813,470
|
|
|
$
|
407,418
|
|
|
$
|
2,220,888
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
North America
|
|
International
|
|
Total
|
Sales-type lease receivables
|
|
|
|
|
|
|
|
|
Gross finance receivables
|
$
|
1,727,653
|
|
|
$
|
460,101
|
|
|
$
|
2,187,754
|
|
Unguaranteed residual values
|
185,450
|
|
|
20,443
|
|
|
205,893
|
|
Unearned income
|
(348,286
|
)
|
|
(102,618
|
)
|
|
(450,904
|
)
|
Allowance for credit losses
|
(28,661
|
)
|
|
(12,039
|
)
|
|
(40,700
|
)
|
Net investment in sales-type lease receivables
|
1,536,156
|
|
|
365,887
|
|
|
1,902,043
|
|
Loan receivables
|
|
|
|
|
|
|
|
|
Loan receivables
|
436,631
|
|
|
40,937
|
|
|
477,568
|
|
Allowance for credit losses
|
(20,272
|
)
|
|
(2,458
|
)
|
|
(22,730
|
)
|
Net investment in loan receivables
|
416,359
|
|
|
38,479
|
|
|
454,838
|
|
Net investment in finance receivables
|
$
|
1,952,515
|
|
|
$
|
404,366
|
|
|
$
|
2,356,881
|
|
Allowance for Credit Losses and Aging of Receivables
We estimate our finance receivable risks and provide allowances for credit losses accordingly. We establish credit approval limits based on the credit quality of the customer and the type of equipment financed. We believe that our concentration of credit risk is limited because of our large number of customers, small account balances for most of our customers, and customer geographic and industry diversification.
Our policy is to discontinue revenue recognition for lease receivables that are more than 120 days past due and for unsecured loan receivables that are more than 90 days past due. We resume revenue recognition when customer payments reduce the account balance aging to 60 days or less past due. We evaluate the adequacy of the allowance for credit losses based on historical loss experience, the nature and volume of our portfolios, adverse situations that may affect a customer’s ability to pay and prevailing economic conditions, and make adjustments to the reserves as necessary. This evaluation is inherently subjective and actual results may differ significantly from estimated reserves.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)
We maintain a program for U.S. borrowers in our North America loan portfolio who are experiencing financial difficulties, but are able to make reduced payments over an extended period of time. Upon acceptance into the program, the borrower’s credit line is closed, interest accrual is suspended, the borrower’s minimum required payment is reduced and the account is re-aged and classified as current. There is generally no forgiveness of debt or reduction of balances owed. The loans in the program are considered to be troubled debt restructurings because of the concessions granted to the borrower. At
September 30, 2012
and
December 31, 2011
, loans in this program had a balance of
$5 million
and
$7 million
, respectively.
The allowance for credit losses for these modified loans is determined by the difference between the cash flows expected to be received from the borrower discounted at the original effective rate and the carrying value of the loan. The allowance for credit losses related to such loans was
$1 million
at
September 30, 2012
and
$2 million
at
December 31, 2011
and is included in the allowance for credit losses of North America loans in the table below. Management believes that the allowance for credit losses is adequate for these loans and all other loans in the portfolio. Write-offs of loans in the program for the past twelve months were less than
$1 million
.
Activity in the allowance for credit losses for finance receivables for the
nine months ended September 30,
2012
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales-type Lease Receivables
|
|
Loan Receivables
|
|
|
|
North
America
|
|
International
|
|
North
America
|
|
International
|
|
Total
|
Balance at January 1, 2012
|
$
|
28,661
|
|
|
$
|
12,039
|
|
|
$
|
20,272
|
|
|
$
|
2,458
|
|
|
$
|
63,430
|
|
Amounts charged to expense
|
1,171
|
|
|
1,489
|
|
|
4,069
|
|
|
703
|
|
|
7,432
|
|
Accounts written off
|
(12,694
|
)
|
|
(3,708
|
)
|
|
(8,864
|
)
|
|
(973
|
)
|
|
(26,239
|
)
|
Balance at September 30, 2012
|
$
|
17,138
|
|
|
$
|
9,820
|
|
|
$
|
15,477
|
|
|
$
|
2,188
|
|
|
$
|
44,623
|
|
The aging of finance receivables at
September 30, 2012
and
December 31, 2011
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales-type Lease Receivables
|
|
Loan Receivables
|
|
|
|
North
America
|
|
International
|
|
North
America
|
|
International
|
|
Total
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< 31 days
|
$
|
1,520,139
|
|
|
$
|
429,389
|
|
|
$
|
382,897
|
|
|
$
|
42,549
|
|
|
$
|
2,374,974
|
|
> 30 days and < 61 days
|
30,160
|
|
|
8,996
|
|
|
11,268
|
|
|
3,451
|
|
|
53,875
|
|
> 60 days and < 91 days
|
29,187
|
|
|
5,444
|
|
|
4,302
|
|
|
1,211
|
|
|
40,144
|
|
> 90 days and < 121 days
|
6,441
|
|
|
3,118
|
|
|
2,280
|
|
|
347
|
|
|
12,186
|
|
> 120 days
|
17,517
|
|
|
9,423
|
|
|
3,352
|
|
|
290
|
|
|
30,582
|
|
Total
|
$
|
1,603,444
|
|
|
$
|
456,370
|
|
|
$
|
404,099
|
|
|
$
|
47,848
|
|
|
$
|
2,511,761
|
|
Past due amounts > 90 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Still accruing interest
|
$
|
6,441
|
|
|
$
|
3,118
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,559
|
|
Not accruing interest
|
17,517
|
|
|
9,423
|
|
|
5,632
|
|
|
637
|
|
|
33,209
|
|
Total
|
$
|
23,958
|
|
|
$
|
12,541
|
|
|
$
|
5,632
|
|
|
$
|
637
|
|
|
$
|
42,768
|
|
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales-type Lease Receivables
|
|
Loan Receivables
|
|
|
|
North
America
|
|
International
|
|
North
America
|
|
International
|
|
Total
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< 31 days
|
$
|
1,641,706
|
|
|
$
|
434,811
|
|
|
$
|
414,434
|
|
|
$
|
38,841
|
|
|
$
|
2,529,792
|
|
> 30 days and < 61 days
|
41,018
|
|
|
10,152
|
|
|
12,399
|
|
|
1,066
|
|
|
64,635
|
|
> 60 days and < 91 days
|
24,309
|
|
|
5,666
|
|
|
4,362
|
|
|
425
|
|
|
34,762
|
|
> 90 days and < 121 days
|
4,912
|
|
|
3,207
|
|
|
2,328
|
|
|
186
|
|
|
10,633
|
|
> 120 days
|
15,708
|
|
|
6,265
|
|
|
3,108
|
|
|
419
|
|
|
25,500
|
|
Total
|
$
|
1,727,653
|
|
|
$
|
460,101
|
|
|
$
|
436,631
|
|
|
$
|
40,937
|
|
|
$
|
2,665,322
|
|
Past due amounts > 90 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Still accruing interest
|
$
|
4,912
|
|
|
$
|
3,207
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,119
|
|
Not accruing interest
|
15,708
|
|
|
6,265
|
|
|
5,436
|
|
|
605
|
|
|
28,014
|
|
Total
|
$
|
20,620
|
|
|
$
|
9,472
|
|
|
$
|
5,436
|
|
|
$
|
605
|
|
|
$
|
36,133
|
|
Credit Quality
The extension of credit and management of credit lines to new and existing customers uses a combination of an automated credit score, where available, and a detailed manual review of the customer’s financial condition and, when applicable, the customer’s payment history. Once credit is granted, the payment performance of the customer is managed through automated collections processes and is supplemented with direct follow up should an account become delinquent. We have robust automated collections and extensive portfolio management processes. The portfolio management processes ensure that our global strategy is executed, collection resources are allocated appropriately and enhanced tools and processes are implemented as needed.
We use a third party to score the majority of the North America portfolio on a quarterly basis using a commercial credit score. We do not use a third party to score our International portfolios because the cost to do so is prohibitive, it is a localized process and there is no single credit score model that covers all countries.
The table below shows the North America portfolio at
September 30, 2012
and
December 31, 2011
by relative risk class (low, medium, high) based on the relative scores of the accounts within each class. The relative scores are determined based on a number of factors, including the company type, ownership structure, payment history and financial information. A fourth class is shown for accounts that are not scored. Absence of a score is not indicative of the credit quality of the account. The degree of risk, as defined by the third party, refers to the relative risk that an account in the next 12 month period may become delinquent.
|
|
•
|
Low risk accounts are companies with very good credit scores and are considered to approximate the top
30%
of all commercial borrowers.
|
|
|
•
|
Medium risk accounts are companies with average to good credit scores and are considered to approximate the middle
40%
of all commercial borrowers.
|
|
|
•
|
High risk accounts are companies with poor credit scores, are delinquent or are at risk of becoming delinquent and are considered to approximate the bottom
30%
of all commercial borrowers.
|
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
December 31,
2011
|
Sales-type lease receivables
|
|
|
|
|
|
Risk Level
|
|
|
|
|
|
Low
|
$
|
1,070,643
|
|
|
$
|
1,096,676
|
|
Medium
|
416,138
|
|
|
473,394
|
|
High
|
50,222
|
|
|
58,177
|
|
Not Scored
|
66,441
|
|
|
99,406
|
|
Total
|
$
|
1,603,444
|
|
|
$
|
1,727,653
|
|
Loan receivables
|
|
|
|
|
|
Risk Level
|
|
|
|
|
|
Low
|
$
|
258,849
|
|
|
$
|
269,547
|
|
Medium
|
126,984
|
|
|
115,490
|
|
High
|
15,114
|
|
|
21,081
|
|
Not Scored
|
3,152
|
|
|
30,513
|
|
Total
|
$
|
404,099
|
|
|
$
|
436,631
|
|
Although the relative score of accounts within each class is used as a factor in determining a customer credit limit, it is not indicative of our actual history of losses due to the business essential nature of our products and services. The aging schedule included above, showing approximately
1.7%
of the portfolio as greater than 90 days past due, and the roll-forward schedule of the allowance for credit losses, showing the actual losses for the
nine months ended September 30,
2012
, are more representative of the potential loss performance of our portfolio than relative risk based on scores, as defined by the third party.
Leveraged Leases
Our investment in leveraged lease assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
December 31,
2011
|
Rental receivables
|
$
|
89,193
|
|
|
$
|
810,306
|
|
Unguaranteed residual values
|
14,312
|
|
|
13,784
|
|
Principal and interest on non-recourse loans
|
(60,762
|
)
|
|
(606,708
|
)
|
Unearned income
|
(8,370
|
)
|
|
(79,111
|
)
|
Investment in leveraged leases
|
34,373
|
|
|
138,271
|
|
Less: deferred taxes related to leveraged leases
|
(20,199
|
)
|
|
(101,255
|
)
|
Net investment in leveraged leases
|
$
|
14,174
|
|
|
$
|
37,016
|
|
The following is a summary of the components of income from leveraged leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Pretax leveraged lease income
|
$
|
467
|
|
|
$
|
1,457
|
|
|
$
|
1,692
|
|
|
$
|
4,551
|
|
Income tax effect
|
8
|
|
|
(641
|
)
|
|
33
|
|
|
(804
|
)
|
Income from leveraged leases
|
$
|
475
|
|
|
$
|
816
|
|
|
$
|
1,725
|
|
|
$
|
3,747
|
|
During 2012, we sold certain non-U.S. leveraged lease assets for cash. The investment in the leveraged lease assets at the date of sale was
$109 million
and an after-tax gain of
$13 million
was recognized. In the third quarter 2011, we also sold certain non-U.S. leveraged lease assets for cash. The investment in the leveraged lease assets at the date of sale was
$109 million
and an after-tax gain of
$27 million
was recognized. The effects of these sales are not included in the table above.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)
4. Intangible Assets and Goodwill
Intangible assets
Intangible assets at
September 30, 2012
and
December 31, 2011
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
December 31, 2011
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Customer relationships
|
$
|
406,746
|
|
|
$
|
(260,737
|
)
|
|
$
|
146,009
|
|
|
$
|
409,489
|
|
|
$
|
(237,536
|
)
|
|
$
|
171,953
|
|
Supplier relationships
|
29,000
|
|
|
(21,387
|
)
|
|
7,613
|
|
|
29,000
|
|
|
(19,213
|
)
|
|
9,787
|
|
Software & technology
|
168,912
|
|
|
(149,360
|
)
|
|
19,552
|
|
|
170,286
|
|
|
(143,456
|
)
|
|
26,830
|
|
Trademarks & trade names
|
34,844
|
|
|
(32,101
|
)
|
|
2,743
|
|
|
33,908
|
|
|
(30,076
|
)
|
|
3,832
|
|
Non-compete agreements
|
7,487
|
|
|
(7,409
|
)
|
|
78
|
|
|
7,564
|
|
|
(7,363
|
)
|
|
201
|
|
Total intangible assets
|
$
|
646,989
|
|
|
$
|
(470,994
|
)
|
|
$
|
175,995
|
|
|
$
|
650,247
|
|
|
$
|
(437,644
|
)
|
|
$
|
212,603
|
|
Amortization expense for intangible assets was
$10 million
and
$14 million
for the
three months ended September 30, 2012 and 2011
, respectively, and
$35 million
and
$43 million
for the
nine months ended September 30, 2012 and 2011
, respectively. We also recorded impairment charges of
$3 million
to write-down the carrying values of certain intangible assets associated with our International Mail Services business to their respective fair values. See Goodwill section below for further details of the impairment charge and method of determining fair value.
The future amortization expense for intangible assets as of
September 30, 2012
was as follows:
|
|
|
|
|
Remaining for year ended December 31, 2012
|
$
|
10,222
|
|
Year ended December 31, 2013
|
39,429
|
|
Year ended December 31, 2014
|
36,774
|
|
Year ended December 31, 2015
|
32,812
|
|
Year ended December 31, 2016
|
24,182
|
|
Thereafter
|
32,576
|
|
Total
|
$
|
175,995
|
|
Actual amortization expense may differ from the amounts above due to, among other things, fluctuations in foreign currency exchange rates, impairments, future acquisitions and accelerated amortization.
Goodwill
We perform our annual goodwill impairment test during the fourth quarter of each year, or sooner, if circumstances indicate an impairment may exist. Based on the recent performance of our International Mail Services (IMS) business and to enable us to better focus on higher growth cross-border ecommerce parcel opportunities, in the third quarter of 2012, we began exploring strategic alternatives for the IMS business. In October 2012, we made a strategic decision to exit the IMS business related to the international delivery of mail and catalogs. We are engaged in negotiations with potential buyers and have received preliminary indications of interest and written offers. As a result of these factors, we concluded that it was more likely than not that the fair value of the IMS reporting unit was below its book value and an interim impairment test was performed. The fair value of the reporting unit was determined in combination of the written offers received as well as applying an income approach with revised cash flow projections. The inputs used to determine the fair value of the IMS business are classified as Level 3 in the fair value hierarchy. Based on the results of our impairment test, a non-cash goodwill impairment charge of
$18 million
was recorded in the third quarter of 2012 to write-down the carrying value of goodwill associated with the IMS business to its implied fair value.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)
The changes in the carrying amount of goodwill, by reporting segment, for the
nine months ended September 30,
2012
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross value before accumulated impairment
|
|
Accumulated impairment
|
|
December 31, 2011
|
|
Impairment
|
|
Other (1)
|
|
September 30, 2012
|
North America Mailing
|
$
|
352,897
|
|
|
$
|
—
|
|
|
$
|
352,897
|
|
|
$
|
—
|
|
|
$
|
(178
|
)
|
|
$
|
352,719
|
|
International Mailing
|
189,067
|
|
|
—
|
|
|
189,067
|
|
|
—
|
|
|
(8,105
|
)
|
|
180,962
|
|
Small & Medium Business Solutions
|
541,964
|
|
|
—
|
|
|
541,964
|
|
|
—
|
|
|
(8,283
|
)
|
|
533,681
|
|
Production Mail
|
127,589
|
|
|
—
|
|
|
127,589
|
|
|
—
|
|
|
2,603
|
|
|
130,192
|
|
Software
|
667,124
|
|
|
—
|
|
|
667,124
|
|
|
—
|
|
|
3,479
|
|
|
670,603
|
|
Management Services
|
487,223
|
|
|
(84,500
|
)
|
|
402,723
|
|
|
—
|
|
|
542
|
|
|
403,265
|
|
Mail Services
|
259,105
|
|
|
(45,650
|
)
|
|
213,455
|
|
|
(18,315
|
)
|
|
—
|
|
|
195,140
|
|
Marketing Services
|
194,233
|
|
|
—
|
|
|
194,233
|
|
|
—
|
|
|
—
|
|
|
194,233
|
|
Enterprise Business Solutions
|
1,735,274
|
|
|
(130,150
|
)
|
|
1,605,124
|
|
|
(18,315
|
)
|
|
6,624
|
|
|
1,593,433
|
|
Total
|
$
|
2,277,238
|
|
|
$
|
(130,150
|
)
|
|
$
|
2,147,088
|
|
|
$
|
(18,315
|
)
|
|
$
|
(1,659
|
)
|
|
$
|
2,127,114
|
|
|
|
(1)
|
Primarily foreign currency translation adjustments.
|
5. Debt
In March 2012, we redeemed, at par plus accrued interest, a
$150 million
term loan that was scheduled to mature in the fourth quarter of 2012.
In April 2012, we entered into forward starting swap agreements with an aggregate notional value of
$150 million
to hedge the interest rate risk associated with the forecasted issuance of long-term debt. The anticipated debt issuance did not occur prior to the expiration of these swap agreements and a loss of
$6 million
was recognized in the second quarter of 2012.
In June 2012, we redeemed our
$400 million
,
4.625%
notes (the 2012 Notes) that were scheduled to mature in October 2012. As a result of the early redemption of the 2012 Notes, we recorded a net loss of
$2 million
on the extinguishment of debt.
At
September 30, 2012
, there were no outstanding commercial paper borrowings. During the quarter, commercial paper borrowings averaged
$418 million
at a weighted-average interest rate of
0.48%
and the maximum amount outstanding at any time was
$709 million
.
In October 2012, we borrowed
$220 million
under term loan agreements. The loans bear interest at the applicable London Interbank Offered Rate (LIBOR) plus
2.25%
or Prime Rate plus
1.25%
, at our option. Interest is payable quarterly and the loans mature in
2015
and
2016
. The proceeds from the loans will be used for general corporate purposes, including the repayment of commercial paper and 2013 debt maturities.
6. Noncontrolling Interests (Preferred Stockholders’ Equity in Subsidiaries)
Pitney Bowes International Holdings, Inc. (PBIH), a subsidiary, has
300,000
shares, or
$300 million
, of outstanding perpetual voting preferred stock (the Preferred Stock) held by certain institutional investors. The holders of the Preferred Stock are entitled as a group to
25%
of the combined voting power of all classes of capital stock of PBIH. All outstanding common stock of PBIH, representing the remaining
75%
of the combined voting power of all classes of capital stock, is owned directly or indirectly by the company. The Preferred Stock is entitled to cumulative dividends at a rate of
6.125%
through 2016 after which it becomes callable and, if it remains outstanding, will yield a dividend that increases by
50%
every six months thereafter. No dividends were in arrears at
September 30, 2012
or
December 31, 2011
. There was no change in the carrying value of noncontrolling interests during the period ended
September 30, 2012
or the year ended
December 31, 2011
.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)
7. Income Taxes
The effective tax rate for the
three months ended September 30, 2012 and 2011
was
24.6%
and
(17.1)%
, respectively. The effective tax rate for the
three months ended September 30,
2012
includes tax benefits of
$36 million
from the resolution of tax examinations and tax accruals of
$28 million
for the repatriation of non-U.S. earnings. The effective tax rate for the
three months ended September 30,
2011
includes tax benefits of
$34 million
from the sale of non-U.S. leveraged lease assets and
$18 million
from the resolution of tax examinations.
The effective tax rate for the
nine months ended September 30, 2012 and 2011
was
22.1%
and
19.7%
, respectively. The effective tax rate for the
nine months ended September 30,
2012
include tax benefits of
$17 million
from the sale of non-U.S. leveraged lease assets (net of
$15 million
of tax accrued to repatriate these earnings),
$58 million
from the resolution of tax examinations, and tax accruals of
$28 million
for the repatriation of additional non-U.S. earnings. The effective tax rate for the
nine months ended September 30,
2011
includes the tax benefit of
$34 million
from the sale of non-U.S. leveraged lease assets and
$27 million
from the resolution of tax examinations.
With the exception of the impact of unusual sales of leveraged lease assets and the one-time restructuring of our Canadian operations that led us to accrue taxes for the repatriation of certain earnings, it is our intention to permanently reinvest substantially all of our foreign cash in our foreign operations.
On August 27, 2012, the Third Circuit Court of Appeals overturned a prior Tax Court decision and ruled in favor of the IRS and adverse to the Historic Boardwalk Hall LLC, a partnership in which we had made an investment in 2000. The judgment is not yet final. Based on our partnership contractual relationship, we do not expect this matter to have a material effect on our financial position or results of operations.
As is the case with other large corporations, our tax returns are examined each year by tax authorities in the United States, other countries and local jurisdictions in which we have operations. Except for issues arising out of certain partnership investments, the IRS examination of tax years 2001-2004 is closed to audit and the examination of years 2005-2008 is expected to be closed to audit by the end of 2012. Other significant tax filings subject to examination include various post-2000 U.S. state and local, post 2007 Canadian and German, and post-2008 French and U.K. tax filings. We have other less significant tax filings currently under examination or subject to examination.
We regularly assess the likelihood of tax adjustments in each of the tax jurisdictions in which we have operations and account for the related financial statement implications. We believe we have established tax reserves that are appropriate given the possibility of tax adjustments. However, determining the appropriate level of tax reserves requires judgment regarding the uncertain application of tax law and the possibility of tax adjustments. Future changes in tax reserve requirements could have a material impact, positive or negative, on our results of operations, financial position and cash flows.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)
8. Stockholders
’
Equity
Changes in stockholders’ equity for the
nine months ended September 30, 2012 and 2011
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
Preference
stock
|
|
Common Stock
|
|
Additional Paid-in Capital
|
|
Retained earnings
|
|
Accumulated other comprehensive loss
|
|
Treasury stock
|
|
Total equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2012
|
$
|
4
|
|
|
$
|
659
|
|
|
$
|
323,338
|
|
|
$
|
240,584
|
|
|
$
|
4,600,217
|
|
|
$
|
(661,645
|
)
|
|
$
|
(4,542,143
|
)
|
|
$
|
(38,986
|
)
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
334,826
|
|
|
—
|
|
|
—
|
|
|
334,826
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35,777
|
|
|
—
|
|
|
35,777
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common ($1.125 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(225,244
|
)
|
|
—
|
|
|
—
|
|
|
(225,244
|
)
|
Preference
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(38
|
)
|
|
—
|
|
|
—
|
|
|
(38
|
)
|
Issuances of common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(31,306
|
)
|
|
—
|
|
|
—
|
|
|
36,138
|
|
|
4,832
|
|
Conversions to common stock
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
(124
|
)
|
|
—
|
|
|
—
|
|
|
130
|
|
|
—
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
13,466
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,466
|
|
Balance at September 30, 2012
|
$
|
4
|
|
|
$
|
653
|
|
|
$
|
323,338
|
|
|
$
|
222,620
|
|
|
$
|
4,709,761
|
|
|
$
|
(625,868
|
)
|
|
$
|
(4,505,875
|
)
|
|
$
|
124,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
Preference
stock
|
|
Common Stock
|
|
Additional Paid-in Capital
|
|
Retained earnings
|
|
Accumulated other comprehensive loss
|
|
Treasury stock
|
|
Total equity
|
Balance at January 1, 2011
|
$
|
4
|
|
|
$
|
752
|
|
|
$
|
323,338
|
|
|
$
|
250,928
|
|
|
$
|
4,282,316
|
|
|
$
|
(473,806
|
)
|
|
$
|
(4,480,113
|
)
|
|
$
|
(96,581
|
)
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
360,006
|
|
|
—
|
|
|
—
|
|
|
360,006
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,625
|
)
|
|
—
|
|
|
(3,625
|
)
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common ($1.11 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(225,632
|
)
|
|
—
|
|
|
—
|
|
|
(225,632
|
)
|
Preference
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(44
|
)
|
|
—
|
|
|
—
|
|
|
(44
|
)
|
Issuances of common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(25,387
|
)
|
|
—
|
|
|
—
|
|
|
32,584
|
|
|
7,197
|
|
Conversions to common stock
|
—
|
|
|
(28
|
)
|
|
—
|
|
|
(621
|
)
|
|
—
|
|
|
—
|
|
|
649
|
|
|
—
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
13,393
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,393
|
|
Repurchase of common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
(99,997
|
)
|
|
(99,997
|
)
|
Balance at September 30, 2011
|
$
|
4
|
|
|
$
|
724
|
|
|
$
|
323,338
|
|
|
$
|
238,313
|
|
|
$
|
4,416,646
|
|
|
$
|
(477,431
|
)
|
|
$
|
(4,546,877
|
)
|
|
$
|
(45,283
|
)
|
The components of accumulated other comprehensive loss at
September 30, 2012
and
2011
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2012
|
|
Other comprehensive income
|
|
September 30, 2012
|
|
January 1, 2011
|
|
Other comprehensive income
|
|
September 30, 2011
|
Foreign currency translation adjustments
|
$
|
83,952
|
|
|
$
|
(883
|
)
|
|
$
|
83,069
|
|
|
$
|
137,521
|
|
|
$
|
(35,336
|
)
|
|
$
|
102,185
|
|
Net unrealized (loss) gain on derivatives
|
(8,438
|
)
|
|
578
|
|
|
(7,860
|
)
|
|
(10,445
|
)
|
|
1,596
|
|
|
(8,849
|
)
|
Net unrealized gain on investment securities
|
4,387
|
|
|
967
|
|
|
5,354
|
|
|
1,439
|
|
|
4,258
|
|
|
5,697
|
|
Net unamortized (loss) gain on pension and postretirement plans
|
(741,546
|
)
|
|
35,115
|
|
|
(706,431
|
)
|
|
(602,321
|
)
|
|
25,857
|
|
|
(576,464
|
)
|
Accumulated other comprehensive loss
|
$
|
(661,645
|
)
|
|
$
|
35,777
|
|
|
$
|
(625,868
|
)
|
|
$
|
(473,806
|
)
|
|
$
|
(3,625
|
)
|
|
$
|
(477,431
|
)
|
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)
9. Fair Value Measurements and Derivative Instruments
We measure certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. An entity is required to classify certain assets and liabilities measured at fair value based on the following fair value hierarchy that prioritizes the inputs used to measure fair value:
Level 1
– Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2
– Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
– Unobservable inputs that are supported by little or no market activity, may be derived from internally developed methodologies based on management’s best estimate of fair value and that are significant to the fair value of the asset or liability.
The following tables show, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis at
September 30, 2012
and
December 31, 2011
. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect their placement within the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds / commercial paper
|
$
|
198,431
|
|
|
$
|
20,717
|
|
|
$
|
—
|
|
|
$
|
219,148
|
|
Equity securities
|
—
|
|
|
24,891
|
|
|
—
|
|
|
24,891
|
|
Commingled fixed income securities
|
—
|
|
|
29,286
|
|
|
—
|
|
|
29,286
|
|
Debt securities - U.S. and foreign governments, agencies and municipalities
|
119,858
|
|
|
21,322
|
|
|
—
|
|
|
141,180
|
|
Debt securities - corporate
|
—
|
|
|
40,134
|
|
|
—
|
|
|
40,134
|
|
Mortgage-backed / asset-backed securities
|
—
|
|
|
143,631
|
|
|
—
|
|
|
143,631
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
—
|
|
|
11,643
|
|
|
—
|
|
|
11,643
|
|
Foreign exchange contracts
|
—
|
|
|
1,187
|
|
|
—
|
|
|
1,187
|
|
Total assets
|
$
|
318,289
|
|
|
$
|
292,811
|
|
|
$
|
—
|
|
|
$
|
611,100
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
|
$
|
(5,434
|
)
|
|
$
|
—
|
|
|
$
|
(5,434
|
)
|
Total liabilities
|
$
|
—
|
|
|
$
|
(5,434
|
)
|
|
$
|
—
|
|
|
$
|
(5,434
|
)
|
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds / commercial paper
|
$
|
239,157
|
|
|
$
|
300,702
|
|
|
$
|
—
|
|
|
$
|
539,859
|
|
Equity securities
|
—
|
|
|
22,097
|
|
|
—
|
|
|
22,097
|
|
Commingled fixed income securities
|
—
|
|
|
27,747
|
|
|
—
|
|
|
27,747
|
|
Debt securities - U.S. and foreign governments, agencies and municipalities
|
93,175
|
|
|
19,042
|
|
|
—
|
|
|
112,217
|
|
Debt securities - corporate
|
—
|
|
|
31,467
|
|
|
—
|
|
|
31,467
|
|
Mortgage-backed / asset-backed securities
|
—
|
|
|
134,262
|
|
|
—
|
|
|
134,262
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
—
|
|
|
15,465
|
|
|
—
|
|
|
15,465
|
|
Foreign exchange contracts
|
—
|
|
|
4,230
|
|
|
—
|
|
|
4,230
|
|
Total assets
|
$
|
332,332
|
|
|
$
|
555,012
|
|
|
$
|
—
|
|
|
$
|
887,344
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
|
$
|
(1,439
|
)
|
|
$
|
—
|
|
|
$
|
(1,439
|
)
|
Total liabilities
|
$
|
—
|
|
|
$
|
(1,439
|
)
|
|
$
|
—
|
|
|
$
|
(1,439
|
)
|
Investment Securities
The valuation of investment securities is based on the market approach using inputs that are observable, or can be corroborated by observable data, in an active marketplace. The following information relates to our classification into the fair value hierarchy:
|
|
•
|
Money Market Funds / Commercial Paper:
Money market funds typically invest in government securities, certificates of deposit, commercial paper and other highly liquid and low-risk securities. Money market funds are principally used for overnight deposits and are classified as Level 1 when unadjusted quoted prices in active markets are available and as Level 2 when they are not actively traded on an exchange. Direct investments in commercial paper are not listed on an exchange in an active market and are classified as Level 2.
|
|
|
•
|
Equity Securities:
Equity securities are comprised of mutual funds investing in U.S. and foreign common stock. These mutual funds are classified as Level 2 as they are not separately listed on an exchange.
|
|
|
•
|
Commingled Fixed Income Securities:
Mutual funds that invest in a variety of fixed income securities including securities of the U.S. government and its agencies, corporate debt, mortgage-backed securities and asset-backed securities. The value of the funds is based on the market value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding, as reported by the fund manager. These commingled funds are not listed on an exchange in an active market and are classified as Level 2.
|
|
|
•
|
Debt Securities – U.S. and Foreign Governments, Agencies and Municipalities:
Debt securities are classified as Level 1 where active, high volume trades for identical securities exist. Valuation adjustments are not applied to these securities. Debt securities valued using quoted market prices for similar securities or benchmarking model derived prices to quoted market prices and trade data for identical or comparable securities are classified as Level 2.
|
|
|
•
|
Debt Securities – Corporate:
Corporate debt securities are valued using recently executed transactions, market price quotations where observable, or bond spreads. The spread data used are for the same maturity as the security. These securities are classified as Level 2.
|
|
|
•
|
Mortgage-Backed Securities (MBS) / Asset-Backed Securities (ABS):
These securities are valued based on external pricing indices. When external index pricing is not observable, MBS and ABS are valued based on external price/spread data. These securities are classified as Level 2.
|
The carrying value of our investment securities at
September 30, 2012
and
December 31, 2011
was
$590 million
and
$861 million
, respectively.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)
Investment securities include investments held by The Pitney Bowes Bank, a wholly owned subsidiary and a Utah-chartered Industrial Loan Company. The bank’s investments at
September 30, 2012
and
December 31, 2011
were
$348 million
and
$282 million
, respectively. These investments are reported on the Condensed Consolidated Balance Sheets as cash and cash equivalents, short-term investments and other assets depending on the type of investment and maturity.
We have not experienced any write-offs in our investment portfolio. The majority of our MBS are either guaranteed or supported by the U.S. government. Market events have not caused our money market funds to experience declines in their net asset value below $1.00 per share or to incur imposed limits on redemptions. We have no investments in inactive markets that would warrant a possible change in our pricing methods or classification within the fair value hierarchy. Further, we have no investments in auction rate securities.
Derivative Instruments
In the normal course of business, we are exposed to the impact of interest rate changes and foreign currency fluctuations. We limit these risks by following established risk management policies and procedures, including the use of derivatives. We use derivatives to manage the related cost of debt and to limit the effects of foreign exchange rate fluctuations on financial results. We do not use derivatives for trading or speculative purposes. We record our derivative instruments at fair value, and the accounting for changes in the fair value of the derivatives depends on the intended use of the derivative, the resulting designation, and the effectiveness of the instrument in offsetting the risk exposure it is designed to hedge.
As required by the fair value measurements guidance, we have incorporated counterparty credit risk and our credit risk into the fair value measurement of our derivative assets and liabilities, respectively. We derive credit risk from observable data related to credit default swaps. We have not seen a material change in the creditworthiness of those banks acting as derivative counterparties.
The valuation of our interest rate swaps is based on the income approach using a model with inputs that are observable or that can be derived from or corroborated by observable market data. The valuation of our foreign exchange derivatives is based on the market approach using observable market inputs, such as forward rates.
The fair value of our derivative instruments at
September 30, 2012
and
December 31, 2011
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Designation of Derivatives
|
|
Balance Sheet Location
|
|
September 30,
2012
|
|
December 31,
2011
|
Derivatives designated as
hedging instruments
|
|
Other current assets and prepayments:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
369
|
|
|
$
|
780
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
11,643
|
|
|
15,465
|
|
|
|
Accounts payable and accrued liabilities:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
(240
|
)
|
|
(79
|
)
|
Derivatives not designated as
hedging instruments
|
|
Other current assets and prepayments:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
818
|
|
|
3,450
|
|
|
|
Accounts payable and accrued liabilities:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
(5,194
|
)
|
|
(1,360
|
)
|
|
|
|
|
|
|
|
|
|
Total derivative assets
|
|
$
|
12,830
|
|
|
$
|
19,695
|
|
|
|
Total derivative liabilities
|
|
(5,434
|
)
|
|
(1,439
|
)
|
|
|
Total net derivative assets
|
|
$
|
7,396
|
|
|
$
|
18,256
|
|
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)
Interest Rate Swaps
Derivatives designated as fair value hedges include interest rate swaps related to fixed rate debt. Changes in the fair value of both the derivative and item being hedged are recognized in earnings. The following represents the results of fair value hedging relationships for the
three and nine months ended September 30, 2012 and 2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
Derivative Gain
Recognized in Earnings
|
|
Hedged Item Expense
Recognized in Earnings
|
Derivative Instrument
|
|
Location of Gain (Loss)
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Interest rate swaps
|
|
Interest expense
|
|
$
|
1,578
|
|
|
$
|
3,488
|
|
|
$
|
(5,484
|
)
|
|
$
|
(10,109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 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
|
|
$
|
8,351
|
|
|
$
|
8,406
|
|
|
$
|
(25,652
|
)
|
|
$
|
(23,016
|
)
|
Foreign Exchange Contracts
We enter into foreign currency exchange contracts to mitigate the currency risk associated with the anticipated purchase of inventory between affiliates and from third parties. These contracts are designated as cash flow hedges. The effective portion of the gain or loss on cash flow hedges is included in accumulated other comprehensive income (AOCI) in the period that the change in fair value occurs and is reclassified to earnings in the period that the hedged item is recorded in earnings. At
September 30, 2012
and
December 31, 2011
, we had outstanding contracts associated with these anticipated transactions with a notional amount of
$21 million
and
$19 million
, respectively. The
net asset
value of these contracts was less than
$1 million
at
September 30, 2012
and
December 31, 2011
.
The amounts included in AOCI at
September 30, 2012
will be recognized in earnings within the next 12 months. No amount of ineffectiveness was recorded in earnings for these designated cash flow hedges.
The following represents the results of cash flow hedging relationships for the
three and nine months ended September 30, 2012 and 2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Derivative Gain (Loss)
Recognized in AOCI
(Effective Portion)
|
|
Location of Gain (Loss)
(Effective Portion)
|
|
Gain (Loss) Reclassified
from AOCI to Earnings
(Effective Portion)
|
Derivative Instrument
|
|
2012
|
|
2011
|
|
|
2012
|
|
2011
|
Foreign exchange contracts
|
|
$
|
(863
|
)
|
|
$
|
1,746
|
|
|
Revenue
|
|
$
|
456
|
|
|
$
|
(129
|
)
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
(56
|
)
|
|
(146
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
400
|
|
|
$
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Derivative Gain (Loss)
Recognized in AOCI
(Effective Portion)
|
|
Location of Gain (Loss)
(Effective Portion)
|
|
Gain (Loss) Reclassified
from AOCI to Earnings
(Effective Portion)
|
Derivative Instrument
|
|
2012
|
|
2011
|
|
|
2012
|
|
2011
|
Foreign exchange contracts
|
|
$
|
(1,672
|
)
|
|
$
|
2,049
|
|
|
Revenue
|
|
$
|
1,230
|
|
|
$
|
(260
|
)
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
(129
|
)
|
|
(700
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
1,101
|
|
|
$
|
(960
|
)
|
We also enter into foreign exchange contracts to minimize the impact of exchange rate fluctuations on short-term intercompany loans and related interest that are denominated in a foreign currency. The revaluation of the intercompany loans and interest and the mark-to-market adjustment on the derivatives are both recorded in earnings. Outstanding foreign exchange contracts to buy or sell various currencies had a
net liability
value of
$4 million
at
September 30, 2012
and a
net asset
value of
$2 million
at
December 31, 2011
. All outstanding contracts at
September 30, 2012
mature by the end of the year.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)
The following represents the results of our non-designated derivative instruments for the
three and nine months ended September 30, 2012 and 2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
Derivative Gain (Loss)
Recognized in Earnings
|
Derivatives Instrument
|
|
Location of Derivative Gain (Loss)
|
|
2012
|
|
2011
|
Foreign exchange contracts
|
|
Selling, general and administrative expense
|
|
$
|
939
|
|
|
$
|
2,090
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
Derivative Gain (Loss)
Recognized in Earnings
|
Derivatives Instrument
|
|
Location of Derivative Gain (Loss)
|
|
2012
|
|
2011
|
Foreign exchange contracts
|
|
Selling, general and administrative expense
|
|
$
|
(2,129
|
)
|
|
$
|
(18,770
|
)
|
Credit-Risk-Related Contingent Features
Certain derivative instruments contain credit-risk-related contingent features that would require us to post collateral based on a combination of our long-term senior unsecured debt ratings and the net fair value of our derivatives. At
September 30, 2012
, we were not required to post any collateral. The maximum amount of collateral that we would have been required to post at
September 30, 2012
, had the credit-risk-related contingent features been triggered, was
$5 million
.
Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, investment securities, accounts receivable, loan receivables, derivative instruments, accounts payable and debt. The carrying value for cash and cash equivalents, accounts receivable, loans receivable, and accounts payable approximate fair value because of the short maturity of these instruments.
The fair value of our debt is estimated based on recently executed transactions and market price quotations. We classify our debt as Level 2 in the fair value hierarchy. The carrying value and estimated fair value of our debt at
September 30, 2012
and
December 31, 2011
was as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
December 31, 2011
|
|
Carrying value
|
$
|
3,680,504
|
|
|
$
|
4,233,909
|
|
|
Fair value
|
$
|
3,909,732
|
|
|
$
|
4,364,176
|
|
|
10. Restructuring Charges and Asset Impairments
In 2009, we implemented a series of strategic transformation initiatives designed to enhance our responsiveness to changing market conditions, create improved processes and systems to further enable us to invest in future growth and transform and enhance the way we operate as a global company (the 2009 Program). In 2007, we implemented a program to lower our cost structure, accelerate efforts to improve operational efficiencies, and transition our product line to a new generation of fully digital, networked, and remotely-downloadable equipment (the 2007 Program). These programs are substantially complete.
Activity in restructuring reserves for these programs for the
nine months ended September 30,
2012
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefits costs
|
|
Other exit
costs
|
|
Total
|
Balance at January 1, 2012
|
$
|
105,036
|
|
|
$
|
14,075
|
|
|
$
|
119,111
|
|
Expenses, net
|
2,608
|
|
|
(1,534
|
)
|
|
1,074
|
|
Cash payments
|
(55,865
|
)
|
|
(4,881
|
)
|
|
(60,746
|
)
|
Balance at September 30, 2012
|
$
|
51,779
|
|
|
$
|
7,660
|
|
|
$
|
59,439
|
|
The majority of the remaining restructuring payments are expected to be paid through 2014; however, due to certain international labor laws and long-term lease agreements, some payments will extend beyond 2014. We expect that cash flows from operations will be sufficient to fund these payments.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)
In connection with our strategic decision to exit the IMS business related to the international delivery of mail and catalogs, asset impairment charges of
$7 million
were recorded to write-down the carrying value of certain fixed assets of IMS and
$3 million
to write-down the carrying value of certain intangible assets of IMS to their fair values. The fair value of these assets was determined in combination of the written offers received for the IMS business as well as applying an income approach with revised cash flow projections. The inputs used to determine the fair value are classified as Level 3 in the fair value hierarchy. These charges are included in restructuring charges and asset impairments in the Condensed Consolidated Statements of Income. See Note 4 for further details.
11. Commitments and Contingencies
In the ordinary course of business, we are routinely defendants in, or party to a number of pending and threatened legal actions. These may involve litigation by or against us relating to, among other things, contractual rights under vendor, insurance or other contracts; intellectual property or patent rights; equipment, service, payment or other disputes with customers; or disputes with employees. Some of these actions may be brought as a purported class action on behalf of a purported class of employees, customers or others.
In October 2009, the company and certain of its current and former officers were named as defendants in
NECA-IBEW Health & Welfare Fund v. Pitney Bowes Inc. et al.
,
a class action lawsuit filed in the U.S. District Court for the District of Connecticut. The complaint asserts claims under the Securities Exchange Act of 1934 on behalf of those who purchased the common stock of the company during the period between July 30, 2007 and October 29, 2007 alleging that the company, in essence, missed two financial projections. Plaintiffs filed an amended complaint in September 2010. After briefing on the motion to dismiss was completed, the plaintiffs filed a new amended complaint on February 17, 2012. We have moved to dismiss this new amended complaint. We expect to prevail in this legal action; however, as litigation is inherently unpredictable, there can be no assurance in this regard. If the plaintiffs do prevail, the results may have a material effect on our financial position, results of operations or cash flows. Based upon our current understanding of the facts and applicable laws, we do not believe there is a reasonable possibility that any loss has been incurred.
12. Segment Information
We conduct our business activities in
seven
reporting segments within
two
business groups, Small & Medium Business Solutions and Enterprise Business Solutions. The principal products and services of each of our reporting segments are as follows:
Small & Medium Business Solutions:
North America Mailing
: Includes the U.S. and Canadian revenue and related expenses from the sale, rental and financing of our mail finishing, mail creation, shipping equipment and software; supplies; support and other professional services; and payment solutions.
International Mailing
: Includes the revenue and related expenses from the sale, rental and financing of our mail finishing, mail creation, shipping equipment and software; supplies; support and other professional services; and payment solutions outside North America.
Enterprise Business Solutions:
Production Mail
: Includes the worldwide revenue and related expenses from the sale, support and other professional services of our high-speed, production mail systems, sorting and production print equipment and related software.
Software
:
Includes the worldwide revenue and related expenses from the sale and support services of non-equipment-based mailing, customer relationship and communication and location intelligence software.
Management Services
: Includes worldwide revenue and related expenses from facilities management services; secure mail services; reprographic, document management services; and litigation support and eDiscovery services.
Mail Services
: Includes worldwide revenue and related expenses from presort mail services and cross-border mail services.
Marketing Services
:
Includes revenue and related expenses from direct marketing services for targeted customers.
Segment earnings before interest and taxes (EBIT), a non-GAAP measure, is determined by deducting from segment revenue the related costs and expenses attributable to the segment. Segment EBIT excludes interest, taxes, general corporate expenses not allocated to a particular business segment, restructuring charges, asset impairments and goodwill charges which are recognized on a consolidated basis. Management uses segment EBIT to measure profitability and performance at the segment level. Segment
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)
EBIT may not be indicative of our overall consolidated performance and therefore, should be read in conjunction with our consolidated results of operations.
Revenue and EBIT by business segment for the
three and nine months ended September 30, 2012 and 2011
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
North America Mailing
|
$
|
447,920
|
|
|
$
|
475,663
|
|
|
$
|
1,362,709
|
|
|
$
|
1,478,355
|
|
International Mailing
|
154,171
|
|
|
177,797
|
|
|
487,665
|
|
|
524,488
|
|
Small & Medium Business Solutions
|
602,091
|
|
|
653,460
|
|
|
1,850,374
|
|
|
2,002,843
|
|
Production Mail
|
122,251
|
|
|
117,220
|
|
|
360,334
|
|
|
382,595
|
|
Software
|
88,629
|
|
|
109,153
|
|
|
288,830
|
|
|
304,921
|
|
Management Services
|
220,887
|
|
|
235,428
|
|
|
679,078
|
|
|
717,513
|
|
Mail Services
|
142,182
|
|
|
143,055
|
|
|
432,845
|
|
|
421,611
|
|
Marketing Services
|
39,637
|
|
|
41,408
|
|
|
105,690
|
|
|
107,784
|
|
Enterprise Business Solutions
|
613,586
|
|
|
646,264
|
|
|
1,866,777
|
|
|
1,934,424
|
|
Total revenue
|
$
|
1,215,677
|
|
|
$
|
1,299,724
|
|
|
$
|
3,717,151
|
|
|
$
|
3,937,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
EBIT:
|
|
|
|
|
|
|
|
|
|
|
|
North America Mailing
|
$
|
168,934
|
|
|
$
|
177,280
|
|
|
$
|
514,975
|
|
|
$
|
532,727
|
|
International Mailing
|
11,286
|
|
|
25,105
|
|
|
53,041
|
|
|
75,033
|
|
Small & Medium Business Solutions
|
180,220
|
|
|
202,385
|
|
|
568,016
|
|
|
607,760
|
|
Production Mail
|
3,555
|
|
|
(3,426
|
)
|
|
11,928
|
|
|
12,971
|
|
Software
|
956
|
|
|
16,564
|
|
|
20,135
|
|
|
31,618
|
|
Management Services
|
10,266
|
|
|
18,248
|
|
|
36,187
|
|
|
59,256
|
|
Mail Services
|
16,671
|
|
|
35,107
|
|
|
75,661
|
|
|
55,191
|
|
Marketing Services
|
9,297
|
|
|
8,716
|
|
|
21,617
|
|
|
19,668
|
|
Enterprise Business Solutions
|
40,745
|
|
|
75,209
|
|
|
165,528
|
|
|
178,704
|
|
Total EBIT
|
220,965
|
|
|
277,594
|
|
|
733,544
|
|
|
786,464
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net (1)
|
(45,088
|
)
|
|
(49,097
|
)
|
|
(142,853
|
)
|
|
(148,219
|
)
|
Corporate and other expenses
|
(39,960
|
)
|
|
(50,046
|
)
|
|
(138,521
|
)
|
|
(135,426
|
)
|
Restructuring charges and asset impairments
|
(9,986
|
)
|
|
(32,956
|
)
|
|
(11,060
|
)
|
|
(63,974
|
)
|
Goodwill impairment
|
(18,315
|
)
|
|
(45,650
|
)
|
|
(18,315
|
)
|
|
(45,650
|
)
|
Income from continuing operations before income taxes
|
$
|
107,616
|
|
|
$
|
99,845
|
|
|
$
|
422,795
|
|
|
$
|
393,195
|
|
(1) Includes financing interest expense, other interest expense and interest income.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)
13. Pensions and Other Benefit Programs
Defined Benefit Pension Plans
The components of net periodic benefit cost for defined benefit pension plans for the
three and nine months ended September 30, 2012 and 2011
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
United States
|
|
Foreign
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Service cost
|
$
|
4,735
|
|
|
$
|
4,862
|
|
|
$
|
1,774
|
|
|
$
|
1,836
|
|
Interest cost
|
20,260
|
|
|
21,935
|
|
|
6,909
|
|
|
7,089
|
|
Expected return on plan assets
|
(30,406
|
)
|
|
(30,765
|
)
|
|
(8,069
|
)
|
|
(7,945
|
)
|
Amortization of transition credit
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
Amortization of prior service cost
|
200
|
|
|
36
|
|
|
28
|
|
|
42
|
|
Recognized net actuarial loss
|
13,240
|
|
|
9,381
|
|
|
3,558
|
|
|
2,782
|
|
Settlement
|
—
|
|
|
—
|
|
|
192
|
|
|
—
|
|
Special termination benefits
|
—
|
|
|
229
|
|
|
—
|
|
|
—
|
|
Curtailment
|
—
|
|
|
435
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
$
|
8,029
|
|
|
$
|
6,113
|
|
|
$
|
4,390
|
|
|
$
|
3,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
United States
|
|
Foreign
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Service cost
|
$
|
14,204
|
|
|
$
|
14,587
|
|
|
$
|
5,805
|
|
|
$
|
5,650
|
|
Interest cost
|
60,780
|
|
|
65,805
|
|
|
20,766
|
|
|
21,344
|
|
Expected return on plan assets
|
(91,218
|
)
|
|
(92,294
|
)
|
|
(24,133
|
)
|
|
(23,978
|
)
|
Amortization of transition credit
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
(6
|
)
|
Amortization of prior service cost
|
602
|
|
|
109
|
|
|
83
|
|
|
130
|
|
Recognized net actuarial loss
|
39,719
|
|
|
28,142
|
|
|
10,546
|
|
|
8,307
|
|
Settlement
|
—
|
|
|
—
|
|
|
442
|
|
|
—
|
|
Special termination benefits
|
—
|
|
|
989
|
|
|
—
|
|
|
10
|
|
Curtailment
|
—
|
|
|
2,531
|
|
|
—
|
|
|
224
|
|
Net periodic benefit cost
|
$
|
24,087
|
|
|
$
|
19,869
|
|
|
$
|
13,503
|
|
|
$
|
11,681
|
|
Through
September 30, 2012
, we contributed
$92 million
to our U.S. pension plan and
$29 million
to our foreign pension plans. This includes special contributions of
$85 million
to our U.S. pension plan and
$10 million
to our foreign pension plans.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)
Nonpension Postretirement Benefit Plans
The components of net periodic benefit cost for nonpension postretirement benefit plans for the
three and nine months ended September 30, 2012 and 2011
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Service cost
|
$
|
801
|
|
|
$
|
834
|
|
|
$
|
2,560
|
|
|
$
|
2,501
|
|
Interest cost
|
2,896
|
|
|
3,387
|
|
|
8,685
|
|
|
10,158
|
|
Amortization of prior service credit
|
(523
|
)
|
|
(626
|
)
|
|
(1,569
|
)
|
|
(1,878
|
)
|
Amortization of net loss
|
2,054
|
|
|
1,917
|
|
|
6,111
|
|
|
5,750
|
|
Special termination benefits
|
—
|
|
|
44
|
|
|
—
|
|
|
157
|
|
Curtailment
|
—
|
|
|
416
|
|
|
—
|
|
|
1,652
|
|
Net periodic benefit cost
|
$
|
5,228
|
|
|
$
|
5,972
|
|
|
$
|
15,787
|
|
|
$
|
18,340
|
|
Contributions for benefit payments were
$7 million
and
$9 million
for the
three months ended September 30, 2012 and 2011
, respectively, and
$21 million
and
$23 million
for the
nine months ended September 30, 2012 and 2011
, respectively.
14. Discontinued Operations
During the
nine months ended September 30,
2012
, we recognized
$19 million
of tax benefits in discontinued operations arising from the resolution of tax examinations related to our Capital Services business that was sold in 2006. During the third quarter of 2011, we entered into a series of settlements with the IRS in connection with their examination of our tax years 2001-2004. We agreed upon the tax treatment of a number of disputed issues, including issues related to our Capital Services business, and as a result,
$60 million
of previously provided tax and interest reserves were released through discontinued operations.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands of dollars, unless otherwise noted)
15. Earnings per Share
The calculations of basic and diluted earnings per share for the
three and nine months ended September 30, 2012 and 2011
are presented below. The sum of earnings per share amounts may not equal the totals due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
76,533
|
|
|
$
|
112,339
|
|
|
$
|
315,494
|
|
|
$
|
302,095
|
|
Income from discontinued operations
|
—
|
|
|
60,428
|
|
|
19,332
|
|
|
57,911
|
|
Net income (numerator for diluted EPS)
|
76,533
|
|
|
172,767
|
|
|
334,826
|
|
|
360,006
|
|
Less: Preference stock dividend
|
(12
|
)
|
|
(15
|
)
|
|
(38
|
)
|
|
(44
|
)
|
Income attributable to common stockholders (numerator for basic EPS)
|
$
|
76,521
|
|
|
$
|
172,752
|
|
|
$
|
334,788
|
|
|
$
|
359,962
|
|
Denominator (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in basic EPS
|
200,593
|
|
|
201,294
|
|
|
200,266
|
|
|
202,664
|
|
Effect of dilutive shares:
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
2
|
|
|
2
|
|
|
2
|
|
|
2
|
|
Preference stock
|
399
|
|
|
447
|
|
|
399
|
|
|
451
|
|
Stock plans
|
608
|
|
|
451
|
|
|
458
|
|
|
366
|
|
Weighted-average shares used in diluted EPS
|
201,602
|
|
|
202,194
|
|
|
201,125
|
|
|
203,483
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
0.38
|
|
|
$
|
0.56
|
|
|
$
|
1.58
|
|
|
$
|
1.49
|
|
Income from discontinued operations
|
—
|
|
|
0.30
|
|
|
0.10
|
|
|
0.29
|
|
Net income
|
$
|
0.38
|
|
|
$
|
0.86
|
|
|
$
|
1.67
|
|
|
$
|
1.78
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
0.38
|
|
|
$
|
0.56
|
|
|
$
|
1.57
|
|
|
$
|
1.48
|
|
Income from discontinued operations
|
—
|
|
|
0.30
|
|
|
0.10
|
|
|
0.28
|
|
Net income
|
$
|
0.38
|
|
|
$
|
0.85
|
|
|
$
|
1.66
|
|
|
$
|
1.77
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares not used in calculating diluted weighted-average shares (in thousands):
|
13,607
|
|
|
15,442
|
|
|
14,391
|
|
|
15,435
|
|