10-Q 1 pbi2013033110q.htm 10-Q PBI 2013.03.31 10Q



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number: 1-3579
PITNEY BOWES INC.
(Exact name of registrant as specified in its charter)

Delaware
 
06-0495050
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1 Elmcroft Road, Stamford, Connecticut
 
06926-0700
(Address of principal executive offices)
 
(Zip Code)
(203) 356-5000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
 
 
As of April 22, 2013, 201,473,817 shares of common stock, par value $1 per share, of the registrant were outstanding.
 
 
 

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
 
March 31,
 
2013
 
2012
Revenue:
 

 
 

Equipment sales
$
214,999

 
$
220,179

Supplies
74,287

 
76,365

Software
87,012

 
104,350

Rentals
136,379

 
140,389

Financing
116,762

 
126,748

Support services
165,486

 
173,518

Business services
372,031

 
378,587

Total revenue
1,166,956

 
1,220,136

Costs and expenses:
 

 
 

Cost of equipment sales
109,337

 
96,916

Cost of supplies
23,262

 
23,871

Cost of software
20,706

 
21,093

Cost of rentals
27,755

 
30,225

Financing interest expense
19,875

 
21,139

Cost of support services
108,009

 
115,087

Cost of business services
291,648

 
286,817

Selling, general and administrative
377,206

 
405,486

Research and development
33,335

 
34,073

Other interest expense
30,739

 
29,367

Interest income
(1,748
)
 
(1,733
)
Other expense (income), net
25,121

 
(3,234
)
Total costs and expenses
1,065,245

 
1,059,107

Income from continuing operations before income taxes
101,711

 
161,029

Provision for income taxes
27,549

 
15,493

Income from continuing operations
74,162

 
145,536

(Loss) income from discontinued operations, net of tax
(2,062
)
 
17,728

Net income before attribution of noncontrolling interests
72,100

 
163,264

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

 
4,594

Net income - Pitney Bowes Inc.
$
67,506

 
$
158,670

Amounts attributable to common stockholders:
 

 
 

Net income from continuing operations
$
69,568

 
$
140,942

(Loss) income from discontinued operations, net of tax
(2,062
)
 
17,728

Net income - Pitney Bowes Inc.
$
67,506

 
$
158,670

Basic earnings per share attributable to common stockholders:
 

 
 

Continuing operations
$
0.35

 
$
0.70

Discontinued operations
(0.01
)
 
0.09

Net income - Pitney Bowes Inc.
$
0.34

 
$
0.79

Diluted earnings per share attributable to common stockholders:
 

 
 

Continuing operations
$
0.34

 
$
0.70

Discontinued operations
(0.01
)
 
0.09

Net income - Pitney Bowes Inc.
$
0.33

 
$
0.79


See Notes to Condensed Consolidated Financial Statements

3


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



 
Three Months Ended
 
March 31,
 
2013
 
2012
Net income
$
72,100

 
$
163,264

Other comprehensive income, net of tax:
 
 
 
Net unrealized gain on cash flow hedges, net of tax of $344 and $32, respectively
538

 
49

Net unrealized gain on investment securities, net of tax of $175 and $(548), respectively
274

 
(857
)
Amortization of pension and postretirement costs, net of tax of $6,139 and $6,886, respectively
10,631

 
11,988

Foreign currency translations
(42,204
)
 
33,359

Other comprehensive (loss) income
(30,761
)
 
44,539

Comprehensive income
41,339

 
207,803

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

 
4,594

Total comprehensive income - Pitney Bowes Inc.
$
36,745

 
$
203,209






































See Notes to Condensed Consolidated Financial Statements

4


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


 
March 31, 2013
 
December 31, 2012
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
909,664

 
$
913,276

Short-term investments
37,712

 
36,611

Accounts receivable, gross
663,357

 
748,469

Allowance for doubtful accounts receivables
(15,739
)
 
(20,219
)
Accounts receivable, net
647,618

 
728,250

Finance receivables
1,160,865

 
1,213,776

Allowance for credit losses
(23,774
)
 
(25,484
)
Finance receivables, net
1,137,091

 
1,188,292

Inventories
167,469

 
179,678

Current income taxes
49,082

 
51,836

Other current assets and prepayments
113,142

 
114,184

Total current assets
3,061,778

 
3,212,127

Property, plant and equipment, net
377,246

 
385,377

Rental property and equipment, net
236,026

 
241,192

Finance receivables
993,242

 
1,041,099

Allowance for credit losses
(13,206
)
 
(14,610
)
Finance receivables, net
980,036

 
1,026,489

Investment in leveraged leases
34,236

 
34,546

Goodwill
2,115,450

 
2,136,138

Intangible assets, net
153,440

 
166,214

Non-current income taxes
93,391

 
94,434

Other assets
564,503

 
563,374

Total assets
$
7,616,106

 
$
7,859,891

LIABILITIES, NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY
 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
1,586,957

 
$
1,809,226

Current income taxes
207,081

 
240,681

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

 
375,000

Advance billings
466,677

 
452,130

Total current liabilities
2,635,715

 
2,877,037

Deferred taxes on income
94,883

 
69,222

Tax uncertainties and other income tax liabilities
144,739

 
145,881

Long-term debt
3,657,634

 
3,642,375

Other non-current liabilities
713,578

 
718,375

Total liabilities
7,246,549

 
7,452,890

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

 
296,370

Commitments and contingencies (See Note 12)


 


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

 
4

Cumulative preference stock, no par value, $2.12 convertible
648

 
648

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

 
323,338

Additional paid-in capital
203,454

 
223,847

Retained earnings
4,736,961

 
4,744,802

Accumulated other comprehensive loss
(711,974
)
 
(681,213
)
Treasury stock, at cost (121,867,606 and 122,453,865 shares, respectively)
(4,479,244
)
 
(4,500,795
)
Total Pitney Bowes Inc. stockholders’ equity
73,187

 
110,631

Total liabilities, noncontrolling interests and stockholders’ equity
$
7,616,106

 
$
7,859,891

See Notes to Condensed Consolidated Financial Statements

5


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



 
Three Months Ended March 31,
 
2013
 
2012
Cash flows from operating activities:
 

 
 

Net income before attribution of noncontrolling interests
$
72,100

 
$
163,264

Restructuring payments
(16,275
)
 
(26,245
)
Special pension plan contributions

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

 
(69,233
)
Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Gain on sale of leveraged lease assets, net of tax

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

 

Depreciation and amortization
57,227

 
64,370

Stock-based compensation
3,704

 
4,377

Changes in operating assets and liabilities:
 

 
 

(Increase) decrease in accounts receivable
71,401

 
34,798

(Increase) decrease in finance receivables
76,628

 
63,926

(Increase) decrease in inventories
8,807

 
925

(Increase) decrease in other current assets and prepayments
(4,396
)
 
(13,002
)
Increase (decrease) in accounts payable and accrued liabilities
(169,292
)
 
(141,759
)
Increase (decrease) in current and non-current income taxes
(11,472
)
 
53,087

Increase (decrease) in advance billings
23,101

 
43,166

Increase (decrease) in other operating capital, net
15,789

 
1,592

Net cash provided by operating activities
132,160

 
71,380

Cash flows from investing activities:
 

 
 

Short-term and other investments
2,143

 
(8,334
)
Capital expenditures
(38,839
)
 
(50,029
)
Proceeds from sale of leveraged lease assets

 
105,506

Net investment in external financing
(506
)
 
(825
)
Reserve account deposits
(27,327
)
 
(25,674
)
Net cash (used in) provided by investing activities
(64,529
)
 
20,644

Cash flows from financing activities:
 

 
 

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

 

Principal payments of long-term obligations
(404,637
)
 
(150,000
)
Increase in commercial paper borrowings, net

 
177,830

Proceeds from the issuance of common stock under employee stock-based compensation plans
1,876

 
2,059

Dividends paid to stockholders
(75,347
)
 
(74,938
)
Net cash used in financing activities
(66,495
)
 
(45,049
)
Effect of exchange rate changes on cash and cash equivalents
(4,748
)
 
12,340

(Decrease) increase in cash and cash equivalents
(3,612
)
 
59,315

Cash and cash equivalents at beginning of period
913,276

 
856,238

Cash and cash equivalents at end of period
$
909,664

 
$
915,553

Cash interest paid
$
72,650

 
$
77,572

Cash income tax payments, net of refunds
$
36,871

 
$
28,148





See Notes to Condensed Consolidated Financial Statements

6


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


1. Description of Business and Basis of Presentation
Pitney Bowes Inc. and its subsidiaries (we, us, our or the company) is a global provider of software, hardware and services that enables and integrates both physical and digital communications. We offer a full suite of equipment, supplies, software, services and solutions for managing and integrating physical and digital communication channels. We conduct our business activities in seven reporting segments within two business groups: Small & Medium Business Solutions and Enterprise Business Solutions. See Note 13 for information regarding our reportable segments.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In addition, the December 31, 2012 Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In management's opinion, all adjustments, consisting only of normal recurring adjustments, considered necessary to state fairly our financial position, results of operations and cash flows for the periods presented have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2013.
In January 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (ASU 2013-01), ASU 2013-01 requires an entity to disclose gross and net information about transactions that are (1) offset in the financial statements or (2) subject to an enforceable master netting arrangement or similar agreement, regardless of whether the transactions are actually offset in the statement of financial position. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The amounts impacting our disclosure were immaterial at March 31, 2013 and December 31, 2012.

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02). ASU 2013-02 requires an entity to present either parenthetically on the face of the financial statements, or in the notes, significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification. The new standard became effective this quarter. The adoption of this standard resulted in additional disclosures, but did not impact our financial condition, results of operations or cash flows.
During the fourth quarter of 2012, we determined that changes in certain investment-related working capital accounts that were classified as cash flows from operating activities in the Condensed Consolidated Statement of Cash Flows should have been classified as cash flows from investing activities. Accordingly, the Condensed Consolidated Statement of Cash Flows for the period ended March 31, 2012 has been revised to reflect the correct classification of cash flows, resulting in an increase in cash provided by operating activities and an increase in cash used in investing activities of $25 million.
These statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report to Stockholders on Form 10-K for the year ended December 31, 2012 (the 2012 Annual Report). Certain prior year amounts have been reclassified to conform to the current period presentation.
2. Inventories
Inventories at March 31, 2013 and December 31, 2012 consisted of the following:
 
March 31,
2013
 
December 31,
2012
Raw materials and work in process
$
60,389

 
$
66,221

Supplies and service parts
70,842

 
72,551

Finished products
63,925

 
68,335

Inventory at FIFO cost
195,156

 
207,107

Excess of FIFO cost over LIFO cost
(27,687
)
 
(27,429
)
Total inventory, net
$
167,469

 
$
179,678



7


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 March 31, 2013 and December 31, 2012 consisted of the following:
 
March 31, 2013
 
North America
 
International
 
Total
Sales-type lease receivables
 

 
 

 
 

Gross finance receivables
$
1,527,074

 
$
435,822

 
$
1,962,896

Unguaranteed residual values
139,759

 
20,190

 
159,949

Unearned income
(307,448
)
 
(98,744
)
 
(406,192
)
Allowance for credit losses
(15,572
)
 
(7,767
)
 
(23,339
)
Net investment in sales-type lease receivables
1,343,813

 
349,501

 
1,693,314

Loan receivables
 

 
 

 
 

Loan receivables
393,283

 
44,171

 
437,454

Allowance for credit losses
(11,829
)
 
(1,812
)
 
(13,641
)
Net investment in loan receivables
381,454

 
42,359

 
423,813

Net investment in finance receivables
$
1,725,267

 
$
391,860

 
$
2,117,127

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

 
 

 
 

Gross finance receivables
$
1,581,711

 
$
461,510

 
$
2,043,221

Unguaranteed residual values
148,664

 
21,025

 
169,689

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

 
369,615

 
1,766,981

Loan receivables
 

 
 

 
 

Loan receivables
414,960

 
47,293

 
462,253

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

 
45,162

 
447,800

Net investment in finance receivables
$
1,800,004

 
$
414,777

 
$
2,214,781

Allowance for Credit Losses and Aging of Receivables
We estimate our finance receivable risks and provide an allowance for credit losses accordingly. We evaluate the adequacy of the allowance for credit losses based on historical loss experience, the nature and volume of our portfolios, adverse situations that may affect a client's ability to pay, prevailing economic conditions and our ability to manage the collateral and make adjustments to the allowance as necessary. This evaluation is inherently subjective and actual results may differ significantly from estimated reserves.

We establish credit approval limits based on the credit quality of the client and the type of equipment financed. Our policy is to discontinue revenue recognition for lease receivables that are more than 120 days past due and for unsecured loan receivables that are more than 90 days past due. We resume revenue recognition when payments reduce the account balance aging to 60 days or less past due. Finance receivables deemed uncollectible are written off against the allowance after all collection efforts have been exhausted and management deems the account to be uncollectible. We believe that our finance receivable credit risk is limited because of our large number of clients, small account balances for most of our clients, and geographic and industry diversification.

8


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


Activity in the allowance for credit losses for finance receivables for the three months ended March 31, 2013 was as follows:
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
Balance at January 1, 2013
$
16,979

 
$
8,662

 
$
12,322

 
$
2,131

 
$
40,094

Amounts charged to expense
1,067

 
360

 
2,462

 
70

 
3,959

Accounts written off
(2,474
)
 
(1,255
)
 
(2,955
)
 
(389
)
 
(7,073
)
Balance at March 31, 2013
$
15,572

 
$
7,767

 
$
11,829

 
$
1,812

 
$
36,980


Aging of Receivables
The aging of gross finance receivables at March 31, 2013 and December 31, 2012 was as follows:
 
March 31, 2013
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
< 31 days
$
1,445,912

 
$
399,412

 
$
375,470

 
$
42,329

 
$
2,263,123

> 30 days and < 61 days
36,003

 
13,952

 
9,602

 
1,126

 
60,683

> 60 days and < 91 days
22,693

 
11,824

 
3,647

 
341

 
38,505

> 90 days and < 121 days
6,143

 
3,735

 
1,845

 
187

 
11,910

> 120 days
16,323

 
6,899

 
2,719

 
188

 
26,129

Total
$
1,527,074

 
$
435,822

 
$
393,283

 
$
44,171

 
$
2,400,350

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
6,143

 
$
3,735

 
$

 
$

 
$
9,878

Not accruing interest
16,323

 
6,899

 
4,564

 
375

 
28,161

Total
$
22,466

 
$
10,634

 
$
4,564

 
$
375

 
$
38,039


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

 
$
435,780

 
$
392,108

 
$
45,324

 
$
2,371,009

> 30 days and < 61 days
37,348

 
9,994

 
12,666

 
1,368

 
61,376

> 60 days and < 91 days
24,059

 
5,198

 
4,577

 
285

 
34,119

> 90 days and < 121 days
6,665

 
3,327

 
2,319

 
179

 
12,490

> 120 days
15,842

 
7,211

 
3,290

 
137

 
26,480

Total
$
1,581,711

 
$
461,510

 
$
414,960

 
$
47,293

 
$
2,505,474

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
6,665

 
$
3,327

 
$

 
$

 
$
9,992

Not accruing interest
15,842

 
7,211

 
5,609

 
316

 
28,978

Total
$
22,507

 
$
10,538

 
$
5,609

 
$
316

 
$
38,970

Credit Quality
The extension of credit and management of credit lines to new and existing clients uses a combination of an automated credit score, where available, and a detailed manual review of the client’s financial condition and, when applicable, payment history. Once credit is granted, the payment performance of the client is managed through automated collections processes and is supplemented with direct follow up should an account become delinquent. We have robust automated collections and extensive portfolio management processes.

9


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

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 March 31, 2013 and December 31, 2012 by relative risk class (low, medium, high) based on the relative scores of the accounts within each class. The relative scores are determined based on a number of factors, including the company type, ownership structure, payment history and financial information. A fourth class is shown for accounts that are not scored. Absence of a score is not indicative of the credit quality of the account. The degree of risk, as defined by the third party, refers to the relative risk that an account in the next 12 month period may become delinquent.
Low risk accounts are companies with very good credit scores and are considered to approximate the top 30% of all commercial borrowers.
Medium risk accounts are companies with average to good credit scores and are considered to approximate the middle 40% of all commercial borrowers.
High risk accounts are companies with poor credit scores, are delinquent or are at risk of becoming delinquent and are considered to approximate the bottom 30% of all commercial borrowers.
 
March 31,
2013
 
December 31,
2012
Sales-type lease receivables
 

 
 

Low
$
1,030,809

 
$
1,016,413

Medium
397,721

 
450,432

High
45,669

 
43,658

Not Scored
52,875

 
71,208

Total
$
1,527,074

 
$
1,581,711

Loan receivables
 

 
 

Low
$
248,494

 
$
254,567

Medium
127,599

 
136,069

High
13,786

 
14,624

Not Scored
3,404

 
9,700

Total
$
393,283

 
$
414,960

Troubled Debt
We maintain a program for U.S. clients in our North America loan portfolio who are experiencing financial difficulties, but are able to make reduced payments over an extended period of time. Upon acceptance into the program, the client’s credit line is closed and interest accrual is suspended. There is generally no forgiveness of debt or reduction of balances owed. The balance of loans in this program, related loan loss allowance and write-offs are insignificant to the overall portfolio.
Leveraged Leases
Our investment in leveraged lease assets at March 31, 2013 and December 31, 2012 consisted of the following:
 
March 31,
2013
 
December 31,
2012
Rental receivables
$
78,287

 
$
83,254

Unguaranteed residual values
13,841

 
14,177

Principal and interest on non-recourse loans
(50,802
)
 
(55,092
)
Unearned income
(7,090
)
 
(7,793
)
Investment in leveraged leases
34,236

 
34,546

Less: deferred taxes related to leveraged leases
(18,234
)
 
(19,372
)
Net investment in leveraged leases
$
16,002

 
$
15,174


10


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 March 31, 2013 and December 31, 2012 consisted of the following:
 
March 31, 2013
 
December 31, 2012
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships
$
403,534

 
$
(274,203
)
 
$
129,331

 
$
407,901

 
$
(269,100
)
 
$
138,801

Supplier relationships
29,000

 
(22,838
)
 
6,162

 
29,000

 
(22,113
)
 
6,887

Software & technology
167,873

 
(152,074
)
 
15,799

 
169,632

 
(151,628
)
 
18,004

Trademarks & trade names
34,554

 
(32,450
)
 
2,104

 
35,078

 
(32,615
)
 
2,463

Non-compete agreements
7,372

 
(7,328
)
 
44

 
7,471

 
(7,412
)
 
59

Total intangible assets
$
642,333

 
$
(488,893
)
 
$
153,440

 
$
649,082

 
$
(482,868
)
 
$
166,214


Amortization expense for intangible assets was $10 million and $12 million for the three months ended March 31, 2013 and 2012, respectively. The future amortization expense for intangible assets as of March 31, 2013 was as follows:
Remaining for year ended December 31, 2013
$
28,120

Year ended December 31, 2014
36,919

Year ended December 31, 2015
32,383

Year ended December 31, 2016
24,071

Year ended December 31, 2017
11,409

Thereafter
20,538

Total
$
153,440

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 three months ended March 31, 2013 were as follows:
 
Gross value before accumulated impairment
 
Accumulated impairment
 
December 31, 2012
 
Other (1)
 
March 31,
2013
North America Mailing
$
355,874

 
$

 
$
355,874

 
$
(4,164
)
 
$
351,710

International Mailing
183,908

 

 
183,908

 
(5,664
)
 
178,244

Small & Medium Business Solutions
539,782

 

 
539,782

 
(9,828
)
 
529,954

Production Mail
131,866

 

 
131,866

 
(3,773
)
 
128,093

Software
671,218

 

 
671,218

 
(5,398
)
 
665,820

Management Services
488,399

 
(84,500
)
 
403,899

 
(1,689
)
 
402,210

Mail Services
259,105

 
(63,965
)
 
195,140

 

 
195,140

Marketing Services
194,233

 

 
194,233

 

 
194,233

Enterprise Business Solutions
1,744,821

 
(148,465
)
 
1,596,356

 
(10,860
)
 
1,585,496

Total
$
2,284,603

 
$
(148,465
)
 
$
2,136,138

 
$
(20,688
)
 
$
2,115,450

(1)
Primarily foreign currency translation adjustments.


11


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

5. Debt
Debt at March 31, 2013 and December 31, 2012 consisted of the following:
 
 
March 31,
2013
 
December 31, 2012
Term loans
$
230,000

 
$
230,000

3.875%
notes due 2013
375,000

 
375,000

4.875%
notes due 2014 (1), (2)
299,570

 
450,000

5.0%
notes due 2015 (1)
274,879

 
400,000

4.75%
notes due 2016 (1)
370,914

 
500,000

5.75%
notes due 2017
500,000

 
500,000

5.60%
notes due 2018
250,000

 
250,000

4.75%
notes due 2018
350,000

 
350,000

6.25%
notes due 2019
300,000

 
300,000

5.25%
notes due 2022
110,000

 
110,000

5.25%
notes due 2037
500,000

 
500,000

6.70%
notes due 2043 (3)
425,000

 

Other (4)
47,271

 
52,375

Total debt
4,032,634

 
4,017,375

Current portion
375,000

 
375,000

Long-term debt
$
3,657,634

 
$
3,642,375

(1)
During the quarter, we completed a cash tender offer (the Tender Offer) for a portion of our 4.875% Notes due 2014, our 5.0% Notes due 2015, and our 4.75% Notes due 2016 (the Subject Notes). Holders who validly tendered their notes received the principal amount of the notes tendered, all accrued and unpaid interest and a premium amount. An aggregate $405 million of the Subject Notes were tendered. A net loss of $25 million, consisting of the premium payments, the write-off of unamortized costs and fees, partially offset by a gain from the unwinding of interest rate swap agreements, was recognized as Other expense (income), net on the Condensed Consolidated Statements of Income.

(2)
Prior to the Tender Offer, we had interest rate swap agreements with an aggregate notional value of $450 million that effectively converted the fixed rate interest payments on these notes into variable interest rates. As a result of the Tender Offer, we unwound $225 million of these swap agreements.

(3)
During the quarter, we issued $425 million of 30-year notes with a fixed-rate of 6.7%. Interest is payable quarterly commencing in June 2013. The notes mature in 2043, but may be redeemed, at our option, in whole or in part, at any time on or after March 7, 2018 at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest. The net proceeds from the notes were used to fund the repurchase of notes under the Tender Offer.

(4)
Other consists of the unamortized net proceeds received from unwinding of interest rate swaps, the mark-to-market adjustment of interest rate swaps and debt discounts and premiums.

At March 31, 2013, there were no outstanding commercial paper borrowings. During the quarter, commercial paper borrowings averaged $100 million at a weighted-average interest rate of 0.41% and the maximum amount outstanding at any time was $300 million.

12


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

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 March 31, 2013 or December 31, 2012. There was no change in the carrying value of noncontrolling interests during the period ended March 31, 2013 or the year ended December 31, 2012.
7. Income Taxes
The effective tax rate for the three months ended March 31, 2013 and 2012 was 27.1% and 9.6%, respectively. The effective tax rate for the three months ended March 31, 2013 includes tax benefits of $4 million from the retroactive effect of 2013 U.S. tax legislation. The effective tax rate for the three months ended March 31, 2012 includes tax benefits of $17 million from the sale of non-U.S. leveraged lease assets and $22 million from the resolution of tax examinations.

As is the case with other large corporations, our tax returns are examined each year by tax authorities in the U.S., other countries and local jurisdictions in which we have operations. We regularly assess the likelihood of tax adjustments in each of the tax jurisdictions in which we do business 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.

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 the year 2000. The decision has been appealed and, therefore, 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 results of operations.

13


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 three months ended March 31, 2013 and 2012 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, 2013
$
4

 
$
648

 
$
323,338

 
$
223,847

 
$
4,744,802

 
$
(681,213
)
 
$
(4,500,795
)
 
$
110,631

Net income

 

 

 

 
67,506

 

 

 
67,506

Other comprehensive income

 

 

 

 

 
(30,761
)
 

 
(30,761
)
Cash dividends
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common ($1.125 per share)

 

 

 

 
(75,334
)
 

 

 
(75,334
)
Preference

 

 

 

 
(13
)
 

 

 
(13
)
Issuances of common stock

 

 

 
(24,097
)
 

 

 
21,551

 
(2,546
)
Stock-based compensation expense

 

 

 
3,704

 

 

 

 
3,704

Balance at March 31, 2013
$
4

 
$
648

 
$
323,338

 
$
203,454

 
$
4,736,961

 
$
(711,974
)
 
$
(4,479,244
)
 
$
73,187


 
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

 

 

 

 
158,670

 

 

 
158,670

Other comprehensive income

 

 

 

 

 
44,539

 

 
44,539

Cash dividends
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common ($1.11 per share)

 

 

 

 
(74,925
)
 

 

 
(74,925
)
Preference

 

 

 

 
(13
)
 

 

 
(13
)
Issuances of common stock

 

 

 
(18,931
)
 

 

 
16,352

 
(2,579
)
Conversions to common stock

 
(6
)
 

 
(121
)
 

 

 
127

 

Stock-based compensation expense

 

 

 
4,337

 

 

 

 
4,337

Balance at March 31, 2012
$
4

 
$
653

 
$
323,338

 
$
225,869

 
$
4,683,949

 
$
(617,106
)
 
$
(4,525,664
)
 
$
91,043

 
 
 
 
 
 
 
 
 
 
 
 


14


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

9. Accumulated Other Comprehensive Income

Changes in accumulated other comprehensive income (AOCI) for the three months ended March 31, 2013 was as follows:
 
Gains (losses) on cash flow hedges
 
Unrealized gains (losses) on available for sale securities
 
Defined benefit pension plans and nonpension postretirement benefit plans
 
Foreign currency items
 
Total
Beginning balance
$
(7,777
)
 
$
4,513

 
$
(759,199
)
 
$
81,250

 
$
(681,213
)
Other comprehensive income before reclassifications (a)
72

 
(1,372
)
 

 
(42,204
)
 
(43,504
)
Amounts reclassified from accumulated other comprehensive income (a), (b)
466

 
1,646

 
10,631

 

 
12,743

Net current period other comprehensive income
538

 
274

 
10,631

 
(42,204
)
 
(30,761
)
Ending balance
$
(7,239
)
 
$
4,787

 
$
(748,568
)
 
$
39,046

 
$
(711,974
)
(a) Amounts are net of tax. Amounts in parentheses indicate debits to AOCI.
(b) See table below for additional details of these reclassifications.

Reclassifications out of accumulated other comprehensive income for the three months ended March 31, 2013 was as follows:
AOCI Component
 
Amount Reclassified from AOCI (a)
 
Affected Statement of Income Line Item
 
 
 
 
 
Gains (losses) on cash flow hedges
 
 
 
 
Foreign exchange contracts
 
$
(382
)
 
Revenue
Foreign exchange contracts
 
126

 
Cost of sales
Interest rate lock contracts
 
(507
)
 
Interest expense
 
 
(763
)
 
Total before tax
 
 
297

 
Tax benefit
 
 
$
(466
)
 
Net of tax
 
 
 
 
 
Unrealized gains (losses) on available for sale securities
 
 
 
 
 
 
$
(2,612
)
 
Interest income
 
 
966

 
Tax benefit
 
 
$
(1,646
)
 
Net of tax
 
 
 
 
 
Defined Benefit Pension Plans and Nonpension Postretirement Benefit Plans
 
 
 
 
Transition credit
 
$
2

(b)
 
Prior service costs
 
(198
)
(b)
 
Actuarial losses
 
(16,574
)
(b)
 
 
 
(16,770
)
 
Total before tax
 
 
6,139

 
Tax benefit
 
 
$
(10,631
)
 
Net of tax
(a)     Amounts in parentheses indicate debits (reductions) to income.
(b)
These items are included in the computation of net periodic costs of defined benefit pension plans and nonpension postretirement benefit plans (see Note 14 for additional details).

15


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

10. 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 March 31, 2013 and December 31, 2012. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect their placement within the fair value hierarchy.
 
March 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
532,425

 
$
37,554

 
$

 
$
569,979

Equity securities

 
27,198

 

 
27,198

Commingled fixed income securities

 
29,378

 

 
29,378

Debt securities - U.S. and foreign governments, agencies and municipalities
122,589

 
24,640

 

 
147,229

Debt securities - corporate

 
43,468

 

 
43,468

Mortgage-backed / asset-backed securities

 
160,489

 

 
160,489

Derivatives
 
 
 
 
 

 


Interest rate swaps

 
3,980

 

 
3,980

Foreign exchange contracts

 
1,654

 

 
1,654

Total assets
$
655,014

 
$
328,361

 
$

 
$
983,375

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$

 
$
(3,288
)
 
$

 
$
(3,288
)
Total liabilities
$

 
$
(3,288
)
 
$

 
$
(3,288
)


16


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

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

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
581,648

 
$
34,369

 
$

 
$
616,017

Equity securities

 
25,106

 

 
25,106

Commingled fixed income securities

 
29,359

 

 
29,359

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

 
18,908

 

 
143,129

Debt securities - corporate

 
43,926

 

 
43,926

Mortgage-backed / asset-backed securities

 
162,375

 

 
162,375

Derivatives
 

 
 

 
 

 


Interest rate swaps

 
10,117

 

 
10,117

Foreign exchange contracts

 
2,582

 

 
2,582

Total assets
$
705,869

 
$
326,742

 
$

 
$
1,032,611

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$

 
$
(1,174
)
 
$

 
$
(1,174
)
Total liabilities
$

 
$
(1,174
)
 
$

 
$
(1,174
)
Investment Securities
The valuation of investment securities is based on the market approach using inputs that are observable, or can be corroborated by observable data, in an active marketplace. The following information relates to our classification into the fair value hierarchy:
Money Market Funds / Commercial Paper: Money market funds typically invest in government securities, certificates of deposit, commercial paper and other highly liquid, low-risk securities. Money market funds are principally used for overnight deposits and are classified as Level 1 when unadjusted quoted prices in active markets are available and as Level 2 when they are not actively traded on an exchange. Direct investments in commercial paper are not listed on an exchange in an active market and are classified as Level 2.
Equity Securities: Equity securities are comprised of mutual funds investing in U.S. and foreign common stock. These mutual funds are classified as Level 2 as they are not separately listed on an exchange.
Commingled Fixed Income Securities: Mutual funds that invest in a variety of fixed income securities including securities of the U.S. government and its agencies, corporate debt, mortgage-backed securities and asset-backed securities. The value of the funds is based on the market value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding, as reported by the fund manager. These commingled funds are not listed on an exchange in an active market and are classified as Level 2.
Debt Securities – U.S. and Foreign Governments, Agencies and Municipalities: Debt securities are classified as Level 1 where active, high volume trades for identical securities exist. Valuation adjustments are not applied to these securities. Debt securities valued using quoted market prices for similar securities or benchmarking model derived prices to quoted market prices and trade data for identical or comparable securities are classified as Level 2.
Debt Securities – Corporate: Corporate debt securities are valued using recently executed transactions, market price quotations where observable, or bond spreads. The spread data used are for the same maturity as the security. These securities are classified as Level 2.
Mortgage-Backed Securities (MBS) / Asset-Backed Securities (ABS): These securities are valued based on external pricing indices. When external index pricing is not observable, MBS and ABS are valued based on external price/spread data. These securities are classified as Level 2.
Investment securities include investments held by The Pitney Bowes Bank (the Bank), an indirect wholly owned subsidiary whose primary business is to provide financing solutions to clients that rent or lease postage meters. The Bank's key product offering, Purchase Power, is a revolving credit solution, which enables clients to finance their postage costs when they refill their meter. The Bank also provides

17


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

a deposit solution to those clients that prefer to prepay postage and earn interest on their deposits. When a client refills their postage meter, the funds are withdrawn from the savings account to pay for the postage. The Bank's assets and liabilities consist primarily of cash, finance receivables, short and long-term investments and deposit accounts.
The Bank's investment securities are classified as available-for-sale and recorded at fair value on the Condensed Consolidated Balance Sheets as cash and cash equivalents, short-term investments and other assets depending on the type of investment and maturity. Unrealized holding gains and losses are recorded, net of tax, in accumulated other comprehensive income.
Available-for-sale securities at March 31, 2013 and December 31, 2012 consisted of the following:
 
March 31, 2013
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
Money market funds / commercial paper
$
14,402

 
$
42

 
$

 
$
14,444

U.S. and foreign governments, agencies and municipalities
123,272

 
3,707

 
(135
)
 
126,844

Corporate
40,772

 
2,744

 
(48
)
 
43,468

Mortgage-back / asset-back securities
158,030

 
3,203

 
(744
)
 
160,489

Total
$
336,476

 
$
9,696

 
$
(927
)
 
$
345,245

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

 
$
53

 
$

 
$
44,664

U.S. and foreign governments, agencies and municipalities
127,807

 
3,972

 
(56
)
 
131,723

Corporate
41,095

 
2,851

 
(20
)
 
43,926

Mortgage-back / asset-back securities
162,180

 
3,340

 
(3,145
)
 
162,375

Total
$
375,693

 
$
10,216

 
$
(3,221
)
 
$
382,688


Scheduled maturities of investment securities at March 31, 2013 were as follows:
 
Amortized cost
 
Estimated fair value
Within 1 year
$
53,086

 
$
53,218

After 1 year through 5 years
40,122

 
41,610

After 5 years through 10 years
76,310

 
79,377

After 10 years
166,958

 
171,040

Total
$
336,476

 
$
345,245

We have not experienced any significant write-offs in our investment portfolio. The majority of our MBS are either guaranteed or supported by the U.S. government. We have no investments in inactive markets that would warrant a possible change in our pricing methods or classification within the fair value hierarchy. Further, we have no investments in auction rate securities.
Derivative Instruments
In the normal course of business, we are exposed to the impact of interest rate changes and foreign currency fluctuations. We limit these risks by following established risk management policies and procedures, including the use of derivatives. We use derivatives to manage the related cost of debt and to limit the effects of foreign exchange rate fluctuations on financial results. We do not use derivatives for trading or speculative purposes. We record our derivative instruments at fair value, and the accounting for changes in the fair value of the derivatives depends on the intended use of the derivative, the resulting designation, and the effectiveness of the instrument in offsetting the risk exposure it is designed to hedge.

18


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

As required by the fair value measurements guidance, we have incorporated counterparty credit risk and our credit risk into the fair value measurement of our derivative assets and liabilities, respectively. We derive credit risk from observable data related to credit default swaps. We have not seen a material change in the creditworthiness of those banks acting as derivative counterparties.
The valuation of our interest rate swaps is based on the income approach using a model with inputs that are observable or that can be derived from or corroborated by observable market data. The valuation of our foreign exchange derivatives is based on the market approach using observable market inputs, such as forward rates.

The fair value of our derivative instruments at March 31, 2013 and December 31, 2012 was as follows:
Designation of Derivatives
 
Balance Sheet Location
 
March 31,
2013
 
December 31,
2012
Derivatives designated as
hedging instruments
 
Other current assets and prepayments:
 
 

 
 

 
 
Foreign exchange contracts
 
$
558

 
$
78

 
 
Other assets:
 
 

 
 

 
 
Interest rate swaps
 
3,980

 
10,117

 
 
Accounts payable and accrued liabilities:
 
 

 
 

 
 
Foreign exchange contracts
 
(425
)
 
(320
)
Derivatives not designated as
hedging instruments
 
Other current assets and prepayments:
 
 

 
 

 
 
Foreign exchange contracts
 
1,096

 
2,504

 
 
Accounts payable and accrued liabilities:
 
 

 
 

 
 
Foreign exchange contracts
 
(2,863
)
 
(854
)
 
 
 
 
 
 
 
 
 
Total derivative assets
 
$
5,634

 
$
12,699

 
 
Total derivative liabilities
 
(3,288
)
 
(1,174
)
 
 
Total net derivative assets
 
$
2,346

 
$
11,525


Interest Rate Swaps
Derivatives designated as fair value hedges include interest rate swaps related to fixed rate debt. Changes in the fair value of both the derivative and item being hedged are recognized in earnings. The following represents the results of fair value hedging relationships for the three months ended March 31, 2013 and 2012:
 
 
 
 
Three Months Ended March 31,
 
 
 
 
Derivative Gain
Recognized in Earnings
 
Hedged Item Expense
Recognized in Earnings
Derivative Instrument
 
Location of Gain (Loss)
 
2013
 
2012
 
2013
 
2012
Interest rate swaps
 
Interest expense
 
$
1,993

 
$
3,327

 
$
(5,484
)
 
$
(10,109
)

Foreign Exchange Contracts
We enter into foreign currency exchange contracts to mitigate the currency risk associated with the anticipated purchase of inventory between affiliates and from third parties. These contracts are designated as cash flow hedges. The effective portion of the gain or loss on cash flow hedges is included in AOCI in the period that the change in fair value occurs and is reclassified to earnings in the period that the hedged item is recorded in earnings. At March 31, 2013 and December 31, 2012, we had outstanding contracts associated with these anticipated transactions with a notional amount of $30 million and $25 million, respectively. The value of these contracts at March 31, 2013 and December 31, 2012 was less than $1 million.
The amounts included in AOCI at March 31, 2013 will be recognized in earnings within the next 12 months. No amount of ineffectiveness was recorded in earnings for these designated cash flow hedges.

19


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 cash flow hedging relationships for the three months ended March 31, 2013 and 2012:
 
 
Three Months Ended March 31,
 
 
Derivative Gain (Loss)
Recognized in AOCI
(Effective Portion)
 
Location of Gain (Loss)
(Effective Portion)
 
Gain (Loss) Reclassified
from AOCI to Earnings
(Effective Portion)
Derivative Instrument
 
2013
 
2012
 
 
2013
 
2012
Foreign exchange contracts
 
$
630

 
$
(659
)
 
Revenue
 
$
(382
)
 
$
301

 
 
 

 
 

 
Cost of sales
 
126

 
(66
)
 
 
 

 
 

 
 
 
$
(256
)
 
$
235

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 $2 million at March 31, 2013 and December 31, 2012. All outstanding contracts at March 31, 2013 mature by the end of the year.
The following represents the results of our non-designated derivative instruments for the three months ended March 31, 2013 and 2012:
 
 
 
 
Three Months Ended March 31,