0000078814-15-000026.txt : 20150805 0000078814-15-000026.hdr.sgml : 20150805 20150805114631 ACCESSION NUMBER: 0000078814-15-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20150630 FILED AS OF DATE: 20150805 DATE AS OF CHANGE: 20150805 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PITNEY BOWES INC /DE/ CENTRAL INDEX KEY: 0000078814 STANDARD INDUSTRIAL CLASSIFICATION: OFFICE MACHINES, NEC [3579] IRS NUMBER: 060495050 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03579 FILM NUMBER: 151028031 BUSINESS ADDRESS: STREET 1: PITNEY BOWES INC STREET 2: 1 ELMCROFT ROAD CITY: STAMFORD STATE: CT ZIP: 06926-0700 BUSINESS PHONE: 2033565000 MAIL ADDRESS: STREET 1: 1 ELMCROFT ROAD CITY: STAMFORD STATE: CT ZIP: 06926-0700 10-Q 1 pbi2015063010q.htm 10-Q PBI 2015.06.30 10Q



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number: 1-3579
PITNEY BOWES INC.
(Exact name of registrant as specified in its charter)

Delaware
 
06-0495050
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
3001 Summer Street, Stamford, Connecticut
 
06926
(Address of principal executive offices)
 
(Zip Code)
(203) 356-5000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
 
 
As of July 29, 2015, 201,918,974 shares of common stock, par value $1 per share, of the registrant were outstanding.
 
 
 





PITNEY BOWES INC.
INDEX

 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2015 and 2014
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014
 
 
 
 
Condensed Consolidated Balance Sheets at June 30, 2015 and December 31, 2014
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2





PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
PITNEY BOWES INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; in thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 

 
 

 
 

 
 

Equipment sales
$
165,507

 
$
191,518

 
$
331,471

 
$
380,574

Supplies
70,636

 
76,284

 
144,004

 
155,801

Software
99,184

 
109,065

 
185,541

 
200,620

Rentals
111,312

 
122,443

 
225,309

 
246,022

Financing
101,437

 
107,644

 
207,067

 
217,694

Support services
139,237

 
158,190

 
278,795

 
316,442

Business services
193,578

 
193,306

 
399,385

 
378,794

Total revenue
880,891

 
958,450

 
1,771,572

 
1,895,947

Costs and expenses:
 

 
 

 
 

 
 

Cost of equipment sales
79,043

 
88,818

 
154,056

 
171,352

Cost of supplies
21,624

 
23,505

 
44,283

 
47,659

Cost of software
28,501

 
33,484

 
58,365

 
63,648

Cost of rentals
21,003

 
25,193

 
41,704

 
50,637

Financing interest expense
17,868

 
20,413

 
36,638

 
40,066

Cost of support services
81,507

 
96,722

 
165,106

 
195,703

Cost of business services
135,636

 
135,024

 
275,555

 
263,960

Selling, general and administrative
315,578

 
338,384

 
630,107

 
689,759

Research and development
28,492

 
28,649

 
54,540

 
54,841

Restructuring charges and asset impairments, net
14,350

 
8,299

 
14,269

 
18,140

Interest expense, net
20,971

 
21,482

 
45,035

 
45,546

Other (income) expense, net
(93,135
)
 

 
(93,135
)
 
61,657

Total costs and expenses
671,438

 
819,973

 
1,426,523

 
1,702,968

Income from continuing operations before income taxes
209,453

 
138,477

 
345,049

 
192,979

Provision for income taxes
52,351

 
46,335

 
102,898

 
54,371

Income from continuing operations
157,102

 
92,142

 
242,151

 
138,608

(Loss) income from discontinued operations, net of tax
(739
)
 
6,717

 
(582
)
 
9,518

Net income
156,363

 
98,859

 
241,569

 
148,126

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

 
4,594

 
9,187

 
9,188

Net income attributable to Pitney Bowes Inc.
$
151,770

 
$
94,265

 
$
232,382

 
$
138,938

Amounts attributable to common stockholders:
 

 
 

 
 

 
 

Net income from continuing operations
$
152,509

 
$
87,548

 
$
232,964

 
$
129,420

(Loss) income from discontinued operations, net of tax
(739
)
 
6,717

 
(582
)
 
9,518

Net income attributable to Pitney Bowes Inc.
$
151,770

 
$
94,265

 
$
232,382

 
$
138,938

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

 
 

 
 

 
 

Continuing operations
$
0.76

 
$
0.43

 
$
1.16

 
$
0.64

Discontinued operations

 
0.03

 

 
0.05

Net income attributable to Pitney Bowes Inc.
$
0.75

 
$
0.47

 
$
1.15

 
$
0.69

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

 
 

 
 

 
 

Continuing operations
$
0.75

 
$
0.43

 
$
1.15

 
$
0.63

Discontinued operations

 
0.03

 

 
0.05

Net income attributable to Pitney Bowes Inc.
$
0.75

 
$
0.46

 
$
1.15

 
$
0.68

 
 
 
 
 
 
 
 
Dividends declared per share of common stock
$
0.1875

 
$
0.1875

 
$
0.375

 
$
0.375


(1) The sum of earnings per share amounts may not equal the totals due to rounding.
See Notes to Condensed Consolidated Financial Statements

3


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



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
156,363

 
$
98,859

 
$
241,569

 
$
148,126

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

 
4,594

 
9,187

 
9,188

Net income attributable to Pitney Bowes Inc.
151,770

 
94,265

 
232,382

 
138,938

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translations
13,157

 
5,149

 
(59,022
)
 
(2,202
)
Net unrealized (loss) gain on cash flow hedges, net of tax of $(201), $267, $140 and $505, respectively
(333
)
 
417

 
216

 
790

Net unrealized (loss) gain on investment securities, net of tax of $(1,877), $1,249, $(863) and $2,453, respectively
(3,203
)
 
2,136

 
(1,473
)
 
4,195

Amortization of pension and postretirement costs, net of tax of $3,614, $3,613, $7,781 and $7,254, respectively
6,520

 
6,280

 
13,929

 
12,422

Other comprehensive income (loss), net of tax
16,141

 
13,982

 
(46,350
)
 
15,205

Comprehensive income attributable to Pitney Bowes Inc.
$
167,911

 
$
108,247

 
$
186,032

 
$
154,143





































See Notes to Condensed Consolidated Financial Statements

4


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


 
June 30, 2015
 
December 31, 2014
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
754,171

 
$
1,079,145

Short-term investments
46,256

 
32,121

Accounts receivable (net of allowance of $11,448 and $10,742, respectively)
400,044

 
437,275

Short-term finance receivables (net of allowance of $16,508 and $19,108, respectively)
952,890

 
1,000,304

Inventories
101,072

 
84,827

Current income taxes
37,035

 
40,542

Other current assets and prepayments
72,079

 
57,173

Assets held for sale

 
52,271

Total current assets
2,363,547

 
2,783,658

Property, plant and equipment, net
304,990

 
285,091

Rental property and equipment, net
193,939

 
200,380

Long-term finance receivables (net of allowance of $7,098 and $9,002, respectively)
780,968

 
819,721

Goodwill
1,747,950

 
1,672,721

Intangible assets, net
223,320

 
82,173

Non-current income taxes
78,766

 
96,377

Other assets
560,677

 
569,110

Total assets
$
6,254,157

 
$
6,509,231

 
 
 
 
LIABILITIES, NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY
 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
1,420,283

 
$
1,572,971

Current income taxes
92,803

 
90,167

Current portion of long-term debt and notes payable
521,103

 
324,879

Advance billings
372,783

 
386,846

Total current liabilities
2,406,972

 
2,374,863

Deferred taxes on income
119,634

 
64,839

Tax uncertainties and other income tax liabilities
85,191

 
86,127

Long-term debt
2,473,087

 
2,927,127

Other non-current liabilities
681,539

 
682,646

Total liabilities
5,766,423

 
6,135,602

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

 
296,370

Commitments and contingencies (See Note 15)


 


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

 
1

Cumulative preference stock, no par value, $2.12 convertible
522

 
548

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

 
323,338

Additional paid-in capital
155,371

 
178,852

Retained earnings
5,054,442

 
4,897,708

Accumulated other comprehensive loss
(892,506
)
 
(846,156
)
Treasury stock, at cost (121,566,093 and 122,309,948 shares, respectively)
(4,449,804
)
 
(4,477,032
)
Total stockholders’ equity
191,364

 
77,259

Total liabilities, noncontrolling interests and stockholders’ equity
$
6,254,157

 
$
6,509,231



See Notes to Condensed Consolidated Financial Statements

5


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


 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from operating activities:
 

 
 

Net income
$
241,569

 
$
148,126

Restructuring payments
(30,775
)
 
(33,530
)
Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Gain on disposal of businesses
(107,548
)
 
(26,152
)
Depreciation and amortization
85,153

 
93,717

Stock-based compensation
11,067

 
7,976

Restructuring charges, net
14,269

 
18,140

Changes in operating assets and liabilities, net of acquisitions/divestitures:
 

 
 

Decrease in accounts receivable
32,784

 
66,778

Decrease in finance receivables
77,232

 
82,597

Increase in inventories
(17,414
)
 
(1,852
)
Increase in other current assets and prepayments
(16,101
)
 
(8,369
)
Decrease in accounts payable and accrued liabilities
(130,100
)
 
(88,567
)
Increase in current and non-current income taxes
24,260

 
7,657

Increase in advance billings
15,850

 
11,201

Other, net
85

 
2,725

Net cash provided by operating activities
200,331

 
280,447

Cash flows from investing activities:
 

 
 

Purchases of available-for-sale securities
(106,431
)
 
(613,429
)
Proceeds from sales/maturities of available-for-sale securities
111,993

 
592,799

Capital expenditures
(88,935
)
 
(72,350
)
Proceeds from sale of former corporate world headquarters building
38,640

 

Acquisition of businesses, net of cash acquired
(391,531
)
 

Divestiture of businesses, net of cash transferred
289,639

 
101,454

Change in reserve account deposits
(21,464
)
 
(3,356
)
Other investing activities
8,886

 
6,889

Net cash (used in) provided by investing activities
(159,203
)
 
12,007

Cash flows from financing activities:
 

 
 

Proceeds from the issuance of debt, net of fees and discounts of $7,475 in 2014
950

 
492,525

Principal payments of long-term debt
(354,909
)
 
(599,850
)
Increase in notes payable, net
100,000

 

Dividends paid to stockholders
(75,637
)
 
(76,000
)
Proceeds from the issuance of common stock under employee stock-based compensation plans
1,585

 
4,027

Purchase of subsidiary shares from noncontrolling interest

 
(7,718
)
Dividends paid to noncontrolling interests
(9,188
)
 
(9,188
)
Net cash used in financing activities
(337,199
)
 
(196,204
)
Effect of exchange rate changes on cash and cash equivalents
(28,903
)
 
1,845

(Decrease) increase in cash and cash equivalents
(324,974
)
 
98,095

Cash and cash equivalents at beginning of period
1,079,145

 
907,806

Cash and cash equivalents at end of period
$
754,171

 
$
1,005,901

 
 
 
 
Cash interest paid
$
86,888

 
$
93,617

Cash income tax payments, net of refunds
$
75,939

 
$
71,741


See Notes to Condensed Consolidated Financial Statements

6


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands, except per share data)


1. Description of Business and Basis of Presentation
Pitney Bowes Inc. and its subsidiaries (we, us, our or the Company) is a global technology company offering innovative products and solutions that enable commerce in the areas of customer information management, location intelligence, customer engagement, shipping and mailing, and global ecommerce. 
We have prepared the accompanying unaudited Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In addition, the December 31, 2014 Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In management's opinion, all adjustments, consisting only of normal recurring adjustments, considered necessary to fairly state our financial position, results of operations and cash flows for the periods presented have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2015.
During the second quarter, we determined that at December 31, 2014, certain customer deposits in a debit position within current liabilities should have been classified as a current asset and certain customer deposits within current liabilities should have been classified as a non-current liability. Accordingly, the Condensed Consolidated Balance Sheet at December 31, 2014 has been revised by increasing accounts receivable, accounts payable and accrued liabilities, and other non-current liabilities by $23 million, $14 million and $9 million, respectively. This revision was not material to any of our previously issued financial statements. Previously issued financial statements will be revised to reflect this revision in future filings.

In the fourth quarter of 2014, we noted that certain purchases and sales of available-for-sale securities were reported net in our Condensed Consolidated Statements of Cash Flows. Accordingly, the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 has been revised by increasing purchases of available-for-sale securities and proceeds from sales/maturities of available-for-sale securities by $422 million. This revision did not have any impact on the reported net cash flow from investing activities or overall change in cash in any of our previously issued financial statements.

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, 2014 (2014 Annual Report).
New Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2015-05, Intangibles - Goodwill and Other - Internal-Use Software, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance on fees paid by an entity in a cloud computing arrangement and whether an arrangement includes a license to the underlying software. This standard is effective for fiscal periods beginning after December 15, 2015. Early adoption is permitted. We are currently assessing the impact this standard will have on our consolidated financial statements and disclosures.

In April 2015, the FASB issued Accounting Standard Update (ASU) 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. This standard is effective for fiscal periods beginning after December 15, 2015. Early adoption is permitted. We do not believe this standard will have a significant impact on our consolidated financial statements or disclosures.

In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items, which removes the concept of extraordinary items, thereby eliminating the need for companies to assess transactions for extraordinary treatment. The standard retained the presentation and disclosure requirements for items that are unusual in nature and/or infrequent in occurrence. The standard is effective for fiscal periods beginning after December 15, 2015. Early adoption is permitted. We do not believe this standard will have a significant impact on our consolidated financial statements or disclosures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The standard requires companies to recognize revenue for the transfer of goods and services to customers in amounts that reflect the consideration the company expects to receive in exchange for those goods and services. The standard will also result in enhanced disclosures about revenue. In July 2015, the FASB approved a one-year deferral of the effective date. This standard is now effective for fiscal periods beginning after December 15, 2017. The standard can be adopted either retrospectively or as a cumulative-effect adjustment. Companies are permitted to adopt the standard as early as the original public entity effective date (fiscal periods beginning after December 15, 2016). Early adoption prior to that date is prohibited. We are currently assessing the impact this standard will have on our consolidated financial statements and disclosures.


7


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands, except per share data)

2. Segment Information
As a result of the acquisition of Borderfree Inc. (Borderfree) and the sale of Imagitas (see Note 3), we realigned our segment reporting to conform to the way we now manage our segments and recast prior period amounts to conform to the current year presentation. Our business continues to be organized around three distinct sets of solutions – Small and Medium Business (SMB) Solutions, Enterprise Business Solutions and Digital Commerce Solutions (DCS). Under the new segment reporting, there are no changes to SMB Solutions or Enterprise Business Solutions; however, within DCS, we now report Software Solutions and Global Ecommerce Solutions as reportable segments. Other is comprised of our Marketing Services business, Imagitas, which was sold in May 2015. Imagitas was previously reported in DCS. The principal products and services of each of our reportable segments are as follows:

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

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

Digital Commerce Solutions:
Software Solutions: Includes the worldwide revenue and related expenses from the sale of non-equipment-based mailing, customer information management, location intelligence and customer engagement solutions and related support services.
Global Ecommerce Solutions: Includes the worldwide revenue and related expenses from global ecommerce and shipping solutions.

We determine segment earnings before interest and taxes (EBIT) by deducting the related costs and expenses attributable to the segment from segment revenue. Segment EBIT excludes interest, taxes, general corporate expenses, restructuring charges and other items, which are not allocated to a particular business segment. Management uses segment EBIT to measure profitability and performance at the segment level. Management believes segment EBIT provides a useful measure of our operating performance and underlying trends of the businesses. Segment EBIT may not be indicative of our overall consolidated performance and therefore, should be read in conjunction with our consolidated results of operations.

8


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands, except per share data)

Revenue and EBIT by business segment is presented below:
 
Revenue
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
North America Mailing
$
356,791

 
$
371,194

 
$
718,665

 
$
752,221

International Mailing
110,610

 
153,260

 
226,783

 
306,528

Small & Medium Business Solutions
467,401

 
524,454

 
945,448

 
1,058,749

Production Mail
97,731

 
111,756

 
197,234

 
216,972

Presort Services
113,922

 
111,281

 
235,453

 
227,772

Enterprise Business Solutions
211,653

 
223,037

 
432,687

 
444,744

Software Solutions
99,041

 
108,820

 
185,278

 
200,194

Global Ecommerce
77,966

 
68,653

 
153,352

 
132,529

Digital Commerce Solutions
177,007

 
177,473

 
338,630

 
332,723

Other
24,830

 
33,486

 
54,807

 
59,731

Total revenue
$
880,891

 
$
958,450

 
$
1,771,572

 
$
1,895,947

 
EBIT
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
North America Mailing
$
159,392

 
$
156,781

 
$
323,057

 
$
317,119

International Mailing
14,122

 
26,449

 
25,846

 
51,268

Small & Medium Business Solutions
173,514

 
183,230

 
348,903

 
368,387

Production Mail
10,028

 
10,558

 
19,060

 
18,295

Presort Services
23,544

 
22,412

 
51,038

 
46,308

Enterprise Business Solutions
33,572

 
32,970

 
70,098

 
64,603

Software Solutions
16,158

 
9,877

 
20,291

 
11,699

Global Ecommerce
3,056

 
3,749

 
11,202

 
9,776

Digital Commerce Solutions
19,214

 
13,626

 
31,493

 
21,475

Other
5,611

 
4,303

 
10,569

 
5,985

Total EBIT
231,911

 
234,129

 
461,063

 
460,450

Reconciling items:
 

 
 

 
 

 
 

Interest, net
(38,839
)
 
(41,895
)
 
(81,673
)
 
(85,612
)
Unallocated corporate expenses
(51,921
)
 
(45,458
)
 
(102,724
)
 
(102,062
)
Restructuring charges and asset impairments, net
(14,350
)
 
(8,299
)
 
(14,269
)
 
(18,140
)
Acquisition-related compensation expense
(10,483
)
 

 
(10,483
)
 

Other income (expense), net
93,135

 

 
93,135

 
(61,657
)
Income from continuing operations before income taxes
$
209,453

 
$
138,477

 
$
345,049

 
$
192,979

 
 
 
 

9


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands, except per share data)

3. Business Combinations and Divestiture
Business Combinations
Borderfree Inc.
On June 10, 2015, we acquired 100% of the outstanding shares of Borderfree. Borderfree provides cross-border ecommerce solutions through a proprietary technology and services platform that enables retailers to transact with consumers around the world. Borderfree is reported within our Global Ecommerce segment (see Note 2). The purchase price was $386 million, net of $88 million of cash acquired. In addition, we also paid $10 million for the accelerated vesting and settlement of Borderfree stock-based compensation awards and $8 million of transaction costs. The $10 million of expense related to Borderfree stock-based compensation awards was recognized as selling, general and administrative expenses and the $8 million of transaction costs was recognized within other (income) expense, net in the Condensed Consolidated Statements of Income.

The preliminary allocation of the purchase price to the fair values of assets acquired and liabilities assumed was as follows:
Accounts receivable
$
16,964

Fixed assets
7,293

Goodwill
285,727

Intangible assets
156,800

Accounts payable and other current liabilities
(35,117
)
Deferred taxes, net
(46,819
)
Other assets and liabilities, net
1,412

 
$
386,260

Goodwill represents the excess of the purchase price over the fair values of assets acquired and liabilities assumed. Goodwill is primarily attributable to expected growth opportunities, synergies and other benefits that we believe will result from combining the operations of Borderfree with our operations. Goodwill is not deductible for tax purposes.

Intangible assets acquired consist of the following:
 
Value
 
Amortization period
Customer Relationships
$
135,500

 
10 years
Developed Technology
12,600

 
5 years
Trade Names
8,700

 
5 years
 
$
156,800

 
 

The allocation of the purchase price to the fair values of assets acquired and liabilities assumed is preliminary and subject to further adjustments as we obtain additional information during the measurement period, which will not exceed 12 months from the acquisition date. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill retroactive to the period in which the acquisition occurred.

The results of operations of Borderfree are included in our consolidated results from the date of acquisition. Our consolidated operating results for the three and six months ended June 30, 2015 include revenue of $7 million. On a supplemental pro forma basis, had we acquired Borderfree on January 1, 2014, our revenues would have been higher by $22 million and $31 million for the three months ended June 30, 2015 and 2014, respectively, and $47 million and $57 million for the six months ended June 30, 2015 and 2014, respectively. The impact on our earnings would not have been material.

Real Time Content, Inc.
On May 1, 2015, we acquired Real Time Content, Inc. (RTC) for $6 million, net of cash acquired. RTC provides technology that enables clients to provide personalized interactive video communications to their customers. RTC is reported within our Software Solutions segment.
  



10


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands, except per share data)

Divestiture
On May 29, 2015, we sold Imagitas, for net proceeds of $291 million and recognized a pre-tax gain of $109 million, which was reported within other (income) expense, net in the Condensed Consolidated Statements of Income.

 
 
 
 
 
 
 
 
 
 
4. Discontinued Operations and Assets Held For Sale
Discontinued Operations
Loss from discontinued operations, net of tax for the three and six months ended June 30, 2015 consisted of post-closing and purchase price adjustments in connection with the sale of our Management Services business in 2014.
The table below shows selected financial information for discontinued operations for three and six months ended June 30, 2014:
 
Three Months Ended June 30, 2014
 
PBMS
 
IMS
 
Nordic furniture business
 
DIS
 
Total
Revenue
$

 
$

 
$

 
$
3,567

 
$
3,567

 
 
 
 
 
 
 
 
 
 
Income from operations before taxes
$
580

 
$

 
$

 
$
1,018

 
$
1,598

Gain on sale

 
831

 

 
25,198

 
26,029

Income before taxes
580

 
831

 

 
26,216

 
27,627

Tax provision
217

 
321

 

 
20,372

 
20,910

Income from discontinued operations
$
363

 
$
510

 
$

 
$
5,844

 
$
6,717

 
 
 
Six Months Ended June 30, 2014
 
PBMS
 
IMS
 
Nordic furniture business
 
DIS
 
Total
Revenue
$

 
$

 
$

 
$
19,858

 
$
19,858

 
 
 
 
 
 
 
 
 
 
Income before taxes
$
334

 
$
308

 
$
345

 
$
3,429

 
$
4,416

Gain on sale
130

 
1,994

 

 
25,198

 
27,322

Income before taxes
464

 
2,302

 
345

 
28,627

 
31,738

Tax provision
196

 
850

 
97

 
21,077

 
22,220

Income from discontinued operations
$
268

 
$
1,452

 
$
248

 
$
7,550

 
$
9,518


Assets Held for Sale
Assets held for sale at December 31, 2014 included the fair value of our former corporate headquarters building and the value of a lease portfolio. The lease portfolio was sold in January 2015 and the corporate headquarters building was sold in June 2015 (see Note 10 for further details).
 
 


11


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands, except per share data)

5. Earnings per Share
The calculations of basic and diluted earnings per share are presented below:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Numerator:
 

 
 

 
 

 
 

Net income from continuing operations
$
152,509

 
$
87,548

 
$
232,964

 
$
129,420

(Loss) income from discontinued operations, net of tax
(739
)
 
6,717

 
(582
)
 
9,518

Net income - Pitney Bowes Inc. (numerator for diluted EPS)
151,770

 
94,265

 
232,382

 
138,938

Less: Preference stock dividend
10

 
11

 
21

 
22

Income attributable to common stockholders (numerator for basic EPS)
$
151,760

 
$
94,254

 
$
232,361

 
$
138,916

Denominator:
 

 
 

 
 

 
 

Weighted-average shares used in basic EPS
201,712

 
202,662

 
201,504

 
202,480

Effect of dilutive shares:
 

 
 

 
 

 
 

Conversion of Preferred stock and Preference stock
324

 
345

 
329

 
349

Employee stock plans
804

 
1,463

 
801

 
1,272

Weighted-average shares used in diluted EPS
202,840

 
204,470

 
202,634

 
204,101

Basic earnings per share (1):
 

 
 

 
 

 
 

Continuing operations
$
0.76

 
$
0.43

 
$
1.16

 
$
0.64

Discontinued operations

 
0.03

 

 
0.05

Net income
$
0.75

 
$
0.47

 
$
1.15

 
$
0.69

Diluted earnings per share (1):
 

 
 

 
 

 
 

Continuing operations
$
0.75

 
$
0.43

 
$
1.15

 
$
0.63

Discontinued operations

 
0.03

 

 
0.05

Net income
$
0.75

 
$
0.46

 
$
1.15

 
$
0.68

Anti-dilutive shares not used in calculating diluted weighted-average shares:
6,395

 
6,062

 
7,313

 
7,943

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

6. Inventories
Inventories are stated at the lower of cost or market. Cost is determined on the last-in, first-out (LIFO) basis for most U.S. inventories and on the first-in, first-out (FIFO) basis for most non-U.S. inventories. Inventories at June 30, 2015 and December 31, 2014 consisted of the following:
 
June 30,
2015
 
December 31,
2014
Raw materials and work in process
$
36,804

 
$
37,175

Supplies and service parts
45,179

 
33,760

Finished products
32,445

 
26,992

Inventory at FIFO cost
114,428

 
97,927

Excess of FIFO cost over LIFO cost
(13,356
)
 
(13,100
)
Total inventory, net
$
101,072

 
$
84,827



12


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands, except per share data)

7. 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 supplies. Loan receivables are generally due each month; however, customers may rollover outstanding balances. Interest is recognized on loan receivables using the effective interest method and related annual fees are initially deferred and recognized ratably over the annual period covered. Customer acquisition costs are expensed as incurred.
Finance receivables at June 30, 2015 and December 31, 2014 consisted of the following:
 
June 30, 2015
 
December 31, 2014
 
North America
 
International
 
Total
 
North America
 
International
 
Total
Sales-type lease receivables
 

 
 

 
 

 
 

 
 

 
 

Gross finance receivables
$
1,236,030

 
$
329,171

 
$
1,565,201

 
$
1,286,624

 
$
366,669

 
$
1,653,293

Unguaranteed residual values
101,622

 
16,825

 
118,447

 
105,205

 
18,291

 
123,496

Unearned income
(262,081
)
 
(74,024
)
 
(336,105
)
 
(270,196
)
 
(83,110
)
 
(353,306
)
Allowance for credit losses
(7,973
)
 
(3,721
)
 
(11,694
)
 
(10,281
)
 
(5,129
)
 
(15,410
)
Net investment in sales-type lease receivables
1,067,598

 
268,251

 
1,335,849

 
1,111,352

 
296,721

 
1,408,073

Loan receivables
 

 
 

 
 

 
 

 
 

 
 

Loan receivables
359,033

 
50,888

 
409,921

 
376,987

 
47,665

 
424,652

Allowance for credit losses
(10,193
)
 
(1,719
)
 
(11,912
)
 
(10,912
)
 
(1,788
)
 
(12,700
)
Net investment in loan receivables
348,840

 
49,169

 
398,009

 
366,075

 
45,877

 
411,952

Net investment in finance receivables
$
1,416,438

 
$
317,420

 
$
1,733,858

 
$
1,477,427

 
$
342,598

 
$
1,820,025


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.


13


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands, except per share data)

Activity in the allowance for credit losses for the six months ended June 30, 2015 and 2014 was as follows:
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
Balance at January 1, 2015
$
10,281

 
$
5,129

 
$
10,912

 
$
1,788

 
$
28,110

Amounts charged to expense
112

 
(447
)
 
3,913

 
554

 
4,132

Write-offs and other
(2,420
)
 
(961
)
 
(4,632
)
 
(623
)
 
(8,636
)
Balance at June 30, 2015
$
7,973

 
$
3,721

 
$
10,193

 
$
1,719

 
$
23,606

 
 
 
 
 
 
 
 
 
 
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
Balance at January 1, 2014
$
14,165

 
$
9,703

 
$
11,165

 
$
1,916

 
$
36,949

Amounts charged to expense
2,360

 
(350
)
 
4,742

 
1,034

 
7,786

Write-offs and other
(3,382
)
 
(1,749
)
 
(5,132
)
 
(801
)
 
(11,064
)
Balance at June 30, 2014
$
13,143

 
$
7,604

 
$
10,775

 
$
2,149

 
$
33,671


Aging of Receivables
The aging of gross finance receivables at June 30, 2015 and December 31, 2014 was as follows:
 
June 30, 2015
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
1 - 30 days
$
1,171,926

 
$
310,382

 
$
344,290

 
$
48,546

 
$
1,875,144

31 - 60 days
22,927

 
5,785

 
8,274

 
1,598

 
38,584

61 - 90 days
18,667

 
3,575

 
2,790

 
340

 
25,372

> 90 days
22,510

 
9,429

 
3,679

 
404

 
36,022

Total
$
1,236,030

 
$
329,171

 
$
359,033

 
$
50,888

 
$
1,975,122

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
6,658

 
$
2,819

 
$

 
$

 
$
9,477

Not accruing interest
15,852

 
6,610

 
3,679

 
404

 
26,545

Total
$
22,510

 
$
9,429

 
$
3,679

 
$
404

 
$
36,022


 
December 31, 2014
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
1 - 30 days
$
1,217,623

 
$
347,236

 
$
359,672

 
$
45,678

 
$
1,970,209

31 - 60 days
23,242

 
6,207

 
9,245

 
1,201

 
39,895

61 - 90 days
24,198

 
4,494

 
3,498

 
413

 
32,603

> 90 days
21,561

 
8,732

 
4,572

 
373

 
35,238

Total
$
1,286,624

 
$
366,669

 
$
376,987

 
$
47,665

 
$
2,077,945

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
5,931

 
$
2,517

 
$

 
$

 
$
8,448

Not accruing interest
15,630

 
6,215

 
4,572

 
373

 
26,790

Total
$
21,561

 
$
8,732

 
$
4,572

 
$
373

 
$
35,238


14


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands, except per share data)

Credit Quality
The extension of credit and management of credit lines to new and existing clients uses a combination of an automated credit score, where available, and a detailed manual review of the client’s financial condition and, when applicable, payment history. Once credit is granted, the payment performance of the client is managed through automated collections processes and is supplemented with direct follow up should an account become delinquent. We have robust automated collections and extensive portfolio management processes. The portfolio management processes ensure that our global strategy is executed, collection resources are allocated appropriately and enhanced tools and processes are implemented as needed.
We use a third party to score the majority of the North America portfolio on a quarterly basis using a commercial credit score. We do not use a third party to score our international portfolio because the cost to do so is prohibitive, given that it is a localized process and there is no single credit score model that covers all countries.
The table below shows the North America portfolio at June 30, 2015 and December 31, 2014 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.
 
June 30,
2015
 
December 31,
2014
Sales-type lease receivables
 

 
 

Low
$
923,475

 
$
936,979

Medium
215,444

 
230,799

High
43,248

 
45,202

Not Scored
53,863

 
73,644

Total
$
1,236,030

 
$
1,286,624

Loan receivables
 

 
 

Low
$
248,331

 
$
259,436

Medium
89,725

 
96,243

High
10,287

 
10,913

Not Scored
10,690

 
10,395

Total
$
359,033

 
$
376,987



15


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands, except per share data)

8. Intangible Assets and Goodwill
Intangible Assets
Intangible assets consisted of the following:
 
June 30, 2015
 
December 31, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships
$
453,879

 
$
(257,095
)
 
$
196,784

 
$
337,438

 
$
(263,121
)
 
$
74,317

Supplier relationships

 

 

 
29,000

 
(27,913
)
 
1,087

Software & technology
168,695

 
(151,291
)
 
17,404

 
160,825

 
(154,610
)
 
6,215

Trademarks & other
35,959

 
(26,827
)
 
9,132

 
33,079

 
(32,525
)
 
554

Total intangible assets
$
658,533

 
$
(435,213
)
 
$
223,320

 
$
560,342

 
$
(478,169
)
 
$
82,173


Amortization expense was $8 million and $6 million for the three months ended June 30, 2015 and 2014, respectively and $16 million and $12 million, for the six months ended June 30, 2015 and 2014, respectively.

In 2015, we acquired certain intangible assets in connection with the acquisitions of Borderfree (see Note 3). The change in supplier relationships is the result of the sale of Imagitas.

Future amortization expense for intangible assets as of June 30, 2015 was as follows:
Remaining for year ending December 31, 2015
$
22,328

Year ending December 31, 2016
39,995

Year ending December 31, 2017
29,077

Year ending December 31, 2018
26,470

Year ending December 31, 2019
23,415

Thereafter
82,035

Total
$
223,320

Actual amortization expense may differ from the amounts above due to, among other things, fluctuations in foreign currency exchange rates, impairments, acquisitions and accelerated amortization.
Goodwill
The changes in the carrying value of goodwill for the six months ended June 30, 2015 were as follows:
 
December 31, 2014
 
Acquisition
 
Divestiture
 
Foreign currency translation
 
June 30,
2015
North America Mailing
$
309,448

 
$

 
$

 
$
(9,949
)
 
$
299,499

International Mailing
162,146

 

 

 
(8,662
)
 
153,484

Small & Medium Business Solutions
471,594

 

 

 
(18,611
)
 
452,983

Production Mail
110,837

 

 

 
(2,786
)
 
108,051

Presort Services
195,140

 

 

 

 
195,140

Enterprise Business Solutions
305,977

 

 

 
(2,786
)
 
303,191

Software Solutions
677,008

 
5,792

 

 
(661
)
 
682,139

Global Ecommerce
23,910

 
285,727

 

 

 
309,637

Digital Commerce Solutions
700,918

 
291,519

 

 
(661
)
 
991,776

Other
194,232

 

 
(194,232
)
 

 

Total goodwill
$
1,672,721

 
$
291,519

 
$
(194,232
)
 
$
(22,058
)
 
$
1,747,950


16


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands, except per share data)

9. Fair Value Measurements and Derivative Instruments
We measure certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. An entity is required to classify certain assets and liabilities measured at fair value based on the following fair value hierarchy that prioritizes the inputs used to measure fair value:
Level 1
Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2
Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
Unobservable inputs that are supported by little or no market activity, may be derived from internally developed methodologies based on management’s best estimate of fair value and that are significant to the fair value of the asset or liability.
The following tables show, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis at June 30, 2015 and December 31, 2014. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect its placement within the fair value hierarchy.
 
June 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
135,822

 
$
228,787

 
$

 
$
364,609

Equity securities

 
25,434

 

 
25,434

Commingled fixed income securities

 
22,709

 

 
22,709

U.S. Government, federal agencies and municipalities
112,508

 
19,206

 

 
131,714

Corporate notes and bonds

 
65,840

 

 
65,840

Mortgage-backed / asset-backed securities

 
166,326

 

 
166,326

Derivatives
 
 
 
 
 

 


Foreign exchange contracts

 
838

 

 
838

Total assets
$
248,330

 
$
529,140

 
$

 
$
777,470

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$

 
$
(4,530
)
 
$

 
$
(4,530
)
Total liabilities
$

 
$
(4,530
)
 
$

 
$
(4,530
)


17


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands, except per share data)

 
December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
505,643

 
$
193,986

 
$

 
$
699,629

Equity securities

 
27,409

 

 
27,409

Commingled fixed income securities

 
24,077

 

 
24,077

U.S. Government, federal agencies and municipalities
113,974

 
24,006

 

 
137,980

Corporate notes and bonds

 
67,448

 

 
67,448

Mortgage-backed / asset-backed securities

 
156,614

 

 
156,614

Derivatives
 

 
 

 
 

 


Foreign exchange contracts

 
1,386

 

 
1,386

Total assets
$
619,617

 
$
494,926

 
$

 
$
1,114,543

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$

 
$
(2,988
)
 
$

 
$
(2,988
)
Total liabilities
$

 
$
(2,988
)
 
$

 
$
(2,988
)
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.
U.S. Government, federal agencies and municipalities: Securities are classified as Level 1 where active, high volume trades for identical securities exist. Valuation adjustments are not applied to these securities. 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.
Corporate notes and bonds: Corporate notes and bonds 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 / asset-backed securities: These securities are valued based on external pricing indices. When external index pricing is not observable, these securities are valued based on external price/spread data. These securities are classified as Level 2.

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PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands, except per share data)

Available-For-Sale Securities
Certain investment securities are classified as available-for-sale and recorded at fair value in the unaudited Condensed Consolidated Balance Sheets as cash and cash equivalents, short-term investments and other assets depending on the type of investment and maturity. Unrealized holding gains and losses are recorded, net of tax, in accumulated other comprehensive loss (AOCL).
Available-for-sale securities at June 30, 2015 and December 31, 2014 consisted of the following:
 
June 30, 2015
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
U.S. Government, federal agencies and municipalities
$
131,031

 
$
1,927

 
$
(1,244
)
 
$
131,714

Corporate notes and bonds
65,396