10-K 1 pbi2017123110k.htm 10-K Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017    Commission file number: 1-3579
PITNEY BOWES INC.
Incorporated in Delaware
I.R.S. Employer Identification No. 06-0495050
3001 Summer Street, Stamford, CT 06926
 
(203) 356-5000
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $1 par value per share
 
New York Stock Exchange
$2.12 Convertible Cumulative Preference Stock (no par value)
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: 4% Convertible Cumulative Preferred Stock ($50 par value)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
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 ¨
Indicate by check marks whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
Emerging growth company ¨
 
If an emerging growth company, indicate by check mark whether the registrant has elected not to use the extended transition period for complying with new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
As of June 30, 2017, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $2.8 billion based on the closing sale price as reported on the New York Stock Exchange.
Number of shares of common stock, $1 par value, outstanding as of close of business on January 31, 2018: 186,779,761 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement to be filed with the Securities and Exchange Commission (the Commission) no later than 120 days after our fiscal year end and to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held May 7, 2018, are incorporated by reference in Part III of this Form 10-K.


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PITNEY BOWES INC.
TABLE OF CONTENTS

 
 
Page Number
PART I
 
Item 1.
Item 1A.
 10
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
 
Item 15.
Item 16.
 
 
 

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PART I


Forward-Looking Statements
This Annual Report on Form 10-K (Annual Report) contains statements that are forward-looking. We want to caution readers that any forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 may change based on various factors. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties and actual results could differ materially. Words such as "estimate," "target," "project," "plan," "believe," "expect," "anticipate," "intend" and similar expressions may identify such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Factors which could cause future financial performance to differ materially from the expectations as expressed in any forward-looking statement made by or on our behalf include, without limitation:
any potential impact from the announcement that the Board of Directors of the Company is conducting a review of strategic alternatives
declining physical mail volumes
competitive factors, including pricing pressures; technological developments and the introduction of new products and services by competitors
our success in developing new products and services, including digital-based products and services, obtaining regulatory approval if required
the market’s acceptance of new products and services
our ability to fully utilize the enterprise business platform in North America, implemented in 2016, and successfully deploy it in major international markets without significant disruption to existing operations
the continued availability and security of key information technology systems and the cost to comply with information security requirements and privacy laws
a breach of security, including a cyberattack or other comparable event
macroeconomic factors, including global and regional business conditions that adversely impact customer demand, foreign currency exchange rates, interest rates, labor conditions and fuel prices
third-party suppliers' ability to provide products and services required by our clients
our success at managing the relationships with our outsource providers, including the costs of outsourcing functions and operations not central to our business
changes in postal or banking regulations, including changes in, or loss of, our contractual relationships with the U.S. Postal Service
integrating newly acquired businesses, including operations and product and service offerings
the loss of some of our larger clients in the Global Ecommerce segment
intellectual property infringement claims
our success at managing customer credit risk
capital market disruptions or credit rating downgrades that adversely impact our ability to access capital markets at reasonable costs
significant changes in pension, health care and retiree medical costs
income tax adjustments or other regulatory levies for prior audit years and changes in tax laws, rulings or regulations, including the impact of the Tax Cuts and Jobs Act of 2017
a disruption of our businesses due to changes in international or national political conditions, including the use of the mail for transmitting harmful biological agents or other terrorist attacks
acts of nature
 
Risks are more fully described under Item 1A. "Risk Factors" in this Annual Report.





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ITEM 1. BUSINESS

General
Pitney Bowes Inc. (we, us, our, or the company), was incorporated in the state of Delaware in 1920. We are a global technology company offering innovative products and solutions that help our clients navigate the complex world of commerce. We offer customer information management, location intelligence and customer engagement products and solutions to help our clients market to their customers, and shipping, mailing, fulfillment, returns and cross-border ecommerce products and solutions that enable the sending of parcels and packages across the globe. Clients around the world rely on our products, solutions and services. For more information about us, our products, services and solutions, visit www.pb.com.

Our Strategy and Business Segments
Our business is organized around three distinct sets of solutions -- Small and Medium Business Solutions (SMB), Enterprise Business Solutions and Digital Commerce Solutions (DCS).

Small and Medium Business Solutions
We are a global leader in providing a full range of equipment, software, supplies and services that enable our clients to efficiently create physical and digital mail, evidence postage and print shipping labels for the sending of mail, flats and parcels. We segment the SMB Solutions group between our North America operations, comprising the U.S. and Canadian businesses, and our International operations, comprising all other SMB businesses globally. We are a leading provider of mailing systems and technology globally with about 1.1 million meters installed worldwide.  We are also continuing to expand our business to include on-line and software-as-a-service (SaaS) offerings delivered via our newest meters, desktop computers and mobile devices.  Our latest hardware systems are designed with an open platform architecture to enable access to additional value to clients via online or SaaS offerings delivered directly through the device.

Enterprise Business Solutions
Our Enterprise Business Solutions group includes equipment and services that enable large enterprises to process inbound and outbound mail. The Enterprise Business Solutions group includes our Production Mail operations and Presort Services operations.

Production Mail
Our product and service offerings enable clients to integrate all areas of print and mail into an end-to-end production environment from message creation to dispatch while realizing cost savings on postage. The core products within this segment include high-speed, high-volume inserting equipment, customized sortation products for mail and parcels and high-speed digital color printing systems that create high-value, relevant and timely communications targeted to our clients' customers. We will be expanding our cloud connectivity solutions that are currently available for our inserter equipment to become available for our print and sortation machines.

Presort Services
We are a national outsource provider of mail presort services for First-Class, Standard and flats in the U.S. and a workshare partner of the United States Postal Service (USPS). Our Presort Services network and fully-customized proprietary technology provides our clients with end-to-end solutions from pick up at their location to delivery into the postal system network. We process approximately 16 billion pieces of mail annually through our network of operating centers throughout the Unites States and are able to expedite mail delivery and optimize postage savings for our clients.

Digital Commerce Solutions
Within the Digital Commerce Solutions group, we provide a broad range of solutions, including customer information management, location intelligence, customer engagement software and shipping management and cross-border ecommerce solutions for businesses of all sizes. These solutions are delivered as traditional software licenses, enterprise platforms, SaaS or on-demand applications. Our Digital Commerce Solutions group includes Software Solutions and Global Ecommerce.

Software Solutions
Software Solutions help clients sharpen, refine, and polish business solutions that enable billions of transactions in a connected borderless world of commerce.

Data solutions enable clients to identify addresses, locations, businesses and individuals. Our address centric approach provides us the ability to verify, standardize, locate and enrich addresses with information actionable insights. Accuracy of data is foundational to many

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business processes including risk and fraud, onboarding and marketing. Our client value for data quality and insights is foundational to businesses operations and helping organizations to better serve their customers.
Customer information management solutions help businesses identify high-value customers and prospects, and develop a deep and broad understanding of their customers to provide a single view of the customer in context to their location, relationships, propensity, sentiment and influence. By understanding who their customers are, and what they do, businesses can in turn understand preferences and purchasing behaviors, detect fraudulent activity and increase marketing effectiveness and services. We are one of the market leaders in the data quality segment. Large corporations and government agencies rely on our products in complex, high-volume, transactional environments to support their business processes.
Location intelligence solutions enable our clients to precisely locate customers all around the world, and understand the complex relationships between location, geographic and other forms of data to drive business decisions and customer experiences. Our location intelligence solutions use predictive analytics and location, geographic and socio-demographic data to add context and insight, making it possible to pinpoint the best placement for retail sites, improve risk assessment and efficiently deploy infrastructure resources more efficiently to better serve their customers, solve business problems, deliver location-based services and ultimately drive business growth.
Customer engagement solutions provide our clients with the tools to communicate with their customers in more personalized and relevant ways that enhance customer interactions across the entire customer lifecycle. Through personalized, impactful and timely physical and digital interactions, businesses can improve customer satisfaction, reduce support costs and drive sales. When coupled with our inserting, sortation and digital print products, we are able to provide clients an all-inclusive solution that enables them to create, print and distribute wide-spread targeted customer communications. Our customer engagement solutions enable our clients to create connected experiences that positively influence future consumer behavior and generate business growth.
Global Ecommerce
Global Ecommerce includes our cross-border ecommerce solutions and domestic retail and ecommerce shipping solutions, including fulfillment and returns. Global Ecommerce provides a full suite of domestic and cross-border solutions that help businesses of all sizes conduct commerce and participate in the parcel journey from “Anywhere to Everywhere™.” It is our technology, services and industry expertise that have made us an industry leader in global ecommerce. We offer a unified ecommerce platform of capabilities for cross-border, marketplaces and shipping that center around the consumer. With our proprietary technology, we are able to manage all aspects of the international shopping and shipping experience, including multi-currency pricing, payment processing, fraud management, calculation of fully landed costs by quoting duty, taxes and shipping at checkout, compliance with product restrictions, export complexities and documentation requirements for customs clearance and brokerage and global logistics services. Our cross-border ecommerce software platforms are currently utilized by direct merchants as well as major online marketplaces enabling millions of parcels to be shipped worldwide. Our platform also connects retailers to marketplaces around the world, opening new markets and expanding existing markets for their goods.
Our shipping management solutions enable clients to reduce transportation and logistics costs, select the best carrier based on need and cost, improve delivery times and track packages in real-time. Our shipping application programming interface (API) technology, an integral part of the Pitney Bowes Commerce Cloud, provides easy access to shipping and tracking services that can be easily integrated into any web application such as online shopping carts or ecommerce sites.

The acquisition of Newgistics adds fulfillment, delivery and returns capabilities to our suite of ecommerce solutions.  The Newgistics platform provides services that create a seamless post-purchase experience for consumers and retailers.  Newgistics capabilities are utilized by retailers and by logistics partners to enhance or complete their products and services. See Note 7 to the Consolidated Financial Statements.

See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 to the Consolidated Financial Statements for additional segment and geographic information.

Client Service
We have a client care service organization that provides telephone, online and on-site support services for increasingly complex mailing equipment, production printers and sophisticated software solutions. Most of our support services are provided under annual contracts.

Sales and Marketing
We market our products and services through a direct and inside sales force, direct mailings, telemarketing and web and partner channels.


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Competition
All of our businesses face competition from a number of companies. Our competitors range from large, multinational companies that compete against many of our businesses to smaller, more narrowly focused regional and local firms. We compete on the basis of technology and innovation; breadth of product offerings; our ability to design and tailor solutions to specific client needs; performance; client service and support; price; quality and brand.

We must continue to invest in our current technologies, products and solutions, and in the development of new technologies, products and solutions in order to maintain and improve our competitive position. We will encounter new competitors as we transition to higher value markets and offerings and enter new markets.

A summary of the competitive environment for each of our business segments is as follows:

North America Mailing and International Mailing
We face significant competition from other mail equipment and software companies, companies that offer products and services as alternative means of message communications and companies that offer shipping and mailing products and services through online solutions. The principal competitive factors include the composition of offerings between software and hardware solutions, pricing, available financing and payment offerings, product reliability, support services, industry knowledge and expertise and attractiveness of alternative communication methods. Our competitive advantage includes our breadth of physical and web-based digital offerings, customer service and our extensive knowledge of the shipping and mailing industry.

Through our wholly owned subsidiary, The Pitney Bowes Bank (the Bank), we offer a revolving credit solution to our clients in the United States that enables them to pay the rental fee for certain mailing equipment and to purchase postage, products, supplies and services. The Bank also provides an interest-bearing deposit solution to those clients who prefer to prepay postage. We also provide similar revolving credit solutions to our clients in Canada and the U.K. but do not offer these through the Bank. Our financing operations face competition, in varying degrees, from large, diversified financial institutions, including leasing companies, commercial finance companies and commercial banks, as well as small, specialized firms. Not all our competitors are able to offer these financing and payment solutions to their customers and we believe these solutions differentiate us from our competitors and are a source of competitive advantage. The Bank is chartered as an Industrial Bank under the laws of the State of Utah, and is regulated by the Federal Deposit Insurance Corporation (FDIC) and the Utah Department of Financial Institutions.

Production Mail
We face competition from other companies that offer large production printers, inserters or sorters. We also face competition from the fact that some companies choose to outsource although those outsource providers can also be our customers. Our primary competitive advantage lies in our ability to offer all of these products and services and integrate them into an end-to-end solution. The principal competitive factors include functionality, reliability, productivity, price and service.
Presort Services
We face competition from regional and local presort providers and service bureaus that offer presort solutions as part of a larger bundle of outsourcing services, and large entities that have the capability to presort their own mailings in-house. The principal competitive factors include innovative service, delivery speed, industry expertise and economies of scale. Our competitive advantage includes our extensive network of presort facilities capable of processing significant volumes of mail and our innovative and proprietary technology that enables us to provide our clients with reliable and accurate services at maximum discounts.
Software Solutions
We operate in several highly competitive and rapidly evolving markets and face competition ranging from large global companies that offer a broad suite of solutions to smaller, more narrowly-focused companies that can design very targeted solutions. The principal competitive factors include reliability, functionality, ease of integration and use, scalability, innovation, support services and price. We compete based on the accuracy and processing speed of our solutions, particularly those used in our location intelligence solutions, the breadth and scalability of our products and solutions, our geocoding and reverse geocoding capabilities, and our ability to identify rapidly changing customer needs and develop technologies and solutions to meet these changing needs.
Global Ecommerce
The market for international ecommerce software and fulfillment services is highly fragmented and includes competitors of various sizes, including companies with greater financial resources than us. Some of these competitors specialize in point solutions or freight forwarding services, are full-service ecommerce business process outsourcers and online marketplaces with international logistic support, or major global delivery services companies. In addition, we see a competitive threat from companies who can offer both domestic and cross-border solutions in a single package which creates leverage for those competitors on pricing. The principal competitive factors include reliability, functionality, ease of integration and use, scalability, innovation, support services and price.   We compete based on the accuracy,

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reliability and scalability of our platform and logistics services, and our ability to provide our clients and their customers a one-stop full-service cross-border ecommerce experience. We also compete, within shipping solutions, with a wide range of technology providers who help make shipping easier and more cost-effective. There are established players in the marketplace as well as many small companies offering negotiated carrier rates (primarily with the USPS).  The principal competitive factors include technology stability and reliability, innovation, access to preferred shipping rates and ease of integration with existing systems.

Financing Solutions
We offer a variety of finance and payment solutions to clients to finance their equipment and product purchases, rental and lease payments, postage replenishment and supplies purchases. As our other product and service offerings evolve, we continually evaluate whether there are appropriate financing solutions to offer our clients. We establish credit approval limits and procedures based on the credit quality of the client and the type of product or service provided to control risk in extending credit to clients. In addition, we utilize a systematic decision program for certain leases. This program is designed to facilitate low dollar transactions by utilizing historical payment patterns and behaviors of clients with similar credit characteristics. This program defines criteria under which we will accept a client without performing a more detailed credit investigation, such as maximum equipment cost, a client's time in business and payment experience. 
We closely monitor the portfolio by analyzing industry sectors and delinquency trends by product line, industry and client to ensure reserve levels and credit policies reflect current trends. Management continues to closely monitor credit lines and collection resources and revise credit policies as necessary to be more selective in managing the portfolio.
 
Research, Development and Intellectual Property
We invest in research and development programs to develop new products and solutions, enhance the effectiveness and functionality of existing products and solutions and deliver high value technology, innovative software and differentiated services in high value segments of the market. As a result of our research and development efforts, we have been awarded a number of patents with respect to several of our existing and planned products. The continued evolution of patent law and the nature of our innovation work may affect the number of patents we are able to receive for our internal development efforts. Our businesses are not materially dependent on any one patent or license or group of related patents or licenses. Research and development expenditures were $130 million in 2017, $121 million in 2016 and $110 million 2015.

Material Suppliers
We depend on third-party suppliers for a variety of services, components, supplies and a large portion of our product manufacturing. In certain instances, we rely on single-sourced or limited-sourced suppliers around the world because the relationship is advantageous due to quality, price, or there are no alternative sources. We believe that our available sources for services, components, supplies and manufacturing are adequate. Additionally, we often use third-parties to provide services to clients and there is a risk that if their systems fail, then our offerings will be affected.

Regulatory Matters
We are subject to the regulations of postal authorities worldwide related to product specifications and business practices involving our postage meters and in the U.S. for our presort services. We are further subject to the regulations of the Utah Department of Financial Institutions and the FDIC with respect to the operations of the Bank and certain company affiliates that provide services to the Bank. We are also subject to the regulations of transportation, customs and trade regulations worldwide related to our cross-border shipping services. In addition, we are subject to regulations worldwide concerning data privacy and security for our businesses that use, process and store certain personal, confidential or proprietary data.

Employees and Employee Relations
At December 31, 2017, we have approximately 14,700 employees worldwide. We believe that we maintain strong relationships with our employees. Management keeps employees informed of decisions and encourages and implements employee suggestions whenever practicable.








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Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto filed with, or furnished to, the Securities and Exchange Commission (the SEC), are available, free of charge, through the Investor Relations section of our website at www.pb.com/investorrelations or from the SEC's website at www.sec.gov, as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC. The other information found on our website is not part of this or any other report we file with or furnish to the SEC.
You may also read and copy any document filed with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549 or request copies of these documents by writing to the Office of Public Reference. Call the SEC at (800) 732-0330 for further information on the operations of the Public Reference Room and copying charges.

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Executive Officers of the Registrant
Our executive officers are:
Name
 
Age
 
Title
 
Executive
Officer Since
Marc B. Lautenbach
 
56
 
President and Chief Executive Officer
 
2012
Jason C. Dies
 
48
 
Executive Vice President and President, SMB Solutions
 
2017
Daniel J. Goldstein
 
56
 
Executive Vice President and Chief Legal Officer and Corporate Secretary
 
2010
Robert Guidotti
 
60
 
Executive Vice President and President, Software Solutions
 
2016
Abby F. Kohnstamm
 
64
 
Executive Vice President and Chief Marketing Officer
 
2013
Michael Monahan
 
57
 
Executive Vice President and Chief Operating Officer
 
2005
Roger J. Pilc
 
50
 
Executive Vice President and Chief Innovation Officer
 
2013
Mark L. Shearer
 
61
 
Executive Vice President
 
2013
Lila Snyder
 
45
 
Executive Vice President and President, Commerce Services
 
2016
Christoph Stehmann
 
55
 
Executive Vice President, International SMB Solutions
 
2016
Stanley J. Sutula III
 
52
 
Executive Vice President and Chief Financial Officer
 
2017
Johnna G. Torsone
 
67
 
Executive Vice President and Chief Human Resources Officer
 
1993
There are no family relationships among the above officers. All of the officers have served in various executive positions with the company for at least the past five years except as described below:

Mr. Dies was appointed to the office of Executive Vice President and President, SMB Solutions in October 2017. He joined the company in 2015 as President, Document Messaging Technologies (DMT). Prior to joining the company, Mr. Dies was employed at IBM where he held several leadership positions in North America, Europe, and Asia across diverse business units.

Mr. Guidotti was appointed Executive Vice President and President, Software Solutions in January 2016. Before joining Pitney Bowes, Mr. Guidotti held a series of executive positions at IBM including General Manager, Software Sales where he was responsible for the $23 billion worldwide Software portfolio.

Ms. Kohnstamm joined the company as Executive Vice President and Chief Marketing Officer in June 2013. Before joining Pitney Bowes, Ms. Kohnstamm served as President of Abby F. Kohnstamm & Associates, Inc., a marketing and consulting firm.

Mr. Pilc joined the company as Executive Vice President and Chief Innovation Officer in June 2013. Before joining Pitney Bowes, Mr. Pilc served as General Manager at CA Technologies, where he was responsible for the company’s Industries, Solutions and Alliances unit.

Mr. Shearer joined the company as Executive Vice President and President, Pitney Bowes SMB Mailing Solutions in April 2013. Before joining Pitney Bowes, Mr. Shearer held numerous positions during his 30 year career at IBM, including general management, business and product strategy, and marketing. Effective March 1, 2018, Mr. Shearer will retire from Pitney Bowes.

Ms. Snyder was elected to the office of Executive Vice President and President, Global Ecommerce in January 2016. She joined the company in November 2013 as President of DMT and became President, Global Ecommerce in June 2015. Prior to joining Pitney Bowes, Ms. Snyder was a Partner at McKinsey & Company, Inc.  In her 15 years at McKinsey, she focused on serving clients in the technology, media and communications sectors and was the leader of McKinsey's Stamford office. 

Mr. Sutula joined the company as Executive Vice President and Chief Financial Officer in February 2017. Prior to joining the company, Mr. Sutula was employed at IBM for 28 years where he held several leadership positions in the United States and Europe. Most recently, Mr. Sutula was Vice President and Controller.



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ITEM 1A. RISK FACTORS

Our operations face certain risks that should be considered in evaluating our business. We manage and mitigate these risks on a proactive basis, including through the use of an enterprise risk management program. Nevertheless, the following risk factors, some of which may be beyond our control, could materially impact our business, financial condition, results of operations, brand and reputation, and may cause future results to be materially different than our current expectations. These risk factors are not intended to be all inclusive.
We are subject to postal regulations and processes, which could adversely affect our revenue and profitability.
A significant portion of our revenue and profitability is directly or indirectly subject to regulation and oversight by postal authorities worldwide. We are dependent on a healthy postal sector in the geographic markets where we do business, which could be influenced positively or negatively by legislative or regulatory changes in those countries. Our revenue and profitability in a particular country could be affected by adverse changes in postal regulations, business processes and practices of individual posts, the decision of a post to enter into particular markets in direct competition with us and the impact of any of these changes on postal competitors that do not use our products or services. Many of our new offerings depend upon the approval of postal organizations in different geographies, and if those products are not approved or if there are significant conditions to approval, which are not eventually lifted, it may adversely affect revenue and profitability. These changes could affect product specifications, service offerings, client behavior and the overall mailing and shipping industry.
If we are not able to respond to the continuing decline in the volume of physical mail delivered via traditional postal services, our results of operations and profitability could be adversely impacted.
Declining mail volumes have had an adverse impact on our revenues and profitability and is expected to continue to influence our revenue and profitability in the future. We continue to employ strategies for stabilizing the mailing business which include new product and service offerings, transitioning our current products and services to more digital offerings and providing our clients broader access to products and services through online and direct sales channels. There is no guarantee that these offerings will be widely accepted in the marketplace, and they will likely face competition from existing and emerging alternative products and services.
Further, an accelerated or sudden decline in physical mail volumes could have an adverse effect on our mailing business. An accelerated or sudden decline could result from, among other things, changes in our clients' communication behavior, changes in communication technologies or legislation or regulations that mandate electronic substitution, prohibit certain types of mailings, increase the difficulty of using information or materials in the mail, or impose higher taxes or fees on mailing or postal services.
If we are not successful at meeting the continuing challenges faced in our mailing business, or if physical mail volumes were to experience an accelerated or sudden decline, our financial results could be negatively impacted.
If we are unable to protect our information technology systems against service interruptions, misappropriation of data, or breaches of security resulting from cyberattacks or other events, or we encounter other unforeseen difficulties in the operation of our information technology systems, our operations could be disrupted, our reputation may be harmed and we could be subject to legal liability or regulatory enforcement action.
We rely on the continuous and uninterrupted performance of our information technology systems to support numerous business processes and activities, to support and service our clients, to support consumer transactions and to support postal services. Several of our businesses use, process and store proprietary information and sensitive or confidential data relating to our businesses, our clients, consumers and our employees. Privacy laws and similar regulations in many jurisdictions where we do business require that we take significant steps to safeguard such information, and such legal requirements continue to evolve. The scope of the laws that may be applicable to us is often uncertain and may be conflicting, particularly with respect to foreign laws. For example, the European Union’s General Data Protection Regulation (GDPR), which greatly increases the jurisdictional reach of European Union law and adds a broad array of requirements for handling personal data, including the public disclosure of significant data breaches, becomes effective in May 2018. Other countries have enacted or are enacting data localization laws that require data to stay within their borders. All of these evolving compliance and operational requirements impose significant costs that are likely to increase over time.
In today's environment there are numerous risks to cybersecurity and privacy, including individual and groups of criminal hackers, industrial espionage, employee errors and/or malfeasance and technological errors. These cyber threats are constantly evolving, thereby increasing the difficulty of detecting and successfully defending against them. We have security systems and procedures in place designed to ensure the continuous and uninterrupted performance of our information technology systems and protect against unauthorized access to such information. However, there is no guarantee that these security measures will prevent or detect the unauthorized access by experienced computer programmers, hackers or others. Successful breaches could, among other things, result in the unauthorized disclosure, theft and misuse of company, client, consumer and employee sensitive and confidential information, disrupt the performance of our information technology systems and deny services to our clients. Additionally, we could be exposed to potential liability, litigation, governmental inquiries, investigations or regulatory enforcement actions, our brand and reputation damaged, and we could be subject to the payment of fines or other penalties, legal claims by our clients and significant remediation costs.

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Our systems and those of our partners are also subject to adverse acts of nature, computer viruses, denial-of-service attacks, vandalism, power loss, computer or communications failures and other unexpected events. We have business continuity and disaster recovery plans in place to protect our business operations in case of such events; however, there can be no guarantee that these plans will function as designed. If our information technology systems are damaged or cease to function properly, we could be prevented from fulfilling orders and servicing clients and postal services. Also, we may have to make a significant investment to repair or replace these systems, and could suffer loss of critical data and interruptions or delays in our operations.
We depend on third-party suppliers and outsource providers and our business could be adversely affected if we fail to manage these vendors effectively.
We depend on third-party suppliers and outsource providers for a variety of services, components and supplies, including a large portion of our product manufacturing, the hosting of our software-as-a-service offerings, as well as the logistics portion of our ecommerce business, and some non-core functions and operations. Some of our suppliers may also be our competitors in other contexts. In certain instances, we rely on single-sourced or limited-sourced suppliers and outsourcing vendors around the world because doing so is advantageous due to quality, price or lack of alternative sources. If production or services were interrupted and we were not able to find alternate third-party suppliers, we could experience significant disruptions in manufacturing and operations including product shortages, higher freight costs and re-engineering costs. If outsourcing services were interrupted, not performed, or the performance was poor, our ability to process, record and report transactions with our clients, consumers and other constituents could be impacted. Such interruptions, including a cybersecurity event, in the provision of supplies and/or services could impact our ability to meet client demand, damage our reputation and client relationships and adversely affect our revenue and profitability.
As we transform our businesses to more digital and commerce services, our profit margins will be lower and if we cannot reduce our costs, our earnings could be impacted.
Our financial performance, including our profit margins, can be impacted depending on the mix of products or services we sell during a given period. Similarly, within each segment, if we experience lower sales of products or services that generally carry higher profit margins, our financial performance, including profit margins and net earnings, could be negatively impacted. We have seen a greater mix of DCS revenue, which has lower margins compared to our SMB revenue. We expect our overall profit margins to continue to be impacted as a result of this change in mix.
Capital market disruptions and credit rating downgrades could adversely affect our ability to provide competitive financing services to our clients and to fund various discretionary priorities.
Our financing activities include, among other things, providing competitive financing offerings to our clients and funding various discretionary priorities, such as business investments, strategic acquisitions, share repurchases and dividend payments. We fund these activities through a combination of cash generated from operations, deposits held in the Bank, commercial paper borrowings and long-term borrowings.
Our ability to fund these activities is dependent, in part, upon our ability to borrow and the cost of borrowing in U.S. capital markets. This ability and the cost, in turn, is dependent upon our credit ratings and is subject to capital market volatility. Credit rating downgrades, an increase in our credit default swap spread, material capital market disruptions, significant withdrawals by depositors at the Bank, adverse changes to our industrial loan charter or a significant decline in cash flow could impact our ability to provide competitive finance offerings to our clients and fund other financing activities, which in turn, could adversely affect our revenue, profitability and financial condition.
The international nature of our Global Ecommerce business subjects us to increased customs and regulatory risks from cross-border transactions, and fluctuations in foreign currency exchange rates. Further, the loss of any of our largest clients in our Global Ecommerce segment could have a material adverse effect on the segment.
International sales generated by our clients processing transactions through our platform are the primary source of both revenue and profit for the Global Ecommerce segment. Our Global Ecommerce segment is subject to significant trade regulations, taxes, and duties throughout the world. Any changes to these regulations could potentially impose increased documentation and delivery requirements, increase costs, delay delivery times, and subject us to additional liabilities, which could negatively impact our ability to compete in international markets and adversely impact our revenues and profitability.
The operating results of, and sales generated from, many of our clients’ internationally focused websites running on our platform are exposed to foreign exchange rate fluctuations. Currently, our platforms are located in the United States, the United Kingdom and Australia and a majority of consumers making purchases through these platforms are in a limited number of foreign countries. A strengthening of the U.S. Dollar or British Pound relative to currencies in the countries where we do the most business impacts our ability to compete internationally as the cost of similar international products improves relative to the cost of U.S. and U.K. retailers' products. A strong U.S. Dollar or British Pound would likely result in a decrease in international sales volumes, which would adversely affect the segment's revenue and profitability.

11


The Global Ecommerce segment is dependent on a relatively small number of significant clients and business partners for a large portion of its revenue. The loss of any of these larger clients or business partners, or a substantial reduction in their use of our products or services, could have a material adverse effect on the revenue and profitability of the segment. There can be no assurance that our larger clients and business partners will continue to utilize our products or services at current levels, or that we would be able to replace any of these clients or business partners with others who can generate revenue at current levels.
Our revenue and profitability in our global ecommerce segment depends upon the successful integration of the Newgistics acquisition and on the market acceptance of our newer offerings.
If we are unable to realize the expected cost and revenue benefits from integrating Newgistics into our existing presort and global ecommerce segments we are expecting to gain by virtue of being able to offer both United States domestic ecommerce services along with cross-border services, it could adversely affect our revenue and profitability. Further, if our growing shipping API services do not continue to gain rapid market acceptance, it could adversely affect both revenue and profitability.
Our business, results of operations and financial condition may be negatively impacted by conditions abroad, including local economies, political environments and fluctuating foreign currencies.
A portion of our revenue is generated from operations outside the United States. Our future revenues, costs and results of operations could be affected by changes in foreign currency exchange rates as well as by a number of other factors, including changes in economic conditions from country to country, changes in a country's political conditions, trade protection measures, licensing requirements, local tax issues, capitalization and other related legal matters. We generally hedge foreign currency denominated transactions primarily through the use of currency derivative contracts. The use of derivative contracts is intended to mitigate or reduce transactional level volatility in the results of foreign operations, but does not completely eliminate volatility. We do not hedge the translation effect of international revenues and expenses, which are denominated in currencies other than our U.S. parent functional currency.
Our inability to obtain and protect our intellectual property and defend against claims of infringement by others may negatively impact our operating results.
Our business success depends in part upon protecting our intellectual property rights, including proprietary technology developed or obtained through acquisitions. We rely on copyrights, patents, trademarks and trade secrets and other intellectual property laws to establish and protect our proprietary rights. If we are unable to protect our intellectual property rights, our competitive position may suffer which could adversely affect our revenue and profitability. The continued evolution of patent law and the nature of our innovation work may affect the number of patents we are able to receive for our internal development efforts.
From time to time, third-parties may claim that we, our clients, or our suppliers, have infringed their intellectual property rights. These claims, if successful, may require us to redesign affected products, enter into costly settlement or license agreements, pay damage awards, or face a temporary or permanent injunction prohibiting us from marketing or selling certain products.
If we fail to comply with government contracting regulations, our operating results, brand name and reputation could suffer.
We have a significant number of contracts with governmental entities. Government contracts are subject to extensive and complex procurement laws and regulations, along with regular audits and investigations by government agencies. If one or more government agencies discovers instances of contractual noncompliance in the course of an audit or investigation, we may be subject to various civil or criminal penalties and administrative sanctions, which could include the termination of the contract, reimbursement of payments received, fines and debarment from doing business with one or more governments. Any of these events could not only affect us financially, but also adversely affect our brand and reputation.
We may not realize the anticipated benefits from our implementation of a new enterprise business platform in North America, and the transition to the new enterprise business platform may not be uninterrupted or error-free in other locations.
We have made significant investments in the development and implementation of a new enterprise business platform that is expected to provide operating cost savings through the elimination of redundant systems and strategic efficiencies through the use of a standardized, integrated system. We have implemented this platform in our North American operations and have begun developing the platform internationally. There is no guarantee that when we implement this platform in our international operations, we will not experience temporary disruptions similar to those that occurred with the North America implementation.
We may not realize the anticipated benefits of strategic acquisitions and divestitures, which may harm our financial results.
As we look for opportunities to invest in strategic initiatives to drive revenue growth and market share gains while maintaining a leadership role in the mailing industry, we may make strategic acquisitions or divest certain businesses. These acquisitions and divestitures may involve significant risks and uncertainties, which could have an adverse effect on our operating results, including:
difficulties in achieving anticipated benefits or synergies from acquisitions and divestitures;
difficulties in integrating newly acquired businesses and operations, including combining product and service offerings and entering new markets, or reducing fixed costs previously associated with divested businesses;

12


the loss of key employees or clients of businesses acquired or divested; and
significant charges to earnings for employee severance and other restructuring costs, goodwill and asset impairments and legal, accounting and financial advisory fees.
We are exploring and evaluating strategic alternatives and there can be no assurance that we will be successful in identifying, or completing any strategic alternative or that any such strategic alternative will yield additional value for shareholders.
Our Board of Directors has commenced a review of strategic alternatives which could result, among other things, in a sale, a merger, a consolidation or business combination, an asset divestiture, a partnering or other collaboration agreement, or potential acquisitions or recapitalizations, in one or more transactions, or continuing to operate with our current business plan and strategy. There can be no assurance that the exploration of strategic alternatives will result in the identification or consummation of any transaction or transactions. In addition, we may incur substantial expenses associated with identifying and evaluating potential strategic alternatives. The process of exploring strategic alternatives may be time consuming and disruptive to our business operations and if we are unable to effectively manage the process, our business, financial condition and results of operations could be adversely effected. Any potential transaction would be dependent upon a number of factors that may be beyond our control, including among other factors, market conditions, industry trends, regulatory limitations and the interest of third parties in our business.
Our operational costs could increase from changes in environmental regulations, or we could be subject to significant liabilities.
We are subject to various federal, state, local and foreign environmental protection laws and regulations around the world, including without limitation, those related to the manufacture, distribution, use, packaging, labeling, recycling or disposal of our products or the products of our clients for whom we perform services. Environmental rules concerning products and packaging can have a significant impact on the cost of operations or affect our ability to do business in certain countries. We are also subject to laws concerning use, discharge or disposal of materials. All of these laws are complex, change frequently and have tended to become more stringent over time. If we are found to have violated these laws, we could be fined, criminally charged, otherwise sanctioned by regulators, or we could be subject to liability and clean-up costs. These risk can apply to both current and legacy operations and sites. From time to time, we may be involved in litigation over these issues. The amount and timing of costs under environmental laws are difficult to predict and there can be no assurance that these costs will not have an adverse effect our financial condition, results of operations or cash flows.

ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

ITEM 2. PROPERTIES
We own or lease numerous facilities worldwide, which house general offices, including our corporate headquarters located in Stamford, Connecticut, sales offices, service locations, data centers, call centers and parcel and mail processing facilities. We conduct research and development, manufacturing and assembly, product management, information technology and many other activities at our Global Technology Center located in Danbury, Connecticut. Our other primary research and development facilities are located in Noida and Pune, India. Management believes that our facilities are in good operating condition and adequate for our current business needs.


13


ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we are routinely defendants in, or party to, a number of pending and threatened legal actions. These may involve litigation by or against us relating to, among other things, contractual rights under vendor, insurance or other contracts; intellectual property or patent rights; equipment, service, payment or other disputes with clients; or disputes with employees. Some of these actions may be brought as a purported class action on behalf of a purported class of employees, clients or others.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

14

PART II


ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded under the symbol "PBI" and is principally traded on the New York Stock Exchange (NYSE). At January 31, 2018, we had 15,545 common stockholders of record. The following table sets forth the high and low sales prices, as reported on the NYSE, and the cash dividends paid per share of common stock, for the periods indicated.
 
Stock Price
 
Dividend Per Share
 
High
 
Low
 
2017
 
 
 
 
 
First Quarter
$
16.60

 
$
12.31

 
$
0.1875

Second Quarter
$
16.26

 
$
13.24

 
0.1875

Third Quarter
$
15.31

 
$
12.40

 
0.1875

Fourth Quarter
$
14.34

 
$
9.50

 
0.1875

 
 
 
 
 
$
0.75

2016
 
 
 
 
 
First Quarter
$
21.60

 
$
16.24

 
$
0.1875

Second Quarter
$
21.81

 
$
16.28

 
0.1875

Third Quarter
$
19.33

 
$
16.88

 
0.1875

Fourth Quarter
$
18.20

 
$
14.22

 
0.1875

 
 
 
 
 
$
0.75

Share Repurchases
We periodically have repurchased shares of our common stock to manage the dilution created by shares issued under employee stock plans and for other purposes. During 2017, we did not repurchase any shares of our common stock. We have remaining Board of Directors authorization to purchase $21 million of our common stock.

Stock Performance Graph
Our peer group is comprised of: Alliance Data Systems Corporation, Deluxe Corporation, Diebold, Incorporated, EchoStar Corp., Fidelity National Information Services, Inc., Fiserv, Inc., NCR Corp., NetApp Inc., Pitney Bowes Inc., R.R. Donnelley & Sons Company, Rockwell Automation Inc., Teradata Corp., Unisys Corporation, The Western Union Company and Xerox Corporation.

The accompanying graph shows the annual change in the value of a $100 investment in Pitney Bowes Inc., the Standard and Poor's (S&P) 500 Composite Index, the S&P MidCap 400 and the peer group over a five-year period assuming the reinvestment of dividends. On a total return basis, a $100 investment on December 31, 2012 in Pitney Bowes Inc., the S&P 500 Composite Index, the S&P MidCap 400 and the peer group would have been worth $132, $208, $201, and $198 respectively, on December 31, 2017.

All information is based upon data independently provided to us by Standard & Poor's Corporation and is derived from their official total return calculation. Total return for the S&P 500 and S&P MidCap 400 Composite Indexes and each peer group is based on market capitalization, weighted for each year. The stock price performance is not necessarily indicative of future stock price performance.

15


pbi2016123_chart-06287a01.jpg
 
 
 
 
 
 
 
 
 
 
 
 

16


ITEM 6. SELECTED FINANCIAL DATA

The following table of selected financial data should be read in conjunction with the more detailed consolidated financial statements and related notes thereto included in Item 8 of this Form 10-K.
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
Total revenue
$
3,549,948

 
$
3,406,575

 
$
3,578,060

 
$
3,821,504

 
$
3,791,335

 
 
 
 
 
 
 
 
 
 
Amounts attributable to common stockholders:
 
 
 
 
 
 
 
 
 
Net income from continuing operations
$
261,340

 
$
95,506

 
$
402,672

 
$
300,006

 
$
287,612

(Loss) income from discontinued operations

 
(2,701
)
 
5,271

 
33,749

 
(144,777
)
Net income - Pitney Bowes Inc.
$
261,340

 
$
92,805

 
$
407,943

 
$
333,755

 
$
142,835

 
 
 
 
 
 
 
 
 
 
Basic earnings per share attributable to common stockholders (1):
 
 
 
 
 
 
 
 
Continuing operations
$
1.40

 
$
0.51

 
$
2.01

 
$
1.49

 
$
1.43

Discontinued operations

 
(0.01
)
 
0.03

 
0.17

 
(0.72
)
Net income - Pitney Bowes Inc.
$
1.40

 
$
0.49

 
$
2.04

 
$
1.65

 
$
0.71

 
 
 
 
 
 
 
 
 
 
Diluted earnings per share attributable to common stockholders (1):
 
 
 
 
 
 
Continuing operations
$
1.39

 
$
0.51

 
$
2.00

 
$
1.47

 
$
1.42

Discontinued operations

 
(0.01
)
 
0.03

 
0.17

 
(0.71
)
Net income - Pitney Bowes Inc.
$
1.39

 
$
0.49

 
$
2.03

 
$
1.64

 
$
0.70

 
 
 
 
 
 
 
 
 
 
Cash dividends paid per share of common stock
$
0.75

 
$
0.75

 
$
0.75

 
$
0.75

 
$
0.94

 
 
 
 
 
 
 
 
 
 
Balance sheet data:
 
 
 
 
 
 
 
 
 
 
December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
Total assets
$
6,678,715

 
$
5,837,133

 
$
6,123,132

 
$
6,476,599

 
$
6,754,371

Long-term debt
$
3,559,278

 
$
2,750,405

 
$
2,489,583

 
$
2,904,024

 
$
3,323,231

Total debt
$
3,830,335

 
$
3,364,890

 
$
2,950,668

 
$
3,228,903

 
$
3,323,231

Noncontrolling interests (Preferred stockholders' equity in subsidiaries)
$

 
$

 
$
296,370

 
$
296,370

 
$
296,370


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


17


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes. This discussion and analysis contains forward-looking statements based on management's current expectations, estimates and projections and involves risks and uncertainties. Our actual results may differ significantly from those currently expressed in our forward-looking statements as a result of various factors, including those factors described under "Forward-Looking Statements" and "Risk Factors" contained elsewhere in this Annual Report. All table amounts are presented in thousands of dollars, unless otherwise stated.
Overview
During 2017, we started to see the benefits of our strategic initiatives as revenue grew compared to prior year. Excluding revenue from Newgistics, which we acquired in October 2017, revenue increased slightly over last year.
In Small and Medium Business (SMB) Solutions, we introduced the SendPro C-series in the U.S. This product leverages the latest cloud technology to securely deliver a digital multi-carrier shipping platform, as well as mailing functionality. The SendPro C-series enables offices of all sizes to select the best sending option for parcels, letters and flats, delivering potential savings across carriers, and providing full package tracking capabilities. The introduction of the SendPro C-series was a significant step in our plan to stabilize and reinvent our mail business.
In Enterprise Business Solutions (EBS), Production Mail revenue grew slightly due to higher equipment sales, partially offset by lower support services revenue. Revenue for Presort Services increased due to higher volumes. During the year, we continued to make investments to expand our Presort Services network.
Within Digital Commerce Solutions (DCS), Global Ecommerce experienced significant revenue growth, as we continued to add new clients, stabilize our shipping APIs, invest in our cross-border solutions, domestic shipping and carrier services capabilities. Revenue growth also benefited from the acquisition of Newgistics in October 2017. Newgistics provides parcel delivery, returns, fulfillment and digital commerce solutions for retailers and ecommerce brands. In Software Solutions, our partner channel continued to grow as we shifted more of our sales opportunities to this channel.
Financial Highlights
Financial Results Summary - Twelve Months Ended December 31:
 
2017
2016
Change
Revenue
$
3,549,948

$
3,406,575

4
%
Income from continuing operations
$
261,340

$
114,551

>100%

Net income
$
261,340

$
92,805

>100%

Earnings per share from continuing operations - diluted
$
1.39

$
0.51

>100%

Net Cash Provided by Operations
$
495,813

$
496,122

%

Revenue
Revenue increased 4%, on a reported and constant currency basis reflecting growth in business services, software and equipment sales and declines in financing, support services, supplies and rentals.
SMB revenue declined 5% on a reported and constant currency basis. North America Mailing revenue declined 5% on a reported and constant currency basis driven by declines in recurring revenue streams. International Mailing revenue declined 7% as reported and 6% on a constant currency basis primarily due to lower equipment sales and recurring revenue streams.
EBS revenue increased 3% on a reported and constant currency basis. Presort Services revenue grew 5% driven by higher standard mail and parcel volumes and higher revenue per piece. Production Mail revenue increased 1% as reported and was flat on a constant currency basis as the higher equipment sales were offset by lower support services revenue.
DCS revenue grew 32% on a reported and constant currency basis. Global Ecommerce revenue grew 63% on a reported and constant currency basis driven by the acquisition of Newgistics, growth in cross-border retail and marketplace volumes and growth in domestic shipping. In the fourth quarter, we stabilized our shipping APIs, which also positively impacted the growth in domestic shipping. Software Solutions revenue increased 1% as reported and 2% on a constant currency basis, primarily due to an increase in licensing revenue.


18


Net Income
Net income and earnings per share increased significantly over last year primarily due to an after-tax goodwill impairment charge of $169 million in 2016. Also, net income in 2017 benefited from a net provisional one-time benefit of $39 million from the enactment of the Tax Cuts and Jobs Act of 2017. See Note 13 to the Consolidated Financial Statements.

Cash Flows
In 2017, we generated cash flows from operations of $496 million and raised net proceeds from the issuance of debt of $472 million. We used this cash primarily to:
Acquire Newgistics for $471 million;
Spend $171 million on capital expenditures; and
Pay dividends of $139 million to our stockholders.

Outlook

We anticipate continuing the shift in our overall portfolio to higher growth, digital and shipping solutions. We expect our offerings related to shipping services will become a larger contributor to overall revenue. We expect Global Ecommerce revenue, before the incremental revenue from Newgistics, to continue to grow largely from growth in our domestic shipping APIs, carrier services offerings and cross-border volume expansion.
We expect Software Solutions to continue to improve its performance driven by the indirect channel, and in 2018, we will be working with our partners to expand our customer base. Within Production Mail and Presort Services, we expect revenue to continue to perform around the market ranges. Within SMB, the new SendPro products are expected to improve trends in equipment sales and stream revenues in North America. We also plan on introducing new and expanded finance offerings to our clients.
The acquisition of Newgistics provides for expansion into the domestic market for our Global Ecommerce segment while complementing our cross-border offerings. It also aligns with our Presort Services network and builds on the strengths of our Global Ecommerce and Presort Services segments. We plan to leverage Newgistics' existing network and volumes to drive scale across our parcel platform and synergies with our Global Ecommerce and Presort Services segments. We further anticipate cross-selling opportunities across the clients of Newgistics, Presort Services and Global Ecommerce. We report Newgistics in our Global Ecommerce segment and, in January 2018, we reorganized our reporting groups to form the Commerce Services group, which will be comprised of our Presort Services and Global Ecommerce segments.
While we expect 2018 revenue to grow, we also expect our overall gross profit margins to contract as our portfolio mix shifts to higher revenue growth areas, but lower-margin businesses. Over the last five years, we have developed a simpler and more digital operating model. In that time, we have reduced our cost structure by $300 million. In the fourth quarter of 2017, we announced that we intend to reduce our overall cost structure by an additional $200 million over a 24 month period. These cost reductions will come from across the organization, including people and programs.
As a result of the Tax Cuts and Jobs Act of 2017 and the recording of tax benefits from the resolution of certain tax examinations in 2017, we expect our annual effective income tax rate for 2018 to be comparable to 2017. In addition, as a result of the legislation, we intend to repatriate approximately $0.5 billion of cash held in our foreign subsidiaries back to the U.S. and use this cash to reduce debt.
In November 2017, the Company's Board of Directors, together with management, announced that it is conducting a process to explore and evaluate strategic alternatives to further enhance shareholder value. There can be no assurance that the exploration of strategic alternatives will result in any particular outcome.



19


RESULTS OF OPERATIONS
Revenue by source and the related cost of revenue are shown in the following tables:
 
Revenue
 
% change
 
Years Ended December 31,
 
Actual
 
Constant Currency
 
2017
 
2016
 
2015
 
2017
 
2016
 
2017
 
2016
Equipment sales
$
680

 
$
675

 
$
695

 
1
 %
 
(3
)%
 
 %
 
(2
)%
Supplies
253

 
263

 
288

 
(4
)%
 
(9
)%
 
(4
)%
 
(7
)%
Software
353

 
349

 
386

 
1
 %
 
(10
)%
 
2
 %
 
(7
)%
Rentals
386

 
413

 
442

 
(6
)%
 
(7
)%
 
(7
)%
 
(6
)%
Financing
331

 
366

 
410

 
(10
)%
 
(11
)%
 
(9
)%
 
(10
)%
Support services
479

 
513

 
555

 
(7
)%
 
(8
)%
 
(7
)%
 
(7
)%
Business services
1,068

 
828

 
802

 
29
 %
 
3
 %
 
29
 %
 
4
 %
Total revenue
$
3,550

 
$
3,407

 
$
3,578

 
4
 %
 
(5
)%
 
4
 %
 
(4
)%
 
Cost of Revenue
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
$
 
% of revenue
 
$
 
% of revenue
 
$
 
% of revenue
Cost of equipment sales
$
341

 
50.1
%
 
$
332

 
49.1
%
 
$
331

 
47.6
%
Cost of supplies
83

 
32.8
%
 
81

 
31.0
%
 
89

 
30.8
%
Cost of software
102

 
28.9
%
 
106

 
30.4
%
 
114

 
29.4
%
Cost of rentals
84

 
21.8
%
 
76

 
18.4
%
 
84

 
19.1
%
Financing interest expense
51

 
15.3
%
 
55

 
15.1
%
 
72

 
17.5
%
Cost of support services
289

 
60.4
%
 
296

 
57.7
%
 
323

 
58.2
%
Cost of business services
773

 
72.4
%
 
569

 
68.7
%
 
546

 
68.1
%
Total cost of revenue
$
1,723

 
48.5
%
 
$
1,515

 
44.5
%
 
$
1,559

 
43.6
%

The discussion below refers to revenue growth on a constant currency basis. Constant currency measures exclude the impact of changes in foreign currency exchange rates since the prior period under comparison and are intended to help investors better understand the underlying revenue performance of the business excluding the impacts of shifts in currency exchange rates over the period.  Constant currency is calculated by converting our current period reported revenue using the prior year’s exchange rate for the comparable period. 

Equipment sales
Equipment sales increased 1% in 2017 compared to 2016, however were flat on a constant currency basis, primarily due to:
1% from higher equipment sales in Production Mail; and
1% from higher equipment sales in North America Mailing, reflecting a favorable comparison to prior year, which was impacted by the enterprise business platform implementation in the second quarter of 2016; offset by
2% from lower equipment sales in International Mailing particularly in Europe.
Cost of equipment sales as a percentage of equipment sales revenue increased to 50.1% primarily due to lower equipment sales margins in Production Mail and North America Mailing.

Equipment sales decreased 3% in 2016 compared to 2015. On a constant currency basis, equipment sales decreased 2% primarily due to:
3% from lower mailing equipment sales in North America, due in part to sales disruption during the second quarter from the enterprise business platform implementation; and
1% from the exit of certain geographic markets in 2016 (Market Exits); partially offset by
2% from higher sales in our production mail business, primarily due to higher installations of sorter, inserter and print equipment.
Cost of equipment sales as a percentage of equipment sales revenue increased to 49.1% primarily due to product mix.


20



Supplies
Supplies revenue decreased 4% in 2017 compared to 2016 primarily from the decline in installed mailing equipment and postage volumes in North America Mailing.

Cost of supplies as a percentage of supplies revenue increased to 32.8% in 2017 primarily due to higher mix of lower margin products.

Supplies revenue decreased 9% in 2016 compared to 2015. On a constant currency basis, supplies revenue decreased 7% primarily due to:
4% from lower North America mailing supplies sales;
1% from lower international mailing supplies, primarily in the U.K. and France;
1% from lower sales in our production mail business; and
1% from Market Exits.
Cost of supplies as a percentage of supplies revenue increased slightly to 31.0% primarily due to lower revenue and sales productivity issues.

Software
Software revenue increased 1% (2% on a constant currency basis) in 2017 compared to 2016 primarily due to higher software licensing, data and SaaS revenue. Cost of software as a percentage of software revenue decreased to 28.9% in 2017 primarily due to the increase in high margin licensing revenue and cost reduction initiatives.

Software revenue decreased 10% in 2016 compared to 2015. On a constant currency basis, software revenue decreased 7% in primarily due to a worldwide decline in licensing revenue. License revenue from our customer engagement and our location intelligence software offerings declined, but were partly offset by growth in our customer information management offerings. Cost of software as a percentage of software revenue increased to 30.4% primarily due to the decline in high margin licensing revenue.

Rentals
Rentals revenue decreased 6% (7% on a constant currency basis) in 2017 compared to 2016 and 7% (6% on a constant currency basis) in 2016 compared to 2015. Both of these declines were primarily due to a declining meter population.
Cost of rentals as a percentage of rentals revenue increased to 21.8% in 2017 primarily due to higher scrapping costs associated with retiring aging meters. Cost of rentals as percentage of rental revenue improved to 18.4% in 2016 primarily due to lower depreciation.

Financing
Financing revenue decreased 10% (9% on a constant currency basis) in 2017 compared to 2016 primarily due to lower mailing equipment sales in prior periods, a declining lease portfolio and lower fees.

Financing revenue decreased 11% in 2016 compared to 2015. On a constant currency basis, financing revenue decreased 10% primarily due to lower mailing equipment sales in prior periods, a declining lease portfolio and lower fees as a result of proactive waivers to allow clients to adjust to new billing formats and timing of invoices being sent as a result of the platform cutover.

We allocate a portion of our total cost of borrowing to financing interest expense. In computing financing interest expense, we assume an 8:1 debt to equity leverage ratio in 2017 and 2016 (10:1 in 2015) and apply our overall effective interest rate to the average outstanding finance receivables. Finance interest expense decreased 7% in 2017 compared to 2016 primarily due to lower average outstanding finance receivables. Finance interest expense decreased 23% in 2016 compared to 2015 primarily due to a decline in our overall effective interest rate and lower average outstanding finance receivables.
 









21




Support Services
Support services revenue decreased 7% in 2017 compared to 2016 primarily due to:
6% from a decline in installed mailing equipment worldwide; and
1% from lower maintenance revenue on Production Mail equipment as some in-house mailers in the prior year moved their mail processing to third-party service bureaus who service their own equipment.
Cost of support services as a percentage of support services revenue increased to 60.4% in 2017 primarily due to the decline in support services revenue.

Support services revenue decreased 8% in 2016 compared to 2015. On a constant currency basis, revenue decreased 7%, primarily due to:
2% from lower maintenance revenue on production mail equipment as some in-house mailers moved their mail processing to third-party service bureaus who service some of their own equipment;
2% from the worldwide decline in the number of mailing machines in service and shift to less-featured, lower cost machines; and
2% from Market Exits.
Cost of support services as a percentage of support services revenue improved to 57.7% in 2016 primarily due to expense reductions and productivity initiatives.

Business Services
Business services revenue increased 29% in 2017 compared to 2016 primarily due to:
17% from the acquisition of Newgistics;
9% from growth in Global Ecommerce due to higher cross-border and retail volumes; and
3% from higher volumes of mail processed in Presort Services.
Cost of business services as a percentage of business services revenue increased to 72.4% in 2017 primarily due to continued investment in our Global Ecommerce business and the additional costs of Newgistics.
Business services revenue increased 3% in 2016 compared to 2015. On a constant currency basis, revenue increased 4%. Business Services revenue for 2016 was impacted by the sale of Imagitas in May 2015 and the acquisition of Borderfree in June 2015. Excluding the impacts of these transactions, business services revenue increased 11% primarily due to:
10% from growth in our Ecommerce business from the expansion of our U.S. and U.K. cross-border marketplace business and retail network, including a full year of operations of Borderfree; and
1% from higher shipping solutions services.
Cost of business services as a percentage of business services revenue increased to 68.7% in 2016, primarily due higher mail processing costs in Presort Services.

Selling, general and administrative (SG&A)
SG&A expense increased 3%, or $37 million, in 2017 compared to 2016. Contributing to this increase was higher compensation-related costs of $28 million due to the reinstatement of our annual variable compensation program and higher stock-based compensation expense. Each of these programs are tied to our performance against pre-established targets and costs in 2016 were significantly lower than in 2017. Additionally, expenses in Global Ecommerce were $21 million higher as we continue to invest in the growth of this business, we incurred $17 million of additional expense from Newgistics, $9 million of higher marketing expenses, $9 million of higher residual losses on leased equipment due to the timing of trade-up activity and $9 million of transaction costs, primarily related to the acquisition of Newgistics. Offsetting these increases was approximately $63 million of benefits from productivity initiatives and a $6 million pre-tax gain from the sale of technology. Additionally, 2016 included loan forgiveness income of $10 million and a favorable state sales tax adjustment of $5 million.

SG&A expense decreased 6% in 2016 compared to 2015 primarily due to lower salaries and benefits expense from our prior restructuring actions, lower annual variable compensation costs of $36 million, benefits from the new enterprise business platform of $28 million, loan forgiveness income of $10 million, a favorable sales tax adjustment of $5 million and other productivity and cost-saving initiatives. SG&A expense in 2015 also included a one-time compensation charge of $10 million related to the acquisition of Borderfree.





22


Restructuring charges and asset impairments, net
Restructuring charges and asset impairments were $59 million in 2017, consisting of $55 million of restructuring related charges and $4 million of asset impairment charges.

Restructuring charges and asset impairments were $63 million in 2016. During the year, we recorded restructuring charges of $48 million related to restructuring actions and pension settlement charges due to prior restructuring actions. Asset impairment charges consisted primarily of a loss of $5 million from the sale of a facility and an impairment charge of $4 million related to another facility.

Goodwill impairment
In 2016, we recorded a non-cash pre-tax goodwill impairment charge of $171 million associated with our Software Solutions reporting unit.

Other (income) expense, net
Other income, net for 2017 includes a loss on the early extinguishment of debt. See Note 11 to the Consolidated Financial Statements.
Other income, net for 2015 includes the gain on the sale of Imagitas of $111 million, transaction costs of $10 million incurred in connection with the acquisitions of Borderfree and RTC and a charge of $7 million associated with the settlement of a legal matter.
Income taxes
We recorded a net provisional one-time non-cash benefit of $39 million in our provision for income taxes related to the enactment of the Tax Cuts and Jobs Act of 2017. The net benefit is comprised of a provisional $130 million benefit from the remeasurement of net U.S. deferred tax liabilities arising from a lower U.S. corporate tax rate, offset by a provisional $91 million charge related primarily to a U.S. tax on unremitted earnings of our foreign subsidiaries. See Note 13 to the Consolidated Financial Statements.

Discontinued operations
Loss from discontinued operations in 2016 was due to an additional expense related to our Management Services business sold in 2013. Income from discontinued operations in 2015 was due to a favorable tax adjustment related to our Document Imaging Solutions business sold in 2014.
 
Preferred stock dividends of subsidiaries attributable to noncontrolling interests
We redeemed all of the PBIH Preferred Stock in November 2016.


23


Business Segments
Effective January 1, 2017, we revised our segment reporting to reflect a change in how we manage and report office shipping solutions, which were previously reported within the Global Ecommerce segment. The needs of retail and ecommerce clients differ from those of office shipping clients. Accordingly, we now report the results for office shipping solutions within Small & Medium Business Solutions and the retail and ecommerce shipping solutions remain in Global Ecommerce. 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 mailing and office solutions, financing services and supplies for small and medium businesses to efficiently create physical and digital mail, evidence postage and help simplify and save on the sending, tracking and receiving of letters, parcels and flats in the U.S. and Canada.
International Mailing: Includes the revenue and related expenses from mailing and office solutions, financing services and supplies for small and medium businesses to efficiently create physical and digital mail, evidence postage and help simplify and save on the sending, tracking and receiving of letters, parcels and flats 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 services for 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 licensing of customer engagement, customer information, and location intelligence software solutions and related support services.
Global Ecommerce: Include the worldwide revenue and related expenses from cross-border ecommerce transactions and domestic retail and ecommerce shipping solutions, including fulfillment and returns.
 
We determine segment EBIT by deducting from segment revenue the related costs and expenses attributable to the segment. Segment EBIT excludes interest, taxes, general corporate expenses, restructuring charges and other items, which are not allocated to a particular business segment. Management uses segment EBIT to measure profitability and performance at the segment level and believes that it provides a useful measure of 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. See Note 2 to the Consolidated Financial Statements for a reconciliation of segment EBIT to net income.
Revenue and EBIT by business segment are presented in the tables below. The sum of the individual segments in the tables above may not equal the totals due to rounding.
 
Revenue
 
% change
 
Years Ended December 31,
 
Actual
 
Constant Currency
 
2017
 
2016
 
2015
 
2017
 
2016
 
2017
 
2016
North America Mailing
$
1,357

 
$
1,427

 
$
1,530

 
(5
)%
 
(7
)%
 
(5
)%
 
(7
)%
International Mailing
384

 
412

 
450

 
(7
)%
 
(8
)%
 
(6
)%
 
(5
)%
Small & Medium Business Solutions
1,740

 
1,839

 
1,980

 
(5
)%
 
(7
)%
 
(5
)%
 
(6
)%
Production Mail
407

 
405

 
421

 
1
 %
 
(4
)%
 
 %
 
(3
)%
Presort Services
498

 
476

 
474

 
5
 %
 
 %
 
5
 %
 
 %
Enterprise Business Solutions
905

 
881

 
895

 
3
 %
 
(2
)%
 
3
 %
 
(1
)%
Software Solutions
352

 
348

 
386

 
1
 %
 
(10
)%
 
2
 %
 
(7
)%
Global Ecommerce
552

 
339

 
263

 
63
 %
 
29
 %
 
63
 %
 
31
 %
Digital Commerce Solutions
905

 
688

 
649

 
32
 %
 
6
 %
 
32
 %
 
8
 %
Other

 

 
55

 
 %
 
(100
)%
 
 %
 
(100
)%
Total
$
3,550

 
$
3,407

 
$
3,578

 
4
 %
 
(5
)%
 
4
 %
 
(4
)%

24


 
EBIT
 
Years Ended December 31,
 
% change
 
2017
 
2016
 
2015
 
2017
 
2016
North America Mailing
$
498

 
$
593

 
$
663

 
(16
)%
 
(11
)%
International Mailing
48

 
45

 
49

 
7
 %
 
(9
)%
Small & Medium Business Solutions
546

 
638

 
712

 
(14
)%
 
(10
)%
Production Mail
51

 
54

 
48

 
(7
)%
 
12
 %
Presort Services
98

 
95

 
105

 
2
 %
 
(9
)%
Enterprise Business Solutions
148

 
149

 
153

 
(1
)%
 
(2
)%
Software Solutions
42

 
30

 
49

 
38
 %
 
(38
)%
Global Ecommerce
(18
)
 
3

 
5

 
> (100)%

 
(40
)%
Digital Commerce Solutions
24

 
33

 
54

 
(29
)%
 
(38
)%
Other

 

 
10

 
 %
 
(100
)%
Total
$
718

 
$
820

 
$
929

 
(13
)%
 
(12
)%

Small & Medium Business Solutions
North America Mailing
North America Mailing revenue decreased 5% in 2017 compared to 2016 primarily due to:
3% from declines in rentals and support services revenue due to a decline in installed mailing equipment and lower postage volumes; and
2% from lower financing revenue primarily due to a declining lease portfolio and lower fee income.
EBIT decreased 16% primarily due to the decline in revenue and margins.
North America Mailing revenue decreased 7% in 2016 compared to 2015 primarily due to:
2% from lower financing revenue primarily from declining equipment sales in prior periods and lower fees resulting from proactive waivers to allow clients to adjust to new billing formats and delayed timing of invoices resulting from the platform cutover;
1% from lower sales of supplies due to lower demand and sales productivity issues from the platform cutover;
1% from lower rentals revenue and 1% from lower support services revenue, primarily reflecting continuing decline in installed meters and shift to less-featured lower-cost machines; and
1% from lower equipment sales which were impacted by sales productivity issues from the platform cutover.

EBIT decreased 11% primarily due to the decline in higher margin recurring revenue streams and higher costs due in part to the sales productivity issues from the platform cutover.

International Mailing
International Mailing revenue declined 7% (6% on a constant currency basis) in 2017 compared to 2016 primarily due to:
3% from lower equipment sales particularly in Europe; and
3% from declines in rentals, financing and support services revenue resulting from a decline in installed mailing equipment and the lease portfolio.
EBIT increased 7% in 2017 compared to 2016, primarily due to higher equipment margins and lower expenses.

International Mailing revenue declined 8% in 2016 compared to 2015. On a constant currency basis, revenue decreased 5% primarily due to:
2% from Market Exits; and
1% decline in each of rental, supplies and support services revenue resulting from the continued decline in installed meters.
EBIT decreased 9% in 2016 compared to 2015, primarily due to the decline in revenue, partially offset by lower costs from cost savings and productivity initiatives. Foreign currency translation had a 4% adverse impact on EBIT.



25


Enterprise Business Solutions
Production Mail
Production Mail revenue increased 1% in 2017 compared to 2016. Revenue was flat on a constant currency basis primarily due to:
1% from higher equipment sales as a significant deal for printers and sorters closed and were installed in the fourth quarter of 2017; partially offset by
1% from lower support services revenue as result of some in-house mailers shifting their mail processing to third-party outsourcers who service their own equipment in the prior year.

EBIT decreased 7% in 2017 compared to 2016 primarily due to lower equipment sales margins due to the mix of equipment sales.

Production Mail revenue decreased 4% in 2016 compared to 2015. On a constant currency basis, revenue decreased 3% primarily due to:
3% from Market Exits; and
3% from lower support services revenue as result of some in-house mailers shifting their mail processing to third-party outsourcers; partially offset by
4% from higher equipment sales due to higher installations of sorter, inserter and print equipment.
Despite the decline in revenue, EBIT increased 12% in 2016 compared to 2015 primarily due to service delivery cost management initiatives and lower sales and marketing costs.

Presort Services
Presort Services revenue increased 5% in 2017 compared to 2016 primarily due to higher volumes and revenue per piece of mail processed. EBIT increased 2% in 2017 compared to 2016 primarily due to higher revenue.
Presort Services revenue was flat in 2016 compared to 2015 as volume growth was offset by lower revenue per piece of mail from a USPS rate change. EBIT decreased 9% in 2016 compared to 2015 primarily due to lower margins and increased labor costs.

Digital Commerce Solutions
Software Solutions
Software revenue increased 1% (2% on a constant currency basis) in 2017 compared to 2016 primarily due to higher software licensing, data and SaaS revenue. EBIT increased 38% primarily due to an increase in high margin licensing revenue.

Software revenue decreased 10% in 2016 compared to 2015. On a constant currency basis, revenue decreased 7% primarily due to a worldwide decline in licensing revenue. License revenue from our customer engagement and our location intelligence software offerings declined but were partly offset by growth in the customer information management software license revenue. EBIT decreased 38% primarily due to the lower high margin licensing revenue.

Global Ecommerce
Global Ecommerce revenue increased 63% in 2017 compared to 2016 primarily due to:
41% from the acquisition of Newgistics;
12% from higher domestic ecommerce shipping revenues;
6% from higher cross-border marketplace volumes, particularly in the UK; and
4% from higher retail volumes.
EBIT was a loss of $18 million in 2017 primarily due to investments in market growth opportunities and additional amortization expense from the acquisition of Newgistics.

Global Ecommerce revenue increased 29% in 2016 compared to 2015. On a constant currency basis, revenue increased 31% primarily due to the expansion of our U.S. and U.K. cross-border business and retail network, including the acquisition of Borderfree.
EBIT declined 40% in 2016 compared to 2015 as higher revenue was offset by $7 million of additional amortization expense from acquisitions, $6 million of deferred cross-border delivery fees recognized in 2015 and additional investments in the business. Foreign currency translation had a 6% adverse impact on EBIT.



26


Other
Other includes our Marketing Services business which was sold in May 2015.
LIQUIDITY AND CAPITAL RESOURCES
We believe that existing cash and investments, cash generated from operations and borrowing capacity under our commercial paper program will be sufficient to support our current cash needs, including discretionary uses such as capital investments, dividends, share repurchases and acquisitions. Cash and cash equivalents and short-term investments were $1,058 million at December 31, 2017 and $803 million at December 31, 2016. We continuously review our credit profile through published credit ratings and the credit default swap market. We also monitor the creditworthiness of those banks acting as derivative counterparties, depository banks or credit providers.

Cash and cash equivalents held by our foreign subsidiaries were $608 million and $475 million at December 31, 2017 and December 31, 2016, respectively. Cash and cash equivalents held by our foreign subsidiaries are generally used to support the liquidity needs of these subsidiaries.

Cash Flow Summary
The change in cash and cash equivalents is as follows:
 
Years Ended December 31,
 
Change
 
2017
 
2016
 
2015
 
2017
 
2016
Net cash provided by operating activities
$
496

 
$
496

 
$
523

 
$

 
$
(27
)
Net cash used in investing activities
(663
)
 
(116
)
 
(303
)
 
(547
)
 
187

Net cash provided by (used in) financing activities
368

 
(230
)
 
(579
)
 
598

 
349

Effect of exchange rate changes on cash and cash equivalents
44

 
(27
)
 
(44
)
 
71

 
17

Change in cash and cash equivalents
$
244

 
$
124

 
$
(403
)
 
$
122

 
$
526

The amounts in the table above may not foot or recalculate due to rounding.

Cash flows from operations was flat in 2017 compared to 2016 as lower restructuring payments and pension contributions were offset by changes in working capital.

Cash flows from operations decreased $27 million in 2016 compared to 2015, primarily due:
Lower income;
A special pension plan contribution of $37 million to the U.K. pension plan; and
Payments associated with the launch of the enterprise business platform and new advertising campaign; partially offset by
Lower employee related costs and income tax payments.

Cash flows used by investing activities increased $547 million in 2017 compared to 2016, primarily due to:
Higher acquisitions spending of $445 million;
Lower cash from investment activities of $94 million;
Lower proceeds from asset sales of $12 million;
Higher capital expenditures of $10 million; partially offset by
An increase in reserve deposits of $13 million.

Cash flows used by investing activities were $187 million lower in 2016 compared to 2015, primarily due to:
Lower acquisitions spending of $356 million;
Higher cash from investment activities of $142 million;
An increase in reserve deposits of $22 million; and
Lower capital expenditures of $6 million; partially offset by
Proceeds of $292 million from the sale of Imagitas in 2015; and
Lower proceeds from asset sales of $34 million.

Cash flows from financing activities were $598 million higher in 2017 compared to 2016, primarily due to:
The payment of $300 million in 2016 to redeem a noncontrolling interest;
Share repurchases of $197 million in 2016;
Higher net cash flows from debt activities of $38 million; and

27


In 2017, other financing activities of $35 million includes $46 million related to a timing difference between our investing excess cash at a subsidiary level and our funding of an intercompany cash transfer. This amount was partially offset by payments related to the early extinguishment of debt and withholding tax associated with stock-based compensation.

Cash flows used in financing activities decreased $349 million in 2016 compared to 2015, primarily due to:
Higher cash from debt activities of $709 million as we had net borrowings of debt of $434 million in 2017 compared to net repayments of debt of $275 million in 2016; partially offset by
Redemption of noncontrolling interests for $300 million; and
Higher share repurchases of $65 million.

Financings and Capitalization
We are a "Well-Known Seasoned Issuer" within the meaning of Rule 405 under the Securities Act, which allows us to issue debt securities, preferred stock, preference stock, common stock, purchase contracts, depositary shares, warrants and units in an expedited fashion. We have a commercial paper program that is an important source of liquidity for us and a committed credit facility of $1 billion to support our commercial paper issuances. The credit facility expires in January 2021, and as of December 31, 2017 we have not drawn upon the credit facility.
At December 31, 2017 and 2016, there were no outstanding commercial paper borrowings. During the fourth quarter of 2017, commercial paper borrowings averaged $5 million at a weighted average interest rate of 1.8% and the maximum amount of commercial paper outstanding at any point during the quarter was $30 million.
2017 Activity
In September 2017, we issued $300 million of 3.625% Notes due September 2020 and $400 million of 4.7% Notes due April 2023. Interest is payable semi-annually and is subject to adjustment from time to time based on changes in our credit ratings. Both of these notes may be redeemed, at our option, in whole or in part, at any time at par plus accrued, unpaid interest and a make-whole amount, if any.

In September 2017, we also borrowed $350 million under term loan agreements. The new term loans consist of a $200 million term loan that bears interest at the applicable Eurodollar Rate plus 1.5% and matures in September 2020 and a $150 million term loan that bears interest at the applicable Eurodollar Rate plus 1.125% and matures in August 2018, but includes an option to extend the maturity by one year. For the fourth quarter of 2017, the effective interest rate for the $200 million term loan was 2.78% and the effective interest rate for the $150 million term loan was 2.49%. The interest rates on these term loans are subject to adjustment from time to time based on changes in our credit ratings.

In May 2017, we issued $400 million of 3.875% Notes. Interest is payable semi-annually and is subject to adjustment based on changes in our credit ratings. The notes mature in May 2022, but may be redeemed, at our option, in whole or in part, at any time at par plus accrued, unpaid interest and a make-whole amount, if any. Subsequent to the issuance of these notes, we experienced a change in our credit rating, resulting in an increase in the fixed rate of 0.25% to 4.125%.

In 2017, we repaid a $150 million term loan, the $385 million of 5.75% Notes due in September 2017 and early redeemed the $350 million 4.75% Notes that were due May 2018. Additionally, bondholders of the 5.25% Notes due 2037 caused us to redeem $79 million of the outstanding notes.

2016 Activity
In January 2016, we borrowed $300 million under a term loan agreement and applied the proceeds to the repayment of the $371 million, 4.75% notes due January 2016. The new term loan bears interest at the applicable Eurodollar Rate plus 1.5% (1.25% at time of issuance, and adjusted to 1.5% based on a change in our credit ratings) and matures in December 2020. In September 2016, we entered into an interest rate swap with a notional amount of $300 million to mitigate the interest rate risk associated with these variable-rate term loans. Under the terms of the swap agreement, we pay fixed-rate interest of 0.8826% and receive variable-rate interest based on one-month LIBOR. The variable rate resets monthly. 

In March 2016, we satisfied certain employment obligations stipulated in the State of Connecticut Department of Economic and Community Development loan (issued in 2014), and under the terms of the loan, $10 million was forgiven. We recorded loan forgiveness income in selling, general and administrative expenses.
In September 2016, we issued $600 million of 3.375% fixed-rate notes due in October 2021. Interest is payable semi-annually and is subject to adjustment from time to time based on changes in our credit ratings. The notes may be redeemed, at our option, in whole or in

28


part, at any time or from time to time at par plus accrued and unpaid interest. The proceeds were used to repay approximately $300 million of outstanding commercial paper and redeem noncontrolling interests for $300 million.

Debt Maturities
We have $2.5 billion of debt due within the next five years, including $270 million scheduled to mature in 2018. While we fully expect to be able to fund these maturities with cash or by refinancing through the U.S. capital markets, these obligations could increase our vulnerability to adverse changes in capital market conditions and impact our ability to refinance existing maturities.

Dividends and Share Repurchases
We paid dividends to our common stockholders of $139 million ($0.75 per share), $141 million ($0.75 per share) and $150 million ($0.75 per share) in 2017, 2016 and 2015, respectively. Each quarter, our Board of Directors considers our recent and projected earnings and other capital needs and priorities in deciding whether to approve the payment, as well as the amount of a dividend. There are no material restrictions on our ability to declare dividends.

We did not repurchase shares during 2017. We purchased $197 million and $132 million of our common shares during 2016 and 2015, respectively. We have remaining authorization to repurchase up to $21 million of our shares.

Contractual Obligations
The following table summarizes our known contractual obligations at December 31, 2017 and the effect that such obligations are expected to have on our liquidity and cash flow in future periods:
 
Payments due in
 
Total
 
2018
 
2019-20
 
2021-22
 
After 2022
Debt maturities
$
3,866

 
$
270

 
$
1,230

 
$
1,000

 
$
1,366

Interest payments on debt (1)
1,293

 
167

 
287

 
191

 
648

Noncancelable operating lease obligations
218

 
48

 
69

 
38

 
64

Purchase obligations (2)
241

 
202

 
31

 
4

 
4

Pension plan contributions (3)
19

 
19

 

 

 

Retiree medical payments (4)
146

 
18

 
34

 
31

 
63

Total
$
5,783

 
$
724

 
$
1,651

 
$
1,264

 
$
2,145

The amounts in the table above may not foot or recalculate due to rounding.
The amount and period of future payments related to our income tax uncertainties cannot be reliably estimated and are not included in the above table. See Note 13 to the Consolidated Financial Statements for further details.

(1)
Assumes all debt is held to maturity.
(2)
Includes unrecorded agreements to purchase goods and services that are enforceable and legally binding upon us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.
(3)
Represents the amount of contributions we anticipate making to our pension plans during 2018. We will assess our funding alternatives as the year progresses and this amount is subject to change.
(4)
Our retiree health benefit plans are nonfunded plans and cash contributions are made each year to cover medical claims costs incurred. The amounts reported in the above table represent our estimate of future payments.

Off-Balance Sheet Arrangements
At December 31, 2017, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, results of operations or liquidity.


29


Critical Accounting Estimates
The preparation of our financial statements in conformity with GAAP requires management to make estimates and assumptions about certain items that affect the reported amounts of assets, liabilities, revenues, expenses and accompanying disclosures, including the disclosure of contingent assets and liabilities. The accounting policies below have been identified by management as those accounting policies that are most critical to our financial statements due to the estimates and assumptions required. Management believes that the estimates and assumptions used are reasonable and appropriate based on the information available at the time the financial statements were prepared; however, actual results could differ from those estimates and assumptions. See Note 1 to the Consolidated Financial Statements for a summary of our accounting policies.

Revenue recognition - Multiple element arrangements
We derive revenue from multiple sources including sales, rentals, financing and services. Certain transactions are consummated at the same time and can therefore generate revenue from multiple sources. The most common form of these transactions involves a sale or noncancelable lease of equipment, a meter rental and an equipment maintenance agreement. As a result, we are required to determine whether the deliverables in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes, and if so, how the price should be allocated among the delivered elements and when to recognize revenue for each element. We recognize revenue for delivered elements only when the fair values of undelivered elements are known, customer acceptance has occurred and payment is probable.

In these multiple element arrangements, revenue is allocated to each of the elements based on relative "selling prices" and the selling price for each of the elements is determined based on vendor specific objective evidence (VSOE). We establish VSOE of selling prices for our products and services based on the prices charged for each element when sold separately in standalone transactions. The allocation of relative selling price to the various elements impacts the timing of revenue recognition, but does not change the total revenue recognized. Revenue is allocated to the meter rental and equipment maintenance agreement elements using their respective selling prices charged in standalone and renewal transactions. For a sale transaction, revenue is allocated to the equipment based on a range of selling prices in standalone transactions. For a lease transaction, revenue is allocated to the equipment based on the present value of the remaining minimum lease payments. The amount allocated to equipment is compared to the range of selling prices in standalone transactions during the period to ensure the allocated equipment amount approximates average selling prices.

We also have multiple element arrangements containing only software and software related elements. Under these arrangements, revenue is allocated based on VSOE, which is based on company specific stand-alone sales data or renewal rates. If we cannot obtain VSOE for any undelivered software element, revenue is deferred until all deliverables have been delivered or until VSOE can be determined for the remaining undelivered software elements. When the fair value of a delivered element cannot be established, but fair value evidence exists for the undelivered software elements, we use the residual method to recognize revenue. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement consideration is allocated to the delivered elements and recognized as revenue.

Pension benefits
The valuation of our pension assets and obligations and the calculation of net periodic pension expense are dependent on assumptions and estimates relating to, among other things, the discount rate (interest rate used to discount the future estimated liability) and the expected rate of return on plan assets. These assumptions are evaluated and updated annually.

The discount rate for our largest plan, the U.S. Qualified Pension Plan (the U.S. Plan) is determined by matching the expected cash flows associated with our benefit obligation to a pool of corporate long-term, high-quality fixed income debt instruments available as of the measurement date. The discount rate for our largest foreign plan, the U.K. Qualified Pension Plan (the U.K. Plan), is determined by using a model that discounts each year's estimated benefit payments by an applicable spot rate derived from a yield curve created from a large number of high quality corporate bonds. The discount rate used in the determination of net periodic pension expense for 2017 was 4.2% for the U.S. Plan and 2.55% for the U.K. Plan. For 2018, the discount rate used in the determination of net periodic pension expense for the U.S. Plan and the U.K. Plan will be 3.7% and 2.4%, respectively. A 0.25% change in the discount rate would impact annual pension expense by less than $1 million for both the U.S. Plan and the U.K. Plan, and the projected benefit obligation of the U.S. Plan and U.K. Plan by $47 million and $27 million, respectively.

Pension assets are exposed to various risks such as interest rate, market and credit risks. We invest our pension plan assets in a variety of investment securities in accordance with our strategic asset allocation policy. The expected return on plan assets is based on historical and expected future returns for current and targeted asset allocations for each asset class in the investment portfolio, adjusted for historical and expected experience of active portfolio management results, as compared to the benchmark returns. The expected rate of return on plan assets used in the determination of net periodic pension expense for 2017 was 6.75% for the U.S. Plan and 6.25% for the U.K. Plan.

30


For 2018, the expected rate of return on plan assets used in the determination of net periodic pension expense for the U.S. Plan will be 7.0% and the U.K. Plan will be 6.25%. A 0.25% change in the expected rate of return on plan assets would impact annual pension expense for the U.S. Plan by $4 million and the U.K. Plan by $1 million.

Actual pension plan results that differ from our assumptions and estimates are accumulated and amortized primarily over the life expectancy of plan participants and affect future pension expense. Net pension expense is also based on a market-related valuation of plan assets where differences between the actual and expected return on plan assets are recognized in the calculation of the market-related value of assets over a five-year period. Plan benefits for participants in a majority of our U.S. and foreign pension plans are frozen.

See Note 12 to the Consolidated Financial Statements for further information about our pension plans.

Residual value of leased assets
Equipment residual values are determined at the inception of the lease using estimates of fair value at the end of the lease term. Residual value estimates impact the determination of whether a lease is classified as an operating lease or a sales-type lease. Fair value estimates of equipment at the end of the lease term are based primarily on our historical experience. We also consider forecasted supply and demand for our products, product retirement and product launch plans, client behavior, regulatory changes, remanufacturing strategies, used equipment markets, competition and technological changes.

We evaluate residual values on an annual basis or sooner if circumstances warrant. Declines in estimated residual values considered "other-than-temporary" are recognized immediately. Estimated increases in future residual values are not recognized until the equipment is remarketed. If the actual residual value of leased assets were 10% lower than management's current estimates, pre-tax income would be lower by $9 million.

Allowances for doubtful accounts and credit losses
Finance receivables are comprised of sales-type lease receivables and unsecured revolving loan receivables. We provide an allowance for probable 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. The aging disclosed in Note 5 of the Consolidated Financial Statements represents full contract value while approximately 30% of the balance greater than 90 days had actually been billed as of December 31, 2017.
As of December 31, 2017, North American sales-type lease receivables aged greater than 90 days had a full contract value of $53 million. As of February 15, 2018, we received payments with a contract value of $28 million related to these receivables.
Total allowance for credit losses as a percentage of finance receivables was 1% at both December 31, 2017 and 2016. Holding all other assumptions constant, a 0.25% change in the allowance rate at December 31, 2017 would have reduced pre-tax income by $4 million.
Accounts receivable are generally due within 30 days after the invoice date. Accounts 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 accounts receivable credit risk is low because of the geographic and industry diversification of our clients and small account balances for most of our clients.
The allowance for doubtful accounts as a percentage of trade receivables was 3% at both December 31, 2017 and 2016. Holding all other assumptions constant, a 0.25% change in the allowance rate at December 31, 2017 would have reduced pre-tax income by $1 million.

Income taxes and valuation allowance
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Our annual tax rate is based on income, statutory tax rates, tax reserve changes and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant judgment is required in determining the annual tax rate and in evaluating our tax positions. The impact of the Tax Cuts and Jobs Act of 2017 consists of preliminary estimates and are subject to change. Our determination of the impact of this legislation is based on currently available information and interpretations, which are subject to further updates. If interpretations change as we learn more, there could be a material impact to our consolidated financial statements.

We regularly assess the likelihood of tax adjustments in each of the tax jurisdictions in which we have operations and account for the related financial statement implications. Tax reserves have been established that we believe to be appropriate given the possibility of tax adjustments. Determining the appropriate level of tax reserves requires us to exercise judgment regarding the uncertain application of tax laws. The amount of reserves is adjusted when information becomes available or when an event occurs indicating a change in the reserve is appropriate. Future changes in tax reserve requirements could have a material impact on our financial condition or results of operations.

31



Significant judgment is also required in determining the amount of deferred tax assets that will ultimately be realized and corresponding deferred tax asset valuation allowance. When estimating the necessary valuation allowance, we consider all available evidence for each jurisdiction including historical operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies. If new information becomes available that would alter our estimate of the amount of deferred tax assets that will ultimately be realized, we adjust the valuation allowance through income tax expense.

Impairment review
Long-lived and finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. The estimated future undiscounted cash flows expected to result from the use and eventual disposition of the assets is compared to the carrying value. We derive the cash flow estimates from our long-term business plans and historical experience. If the sum of the undiscounted cash flows is less than the asset's carrying value, an impairment charge is recorded for an amount by which the carrying value exceeds its fair value. The fair value of the impaired asset is determined using probability weighted expected cash flow estimates, quoted market prices when available and appraisals, as appropriate. Changes in the estimates and assumptions incorporated in our impairment assessment could materially affect the determination of fair value and the associated impairment charge.

Goodwill is tested annually for impairment at the reporting unit level during the fourth quarter or sooner when circumstances indicate an impairment may exist. The impairment test for goodwill determines the fair value of each reporting unit and compares it to the reporting unit's carrying value, including goodwill. If the fair value of a reporting unit is less than its carrying value an impairment loss is recognized for the difference, not to exceed the carrying amount of goodwill.

Significant estimates and assumptions are used in our goodwill impairment review and include the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units and determining the fair value of each reporting unit. The fair value of each reporting unit is determined based on a combination of techniques, including the present value of future cash flows, multiples of competitors and multiples from sales of like businesses. The assumptions used to estimate fair value are based on projections incorporated in our current operating plans as well as other available information. Our operating plans include significant assumptions and estimates associated with sales growth, profitability and cash flows, along with cash flows associated with taxes and capital spending. The determination of fair value also incorporates a risk-adjusted discount rate based on current interest rates and the economic conditions of the reporting unit. We also consider other assumptions that market participants may use. Changes in any of these estimates or assumptions could materially affect the determination of fair value and the associated goodwill impairment charge for each reporting unit. Potential events and circumstances, such as the inability to acquire new clients, downward pressures on pricing and rising interest rates could have an adverse impact on our assumptions and result in non-cash impairment charges in future periods.

During the fourth quarter, we conducted our annual impairment review of all our reporting units.  Based on the results of this review, we concluded that the estimated fair value of each of our reporting units were substantially in excess of their respective carrying values.

Stock-based compensation expense
We recognize compensation cost for stock-based awards based on the estimated fair value of the award, net of estimated forfeitures. Compensation costs for those shares expected to vest are recognized on a straight-line basis over the requisite service period.

The fair value of stock awards is estimated using a Black-Scholes valuation model or Monte Carlo simulation model. These models require assumptions to be made regarding the expected stock price volatility, risk-free interest rate, expected life of the award and dividend yield. The expected stock price volatility is based on historical price changes of our stock. The risk-free interest rate is based on U.S. Treasuries with a term equal to the expected life of the stock award. The expected life of the award and dividend yield are based on historical experience.

We believe that the valuation techniques and the underlying assumptions are appropriate in estimating the fair value of our stock-based awards. If factors change causing our assumptions to change, our stock-based compensation expense could be different in the future. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value. In addition, we are required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, stock-based compensation expense could be significantly different from what we have recorded in the current period.



32


Restructuring
Our restructuring actions require management to utilize certain estimates related to the amount and timing of expenses. If the actual amounts differ from our estimates, the amount and timing of the restructuring charges could be impacted. On a quarterly basis, we update our estimates of future remaining obligations and costs associated with all restructuring actions and compare these updated estimates to our current restructuring reserves, and make adjustments if necessary.

Loss contingencies
In the ordinary course of business, we are routinely defendants in, or party to, a number of pending and threatened legal actions. On a quarterly basis, we review the status of each significant matter and assess the potential financial exposure. If the potential loss from any claim or legal action is considered probable and can be reasonably estimated, we establish a liability for the estimated loss. The assessment of the ultimate outcome of each claim or legal action and the determination of the potential financial exposure requires significant judgment. Estimates of potential liabilities for claims or legal actions are based only on information that is available at that time. As additional information becomes available, we may revise our estimates, and these revisions could have a material impact on our results of operations and financial position.

New Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements for a discussion of new accounting standards.

Legal and Regulatory Matters
See Legal Proceedings in Item 3 for information regarding our legal proceedings and Other Tax Matters in Note 13 to the Consolidated Financial Statements for regulatory matters regarding our tax returns.

Foreign Currency Exchange
During 2017, we derived 23% of our consolidated revenue from operations outside the United States. The functional currency for most of our foreign operations is the local currency. Changes in the value of the U.S. dollar relative to the currencies of countries in which we operate impact our reported assets, liabilities, revenue and expenses. Exchange rate fluctuations can also impact the settlement of intercompany receivables and payables between our subsidiaries in different countries. The translation of foreign currencies to U.S. dollar did not have a material impact on revenues for the year ended December 31, 2017, and decreased revenues by 1.0% and 4.0% for the years ended December 31, 2016 and 2015, respectively.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes and foreign currency fluctuations. Our objective in managing exposure to foreign currency is to reduce the volatility in earnings and cash flows associated with fluctuations in foreign currency exchange rates on transactions denominated in foreign currencies. Accordingly, we enter into forward contracts, which change in value as foreign currency exchange rates change, and are intended to offset the corresponding change in value of the underlying external and intercompany transactions. The principal currencies actively hedged are the British Pound, Euro and Japanese Yen.
At December 31, 2017, 91% of our debt was fixed rate obligations with a weighted average interest rate of 4.43%. Our variable rate debt had a weighted average interest rate at December 31, 2017 of 2.64%. A one-percentage point change in the effective interest rate of our variable rate debt would not have had a material impact on our 2017 pre-tax income.
We employ established policies and procedures governing the use of financial instruments to manage our exposure to such risks and do not enter into foreign currency or interest rate transactions for speculative purposes.
We utilize a "Value-at-Risk" (VaR) model to determine the potential loss in fair value from changes in market conditions. The VaR model utilizes a "variance/co-variance" approach and assumes normal market conditions, a 95% confidence level and a one-day holding period. The model includes all of our public debt and foreign exchange derivative contracts. The model excludes all anticipated transactions, firm commitments and accounts receivables and payables denominated in foreign currencies, which certain of these instruments are intended to hedge. The VaR model is a risk analysis tool and does not purport to represent actual losses in fair value that will be incurred, nor does it consider the potential effect of favorable changes in market factors.
During 2017 and 2016, our maximum potential one-day loss in fair value of our exposure to foreign exchange rates and interest rates, using the variance/co-variance technique described above, was not material.



33


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements and Supplemental Data" in this Form 10-K.


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), that are designed to reasonably assure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to reasonably assure that such information is accumulated and communicated to management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), to allow timely decisions regarding required disclosure.

Any system of controls and procedures, no matter how well designed and operated, can provide only reasonable (and not absolute) assurance of achieving the desired control objectives. Management, under the direction of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as required by Rule 13a-15 or Rule 15d-15 under the Exchange Act. Notwithstanding this caution, the CEO and CFO have reasonable assurance that the disclosure controls and procedures were effective as of December 31, 2017.

Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Management assessed the effectiveness of the internal control over financial reporting as of December 31, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on its assessment, management concluded that, as of December 31, 2017, the internal control over financial reporting was effective based on the criteria issued by COSO in Internal Control - Integrated Framework (2013).

Pursuant to SEC guidance, a recently acquired business may be omitted from the scope of the assessment of the effectiveness of internal control over financial reporting in the year of acquisition. Accordingly, the Newgistics business was excluded from our evaluation of the effectiveness of internal control over financial reporting as of December 31, 2017. Excluded assets and total revenue represented 2% of assets and less than 4% of total revenue as of and for the year ended December 31, 2017.

The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report in this Form 10-K.

Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the three months ended December 31, 2017, that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.

ITEM 9B. OTHER INFORMATION
None.


34

PART III


ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Other than information regarding our executive officers disclosed in Part I of this Annual Report, the information required by this Item is incorporated by reference to our Proxy Statement to be filed in connection with the 2018 Annual Meeting of Stockholders.

Code of Ethics
We have Business Practices Guidelines (BPG) that apply to all our officers and other employees and a Code of Business Conduct and Ethics (the Code) that applies to our Board of Directors. The BPG and the Code are posted on our corporate governance website located at www.pb.com/us/our-company/leadership-and-governance/corporate-governance.html. Amendments to either the BPG or the Code and any waiver from a provision of the BPG or the Code requiring disclosure will be disclosed on our corporate governance website.

Audit Committee - Audit Committee Financial Expert
The information regarding the Audit Committee, its members and the Audit Committee financial experts is incorporated by reference to our Proxy Statement to be filed in connection with the 2018 Annual Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to our Proxy Statement to be filed in connection with the 2018 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

EQUITY COMPENSATION PLAN INFORMATION TABLE

The following table provides information as of December 31, 2017 regarding the number of shares of common stock that may be issued under our equity compensation plans.

Plan Category
 
(a)
Number of securities to be issued upon exercise of outstanding options, warrants and rights
 
(b)
Weighted-average exercise price of outstanding options, warrants and rights
 
(c)
Number of securities remaining available for future issuance under equity compensation plans excluding securities reflected in column (a)
Equity compensation plans approved by security holders
 
10,495,039

 
$21.67
 
15,725,806

Equity compensation plans not approved by security holders
 

 

 

Total
 
10,495,039

 
$21.67
 
15,725,806


Other than information regarding securities authorized for issuance under equity compensation plans, the information required by this Item is incorporated by reference to our Proxy Statement to be filed in connection with the 2018 Annual Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference to our Proxy Statement to be filed in connection with the 2018 Annual Meeting of Stockholders.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to our Proxy Statement to be filed in connection with the 2018 Annual Meeting of Stockholders.

35


PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)
1.    Financial statements - see "Index to Consolidated Financial Statements and Supplemental Data" on page 41 of this Form 10-K.
2.    Financial statement schedules - see "Index to Consolidated Financial Statements and Supplemental Data" on page 41 of this Form 10-K.
3.    Index to Exhibits
Reg. S-K
exhibits
Description
Status or incorporation by reference
3(a)
Restated Certificate of Incorporation of Pitney Bowes Inc.
3(b)
Pitney Bowes Inc. Amended and Restated By-laws (effective May 10, 2013)
4(a)
Form of Indenture between the Company and SunTrust Bank, as Trustee
4(b)
Supplemental Indenture No. 1 dated April 18, 2003 between the Company and SunTrust Bank, as Trustee
4(d)
First Supplemental Indenture, by and among Pitney Bowes Inc., The Bank of New York, and Citibank, N.A., to the Indenture, dated as of February 14, 2005, by and between the Company and Citibank
10(a) *
Retirement Plan for Directors of Pitney Bowes Inc.
10(b.3) *
Pitney Bowes Inc. Directors' Stock Plan (Amended and Restated effective May 12, 2014)
10(c) *
Pitney Bowes Stock Plan (as amended and restated as of January 1, 2002)
10(d) *
Pitney Bowes Inc. 2007 Stock Plan (as amended November 7, 2009)
10(e) *
Pitney Bowes Inc. Key Employees' Incentive Plan (as amended and restated October 1, 2007) (as amended November 7, 2009)
10(f) *
Pitney Bowes Severance Plan (as amended and restated as of January 1, 2008)
10(g) *
Pitney Bowes Senior Executive Severance Policy (as amended and restated as of September 11, 2017)
10(h) *
Pitney Bowes Inc. Deferred Incentive Savings Plan for the Board of Directors, as amended and restated effective January 1, 2009
10(i) *
Pitney Bowes Inc. Deferred Incentive Savings Plan as amended and restated effective January 1, 2009
10(j) *
Pitney Bowes Inc. 1998 U.K. S.A.Y.E. Stock Option Plan
10(k) *
Form of Long Term Incentive Award Agreement
10(l) **
Agreement and Plan of Merger, dated as of September 6, 2017, among Pitney Bowes Inc., Neutron Acquisition Corp., NGS Holdings, Inc. and Littlejohn Fund IV, L.P., solely in its capacity as stockholder representative

36


Reg. S-K
exhibits
Description
Status or incorporation by reference
10(m)*
Pitney Bowes Director Equity Deferral plan dated November 8, 2013 (effective May 12, 2014)
10(o)*
Pitney Bowes Executive Equity Deferral Plan dated November 7, 2014
10(p)*
Pitney Bowes Inc. 2013 Stock Plan
10(q)
Credit Agreement $1,000,000,000, dated as of January 6, 2015, by and among the company, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (the “Revolving Credit Agreement”).
10(r)
First Amendment to the Revolving Credit Agreement, dated as of May 31, 2017, by and among the company, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto.
10(s)
Second Amendment to the Revolving Credit Agreement, dated as of September 12, 2017, by and among the company, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto.
10(t)
Credit Agreement $300,000,000, dated as of January 6, 2015, by and among the company, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (the “$300M Term Loan”).
10(u)
First Amendment to the $300M Term Loan, dated as of September 12, 2017, by and among the company, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto.
10(v)
Credit Agreement $200,000,000, dated as of September 12, 2017, by and among the company, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto.
10(w)
Term Loan Facility $150,000,000, dated as of August 30, 2017, by and between the company and The Bank of Tokyo-Mitsubishi-UFJ, Ltd.
12
Computation of ratio of earnings to fixed charges
21
Subsidiaries of the registrant
23
Consent of experts and counsel
31.1
Certification of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
31.2
Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
101.INS
XBRL Report Instance Document
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
101.CAL
XBRL Taxonomy Calculation Linkbase Document
 
101.DEF
XBRL Taxonomy Definition Linkbase Document
 
101.LAB
XBRL Taxonomy Label Linkbase Document
 
101.PRE
XBRL Taxonomy Presentation Linkbase Document
 
* The Exhibits identified above with an asterisk (*) are management contracts or compensatory plans or arrangements.
** Pursuant to Item 601(b)(2) of Regulation S-K, certain exhibits and schedules have been omitted. The registrant hereby agrees to furnish a supplementary copy of any
omitted attachment to the SEC upon request

The Company has outstanding certain other long-term indebtedness. Such long-term indebtedness does not exceed 10% of the total assets of the Company; therefore, copies of instruments defining the rights of holders of such indebtedness are not included as exhibits. The Company agrees to furnish copies of such instruments to the SEC upon request.
ITEM 16. FORM 10-K SUMMARY

None

37







38


Report of Independent Registered Public Accounting Firm


To the Board of Directors and Stockholders of Pitney Bowes Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Pitney Bowes Inc. and its subsidiaries (the “Company”) as of December 31, 2017 and December 31, 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and December 31, 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Newgistics from its assessment of internal control over financial reporting as of December 31, 2017 because it was acquired by the Company in a purchase business combination during 2017. We have also excluded Newgistics from our audit of internal control over financial reporting. Newgistics is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 2% and 4%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2017.







39





Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ PricewaterhouseCoopers LLC
Stamford, CT
February 22, 2018
We have served as the Company’s auditor since 1934.

40

PITNEY BOWES INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)


 
Years Ended December 31,
 
2017
 
2016
 
2015
Revenue:
 

 
 

 
 
Equipment sales
$
679,803

 
$
675,451

 
$
695,159

Supplies
252,824

 
262,682

 
288,103

Software
352,595

 
348,661

 
386,506

Rentals
386,348

 
412,738

 
441,663

Financing
331,416

 
366,547

 
410,035

Support services
478,536

 
512,820

 
554,764

Business services
1,068,426

 
827,676

 
801,830

Total revenue
3,549,948

 
3,406,575

 
3,578,060

Costs and expenses:
 

 
 

 
 
Cost of equipment sales
340,745

 
331,942

 
331,069

Cost of supplies
82,992

 
81,420

 
88,802

Cost of software
101,969

 
105,841

 
113,580

Cost of rentals
84,270

 
76,040

 
84,188

Financing interest expense
50,665

 
55,241

 
71,791

Cost of support services
288,976

 
295,685

 
322,960

Cost of business services
773,052

 
568,509

 
546,201

Selling, general and administrative
1,237,739

 
1,200,327

 
1,279,961

Research and development
129,767

 
121,306

 
110,156

Restructuring charges and asset impairments, net
59,431

 
63,296

 
25,782

Goodwill impairment

 
171,092

 

Interest expense, net
113,497

 
88,970

 
87,583

Other expense (income), net
3,856

 
536

 
(94,838
)
Total costs and expenses
3,266,959

 
3,160,205

 
2,967,235

Income from continuing operations before income taxes
282,989

 
246,370

 
610,825

Provision for income taxes
21,649

 
131,819

 
189,778

Income from continuing operations
261,340

 
114,551

 
421,047

(Loss) income from discontinued operations, net of tax

 
(2,701
)
 
5,271

Net income
261,340

 
111,850

 
426,318

Less: Preferred stock dividends of subsidiaries attributable to noncontrolling interests

 
19,045

 
18,375

Net income - Pitney Bowes Inc.
$
261,340

 
$
92,805

 
$
407,943

Amounts attributable to common stockholders:
 

 
 

 
 
Net income from continuing operations
$
261,340

 
$
95,506

 
$
402,672

(Loss) income from discontinued operations, net of tax

 
(2,701
)
 
5,271

Net income - Pitney Bowes Inc.
$
261,340

 
$
92,805

 
$
407,943

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

 
 

 
 
Continuing operations
$
1.40

 
$
0.51

 
$
2.01

Discontinued operations

 
(0.01
)
 
0.03

Net income - Pitney Bowes Inc.
$
1.40

 
$
0.49

 
$
2.04

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

 
 

 
 
Continuing operations
$
1.39

 
$
0.51

 
$
2.00

Discontinued operations

 
(0.01
)
 
0.03

Net income - Pitney Bowes Inc.
$
1.39

 
$
0.49

 
$
2.03

 
 
 
 
 
 
Dividends declared per share of common stock
$
0.75

 
$
0.75

 
$
0.75

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



See Notes to Consolidated Financial Statements

41

PITNEY BOWES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)



 
Years Ended December 31,
 
2017
 
2016
 
2015
 
 
 
 
 
 
Net income
$
261,340

 
$
111,850

 
$
426,318

Less: Preferred stock dividends attributable to noncontrolling interests

 
19,045

 
18,375

Net income - Pitney Bowes Inc.
261,340

 
92,805

 
407,943

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Foreign currency translations
106,391

 
(4,464
)
 
(88,137
)
Net unrealized gain on cash flow hedges, net of tax of $678, $1,513, and $484, respectively
1,079

 
2,427

 
777

Net unrealized gain (loss) on available for sale securities, net of tax of $944, $(244) and $(1,427), respectively
1,477

 
(416
)
 
(2,430
)
Adjustments to pension and postretirement plans, net of tax of $3,089, $(17,550) and $13,844, respectively
12,185

 
(73,141
)
 
19,146

Amortization of pension and postretirement costs, net of tax of $13,936, $14,430, and $15,966, respectively
26,828

 
24,096

 
28,165

Other comprehensive income (loss)
147,960

 
(51,498
)
 
(42,479
)
Comprehensive income - Pitney Bowes Inc.
$
409,300

 
$
41,307

 
$
365,464



































See Notes to Consolidated Financial Statements

42

PITNEY BOWES INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

 
December 31, 2017
 
December 31, 2016
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
1,009,021

 
$
764,522

Short-term investments
48,988

 
38,448

Accounts receivable (net of allowance of $15,985 and $14,372 respectively)
524,424

 
455,527

Short-term finance receivables (net of allowance of $12,187 and $13,323, respectively)
828,003

 
893,950

Inventories
89,679

 
92,726

Current income taxes
58,439

 
11,373

Other current assets and prepayments
77,954

 
68,637

Total current assets
2,636,508

 
2,325,183

Property, plant and equipment, net
379,044

 
314,603

Rental property and equipment, net
185,741

 
188,054

Long-term finance receivables (net of allowance of $6,446 and $7,177, respectively)
652,087

 
673,207

Goodwill
1,952,444

 
1,571,335

Intangible assets, net
272,186

 
165,172

Noncurrent income taxes
59,909

 
74,806

Other assets
540,796

 
524,773

Total assets
$
6,678,715

 
$
5,837,133

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
1,486,741

 
$
1,378,822

Current income taxes
8,823

 
34,434

Current portion of long-term obligations
271,057

 
614,485

Advance billings
288,372

 
299,878

Total current liabilities
2,054,993

 
2,327,619

Deferred taxes on income
234,643

 
204,289

Tax uncertainties and other income tax liabilities
116,551

 
61,276

Long-term debt
3,559,278

 
2,750,405

Other noncurrent liabilities
524,689

 
597,204

Total liabilities
6,490,154

 
5,940,793

 
 
 
 
Commitments and contingencies (See Note 14)


 


 
 
 
 
Stockholders' equity (deficit):
 
 
 
Cumulative preferred stock, $50 par value, 4% convertible
1

 
1

Cumulative preference stock, no par value, $2.12 convertible
441

 
483

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

 
323,338

Additional paid-in capital
138,367

 
148,125

Retained earnings
5,229,584

 
5,107,734

Accumulated other comprehensive loss
(792,173
)
 
(940,133
)
Treasury stock, at cost (136,734,174 and 137,669,194 shares, respectively)
(4,710,997
)
 
(4,743,208
)
Total Pitney Bowes Inc. stockholders’ equity (deficit)
188,561

 
(103,660
)
Total liabilities and stockholders’ equity (deficit)
$
6,678,715

 
$
5,837,133





See Notes to Consolidated Financial Statements

43

PITNEY BOWES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)


 
Years Ended December 31,
 
2017
 
2016
 
2015
Cash flows from operating activities:
 

 
 

 
 
Net income
$
261,340

 
$
111,850

 
$
426,318

Restructuring payments
(40,804
)
 
(64,930
)
 
(62,086
)
Special pension plan contribution

 
(36,731
)
 

Net tax payments from other investments

 

 
(20,602
)
Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

 
 
Restructuring charges and asset impairments
59,431

 
63,296

 
25,782

Goodwill impairment

 
171,092

 

Depreciation and amortization
182,336

 
178,486

 
173,312

Loss (gain) on sale of businesses

 
5,786

 
(105,826
)
Gain on sale of technology
(6,085
)
 

 

Gain on sale of leveraged lease assets, net of tax

 

 
(2,152
)
Gain on debt forgiveness

 
(10,000
)
 

Stock-based compensation
24,389

 
14,882

 
21,049

Deferred tax (benefit) provision
(23,882
)
 
3,940

 
40,184

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