PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Six Months Ended June 30, 2022 |
| Global Ecommerce | Presort Services | SendTech Solutions | Revenue from products and services | Revenue from leasing transactions and financing | Total consolidated revenue |
| Major products/service lines | | | | | | |
| Business services | $ | 812,297 | | $ | 299,478 | | $ | 37,087 | | $ | 1,148,862 | | $ | — | | $ | 1,148,862 | |
| Support services | — | | — | | 217,977 | | 217,977 | | — | | 217,977 | |
| Financing | — | | — | | — | | — | | 139,327 | | 139,327 | |
| Equipment sales | — | | — | | 42,699 | | 42,699 | | 136,583 | | 179,282 | |
| Supplies | — | | — | | 79,306 | | 79,306 | | — | | 79,306 | |
| Rentals | — | | — | | — | | — | | 33,683 | | 33,683 | |
| Subtotal | 812,297 | | 299,478 | | 377,069 | | 1,488,844 | | $ | 309,593 | | $ | 1,798,437 | |
| | | | | | |
| | | | | | |
| Revenue from leasing transactions and financing | — | | — | | 309,593 | | 309,593 | | | |
| | | | | | |
| | | | | | |
| Total revenue | $ | 812,297 | | $ | 299,478 | | $ | 686,662 | | $ | 1,798,437 | | | |
| | | | | | |
| Timing of revenue recognition from products and services | | | | |
| Products/services transferred at a point in time | $ | — | | $ | — | | $ | 154,526 | | $ | 154,526 | | | |
| Products/services transferred over time | 812,297 | | 299,478 | | 222,543 | | 1,334,318 | | | |
| Total | $ | 812,297 | | $ | 299,478 | | $ | 377,069 | | $ | 1,488,844 | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Six Months Ended June 30, 2021 |
| Global Ecommerce | Presort Services | SendTech Solutions | Revenue from products and services | Revenue from leasing transactions and financing | Total consolidated revenue |
| Major products/service lines | | | | | | |
| Business services | $ | 831,515 | | $ | 277,745 | | $ | 28,216 | | $ | 1,137,476 | | $ | — | | $ | 1,137,476 | |
| Support services | — | | — | | 233,853 | | 233,853 | | — | | 233,853 | |
| Financing | — | | — | | — | | — | | 151,265 | | 151,265 | |
| Equipment sales | — | | — | | 41,511 | | 41,511 | | 131,559 | | 173,070 | |
| Supplies | — | | — | | 80,879 | | 80,879 | | — | | 80,879 | |
| Rentals | — | | — | | — | | — | | 37,857 | | 37,857 | |
| Subtotal | 831,515 | | 277,745 | | 384,459 | | 1,493,719 | | $ | 320,681 | | $ | 1,814,400 | |
| | | | | | |
| | | | | | |
| Revenue from leasing transactions and financing | — | | — | | 320,681 | | 320,681 | | | |
| | | | | | |
| | | | | | |
| Total revenue | $ | 831,515 | | $ | 277,745 | | $ | 705,140 | | $ | 1,814,400 | | | |
| | | | | | |
| Timing of revenue recognition from products and services | | | | |
| Products/services transferred at a point in time | $ | — | | $ | — | | $ | 154,811 | | $ | 154,811 | | | |
| Products/services transferred over time | 831,515 | | 277,745 | | 229,648 | | 1,338,908 | | | |
| Total | $ | 831,515 | | $ | 277,745 | | $ | 384,459 | | $ | 1,493,719 | | | |
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
Our performance obligations for revenue from products and services are as follows:
Business services includes fulfillment, delivery and return services, cross-border solutions, mail processing services and shipping subscription solutions. Revenue for fulfillment, delivery and return services and cross-border solutions and mail processing services is recognized over time using an output method based on the number of parcels or mail pieces either processed or delivered, depending on the service type, since that measure best depicts the value of goods and services transferred to the client over the contract period. Contract terms for these services initially range from one to five years and contain annual renewal options. Revenue for shipping subscription solutions revenue is recognized ratably over the contract period as the client obtains equal benefit from these services through the period.
Support services includes providing maintenance, professional and subscription services for our equipment and digital mailing and shipping technology solutions. Contract terms range from one to five years, depending on the term of the lease contract for the related equipment. Revenue for maintenance and subscription services is recognized ratably over the contract period and revenue for professional services is recognized when services are provided.
Equipment sales generally includes the sale of mailing and shipping equipment, excluding sales-type leases. We recognize revenue upon delivery for self-install equipment and upon acceptance or installation for other equipment. We provide a warranty that the equipment is free of defects and meets stated specifications. The warranty is not considered a separate performance obligation.
Supplies revenue includes revenue from supplies for our mailing equipment and is recognized upon delivery.
Revenue from leasing transactions and financing includes revenue from sales-type and operating leases, finance income, late fees and investment income, gains and losses at the Bank.
Advance Billings from Contracts with Customers
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance sheet location | | June 30, 2022 | | December 31, 2021 | | Increase/ (decrease) |
| Advance billings, current | Advance billings | | $ | 88,504 | | | $ | 92,926 | | | $ | (4,422) | |
| Advance billings, noncurrent | Other noncurrent liabilities | | $ | 996 | | | $ | 1,109 | | | $ | (113) | |
Advance billings are recorded when cash payments are due in advance of our performance. Revenue is recognized ratably over the contract term. Items in advance billings primarily relate to support services on mailing equipment. Revenue recognized during the period includes $73 million of advance billings at the beginning of the period. Advance billings, current reported on the condensed consolidated balance sheets at June 30, 2022 and December 31, 2021 also includes $8 million and $6 million, respectively, from leasing transactions.
Future Performance Obligations
Future performance obligations include revenue streams bundled with our leasing contracts, primarily maintenance and subscription services. The transaction prices allocated to future performance obligations will be recognized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Remainder of 2022 | | 2023 | | 2024-2027 | | Total |
| SendTech Solutions | | $ | 139,124 | | | $ | 229,620 | | | $ | 308,281 | | | $ | 677,025 | |
The amounts above do not include revenue for performance obligations under contracts with terms less than 12 months or revenue for performance obligations where revenue is recognized based on the amount billable to the customer.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
3. Segment Information
Our reportable segments are Global Ecommerce, Presort Services and SendTech Solutions. The principal products and services of each reportable segment are as follows:
Global Ecommerce: Includes the revenue and related expenses from business to consumer logistics services for domestic and cross-border delivery, returns and fulfillment.
Presort Services: Includes revenue and related expenses from sortation services to qualify large volumes of First Class Mail, Marketing Mail, Marketing Mail Flats and Bound Printed Matter for postal worksharing discounts.
SendTech Solutions: Includes the revenue and related expenses from physical and digital mailing and shipping technology solutions, financing, services, supplies and other applications to help simplify and save on the sending, tracking and receiving of letters, parcels and flats.
Management measures segment profitability and performance using segment earnings before interest and taxes (EBIT). Segment EBIT is calculated by deducting from segment revenue the related costs and expenses attributable to the segment. Segment EBIT excludes interest, taxes, unallocated corporate expenses, restructuring charges, asset and goodwill impairment charges and other items not allocated to a business segment. Costs related to shared assets are allocated to the relevant segments. Management believes that segment EBIT provides investors a useful measure of operating performance and underlying trends of the business. Segment EBIT may not be indicative of our overall consolidated performance and therefore, should be read in conjunction with our consolidated results of operations. The following tables provide information about our reportable segments and a reconciliation of segment EBIT to net income (loss).
| | | | | | | | | | | | | | | | | | | | | | | |
| Revenue |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Global Ecommerce | $ | 393,770 | | | $ | 418,429 | | | $ | 812,297 | | | $ | 831,515 | |
| Presort Services | 138,934 | | | 134,619 | | | 299,478 | | | 277,745 | |
| SendTech Solutions | 338,791 | | | 346,155 | | | 686,662 | | | 705,140 | |
| Total revenue | $ | 871,495 | | | $ | 899,203 | | | $ | 1,798,437 | | | $ | 1,814,400 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| EBIT |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Global Ecommerce | $ | (28,825) | | | $ | (10,831) | | | $ | (42,521) | | | $ | (37,207) | |
| Presort Services | 12,851 | | | 16,134 | | | 32,483 | | | 35,185 | |
| SendTech Solutions | 95,565 | | | 107,121 | | | 200,140 | | | 221,591 | |
| Total segment EBIT | 79,591 | | | 112,424 | | | 190,102 | | | 219,569 | |
| Reconciliation of Segment EBIT to net income (loss): | | | | | | | |
| Unallocated corporate expenses | (40,761) | | | (56,316) | | | (98,595) | | | (113,781) | |
| Restructuring charges | (4,224) | | | (4,844) | | | (8,408) | | | (7,733) | |
| Interest expense, net | (33,540) | | | (36,119) | | | (67,266) | | | (73,163) | |
| | | | | | | |
| | | | | | | |
| Loss on debt redemption/refinancing | — | | | (989) | | | (4,993) | | | (52,383) | |
| Gain on sale of business | — | | | 10,201 | | | 2,522 | | | 10,201 | |
| Gain on sale of assets | — | | | 1,434 | | | 14,372 | | | 1,434 | |
| Transaction costs | (3,756) | | | — | | | (5,400) | | | — | |
| Benefit (provision) for income taxes | 7,026 | | | (4,915) | | | 2,823 | | | 9,077 | |
| Income (loss) from continuing operations | 4,336 | | | 20,876 | | | 25,157 | | | (6,779) | |
| Loss from discontinued operations, net of tax | — | | | (1,020) | | | — | | | (4,906) | |
| Net income (loss) | $ | 4,336 | | | $ | 19,856 | | | $ | 25,157 | | | $ | (11,685) | |
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
Effective for 2022, we refined our methodology for allocating transportation costs between Global Ecommerce and Presort Services, resulting in an increase to Global Ecommerce EBIT and a corresponding decrease to Presort Services EBIT of approximately $3 million and $7 million for the three and six months ended June 30, 2022, respectively.
4. Earnings per Share (EPS)
The calculation of basic and diluted earnings per share is presented below. The sum of the earnings per share amounts may not equal the totals due to rounding.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Numerator: | | | | | | | |
| Income (loss) from continuing operations | $ | 4,336 | | | $ | 20,876 | | | $ | 25,157 | | | $ | (6,779) | |
| Loss from discontinued operations, net of tax | — | | | (1,020) | | | — | | | (4,906) | |
| | | | | | | |
| | | | | | | |
| Net income (loss) | $ | 4,336 | | | $ | 19,856 | | | $ | 25,157 | | | $ | (11,685) | |
| Denominator: | | | | | | | |
| Weighted-average shares used in basic EPS | 173,490 | | | 173,970 | | | 173,859 | | | 173,367 | |
Dilutive effect of common stock equivalents (1) | 3,479 | | | 5,009 | | | 3,814 | | | — | |
| Weighted-average shares used in diluted EPS | 176,969 | | | 178,979 | | | 177,673 | | | 173,367 | |
| Basic earnings (loss) per share: | | | | | | | |
| Continuing operations | $ | 0.02 | | | $ | 0.12 | | | $ | 0.14 | | | $ | (0.04) | |
| Discontinued operations | — | | | (0.01) | | | — | | | (0.03) | |
| Net income (loss) | $ | 0.02 | | | $ | 0.11 | | | $ | 0.14 | | | $ | (0.07) | |
| Diluted earnings (loss) per share: | | | | | | | |
| Continuing operations | $ | 0.02 | | | $ | 0.12 | | | $ | 0.14 | | | $ | (0.04) | |
| Discontinued operations | — | | | (0.01) | | | — | | | (0.03) | |
| Net income (loss) | $ | 0.02 | | | $ | 0.11 | | | $ | 0.14 | | | $ | (0.07) | |
| | | | | | | |
Common stock equivalents excluded from calculation of diluted earnings per share because their impact would be anti-dilutive: | 9,602 | | | 6,451 | | | 9,602 | | | 6,451 | |
(1) Due to the net loss for the six months ended June 30, 2021, common stock equivalents of 5,382 were also excluded from the calculation of diluted earnings per share.
5. Inventories
Inventories are stated at the lower of cost, determined on the first-in, first-out (FIFO) basis, or net realizable value. Inventories consisted of the following:
| | | | | | | | | | | |
| June 30,
2022 | | December 31,
2021 |
| Raw materials | $ | 22,940 | | | $ | 22,352 | |
| Supplies and service parts | 30,049 | | | 26,076 | |
| Finished products | 29,808 | | | 30,160 | |
| | | |
| | | |
| Total inventory, net | $ | 82,797 | | | $ | 78,588 | |
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
6. Finance Assets and Lessor Operating Leases
Finance Assets
Finance receivables are comprised of sales-type lease receivables, secured loans and unsecured loans. Sales-type leases and secured loans are from financing options provided to clients for Pitney Bowes equipment or leasing of other manufacturers' equipment and are generally due in installments over periods ranging from three to five years. Unsecured loans comprise revolving credit lines offered to our clients for postage, supplies and working capital purposes. These revolving credit lines are generally due monthly; however, clients may rollover outstanding balances. Interest is recognized on finance receivables using the effective interest method. Annual fees are recognized ratably over the annual period covered and client acquisition costs are expensed as incurred. All finance receivables are in our SendTech Solutions segment and we segregate finance receivables into a North America portfolio and an International portfolio.
Finance receivables consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| North America | | International | | Total | | North America | | International | | Total |
| Sales-type lease receivables | | | | | | | | | | | |
| Gross finance receivables | $ | 956,365 | | | $ | 157,740 | | | $ | 1,114,105 | | | $ | 958,440 | | | $ | 187,831 | | | $ | 1,146,271 | |
| Unguaranteed residual values | 38,123 | | | 9,451 | | | 47,574 | | | 37,896 | | | 10,717 | | | 48,613 | |
| Unearned income | (237,143) | | | (48,460) | | | (285,603) | | | (246,381) | | | (56,643) | | | (303,024) | |
| Allowance for credit losses | (18,438) | | | (2,522) | | | (20,960) | | | (19,546) | | | (3,246) | | | (22,792) | |
| Net investment in sales-type lease receivables | 738,907 | | | 116,209 | | | 855,116 | | | 730,409 | | | 138,659 | | | 869,068 | |
| Loan receivables | | | | | | | | | | | |
| Loan receivables | 278,472 | | | 20,609 | | | 299,081 | | | 262,310 | | | 20,155 | | | 282,465 | |
| Allowance for credit losses | (3,528) | | | (170) | | | (3,698) | | | (3,259) | | | (167) | | | (3,426) | |
| Net investment in loan receivables | 274,944 | | | 20,439 | | | 295,383 | | | 259,051 | | | 19,988 | | | 279,039 | |
| Net investment in finance receivables | $ | 1,013,851 | | | $ | 136,648 | | | $ | 1,150,499 | | | $ | 989,460 | | | $ | 158,647 | | | $ | 1,148,107 | |
Maturities of gross finance receivables at June 30, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales-type Lease Receivables | | Loan Receivables |
| North America | | International | | Total | | North America | | International | | Total |
| Remainder 2022 | $ | 195,735 | | | $ | 46,071 | | | $ | 241,806 | | | $ | 222,590 | | | $ | 20,609 | | | $ | 243,199 | |
| 2023 | 324,790 | | | 49,092 | | | 373,882 | | | 21,785 | | | — | | | 21,785 | |
| 2024 | 224,487 | | | 32,113 | | | 256,600 | | | 16,518 | | | — | | | 16,518 | |
| 2025 | 134,494 | | | 18,892 | | | 153,386 | | | 11,345 | | | — | | | 11,345 | |
| 2026 | 65,143 | | | 8,573 | | | 73,716 | | | 4,898 | | | — | | | 4,898 | |
| Thereafter | 11,716 | | | 2,999 | | | 14,715 | | | 1,336 | | | — | | | 1,336 | |
| Total | $ | 956,365 | | | $ | 157,740 | | | $ | 1,114,105 | | | $ | 278,472 | | | $ | 20,609 | | | $ | 299,081 | |
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
Aging of Receivables
The aging of gross finance receivables was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| Sales-type Lease Receivables | | Loan Receivables | | |
| North
America | | International | | North
America | | International | | Total |
| Past due amounts 0 - 90 days | $ | 949,440 | | | $ | 155,312 | | | $ | 273,985 | | | $ | 20,556 | | | $ | 1,399,293 | |
| Past due amounts > 90 days | 6,925 | | | 2,428 | | | 4,487 | | | 53 | | | 13,893 | |
| Total | $ | 956,365 | | | $ | 157,740 | | | $ | 278,472 | | | $ | 20,609 | | | $ | 1,413,186 | |
| Past due amounts > 90 days | | | | | | | | | |
| Still accruing interest | $ | 1,898 | | | $ | 659 | | | $ | — | | | $ | — | | | $ | 2,557 | |
| Not accruing interest | 5,027 | | | 1,769 | | | 4,487 | | | 53 | | | 11,336 | |
| Total | $ | 6,925 | | | $ | 2,428 | | | $ | 4,487 | | | $ | 53 | | | $ | 13,893 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Sales-type Lease Receivables | | Loan Receivables | | |
| North
America | | International | | North
America | | International | | Total |
| Past due amounts 0 - 90 days | $ | 950,138 | | | $ | 185,057 | | | $ | 258,514 | | | $ | 20,018 | | | $ | 1,413,727 | |
| Past due amounts > 90 days | 8,302 | | | 2,774 | | | 3,796 | | | 137 | | | 15,009 | |
| Total | $ | 958,440 | | | $ | 187,831 | | | $ | 262,310 | | | $ | 20,155 | | | $ | 1,428,736 | |
| Past due amounts > 90 days | | | | | | | | | |
| Still accruing interest | $ | 4,964 | | | $ | 682 | | | $ | — | | | $ | — | | | $ | 5,646 | |
| Not accruing interest | 3,338 | | | 2,092 | | | 3,796 | | | 137 | | | 9,363 | |
| Total | $ | 8,302 | | | $ | 2,774 | | | $ | 3,796 | | | $ | 137 | | | $ | 15,009 | |
Allowance for Credit Losses
We provide an allowance for credit losses based on historical loss experience, the nature of our portfolios, adverse situations that may affect a client's ability to pay and current economic conditions and outlook based on reasonable and supportable forecasts. We continually evaluate the adequacy of the allowance for credit losses and adjust as necessary. The assumptions used in determining an estimate of credit losses are inherently subjective and actual results may differ significantly from estimated reserves.
We established credit approval limits based on the credit quality of the client and the type of equipment financed. We cease recognition of financing revenue for lease receivables greater than 120 days past due and for unsecured loan receivables greater than 90 days past due. Revenue recognition is resumed when the client's payments reduce the account aging to less than 60 days past due. Finance receivables 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 credit risk is low because of the geographic and industry diversification of our clients and small account balances for most of our clients.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
Activity in the allowance for credit losses for finance receivables was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales-type Lease Receivables | | Loan Receivables | | |
| North
America | | International | | North
America | | International | | Total |
| Balance at January 1, 2022 | $ | 19,546 | | | $ | 3,246 | | | $ | 3,259 | | | $ | 167 | | | $ | 26,218 | |
| | | | | | | | | |
| Amounts charged to expense | 145 | | | 73 | | | 1,408 | | | 186 | | | 1,812 | |
| Write-offs | (2,806) | | | (433) | | | (2,491) | | | (152) | | | (5,882) | |
| Recoveries | 1,572 | | | — | | | 1,354 | | | — | | | 2,926 | |
| Other | (19) | | | (364) | | | (2) | | | (31) | | | (416) | |
| Balance at June 30, 2022 | $ | 18,438 | | | $ | 2,522 | | | $ | 3,528 | | | $ | 170 | | | $ | 24,658 | |
| | | | | | | | | |
| Sales-type Lease Receivables | | Loan Receivables | | |
| North
America | | International | | North
America | | International | | Total |
| Balance at January 1, 2021 | $ | 22,917 | | | $ | 6,006 | | | $ | 6,484 | | | $ | 462 | | | $ | 35,869 | |
| | | | | | | | | |
| Amounts charged to expense | 1,127 | | | (81) | | | 1,477 | | | (23) | | | 2,500 | |
| Write-offs | (2,226) | | | (631) | | | (3,392) | | | (29) | | | (6,278) | |
| Recoveries | 1,500 | | | 146 | | | 1,862 | | | 1 | | | 3,509 | |
| Other | 34 | | | (78) | | | 5 | | | 5 | | | (34) | |
| Balance at June 30, 2021 | $ | 23,352 | | | $ | 5,362 | | | $ | 6,436 | | | $ | 416 | | | $ | 35,566 | |
Credit Quality
The extension of credit and management of credit lines to new and existing clients uses a combination of a client's credit score, where available, a detailed manual review of their financial condition and payment history, or an automated process. Once credit is granted, the payment performance of the client is managed through automated collections processes and is supplemented with direct follow up should an account become delinquent. We have robust automated collections and extensive portfolio management processes to ensure that our global strategy is executed, collection resources are allocated and enhanced tools and processes are implemented as needed.
Over 85% of our finance receivables are within the North American portfolio. We use a third party to score the majority of this portfolio on a quarterly basis using a proprietary commercial credit score. The relative scores are determined based on a number of factors, including financial information, payment history, company type and ownership structure. We stratify the third party's credit scores of our clients into low, medium and high-risk accounts. Due to timing and other issues, our entire portfolio may not be scored at period end. We report these amounts as "Not Scored"; however, absence of a score is not indicative of the credit quality of the account. The third-party credit score is used to predict the payment behaviors of our clients and the probability that an account will become greater than 90 days past due during the subsequent 12-month period.
•Low risk accounts are companies with very good credit scores and a predicted delinquency rate of less than 5%.
•Medium risk accounts are companies with average to good credit scores and a predicted delinquency rate between 5% and 10%.
•High risk accounts are companies with poor credit scores, are delinquent or are at risk of becoming delinquent. The predicted delinquency rate would be greater than 10%.
We do not use a third party to score our International portfolio because the cost to do so is prohibitive as there is no single credit score model that covers all countries. Accordingly, the entire International portfolio is reported in the Not Scored category. This portfolio comprises less than 15% of total finance receivables. Most of the International credit applications are small dollar applications (i.e. below $50 thousand) and are subjected to an automated review process. Larger credit applications are manually reviewed, which includes obtaining client financial information, credit reports and other available financial information.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
The table below shows gross finance receivables by relative risk class and year of origination based on the relative scores of the accounts within each class as of June 30, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| Sales Type Lease Receivables | | Loan Receivables | | Total |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | |
| Low | $ | 149,028 | | | $ | 239,044 | | | $ | 168,984 | | | $ | 131,081 | | | $ | 64,344 | | | $ | 25,612 | | | $ | 201,467 | | | $ | 979,560 | |
| Medium | 24,967 | | | 40,808 | | | 30,332 | | | 24,239 | | | 11,813 | | | 5,657 | | | 62,402 | | | 200,218 | |
| High | 3,096 | | | 4,588 | | | 4,415 | | | 3,068 | | | 1,520 | | | 906 | | | 4,974 | | | 22,567 | |
| Not Scored | 34,763 | | | 64,173 | | | 38,386 | | | 28,750 | | | 13,150 | | | 1,381 | | | 30,238 | | | 210,841 | |
| Total | $ | 211,854 | | | $ | 348,613 | | | $ | 242,117 | | | $ | 187,138 | | | $ | 90,827 | | | $ | 33,556 | | | $ | 299,081 | | | $ | 1,413,186 | |
| | | | | | | | | | | | | | | |
| December 31, 2021 |
| Sales Type Lease Receivables | | Loan Receivables | | Total |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | |
| Low | $ | 274,191 | | | $ | 195,421 | | | $ | 162,479 | | | $ | 95,661 | | | $ | 33,698 | | | $ | 14,862 | | | $ | 192,161 | | | $ | 968,473 | |
| Medium | 43,403 | | | 34,955 | | | 31,038 | | | 17,895 | | | 6,981 | | | 3,619 | | | 55,708 | | | 193,599 | |
| High | 5,474 | | | 5,017 | | | 4,044 | | | 2,708 | | | 849 | | | 889 | | | 4,822 | | | 23,803 | |
| Not Scored | 45,644 | | | 54,097 | | | 47,973 | | | 33,998 | | | 19,161 | | | 12,214 | | | 29,774 | | | 242,861 | |
| Total | $ | 368,712 | | | $ | 289,490 | | | $ | 245,534 | | | $ | 150,262 | | | $ | 60,689 | | | $ | 31,584 | | | $ | 282,465 | | | $ | 1,428,736 | |
Lease Income
Lease income from sales-type leases, excluding variable lease payments, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Profit recognized at commencement | $ | 34,337 | | | $ | 32,057 | | | $ | 69,378 | | | $ | 64,365 | |
| Interest income | 41,021 | | | 47,770 | | | 83,304 | | | 96,266 | |
| Total lease income from sales-type leases | $ | 75,358 | | | $ | 79,827 | | | $ | 152,682 | | | $ | 160,631 | |
Lessor Operating Leases
We also lease mailing equipment under operating leases with terms of one to five years. Maturities of these operating leases are as follows:
| | | | | |
| Remainder 2022 | $ | 12,021 | |
| 2023 | 17,793 | |
| 2024 | 16,087 | |
| 2025 | 7,914 | |
| 2026 | 2,177 | |
| Thereafter | 453 | |
| Total | $ | 56,445 | |
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
7. Divestiture, Intangible Assets and Goodwill
Divestiture
On June 20, 2022, we entered into a definitive agreement to sell our Borderfree cross-border ecommerce solutions business (Borderfree) for $100 million. This transaction closed on July 1, 2022.
As of June 30, 2022, the assets and liabilities of Borderfree were classified as assets held for sale and liabilities held for sale. The major categories of assets and liabilities of Borderfree included in assets held for sale and liabilities held for sale is shown in the table below.
| | | | | | | |
| June 30, 2022 | | |
| Cash and cash equivalents | $ | 5,732 | | | |
| Accounts and other receivables, net | 5,021 | | | |
| | | |
| | | |
| | | |
| Property, plant and equipment, net | 4,325 | | | |
| | | |
| Goodwill | 55,878 | | | |
| Intangible assets | 34,214 | | | |
| | | |
| | | |
| All other assets | 3,507 | | | |
| Assets held for sale | $ | 108,677 | | | |
| | | |
| Accounts payable and accrued liabilities | $ | 10,338 | | | |
| | | |
| | | |
| | | |
| Deferred taxes on income | 5,971 | | | |
| All other liabilities | 2,391 | | | |
| Liabilities held for sale | $ | 18,700 | | | |
Intangible Assets
Intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| Customer relationships | $ | 151,953 | | | $ | (72,705) | | | $ | 79,248 | | | $ | 268,187 | | | $ | (141,492) | | | $ | 126,695 | |
| Software & technology | 21,894 | | | (18,372) | | | 3,522 | | | 21,981 | | | (16,234) | | | 5,747 | |
| | | | | | | | | | | |
| Total intangible assets | $ | 173,847 | | | $ | (91,077) | | | $ | 82,770 | | | $ | 290,168 | | | $ | (157,726) | | | $ | 132,442 | |
Amortization expense for both the three months ended June 30, 2022 and 2021 was $8 million and amortization expense for both the six months ended June 30, 2022 and 2021 was $15 million.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
Future amortization expense as of June 30, 2022 is shown in the table below. Actual amortization expense may differ due to, among other things, fluctuations in foreign currency exchange rates, acquisitions, divestitures and impairment charges.
| | | | | |
| Remainder 2022 | $ | 8,614 | |
| 2023 | 15,327 | |
| 2024 | 15,327 | |
| 2025 | 15,123 | |
| 2026 | 14,134 | |
| Thereafter | 14,245 | |
| Total | $ | 82,770 | |
Goodwill
Goodwill is tested annually for impairment at the reporting unit level during the fourth quarter or sooner if 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 exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired and no further testing is required. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, the goodwill impairment loss is calculated as the difference between these amounts, limited to the amount of goodwill allocated to the reporting unit.
We determined that the agreement to sell Borderfree was a triggering event that indicated an impairment may exist. Accordingly, we performed a goodwill impairment test of the Global Ecommerce reporting unit to assess the recoverability of the carrying value of remaining goodwill. We engaged a third-party to assist in the determination of the fair value of the reporting unit.
The results of our test indicated that no impairment existed; however, the estimated fair value of the Global Ecommerce reporting unit exceeded its carrying value by less than 20%. The determination of fair value relied on internal projections developed using numerous estimates and assumptions that are inherently subject to significant uncertainties. These estimates and assumptions included revenue growth, profitability, cash flows, capital spending and other available information. The determination of fair value also incorporated a risk-adjusted discount rate, terminal growth rates and other assumptions that market participants may use. Changes in any of these estimates or assumptions could materially affect the determination of fair value and potentially result in an impairment charge in the future. These estimates and assumptions are considered Level 3 inputs under the fair value hierarchy.
Changes in the carrying value of goodwill by reporting segment are shown in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2021 | | | | Disposition | | Currency impact | | June 30,
2022 |
| Global Ecommerce | | | | | $ | 395,062 | | | | | $ | (55,878) | | | $ | — | | | $ | 339,184 | |
| Presort Services | | | | | 220,992 | | | | | — | | | — | | | 220,992 | |
| SendTech Solutions | | | | | 519,049 | | | | | — | | | (18,773) | | | 500,276 | |
| Total goodwill | | | | | $ | 1,135,103 | | | | | $ | (55,878) | | | $ | (18,773) | | | $ | 1,060,452 | |
Global Ecommerce goodwill is net of accumulated goodwill impairment charges of $198 million at June 30, 2022 and December 31, 2021.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
8. Fair Value Measurements and Derivative Instruments
We measure certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. An entity is required to classify certain assets and liabilities measured at fair value based on the following fair value hierarchy that prioritizes the inputs used to measure fair value:
Level 1 – Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity, may be derived from internally developed methodologies based on management’s best estimate of fair value and that are significant to the fair value of the asset or liability.
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect its placement within the fair value hierarchy. The following tables show, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis.
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
| Investment securities | | | | | | | |
| Money market funds | $ | 84,636 | | | $ | 164,238 | | | $ | — | | | $ | 248,874 | |
| Equity securities | — | | | 15,167 | | | — | | | 15,167 | |
| Commingled fixed income securities | 1,569 | | | 13,445 | | | — | | | 15,014 | |
Government and related securities | 9,018 | | | 19,870 | | | — | | | 28,888 | |
| Corporate debt securities | — | | | 54,683 | | | — | | | 54,683 | |
| Mortgage-backed / asset-backed securities | — | | | 140,114 | | | — | | | 140,114 | |
| Derivatives | | | | | | | |
| Interest rate swap | — | | | 12,030 | | | — | | | 12,030 | |
| Foreign exchange contracts | — | | | 675 | | | — | | | 675 | |
| Total assets | $ | 95,223 | | | $ | 420,222 | | | $ | — | | | $ | 515,445 | |
| Liabilities: | | | | | | | |
| Derivatives | | | | | | | |
| | | | | | | |
| Foreign exchange contracts | $ | — | | | $ | (2,505) | | | $ | — | | | $ | (2,505) | |
| Total liabilities | $ | — | | | $ | (2,505) | | | $ | — | | | $ | (2,505) | |
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
| Investment securities | | | | | | | |
| Money market funds | $ | 88,705 | | | $ | 338,043 | | | $ | — | | | $ | 426,748 | |
| Equity securities | — | | | 29,356 | | | — | | | 29,356 | |
| Commingled fixed income securities | 1,692 | | | 16,815 | | | — | | | 18,507 | |
Government and related securities | 9,790 | | | 25,439 | | | — | | | 35,229 | |
| Corporate debt securities | — | | | 65,167 | | | — | | | 65,167 | |
| Mortgage-backed / asset-backed securities | — | | | 172,018 | | | — | | | 172,018 | |
| Derivatives | | | | | | | |
| Interest rate swap | — | | | 3,103 | | | — | | | 3,103 | |
| Foreign exchange contracts | — | | | 2,474 | | | — | | | 2,474 | |
| Total assets | $ | 100,187 | | | $ | 652,415 | | | $ | — | | | $ | 752,602 | |
| Liabilities: | | | | | | | |
| Derivatives | | | | | | | |
| | | | | | | |
| Foreign exchange contracts | $ | — | | | $ | (304) | | | $ | — | | | $ | (304) | |
| Total liabilities | $ | — | | | $ | (304) | | | $ | — | | | $ | (304) | |
Investment Securities
The valuation of investment securities is based on the market approach using inputs that are observable, or can be corroborated by observable data, in an active marketplace. The following information relates to our classification within the fair value hierarchy:
•Money Market Funds: Money market funds typically invest in government securities, certificates of deposit, commercial paper and other highly liquid, low risk securities. Money market funds are principally used for overnight deposits and are classified as Level 1 when unadjusted quoted prices in active markets are available and as Level 2 when they are not actively traded on an exchange.
•Equity Securities: Equity securities are comprised of mutual funds investing in U.S. and foreign stocks. These mutual funds are classified as Level 2.
•Commingled Fixed Income Securities: Commingled fixed income securities are comprised of mutual funds that invest in a variety of fixed income securities, including securities of the U.S. government and its agencies, corporate debt, mortgage-backed securities and asset-backed securities. Fair value is based on the value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding, as reported by the fund manager. These mutual funds are classified as Level 1 when unadjusted quoted prices in active markets are available and as Level 2 when they are not actively traded on an exchange.
•Government and Related Securities: Debt securities are classified as Level 1 when unadjusted quoted prices in active markets are available. Debt securities are classified as Level 2 where fair value is determined using quoted market prices for similar securities or benchmarking model derived prices to quoted market prices and trade data for identical or comparable securities.
•Corporate Debt Securities: Corporate debt securities are valued using recently executed comparable transactions, market price quotations or bond spreads for the same maturity as the security. These securities are classified as Level 2.
•Mortgage-Backed Securities / Asset-Backed Securities: These securities are valued based on external pricing indices or external price/spread data. These securities are classified as Level 2.
Derivative Securities
•Foreign Exchange Contracts: The valuation of foreign exchange derivatives is based on the market approach using observable market inputs, such as foreign currency spot and forward rates and yield curves. These securities are classified as Level 2.
•Interest Rate Swaps: The valuation of interest rate swaps is based on an income approach using inputs that are observable or that can be derived from, or corroborated by, observable market data. These securities are classified as Level 2.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
Available-For-Sale Securities
Investment securities classified as available-for-sale are recorded at fair value with changes in fair value due to market conditions (i.e., interest rates) recorded in accumulated other comprehensive loss (AOCL), and changes in fair value due to credit conditions recorded in earnings. There were no unrealized losses due to credit losses charged to earnings through the six months ended June 30, 2022.
Available-for-sale securities consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Estimated fair value |
| Government and related securities | $ | 35,921 | | | $ | 30 | | | $ | (7,063) | | | $ | 28,888 | |
| Corporate debt securities | 67,129 | | | 1 | | | (12,447) | | | 54,683 | |
| Commingled fixed income securities | 1,735 | | | — | | | (166) | | | 1,569 | |
| Mortgage-backed / asset-backed securities | 163,527 | | | 2 | | | (23,415) | | | 140,114 | |
| Total | $ | 268,312 | | | $ | 33 | | | $ | (43,091) | | | $ | 225,254 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Estimated fair value |
| Government and related securities | $ | 36,160 | | | $ | 81 | | | $ | (1,012) | | | $ | 35,229 | |
| Corporate debt securities | 67,906 | | | 259 | | | (2,998) | | | 65,167 | |
| Commingled fixed income securities | 1,725 | | | — | | | (33) | | | 1,692 | |
| Mortgage-backed / asset-backed securities | 176,559 | | | 144 | | | (4,685) | | | 172,018 | |
| Total | $ | 282,350 | | | $ | 484 | | | $ | (8,728) | | | $ | 274,106 | |
Investment securities in a loss position were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Fair Value | | Gross unrealized losses | | Fair Value | | Gross unrealized losses |
| Greater than 12 continuous months | | | | | | | |
| Government and related securities | $ | 22,325 | | | $ | 4,823 | | | $ | 16,018 | | | $ | 579 | |
| Corporate debt securities | 46,695 | | | 11,501 | | | 51,385 | | | 2,658 | |
| Commingled fixed income securities | 1,569 | | | 166 | | | — | | | — | |
| Mortgage-backed / asset-backed securities | 129,223 | | | 22,339 | | | 135,441 | | | 4,057 | |
| Total | $ | 199,812 | | | $ | 38,829 | | | $ | 202,844 | | | $ | 7,294 | |
| | | | | | | |
| Less than 12 continuous months | | | | | | | |
| Government and related securities | $ | 6,098 | | | $ | 2,240 | | | $ | 15,438 | | | $ | 433 | |
| Corporate debt securities | 7,566 | | | 946 | | | 8,859 | | | 340 | |
| Commingled fixed income securities | — | | | — | | | 1,692 | | | 33 | |
| Mortgage-backed / asset-backed securities | 10,684 | | | 1,076 | | | 30,754 | | | 628 | |
| Total | $ | 24,348 | | | $ | 4,262 | | | $ | 56,743 | | | $ | 1,434 | |
At June 30, 2022, 92% of the securities were in a loss position. We believe our allowance for credit losses on available-for-sale investment securities is adequate as our investments are primarily in highly liquid U.S. government and agency securities, high grade corporate bonds and municipal bonds. We have not recognized an impairment on investment securities in an unrealized loss position because we have the ability and intent to hold these securities until recovery of the unrealized losses or expect to receive the stated principal and interest at maturity.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
Scheduled maturities of available-for-sale securities at June 30, 2022 were as follows:
| | | | | | | | | | | |
| Amortized cost | | Estimated fair value |
| Within 1 year | $ | 2,449 | | | $ | 2,281 | |
| After 1 year through 5 years | 14,501 | | | 13,366 | |
| After 5 years through 10 years | 74,801 | | | 62,502 | |
| After 10 years | 176,561 | | | 147,105 | |
| Total | $ | 268,312 | | | $ | 225,254 | |
The actual maturities may not coincide with the scheduled maturities as certain securities contain early redemption features and/or allow for the prepayment of obligations.
Held-to-Maturity Securities
Held-to-maturity securities at June 30, 2022 and December 31, 2021 totaled $21 million and $20 million, respectively.
Derivative Instruments
In the normal course of business, we are exposed to the impact of changes in foreign currency exchange rates and interest rates. We limit these risks by following established risk management policies and procedures, including the use of derivatives. We use derivative instruments to limit the effects of currency exchange rate fluctuations on financial results and manage the cost of debt. We do not use derivatives for trading or speculative purposes. Derivative instruments are recorded at fair value and the accounting for changes in fair value depends on the intended use of the derivative, the resulting designation and the effectiveness of the instrument in offsetting the risk exposure it is designed to hedge.
Foreign Exchange Contracts
We enter into foreign exchange contracts to mitigate the currency risk associated with anticipated inventory purchases between affiliates and from third parties. These contracts are designated as cash flow hedges. The effective portion of the gain or loss on cash flow hedges is included in AOCL in the period that the change in fair value occurs and is reclassified to earnings in the period that the hedged item is recorded in earnings. At June 30, 2022 and December 31, 2021, outstanding contracts associated with these anticipated transactions had a notional value of $2 million and $1 million, respectively. Amounts included in AOCL at June 30, 2022 will be recognized in earnings within the next 12 months. No amount of ineffectiveness was recorded in earnings for these designated cash flow hedges.
Interest Rate Swaps
We have interest rate swap agreements with an aggregate notional value of $200 million that are designated as cash flow hedges. The fair value of the interest rate swaps is recorded as a derivative asset or liability at the end of each reporting period with the change in fair value reflected in AOCL.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
The fair value of derivative instruments was as follows:
| | | | | | | | | | | | | | | | | | | | |
| Designation of Derivatives | | Balance Sheet Location | | June 30,
2022 | | December 31,
2021 |
Derivatives designated as
hedging instruments | | | | | | |
| Foreign exchange contracts | | Other current assets and prepayments | | $ | 80 | | | $ | 21 | |
| | | Accounts payable and accrued liabilities | | (9) | | | (10) | |
| | | | | | |
| Interest rate swaps | | Other assets | | 12,030 | | | 3,103 | |
| | | | | | |
Derivatives not designated as
hedging instruments | | | | | | |
| Foreign exchange contracts | | Other current assets and prepayments | | 595 | | | 2,453 | |
| | | Accounts payable and accrued liabilities | | (2,496) | | | (294) | |
| | | | | | |
| | | Total derivative assets | | $ | 12,705 | | | $ | 5,577 | |
| | | Total derivative liabilities | | (2,505) | | | (304) | |
| | | Total net derivative asset | | $ | 10,200 | | | $ | 5,273 | |
Results of cash flow hedging relationships were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| | Derivative Gain (Loss)
Recognized in AOCL
(Effective Portion) | | Location of Gain (Loss)
(Effective Portion) | | Gain (Loss) Reclassified
from AOCL to Earnings
(Effective Portion) |
| Derivative Instrument | | 2022 | | 2021 | | | 2022 | | 2021 |
| Foreign exchange contracts | | $ | 100 | | | $ | (54) | | | Revenue | | $ | — | | | $ | 118 | |
| | | | | | | Cost of sales | | 49 | | | (47) | |
| Interest rate swap | | 1,717 | | | (3,672) | | | Interest expense | | 138 | | | — | |
| | | $ | 1,817 | | | $ | (3,726) | | | | | $ | 187 | | | $ | 71 | |
| | | | | | | | | | |
| | | Six Months Ended June 30, |
| | | Derivative Gain (Loss)
Recognized in AOCL
(Effective Portion) | | Location of Gain (Loss)
(Effective Portion) | | Gain (Loss) Reclassified
from AOCL to Earnings
(Effective Portion) |
| Derivative Instrument | | 2022 | | 2021 | | | 2022 | | 2021 |
| Foreign exchange contracts | | $ | 123 | | | $ | 174 | | | Revenue | | $ | — | | | $ | 244 | |
| | | | | | | Cost of sales | | 63 | | | (105) | |
| Interest rate swap | | 8,927 | | | 2,608 | | | Interest expense | | 275 | | | — | |
| | | $ | 9,050 | | | $ | 2,782 | | | | | $ | 338 | | | $ | 139 | |
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
Nondesignated Derivative Instruments
We also enter into foreign exchange contracts to minimize the impact of exchange rate fluctuations on short-term intercompany loans and related interest that are denominated in a foreign currency. These foreign exchange contracts are not designated as hedging instruments. Accordingly, the revaluation of intercompany loans and interest and the mark-to-market adjustment on these derivatives are recorded in earnings. All outstanding contracts at June 30, 2022 mature within 3 months.
The mark-to-market adjustments of non-designated derivative instruments were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended June 30, | | | | |
| | | | Derivative Gain (Loss) Recognized in Earnings | | | | |
| Derivatives Instrument | | Location of Derivative Gain (Loss) | | 2022 | | 2021 | | | | |
| Foreign exchange contracts | | Selling, general and administrative expense | | $ | (17,769) | | | $ | 514 | | | | | |
| | | | | | | | | | |
| | | | Six Months Ended June 30, | | | | |
| | | | Derivative Gain (Loss) Recognized in Earnings | | | | |
| Derivatives Instrument | | Location of Derivative Gain (Loss) | | 2022 | | 2021 | | | | |
| Foreign exchange contracts | | Selling, general and administrative expense | | $ | (21,183) | | | $ | 1,067 | | | | | |
Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, available-for-sale and held-to-maturity investment securities, accounts receivable, loan receivables, derivative instruments, accounts payable and debt. The carrying value of cash and cash equivalents, held-to-maturity investment securities, accounts receivable, loans receivable, and accounts payable approximate fair value. The fair value of available-for-sale investment securities and derivative instruments are presented above. The fair value of debt is estimated based on recently executed transactions and market price quotations. The inputs used to determine the fair value of debt were classified as Level 2 in the fair value hierarchy. The carrying value and estimated fair value of debt was as follows:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Carrying value | $ | 2,219,519 | | | $ | 2,323,838 | |
| Fair value | $ | 1,932,664 | | | $ | 2,355,894 | |
9. Restructuring Charges
Activity in our restructuring reserves was as follows:
| | | | | | | | | |
| Severance and other exit costs | | | | |
| Balance at January 1, 2022 | $ | 5,747 | | | | | |
| Amounts charged to expense | 8,408 | | | | | |
| Cash payments | (8,255) | | | | | |
| Noncash activity | (275) | | | | | |
| Balance at June 30, 2022 | $ | 5,625 | | | | | |
| | | | | |
| Balance at January 1, 2021 | $ | 10,063 | | | | | |
| Amounts charged to expense | 7,733 | | | | | |
| Cash payments | (8,825) | | | | | |
| Noncash activity | (541) | | | | | |
| Balance at June 30, 2021 | $ | 8,430 | | | | | |
The majority of the restructuring reserves are expected to be paid over the next 12 to 24 months.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
10. Debt
Total debt consisted of the following:
| | | | | | | | | | | | | | | | | |
| Interest rate | | June 30, 2022 | | December 31, 2021 |
| | | | | |
| | | | | |
| Notes due April 2023 | 6.20% | | — | | | 90,259 | |
| Notes due March 2024 | 4.625% | | 238,449 | | | 242,603 | |
| Term loan due March 2026 | LIBOR + 1.75% | | 361,000 | | | 370,500 | |
| Notes due March 2027 | 6.875% | | 400,000 | | | 400,000 | |
| Term loan due March 2028 | LIBOR + 4.0% | | 444,375 | | | 446,625 | |
| Notes due March 2029 | 7.25% | | 350,000 | | | 350,000 | |
| Notes due January 2037 | 5.25% | | 35,841 | | | 35,841 | |
| Notes due March 2043 | 6.70% | | 425,000 | | | 425,000 | |
| | | | | |
| Other debt | | | 3,068 | | | 3,685 | |
| Principal amount | | | 2,257,733 | | | 2,364,513 | |
| Less: unamortized costs, net | | | 38,214 | | | 40,675 | |
| Total debt | | | 2,219,519 | | | 2,323,838 | |
| Less: current portion long-term debt | | | 24,752 | | | 24,739 | |
| Long-term debt | | | $ | 2,194,767 | | | $ | 2,299,099 | |
During 2022, we redeemed the April 2023 notes and recorded a $5 million pre-tax loss in connection with this redemption. We also made scheduled principal repayments of $12 million on our term loans. At June 30, 2022, the interest rate on the 2026 Term Loan was 3.4% and the interest rate of the 2028 Term Loan was 5.7%.
We have outstanding interest rate swaps that effectively convert $200 million of our variable rate debt to fixed rates. Under the terms of these interest rate swap agreements, we pay fixed-rate interest of 0.56% and receive variable-rate interest based on one-month LIBOR. The variable interest rates under the term loans and the swaps reset monthly.
The credit agreement that governs our $500 million secured revolving credit facility and term loans contains financial and non-financial covenants. At June 30, 2022, we were in compliance with all covenants and there were no outstanding borrowings under the revolving credit facility.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
11. Pensions and Other Benefit Programs
The components of net periodic benefit cost were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Defined Benefit Pension Plans | | Nonpension Postretirement Benefit Plans |
| United States | | Foreign | | |
| Three Months Ended | | Three Months Ended | | Three Months Ended |
| June 30, | | June 30, | | June 30, |
| 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| Service cost | $ | 24 | | | $ | 105 | | | $ | 332 | | | $ | 314 | | | $ | 179 | | | $ | 226 | |
| Interest cost | 11,141 | | | 10,744 | | | 3,450 | | | 3,007 | | | 939 | | | 964 | |
| Expected return on plan assets | (17,862) | | | (19,478) | | | (6,809) | | | (8,107) | | | — | | | — | |
| | | | | | | | | | | |
| Amortization of prior service (credit) cost | (11) | | | (15) | | | 64 | | | 68 | | | — | | | 33 | |
| Amortization of net actuarial loss | 8,232 | | | 9,639 | | | 1,726 | | | 2,380 | | | 88 | | | 1,077 | |
| Settlement | — | | | 314 | | | — | | | — | | | — | | | — | |
| Net periodic benefit cost (income) | $ | 1,524 | | | $ | 1,309 | | | $ | (1,237) | | | $ | (2,338) | | | $ | 1,206 | | | $ | 2,300 | |
| Contributions to benefit plans | $ | 1,148 | | | $ | 1,845 | | | $ | 392 | | | $ | 328 | | | $ | 3,490 | | | $ | 3,380 | |
| | | | | | | | | | | |
| Defined Benefit Pension Plans | | Nonpension Postretirement Benefit Plans |
| United States | | Foreign | | |
| Six Months Ended | | Six Months Ended | | Six Months Ended |
| June 30, | | June 30, | | June 30, |
| 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| Service cost | $ | 48 | | | $ | 131 | | | $ | 687 | | | $ | 709 | | | $ | 358 | | | $ | 450 | |
| Interest cost | 22,282 | | | 21,489 | | | 7,084 | | | 5,968 | | | 1,879 | | | 1,925 | |
| Expected return on plan assets | (35,725) | | | (38,956) | | | (14,014) | | | (16,091) | | | — | | | — | |
| | | | | | | | | | | |
| Amortization of prior service (credit) cost | (22) | | | (30) | | | 132 | | | 135 | | | — | | | 65 | |
| Amortization of net actuarial loss | 16,464 | | | 19,277 | | | 3,547 | | | 4,725 | | | 175 | | | 2,155 | |
| Settlement | — | | | 314 | | | — | | | — | | | — | | | — | |
| Net periodic benefit cost (income) | $ | 3,047 | | | $ | 2,225 | | | $ | (2,564) | | | $ | (4,554) | | | $ | 2,412 | | | $ | 4,595 | |
| Contributions to benefit plans | $ | 2,298 | | | $ | 2,860 | | | $ | 8,613 | | | $ | 9,024 | | | $ | 7,648 | | | $ | 6,900 | |
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
12. Income Taxes
For the three months ended June 30, 2022, we reported a tax benefit of $7 million on a pre-tax loss of $3 million primarily due to the recognition of a tax benefit from a tax basis adjustment related to the sale of Borderfree. This benefit is a one-time tax benefit that was recorded as a result of the Borderfree business classified as assets held for sale. For the six months ended June 30, 2022, we reported a tax benefit of $3 million on pre-tax income of $22 million primarily due to the benefit related to the sale of Borderfree and a $1 million benefit associated with the 2019 sale of a business.
The effective tax rate for the three and six months ended June 30, 2021 was 19.1% and 57.2%, respectively, and includes a tax benefit of $5 million due to tax legislation in the U.K. and a tax charge of $6 million on the pre-tax gain of $10 million from the sale of Tacit as the tax basis was lower than the book basis. The effective tax rate for the six months ended June 30, 2021 also includes benefits of $3 million from an affiliate reorganization.
As is the case with other large corporations, our tax returns are examined by tax authorities in the U.S. and other global taxing jurisdictions in which we have operations. As a result, it is reasonably possible that the amount of unrecognized tax benefits will decrease in the next 12 months, and this decrease could be up to 15% of our unrecognized tax benefits.
The Internal Revenue Service examinations of our consolidated U.S. income tax returns for tax years prior to 2018 are closed to audit; however, various post-2016 U.S. state and local tax returns are still subject to examination, with some states in appeals from 2011. For our significant non-U.S. jurisdictions, Canada is closed to examination through 2016 except for a specific issue arising in earlier years, France is closed through 2019, Germany is closed through 2016 and the U.K. is closed through 2019. We also have other less significant tax filings currently subject to examination.
13. Commitments and Contingencies
In the ordinary course of business, we are routinely defendants in, or party to, a number of pending and threatened legal actions. These may involve litigation by or against us relating to, among other things, contractual rights under vendor, insurance or other contracts; intellectual property or patent rights; equipment, service, payment or other disputes with 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, customers or others. In management's opinion, it is not reasonably possible that the potential liability, if any, that may result from these actions, either individually or collectively, will have a material effect on our financial position, results of operations or cash flows. However, as litigation is inherently unpredictable, there can be no assurances in this regard.
As of June 30, 2022, we have entered into real estate and equipment leases with aggregate payments of $124 million and terms ranging from four to eight years that have not commenced.
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
14. Stockholders’ Equity
Changes in stockholders’ equity were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Treasury stock | | Total equity |
| Balance at April 1, 2022 | | | | | $ | 323,338 | | | $ | — | | | $ | 5,141,636 | | | $ | (800,330) | | | $ | (4,571,762) | | | $ | 92,882 | |
| | | | | | | | | | | | | | | |
| Net income | | | | | — | | | — | | | 4,336 | | | — | | | — | | | 4,336 | |
| Other comprehensive loss | | | | | — | | | — | | | — | | | (49,723) | | | — | | | (49,723) | |
Dividends paid ($0.05 per common share) | | | | | — | | | — | | | (8,625) | | | — | | | — | | | (8,625) | |
| Issuance of common stock | | | | | — | | | (5,371) | | | (99) | | | — | | | 5,383 | | | (87) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Stock-based compensation expense | | | | | — | | | 5,371 | | | — | | | — | | | — | | | 5,371 | |
| | | | | | | | | | | | | | | |
| Balance at June 30, 2022 | | | | | $ | 323,338 | | | $ | — | | | $ | 5,137,248 | | | $ | (850,053) | | | $ | (4,566,379) | | | $ | 44,154 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Treasury stock | | Total equity |
| Balance at April 1, 2021 | | | | | $ | 323,338 | | | $ | 15,269 | | | $ | 5,161,029 | | | $ | (847,538) | | | $ | (4,632,935) | | | $ | 19,163 | |
| | | | | | | | | | | | | | | |
| Net income | | | | | — | | | — | | | 19,856 | | | — | | | — | | | 19,856 | |
| Other comprehensive income | | | | | — | | | — | | | — | | | 16,235 | | | — | | | 16,235 | |
Dividends paid ($0.05 per common share) | | | | | — | | | — | | | (8,700) | | | — | | | — | | | (8,700) | |
| Issuance of common stock | | | | | — | | | (16,423) | | | — | | | — | | | 16,182 | | | (241) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Stock-based compensation expense | | | | | — | | | 7,057 | | | — | | | — | | | — | | | 7,057 | |
| | | | | | | | | | | | | | | |
| Balance at June 30, 2021 | | | | | $ | 323,338 | | | $ | 5,903 | | | $ | 5,172,185 | | | $ | (831,303) | | | $ | (4,616,753) | | | $ | 53,370 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Treasury stock | | Total equity |
| Balance at January 1, 2022 | | | | | $ | 323,338 | | | $ | 2,485 | | | $ | 5,169,270 | | | $ | (780,312) | | | $ | (4,602,149) | | | $ | 112,632 | |
| | | | | | | | | | | | | | | |
| Net income | | | | | — | | | — | | | 25,157 | | | — | | | — | | | 25,157 | |
| Other comprehensive loss | | | | | — | | | — | | | — | | | (69,741) | | | — | | | (69,741) | |
Dividends paid ($0.10 per common share) | | | | | — | | | — | | | (17,313) | | | — | | | — | | | (17,313) | |
| Issuance of common stock | | | | | — | | | (12,351) | | | (39,866) | | | — | | | 49,216 | | | (3,001) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Stock-based compensation expense | | | | | — | | | 9,866 | | | — | | | — | | | — | | | 9,866 | |
| Repurchase of common stock | | | | | — | | | — | | | — | | | — | | | (13,446) | | | (13,446) | |
| Balance at June 30, 2022 | | | | | $ | 323,338 | | | $ | — | | | $ | 5,137,248 | | | $ | (850,053) | | | $ | (4,566,379) | | | $ | 44,154 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Treasury stock | | Total equity |
| Balance at January 1, 2021 | | | | | $ | 323,338 | | | $ | 68,502 | | | $ | 5,201,195 | | | $ | (839,131) | | | $ | (4,687,509) | | | $ | 66,395 | |
| | | | | | | | | | | | | | | |
| Net loss | | | | | — | | | — | | | (11,685) | | | — | | | — | | | (11,685) | |
| Other comprehensive income | | | | | — | | | — | | | — | | | 7,828 | | | — | | | 7,828 | |
Dividends paid ($0.10 per common share) | | | | | — | | | — | | | (17,325) | | | — | | | — | | | (17,325) | |
| Issuance of common stock | | | | | — | | | (74,877) | | | — | | | — | | | 70,756 | | | (4,121) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Stock-based compensation expense | | | | | — | | | 12,278 | | | — | | | — | | | — | | | 12,278 | |
| | | | | | | | | | | | | | | |
| Balance at June 30, 2021 | | | | | $ | 323,338 | | | $ | 5,903 | | | $ | 5,172,185 | | | $ | (831,303) | | | $ | (4,616,753) | | | $ | 53,370 | |
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
15. Accumulated Other Comprehensive Loss
Reclassifications out of AOCL were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Gain (Loss) Reclassified from AOCL |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Cash flow hedges | | | | | | | |
| Revenue | $ | — | | | $ | 118 | | | $ | — | | | $ | 244 | |
| Cost of sales | 49 | | | (47) | | | 63 | | | (105) | |
| Interest expense, net | 138 | | | (96) | | | 275 | | | (96) | |
| Total before tax | 187 | | | (25) | | | 338 | | | 43 | |
| Income tax provision | 47 | | | (6) | | | 83 | | | 11 | |
| Net of tax | $ | 140 | | | $ | (19) | | | $ | 255 | | | $ | 32 | |
| | | | | | | |
| Available-for-sale securities | | | | | | | |
| Financing revenue | $ | (4) | | | $ | 1 | | | $ | (6) | | | $ | — | |
| Selling, general and administrative expense | 35 | | | 217 | | | 22 | | | 259 | |
| Total before tax | 31 | | | 218 | | | 16 | | | 259 | |
| Income tax provision | 8 | | | 55 | | | 5 | | | 65 | |
| Net of tax | $ | 23 | | | $ | 163 | | | $ | 11 | | | $ | 194 | |
| | | | | | | |
Pension and postretirement benefit plans | | | | | | | |
| | | | | | | |
| Prior service costs | (53) | | | (86) | | | $ | (110) | | | $ | (170) | |
| Actuarial losses | (10,046) | | | (13,096) | | | (20,186) | | | (26,157) | |
| Settlement | — | | | (314) | | | — | | | (314) | |
| Total before tax | (10,099) | | | (13,496) | | | (20,296) | | | (26,641) | |
| Income tax benefit | (1,870) | | | (3,303) | | | (4,331) | | | (6,511) | |
| Net of tax | $ | (8,229) | | | $ | (10,193) | | | $ | (15,965) | | | $ | (20,130) | |
Changes in AOCL, net of tax were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash flow hedges | | Available for sale securities | | Pension and postretirement benefit plans | | Foreign currency adjustments | | Total |
| Balance at January 1, 2022 | $ | 3,803 | | | $ | (6,249) | | | $ | (756,639) | | | $ | (21,227) | | | $ | (780,312) | |
| Other comprehensive income (loss) before reclassifications | 6,817 | | | (26,554) | | | — | | | (65,703) | | | (85,440) | |
| Reclassifications into earnings | (255) | | | (11) | | | 15,965 | | | — | | | 15,699 | |
| Net other comprehensive income (loss) | 6,562 | | | (26,565) | | | 15,965 | | | (65,703) | | | (69,741) | |
| Balance at June 30, 2022 | $ | 10,365 | | | $ | (32,814) | | | $ | (740,674) | | | $ | (86,930) | | | $ | (850,053) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash flow hedges | | Available for sale securities | | Pension and postretirement benefit plans | | Foreign currency adjustments | | Total |
| Balance at January 1, 2021 | $ | (1,411) | | | $ | 402 | | | $ | (851,063) | | | $ | 12,941 | | | $ | (839,131) | |
| Other comprehensive income (loss) before reclassifications | 3,456 | | | (4,783) | | | — | | | (10,749) | | | (12,076) | |
| Reclassifications into earnings | (32) | | | (194) | | | 20,130 | | | — | | | 19,904 | |
| Net other comprehensive income (loss) | 3,424 | | | (4,977) | | | 20,130 | | | (10,749) | | | 7,828 | |
| Balance at June 30, 2021 | $ | 2,013 | | | $ | (4,575) | | | $ | (830,933) | | | $ | 2,192 | | | $ | (831,303) | |
PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)
16. Supplemental Financial Statement Information
Activity in the allowance for credit losses on accounts receivables and other assets for the six months ended June 30, 2022 and 2021 is presented below. See Note 7 for additional information regarding finance receivables.
| | | | | | | | | | | | | | | |
| | | | | Six Months Ended June 30, |
| | | | | 2022 | | 2021 |
| Balance at beginning of year | | | | | $ | 29,179 | | | $ | 35,344 | |
| | | | | | | |
| Amounts charged to expense | | | | | 5,280 | | | 2,488 | |
| Write-offs, recoveries and other | | | | | (21,763) | | | (7,085) | |
| Balance at end of period | | | | | $ | 12,696 | | | $ | 30,747 | |
| | | | | | | |
| Accounts and other receivables | | | | | $ | 12,176 | | | $ | 13,959 | |
| Other assets | | | | | 520 | | | 16,788 | |
| Total | | | | | $ | 12,696 | | | $ | 30,747 | |
Other (income) expense consisted of the following:
| | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2021 | | 2022 | | 2021 |
| Loss on debt redemption/refinancing | | | $ | 989 | | | $ | 4,993 | | | $ | 52,383 | |
| Insurance proceeds | | | (3,000) | | | — | | | (3,000) | |
| | | | | | | |
| Gain on sale of business | | | (10,201) | | | (2,522) | | | (10,201) | |
| Gain on sale of assets | | | (1,434) | | | (14,372) | | | (1,434) | |
| Other (income) expense | | | $ | (13,646) | | | $ | (11,901) | | | $ | 37,748 | |
During the first quarter of 2022, we recognized a pre-tax loss of $5 million on the early redemption of debt (see Note 10). During the first quarter, we also received proceeds of $9 million related to the 2019 sale of six smaller international businesses and recognized a pre-tax gain of $3 million and closed on the sale and leaseback of our Shelton, Connecticut office building, receiving net proceeds of $51 million and recognizing a pre-tax gain of $14 million.
Supplemental cash flow information is as follows:
| | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 | | |
| | | | | |
| Cash interest paid | $ | 64,511 | | | $ | 58,501 | | | |
| Cash income tax payments, net of refunds | $ | 11,164 | | | $ | 2,180 | | | |
| Noncash activity | | | | | |
| Capital assets obtained under capital lease obligations | $ | 14,017 | | | $ | 19,568 | | | |
| | | | | |