Pitney Bowes Annual Report 2014

Plain-text annual report

A n n u a l R e p o r t 2 0 1 4 A Bridge to the Second Century Pitney Bowes Annual Report 2014 3001 Summer Street, Stamford, CT 06926 203.356.5000 www.pitneybowes.com 46537cover.indd coviv-i 46537cover.indd coviv-i 3/18/15 1:57 PM 3/18/15 1:57 PM At Pitney Bowes, we’re building a bridge to our second century. For nearly 100 years, we have been delivering innovations that help clients navigate the complex and always evolving world of commerce. We are transforming Pitney Bowes for the next century by expanding into high-growth markets, including digital commerce and software, while continuing to innovate in our core shipping and mailing businesses. We are building a stronger, globally integrated company with new physical and digital capabilities and new ways of delivering sustainable value. Stockholder Information World Headquarters Pitney Bowes Inc. 3001 Summer Street, Stamford, CT 06926 203.356.5000 www.pitneybowes.com Annual Meeting Stockholders are cordially invited to attend the Annual Meeting at 9:00 a.m., Monday, May 11, 2015, at the Hyatt Regency Hotel, 1800 East Putnam Ave., Old Greenwich, Connecticut. Notice of the meeting will be mailed or made available to stockholders of record as of March 13, 2015. Please refer to the Proxy Statement for information concerning admission to the meeting. 10-K Report Included in this Annual Report to Stockholders is a copy of our Annual Report on Form 10-K for the ﬁ scal year ended December 31, 2014, as ﬁ led with the Securities and Exchange Commission (SEC). This Annual Report contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could diff er materially because of factors discussed in the Forward-Looking Statements section of the Form 10-K. The CEO/ CFO certiﬁ cations required to be ﬁ led with the SEC under Section 302 of the Sarbanes-Oxley Act of 2002 were ﬁ led as exhibits to our Annual Report on Form 10-K for the ﬁ scal year ended December 31, 2014. The CEO certiﬁ cation required to be submitted to the NYSE pursuant to Section 303A.12(a) of the NYSE Listed Company Manual was submitted on June 3, 2014. Copies of our Form 10-K are available without charge at www.pb.com/investorrelations or upon written request to: Investor Relations Pitney Bowes Inc. 3001 Summer Street, Stamford, CT 06926 Stock Exchanges Pitney Bowes common stock is traded under the symbol “PBI.” The principal market on which it is listed is the New York Stock Exchange. Investor Inquiries All investor inquiries about Pitney Bowes should be addressed to: Investor Relations Pitney Bowes Inc. 3001 Summer Street, Stamford, CT 06926 Comments concerning the Annual Report should be sent to: Corporate Financial Communications Pitney Bowes Inc. 3001 Summer Street, Stamford, CT 06926 Transfer Agent and Registrar Computershare PO Box 30170 College Station, TX 77842-3170 Stockholders may call Computershare at (800) 648-8170 www.computershare.com Stockholder Inquiries To provide or obtain information concerning transfer requirements, lost certiﬁ cates, dividends, changes of address and other matters, please call: (800) 648-8170, TDD phone service for the hearing impaired (800) 952-9245, for foreign holders (781) 575-2721; or write to the address above. Dividend Reinvestment Plan Owners of Pitney Bowes Inc. common stock may purchase common stock, $1 par value, with their dividends through the Dividend Reinvestment Plan. A prospectus and enrollment card may be obtained by calling (800) 648-8170 or by writing to the agent at the address above. Direct Deposit of Dividends For information about direct deposit of dividends, please call (800) 648-8170 or write to the agent at the address above. Duplicate Mailings If you receive duplicate mailings because you have more than one account listing, you may wish to save your company money by consolidating your accounts. Please call (800) 648-8170 or write to the agent at the address above. Stock Information Dividends per common share: Quarter First Second Third Fourth Total 2014 $ 0.1875 $ 0.1875 $ 0.1875 $ 0.1875 $ 0.75 Quarterly price ranges of common stock: 2014 Quarter First Second Third Fourth 2013 Quarter First Second Third Fourth High $ 26.63 $ 28.23 $ 28.37 $ 25.68 High $ 15.56 $ 16.43 $ 18.82 $ 24.18 2013 $ 0.375 $ 0.1875 $ 0.1875 $ 0.1875 $ 0.9375 Low $ 21.01 $ 24.06 $ 24.63 $ 22.38 Low $ 10.71 $ 13.12 $ 13.76 $ 18.21 Pitney Bowes, the Corporate logo, Mailstream Evolution, Print+ Messenger, Portrait, and Connect+ are trademarks of Pitney Bowes Inc. or a subsidiary. All other trademarks are the property of their respective owners. The materials used in this publication are recyclable. The paper is certiﬁ ed to Forest Stewardship Council® (FSC®) standards. 4 1 0 2 R A d e v r e s e r s t h g i r l l A . c n I s e w o B y e n t i P 5 1 0 2 © k r o Y w e N , l e u q e S : n g i s e D 46537_Cover.indd ii-iv 46537_Cover.indd ii-iv 3/20/15 3:05 PM 3/20/15 3:05 PM Marc B. Lautenbach President and Chief Executive Offi cer Michael Monahan Executive Vice President, Chief Operating Offi cer and Chief Financial Offi cer Fellow shareholders: In today’s competitive market, few companies get a second act, much less a second century. Some of the most iconic companies have survived and prospered for more than 100 years — companies like Procter & Gamble, 3M, ExxonMobil, and General Electric. One study found that fewer than 1 in 10 publicly traded companies in the U.S. are 100 years old or older. What sets these companies apart? It is the ability to adapt and succeed in the face of changing markets, disruptive technologies and new business models — not just once or twice, but consistently over the decades. As we approach our second century as an industry leader, you won’t ﬁ nd any complacency on our part. We know there is no manifest destiny for corporations. We have to earn our leadership and continued longevity every day. This is why we’re working so hard to transform Pitney Bowes — to achieve our vision of delivering innovative physical and digital products and solutions to our clients around the world. To us, longevity is less a goal but more a symbol of what we’re able to do for our clients and shareholders, day in and day out. Disruption and Transformation To build a strong bridge to our second century, we need to have solid footings in both the physical and digital worlds. We have to be successful in our traditional businesses, like mailing, as we build new leadership positions in software and digital commerce. Our clients need us to be great at both. Much has changed since Arthur Pitney joined Walter Bowes to commercialize the ﬁ rst postage meter and create the modern mailing industry we lead today. For decades, business was a series of predominantly physical transactions until the Internet and e-commerce disrupted the business models most companies knew best and created a world of vast new possibilities — and new competitors. 46537_Text.indd 1 46537_Text.indd 1 3/20/15 1:02 PM 3/20/15 1:02 PM Pitney Bowes Annual Report 2014 1 Letter to Shareholders This disruption continues to accelerate as the business world embraces new software and applications, cloud computing, mobility and social media. Pitney Bowes is transforming to take advantage of these enormous shifts and to extend our leadership into this new, hybrid world. Whether we are simplifying overseas shipping for our eCommerce clients or enabling major social media platforms to use our location intelligence technology, our clients are ﬁ nding value in our ability to help them navigate the complex world of commerce and create lasting impact for their own customers. Transforming a company is a signiﬁ cant undertaking, but we have the strategy, the assets, and the team to succeed. We are building on our formidable strengths — a culture of innovation, market-leading technologies, and an enviable base of more than 1.5 million clients. We also have an outstanding team of experienced leaders who have built businesses, launched new brands, and optimized sales operations in this new world of commerce. Our Progress While it’s still early in our multiyear journey, we have made tremendous progress on the three strategic priorities we introduced in May 2013. The ﬁ rst is to stabilize our mail business. We have moderated the rate of decline in our SMB business during the past two years. We have taken important steps to evolve our go-to-market model to make it more robust, eff ective, and effi cient to reach clients. We also grew services in our Enterprise business, where we sorted more than 14 billion pieces of U.S. mail last year alone. Our second strategic priority is to drive operational excellence. We continue to enhance our business processes, reduce ineffi ciencies, and streamline the organization. We have reduced our days sales outstanding and inventory levels. In fact, our inventory is a little more than half what it was in 2012. In May 2013, we committed to reducing our going-rate expense by $100 –$125 million by 2015. We did that, and we are 2 Pitney Bowes Annual Report 2014 Powering Physical and Digital Commerce of the Fortune 500 use our products and solutions 14B pieces of mail presorted by Pitney Bowes in 2014 now committed to reducing our going-rate expense by another $100 –$125 million by 2017. Our third strategic priority is growing our business through digital commerce. Two years ago we identiﬁ ed a series of digital markets that represented approximately $25 billion of opportunity growing at a double-digit rate. In 2014, we grew our Digital Commerce Solutions segment by more than 20 percent. Longer term we expect to grow at double-digit rates in these markets. By 2017, we expect this segment will represent 30 –35 percent of our total revenues. We’ve accomplished a great deal in a short period of time and delivered on our commitments. For the ﬁ rst time in several years, we grew revenue for the full year. We also met our 2014 objectives for adjusted earnings per share and free cash ﬂ ow. We were able to do this 46537_Text_Rev.indd 2 46537_Text_Rev.indd 2 3/23/15 6:10 PM 3/23/15 6:10 PM Delivering Unmatched Accuracy and Precision B-Source Outline, a leading Swiss business process outsourcing company specializing in multichannel client communication management, serves the highly regulated European banking industry. Leveraging Pitney Bowes production mail technology, including the Mailstream Productivity Series, Mailstream Evolution™ Inserting System, and Print+ Messenger™ Color Inkjet System, B-Source produces and distributes personalized and conﬁ dential statements and invoices that reach the right person, while increasing productivity by up to 200 percent. Pitney Bowes technology gives B-Source unmatched control and visibility into every document produced; setting a new standard of accuracy and precision to better meet the needs of their clients. “Pitney Bowes is the only company today that can help us fulﬁ ll our compliance requirements. The solution provides an unmatched level of security. For our private banking clients, accuracy must be 100%,” said Rene Felder, CEO, B-Source Outline. while simultaneously making important investments in our systems, our products, and our brand. In short, we are building for the long term, but keeping our commitments along the way. We reached a signiﬁ cant milestone in January when we relaunched our brand strategy and identity to better reﬂ ect our role in this changing world of commerce and growing relevance to a wider audience around the world. Our new brand reﬂ ects our ability to deliver with accuracy, precision, and impact across the connected and borderless world of commerce. Creating Value Our transformation has a singular purpose — to help our clients succeed in the physical and digital worlds of commerce. From small businesses to 90 percent of the Fortune 500, our clients need to get it right every time and need a partner who can deliver the business outcomes they want, cost-effi ciently. We are using our capabilities and experience to deliver innovative solutions — from helping clients use data to market to their best customers, to enabling the effi cient sending of parcels and packages, to securing payments through statements and invoices. In our core mailing business, we continue to help small and medium businesses simplify their shipping and mailing operations, while improving impact. For example, we are extending our Connect+® technology to lower volume mailers, allowing more businesses to access our online services and print custom-marketing messages to enhance client engagement. Our cloud-based Mailstream on Demand solution allows clients to create, manage, and distribute their critical communications through physical and digital channels. Our ability to marry physical and digital transactions helps clients deliver a positive experience to their own customers and grow their businesses. Consider the demanding world of online shopping. It’s estimated that 1.2 billion online shoppers globally spent nearly $1.5 trillion in 2014 on digital purchases. Most of these digital transactions are completed with a physical product. We help do both. 46537_Text.indd 3 46537_Text.indd 3 3/20/15 1:02 PM 3/20/15 1:02 PM Pitney Bowes Annual Report 2014 3 Letter to Shareholders Gaining Traction in Digital Commerce growth in 2014 22% of total PBI revenue Our cross-border shipping solution enables U.S. eBay sellers to reach buyers in 64 countries Lifestyle shoe retailer PlanetShoes sells more than 200 brands of hard-to-ﬁ nd shoes, boots, bags, and accessories, and ships to more than 20 countries. Their customers want to see all of the duties, taxes, fees, and timing associated with international shipping before they buy. The online retailer uses our Global eCommerce solution to remove the guesswork of cross-border buying and selling to deliver a seamless — and successful — shopping experience, giving PlanetShoes the conﬁ dence to expand. Printlaser, the largest printing company in Brazil, serves its country’s biggest banks and telecommunications operations. Responsible for more than 25 percent of Brazil’s transactional volume, Printlaser was looking for ways to make its workﬂ ow more effi cient, reduce costs, and expand its business. The company is now using a combination of our production mailing hardware integrated with our customer engagement software to create and distribute more than 1.5 billion documents per year. This allows Printlaser to deliver targeted client communications with greater impact, accuracy, and precision. Our location intelligence capabilities are turning data into insight our clients are ﬁ nding invaluable. Clients are using our geographic data and geospatial analysis to make smarter strategic decisions, uncover new opportunities, and target customers. Our technology also makes it possible for 1.2 billion people around the world to check in on social media. We remain focused on innovation driven by what our clients need, and we plan to launch several solutions this year that help clients connect physical and digital communications in new, more powerful ways. A Strong Business When we began this transformation we divested businesses that were not core or providing adequate returns. We used those proceeds primarily to pay down debt. Today, we have investment-grade ratios and have created a very strong foundation for our business. Now in the next phase of our capital allocation strategy, we are maintaining a balanced and disciplined approach and are investing in the business to create reduction in SG&A since 2012 $100M debt paid down in 2014 reduction in inventory since 2012 4 Pitney Bowes Annual Report 2014 46537_Text.indd 4 46537_Text.indd 4 3/20/15 3:04 PM 3/20/15 3:04 PM Growing Our Digital Assets What if you could make each of your 15 million customers feel unique? Nationwide Building Society, the United Kingdom’s largest member-owned ﬁ nancial institution, uses Pitney Bowes Portrait™ Software to help create real-time customer proﬁ les that enable its associates to off er speciﬁ c programs and promotions that are aligned with customer history and needs. This holistic view of the customer’s banking history and previous transactions helps Nationwide provide personalized service and better meet its customers’ needs at every interaction. Working with Pitney Bowes, Nationwide is able to treat each of its customers like one in 15 million. additional value. In 2014 we delivered more than $200 million of capital back to our shareholders through dividends and share buybacks. Our progress so far demonstrates the resilience and sustainability of our business model as well as our potential. We’re global and have leading, defendable market positions in our core businesses. We have substantial, recurring revenue — which drives signiﬁ cant cash ﬂ ow — and a strong balance sheet that supports a strong dividend. We have already identiﬁ ed considerable productivity enhancements and have a long track record of delivering effi ciencies that continue to streamline our operations. We are creating a common set of processes and systems that allow us to execute more effi ciently and at the same time pursue the tremendous growth opportunities in digital commerce. A Bridge to Our Second Century Of course, it takes more than products and business models to enable a company to reach its second century. It takes vision and an inspired team able to drive transformation. We have that at Pitney Bowes — 15,000 people who share a rich culture of innovation and are dedicated to doing the right things the right way for our clients and shareholders. They are guided by proven leaders who have experience delivering on the challenges and potential in front of us. Our 95th anniversary in April is an important milestone in our history, but it is just that, a milestone. Our ambitions are greater and our vision is longer. We want to take a company that has made markets and prospered for nearly 100 years and make it a leader in driving the physical and digital transformations that deﬁ ne the 21st century and our second century. One thing that will remain consistent is our unwavering commitment to delivering value to our clients and shareholders. I am grateful to you, our shareholders, for your support of our strategy and our vision to build a new, revitalized, and energized Pitney Bowes that will lead for decades to come. Marc B. Lautenbach President and Chief Executive Offi cer 46537_Text.indd 5 46537_Text.indd 5 3/20/15 1:02 PM 3/20/15 1:02 PM Pitney Bowes Annual Report 2014 5 Summary of Selected Financial Data For the year (Dollars in thousands, except per share amounts) As reported Revenue Income from continuing operations Diluted earnings per share from continuing operations Net cash provided by operating activities Depreciation and amortization Capital expenditures Cash dividends declared per share of common stock Average common and potential common shares outstanding Total assets Total debt Stockholders’ equity Total employees As adjusted EBIT Income from continuing operations Diluted earnings per share from continuing operations Free cash flow EBIT to interest 2014 2013 2012 $ 3,821,504 $ 300,006 $ $ 1.47 655,526 $ 198,088 $ 180,556 $ 0.75 203,961,446 $ 6,485,693 $ 3,252,006 $ 77,259 15,159 $ 730,944 $ 387,414 $ 1.90 $ 571,386 4.3 $ 3,791,335 $ 287,612 $ 1.42 $ 624,824 $ 211,243 $ 137,512 $ 0.94 $ 3,823,713 $ 379,107 $ 1.88 $ 660,188 $ 255,556 $ 176,586 $ 1.50 202,956,738 201,366,139 $ 6,772,708 $ 3,346,295 $ 205,176 16,097 $ 687,924 $ 366,547 $ 1.81 $ 634,912 3.7 $ 7,859,891 $ 4,017,375 $ 127,404 27,353 $ 717,438 $ 377,821 $ 1.88 $ 769,084 3.9 6 Pitney Bowes Annual Report 2014 46537_Text.indd 6 46537_Text.indd 6 3/20/15 1:03 PM 3/20/15 1:03 PM Reconciliation of Reported Consolidated Results to Adjusted Results For the year (Dollars in thousands, except per share amounts) 2014 2013 2012 Income from continuing operations before income taxes, as reported $ 431,196 Restructuring charges and asset impairments Extinguishment of debt Other Income from continuing operations before income taxes, as adjusted Provision for income taxes, as adjusted Preferred stock dividends of subsidiaries attributable to noncontrolling interests Income from continuing operations, as adjusted Interest expense, net Provision for income taxes, as adjusted 84,560 61,657 (15,919) 561,494 155,705 18,375 387,414 169,450 155,705 $ 383,954 84,344 32,639 — 500,937 116,015 18,375 366,547 186,987 116,015 Preferred stock dividends of subsidiaries attributable to noncontrolling interests 18,375 18,375 $ 511,770 17,176 — 3,817 532,763 136,556 18,376 377,831 184,675 136,556 18,376 EBIT $ 730,944 $ 687,924 $ 717,438 Diluted earnings per share from continuing operations, as reported $ Restructuring charges and asset impairments Extinguishment of debt Other 1.47 0.29 0.19 (0.05) $ 1.42 0.29 0.10 — $ 1.88 0.06 — (0.06) Diluted earnings per share from continuing operations, as adjusted $ 1.90 $ 1.81 $ 1.88 Net cash provided by operating activities, as reported $ 655,526 $ 624,824 $ 660,188 Capital expenditures Payments related to restructuring charges Net tax and other (receipts) payments Extinguishment of debt Reserve account deposits Pension plan contributions (180,556) 56,162 (5,737) 61,657 (15,666) — (137,512) 59,520 75,545 32,639 (20,104) — (176,586) 74,718 114,128 — 1,636 95,000 Free cash flow $ 571,386 $ 634,912 $ 769,084 The sum of the earnings per share amounts may not equal the totals due to rounding. Management believes this presentation provides a reasonable basis on which to present the adjusted ﬁ nancial information. The Company’s ﬁ nancial results are reported in accordance with generally accepted accounting principles (GAAP). The earnings per share and free cash ﬂ ow results are adjusted to exclude the impact of special items such as restructuring charges, debt extinguishment charges and other income and expense items that materially impact the comparability of the Company’s results of operations. The use of free cash ﬂ ow has limitations. GAAP cash ﬂ ow includes all cash available to the Company after actual expenditures for all purposes. Free cash ﬂ ow is the amount of cash that management could have available for discretionary uses if it made diff erent decisions about employing cash. It adjusts for long-term commitments such as capital expenditures, and for special items such as cash used for restructuring charges and contributions to its pension funds. All these items use cash that is not otherwise available to the Company and are important expenditures. Management compensates for these limitations by using a combination of GAAP cash ﬂ ow and free cash ﬂ ow in doing its planning. The adjusted ﬁ nancial information and certain ﬁ nancial measures such as earnings before interest and taxes (EBIT) and EBIT to interest are intended to be more indicative of the ongoing operations and economic results of the Company. EBIT excludes interest and taxes and, as a result, has the eff ect of showing a greater amount of earnings than net income. In assessing performance, the Company uses both EBIT and net income. This adjusted ﬁ nancial information should not be construed as an alternative to our reported results determined in accordance with GAAP. Further, our deﬁ nition of this adjusted ﬁ nancial information may diff er from similarly titled measures used by other companies. 46537_Text.indd 7 46537_Text.indd 7 3/20/15 1:03 PM 3/20/15 1:03 PM Pitney Bowes Annual Report 2014 7 Directors and Corporate Officers* Directors Corporate Offi cers Linda G. Alvarado President and Chief Executive Offi cer, Alvarado Construction, Inc. Anne M. Busquet Principal, AMB Advisors, LLC Roger Fradin Vice Chairman, Honeywell International Inc. Anne Sutherland Fuchs Consultant S. Douglas Hutcheson Chief Executive Offi cer, Laser, Inc. Marc B. Lautenbach President and Chief Executive Offi cer, Pitney Bowes Inc. Eduardo R. Menascé Co-Chairman, The Taylor Companies Michael I. Roth Chairman and Chief Executive Offi cer, The Interpublic Group of Companies, Inc. Non-Executive Chairman, Pitney Bowes Inc. David L. Shedlarz Retired Vice Chairman, Pﬁ zer Inc. David B. Snow, Jr. Chairman and Chief Executive Offi cer, Cedar Gate Technologies, Inc. Mark L. Shearer Executive Vice President and President, Pitney Bowes SMB Mailing Solutions Johnna G. Torsone Executive Vice President and Chief Human Resources Offi cer Mark F. Wright Executive Vice President and President, Pitney Bowes Digital Commerce Solutions *As of February 9, 2015 Stockholders may visit the Pitney Bowes corporate governance website at www.pitneybowes.com under Our Company — Leadership + Governance for information concerning the Company’s governance practices, including the Governance Principles of the Board of Directors, charters of the committees of the board, the Company’s Business Practices Guidelines and the Directors’ Code of Business Conduct and Ethics. Marc B. Lautenbach President and Chief Executive Offi cer Patrick M. Brand Vice President and President, Pitney Bowes Mailing, North America Amy C. Corn Vice President, Secretary and Chief Governance Offi cer Daniel J. Goldstein Executive Vice President and Chief Legal and Compliance Offi cer Steven J. Green Vice President — Finance and Chief Accounting Offi cer Abby F. Kohnstamm Executive Vice President and Chief Marketing Offi cer Michael Monahan Executive Vice President, Chief Operating Offi cer and Chief Financial Offi cer Roger J. Pilc Executive Vice President and Chief Innovation Offi cer Debbie D. Salce Vice President and Treasurer Joseph Schmitt Vice President and Chief Information Offi cer 8 Pitney Bowes Annual Report 2014 46537_Text.indd 8 46537_Text.indd 8 3/20/15 1:03 PM 3/20/15 1:03 PM 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, 2014 Commission file number: 1-3579 PITNEY BOWES INC. Incorporated in Delaware 3001 Summer Street, Stamford, CT 06926 (203) 356-5000 Securities registered pursuant to Section 12(b) of the Act: I.R.S. Employer Identification No. 06-0495050 Title of Each Class Common Stock, $1 par value per share $2.12 Convertible Cumulative Preference Stock (no par value) Name of Each Exchange on Which Registered New York Stock Exchange 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 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 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 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 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, or a smaller reporting company. See definition of "large accelerated filer", "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No As of June 30, 2014, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $5.6 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 February 12, 2015: 201,622,001 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 11, 2015, are incorporated by reference in Part III of this Form 10-K. 1 Page Number 3 9 12 12 12 12 13 15 16 29 30 30 30 30 31 31 31 31 31 32 34 35 PITNEY BOWES INC. TABLE OF CONTENTS PART I PART II Item 1. Item 1A. Business Risk Factors Item 1B. Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures Item 2. Item 3. Item 4. Item 5. Market for the Company's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Item 10. Item 11. Item 12. Item 13. Item 14. Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Directors, Executive Officers and Corporate Governance Executive Compensation PART III Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships, Related Transactions and Director Independence Principal Accountant Fees and Services Item 15. Exhibits and Financial Statement Schedules PART IV Signatures Consolidated Financial Statements and Supplemental Data 2 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: • • • • • • • • • • • • • • • declining physical mail volumes competitive factors, including pricing pressures, technological developments and introduction of new products and services by competitors our success in developing and transitioning to more digital-based products and services and the market’s acceptance of these new products and services the success of our investment in rebranding the company to build the market awareness to create new demand for our businesses our ability to gain product approval in new markets where regulatory approval is required changes in postal or banking regulations the continued availability and security of key information systems our ability to successfully implement a new ERP system without significant disruption to existing operations third-party suppliers' ability to provide product components, assemblies or inventories our success at managing the relationships with our outsource providers, including the costs of outsourcing functions and operations not central to our business loss of some of our largest clients or business partners in our Digital Commerce Solutions segment the cost to comply with current and any changes in information security requirements and privacy laws intellectual property infringement claims our success at managing customer credit risk significant changes in pension, health care and retiree medical costs • macroeconomic factors, including global and regional business conditions that adversely impact customer demand, access to capital markets at reasonable costs, changes in interest rates and foreign currency exchange rates • • • income tax adjustments or other regulatory levies for prior audit years and changes in tax laws, rulings or regulations 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 Other risks that may also adversely impact us are more fully described under "Item 1A. Risk Factors" in this Annual Report. 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 enable commerce in the areas of customer information management, location intelligence, customer engagement, shipping and mailing, and global ecommerce. More than 1.5 million clients in approximately 100 countries around the world rely on our products, solutions and services. For more information about us, our products, services and solutions, visit www.pb.com. Also, 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. 3 You may also read and copy any document we file 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. Our Strategy and Business Segments Our business is organized around three distinct sets of solutions -- Small and Medium Business (SMB) Solutions, Enterprise Business Solutions and Digital Commerce Solutions (DCS). Small and Medium Business Solutions We are a global leader in providing a full range of mailing equipment, software, supplies and support services that enable our clients to efficiently create mail and evidence postage. 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 postage meters and have over 900,000 meters installed in North America and over 300,000 meters installed elsewhere. This business is characterized by a high level of recurring revenue driven by rental, lease and loan arrangements, contract support services and supplies sales. Enterprise Business Solutions Our Enterprise Business Solutions group includes equipment and services that enable large enterprises to process inbound and outbound mail. We segment the Enterprise Business Solutions group between 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. Presort Services We are a national outsource provider of mail presort services for first-class, standard-class and flat mail in the U.S. and a workshare partner of the United States Postal Service (USPS). Our Presort Services network provides mailers with end-to-end solutions from pick up at their location to delivery into the postal system. Approximately 90 billion pieces of mail are processed annually by third-parties like us or through in-house operations. Through our network of 32 U.S. locations, and with our fully-customized proprietary technology, we process approximately 15 billion pieces of mail annually and are able to expedite mail delivery and optimize postage savings for our clients. Our client volumes represent less than 25% of all automated first-class, standard-class and flat mail. Digital Commerce Solutions We provide a broad range of solutions, including customer information management, location intelligence, customer engagement, shipping management and global ecommerce. These solutions are primarily delivered as traditional software licenses, enterprise platforms, software-as-a-service (SaaS) and on-demand applications. The DCS segment is dependent on a relatively small number of clients and business partners for a large portion of its revenue. Customer information management solutions help businesses harness and deliver a deep and broad understanding of their customers and their context, such as location, relationships, propensity, sentiment and influence. The trusted data and associated insights allow our clients to deliver a personalized customer experience across multiple channels, manage risk and compliance, and improve sales, marketing and service effectiveness. We are one of the market leaders in the data quality segment. Large corporations and government agencies rely on our products in very complex, high-volume, transactional environments to support their business processes. Location intelligence solutions enable our clients to organize 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, location, geographic and socio-demographic characteristics, which enable our clients to harness the power of location to better serve their customers, solve business problems, deliver location-based services and ultimately drive business growth. Customer engagement solutions provide clients with insight and understanding into customer behavior and interactions across the entire customer lifecycle, enabling them to orchestrate impactful, relevant and timely physical and digital interactions. 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. 4 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. We also offer scalable global logistics management systems that can be integrated into mail centers, as well as desktop and production shipping environments. Global ecommerce solutions enable full transparency of the fully landed costs by quoting duty, taxes and shipping at checkout, compliance with all import/export complexities, restrictions, regulations and documentation requirements and provide reliable tracking information. Our global ecommerce software platform is currently utilized by over 40 direct merchants and a major online marketplace enabling millions of parcels to be shipped to over 60 countries from the U.S. and more than 15 countries from the U.K. We also offer targeted direct and digital marketing programs to large advertisers that enable them to connect with movers. Through a contract with the USPS, we produce a "Movers' Guide" in both printed and digital format and a "Welcome Kit" in printed format with targeted advertisers' coupons for movers. We also offer digital advertising programs through MyMove.com, a move related website we own and operate. Client Service We have a client care service organization that provides telephone, online and on-site support to diagnose and repair our increasingly complex mailing equipment, production printers and sophisticated software solutions. Most of our support services are provided under annual contracts. Sales and Marketing We sell to a variety of business, governmental, institutional and other organizations. We have a broad base of clients and we are not dependent upon any one client or type of client for a significant part of our total revenue. We market our products and services through a direct and inside sales force, direct mailings, outbound telemarketing, independent dealers and distributors and web channels. During 2014, we began implementing a phased roll-out of a go-to-market strategy designed to improve the sales process and reduce costs by providing our clients broader access to products and services though expanded insides sales and web channels with less reliance on a direct sales force. We are in the final stages of implementing this go-to-market strategy in our North America businesses and will implement this strategy in our International Mailing and other businesses in 2015. We have made, and are continuing to make, significant investments in the rebranding of the company in order to build market awareness and client demand for our products and services. We are also making investments in marketing in support of the company’s brand and business strategy. The brand investments, including a newly launched external website (www.pb.com), are designed to enhance our operational and go-to-market changes, including how we sell to and service clients. 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 competition from other mail equipment companies and companies that offer products and services as alternative means of message communications. The principal competitive factors in these markets include 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 SMB clients in the United States that enables them to pay for the use of certain mailing equipment under rental agreements and purchase products, 5 supplies and services. The Bank also provides a deposit solution to those clients who prefer to prepay postage and earn interest on their deposits. 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 regulated by the Federal Deposit Insurance Corporation (FDIC) and the Utah Department of Financial Institutions. Production Mail We face competition from a small number of companies that offer large production printers, inserters or sorters, but only a few companies are able to offer all of these products and integrate them into an end-to-end solution. The principal competitive factors include functionality, reliability, productivity, price and support. We believe we have a competitive advantage as our equipment provides a wider range of features and functionality and greater productivity than our competitors, which drives a higher investment return for our clients. Presort Services We are a significant third-party presort service provider in the United States and the only provider with a national network. We face competition from regional and local presort providers, 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 experience and expertise and economies of scale. Our competitive advantage includes our extensive network, size of our presort facilities and our innovative and proprietary technology that enables us to provide our clients with reliable and accurate services at maximum discounts. Digital Commerce Solutions The DCS segment operates in several highly competitive and rapidly evolving markets. We face competition from large global companies that offer a broad range of solutions to smaller, more narrowly-focused companies that can design very targeted solutions. In addition, major global delivery services companies are acquiring the technology to improve their global ecommerce shipping capabilities. The principal competitive factors include reliability, functionality and ease of integration and use, scalability, innovation, support services and price. We compete in this segment based on the accuracy and processing speed of our solutions, particularly those used in our location intelligence and global ecommerce solutions, the breadth and scalability of our products and solutions, our single-sourced geocoding and reverse geocoding capabilities, and our ability to identify rapidly changing customer needs and develop technologies and solutions to meet these changing needs. Our direct marketing services products compete with multiple alternative marketing offerings for a portion of our clients' overall marketing budget by demonstrating the value of our products and services relative to these other marketing programs available to our advertising clients. 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. 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 an automatic approval program for certain leases. This program is designed to facilitate low dollar transactions by utilizing historical payment patterns and losses realized for clients with common credit characteristics. The program defines the 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. 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. 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. However, our businesses are not materially dependent on any one patent or license or group of related patents or licenses. 6 Our research and development expenditures were $110 million, $110 million and $114 million in 2014, 2013 and 2012, respectively. In 2015, research and development activities will include investments in our DCS offerings. We will also invest in our mailing equipment product line to enhance the effectiveness, functionality and value proposition of these products and solutions. 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 have not historically experienced shortages in services, components or products and believe that our available sources for materials, components, services and supplies are adequate. Regulatory Matters We are subject to the regulations of postal authorities worldwide related to product specifications and business practices involving our postage meters. We are further subject to the regulations of the State of 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 other trade authorities worldwide related to the cross-border shipment of equipment, materials and parcels. 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, 2014, we have approximately 10,600 employees in North America and 4,600 employees internationally. We believe that our current relations with employees are good. Management keeps employees informed of decisions and encourages and implements employee suggestions whenever practicable. 7 Executive Officers of the Registrant Our executive officers are as follows: Name Age Title Marc B. Lautenbach Daniel J. Goldstein Abby F. Kohnstamm Michael Monahan Roger J. Pilc Mark L. Shearer Johnna G. Torsone Mark F. Wright 53 53 61 54 47 58 64 57 President and Chief Executive Officer Executive Vice President and Chief Legal and Compliance Officer Executive Vice President and Chief Marketing Officer Executive Vice President, Chief Operating Officer and Chief Financial Officer (1) Executive Vice President and Chief Innovation Officer Executive Vice President and President, Pitney Bowes SMB Mailing Solutions Executive Vice President and Chief Human Resources Officer Executive Vice President and President, Pitney Bowes Digital Commerce Solutions Executive Officer Since 2012 2010 2013 2005 2013 2013 1993 2013 There is no family relationship among the above officers. All of the officers have served in various corporate, division or subsidiary positions with the Company for at least the past five years except as described below: Mr. Lautenbach was appointed President and Chief Executive Officer of the company in December 2012. Before joining Pitney Bowes, Mr. Lautenbach held numerous positions during his career at IBM, which he joined in 1985. His leadership roles at IBM included serving as Vice President Small and Medium Business in Asia Pacific from 1998-2000, General Manager of IBM Global Small and Medium Business from 2000-2005, General Manager of IBM North America from 2005-2010, and Managing Partner, North America, for IBM Global Business Services. Mr. Goldstein re-joined the company in October 2010 as Executive Vice President and Chief Legal and Compliance Officer. From September 2008 until October 2010, Mr. Goldstein served as the Senior Vice President and General Counsel for GAF Materials Corporation, International Specialty Products, and ISP Minerals, a group of privately held, commonly owned companies in the building materials, chemicals and mining industries. Mr. Goldstein originally joined Pitney Bowes in 1999 as Associate General Counsel and was appointed Vice President, Deputy General Counsel in 2005. 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. Before his retirement from IBM in 2010, he served as Vice President, Marketing and Strategy for IBM’s hardware business. Mr. Wright joined the company as Executive Vice President and President, Pitney Bowes Software Solutions in April 2013. In February 2014, the board of directors elected him to the office of Executive Vice President and President, Pitney Bowes Digital Commerce Solutions. Before joining Pitney Bowes, Mr. Wright served as Executive Vice President, Enterprise Solutions Group, Information Global Solutions. (1) Mr. Monahan was appointed to the newly created position of Chief Operating Officer effective February 9, 2015. He will continue his role as Chief Financial Officer. 8 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 depend 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, the 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. These changes could affect product specifications, service offerings, client behavior and the overall mailing industry. The volume of physical mail delivered via traditional postal services has been declining and is projected to continue to decline. If we are not successful at addressing this decline and transitioning to more digital-based products and services, our results of operations and profitability could be adversely impacted. The historical decline in mail volumes has had an adverse impact on our revenues and profitability and is expected to continue to influence our revenue and profitability in the future. We have been employing strategies for stabilizing our mailing business and providing our clients broader access to products and services through online and direct sales channels. In addition, we are introducing new products and services and transitioning our current products and services to more digital offerings; however, the margins associated with these digital offerings are typically lower than our traditional mailing business. 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 not successful in increasing revenue in our DCS segment, our consolidated revenues, profitability and long-term growth could be adversely impacted. We are executing on a strategy to grow revenue significantly in our DCS segment. The successful execution of this strategy will require us to make continued investments in research and development opportunities that offer the greatest potential for near and long-term growth. These investments include, among other things, new and enhanced offerings in our global ecommerce, location intelligence and customer engagement solutions, and the specialization of sales channels. However, the process of developing new technologies, products and solutions can be time-consuming, costly and uncertain, and there are no guarantees that we will be successful developing new technologies and solutions to meet rapidly changing customer needs. Further, even if we are successful at developing new technologies and solutions, they may not be accepted by the marketplace. We may not realize the anticipated benefits from our planned implementation of a new Enterprise Resource Planning (ERP) system, and the transition to the new ERP system may not be uninterrupted or error-free. We are in the process of implementing a new ERP system 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 made and will continue to make significant investments and incur incremental expenses over the course of the implementation of this ERP system. We expect this implementation will begin in 2015 and occur in stages over the next few years. If the implementation of the system is not successful, or is delayed, the expected operating cost savings and strategic efficiencies may be delayed or may not be obtained or sustainable. Further, the transition to the new ERP system will affect numerous systems necessary for the company's operation. If we fail to correctly implement one or more components of the new ERP system, we could experience significant disruption to our operations. Such disruptions could include, among other things, temporary loss of data, inability to process certain orders, failure of systems to communicate with each other and the inability to track or reconcile key data. 9 If we are unable to protect our information technology systems against service interruptions, misappropriation of data, or breaches of security resulting from cyber-attacks 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. Several of our businesses use, process and store proprietary information and confidential data relating to our businesses, clients and employees. Privacy laws and similar regulations in many jurisdictions where we do business, as well as customer demands, require that we take significant steps to safeguard this information. Both customer demands and legal requirements continue to evolve. We have security systems and procedures in place designed to protect against unauthorized access to such information. However, there is no guarantee that experienced computer programmers or hackers will not be able to breach our security systems and misappropriate confidential information. Breaches of our security systems could result in the loss of data or the unauthorized disclosure or misuse of confidential information of our clients or our clients' customers. This could result in harm to our reputation, damage to our systems, governmental inquiries, investigations or regulatory enforcement action, the payment of fines or other penalties, legal claims by our clients and the payment of significant remediation costs. 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 and to support postal services. We maintain secure systems to collect revenue for certain postal services, which is critical to enable both our systems and the postal systems to run reliably. These systems are subject to adverse acts of nature, targeted or random security breaches, cyber-attacks, computer viruses, vandalism, power loss, computer or communications failures and other unexpected events. We have 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 constituents 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 and some non-core functions and operations. 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 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 and other constituents could be impacted. Such interruptions 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. Capital market disruptions and credit rating downgrades could adversely affect our ability to provide financing services to our clients and to fund various discretionary priorities, including business investments, acquisitions and dividend payments. We fund our financing activities with a combination of cash generated from operations, deposits held in the Bank and access to the U.S. capital markets to facilitate short and long-term borrowings. Our ability to access the U.S. capital markets and the cost associated with our funding activities is dependent on our credit ratings and market volatility. A credit ratings downgrade, 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. In addition, if such events occurred, there can be no assurance that liquidity funding sources would be available or sufficient and that related costs would not adversely impact our ability to fund various discretionary priorities, including business investments, acquisitions and dividend payments. The loss of any of the company’s largest clients or business partners in our DCS segment could have a material adverse effect on the segment. The DCS 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. 10 Our inability to obtain and protect our intellectual property and defend against claims of infringement by others may negatively impact our operating results. We rely on copyright, trade secret, patent and other intellectual property laws to establish and protect proprietary rights that are important to our business. If we fail to enforce our intellectual property rights, our business may suffer. We, our clients, or our suppliers, may be subject to third-party claims of infringement on 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 of contract pricing and our business practices by government agencies. If we are found to have violated some provisions of these contracts, we could be required to provide a refund, pay significant damages, or be subject to contract cancellation, civil or criminal penalties, fines or debarment from doing business with the government. 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 of strategic acquisitions and divestitures, which may harm our financial results. As we increase our focus towards providing more digital technology and software solutions 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: • • • • • the loss of key employees or clients of businesses acquired or divested; significant charges to earnings for employee severance and other restructuring costs, goodwill and asset impairments and legal, accounting and financial advisory fees; 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; and difficulties in identifying and separating intellectual property to be divested from intellectual property we wish to keep. If we are not successful at realizing the anticipated benefits of strategic acquisitions and divestitures, our financial results could be negatively impacted. Our operations expose us to the risk of material environmental liabilities, litigation and violations. We are subject to various federal, state, local and foreign environmental protection and health and safety laws governing, among other things: • • • • • the generation, storage, use and transportation of hazardous materials; emissions or discharges of substances into the environment; the cleanup of contaminated sites; substances that may be subject to regulation in the manufacture, distribution, use or disposal of our products; and the health and safety of our employees. Environmental 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 or otherwise sanctioned by regulators. In addition, private parties could bring personal injury or other claims due to the presence of, or exposure to, hazardous substances. Certain environmental laws can assess liability on contaminated sites retroactively, on a joint and several basis, and without any finding of noncompliance or fault. 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 materially adversely affect our financial condition, results of operations or cash flows. Our investment in rebranding the company and enhancing marketing programs to build the market awareness necessary to create demand for our businesses may not result in increased revenue and could adversely affect our profitability. Our new brand strategy and identity are important to the next phase of our global business transformation. Our phased roll-out of the new branding is integrated into the way we sell and service clients, including sales collateral and the digital experience of getting information, service performance and transacting on our website. These factors are important to maintaining acceptance of our products and services by our existing clients and achieving increased acceptance with new clients. We expect increased spending in brand development and marketing promotion activities and if this increased spending does not result in increased revenue sufficient to offset these expenses, our profitability could be adversely affected. 11 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 and call centers. 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. We also have research and development facilities located in Noida, India and Pune, India. Management believes that our facilities are well maintained, are in good operating condition and are suitable and adequate for our current business needs. 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. In December 2013, we received a Civil Investigative Demand (CID) from the Department of Justice (DOJ) pursuant to the False Claims Act requesting documents and information relating to compliance with certain postal regulatory requirements in our Presort Services business. We had previously provided information to the DOJ in response to letter requests and continue to provide information in response to the CID and other requests from the DOJ. Given the current stage of this inquiry, we cannot provide an estimate of any possible losses or range of loss and we cannot yet predict the ultimate outcome of this matter or its impact, if any, on our business, financial condition or results of operations. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 12 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, 2015, we had 18,689 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. 2014 First Quarter Second Quarter Third Quarter Fourth Quarter 2013 First Quarter Second Quarter Third Quarter Fourth Quarter Share Repurchases Stock Price High Low Dividend Per Share $ $ $ $ $ $ $ $ 26.63 28.23 28.37 25.68 15.56 16.43 18.82 24.18 $ $ $ $ $ $ $ $ 21.01 24.06 24.63 22.38 10.71 13.12 13.76 18.21 $ $ $ $ 0.1875 0.1875 0.1875 0.1875 0.75 0.3750 0.1875 0.1875 0.1875 0.9375 We may periodically repurchase shares of our common stock to manage the dilution created by shares issued under employee stock plans and for other purposes. During 2014, we repurchased 1,863,262 shares of our common stock in the open market at an average share price of $26.84. There were no share repurchases during the fourth quarter of 2014. At December 31, 2014, we have authorization to repurchase up to $100 million of our common stock. Stock Performance Graph In 2014, we revised our peer group in response to our enhanced focus on software and technology. Our new peer group consists of services, industrial and technology companies with revenues of $3 to $22 billion and market capitalization of $2 to $16 billion. Our new peer group is comprised of: Alliance Data Systems Corporation, Diebold, Incorporated, DST Systems Inc., EchoStar Corp., Fidelity National Information Services, Inc., Fiserv, Inc., Harris Corporation, Iron Mountain Inc., Lexmark International Inc., NCR Corp., Pitney Bowes Inc., R.R. Donnelley & Sons Company, Rockwell Automation Inc., Unisys Corporation, The Western Union Company and Xerox Corporation. Our prior peer group was comprised of: Agilent Technologies Inc., Alliance Data Systems Corporation, Avery Dennison Corp., Diebold, Incorporated, DST Systems Inc., Fiserv, Inc., Harris Corporation, Iron Mountain Inc., Lexmark International Inc., NCR Corp., Pitney Bowes Inc., R.R. Donnelley & Sons Company., Rockwell Automation Inc., Unisys Corporation and Xerox Corporation. The accompanying graph and table below compare the most recent five-year share performance of Pitney Bowes, the Standard and Poor's (S&P) 500 Composite Index, our new peer group and our prior peer group. On a total return basis, assuming reinvestment of all dividends, $100 invested in Pitney Bowes, the S&P 500 Composite Index, the new peer group and the prior peer group on December 31, 2009 would have been worth $149, $205, $203 and $205, respectively, on December 31, 2014. 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 Composite Index 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. 13 Company Name / Index Pitney Bowes S&P 500 New Peer Group Old Peer Group Indexed Returns December 31, 2009 $100 $100 $100 $100 2010 $114 $115 $115 $121 2011 $93 $117 $110 $110 2012 $60 $136 $120 $125 2013 $139 $180 $185 $191 2014 $149 $205 $203 $205 14 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, 2014 3,821,504 2013 2012 2011 2010 $ 3,791,335 $ 3,823,713 $ 4,030,669 $ 4,125,101 $ $ $ $ $ $ $ $ $ $ $ 287,612 (144,777) 142,835 1.43 (0.72) 0.71 1.42 (0.71) 0.70 0.9375 $ $ $ $ $ $ $ 379,107 66,056 445,163 1.89 0.33 2.22 1.88 0.33 2.21 1.50 2013 6,772,708 3,346,295 3,346,295 296,370 December 31, 2012 7,859,891 3,642,375 4,017,375 296,370 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 418,967 198,513 617,480 2.07 0.98 3.06 2.07 0.98 3.05 1.48 2011 8,147,104 3,683,909 4,233,909 296,370 $ $ $ $ $ $ $ $ $ $ $ 244,460 47,919 292,379 1.19 0.23 1.42 1.18 0.23 1.41 1.46 2010 8,444,023 4,239,248 4,289,248 296,370 Total revenue Amounts attributable to common stockholders: Net income from continuing operations Income (loss) from discontinued operations Net income - Pitney Bowes Inc. $ $ $ 300,006 33,749 333,755 Basic earnings per share attributable to common stockholders (1): Continuing operations Discontinued operations Net income - Pitney Bowes Inc. $ $ 1.49 0.17 1.65 Diluted earnings per share attributable to common stockholders (1): 1.47 Continuing operations $ Discontinued operations Net income - Pitney Bowes Inc. Cash dividends paid per share of common stock Balance sheet data: Total assets Long-term debt Total debt Noncontrolling interests (Preferred stockholders' equity in subsidiaries) 0.17 1.64 0.75 2014 6,485,693 2,927,127 3,252,006 296,370 $ $ $ $ $ $ (1) The sum of earnings per share may not equal the totals due to rounding. 15 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 involve 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 Revenue for 2014 increased 1% to $3,822 million compared to $3,791 million in 2013. Business service revenue increased 23% over the prior year, primarily due to growth in our global ecommerce solutions and higher volumes of first-class mail processed and improved operational efficiencies in our presort business. Software revenue increased 8% due to higher software licensing revenue. Supplies revenue increased 5% due to the growing base of production print equipment and improved sales in our mailing business. Partially offsetting these increases was a decline in equipment sales of 11% primarily due to strong sales of production print equipment in 2013 and lower equipment sales in our mailing business. Rentals and support services declined 5% and 3%, respectively, due to a decline in the number of installed meters worldwide and financing revenue declined 4% because of lower equipment sales in prior periods. Looking at our operating segments, DCS revenue grew 21% primarily due to increased parcel volumes using our global ecommerce solutions and higher software licensing revenue. Enterprise Business Solutions revenue declined 2% due to a 10% decline in Production Mail revenue primarily as a result of strong sales of production print equipment in 2013. This decline was partially offset by a 6% increase in Presort Services due to higher volumes of first-class mail processed and improved operational efficiencies. SMB revenue declined 4% primarily due to continued declines in mail volumes and our installed meter population. Net income from continuing operations and earnings per diluted share for the year were $300 million and $1.47, respectively, compared to $288 million and $1.42, respectively, in 2013. The increase was primarily due to lower selling, general and administrative expenses primarily due to the benefits of our restructuring actions, changes in our go-to-market strategy and other productivity initiatives. An increase in the effective tax rate partially offset these benefits. We generated cash flow from operations of $656 million, received $102 million from the sale of businesses and issued $509 million of long-term debt. We used these proceeds to redeem $600 million of debt, fund capital investments of $181 million, pay dividends of $170 million and repurchased $50 million of our common shares. At December 31, 2014, cash and cash equivalents was $1,079 million. Outlook Our growth initiatives continue to focus on leveraging our expertise in physical and digital communications, hybrid communications and the development of products, software, services and solutions that help our clients connect with customers to power commerce and grow their businesses. In 2015, we will make significant investments to begin implementing our ERP program, expand our marketing efforts to build awareness of our unique capabilities and refreshed brand identity and complete our go-to-market initiatives globally. We anticipate these incremental expenses could approximate $0.15 to $0.18 per diluted share in 2015. However, we anticipate the continued benefits from prior restructuring programs and the transition to an inside sales organization should mostly offset the incremental costs associated with the ERP implementation and expanded brand and marketing programs. We also expect the incremental expenses incurred in 2015 to provide profitability benefits in 2016 and beyond. We expect revenue and profitability growth in our DCS segment to be driven by increasing volumes associated with our global ecommerce solutions, including a full year benefit of our U.K. outbound cross-border services, continued licensing demand for our location intelligence, customer information management and customer engagement solutions and higher revenue from marketing services and shipping solutions driven by new client acquisitions and expanded services provided to existing clients. Within the SMB group, we expect revenue to decline, but at a moderating rate as trends in our North America mailing business continue to progress and stabilize and we see improved sales productivity from our go-to-market initiatives. In our International Mailing business, we expect revenue to be challenged due in part to the uncertain macro-economic environment in Europe, potential distractions from the roll-out of our go-to-market strategy, and as a result of our 2014 initiatives to exit certain non-core product lines in Norway and transition our business in certain European countries to a dealer network. Within the Enterprise Business Solutions group, we expect continued revenue and profitability growth in our Presort Services segment due to client expansion, higher processed mail volumes and operational efficiencies. Within our Production Mail segment, we anticipate 16 that revenue growth could be challenged by the uncertain macro-economic environment in Europe, the impact on revenue from the transition of our business in certain European countries to a dealer network and declining services revenue. In recent months, we have seen a considerable strengthening of the U.S. dollar. A continuing strong U.S. dollar could adversely affect our reported revenues and profitability, both from a translation perspective as well as a competitive perspective, as the cost of our international competitors' products and solutions improves relative to our products and solutions. A strengthening dollar could also affect the demand for U.S. goods sold to consumers in other countries through our global ecommerce solutions. Revenue by source and the related cost of revenue are shown in the following tables: RESULTS OF OPERATIONS Revenue Equipment sales Supplies Software Rentals Financing Support services Business services Total revenue Cost of revenue Cost of equipment sales Cost of supplies Cost of software Cost of rentals Financing interest expense Cost of support services Cost of business services Total cost of revenue Year Ended December 31, % change 2014 2013 2012 2014 2013 $ $ 770 300 430 485 433 625 779 $ 868 286 398 512 449 647 631 841 279 413 541 481 675 594 $ 3,822 $ 3,791 $ 3,824 (11)% 5 % 8 % (5)% (4)% (3)% 23 % 1 % 3 % 2 % (3)% (5)% (7)% (4)% 6 % (1)% Year Ended December 31, 2014 2013 2012 $ % of revenue $ % of revenue $ $ 366 94 124 97 78 377 545 1,681 47.5% $ 31.2% 28.8% 20.1% 18.1% 60.3% 70.0% 44.0% $ 423 89 111 100 78 400 450 1,651 48.7 % $ 31.3 % 27.8 % 19.6 % 17.3 % 61.9 % 71.3 % 43.5 % $ $ 378 86 115 110 77 420 396 1,582 % of revenue 45.0% 30.7% 28.0% 20.3% 16.1% 62.2% 66.7% 41.4% Equipment sales Equipment sales decreased 11% in 2014 compared to 2013. Approximately half of this decrease came from lower sales of production mail inserters and high-speed printers and half came from lower sales in our SMB group. The decline in production mail inserters and high-speed production printers was due to significant installations of this equipment for certain enterprise customers in 2013. In our mailing business, equipment sales declined due to a temporary distraction from the transition to an inside sales organization and reassignment of accounts and resources in North America, the exit of certain non-core product lines in Norway, the transition of our business in certain European countries to a dealer network and lower sales in France. Cost of equipment sales as a percentage of equipment sales revenue decreased to 47.5% compared to 48.7% in the prior year primarily due to the decline in sales of production printers, which have a lower margin relative to other products. Equipment sales increased 3% in 2013 compared to 2012. Higher sales of production printers globally and sorting equipment in North America drove a 5% increase in equipment sales; however, lower mailing equipment sales in North America accounted for a 2% decrease in equipment sales. Cost of equipment sales as a percentage of equipment sales revenue increased to 48.7% compared with 45.0% in the prior year primarily due to a higher mix of production printers, which have a lower margin relative to other products. 17 Supplies Supplies revenue increased 5% in 2014 compared to 2013. Of this amount, 3% was due to targeted outreach to customers and favorable pricing in our postage meter business and the remaining 2% was due to the growing base of production print equipment. Cost of supplies as a percentage of supplies revenue was virtually unchanged at 31.2% in 2014 compared to 31.3% in 2013. Supplies revenue increased 2% in 2013 compared to 2012 primarily due to supply sales related to the growing base of production print equipment installations. Supplies sales for our postage meter business in 2013 were flat compared to 2012 due to higher ink sales in the U.K. and a slowing decline in worldwide meter population trends. Cost of supplies as a percentage of supplies revenue was 31.3% compared to 30.7% in the prior year primarily due to lower relative margins on supplies for production print equipment. Software Software revenue increased 8% in 2014 compared to 2013, primarily due to a 33% worldwide increase in licensing revenue. Cost of software as a percentage of software revenue increased to 28.8% compared to 27.8% in the prior year primarily due to investments in the specialization of the software sales channel and higher production costs. Software revenue decreased 3% in 2013 compared to 2012 primarily due to constrained public sector spending, especially in our international markets, and lower licensing revenue in North America. This decrease was partially offset by licensing revenue from our digital mail delivery service offering. Cost of software as a percentage of software revenue improved slightly to 27.8% compared with 28.0% in the prior year. Rentals Rentals revenue decreased 5% in 2014 compared to 2013. Of this amount, 4% was due to a reduction in the number of installed meters and clients downgrading to lower cost, less functional machines as a result of declining mail volumes. Lower rentals revenue in France accounted for the remaining 1% decrease. Cost of rentals as a percentage of rentals revenue increased to 20.1% compared to 19.6% in the prior year primarily due to a higher proportion of fixed costs as a percentage of revenue. Rentals revenue decreased 5% in 2013 compared to 2012 primarily due to a decline in our installed meter base in North America and a customer driven change in mix from rental to equipment sales in France. Cost of rentals as a percentage of rentals revenue improved to 19.6% compared with 20.3% in the prior year primarily due to lower depreciation expense. Financing We earn finance revenue primarily on sales-type leases from equipment sales. As a result of declining equipment sales in prior periods, financing revenue has also been declining year-over-year. We allocate a portion of our total cost of borrowing to financing interest expense. In computing financing interest expense, we assume a 10:1 leverage ratio of debt to equity and apply our overall effective interest rate to the average outstanding finance receivables. Despite lower average outstanding finance receivables, financing interest expense as a percentage of financing revenue has increased in 2014 compared to 2013 and 2013 compared to 2012 due to an increase in our overall effective interest rate. Support Services Support services revenue decreased 3% in 2014 compared to 2013 primarily due to declines in our mailing business due to fewer installed mailing machines in North America, the exit of certain non-core product lines in Norway and the transition of our business in certain European countries to a dealer network. Cost of support services as a percentage of support services revenue improved to 60.3% in 2014 compared to 61.9% in 2013 primarily due to continued focus on expense reductions and productivity initiatives. Support services revenue decreased 4% in 2013 compared to 2012 primarily due to a decline in equipment maintenance revenue resulting from fewer mailing and production machines in service. Cost of support services as a percentage of support services revenue improved slightly to 61.9% in 2013 compared to 62.2% in 2012. Business Services Business services revenue increased 23% in 2014 compared to 2013. Of this amount, 17% was due to higher volumes in our global ecommerce solutions, 4% was due to higher volumes of first-class mail processed and improved operational efficiencies in our presort business and 2% was due to higher marketing services fees due to new clients. Cost of business services as a percentage of business services revenue improved to 70.0% in 2014 compared to 71.3% in 2013 as margin improvement in our presort operations and marketing services more than offset our continuing investment in our global ecommerce solutions. Business services revenue increased 6% in 2013 compared to 2012. Revenue from our global ecommerce solutions increased revenue by 10%, but lower marketing services fees resulting from certain contract renewals decreased revenue by 4%. Cost of business services 18 as a percentage of business services revenue increased to 71.3% in 2013 compared to 66.7% in 2012 primarily due to continuing investment in our global ecommerce solutions and lower marketing services fees. Selling, general and administrative (SG&A) SG&A expense decreased 3% in 2014 compared to 2013. The decrease was primarily due to the benefits of our restructuring actions and productivity initiatives and lower depreciation expense. These benefits were partially offset by expenses of $36 million incurred in connection with expanded branding and marketing programs and the planned implementation of an ERP system. SG&A expense decreased 5% in 2013 compared to 2012 primarily driven by lower employee-related costs resulting from ongoing restructuring actions and productivity initiatives. Restructuring charges and asset impairments, net In 2013, we initiated actions designed to enhance our responsiveness to changing market conditions, further streamline our business operations, reduce our cost structure and create long-term flexibility to invest in growth (Operational Excellence). This program was completed as of December 31, 2014. Total restructuring charges recorded in 2013 and 2014 related to this program were $157 million. We anticipate this program will provide annualized pre-tax benefits of $130 to $165 million, net of investments, by 2016. In addition, a non-cash asset impairment charge of $26 million was recorded in 2013 to write-down the carrying value of our corporate headquarters building to its fair value. See Note 11 to the Consolidated Financial Statements for further details. Other expense, net Other expense, net for 2014 includes costs of $62 million incurred in connection with the early redemption of debt offset by $16 million recognized in connection with the divestiture of a partnership investment. See Liquidity and Capital Resources - Financings and Capitalization and Note 14 to the Consolidated Financial Statements for further details. Other expense, net for 2013 includes costs associated with the early redemption of debt. See Liquidity and Capital Resources - Financings and Capitalization for further details. Other expense, net in 2012 includes losses of $6 million on a forward rate swap agreement, $2 million on the early redemption of debt and $4 million on the sale of leveraged lease assets offset by income of $11 million from insurance proceeds received in connection with the 2011 presort facility fire. Income taxes See Note 14 to the Consolidated Financial Statements. Discontinued operations See Note 3 to the Consolidated Financial Statements. Preferred stock dividends of subsidiaries attributable to noncontrolling interests See Note 15 to the Consolidated Financial Statements. Business Segments The principal products and services of each of our reportable segments are as follows: Small & Medium Business Solutions: North America Mailing: Includes the revenue and related expenses from the sale, rental, financing and servicing of mailing equipment and supplies for small and medium businesses to efficiently create mail and evidence postage in the U.S. and Canada. International Mailing: Includes the revenue and related expenses from the sale, rental, financing and servicing of mailing equipment and supplies for small and medium businesses to efficiently create mail and evidence postage in areas outside North America. Enterprise Business Solutions: Production Mail: Includes the worldwide revenue and related expenses from the sale of production mail inserting and sortation equipment, high-speed production print systems, supplies and related support services to large enterprise clients to process inbound and outbound mail. Presort Services: Includes revenue and related expenses from presort mail services for our large enterprise clients to qualify large mail volumes for postal worksharing discounts. 19 Digital Commerce Solutions: Digital Commerce Solutions: Includes the worldwide revenue and related expenses from (i) the sale of non-equipment-based mailing, customer information management, location intelligence and customer engagement solutions and related support services; (ii) shipping and global ecommerce solutions; and (iii) direct marketing services for targeted clients. Segment earnings before interest and taxes (EBIT) is determined 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 asset impairment charges, which are not allocated to a particular business segment. Management uses segment EBIT to measure profitability and performance at the segment level. Management believes segment EBIT provides investors with a useful measure of our operating performance and underlying trends of the businesses. Segment EBIT may not be indicative of our overall consolidated performance and therefore, should be read in conjunction with our consolidated results of operations. Refer to Note 2 to the Consolidated Financial Statements for a reconciliation of segment EBIT to income from continuing operations before income taxes. Revenue and EBIT by business segment are presented in the tables below. North America Mailing International Mailing Small & Medium Business Solutions Production Mail Presort Services Enterprise Business Solutions Digital Commerce Solutions Total North America Mailing International Mailing Small & Medium Business Solutions Production Mail Presort Services Enterprise Business Solutions Digital Commerce Solutions Total Small & Medium Business Solutions North America Mailing Revenue Year Ended December 31, % change 2014 2013 2012 2014 2013 $ 1,492 573 2,065 1,555 603 2,158 $ 1,644 602 2,246 462 457 919 512 430 942 480 430 910 838 3,822 $ 691 3,791 $ 668 3,824 (4)% (5)% (4)% (10)% 6 % (2)% 21 % 1 % (5)% — % (4)% 6 % — % 3 % 4 % (1)% EBIT Year Ended December 31, % change 2014 2013 2012 2014 2013 642 89 731 48 98 146 84 961 $ $ 641 71 712 55 83 138 55 905 $ $ 647 76 723 49 106 155 53 931 — % 24 % 3 % (14)% 18 % 5 % 53 % 6 % (1)% (6)% (1)% 12 % (22)% (11)% 3 % (3)% $ $ $ $ North America Mailing revenue decreased 4% in 2014 compared to 2013. This decrease was due to lower rentals revenue and support services revenue due to a decline in the number of installed meters in service and lower equipment sales primarily due to a temporary distraction due to the transition to an inside sales organization and reassignment of accounts and resources. Financing revenue also declined due to lower equipment sales in current and prior years, but was offset by higher supply sales due to sales efficiencies and 20 favorable pricing. Despite the decline in revenue, EBIT remained relatively flat due to cost savings from the transition to an inside sales organization and other ongoing productivity initiatives and cost reductions. North America Mailing revenue decreased 5% in 2013 compared to 2012. Recurring stream revenues, comprised of supplies, rentals and financing revenue, declined 5% primarily due to fewer meters in service and lower equipment sales in prior periods. The decline in recurring stream revenues caused a 3% decline in North America Mailing revenue. The remaining 2% decrease was due to lower equipment sales and support services revenue primarily due to declines in the U.S. EBIT decreased 1% in 2013 compared to 2012 due to the decline in revenue, partially offset by various productivity initiatives. EBIT also benefited from the progress made in implementing our go-to- market strategy designed to improve the sales process and reduce costs by providing our clients broader access to products and services through online and direct sales channels. International Mailing International Mailing revenue decreased 5% in 2014 compared to 2013 primarily due to the exit of certain non-core product lines in Norway, the transition of our business in certain European countries to a dealer network and lower equipment sales and rentals in France. EBIT increased 24% in 2014 compared to 2013 primarily due to productivity and cost reduction initiatives and savings from the transition to an inside sales organization in certain European markets. International Mailing revenue in 2013 was relatively flat compared to 2012 as higher equipment sales, supplies sales and financing revenue were offset by lower rental revenue. Equipment sales increased 1% primarily due to higher sales in France and Germany, partially offset by lower sales in the U.K. Supplies revenue increased 2% due to a stabilization in our international meter population, favorable pricing in the U.K. and higher sales in Asia-Pacific. Rentals revenue declined 8% primarily due to a change in mix from rental to equipment sales in France. EBIT decreased 6% in 2013 compared to 2012 primarily due to lower margins on equipment sales. Enterprise Business Solutions Production Mail Production Mail revenue decreased 10% in 2014 compared to 2013 primarily due to a 19% decline in equipment sales due to significant installations of production mail inserters and high-speed printers to certain enterprise customers in 2013. Support services revenue also declined but was more than offset by higher supplies revenue due to the growing base of production printers. EBIT decreased 14% in 2014 compared to 2013 primarily due to the decline in revenue. Production Mail revenue increased 6% in 2013 compared to 2012. Higher sales and installations of large production printers globally and sorters in North America increased Production Mail revenue 8%, while higher supplies sales due to the growing base of production printers increased Production Mail revenue 2%. These increases were partially offset by lower support services revenue primarily due to fewer maintenance contracts on new equipment installations which caused a 3% decline in Production Mail revenue. EBIT increased 12% in 2013 compared to 2012 primarily due to the increase in revenue and productivity improvement initiatives. Presort Services Presort Services revenue increased 6% in 2014 compared to 2013 primarily due to a 2% increase in the volume of first-class mail processed and improved operational efficiencies. EBIT increased 18% in 2014 compared to 2013 primarily due to the increase in revenue and improved operational efficiencies. Presort Services revenue in 2013 was flat compared to 2012 as reduced discounts in certain presort categories offset the impact of a 2% increase in presort mail volumes. EBIT decreased 22% in 2013 compared to 2012 primarily due to a benefit of $11 million from insurance recoveries in 2012 and margin compression in 2013. Digital Commerce Solutions DCS revenue increased 21% in 2014 compared to 2013. Of this amount, 16% was due to higher revenue from our global ecommerce solutions due to an increase in the number of orders processed and parcels shipped. Late in the third quarter, we began outbound ecommerce services from the U.K., which had a small benefit to the full-year revenue. Higher licensing revenue from our software solutions products, particularly enterprise location intelligence, increased DCS revenue 5%. Licensing revenue increased 36% in North America and 29% internationally, primarily due to product enhancements and investments in the specialization of the software sales channel. EBIT increased 53% in 2014 compared to 2013 primarily due to the increase in revenue and improved operating leverage which offset fixed costs and continued investments in global ecommerce technology and infrastructure. DCS revenue increased 4% in 2013 compared to 2012. Revenue from our global ecommerce solutions and our digital mail delivery service drove a 10% increase in DCS revenue. However, this revenue growth was partially offset by a decline in worldwide software revenue and lower marketing services fees, which caused DCS revenue to decline 4% and 3%, respectively. EBIT increased 3% in 2013 21 compared to 2012 as higher volumes in global ecommerce parcels helped partially offset the high level of fixed costs and our continuing investment in this business and reduced margins on equipment sales. 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 and share repurchases. Cash and cash equivalents and short-term investments were $1,111 million at December 31, 2014 and $939 million at December 31, 2013. 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 $470 million at December 31, 2014 and $392 million at December 31, 2013. Cash and cash equivalents held by our foreign subsidiaries are generally used to support the liquidity needs of these subsidiaries. Most of these amounts could be repatriated to the U.S. but would be subject to additional taxes. Repatriation of some foreign balances is restricted by local laws. Cash Flow Summary The change in cash and cash equivalents is as follows: Net cash provided by operating activities Net cash (used in) provided by investing activities Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents Change in cash and cash equivalents Year Ended December 31, Change 2014 2013 2012 2014 2013 $ $ 655 (143) (312) (29) 171 $ $ 625 $ 251 (868) (13) (5) $ $ 660 (87) (519) 3 57 $ 30 (394) 556 (16) 176 $ $ (35) 338 (349) (16) (62) Cash flows from operations increased $30 million in 2014 compared to 2013, primarily due to higher income and lower tax and interest payments partially offset by higher cash payments related to the early repayment of debt and changes in working capital accounts, primarily due to lower cash flows from changes in inventory and accounts receivable. Cash management initiatives implemented in 2013 significantly improved working capital and cash flows from operations last year. In 2014, we continue to see benefits from changes in accounts receivable and inventory; however, the benefits were not as dramatic as in 2013. The timing of payments for accounts payables and accrued liabilities partially offset these reductions in cash flow from working capital. Cash flows from operations decreased $35 million in 2013 compared to 2012. The decrease in cash flow from operations was due to lower income and cash payments related to early repayment of debt. These decreases were partially offset by lower pension contributions, lower restructuring payments and increased cash from working capital management. During 2013, we implemented several cash management initiatives to improve working capital and cash flows from operations. These initiatives resulted in improved supply chain management, which resulted in lower inventory purchases and lower inventory levels, and lower accounts receivable through enhanced collection efforts, which resulted in an improvement in days sales outstanding. These cash flow improvements were offset by lower accounts payable and accrued liabilities due to the timing of payments. Cash flows from investing activities were $394 million lower in 2014 compared to 2013. In 2014, we received $102 million from the sale of businesses compared to $390 million in 2013. Higher cash outflows of $54 million for the purchase of available for sale investments and $43 million of higher capital expenditures primarily due to spending on our global ERP system also contributed to the decrease in cash flows from investing activities in 2014. Cash flows from investing activities increased $338 million in 2013 compared to 2012 mainly due to net proceeds of $390 million from the sale of businesses during 2013 and lower capital expenditures, partially offset by lower deposits at the Bank. Cash flow in 2012 included proceeds of $106 million from the sale of leveraged lease assets. Cash flows from financing activities increased $556 million in 2014 and decreased $349 million in 2013 due to the timing of debt activity. See Financing and Capitalization section below for a detailed discussion of our debt activity for 2014, 2013 and 2012. 22 Financings and Capitalization We are a Well-Known Seasoned Issuer with the SEC, 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 $1.0 billion to support our commercial paper issuances. During 2014, we did not borrow under our commercial paper program. In 2013, commercial paper borrowings averaged $52 million at a weighted- average interest rate of 0.41% and the maximum amount of commercial paper outstanding at any point in time was $300 million. The credit facility was renewed in January 2015 and expires in January 2020. We have not drawn upon the credit facility. 2014 Activity We issued $500 million of 4.625% fixed rate 10-year notes. Interest is payable in March and September and the notes mature in March 2024, but may be redeemed, at any time, in whole or in part, at our option. If the notes are redeemed prior to December 15, 2023, the redemption price will be equal to the sum of 100% of the principal amount, accrued and unpaid interest and a make-whole payment. Net proceeds of $493 million received after fees and discounts were used to fund the 2014 Tender Offer (see below). We redeemed an aggregate $500 million of the 5.75% Notes due 2017 and the 5.25% Notes due 2037 through a cash tender offer (the 2014 Tender Offer). Holders who validly tendered their notes received the principal amount, all accrued and unpaid interest and a premium payment. We incurred expenses of $62 million, consisting of the call premium, the write-off of unamortized costs and bank transaction fees. We also repaid $100 million of outstanding Term Loans and received a loan of $16 million from the State of Connecticut in connection with the relocation of our corporate headquarters. The loan consists of a $15 million development loan and $1 million jobs-training grant that is subject to refund if certain conditions are not met. The loan requires monthly interest payments through November 2020 and principal and interest payments from December 2020 through maturity in November 2024. We repurchased $50 million of our common shares during 2014. 2013 Activity We issued $425 million of 6.7% fixed-rate 30-year notes. Interest is payable quarterly and the notes mature in March 2043, but may be redeemed, in whole or in part, at our option any time on or after March 2018 at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest. Net proceeds of $412 million received after fees and discounts were used to fund the 2013 Tender Offer (see below). We redeemed an aggregate $405 million of the 4.875% Notes due 2014, the 5.0% Notes due 2015, and the 4.75% Notes due 2016 through a cash tender offer (the 2013 Tender Offer). Holders who validly tendered their notes received the principal amount, all accrued and unpaid interest and a premium payment. We received $5 million from the unwind of certain interest rate swap agreements and recognized a net loss of $25 million, consisting primarily of the premium payment. We redeemed $375 million of maturing 3.875% notes and an additional $300 million of 4.875% notes that were scheduled to mature in August 2014. In connection with the early redemption of the notes, we received $3 million from the unwind of an interest rate swap and incurred expenses of $8 million, consisting primarily of a premium payment. 2012 Activity We borrowed $230 million under term loan agreements that bear interest at the applicable London Interbank Offered Rate plus 2.25% or Prime Rate plus 1.25%, at our option. Interest is paid quarterly and the loans mature in 2015 and 2016. We also issued $110 million of 10-year notes with a coupon rate of 5.25%. Interest is paid quarterly and the notes mature in November 2022. However, we may redeem some or all of the notes at any time on or after November 2015 at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest. The proceeds from these issuances were for general corporate purposes, including the repayment of 2013 debt maturities. Debt Maturities We have $2 billion of debt maturing within the next five years, including $325 million due in 2015. 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 market conditions and impact our ability to refinance existing maturities. 23 Dividends We paid dividends to our common stockholders of $152 million ($0.75 per share), $189 million ($0.9375 per share) and $301 million ($1.50 per share) in 2014, 2013 and 2012, 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. Contractual Obligations The following table summarizes our known contractual obligations at December 31, 2014 and the effect that such obligations are expected to have on our liquidity and cash flow in future periods: Debt maturities Interest payments on debt (1) Non-cancelable operating lease obligations Purchase obligations (2) Pension plan contributions (3) Retiree medical payments (4) Total Payments due in Total 2015 2016-17 2018-19 After 2019 $ $ 3,227 1,458 211 198 23 193 $ 325 159 47 156 23 22 $ 836 261 62 38 — 42 $ 900 159 34 4 — 40 1,166 879 68 — — 89 $ 5,310 $ 732 $ 1,239 $ 1,137 $ 2,202 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 14 to the Consolidated Financial Statements for further details. (1) Assumes all debt is held to maturity. Certain notes permit us to redeem, or the bondholders to require us to redeem, some or all of the applicable outstanding notes at par plus accrued interest before the scheduled maturity date. (2) Includes unrecorded agreements to purchase goods or 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 2015; however, we will assess our funding alternatives as the year progresses. (4) Our retiree health benefit plans are non-funded 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 benefits payments. Off-Balance Sheet Arrangements At December 31, 2014, 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. See Note 16 to the Consolidated Financial Statements for detailed information about our commitments and contingencies. 24 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 non-cancelable 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 any 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 interest rate used to discount the future estimated liability (discount rate) and the expected rate of return on plan assets. These assumptions are evaluated and updated annually and are described in further detail in Note 13 to the Consolidated Financial Statements. 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 obligations 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 2014 was 4.95% for the U.S. Plan and 4.45% for the U.K. Plan. For 2015, the discount rate used in the determination of net periodic pension expense for the U.S. Plan and the U.K. Plan will be 4.15% and 3.7%, 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 $49 million and $23 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. When assessing the expected 25 future returns for the portfolio, management places more emphasis on the expected future returns than historical returns. The expected rate of return on plan assets used in the determination of net periodic pension expense for 2014 was 7.0% for the U.S. Plan and 7.5% for the U.K. Plan. For 2015, the expected rate of return on plan assets used in the determination of net periodic pension expense for both the U.S. Plan and the U.K. Plan will be 7.0%. A 0.25% change in the expected rate of return on plan return on assets would impact annual pension expense for the U.S. Plan by $4 million and the U.K. Plan by $1 million. See Note 13 to the Consolidated Financial Statements for information about the allocation of pension assets. In October 2014, the Society of Actuaries published updated mortality tables for U.S. plans (RP-2014) and an updated improvement scale (MP-2014), which both reflect improved longevity. We have historically utilized the Society of Actuaries' published mortality data in our plan assumptions. Accordingly, we adopted RP-2014 and MP-2014 for purposes of measuring pension and other postretirement benefit obligations at year end. The change to the mortality assumption increased the year-end pension and other postretirement obligation by an aggregate $119 million. Actual pension plan results that differ from our assumptions and estimates are accumulated and amortized over the life expectancy of inactive 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. At December 31, 2014, plan benefits for participants in a majority of our U.S. and foreign pension plans were frozen. Residual value of leased assets We provide lease financing for our products primarily through sales-type leases. Equipment residual values are determined at inception of the lease using estimates of equipment 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. Estimates of future equipment fair value are based primarily on our historical experience. We also consider forecasted supply and demand for our various products, product retirement and future product launch plans, end of lease customer behavior, regulatory changes, remanufacturing strategies, used equipment markets, if any, 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 $12 million. Allowances for doubtful accounts and credit losses We estimate our credit risk for accounts receivables and finance receivables and provide allowances for estimated losses. We believe that our credit risk is limited because of our large number of customers, small account balances for most of our customers and customer geographic and industry diversification. We continuously monitor collections and payments from our customers and evaluate the adequacy of the applicable allowance based on historical loss experience, past due status, adverse situations that may affect a customer's ability to pay and prevailing economic conditions. We make adjustments to the reserves as deemed necessary. This evaluation is inherently subjective and actual results may differ significantly from estimated reserves. The allowance for doubtful accounts as a percentage of trade receivables was 2.5% at December 31, 2014 and 2.7% at 2013. Holding all other assumptions constant, a 0.25% change in the allowance rate at December 31, 2014 would have changed the 2014 provision by $1 million. Total allowance for credit losses as a percentage of finance receivables was 1.5% at December 31, 2014 and 1.8% at 2013. Holding all other assumptions constant, a 0.25% change in the allowance rate at December 31, 2014 would have changed the 2014 provision by $5 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 our 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 our annual tax rate and in evaluating our tax positions. 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 which 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 26 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. Significant judgment is also required in determining the amount of valuation allowance to be recorded against deferred tax assets. In assessing whether a valuation allowance is necessary, and the amount of such allowance, we consider all available evidence for each jurisdiction including past operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies. As new information becomes available that would alter our determination as to the amount of deferred tax assets that will ultimately be realized, we adjust the valuation allowance with a corresponding impact to income tax expense in the period in which such determination is made. 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 of the asset and its eventual disposition is compared to the carrying amount. We derive the cash flow estimates from our future long-term business plans and historical experience. If the sum of the expected cash flows is less than the carrying amount, an impairment charge is recorded for an amount by which the carrying amount exceeds the fair value of the asset. The fair value of the asset is determined using probability weighted expected discounted 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 is a two-step approach. In the first step, the fair value of each reporting unit is compared to the reporting unit's carrying value, including goodwill. If the fair value of a reporting unit is less than its carrying value, the second step of the goodwill impairment test is performed to measure the amount of impairment, if any. In the second step, the fair value of the reporting unit is allocated to the assets and liabilities of the reporting unit as if it had been acquired in a business combination and the purchase price was equivalent to the fair value of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is referred to as the implied fair value of goodwill. The implied fair value of the reporting unit's goodwill is then compared to the actual carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized for the difference. 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, applicable 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 related 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 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. Based on the results of the annual impairment test performed during the fourth quarter of 2014, we determined that the estimated fair value of each of the reporting units exceeded their carrying value by 20% or more. 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 be made regarding the expected stock price volatility, risk-free interest rate, 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 expected dividend yield are based on historical experience. 27 We believe that the valuation techniques and the approach utilized to develop the underlying assumptions are appropriate in estimating the fair value of our stock-based awards. If factors change and we use different assumptions, 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. Restructuring We have undertaken restructuring actions which require management to utilize certain estimates related to the amount and timing of expenses. If the actual amounts differ from our estimates, the amount 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. Legal and Regulatory Matters See Legal Proceedings in Item 3 for information regarding our legal proceedings and Other Tax Matters in Note 14 to the Consolidated Financial Statements for regulatory matters regarding our tax returns. Foreign Currency Exchange During 2014, we derived 28% of our consolidated revenue from operations outside the United States. The functional currency for most of our foreign operations is the local currency. Our largest foreign currency exposures are to the British pound, Euro, Canadian dollar, Australian dollar and Japanese Yen (see Note 9 to the Consolidated Financial Statements for information regarding our foreign exchange derivative instruments). 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. For the years ended December 31, 2014, 2013 and 2012, currency rate movements did not have a significant impact on our revenue, decreasing revenue 0.4%, 0.4% and 1.1%, respectively. However, in recent months, we have seen a considerable strengthening of the U.S. dollar. A continuing strong U.S. dollar could adversely affect our reported revenues and profitability, both from a translation perspective as well as a competitive perspective, as the cost of our international competitors' products and solutions improves relative to our products and solutions. A strengthening dollar could also affect the demand for U.S. goods sold to consumers in other countries through our global ecommerce solutions. 28 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to the impact of interest rate changes and foreign currency fluctuations due to our investing and funding activities and our operations denominated in different foreign currencies. Our objective in managing exposure to foreign currency fluctuations is to reduce the volatility in earnings and cash flows associated with the effect of foreign exchange rate changes on transactions that are denominated in foreign currencies. Accordingly, we enter into various contracts, which change in value as foreign exchange rates change, to protect the value of external and intercompany transactions. The principal currencies actively hedged are the British pound and Euro. Our objective in managing exposure to changing interest rates is to limit the volatility and impact of changing interest rates on earnings and cash flows. To achieve these objectives, we may enter into interest rate swap agreements that convert fixed rate interest payments to variable rates and vice-versa. At December 31, 2014, 96% of our debt was fixed rate obligations at a weighted average interest rate of 5.2%. Our variable rate debt had a weighted average interest rate at December 31, 2014 of 2.48%. A one-percentage point change in the effective interest rate of our variable rate debt would not have had a material impact on our 2014 pre-tax income. We employ established policies and procedures governing the use of financial instruments to manage our exposure to such risks. We do not enter into foreign currency or interest rate transactions for speculative purposes. The gains and losses on these contracts offset changes in the value of the related exposures. 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 debt, interest rate derivative contracts and foreign exchange derivative contracts associated with forecasted transactions. 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 2014 and 2013, 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. 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See "Index to Consolidated Financial Statements and Supplemental Data" on page 35 of 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 Under the direction of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), we evaluated our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) and internal control over financial reporting. Our CEO and CFO concluded that such disclosure controls and procedures were effective as of December 31, 2014, based on the evaluation of these controls and procedures required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Exchange Act. Any system of controls is based in part upon certain assumptions designed to obtain reasonable (and not absolute) assurance as to its effectiveness, and there can be no assurance that any design will succeed in achieving its stated goals. Notwithstanding this caution, the CEO and CFO have reasonable assurance that the disclosure controls and procedures were effective as of December 31, 2014. 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. Our 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all 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 internal control policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. 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, 2014, our internal control over financial reporting was effective based on the criteria issued by COSO in Internal Control - Integrated Framework (2013). The effectiveness of our internal control over financial reporting as of December 31, 2014 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears 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, 2014, that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. 30 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 2015 Annual Meeting of Stockholders. Code of Ethics We have adopted Business Practices Guidelines (BPG) that applies to all our officers and other employees. Our Board of Directors has also adopted a Code of Business Conduct and Ethics (the Code) that applies to our 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. 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 2015 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, 2014 regarding the number of shares of common stock that may be issued under our equity compensation plans. (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) 13,323,075 — 13,323,075 $31.14 — $31.14 19,715,336 — 19,715,336 Plan Category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total 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 2015 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 2015 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 2015 Annual Meeting of Stockholders. 31 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES PART IV (a) 1. Financial statements - see "Index to Consolidated Financial Statements and Supplemental Data" on page 35 of this Form 10-K. 2. Financial statement schedules - see "Index to Consolidated Financial Statements and Supplemental Data" on page 35 of this Form 10-K. 3. Index to Exhibits Reg. S-K exhibits 3(a) 3(b) 4(a) 4(b) 4(c) 4(d) 10(a) * Restated Certificate of Incorporation of Pitney Bowes Inc. Description Pitney Bowes Inc. Amended and Restated By-laws (effective May 10, 2013) Form of Indenture between the Company and SunTrust Bank, as Trustee Supplemental Indenture No. 1 dated April 18, 2003 between the Company and SunTrust Bank, as Trustee Form of Indenture between the Company and Citibank, N.A., as Trustee, dated as of February 14, 2005 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 Retirement Plan for Directors of Pitney Bowes Inc. 10(b) * Pitney Bowes Inc. Directors' Stock Plan (as amended and restated 1999) 10(b.1) * Pitney Bowes Inc. Directors' Stock Plan (Amendment No. 1, effective as of May 12, 2003) 10(b.2) * Pitney Bowes Inc. Directors' Stock Plan (Amendment No. 2, effective as of May 1, 2007) 10(b.3) * Pitney Bowes Inc. Directors' Stock Plan (Amended and Restated effective May 12, 2014) Status or incorporation by reference Incorporated by reference to Exhibit 3(c) to Form 8-K filed with the Commission on May 12, 2011 (Commission file number 1-3579) Incorporated by reference to Exhibit 3(d) to Form 8-K filed with the Commission on May 13, 2013 (Commission file number 1-3579) Incorporated by reference to Exhibit 4.4 to Registration Statement on Form S-3 (No. 333-72304) filed with the Commission on October 26, 2001 Incorporated by reference to Exhibit 4.1 to Form 8-K filed with the Commission on August 18, 2004 Incorporated by reference to Exhibit 4(a) to Registration Statement on Form S-3ASR (No. 333-151753) filed with the Commission on June 18, 2008 Incorporated by reference to Exhibit 4.1 to Form 8-K filed with the Commission on October 24, 2007 (Commission file number 1-3579) Incorporated by reference to Exhibit 10(a) to Form 10-K filed with the Commission on March 30, 1993 (Commission file number 1-3579) Incorporated by reference to Exhibit (i) to Form 10-K filed with the Commission on March 30, 2000 (Commission file number 1-3579) Incorporated by reference to Exhibit 10 to Form 10-Q filed with the Commission on August 11, 2003 (Commission file number 1-3579) Incorporated by reference to Exhibit 10(b.2) to Form 10-K filed with the Commission on March 1, 2007 (Commission file number 1-3579) Exhibit 10(b.3) 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 January 1, 2008) 10(h) * Pitney Bowes Inc. Deferred Incentive Savings Plan for the Board of Directors, as amended and restated effective January 1, 2009 Incorporated by reference to Annex 1 to the Definitive Proxy Statement for the 2002 Annual Meeting of Stockholders filed with the Commission on March 26, 2002 (Commission file number 1-3579) Incorporated by reference to Exhibit (v) to Form 10-K filed with the Commission on February 26, 2010 (Commission file number 1-3579) Incorporated by reference to Exhibit (iv) to Form 10-K filed with the Commission on February 26, 2010 (Commission file number 1-3579) Incorporated by reference to Exhibit 10(e) to Form 10-K filed with the Commission on February 29, 2008 (Commission file number 1-3579) Incorporated by reference to Exhibit 10(f) to Form 10-K filed with the Commission on February 29, 2008 (Commission file number 1-3579) Incorporated by reference to Exhibit 10(g) to Form 10-K filed with the Commission on February 26, 2009 (Commission file number 1-3579) 32 Reg. S-K exhibits 10(i) * Description Pitney Bowes Inc. Deferred Incentive Savings Plan as amended and restated effective January 1, 2009 Status or incorporation by reference Incorporated by reference to Exhibit 10(h) to Form 10-K filed with the Commission on February 26, 2009 (Commission file number 1-3579) 10(j) * Pitney Bowes Inc. 1998 U.K. S.A.Y.E. Stock Option Plan 10(k) * Form of Long Term Incentive Award Agreement Incorporated by reference to Annex II to the Definitive Proxy Statement for the 2006 Annual Meeting of Stockholders filed with the Commission on March 23, 2006 (Commission file number 1-3579) Incorporated by reference to Exhibit 10(k) to Form 10-K filed with the Commission on February 21, 2014 (Commission file number 1-3579) 10(l) * 12 21 23 31.1 31.2 32.1 32.2 Compensation arrangement for Vicki O'Meara dated June 1, 2010 Incorporated by reference to Exhibit 10(a) to Form 10-Q filed with the Commission on August 5, 2010 (Commission file number 1-3579) Exhibit 12 Computation of ratio of earnings to fixed charges Subsidiaries of the registrant Consent of experts and counsel Certification of Chief Executive Officer Pursuant to Rules 13a-14 (a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended. Certification of Chief Financial Officer Pursuant to Rules 13a-14 (a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended. Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 Exhibit 21 Exhibit 23 Exhibit 31.1 Exhibit 31.2 Exhibit 32.1 Exhibit 32.2 101.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. 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. 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: February 20, 2015 PITNEY BOWES INC. Registrant By: /s/ Marc B. Lautenbach Marc B. Lautenbach President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Marc B. Lautenbach Marc B. Lautenbach /s/ Michael Monahan Michael Monahan /s/ Steven J. Green Steven J. Green /s/ Michael I. Roth Michael I. Roth /s/ Linda G. Alvarado Linda G. Alvarado /s/ Anne M. Busquet Anne M. Busquet /s/ Roger Fradin Roger Fradin /s/ Anne Sutherland Fuchs Anne Sutherland Fuchs /s/ S. Douglas Hutcheson S. Douglas Hutcheson /s/ Eduardo R. Menascé Eduardo R. Menascé /s/ David L. Shedlarz David L. Shedlarz /s/ David B. Snow, Jr. David B. Snow, Jr. President and Chief Executive Officer - Director February 20, 2015 Executive Vice President, Chief Operating Officer and Chief Financial Officer (Principal Financial Officer) February 20, 2015 Vice President-Finance and Chief Accounting Officer (Principal Accounting Officer) February 20, 2015 Non-Executive Chairman - Director February 20, 2015 Director Director Director Director Director Director Director Director 34 February 20, 2015 February 20, 2015 February 20, 2015 February 20, 2015 February 20, 2015 February 20, 2015 February 20, 2015 February 20, 2015 PITNEY BOWES INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA Report of Independent Registered Public Accounting Firm Consolidated Financial Statements of Pitney Bowes Inc. Consolidated Statements of Income for the Years Ended December 31, 2014, 2013 and 2012 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012 Consolidated Balance Sheets at December 31, 2014 and 2013 Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 2014, 2013 and 2012 Notes to Consolidated Financial Statements Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts and Reserves Page Number 36 37 38 39 40 41 42 88 35 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of Pitney Bowes Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of comprehensive income, of stockholders’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Pitney Bowes Inc. and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, 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 these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. 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 discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for discontinued operations in 2014. 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 LLP Stamford, CT February 20, 2015 36 PITNEY BOWES INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) Revenue: Equipment sales Supplies Software Rentals Financing Support services Business services Total revenue Costs and expenses: Cost of equipment sales Cost of supplies Cost of software Cost of rentals Financing interest expense Cost of support services Cost of business services Selling, general and administrative Research and development Restructuring charges and asset impairments, net Interest expense Interest income Other expense, net Total costs and expenses Income from continuing operations before income taxes Provision for income taxes Income from continuing operations Income (loss) from discontinued operations, net of tax Net income Less: Preferred stock dividends of subsidiaries attributable to noncontrolling interests Net income - Pitney Bowes Inc. Amounts attributable to common stockholders: Net income from continuing operations Income (loss) from discontinued operations, net of tax Net income - Pitney Bowes Inc. Basic earnings per share attributable to common stockholders (1): Continuing operations Discontinued operations Net income - Pitney Bowes Inc. Diluted earnings per share attributable to common stockholders (1): Continuing operations Discontinued operations Net income - Pitney Bowes Inc. Dividends declared per share of common stock (1) The sum of the earnings per share amounts may not equal the totals due to rounding. 2014 Years Ended December 31, 2013 2012 $ $ $ $ $ $ $ $ $ 770,371 300,040 429,743 484,629 432,859 625,135 778,727 3,821,504 365,724 93,675 123,760 97,338 78,562 377,003 544,729 1,378,400 109,931 84,560 95,291 (4,403) 45,738 3,390,308 431,196 112,815 318,381 33,749 352,130 18,375 333,755 300,006 33,749 333,755 1.49 0.17 1.65 1.47 0.17 1.64 0.75 $ $ $ $ $ $ $ $ $ 867,593 285,730 398,664 512,493 448,906 646,657 631,292 3,791,335 422,580 89,365 110,653 100,335 77,719 400,038 449,932 1,420,096 110,412 84,344 114,740 (5,472) 32,639 3,407,381 383,954 77,967 305,987 (144,777) 161,210 18,375 142,835 287,612 (144,777) 142,835 1.43 (0.72) 0.71 1.42 (0.71) 0.70 0.9375 $ $ $ $ $ $ $ $ $ 840,748 279,104 412,762 540,689 481,177 675,246 593,987 3,823,713 378,136 85,766 115,388 109,493 77,429 419,891 396,295 1,489,735 114,250 17,176 115,228 (7,982) 1,138 3,311,943 511,770 114,287 397,483 66,056 463,539 18,376 445,163 379,107 66,056 445,163 1.89 0.33 2.22 1.88 0.33 2.21 1.50 See Notes to Consolidated Financial Statements 37 PITNEY BOWES INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Net income Less: Preferred stock dividends attributable to noncontrolling interests Net income - Pitney Bowes Inc. Other comprehensive (loss) income, net of tax: Foreign currency translations Net unrealized gain on cash flow hedges, net of tax of $1,080, $894 and $429, respectively Net unrealized gain (loss) on investment securities, net of tax of $2,775, $(3,689) and $81, respectively Adjustments to pension and postretirement plans, net of tax of $(106,336), $64,316 and $(38,934), respectively Amortization of pension and postretirement costs, net of tax of $15,643, $19,228 and $21,876, respectively Other comprehensive (loss) income Comprehensive income - Pitney Bowes Inc. Years Ended December 31, 2014 2013 2012 $ 352,130 $ 161,210 $ 18,375 333,755 18,375 142,835 463,539 18,376 445,163 (93,368) (46,236) (2,702) 1,691 4,735 1,397 (6,282) 661 126 (212,818) 122,023 (70,232) 28,160 (271,600) 35,755 106,657 52,579 (19,568) $ 62,155 $ 249,492 $ 425,595 See Notes to Consolidated Financial Statements 38 PITNEY BOWES INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable (net of allowance of $10,742 and $13,149 respectively) Short-term finance receivables (net of allowance of $19,108 and $24,340, respectively) Inventories Current income taxes Other current assets and prepayments Assets held for sale Total current assets Property, plant and equipment, net Rental property and equipment, net Long-term finance receivables (net of allowance of $9,002 and $12,609, respectively) Goodwill Intangible assets, net Non-current income taxes Other assets Total assets LIABILITIES, NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities Current income taxes Current portion of long-term obligations Advance billings Total current liabilities Deferred taxes on income Tax uncertainties and other income tax liabilities Long-term debt Other non-current liabilities Total liabilities Noncontrolling interests (Preferred stockholders’ equity in subsidiaries) Commitments and contingencies (See Note 16) Stockholders’ equity: Cumulative preferred stock, $50 par value, 4% convertible Cumulative preference stock, no par value, $2.12 convertible Common stock, $1 par value (480,000,000 shares authorized; 323,337,912 shares issued) Additional paid-in capital Retained earnings Accumulated other comprehensive loss Treasury stock, at cost (122,309,948 and 121,255,390 shares, respectively) Total Pitney Bowes Inc. stockholders’ equity Total liabilities, noncontrolling interests and stockholders’ equity See Notes to Consolidated Financial Statements 39 December 31, 2014 December 31, 2013 $ $ $ $ $ $ $ 1,079,145 32,121 413,737 1,000,304 84,827 40,542 57,173 52,271 2,760,120 285,091 200,380 819,721 1,672,721 82,173 96,377 569,110 6,485,693 1,558,731 90,167 324,879 386,846 2,360,623 64,839 86,127 2,927,127 673,348 6,112,064 907,806 31,128 469,800 1,102,921 103,580 28,934 147,067 46,976 2,838,212 245,171 226,146 962,363 1,734,871 120,387 73,751 571,807 6,772,708 1,644,582 157,340 — 425,833 2,227,755 39,701 190,645 3,346,295 466,766 6,271,162 296,370 296,370 1 548 323,338 178,852 4,897,708 (846,156) (4,477,032) 77,259 6,485,693 $ 4 591 323,338 196,977 4,715,564 (574,556) (4,456,742) 205,176 6,772,708 PITNEY BOWES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Years Ended December 31, 2014 2013 2012 Cash flows from operating activities: Net income Restructuring payments Special pension plan contributions Tax and other payments on sale of businesses and leveraged lease assets Net tax receipts from other investments Adjustments to reconcile net income to net cash provided by operating activities: $ Restructuring charges and asset impairments Goodwill impairment Depreciation and amortization (Gain) loss on sale of businesses Gain on sale of leveraged lease assets, net of tax Stock-based compensation Proceeds from settlement of derivative instruments Deferred tax provision (benefit) Changes in operating assets and liabilities: Decrease (increase) in accounts receivable Decrease in finance receivables Decrease (increase) in inventories (Increase) decrease in other current assets and prepayments Decrease in accounts payable and accrued liabilities (Decrease) increase in current and non-current income taxes (Decrease) increase in advance billings Other, net Net cash provided by operating activities Cash flows from investing activities: Purchases of available-for-sale investment securities Proceeds from sales/maturities of available-for-sale investment securities Capital expenditures Proceeds from sale of businesses Proceeds from sale of leveraged lease assets Reserve account deposits Other investing activities Net cash (used in) provided by investing activities Cash flows from financing activities: Proceeds from issuance of long-term debt Principal payments of long-term obligations Proceeds from issuance of common stock Dividends paid to stockholders Dividends paid to noncontrolling interests Common stock repurchases Purchase of subsidiary shares from noncontrolling interest Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Cash interest paid Cash income tax payments, net of refunds $ $ $ 352,130 (56,162) — — 5,737 83,466 — 198,088 (28,151) — 17,446 — 1,454 45,046 119,668 9,104 (10,106) (51,080) (52,080) (18,695) 39,661 655,526 (670,573) 622,727 (180,556) 102,392 — (15,666) (1,585) (143,261) 508,525 (599,850) 7,188 (151,611) (18,375) (50,003) (7,718) (311,844) (29,082) 171,339 907,806 1,079,145 180,250 203,193 $ $ $ $ 161,210 (59,520) — (75,545) — 86,175 101,415 211,243 42,450 — 14,921 8,059 (33,770) 58,980 123,587 67,188 3,172 (95,843) 6,322 (16,450) 21,230 624,824 (348,316) 354,302 (137,512) 389,680 — (20,104) 12,691 250,741 411,613 (1,079,207) 6,753 (188,846) (18,375) — — (868,062) (12,973) (5,470) 913,276 907,806 199,505 224,432 $ $ $ $ 463,539 (74,718) (95,000) (114,128) — 33,351 18,315 255,556 — (12,886) 18,227 — (92,999) (3,068) 147,165 (599) (3,131) (47,023) 116,013 3,767 47,807 660,188 (304,191) 295,470 (176,586) — 105,506 1,636 (8,567) (86,732) 340,000 (550,000) 9,314 (300,578) (18,376) — — (519,640) 3,222 57,038 856,238 913,276 190,892 206,285 See Notes to Consolidated Financial Statements 40 PITNEY BOWES INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (In thousands) Preferred stock Preference stock Common Stock Additional Paid-in Capital Retained earnings Accumulated other comprehensive income (loss) Treasury stock Total equity Balance at December 31, 2011 $ 4 $ 659 $ 323,338 $ 240,584 $ 4,600,217 $ (661,645) $(4,542,143) $ (38,986) Retained earnings adjustment (see Note 14) Adjusted balance December 31, 2011 Net income - Pitney Bowes Inc. Other comprehensive loss Cash dividends Common Preference Issuances of common stock Conversions to common stock Stock-based compensation Balance at December 31, 2012 Net income - Pitney Bowes Inc. Other comprehensive income Cash dividends Common Preference Issuances of common stock Conversions to common stock Stock-based compensation Balance at December 31, 2013 Net income - Pitney Bowes Inc. Other comprehensive loss Cash dividends Common Preference Issuances of common stock Conversions to common stock Stock-based compensation Repurchase of subsidiary shares from noncontrolling interest Repurchase of common stock — 4 — — — — — — — 4 — — — — — — — 4 — — — — — (3) — — — — 659 — — — — — (11) — 648 — — — — — (57) — 591 — — — — — (43) — — — — — 16,773 — — 16,773 323,338 240,584 4,616,990 (661,645) (4,542,143) (22,213) — — — — — — — — — — — (34,727) (237) 18,227 445,163 — — (19,568) (300,527) (51) — — — — — — — — — — — — 41,100 248 — 445,163 (19,568) (300,527) (51) 6,373 — 18,227 323,338 223,847 4,761,575 (681,213) (4,500,795) 127,404 — — — — — — — — — — — (40,569) (1,222) 14,921 142,835 — — 106,657 (188,800) (46) — — — — — — — — — — — — 42,774 1,279 142,835 106,657 (188,800) (46) 2,205 — — 14,921 323,338 196,977 4,715,564 (574,556) (4,456,742) 205,176 — — — — — — — — — — — — — (27,081) (970) 17,446 (7,520) — 333,755 — — (271,600) (151,567) (44) — — — — — — — — — — — — — — — — 28,697 1,016 — — 333,755 (271,600) (151,567) (44) 1,616 — 17,446 (7,520) (50,003) (50,003) Balance at December 31, 2014 $ 1 $ 548 $ 323,338 $ 178,852 $ 4,897,708 $ (846,156) $(4,477,032) $ 77,259 See Notes to Consolidated Financial Statements 41 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) 1. Summary of Significant Accounting Policies Basis of Presentation The accompanying Consolidated Financial Statements of Pitney Bowes Inc. (we, us, our, or the company) and its wholly owned subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform to the current year presentation. In April 2014, Pitney Bowes of Canada Ltd., a wholly owned subsidiary, completed the sale of its Document Imaging Solutions (DIS) business, which consisted of hardware (copiers and printers) and document management software solutions to Konica Minolta Business Solutions (Canada) Ltd. and the related lease portfolio to a business equipment leasing services provider in two separate transactions. Accordingly, the results of operations of DIS were reclassified as discontinued operations (see Note 3). The cash flows from discontinued operations are not separately stated or reclassified in the accompanying Consolidated Statements of Cash Flows. In 2013, we sold our Management Services business (PBMS), Nordic furniture business and International Mailing Services business (IMS). Further, we made certain organizational changes and realigned our business units and segment reporting to reflect the clients we serve, the solutions we offer, and how we manage, review, analyze and measure our operations. Historical results have been recast to present the operating results of these divested businesses as discontinued operations and our segment results have been recast to conform to the new segment reporting. Use of Estimates The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and accompanying disclosures, including the disclosure of contingent assets and liabilities. These estimates and assumptions are based on management's best knowledge of current events, historical experience and other information available when the financial statements are prepared. These estimates include, but are not limited to, revenue recognition for multiple element arrangements, goodwill and intangible asset impairment review, allowance for doubtful accounts and credit losses, residual values of leased assets, useful lives of long-lived and intangible assets, restructuring costs, pensions and other postretirement costs, income tax reserves, deferred tax asset valuation allowance, stock-based compensation expense and loss contingencies. Actual results could differ from those estimates and assumptions. Cash Equivalents and Short-Term Investments Cash equivalents include short-term, liquid investments with maturities of three months or less at the date of purchase. Short-term investments include investments with a maturity of greater than three months but less than one year from the reporting date. Investment Securities Investment securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. Investment securities not classified as held-to-maturity are classified as available-for-sale and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of tax. Purchase premiums and discounts are recognized in interest income using the effective interest method over the terms of the securities. Gains and losses on the sale of available-for-sale securities are recorded on the trade date and are determined using the specific identification method. Investment securities are recorded in the Consolidated Balance Sheets as cash and cash equivalents, short-term investments and other assets depending on the type of investment and maturity. During 2014, we determined that for years ended December 31, 2013 and 2012 certain non-cash exchanges of investments were reported as cash used for purchases of available-for-sale investment securities and cash provided by proceeds from sales/maturities of available- for-sale investment securities. The Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012 have been revised in this Form 10-K by decreasing cash used for purchases of available-for-sale investment securities and cash provided by proceeds from sales/maturities of available-for-sale investment securities by $28 million and $64 million, respectively. We have determined that these adjustments are not material to our consolidated financial statements for any of the affected periods. Accounts Receivable and Allowance for Doubtful Accounts We estimate our accounts receivable risks and provide an allowance for doubtful accounts accordingly. We evaluate the adequacy of the allowance based on historical loss experience, aging of receivables, adverse situations that may affect a customer's ability to pay and prevailing economic conditions and make adjustments to the allowance as necessary. This evaluation is inherently subjective and actual results may differ significantly from estimated reserves. 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 42 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) deems the account to be uncollectible. We believe that our accounts receivable credit risk is limited because of our large number of customers, small account balances for most of our customers and customer geographic and industry diversification. Finance Receivables and Allowance for Credit Losses Finance receivables are composed of sales-type lease receivables and unsecured revolving loan receivables. We estimate our finance receivable risks and provide an allowance for credit losses accordingly. We evaluate the adequacy of the allowance for credit losses based on historical loss experience, the nature and volume of our portfolios, adverse situations that may affect a customer's ability to pay, prevailing economic conditions and our ability to manage the collateral and make adjustments to the allowance as necessary. This evaluation is inherently subjective and actual results may differ significantly from estimated reserves. We establish credit approval limits based on the credit quality of the customer and the type of equipment financed. Our policy is to discontinue revenue recognition for lease receivables that are more than 120 days past due and for unsecured loan receivables that are more than 90 days past due. We resume revenue recognition when customer payments reduce the account balance aging to 60 days or less past due. Finance receivables deemed uncollectible are written off against the allowance after all collection efforts have been exhausted and management deems the account to be uncollectible. We believe that our finance receivable credit risk is limited because of our large number of customers, small account balances for most of our customers and customer geographic and industry diversification. Inventories Inventories are stated at the lower of cost or market. Cost is determined on the last-in, first-out (LIFO) basis for most U.S. inventories and on the first-in, first-out (FIFO) basis for most non-U.S. inventories. Fixed Assets Property, plant and equipment and rental equipment are stated at cost and depreciated principally using the straight-line method over their estimated useful lives, which are up to 50 years for buildings, three to 15 years for machinery and equipment, four to six years for rental equipment and three to five years for computer equipment. Major improvements which add to productive capacity or extend the life of an asset are capitalized while repairs and maintenance are charged to expense as incurred. Leasehold improvements are amortized over the shorter of the estimated useful life or the remaining lease term. We capitalize certain costs of software developed for internal use. Capitalized costs include purchased materials and services, payroll and personnel-related costs and interest. The cost of internally developed software is amortized on a straight-line basis over its estimated useful life, principally three to 10 years. Fully depreciated assets are retained in fixed assets and accumulated depreciation until they are removed from service. In the case of disposals, assets and related accumulated depreciation are removed from the accounts and the net amounts, less proceeds from disposal, are included in earnings. Intangible assets Finite-lived intangible assets are amortized over their estimated useful lives, principally three to 15 years, using either the straight-line method or an accelerated attrition method. Costs incurred for the development of software to be sold, leased or otherwise marketed Costs incurred for the development of software to be sold, leased or otherwise marketed are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to the public. Capitalized software development costs include purchased materials and services and payroll and personnel-related costs attributable to programmers, software engineers, quality control and field certifiers, and are amortized on a straight-line basis over three to five years. We did not capitalize any software development costs in 2014 and capitalized $4 million of software development costs in 2013. Amortization of capitalized software development costs was $3 million, $8 million and $10 million for the years ended December 31, 2014, 2013 and 2012, respectively. Capitalized software development costs included in other assets in the Consolidated Balance Sheets at December 31, 2014 and 2013 were $2 million and $5 million, respectively. Research and Development Costs Research and product development costs include engineering costs related to research and product development activities and are expensed as incurred. Impairment Review for Long-lived and Finite-Lived Intangible Assets Long-lived assets 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 related estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition is compared to the carrying amount. If the sum of the expected cash flows is less than the 43 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) carrying amount, an impairment charge is recorded for an amount by which the carrying amount exceeds the fair value of the asset. 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. We derive cash flow estimates from our long-term business plans and historical experience. Impairment Review for Goodwill Goodwill is tested annually for impairment at the reporting unit level during the fourth quarter or sooner when circumstances indicate an impairment may exist. A reporting unit is the operating segment, or a business that is one level below that operating segment. Reporting units are aggregated as a single reporting unit if they have similar economic characteristics. Goodwill is tested for impairment using a two-step approach. In the first step, the fair value of each reporting unit is determined and compared to the reporting unit's carrying value, including goodwill. If the fair value of a reporting unit is less than its carrying value, the second step of the goodwill impairment test is performed to measure the amount of impairment, if any. In the second step, the fair value of the reporting unit is allocated to the assets and liabilities of the reporting unit as if it had been acquired in a business combination and the purchase price was equivalent to the fair value of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is referred to as the implied fair value of goodwill. The implied fair value of the reporting unit's goodwill is then compared to the actual carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized for the difference. The fair value of a reporting unit is determined based on a combination of various techniques, including the present value of future cash flows, multiples of competitors and multiples from sales of like businesses. Retirement Plans Net periodic benefit cost includes current service cost, interest cost, expected return on plan assets and the amortization of actuarial gains and losses. Actuarial gains and losses arise from actual experiences that differ from previous assumptions as well as changes in assumptions including expected return on plan assets, discount rates used to measure pension and other postretirement obligations and life expectancy. The expected return on assets is measured using the market-related value of assets, which is a calculated value that recognizes changes in the fair value of plan assets over 5 years. Actuarial gains and losses are recognized in accumulated other comprehensive loss, net of tax and amortized to benefit cost over the life expectancy of inactive plan participants. We recognize the funded status of pension and other postretirement benefit plans in the Consolidated Balance Sheets. Stock-based Compensation We measure compensation expense for stock-based awards based on the estimated fair value of the awards expected to vest (net of estimated forfeitures) and recognize the expense on a straight-line basis over the employee requisite service period. We estimate the fair value of stock awards using a Black-Scholes valuation model or a Monte Carlo simulation model for those awards that contain a market condition. We believe that the valuation techniques and the approach utilized to develop the underlying assumptions are appropriate in estimating the fair value of our stock awards. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees and subsequent events are not indicative of the reasonableness of the original estimates of fair value. Revenue Recognition 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 non-cancelable lease of equipment, a meter rental and an equipment maintenance agreement. 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. More specifically, revenue related to our offerings is recognized as follows: Sales Revenue Sales of Equipment We sell equipment directly to our customers and to distributors (re-sellers) throughout the world. We recognize revenue from these sales when the risks and rewards of ownership transfer to the customer, which is generally upon shipment or acceptance by the customer. We recognize revenue from the sale of equipment under sales-type leases as equipment sales revenue at the inception of the lease. We do not typically offer any rights of return or stock balancing rights. Sales revenue from customized equipment, mail creation equipment and shipping products is generally recognized when installed. 44 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) Sales of Supplies Revenue related to supplies is generally recognized upon delivery. Standalone Software Sales and Integration Services 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 any 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. We recognize revenue from standalone software licenses upon delivery of the product when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable and collectability is probable. For software licenses that are included in a lease contract, we recognize revenue upon shipment of the software unless the lease contract specifies that the license expires at the end of the lease or the price of the software is deemed not fixed or determinable based on historical evidence of similar software leases. In these instances, revenue is recognized on a straight-line basis over the term of the lease contract. We recognize revenue from software requiring integration services at the point of customer acceptance. We recognize revenue related to off-the-shelf perpetual software licenses generally upon shipment. Rentals Revenue We rent equipment, primarily postage meters and mailing equipment, under short-term rental agreements. Rentals revenue includes revenue from the subscription for digital meter services. We may invoice in advance for postage meter rentals according to the terms of the agreement. We initially defer these advanced billings and recognize rentals revenue on a straight-line basis over the invoice period. Revenues generated from financing customers for the continued use of equipment subsequent to the expiration of the original lease term are recognized as rentals revenue. We capitalize certain initial direct costs incurred in consummating a rental transaction and recognize these costs over the expected term of the agreement. Amortization of initial direct costs was $10 million, $11 million and $13 million in 2014, 2013 and 2012, respectively. Initial direct costs included in rental property and equipment, net in the Consolidated Balance Sheets at December 31, 2014 and 2013 were $22 million and $26 million, respectively. Financing Revenue We provide lease financing for our products primarily through sales-type leases. We also provide revolving lines of credit to our customers for the purchase of postage and supplies. We believe that our sales-type lease portfolio contains only normal collection risk. Accordingly, we record the fair value of equipment as sales revenue, the cost of equipment as cost of sales and the minimum lease payments plus the estimated residual value as finance receivables. The difference between the finance receivable and the equipment fair value is recorded as unearned income and is amortized as income over the lease term using the interest method. Equipment residual values are determined at inception of the lease using estimates of equipment fair value at the end of the lease term. Estimates of future equipment fair value are based primarily on historical experience. We also consider forecasted supply and demand for various products, product retirement and launch plans, regulatory changes, remanufacturing strategies, used equipment markets, if any, 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. Support Services Revenue We provide support services for our equipment primarily through maintenance contracts. Revenue related to these agreements is recognized on a straight-line basis over the term of the agreement. Business Services Revenue Business services revenue includes revenue from presort mail services, marketing services, global ecommerce solutions and shipping solutions. Revenue for these services is recognized as the services are provided. We also evaluate whether it is appropriate to record revenue on a gross basis when we are acting as a principal in the transaction or net of costs when we are acting as an agent between the customer and the vendor. We consider several factors in determining whether we 45 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) are acting as principal or agent such as whether we are the primary obligor to the customer, have control over the pricing and have credit risk. Shipping and Handling Shipping and handling costs are recognized as incurred and recorded in cost of revenues. Product Warranties We provide product warranties in conjunction with the sale of certain products, generally for a period of 90 days from the date of installation. We estimate our liability for product warranties based on historical claims experience and other currently available evidence. Our product warranty liability at December 31, 2014 and 2013 was not material. Deferred Marketing Costs We capitalize certain costs associated with the acquisition of new customers and recognize these costs over the expected revenue stream of eight years. Amortization of deferred marketing costs was $23 million, $27 million and $30 million in 2014, 2013 and 2012, respectively. Deferred marketing costs included in other assets in the Consolidated Balance Sheets at December 31, 2014 and 2013 were $49 million and $59 million, respectively. We review individual marketing programs for impairment on a quarterly basis or as circumstances warrant. Restructuring Charges Costs associated with exit or disposal activities, including lease termination costs and employee severance costs associated with restructuring, are recognized when they are incurred. The cost and related liability for termination benefit arrangements is recognized when they are both probable and reasonably estimable. 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 foreign exchange rate fluctuations on financial results and manage the related cost of debt. We do not use derivatives for trading or speculative purposes. We record our derivative instruments 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. To qualify as a hedge, a derivative must be highly effective in offsetting the risk designated for hedging purposes. The hedge relationship must be formally documented at inception, detailing the particular risk management objective and strategy for the hedge. The effectiveness of the hedge relationship is evaluated on a retrospective and prospective basis. The use of derivative instruments exposes us to counterparty credit risk. To mitigate such risks, we enter into contracts with only those financial institutions that meet stringent credit requirements. We regularly review our credit exposure balances as well as the creditworthiness of our counterparties. We have not seen a material change in the creditworthiness of those banks acting as derivative counterparties. Income Taxes We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the carrying amounts of assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the period in which related temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in this assessment. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date of such change. Earnings per Share Basic earnings per share is based on the weighted-average number of common shares outstanding during the year. Diluted earnings per share also includes the dilutive effect of stock awards, preference stock, preferred stock and stock purchase plans. Translation of Non-U.S. Currency Amounts In general, the functional currency of our foreign operations is the local currency. Assets and liabilities of subsidiaries operating outside the U.S. are translated at rates in effect at the end of the period and revenue and expenses are translated at average monthly rates during the period. Net deferred translation gains and losses are included as a component of accumulated other comprehensive income. 46 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) 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. Legal fees are expensed as incurred. New Accounting Pronouncements In August 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements — Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This standard requires management to evaluate the entity's ability to continue as a going concern for 12 months following the issuance of the financial statements and provide related footnote disclosures. This standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods thereafter. Early adoption is permitted. We do not believe this standard will have a significant impact on our consolidated financial statements or disclosures. In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. The new standard requires companies to recognize revenue for the transfer of goods and services to customers in amounts that reflect the consideration the company expects to receive in exchange for those goods and services. The new standard will also result in enhanced disclosures about revenue. This standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and can be adopted either retrospectively or as a cumulative-effect adjustment. Early adoption is prohibited. We are assessing the impact the adoption of this standard will have on our consolidated financial statements and disclosures. In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. The standard is effective on January 1, 2015, but early adoption is permitted for disposals or classifications of assets held for sale that have not been reported in financial statements previously issued or available for issuance. We elected to adopt this standard effective April 1, 2014. The adoption of this standard did not have a significant impact on our consolidated financial statements. 47 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) 2. Segment Information Small & Medium Business Solutions: North America Mailing: Includes the revenue and related expenses from the sale, rental, financing and servicing of mailing equipment and supplies for small and medium businesses to efficiently create mail and evidence postage in the U.S. and Canada. International Mailing: Includes the revenue and related expenses from the sale, rental, financing and servicing of mailing equipment and supplies for small and medium businesses to efficiently create mail and evidence postage in areas outside North America. Enterprise Business Solutions: Production Mail: Includes the worldwide revenue and related expenses from the sale of production mail inserting and sortation equipment, high-speed production print systems, supplies and related support services to large enterprise clients to process inbound and outbound mail. Presort Services: Includes revenue and related expenses from presort mail services for our large enterprise clients to qualify large mail volumes for postal worksharing discounts. Digital Commerce Solutions: Digital Commerce Solutions: Includes the worldwide revenue and related expenses from (i) the sale of non-equipment-based mailing, customer information management, location intelligence and customer engagement solutions and related support services; (ii) shipping and global ecommerce solutions; and (iii) direct marketing services for targeted clients. We determine segment earnings before interest and taxes (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 asset impairment charges, which are not allocated to a particular business segment. Management uses segment EBIT to measure profitability and performance at the segment level. Management believes segment EBIT provides a useful measure of our operating performance and underlying trends of the businesses. Segment EBIT may not be indicative of our overall consolidated performance and therefore, should be read in conjunction with our consolidated results of operations. The following tables provide information about our reportable segments. North America Mailing International Mailing Small & Medium Business Solutions Production Mail Presort Services Enterprise Business Solutions Digital Commerce Solutions Total revenue Geographic Data: United States Outside United States Total Revenues Years Ended December 31, 2014 1,491,927 572,440 2,064,367 2013 2012 $ 1,555,585 $ 1,643,855 602,582 2,158,167 601,629 2,245,484 462,199 456,556 918,755 838,382 3,821,504 2,743,957 1,077,547 3,821,504 511,544 430,469 942,013 691,155 3,791,335 2,654,301 1,137,034 3,791,335 480,718 429,804 910,522 667,707 3,823,713 2,669,074 1,154,639 3,823,713 $ $ $ $ $ $ $ $ $ $ 48 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) North America Mailing International Mailing Small & Medium Business Solutions Production Mail Presort Services Enterprise Business Solutions Digital Commerce Solutions Total EBIT Reconciling items: Interest, net Unallocated corporate expenses Restructuring charges and asset impairments, net Other expense, net Income from continuing operations before income taxes North America Mailing International Mailing Small & Medium Business Solutions Production Mail Presort Services Enterprise Business Solutions Digital Commerce Solutions Total for reportable segments Reconciliation to consolidated amount: Unallocated amount Discontinued operations Consolidated depreciation and amortization EBIT Years Ended December 31, $ 2014 642,521 88,710 731,231 47,543 98,230 145,773 83,725 960,729 2013 2012 $ 640,830 $ 646,979 71,516 712,346 55,000 83,259 138,259 54,777 905,382 75,844 722,823 48,981 106,170 155,151 53,242 931,216 (169,450) (229,785) (84,560) (45,738) 431,196 $ (186,987) (217,458) (84,344) (32,639) 383,954 (184,675) (216,457) (17,176) (1,138) $ 511,770 Depreciation and amortization Years Ended December 31, 2014 2013 2012 68,291 30,629 98,920 7,740 28,462 36,202 33,654 168,776 29,312 — 198,088 $ $ 81,238 29,515 110,753 15,740 29,999 45,739 24,361 180,853 14,052 16,338 211,243 $ 104,957 26,804 131,761 12,227 26,753 38,980 30,167 200,908 16,785 37,863 255,556 $ $ $ $ 49 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) North America Mailing International Mailing Small & Medium Business Solutions Production Mail Presort Services Enterprise Business Solutions Digital Commerce Solutions Total for reportable segments Reconciliation to consolidated amount: Unallocated amount Discontinued operations Consolidated capital expenditures North America Mailing International Mailing Small & Medium Business Solutions Production Mail Presort Services Enterprise Business Solutions Digital Commerce Solutions Total for reportable segments Reconciliation to consolidated amount: Cash and cash equivalents Short-term investments Other corporate assets Discontinued operations Consolidated assets Identifiable long-lived assets: United States Outside United States Total Capital expenditures Years Ended December 31, 2014 2013 2012 67,596 13,966 81,562 801 17,457 18,258 12,467 112,287 68,269 — 180,556 $ $ 57,973 25,386 83,359 2,875 12,512 15,387 25,562 124,308 4,876 8,328 78,511 29,642 108,153 12,339 17,220 29,559 4,794 142,506 1,231 32,849 $ 137,512 $ 176,586 Assets December 31, 2014 2,614,123 687,233 3,301,356 2013 2012 $ 2,767,743 $ 2,863,233 856,073 3,623,816 866,620 3,729,853 266,831 346,850 613,681 1,212,105 5,127,142 1,079,145 32,121 247,285 — 6,485,693 391,311 94,160 485,471 305,428 343,206 648,634 386,338 369,405 755,743 1,242,013 5,514,463 1,291,670 5,777,266 907,806 31,128 217,913 101,398 6,772,708 351,772 119,545 471,317 913,276 36,611 278,731 854,007 7,859,891 483,422 143,147 626,569 $ $ $ $ $ $ $ $ $ $ $ $ 50 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) 3. Discontinued Operations Discontinued operations include PBMS, IMS and our Nordic furniture business, which were sold during 2013 and DIS, which was sold in 2014. Discontinued operations also include certain tax benefits related to our Capital Services business that was sold in 2006. The following tables show selected financial information included in discontinued operations: Year Ended December 31, 2014 Revenue (Loss) income from operations Gain on sale Income before taxes Tax (benefit) provision Net income Capital Services, net of tax Income from discontinued operations $ $ $ PBMS IMS Nordic furniture business — $ — $ — $ 308 $ 509 $ (245) $ 2,778 2,533 (6,931) 9,464 1,994 2,302 851 $ 1,451 $ — 509 141 368 $ DIS 19,858 2,123 24,733 26,856 18,184 8,672 Total 19,858 2,695 29,505 32,200 12,245 19,955 13,794 33,749 $ $ $ $ Revenue $ 639,237 $ 23,036 $ 37,785 $ 78,066 $ 778,124 Year Ended December 31, 2013 PBMS IMS Nordic furniture business DIS Total (Loss) income from operations Gain (loss) on sale (Loss) income before taxes Tax provision (benefit) Net (loss) income Capital Services, net of tax Loss from discontinued operations Revenue Income (loss) from operations Tax provision (benefit) Net income (loss) Capital Services, net of tax Income from discontinued operations $ (118,017) $ 5,126 (112,891) 41,384 $ (154,275) $ (3,057) $ (2,717) (5,774) (1,064) (4,710) $ (4,037) $ 4,562 525 149 376 19,223 $ (105,888) — 19,223 5,102 6,971 (98,917) 45,571 $ 14,121 $ (144,488) (289) $ (144,777) Year Ended December 31, 2012 IMS Nordic furniture business 135,222 $ 67,994 (40,084) $ (15,003) (25,081) $ 2,839 794 2,045 $ $ $ PBMS 920,958 67,458 29,255 38,203 $ $ $ $ $ $ DIS Total 91,351 $ 1,215,525 22,542 5,965 16,577 $ $ $ 52,755 21,011 31,744 34,312 66,056 The loss from discontinued operations in 2013 includes goodwill impairment charges of $101 million and asset impairment charges of $15 million. As a result of lower than expected operating performance of our PBMS North America business due to the loss of certain customer contracts, pricing pressure on contract renewals and a longer than originally anticipated sales cycle for some of our new growth areas, future cash flows were estimated to be lower than originally projected. Given these factors, a goodwill impairment test was performed and it was determined that the carrying value of goodwill exceeded its implied fair value. Accordingly, a goodwill impairment charge of 51 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) $98 million was recognized to write-down the carrying value of goodwill to its estimated implied fair value. The fair value of PBMS North America was determined based on a combination of techniques, including external valuation data, the present value of future cash flows and applicable multiples of competitors. These inputs were classified as Level 3 in the fair value hierarchy. In 2013, we also recorded goodwill impairment charges of $2 million in connection with the sale of PBMS International and $1 million in connection with the sale of the Nordic furniture business. During 2012, in connection with our decision to exit our IMS operations, we conducted a goodwill impairment review. We determined the fair value of IMS based on third-party written offers to purchase the business as well as applying an income approach with revised cash flow projections. The inputs used to determine the fair value of IMS were classified as Level 3 in the fair value hierarchy. Based on the results of our impairment test, a goodwill impairment charge of $18 million and asset impairment charges of $17 million were recorded to write-down the carrying value of goodwill, intangible assets and other assets to their respective implied fair values. 4. Earnings per Share The calculations of basic and diluted earnings per share for the years ended December 31, 2014, 2013 and 2012 are presented below. The sum of earnings per share amounts may not equal the totals due to rounding. Numerator: Amounts attributable to common stockholders: Net income from continuing operations Income (loss) from discontinued operations Net income (numerator for diluted EPS) Less: Preference stock dividend Income attributable to common stockholders (numerator for basic EPS) Denominator (in thousands): Weighted-average shares used in basic EPS Effect of dilutive shares: Preferred stock Preference stock Stock plans Weighted-average shares used in diluted EPS Basic earnings per share: Continuing operations Discontinued operations Net income attributable to Pitney Bowes Inc. Diluted earnings per share: Continuing operations Discontinued operations Net income attributable to Pitney Bowes Inc. Years Ended December 31, 2014 2013 2012 $ 300,006 $ 33,749 333,755 44 287,612 (144,777) 142,835 46 $ 379,107 66,056 445,163 51 $ 333,711 $ 142,789 $ 445,112 201,992 201,614 200,389 1 344 1,624 203,961 2 381 960 2 398 577 202,957 201,366 $ $ $ $ 1.49 0.17 1.65 1.47 0.17 1.64 $ $ $ $ 1.43 (0.72) 0.71 1.42 (0.71) 0.70 $ $ $ $ 1.89 0.33 2.22 1.88 0.33 2.21 Anti-dilutive options excluded from diluted earnings per share (in thousands): 7,322 12,448 13,801 52 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) 5. Inventories Inventories at December 31, 2014 and 2013 consisted of the following: Raw materials and work in process Supplies and service parts Finished products Inventory at FIFO cost Excess of FIFO cost over LIFO cost Total inventory, net 6. Finance Assets Finance Receivables December 31, 2014 2013 37,175 33,760 26,992 97,927 (13,100) 84,827 $ $ 33,920 48,165 38,515 120,600 (17,020) 103,580 $ $ Finance receivables are comprised of sales-type lease receivables and unsecured revolving loan receivables. Sales-type lease receivables are generally due in monthly, quarterly or semi-annual installments over periods ranging from three to five years. Loan receivables arise primarily from financing services offered to our clients for postage and supplies. Loan receivables are generally due each month; however, customers may rollover outstanding balances. Interest is recognized on loan receivables using the effective interest method and related annual fees are initially deferred and recognized ratably over the annual period covered. Customer acquisition costs are expensed as incurred. Finance receivables at December 31, 2014 and 2013 consisted of the following: Sales-type lease receivables Gross finance receivables Unguaranteed residual values Unearned income Allowance for credit losses December 31, 2014 December 31, 2013 North America International Total North America International Total $ 1,286,624 $ 366,669 $ 1,653,293 $ 1,456,420 $ 456,759 $ 1,913,179 105,205 18,291 123,496 121,339 21,553 142,892 (270,196) (83,110) (353,306) (299,396) (101,311) (400,707) (10,281) (5,129) (15,410) (14,165) (9,703) (23,868) Net investment in sales-type lease receivables 1,111,352 296,721 1,408,073 1,264,198 367,298 1,631,496 Loan receivables Loan receivables Allowance for credit losses Net investment in loan receivables 376,987 (10,912) 366,075 47,665 (1,788) 45,877 424,652 397,815 (12,700) (11,165) 411,952 386,650 49,054 (1,916) 47,138 446,869 (13,081) 433,788 Net investment in finance receivables $ 1,477,427 $ 342,598 $ 1,820,025 $ 1,650,848 $ 414,436 $ 2,065,284 Finance receivables with a net investment of $62 million were included in the sale of DIS. 53 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) Loans receivables are due within one year. Maturities of gross sales-type lease finance receivables at December 31, 2014 were as follows: 2015 2016 2017 2018 2019 Thereafter Total Sales-type Lease Receivables North America 580,232 $ 362,876 214,582 97,914 25,497 5,523 International Total $ 146,670 $ 104,442 67,824 36,227 10,760 746 726,902 467,318 282,406 134,141 36,257 6,269 $ 1,286,624 $ 366,669 $ 1,653,293 Allowance for Credit Losses Activity in the allowance for credit losses for the years ended December 31, 2014, 2013 and 2012 was as follows: Sales-type Lease Receivables Loan Receivables North America International North America International Total Balance at December 31, 2011 $ 28,661 $ 12,039 $ 20,272 $ 2,458 $ Amounts charged to expense Accounts written off Balance at December 31, 2012 Amounts charged to expense Accounts written off Balance at December 31, 2013 Amounts charged to expense Accounts written off 2,276 (13,958) 16,979 4,584 (7,398) 14,165 4,346 (8,230) Balance at December 31, 2014 $ 10,281 $ 994 (4,371) 8,662 4,553 (3,512) 9,703 866 (5,440) 5,129 $ 3,278 (11,228) 12,322 9,663 (10,820) 11,165 10,237 (10,490) 10,912 $ 903 (1,230) 2,131 1,254 (1,469) 1,916 1,626 (1,754) 1,788 $ 63,430 7,451 (30,787) 40,094 20,054 (23,199) 36,949 17,075 (25,914) 28,110 Aging of Receivables The aging of finance receivables at December 31, 2014 and 2013 was as follows: December 31, 2014 1 - 30 days 31 - 60 days 61 - 90 days > 90 days Total Past due amounts > 90 days Still accruing interest Not accruing interest Total Sales-type Lease Receivables Loan Receivables North America International North America International Total $ $ $ $ 1,217,623 23,242 24,198 21,561 1,286,624 5,931 15,630 21,561 $ $ $ $ 347,236 6,207 4,494 8,732 366,669 2,517 6,215 8,732 $ $ $ $ 359,672 9,245 3,498 4,572 376,987 $ $ — $ 4,572 4,572 $ 45,678 1,201 413 373 47,665 $ $ 1,970,209 39,895 32,603 35,238 2,077,945 — $ 373 373 $ 8,448 26,790 35,238 54 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) Sales-type Lease Receivables Loan Receivables North America International North America International Total $ 1,383,253 $ 425,923 $ 379,502 $ 42,573 $ 2,231,251 32,102 20,830 20,235 1,456,420 6,413 13,822 20,235 $ $ $ $ $ $ 11,760 5,724 13,352 456,759 3,979 9,373 13,352 $ $ $ 10,464 3,330 4,519 4,391 1,363 727 58,717 31,247 38,833 397,815 $ 49,054 $ 2,360,048 — $ 4,519 4,519 $ — $ 727 727 $ 10,392 28,441 38,833 December 31, 2013 1 - 30 days 31 - 60 days 61 - 90 days > 90 days Total Past due amounts > 90 days Still accruing interest Not accruing interest Total Credit Quality The extension of credit and management of credit lines to new and existing clients uses a combination of an automated credit score, where available, and a detailed manual review of the client's financial condition and, when applicable, payment history. Once credit is granted, the payment performance of the client is managed through automated collections processes and is supplemented with direct follow up should an account become delinquent. We have robust automated collections and extensive portfolio management processes. The portfolio management processes ensure that our global strategy is executed, collection resources are allocated appropriately and enhanced tools and processes are implemented as needed. We use a third party to score the majority of the North America portfolio on a quarterly basis using a commercial credit score. We do not use a third party to score our International portfolio because the cost to do so is prohibitive, it is a localized process and there is no single credit score model that covers all countries. The table below shows the North America portfolio at December 31, 2014 and 2013 by relative risk class (low, medium, high) based on the relative scores of the accounts within each class. The relative scores are determined based on a number of factors, including the company type, ownership structure, payment history and financial information. A fourth class is shown for accounts that are not scored. Absence of a score is not indicative of the credit quality of the account. The degree of risk, as defined by the third party, refers to the relative risk that an account in the next 12 month period may become delinquent. • Low risk accounts are companies with very good credit scores and are considered to approximate the top 30% of all commercial borrowers. • Medium risk accounts are companies with average to good credit scores and are considered to approximate the middle 40% of all commercial borrowers. • High risk accounts are companies with poor credit scores, are delinquent or are at risk of becoming delinquent and are considered to approximate the bottom 30% of all commercial borrowers. 55 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) Sales-type lease receivables Low Medium High Not Scored Total Loan receivables Low Medium High Not Scored Total 7. Fixed Assets Fixed assets at December 31, 2014 and 2013 consisted of the following: Land Buildings Machinery and equipment Accumulated depreciation Property, plant and equipment, net Rental property and equipment Accumulated depreciation Rental property and equipment, net December 31, 2014 2013 $ 936,979 $ 1,081,853 $ $ 230,799 45,202 73,644 1,286,624 259,436 96,243 10,913 10,395 $ $ 244,379 51,851 78,337 1,456,420 279,607 95,524 11,511 11,173 $ 376,987 $ 397,815 December 31, 2014 2013 $ 9,908 $ 213,196 923,374 1,146,478 (861,387) 285,091 462,244 (261,864) 200,380 $ $ $ $ $ $ 6,797 176,200 918,075 1,101,072 (855,901) 245,171 537,128 (310,982) 226,146 Depreciation expense was $165 million, $158 million and $177 million for the years ended December 31, 2014, 2013 and 2012, respectively. 56 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) 8. Intangible Assets and Goodwill Intangible assets Intangible assets at December 31, 2014 and 2013 consisted of the following: December 31, 2014 December 31, 2013 Customer relationships Supplier relationships Software & technology Trademarks & other Gross Carrying Amount $ 337,438 29,000 160,825 33,079 Total intangible assets, net $ 560,342 $ Accumulated Amortization $ (263,121) $ (27,913) (154,610) (32,525) (478,169) $ Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount 74,317 $ 354,373 $ 1,087 6,215 554 29,000 167,009 42,773 82,173 $ 593,155 $ (251,388) $ (25,013) (155,009) (41,358) (472,768) $ 102,985 3,987 12,000 1,415 120,387 Amortization expense for intangible assets was $34 million, $37 million and $41 million for the years ended December 31, 2014, 2013 and 2012, respectively. The future amortization expense for intangible assets at December 31, 2014 was as follows: Year ended December 31, 2015 2016 2017 2018 2019 Thereafter Total $ 28,827 22,061 10,949 8,321 5,257 6,758 $ 82,173 Actual amortization expense may differ from the amounts above due to, among other things, fluctuations in foreign currency exchange rates, acquisitions, divestitures and impairment charges. 57 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) Goodwill The changes in the carrying amount of goodwill, by reporting segment, for the years ended December 31, 2014 and 2013 are shown in the tables below. Prior year amounts have been recast for the change in reportable segments and discontinued operations. Gross value before accumulated impairment Accumulated impairment December 31, 2013 Impairment Other (1) North America Mailing International Mailing Small & Medium Business Solutions Production Mail Presort Services Enterprise Business Solutions Digital Commerce Solutions Total reportable segments Discontinued operations Total goodwill $ 326,664 $ — $ 326,664 $ — $ 182,261 508,925 118,060 195,140 313,200 903,393 1,725,518 9,353 — — — — — — 182,261 508,925 118,060 195,140 313,200 903,393 — 1,725,518 — 9,353 — — — — — — — — $ 1,734,871 $ — $ 1,734,871 $ — $ (17,216) $ (20,115) (37,331) (7,223) — (7,223) (8,243) (52,797) (9,353) (62,150) $ December 31, 2014 309,448 162,146 471,594 110,837 195,140 305,977 895,150 1,672,721 — 1,672,721 Gross value before accumulated impairment Accumulated impairment December 31, 2012 Impairment Other (1) December 31, 2013 North America Mailing International Mailing Small & Medium Business Solutions Production Mail Presort Services Enterprise Business Solutions Digital Commerce Solutions Total reportable segments Discontinued operations Total goodwill $ 322,610 $ — $ 322,610 $ — $ 182,746 505,356 120,881 195,140 316,021 900,347 — — — — — — 182,746 505,356 120,881 195,140 316,021 900,347 — — — — — — $ 4,054 (485) 3,569 (2,821) — (2,821) 3,046 326,664 182,261 508,925 118,060 195,140 313,200 903,393 1,721,724 562,879 $ 2,284,603 — 1,721,724 (148,465) 414,414 $ (148,465) $ 2,136,138 $ — (101,415) (101,415) $ (299,852) $ 3,794 (303,646) 1,725,518 9,353 1,734,871 (1) Primarily represents foreign currency translation adjustments. For discontinued operations, the adjustment primarily represents the write-off of remaining goodwill upon sale. 58 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) 9. Fair Value Measurements and Derivative Instruments We measure certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. An entity is required to classify certain assets and liabilities measured at fair value based on the following fair value hierarchy that prioritizes the inputs used to measure fair value: Level 1 – Unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or other inputs that are observable or can be corroborated by observable market data. Level 3 – Unobservable inputs that are supported by little or no market activity and may be derived from internally developed methodologies based on management's best estimates. The following tables show, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis at December 31, 2014 and 2013. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect their placement within the fair value hierarchy. Assets: Investment securities Money market funds / commercial paper $ 505,643 $ 193,986 $ — $ 699,629 Level 1 Level 2 Level 3 Total December 31, 2014 — — 113,974 — — — 27,409 24,077 24,006 67,448 156,614 1,386 — — — — — — 27,409 24,077 137,980 67,448 156,614 1,386 619,617 $ 494,926 $ — $ 1,114,543 — $ — $ (2,988) $ (2,988) $ — $ — $ (2,988) (2,988) Equity securities Commingled fixed income securities Debt securities - U.S. and foreign governments, agencies and municipalities Debt securities - corporate Mortgage-backed / asset-backed securities Derivatives Foreign exchange contracts Total assets Liabilities: Derivatives Foreign exchange contracts Total liabilities $ $ $ 59 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) Level 1 Level 2 Level 3 Total December 31, 2013 Assets: Investment securities Money market funds / commercial paper $ 403,706 $ 224,440 $ — $ 628,146 Equity securities Commingled fixed income securities Debt securities - U.S. and foreign governments, agencies and municipalities Debt securities - corporate Mortgage-backed / asset-backed securities Derivatives Foreign exchange contracts Total assets Liabilities: Investment securities Mortgage-backed securities Derivatives Foreign exchange contracts Total liabilities Investment Securities — — 122,783 — — — 26,536 24,695 17,653 38,264 164,598 1,358 — — — — — — 26,536 24,695 140,436 38,264 164,598 1,358 526,489 $ 497,544 $ — $ 1,024,033 — $ (4,445) $ — $ (4,445) — — $ (3,009) (7,454) $ — — $ (3,009) (7,454) $ $ $ The valuation of investment securities is based on the market approach using inputs that are observable, or can be corroborated by observable data, in an active marketplace. The following information relates to our classification into the fair value hierarchy: • Money Market Funds / Commercial Paper: Money market funds typically invest in government securities, certificates of deposit, commercial paper and other highly liquid, low risk securities. Money market funds are principally used for overnight deposits and are classified as Level 1 when unadjusted quoted prices in active markets are available and as Level 2 when they are not actively traded on an exchange. Direct investments in commercial paper are not listed on an exchange in an active market and are classified as Level 2. • Equity Securities: Equity securities are comprised of mutual funds investing in U.S. and foreign common stock. These mutual funds are classified as Level 2 as they are not separately listed on an exchange. • Commingled Fixed Income Securities: Mutual funds that invest in a variety of fixed income securities including securities of the U.S. government and its agencies, corporate debt, mortgage-backed securities and asset-backed securities. The value of the funds is based on the market value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding, as reported by the fund manager. These commingled funds are not listed on an exchange in an active market and are classified as Level 2. • Debt Securities – U.S. and Foreign Governments, Agencies and Municipalities: Debt securities are classified as Level 1 where active, high volume trades for identical securities exist. Valuation adjustments are not applied to these securities. Debt securities valued using quoted market prices for similar securities or benchmarking model derived prices to quoted market prices and trade data for identical or comparable securities are classified as Level 2. • Debt Securities – Corporate: Corporate debt securities are valued using recently executed transactions, market price quotations where observable, or bond spreads. The spread data used are for the same maturity as the security. These securities are classified as Level 2. • Mortgage-Backed Securities / Asset-Backed Securities: These securities are valued based on external pricing indices. When external index pricing is not observable, these securities are valued based on external price/spread data. These securities are classified as Level 2. Investment securities include investments held by the Bank whose primary business is to provide financing solutions to clients that rent postage meters and purchase supplies. The Bank's assets and liabilities consist primarily of cash, finance receivables, short and long-term investments and deposit accounts. 60 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) The Bank's investment securities are classified as available-for-sale and recorded at fair value in the Consolidated Balance Sheets as cash and cash equivalents, short-term investments and other assets depending on the type of investment and maturity. Unrealized holding gains and losses are recorded, net of tax, in accumulated other comprehensive income (AOCI). Available-For-Sale Securities At December 31, 2014 and 2013, available-for-sale securities consisted of the following: U.S. and foreign governments, agencies and municipalities Corporate Mortgage-backed / asset-backed securities Total December 31, 2014 Gross unrealized gains Gross unrealized losses 2,905 1,569 2,362 6,836 $ $ (764) (291) (1,078) (2,133) Estimated fair value 137,980 $ 67,448 156,614 $ 362,042 Amortized cost 135,839 $ $ 66,170 155,330 $ 357,339 $ December 31, 2013 Amortized cost Gross unrealized gains Gross unrealized losses Estimated fair value U.S. and foreign governments, agencies and municipalities $ 121,803 $ Corporate Mortgage-backed / asset-backed securities Total 37,901 165,664 $ 325,368 $ 999 935 1,570 3,504 $ $ (3,372) (572) (2,636) (6,580) $ 119,430 38,264 164,598 $ 322,292 Investment securities that were in a loss position for 12 or more continuous months at December 31, 2014 had aggregate unrealized holding losses of $1 million and an estimated fair value of $42 million. Investment securities that were in a loss position for less than 12 continuous months at December 31, 2014 had aggregate unrealized holding losses of $1 million and an estimated fair value of $88 million. Investment securities that were in a loss position for 12 or more continuous months at December 31, 2013 had aggregate unrealized holding losses of $1 million and an estimated fair value of $19 million. Investment securities that were in a loss position for less than 12 continuous months at December 31, 2013 had aggregate unrealized holding losses of $6 million and an estimated fair value of $166 million. We have not recognized an other-than-temporary impairment on any of the investment securities in an unrealized loss position because we do not intend to sell these securities, it is more likely than not that we will not be required to sell these securities before recovery of the unrealized losses and we expect to receive the contractual principal and interest on these investment securities. At December 31, 2014, the amortized cost and estimated fair value of available-for-sale securities have scheduled maturities as follows: Within 1 year After 1 year through 5 years After 5 years through 10 years After 10 years Total Amortized cost 48,452 $ 70,734 80,426 157,727 357,339 $ Estimated fair value $ $ 48,527 71,526 81,744 160,245 362,042 The expected payments on mortgage-backed and asset-backed securities may not coincide with their contractual maturities as borrowers have the right to prepay obligations with or without prepayment penalties. We have not experienced any write-offs in our investment portfolio. The majority of our mortgage-backed securities are either guaranteed or supported by the U.S. government. We have no investments in inactive markets that would warrant a possible change in our pricing methods or classification within the fair value hierarchy. Further, we have no investments in auction rate securities. 61 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) Derivative Instruments The valuation of foreign exchange derivatives is based on a market approach using observable market data inputs, such as foreign currency spot and forward rates and yield curves. As required by the fair value measurements guidance, we also incorporate counterparty credit risk and our credit risk into the fair value measurement of our derivative assets and liabilities, respectively. We derive credit risk from observable data in the credit default swap market. The fair value of our derivative instruments at December 31, 2014 and 2013 was as follows: Designation of Derivatives Balance Sheet Location 2014 2013 December 31, Derivatives designated as hedging instruments Foreign exchange contracts Other current assets and prepayments $ 762 $ Accounts payable and accrued liabilities — Derivatives not designated as hedging instruments Foreign exchange contracts Other current assets and prepayments Accounts payable and accrued liabilities 624 (2,988) Total derivative assets Total derivative liabilities Total net derivative liability 1,386 (2,988) (1,602) $ $ 546 (526) 812 (2,483) 1,358 (3,009) (1,651) Foreign Exchange Contracts We enter into foreign exchange contracts to mitigate the currency risk associated with the anticipated purchase of inventory between affiliates and from third parties. These contracts are designated as cash flow hedges. The effective portion of the gain or loss on cash flow hedges is included in AOCI in the period that the change in fair value occurs and is reclassified to earnings in the period that the hedged item is recorded in earnings. At December 31, 2014 and 2013, we had outstanding contracts associated with these anticipated transactions with a notional amount of $18 million and $26 million, respectively. The amounts included in AOCI at December 31, 2014 will be recognized in earnings within the next 12 months. No amount of ineffectiveness was recorded in earnings for these designated cash flow hedges. The following represents the results of cash flow hedging relationships for the years ended December 31, 2014 and 2013: Derivative Instrument Foreign exchange contracts Derivative Gain (Loss) Recognized in AOCI (Effective Portion) 2014 2013 $ 1,878 $ 241 Year Ended December 31, Location of Gain (Loss) (Effective Portion) Revenue Cost of sales Gain (Loss) Reclassified from AOCI to Earnings (Effective Portion) 2014 2013 $ $ 1,276 (140) 1,136 $ $ (835) 332 (503) We also enter into foreign exchange contracts to minimize the impact of exchange rate fluctuations on short-term intercompany loans and related interest that are denominated in a foreign currency. The revaluation of the intercompany loans and interest and the mark-to- market adjustment on the derivatives are both recorded in earnings. All outstanding contracts at December 31, 2014 mature over the next 13 months. 62 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) The following represents the results of our non-designated derivative instruments for the years ended December 31, 2014 and 2013: Derivatives Instrument Foreign exchange contracts Location of Derivative Gain (Loss) Selling, general and administrative expense Year Ended December 31, Derivative Gain (Loss) Recognized in Earnings 2014 2013 $ (4,701) $ (16,574) Interest Rate Swaps We had no interest rate swap agreements outstanding at December 31, 2014 or 2013. During 2013, we had interest rate swaps related to our fixed-rate debt outstanding. These interest rate swaps were designated as fair value hedges and changes in the fair value of both the derivative and item being hedged were recognized in earnings. No amount of ineffectiveness was recorded in earnings during 2013. Activity for interest rate swaps outstanding during 2013 was as follows: Derivative Instrument Interest rate swaps Location of Gain (Loss) Interest expense Year Ended December 31, 2013 Derivative Gain Recognized in Earnings Hedged Item Expense Recognized in Earnings $ 3,798 $ (11,883) Credit-Risk-Related Contingent Features Certain derivative instruments contain credit-risk-related contingent features that would require us to post collateral based on a combination of our long-term senior unsecured debt ratings and the net fair value of our derivatives. At December 31, 2014, the maximum amount of collateral that we would have been required to post had the credit-risk-related contingent features been triggered was $2 million. Fair Value of Financial Instruments Our financial instruments include cash and cash equivalents, investment securities, accounts receivable, loan receivables, derivative instruments, accounts payable and debt. The carrying value for cash and cash equivalents, accounts receivable, loans receivable, and accounts payable approximate fair value because of the short maturity of these instruments. The fair value of our debt is estimated based on recently executed transactions and market price quotations. The inputs used to determine the fair value of our debt were classified as Level 2 in the fair value hierarchy. The carrying value and estimated fair value of our debt at December 31, 2014 and 2013 was as follows: Carrying value Fair value December 31, 2014 3,252,006 3,440,383 $ $ 2013 $ $ 3,346,295 3,539,022 63 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) 10. Supplemental Balance Sheet Information The following table shows selected balance sheet information at December 31, 2014 and 2013: Other assets: Long-term investments Deferred charges Other Total Accounts payable and accrued liabilities: Accounts payable Customer deposits Employee related liabilities Miscellaneous other Total Assets held for sale $ $ $ December 31, 2014 2013 324,439 $ 149,092 95,579 569,110 $ 293,514 161,570 116,723 571,807 268,527 $ 661,167 319,963 309,074 270,067 672,440 332,072 370,003 $ 1,558,731 $ 1,644,582 Assets held for sale at December 31, 2014 and 2013 includes the fair value of our corporate headquarters building. At December 31, 2014, the fair value of the building, determined as the estimated selling price less the costs to sell, was $44 million. Assets held for sale at December 31, 2014 also includes the value of a lease portfolio that was subsequently sold in January 2015. 11. Restructuring Charges and Asset Impairments Operational Excellence In 2013, we initiated actions designed to enhance our responsiveness to changing market conditions, further streamline our business operations, reduce our cost structure and create long-term flexibility to invest in growth (Operational Excellence). The table below shows the activity in our restructuring reserves for Operational Excellence for the years ended December 31, 2014 and 2013 and includes amounts for both continuing operations and discontinued operations. Balance at December 31, 2012 Expenses, net Cash payments Balance at December 31, 2013 Expenses, net Cash payments Balance at December 31, 2014 Severance and benefits costs Other exit costs Total $ $ — $ — $ 55,449 (13,022) 42,427 82,730 (47,052) 78,105 $ 9,961 (2,339) 7,622 5,444 (4,912) 8,154 $ — 65,410 (15,361) 50,049 88,174 (51,964) 86,259 The majority of the remaining restructuring reserves are expected to be paid over the next 12-24 months. Due to certain international labor laws and long-term lease agreements, some payments will extend beyond 24 months. We expect to fund these payments from cash flows from operations. 64 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) Other Plans Other plans include workforce reduction actions taken in 2012 and strategic transformation initiatives announced in 2009 that were implemented over a three year period. The table below shows the activity in our restructuring reserves for these other plans for the years ended December 31, 2014, 2013 and 2012 and includes amounts for both continuing operations and discontinued operations. Severance and benefits costs Other exit costs Balance at December 31, 2011 $ 105,036 $ Expenses, net Cash payments Balance at December 31, 2012 Expenses, net Cash payments Balance at December 31, 2013 Expenses, net Cash payments Balance at December 31, 2014 $ Asset Impairments 24,992 (67,488) 62,540 (7,076) (39,333) 16,131 (8,405) (3,995) 3,731 $ 14,075 (1,627) (7,230) 5,218 — (4,826) 392 — (203) 189 Total 119,111 $ 23,365 (74,718) 67,758 (7,076) (44,159) 16,523 (8,405) (4,198) 3,920 $ In 2013, we entered into an agreement to sell our corporate headquarters building and recorded a non-cash impairment charge of $26 million to write-down the carrying value of the building to its fair value. The fair value was determined based on the estimated selling price less the costs to sell. The inputs used to determine the fair value were classified as Level 3. The impairment charge was included as restructuring charges and asset impairments, net in the Consolidated Statements of Income. 12. Debt Notes due March 2015 Notes due January 2016 Notes due September 2017 Notes due March 2018 Notes due May 2018 Notes due March 2019 Notes due November 2022 Notes due March 2024 State of CT DECD loan due November 2024 Notes due January 2037 Notes due March 2043 Term loans Principal amount Less: unamortized discount Plus: unamortized interest rate swap proceeds Total debt Less: current portion long-term debt Long-term debt 65 December 31, Interest rate 5.0% $ 4.75% 5.75% 5.6% 4.75% 6.25% 5.25% 4.625% 2.0% 5.25% 6.7% Variable 2014 274,879 370,914 385,109 250,000 350,000 300,000 110,000 500,000 16,000 115,041 425,000 130,000 3,226,943 6,653 31,716 3,252,006 324,879 $ 2,927,127 2013 $ 274,879 370,914 500,000 250,000 350,000 300,000 110,000 — — 500,000 425,000 230,000 3,310,793 5,158 40,660 3,346,295 — $ 3,346,295 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) During the first quarter of 2014, we completed a cash tender offer (the Tender Offer) for a portion of the 5.75% Notes due 2017 and the 5.25% Notes due 2037 (the Subject Notes). Holders who validly tendered their notes received the principal amount of the notes tendered, all accrued and unpaid interest and a premium amount. An aggregate $500 million of the Subject Notes were tendered. We incurred expenses of $62 million, consisting of the call premium, the write-off of unamortized costs and bank transaction fees. To fund the Tender Offer, also in the first quarter of 2014, we issued $500 million of 4.625% fixed rate 10-year notes. Interest is payable in March and September. The notes mature in March 2024, but may be redeemed, at any time, in whole or in part, at our option, at par plus accrued interest. If the notes are redeemed prior to December 15, 2023, the redemption price will be equal to the sum of 100% of the principal amount, accrued and unpaid interest and a make-whole payment. Net proceeds from the issuance of the notes were $493 million. In October 2014, we received a loan from the State of Connecticut Department of Economic and Community Development (CT DECD). The loan consists of a $15 million development loan and $1 million jobs-training grant that is subject to refund if certain conditions are not met. The loan requires monthly interest payments through November 2020 and principal and interest payments from December 2020 through maturity in November 2024. The 5.25% Notes due November 2022 and 6.7% Notes due March 2043 may be redeemed, at our option, in whole or in part, at par plus accrued interest any time on or after November 2015 and March 2018, respectively. The 5.25% Notes due 2037 may be redeemed by bondholders, in whole or in part, at par plus accrued interest in January 2017. Term loans bear interest at the applicable London Interbank Offered Rate plus 2.25% or Prime Rate plus 1.25%, at our option. Interest is payable and resets quarterly and the loans mature in 2015 and 2016. In 2014, we repaid $100 million of the term loans. At December 31, 2014, the weighted-average interest rate of the term loans was 2.48%. There were no outstanding commercial paper borrowings at December 31, 2014 or 2013. As of December 31, 2014, we had not drawn upon our $1.0 billion credit facility. The credit facility was renewed in January 2015 and expires in January 2020. Annual maturities of outstanding debt at December 31, 2014 are as follows: 2015 2016 2017 2018 2019 Thereafter Total $ $ 324,879 450,914 385,109 600,000 300,000 1,166,041 3,226,943 66 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) 13. Retirement Plans and Postretirement Medical Benefits We provide certain retirement benefits to our U.S. employees hired prior to January 1, 2005 and to eligible employees outside the U.S. under various defined benefit retirement plans. Benefit accruals under most of our defined benefit plans, including our two largest U.S. pension plans, our U.K. pension plans and Canadian pension plans, have been frozen. We also provide certain employer subsidized health care and employer provided life insurance benefits in the U.S. and Canada to eligible retirees and their dependents. Employees hired before January 1, 2005 in the U.S. and April 1, 2005 in Canada become eligible for retiree medical benefits after reaching age 55 and with the completion of the required service period. The cost of these benefits is recognized over the period the employee provides credited service to the company. Retirement Plans The benefit obligations and funded status of defined benefit pension plans are as follows: Accumulated benefit obligation Projected benefit obligation United States Foreign 2014 1,866,914 $ 2013 2014 2013 $ 1,611,457 $ 698,176 $ 659,602 Benefit obligation - beginning of year $ 1,622,591 $ 1,822,677 $ 672,773 $ 663,826 Service cost Interest cost Plan participants' contributions Actuarial loss (gain) Foreign currency changes Settlement / curtailment Special termination benefits Benefits paid Benefit obligation - end of year $ Fair value of plan assets available for benefits 6,908 77,655 — 306,718 — (16,867) — (128,829) 1,868,176 $ 13,981 74,370 — (154,996) — (3,275) 548 (130,714) 1,622,591 $ 3,565 28,518 59 89,695 (52,750) — 1,238 (27,811) 715,287 6,272 27,365 496 (1,224) (204) (86) 935 (24,607) $ 672,773 Fair value of plan assets - beginning of year $ 1,523,679 $ 1,583,932 $ 561,078 $ 509,331 Actual return on plan assets Company contributions Plan participants' contributions Settlement / curtailment Foreign currency changes Benefits paid Fair value of plan assets - end of year Amounts recognized in the Consolidated Balance Sheets Non-current asset Current liability Non-current liability Funded status 195,946 19,534 — (16,867) — (128,829) 1,593,463 300 (6,590) (268,423) (274,713) $ $ $ 60,569 9,892 — — — (130,714) 1,523,679 195 (18,097) (81,010) (98,912) $ $ $ $ $ $ 67,306 15,323 59 — (40,963) (27,811) 574,992 5,813 (1,008) (145,100) (140,295) $ $ $ 62,777 14,509 496 — (1,428) (24,607) 561,078 11,951 (1,051) (122,595) (111,695) In October 2014, the Society of Actuaries published updated mortality tables for U.S. plans (RP-2014) and an updated improvement scale (MP-2014), which both reflect improved longevity. We have historically utilized the Society of Actuaries' published mortality data in our plan assumptions. Accordingly, we adopted RP-2014 and MP-2014 for purposes of measuring the pension obligation at year end. The change to the mortality assumption increased the year-end pension obligation by $110 million. 67 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) Information provided in the table below is only for pension plans with an accumulated benefit obligation in excess of plan assets at December 31, 2014 and 2013: Projected benefit obligation Accumulated benefit obligation Fair value of plan assets Pretax amounts recognized in AOCI consist of: Net actuarial loss Prior service credit Transition asset Total United States 2014 1,867,788 1,866,525 1,592,774 2013 1,621,164 1,610,029 1,522,057 $ $ $ United States 2014 918,641 (144) — $ 2013 733,943 (135) — $ $ $ $ 918,497 $ 733,808 $ $ $ $ $ $ Foreign 2014 583,317 566,365 437,209 $ $ $ 2013 544,875 532,774 421,229 Foreign 2014 253,257 (806) (49) 252,402 $ $ 2013 200,000 (863) (59) 199,078 The estimated amounts that will be amortized from AOCI into net periodic benefit cost in 2015 are as follows: Net actuarial loss Prior service cost (credit) Transition asset Total United States Foreign 30,590 $ 6,828 9 — (79) (10) 30,599 $ 6,739 $ $ The components of net periodic benefit cost for defined benefit pension plans were as follows: Service cost Interest cost Expected return on plan assets Amortization of net transition asset Amortization of prior service cost (credit) Amortization of net actuarial loss Special termination benefits Settlement / curtailment Net periodic benefit cost United States 2014 2013 2012 2014 Foreign 2013 $ 6,908 $ 13,981 $ 18,939 $ 3,565 $ 6,272 $ 77,655 (103,822) — 9 25,369 — 4,528 10,647 74,370 (107,608) — 380 32,494 548 2,638 16,803 $ 81,040 (121,623) — 803 52,957 — (48) 32,068 $ $ $ 28,518 (39,137) (10) (57) 8,268 1,238 — 2,385 $ 27,365 (34,769) (9) 112 14,445 935 — 14,351 $ 2012 7,763 27,793 (32,299) (10) 112 14,103 601 444 18,507 68 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) Other changes in plan assets and benefit obligations for defined benefit pension plans recognized in other comprehensive income were as follows: Net actuarial loss (gain) Amortization of net actuarial loss Amortization of prior service (cost) credit Net transition asset Settlement / curtailment Total recognized in other comprehensive income United States Foreign 2014 214,593 (25,369) (9) — (4,528) 184,687 $ $ 2013 (111,232) (32,494) (380) — (2,638) (146,744) $ $ $ 2014 2013 $ 61,525 (8,268) 57 10 — (29,320) (14,445) (112) 9 — $ 53,324 $ (43,868) Weighted-average actuarial assumptions used to determine end of year benefit obligations and net periodic benefit cost for defined benefit pension plans include: United States Used to determine benefit obligations Discount rate Rate of compensation increase Used to determine net periodic benefit cost Discount rate Expected return on plan assets Rate of compensation increase Foreign Used to determine benefit obligations Discount rate Rate of compensation increase Used to determine net periodic benefit cost Discount rate Expected return on plan assets Rate of compensation increase 2014 2013 2012 4.15% N/A 4.95% 7.00% 3.50% 4.95% 3.50% 4.05% 7.25% 3.50% 4.05% 3.50% 4.95% 7.75% 3.50% 1.10% - 3.80% 1.50% - 3.50% 1.45% - 4.60% 1.50% - 3.50% 1.95% - 4.65% 1.50% - 3.50% 1.45% - 4.60% 3.75% - 7.50% 1.50% - 3.50% 1.95% - 4.65% 3.50% - 7.50% 1.50% - 3.50% 1.80% - 6.10% 3.25% - 7.50% 2.10% - 4.60% A discount rate is used to determine the present value of our future benefit obligations. The discount rate for our U.S. pension and postretirement medical benefit plans is determined by matching the expected cash flows associated with our benefit obligations 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. For our other smaller foreign pension plans, the discount rate is selected based on high-quality fixed income indices available in the country in which the plan is domiciled. The expected return on plan assets is based on historical and expected rates of return for current and planned asset classes in the plans' investment portfolio after analyzing historical experience and future expectations of the returns and volatility of the various asset classes. The overall expected rate of return for the portfolio is based on the target asset allocation of our global pension plans, adjusted for historical and expected experience of active portfolio management results, when compared to the benchmark returns. When assessing the expected future returns for the portfolio, management places more emphasis on the expected future returns than historical returns. 69 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) During 2015, we anticipate making total contributions of $7 million to our U.S. pension plans and $16 million to our foreign pension plans. We will reassess our funding alternatives as the year progresses. Investment Strategy and Asset Allocation - U.S. Pension Plans The investment strategy of our U.S. pension plans is to maximize returns within reasonable and prudent levels of risk, to achieve and maintain full funding of the accumulated benefit obligation and the actuarial liabilities and to earn a nominal rate of return of at least 7.0%. The fund has established a strategic asset allocation policy to achieve these objectives. Investments are diversified across asset classes and within each class to reduce the risk of large losses and are periodically rebalanced. Derivatives, such as swaps, options, forwards and futures contracts may be used for market exposure, to alter risk/return characteristics and to manage foreign currency exposure. Investments within the private equity and real estate portfolios are comprised of limited partnership units in primary and secondary fund of funds and units in open-ended commingled real estate funds, respectively. These types of investment vehicles are used in an effort to gain greater asset diversification. We do not have any significant concentrations of credit risk within the plan assets. The pension plans' liabilities, investment objectives and investment managers are reviewed periodically. The target asset allocation for 2015 and the actual asset allocations at December 31, 2014 and 2013, for the U.S. pension plans are as follows: Asset category U.S. equities Non-U.S. equities Fixed income Real estate Private equity Total Target allocation Percent of Plan Assets at December 31, 2015 2014 2013 11% 11% 68% 2% 8% 12% 9% 69% 5% 5% 16% 14% 60% 4% 6% 100% 100% 100% Investment Strategy and Asset Allocation - Foreign Pension Plans Our foreign pension plan assets are managed by outside investment managers and monitored regularly by local trustees and our corporate personnel. The investment strategies adopted by our foreign plans vary by country and plan, with each strategy tailored to achieve the expected rate of return within an acceptable or appropriate level of risk, depending upon the liability profile of plan participants, local funding requirements, investment markets and restrictions. The U.K. plan represents 74% of the non-U.S. pension assets. The U.K. pension plan's investment strategy is to maximize returns within reasonable and prudent levels of risk, to achieve and maintain full funding of the accumulated benefit obligation and the actuarial liabilities and to earn a nominal rate of return of at least 7.0%. The fund has established a strategic asset allocation policy to achieve these objectives. Investments are diversified across asset classes and within each class to minimize the risk of large losses and are periodically rebalanced. Derivatives, such as swaps, options, forwards and futures contracts may be used for market exposure, to alter risk/return characteristics and to manage foreign currency exposure. We do not have any significant concentrations of credit risk within the plan assets. The pension plans' liabilities, investment objectives and investment managers are reviewed periodically. The target asset allocation for 2015 and the actual asset allocations at December 31, 2014 and 2013, for the U.K. pension plan are as follows: Asset category U.K. equities Non-U.K. equities Fixed income Cash Total Target Allocation Percent of Plan Assets at December 31, 2015 2014 2013 30% 30% 40% —% 100% 28% 29% 40% 3% 100% 33% 35% 31% 1% 100% The target asset allocation used to manage the investment portfolios is based on the broad asset categories shown above. The plan asset categories presented in the fair value hierarchy are subsets of the broad asset categories. 70 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) The fair value of the U.K. plan assets was $427 million and $414 million at December 31, 2014 and 2013, respectively, and the expected long-term weighted average rate of return on these plan assets was 7.50% in 2014 and 7.38% in 2013. Fair Value Measurements of Plan Assets The following tables show, by level within the fair value hierarchy, the financial assets and liabilities that are accounted for at fair value on a recurring basis at December 31, 2014 and 2013, respectively, for the U.S. and foreign pension plans. 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 placement within the fair value hierarchy levels. There are no shares of our common stock included in the plan assets of our pension plans. United States Pension Plans Money market funds Equity securities Commingled fixed income securities Debt securities - U.S. and foreign governments, agencies and municipalities Debt securities - corporate Mortgage-backed securities Asset-backed securities Private equity Real estate Securities lending collateral (1) Total plan assets at fair value Securities lending payable (1) Cash Other December 31, 2014 Level 1 Level 2 Level 3 Total $ — $ 10,758 $ — $ 180,069 — 184,209 — — — — — — 146,716 261,571 25,131 598,927 20,401 2,158 — — 131,901 — — — — 2,102 — 81,246 74,747 — $ 364,278 $ 1,197,563 $ 158,095 $ 10,758 326,785 261,571 209,340 598,927 22,503 2,158 81,246 74,747 131,901 1,719,936 (131,901) 4,621 807 Fair value of plan assets available for benefits $ 1,593,463 Money market funds Equity securities Commingled fixed income securities Debt securities - U.S. and foreign governments, agencies and municipalities Debt securities - corporate Mortgage-backed securities Asset-backed securities Private equity Real estate Securities lending collateral (1) Total plan assets at fair value Securities lending payable (1) Cash Other December 31, 2013 Level 1 Level 2 Level 3 Total $ — $ 30,374 $ — $ 279,988 — 43,390 — — — — — — 323,378 165,303 209,674 30,477 568,567 31,738 625 — — 6,602 1,043,360 $ $ — — — — 2,634 — 87,470 67,917 — 158,021 $ $ 30,374 445,291 209,674 73,867 568,567 34,372 625 87,470 67,917 6,602 1,524,759 (6,602) 634 4,888 Fair value of plan assets available for benefits $ 1,523,679 (1) Securities lending collateral is offset by a corresponding securities lending payable amount. 71 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) Foreign Plans Money market funds Equity securities Commingled fixed income securities Debt securities - U.S. and foreign governments, agencies and municipalities Debt securities - corporate Total plan assets at fair value Cash Other Fair value of plan assets available for benefits Money market funds Equity securities Commingled fixed income securities Debt securities - U.S. and foreign governments, agencies and municipalities Debt securities - corporate Total plan assets at fair value Cash Other Fair value of plan assets available for benefits December 31, 2014 Level 1 Level 2 Level 3 Total $ — $ 6,684 $ — $ 99,570 — — — 190,924 151,017 85,711 26,154 — — — — 6,684 290,494 151,017 85,711 26,154 $ 99,570 $ 460,490 $ — $ 560,060 10,859 4,073 $ 574,992 December 31, 2013 Level 1 Level 2 Level 3 Total $ — $ 6,058 $ — $ 109,403 — — — 257,046 104,070 60,204 17,944 — — — — 6,058 366,449 104,070 60,204 17,944 $ 109,403 $ 445,322 $ — $ 554,725 5,285 1,068 $ 561,078 The following information relates to our classification of investments into the fair value hierarchy: • Money Market Funds: Money market funds typically invest in government securities, certificates of deposit, commercial paper of companies and other highly liquid, low risk securities. Money market funds are principally used for overnight deposits. The money market funds are classified as Level 2 since they are not actively traded on an exchange. • Equity Securities: Equity securities include U.S. and foreign common stock, American Depository Receipts, preferred stock and commingled funds. Equity securities classified as Level 1 are valued using active, high volume trades for identical securities. Equity securities classified as Level 2 represent those not listed on an exchange in an active market. These securities are valued based on quoted market prices of similar securities. • Commingled Fixed Income Securities: Mutual funds that invest in a variety of fixed income securities including securities of the U.S. government and its agencies, corporate debt, mortgage-backed securities and asset-backed securities. Value of the funds is based on the net asset value (NAV) per unit as reported by the fund manager. NAV is based on the market value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding. Commingled fixed income securities are not listed on an active exchange and are classified as Level 2. • Debt Securities - U.S. and Foreign Governments, Agencies and Municipalities: Government securities include treasury notes and bonds, foreign government issues, U.S. government sponsored agency debt and commingled funds. Municipal debt securities include general obligation securities and revenue-backed securities. Debt securities classified as Level 1 are valued using active, high volume trades for identical securities. Debt securities classified as Level 2 are valued through benchmarking model derived prices to quoted market prices and trade data for identical or comparable securities. 72 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) • Debt Securities – Corporate: Investments are comprised of both investment grade debt The fair value of corporate debt securities is valued using recently executed transactions, market price quotations where observable, or bond spreads. The spread data used are for the same maturity as the security. These securities are classified as Level 2. and high-yield debt • Mortgage-Backed Securities (MBS): Investments are comprised of agency-backed MBS, non-agency MBS, collateralized mortgage obligations, commercial MBS, and commingled funds. These securities are valued based on external pricing indices. When external index pricing is not observable, MBS are valued based on external price/spread data. If neither pricing method is available, broker quotes are utilized. When inputs are observable and supported by an active market, MBS are classified as Level 2 and when inputs are unobservable, MBS are classified as Level 3. • Asset-Backed Securities (ABS): Investments are primarily comprised of credit card receivables, auto loan receivables, student loan receivables, and Small Business Administration loans. These securities are valued based on external pricing indices or external price/ spread data and are classified as Level 2. • Private Equity: Investments are comprised of units in fund-of-fund investment vehicles. Fund-of-funds consist of various private equity investments and are used in an effort to gain greater diversification. The investments are valued in accordance with the most appropriate valuation techniques, and are classified as Level 3 due to the unobservable inputs used to determine a fair value. • Real Estate: Investments include units in open-ended commingled real estate funds. Properties that comprise these funds are valued in accordance with the most appropriate valuation techniques, and are classified as Level 3 due to the unobservable inputs used to determine a fair value. • Securities Lending Fund: Investment represents a commingled fund through our custodian's securities lending program. The U.S. pension plan lends securities that are held within the plan to other banks and/or brokers, and receives collateral, typically cash. This collateral is invested in a short-term fixed income securities commingled fund. The commingled fund is not listed or traded on an exchange and is classified as Level 2. This amount invested in the fund is offset by a corresponding liability reflected in the U.S. pension plan's net assets available for benefits. Level 3 Gains and Losses The following table summarizes the changes in the fair value of Level 3 assets for the years ended December 31, 2014 and 2013: Balance at December 31, 2012 Realized (losses) gains Unrealized gains Net purchases, sales and settlements Balance at December 31, 2013 Realized gains Unrealized gains Net purchases, sales and settlements Balance at December 31, 2014 Private equity Real estate Total 91,805 (1,591) 2,190 (4,934) 87,470 11,174 1,886 (19,284) 81,246 $ 63,168 $ 158,164 1,939 5,182 (2,372) 67,917 285 6,140 405 74,747 $ 348 7,577 (8,068) 158,021 11,471 8,085 (19,482) 158,095 $ Mortgage-backed securities $ 3,191 $ — 205 (762) 2,634 12 59 (603) 2,102 $ $ 73 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) Nonpension Postretirement Benefits The benefit obligation and funded status for nonpension postretirement benefit plans are as follows: Benefit obligation Benefit obligation - beginning of year Service cost Interest cost Plan participants' contributions Actuarial loss (gain) Foreign currency changes Curtailment Benefits paid Benefit obligation - end of year (1) Fair value of plan assets Fair value of plan assets - beginning of year Company contribution Plan participants' contributions Benefits paid Fair value of plan assets - end of year Amounts recognized in the Consolidated Balance Sheets Current liability Non-current liability Funded status 2014 2013 $ 231,153 $ 282,857 2,683 9,951 5,418 37,532 (2,096) (2,160) (28,501) 253,980 $ — $ 23,083 5,418 (28,501) — $ 3,684 9,503 4,313 (30,051) (1,693) (4,839) (32,621) 231,153 — 28,308 4,313 (32,621) — (22,113) (231,867) (253,980) $ $ (23,668) (207,485) (231,153) $ $ $ $ $ (1) The benefit obligation for the U.S. nonpension postretirement plans was $231 million and $208 million at December 31, 2014 and 2013, respectively. Pretax amounts recognized in AOCI consist of: Net actuarial loss Prior service cost Total 2014 2013 $ $ 97,955 2,356 100,311 $ $ 68,120 2,516 70,636 The components of net periodic benefit cost for nonpension postretirement benefit plans were as follows: Service cost Interest cost Amortization of prior service cost (credit) Amortization of net actuarial loss Curtailment Net periodic benefit cost 2014 2013 2012 $ $ 2,683 9,951 159 5,949 — 18,742 $ $ 3,684 9,503 128 7,433 2,920 23,668 $ $ 3,563 11,187 (1,724) 8,214 — 21,240 74 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) Other changes in plan assets and benefit obligation for nonpension postretirement benefit plans recognized in other comprehensive income were as follows: Net actuarial loss (gain) Amortization of net actuarial loss Amortization of prior service cost Curtailment Other adjustments Total recognized in other comprehensive income $ 2014 2013 35,372 (5,949) (159) — 412 $ (34,890) (7,433) (128) (2,920) 481 $ 29,676 $ (44,890) The estimated amounts that will be amortized from AOCI into net periodic benefit cost in 2015 are as follows: Net actuarial loss Prior service cost Total $ $ 9,619 297 9,916 The weighted-average discount rates used to determine end of year benefit obligation and net periodic pension cost include: Discount rate used to determine benefit obligation U.S. Canada Discount rate used to determine net period benefit cost U.S. Canada 2014 2013 2012 3.90% 3.80% 4.40% 4.65% 4.40% 4.65% 3.65% 3.90% 3.65% 3.90% 4.50% 4.15% The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation for the U.S. plan was 6.5% for 2014 and 7.0% for 2013. The assumed health care trend rate is 6.0% for 2015 and will gradually decline to 5.0% by the year 2017 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in the assumed health care cost trend rates would have the following effects: Effect on total of service and interest cost components Effect on postretirement benefit obligation Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, are expected to be paid. Years ending December 31, 2015 2016 2017 2018 2019 2020 - 2024 75 1% Increase 1% Decrease $ $ 548 9,512 $ $ (431) (8,829) Pension Benefits Nonpension Benefits $ $ 126,662 125,924 127,549 130,141 131,871 676,833 22,187 21,530 20,863 20,174 19,567 88,921 $ 1,318,980 $ 193,242 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) Savings Plans We offer voluntary defined contribution plans to our U.S. employees designed to help them accumulate additional savings for retirement. We provide a core contribution to all employees, regardless if they participate in the plan, and match a portion of each participating employees' contribution, based on eligible pay. Total contributions to our defined contribution plans were $25 million in 2014 and $32 million in 2013. 14. Income Taxes Income from continuing operations before taxes consisted of the following: U.S. International Total Years Ended December 31, 2014 356,017 75,179 431,196 $ $ 2013 2012 $ $ 288,660 95,294 383,954 $ $ 387,987 123,783 511,770 The provision for income taxes from continuing operations consisted of the following: U.S. Federal: Current Deferred U.S. State and Local: Current Deferred International: Current Deferred Total current Total deferred Total provision for income taxes Years Ended December 31, 2014 2013 2012 $ 71,683 $ 6,941 78,624 7,186 (9,307) (2,121) 32,492 3,820 36,312 78,315 (19,754) 58,561 $ 151,984 16,136 168,120 5,359 (8,026) (2,667) 28,063 (5,990) 22,073 (2,604) (26,273) (28,877) 57,906 (82,862) (24,956) 111,361 1,454 112,815 $ 111,737 (33,770) 77,967 $ 207,286 (92,999) 114,287 $ Effective tax rate 26.2% 20.3% 22.3% The effective tax rate for 2014 includes tax benefits of $22 million from the resolution of tax examinations and $5 million from the retroactive effect of 2014 U.S. tax legislation. The effective tax rate for 2013 includes tax benefits of $13 million from an affiliate reorganization, $17 million from tax planning initiatives and $5 million from the adjustment of non-U.S. tax accounts from prior periods and the retroactive effect of 2013 U.S. tax legislation. The effective tax rate for 2012 includes tax benefits of $32 million from the sale of non-U.S. leveraged lease assets and $47 million from the resolution of U.S. tax examinations and tax accruals of $43 million for the repatriation of additional non-U.S. earnings that arose as a result of one-time events including the sale of leveraged lease assets and Canadian tax law changes. 76 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) The items accounting for the difference between income taxes computed at the federal statutory rate and our provision for income taxes consist of the following: Federal statutory provision State and local income taxes Other impact of foreign operations Tax exempt income/reimbursement Federal income tax credits/incentives Unrealized stock compensation benefits Resolution of U.S. tax examinations Impact of non-U.S. leveraged lease asset sales Outside basis differences Other, net Provision for income taxes Years Ended December 31, 2014 150,920 (1,379) (12,668) (1,327) (17,905) 2,318 (5,856) — — (1,288) 112,815 $ $ $ 2013 2012 $ 134,389 (1,733) (28,238) (1,672) (10,282) 2,292 (3,853) — (13,214) 278 179,119 (2,071) 23,025 (1,992) (8,918) 3,456 (47,380) (30,367) — (585) $ 77,967 $ 114,287 Other impacts of foreign operations include income of foreign affiliates taxed at rates other than the 35% U.S. statutory rate, the accrual or release of tax uncertainty amounts related to foreign operations, the tax impacts of foreign earnings repatriation and the U.S. foreign tax credit impacts of other foreign income taxed in the U.S. Deferred tax liabilities and assets at December 31, 2014 and 2013 consisted of the following: Deferred tax liabilities: Depreciation Deferred profit (for tax purposes) on sale to finance subsidiary Lease revenue and related depreciation Amortizable intangibles Other Deferred tax liabilities Deferred tax assets: Nonpension postretirement benefits Pension Inventory and equipment capitalization Restructuring charges Long-term incentives Net operating loss Tax credit carry forwards Tax uncertainties gross-up Other Valuation allowance Deferred tax assets Total deferred taxes, net 77 December 31, 2014 2013 $ $ (60,282) (114,633) (205,683) (74,034) (64,900) (519,532) 82,181 141,492 18,502 35,432 25,718 102,686 47,493 22,851 125,512 (116,935) 484,932 (34,600) $ (33,057) (142,114) (249,998) (79,852) (73,077) (578,098) 99,628 43,301 22,824 26,837 28,880 143,839 48,617 35,298 147,709 (122,780) 474,153 (103,945) $ PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) The above amounts are classified as current or long-term in the Consolidated Balance Sheets in accordance with the asset or liability to which they relate or based on the expected timing of the reversal. A valuation allowance is recognized to reduce the total deferred tax assets to an amount that will more-likely-than-not be realized. The valuation allowance relates primarily to certain foreign, state and local net operating loss and tax credit carryforwards that are more likely than not to expire unutilized. We have net operating loss carryforwards of $240 million as of December 31, 2014, of which, $210 million can be carried forward indefinitely and the remainder expire over the next 15 years. In addition, we have tax credit carryforwards of $47 million, the majority of which can be carried forward indefinitely. As of December 31, 2014 we have not provided for income taxes on $830 million of cumulative undistributed earnings of subsidiaries outside the U.S. as these earnings will be either indefinitely reinvested or remitted substantially free of additional tax. However, we estimate that withholding taxes on such remittances would be $12 million. Determination of the liability that would be incurred if these earnings were remitted to the U.S. is not practicable as there is a significant amount of uncertainty with respect to determining the amount of foreign tax credits and other indirect tax consequences that may arise from the distribution of these earnings. Uncertain Tax Positions A reconciliation of the amount of unrecognized tax benefits is as follows: Balance at beginning of year Increases from prior period positions Decreases from prior period positions Increases from current period positions Decreases relating to settlements with tax authorities Reductions from lapse of applicable statute of limitations Balance at end of year 2014 172,594 9,090 (33,692) 17,704 (22,127) (11,074) 132,495 $ $ 2013 2012 $ 151,098 $ 202,828 15,777 (6,908) 23,549 (482) (10,440) 172,594 $ 11,811 (17,985) 28,255 (1,948) (71,863) $ 151,098 The amount of the unrecognized tax benefits at December 31, 2014, 2013 and 2012 that would affect the effective tax rate if recognized was $110 million, $148 million and $127 million, respectively. On a regular basis, we conclude tax return examinations, statutes of limitations expire, and court decisions interpret tax law. We regularly assess tax uncertainties in light of these developments. As a result, it is reasonably possible that the amount of our unrecognized tax benefits will decrease in the next 12 months, and we expect this change could be up to 25% of our unrecognized tax benefits. We recognize interest and penalties related to uncertain tax positions in our provision for income taxes or discontinued operations as appropriate. During the years ended December 31, 2014, 2013 and 2012, we recorded interest and penalties of $2 million, $27 million and $(28) million, respectively. We had $11 million and $37 million accrued for the payment of interest and penalties at December 31, 2014 and 2013, respectively. Other Tax Matters As is the case with other large corporations, our tax returns are examined each year by tax authorities in the U.S., other countries and local jurisdictions in which we have operations. Except for issues arising out of certain partnership investments, the IRS examinations of tax years prior to 2009 are closed to audit. Other than the pending application of legal principles to specific issues arising in earlier years, only post-2009 Canadian tax years are subject to examination. Other significant tax filings subject to examination include various post-2004 U.S. state and local, post-2007 German, and post-2010 French and U.K. tax filings. We have other less significant tax filings currently under examination or subject to examination. We regularly assess the likelihood of tax adjustments in each of the tax jurisdictions in which we have operations and account for the related financial statement implications. We believe we have established tax reserves that are appropriate given the possibility of tax adjustments. However, determining the appropriate level of tax reserves requires judgment regarding the uncertain application of tax law and the possibility of tax adjustments. Future changes in tax reserve requirements could have a material impact, positive or negative, on our results of operations, financial position and cash flows. During 2014, we determined that certain pre-2009 tax deductions associated with software development expenditures had not been deducted on our tax returns, the expenditures could be claimed on our current year return and our deferred tax liability was overstated. We assessed the materiality of this item on previously issued financial statements and concluded that it was not material to any annual 78 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) or interim period. However, due to the impact of this error on the 2014 annual consolidated financial statements, the accompanying Consolidated Balance Sheet and Consolidated Statements of Stockholders' Equity (Deficit) have been revised for the earliest period presented to increase opening retained earnings by $17 million and decrease our tax liabilities. In August 2012, the United States Court of Appeals for the Third Circuit overturned a prior Tax Court decision and ruled in favor of the IRS and adverse to Historic Boardwalk Hall LLC (HBH), a partnership in which we had made an investment in the year 2000. In January 2014, the Tax Court entered an order to implement rulings of the Third Circuit. In August 2014, we entered into an agreement with our partner in the HBH investment releasing our respective claims against each other and agreeing to divest our investment in the partnership. The impact of this agreement is recorded in other expense in the Consolidated Statements of Income. During the year, we paid $54 million in tax payments representing a portion of the tax and interest due as a result of the Third Circuit decision and received $60 million from our partner under the indemnity agreement. Additional tax payments will be due in 2015, which we have accrued in our financial statements. 15. Noncontrolling Interests (Preferred Stockholders’ Equity in Subsidiaries) Pitney Bowes International Holdings, Inc. (PBIH), a subsidiary, has 300,000 shares, or $300 million, of outstanding perpetual voting preferred stock (PBIH Preferred Stock) held by certain institutional investors. The holders of PBIH Preferred Stock are entitled as a group to 25% of the combined voting power of all classes of capital stock of PBIH. All outstanding common stock of PBIH, representing the remaining 75% of the combined voting power of all classes of capital stock, is owned directly or indirectly by the company. The PBIH Preferred Stock is entitled to cumulative dividends at a rate of 6.125% through April 30, 2016. Commencing October 30, 2016, the PBIH Preferred Stock is redeemable, in whole or in part, at the option of PBIH. If the PBIH Preferred Stock is not redeemed in whole on October 30, 2016, the dividend rate increases 50% and will increase 50% every six months thereafter. No dividends were in arrears at December 31, 2014 or December 31, 2013. 16. 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, clients or others. In management's opinion, the potential liability, if any, that may result from these actions, either individually or collectively, is not reasonably expected to 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. In December 2013, we received a Civil Investigative Demand (CID) from the Department of Justice (DOJ) pursuant to the False Claims Act requesting documents and information relating to compliance with certain postal regulatory requirements in our Presort Services business. We had previously provided information to the DOJ in response to letter requests and continue to provide information in response to the CID and other requests from the DOJ. Given the current stage of this inquiry, we cannot provide an estimate of any possible losses or range of loss and we cannot yet predict the ultimate outcome of this matter or its impact, if any, on our business, financial condition or results of operations. 79 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) 17. Leases We lease office facilities, sales and service offices, equipment and other properties under operating lease agreements with varying terms. Certain leases require us to pay property taxes, insurance and routine maintenance and include renewal options and escalation clauses. Rent expense was $55 million, $67 million and $68 million in 2014, 2013 and 2012, respectively. Future minimum lease payments under non-cancelable operating leases at December 31, 2014 were as follows: Years ending December 31, 2015 2016 2017 2018 2019 Thereafter Total minimum lease payments 18. Stockholders' Equity Preferred and Preference Stock $ 47,496 35,864 26,306 19,899 14,313 67,726 $ 211,604 We have two classes of preferred stock issued and outstanding: the 4% Preferred Stock (the Preferred Stock) and the $2.12 Preference Stock (the Preference Stock). The Preferred Stock is entitled to cumulative dividends of $2 per year and can be converted into 24.24 shares of common stock, subject to adjustment, in certain events. The Preferred Stock is redeemable at our option at a price of $50 per share, plus dividends accrued through the redemption date. We are authorized to issue 600,000 shares of Preferred Stock. At December 31, 2014 and 2013, there were 24 shares and 74 shares outstanding, respectively. There are no unpaid dividends in arrears. The Preference Stock is entitled to cumulative dividends of $2.12 per year and can be converted into 16.53 shares of common stock, subject to adjustment, in certain events. The Preference Stock is redeemable at our option at a price of $28 per share. We are authorized to issue 5,000,000 shares of Preference Stock. At December 31, 2014 and 2013, there were 20,237 shares and 21,838 shares outstanding, respectively. There are no unpaid dividends in arrears. Common and Treasury Stock The following table summarizes the changes in Common Stock and Treasury Stock: Balance at December 31, 2011 Issuance of common stock Conversions to common stock Balance at December 31, 2012 Issuance of common stock Conversions to common stock Balance at December 31, 2013 Repurchases of common stock Issuance of common stock Conversions to common stock Balance at December 31, 2014 Common Stock 199,751,070 Treasury Stock 123,586,842 1,118,089 14,888 200,884,047 1,163,668 34,807 202,082,522 (1,863,262) 781,032 27,672 201,027,964 (1,118,089) (14,888) 122,453,865 (1,163,668) (34,807) 121,255,390 1,863,262 (781,032) (27,672) 122,309,948 At December 31, 2014, 37,568,025 shares were reserved for issuance under our stock plans, dividend reinvestment program and the conversion of Preferred Stock and Preference Stock. 80 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) 19. Accumulated Other Comprehensive Loss Reclassifications out of accumulated other comprehensive loss for the years ended December 31, 2014, 2013 and 2012 were as follows: Gains (losses) on cash flow hedges Revenue Cost of sales Interest expense Total before tax Tax benefit Net of tax Unrealized gains (losses) on available for sale securities Interest income Tax (benefit) provision Net of tax Pension and Postretirement Benefit Plans (b) Transition asset Prior service (costs) credit Actuarial losses Total before tax Tax benefit Net of tax Amounts Reclassified from AOCI (a) Years Ended December 31, 2014 2013 2012 $ $ $ $ $ $ 1,276 (140) (2,028) (892) (347) (545) (1,149) (424) (725) 10 (111) (43,702) (43,803) (15,643) (28,160) $ $ $ $ $ $ (835) 332 (2,028) (2,531) (987) (1,544) (1,140) (422) (718) 9 (620) (54,372) (54,983) (19,228) (35,755) $ $ $ $ $ $ 1,298 (185) (2,028) (915) (358) (557) 1,768 654 1,114 10 809 (75,274) (74,455) (21,876) (52,579) (a) Amounts in parentheses indicate debits (reductions) to income. (b) These items are included in the computation of net periodic costs of defined benefit pension plans and nonpension postretirement benefit plans (see Note 13 for additional details). 81 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) Changes in accumulated other comprehensive loss for the years ended December 31, 2014, 2013 and 2012 were as follows: Balance January 1, 2012 Other comprehensive income (loss) before reclassifications (a) Amounts reclassified from accumulated other comprehensive income (loss) (a), (b) Net other comprehensive income (loss) Balance at December 31, 2012 Other comprehensive income (loss) before reclassifications (a) Amounts reclassified from accumulated other comprehensive income (loss) (a), (b), (c) Net other comprehensive income (loss) Balance at December 31, 2013 Other comprehensive income (loss) before reclassifications (a) Amounts reclassified from accumulated other comprehensive income (loss) (a), (b), (c) Unrealized gains (losses) on available for sale securities Defined benefit pension plans and nonpension postretirement benefit plans 4,387 $ (741,546) $ Gains (losses) on cash flow hedges $ (8,438) $ Foreign currency items 83,952 Total (661,645) $ 104 557 661 (7,777) (147) 1,544 1,397 (6,380) 1,146 545 1,240 (1,114) 126 4,513 (7,000) 718 (6,282) (1,769) 4,010 725 4,735 2,966 (70,232) (2,702) (71,590) 52,579 (17,653) (759,199) — (2,702) 81,250 52,022 (19,568) (681,213) 122,023 (39,489) 75,387 35,755 157,778 (601,421) (6,747) (46,236) 35,014 31,270 106,657 (574,556) (212,818) (89,584) (297,246) 28,160 (184,658) (786,079) $ (3,784) (93,368) (58,354) $ 25,646 (271,600) (846,156) $ Net other comprehensive income (loss) Balance at December 31, 2014 1,691 (4,689) $ $ (a) Amounts are net of tax. Amounts in parentheses indicate debits to AOCI. (b) See table above for additional details of these reclassifications. (c) Foreign currency item amount represents the recognition of deferred translation upon the sale of certain businesses. 20. Stock-Based Compensation Plans The following table shows stock-based compensation expense included in the Consolidated Statements of Income: Cost of equipment sales Cost of software Cost of support services Cost of business services Selling, general and administrative Research and development Discontinued operations (1) Stock-based compensation expense Tax benefit Stock-based compensation expense, net of tax Years Ended December 31, 2014 2013 2012 $ 1,004 $ 95 607 694 14,028 1,018 — 17,446 (5,776) 11,670 $ $ $ 886 — 382 527 11,099 435 1,592 14,921 (5,759) 9,162 $ 1,212 — 522 721 15,176 596 — 18,227 (6,061) 12,166 (1) Amount represents the expense related to the immediate vesting of restricted stock units and stock options held by employees of PBMS upon the sale of the business. 82 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) Stock Plans We have a long-term incentive program whereby eligible employees may be granted restricted stock units, non-qualified stock options, other stock-based awards, cash or any combination thereof. The Executive Compensation Committee of the Board of Directors administers these plans. We settle employee stock compensation awards with treasury shares. At December 31, 2014, there were 19,715,336 shares available for future grants under our long-term incentive program. Restricted Stock Units Restricted stock units (RSUs) entitle the holder to shares of common stock as the units vest, typically over a three or four year service period. The fair value of the units is determined based on the stock price on the grant date less the present value of expected dividends. At December 31, 2014, there was $13 million of unrecognized compensation cost related to RSUs that is expected to be recognized over a weighted-average period of 1.8 years. The intrinsic value of RSUs outstanding at December 31, 2014 was $44 million. The intrinsic value of RSUs vested during 2014, 2013 and 2012 was $18 million, $15 million and $11 million, respectively. The fair value of RSUs vested during 2014, 2013 and 2012 was $10 million, $18 million and $13 million, respectively. During 2012, we granted 999,381 RSUs at a weighted average fair value of $14.72. The following table summarizes information about restricted stock units during 2014 and 2013: Restricted stock units outstanding - beginning of the year Granted Vested Forfeited Restricted stock units outstanding - end of the year Market Stock Units 2014 2013 Shares 1,941,312 685,994 (713,886) (94,181) 1,819,239 Weighted average grant date fair value 13.19 $ 23.62 14.50 15.11 16.41 $ Shares Weighted average grant date fair value 1,909,160 $ 1,365,798 (1,049,572) (284,074) 1,941,312 $ 17.68 10.37 17.52 13.33 13.19 Market stock units (MSUs) are stock awards that entitle the holder to receive a number of shares, adjusted for the attainment of certain performance and market conditions. The award vests at the end of a three-year performance period and the actual number of shares the recipient receives may range from 50% to 200% of the shares awarded. The expense for these awards, net of estimated forfeitures, is recorded over the performance period based on the fair value of the award, which was determined on the grant date using a Monte Carlo simulation model. At December 31, 2014, substantially all of expense for these awards has been recognized as the award fully vests in February 2015. In February 2015, 259,531 shares were issued with an intrinsic value of $6 million. There were no MSUs awarded during 2014 or 2013 and in 2012, we awarded 205,013 MSUs at a weighted average fair value of $17.91. The fair value of MSUs was determined based on the following assumptions: expected dividend yield - 6.7%, expected stock price volatility - 29.7%, and risk-free interest rate - 0.4%. The following table summarizes information about market stock units during 2014 and 2013: Market stock units outstanding - beginning of the year Forfeited Market stock units outstanding - end of the year Performance Stock Units 2014 2013 Shares 188,427 — 188,427 Weighted average grant date fair value 17.91 $ — 17.91 $ Shares 198,145 (9,718) 188,427 Weighted average grant date fair value 17.91 $ 17.91 17.91 $ Performance stock units (PSUs) are stock awards where the number of shares ultimately received by the employee is conditional upon the attainment of certain performance targets as well as total shareholder return relative to peer companies. PSUs vest at the end of a three-year service period and the actual number of shares awarded may range from 0% to 200% of the target award. However, the final determination of the number of shares to be issued is made by our Board of Directors, who may reduce, but not increase, the ultimate 83 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) number of shares to be awarded (negative discretion). PSUs are accounted for as variable awards until the end of the service period when the grant date is established. Total share-based compensation expense for PSUs is determined by the product of the number of shares eligible to be awarded and expected to vest and the fair value of the award, determined using a Monte Carlo simulation model, commencing at the inception of the requisite service period. During the performance period, the compensation expense for PSUs is re-computed using the fair value of the award, determined using a Monte Carlo simulation model each balance sheet date. Due to the variability of these awards, significant fluctuations in share-based compensation expense recognized from one period to the next are possible. At December 31, 2014, there was $11 million of unrecognized compensation cost related to PSUs that will be recognized over 2.1 years. The following table summarizes information about PSUs during 2014: PSUs outstanding - beginning of the year Granted Performance adjustments PSUs outstanding - end of the year Stock Options Shares — 493,255 113,460 606,715 We may also grant stock options to certain officers and employees at an exercise price equal to the stock price of our common stock on the grant date. Options vest ratably over three or four years and expire ten years from the date of grant. At December 31, 2014, there was less than $1 million of unrecognized compensation cost related to stock options that is expected to be recognized over a weighted-average period of 1.3 years. The intrinsic value of options outstanding and options exercisable at December 31, 2014 was $10 million and $5 million, respectively. The intrinsic value of options exercised during 2014 and 2013 was not material. The following table summarizes information about stock option activity during 2014 and 2013: Options outstanding - beginning of the year Granted Exercised Canceled Expired Options outstanding - end of the year Options exercisable - end of the year 2014 2013 Per share weighted average exercise prices 34.90 $ — 22.78 36.05 40.06 34.27 35.60 $ $ Shares 12,396,894 — (137,072) (114,925) (1,436,203) 10,708,694 9,808,694 Per share weighted average exercise prices Shares 13,653,245 $ 800,000 (35,461) (628,731) (1,392,159) 12,396,894 10,864,753 $ $ 35.28 21.93 22.09 32.93 32.39 34.90 36.84 The following table provides additional information about stock options outstanding and exercisable at December 31, 2014: Options Outstanding Options Exercisable Range of per share exercise prices Shares Per share weighted-average exercise price Weighted-average remaining contractual life $13.39 - $22.99 $23.00 - $30.99 $31.00 - $45.99 $46.00 - $48.03 2,318,742 2,410,252 3,356,418 2,623,282 10,708,694 $ $ 20.26 25.31 40.30 47.20 34.27 6.7 years 5.3 years 2.2 years 0.6 years 3.5 years Shares 1,578,742 2,250,252 3,356,418 2,623,282 9,808,694 Per share weighted-average exercise price Weighted-average remaining contractual life $ $ 20.89 25.41 40.30 47.20 35.60 6.0 years 5.1 years 2.2 years 0.6 years 3.1 years 84 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) We estimate the fair value of stock options using a Black-Scholes valuation model. Key assumptions used to estimate the fair value of stock options include the volatility of our stock price, a risk-free interest rate, the expected dividend yield and expected life of the award. 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 option term. The expected life of the award and expected dividend yield are based on historical experience. There were no stock options granted during 2014. In 2013, we granted 800,000 options at a weighted average exercise price of $21.93 and in 2012, we granted 600,000 options at a weighted average exercise price of $15.71. The fair value of stock options granted during 2013 and 2012 was determined using the following assumptions: Expected dividend yield Expected stock price volatility Risk-free interest rate Expected life Weighted-average fair value per option granted Fair value of options granted (in thousands) Employee Stock Purchase Plan Years Ended December 31, 2013 2012 7.7% 29.5% 1.8% 9.3% 30.0% 1.2% 7.9 years 7.9 years $0.88 $704 $0.48 $288 We maintain a non-compensatory Employee Stock Purchase Plan that enables substantially all U.S. and Canadian employees to purchase shares of our common stock at an offering price of 95% of the average market price on the offering date. At no time will the exercise price be less than the lowest price permitted under Section 423 of the Internal Revenue Code. Employees purchased 87,606 shares and 222,159 shares in 2014 and 2013, respectively. We have reserved 3,200,506 common shares for future purchase under the ESPP. Directors' Stock Plan The Directors Stock Plan was amended and restated as of May 12, 2014. Under the revised plan, non-employee directors receive restricted stock units which are convertible into shares of common stock one year from date of grant. Under the Directors’ Stock Plan in effect for the 2013 awards, non-employee directors received shares of stock that vested after six months. In 2014, 34,344 restricted stock units were awarded to non-employee directors and in 2013, 19,800 shares of stock were awarded to non-employee directors. 85 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) 21. Quarterly Financial Data (unaudited) 2014 Revenue Cost of revenues Operating expenses Income from continuing operations before income taxes Provision for income taxes Income from continuing operations Income from discontinued operations Net income before attribution of noncontrolling interests Less: Preferred stock dividends of subsidiaries attributable to noncontrolling interests Net income - Pitney Bowes Inc. Amounts attributable to common stockholders: Income from continuing operations Income from discontinued operations Net income - Pitney Bowes Inc. Basic earnings per share attributable to common stockholders (1): Continuing operations Discontinued operations Net income - Pitney Bowes Inc. Diluted earnings per share attributable to common stockholders (1): Continuing operations Discontinued operations Net income - Pitney Bowes Inc. First Quarter Second Quarter Third Quarter Fourth Quarter Total $ 937,497 $ 958,450 $ 941,644 $ 983,913 $ 3,821,504 409,866 473,129 54,502 8,036 46,466 2,801 49,267 423,159 396,814 138,477 46,335 92,142 6,717 98,859 421,544 378,563 141,537 25,310 116,227 20,655 136,882 426,222 461,011 96,680 33,134 63,546 3,576 67,122 1,680,791 1,709,517 431,196 112,815 318,381 33,749 352,130 4,594 4,594 4,593 4,594 18,375 44,673 $ 94,265 $ 132,289 $ 62,528 $ 333,755 41,872 $ 87,548 $ 111,634 $ 58,952 $ 300,006 2,801 6,717 20,655 3,576 33,749 44,673 $ 94,265 $ 132,289 $ 62,528 $ 333,755 0.21 $ 0.43 $ 0.55 $ 0.29 $ 0.01 0.03 0.10 0.02 0.22 $ 0.47 $ 0.65 $ 0.31 $ 0.21 $ 0.43 $ 0.55 $ 0.29 $ 0.01 0.03 0.10 0.02 0.22 $ 0.46 $ 0.65 $ 0.31 $ 1.49 0.17 1.65 1.47 0.17 1.64 $ $ $ $ $ $ $ (1) The sum of the earnings per share amounts may not equal the totals due to rounding. 86 PITNEY BOWES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter Total $ 909,363 $ 950,662 $ 920,489 $ 1,010,821 $ 3,791,335 2013 Revenue Cost of revenues Operating expenses Income from continuing operations before income taxes Provision for income taxes Income from continuing operations Income (loss) from discontinued operations Net income (loss) before attribution of noncontrolling interests Less: Preferred stock dividends of subsidiaries attributable to noncontrolling interests Net income (loss) - Pitney Bowes Inc. Amounts attributable to common stockholders: Income from continuing operations Income (loss) from discontinued operations Net income (loss) - Pitney Bowes Inc. Basic earnings per share attributable to common stockholders (1): Continuing operations Discontinued operations Net income (loss) - Pitney Bowes Inc. Diluted earnings per share attributable to common stockholders (1): Continuing operations Discontinued operations Net income (loss) - Pitney Bowes Inc. $ $ $ $ $ $ $ 392,481 435,017 81,865 17,795 64,070 8,030 72,100 4,594 411,499 430,330 108,833 24,218 84,615 (89,254) (4,639) 394,861 438,028 87,600 10,032 77,568 (78,501) (933) 451,781 453,384 105,656 25,922 79,734 14,948 94,682 1,650,622 1,756,759 383,954 77,967 305,987 (144,777) 161,210 4,594 4,594 4,593 18,375 67,506 $ (9,233) $ (5,527) $ 90,089 $ 142,835 59,476 $ 80,021 $ 72,974 $ 75,141 $ 287,612 8,030 (89,254) (78,501) 14,948 (144,777) 67,506 $ (9,233) $ (5,527) $ 90,089 $ 142,835 0.30 $ 0.40 $ 0.36 $ 0.37 $ 0.04 (0.44) (0.39) 0.07 0.34 $ (0.05) $ (0.03) $ 0.45 $ 0.29 $ 0.39 $ 0.36 $ 0.37 $ 0.04 (0.44) (0.39) 0.07 0.33 $ (0.05) $ (0.03) $ 0.44 $ 1.43 (0.72) 0.71 1.42 (0.71) 0.70 (1) The sum of the earnings per share amounts may not equal the totals due to rounding. 87 PITNEY BOWES INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (Dollars in thousands) Description Balance at beginning of year Additions charged to expense Deductions Balance at end of year Allowance for doubtful accounts 2014 2013 2012 Valuation allowance for deferred tax asset 2014 2013 2012 $ $ $ $ $ $ 13,149 20,219 25,667 122,780 142,176 111,438 $ $ $ $ $ $ 2,041 3,881 13,112 636 15,921 40,078 $ $ $ $ $ $ (4,448) (10,951) (18,560) (6,481) (35,317) (9,340) $ $ $ $ $ $ 10,742 13,149 20,219 116,935 122,780 142,176 88 Exhibit 12 PITNEY BOWES INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in thousands) 2014 2013 2012 2011 2010 Years Ended December 31, Income from continuing operations before income taxes Add: Interest expense (1) Portion of rents representative of the interest factor Amortization of capitalized interest Income as adjusted Fixed charges: Interest expense (1) Portion of rents representative of the interest factor Noncontrolling interests (preferred stock dividends of subsidiaries), excluding taxes Total fixed charges $ 431,196 $ 383,954 $ 511,770 $ 465,616 $ 431,678 174,661 195,836 196,368 203,061 203,911 18,367 — 22,259 — 22,564 973 25,893 1,535 25,270 1,716 624,224 $ 602,049 $ 731,675 $ 696,105 $ 662,575 174,661 $ 195,836 $ 196,368 $ 203,061 $ 203,911 18,367 22,259 22,564 25,893 25,270 $ $ 29,878 27,841 27,841 27,507 29,790 $ 222,906 $ 245,936 $ 246,773 $ 256,461 $ 258,971 Ratio of earnings to fixed charges (2) 2.80 2.45 2.96 2.71 2.56 (1) Interest expense includes both financing interest expense and other interest expense. (2) The computation of the ratio of earnings to fixed charges has been computed by dividing income from continuing operations before income taxes as adjusted by fixed charges. Included in fixed charges is one-third of rent expense as the representative portion of interest. PITNEY BOWES INC. SUBSIDIARIES OF REGISTRANT The Registrant, Pitney Bowes Inc., a Delaware Corporation, has no parent The following are subsidiaries of the Registrant (as of December 31, 2014) Exhibit 21 Subsidiary Name AIT Quest Trustee Ltd Alternative Mail & Parcel Investments Limited B. Williams Funding Corp. B. Williams Holding Corp. Canadian Office Services (Toronto) Limited Digital Cement Co. Digital Cement Inc. Elmcroft Road Realty Corporation Emtex Software, Inc. Encom Europe Limited Factor Humano y Cadena de Personal, S.A. de C.V. FSL Holdings Inc. FSL Risk Managers Inc. Group 1 Software China Ltd. Harvey Company, L.L.C Historic Boardwalk Hall, L.L.C. Imagitas, Inc. Mag Systèmes SAS MapInfo Realty LLC OLDEMT LIMITED OldMS Limited PB Equipment Management Inc. PB European UK LLC PB Forms, Inc. PB Historic Renovation LLC PB Miles Inc. PB Nova Scotia Holdings Inc. PB Nova Scotia Holdings II ULC PB Nova Scotia Holdings ULC PB Nova Scotia V ULC PB Nova Scotia VI ULC PB Nova Scotia VII ULC PB Nova Scotia II ULC PB Nova Scotia LP PB Partnership Financing Inc. PB Professional Services Inc. PBDorm Ireland Limited Pitney Bowes (Asia Pacific) Pte. Ltd Country or state of incorporation UK UK Delaware Delaware Canada Canada Delaware Connecticut Canada UK Mexico Connecticut New York Hong Kong Delaware Delaware Delaware France New York UK UK Delaware Delaware Nebraska Delaware Delaware Delaware Canada Canada Canada Canada Canada Canada Delaware Delaware Delaware Ireland Singapore Pitney Bowes (Dormant) Pte Ltd Pitney Bowes (Malaysia) Sdn Bhd Pitney Bowes (Singapore) Pte Ltd Pitney Bowes (Switzerland) AG Pitney Bowes (Thailand) Limited Pitney Bowes Australia FAS Pty Limited Pitney Bowes Australia Pty Limited Pitney Bowes Batsumi Enterprise (Pty) Limited Pitney Bowes Brasil Equipamentos e Servicos Ltda Pitney Bowes Canada II LP Pitney Bowes Canada LP Pitney Bowes Credit Australia Limited Pitney Bowes Cross Border Services Inc. Pitney Bowes Danmark A/S Pitney Bowes de Mexico, S.A. de C.V. Pitney Bowes Deutschland GmbH Pitney Bowes Europe Limited Pitney Bowes Finance Ireland Limited Pitney Bowes Finance Limited Pitney Bowes Global Financial Services LLC Pitney Bowes Global Limited Pitney Bowes Global LLC Pitney Bowes Holdco Limited Pitney Bowes Holding SNC Pitney Bowes Holdings Limited Pitney Bowes Hong Kong Limited Pitney Bowes India Private Limited Pitney Bowes International Funding Pitney Bowes International Holdings, Inc. Pitney Bowes International Mail Services Limited Pitney Bowes Ireland Limited Pitney Bowes Italia S.r.l. Pitney Bowes Japan K.K. Pitney Bowes Limited Pitney Bowes Luxembourg Holding II S.a.r.l. Pitney Bowes Luxembourg Holding S.a.r.l. Pitney Bowes Mail and Messaging Systems (Shanghai) Co., Ltd. Pitney Bowes MapInfo Business Applications Limited Pitney Bowes MapInfo GDC Limited Pitney Bowes MapInfo Scotland Limited Pitney Bowes Middle East FZ-LLC Pitney Bowes New Zealand Limited Pitney Bowes Norge AS Pitney Bowes Nova Scotia ULC Pitney Bowes of Canada Ltd. - Pitney Bowes du Canada Ltee Pitney Bowes Oy Singapore Malaysia Singapore Switzerland Thailand Australia Australia South Africa Brazil Canada Canada Australia Delaware Denmark Mexico Germany UK Ireland UK Delaware UK Delaware UK France UK Hong Kong India Ireland Delaware UK Ireland Italy Japan UK Luxembourg Luxembourg China UK UK UK Dubai New Zealand Norway Canada Canada Finland Pitney Bowes Polska Sp. z.o.o. Pitney Bowes Presort Services, Inc. Pitney Bowes Properties Inc. Pitney Bowes Puerto Rico, Inc. Pitney Bowes SA (Pty) Ltd Pitney Bowes SAS Pitney Bowes Servicios, S.A. de C.V. Pitney Bowes Shelton Realty Inc. Pitney Bowes Software (Beijing) Ltd Pitney Bowes Software Canada Inc. Pitney Bowes Software Europe Holdco Limited Pitney Bowes Software Europe Limited Pitney Bowes Software GmbH Pitney Bowes Software Holdings Limited Pitney Bowes Software Inc. Pitney Bowes Software India Private Limited Pitney Bowes Software K. K. Pitney Bowes Software Latin America Inc. Pitney Bowes Software Limited Pitney Bowes Software Pte. Ltd Pitney Bowes Software Pty Ltd Pitney Bowes Software SAS Pitney Bowes Svenska Aktiebolag Pitney Bowes UK LP PitneyWorks.com Inc. PitneyWorks.com L.L.C. Portrait International, Inc. Portrait Million Handshakes AS Portrait Software International Limited Portrait Software Limited Portrait Software UK Limited Print, Inc. Quadstone Paramics Ltd Quadstone Trustee Company Limited Technopli SARL The Pitney Bowes Bank, Inc. Volly LLC Wheeler Insurance, Ltd. Poland Delaware Connecticut Puerto Rico South Africa France Mexico Connecticut China Canada UK UK Germany UK Delaware India Japan Delaware UK Singapore Australia France Sweden UK Delaware Delaware Ohio Norway UK UK UK Washington Scotland Scotland France Utah Delaware Vermont EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Registration Nos. 333-05731, 333-132589, 333-132590, 333-132591, 333-132592, 333-145527, 333-190308) and on Forms S-3 (Registration Nos. 333-183070, 333-198759) of Pitney Bowes Inc. of our report dated February 20, 2015 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Stamford, Connecticut February 20, 2015 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 31.1 I, Marc B. Lautenbach, certify that: 1. I have reviewed this Annual Report on Form 10-K of Pitney Bowes Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 20, 2015 /s/ Marc B. Lautenbach Marc B. Lautenbach President and Chief Executive Officer CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 31.2 I, Michael Monahan, certify that: 1. I have reviewed this Annual Report on Form 10-K of Pitney Bowes Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 20, 2015 /s/ Michael Monahan Michael Monahan Executive Vice President, Chief Operating Officer and Chief Financial Officer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32.1 In connection with the Annual Report of Pitney Bowes Inc. (the "Company") on Form 10-K for the year ended December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Marc B. Lautenbach, President and Chief Executive Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) (2) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Marc B. Lautenbach Marc B. Lautenbach President and Chief Executive Officer Date: February 20, 2015 The foregoing certification is being furnished solely to accompany this report pursuant to 18 U.S.C. §1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32.2 In connection with the Annual Report of Pitney Bowes Inc. (the "Company") on Form 10-K for the year ended December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael Monahan, Executive Vice President, Chief Operating Officer and Chief Financial Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) (2) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Michael Monahan Michael Monahan Executive Vice President, Chief Operating Officer and Chief Financial Officer Date: February 20, 2015 The foregoing certification is being furnished solely to accompany this report pursuant to 18 U.S.C. §1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company. At Pitney Bowes, we’re building a bridge to our second century. For nearly 100 years, we have been delivering innovations that help clients navigate the complex and always evolving world of commerce. We are transforming Pitney Bowes for the next century by expanding into high-growth markets, including digital commerce and software, while continuing to innovate in our core shipping and mailing businesses. We are building a stronger, globally integrated company with new physical and digital capabilities and new ways of delivering sustainable value. 4 4 1 1 0 0 2 2 R R A A d d e e v v r r e e s s e e r r s s t t h h g g i i r r l l l l A A . . c c n n I I s s e e w w o o B B y y e e n n t t i i P P 5 5 1 1 0 0 2 2 © © Stockholder Information Stockholder Information World Headquarters World Headquarters Pitney Bowes Inc. Pitney Bowes Inc. 3001 Summer Street, Stamford, CT 06926 3001 Summer Street, Stamford, CT 06926 203.356.5000 203.356.5000 www.pitneybowes.com www.pitneybowes.com Annual Meeting Annual Meeting Stockholders are cordially invited to attend the Annual Meeting Stockholders are cordially invited to attend the Annual Meeting at 9:00 a.m., Monday, May 11, 2015, at the Hyatt Regency Hotel, at 9:00 a.m., Monday, May 11, 2015, at the Hyatt Regency Hotel, 1800 East Putnam Ave., Old Greenwich, Connecticut. Notice of 1800 East Putnam Ave., Old Greenwich, Connecticut. Notice of the meeting will be mailed or made available to stockholders of the meeting will be mailed or made available to stockholders of record as of March 13, 2015. Please refer to the Proxy Statement record as of March 13, 2015. Please refer to the Proxy Statement for information concerning admission to the meeting. for information concerning admission to the meeting. 10-K Report 10-K Report Included in this Annual Report to Stockholders is a copy of our Included in this Annual Report to Stockholders is a copy of our Annual Report on Form 10-K for the ﬁ scal year ended December 31, Annual Report on Form 10-K for the fiscal year ended December 31, 2014, as ﬁ led with the Securities and Exchange Commission (SEC). 2014, as filed with the Securities and Exchange Commission (SEC). This Annual Report contains statements that are forward-looking. This Annual Report contains statements that are forward-looking. These statements are based on current expectations and These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual assumptions that are subject to risks and uncertainties. Actual results could diff er materially because of factors discussed in the results could differ materially because of factors discussed in the Forward-Looking Statements section of the Form 10-K. The CEO/ Forward-Looking Statements section of the Form 10-K. The CEO/ CFO certiﬁ cations required to be ﬁ led with the SEC under Section CFO certifications required to be filed with the SEC under Section 302 of the Sarbanes-Oxley Act of 2002 were ﬁ led as exhibits 302 of the Sarbanes-Oxley Act of 2002 were filed as exhibits to our Annual Report on Form 10-K for the ﬁ scal year ended to our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. The CEO certiﬁ cation required to be December 31, 2014. The CEO certification required to be submitted to the NYSE pursuant to Section 303A.12(a) of the submitted to the NYSE pursuant to Section 303A.12(a) of the NYSE Listed Company Manual was submitted on June 3, 2014. NYSE Listed Company Manual was submitted on June 3, 2014. Copies of our Form 10-K are available without charge at Copies of our Form 10-K are available without charge at www.pb.com/investorrelations or upon written request to: www.pb.com/investorrelations or upon written request to: Investor Relations Investor Relations Pitney Bowes Inc. Pitney Bowes Inc. 3001 Summer Street, Stamford, CT 06926 3001 Summer Street, Stamford, CT 06926 Stock Exchanges Stock Exchanges Pitney Bowes common stock is traded under the symbol “PBI.” Pitney Bowes common stock is traded under the symbol “PBI.” The principal market on which it is listed is the New York Stock The principal market on which it is listed is the New York Stock Exchange. Exchange. Investor Inquiries Investor Inquiries All investor inquiries about Pitney Bowes should be addressed to: All investor inquiries about Pitney Bowes should be addressed to: Investor Relations Investor Relations Pitney Bowes Inc. Pitney Bowes Inc. 3001 Summer Street, Stamford, CT 06926 3001 Summer Street, Stamford, CT 06926 Comments concerning the Annual Report Comments concerning the Annual Report should be sent to: should be sent to: Corporate Financial Communications Corporate Financial Communications Pitney Bowes Inc. Pitney Bowes Inc. 3001 Summer Street, Stamford, CT 06926 3001 Summer Street, Stamford, CT 06926 Transfer Agent and Registrar Transfer Agent and Registrar Computershare Computershare PO Box 30170 PO Box 30170 College Station, TX 77842-3170 College Station, TX 77842-3170 Stockholders may call Computershare at (800) 648-8170 Stockholders may call Computershare at (800) 648-8170 www.computershare.com www.computershare.com Stockholder Inquiries Stockholder Inquiries To provide or obtain information concerning transfer requirements, To provide or obtain information concerning transfer requirements, lost certiﬁ cates, dividends, changes of address and other matters, lost certificates, dividends, changes of address and other matters, please call: (800) 648-8170, TDD phone service for the hearing please call: (800) 648-8170, TDD phone service for the hearing impaired (800) 952-9245, for foreign holders (781) 575-2721; or impaired (800) 952-9245, for foreign holders (781) 575-2721; or write to the address above. write to the address above. Dividend Reinvestment Plan Dividend Reinvestment Plan Owners of Pitney Bowes Inc. common stock may purchase Owners of Pitney Bowes Inc. common stock may purchase common stock, $1 par value, with their dividends through the common stock, $1 par value, with their dividends through the Dividend Reinvestment Plan. A prospectus and enrollment card Dividend Reinvestment Plan. A prospectus and enrollment card may be obtained by calling (800) 648-8170 or by writing to the may be obtained by calling (800) 648-8170 or by writing to the agent at the address above. agent at the address above. Direct Deposit of Dividends Direct Deposit of Dividends For information about direct deposit of dividends, please call For information about direct deposit of dividends, please call (800) 648-8170 or write to the agent at the address above. (800) 648-8170 or write to the agent at the address above. Duplicate Mailings Duplicate Mailings If you receive duplicate mailings because you have more than If you receive duplicate mailings because you have more than one account listing, you may wish to save your company money one account listing, you may wish to save your company money by consolidating your accounts. Please call (800) 648-8170 by consolidating your accounts. Please call (800) 648-8170 or write to the agent at the address above. or write to the agent at the address above. Stock Information Stock Information Dividends per common share: Dividends per common share: Quarter Quarter First First Second Second Third Third Fourth Fourth Total Total 2014 2014 $ 0.1875 $ 0.1875 $ 0.1875 $ 0.1875 $ 0.1875 $ 0.1875 $ 0.1875 $ 0.1875 $ 0.75 $ 0.75 Quarterly price ranges of common stock: Quarterly price ranges of common stock: 2014 Quarter 2014 Quarter First First Second Second Third Third Fourth Fourth 2013 Quarter 2013 Quarter First First Second Second Third Third Fourth Fourth High High $ 26.63 $ 26.63 $ 28.23 $ 28.23 $ 28.37 $ 28.37 $ 25.68 $ 25.68 High High $ 15.56 $ 15.56 $ 16.43 $ 16.43 $ 18.82 $ 18.82 $ 24.18 $ 24.18 2013 2013 $ 0.375 $ 0.375 $ 0.1875 $ 0.1875 $ 0.1875 $ 0.1875 $ 0.1875 $ 0.1875 $ 0.9375 $ 0.9375 Low Low $ 21.01 $ 21.01 $ 24.06 $ 24.06 $ 24.63 $ 24.63 $ 22.38 $ 22.38 Low Low $ 10.71 $ 10.71 $ 13.12 $ 13.12 $ 13.76 $ 13.76 $ 18.21 $ 18.21 46537_Cover.indd ii-iv 3/20/15 3:05 PM k k r r o o Y Y w w e e N N , , l l e e u u q q e e S S : : n n g g i i s s e e D D Pitney Bowes, the Corporate logo, Mailstream Evolution, Print+ Messenger, Pitney Bowes, the Corporate logo, Mailstream Evolution, Print+ Messenger, Portrait, and Connect+ are trademarks of Pitney Bowes Inc. or a subsidiary. Portrait, and Connect+ are trademarks of Pitney Bowes Inc. or a subsidiary. All other trademarks are the property of their respective owners. All other trademarks are the property of their respective owners. The materials used in this publication are recyclable. The materials used in this publication are recyclable. The paper is certified to Forest Stewardship Council® (FSC®) standards. The paper is certiﬁ ed to Forest Stewardship Council® (FSC®) standards. A n n u a l R e p o r t 2 0 1 4 A Bridge to the Second Century Pitney Bowes Annual Report 2014 3001 Summer Street, Stamford, CT 06926 203.356.5000 www.pitneybowes.com 46537cover.indd coviv-i 46537cover.indd coviv-i 3/18/15 1:57 PM 3/18/15 1:57 PM

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