# PITNEY BOWES INC /DE/ (PBI) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from PITNEY BOWES INC /DE/'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/78814/000007881423000012/pbi-20221231.htm
Accession: 0000078814-23-000012
Filing date: 2023-02-17
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/PBI/
All MD&A years: /company/PBI/mda/
Previous year: /company/PBI/mda/fy2021/ (FY 2021)
Next year: /company/PBI/mda/fy2023/ (FY 2023)

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

OPERATIONS

The following discussion of our financial condition and operating results should be read in conjunction with our risk factors, consolidated financial statements and related notes. This discussion includes forward-looking statements based on management's current expectations, estimates and projections and involves risks and uncertainties. Actual results may differ significantly from those currently expressed. A detailed discussion of risks and uncertainties that could cause actual results to differ materially from such forward-looking statements is outlined under "Forward-Looking Statements" and "Item 1A. Risk Factors" in this Form 10-K. All table amounts are presented in thousands of dollars.

Throughout this discussion, we refer to revenue growth on a constant currency basis. Constant currency measures exclude the impact of changes in currency exchange rates from the prior period under comparison and is calculated by converting the current period non-U.S. dollar denominated revenue using the prior year's exchange rate. Management believes that excluding the impacts of currency exchange rates provides investors a better understanding of the underlying revenue performance. Where constant currency measures are not provided, the actual change and constant currency change are the same.

Management measures segment profitability and performance using segment earnings before interest and taxes (EBIT). Segment EBIT is calculated by deducting from segment revenue the related costs and expenses attributable to the segment. Segment EBIT excludes interest, taxes, general corporate expenses, restructuring charges, goodwill impairment charges and other items not allocated to a business segment. Management believes that it provides investors a useful measure of operating performance and underlying trends of the business. Segment EBIT may not be indicative of our overall consolidated performance and should be read in conjunction with our consolidated results of operations.

A discussion of our financial condition and results of operations for the year ended December 31, 2020, can be found under Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 22, 2022.

Overview

Financial Results Summary - Year Ended December 31:

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[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","EBIT"],["","Years Ended December 31,"],["","2022","","2021","","% change"],["Global Ecommerce","$","(100,308)","","","$","(98,673)","","","(2)","%"],["Presort Services","82,430","","","79,721","","","3","%"],["SendTech Solutions","400,909","","","429,415","","","(7)","%"],["Total Segment EBIT","$","383,031","","","$","410,463","","","(7)","%"]]
[[/GREPCENT_TABLE]]

16

Revenue decreased 4% (3% at constant currency) in 2022 compared to 2021 primarily due to a decrease in business services revenue primarily driven by lower Global Ecommerce volumes, lower support services revenue driven by a declining meter population and a shift to cloud-enabled products and lower financing revenue primarily due to lower lease extensions. Global Ecommerce revenue decreased 7%, Presort Services revenue increased 5% and SendTech Solutions revenue declined 3% (1% at constant currency).

Segment EBIT for 2022 decreased 7% compared to 2021. Global Ecommerce EBIT decreased 2%, primarily due to higher operating expenses and a decline in revenue from cross-border services and digital delivery services, partially offset by the increase in domestic parcel delivery services gross margin. Presort Services EBIT increased 3%, primarily due to higher revenue, partially offset by higher transportation costs. SendTech Solutions EBIT decreased 7%, primarily driven by the decline in revenue and lower margins. Refer to Results of Operations section for further information.

Factors Affecting Comparability

Certain transactions and changes occurred during the year that impact the comparability of our 2022 financial results to the prior periods. These transactions and changes include:

•The sale of our Borderfree cross-border ecommerce solutions business (Borderfree);

•A change in the presentation of revenue for digital delivery services primarily related to our Global Ecommerce business from a gross basis to a net basis due to an adjustment in terms of one of our contracts with the USPS; and

•A refinement in the methodology of allocating transportation costs between our Global Ecommerce and Presort Services segments

Effective July 1, 2022, we sold Borderfree, which was reported in our Global Ecommerce segment. Prior year results were not recast to exclude the revenue and expenses from Borderfree. Accordingly, revenue and costs for 2022 include only six months of operations for Borderfree, whereas 2021 includes a full year of operations. Net income of Borderfree was not significant in any period presented.

The change in revenue presentation became effective October 1, 2022. Accordingly, revenue and cost of revenue for certain digital delivery services for the first nine months of 2022 and full year 2021 are reported as business services revenue and cost of business services, respectively, and beginning for the fourth quarter of 2022, the revenue and cost of revenue for these services are reported on a net basis as business services revenue.

The refinement to the methodology of allocating transportation costs between Global Ecommerce and Presort Services resulted in an increase to Global Ecommerce EBIT and a corresponding decrease to Presort Services EBIT of approximately $10 million in 2022.

Outlook

We expect consolidated revenue growth in 2023 to be flat to a mid-single digit increase, on a comparable basis, and the percentage of EBIT growth to outpace revenue growth, primarily due to an anticipated improvement in profitability in our Global Ecommerce segment.

Within Global Ecommerce, we anticipate growth in Domestic Parcel, partially offset by continued softness in our Cross-border operations. We anticipate Domestic Parcel margin and profit improvements from higher volumes and continued productivity improvements from the investments we made in our facilities and network. In 2022, we saw significant productivity improvements in labor, transportation and warehouse operations and expect further improvements in 2023. We expect our cross-border operations to continue to be adversely impacted by a strong U.S. dollar and headwinds from changes in how certain of our clients may access cross-border services in 2023 compared to 2022.

Within Presort Services, we expect margin and profit improvements from continued productivity improvements driven by our investments in increased automation and facilities consolidation. Revenue is expected to benefit from growth in Marketing Mail and Bound and Packet Mail and from a full year of volumes from our recent acquisitions, which we expect to offset the impact on revenue from the expected decline in First Class Mail volumes.

In SendTech Solutions, we expect revenue growth from new products and our cloud-enabled shipping solutions to partially offset an expected decline in mailing related revenues. We expect a stabilization in financing revenue due to new product offerings and an increasing finance receivable portfolio. Overall segment margins are expected to remain strong.

Certain factors beyond our control could have adverse impacts on our 2023 results including, but not limited to, reduced consumer spending due to inflationary pressures and rising prices, higher interest rates, a slow-down in economic activity, higher fuel and transportation costs and other adverse geopolitical developments. Inflationary pressures and rising prices could put increase pressure on wages, particularly warehouse and transportation employees, and result in higher component costs. Higher fuel and freight costs could also adversely impact our operations. We expect that interest expense for 2023 will be about $30 million higher due to the recent increases in interest rates and additional increases anticipated in 2023.

17

RESULTS OF OPERATIONS

REVENUE AND SEGMENT EBIT

Global Ecommerce

Global Ecommerce includes the revenue and related expenses from domestic parcel services, cross-border solutions and digital delivery services.

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Global Ecommerce revenue decreased 7% in 2022 compared to 2021. The sale of Borderfree and the change in revenue presentation each contributed a revenue decline of 2%. Lower cross-border services volumes contributed a revenue decline of 5% and lower digital delivery services contributed a revenue decline of 2% compared to the prior year. Offsetting these declines, domestic parcel delivery services contributed revenue growth of 5% compared to the prior year due to pricing actions.

Gross margin increased $11 million in 2022 compared to 2021 and gross margin percentage increased to 8.6% from 7.3% compared to the prior year. Domestic parcel delivery services gross margin increased $59 million over the prior year due to pricing actions, improved warehouse productivity and a $14 million prior year charge reflecting the estimated cost of a price assessment. Cross-border gross margin declined $33 million compared to the prior year period primarily due to the decline in volumes driven by a strong U.S. dollar and the loss of $21 million of gross margin due to the sale of Borderfree. Digital delivery services gross margin declined $18 million compared to the prior year period primarily due to the decline in volumes and revenue.

Segment EBIT for 2022 was a loss of $100 million compared to a loss of $99 million in 2021. The slight increase in loss was driven by higher operating expenses of $12 million primarily due to higher employee-related expenses, which more than offset the increase in gross margin of $11 million.

Presort Services

Presort Services includes revenue and related expenses from sortation services to qualify large volumes of First Class Mail, Marketing Mail, Marketing Mail Flats and Bound Printed Matter for postal worksharing discounts.

[[GREPCENT_TABLE]]
[["","Revenue","","Cost of Revenue","","Gross Margin"],["","Years Ended December 31,","","Years Ended December 31,","","Years Ended December 31,"],["","2022","","2021","","Actual % change","","Constant Currency % change","","2022","","2021","","2022","","2021"],["Business services","$","602,016","","","$","573,480","","","5","%","","5","%","","$","454,923","","","$","431,382","","","24.4","%","","24.8","%"],["","Segment EBIT"],["","Years Ended December 31,"],["","2022","","2021","","Actual % change"],["Segment EBIT","$","82,430","","","$","79,721","","","3","%"]]
[[/GREPCENT_TABLE]]

Presort Services revenue increased 5% in 2022 compared to 2021. The processing of First Class Mail, Marketing Mail and Marketing Mail Flats and Bound Printed Matter contributed revenue growth of 3%, 1%, and 1%, respectively, primarily due to the impact of pricing actions.

18

Gross margin increased $5 million and segment EBIT increased $3 million, or 3% in 2022 compared to 2021 primarily due to higher revenue from pricing actions and productivity improvements driven by investments in automation, partially offset by higher transportation costs of $23 million driven by increased demand, higher fuel costs and higher allocated costs due to the revised transportation cost allocation methodology. Gross margin percentage in 2022 was consistent with 2021.

SendTech Solutions

SendTech Solutions includes the revenue and related expenses from physical and digital mailing and shipping technology solutions, financing, services, supplies and other applications to help simplify and save on the sending, tracking and receiving of letters, parcels and flats.

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

SendTech Solutions revenue decreased 3% (1% at constant currency) in 2022 compared to 2021. Support services revenue declined 5% (3% at constant currency) primarily due to a declining meter population and shift to cloud-enabled products. Financing revenue declined 7% (5% at constant currency) primarily due to lower lease extensions as more clients are deciding to lease new equipment rather than extend leases on existing equipment. Rentals revenue declined 10% (9% at constant currency). Partially offsetting these decreases, business services revenue increased 22% (23% at constant currency) primarily due to growth in subscription services.

Gross margin for 2022 decreased $55 million and gross margin percentage decreased to 59% from 61.4%, primarily due to declines in financing and support services revenue which have high gross margins. Segment EBIT decreased $29 million, or 7%, due to the decline in gross margin, partially offset by lower operating expenses of $26 million, due in part, to lower employee-related expenses, lower professional fees, lower credit loss provision and other cost savings.

19

CONSOLIDATED EXPENSES

Selling, general and administrative (SG&A)

SG&A expense of $906 million in 2022 decreased 2%, or $19 million, compared to 2021, primarily due to lower employee-related expenses of $23 million, lower depreciation expense of $7 million, and lower professional fees of $7 million, partially offset by higher travel expenses of $6 million and higher credit card fees of $5 million.

The majority of our SG&A expenses are recorded directly or allocated to our reportable segments. SG&A expenses not recorded directly or allocated to our reportable segments are reported as unallocated corporate expenses. Unallocated corporate expenses primarily represents corporate administrative functions such as finance, marketing, human resources, legal, information technology and innovation.

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2022","","2021","","Actual % change"],["Unallocated corporate expenses","$","204,251","","","$","207,774","","","(2)","%"]]
[[/GREPCENT_TABLE]]

Unallocated corporate expenses decreased $4 million in 2022 compared to 2021 primarily driven by lower salaries and variable-compensation expenses of $9 million and lower marketing expenses of $6 million, partially offset by higher pension costs of $5 million and higher travel expenses, rent expense and insurance costs of $2 million each.

Research and development (R&D)

R&D expense decreased 7%, or $3 million in 2022 compared to 2021, primarily due to cost savings, partially offset by higher R&D spending in our SendTech Solutions segment.

Restructuring charges

Restructuring charges, consisting of costs for employee severance and facility closures, were $19 million for each of the years ended December 31, 2022 and 2021. See Note 12 to the Consolidated Financial Statements for further information.

Other components of net pension and postretirement cost

Other components of net pension and postretirement cost for the year ended December 31, 2022, was $4 million compared to $1 million in 2021. The amount of other components of net pension and postretirement cost (income) recognized each year will vary based on actuarial assumptions and actual results of our pension plans. See Note 14 to the Consolidated Financial Statements for further information.

Other (income) expense

Other income for the year ended December 31, 2022, of $22 million consists of a $14 million gain from the sale of our Shelton, Connecticut office building, a $5 million gain from the sale of Borderfree, and a gain of $7 million from deferred proceeds received related to the sale of businesses in prior years, and a charge of $5 million from the early redemption of debt. See Notes 9, 11 and 13 to the Consolidated Financial Statements for further information.

Income taxes

The effective tax rate for 2022 includes a tax benefit of $5 million on the pre-tax gain from the sale of Borderfree as the tax basis was higher than book basis, and a $1 million benefit associated with the 2019 sale of a business. See Note 15 to the Consolidated Financial Statements for further information.

20

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2022 we had cash, cash equivalents and short-term investments of $681 million, which includes $182 million held at our foreign subsidiaries used to support the liquidity needs of those subsidiaries. Our primary sources of liquidity include existing cash and investments, cash generated from operations and borrowing capacity under our $500 million revolving credit facility. We currently believe these sources of liquidity will be sufficient to fund our cash needs for the next 12 months.

Cash Flow Summary

The change in cash and cash equivalents is as follows:

[[GREPCENT_TABLE]]
[["","2022","","2021","","Increase/(decrease)"],["Net cash from operating activities","$","175,983","","","$","301,515","","","$","(125,532)"],["Net cash from investing activities","(24,269)","","","(155,251)","","","130,982"],["Net cash from financing activities","(198,083)","","","(330,371)","","","132,288"],["Effect of exchange rate changes on cash and cash equivalents","(16,130)","","","(4,863)","","","(11,267)"],["Change in cash and cash equivalents","$","(62,499)","","","$","(188,970)","","","$","126,471"]]
[[/GREPCENT_TABLE]]

Operating activities

Cash flows from operating activities in 2022 declined $126 million compared to 2021, primarily due to growth in our trade and finance receivables which reduced year-over-year cash flow by $100 million. Cash flow from operations was also impacted by higher tax payments of $10 million, higher interest payments of $10 million due to increases in variable rates and a postage payment of $14 million in 2022 related to a 2021 volume-related vendor price adjustment.

Investing activities

Cash flows from investing activities for 2022 improved $131 million compared to the prior year. Proceeds from the sale of businesses and assets increased $133 million, primarily due to the sale of Borderfree ($95 million) and our Shelton, CT office building ($51 million), and capital expenditures were $59 million lower than the prior year. These improvements were partially offset by increased investments in our financing products of $47 million and net payments of $28 million for the settlement of foreign currency exchange contracts due to increased volatility in foreign exchange rates during 2022. We enter into foreign currency exchange contracts with third-parties to offset the earnings volatility caused by changes in foreign currency exchange rates and the revaluation of intercompany loans denominated in a foreign currency. Although there is minimal impact to our reported earnings, the settlement of these derivative contracts results in cash outflows or inflows.

Financing activities

Cash flows from financing activities for 2022 improved $132 million compared to the prior year primarily due to lower net repayments of debt of $126 million and lower premiums and fees paid to refinance debt of $42 million. These improvements were partially offset by lower cash flow from changes in customer deposits at the PB Bank of $19 million and common stock repurchases of $13 million .

Debt Activity

During 2022, we have reduced debt by $124 million, primarily from the redemption of the remaining $90 million of outstanding April 2023 notes, scheduled term loan repayments of $24 million and the purchase of $9 million of our debt in the open market. Through February 16, 2023, we have purchased an additional $12 million of our debt in the open market.

The credit agreement that governs our $500 million secured revolving credit facility and term loans contains financial and non-financial covenants. At December 31, 2022, we were in compliance with all covenants and there were no outstanding borrowings under the revolving credit facility. In December 2022, we amended our $500 million credit facility to adjust our financial covenants and provide additional financial flexibility. Borrowings under the revolving credit facility and term loans are secured by assets of the company.

During 2022, The PB Bank (the Bank), a wholly owned subsidiary, has become a member of the Federal Home Loan Bank (FHLB) of Des Moines. As a member, the Bank has access to certain credit products as a funding source known as "advances." As of December 31, 2022, the Bank had yet to apply for any advances.

21

Future Cash Requirements

The following table summarizes our known and contractually committed cash requirements at December 31, 2022 (in millions):

[[GREPCENT_TABLE]]
[["","Payments due in"],["","Total","","2023","","2024","","2025","","2026","","2027","","Thereafter"],["Debt maturities","$","2,240","","","$","33","","","$","281","","","$","51","","","$","245","","","$","401","","","$","1,229"],["Lease obligations","405","","","74","","","70","","","63","","","53","","","46","","","99"],["Purchase obligations","217","","","215","","","1","","","1","","","\u2014","","","\u2014","","","\u2014"],["Retiree medical payments","93","","","12","","","11","","","11","","","10","","","10","","","39"],["Total","$","2,955","","","$","334","","","$","363","","","$","126","","","$","308","","","$","457","","","$","1,367"]]
[[/GREPCENT_TABLE]]

Debt

At December 31, 2022, we have outstanding debt of $2.2 billion. Approximately 65% of this debt is at fixed rates, including the effect of interest rate swaps, and the remaining 35% is at variable rates. The weighted average interest rate of our variable rate debt at December 31, 2022 was 7.5%. We estimate that cash interest payments for the next 12 months will be $170 - $180 million.

Required debt repayments over the next 12 months are $33 million, which we anticipate satisfying through available cash on hand and cash generated from operations. Our next material principal maturity is in March 2024. We expect to satisfy this obligation with a cost-effective capital market solution, available cash, or revolver access. See Note 13 to the Consolidated Financial Statements for information regarding our debt.

Lease obligations

We lease real estate and equipment under operating and capital lease arrangements. These leases have terms of up to 15 years and include renewal options. Lease obligations in the table above do not include $53 million of payments for leases signed but not yet commenced at December 31, 2022. See Note 8 and Note 17 to the Consolidated Financial Statements for further information.

Purchase obligations

Purchase obligations include unrecorded agreements to purchase goods and services that are enforceable and legally binding upon us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancellable without penalty.

In addition to the above known and contractually committed cash payments, we anticipate using cash for the following items:

Capital Expenditures

We will continue to invest in new solutions and services across our businesses to capitalize on market opportunities, and in our facilities and technology to grow our businesses, improve productivity and gain additional economies of scale. Capital expenditures are evaluated and approved by senior leadership based on several factors, including expected impacts on revenue growth, productivity enhancements, service improvements and cost savings.

Capital expenditures totaled $125 million and $184 million for the years ended December 31, 2022 and 2021, respectively. In 2021, we invested significantly in our facilities, network and technologies to expand operations, improve productivity and gain economies of scale in our Global Ecommerce and Presort operations. During 2022, we continued to make necessary investments in our facilities, network and technologies.

Dividends

We have historically paid a quarterly dividend to our shareholders. Each quarter, our Board of Directors considers our recent and projected earnings and other capital needs and priorities in deciding whether to approve a dividend. We expect to continue to pay a quarterly dividend of $0.05 per share; however, our Board of Directors may decide to increase or decrease this amount or to not approve the payment of a dividend at any time and for any reason without notice. Assuming the current $0.05 per quarter dividend payment, we estimate that dividend payments will be approximately $35 million in 2023. There are no material restrictions on our ability to declare dividends.

22

Share Repurchases

We may repurchase shares of our common stock to manage the dilution created by shares issued under employee stock plans and for other purposes. At December 31, 2022, we have authorization from our Board of Directors to repurchase up to of $3 million of our common stock.

Off Balance Sheet Arrangements

At December 31, 2022, we had approximately $26 million outstanding letters of credit guarantees with financial institutions that are primarily issued as security for insurance, leases, customs and other performance obligations. In general, we would only be liable for the amount of these guarantees in the event of default in the performance of our obligations, the probability of which we believe is remote.

23

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 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

We derive revenue from multiple sources including the sale and lease of equipment, equipment rentals, financing, support services and business services. Certain transactions are consummated at the same time and can therefore generate revenue from multiple sources. The most common form of these arrangements involves a sale or noncancelable lease of equipment, meter services and an equipment maintenance agreement. We are required to determine whether each product and service within the contract should be treated as a separate performance obligation (unit of accounting) for revenue recognition purposes. We recognize revenue for performance obligations when control is transferred to the customer. Transfer of control may occur at a point in time or over time, depending on the nature of the contract and the performance obligation.

Revenue is allocated among performance obligations based on relative standalone selling prices (SSP), which are a range of selling prices that we would sell the good or service to a customer on a separate basis. SSP are established for each performance obligation at the inception of the contract and can be observable prices or estimated. Revenue is allocated to the meter service and equipment maintenance agreement elements using their respective observable selling prices charged in standalone and renewal transactions. For sale and lease transactions, the SSP of the equipment is based on a range of observable selling prices in standalone transactions. We recognize revenue on non-lease transactions when control of the equipment transfers to the customer, which is upon delivery for customer installable models and upon installation or customer acceptance for other models. We recognize revenue on equipment for lease transactions upon shipment for customer installable models and upon installation or customer acceptance for other models.

Impairment review

Goodwill is tested annually for impairment at the reporting unit level during the fourth quarter or sooner if circumstances indicate an impairment may exist. The impairment test for goodwill determines the fair value of each reporting unit and compares it to the reporting unit's carrying value, including goodwill. If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired, If the fair value of the reporting unit is less than the carrying value of the net assets assigned to the reporting unit, a goodwill impairment loss is calculated as the difference between these amounts, limited to the amount of goodwill allocated to the reporting unit.

Testing goodwill for impairment requires us to identify our reporting units and assign assets and liabilities, including goodwill, to each reporting unit. The fair value of a reporting unit is based on one or a combination of techniques, which include a discounted cash flow model, multiples of competitors, and/or multiples from sales of like businesses. The results of our annual goodwill impairment test indicated that the fair value of our reporting units exceeded their fair value and no impairment existed.

During 2022, we determined that the agreement to sell Borderfree was a triggering event and an impairment test was performed as of July 1, 2022. Further, we determined that the shortfall in fourth quarter performance of the Global Ecommerce reporting unit was an additional triggering event. Accordingly, we performed another goodwill impairment test as of December 31, 2022 to assess whether the goodwill of the Global Ecommerce reporting unit was impaired. We engaged a third-party to assist in the determination of the reporting unit fair value. The fair value was estimated using a discounted cash flow model based on management developed cash flow projections, which included judgements and assumptions related to revenue growth rates, operating margins, operating income, and discount rate.

The results of our impairment analysis indicated that the Global Ecommerce reporting unit was not impaired. However, the fair value of the reporting unit exceeded the carrying value by less than 10%. The judgements and assumptions used to estimate the fair value of the reporting unit are inherently subjective and changes in any of the judgements or assumptions used to determine the fair value of this reporting unit at December 31, 2022, could result in a different fair value determination. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we applied hypothetical changes to our most significant judgments and assumptions. The most significant judgements and assumptions used in our analysis to determine the fair value of the reporting unit was the discount rate and operating margins. Assuming all other factors remain constant, a 100 basis point increase in the discount rate or a 100 basis point reduction in operating margins in each year would have resulted in a reporting unit fair value less than its carrying value. The carrying value of goodwill for the Global Ecommerce reporting unit at December 31, 2022 was $339 million.

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Events and circumstances that could change our estimates and assumptions and impact the fair value determination of the Global Ecommerce reporting unit, include, but are not limited to, continued financial and operating performance below expectations, reduced consumer spending due to inflationary pressures and rising prices, a continued and prolonged slow-down in economic activity, increased competition and pricing pressures, changing consumer behaviors, our ability to increase volumes, gain economies of scale and improve margins, and rising interest rates.

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

Allowances for credit losses

Finance receivables are comprised of sales-type leases, secured loans and unsecured revolving loans. We provide an allowance for probable credit losses based on historical loss experience, the nature of our portfolios, adverse situations that may affect a client's ability to pay and current economic conditions and outlook based on reasonable and supportable forecasts. Total allowance for credit losses as a percentage of finance receivables was 2% at both December 31, 2022 and 2021. Holding all other assumptions constant, a 0.25% increase in the allowance rate at December 31, 2022 would have reduced pre-tax income by $3 million.

Trade accounts receivable are generally due within 30 days after the invoice date. We provide an allowance for credit losses based on historical loss experience, the age of the receivables, specific troubled accounts and other currently available information. Accounts deemed uncollectible are written off against the allowance after all collection efforts have been exhausted and management deems the account to be uncollectible, or when they are 365 days past due, if sooner. We believe that our accounts receivable credit risk is low because of the geographic and industry diversification of our clients and small account balances for most of our clients. The allowance for credit losses as a percentage of trade accounts receivables was 2% at December 31, 2022 and 3% at December 31, 2021. Holding all other assumptions constant, a 0.25% increase in the allowance rate at December 31, 2022 would have reduced pre-tax income by $1 million.

Income taxes and valuation allowance

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Our annual tax rate is based on income, statutory tax rates, tax reserve changes and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant judgment is required in determining the annual tax rate and in evaluating our tax positions. 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 have established tax reserves that we believe are appropriate given the possibility of tax adjustments. Determining the appropriate level of tax reserves requires judgment regarding the uncertain application of tax laws. Reserves are adjusted when information becomes available or when an event occurs indicating a change in the reserve is appropriate. Changes in tax reserves could have a material impact on our financial condition or results of operations.

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

Pension benefits

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

The discount rate for our largest plan, the U.S. Qualified Pension Plan (the U.S. Plan) and our largest foreign plan, the U.K. Qualified Pension Plan (the U.K. Plan) used in the determination of net periodic pension expense for 2022 was 2.85% and 1.85%, respectively. For 2023, the discount rate used in the determination of net periodic pension expense for the U.S. Plan and the U.K. Plan will be 5.55% and 4.8%, respectively. A 0.25% change in the discount rate would not materially impact annual pension expense for the U.S.

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Plan or the U.K. Plan. A 0.25% change in the discount rate would impact the projected benefit obligation of the U.S. Plan and U.K. Plan by $24 million and $12 million, respectively.

The expected rate of return on plan assets used in the determination of net periodic pension expense for 2022 was 5.1% for the U.S. Plan and 4.0% for the U.K. Plan. For 2023, the expected rate of return on plan assets used in the determination of net periodic pension expense for the U.S. Plan will be 6.5% and the U.K. Plan will be 5.25%. A 0.25% change in the expected rate of return on plan assets would impact annual pension expense for the U.S. Plan by $3 million and the U.K. Plan by $1 million.

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

Residual value of leased assets

Equipment residual values are determined at the inception of the lease using estimates of the equipment's fair value at the end of the lease term. Residual value estimates impact the determination of whether a lease is classified as an operating lease or a sales-type lease. Fair value estimates of equipment at the end of the lease term are based on historical renewal experience, used equipment markets, competition and technological changes.

We evaluate residual values on an annual basis or sooner if circumstances warrant. Declines in estimated residual values considered "other-than-temporary" are recognized immediately. Increases in estimated 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 and considered "other-than-temporary", pre-tax income would be $5 million lower.

Legal and Regulatory Matters

See Regulatory Matters in Item 1 and Other Tax Matters in Note 15 to the Consolidated Financial Statements for regulatory matters regarding our tax returns and Note 16 to the Consolidated Financial Statements for information regarding our legal proceedings.

Foreign Currency Exchange

The functional currency for most of our foreign operations is the local currency. Changes in the value of the U.S. dollar relative to the currencies of countries in which we operate impact our reported assets, liabilities, revenue and expenses. Exchange rate fluctuations can also impact the settlement of intercompany receivables and payables between our subsidiaries in different countries. During 2022, 13% of our consolidated revenue was from operations outside the United States and the translation of foreign currencies to the U.S. dollar did not have a material impact on revenues or operating results for the year ended December 31, 2022.

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