# PITNEY BOWES INC /DE/ (PBI) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from PITNEY BOWES INC /DE/'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/78814/000007881424000004/pbi-20231231.htm
Accession: 0000078814-24-000004
Filing date: 2024-02-20
Report date: 2023-12-31
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/fy2022/ (FY 2022)
Next year: /company/PBI/mda/fy2024/ (FY 2024)

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

OPERATIONS

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.

A discussion of our financial condition and results of operations for the year ended December 31, 2021, 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, 2022, filed with the SEC on February 17, 2023.

OUTLOOK

We expect consolidated revenue to be flat to a low single-digit decline and EBIT margins to be relatively flat in 2024 compared to 2023. Within SendTech Solutions, we expect revenue and EBIT declines due in part to lower equipment sales as initial lease terms of prior equipment sales expire and customers are expected to renew these leases for a fixed term rather than purchase new equipment. We also expect revenue to decline due to lower meter populations due to the migration to cloud-based solutions. These declines will be partially offset by higher shipping revenues.

Within Presort Services, we anticipate total volumes to be relatively flat in 2024 compared to 2023, but revenue to benefit slightly from increased workshare discounts. We expect margin and profit to remain relatively flat to slightly higher compared to the prior year.

Within Global Ecommerce, we expect revenue growth in domestic parcel services driven by increased volumes, partially offset by lower revenue from cross-border services. We anticipate margin and profit improvements compared to 2023.

We continue to make progress on our worldwide restructuring program and expect to realize annualized cost savings of $75-$85 million by the end of 2024, a portion of which was realized in 2023. However, we also expect higher interest costs and the restoration of variable compensation costs in 2024 to significantly offset these savings.

See our Forward-Looking Statements under Part I on page 3 and Risk Factors under Item 1A for certain factors, some beyond our control, which could adversely impact our 2024 results.

OVERVIEW OF CONSOLIDATED RESULTS

Factors Affecting Comparability

Certain transactions and changes occurred in 2022 that impact the comparability to our 2023 financial results. These transactions and changes include:

•the sale of our Borderfree cross-border ecommerce solutions business (Borderfree) in July 2022. Accordingly, reported revenue and costs for the twelve months ended December 31, 2022 include six months of revenue and costs for Borderfree. Net income of Borderfree for these periods was not significant.

•a change in the presentation of revenue for digital delivery services effective October 1, 2022, from a gross basis to a net basis. Accordingly, in 2023, revenue and costs of revenue for certain digital delivery services are reported on a net basis as business services revenue; whereas in 2022, revenue and cost of revenue for these services through September 30 were reported as business services revenue and cost of business services, respectively. The change primarily impacts our Global Ecommerce segment.

Constant Currency

In the tables below, we report the change in revenue on a reported basis and a constant currency basis. Constant currency measures exclude the impact of changes in currency exchange rates from the prior period under comparison. We believe that excluding the impacts of currency exchange rates provides investors with a better understanding of the underlying revenue performance. Constant

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currency change is calculated by converting the current period non-U.S. dollar denominated revenue using the prior year’s exchange rate.

Financial Results Summary:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","","","","","Favorable/(Unfavorable)"],["","2023","","2022","","Actual % Change","","Constant Currency % change"],["Total revenue","$","3,266,348","","","$","3,538,042","","","(8)","%","","(8)","%"],["Total costs and expenses","3,672,850","","","3,498,162","","","(5)","%"],["(Loss) income before taxes","(406,502)","","","39,880","","","(100%)"],["(Benefit) provision for income taxes","(20,875)","","","2,940","","","100%"],["Net (loss) income","$","(385,627)","","","$","36,940","","","(100%)"]]
[[/GREPCENT_TABLE]]

Revenue decreased $272 million in 2023 compared to the prior year primarily due to a decrease in business services revenue of $205 million (see Factors Affecting Comparability above), lower equipment sales of $31 million and lower support services revenue of $27 million.

Total costs and expenses increased $175 million compared to the prior year primarily due to:

•Costs of revenue (excluding financing interest expense) decreased $225 million primarily due to lower cost of business services of $178 million (see Factors Affecting Comparability above) and lower cost of equipment sales of $30 million.

•SG&A expense declined $8 million compared to the prior year. This decrease was primarily driven by lower professional fees of $10 million, salaries of $8 million, credit cards fees of $8 million, amortization expense of $8 million and stock based compensation expense of $7 million, partially offset by proxy solicitation fees of $11 million, higher variable compensation expense of $9 million, higher credit loss provision of $8 million and non-cash foreign currency revaluation losses on intercompany loans of $6 million.

•Restructuring charges increased $43 million compared to the prior year driven by actions taken under the 2023 Plan.

•Aggregate non-cash goodwill impairment charges totaling $339 million associated with our Global Ecommerce reporting unit. See Note 8 to the Consolidated Financial Statements for more information.

•Interest expense, net, including financing interest expense, increased $22 million in 2023 compared to the prior year primarily due to higher interest rates. We allocate a portion of gross interest expense to financing interest expense based on our effective interest rate and average finance receivables for the period.

•Other (income) expense declined $19 million compared to the prior year primarily driven by prior year gains of $27 million from the sale of assets and businesses, partially offset by a favorable year-over-year impact of $8 million associated with the redemption of debt.

The effective tax rate for the year ended December 31, 2023 was 5.1%, primarily due to the nondeductibility of the aggregate goodwill impairment charge. See Note 14 to the Consolidated Financial Statements for more information.

Net loss for 2023 was $386 million compared to net income of $37 million in the prior year.

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SEGMENT RESULTS

Management measures segment profitability and performance by deducting from segment revenue the related costs and expenses attributable to the segment. Segment results exclude interest, taxes, unallocated corporate expenses, restructuring charges, and other items not allocated to a business segment.

Global Ecommerce

Global Ecommerce includes the revenue and related expenses from business to consumer logistics services for domestic and cross-border delivery, returns and fulfillment. Our domestic parcel services provide retailers domestic parcel delivery and returns services for its end consumers through our nationwide parcel sortation centers and transportation network. Our cross-border services offers our clients a range of services to manage their international shopping and parcel shipping experience. Using our digital delivery services, clients can purchase postage, print shipping labels and access shipping and tracking services from multiple carriers. Delivery and return parcels using our digital delivery services are not physically processed through our network.

Financial performance for the Global Ecommerce segment was as follows:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","","","","","Favorable/(Unfavorable)"],["","2023","","2022","","Actual % Change","","Constant Currency % change"],["Business Services Revenue","$","1,355,326","","","$","1,576,348","","","(14)","%","","(14)","%"],["Cost of Business Services","1,293,285","","","1,440,807","","","10","%"],["Gross Margin","62,041","","","135,541","","","(54)","%"],["Gross Margin %","4.6","%","","8.6","%"],["Selling, general and administrative","184,923","","","225,514","","","18","%"],["Research and development","10,851","","","10,335","","","(5)","%"],["Adjusted segment EBIT","$","(133,733)","","","$","(100,308)","","","(33)","%"]]
[[/GREPCENT_TABLE]]

Global Ecommerce revenue decreased $221 million in 2023 compared to the prior year. The change in revenue presentation for digital delivery services and the sale of Borderfree accounted for $139 million of the decrease. Cross-border revenue declined $190 million due to lower volumes, primarily driven by changes in how two of our largest clients access our services, digital delivery services revenue declined $26 million due to a decrease in the number of shipping labels printed and fulfillment services revenue declined $23 million due to lower volumes. These declines were partially offset by domestic parcel delivery revenue growth of $158 million, driven by an increase in domestic parcel volumes.

Gross margin decreased $74 million and gross margin percentage decreased to 4.6% from 8.6% compared to the prior year. Cross-border services gross margin declined $52 million, primarily due to the decline in volumes. Digital delivery services gross margin declined $9 million primarily due to the decline in the number of shipping labels printed. The sale of Borderfree contributed a decline in gross margin of $8 million. Domestic parcel delivery services gross margin increased $3 million compared to the prior year primarily due to higher domestic parcel volumes, which was partially offset by $4 million of one-time costs in the third quarter related to facility consolidation.

SG&A expenses declined $41 million compared to the prior year period, primarily due to lower employee-related expenses of $16 million, lower amortization expense of $9 million and lower credit card fees of $8 million.

Adjusted segment EBIT was a loss of $134 million in 2023 compared to a loss of $100 million in the prior year.

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Presort Services

We are the largest workshare partner of the USPS and national outsource provider of mail sortation services that allow clients to qualify large volumes of First Class Mail, Marketing Mail, and Marketing Mail Flats and Bound Printed Matter for postal worksharing discounts.

Financial performance for the Presort Services segment was as follows:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","","","","","Favorable/(Unfavorable)"],["","2023","","2022","","Actual % Change","","Constant Currency % change"],["Business Services Revenue","$","617,599","","","$","602,016","","","3","%","","3","%"],["Cost of Business Services","432,229","","","454,923","","","5","%"],["Gross Margin","185,370","","","147,093","","","26","%"],["Gross Margin %","30.0","%","","24.4","%"],["Selling, general and administrative","74,230","","","64,517","","","(15)","%"],["Other components of net pension and postretirement costs","228","","","146","","","(56)","%"],["Adjusted segment EBIT","$","110,912","","","$","82,430","","","35","%"]]
[[/GREPCENT_TABLE]]

Revenue increased $16 million in 2023 compared to the prior year as pricing actions to mitigate inflationary pressures on costs offset the revenue decline driven by a 6% decrease in total mail volumes. The processing of Marketing Mail Flats and Bound Printed Matter and First Class Mail contributed revenue increases of $18 million and $5 million, respectively, while the processing of Marketing Mail contributed to a revenue decrease of $7 million.

Gross margin increased $38 million and gross margin percentage increased from 24.4% to 30.0% compared to the prior year primarily due to the increase in revenue, lower transportation costs of $15 million, driven by improvements in network management, and the benefits from investments made in automation and higher-throughput sortation equipment.

SG&A expenses increased $10 million primarily due to higher employee-related expenses.

Adjusted segment EBIT was $111 million in 2023 compared to $82 million in the prior year.

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SendTech Solutions

SendTech Solutions provides clients with physical and digital mailing and shipping technology solutions and other applications to help simplify and save on the sending, tracking and receiving of letters, parcels and flats, as well as supplies and maintenance services for these offerings. We offer financing alternatives that enable clients to finance equipment and product purchases, a revolving credit solution that enables clients to make meter rental payments and purchase postage, services and supplies, and an interest-bearing deposit solution to clients who prefer to prepay postage. We also offer financing alternatives that enable clients to finance or lease other manufacturers’ equipment and provide working capital.

Financial performance for the SendTech Solutions segment was as follows:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","","","","","Favorable/(Unfavorable)"],["","2023","","2022","","Actual % change","","Constant Currency % change"],["Business services","$","72,144","","","$","71,578","","","1","%","","1","%"],["Support services","410,734","","","438,191","","","(6)","%","","(6)","%"],["Financing","271,197","","","274,508","","","(1)","%","","(1)","%"],["Equipment sales","323,739","","","354,960","","","(9)","%","","(8)","%"],["Supplies","147,709","","","154,186","","","(4)","%","","(4)","%"],["Rentals","67,900","","","66,256","","","2","%","","2","%"],["Total revenue","1,293,423","","","1,359,679","","","(5)","%","","(5)","%"],["Cost of business services","29,860","","","37,272","","","20","%"],["Cost of support services","136,821","","","147,653","","","7","%"],["Cost of equipment sales","222,220","","","251,916","","","12","%"],["Cost of supplies","43,140","","","43,537","","","1","%"],["Cost of rentals","19,407","","","24,864","","","22","%"],["Total costs of revenue","451,448","","","505,242","","","11","%"],["Gross margin","841,975","","","854,437","","","(1)","%"],["Gross margin %","65.1","%","","62.8","%"],["Selling, general and administrative","418,213","","","431,213","","","3","%"],["Research and development","20,660","","","22,646","","","9","%"],["Other components of pension and post retirement costs","(2,245)","","","(331)","","","(100%)"],["Adjusted Segment EBIT","$","405,347","","","$","400,909","","","1","%"]]
[[/GREPCENT_TABLE]]

SendTech Solutions revenue decreased $66 million in 2023 compared to the prior year. Equipment sales declined $31 million primarily due to customers opting to extend leases of their existing advanced-technology equipment rather than purchase new equipment. Support services revenue declined $27 million primarily due to the declining meter population and continuing shift to cloud-enabled products. Supplies revenue declined $6 million primarily driven by a declining meter population. Financing revenue declined $3 million primarily due to $6 million of lower lease extensions and lower late fees of $1 million, partially offset by higher investment income of $7 million. Business services revenue increased $14 million primarily driven by growth in enterprise shipping subscriptions, which was partially offset by a $13 million reduction in revenue due to the change in revenue presentation for digital delivery services.

Gross margin decreased $12 million primarily due to the decline in revenue. However, gross margin percentage increased to 65.1% from 62.8% compared to the prior year driven by improvements in business services gross margin due to growth in enterprise shipping subscriptions, rentals gross margin due in part to a $2 million prior year unfavorable scrap adjustment and a current year favorable adjustment and equipment sales gross margin due to cost management.

SG&A expenses declined $13 million primarily driven by lower outsourcing and professional fees of $5 million, lower rent expense of $3 million and lower marketing expenses of $1 million.

Adjusted segment EBIT was $405 million in 2023 compared to $401 million for the prior year.

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UNALLOCATED CORPORATE EXPENSES

The majority of operating expenses are recorded directly or allocated to our reportable segments. Operating 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 research and development.

[[GREPCENT_TABLE]]
[["","","","Years Ended December 31,"],["","","","","","","","","","","","Favorable/(Unfavorable)"],["","","","","","","","2023","","2022","","Actual % change"],["Unallocated corporate expenses","","","","","","","$","210,931","","","$","204,251","","","(3)","%"]]
[[/GREPCENT_TABLE]]

Unallocated corporate expenses for 2023 increased $7 million compared to the prior year primarily due to higher variable compensation expense of $4 million and higher depreciation expense of $2 million.

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LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2023 we had cash, cash equivalents and short-term investments of $623 million, which includes $136 million held at our foreign subsidiaries used to support the liquidity needs of those subsidiaries. Our ability to maintain adequate liquidity for our operations is dependent upon a number of factors, including revenue and earnings, our ability to manage costs and improve productivity, our clients' ability to pay their balances on a timely basis and the impacts of changing macroeconomic and geopolitical conditions. We believe that existing cash and investments, cash generated from operations and borrowing capacity under our $500 million revolving credit facility 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]]
[["","2023","","2022","","Increase/(decrease)"],["Net cash from operating activities","$","79,468","","","$","175,983","","","$","(96,515)"],["Net cash from investing activities","(122,832)","","","(24,269)","","","(98,563)"],["Net cash from financing activities","(31,266)","","","(198,083)","","","166,817"],["Effect of exchange rate changes on cash and cash equivalents","5,702","","","(16,130)","","","21,832"],["Change in cash and cash equivalents","$","(68,928)","","","$","(62,499)","","","$","(6,429)"]]
[[/GREPCENT_TABLE]]

Operating activities

Cash flows from operating activities in 2023 declined $97 million compared to the prior year. This decline was driven by lower earnings, higher interest payments of $30 million, higher restructuring payments of $19 million and higher pension contributions of $7 million, partially offset by higher collections of accounts receivables and finance receivables of $33 million, lower inventory purchases of $19 million and changes in other working capital items.

Investing activities

Cash flows from investing activities for 2023 declined $99 million compared to the prior year primarily due to prior year proceeds of $162 million from the sale of businesses and our Shelton, Connecticut office building, partially offset by lower payments of $28 million to settle foreign exchange derivative contracts, lower capital expenditures of $22 million and lower net investment activity of $10 million.

Financing activities

Cash flows from financing activities for 2023 improved $167 million compared to the prior year primarily due to lower net cash outflows from debt activity of $68 million, an increase in customer account deposits at the Bank of $90 million and $13 million of common stock repurchases in the prior year.

Debt Activity

During 2023, we issued an aggregate $275 million of senior secured notes. The notes mature in March 2028 and bear interest at the Secured Overnight Financing Rate (SOFR) plus 6.9%, payable quarterly. The net proceeds (net of original issue discount of 3%) were used to redeem the March 2024 notes and repay $30 million of the term loan due March 2026. Also, during 2023, we purchased an aggregate $39 million of the March 2024 notes and March 2027 notes, recognizing a gain of $3 million, and made scheduled principal repayments of $42 million on our term loans.

The credit agreement that governs our $500 million secured revolving credit facility and the term loan due March 2026 contains certain financial covenants. These covenants require us to maintain, on a quarterly basis, a maximum leverage ratio and a minimum interest coverage ratio, both of which are defined and calculated in accordance with the credit agreement. The maximum leverage ratio decreases from 4.25x to 4.0x as of June 30, 2024 and the minimum interest coverage ratio increases from 1.75x to 2.0x as of March 31, 2025. At December 31, 2023, we were in compliance with these financial covenants. Additionally, management expects that we will remain in compliance with these financial covenants over the next twelve months. However, events and circumstances could occur, some beyond our control, that could adversely impact our compliance with these covenants and require us to seek to obtain a waiver from our lenders, modify our existing covenants or refinance certain debt to cure the noncompliance. If we are unable to cure the noncompliance, amounts due under our revolving credit facility and term loan due March 2026 could be called by our lenders. At December 31, 2023, there were no outstanding borrowings under the revolving credit facility. Borrowings under our secured debt are secured by assets of the company.

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The PB Bank (the Bank), a wholly owned subsidiary, is a member of the Federal Home Loan Bank (FHLB) of Des Moines and has access to certain credit products as a funding source known as "advances." As of December 31, 2023, the Bank had yet to apply for any advances.

Future Cash Requirements

The following table summarizes our known and contractually committed cash requirements at December 31, 2023 (in millions):

[[GREPCENT_TABLE]]
[["","Payments due in"],["","Total","","2024","","2025","","2026","","2027","","2028","","Thereafter"],["Debt maturities","$","2,189","","","$","59","","","$","53","","","$","196","","","$","387","","","$","683","","","$","811"],["Lease obligations","431","","","88","","","83","","","72","","","63","","","54","","","71"],["Purchase obligations","145","","","140","","","2","","","1","","","1","","","1","","","\u2014"],["Retiree medical payments","84","","","11","","","10","","","10","","","9","","","9","","","35"],["Total","$","2,849","","","$","298","","","$","148","","","$","279","","","$","460","","","$","747","","","$","917"]]
[[/GREPCENT_TABLE]]

Debt

At December 31, 2023, we have outstanding principal debt of $2.2 billion. Approximately 64% of this debt is at fixed rates, including the effect of interest rate swaps, and the remaining 36% is at variable rates. The weighted average interest rate of our variable rate debt at December 31, 2023 was 9.7%. We estimate that cash interest payments for the next 12 months will be $190 - $200 million. Required debt repayments over the next 12 months are $59 million, which we anticipate satisfying through available cash on hand and cash generated from operations. See Note 12 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 $17 million of payments for leases signed but not yet commenced at December 31, 2023. See Note 6 and Note 16 to the Consolidated Financial Statements for further information.

Purchase obligations

Purchase obligations include unrecorded open purchase orders for goods and services.

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

Capital Expenditures

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 $103 million and $125 million for the years ended December 31, 2023 and 2022, respectively.

Dividends

Assuming the current $0.05 per quarter dividend payment, we estimate that dividend payments will be approximately $35 million in 2024. Under the terms of the March 2028 note purchase agreement, the annual amount of permitted dividend payments is capped at the lesser of $36 million or a maximum dividend yield of 6.25%. In addition, share repurchases would further limit this amount.

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. We did not repurchase any additional shares of our common stock in 2023.

Off Balance Sheet Arrangements

At December 31, 2023, we had approximately $28 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.

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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 at the beginning of 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, including a discounted cash flow model, multiples of competitors, and/or multiples from sales of like businesses.

The performance of our Global Ecommerce reporting unit, continuing changes in macroeconomic conditions and our long-term outlook for this business were triggering events that caused us to evaluate the Global Ecommerce goodwill for impairment during the second and fourth quarters. To assess Global Ecommerce goodwill for impairment, we determined the fair value of the reporting unit and compared it to the unit's carrying value, including goodwill. We engaged a third party to assist in the determination of the fair value of the reporting unit. 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 a discount rate. The estimates and assumptions are considered Level 3 inputs under the fair value hierarchy. We assessed Global Ecommerce goodwill for impairment in the second and fourth quarters, and based on the results of our assessments, recorded non-cash, pre-tax goodwill impairment charges of $119 million and $220 million, respectively.

The results of our annual impairment test as of the beginning of the fourth quarter for our other reporting units indicated that the fair value of these reporting units exceeded their carrying values and no impairment existed.

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

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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, 2023 and 2022. Holding all other assumptions constant, a 0.25% increase in the allowance rate at December 31, 2023 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. The allowance for credit losses as a percentage of trade accounts receivables was 2% at both December 31, 2023 and 2022. Holding all other assumptions constant, a 0.25% increase in the allowance rate at December 31, 2023 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 to determine net periodic pension expense for 2023 was 5.55% and 4.80%, respectively. The discount rate used to determine 2024 net periodic pension expense for the U.S. Plan and the U.K. Plan was 5.15% and 4.5%, respectively. A 0.25% change in the discount rate would not materially impact annual pension expense for the U.S. 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 $13 million, respectively.

The expected rate of return on plan assets used to determine net periodic pension expense for 2023 was 6.5% for the U.S. Plan and 5.26% for the U.K. Plan. The expected rate of return on plan assets used to determine 2024 net periodic pension expense was 6.7% and 5.5% for the U.S. Plan and the U.K. Plan, respectively. 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.

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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 14 to the Consolidated Financial Statements for regulatory matters regarding our tax returns and Note 15 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 2023, 11% 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, 2023.

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