0000078814-16-000061.txt : 20161107 0000078814-16-000061.hdr.sgml : 20161107 20161107145612 ACCESSION NUMBER: 0000078814-16-000061 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 76 CONFORMED PERIOD OF REPORT: 20160930 FILED AS OF DATE: 20161107 DATE AS OF CHANGE: 20161107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PITNEY BOWES INC /DE/ CENTRAL INDEX KEY: 0000078814 STANDARD INDUSTRIAL CLASSIFICATION: OFFICE MACHINES, NEC [3579] IRS NUMBER: 060495050 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03579 FILM NUMBER: 161977743 BUSINESS ADDRESS: STREET 1: PITNEY BOWES INC STREET 2: 3001 SUMMER STREET CITY: STAMFORD STATE: CT ZIP: 06926-0700 BUSINESS PHONE: 203-356-5000 MAIL ADDRESS: STREET 1: 3001 SUMMER STREET CITY: STAMFORD STATE: CT ZIP: 06926-0700 10-Q 1 pbi2016093010q.htm 10-Q Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number: 1-3579
PITNEY BOWES INC.
(Exact name of registrant as specified in its charter)

Delaware
 
06-0495050
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
3001 Summer Street, Stamford, Connecticut
 
06926
(Address of principal executive offices)
 
(Zip Code)
(203) 356-5000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
 
 
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
 
 
As of November 4, 2016, 185,758,673 shares of common stock, par value $1 per share, of the registrant were outstanding.
 
 
 

1




PITNEY BOWES INC.
INDEX

 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2016 and 2015
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015
 
 
 
 
Condensed Consolidated Balance Sheets at September 30, 2016 and December 31, 2015
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2





PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
PITNEY BOWES INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; in thousands, except per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenue:
 

 
 

 
 

 
 

Equipment sales
$
173,143

 
$
163,857

 
$
485,145

 
$
495,328

Supplies
61,306

 
71,174

 
198,631

 
215,178

Software
89,087

 
97,700

 
257,760

 
283,241

Rentals
102,747

 
108,420

 
309,706

 
333,729

Financing
87,883

 
99,925

 
276,915

 
306,992

Support services
123,954

 
136,820

 
383,632

 
415,615

Business services
200,911

 
191,645

 
607,717

 
591,030

Total revenue
839,031

 
869,541

 
2,519,506

 
2,641,113

Costs and expenses:
 

 
 

 
 

 
 

Cost of equipment sales
86,147

 
78,650

 
235,741

 
232,706

Cost of supplies
20,348

 
21,629

 
60,662

 
65,912

Cost of software
25,698

 
27,219

 
79,496

 
85,584

Cost of rentals
16,041

 
21,423

 
54,951

 
63,127

Financing interest expense
12,965

 
17,533

 
41,375

 
54,171

Cost of support services
74,799

 
79,747

 
224,790

 
244,853

Cost of business services
140,989

 
130,004

 
417,357

 
405,559

Selling, general and administrative
300,983

 
309,211

 
916,445

 
939,318

Research and development
28,680

 
29,153

 
89,761

 
83,693

Restructuring charges and asset impairments, net
16,494

 
36

 
49,503

 
14,305

Interest expense, net
22,294

 
20,165

 
62,394

 
65,200

Other (income) expense, net

 
(1,781
)
 
536

 
(94,916
)
Total costs and expenses
745,438

 
732,989

 
2,233,011

 
2,159,512

Income from continuing operations before income taxes
93,593

 
136,552

 
286,495

 
481,601

Provision for income taxes
23,197

 
42,676

 
93,615

 
145,574

Income from continuing operations
70,396

 
93,876

 
192,880

 
336,027

Loss from discontinued operations, net of tax
(291
)
 

 
(1,951
)
 
(582
)
Net income
70,105

 
93,876

 
190,929

 
335,445

Less: Preferred stock dividends attributable to noncontrolling interests
4,593

 
4,594

 
13,781

 
13,781

Net income attributable to Pitney Bowes Inc.
$
65,512

 
$
89,282

 
$
177,148

 
$
321,664

Amounts attributable to common stockholders:
 

 
 

 
 

 
 

Net income from continuing operations
$
65,803

 
$
89,282

 
$
179,099

 
$
322,246

Loss from discontinued operations, net of tax
(291
)
 

 
(1,951
)
 
(582
)
Net income attributable to Pitney Bowes Inc.
$
65,512

 
$
89,282

 
$
177,148

 
$
321,664

Basic earnings per share attributable to common stockholders:
 

 
 

 
 

 
 

Continuing operations
$
0.35

 
$
0.45

 
$
0.95

 
$
1.60

Discontinued operations

 

 
(0.01
)
 

Net income attributable to Pitney Bowes Inc.
$
0.35

 
$
0.45

 
$
0.94

 
$
1.60

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

 
 

 
 

 
 

Continuing operations
$
0.35

 
$
0.44

 
$
0.94

 
$
1.60

Discontinued operations

 

 
(0.01
)
 

Net income attributable to Pitney Bowes Inc.
$
0.35

 
$
0.44

 
$
0.93

 
$
1.59

Dividends declared per share of common stock
$
0.1875

 
$
0.1875

 
$
0.5625

 
$
0.5625

(1) The sum of earnings per share amounts may not equal the totals due to rounding.
See Notes to Condensed Consolidated Financial Statements

3


PITNEY BOWES INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; in thousands)



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
70,105

 
$
93,876

 
$
190,929

 
$
335,445

Less: Preferred stock dividends attributable to noncontrolling interests
4,593

 
4,594

 
13,781

 
13,781

Net income attributable to Pitney Bowes Inc.
65,512

 
89,282

 
177,148

 
321,664

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translations
6,938

 
(17,131
)
 
37,263

 
(76,153
)
Net unrealized (loss) gain on cash flow hedges, net of tax of $(40), $79, $224 and $219, respectively
(64
)
 
119

 
358

 
335

Net unrealized gain (loss) on investment securities, net of tax of $956, $721, $4,399 and $(142), respectively
1,628

 
1,231

 
7,491

 
(242
)
Adjustments to pension and postretirement plans, net of tax of $(777) for the nine months ended September 30, 2016

 

 
(1,230
)
 

Amortization of pension and postretirement costs, net of tax of $3,243, $4,219, $10,362 and $12,001, respectively
5,963

 
7,435

 
18,791

 
21,364

Other comprehensive income (loss), net of tax
14,465

 
(8,346
)
 
62,673

 
(54,696
)
Comprehensive income attributable to Pitney Bowes Inc.
$
79,977

 
$
80,936

 
$
239,821

 
$
266,968





































See Notes to Condensed Consolidated Financial Statements

4


PITNEY BOWES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except share and per share amounts)


 
September 30, 2016
 
December 31, 2015
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
992,089

 
$
650,557

Short-term investments
24,259

 
117,021

Accounts receivable (net of allowance of $10,722 and $9,997, respectively)
427,556

 
476,583

Short-term finance receivables (net of allowance of $13,033 and $15,480, respectively)
870,256

 
918,383

Inventories
108,766

 
88,824

Current income taxes
13,060

 
6,584

Other current assets and prepayments
65,622

 
67,400

Total current assets
2,501,608

 
2,325,352

Property, plant and equipment, net
312,597

 
330,088

Rental property and equipment, net
179,554

 
177,515

Long-term finance receivables (net of allowance of $5,092 and $6,210, respectively)
704,294

 
760,657

Goodwill
1,766,418

 
1,745,957

Intangible assets, net
174,221

 
187,378

Non-current income taxes
66,547

 
70,294

Other assets
553,635

 
525,891

Total assets
$
6,258,874

 
$
6,123,132

 
 
 
 
LIABILITIES, NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY
 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
1,307,808

 
$
1,448,321

Current income taxes
19,170

 
16,620

Current portion of long-term debt and notes payable
535,289

 
461,085

Advance billings
303,153

 
353,025

Total current liabilities
2,165,420

 
2,279,051

Deferred taxes on income
229,998

 
205,668

Tax uncertainties and other income tax liabilities
57,423

 
68,429

Long-term debt
2,831,767

 
2,489,583

Other non-current liabilities
547,444

 
605,310

Total liabilities
5,832,052

 
5,648,041

 
 
 
 
Commitments and contingencies (See Note 13)


 


Noncontrolling interests (Preferred stockholders’ equity in subsidiaries)
296,370

 
296,370

 
 
 
 
Stockholders’ equity:
 
 
 
Cumulative preferred stock, $50 par value, 4% convertible
1

 
1

Cumulative preference stock, no par value, $2.12 convertible
489

 
505

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

 
323,338

Additional paid-in capital
149,997

 
161,280

Retained earnings
5,226,894

 
5,155,537

Accumulated other comprehensive loss
(825,962
)
 
(888,635
)
Treasury stock, at cost (137,701,038 and 127,816,704 shares, respectively)
(4,744,305
)
 
(4,573,305
)
Total Pitney Bowes Inc. stockholders’ equity
130,452

 
178,721

Total liabilities, noncontrolling interests and stockholders’ equity
$
6,258,874

 
$
6,123,132



See Notes to Condensed Consolidated Financial Statements

5


PITNEY BOWES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)


 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from operating activities:
 

 
 

Net income
$
190,929

 
$
335,445

Restructuring payments
(51,161
)
 
(46,056
)
Special pension plan contributions
(36,731
)
 

Tax payments related to other investments

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

 
 

Loss (gain) on disposal of businesses
3,938

 
(109,069
)
Depreciation and amortization
140,225

 
127,486

Gain on debt forgiveness
(10,000
)
 

Stock-based compensation
16,014

 
14,921

Restructuring charges and asset impairments, net
49,503

 
14,305

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

 
 

Decrease in accounts receivable
51,853

 
29,128

Decrease in finance receivables
113,180

 
91,184

Increase in inventories
(20,489
)
 
(20,850
)
Decrease (increase) in other current assets and prepayments
3,312

 
(16,697
)
Decrease in accounts payable and accrued liabilities
(125,248
)
 
(138,481
)
Increase in current and non-current income taxes
1,543

 
68,894

Decrease in advance billings
(47,183
)
 
(535
)
Other, net
11,244

 
22,327

Net cash provided by operating activities
290,929

 
351,400

Cash flows from investing activities:
 

 
 

Purchases of available-for-sale securities
(163,134
)
 
(153,471
)
Proceeds from sales/maturities of available-for-sale securities
167,424

 
159,436

Net change in short-term and other investments
62,256

 
(119
)
Capital expenditures
(115,532
)
 
(130,328
)
Proceeds from sale of buildings
17,671

 
38,640

Acquisition of businesses, net of cash acquired
(37,942
)
 
(387,391
)
Divestiture of businesses, net of cash transferred

 
290,543

Change in reserve account deposits
1,813

 
(25,630
)
Other investing activities
(7,420
)
 
3,011

Net cash used in investing activities
(74,864
)
 
(205,309
)
Cash flows from financing activities:
 

 
 

Proceeds from the issuance of long-term debt
894,744

 
950

Principal payments of long-term debt
(371,007
)
 
(404,952
)
Net change in short-term borrowings
(90,000
)
 
150,000

Dividends paid to stockholders
(105,791
)
 
(113,158
)
Common stock repurchases
(197,267
)
 
(100,000
)
Dividends paid to noncontrolling interests
(9,188
)
 
(9,188
)
Other financing activities

 
4,531

Net cash provided by (used in) financing activities
121,491

 
(471,817
)
Effect of exchange rate changes on cash and cash equivalents
3,976

 
(38,370
)
Increase (decrease) in cash and cash equivalents
341,532

 
(364,096
)
Cash and cash equivalents at beginning of period
650,557

 
1,054,118

Cash and cash equivalents at end of period
$
992,089

 
$
690,022

Cash interest paid
$
132,359

 
$
146,838

Cash income tax payments, net of refunds
$
95,487

 
$
95,770


See Notes to Condensed Consolidated Financial Statements

6


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)


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

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In addition, the December 31, 2015 Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In management's opinion, all adjustments, consisting only of normal recurring adjustments, considered necessary to fairly state our financial position, results of operations and cash flows for the periods presented have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2016. These statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report to Stockholders on Form 10-K for the year ended December 31, 2015 (2015 Annual Report).
During the second quarter of 2016, we determined that certain amounts included in finance receivables and rental property and equipment should be classified as accounts receivable and other current assets and prepayments. Accordingly, the Condensed Consolidated Balance Sheet as of December 31, 2015 was revised to increase accounts receivable by $19 million and prepaid and other current assets by $3 million and reduce rental property and equipment by $3 million, short-term finance receivables by $17 million and long-term finance receivables by $2 million. The Condensed Consolidated Statement of Cash Flows for the period ended September 30, 2015 has also been adjusted accordingly.

In 2015, we determined that certain investments were classified as cash and cash equivalents. Accordingly, the Condensed Consolidated Statement of Cash Flows for the period ended September 30, 2015 has been revised to reduce beginning cash and cash equivalents by $25 million and ending cash and cash equivalents by $26 million and investments and with corresponding changes to investment activity.
New Accounting Pronouncements - Standards Adopted in 2016
In September 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2015-16, Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. Consistent with existing guidance, the new guidance requires an acquirer to disclose the nature and amount of measurement period adjustments. We adopted this standard as of January 1, 2016, and there was no impact to the consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance on fees paid by an entity in a cloud computing arrangement and whether an arrangement includes a license to the underlying software. We adopted this standard as of January 1, 2016, and there was no impact to the consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. We adopted this standard effective January 1, 2016 and recast the Condensed Consolidated Balance Sheet at December 31, 2015 to reduce other assets and long-term debt by $18 million.

In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items, which removes the concept of extraordinary items, thereby eliminating the need for companies to assess transactions for extraordinary treatment. The standard retained the presentation and disclosure requirements for items that are unusual in nature and/or infrequent in occurrence. We adopted this standard as of January 1, 2016, and there was no impact to the financial statements.



7


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)

New Accounting Pronouncements - Standards Not Yet Adopted
In August, 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). The ASU is intended to reduce diversity in practice in presentation and classification of certain cash receipts and cash payments by providing guidance on eight specific cash flow issues. The ASU is effective for interim and annual periods beginning after December 15, 2017 and early adoption is permitted, including adoption during an interim period. We are currently assessing the impact this standard will have on our consolidated statement of cash flows.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. The ASU sets forth a “current expected credit loss” (CECL) model which requires companies to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This standard is effective for interim and annual periods beginning after December 15, 2019. We are currently assessing the impact this standard will have on our financial statements and disclosures.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The standard includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. The standard is effective for interim and annual periods beginning after December 15, 2016 and early adoption is permitted. We are currently assessing the impact this standard will have on our financial statements and disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases. This standard, among other things, will require lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability and result in enhanced disclosures. The standard is effective for interim and annual periods beginning after December 15, 2018. The standard requires modified retrospective transition and early adoption is permitted. We are currently assessing the impact this standard will have on our financial statements and disclosures.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. This standard primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The standard is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. We are currently assessing the impact this standard will have on our financial statements and disclosures.

In July 2015, the FASB issued ASU 2015-11, Inventory - Simplifying the Measurement of Inventory, which requires inventory to be measured at the lower of cost and net realizable value (estimated selling price less reasonably predictable costs of completion, disposal and transportation). Inventory measured using the last-in, first-out (LIFO) basis is not impacted by the new guidance. The standard is effective for interim and annual periods beginning after December 15, 2016 and early adoption is permitted. We do not believe this standard will have a significant impact on our financial statements or disclosures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The 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 standard will also result in enhanced disclosures about revenue. In July 2015, the FASB approved a one-year deferral of the effective date. This standard is now effective for fiscal periods beginning after December 15, 2017. The standard can be adopted either retrospectively or as a cumulative-effect adjustment. Companies are permitted to adopt the standard as early as the original public entity effective date (fiscal periods beginning after December 15, 2016). Early adoption prior to that date is prohibited. We are in the process of evaluating a sample of contracts under the new standard. At this point, we cannot estimate the financial statement impact of this standard upon adoption, nor have we decided on the transition method we will use to adopt this standard.





8


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)

2. Segment Information
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, software and supplies for small and medium businesses to efficiently create physical and digital mail and evidence postage for the sending of mail, flats and parcels in the U.S. and Canada.
International Mailing: Includes the revenue and related expenses from the sale, rental, financing and servicing of mailing equipment, software and supplies for small and medium businesses to efficiently create physical and digital mail and evidence postage for the sending of mail, flats and parcels in areas outside the U.S. and Canada.

Enterprise Business Solutions:
Production Mail: Includes the worldwide revenue and related expenses from the sale of production mail inserting and sortation equipment, high-speed production print systems, supplies and related support services to large enterprise clients to process inbound and outbound mail.
Presort Services: Includes revenue and related expenses from presort mail services for our large enterprise clients to qualify large mail volumes for postal worksharing discounts.

Digital Commerce Solutions:
Software Solutions: Includes the worldwide revenue and related expenses from the licensing of non-equipment-based mailing, customer information management, location intelligence and customer engagement solutions and related support services.
Global Ecommerce: Includes the worldwide revenue and related expenses from shipping solutions and cross-border ecommerce.

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 other items that are not allocated to a particular business segment. Management uses segment EBIT to measure profitability and performance at the segment level and believes that it provides a useful measure of operating performance and underlying trends of the businesses. Segment EBIT may not be indicative of our overall consolidated performance and therefore, should be read in conjunction with our consolidated results of operations.

9


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)

Revenue and EBIT by business segment is presented below:
 
Revenue
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
North America Mailing
$
329,995

 
$
353,159

 
$
1,001,789

 
$
1,071,824

International Mailing
95,628

 
104,615

 
305,725

 
331,398

Small & Medium Business Solutions
425,623

 
457,774

 
1,307,514

 
1,403,222

Production Mail
106,350

 
101,646

 
289,649

 
298,880

Presort Services
114,053

 
115,912

 
357,214

 
351,365

Enterprise Business Solutions
220,403

 
217,558

 
646,863

 
650,245

Software Solutions
89,031

 
97,638

 
257,417

 
282,916

Global Ecommerce
103,974

 
96,571

 
307,712

 
249,923

Digital Commerce Solutions
193,005

 
194,209

 
565,129

 
532,839

Other

 

 

 
54,807

Total revenue
$
839,031

 
$
869,541

 
$
2,519,506

 
$
2,641,113

 
EBIT
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
North America Mailing
$
138,588

 
$
159,319

 
$
436,730

 
$
482,376

International Mailing
9,733

 
10,739

 
34,365

 
36,585

Small & Medium Business Solutions
148,321

 
170,058

 
471,095

 
518,961

Production Mail
15,696

 
12,401

 
35,434

 
31,461

Presort Services
19,181

 
25,908

 
69,305

 
76,946

Enterprise Business Solutions
34,877

 
38,309

 
104,739

 
108,407

Software Solutions
10,329

 
14,613

 
17,908

 
34,904

Global Ecommerce
4,389

 
(1,240
)
 
8,835

 
9,962

Digital Commerce Solutions
14,718

 
13,373

 
26,743

 
44,866

Other

 

 

 
10,569

Total EBIT
197,916

 
221,740

 
602,577

 
682,803

Reconciling items:
 
 
 
 
 

 
 

Interest, net
(35,259
)
 
(37,698
)
 
(103,769
)
 
(119,371
)
Unallocated corporate expenses
(51,992
)
 
(49,235
)
 
(158,536
)
 
(151,959
)
Restructuring charges and asset impairments, net
(16,494
)
 
(36
)
 
(49,503
)
 
(14,305
)
Acquisition and disposition-related expenses
(578
)
 

 
(3,738
)
 
(10,483
)
Other income (expense), net

 
1,781

 
(536
)
 
94,916

Income from continuing operations before income taxes
93,593

 
136,552

 
286,495

 
481,601

Provision for income taxes
23,197

 
42,676

 
93,615

 
145,574

Loss from discontinued operations, net of tax
(291
)
 

 
(1,951
)
 
(582
)
Net income
$
70,105

 
$
93,876

 
$
190,929

 
$
335,445


10


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)

3. Earnings per Share
The calculations of basic and diluted earnings per share are presented below. The sum of earnings per share amounts may not equal the totals due to rounding.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Numerator:
 

 
 

 
 

 
 

Amounts attributable to common stockholders:
 

 
 

 
 

 
 

Net income from continuing operations
$
65,803

 
$
89,282

 
$
179,099

 
$
322,246

Loss from discontinued operations, net of tax
(291
)
 

 
(1,951
)
 
(582
)
Net income attributable to Pitney Bowes Inc. (numerator for diluted EPS)
65,512

 
89,282

 
177,148

 
321,664

Less: Preference stock dividend
10

 
10

 
29

 
31

Income attributable to common stockholders (numerator for basic EPS)
$
65,502

 
$
89,272

 
$
177,119

 
$
321,633

Denominator:
 

 
 

 
 

 
 

Weighted-average shares used in basic EPS
185,603

 
199,874

 
188,634

 
200,825

Effect of dilutive shares:
 

 
 

 
 

 
 

Conversion of Preferred stock and Preference stock
299

 
318

 
301

 
326

Employee stock plans
781

 
825

 
657

 
734

Weighted-average shares used in diluted EPS
186,683

 
201,017

 
189,592

 
201,885

Basic earnings per share:
 

 
 

 
 

 
 

Continuing operations
$
0.35

 
$
0.45

 
$
0.95

 
$
1.60

Discontinued operations

 

 
(0.01
)
 

Net income
$
0.35

 
$
0.45

 
$
0.94

 
$
1.60

Diluted earnings per share:
 

 
 

 
 

 
 

Continuing operations
$
0.35

 
$
0.44

 
$
0.94

 
$
1.60

Discontinued operations

 

 
(0.01
)
 

Net income
$
0.35

 
$
0.44

 
$
0.93

 
$
1.59

Anti-dilutive shares not used in calculating diluted weighted-average shares:
8,036

 
7,934

 
8,148

 
8,609

4. Inventories
Inventories are stated at the lower of cost or market. Cost is determined on the LIFO basis for most U.S. inventories and on the first-in, first-out (FIFO) basis for most non-U.S. inventories. Inventories at September 30, 2016 and December 31, 2015 consisted of the following:
 
September 30,
2016
 
December 31,
2015
Raw materials
$
35,228

 
$
25,803

Work in process
8,512

 
6,408

Supplies and service parts
45,653

 
44,323

Finished products
31,701

 
24,618

Inventory at FIFO cost
121,094

 
101,152

Excess of FIFO cost over LIFO cost
(12,328
)
 
(12,328
)
Total inventory, net
$
108,766

 
$
88,824


11


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)

5. Finance Assets
Finance Receivables
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 customers 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. During the second quarter of 2016, we determined that certain finance receivables with a net investment of $35 million at December 31, 2015 classified as a sales type lease receivable should have been classified as loan receivables. Accordingly, prior period amounts have been revised to reflect this change.
Finance receivables at September 30, 2016 and December 31, 2015 consisted of the following:
 
September 30, 2016
 
December 31, 2015
 
North America
 
International
 
Total
 
North America
 
International
 
Total
Sales-type lease receivables
 

 
 

 
 

 
 

 
 

 
 

Gross finance receivables
$
1,083,873

 
$
287,519

 
$
1,371,392

 
$
1,157,189

 
$
303,854

 
$
1,461,043

Unguaranteed residual values
95,618

 
14,701

 
110,319

 
100,000

 
15,709

 
115,709

Unearned income
(228,709
)
 
(63,599
)
 
(292,308
)
 
(247,854
)
 
(68,965
)
 
(316,819
)
Allowance for credit losses
(6,054
)
 
(2,587
)
 
(8,641
)
 
(6,606
)
 
(3,542
)
 
(10,148
)
Net investment in sales-type lease receivables
944,728

 
236,034

 
1,180,762

 
1,002,729

 
247,056

 
1,249,785

Loan receivables
 

 
 

 
 

 
 

 
 

 
 

Loan receivables
365,725

 
37,547

 
403,272

 
399,193

 
41,604

 
440,797

Allowance for credit losses
(8,288
)
 
(1,196
)
 
(9,484
)
 
(10,024
)
 
(1,518
)
 
(11,542
)
Net investment in loan receivables
357,437

 
36,351

 
393,788

 
389,169

 
40,086

 
429,255

Net investment in finance receivables
$
1,302,165

 
$
272,385

 
$
1,574,550

 
$
1,391,898

 
$
287,142

 
$
1,679,040


Allowance for Credit Losses
We provide an allowance for probable credit losses based on historical loss experience, the nature and volume of our portfolios, adverse situations that may affect a client's ability to pay, prevailing economic conditions and our ability to manage the collateral. We continually evaluate the adequacy of the allowance for credit losses and make adjustments as necessary. The assumptions used in determining an estimate of credit losses are inherently subjective and actual results may differ significantly from estimated reserves.

We establish credit approval limits based on the credit quality of the client 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 loan receivables that are more than 90 days past due. We resume revenue recognition when the client's payments reduce the account aging to less than 60 days 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 low because of the geographic and industry diversification of our clients and small account balances for most of our clients.











12


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)


Activity in the allowance for credit losses for the nine months ended September 30, 2016 and 2015 was as follows:
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
Balance at January 1, 2016
$
6,606

 
$
3,542

 
$
10,024

 
$
1,518

 
$
21,690

Amounts charged to expense
2,881

 
464

 
4,217

 
688

 
8,250

Write-offs and other
(3,433
)
 
(1,419
)
 
(5,953
)
 
(1,010
)
 
(11,815
)
Balance at September 30, 2016
$
6,054

 
$
2,587

 
$
8,288

 
$
1,196

 
$
18,125

 
 
 
 
 
 
 
 
 
 
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
Balance at January 1, 2015
$
10,125

 
$
5,024

 
$
11,068

 
$
1,788

 
$
28,005

Amounts charged to expense
793

 
183

 
6,180

 
867

 
8,023

Write-offs and other
(3,523
)
 
(1,711
)
 
(7,260
)
 
(1,005
)
 
(13,499
)
Balance at September 30, 2015
$
7,395

 
$
3,496

 
$
9,988

 
$
1,650

 
$
22,529


Aging of Receivables
The aging of gross finance receivables at September 30, 2016 and December 31, 2015 was as follows:
 
September 30, 2016
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
1 - 90 days
$
1,017,772

 
$
282,269

 
$
361,883

 
$
37,251

 
$
1,699,175

> 90 days
66,101

 
5,250

 
3,842

 
296

 
75,489

Total
$
1,083,873

 
$
287,519

 
$
365,725

 
$
37,547

 
$
1,774,664

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
10,447

 
$
1,748

 
$

 
$

 
$
12,195

Not accruing interest
55,654

 
3,502

 
3,842

 
296

 
63,294

Total
$
66,101

 
$
5,250

 
$
3,842

 
$
296

 
$
75,489

As of September 30, 2016, we had North America sales-type lease receivables aged greater than 90 days with a contract value of $66 million. As of October 30, 2016, we have received payments with a contract value of approximately $30 million related to these receivables.
 
December 31, 2015
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
1 - 90 days
$
1,138,031

 
$
298,772

 
$
395,573

 
$
41,117

 
$
1,873,493

> 90 days
19,158

 
5,082

 
3,620

 
487

 
28,347

Total
$
1,157,189

 
$
303,854

 
$
399,193

 
$
41,604

 
$
1,901,840

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
5,041

 
$
1,617

 
$

 
$

 
$
6,658

Not accruing interest
14,117

 
3,465

 
3,620

 
487

 
21,689

Total
$
19,158

 
$
5,082

 
$
3,620

 
$
487

 
$
28,347



13


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)

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, given that 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 September 30, 2016 and December 31, 2015 by relative risk class 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 (low, medium, high), 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.

 
September 30,
2016
 
December 31,
2015
Sales-type lease receivables
 

 
 

Low
$
824,756

 
$
886,198

Medium
172,278

 
192,645

High
19,339

 
37,573

Not Scored
67,500

 
40,773

Total
$
1,083,873

 
$
1,157,189

Loan receivables
 

 
 

Low
$
278,210

 
$
295,725

Medium
70,052

 
85,671

High
6,648

 
10,810

Not Scored
10,815

 
6,987

Total
$
365,725

 
$
399,193



14


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)

6. Acquisitions, Intangible Assets and Goodwill
Acquisitions
On July 1, 2016, we acquired Maponics for $24 million, net of cash acquired. Maponics provides comprehensive boundary information and geospatial data that support location-based services and analytics and will be reported within our Software Solutions segment.

On January 12, 2016, we acquired Enroute for $14 million in cash. Additional cash payments may also be required during 2017-2019 based on the achievement of certain annual revenue targets for 2016-2018. Enroute is a software-as-a-service enterprise retail and fulfillment solutions company and is reported within our Global Ecommerce segment.

In June 2015, we acquired Borderfree, Inc. ("Borderfree"). During the second quarter of 2016, we obtained new information about facts and circumstances that existed as of the acquisition date and increased accounts payable and accrued expenses and goodwill acquired in the Borderfree acquisition by $2 million. On a supplemental pro forma basis, had we acquired Borderfree on January 1, 2015, our revenues would have been $47 million higher for the nine months ended September 30, 2015. The impact on our earnings would not have been material.
Intangible Assets
Intangible assets at September 30, 2016 and December 31, 2015 consisted of the following:
 
September 30, 2016
 
December 31, 2015
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships
$
450,890

 
$
(299,224
)
 
$
151,666

 
$
437,459

 
$
(272,353
)
 
$
165,106

Software & technology
152,201

 
(137,680
)
 
14,521

 
149,591

 
(135,198
)
 
14,393

Trademarks & other
36,851

 
(28,817
)
 
8,034

 
35,314

 
(27,435
)
 
7,879

Total intangible assets
$
639,942

 
$
(465,721
)
 
$
174,221

 
$
622,364

 
$
(434,986
)
 
$
187,378


Amortization expense was $10 million and $11 million for the three months ended September 30, 2016 and 2015, respectively and $32 million and $27 million, for the nine months ended September 30, 2016 and 2015, respectively.
Future amortization expense as of September 30, 2016 was as follows:
Remaining for year ending December 31, 2016
$
8,189

Year ending December 31, 2017
29,721

Year ending December 31, 2018
27,418

Year ending December 31, 2019
23,992

Year ending December 31, 2020
18,836

Thereafter
66,065

Total
$
174,221

Actual amortization expense may differ from the amounts above due to, among other things, fluctuations in foreign currency exchange rates, impairments, acquisitions and accelerated amortization.








15


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)

Goodwill
Changes in the carrying value of goodwill for the nine months ended September 30, 2016 were as follows:
 
December 31, 2015
 
Acquisitions
 
Foreign currency translation
 
September 30,
2016
North America Mailing
$
296,053

 
$

 
$
3,993

 
$
300,046

International Mailing
148,351

 

 
5,552

 
153,903

Small & Medium Business Solutions
444,404

 

 
9,545

 
453,949

Production Mail
105,757

 

 
(1,382
)
 
104,375

Presort Services
196,890

 

 

 
196,890

Enterprise Business Solutions
302,647

 

 
(1,382
)
 
301,265

Software Solutions
674,976

 
12,137

 
(9,260
)
 
677,853

Global Ecommerce
323,930

 
9,421

 

 
333,351

Digital Commerce Solutions
998,906

 
21,558

 
(9,260
)
 
1,011,204

Total goodwill
$
1,745,957

 
$
21,558

 
$
(1,097
)
 
$
1,766,418


7. Fair Value Measurements and Derivative Instruments
We measure certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. An entity is required to classify certain assets and liabilities measured at fair value based on the following fair value hierarchy that prioritizes the inputs used to measure fair value:
Level 1
Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2
Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
Unobservable inputs that are supported by little or no market activity, may be derived from internally developed methodologies based on management’s best estimate of fair value and that are significant to the fair value of the asset or liability.
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect its placement within the fair value hierarchy. The following tables show, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis at September 30, 2016 and December 31, 2015.

16


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)

 
September 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
143,960

 
$
104,169

 
$

 
$
248,129

Equity securities

 
23,782

 

 
23,782

Commingled fixed income securities
1,575

 
22,769

 

 
24,344

Debt securities - U.S. and foreign governments, agencies and municipalities
93,515

 
19,396

 

 
112,911

Debt securities - corporate

 
82,149

 

 
82,149

Mortgage-backed / asset-backed securities

 
163,806

 

 
163,806

Derivatives
 
 
 
 
 

 


Foreign exchange contracts

 
3,508

 

 
3,508

Total assets
$
239,050

 
$
419,579

 
$

 
$
658,629

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Interest rate swap
$


$
(591
)

$


$
(591
)
Foreign exchange contracts

 
(1,515
)
 

 
(1,515
)
Total liabilities
$

 
$
(2,106
)
 
$

 
$
(2,106
)

 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
41,215

 
$
292,412

 
$

 
$
333,627

Equity securities

 
24,538

 

 
24,538

Commingled fixed income securities

 
22,571

 

 
22,571

Debt securities - U.S. and foreign governments, agencies and municipalities
102,235

 
12,566

 

 
114,801

Debt securities - corporate

 
62,884

 

 
62,884

Mortgage-backed / asset-backed securities

 
178,234

 

 
178,234

Derivatives
 

 
 

 
 

 


Foreign exchange contracts

 
1,716

 

 
1,716

Total assets
$
143,450

 
$
594,921

 
$

 
$
738,371

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$

 
$
(5,387
)
 
$

 
$
(5,387
)
Total liabilities
$

 
$
(5,387
)
 
$

 
$
(5,387
)
Investment Securities
The valuation of investment securities is based on the market approach using inputs that are observable, or can be corroborated by observable data, in an active marketplace. The following information relates to our classification 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.

17


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)

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 Pitney Bowes Bank (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.
Available-For-Sale Securities
Certain investment securities are classified as available-for-sale and recorded at fair value in the Condensed 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 loss (AOCL).
Available-for-sale securities at September 30, 2016 and December 31, 2015 consisted of the following:
 
September 30, 2016
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
U.S. and foreign governments, agencies and municipalities
$
109,027

 
$
4,145

 
$
(261
)
 
$
112,911

Corporate notes and bonds
79,264

 
2,982

 
(97
)
 
82,149

Commingled fixed income securities
1,559

 
16

 

 
1,575

Mortgage-backed / asset-backed securities
161,131

 
3,378

 
(703
)
 
163,806

Total
$
350,981

 
$
10,521

 
$
(1,061
)
 
$
360,441

 
December 31, 2015
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
U.S. and foreign governments, agencies and municipalities
$
114,265

 
$
1,804

 
$
(1,268
)
 
$
114,801

Corporate notes and bonds
63,140

 
823

 
(1,079
)
 
62,884

Mortgage-backed / asset-backed securities
177,821

 
1,901

 
(1,488
)
 
178,234

Total
$
355,226

 
$
4,528

 
$
(3,835
)
 
$
355,919


At September 30, 2016, investment securities that were in a loss position for 12 or more continuous months had aggregate unrealized holding losses of less than $1 million and an estimated fair value of $14 million, and investment securities that were in a loss position for less than 12 continuous months had aggregate unrealized holding losses of less than $1 million and an estimated fair value of $81 million.


18


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)

At December 31, 2015, investment securities that were in a loss position for 12 or more continuous months had aggregate unrealized holding losses of $2 million and an estimated fair value of $36 million, and investment securities that were in a loss position for less than 12 continuous months had aggregate unrealized holding losses of $2 million and an estimated fair value of $146 million.

We have not recognized an other-than-temporary impairment on any of the investment securities in an unrealized loss position because we have the ability and intent to hold these securities until recovery of the unrealized losses and we expect to receive the contractual principal and interest on these investment securities at maturity.

Scheduled maturities of available-for-sale securities at September 30, 2016 were as follows:
 
Amortized cost
 
Estimated fair value
Within 1 year
$
28,111

 
$
28,208

After 1 year through 5 years
120,611

 
122,284

After 5 years through 10 years
56,375

 
58,585

After 10 years
145,884

 
151,364

Total
$
350,981

 
$
360,441

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 significant 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.
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 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 derivative instruments at fair value and the accounting for changes in the fair value depends on the intended use of the derivative, the resulting designation and the effectiveness of the instrument in offsetting the risk exposure it is designed to hedge.
Foreign Exchange Contracts
We enter into foreign exchange contracts to mitigate the currency risk associated with 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 AOCL in the period that the change in fair value occurs and is reclassified to earnings in the period that the hedged item is recorded in earnings. At September 30, 2016 and December 31, 2015, we had outstanding contracts associated with these anticipated transactions with notional amounts of $14 million and $13 million, respectively.

The valuation of foreign exchange derivatives is based on the market approach using observable market inputs, such as foreign currency spot and forward rates and yield curves. 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. We have not seen a material change in the creditworthiness of those banks acting as derivative counterparties.

Interest Rate Swaps
In September 2016, we entered into an interest rate swap with a notional amount of $300 million to mitigate the interest rate risk associated with our $300 million variable-rate term loans. The swap is designated as a cash flow hedge. The effective portion of the gain or loss on the cash flow hedge is included in AOCL in the period that the change in fair value occurs and is reclassified to earnings in the period that the hedged item is recorded in earnings. Under the terms of the swap agreement, we pay fixed-rate interest of 0.8826% and receive variable-rate interest based on 1-month LIBOR. The variable interest rate resets monthly.
The valuation of our interest rate swap is based on the income approach using a model with inputs that are observable or that can be derived from or corroborated by observable market data.

19


PITNEY BOWES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; table amounts in thousands unless otherwise noted, except per share amounts)

The majority of the amounts included in AOCL at September 30, 2016 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 fair value of derivative instruments at September 30, 2016 and December 31, 2015 was as follows:
Designation of Derivatives
 
Balance Sheet Location
 
September 30,
2016
 
December 31,
2015
Derivatives designated as
hedging instruments
 
 
 
 

 
 

Foreign exchange contracts
 
Other current assets and prepayments
 
$
247

 
$
217

 
 
Accounts payable and accrued liabilities
 
(573
)
 
(208
)
 
 
 
 
 
 
 
Interest rate swap
 
Other non-current liabilities
 
(591
)
 

 
 
 
 
 
 
 
Derivatives not designated as
hedging instruments
 
 
 
 

 
 

Foreign exchange contracts
 
Other current assets and prepayments
 
3,261

 
1,499

 
 
Accounts payable and accrued liabilities
 
(942
)
 
(5,179
)
 
 
 
 
 
 
 
 
 
Total derivative assets
 
$
3,508

 
$
1,716

 
 
Total derivative liabilities
 
(2,106
)
 
(5,387
)
 
 
Total net derivative asset (liabilities)
 
$
1,402

 
$
(3,671
)

The following represents the results of cash flow hedging relationships for the three and nine months ended September 30, 2016 and 2015:
 
 
Three Months Ended September 30,
 
 
Derivative Gain (Loss)
Recognized in AOCL
(Effective Portion)
 
Location of Gain (Loss)
(Effective Portion)
 
Gain (Loss) Reclassified
from AOCL to Earnings
(Effective Portion)
Derivative Instrument
 
2016