0000078814-17-000006.txt : 20170503 0000078814-17-000006.hdr.sgml : 20170503 20170502193724 ACCESSION NUMBER: 0000078814-17-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 73 CONFORMED PERIOD OF REPORT: 20170331 FILED AS OF DATE: 20170503 DATE AS OF CHANGE: 20170502 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: 17806816 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 pbi2017033110q.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 March 31, 2017
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
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. 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 April 26, 2017, 186,500,998 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 Months Ended March 31, 2017 and 2016
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016
 
 
 
 
Condensed Consolidated Balance Sheets at March 31, 2017 and December 31, 2016
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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 March 31,
 
2017
 
2016
Revenue:
 

 
 

Equipment sales
$
162,974

 
$
159,361

Supplies
66,818

 
72,051

Software
77,867

 
78,058

Rentals
99,870

 
104,090

Financing
85,745

 
97,423

Support services
118,847

 
128,260

Business services
224,519

 
205,346

Total revenue
836,640

 
844,589

Costs and expenses:
 

 
 

Cost of equipment sales
69,562

 
71,539

Cost of supplies
21,471

 
20,690

Cost of software
25,308

 
26,815

Cost of rentals
20,662

 
20,495

Financing interest expense
12,974

 
14,915

Cost of support services
73,354

 
75,249

Cost of business services
150,843

 
135,538

Selling, general and administrative
306,303

 
326,882

Research and development
31,856

 
26,568

Restructuring charges and asset impairments, net
2,082

 
6,933

Interest expense, net
25,676

 
19,301

Total costs and expenses
740,091

 
744,925

Income before income taxes
96,549

 
99,664

Provision for income taxes
31,416

 
37,024

Net income
65,133

 
62,640

Less: Preferred stock dividends attributable to noncontrolling interests

 
4,594

Net income attributable to Pitney Bowes Inc.
$
65,133

 
$
58,046

Earnings per share attributable to common stockholders:
 

 
 

Basic
$
0.35

 
$
0.30

Diluted
$
0.35

 
$
0.30

Dividends declared per share of common stock
$
0.1875

 
$
0.1875



















See Notes to Condensed Consolidated Financial Statements

3


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



 
Three Months Ended March 31,
 
2017
 
2016
Net income
$
65,133

 
$
62,640

Less: Preferred stock dividends attributable to noncontrolling interests

 
4,594

Net income attributable to Pitney Bowes Inc.
65,133

 
58,046

Other comprehensive income, net of tax:
 
 
 
Foreign currency translations
19,915

 
39,849

Net unrealized gain (loss) on cash flow hedges, net of tax of $353 and $(18), respectively
576

 
(28
)
Net unrealized gain on investment securities, net of tax of $344 and $2,029, respectively
585

 
3,454

Adjustments to pension and postretirement plans, net of tax of $(304) and $(777), respectively
(1,482
)
 
(1,230
)
Amortization of pension and postretirement costs, net of tax of $3,517 and $3,799, respectively
6,708

 
6,748

Other comprehensive income, net of tax
26,302

 
48,793

Comprehensive income attributable to Pitney Bowes Inc.
$
91,435

 
$
106,839







































See Notes to Condensed Consolidated Financial Statements

4


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


 
March 31, 2017
 
December 31, 2016
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
739,553

 
$
764,522

Short-term investments
43,895

 
38,448

Accounts receivable (net of allowance of $14,613 and $14,372, respectively)
389,990

 
455,527

Short-term finance receivables (net of allowance of $13,844 and $13,323, respectively)
853,390

 
893,950

Inventories
115,638

 
92,726

Current income taxes
11,919

 
11,373

Other current assets and prepayments
78,749

 
68,637

Total current assets
2,233,134

 
2,325,183

Property, plant and equipment, net
319,899

 
314,603

Rental property and equipment, net
178,281

 
188,054

Long-term finance receivables (net of allowance of $5,986 and $7,177, respectively)
664,630

 
673,207

Goodwill
1,583,302

 
1,571,335

Intangible assets, net
159,200

 
165,172

Noncurrent income taxes
78,946

 
74,806

Other assets
529,779

 
524,773

Total assets
$
5,747,171

 
$
5,837,133

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
1,317,532

 
$
1,378,822

Current income taxes
49,933

 
34,434

Current portion of long-term debt
785,287

 
614,485

Advance billings
295,688

 
299,878

Total current liabilities
2,448,440

 
2,327,619

Deferred taxes on income
210,604

 
204,289

Tax uncertainties and other income tax liabilities
61,195

 
61,276

Long-term debt
2,499,025

 
2,750,405

Other noncurrent liabilities
574,245

 
597,204

Total liabilities
5,793,509

 
5,940,793

 
 
 
 
Commitments and contingencies (See Note 12)


 


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

 
1

Cumulative preference stock, no par value, $2.12 convertible
478

 
483

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

 
323,338

Additional paid-in capital
126,564

 
148,125

Retained earnings
5,138,300

 
5,107,734

Accumulated other comprehensive loss
(913,831
)
 
(940,133
)
Treasury stock, at cost (137,029,999 and 137,669,194 shares, respectively)
(4,721,188
)
 
(4,743,208
)
Total Pitney Bowes Inc. stockholders’ deficit
(46,338
)
 
(103,660
)
Total liabilities and stockholders’ deficit
$
5,747,171

 
$
5,837,133





See Notes to Condensed Consolidated Financial Statements

5


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


 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 

 
 

Net income
$
65,133

 
$
62,640

Restructuring payments
(12,416
)
 
(21,656
)
Special pension plan contributions

 
(36,731
)
Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Loss on disposal of businesses

 
2,059

Depreciation and amortization
44,295

 
44,300

Gain on debt forgiveness

 
(10,000
)
Stock-based compensation
5,638

 
6,303

Restructuring charges and asset impairments, net
2,082

 
6,933

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

 
 

Decrease in accounts receivable
67,765

 
77,629

Decrease in finance receivables
63,390

 
53,935

Increase in inventories
(22,195
)
 
(11,489
)
Increase in other current assets and prepayments
(9,746
)
 
(7,955
)
Decrease in accounts payable and accrued liabilities
(32,829
)
 
(110,067
)
Increase in current and non-current income taxes
13,542

 
13,380

(Decrease) increase in advance billings
(9,194
)
 
1,289

Other, net
(21,459
)
 
(7,077
)
Net cash provided by operating activities
154,006

 
63,493

Cash flows from investing activities:
 

 
 

Purchases of available-for-sale securities
(34,308
)
 
(31,661
)
Proceeds from sales/maturities of available-for-sale securities
34,396

 
46,209

Capital expenditures
(35,920
)
 
(40,670
)
Acquisition of businesses, net of cash acquired
(7,889
)
 
(13,371
)
Change in reserve account deposits
(19,346
)
 
(16,253
)
Other investing activities
(5,803
)
 
(4,786
)
Net cash used in investing activities
(68,870
)
 
(60,532
)
Cash flows from financing activities:
 

 
 

Proceeds from the issuance of long-term debt

 
300,000

Principal payments of long-term debt
(79,278
)
 
(370,952
)
Net change in short-term borrowings

 
179,550

Dividends paid to stockholders
(34,567
)
 
(36,010
)
Common stock repurchases

 
(128,451
)
Other financing activities
(5,658
)
 
(4,962
)
Net cash used in financing activities
(119,503
)
 
(60,825
)
Effect of exchange rate changes on cash and cash equivalents
9,398

 
19,906

Decrease in cash and cash equivalents
(24,969
)
 
(37,958
)
Cash and cash equivalents at beginning of period
764,522

 
640,190

Cash and cash equivalents at end of period
$
739,553

 
$
602,232

Cash interest paid
$
52,989

 
$
59,566

Cash income tax payments, net of refunds
$
18,511

 
$
25,585






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, 2016 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, 2017. 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, 2016 (2016 Annual Report).
In the fourth quarter of 2016, we determined that certain investments were classified as cash and cash equivalents. Accordingly, the Condensed Consolidated Statement of Cash Flows for the period ended March 31, 2016 has been revised to reduce beginning cash and cash equivalents by $10 million and ending cash and cash equivalents by $11 million with corresponding change to other investing activities.
New Accounting Pronouncements - Standards Adopted in 2017
In January 2017, the Financial Accounting Standard Board (FASB) issued Accounting Standard Update (ASU) 2017-04, Intangibles - Goodwill and Other (Topic 350),  Simplifying the Test for Goodwill Impairment, which eliminates Step 2 of the current two-step goodwill impairment test and requires only a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit).  The ASU is effective for interim and annual periods beginning after December 15, 2019, and is required to be applied prospectively. We elected to early adopt this standard effective January 1, 2017.  The adoption of this standard had no impact on our consolidated financial statements or 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. We retroactively adopted this ASU effective January 1, 2017. Accordingly, the Condensed Consolidated Statement of Cash Flows as of March 31, 2016 has been recast to increase net cash provided by operating activities and net cash used in financing activities by $5 million.
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. This standard became effective January 1, 2017 and there was no impact on our consolidated financial statements or disclosures.
New Accounting Pronouncements - Standards Not Yet Adopted
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Benefit Cost. The ASU requires the service cost component of net periodic benefit cost to be presented in the same income statement line item as other employee compensation costs arising from services rendered during the period. Other components of the net periodic benefit cost are to be presented separately, in an appropriately titled line item outside of any subtotal of operating income or disclosed in the footnotes. The standard also limits the amount eligible for capitalization to the service cost component. The standard is effective for interim and annual periods beginning after December 15, 2017 and we are currently assessing the impact this standard will have on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-06 – Plan Accounting: Defined Benefit Pension Plans (Topic 960); Defined Contribution Pension Plans (Topic 962); Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting. The ASU requires separate disclosure in the statement of net assets available for benefits and the statement of changes in net assets available for benefits of changes in any interests held in a Master Trust and other enhanced disclosures. The standard is effective for interim and annual

7


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

periods beginning after December 15, 2018 and we are currently evaluating the impact of this standard on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard is effective for interim and annual periods beginning after December 15, 2017. The impact on our consolidated financial statements will depend on the facts and circumstances of any specific future transactions.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Inter-entity Transfers of Assets other than Inventory, which requires tax expense to be recognized from the sale of intra-entity assets, other than inventory, when the transfer occurs, even though the effects of the transaction are eliminated in consolidation. Under current guidance, the tax effects of transfers are deferred until the transferred asset is sold or otherwise recovered through use. The standard 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 financial statements.
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 the 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 consolidated 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 and early adoption is permitted. We are currently assessing the impact this standard will have on our consolidated 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 consolidated financial statements and disclosures.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which 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.  In addition, the standard requires enhanced disclosures about the nature, amount, timing and uncertainty of revenue.  There were several amendments to the standard during 2016, including clarification of the accounting for licenses of intellectual property and identifying performance obligations. The standard is effective beginning January 1, 2018 and can be adopted either retrospectively to each reporting period presented or on a modified retrospective basis with a cumulative effect adjustment at the date of the initial application. We plan to adopt the standard retrospectively with a cumulative effect adjustment. 
We are continuing to assess all potential impacts of the standard across all of our business segments and believe that the most significant impact will be in our Software Solutions segment related to the timing of software licenses and certain other ancillary revenue streams. In addition, we currently capitalize certain costs associated with the acquisition of new customers and recognize these costs over their expected revenue stream of eight years.  Under the new standard, these costs will be expensed as incurred.  Also, we are continuing to review our sales commission plans to determine which payments may be capitalized. We plan to use the practical expedient that allows companies to expense costs to obtain a contract when the estimated amortization period is less than one year. 


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
Effective January 1, 2017, we revised our segment reporting to reflect a change in how we manage and report office shipping solutions, which were previously reported within the Global Ecommerce segment. The needs of retail and ecommerce clients are different from those of office shipping clients. Accordingly, the results for office shipping solutions are now reported within Small & Medium Business Solutions and the retail and ecommerce shipping solutions remain in Global Ecommerce. Prior period results have been recast to conform to our current segment presentation. 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 mailing and office shipping solutions, financing services, and supplies for small and medium businesses to efficiently create physical and digital mail, evidence postage and help simplify and save on the sending, tracking and receiving of letters, parcels and flats in the U.S. and Canada.
International Mailing: Includes the revenue and related expenses from mailing and office shipping solutions, financing services, and supplies for small and medium businesses to efficiently create physical and digital mail, evidence postage and help simplify and save on the sending, tracking and receiving of letters, parcels and flats 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 and parcel 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 customer engagement, customer information and location intelligence software solutions and related support services.
Global Ecommerce: Includes the worldwide revenue and related expenses from cross-border ecommerce transactions and domestic retail and ecommerce shipping solutions.

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 March 31,
 
2017
 
2016
North America Mailing
$
355,578

 
$
371,453

International Mailing
93,058

 
104,986

Small & Medium Business Solutions
448,636

 
476,439

Production Mail
88,955

 
87,425

Presort Services
132,677

 
127,396

Enterprise Business Solutions
221,632

 
214,821

Software Solutions
78,220

 
77,922

Global Ecommerce
88,152

 
75,407

Digital Commerce Solutions
166,372

 
153,329

Total revenue
$
836,640

 
$
844,589

 
EBIT
 
Three Months Ended March 31,
 
2017
 
2016
North America Mailing
$
141,008

 
$
160,831

International Mailing
13,269

 
11,176

Small & Medium Business Solutions
154,277

 
172,007

Production Mail
8,964

 
6,824

Presort Services
30,717

 
28,910

Enterprise Business Solutions
39,681

 
35,734

Software Solutions
2,749

 
(2,572
)
Global Ecommerce
(4,270
)
 
(3,469
)
Digital Commerce Solutions
(1,521
)
 
(6,041
)
Total segment EBIT
192,437

 
201,700

Reconciling items:
 
 
 
Interest, net
(38,650
)
 
(34,216
)
Unallocated corporate expenses
(55,156
)
 
(57,767
)
Restructuring charges and asset impairments, net
(2,082
)
 
(6,933
)
Acquisition and disposition-related expenses

 
(3,120
)
Income before income taxes
96,549

 
99,664

Provision for income taxes
31,416

 
37,024

Net income
$
65,133

 
$
62,640


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.
 
Three Months Ended March 31,
 
2017
 
2016
Numerator:
 

 
 

Amounts attributable to common stockholders:
 

 
 

Net income attributable to Pitney Bowes Inc. (numerator for diluted EPS)
$
65,133

 
$
58,046

Less: Preference stock dividend
9

 
10

Income attributable to common stockholders (numerator for basic EPS)
$
65,124

 
$
58,036

Denominator:
 

 
 

Weighted-average shares used in basic EPS
185,982

 
192,241

Effect of dilutive shares:
 

 
 

Conversion of Preferred stock and Preference stock
293

 
304

Employee stock plans
600

 
636

Weighted-average shares used in diluted EPS
186,875

 
193,181

 
 
 
 
Basic earnings per share
$
0.35

 
$
0.30

 
 
 
 
Diluted earnings per share
$
0.35

 
$
0.30

 
 
 
 
Anti-dilutive shares not used in calculating diluted weighted-average shares
11,176

 
8,870

4. Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined on the last-in, last-out (LIFO) basis for most U.S. inventories and the first-in, first-out (FIFO) basis for most non-U.S. inventories. Inventories at March 31, 2017 and December 31, 2016 consisted of the following:
 
March 31,
2017
 
December 31,
2016
Raw materials
$
35,499

 
$
28,541

Work in process
5,994

 
6,498

Supplies and service parts
49,729

 
45,152

Finished products
36,559

 
24,678

Inventory at FIFO cost
127,781

 
104,869

Excess of FIFO cost over LIFO cost
(12,143
)
 
(12,143
)
Total inventory, net
$
115,638

 
$
92,726


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.
Finance receivables at March 31, 2017 and December 31, 2016 consisted of the following:
 
March 31, 2017
 
December 31, 2016
 
North America
 
International
 
Total
 
North America
 
International
 
Total
Sales-type lease receivables
 

 
 

 
 

 
 

 
 

 
 

Gross finance receivables
$
1,073,533

 
$
266,437

 
$
1,339,970

 
$
1,088,053

 
$
273,262

 
$
1,361,315

Unguaranteed residual values
89,292

 
13,543

 
102,835

 
90,190

 
13,655

 
103,845

Unearned income
(220,515
)
 
(61,056
)
 
(281,571
)
 
(223,908
)
 
(60,458
)
 
(284,366
)
Allowance for credit losses
(8,816
)
 
(2,569
)
 
(11,385
)
 
(8,247
)
 
(2,647
)
 
(10,894
)
Net investment in sales-type lease receivables
933,494

 
216,355

 
1,149,849

 
946,088

 
223,812

 
1,169,900

Loan receivables
 

 
 

 
 

 
 

 
 

 
 

Loan receivables
342,037

 
34,579

 
376,616

 
374,147

 
32,716

 
406,863

Allowance for credit losses
(7,369
)
 
(1,076
)
 
(8,445
)
 
(8,517
)
 
(1,089
)
 
(9,606
)
Net investment in loan receivables
334,668

 
33,503

 
368,171

 
365,630

 
31,627

 
397,257

Net investment in finance receivables
$
1,268,162

 
$
249,858

 
$
1,518,020

 
$
1,311,718

 
$
255,439

 
$
1,567,157


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 three months ended March 31, 2017 and 2016 was as follows:
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
Balance at January 1, 2017
$
8,247

 
$
2,647

 
$
8,517

 
$
1,089

 
$
20,500

Amounts charged to expense
1,758

 
178

 
639

 
144

 
2,719

Write-offs and other
(1,189
)
 
(256
)
 
(1,787
)
 
(157
)
 
(3,389
)
Balance at March 31, 2017
$
8,816

 
$
2,569

 
$
7,369

 
$
1,076

 
$
19,830

 
 
 
 
 
 
 
 
 
 
 
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
995

 
50

 
1,300

 
157

 
2,502

Write-offs and other
(1,705
)
 
(495
)
 
(2,138
)
 
(123
)
 
(4,461
)
Balance at March 31, 2016
$
5,896

 
$
3,097

 
$
9,186

 
$
1,552

 
$
19,731


Aging of Receivables
The aging of gross finance receivables at March 31, 2017 and December 31, 2016 was as follows:
 
March 31, 2017
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
1 - 90 days
$
1,004,804

 
$
262,172

 
$
333,362

 
$
34,251

 
$
1,634,589

> 90 days
68,729

 
4,265

 
8,675

 
328

 
81,997

Total
$
1,073,533

 
$
266,437

 
$
342,037

 
$
34,579

 
$
1,716,586

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
12,104

 
$
1,192

 
$

 
$

 
$
13,296

Not accruing interest
56,625

 
3,073

 
8,675

 
328

 
68,701

Total
$
68,729

 
$
4,265

 
$
8,675

 
$
328

 
$
81,997

As of March 31, 2017, we had North America sales-type lease receivables aged greater than 90 days with a contract value of $69 million. As of April 28, 2017, we received payments with a contract value of approximately $26 million related to these receivables.
 
December 31, 2016
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
1 - 90 days
$
1,025,313

 
$
269,247

 
$
366,726

 
$
32,420

 
$
1,693,706

> 90 days
62,740

 
4,015

 
7,421

 
296

 
74,472

Total
$
1,088,053

 
$
273,262

 
$
374,147

 
$
32,716

 
$
1,768,178

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
8,831

 
$
972

 
$

 
$

 
$
9,803

Not accruing interest
53,909

 
3,043

 
7,421

 
296

 
64,669

Total
$
62,740

 
$
4,015

 
$
7,421

 
$
296

 
$
74,472



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 March 31, 2017 and December 31, 2016 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.

 
March 31,
2017
 
December 31,
2016
Sales-type lease receivables
 

 
 

Low
$
865,202

 
$
879,823

Medium
137,624

 
135,953

High
22,202

 
22,600

Not Scored
48,505

 
49,677

Total
$
1,073,533

 
$
1,088,053

Loan receivables
 

 
 

Low
$
265,626

 
$
296,598

Medium
54,164

 
53,647

High
6,078

 
7,216

Not Scored
16,169

 
16,686

Total
$
342,037

 
$
374,147



14


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

6. Intangible Assets and Goodwill
Intangible Assets
Intangible assets at March 31, 2017 and December 31, 2016 consisted of the following:
 
March 31, 2017
 
December 31, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships
$
447,830

 
$
(308,756
)
 
$
139,074

 
$
445,039

 
$
(300,906
)
 
$
144,133

Software & technology
150,748

 
(137,693
)
 
13,055

 
150,037

 
(136,508
)
 
13,529

Trademarks & other
36,372

 
(29,301
)
 
7,071

 
36,212

 
(28,702
)
 
7,510

Total intangible assets
$
634,950

 
$
(475,750
)
 
$
159,200

 
$
631,288

 
$
(466,116
)
 
$
165,172


Amortization expense was $8 million and $11 million for the three months ended March 31, 2017 and 2016, respectively.
Future amortization expense as of March 31, 2017 was as follows:
Remaining for year ending December 31, 2017
$
21,768

Year ending December 31, 2018
27,455

Year ending December 31, 2019
24,079

Year ending December 31, 2020
18,904

Year ending December 31, 2021
15,301

Thereafter
51,693

Total
$
159,200

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.
Goodwill
Changes in the carrying value of goodwill, by reporting segment, for the three months ended March 31, 2017 are shown in the table below. Prior year amounts have been recast for the change in reportable segments.
 
December 31, 2016
 
Acquisitions
 
Foreign currency translation
 
March 31,
2017
North America Mailing
$
354,000

 
$

 
$
1,402

 
$
355,402

International Mailing
145,566

 

 
1,587

 
147,153

Small & Medium Business Solutions
499,566

 

 
2,989

 
502,555

Production Mail
101,099

 

 
766

 
101,865

Presort Services
196,890

 
6,229

 

 
203,119

Enterprise Business Solutions
297,989

 
6,229

 
766

 
304,984

Software Solutions
501,591

 

 
1,983

 
503,574

Global Ecommerce
272,189

 

 

 
272,189

Digital Commerce Solutions
773,780

 

 
1,983

 
775,763

Total goodwill
$
1,571,335

 
$
6,229

 
$
5,738

 
$
1,583,302



15


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

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 March 31, 2017 and December 31, 2016.
 
March 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
121,807

 
$
255,169

 
$

 
$
376,976

Equity securities

 
23,432

 

 
23,432

Commingled fixed income securities
1,543

 
21,598

 

 
23,141

Debt securities - U.S. and foreign governments, agencies and municipalities
111,144

 
22,126

 

 
133,270

Debt securities - corporate

 
71,093

 

 
71,093

Mortgage-backed / asset-backed securities

 
158,681

 

 
158,681

Derivatives
 
 
 
 
 

 


Interest rate swap

 
2,056

 

 
2,056

Foreign exchange contracts

 
889

 

 
889

Total assets
$
234,494

 
$
555,044

 
$

 
$
789,538

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$

 
$
(263
)
 
$

 
$
(263
)
Total liabilities
$

 
$
(263
)
 
$

 
$
(263
)


16


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

 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
114,471

 
$
217,175

 
$

 
$
331,646

Equity securities

 
24,571

 

 
24,571

Commingled fixed income securities
1,536

 
22,132

 

 
23,668

Debt securities - U.S. and foreign governments, agencies and municipalities
116,822

 
19,358

 

 
136,180

Debt securities - corporate

 
69,891

 

 
69,891

Mortgage-backed / asset-backed securities

 
158,996

 

 
158,996

Derivatives
 

 
 

 
 

 


Interest rate swap

 
1,588

 

 
1,588

Foreign exchange contracts

 
637

 

 
637

Total assets
$
232,829

 
$
514,348

 
$

 
$
747,177

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$

 
$
(3,717
)
 
$

 
$
(3,717
)
Total liabilities
$

 
$
(3,717
)
 
$

 
$
(3,717
)
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.
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.

17


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


Available-For-Sale Securities
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 income (AOCI).
Available-for-sale securities at March 31, 2017 and December 31, 2016 consisted of the following:
 
March 31, 2017
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
U.S. and foreign governments, agencies and municipalities
$
125,151

 
$
1,694

 
$
(1,473
)
 
$
125,372

Corporate notes and bonds
70,302

 
1,312

 
(521
)
 
71,093

Commingled fixed income securities
1,576

 

 
(33
)
 
1,543

Mortgage-backed / asset-backed securities
158,718

 
1,583

 
(1,620
)
 
158,681

Total
$
355,747

 
$
4,589

 
$
(3,647
)
 
$
356,689

 
December 31, 2016
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
U.S. and foreign governments, agencies and municipalities
$
136,316

 
$
1,571

 
$
(1,707
)
 
$
136,180

Corporate notes and bonds
69,376

 
1,180

 
(665
)
 
69,891

Commingled fixed income securities
1,568

 

 
(32
)
 
1,536

Mortgage-backed / asset-backed securities
159,312

 
1,566

 
(1,882
)
 
158,996

Total
$
366,572

 
$
4,317

 
$
(4,286
)
 
$
366,603


At March 31, 2017, 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 $7 million, and investment securities that were in a loss position for less than 12 continuous months had aggregate unrealized holding losses of $3 million and an estimated fair value of $166 million.

At December 31, 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 $12 million, and investment securities that were in a loss position for less than 12 continuous months had aggregate unrealized holding losses of $4 million and an estimated fair value of $171 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 March 31, 2017 were as follows:
 
Amortized cost
 
Estimated fair value
Within 1 year
$
29,886

 
$
29,936

After 1 year through 5 years
106,796

 
107,300

After 5 years through 10 years
63,107

 
63,339

After 10 years
155,958

 
156,114

Total
$
355,747

 
$
356,689

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.

18


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

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 AOCI in the period that the change in fair value occurs and is reclassified to earnings in the period that the hedged item is recorded in earnings. At March 31, 2017 and December 31, 2016, we had outstanding contracts associated with these anticipated transactions with notional amounts of $12 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 Swap
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 AOCI in the period that the change in fair value occurs and is reclassified to earnings in the period that the hedged item is recorded in earnings. 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 fair value of derivative instruments at March 31, 2017 and December 31, 2016 was as follows:
Designation of Derivatives
 
Balance Sheet Location
 
March 31,
2017
 
December 31,
2016
Derivatives designated as
hedging instruments
 
 
 
 

 
 

Foreign exchange contracts
 
Other current assets and prepayments
 
$
353

 
$
487

 
 
Accounts payable and accrued liabilities
 
(35
)
 
(136
)
 
 
 
 
 
 
 
Interest Rate Swap
 
Other assets
 
2,056

 
1,588

 
 
 
 
 

 
 

Derivatives not designated as
hedging instruments
 
 
 
 

 
 

Foreign exchange contracts
 
Other current assets and prepayments
 
536

 
150

 
 
Accounts payable and accrued liabilities
 
(228
)
 
(3,581
)
 
 
 
 
 
 
 
 
 
Total derivative assets
 
$
2,945

 
$
2,225

 
 
Total derivative liabilities
 
(263
)
 
(3,717
)
 
 
Total net derivative asset (liabilities)
 
$
2,682

 
$
(1,492
)
The majority of the amounts included in AOCI at March 31, 2017 will be recognized in earnings within the next 12 months. No amount of ineffectiveness was recorded in earnings for these designated cash flow hedges.
The following represents the results of cash flow hedging relationships for the three months ended March 31, 2017 and 2016:
 
 
Three Months Ended March 31,
 
 
Derivative Gain (Loss)
Recognized in AOCI
(Effective Portion)
 
Location of Gain (Loss)
(Effective Portion)
 
Gain (Loss) Reclassified
from AOCI to Earnings
(Effective Portion)
Derivative Instrument
 
2017
 
2016
 
 
2017
 
2016
Foreign exchange contracts
 
$
50

 
$
(393
)
 
Revenue
 
$
(28
)
 
(380
)
 
 
 

 
 

 
Cost of sales
 
111

 
225

Interest rate swap
 
468

 

 
Interest Expense
 

 

 
 
$
518

 
$
(393
)
 
 
 
$
83

 
$
(155
)
We also enter into foreign exchange contracts to minimize the impact of exchange rate fluctuations on short-term intercompany loans and related interest that are denominated in a foreign currency. The revaluation of the intercompany loans and interest and the mark-to-market adjustment on the derivatives are both recorded in earnings. All outstanding contracts at March 31, 2017 mature within 12 months.
The following represents the results of our non-designated derivative instruments for the three months ended March 31, 2017 and 2016:
 
 
 
 
Three Months Ended March 31,
 
 
 
 
Derivative Gain (Loss) Recognized in Earnings
Derivatives Instrument
 
Location of Derivative Gain (Loss)
 
2017
 
2016
Foreign exchange contracts
 
Selling, general and administrative expense
 
$
(1,849
)
 
$
(5,977
)

Credit-Risk-Related Contingent Features
Certain derivative instruments contain credit-risk-related contingent features that would require us to post collateral based on a combination of our long-term senior unsecured debt ratings and the net fair value of our derivatives. At March 31, 2017, we did not post any collateral and the maximum amount of collateral that we would have been required to post had the credit-risk-related contingent features been triggered was not significant.





20


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

Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, investment securities, accounts receivable, loan receivables, derivative instruments, accounts payable and debt. The carrying value for cash and cash equivalents, accounts receivable, loans receivable, and accounts payable approximate fair value because of the short maturity of these instruments.
The fair value of our debt is estimated based on recently executed transactions and market price quotations. The inputs used to determine the fair value of our debt were classified as Level 2 in the fair value hierarchy. The carrying value and estimated fair value of our debt at March 31, 2017 and December 31, 2016 were as follows:
 
March 31, 2017
 
December 31, 2016
Carrying value
$
3,284,312

 
$
3,364,890

Fair value
$
3,341,434

 
$
3,412,581



8. Restructuring Charges
Activity in our restructuring reserves for the three months ended March 31, 2017 and 2016 was as follows:
 
Severance and benefits costs
 
Other exit
costs
 
Total
Balance at January 1, 2017
$
28,376

 
$
281

 
$
28,657

Expenses, net
1,419

 
67

 
1,486

Cash payments
(12,294
)
 
(122
)
 
(12,416
)
Balance at March 31, 2017
$
17,501

 
$
226

 
$
17,727

 
 
 
 
 
 
Balance at January 1, 2016
$
43,700

 
$
3,722

 
$
47,422

Expenses, net
4,590

 
1,060

 
5,650

Cash payments
(19,956
)
 
(1,700
)
 
(21,656
)
Balance at March 31, 2016
$
28,334

 
$
3,082

 
$
31,416


The majority of the remaining restructuring reserves are expected to be paid over the next 12 to 24 months; however, due to certain international labor laws and long-term lease agreements, some payments will extend beyond 24 months. We expect to fund these payments from cash flows from operations.

21


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

9. Debt
Total debt at March 31, 2017 and December 31, 2016 consisted of the following:


Interest rate
 
March 31, 2017
 
December 31, 2016
Notes due September 2017
5.75%
 
$
385,109

 
$
385,109

Notes due March 2018
5.6%
 
250,000

 
250,000

Notes due May 2018
4.75%
 
350,000

 
350,000

Notes due March 2019
6.25%
 
300,000

 
300,000

Notes due October 2021
3.375%
 
600,000

 
600,000

Notes due March 2024
4.625%
 
500,000

 
500,000

Notes due January 2037
5.25%
 
35,841

 
115,041

Notes due March 2043
6.7%
 
425,000

 
425,000

Term loans
Variable
 
450,000

 
450,000

Other debt
 
 
5,584

 
5,677

Principal amount
 
 
3,301,534

 
3,380,827

Less: unamortized debt discount and issuance costs
 
 
27,600

 
28,796

Plus: unamortized interest rate swap proceeds
 
 
10,378

 
12,859

Total debt
 
 
3,284,312

 
3,364,890

Less: current portion long-term debt
 
 
785,287

 
614,485

Long-term debt
 
 
$
2,499,025

 
$
2,750,405

In January 2017, bondholders of the 5.25% Notes due 2037 caused us to redeem $79 million of the debt outstanding.
 
10. Pensions and Other Benefit Programs
The components of net periodic benefit cost (income) were as follows:
 
Defined Benefit Pension Plans
 
Nonpension Postretirement Benefit Plans
 
United States
 
Foreign
 
 
 
Three Months Ended
 
Three Months Ended
 
Three Months Ended
 
March 31,
 
March 31,
 
March 31,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Service cost
$
30

 
$
32

 
$
542

 
$
527

 
$
419

 
$
501

Interest cost
17,244

 
18,830

 
4,544

 
5,661

 
1,771

 
2,136

Expected return on plan assets
(24,548
)
 
(25,589
)
 
(7,780
)
 
(8,472
)
 

 

Amortization of transition credit

 

 
(2
)
 
(2
)
 

 

Amortization of prior service (credit) cost
(15
)
 
(15
)
 
(18
)
 
(17
)
 
74

 
74

Amortization of net actuarial loss
7,268

 
6,706

 
2,034

 
1,343

 
884

 
1,360

Settlement (1)

 
1,098

 

 

 

 

Net periodic benefit cost (income)
$
(21
)
 
$
1,062

 
$
(680
)
 
$
(960
)
 
$
3,148

 
$
4,071


(1) Included in restructuring charges and asset impairments, net in the Condensed Consolidated Statements of Income.
Through March 31, 2017 and 2016, contributions to our U.S. pension plans were $2 million and $4 million, respectively, and contributions to our foreign plans were $9 million and $38 million, respectively. Nonpension postretirement benefit plan contributions were $5 million and $4 million through March 31, 2017 and March 31, 2016, respectively.


22


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

11. Income Taxes
The effective tax rate for the three months ended March 31, 2017 and 2016 was 32.5% and 37.1%, respectively. The effective tax rate for the three months ended March 31, 2017 and 2016 includes a $4 million and $3 million charge, respectively, from the write-off of deferred tax assets associated with expiration of out-of-the-money vested stock options and the vesting of restricted stock. The effective tax rate for the three months ended March 31, 2017 also includes a $4 million benefit from the resolution of tax examinations.
As is the case with other large corporations, our tax returns are examined each year by tax authorities in the U.S. and other global taxing jurisdictions in which we have operations. As a result, it is reasonably possible that the amount of our unrecognized tax benefits will decrease in the next 12 months, and we expect this change could be up to 25% of our unrecognized tax benefits.
The IRS examinations of our consolidated U.S. income tax returns for tax years prior to 2012 are closed to audit; however, various post-2006 U.S. state and local tax returns are still subject to examination. In Canada, the examination of our tax filings prior to 2011 are closed to audit, except for the pending application of legal principles to specific issues arising in earlier years. Other significant jurisdictions include France, which is closed to audit through the end of 2012, Germany, which is closed to audit through the end of 2011 and the U.K., which, except for an item under appeal, is closed to audit through the end of 2011. We have other less significant tax fillings currently subject to examination.
12. Commitments and Contingencies
In the ordinary course of business, we are routinely defendants in, or party to a number of pending and threatened legal actions. These may involve litigation by or against us relating to, among other things, contractual rights under vendor, insurance or other contracts; intellectual property or patent rights; equipment, service, payment or other disputes with clients; or disputes with employees. Some of these actions may be brought as a purported class action on behalf of a purported class of employees, customers or others. In management's opinion, the potential liability, if any, that may result from these actions, either individually or collectively, is not reasonably expected to have a material effect on our financial position, results of operations or cash flows. However, as litigation is inherently unpredictable, there can be no assurances in this regard.

13. Stockholders’ (Deficit) Equity

Changes in stockholders’ (deficit) equity for the three months ended March 31, 2017 and 2016 were as follows:
 
Preferred
stock
 
Preference
stock
 
Common stock
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Treasury stock
 
Total deficit
Balance at January 1, 2017
$
1

 
$
483

 
$
323,338

 
$
148,125

 
$
5,107,734

 
$
(940,133
)
 
$
(4,743,208
)
 
$
(103,660
)
Net income

 

 

 

 
65,133

 

 

 
65,133

Other comprehensive income

 

 

 

 

 
26,302

 

 
26,302

Dividends paid

 

 

 

 
(34,567
)
 

 

 
(34,567
)
Issuance of common stock

 

 

 
(27,098
)
 

 

 
21,914

 
(5,184
)
Conversion to common stock

 
(5
)
 

 
(101
)
 

 

 
106

 

Stock-based compensation expense

 

 

 
5,638

 

 

 

 
5,638

Balance at March 31, 2017
$
1

 
$
478

 
$
323,338

 
$
126,564

 
$
5,138,300

 
$
(913,831
)
 
$