0000078814-17-000015.txt : 20170802 0000078814-17-000015.hdr.sgml : 20170802 20170802155701 ACCESSION NUMBER: 0000078814-17-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 74 CONFORMED PERIOD OF REPORT: 20170630 FILED AS OF DATE: 20170802 DATE AS OF CHANGE: 20170802 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: 17999803 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 pbi2017063010q.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 June 30, 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth 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 July 28, 2017, 186,681,977 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 Six Months Ended June 30, 2017 and 2016
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016
 
 
 
 
Condensed Consolidated Balance Sheets at June 30, 2017 and December 31, 2016
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 

 
 

 
 

 
 

Equipment sales
$
158,625

 
$
152,641

 
$
321,599

 
$
312,002

Supplies
63,228

 
65,274

 
130,046

 
137,325

Software
86,664

 
90,615

 
164,531

 
168,673

Rentals
95,999

 
102,869

 
195,869

 
206,959

Financing
83,653

 
91,609

 
169,398

 
189,032

Support services
115,299

 
131,418

 
234,146

 
259,678

Business services
217,903

 
201,460

 
442,422

 
406,806

Total revenue
821,371

 
835,886

 
1,658,011

 
1,680,475

Costs and expenses:
 

 
 

 
 

 
 

Cost of equipment sales
77,189

 
78,055

 
146,751

 
149,594

Cost of supplies
19,909

 
19,624

 
41,380

 
40,314

Cost of software
24,795

 
26,983

 
50,103

 
53,798

Cost of rentals
21,576

 
18,415

 
42,238

 
38,910

Financing interest expense
12,843

 
13,495

 
25,817

 
28,410

Cost of support services
73,190

 
74,742

 
146,544

 
149,991

Cost of business services
153,063

 
140,830

 
303,906

 
276,368

Selling, general and administrative
297,468

 
289,116

 
603,771

 
615,998

Research and development
32,958

 
34,513

 
64,814

 
61,081

Restructuring charges and asset impairments, net
26,927

 
26,076

 
29,009

 
33,009

Interest expense, net
27,600

 
20,799

 
53,276

 
40,100

Total costs and expenses
767,518

 
742,648

 
1,507,609

 
1,487,573

Income before income taxes
53,853

 
93,238

 
150,402

 
192,902

Provision for income taxes
4,952

 
33,394

 
36,368

 
70,418

Income from continuing operations
48,901

 
59,844

 
114,034

 
122,484

Loss from discontinued operations, net of tax

 
(1,660
)
 

 
(1,660
)
Net income
48,901

 
58,184

 
114,034

 
120,824

Less: Preferred stock dividends attributable to noncontrolling interests

 
4,594

 

 
9,188

Net income attributable to Pitney Bowes Inc.
$
48,901

 
$
53,590

 
$
114,034

 
$
111,636

Amounts attributable to common stockholders:
 

 
 

 
 

 
 

Net income from continuing operations
$
48,901

 
$
55,250

 
$
114,034

 
$
113,296

Loss from discontinued operations, net of tax

 
(1,660
)
 

 
(1,660
)
Net income attributable to Pitney Bowes Inc.
$
48,901

 
$
53,590

 
$
114,034

 
$
111,636

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

 
 

 
 

 
 

Continuing operations
$
0.26

 
$
0.29

 
$
0.61

 
$
0.60

Discontinued operations

 
(0.01
)
 

 
(0.01
)
Net income attributable to Pitney Bowes Inc.
$
0.26

 
$
0.29

 
$
0.61

 
$
0.59

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

 
 

 
 

 
 

Continuing operations
$
0.26

 
$
0.29

 
$
0.61

 
$
0.59

Discontinued operations

 
(0.01
)
 

 
(0.01
)
Net income attributable to Pitney Bowes Inc.
$
0.26

 
$
0.28

 
$
0.61

 
$
0.59

Dividends declared per share of common stock
$
0.1875

 
$
0.1875

 
$
0.375

 
$
0.375


(1) The sum of the 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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
48,901

 
$
58,184

 
$
114,034

 
$
120,824

Less: Preferred stock dividends attributable to noncontrolling interests

 
4,594

 

 
9,188

Net income attributable to Pitney Bowes Inc.
48,901

 
53,590

 
114,034

 
111,636

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translations
46,791

 
(9,520
)
 
66,706

 
30,325

Net unrealized (loss) gain on cash flow hedges, net of tax of $(120), $281, $235 and $264, respectively
(196
)
 
450

 
383

 
422

Net unrealized gain on investment securities, net of tax of $758, $1,415, $1,102 and $3,443, respectively
1,291

 
2,409

 
1,876

 
5,863

Adjustments to pension and postretirement plans, net of tax of $(304) and $(777) for the six months ended June 30, 2017 and 2016, respectively.

 

 
(1,482
)
 
(1,230
)
Amortization of pension and postretirement costs, net of tax of $3,442, $4,122, $6,956 and $7,921, respectively
6,624

 
6,080

 
13,335

 
12,828

Other comprehensive income (loss), net of tax
54,510

 
(581
)
 
80,818

 
48,208

Comprehensive income attributable to Pitney Bowes Inc.
$
103,411

 
$
53,009

 
$
194,852

 
$
159,844





































See Notes to Condensed Consolidated Financial Statements

4


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


 
June 30, 2017
 
December 31, 2016
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
840,564

 
$
764,522

Short-term investments
164,716

 
38,448

Accounts receivable (net of allowance of $14,709 and $14,372, respectively)
389,262

 
455,527

Short-term finance receivables (net of allowance of $14,491 and $13,323, respectively)
857,764

 
893,950

Inventories
121,478

 
92,726

Current income taxes
28,732

 
11,373

Other current assets and prepayments
89,061

 
68,637

Total current assets
2,491,577

 
2,325,183

Property, plant and equipment, net
327,140

 
314,603

Rental property and equipment, net
182,997

 
188,054

Long-term finance receivables (net of allowance of $5,121 and $7,177, respectively)
662,384

 
673,207

Goodwill
1,604,320

 
1,571,335

Intangible assets, net
152,019

 
165,172

Noncurrent income taxes
75,105

 
74,806

Other assets
541,806

 
524,773

Total assets
$
6,037,348

 
$
5,837,133

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
1,339,287

 
$
1,378,822

Current income taxes
17,349

 
34,434

Current portion of long-term debt
985,291

 
614,485

Advance billings
291,180

 
299,878

Total current liabilities
2,633,107

 
2,327,619

Deferred taxes on income
214,287

 
204,289

Tax uncertainties and other income tax liabilities
51,112

 
61,276

Long-term debt
2,543,476

 
2,750,405

Other noncurrent liabilities
565,993

 
597,204

Total liabilities
6,007,975

 
5,940,793

 
 
 
 
Commitments and contingencies (See Note 12)


 


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

 
1

Cumulative preference stock, no par value, $2.12 convertible
463

 
483

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

 
323,338

Additional paid-in capital
131,691

 
148,125

Retained earnings
5,152,241

 
5,107,734

Accumulated other comprehensive loss
(859,315
)
 
(940,133
)
Treasury stock, at cost (136,967,821 and 137,669,194 shares, respectively)
(4,719,046
)
 
(4,743,208
)
Total Pitney Bowes Inc. stockholders’ equity (deficit)
29,373

 
(103,660
)
Total liabilities and stockholders’ equity (deficit)
$
6,037,348

 
$
5,837,133





See Notes to Condensed Consolidated Financial Statements

5


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


 
Six Months Ended June 30,
 
2017
 
2016
Cash flows from operating activities:
 

 
 

Net income
$
114,034

 
$
120,824

Restructuring payments
(19,016
)
 
(33,866
)
Special pension plan contributions

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

 
 

Loss on disposal of businesses

 
2,099

Gain on sale of technology
(6,085
)
 

Depreciation and amortization
88,160

 
89,538

Gain on debt forgiveness

 
(10,000
)
Stock-based compensation
12,531

 
9,511

Restructuring charges and asset impairments, net
29,009

 
33,009

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

 
 

Decrease in accounts receivable
78,279

 
46,828

Decrease in finance receivables
77,877

 
73,496

Increase in inventories
(26,812
)
 
(22,601
)
(Increase) decrease in other current assets and prepayments
(18,850
)
 
7,206

Decrease in accounts payable and accrued liabilities
(71,783
)
 
(75,042
)
Decrease in current and noncurrent income taxes
(40,774
)
 
(10,801
)
Decrease in advance billings
(20,218
)
 
(45,410
)
Other, net
(11,705
)
 
10,524

Net cash provided by operating activities
184,647

 
158,584

Cash flows from investing activities:
 

 
 

Purchases of available-for-sale securities
(70,405
)
 
(77,185
)
Proceeds from sales/maturities of available-for-sale securities
61,913

 
84,854

Net change in short-term and other investments
(131,303
)
 
55,702

Capital expenditures
(76,621
)
 
(71,359
)
Proceeds from sale of buildings

 
17,671

Acquisition of businesses, net of cash acquired
(7,889
)
 
(13,417
)
Divestiture of businesses, net of cash transferred

 
(3,039
)
Change in reserve account deposits
2,514

 
(7,143
)
Other investing activities
(3,000
)
 
(4,480
)
Net cash used in investing activities
(224,791
)
 
(18,396
)
Cash flows from financing activities:
 

 
 

Proceeds from the issuance of long-term debt
395,772

 
300,000

Principal payments of long-term debt
(229,323
)
 
(370,952
)
Net change in short-term borrowings

 
229,875

Dividends paid to stockholders
(69,527
)
 
(70,979
)
Common stock repurchases

 
(194,776
)
Dividends paid to noncontrolling interests

 
(9,188
)
Other financing activities
(5,551
)
 
(4,997
)
Net cash provided by (used in) financing activities
91,371

 
(121,017
)
Effect of exchange rate changes on cash and cash equivalents
24,815

 
4,355

Increase in cash and cash equivalents
76,042

 
23,526

Cash and cash equivalents at beginning of period
764,522

 
640,190

Cash and cash equivalents at end of period
$
840,564

 
$
663,716

Cash interest paid
$
82,405

 
$
78,311

Cash income tax payments, net of refunds
$
78,649

 
$
84,225


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 provide innovative products and solutions for mailing, shipping and cross border ecommerce that enable the sending of packages globally and products and solutions for customer information management, location intelligence and customer engagement to help our clients market to their customer. 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 June 30, 2016 has been revised to reduce beginning cash and cash equivalents by $10 million and ending cash and cash equivalents by $12 million with a corresponding adjustment to net change in short-term and 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 for the six months ended June 30, 2016 has been recast to increase both 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 May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting. The ASU provides guidance about which changes to terms and conditions of a share-based payment award require an entity to apply modification accounting. The standard is effective for interim and annual periods beginning after December 15, 2017 and would be applied prospectively to awards modified on or after the effective date. We do not expect the adoption of this standard will have any impact on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. The standard will be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. 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.


7


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

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 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 on the modified retrospective basis, with a cumulative effect adjustment. 
We have completed the majority of our assessment of all potential impacts of the standard. We do not expect a change in revenue recognition for the majority of our product and service offerings. However, we believe that the most likely changes will be in our Software

8


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

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 have determined that certain sales commission plans will qualify for capitalization under the new standard. 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. 
We are in the process of drafting our accounting policies and evaluating the new disclosure requirements and expect to complete our evaluation of the impacts of the accounting and disclosure requirements on our business processes, controls and systems by the end of the year.
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 we previously reported within the Global Ecommerce segment. The needs of retail and ecommerce clients differ from those of office shipping clients. Accordingly, we now report the results for office shipping solutions within Small & Medium Business Solutions and the retail and ecommerce shipping solutions remain in Global Ecommerce. We have recast prior period results 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 and parcel 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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
North America Mailing
$
341,096

 
$
343,218

 
$
696,674

 
$
714,671

International Mailing
95,322

 
107,581

 
188,380

 
212,567

Small & Medium Business Solutions
436,418

 
450,799

 
885,054

 
927,238

Production Mail
85,570

 
95,874

 
174,525

 
183,299

Presort Services
118,452

 
115,765

 
251,129

 
243,161

Enterprise Business Solutions
204,022

 
211,639

 
425,654

 
426,460

Software Solutions
86,425

 
90,464

 
164,645

 
168,386

Global Ecommerce
94,506

 
82,984

 
182,658

 
158,391

Digital Commerce Solutions
180,931

 
173,448

 
347,303

 
326,777

Total revenue
$
821,371

 
$
835,886

 
$
1,658,011

 
$
1,680,475


 
EBIT
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
North America Mailing
$
120,877

 
$
146,897

 
$
261,885

 
$
307,728

International Mailing
13,969

 
12,468

 
27,238

 
23,644

Small & Medium Business Solutions
134,846

 
159,365

 
289,123

 
331,372

Production Mail
7,631

 
12,914

 
16,595

 
19,738

Presort Services
19,270

 
21,214

 
49,987

 
50,124

Enterprise Business Solutions
26,901

 
34,128

 
66,582

 
69,862

Software Solutions
7,555

 
10,151

 
10,304

 
7,579

Global Ecommerce
(4,030
)
 
(683
)
 
(8,300
)
 
(4,152
)
Digital Commerce Solutions
3,525

 
9,468

 
2,004

 
3,427

Total segment EBIT
165,272

 
202,961

 
357,709

 
404,661

Reconciling items:
 
 
 
 
 

 
 

Interest, net
(40,443
)
 
(34,294
)
 
(79,093
)
 
(68,510
)
Unallocated corporate expenses
(50,134
)
 
(48,777
)
 
(105,290
)
 
(106,544
)
Restructuring charges and asset impairments, net
(26,927
)
 
(26,076
)
 
(29,009
)
 
(33,009
)
Gain from the sale of technology
6,085

 

 
6,085

 

Acquisition and disposition-related expenses

 
(576
)
 

 
(3,696
)
Income before income taxes
53,853

 
93,238

 
150,402

 
192,902

Provision for income taxes
4,952

 
33,394

 
36,368

 
70,418

Loss from discontinued operations, net of tax

 
(1,660
)
 

 
(1,660
)
Net income
$
48,901

 
$
58,184

 
$
114,034

 
$
120,824



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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Numerator:
 

 
 

 
 

 
 

Amounts attributable to common stockholders:
 

 
 

 
 

 
 

Net income from continuing operations
$
48,901

 
$
55,250

 
$
114,034

 
$
113,296

Loss from discontinued operations, net of tax

 
(1,660
)
 

 
(1,660
)
Net income attributable to Pitney Bowes Inc. (numerator for diluted EPS)
48,901

 
53,590

 
114,034

 
$
111,636

Less: Preference stock dividend
10

 
9

 
19

 
19

Income attributable to common stockholders (numerator for basic EPS)
$
48,891

 
$
53,581

 
$
114,015

 
$
111,617

Denominator:
 

 
 

 
 

 
 

Weighted-average shares used in basic EPS
186,333

 
187,395

 
186,136

 
189,929

Effect of dilutive shares:
 

 
 

 
 

 
 

Conversion of Preferred stock and Preference stock
288

 
300

 
290

 
302

Employee stock plans
756

 
667

 
519

 
575

Weighted-average shares used in diluted EPS
187,377

 
188,362

 
186,945

 
190,806

Basic earnings per share:
 

 
 

 
 

 
 

Continuing operations
$
0.26

 
$
0.29

 
$
0.61

 
$
0.60

Discontinued operations

 
(0.01
)
 

 
(0.01
)
Net Income
$
0.26

 
$
0.29

 
$
0.61

 
$
0.59

Diluted earnings per share:
 

 
 

 
 

 
 

Continuing operations
$
0.26

 
$
0.29

 
$
0.61

 
$
0.59

Discontinued operations

 
(0.01
)
 

 
(0.01
)
Net Income
$
0.26

 
$
0.28

 
$
0.61

 
$
0.59

Anti-dilutive shares not used in calculating diluted weighted-average shares
9,916

 
6,878

 
11,379

 
8,892

4. Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined on the last-in, first-out (LIFO) basis for most U.S. inventories and the first-in, first-out (FIFO) basis for most non-U.S. inventories. Inventories at June 30, 2017 and December 31, 2016 consisted of the following:
 
June 30,
2017
 
December 31,
2016
Raw materials
$
38,322

 
$
28,541

Work in process
10,541

 
6,498

Supplies and service parts
53,265

 
45,152

Finished products
31,493

 
24,678

Inventory at FIFO cost
133,621

 
104,869

Excess of FIFO cost over LIFO cost
(12,143
)
 
(12,143
)
Total inventory, net
$
121,478

 
$
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 June 30, 2017 and December 31, 2016 consisted of the following:
 
June 30, 2017
 
December 31, 2016
 
North America
 
International
 
Total
 
North America
 
International
 
Total
Sales-type lease receivables
 

 
 

 
 

 
 

 
 

 
 

Gross finance receivables
$
1,061,888

 
$
276,795

 
$
1,338,683

 
$
1,088,053

 
$
273,262

 
$
1,361,315

Unguaranteed residual values
82,581

 
14,083

 
96,664

 
90,190

 
13,655

 
103,845

Unearned income
(221,083
)
 
(61,768
)
 
(282,851
)
 
(223,908
)
 
(60,458
)
 
(284,366
)
Allowance for credit losses
(8,456
)
 
(2,496
)
 
(10,952
)
 
(8,247
)
 
(2,647
)
 
(10,894
)
Net investment in sales-type lease receivables
914,930

 
226,614

 
1,141,544

 
946,088

 
223,812

 
1,169,900

Loan receivables
 

 
 

 
 

 
 

 
 

 
 

Loan receivables
351,077

 
36,187

 
387,264

 
374,147

 
32,716

 
406,863

Allowance for credit losses
(7,503
)
 
(1,157
)
 
(8,660
)
 
(8,517
)
 
(1,089
)
 
(9,606
)
Net investment in loan receivables
343,574

 
35,030

 
378,604

 
365,630

 
31,627

 
397,257

Net investment in finance receivables
$
1,258,504

 
$
261,644

 
$
1,520,148

 
$
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 six months ended June 30, 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
5,182

 
466

 
2,891

 
450

 
8,989

Write-offs and other
(4,973
)
 
(617
)
 
(3,905
)
 
(382
)
 
(9,877
)
Balance at June 30, 2017
$
8,456

 
$
2,496

 
$
7,503

 
$
1,157

 
$
19,612

 
 
 
 
 
 
 
 
 
 
 
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
1,895

 
186

 
2,765

 
390

 
5,236

Write-offs and other
(2,784
)
 
(1,031
)
 
(3,798
)
 
(569
)
 
(8,182
)
Balance at June 30, 2016
$
5,717

 
$
2,697

 
$
8,991

 
$
1,339

 
$
18,744


Aging of Receivables
The aging of gross finance receivables at June 30, 2017 and December 31, 2016 was as follows:
 
June 30, 2017
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
1 - 90 days
$
1,006,333

 
$
271,713

 
$
343,205

 
$
36,044

 
$
1,657,295

> 90 days
55,555

 
5,082

 
7,872

 
143

 
68,652

Total
$
1,061,888

 
$
276,795

 
$
351,077

 
$
36,187

 
$
1,725,947

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
7,484

 
$
1,578

 
$

 
$

 
$
9,062

Not accruing interest
48,071

 
3,504

 
7,872

 
143

 
59,590

Total
$
55,555

 
$
5,082

 
$
7,872

 
$
143

 
$
68,652

As of June 30, 2017, we had North America sales-type lease receivables aged greater than 90 days with a contract value of $56 million. As of August 1, 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 June 30, 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.

 
June 30,
2017
 
December 31,
2016
Sales-type lease receivables
 

 
 

Low
$
837,486

 
$
879,823

Medium
152,362

 
135,953

High
21,767

 
22,600

Not Scored
50,273

 
49,677

Total
$
1,061,888

 
$
1,088,053

Loan receivables
 

 
 

Low
$
272,022

 
$
296,598

Medium
55,493

 
53,647

High
6,672

 
7,216

Not Scored
16,890

 
16,686

Total
$
351,077

 
$
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 June 30, 2017 and December 31, 2016 consisted of the following:
 
June 30, 2017
 
December 31, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships
$
452,614

 
$
(319,812
)
 
$
132,802

 
$
445,039

 
$
(300,906
)
 
$
144,133

Software & technology
152,589

 
(139,947
)
 
12,642

 
150,037

 
(136,508
)
 
13,529

Trademarks & other
36,981

 
(30,406
)
 
6,575

 
36,212

 
(28,702
)
 
7,510

Total intangible assets
$
642,184

 
$
(490,165
)
 
$
152,019

 
$
631,288

 
$
(466,116
)
 
$
165,172


Amortization expense was $8 million and $11 million for the three months ended June 30, 2017 and 2016, respectively and $17 million and $21 million for the six months ended June 30, 2017 and 2016, respectively.
Future amortization expense as of June 30, 2017 was as follows:
Remaining for year ending December 31, 2017
$
14,245

Year ending December 31, 2018
27,632

Year ending December 31, 2019
24,260

Year ending December 31, 2020
19,126

Year ending December 31, 2021
15,401

Thereafter
51,355

Total
$
152,019

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 six months ended June 30, 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
 
June 30,
2017
North America Mailing
$
354,000

 
$

 
$
9,095

 
$
363,095

International Mailing
145,566

 

 
8,085

 
153,651

Small & Medium Business Solutions
499,566

 

 
17,180

 
516,746

Production Mail
101,099

 

 
3,963

 
105,062

Presort Services
196,890

 
6,229

 

 
203,119

Enterprise Business Solutions
297,989

 
6,229

 
3,963

 
308,181

Software Solutions
501,591

 

 
5,613

 
507,204

Global Ecommerce
272,189

 

 

 
272,189

Digital Commerce Solutions
773,780

 

 
5,613

 
779,393

Total goodwill
$
1,571,335

 
$
6,229

 
$
26,756

 
$
1,604,320



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 June 30, 2017 and December 31, 2016.
 
June 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
169,023

 
$
464,970

 
$

 
$
633,993

Equity securities

 
24,186

 

 
24,186

Commingled fixed income securities
1,560

 
21,871

 

 
23,431

Debt securities - U.S. and foreign governments, agencies and municipalities
115,852

 
16,646

 

 
132,498

Debt securities - corporate

 
77,352

 

 
77,352

Mortgage-backed / asset-backed securities

 
162,081

 

 
162,081

Derivatives
 
 
 
 
 

 


Interest rate swap

 
1,909

 

 
1,909

Foreign exchange contracts

 
298

 

 
298

Total assets
$
286,435

 
$
769,313

 
$

 
$
1,055,748

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$

 
$
(539
)
 
$

 
$
(539
)
Total liabilities
$

 
$
(539
)
 
$

 
$
(539
)


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 June 30, 2017 and December 31, 2016 consisted of the following:
 
June 30, 2017
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
U.S. and foreign governments, agencies and municipalities
$
124,051

 
$
2,142

 
$
(1,092
)
 
$
125,101

Corporate notes and bonds
75,876

 
1,779

 
(303
)
 
77,352

Commingled fixed income securities
1,584

 

 
(24
)
 
1,560

Mortgage-backed / asset-backed securities
161,676

 
1,776

 
(1,371
)
 
162,081

Total
$
363,187

 
$
5,697

 
$
(2,790
)
 
$
366,094

 
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 June 30, 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 $24 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 $132 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 June 30, 2017 were as follows:
 
Amortized cost
 
Estimated fair value
Within 1 year
$
24,079

 
$
24,146

After 1 year through 5 years
116,356

 
116,910

After 5 years through 10 years
65,193

 
65,864

After 10 years
157,559

 
159,174

Total
$
363,187

 
$
366,094

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 June 30, 2017 and December 31, 2016, we had outstanding contracts associated with these anticipated transactions with notional amounts of $9 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 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 June 30, 2017 and December 31, 2016 was as follows:
Designation of Derivatives
 
Balance Sheet Location
 
June 30,
2017
 
December 31,
2016
Derivatives designated as
hedging instruments
 
 
 
 

 
 

Foreign exchange contracts
 
Other current assets and prepayments
 
$
50

 
$
487

 
 
Accounts payable and accrued liabilities
 
(401
)
 
(136
)
 
 
 
 
 
 
 
Interest rate swap
 
Other assets
 
1,909

 
1,588

 
 
 
 
 

 
 

Derivatives not designated as
hedging instruments
 
 
 
 

 
 

Foreign exchange contracts
 
Other current assets and prepayments
 
248

 
150

 
 
Accounts payable and accrued liabilities
 
(138
)
 
(3,581
)
 
 
 
 
 
 
 
 
 
Total derivative assets
 
$
2,207

 
$
2,225

 
 
Total derivative liabilities
 
(539
)
 
(3,717
)
 
 
Total net derivative asset (liabilities)
 
$
1,668

 
$
(1,492
)
The majority of the amounts included in AOCI at June 30, 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 and six months ended June 30, 2017 and 2016:
 
 
Three Months Ended June 30,
 
 
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
 
$
(599
)
 
$
437