10-Q



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, 2016
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number: 1-3579
PITNEY BOWES INC.
(Exact name of registrant as specified in its charter)

Delaware
 
06-0495050
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
3001 Summer Street, Stamford, Connecticut
 
06926
(Address of principal executive offices)
 
(Zip Code)
(203) 356-5000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
 
 
As of April 29, 2016, 188,620,368 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, 2016 and 2015
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and 2015
 
 
 
 
Condensed Consolidated Balance Sheets at March 31, 2016 and December 31, 2015
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2




PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
PITNEY BOWES INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; in thousands, except per share amounts)
 
Three Months Ended March 31,
 
2016
 
2015
Revenue:
 

 
 

Equipment sales
$
159,361

 
$
165,964

Supplies
72,051

 
73,368

Software
78,058

 
86,357

Rentals
104,090

 
113,997

Financing
97,423

 
105,630

Support services
128,260

 
139,558

Business services
205,346

 
205,807

Total revenue
844,589

 
890,681

Costs and expenses:
 

 
 

Cost of equipment sales
71,539

 
75,013

Cost of supplies
20,690

 
22,659

Cost of software
26,815

 
29,864

Cost of rentals
20,495

 
20,701

Financing interest expense
14,915

 
18,770

Cost of support services
75,249

 
83,599

Cost of business services
135,538

 
139,919

Selling, general and administrative
326,882

 
314,529

Research and development
26,568

 
26,048

Restructuring charges, net
6,933

 
(81
)
Interest expense, net
19,301

 
24,064

Total costs and expenses
744,925

 
755,085

Income from continuing operations before income taxes
99,664

 
135,596

Provision for income taxes
37,024

 
50,547

Income from continuing operations
62,640

 
85,049

Income from discontinued operations, net of tax
—

 
157

Net income
62,640

 
85,206

Less: Preferred stock dividends attributable to noncontrolling interests
4,594

 
4,594

Net income attributable to Pitney Bowes Inc.
$
58,046

 
$
80,612

Amounts attributable to common stockholders:
 

 
 

Net income from continuing operations
$
58,046

 
$
80,455

Income from discontinued operations, net of tax
—

 
157

Net income attributable to Pitney Bowes Inc.
$
58,046

 
$
80,612

Basic earnings per share attributable to common stockholders:
 

 
 

Continuing operations
$
0.30

 
$
0.40

Discontinued operations
—

 
—

Net income attributable to Pitney Bowes Inc.
$
0.30

 
$
0.40

Diluted earnings per share attributable to common stockholders:
 

 
 

Continuing operations
$
0.30

 
$
0.40

Discontinued operations
—

 
—

Net income attributable to Pitney Bowes Inc.
$
0.30

 
$
0.40

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,
 
2016
 
2015
Net income
$
62,640

 
$
85,206

Less: Preferred stock dividends attributable to noncontrolling interests
4,594

 
4,594

Net income attributable to Pitney Bowes Inc.
58,046

 
80,612

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translations
39,849

 
(72,179
)
Net unrealized (loss) gain on cash flow hedges, net of tax of $(18), and $341, respectively
(28
)
 
549

Net unrealized gain on investment securities, net of tax of $2,029 and $1,012, respectively
3,454

 
1,730

Adjustments to pension and postretirement plans, net of tax of $(777) and $0, respectively
(1,230
)
 
—

Amortization of pension and postretirement costs, net of tax of $3,799, and $4,167, respectively
6,748

 
7,409

Other comprehensive income (loss), net of tax
48,793

 
(62,491
)
Comprehensive income attributable to Pitney Bowes Inc.
$
106,839

 
$
18,121





































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, 2016
 
December 31, 2015
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
612,987

 
$
650,557

Short-term investments
122,147

 
117,021

Accounts receivable (net of allowance of $10,056 and $9,262, respectively)
383,839

 
457,327

Short-term finance receivables (net of allowance of $14,196 and $15,514, respectively)
912,755

 
935,170

Inventories
100,353

 
88,824

Current income taxes
11,494

 
6,584

Other current assets and prepayments
70,609

 
64,325

Total current assets
2,214,184

 
2,319,808

Property, plant and equipment, net
335,760

 
330,088

Rental property and equipment, net
178,877

 
180,662

Long-term finance receivables (net of allowance of $5,584 and $6,249, respectively)
741,138

 
763,054

Goodwill
1,765,002

 
1,745,957

Intangible assets, net
184,047

 
187,378

Non-current income taxes
68,437

 
70,294

Other assets
518,377

 
525,891

Total assets
$
6,005,822

 
$
6,123,132

 
 
 
 
LIABILITIES, NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY
 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
1,311,486

 
$
1,448,321

Current income taxes
27,471

 
16,620

Current portion of long-term debt and notes payable
269,732

 
461,085

Advance billings
356,412

 
353,025

Total current liabilities
1,965,101

 
2,279,051

Deferred taxes on income
216,648

 
205,668

Tax uncertainties and other income tax liabilities
67,502

 
68,429

Long-term debt
2,775,213

 
2,489,583

Other non-current liabilities
561,720

 
605,310

Total liabilities
5,586,184

 
5,648,041

 
 
 
 
Commitments and contingencies (See Note 13)


 


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

 
296,370

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

 
1

Cumulative preference stock, no par value, $2.12 convertible
492

 
505

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

 
323,338

Additional paid-in capital
145,755

 
161,280

Retained earnings
5,177,573

 
5,155,537

Accumulated other comprehensive loss
(839,842
)
 
(888,635
)
Treasury stock, at cost (131,097,268 and 127,816,704 shares, respectively)
(4,684,049
)
 
(4,573,305
)
Total Pitney Bowes, Inc. stockholders’ equity
123,268

 
178,721

Total liabilities, noncontrolling interests and stockholders’ equity
$
6,005,822

 
$
6,123,132



See Notes to Condensed Consolidated Financial Statements

5

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


 
March 31,
 
2016
 
2015
Cash flows from operating activities:
 

 
 

Net income
$
62,640

 
$
85,206

Restructuring payments
(21,656
)
 
(21,874
)
Special pension plan contributions
(36,731
)
 
—

Tax payments related to other investments
—

 
(23,160
)
Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Loss on disposal of businesses
2,059

 
821

Depreciation and amortization
44,300

 
42,496

Gain on debt forgiveness
(10,000
)
 
—

Stock-based compensation
6,303

 
5,036

Restructuring charges, net
6,933

 
(81
)
Changes in operating assets and liabilities, net of acquisitions/divestitures:
 

 
 

Decrease in accounts receivable
76,559

 
48,943

Decrease in finance receivables
54,863

 
64,590

Increase in inventories
(11,489
)
 
(12,029
)
Increase in other current assets and prepayments
(7,978
)
 
(13,285
)
Decrease in accounts payable and accrued liabilities
(115,029
)
 
(157,304
)
Increase in current and non-current income taxes
13,380

 
53,429

Increase in advance billings
1,289

 
30,971

Other, net
(7,077
)
 
128

Net cash provided by operating activities
58,366

 
103,887

Cash flows from investing activities:
 

 
 

Purchases of available-for-sale securities
(31,661
)
 
(69,201
)
Proceeds from sales/maturities of available-for-sale securities
46,209

 
68,411

Capital expenditures
(40,504
)
 
(43,908
)
Acquisition of businesses, net of cash acquired
(13,371
)
 
—

Change in reserve account deposits
(16,253
)
 
(20,077
)
Other investing activities
(4,399
)
 
(593
)
Net cash used in investing activities
(59,979
)
 
(65,368
)
Cash flows from financing activities:
 

 
 

Proceeds from the issuance of long-term debt
300,000

 
—

Principal payments of long-term debt
(370,952
)
 
(274,879
)
Increase in short-term borrowings, net
179,550

 
100,000

Dividends paid to stockholders
(36,010
)
 
(37,804
)
Common stock repurchases
(128,451
)
 
—

Other financing activities
—

 
713

Net cash used in financing activities
(55,863
)
 
(211,970
)
Effect of exchange rate changes on cash and cash equivalents
19,906

 
(34,935
)
Decrease in cash and cash equivalents
(37,570
)
 
(208,386
)
Cash and cash equivalents at beginning of period
650,557

 
1,054,118

Cash and cash equivalents at end of period
$
612,987

 
$
845,732

Cash interest paid
$
59,566

 
$
68,187

Cash income tax payments, net of refunds
$
25,585

 
$
21,197

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.

We have prepared the accompanying unaudited Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In addition, the December 31, 2015 Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In management's opinion, all adjustments, consisting only of normal recurring adjustments, considered necessary to fairly state our financial position, results of operations and cash flows for the periods presented have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2016.
These statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report to Stockholders on Form 10-K for the year ended December 31, 2015 (2015 Annual Report).
In 2015, we determined that certain investments were classified as cash and cash equivalents and made reclassifications primarily between short-term investments and cash and cash equivalents. Accordingly, the Consolidated Statements of Cash Flows for the period ended March 31, 2015 has been revised to reduce beginning cash and cash equivalents by $25 million and ending cash and cash equivalents by $26 million and investments have been increased in these same periods.
New Accounting Pronouncements - Standards Adopted in 2016
In September 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2015-16, Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. Consistent with existing guidance, the new guidance requires an acquirer to disclose the nature and amount of measurement period adjustments.
We adopted this standard as of January 1, 2016, and will apply when applicable.

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

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. This standard is effective for fiscal periods beginning after December 15, 2015. We retrospectively adopted this ASU effective January 1, 2016. Accordingly, the Consolidated Balance Sheet at December 31, 2015, has been revised to reduce other assets and long-term debt by $18 million.

In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items, which removes the concept of extraordinary items, thereby eliminating the need for companies to assess transactions for extraordinary treatment. The standard retained the presentation and disclosure requirements for items that are unusual in nature and/or infrequent in occurrence. We adopted this standard as of January 1, 2016, and will apply when applicable.
New Accounting Pronouncements - Standards Not Yet Adopted
In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. Changes under this guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The ASU is effective for fiscal years beginning after December 15, 2017 and interim periods therein. Early adoption is permitted. We are currently assessing the impact this standard will have on our consolidated financial statements and disclosures.


7

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


In February 2016, the FASB issued ASU 2016-02, Leases. Lessees will need to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. The standard will also result in enhanced disclosures. The ASU is effective for interim and annual periods beginning after December 15, 2018. The standard requires modified retrospective transition and early adoption is permitted. We are currently assessing the impact this standard will have on our consolidated financial statements and disclosures.

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

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

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The standard requires companies to recognize revenue for the transfer of goods and services to customers in amounts that reflect the consideration the company expects to receive in exchange for those goods and services. The standard will also result in enhanced disclosures about revenue. In July 2015, the FASB approved a one-year deferral of the effective date. This standard is now effective for fiscal periods beginning after December 15, 2017. The standard can be adopted either retrospectively or as a cumulative-effect adjustment. Companies are permitted to adopt the standard as early as the original public entity effective date (fiscal periods beginning after December 15, 2016). Early adoption prior to that date is prohibited. We are currently in the process of evaluating a sample of contracts with customers under the new standard and cannot currently estimate the financial statement impact of adoption. We have not decided on the transition method we will use to adopt the new standard. Areas of potential change include, but are not limited to: units of accounting; estimating and allocating variable consideration as well as changes in variable consideration and cumulative adjustments to revenue; determining standalone selling price of software; and capitalization of certain contract costs, including sales commissions. In addition, we continue to monitor additional changes, clarifications or interpretations being undertaken by the FASB.


8

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

2. Segment Information
The principal products and services of each of our reportable segments are as follows:

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

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

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

We determine segment earnings before interest and taxes (EBIT) by deducting from segment revenue the related costs and expenses attributable to the segment. Segment EBIT excludes interest, taxes, general corporate expenses and restructuring charges that are not allocated to a particular business segment. Management uses segment EBIT to measure profitability and performance at the segment level. Management believes segment EBIT provides a useful measure of our 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,
 
2016
 
2015
North America Mailing
$
349,726

 
$
361,874

International Mailing
103,759

 
116,173

Small & Medium Business Solutions
453,485

 
478,047

Production Mail
87,425

 
99,503

Presort Services
127,396

 
121,531

Enterprise Business Solutions
214,821

 
221,034

Software Solutions
77,922

 
86,237

Global Ecommerce
98,361

 
75,386

Digital Commerce Solutions
176,283

 
161,623

Other
—

 
29,977

Total revenue
$
844,589

 
$
890,681

 
EBIT
 
Three Months Ended March 31,
 
2016
 
2015
North America Mailing
$
155,915

 
$
163,665

International Mailing
11,851

 
11,724

Small & Medium Business Solutions
167,766

 
175,389

Production Mail
6,824

 
9,032

Presort Services
28,910

 
27,494

Enterprise Business Solutions
35,734

 
36,526

Software Solutions
(2,572
)
 
4,133

Global Ecommerce
772

 
8,146

Digital Commerce Solutions
(1,800
)
 
12,279

Other
—

 
4,958

Total EBIT
201,700

 
229,152

Reconciling items:
 
 
 
Interest, net
(34,216
)
 
(42,834
)
Unallocated corporate expenses
(57,767
)
 
(50,803
)
Restructuring charges, net
(6,933
)
 
81

Acquisition and disposition-related expenses
(3,120
)
 
—

Income from continuing operations before income taxes
$
99,664

 
$
135,596


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,
 
2016
 
2015
Numerator:
 

 
 

Net income from continuing operations
$
58,046

 
$
80,455

Income from discontinued operations, net of tax
—

 
157

Net income - Pitney Bowes Inc. (numerator for diluted EPS)
58,046

 
80,612

Less: Preference stock dividend
10

 
11

Income attributable to common stockholders (numerator for basic EPS)
$
58,036

 
$
80,601

Denominator:
 

 
 

Weighted-average shares used in basic EPS
192,241

 
201,337

Effect of dilutive shares:
 

 
 

Conversion of Preferred stock and Preference stock
304

 
334

Employee stock plans
636

 
1,008

Weighted-average shares used in diluted EPS
193,181

 
202,679

Basic earnings per share:
 

 
 

Continuing operations
$
0.30

 
$
0.40

Discontinued operations
—

 
—

Net income
$
0.30

 
$
0.40

Diluted earnings per share:
 

 
 

Continuing operations
$
0.30

 
$
0.40

Discontinued operations
—

 
—

Net income
$
0.30

 
$
0.40

Anti-dilutive shares not used in calculating diluted weighted-average shares:
8,870

 
7,779


4. Inventories
Inventories are stated at the lower of cost or market. Cost is determined on the last-in, first-out (LIFO) basis for most U.S. inventories and on the first-in, first-out (FIFO) basis for most non-U.S. inventories. Inventories at March 31, 2016 and December 31, 2015 consisted of the following:
 
March 31,
2016
 
December 31,
2015
Raw materials
$
29,173

 
$
25,803

Work in process
12,304

 
6,408

Supplies and service parts
44,592

 
44,323

Finished products
26,612

 
24,618

Inventory at FIFO cost
112,681

 
101,152

Excess of FIFO cost over LIFO cost
(12,328
)
 
(12,328
)
Total inventory, net
$
100,353

 
$
88,824


11

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

5. Finance Assets
Finance Receivables
Finance receivables are comprised of sales-type lease receivables and unsecured revolving loan receivables. Sales-type lease receivables are generally due in monthly, quarterly or semi-annual installments over periods ranging from three to five years. Loan receivables arise primarily from financing services offered to our customers for postage and supplies. Loan receivables are generally due each month; however, customers may rollover outstanding balances. Interest is recognized on loan receivables using the effective interest method and related annual fees are initially deferred and recognized ratably over the annual period covered. Customer acquisition costs are expensed as incurred.
Finance receivables at March 31, 2016 and December 31, 2015 consisted of the following:
 
March 31, 2016
 
December 31, 2015
 
North America
 
International
 
Total
 
North America
 
International
 
Total
Sales-type lease receivables
 

 
 

 
 

 
 

 
 

 
 

Gross finance receivables
$
1,181,780

 
$
299,214

 
$
1,480,994

 
$
1,212,390

 
$
308,099

 
$
1,520,489

Unguaranteed residual values
98,801

 
15,721

 
114,522

 
100,000

 
15,709

 
115,709

Unearned income
(246,061
)
 
(69,164
)
 
(315,225
)
 
(252,522
)
 
(68,965
)
 
(321,487
)
Allowance for credit losses
(6,010
)
 
(3,146
)
 
(9,156
)
 
(6,735
)
 
(3,614
)
 
(10,349
)
Net investment in sales-type lease receivables
1,028,510

 
242,625

 
1,271,135

 
1,053,133

 
251,229

 
1,304,362

Loan receivables
 

 
 

 
 

 
 

 
 

 
 

Loan receivables
351,513

 
41,869

 
393,382

 
363,672

 
41,604

 
405,276

Allowance for credit losses
(9,072
)
 
(1,552
)
 
(10,624
)
 
(9,896
)
 
(1,518
)
 
(11,414
)
Net investment in loan receivables
342,441

 
40,317

 
382,758

 
353,776

 
40,086

 
393,862

Net investment in finance receivables
$
1,370,951

 
$
282,942

 
$
1,653,893

 
$
1,406,909

 
$
291,315

 
$
1,698,224


Allowance for Credit Losses
We estimate probable losses and provide an allowance for credit losses. Losses are 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 unsecured 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, 2016 and 2015 was as follows:
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
Balance at January 1, 2016
$
6,735

 
$
3,614

 
$
9,896

 
$
1,518

 
$
21,763

Amounts charged to expense
995

 
50

 
1,300

 
157

 
2,502

Write-offs and other
(1,720
)
 
(518
)
 
(2,124
)
 
(123
)
 
(4,485
)
Balance at March 31, 2016
$
6,010

 
$
3,146

 
$
9,072

 
$
1,552

 
$
19,780

 
 
 
 
 
 
 
 
 
 
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
Balance at January 1, 2015
$
10,281

 
$
5,129

 
$
10,912

 
$
1,788

 
$
28,110

Amounts charged to expense
16

 
(270
)
 
2,431

 
214

 
2,391

Write-offs and other
(1,832
)
 
(793
)
 
(2,611
)
 
(364
)
 
(5,600
)
Balance at March 31, 2015
$
8,465

 
$
4,066

 
$
10,732

 
$
1,638

 
$
24,901


Aging of Receivables
The aging of gross finance receivables at March 31, 2016 and December 31, 2015 was as follows:
 
March 31, 2016
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
1 - 90 days
$
1,159,519

 
$
294,247

 
$
347,336

 
$
41,411

 
$
1,842,513

> 90 days
22,261

 
4,967

 
4,177

 
458

 
31,863

Total
$
1,181,780

 
$
299,214

 
$
351,513

 
$
41,869

 
$
1,874,376

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
6,904

 
$
1,371

 
$
—

 
$
—

 
$
8,275

Not accruing interest
15,357

 
3,596

 
4,177

 
458

 
23,588

Total
$
22,261

 
$
4,967

 
$
4,177

 
$
458

 
$
31,863


 
December 31, 2015
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
1 - 90 days
$
1,193,232

 
$
303,017

 
$
360,052

 
$
41,117

 
$
1,897,418

> 90 days
19,158

 
5,082

 
3,620

 
487

 
28,347

Total
$
1,212,390

 
$
308,099

 
$
363,672

 
$
41,604

 
$
1,925,765

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
5,041

 
$
1,617

 
$
—

 
$
—

 
$
6,658

Not accruing interest
14,117

 
3,465

 
3,620

 
487

 
21,689

Total
$
19,158

 
$
5,082

 
$
3,620

 
$
487

 
$
28,347





13

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

Credit Quality
The extension of credit and management of credit lines to new and existing clients uses a combination of an automated credit score, where available, and a detailed manual review of the client's financial condition and, when applicable, payment history. Once credit is granted, the payment performance of the client is managed through automated collections processes and is supplemented with direct follow up should an account become delinquent. We have robust automated collections and extensive portfolio management processes. The portfolio management processes ensure that our global strategy is executed, collection resources are allocated appropriately and enhanced tools and processes are implemented as needed.
We use a third party to score the majority of the North America portfolio on a quarterly basis using a commercial credit score. We do not use a third party to score our International portfolio because the cost to do so is prohibitive, given that it is a localized process and there is no single credit score model that covers all countries.
The table below shows the North America portfolio at March 31, 2016 and December 31, 2015 by relative risk class (low, medium, high) 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, 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,
2016
 
December 31,
2015
Sales-type lease receivables
 

 
 

Low
$
915,792

 
$
926,387

Medium
194,933

 
192,645

High
35,904

 
37,573

Not Scored
35,151

 
55,785

Total
$
1,181,780

 
$
1,212,390

Loan receivables
 

 
 

Low
$
248,426

 
$
260,204

Medium
82,061

 
85,671

High
9,550

 
10,810

Not Scored
11,476

 
6,987

Total
$
351,513

 
$
363,672



14

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

6. Acquisitions, Intangible Assets and Goodwill
Acquisitions
In June 2015, we acquired 100% of the outstanding shares of Borderfree. The results of operations of Borderfree are included in our consolidated results from the date of acquisition. Our consolidated operating results for the three months ended March 31, 2016 include revenue of $25 million from Borderfree operations. On a supplemental pro forma basis, had we acquired Borderfree on January 1, 2015, our revenues would have been $25 million higher for the three months ended March 31, 2015. The impact on our earnings would not have been material.

On January 12, 2016, we acquired Enroute for $14 million in cash plus potential additional payments during the periods 2017-2019 based on the achievement of revenue targets during the periods 2016-2018. Enroute is a software-as-a-service enterprise retail and fulfillment solutions company and is reported within our Global Ecommerce segment.
Intangible Assets
Intangible assets consisted of the following:
 
March 31, 2016
 
December 31, 2015
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships
$
445,179

 
$
(283,209
)
 
$
161,970

 
$
437,459

 
$
(272,353
)
 
$
165,106

Software & technology
151,337

 
(137,215
)
 
14,122

 
149,591

 
(135,198
)
 
14,393

Trademarks & other
36,178

 
(28,223
)
 
7,955

 
35,314

 
(27,435
)
 
7,879

Total intangible assets
$
632,694

 
$
(448,647
)
 
$
184,047

 
$
622,364

 
$
(434,986
)
 
$
187,378


Amortization expense was $11 million and $8 million for the three months ended March 31, 2016 and 2015, respectively.
Future amortization expense for intangible assets as of March 31, 2016 was as follows:
Remaining for year ending December 31, 2016
$
28,051

Year ending December 31, 2017
28,294

Year ending December 31, 2018
25,695

Year ending December 31, 2019
22,606

Year ending December 31, 2020
17,795

Thereafter
61,606

Total
$
184,047

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










15

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


Goodwill
The changes in the carrying value of goodwill for the three months ended March 31, 2016 were as follows:
 
December 31, 2015
 
Acquisitions
 
Foreign currency translation
 
March 31,
2016
North America Mailing
$
296,053

 
$
—

 
$
5,497

 
$
301,550

International Mailing
148,351

 
—

 
5,566

 
153,917

Small & Medium Business Solutions
444,404

 
—

 
11,063

 
455,467

Production Mail
105,757

 
—

 
1,178

 
106,935

Presort Services
196,890

 


 
—

 
196,890

Enterprise Business Solutions
302,647

 
—

 
1,178

 
303,825

Software Solutions
674,976

 
—

 
(965
)
 
674,011

Global Ecommerce
323,930

 
7,769

 
—

 
331,699

Digital Commerce Solutions
998,906

 
7,769

 
(965
)
 
1,005,710

Total goodwill
$
1,745,957

 
$
7,769

 
$
11,276

 
$
1,765,002




16

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.
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, 2016 and December 31, 2015. 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.
 
March 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
20,453

 
$
181,894

 
$
—

 
$
202,347

Equity securities
—

 
22,413

 
—

 
22,413

Commingled fixed income securities
—

 
23,811

 
—

 
23,811

Debt securities - U.S. and foreign governments, agencies and municipalities
120,388

 
12,537

 
—

 
132,925

Debt securities - corporate
—

 
62,671

 
—

 
62,671

Mortgage-backed / asset-backed securities
—

 
165,354

 
—

 
165,354

Derivatives
 
 
 
 
 

 


Foreign exchange contracts
—

 
145

 
—

 
145

Total assets
$
140,841

 
$
468,825

 
$
—

 
$
609,666

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$
—

 
$
(5,507
)
 
$
—

 
$
(5,507
)
Total liabilities
$
—

 
$
(5,507
)
 
$
—

 
$
(5,507
)


17

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

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

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
41,215

 
$
292,412

 
$
—

 
$
333,627

Equity securities
—

 
24,538

 
—

 
24,538

Commingled fixed income securities
—

 
22,571

 
—

 
22,571

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

 
12,566

 
—

 
114,801

Debt securities - corporate
—

 
62,884

 
—

 
62,884

Mortgage-backed / asset-backed securities
—

 
178,234

 
—

 
178,234

Derivatives
 

 
 

 
 

 


Foreign exchange contracts
—

 
1,716

 
—

 
1,716

Total assets
$
143,450

 
$
594,921

 
$
—

 
$
738,371

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$
—

 
$
(5,387
)
 
$
—

 
$
(5,387
)
Total liabilities
$
—

 
$
(5,387
)
 
$
—

 
$
(5,387
)
Investment Securities
The valuation of investment securities is based on the market approach using inputs that are observable, or can be corroborated by observable data, in an active marketplace. The following information relates to our classification into the fair value hierarchy:
•
Money Market Funds / Commercial Paper: Money market funds typically invest in government securities, certificates of deposit, commercial paper and other highly liquid, low risk securities. Money market funds are principally used for overnight deposits and are classified as Level 1 when unadjusted quoted prices in active markets are available and as Level 2 when they are not actively traded on an exchange. Direct investments in commercial paper are not listed on an exchange in an active market and are classified as Level 2.
•
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.


18

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 unaudited Condensed Consolidated Balance Sheets as cash and cash equivalents, short-term investments and other assets depending on the type of investment and maturity. Unrealized holding gains and losses are recorded, net of tax, in accumulated other comprehensive loss (AOCL).
Available-for-sale securities at March 31, 2016 and December 31, 2015 consisted of the following:
 
March 31, 2016
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
U.S. and foreign governments, agencies and municipalities
$
129,918

 
$
3,328

 
$
(321
)
 
$
132,925

Corporate notes and bonds
61,181

 
1,869

 
(379
)
 
62,671

Commingled fixed income securities
1,542

 
14

 
—

 
1,556

Mortgage-backed / asset-backed securities
163,491

 
3,024

 
(1,161
)
 
165,354

Total
$
356,132

 
$
8,235

 
$
(1,861
)
 
$
362,506

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

 
$
1,804

 
$
(1,268
)
 
$
114,801

Corporate notes and bonds
63,140

 
823

 
(1,079
)
 
62,884

Mortgage-backed / asset-backed securities
177,821

 
1,901

 
(1,488
)
 
178,234

Total
$
355,226

 
$
4,528

 
$
(3,835
)
 
$
355,919


At March 31, 2016, investment securities that were in a loss position for 12 or more continuous months had aggregate unrealized holding losses of $1 million and an estimated fair value of $39 million, and investment securities that were in a loss position for less than 12 continuous months had aggregate unrealized holding losses of $1 million and an estimated fair value of $59 million.

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

We have not recognized an other-than-temporary impairment on any of the investment securities in an unrealized loss position because we do not intend to sell these securities, it is more likely than not that we will not be required to sell these securities before recovery of the unrealized losses and we expect to receive the contractual principal and interest on these investment securities.

Scheduled maturities of available-for-sale securities at March 31, 2016 were as follows:
 
Amortized cost
 
Estimated fair value
Within 1 year
$
64,649

 
$
64,711

After 1 year through 5 years
78,466

 
79,906

After 5 years through 10 years
52,093

 
53,610

After 10 years
160,924

 
164,279

Total
$
356,132

 
$
362,506

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.


19

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. Further, we have no investments in auction rate securities.
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 our 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.
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.
The fair value of derivative instruments at March 31, 2016 and December 31, 2015 was as follows:
Designation of Derivatives
 
Balance Sheet Location
 
March 31,
2016
 
December 31,
2015
Derivatives designated as
hedging instruments
 
 
 
 

 
 

Foreign exchange contracts
 
Other current assets and prepayments
 
$
122

 
$
217

 
 
Accounts payable and accrued liabilities:
 
(661
)
 
(208
)
 
 
 
 
 
 
 
Derivatives not designated as
hedging instruments
 
 
 
 

 
 

Foreign exchange contracts
 
Other current assets and prepayments
 
23

 
1,499

 
 
Accounts payable and accrued liabilities:
 
(4,846
)
 
(5,179
)
 
 
 
 
 
 
 
 
 
Total derivative assets
 
$
145

 
$
1,716

 
 
Total derivative liabilities
 
(5,507
)
 
(5,387
)
 
 
Total net derivative liabilities
 
$
(5,362
)
 
$
(3,671
)

Foreign Exchange Contracts
We enter into foreign exchange contracts to mitigate the currency risk associated with the anticipated purchase of inventory between affiliates and from third parties. These contracts are designated as cash flow hedges. The effective portion of the gain or loss on cash flow hedges is included in AOCL in the period that the change in fair value occurs and is reclassified to earnings in the period that the hedged item is recorded in earnings. At March 31, 2016 and December 31, 2015, we had outstanding contracts associated with these anticipated transactions with notional amounts of $16 million and $13 million, respectively.

The amounts included in AOCL at March 31, 2016 will be recognized in earnings within the next 12 months. No amount of ineffectiveness was recorded in earnings for these designated cash flow hedges.

20

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

The following represents the results of cash flow hedging relationships for the three months ended March 31, 2016 and 2015:
 
 
Three Months Ended March 31,
 
 
Derivative Gain (Loss)
Recognized in AOCL
(Effective Portion)
 
Location of Gain (Loss)
(Effective Portion)
 
Gain (Loss) Reclassified
from AOCL to Earnings
(Effective Portion)
Derivative Instrument
 
2016
 
2015
 
 
2016
 
2015
Foreign exchange contracts
 
$
(393
)
 
$
(409
)
 
Revenue
 
$
(380
)
 
$
(396
)
 
 
 

 
 

 
Cost of sales
 
225

 
(395
)
 
 
 

 
 

 
 
 
$
(155
)
 
$
(791
)
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, 2016 mature within 12 months.
The following represents the results of our non-designated derivative instruments for the three months ended March 31, 2016 and 2015:
 
 
 
 
Three Months Ended March 31,
 
 
 
 
Derivative Gain (Loss) Recognized in Earnings
Derivatives Instrument
 
Location of Derivative Gain (Loss)
 
2016
 
2015
Foreign exchange contracts
 
Selling, general and administrative expense
 
$
(5,977
)
 
$
(208
)

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, 2016, the maximum amount of collateral that we would have been required to post had the credit-risk-related contingent features been triggered was $5 million.

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. These 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, 2016 and December 31, 2015 were as follows:
 
March 31, 2016
 
December 31, 2015
Carrying value excluding unamortized debt issuance costs
$
3,065,603

 
$
2,968,997

Fair value
$
3,203,797

 
$
3,102,890



21

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


8. Restructuring Charges
The tables below shows the activity in our restructuring reserves for the three months ended March 31, 2016 and 2015:
 
Severance and benefits costs
 
Other exit
costs
 
Total
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

 
 
 
 
 
 
Balance at January 1, 2015
$
81,836

 
$
8,343

 
$
90,179

Expenses, net
(51
)
 
(30
)
 
(81
)
Cash payments
(19,884
)
 
(1,990
)
 
(21,874
)
Balance at March 31, 2015
$
61,901

 
$
6,323

 
$
68,224


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.

9. Debt
At March 31, 2016 and December 31, 2015, total debt consisted of the following:


Interest rate
 
March 31, 2016
 
December 31, 2015
Commercial paper
1.13%
 
$
269,550

 
$
90,000

Notes due January 2016
4.75%
 
—

 
370,914

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 March 2024
4.625%
 
500,000

 
500,000

Notes due January 2037
5.25%
 
115,041

 
115,041

Notes due March 2043
6.7%
 
425,000

 
425,000

Term loans
Variable
 
450,000

 
150,000

Other debt
 
 
5,770

 
15,758

Principal amount
 
 
3,050,470

 
2,951,822

Less: unamortized discount and debt issuance costs
 
 
25,630

 
23,617

Plus: unamortized interest rate swap proceeds
 
 
20,105

 
22,463

Total debt
 
 
3,044,945

 
2,950,668

Less: current portion long-term debt and notes payable
 
 
269,732

 
461,085

Long-term debt
 
 
$
2,775,213

 
$
2,489,583


In January 2016, we borrowed $300 million under a term loan and used the proceeds to repay a portion of the $371 million, 4.75% notes due January 15, 2016. The remaining portion of the loan was repaid using cash from operations. The new term loan bears interest at the applicable Eurodollar Rate plus 1.25% and matures in December 2020. The applicable Eurodollar Rate at March 31, 2016 was .62%.

22

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


In October 2014, we received a loan from the State of Connecticut Department of Economic and Community Development (CDECD). The loan consisted of a $15 million development loan and $1 million jobs-training grant that was subject to certain conditions being met. We satisfied the conditions related to the $1 million jobs-training grant during 2015. The loan agreement provided that $10 million of the loan would be forgiven if we satisfied certain employment obligations. In March 2016, we satisfied all criteria to receive the $10 million of loan forgiveness and, as a result, recorded the loan forgiveness as reductions of long-term debt and selling, general and administrative expenses.


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,
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Service cost
$
32

 
$
38

 
$
527

 
$
565

 
$
501

 
$
679

Interest cost
18,830

 
18,859

 
5,661

 
6,063

 
2,136

 
2,375

Expected return on plan assets
(25,589
)
 
(26,044
)
 
(8,472
)
 
(8,839
)
 
—

 
—

Amortization of transition credit
—

 
—

 
(2
)
 
(2
)
 
—

 
—

Amortization of prior service (credit) cost
(15
)
 
2

 
(17
)
 
(17
)
 
74

 
74

Amortization of net actuarial loss
6,706

 
7,648

 
1,343

 
1,480

 
1,360

 
2,391

Settlement (1)
1,098

 
—

 
—

 
—

 
—

 
—

Net periodic benefit cost (income)
$
1,062

 
$
503

 
$
(960
)
 
$
(750
)
 
$
4,071

 
$
5,519


(1) Included in restructuring charges, net in the Condensed Consolidated Statements of Income.
Through March 31, 2016 and March 31, 2015, contributions to our U.S. pension plans were $4 million and $3 million, respectively, and contributions to our foreign plans were $38 million and $9 million, respectively. Nonpension postretirement benefit plan contributions were $4 million and $6 million through March 31, 2016 and March 31, 2015, respectively.

11. Income Taxes
The effective tax rate for the three months ended March 31, 2016 and 2015 was 37.1% and 37.3%, respectively. The effective tax rate for 2016 and 2015 each include a $3 million charge from the write-off of deferred tax assets associated with the expiration of out-of-the-money vested stock options and the vesting of restricted stock units previously granted to our employees.
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. The IRS examinations of our consolidated U.S. income tax returns for tax years prior to 2012 are closed to audit. Additionally, various post-2005 U.S. state and local tax returns are subject to examination. In Canada, the examination of our tax filings prior to 2009 are closed to audit, except for the pending application of legal principles to specific issues arising in earlier years. Other significant jurisdictions in which we have, or have recently completed, tax examinations include France, closed through the end of 2012, Germany closed through the end of 2011 and except for an item under appeal the U.K. is closed through the end of 2011. We have other less significant tax fillings currently subject to examination.

23

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

12. Noncontrolling Interests (Preferred Stockholders’ Equity in Subsidiaries)
Pitney Bowes International Holdings, Inc. (PBIH), a subsidiary of the Company, has 300,000 shares of outstanding perpetual voting preferred stock valued at $300 million held by certain institutional investors (PBIH Preferred Stock). The holders of PBIH Preferred Stock are entitled as a group to 25% of the combined voting power of all classes of capital stock of PBIH. All outstanding common stock of PBIH, representing the remaining 75% of the combined voting power of all classes of capital stock, is owned directly or indirectly by the Company. The PBIH Preferred Stock is entitled to cumulative dividends at a rate of 6.125% through April 30, 2016. Commencing October 30, 2016, the PBIH Preferred Stock is redeemable, in whole or in part, at the option of PBIH. If the PBIH Preferred Stock is not redeemed in whole on October 30, 2016, the dividend rate increases 50% and will increase 50% every six months thereafter. No dividends were in arrears at March 31, 2016 or December 31, 2015.
13. 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.

14. Stockholders’ Equity

Changes in stockholders’ equity for the three months ended March 31, 2016 and 2015 were as follows:
 
Preferred
stock
 
Preference
stock
 
Common stock
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Treasury stock
 
Total equity
Balance at January 1, 2016
$
1

 
$
505

 
$
323,338

 
$
161,280

 
$
5,155,537

 
$
(888,635
)
 
$
(4,573,305
)
 
$
178,721

Net income
—

 
—

 
—

 
—

 
58,046

 
—

 
—

 
58,046

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
48,793

 
—

 
48,793

Dividends declared
—

 
—

 
—

 
—

 
(36,010
)
 
—

 
—

 
(36,010
)
Issuance of common stock
—

 
—

 
—

 
(21,555
)
 
—

 
—

 
17,421

 
(4,134
)
Conversion to common stock

 
(13
)
 
—

 
(273