Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
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 (§232.405 of this chapter) 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 (Do not check if a smaller reporting company)
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 13(a) of the Exchange 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 May 3, 2018, 187,550,191 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, 2018 and 2017
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017
 
 
 
 
Condensed Consolidated Balance Sheets at March 31, 2018 and December 31, 2017
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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,
 
2018
 
2017
Revenue:
 

 
 

Equipment sales
$
155,808

 
$
162,974

Supplies
65,374

 
66,818

Software
81,616

 
77,867

Rentals
95,280

 
99,870

Financing
80,103

 
85,745

Support services
118,463

 
118,847

Business services
386,538

 
224,519

Total revenue
983,182

 
836,640

Costs and expenses:
 

 
 

Cost of equipment sales
78,751

 
69,562

Cost of supplies
21,147

 
21,471

Cost of software
25,353

 
25,308

Cost of rentals
24,596

 
20,662

Financing interest expense
12,225

 
12,974

Cost of support services
75,572

 
73,354

Cost of business services
297,399

 
150,843

Selling, general and administrative
312,108

 
304,847

Research and development
32,784

 
31,856

Restructuring charges, net
1,021

 
2,082

Other components of net pension and postretirement cost
(1,719
)
 
1,456

Interest expense, net
30,853

 
25,676

Total costs and expenses
910,090

 
740,091

Income before income taxes
73,092

 
96,549

Provision for income taxes
19,579

 
31,416

Net income
$
53,513

 
$
65,133

Earnings per share attributable to common stockholders:
 

 
 

Basic
$
0.29

 
$
0.35

Diluted
$
0.28

 
$
0.35

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,
 
2018
 
2017
Net income
$
53,513

 
$
65,133

Other comprehensive income, net of tax:
 
 
 
Foreign currency translations
15,512

 
19,915

Net unrealized gain on cash flow hedges, net of tax of $162 and $353, respectively
486

 
576

Net unrealized (loss) gain on investment securities, net of tax of $(1,366) and $344, respectively
(3,992
)
 
585

Adjustments to pension and postretirement plans, net of tax of $(304)
—

 
(1,482
)
Amortization of pension and postretirement costs, net of tax of $2,803 and $3,517, respectively
8,172

 
6,708

Other comprehensive income, net of tax
20,178

 
26,302

Comprehensive income attributable to Pitney Bowes Inc.
$
73,691

 
$
91,435










































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, 2018
 
December 31, 2017
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
719,875

 
$
1,009,021

Short-term investments
55,603

 
48,988

Accounts receivable (net of allowance of $15,889 and $15,985, respectively)
488,028

 
524,424

Short-term finance receivables (net of allowance of $12,821 and $12,187, respectively)
792,802

 
828,003

Inventories
96,224

 
89,679

Current income taxes
42,274

 
58,439

Other current assets and prepayments
94,227

 
77,954

Total current assets
2,289,033

 
2,636,508

Property, plant and equipment, net
386,977

 
379,044

Rental property and equipment, net
182,727

 
185,741

Long-term finance receivables (net of allowance of $6,959 and $6,446 respectively)
640,987

 
652,087

Goodwill
1,965,984

 
1,952,444

Intangible assets, net
261,318

 
272,186

Noncurrent income taxes
61,367

 
59,909

Other assets
531,225

 
540,796

Total assets
$
6,319,618

 
$
6,678,715

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
1,375,166

 
$
1,486,741

Current income taxes
9,457

 
8,823

Current portion of long-term debt
327,429

 
271,057

Advance billings
292,174

 
288,372

Total current liabilities
2,004,226

 
2,054,993

Deferred taxes on income
239,472

 
234,643

Tax uncertainties and other income tax liabilities
112,520

 
116,551

Long-term debt
3,248,713

 
3,559,278

Other noncurrent liabilities
499,794

 
524,689

Total liabilities
6,104,725

 
6,490,154

 
 
 
 
Commitments and contingencies (See Note 13)


 


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

 
1

Cumulative preference stock, no par value, $2.12 convertible
422

 
441

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

 
323,338

Additional paid-in capital
119,647

 
138,367

Retained earnings
5,235,874

 
5,229,584

Accumulated other comprehensive loss
(771,995
)
 
(792,173
)
Treasury stock, at cost (136,194,172 and 136,734,174 shares, respectively)
(4,692,394
)
 
(4,710,997
)
Total stockholders’ equity
214,893

 
188,561

Total liabilities and stockholders’ equity
$
6,319,618

 
$
6,678,715





See Notes to Condensed Consolidated Financial Statements

5

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


 
Three Months Ended March 31,
 
2018
 
2017
Cash flows from operating activities:
 

 
 

Net income
$
53,513

 
$
65,133

Restructuring payments
(15,702
)
 
(12,416
)
Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
50,820

 
44,295

Stock-based compensation
3,273

 
5,638

Restructuring charges, net
1,021

 
2,082

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

 
 

Decrease in accounts receivable
37,525

 
67,765

Decrease in finance receivables
49,350

 
63,390

Increase in inventories
(3,823
)
 
(22,195
)
Increase in other current assets and prepayments
(22,683
)
 
(9,746
)
Decrease in accounts payable and accrued liabilities
(70,476
)
 
(32,829
)
Increase in current and non-current income taxes
13,369

 
13,542

Decrease in advance billings
(2,106
)
 
(9,194
)
Other, net
(11,409
)
 
(21,459
)
Net cash provided by operating activities
82,672

 
154,006

Cash flows from investing activities:
 

 
 

Purchases of available-for-sale securities
(29,922
)
 
(34,308
)
Proceeds from sales/maturities of available-for-sale securities
15,044

 
34,396

Net activity from short-term and other investments
16,562

 
(4,303
)
Capital expenditures
(42,923
)
 
(35,920
)
Acquisition of businesses, net of cash acquired
(2,407
)
 
(7,889
)
Change in reserve account deposits
6,654

 
(19,346
)
Other investing activities
(1,250
)
 
(1,500
)
Net cash used in investing activities
(38,242
)
 
(68,870
)
Cash flows from financing activities:
 

 
 

Principal payments of long-term debt
(255,045
)
 
(79,278
)
Dividends paid to stockholders
(35,016
)
 
(34,567
)
Other financing activities
(50,256
)
 
(5,658
)
Net cash used in financing activities
(340,317
)
 
(119,503
)
Effect of exchange rate changes on cash and cash equivalents
6,741

 
9,398

Decrease in cash and cash equivalents
(289,146
)
 
(24,969
)
Cash and cash equivalents at beginning of period
1,009,021

 
764,522

Cash and cash equivalents at end of period
$
719,875

 
$
739,553

Cash interest paid
$
46,998

 
$
52,989

Cash income tax payments, net of refunds
$
4,560

 
$
18,511











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 customers. 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, 2017 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, 2018. 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, 2017 (2017 Annual Report).
Accounting Pronouncements Adopted on January 1, 2018
We adopted Accounting Standard Update (ASU) 2014-09, Revenue from Contracts with Customers (ASC 606), which requires companies to recognize revenue when or as control of a promised good or service is transferred to a client in amounts that reflect consideration the company expects to receive in exchange for those goods and services. See Note 2 for more information on the adoption of ASC 606.
We adopted ASU No. 2016-16, Income Taxes: Intra-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 prior guidance, the tax effects of transfers were deferred until the transferred asset was sold or otherwise recovered through use. We recognized the cumulative effect of initially applying this standard as a net reduction of $3 million to opening retained earnings.
We adopted ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Benefit Cost. The ASU requires only the service cost component of net periodic benefit cost be presented in the same income statement line item as other employee compensation costs. Other components of the net periodic benefit cost are now presented separately in Other components of net pension and postretirement costs in the Consolidated Statements of Income. Prior period information has been recast to conform to the current period presentation.
We adopted 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. There was no impact on our consolidated financial statements.
We early adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The ASU changes the recognition and presentation requirements as well as the cost and complexity of applying hedge accounting by easing the requirements for effectiveness testing and hedge documentation. There was no impact on our consolidated financial statements.
We adopted 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. There was no impact on our consolidated financial statements.
We adopted 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 in evaluating whether transactions should be accounted for as an acquisition or disposal of assets or a business. There was no impact 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)

New Accounting Pronouncements - Not Yet Adopted
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI). The ASU permits a reclassification of the disproportionate income tax effects of the 2017 Tax Cuts and Jobs Act (the Act) on items within AOCI to retained earnings. The ASU also requires certain new disclosures, some of which are applicable for all companies. The standard is effective beginning January 1, 2019; however, early adoption is permitted. We are currently assessing the impact this standard will have 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 as of the beginning of the period of adoption. The standard is effective beginning January 1, 2019; however, early adoption is permitted. 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 beginning January 1, 2019. We are currently evaluating the impact this standard will have on our consolidated financial statements.
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 expected credit losses for all financial instruments held at the reporting date based on historical experience, current conditions and reasonably 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 beginning January 1, 2020. 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, requires lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability and provide enhanced disclosures. The standard is effective beginning January 1, 2019. We are currently assessing the impact this standard will have on our consolidated financial statements and disclosures.
2. Revenue from Contracts with Customers
Adoption of ASC 606
We adopted ASU 2014-09, Revenue from Contracts with Customers (ASC 606) using the modified retrospective approach.  Prior period information was not restated and continues to be reported under the accounting standards in effect for those periods. We recognized a cumulative effect adjustment from the adoption of this standard that reduced opening retained earnings by $9 million.  Significant components of the cumulative effect adjustment include:
•
The write-off of previously capitalized deferred marketing costs that did not meet the criteria for capitalization under ASC 606.
•
The capitalization of certain costs to obtain a contract, primarily sales commissions, that are permitted to be capitalized under ASC 606.
•
The establishment of deferred revenue related to the early renewal of software and data license contracts with terms beginning in 2018, as ASC 606 requires revenue recognition at the commencement of the license term.
•
The write-off of deferred revenues and related costs for certain software licenses bundled with a lease that are recognized at time of delivery under ASC 606.
•
The write-off of advance billings related to certain software data products that are recognized upon delivery under ASC 606.







8

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

The pro forma impact on our consolidated financial statements as if they were presented under the prior guidance is as follows:
 
Three months ended March 31, 2018
 
As reported
 
Pro forma
 
Total increase (decrease)
Income Statement
 
 
 
 
 
Total revenue
$
983,182

 
$
970,451

 
$
12,731

Equipment sales
$
155,808

 
$
153,607

 
$
2,201

Software
$
81,616

 
$
70,597

 
$
11,019

Business services
$
386,538

 
$
387,027

 
$
(489
)
 
 
 
 
 
 
Total costs and expenses
$
910,090

 
$
907,747

 
$
2,343

Cost of equipment sales
$
78,751

 
$
76,738

 
$
2,013

Cost of software
$
25,353

 
$
24,071

 
$
1,282

Selling, general and administrative
$
312,108

 
$
313,060

 
$
(952
)
 
 
 
 
 
 
Income before taxes
$
73,092

 
$
62,704

 
$
10,388

Provision for income taxes
$
19,579

 
$
16,931

 
$
2,648

Net income
$
53,513

 
$
45,773

 
$
7,740

 
 
 
 
 
 
Basic earnings per share attributable to common stockholders
$
0.29

 
$
0.25

 
$
0.04

Diluted earnings per share attributable to common stockholders
$
0.28

 
$
0.24

 
$
0.04

The most significant change to the Consolidated Statement of Income for the three months ended March 31, 2018, was due to higher software revenue and income before taxes of $11 million and $9 million, respectively, under ASC 606 primarily as a result of the renewal of software data licenses with a term beginning in 2018.

9

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

 
March 31, 2018
 
As reported
 
Pro forma
 
Total increase (decrease)
Balance Sheet
 
 
 
 
 
Total Assets
$
6,319,618

 
$
6,331,186

 
$
(11,568
)
Accounts receivable, net
$
488,028

 
$
486,327

 
$
1,701

Current income taxes
$
42,274

 
$
42,472

 
$
(198
)
Other current assets and prepayments
$
94,227

 
$
97,909

 
$
(3,682
)
Noncurrent income taxes
$
61,367

 
$
61,571

 
$
(204
)
Other assets
$
531,225

 
$
540,410

 
$
(9,185
)
 
 
 
 
 
 
Total Liabilities
$
6,104,725

 
$
6,115,357

 
$
(10,632
)
Accounts payable and accrued liabilities
$
1,375,166

 
$
1,373,465

 
$
1,701

Current income taxes
$
9,457

 
$
6,034

 
$
3,423

Advance billings
$
292,174

 
$
302,586

 
$
(10,412
)
Deferred taxes on income
$
239,472

 
$
243,843

 
$
(4,371
)
Other noncurrent liabilities
$
499,794

 
$
500,767

 
$
(973
)
 
 
 
 
 
 
Total Stockholder's equity
$
214,893

 
$
215,829

 
$
(936
)
Retained earnings
$
5,235,874

 
$
5,236,690

 
$
(816
)
Accumulated other comprehensive loss
$
(771,995
)
 
$
(771,875
)
 
$
(120
)
The most significant changes to the Consolidated Balance Sheet at March 31, 2018 were:
•
Lower Other current assets and prepayments due to the write-off of prepaid costs related to software licenses and software data products, which are now recognized at time of delivery rather than ratably under previous guidance.
•
Lower Other assets primarily due to the write-off of deferred marketing costs at January 1, 2018, offset by the capitalization of certain costs to obtain a contract, primarily related to sales commissions.
•
Lower Advance billings due to the write-off of deferred revenue from software licenses bundled with leases and data products, which are now recognized at time of delivery rather than ratably under previous guidance.
Cash Flow Statement
The adoption of ASC 606 had no impact on our Consolidated Statements of Cash Flows.
Significant Accounting Policies
The most significant impact of ASC 606 on our consolidated financial statements will be in the timing of recognizing certain revenues and costs to obtain a contract related to software and software related products.  We will continue to recognize revenue from equipment sales under sales-type leases and related financing income and rental of postage meters and mailing equipment in accordance with ASC 840, Leases.
We applied the following practical expedients and policy elections when adopting ASC 606:
•
Costs incurred to obtain a contract with a customer are expensed if the amortization period of the asset is one year or less.
•
With the exception of certain services contracts, all taxes assessed by government authorities, such as sales and use taxes, value added taxes and excise tax, are excluded from the transaction price.
•
The transaction price is not adjusted for a significant financing component when a performance obligation is satisfied within one year.
•
Revenue is recognized based on the amount billable to the customer, when that amount corresponds to the value transferred to the customer.
•
Shipping and handling activities are accounted for as a fulfillment activity rather than a separate performance obligation.
•
We reflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price.
Significant changes to accounting policies disclosed in our 2017 Annual Report due to the adoption of ASC 606 are discussed below.

10

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

Software Sales and Integration Services
Our software products include software and data licenses that are either “right to use” or “right to access”. A majority of our software and data license products are considered right to use and are generally distinct from other promised goods and services within a contract. Revenue for right to use software and data licenses is recognized at a point in time when control has transferred to the customer, which is generally upon delivery or acceptance for those licenses requiring significant integration or customization. Revenue from renewals are recognized at the beginning of the license term.
Right to access licenses generally bundle certain software licenses, data licenses and data updates that are highly interdependent and the updates are critical to the continued use of the license by the customer. Revenue for these arrangements are deferred and recognized ratably over the license term.
We generally invoice customers upon delivery of our software and data licenses. Data contracts that include both data and data updates are invoiced in one or more equal installments. A contract asset is recognized on data licenses for which consideration will be received in future periods.
We allocate the transaction price based on relative standalone selling prices, which are generally based on observable selling prices in standalone transactions for our data products, maintenance and professional services. We estimate the standalone selling prices for our software licenses using the residual approach, as the selling prices are highly variable and when observable standalone selling prices exist for the other goods and services in the contract.
We often bundle software licenses with lease contracts. Revenue is recognized upon delivery of those software licenses considered distinct and functional in nature.
Costs to Obtain a Contract and Marketing Costs
Certain incremental costs to obtain a contract are capitalized as contract costs if we expect the benefit of those costs to be realized for a period greater than one year. These costs primarily relate to sales commission on multi-year equipment and software support service contracts. These costs will be amortized in a manner consistent with the timing of the related revenue over the period of contract performance or a longer period, if renewals are expected and the renewal commission is not commensurate with the initial commission. Amortization expense for the three months ended March 31, 2018 was $4 million and is included in Selling, general and administrative expenses. Unamortized contract costs at March 31, 2018 were $26 million and are included in Other assets.
Certain marketing costs associated with the acquisition of new customers are expensed as incurred since these costs do not meet the criteria of a cost to obtain a contract.












11

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

Revenue from Contracts with Customers
The following table disaggregates our revenue by major source:
 
Three months ended March 31, 2018
 
Global Ecommerce
Presort Services
North America Mailing
International Mailing
Software Solutions
Production Mail
Total Revenue from sales and services (ASC 606)
Revenue from leasing transactions and financing
Total Consolidated Revenue
Equipment sales
$
—

$
—

$
17,145

$
13,364

$
—

$
45,435

$
75,944

$
79,864

$
155,808

Supplies
—

—

38,951

21,041

—

5,382

65,374

—

65,374

Software
—

—

—

—

81,616

—

81,616

—

81,616

Rentals
—

—

730

2,167

—

—

2,897

92,383

95,280

Financing
—

—

16,577

2,976

—

—

19,553

60,550

80,103

Support services
—

—

50,744

22,278

—

45,440

118,462

—

118,462

Business services
246,590

134,458

3,803

1,688

—

—

386,539

—

386,539

 
$
246,590

$
134,458

$
127,950

$
63,514

$
81,616

$
96,257

$
750,385

$
232,797

$
983,182

 
 
 
 
 
 
 
 
 
 
Revenue from sales and services (ASC 606)
$
246,590

$
134,458

$
127,950

$
63,514

$
81,616

$
96,257

$
750,385

$
—

$
750,385

Revenue from leasing transactions and financing
—

—

197,480

34,383

—

934

—

232,797

232,797

     Total revenue
$
246,590

$
134,458

$
325,430

$
97,897

$
81,616

$
97,191

$
750,385

$
232,797

$
983,182

 
 
 
 
 
 
 
 
 
 
Timing of revenue recognition (ASC 606)
 
 
 
 
 
 
 
Products/services transferred at a point in time
$
—

$
—

$
56,096

$
34,405

$
26,057

$
50,817

$
167,375

 
 
Products/services transferred over time
246,590

134,458

71,854

29,109

55,559

45,440

583,010

 
 
      Total revenue
$
246,590

$
134,458

$
127,950

$
63,514

$
81,616

$
96,257

$
750,385

 
 
Our performance obligations are as follows:
Equipment sales and supplies: Our performance obligations generally include the sale of mailing equipment, excluding sales-type leases, and supplies. We recognize revenue upon delivery for self-install equipment and supplies and upon acceptance or installation for other equipment. We provide a warranty that our equipment is free of defects and meets stated specifications. The warranty is not considered a separate performance obligation.
Software: Our performance obligations include the sale of software licenses, maintenance, data products and professional services. Revenue for licenses is generally recognized upon delivery or over time for those licenses that require critical updates over the term of the contract.
Rentals: Our performance obligations include the fees associated with postage refills for meters.
Financing: Our performance obligations for financing revenue include services under our equipment replacement program.  The fees received for this program are recognized ratably over the contract term.
Support services: Our performance obligations include providing maintenance and professional services for our equipment. Maintenance contract revenue is recognized ratably over the contract period and revenue for professional services is recognized when services are complete.
Business services: Our performance obligations include mail processing services and ecommerce solutions. Revenue is recognized as the services are provided as these services represent a series of distinct services that are similar and the revenue is recognized as the services are provided.

Revenue from leasing transactions and financing include revenue from sales-type leases, finance income and late fees that are not accounted for under ASC 606.


12

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

Contract Assets and Advance Billings from Contracts with Customers
 
March 31, 2018
 
January 1, 2018 (1)
 
Total increase (decrease)
Contracts assets, current portion
$
4,565

 
$
5,075

 
$
(510
)
Contracts assets, noncurrent portion
$
1,752

 
$
648

 
$
1,104

Advance billings, current portion
$
236,599

 
$
238,707

 
$
(2,108
)
Advance billings, noncurrent portion
$
14,887

 
$
17,874

 
$
(2,987
)
(1) Balances adjusted for the cumulative effect of accounting change
Contract assets, current and non current, are recorded in Other current assets and prepayments and Other assets, respectively. Advance billings, current and noncurrent, are recorded in Advance billings and Other noncurrent liabilities, respectively.
Contract Assets
We record contract assets when performance obligations are satisfied in advance of invoicing the customer when the right to consideration is conditional on the satisfaction of another performance obligation within a contract. 
Advance Billings from Contracts with Customers
Advance billings are recorded when cash payments are due in advance of our performance. Items in advance billings primarily relate to support services on equipment and software licenses, subscription services and certain software data products.  Revenue is recognized ratably over the contract term.
The net decrease in advance billings at March 31, 2018 is primarily driven by revenues recognized during the period, which includes $107 million of advance billings at the beginning of the period, partially offset by advance billings in the quarter.
Future Performance Obligations
The transaction prices allocated to future performance obligations will be recognized as follows:
 
Total
 
Remainder of 2018
 
2019
 
2020-2023
North America Mailing(1)
$
269,197

 
$
91,823

 
$
90,473

 
$
86,901

International Mailing(1)
121,695

 
38,663

 
33,801

 
49,231

Production Mail(2)
8,321

 
4,194

 
3,557

 
570

Software Solutions(3)
87,868

 
40,592

 
30,440

 
16,836

Total
$
487,081

 
$
175,272

 
$
158,271

 
$
153,538

(1) Revenue streams bundled with our leasing contracts, primarily maintenance and other services
(2) Noncancellable maintenance contracts for production mail equipment for contract terms greater than 12 months
(3) Multiple-year software maintenance contracts, certain software and data licenses and data updates
The table above does not include revenue related to performance obligations for contracts with terms less than 12 months and expected consideration for those performance obligations where revenue is recognized based on the amount billable to the customer.

13

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

3. Segment Information
In January 2018, we revised our business reporting groups to reflect how we manage these groups and clients served in each market.  The Commerce Services group was formed and includes our Global Ecommerce and Presort Services segments. The principal products and services of each of our reportable segments are as follows:
Commerce Services:
Global Ecommerce: Includes the worldwide revenue and related expenses from cross-border ecommerce transactions and domestic retail and ecommerce shipping solutions, including fulfillment and returns.
Presort Services: Includes revenue and related expenses from sortation services which allow clients to qualify large mail volumes for postal worksharing discounts.
Small & Medium Business Solutions:
North America Mailing: Includes the revenue and related expenses from mailing and office 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 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.
Software Solutions:
Includes the worldwide revenue and related expenses from the licensing of customer engagement, customer information, and location intelligence software and data solutions and related support services.
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.
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, which 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. The following tables provide information about our reportable segments.

14

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,
 
2018
 
2017
Global Ecommerce
$
246,590

 
$
88,152

Presort Services
134,458

 
132,677

Commerce Services
381,048

 
220,829

North America Mailing
325,430

 
355,578

International Mailing
97,897

 
93,058

Small & Medium Business Solutions
423,327

 
448,636

Software Solutions
81,616

 
78,220

Production Mail
97,191

 
88,955

Total revenue
$
983,182

 
$
836,640

 
EBIT
 
Three Months Ended March 31,
 
2018
 
2017
Global Ecommerce
$
(7,711
)
 
$
(4,270
)
Presort Services
27,026

 
30,717

Commerce Services
19,315

 
26,447

North America Mailing
119,471

 
141,008

International Mailing
15,892

 
13,269

Small & Medium Business Solutions
135,363

 
154,277

Software Solutions
4,849

 
2,749

Production Mail
9,619

 
8,964

Total segment EBIT
169,146

 
192,437

Reconciling items:
 
 
 
Interest, net
(43,078
)
 
(38,650
)
Unallocated corporate expenses
(49,361
)
 
(55,156
)
Restructuring charges, net
(1,021
)
 
(2,082
)
Transaction costs
(2,594
)
 
—

Income before income taxes
73,092

 
96,549

Provision for income taxes
19,579

 
31,416

Net income
$
53,513

 
$
65,133



15

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

4. Earnings per Share
 
Three Months Ended March 31,
 
2018
 
2017
Numerator:
 

 
 

Net income (numerator for diluted EPS)
$
53,513

 
$
65,133

Less: Preference stock dividend
8

 
9

Income attributable to common stockholders (numerator for basic EPS)
$
53,505

 
$
65,124

Denominator:
 

 
 

Weighted-average shares used in basic EPS
186,863

 
185,982

Effect of dilutive shares
1,312

 
893

Weighted-average shares used in diluted EPS
188,175

 
186,875

 
 

 
 

Basic earnings per share
$
0.29

 
$
0.35

 
 

 
 

Diluted earnings per share
$
0.28

 
$
0.35

 
 
 
 
Anti-dilutive shares not used in calculating diluted weighted-average shares
11,636

 
11,176

5. 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 March 31, 2018 and December 31, 2017 consisted of the following:
 
March 31,
2018
 
December 31,
2017
Raw materials
$
29,150

 
$
30,166

Work in process
7,127

 
4,981

Supplies and service parts
46,049

 
45,366

Finished products
26,497

 
21,765

Inventory at FIFO cost
108,823

 
102,278

Excess of FIFO cost over LIFO cost
(12,599
)
 
(12,599
)
Total inventory, net
$
96,224

 
$
89,679


16

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

6. 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, 2018 and December 31, 2017 consisted of the following:
 
March 31, 2018
 
December 31, 2017
 
North America
 
International
 
Total
 
North America
 
International
 
Total
Sales-type lease receivables
 

 
 

 
 

 
 

 
 

 
 

Gross finance receivables
$
1,012,917

 
$
290,618

 
$
1,303,535

 
$
1,023,549

 
$
292,059

 
$
1,315,608

Unguaranteed residual values
68,719

 
14,242

 
82,961

 
74,093

 
14,202

 
88,295

Unearned income
(218,628
)
 
(62,527
)
 
(281,155
)
 
(216,720
)
 
(62,325
)
 
(279,045
)
Allowance for credit losses
(8,763
)
 
(3,083
)
 
(11,846
)
 
(7,721
)
 
(2,794
)
 
(10,515
)
Net investment in sales-type lease receivables
854,245

 
239,250

 
1,093,495

 
873,201

 
241,142

 
1,114,343

Loan receivables
 

 
 

 
 

 
 

 
 

 
 

Loan receivables
314,664

 
33,564

 
348,228

 
339,373

 
34,492

 
373,865

Allowance for credit losses
(6,950
)
 
(984
)
 
(7,934
)
 
(7,098
)
 
(1,020
)
 
(8,118
)
Net investment in loan receivables
307,714

 
32,580

 
340,294

 
332,275

 
33,472

 
365,747

Net investment in finance receivables
$
1,161,959

 
$
271,830

 
$
1,433,789

 
$
1,205,476

 
$
274,614

 
$
1,480,090


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.













17

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, 2018 and 2017 was as follows:
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
Balance at January 1, 2018
$
7,721

 
$
2,794

 
$
7,098

 
$
1,020

 
$
18,633

Amounts charged to expense
2,217

 
399

 
1,925

 
141

 
4,682

Write-offs and other
(1,175
)
 
(110
)
 
(2,073
)
 
(177
)
 
(3,535
)
Balance at March 31, 2018
$
8,763

 
$
3,083

 
$
6,950

 
$
984

 
$
19,780

 
 
 
 
 
 
 
 
 
 
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
Balance at January 1, 2017
$
8,247

 
$
2,647

 
$
8,517

 
$
1,089

 
$
20,500

Amounts charged to expense
1,758

 
178

 
639

 
144

 
2,719

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

 
$
2,569

 
$
7,369

 
$
1,076

 
$
19,830


Aging of Receivables
The aging of gross finance receivables at March 31, 2018 and December 31, 2017 was as follows:
 
March 31, 2018
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
1 - 90 days
$
960,922

 
$
284,696

 
$
305,623

 
$
33,292

 
$
1,584,533

> 90 days
51,995

 
5,922

 
9,041

 
272

 
67,230

Total
$
1,012,917

 
$
290,618

 
$
314,664

 
$
33,564

 
$
1,651,763

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
8,757

 
$
1,774

 
$
—

 
$
—

 
$
10,531

Not accruing interest
43,238

 
4,148

 
9,041

 
272

 
56,699

Total
$
51,995

 
$
5,922

 
$
9,041

 
$
272

 
$
67,230

 
December 31, 2017
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
1 - 90 days
$
971,002

 
$
286,170

 
$
330,503

 
$
34,239

 
$
1,621,914

> 90 days
52,547

 
5,889

 
8,870

 
253

 
67,559

Total
$
1,023,549

 
$
292,059

 
$
339,373

 
$
34,492

 
$
1,689,473

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
10,807

 
$
1,738

 
$
—

 
$
—

 
$
12,545

Not accruing interest
41,740

 
4,151

 
8,870

 
253

 
55,014

Total
$
52,547

 
$
5,889

 
$
8,870

 
$
253

 
$
67,559





18

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, 2018 and December 31, 2017 by relative risk class based on the relative scores of the accounts within each class. The relative scores are determined based on a number of factors, including the company type, ownership structure, payment history and financial information. A fourth class is shown for accounts that are not scored. Absence of a score is not indicative of the credit quality of the account. The degree of risk (low, medium, high), as defined by the third party, refers to the relative risk that an account in the next 12 month period may become delinquent.
•
Low risk accounts are companies with very good credit scores and are considered to approximate the top 30% of all commercial borrowers.
•
Medium risk accounts are companies with average to good credit scores and are considered to approximate the middle 40% of all commercial borrowers.
•
High risk accounts are companies with poor credit scores, are delinquent or are at risk of becoming delinquent and are considered to approximate the bottom 30% of all commercial borrowers.

 
March 31,
2018
 
December 31,
2017
Sales-type lease receivables
 

 
 

Low
$
817,697

 
$
819,776

Medium
138,411

 
148,000

High
21,858

 
21,728

Not Scored
34,951

 
34,045

Total
$
1,012,917

 
$
1,023,549

Loan receivables
 

 
 

Low
$
239,104

 
$
262,646

Medium
56,560

 
56,744

High
6,067

 
6,791

Not Scored
12,933

 
13,192

Total
$
314,664

 
$
339,373



19

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

7. Acquisitions, Intangible Assets and Goodwill
Acquisitions
In October 2017, we acquired Newgistics for $471 million, net of cash acquired. The results of Newgistics are included in our consolidated operating results from the date of acquisition. Our consolidated revenue for the three months ended March 31, 2018 includes $131 million from Newgistics. On a supplemental pro forma basis, had we acquired Newgistics on January 1, 2017, our revenues would have been $119 million higher for the three months ended March 31, 2017. The impact on our earnings would not have been material.
Intangible Assets
Intangible assets at March 31, 2018 and December 31, 2017 consisted of the following:
 
March 31, 2018
 
December 31, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships
$
528,997

 
$
(303,449
)
 
$
225,548

 
$
526,149

 
$
(292,500
)
 
$
233,649

Software & technology
174,208

 
(147,595
)
 
26,613

 
173,141

 
(144,742
)
 
28,399

Trademarks & other
42,838

 
(33,681
)
 
9,157

 
42,505

 
(32,367
)
 
10,138

Total intangible assets
$
746,043

 
$
(484,725
)
 
$
261,318

 
$
741,795

 
$
(469,609
)
 
$
272,186

Amortization expense was $11 million and $8 million for the three months ended March 31, 2018 and 2017, respectively.
Future amortization expense as of March 31, 2018 was as follows:
Remaining for year ending December 31, 2018
$
37,598

Year ending December 31, 2019
38,330

Year ending December 31, 2020
33,744

Year ending December 31, 2021
30,119

Year ending December 31, 2022
29,038

Thereafter
92,489

Total
$
261,318

Actual amortization expense may differ from the amounts above due to, among other things, fluctuations in foreign currency exchange rates, impairments, acquisitions and accelerated amortization.
Goodwill
Changes in the carrying value of goodwill, by reporting segment, for the three months ended March 31, 2018 are shown in the table below.
 
December 31, 2017
 
Acquisitions
 
Other(1)
 
March 31,
2018
Global Ecommerce
$
602,461

 
$
—

 
$
(653
)
 
$
601,808

Presort Services
204,781

 
2,684

 
—

 
207,465

Commerce Services
807,242

 
2,684

 
(653
)
 
809,273

North America Mailing
368,905

 
—

 
(205
)
 
368,700

International Mailing
158,203

 
—

 
7,127

 
165,330

Small & Medium Business Solutions
527,108

 
—

 
6,922

 
534,030

Software Solutions
510,605

 
—

 
2,924

 
513,529

Production Mail
107,489

 
—

 
1,663

 
109,152

Total goodwill
$
1,952,444

 
$
2,684

 
$
10,856

 
$
1,965,984

(1) Primarily represents foreign currency translation adjustments.

20

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

8. Fair Value Measurements and Derivative Instruments
We measure certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. An entity is required to classify certain assets and liabilities measured at fair value based on the following fair value hierarchy that prioritizes the inputs used to measure fair value:
Level 1 –
Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2 –
Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 –
Unobservable inputs that are supported by little or no market activity, may be derived from internally developed methodologies based on management’s best estimate of fair value and that are significant to the fair value of the asset or liability.
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect its placement within the fair value hierarchy. The following tables show, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis at March 31, 2018 and December 31, 2017.
 
March 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
84,345

 
$
312,373

 
$
—

 
$
396,718

Equity securities
—

 
23,734

 
—

 
23,734

Commingled fixed income securities
1,552

 
21,125

 
—

 
22,677

Government and related securities
127,475

 
16,439

 
—

 
143,914

Corporate debt securities
—

 
72,289

 
—

 
72,289

Mortgage-backed / asset-backed securities
—

 
161,069

 
—

 
161,069

Derivatives
 
 
 
 
 

 


Interest rate swap
—

 
1,595

 
—

 
1,595

Foreign exchange contracts
—

 
529

 
—

 
529

Total assets
$
213,372

 
$
609,153

 
$
—

 
$
822,525

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$
—

 
$
(1,639
)
 
$
—

 
$
(1,639
)
Total liabilities
$
—

 
$
(1,639
)
 
$
—

 
$
(1,639
)


21

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

 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
143,349

 
$
542,568

 
$
—

 
$
685,917

Equity securities
—

 
40,717

 
—

 
40,717

Commingled fixed income securities
1,569

 
4,516

 
—

 
6,085

Government and related securities
116,041

 
18,587

 
—

 
134,628

Corporate debt securities
—

 
75,109

 
—

 
75,109

Mortgage-backed / asset-backed securities
—

 
158,202

 
—

 
158,202

Derivatives
 

 
 

 
 

 


Interest rate swap
—

 
1,776

 
—

 
1,776

Foreign exchange contracts
—

 
122

 
—

 
122

Total assets
$
260,959

 
$
841,597

 
$
—

 
$
1,102,556

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$
—

 
$
(335
)
 
$
—

 
$
(335
)
Total liabilities
$
—

 
$
(335
)
 
$
—

 
$
(335
)
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: Comprised of mutual funds investing in U.S. and foreign stocks. These mutual funds are classified as Level 2.
•
Commingled Fixed Income Securities: Comprised of 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. Fair value is based on the 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 mutual funds are classified as Level 2.
•
Government and Related Securities: 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.
•
Corporate Debt Securities: 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.



22

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 AOCI.
Available-for-sale securities at March 31, 2018 and December 31, 2017 consisted of the following:
 
March 31, 2018
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
Government and related securities
$
142,719

 
$
1,393

 
$
(1,996
)
 
$
142,116

Corporate debt securities
72,790

 
555

 
(1,056
)
 
72,289

Commingled fixed income securities
1,791

 
—

 
(67
)
 
1,724

Mortgage-backed / asset-backed securities
163,174

 
879

 
(2,984
)
 
161,069

Total
$
380,474

 
$
2,827

 
$
(6,103
)
 
$
377,198

 
December 31, 2017
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
Government and related securities
$
131,872

 
$
1,984

 
$
(1,090
)
 
$
132,766

Corporate debt securities
73,612

 
1,724

 
(227
)
 
75,109

Commingled fixed income securities
1,796

 
—

 
(40
)
 
1,756

Mortgage-backed / asset-backed securities
158,496

 
1,348

 
(1,642
)
 
158,202

Total
$
365,776

 
$
5,056

 
$
(2,999
)
 
$
367,833


At March 31, 2018, investment securities that were in a loss position for 12 or more continuous months had aggregate unrealized holding losses of $4 million and an estimated fair value of $140 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 $147 million.

At December 31, 2017, 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 $116 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 $91 million.

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

Scheduled maturities of available-for-sale securities at March 31, 2018 were as follows:
 
Amortized cost
 
Estimated fair value
Within 1 year
$
51,133

 
$
50,855

After 1 year through 5 years
115,266

 
114,330

After 5 years through 10 years
66,418

 
65,540

After 10 years
147,657

 
146,473

Total
$
380,474

 
$
377,198

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.

23

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 both March 31, 2018 and December 31, 2017, we had outstanding contracts associated with these anticipated transactions with notional amounts of $10 million.

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 have an interest rate swap with a notional amount of $300 million to mitigate the interest rate risk associated with $300 million of 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.


24

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

The fair value of derivative instruments at March 31, 2018 and December 31, 2017 was as follows:
Designation of Derivatives
 
Balance Sheet Location
 
March 31,
2018
 
December 31,
2017
Derivatives designated as
hedging instruments
 
 
 
 

 
 

Foreign exchange contracts
 
Other current assets and prepayments
 
$
103

 
$
57

 
 
Accounts payable and accrued liabilities
 
(69
)
 
(144
)
 
 
 
 
 
 
 
Interest rate swap
 
Other assets
 
1,595

 
1,776

 
 
 
 
 

 
 

Derivatives not designated as
hedging instruments
 
 
 
 

 
 

Foreign exchange contracts
 
Other current assets and prepayments
 
426

 
65

 
 
Accounts payable and accrued liabilities
 
(1,570
)
 
(191
)
 
 
 
 
 
 
 
 
 
Total derivative assets
 
$
2,124

 
$
1,898

 
 
Total derivative liabilities
 
(1,639
)
 
(335
)