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Fair Value Measurements and Derivative Instruments
 9 Months Ended
Sep. 30, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements and Derivative Instruments
Fair Value Measurements and Derivative Instruments
We measure certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. An entity is required to classify certain assets and liabilities measured at fair value based on the following fair value hierarchy that prioritizes the inputs used to measure fair value:
Level 1 –
Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2 –
Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 –
Unobservable inputs that are supported by little or no market activity, may be derived from internally developed methodologies based on management’s best estimate of fair value and that are significant to the fair value of the asset or liability.
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect its placement within the fair value hierarchy. The following tables show, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis at September 30, 2018 and December 31, 2017.
 
September 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
102,777

 
$
432,125

 
$
—

 
$
534,902

Equity securities
—

 
25,621

 
—

 
25,621

Commingled fixed income securities
1,546

 
20,726

 
—

 
22,272

Government and related securities
118,914

 
17,405

 
—

 
136,319

Corporate debt securities
—

 
69,924

 
—

 
69,924

Mortgage-backed / asset-backed securities
—

 
158,540

 
—

 
158,540

Derivatives
 
 
 
 
 

 


Foreign exchange contracts
—

 
2,507

 
—

 
2,507

Total assets
$
223,237

 
$
726,848

 
$
—

 
$
950,085

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$
—

 
$
(3,888
)
 
$
—

 
$
(3,888
)
Total liabilities
$
—

 
$
(3,888
)
 
$
—

 
$
(3,888
)

 
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 are classified as Level 2 where fair value is determined using quoted market prices for similar securities or benchmarking model derived prices to quoted market prices and trade data for identical or comparable securities.
•
Corporate Debt Securities: Corporate debt securities are valued using recently executed comparable transactions, market price quotations or bond spreads 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 or external price/spread data. These securities are classified as Level 2.





Available-For-Sale Securities
Certain investment securities are classified as available-for-sale and recorded at fair value. Unrealized holding gains and losses, net of tax are recorded in AOCI. Available-for-sale investment securities are predominantly held at the Pitney Bowes Bank, whose primary business is to provide financing solutions to clients that rent postage meters and purchase supplies.
Available-for-sale securities at September 30, 2018 and December 31, 2017 consisted of the following:
 
September 30, 2018
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
Government and related securities
$
136,967

 
$
980

 
$
(2,879
)
 
$
135,068

Corporate debt securities
71,261

 
218

 
(1,555
)
 
69,924

Commingled fixed income securities
1,628

 
—

 
(82
)
 
1,546

Mortgage-backed / asset-backed securities
161,972

 
569

 
(4,001
)
 
158,540

Total
$
371,828

 
$
1,767

 
$
(8,517
)
 
$
365,078

 
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



The aggregate unrealized holding losses of investment securities in a loss position at September 30, 2018 and December 31, 2017 were as follows:
 
September 30, 2018
 
December 31, 2017
 
Fair Value
 
Gross unrealized losses
 
Fair Value
 
Gross unrealized losses
Greater than 12 continuous months
$
171,927

 
$
3,193

 
$
90,838

 
$
709

Less than 12 continuous months
150,120

 
5,324

 
115,815

 
2,290

Total
$
322,047

 
$
8,517

 
$
206,653

 
$
2,999


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 expect to receive the stated principal and interest at maturity.
Scheduled maturities of available-for-sale securities at September 30, 2018 were as follows:
 
Amortized cost
 
Estimated fair value
Within 1 year
$
54,573

 
$
54,230

After 1 year through 5 years
111,948

 
110,591

After 5 years through 10 years
59,377

 
57,862

After 10 years
145,930

 
142,395

Total
$
371,828

 
$
365,078


The scheduled maturities of mortgage-backed and asset-backed securities may not coincide with the actual payment as borrowers have the right to prepay obligations.
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 mitigate these exposures 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 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 September 30, 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 had 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. This swap matured in September 2018. While outstanding, the swap was designated as a cash flow hedge and the effective portion of the gain or loss on the cash flow hedge was included in AOCI in the period that the change in fair value occurred and reclassified to earnings in the period that the hedged item was recorded in earnings.
The fair value of derivative instruments at September 30, 2018 and December 31, 2017 was as follows:
Designation of Derivatives
 
Balance Sheet Location
 
September 30,
2018
 
December 31,
2017
Derivatives designated as
hedging instruments
 
 
 
 

 
 

Foreign exchange contracts
 
Other current assets and prepayments
 
$
80

 
$
57

 
 
Accounts payable and accrued liabilities
 
(60
)
 
(144
)
 
 
 
 
 
 
 
Interest rate swap
 
Other assets
 
—

 
1,776

 
 
 
 
 

 
 

Derivatives not designated as
hedging instruments
 
 
 
 

 
 

Foreign exchange contracts
 
Other current assets and prepayments
 
2,427

 
65

 
 
Accounts payable and accrued liabilities
 
(3,828
)
 
(191
)
 
 
 
 
 
 
 
 
 
Total derivative assets
 
$
2,507

 
$
1,898

 
 
Total derivative liabilities
 
(3,888
)
 
(335
)
 
 
Total net derivative (liability) asset
 
$
(1,381
)
 
$
1,563


The majority of the amounts included in AOCI at September 30, 2018 will be recognized in earnings within the next 12 months. No amount of ineffectiveness was recorded in earnings for these designated cash flow hedges.



The following represents the results of cash flow hedging relationships for the three and nine months ended September 30, 2018 and 2017:
 
 
Three Months Ended September 30,
 
 
Derivative Gain (Loss)
Recognized in AOCI
(Effective Portion)
 
Location of Gain (Loss)
(Effective Portion)
 
Gain (Loss) Reclassified
from AOCI to Earnings
(Effective Portion)
Derivative Instrument
 
2018
 
2017
 
 
2018
 
2017
Foreign exchange contracts
 
$
(42
)
 
$
(152
)
 
Revenue
 
$
(38
)
 
$
(139
)
 
 
 

 
 

 
Cost of sales
 
52

 
(59
)
Interest rate swap
 
(824
)
 
(229
)
 
Interest Expense
 
—

 
—

 
 
$
(866
)
 
$
(381
)
 
 
 
$
14

 
$
(198
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
Derivative Gain (Loss)
Recognized in AOCL
(Effective Portion)
 
Location of Gain (Loss)
(Effective Portion)
 
Gain (Loss) Reclassified
from AOCL to Earnings
(Effective Portion)
Derivative Instrument
 
2018
 
2017
 
 
2018
 
2017
Foreign exchange contracts
 
$
111

 
$
(701
)
 
Revenue
 
$
38

 
$
(133
)
 
 
 

 
 

 
Cost of sales
 
(33
)
 
89

Interest rate swap
 
(1,776
)
 
92

 
Interest Expense
 
—

 
—

 
 
$
(1,665
)
 
$
(609
)
 
 
 
$
5

 
$
(44
)

We 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 intercompany loans and interest and the corresponding mark-to-market adjustment on derivatives are recorded in earnings. The table below represents the mark-to-market adjustments of non-designated derivative instruments for the three and nine months ended September 30, 2018 and 2017. All outstanding contracts at September 30, 2018 mature within 12 months.
 
 
 
 
Three Months Ended September 30,
 
 
 
 
Derivative Gain (Loss) Recognized in Earnings
Derivatives Instrument
 
Location of Derivative Gain (Loss)
 
2018
 
2017
Foreign exchange contracts
 
Selling, general and administrative expense
 
$
(1,948
)
 
$
(655
)
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
Derivative Gain (Loss) Recognized in Earnings
Derivatives Instrument
 
Location of Derivative Gain (Loss)
 
2018
 
2017
Foreign exchange contracts
 
Selling, general and administrative expense
 
$
(20,344
)
 
$
(1,716
)


Credit-Risk-Related Contingent Features
Certain derivative instruments contain credit-risk-related contingent features that 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 September 30, 2018, we had no cash collateral posted with certain counterparties.
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 carrying value and estimated fair value of our debt at September 30, 2018 and December 31, 2017 were as follows:
 
September 30, 2018
 
December 31, 2017
Carrying value
$
3,269,617

 
$
3,830,335

Fair value
$
3,092,977

 
$
3,718,986