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Fair Value Measurements and Derivative Instruments
 6 Months Ended
Jun. 30, 2020
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.
 
June 30, 2020
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds
$
85,243

 
$
441,600

 
$
—

 
$
526,843

Equity securities
—

 
20,822

 
—

 
20,822

Commingled fixed income securities
1,713

 
19,376

 
—

 
21,089

Government and related securities
39,525

 
18,583

 
—

 
58,108

Corporate debt securities
—

 
75,557

 
—

 
75,557

Mortgage-backed / asset-backed securities
—

 
115,742

 
—

 
115,742

Derivatives
 
 
 
 
 

 


Foreign exchange contracts
—

 
308

 
—

 
308

Total assets
$
126,481

 
$
691,988

 
$
—

 
$
818,469

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Interest rate swaps
$
—

 
$
(1,605
)
 
$
—

 
$
(1,605
)
Foreign exchange contracts
—

 
(1,106
)
 
—

 
(1,106
)
Total liabilities
$
—

 
$
(2,711
)
 
$
—

 
$
(2,711
)
 
December 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds
$
161,441

 
$
240,364

 
$
—

 
$
401,805

Equity securities
—

 
21,979

 
—

 
21,979

Commingled fixed income securities
1,656

 
18,404

 
—

 
20,060

Government and related securities
64,572

 
17,478

 
—

 
82,050

Corporate debt securities
—

 
72,149

 
—

 
72,149

Mortgage-backed / asset-backed securities
—

 
66,339

 
—

 
66,339

Derivatives
 

 
 

 
 

 


Foreign exchange contracts
—

 
3,256

 
—

 
3,256

Total assets
$
227,669

 
$
439,969

 
$
—

 
$
667,638

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$
—

 
$
(1,402
)
 
$
—

 
$
(1,402
)
Total liabilities
$
—

 
$
(1,402
)
 
$
—

 
$
(1,402
)

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: 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.
•
Equity Securities: Equity securities are comprised of mutual funds investing in U.S. and foreign stocks. These mutual funds are classified as Level 2.
•
Commingled Fixed Income Securities: Commingled fixed income securities are 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 1 when unadjusted quoted prices in active markets are available and as Level 2 when they are not actively traded on an exchange.
•
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.

Derivative Securities
•
Foreign Exchange Contracts: 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. These securities are classified as Level 2.
•
Interest Rate Swaps: The valuation of interest rate swaps is based on an income approach using inputs that are observable or that can be derived from, or corroborated by, observable market data. These securities are classified as Level 2.



Available-For-Sale Securities
Available-for-sale 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. Investment securities classified as available-for-sale are recorded at fair value with changes in fair value due to market conditions (i.e. interest rates) recorded in accumulated other comprehensive income (AOCI) and changes in fair value due to credit conditions recorded in earnings. Individual securities are considered impaired when the fair value declines below amortized cost. We use a discounted cash flow model to determine the amount of unrealized losses due to credit losses. Unrealized losses recorded during the period due to credit conditions were immaterial.

Available-for-sale securities consisted of the following:
 
June 30, 2020
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
Government and related securities
$
55,576

 
$
1,289

 
$
(338
)
 
$
56,527

Corporate debt securities
71,689

 
4,558

 
(690
)
 
75,557

Commingled fixed income securities
1,692

 
21

 
—

 
1,713

Mortgage-backed / asset-backed securities
113,497

 
2,520

 
(275
)
 
115,742

Total
$
242,454

 
$
8,388

 
$
(1,303
)
 
$
249,539

 
December 31, 2019
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
Government and related securities
$
80,732

 
$
1,358

 
$
(114
)
 
$
81,976

Corporate debt securities
70,426

 
2,009

 
(286
)
 
72,149

Commingled fixed income securities
1,675

 
—

 
(19
)
 
1,656

Mortgage-backed / asset-backed securities
65,679

 
960

 
(300
)
 
66,339

Total
$
218,512

 
$
4,327

 
$
(719
)
 
$
222,120



Investment securities in a loss position were as follows:
 
June 30, 2020
 
December 31, 2019
 
Fair Value
 
Gross unrealized losses
 
Fair Value
 
Gross unrealized losses
Less than 12 continuous months
$
46,650

 
$
1,192

 
$
52,521

 
$
583

Greater than 12 continuous months
4,441

 
111

 
9,227

 
136

Total
$
51,091

 
$
1,303

 
$
61,748

 
$
719


Our allowance for credit losses on available-for-sale investment securities was not significant at June 30, 2020. At June 30, 2020, approximately 10% of total securities in the investment portfolio were in a net loss position. We believe our allowance for credit losses on available-for-sale investment securities is adequate as the majority of our investments are in short-term, highly liquid investments, high grade corporate securities and U.S. government securities. We have not recognized an impairment on investment securities in an unrealized loss position because we have the ability and intent to hold these securities until recovery of the unrealized losses or expect to receive the stated principal and interest at maturity.

Scheduled maturities of available-for-sale securities at June 30, 2020 were as follows:
 
Amortized cost
 
Estimated fair value
Within 1 year
$
26,274

 
$
26,407

After 1 year through 5 years
56,027

 
58,709

After 5 years through 10 years
47,838

 
49,663

After 10 years
112,315

 
114,760

Total
$
242,454

 
$
249,539


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.

Held-to-Maturity Securities
Held-to-maturity securities at June 30, 2020 and December 31, 2019, include $257 million and $383 million, respectively, of short-term, highly liquid time deposits. Due to the short-term nature of these securities, the carrying value approximates fair value.

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. No amount of ineffectiveness was recorded in earnings for these designated cash flow hedges. At both June 30, 2020 and December 31, 2019, we had outstanding contracts associated with these anticipated transactions with notional amounts of $7 million. Amounts included in AOCI at June 30, 2020 will be recognized in earnings within the next 12 months.

Interest Rate Swaps
During the quarter, we entered into interest rate swap agreements with an aggregate notional amount of $500 million that are designated as cash flow hedges. The fair value of the interest rate swaps is recorded as a derivative asset or liability at the end of each reporting period with the change in fair value reflected in AOCI.










The fair value of derivative instruments was as follows:
Designation of Derivatives
 
Balance Sheet Location
 
June 30,
2020
 
December 31,
2019
Derivatives designated as
hedging instruments
 
 
 
 

 
 

Foreign exchange contracts
 
Other current assets and prepayments
 
$
46

 
$
207

 
 
Accounts payable and accrued liabilities
 
(214
)
 
(56
)
 
 
 
 
 
 
 
Interest rate swaps
 
Other noncurrent liabilities
 
(1,605
)
 
—

 
 
 
 
 
 
 
Derivatives not designated as
hedging instruments
 
 
 
 

 
 

Foreign exchange contracts
 
Other current assets and prepayments
 
262

 
3,049

 
 
Accounts payable and accrued liabilities
 
(892
)
 
(1,346
)
 
 
 
 
 
 
 
 
 
Total derivative assets
 
$
308

 
$
3,256

 
 
Total derivative liabilities
 
(2,711
)
 
(1,402
)
 
 
Total net derivative (liability) asset
 
$
(2,403
)
 
$
1,854



Results of cash flow hedging relationships were as follows:
 
 
Three Months Ended June 30,
 
 
Derivative Gain (Loss)
Recognized in AOCI
(Effective Portion)
 
Location of Gain (Loss)
(Effective Portion)
 
Gain (Loss) Reclassified
from AOCI to Earnings
(Effective Portion)
Derivative Instrument
 
2020
 
2019
 
 
2020
 
2019
Foreign exchange contracts
 
$
(121
)
 
$
(320
)
 
Revenue
 
$
(64
)
 
$
(36
)
 
 
 

 
 

 
Cost of sales
 
32

 
29

Interest rate swap
 
(1,605
)
 
—

 
Interest expense
 
—

 
—

 
 
$
(1,726
)
 
$
(320
)
 
 
 
$
(32
)
 
$
(7
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
Derivative Gain (Loss)
Recognized in AOCI
(Effective Portion)
 
Location of Gain (Loss)
(Effective Portion)
 
Gain (Loss) Reclassified
from AOCI to Earnings
(Effective Portion)
Derivative Instrument
 
2020
 
2019
 
 
2020
 
2019
Foreign exchange contracts
 
$
(281
)
 
$
25

 
Revenue
 
$
(3
)
 
$
75

 
 
 

 
 

 
Cost of sales
 
42

 
45

Interest rate swap
 
(1,605
)
 
—

 
Interest expense
 
—

 
—

 
 
$
(1,886
)
 
$
25

 
 
 
$
39

 
$
120


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. All outstanding contracts at June 30, 2020 mature within 12 months.





The mark-to-market adjustments of non-designated derivative instruments were as follows:
 
 
 
 
Three Months Ended June 30,
 
 
 
 
Derivative Gain (Loss) Recognized in Earnings
Derivatives Instrument
 
Location of Derivative Gain (Loss)
 
2020
 
2019
Foreign exchange contracts
 
Selling, general and administrative expense
 
$
1,200

 
$
(65
)
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
Derivative Gain (Loss) Recognized in Earnings
Derivatives Instrument
 
Location of Derivative Gain (Loss)
 
2020
 
2019
Foreign exchange contracts
 
Selling, general and administrative expense
 
$
(3,667
)
 
$
5,205



Fair Value of Financial Instruments
Financial instruments not reported at fair value on a recurring basis include cash and cash equivalents, accounts receivable, loan receivables, accounts payable and debt. The carrying value for cash and cash equivalents, accounts receivable, loans receivable and accounts payable approximate fair value. The fair value of debt is estimated based on recently executed transactions and market price quotations. The inputs used to determine the fair value of debt are classified as Level 2 in the fair value hierarchy. The carrying value and estimated fair value of debt was as follows:
 
June 30, 2020
 
December 31, 2019
Carrying value
$
2,716,747

 
$
2,739,722

Fair value
$
2,156,837

 
$
2,572,794