PBI 2013.09.30 10Q



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 September 30, 2013
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.)
 
 
 
1 Elmcroft Road, Stamford, Connecticut
 
06926-0700
(Address of principal executive offices)
 
(Zip Code)
(203) 356-5000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
 
 
As of November 1, 2013, 201,992,623 shares of common stock, par value $1 per share, of the registrant were outstanding.
 
 
 




PITNEY BOWES INC.
INDEX

 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2




PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
PITNEY BOWES INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited; in thousands, except per share data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenue:
 

 
 

 
 

 
 

Equipment sales
$
201,830

 
$
199,609

 
$
634,779

 
$
618,620

Supplies
69,696

 
66,878

 
216,254

 
213,665

Software
98,164

 
93,476

 
285,658

 
302,377

Rentals
128,225

 
137,149

 
391,590

 
414,922

Financing
113,955

 
123,999

 
346,646

 
373,695

Support services
166,785

 
176,769

 
505,226

 
529,615

Business services
160,131

 
151,909

 
458,061

 
446,654

Total revenue
938,786

 
949,789

 
2,838,214

 
2,899,548

Costs and expenses:
 

 
 

 
 

 
 

Cost of equipment sales
92,307

 
95,008

 
307,992

 
278,457

Cost of supplies
21,840

 
20,689

 
67,794

 
65,423

Cost of software
29,698

 
29,227

 
80,093

 
85,023

Cost of rentals
25,612

 
25,182

 
79,791

 
87,258

Financing interest expense
20,306

 
19,604

 
59,979

 
61,385

Cost of support services
103,004

 
107,074

 
315,275

 
334,274

Cost of business services
112,447

 
103,230

 
322,970

 
298,689

Selling, general and administrative
355,202

 
370,935

 
1,067,394

 
1,111,144

Research and development
24,769

 
30,226

 
81,351

 
87,810

Restructuring charges and asset impairments
34,909

 
—

 
53,940

 
(980
)
Other interest expense
27,508

 
27,541

 
89,594

 
87,261

Interest income
(1,457
)
 
(2,057
)
 
(4,507
)
 
(5,793
)
Other expense, net
—

 
—

 
25,121

 
1,138

Total costs and expenses
846,145

 
826,659

 
2,546,787

 
2,491,089

Income from continuing operations before income taxes
92,641

 
123,130

 
291,427

 
408,459

Provision for income taxes
11,370

 
30,590

 
55,530

 
85,108

Income from continuing operations
81,271

 
92,540

 
235,897

 
323,351

(Loss) income from discontinued operations, net of tax
(82,204
)
 
(11,413
)
 
(169,369
)
 
25,257

Net (loss) income before attribution of noncontrolling interests
(933
)
 
81,127

 
66,528

 
348,608

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

 
4,594

 
13,782

 
13,782

Net (loss) income - Pitney Bowes Inc.
$
(5,527
)
 
$
76,533

 
$
52,746

 
$
334,826

Amounts attributable to common stockholders:
 

 
 

 
 

 
 

Net income from continuing operations
$
76,677

 
$
87,946

 
$
222,115

 
$
309,569

(Loss) income from discontinued operations, net of tax
(82,204
)
 
(11,413
)
 
(169,369
)
 
25,257

Net (loss) income - Pitney Bowes Inc.
$
(5,527
)
 
$
76,533

 
$
52,746

 
$
334,826

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

 
 

 
 

 
 

Continuing operations
$
0.38

 
$
0.44

 
$
1.10

 
$
1.55

Discontinued operations
(0.41
)
 
(0.06
)
 
(0.84
)
 
0.13

Net (loss) income - Pitney Bowes Inc.
$
(0.03
)
 
$
0.38

 
$
0.26

 
$
1.67

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

 
 

 
 

 
 

Continuing operations
$
0.38

 
$
0.44

 
$
1.10

 
$
1.54

Discontinued operations
(0.40
)
 
(0.06
)
 
(0.84
)
 
0.13

Net (loss) income - Pitney Bowes Inc.
$
(0.03
)
 
$
0.38

 
$
0.26

 
$
1.66

Dividends declared per share of common stock
$
0.1875

 
$
0.375

 
$
0.75

 
$
1.125

(1) The sum of earnings per share amounts may not equal the totals due to rounding
See Notes to Condensed Consolidated Financial Statements

3

PITNEY BOWES INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; in thousands)



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Net (loss) income - Pitney Bowes Inc.
$
(5,527
)
 
$
76,533

 
$
52,746

 
$
334,826

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Net unrealized gain on cash flow hedges, net of tax of $41, $21, $615 and $374, respectively
62

 
25

 
962

 
578

Net unrealized (loss) gain on investment securities, net of tax of $(142), $377, $(2,984) and $618, respectively
(222
)
 
589

 
(4,667
)
 
967

Amortization of pension and postretirement costs, net of tax of $4,347, $6,404, $15,613 and $20,371, respectively
7,950

 
12,151

 
28,943

 
35,115

Foreign currency translations
19,140

 
19,025

 
(40,618
)
 
(883
)
Other comprehensive income (loss)
26,930

 
31,790

 
(15,380
)
 
35,777

Total comprehensive income - Pitney Bowes Inc.
$
21,403

 
$
108,323

 
$
37,366

 
$
370,603








































See Notes to Condensed Consolidated Financial Statements

4

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


 
September 30, 2013
 
December 31, 2012
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
759,636

 
$
913,276

Short-term investments
20,471

 
36,611

Accounts receivable (net of allowance of $15,230 and $20,219, respectively)
418,035

 
728,250

Finance receivables (net of allowance of $25,007 and $25,484, respectively)
1,120,068

 
1,188,292

Inventories
134,266

 
179,678

Current income taxes
28,419

 
51,836

Other current assets and prepayments
173,068

 
114,184

Assets held for sale
550,641

 
—

Total current assets
3,204,604

 
3,212,127

Property, plant and equipment, net
240,609

 
385,377

Rental property and equipment, net
230,098

 
241,192

Finance receivables (net of allowance of $11,489 and $14,610, respectively)
947,028

 
1,026,489

Investment in leveraged leases
34,858

 
34,546

Goodwill
1,729,178

 
2,136,138

Intangible assets, net
128,588

 
166,214

Non-current income taxes
96,714

 
94,434

Other assets
538,255

 
563,374

Total assets
$
7,149,932

 
$
7,859,891

LIABILITIES, NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY
 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
1,501,189

 
$
1,809,226

Current income taxes
291,930

 
240,681

Notes payable and current portion of long-term obligations
299,570

 
375,000

Advance billings
418,231

 
452,130

Liabilities related to assets held for sale
118,177

 
—

Total current liabilities
2,629,097

 
2,877,037

Deferred taxes on income
19,192

 
69,222

Tax uncertainties and other income tax liabilities
157,102

 
145,881

Long-term debt
3,351,020

 
3,642,375

Other non-current liabilities
685,914

 
718,375

Total liabilities
6,842,325

 
7,452,890

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

 
296,370

Commitments and contingencies (See Note 14)


 


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

 
4

Cumulative preference stock, no par value, $2.12 convertible
608

 
648

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

 
323,338

Additional paid-in capital
201,643

 
223,847

Retained earnings
4,646,593

 
4,744,802

Accumulated other comprehensive loss
(696,593
)
 
(681,213
)
Treasury stock, at cost (121,462,568 and 122,453,865 shares, respectively)
(4,464,356
)
 
(4,500,795
)
Total Pitney Bowes Inc. stockholders’ equity
11,237

 
110,631

Total liabilities, noncontrolling interests and stockholders’ equity
$
7,149,932

 
$
7,859,891




See Notes to Condensed Consolidated Financial Statements

5

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


 
Nine Months Ended September 30,
 
2013
 
2012
Cash flows from operating activities:
 

 
 

Net income before attribution of noncontrolling interests
$
66,528

 
$
348,608

Restructuring payments
(41,353
)
 
(60,746
)
Special pension plan contributions
—

 
(95,000
)
Tax payments related to sale of leveraged lease assets
—

 
(99,249
)
Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Goodwill impairment
101,415

 
18,315

Loss on disposal of businesses
35,315

 
—

Gain on sale of leveraged lease assets, net of tax
—

 
(12,886
)
Proceeds from settlement of derivative instruments
4,838

 
—

Depreciation and amortization
167,377

 
191,507

Stock-based compensation
12,061

 
13,505

Restructuring charges and asset impairments
55,771

 
11,060

Changes in operating assets and liabilities:
 

 
 

(Increase) decrease in accounts receivable
111,549

 
58,135

(Increase) decrease in finance receivables
128,812

 
144,442

(Increase) decrease in inventories
36,967

 
(7,620
)
(Increase) decrease in other current assets and prepayments
(13,588
)
 
(20,426
)
Increase (decrease) in accounts payable and accrued liabilities
(192,373
)
 
(157,156
)
Increase (decrease) in current and non-current income taxes
11,861

 
38,761

Increase (decrease) in advance billings
(23,179
)
 
(1,551
)
Increase (decrease) in other operating capital, net
31,559

 
34,929

Net cash provided by operating activities
493,560

 
404,628

Cash flows from investing activities:
 

 
 

Short-term and other investments
2,162

 
(23,250
)
Capital expenditures
(103,392
)
 
(127,816
)
Proceeds from sale of leveraged lease assets
—

 
105,506

Net investment in external financing
(1,609
)
 
(134
)
Net proceeds from sale of businesses
2,627

 
—

Reserve account deposits
(16,962
)
 
(15,373
)
Net cash used in investing activities
(117,174
)
 
(61,067
)
Cash flows from financing activities:
 

 
 

Proceeds from the issuance of long-term obligations, net of fees and discounts of $13,387
411,613

 
—

Principal payments of long-term obligations
(779,637
)
 
(550,000
)
Proceeds from the issuance of common stock under employee stock-based compensation plans
6,499

 
6,989

Dividends paid to stockholders
(150,955
)
 
(225,282
)
Dividends paid to noncontrolling interests
(9,188
)
 
(9,188
)
Net cash used in financing activities
(521,668
)
 
(777,481
)
Effect of exchange rate changes on cash and cash equivalents
(8,358
)
 
2,471

Decrease in cash and cash equivalents
(153,640
)
 
(431,449
)
Cash and cash equivalents at beginning of period
913,276

 
856,238

Cash and cash equivalents at end of period
$
759,636

 
$
424,789

Cash interest paid
$
162,938

 
$
170,119

Cash income tax payments, net of refunds
$
110,396

 
$
145,090


See Notes to Condensed Consolidated Financial Statements

6

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


1. Description of Business and Basis of Presentation
Pitney Bowes Inc. and its subsidiaries (we, us, our or the company) is a global provider of technology solutions for small, mid-sized and large firms that help them connect to customers to build loyalty and grow revenue. We deliver our solutions on open platforms to best organize, analyze and apply public and proprietary data to two-way customer communications. We offer solutions for direct mail, transactional mail and call center communications, along with digital channel messaging for the Web, email and mobile applications. We conduct our business activities in five reporting segments. See Note 2 for information regarding our reportable segments.
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, 2012 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 state fairly 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, 2013.
During the third quarter of 2013, we entered into an agreement to sell the North America Management Services operations (PBMS NA) and our Nordic furniture business. In the second quarter of 2013, we entered into two separate agreements to sell the International Management Services business (PBMSi) and completed the sale of our International Mailing Services (IMS) operations related to the international delivery of mail and catalogs. PBMS (collectively PBMS NA and PBMSi), the Nordic furniture business and IMS are presented as discontinued operations in the Condensed Consolidated Statements of Income (Loss). The cash flows from discontinued operations for the nine months ended September 30, 2013 and 2012 are not separately stated and classified in the accompanying Condensed Consolidated Statements of Cash Flows. See Note 4 for additional information.
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, 2012 (the 2012 Annual Report).

Changes in Segment Presentation
As a result of certain organizational changes designed to realign our business units to reflect the clients served and how we review, analyze, measure and manage our operations, we have revised our business segment reporting (see Note 2). We have recast historical segment results to conform to our current segment presentation and to exclude discontinued operations.
  
Revision of Prior Period Amounts
During the third quarter of 2013, we determined that certain revenue previously reported as rentals revenue included a service component and should have been classified as support services revenue, and that certain research and development costs should have been classified as cost of software. Accordingly, the Condensed Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2012 have been revised to reflect the correct classification, resulting in a decrease in rentals revenue and corresponding increase in support services revenue of $5 million and $13 million, respectively, and a decrease in research and development expenses and a corresponding increase in cost of software of $6 million and $17 million, respectively. These revisions did not impact previously reported total revenue, total costs and expenses, net income or earnings per share amounts.
We determined that the effect of these revisions was not material to any of our previously issued financial statements and will revise our previously issued financial statements to reflect these reclassification adjustments in future filings.

New Accounting Pronouncements
In January 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (ASU 2013-01). ASU 2013-01 requires an entity to disclose gross and net information about transactions that are (1) offset in the financial statements or (2) subject to an enforceable master netting arrangement or similar agreement, regardless of whether the transactions are actually offset in the statement of financial position. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The amounts impacting our disclosure were immaterial at September 30, 2013 and December 31, 2012.
In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02). ASU 2013-02 requires an entity to present either parenthetically on the face of the financial statements, or in the notes, significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification. The new standard is effective for annual

7

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

reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this standard resulted in additional disclosures, but did not impact our financial condition, results of operations or cash flows.
In July 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-11, Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists (ASU 2013-11). ASU 2013-11 provides explicit guidance regarding the presentation in the statement of financial position of an unrecognized tax benefit when a net operating loss carryforward or a tax credit carryfoward exists. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We do not expect the application of this new guidance will have a material impact on our financial position.
Statement of Cash Flows
During the fourth quarter of 2012, we determined that changes in certain investment-related working capital accounts that were classified as cash flows from operating activities in the Condensed Consolidated Statement of Cash Flows should have been classified as cash flows from investing activities. Accordingly, the Condensed Consolidated Statement of Cash Flows for the period ended September 30, 2012 has been revised to reflect the correct classification of cash flows, resulting in a decrease in cash provided by operating activities and a corresponding increase in cash provided by investing activities of $35 million.

2. Segment Information
During the third quarter of 2013, we changed our reporting segments in response to organizational changes made that realigned our business units to reflect the clients served and how we review, analyze, measure and manage our operations. There were no changes to the Small & Medium Business Solutions group, but certain business activities within our Enterprise Business Solutions group were consolidated under a new reporting segment, Digital Commerce Solutions. Historical segment results have been recast to conform to our current presentation and to exclude discontinued operations (see Note 4). The principal products and services of each of our reporting segments are as follows:
Small & Medium Business Solutions:
North America Mailing: Includes the revenue and related expenses from the sale, rental and financing of mailing equipment and supplies for small and medium size businesses to efficiently create mail and evidence postage in the U.S. and Canada.
International Mailing: Includes the revenue and related expenses from the sale, rental and financing of mailing equipment and supplies for small and medium size businesses to efficiently create mail and evidence postage in areas outside North America.

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

Digital Commerce Solutions:
Digital Commerce Solutions: Includes the worldwide revenue and related expenses from (i) the sale and support services of non-equipment-based mailing, client relationship and communication and location intelligence software; (ii) direct marketing services for targeted clients; (iii) our digital mail delivery service offering (VollyTM); and (iv) our cross-border e-commerce solutions.
Segment earnings before interest and taxes (EBIT) is determined 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 impairment charges, which are not allocated to a particular business segment. Management uses segment EBIT to measure profitability and performance at the segment level. Management presents segment EBIT because it believes segment EBIT provides investors with an analysis of the company's 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 condensed consolidated results of operations.

8

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

Revenue and EBIT by business segment was as follows:
 
Revenues
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
North America Mailing
$
422,821

 
$
447,920

 
$
1,286,085

 
$
1,362,709

International Mailing
142,443

 
141,630

 
448,684

 
449,583

Small & Medium Business Solutions
565,264

 
589,550

 
1,734,769

 
1,812,292

 
 
 
 
 
 
 
 
Production Mail
116,477

 
114,889

 
360,352

 
337,582

Presort Services
105,093

 
105,909

 
322,954

 
322,401

Enterprise Business Solutions
221,570

 
220,798

 
683,306

 
659,983

 
 
 
 
 
 
 
 
Digital Commerce Solutions
151,952

 
139,441

 
420,139

 
427,273

 
 
 
 
 
 
 
 
Total revenue
$
938,786

 
$
949,789

 
$
2,838,214

 
$
2,899,548

 
EBIT
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
North America Mailing
$
167,433

 
$
168,934

 
$
488,301

 
$
514,975

International Mailing
15,456

 
11,206

 
52,967

 
51,670

Small & Medium Business Solutions
182,889

 
180,140

 
541,268

 
566,645

 
 
 
 
 
 
 
 
Production Mail
10,620

 
10,125

 
34,239

 
28,439

Presort Services
20,398

 
19,167

 
65,132

 
82,728

Enterprise Business Solutions
31,018

 
29,292

 
99,371

 
111,167

 
 
 
 
 
 
 
 
Digital Commerce Solutions
10,196

 
2,971

 
20,134

 
23,674

 
 
 
 
 
 
 
 
Total EBIT
224,103

 
212,403

 
660,773

 
701,486

Reconciling items:
 

 
 

 
 

 
 

Interest, net (1)
(46,357
)
 
(45,088
)
 
(145,066
)
 
(142,853
)
Unallocated corporate and other expenses
(50,196
)
 
(44,185
)
 
(170,340
)
 
(151,154
)
Restructuring charges and asset impairments
(34,909
)
 
—

 
(53,940
)
 
980

Income from continuing operations before income taxes
$
92,641

 
$
123,130

 
$
291,427

 
$
408,459

(1) Includes financing interest expense, other interest expense and interest income.
 
 
 
 

9

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

3. 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 related supplies. Loan receivables are generally due each month; however, customers may rollover outstanding balances.
Finance receivables consisted of the following:
 
September 30, 2013
 
North America
 
International
 
Total
Sales-type lease receivables
 

 
 

 
 

Gross finance receivables
$
1,466,556

 
$
446,810

 
$
1,913,366

Unguaranteed residual values
127,846

 
21,248

 
149,094

Unearned income
(299,700
)
 
(100,451
)
 
(400,151
)
Allowance for credit losses
(15,326
)
 
(7,823
)
 
(23,149
)
Net investment in sales-type lease receivables
1,279,376

 
359,784

 
1,639,160

Loan receivables
 

 
 

 
 

Loan receivables
389,828

 
51,455

 
441,283

Allowance for credit losses
(11,498
)
 
(1,849
)
 
(13,347
)
Net investment in loan receivables
378,330

 
49,606

 
427,936

Net investment in finance receivables
$
1,657,706

 
$
409,390

 
$
2,067,096

 
 
 
 
 
 
 
December 31, 2012
 
North America
 
International
 
Total
Sales-type lease receivables
 

 
 

 
 

Gross finance receivables
$
1,581,711

 
$
461,510

 
$
2,043,221

Unguaranteed residual values
148,664

 
21,025

 
169,689

Unearned income
(316,030
)
 
(104,258
)
 
(420,288
)
Allowance for credit losses
(16,979
)
 
(8,662
)
 
(25,641
)
Net investment in sales-type lease receivables
1,397,366

 
369,615

 
1,766,981

Loan receivables
 

 
 

 
 

Loan receivables
414,960

 
47,293

 
462,253

Allowance for credit losses
(12,322
)
 
(2,131
)
 
(14,453
)
Net investment in loan receivables
402,638

 
45,162

 
447,800

Net investment in finance receivables
$
1,800,004

 
$
414,777

 
$
2,214,781

Allowance for Credit Losses and Aging of Receivables
We estimate our finance receivable risks and provide an allowance for credit losses accordingly. We evaluate the adequacy of the allowance for 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 and make adjustments to the allowance as necessary. This evaluation is inherently subjective and actual results may differ significantly from estimated reserves.

We establish credit approval limits based on the credit quality of the client and the type of equipment financed. Our policy is to discontinue revenue recognition for lease receivables that are more than 120 days past due and for unsecured loan receivables that are more than 90 days past due. We resume revenue recognition when payments reduce the account balance aging to 60 days or less past due. Finance receivables deemed uncollectible are written off against the allowance after all collection efforts have been exhausted and management

10

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

deems the account to be uncollectible. We believe that our finance receivable credit risk is limited because of our large number of clients, small account balances for most of our clients, and geographic and industry diversification.

Activity in the allowance for credit losses for the nine months ended September 30, 2013 and 2012 was as follows:
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
Balance at January 1, 2013
$
16,979

 
$
8,662

 
$
12,322

 
$
2,131

 
$
40,094

Amounts charged to expense
4,617

 
2,031

 
7,265

 
793

 
14,706

Accounts written off
(6,270
)
 
(2,870
)
 
(8,089
)
 
(1,075
)
 
(18,304
)
Balance at September 30, 2013
$
15,326

 
$
7,823

 
$
11,498

 
$
1,849

 
$
36,496

 
 
 
 
 
 
 
 
 
 
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
Balance at January 1, 2012
$
28,661

 
$
12,039

 
$
20,272

 
$
2,458

 
$
63,430

Amounts charged to expense
1,171

 
1,489

 
4,069

 
703

 
7,432

Accounts written off
(12,694
)
 
(3,708
)
 
(8,864
)
 
(973
)
 
(26,239
)
Balance at September 30, 2012
$
17,138

 
$
9,820

 
$
15,477

 
$
2,188

 
$
44,623


Aging of Receivables
The aging of gross finance receivables at September 30, 2013 and December 31, 2012 was as follows:
 
September 30, 2013
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
< 31 days
$
1,400,998

 
$
417,881

 
$
372,330

 
$
49,330

 
$
2,240,539

> 30 days and < 61 days
27,467

 
8,845

 
9,233

 
1,276

 
46,821

> 60 days and < 91 days
18,255

 
5,346

 
3,544

 
431

 
27,576

> 90 days and < 121 days
5,383

 
3,982

 
2,026

 
221

 
11,612

> 120 days
14,453

 
10,756

 
2,695

 
197

 
28,101

Total
$
1,466,556

 
$
446,810

 
$
389,828

 
$
51,455

 
$
2,354,649

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
5,383

 
$
3,982

 
$
—

 
$
—

 
$
9,365

Not accruing interest
14,453

 
10,756

 
4,721

 
418

 
30,348

Total
$
19,836

 
$
14,738

 
$
4,721

 
$
418

 
$
39,713



11

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

 
December 31, 2012
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
< 31 days
$
1,497,797

 
$
435,780

 
$
392,108

 
$
45,324

 
$
2,371,009

> 30 days and < 61 days
37,348

 
9,994

 
12,666

 
1,368

 
61,376

> 60 days and < 91 days
24,059

 
5,198

 
4,577

 
285

 
34,119

> 90 days and < 121 days
6,665

 
3,327

 
2,319

 
179

 
12,490

> 120 days
15,842

 
7,211

 
3,290

 
137

 
26,480

Total
$
1,581,711

 
$
461,510

 
$
414,960

 
$
47,293

 
$
2,505,474

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
6,665

 
$
3,327

 
$
—

 
$
—

 
$
9,992

Not accruing interest
15,842

 
7,211

 
5,609

 
316

 
28,978

Total
$
22,507

 
$
10,538

 
$
5,609

 
$
316

 
$
38,970

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 portfolios because the cost to do so is prohibitive, 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 September 30, 2013 and December 31, 2012 by relative risk class (low, medium, high) based on the relative scores of the accounts within each class. The relative scores are determined based on a number of factors, including the company type, ownership structure, payment history and financial information. A fourth class is shown for accounts that are not scored. Absence of a score is not indicative of the credit quality of the account. The degree of risk, as defined by the third party, refers to the relative risk that an account in the next 12 month period may become delinquent.
•
Low risk accounts are companies with very good credit scores and are considered to approximate the top 30% of all commercial borrowers.
•
Medium risk accounts are companies with average to good credit scores and are considered to approximate the middle 40% of all commercial borrowers.
•
High risk accounts are companies with poor credit scores, are delinquent or are at risk of becoming delinquent and are considered to approximate the bottom 30% of all commercial borrowers.

12

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

 
September 30,
2013
 
December 31,
2012
Sales-type lease receivables
 

 
 

Low
$
1,097,080

 
$
1,016,413

Medium
260,434

 
450,432

High
53,569

 
43,658

Not Scored
55,473

 
71,208

Total
$
1,466,556

 
$
1,581,711

Loan receivables
 

 
 

Low
$
271,874

 
$
254,567

Medium
92,579

 
136,069

High
11,666

 
14,624

Not Scored
13,709

 
9,700

Total
$
389,828

 
$
414,960

Troubled Debt
We maintain a program for U.S. clients in our North America loan portfolio who are experiencing financial difficulties, but are able to make reduced payments over an extended period of time. Upon acceptance into the program, the client’s credit line is closed and interest accrual is suspended. There is generally no forgiveness of debt or reduction of balances owed. The balance of loans in this program, related loan loss allowance and write-offs are insignificant to the overall portfolio.
Leveraged Leases
Our investment in leveraged lease assets at September 30, 2013 and December 31, 2012 consisted of the following:
 
September 30,
2013
 
December 31,
2012
Rental receivables
$
68,918

 
$
83,254

Unguaranteed residual values
13,644

 
14,177

Principal and interest on non-recourse loans
(41,836
)
 
(55,092
)
Unearned income
(5,868
)
 
(7,793
)
Investment in leveraged leases
34,858

 
34,546

Less: deferred taxes related to leveraged leases
(16,319
)
 
(19,372
)
Net investment in leveraged leases
$
18,539

 
$
15,174


13

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

4. Discontinued Operations and Assets Held For Sale
During the third quarter of 2013, we entered into an agreement to sell PBMS NA. The sale closed on October 1, 2013 and we received cash proceeds of $392 million. In addition, during the third quarter of 2013, we sold our Nordic furniture business. Total proceeds from this sale were not material.
During the second quarter of 2013, we entered into two separate agreements to sell PBMSi and completed the sale of IMS. We closed on the agreements to sell PBMSi on July 5, 2013 and August 31, 2013. Total proceeds from the sale of PBMSi and IMS were not material.
The following tables show selected financial information included in discontinued operations:
 
Three Months Ended September 30, 2013
 
PBMS
 
IMS
 
Nordic furniture business
 
Total
Revenue
$
194,511

 
$
4

 
$
12,014

 
$
206,529

 
 
 
 
 
 
 
 
Loss from operations before taxes
$
(14,438
)
 
$
(1,072
)
 
$
(4,381
)
 
$
(19,891
)
Gain on sale
13,269

 
1,196

 
4,465

 
18,930

(Loss) income before taxes
(1,169
)
 
124

 
84

 
(961
)
Tax provision (benefit)
81,084

 
168

 
(9
)
 
81,243

(Loss) income from discontinued operations
$
(82,253
)
 
$
(44
)
 
$
93

 
$
(82,204
)
 
Three Months Ended September 30, 2012
 
PBMS
 
IMS
 
Nordic furniture business
 
Total
Revenue
$
220,887

 
$
32,461

 
$
12,539

 
$
265,887

 
 
 
 
 
 
 
 
Income (loss) before taxes
$
14,491

 
$
(30,086
)
 
$
79

 
$
(15,516
)
Tax provision (benefit)
7,210

 
(11,335
)
 
22

 
(4,103
)
(Loss) income from discontinued operations
$
7,281

 
$
(18,751
)
 
$
57

 
$
(11,413
)

 
Nine Months Ended September 30, 2013
 
PBMS
 
IMS
 
Nordic furniture business
 
Total
Revenue
$
639,237

 
$
23,036

 
$
37,785

 
$
700,058

 
 
 
 
 
 
 
 
Loss from operations before taxes
$
(116,018
)
 
$
(3,050
)
 
$
(4,859
)
 
$
(123,927
)
Gain (loss) on sale
13,269

 
(2,717
)
 
4,465

 
15,017

Loss before taxes
(102,749
)
 
(5,767
)
 
(394
)
 
(108,910
)
Tax provision (benefit)
61,679

 
(1,076
)
 
(144
)
 
60,459

(Loss) income from discontinued operations
$
(164,428
)
 
$
(4,691
)
 
$
(250
)
 
$
(169,369
)


14

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

 
Nine Months Ended September 30, 2012
 
PBMS
 
IMS
 
Nordic furniture business
 
Capital Services (1)
 
Total
Revenue
$
679,080

 
$
100,443

 
$
38,081

 
$
—

 
$
817,604

 
 
 
 
 
 
 
 
 
 
Income (loss) before taxes
$
47,015

 
$
(34,051
)
 
$
1,370

 
$
—

 
$
14,334

Tax provision (benefit)
20,589

 
(12,563
)
 
383

 
(19,332
)
 
(10,923
)
(Loss) income from discontinued operations
$
26,426

 
$
(21,488
)
 
$
987

 
$
19,332

 
25,257

(1) Represents tax benefits arising from the resolution of tax examinations related to our Capital Services business, which was sold in 2006.
 
 
 
 
 
 
 
 
The pre-tax loss from operations for PBMS for the three and nine months ended September 30, 2013 includes an estimated loss on disposal of $20 million and $36 million, respectively. The pre-tax loss from operations for PBMS for the nine months ended September 30, 2013 also includes goodwill impairment charges of $100 million and asset impairment charges of $15 million. The inputs used to determine the fair value of the long-lived assets and goodwill were classified as Level 3 in the fair value hierarchy.

The assets and related liabilities held for sale at September 30, 2013 consist of the following:
Accounts receivables
$
145,955

Inventories
1,595

Other current assets and prepayments
11,948

Total current assets
159,498

Property, plant and equipment, net (1)
77,001

Goodwill
302,487

Intangible assets, net
7,193

Other assets
4,462

Assets held for sale
$
550,641

 
 
Accounts payable and accrued liabilities
$
77,639

Advance billings
9,862

Total current liabilities
87,501

Other non-current liabilities
30,676

Liabilities related to assets held for sale
$
118,177

(1) Also includes the carrying value of our corporate headquarters building and certain surrounding parcels of land. See Note 6.

15

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

5. Fair Value Measurements and Derivative Instruments
We measure certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. An entity is required to classify certain assets and liabilities measured at fair value based on the following fair value hierarchy that prioritizes the inputs used to measure fair value:
Level 1 – Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity, may be derived from internally developed methodologies based on management’s best estimate of fair value and that are significant to the fair value of the asset or liability.
The following tables show, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis at September 30, 2013 and December 31, 2012. 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 their placement within the fair value hierarchy.
 
September 30, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
194,486

 
$
147,259

 
$
—

 
$
341,745

Equity securities
—

 
25,384

 
—

 
25,384

Commingled fixed income securities
—

 
26,772

 
—

 
26,772

Debt securities - U.S. and foreign governments, agencies and municipalities
118,071

 
18,049

 
—

 
136,120

Debt securities - corporate
—

 
31,534

 
—

 
31,534

Mortgage-backed / asset-backed securities
—

 
159,300

 
—

 
159,300

Derivatives
 
 
 
 
 

 


Interest rate swaps
—

 
1,855

 
—

 
1,855

Foreign exchange contracts
—

 
1,845

 
—

 
1,845

Total assets
$
312,557

 
$
411,998

 
$
—

 
$
724,555

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$
—

 
$
(5,473
)
 
$
—

 
$
(5,473
)
Total liabilities
$
—

 
$
(5,473
)
 
$
—

 
$
(5,473
)


16

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

 
December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
581,648

 
$
34,369

 
$
—

 
$
616,017

Equity securities
—

 
25,106

 
—

 
25,106

Commingled fixed income securities
—

 
29,359

 
—

 
29,359

Debt securities - U.S. and foreign governments, agencies and municipalities
124,221

 
18,908

 
—

 
143,129

Debt securities - corporate
—

 
43,926

 
—

 
43,926

Mortgage-backed / asset-backed securities
—

 
162,375

 
—

 
162,375

Derivatives
 

 
 

 
 

 


Interest rate swaps
—

 
10,117

 
—

 
10,117

Foreign exchange contracts
—

 
2,582

 
—

 
2,582

Total assets
$
705,869

 
$
326,742

 
$
—

 
$
1,032,611

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$
—

 
$
(1,174
)
 
$
—

 
$
(1,174
)
Total liabilities
$
—

 
$
(1,174
)
 
$
—

 
$
(1,174
)
Investment Securities
The valuation of investment securities is based on the market approach using inputs that are observable, or can be corroborated by observable data, in an active marketplace. The following information relates to our classification into the fair value hierarchy:
•
Money Market Funds / Commercial Paper: Money market funds typically invest in government securities, certificates of deposit, commercial paper and other highly liquid, low-risk securities. Money market funds are principally used for overnight deposits and are classified as Level 1 when unadjusted quoted prices in active markets are available and as Level 2 when they are not actively traded on an exchange. Direct investments in commercial paper are not listed on an exchange in an active market and are classified as Level 2.
•
Equity Securities: Equity securities are comprised of mutual funds investing in U.S. and foreign common stock. These mutual funds are classified as Level 2 as they are not separately listed on an exchange.
•
Commingled Fixed Income Securities: Mutual funds that invest in a variety of fixed income securities including securities of the U.S. government and its agencies, corporate debt, mortgage-backed securities and asset-backed securities. The value of the funds is based on the market value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding, as reported by the fund manager. These commingled funds are not listed on an exchange in an active market and are classified as Level 2.
•
Debt Securities – U.S. and Foreign Governments, Agencies and Municipalities: Debt securities are classified as Level 1 where active, high volume trades for identical securities exist. Valuation adjustments are not applied to these securities. Debt securities valued using quoted market prices for similar securities or benchmarking model derived prices to quoted market prices and trade data for identical or comparable securities are classified as Level 2.
•
Debt Securities – Corporate: Corporate debt securities are valued using recently executed transactions, market price quotations where observable, or bond spreads. The spread data used are for the same maturity as the security. These securities are classified as Level 2.
•
Mortgage-Backed Securities (MBS) / Asset-Backed Securities (ABS): These securities are valued based on external pricing indices. When external index pricing is not observable, MBS and ABS 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), an indirect wholly owned subsidiary whose primary business is to provide financing solutions to clients that rent or lease postage meters. The Bank's key product offering, Purchase Power, is a revolving credit solution, which enables clients to finance their postage costs when they refill their meter. The Bank also provides a

17

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

deposit solution to those clients that prefer to prepay postage and earn interest on their deposits. When a client refills their postage meter, the funds are withdrawn from the savings account to pay for the postage. The Bank's assets and liabilities consist primarily of cash, finance receivables, short and long-term investments and deposit accounts.
The Bank's investment securities are classified as available-for-sale and recorded at fair value on the Condensed Consolidated Balance Sheets as cash and cash equivalents, short-term investments and other assets depending on the type of investment and maturity. Unrealized holding gains and losses are recorded, net of tax, in accumulated other comprehensive income (AOCI).
Available-for-sale securities at September 30, 2013 and December 31, 2012 consisted of the following:
 
September 30, 2013
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
Money market funds / commercial paper
$
36,134

 
$
—

 
$
(13
)
 
$
36,121

Debt securities - U.S. and foreign governments, agencies and municipalities
116,146

 
1,405

 
(2,441
)
 
115,110

Debt securities - corporate
31,084

 
915

 
(465
)
 
31,534

Mortgage-backed / asset-backed securities
159,203

 
1,855

 
(1,758
)
 
159,300

Total
$
342,567

 
$
4,175

 
$
(4,677
)
 
$
342,065

 
December 31, 2012
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
Money market funds / commercial paper
$
44,611

 
$
53

 
$
—

 
$
44,664

Debt securities - U.S. and foreign governments, agencies and municipalities
127,807

 
3,972

 
(56
)
 
131,723

Debt securities - corporate
41,095

 
2,851

 
(20
)
 
43,926

Mortgage-backed / asset-backed securities
162,180

 
3,340

 
(3,145
)
 
162,375

Total
$
375,693

 
$
10,216

 
$
(3,221
)
 
$
382,688


Scheduled maturities of investment securities at September 30, 2013 were as follows:
 
Amortized cost
 
Estimated fair value
Within 1 year
$
55,811

 
$
55,853

After 1 year through 5 years
61,774

 
62,635

After 5 years through 10 years
62,694

 
62,301

After 10 years
162,288

 
161,276

Total
$
342,567

 
$
342,065

We have not experienced any significant write-offs in our investment portfolio. The majority of our MBS are either guaranteed or supported by the U.S. government. We have no investments in inactive markets that would warrant a possible change in our pricing methods or classification within the fair value hierarchy. Further, we have no investments in auction rate securities.
Derivative Instruments
In the normal course of business, we are exposed to the impact of interest rate changes and foreign currency fluctuations. We limit these risks by following established risk management policies and procedures, including the use of derivatives. We use derivatives to manage the related cost of debt and to limit the effects of foreign exchange rate fluctuations on financial results. We do not use derivatives for trading or speculative purposes. We record our derivative instruments at fair value, and the accounting for changes in the fair value of the derivatives 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.

18

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

As required by the fair value measurements guidance, we have incorporated counterparty credit risk and our credit risk into the fair value measurement of our derivative assets and liabilities, respectively. We derive credit risk from observable data related to credit default swaps. We have not seen a material change in the creditworthiness of those banks acting as derivative counterparties.
The valuation of our interest rate swaps 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. The valuation of our foreign exchange derivatives is based on the market approach using observable market inputs, such as forward rates.

The fair value of our derivative instruments at September 30, 2013 and December 31, 2012 was as follows:
Designation of Derivatives
 
Balance Sheet Location
 
September 30,
2013
 
December 31,
2012
Derivatives designated as
hedging instruments
 
Other current assets and prepayments:
 
 

 
 

 
 
Foreign exchange contracts
 
$
398

 
$
78

 
 
Other assets:
 
 

 
 

 
 
Interest rate swaps
 
1,855

 
10,117

 
 
Accounts payable and accrued liabilities:
 
 

 
 

 
 
Foreign exchange contracts
 
(584
)
 
(320
)
Derivatives not designated as
hedging instruments
 
Other current assets and prepayments:
 
 

 
 

 
 
Foreign exchange contracts
 
1,447

 
2,504

 
 
Accounts payable and accrued liabilities:
 
 

 
 

 
 
Foreign exchange contracts
 
(4,889
)
 
(854
)
 
 
 
 
 
 
 
 
 
Total derivative assets
 
$
3,700

 
$
12,699

 
 
Total derivative liabilities
 
(5,473
)
 
(1,174
)
 
 
Total net derivative (liabilities) assets
 
$
(1,773
)
 
$
11,525


Interest Rate Swaps
Derivatives designated as fair value hedges include interest rate swaps related to fixed rate debt. Changes in the fair value of both the derivative and item being hedged are recognized in earnings. The following represents the results of fair value hedging relationships for the three and nine months ended September 30, 2013 and 2012:
 
 
 
 
Three Months Ended September 30,
 
 
 
 
Derivative Gain
Recognized in Earnings
 
Hedged Item Expense
Recognized in Earnings
Derivative Instrument
 
Location of Gain (Loss)
 
2013
 
2012
 
2013
 
2012
Interest rate swaps
 
Interest expense
 
$
863

 
$
1,578

 
$
(2,742
)
 
$
(5,484
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
Derivative Gain
Recognized in Earnings
 
Hedged Item Expense
Recognized in Earnings
Derivative Instrument
 
Location of Gain (Loss)
 
2013
 
2012
 
2013
 
2012
Interest rate swaps
 
Interest expense
 
$
3,631

 
$
8,351

 
$
(10,969
)
 
$
(25,652
)

Foreign Exchange Contracts
We enter into foreign currency 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 September 30, 2013 and December 31, 2012, we had outstanding contracts associated with

19

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

these anticipated transactions with a notional amount of $29 million and $25 million, respectively. The value of these contracts at September 30, 2013 and December 31, 2012 was less than $1 million.
The amounts included in AOCI at September 30, 2013 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, 2013 and 2012:
 
 
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
 
2013
 
2012
 
 
2013
 
2012
Foreign exchange contracts
 
$
(343
)
 
$
(863
)
 
Revenue
 
$
(169
)
 
$
456