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Fair Value Measurements and Derivative Instruments | 9 Months Ended
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Sep. 30, 2013
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. 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 | )
| 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 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. 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 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 |
|  |  |  |  |  |  |  | Cost of sales |  | 108 |  |  | (56 | )
|  |  |  |  |  |  |  |  |  | $ | (61 | ) |  | $ | 400 |
|  | Nine 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 |  | $ | 457 |  |  | $ | (1,672 | ) |  | Revenue |  | $ | (922 | ) |  | $ | 1,230 |
|  |  |  |  |  |  |  | Cost of sales |  | 520 |  |  | (129 | )
|  |  |  |  |  |  |  |  |  | $ | (402 | ) |  | $ | 1,101 |
We also enter into foreign exchange contracts to minimize the impact of exchange rate fluctuations on short-term intercompany loans and related interest that are denominated in a foreign currency. The revaluation of the intercompany loans and interest and the mark-to-market adjustment on the derivatives are both recorded in earnings. Outstanding foreign exchange contracts to buy or sell various currencies had a net liability value of $3 million at September 30, 2013 and a net asset value of $2 million at December 31, 2012. All outstanding contracts at September 30, 2013 mature by the end of the year. The following represents the results of our non-designated derivative instruments for the three and nine months ended September 30, 2013 and 2012:
|  |  |  | Three Months Ended September 30,
|  |  |  | Derivative Gain (Loss) Recognized in Earnings
Derivatives Instrument |  | Location of Derivative Gain (Loss) |  | 2013 |  | 2012
Foreign exchange contracts |  | Selling, general and administrative expense |  | $ | (6,798 | ) |  | $ | 939 |
|  |  |  | Nine Months Ended September 30,
|  |  |  | Derivative Gain (Loss) Recognized in Earnings
Derivatives Instrument |  | Location of Derivative Gain (Loss) |  | 2013 |  | 2012
Foreign exchange contracts |  | Selling, general and administrative expense |  | $ | (12,793 | ) |  | $ | (2,129 | )
Credit-Risk-Related Contingent Features Certain derivative instruments contain credit-risk-related contingent features that would require us to post collateral based on a combination of our long-term senior unsecured debt ratings and the net fair value of our derivatives. At September 30, 2013, we were not required to post any collateral. The maximum amount of collateral that we would have been required to post at September 30, 2013, had the credit-risk-related contingent features been triggered, was $4 million. Fair Value of Financial Instruments Our financial instruments include cash and cash equivalents, investment securities, accounts receivable, loan receivables, derivative instruments, accounts payable and debt. The carrying value for cash and cash equivalents, accounts receivable, loans receivable, and accounts payable approximate fair value because of the short maturity of these instruments. The fair value of our debt is estimated based on recently executed transactions and market price quotations. These inputs are classified as Level 2 in the fair value hierarchy. The carrying value and estimated fair value of our debt at September 30, 2013 and December 31, 2012 was as follows:
| September 30, 2013 |  | December 31, 2012
Carrying value | $ | 3,650,590 |  |  | $ | 4,017,375 |
Fair value | $ | 3,867,130 |  |  | $ | 4,200,970 |

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