XNYS:PBI Pitney Bowes Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
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)
 
(Former name, former address and former fiscal year, if changed since last report)
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          
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of April 30, 2012.
Class
 
Outstanding
Common Stock, $1 par value per share
 
200,214,743 shares

1




PITNEY BOWES INC.
INDEX

 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2




PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
PITNEY BOWES INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; in thousands, except per share data)
 
 
 
 
Three Months Ended March 31,
 
 
2012
 
2011
 
Revenue:
 

 
 

 
Equipment sales
$
220,179

 
$
241,631

 
Supplies
76,365

 
82,870

 
Software
104,350

 
99,565

 
Rentals
140,389

 
156,692

 
Financing
126,748

 
140,589

 
Support services
173,518

 
178,614

 
Business services
414,107

 
423,108

 
Total revenue
1,255,656

 
1,323,069

 
Costs and expenses:
 

 
 

 
Cost of equipment sales
96,916

 
114,753

 
Cost of supplies
23,871

 
26,192

 
Cost of software
21,093

 
25,212

 
Cost of rentals
30,225

 
35,907

 
Financing interest expense
21,139

 
23,293

 
Cost of support services
115,087

 
115,276

 
Cost of business services
318,976

 
333,567

 
Selling, general and administrative
411,185

 
426,611

 
Research and development
34,073

 
34,758

 
Restructuring charges and asset impairments

 
26,024

 
Other interest expense
29,367

 
28,524

 
Interest income
(1,733
)
 
(1,222
)
 
Other income, net
(3,234
)
 

 
Total costs and expenses
1,096,965

 
1,188,895

 
Income from continuing operations before income taxes
158,691

 
134,174

 
Provision for income taxes
14,759

 
41,394

 
Income from continuing operations
143,932

 
92,780

 
Income (loss) from discontinued operations, net of tax
19,332

 
(1,882
)
 
Net income before attribution of noncontrolling interests
163,264

 
90,898

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

 
4,594

 
Net income - Pitney Bowes Inc.
$
158,670

 
$
86,304

 
Amounts attributable to common stockholders:
 

 
 

 
Income from continuing operations
$
139,338

 
$
88,186

 
Income (loss) from discontinued operations
19,332

 
(1,882
)
 
Net income - Pitney Bowes Inc.
$
158,670

 
$
86,304

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

 
 

 
Continuing operations
$
0.70

 
$
0.43

 
Discontinued operations
0.10

 
(0.01
)
 
Net income - Pitney Bowes Inc.
$
0.79

 
$
0.42

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

 
 

 
Continuing operations
$
0.69

 
$
0.43

 
Discontinued operations
0.10

 
(0.01
)
 
Net income - Pitney Bowes Inc.
$
0.79

 
$
0.42

 

(1)
The sum of the 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, except per share data)

 
 
Three Months Ended March 31,
 
 
2012
 
2011
 
 
 
 
 
Net income - Pitney Bowes Inc.
 
$
158,670

 
$
86,304

Other comprehensive income, net of tax:
 
 
 
 
Foreign currency translations
 
33,359

 
50,817

Net unrealized gain (loss) on cash flow hedges, net of tax of $32 and $(28), respectively
 
49

 
(51
)
Net unrealized loss on investment securities, net of tax of $(548) and $(80), respectively
 
(857
)
 
(125
)
Amortization of pension and postretirement costs, net of tax of $6,886 and $4,977, respectively
 
11,988

 
8,669

Other comprehensive income
 
44,539

 
59,310

 
 
 
 
 
Comprehensive income - Pitney Bowes Inc.
 
$
203,209

 
$
145,614

 
 
 
 
 


































See Notes to Condensed Consolidated Financial Statements


4




PITNEY BOWES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except share and per share data)
 
March 31, 2012
 
December 31, 2011
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
915,553

 
$
856,238

Short-term investments
35,863

 
12,971

Accounts receivable, gross
725,446

 
755,485

Allowance for doubtful accounts receivables
(31,117
)
 
(31,855
)
Accounts receivable, net
694,329

 
723,630

Finance receivables
1,263,826

 
1,296,673

Allowance for credit losses
(39,124
)
 
(45,583
)
Finance receivables, net
1,224,702

 
1,251,090

Inventories
179,321

 
178,599

Current income taxes
116,247

 
102,556

Other current assets and prepayments
128,244

 
134,774

Total current assets
3,294,259

 
3,259,858

Property, plant and equipment, net
403,657

 
404,146

Rental property and equipment, net
261,388

 
258,711

Finance receivables
1,097,093

 
1,123,638

Allowance for credit losses
(15,278
)
 
(17,847
)
Finance receivables, net
1,081,815

 
1,105,791

Investment in leveraged leases
32,977

 
138,271

Goodwill
2,162,689

 
2,147,088

Intangible assets, net
201,891

 
212,603

Non-current income taxes
85,410

 
89,992

Other assets
538,172

 
530,644

Total assets
$
8,062,258

 
$
8,147,104

LIABILITIES, NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
 

Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
1,675,152

 
$
1,840,465

Current income taxes
295,283

 
242,972

Notes payable and current portion of long-term obligations
577,830

 
550,000

Advance billings
494,068

 
458,425

Total current liabilities
3,042,333

 
3,091,862

Deferred taxes on income
107,175

 
175,944

Tax uncertainties and other income tax liabilities
198,853

 
194,840

Long-term debt
3,682,798

 
3,683,909

Other non-current liabilities
643,686

 
743,165

Total liabilities
7,674,845

 
7,889,720

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

 
296,370

Commitments and contingencies (See Note 11)


 


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

 
4

Cumulative preference stock, no par value, $2.12 convertible
653

 
659

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

 
323,338

Additional paid-in capital
225,869

 
240,584

Retained earnings
4,683,949

 
4,600,217

Accumulated other comprehensive loss
(617,106
)
 
(661,645
)
Treasury stock, at cost (123,130,405 and 123,586,842 shares, respectively)
(4,525,664
)
 
(4,542,143
)
Total Pitney Bowes Inc. stockholders’ equity (deficit)
91,043

 
(38,986
)
Total liabilities, noncontrolling interests and stockholders’ equity (deficit)
$
8,062,258

 
$
8,147,104

See Notes to Condensed Consolidated Financial Statements

5




PITNEY BOWES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
 
Three Months Ended March 31,
 
2012
 
2011
Cash flows from operating activities:
 

 
 

Net income before attribution of noncontrolling interests
$
163,264

 
$
90,898

Restructuring payments
(26,245
)
 
(29,745
)
Special pension plan contributions
(95,000
)
 

Tax payments related to sale of leveraged lease assets
(69,233
)
 

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Gain on sale of leveraged lease assets, net of tax
(12,886
)
 

Depreciation and amortization
64,370

 
69,318

Stock-based compensation
4,377

 
3,918

Restructuring charges and asset impairments

 
26,024

Changes in operating assets and liabilities:
 

 
 

(Increase) decrease in accounts receivable
34,798

 
51,868

(Increase) decrease in finance receivables
63,926

 
89,611

(Increase) decrease in inventories
925

 
(11,410
)
(Increase) decrease in other current assets and prepayments
3,023

 
(835
)
Increase (decrease) in accounts payable and accrued liabilities
(133,169
)
 
(79,362
)
Increase (decrease) in current and non-current income taxes
53,087

 
58,197

Increase (decrease) in advance billings
43,166

 
22,100

Increase (decrease) in other operating capital, net
1,592

 
6,179

Net cash provided by operating activities
95,995

 
296,761

Cash flows from investing activities:
 

 
 

Short-term and other investments
(32,949
)
 
(11,144
)
Capital expenditures
(50,029
)
 
(34,676
)
Proceeds from sale of leveraged lease assets
105,506

 

Net investment in external financing
(825
)
 
(1,560
)
Reserve account deposits
(25,674
)
 
(5,995
)
Net cash used in investing activities
(3,971
)
 
(53,375
)
Cash flows from financing activities:
 

 
 

Increase (decrease) in notes payable, net
177,830

 
(7,700
)
Principal payments of long-term obligations
(150,000
)
 

Proceeds from issuance of common stock
2,059

 
3,500

Dividends paid to stockholders
(74,938
)
 
(75,423
)
Net cash used in financing activities
(45,049
)
 
(79,623
)
Effect of exchange rate changes on cash and cash equivalents
12,340

 
3,943

Increase in cash and cash equivalents
59,315

 
167,706

Cash and cash equivalents at beginning of period
856,238

 
484,363

Cash and cash equivalents at end of period
$
915,553

 
$
652,069

Cash interest paid
$
77,572

 
$
77,558

Cash income tax payments (refund), net
$
28,148

 
$
(19,503
)



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 (PBI, the company, we, us, and our) is a global provider of software, hardware and services that enables both physical and digital communications and that integrates those physical and digital communications channels. We offer a full suite of equipment, supplies, software, services and solutions for managing and integrating physical and digital communication channels. We conduct our business activities in seven reporting segments within two business groups: Small & Medium Business Solutions and Enterprise Business Solutions. See Note 12 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, 2011 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, including normal recurring adjustments, considered necessary to present fairly our financial position at March 31, 2012, and the results of operations and cash flows for the three months ended March 31, 2012 and 2011 have been included. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for any other interim period or the year ending December 31, 2012.
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, 2011 (the 2011 Annual Report). Certain prior year amounts have been reclassified to conform to the current period presentation.
2. Inventories
Inventories at March 31, 2012 and December 31, 2011 consisted of the following:
 
March 31,
2012
 
December 31,
2011
Raw materials and work in process
$
70,472

 
$
63,216

Supplies and service parts
70,346

 
68,600

Finished products
64,177

 
71,958

Inventory at FIFO cost
204,995

 
203,774

Excess of FIFO cost over LIFO cost
(25,674
)
 
(25,175
)
Total inventory, net
$
179,321

 
$
178,599



7

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 leases 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 at March 31, 2012 and December 31, 2011 consisted of the following:
 
March 31, 2012
 
North America
 
International
 
Total
Sales-type lease receivables
 

 
 

 
 

Gross finance receivables
$
1,692,255

 
$
459,242

 
$
2,151,497

Unguaranteed residual values
173,542

 
21,062

 
194,604

Unearned income
(337,164
)
 
(104,739
)
 
(441,903
)
Allowance for credit losses
(24,914
)
 
(11,035
)
 
(35,949
)
Net investment in sales-type lease receivables
1,503,719

 
364,530

 
1,868,249

Loan receivables
 

 
 

 
 

Loan receivables
415,425

 
41,296

 
456,721

Allowance for credit losses
(17,411
)
 
(1,042
)
 
(18,453
)
Net investment in loan receivables
398,014

 
40,254

 
438,268

Net investment in finance receivables
$
1,901,733

 
$
404,784

 
$
2,306,517

 
 
 
 
 
 
 
December 31, 2011
 
North America
 
International
 
Total
Sales-type lease receivables
 

 
 

 
 

Gross finance receivables
$
1,727,653

 
$
460,101

 
$
2,187,754

Unguaranteed residual values
185,450

 
20,443

 
205,893

Unearned income
(348,286
)
 
(102,618
)
 
(450,904
)
Allowance for credit losses
(28,661
)
 
(12,039
)
 
(40,700
)
Net investment in sales-type lease receivables
1,536,156

 
365,887

 
1,902,043

Loan Receivables
 

 
 

 
 

Loan receivables
436,631

 
40,937

 
477,568

Allowance for credit losses
(20,272
)
 
(2,458
)
 
(22,730
)
Net investment in loan receivables
416,359

 
38,479

 
454,838

Net investment in finance receivables
$
1,952,515

 
$
404,366

 
$
2,356,881

Allowance for Credit Losses and Aging of Receivables
We estimate our finance receivable risks and provide allowances for credit losses accordingly. We establish credit approval limits based on the credit quality of the customer and the type of equipment financed. We believe that our concentration of credit risk is limited because of our large number of customers, small account balances for most of our customers and customer geographic and industry diversification.

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 customer payments reduce the account balance aging to 60 days or less past due. 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 customer's ability to pay and prevailing economic conditions, and make adjustments to the reserves as necessary. This evaluation is inherently subjective and actual results may differ significantly from estimated reserves.


8

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

We maintain a program for U.S. borrowers 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 borrower’s credit line is closed, interest accrual is suspended, the borrower’s minimum required payment is reduced and the account is re-aged and classified as current. There is generally no forgiveness of debt or reduction of balances owed. The loans in the program are considered to be troubled debt restructurings because of the concessions granted to the borrower. At March 31, 2012 and December 31, 2011, loans in this program had a balance of $6 million and $7 million, respectively.

The allowance for credit losses for these modified loans is determined by the difference between cash flows expected to be received from the borrower discounted at the original effective rate and the carrying value of the loan. The allowance for credit losses related to such loans was $2 million at March 31, 2012 and December 31, 2011 and is included in the allowance for credit losses of North America loans in the table below. Management believes that the allowance for credit losses is adequate for these loans and all other loans in the portfolio. Write-offs of loans in the program totaled approximately $1 million for the previous twelve months.

Activity in the allowance for credit losses for finance receivables for the three months ended March 31, 2012 was as follows:
 
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
(1,330
)
 
572

 
283

 
(958
)
 
(1,433
)
Accounts written off
(2,417
)
 
(1,576
)
 
(3,144
)
 
(458
)
 
(7,595
)
Balance at March 31, 2012
$
24,914

 
$
11,035

 
$
17,411

 
$
1,042

 
$
54,402


The aging of finance receivables at March 31, 2012 and December 31, 2011 was as follows:
 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
March 31, 2012
 

 
 

 
 

 
 

 
 

< 31 days past due
$
1,604,761

 
$
432,790

 
$
394,913

 
$
39,346

 
$
2,471,810

> 30 days and < 61 days
35,892

 
10,495

 
10,542

 
970

 
57,899

> 60 days and < 91 days
25,941

 
6,238

 
4,318

 
509

 
37,006

> 90 days and < 121 days
7,530

 
3,756

 
2,732

 
151

 
14,169

> 120 days
18,131

 
5,963

 
2,920

 
320

 
27,334

Total
$
1,692,255

 
$
459,242

 
$
415,425

 
$
41,296

 
$
2,608,218

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
7,530

 
$
3,756

 
$

 
$

 
$
11,286

Not accruing interest
18,131

 
5,963

 
5,652

 
471

 
30,217

Total
$
25,661

 
$
9,719

 
$
5,652

 
$
471

 
$
41,503


9

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

 
Sales-type Lease Receivables
 
Loan Receivables
 
 
 
North
America
 
International
 
North
America
 
International
 
Total
December 31, 2011
 

 
 

 
 

 
 

 
 

< 31 days past due
$
1,641,706

 
$
434,811

 
$
414,434

 
$
38,841

 
$
2,529,792

> 30 days and < 61 days
41,018

 
10,152

 
12,399

 
1,066

 
64,635

> 60 days and < 91 days
24,309

 
5,666

 
4,362

 
425

 
34,762

> 90 days and < 121 days
4,912

 
3,207

 
2,328

 
186

 
10,633

> 120 days
15,708

 
6,265

 
3,108

 
419

 
25,500

Total
$
1,727,653

 
$
460,101

 
$
436,631

 
$
40,937

 
$
2,665,322

Past due amounts > 90 days
 

 
 

 
 

 
 

 
 

Still accruing interest
$
4,912

 
$
3,207

 
$

 
$

 
$
8,119

Not accruing interest
15,708

 
6,265

 
5,436

 
605

 
28,014

Total
$
20,620

 
$
9,472

 
$
5,436

 
$
605

 
$
36,133

Credit Quality
The extension of credit and management of credit lines to new and existing customers uses a combination of an automated credit score, where available, and a detailed manual review of the customer’s financial condition and, when applicable, the customer’s payment history. Once credit is granted, the payment performance of the customer 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 American 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 American portfolio at March 31, 2012 and December 31, 2011 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.


10

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

 
March 31,
2012
 
December 31,
2011
Sales-type lease receivables
 

 
 

Risk Level
 

 
 

Low
$
1,037,825

 
$
1,096,676

Medium
504,349

 
473,394

High
55,059

 
58,177

Not Scored
95,022

 
99,406

Total
$
1,692,255

 
$
1,727,653

Loan receivables
 

 
 

Risk Level
 

 
 

Low
$
253,803

 
$
269,547

Medium
136,881

 
115,490

High
18,965

 
21,081

Not Scored
5,776

 
30,513

Total
$
415,425

 
$
436,631


 
 
 
Although the relative score of accounts within each class is used as a factor in determining a customer credit limit, it is not indicative of our actual history of losses due to the business essential nature of our products and services. The aging schedule included above, showing approximately 1.6% of the portfolio as greater than 90 days past due, and the roll-forward schedule of the allowance for credit losses, showing the actual losses for the three months ended March 31, 2012 are more representative of the potential loss performance of our portfolio than relative risk based on scores, as defined by the third party.

Leveraged Leases
Our investment in leveraged lease assets consisted of the following:
 
March 31,
2012
 
December 31,
2011
Rental receivables
$
95,737

 
$
810,306

Unguaranteed residual values
14,104

 
13,784

Principal and interest on non-recourse loans
(67,713
)
 
(606,708
)
Unearned income
(9,151
)
 
(79,111
)
Investment in leveraged leases
32,977

 
138,271

Less: deferred taxes related to leveraged leases
(21,233
)
 
(101,255
)
Net investment in leveraged leases
$
11,744

 
$
37,016

The following is a summary of the components of income from leveraged leases:
 
Three Months Ended March 31,
 
2012
 
2011
Pre-tax leveraged lease income
$
793

 
$
1,536

Income tax effect
19

 
(82
)
Income from leveraged leases
$
812

 
$
1,454

During the quarter, we completed a sale of non-U.S. leveraged lease assets to the lessee for cash. The investment in the leveraged lease at the date of sale was $109 million and an after-tax gain of $13 million was recognized. The effects of the sale are not included in the table above.

11

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

4. Intangible Assets and Goodwill
Intangible assets
Intangible assets at March 31, 2012 and December 31, 2011 consisted of the following:
 
March 31, 2012
 
December 31, 2011
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships
$
412,020

 
$
(247,106
)
 
$
164,914

 
$
409,489

 
$
(237,536
)
 
$
171,953

Supplier relationships
29,000

 
(19,938
)
 
9,062

 
29,000

 
(19,213
)
 
9,787

Software & technology
171,519

 
(147,071
)
 
24,448

 
170,286

 
(143,456
)
 
26,830

Trademarks & trade names
34,299

 
(30,953
)
 
3,346

 
33,908

 
(30,076
)
 
3,832

Non-compete agreements
7,596

 
(7,475
)
 
121

 
7,564

 
(7,363
)
 
201

Total intangible assets
$
654,434

 
$
(452,543
)
 
$
201,891

 
$
650,247

 
$
(437,644
)
 
$
212,603


Amortization expense for intangible assets was $12 million and $15 million for the three months ended March 31, 2012 and 2011, respectively. The future amortization expense for intangible assets as of March 31, 2012 was as follows:
 
Amount
Remaining for year ended December 31, 2012
$
32,188

Year ended December 31, 2013
39,022

Year ended December 31, 2014
34,996

Year ended December 31, 2015
31,062

Year ended December 31, 2016
22,875

Thereafter
41,748

Total
$
201,891

Actual amortization expense may differ from the amounts above due to, among other things, fluctuations in foreign currency exchange rates, impairments, future acquisitions and accelerated amortization.
Goodwill
The changes in the carrying amount of goodwill, by reporting segment, for the three months ended March 31, 2012 were as follows:
 
 
December 31, 2011
 
Other (1)
 
March 31, 2012
North America Mailing
 
$
352,897

 
$
4,266

 
$
357,163

International Mailing
 
176,285

 
5,816

 
182,101

Small & Medium Business Solutions
 
529,182

 
10,082

 
539,264

Production Mail
 
140,371

 
1,434

 
141,805

Software
 
667,124

 
2,942

 
670,066

Management Services
 
402,723

 
1,143

 
403,866

Mail Services
 
213,455

 

 
213,455

Marketing Services
 
194,233

 

 
194,233

Enterprise Business Solutions
 
1,617,906

 
5,519

 
1,623,425

Total
 
$
2,147,088

 
$
15,601

 
$
2,162,689

(1)
Primarily foreign currency translation adjustments.


12

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

5. Debt
During the quarter, we prepaid a $150 million term loan that was scheduled to mature in the fourth quarter of 2012. At March 31, 2012, outstanding commercial paper borrowings were $178 million at a weighted-average interest rate of 0.4%.
In April 2012, we entered into forward starting swap agreements with an aggregate notional value of $150 million to hedge interest rate risk associated with a forecasted issuance of long-term debt.
6. Noncontrolling Interests (Preferred Stockholders’ Equity in Subsidiaries)
Pitney Bowes International Holdings, Inc. (PBIH), a subsidiary, has outstanding 300,000 shares, or $300 million, of perpetual voting preferred stock (the Preferred Stock) held by certain outside institutional investors. The holders of the Preferred Stock are entitled as a group to 25% of the combined voting power of all classes of capital stock of PBIH. All outstanding common stock of PBIH, representing the remaining 75% of the combined voting power of all classes of capital stock, is owned directly or indirectly by the company. The Preferred Stock is entitled to cumulative dividends at a rate of 6.125% for a period of seven years after which it becomes callable and, if it remains outstanding, will yield a dividend that increases by 50% every six months thereafter. No dividends were in arrears at March 31, 2012 or December 31, 2011. There was no change in the carrying value of noncontrolling interests during the period ended March 31, 2012 or the year ended December 31, 2011.
7. Income Taxes
The effective tax rate for the three months ended March 31, 2012 and 2011 was 9.3% and 30.9%, respectively. The effective tax rate for the three months ended March 31, 2012 includes a $17 million tax benefit from the sale of non-U.S. leveraged lease assets and $22 million of tax benefits arising from the conclusion of tax examinations. The effective tax rate for the three months ended March 31, 2011 includes a $9 million tax benefit arising from a favorable conclusion of a foreign tax examination.
As is the case with other large corporations, our tax returns are examined each year by tax authorities in the United States, other countries and local jurisdictions in which we have operations. Except for issues arising out of partnership investments, the IRS examination of tax years 2001-2004 is closed to audit and the examination of years 2005-2008 is expected to be closed to audit by the end of 2012. We have other domestic and international tax filings currently under examination or subject to examination. 
We regularly assess the likelihood of tax adjustments in each of the tax jurisdictions in which we have operations and account for the related financial statement implications.  We believe we have established tax reserves that are appropriate given the possibility of tax adjustments.  However, determining the appropriate level of tax reserves requires judgment regarding the uncertain application of tax law and the possibility of tax adjustments. Future changes in tax reserve requirements could have a material impact, positive or negative, on our results of operations, financial position and cash flows.


13

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


8. Stockholders Equity

Changes in stockholders’ equity for the three months ended March 31, 2012 were as follows:
 
Preferred
stock
 
Preference
stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Treasury stock
 
Total equity
Balances at December 31, 2011
$
4

 
$
659

 
$
323,338

 
$
240,584

 
$
4,600,217

 
$
(661,645
)
 
$
(4,542,143
)
 
$
(38,986
)
Net income

 

 

 

 
158,670

 

 

 
158,670

Other comprehensive income

 

 

 

 

 
44,539

 

 
44,539

Cash dividends
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common ($0.375 per share)

 

 

 

 
(74,925
)
 

 

 
(74,925
)
Preference

 

 

 

 
(13
)
 

 

 
(13
)
Issuances of common stock

 

 

 
(18,931
)
 

 

 
16,352

 
(2,579
)
Conversions to common stock

 
(6
)
 

 
(121
)
 

 

 
127

 

Stock-based compensation expense

 

 

 
4,337

 

 

 

 
4,337

Balance at March 31, 2012
$
4

 
$
653

 
$
323,338

 
$
225,869

 
$
4,683,949

 
$
(617,106
)
 
$
(4,525,664
)
 
$
91,043


The components of accumulated other comprehensive loss at March 31, 2012 and 2011 were as follows:
 
January 1, 2012
 
Other comprehensive income
 
March 31, 2012
 
January 1, 2011
 
Other comprehensive income
 
March 31, 2011
Foreign currency translation adjustments
83,952

 
33,359

 
117,311

 
137,521

 
50,817

 
188,338

Net unrealized loss (gain) on derivatives
(8,438
)
 
49

 
(8,389
)
 
(10,445
)
 
(51
)
 
(10,496
)
Net unrealized gain (loss) on investment securities
4,387

 
(857
)
 
3,530

 
1,439

 
(125
)
 
1,314

Net unamortized (loss) gain on pension and postretirement plans
(741,546
)
 
11,988

 
(729,558
)
 
(602,321
)
 
8,669

 
(593,652
)
Accumulated other comprehensive (loss) income
$
(661,645
)
 
$
44,539

 
$
(617,106
)
 
$
(473,806
)
 
$
59,310

 
$
(414,496
)

9. 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 March 31, 2012 and December 31, 2011. 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.

14

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

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

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
346,024

 
$
283,575

 
$

 
$
629,599

Equity securities

 
24,888

 

 
24,888

Commingled fixed income securities

 
28,152

 

 
28,152

Debt securities - U.S. and foreign governments, agencies and municipalities
123,302

 
19,288

 

 
142,590

Debt securities - corporate

 
33,820

 

 
33,820

Mortgage-back / asset-back securities

 
136,322

 

 
136,322

Derivatives
 

 
 

 
 

 


Interest rate swaps

 
14,468

 

 
14,468

Foreign exchange contracts

 
900

 

 
900

Total assets
$
469,326

 
$
541,413

 
$

 
$
1,010,739

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$

 
$
(4,144
)
 
$

 
$
(4,144
)
Total liabilities
$

 
$
(4,144
)
 
$

 
$
(4,144
)

 
December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Investment securities
 

 
 

 
 

 
 

Money market funds / commercial paper
$
239,157

 
$
300,702

 
$

 
$
539,859

Equity securities

 
22,097

 

 
22,097

Commingled fixed income securities

 
27,747

 

 
27,747

Debt securities - U.S. and foreign governments, agencies and municipalities
93,175

 
19,042

 

 
112,217

Debt securities - corporate

 
31,467

 

 
31,467

Mortgage-back / asset-back securities

 
134,262

 

 
134,262

Derivatives
 

 
 

 
 

 


Interest rate swaps

 
15,465

 

 
15,465

Foreign exchange contracts

 
4,230

 

 
4,230

Total assets
$
332,332

 
$
555,012

 
$

 
$
887,344

Liabilities:
 

 
 

 
 

 
 

Derivatives
 

 
 

 
 

 
 

Foreign exchange contracts
$

 
$
(1,439
)
 
$

 
$
(1,439
)
Total liabilities
$

 
$
(1,439
)
 
$

 
$
(1,439
)

15

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

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 and 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. Value of the funds is based on the net asset value (NAV) per unit as reported by the fund manager. NAV is based on the market value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding. 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.
The carrying value of our investment securities at March 31, 2012 and December 31, 2011 was $990 million and $861 million, respectively.
Investment securities include investments held by The Pitney Bowes Bank (PBB). PBB, a wholly-owned subsidiary, is a Utah-chartered Industrial Loan Company (ILC). The bank’s investments at March 31, 2012 were $316 million. These investments were reported on the Condensed Consolidated Balance Sheets as cash and cash equivalents of $27 million, short-term investments of $33 million and other assets of $256 million. The bank’s investments at December 31, 2011 were $282 million and were reported as cash and cash equivalents of $28 million, short-term investments of $11 million and other assets of $243 million.
We have not experienced any write-offs in our investment portfolio. The majority of our MBS are either guaranteed or supported by the U.S. government. Market events have not caused our money market funds to experience declines in their net asset value below $1.00 per share or to incur imposed limits on redemptions. We have no investments in inactive markets which 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

16

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

market approach using observable market inputs, such as forward rates.

The fair value of our derivative instruments at March 31, 2012 and December 31, 2011 was as follows:
Designation of Derivatives
 
Balance Sheet Location
 
March 31,
2012
 
December 31,
2011
Derivatives designated as
hedging instruments
 
Other current assets and prepayments:
 
 

 
 

 
 
Foreign exchange contracts
 
$
384

 
$
780

 
 
Other assets:
 
 

 
 

 
 
Interest rate swaps
 
14,468

 
15,465

 
 
Accounts payable and accrued liabilities:
 
 

 
 

 
 
Foreign exchange contracts
 
108

 
79

Derivatives not designated as
hedging instruments
 
Other current assets and prepayments:
 
 

 
 

 
 
Foreign exchange contracts
 
516

 
3,450

 
 
Accounts payable and accrued liabilities:
 
 

 
 

 
 
Foreign exchange contracts
 
4,036

 
1,360

 
 
Total Derivative Assets
 
$
15,368

 
$
19,695

 
 
Total Derivative Liabilities
 
4,144

 
1,439

 
 
Total Net Derivative Assets
 
$
11,224

 
$
18,256


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 months ended March 31, 2012 and 2011:
 
 
 
 
Three Months Ended March 31,
 
 
 
 
Derivative Gain
Recognized in Earnings
 
Hedged Item Expense
Recognized in Earnings
Derivative Instrument
 
Location of Gain (Loss)
 
2012
 
2011
 
2012
 
2011
Interest rate swaps
 
Interest expense
 
$
3,327

 
$
1,733

 
$
(10,109
)
 
$
(4,625
)

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 the cash flow hedges is included in accumulated other comprehensive income (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 March 31, 2012 and December 31, 2011, we had outstanding contracts associated with these anticipated transactions with a notional amount of $22 million and $19 million, respectively. These contracts had a net asset value of less than $1 million at March 31, 2012 and December 31, 2011.
The amounts included in AOCI at March 31, 2012 will be recognized in earnings within the next 12 months. No amount of ineffectiveness was recorded in earnings for these designated cash flow hedges.

17

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

The following represents the results of cash flow hedging relationships for the three months ended March 31, 2012 and 2011:
 
 
Three Months Ended March 31,
 
 
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
 
2012
 
2011
 
 
2012
 
2011
Foreign exchange contracts
 
$
(659
)
 
$
(315
)
 
Revenue
 
$
301

 
$
(9
)
 
 
 

 
 

 
Cost of sales
 
(66
)
 
(262
)
 
 
 

 
 

 
 
 
$
235

 
$
(271
)
 
 
 
 
 
 
 
 
 
 
 
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. At March 31, 2012, outstanding foreign exchange contracts to buy or sell various currencies had a net liability value of $3 million. These contracts mature in 2012. At December 31, 2011, outstanding foreign exchange contracts to buy or sell various currencies had a net asset value of $2 million.
The following represents the results of our non-designated derivative instruments for the three months ended March 31, 2012 and 2011:
 
 
 
 
Three Months Ended March 31,
 
 
 
 
Derivative Gain (Loss)
Recognized in Earnings
Derivatives Instrument
 
Location of Derivative Gain (Loss)
 
2012
 
2011
Foreign exchange contracts
 
Selling, general and administrative expense
 
$
(4,224
)
 
$
(7,242
)
 
 
 
 
 
 
 

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 March 31, 2012, we were not required to post any collateral. The maximum amount of collateral that we would have been required to post at March 31, 2012, had the credit-risk-related contingent features been triggered, was $2 million.

Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, investment securities, accounts receivable, loan receivables, derivative instruments, account payables 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.  We classify our debt as Level 2 in the fair value hierarchy. The carrying value and estimated fair value of our debt at March 31, 2012 and December 31, 2011 was as follows:
 
March 31, 2012
 
December 31, 2011
 
Carrying value
$
4,260,628

 
$
4,233,909

 
Fair value
$
4,419,066

 
$
4,364,176

 
 
 
 
 
 


18

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

10. Restructuring Charges and Asset Impairments
2009 Program
In 2009, we implemented a series of strategic transformation initiatives designed to transform and enhance the way we operate as a global company (the 2009 Program). The initiatives were designed to enhance our responsiveness to changing market conditions and create improved processes and systems to further enable us to invest in future growth in areas such as our global customer interactions and product development processes. This program is substantially completed and we do not anticipate any further significant charges under this program. Most of the costs were cash-related charges. The majority of the remaining restructuring payments are expected to be paid through 2014; however, due to certain international labor laws and long-term lease agreements, some payments will extend beyond 2014. We expect that cash flows from operations will be sufficient to fund these payments.
Activity in the reserves for the restructuring actions taken in connection with the 2009 program for the three months ended March 31, 2012 was as follows:
 
Severance and benefits costs
 
Other exit
costs
 
Total
Balance at January 1, 2012
$
96,036

 
$
11,358

 
$
107,394

Cash payments
(23,923
)
 
(2,271
)
 
(26,194
)
Balance at March 31, 2012
$
72,113

 
$
9,087

 
$
81,200

2007 Program
In 2007, we announced a program to lower our cost structure, accelerate efforts to improve operational efficiencies, and transition our product line (the 2007 Program). The program included charges primarily associated with older equipment that we had stopped selling upon transition to the new generation of fully digital, networked, and remotely-downloadable equipment. We are not recording additional restructuring charges under the 2007 Program; however, due to international labor laws and long-term lease agreements, we are still making cash payments under this program and expect these payments to be substantially complete by the end of 2012. We expect that cash flows from operations will be sufficient to fund these payments.

Activity in the reserves for the restructuring actions taken in connection with the 2007 program for the three months ended March 31, 2012 was as follows:
 
Severance and
benefits costs
 
Other exit costs
 
Total
Balance at January 1, 2012
$
9,000

 
$
2,717

 
$
11,717

Cash payments
(51
)
 

 
(51
)
Balance at March 31, 2012
$
8,949

 
$
2,717

 
$
11,666


11. Commitments and Contingencies
Legal Proceedings
In the ordinary course of business, we are routinely defendants in, or party to a number of pending and threatened legal actions. These may involve litigation by or against us relating to, among other things, contractual rights under vendor, insurance or other contracts; intellectual property or patent rights; equipment, service, payment or other disputes with customers; or disputes with employees. Some of these actions may be brought as a purported class action on behalf of a purported class of employees, customers or others.

Our wholly owned subsidiary, Imagitas, Inc., was a defendant in several purported class actions initially filed in six different states. These lawsuits were coordinated in the United States District Court for the Middle District of Florida, In re: Imagitas, Drivers Privacy Protection Act Litigation (Coordinated, May 28, 2007). Each of these lawsuits alleged that the Imagitas DriverSource program violated the federal Drivers Privacy Protection Act (DPPA). Under the DriverSource program, Imagitas entered into contracts with state governments to mail out automobile registration renewal materials along with third party advertisements, without revealing the personal information of any state resident to any advertiser. The DriverSource program assisted the state in performing its governmental function of delivering these mailings and funding the costs of them. The plaintiffs in these actions were seeking statutory damages under the DPPA. On December 21, 2009, the Eleventh Circuit Court affirmed the District Court’s

19

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

summary judgment decision in Rine, et al. v. Imagitas, Inc. (United States District Court, Middle District of Florida, filed August 1, 2006) which ruled in Imagitas’ favor and dismissed that litigation. That decision is now final, with no further appeals available. With respect to the remaining state cases, on December 30, 2011, the District Court ruled in Imagitas’ favor and dismissed the litigation. Plaintiff filed a notice of appeal to the Court of Appeals for the Eleventh Circuit. On April 2, 2012, the parties agreed to resolve the matter. The remaining plaintiffs have dismissed their appeal and Imagitas has withdrawn a Motion for Taxation of Costs. This litigation is now concluded with no payments made by Imagitas to plaintiffs.

On October 28, 2009, the company and certain of its current and former officers were named as defendants in NECA-IBEW Health & Welfare Fund v. Pitney Bowes Inc. et al., a class action lawsuit filed in the U.S. District Court for the District of Connecticut.  The complaint asserts claims under the Securities Exchange Act of 1934 on behalf of those who purchased the common stock of the company during the period between July 30, 2007 and October 29, 2007 alleging that the company, in essence, missed two financial projections.  Plaintiffs filed an amended complaint on September 20, 2010. After briefing on the motion to dismiss was completed, the plaintiffs filed a new amended complaint on February 17, 2012. We have moved to dismiss this new amended complaint. Based upon our current understanding of the facts and applicable laws, we do not believe there is a reasonable possibility that any loss will be been incurred.

We expect to prevail in the legal actions above; however, as litigation is inherently unpredictable, there can be no assurance in this regard. If the plaintiffs do prevail, the results may have a material effect on our financial position, future results of operations or cash flows.
12. Segment Information
We conduct our business activities in seven reporting segments within two business groups, Small & Medium Business Solutions and Enterprise Business Solutions. The principal products and services of each of our reporting segments are as follows:
Small & Medium Business Solutions:
North America Mailing: Includes the U.S. and Canadian revenue and related expenses from the sale, rental and financing of our mail finishing, mail creation, shipping equipment and software; supplies; support and other professional services; and payment solutions.
International Mailing: Includes the revenue and related expenses from the sale, rental and financing of our mail finishing, mail creation, shipping equipment and software; supplies; support and other professional services; and payment solutions 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, production mail systems, sorting and production print equipment and related software.
Software: Includes the worldwide revenue and related expenses from the sale and support services of non-equipment-based mailing, customer relationship and communication and location intelligence software.
Management Services: Includes worldwide revenue and related expenses from facilities management services; secure mail services; reprographic, document management services; and litigation support and eDiscovery services.
Mail Services: Includes worldwide revenue and related expenses from presort mail services and cross-border mail services.
Marketing Services: Includes revenue and related expenses from direct marketing services for targeted customers.
Segment earnings before interest and taxes (EBIT), a non-GAAP measure, is determined by deducting from segment revenue the related costs and expenses attributable to the segment. Segment EBIT excludes interest, taxes, general corporate expenses not allocated to a particular business segment, restructuring charges, asset impairments and goodwill charges which are recognized on a consolidated basis. Management uses segment EBIT to measure profitability and performance at the segment level. Segment EBIT may not be indicative of our overall consolidated performance and therefore, should be read in conjunction with our consolidated results of operations.

20

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 for the three months ended March 31, 2012 and 2011 is as follows:
 
Three Months Ended March 31,
 
2012
 
2011
Revenue:
 

 
 

North America Mailing
$
461,305

 
$
509,039

International Mailing
168,014

 
170,533

Small & Medium Business Solutions
629,319

 
679,572

Production Mail
115,016

 
131,606

Software
100,327

 
95,985

Management Services
230,630

 
241,624

Mail Services
150,156

 
144,283

Marketing Services
30,208

 
29,999

Enterprise Business Solutions
626,337

 
643,497

Total revenue
$
1,255,656

 
$
1,323,069


 
Three Months Ended March 31,
 
2012
 
2011
EBIT:
 

 
 

North America Mailing
$
178,171

 
$
179,661

International Mailing
19,997

 
23,193

Small & Medium Business Solutions
198,168

 
202,854

Production Mail
2,779

 
7,174

Software
10,692

 
5,512

Management Services
13,315

 
21,029

Mail Services
31,905

 
10,265

Marketing Services
4,817

 
4,160

Enterprise Business Solutions
63,508

 
48,140

Total EBIT
261,676

 
250,994

Reconciling items:
 

 
 

Interest, net (1)
(48,773
)
 
(50,595
)
Corporate and other expenses
(54,212
)
 
(40,201
)
Restructuring charges and asset impairments

 
(26,024
)
Income from continuing operations before income taxes
$
158,691

 
$
134,174

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

21

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

13. Pensions and Other Benefit Programs
Defined Benefit Pension Plans
The components of net periodic benefit cost for defined benefit pension plans for the three months ended March 31, 2012 and 2011 were as follows:
 
Three Months Ended March 31,
 
United States
 
Foreign
 
2012
 
2011
 
2012
 
2011
Service cost
$
4,954

 
$
5,023

 
$
2,018

 
$
1,885

Interest cost
20,603

 
21,939

 
6,923

 
7,057

Expected return on plan assets
(30,618
)
 
(29,818
)
 
(8,023
)
 
(7,945
)
Amortization of transition credit

 

 
(2
)
 
(2
)
Amortization of prior service cost
205

 
36

 
28

 
44

Recognized net actuarial loss
13,314