PBI

Pitney Bowes Inc. 10-Q Summary: Period Ended September 30, 2007

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2007, and the nine months ended on that date. Pitney Bowes Inc. operates as a provider of global mail and document management solutions, organized into two primary business groups: Mailstream Solutions (equipment, software, supplies) and Mailstream Services (facilities management, mail services, marketing). The company reported 216,887,629 shares of common stock outstanding as of November 2, 2007.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 5% in the quarter and 7% year-to-date compared to 2006. Growth was driven by acquisitions (notably MapInfo) and foreign currency translation, offset by declines in equipment sales and rentals.
• Profitability: Net income decreased 14% in the quarter ($127.7M vs. $148.6M) but improved significantly year-to-date ($424.7M vs. a loss of $53.9M in 2006). The 2006 prior-year loss was heavily impacted by discontinued operations.
• Segment Performance: Software revenue surged 85% quarter-over-quarter due to the MapInfo acquisition. Mail Services revenue grew 27%. Conversely, U.S. Mailing revenue declined 3% due to lower equipment sales and the wind-down of meter migration.
• Discontinued Operations: The 2006 prior-year results included significant losses from the sale of Capital Services and Imagistics. In 2007, discontinued operations resulted in a minor net loss of $1.6 million for the quarter.

Guidance, Outlook, and Risks

Outlook: Management noted challenging business conditions in the third quarter. The company expects a shift in product mix toward smaller, fully featured systems and away from large system sales. They plan to review product lines in light of new U.S. postal reform regulations issued in October 2007 and will focus on infrastructure improvements to lower costs.

Unusual Items:

• Acquisitions: Significant cash outflows for acquisitions ($559.9 million in the first nine months), primarily for MapInfo ($448 million), Digital Cement ($38 million), and Asterion ($30 million).
• Impairment: A $4.3 million pre-tax charge was recorded in Q3 for the impairment of intangible assets in the legal solutions business.
• Tax Charges: A $3.6 million non-cash deferred tax charge impacted Q3 results due to tax rate changes in Germany and the U.K.

Risks and Contingencies:

• Legal Proceedings: Ongoing patent litigation with Ricoh Corporation (appeal stage) and Multi-District Litigation regarding the DriverSource program (Imagitas). Outcomes could materially affect financial position.
• Tax Uncertainty: The company is under examination by the IRS for tax years 2001-2004 and other international jurisdictions. Unrecognized tax benefits could decrease by approximately 10% in Q4 2007.

Investor Verification Checklist

• MapInfo Integration: Verify the realization of synergies and revenue recognition alignment from the MapInfo acquisition, which significantly boosted Software segment results.
• Postal Reform Impact: Assess the potential impact of the new U.S. postal rate-setting regulations on the U.S. Mailing segment's equipment sales and rental volumes.
• Legal Exposure: Monitor the status of the Imagitas litigation and the Ricoh patent appeal, as adverse rulings could restrict service offerings.
• Debt Servicing: Review the company's ability to service its ~$4.9 billion debt load, particularly given the issuance of $500 million in new notes in September 2007.
• Tax Liability Resolution: Track the resolution of the IRS audit for 2001-2004 and the expected 10% reduction in unrecognized tax benefits in Q4.