PBI

Pitney Bowes Inc. 10-Q Summary: Quarter Ended June 30, 2006

Business Context and Reporting Period

This Form 10-Q covers the three and six months ended June 30, 2006. Pitney Bowes Inc. operates in two primary business groups: Mailstream Solutions (equipment, supplies, software, rentals) and Mailstream Services (facilities management, mail services, marketing). The reporting period is significantly impacted by the classification of the Imagistics lease portfolio and the Capital Services external financing business as discontinued operations following their sale in April and July 2006, respectively.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 5% year-over-year for both the quarter and the six-month period. Growth was driven by financing, supplies, software, and business services. Acquisitions contributed 1.9% to quarterly revenue growth.
• Discontinued Operations Impact: The reported net loss is primarily due to a $442.2 million after-tax loss on the sale of the Capital Services business and a $41.0 million tax charge related to a tentative IRS settlement, both classified as discontinued operations. Excluding these items, income from continuing operations grew.
• Segment Performance:
  • Mailstream Solutions: Revenue up 5%; EBIT up 5%.
  • Mailstream Services: Revenue up 6%; EBIT up 48%, driven by strong growth in Mail Services and Marketing Services.
• Costs and Margins: Cost of equipment sales as a percentage of revenue improved to 50.0% (from 50.8% prior year). Selling, general, and administrative expenses increased slightly as a percentage of revenue due to transition costs in Europe and Canada.
• Restructuring: Pre-tax restructuring charges were $5.0 million for the quarter and $10.6 million for the six months, significantly lower than the $26.4 million and $10.6 million recorded in the prior year periods, respectively.

Guidance, Outlook, and Risks

• Outlook: Management anticipates continued strength in financial results for the second half of 2006. They expect a changing revenue mix with a greater percentage from diversified streams (smaller systems) and less from larger system sales.
• Restructuring: The company expects to record additional restructuring charges in 2006, estimating a total range of $25 million to $35 million for the full year.
• Tax Contingency: A tentative settlement with the IRS regarding tax years through 2000 resulted in a $61 million additional tax expense ($20 million in continuing operations, $41 million in discontinued). The company anticipates paying approximately $1.1 billion in additional taxes over the next six months, funded by proceeds from asset sales and COLI advances.
• Liquidity: The company maintains substantial borrowing capability, including $704.6 million in outstanding commercial paper and $3.1 billion in unused credit facilities. Capital expenditures for 2006 are expected to be approximately the same as the prior year.
• Risks: Key risks include changes in postal regulations, foreign currency fluctuations, interest rate changes, and the successful integration of recent acquisitions.

Investor Verification Checklist

• Discontinued Operations: Verify the final tax implications and working capital adjustments related to the Capital Services and Imagistics sales.
• IRS Settlement: Monitor the finalization of the tentative IRS settlement and the actual cash outflow of the anticipated $1.1 billion tax payment.
• Revenue Mix: Assess the sustainability of revenue growth in Mailstream Services versus the transition to smaller digital systems in Mailstream Solutions.
• Restructuring Costs: Track actual restructuring charges against the $25-$35 million full-year estimate.
• Debt Levels: Review the impact of debt repayments and the utilization of the $3.1 billion credit facility on future liquidity.