PBI

Pitney Bowes Inc. Q3 2006 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2006. Pitney Bowes Inc. operates in two primary business groups: Mailstream Solutions (equipment, software, supplies) and Mailstream Services (facilities management, mailing services, marketing). The reporting period is significantly impacted by the sale of the Capital Services external financing business and the Imagistics lease portfolio, which are now classified as discontinued operations.

Key Financial Metrics

Note: Nine-month net income reflects a $456.3 million loss from discontinued operations, primarily due to the sale of Capital Services.

Material Changes vs. Prior Period

• Revenue Growth: Q3 revenue increased 8% year-over-year, driven by growth in financing (14%), supplies (16%), and equipment sales (14%). Foreign currency translation contributed 1% to growth.
• Discontinued Operations Impact: The nine-month period shows a net loss of $53.9 million compared to a net income of $420.0 million in the prior year. This reversal is almost entirely due to a $445.2 million after-tax loss on the sale of the Capital Services business, offset by a $11.1 million gain on the sale of the Imagistics portfolio.
• Continuing Operations Performance: Excluding discontinued operations, income from continuing operations for the nine months ended September 30, 2006, was $402.3 million, compared to $389.6 million in the prior year.
• Segment Performance: Mailstream Services EBIT grew 32% in Q3, led by Marketing Services (42% EBIT growth) and Mail Services (81% EBIT growth). Production Mail EBIT increased 43%.
• Tax Rate: The effective tax rate for the nine months ended September 30, 2006, was 37.5%, compared to 33.6% in the prior year, largely due to a $20 million charge related to an IRS settlement.

Guidance, Outlook, and Risks

• Outlook: Management anticipates ongoing strength in Q4 2006 financial results. They expect a continuing shift in revenue mix toward diversified streams from smaller systems rather than large system sales.
• Restructuring: The company expects to record additional restructuring charges in 2006, estimating total pre-tax charges for the year to be in the range of $30 million to $35 million. Approximately 3,800 employees have been reduced to date, with 500 more expected.
• IRS Settlement: In August 2006, the company settled tax audit issues through 2000. The total liability is approximately $1.1 billion (net of $330 million in tax bonds). $239 million was paid in Q3, with the remainder expected to be paid by year-end, funded by proceeds from asset sales and COLI advances.
• Legal Proceedings: A patent infringement trial with Ricoh Corporation began in October 2006. Additionally, six class-action lawsuits were filed against subsidiary Imagitas, Inc., alleging violations of the Driver's Privacy Protection Act (DPPA).
• Accounting Changes: Adoption of SFAS 158 (pension accounting) is expected to reduce stockholders' equity by approximately $410 million upon adoption on December 31, 2006.

Investor Verification Checklist

• Discontinued Operations: Verify the final working capital adjustments on the Capital Services sale to Cerberus, which could impact the final loss figure.
• Tax Liability: Confirm the final payment schedule and amount for the remaining ~$861 million of the IRS settlement obligation.
• Legal Exposure: Monitor the outcome of the Ricoh patent trial and the Imagitas DPPA class actions for potential material financial impact.
• Revenue Mix: Assess the sustainability of the shift toward smaller system sales and the impact on long-term rental revenue streams.
• Debt Levels: Review the impact of the $1.1 billion tax payment on liquidity and the utilization of the $3.1 billion in unused credit facilities.