Pitney Bowes Announces Second Quarter Results for 2010

STAMFORD, Conn., August 03, 2010 - Pitney Bowes Inc. (NYSE:PBI) today reported second quarter 2010 results.

Revenue for the quarter was $1.3 billion, a decline of 6 percent compared with the prior year. Adjusted earnings per diluted share from continuing operations for the second quarter was $0.48 compared with $0.55 for the prior year. Adjusted earnings per diluted share reflected the impact of lower revenue as a result of weaker than expected business conditions in the second half of the quarter and a one-time charge of $0.05 primarily to correct rates used to estimate unbilled International Mail Services revenue in prior periods. Earnings per diluted share for the quarter on a Generally Accepted Accounting Principles (GAAP) basis were $0.30 compared with $0.57 per diluted share for the prior year. GAAP earnings per diluted share for the quarter included a $0.15 charge for restructuring costs associated with the company’s Strategic Transformation initiatives and asset impairments; a tax charge of $0.02 related to certain leveraged lease transactions outside the U.S.; a less than $0.01 tax charge primarily associated with out-of-the money stock options that expired during the quarter; and a $0.01 loss associated with discontinued operations.

Free cash flow for the quarter was $157 million, net of $70 million of tax payments. Free cash flow benefited from lower capital expenditures and lower finance receivables. On a GAAP basis, the company generated $118 million in cash from operations. During the quarter the company used $80 million of cash for dividends. Year-to-date, the company has generated $451 million in free cash flow and on a GAAP basis $424 million in cash from operations, which was used primarily to pay dividends and reduce debt.

The company’s results for the quarter are summarized in the table below:

Commenting on the quarter, Chairman, President and CEO Murray D. Martin said, “We continue to implement a broad range of actions to manage through a prolonged period of global economic weakness. After seeing some early signs of stabilization among our small to mid-sized customer base in the first quarter, we experienced a decline in activity levels in the latter part of the second quarter. Our actions are positioning the company to deliver long-term value to customers and shareholders, despite the near-term impact of weaker demand.”

Martin added, “We continued to generate strong free cash flow in the quarter, and are raising our free cash flow guidance for the year. In addition, our Strategic Transformation program is already generating meaningful results and contributed more than $20 million in net benefits during the quarter. The program is on track to achieve its objectives of improving our processes and reducing our cost of business while allowing us to invest in attractive growth opportunities.”

Business Segment Results

To provide a better perspective on the business, its financial results and trends, the company is now aggregating its business segments into two groups based on the customers it primarily serves: Small and Medium Business (SMB) Solutions and Enterprise Business Solutions. The SMB Solutions group consists of the company’s global Mailing operations. The Enterprise Business Solutions group includes the company’s global Production Mail, Software, Management Services, Mail Services and Marketing Services operations.

SMB Solutions

Within the SMB Solutions Group:

U.S. Mailing

Renewed concerns about uncertain business and economic conditions are reflected in an increased number and proportion of U. S. Mailing customers electing to extend their leases for existing equipment. Lease extensions are profitable transactions but generate less sales revenue than new equipment leases. The segment’s revenue was also adversely affected by lower rental and financing revenue from reduced equipment on lease as a result of lower sales in prior periods. Rental and financing revenue is relatively high-margin and the decline in this revenue accounted for the majority of the total year-over-year reduction in EBIT.

In mid-May, the company completed the U.S launch of its new, innovative Connect+ ^TM communications and mailing system. The global rollout will continue in phases going forward. Connect+ ^TM is being well received by customers as the industry’s first mailing system with web and application based software architecture and instant online access to numerous mailing, printing and reporting applications.

International Mailing

International Mailing revenue declined slightly with very little currency impact during the quarter. Consistent with the pattern in the U.S., customers increasingly opted for lease extensions for existing equipment, especially in the UK and other parts of Europe. Financing and rental revenue declined because of lower equipment sales in prior periods. EBIT margin improved versus the prior year in part due to past and ongoing productivity initiatives which offset the negative margin impact from lower financing revenue.

Enterprise Business Solutions

The impacts for International Mail Services (IMS), noted earlier, reduced revenue and EBIT for the Enterprise Business Solutions group by $21 million and $16 million, respectively, in the quarter.

Within the Enterprise Business Solutions Group:

Worldwide Production Mail

Revenue growth during the quarter was adversely impacted by the timing of installations of inserting systems and related software. As a result, worldwide Production Mail backlog remained above prior year at the end of the second quarter. Equipment sales revenue was further reduced as customers, particularly in Europe, made fewer capital investments in new equipment and displayed renewed concerns about future business conditions. The EBIT margin for the quarter declined on lower revenue when compared with the prior year.

Software

Revenue declined slightly in the quarter versus the prior year due primarily to the continued transition to annuity-based pricing for some software solutions. Excluding the impacts of this transition, revenue growth would have been slightly positive versus the prior year. The company’s actions to integrate its operations and focus its product offerings have resulted in continued year-over-year improvement in the Software segment EBIT margin. The company plans to continue expansion of its SaaS offerings and recurring revenue streams from term licenses. The company recently formed an alliance with salesforce.com, for example, to deliver software as a service solutions in the salesforce.com ecosystem that will help agents and insurance carriers increase profitability and strengthen customer relationships. During the quarter, the company announced its planned acquisition of Portrait Software plc and expects to complete the transaction in the third quarter. Portrait Software plc will further enhance the company’s analytics and customer communications management capabilities.

Management Services

As expected, revenue for the quarter declined as a result of account contractions and terminations in the U.S. last year. Revenue also reflected a customer decision, at end of contract, to close some outsourced postal-related facilities that Management Services had previously operated. Outside the U.S., where the company principally provides print and customer communication services to enterprise accounts in Europe, revenue declined on lower volumes. However, EBIT margins improved globally versus the prior year, led by continuing margin improvement in Europe and the U.S. resulting from the company’s focus on more profitable contracts, ongoing productivity initiatives, and a continued transition to a more variable cost structure.

Mail Services

Mail Services continues to process increasing volumes of U.S. domestic presort mail and diversify its mix of mail as it grows Standard Class mail volumes. Overall volume of mail processed increased from both new and existing customers and was driven in part by the company’s unique ability to help mailers benefit from the discounts available when properly utilizing the Intelligent Mail Barcode. Presort-related revenue for the quarter grew and the EBIT margin improved.

As noted earlier, revenue growth and margin were impacted by an adjustment made in the IMS portion of the business. During the quarter, the company made a one-time out of period adjustment primarily to correct the rates used previously to estimate earned but unbilled revenue for the periods 2007 through the first quarter 2010. The aggregate adjustment reduced second quarter revenue and EBIT, but the impact of this adjustment was not material on any individual quarter during these periods.

Marketing Services

Revenue improved versus the prior year primarily because of increased vendor advertising revenue for the Movers’ Source kits. EBIT margin improved year-over-year due to ongoing productivity initiatives.

2010 Guidance

This guidance discusses future results which are inherently subject to unforeseen risks and developments. As such, discussions about the business outlook should be read in the context of an uncertain future, as well as the risk factors identified in the safe harbor language at the end of this release.

The company is modifying its revenue and earnings guidance as a result of the business trends during the second quarter; the economic and business outlook for the remainder of the year and the one-time adjustment in the second quarter. The global economy and business environment have not stabilized or improved as quickly as the company anticipated when it provided guidance earlier in the year. The company noted deterioration in conditions as the second quarter progressed, particularly among the customers in its SMB segment group. Based on the uncertainty surrounding the current economic outlook, the company now does not expect the business environment to improve as much as it had previously expected in the second half of the year.

Given the continued volatility and uncertainty concerning currency, the company will only provide revenue guidance on a constant currency basis. The company now expects revenue for the year on a constant currency basis in the range of flat to a three percent decline when compared with the prior year. Adjusted EPS from continuing operations for the year is expected to be in the range of $2.10 to $2.30 and GAAP EPS is expected to be in the range of $1.49 to $1.85. GAAP EPS includes tax charges of $.13 per diluted share related to out of the money stock options; certain capital lease transactions outside the U.S. and health care legislation enacted in the beginning of the year. GAAP EPS also includes expected restructuring and asset impairment charges in the range of $.32 to $.48 related to the company’s previously announced Strategic Transformation program.

Based on the strong generation of free cash flow in the first half of the year and the outlook for the remainder of the year, the company is increasing its free cash flow guidance for the year by $50 million. The company now expects to generate free cash flow for 2010 in the range of $700 million to $800 million.

The company’s expected earnings results for 2010 are summarized below.

Mr. Martin concluded, “Given diminished economic growth expectations globally in the second half of the year, and a more cautious sentiment among our customers, we are reducing our full-year revenue and earnings guidance. However, we are also increasing our free cash flow guidance. We remain confident in and committed to our long-term growth strategies and Strategic Transformation program, and our strong free cash flow gives us significant financial and strategic flexibility.”

Management of Pitney Bowes will discuss the company’s results in a broadcast over the Internet today at 5:00 p.m. EST. Instructions for listening to the earnings results via the Web are available on the Investor Relations page of the company’s web site at www.pb.com/investorrelations.

Pitney Bowes is a $5.6 billion global leader whose products, services and solutions deliver value within the mailstream and beyond. For more information visit www.pitneybowes.com.

The company's financial results are reported in accordance with generally accepted accounting principles (GAAP). However, earnings per share, income from continuing operations, and free cash flow results are adjusted to exclude the impact of special items such as transformation initiatives, restructuring charges, tax adjustments, accounting adjustments and write downs of assets. Although these charges represent actual expenses to the company, these charges might mask the periodic income and financial and operating trends associated with our business. The use of free cash flow has limitations. GAAP cash flow has the advantage of including all cash available to the company after actual expenditures for all purposes. Free cash flow permits a shareholder insight into the amount of cash that management could have available for other discretionary uses. It adjusts for long-term commitments such as capital expenditures, as well as special items like cash used for restructuring charges, unusual tax payments and contributions to its pension funds. These items use cash that is not otherwise available to the company and are important expenditures. Management compensates for these limitations by using a combination of GAAP cash flow and free cash flow in doing its planning.

EBIT excludes interest payments and taxes, both cash expenses to the company, and as a result, has the effect of showing a greater amount of earnings than net income. The company uses EBIT for purposes of measuring the performance of its management team. The interest rates and tax rates applicable to the company generally are outside the control of management, and it can be useful to judge performance independent of those variables. Financial results on a constant currency basis exclude the impact of changes in foreign currency exchange rates since the prior period under comparison and are calculated using the average of the rates in effect during that period. Constant currency measures are intended to help investors better understand the underlying operational performance of the business excluding the impacts of shifts in currency exchange rates over the intervening period.

Pitney Bowes has provided a quantitative reconciliation to GAAP in supplemental schedules. This information may also be found at the company's web site www.pb.com/investorrelations in the Investor Relations section.

This document contains “forward-looking statements” about our expected or potential future business and financial performance. For us forward-looking statements include, but are not limited to, statements about possible transformation initiatives; restructuring charges; our future revenue and earnings guidance; and other statements about future events or conditions. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to: the uncertain economic environment, fluctuations in customer demand; mail volumes; foreign currency exchange rates; the outcome of litigations; and changes in postal regulations, as more fully outlined in the company's 2009 Form 10-K Annual Report and other reports filed with the Securities and Exchange Commission. Pitney Bowes assumes no obligation to update any forward-looking statements contained in this document as a result of new information, events or developments.

Note: Consolidated statements of income; revenue and EBIT by business segment; and reconciliation of GAAP to non-GAAP measures for the three and six months ended June 30, 2010 and 2009, and consolidated balance sheets at June 30, 2010 and March 31, 2010 are attached.