DBRS Changes the Trend on Pitney Bowes to Negative

DBRS has today changed the trend on Pitney Bowes Inc. (PBI or the Company) and Pitney Bowes of Canada Ltd. to Negative from Stable. The trend change reflects the gradual increase in the Company’s debt levels, partly driven by enhanced share repurchase activity. In addition, softening in the Company’s core U.S. mailing business, due mainly to structural industry changes, has led to a shift in the mix of sales toward PBI’s less profitable businesses. A downward revision to the rating over the near term is likely in the absence of a reduction of leverage and improvement in profitability.

PBI has consistently generated free cash flow and should continue to do so. However, the Company has increased its share repurchase activity over the past year despite generally flat free cash flow (recurring, before working capital as per DBRS’s calculations) in 2007 and into Q1 2008, which contributed to higher-than-expected debt levels. Gradually rising share repurchases since 2004 have been funded partly with debt, which has contributed to the steady increase in PBI’s leverage. While the debt-to-EBITDA ratio (excluding estimated debt from PBI’s financial services operations) remains below 2.0 times, it is aggressive for the ratings. DBRS expects the Company’s share repurchase activity to continue, along with modest acquisitions. Given the recent decision by the Company to continue to operate – rather than to sell – its Management Services (PBMS) division, opportunities for material debt reduction are expected to be limited, which adds pressure to the ratings.

PBI’s earnings and profitability have gradually moderated from peak 2006 levels, mainly related to slowing sales in the Company’s core U.S. mailing business, which accounted for 37% of sales – but over two-thirds of operating profit – for the 12 months to March 31, 2008. Structural changes, including the wind-down of meter migration, a shift in demand from larger to smaller, more fully-featured, mailing systems, and overall market maturity, have contributed to the softness. In addition, the U.S. economic downturn and issues in the financial services sector, which is an important customer segment for the Company, have also added pressure. As a result, growth in sales has been generated from most of PBI’s other mail-related businesses, which generate returns below its more profitable U.S. mailing business, and this trend is expected to continue. An increasing mix of sales outside of U.S. mailing, which is expected to maintain very strong operating margins in the 40% range but with limited organic growth, is likely to constrain profitability over the near to medium term.

Despite the above-noted concerns, PBI remains the largest provider of mail-related equipment globally, with a dominant market position in the United States and Canada. The Company’s significant share of recurring revenues – mainly from mailing equipment sales, leases and related services – provides a high degree of stability to earnings and cash flow through a cycle. PBI is expected to continue to generate consistent free cash flow and maintain a favourable liquidity profile, which helps to limit significant downside to the ratings. While margins are unlikely to measurably improve, PBI’s non-U.S. mailing businesses provide generally favourable profitability and solid growth is expected both organically and via bolt-on acquisitions. Importantly, the Company’s technological leadership position provides opportunities for longer-term growth from new products and services. Furthermore, PBI’s captive financial services business effectively complements its operations, contributes an important source of earnings and customer support, and was not materially impacted by the credit market issues over the past year.