Exhibit 99.1
IKON ANNOUNCES RESULTS
FOR THE THIRD QUARTER OF FISCAL 2005
Delivers Earnings Consistent with Company Expectations
Malvern, Pa. – July 28, 2005 – IKON Office Solutions (NYSE:IKN), the world’s largest independent channel for document management systems and services, today reported results for the third fiscal quarter ended June 30, 2005. Net income from continuing operations for the third quarter was $26 million, or $.18 per diluted share, consistent with the Company’s previously communicated expectations of $.16 to $.18.
Total revenues for the third quarter were $1.1 billion, which represents a decline of 4% compared to the same period a year ago, primarily due to the transition out of captive leasing in North America. Targeted revenues, which represent 98% of total revenues and exclude revenues from U.S. and Canadian lease financing and deemphasized technology hardware, declined by 1% versus the prior year. Foreign currency translation provided a 0.8% benefit to total revenues.
“We made significant progress on a number of our key initiatives during the third quarter,” stated Matthew J. Espe, IKON’s chairman and chief executive officer. “We grew digital office placements in both the black and white and color equipment segments. Customer Services improved sequentially, driven by increased copy volumes and a more favorable mix of color. In addition, Europe had another strong quarter of revenue and earnings growth.”
“While our core business continues to grow, we are focused on cost and expense management in a market where average selling prices and margins remain under pressure,” continued Espe. The ongoing reductions in selling and administrative expenses, as well as the restructuring actions taken earlier in the year, continue to benefit our bottom line. Other operational improvements in the quarter included the development of a strategy to improve billing quality, based upon the completion of our billing review, and additional headcount and facilities reductions. In addition, we closed on the sale of substantially all of our operations in France shortly after the quarter end. We will continue to serve our pan-European customers through an ongoing presence in Paris in a more cost-effective manner.”
Financial Analysis
Net Sales of $487 million, which includes the sale of copier/printer multifunction equipment and supplies, decreased 5% from the third quarter of fiscal 2004. Targeted Net Sales, which excludes deemphasized technology hardware revenues and represents approximately 99% of Net Sales, decreased 3%, including a decline in Equipment revenues of 2%. The equipment decline was primarily driven by lower average selling prices and the continued shift from the light production to the office equipment segment, partially offset by an 8% increase in color. Gross profit margin on Net Sales declined to 24.6% from 28.5%, due primarily to competitive pricing, aggressive promotions, and a higher percentage of state and local government business.
Services revenues of $586 million, which includes Customer Services revenues from the servicing of copier/printer equipment, on- and off-site Managed Services, Professional Services, rentals and other fees, decreased 0.3% from the third quarter of fiscal 2004. The decline in overall Services revenues was driven by a 2% decrease in Managed Services, partially offset by 0.2% growth in Customer Services, which represents approximately 61% of Services revenues. The modest growth in Customer Services resulted from increased copy volumes due to strength in digital and color equipment. The decline in Managed Services was driven by a decline in Legal Document Services, due to site closings in the second quarter designed to improve profitability, partially offset by growth in on-site Managed Services. Gross profit margin on Services increased to 42.8% from 42.1% a year ago, driven by a 2 point increase in Customer Services margins due to a lower cost structure as a result of the restructuring actions taken in the second quarter of fiscal 2005.
Finance Income of $25 million declined 40% from the prior year due to the Company’s transition out of captive lease financing in North America. Most of the finance income from the retained U.S. portfolio is expected to run off by fiscal 2007. Gross profit margin on finance income increased to 75.3% for the third quarter from 72.6% for the same period a year ago.
Selling and Administrative Expenses declined $24 million from the third quarter of the prior year, due to aggressive expense management and lower administrative expenses resulting from the benefit of restructuring actions taken in the second quarter. As a result of the reduction in administrative expenses, selling and administrative expenses as a percentage of revenues declined to 30.9% from 31.7% in the third quarter a year ago.
Balance Sheet and Liquidity
Unrestricted cash was $289 million as of June 30, 2005, with cash used for continuing operations in the third quarter totaling approximately $34 million compared to $444 million for the third quarter of fiscal 2004. Capital expenditures on operating rentals and property and equipment, net of proceeds, totaled $10 million for the quarter compared to $19 million for the same period a year ago. The total debt to capital ratio decreased to 43% at the end of this quarter from 50% as of September 30, 2004.
Cumulative share repurchases under the Company’s fiscal 2004 Board authorization remain at 9.8 million shares, or $112 million, leaving $138 million remaining under the share repurchase program, subject to the terms of the Company’s Credit Facility. The Company expects its fourth quarter repurchase activity to be above recent trends.
IKON’s Board of Directors approved the Company’s regular quarterly cash dividend of $.04 per common share, payable on September 10, 2005 to holders of record at the close of business on August 22, 2005.
Outlook
“As the aggressive actions we are taking to grow our volumes will affect margins in the near term, for fiscal 2005 we now expect earnings from continuing operations to be in the range of $.60 to $.63, excluding any charges we may take to improve our business and any actions regarding stock option expensing,” said Espe. “We will continue our diligent focus on cost and expense control to offset pricing pressures in an effort to achieve an operating margin greater than 5% in fiscal 2006, which would put us on track for our goal of 6% or greater in fiscal 2007. As we drive improvements in our sales coverage model, we are taking steps to align our cost structure and selling and administrative expenses to ensure we meet these goals.”
About IKON
IKON Office Solutions, Inc. (www.ikon.com), the world’s largest independent channel for copier, printer and MFP technologies, delivers integrated document management solutions and systems, enabling customers worldwide to improve document workflow and increase efficiency. IKON integrates best-in-class systems from leading manufacturers, such as Canon, Ricoh, Konica Minolta, EFI and HP, and document management software from companies like Captaris, EMC (Documentum), Kofax and others, to deliver tailored, high-value solutions implemented and supported by its global services organization—IKON Enterprise Services. With fiscal 2004 revenues of $4.6 billion, IKON has approximately 27,000 employees in 500 locations throughout North America and Western Europe.
QUARTERLY EARNINGS CONFERENCE CALL: Additional information regarding the third quarter results and the Company’s outlook for fiscal 2005 will be discussed on a conference call hosted by IKON at 10:00 a.m. EDT on Thursday, July 28, 2005. Please call (719) 457-2638 to participate. Thelive audio broadcast of the call, with slides, can be accessed on IKON’s Investor Relations homepage. A complete replay of the conference call will also be available on IKON’s Investor Relations homepage approximately two hours after the call ends through the next quarterly reporting period. To listen, please go to www.ikon.com and click on Investor Relations. Beginning at 1:00 p.m. EDT on July 28, 2005 and ending at midnight EDT on August 1, 2005, a complete replay of the conference call can also be accessed via telephone by calling (719) 457-0820 and using the access code 6488605.
NON-GAAP INFORMATION: In the event any non-GAAP measures are discussed during the conference call, a file will be available, within 24 hours, on the Company’s website, www.ikon.com, that reconciles non-GAAP and GAAP results. The file can be accessed on the Investor Relations home page. |
This news release includes information which may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include, but are not limited to, statements relating to our expected fiscal 2005 results, expected fiscal 2006 and 2007 operating margins, our actions to grow volumes and the corresponding near-term effect on margins, our share repurchase activity, our operations in France, the run-off of our retained U.S. portfolio and our ability to execute long-term strategic initiatives, achieve growth objectives and improve operational efficiency. Although IKON believes the expectations contained in such forward-looking statements are reasonable, it can give no assurances that such expectations will prove correct. Such forward-looking statements are based upon management’s current plans or expectations and are subject to a number of risks and uncertainties, including, but not limited to: risks and uncertainties relating to conducting operations in a competitive environment and a changing industry; delays, difficulties, management transitions and employment issues associated with consolidation of, and/or changes in business operations; risks and uncertainties associated with existing or future vendor relationships; and general economic conditions. Certain additional risks and uncertainties are set forth in IKON’s 2004 Annual Report on Form 10-K/A and subsequent quarterly reports on Form 10-Q/A or 10-Q, as applicable, filed with the Securities and Exchange Commission. Prior period financial results in this news release are reported on a restated basis. As a consequence of these and other risks and uncertainties, IKON’s current plans, anticipated actions and future financial condition and results may differ materially from those expressed in any forward-looking statements.
(FIKN)
_________________
IKON Office Solutions, Inc.
Financial Summary (in thousands, except earnings per share)
(unaudited)
Third Quarter Fiscal
--------------------------
Restated
2005 2004
-------------- -----------
Revenues
Net sales $ 487,211 $ 513,412
Services 586,195 587,989
Finance income 24,899 41,827
- ----------------------------------------------------------------
1,098,305 1,143,228
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Costs and Expenses
Cost of goods sold 367,527 366,881
Services costs 335,200 340,302
Finance interest expense 6,139 11,473
Selling and administrative 338,879 362,577
Gain on divestiture of businesses 698
Asset impairments 27
Restructuring (406)
- ----------------------------------------------------------------
1,047,366 1,080,535
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Operating income 50,939 62,693
Loss from early extinguishment of
debt 32,687
Interest expense, net 11,260 15,175
- ----------------------------------------------------------------
Income from continuing operations
before taxes on income 39,679 14,831
Taxes on income 13,307 5,629
- ----------------------------------------------------------------
Income from continuing operations 26,372 9,202
Discontinued operations:
Operating loss (3,210) (1,336)
Tax benefit 1,268 527
Net loss from discontinued operations (1,942) (809)
- ----------------------------------------------------------------
Net income $ 24,430 $ 8,393
=========== ===========
Basic Earnings Per Common Share
Continuing operations $ 0.19 $ 0.06
Discontinued operations, net of
income taxes (0.01) (0.01)
----------- -----------
Net income $ 0.17 (a) $ 0.06 (a)
=========== ===========
Diluted Earnings Per Common Share
Continuing operations $ 0.18 $ 0.06
Discontinued operations, net of
income taxes (0.01) (0.01)
----------- -----------
Net income $ 0.17 (b) $ 0.06 (a)(b)
=========== ===========
Weighted Average Common Shares
Outstanding, Basic 139,826 147,657
=========== ===========
Weighted Average Common Shares
Outstanding, Diluted 157,973 150,531
=========== ===========
Operations Analysis:
Gross profit %, net sales 24.6% 28.5%
Gross profit %, services 42.8% 42.1%
Gross profit %, finance 75.3% 72.6%
Total gross profit % 35.5% 37.1%
Selling and administrative as a
% of revenue 30.9% 31.7%
Operating income as a % of
revenue 4.6% 5.5%
(a) The sum of the earnings per share amounts do not equal the total
due to rounding.
(b) The calculation of diluted earnings per common share for the third
quarter of fiscal 2005 assumes the conversion of convertible
notes issued in May 2002 resulting in 16,306 shares. For
purposes of diluted earnings per common share, net income for the
third quarter of fiscal 2005 includes the add-back of $1,848,
representing interest expense, net of taxes, associated with
such convertible notes. The impact of the convertible notes in
the third quarter of fiscal 2004 was antidilutive and excluded
from the calculation of diluted earnings per share.
IKON Office Solutions, Inc.
Financial Summary (in thousands, except earnings per share)
(unaudited)
Year to Date Fiscal
-----------------------------
Restated
2005 2004
----------- -----------
Revenues
Net sales $1,447,624 $1,450,201
Services 1,745,035 1,739,368
Finance income 83,364 239,097
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3,276,023 3,428,666
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Costs and Expenses
Cost of goods sold 1,056,532 1,032,872
Services costs 1,033,332 1,032,670
Finance interest expense 21,033 80,748
Selling and administrative 1,030,885 1,103,540
(Gain) loss on divestiture of
businesses (1,901) 11,427
Asset impairments 340
Restructuring 10,990
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3,151,211 3,261,257
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Operating income 124,812 167,409
Loss from early extinguishment of
debt 1,734 35,906
Interest expense, net 34,571 34,923
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Income from continuing operations
before taxes on income 88,507 96,580
Taxes on income 30,715 29,175
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Income from continuing operations 57,792 67,405
Discontinued operations:
Operating income (19,410) (4,917)
Tax benefit 7,667 1,940
Net loss from discontinued operations (11,743) (2,977)
- -------------------------------------------------------------------
Net income $ 46,049 $ 64,428
=========== ===========
Basic Earnings Per Common Share
Continuing operations $ 0.41 $ 0.46
Discontinued operations, net of
income taxes (0.08) (0.02)
----------- -----------
Net income $ 0.33 $ 0.44
=========== ===========
Diluted Earnings Per Common Share
Continuing operations $ 0.40 $ 0.44
Discontinued operations, net of
income taxes (0.07) (0.02)
----------- -----------
Net income $ 0.32 (a)(b) $ 0.42 (b)
=========== ===========
Weighted Average Common Shares
Outstanding, Basic 140,567 147,202
=========== ===========
Weighted Average Common Shares
Outstanding, Diluted 160,564 170,094
=========== ===========
Operations Analysis:
Gross profit %, net sales 27.0% 28.8%
Gross profit %, services 40.8% 40.6%
Gross profit %, finance 74.8% 66.2%
Total gross profit % 35.6% 37.4%
Selling and administrative as a
% of revenue 31.5% 32.2%
Operating income as a % of
revenue 3.8% 4.9%
(a) The sum of the earnings per share amounts do not equal the total
due to rounding.
(b) The calculation of diluted earnings per common share for fiscal
2005 and fiscal 2004 assumes the conversion of convertible
notes issued in May 2002 resulting in 17,857 and 19,870 shares,
respectively. For purposes of diluted earnings per common share,
net income for fiscal 2005 and fiscal 2004 includes the add-back
of $6,072 and $6,959, respectively, representing interest
expense, net of taxes, associated with such convertible notes.
IKON Office Solutions, Inc.
Computations of Earnings per Common Share
(in thousands, except earnings per share)
(unaudited)
Three Months Ended June 30,
--------------------------------------
2005 Restated 2004
------------------- -------------------
Basic Diluted Basic Diluted
--------- --------- --------- ---------
Average Shares Outstanding
Common shares 139,826 139,826 147,657 147,657
Convertible notes 16,306
Restricted stock awards 402 355
Stock options 1,439 2,519
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Total shares 139,826 157,973 147,657 150,531
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Income from continuing
operations
Net income from continuing
operations $ 26,372 $ 26,372 $ 9,202 $ 9,202
Interest on convertible notes,
net 1,848
- ----------------------------------------------------------------------
Adjusted net income from
continuing operations $ 26,372 $ 28,220 $ 9,202 $ 9,202
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
Net loss from discontinued
operations $ (1,942) $ (1,942) $ (809) $ (809)
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
Total adjusted net income $ 24,430 $ 26,278 $ 8,393 $ 8,393
- ----------------------------------------------------------------------
Earnings per share ("EPS")
EPS from continuing operations $ 0.19 $ 0.18 $ 0.06 $ 0.06
EPS from discontinued
operations (0.01) (0.01) (0.01) (0.01)
- ----------------------------------------------------------------------
Total EPS $ 0.17 $ 0.17 $ 0.06 $ 0.06
======================================================================
Nine Months Ended June 30,
---------------------------------------
2005 Restated 2004
------------------- ------------------
Basic Diluted Basic Diluted
--------- --------- --------- ---------
Average Shares Outstanding
Common shares 140,567 140,567 147,202 147,202
Convertible notes 17,857 19,870
Restricted stock awards 382 341
Stock options 1,758 2,681
- ----------------------------------------------------------------------
Total shares 140,567 160,564 147,202 170,094
- ----------------------------------------------------------------------
Income from continuing
operations
Net income from continuing
operations $ 57,792 $ 57,792 $ 67,405 $ 67,405
Interest on convertible notes,
net 6,072 6,959
- ----------------------------------------------------------------------
Adjusted net income from
continuing operations $ 57,792 $ 63,864 $ 67,405 $ 74,364
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
Net loss from discontinued
operations $(11,743) $(11,743) $ (2,977) $ (2,977)
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
Total adjusted net income $ 46,049 $ 52,121 $ 64,428 $ 71,387
- ----------------------------------------------------------------------
Earnings per share ("EPS")
EPS from continuing operations $ 0.41 $ 0.40 $ 0.46 $ 0.44
EPS from discontinued
operations (0.08) (0.07) (0.02) (0.02)
- ----------------------------------------------------------------------
Total EPS $ 0.33 $ 0.32 $ 0.44 $ 0.42
======================================================================
IKON Office Solutions, Inc.
Reconciliation of Reported to Targeted Revenue
(in thousands)
Reported Adjustments(1) Targeted Revenues
----------- ----------- -----------------
Third Quarter Fiscal 2005
Total Revenues $1,098,305 $ (24,454) $ 1,073,851
Third Quarter Fiscal 2004
Total Revenues $1,143,228 $ (54,490) $ 1,088,738
Growth -3.9% -1.4%
=========== =================
(1) Adjusted for revenues from U.S. and Canadian lease financing and
computer related technology hardware, which have either been
divested or de-emphasized.
IKON Office Solutions, Inc.
Reconciliation of Reported to Targeted Net Sales
(in thousands)
Reported Adjustments(1) Targeted Revenues
----------- ----------- -----------------
Third Quarter Fiscal 2005
Net Sales $ 487,211 $ (6,410) $ 480,801
Third Quarter Fiscal 2004
Net Sales $ 513,412 $ (19,121) $ 494,291
Growth -5.1% -2.7%
=========== =================
IKON Office Solutions, Inc.
Consolidated Balance Sheets
Preliminary and Unaudited
Restated
(in millions) June 30, 2005 September 30, 2004
- ----------------------------------------------------------------------
Assets
Cash and cash equivalents $ 289.3 $ 473.0
Restricted cash 23.7 27.0
Accounts receivable, net 668.9 728.6
Finance receivables, net 360.7 457.6
Inventories 233.9 233.3
Prepaid expenses and other
current assets 72.0 81.2
Deferred taxes 52.4 64.5
Assets held for sale 16.9
- ----------------------------------------------------------------------
Total current assets 1,717.8 2,065.2
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Long-term finance receivables,
net 514.9 753.2
Equipment on operating leases,
net 104.5 78.7
Property and equipment, net 149.4 164.1
Goodwill 1,278.0 1,286.6
Unsold residual value 35.7 45.5
Other assets 117.4 125.1
Long-term assets held for sale 13.6
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Total Assets $ 3,931.3 $ 4,518.4
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Liabilities and Shareholders'
Equity
Current portion of corporate
debt $ 3.4 $ 62.1
Current portion of debt
supporting finance contracts 333.8 439.9
Trade accounts payable 210.4 308.1
Accrued salaries, wages and
commissions 92.9 124.8
Deferred revenues 99.1 116.7
Taxes payable 61.4 53.0
Other accrued expenses 146.3 170.7
Liabilities held for sale 18.9
- ----------------------------------------------------------------------
Total current liabilities 966.2 1,275.3
- ----------------------------------------------------------------------
Long-term corporate debt 694.7 741.9
Long-term debt supporting
finance contracts and unsold
residual value 263.5 422.9
Deferred taxes 107.5 187.1
Other long-term liabilities 207.1 203.5
Long-term liabilities held for
sale 2.4
Commitments and contingencies
Shareholders' Equity
Common stock, no par value:
authorized: 300.0 shares;
issued June 30, 2005 - 148.4
shares; September 30, 2004 -
150.0, shares outstanding;
June 30, 2005 - 140.0 shares;
September 30, 2004 - 142.1
shares 1,026.2 1,022.8
Series 12 preferred stock, no
par value: authorized 480
shares; none issued or
outstanding
Unearned compensation (4.8) (2.2)
Retained earnings 748.8 723.8
Accumulated other comprehensive
income 20.6 20.2
Cost of common shares in
treasury: June 30, 2005 - 9.4
shares; September 30, 2004 -
7.2 shares (100.9) (76.9)
- ----------------------------------------------------------------------
Total Shareholders' Equity 1,689.9 1,687.7
- ----------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $ 3,931.3 $ 4,518.4
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IKON Office Solutions, Inc.
Consolidated Statements of Cash Flows
Preliminary
Nine Months Ended
June 30,
Restated
2005 2004
(in thousands) (unaudited)
- ----------------------------------------------------------------------
Cash Flows from Operating
Activities
Net income $ 46.1 $ 64.4
Net loss from discontinued
operations (11.7) (3.0)
- ----------------------------------------------------------------------
Income from continuing
operations 57.8 67.4
Additions (deductions) to
reconcile net income to net
cash used in operating
activities:
Depreciation 55.1 62.0
Amortization 5.9 7.9
(Gain) loss from
divestiture of business (1.9) 11.4
Provision for losses on
accounts receivable 12.0 4.3
Restructuring charge 11.0
Asset impairment charge 0.3
Deferred income taxes (67.5) (211.3)
Provision for lease default
reserves 2.1 32.3
Pension expense 32.7 38.3
Non-cash interest expense
on debt supporting
residual value 0.4
Loss from early
extinguishment of debt 1.7 35.9
Changes in operating assets
and liabilities (net of
disposition of
businesses):
Decrease (increase) in
accounts receivable 30.6 (224.7)
Increase in inventories (6.6) (43.3)
Increase in prepaid
expenses and other
current assets (0.1) (14.1)
Decrease in accounts
payable, deferred
revenues and accrued
expenses (156.0) (203.5)
Decrease in accrued
restructuring (5.8) (3.0)
Other, net 0.3 (4.1)
- ----------------------------------------------------------------------
Net cash used by
continuing activities (28.0) (444.5)
Net cash used by
discontinued operations (9.6) (5.5)
- ----------------------------------------------------------------------
Net cash used by
operating activities (37.6) (450.0)
- ----------------------------------------------------------------------
Cash Flows from Investing
Activities
Proceeds from the divestiture
of business 5.3 1,849.1
Expenditures for property and
equipment (22.1) (24.4)
Expenditures for equipment on
operating leases (36.1) (39.5)
Proceeds from sale of
property and equipment 2.3 5.0
Proceeds from sale of
equipment on operating
leases 14.2 11.9
Proceeds from the sale of
finance receivables 189.0 162.5
Finance receivables --
additions (277.6) (934.6)
Finance receivables --
collections 398.4 1,025.4
Other (1.3) (7.9)
- ----------------------------------------------------------------------
Net cash provided by
continuing operations 272.1 2,047.5
Net cash provided by
(used by) discontinued
operations 1.6 (0.8)
- ----------------------------------------------------------------------
Net cash provided by
investing activities 273.7 2,046.7
- ----------------------------------------------------------------------
Cash Flows from Financing
Activities
Proceeds from issuance of
long-term corporate debt 1.5 0.6
Short-term corporate debt
repayments, net (0.2) (2.7)
Repayment of other borrowings (3.4) (60.0)
Long-term corporate debt
repayments (104.9) (327.4)
Debt supporting finance
contracts -- issuances 19.3 337.1
Debt supporting finance
contracts -- repayments (289) (1,436.3)
Dividends paid (17.0) (17.7)
Decrease in restricted cash 3.3 1.1
Proceeds from option
exercises and sale of
treasury shares 3.9 8.1
Purchases of treasury shares
and other (34.2) (25.8)
- ----------------------------------------------------------------------
Net cash used in
financing activities (420.7) (1,523.0)
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
Effect of exchange rate
changes on cash and cash
equivalents 1.0 5.0
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
Net (decrease) increase in
cash and cash equivalents (183.6) 78.7
Cash and cash equivalents at
beginning of year 472.9 360.0
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- ----------------------------------------------------------------------
Cash and cash equivalents at
end of period $ 289.3 $ 438.7
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