IKON ANNOUNCES RESULTS FOR THE SECOND QUARTER OF FISCAL YEAR 2006
•
Exceeds High End of Earnings Expectations
•
4% Growth in Equipment Revenue
•
9% Reduction in Selling & Administrative Expenses
Malvern, Pa. – April 27, 2006– IKON Office Solutions (NYSE:IKN), the world’s largest independent channel for document management systems and services, today reported results for the quarter ended March 31, 2006. Net income from continuing operations for the second quarter of fiscal year 2006 was $25 million, or $0.19 per diluted share, exceeding the Company’s previously communicated EPS range of $0.16 to $0.18. Earnings per diluted share from continuing operations grew $0.14 when compared to $0.05 per diluted share for the second quarter of fiscal year 2005, and increased 56% when compared to the adjusted $0.12 per diluted share for the same period.
Total revenue for the second quarter of fiscal year 2006 was $1.08 billion, compared to $1.09 billion for the second quarter of fiscal year 2005, a decline of 1% year over year. Excluding the negative impact of currency, total revenue was flat year over year. Targeted revenue, which represents 97% of total revenue, increased 3% year over year.
“I am pleased to report that the momentum in targeted revenue and earnings growth we experienced during the first quarter continued during the second quarter,” said Matthew J. Espe, IKON’s Chairman and Chief Executive Officer. “Once again, new digital equipment placements grew in the office, production and color segments, and new digital revenue grew in production and color. Services continued to expand in the second quarter, with Professional Services revenue up by 34% and North American on-site Managed Services revenue up by 10%. Europe continued its strong performance, particularly in Germany and Denmark.”
Selling and administrative (S&A) expenses of $315 million in the quarter decreased 9%, or $33 million, compared to the second quarter of fiscal year 2005. The decline resulted from actions taken in 2005 and the Company’s continued focus on expense management. Operating margin increased to 4.7% in the quarter.
“We saw growth and improved performance in all key areas of our business,” Espe said. “In addition, we remain on track to achieve an S&A expense-to-revenue ratio below 30% for fiscal year 2006, resulting in improved operating income margin and strong EPS growth. The net result is that we exceeded the high end of our EPS range for the quarter, and our operating income margin is approaching our fiscal year 2006 goal of 5%.”
Second Quarter 2006 Financial Details Equipmentrevenue of $461 million, which includes the sale of copier/printer multifunction products, increased 4% from the second quarter of fiscal year 2005. The year over year increase was driven by revenue growth in the color market and the black and white production market. Gross margin on equipment was 25.5%, down from 27.5% in the second quarter of fiscal 2005, and up sequentially from the first quarter of fiscal 2006 by over 150 basis points.
Customer Service and Suppliesrevenue of $361 million, which includes revenue from the servicing of copier/printer equipment and direct sales of supplies, was flat compared to the second quarter of fiscal year 2005. The positive impact from continued growth in the digital equipment base was offset by the rapid decline in the analog equipment base. Gross margin on Customer Service and Supplies increased to 42.8% from 42.0% a year ago, driven by an improvement in parts costs and a lower cost structure in North America, as well as a continued focus on cost reduction and productivity improvements.
Managed and Professional Servicesrevenue of $185 million, which includes both on-site and off-site Managed Services, as well as Professional Services, increased 6% compared to the second quarter of fiscal year 2005. Strong revenue growth in Professional Services and North-American on-site Managed Services was offset by a revenue decline in on-site Managed Services in Europe and off-site Managed Services. Gross margin on Managed and Professional Services dropped 40 basis points to 26.5% from 26.9% a year ago, due to slightly lower on-site and off-site service margins, partially offset by improved margins in Professional Services.
Rental and Feesrevenue of $43 million was flat, and gross margin decreased to 70.0% from 73.3% a year ago, due to a decline in higher-margin renewal sharing revenue on certain lease-end activities.
Otherrevenue of $30 million declined 56% compared to the second quarter of fiscal year 2005, primarily due to the sale of non-strategic businesses in 2005 and the continued runoff of the U.S. retained lease portfolio. On April 3, 2006, the Company announced the sale of that portfolio to General Electric Capital Corporation, effective as of April 1, 2006. As a result of the transaction, IKON will net approximately $70 million in cash after payments of related debt and taxes.
Targeted revenue includes all revenues except those categorized as “Other.” Other revenue includes finance income and revenue generated by the remaining technology services and hardware businesses. Prior to fiscal year 2006, Other revenue also included revenue from the Company’s operating subsidiaries in France and Mexico, which were sold during fiscal year 2005, and revenue from Kafevend, which was sold in the first quarter of fiscal year 2006.
Balance Sheet and Liquidity Unrestricted cash was $312 million as of March 31, 2006, with cash flow from continuing operations totaling $77 million for the second quarter, primarily due to an increase of net income and a reduction in accounts receivable. Capital expenditures on operating rentals and property and equipment, net of proceeds, totaled $7 million for the second quarter, compared to $16 million for the second quarter of fiscal year 2005. The total debt-to-capital ratio decreased to 40% as of March 31, 2006, from 44% as of September 30, 2005.
The Company continued to repurchase shares during the quarter, buying back 2.7 million shares of outstanding common stock for approximately $36 million. IKON’s Board of Directors approved the Company’s regular quarterly cash dividend of $0.04 per common share, payable on June 10, 2006 to holders of record at the close of business on May 22, 2006.
Consistent with its balanced capital strategy objectives, IKON made a $50 million cash contribution to its U.S. pension plan on April 4, 2006. In addition, the Company plans to announce the commencement of a tender offer for the $95 million 7.25% outstanding notes due 2008. The Company expects this action to result in a significant reduction in its corporate debt balance, which stood at $676 million as of March 31, 2006.
Outlook “Looking ahead, we remain focused on executing our long-term plan, while continuing the strong momentum we’ve generated during the first half of fiscal 2006,” Espe said.
“For the third quarter, we expect earnings per diluted share from continuing operations to range between $0.19 and $0.21, as compared to $0.17 per diluted share earned in the third quarter of fiscal year 2005. For fiscal year 2006, we expect to deliver earnings per diluted share from continuing operations at the high end of the previously communicated range of $0.70 to $0.75. These expectations include the premium from the retained portfolio sale, which is anticipated to offset the operating income that the portfolio would have generated in the second half of fiscal 2006. These expectations exclude any charges associated with the tender offer for the 2008 notes, any charges we may take to improve our business, as well as the net gain previously disclosed in the first quarter of fiscal 2006.”
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, Kofax and others, to deliver tailored, high-value solutions implemented and supported by its global services organization—IKON Enterprise Services. With fiscal year 2005 revenue of $4.4 billion, IKON has approximately 26,000 employees in 450 locations throughout North America and Western Europe.
QUARTERLY EARNINGS CONFERENCE CALL: Additional information regarding the second quarter results and the Company’s outlook for fiscal year 2006 will be discussed on a conference call hosted by IKON at 10:00 a.m. ET on Thursday, April 27, 2006. The live audio broadcast of the call, with slides, can be accessed on IKON’s Investor Relations homepage or by calling (706) 679-3408 using conference ID number 7068915. 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. ET on April 27, 2006 and ending at midnight ET on May 2, 2006, a complete replay of the conference call can also be accessed via telephone by calling (706) 645-9291 or (800) 642-1687 and using the access code 7068915.
NON-GAAP INFORMATION: IKON will refer to certain non-GAAP measures during the conference call, which IKON believes provide a reasonable basis on which to present adjusted financial information that provides investors with a useful indication of the performance of IKON’s ongoing operations and financial position. This adjusted financial information should not be construed as an alternative to our reported results determined in accordance with GAAP. A reconciliation of these non-GAAP financial measures to GAAP can be found within the Investor Relations section of www.IKON.com. MARK YOUR CALENDAR:IKON’s third quarter fiscal year 2006 results will be discussed on Thursday, July 27, 2006 on a conference call hosted at 10:00 a.m. ET. More information on how to access the audio broadcast and replay will be provided at a later date.
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 third quarter and full year fiscal 2006 results from continuing operations, growth in targeted revenue, the impact of our sale of our U.S. retained lease portfolio, our planned tender offer for our $95 million 7.25% outstanding notes due 2008 and our ability to execute on our strategic priorities, including growth objectives, improved operating efficiency and balanced capital strategy. 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 filings with the Securities and Exchange Commission. 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. This news release also refers to certain non-GAAP financial measures, which IKON believes provide a reasonable basis on which to present adjusted financial information that provides investors with a useful indication of the performance of IKON’s ongoing operations and financial position. This adjusted financial information should not be construed as an alternative to our reported results determined in accordance with GAAP. A reconciliation of these non-GAAP financial measures to GAAP can be found within the Investor Relations section of www.IKON.com.
(FIKN) # # #
1
IKON Office Solutions, Inc.
Income Statement and Operational Analysis (in thousands, except earnings per share)
(unaudited)
Second Quarter Fiscal
2006
2005
Revenues
Equipment
$
460,748
$
444,068
Customer service and supplies
361,383
362,752
Managed and professional services
185,470
174,916
Rental and fees
43,248
43,039
Other
29,660
67,498
1,080,509
1,092,273
Cost of Revenues
Equipment
343,405
322,098
Customer service and supplies
206,679
210,547
Managed and professional services
136,366
127,844
Rental and fees
12,975
11,512
Other
15,757
38,059
715,182
710,060
Gross Profit
Equipment
117,343
121,970
Customer service and supplies
154,704
152,205
Managed and professional services
49,104
47,072
Rental and fees
30,273
31,527
Other
13,903
29,439
365,327
382,213
Selling and administrative
314,827
347,541
Gain on divestiture of business
105
1,901
Asset impairment and restructuring
17
11,709
Operating income
50,588
24,864
Loss from early extinguishment of debt
—
1,734
Interest income
2,365
2,360
Interest expense
13,315
12,868
Income from continuing operations before taxes on income
39,638
12,622
Taxes on income
14,270
4,873
Income from continuing operations
25,368
7,749
Discontinued Operations:
Operating loss
(51
)
(14,339
)
Tax benefit
21
5,664
Net loss from discontinued operations
(30
)
(8,675
)
Net income (loss)
$
25,338
$
(926
)
Basic Earnings (Loss) Per Common Share
Continuing operations
$
0.19
$
0.06
Discontinued operations
0.00
(0.06
)
Net income (loss)
$
0.19
$
(0.01
)
(a
)
Diluted Earnings (Loss) Per Common Share
Continuing operations
$
0.19
$
0.05
Discontinued operations
0.00
(0.06
)
Net income (loss)
$
0.19
$
(0.01
)
Weighted Average Common Shares Outstanding, Basic
132,506
140,404
Weighted Average Common Shares Outstanding, Diluted
134,033
141,629
Operational Analysis:
Gross profit %, equipment
25.5
%
27.5
%
Gross profit %, customer service and supplies
42.8
%
42.0
%
Gross profit %, managed and professional services
26.5
%
26.9
%
Gross profit %, rental and fees
70.0
%
73.3
%
Gross profit %, other
46.9
%
43.6
%
Total gross profit %
33.8
%
35.0
%
Selling and administrative as a % of revenue
29.1
%
31.8
%
Operating income as a % of revenue
4.7
%
2.3
%
(a)
The sum of the earnings per share amounts do not equal the total due to rounding.
2
IKON Office Solutions, Inc.
Income Statement and Operational Analysis (in thousands, except earnings per share)
(unaudited)
Six Months Ended March 31
2006
2005
Revenues
Equipment
$
885,737
$
851,481
Customer service and supplies
732,606
740,982
Managed and professional services
361,852
354,148
Rental and fees
83,675
86,903
Other
59,502
144,204
2,123,372
2,177,718
Cost of Revenues
Equipment
666,648
612,346
Customer service and supplies
405,732
419,356
Managed and professional services
268,012
262,895
Rental and fees
25,773
23,834
Other
29,687
83,600
1,395,852
1,402,031
Gross Profit
Equipment
219,089
239,135
Customer service and supplies
326,874
321,626
Managed and professional services
93,840
91,253
Rental and fees
57,902
63,069
Other
29,815
60,604
727,520
775,687
Selling and administrative
628,814
696,449
Gain on divestiture of business
5,029
1,901
Asset impairment and restructuring
(135
)
11,709
Operating income
103,870
69,430
Loss from early extinguishment of debt
1,650
1,734
Interest income
4,936
3,288
Interest expense
27,113
26,599
Income from continuing operations before taxes on income
80,043
44,385
Taxes on income
27,043
15,764
Income from continuing operations
53,000
28,621
Discontinued Operations:
Operating loss
(32
)
(16,200
)
Tax benefit
13
6,399
Net loss from discontinued operations
(19
)
(9,801
)
Net income
$
52,981
$
18,820
Basic Earnings (Loss) Per Common Share
Continuing operations
$
0.40
$
0.20
Discontinued operations
(0.00
)
(0.07
)
Net income
$
0.40
$
0.13
Diluted Earnings (Loss) Per Common Share
Continuing operations
$
0.39
$
0.20
Discontinued operations
(0.00
)
(0.07
)
Net income
$
0.39
(a
)
$
0.13
Weighted Average Common Shares Outstanding, Basic
132,827
140,941
Weighted Average Common Shares Outstanding, Diluted
134,453
142,319
Operational Analysis:
Gross profit %, equipment
24.7
%
28.1
%
Gross profit %, customer service and supplies
44.6
%
43.4
%
Gross profit %, managed and professional services
25.9
%
25.8
%
Gross profit %, rental and fees
69.2
%
72.6
%
Gross profit %, other
50.1
%
42.0
%
Total gross profit %
34.3
%
35.6
%
Selling and administrative as a % of revenue
29.6
%
32.0
%
Operating income as a % of revenue
4.9
%
3.2
%
(a)
The calculation of diluted earnings per common share for the six months ended March 31, 2006 assumes the conversion of convertible notes resulting in 389 shares. The calculation of diluted EPS for the six months ended March 31, 2005 excludes the dilution from convertible notes because the effect would be anti-dilutive. For purposes of diluted earnings per common share, net income for the six months ended March 31, 2006 includes the add-back of $88, representing interest expense, net of taxes, associated with such convertible notes.
3
IKON Office Solutions, Inc.
Consolidated Balance Sheets
(in thousands and unaudited)
March 31,
September 30,
2006
2005
Assets
Cash and cash equivalents
$
311,653
$
373,705
Restricted cash
637
18,272
Accounts receivable, net
643,555
678,313
Lease receivables, net
94,972
317,928
Inventories
263,238
241,470
Prepaid expenses and other current assets
25,288
42,660
Deferred taxes
55,128
55,566
Assets held for sale
382,223
—
Total current assets
1,776,694
1,727,914
Long-term lease receivables, net
246,442
503,281
Equipment on operating leases, net
79,555
101,614
Property and equipment, net
145,322
144,309
Goodwill
1,265,311
1,280,578
Other assets
73,312
74,123
Total Assets
$
3,586,636
$
3,831,819
Liabilities
$
Current portion of corporate debt
$
1,309
1,137
Current portion of non-corporate debt
131,852
299,359
Trade accounts payable
202,856
211,783
Accrued salaries, wages and commissions
80,249
94,614
Deferred revenues
107,374
111,890
Taxes payable
77,006
79,458
Other accrued expenses
120,203
139,099
Liabilities held for sale
205,292
—
Total current liabilities
926,141
937,340
Long-term corporate debt
674,736
728,156
Long-term non-corporate debt
68,630
225,307
Deferred taxes
9,913
20,853
Other long-term liabilities
319,004
349,819
Shareholders’ Equity
1,588,212
1,570,344
Total Liabilities and Shareholders’ Equity
$
3,586,636
$
3,831,819
IKON Office Solutions, Inc.
Consolidated Statements of Cash Flows
(in thousands and unaudited)
Six Months Ended March 31
2006
2005
Cash Flows from Operating Activities
Net income
$
52,981
$
18,820
Net loss from discontinued operations
(19
)
(9,801
)
Income from continuing operations
53,000
28,621
Additions (deductions) to reconcile net income to net cash provided by operating activities:
Depreciation
36,119
37,405
Amortization
2,033
2,692
Gain from divestiture of business
(5,029
)
(1,901
)
Loss on disposal of property and equipment
1,458
2,306
Provision for losses on accounts receivable
7,288
6,931
Restructuring and asset impairment charges
(135
)
11,709
Deferred income taxes
(27,750
)
(66,626
)
Provision for lease default reserves
1,086
988
Stock-based compensation expense
5,084
5,307
Pension expense
21,820
21,880
Loss from early extinguishment of debt
1,650
1,734
Changes in operating assets and liabilities, net of divestiture of businesses:
(Increase) decrease in accounts receivable
(1,418
)
37,822
(Increase) decrease in inventories
(22,321
)
12,377
Decrease in prepaid expenses and other current assets
14,463
17,691
Decrease in accounts payable, deferred revenues, and accrued expenses
(71,419
)
(123,797
)
Increase in taxes payable
26,325
12,783
Decrease in accrued restructuring
(1,300
)
(905
)
Other
140
728
Net cash provided by continuing operations
41,094
7,745
Net cash used in discontinued operations
(846
)
(2,928
)
Net cash provided by operating activities
40,248
4,817
Cash Flows from Investing Activities
Proceeds from the divestiture of business
19,575
5,330
Expenditures for property and equipment
(18,517
)
(14,387
)
Expenditures for equipment on operating leases
(12,211
)
(25,038
)
Proceeds from the sale of equipment on operating leases
15,572
5,627
Proceeds from the sale of lease receivables
92,865
139,392
Lease receivables — additions
(186,542
)
(195,189
)
Lease receivables — collections
238,495
266,079
Other
(1,246
)
(2,673
)
Net cash provided by continuing operations
147,991
179,141
Net cash provided by discontinued operations
—
88
Net cash provided by investing activities
147,991
179,229
Cash Flows from Financing Activities
Short-term corporate debt repayments, net
(30
)
(182
)
Repayment of other borrowings
(3,754
)
(3,439
)
Proceeds from issuance of long-term corporate debt
—
886
Debt issuance costs
(984
)
—
Long-term corporate debt repayments
(54,460
)
(104,031
)
Non-corporate debt — issuances
7,256
16,965
Non-corporate debt — repayments
(134,298
)
(199,727
)
Dividends paid
(10,614
)
(11,298
)
Decrease in restricted cash
1,489
2,978
Proceeds from stock option exercises
13,758
2,743
Tax benefit relating to stock plans
4,997
789
Purchase of treasury shares
(68,975
)
(34,240
)
Net cash used in financing activities
(245,615
)
(328,556
)
Effect of exchange rate changes on cash and cash equivalents
(4,676
)
4,845
Net decrease in cash and cash equivalents
(62,052
)
(139,665
)
Cash and cash equivalents at beginning of the year
373,705
472,951
Cash and cash equivalents at end of the period
$
311,653
$
333,286
4
IKON Office Solutions, Inc.
Reconciliation of Reported to Adjusted Earnings per Diluted Share
(in millions, except per share data)
Second Quarter Fiscal 2005
Non-GAAP
2Q06
Reported
Adjustments
Adjusted
Reported
Revenue
$
1,092
$
1,092
$
1,081
Cost and expenses
1,067
(12
)
(a
)
1,055
1,030
Operating income
25
37
51
Loss on early extinguishment of debt
2
(2
)
(b
)
—
—
Interest, net
11
11
11
Income from continuing operations before taxes on income
13
27
40
Taxes on income
5
4
(c
)
9
14
Income from continuing operations
$
8
$
10
$
17
$
25
Weighted Average Common Shares Outstanding, Diluted
142
18
160
134
Diluted EPS - continuing operations
$
0.05
$
0.12
(d
)
$
0.19
Growth in
Adjusted/Non-GAAPEPS
56
%
Growth in GAAPEPS
246
%
May not add due to rounding
(a)
Includes an $11.4 restructuring charge, a $0.3 asset impairment charge, a $2.2 real-estate charge and $0.3 charge related to the consolidation of our LDS business, a $6.7 loss on the sale of substantiallyall operations in Mexico, a $1.1 gain on sale of certain technology business, and a $7.5 gain from a final reconciliation with GE related to the sale of our U.S. leasing business in 2004.
(b)
Loss from early extinguishment of debt.
(c)
Tax impact from early extinguishment of debt and charges mentioned in {a}.
(d)
Non-GAAPEPS for the second quarter of fiscal 2005 assumes the conversion of convertible notes resulting in 18 shares, and an add-back of $2.0 to net income representing associated interest expense, netof taxes.
5
IKON Office Solutions, Inc.
Reconciliation of revenue to revenue excluding the impact of currency
(in thousands)
Revenues excluding
Revenues
Adjustments
(1)
currency impact
Second Quarter Fiscal 2006
Total Revenues
$
1,080,509
$
7,061
$
1,087,570
Second Quarter Fiscal 2005
Total Revenues
$
1,092,273
$
1,092,273
2Q Yr/Yr Growth
-0.4
%
(1)Impact of exchange rates
6
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