IKON ANNOUNCES RESULTS FOR THE THIRD QUARTER OF FISCAL YEAR 2006
•
EPS from Continuing Operations up 17%; Increases 27% Excluding Debt Extinguishment
•
Equipment Revenue Grows for Third Consecutive Quarter; Color Equipment Revenue up 13%
Malvern, Pa. – July 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 June 30, 2006. Net income from continuing operations for the third quarter was $27 million, or $0.20 per diluted share, including a $0.02 charge for a loss on early extinguishment of debt. Excluding this charge, earnings per diluted share were $0.22, exceeding the Company’s previously communicated EPS range of $0.19 to $0.21, and representing a 27% increase over the same period last year.
Total revenue for the third quarter of fiscal year 2006 was $1.05 billion, compared to $1.10 billion for the third quarter of fiscal year 2005. The expected decline resulted from the Company’s decision to sell or exit unprofitable and non-core businesses. Targeted revenue, which represents 98% of total revenue, declined 1% year over year.
“During the third quarter, color equipment revenue continued to perform well, as placements increased 40% and revenue increased 13% year over year. In addition, we experienced strong placement growth in the office segment and strong revenue growth in the production segment,” said Matthew J. Espe, IKON’s Chairman and Chief Executive Officer. “In a challenging market, we have grown equipment revenue for the last three quarters, with recent strength coming from new product introductions from Canon and Ricoh, as well as our co-branded initiatives with Konica Minolta.”
Selling and administrative (S&A) expenses of $311 million in the quarter decreased 9%, or $29 million, compared to the third quarter of fiscal year 2005. Operating income of $54 million increased 10% year over year.
“Our steady progress managing S&A expenses resulted in an expense-to-revenue ratio of 29.7% this quarter, in line with our full-year goal to achieve an expense-to-revenue ratio below 30%,” Espe said. “Our commitment to cost containment and productivity improvements contributed to a strong operating income margin of 5.2% for the quarter.”
Third Quarter 2006 Financial Details Equipmentrevenue of $445 million, which includes the sale of copier/printer multifunction products, increased 1% compared to the third 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 25.6%, up significantly from 23.8% in the third quarter of fiscal year 2005.
Customer Service and Suppliesrevenue of $362 million, which includes revenue from the servicing of copier/printer equipment and direct sales of supplies, decreased 4% compared to the third quarter of fiscal year 2005, but was flat sequentially. Customer Service revenue was negatively impacted by the expected decline in the analog equipment base, and by a decline in revenue per copy, partially offset by continued growth in the digital equipment base. Gross margin on Customer Service and Supplies decreased to 45.6% from 47.5% a year ago, due to lower revenue offset slightly by a decline in costs during the quarter.
Managed and Professional Servicesrevenue of $187 million, which includes revenue from on-site and off-site Managed Services, as well as Professional Services, increased 4% compared to the third quarter of fiscal year 2005. On-site Managed Services revenue grew 6% and Professional Services revenue increased 31%, partially offset by an 11% decline in off-site Managed Services revenue during the quarter. Gross margin on Managed and Professional Services declined to 25.1% from 27.2% a year ago, due to lower off-site Managed Service margins driven by lower revenue, and a slight decline in on-site Managed Services margin.
Rental and Feesrevenue of $34 million decreased 20% driven primarily by the sale of the U.S. retained lease portfolio in April 2006. Gross margin increased to 74.7% from 68.1% a year ago, due to a greater mix of higher-margin agency fees.
Otherrevenue of $19 million declined 67% compared to the third quarter of fiscal year 2005, primarily due to the sale of non-strategic businesses in 2005 and the sale of the U.S. retained lease portfolio.
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 $354 million as of June 30, 2006, with cash used in continuing operations totaling $68 million for the third quarter, primarily due to $58 million in pension contributions to U.S. and foreign plans.
The Company continued to execute its balanced capital strategy and completed six key initiatives during the quarter, including:
•
Significantly reducing corporate debt by successfully tendering for its 2008 notes and purchasing $81 million of the $95 million balance. As a result, the total debt-to-capital ratio decreased to 34% as of June 30, 2006, down from 44% as of September 30, 2005.
•
Signing an amended, less restrictive and more cost effective $200 million credit facility.
•
Contributing $58 million to fund U.S. and foreign pension plans, reducing under-funded positions to very manageable levels.
•
Selling the U.S. retained lease portfolio, which will generate net cash of approximately $70 million.
•
Selling the German lease portfolio, which will generate net cash of approximately $38 million.
•
Initiating a strategy to repatriate approximately $47 million of cash to the U.S., at little or no tax cost.
The Company continued to repurchase shares during the quarter, buying back 1.7 million shares of outstanding common stock for approximately $22 million, resulting in year-to-date purchases of 7.7 million shares for approximately $91 million. IKON’s Board of Directors approved the Company’s regular quarterly cash dividend of $0.04 per common share, payable on September 10, 2006 to holders of record at the close of business on August 21, 2006.
Outlook “Looking ahead, we remain focused on executing our long-term plan, while continuing the momentum we’ve generated during the first nine months of fiscal year 2006,” Espe said. “Based on our performance to-date, we are increasing our earnings expectations for fiscal year 2006. We now expect earnings per diluted share from continuing operations to range between $0.75 and $0.77 for the full fiscal year 2006, with fourth quarter earnings per diluted share from continuing operations expected to range between $0.17 and $0.19.
“In addition, as we continue to execute on our strategy, we expect to generate cash from operations for the full year between $50 million and $100 million, excluding an accelerated $50 million tax payment related to the sale of the U.S. retained lease portfolio.”
The expectation for full-year earnings per diluted share excludes any charges associated with the early extinguishment of debt, as well as the net gain on the sale of Kafevend previously disclosed in the first quarter of fiscal 2006. This expectation includes the premium from the U.S. retained lease portfolio sale, which offsets the operating income that the portfolio would have generated in the second half 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 425 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 year 2006 will be discussed on a conference call hosted by IKON at 10:00 a.m. ET on Thursday, July 27, 2006. The live audio broadcast of the call, with slides, can be accessed on IKON’s Investor Relations homepage or by calling (201) 689-8261. 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 July 27, 2006 and ending at midnight ET on August 1, 2006, a complete replay of the conference call can also be accessed via telephone by calling (877) 660-6853 or (201) 612-7415 and entering account number 270 and conference number 207084.
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 slide presentation. MARK YOUR CALENDAR:IKON’s fourth quarter fiscal year 2006 results will be discussed on Thursday, October 26, 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 that 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 fourth quarter, full fiscal year 2006 results from continuing operations, the impact of our sale of our U.S. retained lease portfolio 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 set forth in our 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.
(FIKN) # # #
IKON Office Solutions, Inc.
Income Statement and Operational Analysis (in thousands, except earnings per share)
(unaudited)
Third Quarter Fiscal
2006
2005
Revenues
Equipment
$
445,275
$
440,378
Customer service and supplies
361,587
377,522
Managed and professional services
187,276
180,386
Rental and fees
34,007
42,578
Other
18,752
57,441
1,046,897
1,098,305
Cost of Revenues
Equipment
331,065
335,590
Customer service and supplies
196,597
198,312
Managed and professional services
140,232
131,271
Rental and fees
8,596
13,572
Other
12,367
30,121
688,857
708,866
Gross Profit
Equipment
114,210
104,788
Customer service and supplies
164,990
179,210
Managed and professional services
47,044
49,115
Rental and fees
25,411
29,006
Other
6,385
27,320
358,040
389,439
Selling and administrative
311,035
340,465
Gain on divestiture of businesses and assets
6,931
Asset impairment and restructuring
(129
)
(379
)
Operating income
54,065
49,353
Loss from early extinguishment of debt
3,866
—
Interest income
4,124
1,855
Interest expense
12,245
13,115
Income from continuing operations before taxes on income
42,078
38,093
Taxes on income
15,207
12,720
Income from continuing operations
26,871
25,373
Discontinued Operations:
Operating income (loss)
17
(3,210
)
Tax (expense) benefit
(7
)
1,268
Net income (loss) from discontinued operations
10
(1,942
)
Net income
$
26,881
$
23,431
Basic Earnings (Loss) Per Common Share
Continuing operations
$
0.21
$
0.18
Discontinued operations
0.00
(0.01
)
Net income
$
0.21
$
0.17
Diluted Earnings (Loss) Per Common Share
Continuing operations
$
0.20
$
0.17
Discontinued operations
0.00
(0.01
)
Net income
$
0.20
$
0.16
Weighted Average Common Shares Outstanding, Basic
130,690
139,826
Weighted Average Common Shares Outstanding, Diluted
132,311
157,110
Operational Analysis:
Gross profit %, equipment
25.6
%
23.8
%
Gross profit %, customer service and supplies
45.6
%
47.5
%
Gross profit %, managed and professional services
25.1
%
27.2
%
Gross profit %, rental and fees
74.7
%
68.1
%
Gross profit %, other
34.0
%
47.6
%
Total gross profit %
34.2
%
35.5
%
Selling and administrative as a % of revenue
29.7
%
31.0
%
Operating income as a % of revenue
5.2
%
4.5
%
The calculation of diluted EPS for the three months ended June 30, 2005 assumes the conversion of convertible notes resulting in 16,306 shares. For purposes of diluted earnings per common share, net income for the three
(a)
months ended June 30, 2005 includes the add-back of $1,848, representing interest expense, net of taxes, associated with such convertible notes.
IKON Office Solutions, Inc.
Income Statement and Operational Analysis(in thousands, except earnings per share)
(unaudited)
Nine Months Ended June 30
2006
2005
Revenues
Equipment
$
1,331,012
$
1,291,859
Customer service and supplies
1,094,193
1,118,504
Managed and professional services
549,128
534,534
Rental and fees
117,682
129,481
Other
78,254
201,645
3,170,269
3,276,023
Cost of Revenues
Equipment
997,713
947,936
Customer service and supplies
602,329
617,668
Managed and professional services
408,244
394,166
Rental and fees
34,369
37,406
Other
42,054
113,721
2,084,709
2,110,897
Gross Profit
Equipment
333,299
343,923
Customer service and supplies
491,864
500,836
Managed and professional services
140,884
140,368
Rental and fees
83,313
92,075
Other
36,200
87,924
1,085,560
1,165,126
Selling and administrative
939,849
1,036,914
Gain on divestiture of businesses and assets
11,960
1,901
Asset impairment and restructuring
(264)
11,330
Operating income
157,935
118,783
Loss from early extinguishment of debt
5,516
1,734
Interest income
9,060
5,143
Interest expense
39,358
39,714
Income from continuing operations before taxes on income
122,121
82,478
Taxes on income
42,250
28,484
Income from continuing operations
79,871
53,994
Discontinued Operations:
Operating loss
(15)
(19,410)
Tax benefit
6
7,667
Net loss from discontinued operations
(9)
(11,743)
Net income
$
79,862
$
42,251
Basic Earnings (Loss) Per Common Share
Continuing operations
$
0.60
$
0.38
Discontinued operations
0.00
(0.08)
Net income
$
0.60
$
0.30
Diluted Earnings (Loss) Per Common Share
Continuing operations
$
0.60
$
0.38
Discontinued operations
0.00
(0.07)
Net income
$
0.60
(a)
$
0.30
(a
)(b)
Weighted Average Common Shares Outstanding, Basic
132,115
140,567
Weighted Average Common Shares Outstanding, Diluted
133,728
159,669
Operational Analysis:
Gross profit %, equipment
25.0%
26.6%
Gross profit %, customer service and supplies
45.0%
44.8%
Gross profit %, managed and professional services
25.7%
26.3%
Gross profit %, rental and fees
70.8%
71.1%
Gross profit %, other
46.3%
43.6%
Total gross profit %
34.2%
35.6%
Selling and administrative as a % of revenue
29.6%
31.7%
Operating income as a % of revenue
5.0%
3.6%
The calculation of diluted earnings per common share for the nine months ended June 30, 2006 assumes the conversion of convertible notes resulting in 260 shares. The calculation of diluted EPS for the nine months ended June 30, 2005 assumes the conversion of convertible notes resulting in 17,857 shares. For purposes of
(a)
diluted earnings per common share, net income for the nine months ended June 30, 2006 and June 30, 2005 includes the add-back of $88 and $6,072, respectively, representing interest expense, net of taxes, associated with such convertible notes.
(b)
Does not add due to rounding.
IKON Office Solutions, Inc.
Consolidated Balance Sheets
(in thousands and unaudited)
June 30,
September 30,
2006
2005
Assets
Cash and cash equivalents
$
353,845
$
373,705
Restricted cash
—
18,272
Accounts receivable, net
660,077
678,313
Lease receivables, net
81,612
317,928
Inventories
282,023
241,470
Prepaid expenses and other current assets
38,482
42,660
Deferred taxes
53,232
55,566
Total current assets
1,469,271
1,727,914
Long-term lease receivables, net
252,675
503,281
Equipment on operating leases, net
83,832
101,614
Property and equipment, net
143,465
144,309
Deferred taxes
74,838
—
Goodwill
1,290,288
1,280,578
Other assets
71,328
74,123
Total Assets
$
3,385,697
$
3,831,819
Liabilities
Current portion of corporate debt
$
980
$
1,137
Current portion of non-corporate debt
136,998
299,359
Trade accounts payable
182,709
211,783
Accrued salaries, wages and commissions
100,421
94,614
Deferred revenues
112,329
111,890
Taxes payable
141,383
79,458
Other accrued expenses
108,900
139,099
Payable from divestiture of asset
9,682
-
Total current liabilities
793,402
937,340
Long-term corporate debt
593,555
728,156
Long-term non-corporate debt
100,242
225,307
Deferred taxes
—
20,853
Other long-term liabilities
264,605
349,819
Shareholders’ Equity
1,633,893
1,570,344
Total Liabilities and Shareholders’ Equity
$
3,385,697
$
3,831,819
IKON Office Solutions, Inc.
Consolidated Statements of Cash Flows
(in thousands and unaudited)
Nine Months Ended June 30
2006
2005
Cash Flows from Operating Activities
Net income
$
79,862
$
42,251
Net loss from discontinued operations
(9
)
(11,743
)
Income from continuing operations
79,871
53,994
Additions (deductions) to reconcile net income to net cash used in operating activities:
Depreciation
52,366
55,068
Amortization
2,663
4,316
Gain from divestiture of businesses and assets
(11,960
)
(1,901
)
Loss on disposal of property and equipment
4,017
2,308
Provision for losses on accounts receivable
3,823
11,898
Restructuring and asset impairment charges
(264
)
11,330
Deferred income taxes
(108,922
)
(69,766
)
Provision for lease default reserves
191
2,124
Stock-based compensation expense
7,502
7,575
Pension expense
24,973
32,654
Loss from early extinguishment of debt
5,516
1,734
Changes in operating assets and liabilities, net of divestiture of businesses:
Decrease in accounts receivable
15,358
30,629
Increase in inventories
(38,313
)
(6,621
)
Increase in prepaid expenses and other current assets
(2,555
)
(66
)
Decrease in accounts payable
(31,532
)
(84,681
)
Decrease in deferred revenue
(2,178
)
(16,563
)
Decrease in accrued expenses
(28,424
)
(23,827
)
Pension contributions
(63,464
)
(42,604
)
Increase in taxes payable
66,279
10,475
Decrease in accrued restructuring
(1,493
)
(5,849
)
Other
98
826
Net cash used in continuing operations
(26,448
)
(26,947
)
Net cash used in discontinued operations
(1,158
)
(9,618
)
Net cash used in operating activities
(27,606
)
(36,565
)
Cash Flows from Investing Activities
Proceeds from the divestiture of businesses and assets
251,642
5,330
Expenditures for property and equipment
(26,093
)
(22,091
)
Expenditures for equipment on operating leases
(27,610
)
(36,151
)
Proceeds from the sale of equipment on operating leases
18,346
14,165
Proceeds from the sale of lease receivables
145,969
188,956
Lease receivables — additions
(264,161
)
(277,560
)
Lease receivables — collections
268,412
398,448
Other
1,077
(1,266
)
Net cash provided by continuing operations
367,582
269,831
Net cash provided by discontinued operations
-
1,558
Net cash provided by investing activities
367,582
271,389
Cash Flows from Financing Activities
Short-term corporate debt repayments, net
(855
)
(223
)
Repayment of other borrowings
(3,792
)
(3,465
)
Proceeds from issuance of long-term corporate debt
-
1,450
Debt issuance costs
(2,304
)
—
Long-term corporate debt repayments
(138,804
)
(104,924
)
Non-corporate debt — issuances
7,312
19,339
Non-corporate debt — repayments
(142,354
)
(289,037
)
Dividends paid
(15,841
)
(16,889
)
Decrease in restricted cash
2,127
3,338
Proceeds from stock option exercises
18,025
3,946
Tax benefit relating to stock plans
4,922
1,221
Purchase of treasury shares
(90,816
)
(34,240
)
Other
(49
)
—
Net cash used in financing activities
(362,429
)
(419,484
)
Effect of exchange rate changes on cash and cash equivalents
2,593
1,040
Net decrease in cash and cash equivalents
(19,860
)
(183,620
)
Cash and cash equivalents at beginning of the year
373,705
472,951
Cash and cash equivalents at end of the period
$
353,845
$
289,331
IKON Office Solutions, Inc.
Reconciliation of Reported to Adjusted Earnings per Diluted Share
(in millions, except per share data)
Third Quarter Fiscal 2006
3Q06
Non-GAAP
Reported
Adjustments
Adjusted
Revenue
$1,047
$
1,047
Cost and expenses
993
993
Operating income
54
54
Loss on early extinguishment of debt
4
(4
)
(a
)
-
Interest, net
8
8
Income from continuing operations before taxes on income
42
46
Taxes on income
15
��
2
(b
)
17
Income from continuing operations
$
27
$
(2
)
$
29
Weighted Average Common Shares Outstanding, Diluted
132
132
Diluted EPS — continuing operations — fiscal 2006
$0.20
$
0.22
Diluted EPS — continuing operations- fiscal 2005
$0.17
$
0.17
3Q Yr/Yr Growth
17%(c)
27
%
(c
)
(a)
Loss from early extinguishment of debt.
(b)
Tax impact from early extinguishment of debt mentioned in (a).
(c)
May not recalculate due to rounding
We use cookies on this site to provide a more responsive and personalized service. Continuing to browse, clicking I Agree, or closing this banner indicates agreement. See our Cookie Policy for more information.
