IKON ANNOUNCES FOURTH QUARTER AND FISCAL YEAR 2006 RESULTS
Full Year and Fourth Quarter EPS Exceed Company Guidance
Malvern, Pa. – October 26, 2006– IKON Office Solutions (NYSE:IKN), the world’s largest independent channel for document management systems and services, today reported results for the fiscal year and fourth quarter ended September 30, 2006. Net income from continuing operations for fiscal year 2006 was $106 million, or $0.80 per diluted share, including a $0.01 net benefit from the gain on the sale of Kafevend, partially offset by a loss from the early extinguishment of debt. Excluding this net benefit, diluted earnings per share were $0.79, representing a 33% increase over the adjusted $0.59 last year and exceeding the Company’s previously communicated guidance of $0.75 to $0.77. As reported, earnings per diluted share from continuing operations increased 56%.
Total revenue for fiscal year 2006 was $4.2 billion, a decline of 3% compared to $4.4 billion in fiscal year 2005. This decline was consistent with the Company’s revenue guidance of a 3% to 4% decline, and was driven by the decision to sell or exit unprofitable and non-strategic businesses. Targeted revenue, which represents 98% of total revenue, was flat year over year, and consistent with the Company’s guidance of flat to up 1%.
Selling and Administrative expenses declined $145 million year over year and represented 29.6% of revenue in fiscal year 2006, achieving the Company’s expense-to-revenue goal of less than 30%. This expense reduction contributed to an increased operating income margin of 4.8% for fiscal year 2006. Excluding the gain on the sale of Kafevend, the Company’s operating income margin was 4.7%.
“We made significant progress in fiscal year 2006 delivering on the goals we set last year at our November 2005 investor conference. Our adjusted earnings per diluted share were $0.79, exceeding both our initial projection of $0.70 to $0.75 and our recently increased guidance of $0.75 to $0.77. I am pleased with our performance and with the contributions made by all IKON employees to deliver these solid results,” said Matthew J. Espe, IKON’s Chairman and Chief Executive Officer.
Fourth Quarter 2006 Financial Details For the fourth quarter of fiscal year 2006, net income from continuing operations was $26 million, or $0.20 per diluted share, representing a 31% increase over the adjusted $0.15 in the fourth quarter of fiscal year 2005 and exceeding the Company’s guidance of $0.17 to $0.19. As reported, earnings per diluted share from continuing operations increased 48%. Total revenue for the fourth quarter of fiscal year 2006 was $1.06 billion, down 4% year over year. Targeted revenue declined 2% compared to the same quarter last year.
Equipment Revenueof $459 million, which includes the sale of copier/printer multifunction products, declined 3% against a strong fourth quarter of fiscal year 2005. The year-over-year decline was driven primarily by lower revenue in the black and white office market due to continued pricing pressures in line with industry trends and a mix shift in the quarter toward lower-priced segments. Color revenue declined year over year driven by product transitions and customer buying delays in anticipation of new products, including the IKON CPP TM 650,which was launched this month. Gross margin on equipment was 25.5%, down from 25.9% in the same quarter a year ago, due to ongoing pricing pressures, as expected.
Customer Service and Suppliesrevenue of $351 million, which includes revenue from the servicing of copier/printer equipment and direct sales of supplies, decreased 3% year over year. The Company continued to experience a decrease in revenue per copy, contributing to the overall Customer Service revenue decline. The Company believes this year-over-year trend is likely to continue into fiscal year 2007, although improvement is expected as the year progresses. Gross margin on Customer Service and Supplies decreased to 44.4% from 46.7% a year ago as a result of lower revenue in Customer Service.
Managed and Professional Servicesrevenue of $192 million, which includes both on-site and off-site Managed Services, as well as Professional Services, increased 9% compared to the fourth quarter of fiscal year 2005. This strong performance resulted from 10% revenue growth in on-site Managed Services and 29% revenue growth in Professional Services, partially offset by a 1% decline in off-site Managed Services. Gross margin on Managed and Professional Services increased 360 basis points to 27.5% from 23.9% a year ago as a result of improved on-site Managed Services contract profitability in both North America and Europe and better cost management in off-site Managed Services.
Rental and Feesrevenue of $34 million decreased 27%, and gross margin decreased to 67.5% from 68.9% a year ago, driven primarily by the sale of the U.S. retained lease portfolio in the third quarter of fiscal year 2006.Otherrevenue of $22 million decreased 47% compared to the fourth quarter of fiscal year 2005, due primarily to the Company’s decision to sell or exit unprofitable and non-strategic businesses.
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.
Selling and Administrative expenses were $312 million in the fourth quarter of fiscal year 2006, down 13% year over year. S&A expenses represented 29.5% of revenue and were below 30% for the third consecutive quarter. Operating income margin in the fourth quarter increased to 4.1% and the effective tax rate was 26%.
Balance Sheet and Liquidity Cash was $414 million as of September 30, 2006, and cash from operations totaled $98 million for fiscal year 2006, even after payment of $130 million for income taxes related to the U.S. retained lease portfolio and contributions of $100 million to IKON’s defined benefit pension plans. The Company’s solid cash flow for the year was driven by improvements in net income and working capital, including a $92 million reduction in accounts receivable and a $29 million reduction in inventory, partially offset by a $24 million decrease in accounts payable. Capital expenditures on operating rentals and property and equipment, net of proceeds, totaled $57 million for the year, compared to $48 million for fiscal year 2005. The Company’s total debt-to-capital ratio decreased to 33% as of September 30, 2006, from 44% as of September 30, 2005, as a result of debt reductions totaling $442 million, including $134 million of corporate debt.
For the fourth quarter, fully diluted weighted average shares were 131 million. At the end of the quarter, actual shares outstanding were 128 million, a reduction of 5% year over year driven by the Company’s share repurchase program. The Company purchased 3 million shares of common stock for $40 million during the fourth quarter. For fiscal year 2006, the Company purchased a total of 11 million shares for $131 million, achieving the Company’s previously communicated guidance of more than $120 million. For fiscal year 2006, the Company maintained its dividend strategy and paid $21 million in dividends or $0.16 per share. IKON’s Board of Directors approved the Company’s regular quarterly cash dividend of $0.04 per common share, payable on December 10, 2006 to holders of record at the close of business on November 20, 2006.
Outlook “Our ability to accomplish the goals we set out at the beginning of fiscal year 2006 positions us well for another solid year as we enter fiscal 2007,” Espe said. “Our strategy is to further accelerate our color equipment placement growth and increase our color page volume mix to help us offset the expected decline in black and white revenue per copy. We expect this acceleration to be driven by the unprecedented new color product launches from Canon, Ricoh and Konica Minolta, which will expand our color product portfolio and differentiate our offerings in the marketplace. We also anticipate continued growth in Managed and Professional Services.
“For fiscal year 2007, we expect earnings per diluted share from continuing operations to range between $0.90 and $0.95. This range represents an EPS increase of up to 20% year over year. We also anticipate total revenue to be flat to down 1% and targeted revenue to be flat to up 1%. Cash from operations is expected to range between $170 million and $190 million and net capital expenditures between $70 million and $90 million. As a result, we expect free cash flow of $80 million to $120 million, or up to three times what we generated in fiscal year 2006. Our effective tax rate for fiscal 2007 is expected to be between 36% and 37%. For the first quarter of fiscal year 2007, we expect earnings per diluted share to range between $0.20 and $0.22. As in prior years, we anticipate operating activities to use cash in the first quarter.”
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, eCopy and others, to deliver tailored, high-value solutions implemented and supported by its global services organization—IKON Enterprise Services. With fiscal year 2006 revenue of $4.2 billion, IKON has approximately 25,000 employees in over 400 locations throughout North America and Western Europe.
QUARTERLY EARNINGS CONFERENCE CALL: Additional information regarding the fourth quarter and fiscal year 2006 results and the Company’s outlook for fiscal year 2007 will be discussed on a conference call hosted by IKON at 10:00 a.m. ET on Thursday, October 26, 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 October 26, 2006 and ending at midnight ET on October 31, 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 216254.
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 first quarter fiscal year 2007 results will be discussed on Thursday, January 25, 2007, 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 first quarter and full fiscal year 2007 results from continuing operations, color product strategies, 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.
IKON Office Solutions®, IKON: Document Efficiency at Work®, IKON CPPTM are trademarks of IKON Office Solutions West, Inc. All other trademarks are the property of their respective owners.
(FIKN) # # #
1
IKON Office Solutions, Inc.
Income Statement and Operational Analysis (in thousands, except earnings per share)
(unaudited)
Fourth Quarter Fiscal
2006
2005
Revenues
Equipment
$
459,176
$
475,153
Customer service and supplies
351,368
363,516
Managed and professional services
191,870
175,468
Rental and fees
33,546
45,776
Other
22,020
41,369
1,057,980
1,101,282
Cost of Revenues
Equipment
342,149
352,220
Customer service and supplies
195,212
193,872
Managed and professional services
139,040
133,493
Rental and fees
10,919
14,258
Other
14,442
20,887
701,762
714,730
Gross Profit
Equipment
117,027
122,933
Customer service and supplies
156,156
169,644
Managed and professional services
52,830
41,975
Rental and fees
22,627
31,518
Other
7,578
20,482
356,218
386,552
Selling and administrative
311,999
359,776
(Loss) gain on divestiture of businesses and assets
(463
)
9,651
Asset impairment and restructuring (benefit) charge
(58
)
(788
)
Operating income
43,814
37,215
Loss from the early extinguishment of debt
19
4,300
Interest income
3,980
2,244
Interest expense
11,978
12,687
Income from continuing operations before taxes on income
35,797
22,472
Taxes on income
9,419
3,271
Income from continuing operations
26,378
19,201
Discontinued Operations:
Operating loss
(63
)
(1,299
)
Tax benefit
25
513
Net loss from discontinued operations
(38
)
(786
)
Net income
$
26,340
$
18,415
Basic Earnings (Loss) Per Common Share
Continuing operations
$
0.20
$
0.14
Discontinued operations
0.00
(0.01
)
Net income
$
0.20
$
0.13
Diluted Earnings (Loss) Per Common Share
Continuing operations
$
0.20
$
0.14
Discontinued operations
0.00
(0.01
)
Net income
$
0.20
$
0.13
(a
)
Weighted Average Common Shares Outstanding, Basic
129,027
137,865
Weighted Average Common Shares Outstanding, Diluted
130,574
151,806
Operational Analysis:
Gross profit %, equipment
25.5
%
25.9
%
Gross profit %, customer service and supplies
44.4
%
46.7
%
Gross profit %, managed and professional services
27.5
%
23.9
%
Gross profit %, rental and fees
67.5
%
68.9
%
Gross profit %, other
34.4
%
49.5
%
Total gross profit %
33.7
%
35.1
%
Selling and administrative as a % of revenue
29.5
%
32.7
%
Operating income as a % of revenue
4.1
%
3.4
%
(a)
The calculation of diluted earnings per common share for the three months ended September 30, 2005 assumes the conversion of convertible notes resulting in 12,921 shares. For purposes of calculating diluted earnings per common share, net income for the three months ended September 30, 2005 includes the add-back of $1,481, representing interest expense, net of taxes, associated with such convertible notes.
2
IKON Office Solutions, Inc.
Income Statement and Operational Analysis (in thousands, except earnings per share)
(unaudited)
Fiscal Year Ended September 30
2006
2005
Revenues
Equipment
$
1,790,188
$
1,767,012
Customer service and supplies
1,445,561
1,482,020
Managed and professional services
740,998
710,002
Rental and fees
151,228
175,257
Other
100,274
243,014
4,228,249
4,377,305
Cost of Revenues
Equipment
1,339,862
1,300,156
Customer service and supplies
797,541
811,540
Managed and professional services
547,284
527,659
Rental and fees
45,288
51,664
Other
56,496
134,608
2,786,471
2,825,627
Gross Profit
Equipment
450,326
466,856
Customer service and supplies
648,020
670,480
Managed and professional services
193,714
182,343
Rental and fees
105,940
123,593
Other
43,778
108,406
1,441,778
1,551,678
Selling and administrative
1,251,848
1,396,669
Gain on divestiture of businesses and assets
11,497
11,531
Asset impairment and restructuring (benefit) charge
(322
)
10,543
Operating income
201,749
155,997
Loss from the early extinguishment of debt
5,535
6,034
Interest income
13,040
7,388
Interest expense
51,336
52,401
Income from continuing operations before taxes on income
157,918
104,950
Taxes on income
51,669
31,755
Income from continuing operations
106,249
73,195
Discontinued Operations:
Operating loss
(78
)
(20,709
)
Tax benefit
31
8,180
Net loss from discontinued operations
(47
)
(12,529
)
Net income
$
106,202
$
60,666
Basic Earnings (Loss) Per Common Share
Continuing operations
$
0.81
$
0.52
Discontinued operations
0.00
(0.09
)
Net income
$
0.81
$
0.43
Diluted Earnings (Loss) Per Common Share
Continuing operations
$
0.80
$
0.51
Discontinued operations
0.00
(0.08
)
Net income
$
0.80
(a
)
$
0.43
(a
)
Weighted Average Common Shares Outstanding, Basic
131,336
139,890
Weighted Average Common Shares Outstanding, Diluted
132,941
157,691
Operational Analysis:
Gross profit %, equipment
25.2
%
26.4
%
Gross profit %, customer service and supplies
44.8
%
45.2
%
Gross profit %, managed and professional services
26.1
%
25.7
%
Gross profit %, rental and fees
70.1
%
70.5
%
Gross profit %, other
43.7
%
44.6
%
Total gross profit %
34.1
%
35.4
%
Selling and administrative as a % of revenue
29.6
%
31.9
%
Operating income as a % of revenue
4.8
%
3.6
%
(a)
The calculation of diluted earnings per common share for the year ended September 30, 2006 assumes the conversion of convertible notes resulting in 194 shares. The calculation of diluted earnings per common share for the year ended September 30, 2005 assumes the conversion of convertible notes resulting in 16,613 shares. For purposes of calculating diluted earnings per common share, net income for the years ended September 30, 2006 and 2005 includes the add-back of $88 and $7,553, respectively, representing interest expense, net of taxes, associated with such convertible notes.
3
IKON Office Solutions, Inc.
Consolidated Balance Sheets
(in thousands and unaudited)
September 30,
2006
2005
Assets
Cash and cash equivalents
$
414,239
$
373,705
Restricted cash
—
18,272
Accounts receivable, net
586,246
678,313
Lease receivables, net
83,051
317,928
Inventories
214,792
241,470
Prepaid expenses and other current assets
34,742
42,660
Deferred taxes
46,504
55,566
Total current assets
1,379,574
1,727,914
Long-term lease receivables, net
222,333
503,281
Equipment on operating leases, net
83,248
101,614
Property and equipment, net
144,453
144,309
Deferred taxes
30,215
—
Goodwill
1,297,333
1,280,578
Other assets
74,543
74,123
Total Assets
$
3,231,699
$
3,831,819
Liabilities
$
Current portion of corporate debt
$
1,487
1,137
Current portion of non-corporate debt
152,971
299,359
Trade accounts payable
220,585
240,306
Accrued salaries, wages and commissions
109,090
94,614
Deferred revenues
118,146
111,890
Income taxes payable
15,831
26,218
Other accrued expenses
139,590
163,816
Total current liabilities
757,700
937,340
Long-term corporate debt
593,578
728,156
Long-term non-corporate debt
64,005
225,307
Deferred taxes
—
20,853
Other long-term liabilities
130,283
349,819
Shareholders’ Equity
1,686,133
1,570,344
Total Liabilities and Shareholders’ Equity
$
3,231,699
$
3,831,819
4
IKON Office Solutions, Inc.
Consolidated Statements of Cash Flows
Year Ended September 30
(in thousands and unaudited)
2006
2005
Cash Flows from Operating Activities
Net income
$
106,202
$
60,666
Net loss from discontinued operations
(47
)
(12,529
)
Income from continuing operations
106,249
73,195
Additions (deductions) to reconcile net income to net cash provided by (used in) operating activities:
Depreciation
70,070
73,110
Amortization
3,300
5,256
Gain from divestiture of businesses and assets
(11,497
)
(11,531
)
Loss on disposal of property and equipment
4,057
3,729
Provision for losses on accounts receivable
2,165
14,237
Restructuring and asset impairment (benefit) charges
(322
)
10,543
Deferred income taxes
(96,153
)
(102,972
)
Provision for lease default reserves
437
2,929
Stock-based compensation expense
9,197
10,060
Pension expense
27,603
43,079
Loss from the early extinguishment of debt
5,535
6,034
Changes in operating assets and liabilities, net of divestiture of businesses:
Decrease in accounts receivable
91,536
37,288
Decrease (increase) in inventories
29,204
(14,116
)
Decrease in prepaid expenses and other current assets
2,704
8,003
Decrease in accounts payable
(23,594
)
(68,557
)
Increase in deferred revenue
3,220
2,058
Decrease in accrued expenses
(11,346
)
(1,694
)
Pension contributions
(100,210
)
(44,108
)
Decrease in taxes payable
(10,739
)
(28,098
)
Decrease in accrued restructuring
(1,534
)
(8,306
)
Other
(932
)
218
Net cash provided by continuing operations
98,950
10,357
Net cash used in discontinued operations
(1,159
)
(13,076
)
Net cash provided by (used in) operating activities
97,791
(2,719
)
Cash Flows from Investing Activities
Proceeds from the divestiture of businesses and assets
242,043
23,107
Expenditures for property and equipment
(37,470
)
(28,000
)
Expenditures for equipment on operating leases
(40,705
)
(44,149
)
Proceeds from the sale of equipment on operating leases
21,647
23,677
Proceeds from the sale of lease receivables
201,687
249,083
Lease receivables — additions
(348,119
)
(385,630
)
Lease receivables — collections
292,421
531,267
Proceeds from life insurance (cash surrender value)
—
55,343
Other
(3,946
)
(1,032
)
Net cash provided by continuing operations
327,558
423,666
Net cash provided by discontinued operations
—
1,558
Net cash provided by investing activities
327,558
425,224
Cash Flows from Financing Activities
Short-term corporate debt repayments, net
(30
)
(774
)
Repayment of other borrowings
(7,786
)
(3,429
)
Proceeds from issuance of long-term corporate debt
—
227,049
Debt issuance costs
(2,510
)
(4,140
)
Long-term corporate debt repayments
(138,748
)
(300,723
)
Non-corporate debt — issuances
23,964
18,756
Non-corporate debt — repayments
(142,452
)
(366,481
)
Dividends paid
(21,009
)
(22,393
)
Decrease in restricted cash
2,127
8,760
Proceeds from stock option exercises
22,182
4,787
Tax benefit relating to stock plans
5,696
1,843
Purchase of treasury shares
(131,190
)
(86,943
)
Other
(49
)
—
Net cash used in financing activities
(389,805
)
(523,688
)
Effect of exchange rate changes on cash and cash equivalents
4,990
1,937
Net increase (decrease) in cash and cash equivalents
40,534
(99,246
)
Cash and cash equivalents at beginning of the year
373,705
472,951
Cash and cash equivalents at end of the year
$
414,239
$
373,705
5
IKON Office Solutions, Inc.
Reconciliation of Reported to Adjusted Earnings per Diluted Share
Three months ended September 30, 2005 and 2006, respectively
Q4 FY05
Q4 FY06
Actual
Adj.
Non-GAAP
Actual
(in millions, except per share data)
Adjusted
Revenue
$
1,101
$
1,101
$
1,058
Gross profit margin
35.1
%
35.1
%
33.7
%
Selling & Administrative expense ratio
32.7
%
31.2
%
29.5
%
Operating income
$
37
5
(a
)
$
43
$
44
Operating income margin
3.4
%
3.9
%
4.1
%
-
Loss from the early extinguishment of debt
4
(4
)
-
-
Interest expense, net
10
10
8
Taxes on income
3
7
10
9
Net income, continuing operations
$
19
$
22
$
26
Diluted EPS, continuing operations
$
0.14
$
0.15
$
0.20
-
-
Y/Y Growth rate vs. Adjusted 4Q FY05
31
%
Y/Y Growth rate vs. Actual 4Q FY05
48
%
(a)
Charge of $16 million, including $7 million for early termination of consulting contract, $4 million for U.K. pension plan, $4 million for lease terminations and $1 million reserve for Hurricanes Katrina and Rita; partially offset by non-taxable $10 million gain from the sale of our operating subsidiary in France and $1 million adjustment for restructuring and asset impairment
May not add due to rounding
6
IKON Office Solutions, Inc.
Reconciliation of Reported to Adjusted Earnings per Diluted Share and Adjusted Operating Income Margin
Fiscal years ended September 30, 2005 and 2006, respectively
FY05
FY06
Actual
Adj.
Non-GAAP
Actual
Adj.
Non-GAAP
(in millions, except per share data)
Adjusted
Adjusted
Revenue
$
4,377
$
4,377
$
4,228
$
4,228
Gross profit margin
35.4
%
35.4
%
34.1
%
34.1
%
Selling & Administrative expense ratio
31.9
%
31.5
%
29.6
%
29.6
%
Operating income
$
156
18
(a
)
$174
$
202
(5
)
(b
)
$197
Operating income margin
3.6
%
4.0
%
4.8
%
4.7
%
-
Loss from the early extinguishment of debt
6
(6
)
-
6
(6
)
-
Interest expense, net
45
45
38
38
Taxes on income
32
11
43
52
2
54
Net income, continuing operations
$
73
$
86
$
106
$
105
Diluted EPS, continuing operations
$
0.51
$
0.59
$
0.80
$
0.79
-
-
-
Y/Y Growth rate
56
%
33
%
(a)
Charge of approximately $29 million, including $7 million for early termination of consulting contract, $4 million for U.K. pension plan, $6 million for early termination of real estate leases and $1 million reserve for Hurricanes Katrina and Rita, $11 million for net restructuring and asset impairment charges and other; partially offset by approximately $12 million of gain from divestiture of businesses
(b)
Gain on sale of Kafevend
May not add due to rounding
7
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