IKON ANNOUNCES FIRST QUARTER RESULTS EPS of $0.17, Excluding $0.04 Restructuring Charge; EPS of $0.13 As Reported Company Takes Actions to Improve Equipment Revenue and Reduce Cost and Expense Structure
MALVERN, Pa. – January 24, 2008– IKON Office Solutions (NYSE:IKN), the world’s largest independent channel for document management systems and services, today reported results for the first quarter of fiscal 2008, which ended December 31, 2007. Earnings per diluted share were $0.17, excluding a $7 million pre-tax restructuring charge, or $0.04 per diluted share. Excluding the charge, earnings per diluted share were within the Company’s revised outlook of $0.15 to $0.17 provided on January 10, 2008. As reported, net income was $15 million, or $0.13 per diluted share for the first quarter of fiscal 2008. For the first quarter of fiscal 2007, the Company’s net income was $27 million, or $0.21 per diluted share.
Total revenue for the first quarter of fiscal 2008 was $998 million, representing a 1 percent decline year over year, including 2 points of currency benefit. Selling and administrative expenses increased $7 million year over year to $295 million, primarily due to currency and, to a lesser extent, the Company’s investment in selling resources in the latter part of fiscal 2007. Selling and administrative expenses were 29.6 percent of revenue in the first quarter of fiscal 2008 versus 28.6 percent in the first quarter last fiscal year. In addition, the Company continued to advance its migration to One Platform in the U.S. by successfully completing its fifth migration. As a result, the Company is on track to complete the last remaining migration in the third quarter of fiscal 2008.
Operating income for the first quarter of fiscal 2008 was $38 million, or 3.8 percent of revenue, including the $7 million restructuring charge. In the first quarter of fiscal 2007, operating income was $49 million, or 4.9 percent of revenue. The Company’s effective tax rate for the quarter was 44 percent, which was negatively impacted by a change in the corporate tax rate in Canada that resulted in a $2.4 million one-time, non-cash revaluation of the Company’s Canadian deferred tax asset.
“Our first quarter financial performance was disappointing,” said IKON Chairman and Chief Executive Officer Matthew J. Espe. “Two key factors drove our results. The primary driver was lower-than-expected Equipment revenue in North America, but our earnings were also impacted by a higher-than-anticipated tax rate.
“We believe our first quarter performance included IKON-specific issues that have been and will be corrected. As a result, we have taken several steps to improve Equipment revenue. In addition, we are taking immediate actions that are expected to reduce our cost and expense structure by $25 million this fiscal year.”
First Quarter Fiscal 2008 Financial Details Equipmentrevenue of $393 million, which includes the sale of copier/printer multifunction products, declined 6 percent from the first quarter of fiscal 2007. This performance reflects fewer large transactions as a result of customers delaying their buying decisions, as well as lower-than-expected sales productivity and a quarter-end IT systems outage. The equipment results were driven primarily by lower revenues in the black and white office and production segments of 14 and 16 percent, respectively, and, to a lesser extent, the color office segment, partially offset by a 39 percent increase in the color production segment and currency. Gross margin on Equipment increased to 25.9 percent from 25.0 percent, reflecting a 150 basis point benefit from a significant vendor rebate on a large equipment purchase in the quarter, partially offset by pricing pressures.
Customer Service and Suppliesrevenue of $350 million, which includes revenue from the servicing of copier/printer equipment and direct sales of supplies, grew 1 percent year over year, reflecting strong performance in Europe and a currency benefit of 2 points. Sequentially, Customer Service and Supplies revenues reflect continued stabilization in North America. For the year, the Company now expects Customer Service and Supplies revenue to be essentially flat year over year. In North America, Customer Service revenue continued to be driven by lower total page volume. Within total page volume, declining pages from analog and black and white devices were partially offset by strong page growth from color devices. Gross margin on Customer Service and Supplies was 43.4 percent in the first quarter of fiscal 2008 compared with 43.9 percent in the first quarter of fiscal 2007, reflecting slightly higher costs.
Managed and Professional Servicesrevenue of $206 million increased 7 percent year over year. On-site Managed Services revenue, which represents approximately two-thirds of total Managed and Professional Services, increased 10 percent; Professional Services grew 9 percent; and Off-site Managed Services declined 3 percent. Gross margin on Managed and Professional Services increased to 27.6 percent from 26.0 percent a year ago primarily due to improved contract profitability in On-site Managed Services and improved Professional Services margin.
Rental and Feesrevenue of $31 million declined 13 percent year over year, reflecting lower fees received from GE due to the change in the GE lease program agreement last year and the impact of lower Equipment revenue. Gross margin improved to 75.1 percent from 72.0 percent in the prior year.Otherrevenue of $18 million grew 2 percent and gross margin was 33.1 percent.
Cost and Expense Reduction Plan In the first quarter, the Company incurred a $7 million pre-tax restructuring charge, or $0.04 per diluted share, as a result of actions the Company is taking to reduce cost and expense, which when combined with other actions will reduce headcount by approximately 350. The majority of the reductions will affect non-sales related functions. In addition, the Company is reducing executive bonuses to reflect management’s disappointment with the first quarter results and accelerating its ongoing efforts to reduce spending. The Company expects these actions to yield approximately $25 million in savings in fiscal 2008 and to improve the operating income run rate, particularly in the second half of the fiscal year.
Tender Offer Results and Share Repurchase Plan In November 2007, the Company announced its intention to repurchase $500 million of its common stock. As part of that plan, the Company completed a $295 million modified Dutch auction self-tender offer in December, purchasing 22.69 million shares. The repurchased shares represented 19.6 percent of shares outstanding as of November 27, 2007. The tender offer was financed with cash and $150 million of new notes.
In addition, the Company repurchased $20 million of its common stock in the open market, bringing total repurchases to $315 million in the first quarter.
The Company plans to complete the balance of the $500 million share repurchase plan announced in November 2007. The plan, rate and timing of any share repurchases remain subject to financing and market conditions, as well as applicable regulations. The Company currently has little remaining share repurchase capacity under the terms of its 2015 and 2012 Notes, and $315 million remaining under its Board authorization. Execution of the balance of the share repurchase plan is expected to result in a one-time cash and pre-tax charge of $60 to $70 million to refinance the 2015 and 2012 Notes and complete other related transactions.
Balance Sheet and Liquidity During the first quarter, the Company’s cash balance declined to $142 million, corporate debt increased to $746 million and shareholders’ equity declined to $1.4 billion, primarily due to the $315 million of share repurchases in the quarter. The Company’s inventory was $357 million at December 31, 2007, up from $288 million at September 30, 2007, substantially due to a large equipment purchase to take advantage of certain vendor rebates in the quarter. The Company anticipates it will sell the vast majority of this incremental inventory in the second quarter.
In the first quarter, the Company used $16 million of cash from operations, compared to an $8 million usage in the first quarter of fiscal 2007. The Company typically uses cash in its first fiscal quarter due to annual bonus payments. Capital expenditures on operating rentals and property and equipment, net of proceeds, totaled $10 million in the first quarter of fiscal 2008, compared with $9 million in the prior-year quarter. As a result, free cash flow was a usage of $26 million in the quarter, versus a usage of $18 million in the prior-year quarter.
For the first quarter of fiscal 2008, fully diluted weighted average shares were 115 million. At December 31, 2007, actual shares outstanding were 93 million, a reduction of 26 percent year over year, driven by the Company’s share repurchase program.
In the first quarter, the Company paid $5 million in dividends to shareholders. In January, IKON’s Board of Directors approved the Company’s regular quarterly cash dividend of $0.04 per common share, payable on March 10, 2008 to holders of record at the close of business on February 19, 2008.
Outlook For fiscal 2008, the Company expects revenue to be flat year over year. This expectation reflects an improving year-over-year Equipment trend, essentially flat Customer Service & Supplies, and continued growth in Managed & Professional Services. The Company expects its expense-to-revenue ratio and operating income margin to be approximately 28 and 5 percent, respectively, and its tax rate to be less than 33 percent. The Company expects fully diluted weighted average shares will average 96 million over the remaining three quarters of fiscal 2008. For the full fiscal year 2008, the Company anticipates fully diluted weighted average shares will be about 101 million.
For fiscal 2008, the Company expects earnings per diluted share to range from $0.92 to $0.98, excluding the restructuring charge taken in the first quarter. As reported, the Company expects diluted earnings per share to range from $0.88 to $0.94. In addition, free cash flow is expected to range from $80 to $110 million.
For the second quarter of fiscal 2008, the Company expects earnings per diluted share to range from $0.16 to $0.19 and its tax rate to range from 34 to 36 percent. The significantly higher earnings projection in the second half of fiscal 2008 is primarily due to the benefits of the Company’s cost and expense reductions, and a substantially lower tax rate in the second half of the fiscal year.
“We have already taken several actions to improve revenue growth, lower selling and administrative expenses and improve our operating income margin,” said Espe. “While we are disappointed with our first quarter North American Equipment revenue performance, I am pleased that the rest of our business is healthy and performing as expected.”
The aforementioned outlook is based on the Company’s capital structure as of December 31, 2007, and excludes the impact of any additional actions it may take to improve results.
About IKON IKON Office Solutions, Inc. (www.ikon.com) is the world’s largest independent channel for document management systems and services, enabling customers worldwide to improve document workflow and increase efficiency. IKON integrates best-in-class copiers, printers and MFP technologies from leading manufacturers, such as Canon, Ricoh, Konica Minolta, and HP, and document management software and systems from companies like Captaris, Kofax, EFI, eCopy and others, to deliver tailored, high-value solutions implemented and supported by its global services organization – IKON Enterprise Services. With fiscal year 2007 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 first quarter fiscal 2008 results will be discussed on a conference call hosted by IKON at 9:00 a.m. ET on Thursday, January 24, 2008. 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 and then Calendar & Presentations. Beginning at 12:00 p.m. ET on January 24, 2008 and ending at midnight ET on January 28, 2008, 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 268152.
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 second quarter and full fiscal year 2008 results from operations, tax rate, free cash flow, capital structure, actions we may take to improve our business, growth strategies, and our ability to execute on our strategic priorities, including growth objectives, operational leverage and capital strategy initiatives, and our share repurchase plan. 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 U.S. Securities and Exchange Commission. As a consequence of these and other risks and uncertainties, IKON’s current plans, anticipated actions and future financial condition, results may differ materially from those expressed in any forward-looking statements.
The Company has reported its financial results in accordance with generally accepted accounting principles (GAAP). In addition, this news release contains certain non-GAAP financial measures, free cash flow and adjusted EPS.
Free cash flow is defined as cash from operations less expenditures for property and equipment, less expenditures for equipment on operating leases, plus proceeds from the sale of property and equipment and equipment on operating leases. IKON believes free cash flow is useful because it provides insight into the amount of cash that the Company has available for discretionary uses, after expenditures for capital commitments.
Adjusted EPS as used in this presentation, excludes the restructuring charge incurred in the first quarter of fiscal 2008. IKON believes this measure provides investors with a useful indication of the performance of IKON’s ongoing operations and financial position.
The reader is encouraged to evaluate these non-GAAP financial measures and the reasons IKON considers them useful for supplemental analysis.
IKON Office Solutions® and IKON: Document Efficiency at Work® are trademarks of IKON Office Solutions, 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)
Three Months Ended December 31,
2007
2006
Revenues
Equipment
$
392,643
$
416,237
Customer service and supplies
350,221
345,970
Managed and professional services
205,875
192,243
Rental and fees
30,963
35,408
Other
18,353
18,026
998,055
1,007,884
Cost of Revenues
Equipment
290,944
312,384
Customer service and supplies
198,090
194,230
Managed and professional services
149,154
142,252
Rental and fees
7,698
9,909
Other
12,274
11,997
658,160
670,772
Gross Profit
Equipment
101,699
103,853
Customer service and supplies
152,131
151,740
Managed and professional services
56,721
49,991
Rental and fees
23,265
25,499
Other
6,079
6,029
339,895
337,112
Selling and administrative
295,429
288,137
Restructuring charge
6,683
—
Operating income
37,783
48,975
Interest income
2,401
3,360
Interest expense
13,236
12,452
Income before taxes on income
26,948
39,883
Taxes on income
11,975
12,546
Net income
$
14,973
$
27,337
Basic Earnings Per Common Share
$
0.13
$
0.21
Diluted Earnings Per Common Share
$
0.13
$
0.21
Cash dividends per common share
$
0.04
$
0.04
Operational Analysis:
Gross profit %, equipment
25.9
%
25.0
%
Gross profit %, customer service and supplies
43.4
%
43.9
%
Gross profit %, managed and professional services
27.6
%
26.0
%
Gross profit %, rental and fees
75.1
%
72.0
%
Gross profit %, other
33.1
%
33.4
%
Total gross profit %
34.1
%
33.4
%
Selling and administrative as a % of revenue
29.6
%
28.6
%
Operating income as a % of revenue
3.8
%
4.9
%
2
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
December 31,
September
30,
2007
2007
Assets
Cash and cash equivalents
$
142,446
$
349,237
Accounts receivable, net
553,913
552,716
Lease receivables, net
81,604
84,207
Inventories
357,329
287,503
Prepaid expenses and other current assets
33,502
35,085
Deferred taxes
51,729
48,167
Total current assets
1,220,523
1,356,915
Long-term lease receivables, net
249,283
251,776
Equipment on operating leases, net
64,801
72,052
Property and equipment, net
153,775
154,218
Deferred taxes
35,806
18,144
Goodwill
1,326,564
1,333,249
Other assets
91,965
84,354
Total Assets
$
3,142,717
$
3,270,708
Liabilities
Current portion of corporate debt
$
20,482
$
16,798
Current portion of non-corporate debt
49,508
51,077
Trade accounts payable
307,438
263,657
Accrued salaries, wages and commissions
71,756
93,052
Deferred revenues
103,169
109,796
Taxes payable
5,379
15,240
Other accrued expenses
125,495
129,323
Total current liabilities
683,227
678,943
Long-term corporate debt
725,144
576,199
Long-term non-corporate debt
178,582
181,334
Other long-term liabilities
164,954
128,211
Total Shareholders’ Equity
1,390,810
1,706,021
Total Liabilities and Shareholders’ Equity
$
3,142,717
$
3,270,708
3
IKON Office Solutions, Inc.
Consolidated Statements of Cash Flows
Three Months Ended December 31
(in thousands and unaudited)
2007
2006
Cash Flows from Operating Activities
Net income
$
14,973
$
27,337
Additions (deductions) to reconcile net income to net cash used in operating activities:
Depreciation
18,372
17,143
Amortization
252
59
Other non-cash items
354
458
Loss on disposal of property and equipment
68
151
Provision for losses on accounts receivable
2,665
1,782
Restructuring charge
6,683
—
Provision for deferred income taxes
(335
)
(4,282
)
Stock-based compensation expense
3,139
2,848
Excess tax benefits from stock-based payments arrangements
(141
)
(788
)
Pension expense
1,058
524
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable
(3,657
)
29,482
Increase in inventories
(70,798
)
(51,051
)
Decrease in prepaid expenses and other current assets
2,661
2,995
Increase in accounts payable
41,675
15,235
Decrease in deferred revenue
(6,719
)
(7,580
)
Decrease in accrued expenses
(33,573
)
(55,302
)
Contributions to pension plans
(1,102
)
(801
)
Increase in taxes payable
8,718
13,674
Other
—
(324
)
Net cash used in operating activities
(15,707
)
(8,440
)
Cash Flows from Investing Activities
Expenditures for property and equipment
(9,908
)
(4,837
)
Expenditures for equipment on operating leases
(3,658
)
(7,345
)
Proceeds from the sale of property and equipment and equipment on operating leases
3,294
2,732
Proceeds from the sale of lease receivables
52,325
53,481
Lease receivables — additions
(82,696
)
(80,925
)
Lease receivables — collections
28,011
24,597
Proceeds from life insurance
921
2,227
Other
(1,620
)
76
Net cash used in investing activities
(13,331
)
(9,994
)
Cash Flows from Financing Activities
Short-term corporate debt borrowings (repayments), net
-
1
Repayment of other borrowings
(5,780
)
(27
)
Debt issuance costs
(2,506
)
—
Corporate — debt issuances
151,780
-
Corporate — debt repayments
(1,278
)
(218
)
Non-corporate debt — issuances
-
4,220
Non-corporate debt — repayments
-
(7,139
)
Dividends paid
(4,641
)
(5,092
)
Proceeds from stock option exercises
1,350
10,283
Excess tax benefits from stock-based payments arrangements
141
788
Purchase of treasury shares
(315,804
)
(34,091
)
Net cash used in financing activities
(176,738
)
(31,275
)
Effect of exchange rate changes on cash and cash equivalents
(1,015
)
1,284
Net decrease in cash and cash equivalents
$
(206,791
)
$
(48,425
)
Cash and cash equivalents at beginning of year
349,237
414,239
Cash and cash equivalents at end of period
$
142,446
$
365,814
Non-cash investing and financing activities:
Assets acquired under capital leases
$
1,874
$
2,242
4
IKON Office Solutions, Inc.
Reconciliation of Reported to Adjusted Earnings per Diluted Share
For the quarterly period ended December 31, 2007
(in millions, except per share data)
GAAP
Adj.
Non-GAAP
Revenue
$
998
$
$
998
Gross profit
340
340
Selling & adminstrative expense
295
295
Restructuring charge
7
(7
)
(a)
-
Operating Income
38
(7
)
44
Interest expense, net
11
11
Taxes on income
12
3
(b)
15
Net income
15
(4
)
19
Diluted EPS
$
0.13
$
(0.04
)
$0.17
(a)
Restructuring charge
(b)
Tax impact from restructuring charge
Note: May not add due to rounding
5
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