IKON ANNOUNCES FOURTH QUARTER AND FISCAL YEAR 2008 RESULTS Fourth Quarter EPS of $0.31 Excluding Items; EPS of $0.23 as Reported Fiscal Year 2008 EPS of $1.07 Excluding Items; EPS of $0.91 as Reported
MALVERN, Pa.—October 22, 2008– IKON Office Solutions (NYSE:IKN), the world’s largest independent channel for document management systems and services, today reported results for the fourth quarter and fiscal year, which ended September 30, 2008. For the fourth quarter, earnings per diluted share were $0.23, including restructuring and asset impairment charges related to the Company’s Off-site Managed Services business and costs associated with the Company’s pending acquisition by Ricoh Company, Ltd. Excluding these non-recurring items, earnings per diluted share were $0.31. These results were in line with the Company’s previously communicated guidance including a $0.05 per share benefit from the favorable closure of a tax audit. In the fourth quarter of fiscal 2007, the Company earned $0.23 per diluted share.
Total revenue for the fourth quarter of fiscal 2008 was $1.1 billion. As reported, operating income was $39.3 million and operating income margin was 3.7 percent in the quarter. Excluding the restructuring and asset impairment charges and the acquisition-related costs totaling $12.4 million, operating income was $51.7 million and operating income margin was 4.9 percent. Interest expense, net of interest income, increased $3 million year over year to $13 million, and weighted average fully diluted shares declined 20 percent to approximately 97 million, primarily due to the financing associated with the Company’s share repurchase activity in the first quarter. The Company’s effective tax rate for the fourth quarter was 17 percent as reported, compared with 28 percent in the prior-year quarter, due to the favorable closure of federal income tax audits and the expiration of certain statutes of limitations. Net income for the quarter was $22 million and included $8 million in after-tax charges from non-recurring items. Excluding these items, net income was $30 million.
For fiscal year 2008, earnings per diluted share were $0.91, including restructuring and asset impairment charges, acquisition-related costs and a loss from the early extinguishment of debt. Excluding these non-recurring items, earnings per diluted share were $1.07. In fiscal 2007, the Company earned $0.91 per diluted share. Total revenue was $4.2 billion in fiscal 2008, essentially flat year over year, including a currency benefit of 1 percentage point. Net income for fiscal 2008 was $91.3 million and included $15.3 million in after-tax charges from non-recurring items. Excluding these items, net income was $106.6 million.
Balance Sheet and Cash Flow The Company’s cash increased $110 million in the quarter to $216 million driven by strong operating cash flow. The Company generated $272 million of cash from operations in fiscal 2008, compared with $172 million in fiscal 2007. Capital expenditures on operating leases and property and equipment, net of proceeds, totaled $45 million in fiscal 2008, compared with $53 million in fiscal 2007. As a result, free cash flow was $227 million in fiscal 2008, compared with $119 million in fiscal 2007.
The Company paid $4 million, or $0.04 per share, of dividends to shareholders during the quarter. At September 30, 2008, actual shares outstanding were approximately 95 million.
Pending Acquisition by Ricoh
On August 27, 2008, IKON announced it had entered into a definitive agreement to be acquired by Ricoh Company, Ltd. for $17.25 per share. The transaction, which was approved by the Boards of Directors of both companies, is subject to regulatory approval in the U.S., Canada and Europe, customary closing conditions and IKON shareholder approval. On October 31, 2008, IKON shareholders will vote on the pending acquisition. For more information on the proposed transaction, see the definitive proxy statement filed on October 3, 2008, which is available on the Investor Relations section of IKON’s web site (www.ikon.com).
About IKON IKON Office Solutions, Inc. is the world’s largest independent channel for document management systems and services, enabling customers to improve document workflow and increase efficiency. IKON integrates best-in-class copiers, printers and MFP technologies from leading manufacturers and document management software and systems, to deliver tailored, high-value solutions implemented and supported by its global services organization — IKON Enterprise Services. With fiscal year 2008 revenue of $4.2 billion, IKON has approximately 24,000 employees in over 400 locations throughout North America and Western Europe.
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 such as free cash flow, adjusted operating income and income margin, 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 operating income and operating income margin exclude the restructuring and asset impairment charges and acquisition-related costs. Adjusted net income and adjusted EPS exclude restructuring and asset impairment charges, acquisition-related costs and a loss from the early extinguishment of debt. IKON believes these measures provide investors with useful indications 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.
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1
IKON Office Solutions, Inc.
Consolidated Balance Sheets
(unaudited)
(in thousands)
September
30,
2008
2007
Assets
Cash and cash equivalents
$
216,236
$
349,237
Accounts receivable, net
529,629
552,776
Lease receivables, net
74,757
84,207
Inventories
237,289
287,503
Prepaid expenses and other current assets
33,955
35,025
Income taxes receivable
2,067
—
Deferred taxes
41,955
48,167
Total current assets
1,135,888
1,356,915
Long-term lease receivables, net
247,051
251,776
Equipment on operating leases, net
53,906
72,052
Property and equipment, net
139,479
154,218
Deferred taxes
14,946
18,144
Goodwill
1,296,576
1,333,249
Other assets
78,488
84,354
Total Assets
$
2,966,334
$
3,270,708
Liabilities
Current portion of corporate debt
$
3,915
$
16,798
Current portion of non-corporate debt
60,229
51,077
Trade accounts payable
268,520
263,657
Accrued salaries, wages and commissions
117,133
93,052
Deferred revenues
107,099
109,796
Income taxes payable
—
15,240
Other accrued expenses
128,478
129,323
Total current liabilities
685,374
678,943
Long-term corporate debt
574,987
576,199
Long-term non-corporate debt
162,635
181,334
Other long-term liabilities
135,347
128,211
Total Shareholders’ Equity
1,407,991
1,706,021
Total Liabilities and Shareholders’ Equity
$
2,966,334
$
3,270,708
2
IKON Office Solutions, Inc.
Income Statement and Operational Analysis (in thousands, except earnings per share)
(unaudited)
Three Months Ended September 30,
2008
2007
Revenues
Equipment
$
459,703
$
470,080
Customer service and supplies
345,549
340,505
Managed and professional services
204,225
203,110
Rental and fees
34,114
34,736
Other
15,229
16,277
1,058,820
1,064,708
Cost of Revenues
Equipment
350,620
357,035
Customer service and supplies
197,301
187,979
Managed and professional services
145,417
146,790
Rental and fees
7,293
7,911
Other
8,784
10,893
709,415
710,608
Gross Profit
Equipment
109,083
113,045
Customer service and supplies
148,248
152,526
Managed and professional services
58,808
56,320
Rental and fees
26,821
26,825
Other
6,445
5,384
349,405
354,100
Selling and administrative
297,743
305,536
Restructuring charge
5,698
—
Asset impairment
200
—
Transactional costs associated with pending acquisition of IKON
6,479
—
Operating income
39,285
48,564
Interest income
732
2,500
Interest expense
13,847
12,949
Income before taxes on income
26,170
38,115
Taxes on income
4,377
10,484
Net income
$
21,793
$
27,631
Basic Earnings Per Common Share
$
0.23
$
0.23
Diluted Earnings Per Common Share
$
0.23
$
0.23
Cash Dividends Per Common Share
$
0.04
$
0.04
Weighted Average Common Shares Outstanding, Basic
94,397
120,160
Weighted Average Common Shares Outstanding, Diluted
96,730
121,610
Operational Analysis:
Gross profit %, equipment
23.7
%
24.0
%
Gross profit %, customer service and supplies
42.9
%
44.8
%
Gross profit %, managed and professional services
28.8
%
27.7
%
Gross profit %, rental and fees
78.6
%
77.2
%
Gross profit %, other
42.3
%
33.1
%
Total gross profit %
33.0
%
33.3
%
Selling and administrative as a % of revenue
28.1
%
28.7
%
Operating income as a % of revenue
3.7
%
4.6
%
3
IKON Office Solutions, Inc.
Income Statement and Operational Analysis (in thousands, except earnings per share)
(unaudited)
Fiscal Year Ended September 30,
2008
2007
Revenues
Equipment
$
1,751,306
$
1,787,730
Customer service and supplies
1,386,957
1,377,669
Managed and professional services
831,805
796,962
Rental and fees
130,917
136,674
Other
65,568
69,309
4,166,553
4,168,344
Cost of Revenues
Equipment
1,308,035
1,346,244
Customer service and supplies
798,788
778,013
Managed and professional services
594,526
580,164
Rental and fees
29,629
34,650
Other
41,469
46,094
2,772,447
2,785,165
Gross Profit
Equipment
443,271
441,486
Customer service and supplies
588,169
599,656
Managed and professional services
237,279
216,798
Rental and fees
101,288
102,024
Other
24,099
23,215
1,394,106
1,383,179
Selling and administrative
1,184,080
1,180,326
Restructuring charge
11,259
—
Asset impairment
200
—
Transactional costs associated with pending acquisition of IKON
6,479
—
Operating income
192,088
202,853
Loss from the early extinguishment of debt
5,702
—
Interest income
5,005
11,372
Interest expense
59,661
50,791
Income before taxes on income
131,730
163,434
Taxes on income
40,395
48,947
Net income
$
91,335
$
114,487
Basic Earnings Per Common Share
$
0.92
$
0.92
Diluted Earnings Per Common Share
$
0.91
$
0.91
Cash Dividends Per Common Share
$
0.16
$
0.16
Weighted Average Common Shares Outstanding, Basic
98,931
124,563
Weighted Average Common Shares Outstanding, Diluted
99,974
126,342
Operational Analysis:
Gross profit %, equipment
25.3
%
24.7
%
Gross profit %, customer service and supplies
42.4
%
43.5
%
Gross profit %, managed and professional services
28.5
%
27.2
%
Gross profit %, rental and fees
77.4
%
74.6
%
Gross profit %, other
36.8
%
33.5
%
Total gross profit %
33.5
%
33.2
%
Selling and administrative as a % of revenue
28.4
%
28.3
%
Operating income as a % of revenue
4.6
%
4.9
%
4
IKON Office Solutions, Inc.
Consolidated Statements of Cash Flows
(in thousands and unaudited)
Fiscal Year Ended September 30,
Cash Flows from Operating Activities
2008
2007
Net income
$
91,335
$
114,487
Additions (deductions) to reconcile net income to net cash provided by operating activities:
Depreciation
72,782
68,719
Amortization
1,080
1,010
Other non-cash items
3,325
2,394
Loss on disposal of property and equipment
2,634
759
Provision for losses on accounts and lease receivables
7,397
6,940
Restructuring charge
11,259
—
Asset impairment
200
Provision for deferred income taxes
32,245
6,333
Stock-based compensation expense
10,277
9,637
Excess tax benefits from stock-based payments arrangements
(984
)
(1,740
)
Pension expense
4,341
2,372
Loss from the early extinguishment of debt
5,702
-
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivables
(1,055
)
40,624
(Increase) decrease in finance lease receivables
(10,035
)
4,019
Decrease (increase) in inventories
45,494
(67,893
)
Increase in prepaid expenses and other assets
(6,508
)
(3
)
Increase in accounts payable
11,183
33,523
Increase (decrease) in deferred revenue
1,831
(12,858
)
Payments related to restructuring plans
(3,606
)
—
Increase (decrease) in accrued expenses
22,144
(28,040
)
Contributions to pension plans
(3,422
)
(9,725
)
(Decrease) increase in income taxes payable
(25,485
)
1,262
Other
—
80
Net cash provided by operating activities
272,134
171,900
Cash Flows from Investing Activities
Expenditures for property and equipment
(33,101
)
(34,269
)
Expenditures for equipment on operating leases
(22,772
)
(29,600
)
Proceeds from the sale of property and equipment and equipment on operating leases
10,886
11,015
Proceeds from life insurance
4,366
5,821
Other
(4,264
)
(2,124
)
Net cash used in investing activities
(44,885
)
(49,157
)
Cash Flows from Financing Activities
Repayment of other borrowings
(5,859
)
(66
)
Debt issuance costs
(3,970
)
—
Debt modification costs
—
(16,430
)
Corporate debt — issuances
152,051
-
Corporate debt — repayments
(172,072
)
(2,598
)
Non-corporate debt — issuances
22,566
158,244
Non-corporate debt — repayments
(20,595
)
(166,225
)
Dividends paid
(15,903
)
(20,048
)
Proceeds from stock option exercises
10,517
17,944
Excess tax benefits from stock-based payments arrangements
984
1,740
Purchase of treasury shares
(316,988
)
(174,968
)
Net cash used in financing activities
(349,269
)
(202,407
)
Effect of exchange rate changes on cash and cash equivalents
(10,981
)
14,662
Net decrease in cash and cash equivalents
(133,001
)
(65,002
)
Cash and cash equivalents at beginning of year
349,237
414,239
Cash and cash equivalents at end of year
$
216,236
$
349,237
Non-cash investing and financing activities:
Assets acquired under capital leases
$
3,270
$
15,406
5
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