IKON OFFICE SOLUTIONS ANNOUNCES
FIRST QUARTER RESULTS
Earnings at High End of Expected Range
Company Demonstrates Continued Execution and Operational Improvement
Valley Forge, Pennsylvania - January 23, 2003 - IKON Office Solutions
(NYSE:IKN), the largest independent distributor of document management products
and services in the U.S. with operations in Canada, Mexico and Europe, today
reported results for the first quarter of its fiscal year which ends September
30, 2003. Earnings per diluted share for the first quarter of Fiscal 2003 were
$.21 compared to $.22 for the first quarter of Fiscal 2002. Net income was $32.5
million compared to $32.6 million for the same period a year ago.
Revenues for the first quarter of Fiscal 2003 were $1.14 billion compared to
$1.21 billion for the same period in the prior year, a decline of 6.1%.
Three-quarters of the decline related to business downsizing and exit strategies
employed during the first quarter of the prior year, equating to a decline in
core revenues of approximately 1.5%. Core revenues represent the distribution of
copiers/printers from leading vendors such as Canon and Ricoh and the Company's
wide array of service offerings, including copier/printer fleet maintenance,
outsourcing and lease financing. These core revenues continued to be impacted by
a soft economy, but showed steady improvement in terms of profitability and
shifts in customer and product mix consistent with the Company's long-term
strategy for market leadership and profit expansion.
"Our results this quarter were right on track with our expectations," stated
Matthew J. Espe, President and Chief Executive Officer. "IKON's business model
calls for improved profitability of our revenue streams and the creation of a
more powerful and responsive infrastructure. Well-executed strategies in both
these areas played a key role in delivering earnings results at the high end of
our expected range for the quarter, despite a tentative economy.
"Taking a conservative view of top line performance given the economic
environment, our 2003 priorities will optimize the strength of our growing
product and services portfolio, with a sharp focus on premium growth
opportunities. This includes the distribution and servicing of color and
high-end copiers/printers - two important building blocks to our equipment
service and consumable revenue opportunities. On the services front, we will be
capitalizing on IKON's strength in outsourcing, and expanding our service
opportunities in the delivery of document management and workflow solutions to
IKON's sizeable customer base. We are also working closely with our suppliers to
build new channels for growth, particularly as we gain increased recognition as
a strong partner for large regional, national and international accounts,"
continued Mr. Espe.
"In the first quarter, we saw clear execution against these goals, with some
great customer wins that demonstrate the value of IKON's size, scale and scope.
We saw strong results in Europe - particularly in outsourcing. Across the entire
organization, we also delivered strong results in color, and we continued to
deliver growth in high-end equipment sales, including early signals that new
high-end products like the Canon imageRUNNER Pro 150+ will be an added strength
to our portfolio in 2003.
"On the operational front, we will continue to use our centralized
infrastructure to control costs in 2003, while we fund invaluable productivity
investments, such as our e-IKON initiative currently underway - an
enterprise-wide process redesign and system enhancement supported by the Oracle
E-Business Suite. This investment will ensure that we have an efficient and
extremely scalable infrastructure to support future growth as the economic
climate improves.
"Asset management also continues to be a top priority and we
remain committed to meeting our free cash flow target of $250 to $275 million
for the fiscal year," Mr. Espe concluded
Financial Analysis
Year-to-year comparisons within both Net Sales and Services were impacted by
actions the Company has taken to strengthen the business model and facilitate
long-term profitability objectives. During the first quarter of Fiscal 2002, the
Company exited its telephony business, sold its technology education business,
and closed or sold a number of digital print centers and technology service
locations. The Company also began to aggressively phase out the distribution of
low-margin technology hardware - an undertaking expected to continue throughout
Fiscal 2003.
Net Sales, which includes the sale of copier/printer equipment, supplies and
technology hardware, declined 7.4% from the first quarter of Fiscal 2002. As
anticipated, technology hardware declined by over $28 million, accounting for
about two-thirds of the decline. Sales of copier/printer equipment, the largest
component within Net Sales, declined 3%. Sales of high-end, segment 5 & 6
equipment, as well as color sales, grew over the first quarter of Fiscal 2002,
while sales of segment 1 - 4 equipment, fax, and other low-end devices, in
total, declined. Gross profit margin on Net Sales climbed to 35.6%, from 34.2%
in the first quarter of Fiscal 2002, due to an improved product mix and
continued process improvements.
Services, which include revenues from the servicing of copier/printer equipment,
and outsourcing and other services, declined 6% from the first quarter of Fiscal
2002, primarily due to declines in outsourcing and other services as a result of
the downsizing and sale of non-strategic businesses during the first quarter of
the prior fiscal year. Excluding these factors,
Services declined approximately 1% from the first quarter of Fiscal 2002. Gross
profit margin on Services of 39.8% declined slightly from 40.1% for the first
quarter of Fiscal 2002 primarily due to revenue mix.
Finance Income grew 1.9% from the first quarter of Fiscal 2002 due to growth in
the lease portfolio. IKON's customers continue to take advantage of the
Company's captive leasing business. For the first quarter of Fiscal 2003,
approximately 78% of IKON's equipment revenues in the U.S. were financed through
IOS Capital, IKON's largest captive leasing business. Gross profit from finance
subsidiaries in the first quarter of Fiscal 2003 increased to 58.9% from 55.8%
for the first quarter of the prior year, reflecting lower average borrowing
costs as a result of market rate reductions and the Company's chosen mix of
capital resources to support lease financing.
Selling and Administrative Costs declined $17.1 million in the first quarter of
Fiscal 2003 compared to the same period in the prior year, primarily due to the
benefits of prior infrastructure improvements and solid expense controls. For
Fiscal 2003, the Company will absorb increased expenses such as health care and
pension expense as well as resources devoted to its e-IKON investment.
Operating Income was $64.5 million for the first quarter of Fiscal 2003, with
operating margins increasing to 5.7%, from 5.4% for the first quarter a year
ago. The improvement in the operating margin reflects the Company's drive toward
its long-term goal of 8% to 10% operating margins.
Outlook
"In Fiscal 2003, we will continue to cultivate our business model, building upon
our steady execution toward market leadership and operational excellence," said
Mr. Espe. "We are encouraged by our performance in the first quarter and our
continued execution of major initiatives that will provide significant long-term
benefits. Maintaining our original expectations for Fiscal 2003, we expect to
deliver modest improvement in operating margins given the economy and the need
to dedicate additional resources to long-term revenue and profit building
opportunities, such as our e-IKON implementation. Earnings are expected to be in
the range of $.94 to $.98 per diluted share for Fiscal 2003. Revenues are
expected to decline 2% to 4%, including an expected decline in technology
hardware of approximately $120 to $150 million for the year.
"For the second quarter, we continue to be mindful of the economic climate, but
anticipate improved revenue performance in our core business. Revenues,
including the expected decline in technology hardware, should decline 2% to 4%.
Earnings for the second quarter are expected to be in the range of $.23 - $.25
per diluted share," Mr. Espe concluded.
IKON Office Solutions (www.ikon.com) is a leading provider of products and
services that help businesses manage document workflow and increase efficiency.
IKON provides customers with total business solutions for every office,
production and outsourcing need, including digital copiers and printers, color
solutions, distributed printing, facilities management, and legal document
solutions, as well as network integration, connectivity and custom workflow and
imaging application development. IOS Capital, LLC, a wholly owned subsidiary of
IKON, provides lease financing to customers and is one of the largest captive
finance companies in North America. With Fiscal 2002 revenues of $4.8 billion,
IKON has approximately 600 locations worldwide including the United States,
Canada, Mexico, the United Kingdom, France, Germany, Ireland and Denmark.
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QUARTERLY EARNINGS CONFERENCE CALL: Additional information regarding the first
quarter results and the Company's outlook for the next quarter and full fiscal
year will be discussed on a conference call hosted by IKON at 10:00 a.m. EST on
Thursday, January 23, 2003. Please call (719) 457-2645 to participate. The live
audio broadcast as well as a complete replay of the conference call will be
available on IKON's Investor Relations homepage through the next quarterly
reporting period. The replay will be available approximately two hours after the
call ends. To listen, please go to www.ikon.com and click on Invest in IKON.
Beginning at 1:00 p.m. EST on January 23, 2003 and ending at midnight EST on
January 28, 2003, a complete replay of the conference call can also be accessed
via telephone by calling (719) 457-0820 and using the access code 585248.
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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 the Company's outlook for the second quarter and full fiscal year 2003, the
benefits of our long-term investments, the execution and impact of the Company's
long-term strategies and the long-term operating margin goal. 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; managing the integration of existing and
acquired companies; risks and uncertainties associated with existing or future
vendor relationships; and general economic conditions. Certain additional risks
and uncertainties are set forth in IKON's 2002 Annual Report on Form 10-K filed
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.
# # #
IKON Office Solutions, Inc.
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FINANCIAL SUMMARY
(in thousands, except earnings per share)
(unaudited)
First Quarter Fiscal
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2003 2002
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Revenues
Net sales $ 526,763 $ 568,997
Services 515,304 548,330
Finance income 94,898 93,122
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1,136,965 1,210,449
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Costs and Expenses
Cost of goods sold 339,463 374,347
Services costs 310,218 328,237
Finance interest expense 39,020 41,165
Selling and administrative 383,794 400,885
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1,072,495 1,144,634
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Operating income 64,470 65,815
Interest expense 12,309 14,511
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Income before income taxes 52,161 51,304
Income taxes 19,691 18,726
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Net income $ 32,470 $ 32,578
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Basic Earnings Per Common Share $0.23 $0.23
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Diluted Earnings Per Common Share $0.21 (a) $0.22
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Weighted Average Common Shares Outstanding, Basic 144,164 141,885
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Weighted Average Common Shares Outstanding, Diluted 166,885 146,394
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Operations Analysis:
Gross profit %, net sales 35.6% 34.2%
Gross profit %, services 39.8% 40.1%
Gross profit %, finance subsidiaries 58.9% 55.8%
Total gross profit % 39.4% 38.6%
Selling and administrative as a % of revenue 33.8% 33.1%
Operating income as a % of revenue 5.7% 5.4%
(a) The calculation of diluted earnings per common share for the first quarter
of fiscal 2003 assumes the conversion of convertible notes issued in May
2002 by IOS Capital, LLC resulting in 19,960 shares. For purposes of
diluted earnings per common share, net income for the first quarter of
fiscal 2003 includes the add-back of $2,354 representing interest expense,
net of taxes, associated with such convertible notes.
IKON Office Solutions, Inc.
COMPUTATIONS OF EARNINGS PER COMMON SHARE
(in thousands, except earnings per share)
(unaudited)
Three Months Ended December 31,
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2002 2001
----------------------------------- -------------------------------
Basic Diluted Basic Diluted
----------------- ----------------- ---------------- ----------------
Average Shares Outstanding
Common shares 144,164 144,164 141,885 141,885
Convertible notes 19,960
Restricted stock awards 263 446
Stock options 2,498 4,063
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Total shares 144,164 166,885 141,885 146,394
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Income
Net Income $ 32,470 $ 32,470 $ 32,578 $ 32,578
Interest on convertible notes, net 2,354
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Adjusted Net Income $ 32,470 $ 34,824 $ 32,578 $ 32,578
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EPS $ 0.23 $ 0.21 $ 0.23 $ 0.22
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IKON Office Solutions, Inc.
Consolidated Balance Sheets
December 31,
2002 September 30,
(in millions) (unaudited) 2002
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Assets
Cash and cash equivalents $ 132.5 $ 271.8
Restricted cash 126.3 116.1
Accounts receivable, less allowances of: December 31, 2002 - $15.5;
September 30, 2002 - $14.2 583.1 568.6
Finance receivables, less allowances of: December 31, 2002 - $20.2;
September 30, 2002 - $20.4 1,201.9 1,198.3
Inventories 315.6 318.2
Prepaid expenses and other current assets 96.5 82.9
Deferred taxes 65.4 65.3
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Total current assets 2,521.3 2,621.2
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Long-term finance receivables, less allowances of: December 31, 2002 -
$37.6; September 30, 2002 - $37.8 2,241.5 2,231.5
Equipment on operating leases, net 100.3 99.6
Property and equipment, net 196.8 202.9
Goodwill, net 1,230.6 1,235.4
Other assets 71.5 67.2
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Total Assets $ 6,362.0 $ 6,457.8
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Liabilities and Shareholders' Equity
Current portion of long-term debt, excluding finance subsidiaries $ 9.2 $ 11.5
Current portion of long-term debt of finance subsidiaries 1,421.9 1,312.0
Notes payable 1.5 7.2
Trade accounts payable 172.1 232.1
Accrued salaries, wages and commissions 70.5 127.7
Deferred revenues 155.1 161.5
Other accrued expenses 286.0 300.9
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Total current liabilities 2,116.3 2,152.9
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Long-term debt, excluding finance subsidiaries 594.4 594.4
Long-term debt of finance subsidiaries 1,379.0 1,495.8
Deferred taxes 497.1 479.4
Other long-term liabilities 208.9 200.4
Commitments and contingencies
Shareholders' Equity
Common stock, no par value: authorized: 300.0 shares; issued: December
31, 2002-150.0 shares; September 30, 2002-150.0 shares;
outstanding: December 31, 2002-144.3 shares; September 30, 2002-
144.0 shares 1,014.7 1,015.2
Series 12 preferred stock, no par value: authorized 0.5 shares; none
issued or outstanding
Unearned compensation (3.5) (2.0)
Retained earnings 625.0 595.7
Accumulated other comprehensive loss (47.6) (50.8)
Cost of common shares in treasury: December 31, 2002-5.1 shares;
September 30, 2002-5.3 shares (22.3) (23.2)
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Total Shareholders' Equity 1,566.3 1,534.9
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Total Liabilities and Shareholders' Equity $ 6,362.0 $ 6,457.8
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