IKON Office Solutions, Inc.
P.O. Box 834
Valley Forge, PA 19482-0834
70 Valley Stream Parkway
Malvern, PA 19355
News Release
Contacts:
Veronica L. Rosa Steven K. Eck
Investor Relations Media Relations
610-408-7196 610-408-7295
vrosa@ikon.com seck@ikon.com
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IKON ANNOUNCES RESULTS
FOR THE SECOND QUARTER OF FISCAL 2004
Earnings in Line With Expectations
Growth Platforms Yielding Results in Strategic Areas
Valley Forge, Pennsylvania - April 29, 2004 - IKON Office Solutions (NYSE:IKN),
the world's largest independent channel for document management systems and
services, today reported results for the second fiscal quarter ended March 31,
2004. Revenues of $1.18 billion grew modestly in the second quarter compared to
the prior year, with foreign currency translation providing a 2.2% revenue
benefit. Net income of $30.2 million, or $.19 per diluted share, includes a
pretax loss of $12.1 million, or $.04 per diluted share, from the sale of the
Company's U.S. leasing operations; a pretax loss on early extinguishment of debt
of $3.1 million, or $.01 per diluted share, primarily related to the
cancellation of the Company's credit facility on March 31; and, a tax benefit of
$4.7 million, or $.02 per diluted share, associated with the utilization of net
operating losses as a result of the tax gain generated on the sale of the U.S.
leasing operations. Excluding these items, earnings per diluted share for the
second quarter of Fiscal 2004 were $.22.
"Our results reflect the investments made to strengthen our service offerings
and to expand our sales channels into the higher growth areas of the market,
such as color and high-end black & white technologies that continue to fuel the
aftermarket," stated Matthew J. Espe, IKON's Chairman and Chief Executive
Officer. "While the equipment market continues to be competitive, we experienced
positive trends in our focus areas of color and high-end production, as well as
our other two strategic areas: aftermarket and document services, which
represent over 54% of the Company's revenue mix. For example, sales of color
technologies grew 62% in the quarter, which will continue to provide a steady
source of profitable aftermarket revenues from equipment service and consumables
in the future. Furthermore, the added resources we deployed this fiscal year to
support our national account program delivered over 100% growth in revenues over
the prior year, making the initiative another contributor to the improvement in
aftermarket we experienced this quarter. We are also benefiting from an
increasing demand for our expertise in Professional Services. These services, as
well as our portfolio of workflow enablers from a range of industry leaders,
provide added advantage for IKON in the marketplace, as integrated workflow
strategies gain increasing importance with customers.
"We also experienced operational improvements from our e-IKON investment,
particularly in supply chain which delivered another record level of inventory
turns for the quarter. In addition, the improvements we've achieved in our
Canadian operations over the last several quarters enabled us to recognize a
deferred tax benefit on net operating loss carryovers in Canada of $2.6 million.
All of these improvements indicate that our growth platforms and efficiency
investments are beginning to yield results. With the completion of our U.S.
leasing transaction with GE Commercial Finance ("GE") and the pending
transaction for our Canadian lease portfolio, we can now sharpen our focus on
our core business as a global document management sales and service channel, and
we look forward to the opportunities additional financial flexibility will
provide to further improve our leadership position within the industry.
"Our financial position today continues to strengthen," continued Espe.
"Unrestricted cash was $853 million at the end of the second quarter, and total
debt has declined by over $1.1 billion from the second quarter a year ago. We
are already on track in the third quarter to further strengthen our capital
structure with the completion of our recent tender for $250 million of the June
2008 notes. The additional resources from the U.S. and Canadian leasing
transactions will give us the opportunity to invest in our business initiatives
and drive our long-term growth and operational efficiency."
Financial Analysis
Supply revenues and related costs sold as part of bundled service contracts were
reclassified from Net Sales to Services in the second quarter. Reclassification
adjustments for 2002, 2003 and the first quarter of Fiscal 2004 can be found on
the Company's investor relations site of IKON.com. There is no impact on total
revenues, operating margin, or net income for these periods.
Net Sales of $500.7 million, which includes the sale of copier/printer
equipment, direct supplies and technology hardware, declined by 1.8% from the
second quarter of Fiscal 2003. Sales of technology hardware declined by $5
million in the quarter, while direct supply sales remained relatively flat
compared to the prior year. Sales of copier/printer equipment declined 1% from
the prior year, with declines in lower-end, segment 1 to 4 and fax offsetting
strong color and high-end black & white production performance over the prior
year. Color equipment revenues grew by 62% in the quarter, due to the strong
portfolio of products from industry leaders -- Canon, Ricoh, and the IKON CPP
8050 co-branded with Konica-Minolta. The Company also continued to build its
installed base of high-end black & white equipment with installations of Canon
imageRUNNER110/150s increasing by 20% from the second quarter of the prior year.
Revenues from color, as well as high-end black & white equipment, represent an
increasingly larger portion of the Company's product mix. This strengthened mix
will continue to be a key factor in supporting future services growth. Gross
profit margin on Net Sales declined to 28.3% from 30.5% in the second quarter of
Fiscal 2003, due primarily to continued market competitiveness, customer mix and
write-offs in the quarter.
Services of $585.4 million, which include revenues from the servicing of
copier/printer equipment and other document services, grew by 2.3% from the
second quarter of Fiscal 2003. Revenues from the servicing of copier/printer
equipment grew by 2.6% from the prior year, as the Company begins to realize the
benefits of a stronger mix of color and high-end technologies and strategic
investments that enhance the potential for aftermarket revenues. Other document
services, which include outsourcing and Professional Services, grew by 1.8%, the
majority of which was due to growth in Professional Services. Gross profit
margin on Services of 40.8% increased from 40.5% in the prior year due to
continued productivity and operational improvements.
Finance Income of $98.3 million grew by 1.3% from the prior year. Gross profit
margin from finance subsidiaries was 65.1% for the second quarter, up from 62.2%
for the same period a year ago due to a continued decline in cost of capital
throughout Fiscal 2003. In the second quarter, approximately 84% of IKON's
equipment revenues in the U.S. were financed through IOS Capital, LLC, IKON's
former U.S. captive lease subsidiary. Beginning in the third quarter, these
equipment sales will be financed through the Company's strategic alliance with
GE that effectively transitions IKON out of the captive finance business in
North America. Under the agreement with GE, IKON will receive origination fees
and other revenue opportunities from GE.
Operating income decreased to $49.5 million for the second quarter of Fiscal
2004 from $69.8 million a year ago, primarily due to the loss on divestiture of
business described below and a higher level of Selling and Administrative
expenses. Selling and Administrative expenses increased by $5.3 million from the
prior year, due primarily to foreign currency translation and increases in
pension and other benefits that were offset by operational improvements. As a
percentage of revenues, Selling and Administrative expenses were 32.4% compared
to 32.0% a year ago. Interest expense of $9.7 million declined by $2.9 million
from the second quarter of Fiscal 2003, due to continued reductions in non-lease
financing related debt.
Divestiture of Business
On March 31, 2004, the Company announced the completion of its previously
announced transaction with GE for its U.S. leasing business. As part of the
transaction, and subject to post-closing adjustments, IKON sold certain assets
and liabilities of IOS Capital and transferred IOS Capital's facilities, systems
and processes to GE. In addition, under the terms of a Program Agreement, GE has
become IKON's preferred lease-financing source in the U.S. The Company has also
signed a definitive agreement with GE to sell the Company's approximate CN$230
million Canadian lease portfolio to GE and, as part of this transaction, GE will
also become IKON's preferred lease-financing source for its Canadian operations.
The Canadian sale is subject to required regulatory approvals and customary
conditions and is expected to close in the third quarter of Fiscal 2004.
The Company incurred approximately $12.1 million, or $7.5 million net of tax, in
expenses consisting primarily of accounting, legal and consulting fees and other
miscellaneous expenses associated with the transaction.
Balance Sheet and Liquidity
Unrestricted cash was $853 million at the end of the second quarter, up
significantly from the prior year due to cash proceeds received as a result of
the transaction described above. A portion of the proceeds received on March 31
were used to repay the outstanding balance of the Company's U.S. lease financing
conduit facilities, further improving the Company's financial position. As of
March 31, 2004, current and long-term debt totaled $2.2 billion, of which
approximately $1.2 billion is supported by lease receivable contracts totaling
$1.6 billion. Since the second quarter of Fiscal 2003, debt has declined by $1.1
billion, and total debt to capital has declined to 56.3% from 67.7%.
Loss on early extinguishment of debt of $3.1 million in the second quarter of
Fiscal 2004 was primarily related to the cancellation of the Company's credit
facility on March 31, 2004. The facility was terminated concurrent with the
closing of the IOS Capital/GE transaction. The Company intends to replace the
facility with terms more appropriate for its capital structure and growth
objectives.
IKON's Board of Directors approved the Company's regular quarterly cash dividend
of $.04 per common share, payable on June 10, 2004 to holders of record at the
close of business on May 24, 2004.
Outlook
The Company has revised expectations for Fiscal 2004 reflecting the impact of
the IOS Capital/GE transaction, which includes the deployment of cash proceeds
from the IOS Capital/GE transaction announced to date; but excluding the impact
of any future deployment of cash proceeds. Fiscal 2004 earnings per diluted
share are expected to be in the range of $.70 to $.75. Third quarter diluted
earnings per share are expected to be in the range of $.15 to $.18. These
expectations exclude the loss on divestiture and related tax benefit in the
quarter, and losses on early extinguishment of debt. As a result of the
completion of the tender for $250 million of the June 2008 notes, the Company
expects to incur a pretax loss on early extinguishment of debt of approximately
$32 million to $34 million in the third quarter of Fiscal 2004. Additional
information regarding cash proceeds, use of cash, and pro-forma financial
information are included on the slides that accompany today's conference call.
About IKON
IKON Office Solutions (www.ikon.com) integrates imaging systems and services
that help businesses manage document workflow and increase efficiency. As the
world's largest independent distribution channel for copier and printer
technologies, IKON offers best-in-class systems from leading manufacturers such
as Canon, Ricoh and HP and service support through its team of 7,000 service
professionals worldwide. IKON also represents the industry's broadest portfolio
of document management services: outsourcing and professional services, on-site
copy and mailroom management, fleet management, off-site digital printing
solutions, and customized workflow and imaging application development. With
Fiscal 2003 revenues of $4.7 billion, IKON has approximately 600 locations
throughout North America and Europe.
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QUARTERLY EARNINGS CONFERENCE CALL: Additional information regarding the
second quarter results and the Company's outlook for the next quarter and
Fiscal 2004 will be discussed on a conference call hosted by IKON at 9:30 a.m.
EST on Thursday, April 29, 2004. Please call (719) 457-2617 to participate.
The live audio broadcast of the call, with slides, can be accessed on IKON's
Investor Relations homepage. 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. EST on April 29, 2004 and ending at midnight EST on May 2, 2004,
a complete replay of the conference call can also be accessed via telephone by
calling (719) 457-0820 and using the access code 541194.
NON-GAAP INFORMATION: In the event any non-GAAP measures are discussed during
the conference call, a file will be available, within 24 hours, on the
Company's website, www.ikon.com, that reconciles non-GAAP and GAAP results.
The file can be accessed on the Investor Relations home page.
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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 our expected third quarter and full fiscal 2004 results, expected
consummation of the IOS Capital/GE transaction in Canada, the ability to execute
long-term strategic initiatives, growth and operational efficiency, plans to
replace the Company's credit facility and expected impact of the IOS Capital/GE
transaction. 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; the
implementation, timing and cost of the e-IKON initiative; 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 2003 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.
(FIKN)
# # #
IKON Office Solutions, Inc.
FINANCIAL SUMMARY (in thousands, except earnings per share)
(unaudited)
Second Quarter Fiscal
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2004 2003
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Revenues
Net sales $ 500,683 $ 509,980
Services 585,375 572,396
Finance income 98,259 97,008
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1,184,317 1,179,384
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Costs and Expenses
Cost of goods sold 358,827 354,606
Services costs 346,295 340,466
Finance interest expense 34,336 36,644
Selling and administrative 383,220 377,900
Loss from divestiture of business 12,125
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1,134,803 1,109,616
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Operating income 49,514 69,768
Loss (gain) from early extinguishment of debt 3,146 (1,348)
Interest expense, net 9,662 12,607
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Income before taxes on income 36,706 58,509
Taxes on income 6,533 22,087
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Net income $ 30,173 $ 36,422
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Basic Earnings Per Common Share $ 0.20 $ 0.25
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Diluted Earnings Per Common Share $ 0.19 (a) $ 0.23 (a)
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Weighted Average Common Shares Outstanding, Basic 147,453 144,483
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Weighted Average Common Shares Outstanding, Diluted 170,901 167,037
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Operations Analysis:
Gross profit %, net sales 28.3% 30.5%
Gross profit %, services 40.8% 40.5%
Gross profit %, finance subsidiaries 65.1% 62.2%
Total gross profit % 37.6% 38.0%
Selling and administrative as a % of revenue 32.4% 32.0%
Operating income as a % of revenue 4.2% 5.9%
(a) The calculation of diluted earnings per common share for the second quarter
of fiscal 2004 and 2003 assumes the conversion of convertible notes issued
in May 2002 resulting in 19,960 shares. For purposes of diluted earnings
per common share, net income for the second quarter of fiscal 2004 and 2003
includes the add-back of $2,328 and $2,302, respectively, representing
interest expense, net of taxes, associated with such convertible notes.
IKON Office Solutions, Inc.
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FINANCIAL SUMMARY (in thousands, except earnings per share)
(unaudited)
Year to Date Fiscal
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2004 2003
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Revenues
Net sales $ 963,411 986,257
Services 1,160,116 1,158,598
Finance income 197,270 191,907
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2,320,797 2,336,762
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Costs and Expenses
Cost of goods sold 685,063 680,521
Services costs 690,534 684,646
Finance interest expense 69,275 75,663
Selling and administrative 759,688 761,694
Loss from divestiture of business 12,125
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2,216,685 2,202,524
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Operating income 104,112 134,238
Loss (gain) from early extinguishment of debt 3,219 (1,250)
Interest expense, net 19,747 24,818
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Income before taxes on income 81,146 110,670
Taxes on income 23,308 41,778
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Net income $ 57,838 68,892
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Basic Earnings Per Common Share $ 0.39 0.48
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Diluted Earnings Per Common Share $ 0.37 (a) 0.44 (a)
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Weighted Average Common Shares Outstanding, Basic 146,975 144,318
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Weighted Average Common Shares Outstanding, Diluted 170,031 166,956
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Operations Analysis:
Gross profit %, net sales 28.9% 31.0%
Gross profit %, services 40.5% 40.9%
Gross profit %, finance subsidiaries 64.9% 60.6%
Total gross profit % 37.7% 38.3%
Selling and administrative as a % of revenue 32.7% 32.6%
Operating income as a % of revenue 4.5% 5.7%
(a) The calculation of diluted earnings per common share for year-to-date
fiscal 2004 and 2003 assumes the conversion of convertible notes issued in
May 2002 resulting in 19,960 shares. For purposes of diluted earnings per
common share, net income for the first six months ended March 31, 2004 and
2003 includes the add-back of $4,681 and $4,656, respectively, representing
interest expense, net of taxes, associated with such convertible notes.
IKON Office Solutions, Inc.
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COMPUTATIONS OF EARNINGS PER COMMON SHARE
(in thousands, except earnings per share)
(unaudited)
Three Months Ended March 31,
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2004 2003
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Basic Diluted Basic Diluted
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Average Shares Outstanding
Common shares 147,453 147,453 144,483 144,483
Convertible notes 19,960 19,960
Restricted stock awards 341 251
Stock options 3,147 2,343
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Total shares 147,453 170,901 144,483 167,037
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Income
Net income $ 30,173 $ 30,173 $ 36,422 $ 36,422
Interest on convertible notes, net 2,328 2,302
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Adjusted net income $ 30,173 $ 32,501 $ 36,422 $ 38,724
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EPS $ 0.20 $ 0.19 $ 0.25 $ 0.23
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Six Months Ended March 31,
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2004 2003
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Basic Diluted Basic Diluted
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Average Shares Outstanding
Common shares 146,975 146,975 144,318 144,318
Convertible notes 19,960 19,960
Restricted stock awards 334 257
Stock options 2,762 2,421
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Total shares 146,975 170,031 144,318 166,956
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Income
Net income $ 57,838 $ 57,838 $ 68,892 $ 68,892
Interest on convertible notes, net 4,681 4,656
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Adjusted net income $ 57,838 $ 62,519 $ 68,892 $ 73,548
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EPS $ 0.39 $ 0.37 $ 0.48 $ 0.44
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IKON Office Solutions, Inc.
Consolidated Balance Sheets
Preliminary
March 31,
2004 September 30,
(in millions) (unaudited) 2003
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Assets
Cash and cash equivalents $ 853.3 $ 360.0
Restricted cash 122.7 165.3
Accounts receivable, less allowances of: March 31, 2004 - $20.8;
September 30, 2003 - $14.3 543.6 560.3
Finance receivables, less allowances of: March 31, 2004 - $2.5;
September 30, 2003 - $20.5 536.0 1,205.1
Inventories 241.5 224.3
Prepaid expenses and other current assets 76.1 103.4
Deferred taxes 44.1 44.1
Receivable from sale of business 177.5
Assets held for sale 176.9
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Total current assets 2,771.7 2,662.5
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Long-term finance receivables, less allowances of: March 31, 2004 -
$8.2; September 30, 2003 - $38.0 1,077.5 2,370.9
Equipment on operating leases, net 63.9 103.5
Property and equipment, net 165.8 177.6
Goodwill, net 1,289.4 1,258.4
Other assets 99.4 66.6
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Total Assets $ 5,467.7 $ 6,639.5
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Liabilities and Shareholders' Equity
Current portion of corporate debt $ 95.7 $ 6.5
Current portion of debt supporting finance contracts 549.7 1,445.2
Notes payable 1.4 4.0
Trade accounts payable 168.3 245.7
Accrued salaries, wages and commissions 105.6 117.1
Deferred revenues 127.2 143.5
Other accrued expenses 548.5 275.4
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Total current liabilities 1,596.4 2,237.4
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Long-term corporate debt 1,001.6 419.1
Long-term debt supporting finance contracts 600.3 1,563.5
Deferred taxes 238.2 482.6
Other long-term liabilities 285.4 301.5
Commitments and contingencies
Shareholders' Equity
Common stock, no par value: authorized: 300.0 shares; issued: March 31, 2004-149.9
shares; September 30, 2003-150.0 shares;
outstanding: March 31, 2004-147.7 shares; September 30, 2003-
146.4 shares 1,015.1 1,015.7
Series 12 preferred stock, no par value: authorized 480 shares; none
issued or outstanding
Unearned compensation (2.3) (2.5)
Retained earnings 742.2 696.1
Accumulated other comprehensive loss (2.1) (60.8)
Cost of common shares in treasury: March 31, 2004 -1.6 shares;
September 30, 2003-2.9 shares (7.1) (13.1)
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Total Shareholders' Equity 1,745.8 1,635.4
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Total Liabilities and Shareholders' Equity $5,467.7 $6,639.5
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