IKON Office Solutions, Inc.
P.O. Box 834
Valley Forge, PA 19482-0834
70 Valley Stream Parkway
Malvern, PA 19355
[GRAPHIC OMITTED]
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
- -------------- -------------
IKON ANNOUNCES RESULTS
FOR THE THIRD QUARTER OF FISCAL 2004
Delivers Earnings at High End of Company Expectations
Company Announces New $200 Million Credit Facility
Valley Forge, Pennsylvania - July 29, 2004 - IKON Office Solutions (NYSE:IKN),
the world's largest independent channel for document management systems and
services, today reported results for the third fiscal quarter ended June 30,
2004, reaching the high end of the Company's expectations for the quarter.
Strength in targeted areas such as color equipment sales and national accounts,
and positive results within IKON's newly formed Enterprise Services group, are
contributing to an expanding pipeline of new customers to IKON.
Net income of $8.1 million, or $.05 per diluted share, includes a pretax loss on
early extinguishment of debt of $32.7 million, or $.13 per diluted share, and a
pretax gain of $.7 million related to the divestiture of the Company's Canadian
leasing business on June 30, 2004. Excluding these items, earnings per diluted
share for the third quarter of Fiscal 2004 were $.18, at the high end of the
Company's expectations for the quarter.
Revenues for the third quarter were $1.16 billion, declining 1.3% compared to
the prior year. Growth in targeted revenue streams was offset by the decline in
finance revenues as the Company began its transition out of captive lease
financing in North America. Targeted revenue streams, which represent 95% of
total revenues and exclude revenues from U.S. and Canadian lease financing and
computer-related technology hardware, grew by 4% compared to the same period a
year ago. Finance income from the U.S. and Canadian portfolios declined by 61%
from the prior year and is expected to decline primarily over the next 24
months, as the Company completes its previously announced transition out of
captive lease financing in the U.S. and Canada. This strategic shift includes
the funding of new lease originations by IKON Financial ServicesSM, a strategic
alliance under GE Commercial Finance ("GE"). Foreign currency translation
provided a 1.1% benefit to total revenues.
"We were pleased to deliver positive results for both our customers and
shareholders in the quarter," stated Matthew J. Espe, IKON's Chairman and Chief
Executive Officer. "The third quarter was our first under a dramatically
different business model, and the transition went smoothly. This important
business transition for IKON was successful because of our customer-centric
focus, and the value of the IKON sales and service distribution network. This
highly-focused business model allows us to
integrate new technologies from various manufacturers and newly developed
relationships with best-in-class solution providers more effectively than any
competitor in our industry.
"In addition, many of our growth initiatives are going well, fueled by organic
improvements as well as the new GE relationship.
Highlights in the quarter included:
o Exceptional color performance, where we delivered 50% growth over the
prior year. With IKON's color portfolio boasting technologies from
industry leaders such as Canon, Ricoh and, the IKON CPP 8050
co-branded with Konica-Minolta - which has become the industry's top
selling light production color unit - we're confident that color will
be a positive contributor to our long-term growth profile.
o The introduction of Enterprise Services, which includes post-sale
Customer Service, outsourced Managed Services, and higher-end
Professional Services. This strategic framework allows IKON to provide
end-to-end document management solutions at varying degrees of
customer needs, and serves as the platform for the ongoing development
of the Company's global document management software and solutions
distribution model.
o National account business also continued to accelerate, with revenues
more than doubling in the quarter compared to a year ago.
Year-to-date, we've already eclipsed our total 2003 success rate in
winning new Fortune 1000 customers. Our best-in-class products and our
integrated services are the differentiators that are increasingly hard
for competitors to beat. These investments allow our customers to
fully leverage the range of capabilities IKON offers within Enterprise
Services.
Our investments and strategic repositioning efforts also are beginning to yield
benefits," continued Espe. "As we complete the transition out of captive leasing
in North America through the run-off of our remaining U.S. lease portfolio, we
look forward to the continued deployment of cash proceeds toward execution of
our share repurchase program and other opportunities that strengthen our
financial position and improve our prospects for growth."
Since last quarter, the Company executed a number of capital structure and
liquidity related objectives. The cumulative effect of these, and prior actions,
has contributed to the decline in the Company's total debt to capital ratio to
50.8%, from 67.7% a year ago.
o Today, IKON announced the completion of a $200 million senior secured
revolving credit facility. The new facility will be used for general
corporate purposes. Wachovia Capital Markets is the sole
administrative agent on the facility, which includes a syndicate of
banks and other financial institutions. Financial covenants of the
credit facility are consistent with IKON's long-term financial
objectives for share repurchases, dividends, and other investment
opportunities.
o On April 28, 2004, the Company completed the tender for $250 million
of June 2008 notes, recording a loss on early extinguishment of debt
of $32.7 million during the quarter.
o On June 30, 2004, the Company completed the sale of its Canadian
leasing business. A portion of the cash proceeds of approximately $160
million was used to eliminate Canadian lease-supported debt.
o During the third quarter, the Company repurchased 2.3 million shares
of IKON's outstanding common stock for $25 million, leaving $225
million remaining for share repurchases under the 2004 Board
authorization.
o IKON's Board of Directors approved the Company's regular quarterly
cash dividend of $.04 per common share, payable on September 10, 2004
to holders of record at the close of business on August 23, 2004.
"As we approach the close of Fiscal 2004, we will continue to focus on the
strategic initiatives and opportunities that position us for improved
operational leverage, and to become a stronger channel for document management
products and services," continued Mr. Espe. "Through operational initiatives
such as e-IKON, Six Sigma and Teleweb, we expect to achieve further productivity
and sales effectiveness. Our National Accounts momentum coupled with positive
trends in color and high-volume equipment will continue to augment core growth,
and opportunities in the European markets and Enterprise Services hold promise
for further expansion across all of IKON's businesses. And now, with our
strategic alliance with GE in place, we have created new opportunities that will
move us toward our goal of becoming the pre-eminent channel for document
management systems and services in the industry."
Outlook
Fourth quarter earnings per diluted share are expected to be in the range of
$.14 to $.17, with earnings per diluted share of $.72 to $.75 expected for the
full fiscal year. These expectations exclude any losses on early extinguishment
of debt incurred throughout the year, net gains or losses on divestitures, and
the tax benefit related to the second quarter tax gain on the divestiture of the
U.S. leasing business.
Financial Analysis
Supply revenues and related costs sold as part of bundled customer service
contracts for IKON's European and Canadian operations were reclassified from Net
Sales to Services in the third quarter, similar to the reclassifications for its
U.S. operations made in the second quarter of Fiscal 2004. Reclassification
adjustments for 2002, 2003 and the first and second quarters of Fiscal 2004 can
be found on the investor relations section of IKON.com. There is no impact on
total revenues, operating margin, or net income for these periods.
Net Sales of $514.1 million, which includes the sale of copier/printer
equipment, direct supplies and technology hardware, increased by 5.0% from the
third quarter of Fiscal 2003. Sales of copier/printer equipment grew by 8% from
the prior year, driven by continued growth in color revenues and the net impact
of the new relationship with GE. Third quarter direct supply sales declined by
$9.2 million from the prior year, with the rate of decline slowing sequentially
to $3.5 million from the second quarter. Sales of technology hardware decreased
by $1.1 million over the prior year. Gross profit margin on Net Sales declined
slightly to 28.6% from 29.0% in the third quarter of Fiscal 2003.
Services of $607.2 million, which includes revenues from the servicing of
copier/printer equipment ("Customer Service"), Managed Services, Professional
Services and other fees, grew by 2.6% from the third quarter of Fiscal 2003.
Overall Services growth was primarily driven by growth in Professional Services
and the net impact of fees received as a result of the new GE relationship.
Offsetting these revenues was a 1.2% decline in Customer Service revenues
compared to the prior year, although copy volumes continued to strengthen,
especially in the areas of color and production. Gross profit margin on Services
of 42.3% remained relatively flat with the third quarter of Fiscal 2003.
Selling and Administrative expenses declined by $15.7 million from the prior
year as a result of the leasing transition and improved selling costs, offset by
foreign currency and other corporate expenses such as pension. Operating income
decreased to $60.9 million for the third quarter of Fiscal 2004 from $63.8
million a year ago. Interest expense of $15.2 million increased by $2.4 million
from the third quarter of Fiscal 2003, due to higher debt levels resulting from
IKON's assumption of IOS Capital's public debt as part of the sale of those
operations to GE, which was previously reported in Finance Interest Expense.
Adjusted Financial Information
Net income and earnings per diluted share in this earnings release are presented
on an adjusted basis to exclude the impact of the loss from early extinguishment
of debt and the gain from the sale of the Company's Canadian leasing business.
Revenue growth has been presented on an adjusted basis to exclude the impact of
revenue streams that have been either divested or de-emphasized. Management
believes these presentations provide a reasonable basis on which to present
adjusted financial information and ratios that provide investors with a useful
indication of the performance of the Company's ongoing operations and financial
strength. This adjusted financial information should not be construed as an
alternative to our reported results determined in accordance with generally
accepted accounting principles (GAAP). Further, our definition of this adjusted
financial information may differ from similarly titled measures used by other
companies.
A supplemental schedule attached provides a quantitative reconciliation of the
differences between the adjusted financial information and the financial
measures calculated and presented in accordance with GAAP. This reconciliation,
in addition to other adjusted financial measures used by management, may be
found at the Company's website at www.ikon.com in the Investor Relations
section.
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.
================================================================================
QUARTERLY EARNINGS CONFERENCE CALL: Additional information regarding the third
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 10:00 a.m. EDT on
Thursday, July 29, 2004. Please call (719) 867-0640 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. EDT
on July 29, 2004 and ending at midnight EDT on August 1, 2004, a complete
replay of the conference call can also be accessed via telephone by calling
(719) 457-0820 and using the access code 207825.
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.
================================================================================
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 fourth quarter and full Fiscal 2004 results and the ability to
execute long-term strategic initiatives, growth and operational efficiency.
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)
Third Quarter Fiscal
----------------------------------------------
2004 2003
----------------- -----------------
Revenues
Net sales $ 514,098 $ 489,618
Services 607,247 591,650
Finance income 41,827 97,211
- ---------------------------------------------------------------------------------------------------------------------------
1,163,172 1,178,479
- ---------------------------------------------------------------------------------------------------------------------------
Costs and Expenses
Cost of goods sold 366,881 347,780
Services costs 350,581 340,709
Finance interest expense 11,473 36,429
Selling and administrative 373,995 389,736
(Gain) on the divesture of business (698)
- ---------------------------------------------------------------------------------------------------------------------------
1,102,232 1,114,654
- ---------------------------------------------------------------------------------------------------------------------------
Operating income 60,940 63,825
Loss from early extinguishment of debt 32,687 27,454
Interest expense 15,175 12,765
- ---------------------------------------------------------------------------------------------------------------------------
Income before taxes on income 13,078 23,606
Taxes on income 4,937 8,911
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 8,141 $ 14,695
================= =================
Basic Earnings Per Common Share $ 0.06 $ 0.10
================= =================
Diluted Earnings Per Common Share $ 0.05 (a) $ 0.10 (a)
================= =================
Weighted Average Common Shares Outstanding, Basic 147,657 145,201
================= =================
Weighted Average Common Shares Outstanding, Diluted 150,531 147,965
================= =================
Operations Analysis:
Gross profit %, net sales 28.6% 29.0%
Gross profit %, services 42.3% 42.4%
Gross profit %, finance subsidiaries 72.6% 62.5%
Total gross profit % 37.3% 38.5%
Selling and administrative as a % of revenue 32.2% 33.1%
Operating income as a % of revenue 5.2% 5.4%
(a) The calculation of diluted earnings per common share for the third quarter
of fiscal 2004 and 2003 excludes the assumed conversion of convertible
notes issued in May 2002 because the impact is antidilutive.
Certain prior year amounts have been reclassified to conform with the current
year presentation. A summary of the reclassification adjustments for 2002, 2003
and the first and second quarters of Fiscal 2004, can be found on the Company's
investor relations website of IKON.com.
IKON Office Solutions, Inc.
- ---------------------------
FINANCIAL SUMMARY (in thousands, except earnings per share)
(unaudited)
Year to Date Fiscal
----------------------------------------
2004 2003
--------------- ---------------
Revenues
Net sales $ 1,452,879 $ 1,467,652
Services 1,791,992 1,758,472
Finance income 239,097 289,118
- -------------------------------------------------------------------------------------------------------------------------
3,483,968 3,515,242
- -------------------------------------------------------------------------------------------------------------------------
Costs and Expenses
Cost of goods sold 1,032,872 1,021,225
Services costs 1,060,187 1,032,432
Finance interest expense 80,747 112,092
Selling and administrative 1,133,683 1,151,430
Loss on divestiture of businesses, net 11,427
- -------------------------------------------------------------------------------------------------------------------------
3,318,916 3,317,179
- -------------------------------------------------------------------------------------------------------------------------
Operating income 165,052 198,063
Loss from early extinguishment of debt 35,906 26,204
Interest expense 34,922 37,583
- -------------------------------------------------------------------------------------------------------------------------
Income before taxes on income 94,224 134,276
Taxes on income 28,245 50,689
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 65,979 $ 83,587
=============== ===============
Basic Earnings Per Common Share $ 0.45 $ 0.58
=============== ===============
Diluted Earnings Per Common Share $ 0.43 (a) $ 0.54 (a)
=============== ===============
Weighted Average Common Shares Outstanding, Basic 147,202 144,614
=============== ===============
Weighted Average Common Shares Outstanding, Diluted 170,094 167,280
=============== ===============
Operations Analysis:
Gross profit %, net sales 28.9% 30.4%
Gross profit %, services 40.8% 41.3%
Gross profit %, finance subsidiaries 66.2% 61.2%
Total gross profit % 37.6% 38.4%
Selling and administrative as a % of revenue 32.5% 32.8%
Operating income as a % of revenue 4.7% 5.6%
(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 19,870 and 19,960 shares, respectively. For purposes
of diluted earnings per common share, net income for year-to-date 2004 and
2003 includes the add-back of $6,959 and $6,984, respectively, representing
interest expense, net of taxes, associated with such convertible notes.
Certain prior year amounts have been reclassified to conform with the current
year presentation. A summary of the reclassification adjustments for 2002, 2003
and the first and second quarters of Fiscal 2004, can be found on the Company's
investor relations website of IKON.com.
IKON Office Solutions, Inc.
- ----------------------------
COMPUTATIONS OF EARNINGS PER COMMON SHARE
(in thousands, except earnings per share)
(unaudited)
Three Months Ended June 30,
-------------------------------------------------------------------
2004 2003
-------------------------------- ----------------------------
Basic Diluted Basic Diluted
------------ ------------- ----------- -----------
Average Shares Outstanding
Common shares 147,657 147,657 145,201 145,201
Restricted stock awards 355 335
Stock options 2,519 2,429
- ----------------------------------------------------------------------------------------------------------------------------
Total shares 147,657 150,531 145,201 147,965
- ----------------------------------------------------------------------------------------------------------------------------
Income
Net income $ 8,141 $ 8,141 $ 14,695 $ 14,695
Interest on convertible notes, net
- ----------------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 8,141 $ 8,141 $ 14,695 $ 14,695
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
EPS $ 0.06 $ 0.05 $ 0.10 $ 0.10
============================================================================================================================
Nine Months Ended June 30,
-------------------------------------------------------------------
2004 2003
-------------------------------- ----------------------------
Basic Diluted Basic Diluted
------------ ------------- ----------- -----------
Average Shares Outstanding
Common shares 147,202 147,202 144,614 144,614
Convertible notes 19,870 19,960
Restricted stock awards 341 283
Stock options 2,681 2,423
- ----------------------------------------------------------------------------------------------------------------------------
Total shares 147,202 170,094 144,614 167,280
- ----------------------------------------------------------------------------------------------------------------------------
Income
Net income $ 65,979 $ 65,979 $ 83,587 $ 83,587
Interest on convertible notes, net 6,959 6,984
- ----------------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 65,979 $ 72,938 $ 83,587 $ 90,571
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
EPS $ 0.45 $ 0.43 $ 0.58 $ 0.54
============================================================================================================================
IKON Office Solutions, Inc.
Consolidated Statements of Cash Flows
Preliminary
Nine Months Ended
June 30,
2004 2003
(in millions) (unaudited)
- ---------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 66.0 $ 83.6
Additions (deductions) to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 63.1 78.4
Amortization 7.9 6.8
Loss on divestiture of businesses 11.4
Provision for losses on accounts receivable 13.7 11.8
Deferred income taxes (210.3) 45.7
Provision for lease default reserves 32.4 48.7
Pension expense 38.3 28.4
Loss from early extinguishment of debt, net 35.9 26.2
Changes in operating assets and liabilities, net of divestiture of
businesses:
Decrease in accounts receivable (219.6) (51.7)
(Increase) decrease in inventories (43.3 39.7
Increase in prepaid expenses and other current assets (14.1 (23.7)
Decrease in accounts payable, deferred revenues and
accrued expenses (224.3) (170.3)
Decrease in accrued restructuring (3.0) (9.1)
Other (4.1) 10.3
- ---------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (450.0) 124.8
- ---------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from divestiture of business 1,849.2
Proceeds from the sale of finance receivables 162.5
Expenditures for property and equipment (25.2 (58.1)
Expenditures for equipment on operating leases (39.5 (46.3)
Proceeds from sale of property and equipment 5.0 21.0
Proceeds from sale of equipment on operating leases 11.9 11.5
Finance receivables--additions (934.6) (1,204.5)
Finance receivables--collections 1,025.4 1,137.7
Other (8.0 (4.0)
- ---------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 2,046.7 (142.7)
- ---------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from issuance of long-term corporate debt 0.6 28.4
Short-term corporate debt repayments, net (2.7 (14.1)
Repayment of other borrowings (60.0)
Long-term corporate debt repayments (327.4 (150.8)
Debt supporting finance contracts--issuances 337.1 2,091.7
Debt supporting finance contracts--repayments (1,436.3) (1,937.8)
Dividends paid (17.7 (17.3)
Decrease (increase) in restricted cash 1.1 (50.6)
Proceeds from option exercises and sale of treasury shares 8.1 2.7
Purchase of treasury shares and other (25.8) (0.5)
- ---------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,523.0) (48.3)
- ---------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 5.0 1.2
Net increase (decrease) in cash and cash equivalents 78.7 (65.0)
Cash and cash equivalents at beginning of year 360.0 271.8
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 438.7 $ 206.8
- ---------------------------------------------------------------------------------------------------