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IKON Q4 Results: Growth in Facilities Management, High-end Copiers

Friday, October 25, 2002

Press release from the issuing company

Sees growth in facilities management, its largest outsourcing offering, as well as continued strong growth in sales of high-end, segment 5 & 6 copier/printer equipment - two of the Company's key growth priorities for Fiscal 2002. Finishes Strong Quarter and Year of Operational Improvements and Earnings Growth Free Cash Flow Exceeds Target for the Year VALLEY FORGE, Pa.--Oct. 24, 2002-- IKON Office Solutions, a leading provider of business communications solutions, today reported results for its fiscal year and fourth quarter ended September 30, 2002. Fiscal 2002 Results For Fiscal 2002, net income was $150.3 million or $.99 per diluted share, which includes a $.04 benefit related to the reversal of Fiscal 2001 restructuring charges. Excluding the benefit of the restructuring reversal, net income for Fiscal 2002 was $143.5 million or $.95 per diluted share, a 17% increase over $.81 per diluted share for the prior year. For comparative purposes, $.81 for Fiscal 2001 excludes a loss of $.43 for special charges, excludes a $.01 gain from discontinued operations, and includes a $.28 impact related to not amortizing goodwill in accordance with SFAS 142. For Fiscal 2001, the Company reported earnings of $.11 per diluted share. Revenues for Fiscal 2002 totaled $4.83 billion, a decline of $446 million or 8.5% from the prior year. The Company has been aggressively divesting or downsizing several business lines over the course of the year to improve its long-term business mix and operational performance. The decline in these revenues accounted for $265 million or 60% of the revenue decline, with all other revenues combined down 3.6% from Fiscal 2001. Delays in customer spending decisions and a generally soft economic environment continued to pressure revenues; however, the Company continued to see growth in facilities management, its largest outsourcing offering, as well as continued strong growth in sales of high-end, segment 5 & 6 copier/printer equipment - two of the Company's key growth priorities for Fiscal 2002. Free cash flow for Fiscal 2002, defined as cash from operations less net capital expenditures, was $339 million, surpassing the Company's expectations and prior year results. Commenting on the Company's Fiscal 2002 performance, IKON's newly appointed President and CEO, Matthew J. Espe, said, "Despite the tough economic climate, the IKON team delivered significant improvements in earnings through a consistent, well-defined and realistic approach to strengthening the fundamentals of our business on all fronts. We have enhanced our business mix and built qualitative improvements into our infrastructure through centralization and longer-term investments. Despite lower revenues, we continued to leverage our strong sales, distribution, and service capabilities to expand the customer base and grow share in important market segments, while capturing significant operational benefits that impact favorably on operating margins and earnings per share. In addition, we have taken important steps to strengthen the Company's finances so that our debt-to-capital ratio at year's end, excluding finance subsidiaries, is 28.5%." Mr. Espe concluded, "By improving our business mix, we now have a stronger focus in terms of our market opportunities and an improved infrastructure to support those opportunities. In addition, our team has done an enormous amount of work implementing an important ongoing initiative - our e-IKON investment backed by the Oracle e-Business Suite, that we believe will give IKON a clear competitive edge in the future. As the economic climate improves, we believe we are well positioned to create long-term value." Fourth Quarter Results Net income for the fourth quarter ended September 30, 2002 was $39.3 million or $.25 per diluted share, including a $.04 benefit related to the $10.5 million reversal of Fiscal 2001 restructuring charges. Excluding the benefit of the restructuring charge reversal, diluted earnings per share for the fourth quarter were $.21 - in line with the Company's expectations for the quarter. The $.21 in diluted earnings per share for the quarter reflects a 10.5% increase from $.19 per diluted share in the fourth quarter of Fiscal 2001. For comparative purposes, $.19 for the fourth quarter of Fiscal 2001 excludes a loss of $.44 for special charges, and includes a $.07 impact related to not amortizing goodwill in accordance with SFAS 142. For the fourth quarter of Fiscal 2001, the Company reported a loss of $.32 per diluted share. Revenues for the fourth quarter of Fiscal 2002 were $1.18 billion, compared to $1.28 billion for the same period in the prior year. The impact of certain downsizing and divestiture actions the Company employed during the year accounted for approximately 62% of the decline. Excluding these actions, revenues declined by approximately 3.3% in the fourth quarter compared to the same period a year ago. Net Sales, which includes the sale of copier/printer equipment, supplies, and technology hardware, declined 9.5% from the fourth quarter of Fiscal 2001. A weak economy was a contributing factor to declines in all categories; however, over 40% of the decline resulted from the decrease in sales of technology hardware, as the Company continues to de-emphasize certain lower-margin revenue streams. Offsetting an overall decline in copier/printer equipment sales was strong performance in the sale of color and high-end, segment 5 & 6 equipment. Gross profit margin on Net Sales declined to 34.5% in the fourth quarter of Fiscal 2002, due primarily to lower supply revenues and margins. Services, which include revenues from the servicing of copier/printer equipment, and outsourcing and other services, declined 8.5% from the fourth quarter of Fiscal 2001, primarily due to the downsizing or sale of non-strategic outsourcing and other service businesses. Excluding these factors, Services declined approximately 1% from the fourth quarter of Fiscal 2001. Gross profit margin on Services improved to 40.2%, largely due to improved productivity in the servicing of copier/printer equipment. Finance Income grew 2.8% from the fourth quarter of Fiscal 2001 due to continued growth in the lease portfolio and the increased percentage of equipment sales leased through IOS Capital, IKON's captive leasing subsidiary in North America. Approximately 79% of IKON's customers in North America now lease through IOS Capital, compared to 75% a year ago. Gross profit from finance subsidiaries increased to 57.4%, from 51.4% in the fourth quarter of Fiscal 2001, largely due to lower average borrowing costs. Selling and Administrative Costs declined $54.4 million compared to the fourth quarter of Fiscal 2001 excluding special charges, due to restructuring benefits, productivity improvements, infrastructure investments, and cost control disciplines. Fourth quarter execution delivered total reductions of over $214 million in Selling and Administrative costs for Fiscal 2002, exceeding the Company's goal of removing $190 million in costs for the year compared to Fiscal 2001 levels. Fiscal 2003 Outlook "We have already made many positive changes in our business structure and market positioning," said Mr. Espe. "As we go forward, we need to leverage these accomplishments, and work aggressively to build market share and expand our market reach, focusing on services and solutions that customers require to remain productive in the workplace. We also must stay focused on our long-term operational investments, particularly as we prepare for the e-IKON implementation throughout North America. "Looking ahead, we are mindful of the challenges posed by changing economic and industry conditions, as well as evolving customer needs. We believe keeping a conservative view of top line performance is prudent in this environment, to ensure we continue to improve our operational performance as we drive toward our goal of 8% to 10% operating margins long-term. In Fiscal 2003, we expect additional share gains through various offerings, and we will continue to improve our business mix as we outsource a significant portion of technology hardware revenues to a third party in Fiscal 2003. As a result, overall revenues for Fiscal 2003 are expected to decline 2% to 4%. Operating margins should reflect modest gains, as we build on our Fiscal 2002 execution. The momentum from these improvements will be partially offset by increases in the cost of pension and health benefits and the balancing of resources required for a successful e-IKON implementation. While operating margins are expected to improve from Fiscal 2002, diluted earnings per share will be negatively impacted by an additional $.05 dilution from the May 2002 convertible offering. Therefore, diluted earnings per share for Fiscal 2003 are expected to be in the range of $.94 to $.98. For the first quarter, we expect revenues to decline in the range of 4% to 6% from the prior year, with earnings per share in the range of $.19 to $.21," Mr. Espe concluded.

 

 

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