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Danka Reports Q3 Results: Revenue Declines 11.8%

Friday, January 31, 2003

Press release from the issuing company

ST. PETERSBURG, Fla.- Jan. 30, 2003--Danka Business Systems PLC today announced results for the three and nine-month periods ended December 31, 2002 that show improved earnings, higher overall gross margin percentages and increased free cash flow from continuing operations. The company will hold a conference call today at 11:00 a.m. EST to discuss these results. Danka reported operating earnings from continuing operations of $12.8 million in the third quarter of its fiscal 2003, a $3.7 million improvement over the $9.1 million posted in the comparable period a year-ago. Earnings from continuing operations before discontinued operations and extraordinary items were $3.3 million, compared to $0.6 million in the year-ago quarter. After allowing for the dilutive effect of dividends and accretion on participating shares, the company posted a $.02 loss in the third quarter for basic and diluted earnings per American Depositary Share (ADS) from continuing operations before extraordinary items. That compares to a $.06 loss per basic and diluted share in the year-ago quarter. Assuming the impact of not amortizing goodwill in accordance with SFAS No. 142, the loss would have been $.04 per basic and diluted share in the year-ago quarter. Total revenues from continuing operations were $353.1 million in the third quarter, a decline of $47.4 million or 11.8% from the $400.6 million posted in the year-ago quarter. Excluding a large hardware transaction in the year-ago quarter, the decline in total revenue would have been $30.5 million or 7.6%. The decline in total revenues was partially offset by a $1.4 million increase in revenues related to lease and residual payments from an external lease funding program and a $13.6 million favorable foreign currency movement. Retail equipment revenues were $121.8 million in the third quarter, a 15.1% decrease from the year-ago quarter. Excluding the transaction referenced above, the retail equipment revenue decline would have been 3.6%. This decrease was primarily due to the company's continued focus on higher-margin sales, technology convergence, and a global slowdown in capital spending, offset in part by a $4.4 million favorable foreign currency movement. Retail service, supply, and rental revenues were $209.2 million, a 11.6% decrease from the year-ago quarter, offset in part by a $6.8 million favorable foreign currency movement. Primary reasons for this decline were the continuing industry-wide conversion from analog-to-digital equipment and technology convergence. Overall gross margins improved to 37.2% in the third quarter from 35.2% in the comparable period a year ago. The retail equipment sales margin increased to 34.0% from 25.0%. Gross margins for service, supplies, and rentals decreased to 41.0% from 42.7%. "We are encouraged by our overall gross profit margin which has been a key strategic goal of the Company and has been instrumental in our cash generation, debt reduction and profitability improvement," said Lang Lowrey, Danka's chairman and chief executive officer. "We saw significant improvements this quarter in free cash flow which was led by our U.S. operations. In addition, we had strong overall performance in our European operations and experienced stabilization in our Canadian operations, which had a significant negative impact on our second quarter results." Overall SG&A expenses in the third quarter were $119.9 million, or 34.0% of revenues, compared to $131.0 million, or 32.7% of revenues, in the year-ago quarter. Current quarter SG&A as a percentage of revenue was positively affected by a $1.7 million workers compensation premium refund offset by rising payroll costs as a percentage of revenue and increased bad debt expense of $4.5 million. The increase in bad debt expense was due, in part, to the company's increased emphasis on the improvement of its U.S. financial and credit policies. These new policies have been enabled, in part, by the implementation of the new Oracle financial systems. Free cash flow was $39.9 million in the third quarter, compared to $30.5 million in the prior-year period. Total debt increased by $2.7 million during the third quarter to $240.4 million due in part to the addition of a $3.3 million capital lease for equipment purchases related to the Vision 21 project. Total capital expenditures during the quarter related to the Vision 21 project were $5.0 million. Although total debt increased slightly during the quarter, the company's cash balance was $71.6 million at the end of the third quarter, an increase of $33.8 million from $37.8 million at the end of the second quarter. The company's total debt of $240.4 million was 21.0% or $64.0 million lower than total debt as of March 31, 2002. The company's total leverage ratio (total debt divided by the trailing 12-month EBITDA (earnings before interest, taxes, depreciation and amortization)) improved from 2.8 to 1 as of March 31, 2002 to 2.2 to 1 as of December 31, 2002. The company's ratio of total debt to total capitalization (including participating shares) decreased over this same time frame from 51.3% to 42.2%. "We decided to abstain from making additional debt repayments during the quarter in order to maximize our liquidity," stated Mark Wolfinger, Danka's chief financial officer. "In addition, we modified the credit facility with our senior bank lenders to allow us greater flexibility in refinancing our senior debt and addressing other elements of our capital structure. We believe that maintaining the flexibility which comes with increased liquidity is important as we explore various opportunities to refinance our debt and reduce our cost of borrowing." The company had $71.6 million in cash at the end of the quarter and liquidity of $121.7 million that includes unused borrowing capacity of $50.1 million. Nine-Month Results For the nine-month period ended December 31, 2002, Danka's operating earnings from continuing operations were $37.1 million, compared to $12.1 million in the same period a year-ago. Earnings from continuing operations before discontinued operations and extraordinary items were $10.8 million, compared to a loss of $14.5 million in the year-ago period. After allowing for the dilutive effect of dividends and accretion on participating shares, the company recorded a $.04 loss in the current nine-month period for basic and diluted earnings per ADS from continuing operations before extraordinary items. That compares to a loss of $.44 per basic and diluted share in the prior period. Assuming the impact of not amortizing goodwill in accordance with SFAS No. 142, the loss would have been $.35 per basic and diluted share in the prior period. Total revenues from continuing operations were $1,043.9 million in the first nine-months of the year, a decline of 11.8% from the $1,183.5 million posted in the same period a year-ago. Overall gross margins were 37.3% in the current nine-month period, compared to 34.7% in the year-ago period. SG&A expenses in the current nine-month period were $357.6 million, or 34.3% of revenues, compared to $394.1 million, or 33.3% of revenues, in the prio

 

 

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