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IKON Announces Fourth Quarter Results: Sales decline 3%

Friday, October 28, 2005

Press release from the issuing company

MALVERN, Pa.--Oct. 27, 2005-- IKON Office Solutions, the world's largest independent channel for document management systems and services, today reported results for the fourth quarter and fiscal year ended September 30, 2005. Net income from continuing operations for the fourth quarter was $20 million, or $0.14 per diluted share, including $0.02 for charges incurred during the quarter. Excluding these charges, fourth quarter earnings per diluted share from continuing operations were $0.16. Total revenue for the fourth quarter of fiscal year 2005 was $1.1 billion, compared to $1.14 billion for the fourth quarter of fiscal year 2004, a decline of 3%. Targeted revenue, which represents 98% of total revenue and excludes revenue from North American lease financing and de-emphasized technology hardware businesses, declined 1% compared to the prior year. When further adjusted for the sale of the Company's operating subsidiaries in France and Mexico, targeted revenue was flat year to year. Foreign currency translation had a positive impact on total revenue of 0.3%. "Our performance during the quarter confirmed that we are headed in the right direction," said Matthew J. Espe, IKON's Chairman and Chief Executive Officer. "Our momentum in both the Mid-Market and in National Accounts continued to deliver positive results. We increased placements of new digital black and white office equipment by 7%. Color equipment revenue grew 11% and color copy volume increased 48% as compared to the fourth quarter of fiscal 2004. In addition, this was our sixth consecutive quarter of record performance for placements of the IKON CPP(TM) 500, with 96% growth year over year from this important 50 page per minute production color multifunction system. These are all positive trends that we expect to continue as we begin our new fiscal year." For the fourth quarter of fiscal year 2005, the Company reported 6% revenue growth from its North American on-site Managed Services business, and 12% growth in Professional Services from consulting, network connectivity services, document strategy assessments and software solutions. "Within IKON Enterprise Services, our U.S. on-site Managed Services business continued to add new customer contracts and expand revenues with existing customers, and we experienced growth in all key areas of Professional Services," stated Espe. "During the quarter, our document consultants significantly increased the number of document strategy assessments performed, and sales of enabling technologies such as the IKON DocSend scanning solution. Professional Services is an important contributor to overall revenue growth and margin enhancement, as our internal analysis shows that average selling prices can be enhanced by including software, services and workflow solutions with the traditional equipment sale." For fiscal year 2005, net income from continuing operations was $78 million, or $0.54 per diluted share, including $0.02 for charges incurred in the fourth quarter and $0.06 for previously disclosed charges incurred during the fiscal year. Excluding the impact of these charges, earnings per diluted share for fiscal year 2005 were $0.62, consistent with the Company's previously communicated expectations of $0.60 to $0.63. As previously disclosed, for fiscal year 2005 financial reporting, the Company will adopt FAS 123R, the new accounting standard on stock-based compensation. The Company anticipates that the implementation of this standard will reduce fiscal year 2005 earnings per diluted share by approximately $0.03. The actual impact on fiscal year 2005 and the impact by quarter will be disclosed when the Company files its Annual Report on Form 10-K in December. Total revenue from continuing operations for fiscal year 2005 was $4.4 billion compared to $4.6 billion in fiscal year 2004, a decline of 4%. Approximately 90% of this $188 million revenue decline was due to an expected decline in finance income as a result of the Company's exit from the leasing business in North America during fiscal year 2004. Foreign currency translation had a positive impact on total revenue of 0.8%. Fourth Quarter 2005 Financial Details Net Sales of $516 million, which includes the sale of copier/printer multifunction equipment and supplies, decreased 4% from the fourth quarter of fiscal year 2004. Excluding de-emphasized technology hardware revenue, Net Sales decreased 3% from last year's fourth quarter. The year-over-year decrease was driven by a 2% decline in equipment revenue and the sale of the Company's operating subsidiaries in France and Mexico. Gross margin on Net Sales declined to 25.9% from 26.8% in the same quarter a year ago, due primarily to competitive pricing and a continuation of aggressive promotions initiated during the second quarter of fiscal year 2005. Services revenue of $564 million, which includes Customer Services revenue from the servicing of copier/printer equipment, on- and off-site Managed Services, Professional Services, rentals and other fees, was flat compared to the fourth quarter of fiscal year 2004. Gross margin on Services increased to 41.9% from 41.2% a year ago, as Customer Services gross margin increased over 4 percentage points, due to a lower cost structure resulting from the actions taken during the second quarter of fiscal year 2005 and a continued focus on cost and expense reductions. Finance Income, derived from the retained U.S. leasing portfolio and IKON's leasing operations in Europe, declined 36% to $22 million from the prior year reflecting the Company's exit from the leasing business in North America. Substantially all of the finance income from the retained U.S. portfolio is expected to run off by the middle of fiscal year 2007. Selling and Administrative Expenses declined 2% to $358 million in the fourth quarter of fiscal year 2005 from $367 million in the fourth quarter of fiscal year 2004. S&A expenses for the fourth quarter of fiscal year 2005 were negatively impacted by a $16 million charge that included $7 million related to the early termination of a consulting contract, $4 million due to a change in certain UK pension liabilities, $4 million from the early termination of real estate leases and $1 million related to Hurricanes Katrina and Rita. Excluding these charges, and a $5 million charge incurred in the fourth quarter of fiscal year 2004, S&A expenses decreased 6%, or $20 million, compared to last fiscal year's fourth quarter, and represented 31.1% of revenue compared with 31.9% in the same quarter last year. Operating Income was $39 million in the fourth quarter of fiscal year 2005 compared with $35 million in the fourth quarter of fiscal year 2004. This quarter's results were positively impacted by a $10 million gain on the sale of the Company's operating subsidiary in France. While this divestiture enabled the Company to eliminate an unprofitable business, IKON continues to serve pan-European customers through an ongoing presence in Paris, as well as its 50 other locations across Europe. Balance Sheet and Liquidity Unrestricted cash was $374 million as of September 30, 2005, with cash generated from continuing operations totaling $37 million for the fourth quarter and $9 million for fiscal year 2005. Cash from continuing operations for the year was consistent with management's previous guidance. Capital expenditures on operating rentals and property and equipment, net of proceeds, totaled $3 million for the fourth quarter and $45 million for the year, compared to $26 million for the fourth quarter of fiscal year 2004 and $73 million for fiscal year 2004. The total debt to capital ratio decreased to 44% as of September 30, 2005, from 50%, as of September 30, 2004. In September 2005, IKON issued $225 million of 7.75% Senior Unsecured Notes at par due in 2015. The proceeds of the Notes were used to purchase the remaining balance of the 5% convertible bonds due May 2007, which had an outstanding balance of $245 million as of June 30, 2005. During the fourth quarter of fiscal year 2005, the Company purchased approximately $192 million of that balance. The remaining $53 million balance was retired with cash in October in accordance with the call notice issued on September 21, 2005. Consistent with its strategy, the Company purchased 5.3 million shares of IKON's outstanding common stock for approximately $53 million. Throughout fiscal year 2005, the Company purchased 8.5 million shares for approximately $87 million, leaving $86 million remaining under the Company's 2004 Board authorization. IKON's Board of Directors approved the Company's regular quarterly cash dividend of $0.04 per common share, payable on December 10, 2005 to holders of record at the close of business on November 21, 2005. Outlook "Fiscal year 2005 was a year in which we made tremendous progress by simplifying our business and positioning the Company for growth," said Espe. "We generated momentum in the Mid-Market with a renewed focus and aggressive marketing promotions. We grew our National Accounts presence and significantly increased our color equipment sales and placements of multifunction systems. In addition, we eliminated unprofitable and non-strategic businesses, reduced selling and administrative expenses, continued to buy back shares and improved our debt to capital ratio." Espe continued, "The work completed in fiscal year 2005 positions us well for the coming year. As we expect to continue improving our operational leverage by further aligning our selling and administrative expenses with industry benchmarks for fiscal year 2006, we expect earnings per diluted share from continuing operations to range between $0.70 and $0.75, including the impact of expensing stock options. As a result of the run off of the U.S. retained leasing portfolio and the sale of the businesses previously noted in fiscal year 2005, we anticipate fiscal year 2006 total revenue to decline 3% to 4%. We will maintain our focus on targeted revenue growth and expect it to be flat to up 1%. We also anticipate cash from continuing operations to be in the range of $50 million to $100 million." The Company also expects earnings per diluted share from continuing operations for the first quarter in fiscal year 2006 to range between $0.16 and $0.18, including the impact of expensing stock options.

 

 

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