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Danka Reports Declining Revenues in Q3

Wednesday, February 08, 2006

Press release from the issuing company

ST. PETERSBURG, Fla.--Feb. 7, 2006-- Danka Business Systems PLC today reported fiscal year 2006 third quarter revenue of $265.5 million, gross margins of 31.8%, and operating income of $5.0 million. Selling, general and administrative (SG&A) expense as a percentage of revenue was 30.0% after the benefit of certain prior period credits described below. The Company reported net income of $8.3 million, or $.05 per share which was favorably impacted by the non-cash resolution of various tax contingencies (principally in the U.S.) totaling $11.7 million in the quarter. "Our third quarter results reflect continued pressure on gross margins, particularly in our service business," said Todd Mavis, Danka's Chief Executive Officer. "In the quarter, we delayed taking cost reductions and in fact added training and other related costs in our service group because of ongoing contract negotiations with two of our larger service customers. We are pleased to have successfully concluded these new contracts with Pitney Bowes Management Services and Kodak, as we recently announced. In addition, we experienced a continued decline in our average cost per copy, which is being driven by newer technology and a shifting services pricing model. To meet our margin challenges, we have continued to take costs out of the business and execute on our Managed Print Services strategy and we are pleased with our progress in these areas." For the third quarter: * Total revenue was $265.5 million, 10.5% less than the year-ago period, with retail equipment and related sales declining by 6.4% and retail service revenue declining by 14.3%. Primary reasons for the decline in retail equipment revenue were softness in certain Europe/Australia geographies and unfavorable foreign currency movements. The decline in retail service revenue was due in large part to the continued decline in average cost per copy and the continued shift to a more utility based industry pricing model. Further, the Company continued to experience a slower than anticipated ramp-up in volume from newer printer manufacturer contracts. * Consolidated gross margins were 31.8% of revenue, compared to 36.0% in the year-ago quarter. In the retail equipment segment the factors in the margin decline included worldwide market pressures on pricing, an unfavorable product mix during the quarter and product gaps in color. The decline in retail service margins was due in large part to the effect of lower revenue on fixed service costs, investments to meet service-level obligations to our newer printer manufacturer partners and a decline in average cost per copy. * SG&A expenses were $79.8 million (or 30.0% of sales), 26.9% lower than the year-ago period. Contributing to the decrease were lower overhead and corporate costs as a result of the company's continued streamlining of operations and efficiencies from its Vision 21 initiative. In addition, the Company recovered $3.2 million in prior period overpayments related to a legacy worker's compensation insurance policy and the reduction of a $1.7 million reserve related to the same policy. The Company's improvement in internal systems also led to a $2.2 million recovery of sales taxes, also relating to prior periods. SG&A expense was favorably impacted by these items. * Operating profit from continuing operations was $5.0 million, compared to an operating loss of ($3.4) million in the year-ago quarter. "In addition to our continuing efforts to streamline the business and reduce costs, we're also focused on the effective management of working capital," noted Danka Chief Financial Officer Ed Quibell. "In the third quarter we saw a $3.4 million improvement in net working capital. This improvement included a continued use of cash in the rationalization of our accounts payable and accrued expenses, which we expect will favorably impact the operation of our business. The reduction of our cash by $34.8 million was offset by the reduction in our accounts payable and accrued expenses of $37.6 million. We have continued to experience slight improvement in our liquidity ratios as we have focused on the better management of our working capital."




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