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IKON Announces Results for the Second Quarter of Fiscal Year 2006

Friday, April 28, 2006

Press release from the issuing company

MALVERN, Pa.--April 27, 2006-- IKON Office Solutions, the world's largest independent channel for document management systems and services, today reported results for the quarter ended March 31, 2006. Net income from continuing operations for the second quarter of fiscal year 2006 was $25 million, or $0.19 per diluted share, exceeding the Company's previously communicated EPS range of $0.16 to $0.18. Earnings per diluted share from continuing operations grew $0.14 when compared to $0.05 per diluted share for the second quarter of fiscal year 2005, and increased 56% when compared to the adjusted $0.12 per diluted share for the same period. Total revenue for the second quarter of fiscal year 2006 was $1.08 billion, compared to $1.09 billion for the second quarter of fiscal year 2005, a decline of 1% year over year. Excluding the negative impact of currency, total revenue was flat year over year. Targeted revenue, which represents 97% of total revenue, increased 3% year over year. "I am pleased to report that the momentum in targeted revenue and earnings growth we experienced during the first quarter continued during the second quarter," said Matthew J. Espe, IKON's Chairman and Chief Executive Officer. "Once again, new digital equipment placements grew in the office, production and color segments, and new digital revenue grew in production and color. Services continued to expand in the second quarter, with Professional Services revenue up by 34% and North American on-site Managed Services revenue up by 10%. Europe continued its strong performance, particularly in Germany and Denmark." Selling and administrative (S&A) expenses of $315 million in the quarter decreased 9%, or $33 million, compared to the second quarter of fiscal year 2005. The decline resulted from actions taken in 2005 and the Company's continued focus on expense management. Operating margin increased to 4.7% in the quarter. "We saw growth and improved performance in all key areas of our business," Espe said. "In addition, we remain on track to achieve an S&A expense-to-revenue ratio below 30% for fiscal year 2006, resulting in improved operating income margin and strong EPS growth. The net result is that we exceeded the high end of our EPS range for the quarter, and our operating income margin is approaching our fiscal year 2006 goal of 5%." Second Quarter 2006 Financial Details Equipment revenue of $461 million, which includes the sale of copier/printer multifunction products, increased 4% from the second quarter of fiscal year 2005. The year over year increase was driven by revenue growth in the color market and the black and white production market. Gross margin on equipment was 25.5%, down from 27.5% in the second quarter of fiscal 2005, and up sequentially from the first quarter of fiscal 2006 by over 150 basis points. Customer Service and Supplies revenue of $361 million, which includes revenue from the servicing of copier/printer equipment and direct sales of supplies, was flat compared to the second quarter of fiscal year 2005. The positive impact from continued growth in the digital equipment base was offset by the rapid decline in the analog equipment base. Gross margin on Customer Service and Supplies increased to 42.8% from 42.0% a year ago, driven by an improvement in parts costs and a lower cost structure in North America, as well as a continued focus on cost reduction and productivity improvements. Managed and Professional Services revenue of $185 million, which includes both on-site and off-site Managed Services, as well as Professional Services, increased 6% compared to the second quarter of fiscal year 2005. Strong revenue growth in Professional Services and North-American on-site Managed Services was offset by a revenue decline in on-site Managed Services in Europe and off-site Managed Services. Gross margin on Managed and Professional Services dropped 40 basis points to 26.5% from 26.9% a year ago, due to slightly lower on-site and off-site service margins, partially offset by improved margins in Professional Services. Rental and Fees revenue of $43 million was flat, and gross margin decreased to 70.0% from 73.3% a year ago, due to a decline in higher-margin renewal sharing revenue on certain lease-end activities. Other revenue of $30 million declined 56% compared to the second quarter of fiscal year 2005, primarily due to the sale of non-strategic businesses in 2005 and the continued runoff of the U.S. retained lease portfolio. On April 3, 2006, the Company announced the sale of that portfolio to General Electric Capital Corporation, effective as of April 1, 2006. As a result of the transaction, IKON will net approximately $70 million in cash after payments of related debt and taxes. Targeted revenue includes all revenues except those categorized as "Other." Other revenue includes finance income and revenue generated by the remaining technology services and hardware businesses. Prior to fiscal year 2006, Other revenue also included revenue from the Company's operating subsidiaries in France and Mexico, which were sold during fiscal year 2005, and revenue from Kafevend, which was sold in the first quarter of fiscal year 2006. Balance Sheet and Liquidity Unrestricted cash was $312 million as of March 31, 2006, with cash flow from continuing operations totaling $77 million for the second quarter, primarily due to an increase of net income and a reduction in accounts receivable. Capital expenditures on operating rentals and property and equipment, net of proceeds, totaled $7 million for the second quarter, compared to $16 million for the second quarter of fiscal year 2005. The total debt-to-capital ratio decreased to 40% as of March 31, 2006, from 44% as of September 30, 2005. The Company continued to repurchase shares during the quarter, buying back 2.7 million shares of outstanding common stock for approximately $36 million. IKON's Board of Directors approved the Company's regular quarterly cash dividend of $0.04 per common share, payable on June 10, 2006 to holders of record at the close of business on May 22, 2006. Consistent with its balanced capital strategy objectives, IKON made a $50 million cash contribution to its U.S. pension plan on April 4, 2006. In addition, the Company plans to announce the commencement of a tender offer for the $95 million 7.25% outstanding notes due 2008. The Company expects this action to result in a significant reduction in its corporate debt balance, which stood at $676 million as of March 31, 2006. Outlook "Looking ahead, we remain focused on executing our long-term plan, while continuing the strong momentum we've generated during the first half of fiscal 2006," Espe said. "For the third quarter, we expect earnings per diluted share from continuing operations to range between $0.19 and $0.21, as compared to $0.17 per diluted share earned in the third quarter of fiscal year 2005. For fiscal year 2006, we expect to deliver earnings per diluted share from continuing operations at the high end of the previously communicated range of $0.70 to $0.75. These expectations include the premium from the retained portfolio sale, which is anticipated to offset the operating income that the portfolio would have generated in the second half of fiscal 2006. These expectations exclude any charges associated with the tender offer for the 2008 notes, any charges we may take to improve our business, as well as the net gain previously disclosed in the first quarter of fiscal 2006."




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