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IKON Announces Results for Q3: EPS Up 17%

Friday, July 28, 2006

Press release from the issuing company

MALVERN, Pa.--July 27, 2006-- IKON Office Solutions, the world's largest independent channel for document management systems and services, today reported results for the quarter ended June 30, 2006. Net income from continuing operations for the third quarter was $27 million, or $0.20 per diluted share, including a $0.02 charge for a loss on early extinguishment of debt. Excluding this charge, earnings per diluted share were $0.22, exceeding the Company's previously communicated EPS range of $0.19 to $0.21, and representing a 27% increase over the same period last year. Total revenue for the third quarter of fiscal year 2006 was $1.05 billion, compared to $1.10 billion for the third quarter of fiscal year 2005. The expected decline resulted from the Company's decision to sell or exit unprofitable and non-core businesses. Targeted revenue, which represents 98% of total revenue, declined 1% year over year. "During the third quarter, color equipment revenue continued to perform well, as placements increased 40% and revenue increased 13% year over year. In addition, we experienced strong placement growth in the office segment and strong revenue growth in the production segment," said Matthew J. Espe, IKON's Chairman and Chief Executive Officer. "In a challenging market, we have grown equipment revenue for the last three quarters, with recent strength coming from new product introductions from Canon and Ricoh, as well as our co-branded initiatives with Konica Minolta." Selling and administrative (S&A) expenses of $311 million in the quarter decreased 9%, or $29 million, compared to the third quarter of fiscal year 2005. Operating income of $54 million increased 10% year over year. "Our steady progress managing S&A expenses resulted in an expense-to-revenue ratio of 29.7% this quarter, in line with our full-year goal to achieve an expense-to-revenue ratio below 30%," Espe said. "Our commitment to cost containment and productivity improvements contributed to a strong operating income margin of 5.2% for the quarter." Third Quarter 2006 Financial Details Equipment revenue of $445 million, which includes the sale of copier/printer multifunction products, increased 1% compared to the third 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 25.6%, up significantly from 23.8% in the third quarter of fiscal year 2005. Customer Service and Supplies revenue of $362 million, which includes revenue from the servicing of copier/printer equipment and direct sales of supplies, decreased 4% compared to the third quarter of fiscal year 2005, but was flat sequentially. Customer Service revenue was negatively impacted by the expected decline in the analog equipment base, and by a decline in revenue per copy, partially offset by continued growth in the digital equipment base. Gross margin on Customer Service and Supplies decreased to 45.6% from 47.5% a year ago, due to lower revenue offset slightly by a decline in costs during the quarter. Managed and Professional Services revenue of $187 million, which includes revenue from on-site and off-site Managed Services, as well as Professional Services, increased 4% compared to the third quarter of fiscal year 2005. On-site Managed Services revenue grew 6% and Professional Services revenue increased 31%, partially offset by an 11% decline in off-site Managed Services revenue during the quarter. Gross margin on Managed and Professional Services declined to 25.1% from 27.2% a year ago, due to lower off-site Managed Service margins driven by lower revenue, and a slight decline in on-site Managed Services margin. Rental and Fees revenue of $34 million decreased 20% driven primarily by the sale of the U.S. retained lease portfolio in April 2006. Gross margin increased to 74.7% from 68.1% a year ago, due to a greater mix of higher-margin agency fees. Other revenue of $19 million declined 67% compared to the third quarter of fiscal year 2005, primarily due to the sale of non-strategic businesses in 2005 and the sale of the U.S. retained lease portfolio. 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 $354 million as of June 30, 2006, with cash used in continuing operations totaling $68 million for the third quarter, primarily due to $58 million in pension contributions to U.S. and foreign plans. The Company continued to execute its balanced capital strategy and completed six key initiatives during the quarter, including: * Significantly reducing corporate debt by successfully tendering for its 2008 notes and purchasing $81 million of the $95 million balance. As a result, the total debt-to-capital ratio decreased to 34% as of June 30, 2006, down from 44% as of September 30, 2005. * Signing an amended, less restrictive and more cost effective $200 million credit facility. * Contributing $58 million to fund U.S. and foreign pension plans, reducing under-funded positions to very manageable levels. * Selling the U.S. retained lease portfolio, which will generate net cash of approximately $70 million. * Selling the German lease portfolio, which will generate net cash of approximately $38 million. * Initiating a strategy to repatriate approximately $47 million of cash to the U.S., at little or no tax cost. The Company continued to repurchase shares during the quarter, buying back 1.7 million shares of outstanding common stock for approximately $22 million, resulting in year-to-date purchases of 7.7 million shares for approximately $91 million. IKON's Board of Directors approved the Company's regular quarterly cash dividend of $0.04 per common share, payable on September 10, 2006 to holders of record at the close of business on August 21, 2006. Outlook "Looking ahead, we remain focused on executing our long-term plan, while continuing the momentum we've generated during the first nine months of fiscal year 2006," Espe said. "Based on our performance to-date, we are increasing our earnings expectations for fiscal year 2006. We now expect earnings per diluted share from continuing operations to range between $0.75 and $0.77 for the full fiscal year 2006, with fourth quarter earnings per diluted share from continuing operations expected to range between $0.17 and $0.19. "In addition, as we continue to execute on our strategy, we expect to generate cash from operations for the full year between $50 million and $100 million, excluding an accelerated $50 million tax payment related to the sale of the U.S. retained lease portfolio." The expectation for full-year earnings per diluted share excludes any charges associated with the early extinguishment of debt, as well as the net gain on the sale of Kafevend previously disclosed in the first quarter of fiscal 2006. This expectation includes the premium from the U.S. retained lease portfolio sale, which offsets the operating income that the portfolio would have generated in the second half of fiscal 2006.




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