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IKON Office Solutions Q4 Net Income Jumps 40%

Friday, October 27, 2006

Press release from the issuing company

MALVERN, Pa.-- IKON Office Solutions, the world's largest independent channel for document management systems and services, today reported results for the fiscal year and fourth quarter ended September 30, 2006. Net income from continuing operations for fiscal year 2006 was $106 million, or $0.80 per diluted share, including a $0.01 net benefit from the gain on the sale of Kafevend, partially offset by a loss from the early extinguishment of debt. Excluding this net benefit, diluted earnings per share were $0.79, representing a 33% increase over the adjusted $0.59 last year and exceeding the Company's previously communicated guidance of $0.75 to $0.77. As reported, earnings per diluted share from continuing operations increased 56%. Total revenue for fiscal year 2006 was $4.2 billion, a decline of 3% compared to $4.4 billion in fiscal year 2005. This decline was consistent with the Company's revenue guidance of a 3% to 4% decline, and was driven by the decision to sell or exit unprofitable and non-strategic businesses. Targeted revenue, which represents 98% of total revenue, was flat year over year, and consistent with the Company's guidance of flat to up 1%. Selling and Administrative expenses declined $145 million year over year and represented 29.6% of revenue in fiscal year 2006, achieving the Company's expense-to-revenue goal of less than 30%. This expense reduction contributed to an increased operating income margin of 4.8% for fiscal year 2006. Excluding the gain on the sale of Kafevend, the Company's operating income margin was 4.7%. "We made significant progress in fiscal year 2006 delivering on the goals we set last year at our November 2005 investor conference. Our adjusted earnings per diluted share were $0.79, exceeding both our initial projection of $0.70 to $0.75 and our recently increased guidance of $0.75 to $0.77. I am pleased with our performance and with the contributions made by all IKON employees to deliver these solid results," said Matthew J. Espe, IKON's Chairman and Chief Executive Officer. Fourth Quarter 2006 Financial Details For the fourth quarter of fiscal year 2006, net income from continuing operations was $26 million, or $0.20 per diluted share, representing a 31% increase over the adjusted $0.15 in the fourth quarter of fiscal year 2005 and exceeding the Company's guidance of $0.17 to $0.19. As reported, earnings per diluted share from continuing operations increased 48%. Total revenue for the fourth quarter of fiscal year 2006 was $1.06 billion, down 4% year over year. Targeted revenue declined 2% compared to the same quarter last year. Equipment Revenue of $459 million, which includes the sale of copier/printer multifunction products, declined 3% against a strong fourth quarter of fiscal year 2005. The year-over-year decline was driven primarily by lower revenue in the black and white office market due to continued pricing pressures in line with industry trends and a mix shift in the quarter toward lower-priced segments. Color revenue declined year over year driven by product transitions and customer buying delays in anticipation of new products, including the IKON CPP(TM) 650, which was launched this month. Gross margin on equipment was 25.5%, down from 25.9% in the same quarter a year ago, due to ongoing pricing pressures, as expected. Customer Service and Supplies revenue of $351 million, which includes revenue from the servicing of copier/printer equipment and direct sales of supplies, decreased 3% year over year. The Company continued to experience a decrease in revenue per copy, contributing to the overall Customer Service revenue decline. The Company believes this year-over-year trend is likely to continue into fiscal year 2007, although improvement is expected as the year progresses. Gross margin on Customer Service and Supplies decreased to 44.4% from 46.7% a year ago as a result of lower revenue in Customer Service. Managed and Professional Services revenue of $192 million, which includes both on-site and off-site Managed Services, as well as Professional Services, increased 9% compared to the fourth quarter of fiscal year 2005. This strong performance resulted from 10% revenue growth in on-site Managed Services and 29% revenue growth in Professional Services, partially offset by a 1% decline in off-site Managed Services. Gross margin on Managed and Professional Services increased 360 basis points to 27.5% from 23.9% a year ago as a result of improved on-site Managed Services contract profitability in both North America and Europe and better cost management in off-site Managed Services. Rental and Fees revenue of $34 million decreased 27%, and gross margin decreased to 67.5% from 68.9% a year ago, driven primarily by the sale of the U.S. retained lease portfolio in the third quarter of fiscal year 2006. Other revenue of $22 million decreased 47% compared to the fourth quarter of fiscal year 2005, due primarily to the Company's decision to sell or exit unprofitable and non-strategic businesses. 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. Selling and Administrative expenses were $312 million in the fourth quarter of fiscal year 2006, down 13% year over year. S&A expenses represented 29.5% of revenue and were below 30% for the third consecutive quarter. Operating income margin in the fourth quarter increased to 4.1% and the effective tax rate was 26%. Balance Sheet and Liquidity Cash was $414 million as of September 30, 2006, and cash from operations totaled $98 million for fiscal year 2006, even after payment of $130 million for income taxes related to the U.S. retained lease portfolio and contributions of $100 million to IKON's defined benefit pension plans. The Company's solid cash flow for the year was driven by improvements in net income and working capital, including a $92 million reduction in accounts receivable and a $29 million reduction in inventory, partially offset by a $24 million decrease in accounts payable. Capital expenditures on operating rentals and property and equipment, net of proceeds, totaled $57 million for the year, compared to $48 million for fiscal year 2005. The Company's total debt-to-capital ratio decreased to 33% as of September 30, 2006, from 44% as of September 30, 2005, as a result of debt reductions totaling $442 million, including $134 million of corporate debt. For the fourth quarter, fully diluted weighted average shares were 131 million. At the end of the quarter, actual shares outstanding were 128 million, a reduction of 5% year over year driven by the Company's share repurchase program. The Company purchased 3 million shares of common stock for $40 million during the fourth quarter. For fiscal year 2006, the Company purchased a total of 11 million shares for $131 million, achieving the Company's previously communicated guidance of more than $120 million. For fiscal year 2006, the Company maintained its dividend strategy and paid $21 million in dividends or $0.16 per share. IKON's Board of Directors approved the Company's regular quarterly cash dividend of $0.04 per common share, payable on December 10, 2006 to holders of record at the close of business on November 20, 2006. Outlook "Our ability to accomplish the goals we set out at the beginning of fiscal year 2006 positions us well for another solid year as we enter fiscal 2007," Espe said. "Our strategy is to further accelerate our color equipment placement growth and increase our color page volume mix to help us offset the expected decline in black and white revenue per copy. We expect this acceleration to be driven by the unprecedented new color product launches from Canon, Ricoh and Konica Minolta, which will expand our color product portfolio and differentiate our offerings in the marketplace. We also anticipate continued growth in Managed and Professional Services. "For fiscal year 2007, we expect earnings per diluted share from continuing operations to range between $0.90 and $0.95. This range represents an EPS increase of up to 20% year over year. We also anticipate total revenue to be flat to down 1% and targeted revenue to be flat to up 1%. Cash from operations is expected to range between $170 million and $190 million and net capital expenditures between $70 million and $90 million. As a result, we expect free cash flow of $80 million to $120 million, or up to three times what we generated in fiscal year 2006. Our effective tax rate for fiscal 2007 is expected to be between 36% and 37%. For the first quarter of fiscal year 2007, we expect earnings per diluted share to range between $0.20 and $0.22. As in prior years, we anticipate operating activities to use cash in the first quarter."

 

 

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