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IKON Reports 3Q Earnings, Expects Flat Revenue for 2008

Friday, July 25, 2008

Press release from the issuing company

MALVERN, Pa. (July 24, 2008) --IKON Office Solutions, the world's largest independent channel for document management systems and services, today reported results for the third quarter of fiscal 2008, which ended June 30, 2008. For the third quarter, earnings per diluted share were $0.34, including a $0.04 per share loss on the early extinguishment of debt and a $0.01 per share benefit from an adjustment to the restructuring charge incurred in the first quarter. Excluding these items, earnings per diluted share were $0.37, a 61 percent increase from the third quarter of fiscal 2007 and at the high end of the Company's recently improved outlook of $0.35 to $0.37. As reported, earnings per diluted share increased 48 percent year over year.

Total revenue for the third quarter of fiscal 2008 was $1.1 billion, a 1 percent increase year over year, including 1.1 points of currency benefit. Total gross profit increased $7 million year over year to $354 million, reflecting a 50 basis point improvement in gross profit margin. Selling and administrative expenses decreased to $292 million, primarily due to lower administrative expenses, partially offset by higher currency and sales compensation-related expenses. Selling and administrative expenses were a record low 27.8 percent of revenue in the third quarter of fiscal 2008 compared with 28.1 percent in the third quarter of fiscal 2007.

Operating income grew 18 percent to $63 million year over year and operating margin was 6 percent. Excluding the $1 million restructuring adjustment, operating income grew 16 percent to $62 million, and operating income margin was 5.9 percent. Interest expense, net of interest income, increased $4 million year over year to $15 million, and weighted average fully diluted shares declined 25 percent to 94 million, primarily due to the financing associated with the Company's share repurchase activity in the first quarter. The Company's effective tax rate for the third quarter was 26 percent as reported, compared with 33 percent in the prior-year quarter, due to the closure of various federal and state income tax audits and the expiration of certain statutes of limitations. Net income for the quarter was $32 million and included a $3 million (after tax) net charge from non-recurring items. Excluding such items, net income was $35 million, compared with $29 million in the third quarter of fiscal 2007.

"We are pleased with our 6 percent operating income margin in the quarter," said IKON Chairman and Chief Executive Officer Matthew J. Espe. "We built on our second quarter momentum and delivered another quarter of better-than-expected results. We also completed our One Platform migration in the U.S., reduced corporate debt by $162 million and generated approximately $90 million of cash from operations during the quarter."

Third Quarter Fiscal 2008 Financial Details

Equipment revenue, which includes the sale of copier/printer multifunction products, was $444 million, a 1 percent decline from $448 million in the third quarter of fiscal 2007. Total Equipment revenue was driven primarily by a decline in revenue in the U.S. black and white office segment of 11 percent; partially offset by growth in the U.S. color office, color production, and black and white production segments of 14, 6, and 3 percent, respectively; growth in Europe; and a currency benefit of 1.3 points. Gross margin on Equipment increased to 25.1 percent from 24.3 percent in the third quarter of fiscal 2007, primarily due to higher average selling prices and a higher mix of used equipment.

Customer Service and Supplies revenue, which includes revenue from the servicing of copier/printer equipment and direct sales of supplies, was $347 million, up from $346 million in the third quarter of fiscal 2007. This performance reflects growth in Europe and a currency benefit of 1.3 points, partially offset by lower revenue in North America. Customer Service and Supplies revenue in North America declined primarily due to lower total page volume, a decline in analog copier machines in field (MIF), as expected, and a 1 percent decline in digital copier MIF. Total North American digital copier MIF, including On-site Managed Services, increased 2 percent year over year. Gross margin on Customer Service and Supplies was 43.3 percent in the third quarter of fiscal 2008, compared with 44.2 percent in the third quarter of fiscal 2007, primarily due to North America, where cost declines did not keep pace with revenue.

Managed and Professional Services revenue was $211 million, up 4 percent year over year. On-site Managed Services revenue, which represents approximately 70 percent of total Managed and Professional Services, increased 6 percent. Professional Services also grew 6 percent, while Off-site Managed Services declined 6 percent. Management is considering options to improve the Off-site Managed Services business performance. Gross margin on Managed and Professional Services increased to 29.4 percent from 27.8 percent a year ago, primarily due to growth in Professional Services revenue on lower fixed costs, continued contract profitability growth in On-site Managed Services, and cost reductions in Off-site Managed Services.

Rental and Fees revenue of $32 million increased 1 percent from the same period in fiscal 2007, primarily due to higher agency fees. Gross margin improved to 77.7 percent from 73.9 percent in the prior year. Other revenue of $16 million increased 2 percent from the prior-year quarter.

Balance Sheet and Liquidity

The Company reduced corporate debt by $162 million during the quarter to $579 million, primarily due to the redemption of its 2012 Notes. As a result of its debt reduction activities, the Company's cash balance declined $97 million in the quarter to $107 million. Inventory increased $9 million to $278 million and accounts payable rose $31 million to $273 million in the quarter.

In the first nine months of fiscal 2008, the Company generated $148 million of cash from operations, compared with $16 million in the first nine months of fiscal 2007. Capital expenditures on operating rentals and property and equipment, net of proceeds, totaled $35 million in the first nine months of fiscal 2008, compared with $33 million in the same period of fiscal 2007. As a result, free cash flow was $112 million in the first nine months of fiscal 2008, a $129 million improvement from the first nine months of fiscal 2007.

The Company paid $4 million of dividends to shareholders during the quarter, and IKON's Board of Directors approved the Company's regular quarterly cash dividend of $0.04 per common share, payable on September 10, 2008, to holders of record at the close of business on August 25, 2008. At June 30, 2008, actual shares outstanding were 94 million. While the Company plans to repurchase shares within the covenants of its existing debt agreements, it does not expect to resume this activity until fiscal 2009 when it has increased its capacity under its debt covenants.

Outlook

For fiscal 2008, the Company expects revenue to be flat year over year, its expense-to-revenue ratio to be approximately 28 percent, an operating income margin of approximately 5 percent, and earnings per diluted share to range from $1.00 to $1.05. For the fourth quarter, the Company expects earnings per diluted share to range from $0.25 to $0.30. These projections exclude the year-to-date net $6 million pre-tax restructuring charge ($0.03 per share), the $0.04 per share loss on early extinguishment of debt in the third quarter, and the impact of any future actions the Company may take to improve its business.

For fiscal 2008, the Company anticipates fully diluted weighted average shares to range from 99 to 100 million and free cash flow to range from $130 to $150 million. The Company's financial projections also anticipate an effective tax rate as reported of approximately 34 percent for fiscal 2008. However, this tax rate expectation is subject to the outcome of a pending audit resolution, which if closed in the fourth quarter, may lower the Company's effective tax rate to as low as 31 percent for fiscal year 2008, representing a potential benefit of up to $0.05 per share.

"We are pleased with our strong third quarter operating performance," said Espe. "We remain focused on increasing placements of color machines, growing our annuity streams, improving sales productivity, reducing costs and expenses, and generating strong cash flow."

 

 

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