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IKON Announces Q4 Results; Strong Growth in Q4 Equipment Sales

Tuesday, October 28, 2003

Press release from the issuing company

VALLEY FORGE, Penn.--Oct. 27, 2003-- IKON Office Solutions today reported fourth quarter revenue and earnings per share that exceeded the Company's expectations for the quarter. For the full fiscal year, approximately $439 million in cash generated from operations also exceeded the Company's expectations, fueled by working capital improvements in most areas. Cash was primarily used throughout Fiscal 2003 to strengthen the Company's financial flexibility, including the reduction of non-finance subsidiary debt to $430 million - a more than 50% reduction from June 2001. Net income for the fourth quarter was $32.4 million, or $.21 per diluted share, including a $7 million pretax gain, or $.03 per diluted share, from the early extinguishment of debt during the quarter. Excluding the gain, fourth quarter earnings were $.18 per diluted share, compared to expectations of $.15 to $.17 per diluted share for the quarter. These results were due to stronger than expected revenues for the fourth quarter, particularly in sales of copier/printer equipment. Sales of copier/printer equipment grew 5% from the fourth quarter of Fiscal 2002, the first period of growth since the second quarter of Fiscal 2001. Revenues for the fourth quarter were $1.20 billion compared to $1.21 billion for the fourth quarter of Fiscal 2002, a decline of 1.3%. (Both current and prior year Net Sales and Cost of Goods Sold include a reclassification adjustment as detailed on the attached schedule; there is no impact on gross profit or operating income dollars.) Excluding approximately $21 million of revenue decrease from downsizing and exit strategies the Company commenced during Fiscal 2002, core revenues, representing all other revenues, including the sale of copier/printer technologies, supplies, and the Company's wide array of services, demonstrated positive growth in the fourth quarter compared to the prior year. "Our fiscal year closed with a strong drive by our sales organization to grow market share with our traditional corporate customers, and expand our presence in new geographies and with Fortune 1000 customers that are part of our future growth platform." said Matthew J. Espe, IKON's Chairman and Chief Executive Officer. "In a tough operating environment, business leaders need a partner that can deliver savings and productivity to their organization through a well-integrated document strategy. Customers are increasingly recognizing IKON as the best choice to fulfill their needs, with our breadth of on-site and off-site service capabilities, document expertise, best-in-class technologies from manufacturers like Canon and Ricoh and our ability to seamlessly integrate these solutions into the workflow. "During the quarter, we continued to execute against our growth platform, with strong sales in our targeted metro markets and new customer wins in our national account program. To ensure we are able to support future growth and improve our productivity, we balanced the year with continued reductions in our expense structure in the quarter while simultaneously funding our e-IKON process and systems redesign project. We also further strengthened the balance sheet through substantial reductions in non-finance subsidiary debt, with over 80% of the remaining non-finance subsidiary debt maturing in 2025 and beyond," Mr. Espe continued. The IKON Board of Directors approved the Company's regular quarterly cash dividend of $.04 per common share. The dividend is payable on December 10, 2003 to holders of record at the close of business on November 24, 2003. Fourth Quarter Analysis Year-to-year comparisons of both Net Sales and Services were impacted unfavorably by prior year actions to strengthen the business model and improve the quality of revenue streams. During Fiscal 2002, the Company exited its telephony business, sold its technology education business, and began the process of closing or selling a number of digital print centers and technology services locations. In addition, the Company continued to de-emphasize the distribution of low-margin technology hardware such as computers, routers and servers throughout Fiscal 2002 and 2003. Net Sales of $600.5 million, which include the sale of copier/printer equipment, supplies and technology hardware, declined by 0.9% from the fourth quarter of Fiscal 2002. Net Sales grew by 2.3% excluding a $19 million decline in technology hardware. Contributing to this growth was a 5% increase in sales of copier/printer equipment in the quarter, offset by a $10 million decline in supply sales. Growth in copier/printer equipment revenues was led by exceptional growth in color and growth in sales of over 70 pages per minute production equipment, offset by a slight decline in sales of lower-end copier/printers. Contributing to overall equipment growth was the flow-through of the third quarter's higher than average level of vendor backorders. Gross profit margin on Net Sales declined to 29.2% from 32.5% in the fourth quarter of Fiscal 2002, due primarily to a more competitive environment for copier/printer equipment, product and customer mix, and a higher level of inventory write-offs compared to a year ago. Services of $496.1 million, which include revenues from the servicing of copier/printer equipment, and outsourcing and other services, declined by 2.8% from the fourth quarter of Fiscal 2002. Revenues from the servicing of copier/printer equipment are linked closely to the number of copies customers generated on copier/printer equipment - an installed base of more 900,000 machines managed by IKON's team of 7,000 service technicians. For the fourth quarter, equipment service revenues declined by 2.4% from the fourth quarter a year ago, primarily due to a lower level of copy volume growth compared to the same period a year ago. Outsourcing and other services declined by 3.2% from the prior year, or 2.6% excluding a $2 million revenue decline associated with the exit and downsizing of certain businesses in Fiscal 2002. Within outsourcing and other services, fourth quarter growth in facilities management services of 4% was offset by declines in off-site digital print and legal document services when compared to the prior year. Gross profit margin on Services improved slightly to 40.6% from 40.2% for the same period a year ago. Finance Income grew by 3.8% from the prior year to $99.1 million. In the fourth quarter, approximately 81% of IKON's equipment revenues in the U.S. were financed through IKON's largest leasing subsidiary, IOS Capital, LLC, compared to 79% in the prior year. Portfolio quality at IOS Capital remains stable, with charge-offs and collections improving over 2002. Gross profit margin from finance subsidiaries increased to 63.7% in the fourth quarter, from 57.4% for the same period a year ago due to market rate reductions and the Company's chosen mix of capital resources - primarily lease-backed notes - to support lease financing. Selling and Administrative Expenses declined by $9.2 million from the fourth quarter of the prior year, primarily from improvements in selling costs and continued expense and headcount controls. These savings have been partially offset by higher pension, health care, and e-IKON implementation expenses in Fiscal 2003. Total employment at the end of Fiscal 2003 was 30,250, compared to 33,200 at the end of Fiscal 2002. Operating Income of $56.5 million in the fourth quarter declined by $18.6 million from the prior year, or $8.1 million excluding the reversal of fourth quarter restructuring charges, as the decline in total gross profit outpaced improvements in Selling and Administrative expenses. Fiscal Year 2003 Results For the fiscal year ended September 30, 2003, net income was $116.0 million, or $.75 per diluted share, which includes $19.2 million in pretax net losses, or $.07 per diluted share, from the early extinguishment of debt. Excluding these net losses, earnings for the fiscal year ended September 30, 2003 were $.82 per diluted share. Prior year net income totaled $150.3 million, or $.99 per diluted share, which includes a $.04 benefit related to the reversal of Fiscal 2001 restructuring charges. Excluding the benefit of the restructuring reversal, net income for Fiscal 2002 was $143.5 million, or $.95 per diluted share. Fiscal 2003 revenues of $4.71 billion declined by $219 million or 4.4% from the prior year, with approximately $156 million of the decline related to downsizing and exit strategies commenced during the first quarter of Fiscal 2002. Excluding the impact of these actions, core revenues for Fiscal 2003 declined by 1.3%, but improved consistently over the course of Fiscal 2003. Balance Sheet and Liquidity As of September 30, 2003, the Company had approximately $360 million in non-restricted cash on its balance sheet. Cash from operations for the fiscal year totaled approximately $439 million, exceeding expectations due to working capital benefits in accounts receivable, inventory, and accounts payable. The most significant improvement was an increase in inventory turns from the prior year due to centralization and organizational benefits in supply chain. Capital expenditures on operating rentals and property and equipment, net of proceeds, totaled $68 million, or $90 million excluding $22 million of proceeds recorded from the Company's sale and leaseback of its headquarters building in the fourth quarter. During the fourth quarter, the Company continued to strengthen the balance sheet by repurchasing $64.3 million of non-finance subsidiary debt in the open market. As of September 30, 2003, the remaining non-finance subsidiary debt was $430 million. Finance subsidiary debt, which is supported by a $3.6 billion lease receivable portfolio, net of reserves, is maintained at no more than a debt to equity ratio of 6 to 1. Outlook "We are excited about the momentum in the business as we exited Fiscal 2003 and believe customers are increasingly recognizing IKON's ability to be their single source for best-in-class document management solutions," commented Mr. Espe. "Our efforts in 2004 will continue to strengthen the business model to enhance shareholder value through a balanced approach toward developing our growth platform, investing in operational excellence, and achieving greater financial flexibility. We believe this combination will allow us to grow earnings per share, on average, in a range of 5% to 10% over the next three years. "For Fiscal 2004, we expect revenues to grow up to 1%, through a blend of equipment and services growth, with earnings per diluted share in the $.82 to $.87 range. Cash from operations is expected to be in the range of $325 to $350 million for Fiscal 2004. Capital expenditures, net of proceeds, should be approximately $90 million. For the first quarter ended December 31, 2003, revenues should be similar to the first quarter of Fiscal 2003 with earnings per diluted share expected to be in the range of $.17 to $.19," Mr. Espe concluded. These expectations exclude any additional potential gain or loss from the early extinguishment of debt that the Company may incur in the first quarter or the full year Fiscal 2004.




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