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Danka Reports Q4 $96 million loss on lower sales

Thursday, May 20, 2004

Press release from the issuing company

ST. PETERSBURG, Fla.--May 19, 2004-- Danka Business Systems PLC today announced fourth-quarter and fiscal 2004 year-end results for the period ended March 31, 2004. Fourth-Quarter Results Summary For the fourth-quarter the Company reported a net loss of $96.4 million, which was largely attributable to certain significant items, including a $50.8 million non-cash charge against deferred tax assets; a $30.5 million restructuring charge; and a $7.8 million provision for income tax expense. The charge against the deferred tax assets was a result of the Company's analysis under FAS 109 which evaluates the likelihood that such net deferred tax assets and net loss carryforwards will ultimately be realized. Excluding the restructuring charge, the Company achieved operating earnings of approximately $1 million. Digital Transition, Growth Initiatives Drive Revenue Danka's fourth-quarter revenue was $343.5 million, 3.5% lower than the year-ago period but a 3.7% increase from the third quarter. Adjusting for currency exchange, revenue was 10.9% lower than in the year-ago period. Within that total, retail service revenue was $160.8 million, 6.0% lower than the year-ago period but 2.8% and 3.5% higher than the third and second quarters, respectively. Revenue from retail equipment and related sales, which include software and professional services, was $125.3 million, a slight decline from the year-ago quarter, but 9.3% higher than the third quarter. The sequential revenue improvements were driven in part by the continued digital transformation of the company's business, including an increase in the digital portion of the worldwide equipment base to 55%. "I am pleased that, as expected, the increased digital base has eased downward pressure on service revenue which has been a major driver of our year on year revenue declines," said Todd Mavis, Danka's Chief Executive Officer. "The increased digital base has also resulted in an increase in connectivity rates, due to more digital placements as well as increased installations of Danka @ the Desktop(TM) solutions and color systems. Increasing connectivity is important because it helps to drive volumes in our installed base and, as a result, the volume decline that we've experienced for some time is finally beginning to flatten." Continued progress in the company's growth initiatives also contributed to the sequential increase in revenues. Revenue from these offerings - which include software, professional services, TechSource(TM) multi-vendor services, and printers - was 180% higher than the year-ago quarter and 12% higher sequentially. "We exited the fourth quarter with an annualized run rate of approximately $65 million in our growth initiatives, which play a vital role in enabling sales of our traditional offerings," said Mavis. "I'm particularly pleased with our TechSource(TM) business development, including the increase in our IBM business and the recent establishment of a new service relationship with H-P, which we expect to drive future growth in our service business." "Our strategies for the analog-to-digital transition have resulted this quarter in the stabilization of our service revenue," commented Todd Mavis. "This success, combined with the positive impact from our growth initiatives, enabled us to increase total revenue sequentially and achieve our largest revenue quarter of the year. At the same time, we generated operating and free cash flows of approximately $18 million and funded the implementation of expense reductions in pursuit of our previously announced target of $50 million-plus in annualized cost savings." Gross margins in the fourth quarter were 35.0%, 270 basis points lower than a year ago. The fourth-quarter margins were negatively impacted versus the year-ago period by some larger, lower-margin equipment transactions and a reduction in lease and residual payments from a diminishing external lease funding program. Sequentially, gross margins were down 130 basis points. Fourth-quarter SG&A was $118.9 million or 34.6% of revenue. SG&A was 6.6% lower than the year-ago quarter. Adjusting for currency exchange SG&A would have been 12.7% lower than the year-ago period. SG&A was 9.4% higher sequentially; however, this sequential increase was largely due to several events in the fourth quarter, such as the seasonal restart of calendar-year employee tax and vacation accruals, an increase in bad debt expense, unfavorable foreign exchange rates, and an increase in sales commissions associated with higher equipment sales. In addition, the third quarter was favorably impacted by a $3 million pension adjustment in Europe. Continued Positive Cash Flow Free cash flow for the fourth quarter was $18.5 million. Significant cash items in the quarter included net working capital contributions of $12.0 million, cost restructuring expenditures of $8.7 million, and capital expenditures of $7.5 million. The Company's cash balance increased by $7.7 million, to $112.8 million. "Our continued ability to generate positive cash enabled us to make significant progress in implementing our cost restructuring program and invest in our growth initiatives," continued Mavis. "We have seen a meaningful reduction in capital expenditures, primarily because most of the spending on our Vision 21 reengineering program is behind us. In addition, although SG&A expenses increased in the fourth quarter because of several quarter-specific events, we still succeeded in attaining more of our previously identified cost reductions. We will vigorously execute on our cost reduction plans and expect to realize the balance of our $51 to $56 million in annualized cost savings during the middle of fiscal 2005." Full-Year Results Summary and CFO Comments For fiscal 2004 year, Danka reported: Revenue of $1.3 billion, 4.9% less than the prior year. Much of the decline is attributable to the impact on retail service revenues by the previously discussed digital transition. Free cash flow of $32.9 million, including a $31.3 million increase in the company's cash balance from $81.5 million to $112.8 million during the course of the year. Gross debt at year-end was $244 million and Net debt at year end was $131.2 million, a 13.3% decrease from the end of the prior fiscal year. SG&A of $465.2 million, a 4.1% decline from the prior year. Capital expenditures of $44.5 million, 8.4% lower than the prior year. "Looking at the past year, we're pleased that we were able to complete our senior note offering last July, finish the U.S. conversion to Oracle, continue to generate cash, and continue reducing our net debt. Going forward we will be very focused on reducing costs in pursuit of our goal of SG&A not exceeding 30% of total revenue," stated Mark Wolfinger, Danka's chief financial officer. "With our strong liquidity and cash positions we are now well positioned to meet and fund both our growth opportunities and our restructuring initiatives."




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