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Danka: Debt Reduction and Margin Improvements Highlight 2002 Results

Friday, May 17, 2002

Press release from the issuing company

Danka's Fourth Quarter and Fiscal 2002 Results ST. PETERSBURG, Fla.--May 16, 2002--Danka Business Systems PLC today announced results for its fourth quarter and fiscal year ended March 31, 2002 that reflect continued improvement in key areas. Summary Results Danka reported operating earnings from continuing operations of $9.3 million for fiscal 2002, a substantial improvement over the $191.4 million operating loss from continuing operations in the prior year. For the fourth quarter, the company incurred an operating loss from continuing operations of $2.9 million, which included a $7.6 million write-off of software related to the company's exit of its legacy business systems and the implementation of its new Vision 21 business systems and $1.8 million of executive contract termination charges. This compares to an operating loss of $106.8 million in the prior year period, which included $89.4 million of asset write-offs and other charges. Excluding these charges, the earnings improvement was due mainly to higher gross margins and improved sales productivity. "Overall, we achieved our key objectives in both the fourth quarter and the full year, and I'm proud of the way our associates have performed," commented Lang Lowrey, Danka's chairman and chief executive officer. "Our progress despite negative industry trends and the worldwide economic downturn is reflected in our continued EBITDA (earnings before interest expense, taxes, depreciation, and amortization) improvement, which increased to $30.4 million for our fourth quarter. The recent quarter marked the fourth consecutive quarter of EBITDA growth." Total revenues from continuing operations in the fourth quarter of fiscal 2002 were $371.6 million, compared to $424.5 million in the prior year quarter, and $1.6 billion for the year, compared to $1.8 billion the previous year. The declines were mainly due to the effect of the continued industry-wide analog-to-digital transition on service revenues, technology convergence, reduced U.S. equipment sales, a worldwide slowdown of capital spending and the company's increased focus on generating higher margins. SG&A expenses, which included a $7.6 million software write-off and $1.8 million of executive contract termination charges, were $137.2 million in the fourth quarter of fiscal 2002, or 36.9% of revenues. Excluding these charges, SG&A expenses would have been 34.4% of revenues. SG&A expenses, excluding $28.6 million in charges for facility closures and receivable writeoffs, were $149.6 million, or 35.2% of revenues, in the prior year fourth quarter. For the year, SG&A expenses were $531.3 million, or 34.2% of revenues. In the prior year, excluding the charges for facility closures and receivable writeoffs, SG&A expenses were $612.9 million or 34.6% of revenues. Net earnings for the fourth quarter of fiscal 2002 were $15.2 million. This included an after tax gain of $10.6 million from discontinued operations, related to the sale of Danka Services International ("DSI"). The net loss for the prior year comparable period was $127.4 million and included after tax earnings from discontinued operations of $0.4 million. After allowing for the dilutive effect of dividends on Danka's participating shares in computing basic earnings/(loss) per American Depositary Share ("ADS"), Danka generated net income from continuing operations of $0.004 per ADS in the fourth quarter of fiscal 2002 compared to a net loss of $2.13 per ADS in the fourth quarter of fiscal 2001. The net income from discontinued operations was $0.17 per ADS in the fourth quarter of fiscal 2002 compared to $0.01 per ADS in the fourth quarter of fiscal 2001. Net earnings for the year ended March 31, 2002 were $137.6 million and includes after-tax earnings from discontinued operations of $3.6 million, an after-tax gain on the sale of DSI of $115.9 million and an after-tax extraordinary gain from the early retirement of debt of $27.9 million. The net loss for the year ended March 31, 2001 was $220.6 million and included $13.0 million of after-tax earnings from discontinued operations and pre-tax charges of $15.7 million for restructuring and $157.9 million of asset and goodwill write-offs and other charges. After allowing for the dilutive effect of dividends on Danka's participating shares in computing basic earnings/(loss) per ADS, Danka incurred a net loss from continuing operations of $0.43 per ADS for fiscal 2002 compared to a net loss of $4.13 per ADS for fiscal 2001. Net earnings from discontinued operations were $1.93 per ADS for fiscal 2002 compared to $0.22 per ADS for fiscal year 2001. Net earnings from extraordinary items were $0.45 per ADS for fiscal 2002. Debt Reduction Danka substantially reduced its debt in the fourth quarter of fiscal 2002 by $37.7 million or 11.0% to $304.5 million. For the full year, the company eliminated $414.7 million or 57.7% of its debt. Reasons for the full-year decrease include the June 2001 financial restructuring, the use of proceeds from the sale of DSI, and the continued generation of free cash flow (cash flow from operations less capital expenditures). Free cash flow was $49.6 million in the fourth quarter, which included the receipt of an $18.2 million U.S. income tax refund including associated interest income, compared to $31.4 million in the prior year period. For the full year, free cash flow was $105.0 million, compared to $58.1 million for the prior year. Danka's EBITDA from continuing operations for fiscal year 2002 was $107.4 million. For fiscal 2002, this represents a total leverage ratio (total debt divided by total EBITDA) of approximately 2.8 to 1. The company's ratio of total debt to total capitalization (including participating shares) decreased during the year from 82.0% at March 31, 2001 to 51.3% at March 31, 2002. "Fiscal 2002 was a watershed year in de-leveraging the company and positioning ourselves for the future," noted Mark Wolfinger, Danka's chief financial officer. "In addition to our significant restructuring last June, our debt reduction initiative was enhanced by continued progress in generating free cash flow." Margin Improvements Overall, Danka's gross profit margin was 37.6% in the fourth quarter of fiscal 2002, compared to 31.6% in the prior year period, excluding the asset writeoffs and other charges discussed above. Gross margin for the year was 35.4%, compared to 34.2% in the prior year excluding $92.3 million of asset write-offs. Much of the quarterly and full-year improvements were the result of higher retail equipment margins resulting from Danka's strategy to focus its marketing efforts on value. Since the beginning of the fiscal year, retail equipment margins increased to 35.5% in the fourth quarter of fiscal 2002 from 23.6% in the first quarter of fiscal 2002. Retail services, supplies and rental gross margins also improved due to the increased efficiencies associated with the servicing of digital equipment. "Improving customer satisfaction and introducing a new value proposition to customers is the cornerstone of our go-forward strategy," explained Lowrey. "We are doing that in several ways. First, we're ensuring that we get full value for the top-quality products and services we have traditionally provided and that has meant walking away from some low-profit and no-profit sales. Second, we're increasing the focus on higher-value solutions through new initiatives such as Danka @ the Desktop, a client-centric print management solution that delivers extended capability and productivity benefits. And third, through our launch of Vision 21, which is our Oracle and re-engineering initiative." Targeted Investments Capital expenditures in fiscal 2002 were $50.6 million, compared to $68.9 million in the prior year. Much of the decrease is attributable to the company's de-emphasis of the capital-intensive rental business. The company significantly improved its inventory and accounts receivable position during the year by a combined $123.0 million. Inventories dropped during fiscal 2002 by 34.5% from $199.5 million to $130.6 million. Accounts receivable, net declined by 15.6%, from $346.4 million to $292.4 million. "We continue to invest in our business, particularly in providing world-class service to our clients, but we're doing so with a sharper focus," noted Lowrey. "Over the last year, we have developed new go-to-market strategies and business plans to better target our spending and investments. In addition, we have begun the rollout of new business systems that will improve our ability to serve customers and at the same time begin to generate savings from increased productivity."

 

 

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