IKON Announces 3Q Results, Equipment and Hardware Sales Down 11%
Press release from the issuing company
VALLEY FORGE, Pa., July 26 IKON Office Solutions today announced net income of $26 million, or earnings per share of $.18, for the third fiscal quarter ended June 30, 2001, exceeding the Company's expectations for the quarter. For the same period in 2000, earnings were $.19 per share, excluding one-time gains from early extinguishment of debt and the sale of investments totaling $.02 per share. Revenues for the quarter were $1.31 billion, compared to $1.40 billion for the same period in 2000.
Free cash flow for the third quarter was approximately $80 million compared to approximately $40 million for the same period in 2000. Based on the Company's latest analysis, free cash flow for the full year should exceed the previously communicated expectation of $170-$185 million.
"Due to continued improvements in gross margin and our ability to control Selling and Administrative expenses without foregoing our strategic investments, we were able to deliver strong earnings for the quarter,'' said James J. Forese, Chairman and Chief Executive Officer of IKON Office Solutions. "Revenues declined 6% from the prior year, or 5% excluding theimpact of foreign currency translation, largely due to growing economic concerns and continued competitive pressure. Understanding these challenges in the quarter, we were increasingly focused on sales discipline -- specifically, improved equipment contribution, the continued penetration of growth markets such as the production and outsourcing sectors, and the delivery of higher value-added solutions to our customers. Equipment aftermarket, namely supply sales and equipment service, also delivered strong productivity. As a result, we were able to enhance profitability for the quarter despite lower revenues.
"During the quarter, we continued to execute in areas critical to our long-term strategy. Specifically, we generated strong growth in the production arena through sales of our higher-end, segments 5 and 6 copier/printer equipment, and facilities management generated double-digit growth for the sixth consecutive quarter,'' continued Mr. Forese.
Net Sales, which include the sale of copier/printer equipment, supplies, and technology hardware, declined 11% from the prior year largely due to the decline in technology hardware and copier/printer equipment sales. Technology hardware, such as computers, routers and servers sold by the various technology divisions, declined as the Company continued to shift emphasis away from these low margin products. Sales of copier/printer equipment declined in response to ongoing economic and competitive pressures as well as the Company's strategic focus on moving from low-end, lower margin products to high-end, higher margin products. The Company continued to post year-over-year growth in sales of higher-end products, specifically segments 5 and 6 black & white production equipment and production color. Gross profit margin on Net Sales increased substantially over the same period in 2000 as the Company focused on cost controls and as it realized the benefits of earlier productivity programs. Adding to the gross margin expansion was the ongoing benefit of less low margin technology hardware revenues in the current Net Sales revenue mix.
Service & Rentals, which include revenues from the servicing of copier/printer equipment, outsourcing, technology services, and rentals, declined 2% from the prior year. While outsourcing continued to record year over year growth, revenues from the servicing of copier/printer equipment as well as technology services declined from the prior year. Service & Rentals gross profit margin increased from the prior year due to improvements in productivity associated with the servicing of copier/printer equipment.
Finance Income grew 5.1% from the prior year. Gross profit margin on Finance Income improved from the prior year primarily due to increased average corporate borrowings on behalf of the finance subsidiaries. Interest on corporate borrowings is reflected as Interest Expense while interest on finance subsidiaries' borrowings is reflected as Finance Interest Expense.
Operating Margins of 4.9% were comparable to the prior year largely due to stronger gross margins and controlled Selling and Administrative costs as the Company continues to balance investments necessary for market differentiation and leadership against cost savings achieved through ongoing productivity programs. Since the beginning of its fiscal year, the Company has reduced headcount by approximately 1,500 as part of these productivity initiatives.
Earnings per share for the full year, excluding special items, are expected to be $.55, as previously communicated. The Company expects that economic and competitive pressures will continue to impact the last quarter of fiscal 2001, along with normal seasonal influences typical within the industry. Free cash flow for fiscal 2001 is expected to exceed $200 million.
"IKON has made strong progress in becoming an integrated provider of business communication solutions. We have realigned our sales and service organizations to focus on new technologies and market opportunities, and we continue to improve our operational infrastructure to ensure we have a profitable and customer-focused business model,'' concluded Mr. Forese. "We will continue to execute on this strategy while responding to the additional challenges of an uncertain economic environment by remaining focused on our cost structures, cash flow, and profitability.''
Additional information regarding the third quarter results and the Company's outlook for next quarter and the full fiscal year will be discussed on a conference call hosted by IKON at 10:00 a.m. EST on Thursday, July 26, 2001. Please call (719) 457-2645 to participate. A complete replay of the conference call will be available over the Internet on IKON's Investor Relations home page approximately two hours after the call ends. To listen, please go to www.ikon.com and click on Invest in IKON. Beginning at 1:00PM EST on July 26, 2001 and ending at midnight on July 30, 2001, a complete replay of the conference call can also be accessed via telephone by calling (719) 457-0820 and using the access code 766184.
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