IKON Q3 Earnings Up 12% on Lower Revenue, Penetrating National Firms
Press release from the issuing company
Execution and Commitment to Long-Term Strategies Yielding Intended Results
Company Increases Full-Year Expectations
VALLEY FORGE, Pa.---July 24, 2002--IKON Office Solutions, a leading provider of business communications solutions, today reported results for its third fiscal quarter ended June 30, 2002. Net income for the third quarter of Fiscal 2002 was $43.1 million, or $.28 per diluted share. These results exceeded the Company's expectations for the quarter and represent a 12% increase over $.25 per diluted share in the prior year, assuming the impact of not amortizing goodwill in accordance with SFAS 142.
"Our strong earnings performance this quarter highlights the effectiveness of the revenue and operating strategies we have implemented over the last several years and our commitment to deliver significant earnings improvement in Fiscal 2002 - despite an anticipated decline in revenues," said James J. Forese, Chairman and Chief Executive Officer. "We are executing on strategies to penetrate new market opportunities, on actions to significantly improve the bottom line, and we have taken appropriate steps to ensure our financial strength. Our performance is on track and the outlook for the business remains strong. By developing IKON into a more efficient and scalable distribution and service organization, we are building value within the business and positioning the Company to take advantage of future market and business growth opportunities."
Revenues for the third quarter of Fiscal 2002 were $1.22 billion, compared to $1.31 billion for the same period a year ago. While delayed customer spending continued to impact revenues generated from sales of copier/printer equipment, the Company delivered on its specific objectives for Fiscal 2002, including growth in sales of high-end production equipment, facilities management, and continued penetration into more major and national account business that leverages the Company's substantial sales and service capabilities. The Company has divested or downsized several business lines throughout Fiscal 2002, and the impact from the decline in those revenues as compared to the prior year accounted for approximately three quarters of the 7% revenue decline for the quarter.
Year to date free cash flow was $139 million compared to $120 million for the same nine month period in Fiscal 2001, which excludes approximately $23 million in proceeds received in the prior year for the sale of certain real estate in the United Kingdom. The Company continues to expect to generate $220 to $230 million of free cash flow for Fiscal 2002. Excluding finance subsidiaries' debt, the Company's debt to capital ratio was 29% at June 30, 2002.
Net Sales, which includes the sale of copier/printer equipment, supplies, and technology hardware, declined 7% from the prior year, led largely by a 30% decline in technology-related hardware. The Company has been de-emphasizing this low-margin revenue stream on a gradual basis, choosing instead to redirect its technical capabilities to support the growing service opportunities in document management and digital connectivity. In sales of copier/printer equipment, the Company's performance remained strong in the high-end, segment 5 & 6 market, as evidenced by double-digit growth in the sale of monochrome and production color devices. Sales of lower-end copier/printer equipment and supply sales declined compared to the prior year - a reflection of the strategies the Company has employed to shift its sales focus to more profitable and strategic product and service offerings, as well as a soft economy.
Services, which primarily includes revenues from the servicing of copier/printer equipment, and outsourcing and other services, declined 9% from the prior year. The Company's significant installed equipment base continues to generate solid revenues from the servicing of copier/printer equipment, which grew slightly from the prior year as the base continues to undergo a shift from analog to digital technology, and from the Company's focus on expanding its product mix to more higher-end devices. The downsizing or sale of non-strategic outsourcing and other service businesses, including the sale of the Company's technology education business, and the sale or closure of a number of digital print centers and technology service locations, accounted for essentially all of the decline from the prior year. Strategic service offerings such as facilities management, legal document services, and professional services continued to perform well in light of current economic conditions.
Finance Income grew 1% from the prior year. During the quarter, approximately 79% of IKON's customers leased through IOS Capital, IKON's captive leasing organization in North America. Effective this quarter, income generated through IOS Capital's administrative infrastructure such as syndication fees, late fees, and other processing-related revenues will be reported as Services rather than within Finance Income. There was no impact on operating income, net income or earnings per share as a result of this change. For comparative purposes, additional quarterly information has been included in the Notes to the attached financial tables.
Total Gross Profit remained strong at 39.7%, unchanged versus the prior year, a result of stronger margins on Services and Finance Income, offset by reduced margins on Net Sales.
Selling and Administrative Costs declined $55.2 million from the prior year through improved productivity, centralization and consolidation strategies, the downsizing or elimination of unprofitable businesses, and the elimination of approximately $10 million of goodwill amortization under SFAS 142. The Company has made significant investments to centralize and streamline its infrastructure over the years, and as a result of these strategies and in anticipation of a tough economic climate for most of Fiscal 2002, the Company set out to reduce Selling and Administrative costs by $190 million from Fiscal 2001 levels. Year to date, Selling and Administrative costs have declined by approximately $160 million compared to the first nine months of Fiscal 2001.
Operating Margin was 6.8% compared to 4.9% in the third quarter a year ago, or 5.7% assuming goodwill amortization was not expensed in the third quarter of Fiscal 2001. The improvement in the operating margin reflects the Company's drive toward its long-term goal of 8% to 10% operating margins.
"We are encouraged by the permanent improvements we are making to our operational infrastructure, to our revenue mix, and by the sequential improvement we are seeing in our core revenue streams," said Mr. Forese. "Although the fourth quarter is typically a softer quarter on the revenue front for IKON as compared to the third, we expect to finish out the year with a solid performance. As a result, we are raising our Fiscal 2002 expectation from earnings per diluted share of $.87 - $.92 to $.94 - $.96 for an anticipated improvement of over 16% from the prior year. This places our fourth quarter earnings expectation in the $.20 - $.22 per diluted share range. Revenues will continue to be affected by the de-emphasis of certain revenue streams, revenue mix strategies, and a cautious economic climate; therefore, revenues are expected to decline by approximately 8% for the full year, and 4% to 6% for the fourth quarter.
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