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IKON Announces Results for Q3: Revenues Decline 1.3%

Press release from the issuing company

VALLEY FORGE, Pa.--July 29, 2004-- IKON Office Solutions, the world's largest independent channel for document management systems and services, today reported results for the third fiscal quarter ended June 30, 2004, reaching the high end of the Company's expectations for the quarter. Strength in targeted areas such as color equipment sales and national accounts, and positive results within IKON's newly formed Enterprise Services group, are contributing to an expanding pipeline of new customers to IKON. Net income of $8.1 million, or $.05 per diluted share, includes a pretax loss on early extinguishment of debt of $32.7 million, or $.13 per diluted share, and a pretax gain of $.7 million related to the divestiture of the Company's Canadian leasing business on June 30, 2004. Excluding these items, earnings per diluted share for the third quarter of Fiscal 2004 were $.18, at the high end of the Company's expectations for the quarter. Revenues for the third quarter were $1.16 billion, declining 1.3% compared to the prior year. Growth in targeted revenue streams was offset by the decline in finance revenues as the Company began its transition out of captive lease financing in North America. Targeted revenue streams, which represent 95% of total revenues and exclude revenues from U.S. and Canadian lease financing and computer-related technology hardware, grew by 4% compared to the same period a year ago. Finance income from the U.S. and Canadian portfolios declined by 61% from the prior year and is expected to decline primarily over the next 24 months, as the Company completes its previously announced transition out of captive lease financing in the U.S. and Canada. This strategic shift includes the funding of new lease originations by IKON Financial Services(SM), a strategic alliance under GE Commercial Finance ("GE"). Foreign currency translation provided a 1.1% benefit to total revenues. "We were pleased to deliver positive results for both our customers and shareholders in the quarter," stated Matthew J. Espe, IKON's Chairman and Chief Executive Officer. "The third quarter was our first under a dramatically different business model, and the transition went smoothly. This important business transition for IKON was successful because of our customer-centric focus, and the value of the IKON sales and service distribution network. This highly-focused business model allows us to integrate new technologies from various manufacturers and newly developed relationships with best-in-class solution providers more effectively than any competitor in our industry. "In addition, many of our growth initiatives are going well, fueled by organic improvements as well as the new GE relationship. Highlights in the quarter included: Exceptional color performance, where we delivered 50% growth over the prior year. With IKON's color portfolio boasting technologies from industry leaders such as Canon, Ricoh and, the IKON CPP 8050 co-branded with Konica-Minolta - which has become the industry's top selling light production color unit - we're confident that color will be a positive contributor to our long-term growth profile. The introduction of Enterprise Services, which includes post-sale Customer Service, outsourced Managed Services, and higher-end Professional Services. This strategic framework allows IKON to provide end-to-end document management solutions at varying degrees of customer needs, and serves as the platform for the ongoing development of the Company's global document management software and solutions distribution model. National account business also continued to accelerate, with revenues more than doubling in the quarter compared to a year ago. Year-to-date, we've already eclipsed our total 2003 success rate in winning new Fortune 1000 customers. Our best-in-class products and our integrated services are the differentiators that are increasingly hard for competitors to beat. These investments allow our customers to fully leverage the range of capabilities IKON offers within Enterprise Services. Our investments and strategic repositioning efforts also are beginning to yield benefits," continued Espe. "As we complete the transition out of captive leasing in North America through the run-off of our remaining U.S. lease portfolio, we look forward to the continued deployment of cash proceeds toward execution of our share repurchase program and other opportunities that strengthen our financial position and improve our prospects for growth." Since last quarter, the Company executed a number of capital structure and liquidity related objectives. The cumulative effect of these, and prior actions, has contributed to the decline in the Company's total debt to capital ratio to 50.8%, from 67.7% a year ago. Today, IKON announced the completion of a $200 million senior secured revolving credit facility. The new facility will be used for general corporate purposes. Wachovia Capital Markets is the sole administrative agent on the facility, which includes a syndicate of banks and other financial institutions. Financial covenants of the credit facility are consistent with IKON's long-term financial objectives for share repurchases, dividends, and other investment opportunities. On April 28, 2004, the Company completed the tender for $250 million of June 2008 notes, recording a loss on early extinguishment of debt of $32.7 million during the quarter. On June 30, 2004, the Company completed the sale of its Canadian leasing business. A portion of the cash proceeds of approximately $160 million was used to eliminate Canadian lease-supported debt. During the third quarter, the Company repurchased 2.3 million shares of IKON's outstanding common stock for $25 million, leaving $225 million remaining for share repurchases under the 2004 Board authorization. IKON's Board of Directors approved the Company's regular quarterly cash dividend of $.04 per common share, payable on September 10, 2004 to holders of record at the close of business on August 23, 2004. "As we approach the close of Fiscal 2004, we will continue to focus on the strategic initiatives and opportunities that position us for improved operational leverage and to become a stronger channel for document management products and services," continued Mr. Espe. "Through operational initiatives such as e-IKON, Six Sigma and Teleweb, we expect to achieve further productivity and sales effectiveness. Our National Accounts momentum coupled with positive trends in color and high-volume equipment will continue to augment core growth, and opportunities in the European markets and Enterprise Services hold promise for further expansion across all of IKON's businesses. And now, with our strategic alliance with GE in place, we have created new opportunities that will move us toward our goal of becoming the pre-eminent channel for document management systems and services in the industry." Outlook Fourth quarter earnings per diluted share are expected to be in the range of $.14 to $.17, with earnings per diluted share of $.72 to $.75 expected for the full fiscal year. These expectations exclude any losses on early extinguishment of debt incurred throughout the year, net gains or losses on divestitures, and the tax benefit related to the second quarter tax gain on the divestiture of the U.S. leasing business. Financial Analysis Supply revenues and related costs sold as part of bundled customer service contracts for IKON's European and Canadian operations were reclassified from Net Sales to Services in the third quarter, similar to the reclassifications for its U.S. operations made in the second quarter of Fiscal 2004. Reclassification adjustments for 2002, 2003 and the first and second quarters of Fiscal 2004 can be found on the investor relations section of IKON.com. There is no impact on total revenues, operating margin, or net income for these periods. Net Sales of $514.1 million, which includes the sale of copier/printer equipment, direct supplies and technology hardware, increased by 5.0% from the third quarter of Fiscal 2003. Sales of copier/printer equipment grew by 8% from the prior year, driven by continued growth in color revenues and the net impact of the new relationship with GE. Third quarter direct supply sales declined by $9.2 million from the prior year, with the rate of decline slowing sequentially to $3.5 million from the second quarter. Sales of technology hardware decreased by $1.1 million over the prior year. Gross profit margin on Net Sales declined slightly to 28.6% from 29.0% in the third quarter of Fiscal 2003. Services of $607.2 million, which includes revenues from the servicing of copier/printer equipment ("Customer Service"), Managed Services, Professional Services and other fees, grew by 2.6% from the third quarter of Fiscal 2003. Overall Services growth was primarily driven by growth in Professional Services and the net impact of fees received as a result of the new GE relationship. Offsetting these revenues was a 1.2% decline in Customer Service revenues compared to the prior year, although copy volumes continued to strengthen, especially in the areas of color and production. Gross profit margin on Services of 42.3% remained relatively flat with the third quarter of Fiscal 2003. Selling and Administrative expenses declined by $15.7 million from the prior year as a result of the leasing transition and improved selling costs, offset by foreign currency and other corporate expenses such as pension. Operating income decreased to $60.9 million for the third quarter of Fiscal 2004 from $63.8 million a year ago. Interest expense of $15.2 million increased by $2.4 million from the third quarter of Fiscal 2003, due to higher debt levels resulting from IKON's assumption of IOS Capital's public debt as part of the sale of those operations to GE, which was previously reported in Finance Interest Expense. Adjusted Financial Information Net income and earnings per diluted share in this earnings release are presented on an adjusted basis to exclude the impact of the loss from early extinguishment of debt and the gain from the sale of the Company's Canadian leasing business. Revenue growth has been presented on an adjusted basis to exclude the impact of revenue streams that have been either divested or de-emphasized. Management believes these presentations provide a reasonable basis on which to present adjusted financial information and ratios that provide investors with a useful indication of the performance of the Company's ongoing operations and financial strength. This adjusted financial information should not be construed as an alternative to our reported results determined in accordance with generally accepted accounting principles (GAAP). Further, our definition of this adjusted financial information may differ from similarly titled measures used by other companies. A supplemental schedule attached provides a quantitative reconciliation of the differences between the adjusted financial information and the financial measures calculated and presented in accordance with GAAP. This reconciliation, in addition to other adjusted financial measures used by management, may be found at the Company's website at www.ikon.com in the Investor Relations section.