IKON Announces Results for the First Quarter: Sales Drop
Press release from the issuing company
MALVERN, Pa.--Jan. 27, 2005-- IKON Office Solutions, the world's largest independent channel for document management systems and services, today reported results for the first quarter of Fiscal 2005. Net income for the first quarter was $16.6 million, or $.12 per diluted share. The Company previously communicated expectations of $.12 to $.14.
Total revenues were $1.1 billion for the first quarter of Fiscal 2005. The decline of 3.6% from the first quarter of Fiscal 2004 was primarily attributable to the decline in finance revenues as a result of the transition out of captive leasing in North America. Foreign currency translation provided a 1.5% benefit to total revenues. Targeted revenues, which exclude technology hardware and finance revenues in North America, increased by approximately 3%, due to positive performance in service offerings and the benefits of the fees received from GE Commercial Finance ("GE").
"We made important progress on a number of key initiatives in the quarter," stated Matthew J. Espe, IKON's Chairman and Chief Executive Officer. "Although we did absorb weakness in North American equipment sales and off-site Managed Services in the quarter, these challenges were offset by solid results in Customer Services, Professional Services and on-site Managed Services. On-site Managed Services delivered another strong quarter, winning new multi-year contracts while strengthening our base of recurring revenue. In addition, Europe delivered a strong quarter in both revenue and operating margin expansion. Our national account program, which leverages both our equipment and service offerings, continued to grow revenues in the quarter, with 13 new contract wins."
Mr. Espe continued, "As we launched important strategic initiatives including the new integrated selling model and a broader Professional Services coverage strategy, we experienced a temporary decline in sales productivity which impacted our North American equipment performance in the first quarter. These major improvements to our coverage and selling processes extended our selling cycle in the quarter. We remain confident in the financial and competitive benefits these strategies will bring to the Company and expect our productivity to substantially improve throughout Fiscal 2005.
"Our off-site Managed Services businesses, comprised of legal document services and digital printing, experienced another quarter of softness and produced lower revenues and reduced operating profitability compared to the prior year. In contrast to our other service offerings, these two businesses are short-cycle in nature and are highly price competitive. As a result, we are taking aggressive actions to improve the flexibility of the cost structure of these businesses.
"The strategic priorities we set for 2005 around operating leverage, core growth, and expansion are well underway. We have seen significant progress in many of our growth platforms and will continue to invest in efficiency initiatives to achieve future operational improvements," said Espe.
Net Sales of $461.9 million, which includes the sale of copier/printer multifunction equipment and supplies, increased by 2.3% from the first quarter of Fiscal 2004. Growth in copier/printer equipment revenues, which represents approximately 90% of Net Sales, was 3.5% and was primarily driven by the current leasing model and strong performance in many of our growth platforms such as national accounts, on-site Managed Services and Europe. The current leasing model provides the Company with origination fees for leases funded in the U.S. and Canada as part of the Company's strategic alliance with GE. Without the leasing model, equipment revenues would have been down 5.6% over the first quarter a year ago due to weakness in North American equipment sales. Gross profit margin on Net Sales declined to 28.4% from 29.5% in the first quarter of Fiscal 2004, due primarily to the mix of products sold and growth in lower margin national account revenues. However, gross profit margin increased sequentially from 27.3% in the fourth quarter of Fiscal 2004.
Services of $602.9 million, which includes revenues from the servicing of copier/printer equipment ("Customer Service"), Managed Services (on- and off-site), Professional Services, rentals and other fees, increased by 2.9% from the first quarter of Fiscal 2004. Overall Services growth was driven by growth in Customer Service, on-site Managed Services, and Professional Services, as well as profit sharing and fees received from GE under the strategic alliance. Customer Services, which represents approximately 60% of Services, grew by 2.1% compared to the prior year, fueled primarily by double-digit growth in color and production copy volumes. Total services growth was partially affected by declines in off-site Managed Services. Gross profit margin on Services held constant with the same period a year ago, at 40.0%.
Finance Income of $30.8 million declined by 68.9% from the prior year due to the Company's transition out of captive lease financing in North America. Most of the finance income from the retained U.S. portfolio is expected to run off by 2007. Gross profit margin on finance income increased to 74.4% for the first quarter from 64.7% for the same period a year ago, due to the higher margins associated with the European and retained U.S. leasing portfolios.
Selling and Administrative Expenses declined by $18.7 million from the first quarter of the prior year, primarily as a result of the leasing transition. Sequentially, expenses declined by $22.0 million reflecting lower selling expense, administrative headcount reductions, and ongoing centralization actions to leverage process and economic efficiencies. Expenses also benefited in the quarter from a refund of administrative fees from GE.
Taxes on income for the first quarter of Fiscal 2005 were calculated at an effective income tax rate of 32.5% compared to 37.8% for the first quarter of Fiscal 2004. The decrease in the effective income tax rate was due to a benefit of $1.3 million received during this quarter from tax planning strategies in Europe. The effective income tax rate for the remaining quarters of Fiscal 2005 will be 38.0%, resulting in a full year effective tax rate of 37.0%.
Balance Sheet and Liquidity
Unrestricted cash was $292 million as of December 31, 2004, with cash used for operations in the first quarter totaling approximately $92 million compared to a use of cash in the prior year's first quarter of $122 million. Capital expenditures on operating rentals and property and equipment, net of proceeds, totaled $17 million for the quarter compared to $13 million for the same period a year ago. As a result of a reduction in debt in the quarter, the total debt to capital ratio decreased to 47% from 49% at the end of Fiscal 2004.
During the first quarter, the Company repurchased 1.96 million shares of IKON's outstanding common stock for approximately $22 million. Since March 31, 2004, the Company has repurchased 8.7 million shares for approximately $99 million, leaving $151 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 March 10, 2005 to holders of record at the close of business on February 22, 2005.
"We are energized by the work we have underway - the success we're seeing in services growth combined with actions we're taking to drive further expense reductions," said Mr. Espe. "As we ramp up our strategic initiatives for 2005, including improvements in our sales coverage model, we are taking steps to align our cost structure and balance selling and administrative expenses to ensure we meet our goals. We are maintaining our full year expectations for earnings per diluted share in the range of $.63 to $.68. This outlook excludes any charges we may incur to improve our business, including possible charges for the off-site Managed Services business, as well as the expensing of stock options beginning in the fourth quarter of Fiscal 2005.
"Second quarter earnings per diluted share are expected to be in the range of $.14 to $.16," concluded Mr. Espe.
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