MALVERN, Pa.--July 28, 2005-- 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, 2005. Net income from continuing operations for the third quarter was $26 million, or $.18 per diluted share, consistent with the Company's previously communicated expectations of $.16 to $.18.
Total revenues for the third quarter were $1.1 billion, which represents a decline of 4% compared to the same period a year ago, primarily due to the transition out of captive leasing in North America. Targeted revenues, which represent 98% of total revenues and exclude revenues from U.S. and Canadian lease financing and deemphasized technology hardware, declined by 1% versus the prior year. Foreign currency translation provided a 0.8% benefit to total revenues.
"We made significant progress on a number of our key initiatives during the third quarter," stated Matthew J. Espe, IKON's chairman and chief executive officer. "We grew digital office placements in both the black and white and color equipment segments. Customer Services improved sequentially, driven by increased copy volumes and a more favorable mix of color. In addition, Europe had another strong quarter of revenue and earnings growth."
"While our core business continues to grow, we are focused on cost and expense management in a market where average selling prices and margins remain under pressure," continued Espe. "The ongoing reductions in selling and administrative expenses, as well as the restructuring actions taken earlier in the year, continue to benefit our bottom line. Other operational improvements in the quarter included the development of a strategy to improve billing quality, based upon the completion of our billing review, and additional headcount and facilities reductions. In addition, we closed on the sale of substantially all of our operations in France shortly after the quarter end. We will continue to serve our pan-European customers through an ongoing presence in Paris in a more cost-effective manner."
Net Sales of $487 million, which includes the sale of copier/printer multifunction equipment and supplies, decreased 5% from the third quarter of fiscal 2004. Targeted Net Sales, which excludes deemphasized technology hardware revenues and represents approximately 99% of Net Sales, decreased 3%, including a decline in Equipment revenues of 2%. The equipment decline was primarily driven by lower average selling prices and the continued shift from the light production to the office equipment segment, partially offset by an 8% increase in color. Gross profit margin on Net Sales declined to 24.6% from 28.5%, due primarily to competitive pricing, aggressive promotions, and a higher percentage of state and local government business.
Services revenues of $586 million, which includes Customer Services revenues from the servicing of copier/printer equipment, on- and off-site Managed Services, Professional Services, rentals and other fees, decreased 0.3% from the third quarter of fiscal 2004. The decline in overall Services revenues was driven by a 2% decrease in Managed Services, partially offset by 0.2% growth in Customer Services, which represents approximately 61% of Services revenues. The modest growth in Customer Services resulted from increased copy volumes due to strength in digital and color equipment. The decline in Managed Services was driven by a decline in Legal Document Services, due to site closings in the second quarter designed to improve profitability, partially offset by growth in on-site Managed Services. Gross profit margin on Services increased to 42.8% from 42.1% a year ago, driven by a 2 point increase in Customer Services margins due to a lower cost structure as a result of the restructuring actions taken in the second quarter of fiscal 2005.
Finance Income of $25 million declined 40% 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 fiscal 2007. Gross profit margin on finance income increased to 75.3% for the third quarter from 72.6% for the same period a year ago.
Selling and Administrative Expenses declined $24 million from the third quarter of the prior year, due to aggressive expense management and lower administrative expenses resulting from the benefit of restructuring actions taken in the second quarter. As a result of the reduction in administrative expenses, selling and administrative expenses as a percentage of revenues declined to 30.9% from 31.7% in the third quarter a year ago.
Balance Sheet and Liquidity
Unrestricted cash was $289 million as of June 30, 2005, with cash used for continuing operations in the third quarter totaling approximately $34 million compared to $444 million for the third quarter of fiscal 2004. Capital expenditures on operating rentals and property and equipment, net of proceeds, totaled $10 million for the quarter compared to $19 million for the same period a year ago. The total debt to capital ratio decreased to 43% at the end of this quarter from 50% as of September 30, 2004.
Cumulative share repurchases under the Company's fiscal 2004 Board authorization remain at 9.8 million shares, or $112 million, leaving $138 million remaining under the share repurchase program, subject to the terms of the Company's Credit Facility. The Company expects its fourth quarter repurchase activity to be above recent trends.
IKON's Board of Directors approved the Company's regular quarterly cash dividend of $.04 per common share, payable on September 10, 2005 to holders of record at the close of business on August 22, 2005.
"As the aggressive actions we are taking to grow our volumes will affect margins in the near term, for fiscal 2005 we now expect earnings from continuing operations to be in the range of $.60 to $.63, excluding any charges we may take to improve our business and any actions regarding stock option expensing," said Espe. "We will continue our diligent focus on cost and expense control to offset pricing pressures in an effort to achieve an operating margin greater than 5% in fiscal 2006, which would put us on track for our goal of 6% or greater in fiscal 2007. As we drive improvements in our sales coverage model, we are taking steps to align our cost structure and selling and administrative expenses to ensure we meet these goals."
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