MALVERN, Pa.--Jan. 26, 2006-- IKON Office Solutions, the world's largest independent channel for document management systems and services, today reported results for the quarter ended December 31, 2005. Net income from continuing operations for the first quarter of fiscal year 2006 was $28 million, or $0.21 per diluted share, including a $0.04 gain related to the previously announced sale of Kafevend, a non-strategic UK business, and a $0.01 charge for the loss from early extinguishment of debt. Excluding these items, first quarter earnings per diluted share from continuing operations were $0.18, consistent with the Company's previously communicated range of $0.16 - $0.18. Total revenue for the first quarter of fiscal year 2006 was $1.04 billion, compared to $1.09 billion for the first quarter of fiscal year 2005, a decline of 4% year over year. Targeted revenue, which represents 97% of total revenue, was flat for the quarter. Currency negatively impacted revenue growth by 1 point. Targeted revenue includes all revenues except those categorized as "Other." Other revenue includes finance income and revenue generated by the remaining technology services and hardware businesses. Prior to fiscal year 2006, Other revenue also included revenue from the Company's operating subsidiaries in France and Mexico, which were sold during fiscal year 2005, and revenue from Kafevend, which was sold in the first quarter of fiscal year 2006. Selling and administrative (S&A) expenses decreased 10%, or $35 million, to $314 million, compared to the first quarter of fiscal year 2005. This decline resulted in a lower S&A expense-to-revenue ratio of 30.1%, compared with 32.1% for the first quarter of fiscal year 2005. Operating margin increased to 5.1% in the quarter. Excluding the gain on the sale of Kafevend, operating margin was 4.6%, representing a 50 basis point improvement over the first quarter of fiscal year 2005. "Our results in the first quarter demonstrate continued progress and represent a great start to the year," said Matthew J. Espe, IKON's Chairman and Chief Executive Officer. "New digital equipment revenue grew in the office, production and color segments. In our services business, we increased Professional Services revenue by 23% and North American on-site Managed Services revenue by 4%, compared to the first quarter of fiscal year 2005. In Europe, strong growth in Germany and Denmark contributed significantly to European revenue. In addition, we continued to reduce selling and administrative expenses and increased our operating income margin, resulting in EPS growth. "This quarter's results are consistent with the plan we presented during our Investor Conference in November 2005," Espe said. "We attained the high end of our EPS range for the quarter, our selling and administrative expense-to-revenue ratio improved to 30% and our operating income margin is approaching 5%." First Quarter 2006 Financial Details Equipment revenue of $425 million, which includes the sale of copier/printer multifunction products, increased 4% from the first quarter of fiscal year 2005. The year over year increase was driven by growth in the color market and the black and white production market. Gross margin on equipment declined to 23.9% from 28.8% in the first quarter of fiscal year 2005, due to a combination of factors, including mix shift between new and used equipment, a significant increase in the mix of color-capable products with lower-than-historical color margins, continued competitive pressure in the color segment, and lease-end activities. Customer Services and Supplies revenue of $371 million, which includes revenue from the servicing of copier/printer equipment and direct sales of supplies, declined 2% compared to the first quarter of fiscal year 2005. Revenue continued to be impacted by the rapid decline in the analog equipment base, partially offset by continued growth in the digital equipment base. Gross margin on Customer Services and Supplies increased to 46.4% from 44.8% a year ago, driven by an improvement in parts costs and a lower cost structure in North America, as well as a continued focus on cost reduction and productivity improvements. Managed and Professional Services revenue of $176 million, which includes both on-site and off-site Managed Services, as well as Professional Services, declined 2% compared to the first quarter of fiscal year 2005. Revenue growth in Professional Services and on-site Managed Services was offset by a revenue decline in off-site Managed Services. Gross margin on Managed and Professional Services increased to 25.4% from 24.7% a year ago, due to improved margins in Professional Services and on-site Managed Services, partially offset by a lower mix of higher-margin off-site Managed Services. Rental and Fees revenue of $40 million declined 8% and gross margin decreased to 68.3% from 71.9% a year ago due to a decline in higher-margin renewal sharing revenue on certain lease-end activities. Other revenue of $30 million declined 61% compared to the first quarter of fiscal year 2005, primarily due to the sale of non-strategic businesses and the continued runoff of the U.S. retained leasing portfolio. Substantially all of the finance income from the retained portfolio is expected to run off by the end of fiscal year 2007. Balance Sheet and Liquidity Unrestricted cash was $266 million as of December 31, 2005, with cash used in continuing operations totaling $37 million for the first quarter, primarily due to annual year-end incentive payments made in the quarter. Capital expenditures on operating rentals and property and equipment, net of proceeds, totaled $8 million for the first quarter, compared to $17 million for the first quarter of fiscal year 2005. The total debt-to-capital ratio decreased to 42% as of December 31, 2005, from 47% as of December 31, 2004. Consistent with its capital structure objectives, the Company purchased 3.3 million shares of outstanding common stock for approximately $33 million during the quarter. IKON's Board of Directors approved the Company's regular quarterly cash dividend of $0.04 per common share, payable on March 10, 2006 to holders of record at the close of business on February 21, 2006. Outlook "Looking ahead, we remain focused on executing our long-term plan and continue to address our business challenges, including equipment gross profit margin and the performance of our off-site Managed Services business," continued Espe. "We are working on these issues with the same commitment that we have applied to increasing equipment revenue and improving operating margin. "Our expectations for fiscal year 2006 earnings per diluted share from continuing operations remain in the previously communicated range of $0.70 to $0.75, excluding any non-recurring items. For the second quarter, we expect earnings per diluted share from continuing operations to be between $0.16 and $0.18, an increase of over 30% as compared to the $0.12 per diluted share earned in the second quarter of fiscal year 2005, which excludes the impact of certain charges incurred in that quarter. In addition, we remain on track to achieve our previously communicated 2006 fiscal year expectation of targeted revenue flat to up 1%."