ST. PETERSBURG, Fla.-- Danka Business Systems PLC today reported fiscal year 2007 third quarter results.
On January 31, 2007, the Company completed the sale of its European operations to Ricoh Europe B.V. as described in the Transaction Description dated October 12, 2006 and the press release dated February 1, 2007 announcing the divestiture. For the third quarter ending December 31, 2006, our European Operations are included in the results from continuing operations.
On February 5, 2007, management concluded, after its review of its interpretation of Financial Accounting Standard No. 109, "Accounting for Income Taxes" and discussions with the Audit Committee of the Company's Board of Directors, that the Company should restate its previously filed financial statements for fiscal years ended March 31, 2006, 2005 and 2004, and for the interim quarterly periods in fiscal year 2007, to correct its accounting for its domestic income tax valuation allowance. The Company had previously established it valuation allowances assuming future taxable income would be generated from the turnaround of non-reversing book/tax timing differences for goodwill. It has been determined that the valuation allowances on Deferred Tax Assets should have been increased by $1.4 million for the fiscal year ended March 31, 2006.
In addition, the Company also is restating those previously issued financial statements to record the reduction to selling general and administrative expenses of $4.6 million relating to the recovery of workers' compensation insurance costs, originally recorded by the Company in fiscal year 2006, in the proper accounting periods. These adjustments were identified in fiscal year 2006 and correctly disclosed at that time as a correction of an error that was not material to the Company's prior financial statements.
Neither of the adjustments above, on their own, would require a restatement of our previously issued financial statements. However, combined, they trigger the restatement requirement as set forth in Staff Accounting Bulletin No. 108 issued by the Securities Exchange Commission. The Company does not believe that this restatement materially changes the overall trends of the Company, but rather moves these two adjustments into their correct accounting periods.
Accordingly, such financial statements previously filed by the Company and related independent registered public accountant's reports should no longer be relied upon. This conclusion and the matters set forth herein have been discussed with Ernst & Young LLP, the Company's independent registered public accountants. The Company will be filing an amended annual report on Form 10-K/A for the period ended March 31, 2006, and amended quarterly reports for fiscal year 2007 on Form 10-Q/A, as soon as practical, to include the restated financial statements. The Company's Form 10-Q for the quarterly period ended December 31, 2006 will reflect the necessary adjustments relating to tax and workers' compensation adjustments as do the financial statements set forth in this press release.
For the third quarter:
* The Company's operating loss from continuing operations was $1.2 million, versus a loss of $0.4 million in the prior year third quarter and earnings of $4.1 million last quarter. Adjusted operating earnings from continuing operations were $0.4 million, versus a loss of $0.4 million in the prior year third quarter and earnings of $4.9 million last quarter. The adjusted operating earnings exclude restructuring charges and $5.0 million in SG&A expenses relating to the sale of our European operations incurred in the third quarter of FY07. These sale costs will be reversed against the sale in the fourth quarter.
* Consolidated gross margin was 30.7%, which was down from 31.5% in the prior year quarter, and down from 32.7% sequentially.
* SG&A expenses were $76.8 million, or 32.8% of revenue. Excluding the $5 million deal costs mentioned above, the percentage of revenue reduces to 30.6%. These expenses were down 4.2%, or $3.4 million from the prior year quarter and up $7.2 million, or 10.4% sequentially.
* Total revenue was $234.4 million, which was 7.5% lower than the prior year quarter but up 4.3% sequentially. Retail equipment and related sales was $80.5 million, down 14.9% from the prior year quarter but up 2.4% sequentially. Retail service revenue was $116.3 million, down 1.0% from the prior year quarter but up 2.3% sequentially.
"This marks the third consecutive quarter of adjusted operating earnings and although we are disappointed with the final results for the quarter, it does give credence to our initiatives and our execution. Our retail equipment and related sales revenue did not stabilize in the quarter as we expected, but we anticipate this will occur in future quarters based on the focus we are placing in this area. We know from survey results that our service is one of the best in the industry and we are working hard to get our billing accuracy consistent with that high standard. With the divestiture of our European operations to Ricoh, we are now able to focus all of our resources and efforts on growing the U.S. business," said A.D. Frazier, Danka's Chairman and Chief Executive Officer.
For the nine months:
* The Company's operating loss from continuing operations was $2.7 million, versus a $14.9 million loss in the first nine months of the prior year. Adjusted operating earnings from continuing operations were $14.8 million, versus a $7.4 million loss in the first nine months of the prior year. The adjusted operating earnings exclude restructuring charges, loss on the sale of a subsidiary, and expenses relating to the sale of our European operations.
* Consolidated gross margin was 32.4%, which is consistent with 32.5% in the first nine months of the prior year.
* SG&A expenses were $221.0 million, or 31.3% of revenue and down from $263.5 million, or 33.6% of revenue in the first nine months of the prior year, representing a 16.1% decrease.
* Total revenue was $706.8 million, which was 10.0% lower than the same period of the prior year. Retail equipment and related sales was $245.1 million, down 17.8% from the prior year period. Retail service revenue was $351.3 million, down 4.1% from the prior year period.
The Company also released a press release in the United Kingdom today which, under International Financial Reporting Standards ("IFRS"), shows the Company's European Operations as discontinued operations.
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