MALVERN, Pa., Apr 24, 2008 -- IKON Office Solutions, the world's largest independent channel for document management systems and services, today reported results for the second quarter of fiscal 2008, which ended March 31, 2008. For the second quarter, earnings per diluted share were $0.24, at the high end of the Company's improved outlook of $0.22 to $0.24 per diluted share provided on April 10, 2008. For the second quarter of fiscal 2007, earnings per diluted share were $0.24.
Total revenue for the second quarter of fiscal 2008 was $1.1 billion, a 1 percent increase year over year, including 1.4 points of currency benefit. Total gross profit increased $6 million year over year to $351 million and resulted in a 30 basis point improvement in gross profit margin. Selling and administrative expenses increased $6 million year over year to $299 million, primarily due to higher sales compensation-related expenses and currency, partially offset by lower administrative expenses. Selling and administrative expenses were 28.2 percent of revenue in the second quarter of fiscal 2008 versus 27.9 percent in the second quarter of fiscal 2007.
Operating income for the second quarter of fiscal 2008 was $52 million, or 4.9 percent of revenue, unchanged from the prior-year quarter. Interest expense, net of interest income, increased $7 million year over year to $16 million and weighted average fully diluted shares declined 27 percent to 94 million, primarily due to the Company's share repurchase-related activity. The Company's effective tax rate for the second quarter was 36 percent, up from 28 percent in the prior-year quarter. Net income was $22 million in the second quarter of fiscal 2008, compared with $30 million in the prior-year quarter.
"We are gaining traction from the actions we took to improve our financial performance and built momentum through the quarter," said IKON Chairman and Chief Executive Officer Matthew J. Espe. "Our new IKON U.S. leadership is off to a great start. We generated strong cash flow and we are on track to reduce costs and expenses by $25 million in fiscal 2008 as part of our spending reduction plan announced in January."
Second Quarter Fiscal 2008 Financial Details
Equipment revenue, which includes the sale of copier/printer multifunction products, was $455 million, consistent with the prior-year quarter. Total Equipment revenue was driven primarily by growth in the U.S. color office and color production segments of 1 and 18 percent, respectively; growth in Europe; and a currency benefit of 1.6 points; partially offset by lower revenue in the U.S. black and white office and production segments of 7 and 5 percent, respectively. Gross margin on Equipment increased to 26.6 percent from 25.6 percent due to higher average selling prices and a higher mix of used equipment.
Customer Service and Supplies revenue, which includes revenue from the servicing of copier/printer equipment and direct sales of supplies, was $344 million, consistent with the prior-year quarter. This performance reflects growth in Europe and a currency benefit of 1.8 points, offset by lower revenue in North America. Customer Service and Supplies revenue in North America declined primarily due to lower total page volume, a decline in analog copier machines in field (MIF) as expected, and a 1 percent decline in digital copier MIF. Total North American digital copier MIF, including On-site Managed Services, increased 2 percent year over year. Gross margin on Customer Service and Supplies was 40.0 percent in the second quarter of fiscal 2008, compared with 41.3 percent in the second quarter of fiscal 2007, primarily due to cost declines in North America, which did not keep pace with revenue.
Managed and Professional Services revenue was $211 million, up 6 percent year over year. On-site Managed Services revenue, which represents approximately two-thirds of total Managed and Professional Services, increased 7 percent. Professional Services grew 9 percent. Off-site Managed Services increased 3 percent. Gross margin on Managed and Professional Services increased to 28.4 percent from 27.3 percent a year ago, primarily due to strong Professional Services revenue on relatively fixed costs and continued contract profitability growth in On-site Managed Services.
Rental and Fees revenue of $34 million declined 3 percent from the prior-year quarter, primarily due to lower rental revenue. Gross margin improved to 77.8 percent from 75.5 percent in the prior year. Other revenue of $16 million declined from $19 million year over year.
Balance Sheet and Liquidity
During the second quarter, the Company's cash balance increased $61 million to $203 million. The Company reduced inventory $89 million to $268 million and reduced accounts payable $66 million to $242 million in the quarter.
In the first six months of fiscal 2008, the Company generated $61 million of cash from operations, compared to a use of $11 million in the first half of fiscal 2007. Capital expenditures on operating rentals and property and equipment, net of proceeds, totaled $24 million in the first six months of fiscal 2008, compared with $20 million in the comparable period of fiscal 2007. As a result, free cash flow was $37 million in the first half of fiscal 2008. Free cash flow improved $68 million year over year.
In the second quarter, the Company paid $4 million in dividends to shareholders. In April, IKON's Board of Directors approved the Company's regular quarterly cash dividend of $0.04 per common share, payable on June 10, 2008, to holders of record at the close of business on May 19, 2008. At March 31, 2008, actual shares outstanding were 94 million.
During the balance of fiscal 2008, the Company expects to purchase $25 million of its shares as part of its repurchase program. In the near term, the Company expects to repurchase its shares and pay dividends within the covenants of its existing debt agreements and to deploy remaining available cash to reduce debt. In early April, the Company announced the redemption of $50 million of its 2012 Notes. As a result of this partial redemption, the Company expects to incur a $1.7 million pretax loss on the early extinguishment of debt in the third quarter of fiscal 2008.
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