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IKON Announces Q1: Net Sales Down 4.9%

Press release from the issuing company

VALLEY FORGE, Pa.--Jan. 29, 2004-- IKON Office Solutions, the world's largest independent channel for document management systems and services, today reported results for the first quarter of its fiscal year which ends on September 30, 2004. Net income was $27.7 million, with earnings per diluted share for the first quarter of $.18, on track with the Company's expectations of $.17 to $.19 for the quarter. Total revenues were $1.14 billion for the first quarter of Fiscal 2004, representing a decline of 1.8% from the same period a year ago. Sales of total copier/printer equipment, which is reported in Net Sales, was flat for the quarter compared to the prior year, as softness in lower-segment black & white was offset by exceptional growth in color. Sales of color technologies grew by approximately 45% from the prior year, as higher quality and more affordably priced products introduced by both Canon and Ricoh throughout 2003 continue to drive the acceptance of color into the workplace. Year-to-year declines in total revenues were attributable to technology hardware, supplies and equipment service declines, which performed as expected for the first quarter. Foreign currency translation provided a 1.9% benefit compared to the prior year. "We started off the new fiscal year with some exciting strategic developments, and earnings results that were on track with our first quarter expectations," stated Matthew J. Espe, IKON's Chairman and Chief Executive Officer. "In the first quarter, we made important advances in our balanced approach for growing shareholder value through enhanced growth platforms, operational efficiencies, and improved financial flexibility. In addition, we made two additions to our board of directors, which expands our expertise in the areas of global marketing, distribution, and finance. "For example, to strengthen our growth platforms centered on supplier integration, we announced an expanded relationship with HP becoming their national distribution partner for delivering document management services and HP's new networked, multifunction peripherals. In the area of channel expansion, we continued to broaden our market reach beyond the middle market, tripling the resources dedicated to our national accounts program. In the first quarter, we continued to accumulate new multi-million dollar, long-term contract wins in our national accounts program, contributing to a more than 40% increase in revenues attributable to these customers over the prior year. To ensure we continue to seize the opportunities in color, the fastest-growing segment of the copier/printer market, we launched the IKON CPP 8050, a next-generation, high-speed digital color printing and copying system co-branded with Konica-Minolta. Combined with IKON's powerful mix of color technologies from Canon and Ricoh, IKON's color portfolio is unmatched, and early results give us added confidence that this product will be a great contributor to strong color performance for Fiscal 2004. "We also made substantial progress in improving our financial flexibility in the first quarter of Fiscal 2004. In December, we announced an agreement with GE Vendor Financial Services, which will effectively transition IKON out of the captive leasing business in the U.S. and Canada. This transaction, expected to close in the second quarter of Fiscal 2004, unleashes the value of our captive leasing organization while substantially transforming our balance sheet and future capital requirements. "Throughout the remainder of Fiscal 2004, we'll continue to focus on our three fundamental drivers of long-term shareholder value - building solid growth initiatives to expand our market reach, developing a highly responsive and cost efficient infrastructure, and achieving greater financial flexibility to ensure we can return value to our shareholders and respond more aggressively to new market opportunities. We are already seeing great traction in many of our growth platforms and continued operational benefits from our efficiency investments that will benefit future periods. We look forward to exciting developments throughout 2004 and continued execution of our strategic priorities to position IKON as the largest and most effective independent sales and service channel in the document management industry," concluded Espe. Financial Analysis Net Sales of $520.5 million, which includes the sale of copier/printer multifunction equipment, supplies and technology hardware declined by 4.9% from the first quarter of Fiscal 2003. Technology hardware declined by approximately $14 million, as the Company completes the transition to third-party distribution for these computer-related products. Supply sales declined by $13 million, impacted by lower demand for fax and other low-end supplies compared to the prior year. Accounting for approximately 75% of Net Sales, copier/printer revenues were flat compared to the first quarter of Fiscal 2003. Color revenues were exceptionally strong, growing by approximately 45% from the first quarter of Fiscal 2003. In addition, the Company continues to place the largest number of segment 6 Canon imageRUNNER110/150's in the industry. Equipment revenues, as a result, have continued to shift to a stronger mix of color and high-end, segment 5 & 6 black & white technologies, which together approached 40% of equipment revenues for the quarter. Gross profit margin on Net Sales declined to 31.0% from 34.2% in the first quarter of Fiscal 2003, due to price competition, product, and customer mix compared to the same period last year, but demonstrated slight improvement from the second half of Fiscal 2003. Services of $516.9 million, which include revenues from the servicing of copier/printer equipment, and outsourcing and other services, grew by .3% from the first quarter of Fiscal 2003. Revenues from the servicing of copier/printer equipment are linked closely to the number of copies customers generate on copier/printer equipment as well as the price per copy associated with the copier/printer that the copy is generated on. Compared to the first quarter of Fiscal 2003, equipment service revenues declined by 3.8% as growth in total copy volume was offset by price and product mix. Sequentially, equipment service demonstrated a seasonal strengthening, with 2.7% growth from the fourth quarter of Fiscal 2003. Outsourcing and other services grew by 5.8% from the prior year, helped by improving growth in facilities management, IKON's largest outsourcing offering, and a large, one-time contract in commercial imaging. Gross profit margin on Services of 39.8% remained constant. Finance Income grew by 4.3% from the prior year to $99.0 million due to continued growth in the lease portfolio throughout Fiscal 2003. In the first quarter of Fiscal 2004, approximately 83% of IKON's equipment revenues in the U.S. were financed through IKON's largest leasing subsidiary, IOS Capital, LLC, compared to 78% in the prior year. Portfolio quality at IOS Capital remains stable, with charge-offs and collections in the first quarter showing improvement over the same period in the prior year. Gross profit margin from finance subsidiaries increased to 64.7% for the first quarter, from 58.9% for the same period a year ago due to a continued decline in cost of capital throughout Fiscal 2003. Selling and Administrative Expenses declined by $7.3 million from the first quarter of the prior year, driven by lower selling expense, and continued expense and headcount controls. Balance Sheet and Liquidity Unrestricted cash was $188 million as of December 31, 2003, with cash used for operations in the first quarter totaling approximately $122 million compared to a use of cash in the prior year's first quarter of $55 million. Capital expenditures on operating rentals and property and equipment, net of proceeds, totaled $13 million for the quarter compared to $19 million for the same period a year ago. Cash performance for the first quarter is in line with the Company's original full year expectations for cash from operations of $325 to $350 million. IKON's Board of Directors approved the Company's regular quarterly cash dividend of $.04 per common share, payable on March 10, 2004 to holders of record at the close of business on February 23, 2004. Outlook "We are energized by our prospects for the future and expect sequential improvement in both revenue and earnings performance, led by strengthening equipment sales. As a result, earnings for the second quarter are expected to be in the range of $.19 to $.22. Of course, all communicated expectations exclude any change in results that could be attributable to the closing of the IOS Capital/GE transaction," concluded Mr. Espe.