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IKON Announces Results for the Q2: Earnings in Line With Expectations

Press release from the issuing company

VALLEY FORGE, Pa.--April 29, 2004-- IKON Office Solutions, the world's largest independent channel for document management systems and services, today reported results for the second fiscal quarter ended March 31, 2004. Revenues of $1.18 billion grew modestly in the second quarter compared to the prior year, with foreign currency translation providing a 2.2% revenue benefit. Net income of $30.2 million, or $.19 per diluted share, includes a pretax loss of $12.1 million, or $.04 per diluted share, from the sale of the Company's U.S. leasing operations; a pretax loss on early extinguishment of debt of $3.1 million, or $.01 per diluted share, primarily related to the cancellation of the Company's credit facility on March 31; and, a tax benefit of $4.7 million, or $.02 per diluted share, associated with the utilization of net operating losses as a result of the tax gain generated on the sale of the U.S. leasing operations. Excluding these items, earnings per diluted share for the second quarter of Fiscal 2004 were $.22. "Our results reflect the investments made to strengthen our service offerings and to expand our sales channels into the higher growth areas of the market, such as color and high-end black & white technologies that continue to fuel the aftermarket," stated Matthew J. Espe, IKON's Chairman and Chief Executive Officer. "While the equipment market continues to be competitive, we experienced positive trends in our focus areas of color and high-end production, as well as our other two strategic areas: aftermarket and document services, which represent over 54% of the Company's revenue mix. For example, sales of color technologies grew 62% in the quarter, which will continue to provide a steady source of profitable aftermarket revenues from equipment service and consumables in the future. Furthermore, the added resources we deployed this fiscal year to support our national account program delivered over 100% growth in revenues over the prior year, making the initiative another contributor to the improvement in aftermarket we experienced this quarter. We are also benefiting from an increasing demand for our expertise in Professional Services. These services, as well as our portfolio of workflow enablers from a range of industry leaders, provide added advantage for IKON in the marketplace, as integrated workflow strategies gain increasing importance with customers. "We also experienced operational improvements from our e-IKON investment, particularly in supply chain which delivered another record level of inventory turns for the quarter. In addition, the improvements we've achieved in our Canadian operations over the last several quarters enabled us to recognize a deferred tax benefit on net operating loss carryovers in Canada of $2.6 million. All of these improvements indicate that our growth platforms and efficiency investments are beginning to yield results. With the completion of our U.S. leasing transaction with GE Commercial Finance ("GE") and the pending transaction for our Canadian lease portfolio, we can now sharpen our focus on our core business as a global document management sales and service channel, and we look forward to the opportunities additional financial flexibility will provide to further improve our leadership position within the industry. "Our financial position today continues to strengthen," continued Espe. "Unrestricted cash was $853 million at the end of the second quarter, and total debt has declined by over $1.1 billion from the second quarter a year ago. We are already on track in the third quarter to further strengthen our capital structure with the completion of our recent tender for $250 million of the June 2008 notes. The additional resources from the U.S. and Canadian leasing transactions will give us the opportunity to invest in our business initiatives and drive our long-term growth and operational efficiency." Financial Analysis Supply revenues and related costs sold as part of bundled service contracts were reclassified from Net Sales to Services in the second quarter. Reclassification adjustments for 2002, 2003 and the first quarter of Fiscal 2004 can be found on the Company's investor relations site of IKON.com. There is no impact on total revenues, operating margin, or net income for these periods. Net Sales of $500.7 million, which includes the sale of copier/printer equipment, direct supplies and technology hardware, declined by 1.8% from the second quarter of Fiscal 2003. Sales of technology hardware declined by $5 million in the quarter, while direct supply sales remained relatively flat compared to the prior year. Sales of copier/printer equipment declined 1% from the prior year, with declines in lower-end, segment 1 to 4 and fax offsetting strong color and high-end black & white production performance over the prior year. Color equipment revenues grew by 62% in the quarter, due to the strong portfolio of products from industry leaders -- Canon, Ricoh, and the IKON CPP 8050 co-branded with Konica-Minolta. The Company also continued to build its installed base of high-end black & white equipment with installations of Canon imageRUNNER110/150s increasing by 20% from the second quarter of the prior year. Revenues from color, as well as high-end black & white equipment, represent an increasingly larger portion of the Company's product mix. This strengthened mix will continue to be a key factor in supporting future services growth. Gross profit margin on Net Sales declined to 28.3% from 30.5% in the second quarter of Fiscal 2003, due primarily to continued market competitiveness, customer mix and write-offs in the quarter. Services of $585.4 million, which include revenues from the servicing of copier/printer equipment and other document services, grew by 2.3% from the second quarter of Fiscal 2003. Revenues from the servicing of copier/printer equipment grew by 2.6% from the prior year, as the Company begins to realize the benefits of a stronger mix of color and high-end technologies and strategic investments that enhance the potential for aftermarket revenues. Other document services, which include outsourcing and Professional Services, grew by 1.8%, the majority of which was due to growth in Professional Services. Gross profit margin on Services of 40.8% increased from 40.5% in the prior year due to continued productivity and operational improvements. Finance Income of $98.3 million grew by 1.3% from the prior year. Gross profit margin from finance subsidiaries was 65.1% for the second quarter, up from 62.2% for the same period a year ago due to a continued decline in cost of capital throughout Fiscal 2003. In the second quarter, approximately 84% of IKON's equipment revenues in the U.S. were financed through IOS Capital, LLC, IKON's former U.S. captive lease subsidiary. Beginning in the third quarter, these equipment sales will be financed through the Company's strategic alliance with GE that effectively transitions IKON out of the captive finance business in North America. Under the agreement with GE, IKON will receive origination fees and other revenue opportunities from GE. Operating income decreased to $49.5 million for the second quarter of Fiscal 2004 from $69.8 million a year ago, primarily due to the loss on divestiture of business described below and a higher level of Selling and Administrative expenses. Selling and Administrative expenses increased by $5.3 million from the prior year, due primarily to foreign currency translation and increases in pension and other benefits that were offset by operational improvements. As a percentage of revenues, Selling and Administrative expenses were 32.4% compared to 32.0% a year ago. Interest expense of $9.7 million declined by $2.9 million from the second quarter of Fiscal 2003, due to continued reductions in non-lease financing related debt. Divestiture of Business On March 31, 2004, the Company announced the completion of its previously announced transaction with GE for its U.S. leasing business. As part of the transaction, and subject to post-closing adjustments, IKON sold certain assets and liabilities of IOS Capital and transferred IOS Capital's facilities, systems and processes to GE. In addition, under the terms of a Program Agreement, GE has become IKON's preferred lease-financing source in the U.S. The Company has also signed a definitive agreement with GE to sell the Company's approximate CN$230 million Canadian lease portfolio to GE and, as part of this transaction, GE will also become IKON's preferred lease-financing source for its Canadian operations. The Canadian sale is subject to required regulatory approvals and customary conditions and is expected to close in the third quarter of Fiscal 2004. The Company incurred approximately $12.1 million, or $7.5 million net of tax, in expenses consisting primarily of accounting, legal and consulting fees and other miscellaneous expenses associated with the transaction. Balance Sheet and Liquidity Unrestricted cash was $853 million at the end of the second quarter, up significantly from the prior year due to cash proceeds received as a result of the transaction described above. A portion of the proceeds received on March 31 were used to repay the outstanding balance of the Company's U.S. lease financing conduit facilities, further improving the Company's financial position. As of March 31, 2004, current and long-term debt totaled $2.2 billion, of which approximately $1.2 billion is supported by lease receivable contracts totaling $1.6 billion. Since the second quarter of Fiscal 2003, debt has declined by $1.1 billion, and total debt to capital has declined to 56.3% from 67.7%. Loss on early extinguishment of debt of $3.1 million in the second quarter of Fiscal 2004 was primarily related to the cancellation of the Company's credit facility on March 31, 2004. The facility was terminated concurrent with the closing of the IOS Capital/GE transaction. The Company intends to replace the facility with terms more appropriate for its capital structure and growth objectives. IKON's Board of Directors approved the Company's regular quarterly cash dividend of $.04 per common share, payable on June 10, 2004 to holders of record at the close of business on May 24, 2004. Outlook The Company has revised expectations for Fiscal 2004 reflecting the impact of the IOS Capital/GE transaction, which includes the deployment of cash proceeds from the IOS Capital/GE transaction announced to date; but excluding the impact of any future deployment of cash proceeds. Fiscal 2004 earnings per diluted share are expected to be in the range of $.70 to $.75. Third quarter diluted earnings per share are expected to be in the range of $.15 to $.18. These expectations exclude the loss on divestiture and related tax benefit in the quarter, and losses on early extinguishment of debt. As a result of the completion of the tender for $250 million of the June 2008 notes, the Company expects to incur a pretax loss on early extinguishment of debt of approximately $32 million to $34 million in the third quarter of Fiscal 2004. Additional information regarding cash proceeds, use of cash, and pro-forma financial information are included on the slides that accompany today's conference call.