IKON Announces 2Q Results: 26% Increase in Earnings Per Share
Press release from the issuing company
Execution Continues to Generate Operational Improvements
VALLEY FORGE, Pa.--April 25, 2002--IKON Office Solutions, a leading provider of business communications solutions, today reported results for its second fiscal quarter ended March 31, 2002. Net income for the second quarter of Fiscal 2002 was $35.3 million, or $.24 per diluted share. These results represent a 26% increase over $.19 per diluted share (assumes impact of not amortizing goodwill in accordance with SFAS 142) in the prior year, exceeding the Company's expectations for this quarter.
"In an operating environment that continues to challenge the business community, we delivered another quarter of strong earnings and solid cash generation," stated James J. Forese, Chairman and Chief Executive Officer. "IKON has been on a consistent and well-defined strategic path to leverage the earnings potential of our powerful sales and service organization. For Fiscal 2002, we set out to deliver substantial earnings improvement following many of the revenue mix and infrastructure investments we have made, and our results to date clearly indicate that our strategies are on track."
Revenues for the second quarter of Fiscal 2002 were $1.22 billion, compared to $1.36 billion for the same period a year ago. The overall decline in revenues reflects both strategic decisions to exit and de-emphasize certain businesses in order to improve long-term profitability, and delays in customer decisions for procurement of copier/printer equipment due to the significant decline in economic conditions since the second quarter of last year. The Company's revenue strategy also includes an emphasis on higher-end products and larger accounts that maximize productivity and leverage the Company's broad array of solutions and service capabilities. These strategic shifts have continued to impact the top line while improving overall operational results.
Steady performance was achieved in the quarter in targeted growth areas as evidenced by increased sales of high-end black & white and production color devices and facilities management services. Growth in these areas was enhanced through continued expansion into more major and national accounts during the quarter. While equipment revenues remained more sensitive to the economic environment, the Company's other revenue sources, such as equipment service, outsourcing, and leasing, are more recurring in nature and therefore more insulated from shifts in the economic environment.
"We are executing our strategies on a consistent basis and becoming a leaner, more productive company. While earnings improvement remains our predominant focus in 2002, we have not lost sight of the importance of gaining market share and solidifying existing customer relationships," said Mr. Forese. "Our sales force is energized going into our second half, and we intend to maintain our drive to strengthen our leadership position in the industry and seize opportunities in targeted markets."
Net Sales, which includes the sale of copier/printer equipment, supplies, and technology hardware, declined 16% from the prior year. The decline in Net Sales is primarily attributable to the decline in technology hardware and sales of copier/printer equipment. The Company has been de-emphasizing sales of technology hardware as part of its margin improvement strategy as it shifts technology resources within the Company to support customer opportunities involving connectivity and document management consulting. While sales of copier/printer equipment demonstrated a sequential improvement from the first quarter, the year over year comparison was significantly impacted by this year's slower economic conditions. In addition, these results also reflect the decline in the sale of lower-end devices as the Company continues to realign its product mix to enhance margins and improve overall profitability. Sales of higher-end, segment 5 and 6 equipment and production color devices continued to demonstrate strong, double-digit growth compared to the prior year.
Service & Rentals, which primarily includes revenues from the servicing of copier/printer equipment, and outsourcing and other services, declined 6% from the prior year. Copier/printer service revenues increased slightly from the prior year due to product mix strategies focused on improving aftermarket revenue streams. Outsourcing and other services declined from the prior year primarily due to the downsizing, sale, and closure of certain non-strategic businesses - a strategy that has successfully contributed to strengthened operational results. Facilities management, the Company's largest outsourcing offering, continued to deliver growth in the quarter, despite a slight slowdown in customer activity due to general economic conditions.
Finance Income grew 6% from the prior year due to continued growth in the lease receivables portfolio and longer average lease terms. In North America, more than 78% of IKON's customers utilized IOS Capital, the Company's U.S. captive leasing organization, for equipment financing in the first six months of the fiscal year.
Total Gross Profit improved over the prior year to 38.6% of revenues due to productivity improvements, product mix strategies, and strong fundamental and strategic disciplines throughout the organization.
Selling and Administrative Costs declined $57.1 million from the prior year as the Company moves toward its goal of removing over $190 million in costs from Fiscal 2001 levels through operational investments, revenue strategies, disciplined cost controls throughout the organization, as well as the elimination of approximately $10 million of goodwill amortization under SFAS 142.
Operating Margin was 5.7% compared to 3.6% in the second quarter a year ago, or 4.4% assuming goodwill amortization was not expensed in the second quarter of Fiscal 2001. This increase reflects the benefits of the Company's ongoing work in streamlining both its revenue composition and infrastructure to achieve significant long-term operating margin improvement.
"We are encouraged by our operational progress and are looking for even more improvement for Fiscal 2002, with earnings per diluted share now expected to be in the $.87 - $.92 range, compared to our previously communicated range of $.84-$.89," said Mr. Forese. "Our strategies are delivering their intended results, and we anticipate continued execution in our second half as we place additional focus on growing the strategic areas of our business. Revenues are anticipated to decline 6% to 8% for the year. We are maintaining a cautious stance on revenue given the economic environment. As we have said before, `we are positioning the Company for growth, but not counting it,' as we work to deliver substantial earnings improvements for Fiscal 2002. Third quarter earnings should be in the range of $.23 to $.26 per diluted share, on a revenue decline of 5% to 7%, with the benefit of typically stronger equipment and equipment service revenues offset, in part, by increased selling costs and increased costs related to our Oracle e-business project."
"Our balance sheet continues to strengthen and benefit from improved asset management," continued Mr. Forese. "Our cash generation was strong in the second quarter, with free cash flow for the first half of Fiscal 2002 ahead of expectations. As a result, we are increasing our full year free cash flow expectation to a range of $220 million to $230 million."
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