IKON Announces Third Quarter 2007 Results
EPS of $0.23, In Line with Company Guidance. Company Continues to Improve Revenue Trends.
MALVERN, PA, July 26, 2007 - IKON Office Solutions (NYSE:IKN), the world's largest independent channel for document management systems and services, today reported results for the third quarter of fiscal 2007 ended June 30, 2007. For the third quarter, net income was $29 million, or $0.23 per diluted share, representing a 15% increase over the $0.20 in the third quarter
of fiscal year 2006, and in line with the Company's previously communicated guidance of $0.22 to $0.24. After adjusting for $0.02 related to the loss on early extinguishment of debt in the third quarter of fiscal year 2006, earnings per diluted share increased 5% year over year.
Total revenue for the third quarter of fiscal year 2007 was $1.0
billion, flat year over year, including a 1% currency benefit. Selling
and administrative expenses decreased $18 million year over year and
represented 28.1% of revenue in the third quarter, in line with the
Company's expense-to-revenue ratio goal of less than 29% for fiscal
year 2007. The decrease in selling and administrative expenses was
primarily driven by lower administrative expenses, including
performance compensation, real estate, and other corporate expenses.
Operating income margin for the third quarter of fiscal year 2007
was $54 million or 5.1% of revenue, compared with $54 million or 5.2%
for the third quarter of 2006. Operating income in the third quarter
of last year included a $7 million gain related to the sale of the
U.S. retained lease portfolio. The Company's effective tax rate for
the quarter was 33%. The Company continues to anticipate that the tax
rate for fiscal year 2007 will be less than 32%.
"We are encouraged by our earnings performance for the quarter.
Our Managed and Professional Services business delivered strong
results, Equipment revenue grew 1%, Europe continued its solid
performance, and Customer Service revenue is beginning to stabilize,"
said Matthew J. Espe, IKON's Chairman and Chief Executive Officer.
Third Quarter Fiscal 2007 Financial Details
Equipment revenue of $448 million, which includes the sale of
copier/printer multifunction products, increased 1% from the third
quarter of fiscal year 2006. The year-over-year increase was driven by
revenue growth in both the color office and color production segments
and currency, offset by revenue declines in both the black and white
office and black and white production segments. Gross margin on
equipment decreased to 24.3% from 25.6% in the third quarter of fiscal
year 2006 due to lower used equipment revenue, a mix shift to light
black and white production devices, and a higher mix of large deals in
the quarter.
Customer Service and Supplies revenue of $346 million, which
includes revenue from the servicing of copier/printer equipment and
direct sales of supplies, decreased 4% year over year, but was flat
sequentially as Customer Service revenue begins to stabilize in line
with the Company's expectations. Customer Service revenue declined
year over year primarily due to lower revenue per page. The Company
continues to expect that Customer Service and Supplies revenue in the
second half of the fiscal year will decrease 1% to 2% from the first
half of fiscal year 2007, driven by a seasonal decline from the third
to the fourth quarter. Gross margin on Customer Service and Supplies
decreased to 44.2% from 45.6% a year ago due to lower revenue
partially offset by lower costs.
Managed and Professional Services revenue of $203 million
increased 9% compared to the third quarter of fiscal year 2006.
Revenue grew in all three service areas. On-site Managed Services
revenue, which represents approximately two-thirds of total Managed
and Professional Services, increased 7% year over year, off-site
Managed Services increased 8% year over year, and Professional
Services grew 22% year over year. Gross margin on Managed and
Professional Services increased to 27.8% from 25.1% a year ago due to
improvements in on-site Managed Services contract profitability,
higher off-site Managed Services revenue on a relatively fixed cost
base, and significantly improved profitability in European
Professional Services.
Rental and Fees revenue of $32 million declined 6% year over year
due to lower rental revenue, and gross margin decreased approximately
one point to 74%. Other revenue of $16 million declined 14% compared
to the third quarter of fiscal year 2006 primarily due to the loss of
a contract in the European technology services business.
Balance Sheet and Liquidity
The Company's cash balance was $287 million as of June 30, 2007,
and the Company's debt-to-capital ratio remained stable from the prior
quarter at 32%. Cash generated by operations totaled $9 million for
the first nine months of fiscal year 2007, compared to a cash usage of
$28 million for the first nine months of last year. The cash generated
in the first nine months of the year was impacted by a $97 million
increase in inventory. The Company expects fiscal year-end 2007
inventory to range from $275 million to $295 million, compared to $315
million at June 30, 2007 and $282 million at June 30, 2006. Capital
expenditures on operating rentals and property and equipment, net of
proceeds, totaled $33 million for the first nine months, compared to
$35 million for the first nine months of fiscal year 2006. Free cash
flow was a negative $23 million for the first nine months of the year
compared to a negative free cash flow of $63 million in the first nine
months last year. The Company expects free cash flow to range between
$80 million and $110 million for fiscal year 2007. For the fourth
quarter, the Company anticipates working capital improvements to
generate between $70 million and $100 million of cash.
For the third quarter, fully diluted weighted average shares were
127 million. At the end of the quarter, actual shares outstanding were
123 million, a reduction of 6% year over year, driven by the Company's
ongoing share repurchase program. The Company purchased 3 million
shares for $44 million during the third quarter.
Year to date the Company has returned $115 million to its
shareholders through $100 million in share repurchases and $15 million
in dividend payments, which was funded with cash from the balance
sheet. For the fourth quarter, the Company expects to spend $40 to $50
million on share repurchases. Cumulatively through June 30, 2007, the
Company has purchased 22% of the shares outstanding as of March 31,
2004. Since the Company initiated its share repurchase program three
years ago, it has repurchased a total of 32 million shares for $395
million, and also eliminated its convertible debt, avoiding a
potential conversion into 20 million shares of common stock.
IKON's Board of Directors also approved the Company's regular
quarterly cash dividend of $0.04 per common share, payable on
September 10, 2007 to holders of record at the close of business on
August 27, 2007.
Outlook
"In the third quarter, we added over 100 selling resources in the
field, including 17 Graphic Arts Specialists who will be focused on
selling color production equipment, such as the Canon imagePRESS C1,
Canon's portfolio of wide format products, and the Canon imagePRESS
C7000VP which we've begun shipping to customers," said Espe. "We
remain committed to our action plans to grow revenue, including
driving color placements to increase our color page volume mix.
"Looking ahead to the fourth quarter of fiscal 2007, we expect
earnings per fully diluted share to be approximately $0.22. Our
expectations for fiscal year 2007 are to deliver an operating income
margin of approximately 5%, up from the prior year, and earnings per
fully diluted share of approximately $0.90."
Mark Your Calendar
Matthew J. Espe, IKON's Chairman and Chief Executive Officer, will
be speaking at the Citigroup Technology Conference on September 5,
2007 at the Hilton New York Hotel in New York City. The conference
will be webcast and available on the Company's website at http://www.ikon.com under Calendar & Presentations.
IKON Office Solutions, Inc. is the world's largest independent channel for document management systems and services. IKON integrates best-in-class copiers, printers and MFP technologies from leading manufacturers, such as Canon, Ricoh, Konica Minolta, Kyocera Mita and HP, and document management software and systems from companies like Captaris, Kofax, EFI, eCopy to deliver tailored, high-value solutions implemented and supported by its global services organization. With fiscal year 2006 revenue of $4.2 billion, IKON has approximately 25,000 employees in over 400 locations throughout North America and Western Europe.
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