April 24, 2003 -
Ikon Office Solutions Announces Second Quarter Results
Net Income up 3%; Operating Margins Expand
Company Continues to Deliver Balanced Performance in Competitive Environment
Valley Forge, Pennsylvania - April 24, 2003 - IKON Office Solutions (NYSE:IKN), the world's largest independent distributor of document management products and services with operations throughout North America and Europe, today reported results for the second quarter ended March 31, 2003. Earnings per diluted share for the second quarter of Fiscal 2003 were $.23, compared to $.24 for the second quarter of Fiscal 2002. Net income of $36.4 million grew by 3% for the second quarter, compared to $35.3 million for the same period a year ago. Operating margins expanded to 6%, compared to 5.7% in the second quarter of Fiscal 2002.
Revenues for the second quarter of Fiscal 2003 were $1.15 billion, a decline of 5.3% compared to revenues of $1.22 billion for the second quarter of Fiscal 2002. Approximately 57%, or $37 million, of the Company's revenue decline related to business downsizing and exit strategies commenced during the first quarter of Fiscal 2002, including the de-emphasis of technology hardware such as computers, routers and servers. Core revenues, defined as all remaining revenues including the sale of copiers/printers from leading vendors such as Canon and Ricoh and the Company's wide array of service offerings, declined 2.4% from the second quarter a year ago. Sequentially, revenues grew by 1.6% compared to the first quarter of Fiscal 2003, led by stronger performance in sales of copier/printer equipment.
"Our results for the second quarter reflect continued, balanced business performance in a tough economic and competitive climate," stated Matthew J. Espe, Chairman and Chief Executive Officer for IKON Office Solutions. "Our earnings results were within our expected range for the quarter, even as we absorbed lower revenues in our equipment maintenance and outsourcing services due to customer downsizings and a slowdown in copy volumes. In addition, while sales of copier/printer equipment were 8% stronger than our results last quarter -a prerequisite for future services growth - we continued to see customers delay decisions for large purchases of copier/printer equipment. The market has also become increasingly competitive, creating some pressure on equipment margins.
"We will continue to fine-tune our actions against short-term changes in market conditions to deliver top line and operational improvement, but our long-term goals remain the same. We are reinforcing the business model with revenue generating and infrastructure investments that support our long-term financial objectives of 8% to 10% operating margins. More specifically, our longer-term priorities call for continued investment in top line growth through expanded sales channels, business mix optimization, and strengthened supplier relationships. Our support structure plans offer substantial opportunity for improved service levels and employee productivity, and we will continue to capture those opportunities through ongoing centralization and consolidation, as well as methodical approaches to system and process improvements that benefit our customers and provide scalability for future growth. Underlying these strategic priorities is our consistent focus on sound asset management and organizational development through investments in our employees. We believe these initiatives, combined with the strength of IOS Capital, continue to improve our competitive position and will enable IKON to more aggressively pursue opportunities when global business and economic conditions improve," concluded Mr. Espe.
Recent developments that highlight these strategic goals and operating priorities include:
· The launch of a new, integrated branding campaign using the new tagline "Document Efficiency At Work" to reinforce the Company's position as a leading provider of comprehensive document management services;
· Expansion of the product portfolio continued in the second quarter with the introduction of two new workflow solutions developed exclusively for IKON - the IKON PowerPRESS(tm) through T/R Systems and the IKON DocSend(tm) developed with Electronics for Imaging - and the first "pay-as-you-use" color offering through Ricoh's Aficio 1224C/1232C copier/printers;
· In the area of training and development, IKON was recognized for the first time as one of the Top 100 in Training magazine's ranking of organizations that excel at human capital development;
· On the operational front, IKON announced plans to develop and implement a Six Sigma initiative to drive customer satisfaction and process improvement to new levels;
· On April 16, an IKON subsidiary priced $852 million in lease-backed notes at 2.58% to support lease financing provided to U.S. customers by IOS Capital; and,
· In the area of corporate governance, Matthew J. Espe was elected Chairman of the Board on February 25. IKON also announced the addition of Anthony P. Terracciano, former Chairman of Dime Bancorp, President of Banking Operations for First Union Corporation, and President and Chief Executive Officer of First Fidelity Bank Corporation, who will be joining the Board effective May 1, 2003.
Financial Analysis
Year-to-year comparisons within both Net Sales and Services were impacted favorably by actions the Company has taken to strengthen the business model and facilitate long-term profitability objectives. During the first quarter of Fiscal 2002, the Company exited its telephony business, sold its technology education business, and began the process of closing or selling a number of digital print centers and technology services locations. The Company also began to de-emphasize the distribution of low-margin technology hardware - an undertaking expected to continue throughout Fiscal 2003.
Net Sales, which include the sale of copier/printer equipment, supplies and technology hardware, declined by 6.4% from the second quarter of Fiscal 2002. As anticipated, technology hardware declined by approximately $24 million, accounting for approximately two-thirds of the total Net Sales decline. Sales of copier/printer equipment, the largest component within Net Sales, declined by 2.2% from the same period a year ago, but improved sequentially by 8% as declines in sales of higher-end, segment 5&6 copier/printer equipment were offset by improved trends in the sale of lower-end fax and segment 1-4 equipment and continued growth in color. Gross profit margin on Net Sales declined from 33.9% in the prior year to 33.4% for the second quarter of Fiscal 2003, largely due to a greater mix of lower-margin copier/printer sales for the quarter.
Services, which include revenues from the servicing of copier/printer equipment, and outsourcing and other services, declined by 5.7% from the second quarter of Fiscal 2002. Revenues from the servicing of copier/printer equipment - which account for approximately 55% of Services, declined by approximately 3.4% due to a slowdown in copy volumes in the quarter. Outsourcing and other services declined by 8.5% from the prior year, negatively impacted by $13 million related to the exit and downsizing of certain businesses in the prior year, as well as economic factors. Excluding the impact of exited or downsized businesses in the prior year, outsourcing and other services declined by 3.4%. Gross profit margin on Services of 40.2% improved from 39.8% for the second quarter of Fiscal 2002 primarily due to improved margins within outsourcing and other services.
Finance Income grew 3.6% from the second quarter of Fiscal 2002 due to continued growth in the lease portfolio as our customers take advantage of IKON's ability to offer captive lease financing. In the second quarter, approximately 79% of IKON's equipment revenues in the U.S. were financed through IOS Capital, IKON's largest leasing subsidiary. Portfolio quality at IOS Capital remains stable, with charge-off and collection levels remaining steady. Gross profit margin from finance subsidiaries in the second quarter of Fiscal 2003 increased to 62.2% from 60.5% for the second quarter of the prior year, reflecting lower average borrowing costs as a result of market rate reductions and the Company's chosen mix of capital resources to support lease financing.
Selling and Administrative Costs declined by $22.8 million in the second quarter of Fiscal 2003 compared to the same period in the prior year. These positive results reflect the benefits of prior infrastructure improvements and solid expense controls, particularly as the Company absorbs additional selling expenses to strengthen sales coverage, increased pension expense, and expenses associated with the implementation of its e-IKON initiative - an enterprise-wide process redesign and system enhancement supported by the Oracle E-Business Suite - in 2003.
Operating Income was $69.8 million for the second quarter of Fiscal 2003, with operating margins increasing to 6%, from 5.7% for the same period a year ago. The improvement in the operating margin reflects the Company's drive toward its long-term goals.
Outlook
"While the entire IKON organization continues to focus its efforts on driving revenue growth in our core markets, we are clearly cautious about the lagging economy and the heightened competitiveness we are seeing in the market," said Mr. Espe. "We remain positive regarding our opportunities for improved second half performance, but lower revenue in the first half adds a level of caution to our performance goals for the full year. As a result, we have revised our expectation for earnings per diluted share for Fiscal 2003 to $.90 - $.94, compared to our previous expectation of $.94 to $.98. This includes an expectation that revenues will decline by approximately 4% to 5% for Fiscal 2003, compared to our original expectation for a 2% to 4% revenue decline. These revenue expectations include an assumption that technology hardware will decline by approximately $120 to $150 million for the year.
"For the third quarter, we expect our performance will benefit from stronger copier/printer sales and equipment service revenues typical of the April through June timeframe; however, that growth could be tempered by the current economic and competitive climate. As a result, earnings for the third quarter are expected to be in the range of $.24 - $.26 per diluted share. Revenues, including the expected decline in technology hardware, are expected to decline by 3% to 5%.
"Cash from Operations for the full year is expected to be in the range of $365 to $390 million. Capital expenditures, consisting of operating rentals and property & equipment expenditures, net of proceeds, are expected to be approximately $115 million for Fiscal 2003. These separate measurements replace our previously communicated 'free cash flow' target of $250 to $275 million, which the Company is discontinuing due to new SEC regulations," Mr. Espe concluded.
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