IKON Announces Fourth Quarter and Fiscal Year 2007 Results

IKON Office Solutions (NYSE:IKN), the world’s largest independent channel for document management systems and services, today reported results for the fourth quarter and fiscal year ended September 30, 2007. For the fourth quarter, net income was $28 million, or $0.23 per diluted share, representing a 15% increase over the $0.20 in the fourth quarter of fiscal 2006, exceeding the Company’s previously communicated guidance of approximately $0.22. Total revenue for the fourth quarter of fiscal 2007 was $1.1 billion, up 0.6% year over year, including 1.4 points of currency benefit. Selling and administrative expenses decreased $6 million year over year and represented 28.7% of revenue in the fourth quarter of 2007 compared with 29.5% in the fourth quarter last year. The decrease in selling and administrative expenses was primarily driven by lower administrative expenses due to lower headcount, performance compensation, and other corporate expenses. Operating income for the fourth quarter of fiscal 2007 was $49 million, or 4.6% of revenue, compared to $44 million or 4.1% of revenue for the fourth quarter of fiscal 2006. The Company’s effective tax rate for the quarter was 28%. "We gained revenue momentum during the fourth quarter, as demonstrated by revenue growth in Equipment, Managed and Professional Services, and in Europe. We also made progress on our sprint-to-color strategy by successfully launching the Canon imagePRESS C7000VP, a 70 page per minute color production device. Finally, we continued to expand our sales coverage, adding over 50 selling resources in the quarter, bringing the total increase in the second half of fiscal year 2007 to over 170,” said Matthew J. Espe, IKON’s Chairman and Chief Executive Officer. For fiscal year 2007, net income was $114 million, or $0.91 per diluted share, representing a 15% increase over the adjusted earnings per diluted share of $0.79 in fiscal year 2006, and exceeding the Company’s previously communicated guidance of approximately $0.90. As reported, earnings per diluted share grew 14%. Total revenue for fiscal year 2007 was $4.2 billion, a 1.4% decline year over year, including 1.2 points of currency benefit. The revenue decline was driven primarily by lower revenue in Customer Service & Supplies, Rental & Fees, and Other, partially offset by revenue growth in Managed and Professional Services. The vast majority of the revenue decline in Rental & Fees and Other was due to the sales of the U.S. retained and German lease portfolios in the third quarter of fiscal 2006. Selling and Administrative expenses decreased $72 million year over year and represented 28.3% of revenue, achieving the Company’s goal of less than 29% for fiscal year 2007. The year-over-year decline was driven by lower administrative expenses due to lower performance compensation, headcount, pension and other corporate expenses. The Company expects its S&A expense-to-revenue ratio to be approximately 28% in fiscal year 2008. Operating income in fiscal year 2007 was $203 million, or 4.9% of revenue, compared with $197 million, or 4.1% of revenue in fiscal year 2006, after adjusting for a $5 million gain on the sale of Kafevend last year. The Company’s effective tax rate for the fiscal year was 30%. At fiscal year end, the Company’s U.S. migration to One Platform was two-thirds complete and on track to be finished in the second half of fiscal year 2008. Due to the success of these migrations and the process improvements and stability achieved over the past two years, the Company concluded that its material weakness in billing was remediated as of September 30, 2007. Fourth Quarter Fiscal 2007 Financial Details Equipment revenue of $470 million, which includes the sale of copier/printer multifunction products, increased 2% from the fourth quarter of fiscal 2006. This strong performance was driven by revenue growth of 18% in the color office segment, 56% in the color production segment, and currency, partially offset by revenue declines in both the black and white office and black and white production segments. Gross margin on Equipment decreased to 24.0% from 25.5% in the fourth quarter of fiscal 2006 primarily due to pricing pressures, lower used equipment revenue, and a mix shift to black and white light production. Customer Service and Supplies revenue of $341 million, which includes revenue from the servicing of copier/printer equipment and direct sales of supplies, decreased 3% year over year as Customer Service revenue continued to stabilize. Revenue was down sequentially, but in line with seasonal trends. For the second half of fiscal year 2007, revenue was down 1% compared to the first half of 2007, as expected. In North America, Customer Service revenue declined year over year driven by lower revenue per page and lower page volume. In fiscal year 2008, the Company expects Customer Service and Supplies revenue to decline slightly with an improving trend as the year progresses. Gross margin on Customer Service and Supplies increased to 44.8% from 44.4% a year ago due to improved cost productivity in the U.S. and higher revenue in Europe. Managed and Professional Services revenue of $203 million increased 6% year over year. On-site Managed Services revenue, which represents approximately two-thirds of total Managed and Professional Services, increased 8%, and Professional Services grew 12%, partially offset by off-site Managed Services, which decreased 5%. Gross margin on Managed and Professional Services increased to 27.7% from 27.5% a year ago primarily due to improved contract profitability in on-site Managed Services and Professional Services, partially offset by a lower off-site Managed Services margin. Rental and Fees revenue of $35 million increased 4% year over year due to higher fee revenue increasing gross margin to 77.2% from 67.5% in the prior year. Other revenue of $16 million declined 26% compared to the fourth quarter of fiscal 2006 primarily due to the loss of a contract in the European technology services business, and gross margin decreased to 33.1% from 34.4% due to higher borrowing costs in the U.K. leasing business. Balance Sheet and Liquidity The Company’s cash balance was $349 million as of September 30, 2007, and the Company’s debt-to-capital ratio remained stable from the prior year at 33%. Cash generated by operations totaled $168 million for fiscal year 2007, a $69 million increase year over year driven by a strong fourth quarter performance. In the fourth quarter, the Company generated $159 million of cash from operations driven by over $100 million in working capital improvements, primarily from lower accounts receivable and inventory levels, as well as improved payment terms from vendors. The Company ended fiscal year 2007 with $288 million in inventory, in line with the Company’s guidance of $275 million to $295 million, generating $29 million of cash during the quarter. Capital expenditures on operating rentals and property and equipment, net of proceeds, totaled $53 million for the year, compared to $57 million for fiscal year 2006. The Company generated $115 million of free cash flow for the year, compared to $43 million in fiscal year 2006. For the fourth quarter of fiscal 2007, fully diluted weighted average shares were 122 million. At the end of the quarter, actual shares outstanding were 118 million, a reduction of 8% year over year, driven by the Company’s share repurchase program. The Company purchased approximately 5 million shares for $75 million during the fourth quarter. In fiscal year 2007, the Company returned a total of $195 million in cash to its shareholders, including $175 million in share repurchases and $20 million in dividend payments, $80 million greater than the free cash flow generated during the year. Since the Company initiated its share repurchase program in the second half of fiscal year 2004, it has repurchased a total of 38 million shares for $470 million, representing 26% of the shares outstanding as of March 31, 2004. During this time, the Company also eliminated its convertible debt, avoiding a potential conversion into 20 million shares of common stock. IKON’s Board of Directors approved the Company’s regular quarterly cash dividend of $0.04 per common share, payable on December 10, 2007 to holders of record at the close of business on November 19, 2007. Outlook "Fiscal 2007 was a good year for IKON. We made significant progress towards growing revenue. We continued to lower our selling and administrative expenses, and we delivered increased earnings per share and cash flow. Our color product portfolio is stronger than ever, and we have made investments to expand and optimize our sales coverage. As a result, we are at an important point in our Company’s history with respect to growth, which is our main focus in fiscal 2008,” said Espe. "Looking ahead to fiscal year 2008, we expect revenue growth of 2% driven by Equipment and Managed & Professional Services growth, and an operating income margin of greater than 5%. For our first quarter, we expect earnings per diluted share to range between $0.22 and $0.24. "In addition, after reviewing investment opportunities for growth for fiscal year 2008, we decided to narrow our acquisition strategy to focus only on small "tuck-in” acquisitions rather than transformational opportunities. We continue to believe share repurchases and a focus on small "tuck-in” acquisitions will increase shareholder value and improve our long-term potential for growth,” continued Espe. About IKON IKON Office Solutions, Inc. (www.ikon.com) is the world’s largest independent channel for document management systems and services, enabling customers worldwide to improve document workflow and increase efficiency. 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 and others, to deliver tailored, high-value solutions implemented and supported by its global services organization – IKON Enterprise Services. With fiscal year 2007 revenue of $4.2 billion, IKON has approximately 25,000 employees in over 400 locations throughout North America and Western Europe.   QUARTERLY EARNINGS CONFERENCE CALL: Additional information regarding the fourth quarter and fiscal year 2007 results will be discussed on a conference call hosted by IKON at 10:00 a.m. ET on Thursday, October 25, 2007. The live audio broadcast of the call, with slides, can be accessed on IKON's Investor Relations homepage or by calling (201) 689-8261. A complete replay of the conference call will also be available on IKON's Investor Relations homepage approximately two hours after the call ends through the next quarterly reporting period. To listen, please go to www.ikon.com and click on Investor Relations and then Calendar & Presentations. Beginning at 1:00 p.m. ET on October 25, 2007 and ending at midnight ET on October 30, 2007, a complete replay of the conference call can also be accessed via telephone by calling (877) 660-6853 or (201) 612-7415 and entering account number 270 and conference number 256781.   MARK YOUR CALENDAR: IKON's first quarter fiscal year 2008 results will be discussed on Thursday, January 24, 2008, on a conference call at 10 a.m. ET. More information on how to access the audio broadcast and replay will be provided at a later date.   This news release includes information that may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include, but are not limited to, statements relating to our expected first quarter and full fiscal year 2008 results, including our color growth strategies, acquisition strategy, and our ability to execute on our strategic priorities, including growth objectives, operational leverage and capital strategy initiatives, and our share repurchase program. Although IKON believes the expectations contained in such forward-looking statements are reasonable, it can give no assurances that such expectations will prove correct. Such forward-looking statements are based upon management’s current plans or expectations and are subject to a number of risks and uncertainties set forth in our filings with the U.S. Securities and Exchange Commission. As a consequence of these and other risks and uncertainties, IKON’s current plans, anticipated actions and future financial condition and results may differ materially from those expressed in any forward-looking statements. The Company has reported its financial results in accordance with generally accepted accounting principles (GAAP). In addition, this news release contains certain non-GAAP financial measures, free cash flow and adjusted EPS. Free cash flow is defined as cash from operations less expenditures for property and equipment, less expenditures for equipment on operating leases, plus proceeds from the sale of property and equipment and equipment on operating leases. IKON believes free cash flow is useful because it provides insight into the amount of cash that the Company has available for discretionary uses, after expenditures for capital commitments. Adjusted EPS as used in this presentation, excludes the loss from the early extinguishment of debt and the gain on the sale of Kafevend. IKON believes this measure provides investors with a useful indication of the performance of IKON’s ongoing operations and financial position. The reader is encouraged to evaluate these non-GAAP financial measures and the reasons IKON considers them useful for supplemental analysis. IKON Office Solutions® and IKON: Document Efficiency at Work® are trademarks of IKON Office Solutions, Inc. All other trademarks are the property of their respective owners. (FIKN) IKON Office Solutions, Inc. Income Statement and Operational Analysis (in thousands, except earnings per share) (unaudited)     Three Months Ended September 30, 2007 2006 Revenues Equipment $ 470,080 $ 459,176 Customer service and supplies 340,505 351,368 Managed and professional services 203,110 191,870 Rental and fees 34,736 33,546 Other   16,277     22,020     1,064,708     1,057,980     Cost of Revenues Equipment 357,035 342,149 Customer service and supplies 187,979 195,212 Managed and professional services 146,790 139,040 Rental and fees 7,911 10,919 Other   10,893     14,442     710,608     701,762     Gross Profit Equipment 113,045 117,027 Customer service and supplies 152,526 156,156 Managed and professional services 56,320 52,830 Rental and fees 26,825 22,627 Other   5,384     7,578     354,100     356,218     Selling and administrative 305,536 311,999 Loss on divestiture of businesses and assets - 463 Restructuring benefit   -     58   Operating income 48,564 43,814   Loss from the early extinguishment of debt - 19 Interest income 2,500 3,980 Interest expense   12,949     11,978   Income from continuing operations before taxes on income 38,115 35,797 Taxes on income   10,484     9,419   Income from continuing operations 27,631 26,378 Discontinued Operations: Operating loss - 63 Tax benefit   -     25   Net loss from discontinued operations   -     38   Net income $ 27,631   $ 26,340     Basic Earnings Per Common Share Continuing operations $ 0.23 $ 0.20 Discontinued operations   -     0.00   Net income $ 0.23   $ 0.20     Diluted Earnings Per Common Share Continuing operations $ 0.23 $ 0.20 Discontinued operations   -     0.00   Net income $ 0.23   $ 0.20     Weighted Average Common Shares Outstanding, Basic   120,160     129,027     Weighted Average Common Shares Outstanding, Diluted   121,610     130,574       Operational Analysis: Gross profit %, equipment 24.0 % 25.5 % Gross profit %, customer service and supplies 44.8 % 44.4 % Gross profit %, managed and professional services 27.7 % 27.5 % Gross profit %, rental and fees 77.2 % 67.5 % Gross profit %, other 33.1 % 34.4 % Total gross profit % 33.3 % 33.7 % Selling and administrative as a % of revenue 28.7 % 29.5 % Operating income as a % of revenue 4.6 % 4.1 % IKON Office Solutions, Inc. Income Statement and Operational Analysis (in thousands, except earnings per share) (unaudited)     Fiscal Year Ended September 30, 2007 2006 Revenues Equipment $ 1,787,730 $ 1,790,188 Customer service and supplies 1,377,669 1,445,561 Managed and professional services 796,962 740,998 Rental and fees 136,674 151,228 Other   69,309     100,274     4,168,344     4,228,249     Cost of Revenues Equipment 1,346,244 1,339,862 Customer service and supplies 778,013 797,541 Managed and professional services 580,164 547,284 Rental and fees 34,650 45,288 Other   46,094     56,496     2,785,165     2,786,471     Gross Profit Equipment 441,486 450,326 Customer service and supplies 599,656 648,020 Managed and professional services 216,798 193,714 Rental and fees 102,024 105,940 Other   23,215     43,778     1,383,179     1,441,778     Selling and administrative 1,180,326 1,251,848 Gain on divestiture of businesses and assets - 11,497 Restructuring benefit   -     322   Operating income 202,853 201,749   Loss from the early extinguishment of debt - 5,535 Interest income 11,372 13,040 Interest expense   50,791     51,336   Income from continuing operations before taxes on income 163,434 157,918 Taxes on income   48,947     51,669   Income from continuing operations 114,487 106,249 Discontinued Operations: Operating loss - 78 Tax benefit   -     31   Net loss from discontinued operations   -     47   Net income $ 114,487   $ 106,202     Basic Earnings Per Common Share Continuing operations $ 0.92 $ 0.81 Discontinued operations   -     0.00   Net income $ 0.92   $ 0.81     Diluted Earnings Per Common Share Continuing operations $ 0.91 $ 0.80 Discontinued operations   -     0.00   Net income $ 0.91   $ 0.80     Weighted Average Common Shares Outstanding, Basic   124,563     131,336     Weighted Average Common Shares Outstanding, Diluted   126,342     132,941       Operational Analysis: Gross profit %, equipment 24.7 % 25.2 % Gross profit %, customer service and supplies 43.5 % 44.8 % Gross profit %, managed and professional services 27.2 % 26.1 % Gross profit %, rental and fees 74.6 % 70.1 % Gross profit %, other 33.5 % 43.7 % Total gross profit % 33.2 % 34.1 % Selling and administrative as a % of revenue 28.3 % 29.6 % Operating income as a % of revenue 4.9 % 4.8 % IKON Office Solutions, Inc. Consolidated Balance Sheets (in thousands and unaudited)   September 30, 2007   2006 Assets Cash and cash equivalents $ 349,237 $ 414,239 Accounts receivable, net 560,089 592,733 Lease receivables, net 84,207 83,051 Inventories 287,503 214,792 Prepaid expenses and other current assets 35,085 34,742 Deferred taxes   48,167   46,504 Total current assets   1,364,288   1,386,061 Long-term lease receivables, net 251,776 222,333 Equipment on operating leases, net 72,052 83,248 Property and equipment, net 154,218 144,453 Deferred taxes 18,144 30,215 Goodwill 1,333,249 1,297,333 Other assets   84,354   74,543 Total Assets $ 3,278,081 $ 3,238,186   Liabilities Current portion of corporate debt $ 16,798 $ 1,487 Current portion of non-corporate debt 51,077 152,971 Trade accounts payable 263,657 224,312 Accrued salaries, wages and commissions 93,052 109,090 Deferred revenues 109,796 118,146 Income taxes payable 17,820 15,831 Other accrued expenses   129,323   142,350 Total current liabilities   681,523   764,187 Long-term corporate debt 576,199 593,578 Long-term non-corporate debt 181,334 64,005 Other long-term liabilities 128,211 130,283   Shareholders’ Equity   1,710,814   1,686,133 Total Liabilities and Shareholders’ Equity $ 3,278,081 $ 3,238,186 IKON Office Solutions, Inc.     Consolidated Statements of Cash Flows Year Ended September 30 (in thousands and unaudited)   2007     2006     Cash Flows from Operating Activities Net income $ 114,487 $ 106,202 Net loss from discontinued operations   -     47   Income from continuing operations 114,487 106,249 Additions (deductions) to reconcile net income to net cash provided by operating activities: Depreciation 68,719 70,070 Amortization 3,404 3,300 Gain from divestiture of businesses and assets - (11,497 ) Loss on disposal of property and equipment 759 4,057 Restructuring and asset impairment benefit - (322 ) Provision for losses on accounts and lease receivables 6,940 2,602 Provision for deferred income taxes 6,333 (95,261 ) Stock-based compensation expense 9,637 9,197 Excess tax benefits from stock-based compensation arrangements (1,740 ) (4,334 ) Pension expense 2,372 27,603 Loss from the early extinguishment of debt - 5,535 Changes in operating assets and liabilities, net of divestiture of businesses: Decrease in accounts receivable 40,624 87,086 (Increase) decrease in inventories (67,893 ) 29,204 (Increase) decrease in prepaid expenses and other current assets (3 ) 2,704 Increase (decrease) in accounts payable 33,523 (19,868 ) (Decrease) increase in deferred revenue (12,858 ) 3,220 Decrease in accrued expenses (28,040 ) (10,622 ) Pension contributions (9,725 ) (100,210 ) Increase (decrease) in taxes payable 1,262 (5,936 ) Decrease in accrued restructuring - (1,534 ) Other   80     (931 ) Net cash provided by continuing operations 167,881 100,312 Net cash used in discontinued operations   -     (1,159 ) Net cash provided by operating activities   167,881     99,153     Cash Flows from Investing Activities Proceeds from the divestiture of businesses and assets - 242,043 Expenditures for property and equipment (34,269 ) (37,470 ) Expenditures for equipment on operating leases (29,600 ) (40,705 ) Proceeds from the sale of equipment on operating leases 11,015 21,647 Proceeds from the sale of lease receivables 238,618 201,687 Lease receivables — additions (332,305 ) (348,119 ) Lease receivables — collections 97,706 292,421 Proceeds from life insurance (cash surrender value) 5,821 5,177 Other   (2,124 )   (9,123 ) Net cash (used in) provided by investing activities   (45,138 )   327,558     Cash Flows from Financing Activities Short-term corporate debt repayments, net 1 (30 ) Repayment of other borrowings (67 ) (7,786 ) Debt modification costs (16,430 ) - Debt issuance costs - (2,510 ) Corporate debt repayments (2,598 ) (138,748 ) Non-corporate debt — issuances 158,244 23,964 Non-corporate debt — repayments (166,225 ) (142,452 ) Dividends paid (20,048 ) (21,009 ) Decrease in restricted cash - 2,127 Proceeds from stock option exercises 17,944 22,182 Excess tax benefit from stock-based compensation arrangements 1,740 4,334 Purchase of treasury shares (174,968 ) (131,190 ) Other   -     (49 ) Net cash used in financing activities   (202,407 )   (391,167 )   Effect of exchange rate changes on cash and cash equivalents   14,662     4,990     Net (decrease) increase in cash and cash equivalents (65,002 ) 40,534 Cash and cash equivalents at beginning of the year   414,239     373,705   Cash and cash equivalents at end of the year $ 349,237   $ 414,239   IKON Office Solutions, Inc. Reconciliation of reported to adjusted earnings per diluted share For the year ending September 30, 2007 and 2006                 FY06           FY07 (in millions, except per share data) Actual   Adj.   Non-GAAP Actual     Revenue $ 4,228 $ 4,228 $ 4,168 Gross profit margin 34.1 % 34.1 % 33.2 % Selling & administrative expense ratio 29.6 % 29.6 % 28.3 % Operating income $ 202 (5 ) (a) $ 197 $ 203                   Operating income margin   4.8 %           4.7 %     4.9 %   Interest expense, net 38 38 39 Loss on extinguishment of debt 6 (6 ) 0 - Taxes on income 52 2 54 49 Net income $ 106 $ 105 $ 114                   Fully diluted EPS $ 0.80           $ 0.79     $ 0.91   Y/Y Fully diluted EPS growth rate vs. Non GAAP 15 % Y/Y Fully diluted EPS growth rate vs. Actual 14 %   (a) Gain on sale of Kafevend   Note: May not add due to rounding