IKON Announces Results for the Third Quarter of Fiscal Year 200631 Jul, 2006
IKON Announces Results for the Third Quarter of Fiscal Year 2006
MALVERN, PA -- IKON Office Solutions has reported results for the quarter
ended June 30, 2006. Net income from continuing operations for the third quarter
was $27 million, or $0.20 per diluted share, including a $0.02 charge for a loss
on early extinguishment of debt. Excluding this charge, earnings per diluted
share were $0.22, exceeding the Company's previously communicated EPS range of
$0.19 to $0.21, and representing a 27% increase over the same period last year.
Total revenue for the third quarter of fiscal year 2006 was $1.05 billion, compared to $1.10 billion for the third quarter of fiscal year 2005. The expected decline resulted from the Company's decision to sell or exit unprofitable and non-core businesses. Targeted revenue, which represents 98% of total revenue, declined 1% year over year.
"During the third quarter, color equipment revenue continued to perform well, as placements increased 40% and revenue increased 13% year over year. In addition, we experienced strong placement growth in the office segment and strong revenue growth in the production segment," said Matthew J. Espe, IKON's Chairman and Chief Executive Officer. "In a challenging market, we have grown equipment revenue for the last three quarters, with recent strength coming from new product introductions from Canon and Ricoh, as well as our co-branded initiatives with Konica Minolta."
Selling and administrative (S&A) expenses of $311 million in the quarter decreased 9%, or $29 million, compared to the third quarter of fiscal year 2005. Operating income of $54 million increased 10% year over year.
"Our steady progress managing S&A expenses resulted in an expense-to-revenue ratio of 29.7% this quarter, in line with our full-year goal to achieve an expense-to-revenue ratio below 30%," Espe said. "Our commitment to cost containment and productivity improvements contributed to a strong operating income margin of 5.2% for the quarter."
Third Quarter 2006 Financial Details
Equipment revenue of $445 million, which includes the sale of copier/printer multifunction products, increased 1% compared to the third quarter of fiscal year 2005. The year-over-year increase was driven by revenue growth in the color market and the black and white production market. Gross margin on equipment was 25.6%, up significantly from 23.8% in the third quarter of fiscal year 2005.
Customer Service and Supplies revenue of $362 million, which includes revenue
from the servicing of copier/printer equipment and direct sales of supplies,
decreased 4% compared to the third quarter of fiscal year 2005, but was flat
sequentially. Customer Service revenue was negatively impacted by the expected
decline in the analog equipment base, and by a decline in revenue per copy,
partially offset by continued growth in the digital equipment base. Gross margin
on Customer Service and Supplies decreased to 45.6% from 47.5% a year ago, due
to lower revenue offset slightly by a decline in costs during the quarter.
Managed and Professional Services revenue of $187 million, which includes revenue from on-site and off-site Managed Services, as well as Professional Services, increased 4% compared to the third quarter of fiscal year 2005. On-site Managed Services revenue grew 6% and Professional Services revenue increased 31%, partially offset by an 11% decline in off-site Managed Services revenue during the quarter. Gross margin on Managed and Professional Services declined to 25.1% from 27.2% a year ago, due to lower off-site Managed Service margins driven by lower revenue, and a slight decline in on-site Managed Services margin.
Rental and Fees revenue of $34 million decreased 20% driven primarily by the sale of the U.S. retained lease portfolio in April 2006. Gross margin increased to 74.7% from 68.1% a year ago, due to a greater mix of higher-margin agency fees. Other revenue of $19 million declined 67% compared to the third quarter of fiscal year 2005, primarily due to the sale of non-strategic businesses in 2005 and the sale of the U.S. retained lease portfolio.
Targeted revenue includes all revenues except those categorized as "Other." Other revenue includes finance income and revenue generated by the remaining technology services and hardware businesses. Prior to fiscal year 2006, Other revenue also included revenue from the Company's operating subsidiaries in France and Mexico, which were sold during iscal year 2005, and revenue from Kafevend, which was sold in the first quarter of fiscal year 2006.
"Looking ahead, we remain focused on executing our long-term plan, while continuing the momentum we've generated during the first nine months of fiscal year 2006," Espe said. "Based on our performance to-date, we are increasing our earnings expectations for fiscal year 2006. We now expect earnings per diluted share from continuing operations to range between $0.75 and $0.77 for the full fiscal year 2006, with fourth quarter earnings per diluted share from continuing operations expected to range between $0.17 and $0.19.
"In addition, as we continue to execute on our strategy, we expect to generate cash from operations for the full year between $50 million and $100 million, excluding an accelerated $50 million tax payment related to the sale of the U.S. retained lease portfolio."
The expectation for full-year earnings per diluted share excludes any charges associated with the early extinguishment of debt, as well as the net gain on the sale of Kafevend previously disclosed in the first quarter of fiscal 2006. This expectation includes the premium from the U.S. retained lease portfolio sale, which offsets the operating income that the portfolio would have generated in the second half of fiscal 2006.