IKN Ikon Office Solutions

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, which ended September 30, 2008. For the fourth quarter, earnings per diluted share were $0.23, including restructuring and asset impairment charges related to the Company�s Off-site Managed Services business and costs associated with the Company�s pending acquisition by Ricoh Company, Ltd. Excluding these non-recurring items, earnings per diluted share were $0.31. These results were in line with the Company�s previously communicated guidance including a $0.05 per share benefit from the favorable closure of a tax audit. In the fourth quarter of fiscal 2007, the Company earned $0.23 per diluted share. Total revenue for the fourth quarter of fiscal 2008 was $1.1 billion. As reported, operating income was $39.3 million and operating income margin was 3.7 percent in the quarter. Excluding the restructuring and asset impairment charges and the acquisition-related costs totaling $12.4 million, operating income was $51.7 million and operating income margin was 4.9 percent. Interest expense, net of interest income, increased $3 million year over year to $13 million, and weighted average fully diluted shares declined 20 percent to approximately 97 million, primarily due to the financing associated with the Company�s share repurchase activity in the first quarter. The Company�s effective tax rate for the fourth quarter was 17 percent as reported, compared with 28 percent in the prior-year quarter, due to the favorable closure of a federal income tax audit and the expiration of certain statutes of limitations. Net income for the quarter was $22 million and included $8 million in after-tax charges from non-recurring items. Excluding these items, net income was $30 million. For fiscal year 2008, earnings per diluted share were $0.91, including restructuring and asset impairment charges, acquisition-related costs and a loss from the early extinguishment of debt. Excluding these non-recurring items, earnings per diluted share were $1.07. In fiscal 2007, the Company earned $0.91 per diluted share. Total revenue was $4.2 billion in fiscal 2008, essentially flat year over year, including a currency benefit of 1 percentage point. Net income for fiscal 2008 was $91.3 million and included $15.3 million in after-tax charges from non-recurring items. Excluding these items, net income was $106.6 million. Balance Sheet and Cash Flow The Company�s cash increased $110 million in the quarter to $216 million driven by strong operating cash flow. The Company generated $272 million of cash from operations in fiscal 2008, compared with $172 million in fiscal 2007. Capital expenditures on operating leases and property and equipment, net of proceeds, totaled $45 million in fiscal 2008, compared with $53 million in fiscal 2007. As a result, free cash flow was $227 million in fiscal 2008, compared with $119 million in fiscal 2007. The Company paid $4 million, or $0.04 per share, of dividends to shareholders during the quarter. At September 30, 2008, actual shares outstanding were approximately 95 million. Pending Acquisition by Ricoh On August 27, 2008, IKON announced it had entered into a definitive agreement to be acquired by Ricoh Company, Ltd. for $17.25 per share. The transaction, which was approved by the Boards of Directors of both companies, is subject to regulatory approval in the U.S., Canada and Europe, customary closing conditions and IKON shareholder approval. On October 31, 2008, IKON shareholders will vote on the pending acquisition. For more information on the proposed transaction, see the definitive proxy statement filed on October 3, 2008, which is available on the Investor Relations section of IKON�s web site (www.ikon.com). About IKON IKON Office Solutions, Inc. is the world�s largest independent channel for document management systems and services, enabling customers to improve document workflow and increase efficiency. IKON integrates best-in-class copiers, printers and MFP technologies from leading manufacturers and document management software and systems, to deliver tailored, high-value solutions implemented and supported by its global services organization � IKON Enterprise Services. With fiscal year 2008 revenue of $4.2 billion, IKON has approximately 24,000 employees in over 400 locations throughout North America and Western Europe. 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 such as free cash flow, adjusted operating income and income margin, 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 operating income and operating income margin exclude the restructuring and asset impairment charges and acquisition-related costs. Adjusted net income and adjusted EPS exclude restructuring and asset impairment charges, acquisition-related costs and a loss from the early extinguishment of debt. IKON believes these measures provide investors with useful indications 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. Consolidated Balance Sheets (unaudited) (in thousands) � September 30, 2008 � 2007 Assets Cash and cash equivalents $ 216,236 $ 349,237 Accounts receivable, net 529,629 552,776 Lease receivables, net 74,757 84,207 Inventories 237,289 287,503 Prepaid expenses and other current assets 33,955 35,025 Income taxes receivable 2,067 - Deferred taxes � 41,955 � 48,167 Total current assets � 1,135,888 � 1,356,915 Long-term lease receivables, net 247,051 251,776 Equipment on operating leases, net 53,906 72,052 Property and equipment, net 139,479 154,218 Deferred taxes 14,946 18,144 Goodwill 1,296,576 1,333,249 Other assets � 78,488 � 84,354 Total Assets $ 2,966,334 $ 3,270,708 � Liabilities Current portion of corporate debt $ 3,915 $ 16,798 Current portion of non-corporate debt 60,229 51,077 Trade accounts payable 268,520 263,657 Accrued salaries, wages and commissions 117,133 93,052 Deferred revenues 107,099 109,796 Income taxes payable - 15,240 Other accrued expenses � 128,478 � 129,323 Total current liabilities 685,374 678,943 � Long-term corporate debt 574,987 576,199 Long-term non-corporate debt 162,635 181,334 Other long-term liabilities 135,347 128,211 � Total Shareholders� Equity � 1,407,991 � 1,706,021 Total Liabilities and Shareholders� Equity $ 2,966,334 $ 3,270,708 � IKON Office Solutions, Inc. Income Statement and Operational Analysis (in thousands, except earnings per share) (unaudited) � � Three Months Ended September 30, 2008 � � 2007 Revenues Equipment $ 459,703 $ 470,080 Customer service and supplies 345,549 340,505 Managed and professional services 204,225 203,110 Rental and fees 34,114 34,736 Other � 15,229 � � 16,277 � � 1,058,820 � � 1,064,708 � Cost of Revenues Equipment 350,620 357,035 Customer service and supplies 197,301 187,979 Managed and professional services 145,417 146,790 Rental and fees 7,293 7,911 Other � 8,784 � � 10,893 � � 709,415 � � 710,608 � Gross Profit Equipment 109,083 113,045 Customer service and supplies 148,248 152,526 Managed and professional services 58,808 56,320 Rental and fees 26,821 26,825 Other � 6,445 � � 5,384 � 349,405 354,100 � Selling and administrative 297,743 305,536 Restructuring charge 5,698 - Asset impairment 200 - Transactional costs associated with pending acquisition of IKON � 6,479 � � - � Operating income 39,285 48,564 � Interest income 732 2,500 Interest expense � 13,847 � � 12,949 � Income before taxes on income 26,170 38,115 Taxes on income � 4,377 � � 10,484 � Net income $ 21,793 � $ 27,631 � � Basic Earnings Per Common Share $ 0.23 � $ 0.23 � � Diluted Earnings Per Common Share $ 0.23 � $ 0.23 � � Cash Dividends Per Common Share $ 0.04 � $ 0.04 � � Weighted Average Common Shares Outstanding, Basic � 94,397 � � 120,160 � � Weighted Average Common Shares Outstanding, Diluted � 96,730 � � 121,610 � � Operational Analysis: Gross profit %, equipment 23.7 % 24.0 % Gross profit %, customer service and supplies 42.9 % 44.8 % Gross profit %, managed and professional services 28.8 % 27.7 % Gross profit %, rental and fees 78.6 % 77.2 % Gross profit %, other 42.3 % 33.1 % Total gross profit % 33.0 % 33.3 % Selling and administrative as a % of revenue 28.1 % 28.7 % Operating income as a % of revenue 3.7 % 4.6 % � IKON Office Solutions, Inc. Income Statement and Operational Analysis (in thousands, except earnings per share) (unaudited) � � Fiscal Year Ended September 30, 2008 � � 2007 Revenues Equipment $ 1,751,306 $ 1,787,730 Customer service and supplies 1,386,957 1,377,669 Managed and professional services 831,805 796,962 Rental and fees 130,917 136,674 Other � 65,568 � � 69,309 � � 4,166,553 � � 4,168,344 � Cost of Revenues Equipment 1,308,035 1,346,244 Customer service and supplies 798,788 778,013 Managed and professional services 594,526 580,164 Rental and fees 29,629 34,650 Other � 41,469 � � 46,094 � � 2,772,447 � � 2,785,165 � Gross Profit Equipment 443,271 441,486 Customer service and supplies 588,169 599,656 Managed and professional services 237,279 216,798 Rental and fees 101,288 102,024 Other � 24,099 � � 23,215 � 1,394,106 1,383,179 � Selling and administrative 1,184,080 1,180,326 Restructuring charge 11,259 - Asset impairment 200 - Transactional costs associated with pending acquisition of IKON � 6,479 � � - � Operating income 192,088 202,853 � Loss from the early extinguishment of debt 5,702 - Interest income 5,005 11,372 Interest expense � 59,661 � � 50,791 � Income before taxes on income 131,730 163,434 Taxes on income � 40,395 � � 48,947 � Net income $ 91,335 � $ 114,487 � � Basic Earnings Per Common Share $ 0.92 � $ 0.92 � � Diluted Earnings Per Common Share $ 0.91 � $ 0.91 � � Cash Dividends Per Common Share $ 0.16 � $ 0.16 � � Weighted Average Common Shares Outstanding, Basic � 98,931 � � 124,563 � � Weighted Average Common Shares Outstanding, Diluted � 99,974 � � 126,342 � � Operational Analysis: Gross profit %, equipment 25.3 % 24.7 % Gross profit %, customer service and supplies 42.4 % 43.5 % Gross profit %, managed and professional services 28.5 % 27.2 % Gross profit %, rental and fees 77.4 % 74.6 % Gross profit %, other 36.8 % 33.5 % Total gross profit % 33.5 % 33.2 % Selling and administrative as a % of revenue 28.4 % 28.3 % Operating income as a % of revenue 4.6 % 4.9 % � IKON Office Solutions, Inc. Consolidated Statements of Cash Flows (in thousands and unaudited) � Fiscal Year EndedSeptember 30, � Cash Flows from Operating Activities 2008 2007 Net income $ 91,335 $ 114,487 Additions (deductions) to reconcile net income to net cash provided by operating activities: Depreciation 72,782 68,719 Amortization 1,080 1,010 Other non-cash items 3,325 2,394 Loss on disposal of property and equipment 2,634 759 Provision for losses on accounts and lease receivables 7,397 6,940 Restructuring charge 11,259 - Asset impairment 200 - Provision for deferred income taxes 32,245 6,333 Stock-based compensation expense 10,277 9,637 Excess tax benefits from stock-based payments arrangements (984 ) (1,740 ) Pension expense 4,341 2,372 Loss from the early extinguishment of debt 5,702 - Changes in operating assets and liabilities: (Increase) decrease in accounts receivables (1,055 ) 40,624 (Increase) decrease in finance lease receivables (10,035 ) 4,019 Decrease (increase) in inventories 45,494 (67,893 ) Increase in prepaid expenses and other assets (6,508 ) (3 ) Increase in accounts payable 11,183 33,523 Increase (decrease) in deferred revenue 1,831 (12,858 ) Payments related to restructuring plans (3,606 ) - Increase (decrease) in accrued expenses 22,144 (28,040 ) Contributions to pension plans (3,422 ) (9,725 ) (Decrease) increase in income taxes payable (25,485 ) 1,262 Other � - � � 80 � Net cash provided by operating activities � 272,134 � � 171,900 � � Cash Flows from Investing Activities Expenditures for property and equipment (33,101 ) (34,269 ) Expenditures for equipment on operating leases (22,772 ) (29,600 ) Proceeds from the sale of property and equipment and equipment on operating leases 10,886 11,015 Proceeds from life insurance 4,366 5,821 Other � (4,264 ) � (2,124 ) Net cash used in investing activities � (44,885 ) � (49,157 ) � Cash Flows from Financing Activities Repayment of other borrowings (5,859 ) (66 ) Debt issuance costs (3,970 ) - Debt modification costs - (16,430 ) Corporate debt � issuances 152,051 - Corporate debt � repayments (172,072 ) (2,598 ) Non-corporate debt � issuances 22,566 158,244 Non-corporate debt � repayments (20,595 ) (166,225 ) Dividends paid (15,903 ) (20,048 ) Proceeds from stock option exercises 10,517 17,944 Excess tax benefits from stock-based payments arrangements 984 1,740 Purchase of treasury shares � (316,988 ) � (174,968 ) Net cash used in financing activities � (349,269 ) � (202,407 ) � Effect of exchange rate changes on cash and cash equivalents � (10,981 ) � 14,662 � � Net decrease in cash and cash equivalents (133,001 ) (65,002 ) Cash and cash equivalents at beginning of year � 349,237 � � 414,239 � Cash and cash equivalents at end of year $ 216,236 � $ 349,237 � � Non-cash investing and financing activities: Assets acquired under capital leases $ 3,270 � $ 15,406 �