##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the three months ended December 31, 2006
 Or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to
 Commission file number 1-5964
 IKON OFFICE SOLUTIONS, INC.
 (Exact name of registrant as specified in its charter)
 OHIO(State or other jurisdiction of 
incorporation or organization)
    
    23-0334400(I.R.S. Employer
Identification No.)70 Valley Stream ParkwayMalvern, Pennsylvania
    
    19355(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code:
(610) 296-8000
  þ o
  þ o o
 o þ




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##### 



INDEX
 Page No.CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
    
    
    3PART I  FINANCIAL INFORMATIONITEM 1.
    
    FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETS  DECEMBER 31, 2006 AND
SEPTEMBER 30, 2006 (UNAUDITED)
    
    
    4CONSOLIDATED STATEMENTS OF INCOME  THREE MONTHS ENDED
DECEMBER 31, 2006 AND 2005 (UNAUDITED)
    
    
    5CONSOLIDATED STATEMENTS OF CASH FLOWS  THREE MONTHS ENDED
DECEMBER 31, 2006 AND 2005 (UNAUDITED)
    
    
    6NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
    
    
    714ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
    
    
    1521ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    21ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    2122PART II  OTHER INFORMATIONITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    23ITEM 1A.
    
    RISK FACTORS
    
    
    23ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    23ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    23ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    23ITEM 5.
    
    OTHER INFORMATION
    
    
    23ITEM 6.
    
    EXHIBITS
    
    
    2324SIGNATURESCertification of Principal Executive OfficerCertification of Principal Financial OfficerCertification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350
   2




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FORWARD-LOOKING STATEMENTS
   
    
    conducting operations in a competitive environment and a changing industry;
    
    existing or future supplier relationships;
    
    our relationship with General Electric Capital Corporation (GE);
    
    our One Platform Conversion and our infrastructure and productivity initiatives;
    
    our ability to remediate our material weakness in billing and achieve effective
internal control over financial reporting;
    
    our ability to improve operational efficiency;
    
    new technologies;
    
    our ability to finance current operations and growth initiatives; and
    
    economic, legal and political issues associated with our international operations.
 3




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 IKON OFFICE SOLUTIONS, INC.
 CONSOLIDATED BALANCE SHEETS
 (unaudited)
 (in thousands)
 December 31, 2006
    
    
    September 30, 2006AssetsCash and cash equivalents
    
    $
    365,814
    
    
    $
    414,239Accounts receivable, net
    
    
    562,171
    
    
    
    589,973Lease receivables, net
    
    
    85,024
    
    
    
    83,051Inventories
    
    
    267,117
    
    
    
    214,792Prepaid expenses and other current assets
    
    
    31,907
    
    
    
    34,742Deferred taxes
    
    
    50,817
    
    
    
    46,504Total current assets
    
    
    1,362,850
    
    
    
    1,383,301Long-term lease receivables, net
    
    
    241,222
    
    
    
    222,333Equipment on operating leases, net
    
    
    80,501
    
    
    
    83,248Property and equipment, net
    
    
    141,794
    
    
    
    144,453Deferred taxes
    
    
    28,092
    
    
    
    30,215Goodwill
    
    
    1,308,090
    
    
    
    1,297,333Other assets
    
    
    71,490
    
    
    
    74,543Total Assets
    
    $
    3,234,039
    
    
    $
    3,235,426LiabilitiesCurrent portion of corporate debt
    
    $
    2,035
    
    
    $
    1,487Current portion of non-corporate debt
    
    
    156,822
    
    
    
    152,971Trade accounts payable
    
    
    241,305
    
    
    
    224,312Accrued salaries, wages and commissions
    
    
    73,572
    
    
    
    109,090Deferred revenues
    
    
    111,911
    
    
    
    118,146Taxes payable
    
    
    25,876
    
    
    
    15,831Other accrued expenses
    
    
    117,064
    
    
    
    139,590Total current liabilities
    
    
    728,585
    
    
    
    761,427Long-term corporate debt
    
    
    595,133
    
    
    
    593,578Long-term non-corporate debt
    
    
    70,111
    
    
    
    64,005Other long-term liabilities
    
    
    132,475
    
    
    
    130,283Commitments and contingencies (Note 8)Shareholders EquityCommon stock, no par value
    
    
    1,051,259
    
    
    
    1,044,633Retained earnings
    
    
    848,147
    
    
    
    828,255Accumulated other comprehensive income
    
    
    75,736
    
    
    
    59,169Cost of common stock in treasury
    
    
    (267,407
    )
    
    
    (245,924
    )Total Shareholders Equity
    
    
    1,707,735
    
    
    
    1,686,133Total Liabilities and Shareholders Equity
    
    $
    3,234,039
    
    
    $
    3,235,426Supplemental InformationShares of common stock authorized
    
    
    300,000
    
    
    
    300,000Shares of common stock issued
    
    
    149,310
    
    
    
    149,310Treasury stock
    
    
    22,820
    
    
    
    21,695Shares of common stock outstanding
    
    
    126,490
    
    
    
    127,615Series 12 preferred stock, no par value: authorized 480 shares; none issued or
outstanding
    
    
    
    
    
    
    
 See notes to consolidated financial statements
 4




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##### Table of Contents



IKON OFFICE SOLUTIONS, INC.
 CONSOLIDATED STATEMENTS OF INCOME
 (unaudited)
 (in thousands, except per share data)
 Three Months EndedDecember 312006
    
    
    2005RevenuesEquipment
    
    $
    416,237
    
    
    $
    424,989Customer service and supplies
    
    
    345,970
    
    
    
    371,223Managed and professional services
    
    
    192,243
    
    
    
    176,382Rental and fees
    
    
    35,408
    
    
    
    40,427Other
    
    
    18,026
    
    
    
    29,8421,007,884
    
    
    
    1,042,863Cost of RevenuesEquipment
    
    
    312,384
    
    
    
    323,243Customer service and supplies
    
    
    194,230
    
    
    
    199,053Managed and professional services
    
    
    142,252
    
    
    
    131,646Rental and fees
    
    
    9,909
    
    
    
    12,798Other
    
    
    11,997
    
    
    
    13,930670,772
    
    
    
    680,670Gross ProfitEquipment
    
    
    103,853
    
    
    
    101,746Customer service and supplies
    
    
    151,740
    
    
    
    172,170Managed and professional services
    
    
    49,991
    
    
    
    44,736Rental and fees
    
    
    25,499
    
    
    
    27,629Other
    
    
    6,029
    
    
    
    15,912337,112
    
    
    
    362,193Selling and administrative
    
    
    288,137
    
    
    
    313,987Gain on divestiture of business
    
    
    
    
    
    
    4,924Restructuring benefit
    
    
    
    
    
    
    152Operating income
    
    
    48,975
    
    
    
    53,282Loss from the early extinguishment of debt
    
    
    
    
    
    
    1,650Interest income
    
    
    3,360
    
    
    
    2,571Interest expense
    
    
    12,452
    
    
    
    13,798Income from continuing operations before taxes on income
    
    
    39,883
    
    
    
    40,405Taxes on income
    
    
    12,546
    
    
    
    12,773Income from continuing operations
    
    
    27,337
    
    
    
    27,632Discontinued Operations:Operating income
    
    
    
    
    
    
    19Tax expense
    
    
    
    
    
    
    8Net income from discontinued operations
    
    
    
    
    
    
    11Net income
    
    $
    27,337
    
    
    $
    27,643Basic Earnings Per Common ShareContinuing operations
    
    $
    0.21
    
    
    $
    0.21Discontinued operations
    
    
    
    
    
    
    0.00Net income
    
    $
    0.21
    
    
    $
    0.21Diluted Earnings Per Common ShareContinuing operations
    
    $
    0.21
    
    
    $
    0.21Discontinued operations
    
    
    
    
    
    
    0.00Net income
    
    $
    0.21
    
    
    $
    0.21Cash dividends per common share
    
    $
    0.04
    
    
    $
    0.04
  5




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##### Table of Contents



IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 Three Months Ended December 312006
    
    
    2005Cash Flows from Operating ActivitiesNet income
    
    $
    27,337
    
    
    $
    27,643Net income from discontinued operations
    
    
    
    
    
    
    11Income from continuing operations
    
    
    27,337
    
    
    
    27,632Additions (deductions) to reconcile net income to net cash used in operating activities:Depreciation
    
    
    17,143
    
    
    
    17,251Amortization
    
    
    517
    
    
    
    1,097Gain from divestiture of business
    
    
    
    
    
    
    (4,924
    )Loss on disposal of property and equipment
    
    
    151
    
    
    
    633Provision for losses on accounts receivable
    
    
    1,754
    
    
    
    97Provision for deferred income taxes
    
    
    (4,282
    )
    
    
    (7,289
    )Provision for lease default reserves
    
    
    28
    
    
    
    802Stock-based compensation expense
    
    
    2,848
    
    
    
    2,551Pension expense
    
    
    524
    
    
    
    16,844Loss from the early extinguishment of debt
    
    
    
    
    
    
    1,650Changes in operating assets and liabilities, net of divestiture of businesses:Decrease (increase) in accounts receivable
    
    
    29,898
    
    
    
    (20,214
    )Increase in inventories
    
    
    (51,051
    )
    
    
    (17,328
    )Decrease in prepaid expenses and other current assets
    
    
    2,995
    
    
    
    2,509Increase (decrease) in accounts payable
    
    
    15,235
    
    
    
    (33,573
    )(Decrease) increase in deferred revenue
    
    
    (7,580
    )
    
    
    2,877Decrease in accrued expenses
    
    
    (55,718
    )
    
    
    (40,043
    )Contributions to pension plans
    
    
    (801
    )
    
    
    (1,205
    )Increase in taxes payable
    
    
    12,886
    
    
    
    15,329Other
    
    
    (324
    )
    
    
    (722
    )Net cash used in continuing operations
    
    
    (8,440
    )
    
    
    (36,026
    )Net cash used in discontinued operations
    
    
    
    
    
    
    (2,114
    )Net cash used in operating activities
    
    
    (8,440
    )
    
    
    (38,140
    )Cash Flows from Investing ActivitiesProceeds from the divestiture of a business
    
    
    
    
    
    
    19,128Expenditures for property and equipment
    
    
    (4,837
    )
    
    
    (3,611
    )Expenditures for equipment on operating leases
    
    
    (7,345
    )
    
    
    (7,371
    )Proceeds from the sale of property and equipment and equipment on operating leases
    
    
    2,732
    
    
    
    2,823Proceeds from the sale of lease receivables
    
    
    53,481
    
    
    
    51,142Lease receivables  additions
    
    
    (80,925
    )
    
    
    (94,180
    )Lease receivables  collections
    
    
    24,597
    
    
    
    122,389Proceeds from life insurance
    
    
    2,227
    
    
    
    1,501Other
    
    
    76
    
    
    
    (2,235
    )Net cash (used in) provided by investing activities
    
    
    (9,994
    )
    
    
    89,586Cash Flows from Financing Activities
    
    
    
    
    
    
    
    

Short-term corporate debt borrowings (repayments), net
    
    
    1
    
    
    
    (29
    )Repayment of other borrowings
    
    
    (27
    )
    
    
    (3,752
    )Debt issuance costs
    
    
    
    
    
    
    (821
    )Corporate  debt repayments
    
    
    (218
    )
    
    
    (54,482
    )Non-corporate debt  issuances
    
    
    4,220
    
    
    
    18,432Non-corporate debt  repayments
    
    
    (7,139
    )
    
    
    (87,358
    )Dividends paid
    
    
    (5,092
    )
    
    
    (5,249
    )Increase in restricted cash
    
    
    
    
    
    
    (5
    )Proceeds from stock option exercises
    
    
    10,283
    
    
    
    5,283Tax benefit relating to stock plans
    
    
    788
    
    
    
    2,962Purchase of treasury shares
    
    
    (34,091
    )
    
    
    (33,392
    )Net cash used in financing activities
    
    
    (31,275
    )
    
    
    (158,411
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    1,284
    
    
    
    (986
    )Net decrease in cash and cash equivalents
    
    $
    (48,425
    )
    
    $
    (107,951
    )Cash and cash equivalents at beginning of year
    
    
    414,239
    
    
    
    373,705Cash and cash equivalents at end of period
    
    $
    365,814
    
    
    $
    265,754Supplemental cash flow information:Cash paid for income taxes
    
    $
    3,743
    
    
    $
    2,390Cash paid for interest
    
    $
    13,746
    
    
    $
    18,069Non-cash investing and financing activities:Assets acquired under capital leases
    
    $
    2,242
    
    
    $
    
 See notes to consolidated financial statements
 6




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IKON OFFICE SOLUTIONS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. BASIS OF PRESENTATION
     2. RECENT ACCOUNTING STANDARDS
   7




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##### Table of Contents



3. ACCOUNTING FOR STOCK BASED COMPENSATION
  Stock Options
      WeightedShares
    
    Average PriceOutstanding at September 30, 2006
    
    
    9,366
    
    
    $
    11.50Granted
    
    
    563
    
    
    
    16.54Exercised
    
    
    1,096
    
    
    
    14.94Cancelled
    
    
    153
    
    
    
    30.80Outstanding at December 31, 2006
    
    
    8,680
    
    
    $
    11.76Exercisable at December 31, 2006
    
    
    6,752
    *
    
    $
    11.58
 
 *
    
    6,158 of the 6,752 options exercisable at December 31, 2006 have a market value in excess of the
strike price.   8




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##### Table of Contents



Three Months Ended December 312006
    
    2005Expected dividend yield (1)
    
    
    1.0
    %
    
    
    1.5
    %Expected volatility rate (2)
    
    
    24.6
    %
    
    
    55.1
    %Expected lives (3)
    
    5.0 years
    
    5.0 yearsRisk-free interest rate (4)
    
    
    4.4
    %
    
    
    4.4
    %
 
 (1)
    
    Dividend yield assumption is based on the Companys history and expectation of future
dividend payouts.(2)
    
    For options granted prior to October 1, 2006, the expected volatility rate is determined
using historical price observations at regular intervals since 1993 through the respective
option date. For options granted after October 1, 2006, the expected volatility rate is
determined using historical price observations at regular intervals since April 1, 2004.(3)
    
    The expected life of employee stock options is based on both historical exercise pattern and
from calculating an expected term from the option date to full exercise for the options
granted.(4)
    
    Risk-free interest rate assumption is based upon the interest rates published by the Federal
Reserve for U.S. Treasury Securities with a five-year life.  Options Outstanding

    Options ExercisableWeighted-
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted-Number
    
    
    Weighted-
    
    
    Average
    
    
    
    
    
    
    Number
    
    
    Weighted-
    
    
    AverageOutstanding
    
    
    Average
    
    
    Remaining
    
    
    Aggregate
    
    
    Exercisable
    
    
    Average
    
    
    Remaining
    
    
    AggregateRange of
    
    at December 31,
    
    
    Exercise
    
    
    Contractual
    
    
    Intrinsic
    
    
    at December 31,
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicExercise Prices
    
    2006
    
    
    Price
    
    
    Life
    
    
    Value
    
    
    2006
    
    
    Price
    
    
    Life
    
    
    Value$  2.35
    9.09
    
    
    2,074
    
    
    $
    6.07
    
    
    5.7 years
    
    $
    21,364
    
    
    
    1,924
    
    
    $
    5.84
    
    
    5.7 years
    
    $
    20,2669.10   10.99
    
    
    3,463
    
    
    
    10.77
    
    
    
    7.7
    
    
    
    19,373
    
    
    
    2,289
    
    
    
    10.75
    
    
    
    7.3
    
    
    
    12,85811.00   16.49
    
    
    1,998
    
    
    
    13.28
    
    
    
    4.0
    
    
    
    6,179
    
    
    
    1,945
    
    
    
    13.30
    
    
    
    3.8
    
    
    
    5,97416.50   44.63
    
    
    1,145
    
    
    
    22.39
    
    
    
    5.7
    
    
    
    
    
    
    
    594
    
    
    
    27.76
    
    
    
    1.8
    
    
    
    8,680
    
    
    $
    11.76
    
    
    6.1 years
    
    $
    46,916
    
    
    
    6,752
    
    
    $
    11.58
    
    
    5.4 years
    
    $
    39,098
 Stock Awards
    4. GOODWILL
  IKON North
    
    
    IKONAmerica
    
    
    Europe
    
    
    TotalGoodwill at September 30, 2006
    
    $
    962,407
    
    
    $
    334,926
    
    
    $
    1,297,333Translation adjustment
    
    
    (4,358
    )
    
    
    15,115
    
    
    
    10,757Goodwill at December 31, 2006
    
    $
    958,049
    
    
    $
    350,041
    
    
    $
    1,308,090
 9




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5. EARNINGS PER COMMON SHARE
  Three Months EndedDecember 312006
    
    
    2005Numerator:Numerator for basic earnings per common share  income
from continuing operations
    
    $
    27,337
    
    
    $
    27,632Effect of dilutive securities:Interest expense on convertible notes, net of taxes
    
    
    
    
    
    
    88Numerator for diluted earnings per common share  net
income from continuing operations
    
    $
    27,337
    
    
    $
    27,720Denominator:Denominator for basic earnings per common share 
weighted average common shares
    
    
    127,235
    
    
    
    133,141Effect of dilutive securities:Convertible notes
    
    
    
    
    
    
    770Employee stock awards
    
    
    679
    
    
    
    435Employee stock options
    
    
    1,390
    
    
    
    512Dilutive potential common shares
    
    
    2,069
    
    
    
    1,717Denominator for diluted earnings per common share 
adjusted weighted average common shares and assumed
conversions
    
    
    129,304
    
    
    
    134,858Basic earnings per common share from continuing operations
    
    $
    0.21
    
    
    $
    0.21Diluted earnings per common share from continuing operations
    
    $
    0.21
    
    
    $
    0.21
   6. SHARE REPURCHASES
  10




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7. COMPREHENSIVE INCOME
  Three Months EndedDecember 312006
    
    
    2005Net income
    
    $
    27,337
    
    
    $
    27,643Foreign currency translation adjustments
    
    
    16,567
    
    
    
    (11,867
    )Loss on derivative financial instruments
    
    
    
    
    
    
    (131
    )Minimum pension liability adjustment
    
    
    
    
    
    
    24,784
    *Total comprehensive income
    
    $
    43,904
    
    
    $
    40,429
 
 *
    
    As a result of freezing the U.S. Plans (discussed in Note 10). 8. CONTINGENCIES
 Environmental and Legal
    11




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##### Table of Contents



Other Contingencies
    12




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##### Table of Contents



9. SEGMENT REPORTING
  *CorporateIKON North
    
    
    IKON
    
    
    andAmerica
    
    
    Europe
    
    
    Eliminations
    
    
    TotalThree Months Ended December 31, 2006Revenues:Equipment
    
    $
    361,755
    
    
    $
    54,482
    
    
    $
    
    
    
    $
    416,237Customer service and supplies
    
    
    304,617
    
    
    
    41,353
    
    
    
    
    
    
    
    345,970Managed and professional services
    
    
    178,473
    
    
    
    13,770
    
    
    
    
    
    
    
    192,243Rental and fees
    
    
    33,192
    
    
    
    2,216
    
    
    
    
    
    
    
    35,408Other
    
    
    
    
    
    
    18,026
    
    
    
    
    
    
    
    18,026Total revenues
    
    
    878,037
    
    
    
    129,847
    
    
    
    
    
    
    
    1,007,884Cost of Revenues:Equipment
    
    
    277,522
    
    
    
    34,862
    
    
    
    
    
    
    
    312,384Customer service and supplies
    
    
    165,687
    
    
    
    28,543
    
    
    
    
    
    
    
    194,230Managed and professional services
    
    
    129,925
    
    
    
    12,327
    
    
    
    
    
    
    
    142,252Rental and fees
    
    
    9,692
    
    
    
    217
    
    
    
    
    
    
    
    9,909Other
    
    
    
    
    
    
    11,997
    
    
    
    
    
    
    
    11,997Total cost of revenues
    
    
    582,826
    
    
    
    87,946
    
    
    
    
    
    
    
    670,772Gross Profit:Equipment
    
    
    84,233
    
    
    
    19,620
    
    
    
    
    
    
    
    103,853Customer service and supplies
    
    
    138,930
    
    
    
    12,810
    
    
    
    
    
    
    
    151,740Managed and professional services
    
    
    48,548
    
    
    
    1,443
    
    
    
    
    
    
    
    49,991Rental and fees
    
    
    23,500
    
    
    
    1,999
    
    
    
    
    
    
    
    25,499Other
    
    
    
    
    
    
    6,029
    
    
    
    
    
    
    
    6,029Total gross profit
    
    
    295,211
    
    
    
    41,901
    
    
    
    
    
    
    
    337,112Selling and administrative
    
    
    219,772
    
    
    
    33,054
    
    
    
    35,311
    
    
    
    288,137Operating income
    
    
    75,439
    
    
    
    8,847
    
    
    
    (35,311
    )
    
    
    48,975Interest income
    
    
    
    
    
    
    
    
    
    
    3,360
    
    
    
    3,360Interest expense
    
    
    
    
    
    
    
    
    
    
    12,452
    
    
    
    12,452Income from continuing operations before
taxes on income
    
    $
    75,439
    
    
    $
    8,847
    
    
    $
    (44,403
    )
    
    $
    39,883Three Months Ended December 31, 2005Revenues:Equipment
    
    $
    375,723
    
    
    $
    49,266
    
    
    $
    
    
    
    $
    424,989Customer service and supplies
    
    
    336,668
    
    
    
    34,555
    
    
    
    
    
    
    
    371,223Managed and professional services
    
    
    162,824
    
    
    
    13,558
    
    
    
    
    
    
    
    176,382Rental and fees
    
    
    39,027
    
    
    
    1,400
    
    
    
    
    
    
    
    40,427Other
    
    
    13,274
    
    
    
    16,568
    
    
    
    
    
    
    
    29,842Total revenues
    
    
    927,516
    
    
    
    115,347
    
    
    
    
    
    
    
    1,042,863Cost of revenues:Equipment
    
    
    291,214
    
    
    
    32,029
    
    
    
    
    
    
    
    323,243Customer service and supplies
    
    
    174,852
    
    
    
    24,201
    
    
    
    
    
    
    
    199,053Managed and professional services
    
    
    120,245
    
    
    
    11,401
    
    
    
    
    
    
    
    131,646Rental and fees
    
    
    12,649
    
    
    
    149
    
    
    
    
    
    
    
    12,798Other
    
    
    3,741
    
    
    
    10,189
    
    
    
    
    
    
    
    13,930Total cost of revenues
    
    
    602,701
    
    
    
    77,969
    
    
    
    
    
    
    
    680,670Gross profit:Equipment
    
    
    84,509
    
    
    
    17,237
    
    
    
    
    
    
    
    101,746Customer service and supplies
    
    
    161,816
    
    
    
    10,354
    
    
    
    
    
    
    
    172,170Managed and professional services
    
    
    42,579
    
    
    
    2,157
    
    
    
    
    
    
    
    44,736Rental and fees
    
    
    26,378
    
    
    
    1,251
    
    
    
    
    
    
    
    27,629Other
    
    
    9,533
    
    
    
    6,379
    
    
    
    
    
    
    
    15,912Total gross profit
    
    
    324,815
    
    
    
    37,378
    
    
    
    
    
    
    
    362,193Selling and administrative
    
    
    226,250
    
    
    
    29,804
    
    
    
    57,933
    
    
    
    313,987Gain on divestiture of business
    
    
    
    
    
    
    4,924
    
    
    
    
    
    
    
    4,924Restructuring and asset benefit
    
    
    152
    
    
    
    
    
    
    
    
    
    
    
    152Operating income
    
    
    98,717
    
    
    
    12,498
    
    
    
    (57,933
    )
    
    
    53,282Loss from the early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    1,650
    
    
    
    1,650Interest income
    
    
    
    
    
    
    
    
    
    
    2,571
    
    
    
    2,571Interest expense
    
    
    
    
    
    
    
    
    
    
    13,798
    
    
    
    13,798Income from continuing operations before
taxes on income
    
    $
    98,717
    
    
    $
    12,498
    
    
    $
    (70,810
    )
    
    $
    40,405
 
 *
    
    Corporate and Eliminations, which is not treated as a business segment, includes certain
selling and administrative functions such as finance and customer support. 13




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##### Table of Contents



10. PENSION PLANS
    Three Months Ended December 312006
    
    
    2005U.S.
    
    
    Non-U.S.
    
    
    U.S.
    
    
    Non-U.S.Plans
    
    
    Plans
    
    
    Plans
    
    
    PlansService cost
    
    $
    
    
    
    $
    720
    
    
    $
    8,721
    
    
    $
    1,189Interest cost
    
    
    8,191
    
    
    
    1,234
    
    
    
    8,417
    
    
    
    1,115Expected return on assets
    
    
    (9,089
    )
    
    
    (1,400
    )
    
    
    (7,803
    )
    
    
    (1,027
    )Amortization of net obligation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9Amortization of prior service cost
    
    
    
    
    
    
    (52
    )
    
    
    47
    
    
    
    (51
    )Recognized net actuarial loss
    
    
    673
    
    
    
    247
    
    
    
    2,978
    
    
    
    397Curtailment
    
    
    
    
    
    
    
    
    
    
    2,852
    
    
    
    Net periodic pension (income) cost
    
    $
    (225
    )
    
    $
    749
    
    
    $
    15,212
    
    
    $
    1,632
   14




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 OVERVIEW
 The Company
  Summary of Consolidated Results
  Recent Developments
  RESULTS OF OPERATIONS
 Three Months Ended December 31, 2006 Compared to the Three Months Ended December 31, 2005
 Reportable Segments
  *CorporateIKON North
    
    
    IKON
    
    
    andAmerica
    
    
    Europe
    
    
    Eliminations
    
    
    TotalThree Months Ended December 31, 2006Revenues:Equipment
    
    $
    361,755
    
    
    $
    54,482
    
    
    $
    
    
    
    $
    416,237Customer service and supplies
    
    
    304,617
    
    
    
    41,353
    
    
    
    
    
    
    
    345,970Managed and professional services
    
    
    178,473
    
    
    
    13,770
    
    
    
    
    
    
    
    192,243Rental and fees
    
    
    33,192
    
    
    
    2,216
    
    
    
    
    
    
    
    35,408Other
    
    
    
    
    
    
    18,026
    
    
    
    
    
    
    
    18,026Total revenues
    
    
    878,037
    
    
    
    129,847
    
    
    
    
    
    
    
    1,007,884Cost of Revenues:Equipment
    
    
    277,522
    
    
    
    34,862
    
    
    
    
    
    
    
    312,384Customer service and supplies
    
    
    165,687
    
    
    
    28,543
    
    
    
    
    
    
    
    194,230Managed and professional services
    
    
    129,925
    
    
    
    12,327
    
    
    
    
    
    
    
    142,252Rental and fees
    
    
    9,692
    
    
    
    217
    
    
    
    
    
    
    
    9,909Other
    
    
    
    
    
    
    11,997
    
    
    
    
    
    
    
    11,997Total cost of revenues
    
    
    582,826
    
    
    
    87,946
    
    
    
    
    
    
    
    670,772Gross Profit:Equipment
    
    
    84,233
    
    
    
    19,620
    
    
    
    
    
    
    
    103,853Customer service and supplies
    
    
    138,930
    
    
    
    12,810
    
    
    
    
    
    
    
    151,740Managed and professional services
    
    
    48,548
    
    
    
    1,443
    
    
    
    
    
    
    
    49,991
 15




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##### Table of Contents



*CorporateIKON North
    
    
    IKON
    
    
    andAmerica
    
    
    Europe
    
    
    Eliminations
    
    
    TotalRental and fees
    
    
    23,500
    
    
    
    1,999
    
    
    
    
    
    
    
    25,499Other
    
    
    
    
    
    
    6,029
    
    
    
    
    
    
    
    6,029Total gross profit
    
    
    295,211
    
    
    
    41,901
    
    
    
    
    
    
    
    337,112Selling and administrative
    
    
    219,772
    
    
    
    33,054
    
    
    
    35,311
    
    
    
    288,137Operating income
    
    
    75,439
    
    
    
    8,847
    
    
    
    (35,311
    )
    
    
    48,975Interest income
    
    
    
    
    
    
    
    
    
    
    3,360
    
    
    
    3,360Interest expense
    
    
    
    
    
    
    
    
    
    
    12,452
    
    
    
    12,452Income from continuing operations before
taxes on income
    
    $
    75,439
    
    
    $
    8,847
    
    
    $
    (44,403
    )
    
    $
    39,883Three Months Ended December 31, 2005Revenues:Equipment
    
    $
    375,723
    
    
    $
    49,266
    
    
    $
    
    
    
    $
    424,989Customer service and supplies
    
    
    336,668
    
    
    
    34,555
    
    
    
    
    
    
    
    371,223Managed and professional services
    
    
    162,824
    
    
    
    13,558
    
    
    
    
    
    
    
    176,382Rental and fees
    
    
    39,027
    
    
    
    1,400
    
    
    
    
    
    
    
    40,427Other
    
    
    13,274
    
    
    
    16,568
    
    
    
    
    
    
    
    29,842Total revenues
    
    
    927,516
    
    
    
    115,347
    
    
    
    
    
    
    
    1,042,863Cost of Revenues:Equipment
    
    
    291,214
    
    
    
    32,029
    
    
    
    
    
    
    
    323,243Customer service and supplies
    
    
    174,852
    
    
    
    24,201
    
    
    
    
    
    
    
    199,053Managed and professional services
    
    
    120,245
    
    
    
    11,401
    
    
    
    
    
    
    
    131,646Rental and fees
    
    
    12,649
    
    
    
    149
    
    
    
    
    
    
    
    12,798Other
    
    
    3,741
    
    
    
    10,189
    
    
    
    
    
    
    
    13,930Total cost of revenues
    
    
    602,701
    
    
    
    77,969
    
    
    
    
    
    
    
    680,670Gross Profit:Equipment
    
    
    84,509
    
    
    
    17,237
    
    
    
    
    
    
    
    101,746Customer service and supplies
    
    
    161,816
    
    
    
    10,354
    
    
    
    
    
    
    
    172,170Managed and professional services
    
    
    42,579
    
    
    
    2,157
    
    
    
    
    
    
    
    44,736Rental and fees
    
    
    26,378
    
    
    
    1,251
    
    
    
    
    
    
    
    27,629Other
    
    
    9,533
    
    
    
    6,379
    
    
    
    
    
    
    
    15,912Total gross profit
    
    
    324,815
    
    
    
    37,378
    
    
    
    
    
    
    
    362,193Selling and administrative
    
    
    226,250
    
    
    
    29,804
    
    
    
    57,933
    
    
    
    313,987Gain on divestiture of business
    
    
    
    
    
    
    4,924
    
    
    
    
    
    
    
    4,924Restructuring and asset benefit
    
    
    152
    
    
    
    
    
    
    
    
    
    
    
    152Operating income
    
    
    98,717
    
    
    
    12,498
    
    
    
    (57,933
    )
    
    
    53,282Loss from the early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    1,650
    
    
    
    1,650Interest income
    
    
    
    
    
    
    
    
    
    
    2,571
    
    
    
    2,571Interest expense
    
    
    
    
    
    
    
    
    
    
    13,798
    
    
    
    13,798Income from continuing operations before
taxes on income
    
    $
    98,717
    
    
    $
    12,498
    
    
    $
    (70,810
    )
    
    $
    40,405
 
 *
    
    Corporate and eliminations, which is not treated as a reportable segment, includes certain
selling and administrative functions such as finance and customer support.
 Equipment
 2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    416,237
    
    
    $
    424,989
    
    
    $
    (8,752
    )
    
    
    (2.1
    )%Cost of revenue
    
    
    312,384
    
    
    
    323,243
    
    
    
    (10,859
    )
    
    
    (3.4
    )%Gross profit
    
    $
    103,853
    
    
    $
    101,746
    
    
    $
    2,107
    
    
    
    2.1
    %Gross profit %
    
    
    25.0
    %
    
    
    23.9
    %
  16




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##### Table of Contents



TM
  Customer Service and Supplies
 2007
    
    2006
    
    $ Change
    
    % ChangeRevenue
    
    $
    345,970
    
    
    $
    371,223
    
    
    $
    (25,253
    )
    
    
    (6.8
    )%Cost of revenue
    
    
    194,230
    
    
    
    199,053
    
    
    
    (4,823
    )
    
    
    (2.4
    )%Gross profit
    
    $
    151,740
    
    
    $
    172,170
    
    
    $
    (20,430
    )
    
    
    (11.9
    )%Gross profit %
    
    
    43.9
    %
    
    
    46.4
    %
   Managed and Professional Services
 2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    192,243
    
    
    $
    176,382
    
    
    $
    15,861
    
    
    
    9.0
    %Cost of revenue
    
    
    142,252
    
    
    
    131,646
    
    
    
    10,606
    
    
    
    8.1
    %Gross profit
    
    $
    49,991
    
    
    $
    44,736
    
    
    $
    5,255
    
    
    
    11.7
    %Gross profit %
    
    
    26.0
    %
    
    
    25.4
    %
 17




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##### Table of Contents



Rental and Fees
 2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    35,408
    
    
    $
    40,427
    
    
    $
    (5,019
    )
    
    
    (12.4
    )%Cost of revenue
    
    
    9,909
    
    
    
    12,798
    
    
    
    (2,889
    )
    
    
    (22.6
    )%Gross profit
    
    $
    25,499
    
    
    $
    27,629
    
    
    $
    (2,130
    )
    
    
    (7.7
    )%Gross profit %
    
    
    72.0
    %
    
    
    68.3
    %
  Other Revenue
 2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeFinance income
    
    $
    5,975
    
    
    $
    19,072
    
    
    $
    (13,097
    )
    
    
    (68.7
    )%Other
    
    
    12,051
    
    
    
    10,770
    
    
    
    1,281
    
    
    
    11.9
    %Total other revenue
    
    $
    18,026
    
    
    $
    29,842
    
    
    $
    (11,816
    )
    
    
    (39.6
    )%Finance interest expense
    
    $
    1,418
    
    
    $
    4,612
    
    
    $
    (3,194
    )
    
    
    (69.3
    )%Other
    
    
    10,579
    
    
    
    9,318
    
    
    
    1,261
    
    
    
    13.5
    %Total cost of other revenue
    
    $
    11,997
    
    
    $
    13,930
    
    
    $
    (1,933
    )
    
    
    (13.9
    )%Finance income gross profit
    
    $
    4,557
    
    
    $
    14,460
    
    
    $
    (9,903
    )
    
    
    (68.5
    )%Other gross profit
    
    
    1,472
    
    
    
    1,452
    
    
    
    20
    
    
    
    1.4
    %Total other gross profit
    
    $
    6,029
    
    
    $
    15,912
    
    
    $
    (9,883
    )
    
    
    (62.1
    )%Finance income gross profit %
    
    
    76.3
    %
    
    
    75.8
    %Other gross profit%
    
    
    12.2
    %
    
    
    13.5
    %Total gross profit %
    
    
    33.4
    %
    
    
    53.3
    %
 18




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##### Table of Contents



Selling and Administrative Expenses
 2007
    
    2006
    
    $ Change
    
    % ChangeSelling and administrative expenses
    
    $
    288,137
    
    
    $
    313,987
    
    
    $
    (25,850
    )
    
    
    (8.2
    )%Selling and administrative expenses as
a % of revenue
    
    
    28.6
    %
    
    
    30.1
    %
   
    
    pension expense, which is allocated between selling and administrative expense and
cost of revenues based on the number of employees related to those areas, decreased
from $16,844 to $524 in fiscal 2007 primarily as a result of the freezing of certain of
our defined benefit pension plans during fiscal 2006, which included a curtailment
charge of $2,852 in the first quarter of fiscal 2006. The year-over-year decline
attributed specifically to selling and administrative was approximately $10,000;
    
    a decrease of $13,529 compared to fiscal 2006 as a result of lower spending for
contract labor, information technology, healthcare costs and facilities due to spending
actions taken during fiscal 2006; and
    
    a decrease of $3,254 in professional fees, which includes lower fees from GE related
to the sale of the U.S. Retained Portfolio.
 Other Items
 2007
    
    2006
    
    $ ChangeGain on divestiture of business
    
    $
    
    
    
    $
    4,924
    
    
    $
    (4,924
    )Restructuring benefit
    
    
    
    
    
    
    152
    
    
    
    (152
    )Loss from the early extinguishment of debt
    
    
    
    
    
    
    1,650
    
    
    
    (1,650
    )Interest income
    
    
    3,360
    
    
    
    2,571
    
    
    
    789Interest expense
    
    
    12,452
    
    
    
    13,798
    
    
    
    (1,346
    )Taxes on income
    
    
    12,546
    
    
    
    12,773
    
    
    
    (227
    )Income from continuing operations
    
    
    27,337
    
    
    
    27,632
    
    
    
    (295
    )Diluted earnings per common share  continuing operations
    
    $
    0.21
    
    
    $
    0.21
    
    
    $
    
      19




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##### Table of Contents



FINANCIAL CONDITION AND LIQUIDITY
 Cash Flows and Liquidity
  2007Cash used in operating activities
    
    $
    (8,440
    )Cash used in investing activities
    
    
    (9,994
    )Cash used in financing activities
    
    
    (31,275
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    1,284Decrease in cash and cash equivalents
    
    
    (48,425
    )Cash and cash equivalents at the beginning of the year
    
    
    414,239Cash and cash equivalents at the end of period
    
    $
    365,814
 Operating Cash Flows
  Investing Cash Flows
  Financing Cash Flows
  20




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##### Table of Contents



Capital Structure
  Liquidity Outlook
   RECENT ACCOUNTING STANDARDS
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
 Foreign Exchange Risk
 
 Item 4. Controls and Procedures
 EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
  21




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##### Table of Contents



Material Weakness in Internal Control Over Financial Reporting
   Managements Remediation Initiatives
   Changes in Internal Control Over Financial Reporting
  22




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Purchases of Equity
Securities
  ApproximateTotal Number
    
    
    Dollar Valueof Shares
    
    
    of Shares thatTotal Number
    
    
    Average
    
    
    Purchased as
    
    
    May Yet Beof Shares
    
    
    Price Paid
    
    
    Part of
    
    
    Purchased UnderPeriod
    
    Purchased
    
    
    per Share
    
    
    Repurchase Plan
    
    
    the Repurchase PlanOctober 1, 2006  October 31, 2006
    
    
    693
    
    
    $
    13.89
    
    
    
    693
    
    
    $
    95,331November 1, 2006  November 30, 2006
    
    
    908
    
    
    
    15.57
    
    
    
    908
    
    
    
    81,188December 1, 2006  December 31, 2006
    
    
    623
    
    
    
    16.46
    
    
    
    623
    
    
    
    70,9272,224
    
    
    $
    15.30
    
    
    
    2,224
    
    
    $
    70,927
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 31.1
    
    Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended31.2
    
    Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended
 23




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##### Table of Contents



32.1
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 135032.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350
 24




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##### Table of Contents



SIGNATURES
    By:
    /s/ ROBERT F. WOODS(Robert F. Woods)Senior Vice President and Chief
Financial Officer
(Principal Financial Officer) 25