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Danka income sign of recovery

The photocopier distributor's bottom line spotlights positive effects of radical restructuring.

Danka Business Systems PLC showed a net profit for the first time in four quarters, providing the strongest evidence to date that the photocopier distributor has turned the corner.

Danka said Thursday that net income in the first quarter of its new fiscal year more than doubled to $12.2-million, or 21 cents a share, from $5-million, or 9 cents a share, a year ago. The St. Petersburg company got back on its feet after a severe retrenchment that included 1,400 layoffs, branch closures, inventory reductions and asset sales.

Besides cost-cutting, the bottom line got a boost from higher sales of digital copiers and increased productivity from service technicians. One of the few lowlights was the 16 percent drop in total revenue to $645.7-million from $765.4-million in the year-ago period.

"The restructuring is having the effect that Danka was looking for," said Lou Slawetsky, president of Industry Analysts Inc. in Rochester, N.Y. "Now, the challenge is to get the revenue up."

Still, the performance in the quarter ended June 30 easily beat conservative analysts' estimates. That said, analysts were given little guidance from management. Last month, the company would say only that earnings would be "substantially in excess" of 9 cents a share on revenue of about $630-million.

Investors already had aggressively bid up Danka's stock in anticipation of its earnings release. Since closing at $5.50 on June 1, shares have nearly doubled. The stock closed at $10.87{ Thursday, up 25 cents.

The return to profitability is a triumph for Danka's new management team led by chief executive Larry K. Switzer and president Brian L. Merriman, who were installed last fall after the company's board ousted co-founder Dan Doyle. They have brought Danka back from the brink of bankruptcy by restructuring the company.

They wriggled out of a contract with Eastman Kodak Co. that forced Danka to buy copiers it could not sell. They winnowed the number of suppliers to three: Canon, Toshiba and Heidelberger Druckmachinen AG. They got Xerox Corp. to buy a money-losing business for servicing older Xerox machines. More recently, Xerox bought Danka's fax division for $45-million in cash.

The new team also managed to cut more than $100-million out of annual costs. The layoffs reduced the work force to about 18,000. Danka closed 60 sales offices and warehouses. The belt-tightening helped reduce selling, general and administrative expenses in the first quarter by 11 percent to $199.5-million.

"We've got the cost structure under control," Merriman said. "Now, we go back and lay the foundation for the rest of the year."

To that end, Merriman wants to add about 200 salespeople to his current force of 1,100 by the end of September. The larger staff is needed to help rebuild copier sales, which fell 15 percent in the quarter. "I found the revenue levels a little bit disturbing because most of the manufacturers tell me they are having record quarters," Slawetsky said.

The lower equipment sales had a silver lining: Digital copiers made up 35 percent of the units sold in the United States, up from 19 percent in the quarter ended March 31. Because of its financial problems, Danka has been playing catch-up in the transition to digital copiers, which connect to computer networks and allow users to copy, print and fax.

On the service side, Danka expects to speed up the distribution of parts by moving its warehouse from Rochester, N.Y., to Indianapolis, next to a hub for United Parcel Service. In addition, technicians now have cell phones that also serve as two-way radios, which helped improve communication with the dispatch center.

Danka still faces the double-digit interest rates it is paying on its $1.1-billion debt. The company would like to refinance its bank debt by the end of the year.

Danka was deprived of cash to pay down debt when a deal to sell its division that runs corporate copy centers to a British buyout firm fell through at the end of June. Switzer said many parties have expressed interest in aligning with the division, but the company has made no decision about its future.