Profit Comes First

Profit Comes First

The CEO at Tampa's Global Imaging Systems Inc. learned at two other office-technology distributors that acquisition-aided revenue growth doesn't always boost earnings.

By Francis X. Gilpin

Associate Editor

Thomas S. Johnson wore an orange and blue diagonally striped necktie to Global Imaging Systems Inc.'s Aug. 18 annual meeting. During his presentation, the 1972 University of Florida graduate eyed a national map with orange and - gasp! - yellow dots that was projected onto the wall. Perhaps, the Global president and chief executive officer mused, his old school's colors should be used to signify the locations of Global's core subsidiaries and satellite offices, too.

If, from here on out, Global maps mimic the hues of Johnson's tie, there will be a little more Gator orange and blue on the wall in 2004.

A nationwide distributor of office technology products based in Tampa, Global has gobbled up 60 smaller regional office-gadget suppliers since its 1994 founding. That's an average of almost seven a year. The pace slowed to just two acquisitions during the 2001 recession, but Johnson is picking it up again.

With $679 million in fiscal 2003 revenue, Global has grown at a healthy clip. Seventeen acquisitions since 2001 have helped double net cash from operations. However, unlike bigger publicly held competitors like IKON Office Solutions Inc. and Danka Business Systems PLC, Global grows profits along with its affiliate network and cash flow.

"One of the hallmarks of a distribution company like us is, can you grow your earnings faster than you can grow your income?" says Johnson, who recently added the title of chairman to his Global business card. "We've succeeded in doing that consistently over our whole life."

Global's annual earnings per diluted share have steadily risen from 78 cents in 2000 to $1.58 for the fiscal year that ended March 31.

In contrast, IKON earned 99 cents in fiscal 2003 after its EPS hovered between a dime and a quarter during the prior three years. Danka's EPS swung wildly: 10 cents in 2000, down to a $4 loss in 2001, back up to $2 ahead in 2002, before logging another 13-cent loss this year.

"We're the only company growing in good times and bad," Johnson says.

A 57-year-old Harvard MBA, Johnson knows a little about IKON and Danka. From 1975 to 1989, he worked at IKON, which was then known as Alco Standard Corp. After rising to vice president for operations in Alco's office products group, Johnson left for St. Petersburg, where he was Danka's chief operating officer for a couple of years.

"We have money and we've had the money every year to buy $200 or $300 million in revenue, if we wanted to," says Johnson. "But we've been going at it - if you look at a 47% compounded annual growth rate, that's not too slow. But it's not so fast as to have a blowup, like IKON and Danka both experienced in their acquisition process."

Even when new revenue from acquisitions is excluded, Global's internal growth has averaged better than 8% during the past five years.

"Our goal has been, all along, not to be the biggest but to be the leading and most profitable provider of office technology solutions, focusing on the middle market," says Johnson.

Global defines the "middle market" for office equipment as the estimated 25 million American businesses, nonprofits and schools that employ between 15 and 1,000. Global customers are varied, from elite Davidson College to the Elite modeling agency.

Johnson is delighted to leave most other potential customers larger than that to his former employers. "Our goal has been to not fight the big boys on the big accounts, and try to build them over 10 or 20 states, where you get this really tough administrative burden," says Johnson.

Bigger-volume rivals enjoy 5% to 10% better discounts from equipment manufacturers such as Canon and IBM. "They buy their product better than we do," says Johnson. So Global must keep other costs low. Its selling, general and administrative expense equals a little more than 25% of sales, whereas that of IKON and Danka has crept well above 30%. Even Xerox Corp. is in the high 20s.

Most of the 1,000-plus-employee companies require office suppliers to bid for their business. That makes the market segment even more unattractive to Johnson. "All of those big boys are bid business," he says. "So what you get out of that is the lowest gross margin and the highest administrative burden."

The mid-sized customers don't need as many photocopiers or facsimile machines.

But the ones they do need, they keep busy. "We do get better prices out of them because we service them better," Johnson says. "At their stage of growth, service is more important than price, because they're looking to get an edge against their major competitors also."

Although Global has less than 2% of the American office equipment market, Johnson still doesn't mind mocking his industry's giants and their problems. At the annual meeting, his PowerPoint presentation made selective use of financial data to draw other unfavorable comparisons between Global and rivals IKON and Danka.

Measuring productivity, for example, Johnson noted that Global has generated no less than $217 in revenue per employee during any of the past four years. IKON and Danka never got higher than $138 and $154, respectively. Global employs about 3,150. But only 35 of them work at headquarters in Tampa's Northdale district.

Johnson has been rewarded handsomely for Global's success.

His total compensation for fiscal 2003 was $1.7 million, including stock awards valued at $845,550. As of June 19, Johnson owned 3.2% of Global's common shares, making him the largest individual holder.

In addition, the company loaned Johnson $400,000 in 2000 to meet a margin call that would have forced him to unload Global stock, according to the latest proxy statement, "at a price Mr. Johnson believed was inappropriately low." As of two months ago, Johnson still owed $400,000 in principal and $2,844 in interest on the loan, which is due and payable in 2005. His son, Todd S. Johnson, made $213,000 in fiscal 2003 as Global's vice president for acquisitions.

Global shares have generally floated upward, recently topping $26, since the July release of results for fiscal 2004's first quarter, when the company took $8.4 million in pretax charges. Those charges related to the refinancing of debt from the acquisition binges. Stock analysts at Raymond James & Associates Inc. and Robert W. Baird & Co. Inc. have issued "strong buy" recommendations for Global. But both brokerages recently purchased Global notes as part of the debt refinancing. The notes may be converted to Global common stock at a share price of $23.89.

Who would bet against the stock climbing to the $29 forecast by analysts over the next year?

Johnson would like Global to buy more companies in order to add between $60 million and $100 million to 2004 revenue. But the brash CEO says he will be cautious about future purchases.

"I was the chief operating officer at Danka and left because I didn't like their business practices," says Johnson. "That doesn't mean they were bad. But that was an acquisition-and-volume game from day one, rather than profitability. Our goal has been profitability and then volume."

Sector comparison

Revenue growth by percentage

COMPANY2000200120022003

DANKA-23.6-19.9-12.3-10

IKON-1.82-3.2-8.5

GLOBAL63.926.13.29.9