Lexmark Newsroom

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(In Millions, Except Per Share Amounts)

(Unaudited)

Three Months Ended

March 31

2014

2013

Revenue:

Product

$         763.6

$         787.4

Service

114.1

96.9

Total Revenue

877.7

884.3

Cost of revenue:

Product

445.6

463.9

Service

83.9

76.6

Restructuring-related costs

6.6

7.4

536.1

547.9

Gross profit

341.6

336.4

Research and development

79.0

78.3

Selling, general and administrative

207.1

199.8

Restructuring and related charges (reversals)

1.6

(4.0)

Operating expense

287.7

274.1

Operating income

53.9

62.3

Interest expense (income), net

7.9

9.5

Other expense (income), net

0.7

1.0

Loss on extinguishment of debt

-

3.3

Earnings before income taxes

45.3

48.5

Provision for income taxes

16.0

8.5

Net earnings

$           29.3

$           40.0

Net earnings per share:

Basic

$           0.47

$           0.63

Diluted

$           0.46

$           0.62

Shares used in per share calculation:

Basic

62.1

63.7

Diluted

63.4

64.7

Cash dividends declared per common share

$           0.30

$           0.30

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION

(In Millions)

(Unaudited)

March 31,

December 31,

2014

2013

ASSETS

Current assets:

Cash and cash equivalents

$         194.7

$         273.2

Marketable securities

790.5

781.5

Trade receivables, net

429.4

452.3

Inventories

277.9

268.2

Prepaid expenses and other current assets

208.4

195.3

Total current assets

1,900.9

1,970.5

Property, plant and equipment, net

808.2

812.4

Marketable securities

3.4

6.7

Goodwill

454.9

454.7

Intangibles, net

239.9

258.0

Other assets

105.5

114.6

Total assets

$      3,512.8

$      3,616.9

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

$         481.7

$         474.7

Accrued liabilities

567.6

672.4

Total current liabilities

1,049.3

1,147.1

Long-term debt

699.7

699.6

Other liabilities

391.7

401.9

2,140.7

2,248.6

Stockholders' equity:

Common stock and capital in excess of par

931.2

916.8

Retained earnings

1,423.2

1,413.1

Treasury stock, net

(947.4)

(926.4)

Accumulated other comprehensive loss

(34.9)

(35.2)

Total stockholders' equity

1,372.1

1,368.3

Total liabilities and stockholders' equity

$      3,512.8

$      3,616.9

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP MEASURES

(Unaudited)

Net Earnings (In Millions)

1Q14

1Q13

GAAP

$             29

$             40

Restructuring charges and project costs 

9

7

Acquisition and divestiture-related adjustments

20

13

Loss on extinguishment of debt

-

2

Non-GAAP

$             58

$             62

Earnings Per Share 

1Q14

1Q13

GAAP

$           0.46

$           0.62

Restructuring charges and project costs

0.14

0.10

Acquisition and divestiture-related adjustments

0.32

0.19

Loss on extinguishment of debt

-

0.04

Non-GAAP

$           0.92

$           0.95

Earnings Per Share Guidance

2Q14

2Q13

GAAP

 $0.47 - $0.57 

$           1.47

Restructuring charges and project costs

0.10

0.15

Acquisition and divestiture-related adjustments

0.28

(0.58)

Non-GAAP

 $0.85 - $0.95 

$           1.04

Refer to Appendix 1 for discussion of management's use of GAAP and Non-GAAP measures.

Totals may not foot due to rounding.

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP MEASURES

(Unaudited)

Revenue (In Millions) *

1Q14

1Q13

GAAP

$            878

$            884

Acquisition-related adjustments (1)(2)

3

2

Non-GAAP

$            881

$            886

Higher Value Solutions Revenue (In Millions) **

1Q14

1Q13

GAAP

$            240

$            204

Acquisition-related adjustments (1)(2)

3

2

Non-GAAP

$            244

$            206

Software and Other Revenue (In Millions) ***

1Q14

1Q13

GAAP

$            106

$             94

Acquisition-related adjustments (1)(2)

3

2

Non-GAAP

$            109

$             97

Perceptive Software Revenue (In Millions) ****

1Q14

1Q13

GAAP

$             61

$             44

Acquisition-related adjustments (1)(2)

3

2

Non-GAAP

$             64

$             46

Revenue, excluding Inkjet Exit

and acquisition-related adjustments (In Millions) *****

1Q14

1Q13

GAAP

$            878

$            884

Acquisition-related adjustments (1)(2)

3

2

Inkjet Exit Revenue

(73)

(122)

Non-GAAP, excluding Inkjet Exit 

and acquisition-related adjustments

$            808

$            765

ISS Revenue, excluding Inkjet Exit(In Millions) ******

1Q14

1Q13

GAAP ISS Revenue

$            817

$            840

Inkjet Exit Revenue

(73)

(122)

Non-GAAP ISS Revenue, excluding Inkjet Exit

$            744

$            718

Hardware Revenue, excluding Inkjet Exit(In Millions) *******

1Q14

1Q13

GAAP Hardware Revenue

$            167

$            181

Inkjet Hardware Revenue

0

(2)

Non-GAAP Hardware Revenue, excluding Inkjet Exit

$            167

$            178

Gross Profit (In Millions)

1Q14

1Q13

GAAP

$            342

$            336

Restructuring charges and project costs (3)(4)

7

7

Acquisition-related adjustments (1)(2)

13

11

Non-GAAP

$            362

$            354

Gross Profit Margin (%)

1Q14

1Q13

GAAP

38.9%

38.0%

Restructuring charges and project costs

0.7%

0.8%

Acquisition-related adjustments

1.5%

1.2%

Non-GAAP

41.0%

40.0%

Operating Expense (In Millions)

1Q14

1Q13

GAAP

$            288

$            274

Restructuring charges and project costs (3)(4)

(5)

(2)

Acquisition and divestiture-related adjustments (1)(2)

(13)

(7)

Non-GAAP

$            270

$            265

Operating Income  (In Millions)

1Q14

1Q13

GAAP

$             54

$             62

Restructuring charges and project costs (3)(4)

12

9

Acquisition and divestiture-related adjustments (1)(2)

26

18

Non-GAAP

$             92

$             89

Operating Income Margin (%)  

1Q14

1Q13

GAAP

6.1%

7.0%

Restructuring charges and project costs

1.4%

1.0%

Acquisition and divestiture-related adjustments

3.0%

2.0%

Non-GAAP

10.4%

10.1%

Refer to Appendix 1 for discussion of management's use of GAAP and Non-GAAP measures.

Totals may not foot due to rounding.

*

Year-to-year Revenue growth was approximately -1% on a GAAP basis and -1% on a non-GAAP basis. Financial results in the first quarter of 2014 include those of Saperion acquired in the third quarter of 2013 and those of PACSGEAR acquired in the fourth quarter of 2013. Financial results in the first quarter of 2013 include AccessVia and Twistage subsequent to the date of acquisition.

**

Year-to-year Higher Value Solutions Revenue growth was approximately 18% on a GAAP basis and 18% on a non-GAAP basis. Higher Value Solutions Revenue as a percentage of total revenue was 27% on a GAAP basis and 28% on a non-GAAP basis for the period ending March 31, 2014. Higher Value Solutions Revenue as a percentage of total revenue was 23% on a GAAP basis and 23% on a non-GAAP basis for the period ending March 31, 2013. Financial results in the first quarter of 2014 include those of Saperion acquired in the third quarter of 2013 and those of PACSGEAR acquired in the fourth quarter of 2013. Financial results in the first quarter of 2013 include AccessVia and Twistage subsequent to the date of acquisition.

***

Year-to-year Software and Other Revenue growth was approximately 13% on a GAAP basis and 13% on a non-GAAP basis. Financial results in the first quarter of 2014 include those of Saperion acquired in the third quarter of 2013 and those of PACSGEAR acquired in the fourth quarter of 2013. Financial results in the first quarter of 2013 include AccessVia and Twistage subsequent to the date of acquisition.

****

Year-to-year Perceptive Software Revenue growth was approximately 38% on a GAAP basis and 38% on a non-GAAP basis. Financial results in the first quarter of 2014 include those of Saperion acquired in the third quarter of 2013 and those of PACSGEAR acquired in the fourth quarter of 2013. Financial results in the first quarter of 2013 include AccessVia and Twistage subsequent to the date of acquisition.

*****

Year-to-year Revenue growth, excluding Inkjet Exit, was approximately -1% on a GAAP basis and 6% on a non-GAAP basis. Financial results in the first quarter of 2014 include those of Saperion acquired in the third quarter of 2013 and those of PACSGEAR acquired in the fourth quarter of 2013. Financial results in the first quarter of 2013 include AccessVia and Twistage subsequent to the date of acquisition.

******

Year-to-year ISS Revenue growth, excluding Inkjet Exit, was approximately -3% on a GAAP basis and 4% on a non-GAAP basis.

*******

Year-to-year Hardware Revenue growth, excluding Inkjet Exit, was approximately -8% on a GAAP basis and -7% on a non-GAAP basis.

⁽¹⁾ 

Amounts for the three months ended March 31, 2014, include total acquisition and divestiture-related adjustments of $26.3 million with $3.1 million, $10.2 million, $0.2 million and $12.8 million included in Revenue, Cost of revenue, Research and development and Selling, general and administrative, respectively. Selling, general and administrative includes $11.6 million of acquisition-related expenses and $1.2 million of divestiture-related expenses.

⁽²⁾ 

Amounts for the three months ended March 31, 2013, include total acquisition-related adjustments of $17.8 million with $2.1 million, $8.5 million, $0.2 million and $7.0 million included in Revenue, Cost of revenue, Research and development and Selling, general and administrative, respectively.

⁽³⁾ 

Amounts for the three months ended March 31, 2014, include total restructuring charges and project costs of $11.9 million with $6.6 million and $3.7 million included in Restructuring-related costs and Selling, general and administrative, respectively, in addition to the $1.6 million in Restructuring and related charges (reversals).

⁽⁴⁾ 

Amounts for the three months ended March 31, 2013, include total restructuring charges and project costs of $9.1 million with $7.4 million and $5.7 million included in Restructuring-related costs and Selling, general and administrative, respectively, in addition to the $(4.0) million in Restructuring and related charges (reversals).

Appendix 1

Note:

Management believes that presenting non-GAAP measures is useful because they enhance investors' understanding of how management assesses the performance of the Company's businesses. Management uses non-GAAP measures for budgeting purposes, measuring actual results to budgeted projections, allocating resources, and in certain circumstances for employee incentive compensation. Adjustments to GAAP results in determining non-GAAP results fall into  three general  categories that are described below:

1) Restructuring-related charges
In recent years, the Company has initiated restructuring plans which have resulted in operating expenses which otherwise would not have been incurred. The size of these items can vary significantly from period to period, and the Company does not consider these items to be part of core operating expenses of the business.  Restructuring and related charges that are excluded from GAAP earnings to determine non-GAAP earnings consist of accelerated depreciation, asset impairments, employee termination benefits, pension and postretirement plan curtailments, inventory-related charges and contract termination and lease charges. They also include project costs that relate to the execution of the restructuring plans. These project costs are incremental to normal operating charges and are expensed as incurred, such as compensation costs for overlap staffing, travel expenses, consulting costs and training costs.

2) Acquisition and divestiture-related adjustments
In connection with acquisitions, management provides supplementary non-GAAP financial measures of revenue and expenses to normalize for the impact of business combination accounting rules as well as to exclude certain expenses which would not have been incurred otherwise.

a. Adjustments to Revenue
Due to business combination accounting rules, deferred revenue balances for service contracts assumed as part of acquisitions are adjusted down to fair  value. Fair value approximates the cost of fulfilling the service obligation, plus a reasonable profit margin. Subsequent to acquisitions, management  adds back the  amount of amortized revenue that would have been recognized had the acquired company remained independent and had the deferred revenue balances not been  adjusted to fair value.  Management reviews non-GAAP revenue to allow for more complete comparisons to historical performance as well as to forward-looking  projections and also uses it as a metric for employee incentive compensation.

b. Amortization of intangible assets
Due to business combination accounting rules, intangible assets are recognized which were not previously presented on the balance sheet of the acquired  company. These intangible assets consist primarily of purchased technology, customer relationships, trade names, in-process R&D and non-compete  agreements. Subsequent to the acquisition date, some of these intangible assets begin amortizing and represent an expense that would not have been  recorded had the acquired company remained independent. The total amortization of the acquired intangible assets varies from period to period, due to the mix in  value and useful lives of the different assets. For the purpose of comparing financial results to historical performance as well as for defining targets for employee  incentive compensation, management excludes the amortization of the acquired intangible assets on a non-GAAP basis.

c. Acquisition and integration costs
In connection with its acquisitions, the Company incurs expenses that would not have been incurred otherwise. The acquisition costs include items such as  investment banking fees, legal and accounting fees, and costs of retention bonus programs for the senior management of the acquired company. Integration costs  may consist of information technology expenses including software and systems to be implemented in acquired companies, consulting costs and travel expenses as  well as non-cash charges related to the abandonment of assets under construction by the Company that are determined to be duplicative of assets of the acquired  company. The costs are expensed as incurred and can vary substantially in size from one period to the next. For these reasons, management excludes these  expenses from non-GAAP earnings in order to evaluate the Company's performance on a continuing and comparable basis.

d. Divestiture-related adjustments
In connection with divestitures, management provides supplementary non-GAAP financial measures of expenses to normalize for the impact of certain earnings and   expenses which would not have been incurred otherwise. The Company recognized a net gain on the sale of inkjet-related technology and assets, which consisted of a   subsidiary, intellectual property and other assets, and transition services.  In addition, the Company has incurred costs related to the divestiture, such as employee   travel expenses and compensation, consulting costs, training costs, and transition services. These costs are incremental to normal operating charges and are    expensed as incurred. Management excluded the income and  expenses from non-GAAP earnings in order to evaluate the Company's performance on a continuing   and  comparable basis.

3) Loss on extinguishment of debt
The Company has extinguished debt prior to its scheduled maturity which has resulted in non-operating expenses which otherwise would not have been incurred. The size of these items can vary significantly depending on timing of the debt maturity versus execution of the redemption, and the Company does not consider these items to be part of typical non-operating expenses of the business.  Debt extinguishment related charges that are excluded from GAAP earnings to determine non-GAAP earnings consist of premium and redemption fees paid, as well as the write-off of unamortized debt issuance costs and original issue discount.

4) Actuarial gain (loss) on pension plan
Lexmark elected during the fourth quarter of 2013 to change its method of accounting for mark-to-market ("MTM") asset and actuarial gains and losses for its pension and other postretirement plans to improve transparency of operational performance.  MTM is also a more preferable approach under generally accepted accounting principles. Under this MTM accounting approach, asset and actuarial gains and losses will be recognized in net periodic benefit cost in the period in which they occur, rather than being recognized in accumulated other comprehensive income and amortized over future periods. Lexmark management believes that it is appropriate to exclude MTM asset and actuarial gains and losses from non-GAAP financial measures due to the nature and underlying volatility of these gains and losses.  Further, management believes that MTM asset and actuarial gains and losses relate to market performance of assets, discount rates, and actuarial assumptions, which do not directly arise from the Company's core operations, and the exclusion of these items from non-GAAP financial measures facilitates meaningful comparison both across periods and among entities.

In addition to GAAP results, management presents these non-GAAP financial measures to provide investors with additional information that they can utilize in their own methods of evaluating the Company's performance. Management compensates for the material limitations associated with the use of non-GAAP financial measures by having specific initiatives associated with restructuring actions and acquisitions approved by management, along with their budgeted costs. Subsequently, actual costs incurred as a part of these approved restructuring plans and acquisitions are monitored and compared to budgeted costs to assure that the Company's non-GAAP financial measures only exclude pre-approved restructuring-related costs and acquisition-related adjustments. Any non-GAAP measures provided by the Company may not be comparable to similar measures of other companies as not all companies calculate these measures in the same manner.