Lexmark Newsroom

(1)

In an effort to provide investors with additional information regarding the company's results as determined by generally accepted accounting principles (GAAP), the company has also disclosed in this press release non-GAAP earnings per share amounts and related income statement items which management believes provides useful information to investors. When used in this press release, "non-GAAP" earnings per share amounts and related income statement items exclude restructuring-related, acquisition and divestiture-related, debt extinguishment-related and pension mark-to-market adjustments. The rationale for management's use of non-GAAP measures is included in Appendix A to the financial information attached hereto.

(2)

Inkjet Exit is defined as consumer and business inkjet hardware and supplies that the company is exiting.

(3)

MPS revenue is defined as ISS laser hardware, supplies and fleet management solutions sold through a managed services agreement.

(4)

Non-MPS revenue is defined as ISS laser hardware, laser supplies, dot matrix hardware, and dot matrix supplies not sold as a part of an MPS agreement. Non-MPS also includes parts and service related to hardware maintenance.

(5)

Free Cash Flow is defined as net cash flows provided by operating activities minus purchases of property, plant and equipment plus proceeds from sale of fixed assets.

(6)

Quocirca Managed Print Services Landscape, 2014.

(7)

Gartner, Inc. Magic Quadrant for Enterprise Search, Whit Andrews, Hanns Koehler-Kruener, July 16 2014.

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(In Millions, Except Per Share Amounts)

(Unaudited)

Three Months Ended

Six Months Ended

June 30

June 30

2014

2013

2014

2013

Revenue:

Product

773.2

785.1

1,536.8

1,572.5

Service

118.6

101.6

232.7

198.5

Total Revenue

891.8

886.7

1,769.5

1,771.0

Cost of revenue:

Product

453.8

462.3

899.5

926.3

Service

84.8

76.6

168.6

153.2

Restructuring-related costs

2.0

5.9

8.6

13.3

540.6

544.8

1,076.7

1,092.8

Gross profit

351.2

341.9

692.8

678.2

Research and development

80.9

77.3

160.0

155.6

Selling, general and administrative

201.6

201.3

408.6

401.1

Gain on sale of inkjet-related technology and assets

-

(73.5)

-

(73.5)

Restructuring and related charges (reversals)

6.3

1.2

7.9

(2.8)

Operating expense

288.8

206.3

576.5

480.4

Operating income

62.4

135.6

116.3

197.8

Interest expense (income), net

7.4

7.9

15.2

17.3

Other expense (income), net

0.3

1.5

1.1

2.4

Loss on extinguishment of debt

-

-

-

3.3

Earnings before income taxes

54.7

126.2

100.0

174.8

Provision for income taxes

17.2

32.1

33.2

40.7

Net earnings

$       37.5

$       94.1

$       66.8

$     134.1

Net earnings per share:

Basic

$       0.60

$       1.49

$       1.08

$       2.11

Diluted

$       0.59

$       1.47

$       1.05

$       2.08

Shares used in per share calculation:

Basic

62.2

63.2

62.1

63.4

Diluted

63.4

64.1

63.4

64.4

Cash dividends declared per common share

$       0.36

$       0.30

$       0.66

$       0.60

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION

(In Millions)

(Unaudited)

June 30

December 31

2014

2013

ASSETS

Current assets:

Cash and cash equivalents

$         335.8

$         273.2

Marketable securities

695.1

781.5

Trade receivables, net

403.1

452.3

Inventories

286.4

268.2

Prepaid expenses and other current assets

203.7

195.3

Total current assets

1,924.1

1,970.5

Property, plant and equipment, net

798.6

812.4

Marketable securities

-

6.7

Goodwill

454.7

454.7

Intangibles, net

222.6

258.0

Other assets

125.8

114.6

Total assets

$      3,525.8

$      3,616.9

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

$         493.6

$         474.7

Accrued liabilities

572.6

672.4

Total current liabilities

1,066.2

1,147.1

Long-term debt

699.7

699.6

Other liabilities

373.9

401.9

2,139.8

2,248.6

Stockholders' equity:

Common stock and capital in excess of par

944.9

916.8

Retained earnings

1,437.5

1,413.1

Treasury stock, net

(966.4)

(926.4)

Accumulated other comprehensive loss

(30.0)

(35.2)

Total stockholders' equity

1,386.0

1,368.3

Total liabilities and stockholders' equity

$      3,525.8

$      3,616.9

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP MEASURES

(Unaudited)

Net Earnings (In Millions)

2Q14

2Q13

GAAP

$             37

$             94

Restructuring charges and project costs 

8

10

Acquisition and divestiture-related adjustments

19

(37)

Actuarial gain on pension plan

(2)

-

Non-GAAP

$             62

$             67

Six Months Ended June 30

Net Earnings (In Millions)

2014

2013

GAAP

$             67

$            134

Restructuring charges and project costs 

17

16

Acquisition and divestiture-related adjustments

38

(24)

Loss on extinguishment of debt

-

2

Actuarial gain on pension plan

(2)

-

Non-GAAP

$            121

$            129

Earnings Per Share 

2Q14

2Q13

GAAP

$           0.59

$           1.47

Restructuring charges and project costs

0.13

0.15

Acquisition and divestiture-related adjustments

0.30

(0.58)

Actuarial gain on pension plan

(0.03)

-

Non-GAAP

$           0.99

$           1.04

Six Months Ended June 30

Earnings Per Share 

2014

2013

GAAP

$           1.05

$           2.08

Restructuring charges and project costs

0.27

0.25

Acquisition and divestiture-related adjustments

0.61

(0.37)

Loss on extinguishment of debt

-

0.04

Actuarial gain on pension plan

(0.03)

-

Non-GAAP

$           1.90

$           2.00

Earnings Per Share Guidance

3Q14

3Q13

GAAP

 $0.44 - $0.54 

$           0.53

Restructuring charges and project costs

0.12

0.20

Acquisition and divestiture-related adjustments

0.29

0.29

Non-GAAP

 $0.85 - $0.95 

$           1.02

Earnings Per Share Guidance

2014

2013

GAAP

 $2.27 - $2.47 

$           4.08

Restructuring charges and project costs

0.59

0.57

Acquisition and divestiture-related adjustments

1.12

0.14

Loss on extinguishment of debt

-

0.04

Actuarial gain on pension plan

(0.63)

Non-GAAP

$           4.19

        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)*

2Q14

2Q13

GAAP

$            892

$            887

Acquisition-related adjustments (1)(2)

2

3

Non-GAAP

$            894

$            890

Higher Value Solutions Revenue (In Millions)**

2Q14

2Q13

GAAP

$            256

$            229

Acquisition-related adjustments (1)(2)

2

3

Non-GAAP

$            259

$            232

Software and Other Revenue (In Millions) ***

2Q14

2Q13

GAAP

$            106

$            108

Acquisition-related adjustments (1)(2)

2

3

Non-GAAP

$            109

$            111

Perceptive Software Revenue (In Millions) ****

2Q14

2Q13

GAAP

$             61

$             59

Acquisition-related adjustments (1)(2)

2

3

Non-GAAP

$             64

$             62

Revenue, excluding Inkjet Exit and 

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

2Q14

2Q13

GAAP

$            892

$            887

Acquisition-related adjustments (1)(2)

2

3

Inkjet Exit Revenue

(67)

(99)

Non-GAAP, excluding Inkjet Exit and

acquisition-related adjustments

$            827

$            791

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

2Q14

2Q13

GAAP ISS Revenue

$            830

$            828

Inkjet Exit Revenue

(67)

(99)

Non-GAAP ISS Revenue, excluding Inkjet Exit

$            764

$            729

Gross Profit (In Millions)

2Q14

2Q13

GAAP

$            351

$            342

Restructuring charges and project costs (3)(4)

2

6

Acquisition-related adjustments (1)(2)

13

12

Actuarial gain on pension plan (5)

(1)

-

Non-GAAP

$            365

$            360

Gross Profit Margin (%)

2Q14

2Q13

GAAP

39.4%

38.6%

Restructuring charges and project costs

0.2%

0.7%

Acquisition-related adjustments

1.4%

1.4%

Actuarial gain on pension plan

-0.1%

-

Non-GAAP

40.8%

40.4%

Operating Expense (In Millions)

2Q14

2Q13

GAAP

$            289

$            206

Restructuring charges and project costs (3)(4)

(10)

(7)

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

(14)

63

Actuarial gain on pension plan (5)

2

-

Non-GAAP

$            267

$            262

Operating Income  (In Millions)

2Q14

2Q13

GAAP

$             62

$            136

Restructuring charges and project costs (3)(4)

12

13

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

26

(51)

Actuarial gain on pension plan (5)

(3)

-

Non-GAAP

$             98

$             98

Operating Income Margin (%)  

2Q14

2Q13

GAAP

7.0%

15.3%

Restructuring charges and project costs

1.3%

1.5%

Acquisition and divestiture-related adjustments

2.9%

-5.7%

Actuarial gain on pension plan

-0.3%

-

Non-GAAP

10.9%

11.0%

      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 0% on a non-GAAP basis.

**

Year-to-year Higher Value Solutions Revenue growth was approximately 12% on a GAAP basis and 11% on a non-GAAP basis. Higher Value Solutions Revenue as a percentage of total revenue was 29% on a GAAP basis and 29% on a non-GAAP basis for the second quarter ending June 30, 2014. Higher Value Solutions Revenue as a percentage of total revenue was 26% on a GAAP basis and 26% on a non-GAAP basis for the second quarter ending June 30, 2013.

***

Year-to-year Software and Other Revenue growth was approximately -1% on a GAAP basis and -2% on a non-GAAP basis.

****

Year-to-year Perceptive Software Revenue growth was approximately 5% on a GAAP basis and 3% on a non-GAAP basis.

*****

Year-to-year Revenue growth was approximately 1% on a GAAP basis and 5% excluding Inkjet Exit and acquisition-related adjustments.

******

Year-to-year ISS Revenue growth, excluding Inkjet Exit, was approximately 0% on a GAAP basis and 5% on a non-GAAP basis.

⁽¹⁾ 

Amounts for the three months ended June 30, 2014, include total acquisition and divestiture-related adjustments of $26.2 million with $2.4 million, $10.3 million, $0.2 million and $13.3 million included in Revenue, Cost of revenue, Research and development and Selling, general and administrative, respectively. Selling, general and administrative includes $13.0 million of acquisition-related expenses and $0.3 million of divestiture-related expenses.

⁽²⁾ 

Amounts for the three months ended June 30, 2013, include total acquisition and divestiture-related adjustments of $(51.1) million with $3.5 million, $8.8 million, $0.2 million, $9.9 million and $(73.5) million included in Revenue, Cost of revenue, Research and development, Selling, general and administrative and Gain on sale of inkjet-related technology and assets, respectively. Selling, general and administrative includes $7.4 million of acquisition-related expenses and $2.5 million of divestiture-related expenses.

⁽³⁾ 

Amounts for the three months ended June 30, 2014, include total restructuring charges and project costs of $11.8 million with $2.0 million and $3.5 million included in Restructuring-related costs and Selling, general and administrative, respectively, in addition to the $6.3 million in Restructuring and related charges (reversals).

⁽⁴⁾ 

Amounts for the three months ended June 30, 2013, include total restructuring charges and project costs of $13.3 million with $5.9 million and $6.2 million included in Restructuring-related costs and Selling, general and administrative, respectively, in addition to the $1.2 million in Restructuring and related charges (reversals).

⁽⁵⁾ 

Amounts for the three months ended June 30, 2014, include actuarial gain on pension plan of $2.9 million with $0.6 million, $1.2 million and $1.1 million included in Cost of revenue, Research and development and Selling, general and administrative.

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP MEASURES

(Unaudited)

Six Months Ended June 30

Revenue (In Millions)*

2014

2013

GAAP

$         1,769

$         1,771

Acquisition-related adjustments (1)(2)

5

6

Non-GAAP

$         1,775

$         1,777

Higher Value Solutions Revenue (In Millions) **

2014

2013

GAAP

$            497

$            433

Acquisition-related adjustments (1)(2)

5

6

Non-GAAP

$            502

$            438

Software and Other Revenue (In Millions)***

2014

2013

GAAP

$            213

$            202

Acquisition-related adjustments (1)(2)

5

6

Non-GAAP

$            218

$            208

Perceptive Software Revenue (In Millions) ****

2014

2013

GAAP

$            122

$            103

Acquisition-related adjustments (1)(2)

5

6

Non-GAAP

$            128

$            108

Revenue, excluding Inkjet Exit and

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

2014

2013

GAAP

$         1,769

$         1,771

Acquisition-related adjustments (1)(2)

5

6

Inkjet Exit Revenue

(139)

(221)

Non-GAAP, excluding Inkjet Exit and

acquisition-related adjustments

$         1,636

$         1,556

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

2014

2013

GAAP ISS Revenue

$         1,647

$         1,668

Inkjet Exit Revenue

(139)

(221)

Non-GAAP ISS Revenue, excluding Inkjet Exit

$         1,508

$         1,447

Gross Profit (In Millions)

2014

2013

GAAP

$            693

$            678

Restructuring charges and project costs (3)(4)

9

13

Acquisition-related adjustments (1)(2)

26

23

Actuarial gain on pension plan (5)

(1)

-

Non-GAAP

$            727

$            714

Gross Profit Margin (%)

2014

2013

GAAP

39.2%

38.3%

Restructuring charges and project costs

0.5%

0.7%

Acquisition-related adjustments

1.5%

1.3%

Actuarial gain on pension plan

0.0%

-

Non-GAAP

40.9%

40.2%

Operating Expense (In Millions)

2014

2013

GAAP

$            577

$            480

Restructuring charges and project costs (3)(4)

(15)

(9)

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

(27)

56

Actuarial gain on pension plan (5)

2

-

Non-GAAP

$            537

$            528

Operating Income  (In Millions)

2014

2013

GAAP

$            116

$            198

Restructuring charges and project costs (3)(4)

24

22

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

53

(33)

Actuarial gain on pension plan (5)

(3)

-

Non-GAAP

$            190

$            187

Operating Income Margin (%)  

2014

2013

GAAP

6.6%

11.2%

Restructuring charges and project costs

1.3%

1.3%

Acquisition and divestiture-related adjustments

3.0%

-1.9%

Actuarial gain on pension plan

-0.2%

-

Non-GAAP

10.7%

10.5%

     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 0% on a GAAP basis and 0% on a non-GAAP basis. Financial results of 2013 include those of AccessVia and Twistage subsequent to the date of acquisition.

**

Year-to-year Higher Value Solutions Revenue growth was approximately 15% on a GAAP basis and 14% on a non-GAAP basis. Higher Value Solutions Revenue as a percentage of total revenue was 28% on a GAAP basis and 28% on a non-GAAP basis for the period ending June 30, 2014. Higher Value Solutions Revenue as a percentage of total revenue was 24% on a GAAP basis and 25% on a non-GAAP basis for the period ending June 30, 2013. Financial results of 2013 include those of AccessVia and Twistage subsequent to the date of acquisition.

***

Year-to-year Software and Other Revenue growth was approximately 5% on a GAAP basis and 5% on a non-GAAP basis. Financial results of 2013 include those of AccessVia and Twistage subsequent to the date of acquisition.

****

Year-to-year Perceptive Software Revenue growth was approximately 19% on a GAAP basis and 18% on a non-GAAP basis. Financial results of 2013 include those of AccessVia and Twistage subsequent to the date of acquisition.

*****

Year-to-year Revenue growth was approximately 0% on a GAAP basis and 5% excluding Inkjet Exit and acquisition-related adjustments. Financial results of 2013 include those of AccessVia and Twistage subsequent to the date of acquisition.

******

Year-to-year ISS Revenue growth, excluding Inkjet Exit, was approximately -1% on a GAAP basis and 4% on a non-GAAP basis.

⁽¹⁾ 

Amounts for the six months ended June 30, 2014, include total acquisition and divestiture-related adjustments of $52.5 million with $5.4 million, $20.5 million, $0.4 million and $26.2 million included in Revenue, Cost of revenue, Research and development and Selling, general and administrative, respectively. Selling, general and administrative includes $24.7 million of acquisition-related expenses and $1.5 million of divestiture-related expenses.

⁽²⁾ 

Amounts for the six months ended June 30, 2013, include total acquisition and divestiture-related adjustments of $(33.3) million with $5.6 million, $17.3 million, $0.3 million, $17.0 million and $(73.5) million included in Revenue, Cost of revenue, Research and development, Selling, general and administrative and Gain on sale of inkjet-related technology and assets, respectively. Selling, general and administrative includes $14.3 million of acquisition-related expenses and $2.7 million of divestiture-related expenses.

⁽³⁾ 

Amounts for the six months ended June 30, 2014, include total restructuring charges and project costs of $23.7 million with $8.6 million and $7.2 million included in Restructuring-related costs and Selling, general and administrative, respectively, in addition to the $7.9 million in Restructuring and related charges (reversals).

⁽⁴⁾ 

Amounts for the six months ended June 30, 2013, include total restructuring charges and project costs of $22.4 million with $13.3 million and $11.9 million included in Restructuring-related costs and Selling, general and administrative, respectively, in addition to the $(2.8) million in Restructuring and related charges (reversals).

⁽⁵⁾ 

Amounts for the six months ended June 30, 2014, include actuarial gain on pension plan of $2.9 million with $0.6 million, $1.2 million and $1.1 million included in Cost of revenue, Research and development and Selling, general and administrative.

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  four general  categories that are described below:

1) Restructuring charges and project costs
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 and non-cash charges related to certain assets which are abandoned as systems are integrated across the combined entity. 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.