Lexmark Newsroom

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"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements in this release which are not historical facts are forward-looking and involve risks and uncertainties which may cause the company's actual results or performance to be materially different from the results or performance expressed or implied by the forward-looking statements. Factors that may impact such forward-looking statements include, but are not limited to, fluctuations in foreign currency exchange rates; failure to successfully integrate newly acquired businesses; continued economic uncertainty related to volatility of the global economy; inability to execute the company's strategy to become an end-to-end solutions provider; decreased supplies consumption; inability to realize all of the anticipated benefits of the company's acquisitions; possible changes in the size of expected restructuring costs, charges, and savings; market acceptance of new products; aggressive pricing from competitors and resellers; changes in the company's tax provisions or tax liabilities; the inability to develop new products and enhance existing products to meet customer needs on a cost competitive basis; reliance on international production facilities, manufacturing partners and certain key suppliers; increased investment to support product development and marketing; the financial failure or loss of business with a key customer or reseller; periodic variations affecting revenue and profitability; excessive inventory for the company's reseller channel; failure to manage inventory levels or production capacity; credit risk associated with the company's customers, channel partners, and investment portfolio; entrance into the market of additional competitors focused on office printing and imaging and software solutions, including enterprise content management, business process management, document output management, intelligent data capture and search; inability to perform under managed print services contracts; increased competition in the aftermarket supplies business; fees on the company's products or litigation costs required to protect the company's rights; inability to obtain and protect the company's intellectual property rights and defend against claims of infringement and/or anticompetitive conduct; the outcome of litigation or regulatory proceedings to which the company may be a party; unforeseen cost impacts as a result of new legislation; the inability to attract, retain and motivate key employees; changes in a country's political or economic conditions; the failure of information technology systems, including data breaches or cyber attacks; disruptions at important points of exit and entry and distribution centers; business disruptions; terrorist acts; acts of war or other political conflicts; or the outbreak of a communicable disease; and other risks described in the company's Securities and Exchange Commission filings. The company undertakes no obligation to update any forward-looking statement.

(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)

Higher Value Solutions revenue is defined as combined MPS and Perceptive Software revenue.

(4)

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

(5)

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.

(6)

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.

(7)

The ReadSoft purchase price is based on 30,707,744 outstanding shares and includes the future estimated payment (based on the Swedish Krona currency exchange rate to the U.S. dollar) for the compulsory purchase of the remaining 2 percent of shares held by minority shareholders and payment for outstanding convertible loans issued as part of ReadSoft's incentive programs for employees, less acquired cash and cash equivalents. Excludes transaction fees.

(8)

Gartner Magic Quadrant for Enterprise Content Management, 2014.

(9)

IDC MarketScape: Worldwide Managed Print and Document Services 2014 Vendor Assessment – Focus on Managed Workflow Services September 2014, IDC #250631.

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(In Millions, Except Per Share Amounts)

(Unaudited)

Three Months Ended

Nine Months Ended

September 30

September 30

2014

2013

2014

2013

Revenue:

Product

786.7

782.3

2,323.5

2,353.8

Service

131.4

108.2

364.1

307.7

Total Revenue

918.1

890.5

2,687.6

2,661.5

Cost of revenue:

Product

470.4

459.5

1,369.9

1,385.2

Service

90.3

78.0

258.9

231.8

Restructuring-related costs

0.1

5.1

8.7

18.4

560.8

542.6

1,637.5

1,635.4

Gross profit

357.3

347.9

1,050.1

1,026.1

Research and development

87.2

80.1

247.2

235.6

Selling, general and administrative

208.9

199.6

617.5

600.7

Gain on sale of inkjet-related technology and assets

-

-

-

(73.5)

Restructuring and related charges

6.7

7.6

14.6

4.8

Operating expense

302.8

287.3

879.3

767.6

Operating income

54.5

60.6

170.8

258.5

Interest expense (income), net

8.2

8.1

23.4

25.4

Other expense (income), net

1.0

0.7

2.2

3.2

Loss on extinguishment of debt

-

-

-

3.3

Earnings before income taxes

45.3

51.8

145.2

226.6

Provision for income taxes

7.4

18.1

40.5

58.8

Net earnings

$       37.9

$       33.7

$     104.7

$     167.8

Net earnings per share:

Basic

$       0.61

$       0.54

$       1.69

$       2.65

Diluted

$       0.60

$       0.53

$       1.65

$       2.61

Shares used in per share calculation:

Basic

62.0

62.8

62.1

63.2

Diluted

63.3

64.0

63.4

64.3

Cash dividends declared per common share

$       0.36

$       0.30

$       1.02

$       0.90

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION

(In Millions)

(Unaudited)

September 30

December 31

2014

2013

ASSETS

Current assets:

Cash and cash equivalents

$         206.3

$         273.2

Marketable securities

626.8

781.5

Trade receivables, net

396.3

452.3

Inventories

272.1

268.2

Prepaid expenses and other current assets

227.2

195.3

Total current assets

1,728.7

1,970.5

Property, plant and equipment, net

788.6

812.4

Marketable securities

-

6.7

Goodwill

616.6

454.7

Intangibles, net

291.6

258.0

Other assets

116.4

114.6

Total assets

$      3,541.9

$      3,616.9

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Current portion of long-term debt

$            1.3

$                -

Accounts payable

465.8

474.7

Accrued liabilities

653.8

672.4

Total current liabilities

1,120.9

1,147.1

Long-term debt

699.7

699.6

Other liabilities

369.1

401.9

2,189.7

2,248.6

Stockholders' equity:

Common stock and capital in excess of par

951.5

916.8

Retained earnings

1,452.5

1,413.1

Treasury stock, net

(984.4)

(926.4)

Accumulated other comprehensive loss

(67.4)

(35.2)

Total stockholders' equity

1,352.2

1,368.3

Total liabilities and stockholders' equity

$      3,541.9

$      3,616.9

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP MEASURES

(Unaudited)

Net Earnings (In Millions)

3Q14

3Q13

GAAP

$             38

$             34

Restructuring charges and project costs 

8

13

Acquisition and divestiture-related adjustments

21

18

Non-GAAP

$             66

$             65

Nine Months Ended

September 30

Net Earnings (In Millions)

2014

2013

GAAP

$            105

$            168

Restructuring charges and project costs 

25

29

Acquisition and divestiture-related adjustments

59

(6)

Loss on extinguishment of debt

-

2

Actuarial gain on pension plan

(2)

-

Non-GAAP

$            187

$            194

Earnings Per Share *

3Q14

3Q13

GAAP

$           0.60

$           0.53

Restructuring charges and project costs

0.13

0.20

Acquisition and divestiture-related adjustments

0.32

0.29

Non-GAAP

$           1.05

$           1.02

 Nine Months Ended  

September 30

Earnings Per Share *

2014

2013

GAAP

$           1.65

$           2.61

Restructuring charges and project costs

0.40

0.46

Acquisition and divestiture-related adjustments

0.93

(0.09)

Loss on extinguishment of debt

-

0.04

Actuarial gain on pension plan

(0.03)

-

Non-GAAP

$           2.95

$           3.01

Earnings Per Share Guidance

4Q14

4Q13

GAAP

 $0.56 - $0.66 

$           1.48

Restructuring charges and project costs

0.16

0.11

Acquisition and divestiture-related adjustments

0.38

0.23

Actuarial gain on pension plan

-

(0.64)

Non-GAAP

 $1.10 - $1.20 

$           1.18

Earnings Per Share Guidance

2014

2013

GAAP

 $2.21 - 2.31 

$           4.08

Restructuring charges and project costs

0.56

0.57

Acquisition and divestiture-related adjustments

1.31

0.14

Loss on extinguishment of debt

-

0.04

Actuarial gain on pension plan

(0.03)

(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.

*

ReadSoft financial results for the three and nine months ended September 30, 2014, subsequent to August 19, 2014, impacted earnings per share by approximately $(0.06) on a GAAP basis and approximately $0.04 on a non-GAAP basis.  Amounts impacting earnings per share for the three and nine months ended September 30, 2014 include approximately $0.10 for acquisition-related adjustments.

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP MEASURES

(Unaudited)

Revenue (In Millions) *

3Q14

3Q13

GAAP

$            918

$            890

Acquisition-related adjustments (1)(2)

3

5

Non-GAAP

$            921

$            896

Higher Value Solutions Revenue (In Millions) **

3Q14

3Q13

GAAP

$            288

$            237

Acquisition-related adjustments (1)(2)

3

5

Non-GAAP

$            291

$            242

Software and Other Revenue (In Millions) ***

3Q14

3Q13

GAAP

$            129

$            102

Acquisition-related adjustments (1)(2)

3

5

Non-GAAP

$            132

$            107

Perceptive Software Revenue (In Millions) ****

3Q14

3Q13

GAAP

$             83

$             54

Acquisition-related adjustments (1)(2)

3

5

Non-GAAP

$             86

$             59

Revenue, excluding Inkjet Exit and 

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

3Q14

3Q13

GAAP

$            918

$            890

Acquisition-related adjustments (1)(2)

3

5

Inkjet Exit Revenue

(60)

(84)

Non-GAAP, excluding Inkjet Exit and

acquisition-related adjustments

$            861

$            811

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

3Q14

3Q13

GAAP ISS Revenue

$            835

$            837

Inkjet Exit Revenue

(60)

(84)

Non-GAAP ISS Revenue, excluding Inkjet Exit

$            775

$            753

ReadSoft Revenue, subsequent to August 19, 2014 (In Millions)

3Q14

3Q13

GAAP

$             14

$                -

Acquisition-related adjustments (1)

1

-

Non-GAAP

$             16

$                -

Gross Profit (In Millions)

3Q14

3Q13

GAAP

$            357

$            348

Restructuring charges and project costs (3)(4)

0

5

Acquisition-related adjustments (1)(2)

15

14

Non-GAAP

$            372

$            367

Gross Profit Margin (%)

3Q14

3Q13

GAAP

38.9%

39.1%

Restructuring charges and project costs

0.0%

0.6%

Acquisition-related adjustments

1.6%

1.6%

Non-GAAP

40.4%

41.0%

Operating Expense (In Millions)

3Q14

3Q13

GAAP

$            303

$            287

Restructuring charges and project costs (3)(4)

(12)

(13)

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

(16)

(11)

Non-GAAP

$            276

$            263

Operating Income  (In Millions)

3Q14

3Q13

GAAP

$             55

$             61

Restructuring charges and project costs (3)(4)

12

18

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

30

25

Non-GAAP

$             96

$            104

Operating Income Margin (%)  

3Q14

3Q13

GAAP

5.9%

6.8%

Restructuring charges and project costs

1.3%

2.0%

Acquisition and divestiture-related adjustments

3.3%

2.8%

Non-GAAP

10.5%

11.6%

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 3% on a GAAP basis and 3% on a non-GAAP basis. Financial results in the third quarter of 2014 include those of ReadSoft subsequent to August 19, 2014. Financial results in the third quarter of 2013 include those of Saperion subsequent to the date of acquisition.

**

Year-to-year Higher Value Solutions Revenue growth was approximately 21% on a GAAP basis and 20% on a non-GAAP basis. Higher Value Solutions Revenue as a percentage of total revenue was 31% on a GAAP basis and 32% on a non-GAAP basis for the third quarter ending September 30, 2014. Higher Value Solutions Revenue as a percentage of total revenue was 27% on a GAAP basis and 27% on a non-GAAP basis for the third quarter ending September 30, 2013. Financial results in the third quarter of 2014 include those of ReadSoft subsequent to August 19, 2014. Financial results in the third quarter of 2013 include those of Saperion subsequent to the date of acquisition.

***

Year-to-year Software and Other Revenue growth was approximately 27% on a GAAP basis and 23% on a non-GAAP basis. Financial results in the third quarter of 2014 include those of ReadSoft subsequent to August 19, 2014. Financial results in the third quarter of 2013 include those of Saperion subsequent to the date of acquisition.

****

Year-to-year Perceptive Software Revenue growth was approximately 55% on a GAAP basis and 46% on a non-GAAP basis. Financial results in the third quarter of 2014 include those of ReadSoft subsequent to August 19, 2014. Financial results in the third quarter of 2013 include those of Saperion subsequent to the date of acquisition.

*****

Year-to-year Revenue growth was approximately 3% on a GAAP basis and 6% excluding Inkjet Exit and acquisition-related adjustments. Financial results in the third quarter of 2014 include those of ReadSoft subsequent to August 19, 2014. Financial results in the third quarter of 2013 include those of Saperion subsequent to the date of acquisition.

******

Year-to-year ISS Revenue growth, excluding Inkjet Exit, was approximately 0% on a GAAP basis and 3% on a non-GAAP basis.

⁽¹⁾ 

Amounts for the three months ended September 30, 2014, include total acquisition and divestiture-related adjustments of $30.2 million with $2.5 million, $12.0 million, $0.2 million and $15.5 million included in Revenue, Cost of revenue, Research and development and Selling, general and administrative, respectively. Selling, general and administrative includes $15.2 million of acquisition-related expenses and $0.3 million of divestiture-related expenses. Revenue includes $1.4 million of acquisition-related expenses resulting from the ReadSoft acquisition completed during the third quarter of 2014.

⁽²⁾ 

Amounts for the three months ended September 30, 2013, include total acquisition and divestiture-related adjustments of $25.2 million with $5.0 million, $9.0 million, $0.2 million and $11.0 million included in Revenue, Cost of revenue, Research and development and Selling, general and administrative, respectively. Selling, general and administrative includes $9.9 million of acquisition-related expenses and $1.1 million of divestiture-related expenses.

⁽³⁾ 

Amounts for the three months ended September 30, 2014, include total restructuring charges and project costs of $11.7 million with $0.1 million and $4.9 million included in Restructuring-related costs and Selling, general and administrative, respectively, in addition to the $6.7 million in Restructuring and related charges.

⁽⁴⁾ 

Amounts for the three months ended September 30, 2013, include total restructuring charges and project costs of $17.7 million with $5.1 million and $5.0 million included in Restructuring-related costs and Selling, general and administrative, respectively, in addition to the $7.6 million in Restructuring and related charges.

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP MEASURES

(Unaudited)

Nine Months Ended

September 30

Revenue (In Millions) *

2014

2013

GAAP

$         2,688

$         2,661

Acquisition-related adjustments (1)(2)

8

11

Non-GAAP

$         2,696

$         2,672

Higher Value Solutions Revenue (In Millions) **

2014

2013

GAAP

$            785

$            670

Acquisition-related adjustments (1)(2)

8

11

Non-GAAP

$            793

$            681

Software and Other Revenue (In Millions) ***

2014

2013

GAAP

$            342

$            304

Acquisition-related adjustments (1)(2)

8

11

Non-GAAP

$            350

$            315

Perceptive Software Revenue (In Millions) ****

2014

2013

GAAP

$            206

$            157

Acquisition-related adjustments (1)(2)

8

11

Non-GAAP

$            214

$            167

Revenue, excluding Inkjet Exit and

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

2014

2013

GAAP

$         2,688

$         2,661

Acquisition-related adjustments (1)(2)

8

11

Inkjet Exit Revenue

(199)

(305)

Non-GAAP, excluding Inkjet Exit and

acquisition-related adjustments

$         2,497

$         2,367

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

2014

2013

GAAP ISS Revenue

$         2,482

$         2,505

Inkjet Exit Revenue

(199)

(305)

Non-GAAP ISS Revenue, excluding Inkjet Exit

$         2,283

$         2,200

ReadSoft Revenue, subsequent to August 19, 2014 (In Millions)

2014

2013

GAAP

$             14

$                -

Acquisition-related adjustments (1)

1

-

Non-GAAP

$             16

$                -

Gross Profit (In Millions)

2014

2013

GAAP

$         1,050

$         1,026

Restructuring charges and project costs (3)(4)

9

18

Acquisition-related adjustments (1)(2)

40

37

Actuarial gain on pension plan (5)

(1)

-

Non-GAAP

$         1,099

$         1,081

Gross Profit Margin (%)

2014

2013

GAAP

39.1%

38.6%

Restructuring charges and project costs

0.3%

0.7%

Acquisition-related adjustments

1.5%

1.4%

Actuarial gain on pension plan

0.0%

-

Non-GAAP

40.8%

40.5%

Operating Expense (In Millions)

2014

2013

GAAP

$            879

$            768

Restructuring charges and project costs (3)(4)

(27)

(22)

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

(42)

45

Actuarial gain on pension plan (5)

2

-

Non-GAAP

$            813

$            791

Operating Income  (In Millions)

2014

2013

GAAP

$            171

$            259

Restructuring charges and project costs (3)(4)

35

40

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

83

(8)

Actuarial gain on pension plan (5)

(3)

-

Non-GAAP

$            286

$            290

Operating Income Margin (%)  

2014

2013

GAAP

6.4%

9.7%

Restructuring charges and project costs

1.3%

1.5%

Acquisition and divestiture-related adjustments

3.1%

-0.3%

Actuarial gain on pension plan

-0.1%

-

Non-GAAP

10.6%

10.9%

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 of 2014 include full year results of PACSGEAR, acquired in the fourth quarter of 2013, and those of ReadSoft subsequent to August 19, 2014. Financial results of 2013 include those of AccessVia, Twistage and Saperion subsequent to the date of acquisition.

**

Year-to-year Higher Value Solutions Revenue growth was approximately 17% on a GAAP basis and 16% 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 period ending September 30, 2014. Higher Value Solutions Revenue as a percentage of total revenue was 25% on a GAAP basis and 25% on a non-GAAP basis for the period ending September 30, 2013. Financial results of 2014 include full year results of PACSGEAR, acquired in the fourth quarter of 2013, and those of ReadSoft subsequent to August 19, 2014. Financial results of 2013 include those of AccessVia, Twistage and Saperion subsequent to the date of acquisition.

***

Year-to-year Software and Other Revenue growth was approximately 13% on a GAAP basis and 11% on a non-GAAP basis. Financial results of 2014 include full year results of PACSGEAR, acquired in the fourth quarter of 2013, and those of ReadSoft subsequent to August 19, 2014. Financial results of 2013 include those of AccessVia, Twistage and Saperion subsequent to the date of acquisition.

****

Year-to-year Perceptive Software Revenue growth was approximately 31% on a GAAP basis and 28% on a non-GAAP basis. Financial results of 2014 include full year results of PACSGEAR, acquired in the fourth quarter of 2013, and those of ReadSoft subsequent to August 19, 2014. Financial results of 2013 include those of AccessVia, Twistage and Saperion subsequent to the date of acquisition.

*****

Year-to-year Revenue growth was approximately 1% on a GAAP basis and 5% excluding Inkjet Exit and acquisition-related adjustments. Financial results of 2014 include full year results of PACSGEAR, acquired in the fourth quarter of 2013, and those of ReadSoft subsequent to August 19, 2014. Financial results of 2013 include those of AccessVia, Twistage and Saperion 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 nine months ended September 30, 2014, include total acquisition and divestiture-related adjustments of $82.7 million with $7.9 million, $32.5 million, $0.6 million and $41.7 million included in Revenue, Cost of revenue, Research and development and Selling, general and administrative, respectively. Selling, general and administrative includes $39.9 million of acquisition-related expenses and $1.8 million of divestiture-related expenses. Revenue includes $1.4 million of acquisition-related expenses resulting from the ReadSoft acquisition completed during the third quarter of 2014.

⁽²⁾ 

Amounts for the nine months ended September 30, 2013, include total acquisition and divestiture-related adjustments of $(8.1) million with $10.6 million, $26.3 million, $0.5 million, $28.0 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 $24.2 million of acquisition-related expenses and $3.8 million of divestiture-related expenses.

⁽³⁾ 

Amounts for the nine months ended September 30, 2014, include total restructuring charges and project costs of $35.4 million with $8.7 million and $12.1 million included in Restructuring-related costs and Selling, general and administrative, respectively, in addition to the $14.6 million in Restructuring and related charges.

⁽⁴⁾ 

Amounts for the nine months ended September 30, 2013, include total restructuring charges and project costs of $40.1 million with $18.4 million and $16.9 million included in Restructuring-related costs and Selling, general and administrative, respectively, in addition to the $4.8 million in Restructuring and related charges.

⁽⁵⁾ 

Amounts for the nine months ended September 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, respectively.

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.