Lexmark Newsroom

1Q16

1Q15

    GAAP

$806

$852

    Adjustments

6

3

    Non-GAAP

$812

$855

EPS

1Q16

1Q15

    GAAP

-$0.63

$0.32

    Adjustments

$0.94

0.49

    Non-GAAP

$0.31

$0.81

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(In Millions, Except Per Share Amounts)

(Unaudited)

Three Months Ended

March 31

2016

2015

Revenue:

Product

$

626.8

$

714.7

Service

179.4

137.3

Total Revenue

806.2

852.0

Cost of revenue:

Product

394.9

428.4

Service

104.9

93.6

Restructuring-related costs

-

0.1

Total Cost of revenue

499.8

522.1

Gross profit

306.4

329.9

Research and development

83.7

77.7

Selling, general and administrative

272.8

210.2

Restructuring and related reversals

(11.6)

(0.2)

Operating expense

344.9

287.7

Operating (loss) income

(38.5)

42.2

Interest expense (income), net

11.3

7.7

Other expense (income), net

0.4

0.8

(Loss) earnings before income taxes

(50.2)

33.7

(Benefit) provision for income taxes

(10.8)

13.5

Net (loss) earnings

$

(39.4)

$

20.2

Net (loss) earnings per share:

Basic

$

(0.63)

$

0.33

Diluted

$

(0.63)

$

0.32

Shares used in per share calculation:

Basic

62.3

61.3

Diluted

62.3

62.4

Cash dividends declared per common share

$

0.36

$

0.36

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION

(In Millions)

(Unaudited)

March 31,

December 31,

2016

2015

ASSETS

Current assets:

Cash and cash equivalents

$

127.0

$

158.3

Trade receivables, net

420.4

434.2

Inventories

232.9

231.9

Prepaid expenses and other current assets

202.5

204.9

Total current assets

982.8

1,029.3

Property, plant and equipment, net

725.2

740.2

Goodwill

1,334.4

1,325.1

Intangibles, net

507.3

532.5

Other assets

281.1

285.3

Total assets

$

3,830.8

$

3,912.4

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Current portion of long-term debt

$

3.5

$

-

Accounts payable

539.5

501.7

Accrued liabilities

645.9

669.8

Total current liabilities

1,188.9

1,171.5

Long-term debt, net of unamortized issuance costs

992.0

1,061.3

Other liabilities

580.9

561.6

Total liabilities

2,761.8

2,794.4

Stockholders' equity:

Common stock and capital in excess of par

1,044.7

1,026.9

Retained earnings

1,229.9

1,292.8

Treasury stock, net

(1,040.4)

(1,036.7)

Accumulated other comprehensive loss

(165.2)

(165.0)

Total stockholders' equity

1,069.0

1,118.0

Total liabilities and stockholders' equity

$

3,830.8

$

3,912.4

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP MEASURES

(In Millions, Except Per Share Amounts)

(Unaudited)

Net (Loss) Earnings

1Q16

1Q15

GAAP

$

(39)

$

20

Restructuring (reversals) charges and project costs

(5)

1

Acquisition and strategic alternatives-related adjustments

46

29

Actuarial loss on pension plan

13

-

Remediation-related charges

5

-

Non-GAAP

$

19

$

51

EBITDA and Adjusted EBITDA

1Q16

1Q15

GAAP Net (Loss) Earnings

$

(39)

$

20

Interest expense (income), net

11

8

(Benefit) provision for income taxes

(11)

14

Depreciation and amortization

72

66

EBITDA

$

33

$

107

Restructuring (reversals) charges and project costs

(8)

2

Acquisition and strategic alternatives-related adjustments

31

14

Actuarial loss on pension plan

18

-

Remediation-related charges

7

-

Adjusted EBITDA

$

80

$

123

(Loss) Earnings Per Share

1Q16

1Q15

GAAP

$

(0.63)

$

0.32

Restructuring (reversals) charges and project costs

(0.08)

0.02

Acquisition and strategic alternatives-related adjustments

0.73

0.46

Actuarial loss on pension plan

0.21

-

Remediation-related charges

0.08

-

Non-GAAP

$

0.31

$

0.81

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

(In Millions)

(Unaudited)

Revenue

(1)

1Q16

1Q15

GAAP

$

806

$

852

Acquisition-related adjustments

[A][B]

6

3

Non-GAAP

$

812

$

855

Constant currency adjustments

(1)

(39)

Non-GAAP, at constant currency

$

811

$

816

Higher Value Solutions Revenue

(2)

1Q16

1Q15

GAAP

$

806

$

852

Inkjet Exit Revenue

(20)

(48)

Non-MPS Revenue

(460)

(533)

Higher Value Solutions Revenue

$

326

$

272

Acquisition-related adjustments

[A][B]

6

3

Higher Value Solutions Revenue,

excluding acquisition-related adjustments

$

332

$

275

Constant currency adjustments

-

(12)

Non-GAAP, at constant currency

$

332

$

263

Core Revenue

(3)

1Q16

1Q15

GAAP

$

806

$

852

Inkjet Exit Revenue

(20)

(48)

Acquisition-related adjustments

[A][B]

6

3

Core Revenue

$

792

$

807

Constant currency adjustments

(1)

(38)

Non-GAAP, at constant currency

$

791

$

769

Enterprise Software Revenue

(4)

1Q16

1Q15

GAAP

$

137

$

86

Acquisition-related adjustments

[A][B]

6

3

Non-GAAP

$

143

$

90

Constant currency adjustments

-

(1)

Non-GAAP, at constant currency

$

143

$

88

Imaging Solutions and Services ("ISS") Revenue

(5)

1Q16

1Q15

GAAP

$

669

$

766

Constant currency adjustments

(1)

(38)

Non-GAAP, at constant currency

$

668

$

728

Managed Print Services ("MPS") Revenue

(6)

1Q16

1Q15

GAAP ISS Revenue

$

669

$

766

Inkjet Exit Revenue

(20)

(48)

Non-MPS Revenue

(460)

(533)

MPS Revenue

$

189

$

185

Constant currency adjustments

-

(10)

Non-GAAP, at constant currency

$

189

$

175

Non-MPS Revenue

(7)

1Q16

1Q15

GAAP ISS Revenue

$

669

$

766

Inkjet Exit Revenue

(20)

(48)

MPS Revenue

(189)

(185)

Non-MPS Revenue

$

460

$

533

Constant currency adjustments

(1)

(27)

Non-GAAP, at constant currency

$

459

$

506

Inkjet Exit Revenue

(8)

1Q16

1Q15

GAAP ISS Revenue

$

669

$

766

MPS Revenue

(189)

(185)

Non-MPS Revenue

(460)

(533)

Inkjet Exit Revenue

$

20

$

48

Deferred Software Revenue

(9)

1Q16

1Q15

GAAP

$

202

$

118

Acquisition-related adjustments

12

12

Non-GAAP

$

214

$

130

Net (Debt) Cash

(10)

1Q16

1Q15

GAAP Cash and Cash Equivalents

$

127

$

158

Long-term and short-term debt

(996)

(1,061)

Non-GAAP Net Debt

$

(869)

$

(903)

Free Cash Flow

(11)

1Q16

 1Q15

GAAP Cash Flows Provided by (Used for) Operating Activities

$

79

$

(10)

Purchases of property, plant and equipment

(23)

(37)

Non-GAAP Free Cash Flow

$

56

$

(47)

Gross Profit

1Q16

1Q15

GAAP

$

306

$

330

Restructuring charges and project costs

[C][D]

-

-

Acquisition-related adjustments

[A][B]

24

17

Actuarial loss on pension plan

[E]

4

-

Non-GAAP

$

335

$

347

Gross Profit Margin (%)

1Q16

1Q15

GAAP

38.0%

38.7%

Restructuring charges and project costs

-

0.0%

Acquisition-related adjustments

3.0%

1.9%

Actuarial loss on pension plan

0.5%

-

Non-GAAP

41.2%

40.5%

Operating (Loss) Income

1Q16

1Q15

GAAP

$

(39)

$

42

Restructuring (reversals) charges and project costs

[C][D]

(7)

2

Acquisition and strategic alternatives-related adjustments

[A][B]

60

37

Actuarial loss on pension plan

[E]

18

-

Remediation-related charges

[F]

7

-

Non-GAAP

$

39

$

81

Operating Income Margin (%) 

1Q16

1Q15

GAAP

(4.8%)

5.0%

Restructuring (reversals) charges and project costs

(0.9%)

0.2%

Acquisition and strategic alternatives-related adjustments

7.4%

4.3%

Actuarial loss on pension plan

2.2%

-

Remediation-related charges

0.8%

-

Non-GAAP

4.8%

9.5%

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

Totals may not foot due to rounding.

(1)

Year-to-year Revenue growth was approximately -5% on a GAAP basis, -5% on a non-GAAP basis, excluding acquisition-related adjustments, and -1% on a non-GAAP basis at constant currency. Financial results in the first quarter of 2016 include those of Kofax acquired in the second quarter of 2015.

(2)

Year-to-year Higher Value Solutions Revenue growth was approximately 20% on a GAAP basis, 21% on a non-GAAP basis, excluding acquisition-related adjustments, and 26% on a non-GAAP basis at constant currency. Higher Value Solutions Revenue was 40% as a percentage of total GAAP Revenue and 41% as a percentage of total non-GAAP Revenue, excluding acquisition-related adjustments, for the quarter ending March 31, 2016. Higher Value Solutions Revenue was 32% as a percentage of total GAAP Revenue and 32% as a percentage of total non-GAAP Revenue, excluding acquisition-related adjustments, for the quarter ending March 31, 2015. Financial results in the first quarter of 2016 include those of Kofax acquired in the second quarter of 2015.

(3)

Year-to-year Revenue growth was approximately -5% on a GAAP basis, -2% on a non-GAAP basis, excluding Inkjet Exit and acquisition-related adjustments, and 3% on a non-GAAP basis at constant currency. Financial results in the first quarter of 2016 include those of Kofax acquired in the second quarter of 2015.

(4)

Year-to-year Enterprise Software Revenue growth was approximately 59% on a GAAP basis, 60% on a non-GAAP basis, excluding acquisition-related adjustments, and 62% on a non-GAAP basis at constant currency. Financial results in the first quarter of 2016 include those of Kofax acquired in the second quarter of 2015.

(5)

Year-to-year ISS Revenue growth was approximately -13% on a GAAP basis and -8% on a non-GAAP basis at constant currency.

(6)

Year-to-year MPS Revenue growth was approximately 2% on a GAAP basis and 8% on a non-GAAP basis at constant currency.

(7)

Year-to-year Non-MPS Revenue growth was approximately -14% on GAAP basis and -9% on a non-GAAP basis at constant currency.

(8)

Year-to-year Inkjet Exit Revenue growth was approximately -58% on a GAAP basis.

(9)

Year-to-year Deferred Software Revenue growth was approximately 71% on a GAAP basis and 65% on a non-GAAP basis, excluding acquisition-related adjustments. Financial results in the first quarter of 2016 include those of Kofax acquired in the second quarter of 2015.

(10)

Net Debt or Net Cash, a non-GAAP measure, is defined as cash and cash equivalents minus long-term and short-term debt.

(11)

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

[A]

Amounts for the three months ended March 31, 2016, include total acquisition and strategic alternatives-related adjustments of $60.3 million with $5.9 million, $18.1 million, $0.3 million and $36.0 million included in Revenue, Cost of revenue, Research and development and Selling, general and administrative, respectively. Selling, general and administrative includes $27.3 million of acquisition-related expenses and $8.7 million of strategic alternatives-related adjustments.

[B]

Amounts for the three months ended March 31, 2015, include total acquisition-related adjustments of $36.7 million with $3.2 million, $13.3 million, $0.2 million and $20.0 million included in Revenue, Cost of revenue, Research and development and Selling, general and administrative, respectively.

[C]

Amounts for the three months ended March 31, 2016, include total restructuring charges (reversals) and project costs of $(7.0) million with $4.6 million included in Selling, general and administrative and $(11.6) million included in Restructuring and related reversals.

[D]

Amounts for the three months ended March 31, 2015, include total restructuring charges (reversals) and project costs of $1.9 million with $0.1 million and $2.0 million included in Restructuring-related costs and Selling, general and administrative, respectively, in addition to $(0.2) million in Restructuring and related reversals.

[E]

Amounts for the three months ended March 31, 2016, include actuarial loss on pension plan of $17.7 million with $4.4 million, $2.1 million and $11.2 million included in Cost of revenue, Research and development and Selling, general and administrative, respectively.

[F]

Amounts for the three months ended March 31, 2016, include remediation-related charges of $6.6 million included in 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. Effective first quarter 2015, the Company is using a constant non-GAAP tax rate, which management believes reflects the long-term average tax rate based on our international structure and geographic distribution of earnings. In addition, the Company is also using constant currency which removes estimated currency rate impacts and related hedge gains and losses from key performance indicators, which management believes facilitates a better understanding of trends in our business. Adjustments to GAAP results in determining non-GAAP results fall into the 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, stock based compensation expense related to replacement awards issued to employees of acquired companies and costs of retention bonus programs for the senior management of acquired companies. 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. Acquisition and integration expenses also include costs associated with the Company's  rebranding announcement in April 2015 as well as related non-cash charges for the abandonment of certain obsolete marketing assets. 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. In 2013 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) 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.

4) Remediation-related adjustments
The Company implemented various remedial actions to address previously identified material weaknesses in internal control over accounting for income taxes. In connection with its remediation actions, the Company incurs expenses that would not have been incurred otherwise. The remediation-related costs include professional fees associated with the remediation actions being taken. These costs are incremental to normal operating charges and are expensed as incurred. Management excluded these expenses from non-GAAP earnings in order to evaluate the Company's performance on a continuing and comparable basis.

Tax effects of non-GAAP adjustments
Effective this first quarter of 2015, Lexmark is using a constant non-GAAP tax rate of 30%, which management believes reflects the long-term average tax rate based on our global supply chain, including our geographic distribution of earnings. The long-term average rate is calculated after excluding the tax effect of the non-GAAP items described above. Further, the non-GAAP tax rate removes the variability introduced by discrete events such as tax law changes, tax authority settlements and other non-recurring items.  The Company believes the long-term non-GAAP tax rate eliminates the effects of non-recurring and period specific items which can vary in size and frequency, facilitating a meaningful comparison across periods.  This rate is subject to change over time for various reasons, including material changes in our geographic business mix, acquisitions and/or modifications to statutory tax rates.

Constant Currency
Lexmark presents certain measures, such as period-over-period revenue growth and operating income, on a constant currency basis, which excludes the effects of foreign currency translation. Due to the continuing strengthening of the U.S. dollar against foreign currencies and the overall variability of foreign exchange rates from period to period, Lexmark's management uses these measures on a constant currency basis to evaluate period-over-period operating performance. Measures presented on a constant currency basis are calculated by translating prior period results at current period exchange rates and removing related hedge gains and losses.

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.