Home » An evolving Lexmark reports positive fourth quarter and full year 2013 results

An evolving Lexmark reports positive fourth quarter and full year 2013 results

LEXINGTON, Ky. (Jan. 28, 2014) – Lexmark International Inc. (NYSE: LXK) last week announced positive financial results for the fourth quarter and full year of 2013 with big jumps in earning per share.

Importantly for the Lexington-based corporation, its major strategy evolution from a business making and selling printers into one that provides broad data management services is paying off. Those information management services have higher margins, the company said during its earnings call. That could prove important since Lexmark’s expects overall revenues to be down 3 to 5 percent in 2014.

Fourth quarter revenue topped $1 billion. Lexmark’s new Perceptive Software and Managed Print Services operations both grew strongly.

“In the fourth quarter, Lexmark delivered strong revenue and earnings growth, and generated operating cash flow of more than $200 million,” said Paul Rooke, Lexmark chairman and CEO. “Perceptive Software’s profitability increased again year to year, and once again Perceptive Software and Managed Print Services revenue each grew at a double-digit rate and now together represent 28 percent of our total revenue.

“The synergies we have created with our unique imaging and software solutions resonate well with our customers as we help them solve their unstructured information challenges,” Rooke said. “Lexmark is increasing value for our shareholders by utilizing the company’s long history of free cash flow generation to return capital and accelerate our transformation to a higher-value solutions portfolio.”

Rooke said during the earnings call that Lexmark’s long-term aim is margins of 11 to 13 percent and that it will maintain an “aggressive acquisition” posture. The company added 40 new customers last year while maintaining a 100 percent renewal with existing clients, he said.

Fourth Quarter Results

GAAP (generally accepted accounting principles) earnings per share for the fourth quarter of 2013 were $1.48, compared with GAAP earnings of $0.40 per share in the fourth quarter of 2012. As previously announced, the company changed its method of accounting for asset and actuarial gains and losses for its pension and postretirement plans in the fourth quarter of 2013. GAAP earnings per share include a favorable mark-to-market adjustment of $0.64 per share and a $0.37 per share for fourth quarter 2013 and fourth quarter 2012, respectively. GAAP earnings per share in the fourth quarter also include restructuring related charges, and acquisition and divestiture related items.

Fourth quarter 2013 non-GAAP adjustments were ($0.30) per share, compared with fourth quarter 2012 non-GAAP adjustments of $0.28 per share.

Fourth quarter 2013 non-GAAP earnings were $1.18 per share compared with non-GAAP earnings of $0.68 per share in the fourth quarter of 2012.

Segment Revenue
Imaging Solutions and Services (ISS) revenue of $939 million grew 1 percent compared to the same period last year. ISS revenue, excluding Inkjet Exit revenue, grew 8 percent compared to last year. On a year-to-year basis:

• Record Managed Print Services (MPS) revenue of $208 million grew 22 percent.

• Non-MPSrevenue of $631 million grew 4 percent.

• Inkjet Exit2 revenue of $100 million declined 32 percent, represented 10 percent of total company revenue, and is expected to decline as a percentage of total revenue as the trailing inkjet supplies revenue from the remaining installed base of inkjet printers naturally decreases over time.

Perceptive Software revenue was $67 million. Perceptive Software revenue, excluding acquisition-related adjustments of $5 million, was a record $72 million and grew 70 percent compared to the same period in 2012.

Product Revenue 
Hardware revenue of $228 million and Supplies revenue of $661 million grew 3 percent and 1 percent, respectively, compared to last year.

Hardware revenue, excluding Inkjet Exit2, grew 7 percent, compared to last year. Supplies revenue, excluding Inkjet Exit, grew 8 percent, compared to last year.

Other revenue of $116 million grew 31 percent compared to last year, or 36 percent, excluding acquisition-related adjustments.

GAAP Results

• Revenue was $1.006 billion compared to $967 million last year.

• Gross profit margin was 41.5 percent versus 35.0 percent in 2012.

• Operating expense was $267 million compared to $278 million last year.

• Operating income was $151 million compared to $61 million in 2012.

• Operating income margin was 15.0 percent compared to 6.3 percent in 2012.

• Net earnings were $94 million compared to 2012 net earnings of $26 million.

Non-GAAP Results

Revenue was $1.011 billion compared to $968 million last year.

• Gross profit margin was 41.4 percent versus 36.2 percent in 2012.

• Operating expense was $307 million compared to $269 million last year.

• Operating income was $112 million compared to $82 million in 2012.

• Operating income margin was 11.1 percent compared to 8.4 percent last year.

• Net earnings were $75 million compared to $45 million in 2012.

Cash Flow 
In the fourth quarter of 2013, net cash provided by operating activities was $205 million, free cash flow6 was $164 million, capital expenditures were $41 million, and depreciation and amortization was $67 million.

Full Year Results

GAAP revenue of $3.668 billion includes $16 million of acquisition-related adjustments. Non-GAAP revenue of $3.684 billion declined 3 percent compared with last year. Excluding the planned and ongoing decline in Inkjet Exit revenue, non-GAAP revenue grew 4 percent year to year.

GAAP earnings per share for 2013 were $4.08, compared with GAAP earnings of $1.55 per share in 2012. 2013 GAAP earnings per share include a mark-to-market adjustment of a favorable $0.63 per share and an unfavorable $0.23 per share in 2012. GAAP earnings per share for the full year also include restructuring related charges, acquisition and divestiture related items, and loss on early extinguishment of debt.

2013 non-GAAP adjustments were $0.11 per share, compared with 2012 non-GAAP adjustments of $2.23 per share.

2013 non-GAAP earnings were $4.19 per share compared with non-GAAP earnings of $3.78 per share in 2012.

ISS revenue of $3.444 billion declined 5 percent compared to last year. ISS revenue, excluding Inkjet Exit revenue, grew 1 percent compared to last year. On a year-to-year basis:

• Record MPS revenue of $722 million grew 16 percent.

• Non-MPSrevenue of $2.317 billion declined 3 percent.

• Inkjet Exit revenue of $405 million declined 37 percent, represented 11 percent of total company revenue, and is expected to decline as a percentage of total revenue as the trailing inkjet supplies revenue from the remaining installed base of inkjet printers naturally decreases over time.

Perceptive Software revenue was $224 million. Perceptive Software revenue, excluding acquisition-related adjustments of $16 million, was a record $239 million and grew 48 percent compared to 2012.

Hardware revenue of $763 million and Supplies revenue of $2.484 billion declined 8 percent and 6 percent, respectively, compared to last year.

Hardware revenue, excluding Inkjet Exit2, declined 2 percent, compared to last year. Supplies revenue, excluding Inkjet Exit2, grew 2 percent, compared to last year.

Software and Other revenue of $420 million grew 27 percent compared to last year, or 30 percent, excluding acquisition-related adjustments.

GAAP Results

• Revenue was $3.668 billion compared to $3.798 billion last year.

• Gross profit margin was 39.4 percent versus 36.9 percent in 2012.

• Operating expense was $1.035 billion compared to $1.210 billion last year.

• Operating income margin was 11.2 percent compared to 5.0 percent in 2012.

• Net earnings were $262 million compared to 2012 net earnings of $108 million.

Non-GAAP Results

• Revenue was $3.684 billion compared to $3.803 billion last year.

• Gross profit margin was 40.7 percent versus 39.1 percent in 2012.

• Operating expense was $1.098 billion compared to $1.086 billion last year.

• Operating income margin was 10.9 percent compared to 10.5 percent last year.

• Net earnings were $269 million compared to $263 million in 2012.

Cash Flow 
2013 net cash provided by operating activities was $474 million, free cash flow6 was $308 million, capital expenditures were $167 million, and depreciation and amortization was $250 million. The company ended the year with $1.055 billion in cash, equivalents and current marketable securities.

Lexmark is continuing to execute on its stated capital allocation framework of returning more than 50 percent of free cash flow to shareholders, on average, through quarterly dividends and share repurchases while building and growing its solutions and software business through expansion and acquisitions. Lexmark has returned more than $675 million to shareholders through dividends and share repurchases since July 2011.

In the fourth quarter of 2013, Lexmark paid a dividend of $0.30 per share totaling $19 million and also repurchased $20 million of the company’s shares. In the full year of 2013, Lexmark paid dividends of $1.20 per share totaling $75 million and also repurchased $82 million of the company’s shares. The company’s remaining share repurchase authorization is currently $169 million.

MPS Leadership – Lexmark has once again been positioned in the Leaders quadrant by leading industry analyst firm Gartner Inc. in its “Magic Quadrant: Managed Print Services Worldwide” report. In the Gartner Magic Quadrant report, Lexmark was evaluated on “completeness of vision” as well as its “ability to execute.” Lexmark’s vertical MPS prowess ranges from operational excellence to delivering and managing global infrastructure and end-to-end business optimization solutions that enable Lexmark customers to better address their unstructured information challenges.

Smart MFP Leadership – Lexmark has been recognized as a Leader in smart multifunction products (MFPs) by the IDC MarketScape 2013 Smart MFP report, which analyzes the strategies and current capabilities of companies providing smart MFPs. As defined by the IDC MarketScape, Leaders are companies that have led and continue to lead the market in both breadth of offering and strategic intent. In addition, the report notes that “Lexmark holds a leadership position in managed print services as well as extensive software ecosystem.”

Looking Forward

In the first quarter of 2014, revenue excluding Inkjet Exit revenue is expected to be up year to year. The company expects a continued negative impact from the decision to exit inkjet. Total revenue is currently expected to decline 3 to 5 percent, compared to last year. GAAP earnings per share in the first quarter of 2014 are expected to be around $0.31 to $0.41, compared with GAAP earnings per share of $0.62 in the first quarter of 2013. Non-GAAP earnings per share in the first quarter of 2014 are expected to be around $0.80 to $0.90, compared with non-GAAP earnings per share of $0.95 in the first quarter of 2013.