Lexmark releases third quarter financial results

Acquisition of ReadSoft helps boost numbers

LEXINGTON, Ky. (Oct. 22, 2014) — Lexmark announced financial results for the third quarter of 2014.

“In the third quarter, Managed Print Services and Perceptive Software combined revenue grew 20 percent, representing nearly one third of Lexmark’s total revenue, and is on track to exceed $1 billion this year,” said Paul Rooke, Lexmark chairman and chief executive officer. “The acquisition of ReadSoft further broadens Lexmark’s solutions capabilities and reach, and supports our target of generating Perceptive Software revenue of $500 million in 2016.”

Third quarter results include ReadSoft results subsequent to Aug. 19. ReadSoft results added $14 million to revenue ($16 million non-GAAP) and impacted earnings per share (EPS) by approximately -$0.06 (+$0.04 non-GAAP).

Third Quarter Results

• GAAP revenue of $918 million includes acquisition-related adjustments of $3 million. Non-GAA revenue of $921 million grew 3 percent year to year, and grew 6 percent excluding the planned and ongoing decline in Inkjet Exit revenue.
• GAAP EPS for the third quarter of 2014 were $0.60. Third quarter 2014 non-GAAP adjustments were $0.45 per share.
• Third quarter 2014 non-GAAP EPS were $1.05 compared with non-GAAP EPS of $1.02 in the third quarter of 2013.

Higher Value Solutions Revenue

• Lexmark’s higher value solutions revenue, comprised of Managed Print Services (MPS) and Perceptive Software, is expected to exceed $1 billion in 2014.
• Combined MPS and Perceptive Software revenue of $291 million, excluding acquisition-related adjustments of $3 million, grew 20 percent year to year and accounted for 32 percent of total revenue, up from 27 percent in the same period last year.

Segment Revenue

• Imaging Solutions and Services (ISS) revenue of $835 million was about flat compared to the same period last year. ISS revenue, excluding Inkjet Exit revenue, grew 3 percent compared to last year. On a year-to-year basis:
• MPS revenue of $205 million grew 12 percent.
• Non-MPS revenue of $570 million was about flat.
• Inkjet Exit revenue of $60 million (6 percent of total revenue) declined 29 percent.
• Perceptive Software revenue was $83 million. Excluding acquisition-related adjustments, Perceptive Software revenue including ReadSoft of $86 million grew 46 percent compared to the same period in 2013.
• Perceptive Software revenue includes ReadSoft revenue of $14 million ($16 million non-GAAP) subsequent to Aug. 19, 2014.

Product Revenue

• Hardware revenue of $196 million grew 8 percent compared to last year.
• Supplies revenue of $593 million declined 2 percent compared to 2013.
• Laser supplies revenue of $533 million grew 2 percent year to year.
• Software and Other revenue was $129 million. On a non-GAAP basis, Software and Other revenue of $132 million grew 23 percent compared to last year.

GAAP Results

• Revenue was $918 million compared to $890 million last year.
• Gross profit margin was 38.9 percent versus 39.1 percent in 2013.
• Operating expense was $303 million compared to $287 million last year.
• Operating income was $55 million compared to $61 million in 2013.
• Operating income margin was 5.9 percent compared to 6.8 percent in 2013.
• Net earnings were $38 million compared to 2013 net earnings of $34 million.

Non-GAAP Results

• Revenue was $921 million compared to $896 million last year.
• Gross profit margin was 40.4 percent versus 41.0 percent in 2013.
• Operating expense was $276 million compared to $263 million last year.
• Operating income was $96 million compared to $104 million in 2013.
• Operating income margin was 10.5 percent compared to 11.6 percent last year.
• Net earnings were $66 million compared to $65 million in 2013.

Cash Flow

• Net cash provided by operating activities was $123 million.
• Free cash flow⁶ was $87 million.
• Capital expenditures were $36 million.
• Depreciation and amortization of $64 million includes acquisition-related adjustments of $19 million and $1 million of restructuring-related adjustments.
• Cash, including cash equivalents and current marketable securities, was $833 million at quarter end, $810 million of which was non U.S.-based.

Maintaining Capital Allocation Discipline to Transform Lexmark, Drive Shareholder Value

• Lexmark is executing 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 86 percent of free cash flow generated since the first quarter of 2011 to shareholders through dividends and share repurchases.
• In the third quarter of 2014, Lexmark returned $40 million to shareholders:
• The company paid a quarterly dividend of $0.36 per share ($1.44 annually). This was Lexmark’s 12th consecutive quarterly dividend.
• The company repurchased 0.4 million Lexmark shares for $18 million. The company’s remaining share repurchase authorization at quarter end was $111 million.

Lexmark Acquires ReadSoft

• Lexmark acquired ReadSoft for approximately $250 million⁷, net of cash acquired, which was funded entirely with Lexmark’s non U.S.-based cash.
• The company believes that ReadSoft is a strong strategic fit for Lexmark, enabling Perceptive Software to significantly grow its software capabilities with additional document process automation technology and expand its European footprint.
• The company expects ReadSoft to be accretive to 2014 non-GAAP earnings.

Looking Forward

• Total revenue in the fourth quarter is currently expected to be down 2 to 4 percent compared to last year. The company expects the 2012 decision to exit inkjet to have a diminishing negative impact on revenue growth. Excluding Inkjet Exit revenue, fourth quarter 2014 revenue is expected to grow year to year.
• GAAP EPS in the fourth quarter of 2014 are expected to be around $0.56 to $0.66.
• Non-GAAP EPS in the fourth quarter of 2014 are expected to be around $1.10 to $1.20, compared with non-GAAP EPS of $1.18 in the fourth quarter of 2013.
• Full-year 2014 total revenue is currently expected to be in the range of flat to down 1 percent year to year, an increase to the mid-point of the previous revenue guidance of flat to down 2 percent year to year.
• Full-year 2014 GAAP EPS are expected to be around $2.21 to $2.31.
• Full-year 2014 non-GAAP EPS are expected to be around $4.05 to $4.15, an increase to the mid-point of the previous non-GAAP earnings per share guidance of $3.95 to $4.15 per share.