Lexmark Reports First Quarter Results

LEXINGTON, Ky., April 22,  2014 — Lexmark International, Inc. today announced financial results for the first quarter of 2014.

"In the first quarter our higher value solutions portfolio revenue, comprised of Managed Print Services and Perceptive Software, grew 18 percent, accounted for 28 percent of Lexmark's total revenue, and is expected to exceed $1 billion this year," said Paul Rooke, Lexmark chairman and chief executive officer. "We also had strong laser supplies revenue growth again this quarter, and delivered increased non-GAAP gross profit, operating income and pretax earnings.

"Lexmark is creating value for our shareholders by helping business customers solve their unstructured information challenges, advancing our solutions capabilities organically and through acquisitions, and by returning capital through an attractive dividend and ongoing share repurchases," added Rooke.

First Quarter Results

First quarter revenue and earnings per share exceeded the company's January guidance.

GAAP revenue of $878 million includes $3 million of acquisition-related adjustments. Non-GAAP revenue of$881 million declined less than 1 percent year to year, but grew 6 percent excluding the planned and ongoing decline in Inkjet Exit revenue. 

• •GAAP earnings per share for the first quarter of 2014 were $0.46, compared with GAAP earnings of $0.62per share in the first quarter of 2013.
• •First quarter 2014 non-GAAP adjustments were $0.46 per share, compared with first quarter 2013 non-GAAP adjustments of $0.33 per share.
• •First quarter 2014 non-GAAP earnings were $0.92 per share compared with non-GAAP earnings of $0.95per share in the first quarter of 2013.

Higher Value Solutions Portfolio

• •Lexmark's higher value solutions portfolio 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 $244 million, excluding acquisition-related adjustments of $3 million, grew 18 percent year to year and accounted for 28 percent of total revenue, up from 23 percent in the same period last year.

Segment Revenue

• •Imaging Solutions and Services (ISS) revenue of $817 million declined 3 percent compared to the same period last year. ISS revenue, excluding Inkjet Exit revenue, grew 4 percent compared to last year. On a year-to-year basis:
• •MPS revenue of $180 million grew 12 percent.
• •Non-MPS revenue⁴ of $565 million grew 1 percent.
• •Inkjet Exit revenue of $73 million declined 40 percent, represented 8 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 $61 million. Perceptive Software revenue, excluding acquisition-related adjustments of $3 million, was $64 million and grew 38 percent compared to the same period in 2013.

Product Revenue

• •Hardware revenue of $167 million declined 8 percent compared to last year.
• •Hardware revenue, excluding Inkjet Exit, declined 7 percent.
• •Supplies revenue of $605 million declined 1 percent year to year. Laser supplies revenue grew 9 percent.
• •Software and Other revenue of $106 million ($109 million non-GAAP) grew 13 percent compared to last year.

GAAP Results

• •Revenue was $878 million compared to $884 million last year.
• •Gross profit margin was 38.9 percent versus 38.0 percent in 2013.
• •Operating expense was $288 million compared to $274 million last year.
• •Operating income was $54 million compared to $62 million in 2013.
• •Operating income margin was 6.1 percent compared to 7.0 percent in 2013.
• •Net earnings were $29 million compared to 2013 net earnings of $40 million.

Non-GAAP Results

• •Revenue was $881 million compared to $886 million last year.
• •Gross profit margin was 41.0 percent versus 40.0 percent in 2013.
• •Operating expense was $270 million compared to $265 million last year.
• •Operating income was $92 million compared to $89 million in 2013.
• •Operating income margin was 10.4 percent compared to 10.1 percent last year.
• •Net earnings were $58 million compared to $62 million in 2013.

Cash Flow

• •Consistent with the company's January guidance, net cash provided by operating activities was $10 million, and free cash flow⁵ was negative $34 million for the quarter. The company continues to expect 2014 free cash flow to be in the range of 90 percent to 100 percent of non-GAAP net earnings.
• •Capital expenditures were $44 million.
• •Depreciation and amortization was $66 million.
• •Cash, including cash equivalents and current marketable securities, was $985 million at quarter end.

Maintaining Capital Allocation Discipline to Deliver Shareholder Value

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 90 percent of free cash flow generated since the first quarter of 2011 to shareholders through dividends and share repurchases.

In the first quarter of 2014, Lexmark returned $40 million to shareholders.

• •The company paid a dividend of $0.30 per share totaling $19 million. This was Lexmark's 10th consecutive quarterly dividend.
• •The company repurchased $21 million of Lexmark's shares. The company's remaining share repurchase authorization at quarter end was $148 million.

Lexmark's Perceptive Software Drives Better Healthcare Delivery

In the first quarter, Lexmark's Perceptive Software announced the Veterans Health Administration Midwest Health Care Network (also known as Veterans Integrated Service Network 23 (VISN 23)) will deploy Perceptive Software's Acuo Vendor Neutral Archive (VNA) to consolidate medical image storage for VISN 23 radiologists and clinical users, providing a federated view of all clinical data across eight healthcare delivery sites in five states.

Perceptive VNA is a vendor neutral foundation that drives better care delivery through a patient-centric approach to clinical content management. It improves clinical workflow and archiving capabilities for healthcare organizations, enabling all clinical content to be easily shared across the enterprise and providing greater freedom and flexibility in implementing departmental systems that best meet patient care, clinical quality and business process needs. Perceptive VNA also strengthens business continuance and disaster recovery capabilities with VNA software running in primary and secondary data centers.

Looking Forward

Second quarter 2014 revenue, excluding Inkjet Exit revenue, is expected to grow year to year. The company expects a continued negative impact from the decision to exit inkjet. Total revenue is currently expected to decline 2 to 4 percent, compared to last year.

GAAP earnings per share in the second quarter of 2014 are expected to be around $0.47 to $0.57. GAAP earnings per share of $1.47 in the second quarter of 2013 included a $71 million gain on the sale of the company's inkjet technology and assets, net of related costs. Non-GAAP earnings per share in the second quarter of 2014 are expected to be around $0.85 to $0.95, compared with non-GAAP earnings per share of$1.04 in the second quarter of 2013.

Conference Call Today

The company will be hosting a conference call with securities analysts today at 8:30 a.m. (EDT). A live broadcast and a complete replay of this call can be accessed from Lexmark's investor relations website at http://investor.lexmark.com. If you are unable to connect to the Internet, you can access the call via telephone at 888-693-3477 (outside the U.S. by calling 973-582-2710) using access code 17199124.

Lexmark's earnings presentation slides, including reconciliations between GAAP and non-GAAP financial measures, will be available on Lexmark's investor relations website prior to the live broadcast.