LEXMARK INTERNATIONAL INC LEXINGTON, Ky., Oct. 28, 2016 /PRNewswire/ -- Lexmark International, Inc. today announced financial results for the third quarter of 2016.
Results(1)
---------
GAAP Summary 3Q16 3Q15 Year-to-Year
Change
--- ------
Revenue (millions) $844 $851 -1%
ISS(2) $688 $703 -2%
ES(3) $156 $148 +5%
Core4 $830 $820 +1%
Higher Value Solutions5 $366 $355 +3%
Gross Profit Margin 39.0% 37.6%
Operating Income Margin 4.3% -2.5%
EPS $0.28 -$0.25
Non-GAAP Summary 3Q16 3Q15 Year-to-Year Year-to-Year
Change Change at
Constant
Currency6
--- ---------
Revenue (millions) $846 $868 -3% 0%
ISS $688 $703 -2% +1%
ES $157 $165 -5% -4%
Core $832 $837 -1% +2%
Higher Value Solutions $367 $372 -1% 0%
Gross Profit Margin 41.3% 40.9%
Operating Income Margin 9.9% 7.4%
Adjusted EBITDA7 $122 $104
EPS $0.77 $0.57
Balance Sheet / Cash Flow (millions) 3Q16
------------------------------------ ----
Cash8 $118
U.S. $13
Non-U.S. $105
Net debt9 $900
Operating cash flow $25
Free cash flow10 $9
Quarterly dividend ($0.36/share) $23
CFIUS Clearance to Proceed with Acquisition of Lexmark
-- On Sept. 30, 2016, clearance was received from the Committee on Foreign
Investment in the United States (CFIUS) to proceed with the proposed
acquisition of the company. CFIUS found that there are no unresolved
national security issues associated with the proposed transaction.
-- As a precondition to CFIUS clearance of the transaction, CFIUS required
that the company and the Consortium enter into a National Security
Agreement with the Departments of Defense and Homeland Security.
-- The transaction remains subject to approval from China's State
Administration of Foreign Exchange (SAFE) and other customary closing
conditions.
-- The parties continue to expect the transaction to close in 2016.
Looking Forward
-- The company will not conduct quarterly conference calls while the
transaction is pending.
-- Upon closing, Lexmark common stock will cease to be publicly traded on
the New York Stock Exchange.
Earnings Materials
This earnings release, including reconciliations between GAAP and non-GAAP financial measures, will be available on Lexmark's investor relations website at http://investor.lexmark.com.
GAAP to non-GAAP Financial Measures
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 financial measures such as Adjusted EBITDA, 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" Adjusted EBITDA, earnings per share amounts and related income statement items exclude restructuring charges and project costs, strategic alternatives, acquisition and divestiture-related adjustments, pension plan actuarial gains/losses, and remediation-related adjustments. The rationale for management's use of non-GAAP measures is included in Appendix A to the financial information attached hereto.
About Lexmark
Lexmark (NYSE: LXK) creates enterprise software, hardware and services that remove the inefficiencies of information silos and disconnected processes, connecting people to the information they need at the moment they need it. Open the possibilities at www.Lexmark.com.
Lexmark, the Lexmark logo and Open the possibilities are trademarks of Lexmark International, Inc., registered in the U.S. and/or other countries. All other trademarks are the property of their respective owners.
Safe Harbor
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, Lexmark may not be able to complete the proposed sale of the Company to the Consortium pursuant to the terms of the merger agreement by and among the parties because of a number of factors, including without limitation (i) the occurrence of any event, change or other circumstances that could give rise to the expected timing of completion or termination of the Merger Agreement, or (ii) a failure to satisfy the other closing conditions; the proposed transaction also includes risks related to the disruption of management's attention from Lexmark's ongoing business operations due to the pending transaction and the ability of Lexmark to retain and hire key personnel, maintain relationships with its customers and suppliers, and maintain its operating results and business generally; fluctuations in foreign currency exchange rates; decreased supplies consumption; excessive inventory for the company's reseller channel; aggressive pricing from competitors and resellers; failure to successfully integrate newly acquired businesses; inability to realize all of the anticipated benefits of the company's acquisitions; failure to manage inventory levels or production capacity; possible changes in the size of expected restructuring costs, charges, and savings; market acceptance of new products; 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; changes in the company's tax provisions or tax liabilities; periodic variations affecting revenue and profitability; the failure of information technology systems, including data breaches or cyberattacks; 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; business disruptions; increased competition in the aftermarket supplies business; inability to obtain and protect the company's intellectual property rights and defend against claims of infringement and/or anticompetitive conduct; ineffective internal controls; customer demands and new regulations related to conflict-free minerals; fees on the company's products or litigation costs required to protect the company's rights; inability to perform under managed print services contracts; terrorist acts; acts of war or other political conflicts; increased investment to support product development and marketing; the financial failure or loss of business with a key customer or reseller; credit risk associated with the company's customers, channel partners, and investment portfolio; the outcome of litigation or regulatory proceedings to which the company may be a party; unforeseen cost impacts as a result of new legislation; changes in a country's political or economic conditions; disruptions at important points of exit and entry and distribution centers; and other risks described in the company's Securities and Exchange Commission filings. The company undertakes no obligation to update any forward-looking statement.
Footnotes
---------
(1) Totals may not foot due to
rounding.
(2) ISS is the acronym for Lexmark's
Imaging Solutions and Services
segment.
--------------------------------
(3) ES is the acronym for Lexmark's
Enterprise Software segment.
--------------------------------
(4) Core revenue is defined as total
Lexmark revenue minus Inkjet
Exit revenue. Inkjet Exit is
defined as consumer and
business inkjet hardware and
supplies that the company is
exiting.
--------------------------------
(5) Higher Value Solutions revenue
is defined as combined Managed
Print Services (MPS) and
Enterprise Software revenue.
MPS is defined as ISS laser
hardware, supplies, and fleet
management solutions sold
through a managed print
services agreement.
-------------------------------
(6) Constant currency is calculated
by translating prior period
results at current period
exchange rates and removing
related hedge gains and losses.
--------------------------------
(7) Adjusted EBITDA, a non-GAAP
measure, is defined as net
earnings plus net interest
expense (income), provision for
income taxes, depreciation and
amortization, excluding
restructuring charges and
project costs, acquisition and
divestiture related
adjustments, pension plan
actuarial gains or losses, and
remediation related
adjustments.
--------------------------------
(8) Cash is defined as cash and cash
equivalents.
--------------------------------
(9) Net debt, a non-GAAP measure,
is defined as Cash minus long-
term and short-term debt.
------------------------------
(10) 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.
--------------------------------
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
------------ ------------
2016 2015 2016 2015
---- ---- ---- ----
Revenue:
Product $647.8 $669.0 $1,940.0 $2,103.6
Service 196.1 182.1 572.7 478.8
------- ----- ----- ----- -----
Total Revenue 843.9 851.1 2,512.7 2,582.4
Cost of revenue:
Product 415.8 423.8 1,236.9 1,267.9
Service 98.7 107.7 303.0 302.1
Restructuring-related costs - - - 0.8
--------------------------- --- --- --- ---
Total Cost of revenue 514.5 531.5 1,539.9 1,570.8
--------------------- ----- ----- ------- -------
Gross profit 329.4 319.6 972.8 1,011.6
Research and development 68.5 81.6 228.0 244.9
Selling, general and administrative 228.5 261.0 743.1 736.0
Restructuring and related
(reversals) charges (3.5) (1.4) (18.6) 32.2
------------------------- ---- ---- ----- ----
Operating expense 293.5 341.2 952.5 1,013.1
----------------- ----- ----- ----- -------
Operating income (loss) 35.9 (21.6) 20.3 (1.5)
Interest expense (income), net 11.5 10.4 33.8 28.1
Other expense (income), net 1.3 3.4 2.5 3.6
--------------------------- --- --- --- ---
Earnings (loss) before income taxes 23.1 (35.4) (16.0) (33.2)
Provision (benefit) for income taxes 4.8 (20.2) 40.5 (3.5)
------------------------------------ --- ----- ---- ----
Net earnings (loss) $18.3 $(15.2) $(56.5) $(29.7)
Net earnings (loss) per share:
Basic $0.29 $(0.25) $(0.90) $(0.48)
Diluted $0.28 $(0.25) $(0.90) $(0.48)
Shares used in per share
calculation:
Basic 63.0 61.7 62.8 61.5
Diluted 64.2 61.7 62.8 61.5
Cash dividends declared
per common share $0.36 $0.36 $1.08 $1.08
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In Millions)
(Unaudited)
September 30, December 31,
2016 2015
---- ----
ASSETS
Current assets:
Cash and cash equivalents $117.7 $158.3
Trade receivables, net 397.5 434.2
Inventories 238.9 231.9
Prepaid expenses and other current assets 169.2 204.9
----------------------------------------- ----- -----
Total current assets 923.3 1,029.3
Property, plant and equipment, net 683.2 740.2
Goodwill 1,323.0 1,325.1
Intangibles, net 432.6 532.5
Other assets 275.2 285.3
------------ ----- -----
Total assets $3,637.3 $3,912.4
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $398.9 $501.7
Accrued liabilities 645.4 669.8
------------------- ----- -----
Total current liabilities 1,044.3 1,171.5
Long-term debt, net of unamortized discounts and
issuance costs 1,017.9 1,061.3
Other liabilities 571.6 561.6
----------------- ----- -----
Total liabilities 2,633.8 2,794.4
Stockholders' equity:
Common stock and capital in excess of par 1,069.4 1,026.9
Retained earnings 1,165.7 1,292.8
Treasury stock, net (1,040.4) (1,036.7)
Accumulated other comprehensive loss (191.2) (165.0)
------------------------------------ ------ ------
Total stockholders' equity 1,003.5 1,118.0
-------------------------- ------- -------
Total liabilities and stockholders' equity $3,637.3 $3,912.4
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP TO NON-GAAP MEASURES
(In Millions, Except Per Share Amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2016 2015 2016 2015
---- ---- ---- ----
Net Earnings (Loss)
GAAP $18 $(15) $(57) $(30)
Pre-tax adjustments:
--------------------
Restructuring charges (reversals) and
project costs 1 1 (11) 40
Acquisition, strategic alternatives, and
divestiture-related adjustments 46 82 150 198
Actuarial loss on pension plan - - 26 -
Remediation-related charges 2 3 10 3
--- --- --- ---
Total pre-tax adjustments 48 86 176 241
Tax effects of non-GAAP adjustments and
constant non-GAAP tax rate (16) (35) (7) (66)
Non-GAAP $49 $35 $112 $146
EBITDA and Adjusted EBITDA
GAAP Net Earnings (Loss) $18 $(15) $(57) $(30)
Interest expense (income), net 12 10 34 28
Provision (benefit) for income taxes 5 (20) 41 (4)
Depreciation and amortization 69 80 213 223
--- --- --- ---
EBITDA $104 $55 $230 $218
---- --- ---- ----
Restructuring charges (reversals) and
project costs 1 1 (12) 39
Acquisition, strategic alternatives, and
divestiture-related adjustments 16 44 61 105
Actuarial loss on pension plan - - 26 -
Remediation-related charges 2 3 10 3
--- --- --- ---
Adjusted EBITDA $122 $104 $316 $365
Earnings (Loss) Per Share
GAAP $0.28 $(0.25) $(0.90) $(0.48)
Pre-tax adjustments:
--------------------
Restructuring charges (reversals) and
project costs 0.01 0.01 (0.17) 0.65
Acquisition, strategic alternatives, and
divestiture-related adjustments 0.71 1.32 2.39 3.22
Actuarial loss on pension plan - - 0.42 0.00
Remediation-related charges 0.02 0.05 0.17 0.05
---- ---- ---- ----
Total pre-tax adjustments 0.74 1.39 2.81 3.93
Tax effects of non-GAAP adjustments and
constant non-GAAP tax rate (0.26) (0.57) (0.12) (1.08)
----- ----- ----- -----
Non-GAAP $0.77 $0.57 $1.79 $2.37
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)
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2016 2015 2016 2015
---- ---- ---- ----
Revenue (1)
GAAP $844 $851 $2,513 $2,582
Acquisition-related adjustments [A][B] 2 17 10 32
--- --- --- ---
Non-GAAP $846 $868 $2,523 $2,614
---- ---- ------ ------
Constant currency adjustments (1) (21) (1) (90)
--- --- --- ---
Non-GAAP, at constant currency $844 $847 $2,522 $2,524
Higher Value Solutions Revenue (2)
GAAP $844 $851 $2,513 $2,582
Inkjet Exit Revenue (14) (31) (49) (114)
Non-MPS Revenue (465) (465) (1,401) (1,500)
---- ---- ------ ------
Higher Value Solutions Revenue $366 $355 $1,063 $969
---- ---- ------ ----
Acquisition-related adjustments [A][B] 2 17 10 32
--- --- --- ---
Higher Value Solutions Revenue,
excluding acquisition-related adjustments $367 $372 $1,073 $1,000
---- ---- ------ ------
Constant currency adjustments - (6) - (26)
--- --- --- ---
Non-GAAP, at constant currency $367 $366 $1,073 $974
Core Revenue (3)
GAAP $844 $851 $2,513 $2,582
Inkjet Exit Revenue (14) (31) (49) (114)
--- --- --- ----
Core Revenue $830 $820 $2,464 $2,469
---- ---- ------ ------
Acquisition-related adjustments [A][B] 2 17 10 32
--- --- --- ---
Core Revenue, excluding acquisition-related
adjustments $832 $837 $2,474 $2,500
---- ---- ------ ------
Constant currency adjustments (1) (21) (1) (89)
--- --- --- ---
Non-GAAP, at constant currency $831 $816 $2,473 $2,412
Enterprise Software Revenue (4)
GAAP $156 $148 $458 $373
Acquisition-related adjustments [A][B] 2 17 10 32
--- --- --- ---
Non-GAAP $157 $165 $468 $405
---- ---- ---- ----
Constant currency adjustments - (1) - (4)
--- --- --- ---
Non-GAAP, at constant currency $157 $164 $468 $401
Imaging Solutions and Services ("ISS") Revenue (5)
GAAP $688 $703 $2,055 $2,209
Constant currency adjustments (1) (19) (1) (86)
--- --- --- ---
Non-GAAP, at constant currency $687 $684 $2,054 $2,123
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2016 2015 2016 2015
---- ---- ---- ----
Free Cash Flow (6)
GAAP Cash Flows Provided by (Used for) Operating
Activities $25 $22 $128 $5
Purchases of property, plant and equipment (17) (19) (57) (84)
Proceeds from sale of fixed assets 1 - 3 -
Non-GAAP Free Cash Flow $9 $3 $74 $(79)
September 30 December 31
2016 2015
---- ----
Net (Debt) Cash (7)
GAAP Cash and Cash Equivalents $118 $158
Long-term debt (1,018) (1,061)
------ ------
Non-GAAP Net Debt $(900) $(903)
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2016 2015 2016 2015
---- ---- ---- ----
Gross Profit
GAAP $329 $320 $973 $1,012
Restructuring charges and project costs [C][D] - - - 1
Acquisition-related adjustments [A][B] 20 35 64 79
Actuarial loss on pension plan [E][F] - - 6 -
--- --- --- ---
Non-GAAP $349 $355 $1,043 $1,092
Gross Profit Margin (%)
GAAP 39.0% 37.6% 38.7% 39.2%
Restructuring charges and project costs - - - 0.0%
Acquisition-related adjustments 2.3% 4.0% 2.6% 3.0%
Actuarial loss on pension plan - - 0.2% 0.0%
--- ---
Non-GAAP 41.3% 40.9% 41.3% 41.8%
Operating (Loss) Income
GAAP $36 $(22) $20 $(2)
Restructuring charges (reversals) and project costs [C][D] 1 1 (11) 40
Acquisition, strategic alternatives, and divestiture-
related adjustments [A][B] 46 82 150 198
Actuarial loss on pension plan [E][F] - - 26 -
Remediation-related charges [G][H] 2 3 10 3
Non-GAAP $83 $64 $197 $240
Operating Income Margin (%)
GAAP 4.3% (2.5)% 0.8% (0.1)%
Restructuring charges (reversals) and project costs 0.1% 0.1% (0.4)% 1.5%
Acquisition, strategic alternatives, and divestiture-
related adjustments 5.4% 9.4% 6.0% 7.6%
Actuarial loss on pension plan - - 1.0% 0.0%
Remediation-related charges 0.2% 0.4% 0.4% 0.1%
Non-GAAP 9.9% 7.4% 7.8% 9.2%
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 for
the three months ended September
30, 2016 was approximately -1%
on a GAAP basis, -3% on a non-
GAAP basis, excluding
acquisition-related adjustments,
and 0% on a non-GAAP basis at
constant currency.
Year-to-year Revenue growth for
the nine months ended September
30, 2016 was approximately -3%
on a GAAP basis, -3% on a non-
GAAP basis, excluding
acquisition-related adjustments,
and 0% on a non-GAAP basis at
constant currency. Financial
results of 2015 include those of
Kofax acquired in the second
quarter of 2015.
(2) Year-to-year Higher Value
Solutions Revenue growth for the
three months ended September 30,
2016 was approximately 3% on a
GAAP basis, -1% on a non-GAAP
basis, excluding acquisition-
related adjustments, and 0% on a
non-GAAP basis at constant
currency.
Year-to-year Higher Value
Solutions Revenue growth for the
nine months ended September 30,
2016 was approximately 10% on a
GAAP basis, 7% on a non-GAAP
basis, excluding acquisition-
related adjustments, and 10% on a
non-GAAP basis at constant
currency. Financial results of
2015 include those of Kofax
acquired in the second quarter of
2015.
(3) Year-to-year Core Revenue growth
for the three months ended
September 30, 2016 was
approximately 1% on a GAAP basis,
-1% on a non-GAAP basis,
excluding Inkjet Exit and
acquisition-related adjustments,
and 2% on a non-GAAP basis at
constant currency.
Year-to-year Core Revenue growth
for the nine months ended
September 30, 2016 was
approximately 0% on a GAAP basis,
-1% on a non-GAAP basis,
excluding Inkjet Exit and
acquisition-related adjustments,
and 3% on a non-GAAP basis at
constant currency. Financial
results of 2015 include those of
Kofax acquired in the second
quarter of 2015.
(4) Year-to-year Enterprise Software
Revenue growth for the three
months ended September 30, 2016
was approximately 5% on a GAAP
basis, -5% on a non-GAAP basis,
excluding acquisition-related
adjustments, and -4% on a non-
GAAP basis at constant currency.
Year-to-year Enterprise Software
Revenue growth for the nine
months ended September 30, 2016
was approximately 23% on a GAAP
basis, 16% on a non-GAAP basis,
excluding acquisition-related
adjustments, and 17% on a non-
GAAP basis at constant currency.
Financial results of 2015 include
those of Kofax acquired in the
second quarter of 2015.
(5) Year-to-year ISS Revenue growth
for the three months ended
September 30, 2016 was
approximately -2% on a GAAP
basis and 1% on a non-GAAP basis
at constant currency.
Year-to-year ISS Revenue growth
for the nine months ended
September 30, 2016 was
approximately -7% on a GAAP
basis and -3% on a non-GAAP
basis at constant currency.
(6) 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.
(7) Net Debt or Net Cash, a non-GAAP
measure, is defined as cash and
cash equivalents minus long-term
and short-term debt.
[A] Amounts for the three months ended
September 30, 2016, include total
acquisition and strategic
alternatives-related adjustments of
$45.6 million with $1.8 million,
$17.8 million, $0.3 million and
$25.7 million included in Revenue,
Cost of revenue, Research and
development and Selling, general and
administrative, respectively.
Selling, general and administrative
includes $20.6 million of
acquisition-related expenses and
$5.1 million of strategic
alternatives-related expenses.
Amounts for the nine months ended
September 30, 2016, include total
acquisition and strategic
alternatives-related adjustments of
$150.2 million with $10.3 million,
$54.1 million, $0.9 million and
$84.9 million included in Revenue,
Cost of revenue, Research and
development and Selling, general and
administrative, respectively.
Selling, general and administrative
includes $67.1 million of
acquisition-related expenses and
$17.8 million of strategic
alternatives-related expenses.
[B] Amounts for the three months ended
September 30, 2015, include total
acquisition-related adjustments of
$81.5 million with $16.9 million,
$18.2 million, $0.4 million and
$46.0 million included in Revenue,
Cost of revenue, Research and
development and Selling, general and
administrative, respectively.
Selling, general and administrative
includes $45.8 million of
acquisition-related expenses and
$0.2 million of divestiture-related
expenses.
Amounts for the nine months ended
September 30, 2015, include total
acquisition-related adjustments of
$197.9 million with $31.6 million,
$47.6 million, $0.9 million and
$117.8 million included in Revenue,
Cost of revenue, Research and
development and Selling, general and
administrative, respectively.
Selling, general and administrative
includes $117.2 million of
acquisition-related expenses and
$0.6 million of divestiture-related
expenses.
[C] Amounts for the three months ended
September 30, 2016, include total
restructuring charges (reversals)
and project costs of $0.5 million
with $4.0 million included in
Selling, general and administrative
and $(3.5) million included in
Restructuring and related
(reversals) charges.
Amounts for the nine months ended
September 30, 2016, include total
restructuring (reversals) charges
and project costs of $(10.8)
million with $7.8 million included
in Selling, general and
administrative and $(18.6) million
included in Restructuring and
related (reversals) charges.
[D] Amounts for the three months ended
September 30, 2015, include total
restructuring charges and project
costs of $0.9 million with $2.3
million included in Selling,
general and administrative and
$(1.4) million included in
Restructuring and related
(reversals) charges.
Amounts for the nine months ended
September 30, 2015, include total
restructuring charges and project
costs of $40.0 million with $0.8
million and $7.0 million included in
Restructuring-related costs and
Selling, general and administrative,
respectively, in addition to $32.2
million in Restructuring and related
(reversals) charges.
[E] Amounts for the nine months ended
September 30, 2016, include
actuarial loss on pension plan of
$26.4 million with $6.0 million,
$4.3 million and $16.1 million
included in Cost of revenue,
Research and development and
Selling, general and
administrative, respectively.
[F] Amounts for the nine months ended
September 30, 2015, include
actuarial loss on pension plan of
$0.3 million with $0.1 million,
$0.1 million and $0.1 million
included in Cost of revenue,
Research and development and
Selling, general and
administrative, respectively.
[G] Amounts for the three months ended
September 30, 2016, include
remediation-related charges of
$1.5 million included in Selling,
general and administrative.
Amounts for the nine months ended
September 30, 2016, include
remediation-related costs of $10.4
million included in Selling,
general and administrative.
[H] Amounts for the three and nine
months ended September 30, 2015,
include remediation-related
charges of $3.2 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-
related,
divestiture-
related and
strategic
alternatives-
related
adjustments
In connection
with
acquisitions,
divestitures and
the exploration
of strategic
alternatives
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.
e. Strategic
alternative-
related
adjustments
In connection
with the
exploration of
strategic
alternatives,
management
provides
supplementary
non-GAAP
financial
measures of
expenses to
normalize for
the impact of
certain expenses
which would not
have been
incurred
otherwise. In
2015, the
Company
announced that
its Board of
Directors
authorized the
exploration of
strategic
alternatives to
unlock
shareholder
value. The
Company has
incurred costs
related to the
exploration of
strategic
alternatives,
and anticipates
incurring
additional
related costs
such as legal
and accounting
fees, employee
travel expenses
and
compensation,
and consulting
costs. 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.
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 and
constant non-
GAAP tax rate
This line item
shows tax effect
of the non-GAAP
adjustments and
the difference
between the GAAP
effective tax
rate and the
constant non-
GAAP tax rate.
Effective the
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.
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SOURCE Lexmark International, Inc.
