LEXMARK INTERNATIONAL INC LEXINGTON, Ky., April 27, 2016 /PRNewswire/ -- Lexmark International, Inc. today announced financial results for the first quarter of 2016.
First Quarter Results
-- Results reflect growth in MPS and Enterprise Software offset by the
strong U.S. dollar, decline in non-MPS revenue and the ongoing exit of
inkjet.
Revenue (millions) 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
-------- ----- -----
GAAP Results
-- Revenue of $806 million in 2016 compares to $852 million in 2015.
-- Gross profit margin of 38.0 percent compares to 38.7 percent in the same
period last year.
-- Operating income margin was -4.8 percent and 5.0 percent in 2016 and
2015, respectively.
-- EPS of -$0.63 in 2016 compares to $0.32 in the same period last year.
Non-GAAP Results
-- Revenue of $812 million declined 5 percent, down 1 percent at constant
currency(1).
-- Core revenue(2 )of $792 million declined 2 percent, up 3 percent at
constant currency.
-- Gross profit margin of 41.2 percent compares to 40.5 percent in the same
period last year.
-- Operating income margin was 4.8 percent and 9.5 percent in 2016 and
2015, respectively.
-- Adjusted EBITDA(3) of $80 million in 2016 compares to $123 million in
2015.
-- EPS of $0.31 in 2016 compares to $0.81 in the same period last year.
Non-GAAP Segment Revenue
-- Enterprise Software revenue of $143 million grew 60 percent, up 62
percent at constant currency.
-- Deferred software revenue(4) of $214 million increased 65 percent
year to year.
-- Annualized subscription contract value(4 )increased 18 percent year
to year.
-- ISS(5) revenue of $669 million declined 13 percent, down 8 percent at
constant currency.
-- MPS(6) revenue of $189 million grew 2 percent, up 8 percent at constant
currency.
-- Non-MPS(7) revenue of $460 million declined 14 percent, down 9 percent
at constant currency.
-- Inkjet Exit(8) revenue of $20 million declined 58 percent.
Non-GAAP Higher Value Solutions Revenue
-- Lexmark's Higher Value Solutions revenue(9) of $332 million grew 21
percent, up 26 percent at constant currency.
-- Higher Value Solutions revenue accounted for 41 percent of total
revenue, up from 32 percent in the same period in 2015.
Balance Sheet and Cash Flow
-- Cash(10) was $127 million at quarter end, $118 million of which was non
U.S.-based.
-- Total long-term and short-term debt declined $66 million year to date.
-- Net debt(11 )was $869 million.
-- Net cash flow provided by operating activities was $79 million.
-- Free cash flow(12) was $56 million.
Lexmark Acquisition Announcement and Quarterly Dividend Declaration
-- Lexmark announced on April 19, 2016, that it entered into a definitive
merger agreement with a consortium of investors led by Apex Technology
and PAG Asia Capital. Legend Capital is also a member of the consortium.
-- This all-cash transaction is the result of an exhaustive six-month
strategic alternatives review process undertaken by Lexmark's Board of
Directors to maximize shareholder value.
-- At closing, the transaction will provide Lexmark's shareholders $40.50
per share in cash, representing a 30 percent premium to the undisturbed
stock price on Oct. 21, 2015, the date prior to the news of Lexmark's
exploration of strategic alternatives becoming public.
-- In the April 19 announcement, Lexmark's Board of Directors also declared
its regular quarterly dividend of $0.36 per share of Lexmark Class A
Common Stock payable on June 17, 2016, to shareholders of record as of
the close of business on June 3, 2016.
Looking Forward
-- The merger, which is expected to close in the second half of 2016, is
subject to approval by Lexmark shareholders, foreign and domestic
regulatory approvals and other customary closing conditions.
-- The company will not conduct quarterly conference calls while this
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.
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 transaction on the terms described herein or other acceptable terms or at all because of a number of factors, including without limitation (1) 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, (2) the failure to obtain the requisite approval of Lexmark's shareholders or the failure to satisfy the other closing conditions, (3) risks related to disruption of management's attention from Lexmark's ongoing business operations due to the pending transaction and (4) the effect of the announcement of the pending transaction on 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.
Additional Information and Where to Find It
In connection with the proposed transaction, Lexmark will file with the Securities and Exchange Commission (the SEC) and mail or otherwise provide to its shareholders a proxy statement regarding the proposed transaction. BEFORE MAKING ANY VOTING DECISION, LEXMARK'S SHAREHOLDERS ARE URGED TO READ THE PROXY STATEMENT IN ITS ENTIRETY WHEN IT BECOMES AVAILABLE AND ANY OTHER DOCUMENTS FILED WITH THE SEC IN CONNECTION WITH THE PROPOSED TRANSACTION OR INCORPORATED BY REFERENCE THEREIN BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION AND THE PARTIES TO THE PROPOSED TRANSACTION. Investors and security holders may obtain a free copy of the proxy statement and other documents that Lexmark files with the SEC (when available) from the SEC's website at www.sec.gov and the "Investors" section of www.lexmark.com. In addition, the proxy statement and other documents filed by Lexmark with the SEC (when available) may be obtained from Lexmark free of charge by directing a request to Lexington International, Inc., Investor Relations Department, One Lexmark Centre Drive, 740 West New Circle Road, Lexington, Kentucky 40550, (859) 232-5568.
Participants in the Solicitation
Lexmark and its directors, executive officers and employees may be deemed, under SEC rules, to be participants in the solicitation of proxies from Lexmark shareholders with respect to the proposed transaction. Security holders may obtain information regarding the names, affiliations and interests of such individuals in Lexmark's Annual Report on Form 10-K for the fiscal year ended December 31, 2015, and its definitive proxy statement for the 2016 annual meeting of shareholders. Additional information regarding the interests of such individuals in the proposed transaction will be included in the proxy statement relating to the transaction when it is filed with the SEC. These documents may be obtained free of charge from the SEC's website at www.sec.gov and the "Investors" section of www.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 EBITDA, 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, 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.
Footnotes
(1) Constant currency is calculated by translating prior period results at current period exchange rates and removing related hedge gains and losses.
(2) Core revenue is defined as total Lexmark revenue minus Inkjet Exit revenue.
(3) 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.
(4) Deferred software revenue is defined as amounts billed to customers but not yet recognized as software revenue.
(5) ISS is the acronym for Lexmark's Imaging Solutions and Services segment.
(6) MPS revenue is defined as ISS laser hardware, supplies and fleet management solutions sold through a managed print services agreement.
(7) Non-MPS revenue is defined as ISS laser hardware, laser supplies, dot matrix hardware, and dot matrix supplies not sold as a part of an MPS agreement. Non-MPS also includes parts and service related to hardware maintenance.
(8) Inkjet Exit is defined as consumer and business inkjet hardware and supplies that the company is exiting.
(9) Higher Value Solutions revenue is defined as combined MPS and Enterprise Software revenue.
(10) Cash is defined as cash, cash equivalents and current marketable securities.
(11) Net debt or Net cash, a non-GAAP measure, is defined as Cash minus long-term and short-term debt.
(12) 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
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.
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SOURCE Lexmark International, Inc.
