Lexmark Reports Fourth Quarter and Full Year Results

Lexmark International, Inc. today announced financial results for the fourth quarter and full year of 2015.

“Lexmark had a good fourth quarter. We more than doubled fourth quarter Enterprise Software non-GAAP operating income margin year to year to 24 percent, and delivered full year MPS revenue growth for the 16th consecutive year,” said Paul Rooke, Lexmark chairman and chief executive officer. “Our Higher Value Solutions now comprise more than 40 percent of Core revenue and grew 26 percent in constant currency.

“We continue to focus on the growth and transformation of the company. In January, we announced Lexmark’s next generation of A4 color lasers and smart MFPs, which are optimized for MPS and business process solutions,” added Rooke. “In fact, these devices are already integrated with Lexmark’s recently announced Kofax Onboarding Agility solution, which automates and streamlines new customer onboarding processes.

“At the same time we are continuing our exploration of strategic alternatives and are very pleased with the progress being made, including the positive interest we are receiving,” Rooke added. “During this process, we remain squarely focused on the execution of our strategy, our commitment to our customers, partners, suppliers and employees and driving value for our shareholders. Last week, we demonstrated our ongoing commitment to rewarding our shareholders with the announcement of our 18th consecutive quarterly dividend.”

Fourth Quarter Results

  •  Fourth quarter revenue and EPS reflect strong Enterprise Software growth and margin expansion, offset by the strong U.S. dollar and the ongoing exit of inkjet.
Revenue (millions) 4Q15 4Q14
    GAAP $969 $1,023
    Adjustments 13 9
    Non-GAAP $982 $1,032
     
EPS 4Q15 4Q14
    GAAP -$0.17 -$0.37
    Adjustments 1.33 1.51
    Non-GAAP $1.16 $1.14

Fourth Quarter GAAP Results Year-to-Year Comparisons

  •  Revenue of $969 million in 2015 compares to $1.023 billion in 2014.
  •  Gross profit margin of 39.8 percent compares to 35.2 percent in the same period last year.
  •  Operating income margin was -2.4 and -2.1 percent in 2015 and 2014, respectively.
  •  EPS of -$0.17 in 2015 compares to -$0.37 in the same period last year.

Fourth Quarter Non-GAAP Results Year-to-Year Comparisons

  •  Revenue of $982 million in 2015 compares to $1.032 billion in 2014.
  •  Core revenue of $953 million declined 2 percent, up 2 percent at constant currency.
  •  Gross profit margin of 42.6 percent compares to 38.9 percent in the same period last year.
  •  Operating income margin was 11.6 percent and 10.7 percent in 2015 and 2014, respectively.
  • Adjusted EBITDA of $156 million in 2015 compares to $152 million in 2014.
  •  EPS of $1.16 in 2015 compares to $1.14 in the same period last year.

Fourth Quarter Non-GAAP Segment Revenue Year-to-Year Comparisons

  •  Imaging Solutions and Services (ISS) revenue declined 13 percent, down 10 percent at constant currency.◦   Managed Print Services (MPS) revenue declined 4 percent, up 1 percent at     constant              currency.

    ◦   Non-MPS revenue declined 14 percent, down 10 percent at constant currency.

  • ◦   Inkjet Exit revenue declined 50 percent, down 48 percent at constant currency.
  • Enterprise Software revenue was $160 million. Excluding adjustments, Enterprise Software revenue of $174 million grew 75 percent, up 83 percent at constant currency.

Fourth Quarter Non-GAAP Higher Value Solutions Revenue Year-to-Year Comparisons

  • Lexmark’s Higher Value Solutions revenue of $407 million grew 19 percent, up 26 percent at constant currency.
  •  Higher Value Solutions revenue accounted for 41 percent of total revenue, up from 33 percent in the same period in 2014.

Fourth Quarter Cash Flow

  • Net cash flow provided by operating activities was $103 million.
  • Free cash flow was $75 million.

Full Year Results

Revenue (millions) 2015 2014
    GAAP $3,551 $3,710
    Adjustments 45 17
    Non-GAAP $3,596 $3,728
     
EPS 2015 2014
    GAAP -$0.66 $1.26
    Adjustments 4.19 2.73
    Non-GAAP $3.53 $3.99

Full Year GAAP Results Year-to-Year Comparisons

  •  Revenue of $3.551 billion in 2015 compares to $3.710 billion in 2014.
  •  Gross profit margin of 39.3 percent compares to 38.0 percent in the same period last year.
  •  Operating income margin was -0.7 and 4.0 percent in 2015 and 2014, respectively.
  •  EPS of -$0.66 in 2015 compares to $1.26 in the same period last year.

Full Year Non-GAAP Results Year-to-Year Comparisons

  •  Revenue of $3.596 billion in 2015 compares to $3.728 billion in 2014.
  •  Core revenue of $3.454 billion was about flat year to year, up 6 percent at constant currency.
  •  Lexmark’s Annuity revenue of $2.4 billion comprised 68 percent of Core revenue.
  •  Gross profit margin of 42.0 percent compares to 40.2 percent in the same period last year.
  •  Operating income margin was 9.8 percent and 10.6 percent in 2015 and 2014, respectively.
  •  Adjusted EBITDA of $521 million in 2015 compares to $574 million in 2014.
  •  EPS of $3.53 in 2015 compares to $3.99 in the same period last year.

Full Year Non-GAAP Segment Revenue Year-to-Year Comparisons

  • ISS revenue declined 12 percent, down 6 percent at constant currency.

     ◦   MPS revenue grew 1 percent, up 7 percent at constant currency.

     ◦   Non-MPS revenue declined 12 percent, down 7 percent at constant currency.

     ◦   Inkjet Exit revenue declined 44 percent, down 42 percent at constant currency.

  •  Enterprise Software revenue was $534 million. Excluding adjustments, Enterprise Software revenue of $579 million grew 85 percent, up 93 percent at constant currency.

     ◦  Deferred software revenue increased 61 percent year to year.

     ◦  Annualized subscription contract value increased 24 percent year to year.

Full Year Non-GAAP Higher Value Solutions Revenue Year-to-Year Comparisons

  •  Lexmark’s Higher Value Solutions revenue of $1.407 billion grew 24 percent, up 32 percent at constant currency.
  •  Higher Value Solutions revenue accounted for 39 percent of total revenue, up from 30 percent in the same period in 2014.

Year End Balance Sheet and Full Year Cash Flow

  •  Cash was $158 million at year end, $108 million of which was non U.S.-based.
  •  Net Debt was $903 million. Net cash flow provided by operating activities was $108 million.
  •   Free cash flow was -$5 million. Negative free cash flow in 2015 was driven by laser hardware and supplies softness, expenses related to the Kofax acquisition, legal settlements and restructuring.
  •   Also during the quarter, the company paid its 17th consecutive quarterly dividend totaling $22 million in the quarter, and $89 million for the full year 2015. Last week, the company announced its 18th consecutive quarterly dividend.

Looking Forward

Strategic Alternatives Process

  •   As previously announced, Lexmark’s Board of Directors has authorized the exploration of strategic alternatives to enhance shareholder value and unlock the intrinsic value created by the company.
  •  On the company’s third quarter 2015 earnings call, Lexmark indicated that these alternatives could include a sale of the entire company or spin-off of a portion of the company, including to either strategic or financial buyers.
  •  Lexmark is very pleased with both the progress and positive interest in the company’s strategic alternatives process, and is continuing its evaluation.
  •  Given the ongoing exploration of strategic alternatives, the company is not providing guidance, will not host a conference call with securities analysts and investors in conjunction with this release, and will remain in its quiet period.
  •  Lexmark does not intend to comment on the exploration process or disclose further developments until the Board approves a specific transaction or otherwise concludes the exploration of strategic alternatives. No assurance can be given of the outcome of the strategic alternatives review process, including whether any transaction will result or the associated timing or terms.

2016 Restructuring Expected to Generate Ongoing Pretax Savings of $100 Million

  •  Today, Lexmark is announcing a restructuring program designed to increase profitability and operational efficiency primarily in its ISS segment.
  •  This program optimizes the ISS structure, mainly to address the effects of the strong U.S. dollar, and it is aligned with the strategic alternatives process.
  •  Approximately 550 positions worldwide are expected to be eliminated over the next 12 months, a portion of these positions being shifted to low-cost countries. Currently, Lexmark has approximately 14,000 employees worldwide.
  •  The program is expected to generate approximately $67 million in savings for 2016 and annualized ongoing savings of approximately $100 million beginning in 2017. Lexmark expects the savings will be split between operating expense and cost of goods sold, approximately 90 percent and 10 percent, respectively.
  •  The total pretax cost for these actions is expected to be approximately $65 million, with $40 million incurred in 2015 and the remainder in 2016.
  •  The cash cost for these actions is expected to be incurred in 2016 and total $59 million.
  •  The total cash impact of these actions (cash cost net of cash savings) is not expected to result in a material impact on full-year 2016 free cash flow.

Next Generation Color Lasers and Smart MFPs Integrated with New Kofax Onboarding Agility 

  •  Lexmark recently announced its next generation color printers and smart MFPs: CS700 Series Printers, CX700 Series MFPs, CS800 Series Printers and CX800 Series MFPs.
  •  Lexmark’s champion offering, the CX860, offers the highest toner capacity, the largest input/output capacity and the most flexible media support of any A4 color laser MFP. The CX860 rivals the capabilities of A3 products, enabling businesses to bring color production in-house.
  •  With a new tablet-like touchscreen interface and flexible media handling, these products are easy to use, require minimal training and enable future integration of business process solutions, such as Lexmark’s new Kofax Onboarding Agility, also announced recently.

Kofax Onboarding Agility is a smart process application solution framework that dramatically reduces process complexity and shortens processing time to improve the onboarding experience for new customers. Onboarding Agility is ideally suited for banking, insurance, healthcare and government.