Lexmark reports second quarter results

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Lexmark reports second quarter results

Beats EPS by $0.15, misses on revenue

Lexmark International, Inc. today announced financial results for the second quarter of 2015.

“Lexmark delivered strong growth in Higher Value Solutions revenue, which is comprised of Enterprise Software and Managed Print Services,” said Paul Rooke, Lexmark chairman and chief executive officer. “Despite the ongoing headwinds from the strong U.S. dollar and near-term laser supplies channel optimization particularly in EMEA, overall Lexmark delivered a good quarter.

“With the addition of Kofax, Lexmark increased Higher Value Solutions annualized revenue to approximately $1.5 billion while nearly doubling the annualized revenue of our Enterprise Software segment.

“Lexmark’s transformation is fueled by our disciplined capital allocation framework, designed to invest in growing our Higher Value Solutions capabilities while rewarding shareholders through the ongoing return of capital,” Rooke said.

Second Quarter Results

Second quarter results include Kofax subsequent to May 21, 2015.

Revenue (millions)	2Q15	2Q14
GAAP	$879	$892
Adjustments	11	2
Non-GAAP	$891	$894

EPS	2Q15	2Q14
GAAP	-$0.59	$0.59
Adjustments	1.56	0.40
Non-GAAP	$0.97	$0.99

Second Quarter GAAP Results Year-to-Year Comparisons

Revenue of $879 million in 2015 compares to $892 million in 2014.
Gross profit margin of 41.2 percent compares to 39.4 percent in the same period last year.
Operating income margin was -2.2 and 7.0 percent in 2015 and 2014, respectively.
T he 2015 restructuring negatively impacted second quarter 2015 GAAP pre-tax earnings by $32 million. The anticipated resolution of German copyright levy and other litigation resulted in a net benefit to second quarter 2015 GAAP and non-GAAP pre-tax earnings of $21 million.
EPS of -$0.59 in 2015 compares to $0.59 in the same period last year.

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

Revenue of $891 million in 2015 compares to $894 million in 2014.
Core revenue of $856 million grew 3 percent, up 11 percent at constant currency.
Gross profit margin of 43.8 percent compares to 40.8 percent in the same period last year.
Operating income margin was 10.6 percent and 10.9 percent in 2015 and 2014, respectively.
Adjusted EBITDA of $139 million in 2015 compares to $144 million in 2014.
EPS of $0.97 in 2015 compares to $0.99 in the same period last year.

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

ISS revenue declined 11 percent, down 4 percent at constant currency.
- MPS revenue grew 4 percent, up 12 percent at constant currency.
- Non-MPS revenue declined 12 percent, down 5 percent at constant currency.
- Inkjet Exit revenue declined 48 percent, down 45 percent at constant currency.
- Enterprise Software revenue was $139 million. Excluding adjustments, Enterprise Software revenue of $150 million grew 136 percent, up 144 percent at constant currency.
  - Deferred software revenue increased 136 percent year to year.
  - Annualized subscription contract value increased 124 percent year to year.

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

Lexmark’s Higher Value Solutions revenue excluding adjustments grew 37 percent, up 46 percent at constant currency.
Higher Value Solutions revenue accounted for 40 percent of total revenue, up from 29 percent in the same period in 2014.

Second Quarter Annuity Revenue

Lexmark is growing a more predictable Annuity revenue base of laser supplies, Software maintenance, Software subscriptions and ISS extended warranty.
Lexmark’s Annuity revenue of $2.4 billion for the trailing four quarters grew 2 percent and comprised 69 percent of Core revenue.

Balance Sheet

Cash was $144 million at quarter end, $124 million of which was non U.S.-based.
Net Debt was $924 million. This includes cash minus credit facilities of $368 million and long-term bonds of $700 million. This compares to Net Cash¹⁴of $331 million in the same period last year.

Cash Flow

Net cash flow provided by operating activities was -$9 million compared with $102 million in the second quarter of 2014.
Free cash flow was -$37 million compared with $76 million in the second quarter of 2014. Free cash flow was significantly impacted by Kofax acquisition-related expenses and near-term EMEA laser supplies channel optimization.
Capital expenditures were $28 million compared to $26 million in the same quarter last year.

Transforming Lexmark, Driving Shareholder Value

Lexmark’s capital allocation framework delivers shareholder value through investments to build and grow Lexmark’s higher value software and solutions business, and through the return of capital to shareholders.
Lexmark’s target is to return, on average, more than 50 percent of free cash flow to shareholders through quarterly dividends and share repurchases, and the company has returned 91 percent since the first quarter of 2011.
Lexmark paid a second quarter dividend of $22 million, its 15^th consecutive quarterly dividend.
Share repurchases will be paused for an estimated 18 to 24 months while credit facilities related to the Kofax acquisition are paid.

Lexmark Completes Acquisition of Kofax

On May 21, Lexmark closed its acquisition of Kofax Limited in a cash transaction of approximately $1 billion in enterprise value.
This acquisition nearly doubles the size of Lexmark’s Enterprise Software annualized revenue to approximately $700 million.
In addition to the significant increase in scale, Kofax is expected to help accelerate the growth and significantly expand the operating margin of Lexmark’s Enterprise Software.
This acquisition was funded with Lexmark’s non-U.S. cash and existing credit facilities, and has resulted in an enhanced, more efficient balance sheet benefiting from the deployment of available overseas cash and existing balance sheet capacity.
In May, Reynolds C. Bish, formerly CEO of Kofax, was named president of Lexmark’s Enterprise Software reporting directly to Paul Rooke, Lexmark chairman and chief executive officer. Bish has been active in the enterprise software markets for more than 20 years, and successfully led Kofax since 2007.

2015 Restructuring Expected to Generate Ongoing Pretax Savings of $65 Million

Lexmark is announcing restructuring actions today designed to increase profitability and operational efficiency.
These global restructuring actions are expected to be broad-based but are primarily expected to capture the anticipated cost and expense synergies from the Kofax and ReadSoft acquisitions.
Also, as the strong U.S. dollar continues to negatively impact the company’s earnings, restructuring actions will also be taken to reduce cost and expense structure in the ISS segment and corporate organization.
Primary impact will be general and administrative, marketing and development positions as well as the consolidation of regional facilities.
These actions are expected to result in the elimination of approximately 500 positions worldwide over the next 18 months, with approximately one third of the positions being shifted to low cost countries.
These actions are expected to generate $2 million savings in 2015, and annualized savings of $65 million beginning in 2017. Lexmark expects the savings will be split approximately 90 percent operating expense, and 10 percent cost of goods sold.
The total pretax cost for these actions is expected to be approximately $55 million, with $37 million incurred in 2015 and the remainder in 2016.
The cash impact for these actions is expected to be $55 million, with $13 million incurred in 2015 and the remainder in 2016.

Looking Forward Third Quarter of 2015

Core revenue is expected to increase 3 to 5 percent year to year.
Total revenue is expected to be in the range of -1 to +1 percent year to year.
GAAP EPS are expected to be around -$0.48 to -$0.38.
Non-GAAP EPS are expected to be around $0.51 to $0.61.

Looking Forward Full Year of 2015

Core revenue is expected to increase 3 to 5 percent year to year.
Total revenue is expected to be in the range of -1 to +1 percent year to year.
GAAP EPS are expected to be around -$0.49 to -$0.29.
Non-GAAP EPS are expected to be around $3.55 to $3.75.