Lexmark reports fourth quarter and full year results

Lexmark International, Inc. (NYSE: LXK) today announced financial results for the fourth quarter and full year of 2014.

“In the fourth quarter, Lexmark delivered revenue growth that exceeded October guidance,” said Paul Rooke, Lexmark chairman and chief executive officer. “For the year, Lexmark’s Managed Print Services and Perceptive Software combined revenue exceeded $1.1 billion, grew 18 percent and increased to 30 percent of Lexmark’s total revenue.

“These results reflect Lexmark’s ongoing transformation to a higher value portfolio of imaging and software solutions that enable customers to manage their unstructured information challenges,” added Rooke.

“Approximately 70 percent of Lexmark’s revenue comes from our more predictable imaging and software annuity streams,” said Rooke. “2014 marks our 13^th consecutive year of positive free cash flow, which fuels Lexmark’s disciplined capital allocation framework of building and growing our solutions business while concurrently rewarding shareholders through the ongoing return of capital.”

Fourth Quarter Results

• Fourth quarter revenue growth exceeded the company’s October guidance range.

• Fourth quarter 2014 GAAP revenue of $1.023 billion includes acquisition-related adjustments of $9 million. Fourth quarter 2014 non-GAAP¹ revenue of $1.032 billion grew 2 percent year to year, and grew 7 percent excluding the planned and ongoing decline in Inkjet Exit² revenue.
• Fourth quarter GAAP EPS were ($0.42) and $1.48 in 2014 and 2013, respectively.
• Mark-to-market asset and actuarial gains and losses were recognized for the company’s pension and other postretirement benefit plans. Mark-to-market gains and losses are excluded from non-GAAP financial measures and do not impact free cash flow³. For the fourth quarter of 2014, the company recognized an $84 million pre-tax loss ($0.97 per share) compared to a pre-tax gain of $82 million ($0.64 per share) in the same period last year.
• Fourth quarter adjustments (including the mark-to-market adjustments) were $1.53 per share and ($0.30) per share in 2014 and 2013, respectively.
• Fourth quarter non-GAAP EPS were $1.11 compared with non-GAAP EPS of $1.18 in the fourth quarter of 2013. As compared to the company’s October guidance, fourth quarter non-GAAP EPS were negatively impacted $0.18 per share, $0.10 per share from higher than expected taxes, principally a mix shift of earnings toward higher tax geographies and discrete items, and $0.08 per share due to additional currency headwinds.

Fourth Quarter 2014 Higher Value Solutions Revenue

• Lexmark’s Higher Value Solutions revenue⁴ is comprised of Managed Print Services (MPS)⁵ and Perceptive Software.
• Fourth quarter Higher Value Solutions revenue of $341 million, excluding acquisition-related adjustments of $9 million, grew 22 percent year to year and accounted for 33 percent of total revenue, up from 28 percent in the same period in 2013.

Fourth Quarter 2014 Segment Revenue

• Imaging Solutions and Services (ISS) revenue of $933 million declined less than 1 percent year to year. ISS revenue, excluding Inkjet Exit revenue, grew 4 percent year to year.Perceptive Software revenue was $90 million. Excluding acquisition-related adjustments, Perceptive Software revenue grew 37 percent year to year.
  • MPS revenue of $242 million grew 16 percent year to year.
  • Non-MPS⁶ revenue of $633 million was about flat year to year.
  • Inkjet Exit revenue of $58 million declined 42 percent year to year.

Fourth Quarter 2014 Product Revenue

• Hardware revenue of $236 million grew 3 percent year to year.
• Supplies revenue of $646 million declined 2 percent year to year.Software and Other revenue was $140 million. Excluding acquisition-related adjustments, Software and Other revenue of $150 million grew 23 percent year to year.
  • Laser supplies revenue of $589 million grew 5 percent year to year.

Fourth Quarter 2014 GAAP Results

• Revenue was $1.023 billion compared to $1.006 billion in 2013.
• Gross profit margin was 35.2 percent versus 41.5 percent in 2013.
• Operating expense was $381 million compared to $267 million in 2013.
• Operating loss was $22 million compared to income of $151 million in 2013.
• Operating income margin was (2.1) percent compared to 15.0 percent in 2013.
• Net earnings were ($26) million compared to $94 million in 2013.

Fourth Quarter 2014 Non-GAAP Results

• Revenue was $1.032 billion compared to $1.011 billion in 2013.
• Gross profit margin was 38.9 percent versus 41.4 percent in 2013.
• Operating expense was $291 million compared to $307 million in 2013.
• Operating income was $111 million compared to $112 million in 2013.
• Operating income margin was 10.7 percent compared to 11.1 percent in 2013.
• Net earnings were $68 million compared to $75 million in 2013.

Full Year Results

• 2014 GAAP revenue of $3.710 billion includes acquisition-related adjustments of $17 million. 2014 non-GAAP revenue of $3.728 billion grew 1 percent year to year, and grew 6 percent excluding the planned and ongoing decline in Inkjet Exit revenue.

• Mark-to-market asset and actuarial gains and losses were recognized for the company’s pension and other postretirement benefit plans. For the full year of 2014, the company recognized an $81 million pre-tax loss ($0.91 per share) compared to a pre-tax gain of $82 million ($0.63 per share) in the same period last year.
• Full year adjustments (including the mark-to-market adjustments) were $2.79 per share and $0.11 per share in 2014 and 2013, respectively.
• GAAP EPS were $1.25 and $4.08 in 2014 and 2013, respectively.
• Non-GAAP EPS were $4.04 in 2014 compared with non-GAAP EPS of $4.19 in 2013.

Full Year 2014 Higher Value Solutions Revenue

• 2014 Higher Value Solutions revenue of $1.134 billion, excluding acquisition-related adjustments of $17 million, grew 18 percent year to year and accounted for 30 percent of total revenue, up from 26 percent in the same period in 2013.

Full Year 2014 Segment Revenue

• ISS revenue of $3.415 billion declined less than 1 percent year to year. ISS revenue, excluding Inkjet Exit revenue, grew 4 percent year to year.Perceptive Software revenue was $296 million. Excluding acquisition-related adjustments, Perceptive Software revenue grew 31 percent year to year.
  • MPS revenue of $821 million grew 14 percent year to year.
  • Non-MPS revenue of $2.337 billion grew 1 percent year to year.
  • Inkjet Exit revenue of $257 million declined 37 percent year to year.

Full Year 2014 Product Revenue

• Hardware revenue of $782 million grew 3 percent year to year.
• Supplies revenue of $2.446 billion declined 2 percent year to year.Software and Other revenue was $482 million. On a non-GAAP basis, Software and Other revenue of $500 million grew 14 percent year to year.
  • Laser supplies revenue of $2.189 billion grew 5 percent year to year.

Full Year 2014 GAAP Results

• Revenue was $3.710 billion compared to $3.668 billion in 2013.
• Gross profit margin was 38.0 percent versus 39.4 percent in 2013.
• Operating expense was $1.261 billion compared to $1.035 billion in 2013.
• Operating income was $149 million compared to $409 million in 2013.
• Operating income margin was 4.0 percent compared to 11.2 percent in 2013.
• Net earnings were $79 million compared to $262 million in 2013.

Full Year 2014 Non-GAAP Results

• Revenue was $3.728 billion compared to $3.684 billion in 2013.
• Gross profit margin was 40.2 percent versus 40.7 percent in 2013.
• Operating expense was $1.104 billion compared to $1.098 billion in 2013.
• Operating income was $397 million compared to $403 million in 2013.
• Operating income margin was 10.6 percent compared to 10.9 percent in 2013.
• Net earnings were $255 million compared to $269 million in 2013.

Fourth Quarter and Full Year 2014 Cash Flow

• Net cash provided by operating activities was $183 million in the fourth quarter, $418 million for the full year.
• Free cash flow³ was $153 million in the fourth quarter, $282 million for the full year.
• Capital expenditures were $30 million in the fourth quarter, $136 million for the full year.
• Depreciation and amortization of $64 million in the fourth quarter of 2014 includes acquisition-related adjustments of $20 million and $1 million of restructuring-related adjustments.
• Depreciation and amortization of $259 million for the full year of 2014 includes acquisition-related adjustments of $77 million and $4 million of restructuring-related adjustments.
• Cash, including cash equivalents and current marketable securities, was $934 million at year end, $876 million of which was non U.S.-based.

Maintaining Capital Allocation Discipline to Transform Lexmark, Drive Shareholder Value

• Lexmark is executing 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 78 percent of free cash flow generated since the first quarter of 2011 to shareholders through dividends and share repurchases.
• In the fourth quarter of 2014, Lexmark returned $44 million to shareholders:
  • The company paid a quarterly dividend of $0.36 per share ($1.44 annualized). This amounted to $22 million and was Lexmark’s 13th consecutive quarterly dividend.
  • The company repurchased 0.5 million Lexmark shares for $22 million.
• In full year 2014, Lexmark returned $165 million to shareholders:
  • The company paid dividends of $85 million.
  • The company repurchased 1.9 million Lexmark shares for $80 million. The company’s remaining share repurchase authorization at year end was $89 million.

Claron Technology, Inc. Acquisition 

• In January 2015, Lexmark announced the acquisition of Claron Technology, Inc. (Claron), a leading provider of medical image viewing, distribution, sharing and collaboration software technology, for approximately $37 million funded entirely with Lexmark’s non U.S.-based cash.
• Claron and Lexmark’s other healthcare technology acquisitions are enabling the company to further broaden its medical content management capabilities.
• The combination of Perceptive Software’s image capture, vendor neutral archive, universal image viewing software, and image exchange enables the company to offer unique, interoperable solutions with vendor neutrality helping to eliminate silos that exist today within, and between, healthcare organizations.

External Recognition Reflects Lexmark’s Solutions Capabilities Strengths

• In 2014, several top industry analyst firms favorably positioned Lexmark in their key evaluations for the year, acknowledging that Lexmark’s capabilities are among the best at connecting an organization’s information with the people and processes that need it most. This recognition spans a broad range of hardware, software and solutions categories:
  • MPS – Lexmark was named an MPS leader for the fourth consecutive year by Gartner, and for the third consecutive year by both IDC and Quocirca,
  • Enterprise Content Management (ECM) – Perceptive Software was named a leader in Gartner’s Magic Quadrant for ECM in both 2013 and 2014,
  • Enterprise Search – For the first time in 2014, Perceptive Software was named a leader in Gartner’s Magic Quadrant for Enterprise Search,
  • Enterprise Video Content Management – Perceptive Software was positioned as a challenger in Gartner’s 2014 Magic Quadrant for Enterprise Video Content Management.

Alberta Health Services Selects Lexmark for Managed Print Services

• In the fourth quarter, Lexmark announced it has signed a five-year MPS agreement for approximately $100 million with Alberta Health Services (AHS) of Alberta, Canada.
• AHS conducted a rigorous evaluation through an open competitive bid process, which began in 2013 and resulted in the selection of Lexmark as the service provider best able to meet the organizational print goals.
• Lexmark will provide AHS with managed services including business assessments, infrastructure optimization, asset management, proactive consumables management, maintenance service, software solutions, reporting and governance.
• Lexmark will deploy a solutions-enabled fleet of innovative printers and smart MFPs across more than 900 AHS departmental locations.

Perceptive Software to Provide Private Label Healthcare Solutions to Allscripts

• In January, Perceptive Software announced a new agreement with Allscripts, a leading global provider of clinical, financial and operational software solutions for healthcare providers.
• As part of this agreement, components of Perceptive Software’s ECM solution suite will be private labeled and optimized to become part of an integrated medical content management platform within Allscripts.
• Perceptive Software’s ECM solutions will provide Allscripts customers with access to patient documents and medical images that exist outside the electronic medical record.

Looking Forward – First Quarter of 2015

• Total revenue is expected to decline in the range of 3 to 5 percent year to year.
• Revenue, excluding Inkjet Exit revenue, is expected to decline slightly year to year.
• GAAP EPS are expected to be around $0.24 to $0.34.
• Non-GAAP EPS are expected to be around $0.70 to $0.80, compared with non-GAAP EPS of $0.92 in 2014.

Looking Forward – Full Year of 2015

• Total revenue is expected to decline in the range of 3 to 5 percent year to year.
• Revenue, excluding Inkjet Exit revenue, is expected to decline slightly year to year.
• GAAP EPS are expected to be around $1.81 to $2.01.
• Non-GAAP EPS are expected to be around $3.60 to $3.80, compared with non-GAAP EPS of $4.04 in 2014.