Strong Quarter for Lexmark; Growth in MPS; Increases Full-Year Outlook

headquarters 2Lexmark International today reported financial results for the second quarter of 2014, with revenue and earnings per share exceeding its April forecast. Revenue was $892 million compared to $887 million for second-quarter 2013. Net earnings were $37 million compared to second-quarter 2013 net earnings of $94 million – but this was due however to Lexmark benefit from the sale of its inkjet business in second-quarter 2013.

When results are adjusted for the inkjet-business sale in second-quarter 2013, revenue and earnings compared favorably to second-quarter 2013. In particular, Lexmark saw strong revenue growth in managed print services and its Perceptive Software business, and even saw hardware revenue up 7 percent compared to second-quarter 2013.

“In the second quarter, our higher-value solutions portfolio revenue, comprised of Managed Print Services and Perceptive Software, grew 11 percent, accounted for nearly 30 percent of Lexmark’s total revenue and is expected to exceed $1 billion this year,” commented Lexmark CEO and Chairman Paul Rooke. “This growth is fueled by the disciplined execution of our capital allocation framework, which funds the company’s transformation while concurrently rewarding our shareholders with both a 20-percent dividend increase and share repurchases, returning $41 million this past quarter.

“Our strong second-quarter results reflect the synergies we are creating with our unique imaging and software solutions, which help our customers solve their unstructured information challenges,” added Rooke. “Considering our continued strong performance, we are increasing our full-year 2014 revenue and earnings per share guidance.”

Second-Quarter 2014 Results

  • GAAP (Generally Accepted Accounting Principles) revenue of $892 million includes acquisition-related adjustments of $2 million. Non-GAAP revenue of $894 million increased slightly year-to-year, but grew 5 percent excluding the planned and ongoing decline in Inkjet Exit2 revenue.
  • GAAP earnings per share for the second quarter of 2014 were $0.59. Second-quarter 2014 non-GAAP adjustments were $0.40 per share.
  • Second-quarter 2014 non-GAAP earnings were $0.99 per share compared with non-GAAP earnings of $1.04 per share in the second quarter of 2013.

Higher Value Solutions Portfolio

  • Lexmark’s higher-value solutions portfolio revenue, comprised of Managed Print Services (MPS) and Perceptive Software, is expected to exceed $1 billion in 2014.
  • Combined MPS and Perceptive Software revenue of $259 million, excluding acquisition-related adjustments of $2 million, grew 11 percent year-to-year and accounted for 29 percent of total revenue, up from 26 percent in the same period last year.

Segment Revenue

  • Imaging Solutions and Services (ISS) revenue of $830 million increased slightly compared to the same period last year. ISS revenue, excluding Inkjet Exit revenue, grew 5 percent compared to last year. On a year-to-year basis:
    • MPS revenue of $195 million grew 14 percent.
    • Non-MPS revenue of $569 million grew 2 percent.
    • Inkjet Exit revenue of $67 million declined 33 percent and represented 7 percent of total revenue.
  • Perceptive Software revenue was $61 million. Excluding acquisition-related adjustments, Perceptive Software revenue of $64 million grew 3 percent compared to the same period in 2013.

Product Revenue

  • Hardware revenue of $183 million grew 7 percent compared to last year.
  • Supplies revenue of $602 million declined 1 percent year to year. Laser supplies revenue grew 5 percent.
  • Software and Other revenue of $106 million ($109 million non-GAAP) declined 1 percent compared to last year.

Second-Quarter Details

  • Gross profit margin was 39.4 percent versus 38.6 percent in 2013.
  • Operating expense was $289 million compared to $206 million last year.
  • Operating income was $62 million compared to $136 million in 2013, which included a pre-tax gain of $71 million, net of related costs, on the sale of inkjet-related technology and assets.
  • Operating income margin was 7.0 percent compared to 15.3 percent in 2013.

Cash Flow

  • Net cash provided by operating activities was $102 million.
  • Free cash flow was $76 million. The company continues to expect 2014 free cash flow to be in the range of 90 percent to 100 percent of non-GAAP net earnings.
  • Capital expenditures were $26 million.
  • Depreciation and amortization was $65 million.
  • Cash, including cash equivalents and current marketable securities, was $1.031 billion at quarter end.

Lexmark stated it’s executing 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. It has returned 90 percent of free cash flow generated since the first quarter of 2011 to shareholders through dividends and share repurchases. In the second quarter of 2014, Lexmark returned $41 million to shareholders:The company increased its quarterly dividend by 20 percent to $0.36 per share ($1.44 annually). This was Lexmark’s 11th consecutive quarterly dividend.

Forecast

  • Third quarter 2014 revenue, excluding Inkjet Exit revenue, is expected to grow year-over-year. The company expects a continued negative impact from the 2012 decision to exit inkjet.
  • Total revenue in the third quarter is currently expected to be in the range of flat to down 2 percent compared to last year.
  • GAAP earnings per share in the third quarter of 2014 are expected to be around $0.44 to $0.54.
  • Non-GAAP earnings per share in the third quarter of 2014 are expected to be around $0.85 to $0.95, compared with non-GAAP earnings per share of $1.02 in the third quarter of 2013.
  • Full-year 2014 total revenue is currently expected to be in the range of flat to down 2 percent year to year. The previous guidance range was for revenue to decline 2 percent to 4 percent year to year for full-year 2014.
  • Full-year 2014 GAAP earnings per share are expected to be around $2.27 to $2.47.
  • Full-year 2014 non-GAAP earnings per share are expected to be around $3.95 to $4.15, an increase compared with previous non-GAAP earnings per share guidance of $3.80 to $4.00 per share for full-year 2014.
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