Close
SUBSCRIBE TO TMCnet
TMCnet - World's Largest Communications and Technology Community

TMC NEWS

TMCNET eNEWSLETTER SIGNUP

LEXMARK INTERNATIONAL INC /KY/ - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited)
[May 09, 2012]

LEXMARK INTERNATIONAL INC /KY/ - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited)

(Edgar Glimpses Via Acquire Media NewsEdge) LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES OVERVIEW Lexmark makes it easier for businesses of all sizes to improve their business processes by enabling them to capture, manage and access critical unstructured business information in the context of their business process. The Company speeds the movement and management of information between the paper and digital worlds. Since its inception in 1991, Lexmark has become a leading developer, manufacturer and supplier of printing, imaging, device management, document workflow, and more recently business process and content management solutions.

The Company operates in the office imaging and enterprise content and business process management markets. Lexmark's products include laser printers, inkjet printers, multifunction devices, dot matrix printers and the associated supplies/solutions/services, as well as ECM, BPM, intelligent data capture, search and web-based document imaging and workflow software solutions and services.

The Company is primarily managed along two segments: ISS and Perceptive Software.


• ISS offers a broad portfolio of monochrome and color laser printers, laser multifunction products ("MFPs"), inkjet all-in-one ("AIO") devices and accessories, as well as software applications, software solutions and managed print services to help businesses efficiently capture, manage and access information. Laser based products within the distributed printing market primarily serve business customers. Inkjet based products within the distributed printing market historically have served customers in the consumer market, but there is an increasing trend toward inkjet products being designed for the office environment. ISS employs large-account sales and marketing teams whose mission is to generate demand for its business printing solutions and services, primarily among large corporations as well as the public sector.

These sales and marketing teams primarily focus on industries such as financial services, retail, manufacturing, education, government and health care. ISS also markets its laser and inkjet products increasingly through small and medium business ("SMB") sales and marketing teams who work closely with channel partners. ISS distributes and fulfills its products to business customers primarily through its well-established distributor and reseller network. ISS' products are also sold through solution providers, which offer custom solutions to specific markets, and through direct response resellers.

ISS also sells its products through numerous alliances and original equipment manufacturer ("OEM") arrangements.

• Perceptive Software offers a complete suite of ECM, BPM, intelligent data capture and enterprise search software products and solutions. The enterprise content and BPM software and services markets primarily serve business customers. Perceptive Software uses a direct to market sales and broad lead generation approach, employing internal sales and marketing teams that are segmented by industry sector - specifically healthcare, education, public sector/government, financial services and cross industry, which includes areas such as retail and industrial. Perceptive Software also offers a direct channel partner program that allows authorized third-party resellers to market and sell Perceptive Software products and solutions to a distributed market.

Perceptive Software has two general forms of software agreements with its customers, perpetual licenses and subscription services. Certain Perceptive Software products are also sold through OEM arrangements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES Lexmark's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of consolidated condensed financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, as well as disclosures regarding contingencies. On an ongoing basis, the Company evaluates its estimates, including those related to customer programs and incentives, product returns, doubtful accounts, inventories, stock-based compensation, goodwill and intangible assets, income taxes, warranty obligations, copyright fees, restructurings, pension and other postretirement benefits, contingencies and litigation, and fair values that are based on unobservable inputs significant to the overall measurement. Lexmark bases its estimates on historical experience, 34 -------------------------------------------------------------------------------- market conditions, and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements.

Management believes that there have been no significant changes during 2012 to the items that were disclosed as critical accounting policies and estimates in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

RESULTS OF OPERATIONS Operations Overview Key Messages Lexmark is focused on driving long-term performance by strategically investing in technology, hardware and software products and solutions to secure high usage/value product installations and associated profitable supplies, software maintenance and service annuities in document-intensive industries and business processes in distributed environments.

• The ISS strategy is primarily focused on capturing profitable supplies and service annuities generated from its managed print services, industry specific solutions and hardware sales of large and small workgroup devices.

• The Perceptive Software strategy is to deliver affordable, industry and process specific solutions through deep industry expertise and a broad ECM and BPM software platform, imbedding intelligent data capture and enterprise search capabilities, in a model that is easy to integrate, use, and support.

While focusing on core strategic initiatives, Lexmark has taken actions to improve its cost and expense structure. As a result of restructuring initiatives, significant changes have been implemented, from the consolidation and reduction of the manufacturing and support infrastructure to the increased use of shared service centers in low-cost countries.

Lexmark continues to maintain a strong financial position with good cash generation and a solid balance sheet, which positions it to prudently invest in the future of the business. Going forward, the Company plans to return on average more than 50 percent of free cash flow (after operating and capital investment needs) to its shareholders through dividends and share repurchases.

Business Factors Lexmark's first quarter 2012 results reflected revenue that declined 4% from the same period in 2011. Core revenue grew 1%, with this growth offset by a 34% reduction in legacy revenue. During the first quarter, Lexmark experienced continued revenue growth in its high value strategic focus segments of MPS, large workgroup hardware, core supplies and Perceptive Software. This growth was offset by declines in legacy consumer revenue, and in small workgroup hardware, principally inkjet. Operating income declined 21% from the same period in 2011, due to lower operating income in both the ISS and Perceptive Software segments. The lower ISS operating income reflects increased restructuring and related expense. The increase in operating loss for Perceptive Software reflects greater operating expense as the Company invests to expand its software solutions business. The Company uses the term "legacy" to include hardware and supplies for consumer inkjet platforms. "Core" excludes legacy and includes laser, business inkjet, and dot matrix hardware and supplies and the associated features and services sold on a unit basis or through a managed services agreement. Core also includes parts and service related to hardware maintenance and includes software licenses and the associated software maintenance services sold on a unit basis or as a subscription service. The Company's focus continues to be on expanding its core business while legacy 35 -------------------------------------------------------------------------------- continues to become a less significant portion of the Company's revenue mix. The Company uses the term "large workgroup" to include departmental, large workgroup, and medium workgroup lasers, dot matrix printers and options. "Small workgroup" includes small workgroup and personal lasers and newer platform business inkjet based products.

ISS Lexmark continues its investments in ISS, focusing on continuing to broaden its line of large and small workgroup devices and solutions and service offerings, targeting the higher usage segments of the imaging market.

ISS continues to focus on capturing profitable supplies and service annuities generated from managed print services, industry specific solutions and hardware sales of large and small workgroup devices. Associated strategic initiatives include: • Expanding and strengthening the Company's product line; • Advancing and strengthening the Company's industry solutions to maintain and grow the Company's penetration in selected industries; • Advancing and expanding the Company's managed print services business; and • Expanding the Company's rate of participation in market opportunities and channels.

Perceptive Software Perceptive Software enhances Lexmark's capabilities as a document solutions provider, expands the Company's market opportunity, and provides a core strategic component for Lexmark's future. Perceptive Software's strategy is to deliver affordable, industry and process specific solutions through deep industry expertise and a broad ECM and BPM software platform, imbedding intelligent data capture and enterprise search capabilities, in a model that is easy to integrate, use, and support. In keeping with this strategy, Lexmark acquired Pallas Athena in October of 2011, Brainware in February of 2012, and ISYS and Nolij in March of 2012. Brainware's intelligent data capture platform extracts critical information from paper documents and electronic unstructured content enabling customers to more efficiently perform business processes. ISYS's search solutions deliver powerful text mining and enterprise and federated search capabilities across a wide range of platforms enabling customers to facilitate rapid discovery of critical intelligence for more informed decision making. Nolij's software is a fully web-based document imaging and workflow platform that includes innovative, native support for mobile devices and forms processing capabilities, focused on the education market. Activity occurring after each of these acquisitions is included in the Perceptive Software segment. Key strategic initiatives of Perceptive Software include: • Advancing and growing the Company's ECM, BPM, intelligent data capture and search business internationally, leveraging Lexmark's global infrastructure; • Expanding and strengthening the Company's ECM and BPM product lines; and • Expanding the Company's rate of participation in ECM, BPM, intelligent data capture and search market opportunities.

Operating Results Summary The following discussion and analysis should be read in conjunction with the Consolidated Condensed Financial Statements and Notes thereto. The following table summarizes the results of the Company's operations for the three months ended March 31, 2012 and 2011: 36 -------------------------------------------------------------------------------- Three Months Ended March 31 2012 2011 (Dollars in millions) Dollars % of Rev Dollars % of Rev Revenue $ 992.5 100.0 % $ 1,034.4 100.0 % Gross profit 381.4 38.4 389.4 37.6 Operating expense 292.0 29.4 276.2 26.7 Operating income 89.4 9.0 113.2 10.9 Net earnings 60.8 6.1 83.3 8.1 For the first quarter of 2012, total revenue was $992.5 million or down 4% from 2011. Gross profit decreased 2%, Operating expense increased 6% and Operating income decreased 21% when compared to the same period in 2011.

Net earnings for the first quarter of 2012 decreased 27% from the prior year primarily due to lower operating income. Net earnings for the first quarter of 2012 included $10.0 million of pre-tax restructuring-related charges and project costs as well as $9.7 million of acquisition-related adjustments. Net earnings for the first quarter of 2011 included $2.1 million of pre-tax restructuring-related charges and project costs as well as $8.3 million of acquisition-related adjustments.

Revenue For the first quarter of 2012, consolidated revenue decreased 4% year-to-year ("YTY"). Core revenue growth of 1% YTY was offset by a 34% reduction in legacy revenue. Legacy represented 11% of total Lexmark revenue in the first quarter of 2012. Supplies revenue decreased 4% while hardware revenue decreased 9% YTY primarily driven by declines in small workgroup hardware unit volume. These declines were partially offset by approximately 10% YTY revenue growth in Software and other due to U.S. growth and international expansion. During the first quarter, Lexmark experienced continued revenue growth in its high value strategic focus segments of MPS, large workgroup hardware, core supplies and Perceptive Software. This growth was offset by declines in legacy consumer revenue, and in small workgroup hardware, principally inkjet.

The following table provides a breakdown of the Company's revenue by segment: Three Months Ended March 31 (Dollars in millions) 2012 2011 % Change ISS $ 963.0 $ 1,015.8 (5.2 ) % Perceptive Software 29.5 18.6 58.6 Total revenue $ 992.5 $ 1,034.4 (4.1 ) % ISS During the first quarter of 2012, supplies revenue decreased 4% compared to the first quarter of 2011. ISS experienced revenue growth in core supplies, MPS and large workgroup hardware. This was more than offset by declines in legacy consumer revenue and weaker small workgroup hardware revenue. Although core supplies experienced 4% YTY growth, it was offset by the decline in legacy supplies of 33% resulting from the decline in the installed base of consumer inkjet hardware units. Hardware revenue decreased 9% compared to 2011 primarily due to a 27% decrease in unit volumes. Large workgroup hardware revenue increased 7%, driven by a 15% increase in unit volume. Large workgroup average unit revenue declined 7%. This large workgroup revenue growth reflects continued success with large enterprises and in management print services. Small workgroup hardware revenue declined 36%, with unit volume declining 31%. Small workgroup average unit revenue ("AUR") declined 7%.

Perceptive Software The acquisitions of Pallas Athena in the fourth quarter of 2011, and Brainware, ISYS and Nolij in the first quarter of 2012 are contributing factors behind the 59% increase in revenue compared to the same period last year. For comparison purposes, excluding revenue from acquisitions completed over the past 12 months, revenue for 37 --------------------------------------------------------------------------------Perceptive Software grew 32% in the first quarter of 2012 versus the first quarter of 2011. Perceptive Software revenue grew both in the U.S. and internationally.

Under the accounting guidance for business combinations, deferred revenue related to service contracts assumed as part of an acquisition must be recognized initially at fair value. As a result, the Company was not able to recognize as revenue in the first quarter of 2011 a portion of the amortization of Perceptive Software's deferred revenue that originated prior to acquisition.

After considering these acquisition-related adjustments, and excluding revenue from acquisitions completed over the past 12 months, revenue for Perceptive Software in the first quarter of 2012 increased 18% compared to the same period last year.

See "Acquisition-related Adjustments" section that follows for further discussion.

Revenue by geography: The following table provides a breakdown of the Company's revenue by geography: Three Months Ended March 31 (Dollars in millions) 2012 2011 % Change United States $ 423.0 $ 431.6 (2.0 ) % Europe, the Middle East & Africa ("EMEA") 368.1 389.5 (5.5 ) Other International 201.4 213.3 (5.6 ) Total revenue $ 992.5 $ 1,034.4 (4.1 ) % For the three months ended March 31, 2012, the decline in U.S. revenue principally reflects the decline in legacy consumer revenue. EMEA revenue was negatively impacted by currency fluctuations and by the decline in legacy consumer revenue. For the three months ended March 31, 2012, currency exchange rates had a 2% YTY unfavorable impact on Total revenue.

Gross Profit The following table provides gross profit information: Three Months Ended March 31 (Dollars in millions) 2012 2011 Change Gross profit dollars $ 381.4 $ 389.4 (2.1 ) % % of revenue 38.4 % 37.6 % 0.8 pts For the three months ended March 31, 2012, consolidated gross profit decreased 2% while gross profit as a percentage of revenue increased slightly YTY. Gross profit margin versus the same period in 2011 was impacted by a 3.6 percentage point YTY increase due to a favorable mix shift driven by lower inkjet volume, partially offset by a 2.4 percentage point decrease YTY due to unfavorable product margins, predominately inkjet hardware. Gross profit margin was also impacted by a 0.4 percentage point decrease due to higher YTY cost of restructuring and acquisition-related activities.

Gross profit for the three months ended March 31, 2012 included $4.3 million of pre-tax restructuring-related charges and project costs as well as $5.7 million of pre-tax acquisition-related adjustments. Gross profit for the three months ended March 31, 2011 included $0.1 million of pre-tax restructuring-related charges and project costs as well as $6.3 million of pre-tax acquisition-related adjustments.

See "Restructuring and Related Charges and Project Costs" and "Acquisition-related Adjustments" sections that follow for further discussion.

38 --------------------------------------------------------------------------------Operating Expense The following table presents information regarding the Company's operating expenses during the periods indicated: Three Months Ended March 31 2012 2011 (Dollars in millions) Dollars % of Rev Dollars % of Rev Research and development $ 96.7 9.7 % $ 90.9 8.8 % Selling, general & administrative 190.6 19.2 186.9 18.1 Restructuring and related charges (reversals) 4.7 0.5 (1.6 ) (0.2 ) Total operating expense $ 292.0 29.4 % $ 276.2 26.7 % For the three months ended March 31, 2012, research and development expenses increased compare to the same period in 2011 driven by increases in the Perceptive Software segment. These increases reflect the impact of increased research and development from acquisitions that occurred after the first quarter of 2011, as well as increased organic investment in Perceptive Software.

Selling, general and administrative ("SG&A") expenses for the three months ended March 31, 2012 increased YTY due to increases in the Perceptive Software segment. The increase was driven by acquisitions that occurred after the first quarter of 2011, as well as investments made to grow Perceptive Software outside the U.S., primarily in EMEA. The increase in Perceptive Software segment SG&A was partially offset by lower SG&A in the ISS segment, principally in consumer product related demand generation.

See discussion below of restructuring and related charges and project costs and acquisition-related adjustments included in the Company's operating expenses for the periods presented in the table above.

For the three months ended March 31, 2012, the Company incurred $5.7 million of pre-tax restructuring and related charges and project costs due to the Company's restructuring plans. Of that amount, $1.0 million is included in Selling, general and administrative while $4.7 million is included in Restructuring and related charges (reversals) on the Company's Consolidated Condensed Statements of Earnings. Additionally, the Company incurred $4.0 million of pre-tax costs associated with its recent acquisitions, of which $3.9 million is included in Selling, general, and administrative and $0.1 million is included in Research and development on the Company's Consolidated Condensed Statements of Earnings.

For the three months ended March 31, 2011, the Company incurred $2 million of pre-tax restructuring and related charges and project costs due to the Company's restructuring plans. Of that amount, $3.6 million is included in Selling, general and administrative while $(1.6) million is included in Restructuring and related charges (reversals) on the Company's Consolidated Condensed Statements of Earnings. Additionally, the Company incurred $2 million of pre-tax costs associated with the acquisition of Perceptive Software of which $1.9 million is included in Selling, general, and administrative and $0.1 million is included in Research and development on the Company's Consolidated Condensed Statements of Earnings.

See "Restructuring and Related Charges and Project Costs" and "Acquisition-related Adjustments" sections that follow for further discussion.

39 --------------------------------------------------------------------------------Operating Income (Loss) The following table provides operating income by segment: Three Months Ended March 31 (Dollars in millions) 2012 2011 Change ISS $ 178.0 $ 188.4 (5.5 ) % % of segment revenue 18.5 % 18.5 % - pts Perceptive Software (15.9 ) (7.4 ) (114.9 ) % % of segment revenue (53.9 ) % (39.8 ) % (14.1 ) pts All other (72.7 ) (67.8 ) (7.2 ) % Total operating income (loss) $ 89.4 $ 113.2 (21.0 ) % % of total revenue 9.0 % 10.9 % (1.9 ) pts For the three months ended March 31, 2012, the decrease in consolidated operating income from the same period in 2011, reflected lower operating income in both the ISS and Perceptive Software segments. The lower ISS operating income primarily reflects increased restructuring and related expense. The increase in operating loss for Perceptive Software reflects greater operating expense in both research and development and SG&A, as investments are made to expand software and solutions offerings, and sales and marketing capabilities outside the U.S. The YTY decrease in All other was primarily due to unfavorable currency movements and increased compensation expense.

For the three months ended March 31, 2012, the Company incurred total pre-tax restructuring-related charges and project costs related to the Company's restructuring plans of $9.6 million in ISS and $0.4 million in All other as well as pre-tax acquisition-related items of $8.1 million primarily in the Perceptive Software segment with the exception of $1.6 million recognized in All other.

For the three months ended March 31, 2011, the Company incurred total pre-tax restructuring-related charges and project costs related to the Company's restructuring plans of $1.1 million in ISS and $1 million in All other as well as pre-tax acquisition-related items of $8.3 million primarily in the Perceptive Software segment with the exception of $0.7 million recognized in All other.

See "Restructuring and Related Charges and Project Costs" and "Acquisition-related Adjustments" sections that follow for further discussion.

Interest and Other The following table provides interest and other information: Three Months Ended March 31 (Dollars in millions) 2012 2011 Interest (income) expense, net $ 7.1 $ 7.5 Other expense (income), net 0.2 0.1 Total interest and other (income) expense, net $ 7.3 $ 7.6 During the first quarter of 2012, total interest and other (income) expense, net, was an expense of $7.3 million, a 4% decrease compared to expense of $7.6 million in the first quarter of 2011.

Provision for Income Taxes and Related Matters The Provision for income taxes for the three months ended March 31, 2012, was an expense of $21.3 million or an effective tax rate of 26.0%, compared to an expense of $22.3 million or an effective tax rate of 21.1% for the three months ended March 31, 2011. The difference in these rates (excluding discrete items) is primarily due to a shift in the expected geographic distribution of earnings for 2012 and to the fact that the U.S. research and experimentation tax credit was not in effect during the first quarter of 2012 but was in effect during the first quarter of 2011. For the three months ended March 31, 2012, the Company increased income tax expense by $1.0 million in recognition of 40 -------------------------------------------------------------------------------- several discrete items, all of which were adjustments to amounts accrued for tax years prior to 2012. For the three months ended March 31, 2011, the Company decreased income tax expense by $2.4 million in recognition of an anticipated tax benefit from the repatriation of foreign earnings.

Net Earnings and Earnings per Share The following table summarizes net earnings and basic and diluted net earnings per share: Three Months Ended March 31 (Dollars in millions, except per share amounts) 2012 2011 Net earnings $ 60.8 $ 83.3 Basic earnings per share $ 0.85 $ 1.06 Diluted earnings per share $ 0.84 $ 1.04 Net earnings for the three months ended March 31, 2012 decreased 27% from the prior year primarily due to decreased operating income, further reduced by a higher effective tax rate driven primarily by the expiration of the U.S.

research and experimentation tax credit.

For the three months ended March 31, 2012, the YTY decrease in basic and diluted earnings per share was primarily due to decreased earnings.

Natural Disaster in Thailand Flooding in Thailand in the second half of calendar year 2011 significantly impacted much of the country's industrial and manufacturing plants. Although the Company does not have a significant manufacturing or logistics presence in Thailand, the Company does have a number of suppliers that were impacted by this crisis. The Company has worked closely with suppliers to understand the impacts to the supply of materials and components and developed alternative solutions as needed. The crisis impacts only a portion of the Company's laser hardware product lines and has no direct impact on the delivery of inkjet products or inkjet/laser supplies. In the first quarter of 2012, the Company did not incur significant product shortages related to the Thailand floods, but did incur increased expediting and component costs that were somewhat less than the $10 million to $15 million previously expected. The Company does not expect to incur significant costs, net of insurance recoveries, related to Thailand floods in the second quarter of 2012. The Company expects the majority of all costs incurred related to the Thailand floods to be covered by insurance, net of applicable deductibles, with recovery later in 2012.

RESTRUCTURING AND RELATED CHARGES AND PROJECT COSTS Summary of Restructuring Impacts The Company's 2012 financial results are impacted by its restructuring plans and related projects. Project costs consist of additional charges related to the execution of the restructuring plans. These project costs are incremental to the Company's normal operating charges and are expensed as incurred, and include such items as compensation costs for overlap staffing, travel expenses, consulting costs and training costs.

As part of Lexmark's ongoing strategy to increase the focus of its talent and resources on higher usage business platforms, the Company announced restructuring actions (the "January 2012 Restructuring Plan") on January 31, 2012. This action will better align the Company's sales and marketing resources with its business customer focus, adjust manufacturing capacity in its declining legacy product lines, and align and reduce its support structure consistent with its focus on business customers. The Company expects to redeploy a significant portion of the savings from these initiatives towards business products, solutions and channels. The January 2012 Restructuring Plan includes reductions primarily in the areas of manufacturing, marketing, sales and other infrastructure. The Company expects these actions to be principally complete by the end of the first quarter 2013.

The January 2012 Restructuring Plan is expected to impact about 625 positions worldwide. Total pre-tax charges, including project costs, of approximately $35 million are expected for the January 2012 Restructuring Plan, with 41 -------------------------------------------------------------------------------- total cash cost expected to be approximately $24 million. Including the $7.6 million of charges incurred in 2011, the Company has incurred $16.7 million of total charges for the January 2012 Restructuring Plan. Lexmark expects the January 2012 Restructuring Plan to generate savings of approximately $15 million in 2012 and ongoing cash savings beginning in 2013 of approximately $28 million.

These ongoing savings should be split approximately 80% to operating expense and 20% to cost of revenue.

Refer to Note 5 of the Notes to Consolidated Condensed Financial Statements for a description of the Company's October 2009 Restructuring Plan and the Other Restructuring Actions. The October 2009 Restructuring Plan and the Other Restructuring Actions are substantially completed and any remaining charges to be incurred are expected to be immaterial.

The October 2009 Restructuring Plan is expected to impact about 770 positions worldwide. Total pre-tax charges, including project costs, of approximately $120 million are expected for the October 2009 Restructuring Plan, with total cash cost expected to be approximately $108 million. Lexmark expects the October 2009 Restructuring Plan to generate ongoing savings beginning in 2012 of approximately $110 million with ongoing cash savings beginning in 2012 of approximately $105 million. These ongoing savings should be split approximately 60% to operating expense and 40% to cost of revenue. Including the $116.0 million of charges incurred in 2011 and prior years, the Company has incurred $116.9 million of total charges for the October 2009 Restructuring Plan.

Refer to Note 5 of the Notes to Consolidated Condensed Financial Statements for a rollforward of the liability incurred for the January 2012 Restructuring Plan, the October 2009 Restructuring Plan and the Other Restructuring Actions.

Impact to 2012 Financial Results For the three months ended March 31, 2012, the Company incurred charges, including project costs, of $10.0 million for its restructuring plans as follows: January 2012 January 2012 October 2009 October 2009 Restructuring-related Restructuring-related January Restructuring-related Restructuring-related October Charges Project 2012 Charges Project 2009 (Dollars in millions) (Note 5) Costs Total (Note 5) Costs Total Total Accelerated depreciation charges $ 4.3 $ - $ 4.3 $ 0.2 $ - $ 0.2 $ 4.5 Employee termination benefit charges 4.1 - 4.1 0.6 - 0.6 4.7 Project costs - 0.7 0.7 - 0.1 0.1 0.8 Total restructuring-related charges/project costs $ 8.4 $ 0.7 $ 9.1 $ 0.8 $ 0.1 $ 0.9 $ 10.0 The Company incurred accelerated depreciation charges of $4.3 million and $0.2 million, respectively, in Cost of revenue and Selling, general and administrative on the Consolidated Condensed Statements of Earnings. Total employee termination benefit charges of $4.7 million are included in Restructuring and related charges (reversals), and restructuring-related project costs of $0.8 million are included in Selling, general and administrative on the Company's Consolidated Condensed Statements of Earnings. The Company incurred no restructuring-related charges or project costs related to the Other Restructuring Actions in the first quarter of 2012.

For the three months ended March 31, 2012, the Company incurred restructuring and related charges and project costs related to the January 2012 Restructuring Plan of $9.1 million in ISS. The Company incurred restructuring and related charges and project costs related to the October 2009 Restructuring Plan of $0.5 million in ISS and $0.4 million in All other.

42 --------------------------------------------------------------------------------Impact to 2011 Financial Results For the three months ended March 31, 2011, the Company incurred charges (reversals), including project costs, of $2.1 million for its restructuring plans as follows: October 2009 October 2009 Other Actions Other Actions Restructuring-related Restructuring-related October Restructuring-related Restructuring-related Other Charges Project 2009 Charges Project Actions (Dollars in millions) (Note 5) Costs Total (Note 5) Costs Total Total Accelerated depreciation charges $ 0.1 $ - $ 0.1 $ - $ - $ - $ 0.1 Employee termination benefit charges (1.6 ) - (1.6 ) - - - (1.6 ) Impairments on long-lived assets held for sale - - - 1.0 - 1.0 1.0 Project costs - 2.4 2.4 - 0.2 0.2 2.6 Total restructuring-related charges/project costs $ (1.5 ) $ 2.4 $ 0.9 $ 1.0 $ 0.2 $ 1.2 $ 2.1 The Company incurred $0.1 million of accelerated depreciation charges and $(1.6) million of employee termination benefit charges (reversals) in Selling, general and administrative and Restructuring and related charges (reversals), respectively, on the Consolidated Condensed Statements of Earnings. Impairment charges of $1.0 million related to the write-down of the Company's manufacturing facility in Juarez, Mexico, for which fair value has fallen below the carrying value, are included in Selling, general and administrative on the Consolidated Condensed Statements of Earnings. Restructuring-related project costs of $0.1 million and $2.5 million are included in Cost of revenue and Selling, general and administrative, respectively, on the Company's Consolidated Condensed Statements of Earnings. The $(1.6) million reversal for employee termination benefit charges is due primarily to revisions in assumptions.

For the three months ended March 31, 2011, the Company incurred restructuring and related charges (reversals) and project costs related to the October 2009 Restructuring Plan of $0.9 million in All other. The Company incurred restructuring and related charges and project costs related to the Other Restructuring Actions of $1.1 million in ISS and $0.1 million in All other.

ACQUISITION-RELATED ADJUSTMENTS In connection with acquisitions, Lexmark incurs costs and adjustments (referred to as "acquisition-related adjustments") that affect the Company's financial results. These acquisition-related adjustments result from business combination accounting rules as well as expenses that would otherwise have not been incurred by the Company if acquisitions had not taken place.

Pre-tax acquisition-related adjustments affected the Company's financial results as follows: Three Months Ended March 31 (Dollars in Millions) 2012 2011 Adjustment to revenue $ 0.4 $ 2.7 Amortization of intangible assets 7.7 4.9 Acquisition and integration costs 1.6 0.7 Total acquisition-related adjustments $ 9.7 $ 8.3 Adjustments to revenue result from business combination accounting rules when 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, the Company analyzes 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. The $0.4 million and $2.7 million downward adjustments to revenue for the three months ended March 31, 2012 and March 31, 2011, respectively, are reflected in Revenue presented on the Company's Consolidated Condensed Statements of Earnings. The Company expects pre-tax adjustments to deferred revenue of approximately $4 million for the remainder of 2012. For full year 2013 the Company expects pre-tax adjustments to deferred revenue of approximately $1 million.

43 -------------------------------------------------------------------------------- Due to business combination accounting rules, intangible assets are recognized as a result of acquisitions 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. For the three months ended March 31, 2012, the Company incurred $5.3 million in Cost of revenue, $0.1 million in Research and development and $2.3 million in Selling, general and administrative, respectively, on the Company's Consolidated Condensed Statements of Earnings for the amortization of intangible assets. For the three months ended March 31, 2011, the Company incurred $3.6 million in Cost of revenue, $0.1 million in Research and development and $1.2 million in Selling, general and administrative, respectively, on the Company's Consolidated Condensed Statements of Earnings for the amortization of intangible assets. The Company expects pre-tax adjustments for the amortization of intangible assets of approximately $32 million for the remainder of 2012 with approximately $10 million expected in the second quarter of 2012. For full year 2013, the Company expects charges for the amortization of intangible assets of approximately $43 million.

In connection with its acquisitions, the Company incurs acquisition and integration expenses that would not have been incurred otherwise. The acquisition costs include items such as investment banking fees, legal and accounting fees, and costs of retention bonus programs for the senior management of the acquired company. Integration costs may consist of information technology expenses, consulting costs and travel expenses. The costs are expensed as incurred. For the three months ended March 31, 2012 and 2011 the Company incurred $1.6 million and $0.7 million, respectively, in Selling, general and administrative on the Company's Consolidated Condensed Statements of Earnings for acquisition and integration costs. The Company expects pre-tax adjustments for acquisition and integration expenses of approximately $4 million for the remainder of 2012, after which the Company expects charges for acquisition and integration expenses to be immaterial.

Adjustments to revenue and amortization of intangible assets were recognized primarily in the Perceptive Software reportable segment. Acquisition and integration costs were recognized primarily in All other.

FINANCIAL CONDITION Lexmark's financial position remains strong at March 31, 2012, with working capital of $919.2 million compared to $1,085.5 million at December 31, 2011. The $166.3 million decrease in working capital accounts was primarily due to the $200.0 million decrease in Cash and cash equivalents and Marketable securities driven by business acquisitions. These acquisitions shifted a substantial amount of current assets to noncurrent assets, primarily intangible assets and goodwill. The Company also repurchased shares in the amount of $30.0 million and made a cash dividend payment of $17.8 million during the first quarter of 2012.

At March 31, 2012 and December 31, 2011, the Company had senior note debt of $649.4 million and $649.3 million, respectively. The Company had no amounts outstanding under its U.S. trade receivables financing program or its revolving credit facility at March 31, 2012 or December 31, 2011.

The debt to total capital ratio was stable at 31% at March 31, 2012 and 32% at December 31, 2011. The debt to total capital ratio is calculated by dividing the Company's outstanding debt by the sum of its outstanding debt and total stockholders' equity.

The following table summarizes the results of the Company's Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2012 and 2011:

[ Back To TMCnet.com's Homepage ]





LATEST VIDEOS

DOWNLOAD CENTER

UPCOMING WEBINARS

MOST POPULAR STORIES





Technology Marketing Corporation

800 Connecticut Ave, 1st Floor East, Norwalk, CT 06854 USA
Ph: 800-243-6002, 203-852-6800
Fx: 203-866-3326

General comments: tmc@tmcnet.com.
Comments about this site: webmaster@tmcnet.com.

STAY CURRENT YOUR WAY

© 2014 Technology Marketing Corporation. All rights reserved.