Lexmark reports second quarter results

Earnings Per Share

2Q10

2Q09

GAAP

$ 1.07

$ 0.22

Restructuring-related adjustments

0.08

0.33

Acquisition-related adjustments

0.08

0.00

Non-GAAP

$ 1.23

$ 0.55

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(In Millions, Except Per Share Amounts)

(Unaudited)

Three Months Ended

Six Months Ended

June 30

June 30

2010

2009

2010

2009

Revenue

$ 1,033.0

$ 904.6

$ 2,075.9

$ 1,848.7

Cost of revenue

653.0

623.8

1,311.1

1,234.5

Gross profit

380.0

280.8

764.8

614.2

Research and development

91.5

92.9

180.9

190.3

Selling, general and administrative

168.3

155.1

327.2

313.9

Restructuring and related charges

1.3

5.1

4.5

7.7

Operating expense

261.1

253.1

512.6

511.9

Operating income

118.9

27.7

252.2

102.3

Interest (income) expense, net

5.7

5.0

12.3

10.2

Other (income) expense, net

0.3

1.1

1.3

(0.1)

Net impairment losses on securities

-

0.8

0.2

0.8

Earnings before income taxes

112.9

20.8

238.4

91.4

Provision for income taxes

27.8

3.8

58.0

15.2

Net earnings

$      85.1

$   17.0

$    180.4

$      76.2

Net earnings per share:

Basic

$      1.08

$   0.22

$      2.30

$      0.97

Diluted

$      1.07

$   0.22

$      2.28

$      0.97

Shares used in per share calculation:

Basic

78.6

78.2

78.5

78.2

Diluted

79.4

78.4

79.2

78.4

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION

(In Millions)

(Unaudited)

June 30

December 31

2010

2009

ASSETS

Current assets:

Cash and cash equivalents

$    189.4

$           459.3

Marketable securities

817.4

673.2

Trade receivables, net

476.6

424.9

Inventories

339.0

357.3

Prepaid expenses and other current assets

246.6

226.0

Total current assets

2,069.0

2,140.7

Property, plant and equipment, net

899.4

914.9

Marketable Securities

22.0

22.0

Goodwill

177.7

23.7

Intangibles, net

167.1

19.8

Other assets

155.8

233.1

Total assets

$ 3,491.0

$ 3,354.2

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

539.6

510.1

Accrued liabilities

657.7

681.7

Total current liabilities

1,197.3

1,191.8

Long-term debt

649.0

648.9

Other liabilities

465.4

499.9

Total liabilities

2,311.7

2,340.6

Stockholders' equity:

Common stock and capital in excess of par

826.3

820.9

Retained earnings

1,020.2

839.8

Treasury stock, net

(404.5)

(404.5)

Accumulated other comprehensive loss

(262.7)

(242.6)

Total stockholders' equity

1,179.3

1,013.6

Total liabilities and stockholders' equity

$ 3,491.0

$ 3,354.2

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP MEASURES

(Unaudited)

Net Earnings (In Millions)

2Q10

2Q09

GAAP

$            85

$    17

Restructuring-related charges & project costs

7

26

Acquisition-related adjustments

6

-

Non-GAAP

$            98

$    43

Six months ended June 30

Net Earnings (In Millions)

2010

2009

GAAP

$          180

$    76

Restructuring-related charges & project costs

18

37

Acquisition-related adjustments

6

-

Non-GAAP

$          204

$  113

Earnings Per Share

2Q10

2Q09

GAAP

$         1.07

$ 0.22

Restructuring-related charges & project costs

0.08

0.33

Acquisition-related adjustments

0.08

-

Non-GAAP

$         1.23

$ 0.55

Earnings Per Share Guidance

3Q10

3Q09

GAAP

$0.70 - 0.80

$ 0.13

Restructuring-related charges & project costs

0.09

0.52

Acquisition-related adjustments

0.11

-

Non-GAAP

$0.90 - 1.00

$ 0.65

 Refer to Appendix 1 for discussion of management's use of GAAP and Non-GAAP measures.  

 Totals may not foot due to rounding.  

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP MEASURES

(Unaudited)

Revenue (In Millions)  

2Q10

2Q09

GAAP

$ 1,033

$ 905

Acquisition-related adjustments

2

-

Non-GAAP

$ 1,035

$ 905

Gross Profit (In Millions)

2Q10

2Q09

GAAP

$    380

$ 281

Restructuring-related charges & project costs (1) (2)

4

22

Acquisition-related adjustments

3

-

Non-GAAP

$    387

$ 302

Gross Profit Margin (%)

2Q10

2Q09

GAAP

36.8%

31.0%

Restructuring-related charges & project costs

0.4%

2.4%

Acquisition-related adjustments

0.3%

0.0%

Non-GAAP

37.4%

33.4%

Operating Expense (In Millions)

2Q10

2Q09

GAAP

$    261

$ 253

Restructuring-related charges & project costs (1) (2)

(4)

(10)

Acquisition-related adjustments

(5)

-

Non-GAAP

$    251

$ 243

Operating Income  (In Millions)

2Q10

2Q09

GAAP

$    119

$   28

Restructuring-related charges & project costs (1) (2)

9

32

Acquisition-related adjustments

8

-

Non-GAAP

$    136

$   59

Operating Income Margin (%)  

2Q10

2Q09

GAAP

11.5%

3.1%

Restructuring-related charges & project costs

0.8%

3.5%

Acquisition-related adjustments

0.8%

0.0%

Non-GAAP

13.1%

6.6%

 Refer to Appendix 1 for discussion of management's use of GAAP and Non-GAAP measures.  

 Totals may not foot due to rounding.  

(1)   Amounts for the three months ended June 30, 2010, include total restructuring-related charges
and project costs of $8.7 million with $4.2 million and $3.2 million included in Cost of revenue and
Selling, general and administrative, respectively, in addition to the $1.3 million in Restructuring and
related charges.  

(2)   Amounts for the three months ended June 30, 2009, include total restructuring-related charges
and project costs of $31.7 million with $21.6 million and $5.0 million included in Cost of revenue and
Selling, general and administrative, respectively, in addition to the $5.1 million in Restructuring and
related charges.  

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP MEASURES

(Unaudited)

Six months ended June 30

Revenue (In Millions)  

2010

2009

GAAP

$          2,076

$               1,849

Acquisition-related adjustments

2

-

Non-GAAP

$          2,078

$               1,849

Gross Profit (In Millions)

2010

2009

GAAP

$             765

$                  614

Restructuring-related charges & project costs (1) (2)

12

26

Acquisition-related adjustments

3

-

Non-GAAP

$             780

$                  641

Gross Profit Margin (%)

2010

2009

GAAP

36.8%

33.2%

Restructuring-related charges & project costs

0.6%

1.5%

Acquisition-related adjustments

0.1%

0.0%

Non-GAAP

37.5%

34.7%

Operating Expense (In Millions)

2010

2009

GAAP

$             513

$                  512

Restructuring-related charges & project costs (1) (2)

(12)

(18)

Acquisition-related adjustments

(5)

-

Non-GAAP

$             496

$                  494

Operating Income  (In Millions)

2010

2009

GAAP

$             252

$                  102

Restructuring-related charges & project costs (1) (2)

23

45

Acquisition-related adjustments

8

-

Non-GAAP

$             284

$                  147

Operating Income Margin (%)  

2010

2009

GAAP

12.1%

5.5%

Restructuring-related charges & project costs

1.1%

2.4%

Acquisition-related adjustments

0.4%

0.0%

Non-GAAP

13.7%

7.9%

 Refer to Appendix 1 for discussion of management's use of GAAP and Non-GAAP measures.  

 Totals may not foot due to rounding.  

(1)   Amounts for the six months ended June 30, 2010, include total restructuring-related charges
and project costs of $23.3 million with $11.7 million and $7.1 million included in Cost of revenue and
Selling, general and administrative, respectively, in addition to the $4.5 million in Restructuring and
related charges.  

(2)   Amounts for the six months ended June 30, 2009, include total restructuring-related charges
and project costs of $44.7 million with $26.5 million and $10.5 million included in Cost of revenue
and Selling, general and administrative, respectively, in addition to the $7.7 million in Restructuring
and related charges.  

Appendix 1 

Note:

Management believes that presenting non-GAAP measures is useful because they enhance investors’ understanding of how management assesses the performance of the Company’s businesses. Management uses non-GAAP measures for budgeting purposes, measuring actual results to budgeted projections, allocating resources and in certain circumstances for employee incentive compensation. Adjustments to GAAP results in determining non-GAAP results fall into two broad general categories that are described below:

1) Restructuring-related charges
In recent years, the Company has initiated restructuring plans which have resulted in operating expenses which otherwise would not have been incurred. The size of these items can vary significantly from period to period and the Company does not consider these items to be core operating expenses of the business.  Restructuring and related charges that are excluded from GAAP earnings to determine non-GAAP earnings consist of accelerated depreciation, employee termination benefits and contract termination and lease charges. They also include project costs that relate to the execution of the restructuring plans. These project costs are incremental to normal operating charges and are expensed as incurred, such as compensation costs for overlap staffing, travel expenses, consulting costs and training costs.

2) Acquisition-related adjustments
In connection with acquisitions, management provides supplementary non-GAAP financial measures of revenue and expenses to normalize for the impact of business combination accounting rules as well as to exclude certain expenses which would not have been incurred otherwise.

a. Adjustments to Revenue
Due to business combination accounting rules, 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, management adds back 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.   Management reviews non-GAAP revenue to allow for more complete comparisons to historical performance as well as to forward-looking projections and also uses it as a metric for employee incentive compensation.

b. Amortization of intangible assets
Due to business combination accounting rules, intangible assets are recognized 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. The total amortization of the acquired intangible assets varies from period to period, due to the mix in value and useful lives of the different assets. For the purpose of comparing financial results to historical performance as well as for defining targets for employee incentive compensation, management excludes the amortization of the acquired intangible assets on a non-GAAP basis.

c. Acquisition and integration costs
In connection with its acquisitions, the Company incurs 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 and can vary substantially in size from one period to the next. For these reasons, management excludes these expenses from non-GAAP earnings in order to evaluate the Company’s performance on a continuing and comparable basis.

In addition to GAAP results, management presents these non-GAAP financial measures to provide investors with additional information that they can utilize in their own methods of evaluating the Company’s performance.

Management compensates for the material limitations associated with the use of non-GAAP financial measures by having specific initiatives associated with restructuring actions and acquisitions approved by management, along with their budgeted costs. Subsequently, actual costs incurred as a part of these approved restructuring plans and acquisitions are monitored and compared to budgeted costs to assure that the Company’s non-GAAP financial measures only exclude pre-approved restructuring-related costs and acquisition-related adjustments. Any non-GAAP measures provided by the Company may not be comparable to similar measures of other companies as not all companies calculate these measures in the same manner.