LEXMARK INTERNATIONAL INC /KY/ - FORM 10-Q

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - LEXMARK INTERNATIONAL INC /KY/	exhibit311.htm
EX-32.2 - EXHIBIT 32.2 - LEXMARK INTERNATIONAL INC /KY/	exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - LEXMARK INTERNATIONAL INC /KY/	exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - LEXMARK INTERNATIONAL INC /KY/	exhibit312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2016

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______to _______.

Commission File No. 1-14050

LEXMARK INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


Delaware	06-1308215
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)

One Lexmark Centre Drive
740 West New Circle Road
Lexington, Kentucky	40550
(Address of principal executive offices)	(Zip Code)

(859) 232-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [X]

Accelerated filer [ ]

Non-accelerated filer [ ]

(Do not check if a smaller reporting company)

Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

The registrant had 62,641,636 shares outstanding (excluding shares held in treasury) of Class A Common Stock, par value $0.01 per share, as of the close of business on April 22, 2016.

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX

		Page of Form 10-Q
	PART I – FINANCIAL INFORMATION
Item 1.	FINANCIAL STATEMENTS (Unaudited)
	Consolidated Condensed Statements of Earnings
	Three Months Ended March 31, 2016 and 2015	2
	Consolidated Condensed Statements of Comprehensive Earnings
	Three Months Ended March 31, 2016 and 2015	3
	Consolidated Condensed Statements of Financial Position
	As of March 31, 2016 and December 31, 2015	4
	Consolidated Condensed Statements of Cash Flows
	Three Months Ended March 31, 2016 and 2015	5
	Notes to Consolidated Condensed Financial Statements	6
Item 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	26
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	42
Item 4.	CONTROLS AND PROCEDURES	42

	PART II – OTHER INFORMATION

Item 1.	LEGAL PROCEEDINGS	45
Item 1A.	RISK FACTORS	45
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	46
Item 6.	EXHIBITS	46

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact, are forward-looking statements. Forward-looking statements are made based upon information that is currently available or management’s current expectations and beliefs concerning future developments and their potential effects upon the Company, speak only as of the date hereof, and are subject to certain risks and uncertainties. We assume no obligation to update or revise any forward-looking statements contained or incorporated by reference herein to reflect any change in events, conditions or circumstances, or expectations with regard thereto, on which any such forward-looking statement is based, in whole or in part. There can be no assurance that future developments affecting the Company will be those anticipated by management, and there are a number of factors that could adversely affect the Company’s future operating results or cause the Company’s actual results to differ materially from the estimates or expectations reflected in such forward-looking statements, including, without limitation, the factors set forth under the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this report. The information referred to above should be considered by investors when reviewing any forward-looking statements contained in this report, in any of the Company’s public filings or press releases or in any oral statements made by the Company or any of its officers or other persons acting on its behalf. The important factors that could affect forward-looking statements are subject to change, and the Company does not intend to update the factors set forth in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this report. By means of this cautionary note, the Company intends to avail itself of the safe harbor from liability with respect to forward-looking statements that is provided by Section 27A and Section 21E referred to above.

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(In Millions, Except Per Share Amounts)

(Unaudited)

	Three Months Ended
	March 31
	2016		2015
Revenue:
Product	$	626.8	$	714.7
Service		179.4		137.3
Total Revenue		806.2		852.0
Cost of revenue:
Product		394.9		428.4
Service		104.9		93.6
Restructuring-related costs		–		0.1
Total Cost of revenue		499.8		522.1
Gross profit		306.4		329.9

Research and development		83.7		77.7
Selling, general and administrative		272.8		210.2
Restructuring and related reversals		(11.6)		(0.2)
Operating expense		344.9		287.7
Operating (loss) income		(38.5)		42.2

Interest expense (income), net		11.3		7.7
Other expense (income), net		0.4		0.8
(Loss) earnings before income taxes		(50.2)		33.7

(Benefit) provision for income taxes		(10.8)		13.5
Net (loss) earnings	$	(39.4)	$	20.2

Net (loss) earnings per share:
Basic	$	(0.63)	$	0.33
Diluted	$	(0.63)	$	0.32
Shares used in per share calculation:
Basic		62.3		61.3
Diluted		62.3		62.4
Cash dividends declared per common share	$	0.36	$	0.36

See Notes to Consolidated Condensed Financial Statements.

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE EARNINGS

(In Millions)

(Unaudited)

	Three Months Ended
	March 31
	2016		2015
Net (loss) earnings	$	(39.4)	$	20.2
Other comprehensive (loss) earnings, net of tax:
Foreign currency translation adjustment		18.5		(47.9)
Recognition of pension and other postretirement benefit plans prior service credit, net of (amortization)		(0.1)		(0.1)
Net unrealized gain on marketable securities		–		0.8
Unrealized (loss) gain on cash flow hedges		(18.6)		51.7
Total other comprehensive (loss) earnings, net of tax		(0.2)		4.5
Comprehensive (loss) earnings	$	(39.6)	$	24.7

See Notes to Consolidated Condensed Financial Statements.

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION

(In Millions, Except Par Value)

(Unaudited)

	March 31,		December 31,
	2016		2015
ASSETS
Current assets:
Cash and cash equivalents	$	127.0	$	158.3
Trade receivables, net of allowances of $26.4 in 2016 and $24.4 in 2015		420.4		434.2
Inventories		232.9		231.9
Prepaid expenses and other current assets		202.5		204.9
Total current assets		982.8		1,029.3

Property, plant and equipment, net		725.2		740.2
Goodwill		1,334.4		1,325.1
Intangibles, net		507.3		532.5
Other assets		281.1		285.3
Total assets	$	3,830.8	$	3,912.4

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt	$	3.5	$	–
Accounts payable		539.5		501.7
Accrued liabilities		645.9		669.8
Total current liabilities		1,188.9		1,171.5

Long-term debt, net of unamortized issuance costs		992.0		1,061.3
Other liabilities		580.9		561.6
Total liabilities		2,761.8		2,794.4

Commitments and contingencies

Stockholders' equity:
Preferred stock, $.01 par value, 1.6 shares authorized; no shares issued and outstanding		–		–
Common stock, $.01 par value:
Class A, 900.0 shares authorized; 62.6 and 61.9 outstanding in 2016 and 2015, respectively		1.0		1.0
Class B, 10.0 shares authorized; no shares issued and outstanding		–		–
Capital in excess of par		1,043.7		1,025.9
Retained earnings		1,229.9		1,292.8
Treasury stock, net; at cost; 36.5 and 36.4 shares in 2016 and 2015, respectively		(1,040.4)		(1,036.7)
Accumulated other comprehensive loss		(165.2)		(165.0)
Total stockholders' equity		1,069.0		1,118.0
Total liabilities and stockholders' equity	$	3,830.8	$	3,912.4

See Notes to Consolidated Condensed Financial Statements.

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In Millions)

(Unaudited)

	Three Months Ended
	March 31
	2016		2015
Cash flows from operating activities:
Net (loss) earnings	$	(39.4)	$	20.2
Adjustments to reconcile net (loss) earnings to net cash flows provided by (used for) operating activities:
Depreciation and amortization		72.1		65.6
Deferred taxes		0.1		8.7
Stock-based compensation expense		16.1		4.5
Pension and other postretirement expense (income)		20.4		(2.0)
Other		(1.1)		1.8
Change in assets and liabilities, net of acquisitions:
Trade receivables		14.3		26.9
Inventories		(1.0)		(1.5)
Accounts payable		37.8		(2.5)
Accrued liabilities		(16.4)		(88.9)
Other assets and liabilities		(22.6)		(38.3)
Pension and other postretirement contributions		(1.2)		(5.0)
Net cash flows provided by (used for) operating activities		79.1		(10.5)

Cash flows from investing activities:
Purchases of property, plant and equipment		(23.2)		(36.7)
Purchases of marketable securities		–		(241.4)
Proceeds from sales of marketable securities		–		416.4
Proceeds from maturities of marketable securities		–		22.2
Purchase of business, net of cash acquired		–		(30.3)
Other		1.5		(0.5)
Net cash flows (used for) provided by investing activities		(21.7)		129.7

Cash flows from financing activities:
Repayment of assumed debt		–		(1.3)
Payments on long-term debt		(66.0)		–
Purchase of shares from noncontrolling interest		–		(4.6)
Payment of cash dividend		(22.5)		(22.1)
Purchase of treasury stock		(4.0)		(30.0)
Proceeds from employee stock plans		0.3		–
Other		1.1		2.4
Net cash flows used for financing activities		(91.1)		(55.6)
Effect of exchange rate changes on cash and cash equivalents		2.4		(3.8)
Net change in cash and cash equivalents		(31.3)		59.8
Cash and cash equivalents - beginning of period		158.3		309.3
Cash and cash equivalents - end of period	$	127.0	$	369.1

See Notes to Consolidated Condensed Financial Statements.

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In Millions, Except Per Share Amounts)

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying interim Consolidated Condensed Financial Statements are unaudited; however, in the opinion of management of Lexmark International, Inc. (together with its subsidiaries, the “Company” or “Lexmark”), all adjustments necessary for a fair statement of the interim financial results have been included. All adjustments included were of a normal recurring nature. The results for the interim periods are not necessarily indicative of results to be expected for the entire year. The Consolidated Condensed Statements of Financial Position data as of December 31, 2015 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S.”). The Company filed with the Securities and Exchange Commission (“SEC”) audited consolidated financial statements for the year ended December 31, 2015, on Form 10-K, which included all information and notes necessary for such presentation. Accordingly, these financial statements and notes should be read in conjunction with the Company’s audited annual consolidated financial statements for the year ended December 31, 2015.

During 2015, in conjunction with the remediation efforts to resolve the material weakness disclosed in the Company’s 2015 Form 10-K, the Company identified errors related to the income tax provision and related current tax, deferred tax and unrecognized tax benefits accounts that impacted the Company’s previously issued interim and annual consolidated financial statements. Specifically, identified errors related to deferred taxes associated with outside basis differences of certain foreign subsidiaries and other temporary differences and U.S. deferred taxes related to deferred revenue and other temporary differences; additional errors related to the recognition and measurement of U.S. and foreign unrecognized tax benefits and associated correlative offsets in current taxes.

The Company determined that these errors were not material to any of the Company’s prior annual and interim period consolidated financial statements and therefore, amendments of previously filed reports were not required. However, the Company determined that the impact of the corrections would be too significant to record during 2015. As such, the revision for the corrections is reflected in the financial information of the applicable prior periods in this Form 10-Q filing and disclosure of the revised amount on other prior periods will be reflected in future filings containing the applicable period. There was no impact to cash flows from operations on the Consolidated Condensed Statements of Cash Flows for the period ending March 31, 2015.

The impact of this revision for periods presented within this quarterly report on Form 10-Q are shown in the tables below:

Consolidated Condensed Statements of Earnings and Consolidated Condensed Statements of Other Comprehensive Earnings

	Three Months Ended
	March 31, 2015
	As Previously
	Reported		Adjustment		As Revised
Provision for income taxes	$	14.0	$	(0.5)	$	13.5
Net earnings	$	19.7	$	0.5	$	20.2

Net earnings per share:
Basic	$	0.32	$	0.01	$	0.33

Other comprehensive (loss) earnings, net of tax:
Foreign currency translation adjustment	$	(49.6)	$	1.7	$	(47.9)
Total other comprehensive earnings, net of tax	$	2.8	$	1.7	$	4.5
Comprehensive earnings	$	22.5	$	2.2	$	24.7

2. FAIR VALUE

General

The accounting guidance for fair value measurements defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles (“GAAP”), and requires disclosures about fair value measurements. The guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction

between market participants at the measurement date. As part of the framework for measuring fair value, the guidance establishes a hierarchy of inputs to valuation techniques used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.

Fair Value Hierarchy

The three levels of the fair value hierarchy are:

Level 1 — Quoted prices (unadjusted) in active markets for identical, unrestricted assets or liabilities that the Company has the ability to access at the measurement date;

Level 2 — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; and

Level 3 — Unobservable inputs used in valuations in which there is little market activity for the asset or liability at the measurement date.

Fair value measurements of assets and liabilities are assigned a level within the fair value hierarchy based on the lowest level of any input that is significant to the fair value measurement in its entirety.

Assets and Liabilities Measured at Fair Value on a Recurring Basis



	March 31, 2016								December 31, 2015
			Based on								Based on
			Quoted								Quoted
			prices in		Other						prices in		Other
			active		observable		Unobservable				active		observable		Unobservable
			markets		inputs		inputs				markets		inputs		inputs
	Fair value		(Level 1)		(Level 2)		(Level 3)		Fair value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents - money market funds (1)	$	–	$	–	$	–	$	–	$	34.9	$	–	$	34.9	$	–
Foreign currency derivatives (2)		10.3		–		10.3		–		22.7		–		22.7		–
Total	$	10.3	$	–	$	10.3	$	–	$	57.6	$	–	$	57.6	$	–

Liabilities:
Foreign currency derivatives (2)	$	20.1	$	–	$	20.1	$	–	$	11.9	$	–	$	11.9	$	–
Contingent consideration		–		–		–		–		1.0		–		–		1.0
Total	$	20.1	$	–	$	20.1	$	–	$	12.9	$	–	$	11.9	$	1.0

(1) Included in Cash and cash equivalents on the Consolidated Condensed Statements of Financial Position.

(2) Foreign currency derivative assets and foreign currency derivative liabilities are included in Prepaid expenses and other current assets and Accrued liabilities, respectively, on the Consolidated Condensed Statements of Financial Position. Refer to Note 11 for disclosure of derivative assets and liabilities on a gross basis.

The Company’s policy is to consider all highly liquid investments with an original maturity of three months or less at the Company’s date of purchase to be cash equivalents. The amortized cost of these investments closely approximates fair value in accordance with the Company’s policy regarding cash equivalents. Fair value of these instruments is readily determinable using the methods described below for money market funds.

Transfers

In determining where measurements lie in the fair value hierarchy, the Company uses default assumptions regarding the general characteristics of the financial instrument as the starting point. The Company then adjusts the level assigned to the fair value measurement for financial instruments held at the end of the reporting period, as necessary, based on the weight of the evidence obtained by the Company. Except for the levels assigned to its pension plan assets, which are reviewed annually, the Company reviews the levels assigned to its fair value measurements on a quarterly basis and recognizes transfers between levels of the fair value hierarchy as of the beginning of the quarter in which the transfer occurs. There were no transfers between levels of the fair value hierarchy during the first quarter of 2016 or the first quarter of 2015.

Valuation Techniques

Money Market Funds

The money market funds in which the Company is invested are considered cash equivalents and are generally highly liquid investments. Money market funds are valued at the per share (unit) published as the basis for current transactions.

Derivatives

The Company employs foreign currency and interest rate risk management strategies that periodically utilize derivative instruments to protect its interests from unanticipated fluctuations in earnings and cash flows caused by volatility in currency exchange rates and interest rates. Fair values for the Company’s derivative financial instruments are based on pricing models or formulas using current market data. Variables used in the calculations include forward points, spot rates, volatility assumptions and benchmark interest rates at the time of valuation, as well as the frequency of payments to and from counterparties and effective and termination dates. The Company believes there is minimal risk of nonperformance. At March 31, 2016 and December 31, 2015, all of the Company’s derivative instruments were designated as Level 2 measurements in the fair value hierarchy. Refer to Note 11 of the Notes to Consolidated Condensed Financial Statements for more information on the Company’s derivatives.

Senior Notes

The Company’s outstanding senior notes consist of $300 million of fixed rate senior unsecured notes issued in a public debt offering in May 2008 and due on June 1, 2018 (the “2018 senior notes”) and $400 million of fixed rate senior unsecured notes issued in a public debt offering completed in March 2013 and due on March 15, 2020 (the “2020 senior notes”).

The fair values shown in the table below are based on the prices at which the bonds have recently traded in the market as well as the overall market conditions on the date of valuation, stated coupon rates, the number of coupon payments each year and the maturity dates. The fair value of the debt is not recorded on the Company’s Consolidated Condensed Statements of Financial Position and is therefore excluded from the fair value table above. This fair value measurement is classified as Level 2 within the fair value hierarchy. Carrying values shown in the table below are net of unamortized discount and debt issuance costs.

	March 31, 2016						December 31, 2015
					Unamortized						Unamortized
				Carrying	discount and					Carrying	discount and
	Fair value		value		issuance costs		Fair value		value		issuance costs
2018 senior notes	$	318.0	$	299.3	$	0.7	$	322.4	$	299.2	$	0.8
2020 senior notes		419.4		398.2		1.8		413.2		398.1		1.9
Total	$	737.4	$	697.5	$	2.5	$	735.6	$	697.3	$	2.7

Refer to Note 4 of the Notes to Consolidated Condensed Financial Statements for more information on the senior notes.

Contingent Consideration

In the first quarter of 2016 the Company settled the contingent consideration liability for the amount at which it had been accrued as of December 31, 2015.

Other Financial Instruments

The fair values of cash and cash equivalents, trade receivables and accounts payable approximate their carrying values due to the relatively short-term nature of the instruments. Since the borrowings under the revolving credit facility and the accounts receivable program utilize variable interest rate setting mechanisms such as one-month LIBOR, the fair value of these borrowings is deemed to approximate the carrying values. Refer to Note 4 of the Notes to Consolidated Condensed Financial Statements for more information on the accounts receivable and revolving credit facilities.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis Subsequent to Initial Recognition

There were no material fair value adjustments to assets or liabilities measured at fair value on a nonrecurring basis subsequent to initial recognition during the first three months of 2016 or 2015.

3. RESTRUCTURING CHARGES

2016 Restructuring Actions

General

On February 23, 2016, the Company announced restructuring actions (the “2016 Restructuring Actions”) designed to increase profitability and operational efficiency primarily in its ISS segment. These restructuring actions are focused on optimizing the Company’s ISS structure, primarily as a result of the continued strong U.S. dollar, and are also aligned with the previously announced strategic alternatives process.

The 2016 Restructuring Actions will impact about 550 positions worldwide through December 2016, with a portion of the positions being shifted to low-cost countries. The 2016 Restructuring Actions will result in total pre-tax charges of approximately $37 million, with approximately $33 million incurred to date, and approximately $4 million remaining to be incurred in 2016. The total cash costs of the 2016 Restructuring Actions will be approximately $34 million, of which $33 million has been incurred to date and approximately $1 million remaining to be incurred in 2016.

The Company will incur total charges related to the 2016 Restructuring Actions of approximately $36 million in ISS and approximately $1 million in All Other.

Impact to 2016 Financial Results

For the three months ended March 31, 2016, charges (reversals) for the Company’s 2016 Restructuring Actions were recorded in the Consolidated Condensed Statements of Earnings as follows:

	Restructuring
	and related		Impact on
	charges		Operating
	(reversals)		income
Employee termination benefit charges (reversals)	$	(7.6)	$	(7.6)

The Company incurred restructuring charges (reversals) in connection with the 2016 Restructuring Actions in the Company’s segments as follows for the three months ended March 31:

	2016
ISS	$	(8.8)
All other		1.2
Total charges (reversals)	$	(7.6)

For the three months ended March 31, 2016, the Company incurred employee termination benefit charges (reversals), which include severance, medical and other benefits. The Company experienced higher levels of attrition than expected during the first quarter of 2016 as a result of the strategic alternatives process as well as announced restructuring programs. The Company’s cost savings and headcount reduction targets have not changed related to these restructuring actions. Charges (reversals) for the 2016 Restructuring Actions and all of the other restructuring actions were recorded in accordance with FASB guidance on employers’ accounting for postemployment benefits and guidance on accounting for costs associated with exit or disposal activities, as appropriate.

Pension and postretirement plan curtailment and termination benefit losses related to the 2016 Restructuring Actions were not included in the tables above. Refer to Note 10 of the Notes to Consolidated Condensed Financial Statements for more information.

Liability Rollforward

The following table represents a rollforward of the liability incurred for employee termination benefits in connection with the 2016 Restructuring Actions. The total restructuring liability as of March 31, 2016 is included in Accrued liabilities on the Company’s Consolidated Condensed Statements of Financial Position.

	Employee
	Termination
	Benefits
Balance at January 1, 2016	$	40.4
Costs incurred		–
Reversals (1)		(7.6)
Total restructuring charges (reversals), net		(7.6)
Payments and other (2)		(1.8)
Balance at March 31, 2016	$	31.0

(1) Reversals due to changes in estimates for employee termination benefits and attrition.

(2) Other consists of changes in the liability balance due to foreign currency translations.

2015 Restructuring Actions

General

On July 21, 2015, the Company announced restructuring actions (the “2015 Restructuring Actions”) designed to increase profitability and operational efficiency. These Company-wide restructuring actions are broad-based but primarily capture the anticipated cost and expense synergies from the Kofax and ReadSoft acquisitions. Primary Company-wide impact will be general and administrative, marketing and development positions as well as the consolidation of regional facilities.

The 2015 Restructuring Actions will impact about 500 positions worldwide through December 2016, with approximately one-third of the positions being shifted to low-cost countries. The 2015 Restructuring Actions will result in total pre-tax charges of approximately $33 million, with $32 million incurred to date and approximately $1 million remaining to be incurred in 2016. The total cash costs of the 2015 Restructuring Actions will be approximately $32 million, with $31 million accrued to date and approximately $1 million remaining to be incurred in 2016.

The Company will incur total charges related to the 2015 Restructuring Actions of approximately $10 million in ISS, approximately $4 million in All Other and approximately $19 million in Enterprise Software.

Impact to 2016 Financial Results

For the three months ended March 31, 2016, charges (reversals) for the Company’s 2015 Restructuring Actions were recorded in the Consolidated Condensed Statements of Earnings as follows:

			Restructuring
	Selling,		and related		Impact on
	general and		charges		Operating
	administrative		(reversals)		income
Accelerated depreciation charges	$	0.8	$	–	$	0.8
Employee termination benefit charges (reversals)		–		(3.8)		(3.8)
Total restructuring charges (reversals)	$	0.8	$	(3.8)	$	(3.0)

For the periods indicated above, the Company incurred employee termination benefit charges (reversals), which include severance, medical and other benefits. The Company experienced higher levels of attrition than expected during the first quarter of 2016 as a result of the strategic alternatives process as well as announced restructuring programs. The Company’s cost savings and headcount reduction targets have not changed related to these restructuring actions. Charges (reversals) for the 2015 Restructuring Actions and all of the other restructuring actions were recorded in accordance with FASB guidance on employers’ accounting for postemployment benefits and guidance on accounting for costs associated with exit or disposal activities, as appropriate.

The Company incurred restructuring charges (reversals) in connection with the 2015 Restructuring Actions in the Company’s segments as follows for the three months ended March 31:

	2016
ISS	$	(1.0)
Enterprise Software		(2.7)
All other		0.7
Total charges (reversals)	$	(3.0)

Liability Rollforward

The following table represents a rollforward of the liability incurred for employee termination benefits in connection with the 2015 Restructuring Actions.

	Employee
	Termination
	Benefits
Balance at January 1, 2016	$	28.1
Costs incurred		0.7
Reversals (1)		(4.5)
Total restructuring charges (reversals), net		(3.8)
Payments and other (2)		(8.2)
Balance at March 31, 2016	$	16.1

(1) Reversals due to changes in estimates for employee termination benefits and attrition.

(2) Other consists of changes in the liability balance due to foreign currency translations.

Summary of Other Restructuring Actions

General

As part of Lexmark’s ongoing strategy to increase the focus of its talent and resources on higher usage business platforms, the Company announced various restructuring actions (“Other Restructuring Actions”) over the past several years. The Other Restructuring Actions primarily include exiting the development and manufacturing of the Company’s remaining inkjet hardware, with reductions primarily in the areas of inkjet-related manufacturing, research and development, supply chain, marketing and sales as well as other support functions. The Other Restructuring Actions are considered substantially completed and any remaining charges to be incurred from these actions are expected to be immaterial.

Impact to 2016 and 2015 Financial Results

For the three months ended March 31, 2016 and 2015 charges (reversals) for the Company’s Other Restructuring Actions were recorded in the Consolidated Condensed Statements of Earnings as follows:

	Three Months Ended
	March 31, 2016				March 31, 2015
	Restructuring								Restructuring
	and related		Impact on						and related		Impact on
	charges		operating		Restructuring-		Impact on		charges		operating
	(reversals)		income		related costs		Gross Profit		(reversals)		income
Accelerated depreciation charges	$	–	$	–	$	0.1	$	0.1	$	–	$	0.1
Employee termination benefit charges (reversals)		–		–		–		–		(0.2)		(0.2)
Contract termination and lease charges (reversals)		(0.2)		(0.2)		–		–		–		–
Total restructuring charges (reversals)	$	(0.2)	$	(0.2)	$	0.1	$	0.1	$	(0.2)	$	(0.1)

For the three months ended March 31, 2016 and 2015, the Company incurred restructuring charges (reversals) in connection with the Other Restructuring Actions in the Company’s segments as follows:

	Three Months Ended
	March 31,		March 31,
	2016		2015
ISS	$	–	$	0.1
All other		–		0.2
Enterprise Software		(0.2)		(0.4)
Total charges (reversals)	$	(0.2)	$	(0.1)

Liability Rollforward

The following table represents a rollforward of the liability incurred for employee termination benefits and contract termination and lease charges in connection with the Company’s Other Restructuring Actions.

	Employee		Contract
	Termination		Termination &
	Benefits		Lease Charges		Total
Balance at January 1, 2016	$	0.4	$	0.5	$	0.9
Costs incurred		0.1		–		0.1
Reversals (1)		(0.1)		–		(0.1)
Total restructuring charges (reversals), net		–		–		–
Payments and other (2)		(0.2)		(0.3)		(0.5)
Balance at March 31, 2016	$	0.2	$	0.2	$	0.4

(1) Reversals due to changes in estimates for employee termination benefits.

(2) Other consists of changes in the liability balance due to foreign currency translations.

4. DEBT

The carrying value of the Company’s outstanding long-term debt consists of the following:

	March 31,		December 31,
	2016		2015
Trade receivables facility	$	73.5	$	76.0
Revolving credit facility		224.5		288.0
Senior notes, due 2018		299.8		299.8
Senior notes, due 2020		400.0		400.0
	$	997.8	$	1,063.8
Less: Current portion of long-term debt		(3.5)		–
Less: Unamortized issuance costs		(2.3)		(2.5)
Total long-term debt, net of unamortized issuance costs	$	992.0	$	1,061.3

In addition to the information in the table above, during the first quarter of 2016, the Company repaid $66.0 million of borrowings which is presented gross on the Consolidated Condensed Statements of Cash Flows. The Company presents borrowings and repayments of less than 90 days on a net basis on the Consolidated Statements of Cash Flows and such amounts were $206.5 million and $206.5 million, respectively, for the three months ended March 31, 2016 and $104.0 million and $104.0 million, respectively, for the three months ended March 31, 2015.

Trade Receivables Facility

In the U.S., the Company, Lexmark Enterprise Software, LLC (“LESL”) and Kofax, Inc. transfer a majority of their receivables to a wholly-owned subsidiary, Lexmark Receivables Corporation (“LRC”), which then may transfer the receivables on a limited recourse basis to an unrelated third party. The financial results of LRC are included in the Company’s consolidated financial results since it is a wholly-owned subsidiary. LRC is a separate legal entity with its own separate creditors who, in a liquidation of LRC, would be entitled to be satisfied out of LRC’s assets prior to any value in LRC becoming available for equity claims of the Company. The Company accounts for transfers of receivables from LRC to the unrelated third party as a secured borrowing with the pledge of its receivables as collateral since LRC has the ability to repurchase the receivables interests at a determinable price. At March 31, 2016, the Company had total accounts receivable pledged as collateral of $121.5 million held by LRC which were included in Trade receivables in the Company’s Consolidated Condensed Statements of Financial Position.

On August 27, 2015, the trade receivables facility was amended by extending the term of the facility to October 6, 2017. In addition, Kofax, Inc. became a new originator under the facility, permitting advancements under the facility as accounts receivables are originated by Kofax, Inc. and sold to LRC. The maximum capital availability under the facility remains at $125 million under the amended agreement. Interest on borrowings is calculated using daily 1-month LIBOR index or conduit commercial paper rates plus a spread of 0.40% along with a liquidity fee of 0.40%.

This facility contains customary affirmative and negative covenants as well as specific provisions related to the quality of the accounts receivables transferred. As collections reduce previously transferred receivables, the Company, LESL and Kofax, Inc. may replenish these with new receivables. Lexmark, LESL and Kofax, Inc. bear a limited risk of bad debt losses on the trade receivables transferred, since the Company, LESL and Kofax, Inc. over-collateralize the receivables transferred with additional eligible receivables. Lexmark, LESL and Kofax, Inc. address this risk of loss in the allowance for doubtful accounts. Receivables transferred to the unrelated third-party may not include amounts over 90 days past due or concentrations over certain limits with any one customer. The facility also

	2016		2015
Balance at January 1	$	171.1	$	180.3
Revenue deferred for new extended warranty contracts		16.9		41.4
Revenue recognized		(21.8)		(45.4)
Balance at March 31	$	166.2	$	176.3
Current portion		71.7		74.6
Non-current portion		94.5		101.7
Balance at March 31	$	166.2	$	176.3

			Lexmark International, Inc.
			Class A Common Stock
Declaration Date	Record Date	Payment Date	Dividend Per Share		Cash Outlay
February 18, 2016	February 29, 2016	March 11, 2016	$	0.36	$	22.5

Pension Benefits:	Three Months Ended
	March 31
	2016		2015
Service cost	$	1.5	$	1.5
Interest cost		8.1		7.6
Expected return on plan assets		(10.0)		(11.2)
Actuarial net loss		17.2		–
Curtailment and termination benefit loss		2.4		–
Net periodic benefit cost (credit)	$	19.2	$	(2.1)

	March 31,
Long (Short) Positions by Currency (in USD)	2016
EUR / USD	$	208.2
GBP / USD		37.2
EUR / GBP		(34.5)
Other, net		(52.8)
Total	$	158.1

Foreign Exchange	March 31,		December 31,
Contracts	2016		2015
Gross asset position	$	9.2	$	20.5
Gross (liability) position		(18.8)		(9.5)

			Recognition of
			Pension and Other
	Foreign		Postretirement		Unrealized		Accumulated
	Currency		Benefit Plans		(Loss) Gain on		Other
	Translation		Prior Service Credit,		Cash Flow		Comprehensive
	Adjustment		Net of (Amortization)		Hedges		(Loss) Earnings
Balance at December 31, 2015	$	(175.6)	$	0.7	$	9.9	$	(165.0)
Other comprehensive (loss) earnings before reclassifications		18.5		–		(17.5)		1.0
Amounts reclassified from accumulated other comprehensive (loss) earnings		–		(0.1)		(1.1)		(1.2)
Net current-period other comprehensive (loss) earnings		18.5		(0.1)		(18.6)		(0.2)
Balance at March 31, 2016	$	(157.1)	$	0.6	$	(8.7)	$	(165.2)

	Amount Reclassified from
	Accumulated Other
	Comprehensive (Loss) Earnings
Details about Accumulated Other	Three Months Ended
Comprehensive (Loss) Earnings	March 31,		March 31,
Components	2016		2015		Affected Line Item in the Statements of Earnings
Recognition of pension and other postretirement benefit plans prior service credit
Amortization of prior service benefit	$	0.2	$	0.2	Note 10, Employee Pension and Postretirement Plans
		(0.1)		(0.1)	Tax (liability) benefit
	$	0.1	$	0.1	Net of tax

Unrealized gains and (losses) on marketable securities
Non-OTTI	$	–	$	0.5	Other expense (income), net
		–		(0.1)	Tax (liability) benefit
	$	–	$	0.4	Net of tax

Unrealized gain (loss) on cash flow hedges
	$	1.2	$	16.4	Revenue
		–		0.5	Other expense (income), net
		(0.1)		(1.7)	Tax (liability) benefit
	$	1.1	$	15.2	Net of tax

Total reclassifications for the period	$	1.2	$	15.7	Net of tax

Other Postretirement Benefits:	Three Months Ended
	March 31
	2016		2015
Service cost	$	0.1	$	0.1
Interest cost		0.2		0.2
Amortization of prior service (benefit) cost		(0.2)		(0.2)
Actuarial net loss		0.5		–
Curtailment and termination benefit loss		0.6		–
Net periodic benefit cost	$	1.2	$	0.1

	Net Asset Position				Net (Liability) Position
Foreign Exchange	March 31,		December 31,		March 31,		December 31,
Contracts	2016		2015		2016		2015
Gross asset position	$	1.1	$	2.2	$	–	$	–
Gross (liability) position		–		–		(1.3)		(2.4)
Net asset (liability) position (1)		1.1		2.2		(1.3)		(2.4)
Gross amounts not offset (2)		–		–		–		–
Net amounts	$	1.1	$	2.2	$	(1.3)	$	(2.4)

	Recorded in
	Cost of revenue*				Other expense (income), net
	Three Months Ended				Three Months Ended
Fair Value Hedging	March 31				March 31
Relationships	2016		2015		2016		2015
Foreign exchange contracts	$	(1.3)	$	4.2	$	(6.3)	$	0.4
Underlying		2.2		(5.0)		6.5		(0.1)
Total	$	0.9	$	(0.8)	$	0.2	$	0.3

	Three Months Ended
	March 31
(Dollars in millions)	2016		2015		% Change
ISS	$	668.8	$	765.5	(13)	%
Enterprise Software		137.4		86.5	59
Total revenue	$	806.2	$	852.0	(5)	%

	Three Months Ended
	March 31
(Dollars in millions, except per share amounts)	2016		2015
Net (loss) earnings	$	(39.4)	$	20.2

Basic (loss) earnings per share	$	(0.63)	$	0.33
Diluted (loss) earnings per share/	$	(0.63)	$	0.32

	2016
	Actions		2016 Actions				2015 Actions						Other
	Restructuring		Restructuring-				Restructuring		2015 Actions				Restructuring
	Charges		related		2016		Charges		Restructuring		2015		Charges		Other		Total
	(Reversals)		Pension Costs		Actions		(Reversals)		Project		Actions		(Reversals)		Actions		All
(Dollars in millions)	(Note 3)		(Note 10)		Total		(Note 3)		Costs		Total		(Note 3)		Total		Actions
Accelerated depreciation charges	$	–	$	–	$	–	$	0.8	$	–	$	0.8	$	–	$	–	$	0.8
Employee termination benefit charges (reversals)		(7.6)		–		(7.6)		(3.8)		–		(3.8)		–		–		(11.4)
Contract termination and lease charges (reversals)		–		–		–		–		–		–		(0.2)		(0.2)		(0.2)
Pension and other postretirement curtailment and termination benefit loss		–		3.0		3.0		–		–		–		–		–		3.0
Project costs		–		–		–		–		0.8		0.8		–		–		0.8
Total restructuring charges (reversals) and project costs	$	(7.6)	$	3.0	$	(4.6)	$	(3.0)	$	0.8	$	(2.2)	$	(0.2)	$	(0.2)	$	(7.0)

	Selling, general		Restructuring		Impact on
	and		and related		Operating
(Dollars in millions)	administrative		charges (reversals)		income
Accelerated depreciation charges	$	0.8	$	–	$	0.8
Employee termination benefit charges (reversals)		–		(11.4)		(11.4)
Contract termination and lease charges (reversals)		–		(0.2)		(0.2)
Pension and other postretirement curtailment and termination benefit loss		3.0		–		3.0
Project costs		0.8		–		0.8
Total restructuring charges (reversals) and project costs	$	4.6	$	(11.6)	$	(7.0)

	MAR 2016	DEC 2015	MAR 2015	DEC 2014
Days of sales outstanding	47	40	42	37
Days of inventory	42	36	44	34
Days of payables	97	77	92	72
Cash conversion days	(8)	(1)	(6)	(1)

Period	Total Number of Shares Purchased		Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) (1)
January 1-31, 2016	–	$	–	–	$	58.6
February 1-29, 2016	116,558		30.08	–		55.1
March 1-31, 2016	4,610		32.25	–		54.9
Total	121,168	$	30.16

	Lexmark International, Inc.
	(Registrant)

April 29, 2016

	/s/ David Reeder
	David Reeder
	Vice President and Chief Financial Officer

LEXMARK INTERNATIONAL INC /KY/ - FORM 10-Q - April 29, 2016

Attached files

LEXMARK INTERNATIONAL INC /KY/ Reports