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Lexmark Reports 3Q Results, Announces Plant Closure

October 24, 2007

• Lexmark reports third-quarter revenue of $1.195 billion, GAAP EPS of $0.48, including $0.12 for restructuring-related activities
• Company generates cash of $142 million during third quarter
• Restructuring plan expected to generate $40 million savings in 2008 and $60 million annualized savings

Lexmark International, Inc. (NYSE: LXK) announced financial results for the third quarter of 2007. Third-quarter revenue was $1.195 billion, down 3 percent compared to revenue of $1.235 billion last year. Third-quarter GAAP earnings per share were $0.48. Earnings per share for the third quarter of 2007 would have been $0.60 excluding $0.12 per share for restructuring-related activities. In the third quarter of 2007, the GAAP provision for income taxes was a benefit of $18 million, reflecting tax benefits due to the finalization of certain tax audits in the quarter and a reduction in the expected full-year tax rate. Third-quarter 2006 GAAP earnings per share were $0.85. Earnings per share for the third quarter of 2006 would have been $0.95 excluding $0.10 per share for restructuring-related activities.

Third-quarter 2007 business segment revenue of $728 million grew 5 percent year to year and consumer segment revenue of $468 million declined 13 percent compared to a year ago. Third-quarter 2007 gross profit margin was 27.8 percent, the operating expense to revenue ratio was 26.1 percent, the operating income margin was 1.7 percent, and net earnings were $45 million. Third-quarter 2007 operating income includes $15 million pretax charges in connection with the company’s restructuring-related actions.

Third-quarter 2006 gross profit margin was 32.6 percent, the operating expense to revenue ratio was 23.3 percent, the operating income margin was 9.3 percent, and net earnings were $86 million. Third-quarter 2006 results include $13 million restructuring-related pretax charges.

On a non-GAAP basis, excluding third-quarter restructuring-related charges:

• Third-quarter 2007 gross profit margin would have been 28.2 percent, down 4.7 percentage points from 32.9 percent in the same period last year, principally due to lower product margins partially offset by a favorable product mix.
• Third-quarter 2007 operating expense as a percentage of revenue would have been 25.2 percent, up 2.7 percentage points from 22.5 percent in the same quarter last year, driven by increased marketing and sales and product development investments.
• Third-quarter 2007 operating income margin would have been 2.9 percent, down 7.5 percentage points from 10.4 percent last year, primarily reflecting an operating loss in the consumer segment in the quarter.
• Third-quarter 2007 net earnings would have been $57 million compared to $95 million in the third quarter of 2006.

The company ended the quarter with $639 million in cash and marketable securities. Third-quarter net cash provided by operating activities was $142 million. Capital expenditures for the quarter were $39 million. Depreciation and amortization in the quarter was $50 million. Lexmark did not repurchase its stock during the third quarter. The company’s remaining share repurchase authorization was approximately $295 million at quarter end.

"Although our business market segment continues to meet our expectations and our third quarter earnings per share were better than expected, EPS were significantly below a year ago, reflecting the continuation of a very challenging situation in our consumer market segment. We are taking steps to shift our consumer market segment focus to higher-usage customers and to improve our cost and expense structure. At the same time, we are committed to continuing our strategic investments in new product development and branding to strengthen our position in growth market segments," said Paul J. Curlander, Lexmark chairman and chief executive officer.

The company announced a restructuring plan today which includes:

• Closure of one of the company’s inkjet supplies manufacturing facilities in Mexico, and additional optimization measures at the remaining inkjet facilities in Mexico.
• Reduction of business support cost and expense structure by further consolidating activity globally and expanding the use of shared service centers in lower-cost regions. The areas impacted are supply chain, service delivery, general and administrative expense, as well as marketing and sales support functions.
• Focusing consumer segment marketing and sales efforts into countries or geographic regions that have the highest supplies usage.
  
  These actions are expected to impact approximately 1,650 positions by the end of 2008. Most of the impacted positions are being moved to lower-cost countries.

The company estimates that these actions will result in pretax costs of approximately $20 million in 2007, and $70 million in 2008. Total savings from the restructuring are expected to be about $40 million in 2008, and to be approximately $60 million annually once these actions are completed.

Legal Partner and Wireless Inkjets Capitalize on Important Industry Dynamics
During the quarter, Lexmark introduced the Lexmark Legal Partner, a laser multifunction product that is customized specifically for the legal industry. This product, along with the previously announced Education Station and Clinical Assistant, allows Lexmark to capitalize on its extensive research to identify unique document workflow management requirements and trends associated with specific industry verticals in the small and medium business space.

Additions to the new wireless line of inkjet products announced in the third quarter include three full-featured all-in-one printers delivering industry-leading value for small office/home office professionals and combining the flexibility of wireless connectivity, the efficiency of automatic two-sided printing and the convenience of easy installation. Lexmark now offers a full line of the most affordable wireless printers in the market.

Looking Forward
In the fourth quarter of 2007, the company expects revenue to be down in the low- to mid-single digit percentage range year over year. It expects fourth-quarter 2007 GAAP EPS to be in the range of $0.32 to $0.42 per share. Restructuring-related costs and expenses are expected to be approximately $0.18 per share in the fourth quarter of 2007. Excluding these restructuring-related costs and expenses, non-GAAP EPS is expected to be in the range of $0.50 to $0.60 per share. GAAP EPS in the fourth quarter of 2006 were $0.91, or $1.05 excluding $0.14 per share restructuring-related charges.