Lexmark 2013 Annual Report Download - page 32

In order to support these strategic focus areas, and to allow Lexmark to participate in the growing market to manage unstructured data
and processes, and to further strengthen the Company’s products, content/business process management solutions and MPS, the
Company acquired Brainware, Nolij, ISYS and Acuo Technologies in 2012, and Twistage, Access Via, Saperion and Pacsgear in
2013. These acquisitions are included in the Perceptive Software segment.
While focusing on core strategic initiatives, Lexmark has taken actions over the last few years 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 and the increased use of shared service centers in low-cost countries, to the exit of inkjet
technology. In 2012, the Company announced restructuring actions including exiting the development and manufacturing of its
remaining inkjet hardware. In the second quarter of 2013, the Company and Funai Electric Co., Ltd. (“Funai”) entered into a Master
Inkjet Sale Agreement of the Company’s inkjet-related technology and assets to Funai for total cash consideration of $100 million.
Included in the sale were one of the Company’s subsidiaries, certain intellectual property and other assets of the Company. The
Company will continue to provide service, support and aftermarket supplies for its current inkjet installed base. The sale closed in the
second quarter of 2013. With this announcement, Lexmark has focused its printing and MFP development activities solely in laser-
based technologies.
During the fourth quarter of 2013, the Company changed its accounting policy for pension and other postretirement benefit plan asset
and actuarial gains and losses. Under the new accounting policy, these gains and losses will be recognized in net periodic benefit cost
in the year in which they occur rather than amortized over time. In addition, in the fourth quarter of 2013, Lexmark changed its
method of allocating the elements of net periodic pension and other postretirement plan benefit cost to reporting segments. Results for
all periods presented in this Annual Report on Form 10-K reflect the retrospective application of the accounting policy and segment
allocation changes. Refer to Part II, Item 8, Notes 2 and 20 of the Notes to Consolidated Financial Statements for additional
information.
The Company remains committed on its stated capital allocation framework of returning, on average, more than 50 percent of free
cash flow to its shareholders through dividends and share repurchases while pursuing acquisitions and organic investments that
support the strengthening and growth of the Company.
Lexmark’s 2013 revenue was down 3% YTY, primarily due to the decline in inkjet revenue related to the decision to exit inkjet
technology. Operating income increased 114% YTY primarily driven by cost and expense reductions executed in 2012 and 2013
related to the Company’s 2012 Restructuring actions, a $69.2 million, net pre-tax divestiture-related benefit ($73.5 million gain on
sale offset partially by $4.3 million of divestiture-related costs), and a pension and other postretirement benefit plan asset and actuarial
net gain of $83.0 million.
As in 2013, the Company is focused in 2014 on revenue and profit growth from the strategic imaging and software segments of the
business, particularly MPS offerings and Perceptive Software. While this growth will be dampened by the remaining Inkjet Exit
headwind in 2014, this headwind will decline over time.
Refer to the section entitled “RESULTS OF OPERATIONS” that follows for a further discussion of the Company’s results of
operations.
Trends and Opportunities
Lexmark serves both the distributed printing and imaging, and content and process management markets with a focus on business
customers. Lexmark’s enterprise content and process management platform supports traditional business content as well as rich media
and medical image content, and includes enterprise search, intelligent capture, DOM, and business process and case management.
Lexmark’s healthcare offering includes an industry leading, standards based and highly secure, content repository and VNA that
integrates all patient unstructured information across the enterprise to enable easy access through an EMR system along with
workflow automation and information sharing within and between facilities. Lexmark management believes the total relevant market
opportunity of these markets combined in 2013 was approximately $80 billion. Lexmark management believes that the total relevant
distributed laser printing and imaging market opportunity was approximately $70 billion in 2013, including printing hardware,
supplies and related services. This opportunity includes printers and multifunction devices as well as a declining base of copiers and
fax machines that are increasingly being integrated into multifunction devices. Based on industry information, Lexmark management
believes that the overall distributed printing market declined slightly in 2013. The distributed printing industry is expected to
experience flat to low single digit declining revenue overall over the next few years but, continued growth is expected in MPS,
multifunction products (“MFPs”), and color lasers which are all areas of focus for Lexmark. MPS and fleet solutions are expected to
continue to experience double digit annual revenue growth rates over the next few years and the relevant content and process
management software markets that Lexmark participates in, are projected to grow approximately 10% annually over the next few
years, both based on industry analyst estimates. In 2013, the total relevant content and process management software market was
approximately $10 billion, excluding related professional services. However, management believes the total addressable market is
significantly larger due to relatively low penetration of content and process management software solutions worldwide.
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