Lexmark International Management Discusses Q3 2012 Results - Earnings Call Transcript

Oct.23.12 | About: Lexmark International, (LXK)

Lexmark International (NYSE:LXK)

Q3 2012 Earnings Call

October 23, 2012 8:30 am ET

Executives

John Morgan

Paul A. Rooke - Chairman, Chief Executive Officer and Chairman of Executive Committee

John W. Gamble - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Kathryn L. Huberty - Morgan Stanley, Research Division

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Benjamin A. Reitzes - Barclays Capital, Research Division

A.M. Sacconaghi - Sanford C. Bernstein & Co., LLC., Research Division

Jim Suva - Citigroup Inc, Research Division

Robert Schiffman - Crédit Suisse AG, Research Division

Shannon S. Cross - Cross Research LLC

Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division

Alban Gashi - Crédit Suisse AG, Research Division

Operator

Thank you for standing by, and welcome to the Lexmark International Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded on Tuesday, October 23, 2012.

I would now like to turn the call over to John Morgan, Lexmark's Director of Investor Relations. Please go ahead, John.

John Morgan

Good morning, and thank you for joining us. Chairman and CEO, Paul Rooke; and EVP and CFO, John Gamble, are with me this morning. After their prepared remarks, we will open the call for your questions as time permits. [Operator Instructions]

Please note that Paul and John will be referring to specific earnings presentation slides by page number. These slides were posted to our Investor Relations website located at investor.lexmark.com earlier this morning. Paul and John will be referring to non-GAAP measures during their presentation unless otherwise noted. Pursuant to the requirements of Regulation G, the company has provided reconciliations of GAAP to non-GAAP measures and a discussion of management's use of non-GAAP measures in the Supplemental Materials section of the earnings presentation slides.

Lexmark anticipates that the record date of its fourth quarter 2012 dividend will be November 30, with an anticipated payment date of November 14. Please note that future quarterly dividend payments are subject to board approval. We have also included our anticipated dividend schedule for 2013 in the Supplemental section of the earnings presentation.

Following the conclusion of this conference call, a complete replay will also be made available on our Investor Relations website. As a reminder, any of today's remarks that are not statements of historical fact are forward-looking statements and involve certain risks and uncertainties that are disclosed in the Safe Harbor section of our earnings releases and SEC filings. Actual results may differ materially from such statements, and Lexmark undertakes no obligation to update any forward-looking statements.

With that, I'll turn it over to Paul.

Paul A. Rooke

Thank you, John, and good morning to everyone. As John said, we'll be using a presentation slide deck. We'll refer to the slide numbers as we go to keep everyone on the same page. So let's begin.

Starting with Slide 4. Our third quarter financial results reflected good cash and profit performance, with earnings per share exceeding the July guidance. Revenue was in line with the July guidance but dampened year-to-year by the headwinds of currency, weakness in Europe and the natural decline from our decision to exit Inkjet. Our full year 2012 guidance is also in line with our July range but at the lower end due to European weakness, our assumption that we will sell off the remaining branded inkjet hardware and inventory by year-end and Perceptive Software's growth, while up strongly, being less than we expected in the third quarter.

Now regarding the market, relative to what we saw in the second quarter, the overall imaging market remained soft, appearing slightly worse than what we outlooked in July for Europe, with potential orders being delayed or canceled. This is not unlike what we saw back in 2008, 2009 when we had customers decide to defer or postpone new machine purchases and instead, maintain their current fleet of devices for a while rather than replace them. The installed base didn't change, it just got older. Usage continued but hardware sales slowed. We still believe the majority of the softness we're seeing in the market currently is driven by belt tightening due to economic uncertainty rather than any specific trend in the imaging market.

Now we remain focused on creating a higher value portfolio for Lexmark, and we continued progressing here. Perceptive Software and MPS both grew in the third quarter, with Perceptive Software again achieving strong double-digit revenue growth. We also announced last week a wide breadth of laser products further advancing our smart MFP leadership and enabling a growing array of workflow solutions powered by Perceptive Software. We remain committed to our long-term operating margin assumption of 11% to 13%, and as you saw in August, we announced a significant restructuring action, driven by the Inkjet exit, to improve our profitability. We're currently managing through this action and when complete is expected to deliver ongoing savings of $95 million.

Finally, we continue to maintain our capital allocation discipline to deliver shareholder value. Our focus is squarely on the needs of business customers as we build and grow our solutions business through organic expansion and acquisitions. And we remain committed to our capital allocation framework, returning greater than 50% of our free cash flow to shareholders through dividends and share repurchases, on average, amounting to more than $500 million since July of 2011.

Now on Slide 5, you can see the third quarter financial highlights. Revenue for the third quarter was $921 million, down 11% year-to-year and in line with our July guidance. We saw continued revenue growth year-to-year in our strategic focus areas, with Perceptive Software revenue growing 88% for the quarter, driven by strong organic growth of 22% in addition to the growth from the recent software acquisitions. We also had continued growth in Managed Print Services. However, overall revenue growth year-to-year was dampened primarily by the 3 headwinds I mentioned earlier: currency, a weaker European market and the planned ongoing Inkjet decline.

Now our operating income margin was 10.7% for the third quarter, up slightly year-to-year. Now there are a few dynamics to note here. First, we maintained a strong gross profit margin of about 40%, better than we expected and an encouraging result in light of the strong currency headwinds as we continued shifting the mix of our business to higher-value hardware and software. Laser supplies also exceeded our expectations as we entered the quarter. Second, operating expense came in slightly lower than we expected and was down year-to-year, driven by larger reductions in ISS more than compensating for the increased software investments and acquisitions to drive future growth.

Finally, while Perceptive Software's revenue was up strongly year-to-year, it was less than we expected, driving a larger-than-expected operating income loss as we continue to invest for growth. Now for the next several quarters, we plan to limit Perceptive Software's expense levels to allow expected revenue growth to catch up and deliver positive operating margins in 2013.

Earnings per share were $0.94 for the third quarter, about flat year-to-year but well above our guidance, driven by better-than-expected operating income with a lower share count, driven by the additional 100 million of share repurchase, more than offset by the higher-than-expected tax rate. We also generated $95 million of free cash flow resulting from good execution in our inventory and payables performance.

Now moving to Slide 6. You can see how the composition of our revenue is shifting as we evolve to an imaging and software solutions company. As we noted on our August call, we've added some additional disclosure here to help you see the trends. On the left, you can see 3 sections. The Inkjet Exit section is the revenue we're exiting, comprised of the past consumer Inkjet, the prior legacy, and the remaining business Inkjet, which we announced in August that we're exiting. Inkjet exit revenue is expected to decline over time at a rate of about 40% as the trailing supplies revenue from the installed base naturally decreases.

The Imaging Solutions section is comprised of both MPS and non-MPS revenue. The MPS part is our enterprise Managed Print Services revenue, which has been consistently growing in excess of the market. The non-MPS portion is that which flows through our partners, some of which flows through transactional partners and some of which flows through copier dealers that are managing fleets of our devices as a service. Now the third section is the Perceptive Software revenue that we've broken out before.

Now combining the Imaging Solutions and Perceptive Software revenue, the red and the blue sections together, this was 84% of the third quarter revenue and will continue to grow as a percent of our total revenue as the Inkjet exit revenue declines over time. For the third quarter, this combined growth was slightly negative, excluding currency, as the growth in Perceptive and MPS revenue was more than offset by the non-MPS decline.

Now combining the Perceptive Software and MPS revenue, only the blue sections, representing higher value add, longer-term solution relationships with customers, the software and services business grew 13% in the third quarter. Additionally, we expect that as the software revenue grows and the margins expand here, this will be a significant driver of future profitability.

Now on Slide 7, you can see the significant announcement we made last week of a broad array of new workgroup laser products, including 18 solutions-enabled smart MFPs. This announcement is significant because of the breadth and depth of the products and solutions included in it. With 42 products announced, this represents a refresh of about 70% of our laser product line.

Now while broad in scope, this new lineup provides for our customers a deep offering of solutions and services capabilities, higher performance and improved sustainability. For example, the broad range of solutions-enabled smart MFPs, some featuring much quicker scanning, combined with a Perceptive Software portfolio, now transform time-consuming, often manual processes into streamlined, automated workflows.

In addition, with the embedded intelligence for improved fleet diagnostics, these products will extend Lexmark's smart MFP leadership even further. And while these smart MFPs bring strong solutions and services capabilities, the broader line makes significant improvements in the fundamentals, with faster printing, more reliable paper handling and improved sustainability, featuring higher-yield cartridges, lower energy consumption and an expanded recycling program. We're excited about this competitive new lineup and believe it will further strengthen our MPS and solutions propositions.

Now on Slide 8, you can see our unit share position in the high-usage, large workgroup segment for A4 lasers. For those not familiar with the A4 laser workgroup designation, this simply refers to the market of laser printers and MFPs that are designed for letter- and legal-sized documents, in contrast to the larger A3 or 11-by-17 format typically designed in the floor-standing copier devices.

Now these large workgroup A4 laser devices are increasingly displacing the larger copier devices due to their smaller size, lower cost and improved functionality. Now according to IDC, for the last 4 quarters, ending the second quarter of '12, Lexmark continued to grow share in this large workgroup A4 laser segment. This is important since these are higher-usage devices which drive supplies revenue.

Moving to Slide 9. Over the last year, Lexmark has been recognized as a Managed Print Services leader by 4 leading independent research firms. Our leadership position in smart MFPs, further strengthened by our product announcement last week and the seamless integration with Perceptive Software's growing array of solutions, combined with the world-class MPS tools, processes and skills we've built and refined over the past 12 years, enables us to not only execute but also bring additional business process value to our customers.

As further proof, our overall managed print services revenue grew again this quarter, and within the last 24 months, we competed for and won 17 new Managed Print Services contracts with companies listed on either the Global 500 or Fortune 500 list, which represent incremental business to Lexmark. We continue to believe this is a clear indicator that our value proposition here is strong and continues to be differentiating with these large discriminating customers.

Now on Slide 10, you can see how we're creating synergies between our Imaging Solutions unit and the newer Perceptive Software unit to grow each faster. Looking at the red section of this slide, the Imaging Solutions unit is leveraging its global, large account presence and infrastructure to open doors quickly and to integrate the new Perceptive Software capabilities into our industry solutions, enabling Lexmark to penetrate even further into these accounts. The cash generating capability of the Imaging unit also continues to provide funds for additional growth.

In the blue section, Perceptive Software is providing more advanced software capabilities to further differentiate and bring more value to grow our Managed Print Services offering. Additionally, Perceptive Software's presence and expertise in health care, higher education and back-office operations provides further access for the Imaging unit to expand into as well.

And on Slide 11, we're continuing to move towards our vision of creating broader, higher-value, industry-specific solutions for our customers. While we have increased the breadth and depth of our technology portfolio with the recent acquisitions, the competitive advantage comes in how we integrate these together to provide differentiated, seamless, industry-specific solutions that can help our customers capture, manage and access key and structured content that today, they're just simply completely missing, processing manually or having difficulty accessing.

We are leveraging our MPS and smart MFP leadership and our enterprise presence, along with Perceptive Software's new Intelligent Capture solution, powered by Brainware, to help our customers automatically extract key content from documents scanned from their smart MFPs, mobile devices or even electronic feeds, reducing time and manual labor costs in the process. Our solutions also help to manage this unstructured content that's been captured and connect it to the processes or other structured content already residing in their existing core systems.

And then, with our search and analytics capabilities for both content and process, we can give customers the ability to unlock, visualize key content or process relationships they've never seen before. Think of Lexmark now being able to help customers manage the unmanaged, whether it's print assets, content or processes. We have competed successfully in the enterprise segment for over 20 years against broad-based competitors by going deeper with our customers, providing them industry-specific, customer-specific solutions. By leveraging this expertise and now combining it with these new technologies, we are creating broader, higher-value, industry-specific solutions for our customers.

On Slide 12, you can see 3 recent examples of how our expanding solutions value proposition is resonating with global Fortune 50 customers. With our win at Statoil, a 5-year win valued at $20 million, Lexmark will provide a broad range of solutions and services capabilities as the sole printing solution services provider worldwide for this leading global energy company. At Siemens, another large global enterprise, Perceptive Software's Intelligent Capture, powered by Brainware, was selected to automate the accounts payable process at their European shared service center. And Perceptive also announced that ING, a global financial institution, will implement Perceptive Software's Intelligent Capture solution, powered by Brainware, to streamline and automate invoice processing.

Now as a reminder, on Slide 13, Lexmark's overall capital allocation framework is to return more than 50% of free cash flow to shareholders, on average, through quarterly dividends and share repurchases, while pursuing acquisitions that support the strengthening and growth of the company. In the third quarter, Lexmark paid a dividend of $0.30 per share, totaling $21 million, and expended $135 million on share repurchases. Now in the past 15 months, Lexmark has returned more than $500 million to shareholders or 129% of free cash flow.

On Slide 14, you can see our longer-term revenue growth assumptions. Earlier, I discussed how we are creating synergies between our Imaging Solutions unit and the newer Perceptive Software unit to grow each faster. Based on these synergies, we expect to grow the Imaging Solutions revenue greater than or equal to the market, leveraging the differentiation obtained through Perceptive Software's portfolio, along with the industry trends towards MPS and workflow solutions. Similarly, we expect to grow Perceptive Software greater than the market, leveraging the expanded reach through Lexmark's worldwide large account presence and relationships and continued investment in software development, marketing and sales.

On the right hand -- right side of the slide, you can see the Inkjet Exit revenue headwind is a large one but a declining one. We expect this headwind will be less than $100 billion (sic) [million] by 2015. Therefore, as we grow Imaging Solutions and Perceptive Software together, against a declining Inkjet headwind, the underlying revenue growth will emerge.

So looking ahead on Slide 15, you can see our fourth quarter, full year 2012 and long-term outlooks. For the fourth quarter, outlook is for revenue to be down 10% to 12% year-to-year. We expect earnings per share for the fourth quarter, excluding restructuring- and acquisition-related adjustments, to be in the range of $0.82 to $0.92. For the full year 2012, our outlook is for revenue to be down 9% to 10% year-to-year. We expect earnings per share for the full year, excluding restructuring- and acquisition-related adjustments, to be in the range of $3.70 to $3.80. Long term, our outlook is to grow revenue at or above the market, with an operating margin in the range of 11% to 13%.

I'll now turn it over to John Gamble for his more detailed comments on our financials.

John W. Gamble

Thank you, Paul, and good morning. Let me begin with an overview of our performance. The discussion that follows is on a non-GAAP basis and reflects non-GAAP adjustments, unless otherwise noted. As a reminder, included in the earnings supplemental materials posted to the Investor Relations section of the lexmark.com website are reconciliations of GAAP and non-GAAP measures.

For the third quarter, revenue was within guidance, although at the lower end of our range. And EPS was stronger than our guidance range, and cash flow was also strong. Revenue being at the low end of the guidance range reflects weaker-than-expected demand for hardware and software licenses, particularly in EMEA, where the economic environment was weaker than we had expected. This weaker-than-expected demand impacted hardware pricing and to a lesser extent, units, resulting in hardware revenue being weaker than expected.

Supplies revenue was stronger than expected, although we did not see the anticipated reduction in distributor channel inventory in the quarter. Perceptive Software revenue was strong in the quarter, up over 20% organically, as Paul Rooke indicated. However, this was not as strong as we had expected.

EPS at $0.94 per share was stronger than our guidance. Operating income performance in ISS was stronger than expected, reflecting good performance and cost and expense management, as well as stronger-than-expected supplies revenue. This was partially offset by losses at Perceptive Software as software revenue, although up strongly, was weaker than expected. The net impact of a higher effective tax rate, partially offset by lower shares outstanding, negatively impacted EPS by about $0.02 versus guidance. The higher tax rate reflects a lower mix of non-U.S. earnings, which carry a lower tax rate. The lower shares outstanding reflected the impact in the quarter of the $100 million share repurchase that was announced on August 28.

Free cash flow at $95 million was better than expected, reflecting improved working capital performance, primarily inventory and payables. Strategically, we made good progress since July. The integration of Nolij, Brainware and ISYS into Perceptive Software is proceeding well, and we continue to gain traction with our Lexmark customer base. Over the past 2 months, we have made good progress on the restructuring we announced in late August, including the exit of our Inkjet technology. We are also proceeding with marketing this technology and intellectual property for sale. We executed the additional $100 million share repurchase we announced in August. Very importantly, we executed the significant product launch Paul referenced that extends our lead in smart MFPs and solutions.

Turning to Slide 17. Total revenue for the third quarter was $921 million, down 11% compared to last year, flat sequentially from 2Q 2012 and in line with the guidance we provided in July. Declines in Inkjet revenue as we exit that technology negatively impacted revenue 6 percentage points year-to-year. Currency movements negatively impacted revenue 4 points versus 3Q '11. The sequential impact of currency was negligible.

ISS segment revenue in 3Q 2012 of $879 million was down 13% versus 3Q 2011 and flat sequentially. As with total Lexmark revenue, approximately 6 percentage points of the revenue decline is due to our exit from Inkjet technology and 4 percentage points due to the negative impact of currency. Excluding the impact of currency and the Inkjet exit, the year-to-year reduction in revenue was primarily in EMEA and to a lesser extent, other non-U.S. geographies.

MPS continued to grow in the quarter, up 2% year-to-year and 9% year-to-date. I will cover ISS product revenue in more detail shortly. Perceptive Software revenue in 3Q 2012 was $43 million, up 88% year-to-year and down 8% sequentially. Excluding revenue from the 4 acquisitions completed over the last 4 quarters, organic growth was 22% year-to-year.

Perceptive's revenue reflects growth in both North America and internationally. Perceptive's revenue growth, while relatively strong, was below our expectations, reflecting slower growth in EMEA than expected and the delay in the closure of a number of large transactions in North America. With regards to EMEA, we continued to make progress, although slower than expected, and are making changes in sales leadership that we believe will accelerate growth.

In North America, although we are disappointed that several large transactions did not close in the quarter, the majority of them, we believe, were deferred and not lost, and we expect them to close over the next several quarters. We remain very positive about Perceptive and the opportunity to deliver new industry-focused products and solutions through the combination of Brainware's capture technology, ISYS search technology and Perceptive process and content management technologies.

The synergies between the ISS business and Perceptive also continue to expand. We continue to expect revenue growth to be strong in 4Q '12. As shown in Slide 18, geographically for the third quarter, U.S. revenue of $447 million declined approximately 2% year-to-year. EMEA revenue of $289 million declined about 20%, and the remaining geographies had combined revenue of $186 million and declined about 15%. The declines in all regions reflected our planned exit from Inkjet technologies and the weakened demand environment. The decline in EMEA, Latin America and Asia Pacific also reflect the impact of the stronger dollar.

As shown on Slide 19, hardware revenue in the third quarter declined 24% year-to-year. Large workgroup laser hardware revenue, which in 3Q 2012 represented about 74% of total hardware revenue, was down 20% year-to-year, driven by lower AUR and a 6% decline in units. North America saw unit growth, while all other regions saw unit declines. Large workgroup hardware AUR declined 15%. This revenue weakness was primarily outside of North America, principally in EMEA. Specific to AUR decline, about 1/3 was driven by foreign exchange, with the remaining 2/3 reflecting both aggressive market pricing and mix of products sold.

Despite the overall large workgroup unit decline, we did see 25% growth in large workgroup color MFPs. Sequentially, large workgroup laser hardware revenue was flat, with the unit increase of 30% being offset by AUR decline. The increase in units was at the lower end of our large workgroup line and was heavily influenced by large government transactions, particularly in the U.S. Although market pricing was aggressive, the AUR decline was also driven by this higher mix of lower-end large workgroup units sold in 3Q versus 2Q.

Small workgroup laser hardware revenue, which in 3Q 2012 represented 18% of total hardware revenue, declined 11% year-to-year, driven by an 8% decline in units. Despite the overall small workgroup laser decline, MFP units grew over 10% year-to-year. Small workgroup laser hardware AUR declined 3%.

Inkjet exit hardware revenue, which in 3Q 2012 represented 8% of total hardware revenue, declined 55% year-to-year. As Paul indicated, we had a significant launch of 42 new laser printer and MFP products last week, replacing 70% of our laser lineup. Of these new products, 22 were solutions-enabled, including 18 MFPs and 4 printers. We are very optimistic about the impact this new hardware will have on hardware sales as it fully rolls out through 1Q '13. These new products offer step-function improvements in print and product quality, print and scan speed, as well as total cost of ownership. It also extends and improves the capabilities of our smart MFPs and printers to deliver solutions and integrate with Perceptive Software.

Supplies revenue in the third quarter was down 10% versus 3Q '11. Inkjet supplies were down 24%, reflecting our exit of Inkjet technology. Laser supplies declined about 5% year-to-year. Excluding the about 4 percentage point negative impact of currency, laser supplies were down about 1% year-to-year. Laser supplies revenue was stronger than expected. However, we did not see the expected decline in supplies channel inventories we discussed in July. Year-to-year, movements in laser supplies channel inventory were slightly positive to revenue. The impact on channel inventory was most pronounced in EMEA and reflects slower-than-expected end-user demand in EMEA. This was consistent with what we viewed in both hardware and software and reflects the weaker economic environment in EMEA.

In 3Q 2012, software and other revenue was up 28% year-to-year, driven by the 88% growth in Perceptive Software. As shown on Slide 20, gross profit margin for 3Q was 39.9%, up 260 basis points versus 3Q '11 and down 60 basis points sequentially. The year-to-year increase was driven by 420 basis points of positive mix, offset by 160 basis points of lower product margins. The 420 basis points of positive mix was principally driven by hardware being a lesser percentage of the mix and laser supplies and software a greater percentage of the mix. The 160 basis points of lower product margins were primarily due to the pricing pressures and unfavorable movements in currency discussed earlier.

The sequential decline in gross margin of 60 basis points was driven by 130 basis points of unfavorable mix due to a higher relative percentage of hardware. This was partially offset by positive product margins of approximately 70 basis points. ISS gross profit margin increased 210 basis points year-to-year, driven by favorable mix, primarily reduced inkjet hardware, partially offset by lower product margins driven by pricing and currency. Perceptive Software gross profit margin declined 220 basis points year-to-year, driven by an unfavorable product mix shift, with 122% growth in lower-margin professional services outpacing the growth in the higher-margin licenses and subscriptions and maintenance, which grew 81% and 77%, respectively.

Turning to Slide 21. Operating expense for the quarter of $269 million was slightly less than our expectations. Operating expense declined $10 million versus 3Q 2011 and declined $11 million sequentially. The year-to-year decline was driven by lower ISS and all other operating expenses, which was partially offset by increased Perceptive investments, including 4 acquisitions completed over the last 4 quarters. The sequential decrease was also driven by ISS and all other.

As shown on Slide 22, operating income margin for the third quarter of 2012 was 10.7%, up 30 basis points year-to-year and 60 basis points sequentially. Operating income was $99 million, down $9 million versus 3Q 2011 and up $6 million sequentially. ISS segment operating income in 3Q 2012 of $173 million was stronger than expected, down $8 million versus last year and up $8 million sequentially. The stronger-than-expected operating income reflects the strength in supplies revenue and expects -- expense reductions I referenced earlier.

Perceptive segment operating income in 3Q 2012 was negative $8 million, below our expectations. As I indicated earlier, Perceptive had very strong organic growth of over 20%. However, we had expected still better revenue driven by higher licensing revenue. This miss in licensing revenue drove the operating loss.

We have ramped spending in Perceptive in both development and sales to accelerate our solution sales opportunities across both ISS and Perceptive and to expand Perceptive internationally. As we look over the next several quarters, we expect Perceptive operating expenses to be at or only slightly above current levels while we let these resources drive growth. We are confident we will see continued strong growth in Perceptive revenue and expect this trend to allow us to deliver operating profits in 2013. As we move through 2013 and revenue continues to accelerate, we expect to again accelerate investment in Perceptive but at a slower pace than revenue growth. All other operating income of negative $66 million improved 7% from 3Q '11 and was in line with our expectations.

Our effective tax rate estimate on non-GAAP results, excluding the expected U.S. R&E tax credit and discrete items for all of 2012, has increased from 25% to 26%. This increase reflects the weakening markets outside the U.S., principally in EMEA, which changes our mix of worldwide income to be more heavily weighted to the U.S. with its higher tax rates, resulting in a higher worldwide effective tax rate. In 3Q 2012, the effective tax rate, including discrete items on non-GAAP income, was approximately 29%, reflecting the year-to-date catch-up so that our tax rate on year-to-date non-GAAP earnings reflects a 26.5% rate. The impact in 3Q '12 of this higher tax rate versus our expectations was approximately negative $0.05.

Our average diluted shares outstanding declined from 78 million in 3Q '11 to 68.9 million in 3Q '12, an approximate 12% reduction year-to-year. Shares outstanding at September 30, 2012, were 64.6 million. Average shares outstanding for the quarter were approximately 3% below our expectations at the time we gave guidance in July, reflecting the additional $100 million share repurchase executed in early September. The impact of these lower shares outstanding versus our expectations was positive, about $0.03 per share.

Now turning to Slide 23. Net earnings for the quarter were $65 million compared to 3Q 2011 net earnings of $74 million. EPS for 3Q '12 was $0.94 per share, down less than 1% from the $0.95 per share in the same period last year. Please note that my comments on the balance sheet, cash flow and cash conversion cycle are based on GAAP results and refer to Slide 24.

Cash and current marketable securities at the end of 3Q 2012 was $859 million, down $57 million from June 30, 2012. This reduction reflects $141 million in cash returned to shareholders, $120 million through share repurchases, excluding $15 million of share repurchases paid in Q3 with final settlement in Q4, and $21 million through dividends during Q3.

September 30, 2012, U.S. cash and current marketable securities balances were $29 million. Total debt at the end of 3Q 2012 was $650 million, with $350 million maturing in 2013 and the remainder in 2018. Cash flow from operations for the quarter was $133 million compared to $48 million in 3Q 2011. Free cash flow was $95 million, well above the levels generated in both 2Q 2012 and 3Q 2011. The strong free cash flow was the result of stronger-than-expected operating results and a net reduction in working capital of $24 million.

During the quarter, we saw good -- we saw continued good inventory performance, resulting in a reduction of $17 million. In addition, accounts payable increased $53 million during the quarter, up from a very low balance of the end of June that we discussed during our July conference call. Accounts receivable performance was weaker than our expectations. However, our receivables delinquencies and losses remain at their traditional low levels.

We believe 2 factors to be the drivers of the weaker receivables days performance: first, timing and mix of revenue, specifically as services and software become a larger percentage of our overall revenue; and second, lower-than-normal early payments by customers. We continue to believe this is being driven by weak economic conditions, particularly in EMEA. We will continue to address all controllable process factors to maintain low levels of delinquencies and losses and to maintain changes -- and to make changes in business processes to accelerate cash collections.

Our long-term goal remains to generate free cash flow equal to 90% to 100% of non-GAAP net income. Our performance in 3Q '12 was well above this target. 4Q '12 free cash flow is expected to be below this level, as cash payments related to the restructuring we announced in August are outlooked at approximately $35 million. Depreciation and amortization for the quarter was $81 million, approximately $34 million of which is accelerated depreciation related to restructuring and amortization of acquisition-related intangible assets. Capital expenditures were $38 million.

Non-GAAP adjustments for the third quarter of 2012, consisting of restructuring- and acquisition-related costs and expenses, were $86 million on a pretax basis or $0.94 per share. This includes $64 million or $0.70 per share related to the restructuring announced in August, which is lower than the announced amount due to the timing of restructuring expense recognition. Due to the worldwide distribution of these expenses, the effective tax rate on restructuring and acquisition costs and related expenses is 25%, lower than the effective tax rate on our non-GAAP earnings. This results in our overall GAAP effective tax rate, excluding discrete items for 2012, being 27%, which is higher than our non-GAAP effective tax rate of 26%.

Please refer to Slide 25 for my forward-looking comments for 4Q 2012. We expect fourth quarter revenue to be down 10% to 12% year-to-year. This guidance is equivalent to sequential revenue performance of up 1% to 3%, with this range being consistent with normal sequential trends. We are assuming the weaker economic conditions we saw in the third quarter, particularly in EMEA, will continue throughout the remainder of 2012. This outlook includes a year-to-year negative currency impact to revenue of approximately 1 percentage point, a reduction in Inkjet revenue impacting total revenue growth by approximately 5 percentage points and an assumed reduction in the first tier supplies channel inventory. While we expect continued strong growth in software and solutions, due to these factors, we expect overall revenue will decline in 4Q '12.

GAAP EPS in 4Q 2012 is expected to be $0.17 to $0.27 per share. GAAP EPS in 4Q 2011 was $0.94 per share. In 4Q 2012, non-GAAP adjustments made up of restructuring and acquisition-related costs and expense are expected to be $0.65 per share. This includes restructuring cost of $0.47 per share and $0.18 per share of acquisition-related cost and expense. Related to the August restructuring announcement, for the second half of 2012, we expect to incur total costs of $103 million, which is slightly lower than our expectation of $110 million at the time of the announcement. We believe this difference to be timing and still expect total program restructuring cost to be $160 million.

Non-GAAP EPS is expected to be $0.82 to $0.92 per share. Non-GAAP EPS in 4Q 2011 was $1.25. Non-GAAP EPS in the quarter is being negatively impacted by the factors referenced earlier regarding 4Q '12 revenue, as well as the losses related to completing the sale of our remaining branded Inkjet hardware. In terms of EPS, the guidance we provided last July for the second half of 2012 was $1.76 to $1.96 per share. Using the fourth quarter EPS guidance we are providing today, our second half 2012 guidance is now $1.76 to $1.86, consistent with, although at the lower half of our previous July guidance, reflecting the weakening market we saw in EMEA during 3Q '12. As indicated previously, one of the factors driving improved EPS results in 3Q '12 was supplies channel inventory increases versus the decline we'd expected. Our fourth quarter guidance reflects this expected decline in channel inventory occurring in 4Q '12.

In the fourth quarter, we expect the gross profit margin percentage to be below 4Q 2011. Operating expense is expected to be consistent with the $269 million incurred in 3Q 2012. Operating income margin in the fourth quarter is expected to be down from the 11.6% level achieved in the fourth quarter of 2011. We expect the effective tax rate on non-GAAP earnings for 4Q 2012 to be about 20%. Our assumption is that Congress will pass the U.S. R&E tax credit in the fourth quarter, resulting in a lower effective tax rate. The benefit in the period of the passage of the U.S. R&E tax credit is approximately $0.08 per share.

For the full year, this will result in an effective tax rate of approximately 25%. This is approximately 2 percentage points above our previous estimate of 23%, reflecting the decline in the percent of worldwide profits earned outside the U.S. Our guidance is based on foreign exchange rates as of September 30, 2012. At these rates, the currency impact on revenue in 4Q 2012 versus 4Q 2011 is negative 1% and is negligible versus 3Q 2012.

Our expectations for the 2012 calendar year are shown on Slide 26. We expect revenue to decline 9% to 10% in 2012 versus 2011. This is within but at the lower end of the guidance range we provided in July. The decline versus 2011 includes a negative 3% impact of currency. Inkjet revenue is expected to decline about 28% from the $880 million we had in 2011. This results in an approximately negative 6% impact on total revenue in 2012 year-to-year. Laser revenue is expected to decline slightly greater than the impact of currency, reflecting our expectation that the weak demand environment we saw during 2Q '12 and 3Q '12 will continue through the remainder of 2012. Overall, by the end of 2012, Inkjet revenue should decline to be less than 16% of total revenue.

EPS at $3.70 to $3.80 per share is also expected to be within but at the lower end of the guidance we provided in July. The outlook reflects the weakening demand environment, particularly in EMEA, and losses related to the completion of the sale of our remaining branded Inkjet hardware in 4Q '12. Versus our full year guidance in July, the impact of an expected higher 2012 effective tax rate of 25% of approximately negative $0.09 per share is offset by the positive impact of about $0.09 per share due to lower average shares outstanding for the year, down 2% to 69.5 million shares.

For calendar year 2012, free cash flow will be negatively impacted by the approximately $35 million of restructuring payments related to our August restructuring announcement. This will result in free cash flow being 70% to 80% of non-GAAP net income in 2012. Going forward, absent significant restructuring cash flows, we expect free cash flow to be 90% to 100% of non-GAAP net income, as we have previously indicated.

Capital spending is expected to be approximately $180 million, and depreciation and amortization is expected to be $285 million, of which approximately $80 million is accelerated depreciation related to restructuring and amortization of acquisition-related intangible assets. We anticipate pension funding of approximately $40 million in 2012, virtually all of which was completed as of the end of 3Q.

With that, we'll go ahead and open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is coming from the line of Katy Huberty of Morgan Stanley.

Kathryn L. Huberty - Morgan Stanley, Research Division

Just wondering if you can talk through in a little more detail the variables impacting gross margins in the December versus September quarter. You mentioned a number of times that laser supplies inventory reduction is a headwind. But it also sounds like customers are delaying hardware purchases but continuing supplies usage so that should have a positive mix shift. And you have a number of new laser products coming to market that I assume will help pricing. So can you just talk about how you get to fourth quarter gross margin that's down sequentially?

John W. Gamble

Sure. And I think you covered a lot of the items we talked about, right. We're certainly going to have the continued impact of the Inkjet exit as we talked about. Two of the factors to keep in mind are we do intend to try to sell the remainder of our branded inkjet hardware, which will certainly be a negative impact on the fourth quarter in terms of gross margin, and then also, as we mentioned, we had some improvements in the supplies revenue in the third quarter, improving gross margin as our supplies channel inventory didn't decline as we expected and we're now expecting that decline to occur in the fourth quarter. So given the decline in channel inventory that we're expecting regarding supplies and the sale of the inkjet hardware assets, that'll have a negative impact on fourth quarter margins and income.

Kathryn L. Huberty - Morgan Stanley, Research Division

Okay. And then just quickly as a follow-up, the DSOs were a little higher this quarter. You mentioned a number of impacts. But can you comment specifically on linearity in the quarter? Did you see a back-end loaded quarter in general across the business?

John W. Gamble

I'd say it's particularly in EMEA that we saw July and August were weaker than we had expected, so it was more of a back-end loaded quarter in general, overall, this quarter, than we would normally see in the third quarter. And that certainly impacted our receivables performance in the third quarter.

Operator

Your next question is coming from the line of Brian Alexander of Raymond James.

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Just a follow-up on Katy's question. How much specifically of a headwind is the laser supplies channel inventory decline that you're expecting in the fourth quarter that you thought would occur in the third quarter? Just trying to get a sense for what that might look like on a year-over-year basis.

John W. Gamble

Well, we didn't specifically quantify it. What we've indicated is we are expecting to see a decline in the quarter where -- and we actually saw a little bit of growth in the third quarter. So we didn't give a specific number, but it certainly will be an impact in the quarter.

Paul A. Rooke

Yes. Brian, as you know, we don't have full visibility into our channel. We don't control them. It was a bit -- we had planned for it to decline as we went into the third quarter, and it actually went up so that we're recognizing that and then planning again for the decline here as we go from 3 to 4Q.

John W. Gamble

Yes, part of the impact in the third quarter was, as we said, that sellout was weaker in Europe, end-user demand, than we had expected, which was part of the reason why we did see the channel inventory increase more than we thought.

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Okay. And just a follow-up on the long-term margins of 11% to 13%. I understand you'll see a boost next year because you're not going to be selling inkjet hardware at a loss like you did this year. But beyond next year, you're going to see inkjet supplies decline gradually. And I think it will be 10% of your revenue next year. And I would estimate over maybe 200 basis points of total company operating margin or $100 million of operating profit that are going to go away over time. So could you just comment if that math is right? And if so, how do you offset that lost profitability beyond Perceptive getting more profitable? What other levers do you have?

John W. Gamble

Yes, so actually in the August announcement, Brian, we did try to provide a little bit of an operating margin walk-down between 2012 and 2013. And probably, the best thing I can do is refer you back to that presentation. But effectively, we will see less inkjet profit related to inkjet supplies so that declines and there's significant savings, as Paul referenced, $95 million from the restructuring that we announced in August, which will go a significant way to offsetting the decline in inkjet supplies margin. But bottom line is, we're committed to maintaining our 11% to 13% operating margin range, and we'll take the actions necessary to make sure that we stay in that range.

Paul A. Rooke

We're clearly aware of that headwind. We know the magnitude of it. And as you saw, we took some action there with the restructuring. We plan to grow the margins in the software business, and we just got to continue to focus on ongoing cost and expense improvements.

Operator

Your next question comes from the line of Ben Reitzes of Barclays.

Benjamin A. Reitzes - Barclays Capital, Research Division

Can you just talk a little bit more about Perceptive? I mean, $8 million a quarter is a pretty big headwind and turning it profitable next year seems pretty tough on the surface. And just a little more color on how you get there and what quarter do you see that start to be positive. And the other thing that I just wanted to ask about was with regard to free cash flow next year, how does that get closer to net income, a little bit more of a bridge?

Paul A. Rooke

Okay. So Ben, on Perceptive, as we mentioned, here in the third quarter, we had anticipated higher revenue than we achieved. Now I'm not going to apologize for the growth because we had 88% growth, 22% organically, so we're growing this business quite aggressively. But it first starts with the premise that we believe this is going to be a very profitable software business much like other software businesses that are out there. We're in the early phases of this. We're growing. We're investing ahead of revenue, if you will. And what we had happen in the third quarter is we just, we had a few deals that didn't close. They slipped to the right. We think most of them will close here in either the fourth or the first quarter. So these aren't losses, it's just timing of the revenues. So the revenue is growing, and we believe it's going to catch because these are highly profitable, high gross profit licenses. And so we're going to, as we said, limit the expenses here for a while, while we let the organization kind of mature and catch up to its rapid growth. And we expect to see that revenue continue to grow here in the fourth quarter and beyond and then deliver profit in 2013. We haven't said specifically which quarter, but we are planning for 2013 to be a profitable software unit. And you want to comment on free cash flow?

John W. Gamble

Sure. Ben, basically, if you back out the restructuring payment that we talked about during the earnings call, I think we get relatively close to the 90% to 100% of non-GAAP net income really even this year. So I think as we look forward, we're expecting to continue to make improvements in working capital. Our inventory performance has been very good. And given that and given the net income performance we've talked about, we would expect that as restructuring payments decline, and they should start to decline as we go into next year, that we will see -- we will start to see 90% to 100% of net -- of non-GAAP net income as a free cash flow number.

Operator

Your next question is coming from the line of Toni Sacconaghi of Sanford Bernstein.

A.M. Sacconaghi - Sanford C. Bernstein & Co., LLC., Research Division

I wanted to revisit the gross margin guidance for Q4. It looks as though you're guiding for gross margins to be down 300 basis points or more on a sequential basis when currency sequentially is actually going to help. It's even gotten more favorable since the 9/30 spot rate. You're going to have a further exit from the Inkjet business, which should also help gross margins. So I'm trying to understand is this just supplies weakness because you expect to draw down in channel inventory or are there some other factors? And how do we think about that. Laser supplies were minus 11 last quarter when you had a channel inventory drawdown. They were minus 5 this quarter when you had a fractional build in channel inventory. Should we be thinking minus 11? And I'm still not sure that gets us there.

John W. Gamble

So specifically, in terms of the areas you addressed, right as you look at the fourth quarter, as I mentioned in -- to Katy, as we go from third to fourth quarter, we are expecting to sell the remaining of our branded inkjet hardware. And that, certainly, will have a negative effect on our gross margins in the period, right? And it's a nontrivial effect on gross margins in the period. And then the second major impact is the fact that we are going -- we expect to see a reduction in channel inventory, which is going to affect laser supplies sales. So those really are the 2 major factors that we see impacting the fourth quarter. Generally, third to fourth quarter, you tend to see a little bit of a margin decline anyway in some of our businesses related to the fact that at year-end there's some facility shutdowns so you end up with a little higher cost absorption issues. But that's not really the driver. The biggest drivers are the 2 things that I've mentioned upfront, which is liquidating the remaining of the branded inkjet hardware and then the change in channel inventory from a slight positive to a negative in the fourth quarter.

A.M. Sacconaghi - Sanford C. Bernstein & Co., LLC., Research Division

And when you -- what's -- if you try and dimension how you're thinking about that change in channel inventory, is it something that we should be thinking along the lines of what you experienced in Q2 or are you forecasting something more significant than that?

John W. Gamble

Yes, Toni, we didn't really dimension it in our comments. So I think it's -- we're expecting a decline. And as Paul said, it is difficult for us to forecast movements in channel inventory because, obviously, they're dependent on end-user demand as well. But we are expecting to see a decline.

A.M. Sacconaghi - Sanford C. Bernstein & Co., LLC., Research Division

And then, finally, could you quantify the impact of currency on operating profit and EPS on a year-over-year basis? You've done that in the past.

John W. Gamble

Yes, I know we did talk about it a bit in the second quarter, but it isn't something we were going to make a general practice of. So we did not quantify the specific impact of currency movements in the third quarter, and we're not going to do that.

Operator

Your next question is coming from the line of Jim Suva of Citigroup.

Jim Suva - Citigroup Inc, Research Division

On the Perceptive softness, I believe you've mentioned some weakness in EMEA and a delay in large transactions. Is your sense of those more macro-driven or competitive-driven or like a lack of Q2 budget -- or lack of year-end budgets coming through? And just help us understand the softness there.

Paul A. Rooke

So on Perceptive Software, right?

Jim Suva - Citigroup Inc, Research Division

Yes.

Paul A. Rooke

Yes. No, it was more just, I think, timing in terms of closure of the deals. Each one of these is competitive. Perceptive is -- most of our revenue is in the U.S. right now. We are growing it internationally, but most of it were deals that didn't close in the U.S. predominantly. And again, that's just a timing thing. We do expect those to not be losses, but actually close in our favor and close here in the next 3 to 6 months.

Operator

Your next question is coming from the line of Robert Schiffman of Crédit Suisse.

Robert Schiffman - Crédit Suisse AG, Research Division

A couple of balance sheet questions. First is what are your current plans for funding your 2013 maturities? Second, you mentioned investment grade ratings in the slides. And I was wondering if the rating agencies were to indicate they might lower your ratings, would you be willing to adjust your capital allocation program? And finally, maybe you can just talk a little bit about why investment-grade ratings matter. Paper is already trading like low BB levels. And I'm trying to understand why a more aggressive financial policy would necessarily hurt.

John W. Gamble

So I think in terms of your first question, we would intend to refinance the debt which is outstanding, and we would likely do so sometime within the next 3 to 4 months, maybe 5 months. In terms of rating agencies, quite honestly, you need to talk to the rating agencies about -- to get their opinions directly. But we continue to have conversations with the rating agencies. We talked to them prior to the announcements we made in August. I think both of them put out notices after the announcements we made in August, and they're aware of our capital return philosophy. So at this point in time, we think, so long as we execute consistent with the philosophy we've put forward and our operating performance performs consistent with our discussions, that we're okay. But again, you'd need to talk to the rating agencies. In terms of maintaining an investment-grade rating, again, what we're focused on, at this point, is trying to execute the plan that we put in place and executing the capital return philosophy that we've had. Maintaining an investment-grade rating is important to us. We think it's an indication of financial strength. We think it's important as we talk to customers and we compete in the marketplace, so it is something we intend to try to keep. But again, the focus for us is to really execute our operating plan and then to execute consistent with our returning capital to our shareholders, as we indicated. And we believe, if we do those things properly, that the rating can be maintained.

Operator

Your next question is coming from the line of Shannon Cross of Cross Research.

Shannon S. Cross - Cross Research LLC

I just wanted to talk a bit about what you're seeing in terms of pricing for contracts, especially some of the large fleet bids. I noticed your large workgroup AURs were down this quarter fairly substantially. So are you seeing more pressure or what's sort of driving that? And what are you hearing from customers?

Paul A. Rooke

Shannon, we did see aggressive pricing in the third quarter. That work -- when you look at the workgroup revenue decline, a lot of that was in Europe. In fact, our North American large workgroup units were up. But having said that, there were pricing pressures in both geographies. You had additional currency effects, certainly, in Europe that adds to that. So most of that AUR decline, if you will, was really driven by non-U.S. Having said that, we feel good about our progress in the large workgroup. We continue to gain share. The MPS deals continue. We're continuing to grow there. But certainly, we saw a little more pricing pressure here in the third quarter.

Shannon S. Cross - Cross Research LLC

Okay, great. And then just, Paul, can you talk about any update on the potential sales of inkjet assets or the IP? Just where are you at within those negotiations?

Paul A. Rooke

We're actively in the process. As we said in our last call there in August, that we have an investment banker now that we're working with, and so the process is fully engaged. And that's all we can say at this point. We don't have any projections or timing there, but we're deep in the process.

Operator

Your next question is coming from the line of Ananda Baruah of Brean Murray.

Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division

Just wondering if you could comment on what we should expect for long-term OpEx trends. I think, I mean, you commented on expectation to grow OpEx for Perceptive at less than revenue growth long term, which makes sense. But what should we expect for the rest of the business?

Paul A. Rooke

Ananda, we haven't forecast beyond the next quarter. But clearly, what you saw in the trends here to-date is that we've, on a year-to-year basis, have taken the ISS group, the imaging unit, down while we've invested in Perceptive. So we'll see. We're continuing to invest in the ISS business. As you saw with the announcement, this was a very, very significant laser announcement here that we made this last week. So that represents a good stream of investment going into that obviously, and we're going to continue to stay competitive in that area. But we've got also to look at the -- how the trends are in the market. We will adjust our investments accordingly.

John W. Gamble

With the restructuring announcement in August, obviously, we did announce that we're going to be eliminating the expense related to the inkjet technology that we had been previously investing in. So you'll see reductions in operating expense, specifically related to that portion of the business.

Paul A. Rooke

In Perceptive, we've been growing it quite rapidly both in the R&D side to fill some gaps, as well as add some differentiating functionality to the software. We've also been adding to the marketing and sales side to expand it, not only domestically, but internationally. And so we're going to take a bit of a pause and limit that for the moment while the organization catches up to drive further revenue growth. But I think we'll see continued investment over time there.

Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division

Okay, got it. So it sounds like you guys have sort of like longer term -- do you guys have like a margin level you're managing the OpEx to for the laser business or are you looking at it differently? I'm just trying to understand kind of what the right mosaic is to look at it through longer term.

Paul A. Rooke

Well, we're looking at the operating income margin at 11% to 13% range. That's where we're trying to maintain ourselves. And the software and imaging business, as we've talked about, the synergies, that we're evolving from a hardware-centric company to a solutions company, so what you see is us increasing the balance, if you will, between hardware and software. So while they are separate in our reporting. I mean, they're very much integrated as we go to the customer. And so we're adding a software component, and that, when combined with the hardware, that we plan to yield the -- be in 11% to 13% range long term.

Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division

Okay, got it. That's helpful. And then could you guys -- lots of commentary on the dynamics in the supplies channel right now. Can you talk about -- or at least the inventory levels. Can you talk about what usage trends are? What you're seeing, I guess, at the customer level? And what you saw through the quarter and what your folks are telling you heading into this quarter?

Paul A. Rooke

Sure. Ananda, back in the second -- the July call, we adjusted our forward-looking estimates there because of what we were seeing in supplies usage or reduction to shelf inventories and so forth, indicative of kind of what we saw -- comparable to what we saw back in the '08, '09 time frame where -- when things -- economic environment got sluggish, people tend to pull back, so we've seen that. As we look in the third quarter, it hasn't worsened. I'd say it may have worsened a bit in Europe more than the others, but it has been tracking to what we projected at that point in time except for a bit in Europe. So that's what we're seeing. Usage is continuing. Business -- activity in buying is continuing, although, as we said, some of the hardware decisions are being deferred as customers are deciding just to hang on with their equipment and use it and maybe not refresh it at this point in time. But those are the kinds of things that we saw back in '08, '09 in a very sluggish economic time, and we're seeing some of those same indicators here.

Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division

It sounds like what's baked into your go-forward expectations though is sort of -- it's not a worsening of usage trends from what we're currently seeing.

Paul A. Rooke

Yes, it's a not worsening beyond what we indicated back in July, so it's tracking to that.

Operator

Our final question will be coming from the line of Alban Gashi of Crédit Suisse.

Alban Gashi - Crédit Suisse AG, Research Division

Just looking at your op income long-term targets of 11% to 13%. Sort of how much of that do you think is more mix shift towards the software and services and then how much of it is sort of the recovery in more of just the product side? And then also related to that, your top line outlook for growing above the market. Can you just sort of walk us through the outlook that you see for the laser software and services side managed print?

Paul A. Rooke

Yes, Alban, as you look at the margin, as we -- as John referred to, we did a bridge on that back when we announced the restructuring. So you can see some of the elements of that, that'll contribute getting us back into that 11% to 13% range. So some of it is certainly due to the restructuring as we exit the inkjet business and achieve those savings, some of it's with the shift in the business, as you point out, between less hardware, i.e. inkjet and more workgroup, high-usage supplies, as well as software. So you got both of those cost and expense coming out from the restructuring, but also a shift in the business. Both of those will be contributing to the 11% to 13%. And then the second part of your question was how we see the business...

Alban Gashi - Crédit Suisse AG, Research Division

The top line growing at or above the market trend, so your views on the market trends.

Paul A. Rooke

Yes, so what you see there is -- we said on the imaging side that we want to grow greater than or equal to that. And we're -- MPS is the large driver there. It's the piece, the subset, if you will, within the imaging market that is seeing growth as customers shift toward buying printing as a service as opposed to buying pieces and parts, hardware and supplies separately. So we're riding that wave actually, achieving more than our fair share there. And that's actually being accelerated with the addition of Perceptive Software solutions because now our MPS offering becomes even stronger. It's not just a consolidation of the fleet kind of thing. It's also business process improvement. On the other side, on the Perceptive Software, we plan to grow that greater than the market. And I think even in our organic rates of kind of in the low-20s there, that's clearly 2x to maybe even 3x the market rate currently. So we're organically growing much faster than market, and with the investments we're making in R&D and marketing sales to expand that further, we expect to see that growth to continue. As well as the imaging side is opening the doors, with the broad presence we have internationally on the imaging side, it's opening up more and more opportunities for Perceptive every day.

Alban Gashi - Crédit Suisse AG, Research Division

Okay. And then I was just wondering with your new product introduction, do you guys see any type of pause before the introduction that might give you a little benefit on the fourth quarter.

Paul A. Rooke

This has been a good transition. We watch these very closely, particularly with the magnitude of this one and the breadth and depth of the product transition. But we feel pretty good about this transition, and this'll be a ramped rollout, if you will. So what we assumed is in our outlook there in the fourth quarter, but this will get rolling in full steam as we get into 2013. And we're quite excited about these products because we haven't refreshed that laser line to this extent since 2008. So this puts us a real bump in our competitive advantage here, with the strength of this product and the breadth of our product line. So we're quite excited about it

Operator

With that, I would like to turn it back over to Paul Rooke, Lexmark's Chairman and CEO, for closing remarks. Please go ahead, Paul.

Paul A. Rooke

Well, in closing, while our third quarter financial results were impacted by currency and these economic headwinds, we remain confident in our strategy, committed to improving profitability and focused on delivering value for our shareholders. We believe the investments we're making in our high-usage hardware and high-value software technologies to bring new and differentiated solutions and services to market will drive long-term growth in our business, sustain margins and drive long-term value for Lexmark and our shareholders.

With that, I'll turn it back over to the operator to close out the call.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.

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