Lexmark Rev Beats, EPS In Line

Zacks

Lexmark International Inc. (LXK) has posted first quarter 2012 earnings per share (EPS) of $1.05, in line with the Zacks Consensus Estimate. The reported EPS was tilted toward the higher end of the company’s guidance range of 98 cents to $1.08. A challenging macro environment impacted Lexmark’s results in the quarter. Shares fell 6.48% in the day’s trade, though no movement was noticed in after hours.

Revenue

Lexmark’s first quarter revenue of $992.5 million dropped 4.1% from $1.03 billion in the year-ago quarter and was better than the Zacks Consensus Estimate of $987.0 million. The year-over-year decline was consistent with the company’s expectation.

On a year-over-year basis, Hardware revenues declined 9.0% while Supplies dropped 4.0%. However, Software and Other revenue climbed 10.0%.

Imaging Solutions and Services revenue decreased 5.0% year over year to $963.0 million. Perceptive Software revenue grew 41.0% year over year to $30.0 million.

Operating Results

Gross margin in the quarter stood at 38.4% compared with 37.6% in the year-ago quarter.

Reported operating margin was 9.0% compared to 10.9% in the year-ago quarter. Total operating expense increased 5.7% due to a 6.4% rise in research and development expense and 2.0% upside in selling, general and administrative expenses.

Net income on a GAAP basis was $60.8 million or 84 cents per share compared to $83.3 million or $1.04 in the year-ago quarter. Adjusting for restructuring-related charges and project costs as well as acquisition-related adjustments, non-GAAP net income was $76.0 million or $1.05 per share compared to $91.0 million or $1.14 per share in the year-ago quarter.

Balance Sheet & Cash Flow

Lexmark ended the quarter with $949.4 million in cash, cash equivalents and marketable securities, down from $1.15 billion in the previous quarter. The reduced cash balance was due to share buyback, dividend payment and three consecutive acquisitions during the quarter. Trade receivables were $474.3 million and inventories $328.6 million. The company’s long-term debt balance remained flat year over year at $649.4 million.

The company generated $92.0 million in cash from operations, down from $164.0 million in the previous quarter. Capital expenditures totaled $48.0 million versus $46.0 million in the prior quarter.

Lexmark bought back shares worth $30.0 million during the first quarter. The company had roughly $211.0 million remaining under its existing share repurchase authorization at quarter end. Moreover, the company paid a quarterly dividend of 25 cents per share, totaling $18.0 million.

Guidance

For the second quarter of 2012, management expects revenue to decline 7.0% to 9.0% year over year. Earnings on a GAAP basis are expected in the range of 65–75 cents per share.

Excluding 14 cents per share for restructuring charges and 16 cents for acquisition-related adjustments, non-GAAP earnings are expected in the range of 95 cents–$1.05. However, the Zacks Consensus Estimate for the second quarter is pegged at $1.10, above the company’s guided range.

During the fourth quarter, Lexmark announced major restructuring plans for 2012. The restructuring effort will include developing new business products and forming new distribution channels. The company expects these actions to be operational by the end of the first quarter of 2013.

The major restructuring initiative will attract total pre-tax charges of approximately $35.0 million. On the other hand, the program will generate cash savings of approximately $15.0 million in 2012 and roughly $28.0 million in 2013.

Our Take

Lexmark’s first quarter results were a mixed bag with the top line matching the Zacks Consensus Estimate and the bottom line surpassing the same. The company also provided an unimpressive revenue outlook for the second quarter of 2012. Though new products launched during the quarter could win back lost market share, their impact on results could still be some way off.

Lexmark is doing really well in the Managed Printing Services (:MPS) market. It has been declared a leader in this market by the research firms IDC and Gartner. The company recently clinched a 5-year deal from the U.S. Department of Agriculture for a sum of $50.0 million.

Lexmark operates in a highly competitive market. So, there is a constant price war among major players such as Xerox Corp. (XRX) and Hewlett-Packard Co. (HPQ) to snatch market share from one another. On top of that, the market is narrowing with the advent of digital technology and e-commerce.

However, Lexmark may benefit from its retail presence as it sells through Best Buy Co. (BBY) stores in the U.S.

Currently, Lexmark has a Zacks #2 Rank, implying a short-term Buy rating.

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