Lexmark International Inc.
) moved up 2.6% on Jul 22, following better-than-expected second
quarter 2014 results. Moreover, a year-over-year increase in the
top line and an encouraging fiscal 2014 earnings guidance supported
Lexmark posted non-GAAP second-quarter 2014 earnings per share
(EPS) of 99 cents per share, beating the Zacks Consensus Estimate
of 92 cents per share. Non-GAAP earnings (excluding
restructuring-related charges & project costs, acquisition and
divestiture-related adjustments and, actuarial gain on pension
plan) surpassed the company's guided range of 85 cents-95cents per
share. However, earnings per share decreased 5.8% from the year-ago
quarter due to higher tax rate.
Lexmark reported second-quarter non-GAAP revenues (excluding
acquisition and divestiture-related adjustments) of $893.8 million
which not only increased 0.5% from the year-ago quarter but also
came ahead of the Zacks Consensus Estimate of $864.0 million.
On a GAAP basis, revenues came in at $891.8 million, up 0.6% from
the year-ago quarter. The year-over-year increases were primarily
attributed to higher revenues from Laser and Perceptive Software,
which more than offset a decline in Inkjet Exit revenues.
On a year-over-year basis, Hardware revenues grew 7.0% primarily
attributed to 9.0% growth in workgroup hardware revenues. On the
other hand, both Supplies revenues and Software and other revenues
decreased 1.0% each from the year-ago quarter. However, total Laser
supplies revenues increased 5.0% on a year-over-year basis.
Revenues from the Imaging Solutions and Services (ISS) segment
increased marginally on a year-over-year basis to $830.0 million.
Within ISS, revenues from Managed Print Services (MPS) grew 14.0%,
while non-MPS revenues increased 2.0% on a year-over-year basis.
However, Lexmark witnessed a 33.0% decline in Inkjet Exit revenue.
Perceptive Software revenues (excluding acquisition-related
adjustments) grew 3.0% year over year to $64.0 million driven by
higher software and subscription revenue (up 89.0% and 39.0%,
Non-GAAP gross margin in the quarter was 40.9%, up 36 basis points
(bps) from the year-ago quarter primarily due to strength in the
Non-GAAP operating income came in at $97.8 million, relatively flat
year over year, primarily due to efficient cost management and
strong laser business, which offset the decline in inkjet exit
revenues. Operating margin decreased 4 bps to 10.9% from the
year-ago quarter primarily due to higher operating expense as a
percentage of revenue (up 43 bps year over year). Total non-GAAP
operating expense increased 1.7% from the year-ago quarter to
Lexmark International Inc - Earnings Surprise |
Non-GAAP net income was $62.5 million or 99 cents per share
compared with $67.1 million or $1.06 per share in the year-ago
quarter. Non-GAAP net income excludes restructuring-related charges
& project costs, acquisition and divestiture-related
adjustments and, actuarial gain on pension plan.
Balance Sheet & Cash Flow
Lexmark exited the quarter with $1.03 billion in cash, cash
equivalents and marketable securities compared with $985.2 million
in the previous quarter. Trade receivables were $403.1 million and
inventories were $286.4 million. The company's long-term debt
balance was $699.7 million, flat sequentially.
The company generated $102.0 million in cash from operations, up
significantly from $10.0 million in the previous quarter. Free cash
flow was 76.0 million. Capital expenditure totaled $26.0 million
compared with $44.0 million in the previous quarter.
Lexmark paid dividends of $22.0 million (an increase of 20.0%) and
repurchased shares worth $19.0 million during the quarter.
For the third-quarter, management expects revenues to be in the
range of flat to down 2.0% year over year. Revenues excluding the
Inkjet Exit are expected to be up year over year. The weak guidance
reflects the negative impact from the exit of the Inkjet business.
Non-GAAP earnings are expected in the range of 85-95 cents
(mid-point 90 cents). The Zacks Consensus Estimate is pegged at
$1.15 per share.
Management expects Laser supplies to be roughly flat on a
year-over-year basis. Moreover, revenues from Perceptive Software
and MPS are expected to show constant growth. It also affirmed its
view to return 50.0% of free cash flow to shareholders through
share buybacks and dividends. Management also expects the effective
tax rate for fiscal 2014 to be approximately 29.0%.
Moreover, Lexmark expects gross margin to decrease marginally on a
year-over-year basis. Operating expense is expected to be up
sequentially while operating margin is expected to be down on a
For fiscal 2014, Lexmark expects revenues to be in the range of
flat to down 2.0% (previous guidance 2.0% to 4.0%) year over year,
primarily due to the shift to high margin solutions business.
Non-GAAP earnings are expected in the range of $3.95-$4.15 per
share (previous guidance $3.80 to $4.00). The Zacks Consensus
Estimate is pegged at $4.00 per share. For the long term, the
company expects operating margin in the range of 11.0% to 13.0%.
Lexmark's second-quarter results were better-than-expected wherein
both the top and bottom lines beat the Zacks Consensus Estimate.
Moreover, revenues increased on a year-over-year basis primarily
attributed to strong growth in Laser and Perceptive Software
Guidance for the third quarter was tepid, reflecting the Inkjet
exit, the shift to high margin solutions business and macro
uncertainty. However, the company provided an encouraging 2014
earnings guidance. Though synergies from acquisitions and renewed
focus on the software space could set it back on the growth path,
their impact on results could still take some time to materialize.
Nonetheless, we see the Inkjet exit as a positive. Lexmark will now
be able to focus more on MPS and the software business where growth
prospects are better. Moreover, Lexmark is doing really well in the
MPS market and is winning deals continuously.
Lexmark's recent bid for ReadSoft also bodes well as it will
strengthen its position in the European business process management
market. We believe that ReadSoft provides Lexmark the perfect
footing to expand its business process solutions business.
Though restructuring and share buyback plans could boost share
prices in the near term, the overall outlook for the printing
industry remains bearish. Demand for printers is slowing down due
to increasing usage of digital content through mobile devices.
We see good growth prospects for Lexmark in the software sector
although the company is also trying to expand its hardware
solutions business. But the overall macro uncertainty could have an
effect on product demand. Lexmark has a strong market position, but
reduced demand for traditional printing hardware has impacted
pricing in the computer peripherals market.
Though constant pricing pressure from competitors such as
) and a high debt burden remain concerns, we expect Lexmark to turn
the tables with an increased focus on software and services.
Currently, Lexmark has a Zacks Rank #1 (Strong Buy).
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