Lexmark International Inc.
) posted adjusted third-quarter 2013 earnings per share (EPS) of
95 cents, beating the Zacks Consensus Estimate of 92 cents. The
beat was mainly attributable to better-than-expected operating
income from the Imaging Solutions and Services (ISS) segment,
strong revenue growth and lower operating expenses. Adjusted
earnings matched the high end of the company's guided range of
Lexmark's third-quarter revenues of $890.5 million dropped
3.1% from $919.2 million in the year-ago quarter but were higher
than the Zacks Consensus Estimate of $874.0 million. The
year-over-year decline was due to macro-economic weakness and its
exit from the Inkjet business.
Perceptive Software and Managed Printing Services (MPS)
provided good support as the year-over-year decline was lower
than the company's expectations of a 4.0% - 6.0% decline.
Currency headwinds were limited.
On a year-over-year basis, Hardware revenues declined 11.0%
while Supplies dropped 4.0%. However, Software and Other revenues
Revenues from the ISS segment decreased 5.0% year over year to
$837.0 million. Within ISS, revenues from MPS grew 18.0%, which
was offset by 1.0% decline in non-MPS revenues and sale of the
Inkjet business. Perceptive Software revenues (excluding
acquisition-related adjustments) grew 38.0% year over year to
Non-GAAP gross margin in the quarter was 40.5%, up 68 basis
points (bps) from 39.8% in the year-ago quarter due to favorable
Pro forma operating margin dropped 39 bps to 10.1% from 10.5%
in the year-ago quarter. Total operating expense increased
marginally (up 0.4%) from the year-ago quarter to $270.1
Non-GAAP net income was $60.5 million or 95 cents compared
with $65.0 million or 94 cents in the year-ago quarter. Adjusted
net income includes restructuring-related charges as well as
Balance Sheet & Cash Flow
Lexmark ended the quarter with $973.6 million in cash, cash
equivalents and marketable securities, down from $981.2 million
in the previous quarter. Trade receivables were $488.0 million
and inventories were $295.0 million. The company's long-term debt
balance was $699.6 million, flat sequentially.
The company generated $143.0 million in cash from operations,
up from $87.0 million in the previous quarter. Capital
expenditure totaled $45.0 million compared with $39.0 million in
the prior quarter.
Lexmark bought back 0.5 million shares worth $21.0 million
during the third-quarter. Moreover, the company paid a quarterly
dividend of 30 cents per share, totaling $19.0 million.
For the fourth-quarter of 2013, management expects revenues to
decline 3.0% to 5.0% year over year. The weak guidance reflects
the negative impact from the exit of the Inkjet business.
Excluding restructuring charges and acquisition-related
adjustments, non-GAAP earnings are expected in the range of
$1.07-$1.17 per share.
Management expects Laser supplies to be roughly flat on a
year-over-year basis. 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 to be
For fiscal year 2013, Lexmark expects revenues to decline 5.0%
to 6.0% year over year, primarily due to the adverse effect of
the Inkjet business exit. Excluding restructuring charges and
acquisition-related adjustments, non-GAAP earnings are expected
in the range of $3.85-$3.95 per share. For the long term, the
company expects operating margin in the range of 11% to 13%.
Lexmark's third-quarter results were impressive with both the
top and bottom lines beating the Zacks Consensus Estimate.
Revenues came in below the year-ago period but were better than
expected. Guidance for the fourth quarter was disappointing,
reflecting the inkjet exit and macro uncertainty. Though
synergies from the recent acquisitions and renewed focus on the
software space could set it back on the growth path, their impact
on results could still be some way off.
But 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.
Though the 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
We see good growth prospects for Lexmark in the software
sector although the company is also trying its luck at new
hardware solutions. 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.
Lexmark is doing really well in the MPS market and is winning
deals continuously. It has been declared a leader in this market
by research firms IDC and
Though constant pricing pressure from competitors such as
) and a high debt burden will be concerns, we expect Lexmark to
turn the tables with an increased focus on software and
Currently, Lexmark has a Zacks Rank #3 (Hold).
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