Lexmark 2Q Earnings Beat, View Cautious - Analyst Blog

Lexmark International Inc. ( LXK ) posted adjusted second quarter 2013 earnings per share (EPS) of 95 cents, surpassing the Zacks Consensus Estimate of 88 cents. The beat was mainly attributable to better-than-expected revenue growth and lower operating expenses. The results were above the company's guidance range of 80-90 cents.


Lexmark's second quarter revenues of $886.7 million dropped 3.5% from $918.6 million in the year-ago quarter but were higher than the Zacks Consensus Estimate of $859.0 million. The year-over-year decline was due to macro economic weakness and its exit from the Inkjet business.

However, decent growth in Perceptive Software and Managed Printing Services (MPS) provided good support as the year-over-year decline was lower than the company expected range of 6.0% - 8.0% decline. Currency headwinds were limited.

On a year-over-year basis, Hardware revenues declined 14.0% while Supplies dropped 4.0%. However, Software and Other revenues climbed 23.0%.

Imaging Solutions and Services (ISS) revenues decreased 5.0% year over year to $828.0 million. Within ISS, revenues from MPS grew 12.0%, 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 34.0% year over year to $62.0 million.

Operating Results

Gross margin in the quarter was 38.4%, down from 39.3% in the year-ago quarter due to unfavorable mix.

Reported operating margin was 14.4% compared with 6.6% in the year-ago quarter. The improvement was mainly due to a gain from the sale of the inkjet business. Total operating expense decreased 29.2% due to a 14.6% fall in research and development expenses, 0.3% decrease in selling, general and administrative expense and the gain from the sale of the inkjet business.

Net income on a GAAP basis was $88.9 million or $1.39 per share compared with $39.2 million or 55 cents in the year-ago quarter. Adjusting for restructuring-related charges as well as acquisition-related adjustments, non-GAAP net income was 95 cents per share compared with 89 cents in the year-ago quarter.

Balance Sheet & Cash Flow

Lexmark ended the quarter with $981.2 million in cash, cash equivalents and marketable securities, up from $880.0 million in the previous quarter. Trade receivables were $527.9 million and inventories were $272.1 million. The company's long-term debt balance was $699.6 million, flat sequentially.

The company generated $87.0 million in cash from operations, up from $38.0 million in the previous quarter. Capital expenditure totaled $39.0 million compared with $43.0 million in the prior quarter.

Lexmark bought back 0.7 million shares worth $20.0 million during the second quarter. Moreover, the company paid a quarterly dividend of 30 cents per share, totaling $19.0 million.


For the third quarter of 2013, management expects revenues to decline 4.0% to 6.0% year over year. The weak guidance includes the negative impact from the exit of the inkjet business. Earnings on a GAAP basis are expected in the range of 46-56 cents per share.

Excluding restructuring charges and acquisition-related adjustments, non-GAAP earnings are expected in the range of 85 cents-95 cents per share. However, the Zacks Consensus Estimate for the third quarter is pegged at 92 cents, which is toward the higher end of company guided range.

Management also expects to save roughly $85.0 million in costs through 2013, helped by restructuring initiatives announced in Aug 2013. It also affirmed its view to return 50.0% of free cash flow to shareholders through share buybacks and dividends.

Our Take

Lexmark's second quarter results were impressive with both the top and bottom lines surpassing the Zacks Consensus Estimate. Revenues came below the year-ago period but were better than expected. Guidance for the third quarter was deterring, reflecting inkjet exit and macro uncertainty. Though synergies from the recent acquisitions and renewed focus on the software space could win back lost market share, 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 software revenues.

Though the restructuring and share buyback plans could boost share prices in the near term, the overall outlook for the printing industry will remain bearish. Demand for printers is slowing down due to increasing usage of digital content through mobile devices.

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 Gartner Inc. ( IT ).

Though constant pricing pressure from competitors such as Canon Inc., Xerox Corp. ( XRX ) and Hewlett-Packard Co. ( HPQ ) and a high debt burden will be a concern, we expect Lexmark to turn the tables with an increased focus on software and services.

Currently, Lexmark has a Zacks Rank #3 (Hold).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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