Lexmark's EPS Beats, Revs In Line

Lexmark International Inc. (LXK - Analyst Report) has posted fourth quarter 2011 earnings per share of $1.25, beating the Zacks Consensus Estimate of $1.15. Reported EPS was in line with the higher end of the company’s guidance range of $1.15 to $1.25. Challenging macro environment impacted Lexmark’s results in the quarter.

Revenue

Lexmark’s fourth quarter revenue of $1.06 billion dropped 4.0% from $1.10 billion in the year-ago quarter and was in line with the Zacks Consensus Estimate. 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 3.0%. However, Software and Other revenue climbed 5.0%.

Imaging Solutions and Services revenues decreased 5.0% year over year to $1.01 billion. Perceptive Software revenue grew a whopping 41.0% year over year to $30.0 million.

Operating Results

Gross margin in the quarter stood at 37.4% compared to 35.6% in the year-ago quarter.

GAAP operating margin was 8.8% compared to 9.2% in the year-ago quarter. Total operating expense increased 3.9% due to a 2.6% rise in selling, general and administrative expenses and 1.7% upside in research and development expense.

Net income on a GAAP basis was $69.3 million or 94 cents per share compared to $87.6 million or $1.10 in the year-ago quarter. Adjusting for restructuring-related charges and project costs as well as acquisition-related adjustments, non-GAAP net income was $93.0 million or $1.25 per share compared to $103.0 million or $1.29 per share in the year-ago quarter.

Balance Sheet & Cash Flow

Lexmark ended the quarter with $1.15 billion in cash, cash equivalents and marketable securities, down from $1.22 billion in the previous quarter. Trade receivables were $457.8 million and inventories $335.5 million. The company’s long-term debt balance remained flat year over year at $649.3 million.

The company generated $164.0 million in cash from operations, up from $48.0 million in the previous quarter. Capital expenditures totaled $46.0 million versus $41.0 million in the prior quarter.

Share Repurchase

Lexmark bought back shares worth $125 million during the fourth quarter. The company has roughly $241.0 million remaining under its existing share repurchase authorization at quarter end.

Guidance

For the first quarter of 2012, management expects revenue to decline 4.0% to 6.0% year over year. Earnings on a GAAP basis are expected in the range of 76–86 cents per share.

Excluding 14 cents per share for restructuring charges and 8 cents for acquisition-related adjustments, non-GAAP earnings are expected in the range of 98 cents–$1.08. However, the Zacks Consensus Estimate for the first quarter is pegged at $1.12, above the company’s guided range.

Lexmark also announced major restructuring plans in 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 fourth 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 first quarter of 2012. Though new products launched during the quarter could win back lost market share, their impact on results is still  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 brewer giant Anheuser-Busch InBev (BUD - Snapshot Report).

Lexmark operates in a highly competitive market. So there is a constant price war among major players such as Xerox Corp. (XRX - Analyst Report) and Hewlett-Packard Co. (HPQ - Analyst Report) 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 - Analyst Report) stores in the U.S.

Currently, Lexmark has a Zacks #3 Rank, implying a short-term Hold rating.

Read the full analyst report on XRX

Read the full analyst report on LXK

Read the full analyst report on HPQ

Read the full analyst report on BBY

Read the full analyst report on BUD