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Lexmark International Inc. (LXK - Analyst Report) has posted second quarter 2012 earnings per share (EPS) of 89 cents, missing the Zacks Consensus Estimate by a penny. The reported EPS also missed the company’s guidance range of 95 cents to $1.05. A challenging macro environment, Euro concerns and currency headwind impacted Lexmark’s results in the quarter. Shares slumped 12.75% in the day’s trade and 0.06% after hours.

Revenue

Lexmark’s second quarter revenue of $918.6 million dropped 12.0% from $1.04 billion in the year-ago quarter and was much lower than the Zacks Consensus Estimate of $946.0 million. The year-over-year decline was worse than the company’s expected range of 7.0–9.0%.

On a year-over-year basis, Hardware revenues declined 17.0% while Supplies dropped 14.0%. However, Software and Other revenue climbed 24.0%.

Core revenue declined 9%, while Legacy revenue declined 35% year over year. Imaging Solutions and Services revenue decreased 14.0% year over year to $875.0 million. Perceptive Software revenue grew 88.0% year over year to $46.0 million.

Operating Results

Gross margin in the quarter was 39.3%, down from 39.6% in the year-ago quarter due to unfavorable mix.

Reported operating margin was 6.6% compared to 13.2% in the year-ago quarter. Total operating expense increased 9.0% due to a 10.2% rise in selling, general and administrative expense and 4.4% rise in research and development expenses.

Net income on a GAAP basis was $39.2 million or 55 cents per share compared to $101.3 million or $1.27 in the year-ago quarter. Adjusting for restructuring-related charges and project costs as well as acquisition-related adjustments, non-GAAP net income was $64.0 million or 89 cents per share compared to $109.0 million or $1.36 in the year-ago quarter.

Balance Sheet & Cash Flow

Lexmark ended the quarter with $915.8 million in cash, cash equivalents and marketable securities, down from $949.4 million in the previous quarter. The reduced cash balance was due to share buyback and dividend payment during the quarter. Trade receivables were $479.1 million and inventories were $305.7 million. The company’s long-term debt balance remained flat sequentially at $649.4 million.

The company generated $49.0 million in cash from operations, down from $92.0 million in the previous quarter. Capital expenditures totaled $38.0 million versus $48.0 million in the prior quarter.

Lexmark bought back shares worth $25.0 million during the second quarter. The company had roughly $186.0 million remaining under its existing share repurchase authorization at quarter end. Moreover, the company paid a quarterly dividend of 30 cents per share, totaling $21.0 million.

Guidance

For the third quarter of 2012, management expects revenue to decline 9.0% to 11.0% year over year. Earnings on a GAAP basis are expected in the range of 52–62 cents per share.

Excluding 7 cents per share for restructuring charges and 16 cents for acquisition-related adjustments, non-GAAP earnings are expected in the range of 75 cents–85 cents. However, the Zacks Consensus Estimate for the third quarter is pegged at 96 cents, which is above the company’s guided range.

Our Take

Lexmark’s second quarter results were disappointing with both the top and bottom lines missing the Zacks Consensus Estimates. The company also provided an unimpressive revenue and earnings outlook for the third 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 Federal Aviation Administration for a sum of $21.0 million.

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.

Currently, Lexmark has a Zacks #5 Rank, implying a short-term “Strong Sell” rating.

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