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Lexmark International Inc. (LXK - Analyst Report) has posted fourth quarter 2012 earnings per share (EPS) of 61 cents, missing the Zacks Consensus Estimate of 91 cents and the company’s guidance range of 82–92 cents. The miss was mainly attributable to higher- than-expected tax rate, which was due to mix shift toward higher tax regions.

Revenues

Lexmark’s fourth quarter revenue of $967.4 million dropped 8.7% from $1.06 billion in the year-ago quarter but was higher than the Zacks Consensus Estimate of $935.0 million. The year-over-year decline was better than the company’s expected range of 10.0–12.0% decline. The dampened year-over-year comparison was due to currency headwinds, weakness in Europe and its exit from the Inkjet business. However, decent growth in Perceptive Software and Managed Printing Services (MPS) provided good support.

On a year-over-year basis, Hardware revenues declined 15.0% while Supplies dropped 10.0%. However, Software and Other revenue climbed 27.0% (25.0% organic growth).

Imaging Solutions and Services (ISS) revenue decreased 10.0% year over year. The decline moderated from 13.0% year-over-year decrease recorded during the preceding quarter. Within ISS, revenues from MPS grew 3.0%, which was offset by 9.0% decline in non-MPS revenues. Perceptive Software revenues grew 37.0% year over year to $42.0 million. Revenues were flat when compared sequentially.

Operating Results

Gross margin in the quarter was 34.1%, down from 37.4% in the year-ago quarter due to unfavorable mix.

Reported operating margin was 2.6% compared with 8.8% in the year-ago quarter. Total operating expense increased 0.3% due to a 3.7% rise in selling, general and administrative expense and higher one-time expenses. This was mostly offset by a 10.4% decline in research and development expenses.

Net income on a GAAP basis was $6.3 million or 10 cents per share compared with $69.3 million or 94 cents in the year-ago quarter. Adjusting for restructuring-related charges as well as acquisition-related adjustments, non-GAAP net income was 61 cents per share compared with $1.25 in the year-ago quarter.

Balance Sheet & Cash Flow

Lexmark ended the quarter with $905.8 million in cash, cash equivalents and marketable securities, up from $859.3 million in the previous quarter. Trade receivables were $523.6 million and inventories were $277.3 million. The company’s long-term debt balance remained flat sequentially at $649.6 million.

The company generated $138.0 million in cash from operations, up from $133.0 million in the previous quarter. Capital expenditures totaled $38.0 million, flat sequentially.

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

Guidance

For the first quarter of 2013, management expects revenue to decline 11.0% to 13.0% year over year. The weak guidance includes negative impact from the exit of inkjet business. Earnings on a GAAP basis are expected in the range of 43–53 cents per share.

Excluding the restructuring charges and acquisition-related adjustments, non-GAAP earnings are expected in the range of 80 cents–90 cents. However, the Zacks Consensus Estimate for the first quarter is pegged at $1.04, which is above the company’s guided range.

The management also expects to save roughly $85.0 million in costs through 2013, helped by restructuring initiatives announced in Aug 2012. The company also plans to pursue acquisitions to strengthen product portfolio. It also affirmed its view to return 50.0% of free cash flow to shareholders through share buybacks and dividends.

Our Take

Lexmark’s fourth quarter results were not encouraging as its EPS missed the Zacks Consensus Estimate by a wide margin. Revenues came below the year-ago period but were better than expected. Guidance for the first quarter was deterring, too, reflecting inkjet exit and macro uncertainty. Though new products launched and acquisitions made during the quarter 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 revenue.

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. It has been declared a leader in this market by research firms IDC and Gartner. The company recently clinched a 5-year deal from the renowned oil and gas producer Anehuser-Busch InBev (BUD - Snapshot Report) for an undisclosed sum.

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

Currently, Lexmark has a Zacks Rank #4 (Sell).

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