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Lexmark International Inc. (LXK - Analyst Report) has posted first-quarter 2013 earnings per share (EPS) of 88 cents, surpassing the Zacks Consensus Estimate of 86 cents. The beat was mainly attributable to better-than-expected revenue growth and lower operating expenses. The results were within the company’s guidance range of 80–90 cents.

Revenues

Lexmark’s first-quarter revenues of $884.3 million dropped 10.9% from $992.5 million in the year-ago quarter but was higher than the Zacks Consensus Estimate of $876.0 million. The year-over-year decline was better than the company’s expected range of 11.0%–13.0% decline. The dampened year-over-year comparison was due to weakness in Europe and its exit from the Inkjet business. However, decent growth in Perceptive Software and Managed Printing Services (MPS) provided good support. Currency headwinds were limited.

On a year-over-year basis, Hardware revenues declined 9.0% while Supplies dropped 16.0%. However, Software and Other revenues climbed 34.0% (37.0% organic growth).

Imaging Solutions and Services (ISS) revenues decreased 13.0% year over year to $840.0 million. Within ISS, revenues from MPS grew 10.0%, which was offset by 12.0% decline in non-MPS revenues. Perceptive Software revenues (excluding acquisition-related adjustments) grew 54.0% year over year to $44.0 million.

Operating Results

Gross margin in the quarter was 37.8%, down from 38.4% in the year-ago quarter due to unfavorable mix.

Reported operating margin was 6.1% compared with 9.0% in the year-ago quarter. Total operating expense decreased 3.9% due to a 15.9% fall in research and development expenses, partially offset by a 6.5% increase in selling, general and administrative expense.

Net income on a GAAP basis was $34.8 million or 54 cents per share compared with $60.8 million or 84 cents in the year-ago quarter. Adjusting for restructuring-related charges as well as acquisition-related adjustments, non-GAAP net income was 88 cents per share compared with $1.05 in the year-ago quarter.

Balance Sheet & Cash Flow

Lexmark ended the quarter with $880.0 million in cash, cash equivalents and marketable securities, down from $905.8 million in the previous quarter. Trade receivables were $493.5 million and inventories were $276.3 million. The company’s long-term debt balance was $699.6 million, significantly up from $299.6 million in the prior quarter.

The company generated $38.0 million in cash from operations, significantly down from $138.0 million in the previous quarter. Capital expenditures totaled $43.0 million compared with $38.0 million in the prior quarter.

Lexmark bought back 0.9 million shares worth $21.0 million during the first quarter. Moreover, the company paid a quarterly dividend of 30 cents per share, totaling $19.0 million.

Guidance

For the second quarter of 2013, management expects revenues to decline 6.0% to 8.0% 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 42–52 cents per share.

Excluding the restructuring charges and acquisition-related adjustments, non-GAAP earnings are expected in the range of 80–90 cents. However, the Zacks Consensus Estimate for the second quarter is pegged at 88 cents, which is at the higher end of company’s guided range.

Management also expects to save roughly $85.0 million in costs through 2013, helped by restructuring initiatives announced in Aug 2013. 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 first-quarter results were decent with both the top and bottom lines surpassing the Zacks Consensus Estimates. Quarter results came below the year-ago period but were better than expected. Guidance for the second quarter was deterring, reflecting inkjet exit and macro uncertainty. Though acquisitions (Twistage and AccessVia) made during the quarter and renewed focus on the software space could win back lost market share, their impact on results could still be some way off.

However, 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. 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 tables with an increased focus on software and services.

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

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