Renowned printing and imaging solutions provider, Lexmark International Inc. announced some operational changes to boost its earnings potential and cash position. Post-announcement, Lexmark shares surged.
According to the restructuring plan, Lexmark will abandon its consumer-based inkjet hardware (printers) business, which failed to generate profits for the past few quarters. The company intends to focus more on the high-margin imaging and software solutions business. However, Lexmark will continue to provide Inkjet supplies and software services.
Concurrent with this decision, Lexmark is also planning to shut down its inkjet supplies manufacturing facility situated in Cebu, Philippines, by 2015. The closure of the plant will result in a reduction of 1,700 employees.
The exit from the Inkjet business is expected to save cash of roughly $85.0 million annually in 2013 and roughly $95.0 million annually by 2015. But the company has to record a pre-tax severance charge of $110.0 million in 2012, $30.0 million in 2013, and $10.0 million in 2014 and 2015 each.
Apart from the restructuring plans, Lexmark also announced the continuation of its share buyback program. As per the plan, the company will spend an additional $100.0 million on common share repurchases by the second half of 2012. Moreover, the board of directors has approved authorization for another $200.0 million buyback.
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.
Though its strength in the Managed Printing Services arena is a positive for Lexmark, constant price wars amongst competitors such as Canon Inc., Xerox Corp. (XRX - Free Report) and Hewlett-Packard Co. (HPQ - Free Report) and a high debt burden will keep the company’s fundamentals under pressure.
Currently, Lexmark has a Zacks #5 Rank, implying a short-term Strong Sell rating.