Lexmark International Inc. (LXK) has posted third quarter 2011 earnings per share of 95 cents, missing the Zacks Consensus Estimate of $1.02. The quarter’s results came in line with the lower end of its guidance range of 94 cents to $1.04. The quarter’s disappointment was mostly due to higher tax rate.
Revenue
Lexmark’s third quarter revenue of $1.03 billion grew 1.5% from $1.02 billion in the year-ago quarter and surpassed the Zacks Consensus Estimate of $1.01 billion.
On a year-over-year basis, Hardware revenues grew 2.0% and Software and Other revenue climbed 15.0%. Supplies were flat.
Imaging Solutions and Services revenues grew 1.0% year over year to $1.01 billion. Perceptive Software revenue recorded a whopping 57.0% year-over-year growth to reach $23.0 million.
Operating Results
The reported gross margin was 36.9% in the third quarter compared to 35.4% in the year-ago quarter.
GAAP operating margin was 9.6% compared to 9.1% in the year-ago quarter. Total operating expense increased 5.5% due to a 5.2% rise in selling, general and administrative expenses, and 3.9% in research and development expense.
Net income on a GAAP basis was $67.0 million or 86 cents per share, compared with $72.0 million or 90 cents in the year-ago quarter. Adjusting restructuring-related charges and project costs as well as acquisition-related adjustments, non-GAAP net income was $74.0 million or 95 cents per share, compared with $87.0 million or $1.09 per share in the year-ago quarter.
Balance Sheet & Cash Flow
Lexmark ended the quarter with $1.22 billion in cash, cash equivalents and marketable securities, down from $1.34 billion in the previous quarter. Trade receivables were $468.4 million and inventories were $343.6 million. The company’s long-term debt balance stood at the prior-quarter level of $649.3 million.
The company generated $48.0 million in cash from operations, down from $94.0 million in the previous quarter. Capital expenditures totaled $41.0 million versus $34.0 million in the prior quarter.
Share Repurchase
In August, Lexmark announced its intention to resume a share buyback program. At a conference call, the printing solution provider commented that it has managed to generate strong cash as well as maintain a superb liquidity position. The re-initiation of the share repurchase program is indicative of management's commitment and is a good way of encouraging investor confidence as it would return shareholder value.
The repurchase program had received the board's approval back in May 2008. As per the approval, Lexmark was allowed to buy back an additional $0.75 billion of its Class A Common Stock for a total repurchase value of $4.65 billion.
Now, the company expects to buy back $250.0 million shares of its common stock during the back half of this year. Lexmark has already signed an initial accelerated share repurchase agreement for $125.0 million outstanding shares.
The company anticipates completing the remaining $125 million during the fourth quarter of 2011. The company's remaining share repurchase authorization will be about $366 million at quarter end.
Guidance
For the fourth quarter of 2011, management expects revenue to decline in the mid single-digit range from the year-ago quarter. Earnings on a GAAP basis are expected in the range of $1.02–$1.12 per share.
Excluding 5 cents per share for restructuring charges and 8 cents for acquisition-related adjustments, non-GAAP earnings are expected in the range of $1.15–$1.25. However, the Zacks Consensus Estimate for the fourth quarter, pegged at $1.12, is below the company’s guided range.
Lexmark anticipates another buyback of $125 million for the fourth quarter.
Our Take
Lexmark’s third quarter results lacked luster, with the bottom line missing our expectation. The company also provided an unimpressive revenue outlook for the fourth quarter. Though new products launched during the quarter could win back the lost market share, their impact on results could still be some way off.
Lexmark operates in a highly competitive market. So there is a constant price war among major players to snatch market share from one another. On top of that, the market is narrowing as digital technology and e-commerce.
However, Lexmark may benefit from its retail presence as it sells through Best Buy Co. (BBY) stores in the U.S.
Currently, Lexmark has a Zacks #3 Rank, implying a short-term Hold rating.
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