Lexmark International Inc. (LXK) posted first quarter 2011 earnings per share of $1.14, missing the Zacks Consensus Estimate of $1.24 and its own guidance range of $1.18-$1.28. The results disappointed due to lower revenue, with operating expenses retaining the growth pattern.
Revenue
Lexmark’s first quarter revenue of $1.03 billion decreased 0.8% from $1.04 billion in the year-ago quarter and marginally missed the Zacks Consensus Estimate of $1.05 billion. The decline was due to lower printer shipments, which could be due to customers’ shift in preference toward digital documentation.
On a year-over-year basis, Hardware revenues fell 12.0% due to reductions in channel distribution. Supplies remained flat but Software and Other revenue grew 44.0%. The growth in Software revenue was due to demand for its products as well as market share gains.
Imaging Solutions and Services revenues dropped 3.0% to $1.09 billion. Perceptive Software revenue was $19.0 million.
Geographically, U.S. revenue of $434.0 million grew roughly 2% year over year. EMEA revenue declined 4% to $390 million, and the revenue from the rest of the world grew 1% to $213.0 million.
Operating Results
On a GAAP basis, gross margin was 37.6% in the first quarter compared to 36.9% in the year-ago quarter. After adjustments of restructuring and acquisition-related charges, non-GAAP gross margin was 38.2%, up 60 basis points from the year-ago quarter. The improvement was due to positive contribution from Supplies and Software revenue, partially offset by higher non-manufacturing costs.
The quarter’s GAAP operating margin was 10.9% (including $10.0 million in pre-tax restructuring and acquisition-related charges) compared to 12.8% (including $15.0 million in pre-tax restructuring charges) in the year-ago quarter. Excluding special items, operating margin was 11.9% versus 14.2% in the year-ago quarter.
Operating margin decreased to 26.7% as a result of an increase in operating expense to revenue ratio from 24.1% in the comparable quarter last year. Total operating expense increased due to a 17.8% rise in selling, general and administrative expenses.
Net income on a GAAP basis was $83.0 million or $1.04 per share, compared to $95.0 million or $1.20 in the year-ago quarter. Non-GAAP net income was $91.0 million or $1.14 per share, compared to $107.0 million or $1.35 per share in the year-ago quarter.
Balance Sheet & Cash Flow
Lexmark ended the quarter with $1.27 billion of cash, cash equivalents and marketable securities, up from $1.22 billion in the previous quarter. Trade receivables were $482.2 million and inventories stood at $364.8 million. The company’s long-term debt balance remained at $649.2 million, flat with the previous quarter.
The company generated $85.0 million of cash from operations, down from $153.0 million in the previous quarter. Capital expenditures in the quarter totaled $36.0 million versus $53.0 million in the prior quarter.
Guidance
Hence, for the second quarter of 2011, management expects revenue to decline by a low single-digit percentage from the year-ago quarter. Earnings on a GAAP basis are expected in the range of 89-99 cents per share.
Excluding 10 cents per share for restructuring and acquisition-related adjustments, non-GAAP earnings are expected in the range of $1.00–$1.10. The Zacks Consensus Estimate for the second quarter is $1.14, which is higher than the company’s guided range. We think that product launches could boost the quarter’s results.
Our Take
Lexmark’s first quarter results were disappointing, as both top and bottom lines missed Zacks expectations. Lexmark provided a lackluster revenue outlook for the second quarter. Though new products could stem market share losses, the impact on results could still be some way off. Though Lexmark faced little impact from Japan’s disaster, the company expects a mild jolt in its second quarter earnings.
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 #4 Rank, implying a short-term Sell rating.
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