Lexmark International Inc. (LXK) posted decent third quarter earnings per share of $1.09, beating the Zacks Consensus Estimate of 97 cents. The earnings beat was attributable to higher margins.
Revenue
Lexmark’s third quarter revenue of $1.02 billion increased 6.4% from $958.0 million reported in the year-ago quarter, but came in below the Zacks Consensus Estimate of $1.04 billion. Revenue growth came from a rejuvenated product portfolio, growth in managed print services and high-end inkjet products, as well as the company’s continued focus on business customers in the inkjet segment.
However, some analysts believe that Lexmark has lost share in the hardware market to its competitor Hewlett-Packard & Co. (HPQ), leading to lackluster revenue performance in the quarter.
The Printing Solutions and Services Division generated $731.0 million in revenues, up 12.0% year over year. Imaging Solutions Division’s revenue was $274.0 million, down 10.0% from the year-ago quarter.
Operating Results
On a GAAP basis, gross profit margin in the third quarter was 35.4% up from 32.7% in the year-ago quarter. After adjusting restructuring-related and acquisition-related charges, non-GAAP gross margin was 36.5%, up 260 basis points from the year-ago quarter.
The quarter’s GAAP operating margin stood at 9.1% (including $19.0 million in pre-tax restructuring and acquisition-related charges) compared to 2.5% (including $51.0 million in pre-tax restructuring charges) in the year-ago quarter.
Excluding special items, operating margin on a non-GAAP basis stood at 10.9% versus 7.8% in the year-ago quarter. Operating margin increased as a result of a decrease in operating expense to revenue ratio to 25.7% from 26.1% in the comparable period last year.
Net income on a GAAP basis was $72.0 million or 90 cents per share, compared to $10.0 million or 13 cents in the year-ago quarter. Excluding special items, non-GAAP net income was $87.0 million or $1.09 per share, compared to $51.0 million or 65 cents per share in the year-ago quarter.
Balance Sheet & Cash Flow
Lexmark ended the quarter with $1.12 billion of cash, cash equivalents and marketable securities, up from $1.00 billion reported in the previous quarter. The company’s long-term debt balance remained at $649.1 million, flat with the previous quarter.
The company generated $130.0 million of cash from operations, up from $91.0 million in the previous quarter. Capital expenditures in the quarter totaled $28.0 million.
Guidance
For the fourth quarter, management expects low single-digit revenue growth. Earnings on a GAAP basis, is expected to be in the range of 86–96 cents per share. Excluding 17 cents per share for restructuring-related and acquisition-related adjustments, non-GAAP earnings are expected to be in the range of $1.03–$1.13.
Our Take
Lexmark is well positioned in the printer market. The company’s third quarter earnings have exceeded Zacks expectations, though the top line missed marginally. Lexmark provided an uninteresting revenue outlook for the fourth quarter, which we consider as conservative given its strong share in the printing and imaging market and continuous effort to enhance the quality and quantity of its product portfolio.
Though stiff competition from tech giant HP and prospective appointment of the new chief executive officer in the spring of 2011 remains a concern, we believe that Lexmark will benefit from its retail presence by putting its printers into Best Buy Co. stores in the U.S.
Currently, Lexmark has a short-term Buy rating implying Zacks #2 Rank.
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