Lexmark International Inc.’s (LXK) second quarter 2010 EPS of $1.23 per share exceeded the Zacks Consensus Estimate of $0.92. Earnings were also higher than $0.55 per share recorded in the year-ago quarter. Revenue for the quarter of $1033.0 million also exceeded the Zacks Consensus of $970.0 million.
Revenue
Second quarter revenue of $1033.0 million increased 14.0% compared to $904.6 million reported in the year-ago quarter. The substantial growth in revenue can be attributed to growth in both hardware and supplies. This apart, revenue growth has also been augmented by the enhancement of the product portfolio, growth in managed print services, the company’s continuous focus on business customers of the inkjet segment, and growth achieved in lasers as well as high-end inkjet products.
Printing Solutions and Services Division revenue for the second quarter was $752.0 million, an increase of 20% on a year-over-year basis. Imaging Solutions Division revenue was $275.0 million, down 2.0% compared to the year-ago quarter.
Operating Results
Gross profit margin for the second quarter was 36.8% up from 31.0% in the year-ago quarter. On a non-GAAP basis, the company generated a gross margin of 37.4% compared to 33.4% reported in the year-ago quarter.
Operating margin for the reported quarter stood at 11.5% (including $17 million in pre-tax restructuring and acquisition-related charges) compared to an operating margin of 3.1% (including $32 million in pre-tax restructuring charges) reported in the year-ago quarter. Excluding special items such as restructuring charges and acquisition related adjustments, the second quarter operating margin on a non-GAAP basis stood at 14.2%, compared to 6.5% in the year-ago quarter. Operating margin increased following a meaningful decrease in operating expense to revenue ratio to 24.3% from 26.9% last year.
For the reported quarter, net income on a GAAP basis was $85.1 million or $1.07 per share, compared to a net income of $17.0 million or $0.22 in the year-ago quarter. Excluding special items such as restructuring related charges and acquisition-related adjustments of $0.16 per share, the non-GAAP net income for the quarter was $98.0 million or $1.23 per share, compared to $43.0 million or $0.55 per share in the year-ago quarter.
Balance Sheet
Lexmark ended the quarter with $1.00 billion of cash, cash equivalents and marketable securities, down from $1.20 billion reported in the previous quarter. The company’s long-term debt balance remained at $649 million, flat compared to the previous quarter. The company generated $91.0 million cash from operations, down from $146.0 million reported in the year-ago quarter. Capital expenditures for the quarter totaled $37 million.
Guidance
Management expects third quarter 2010 earnings to be in the mid-to-high single-digit percentage range, substantially higher than in the year-ago quarter. The GAAP EPS is expected to come in the range of $0.70 – $0.80.
Conclusion
Lexmark International is well positioned in the printer market. The company’s second quarter 2010 results have exceeded our expectations, and it has also provided a positive outlook for the third quarter. The company has a reasonably strong share in the printing and imaging market and continues to enhance the quality and quantity of its product portfolio.
This apart, the company is reaping the benefits of a revival in IT spending, and customer demand remains strong. On the other hand, Lexmark faces some competition in the printing space due to the increasing availability of cheaper substitutes such as ink/consumables supplies.
We have a Zacks #3 Rank (short-term Hold rating) on Lexmark shares.
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