Lexmark Profits on Higher Sales - Analyst Blog

Lexmark International Inc. (LXK">LXK) posted decent fourth quarter 2010 earnings per share of $1.29, surpassing the Zacks Consensus Estimate of $1.11 and its own guidance range of $1.03–$1.13. The outperformance was attributable to strong demand for laser printers and higher margins.

Revenue

Lexmark's fourth quarter revenue of $1.10 billion increased 2.9% from $1.04 billion reported in the year-ago quarter, but came in slightly below the Zacks Consensus Estimate of $1.11 billion. The improvement was driven by an 8.0% year-over-year growth in Laser Printer revenue.

On a year-over-year basis, revenues grew 3% in Hardware, 1% in Supplies and a whopping 42% in Other. Imaging Solutions and Services revenues inched up 1% year over year to $1.09 billion. Perceptive Software revenue was $17 million.

Operating Results

On a GAAP basis, gross margin in the fourth quarter was 35.6% compared to 35.7% in the year-ago quarter. After adjusting restructuring and acquisition related charges, non-GAAP gross margin was 36.5%, up 40 basis points from the year-ago quarter.

The quarter's GAAP operating margin stood at 9.2% (including $20.0 million in pre-tax restructuring and acquisition-related charges) compared to 8.4% (including $46.0 million in pre-tax restructuring charges) in the year-ago quarter. Excluding special items, operating margin on a non-GAAP basis stood at 11.0% versus 12.6% in the year-ago quarter.

Operating margin decreased as a result of an increase in operating expense to revenue ratio to 25.5% from 24.3% in the comparable quarter last year. Total operating expense increased due to a 21.9% rise in selling, general and administrative expenses and a 3.6% increase in research and development expenses.

Net income on a GAAP basis was $88.0 million or $1.10 per share, compared to $60.0 million or 76 cents in the year-ago quarter. Excluding special items, non-GAAP net income was $103.0 million or $1.29 per share, compared to $92.0 million or $1.16 per share in the year-ago quarter.

Balance Sheet & Cash Flow

Lexmark ended the quarter with $1.22 billion of cash, cash equivalents and marketable securities, up from $1.12 billion in the previous quarter. Trade receivables were $479.6 million and inventories stood at $366.1 million. The company's long-term debt balance remained at $649.1 million, flat with the previous quarter.

The company generated $153.0 million of cash from operations, up from $130.0 million in the previous quarter. Capital expenditures in the quarter totaled $53.0 million versus $28.0 million in the prior quarter.

Guidance

For the first quarter of 2011, management expects revenue to grow 1% from the year-ago quarter. Earnings on a GAAP basis are expected to be in the range of $1.08–$1.18 per share. Excluding $0.10 per share for restructuring and acquisition related adjustments, non-GAAP earnings are expected in the range of $1.18–$1.28.

Our Take

Lexmark is well positioned in the printer market. The company's fourth quarter earnings exceeded the Zacks expectations, although the top line missed marginally.Lexmark provided a lackluster revenue outlook for the fourth quarter, which we consider as conservative given its strong share in the printing and imaging market and continuous efforts to enhance the quality and quantity of its product portfolio.

Despite stiff competition from key players such as Hewlett-Packard Company (HPQ">HPQ), Canon Inc. (CAJ">CAJ), Epson and Samsung, we believe that Lexmark will benefit from its retail presence as it sells through Best Buy Co. (BBY">BBY) stores in the U.S.

Currently, Lexmark has a short-term Hold rating, implying a Zacks #3 Rank.

 
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