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Lexmark (LXK) Misses on Q1 Earnings; Revenues Down Y/Y

Lexmark International Inc. LXK started 2016 on a dismal note. The company’s earnings were lower than expectations while revenues fell from the first-quarter 2015 level. The company’s non-GAAP earnings of 31 cents per share were way below the Zacks Consensus Estimate of 85 cents. Reported earnings also witnessed a year-over-year plunge of 61.7%.

Lexmark’s first-quarter non-GAAP revenues (excluding acquisition and divestiture-related adjustments) of $812 million dropped 5% from the year-ago quarter. On a GAAP basis, revenues came in at $806.2 million, again down 5.4%.

The company’s quarterly results suffered due to a strong U.S. dollar, a decline in non-MPS revenues and the ongoing exit of the company from the inkjet business, which more than offset the benefit from revenue growth at the MPS and Enterprise Software businesses.

Segment-wise, non-GAAP revenues at Enterprise Software and MPS were up 60% and 2%, respectively. On the other hand, ISS and non-MPS revenues tumbled a respective 13% and 14%.

Non-GAAP gross profit in the quarter came at $335 million, down 3.5%. However, gross margin expanded 70 basis points (bps) to 41.2%. Total non-GAAP operating expenses increased over 23.8% to $356.5 million. Operating expenses, as a percentage of revenues, increased to 44.2% from 33.8% in the prior-year quarter.

Consequently, the company’s non-GAAP operating income plunged 51.9% to $39 million, while the operating margin contracted 470 bps to 4.8%.

Lexmark’s non-GAAP net income margin shrunk 350 bps to 2.4%. On a dollar basis, net income slumped 61% year over year to $19.6 million. Non-GAAP net income excluded restructuring-related charges & project costs, as well as acquisition and divestiture-related adjustments.

Balance Sheet & Cash Flow

Lexmark exited the quarter with $127 million in cash, cash equivalents and marketable securities, compared with the quarter-ago level of $158.3 million. Trade receivables were $420.4 million whereas inventories were $232.9 million. The company’s long-term debt balance was $992 billion, compared with $1.061 billion in the last quarter.

The company generated $79 million of cash from operational activities. Capital expenditure totaled $23 million during the first quarter.

Recent Development

On Apr 19, 2016, Lexmark agreed to be acquired by a consortium led by Apex Technology Co., Ltd. and PAG Asia Capital. Legend Capital Management Co., Ltd. is one of the buyers. Per the agreement, the consortium will acquire Lexmark for $3.6 billion or $40.50 per share in cash.

Considering this, the company has decided to not conduct “a conference call with securities analysts and investors in conjunction with its first quarter 2016 earnings release and does not expect to do so for future quarters while the acquisition of the company by a consortium of investors comprised of Apex Technology, PAG Asia Capital and Legend Capital is pending.”

Our Take

Lexmark’s first-quarter results were not very encouraging given the earnings miss. Also, both earnings and revenues decreased on a year-over-year basis primarily due to strong U.S. dollar, decline in non-MPS revenues, and the ongoing exit of the company from the inkjet business.

Although Lexmark has a strong market position, reduced demand for traditional printing hardware and overall macroeconomic uncertainties have been dampening demand.

In our opinion, the recent acquisition deal would be beneficial for Lexmark given that it was struggling amid changing industry dynamics.

However, the deal may bring on some challenges as well. This is because the takeover of U.S companies by Chinese organizations is not as simple as it sounds. In recent times, China's Unisplendour Corp Ltd failed to purchase a 15% stake in Western Digital Corp. WDC after CFIUS, an inter-agency committee of the U.S. government, asked for an investigation to ensure that national security wasn’t being compromised in the process of the takeover.

Competition from players like Canon Inc. CAJ, Xerox Corp. and HP Inc. HPQ are additional concerns.

Currently, Lexmark has a Zacks Rank #3 (Hold).

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