Lexmark (LXK) Q3 Earnings Increase Y/Y; Revenues Down

Lexmark International Inc. (NYSE:LXK) reported third-quarter 2016 non-GAAP earnings of 77 cents per share, up 35.1% year over year.

Lexmark’s third-quarter non-GAAP revenues (excluding acquisition and divestiture-related adjustments) of $846 million dropped 2.5% from the year-ago quarter. On a GAAP basis, revenues came in at $844 million, down 0.8%.

The company’s quarterly revenues suffered due to a strong U.S. dollar, lower-than-expected growth in non-MPS revenues and the ongoing exit of the company from the Inkjet business. Also, lower revenues from Enterprise Software businesses negatively impacted the quarter’s revenues.

Segment-wise, non-GAAP revenues at Enterprise Software were down 4.3%. Imaging Solutions and Services (ISS) however increased 0.4% year over year. Revenues from Non-MPS revenues remained flat on a year-over-year basis at $465 million. Moreover, Inkjet exit business also suffered a loss on a year-over-year basis.

Non-GAAP gross profit in the quarter came in at $349 million, down 1.7%. However, gross margin expanded 40 basis points (bps) to 41.3%. Operating expenses decreased 13.9% to 293.5 million. Operating expenses, as a percentage of revenues, decreased to 34.8% from 40.8% in the prior-year quarter.

Consequently, the company’s non-GAAP operating income increased 29.7% to $83 million, while operating margin expanded 250 bps to 9.9%.

Lexmark’s non-GAAP net income increased 40% year over year to $49 million. Non-GAAP net income excludes restructuring-related charges & project costs, as well as acquisition and other one-time related adjustments.

Balance Sheet & Cash Flow

Lexmark exited the quarter with $117.7 million in cash, cash equivalents and marketable securities, compared with the quarter-ago level of $103.1 million. Trade receivables were $397.5 million whereas inventories were $238.9 million. The company’s long-term debt balance was $1.017 billion compared with $988.7 million in the last quarter.

The company generated $25 million of cash from operational activities. Free cash flow came in at $9 million during the quarter. During the quarter, the company paid a dividend of $23 million (36 cents per share).

LEXMARK INTL Price, Consensus and EPS Surprise

Our Take

Lexmark’s third-quarter results were not very encouraging. Though, earnings increased on a year-over-year basis, revenues decreased primarily due to strong U.S. dollar and the ongoing exit of the company from the Inkjet business.

Recently, Lexmark revealed in an SEC filing that the Committee on Foreign Investment in the United States (CFIUS) has approved its proposed buyout by a Chinese consortium. Per the filing, the CFIUS found no unresolved national security issues related with the acquisition and thus gave the green signal. However, it has asked the parties acquiring Lexmark to sign a national security agreement with the U.S. Department of Defense and Department of Homeland Security.

In April this year, Lexmark agreed to be acquired by a Chinese consortium led by Apex Technology Co., Ltd. (Apex) and PAG Asia Capital (PAG). Legend Capital Management Co., Ltd. (Legend Capital) was also one of the buyers. Per the agreement, the consortium will acquire Lexmark for $3.6 billion or $40.50 per share in cash.

In our opinion, the deal will be beneficial for Lexmark as it has been struggling amid changing industry dynamics.

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

However, synergies from the acquisitions of Kofax and Readsoft and renewed focus on the software space could set it back on the growth path. Moreover, the Inkjet exit, software prospects and the MPS approach are positives that will drive the stock.

Competition from players like Canon Inc. (NYSE:CAJ) , Xerox Corp (NYSE:XRX). and HP Inc. (NYSE:HPQ) are additional concerns.

Currently, Lexmark has a Zacks Rank #3 (Hold). Investors may also consider Broadcom Limited (NASDAQ:AVGO) , which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here

Broadcom has a long-tern expected earnings per share growth rate of 14.31%

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