Lexmark Exits Inkjet Business And Announces Share Repurchases

Lexmark International (NYSE:LXK), which has been struggling with its printer hardware business, has finally pulled the plug on its low profit inkjet hardware business and is likely to concentrate on the more profitable laser printer line, the Perceptive software and managed printing services division. Lexmark had reported lower than expected earnings, mainly due to unfavorable currency impact and a sluggish European economy. Exiting the inkjet hardware business will improve profitability and result in an annualized savings of $95 million. It also planned an additional $100 million in share repurchases during the remainder of 2012. It will continue to provide service, support and supplies to the inkjet installed base. ^[1]

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Lexmark Restructures to Improve Profitability

The restructuring action is expected to result in reductions in inkjet related infrastructure costs, research and development costs, supply chain and other support functions. It also includes closing the Philippines inkjet supplies manufacturing facility by the end of 2015, and this move will eliminate ~1,700 jobs worldwide, including 1,100 manufacturing positions. Lexmark will also look to sell the company’s inkjet-related technology.

The restructuring is expected to generate $85 million savings in 2013, increasing to $95 million beginning in 2015. The pre-tax cost for the restructuring is expected to be $160 million, with a $110 million outflow in 2012, $30 million incurred in 2013, and $20 million spread over 2014 and 2015. The cash flow impact of the restructuring is expected to be $75 million, with $40 million impacting 2012, $30 million impacting 2013, and the remaining $5 million impacting 2014 and 2015. Lexmark also announced an additional $100 million of share repurchases in the third and fourth quarter of 2012.

Managed Print Services And Perceptive Software Key Growth Drivers

Companies are increasingly adopting Managed Printing Solutions (MPS) to cut costs and simplify printer management and Lexmark is the industry leader in this segment. MPS is a high margin business compared to selling inkjet hardware, and we expect this to become the biggest driver for Lexmark, going forward.

Lexmark expects the enterprise content management market to be a $8 billion dollar industry, with a 12% y-o-y growth, and is providing solutions in this space with Perceptive Software. Perceptive Software provides of enterprise content management and business process management software. This involves the capture of data in hard-copies, photographs, physical invoices, faxes, etc., and converting them into digital formats to streamline and automate processes that are currently manual. We expect this to be the biggest growth market after MPS for Lexmark.

We currently have a $31.73 Trefis price estimate for Lexmark, which is about 50% over its current market price.

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1. Lexmark Announces Restructuring, newsroom.lexmark.com, Aug 28, 2012 [↩]