Lexmark International: Restructuring Aims To Resuscitate Growth

Jan. 31, 2006
Declining profits lead to plant closing and job elimination.

Fourth-quarter revenues for 2005 must feel like dj vu for Lexmark International Inc.

Indeed, the manufacturer of printers and print cartridges posted the same revenue results in the fourth quarter, which ended Dec. 31, 2005, as it did December 2003.

While $1.37 billion was respectable in 2003, the move backward in 2005 -- the Lexington, Ky.-based company posted a 13% rise in revenue in 2004 to $1.54 billion -- has prompted Lexmark to restructure.

Another contributor to the restructuring plan: Earnings per share for the fourth quarter were $0.71 compared with $1.18 in 2004.

"Currently, these operating results are not reflective of where we want to be," said Paul Curlander, Lexmark's chairman and CEO, in a Jan. 24 conference call.

Lexmark At A Glance

Lexmark International Inc.
Primary Industry: Motor Vehicle Parts
Number of employees: 13,400
2004 In Review
Revenue: $5.3 billion
Profit Margin: 10.7%
Sales Turnover: 1.3
Inventory Turnover: 7.8
Revenue Growth: 11.8%
Return On Assets: 16.5%
Return On Equity: 34.6%
The company outlined its restructuring plan, which will eliminate 825 positions (the company is closing its Rosyth, Scotland, inkjet cartridge manufacturing plant, which employs about 700 workers) and transfer 525 others from various locations worldwide to primarily low-cost countries.

Additionally, Lexmark is reducing its operating expenses in areas of supply chain, as well as marketing and sales functions. It also will freeze its U.S. pension plan, although it will enhance its corporate 401(k) contribution.

Lexmark -- one of IndustryWeek's IW 50 Best Manufacturing Companies in 2005 -- estimates annual savings from the restructuring and pension plan changes should save the company $80 million per year.

"Although our fourth quarter EPS results were better than expected, they were significantly below a year ago, reflecting a continuation of very challenging business conditions," said Curlander in a Jan, 24, 2006, press release. "While we are taking steps to improve our cost and expense structure, at the same time we are committed to maintaining our strategic investments in new product development and branding to strengthen our positioning in growth market segments in which we are currently underrepresented."

As for full-year results, revenue was down 2% to $5.22 billion. Gross profit margin was 31.3%, compared with 33.7% a year ago, and EPS were $2.91, down $1.37 year-over-year.

Looking to the future, the company expects first-quarter 2006 revenue to decline to the low double-digit range compared with first-quarter 2005, which was a record quarter for Lexmark. First-quarter 2005 revenue was $1.36 billion -- an 8% increase from 2004.

Prior to fourth-quarter results, Curlander acknowledged his company's struggle with finances. In a Nov. 15, 2005, press release he stated that financial results were negatively impacted by a difficult hardware environment, a shortfall in the expected growth rate in supplies and by the company's increased investment in R&D and branding.

Despite declines in sales of hardware, Lexmark enjoyed growth in OEM shipments to Dell.

"For the year, sales to Dell were $782 million and represented 15% of our revenue," Curlander said in the Jan. 24 conference call. "This compares to Dell revenue of $570 million in 2004, which was about 11% of our total revenue."

Lexmark also enjoyed many accolades for its products in 2005. Among them, PC Magazine named the Lexmark T640n laser printer an Editor's Choice; Better Buys for Business, which publishes comparative reviews of document imaging equipment, also gave Editor's Choice ratings for several Lexmark printers; and Buyers Laboratory Inc., an independent printer testing laboratory, recognized Lexmark as its Fall Pick of the Year for "Most Outstanding Monochrome Printer Line of the Year" and for "Outstanding Achievement in Control Panel Design."

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