Lexmark International (NYSE:LXK) -- And its Endless "One-Time" Charges

Just last week, Lexmark International (NYSE:LXK), a printer manufacturer headquartered in Lexington, Kentucky, announced a five-year renewal of its “blanket purchase agreement” with the Social Security Administration. It’s a significant contract given that the SSA has 62,000 employees sprawling over 1,500 offices.

Is this good news for Lexmark all it’s cracked up to be? Agora Financial editor Dan Amoss has a few doubts:

“The press release notes that the SSA has 62,000 employees in 1,500 locations — a remarkable stat that indicates the inefficiency of government ‘services.’ I wouldn’t have guessed it would require a workforce that can fill up an NFL stadium to manage and process a fairly simple system of intergenerational transfer payments.

“Anyway, Lexmark’s press release seeks to draw attention to its bread-and-butter customer base. Lexmark is counting on this type of government customer — one that cares little about workforce productivity — to offset the global trend towards the paperless office.

“More important than the renewal of an existing customer relationship, however, is Lexmark’s cost structure — and how Wall Street incorporates it into earnings models.

“The sell side largely ignores Lexmark’s long streak of restructuring charges that stretches back several years. Some of the more recent additions to Lexmark’s endless restructuring charges occurred in October 2007, July 2008, January 2009, and October 2009. Of course, management always draws attention to earnings ‘adjusted for restructuring charges.’

“Only companies with charges that are truly one-time deserve to be valued on a multiple of non-GAAP earnings. Once the next U.S. recession starts due to the inevitable 2011 tax rate hikes in the U.S., Lexmark will probably announce another round of ‘one-time’ restructuring charges.

“On the subject of Lexmark’s cost structure, when I asked a contact in the semiconductor industry about Lexmark’s supply chain, he replied: ‘The technology to make print heads is getting cheaper and cheaper. Lexmark has been using Texas Instruments as a foundry for their print heads and that can’t be cheap compared to [Asia-based competitors].'”

From Amoss’ perspective, the SSA contract is not going to solve the deeper underlying problems Lexmark has with its core business in an aging technology, a multi-year history of accounting tricks, and an overly-expensive cost structure. Those three factors paint a bearish case for the long term. In the short term, he also sees reason for concern, namely disappointing printer and cartridge sales in Europe.

To find out more about what this means in terms of investment opportunities you should take a look at his paid newsletter. You can subscribe to Amoss’ Strategic Short Report through the Agora Financial reports page, which can be found here.


Rocky Vega,
The Daily Reckoning

[Nothing in this post should be considered personalized investment advice. Agora Financial employees do not receive any type of compensation from companies covered. Investment decisions should be made in consultation with a financial advisor and only after reviewing relevant financial statements.]

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