Lexmark International Announces Bolt-On Acquisition Of Acuo, Continuing Its Transformation

| About: Lexmark International, (LXK)
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Shares of Lexmark International (LXK) have been off to a strong start in 2013, trading with gains of 12.5%. On Wednesday, the manufacturer of supplying printing, imaging, document workflow and content management solutions, announced the acquisition of Acuo Technologies.

The Deal

Lexmark International announced that it has agreed to acquire Acuo Technologies, a privately-held leader in high performance software and services in an all-cash transaction valuing the firm at $45 million.

The company will be integrated with Lexmark's Perceptive Software healthcare software solutions. Acuo's Universal Clinical Platform better drives care delivery through a patient-centric approach. With the technology, the UCP can lower both costs and risks. Its solutions are used in hospitals in both North America and Europe.

CEO and Chairman Paul Rooke commented on the deal, "With the acquisition of Acuo Technologies, Lexmark is further strengthening and differentiating our industry-leading healthcare offerings as the healthcare IT market continues to expand at a rapid pace. The four acquisitions we've completed in 2012 showcase Lexmark's transition to being a key solutions provider to being a key solutions provider to enterprise-sized businesses and organizations across the globe."

Lexmark did not provide financial details regarding Acuo's performance, nor did it specify when it expects to close the deal.


Lexmark ended the third quarter of its fiscal 2012 with $859.3 million in cash, equivalents and marketable securities. The company operates with $649.4 million in short and long-term debt for a net cash position of roughly $210 million.

For the first nine months of the year, Lexmark generated revenues of $2.83 billion. Net earnings for the period came in at $100.0 million, or $1.41 per diluted share. At this rate, the company is on track to generate annual revenues of $3.75 billion on which it is expected to earn around $115 million, or $1.63 per diluted share.

The market currently values Lexmark at roughly $1.68 billion, which values operating assets at roughly $1.47 billion. This values the firm at roughly 0.4 times annual revenues and 12-13 times annual earnings.

Lexmark currently pays a quarterly dividend of $0.30 per share for an annual dividend yield of 4.6%.

Some Historical Perspective

Shares of Lexmark started 2012 around $34 per share, peaking at $38 per share a month later. Shares steadily fell, reaching lows of $17 in July of the year. From that point in time, shares recovered and are currently exchanging hands at $26 per share.

Despite the recovery, shares are still moving in a long-term downtrend. Shares peaked at $130 during the dot-com bubble and were still trading as high as $70 at the end of 2006. Shares hit lows of $15 during the financial crisis in 2009, recovering to almost $50 a year later. Between 2008 and 2012, the company saw its annual revenues fall by over 15% to an expected $3.75 billion. The company has been steadily profitable over the past years, but have seen earnings decline in recent quarters.

Investment Thesis

Shares of Lexmark have seen a spike in the first days of 2013. The deal with Acuo is rather small, but it does highlight the company's mission and progress in its mission to become more digital.

The company's Perceptive Software Group, which has to become the driver of future growth, reported a 88% increase in its quarterly revenues in the third quarter. Growth was mainly driven by acquisitions, but the organic growth pace of 22% was impressive as well. Over the past years, Lexmark acquired companies like Pallas Athena, Brainware, ISYS and Nolij. Despite the aggressive growth, the unit only contributes $43 million in quarterly revenues, or merely 5% in total revenues.

At the same time, Lexmark decided to exit its ailing inkjet printer business in August last year. The plan entails cutting 1,700 jobs while saving $95 million per year. In total, the company will take $160 million in restructuring costs, spread over four years' time.

Excluding the inkjet business, the prospects for Lexmark look a bit better. The Perceptive Software Group continues to grow, fueled by acquisitions such as that of Acuo Technologies. At the same time, the imaging division continues to perform, despite short-term weakness driven by strength in dollar and weakness in Europe.

Despite the transformation, Lexmark continues to boost payouts to shareholders, funded by strong operating cash flows. Last year, the company hiked its dividend by 20% to $0.30 per quarter, for an annual dividend yield of 4.6%. At the same time, the company retired $440 million worth of shares over the past year, retiring almost 12% of its shares outstanding over the past year.

Even if Lexmark cannot return to its annual earnings rate of over $300 million in 2010 and 2011, shares look appealing. Even if earnings stabilize around $200 million, shares are valued at 7-8 times annual earnings. At the same time, the company pays a 4.6% dividend yield and continues to repurchase shares, supported by its strong balance sheet.

Despite a 50% jump from the lows in the summer, shares still offer long-term appeal, driven by strong operating cash flows.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.