LEXMARK MISSES FORECAST,STOCK PLUMMETS

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Date: Wednesday April 27, 2005 10:38:00 am
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    Lexmark Misses Forecast, Stock Plummets
    April 05

    NEW YORK-Lexmark International Inc. , the No. 2 U.S. printer
    maker, on Tuesday posted quarterly profit that fell short of analysts’
    expectations as the inkjet printer market entered a price war, sending its
    shares to an 18-month low.

    Lexmark’s woes follow an effort earlier this year by market leader
    Hewlett-Packard to win market share by cutting prices for its printers, one
    analyst said.

    “HP had (previously) said that they were going to be far more aggressive in
    pricing. It appears to have played out in Lexmark’s results and its guidance for
    next quarter,” Shannon Cross of Cross Research said.

    Lexmark Chief Executive Paul Curlander said that inkjet printer prices fell
    about 15 percent to 20 percent during the quarter on strategic price changes,
    not just from HP, but also from Canon Inc. , Seiko Epson Corp. and Lexmark
    itself.

    “Its hard to say who fired the first shot, and it doesn’t really matter,” he
    told Reuters in an interview. “The reality is that it is very difficult to get
    any advantage if everybody (cuts prices), and any market share you think you
    pick up really isn’t sustainable.”

    Printer makers earn little or no profit from hardware sales. But increased
    printer sales eventually lead to sales of ink and toner, which reap higher
    profit margins that reoccur for years.

    Lexmark’s net income in the first quarter rose to $123.9 million, or 96 cents
    a share, from $121 million, or 91 cents a share, a year earlier, fueled by
    strong sales of replacement ink cartridges and laser printers. Revenue increased
    to $1.36 billion from $1.26 billion, with supplies revenue up about 11 percent
    and hardware up about 7 percent.

    The results include one-time costs for probable losses related to accounts
    receivable in Spain from 2002 to 2004 due to “inappropriate conduct” by a former
    employee, and a tax benefit. Excluding these items, earnings per share would
    have been 99 cents.

    Analysts were expecting a profit of $1.02 a share on revenue of $1.37
    billion, according to Reuters Estimates.

    “The miss is notable given Lexmark typically sets the bar low enough to beat
    numbers,” Merrill Lynch analyst Steven Milunovich said in a note to clients.

    WEAK REVENUE OUTLOOK

    Looking ahead, the Lexington, Kentucky-based company said it sees
    second-quarter profit at $1.01 to $1.11 a share, with revenue growth up in the
    mid single-digit range from $1.24 billion a year ago, while under continued
    pricing pressure.

    Analysts were expecting a profit in the second quarter of $1.11 a share on
    revenue of $1.38 billion, which represents growth of about 11 percent, according
    to Reuters Estimates.

    Curlander said the company has abandoned an older strategy under which it
    kept its prices less than those of HP.

    “We gained a lot of share pricing under HP. I think that those days are
    gone,” he said earlier on a conference call with analysts. “Clearly we have to
    remain price competitive, but we need to bring more value and ease of use to
    (future models).”

    Shares of Lexmark fell $11.10, or 14 percent, to $67.65 in afternoon trading
    on the New York Stock Exchange.

    The weak outlook also weighed on shares of HP and Dell Inc., which resells a
    rebranded version of Lexmark’s printers. HP shares fell 64 cents, or 3 percent,
    to $20.46, while Dell’s shares fell 90 cents, or 2.4 percent, to $35.81.

    Separately, Lexmark’s long-time Chief Financial Officer Gary Morin said he
    will retire in the first quarter of 2006. A search for a new CFO is under
    way.

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