Fitch Ratings Affirms ‘Stable Outlook’ for Lexmark

On May 22nd, American credit-rating agency Fitch Ratings affirmed Lexmark International II LLC’s and Lexmark International Inc.’s Long-Term Issuer Default Ratings (IDR) at ‘B-‘. The Rating Outlook is Stable.

The firm also made some interesting observations – see below – about Lexmark’s prospects for weathering the COVID-19 pandemic and ensuing lockdowns.

Ratings Outlook

Fitch’s ratings and Outlook are said to reflect Lexmark’s recent operational performance, which it say has generally been in line with Fitch’s expectation and better than larger printer competitors (including HP Inc., Canon Inc., Ricoh, Fuji Xerox, Epson,  Brother, and Xerox). Additionally, Fitch noted that In March 2020, Lexmark repaid its public bonds through a $339.1 million draw on commitments provided by China CITIC Bank Corporation Limited, Guangzhou Branch.

It also argued that the COVID-19 pandemic has had less of an impact on Lexmark’s results than others in the printer market, and more broadly among U.S. corporations. Fitch believes the company’s revenue will decline to a “high single digit” for the second quarter of 2020, and to the mid-single-digit in third-quarter 2020 before stabilizing in the fourth quarter.

The agency noted that Lexmark faces an additional $128 million of term loan amortizations over the remainder of 2020, and $249 million in 2021. Additionally, $200 million in revolver facilities are due for renewal/extension upon maturity in 2021.

Ninestar Corporation and PAG Asia Capital – which together, along with Legend Capital,  own Lexmark – have committed to providing $75 million of liquidity to meet Lexmark’s financial obligations to the extent that Lexmark isn’t able to generate positive cash flow over the remainder of the year.

Lexmark also states it has access to the private and public debt markets, but hasn’t  been able to successfully complete a transaction thus far. However, Lexmark has had in excess of $200 million of liquidity available, which should be sufficient to meet its operational needs for the remainder of the year and into 2021. The potential for lender forbearance could further improve the company’s liquidity position.

Impact of COVID-19 Pandemic

Lexmark indicated it experienced some manufacturing delays as a result of the COVID-19 pandemic but minimized the impact by using inventory on hand and realigning certain production activities. All manufacturing facilities have reopened and the majority are at or near full capacity.

Fitch estimates Lexmark’s hardware and supplies revenue will decline 10 percent and other revenue 5 percent in the second quarter, improving to 5 percent and 2 percent, respectively, in the third quarter before stabilizing in the fourth quarter.

Ultimately, Fitch says Lexmark’s business model appears sustainable over the intermediate term given its market position. The company’s strategy to increase hardware placements and leverage its owner’s relationships and capacity in China offers it the potential to offset  declines elsewhere.

Liquidity and Refinancing

Fitch believes Lexmark will ultimately be able to obtain refinancing assuming operational performance is sustained and credit markets are healthy. As noted, Ninestar and PAG have agreed to provide additional contributions to Lexmark of up to $75 million to bolster liquidity.

Operational Performance

Lexmark “modestly exceeded” Fitch’s performance expectations in 2019 as revenue increased 1 percent, reflecting 2 percent supplies growth and $25 million in services revenue growth.

Lexmark’s gross profit margin increased 4bps more than revenue growth, reflecting the increase in supplies and services revenue. Lexmark’s supplies and hardware performance was better than the market overall.

While the outlook remains uncertain due to the coronavirus, Fitch anticipates a return to 2019 levels in 2021.

The ratings agency noted that uncertainty over market access and the impact of the coronavirus are potential limiting factors that could affect Lexmark’s rating. It says it will provide an update if the impact of the COVID-19 pandemic changes for the worse.

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