Earnings slid 55% from a year ago in Lexmark's ( LXK) third quarter as price reductions whacked the gross margin.

The printer and ink company earned $70.2 million, or 59 cents a share, in the quarter, compared with $156.1 million, or $1.17 a share, a year ago. The latest quarter included layoff costs of 5 cents a share and a 5-cent gain related to a lower tax rate. Revenue fell 4% from last year to $1.22 billion.

Analysts were forecasting earnings of 47 cents a share on sales of $1.21 billion in the 2005 third quarter.

Lexmark's gross profit margin was 29.4% in the latest quarter compared with 35.2% a year ago, reflecting lower hardware margins. Operating expenses were 22.6% vs. 20.7%, "driven by a decline in revenue year to year, increased investments in research and development, and workforce reduction costs."

"While these near-term results are significantly less than we expected at the start of the third quarter, we are focused on strengthening the company for the long term," Lexmark said. "This is why we reduced prices in the third quarter to improve our hardware competitiveness and drive future sales of hardware and supplies."

For the fourth quarter, the company expects revenue to fall by a percentage in the high single-digits or low double-digits, while earnings should be 40 cents to 50 cents a share. Analysts were expecting earnings of 65 cents a share on sales of $1.43 billion.

The stock closed at $42.46 Monday, about 13 times the 2006 Thomson First Call consensus estimate of $3.28 a share in earnings.

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