Lexmark International 10Q 2007 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)


x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2007


o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File No. 1-14050

LEXMARK INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


Delaware	06-1308215
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)

One Lexmark Centre Drive
740 West New Circle Road
Lexington, Kentucky	40550
(Address of principal executive offices)	(Zip Code)

(859) 232-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The registrant had 94,723,133 shares outstanding (excluding shares held in treasury) of Class A Common Stock, par value $0.01 per share, as of the close of business on October 31, 2007.

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX

		Page of Form 10-Q
	PART I – FINANCIAL INFORMATION
Item 1.	FINANCIAL STATEMENTS
	Consolidated Condensed Statements of Earnings
	Three and Nine Months Ended September 30, 2007 and 2006	2
	Consolidated Condensed Statements of Financial Position
	As of September 30, 2007 and December 31, 2006	3
	Consolidated Condensed Statements of Cash Flows
	Nine Months Ended September 30, 2007 and 2006	4
	Notes to Consolidated Condensed Financial Statements	5
Item 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	15
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	34
Item 4.	CONTROLS AND PROCEDURES	34

	PART II – OTHER INFORMATION

Item 1.	LEGAL PROCEEDINGS	35
Item 1A.	RISK FACTORS	35
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	36
Item 3.	DEFAULTS UPON SENIOR SECURITIES	36
Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	36
Item 5.	OTHER INFORMATION	36
Item 6.	EXHIBITS	36

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact, are forward-looking statements. Forward-looking statements are made based upon information that is currently available or management’s current expectations and beliefs concerning future developments and their potential effects upon the Company, speak only as of the date hereof, and are subject to certain risks and uncertainties. We assume no obligation to update or revise any forward-looking statements contained or incorporated by reference herein to reflect any change in events, conditions or circumstances, or expectations with regard thereto, on which any such forward-looking statement is based, in whole or in part. There can be no assurance that future developments affecting the Company will be those anticipated by management, and there are a number of factors that could adversely affect the Company’s future operating results or cause the Company’s actual results to differ materially from the estimates or expectations reflected in such forward-looking statements, including, without limitation, the factors set forth under the title “Factors That May Affect Future Results And Information Concerning Forward-Looking Statements” in Part I, Item 2 of this report. The information referred to above should be considered by investors when reviewing any forward-looking statements contained in this report, in any of the Company’s public filings or press releases or in any oral statements made by the Company or any of its officers or other persons acting on its behalf. The important factors that could affect forward-looking statements are subject to change, and the Company does not intend to update the factors set forth in the “Factors That May Affect Future Results and Information Concerning Forward-Looking Statements” section of this report. By means of this cautionary note, the Company intends to avail itself of the safe harbor from liability with respect to forward-looking statements that is provided by Section 27A and Section 21E referred to above.

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(In Millions, Except Per Share Amounts)

(Unaudited)


	Three Months Ended September 30						Nine Months Ended September 30
	2007			2006			2007			2006

Revenue	$	1,195.4		$	1,234.6		$	3,664.2		$	3,738.9
Cost of revenue		862.8			832.2			2,538.6			2,515.0
Gross profit		332.6			402.4			1,125.6			1,223.9

Research and development		101.2			93.2			303.3			273.8
Selling, general and administrative		204.3			186.6			608.5			546.6
Restructuring and other, net		6.6			7.5			6.6			64.3
Operating expense		312.1			287.3			918.4			884.7
Operating income		20.5			115.1			207.2			339.2

Interest (income) expense, net		(5.6	)		(5.2	)		(13.8	)		(17.0	)
Other (income) expense, net		(0.8	)		1.2			(7.0	)		3.9
Earnings before income taxes		26.9			119.1			228.0			352.3

Provision (benefit) for income taxes		(18.3	)		33.5			26.2			103.8
Net earnings	$	45.2		$	85.6		$	201.8		$	248.5

Net earnings per share:
Basic	$	0.48		$	0.86		$	2.12		$	2.38
Diluted	$	0.48		$	0.85		$	2.10		$	2.37

Shares used in per share calculation:
Basic		94.9			100.0			95.4			104.5
Diluted		95.2			100.6			96.0			105.0

See Notes to Consolidated Condensed Financial Statements.

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION

(In Millions, Except Par Value)

(Unaudited)


	September 30 2007			December 31 2006
ASSETS
Current assets:
Cash and cash equivalents	$	202.5		$	144.6
Marketable securities		436.7			406.3
Trade receivables, net of allowances of $38.5 in 2007 and $38.0 in 2006		574.3			584.3
Inventories		459.9			457.8
Prepaid expenses and other current assets		231.9			237.0
Total current assets		1,905.3			1,830.0

Property, plant and equipment, net		864.3			846.8
Other assets		174.1			172.2
Total assets	$	2,943.7		$	2,849.0

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt	$	4.2		$	-
Current portion of long-term debt		149.9			-
Accounts payable		634.2			600.3
Accrued liabilities		672.4			723.7
Total current liabilities		1,460.7			1,324.0

Long-term debt		-			149.8
Other liabilities		335.5			340.0
Total liabilities		1,796.2			1,813.8

Stockholders' equity:
Preferred stock, $.01 par value, 1.6 shares authorized; no shares issued and outstanding		-			-
Common stock, $.01 par value:
Class A, 900.0 shares authorized; 94.7 and 97.0 outstanding in 2007 and 2006, respectively		1.1			1.1
Class B, 10.0 shares authorized; no shares issued and outstanding		-			-
Capital in excess of par		877.3			827.3
Retained earnings		836.7			627.5
Treasury stock, net; at cost; 13.6 and 10.9 shares in 2007 and 2006, respectively		(454.7	)		(289.8	)
Accumulated other comprehensive loss		(112.9	)		(130.9	)
Total stockholders' equity		1,147.5			1,035.2
Total liabilities and stockholders' equity	$	2,943.7		$	2,849.0

See Notes to Consolidated Condensed Financial Statements.

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In Millions)

(Unaudited)

	Nine Months Ended September 30
	2007			2006
Cash flows from operating activities:
Net earnings	$	201.8		$	248.5
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		134.2			159.7
Deferred taxes		(11.2	)		(18.1	)
Stock-based compensation expense		32.0			32.8
Tax shortfall from employee stock plans		(0.2	)		-
Foreign exchange gain upon Scotland liquidation		(8.1	)		-
Gain on sale of Scotland facility		(3.5	)		-
Other		(2.6	)		3.6
		342.4			426.5
Change in assets and liabilities:
Trade receivables		10.0			81.3
Inventories		(2.1	)		(55.0	)
Accounts payable		33.9			34.4
Accrued liabilities		(43.2	)		44.3
Other assets and liabilities		11.5			(3.6	)
Net cash flows provided by operating activities		352.5			527.9

Cash flows from investing activities:
Purchases of property, plant and equipment		(131.0	)		(145.0	)
Purchases of marketable securities		(705.4	)		(1,095.2	)
Proceeds from marketable securities		674.9			1,454.7
Proceeds from sale of Scotland facility		8.1			-
Other		0.5			(1.2	)
Net cash flows (used for) provided by investing activities		(152.9	)		213.3

Cash flows from financing activities:
Issuance of treasury stock		0.1			-
Purchase of treasury stock		(165.0	)		(730.1	)
Increase in short term debt		4.0			-
Proceeds from employee stock plans		15.3			18.8
Tax windfall from employee stock plans		2.8			3.5
Other		(0.8	)		(1.6	)
Net cash flows used for financing activities		(143.6	)		(709.4	)
Effect of exchange rate changes on cash		1.9			0.7
Net change in cash and cash equivalents		57.9			32.5
Cash and cash equivalents - beginning of period		144.6			168.3
Cash and cash equivalents - end of period	$	202.5		$	200.8

See Notes to Consolidated Condensed Financial Statements.

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In Millions, Except Per Share Amounts)

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying interim Consolidated Condensed Financial Statements are unaudited; however, in the opinion of management of Lexmark International, Inc. (together with its subsidiaries, the “Company” or “Lexmark”), all adjustments necessary for a fair statement of the interim financial results have been included. The results for the interim periods are not necessarily indicative of results to be expected for the entire year. The Condensed Consolidated Statement of Financial Position data as of December 31, 2006, was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S.”). The Company filed with the Securities and Exchange Commission audited consolidated financial statements for the year ended December 31, 2006, on Form 10-K, which included all information and notes necessary for such presentation. Accordingly, these financial statements and notes should be read in conjunction with the Company’s audited annual consolidated financial statements for the year ended December 31, 2006.

2. RESTRUCTURING-RELATED CHARGES AND OTHER

2007 Restructuring

As part of its ongoing efforts to optimize its cost and expense structure, the Company continually reviews its resources in light of a variety of factors. On October 23, 2007, the Company announced a plan (the “2007 Restructuring Plan”) which includes:

•	Closure of one of the Company’s inkjet supplies manufacturing facilities in Mexico, and additional optimization measures at the remaining inkjet facilities in Mexico.

•

Reduction of the Company’s business support cost and expense structure by further consolidating activity globally and expanding the use of shared service centers in lower-cost regions. The areas impacted are supply chain, service delivery, general and administrative expense, as well as marketing and sales support functions.

•	Focusing consumer segment marketing and sales efforts into countries or geographic regions that have the highest supplies usage.

The 2007 Restructuring Plan is expected to impact approximately 1,650 positions by the end of 2008. Most of the impacted positions are being moved to lower-cost countries. The Company expects the 2007 Restructuring Plan will result in pre-tax charges of approximately $55 million, of which $40 million will require cash. The Company expects the 2007 Restructuring Plan to be substantially completed by the end of 2008.

For the three and nine months ended September 30, 2007, the Company accrued $6.6 million of employee termination benefit charges in accordance with SFAS No. 112, Employers’ Accounting for Postemployment Benefits. The employee termination benefit charges are included in Restructuring and other, net on the Consolidated Condensed Statements of Earnings.

The following table presents a rollforward of the liability incurred for employee termination benefits in connection with the 2007 Restructuring Plan. The liability is included in Accrued liabilities on the Company’s Consolidated Condensed Statements of Financial Position.

	Employee Termination Benefits		Total
Balance at December 31, 2006	$	-	$	-
Costs incurred		6.6		6.6
Balance at September 30, 2007	$	6.6	$	6.6

For the three and nine months ended September 30, 2007, the Company accrued employee termination benefit charges of $6.2 million in its Consumer segment and $0.4 million in All other. The Company expects to incur charges related to the 2007 Restructuring Plan of approximately $14 million in its Business segment, approximately $19 million in its Consumer segment and approximately $22 million in All other.

2006 Restructuring

During the first quarter of 2006, the Company approved a plan to restructure its workforce, consolidate some manufacturing capacity and make certain changes to its U.S. retirement plans (collectively referred to as the “2006 actions”). The workforce restructuring eliminated or transferred over 1,400 positions from various business functions and job classes, with over 850 positions being eliminated, and over 550 positions being transferred from various locations primarily to low-cost countries. Lexmark consolidated its manufacturing capacity to reduce manufacturing costs, including the closure of its Rosyth, Scotland inkjet cartridge manufacturing facility and Orleans, France laser toner facilities, and reduced its operating expenses, particularly in the areas of supply chain, general and administrative and marketing and sales support. Lexmark also froze pension benefits in its defined benefit pension plan for U.S. employees, effective April 3, 2006, and at the same time changed from a maximum Company matching contribution of three percent of eligible compensation to an automatic Company contribution of one percent and a maximum Company matching contribution of five percent to Lexmark’s existing 401(k) plan. Except for approximately 100 positions to be eliminated in 2007, activities related to the 2006 actions were substantially completed at the end of 2006.

For the three months ended September 30, 2006, the Company incurred pre-tax charges of $10.6 million related to the 2006 actions. Of the $10.6 million of charges incurred for the three months ended September 30, 2006, related to the 2006 actions, $3.1 million is included in Cost of revenue and $7.5 million in Restructuring and other, net on the Company’s Consolidated Condensed Statements of Earnings.

For the nine months ended September 30, 2006, the Company incurred pre-tax charges of $112.2 million related to the 2006 actions which were partially offset by a $9.9 million pre-tax pension curtailment gain. Of the $102.3 million of net charges incurred for the nine months ended September 30, 2006, related to the 2006 actions, $38.0 million is included in Cost of revenue and $64.3 million in Restructuring and other, net on the Company’s Consolidated Condensed Statements of Earnings.

The following table presents a rollforward of the liability incurred for employee termination benefit and contract termination and lease charges in connection with the 2006 actions. The liability is included in Accrued liabilities on the Company’s Consolidated Condensed Statements of Financial Position.

	Employee Termination Benefits			Contract Termination & Lease Charges			Total
Balance at December 31, 2006	$	25.3		$	4.8		$	30.1
Payments & other ⁽¹⁾		(10.4	)		(1.6	)		(12.0	)
Reversals		(0.7	)		(1.7	)		(2.4	)
Balance at September 30, 2007	$	14.2		$	1.5		$	15.7

⁽¹⁾ Other consists of additions due to positions being eliminated in 2007 and changes in the liability balance due to foreign currency translations.

During the first quarter of 2007, the Company sold its Rosyth, Scotland facility for $8.1 million million and recognized a $3.5 million pre-tax gain on the sale.

During the second quarter of 2007, the Company substantially liquidated the remaining operations of its Scotland entity and recognized an $8.1 million pre-tax gain from the realization of the entity’s accumulated foreign currency translation adjustment generated on the investment in the entity during its operating life. This gain is included in Other (income) expense, net on the Company’s Consolidated Condensed Statements of Earnings.

3. TRADE RECEIVABLES FACILITY

In the U.S., the Company transfers a majority of its receivables to its wholly-owned subsidiary, Lexmark Receivables Corporation (“LRC”), which then may sell the receivables to an unrelated third party. The financial results of LRC are included in the Company’s consolidated financial results. LRC is a separate legal entity with its own separate creditors who, in a liquidation of LRC, would be entitled to be satisfied out of LRC’s assets prior to any value in LRC becoming available for equity claims of the Company.

During the first quarter of 2007, the Company amended the facility to allow LRC to repurchase previously sold receivables from the unrelated third party. Prior to the 2007 amendment, the Company accounted for the transfer of receivables from LRC to the unrelated third party as sales of receivables. As a result of the 2007 amendment, the Company accounts for the transfers of receivables from LRC to the unrelated third party as a secured borrowing with a pledge of its receivables as collateral.

At September 30, 2007 and December 31, 2006, there were no receivables or borrowings outstanding under the facility.

4. INVENTORIES

Inventories consist of the following:

	September 30 2007		December 31 2006
Work in process	$	123.3	$	119.7
Finished goods		336.6		338.1
Inventories	$	459.9	$	457.8

5. AGGREGATE WARRANTY LIABILITY

Changes in the Company’s aggregate warranty liability, which includes both warranty and extended warranty (deferred revenue), are presented below:

	2007			2006
Balance at January 1	$	212.4		$	195.0
Accruals for warranties issued		203.8			151.8
Accruals related to pre-existing warranties (including amortization of deferred revenue for extended warranties and changes in estimates)		(37.9	)		(34.3	)
Settlements made (in cash or in kind)		(139.0	)		(118.3	)
Balance at September 30	$	239.3		$	194.2

Both warranty and the short-term portion of extended warranty are included in Accrued liabilities on the Consolidated Condensed Statements of Financial Position. The long-term portion of extended warranty is included in Other liabilities on the Consolidated Condensed Statements of Financial Position.

6. INCOME TAXES

Current year provision (benefit)

The provision for income taxes for the three months ended September 30, 2007, was a benefit of $18.3 million or a (67.7%) effective tax rate, compared to an expense of $33.5 million or a 28.15% effective tax rate for the third quarter of 2006. The difference in these amounts is principally due to an overall reduction in taxes caused by a decrease in third quarter pre-tax earnings ($25.9 million). Also, the settlement of a tax audit outside the U.S. during the third quarter of 2007 generated a $13 million benefit. Additionally, during the third quarter of 2007, the Company reduced its expected annual effective tax rate to approximately 20% due to the geographic shift of its worldwide earnings. As a result of this reduction, the Company reduced its full year provision by approximately $11 million. The $11 million benefit is based on the reduced expected annual effective tax rate compared to the previously expected tax rate applied to the Company’s earnings for the first two quarters of 2007.

The provision for income taxes for the nine months ended September 30, 2007, was an expense of $26.2 million or an 11.5% effective tax rate, compared to an expense of $103.8 million or a 29.5% effective tax rate for the nine months ended September 30, 2006. The difference in these expense amounts is principally due to an overall reduction in taxes caused by a decrease in the nine month’s pre-tax earnings ($37.5 million) and a reduction in the estimated effective income tax rate from 2006 to 2007 ($23.7 million), primarily due to a geographic shift of earnings. In addition to the tax audit settlement in the third quarter of 2007 as discussed above, the income tax provision for the nine months ended September 30, 2007, includes benefits of $1.2 million and $4.8 million from adjustments to the Company’s deferred tax assets. The rate for the nine months ended September 30, 2006, included a $2.5 million benefit regarding the settlement of a tax audit.

Adoption of FIN 48

The Company adopted the provisions of FIN 48 and related guidance on January 1, 2007. As a result of the implementation of FIN 48, the Company reduced its liability for unrecognized tax benefits and related interest and penalties by $7.3 million, which resulted in a corresponding increase in the Company’s January 1, 2007, retained earnings balance. The Company also recorded an increase in its deferred tax assets of $8.5 million and a corresponding increase in its liability for unrecognized tax benefits as a result of adopting FIN 48.

The amount of unrecognized tax benefits at January 1, 2007, was $59.8 million, of which $46.3 million would affect the Company’s effective tax rate if recognized. The Company recognizes accrued interest and penalties associated with uncertain tax positions as part of its income tax provision. As of January 1, 2007, the Company had $18.9 million of accrued interest and penalties.

It is reasonably possible that the total amount of unrecognized tax benefits will increase or decrease in the next 12 months. Such changes could occur based on the expiration of various statutes of limitations or the conclusion of ongoing tax audits in various jurisdictions around the world. If those events occur within the next 12 months, the Company estimates that its unrecognized tax benefits amount could decrease by an amount in the range of $0 to $20 million, the impact of which would affect the Company’s effective tax rate.

Several tax years are subject to examination by major tax jurisdictions. In the U.S., federal tax years 2004 and after are subject to examination. The Internal Revenue Service is currently auditing tax years 2004 and 2005. In France, tax years 2006 and after are subject to examination. In Switzerland, tax years 2001 and after are subject to examination. In most of the other countries where the Company files income tax returns, 2001 is the earliest tax year that is subject to examination.

7. STOCKHOLDERS’ EQUITY

In January 2006, the Company received authorization from the board of directors to repurchase an additional $1.0 billion of its Class A Common Stock for a total repurchase authority of $3.9 billion. As of September 30, 2007, there was approximately $0.3 billion of share repurchase authority remaining. This repurchase authority allows the Company, at management’s discretion, to selectively repurchase its stock from time to time in the open market or in privately negotiated transactions depending upon market price and other factors. During the third quarter of 2007, the Company did not repurchase any shares. During the first nine months of 2007, the Company repurchased approximately 2.7 million shares at a cost of approximately $165 million. As of September 30, 2007, since the inception of the program in April 1996, the Company had repurchased approximately 74.1 million shares for an aggregate cost of approximately $3.6 billion. As of September 30, 2007, the Company had reissued approximately 0.5 million shares of previously repurchased shares in connection with certain of its employee benefit programs. As a result of these issuances as well as the retirement of 44.0 million and 16.0 million shares of treasury stock in 2005 and 2006, respectively, the net treasury shares outstanding at September 30, 2007, were 13.6 million.

8. OTHER COMPREHENSIVE EARNINGS (LOSS)

Comprehensive earnings (loss), net of taxes, consist of the following:


	Three Months Ended September 30					Nine Months Ended September 30
	2007			2006		2007			2006
Net earnings	$	45.2		$	85.6	$	201.8		$	248.5
Other comprehensive earnings (loss):
Foreign currency translation adjustment		8.4			5.0		12.6			10.3
Cash flow hedging		(0.3	)		6.4		(0.7	)		(5.5	)
Pension or other postretirement benefits		1.5			-		6.2			-
Minimum pension liability adjustment		-			0.1		-			3.4
Net unrealized gain (loss) on marketable securities		0.2			0.4		(0.1	)		0.5
Comprehensive earnings	$	55.0		$	97.5	$	219.8		$	257.2

Accumulated other comprehensive (loss) earnings consist of the following:

	Foreign Currency Translation Adjustment		Cash Flow Hedges			Pension or Other Postretirement Benefits			Net Unrealized (Loss) Gain on Marketable Securities			Accumulated Other Comprehensive (Loss) Earnings
Balance at 12/31/06	$	7.1	$	0.7		$	(138.7	)	$	-		$	(130.9	)
1^st Qtr 2007 change		0.7		(0.1	)		3.0			0.1			3.7
Balance at 3/31/07		7.8		0.6			(135.7	)		0.1			(127.2	)
2^nd Qtr 2007 change		3.5		(0.3	)		1.7			(0.4	)		4.5
Balance at 6/30/07		11.3		0.3			(134.0	)		(0.3	)		(122.7	)
3^rd Qtr 2007 change		8.4		(0.3	)		1.5			0.2			9.8
Balance at 9/30/07	$	19.7	$	-		$	(132.5	)	$	(0.1	)	$	(112.9	)

9. EARNINGS PER SHARE (“EPS”)

The following table presents a reconciliation of the numerators and denominators of the basic and diluted EPS calculations:

	Three Months Ended September 30				Nine Months Ended September 30
	2007		2006		2007		2006
Numerator:
Net earnings	$	45.2	$	85.6	$	201.8	$	248.5
Denominator:
Weighted average shares used to compute basic EPS		94.9		100.0		95.4		104.5
Effect of dilutive securities -
Employee stock plans		0.3		0.6		0.6		0.5
Weighted average shares used to compute diluted EPS		95.2		100.6		96.0		105.0

Basic net EPS	$	0.48	$	0.86	$	2.12	$	2.38
Diluted net EPS	$	0.48	$	0.85	$	2.10	$	2.37

Restricted stock units and stock options totaling an additional 11.5 million and 8.0 million shares of Class A Common Stock for the three month periods and 5.7 million and 8.0 million shares of Class A Common Stock for the nine month periods ended September 30, 2007 and 2006, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect would have been antidilutive.

10. EMPLOYEE PENSION AND POSTRETIREMENT PLANS

The components of the net periodic benefit cost for both the pension and postretirement plans for the three month and nine month periods ended September 30, 2007 and 2006, were as follows:

Pension Benefits:	Three Months Ended September 30						Nine Months Ended September 30
	2007			2006			2007			2006
Service cost	$	0.7		$	2.0		$	2.0		$	5.9
Interest cost		10.6			10.6			31.7			31.5
Expected return on plan assets		(12.3	)		(12.3	)		(36.6	)		(36.8	)
Amortization of prior service (benefit) cost		-			(0.1	)		-			(0.1	)
Amortization of net loss		3.7			4.5			11.3			13.0
Settlement, curtailment or special termination losses (gains), net		1.8			3.5			1.8			(5.0	)
Net periodic benefit cost	$	4.5		$	8.2		$	10.2		$	8.5


Other Postretirement Benefits:	Three Months Ended September 30						Nine Months Ended September 30
	2007			2006			2007			2006
Service cost	$	0.4		$	0.5		$	1.3		$	1.4
Interest cost		0.6			0.7			1.9			1.9
Amortization of prior service (benefit) cost		(1.0	)		(1.0	)		(3.0	)		(2.9	)
Amortization of net loss		0.2			0.3			0.6			0.8
Settlement, curtailment or special termination gains, net		-			(0.1	)		-			(0.1	)
Net periodic benefit cost	$	0.2		$	0.4		$	0.8		$	1.1

The $5.1 million Settlement, curtailment or special termination gains, net recognized in the first nine months of 2006 consisted of a $9.9 million pension curtailment gain due to the freezing of plan benefit accruals in the U.S. and $4.8 million of special termination benefit charges related to restructuring activities. See Note 2 for further discussion.

The Company currently expects to contribute approximately $7 million to its pension and other postretirement plans in 2007. As of September 30, 2007, $5.2 million of contributions have been made.

11. SEGMENT DATA

Lexmark manufactures and sells a variety of printing and multifunction products and related supplies and services and is primarily managed along Business and Consumer market segments. The Company evaluates the performance of its segments based on revenue and operating income, and does not include segment assets or other income and expense items for management reporting purposes. Segment operating income (loss) includes: selling, general and administrative; research and development; restructuring and other, net; and other expenses, certain of which are allocated to the respective segments based on internal measures and may not be indicative of amounts that would be incurred on a stand alone basis or may not be indicative of results of other enterprises in similar businesses. All other operating income (loss) includes significant expenses that are managed outside of the reporting segments. These unallocated costs include such items as information technology expenses,

occupancy costs, stock-based compensation and certain other corporate and regional general and administrative expenses such as finance, legal and human resources.

The following table includes information about the Company’s reportable segments:

	Three Months Ended September 30						Nine Months Ended September 30
	2007			2006			2007			2006
Revenue:
Business	$	727.7		$	695.7		$	2,198.8		$	2,097.3
Consumer		467.7			538.9			1,465.4			1,641.6
Total revenue	$	1,195.4		$	1,234.6		$	3,664.2		$	3,738.9

Operating income (loss):
Business	$	143.0		$	146.8		$	445.7		$	443.1
Consumer		(22.2	)		62.2			56.1			195.5
All other		(100.3	)		(93.9	)		(294.6	)		(299.4	)
Total operating income (loss)	$	20.5		$	115.1		$	207.2		$	339.2

In connection with the 2007 Restructuring Plan, operating income (loss) noted above for the three and nine months ended September 30, 2007, includes restructuring-related charges of $6.2 million in its Consumer segment and $0.4 million in All other.

In connection with the Company’s 2006 actions, operating income (loss) noted above for the three months ended September 30, 2006, included restructuring-related charges of $5.6 million in its Business segment, $4.1 million in its Consumer segment and $0.9 million in All other. For the nine months ended September 30, 2006, operating income (loss) noted above included restructuring-related charges of $27.7 million in its Business segment, $53.8 million in its Consumer segment and $30.7 million in All other. All other operating income also included a $9.9 million pension plan freeze benefit.

12. CONTINGENCIES

In accordance with SFAS No. 5, Accounting for Contingencies, Lexmark records a provision for a loss contingency when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company believes it has adequate provisions for any such matters.

Legal proceedings

On December 30, 2002 (“02 action”) and March 16, 2004 (“04 action”), the Company filed claims against Static Control Components, Inc. (“SCC”) in the U.S. District Court for the Eastern District of Kentucky (the “District Court”) alleging violation of the Company’s intellectual property and state law rights. Pendl Companies, Inc. (“Pendl”) and Wazana Brothers International, Inc. (“Wazana”) were added as additional defendants to the claims brought by the Company in the 02 action on October 8, 2004. Pendl, Wazana and NER Data Products, Inc. (“NER”), were added as additional parties to the claims brought by the Company in the 04 action on November 8, 2004. These two cases have been consolidated by the District Court. Similar claims in a separate action were filed by the Company in the District Court against David Abraham and Clarity Imaging Technologies, Inc. (“Clarity”) on October 8, 2004. Clarity, Pendl, SCC and Wazana have filed counterclaims against the Company in the District Court alleging that the Company engaged in anti-competitive and monopolistic conduct and unfair and deceptive trade practices in violation of the Sherman Act, the Lanham Act and state laws. SCC has stated in its legal documents that it is seeking approximately $17.8 million to $19.5 million in damages for the Company’s alleged anticompetitive conduct and approximately $1 billion for Lexmark’s alleged violation of the Lanham Act. Wazana has stated in its legal documents that it is seeking

approximately $2.2 million to $2.8 million in damages for the Company’s alleged anticompetitive conduct and approximately $1 billion for Lexmark’s alleged violation of the Lanham Act. Pendl has stated in its legal documents that it is seeking approximately $3.7 million to $4.1 million in damages for the Company’s alleged anticompetitive conduct. Clarity has not stated a damage dollar amount. All are seeking treble damages, attorney fees, costs and injunctive relief. On September 28, 2006, the District Court dismissed the counterclaims filed by SCC alleging that the Company engaged in anti-competitive and monopolistic conduct and unfair and deceptive trade practices in violation of the Sherman Act, the Lanham Act and state laws. On October 13, 2006, SCC filed a Motion for Reconsideration of the District Court’s Order dismissing SCC’s claims, or in the alternative, to amend its pleadings which the District Court denied on June 1, 2007. On October 13, 2006, the District Court issued an order to stay the action brought against David Abraham and Clarity until a final judgment or settlement are entered into in the consolidated 02 and 04 actions. On March 23, 2007, the Company entered into a Settlement Agreement with NER pursuant to which each party released the other from any and all claims, NER acknowledged the validity and enforceability of the Company's patents-in-suit and the validity and enforceability of the Company's single use license agreement applicable to its "Return Program" cartridges (formerly known as "Prebate" cartridges) and agreed to no longer remanufacture such cartridges. The District Court entered a consent judgment and dismissal with prejudice of the litigation between NER and the Company on May 11, 2007. On May 20, 2007, the Company entered into a Settlement Agreement with Pendl pursuant to which each party released the other from any and all claims, Pendl acknowledged the validity and enforceability of the Company's patents-in-suit and the validity and enforceability of the Company's single use license agreement applicable to its Return Program cartridges. The District Court entered an agreed order of dismissal with prejudice of the litigation between Pendl and the Company on May 22, 2007. On May 27, 2007, the Company entered into a Settlement Agreement with Wazana pursuant to which each party released the other from any and all claims, Wazana acknowledged the validity and enforceability of the Company's patents-in-suit and the validity and enforceability of the Company's single use license agreement applicable to its Return Program cartridges. The District Court entered an agreed order of dismissal with prejudice of the litigation between Wazana and the Company on May 31, 2007. On June 20, 2007, the District Court Judge ruled that SCC directly infringed one of Lexmark’s patents-in-suit. On June 22, 2007, the jury returned a verdict that SCC did not induce infringement of Lexmark’s patents-in-suit. As to SCC’s defense that the Company has committed patent misuse, in an advisory, non-binding capacity, the jury did find some Company conduct constituted misuse. In the jury's advisory, non-binding findings, the jury also found that the relevant market was the cartridge market rather than the printer market and that the Company had unreasonably restrained competition in that market. The misuse defense will be decided by the District Court Judge at a later date. A final judgment for the 02 action and the 04 action has not yet been entered by the District Court.

The Company is also party to various litigation and other legal matters, including claims of intellectual property infringement and various purported consumer class action lawsuits alleging, among other things, various product defects and false and deceptive advertising claims, that are being handled in the ordinary course of business. In addition, various governmental authorities have from time to time initiated inquiries and investigations, some of which are ongoing, concerning the activities of participants in the markets for printers and supplies. The Company intends to continue to cooperate fully with those governmental authorities in these matters.

Although it is not reasonably possible to estimate whether a loss will occur as a result of these legal matters, or if a loss should occur, the amount of such loss, the Company does not believe that any legal matters to which it is a party is likely to have a material adverse effect on the Company’s financial position, results of operations and cash flows. However, there can be no assurance that any pending legal matters or any legal matters that may arise in the future would not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Copyright fees

Certain countries (primarily in Europe) and/or collecting societies representing copyright owners’ interests have taken action to impose fees on devices (such as scanners, printers and multifunction devices) alleging the copyright owners are entitled to compensation because these devices enable reproducing copyrighted content. Other countries are also considering imposing fees on certain devices. The amount of fees, if imposed, would

depend on the number of products sold and the amounts of the fee on each product, which will vary by product and by country. The Company has accrued amounts that it believes are adequate to address the risks related to the copyright fee issues currently pending. The financial impact on the Company, which will depend in large part upon the outcome of local legislative processes, the Company’s and other industry participants’ outcome in contesting the fees and the Company’s ability to mitigate that impact by increasing prices, which ability will depend upon competitive market conditions, remains uncertain. As of September 30, 2007, the Company has accrued approximately $112 million for the pending copyright fee issues, including litigation proceedings, local legislative initiatives and/or negotiations with the parties involved. These accruals are included in Accrued liabilities on the Consolidated Condensed Statements of Financial Position.

13. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). The adoption of FIN 48 did not have a material impact on the Company’s results of operations and cash flows. Refer to Note 6 of the Notes to the Consolidated Condensed Financial Statements for discussion of the impact of adoption on the Company’s financial position.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”) and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with earlier adoption permitted. The provisions of SFAS 157 should be applied prospectively as of the beginning of the fiscal year in which it is initially applied, with limited exceptions. The Company is currently evaluating the provisions of SFAS 157.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities (“SFAS 159”). SFAS 159 provides entities with the option to report selected financial assets and liabilities at fair value. Business entities adopting SFAS 159 will report unrealized gains and losses in earnings at each subsequent reporting date on items for which the fair value option has been elected. SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 requires additional information that will help investors and other financial statement users to understand the effect of an entity’s choice to use fair value on its earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. The Company is currently evaluating the impact of SFAS 159.

14. SUBSEQUENT EVENT

Refer to Note 2 of the Notes to the Consolidated Condensed Financial Statements for discussion of the Company’s 2007 Restructuring Plan.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited)

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

OVERVIEW

Lexmark makes it easier for businesses and consumers to move information between the digital and paper worlds. Since its inception in 1991, Lexmark has become a leading developer, manufacturer and supplier of printing and imaging solutions for offices and homes. Lexmark’s products include laser printers, inkjet printers, multifunction devices, and associated supplies, services and solutions. Lexmark also sells dot matrix printers for printing single and multi-part forms by business users and develops, manufactures and markets a line of other office imaging products.

The Company is primarily managed along Business and Consumer market segments:

•

The Business market segment primarily sells laser products and primarily serves business customers, but also include consumers who choose laser products. Laser products can be divided into two major categories — shared workgroup products and lower-priced desktop products. Lexmark employs large-account sales and marketing teams, closely supported by its development and product marketing teams, to generate demand for its business printing solutions and services. The sales and marketing teams primarily focus on customers who fall into six specific industry groups: finance, services, retail, manufacturing, public sector and health care. Lexmark also markets its laser and inkjet products increasingly through small and medium business (“SMB”) teams who work closely with channel partners. The Company distributes and fulfills its laser products primarily through its well-established distributor and reseller network. Lexmark’s products are also sold through solution providers, which offer custom solutions to specific markets, and through direct response resellers.

•

The Consumer market segment predominantly sells inkjet products to consumers but also includes business users who may choose inkjet products as a lower-priced alternative or supplement to laser products for personal desktop use. For the consumer market, Lexmark distributes its branded inkjet products and supplies primarily through retail outlets worldwide.

The Company also sells its products through numerous alliances and original equipment manufacturer (“OEM”) arrangements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Lexmark’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of consolidated condensed financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to customer programs and incentives, product returns, doubtful accounts, inventories, stock-based compensation, intangible assets, income taxes, warranty obligations, copyright fees, restructurings, pension and other postretirement benefits, and contingencies and litigation. Lexmark bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are uncertain at the time the estimate is made, if different estimates reasonably

could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements.

Management believes that other than the adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) during the first quarter of 2007, there have been no significant changes during the three and nine months ended September 30, 2007, to the items that were disclosed as critical accounting policies and estimates in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

Income Taxes

The Company estimates its tax liability based on current tax laws in the statutory jurisdictions in which it operates. These estimates include judgments about deferred tax assets and liabilities resulting from temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes, as well as about the realization of deferred tax assets. If the provisions for current or deferred taxes are not adequate, if the Company is unable to realize certain deferred tax assets or if the tax laws change unfavorably, the Company could potentially experience significant losses in excess of the reserves established. Likewise, if the provisions for current and deferred taxes are in excess of those eventually needed, if the Company is able to realize additional deferred tax assets or if tax laws change favorably, the Company could potentially experience significant gains.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold as “more-likely-than-not” that a tax position must meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting for income taxes in interim periods, financial statement disclosure and transition rules.

The evaluation of a tax position in accordance with FIN 48 is a two-step process. The first step is recognition: The enterprise determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any litigation. The second step is measurement: A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate resolution.

RESULTS OF OPERATIONS

Operations Overview

Trends

Lexmark believes it is experiencing shrinkage in its installed base of inkjet products and an associated decline in end-user demand for inkjet supplies. The Company sees the potential for continued erosion in end-user inkjet supplies demand due to the reduction in inkjet hardware unit sales reflecting the Company’s decision to focus on more profitable printer placements, a mix shift between cartridges resulting in a higher percentage of moderate use cartridges and the weakness the Company is experiencing in its OEM business. Additionally, Lexmark expects to see continued declines in OEM unit sales, aggressive pricing and promotion activities in the inkjet and laser markets.

For the third quarter of 2007, the Company experienced the following issues in its Consumer segment:

On-going declines in inkjet supplies and OEM unit sales.

Lower average unit revenues (“AURs”) due to aggressive pricing and promotion.

Additional costs in its new products.

As the Company analyzes the situation, it sees the following:

Some of its unit sales are not generating adequate lifetime profitability due to lower prices, higher costs and supplies usage below its model.

Some markets and channels are on the low-end of the supplies generation distribution curve.

Its business is too skewed to the low-end versus the market, resulting in lower supplies generation per unit.

As a result, Lexmark has decided to take the following actions:

The Company is working to minimize the unit sales that do not generate an acceptable profit over their life.

The Company has decided to more aggressively shift its focus to geographic regions, market segments, and customers that generate higher page usage.

The above actions will entail several initiatives:

Investing in research and development and core inkjet technology to better support this higher usage customer set.

Optimizing the Company’s marketing and sales initiatives and prioritizing specific markets and channels relative to page generation and lifetime profitability. For the highest priority markets, this will mean a focus on expanding retail and non-retail sales, and associated marketing campaigns. For the lowest priority markets, this will mean less or no retail sales. As a result of this market prioritization and the previously mentioned business optimization, we expect fourth quarter 2007 inkjet unit sales will be down about 30% year-to-year. While the Company’s analysis is not yet complete, its preliminary view is that it would expect about that same percentage of full-year 2007 inkjet unit sales will not be made in 2008.

Improving the Company’s cost and expense structure. The Company announced a restructuring plan to reduce its cost and infrastructure, including the closure of one of its inkjet supplies manufacturing facilities in Mexico.

2007 Restructuring Plan

Closure of one of the Company’s inkjet supplies manufacturing facilities in Mexico, and additional optimization measures at the remaining inkjet facilities in Mexico.

Focusing consumer segment marketing and sales efforts into countries or geographic regions that have the highest supplies usage.

	Employee Termination Benefits		Total
Balance at December 31, 2006	$	-	$	-
Costs incurred		6.6		6.6
Balance at September 30, 2007	$	6.6	$	6.6

Additionally, beginning in the fourth quarter of 2007, the Company expects to incur additional project costs related to the execution of its 2007 Restructuring Plan. These project costs will be incremental to the Company’s normal operating charges and will be expensed as incurred. Project cost will include such items as compensation costs for overlap staffing, travel expenses, consulting costs and training costs. The Company expects to incur total pre-tax project costs of approximately $35 million resulting in a total of $90 million of expected pre-tax restructuring-related charges and project cost in connection with its 2007 Restructuring Plan. Expected cash payments for the restructuring-related charges and project costs are approximately $75 million.

The Company expects to incur total restructuring-related charges and project costs of approximately $24 million in its Business segment, approximately $29 million in its Consumer segment and approximately $37 million in All other.

Of the total pre-tax restructuring-related charges and project costs of approximately $90 million, approximately $15 million will impact cost of revenue and $75 million will impact operating expense. The 2007 Restructuring Plan (including related projects) are expected to save approximately $40 million in 2008 with approximately 50% benefiting cost of revenue and 50% benefiting operating expense. Annual savings beginning in 2009 are expected to approximate $60 million.

The Company expects to incur an additional $14 million of restructuring-related charges and project costs in the fourth quarter of 2007 in connection with the 2007 Restructuring Plan. Fourth quarter savings from the 2007 Restructuring Plan are expected to be less than $5 million.

Scotland Liquidation

During the first quarter of 2007, the Company sold its Rosyth, Scotland facility for $8.1 million and recognized a $3.5 million pre-tax gain on the sale. During the second quarter of 2007, the Company substantially liquidated the remaining operations of its Scotland entity and recognized an $8.1 million pre-tax gain from the realization of the entity’s accumulated foreign currency translation adjustment generated on the investment in the entity during its operating life. This gain is included in Other (income) expense, net on the Company’s Consolidated Condensed Statements of Earnings.

2006 Actions

During 2006, the Company also incurred additional charges related to the execution of its restructuring-related activities (referred to as “2006 project costs”). The 2006 project costs were incremental to the Company’s normal operating charges and were expensed as incurred.

For the three months ended September 30, 2006, the Company incurred pre-tax restructuring-related charges and 2006 project costs of $10.6 million and $2.7 million, respectively, related to the 2006 actions. Of the $13.3 million of charges incurred for the three months ended September 30, 2006 related to the 2006 actions, $3.6 million is included in Cost of revenue, $2.2 million in Selling, general and administrative and $7.5 million in Restructuring and other, net on the Company’s Consolidated Condensed Statements of Earnings.

For the nine months ended September 30, 2006, the Company incurred pre-tax restructuring-related charges and 2006 project costs of $102.3 million and $4.1 million, respectively, related to the 2006 actions which were partially offset by a $9.9 million pre-tax pension curtailment gain. Of the $106.4 million of net charges incurred for the nine months ended September 30, 2006, related to the 2006 actions, $38.9 million is included in Cost of revenue, $3.2 million in Selling, general and administrative and $64.3 million in Restructuring and other, net on the Company’s Consolidated Condensed Statements of Earnings.

During 2007, the Company expects to incur approximately $5 million per quarter of additional costs related to the Company’s ongoing efforts in connection with its 2006 actions to reduce operating costs. These project costs will be incremental to the Company’s normal operating charges and will be expensed as incurred. Project cost will include such items as compensation costs for overlap staffing, travel expenses, consulting costs and training costs. For the three and nine months ended September 30, 2007, the Company incurred approximately $8 million and $19 million, respectively, of project costs.

Savings from the 2006 actions have been utilized in 2007 to help mitigate some of the impact from increased research and development, demand generation expenses and the reduction in gross profit due to the negative impact of price, mix and costs.

Operating Results Summary

The following discussion and analysis should be read in conjunction with the Consolidated Condensed Financial Statements and Notes thereto. The following table summarizes the results of the Company’s operations for the three and nine months ended September 30, 2007 and 2006:


	Three Months Ended September 30										Nine Months Ended September 30
	2007					2006					2007					2006
*(Dollars in millions)*	Dollars		*% of Rev*			Dollars		*% of Rev*			Dollars		*% of Rev*			Dollars		*% of Rev*
Revenue	$	1,195.4		100.0	%	$	1,234.6		100.0	%	$	3,664.2		100.0	%	$	3,738.9		100.0	%
Gross profit		332.6		27.8			402.4		32.6			1,125.6		30.7			1,223.9		32.7
Operating expense		312.1		26.1			287.3		23.3			918.4		25.1			884.7		23.6
Operating income		20.5		1.7			115.1		9.3			207.2		5.7			339.2		9.1
Net earnings		45.2		3.8			85.6		6.9			201.8		5.5			248.5		6.6

Current quarter

For the third quarter of 2007, consolidated revenue was $1.2 billion or down 3% year-to-year (“YTY”). Laser and inkjet supplies revenue grew about 1% while laser and inkjet hardware revenue declined 11% YTY. In the Business segment, revenue increased 5% YTY. In the Consumer segment, revenue declined 13% YTY.

For the third quarter of 2007, net earnings decreased 47% from the prior year due to lower operating income partially offset by lower taxes YTY. Net earnings for the third quarter of 2007 include a $13 million tax benefit due to the settlement of a tax audit outside the United States. Net earnings for the third quarter of 2007 also include $6.6 million of pre-tax restructuring-related charges in connection with the 2007 Restructuring Plan and $8.0 million of pre-tax restructuring-related project costs in connection with the 2006 actions. Net earnings for the third quarter of 2006 included $10.6 million and $2.7 million of pre-tax restructuring-related charges and project costs, respectively, in connection with the 2006 actions.

Year to date

For the nine months ended September 30, 2007, consolidated revenue was $3.7 billion or down 2% YTY. Laser and inkjet supplies revenue grew 1% YTY while laser and inkjet hardware revenue declined 7% YTY. In the Business segment, revenue increased 5% YTY. In the Consumer segment, revenue declined 11% YTY.

For the nine months ended September 30, 2007, net earnings decreased 19% from the prior year due to lower operating income partially offset by a lower effective tax rate. Net earnings for the nine months ended September 30, 2007, include $6.6 million of pre-tax restructuring-related charges in connection with the 2007 Restructuring Plan and $18.8 million of pre-tax restructuring-related project costs in connection with the 2006 actions. Net earnings for the nine months ended September 30, 2007, also include a $3.5 million pre-tax gain on the sale of the Rosyth, Scotland facility in the first quarter of 2007 and an $8.1 million pre-tax foreign exchange gain in the second quarter of 2007. Net earnings for the nine months ended September 30, 2006, included $112.2 million and $4.1 million of pre-tax restructuring-related charges and project costs, respectively, and a $9.9 million pre-tax pension curtailment gain in connection with the 2006 actions.

Revenue

For the third quarter of 2007, consolidated revenue decreased 3% YTY. Laser and inkjet supplies revenue grew about 1% as growth in laser supplies was mostly offset by a decline in inkjet supplies. Laser and inkjet hardware revenue declined 11% YTY, as both inkjet and laser hardware revenue decreased YTY.

For the nine months ended September 30, 2007, consolidated revenue decreased 2% YTY. Laser and inkjet supplies revenue grew 1% YTY as growth in laser supplies was mostly offset by a decline in inkjet supplies. Laser and inkjet hardware revenue declined 7% YTY, primarily due to a decline in inkjet units and AURs.

Revenue by market segment

The following table provides a breakdown of the Company’s revenue by market segment:

	Three Months Ended September 30							Nine Months Ended September 30
*(Dollars in millions)*	2007		2006		*% Change*			2007		2006		*% Change*
Business	$	727.7	$	695.7		5	%	$	2,198.8	$	2,097.3		5	%
Consumer		467.7		538.9		(13	)		1,465.4		1,641.6		(11	)
Total revenue	$	1,195.4	$	1,234.6		(3	)%	$	3,664.2	$	3,738.9		(2	)%

Business segment

During the third quarter of 2007, Business segment revenue increased $32 million or 5% YTY due to growth in laser supplies revenue partially offset by a decline in laser hardware revenue primarily attributable to lower unit shipments. Laser hardware AUR, which reflects the changes in both pricing and mix, increased approximately 1% from the prior year due to a positive mix shift that was partially offset by price declines. Laser hardware unit shipments declined approximately 7% YTY reflecting strong unit growth in the workgroup segments of monochrome lasers, color lasers and laser multifunction products (“MFPs”), more than offset by a decline in low-end lasers.

For the nine months ended September 30, 2007, Business segment revenue increased $102 million or 5% YTY primarily due to growth in laser supplies revenue. Laser hardware AUR was flat YTY and laser hardware unit shipments were down 2% YTY.

Consumer segment

During the third quarter of 2007, Consumer segment revenue declined $71 million or 13% YTY due to decreased inkjet supplies and hardware revenue. Hardware revenue declined YTY due to lower unit shipments and lower AURs. Inkjet hardware unit shipments declined 14% YTY principally due to lower OEM unit shipments. Inkjet hardware AUR declined 6% YTY as a result of continued aggressive pricing and promotion that was partially offset by a positive mix shift to more all-in-ones (“AIOs”).

For the nine months ended September 30, 2007, Consumer segment revenue decreased $176 million or 11% YTY due to decreased inkjet supplies and hardware revenue. Hardware revenue declined YTY due to lower unit shipments and lower AURs. Inkjet hardware unit shipments declined 7% YTY as growth in AIOs, was more than offset by a decline in single function printers. Inkjet hardware AUR decreased 8% YTY as price declines were partially offset by a favorable mix shift to AIOs.

Revenue by geography

The following table provides a breakdown of the Company’s revenue by geography:

	Three Months Ended September 30							Nine Months Ended September 30
*(Dollars in millions)*	2007		2006		*% Change*			2007		2006		*% Change*
United States	$	526.0	$	563.5		(7	)%	$	1,579.1	$	1,668.3		(5	)%
EMEA (Europe, the Middle East & Africa)		424.8		417.8		2			1,352.4		1,333.4		1
Other International		244.6		253.3		(3	)		732.7		737.2		(1	)
Total revenue	$	1,195.4	$	1,234.6		(3	)%	$	3,664.2	$	3,738.9		(2	)%

For the three and nine months ended September 30, 2007, revenue decreased in the U.S. due to a decline in inkjet revenue.

Gross Profit

The following table provides gross profit information:


	Three Months Ended September 30									Nine Months Ended September 30
*(Dollars in millions)*	2007			2006			*Change*			2007			2006			*Change*
Gross profit dollars	$	332.6		$	402.4			(17	)%	$	1,125.6		$	1,223.9			(8	)%
% of revenue		27.8	%		32.6	%	(4.8) pts				30.7	%		32.7	%	(2.0) pts

For the three and nine months ended September 30, 2007, consolidated gross profit and gross profit as a percentage of revenue decreased YTY.

The gross profit margin for the third quarter of 2007 decreased YTY due to a 7.5 percentage point decrease in product margins, principally in inkjet hardware, and a 0.1 percentage point decrease attributable to restructuring-related actions primarily due to increased project costs YTY, partially offset by a 2.8 percentage point favorable mix among products.

The gross profit margin for the nine months ended September 30, 2007, decreased YTY due a 4.7 percentage point decrease in product margins, principally in inkjet hardware, partially offset by a 1.9 percentage point favorable mix among products and a 0.8 percentage point improvement attributable to restructuring-related actions primarily from a reduction in accelerated depreciation charges YTY.

Operating Expense

The following table presents information regarding the Company’s operating expenses during the periods indicated:

	Three Months Ended September 30										Nine Months Ended September 30
	2007					2006					2007					2006
*(Dollars in millions)*	Dollars		*% of Rev*			Dollars		*% of Rev*			Dollars		*% of Rev*			Dollars		*% of Rev*
Research and development	$	101.2		8.5	%	$	93.2		7.6	%	$	303.3		8.3	%	$	273.8		7.3	%
Selling, general & administrative		204.3		17.1			186.6		15.1			608.5		16.6			546.6		14.6
Restructuring and other, net		6.6		0.5			7.5		0.6			6.6		0.2			64.3		1.7
Total operating expense	$	312.1		26.1	%	$	287.3		23.3	%	$	918.4		25.1	%	$	884.7		23.6	%

For the three and nine months ended September 30, 2007, research and development expenses increased YTY due to the Company’s continued investment to support product and solution development. These continuing investments have led to new products and solutions aimed at targeted growth segments.

For the three and nine months ended September 30, 2007, selling, general and administrative expenses increased YTY as the Company continued to increase spending on marketing and sales activities. For the nine months ended September 30, 2007, demand generation activities, which include the brand development marketing campaign launched in late 2006, increased YTY. The initiative includes a television advertising campaign along with radio and print advertising in targeted geographic and market segments. The Company will continue the increased demand generation activity in 2007 as the Company’s focus continues to be to drive branded hardware growth. Additionally, selling, general and administrative (“SG&A”) expenses for the three and nine months ended September 30, 2007, included $3.9 million and $8.6 million, respectively, of project costs related to the Company’s 2006 actions. Also, SG&A expenses for the nine months ended September 30, 2007, included a $3.5 million gain on the sale of the Company’s Rosyth, Scotland facility in the first quarter of 2007. SG&A expenses for the three and nine months ended September 30, 2006, included $2.2 million and $3.2 million, respectively, of project costs related to the Company’s 2006 actions.

For the three and nine months ended September 30, 2007, the Company incurred $6.6 million of employee termination benefit charges in connection with its 2007 Restructuring Plan. For the three and nine months ended September 30, 2006, the Company incurred $7.5 million and $74.2 million, respectively, of restructuring-related charges in connection with its 2006 actions. Additionally, for the nine months ended September 30, 2006, the Company recognized a $9.9 million pension curtailment gain from its 2006 actions.

Operating Income (Loss)

The following table provides operating income by market segment:


	Three Months Ended September 30										Nine Months Ended September 30
*(Dollars in millions)*	2007			2006			*Change*				2007			2006			*Change*
Business	$	143.0		$	146.8			(3	)	%	$	445.7		$	443.1			1		%
% of segment revenue		19.7	%		21.1	%		(1.4	)	pts		20.3	%		21.1	%		(0.8	)	pts
Consumer		(22.2	)		62.2			n/a				56.1			195.5			(71	)	%
% of segment revenue		(4.7	)%		11.5	%		(16.2	)	pts		3.8	%		11.9	%		(8.1	)	pts
All other		(100.3	)		(93.9	)		(7	)	%		(294.6	)		(299.4	)		2		%
Total operating income (loss)	$	20.5		$	115.1			(82	)	%	$	207.2		$	339.2			(39	)	%
% of total revenue		1.7	%		9.3	%		(7.6	)	pts		5.7	%		9.1	%		(3.4	)	pts

For the three months ended September 30, 2007, the decline in consolidated operating income was primarily attributable to decreased gross profit and higher operating expenses as discussed above. For the nine months ended September 30, 2007, the decline in consolidated operating income was primarily attributable to decreased gross profit and higher operating expenses partially offset by a reduction in pre-tax restructuring-related charges and project costs YTY as discussed above.

In connection with the 2007 Restructuring Plan, for the three and nine months ended September 30, 2007, the Company accrued employee termination benefit charges of $6.2 million in its Consumer segment and $0.4 million in All other.

For the three months ended September 30, 2006, the Company incurred restructuring-related charges and project costs of $5.9 million in its Business segment, $4.6 million in its Consumer segment and $2.8 million in All other.

For the nine months ended September 30, 2006, the Company incurred restructuring-related charges and project costs of $28.0 million in its Business segment, $54.9 million in its Consumer segment and $33.4 million in All other. All other operating income also included a $9.9 million pension curtailment gain.

Interest and Other

The following table provides interest and other information:

	Three Months Ended September 30						Nine Months Ended September 30
*(Dollars in millions)*	2007			2006			2007			2006
Interest (income) expense, net	$	(5.6	)	$	(5.2	)	$	(13.8	)	$	(17.0	)
Other (income) expense , net		(0.8	)		1.2			(7.0	)		3.9
Total interest and other (income) expense, net	$	(6.4	)	$	(4.0	)	$	(20.8	)	$	(13.1	)

For the nine months ended September 30, 2007, the Company’s interest income decreased YTY due to a decreased level of cash and marketable securities held by the Company partially offset by higher interest rates in 2007 as compared to 2006. Additionally, during the second quarter of 2007, the Company substantially liquidated the remaining operations of its Scotland entity and recognized an $8.1 million pre-tax gain from the realization of the entity’s accumulated foreign currency translation adjustment generated on the investment in the entity during its operating life.

Provision (Benefit) for Income Taxes

Net Earnings

Earnings per Share

The following table summarizes basic and diluted net earnings per share:

	Three Months Ended September 30				Nine Months Ended September 30
	2007		2006		2007		2006
Basic earnings per share	$	0.48	$	0.86	$	2.12	$	2.38
Diluted earnings per share	$	0.48	$	0.85	$	2.10	$	2.37

For the three and nine months ended September 30, 2007, the decreases in basic and diluted net earnings per share YTY were attributable to decreased earnings partially offset by the decreases in the average number of shares outstanding, primarily due to the Company’s stock repurchases.

For the three months ended September 30, 2007, both basic and diluted net earnings per share include the tax benefits as discussed above. For the nine months ended September 30, 2007, both basic and diluted net earnings per share include the tax benefits and the Scotland facility and foreign exchange gains as discussed above.

For the three and nine months ended September 30, 2006, both basic and diluted net earnings per share include the restructuring-related charges, project costs and pension curtailment gain as discussed above.

FINANCIAL CONDITION

Lexmark’s financial position remains strong at September 30, 2007, with working capital of $445 million compared to $506 million at December 31, 2006. The decrease in working capital was primarily due to the reclassification of $150 million of senior notes maturing in May 2008 from Long-term debt to Current portion of long-term debt in the second quarter of 2007.

Lexmark had $4 million of outstanding short-term borrowings at September 30, 2007. The Company had no short-term borrowings outstanding at December 31, 2006. The debt to total capital ratio was 12% at September 30, 2007, compared to 13% at December 31, 2006.

The Company had no amounts outstanding under its U.S. trade receivables financing program or its U.S. revolving credit facility at September 30, 2007.

The following table summarizes the results of the Company’s Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2007 and 2006:


	Nine Months Ended September 30
*(Dollars in millions)*	2007			2006
Net cash flow provided by (used for):
Operating activities	$	352.5		$	527.9
Investing activities		(152.9	)		213.3
Financing activities		(143.6	)		(709.4	)
Effect of exchange rate changes on cash		1.9			0.7
Net change in cash and cash equivalents	$	57.9		$	32.5

The Company’s primary source of liquidity has been cash generated by operations, which totaled $353 million and $528 million for the nine months ended September 30, 2007 and 2006, respectively. Cash from operations generally has been sufficient to allow the Company to fund its working capital needs and finance its capital expenditures during these periods along with the repurchase of approximately $0.2 billion and $0.7 billion of its Class A Common Stock during the nine months ended September 30, 2007 and 2006, respectively. Management believes that cash provided by operations will continue to be sufficient to meet operating and capital needs; however, in the event that cash from operations is not sufficient, the Company has other potential sources of cash through utilization of its trade receivables financing program, revolving credit facility or other financing sources.

Operating activities:

The decrease in cash flows from operating activities from 2006 to 2007 primarily resulted from the decrease in net earnings as well as unfavorable changes of $88 million in accrued liabilities and $71 million in trade receivables. The change noted in accrued liabilities was primarily due to unfavorable changes in restructuring-related accruals of $57 million and income taxes payable of $42 million compared to the prior year. The $71 million change noted in trade receivables is primarily the result of greater collections during the nine months ended September 30, 2006 versus September 30, 2007. A significantly higher trade receivables balance existed at December 31, 2005 versus December 31, 2006 due to a larger portion of the fourth quarter sales for 2005 occurring in the later part of the quarter.

The Company’s days of sales outstanding were 43 days at September 30, 2007, compared to 38 days at December 31, 2006, and 42 days at September 30, 2006, compared to 43 days at December 31, 2005. The days of sales outstanding are calculated using the quarter-end trade receivables, net of allowances, and the average daily revenue for the quarter.

The Company’s days of inventory were 48 days at September 30, 2007, compared to 44 days at December 31, 2006, and 50 days at September 30, 2006, compared to 38 days at December 31,2005. The days of inventory is calculated using the quarter-end net inventories balance and the average daily cost of revenue for the quarter.

In connection with the 2006 restructuring, the remaining accrued liability balance at September 30, 2007, of $16 million, is expected to be substantially paid out by the end of 2007. These payments will relate primarily to employee termination benefits. Additionally, the Company accrued $7 million in the third quarter of 2007 for the 2007 Restructuring Plan. Refer to Part I, Item 1, Note 2 of the Notes to Consolidated Condensed Financial Statements for additional information.

As of September 30, 2007, the Company had accrued approximately $112 million for pending copyright fee issues, including litigation proceedings, local legislative initiatives and/or negotiations with the parties involved. These accruals are included in Accrued liabilities on the Consolidated Condensed Statements of Financial Position. Refer to Part I, Item 1, Note 12 of the Notes to Consolidated Condensed Financial Statements for additional information.

Investing activities:

The Company increased its marketable securities investments by $31 million and $360 million for the nine months ended September 30, 2007 and 2006, respectively.

For the nine months ended September 30, 2007 and 2006, the Company spent $131 million and $145 million, respectively, on capital expenditures. The capital expenditures for 2007 principally related to new product support, infrastructure support and manufacturing capacity expansion. The Company continues to make significant capital investments in certain manufacturing facilities. It is anticipated that total capital expenditures for 2007 will be approximately $210 million and are expected to be funded through cash from operations.

During the first quarter of 2007, the Company sold its Rosyth, Scotland facility for $8.1 million and recognized a $3.5 million pre-tax gain on the sale.

Financing activities:

The change in the net cash flows from financing activities was driven by the Company’s share repurchase activity.

Lexmark has outstanding $150.0 million principal amount of senior notes due May 15, 2008. A balance of $149.9 million (net of an unamortized discount of $0.1 million) was outstanding at September 30, 2007.

TRADE RECEIVABLES FACILITY

At September 30, 2007 and December 31, 2006, there were no receivables or borrowings outstanding under the facility.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 13 to the Consolidated Condensed Financial Statements in Item 1 for a description of recent accounting pronouncements which is incorporated herein by reference.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS

The following significant factors, as well as others of which we are unaware or deem to be immaterial at this time, could materially adversely affect our business, financial condition or operating results in the future. Therefore, the following information should be considered carefully together with other information contained in this report. Past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

Overall market trends, seasonal market trends, competitive pressures, pricing, increased product costs or shipping costs, product mix and other factors may result in reductions in revenue or pressure on operating income in a given period.

The Company’s future operating results may be adversely affected if it is unable to continue to develop, manufacture and market products that are reliable, competitive, and meet customers’ needs. The markets for laser and inkjet products and associated supplies are aggressively competitive, especially with respect to pricing and the introduction of new technologies and products offering improved features and functionality. In addition, the introduction of any significant new and/or disruptive technology or business model by a competitor that substantially changes the markets into which the Company sells its products or demand for the products sold by the Company could severely impact sales of the Company’s products and the Company’s operating results. The impact of competitive activities on the sales volumes or revenue of the Company, or the Company’s inability to effectively deal with these competitive issues, could have a material adverse effect on the Company’s ability to attract and retain OEM customers, maintain or grow retail shelf space or maintain or grow market share. The competitive pressure to develop technology and products and to increase marketing expenditures also could cause significant changes in the level of the Company’s operating expenses.

The Company has undertaken cost reduction measures over the last few years in an effort to optimize the Company’s expense structure. Such actions have included workforce reductions, the consolidation of manufacturing capacity, and the centralization of support functions to shared service centers in each geography. In particular, the Company’s manufacturing and support functions are becoming more heavily concentrated in China and the Philippines. The Company expects to realize cost savings in the future through these actions and may announce future actions to further reduce its worldwide workforce and/or centralize its operations. The risks associated with these actions include potential delays in their implementation, particularly workforce reductions due to regulatory requirements; increased costs associated with such actions; decreases in employee morale and the failure to meet operational targets due to unplanned departures of employees, particularly key employees and sales employees.

The Company and its major competitors, many of which have significantly greater financial, marketing and/or technological resources than the Company, have regularly lowered prices on their products and are expected to continue to do so. In particular, both the inkjet and laser printer markets have experienced and are expected to continue to experience significant price pressure. Price reductions on inkjet or laser products or the inability to reduce costs, including warranty costs, to contain expenses or to increase or maintain sales as currently expected, as well as price protection measures, could result in lower profitability and jeopardize the Company’s ability to grow or maintain its market share. In recent years, the gross margins on the Company’s hardware products have been under pressure as a result of competitive pricing pressures in the market. If the Company is unable to reduce costs to offset this competitive pricing or product mix pressure, and if the Company is unable to support declining gross margins through the sale of supplies, the Company’s operating results and future profitability may be negatively impacted. Historically, the Company has not experienced significant supplies pricing pressure, but if supplies pricing was to come under significant pressure, the Company’s financial results could be materially adversely affected.

The entrance of additional competitors that are focused on printing solutions could further intensify competition in the inkjet and laser printer markets and could have a material adverse impact on the Company’s strategy and financial results.

The introduction of products by the Company or its competitors, or delays in customer purchases of existing products in anticipation of new product introductions by the Company or its competitors and market acceptance of new products and pricing programs, any disruption in the supply of new or existing products as well as the costs of any product recall or increased warranty, repair or replacement costs due to quality issues, the reaction of competitors to any such new products or programs, the life cycles of the Company’s products, as well as delays in product development and manufacturing, and variations in cost, including but not limited to component parts, raw materials, commodities, energy, products, distributors, fuel and variations in supplier terms and conditions, may impact sales, may cause a buildup in the Company’s inventories, make the transition from current products to new products difficult and could adversely affect the Company’s future operating results.

Unfavorable global economic conditions may adversely impact the Company’s future operating results. The Company continues to experience some weak markets for its products. Continued softness in certain markets and uncertainty about global economic conditions could result in lower demand for the Company’s products, particularly supplies. Weakness in demand has resulted in intense price competition and may result in excessive inventory for the Company and/or its reseller channel, which may adversely affect sales, pricing, risk of obsolescence and/or other elements of the Company’s operating results. Ongoing weakness in demand for the Company’s hardware products may also cause erosion of the installed base of products over time, thereby reducing the opportunities for supplies sales in the future.

The Company’s inability to perform satisfactorily under service contracts for managed print services and other customer services may result in the loss of customers, loss of reputation and/or financial consequences that may have a material adverse impact on the Company’s financial results and strategy.

The Company’s future operating results could be adversely affected if the consumption of its supplies by end users of its products is lower than expected or declines, if there are declines in pricing, unfavorable mix and/or increased costs.

Refill, remanufactured, clones, counterfeits and other compatible alternatives for some of the Company’s cartridges are available and compete with the Company’s supplies business. The Company expects competitive supplies activity to increase. Various legal challenges and governmental activities may intensify competition for the Company’s aftermarket supplies business.

The Company has migrated the infrastructure support of its information technology system and application maintenance functions to new third-party service providers. The Company is in the process of centralizing certain of its accounting and other finance functions and order-to-cash functions from various countries to shared service centers. The Company is also in the process of reducing, consolidating and moving various parts of its general and administrative resource, supply chain resource, service delivery, and marketing and sales support structure. Many of these processes and functions are moving to lower-cost countries, including China, India and the Philippines. Any disruption in these systems, processes or functions could have a material adverse impact on the Company’s operations, its financial results, its systems of internal controls and its ability to accurately record and report transactions and financial results.

The Company’s performance depends in part upon its ability to successfully forecast the timing and extent of customer demand and reseller demand to manage worldwide distribution and inventory levels of the Company. Unexpected fluctuations in reseller inventory levels could disrupt ordering patterns and may adversely affect the Company’s financial results. In addition, the financial failure or loss of a key customer or reseller could have a material adverse impact on the Company’s financial results. The Company must also be able to address production and supply constraints, including product disruptions caused by quality issues, and delays or disruptions in the supply of key components necessary for production, including without limitation component shortages due to increasing global demand in the Company’s industry and other industries. Such delays, disruptions or shortages may result in lost revenue or in the Company incurring additional costs to meet customer demand. The Company’s future operating results and its ability to effectively grow or maintain its market share may be adversely affected if it is unable to address these issues on a timely basis.

The European Union has adopted the Waste Electrical and Electronic Equipment Directive (the “Directive”) which requires producers of electrical and electronic goods, including printing devices, to be financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. The deadline for enacting and implementing the Directive by individual European Union governments was August 13, 2004 (such legislation, together with the Directive, are defined as the “WEEE Legislation”), although extensions were granted to some countries. Producers were to be financially responsible under the WEEE Legislation beginning in August 2005. Similar legislation may be enacted in the future in other jurisdictions as well. The impact of this legislation could adversely affect the Company’s operating results and profitability.

Certain countries (primarily in Europe) and/or collecting societies representing copyright owners’ interests have commenced proceedings to impose fees on devices (such as scanners, printers and multifunction devices) alleging the copyright owners are entitled to compensation because these devices enable reproducing copyrighted content. Other countries are also considering imposing fees on certain devices. The amount of fees, if imposed, would depend on the number of products sold and the amounts of the fee on each product, which will vary by product and by country. The financial impact on the Company, which will depend in large part upon the outcome of local legislative processes, the Company’s and other industry participants’ outcome in contesting the fees and the Company’s ability to mitigate that impact by increasing prices, which ability will depend upon competitive market conditions, remains uncertain. The outcome of the copyright fee issue could adversely affect the Company’s operating results and business.

The European Union has adopted the “RoHS” Directive (Restriction of use of certain Hazardous Substances) which restricts the use of nine substances in electrical and electronic equipment placed on the market on or after July 1, 2006. Compliance with the RoHS Directive could create shortages of certain components or impact continuity of supply that could adversely affect the Company’s operating results and profitability.

The Company’s success depends in part on its ability to develop technology and obtain patents, copyrights and trademarks, and maintain trade secret protection, to protect its intellectual property against theft, infringement or other misuse by others. The Company must also conduct its operations without infringing the proprietary rights of others. Current or future claims of intellectual property infringement could prevent the Company from obtaining technology of others and could otherwise materially and adversely affect its operating results or business, as could expenses incurred by the Company in obtaining intellectual property rights, enforcing its intellectual property rights against others or defending against claims that the Company’s products infringe the intellectual property rights of others, that the Company engages in false or deceptive practices or that its conduct is anti-competitive.

· The Company relies in large part on its international production facilities and international manufacturing partners, many of which are located in China and the Philippines, for the manufacture of its products and key components of its products. Future operating results may be adversely affected by several other factors, including, without limitation, if the Company’s international operations or manufacturing partners are unable to perform or supply products reliably, if there are disruptions in international trade, disruptions at important geographic points of exit and entry, if there are difficulties in transitioning such manufacturing activities among the Company, its international operations and/or its manufacturing partners, or if there arise production and supply constraints which result in additional costs to the Company. The financial failure or loss of a sole supplier or significant supplier of products or key components, or their inability to produce the required quantities, could result in a material adverse impact on the Company’s operating results. China’s revaluation of its currency to no longer peg its currency to the U.S. dollar may have an adverse impact on the Company’s cost of goods acquired from China, and could have a material adverse impact on the Company’s financial results.

Revenue derived from international sales make up about half of the Company’s revenue. Accordingly, the Company’s future results could be adversely affected by a variety of factors, including changes in a specific country’s or region’s political or economic conditions, foreign currency exchange rate fluctuations, trade protection measures and unexpected changes in regulatory requirements. In addition, changes in tax laws and the ability to repatriate cash accumulated outside the U.S. in a tax efficient manner may adversely affect the Company’s financial results, investment flexibility and operations. Moreover, margins on international sales tend to be lower than those on domestic sales, and the Company believes that international operations in new geographic markets will be less profitable than operations in the U.S. and European markets, in part, because of the higher investment levels for marketing, selling and distribution required to enter these markets.

In many foreign countries, particularly those with developing economies, it is common for local business practices to be prohibited by laws and regulations applicable to the Company, such as employment laws, fair trade laws or the Foreign Corrupt Practices Act. Although the Company implements policies and procedures designed to ensure compliance with these laws, our employees, contractors and agents, as well as those business partners to which we outsource certain of our business operations, may take actions in violation of our policies. Any such violation, even if prohibited by our policies, could have a material adverse effect on our business and our reputation. Because of the challenges in managing a geographically dispersed workforce, there also may be additional opportunities for employees to commit fraud or personally engage in practices which violate the policies and procedures of the Company.

The Company markets and sells its products through several sales channels. The Company has also advanced a strategy of forming alliances and OEM arrangements with many companies. The Company’s future operating results may be adversely affected by any conflicts that might arise between or among its various sales channels, the volume reduction in or loss of any alliance or OEM arrangement or the loss of retail shelf space. Aggressive pricing on laser and inkjet products and/or associated supplies from customers and resellers, including, without limitation, OEM customers, could result in a material adverse impact on the Company’s strategy and financial results.

The Company depends on its information technology systems for the development, manufacture, distribution, marketing, sales and support of its products and services. Any failure in such systems, or the systems of a partner or supplier, may adversely affect the Company’s operating results. Furthermore, because vast quantities of the Company’s products flow through only a few distribution centers to provide product to various geographic regions, the failure of information technology systems or any other disruption affecting those product distribution centers could have a material adverse impact on the Company’s ability to deliver product and on the Company’s financial results.

The Company’s effective tax rate could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates. In addition, the amount of income tax the Company pays is subject to ongoing audits in various jurisdictions. A material assessment by a taxing authority or a decision to repatriate foreign cash could adversely affect the Company’s profitability.

Our worldwide operations and those of our manufacturing partners, suppliers, and freight transporters, among others, are subject to natural and manmade disasters and other business interruptions such as earthquakes, tsunamis, floods, hurricanes, typhoons, fires, extreme weather conditions, environmental hazards, power shortages, water shortages and telecommunications failures. The occurrence of any of these business disruptions could seriously harm our revenue and financial condition and increase our costs and expenses. As the Company continues its consolidation of certain functions into shared service centers and movement of certain functions to lower cost countries, the probability and impact of business disruptions may be increased over time.

Terrorist attacks and the potential for future terrorist attacks have created many political and economic uncertainties, some of which may affect the Company’s future operating results. Future terrorist attacks, the national and international responses to such attacks, and other acts of war or hostility may affect the Company’s facilities, employees, suppliers, customers, transportation networks and supply chains, or may affect the Company in ways that are not capable of being predicted presently.

The Company relies heavily on the health and welfare of its employees and the employees of its manufacturing partners. The widespread outbreak of any form of communicable disease affecting a large number of workers or customers could adversely impact the Company’s operating results.

The Company has historically used stock options and other forms of share-based payment awards as key components of the total rewards program for employee compensation in order to align employees’ interests with the interests of stockholders, motivate employees, encourage employee retention and provide competitive compensation and benefits packages. As a result of Statement of Financial Accounting Standards No. 123R, the Company would incur increased compensation costs associated with its share-based compensation programs and as a result has reviewed its compensation strategy in light of the current regulatory and competitive environment and has decided to change the form of its share-based awards. Due to this change in compensation strategy, combined with other benefit plan changes undertaken to reduce costs, the Company may find it difficult to attract, retain and motivate employees, and any such difficulty could materially adversely affect its operating results.

Factors unrelated to the Company’s operating performance, including the financial failure or loss of significant customers, resellers, manufacturing partners or suppliers; the outcome of pending and future litigation or governmental proceedings, including claims of intellectual property infringement, false or deceptive practices or anticompetitive conduct; and the ability to retain and attract key personnel, could also adversely affect the Company’s operating results. In addition, the Company’s stock price, like that of other technology companies, can be volatile. Trading activity in the Company’s common stock, particularly the trading of large blocks and intraday trading in the Company’s common stock, may affect the Company’s common stock price.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The market risk inherent in the Company’s financial instruments and positions represents the potential loss arising from adverse changes in interest rates and foreign currency exchange rates.

Interest Rates

At September 30, 2007, the fair value of the Company’s senior notes was estimated at $152 million using quoted market prices and yields obtained through independent pricing sources for the same or similar types of borrowing arrangements, taking into consideration the underlying terms of the debt. The fair value of the senior notes exceeded the carrying value as recorded in the Consolidated Condensed Statements of Financial Position at September 30, 2007, by approximately $2 million. Market risk is estimated as the potential change in fair value resulting from a hypothetical 10% adverse change in interest rates and amounts to approximately $0.4 million at September 30, 2007.

The Company has interest rate swaps that serve as a fair value hedge of the Company’s senior notes. The fair value of the interest rate swaps at September 30, 2007, was a liability of $0.5 million. Market risk for the interest rate swaps is estimated as the potential change in fair value resulting from a hypothetical 10% adverse change in interest rates and amounts to approximately $0.4 million at September 30, 2007.

Foreign Currency Exchange Rates

The Company may utilize foreign currency hedging strategies to limit potential losses in earnings or cash flows from adverse foreign currency exchange rate movements. Foreign currency exposures arise from transactions denominated in a currency other than the Company’s functional currency and from foreign denominated revenue and profit translated into U.S. dollars. The primary currencies to which the Company is exposed include the Euro, the Mexican peso, the British pound, the Philippine Peso, the Australian dollar, and other Asian and South American currencies. The Company hedges some of its foreign currency exposures with forward contracts, put options, and call options generally with maturity dates of twelve months or less. The potential loss in fair value at September 30, 2007, for such contracts resulting from a hypothetical 10% adverse change in all foreign currency exchange rates is approximately $14 million. This loss would be mitigated by corresponding gains on the underlying exposures.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chairman and Chief Executive Officer and Executive Vice President and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chairman and Chief Executive Officer and Executive Vice President and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective in providing reasonable assurance that the information required to be disclosed by the Company in the reports that it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and were effective as of the end of the period covered by this report, to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decision regarding required disclosure.

Changes in Internal Control over Financial Reporting

Beginning in the third quarter of 2006 and continuing through the third quarter of 2007, the Company continued its process of centralizing certain of its accounting and other finance functions and order-to-cash functions from various countries to shared service centers. As a result, certain changes in basic processes and internal controls

and procedures for day-to-day accounting functions and financial reporting were made. In the second quarter of 2007, the Company migrated the majority of the transaction processing for after-sales service activities in the United States to a new software system. While management believes the changed controls relating to financial reporting are adequate and effective, management is continuing to evaluate and monitor the changes in controls and procedures as processes in each of these areas evolve.

Except for implementing the changes noted above, there has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2007, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

There have been no material developments to the legal proceedings previously disclosed in Part I, Item 3 of the Company's 2006 Annual Report on Form 10-K, other than those reported in the Company’s 10-Q for the quarters ended March 31, 2007 and June 30, 2007.

Item 1A. RISK FACTORS

A description of the risk factors associated with the Company’s business is included under “Factors That May Affect Future Results And Information Concerning Forward-Looking Statements” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contained in Item 2 of Part I of this report. There have been no material changes to the risk factors associated with the business previously disclosed in Part I, Item 1A of the Company’s 2006 Annual Report on Form 10-K.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table summarizes the repurchases of the Company’s Common Stock in the quarter ended September 30, 2007:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) ⁽¹⁾
July 1 - 31, 2007		-	$	-		-	$	295.5
August 1- 31, 2007		-		-		-		295.5
September 1 - 30, 2007		-		-		-		295.5
Total		-	$	-		-

⁽¹⁾

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

Item 5. OTHER INFORMATION

None.

Item 6. EXHIBITS

A list of exhibits is set forth in the Exhibit Index found on page 38 of this report.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, both on behalf of the registrant and in his capacity as principal accounting officer of the registrant.

	Lexmark International, Inc.
	(Registrant)

November 6, 2007

	/s/ Gary D. Stromquist
	Gary D. Stromquist
	Vice President and Corporate Controller
	(Chief Accounting Officer)

EXHIBIT INDEX

Exhibits:

10.1

Amendment No. 4 to Receivables Purchase Agreement, dated as of October 5, 2007, by and among Lexmark Receivables Corporation, as Seller, CIESCO, LLC and Gotham Funding Corporation, as the Investors, Citibank, N.A. and The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch ("BTMUFJ"), Citicorp North America, Inc. ("CNAI"), as Program Agent, CNAI and BTMUFJ, as Investor Agents and the Company, as Collection Agent and Originator.

10.2	Amendment No. 5 to Purchase and Contribution Agreement, dated as of October 5, 2007, by and between the Company, as Seller, and Lexmark Receivables Corporation, as Purchaser.

31.1	Certification of Chairman and Chief Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Executive Vice President and Chief Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of Chairman and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Executive Vice President and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Positive
Negative
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Litigous
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Lexmark International Inactive 10-Q2007 Q3 Quarterly report

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