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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
|X| For the Quarterly Period Ended June 30, 2001
OR
|_| 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)
Lexmark International Group, Inc.
(Former name, former address and former fiscal year,
if changed since last report)
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 ___
The registrant had 129,327,223 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 August 3, 2001.
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LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Page of
Form 10-Q
---------
PART I
ITEM 1. Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (Unaudited)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000.......2
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION (Unaudited)
AS OF JUNE 30, 2001 AND DECEMBER 31, 2000......................3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE 30, 2001 AND 2000.......................4
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited).5-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (Unaudited)..............9-14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........14
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................15
1
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 Six Months Ended
June 30 June 30
-------------------------- ------------------------
2001 2000 2001 2000
Revenue $987.9 $893.0 $1,987.3 $1,784.7
Cost of revenue 644.9 584.8 1,310.4 1,161.4
------ ------ -------- --------
Gross profit 343.0 308.2 676.9 623.3
------ ------ -------- --------
Research and development 64.2 52.9 126.4 106.7
Selling, general and administrative 156.7 141.4 310.7 282.3
------ ------ -------- --------
Operating expense 220.9 194.3 437.1 389.0
------ ------ -------- --------
Operating income 122.1 113.9 239.8 234.3
Interest expense 3.7 3.2 6.5 5.8
Other expense (income) 2.2 (2.1) 6.4 0.3
------ ------ -------- --------
Earnings before income taxes 116.2 112.8 226.9 228.2
Provision for income taxes 29.1 28.7 60.1 63.9
------ ------ -------- --------
Net earnings $ 87.1 $ 84.1 $ 166.8 $ 164.3
====== ====== ======== ========
Net earnings per share:
Basic $ 0.67 $ 0.65 $ 1.30 $ 1.27
====== ====== ======== ========
Diluted $ 0.65 $ 0.62 $ 1.25 $ 1.21
====== ====== ======== ========
Shares used in per share calculation:
Basic 129.2 129.0 128.6 129.0
====== ====== ======== ========
Diluted 134.3 135.7 133.5 136.0
====== ====== ======== ========
See notes to consolidated condensed financial statements.
2
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In Millions, Except Share Amounts)
(Unaudited)
June 30 December 31
2001 2000
-------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 67.0 $ 68.5
Trade receivables, net of allowance of $29.1
in 2001 and $22.2 in 2000 594.1 594.0
Inventories 551.8 412.3
Prepaid expenses and other current assets 192.8 168.9
-------- --------
Total current assets 1,405.7 1,243.7
Property, plant and equipment, net 780.4 730.6
Other assets 110.1 98.9
-------- --------
Total assets $2,296.2 $2,073.2
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 106.1 $ -
Accounts payable 373.3 426.1
Accrued liabilities 460.4 552.9
-------- --------
Total current liabilities 939.8 979.0
Long-term debt 149.0 148.9
Other liabilities 199.6 168.3
-------- --------
Total liabilities 1,288.4 1,296.2
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 1,600,000 shares authorized;
no shares issued and outstanding - -
Common stock, $.01 par value:
Class A, 900,000,000 shares authorized; 129,250,267 and
127,086,660 outstanding in 2001 and 2000, respectively 1.6 1.6
Class B, 10,000,000 shares authorized; no shares outstanding - -
Capital in excess of par 773.7 715.7
Retained earnings 1,182.2 1,015.7
Treasury stock, at cost; 28,487,458 and 28,572,272 shares in 2001
and 2000, respectively (879.9) (881.1)
Accumulated other comprehensive loss (69.8) (74.9)
-------- --------
Total stockholders' equity 1,007.8 777.0
-------- --------
Total liabilities and stockholders' equity $2,296.2 $2,073.2
======== ========
See notes to consolidated condensed financial statements.
3
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Six Months Ended
June 30
------------------------
2001 2000
Cash flows from operating activities:
Net earnings $166.8 $164.3
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 59.1 42.1
Deferred taxes (3.2) 0.4
Other 3.0 (4.5)
------ ------
225.7 202.3
Change in assets and liabilities:
Trade receivables 35.9 38.6
Trade receivables program (36.0) (20.1)
Inventories (139.5) 9.0
Accounts payable (52.8) 0.1
Accrued liabilities (92.5) (28.7)
Tax benefits from employee stock options 35.3 47.5
Other assets and liabilities 14.4 (37.8)
------ ------
Net cash (used for) provided by operating activities (9.5) 210.9
------ ------
Cash flows from investing activities:
Purchases of property, plant and equipment (116.4) (127.7)
Other 0.1 (1.0)
------ ------
Net cash used for investing activities (116.3) (128.7)
------ ------
Cash flows from financing activities:
Increase in short-term debt 106.1 35.3
Issuance of treasury stock 1.2 -
Purchase of treasury stock - (174.6)
Proceeds from employee stock plans 19.1 16.6
------ ------
Net cash provided by (used for) financing activities 126.4 (122.7)
------ ------
Effect of exchange rate changes on cash (2.1) (0.8)
------ ------
Net decrease in cash and cash equivalents (1.5) (41.3)
Cash and cash equivalents - beginning of period 68.5 93.9
------ ------
Cash and cash equivalents - end of period $ 67.0 $ 52.6
====== ======
See notes to consolidated condensed financial statements.
4
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited; however, in
the opinion of management of Lexmark International, Inc. (together with
its subsidiaries, the "company"), all adjustments (which comprise only
normal and recurring accruals) necessary for a fair presentation 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. 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, 2000. Certain prior year
amounts have been reclassified to conform to the current year
presentation.
2. RESTRUCTURING AND RELATED CHARGES
In October 2000, Lexmark's management and board of directors approved a
plan to restructure its worldwide operations. The restructuring plan
involves relocating manufacturing, primarily laser printers, to Mexico
and China, and reductions in associated support infrastructure.
Restructuring and related charges of $41.3 million ($29.7 million, net of
tax) were expensed during the fourth quarter of 2000. These charges were
comprised of $24.3 million of accrued restructuring costs related to
separation and other exit costs, $10.0 million related to asset
impairment charges and $7.0 million associated with a pension curtailment
loss to recognize a change in the company's projected benefit obligation
associated with the employee separations.
Components of and amounts charged against the restructuring accrual as of
June 30, 2001 were as follows (Dollars in millions):
Total Cash Accrual Balance at
Accrual Payments June 30, 2001
-------------------------------------------------------------------------
Severance and related costs $19.3 $(5.9) $13.4
Other exit costs 5.0 (3.2) 1.8
-------------------------------------------------------------------------
Total $24.3 $(9.1) $15.2
-------------------------------------------------------------------------
The $19.3 million accrued restructuring costs for employee separation is
associated with approximately 900 employees worldwide primarily in the
manufacturing and related support areas. Employee separation benefits
include severance, medical and other benefits. As of June 30, 2001,
approximately 200 employees have exited the business and received
separation benefits.
The other exit costs of $5.0 million are related to vendor and lease
cancellation charges and demolition and cleanup costs associated with the
company's manufacturing relocation.
The $10.0 million charge for asset impairment was determined in
accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
resulted from the company's plans to abandon certain assets (primarily
buildings) associated with the relocation of manufacturing and related
support activities.
In total, the company expects the pre-tax charge of $41.3 million to
result in cash payments of $24.3 million and non-cash charges of $17.0
million. The cash payments are primarily for employee separations and
other exit costs. There have been no material changes to the plan since
its announcement in October 2000. Charges against the accrual are
expected to be substantially completed during 2001.
5
3. INVENTORIES
(Dollars in millions)
Inventories consist of the following:
June 30 December 31
2001 2000
---------------- -----------------
Work in process $ 188.1 $ 171.0
Finished goods 363.7 241.3
------- -------
$ 551.8 $ 412.3
======= =======
4. OTHER COMPREHENSIVE EARNINGS (LOSS)
(Dollars in millions)
Comprehensive earnings, net of taxes, consists of the following:
Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
2001 2000 2001 2000
Net earnings $87.1 $84.1 $166.8 $164.3
Other comprehensive earnings (loss):
Foreign currency translation adjustment (2.1) (6.2) (10.7) (12.7)
Cash flow hedging 4.0 (9.5) 15.6 (2.4)
Minimum pension liability adjustment 0.2 - 0.2 1.7
----- ----- ------ ------
Comprehensive earnings $89.2 $68.4 $171.9 $150.9
===== ===== ====== ======
Accumulated other comprehensive earnings (loss) consists of the
following:
Accumulated
Minimum Other
Translation Cash Flow Pension Comprehensive
Adjustment Hedges Liability Earnings (Loss)
---------- ------ --------- ---------------
Balance, December 31, 2000 $(57.5) $(13.8) $(3.6) $(74.9)
First quarter 2001 change (8.6) 11.6 - 3.0
------ ------ ----- ------
Balance, March 31, 2001 (66.1) (2.2) (3.6) (71.9)
Second quarter 2001 change (2.1) 4.0 0.2 2.1
------ ------ ----- ------
Balance, June 30, 2001 $(68.2) $ 1.8 $(3.4) $(69.8)
====== ====== ===== ======
6
5. EARNINGS PER SHARE (EPS)
(In millions, except per share amounts)
The following is a reconciliation of the weighted average shares used in
the basic and diluted EPS calculations:
Three Months Ended Six Months Ended
June 30 June 30
------------------- --------------------
2001 2000 2001 2000
Net earnings $ 87.1 $ 84.1 $166.8 $164.3
====== ====== ====== ======
Weighted average shares used
for basic EPS 129.2 129.0 128.6 129.0
Effect of dilutive securities
Long-term incentive plan - 0.1 - 0.1
Stock options 5.1 6.6 4.9 6.9
------ ------ ------ ------
Weighted average shares used
for diluted EPS 134.3 135.7 133.5 136.0
====== ====== ====== ======
Basic net EPS $ 0.67 $ 0.65 $ 1.30 $ 1.27
Diluted net EPS $ 0.65 $ 0.62 $ 1.25 $ 1.21
Options to purchase an additional 2.0 million and 1.6 million shares of
Group's Class A common stock were outstanding at June 30, 2001 and 2000,
respectively, but were not included in the computation of diluted
earnings per share because their effect would be antidilutive.
6. NEW ACCOUNTING STANDARDS
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-14,
Accounting for Certain Sales Incentives, which provides that some sales
incentives should be treated as reductions in revenue and other sales
incentives should be classified as cost of sales. In April 2001, the EITF
deferred the effective date for this issue to quarters beginning after
December 15, 2001. The company is evaluating the effect that this
statement may have on its financial position, results of operations and
cash flows.
The EITF has been discussing several issues related to loyalty programs
and vendor payments to retailers in connection with the promotion of the
vendor's products. EITF 00-22, Accounting for "Points" and Certain Other
Time-based or Volume-based Sales Incentive Offers, and Offers for Free
Products or Services to be Delivered in the Future, addresses loyalty
programs that offer awards consisting of the vendor's products or
services. In January 2001, a consensus was reached on one of the five
issues discussed. The EITF concluded that offers to customers to rebate
or refund a specified amount of cash that is redeemable only if the
customer meets a specified cumulative level of revenue transactions
should be recognized as a reduction of revenue. The effective date for
application of this consensus was set for no later than the quarter
ending after February 15, 2001. This consensus did not have a material
impact on the company's financial position, results of operations or cash
flows.
EITF 00-25, Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products,
addresses when consideration paid to a retailer should be classified as a
7
reduction of revenue. In April 2001, a consensus was reached that
consideration from a vendor to a purchaser of the vendor's products is
presumed to be a reduction in the selling prices of the vendor's products
and, therefore, should be characterized as a reduction of revenue. That
presumption can be overcome and the consideration should be characterized
as a cost incurred if certain criteria are met. The consensus is
effective for annual or interim financial statements beginning after
December 15, 2001. The company is evaluating the effect that this
statement may have on its financial position, results of operations and
cash flows.
In June 2001, the Financial Accounting Standards Board approved the
issuance of Statement of Financial Accounting Standard ("SFAS") No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that all business combinations initiated
after June 30, 2001 be accounted for using the purchase method of
accounting. SFAS No. 142 states that goodwill should not be amortized,
but should be tested for impairment annually at the reporting unit level.
All other intangible assets should be amortized over their useful lives.
SFAS No. 141 and SFAS No. 142 are effective for companies with fiscal
years beginning after December 15, 2001. These statements are not
expected to have a material impact on the company's financial position,
results of operations or cash flows.
8
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
(Unaudited)
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
Results of Operations
- ---------------------
Consolidated revenue for the three months ended June 30, 2001 was $988 million,
an increase of 11% over the same period of 2000. Revenue was adversely affected
by weaker foreign currency exchange rates against the U.S. dollar. Revenue
growth was 14% for the quarter on a constant currency basis. Total U.S. revenue
increased $73 million or 20%, and international revenue, including exports from
the U.S., increased $22 million or 4%.
For the six months ended June 30, 2001, consolidated revenue was $1,987 million,
an increase of 11% over the same period of 2000. Revenue growth was 15% for the
period on a constant currency basis. Total U.S. revenue increased $129 million
or 17%, and international revenue, including exports from the U.S., increased
$74 million or 7%.
The revenue growth for the three and six months ended June 30, 2001 over the
same periods in 2000 was primarily driven by unit volume increases in printers
and associated supplies whose revenue increased 13% and 15% for the three and
six month periods, respectively. Printer volumes grew at double-digit rates for
the first six months of 2001 compared to the same period of 2000. Revenue from
sales to all original equipment manufacturers ("OEM") customers for the three
and six months ended June 30, 2001 accounted for less than 15% of consolidated
revenue with no single OEM customer accounting for more than 5% of total
revenue.
Consolidated gross profit was $343 million for the three months ended June 30,
2001, an increase of 11% from the same period of 2000. Gross profit as a
percentage of revenue for the second quarter of 2001 increased to 34.7% from
34.5% for the same period in 2000 due to higher sales of associated printer
supplies, partially offset by lower hardware margins. For the six months ended
June 30, 2001, consolidated gross profit was $677 million, an increase of 9%
over the corresponding period of 2000. Gross profit as a percentage of revenue
for the six months ended June 30, 2001 decreased to 34.1% from 34.9% for the
same period in 2000 primarily due to lower hardware margins and unfavorable
currency impact, partially offset by higher sales of associated printer
supplies.
Total operating expense increased 14% for the quarter ended June 30, 2001 and
increased 12% for the first six months of 2001, compared to the same periods of
2000. Operating expense as a percentage of revenue for the quarter was 22.4%
compared to 21.8% for the corresponding period of 2000. Operating expense as a
percentage of revenue for the first half of 2001 was 22.0% compared to 21.8% for
the same period of 2000. These increases were principally due to higher research
and development expense as a percentage of revenue during the second quarter of
2001.
Consolidated operating income was $122 million for the second quarter of 2001,
an increase of 7% from the same period of 2000 reflecting higher printer and
associated supplies unit sales volumes, partially offset by lower hardware
margins and higher research and development expense as a percentage of revenue.
For the six months ended June 30, 2001, consolidated operating income increased
$6 million to $240 million when compared to the same period of 2000. Higher
printer and associated supplies unit sales volumes and lower selling, general
and administrative expenses as a percentage of revenue were partially offset by
lower hardware margins, unfavorable currency impact and higher research and
development expense as a percentage of revenue.
Other non-operating expense increased $4 million for the second quarter of 2001
and $6 million for the first six months of 2001, compared to the same periods of
2000. These increases were primarily due to a benefit from the sale of an
investment in the second quarter of 2000.
9
Net earnings for the second quarter of 2001 were $87 million, up 3% compared to
the second quarter of 2000. This increase was primarily due to improved
operating income partially offset by an increase in non-operating expense as a
result of a gain on the sale of an investment in the second quarter of 2000. The
income tax provision was 25.1% of earnings before tax for the second quarter of
2001 as compared to approximately 25.4% in the same period of 2000. The decrease
in the effective income tax rate was primarily due to lower income tax rates on
manufacturing activities in certain countries.
Basic net earnings per share were $0.67 for the second quarter of 2001 compared
to $0.65 in the corresponding period of 2000, an increase of 3%. Diluted net
earnings per share were $0.65 for the second quarter of 2001 compared to $0.62
in the comparable period of 2000, an increase of 5%. These increases in basic
and diluted net earnings per share primarily resulted from increased earnings
before income taxes.
Net earnings for the first half of 2001 were $167 million, an increase of 1%
compared to the same period of 2000. The increase was primarily due to a
reduction in the tax provision from 28.0% of earnings before tax in 2000 to
26.5% in 2001, offset by slightly lower earnings before income taxes.
Basic net earnings per share were $1.30 for the first six months of 2001
compared to $1.27 in the corresponding period of 2000, an increase of 2%.
Diluted net earnings per share were $1.25 for the first six months of 2001
compared to $1.21 in the comparable period of 2000, an increase of 3%. These
increases in basic and diluted net earnings per share primarily resulted from
lower income tax rates and reduced shares outstanding.
Financial Condition
- -------------------
The company's financial position remains strong at June 30, 2001, with working
capital of $466 million compared to $265 million at December 31, 2000. At June
30, 2001, the company had outstanding $106 million of short-term debt and $149
million of long-term debt. The debt to total capital ratio was 20% at June 30,
2001 compared to 16% at December 31, 2000. The increase in short-term debt
reflects the utilization of the company's revolving credit facility to finance
certain capital and operating requirements.
Cash used for operating activities for the six months ended June 30, 2001 was
$10 million compared to $211 million cash provided by operating activities for
the same period of 2000. The decrease in cash flows from operating activities
was primarily due to unfavorable changes in working capital accounts,
principally an increase in inventories. Inventories have increased as a result
of product transitions, sourcing changes and slowdown in the overall market.
Capital expenditures for the first half of 2001 were $116 million compared to
$128 million for the same period of 2000. It is anticipated that capital
expenditures for 2001 will be lower than previously estimated and are expected
to be between $250 million and $275 million. This decrease primarily reflects a
reduction in the amount of capital spending to expand capacity. The 2001 capital
expenditures are expected to be funded primarily through cash from operations
and short-term debt.
As of June 30, 2001, the company's board of directors had authorized the
repurchase of up to $1.0 billion of its Class A common stock. 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. No shares
have been repurchased during 2001. As of June 30, 2001, the company had
repurchased 28,606,928 shares at prices ranging from $10.63 to $105.38 for an
aggregate cost of approximately $882 million, leaving approximately $118 million
of share repurchase authority.
In February 2001, the company filed a shelf registration statement with the
Securities and Exchange Commission to register $200 million of debt securities.
The company expects to use the net proceeds from the sale of the
10
securities for capital expenditures, reduction of short-term borrowings, working
capital, acquisitions and other general corporate purposes.
Restructuring and related charges
- ---------------------------------
In October 2000, Lexmark's management and board of directors approved a plan to
restructure its worldwide operations. The restructuring plan involves relocating
manufacturing, primarily laser printers, to Mexico and China, and reductions in
associated support infrastructure. Restructuring and related charges of $41.3
million ($29.7 million, net of tax) were expensed during the fourth quarter of
2000. These charges were comprised of $24.3 million of accrued restructuring
costs related to separation and other exit costs, $10.0 million related to asset
impairment charges and $7.0 million associated with a pension curtailment loss
to recognize a change in the company's projected benefit obligation associated
with the employee separations.
Components of and amounts charged against the restructuring accrual as of June
30, 2001 were as follows (Dollars in millions):
Total Cash Accrual Balance at
Accrual Payments June 30, 2001
------------------------------------------------------------------------
Severance and related costs $19.3 $(5.9) $13.4
Other exit costs 5.0 (3.2) 1.8
------------------------------------------------------------------------
Total $24.3 $(9.1) $15.2
------------------------------------------------------------------------
The $19.3 million accrued restructuring costs for employee separation is
associated with approximately 900 employees worldwide primarily in the
manufacturing and related support areas. Employee separation benefits include
severance, medical and other benefits. As of June 30, 2001, approximately 200
employees have exited the business and received separation benefits.
The other exit costs of $5.0 million are related to vendor and lease
cancellation charges and demolition and cleanup costs associated with the
company's manufacturing relocation.
The $10.0 million charge for asset impairment was determined in accordance with
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
resulted from the company's plans to abandon certain assets (primarily
buildings) associated with the relocation of manufacturing and related support
activities.
In total, the company expects the pre-tax charge of $41.3 million to result in
cash payments of $24.3 million and non-cash charges of $17.0 million. The cash
payments are primarily for employee separations and other exit costs. Lexmark
expects to substantially complete its restructuring initiatives during 2001.
Annual savings from the restructuring should approximate $100 million by 2002,
and will be utilized to strengthen the company's competitive position.
New Accounting Standards
- ------------------------
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-14,
Accounting for Certain Sales Incentives, which provides that some sales
incentives should be treated as reductions in revenue and other sales incentives
should be classified as cost of sales. In April 2001, the EITF deferred the
effective date for this issue to quarters beginning after December 15, 2001. The
company is evaluating the effect that this statement may have on its financial
position, results of operations and cash flows.
The EITF has been discussing several issues related to loyalty programs and
vendor payments to retailers in connection with the promotion of the vendor's
products. EITF 00-22, Accounting for "Points" and Certain Other
11
Time-based or Volume-based Sales Incentive Offers, and Offers for Free Products
or Services to be Delivered in the Future, addresses loyalty programs that offer
awards consisting of the vendor's products or services. In January 2001, a
consensus was reached on one of the five issues discussed. The EITF concluded
that offers to customers to rebate or refund a specified amount of cash that is
redeemable only if the customer meets a specified cumulative level of revenue
transactions should be recognized as a reduction of revenue. The effective date
for application of this consensus was no later than the quarter ending after
February 15, 2001. This consensus did not have a material impact on the
company's financial position, results of operations or cash flows.
EITF 00-25, Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products, addresses
when consideration paid to a retailer should be classified as a reduction of
revenue. In April 2001, a consensus was reached that consideration from a vendor
to a purchaser of the vendor's products is presumed to be a reduction in the
selling prices of the vendor's products and, therefore, should be characterized
as a reduction of revenue. That presumption can be overcome and the
consideration should be characterized as a cost incurred if certain criteria are
met. The consensus is effective for annual or interim financial statements
beginning after December 15, 2001. The company is evaluating the effect that
this statement may have on its financial position, results of operations and
cash flows.
In June 2001, the Financial Accounting Standards Board approved the issuance of
Statement of Financial Accounting Standard ("SFAS") No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method of accounting. SFAS No. 142 states that
goodwill should not be amortized, but should be tested for impairment annually
at the reporting unit level. All other intangible assets should be amortized
over their useful lives. SFAS No. 141 and SFAS No. 142 are effective for
companies with fiscal years beginning after December 15, 2001. These statements
are not expected to have a material impact on the company's financial position,
results of operations or cash flows.
Factors That May Affect Future Results and Information Concerning Forward -
- ---------------------------------------------------------------------------
Looking Statements
- ------------------
Statements contained in this report which are not statements of historical fact
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are made based upon management's current expectations
and beliefs concerning future developments and their potential effects upon the
company. 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 below:
o The company's future operating results may be adversely affected if it is
unable to continue to develop, manufacture and market products that meet
customers' needs. The markets for laser and inkjet printers and associated
supplies are increasingly competitive, especially with respect to pricing and
the introduction of new technologies and products offering improved features and
functionality. The company and its major competitors, all of which have
significantly greater financial, marketing and technological resources than the
company, have regularly lowered prices on their printers 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 from the company's major competitors. Price reductions on inkjet or
laser printer products or the inability to reduce costs, contain expenses or
increase 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, particularly at a time when the company is
increasing its investment to support product introductions, expand capacity and
enter new geographies.
o 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, the reaction of competitors to any
12
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 the
cost of component parts, 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. The competitive
pressure to develop technology and products also could cause significant changes
in the level of the company's operating expenses.
o Revenue derived from international sales make up over 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.
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.
o The company is beginning to rely more heavily on its international production
facilities and international manufacturing partners for the manufacture of its
products and key components of its products. Future operating results may be
adversely affected by several factors, including, without limitation, if the
company's international operations or manufacturing partners are unable to
supply products reliably, if there are difficulties in transitioning such
manufacturing activities from the company to its international operations or
manufacturing partners, or if there arise production and supply constraints
which result in additional costs to the company.
o The company's performance depends in part upon its ability to increase printer
and associated supplies manufacturing capacity on an international basis in line
with growing market demands, to successfully forecast the timing and extent of
customer demand and manage worldwide distribution and inventory levels to
support the demand of its customers, and to address production and supply
constraints, particularly delays in the supply of key components necessary for
production, which may result 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.
o The company's success depends in part on its ability to obtain patents,
copyrights and trademarks, maintain trade secret protection and operate 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 adversely affect its operating results
or business, as could expenses incurred by the company in enforcing its
intellectual property rights against others or defending against claims that the
company's products infringe the intellectual property rights of others.
o The company markets and sells its products through several sales channels. The
company's future results may be adversely affected by any conflicts that might
arise between or among its various sales channels.
o Factors unrelated to the company's operating performance, including economic
and business conditions, both national and international; the loss of
significant customers, manufacturing partners or suppliers; the outcome of
pending and future litigation or governmental proceedings; 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 interday trading in the
company's common stock, may affect the company's common stock price.
While the company reassesses material trends and uncertainties affecting the
company's financial position, results of operations and cash flows in connection
with the preparation of its quarterly and annual reports, the company does not
intend to review or revise, in light of future events, any particular
forward-looking statement contained in 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
13
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 foregoing list
of certain important factors. 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.
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 June 30, 2001, the fair value of the company's senior notes is estimated at
$139 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 carrying value of the
senior notes as recorded in the statement of financial position exceeded the
fair value at June 30, 2001 by approximately $10 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 $6 million at
June 30, 2001.
Foreign Currency Exchange Rates
- -------------------------------
The company employs a foreign currency hedging strategy 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 and other European
currencies, the Japanese yen and other Asian and South American currencies.
Exposures are hedged with foreign currency forward contracts, put options, and
call options with maturity dates of less than eighteen months. The potential
loss in fair value at June 30, 2001 for such contracts resulting from a
hypothetical 10% adverse change in all foreign currency exchange rates is
approximately $33 million. This loss would be mitigated by corresponding gains
on the underlying exposures.
14
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The information required to be reported for the company's Annual
Meeting of Stockholders held April 26, 2001, was previously reported
by the company in its Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
A list of exhibits is set forth in the Exhibit Index found on
page 17 of this report.
(b) Reports on Form 8-K:
None
15
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
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)
Date: August 13, 2001 By: /s/ Gary D. Stromquist
--------------- ------------------------
Gary D. Stromquist
Vice President and Corporate Controller
(Chief Accounting Officer)
16
EXHIBIT INDEX
Exhibits:
10.1 Amendment No. 2 to the Lexmark International Group, Inc. Stock Incentive
Plan, as Amended and Restated, dated as of April 26, 2001.
12 Computation of Ratio of Earning to Fixed Charges.
17