SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 March 31, 2003
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. Employe
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 ___
Indicate by check mark whether the registrant is an accelerated filed (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No __
The registrant had 127,494,727 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 May 7, 2003.
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 ENDED MARCH 31, 2003 AND 2002.................................................2
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION (Unaudited)
AS OF MARCH 31, 2003 AND DECEMBER 31, 2002.................................................3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002................................................4
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)..................................5-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (Unaudited)...................................................8-12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........................................13
ITEM 4. CONTROLS AND PROCEDURES............................................................................13
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................14
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
March 31
------------------------------------
2003 2002
---- ----
Revenue $1,107.9 $1,050.1
Cost of revenue 751.7 740.5
-------- --------
Gross profit 356.2 309.6
-------- --------
Research and development 62.1 61.2
Selling, general and administrative 165.5 143.8
-------- --------
Operating expense 227.6 205.0
-------- --------
Operating income 128.6 104.6
Interest expense, net 0.7 3.1
Other - 4.2
-------- --------
Earnings before income taxes 127.9 97.3
Provision for income taxes 33.3 25.8
-------- --------
Net earnings $ 94.6 $ 71.5
======== ========
Net earnings per share:
Basic $ 0.74 $ 0.55
======== ========
Diluted $ 0.73 $ 0.53
======== ========
Shares used in per share calculation:
Basic 127.1 130.6
======== ========
Diluted 130.2 134.0
======== ========
See notes to consolidated condensed financial statements.
2
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In Millions, Except Par Value)
(Unaudited)
March 31 December 31
------------- -----------------
2003 2002
ASSETS
Current assets:
Cash and cash equivalents $ 722.2 $ 497.7
Trade receivables, net of allowances of $50.9 in 2003 and $46.0 in 2002 548.0 600.3
Inventories 369.3 410.3
Prepaid expenses and other current assets 239.8 290.5
---------- ----------
Total current assets 1,879.3 1,798.8
Property, plant and equipment, net 724.4 747.6
Other assets 257.1 261.7
---------- ----------
Total assets $ 2,860.8 $ 2,808.1
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 2.0 $ 12.3
Accounts payable 388.7 378.5
Accrued liabilities 642.4 708.2
--------- ----------
Total current liabilities 1,033.1 1,099.0
Long-term debt 149.2 149.2
Other liabilities 480.1 478.3
---------- ----------
Total liabilities 1,662.4 1,726.5
---------- ----------
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; 126.9 and
126.2 outstanding in 2003 and 2002, respectively 1.6 1.6
Class B, 10.0 shares authorized; no shares issued and
outstanding - -
Capital in excess of par 884.6 863.5
Retained earnings 1,750.4 1,655.8
Treasury stock, at cost; 34.5 and 34.5 shares in 2003
and 2002, respectively (1,209.4) (1,209.6)
Accumulated other comprehensive loss (228.8) (229.7)
---------- ----------
Total stockholders' equity 1,198.4 1,081.6
---------- ----------
Total liabilities and stockholders' equity $ 2,860.8 $ 2,808.1
========== ==========
See notes to consolidated condensed financial statements.
3
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Three Months Ended
March 31
-------------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net earnings $ 94.6 $ 71.5
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 37.3 32.9
Deferred taxes (2.1) 2.0
Other 10.3 7.5
------- -------
140.1 113.9
Change in assets and liabilities:
Trade receivables 52.3 37.4
Trade receivables program - (15.0)
Inventories 41.0 (2.8)
Accounts payable 10.2 (10.0)
Accrued liabilities (65.8) 6.1
Tax benefits from employee stock plans 6.4 5.9
Other assets and liabilities 52.5 (20.8)
------- -------
Net cash provided by operating activities 236.7 114.7
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment (16.1) (21.5)
Other - -
------- -------
Net cash used for investing activities (16.1) (21.5)
------- -------
Cash flows from financing activities:
(Decrease) increase in short-term debt (10.4) 0.8
Issuance of treasury stock 0.1 0.4
Purchase of treasury stock - (77.0)
Proceeds from employee stock plans 13.1 7.5
------- -------
Net cash provided by (used for) financing activities 2.8 ( 68.3)
------- -------
Effect of exchange rate changes on cash 1.1 (0.6)
------- -------
Net increase in cash and cash equivalents 224.5 24.3
Cash and cash equivalents - beginning of period 497.7 90.7
------- -------
Cash and cash equivalents - end of period $ 722.2 $ 115.0
======= =======
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, 2002.
2. STOCK-BASED COMPENSATION
(In millions, except per share amounts)
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation --Transition and Disclosure - an Amendment of SFAS 123, which
provided alternative methods for a voluntary change to the fair value
method of accounting for stock-based employee compensation and amended the
disclosure requirements of SFAS No. 123, Accounting for Stock-Based
Compensation. The company has elected to continue to account for its
stock-based employee compensation plans under APB Opinion 25, Accounting
for Stock Issued to Employees, and related interpretations. Accordingly, no
compensation cost is reflected in net earnings as all options granted have
an exercise price equal to the market value of the underlying common stock
on the date of grant. The following table is provided in accordance with
the disclosure requirements of SFAS 148 and illustrates the effect on net
earnings and earnings per share if the company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation.
Three Months Ended
March 31
--------------------------------------------
2003 2002
---- ----
Net earnings, as reported $94.6 $71.5
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (10.6) (7.4)
----- -----
Pro forma net income $84.0 $64.1
===== =====
Net earnings per share:
Basic - as reported $0.74 $0.55
Basic - pro forma $0.66 $0.49
Diluted - as reported $0.73 $0.53
Diluted - pro forma $0.65 $0.48
5
3. RESTRUCTURING AND RELATED CHARGES
As of December 31, 2002, the company had substantially completed all
restructuring activities. The remaining restructuring liability of $4.7
million was associated with severance payments, which were expected to
continue into the first half of 2003 for employees who had exited the
business. During the first quarter of 2003, the company paid approximately
$2.6 million of separation payments, leaving a $2.1 million restructuring
liability as of March 31, 2003. This liability is reflected on the accrued
liabilities line in the company's consolidated statements of financial
position.
4. INVENTORIES
(Dollars in millions)
Inventories consist of the following:
March 31 December 31
2003 2002
------------------- -------------------
Work in process $108.0 $121.0
Finished goods 261.3 289.3
------ ------
$369.3 $410.3
====== ======
5. AGGREGATE WARRANTY LIABILITY
(Dollars in millions)
Changes in the company's aggregate warranty liability, which includes both
warranty and extended warranty (deferred revenue), during the three months
ended March 31, 2003 are presented below.
------------------------------------------------------------
Balance as of December 31, 2002 $147.0
Accruals for warranties issued during 2003 52.7
Accruals related to pre-existing warranties
(including amortization of deferred
revenue for extended warranties and (8.5)
changes in estimates)
Settlements made (in cash or in kind) during 2003 (45.0)
------------------------------------------------------------
Balance as of March 31, 2003 $146.2
------------------------------------------------------------
Both warranty and the short-term portion of extended warranty are included
in the accrued liabilities line in the consolidated statements of financial
position. The long-term portion of extended warranty is included in the
other liabilities line in the consolidated statements of financial
position.
6
6. OTHER COMPREHENSIVE EARNINGS (LOSS)
(Dollars in millions)
Comprehensive earnings, net of taxes, consists of the following:
Three Months Ended
March 31
----------------------------------------
2003 2002
---- ----
Net earnings $94.6 $71.5
Other comprehensive earnings (loss):
Foreign currency translation adjustment 2.6 (1.2)
Cash flow hedging, net of reclassifications (2.2) 3.0
Minimum pension liability adjustment 0.5 -
----- -----
Comprehensive earnings $95.5 $73.3
===== =====
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, 2002 $(43.8) $(20.9) $(165.0) $(229.7)
First quarter 2003 change 2.6 (2.2) 0.5 0.9
------ ------ ------- -------
Balance, March 31, 2003 $(41.2) $(23.1) $(164.5) $(228.8)
====== ====== ======= =======
7. EARNINGS PER SHARE (EPS)
(In millions, except per share amounts)
The following table presents a reconciliation of the numerators and
denominators of the basic and diluted EPS calculations:
Three Months Ended
March 31
----------------------------------
2003 2002
---- ----
Numerator:
Net earnings $94.6 $71.5
===== =====
Denominator:
Weighted average shares used
to compute basic EPS 127.1 130.6
Effect of dilutive securities
Stock options 3.1 3.4
----- -----
Weighted average shares used
to compute diluted EPS 130.2 134.0
===== =====
Basic net EPS $0.74 $0.55
Diluted net EPS $0.73 $0.53
Options to purchase an additional 1.7 million and 2.3 million shares of
Class A common stock for the three month periods ended March 31, 2003 and
2002, respectively, were outstanding but were not included in the
computation of diluted earnings per share because their effect would be
antidilutive.
7
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 March 31, 2003 was $1.108
million, an increase of 6% over the same period of 2002. Total U.S. revenue
decreased $18 million or 3% and international revenue, including exports from
the U.S., increased $76 million or 14%. Revenue was positively impacted 7% by
foreign currency exchange rates due to strengthening of European currencies
against the U.S. dollar. Revenue from sales to all original equipment
manufacturers ("OEM") customers accounted for less than 10% of consolidated
revenue in the first quarter of 2003 with no single OEM customer accounting for
more than 5% of total revenue.
The revenue growth was driven by increased sales of laser and inkjet supplies
whose revenue increased 17% over 2002. Laser and inkjet supplies revenue was
$642 million for the first quarter of 2003, versus $546 million for the same
period in 2002, and represents 58% of total revenue versus 52% in 2002. Laser
and inkjet printer revenue was $370 million for the first quarter of 2003, an 8%
decrease from 2002.
Consolidated gross profit was $356 million for the first three months of 2003,
an increase of 15% from the same period of 2002. Gross profit as a percentage of
revenue for the quarter ended March 31, 2003 increased to 32.1% from 29.5% in
the first quarter of 2002, an increase of 2.6 percentage points. The improvement
in the gross profit margin was due to an increase of supplies in the product mix
(4.3 percentage points) and higher supplies margins (1.5 percentage points),
somewhat offset by lower printer margins (3.2 percentage points).
Total operating expense was $228 million for the quarter ended March 31, 2003
compared to $205 million for the same period of 2002. Operating expense as a
percentage of revenue for the quarter was 20.5% compared to 19.5% for the
corresponding period in 2002. The 1.0 percentage point increase was primarily
due to an increase in selling, general and administrative expense as a
percentage of revenue, reflecting additional marketing investments and an
increase in bad debt reserves during the first quarter of 2003.
Consolidated operating income was $129 million for the first quarter of 2003 and
increased 23% from 2002, primarily due to the improved gross profit margin,
partially offset by the increase in operating expense as a percentage of
revenue.
Non-operating expenses declined $7 million in the first three months of 2003,
compared to the same period in 2002. The decrease was principally due to a $3.6
million write-down of a private equity investment during the first quarter of
2002 and additional interest income during the first quarter of 2003 compared to
the same period in 2002.
Net earnings for the first quarter of 2003 were $95 million, compared to $72
million in the first quarter of 2002. The increase in net earnings was due to
the improved operating income, lower non-operating expenses and a slight
reduction in the effective income tax rate. The effective income tax rate was
26.0% in 2003 as compared to 26.5% in 2002. 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 $0.74 the first quarter of 2003 compared to
$0.55 in the corresponding period in 2002. Diluted net earnings per share were
$0.73 in the first quarter of 2003, compared to $0.53 in 2002, an increase of
36%. This increase was primarily due to the increase in net earnings.
8
Financial Condition
- -------------------
The company's financial position remains strong at March 31, 2003, with working
capital of $846 million compared to $700 million at December 31, 2002. At March
31, 2003, the company had outstanding $2 million of short-term debt and $149
million of long-term debt. The debt to total capital ratio was 11% at March 31,
2003, compared to 13% at December 31, 2002. The company had no amounts
outstanding under its U.S. trade receivables financing program or its revolving
credit facility at March 31, 2003.
Cash provided by operating activities for the three months ended March 31, 2003
was $237 million, compared to $115 million in the first quarter of 2002. The
increase in cash flows from operating activities was primarily due to favorable
cash flow changes in other assets and liabilities accounts and certain working
capital accounts (principally inventories and accounts payable), partially
offset by unfavorable cash flow changes in accrued liabilities. The favorable
cash flow changes in working capital accounts were principally due to the
company's continued focus on cash cycle management. The cash flow changes in
other assets and liabilities accounts were principally due to a reclassification
of prepaid income taxes to net against accrued liabilities for income taxes.
This reclassification, as well as the payment of bonuses and commissions,
resulted in the unfavorable cash flow changes in accrued liabilities. The
company did not purchase any treasury stock during the first quarter of 2003,
compared to $77 million of purchases of treasury stock during the same period in
2002. This resulted in a $3 million source of cash from financing activities in
the 2003, compared to a $68 million use of cash for financing activities in
2002. Management believes that cash provided by operations will continue to be
sufficient to meet operating and capital needs.
Capital expenditures for the first three months of 2003 were $16 million
compared to $22 million for the same period of 2002. The 2003 capital
expenditures were principally related to infrastructure support and new product
development. It is anticipated that capital expenditures for 2003 will be
approximately $125 million and are expected to be funded through cash from
operations.
As of March 31, 2003, the company's board of directors had authorized a total
repurchase of $1.4 billion of its Class A common stock and there was
approximately $188 million 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.
No shares have been repurchased during 2003. As of March 31, 2003, the company
had repurchased approximately 34.7 million shares at prices ranging from $10.63
per share to $105.38 per share for an aggregate cost of approximately $1.2
billion.
Restructuring and related charges
- ---------------------------------
As of December 31, 2002, the company had substantially completed all
restructuring activities. The remaining restructuring liability of $4.7 million
was associated with severance payments, which were expected to continue into the
first half of 2003 for employees who had exited the business. During the first
quarter of 2003, the company paid approximately $2.6 million of separation
payments, leaving a $2.1 million restructuring liability as of March 31, 2003.
This liability is reflected on the accrued liabilities line in the company's
consolidated statements of financial position.
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
9
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 Unfavorable global economic conditions may adversely impact the company's
future operating results. Since the second quarter of 2001, the company has
experienced weak markets for its products. Continued softness in these markets
and uncertainty about the timing and extent of the global economic downturn by
both corporate and consumer purchasers of the company's products could result in
lower demand for the company's products. 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.
o 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. 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 maintain or grow retail
shelf space or market share and on its financial results.
o 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, contain expenses or 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.
o 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, 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 the cost of
component parts, 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. 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.
o 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 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. 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.
o 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.
o Revenue derived from international sales make up about half of the company's
revenue. Accordingly, the
10
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 relies in large part 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 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 key supplier could result in a material adverse
impact on the company's financial results.
o The recent outbreak of Severe Acute Respiratory Syndrome ("SARS") may disrupt
the development and/or manufacturing of the company's products and may disrupt
the company's supply chain, beginning with the company's or its manufacturing
partners' ability to source components and through the distribution of finished
product from the company's distribution facilities. In addition, demand for the
company's products from its customers, resellers or end users located in areas
affected by the SARS outbreak could be adversely affected. Such disruptions in
development, maufacturing, supply chain or demand could result in a material
adverse impact on the company's financial results.
o 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 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.
o The company believes that one of its competitive advantages is its exclusive
focus on printing solutions. The entrance of a competitor that is also
exclusively focused on printing solutions could offset this advantage and could
have a material adverse impact on the company's strategy and financial results.
o The company's performance depends in part upon its ability to successfully
forecast the timing and extent of customer demand and manage worldwide
distribution and inventory levels to support the demand of its customers. The
company must also be able to address production and supply constraints,
particularly delays in the supply of key components necessary for production,
which 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.
o Although the company is currently the exclusive supplier of new cartridges for
its laser and inkjet products, there can be no assurance that other companies
will not develop new compatible cartridges for the company's products. In
addition, refill and remanufactured alternatives for some of the company's
cartridges are available and compete with the company's supplies business. The
company expects competitive refill and remanufacturing activity to increase.
Various legal challenges and governmental activities may intensify competition
for the company's aftermarket supplies business.
o The company's success depends in part on its ability to obtain patents,
copyrights and trademarks,
11
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 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.
o 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.
o 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; 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.
While the company reassesses material trends and uncertainties affecting the
company's financial condition and results of operations 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 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.
12
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 March 31, 2003, the fair value of the company's senior notes is estimated at
$163 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 statements of
financial position at March 31, 2003 by approximately $14 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 $3 million at
March 31, 2003.
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, the Canadian
dollar, the Japanese yen, the British pound 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 March 31, 2003 for such contracts resulting from
a hypothetical 10% adverse change in all foreign currency exchange rates is
approximately $30 million. This loss would be mitigated by corresponding gains
on the underlying exposures.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures:
-------------------------------------------------
The company's principal executive officer and principal financial officer
have evaluated the effectiveness of the company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of
a date within ninety days prior to the filing date of this report, and have
concluded that, as of such date the company's disclosure controls and
procedures were adequate and effective.
(b) Changes in internal controls:
-----------------------------
There were no significant changes in the company's internal controls or in
other factors that could significantly affect these controls subsequent to
the date of their evaluation. There were no significant deficiencies or
material weaknesses in the company's internal controls identified as part
of the evaluation, and, as a result, no corrective actions were required or
undertaken.
13
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
(a) The company's Annual Meeting of Stockholders was held on
April 30, 2003.
(b) At said Annual Meeting, the stockholders voted on the following
two proposals:
(i) The election of four Directors for terms expiring in 2006.
The stockholders elected the Directors by the following
votes:
Director Votes For Votes Withheld
-------- --------- --------------
Michael J. Maples 72,783,451 37,806,319
Stephen R. Hardis 70,035,462 40,554,308
William R. Fields 70,088,039 40,501,731
Robert Holland, Jr. 72,781,146 37,808,624
The terms of office of B. Charles Ames, Teresa Beck, Paul J.
Curlander, Frank T. Cary, Ralph E. Gomory, James F. Hardymon,
Marvin L. Mann and Martin D. Walker continued after the meeting.
(ii) The approval of the company's Stock Incentive Plan, as
amended and restated. The stockholders approved such amendment
and restatement by the following votes:
Votes For Votes Against Abstentions
--------- ------------- -----------
83,169,447 26,736,602 683,721
14
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 19 of this report.
(b) Reports on Form 8-K
A Current Report on Form 8-K dated January 9, 2003 was filed by the
company with the Securities and Exchange Commission to provide
Regulation FD disclosure information.
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: May 13, 2003 By: /s/ Gary D. Stromquist
----------------------
Gary D. Stromquist
Vice President and Corporate Controller
(Chief Accounting Officer)
16
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CERTIFICATION
-------------
I, Paul J. Curlander, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Lexmark
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003 /s/ Paul J. Curlander
---------------------
Paul J. Curlander
Chairman and Chief Executive Officer
17
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CERTIFICATION
-------------
I, Gary E. Morin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Lexmark
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date:May 13, 2003 /s/ Gary E. Morin
-----------------
Gary E. Morin
Executive Vice President and
Chief Financial Officer
18
EXHIBIT INDEX
Exhibits:
10.1 Lexmark International, Inc. Stock Incentive Plan, as Amended and Restated,
Effective April 30, 2003.+
12 Computation of Ratio of Earnings to Fixed Charges.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------------------------
+ Indicates management contract or compensatory plan, contract or arrangement.
19