UNITED STATES
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, 2005
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)
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 filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No
--- ---
The registrant had 123,729,218 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 April 29, 2005.
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, 2005 AND 2004...........................2
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION (Unaudited)
AS OF MARCH 31, 2005 AND DECEMBER 31, 2004...........................3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004...........................4
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)....5-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited)............................12-21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............22
ITEM 4. CONTROLS AND PROCEDURES...............................................22
Part II
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS...........23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................24
ITEM 6. EXHIBITS..............................................................24
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
---------------------------------------
2005 2004
---- ----
Revenue $1,357.6 $1,256.0
Cost of revenue 910.3 845.2
-------- --------
Gross profit 447.3 410.8
-------- --------
Research and development 82.6 72.2
Selling, general and administrative 203.0 173.4
-------- --------
Operating expense 285.6 245.6
-------- --------
Operating income 161.7 165.2
Interest (income) expense, net (6.4) (2.3)
Other expense (income), net 2.7 0.6
-------- --------
Earnings before income taxes 165.4 166.9
Provision for income taxes 41.5 45.9
-------- --------
Net earnings $ 123.9 $ 121.0
======== ========
Net earnings per share:
Basic $ 0.97 $ 0.93
======== ========
Diluted $ 0.96 $ 0.91
======== ========
Shares used in per share calculation:
Basic 127.3 129.6
======= ========
Diluted 129.5 133.1
======= ========
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
2005 2004
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 494.4 $ 626.2
Marketable securities 881.4 940.5
Trade receivables, net of allowances of $46.8 in 2005 and $40.5 in 2004 699.5 744.4
Inventories 458.8 464.9
Prepaid expenses and other current assets 218.1 224.9
---------- ----------
Total current assets 2,752.2 3,000.9
Property, plant and equipment, net 806.1 792.2
Other assets 331.8 331.2
---------- ----------
Total assets $ 3,890.1 $ 4,124.3
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ - $ 1.5
Accounts payable 567.8 670.6
Accrued liabilities 727.2 795.6
---------- ----------
Total current liabilities 1,295.0 1,467.7
Long-term debt 149.5 149.5
Other liabilities 431.5 424.2
---------- ----------
Total liabilities 1,876.0 2,041.4
---------- ----------
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; 125.3 and
127.6 shares outstanding in 2005 and 2004, respectively 1.7 1.7
Class B, 10.0 shares authorized; no shares issued and outstanding - -
Capital in excess of par 1,097.9 1,076.0
Retained earnings 2,787.6 2,663.7
Treasury stock, at cost; 40.3 and 37.6 shares in 2005
and 2004, respectively (1,719.7) (1,493.2)
Accumulated other comprehensive loss (153.4) (165.3)
---------- ----------
Total stockholders' equity 2,014.1 2,082.9
---------- ----------
Total liabilities and stockholders' equity $ 3,890.1 $ 4,124.3
========== ==========
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
--------------------------------------------
2005 2004
---- ----
Cash flows from operating activities:
Net earnings $ 123.9 $ 121.0
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 35.6 35.1
Deferred taxes - 5.9
Other 14.9 2.6
------- -------
174.4 164.6
Change in assets and liabilities:
Trade receivables 44.9 43.8
Inventories 6.1 (6.0)
Accounts payable (102.8) 8.4
Accrued liabilities (68.4) (69.2)
Tax benefits from employee stock plans 5.5 19.3
Other assets and liabilities 17.5 (8.6)
------- -------
Net cash provided by (used for) operating activities 77.2 152.3
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment (52.5) (22.8)
Purchases of marketable securities (512.8) (723.6)
Proceeds from marketable securities 571.4 562.2
Other 0.1 -
------- -------
Net cash provided by (used for) investing activities 6.2 (184.2)
------- -------
Cash flows from financing activities:
(Decrease) increase in short-term debt (1.5) 2.0
Issuance of treasury stock 0.1 0.4
Purchase of treasury stock (226.6) -
Proceeds from employee stock plans 14.9 34.5
Other (0.7) -
------- -------
Net cash (used for) provided by financing activities (213.8) 36.9
------- -------
Effect of exchange rate changes on cash (1.4) 0.2
------- -------
Net (decrease) increase in cash and cash equivalents (131.8) 5.2
Cash and cash equivalents - beginning of period 626.2 744.6
------- -------
Cash and cash equivalents - end of period $ 494.4 $ 749.8
======= =======
See notes to consolidated condensed financial statements.
4
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"), all adjustments
(which comprise only normal and recurring accruals except for a charge for
probable losses relating to 2002 through 2004 accounts receivable in Spain
as discussed below) 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, 2004.
First quarter operating income includes a $9.6 million ($7.0 million after
tax), or $0.05 per share, charge which represents management's best
estimate of probable losses relating to 2002 through 2004 accounts
receivable in Spain due to inappropriate conduct by a former employee of
Lexmark Spain. The $9.6 million charge reduced revenue by $0.6 million and
increased selling, general and administrative expense by $9.0 million in
the quarter. Although the ultimate amount of this loss could differ
materially from management's current estimate, the company does not expect
the actual loss to be material to results of operations or the company's
financial position.
2. STOCK-BASED COMPENSATION
The company accounts for its stock-based employee compensation plans under
Accounting Principles Board ("APB") Opinion No. 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 at least 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 Statement of Financial
Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based
Compensation -Transition and Disclosure - an Amendment of SFAS No. 123, and
illustrates the effect on net earnings and earnings per share if the
company had applied the fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Three Months Ended
March 31
--------------------------------
2005 2004
----------------------------------------------------------------------------------------------------------
Net earnings, as reported $ 123.9 $ 121.0
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (9.7) (11.4)
----------------------------------------------------------------------------------------------------------
Pro forma net income $ 114.2 $ 109.6
==========================================================================================================
Net earnings per share:
Basic - as reported $ 0.97 $ 0.93
Basic - pro forma $ 0.90 $ 0.85
Diluted - as reported $ 0.96 $ 0.91
Diluted - pro forma $ 0.88 $ 0.82
5
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS 123R"). SFAS 123R
requires that all share-based payments to employees, including grants of
stock options, be recognized in the financial statements based on their
fair value beginning with the first interim or annual reporting period that
begins after June 15, 2005. In March 2005, the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin No. 107 ("SAB 107")
regarding the SEC Staff's interpretation of SFAS 123R and provides the
Staff's views regarding interactions between SFAS 123R and certain SEC
rules and regulations and provides interpretations of the valuation of
share-based payments for public companies. In April 2005, the SEC amended
Regulation S-X to amend the date for compliance with SFAS 123R so that each
registrant (that is not a small business issuer) will be required to
prepare financial statements in accordance with SFAS 123R beginning with
the first interim or annual reporting period of the registrant's first
fiscal year beginning on or after June 15, 2005. The company is currently
evaluating the requirements of SFAS 123R and SAB 107 to determine the fair
value method to measure compensation expense, the appropriate assumptions
to include in the fair value model and the transition method to use upon
adoption. The company expects that the adoption of SFAS 123R for its first
quarter 2006 reporting will have a material impact on its results of
operations and earnings per share.
3. INVENTORIES
Inventories consist of the following:
March 31 December 31
2005 2004
----------------------------------------------------------------------------------------------------------
Work in process $ 137.4 $ 146.6
Finished goods 321.4 318.3
---------------------------------------------------------------------------------------------------------
Inventories $ 458.8 $ 464.9
=========================================================================================================
4. AGGREGATE WARRANTY LIABILITY
Changes in the company's aggregate warranty liability, which includes both
warranty and extended warranty (deferred revenue), are presented below.
Three Months Ended
March 31
-----------------------------
2005 2004
---------------------------------------------------------------------------------------------------------
Balance at January 1 $176.8 $172.7
Accruals for warranties issued 56.6 61.3
Accruals related to pre-existing warranties (including
amortization of deferred revenue for extended warranties and
changes in estimates) (13.9) (14.5)
Settlements made (in cash or in kind) (41.2) (42.7)
---------------------------------------------------------------------------------------------------------
Balance at March 31 $178.3 $176.8
=========================================================================================================
Both warranty and the short-term portion of extended warranty are included
on the accrued liabilities line in the Consolidated Condensed Statements of
Financial Position. The long-term portion of extended warranty is included
on the other liabilities line in the Consolidated Condensed Statements of
Financial Position.
6
5. INCOME TAXES
Due to the retroactive extension of a favorable non-United States ("U.S.")
tax rate, the income tax provision was reduced by $3.1 million for the
three months ended March 31, 2005, which reduced the effective tax rate to
25.1%. Excluding the $3.1 million benefit, the effective income tax rate
was 27.0% in 2005 compared to 27.5% in 2004.
On October 22, 2004, the President signed the American Jobs Creation Act of
2004 (the "Jobs Act"). The Jobs Act creates a temporary incentive for U.S.
corporations to repatriate accumulated income earned abroad by providing an
85 percent dividends received deduction for certain dividends from
controlled foreign corporations. On April 28, 2005, the company's board of
directors approved a Domestic Reinvestment Plan ("DRP") under the American
Jobs Creation Act. The implementation of the DRP will result in the
repatriation of $683.9 million of dividends during 2005 with a tax cost of
approximately $70 million, which will be included in the company's second
quarter results. If the technical corrections bill as currently proposed is
passed by Congress, the U.S. income tax may be reduced by approximately $12
million.
6. STOCKHOLDERS' EQUITY
In October 2004, 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 $2.4 billion. As of March 31,
2005, there was approximately $0.7 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 first quarter of 2005, the company
repurchased approximately 2.8 million shares, at a cost of approximately
$227 million. As of March 31, 2005, since the inception of the program, the
company had repurchased approximately 40.8 million shares for an aggregate
cost of approximately $1.7 billion.
7. OTHER COMPREHENSIVE EARNINGS (LOSS)
Comprehensive earnings, net of taxes, consist of the following:
Three Months Ended
March 31
-------------------------------
2005 2004
- ----=---------------------------------------------------------------------------------------------------------
Net earnings $ 123.9 $ 121.0
Other comprehensive earnings (loss):
Foreign currency translation adjustment (7.8) 0.2
Cash flow hedging, net of reclassifications 19.9 22.4
Minimum pension liability adjustment 0.4 (1.6)
Net unrealized gain (loss) on marketable
securities (0.6) -
- --------------------------------------------------------------------------------------------------------------
Comprehensive earnings $ 135.8 $ 142.0
==============================================================================================================
7
Accumulated other comprehensive loss consists of the following:
Net Unrealized Accumulated
Minimum Gain (Loss) on Other
Translation Cash Flow Pension Marketable Comprehensive
Adjustment Hedges Liability Securities Loss
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, 12/31/2004 $ 4.1 $ (28.8) $ (139.8) $ (0.8) $ (165.3)
1st Qtr 2005 change (7.8) 19.9 0.4 (0.6) 11.9
--------- --------- --------- --------- -----------
Balance, 3/31/2005 $ (3.7) $ (8.9) $ (139.4) $ (1.4) $ (153.4)
========= ========= ========= ========= ===========
8. 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
March 31
-----------------------------------
2005 2004
--------------------------------------------------------------------------------------------------------
Numerator:
Net earnings $ 123.9 $ 121.0
Denominator:
Weighted average shares used
to compute basic EPS 127.3 129.6
Effect of dilutive securities
Stock options 2.2 3.5
--------------------------------------------------------------------------------------------------------
Weighted average shares used
to compute diluted EPS 129.5 133.1
========================================================================================================
Basic net EPS $ 0.97 $ 0.93
Diluted net EPS $ 0.96 $ 0.91
Options to purchase an additional 3.4 million and 1.3 million shares of
Class A common stock for the three month periods ended March 31, 2005 and
2004, respectively, were outstanding but were not included in the
computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common shares and,
therefore, the effect would have been antidilutive.
8
9. EMPLOYEE PENSION AND POSTRETIREMENT PLANS
The components of the net periodic benefit cost for both the pension and
postretirement plans for the three month periods ended March 31, 2005 and
2004, were as follows:
Other
Postretirement
Pension Benefits Benefits
---------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------------------------------------------------------------
Service cost $ 4.2 $ 3.8 $ 0.5 $ 0.5
Interest cost 10.5 10.6 0.7 0.8
Expected return on plan assets (12.8) (13.1) - -
Amortization of prior service (benefit) cost (0.3) (0.1) (0.4) (0.1)
Amortization of net loss 4.2 3.0 0.1 0.1
--------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 5.8 $ 4.2 $ 0.9 $ 1.3
========================================================================================================
The company previously disclosed in its financial statements for the year
ended December 31, 2004, that it expected to contribute approximately $6
million to its pension and postretirement plans in 2005. As of March 31,
2005, approximately $2 million of contributions have been made. The company
presently anticipates contributing an additional $5 million during the
remainder of 2005, for a total of $7 million.
10. SEGMENT DATA
The company 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 includes selling, general and
administrative, research and development 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. Additionally, segment operating income excludes
significant expenses that are managed outside of the reporting segments.
The following table includes information about the company's reportable
segments:
Three Months Ended
March 31
-------------------------------
2005 2004
---------------------------------------------------------------------------------------------------------
Revenue:
Business $ 727.1 $ 673.0
Consumer 630.5 583.0
All other - -
---------------------------------------------------------------------------------------------------------
Total revenue $1,357.6 $1,256.0
=========================================================================================================
Operating income (loss):
Business $ 177.5 $ 174.8
Consumer 78.9 73.3
All other (94.7) (82.9)
---------------------------------------------------------------------------------------------------------
Total operating income (loss) $ 161.7 $ 165.2
=========================================================================================================
9
11. CONTINGENCY
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 company
has accrued amounts that it believes are adequate to address the currently
pending copyright fee proceedings. 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.
12. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued FASB Staff Position ("FSP") 109-1,
Application of FASB Statement No. 109, Accounting for Income Taxes, for the
Tax Deduction Provided to U.S.-Based Manufacturers by the American Jobs
Creation Act of 2004 ("FSP 109-1"). FSP 109-1 clarifies that the tax
deduction for domestic manufacturers under the American Jobs Creation Act
of 2004 should be accounted for as a special deduction in accordance with
SFAS No. 109, Accounting for Income Taxes. The FSP, issued on December 21,
2004, went into effect upon being issued.
In December 2004, the FASB also issued FSP 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004 ("FSP 109-2"). FSP 109-2 provides
enterprises more time (beyond the financial-reporting period during which
the American Jobs Creation Act took effect) to evaluate the impact on the
enterprise's plan for reinvestment or repatriation of certain foreign
earnings for purposes of applying SFAS No. 109. The FSP, issued on December
21, 2004, went into effect upon being issued. On April 28, 2005, the
company's board of directors approved a Domestic Reinvestment Plan ("DRP")
under the American Jobs Creation Act. The implementation of the DRP will
result in the repatriation of $683.9 million of dividends during 2005 with
a tax cost of approximately $70 million, which will be included in the
company's second quarter results. If the technical corrections bill as
currently proposed is passed by Congress, the U.S. income tax may be
reduced by approximately $12 million.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment ("SFAS
123R"). SFAS 123R requires that all share-based payments to employees,
including grants of stock options, be recognized in the financial
statements based on their fair value beginning with the first interim or
annual reporting period that begins after June 15, 2005. In March 2005, the
SEC issued Staff Accounting Bulletin No. 107 ("SAB 107") regarding the SEC
Staff's interpretation of SFAS 123R and provides the Staff's views
regarding interactions between SFAS 123R and certain SEC rules and
regulations and provides interpretations of the valuation of share-based
payments for public companies. In April 2005, the SEC amended Regulation
S-X to amend the date for compliance with SFAS 123R so that each registrant
(that is not a small business issuer) will be required to prepare financial
statements in accordance with SFAS 123R beginning with the first interim or
annual reporting period of the registrant's first fiscal year beginning on
or after June 15, 2005. The company is currently evaluating the
requirements of SFAS 123R and SAB 107 to determine the fair value method to
measure compensation expense, the appropriate assumptions to include in the
fair value model and the transition method to use upon adoption. The
company expects that the adoption of SFAS 123R for its first quarter 2006
reporting will have a material impact on its results of operations and
earnings per share.
10
In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations ("FIN 47"). FIN 47 clarifies that
an entity must record a liability for a "conditional" asset retirement
obligation if the fair value of the obligation can be reasonably estimated.
The types of asset retirement obligations that are covered by this
Interpretation are those for which an entity has a legal obligation to
perform an asset retirement activity, however the timing and (or) method of
settling the obligation are conditional on a future event that may or may
not be within the control of the entity. FIN 47 also clarifies when an
entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. The provisions of FIN 47 are
effective no later than the end of fiscal years ending after December 15,
2005, although early adoption is encouraged. The company is currently
evaluating the provisions of this standard.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(Unaudited)
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
OVERVIEW
Since its inception in 1991, Lexmark International, Inc. ("Lexmark" or the
"company") has become a leading developer, manufacturer and supplier of
printing and imaging solutions for offices and homes. The company's
products include laser printers, inkjet printers, multifunction devices,
associated supplies, services and solutions. The company also sells dot
matrix printers for printing single and multi-part forms by business users
and develops, manufactures and markets a broad line of other office imaging
products. The principal customers for the company's products are dealers,
retailers and distributors worldwide. The company is primarily managed
along business and consumer market segments.
RESULTS OF OPERATIONS
Summary
Market conditions were particularly challenging in the first quarter as a
result of aggressive pricing and soft consumer market demand. During the
quarter, in the consumer market segment, the company saw continued weak
market demand and a return to aggressive price competition. In the business
market segment, market demand was somewhat better than that experienced in
the consumer market segment but the company continued to see strong price
pressure in this market as well.
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto. The following
table summarizes the results of Lexmark's operations for the three months
ended March 31, 2005 and 2004:
Three Months Ended
March 31
----------------------------------------------------------------
2005 2004
-------------------------- --------------------------
(Dollars in Millions) Dollars % of Rev Dollars % of Rev
---------------------------------------------------------------------------------------------------------------
Revenue $ 1,357.6 100.0% $ 1,256.0 100.0%
Gross profit 447.3 33.0 410.8 32.7
Operating expense 285.6 21.0 245.6 19.6
Operating income 161.7 11.9 165.2 13.2
Net earnings 123.9 9.1 121.0 9.6
---------------------------------------------------------------------------------------------------------------
First quarter operating income includes a $9.6 million ($7.0 million after
tax), or $0.05 per share, charge which represents management's best
estimate of probable losses relating to 2002 through 2004 accounts
receivable in Spain due to inappropriate conduct by a former employee of
Lexmark Spain. The $9.6 million charge reduced revenue by $0.6 million and
increased selling, general and administrative expense by $9.0 million in
the quarter. Although the ultimate amount of this loss could differ
materially from management's current estimate, the company does not expect
the actual loss to be material to results of operations or the company's
financial position. The focus of the company's investigation is on accounts
receivable and the collection process in Spain for the years 2002 through
2004. The former senior finance employee of Lexmark Spain, whose employment
was terminated, did not account for accounts receivable appropriately,
which led to errors in the aging or delinquency of selected accounts. The
company has no evidence of theft. The company is currently
12
gathering documents and working with customers to collect as much of the
delinquent receivables as possible. The charge is based upon the company's
normal accrual rates for bad debts based upon the age of accounts. While
the company cannot predict the loss with certainty, the company believes
the amount reserved is appropriate based upon its analysis to date. The
investigation and recovery is ongoing. As a result of the control
deficiencies discovered in Lexmark Spain's accounts receivable process, the
company is taking steps to further strengthen certain of its control
processes.
First quarter net earnings also included a $3.1 million, or $0.02 per
share, benefit from the retroactive extension of a favorable non-United
States ("U.S.") tax rate. Excluding these items, net earnings would have
been $127.8 million or $0.99 per share for the three months ended March 31,
2005 compared to $121.0 million or $0.91 per share in 2004.
Revenue
Consolidated revenue increased 8% for the three months ended March 31,
2005, compared to 2004 principally due to supplies growth, reflecting the
consistency of the company's business model, and also by strong demand for
its laser printers.
The following tables provide a breakdown of the company's revenue by market
segment and geography.
Revenue by market segment:
Three Months Ended
March 31
-----------------------------------------
(Dollars in Millions) 2005 2004 % Change
- -------------------------------------------------------------------------------------------------------------------
Business $ 727.1 $ 673.0 8%
Consumer 630.5 583.0 8
All other - - -
- -------------------------------------------------------------------------------------------------------------------
Total revenue $ 1,357.6 $ 1,256.0 8%
===================================================================================================================
For the three months ended March 31, 2005, revenue in the business market
segment increased $54 million or 8% over 2004. This growth was principally
due to supplies growth and increases in unit volumes. The company
experienced strong double-digit unit growth in the business market segment,
but saw significant hardware price declines and continuing mix shift to
low-end products, resulting in revenue growth less than unit growth.
For the three months ended March 31, 2005, revenue in the consumer market
segment increased $48 million or 8% over 2004. This growth was primarily
driven by increased supplies revenue.
Revenue by geography:
Three Months Ended
March 31
----------------------------------------
(Dollars in Millions) 2005 2004 % Change
- -------------------------------------------------------------------------------------------------------------------
United States $ 623.7 $ 561.2 11%
Europe 512.0 484.4 6
Other International 221.9 210.4 5
- -------------------------------------------------------------------------------------------------------------------
Total revenue $ 1,357.6 $ 1,256.0 8%
===================================================================================================================
For the three months ended March 31, 2005, revenue increased in all
geographies when compared to 2004 principally due to the previously
discussed supplies growth. Revenue in Europe and Other International
geographies was also favorably impacted by currency.
13
Gross Profit
The following table provides gross profit information:
Three Months Ended
March 31
----------------------------------------
(Dollars in Millions) 2005 2004 Change
- -------------------------------------------------------------------------------------------------------------------
Gross Profit:
Dollars $ 447.3 $ 410.8 9%
% of Revenue 33.0% 32.7% 0.3pts
- -------------------------------------------------------------------------------------------------------------------
For the three months ended March 31, 2005, consolidated gross profit and
gross profit as a percentage of revenue increased when compared to the
prior year. The improvement in the gross profit margin over 2004 was
principally due to a positive mix among products (1.1 percentage points)
partially offset by lower product margins (0.8 percentage points) which was
mostly printer driven.
Operating Expense
The following table presents information regarding the company's operating
expenses during the periods indicated:
Three Months Ended
March 31
--------------------------------------------------
2005 2004
------------------------ -----------------------
(Dollars in Millions) Dollars % of Rev Dollars % of Rev
------------------------------------------------------------------------------------------------------------------
Operating expense:
Research and development $ 82.6 6.1% $ 72.2 5.8%
Selling, general & administrative 203.0 14.9 173.4 13.8
------------------------------------------------------------------------------------------------------------------
Total operating expense $ 285.6 21.0% $ 245.6 19.6%
==================================================================================================================
For the three months ended March 31, 2005, operating expense increased $40
million or 16% compared to 2004 and includes a $9.0 million charge which
represents management's best estimate of probable losses relating to 2002
through 2004 accounts receivable in Spain as discussed above. Excluding the
Spain charge, operating expense increased 13% and was 20.4% of revenue.
Additionally, the company continued its strategic investments in
development, marketing and sales.
14
Operating Income (Loss)
The following table provides operating income (loss) by market segment:
Three Months Ended
March 31
----------------------------------------
(Dollars in Millions) 2005 2004 %Change
- -------------------------------------------------------------------------------------------------------------------
Operating income (loss):
Business $ 177.5 $ 174.8 2%
Consumer 78.9 73.3 8
Other (94.7) (82.9) (14)
- -------------------------------------------------------------------------------------------------------------------
Total operating income (loss) $ 161.7 $ 165.2 (2)%
===================================================================================================================
For the three months ended March 31, 2005, the decrease in the consolidated
operating income was due to a $37 million increase in gross profit, offset
by a $40 million increase in operating expense compared to 2004. Operating
income for the business market segment increased $3 million for the three
months ended March 31, 2005, compared to 2004 due to higher revenue
partially offset by lower product margins and higher expenses. Operating
income for the consumer market segment increased $6 million for the three
months ended March 31, 2005, compared to 2004 due to higher revenue and a
positive mix among products, partially offset by lower product margins and
higher expenses.
Other
For the three months ended March 31, 2005, financing and non-operating
(income) expense increased $2 million compared to 2004, principally due to
additional interest income.
Net Earnings
For the three months ended March 31, 2005, net earnings were $124 million
compared to $121 million in 2004. The increase in net earnings was due to
increased non-operating income and a lower effective tax rate partially
offset by lower operating income. The effective income tax rate was 25.1%
for the three months ended March 31, 2005, compared to 27.5% in 2004 due to
the retroactive extension of a non-U.S. tax rate which reduced the 2005
income tax provision by approximately $3 million.
Earnings Per Share
Basic net earnings per share were $0.97 for the three months ended March
31, 2005, compared to $0.93 in 2004. Diluted net earnings per share were
$0.96 for the three months ended March 31, 2005, compared to $0.91 in 2004.
Both basic and diluted net earnings per share for the three months ended
March 31, 2005, include a $0.05 charge associated with the previously
mentioned estimate of probable losses relating to 2002 through 2004
accounts receivable in Spain partially offset by a $0.02 benefit associated
with the previously mentioned retroactive extension of a favorable non-U.S.
tax rate. Excluding these items, the increases in basic and diluted net
earnings per share were primarily attributable to the increase in net
earnings and a decrease in the average number of shares outstanding,
primarily due to the company's stock repurchases.
15
FINANCIAL CONDITION
Lexmark's financial position remains strong at March 31, 2005, with working
capital of $1,457 million compared to $1,533 million at December 31, 2004.
At March 31, 2005, the company had outstanding $149.5 million of long-term
debt and no short term debt. The debt to total capital ratio was 7% at
March 31, 2005, and December 31, 2004, respectively. The company had no
amounts outstanding under its U.S. trade receivables financing program or
its revolving credit facility at March 31, 2005.
The following table summarizes the results of the company's Consolidated
Condensed Statements of Cash Flows for the three months ended March 31,
2005 and 2004:
Three Months Ended
March 31
----------------------------
(In Millions) 2005 2004
- ------------------------------------------------------------------------------------------------------------------
Net cash flow provided by (used for):
Operating activities $ 77.2 $ 152.3
Investing activities 6.2 (184.2)
Financing activities (213.8) 36.9
Effect of exchange rate changes on cash (1.4) 0.2
- ------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash & cash equivalents $ (131.8) $ 5.2
==================================================================================================================
The company's primary source of liquidity has been cash generated by
operations, which totaled $77 million and $152 million for the three months
ended March 31, 2005 and 2004, respectively. Cash from operations for the
past few years 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 $227 million of its Class A
common stock during the three months ended March 31, 2005. There were no
common stock repurchases during the same period in 2004. 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 receivables financing program, revolving
credit facility or other financing sources.
Operating activities:
The decrease in cash flows from operating activities from 2004 to 2005 was
primarily due to unfavorable cash flow changes in accounts payable
partially offset by favorable cash flow changes in other assets and
liabilities.
Investing activities:
Changes in investments in marketable securities resulted in a net cash
provided of $59 million for the three months ended March 31, 2005, compared
to a net use of cash of $161 million during the same period in 2004. The
company spent $53 million and $23 million on capital expenditures during
2005 and 2004, respectively. The capital expenditures for 2005 principally
related to infrastructure support, manufacturing capacity expansion and new
product development. It is anticipated that capital expenditures for 2005
will be between $250 million and $300 million and are expected to be funded
through cash from operations.
16
Financing activities:
The fluctuations in the net cash flows from financing activities were
principally due to treasury stock activity. The company repurchased $227
million of treasury stock during the three months ended March 31, 2005.
There were no treasury stock repurchases during the same period in 2004.
In October 2004, the company received authorization from the board of
directors to repurchase an additional $1 billion of its Class A common
stock for a total repurchase authority of $2.4 billion. As of March 31,
2005, there was approximately $0.7 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 first quarter of 2005, the company
repurchased approximately 2.8 million shares, at a cost of approximately
$227 million. As of March 31, 2005, since the inception of the program, the
company had repurchased approximately 40.8 million shares for an aggregate
cost of approximately $1.7 billion.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position ("FSP") 109-1, Application of FASB Statement No. 109,
Accounting for Income Taxes, for the Tax Deduction Provided to U.S.-Based
Manufacturers by the American Jobs Creation Act of 2004 ("FSP 109-1"). FSP
109-1 clarifies that the tax deduction for domestic manufacturers under the
American Jobs Creation Act of 2004 should be accounted for as a special
deduction in accordance with SFAS No. 109, Accounting for Income Taxes. The
FSP, issued on December 21, 2004, went into effect upon being issued.
In December 2004, the FASB also issued FSP 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004 ("FSP 109-2"). FSP 109-2 provides
enterprises more time (beyond the financial-reporting period during which
the American Jobs Creation Act took effect) to evaluate the impact on the
enterprise's plan for reinvestment or repatriation of certain foreign
earnings for purposes of applying SFAS No. 109. The FSP, issued on December
21, 2004, went into effect upon being issued. On April 28, 2005, the
company's board of directors approved a Domestic Reinvestment Plan ("DRP")
under the American Jobs Creation Act. The implementation of the DRP will
result in the repatriation of $683.9 million of dividends during 2005 with
a tax cost of approximately $70 million, which will be included in the
company's second quarter results. If the technical corrections bill as
currently proposed is passed by Congress, the U.S. income tax may be
reduced by approximately $12 million.
In December 2004, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), Share-Based Payment ("SFAS
123R"). SFAS 123R requires that all share-based payments to employees,
including grants of stock options, be recognized in the financial
statements based on their fair value beginning with the first interim or
annual reporting period that begins after June 15, 2005. In March 2005, the
Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin
No. 107 ("SAB 107") regarding the SEC Staff's interpretation of SFAS 123R
and provides the Staff's views regarding interactions between SFAS 123R and
certain SEC rules and regulations and provides interpretations of the
valuation of share-based payments for public companies. In April 2005, the
SEC amended Regulation S-X to amend the date for compliance with SFAS 123R
so that each registrant (that is not a small business issuer) will be
required to prepare financial statements in accordance with SFAS 123R
beginning with the first interim or annual reporting period of the
registrant's first fiscal year beginning on or after June 15, 2005. The
company is currently evaluating the requirements of SFAS 123R and SAB 107
to determine the fair value method to measure compensation expense, the
appropriate assumptions to include in the fair value model and the
transition method to use upon adoption. The company expects that the
adoption
17
of SFAS 123R for its first quarter 2006 reporting will have a material
impact on its results of operations and earnings per share.
In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations ("FIN 47"). FIN 47 clarifies that
an entity must record a liability for a "conditional" asset retirement
obligation if the fair value of the obligation can be reasonably estimated.
The types of asset retirement obligations that are covered by this
Interpretation are those for which an entity has a legal obligation to
perform an asset retirement activity, however the timing and (or) method of
settling the obligation are conditional on a future event that may or may
not be within the control of the entity. FIN 47 also clarifies when an
entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. The provisions of FIN 47 are
effective no later than the end of fiscal years ending after December 15,
2005, although early adoption is encouraged. The company is currently
evaluating the provisions of this standard.
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 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 or a
shift in the mix of products sold, could result in lower profitability
and jeopardize the company's ability to grow or maintain its market
share.
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 Unfavorable global economic conditions may adversely impact the
company's future operating results. The company continues to
experience some weak markets for its products, and although the
company has seen some market improvement, continued softness in
certain markets and uncertainty about global economic conditions 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.
18
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 of the company and
its resellers. 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.
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, any disruption in the
supply of new or existing products 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 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.
o 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.
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.
19
o The company relies in large part on its international production
facilities and international manufacturing partners, many of which are
located in China, 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 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
key supplier could result in a material adverse impact on the
company's financial results.
o 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.
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 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.
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 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 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 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.
20
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 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.
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.
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.
21
ITEM 3. QUANTITATIVE AND QUALITIVE 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, 2005, the fair value of the company's senior notes was
estimated at $159 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
March 31, 2005, by approximately $9 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 $2 million at
March 31, 2005.
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 March
31, 2005, was a liability of $3 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 $2 million at March 31, 2005.
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 Mexican peso, the Canadian dollar, the British pound, the Japanese yen,
the Australian dollar 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, 2005, for such contracts
resulting from a hypothetical 10% adverse change in all foreign currency
exchange rates is approximately $57 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.
Changes in Internal Control over Financial Reporting
There has been no change in the company's internal control over financial
reporting that occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the
company's internal control over financial reporting. As a result of the
control deficiencies discovered in Lexmark Spain's accounts receivable
process, the company is taking steps to further strengthen certain of its
control processes.
22
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
Part II. Other Information
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes repurchases of the company common stock in
the quarter ended March 31, 2005:
Approximate Dollar Value of
Total Total Number of Shares Shares that May Yet Be
Number of Average Purchased as Part of Purchased Under the Plans or
Shares Price Publicly Announced Plans or Programs
Period Purchased Paid per Share Programs (in millions) (1)
- ---------------------------------------------------------------------------------------------------------------------------
January 1-31, 2005 200,000 $84.76 200,000 $884.5
February 1-28, 2005 1,047,500 81.32 1,047,500 799.3
March 1-31, 2005 1,536,600 81.03 1,536,600 674.8
- ---------------------------------------------------------------------------------------------------------------------------
Total 2,784,100 $81.40 2,784,100 --
===========================================================================================================================
(1) In October 2004, the company received authorization from the board of
directors to repurchase an additional $1 billion of its Class A common
stock for a total repurchase authority of $2.4 billion. As of March
31, 2005, there was approximately $0.7 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 first
quarter of 2005, the company repurchased approximately 2.8 million
shares, at a cost of approximately $227 million. As of March 31, 2005,
since the inception of the program, the company had repurchased
approximately 40.8 million shares for an aggregate cost of
approximately $1.7 billion.
23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The company's Annual Meeting of Stockholders was held on April 28,
2005.
(b) At said Annual Meeting, the stockholders voted on the following three
proposals:
(i) The election of four Directors for terms expiring in 2008. The
stockholders elected the Directors by the following votes:
Director Votes For Votes Withheld
- -------------------------------------------------------------------------------------------
B. Charles Ames 106,080,524 4,851,340
Teresa Beck 104,418,631 6,513,233
Ralph E. Gomory 106,636,140 4,295,724
Marvin L. Mann 63,954,453 46,977,411
The terms of office of Frank T. Cary, Paul J. Curlander, William R. Fields,
Stephen R. Hardis, James F. Hardymon, Robert Holland, Jr., Michael J.
Maples and Martin D. Walker continued after the meeting.
(ii) The approval of the company's 2005 Nonemployee Director Stock Plan.
The stockholders approved such plan by the following votes:
Broker
Votes For Votes Against Abstentions Non-Vote
- ---------------------------------------------------------------------------------------------
87,816,429 12,445,952 698,967 9,970,516
(iii)The ratification of the appointment of PricewaterhouseCoopers LLP
("PwC") as the company's independent registered public accounting firm
for the company's fiscal year ending December 31, 2005. The
stockholders ratified the appointment of PwC by the following votes:
Votes For Votes Against Abstentions
- --------------------------------------------------------------------------------------------
107,122,870 3,101,439 707,555
ITEM 6. EXHIBITS
A list of exhibits is set forth in the Exhibit Index found on page 26 of
this report.
24
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)
May 3, 2005 By:/s/ Gary D. Stromquist
------------------------------------
Gary D. Stromquist
Vice President and Corporate Controller
(Chief Accounting Officer)
25
EXHIBIT INDEX
Exhibits:
10.1 Credit Agreement, dated as of January 20, 2005, by and among the company,
as Borrower, the Lenders party thereto, JPMorgan Chase Bank, N.A., as
Administrative Agent, Fleet National Bank and Citibank, N.A., as
Co-Syndication Agents, and KeyBank National Association and SunTrust Bank,
as Co-Documentation Agents. (1)
10.2 Form of Agreement pursuant to the company's 2005-2007 Long-Term Incentive
Plan. (2) +
10.3 Description of Compensation Payable to Nonemployee Directors. (2) +
10.4 Lexmark International, Inc. 2005 Nonemployee Director Stock Plan. (3) +
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.
+ Indicates management contract or compensatory plan, contract or arrangement.
(1) Incorporated by reference to the company's Current Report on Form 8-K filed
with the Commission on January 20, 2005 (Commission File No. 1-14050).
(2) Incorporated by reference to the company's Current Report on Form 8-K filed
with the Commission on February 15, 2005 (Commission File No. 1-14050).
(3) Incorporated by reference to the company's Current Report on Form 8-K filed
with the Commission on April 29, 2005 (Commission File No. 1-14050).
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