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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 June 30, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File No.1-14050
LEXMARK INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3074422
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
55 Railroad Avenue
Greenwich, Connecticut 06836
(Address of principal executive offices) (Zip Code)
(203) 629-6700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Class A common stock, $.01 par value New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
The number of shares outstanding (excluding shares held in treasury) of each of
the issuer's classes of common stock, as of the close of business on July 25,
1996:
Class Number of Shares
----- ----------------
Class A common stock; $.01 par value 66,090,703
Class B common stock; $.01 par value 5,888,623
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LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
INDEX
Page of
Form 10-Q
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PART I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995....2
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
AS OF JUNE 30, 1996 AND DECEMBER 31, 1995...................3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995....................4
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS............5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS, FINANCIAL CONDITION AND FACTORS THAT MAY AFFECT
FUTURE RESULTS................................................6-8
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................9
1
Part I - Financial Information
Item 1. Financial Statements
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Millions, Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues $555.3 $541.4 $1,143.1 $1,012.8
Cost of revenues 383.1 379.7 788.5 699.3
------ ------ -------- --------
Gross profit 172.2 161.7 354.6 313.5
Research and development 30.5 30.6 63.5 56.7
Selling, general and administrative 88.8 86.1 189.1 171.1
Amortization of intangibles - 5.2 5.1 15.2
------ ------ -------- --------
119.3 121.9 257.7 243.0
------ ------ -------- --------
Operating income 52.9 39.8 96.9 70.5
Interest expense, net 4.7 8.8 10.5 19.3
Amortization of deferred financing costs and other 1.6 1.6 3.8 4.1
------ ------ -------- --------
Earnings before income taxes and
extraordinary item 46.6 29.4 82.6 47.1
Provision for income taxes 15.8 9.5 30.2 15.8
------ ------ -------- --------
Earnings before extraordinary item 30.8 19.9 52.4 31.3
Extraordinary loss on extinguishment of debt
(net of related tax benefit of $6.4) - (15.7) - (15.7)
------ ------ -------- --------
Net earnings $ 30.8 $ 4.2 $ 52.4 $ 15.6
====== ====== ======== ========
Earnings per common and common equivalent
share, primary and fully diluted:
Before extraordinary item $ 0.40 $ 0.27 $ 0.69 $ 0.42
Extraordinary loss - (0.21) - (0.21)
------ ------ -------- --------
Net earnings $ 0.40 $ 0.06 $ 0.69 $ 0.21
====== ====== ======== ========
Shares used in per share calculation 75.6 75.0 75.5 75.0
====== ====== ======== ========
See notes to consolidated condensed financial statements.
2
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In Millions, Except Share Amounts)
(Unaudited)
June 30 December 31
1996 1995
------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 28.3 $ 150.5
Trade receivables, net of allowance of $24.0 in 1996
and $27.1 in 1995 256.4 213.6
Inventories 325.6 296.3
Prepaid expenses and other current assets 71.6 55.3
-------- --------
Total current assets 681.9 715.7
Property, plant and equipment, net 399.2 361.2
Other assets 58.6 66.0
-------- --------
Total assets $1,139.7 $1,142.9
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 14.0 $ -
Current portion of long-term debt - 20.0
Accounts payable 208.1 209.6
Accrued liabilities 199.8 258.4
-------- --------
Total current liabilities 421.9 488.0
Long-term debt 175.0 175.0
Other liabilities 85.7 89.7
-------- --------
Total liabilities 682.6 752.7
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Stockholders' equity:
Preferred stock, $.01 par value, 1,600,000 shares authorized,
no shares issued and outstanding - -
Common stock $.01 par value:
Class A, 160,000,000 shares authorized; 65,907,405 and
64,303,619 outstanding 0.6 0.6
Class B, 10,000,000 shares authorized; 5,888,623 and
5,888,623 outstanding 0.1 0.1
Capital in excess of par 511.4 494.6
Retained earnings (deficit) (55.6) (108.0)
Accumulated translation adjustment 0.6 2.9
-------- --------
Total stockholders' equity 457.1 390.2
-------- --------
Total liabilities and stockholders' equity $1,139.7 $1,142.9
======== ========
See notes to consolidated condensed financial statements.
3
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Six Months Ended
June 30
----------------
1996 1995
---- ----
Cash flows from operating activities:
Net earnings $ 52.4 $ 15.6
Adjustments to reconcile net earnings to net cash
provided by (used for) operating activities:
Depreciation and amortization 34.9 52.3
Extraordinary loss - 15.7
Deferred taxes (7.8) 2.4
Other non-cash charges to operations 7.1 19.4
------ ------
86.6 105.4
Change in assets and liabilities:
Trade receivables (28.9) (42.5)
Trade receivables program (13.9) -
Inventories (29.3) (12.7)
Accounts payable (1.5) 40.1
Accrued liabilities (58.6) 6.1
Other assets and liabilities (12.5) (15.4)
------ ------
Net cash provided by (used for) operating activities (58.1) 81.0
------ ------
Cash flows from investing activities:
Purchases of property, plant and equipment (69.5) (25.0)
Proceeds from sale of property, plant and equipment 2.6 0.3
------ ------
Net cash used for investing activities (66.9) (24.7)
------ ------
Cash flows from financing activities:
Increase in short-term debt 14.0 -
Proceeds from issuance of long-term debt,
net of issuance costs of $2.8 - 147.2
Principal payments on long-term debt (20.0) (150.0)
Common stock transactions, net 9.7 0.2
Preferred dividends paid - (2.2)
------ ------
Net cash provided by (used for) financing activities 3.7 (4.8)
------ ------
Effect of exchange rate changes on cash (0.9) 0.9
------ ------
Net increase (decrease) in cash and cash equivalents (122.2) 52.4
Cash and cash equivalents - beginning of period 150.5 42.0
------ ------
Cash and cash equivalents - end of period $ 28.3 $ 94.4
====== ======
See notes to consolidated condensed financial statements.
4
LEXMARK INTERNATIONAL GROUP, 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 the Company's management, 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, 1995.
Net earnings per common and common equivalent share are computed by using
the weighted-average number of common shares and common equivalent shares
outstanding during each period. Common equivalent shares and other
potentially dilutive securities include stock options, warrants, and
junior preferred stock. Primary and fully diluted earnings per share do
not differ by a material amount.
Certain prior year amounts have been reclassified to conform to the
current year's presentation.
2. INVENTORIES
(Dollars in millions)
Inventories consist of the following:
June 30 December 31
1996 1995
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Work in process $ 171.3 $ 167.7
Finished goods 154.3 128.6
------- -------
$ 325.6 $ 296.3
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3. SHAREHOLDER'S EQUITY AND LONG-TERM DEBT
On April 23, 1996, the Company's board of directors authorized the
repurchase of up to $50 million of its Class A common stock. The
repurchase authority allows the Company 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. As of June 30,
1996, the Company has not repurchased any of the stock.
The amended and restated credit agreements and the note and stock purchase
agreement have been amended to permit, among other things, the Company's
repurchase of up to $50 million of common stock.
5
Item 2. Management's Discussion and Analysis of Results of Operations,
Financial Condition and Factors that May Affect Future Results
(Unaudited)
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
Results of Operations
- ---------------------
Consolidated revenues for the three months ended June 30, 1996 were $555
million, an increase of $14 million, or 3 percent, from the same period of 1995.
Printers and associated supplies revenues were $427 million, an increase of $63
million, or 17 percent. Revenues from other office imaging products were $127
million, an increase of $4 million, or 3 percent, from 1995. The transition out
of the "keyboards and other" business was completed in March 1996. Excluding
revenues from the keyboard business, revenues for the second quarter were up $67
million, or 14 percent, from 1995. Total U.S. revenues were down $30 million, or
9 percent, and international revenues were up $44 million, or 20 percent. The
weakening of international currencies in relation to the U.S. dollar had the
effect of decreasing revenues in the current quarter by approximately $9
million.
For the six months ended June 30, 1996, consolidated revenues were $1,143
million, an increase of $130 million, or 13 percent, from the same period of
1995. Printers and associated supplies revenues were $845 million, an increase
of $185 million, or 28 percent from 1995. Revenues from other office imaging
products were $264 million, an increase of $13 million, or 6 percent, from 1995.
Excluding the "keyboards and other" business, revenues were up $199 million, or
22 percent, from 1995. Total U.S. revenues were up $36 million, or 6 percent and
international revenues were up $94 million, or 22 percent. Translation effects
were slightly unfavorable for the six month period.
The increase in revenues for the second quarter and the first half of 1996 was
principally due to growth in the core printer and associated supplies business.
Hardware volumes have shown significant growth in the sales of inkjet printers
while printer supplies revenues also showed rapid growth. These revenue
increases more than offset recent price reductions on certain printers.
Consolidated gross profit was $172 million for the second quarter of 1996, an
increase of $11 million, or 7 percent over the second quarter of 1995,
principally due to increased printer and associated supplies volumes. Gross
profit as a percentage of revenues for the second quarter of 1996 increased
slightly to 31 percent from 30 percent. Competitive price pressures on printers
were more than offset by growth in the higher margin consumable supplies.
Gross profit attributable to printers and associated supplies for the second
quarter was $131 million, an increase of 21 percent over the second quarter of
1995, principally due to increased revenues; the gross profit margin was 31
percent, up from 30 percent in the prior year, principally due to growth in the
associated consumable supplies business.
For the six months ended June 30, 1996, consolidated gross profit was $355
million, an increase of $41 million, or 13 percent over the corresponding period
of 1995. Gross profit as a percent of revenues was constant at 31 percent for
the first six months of both 1996 and 1995. Gross profit attributable to
printers and associated supplies was $261 million, an increase of 28 percent.
Total operating expenses decreased 2 percent in the second quarter of 1996
compared to the corresponding period of 1995. Expenses as a percentage of
revenues were 22 percent in the second quarter of 1996 compared to 23 percent
for the same period of 1995, principally due to lower amortization of
intangibles.
Total operating expenses increased 6 percent for the six months ended June 30,
1996 compared to the same period of 1995. Expenses as a percentage of revenues
were 23 percent for the first six months of 1996 compared to 24 percent for the
corresponding period of 1995, principally reflecting lower amortization of
intangibles and growth in revenues.
6
Consolidated operating income was $53 million for the second quarter of 1996 and
$97 million for the six months ended June 30, 1996, an increase of 33 percent
and 37 percent, respectively, over the corresponding periods of 1995, due to the
stronger 1996 sales volumes and lower amortization of intangibles. Earnings
before income taxes were $47 million for the second quarter of 1996 and $83
million for the first six months of 1996, up 58 percent and 75 percent,
respectively, over the corresponding periods of 1995, principally due to the
operating performance and lower interest expense as a result of lower debt
levels and lower interest rates.
Net earnings for the second quarter of 1996 were $31 million, up $27 million, or
626 percent, compared to the second quarter of 1995 and up 54 percent over
1995's earnings before extraordinary loss due to the early extinguishment of
debt for the second quarter. This increase was due to the operating performance
and lower interest expense, partially offset by a higher income tax provision.
The income tax provision was approximately 34 percent of earnings before tax in
the second quarter of 1996 as compared to 32 percent in the same period of 1995.
Net earnings per share was $0.40 for the second quarter of 1996, compared to
$0.06, or $0.27 before extraordinary loss for the second quarter of 1995, an
increase of 620 percent and 53 percent, respectively.
Net earnings for the six months ended June 30, 1996 were $52 million, up $37
million, or 235 percent, compared to the same period of 1995 and up $21 million,
or 67 percent over earnings before extraordinary loss in 1995. The income tax
provision was approximately 37 percent of earnings before tax for the first six
months of 1996 as compared to 33 percent in the same period of 1995. Net
earnings per share was $0.69 for the six months ended June 30, 1996, compared to
$0.21, or $0.42 before extraordinary loss for the same period of 1995, an
increase of 233 percent and 66 percent, respectively.
Financial Condition
- -------------------
The Company's financial position remains strong, with slightly lower debt levels
than at December 31, 1995, and the additional ability to sell trade accounts
receivables under the receivables sales program. Senior notes in the principal
amount of $20 million were redeemed in March 1996. Total long-term debt
outstanding was $175 million at June 30, 1996. The Company had $14 million
outstanding under its revolving lines of credit at June 30, 1996. The debt to
capital ratio was 29 percent at the end of the second quarter 1996 compared to
33 percent at December 31, 1995.
In January 1996 the Company entered into an agreement to sell up to 22 million
deutsche marks of Germany trade receivables on a limited recourse basis. At June
30, 1996, 22 million deutsche marks of receivables (approximately $14 million at
current exchange rates) were outstanding under this program and, as collections
reduce previously sold receivables, the Company may replenish these with new
receivables. Additionally, the U.S. receivables sales program was renewed in
June 1996 with substantially the same terms as the previous U.S. agreement and
had approximately $72 million outstanding at June 30, 1996.
The Company continued to execute its strategy of growth in its core printers and
associated supplies business in the first six months of 1996, including
investing approximately $70 million in capital additions primarily to support
increased manufacturing capacity. This compares to $25 million spent in the
first half of 1995. It is anticipated that capital expenditures for 1996 will be
somewhat less than $200 million.
Cash used for operating activities for the six months ended June 30, 1996 was
$58 million compared to $81 million cash provided by operating activities for
the same period of 1995, reflecting higher working capital requirements in
support of sales growth. Trade accounts receivables and inventories were higher,
while accounts payable/accrued liabilities were lower than at December 31, 1995.
Trade receivables were up due to higher revenues and fewer sales under the sale
of receivables program while inventories have increased to support the higher
sales volumes. Accounts payable/accrued liabilities were down primarily due to
timing of payments.
7
On April 23, 1996, the Company's board of directors authorized the repurchase of
up to $50 million of its Class A common stock. The repurchase authority allows
the Company 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. As of June 30, 1996, the Company has not repurchased any of the
stock.
The amended and restated credit agreements and the note and stock purchase
agreement were amended to permit, among other things, the Company's repurchase
of up to $50 million of common stock.
Factors That May Affect Future Results
- --------------------------------------
The Company's future operating results may be adversely affected if it is unable
to continue to develop, manufacture and market products that meet customers'
needs. The markets for printers and associated supplies are highly competitive,
especially with respect to pricing and the introduction of new products and
features. The Company and its major competitors, all of which have significantly
greater financial, marketing and technological resources than the Company, have
regularly lowered prices on printers and may continue to do so. The inkjet
printer market has recently experienced significant printer price pressure from
the Company's major competitors. The Company expects the impact of anticipated
price reductions on profits and profit margins to be largely mitigated by
manufacturing cost reductions, expense controls, rapid growth in sales of
consumables, and a stronger than expected performance from other office imaging
products. However, price reductions beyond expectations could result in lower
profitability and jeopardize the Company's ability to grow or maintain its
market share.
In addition, the life cycles of the Company's products, as well as delays in
product development and manufacturing, variations in the cost of component parts
and delays in customer purchases of existing products in anticipation of new
product introductions by the Company or its competitors, may cause a build up 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. Further, some of the Company's newly developed products replace or
compete with some of the Company's existing products.
Sales outside the United States make up nearly half of the Company's revenues.
Accordingly, the Company's future results could be adversely affected by a
variety of factors, including foreign currency exchange rate fluctuations, trade
protection measures, changes in a specific country's or region's political or
economic conditions and unexpected changes in regulatory requirements.
Factors unrelated to the Company's operating performance, including trading
activity in the Company's common stock, particularly in light of relatively low
daily trading volume, can result in volatility of the Company's common stock
price.
8
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
Part II. Other Information
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 11 of this report.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the three months
ended June 30, 1996.
9
LEXMARK INTERNATIONAL GROUP, 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 Group, Inc.
(Registrant)
Date: August 8, 1996 By:/s/ Albert L. Luedtke
------------------- ---------------------
Albert L. Luedtke
Corporate Controller
(Principal Accounting Officer)
10
EXHIBIT INDEX
Exhibits:
27 Financial Data Schedule
11