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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Qarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 1997
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.)
One Lexmark Centre Drive
740 New Circle Road NW
Lexington, Kentucky 40550
(Address of principal executive offices) (Zip Code)
(606) 232-2000
(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 April 25,
1997:
Class Number of Shares
------------------------------------ ----------------
Class A common stock; $.01 par value 69,747,570
Class B common stock; $.01 par value 2,313,423
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LEXMARK INTERNATIONAL GROUP, 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, 1997 AND 1996....................2
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION (Unaudited)
AS OF MARCH 31, 1997 AND DECEMBER 31, 1996....................3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996...................4
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited).5-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (Unaudited)..................7-10
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................11
1
Part I - Financial Information
Item 1. Financial Statements
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(In Millions, Except Per Share Amounts)
(Unaudited)
Three Months Ended
March 31
------------------
1997 1996
---- ----
Revenues $583.4 $587.8
Cost of revenues 383.6 405.4
------ ------
Gross profit 199.8 182.4
Research and development 30.6 33.0
Selling, general and administrative 113.5 100.3
Amortization of intangibles - 5.1
------ ------
Operating expenses 144.1 138.4
Operating income 55.7 44.0
Interest expense, net 4.9 5.8
Amortization of deferred financing costs and other 2.4 2.2
------ ------
Earnings before income taxes and
extraordinary item 48.4 36.0
Provision for income taxes 17.7 14.4
------ ------
Earnings before extraordinary item 30.7 21.6
Extraordinary loss on extinguishment of debt
(net of related tax benefit of $8.4) (14.0) -
------ ------
Net earnings $ 16.7 $ 21.6
====== ======
Earnings per common and common equivalent share,
primary and fully diluted:
Before extraordinary item $ 0.40 $ 0.29
Extraordinary loss (0.18) -
------ ------
Net earnings $ 0.22 $ 0.29
====== ======
Shares used in per share calculation 76.9 75.4
====== ======
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)
March 31 December 31
1997 1996
-------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 46.6 $ 119.3
Trade receivables, net of allowance of $18 304.8 304.7
Inventories 256.0 271.0
Prepaid expenses and other current assets 78.3 70.1
-------- --------
Total current assets 685.7 765.1
Property, plant and equipment, net 422.4 434.1
Other assets 18.2 22.3
-------- --------
Total assets $1,126.3 $1,221.5
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 62.7 $ 2.1
Accounts payable 197.8 197.2
Accrued liabilities 204.0 222.0
-------- --------
Total current liabilities 464.5 421.3
Long-term debt 42.9 163.2
Other liabilities 90.6 96.7
-------- --------
Total liabilities 598.0 681.2
Stockholders' equity:
Preferred stock, $.01 par value, 1,600,000
shares authorized, no shares issued
and outstanding - -
Common stock $.01 par value:
Class A, 160,000,000 shares authorized;
70,892,488 and 70,213,603 outstanding 0.7 0.7
Class B, 10,000,000 shares authorized;
2,313,423 and 2,446,523 outstanding - -
Capital in excess of par 525.6 519.3
Retained earnings 36.5 19.8
Accumulated translation adjustment (11.9) 0.5
Treasury stock, at cost, 949,414 shares (22.6) -
-------- --------
Total stockholders' equity 528.3 540.3
-------- --------
Total liabilities and stockholders' equity $1,126.3 $1,221.5
======== ========
See notes to consolidated condensed financial statements.
3
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Three Months Ended
March 31
------------------
1997 1996
---- ----
Cash flows from operating activities:
Net earnings $ 16.7 $ 21.6
Adjustments to reconcile net earnings to net cash
provided by (used for) operating activities:
Depreciation and amortization 18.6 19.6
Extraordinary loss on extinguishment of debt 22.4 -
Deferred taxes 1.1 (1.6)
Other non-cash charges to operations 4.6 3.9
------ ------
63.4 43.5
Change in assets and liabilities:
Trade receivables (10.0) (16.1)
Trade receivables programs 9.9 (25.4)
Inventories 15.0 (28.7)
Accounts payable 0.6 3.7
Accrued liabilities (18.0) (32.5)
Other assets and liabilities (20.3) (14.4)
------ ------
Net cash provided by (used for) operating
activities 40.6 (69.9)
------ ------
Cash flows from investing activities:
Purchases of property, plant and equipment (11.7) (35.0)
Proceeds from sale of property, plant and equipment 0.2 -
------ ------
Net cash used for investing activities (11.5) (35.0)
------ ------
Cash flows from financing activities:
Increase in short-term debt 60.6 1.3
Principal payments on long-term debt (120.0) (20.0)
Charges related to extinguishment of debt (22.4) -
Purchase of treasury stock (22.6) -
Exercise of stock options and warrants 4.0 4.5
------ ------
Net cash used for financing activities (100.4) (14.2)
------ ------
Effect of exchange rate changes on cash (1.4) ( 0.3)
------ ------
Net decrease in cash and cash equivalents (72.7) (119.4)
Cash and cash equivalents - beginning of period 119.3 150.5
------ ------
Cash and cash equivalents - end of period $ 46.6 $ 31.1
====== ======
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, 1996.
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 include stock
options, warrants, restricted stock and deferred stock units. Primary and
fully diluted earnings per share do not differ by a material amount.
2. INVENTORIES
(Dollars in millions)
Inventories consist of the following:
March 31 December 31
1997 1996
-------- -----------
Work in process $140.2 $144.6
Finished goods 115.8 126.4
------ ------
$256.0 $271.0
====== ======
3. LONG-TERM DEBT
In March 1997, the Company prepaid its $120 million 14.25 percent senior
subordinated notes due in 2001. The prepayment resulted in an
extraordinary charge of $22.4 million ($14.0 million net of tax benefit)
caused by a prepayment premium and other fees.
In March 1997, the Company entered into three-year interest rate swaps
with a total notional amount of $60 million, whereby the Company pays
interest at a fixed rate of approximately 6.5 percent and receives
interest at a floating rate equal to the three-month London Interbank
Offered Rate (LIBOR). The swaps serve as a hedge of financings based on
floating interest rates.
5
4. STOCKHOLDERS' EQUITY
In April 1996, the Company's board of directors authorized the repurchase
at management's discretion of up to $50 million of its Class A common
stock in the open market or in privately negotiated transactions
depending upon market price and other factors. During the quarter ended
March 31, 1997, the Company repurchased 949,414 shares in the open market
for an aggregate of approximately $22.6 million.
5. NEW ACCOUNTING STANDARDS
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS
No. 125 provides standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings and
addresses programs such as the Company's trade receivables programs in
the U.S. and Germany. With the adoption of SFAS No. 125, the Company
continues to account for the transfer of receivables under both programs
as sale transactions. In response to SFAS No. 125 for purposes of the
U.S. program, the Company formed and sells its receivables to a wholly
owned subsidiary, Lexmark Receivables Corporation ("LRC"), which then
sells the receivables to an unrelated third party. LRC is a separate
legal entity with its own separate creditors who, in a liquidation of
LRC, would be entitled to be satisfied out of LCR's assets prior to any
value in LRC becoming available for equity claims of an LRC stockholder.
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, Earnings per Share. This statement is effective for the
Company's 1997 annual financial statements. This statement replaces the
presentation of primary earnings per share ("EPS") and fully diluted EPS
with a presentation of basic EPS and diluted EPS, respectively. Basic EPS
were $0.23, $0.42 before extraordinary item, for the first quarter of
1997, compared to $0.31 for the first quarter of 1996. Diluted EPS were
$0.22, $0.40 before extraordinary item, for the quarter ended March 31,
1997, compared to $0.29 for the quarter ended March 31, 1996.
6. SUBSEQUENT EVENT
On May 2, 1997, the Company's board of directors authorized the
repurchase at management's discretion of up to $150 million of its Class
A common stock in the open market or in privately negotiated transactions
depending upon market price and other factors. This authorization is in
addition to the $50 million repurchase authorization granted in April
1996 and currently permitted by the Company's credit facilities. As of
May 9, 1997, the Company has used $40.6 million of the original
authorization to repurchase approximately 1.7 million shares.
6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (Unaudited)
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
Results of Operations
- ---------------------
Consolidated revenues for the three months ended March 31, 1997 were $583
million, a decrease of 1 percent from the same period of 1996. Printers and
associated supplies revenues were $456 million, an increase of 9 percent.
Revenues from other office imaging products were $127 million, a decrease of 7
percent from 1996. The transition out of the keyboard business was completed in
March 1996 and, excluding this business, revenues for the first quarter were up
$28 million or 5 percent from 1996. Total U.S. revenues were down $45 million or
14 percent, and international revenues were up $41 million or 16 percent.
Excluding the keyboard business, total U.S. revenues were down 4 percent.
Revenues for the quarter ended March 31, 1997 were affected by price reductions
taken after the first quarter of 1996, the transition out of the keyboard
business and unfavorable translation of foreign revenues. Printer hardware
volumes have shown strong growth versus a year ago and printer supplies revenues
have increased due to the continued growth of the Company's installed printer
base. This growth, partially offset by price reductions on certain printers,
resulted in a 9 percent increase in printer revenues. Foreign currency
translation effects on revenue were $20 million unfavorable for the quarter
ended March 31, 1997 due to the strengthening of the U.S. dollar.
Consolidated gross profit was $200 million for the three months ended March 31,
1997, an increase of 10 percent from the same period of 1996. This was driven by
margin improvements in printers and associated supplies, which more than offset
the reduced gross margins in other office imaging products resulting from the
previously announced renegotiated IBM supplies distribution agreement which went
into effect after the first quarter of 1996. Gross profit as a percentage of
revenues for the first quarter of 1997 increased to 34 percent from 31 percent
in 1996.
Gross profit attributable to printers and associated supplies for the first
quarter 1997 was $155 million, an increase of 20 percent over the first quarter
of 1996, principally due to reductions in product costs, growth in higher margin
associated consumable supplies and more favorable product sales mix. Gross
profit margin was 34 percent, up from 31 percent in the prior year, as
competitive price pressures on printers were more than offset by lower costs and
higher sales of associated consumable supplies.
Total operating expenses increased 4 percent in the first quarter of 1997
compared to the same period of 1996. Expenses as a percentage of revenues were
25 percent in the first quarter of 1997 compared to 24 percent for the
corresponding period of 1996, principally reflecting in 1997 increased marketing
and sales efforts. Looking forward, the Company expects a significant increase
in second quarter operating expenses versus 1996 as a result of increased
investment in marketing and sales to drive growth.
Consolidated operating income was $56 million for the first quarter of 1997, an
increase of 26 percent over the corresponding period of 1996. This increase was
due principally to product cost reductions, more favorable product sales mix and
the absence of amortization of intangibles, which were fully amortized by the
end of the first quarter of 1996.
7
Earnings before extraordinary item were $31 million for the first quarter of
1997, up 42 percent over the corresponding period of 1996, principally due to
the operating performance and lower interest expense as a result of lower debt
levels and lower interest rates. The income tax provision was approximately 37
percent of earnings before tax for the first quarter of 1997 as compared to 40
percent in the same period of 1996. Earnings per share before extraordinary item
were $0.40 for the three months ended March 31, 1997, compared to $0.29 for the
same period of 1996, an increase of 39 percent.
Net earnings for the first quarter of 1997 were $17 million, a decrease of 23
percent compared to the same period of 1996, due to an extraordinary charge of
$22 million ($14 million net of tax benefit) caused by the prepayment of the
Company's senior subordinated notes. This charge is the result of a prepayment
premium and other fees. Net earnings per share were $0.22 for the three months
ended March 31, 1997, compared to $0.29 for the same period of 1996, a decrease
of 24 percent.
Financial Condition
- -------------------
The Company's financial position remains strong, with lower debt levels than at
December 31, 1996. Senior subordinated notes in the principal amount of $120
million were prepaid in March 1997. The Company utilized cash generated by
operations, its revolving credit facility and funds available under its trade
receivables programs to prepay the debt. At March 31, 1997, the Company had
outstanding $63 million of short-term debt and $43 million of long-term debt.
The debt to total capital ratio was 17 percent at the end of the first quarter
of 1997 compared to 23 percent at December 31, 1996.
In March 1997, the Company entered into three-year interest rate swaps with a
total notional amount of $60 million, whereby the Company pays interest at a
fixed rate of approximately 6.5 percent and receives interest at a floating rate
equal to the three-month London Interbank Offered Rate (LIBOR). The swaps serve
as a hedge of financings based on floating interest rates.
Cash provided by operating activities for the three months ended March 31, 1997
was $41 million compared to $70 million cash used by operating activities for
the same period of 1996, primarily reflecting inventory reductions, stronger
earnings before extraordinary loss and the sale of receivables under the trade
accounts receivable programs.
Capital expenditures were $12 million in 1997 compared to $35 million in 1996.
Capital expenditures in the first quarter of 1996 were higher due to the
Company's expansion of its inkjet printer products manufacturing capacity. These
projects were substantially completed by the end of 1996, and it is anticipated
that capital expenditures for 1997 will be less than $100 million and will be
funded primarily through cash from operations. In April 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 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. As of March 31, 1997, the Company had repurchased 949,414 shares
in the open market at prices ranging from $22.25 to $27.50 for an aggregate cost
of approximately $23 million. On May 2, 1997, the board of directors authorized
the repurchase at management's discretion of up to $150 million of the Company's
Class A common stock in the open market or in privately negotiated transactions
depending upon market price and other factors. This authorization is in addition
to the $50 million repurchase authorization granted in April 1996 and currently
permitted by the Company's credit facilities. As of May 9, 1997, the Company has
used $41 million of the original authorization to repurchase approximately 1.7
million shares.
8
New Accounting Standards
- ------------------------
Effective January 1, 1997, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 125, Accounting for the Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. The adoption of this
accounting standard did not have a material impact on the Company's financial
position, results of operations or liquidity.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share. This statement establishes standards for computing and
presenting earnings per share ("EPS") and generally applies to all publicly held
companies. This statement replaces the presentation of primary EPS and fully
diluted EPS with a presentation of basic EPS and diluted EPS, respectively.
Basic EPS excludes dilution and is computed by dividing earnings available to
common stockholders by the weighted average number of common shares outstanding
for the period. Similar to fully diluted EPS, diluted EPS reflects the potential
dilution of securities that could share in the earnings. This statement is
effective for the Company's financial statements for the year ended December 31,
1997. EPS calculated under SFAS No. 128 are not expected to be materially
different from EPS calculated under the current method.
Factors That May Affect Future Results and Information Concerning Forward -
- ---------------------------------------------------------------------------
Looking Statements
- ------------------
Certain of the statements contained in this Report may be considered
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, and the
Company's future operating results may be adversely affected by a number of
factors, including, without limitation, the factors set forth below:
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 laser and inkjet printers and may continue to do so.
The Company intends to formally announce on May 19, 1997 the introduction of a
new, competitively priced line of laser printer products. The Company believes
that, in response to this upcoming announcement, Hewlett-Packard Company
announced price reductions on its line of monochrome network laser printers. The
factors set forth herein could result in lower profitability for the Company and
jeopardize the Company's ability to grow or maintain its market share.
Also, 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.
In addition, revenues derived from international sales, including exports from
the United States, make up about 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. Moreover, margins
on international sales tend to be lower than those on domestic sales.
9
Factors unrelated to the Company's operating performance, including economic and
business conditions, both national and international; the loss of significant
customers or suppliers; changes in and execution of the Company's business
strategy, including the expansion of its business through the acquisition of
related businesses; the Company's ability to obtain patents, copyrights and
trademarks, maintain trade secret protection and operate without infringing the
proprietary rights of others; and trading activity in the Company's common
stock, particularly in light of the substantial number of shares owned by the
original investor group that are available for resale, also may affect the
Company's results as well as its common stock price.
10
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Stockholders was held on
May 2, 1997.
(b) At said Annual Meeting, the stockholders voted on the election of
three Directors for terms expiring in 2000. The stockholders
elected the Directors by the following votes:
Abstentions and
Director Votes For Votes Withheld Broker Non-Votes
-------- --------- -------------- ----------------
Michael J. Maples 63,312,764 167,760 0
Stephen R. Hardis 63,299,456 181,068 0
William R. Fields 63,301,176 179,348 0
The terms of office of B. Charles Ames, Sir Roderick H. Carnegie,
Frank T. Cary, Paul J. Curlander, Donald J. Gogel, Ralph E. Gomory,
Marvin L. Mann and Martin D. Walker continued after the meeting.
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 13 of this report.
(b) Reports on Form 8-K:
A Current Report on Form 8-K dated January 21, 1997 with respect
to a press release announcing the Company's fourth quarter and
full year 1996 earnings was filed with the Securities and
Exchange Commission by the Company.
11
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: May 12, 1997 By: /s/ David L. Goodnight
------------- -----------------------
David L. Goodnight
Corporate Controller
(Principal Accounting Officer)
12
EXHIBIT INDEX
Exhibits:
27 Financial Data Schedule