Lexmark International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
For the years ended December 31, 1997, 1996 and 1995
(Dollars in Millions, Except Per Share Amounts)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Revenues $2,493.5 $2,377.6 $2,157.8
Cost of revenues 1,623.5 1,630.2 1,487.9
- --------------------------------------------------------------------------------
Gross profit 870.0 747.4 669.9
Research and development 128.9 123.9 116.1
Selling, general and administrative 466.5 388.0 359.1
Option compensation related to IPO - - 60.6
Amortization of intangibles - 5.1 25.6
- --------------------------------------------------------------------------------
Operating expenses 595.4 517.0 561.4
- --------------------------------------------------------------------------------
Operating income 274.6 230.4 108.5
Interest expense 10.8 20.9 35.1
Amortization of deferred financing
costs and other 9.1 7.9 10.1
- --------------------------------------------------------------------------------
Earnings before income taxes
and extraordinary item 254.7 201.6 63.3
Provision for income taxes 91.7 73.8 15.2
- --------------------------------------------------------------------------------
Earnings before extraordinary
item 163.0 127.8 48.1
Extraordinary loss on extinguishment of
debt
(net of related tax benefit of $8.4
in 1997 and $6.4 in 1995) (14.0) - (15.7)
- --------------------------------------------------------------------------------
Net earnings $ 149.0 $ 127.8 $ 32.4
Basic earnings per share:
Before extraordinary item $ 2.29 $ 1.78 $ 0.70
Extraordinary loss (0.20) - (0.23)
- --------------------------------------------------------------------------------
Net earnings per share $ 2.09 $ 1.78 $ 0.47
Diluted earnings per share:
Before extraordinary item $ 2.17 $ 1.69 $ 0.65
Extraordinary loss (0.19) - (0.21)
- --------------------------------------------------------------------------------
Net earnings per share $ 1.98 $ 1.69 $ 0.44
Shares used in per share calculation:
Basic 71,314,311 71,629,572 68,859,900
Diluted 75,168,776 75,665,734 74,200,279
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
1
Lexmark International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As of December 31, 1997 and 1996
(Dollars in Millions, Except Share Amounts)
- --------------------------------------------------------------------------------
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 43.0 $ 119.3
Trade receivables, net of allowance of
$19 in 1997 and $18 in 1996 318.9 304.7
Inventories 353.8 271.0
Prepaid expenses and other current assets 60.4 70.1
- --------------------------------------------------------------------------------
Total current assets 776.1 765.1
Property, plant and equipment, net 409.6 434.1
Other assets 22.5 22.3
- --------------------------------------------------------------------------------
Total assets $1,208.2 $1,221.5
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 18.0 $ 2.1
Accounts payable 302.0 197.2
Accrued liabilities 227.5 222.0
- --------------------------------------------------------------------------------
Total current liabilities 547.5 421.3
Long-term debt 57.0 163.2
Other liabilities 103.0 96.7
- --------------------------------------------------------------------------------
Total liabilities 707.5 681.2
- --------------------------------------------------------------------------------
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;
67,539,935 and 70,213,603 outstanding
in 1997 and 1996, respectively 0.7 0.7
Class B, 10,000,000 shares authorized;
410,537 and 2,446,523 outstanding
in 1997 and 1996, respectively - -
Capital in excess of par 537.2 519.3
Retained earnings 168.8 19.8
Accumulated translation adjustment (23.8) 0.5
Treasury stock, at cost; 6,438,114 shares
in 1997 (182.2) -
- --------------------------------------------------------------------------------
Total stockholders' equity 500.7 540.3
- --------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $1,208.2 $1,221.5
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
2
Lexmark International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1995
(Dollars In Millions)
- --------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net earnings $149.0 $127.8 $ 32.4
Adjustments to reconcile net earnings
to net cash
provided by operating activities:
Depreciation and amortization 77.5 69.2 99.1
Option compensation related to IPO - - 60.6
Extraordinary loss on extinguishment
of debt 22.4 - 15.7
Deferred taxes 40.7 12.3 (30.8)
Other non-cash charges to operations 24.6 22.6 45.5
- --------------------------------------------------------------------------------
314.2 231.9 222.5
Change in assets and liabilities:
Trade receivables (47.5) (70.1) (52.5)
Trade receivables programs 33.3 (21.0) 30.0
Inventories (82.8) 25.3 (17.3)
Accounts payable 104.8 (12.4) 71.3
Accrued liabilities 5.5 (36.4) 76.5
Other assets and liabilities (52.6) 0.7 (23.0)
- --------------------------------------------------------------------------------
Net cash provided by operating
activities 274.9 118.0 307.5
Cash flows from investing activities:
Purchases of property, plant and
equipment (69.5) (145.0) (106.8)
Proceeds from sale of property,
plant and equipment 1.1 3.6 6.6
- --------------------------------------------------------------------------------
Net cash used for investing
activities (68.4) (141.4) (100.2)
Cash flows from financing activities:
Increase in short-term debt 35.8 2.1 -
Proceeds from issuance of long-term debt,
net of issue costs of $2.8 in 1995 0.2 5.7 147.2
Principal payments on long-term debt (125.5) (38.0) (245.0)
Charges related to extinguishment of debt (22.4) - -
Purchase of treasury stock (182.2) - -
Exercise of stock options and warrants 15.2 23.0 -
Preferred dividends paid - - (2.2)
- --------------------------------------------------------------------------------
Net cash used for financing
activities (278.9) (7.2) (100.0)
Effect of exchange rate changes on cash (3.9) (0.6) 1.2
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (76.3) (31.2) 108.5
Cash and cash equivalents - beginning of
period 119.3 150.5 42.0
- --------------------------------------------------------------------------------
Cash and cash equivalents - end of period $ 43.0 $119.3 $150.5
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
3
Lexmark International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1997, 1996 and 1995
(Dollars in Millions, Except Share Amounts)
- --------------------------------------------------------------------------------------------------------------
Junior Class A
Preferred Stock Common Stock
--------------- ------------
Shares Amount Shares Amount
------ ------ ------ ------
Balance at December 31, 1994 50,000 $ 5.0 60,387,105 $0.6
Issuance of common stock less notes receivable of $0.1 3,600
Conversion of Class B to Class A common stock 2,361,377
Conversion of junior preferred stock to Class A common stock (50,000) (5.0) 750,000
Shares issued upon exercise of warrants 254,385
Option compensation related to IPO
Long-term incentive plan compensation
Net shares issued upon exercise of options 547,152
Cash received for payments on notes receivable for common
stock issued to management and certain other individuals
Translation adjustment
Net earnings
- --------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 ---- ---- 64,303,619 0.6
Conversion of Class B to Class A common stock 3,442,100 0.1
Option compensation expense
Long-term incentive plan compensation
Net shares issued upon exercise of options 2,467,884
Tax benefit related to stock options and warrants
Cash received for payments on notes receivable for common
stock issued to management and certain other individuals
Translation adjustment
Net earnings
- --------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 ---- ---- 70,213,603 0.7
Conversion of Class B to Class A common stock 2,035,986
Shares issued upon exercise of warrants 531,284
Option compensation expense
Long-term incentive plan compensation
Deferred stock plan compensation
Shares issued upon exercise of options 1,197,176
Tax benefit related to stock options and warrants
Treasury shares repurchased
Cash received for payments on notes receivable for common
stock issued to management and certain other individuals
Translation adjustment
Net earnings
- --------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 ---- $---- 73,978,049 $0.7
- --------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
4
- -----------------------------------------------------------------------------------------------------------------
Class B
Common Stock
-------------------- Retained Accumulated
Capital in Earnings Translation Treasury
Shares Amount Excess of Par (Deficit) Adjustment Stock Total
------ ------ ------------- --------- ----------- -------- -------
8,250,000 $ 0.1 $430.2 $(140.4) $---- $---- $295.5
----
(2,361,377) ----
5.0 ----
1.7 1.7
58.7 58.7
0.6 0.6
(1.8) (1.8)
0.2 0.2
2.9 2.9
32.4 32.4
- -----------------------------------------------------------------------------------------------------------------
5,888,623 0.1 494.6 (108.0) 2.9 ---- 390.2
(3,442,100) (0.1) ----
1.2 1.2
0.8 0.8
15.1 15.1
7.4 7.4
0.2 0.2
(2.4) (2.4)
127.8 127.8
- -----------------------------------------------------------------------------------------------------------------
2,446,523 ---- 519.3 19.8 0.5 ---- 540.3
(2,035,986) ----
1.1 1.1
0.6 0.6
0.1 0.1
1.8 1.8
7.8 7.8
6.4 6.4
(182.2) (182.2)
0.1 0.1
(24.3) (24.3)
149.0 149.0
- -----------------------------------------------------------------------------------------------------------------
410,537 $---- $537.2 $168.8 $(23.8) $(182.2) $500.7
- -----------------------------------------------------------------------------------------------------------------
5
Lexmark International Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Share Amounts)
1. ORGANIZATION AND BUSINESS
Lexmark International Group, Inc. (together with its subsidiaries, the
"company") is a global developer, manufacturer and supplier of laser and inkjet
printers and associated consumable supplies. The company also sells dot matrix
printers for printing single and multi-part forms by business users. The
company's core printer business targets the office and home markets. In addition
to its core printer business, the company develops, manufactures and markets a
broad line of other office imaging products which include supplies for
International Business Machines Corporation ("IBM") branded printers,
after-market supplies for other original equipment manufacturer ("OEM")
products, and typewriters and typewriter supplies that are sold under the IBM
trademark. The principal customers for the company's products are dealers,
retailers and distributors worldwide. The company employs marketing teams which
target large accounts to generate demand in selected industries worldwide. The
company's products are sold in over 150 countries in North and South America,
Europe, the Middle East, Africa, Asia, the Pacific Rim and the Caribbean.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts
of Lexmark International Group, Inc. and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Foreign Currency Translation:
Assets and liabilities of non-U.S. subsidiaries that operate in a local
currency environment are translated into U.S. dollars at period-end exchange
rates. Income and expense accounts are translated at average exchange rates
prevailing during the period. Adjustments arising from the translation of assets
and liabilities are accumulated as a separate component of stockholders' equity.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Estimates are used when accounting for such items as the allowance
for doubtful accounts, inventory reserves, product warranty, depreciation,
employee benefit plans and taxes.
6
Cash Equivalents:
All highly liquid investments with an original maturity of three months
or less at the company's date of purchase are considered to be cash equivalents.
Inventories:
Inventories are stated at the lower of average cost or market. The
company considers all raw materials to be in production upon their receipt.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost and depreciated over
their estimated useful lives using the straight-line method. Property, plant and
equipment accounts are relieved of the cost and related accumulated depreciation
when assets are disposed of or otherwise retired.
Revenue Recognition:
Sales are recognized when products are shipped to customers. A
provision for estimated sales returns is recorded in the period in which related
sales are recognized.
Advertising Costs:
The company expenses advertising costs when incurred. Advertising
expense was approximately $56.9 million, $49.3 million and $43.0 million in
1997, 1996 and 1995, respectively.
Income Taxes:
The company utilizes the liability method of accounting for income
taxes. This method requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse.
Earnings Per Share:
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 128, Earnings per
Share. Under SFAS No. 128, the company presents two earnings per share ("EPS")
amounts. Basic EPS are computed by dividing earnings available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflect the potential dilution of securities that could
share in the earnings, including stock options and warrants. EPS amounts have
been calculated and presented under the provisions of SFAS No. 128.
7
3. INVENTORIES
Inventories consisted of the following at December 31:
1997 1996
- ----------------------------------------------------
Work in process $211.2 $144.6
Finished goods 142.6 126.4
- ----------------------------------------------------
$353.8 $271.0
- ----------------------------------------------------
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December
31:
1997 1996
- ---------------------------------------------------
Land and improvements $ 16.2 $ 15.9
Buildings and improvements 171.9 184.9
Machinery and equipment 428.9 392.2
Information systems and furniture 124.4 118.7
- ---------------------------------------------------
741.4 711.7
Less accumulated depreciation 331.8 277.6
- ---------------------------------------------------
$409.6 $434.1
- ---------------------------------------------------
Depreciation expense was $76.8 million, $62.3 million and $71.2 million
for 1997, 1996 and 1995, respectively.
5. ACCRUED LIABILITIES
Accrued liabilities consisted of the following at December 31:
1997 1996
- -------------------------------------------------------
Compensation $ 58.7 $ 57.6
Income taxes payable 9.5 7.0
Fixed assets 9.0 26.8
Warranty 30.6 31.0
Value added tax 6.6 15.5
Deferred revenue 27.8 17.4
Other 85.3 66.7
- -------------------------------------------------------
$227.5 $222.0
- -------------------------------------------------------
8
6. DEBT
Long-term debt consisted of the following at December 31:
1997 1996
- ---------------------------------------------------------
Revolving credit facility
refinanced $20.0 $ -
Term loan refinanced 37.0 37.0
Senior subordinated notes, 14.25%
interest rate, due in 2001 - 120.0
Other - 6.2
- ---------------------------------------------------------
$57.0 $163.2
- ---------------------------------------------------------
In March 1997, the company prepaid its $120.0 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 1995, the company refinanced its term
loan and revolving credit facility. This early extinguishment of debt resulted
in an extraordinary charge of $22.1 million ($15.7 million net of tax benefit)
caused by the mark to market of a related hedging instrument and other fees.
In March 1997, the company entered into three-year interest rate swaps
with a total notional amount of $60.0 million, whereby the company pays interest
at a fixed rate of approximately 6.5% and receives interest at a floating rate
equal to the three-month London Inter Bank Offered Rate (LIBOR). The swaps serve
as a hedge of financings based on floating interest rates. The company also has
an interest rate/currency swap with a notional amount remaining of $36.7
million. The interest rate/currency swap matures on March 27, 1998. The
effective rate of interest on the term loan (after giving effect to the interest
rate/currency swap) was 6.7% at December 31, 1997.
In January 1998, the company entered into a new $300.0 million
unsecured, revolving credit facility with a group of banks. Upon entering the
new agreement, the company repaid the amounts outstanding on its existing term
loan and revolving credit facility. The revolving credit facility and term loan
at December 31, 1997 were classified as long-term, as the company had the intent
and ability, supported by the terms of the new revolving credit facility, to
obtain long-term financing.
The interest rate on the new credit facility ranges from 0.2% to 0.7%
above LIBOR, as adjusted under certain limited circumstances, based upon the
company's debt rating, if available, or based upon certain performance ratios.
In addition, the company pays a facility fee on the $300.0 million of 0.1% to
0.3% based upon the company's debt rating, if available, or based upon certain
performance ratios. The interest and facility fee rates are calculated
quarterly.
The $300.0 million credit agreement contains customary default
provisions, leverage and interest coverage restrictions and certain restrictions
on the incurrence of additional debt, liens, mergers or consolidations and
investments. Any amounts outstanding under the $300.0 million credit facility
are due upon the maturity of the facility on January 27, 2003.
Interest expense of $0.9 million, $1.2 million and $7.7 million in
1997, 1996 and 1995, respectively, related to the swaps discussed above,
previously outstanding interest rate/currency swaps and interest rate caps and
options is included in interest expense in the statement of earnings.
9
Total cash paid for interest amounted to $13.2 million, $24.2 million
and $41.4 million in 1997, 1996 and 1995, respectively.
7. STOCKHOLDERS' EQUITY
The Class A common stock is voting and exchangeable for Class B common
stock in very limited circumstances. The Class B common stock is non-voting and
is convertible, subject to certain limitations, into Class A common stock.
At December 31, 1997, approximately 77,300,000 and 1,750,000 shares of
Class A and Class B common stock were unissued and unreserved. These shares are
available for a variety of general corporate purposes, including future public
offerings to raise additional capital and for facilitating acquisitions.
The remaining warrants outstanding in connection with a technology
agreement with an unrelated party to purchase 634,365 shares of Class A common
stock at $6.67 per share were exercised during 1997.
In April 1996, the company's board of directors authorized the
repurchase of up to $50 million of its Class A common stock. In May 1997, the
company's board of directors authorized the repurchase of an additional $150
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. During the year ended December 31, 1997, the company
repurchased 6,438,114 shares at prices ranging from $21.25 to $33.75 per share
for an aggregate cost of approximately $182.2 million. In February 1998, the
company's board of directors authorized the repurchase of up to an additional
$200 million of its Class A common stock. This repurchase authority, like the
prior authorizations, 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.
In February 1998, the company's board of directors adopted a
stockholder rights plan (the "Rights Plan") which provides existing stockholders
with the right to purchase one one-hundredth (0.01) of a share of Series A
Junior Participating preferred stock for each share of common stock held in the
event of certain changes in the company's ownership. The rights will expire on
January 31, 2008, unless earlier redeemed by the company.
8. STOCK INCENTIVE PLANS
The company has established various stock incentive plans to encourage
employees and non-employee directors to remain with the company and to more
closely align their interests with those of the company's stockholders. Under
the employee plans, as of December 31, 1997 approximately 1,300,000 shares of
Class A common stock are reserved for future grants in the form of stock
options, stock appreciation rights, restricted stock, performance shares or
deferred stock units. Under the director plan, as of December 31, 1997
approximately 42,000 shares of Class A common stock are reserved for future
grants in the form of stock options and deferred stock units. As of December 31,
1997, awards under the programs have been limited to stock options, restricted
stock, performance shares and deferred stock units.
10
The exercise price of options awarded under these plans is equal to the
fair market value of the underlying common stock on the date of grant. All
options expire ten years from the date of grant and become fully vested at the
end of five years based upon continued employment or the completion of three
years of service on the board of directors.
The company recognized a non-cash compensation charge in 1995 of $60.6
million ($38.5 million net of tax benefit) for certain stock options outstanding
prior to the initial public offering in November 1995.
The company applies APB Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its plans. Accordingly,
no compensation expense has been recognized for its stock-based compensation
plans other than for restricted stock, performance-based awards and the non-cash
compensation charge mentioned in the preceding paragraph. Had compensation
expense for the company's stock-based compensation plans been determined based
on the fair value at the grant date for awards under these plans consistent with
the methodology prescribed under SFAS No. 123, Accounting for Stock-Based
Compensation, net earnings and earnings per share would have been reduced to the
pro forma amounts indicated in the table below:
1997 1996 1995
- -----------------------------------------------------------------------------
Net earnings - as reported $149.0 $127.8 $32.4
Net earnings - pro forma 145.1 125.0 29.9
Basic EPS - as reported $ 2.09 $ 1.78 $0.47
Basic EPS - pro forma 2.04 1.74 0.44
Diluted EPS - as reported $ 1.98 $ 1.69 $ 0.44
Diluted EPS - pro forma 1.93 1.65 0.40
- -----------------------------------------------------------------------------
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
1997 1996 1995
- -------------------------------------------------------------------------
Expected dividend yield - - -
Expected stock price volatility 44% 45% 45%
Weighted average risk-free 6.2% 5.8% 5.9%
interest rate
Weighted average expected life of options
(years) 4.8 3.9 4.4
- -------------------------------------------------------------------------
The weighted average fair value of options granted during 1997, 1996
and 1995 was $11.84, $7.67 and $8.16 per share, respectively.
The pro forma effects on net income for 1997, 1996 and 1995 are not
representative of the pro forma effect on net income in future years because
they do not take into consideration pro forma compensation expense related to
grants made prior to 1995.
A summary of the status of all of the company's stock incentive plans
as of December 31, 1997, 1996 and 1995 and changes during the years then ended
is presented below:
11
Weighted
Average
Exercise
Number Price
- ---------------------------------------------------------------
Outstanding at January 1, 1995 8,048,010 $ 7.26
Granted 2,609,007 19.14
Exercised (987,108) 7.09
Forfeited or canceled (241,128) 8.20
- ---------------------------------------------------------------
Outstanding at December 31, 1995 9,428,781 10.54
Granted 508,532 19.39
Exercised (2,664,363) 7.11
Forfeited or canceled (321,088) 14.81
- ---------------------------------------------------------------
Outstanding at December 31, 1996 6,951,862 12.31
Granted 1,355,755 25.67
Exercised (1,276,408) 7.82
Forfeited or canceled (239,284) 18.40
- ---------------------------------------------------------------
Outstanding at December 31, 1997 6,791,925 $15.58
- ---------------------------------------------------------------
As of December 31, 1997, 1996, and 1995 there were 3,678,324, 4,574,734
and 6,787,426 options exercisable, respectively.
The following tables summarize information about stock options
outstanding at December 31, 1997:
Options Outstanding
- ------------------------------------------------------------------------
Number Weighted-Average
Range of Outstanding Remaining Weighted-Average
Exercise Prices at Contractual Exercise Price
12/31/97 Life
- ------------------------------------------------------------------------
$ 6.67 to $14.75 2,817,330 4.0 years $ 7.52
15.00 to 19.75 603,574 7.3 16.19
20.00 to 36.44 3,371,021 8.4 22.25
- ------------------------------------------------------------------------
$ 6.67 to $36.44 6,791,925 6.5 $15.58
- ------------------------------------------------------------------------
Options Exercisable
- ----------------------------------------------------
Number
Range of Exercisable Weighted-Average
Exercise Prices at 12/31/97 Exercise Price
- ----------------------------------------------------
$ 6.67 to $14.75 2,701,118 $ 7.37
15.00 to 19.75 282,646 16.07
20.00 to 36.44 694,560 20.40
- ----------------------------------------------------
$ 6.67 to $36.44 3,678,324 $10.50
- ----------------------------------------------------
12
9. INCOME TAXES
The provision for income taxes consisted of the following:
1997 1996 1995
- --------------------------------------------------------
Currently payable:
Federal $37.8 $50.0 $32.3
Non-U.S. 9.9 5.3 5.1
State and local 3.3 6.2 8.6
- --------------------------------------------------------
51.0 61.5 46.0
Deferred payable (benefit):
Federal 34.1 12.0 (23.9)
Non-U.S. 2.6 0.1 (0.4)
State and local 4.0 0.2 (6.5)
- --------------------------------------------------------
40.7 12.3 (30.8)
- --------------------------------------------------------
Provision for income taxes $91.7 $73.8 $15.2
- --------------------------------------------------------
Earnings before income taxes were as follows:
1997 1996 1995
- ---------------------------------------------------------
U.S. $166.7 $129.6 $27.3
Non-U.S. 88.0 72.0 36.0
- ----------------------------------------------------------
Earnings before income taxes $254.7 $201.6 $63.3
- ----------------------------------------------------------
The U.S. and non-U.S. earnings before income taxes reflect write-offs
of certain intercompany obligations owed to the U.S. totaling $10.6 million in
1995.
The company realized an income tax benefit from the exercise of certain
stock options and warrants in 1997 and 1996 of $6.4 million and $7.4 million,
respectively. This benefit resulted in a decrease in current income taxes
payable and an increase in capital in excess of par.
Significant components of deferred income taxes were as follows:
1997 1996
- --------------------------------------------------------
Deferred tax assets:
Tax loss carryforwards $ 14.9 $ 24.2
Intangible assets 7.0 10.3
Alternative minimum tax credits - 6.3
Unexercised stock options 6.4 12.4
Inventories 17.5 20.2
Valuation allowance (20.8) (32.3)
- --------------------------------------------------------
Total deferred tax assets 25.0 41.1
- --------------------------------------------------------
Deferred tax liabilities:
Prepaid expenses 3.1 4.6
Property, plant and equipment 19.9 17.2
Other 24.1 0.7
- --------------------------------------------------------
Total deferred tax liabilities 47.1 22.5
- --------------------------------------------------------
Net deferred tax asset (liability) $(22.1) $ 18.6
- --------------------------------------------------------
13
The net decrease in the total valuation allowance for the years ended
December 31, 1997 and 1996 was $11.5 million and $44.9 million, respectively.
The company has non-U.S. tax loss carryforwards of $53.0 million including $19.7
million which expire between the years 2000 and 2004. Of these non-U.S. tax loss
carryforwards, $13.4 million are not expected to provide a future benefit
because they are attributable to certain non-U.S. entities that are also taxable
in the U.S.
A reconciliation of the provision for income taxes using the U.S.
statutory rate and the company's effective tax rate was as follows:
1997 1996 1995
---------------- --------------- ---------------
Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------
Provision for income taxes at
statutory rate $89.2 35.0% $70.5 35.0% $22.2 35.0%
State and local income taxes, net of
federal tax benefi 7.3 2.9 6.4 3.2 1.4 2.2
Losses providing no tax benefit 5.8 2.3 45.1 22.3 31.2 49.3
Change in the beginning-of-the-year
balance of the valuation allowance
for deferred tax assets affecting
provision (11.5) (4.5) (44.9) (22.3) (33.6) (53.1)
Research and development credit (5.5) (2.2) (2.9) (1.4) (3.8) (6.0)
Foreign sales corporation (2.6) (1.0) (5.0) (2.5) (2.3) (3.6)
Non-U.S. income exempt from tax - - - - (3.7) (5.8)
Other 9.0 3.5 4.6 2.3 3.8 6.0
- ------------------------------------------------------------------------------------------------
Provision for income taxes $91.7 36.0% $73.8 36.6% $15.2 24.0%
- ------------------------------------------------------------------------------------------------
Cash paid for income taxes was $36.3 million, $60.7 million and $24.1
million in 1997, 1996 and 1995, respectively.
10. EMPLOYEE PENSION PLANS
The company and its subsidiaries have retirement plans covering
substantially all regular employees. The total pension expense of all defined
benefit plans is determined using the projected unit credit actuarial method.
Plan assets are invested in government securities, corporate debt,
annuity contracts and equity securities. It is the company's policy to fund
amounts for pensions sufficient to meet the minimum requirements prescribed by
various government regulations and such additional amounts as the company may
determine to be appropriate.
U.S. Plans: Regular full-time employees in the U.S. are covered by a
noncontributory defined benefit plan, which is funded by company contributions
to an irrevocable trust fund held for the sole benefit of employees. Monthly
retirement benefits are based on service and compensation. Benefits become
vested upon completion of five years of service. The company has a supplemental
retirement plan for employees whose benefits under the defined benefit plan are
limited because of restrictions imposed by federal tax laws.
Non-U.S. Plans: Most subsidiaries have retirement plans covering
substantially all employees funded through various fiduciary-type arrangements.
Retirement benefits are generally based on years of service and compensation
during a fixed number of years immediately prior to retirement.
14
Net periodic pension expense included the following components:
U.S. Plans Non-U.S. Plans
--------------------------- -------------------------
1997 1996 1995 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Service cost $10.9 $15.5 $12.3 $2.1 $2.0 $1.9
Interest cost 24.3 23.0 20.3 4.2 4.5 4.5
Actual (gain) loss return on
plan assets (70.2) (27.2) (82.4) (4.7) (4.3) (4.9)
Net amortization and deferral 38.3 (5.8) 56.3 1.1 0.6 1.3
Settlement/curtailment losses - - - 0.3 0.9 -
- ----------------------------------------------------------------------------------------------------------
Net periodic pension expense $ 3.3 $ 5.5 $ 6.5 $3.0 $3.7 $2.8
- ----------------------------------------------------------------------------------------------------------
The funded status at December 31 was as follows:
U.S. Plans Non-U.S. Plans
-------------------- ---------------------
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $266.2 $218.5 $ 57.7 $ 53.7
- ----------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $305.8 $256.0 $ 61.1 $ 57.3
- ----------------------------------------------------------------------------------------------------------
Plan assets at fair value $386.5 $322.8 $ 56.3 $ 54.9
Projected benefit obligation 380.3 303.2 70.6 66.7
- ----------------------------------------------------------------------------------------------------------
Plan assets in excess of (or less than) projected
benefit obligation 6.2 19.6 (14.3) (11.8)
Unrecognized net (gain) loss (1.6) (11.8) 7.1 3.9
Additional minimum liability - - (3.1) (2.5)
- ----------------------------------------------------------------------------------------------------------
Prepaid pension cost (pension liability) $ 4.6 $ 7.8 $(10.3) $(10.4)
- ----------------------------------------------------------------------------------------------------------
Significant actuarial assumptions used to determine the projected
benefit obligation and to compute the expected long-term return on assets were
as follows:
U.S. Plans Non-U.S. Plans
----------------------------- ------------------------------
1997 1996 1995 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
Discount rate 7.0% 7.5% 7.0% 6.3% 6.8% 7.5%
Long-term rate of compensation increase 4.5% 5.0% 4.5% 3.9% 4.3% 4.8%
Expected long-term rate of return on
plan assets 10.0% 10.0% 10.0% 7.2% 7.4% 8.1%
- ------------------------------------------------------------------------------------------------------------
The actuarial assumptions for non-U.S. plans represent weighted
averages reflecting the combined assumptions for all non-U.S. plans.
The company also sponsors various defined contribution plans for
employees in certain countries. Company contributions are based upon a
percentage of employees' contributions. The company's expense under these plans
amounted to $4.5 million, $4.4 million and $2.9 million in 1997, 1996 and 1995,
respectively.
15
11. OTHER POSTRETIREMENT BENEFIT PLANS
The company and certain of its non-U.S. subsidiaries have medical,
dental and life insurance plans for retirees. Most retirees outside the U.S. are
covered by government-sponsored programs. The company provides U.S. retirees
with medical benefits similar to those provided to full-time employees, subject
to certain maximums. The company does not fund its postretirement benefit plans.
All U.S. full-time employees who meet certain years of service requirements are
eligible for postretirement benefits.
Net periodic U.S. postretirement benefit expense included the following
components:
1997 1996 1995
- --------------------------------------------------------
Service cost $3.0 $3.1 $1.7
Interest cost 2.0 1.8 1.4
Amortization of net loss
from earlier periods - 0.2 -
- --------------------------------------------------------
Net periodic U.S.
postretirement benefit expense $5.0 $5.1 $3.1
- --------------------------------------------------------
The U.S. postretirement benefit liability at December 31 was as follows:
1997 1996
- -----------------------------------------------------------
Active employees, not fully eligible
for benefits $23.2 $22.3
Fully eligible active plan participants 9.8 4.8
- -----------------------------------------------------------
Accumulated postretirement benefit
obligation 33.0 27.1
Unrecognized net loss (4.3) (3.0)
- -----------------------------------------------------------
Postretirement benefit liability $28.7 $24.1
- -----------------------------------------------------------
Assumed medical cost inflation for 1998, 1999, and 2000 is projected to
be 8.7%, 7.9% and 4.0%, respectively, for an average annual medical cost
increase over the next three years of 6.9%. No medical inflation is assumed
after 2000, by which time medical costs are assumed to have doubled from 1991
levels. Since the plan caps medical costs at twice the 1991 levels, the effect
of a 1% increase in the assumed medical inflation rate is not material. The
assumed discount rate for postretirement medical benefits is 7.2%, 7.7% and 7.2%
for 1997, 1996 and 1995, respectively.
IBM agreed to pay for its pro rata share (currently estimated at $66.5
million) of future postretirement benefits for all company employees based on
relative years of service with IBM and the company.
12. COMMITMENTS
The company is committed under operating leases (containing various
renewal options) for rental of office and manufacturing space and equipment.
Rent expense (net of rental income of $5.6 million, $5.8 million and $5.6
million) was $16.0 million, $13.0 million and $9.9 million in 1997, 1996 and
1995, respectively. Future minimum rentals under terms of non-cancelable
operating leases at December 31 are: 1998-$18.3 million; 1999-$15.2 million;
2000-$11.5 million; 2001-$7.6 million; 2002-$4.3 million and thereafter-$3.2
million.
16
13. DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The company manages risk arising from fluctuations in interest rates
and currency exchange rates by using derivative financial instruments. The
company manages exposure to counterparty credit risk by entering into derivative
financial instruments with highly rated institutions that can be expected to
fully perform under the terms of such agreements. The company does not hold or
issue financial instruments for trading purposes. Where appropriate, the company
arranges master netting agreements.
Instruments used as hedges must be effective at reducing the risk
associated with the exposure being hedged and must be designated as a hedge at
the inception of the contract. Accordingly, changes in market values of hedge
instruments must be highly correlated with changes in market values of
underlying hedged items both at inception of the hedge and over the life of the
hedge contract. Any instrument not qualifying as a hedge or designated but
ineffective as a hedge is marked to market and recognized in earnings
immediately.
Interest Rate Risk Management: The company has, from time to time,
utilized interest rate swaps, caps and options to maintain an appropriate
balance between fixed and floating rate debt in order to minimize the effect of
changing interest rates on earnings.
Interest rate swaps and interest rate/currency swaps are included in
the statement of financial position as accrued liabilities and other
liabilities, respectively. Interest differentials resulting from interest rate
swap agreements used to change the interest rate characteristics of debt are
recorded on an accrual basis as an adjustment to interest expense. Premiums paid
for interest rate cap and option agreements are included in the statement of
financial position as current assets and non-current assets and are charged to
interest expense over the terms of the agreements or when written off, if the
option expires unexercised. Amounts receivable under cap agreements and gains
realized on options are recognized as reductions of interest expense over the
terms of the agreements. In the event of an early termination of an interest
rate swap agreement designated as a hedge, the gain or loss is deferred,
recorded in non-current assets or liabilities, and recognized as an adjustment
to interest expense over the remaining term of the contract.
For additional information related to derivative financial instruments
used to manage interest rate risk, see Note 6.
Foreign Exchange Risk Management: The company enters into foreign
currency swaps, options, and forward exchange contracts in its management of
foreign currency exposures. Realized and unrealized gains and losses on
contracts that are designated as hedges are recognized in earnings in the same
period as the underlying hedged transactions. Contracts that do not qualify as
hedges for accounting purposes are marked to market and the resulting gains and
losses are recognized in current earnings. The cash flows resulting from hedge
contracts are classified as cash flows from operating activities.
Notional amounts at December 31 were as follows:
1997 1996
- ---------------------------------------------------
Forward contracts $205.7 $102.4
Options purchased 249.8 241.3
Options written (104.9) (97.3)
- ---------------------------------------------------
Forward contracts and purchased options are used to hedge firm and
anticipated purchases of inventory and are included in the statement of
financial position as current assets and accrued liabilities. These instruments
17
typically have remaining terms of one year or less. Gains and losses receiving
hedge accounting treatment are recognized in earnings in the same period as the
underlying hedged transactions. In the event of an early termination of a
currency exchange agreement designated as a hedge, the gain or loss and any fees
paid continue to be deferred and are included in the settlement of the
underlying transaction.
The company purchases and writes offsetting foreign currency options,
which do not qualify for hedge accounting treatment, for the purpose of reducing
the net cost of its hedging strategies. These instruments are included in the
statement of financial position as current assets and accrued liabilities,
respectively.
Concentrations of Credit Risk: The company's main concentrations of
credit risk consist primarily of temporary cash investments and trade
receivables. Temporary cash investments are placed with various financial
institutions. Company guidelines have been established relating to the amount of
deposits or investments that may be held by each financial institution. IBM is
the most significant trade customer of the company (see Note 16); otherwise,
credit risk related to trade receivables is dispersed across a large number of
customers located in various geographic areas. The company also has off-balance
sheet credit risk for the reimbursement from IBM of its pro rata share of
postretirement benefits to be paid by the company (see Note 11).
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying amounts and fair values of
financial instruments with fair values different than their carrying amounts at
December 31:
1997 1996
Asset (Liability) Asset(Liability)
- -------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Non-derivatives:
Long-term debt (senior subordinated notes) $- $- $(120.0) (129.0)
Derivatives:
Prepaid expenses and other current assets 1.4 3.0 1.5 2.2
Accrued liabilities - (0.7) - (0.6)
Other assets (liabilities) 0.4 0.6 (6.0) (7.7)
- --------------------------------------------------------------------------------
The carrying amounts in the table are included in the statement of
financial position under the indicated captions. The amounts in the table are
presented net of amounts offset in accordance with FASB Interpretation No. 39,
Offsetting of Amounts Related to Certain Contracts.
Cash and cash equivalents and trade receivables are valued at their
carrying amounts as recorded in the statement of financial position, and are
reasonable estimates of fair value given the relatively short period to maturity
for these instruments. The carrying value of the term loan approximates its fair
value given its variable rate interest provisions. Derivative financial
instruments which do not qualify for hedge accounting are recorded in the
statement of financial position at their fair value. The fair value of the
senior subordinated notes was estimated based on current rates available to the
company for debt with similar characteristics. Fair values for the company's
derivative financial instruments are based on quoted market prices of comparable
instruments or, if none are available, on pricing models or formulas using
current assumptions.
18
15. SALES OF RECEIVABLES
The company entered into an agreement to sell up to $100.0 million of
U.S. trade receivables on a limited recourse basis. As collections reduce
previously sold receivables, the company may replenish these with new
receivables. At December 31, 1997, U.S. trade receivables of $100.0 million had
been sold and, due to the revolving nature of the agreement, $100.0 million also
remained outstanding. At December 31, 1996, trade receivables of $65.0 million
were sold and outstanding. The agreement, which contains net worth and fixed
charge coverage restrictions, must be renewed annually, and is expected to be
renewed upon its expiration in April 1998. The risk the company bears from bad
debt losses on U.S. trade receivables sold is limited to approximately 10% of
the outstanding balance of receivables sold. The company addresses this risk of
loss in its allowance for doubtful accounts. Receivables sold may not include
amounts over 60 days past due or concentrations over certain limits with any one
customer.
The company entered into an agreement to sell up to 22 million deutsche
marks of Germany trade receivables on a limited recourse basis. At December 31,
1997, Germany trade receivables of 21.8 million deutsche marks ($12.3 million at
December 31, 1997 exchange rates) were outstanding under this program and, as
collections reduce previously sold receivables, the company may replenish these
with new receivables. At December 31, 1996, German trade receivables of 21.8
million deutsche marks ($14.0 million at December 31, 1996 exchange rates) were
sold and outstanding.
During 1997, the company adopted 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 LRC's assets prior to any value in
LRC becoming available for equity claims of an LRC stockholder.
The company sells a portion of its non-U.S. trade receivables on a
recourse basis. Proceeds from these sales totaled $18.6 million, $48.9 million
and $86.9 million in 1997, 1996 and 1995, respectively. All amounts had been
collected at December 31, 1997 and approximately $5.3 million remained
uncollected at December 31, 1996.
Expenses incurred under these programs totaling $5.2 million, $5.4
million and $3.5 million for 1997, 1996 and 1995 respectively, are included in
other non-operating expense.
16. MAJOR CUSTOMER
IBM was considered a major customer prior to 1996, and accounted for
approximately 4%, 8% and 20% of the company's total revenues in 1997, 1996 and
1995, respectively.
19
17. EARNINGS PER SHARE
For the Year Ended December 31, 1997
--------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Earnings before extraordinary item $ 163.0
Basic EPS
Earnings available to common
stockholders 163.0 71,314,311 $ 2.29
Effect of Dilutive Securities
Warrants - 324,238
Long-term incentive plan - 10,430
Stock options - 3,519,797
------- ----------
Diluted EPS
Earnings available to common
stockholders plus assumed
conversions $ 163.0 75,168,776 $ 2.17
--------------------------------------------
Options to purchase an additional 42,948 shares of Class A common stock at
prices between $32.56 and $36.44 per share were outstanding at December 31, 1997
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.
For the Year Ended December 31, 1996
--------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Earnings before extraordinary item $127.8
Basic EPS
Earnings available to common
stockholders 127.8 71,629,572 $1.78
Effect of Dilutive Securities
Warrants - 424,285
Long-term incentive plan - 34,563
Stock options - 3,577,314
------ ----------
Diluted EPS
Earnings available to common
stockholders plus assumed
conversions $127.8 75,665,734 $1.69
--------------------------------------------
Options to purchase an additional 25,124 shares of Class A common stock at
prices between $24.75 and $26.75 per share were outstanding at December 31, 1996
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.
20
For the Year Ended December 31, 1995
--------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Earnings before extraordinary item $48.1
Basic EPS
Earnings available to common
stockholders 48.1 68,859,900 $0.70
Effect of Dilutive Securities
Warrants - 548,421
Long-term incentive plan - 37,165
Stock options - 4,754,793
----- ----------
Diluted EPS
Earnings available to common
stockholders plus assumed
conversions $48.1 74,200,279 $ 0.65
--------------------------------------------
Options to purchase an additional 2,114,321 shares of Class A common stock at
prices between $19.75 and $22.25 per share were outstanding at December 31, 1995
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.
21
18. INTERNATIONAL OPERATIONS
The company operates in the office products industry segment and
manufactures its products in the U.S., France, Australia, Mexico and Scotland
and markets them throughout the world. Intergeographic transfers are accounted
for on an arm's length pricing basis. Revenues from international operations,
including exports from the U.S., represent approximately half of consolidated
revenues. Summarized financial data by region follows:
1997 1996 1995
- ------------------------------------------------------------------------------
Revenues:
U.S.
Trade (1) $1,283.6 $1,282.5 $1,278.4
Intercompany 575.7 546.6 443.7
- ------------------------------------------------------------------------------
Total U.S. 1,859.3 1,829.1 1,722.1
Europe
Trade 919.1 858.7 731.7
Intercompany 100.5 23.1 3.2
- ------------------------------------------------------------------------------
Total Europe 1,019.6 881.8 734.9
Other international
Trade 290.8 236.4 147.7
Intercompany 7.2 2.9 2.8
- ------------------------------------------------------------------------------
Total other international 298.0 239.3 150.5
- ------------------------------------------------------------------------------
3,176.9 2,950.2 2,607.5
Eliminations (683.4) (572.6) (449.7)
- ------------------------------------------------------------------------------
Total $2,493.5 $2,377.6 $2,157.8
- ------------------------------------------------------------------------------
Operating income: (2)
U.S. $ 178.0 $ 154.3 $ 65.8
Europe 96.4 77.5 46.2
Other international (1.1) 3.5 2.3
Eliminations 1.3 (4.9) (5.8)
- ------------------------------------------------------------------------------
Total $ 274.6 $ 230.4 $ 108.5
- ------------------------------------------------------------------------------
Total assets:
U.S. $1,024.4 $1,034.3 $1,016.1
Europe 545.9 385.9 319.8
Other international 119.8 92.7 53.8
Eliminations (481.9) (291.4) (246.8)
- ------------------------------------------------------------------------------
Total $1,208.2 $1,221.5 $1,142.9
- ------------------------------------------------------------------------------
(1) U.S. trade revenues include exports to international locations.
(2) Includes non-cash compensation charge in 1995 of $45.7 million, $13.6
million and $1.3 million for the U.S., Europe, and other international,
respectively.
22
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
1997:
Revenues $583.4 $556.3 $618.3 $735.5
Gross profit 199.8 193.4 215.6 261.2
Operating income 55.7 57.5 67.0 94.4
Earnings before extraordinary item 30.7 34.3 41.0 57.0
Net earnings 16.7 34.3 41.0 57.0
Basic EPS before extraordinary item* $ 0.42 $ 0.48 $ 0.57 $ 0.83
Diluted EPS before extraordinary item* 0.40 0.45 0.54 0.78
Basic EPS* 0.23 0.48 0.57 0.83
Diluted EPS* 0.22 0.45 0.54 0.78
Stock prices:
High $29.63 $30.50 $36.31 $38.00
Low 22.00 19.13 26.88 29.56
1996:
Revenues $587.8 $555.3 $547.6 $686.9
Gross profit 182.4 172.2 173.9 218.9
Operating income 44.0 52.9 55.1 78.4
Net earnings 21.6 30.8 30.2 45.2
Basic EPS* $ 0.31 $ 0.42 $ 0.42 $ 0.62
Diluted EPS* 0.29 0.40 0.40 0.59
Stock prices:
High $23.25 $23.13 $20.88 $27.75
Low 16.00 17.88 13.38 18.88
- --------------------------------------------------------------------------------
*The sum of the quarterly earnings per share amounts do not equal the
year-to-date earnings per share due to changes in average share calculations.
This is in accordance with prescribed reporting requirements.
First quarter 1997 net earnings were reduced by an extraordinary charge
of $22.4 million ($14.0 million net of tax benefit) caused by an early
extinguishment of the company's senior subordinated notes.
20. NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, effective for fiscal years beginning after December 15, 1997. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This statement does not require a specific format for that
financial statement but requires that an entity display an amount representing
total comprehensive income for the period in that financial statement. This
statement requires that an entity classify items of other comprehensive income
by their nature in a financial statement. For example, other comprehensive
income may include foreign currency items, minimum pension liability
adjustments, and unrealized gains and losses on certain investments in debt and
equity securities. In addition, the accumulated balance of other comprehensive
income must be displayed separately from retained earnings and additional
23
paid-in capital in the equity section of a statement of financial position.
Reclassification of financial statements for earlier periods, provided for
comparative purposes, is required. Based on current accounting standards, this
new accounting standard is not expected to have a material impact on the
company's consolidated financial statements. The company will adopt this
accounting standard on January 1, 1998, as required.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the
enterprise's chief operating decision maker in deciding how to allocate
resources and in assessing performance. This statement requires reporting
segment profit or loss, certain specific revenue and expense items and segment
assets. It also requires reconciliations of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed for
segments to corresponding amounts reported in the consolidated financial
statements. Restatement of comparative information for earlier periods presented
is required in the initial year of application. Interim information is not
required until the second year of application, at which time comparative
information is required. This statement's requirements are disclosure oriented
and, therefore, will not have a material impact on the company's financial
position, results of operations or liquidity. The company will adopt this
accounting standard on January 1, 1998, as required.
24
21. SUMMARIZED FINANCIAL INFORMATION
The following is consolidated summarized financial information of Lexmark
International, Inc., a wholly-owned subsidiary of Lexmark International Group,
Inc.
1997 1996 1995
---- ---- ----
Statement of Financial Position Data:
Current assets $776.1 $765.1 $715.7
Noncurrent assets 432.1 456.4 427.2
Current liabilities 551.4 423.9 490.5
Noncurrent liabilities 160.0 259.9 264.7
Statement of Earnings Data:
Revenues $2,493.5 $2,377.6 $2,157.8
Gross profit 870.0 747.4 669.9
Earnings before extraordinary item 163.0 127.8 48.1
Net earnings 149.0 127.8 32.4
Current liabilities at December 31, 1997, 1996 and 1995 include $3.9 million,
$2.6 million and $2.5 million, respectively, that is owed to Lexmark
International Group, Inc.
25
MANAGEMENT'S REPORT ON
FINANCIAL STATEMENTS
The consolidated financial statements and related information included in this
Financial Report are the responsibility of management and have been reported in
conformity with generally accepted accounting principles. All other financial
data in this Annual Report have been presented on a basis consistent with the
information included in the consolidated financial statements. Lexmark
International Group, Inc. maintains a system of financial controls and
procedures, which includes the work of corporate auditors, which we believe
provides reasonable assurance that the financial records are reliable in all
material respects for preparing the consolidated financial statements and
maintaining accountability for assets. The concept of reasonable assurance is
based on the recognition that the cost of a system of financial controls must be
related to the benefits derived and that the balancing of those factors requires
estimates and judgment. This system of financial controls is reviewed, modified
and improved as changes occur in business conditions and operations, and as a
result of suggestions from the corporate auditors and Coopers & Lybrand L.L.P.
The Finance & Audit Committee, composed of outside members of the Board of
Directors, meets periodically with management, the independent accountants and
the corporate auditors, for the purpose of monitoring their activities to ensure
that each is properly discharging its responsibilities. The Finance & Audit
Committee, independent accountants, and corporate auditors have free access to
one another to discuss their findings.
/s/ Marvin L. Mann
Marvin L. Mann
Chairman and chief executive officer
/s/ Gary E. Morin
Gary E. Morin
Vice president and chief financial officer
26
REPORT OF INDEPENDENT ACCOUNTANTS
To the board of directors of Lexmark International Group, Inc.
We have audited the accompanying consolidated statements of financial
position of Lexmark International Group, Inc. and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of earnings, cash
flows and stockholders' equity for each of the three years in the period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Lexmark International Group, Inc. and subsidiaries as of December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Lexington, Kentucky
February 18, 1998
27