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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
X For the Quarterly Period Ended September 30, 1998
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 West New Circle Road
Lexington, Kentucky 40550
(Address of principal executive offices) (Zip Code)
(606) 232-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
The registrant had 65,356,685 shares outstanding (excluding shares held in
treasury) of Class A common stock, par value $0.01 per share, as of the close of
business on October 30, 1998.
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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 AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997.......2
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION (Unaudited)
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997.......................3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997.......................4
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited).......5-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (Unaudited)....................10-15
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................16
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 Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues $743.8 $618.3 $2,113.2 $1,758.0
Cost of revenues 475.9 402.7 1,342.3 1,149.2
------ ------ -------- --------
Gross profit 267.9 215.6 770.9 608.8
Research and development 44.0 32.0 118.7 94.4
Selling, general and administrative 132.5 116.6 397.6 334.2
------ ------ -------- --------
Operating expenses 176.5 148.6 516.3 428.6
------ ------ -------- --------
Operating income 91.4 67.0 254.6 180.2
Interest expense 3.3 1.7 8.4 8.0
Amortization of deferred financing costs and other 1.2 2.2 4.0 6.6
------ ------ -------- --------
Earnings before income taxes and extraordinary item 86.9 63.1 242.2 165.6
Provision for income taxes 29.1 22.1 81.1 59.6
------ ------ -------- --------
Earnings before extraordinary item 57.8 41.0 161.1 106.0
Extraordinary loss on extinguishment of debt
(net of related tax benefit of $8.4) - - - (14.0)
------ ------ -------- --------
Net earnings $ 57.8 $ 41.0 $ 161.1 $ 92.0
====== ====== ======== ========
Basic earnings per share:
Before extraordinary item $ 0.87 $ 0.57 $ 2.41 $ 1.47
Extraordinary loss - - - (0.19)
------ ------ -------- --------
Net earnings per share $ 0.87 $ 0.57 $ 2.41 $ 1.28
====== ====== ======== ========
Diluted earnings per share:
Before extraordinary item $ 0.81 $ 0.54 $ 2.25 $ 1.39
Extraordinary loss - - - (0.18)
------ ------ -------- --------
Net earnings per share $ 0.81 $ 0.54 $ 2.25 $ 1.21
====== ====== ======== ========
Shares used in per share calculation:
Basic 66.3 71.5 66.9 72.1
====== ====== ======== ========
Diluted 71.1 75.7 71.6 75.9
====== ====== ======== ========
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)
September 30 December 31
1998 1997
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 28.2 $ 43.0
Trade receivables, net of allowance of $21 in 1998 and $19 in 1997 421.7 318.9
Inventories 411.6 353.8
Prepaid expenses and other current assets 74.5 60.4
-------- --------
Total current assets 936.0 776.1
Property, plant and equipment, net 415.8 409.6
Other assets 25.9 22.5
-------- --------
Total assets $1,377.7 $1,208.2
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 36.0 $ 18.0
Accounts payable 235.5 302.0
Accrued liabilities 331.5 227.5
-------- --------
Total current liabilities 603.0 547.5
Long-term debt 148.6 57.0
Other liabilities 110.5 103.0
-------- --------
Total liabilities 862.1 707.5
-------- --------
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; 65,712,168 and
67,539,935 outstanding in 1998 and 1997, respectively 0.8 0.7
Class B, 10,000,000 shares authorized; 0 and
410,537 outstanding in 1998 and 1997, respectively - -
Capital in excess of par 548.1 537.2
Retained earnings 329.9 168.8
Accumulated other comprehensive earnings (loss) (26.2) (23.8)
Treasury stock, at cost; 9,570,087 and 6,438,114 shares in 1998 and
1997, respectively (337.0) (182.2)
-------- --------
Total stockholders' equity 515.6 500.7
-------- --------
Total liabilities and stockholders' equity $1,377.7 $1,208.2
======== ========
See notes to consolidated condensed financial statements.
3
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Nine Months Ended
September 30
-----------------
1998 1997
Cash flows from operating activities:
Net earnings $161.1 $ 92.0
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 52.5 56.3
Extraordinary loss on extinguishment of debt - 22.4
Deferred taxes (0.3) 8.9
Other non-cash charges to operations 15.2 17.4
------ ------
228.5 197.0
Change in assets and liabilities:
Trade receivables (90.5) (24.4)
Trade receivables programs (12.3) 21.5
Inventories (57.8) (84.1)
Accounts payable (66.5) 22.9
Accrued liabilities 104.0 8.4
Other assets and liabilities (19.4) (32.6)
------ ------
Net cash provided by operating activities 86.0 108.7
------ ------
Cash flows from investing activities:
Purchases of property, plant and equipment (61.4) (47.8)
Proceeds from sale of property, plant and equipment 0.9 0.2
------ ------
Net cash used for investing activities (60.5) (47.6)
------ ------
Cash flows from financing activities:
Increase in short-term debt 18.0 102.5
Principal payments on long-term debt (207.0) (125.5)
Proceeds from issuance of long-term debt, net of
issuance costs of $1.3 in 1998 297.2 0.2
Charges related to extinguishment of debt - (22.4)
Purchase of treasury stock (154.9) (85.6)
Exercise of stock options and warrants 6.4 8.2
------ ------
Net cash used for financing activities (40.3) (122.6)
------ ------
Effect of exchange rate changes on cash - (2.3)
------ ------
Net decrease in cash and cash equivalents (14.8) (63.8)
Cash and cash equivalents - beginning of period 43.0 119.3
------ ------
Cash and cash equivalents - end of period $ 28.2 $ 55.5
====== ======
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 Lexmark International Group, Inc. ("Group" and together
with its subsidiaries, the "company") 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, 1997.
2. INVENTORIES
(Dollars in millions)
Inventories consist of the following:
September 30 December 31
1998 1997
----- ----
Work in process $188.6 $211.2
Finished goods 223.0 142.6
------ ------
$411.6 $353.8
====== ======
3. STOCKHOLDERS' EQUITY
During the three months ended September 30, 1998, Group repurchased
724,400 shares of its Class A common stock in the open market at prices
ranging from $56.38 to $66.94 for an aggregate cost of approximately
$45.6 million. As of September 30, 1998, Group held, net of issuances, a
total of 9,570,087 shares at an aggregate cost of approximately $337.0
million.
4. LONG-TERM DEBT
In May 1998, Lexmark International, Inc., a wholly-owned subsidiary of
Group ("International"), completed a public offering of $150 million
principal amount of its 6.75% senior notes due May 15, 2008. The senior
notes were priced at 98.998%, to yield 6.89% to maturity. The senior
notes are guaranteed by Group. A substantial portion of the net proceeds
from the sale of the senior notes was used to reduce existing debt
outstanding under the company's credit facility. There are no sinking
fund requirements on the senior notes and they may be redeemed at any
time, at a redemption price as described in the related indenture
agreement, in whole or in part, at the option of International.
5
5. OTHER COMPREHENSIVE EARNINGS (LOSS)
(Dollars in millions)
Effective January 1, 1998 the company adopted Statement of Financial
Accounting Standard ("SFAS") No. 130, Reporting Comprehensive Income.
This statement requires that all items recognized under accounting
standards as components of comprehensive earnings be reported in a
financial statement. This statement also requires that an entity classify
items of other comprehensive earnings by their nature in a financial
statement. For example, other comprehensive earnings may include foreign
currency translation adjustments, minimum pension liability adjustments,
and unrealized gains and losses on certain marketable securities.
Financial statements for prior periods have been reclassified, as
required.
Comprehensive earnings consists of the following:
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Net earnings $57.8 $41.0 $161.1 $92.0
Other comprehensive earnings (loss):
Foreign currency translation adjustment
(net of related tax benefit of $0 in 1998
and 1997) 2.3 (4.6) (0.9) (20.5)
Minimum pension liability adjustment
(net of related tax benefit of $0.8 in 1998) - - (1.5) -
----- ----- ------ -----
Comprehensive earnings $60.1 $36.4 $158.7 $71.5
===== ===== ====== =====
Accumulated other comprehensive earnings (loss) consists of the
following:
Foreign Minimum Accumulated
Currency Pension Other
Translation Liability Comprehensive
Adjustment Adjustment Earnings (Loss)
----------- ---------- ---------------
Balance, December 31, 1997 $(23.8) $ - $(23.8)
First quarter other comprehensive earnings (loss) (0.1) (1.5) (1.6)
------ ------ ------
Balance, March 31, 1998 (23.9) (1.5) (25.4)
Second quarter other comprehensive earnings (loss) (3.1) - (3.1)
------ ------ ------
Balance, June 30, 1998 $(27.0) $(28.5)
Third quarter other comprehensive earnings (loss) 2.3 - 2.3
------ ------ ------
Balance, September 30, 1998 $(24.7) $ (1.5) $(26.2)
====== ====== ======
6
6. EARNINGS PER SHARE (EPS) (Dollars in millions, except share amounts)
The following is a reconciliation of the weighted average shares used in
the basic and diluted EPS calculations:
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Earnings before extraordinary item used for
both basic and dilutive EPS $57.8 $41.0 $161.1 $106.0
===== ===== ====== ======
Weighted average shares used for basic EPS 66,260,721 71,505,531 66,943,347 72,052,035
Effect of dilutive securities
Warrants - 362,012 - 349,790
Long-term incentive plan 42,232 33,744 51,333 19,880
Stock options 4,825,914 3,791,370 4,571,980 3,513,784
---------- ---------- --------- ---------
Weighted average shares used for diluted EPS 71,128,867 75,692,657 71,566,660 75,935,489
========== ========== ========== ==========
Basic EPS before extraordinary item $0.87 $0.57 $2.41 $1.47
Diluted EPS before extraordinary item $0.81 $0.54 $2.25 $1.39
Options to purchase an additional 32,883 and 30,373 shares of Class A
common stock were outstanding at September 30, 1998 and 1997,
respectively, but were not included in the computation of diluted
earnings per share because their effect would be antidilutive.
7. SUMMARIZED FINANCIAL INFORMATION
(Dollars in millions)
The following is consolidated summarized financial information of
International:
September 30 December 31
1998 1997
------------ -----------
Statement of financial position data:
Current assets $936.0 $776.1
Noncurrent assets 441.7 432.1
Current liabilities 606.9 551.4
Noncurrent liabilities 259.1 160.0
7
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Statement of earnings data:
Revenues $743.8 $618.3 $2,113.2 $1,758.0
Gross profit 267.9 215.6 770.9 608.8
Earnings before extraordinary item 57.8 41.0 161.1 106.0
Net earnings 57.8 41.0 161.1 92.0
Current liabilities include $3.9 million at both September 30, 1998
and December 31, 1997 that is owed to Lexmark International Group, Inc.
8. NEW ACCOUNTING STANDARDS
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits, effective for fiscal
years beginning after December 15, 1997. This statement revises
employer's disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans.
It standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer as useful. Restatement of disclosures for
earlier periods provided for comparative purposes is required unless the
information is not readily available. This statement is disclosure
oriented and, therefore, will not have a material impact on the company's
financial position, results of operations or liquidity. This statement is
effective for the company's financial statements for the year ended
December 31, 1998.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. This SOP
provides guidance on accounting for the costs of computer software
developed or obtained for internal use, and requires that entities
capitalize certain internal-use software costs once certain criteria are
met. Currently the company generally expenses the costs of developing or
obtaining internal-use software as incurred. The company is currently
evaluating SOP 98-1, and does not expect it to have a material impact on
its consolidated financial statements. This SOP is effective for
financial statements for fiscal years beginning after December 15, 1998.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires companies to
record derivatives on the balance sheet as assets and liabilities,
measured at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge accounting. The
company is currently evaluating this statement and its impact on the
consolidated financial statements. This statement is effective for fiscal
years beginning after June 15, 1999, with earlier adoption encouraged.
The company will adopt this accounting standard as required by January 1,
2000.
8
9. SUBSEQUENT EVENT
On October 29, 1998, the board of directors of Group authorized the
repurchase at management's discretion of up to $200 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 $400 million in aggregate repurchase authorization
previously granted by the board and is currently permitted under the
Company's credit facilities. As of November 6, 1998, Group has used $363
million of the total authorization granted to it to repurchase
approximately 10 million shares, leaving approximately $237 million of
share repurchase authorization (including the October 1998
authorization).
9
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 September 30, 1998 were $744
million, an increase of 20% over the same period of 1997 and reflected the
company's highest quarterly revenues and earnings per share since becoming a
public company in 1995. The impact of foreign currency translation on revenues
during the quarter was insignificant. Printers and associated supplies revenues
were $632 million, an increase of 25%. Revenues from other office imaging
products remained constant at $112 million compared to the same period of 1997.
Total U.S. revenues were up $73 million or 22%, and total international revenues
were up $53 million or 19%, despite lower revenues in Asia, which accounted for
less than 10% of consolidated revenues.
For the nine months ended September 30, 1998, consolidated revenues were $2,113
million, an increase of 20% over the same period of 1997. Revenues were
adversely affected by foreign currency exchange rates due to the strengthening
of the U.S. dollar. Without the currency effect, year-to-year revenue growth
would have been 23%. Printers and associated supplies revenues were $1,767
million, an increase of 26%. Revenues from other office imaging products were
$346 million, a decrease of 2% from 1997. Total U.S. revenues were up $214
million or 23%, and total international revenues were up $141 million or 17%.
The revenue growth for the quarter and nine months ended September 30, 1998 over
the same periods in 1997 was driven by unit volume increases in printers and
strong growth of associated supplies. Revenues from sales to all original
equipment manufacturers (OEM) accounted for less than 10% of consolidated
revenues for the quarter and nine months ended September 30, 1998.
Consolidated gross profit was $268 million for the three months ended September
30, 1998, an increase of 24% from the same period of 1997. This was driven by
improved printer margins reflecting lower costs and a richer mix of supplies
versus printer hardware. Gross profit as a percentage of revenues for the third
quarter of 1998 increased to 36% from 35% in 1997. Gross profit attributable to
printers and associated supplies increased by 29%, principally due to improved
printer margins reflecting lower costs and growth in higher margin associated
consumable supplies.
For the nine months ended September 30, 1998, consolidated gross profit was $771
million, an increase of 27% over the corresponding period of 1997. Gross profit
as a percentage of revenues increased to 37% from 35% in 1997. Gross profit
attributable to printers and associated supplies increased by 36%, principally
due to improved printer margins reflecting lower costs and growth in higher
margin associated consumable supplies.
Total operating expenses increased 19% and 20% in the third quarter and first
nine months of 1998, respectively, compared to the same periods of 1997
principally reflecting higher marketing expenses in support of new product
introductions and revenue growth. Expenses as a percentage of revenues for the
quarter were 23.7% compared to 24.0% for the corresponding period of 1997.
Expenses as a percentage of revenues for the first nine months of 1998 and 1997
were 24.4%.
Consolidated operating income was $91 million for the third quarter of 1998 and
$255 million for the nine months ended September 30, 1998, an increase of 36%
and 41%, respectively, over the corresponding periods of 1997. This increase was
due principally to improved printer margins reflecting lower costs and growth in
higher margin associated consumable supplies.
10
Net earnings for the third quarter of 1998 were $58 million, up 41% compared to
the third quarter of 1997. This increase was primarily due to the 36% increase
in operating income. The income tax provision was approximately 33% of earnings
before tax for the third quarter of 1998 as compared to approximately 35% in the
same period of 1997. The decrease in the income tax rate is primarily due to the
effect of lower tax rates on manufacturing activities in certain countries.
Basic net earnings per share were $0.87 for the third quarter of 1998 compared
to $0.57 in the corresponding period of 1997, an increase of 52%. Diluted net
earnings per share were $0.81 for the third quarter of 1998 compared to $0.54 in
the comparable period of 1997, an increase of 50%. The increase in basic and
diluted net earnings per share resulted from increased operating income, lower
income tax rates and fewer shares outstanding due to share repurchases.
Earnings before extraordinary item for the first nine months of 1998 were $161
million, an increase of 52% compared to the same period of 1997. This increase
is principally due to the 41% increase in operating income. The income tax
provision was approximately 33% of earnings before tax for the first nine months
of 1998 as compared to approximately 36% in the same period of 1997. The
decrease in the income tax rate is primarily due to the effect of lower tax
rates on manufacturing activities in certain countries.
Net earnings for the first nine months of 1998 were $161 million, an increase of
75% compared to the same period of 1997. Net earnings for the first nine months
of 1997 were affected by an extraordinary charge of $22 million ($14 million net
of tax benefit) caused by a prepayment premium and other fees associated with
the prepayment of the company's senior subordinated notes.
Basic net earnings per share were $2.41 for the first nine months of 1998
compared to $1.28 in the corresponding period of 1997, or $1.47 before
extraordinary item, an increase of 88% and 64%, respectively. Diluted net
earnings per share were $2.25 for the first nine months of 1998 compared to
$1.21 in the comparable period of 1997, or $1.39 before extraordinary item, an
increase of 86% and 61%, respectively. The increase in basic and diluted net
earnings per share resulted from increased operating income, lower income tax
rates and fewer shares outstanding due to share repurchases.
Financial Condition
- -------------------
The company's financial position remains strong at September 30, 1998, with
working capital of $333 million compared to $229 million at December 31, 1997.
At September 30, 1998, the company had outstanding $36 million of short-term
debt and $149 million of long-term debt. The debt to total capital ratio was 26%
at September 30, 1998 compared to 13% at December 31, 1997. The increase in debt
reflects the public debt offering of $150 million principal amount of senior
notes described below and higher revolver usage for stock repurchases.
In February 1998, Group's board of directors declared a dividend distribution of
one right (a "Right") for each outstanding share of Group's Class A common stock
and Class B common stock. The distribution was payable to holders of record on
April 3, 1998. Each Right entitles the registered holder to purchase from Group
one one-hundredth of a share of Series A Junior Participating Preferred Stock at
a price of $200 per one hundredth of a share, subject to adjustment.
In March 1998, the public offering of 7,704,577 shares of Group's Class A common
stock by certain of its stockholders was completed at a public offering price of
$45.00 per share. Group and current members of management chose not to sell any
shares in the offering and, therefore, did not receive any of the proceeds from
the sale of the shares.
11
In March 1998, Group repurchased an additional 2 million shares from certain of
the stockholders participating in the March 1998 offering at a price of $43.38
per share (which was equal to the net proceeds per share received by the selling
stockholders participating in the offering) for an aggregate purchase price of
approximately $87 million.
In May 1998, International completed a public offering of $150 million principal
amount of its 6.75% senior notes due May 15, 2008. The senior notes were priced
at 98.998%, to yield 6.89% to maturity. The senior notes are guaranteed by
Group. A substantial portion of the net proceeds from the sale of the senior
notes was used to reduce existing debt outstanding under the company's credit
facility. There are no sinking fund requirements on the senior notes and they
may be redeemed at any time, at a redemption price as described in the related
indenture agreement, in whole or in part, at the option of International.
Cash provided by operating activities for the nine months ended September 30,
1998 was $86 million compared to $109 million for the same period of 1997. The
decrease in cash flows from operating activities in the first nine months of
1998 was attributable primarily to an increase in trade receivables due to
higher revenues and lower accounts payable which were partially offset by
earnings growth and changes in other working capital accounts.
Capital expenditures for the first nine months of 1998 were $61 million compared
to $48 million for the same period of 1997. It is anticipated that capital
expenditures for 1998 will be approximately $100 million and will be funded
primarily through cash from operations.
During the three months ended September 30, 1998, Group repurchased 724,400
shares of its Class A common stock in the open market at prices ranging from
$56.38 to $66.94 for an aggregate cost of approximately $46 million. As of
September 30, 1998, Group held, net of issuances, a total of 9,570,087 treasury
shares at an aggregate cost of approximately $337 million. On October 29, 1998,
the board of directors of Group authorized the repurchase at management's
discretion of up to $200 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 $400 million in aggregate
repurchase authorization previously granted by the board and is currently
permitted under the Company's credit facilities. As of November 6, 1998 Group
has used $363 million of the total authorization granted to it to repurchase
approximately 10 million shares, leaving approximately $237 million of share
repurchase authorization (including the October 1998 authorization).
Year 2000 Issue
- ---------------
General
- -------
The Year 2000 Issue is the result of computers, software and other equipment
that fail to utilize the full four-digit representation of a year which would
cause date-sensitive software to recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculation causing disruption of operations, including, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities. In addition, equipment containing embedded
chips could malfunction as a result of this issue. If systems are not modified
to be Year 2000 compliant, such failures could occur and could materially affect
the company's results of operations, liquidity, and financial condition. In
recent years, in order to reduce costs associated with information processing
and to improve access to business information through common, integrated
computing systems, the company converted its major information technology
systems to an enterprise resource planning system. This system is Year 2000
compliant.
12
The company has conducted a comprehensive review of its computer and
manufacturing equipment systems to identify the systems that could be affected
by the Year 2000 Issue and has developed a comprehensive plan to address the
issues. This plan includes analyzing and identifying systems and equipment that
need to be replaced or upgraded as a result of the Year 2000 Issue. This review
was completed by September 30, 1998. Required replacements and upgrades of
critical systems and equipment are expected to be substantially complete and
tested by December 31, 1998. The Year 2000 Issue has not delayed implementation
of any other planned system projects; however, some planned system projects were
accelerated to replace non-compliant systems.
Almost all of the company's products are Year 2000 compliant. There are some
products that are not Year 2000 compliant but can be upgraded to become
compliant. A few products are not Year 2000 compliant and may not ever be Year
2000 compliant. The company does not expect costs associated with making its own
products compliant to be material.
The company has established communications with its significant suppliers,
customers and others with which it conducts business to help them identify their
own Year 2000 issues. If necessary modifications and conversions by the company
and those with which it conducts business are not completed timely, the Year
2000 Issue may have a material adverse effect on the company's results of
operations, liquidity, and financial position. The company is currently
evaluating and prioritizing the responses from suppliers to establish
contingency plans. For significant production suppliers, possible contingencies
include securing alternate sources or purchasing additional inventory prior to
January 2000. Services provided by various utility companies are vital to the
company, and the company is communicating with them about their plans and
progress in addressing the Year2000 issue. The company currently does not have a
contingency plan to address an interruption in utility service, although the
company is actively working with its utility suppliers to gain assurance of
uninterrupted service.
Costs
- -----
The total costs associated with the company's required modifications and
conversions to become Year 2000 compliant and to address Year 2000 non-compliant
products are not currently expected to be material to the company's results of
operations, liquidity and financial position and are being expensed as incurred.
The costs of the company's Year 2000 plan and the date on which the company
expects to complete the Year 2000 Issue modifications are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
the company's current expectations.
Risks
- -----
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially adversely affect the company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers, including
utility companies and customers, the company is unable to conclude that the
consequences of Year 2000 failures will not have a material impact on the
company's results of operations, liquidity or financial position.
THE DISCUSSION AND ANALYSIS OF THE YEAR 2000 ISSUE INCLUDED HEREIN CONTAINS
FORWARD-LOOKING STATEMENTS AND ARE BASED ON MANAGEMENT'S BEST ESTIMATES OF
FUTURE EVENTS. RISKS RELATED TO COMPLETING THE COMPANY'S YEAR 2000 PLAN INCLUDE
THE AVAILABILITY OF RESOURCES, THE COMPANY'S ABILITY TO TIMELY DISCOVER AND
CORRECT THE POTENTIAL YEAR 2000 SENSITIVE PROBLEMS WHICH COULD HAVE A SERIOUS
13
IMPACT ON THE COMPANY'S OPERATIONS, THE ABILITY OF SUPPLIERS TO BRING THEIR
SYSTEMS INTO YEAR 2000 COMPLIANCE, AND THE COMPANY'S ABILITY TO IDENTIFY AND
IMPLEMENT EFFECTIVE CONTINGENCY PLANS TO ADDRESS YEAR 2000 FAILURES.
New Accounting Standards
- ------------------------
In February 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 132, Employers' Disclosure about Pensions and Other Postretirement Benefits,
effective for fiscal years beginning after December 15, 1997. This statement
revises employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans. It
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer as
useful. Restatement of disclosures for earlier periods provided for comparative
purposes is required unless the information is not readily available. This
statement is disclosure oriented and, therefore, will not have a material impact
on the company's financial position, results of operations or liquidity. This
statement is effective for the company's financial statements for the year ended
December 31, 1998.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Opinion ("SOP") 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This SOP provides guidance on accounting
for the costs of computer software developed or obtained for internal use, and
requires that entities capitalize certain internal-use software costs once
certain criteria are met. Currently the company generally expenses the costs of
developing or obtaining internal-use software as incurred. The company is
currently evaluating SOP 98-1, and does not expect it to have a material impact
on its consolidated financial statements. This SOP is effective for financial
statements for fiscal years beginning after December 15, 1998.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires companies to record
derivatives on the balance sheet as assets and liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The company is currently evaluating this
statement and its impact on the consolidated financial statements. This
statement is effective for fiscal years beginning after June 15, 1999, with
earlier adoption encouraged. The company will adopt this accounting standard as
required by January 1, 2000.
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.
Forward-looking statements are made based upon management's current expectations
and belief concerning future developments and their potential effects upon the
company. There can be no assurance that future developments affecting the
company will be those anticipated by management, and there are a number of
factors that could adversely affect the company's future operating results or
cause the company's actual results to differ materially from the estimates or
expectations reflected in such forward-looking statements, including without
limitation, the factors set forth below:
~ The markets for printers and associated supplies are highly competitive,
especially with respect to new competitors, pricing and the introduction of new
technologies and products offering improved features and functionality. If it is
unable to continue to develop, manufacture and market products that meet
customers'
14
needs, the company's future operating results may be adversely affected. The
company's major competitors, all of which have significantly greater financial,
marketing and technological resources than the company, have regularly lowered
prices on their laser and inkjet printers and are expected to continue to do so.
The company has also regularly lowered prices on its printers and expects to
continue to do so. In particular, the inkjet printer market has experienced and
is expected to continue to experience significant printer price pressure from
the company's major competitors. Price reductions beyond expectations or the
inability to reduce costs, contain expenses or increase sales as currently
expected, as well as price protection measures, could result in lower
profitability for the company and jeopardize the company's ability to grow or
maintain its market share. In addition, the company's ability to increase or
maintain its presence in the retail marketplace with its branded products may be
adversely affected as the company becomes more successful in its sales and
marketing efforts for original equipment manufacturers. Revenue from all laser
and injet OEM customers for the third quarter and the nine months ended
September 30, 1998, however, accounted for less than 10% of total revenue with
no OEM customer accounting for, or currently expected to account for, more than
5% of total revenue.
~ The life cycles of the company's products, as well as delays in product
development and manufacturing, variations in the cost of component parts,
management of inventory levels by the company and its competitors, delays in
customer purchases of existing products in anticipation of new product
introductions by the company or its competitors and market acceptance of new
products and programs, 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. The competitive pressure to develop technology and products,
as well as increased investment to support new product introductions, also could
cause significant changes in the level of the company's operating expenses.
~ Revenues derived from international sales make up approximately 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. Also, margins on international sales tend to be lower than those
on domestic sales. Moreover, the company believes that international operations
in new geographic markets will be less profitable than operations in the U.S.
and European markets as a result, in part, of the higher investment levels for
product development, marketing, selling and distribution required to enter these
markets.
~ Factors unrelated to the company's operating performance, including the
company's ability to obtain patents, copyrights and trademarks, maintain trade
secret protection and operate without infringing the proprietary rights of
others, as well as expenses incurred by the company in defending and pursuing
its intellectual property and other legal claims; economic and business
conditions, both national and international; the loss of significant customers
or suppliers; the potential impact on the company's customers and suppliers as
they prepare for the Year 2000 and the Euro currency conversion; changes in and
execution of the company's business strategy, including the impact of
acquisitions, and the ability to retain and attract key personnel, also may
affect the company's results. In addition, other factors, such as expectations
about the company's financial performance created in the investment community by
stock analysts who report on the company and the company's ability to meet those
expectations, may also affect Group's Class A common stock price.
15
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 18 of this report.
(b) Reports on Form 8-K:
There were no Reports on Form 8-K filed during the quarter ended
September 30, 1998.
16
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: November 12, 1998 By: /s/ David L. Goodnight
- ------------------------ ----------------------
David L. Goodnight
Vice President and Corporate Controller
(Principal Accounting Officer)
17
EXHIBIT INDEX
Exhibits:
10.1 Form of Non-Qualified Stock Option Agreement, pursuant of the Lexmark
International Group, Inc. Nonemployee Director Stock Plan, Amended and
Restated effective April 30, 1998. +
10.2 Form of Indemnification Agreement entered into as of April 30, 1998,
among Lexmark International Group, Inc., Lexmark International, Inc.
and certain officers thereof. +
10.3 Form of Change in Control Agreement entered into as of April 30, 1998,
among Lexmark International Group, Inc., Lexmark International, Inc.
and certain officers thereof. +
10.4 Employment Agreement, dated as of April 30, 1998, among Lexmark
International, Inc., Lexmark International Group, Inc. and Gary E.
Morin. +
10.5 Separation Agreement, dated as of April 30, 1998, among Lexmark
International, Inc., Lexmark International Group, Inc. and John A.
Stanley. +
27 Financial Data Schedule
- ----------------
+ Indicates management contract or compensatory plan, contract or arrangement.
18