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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Class A common stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ________
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ________
As of March 10, 2000, there were outstanding 129,132,193 shares (excluding
shares held in treasury) of the registrant's Class A common stock, par value
$.01, which is the only class of voting common stock of the registrant, and
there were no shares outstanding of the registrant's Class B common stock, par
value $.01. As of that date, the aggregate market value of the shares of voting
common stock held by non-affiliates of the registrant (based on the closing
price for the Class A common stock on the New York Stock Exchange on March 10,
2000) was approximately $16,679,636,555.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in the company's definitive Proxy Statement for the 2000
Annual Meeting of Stockholders, which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year, is incorporated by reference in Part III of this
Form 10-K.
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LEXMARK INTERNATIONAL GROUP, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
PAGE OF
FORM 10-K
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PART I
Item 1. BUSINESS.................................................... 1
Item 2. PROPERTIES.................................................. 11
Item 3. LEGAL PROCEEDINGS........................................... 11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 11
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 12
Item 6. SELECTED FINANCIAL DATA..................................... 13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 14
Item 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK...................................................... 20
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.................. 21
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 43
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 43
Item 11. EXECUTIVE COMPENSATION...................................... 43
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 43
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 43
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K....................................................... 44
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PART I
ITEM 1. BUSINESS
GENERAL
Lexmark International Group, Inc. ("LIG") is a Delaware corporation that has as
its only significant asset all of the outstanding common stock of Lexmark
International, Inc., a Delaware corporation ("Lexmark International").
Hereinafter, "the company" and "Lexmark" will refer to LIG, or to LIG and
Lexmark International, including its subsidiaries, as the context requires. LIG
was formed in 1990 in connection with the acquisition (the "Acquisition") of IBM
Information Products Corporation (renamed Lexmark International) from IBM. The
Acquisition was completed in March 1991. On November 15, 1995, the company
completed its initial public offering of Class A common stock which trades on
the New York Stock Exchange under the symbol "LXK."
Lexmark is an integrated global developer, manufacturer and supplier of printing
solutions and products, including laser and inkjet printers and associated
supplies for the office and home markets. Lexmark develops and owns most of the
technology for its desktop laser and inkjet printers and associated supplies,
which differentiates the company from a number of its major competitors,
including Hewlett Packard ("HP") which purchases its laser engines from a third
party. Lexmark also sells dot matrix printers for printing single and multi-part
forms by business users. In addition, Lexmark develops, manufactures and markets
a broad line of other office imaging products which include supplies for IBM
branded printers, aftermarket supplies for original equipment manufacturer
("OEM") products, and typewriters and typewriter supplies that are sold under
the IBM trademark. The company operates in the office products industry segment.
The principal supply product for laser printers is a laser cartridge, which
includes toner and a photoconductor. The principal supply product for inkjet
printers is an inkjet cartridge, which includes ink and an ejector system. The
principal supply product for Lexmark's dot matrix printers is an inked fabric
ribbon. As the installed base of Lexmark laser and inkjet printers continues to
grow, the market for their associated supplies will grow as such supplies are
continually purchased throughout the life of the printers. This is a relatively
high margin, recurring business that management expects to contribute to the
stability of Lexmark's earnings over time.
Revenues derived from international sales, including exports from the United
States, make up more than half of the company's consolidated revenues with
Europe accounting for approximately two-thirds of international sales. Lexmark'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. While currency
translation has significantly affected international revenues and cost of
revenues, it did not have a material impact on operating income through 1999.
Although the company manages its net exposure to exchange rate fluctuations
through operational hedges, such as pricing actions and product sourcing
changes, and financial instruments, such as forward exchange contracts and
currency options, there can be no assurances that currency fluctuations will not
have a material impact on operating income in the future. As the company's
international operations continue to grow, more management effort will be
required to focus on the operation and expansion of the company's global
business and to manage the cultural, language and legal differences inherent in
international operations. A summary of the company's revenues and long-lived
total assets by geographic area is found on page 39 of this Form 10-K Annual
Report.
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MARKET OVERVIEW
In 1999, estimated industry-wide revenue for printer hardware and associated
supplies in the 1-50 pages per minute ("ppm") speed category, including
monochrome (also black) and color network and personal laser, inkjet and dot
matrix printers, was approximately $40 billion. Management believes, based on
industry analysts' estimates, that this market will in the aggregate continue to
experience modest growth through 2003*. However, the company believes that
certain product categories within this market that it has targeted, such as
office desktop laser printers and color inkjet printers, will experience
double-digit growth in volume.
The laser printer market is categorized by print speeds. Office desktop or
network laser printers include color laser printers as well as monochrome laser
printers that print 11-50 ppm. Personal low-speed laser printers typically print
1-10 ppm. Most printers employed in the network environment are office desktop
printers with sophisticated software management tools. Lexmark's primary focus
is the 11-50 ppm monochrome and color workgroup laser printers. In this market,
which is dominated by HP, management believes that Lexmark is second in market
share with more than twice the market share of the next nearest competitor.
As businesses have evolved their information technology architectures, the
growth of online information used to run their business, the greater graphical
representation of their information, and the integration of this information
into critical workflow have all emerged as major trends. Accordingly, hardcopy
information output devices continue to evolve with improved print quality,
higher performance and color. In addition, the convergence of traditional analog
copiers, fax machines and printers has resulted in a new breed of network
connected multifunctional devices that can improve inefficient workflow
processes. The software tools for device and asset management enable these new
solutions to offer customers a much greater return on investment through higher
availability and utilization.
Management believes that the market for low-speed laser printers is flat to
declining and that this category is subject to substitution by inkjet printers
at the low end.
Based on the available market data, management believes that between 1991 and
1999 there was steady growth in overall shipments of network and personal laser
printers (1-50 ppm), although different segments of the market experienced
different growth rates. The company's shipments of network and personal laser
printers taken as a whole during 1991 to 1999 increased at a compound annual
rate, which management believes reflected the overall rate of growth of the
market as a whole. Within the office desktop network laser printer category,
Lexmark shipments increased at a rate which enabled the company to gain market
share. Management believes the company maintained its share position in the
office desktop laser printer market in 1999. Management expects the market for
office desktop laser printers--which includes the company's Optra T line of
laser printers--will experience, on average, double-digit unit growth through
2003.
Laser printer unit growth in recent years has generally exceeded the growth rate
of laser printer revenues due to unit price pressure. This is partially offset
by the tendency for customers in the network segment of the market to trade up
to models with faster speeds, greater network connectivity, and other new
features. New models with such enhanced features and improved performance
generally sell at higher price points and carry higher gross profit margins than
the models they replace.
The consumer printer market today consists almost entirely of desktop color
inkjet printers. Lexmark's shipments of inkjet printers increased at or near
triple-digit rates annually from 1993 through 1996 and at double-digit rates for
1997 through 1999 which has enabled the company to gain market share. Management
believes that Lexmark's unit volumes grew at more than twice the market growth
rate in 1999. Growth in inkjet printer revenue
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* Data available from industry analysts as to the size of the laser and inkjet
printer market varies widely. The variance in laser printer market data is
caused in part by the rapid pace of change in laser printer speeds which makes
comparative analyses based on comparable product categories difficult over a
recent historical period. The company bases its analysis of historical market
trends on the data available from several different industry analysts. The
ranges of printing speed used to define and distinguish between laser printer
categories described herein are based on the company's own internal analysis of
the laser printer categories currently used by certain industry analysts to
measure the laser printer market.
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has been slower than unit growth due to rapidly declining prices. The greater
affordability of color inkjet printers has been an important factor in the
explosive growth of this market.
The Internet is impacting Lexmark's business in several ways. Management
believes that as more information is available over the Internet, more of this
information is being printed. This is especially beneficial for printer and
supplies manufacturers since so much of the content is rich in colors and
graphics. The Internet also allows Lexmark to communicate with and provide
support to customers in new and more valuable ways in addition to reducing costs
through achieving operational efficiencies.
The markets for dot matrix printers and most of the company's other office
imaging products are generally declining.
STRATEGY
Lexmark's strategy is based on a business model of building an installed base of
printer hardware in the marketplace that will then generate demand for Lexmark's
aftermarket supplies. Lexmark is executing a three-pronged strategy in
implementing its business model. First, the company is pursuing an increased
share of printing solutions in the large, high-growth corporate and consumer
markets. Second, Lexmark is using its technological leadership to maintain a
competitive difference in its printer hardware and software. Third, the company
uses a differentiated marketing and sales approach.
Lexmark's corporate customer strategy is to target Fortune 1000 companies, other
large global corporations, the large public sector and fast growing industry
segments of the network printing market. The strategy is to increase market
share by providing high quality, technologically advanced products at
competitive prices. To promote Lexmark brand awareness and market penetration,
Lexmark will continue to identify and focus on customer segments where Lexmark
can differentiate itself by supplying printers with features that meet specific
customer needs and represent the best total cost of printing solution.
For the corporate customer, Lexmark expects to continue to offer an array of
advanced laser printer products with superior features and functions, higher
speeds and better print resolution at competitive prices. The company believes
that it is well-positioned to take advantage of the growth potential of local
area network ("LAN") printers due to its development and ownership of both the
software and hardware features that provide network connectivity and management
tools. Lexmark has targeted the office desktop laser printer markets and, as it
has with the 1,200 dots per inch ("dpi") Optra T family, intends to remain one
of the few printer companies that create industry-wide standards for laser
printer performance. Lexmark focuses continually on enhancing the network
capability of its laser printers by introducing new products, like its
MarkVision printer management utility, that enhance the ability of its printers
to function efficiently in a LAN environment and provide significant flexibility
to the LAN user.
The company's consumer market strategy is to generate demand for Lexmark color
inkjet printers by offering high-quality products at competitive prices to
retail, business and OEM customers. For the consumer market, Lexmark focuses on
developing and marketing competitively-priced, reliable, easy-to-use color
inkjet printers. The company expects that hardware improvements in this market
will result in faster printing and better print quality. On the software side,
the company expects that enhanced compatibility with standard PC operating
systems, such as Microsoft Windows 95, Windows 98 and Windows NT, and software
features that take advantage of the computing power of the PC for printing
functions will permit the company to reduce manufacturing costs for the printers
and to produce a product that is easier to use. Lexmark believes that its core
product offerings in this market, including the "Z" family of inkjet printers,
will also permit it to build brand recognition in the retail channels. The
company recognized early on that as PC prices fell below $1,000 and then below
$500, there was a need for high-quality, low-priced printers that retailers
could bundle with the PCs. Lexmark has aggressively reduced cost while pushing
the performance and features of higher-end inkjets into this sub-$100 segment.
Lexmark is also different from its competitors in that it sells its color inkjet
technology through several partnerships with branded and co-branded products.
The company is an attractive partner for PC manufacturers
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such as Compaq, Samsung and Fujitsu since it does not compete with these
companies. The company also sells its inkjet technology to manufacturers of
multifunction/fax machines, wide format and specialty printers.
The company's strategy for dot matrix printers and other office imaging products
is to continue to offer high-quality products and pursue the aftermarket OEM
supplies opportunity, while managing cost to maximize cash flow and profit.
PRODUCTS
Laser Printers
In September 1999, the company announced the new Optra T family of monochrome
laser printers, with four models ranging in speeds from 15 to 35 ppm. This Optra
T family shares identical user interfaces, drivers and common supplies including
a higher yield toner cartridge that delivers reduced user operating costs. The
company also announced the Optra M410 laser printer at the 12 ppm speed and the
wide format Optra W810 at 35 ppm. Along with these announcements, the company
introduced OptraImage multifunction products and options providing customers
with print/copy/fax/scan capabilities which allow customers to increase
productivity and reduce delivery costs. The company also offers the Optra E310
monochrome personal laser printer that prints up to 8 ppm. The Optra SC 1275 and
Optra Color 1200 laser printers continue to offer high quality business color
printing at 12 ppm monochrome and 3 to 12 ppm color.
To enhance the network capabilities, the company offers MarkVision, a print
management software that allows network administrators to remotely monitor and
solve print interruptions, thereby improving efficiency. In 1999, the company
also introduced MarkTrack, a software application that tracks usage and
inventory data across the network for most printer brands, enabling the user to
efficiently balance printer loads and track costs by department.
In addition to offering connectivity solutions and management tools as features
on its laser printers, Lexmark also designs and manufactures both internal and
external network print servers. These products provide a means to connect
virtually any printer to a local or wide area network. The company's current
product offerings are the MarkNet N2000 series of internal print server cards
and the MarkNet X2000 series of external print servers. Both are capable of
simultaneous support of multiple networking environments. The MarkNet X2000
provides direct network connection for multiple printers. The MarkNet X2000 also
provides models with direct network connection for a single printer at a lower
cost.
Inkjet Printers
During 1999, the company introduced the "Z" family of color inkjet printers
primarily for home and office use. The three models in this family offer 1,200 x
1,200 dpi at speeds ranging from 4 ppm black and 2.5 ppm color to 10 ppm black
and 5 ppm color. These printers offer compatibility with leading software
applications and ease of installation and use including the benefits of the
Accu-Feed paper handling system. In a joint product introduction with Kodak, the
Kodak Personal Picture Maker by Lexmark was introduced in the third quarter of
1999. This product targets digital photographers and allows the user to store or
print directly from the camera without using a personal computer.
Dot Matrix Printers
The company continues to market five dot matrix printer models for customers who
print a large volume of multi-part forms.
Supplies
The company designs, manufactures, and distributes a variety of cartridges and
other supplies for use in its installed base of laser, inkjet, and dot matrix
printers. Lexmark is currently the exclusive source for new printer cartridges
for the printers it manufactures. The company also offers a broad range of other
office imaging products, including typewriter products with the IBM logo, and
other OEM printers, using both impact and non-impact technology.
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Service and Support
For the company's printer products, a one year warranty is included, and
customers have the option to purchase up to an additional four years extended
warranty. The warranties generally include a toll-free technical support service
that is available 24 hours a day, seven days a week.
MARKETING AND DISTRIBUTION
The company markets and distributes its corporate customer printers primarily
through its well-established dealer network, which includes such dealers as
Gates/Arrow, Ingram, Inacom, Tech Data, Computer 2000 and Northamber. The
company's products are also sold through value-added resellers, who offer custom
solutions to specific markets. In addition to its dealer network, the company
employs large account sales and marketing teams whose mission is to generate
demand for Lexmark printers primarily among Fortune 1000 companies and other
large global corporations as well as the public sector. Sales and marketing
teams have focused on industry segments such as banking, retail/pharmacy,
automobile distribution, government, education and health care. Those teams, in
conjunction with the company's development and manufacturing teams, are able to
design products to meet customer specifications for printing electronic forms,
media handling, duplex printing and other custom solutions.
The company distributes its personal inkjet printers primarily through more than
15,000 retail outlets worldwide including office superstores such as OfficeMax
and Staples, computer superstores such as CompUSA, and consumer electronics
stores such as Circuit City and Best Buy. The company also distributes its
personal inkjet printers to other large multi-national chains such as Wal-Mart,
Kmart and Target and to overseas stores such as Dixon's, Carrefour, Harvey
Norman, T-Zone, Musimundo and Vobis.
Lexmark's Internet website enables customers to purchase the company's products
and services. It also provides important information regarding the company's
hardware and supplies products, services and technical support, as well as
reseller locations in various countries. Lexmark is using the power of the
Internet as it expands its business-to-business and business-to-consumer
markets.
The company's international sales are an important component of its operations.
The company's sales and marketing activities in its global markets are organized
to meet the needs of the local jurisdictions and the size of their markets. The
company's European marketing operation is structured similarly to its domestic
marketing activity. The company's products are available from major information
technology resellers such as Northamber and in large markets from key retailers
such as Media Markt in Germany, Dixon's in the United Kingdom and Carrefour in
France. Canadian marketing activities, like those in the United States, focus on
large account demand generation and vertical markets, with orders filled through
distributors and retailers. The company's Latin American and Asia Pacific
markets are served through a combination of Lexmark sales offices, strategic
partnerships and distributors. The company also has sales and marketing efforts
for OEM opportunities.
The company's printer supplies and other office imaging products are generally
available at the customer's preferred point of purchase through multiple
channels of distribution. Although channel mix varies somewhat depending on the
geography, substantially all of the company's supplies products sold
commercially in 1999 were sold through the company's network of
Lexmark-authorized supplies distributors and resellers who sell directly to end
users or to independent office supply dealers.
No single customer has accounted for more than 10% of the company's consolidated
revenues since 1996.
COMPETITION
The markets for printers and associated supplies are highly competitive,
especially with respect to pricing and the introduction of new products and
features. The office desktop laser printer market is dominated by HP, which has
a widely recognized brand name and has been estimated to have an approximate 60%
to 65% market share. Several other large vendors such as Canon and Xerox also
compete in the laser printer market.
The company's strategy requires that the company continue to develop and market
new and innovative products at competitive prices. New product announcements by
the company's principal competitors, however, can have and
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in the past have had a material adverse effect on the company's financial
results. Such new product announcements can quickly undermine any technological
competitive edge that one manufacturer may enjoy over another and set new market
standards for quality, speed and function. Furthermore, knowledge in the
marketplace about pending new product announcements by the company's competitors
may also have a material adverse effect on the company inasmuch as purchasers of
printers may defer purchasing decisions until the announcement and subsequent
testing of such new products.
In recent years, the company and its principal competitors, all of which have
significantly greater financial, marketing and technological resources than the
company, have regularly lowered prices on printers and are expected to continue
to do so. The company is vulnerable to these pricing pressures which, if not
mitigated by cost and expense reductions, may result in lower profitability and
could jeopardize the company's ability to grow or maintain market share and
build an installed base of Lexmark printers. The company expects that, as it
competes more successfully with its larger competitors, the company's increased
market presence may attract more frequent challenges, both legal and commercial,
from its competitors, including claims of possible intellectual property
infringement.
HP is also the market leader in the personal color inkjet printer market and,
with Canon and Epson, has been estimated to account for approximately 75% to 85%
of worldwide personal color inkjet printer sales. As with laser printers, if
pricing pressures are not mitigated by cost and expense reductions, the
company's ability to maintain or build market share and its profitability could
be adversely affected. In addition, as a relatively new entrant to the retail
marketplace with a less widely recognized brand name, the company must compete
with HP, Canon and Epson for retail shelf space for its inkjet printers and
supplies.
Like certain of its competitors, the company is a supplier of aftermarket laser
cartridges for laser printers using certain models of Canon engines. There is no
assurance that the company will be able to compete effectively for a share of
the aftermarket cartridge business for its competitors' base of laser printers.
Although Lexmark is currently the exclusive supplier of new printer cartridges
for its laser printers, there can be no assurance that other companies will not
develop new compatible cartridges for Lexmark laser printers. In addition,
refill and remanufactured alternatives for the company's cartridges are
available from independent suppliers and, although generally offering lower
print quality, compete with the company's supplies business. As the installed
base of laser and inkjet printers grows and ages, the company expects
competitive refill and remanufacturing activity to increase.
The market for other office imaging products is extremely competitive and the
impact segment of the supplies market is declining. Although the company has
rights to market certain IBM branded supplies until July 2002, there are many
independent ribbon and toner manufacturers competing to provide compatible
supplies for IBM branded printing products. Independent manufacturers compete
for the aftermarket ribbon business under either their own brand, private label,
or both, using price, aggressive marketing programs, and flexible terms and
conditions to attract customers. Depending on the product, prices for compatible
products produced by independent manufacturers are offered below the company's
prices, in some cases significantly below the company's prices.
The company is increasingly less dependent on revenue and profitability from its
other office imaging products than it has been historically. However there is no
assurance that the company will be able to compete in the aftermarket laser
supplies business effectively or that the declining market areas in its other
office imaging products will not adversely affect the company's operating
results.
MANUFACTURING
The company operates manufacturing control centers in Lexington, Kentucky and
Geneva, Switzerland, and has manufacturing sites in Lexington, Boulder,
Colorado, Orleans, France, Sydney, Australia, Rosyth, Scotland and Juarez,
Mexico. The company opened new manufacturing sites during 1999 in Lapu-Lapu
City, Philippines and Brno, Czech Republic. During 1999, the company announced
plans for expansions to the existing facilities in Rosyth, Scotland and Juarez,
Mexico as well as new plants in Chihuahua, Mexico and Reynosa, Mexico which are
scheduled to be operational in 2000. Most of the company's laser and inkjet
technologies are developed in Lexington and Boulder. The company's manufacturing
strategy is to keep processes that are technologically
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complex, proprietary in nature and higher value added, such as the manufacture
of inkjet cartridges, at the company's own facilities. The company has provided
some of its technical expertise to several lower cost vendors who provide
additional printer production capability. Lexmark oversees these vendors to
ensure that products meet the company's quality standards.
The company's development and manufacturing operations for laser printer
supplies which include toners, photoconductor drums, developers, charge rolls
and fuser rolls, are located in Boulder. The company has made significant
capital investments in the Boulder facility to expand toner and photoconductor
drum processes.
MATERIALS
The company procures a wide variety of components used in the manufacturing
process, including semiconductors, electro-mechanical components and assemblies,
as well as raw materials, such as plastic resins. Although many of these
components are standard off-the-shelf parts that are available from multiple
sources, the company often utilizes preferred supplier relationships to better
ensure more consistent quality, cost, and delivery. Typically, these preferred
suppliers maintain alternate processes and/or facilities to ensure continuity of
supply. The company generally must place commitments for its projected component
needs approximately three to six months in advance. The company occasionally
faces capacity constraints when there has been more demand for its printers and
associated supplies than initially projected.
Some components of the company's products are only available from one supplier,
including certain custom chemicals, microprocessors, application specific
integrated circuits and other semiconductors. In addition, the company sources
some printer engines and finished products from OEMs. Although the company
purchases in anticipation of its future requirements, should these components
not be available from any one of these suppliers, there can be no assurance that
production of certain of the company's products would not be disrupted. Such a
disruption could interfere with the company's ability to manufacture and sell
products and materially adversely affect the company's business.
RESEARCH AND DEVELOPMENT
The company's research and development activity for the past several years has
focused on laser and inkjet printers and associated supplies and on network
connectivity products. The company has been able to keep pace with product
development and improvement while spending less than its larger competitors by
selectively targeting its research and development efforts. It has also been
able to achieve significant productivity improvements and minimize research and
development costs. In the case of certain products, the company may elect to
purchase products and key components from third party suppliers.
The company is committed to being a technology leader in its targeted areas and
is actively engaged in the design and development of additional products and
enhancements to its existing products. Its engineering effort focuses on laser,
inkjet, and connectivity technologies, as well as design features that will
increase efficiency and lower production costs. The process of developing new
technology products is complex and requires innovative designs that anticipate
customer needs and technological trends. Research and development expenditures
were $184 million in 1999, $159 million in 1998 and $129 million in 1997. In
addition, the company must make strategic decisions from time to time as to
which new technologies will produce products in market segments that will
experience the greatest future growth. There can be no assurance that the
company can continue to develop the more technologically advanced products
required to remain competitive.
BACKLOG
The company generally ships its products within 30 days of receiving orders and
therefore has a backlog of generally less than 30 days at any time, which the
company does not consider material to its business.
EMPLOYEES
As of December 31, 1999, the company had approximately 10,900 employees
worldwide of which 6,400 are located in the U.S. and the remaining 4,500 in
Europe, Canada, Latin America and Asia Pacific. None of the U.S.
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employees are represented by any union. Employees in France, Germany and the
Netherlands are represented by Statutory Works Councils. Substantially all
regular employees have stock options.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the company and their respective ages, positions and
years of service with the company are set forth below.
YEARS WITH
NAME OF INDIVIDUAL AGE POSITION THE COMPANY
------------------ --- -------- -----------
Paul J. Curlander 47 Chairman and Chief Executive Officer 9
Gary E. Morin 51 Executive Vice President and Chief
Financial Officer 4
Kathleen J. Affeldt 51 Vice President of Human Resources 9
Daniel P. Bork 48 Director of Taxes 3
Kurt M. Braun 39 Treasurer 8
Vincent J. Cole, Esq. 43 Vice President, General Counsel and
Secretary 9
David L. Goodnight 47 Vice President and Corporate Controller 6
Clifford D. Gookin 42 Vice President, Corporate Strategy and
Business Development 4
Thomas B. Lamb 42 Vice President 4
Bernard V. Masson 52 Executive Vice President 4
Paul A. Rooke 41 Vice President 9
Roger P. Rydell 45 Vice President of Corporate Communications 2
Alfred A. Traversi 47 Executive Vice President 3
Dr. Curlander has been a Director of the company since February 1997. Since
April 1999, Dr. Curlander has been Chairman and Chief Executive Officer of the
company. From May 1998 to April 1999, Dr. Curlander was President and Chief
Executive Officer of the company. From February 1997 to May 1998, Dr. Curlander
was President and Chief Operating Officer of the company, and from January 1995
to February 1997 he was Executive Vice President, Operations of Lexmark
International. In 1993, Dr. Curlander became a Vice President of Lexmark
International, and from 1991 to 1993 he was General Manager of Lexmark
International's printer business.
Mr. Morin has been Executive Vice President and Chief Financial Officer of the
company since January 2000. From January 1996 to January 2000, Mr. Morin was
Vice President and Chief Financial Officer of the company. Prior to joining the
company, Mr. Morin held various executive and senior management positions with
Huffy Corporation, including most recently, the position of Executive Vice
President and Chief Operating Officer.
Ms. Affeldt has been Vice President of Human Resources of the company since July
1996. Prior to such time and since 1991, Ms. Affeldt served as Director of Human
Resources. Prior to 1991, Ms. Affeldt held various human resource management
positions with IBM.
Mr. Bork has been Director of Taxes of the company since he joined the company
in October 1996. Prior to joining the company, Mr. Bork was Director of Taxes
with Cray Research, Inc. Prior to his tenure at Cray Research, Inc., Mr. Bork
was with the accounting firm of Coopers & Lybrand, most recently serving as
Director of International Tax in Coopers & Lybrand's Minneapolis office.
Mr. Braun has been Treasurer of the company since August 1998. Mr. Braun served
as Director, Investor Relations from October 1995 until his appointment as
Treasurer, and as Manager of Currency Exposure from the time he joined the
company in 1992 up to his appointment as Director, Investor Relations. Prior to
joining the company, Mr. Braun held various financial positions with Cummins
Engine Co.
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Mr. Cole has been Vice President and General Counsel of the company since July
1996 and Corporate Secretary since February 1996. Prior to such time, commencing
in March 1991, Mr. Cole served as Corporate Counsel and then Assistant General
Counsel. Prior to joining the company, Mr. Cole was associated with the law firm
of Cahill Gordon & Reindel.
Mr. Goodnight has been Vice President and Corporate Controller of the company
since May 1998 and served as Controller since February 1997. Prior to such time
and since January 1994, when he joined the company, Mr. Goodnight served as CFO
for the company's Business Printer Division. Prior to joining the company, Mr.
Goodnight held various controller positions with Calcomp, Inc.
Mr. Gookin has been Vice President, Corporate Strategy and Business Development
of Lexmark International since July 1998. Prior to such time and since November
1995, when he joined the company, Mr. Gookin served as Vice President-Corporate
Development. Prior to joining the company, Mr. Gookin served as managing
director of the Mergers and Acquisition Group at Rauscher Pierce Refsnes, Inc.
Prior to 1991, Mr. Gookin held various positions in the Investment Banking
Department of CS First Boston Corporation.
Mr. Lamb has been Vice President and President of the Customer Solutions
Division of Lexmark International since December 1999. From May 1998 to December
1999, Mr. Lamb was Executive Vice President of the company. Prior to such time,
Mr. Lamb was Vice President and President of the Imaging Solutions Division of
Lexmark International since August 1997. He served as Vice President and General
Manager of the Imaging Solutions Division from January 1996 up to his
appointment as division president. Prior to joining the company, Mr. Lamb held
various senior management positions with General Chemical Corporation, including
most recently, the position of Vice President and General Manager of the
Industrial Chemicals Division.
Mr. Masson has been Executive Vice President and President of the Consumer
Printer Division of Lexmark International since January 2000. From August 1997
to January 2000, Mr. Masson was Vice President and President of the Consumer
Printer Division of Lexmark International. He served as Vice President and
General Manager of the Consumer Printer Division from December 1995 up to his
appointment as division president. Prior to joining the company, Mr. Masson was
Vice President and General Manager of DH Technology's DHPRINT unit, a
publicly-held manufacturer of specialty printers, primarily for the financial,
retail and gaming markets worldwide. Prior to 1992, Mr. Masson served as Senior
Vice President and General Manager -- Plotter Division of Calcomp, Inc.
Mr. Rooke has been Vice President and President of the Business Printer Division
of Lexmark International since December 1999. From June 1998 to December 1999,
Mr. Rooke was Vice President and President of the Imaging Solutions Division of
Lexmark International. He served as Vice President, Worldwide Marketing for the
Consumer Printer Division from September 1996 up to his appointment as division
president. Prior to such time, he held various positions within Lexmark's
printer divisions and became Vice President and General Manager of Dot
Matrix/Entry Laser Printers in 1994. Prior to joining the company, Mr. Rooke
held various positions with IBM.
Mr. Rydell has been Vice President of Corporate Communications since he joined
the company in January 1998. Prior to joining the company, Mr. Rydell was Vice
President of Corporate Communications for The Timberland Company from December
1994 to January 1998. Prior to that, Mr. Rydell served as Director of Worldwide
Communications for Dell Computer Corporation.
Mr. Traversi has been Executive Vice President of the company since May 1998.
Prior to such time and since October 1997, he was President of Customer
Services. Mr. Traversi served as Vice President of Information Technology and
Operations of Lexmark International from the time he joined the company in
October 1996 up to his appointment as President of Customer Services. Prior to
joining the company, Mr. Traversi was Vice President -- Operations Services with
Taco Bell Corporation, and prior to 1994, Mr. Traversi held various senior
management positions with Digital Equipment Corporation.
INTELLECTUAL PROPERTY
The company's intellectual property is one of its major assets and the ownership
of the technology used in its products is important to its competitive position.
The company has about 120 patent cross-license agreements of
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various types with various third parties. These license agreements include
agreements with, for example, Canon and HP. Most of these license agreements
provide cross-licenses to patents arising from patent applications first filed
by the parties to the agreements before certain dates in the early 1990s, with
the date varying from agreement to agreement. Each of the IBM, Canon and HP
cross-licenses grants worldwide, royalty-free, non-exclusive rights to the
company to use the covered patents to manufacture certain of its products.
Certain of the company's material license agreements, including those that
permit the company to manufacture its current design of laser and inkjet
printers and aftermarket laser cartridges for certain OEM printers, terminate as
to certain products upon certain "changes of control" of the company. The
company also holds a number of specific patent licenses obtained from third
parties to permit the production of particular features in products.
The company holds approximately 1,280 patents worldwide and has approximately
1,200 pending patent applications worldwide covering a range of subject matter.
The company has filed over 1,900 worldwide patent applications since its
inception in 1991. The company's patent strategy includes obtaining patents on
key features of new products which it develops and patenting a range of
inventions contained in new supply products such as toner and ink cartridges for
printers. Where appropriate, the company seeks patents on inventions flowing
from its general research and development activities. While no single patent or
series of patents is material to the company, the company's patent portfolio in
the aggregate serves to protect its product lines and offers the possibility of
entering into license agreements with others.
The company designs its products to avoid infringing the intellectual property
rights of others. The company's major competitors, such as HP and Canon, have
extensive, ongoing worldwide patenting programs. As is typical in technology
industries, disputes arise from time to time about whether the company's
products infringe the patents or other intellectual property rights of major
competitors and others. As the company competes more successfully with its
larger competitors, more frequent claims of infringement may be asserted.
The company has trademark registrations or pending trademark applications for
the name LEXMARK in approximately 70 countries for various categories of goods.
The company also owns a number of trademark applications and registrations for
product names, such as the OPTRA laser printer name.
The company holds worldwide copyrights in computer code, software and
publications of various types.
ENVIRONMENTAL AND REGULATORY MATTERS
The company's operations, both domestically and internationally, are subject to
numerous laws and regulations, particularly relating to environmental matters
that impose limitations on the discharge of pollutants into the air, water and
soil and establish standards for the treatment, storage and disposal of solid
and hazardous wastes. The company is also required to have permits from a number
of governmental agencies in order to conduct various aspects of its business.
Compliance with these laws and regulations has not had and is not expected to
have a material effect on the capital expenditures, earnings or competitive
position of the company. There can be no assurance, however, that future changes
in environmental laws or regulations, or in the criteria required to obtain or
maintain necessary permits, will not have an adverse effect on the company's
operations.
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ITEM 2. PROPERTIES
The company's manufacturing and other material operations are conducted at the
facilities set forth below:
LOCATION SQUARE FEET ACTIVITIES STATUS
-------- ----------- ---------- ------
Lexington, KY 2,995,000 Headquarters, Manufacturing, Development,
Administrative, Distribution, Warehouse,
Marketing Owned
151,000 Warehouses, Development Leased(1)
Seymour, IN 588,000 Warehouse Leased(2)
Boulder, CO 332,000 Manufacturing, Development, Warehouse Leased(3)
Dietzenbach, Germany 35,000 Administrative, Warehouse Leased(4)
Juarez, Mexico 234,000 Manufacturing, Administrative Owned
Richmond Hill, Ontario 105,000 Administrative, Marketing, Warehouse Leased(5)
Orleans, France 452,000 Manufacturing, Administrative, Warehouse Owned
Ormes, France 192,000 Warehouse Leased(6)
Paris, France 48,000 Administrative, Marketing Leased(7)
Rosyth, Scotland 150,000 Manufacturing, Administrative Owned
Sydney, Australia 64,000 Manufacturing, Administrative, Warehouse,
Marketing Leased(8)
Brno, Czech Republic 18,000 Manufacturing, Administrative Leased(9)
Lapu-Lapu City, Philippines 115,000 Manufacturing, Administrative Owned
Geneva, Switzerland 6,000 Manufacturing Control Center Leased(10)
- ---------------
(1) Leases covering 151,000 square feet expire September, 2000, and carry four
one-year renewal options.
(2) Lease covering this property expires June, 2005, and carries two five-year
renewal options.
(3) Lease covering 278,000 square feet expires May, 2001, and carries three
five-year renewal options. Lease covering 54,000 square feet expires
December, 2000, and there are no renewal options.
(4) Lease covering this property expires September, 2004, and there are no
renewal options.
(5) Lease covering this property expires August, 2013, and carries two
five-year renewal options.
(6) Lease covering this property expires February, 2002, and there are no
renewal options.
(7) Leases covering this property expire December, 2006, and there are no
renewal options.
(8) Lease covering this property expires March, 2002, and carries one six-year
renewal option.
(9) Lease covering this property expires December, 2003, and carries one
three-year renewal option.
(10) Lease covering this property expires August, 2002, and carries one
five-year renewal option.
The company believes its facilities are in good operating condition.
ITEM 3. LEGAL PROCEEDINGS
The company is party to various litigation and other legal matters that are
being handled in the ordinary course of business. The company does not believe
that any legal proceedings to which it is a party or to which any of its
property is subject will have a material adverse effect on the company's
financial position or results of operations. As the company competes more
successfully with its larger competitors, the company's increased market
presence may attract more frequent legal challenges from its competitors,
including claims of possible intellectual property infringement. Although the
company does not believe that the outcome of any current claims of intellectual
property infringement is likely to have a material adverse effect on the
company's future operating results and financial condition, there can be no
assurance that such claims will not result in litigation. In addition, there can
be no assurance that any litigation that may result from the current claims or
any future claims by these parties or others would not have a material adverse
effect on the company's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Lexmark International Group's Class A common stock is traded on the New York
Stock Exchange under the symbol LXK. As of March 10, 2000, there were 1,504
holders of record of the Class A common stock and there were no holders of
record of the Class B common stock. Information regarding the market prices of
the company's Class A common stock appears in Part II, Item 8, Notes to
Consolidated Financial Statements, Note 18.
The company has never declared or paid any cash dividends on the Class A common
stock and has no current plans to pay cash dividends on the Class A common
stock. The payment of any future cash dividends will be determined by the
company's Board of Directors in light of conditions then existing, including the
company's earnings, financial condition and capital requirements, restrictions
in financing agreements, business conditions, certain corporate law requirements
and other factors.
The company is a holding company and thus its ability to pay cash dividends on
the Class A common stock depends on the company's subsidiaries' ability to pay
cash dividends to the company.
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ITEM 6. SELECTED FINANCIAL DATA
The table below summarizes recent financial information for the company. For
further information refer to the company's financial statements and notes
thereto presented under Part II, Item 8 of this Form 10-K.
(Dollars in Millions, Except Share Data)
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
STATEMENT OF EARNINGS DATA:
- ----------------------------------------------------------------------------------------------------------------------
Revenues..................................... $ 3,452.3 $ 3,020.6 $ 2,493.5 $ 2,377.6 $ 2,157.8
Cost of revenues............................. 2,222.8 1,934.4 1,623.5 1,630.2 1,487.9
- ----------------------------------------------------------------------------------------------------------------------
Gross profit................................. 1,229.5 1,086.2 870.0 747.4 669.9
Research and development..................... 183.6 158.5 128.9 123.9 116.1
Selling, general and administrative.......... 569.3 544.9 466.5 388.0 359.1
Option compensation related to IPO (1)....... -- -- -- -- 60.6
Amortization of intangibles (2).............. -- -- -- 5.1 25.6
- ----------------------------------------------------------------------------------------------------------------------
Operating income............................. 476.6 382.8 274.6 230.4 108.5
Interest expense............................. 10.7 11.0 10.8 20.9 35.1
Other........................................ 7.0 6.4 9.1 7.9 10.1
- ----------------------------------------------------------------------------------------------------------------------
Earnings before income taxes................. 458.9 365.4 254.7 201.6 63.3
Provision for income taxes................... 140.4 122.4 91.7 73.8 15.2
- ----------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary item........... 318.5 243.0 163.0 127.8 48.1
Extraordinary loss (3)....................... -- -- (14.0) -- (15.7)
- ----------------------------------------------------------------------------------------------------------------------
Net earnings................................. $ 318.5 $ 243.0 $ 149.0 $ 127.8 $ 32.4
Diluted earnings per common share before
extraordinary item (4)..................... $ 2.32 $ 1.70 $ 1.08 $ 0.84 $ 0.32
Diluted net earnings per common share (4).... $ 2.32 $ 1.70 $ 0.99 $ 0.84 $ 0.22
Shares used in per share calculation (4)..... 137,546,661 142,801,780 150,337,552 151,331,468 148,400,558
STATEMENT OF FINANCIAL POSITION DATA:
- ----------------------------------------------------------------------------------------------------------------------
Working capital.............................. $ 353.2 $ 414.3 $ 228.6 $ 343.8 $ 227.7
Total assets................................. 1,702.6 1,483.4 1,208.2 1,221.5 1,142.9
Total debt................................... 164.9 160.4 75.0 165.3 195.0
Stockholders' equity......................... 659.1 578.1 500.7 540.3 390.2
OTHER KEY DATA:
- ----------------------------------------------------------------------------------------------------------------------
Operating income before amortization and
unusual item (5)........................... $ 476.6 $ 382.8 $ 274.6 $ 235.5 $ 194.7
Diluted earnings per share before unusual
items (4)(6)............................... $ 2.32 $ 1.70 $ 1.08 $ 0.84 $ 0.58
Cash from operations (7)..................... $ 400.4 $ 289.0 $ 274.9 $ 118.0 $ 307.5
Capital expenditures......................... $ 220.4 $ 101.7 $ 69.5 $ 145.0 $ 106.8
Debt to total capital ratio.................. 20% 22% 13% 23% 33%
Return on average assets before unusual items
(8)........................................ 20% 18% 13% 11% 8%
Return on average equity before unusual items
(8)........................................ 53% 47% 30% 27% 25%
Number of employees (9)...................... 10,933 8,835 7,985 6,573 7,477
- ----------------------------------------------------------------------------------------------------------------------
(1) The company recognized a non-cash compensation charge of $60.6 million
($38.5 million net of tax benefit) in the fourth quarter of 1995 for certain
of the company's outstanding employee stock options upon the consummation of
the initial public offerings.
(2) Acquisition-related intangibles were fully amortized by March 31, 1996.
(3) In 1997, represents extraordinary after-tax loss caused by the early
extinguishment of the company's senior subordinated notes and in 1995,
represents extraordinary after-tax loss caused by an early extinguishment of
debt related to the refinancing of the company's term loan.
(4) All data prior to 1999 has been restated to reflect a two-for-one stock
split on June 10, 1999.
(5) Unusual item in 1995 reflects the non-cash compensation charge discussed in
(1) above.
(6) Unusual item in 1997 represents the extraordinary after-tax loss discussed
in (3) above. Unusual items in 1995 includes the non-cash compensation
charge discussed in (1) above and the extraordinary after-tax loss discussed
in (3) above.
(7) Cash flows from investing and financing activities, which are not presented,
are integral components of total cash flow activity.
(8) Unusual item in 1997 represents the extraordinary loss discussed in (3)
above. Unusual items in 1995 includes the non-cash compensation charge
discussed in (1) above and the extraordinary after-tax loss discussed in (3)
above.
(9) Represents the number of full-time equivalent employees at December 31 of
each year.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto:
OVERVIEW
Lexmark International Group, Inc. ("Group," and together with its subsidiaries,
the "company" or "Lexmark") is an integrated global developer, manufacturer and
supplier of printing solutions and products, including laser and inkjet printers
and associated supplies for the office and home markets. The company also sells
dot matrix printers for printing single and multi-part forms for business users.
In addition Lexmark develops, manufactures and markets a broad line of other
office imaging products which include supplies for International Business
Machines Corporation ("IBM") branded printers, aftermarket supplies for original
equipment manufacturer ("OEM") products, and typewriters and typewriter supplies
that are sold under the IBM trademark.
In the past few years, the worldwide printer industry has seen substantial
growth in demand for laser and inkjet printers as a result of increasing
penetration of personal computers into home markets and the office migration to
local area networks from mainframes. During this period, the company's own
product mix has evolved, with its laser and inkjet printers and associated
supplies representing an increasing percentage of its sales volume and revenues,
particularly as the increasing base of installed Lexmark printers generates
additional revenues from recurring sales of supplies for those printers
(primarily laser and inkjet cartridges). Lexmark believes that its total
revenues will continue to grow due to overall market growth and increases in the
company's market share in both the office desktop network laser and color inkjet
printer categories. Management believes that this growth will more than offset
reduced demand for dot matrix impact printers and declines in sales of IBM
branded supplies as well as typewriters and typewriter supplies that are sold
under the IBM trademark.
In recent years, the company's growth rate in sales of printer units has
generally exceeded the growth rate of its printer revenues due to selling price
reductions and the introduction of new lower priced products in both the laser
and inkjet printer markets. In the laser printer market, unit price reductions
are partially offset by the tendency of customers to move up to higher priced
printer models with faster speeds, greater network connectivity and other new
features. In the inkjet printer market, advances in color inkjet technology have
resulted in lower prices for printers with sharper resolution and improved
performance. The greater affordability of color inkjet printers has been an
important factor in the recent growth of this market.
As the installed base of Lexmark laser and inkjet printers continues to grow,
the market for their associated supplies will grow as such supplies are
continually purchased throughout the life of the printers. The company expects
this recurring and relatively high margin business to contribute to the
stability of the company's earnings over time.
The company's dot matrix printers and other office imaging products include many
mature products such as supplies for IBM printers, typewriters and other impact
supplies that require little ongoing investment. The company expects that the
market for these products will continue to decline, and has implemented a
strategy to continue to offer high-quality products and pursue the aftermarket
OEM supplies opportunity, while managing cost to maximize cash flow and profit.
The company expects that its overall operating margins will remain relatively
stable as the associated printer supplies become an increasing part of its
business. Although the company expects continuing declines in printer prices, it
expects to be able to reduce costs generally in line with price decreases.
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
Consolidated revenues in 1999 were $3,452 million, an increase of 14% over 1998.
Revenues were adversely affected by foreign currency exchange rates due to the
strengthening of the U.S. dollar. Without the currency translation effect,
year-to-year revenue growth would have been 16%. Total U.S. revenues increased
$118 million
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or 8% and international revenues, including exports from the U.S., increased
$314 million or 19%. Revenues from sales to all OEM customers accounted for less
than 15% of consolidated revenues in 1999 with no single OEM customer accounting
for more than 5% of total revenues.
The revenue growth was primarily driven by unit volume increases in printers and
associated supplies. The company introduced the Optra T family of monochrome
laser printers and the "Z" series color inkjet printers in 1999. The company
also introduced the OptraImage multifunction products providing customers with
print/copy/fax/scan capabilities. Printer volumes grew at double-digit rates and
associated printer supplies revenues increased during 1999 as compared to 1998
primarily due to the continued growth of the company's installed printer base.
Consolidated gross profit was $1,229 million for 1999, an increase of 13% from
1998, mainly driven by printer and associated supplies volume increases. Gross
profit as a percentage of revenues for 1999 decreased to 35.6% from 36.0% in
1998 principally due to a mix shift among products.
Total operating expenses increased 7% for 1999 compared to 1998. Operating
expenses as a percentage of revenues decreased to 21.8% in 1999 compared to
23.3% in 1998 primarily due to increased revenues and lower selling, general and
administrative expenses as a percentage of revenues.
Consolidated operating income was $477 million for 1999, an increase of 24% over
1998. This increase was due principally to higher printer and associated
supplies sales volumes and lower selling, general and administrative expenses as
a percentage of revenues.
Earnings before income taxes and extraordinary item were $459 million, an
increase of 26% over 1998, reflecting the improved operating performance.
Net earnings were $318 million, an increase of 31% over 1998, primarily due to
the operating performance and reduction in the effective income tax rate. The
income tax provision was 30.6% of earnings before tax in 1999 as compared to
33.5% in 1998. The decrease in the effective income tax rate was primarily due
to lower income tax rates on manufacturing activities in certain countries.
Basic net earnings per share were $2.46 for 1999 versus $1.82 in 1998 an
increase of 35%. Diluted net earnings per share were $2.32 in 1999, compared to
$1.70 in 1998 an increase of 36%. These increases were due to the improved net
earnings and fewer shares outstanding as a result of repurchases throughout
1999.
The following table sets forth the percentage of total revenues represented by
certain items reflected in the company's statements of earnings:
1999 1998 1997
- ---------------------------------------------------------------------------------------------
Revenues.................................................... 100% 100% 100%
Cost of revenues............................................ 64% 64% 65%
- ---------------------------------------------------------------------------------------------
Gross profit................................................ 36% 36% 35%
Research & development...................................... 5% 5% 5%
Selling, general & administrative........................... 17% 18% 19%
- ---------------------------------------------------------------------------------------------
Operating income............................................ 14% 13% 11%
- ---------------------------------------------------------------------------------------------
1998 COMPARED TO 1997
Consolidated revenues in 1998 were $3,021 million, an increase of 21% over 1997.
Revenues were adversely affected by foreign currency exchange rates due to the
strengthening of the U.S. dollar. Without the currency translation effect,
year-to-year revenue growth would have been 23%. Total U.S. revenues increased
$301 million or 27% and international revenues, including exports from the U.S.,
increased $226 million or 16%. Revenues from sales to all OEM customers
accounted for less than 10% of consolidated revenues in 1998 with no single OEM
customer accounting for more than 5% of total revenues.
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The company's results were primarily driven by unit volume increases in printers
and strong growth of associated supplies. Printer volumes grew at double-digit
rates and associated printer supplies revenues increased during 1998 as compared
to 1997 primarily due to the continued growth of the company's installed printer
base.
Consolidated gross profit was $1,086 million for 1998, an increase of 25% from
1997. This was mainly driven by improved printer margins reflecting lower costs
and growth in higher margin associated supplies. Gross profit as a percentage of
revenues for 1998 increased to 36.0% from 34.9% in 1997.
Total operating expenses increased 18% for 1998 compared to 1997. The increased
operating expenses were principally due to higher sales and marketing expenses
in support of revenue growth and new product introductions. Operating expenses
as a percentage of revenues were 23.3% in 1998 compared to 23.9% in 1997.
Consolidated operating income was $383 million for 1998, an increase of 39% over
1997. This increase was due principally to improved printer margins reflecting
lower costs and growth in higher margin associated supplies.
Earnings before income taxes and extraordinary item were $365 million, an
increase of 43% over 1997, principally due to the operating performance.
Earnings before extraordinary item were $243 million, an increase of 49% over
1997. The income tax provision was 33.5% of earnings before tax in 1998 as
compared to approximately 36% in 1997. The decrease in the effective income tax
rate was primarily due to lower effective income tax rates on manufacturing
activities in certain countries.
Net earnings were $243 million, up 63% over 1997 net earnings. Net earnings for
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 in the first quarter of
1997.
Basic net earnings per share were $1.82 for 1998 versus $1.14 in 1997 before the
extraordinary charge and $1.04 after the extraordinary charge, an increase of
60% and 75%, respectively. Diluted net earnings per share were $1.70 in 1998,
compared to $1.08 in 1997 before the extraordinary charge and $0.99 after the
extraordinary charge, an increase of 57% and 72%, respectively. These increases
were due to the improved net earnings and fewer shares outstanding as a result
of repurchases throughout 1998.
LIQUIDITY AND CAPITAL RESOURCES
Lexmark's primary source of liquidity has been cash generated by operations,
which totaled $400 million, $289 million and $275 million in 1999, 1998 and
1997, respectively. Cash from operations has been sufficient to allow the
company to fund its working capital needs and finance its capital expenditures
during these periods along with the repurchase of approximately $302 million,
$189 million and $182 million of its Class A common stock during 1999, 1998 and
1997, respectively.
Cash flows from operating activities in 1999 increased 39% over 1998. The
increase in 1999 is primarily due to higher net earnings and favorable changes
in working capital accounts. In 1998, cash provided by operating activities
increased slightly over 1997 as higher net earnings more than offset higher
working capital requirements in support of sales growth.
In 1998, the company entered into a $300 million unsecured, revolving credit
facility with a group of banks. Upon entering this agreement, the company repaid
the amounts outstanding on its existing term loan and revolving credit facility.
The company had an interest rate/currency swap hedging the term loan with a
notional amount of approximately $37 million that matured in the first quarter
of 1998. The interest rate on the credit facility ranges from 0.2% to 0.7% above
London Inter Bank Offered Rate (LIBOR), as adjusted under certain limited
circumstances, based upon the company's debt rating. In addition, the company
pays a facility fee on the $300 million of 0.1% to 0.3% based upon the company's
debt rating. The interest and facility fees are payable quarterly. The $300
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 million credit facility are due upon the maturity of
the facility on January 27, 2003. As of December 31, 1999 there were no amounts
outstanding under this credit facility.
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In 1998, Lexmark International, Inc. ("International"), a wholly-owned
subsidiary of Group 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
and contain restrictions on liens, sale leaseback transactions, mergers and
sales of assets. 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. A balance of $149 million (net of unamortized discount of $1
million) was outstanding at December 31, 1999.
In October 1999, the company amended the agreement to sell its U.S. trade
receivables on a limited recourse basis. The maximum amount of U.S. trade
receivables to be sold was increased from $125 million to $150 million. As
collections reduce previously sold receivables, the company may replenish these
with new receivables. At December 31, 1999, U.S. trade receivables of $140
million had been sold and, due to the revolving nature of the agreement, $140
million also remained outstanding. At December 31, 1998, U.S. trade receivables
of $100 million had been sold and also remained outstanding. The agreement,
which contains customary financial covenants, must be renewed annually, and is
expected to be renewed upon its expiration in October 2000. The risk the company
bears from bad debt losses on U.S. trade receivables sold is limited to
approximately 13% 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. In 1997, the company entered into
three-year interest rate swaps with a total notional amount of $60 million,
whereby the company pays interest at a fixed rate of approximately 6.5% and
receives interest at a floating rate equal to the three-month LIBOR. Since May
1998, the swaps serve as a hedge of the receivables financings which are based
on floating interest rates.
As of December 31, 1999, the company's board of directors had authorized the
repurchase of up to $1.0 billion of its Class A common stock. This repurchase
authority allows the company at management's discretion to selectively
repurchase its stock from time to time in the open market or in privately
negotiated transactions depending upon market price and other factors. During
1999, the company repurchased 5,297,600 shares of its Class A common stock for
approximately $302 million. As of December 31, 1999, the company had repurchased
25,469,028 shares at prices ranging from $10.63 to $75.75 per share for an
aggregate cost of approximately $673 million, leaving approximately $327 million
of share repurchase authority.
CAPITAL EXPENDITURES
Capital expenditures totaled $220 million, $102 million and $70 million in 1999,
1998 and 1997, respectively. The 1999 and 1998 capital expenditures were
primarily due to expansion of printer and associated supplies manufacturing
capacity, including new manufacturing facilities in the Philippines and the
Czech Republic. Looking forward to 2000, the company expects capital
expenditures to be approximately $300 million and will include further expansion
of printer and associated supplies manufacturing capacity and research and
development facilities. The capital expenditures are expected to be funded
primarily through cash from operations.
EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT
Revenues derived from international operations, including exports from the
United States, made up approximately 56% of the company's consolidated revenues,
with European revenues accounting for about two-thirds of international
revenues. Substantially all foreign subsidiaries maintain their accounting
records in their local currencies. Consequently, period-to-period comparability
of results of operations is affected by fluctuations in exchange rates. While
currency translation has significantly affected international revenues and cost
of revenues, it did not have a material impact on operating income for the years
1997 through 1999. The company attempts to reduce its exposure to exchange rate
fluctuations through the use of operational hedges, such as pricing actions and
product sourcing decisions.
The company's exposure to exchange rate fluctuations generally cannot be
minimized solely through the use of operational hedges. Therefore, the company
utilizes financial instruments such as forward exchange contracts and
17
20
currency options to reduce the impact of exchange rate fluctuations on actual
and anticipated cash flow exposures and certain assets and liabilities which
arise from transactions denominated in currencies other than the functional
currency. The company does not purchase currency related financial instruments
for purposes other than exchange rate risk management.
The company believes that international operations in new geographic markets
will be less profitable than operations in U.S. and European markets as a
result, in part, of the higher investment levels for marketing, selling and
distribution required to enter these markets.
TAX MATTERS
The company's effective tax rate was approximately 31%, 34% and 36% for 1999,
1998 and 1997, respectively. The decrease in the income tax rate was primarily
due to the effect of lower tax rates on manufacturing activities in certain
countries.
The company and its subsidiaries are subject to tax examinations in various U.S.
and foreign jurisdictions. The company believes that adequate amounts of tax and
related interest have been provided for any adjustments that may result from
these examinations.
As of December 31, 1999, the company had non-U.S. tax loss carryforwards of $24
million, including $6 million which 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.
INFLATION
The company is subject to the effects of changing prices. The company operates
in an industry where product prices are very competitive and subject to downward
price pressures. As a result, future increases in production costs or raw
material prices could have an adverse effect on the company's business. However,
the company actively manages its product costs and manufacturing processes in an
effort to minimize the impact on earnings of any such increases.
YEAR 2000 UPDATE
Through the first two months of 2000, Lexmark has not experienced any
significant difficulties associated with the year 2000 issue nor has the
company's ability to manufacture, sell or ship products been impacted. While
management is encouraged by its year 2000 readiness and does not anticipate any
significant year 2000 issues, the situation will continue to be monitored.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND INFORMATION CONCERNING
FORWARD-LOOKING STATEMENTS
Statements contained in this report which are not statements of historical fact
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are made based upon management's current expectations
and beliefs concerning future developments and their potential effects upon the
company. There can be no assurance that future developments affecting the
company will be those anticipated by management. There are a number of factors
that could cause actual results to differ materially from estimates or
expectations reflected in such forward-looking statements, including, without
limitation, the factors set forth below:
- - The life cycles of the company's products, as well as delays in product
development and manufacturing, variations in the cost of component parts, 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 buildup in the company's inventories, make
the transition from current products to new products difficult and could
adversely affect the company's future operating results. The competitive
pressure to develop technology and products also could cause significant changes
in the level of the company's operating expenses.
18
21
- - The company's performance depends in part upon its ability to increase printer
and associated supplies manufacturing capacity in line with growing market
demands, to manage inventory levels to support the demands of new customers as
well as its established customer base and to address production and supply
difficulties. The company's future operating results and its ability to
effectively grow or maintain its market share may be adversely affected if it is
unable to address these issues on a timely basis.
- - Revenues derived from international sales, including exports from the United
States, make up over half of the company's revenues. Accordingly, the company's
future results could be adversely affected by a variety of factors, including
foreign currency exchange rate fluctuations, trade protection measures, changes
in a specific country's or region's political or economic conditions and
unexpected changes in regulatory requirements. Moreover, margins on
international sales tend to be lower than those on domestic sales, and the
company believes that international operations in new geographic markets will be
less profitable than operations in the U.S. and European markets, in part,
because of the higher investment levels for marketing, selling and distribution
required to enter these markets.
- - The company's future operating results may be adversely affected if it is
unable to continue to develop, manufacture and market products that meet
customers' needs. The markets for printers and associated supplies are
increasingly competitive, especially with respect to pricing and the
introduction of new technologies and products offering improved features and
functionality. The company and its major competitors, all of which have
significantly greater financial, marketing and technological resources than the
company, have regularly lowered prices on their printers and are expected 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 and jeopardize the company's ability to grow or maintain its
market share, particularly at a time when the company is increasing its
investment to support product introductions, expand capacity and enter new
geographies.
- - The company markets and sells its products through several sales channels. The
company's future results may be adversely affected by any conflicts that might
arise between its various sales channels.
- - The company's success depends in part on its ability to obtain patents,
copyrights and trademarks, maintain trade secret protection and operate without
infringing the proprietary rights of others. Current or future claims of
intellectual property infringement could prevent the company from obtaining
technology of others and could otherwise adversely affect its operating results,
cash flows, financial position or business, as could expenses incurred by the
company in enforcing its intellectual property rights against others or
defending against claims that the company's products infringe the intellectual
property rights of others.
- - Factors unrelated to the company's operating performance, including economic
and business conditions, both national and international; the loss of
significant customers or suppliers; the impact of any remaining year 2000
issues; the outcome of pending and future litigation or governmental
proceedings; and the ability to retain and attract key personnel, could also
adversely affect the company's operating results. In addition, trading activity
in the company's common stock, particularly the trading of large blocks and
interday trading in the company's common stock, may affect the company's common
stock price.
While the company reassesses material trends and uncertainties affecting the
company's financial condition and results of operations in connection with the
preparation of its quarterly and annual reports, the company does not intend to
review or revise, in light of future events, any particular forward-looking
statement contained in this report.
The information referred to above should be considered by investors when
reviewing any forward-looking statements contained in this report, in any of the
company's public filings or press releases or in any oral statements made by the
company or any of its officers or other persons acting on its behalf. The
important factors that could affect forward-looking statements are subject to
change, and the company does not intend to update the foregoing list of certain
important factors. By means of this cautionary note, the company intends to
avail itself of the safe harbor from liability with respect to forward-looking
statements that is provided by Section 27A and Section 21E referred to above.
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ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK SENSITIVITY
The market risk inherent in the company's financial instruments and positions
represents the potential loss arising from adverse changes in interest rates and
foreign currency exchange rates.
Interest Rates
At December 31, 1999, the fair value of the company's senior notes is estimated
at $137 million using quoted market prices and yields obtained through
independent pricing sources for the same or similar types of borrowing
arrangements, taking into consideration the underlying terms of the debt. Such
carrying value exceeded the fair value of debt at December 31, 1999 by
approximately $12 million. Market risk is estimated as the potential change in
fair value resulting from a hypothetical 10% adverse change in interest rates
and amounts to approximately $7 million at December 31, 1999.
The company has interest rate swaps that serve as a hedge of financings which
are based on floating interest rates. The fair value at December 31, 1999 was a
liability of less than $1 million. Market risk is estimated as the potential
change in fair value resulting from a hypothetical 10% adverse change in
interest rates and amounts to less than $1 million at December 31, 1999.
Foreign Currency Exchange Rates
The company employs a foreign currency hedging strategy to limit potential
losses in earnings or cash flows from adverse foreign currency exchange rate
movements. Foreign currency exposures arise from transactions denominated in a
currency other than the company's functional currency and from foreign
denominated revenues and profits translated into U.S. dollars. The primary
currencies to which the company is exposed include the euro, other European
currencies, the Japanese yen and other Asian and South American currencies.
Exposures are hedged with foreign currency forward contracts, put options, and
call options with maturity dates of less than one year. The potential loss in
fair value at December 31, 1999 for such contracts resulting from a hypothetical
10% adverse change in all foreign currency exchange rates is approximately $18
million. This loss would be mitigated by corresponding gains on the underlying
exposures.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in Millions, Except Per Share Amounts)
- --------------------------------------------------------------------------------
1999 1998 1997
----------- ----------- -----------
Revenues.............................................. $3,452.3 $3,020.6 $2,493.5
Cost of revenues...................................... 2,222.8 1,934.4 1,623.5
- -----------------------------------------------------------------------------------------------
GROSS PROFIT..................................... 1,229.5 1,086.2 870.0
Research and development.............................. 183.6 158.5 128.9
Selling, general and administrative................... 569.3 544.9 466.5
- -----------------------------------------------------------------------------------------------
OPERATING EXPENSES............................... 752.9 703.4 595.4
- -----------------------------------------------------------------------------------------------
OPERATING INCOME................................. 476.6 382.8 274.6
Interest expense...................................... 10.7 11.0 10.8
Other................................................. 7.0 6.4 9.1
- -----------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM........................................... 458.9 365.4 254.7
Provision for income taxes............................ 140.4 122.4 91.7
- -----------------------------------------------------------------------------------------------
EARNINGS BEFORE EXTRAORDINARY ITEM............... 318.5 243.0 163.0
Extraordinary loss on extinguishment of debt
(net of related tax benefit of $8.4)................ -- -- (14.0)
- -----------------------------------------------------------------------------------------------
NET EARNINGS..................................... $ 318.5 $ 243.0 $ 149.0
Basic earnings per share:
Before extraordinary item........................ $ 2.46 $ 1.82 $ 1.14
Extraordinary loss............................... -- -- (0.10)
- -----------------------------------------------------------------------------------------------
NET EARNINGS PER SHARE........................... $ 2.46 $ 1.82 $ 1.04
Diluted earnings per share:
Before extraordinary item........................ $ 2.32 $ 1.70 $ 1.08
Extraordinary loss............................... -- -- (0.09)
- -----------------------------------------------------------------------------------------------
NET EARNINGS PER SHARE........................... $ 2.32 $ 1.70 $ 0.99
Shares used in per share calculation:
Basic............................................ 129,360,700 133,242,738 142,628,622
Diluted.......................................... 137,546,661 142,801,780 150,337,552
- --------------------------------------------------------------------------------
All share and per share data have been restated to reflect a two-for-one stock
split on June 10, 1999.
See notes to consolidated financial statements.
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LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS OF DECEMBER 31, 1999 AND 1998
(Dollars in Millions, Except Share Amounts)
- --------------------------------------------------------------------------------
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 93.9 $ 149.0
Trade receivables, net of allowances of $24.1 in 1999 and
$24.2 in 1998.......................................... 507.3 469.4
Inventories............................................... 387.7 333.0
Prepaid expenses and other current assets................. 99.8 68.6
- ---------------------------------------------------------------------------------
TOTAL CURRENT ASSETS................................... 1,088.7 1,020.0
Property, plant and equipment, net.......................... 561.0 430.5
Other assets................................................ 52.9 32.9
- ---------------------------------------------------------------------------------
TOTAL ASSETS........................................... $1,702.6 $1,483.4
- ---------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt........................................... $ 16.2 $ 11.7
Accounts payable.......................................... 300.9 267.1
Accrued liabilities....................................... 418.4 326.9
- ---------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES.............................. 735.5 605.7
Long-term debt.............................................. 148.7 148.7
Other liabilities........................................... 159.3 150.9
- ---------------------------------------------------------------------------------
TOTAL LIABILITIES...................................... 1,043.5 905.3
- ---------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value, 1,600,000 shares
authorized;
no shares issued and outstanding....................... -- --
Common stock, $.01 par value:
Class A, 450,000,000 shares authorized; 128,120,358
and 130,982,262 outstanding in 1999 and 1998,
respectively........................................ 1.5 0.8
Class B, 10,000,000 shares authorized; no shares
issued and outstanding.............................. -- --
Capital in excess of par.................................. 630.4 564.8
Retained earnings......................................... 730.3 411.8
Treasury stock, at cost; 25,441,266 and 20,145,666 shares
in 1999 and 1998, respectively......................... (672.3) (370.3)
Accumulated other comprehensive loss...................... (30.8) (29.0)
- ---------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY............................. 659.1 578.1
- ---------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $1,702.6 $1,483.4
- --------------------------------------------------------------------------------
All Class A common stock share data have been restated to reflect a two-for-one
stock split effective June 10, 1999.
See notes to consolidated financial statements.
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LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars In Millions)
- --------------------------------------------------------------------------------
1999 1998 1997
------ ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................ $318.5 $243.0 $149.0
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization.......................... 80.1 75.6 77.5
Extraordinary loss on extinguishment of debt........... -- -- 22.4
Deferred taxes......................................... (8.9) 3.0 40.7
Other non-cash charges to operations................... 67.9 26.5 24.6
- --------------------------------------------------------------------------------------
457.6 348.1 314.2
Change in assets and liabilities:
Trade receivables.................................... (77.9) (138.2) (47.5)
Trade receivables programs........................... 40.0 (12.3) 33.3
Inventories.......................................... (54.7) 20.8 (82.8)
Accounts payable..................................... 33.8 (34.9) 104.8
Accrued liabilities.................................. 91.5 99.4 5.5
Other assets and liabilities......................... (89.9) 6.1 (52.6)
- --------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 400.4 289.0 274.9
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............. (220.4) (101.7) (69.5)
Proceeds from sales of property, plant and equipment... 0.2 2.0 1.1
- --------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES............ (220.2) (99.7) (68.4)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term debt................. 8.2 (6.3) 35.8
Proceeds from issuance of long-term debt, net of
issuance costs of $1.3 in 1998....................... -- 297.2 0.2
Principal payments on long-term debt................... -- (207.0) (125.5)
Charges related to extinguishment of debt.............. -- -- (22.4)
Purchase of treasury stock............................. (302.0) (188.5) (182.2)
Exercise of stock options and warrants................. 60.2 20.7 15.2
- --------------------------------------------------------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES............ (233.6) (83.9) (278.9)
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (1.7) 0.6 (3.9)
- --------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents........ (55.1) 106.0 (76.3)
Cash and cash equivalents -- beginning of period............ 149.0 43.0 119.3
- --------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS -- END OF PERIOD.................. $ 93.9 $149.0 $ 43.0
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
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LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in Millions, Except Share Amounts)
- --------------------------------------------------------------------------------
CLASS A CLASS B CAPITAL IN
COMMON STOCK COMMON STOCK EXCESS OF PAR
-------------------- ------------------- -------------
SHARES AMOUNT SHARES AMOUNT
----------- ------ ---------- ------
BALANCE AT DECEMBER 31, 1996............................. 140,427,206 $0.7 2,446,523 $-- $519.3
Comprehensive earnings...................................
Net earnings...........................................
Other comprehensive earnings (loss)....................
Translation adjustment...............................
Other comprehensive earnings (loss)....................
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive earnings...................................
Conversion of Class B to Class A common stock............ 4,071,972 (2,035,986)
Shares issued upon exercise of warrants.................. 1,062,568 1.1
Option compensation expense.............................. 0.6
Long-term incentive plan compensation.................... 0.1
Deferred stock plan compensation......................... 1.8
Shares issued upon exercise of options................... 2,394,352 7.8
Tax benefit related to stock options and warrants........ 6.4
Treasury shares purchased................................ (12,876,228)
Cash received for payments on notes receivable for common
stock issued to management and certain other
individuals............................................ 0.1
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997............................. 135,079,870 0.7 410,537 -- 537.2
Comprehensive earnings...................................
Net earnings...........................................
Other comprehensive earnings (loss)....................
Minimum pension liability adjustment (net of related
tax benefit of $3.7)...............................
Translation adjustment...............................
Other comprehensive earnings (loss)....................
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive earnings...................................
Conversion of Class B to Class A common stock............ 821,074 (410,537)
Long-term incentive plan compensation.................... 5.3
Deferred stock plan compensation......................... 1.6
Shares issued upon exercise of options................... 2,350,756 0.1 9.4
Tax benefit related to stock options..................... 11.3
Treasury shares purchased................................ (7,295,200)
Treasury shares issued................................... 25,762
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998............................. 130,982,262 0.8 -- -- 564.8
Comprehensive earnings...................................
Net earnings...........................................
Other comprehensive earnings (loss)....................
Minimum pension liability adjustment (net of related
tax liability of $0.7).............................
Cash flow hedges (net of related tax liability of
$1.0)..............................................
Translation adjustment...............................
Other comprehensive earnings (loss)....................
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive earnings...................................
Long-term incentive plan compensation.................... 2.9
Deferred stock plan compensation......................... 3.9
Shares issued upon exercise of options................... 2,433,696 11.7
Tax benefit related to stock options..................... 47.8
Two-for-one stock split.................................. 0.7 (0.7)
Treasury shares purchased................................ (5,297,600)
Treasury shares issued................................... 2,000
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999............................. 128,120,358 $1.5 -- $-- $630.4
- -----------------------------------------------------------------------------------------------------------------
All Class A common stock share data have been restated to reflect a two-for-one
stock split effective June 10, 1999.
See notes to consolidated statements.
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27
- -----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE EARNINGS (LOSS)
---------------------------------------------------- TOTAL
RETAINED TREASURY MINIMUM TRANSLATION CASH FLOW STOCKHOLDERS'
EARNINGS STOCK PENSION LIABILITY ADJUSTMENT HEDGES TOTAL EQUITY
-------- -------- ------------------ ----------- --------- ----- -------------
BALANCE AT DECEMBER 31, 1996................ $ 19.8 $ -- $ -- $ 0.5 $ -- $ 0.5 $540.3
Comprehensive earnings......................
Net earnings.............................. 149.0 149.0
Other comprehensive earnings (loss).......
Translation adjustment.................. (24.3) (24.3)
-----
Other comprehensive earnings (loss)....... (24.3) (24.3)
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive earnings...................... 124.7
Conversion of Class B to Class A common
stock..................................... --
Shares issued upon exercise of warrants..... 1.1
Option compensation expense................. 0.6
Long-term incentive plan compensation....... 0.1
Deferred stock plan compensation............ 1.8
Shares issued upon exercise of options...... 7.8
Tax benefit related to stock options and
warrants.................................. 6.4
Treasury shares purchased................... (182.2) (182.2)
Cash received for payments on notes
receivable for common stock issued to
management and certain other individuals.. 0.1
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997................ 168.8 (182.2) -- (23.8) -- (23.8) 500.7
Comprehensive earnings......................
Net earnings.............................. 243.0 243.0
Other comprehensive earnings (loss).......
Minimum pension liability adjustment
(net of related tax benefit of $3.7).. (5.1) (5.1)
Translation adjustment.................. (0.1) (0.1)
-----
Other comprehensive earnings (loss)....... (5.2) (5.2)
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive earnings...................... 237.8
Conversion of Class B to Class A common
stock..................................... --
Long-term incentive plan compensation....... 5.3
Deferred stock plan compensation............ 1.6
Shares issued upon exercise of options...... 9.5
Tax benefit related to stock options........ 11.3
Treasury shares purchased................... (188.5) (188.5)
Treasury shares issued...................... 0.4 0.4
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998................ 411.8 (370.3) (5.1) (23.9) -- (29.0) 578.1
Comprehensive earnings......................
Net earnings.............................. 318.5 318.5
Other comprehensive earnings (loss).......
Minimum pension liability adjustment
(net of related tax liability of $0.7) 0.7 0.7
Cash flow hedges (net of related tax
liability of $1.0).................... 8.5 8.5
Translation adjustment.................. (11.0) (11.0)
-----
Other comprehensive earnings (loss)....... (1.8) (1.8)
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive earnings...................... 316.7
Long-term incentive plan compensation....... 2.9
Deferred stock plan compensation............ 3.9
Shares issued upon exercise of options...... 11.7
Tax benefit related to stock options........ 47.8
Two-for-one stock split..................... --
Treasury shares purchased................... (302.0) (302.0)
Treasury shares issued...................... -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999................ $730.3 $(672.3) $(4.4) $(34.9) $8.5 $(30.8) $659.1
- -----------------------------------------------------------------------------------------------------------------------------------
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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. ("Group" and together with its subsidiaries,
the "company" or "Lexmark") is an integrated global developer, manufacturer and
supplier of printing solutions and products, including laser and inkjet printers
and associated supplies for the office and home markets. The company also sells
dot matrix printers for printing single and multi-part forms by business users.
In addition, Lexmark develops, manufactures and markets a broad line of other
office imaging products which include supplies for International Business
Machines Corporation ("IBM") branded printers, aftermarket supplies for 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'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 accumulated other
comprehensive earnings in 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.
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.
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29
Revenue Recognition:
Revenues 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 $121.4 million, $115.6 million and $113.4 million in 1999, 1998
and 1997, 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.
Derivatives:
Effective January 1, 1999 the company adopted Statement of Financial Accounting
Standard ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 requires that all derivatives, including foreign
currency exchange contracts, be recognized on the balance sheet at fair value.
Derivatives that are not hedges must be recorded at fair value through earnings.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative are either offset against the change in fair value
of underlying assets or liabilities through earnings or recognized in other
comprehensive earnings until the underlying hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value is to
be immediately recognized in earnings.
Internal Use Software Costs:
Effective January 1, 1999 the company adopted Statement of Position 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. This statement requires that costs for internal use software be capitalized
and depreciated over its useful life. Prior to adoption of this statement, such
costs were expensed as incurred.
3. INVENTORIES
Inventories consisted of the following at December 31:
1999 1998
- --------------------------------------------------------------------------------
Work in process............................................. $169.5 $140.3
Finished goods.............................................. 218.2 192.7
- --------------------------------------------------------------------------------
$387.7 $333.0
- --------------------------------------------------------------------------------
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4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31:
1999 1998
- --------------------------------------------------------------------------------
Land and improvements....................................... $ 18.5 $ 16.3
Buildings and improvements.................................. 257.9 192.3
Machinery and equipment..................................... 557.4 456.5
Information systems and furniture........................... 139.5 128.9
Internal use software....................................... 9.0 --
- --------------------------------------------------------------------------------
982.3 794.0
Less accumulated depreciation............................... 421.3 363.5
- --------------------------------------------------------------------------------
$561.0 $430.5
- --------------------------------------------------------------------------------
Depreciation expense was $79.8 million, $75.1 million and $76.8 million for
1999, 1998 and 1997, respectively.
5. ACCRUED LIABILITIES
Accrued liabilities consisted of the following at December 31:
1999 1998
- --------------------------------------------------------------------------------
Compensation................................................ $ 93.1 $ 93.2
Income taxes payable........................................ 36.2 18.2
Fixed assets................................................ 25.0 15.3
Warranty.................................................... 33.4 33.5
Value added tax............................................. 11.8 12.4
Deferred revenue............................................ 54.4 43.5
Marketing programs.......................................... 44.7 33.8
Other....................................................... 119.8 77.0
- --------------------------------------------------------------------------------
$418.4 $326.9
- --------------------------------------------------------------------------------
6. DEBT
In 1998, Lexmark International, Inc. ("International"), a wholly-owned
subsidiary of Group, completed a public offering of $150.0 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. A balance of $148.7 million (net of
unamortized discount of $1.3 million) was outstanding at December 31, 1999 and
1998. The senior notes are guaranteed by Group and contain restrictions on
liens, sale leaseback transactions, mergers and sales of assets. 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.
In 1998, the company also entered into a $300.0 million unsecured, revolving
credit facility with a group of banks. Upon entering this agreement, the company
repaid the amounts outstanding on its existing term loan and revolving credit
facility. The company had an interest rate/currency swap hedging the term loan
with a notional amount of $36.7 million that matured in the first quarter of
1998. Interest expense of $0.9 million in 1997 related to the swap is included
in interest expense in the statement of earnings.
The interest rate on the credit facility ranges from 0.2% to 0.7% above London
Inter Bank Offered Rate (LIBOR), as adjusted under certain limited
circumstances, based upon the company's debt rating. 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. The interest and facility fees are payable quarterly.
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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.
In 1997, the company prepaid its $120.0 million, 14.25% 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.
Total cash paid for interest amounted to $14.3 million, $13.0 million and $13.2
million in 1999, 1998 and 1997, respectively.
7. STOCK SPLIT
At the company's Annual Meeting of Stockholders on April 29, 1999, the
stockholders approved an increase in the number of authorized shares of its
Class A common stock from 160 million to 450 million shares.
On April 29, 1999, the company announced a two-for-one stock split. The stock
split was effected in the form of a stock dividend on June 10, 1999 and entitled
each stockholder of record on May 20, 1999 to receive one share of Class A
common stock for each share of Class A common stock held on the record date. All
share and per share data included in the accompanying consolidated financial
statements and related notes have been restated to reflect this stock split.
8. 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, 1999, approximately 274,600,000 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.
As of December 31, 1998, the company's board of directors authorized the
repurchase of $600.0 million of its Class A common stock. In 1999, the company's
board of directors authorized the repurchase of up to an additional $400.0
million of its Class A common stock. This total repurchase authority of $1.0
billion allows the company at management's discretion to selectively repurchase
its stock from time to time in the open market or in privately negotiated
transactions depending upon market price and other factors. As of December 31,
1999, the company had repurchased 25,469,028 shares at prices ranging from
$10.63 to $75.75 per share for an aggregate cost of approximately $672.7
million.
In February 1998, the company's board of directors adopted a stockholder rights
plan (the "Rights Plan") which now provides existing stockholders with the right
to purchase one one-thousandth (0.001) 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, 2009, unless earlier redeemed by the company.
The remaining warrants outstanding in connection with a technology agreement
with an unrelated party to purchase 1,268,730 shares of Class A common stock at
$3.33 per share were exercised in 1997.
9. 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, 1999 approximately 4,500,000 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 non-employee director plan, as of December 31, 1999
approximately 311,000 shares of Class A common stock are reserved for future
grants in the form of stock options and deferred
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stock units. As of December 31, 1999, awards under the programs have been
limited to stock options, restricted stock, performance shares and deferred
stock units.
The company has granted approximately 476,000 shares of restricted stock and
deferred stock units as of December 31, 1999 with various vesting periods. The
cost of the awards, determined to be the fair market value of the shares at the
date of grant, is charged to compensation expense ratably over the vesting
periods. In addition, the company has awarded performance shares for which
specific goals must be attained by the end of the four year period 1997 through
2000 in order for the shares to be fully vested. Compensation expense is
estimated over the four year period based on the fair market value of the shares
during that period.
The exercise price of options awarded under stock option 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 generally 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. In some cases
option vesting and exercisability may be accelerated due to the achievement of
performance objectives.
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 deferred stock
units. Had compensation expense for the company's stock option 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:
1999 1998 1997
- ------------------------------------------------------------------------------------------
Net earnings -- as reported................................. $318.5 $243.0 $149.0
Net earnings -- pro forma................................... 305.2 236.5 145.1
Basic EPS -- as reported.................................... $ 2.46 $ 1.82 $ 1.04
Basic EPS -- pro forma...................................... 2.36 1.77 1.02
Diluted EPS -- as reported.................................. $ 2.32 $ 1.70 $ 0.99
Diluted EPS -- pro forma.................................... 2.22 1.66 0.97
- ------------------------------------------------------------------------------------------
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:
1999 1998 1997
- ------------------------------------------------------------------------------------------
Expected dividend yield..................................... -- -- --
Expected stock price volatility............................. 43% 38% 44%
Weighted average risk-free interest rate.................... 5.0% 5.5% 6.2%
Weighted average expected life of options (years)........... 4.9 4.9 4.8
- ------------------------------------------------------------------------------------------
The weighted average fair value of options granted during 1999, 1998 and 1997
was $24.41, $9.46 and $5.92 per share, respectively.
The pro forma effects on net income for 1999, 1998 and 1997 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.
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33
A summary of the status of the company's stock option plans as of December 31,
1999, 1998 and 1997 and changes during the years then ended is presented below:
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
- ----------------------------------------------------------------------------------------------
Outstanding at December 31, 1996............................ 13,903,724 $ 6.16
Granted..................................................... 2,711,510 12.84
Exercised................................................... (2,552,816) 3.91
Forfeited or canceled....................................... (478,568) 9.20
- ----------------------------------------------------------------------------------------------
Outstanding at December 31, 1997............................ 13,583,850 7.79
Granted..................................................... 2,792,416 22.86
Exercised................................................... (2,531,610) 5.73
Forfeited or canceled....................................... (245,700) 12.87
- ----------------------------------------------------------------------------------------------
Outstanding at December 31, 1998............................ 13,598,956 11.15
Granted..................................................... 2,680,664 52.59
Exercised................................................... (2,588,116) 8.83
Forfeited or canceled....................................... (385,879) 16.73
- ----------------------------------------------------------------------------------------------
Outstanding at December 31, 1999............................ 13,305,625 $19.79
- ----------------------------------------------------------------------------------------------
As of December 31, 1999, 1998 and 1997 there were 6,350,259, 6,968,266 and
7,356,648 options exercisable, respectively.
The following tables summarize information about stock options outstanding at
December 31, 1999:
OPTIONS OUTSTANDING
- -----------------------------------------------------------------------------------------------------
NUMBER WEIGHTED AVERAGE
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE
EXERCISE PRICES AT 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------
$ 3.34 to $ 9.88.............................. 3,327,032 2.8 years $ 4.72
10.00 to 18.22.............................. 5,073,950 6.4 11.24
18.78 to 52.22.............................. 2,555,416 8.2 23.42
52.34 to 87.06.............................. 2,349,227 9.4 55.68
- -----------------------------------------------------------------------------------------------------
$ 3.34 to $87.06.............................. 13,305,625 6.4 $19.79
- -----------------------------------------------------------------------------------------------------
OPTIONS EXERCISABLE
- -----------------------------------------------------------------------------------------------
NUMBER
RANGE OF EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AT 12/31/99 EXERCISE PRICE
- -----------------------------------------------------------------------------------------------
$ 3.34 to $ 9.88............................................ 3,120,640 $ 4.49
10.00 to 18.22............................................ 2,792,070 10.69
18.78 to 52.22............................................ 386,676 23.46
52.34 to 87.06............................................ 50,873 60.54
- -----------------------------------------------------------------------------------------------
$ 3.34 to $87.06............................................ 6,350,259 $ 8.82
- -----------------------------------------------------------------------------------------------
During 1999, stockholders approved an Employee Stock Purchase Plan ("ESPP") to
be effective January 1, 2000. The ESPP will enable substantially all regular
employees to purchase full or fractional shares of Lexmark Class A common stock
through payroll deductions of up to 10% of eligible compensation. The price an
employee pays is 85% of the closing market price on the last business day of
each month. Approximately 3,000,000 shares of Class A common stock are reserved
for the ESPP.
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10. INCOME TAXES
The provision for income taxes consisted of the following:
1999 1998 1997
- -----------------------------------------------------------------------------------------
Currently payable:
Federal................................................... $100.4 $ 92.9 $37.8
Non-U.S................................................... 23.0 16.0 9.9
State and local........................................... 7.7 6.8 3.3
- -----------------------------------------------------------------------------------------
131.1 115.7 51.0
- -----------------------------------------------------------------------------------------
Deferred payable:
Federal................................................... 4.6 1.9 34.1
Non-U.S................................................... 0.9 2.9 2.6
State and local........................................... 3.8 1.9 4.0
- -----------------------------------------------------------------------------------------
9.3 6.7 40.7
- -----------------------------------------------------------------------------------------
Provision for income taxes.................................. $140.4 $122.4 $91.7
- -----------------------------------------------------------------------------------------
Earnings before income taxes were as follows:
1999 1998 1997
- ------------------------------------------------------------------------------------------
U.S......................................................... $261.6 $278.2 $166.7
Non-U.S..................................................... 197.3 87.2 88.0
- ------------------------------------------------------------------------------------------
Earnings before income taxes................................ $458.9 $365.4 $254.7
- ------------------------------------------------------------------------------------------
The company realized an income tax benefit from the exercise of certain stock
options and warrants in 1999, 1998 and 1997 of $47.8 million, $11.3 million and
$6.4 million, respectively. This benefit resulted in a decrease in current
income taxes payable and an increase in capital in excess of par.
The company and its subsidiaries are subject to tax examinations in various U.S.
and foreign jurisdictions. The company believes that adequate amounts of tax and
related interest have been provided for any adjustments that may result from
these examinations.
Significant components of deferred income taxes were as follows:
1999 1998
- --------------------------------------------------------------------------------
Deferred tax assets:
Tax loss carryforwards.................................... $ 7.8 $ 12.5
Intangible assets......................................... 4.1 3.7
Unexercised stock options................................. -- 0.4
Inventories............................................... 9.9 17.6
Valuation allowance....................................... (1.8) (18.4)
- --------------------------------------------------------------------------------
Total deferred tax assets.............................. 20.0 15.8
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Prepaid expenses.......................................... (3.7) (2.2)
Property, plant and equipment............................. (32.8) (29.0)
Other..................................................... 0.3 (9.7)
- --------------------------------------------------------------------------------
Total deferred tax liabilities......................... (36.2) (40.9)
- --------------------------------------------------------------------------------
Net deferred tax liabilities................................ $(16.2) $(25.1)
- --------------------------------------------------------------------------------
The net decrease in the total valuation allowance for the years ended December
31, 1999 and 1998 was $16.6 million and $2.4 million, respectively. The company
has non-U.S. tax loss carryforwards of $23.6 million which have an indefinite
carryforward period. Of these non-U.S. tax loss carryforwards, $6.1 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. Deferred income
taxes have not been provided on the undistributed earnings of foreign
subsidiaries.
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35
Undistributed earnings of non-U.S. subsidiaries included in the consolidated
retained earnings was approximately $262.8 million. These earnings have been
substantially reinvested, and the company does not plan to initiate any action
that would precipitate the payment of income taxes thereon. It is not
practicable to estimate the amount of additional tax that might be payable on
the foreign earnings.
A reconciliation of the provision for income taxes using the U.S. statutory rate
and the company's effective tax rate was as follows:
1999 1998 1997
------------- ------------- -----------------
AMOUNT % AMOUNT % AMOUNT %
- ---------------------------------------------------------------------------------------------------
Provision for income taxes at statutory rate.... $160.6 35.0% $127.9 35.0% $89.2 35.0%
State and local income taxes, net of federal tax
benefit....................................... 9.6 2.1 8.7 2.4 7.3 2.9
Losses providing no tax benefit................. 1.9 0.4 1.2 0.3 5.8 2.3
Foreign tax differential........................ (17.6) (3.8) (11.8) (3.2) -- --
Change in the beginning-of-the-year balance of
the valuation allowance for deferred tax
assets affecting provision.................... (16.6) (3.6) (2.4) (0.6) (11.5) (4.5)
Research and development credit................. (8.9) (1.9) (5.8) (1.6) (5.5) (2.2)
Foreign sales corporation....................... (6.1) (1.4) (6.8) (1.9) (2.6) (1.0)
Other........................................... 17.5 3.8 11.4 3.1 9.0 3.5
- ---------------------------------------------------------------------------------------------------
Provision for income taxes...................... $140.4 30.6% $122.4 33.5% $91.7 36.0%
- ---------------------------------------------------------------------------------------------------
Cash paid for income taxes was $58.3 million, $70.6 million and $36.3 million in
1999, 1998 and 1997, respectively.
11. 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 $3.3 million, $4.2 million and $5.6 million)
was $36.6 million, $25.7 million, and $16.0 million 1999, 1998 and 1997,
respectively. Future minimum rentals under terms of non-cancelable operating
leases at December 31 are: 2000-$34.8 million; 2001-$25.6 million; 2002-$15.8
million; 2003-$8.6 million; 2004-$7.8 million and thereafter-$15.3 million.
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12. EMPLOYEE PENSION AND POSTRETIREMENT PLANS
The company and its subsidiaries have retirement plans covering substantially
all regular employees. Medical, dental and life insurance plans for retirees are
provided by the company and certain of its non-U.S. subsidiaries. The changes in
the benefit obligations and plan assets for 1999 and 1998 were as follows:
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
- -------------------------------------------------------------------------------------------------
1999 1998 1999 1998
----------------- ---------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year..................... $503.5 $450.9 $ 40.2 $ 33.0
Service cost.............................................. 16.4 16.6 3.1 3.4
Interest cost............................................. 31.6 30.7 2.4 2.4
Contributions by plan participants........................ 0.3 0.3 -- --
Actuarial (gain) loss..................................... (67.5) 43.7 (9.6) 1.7
Foreign currency exchange rate changes.................... (7.8) 1.8 -- --
Benefits paid............................................. (21.6) (17.8) (0.6) (0.3)
Plan amendments........................................... -- (23.1) -- --
Settlement or curtailment losses.......................... 0.1 0.4 -- --
- -------------------------------------------------------------------------------------------------
Benefit obligation at end of year........................... 455.0 503.5 35.5 40.2
- -------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year.............. 499.2 442.8 -- --
Actual return on plan assets.............................. 79.5 68.2 -- --
Foreign currency exchange rate changes.................... (6.0) 1.5 -- --
Contributions by the employer............................. 3.3 4.2 0.6 0.3
Contributions by plan participants........................ 0.3 0.3 -- --
Benefits paid............................................. (21.6) (17.8) (0.6) (0.3)
- -------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year.................... 554.7 499.2 -- --
- -------------------------------------------------------------------------------------------------
Funded status............................................... 99.7 (4.3) (35.5) (40.2)
Unrecognized (gain) loss.................................. (79.7) 21.9 (3.6) 6.1
Unrecognized prior service cost........................... (19.4) (20.9) -- --
- -------------------------------------------------------------------------------------------------
Net amount recognized....................................... $ 0.6 $ (3.3) $(39.1) $(34.1)
- -------------------------------------------------------------------------------------------------
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
- ------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
------------------------ -------------------------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF
DECEMBER 31:
Discount rate........................... 7.7% 6.5% 6.8% 8.2% 7.0% 7.2%
Expected return on plan assets.......... 9.7% 9.6% 9.6% -- -- --
Rate of compensation increase........... 5.1% 4.1% 4.3% -- -- --
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost............................ $ 16.4 $ 16.6 $ 13.0 $3.1 $3.4 $3.0
Interest cost........................... 31.5 30.7 28.5 2.4 2.4 2.0
Expected return on plan assets.......... (47.0) (42.1) (35.7) -- -- --
Amortization of prior service cost...... (1.4) (1.4) 0.2 -- -- --
Amortization of net losses.............. 0.7 0.4 0.1 -- -- --
Settlement or curtailment losses........ 0.1 0.4 0.3 -- -- --
- ------------------------------------------------------------------------------------------------
Net periodic benefit cost................. $ 0.3 $ 4.6 $ 6.4 $5.5 $5.8 $5.0
- ------------------------------------------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $36.4 million, $34.4 million and $9.9 million,
respectively, as of December 31, 1999, and $41.7 million, $39.7 million and
$11.1 million, respectively, as of December 31, 1998.
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37
For measurement purposes, an 8.3% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 2000. The rate is assumed to
decrease gradually to 5.5% in 2009 and remain at that level thereafter. Since
the net employer costs for postretirement medical benefits reach the preset caps
within the next seven to nine years, a 1% increase or decrease in trend has a de
minimis effect on costs.
Related to the company's acquisition of the Information Products Corporation
from IBM in 1991, IBM agreed to pay for its pro rata share (currently estimated
at $63.0 million) of future postretirement benefits for all the company's U.S.
employees based on relative years of service with IBM and the company.
The company also sponsors 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 $6.4 million,
$5.5 million and $4.5 million in 1999, 1998 and 1997, respectively.
13. DERIVATIVES, FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
In 1999, the company adopted SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. The company recorded a net-of-tax cumulative-effect-type
loss adjustment of $0.4 million in accumulated other comprehensive earnings to
recognize at fair value all derivatives that were designated as cash-flow
hedging instruments upon adoption of SFAS No. 133 on January 1, 1999. This loss
adjustment, which the company expects to reclassify to earnings by March 31,
2000, consisted of a $0.6 million loss related to interest rate swaps and a $0.2
million gain related to foreign currency options.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The company's activities expose it to a variety of market risks, including the
effects of changes in foreign currency exchange rates and interest rates. The
financial exposures are monitored and managed by the company as an integral part
of its overall risk management program. The company's risk management program
seeks to reduce the potentially adverse effects that the volatility of the
markets may have on its operating results.
The company maintains a foreign currency risk management strategy that uses
derivative instruments to protect its interests from unanticipated fluctuations
in earnings and cash flows caused by volatility in currency exchange rates.
The company maintains an interest rate risk management strategy that uses
derivative instruments to minimize significant, unanticipated earnings
fluctuations caused by interest rate volatility. The company's goal is to
maintain a balance between fixed and floating interest rates on its financings.
By using derivative financial instruments to hedge exposures to changes in
exchange rates and interest rates, the company exposes itself to credit risk and
market risk. 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 the agreement. Market
risk is the adverse effect on the value of a financial instrument that results
from a change in currency exchange rates or interest rates. The company manages
exposure to market risk associated with interest rate and foreign exchange
contracts by establishing and monitoring parameters that limit the types and
degree of market risk that may be undertaken.
The company uses the following hedging strategies to reduce the potentially
adverse effects that market volatility may have on its operating results:
Fair Value Hedges: Fair value hedges are hedges of recognized assets or
liabilities. The company enters into forward exchange contracts to hedge actual
purchases and sales of inventories. The forward contracts used in this program
mature in three months or less, consistent with the related purchase and sale
commitments. Foreign exchange option contracts, as well as forward contracts,
may be used as fair value hedges should derivative instruments, for which hedge
accounting has been discontinued, expose earnings to further change in exchange
rates.
Cash Flow Hedges: Cash flow hedges are hedges of forecasted transactions or of
the variability of cash flows to be received or paid related to a recognized
asset or liability. The company purchases foreign exchange options and forward
exchange contracts expiring within one year as hedges of anticipated purchases
and sales that are
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denominated in foreign currencies. These contracts are entered into to protect
against the risk that the eventual cash flows resulting from such transactions
will be adversely affected by changes in exchange rates. The company also uses
interest rate swaps to convert a portion of its variable rate financings to
fixed rates.
ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES
All derivatives are recognized on the balance sheet at their fair value. 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. On the date the derivative
contract is entered into, the company designates the derivative as either a fair
value or cash flow hedge. Changes in the fair value of a derivative that is
highly effective as -- and that is designated and qualifies as -- a fair value
hedge, along with the loss or gain on the hedged asset or liability are recorded
in current period earnings in cost of revenues. Changes in the fair value of a
derivative that is highly effective as -- and that is designated and qualifies
as -- a cash flow hedge are recorded in other comprehensive earnings, until the
underlying transactions occur.
At December 31, 1999, the company had derivative assets of $23.4 million
classified as prepaid expenses and other current assets as well as derivative
liabilities of $7.5 million classified as accrued liabilities. At December 31,
1998, the company had derivative assets with a carrying amount of $9.2 million
and a fair value of $9.6 million classified as prepaid expenses and other
current assets. The company also had derivative liabilities with a carrying
amount and fair value of $9.6 million classified as accrued liabilities at
December 31, 1998. In addition, the interest rate swap (see Note 14) which had
no carrying amount, was a liability with a fair value of $1.0 million at
December 31, 1998. As of December 31, 1999 a total of $8.5 million of deferred
net gains on derivative instruments were accumulated in other comprehensive
earnings and are expected to be reclassified to earnings during the next twelve
months.
The company formally documents all relationships between hedging instruments and
hedged items, as well as its risk management objective and strategy for
undertaking various hedge items. This process includes linking all derivatives
that are designated as fair value and cash flow to specific assets and
liabilities on the balance sheet or to forecasted transactions. The company also
formally assesses, both at the hedge's inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair value or cash flows of hedged items.
When it is determined that a derivative is not highly effective as a hedge or
that it has ceased to be a highly effective hedge, the company discontinues
hedge accounting prospectively, as discussed below.
The company discontinues hedge accounting prospectively when (1) it is
determined that a derivative is no longer effective in offsetting changes in the
fair value or cash flows of a hedged item; (2) the derivative expires or is
sold, terminated, or exercised or (3) the derivative is discontinued as a hedge
instrument, because it is unlikely that a forecasted transaction will occur. As
of December 31, 1999 no hedges were determined to be ineffective.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair value hedge, the derivative
will continue to be carried on the balance sheet at its fair value. When hedge
accounting is discontinued because it is probable that a forecasted transaction
will not occur, the derivative will continue to be carried on the balance sheet
at its fair value, and gains and losses that were accumulated in other
comprehensive earnings are recognized immediately in earnings. In all other
situations in which hedge accounting is discontinued, the derivative will be
carried at its fair value on the balance sheet, with changes in its fair value
recognized in current period earnings. A fair value hedge is entered into when
the derivative instrument, for which hedge accounting has been discontinued,
exposes earnings to further change in exchange rates.
FINANCIAL INSTRUMENTS
At December 31, 1999, the carrying value of the company's long-term debt was
$148.7 million and the fair value was $137.2 million. At December 31, 1998, the
carrying value of the company's long-term debt was $148.7 million and the fair
value was $150.5 million. The fair value of the long-term debt was estimated
based on current rates available to the company for debt with similar
characteristics. 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.
36
39
CONCENTRATIONS OF CREDIT RISK
The company's main concentrations of credit risk consist primarily of temporary
cash investments and trade receivables. Cash investments are made in a variety
of high quality securities with prudent diversification requirements. Credit
risk related to trade receivables is dispersed across a large number of
customers located in various geographic areas. The company 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 12).
14. SALES OF RECEIVABLES
The company accounts for the transfers of receivables as sales transactions. In
the U.S., the company 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
the company.
In October 1999, the company amended the agreement to sell its U.S. trade
receivables on a limited recourse basis. The maximum amount of U.S. trade
receivables to be sold was increased from $125.0 million to $150.0 million. As
collections reduce previously sold receivables, the company may replenish these
with new receivables. At December 31, 1999, U.S. trade receivables of $140.0
million had been sold and, due to the revolving nature of the agreement, $140.0
million also remained outstanding. At December 31, 1998, U.S. trade receivables
of $100.0 million had been sold and also remained outstanding. The agreement,
which contains customary financial covenants, must be renewed annually, and is
expected to be renewed upon its expiration in October 2000. The risk the company
bears from bad debt losses on U.S. trade receivables sold is limited to
approximately 13% 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 had an agreement to sell up to 22 million deutsche marks of German
trade receivables on a limited recourse basis. During 1998, this agreement was
terminated.
Expenses incurred under these programs totaling $5.4 million, $6.6 million and
$5.2 million for 1999, 1998 and 1997, respectively, are included in other
expense in the statements of earnings.
In 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 LIBOR. Since May 1998, the swaps serve as a hedge of the receivables
financings which are based on floating interest rates. Expense of $0.7 million
and $0.5 million for 1999 and 1998, respectively, related to these swaps is
included in other expense in the statements of earnings.
37
40
15. EARNINGS PER SHARE
FOR THE YEAR ENDED DECEMBER 31, 1999
---------------------------------------
EARNINGS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
Net earnings............................................... $318.5
BASIC EPS
Net earnings available to common stockholders............ 318.5 129,360,700 $2.46
EFFECT OF DILUTIVE SECURITIES
Long-term incentive plan................................. -- 137,362
Stock options............................................ -- 8,048,599
------ -----------
DILUTED EPS
Net earnings available to common stockholders plus
assumed conversions................................... $318.5 137,546,661 $2.32
--------------------------------------
Options to purchase an additional 39,946 shares of Class A common stock at
prices between $82.81 and $87.06 per share were outstanding at December 31, 1999
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, 1998
---------------------------------------
EARNINGS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
Net earnings............................................... $243.0
BASIC EPS
Net earnings available to common stockholders......... 243.0 133,242,738 $1.82
EFFECT OF DILUTIVE SECURITIES
Long-term incentive plan................................. -- 240,764
Stock options......................................... -- 9,318,278
------ -----------
DILUTED EPS
Net earnings available to common stockholders plus
assumed conversions................................. $243.0 142,801,780 $1.70
--------------------------------------
Options to purchase an additional 9,000 shares of Class A common stock at prices
between $37.97 and $44.19 per share were outstanding at December 31, 1998 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, 1997
---------------------------------------
EARNINGS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
Earnings before extraordinary item........................ $163.0
BASIC EPS
Earnings available to common stockholders............... 163.0 142,628,622 $ 1.14
EFFECT OF DILUTIVE SECURITIES
Warrants................................................ -- 648,476
Long-term incentive plan................................ -- 20,860
Stock options........................................... -- 7,039,594
------ -----------
DILUTED EPS
Earnings available to common stockholders plus assumed
conversions.......................................... $163.0 150,337,552 $ 1.08
--------------------------------------
Options to purchase an additional 85,896 shares of Class A common stock at
prices between $16.28 and $18.22 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.
All share and per share data have been restated to reflect a two-for-one stock
split on June 10, 1999.
38
41
16. INTERNATIONAL OPERATIONS
The company manufactures and sells a variety of printers and associated supplies
that have similar economic characteristics as well as similar customers,
production processes and distribution methods and, therefore, continues to
report one segment.
The following are revenues and long-lived asset information by geographic area
for and as of December 31:
REVENUES
------------------------------
1999 1998 1997
------------------------------
United States............................................... $1,528.6 $1,410.5 $1,109.6
International............................................... 1,923.7 1,610.1 1,383.9
------------------------------
Total.................................................. $3,452.3 $3,020.6 $2,493.5
------------------------------
LONG-LIVED ASSETS
------------------
1999 1998
------------------
United States............................................... $358.4 $324.0
International............................................... 202.6 106.5
------------------
Total.................................................. $561.0 $430.5
------------------
Revenues reported above are based on the countries to which the products are
shipped.
17. SUMMARIZED FINANCIAL INFORMATION
The following is consolidated summarized financial information of International:
1999 1998 1997
- --------------------------------------------------------------------------------------------
Statement of Financial Position Data:
Current assets............................................ $1,088.7 $1,020.0 $ 776.1
Noncurrent assets......................................... 613.9 463.4 432.1
Current liabilities....................................... 739.4 609.6 551.4
Noncurrent liabilities.................................... 308.0 299.6 160.0
Statement of Earnings Data:
Revenues.................................................. $3,452.3 $3,020.6 $2,493.5
Gross profit.............................................. 1,229.5 1,086.2 870.0
Earnings before extraordinary item........................ 318.5 243.0 163.0
Net earnings.............................................. 318.5 243.0 149.0
Current liabilities include $3.9 million that are owed to Lexmark International
Group, Inc. at December 31, 1999, 1998 and 1997.
39
42
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------------------------------
1999:
Revenues........................................ $787.0 $817.3 $845.0 $1,003.0
Gross profit.................................... 285.2 295.6 303.6 345.1
Operating income................................ 103.7 112.1 115.8 145.0
Net earnings.................................... 67.8 74.5 76.5 99.7
Basic EPS*...................................... $ 0.52 $ 0.58 $ 0.59 $ 0.78
Diluted EPS*.................................... 0.48 0.55 0.56 0.73
Stock prices:
High.......................................... $58.25 $74.38 $87.50 $ 104.00
Low........................................... 42.56 49.50 59.63 61.81
1998:
Revenues........................................ $672.1 $697.3 $743.8 $ 907.4
Gross profit.................................... 246.6 256.4 267.9 315.3
Operating income................................ 77.9 85.3 91.4 128.2
Net earnings.................................... 49.5 53.8 57.8 81.9
Basic EPS*...................................... $ 0.36 $ 0.40 $ 0.44 $ 0.62
Diluted EPS*.................................... 0.34 0.38 0.41 0.58
Stock prices:
High.......................................... $22.63 $32.09 $37.75 $ 51.00
Low........................................... 17.50 21.88 26.38 25.38
- ----------------------------------------------------------------------------------------
*The sum of the quarterly earnings per share amounts do not necessarily equal
the year-to-date earnings per share due to changes in average share
calculations. This is in accordance with prescribed reporting requirements.
All per share data and stock prices have been restated to reflect a two-for-one
stock split on June 10, 1999.
40
43
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 PricewaterhouseCoopers
LLP.
The Finance and 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 and Audit
Committee, independent accountants, and corporate auditors have free access to
one another to discuss their findings.
/s/ Paul J. Curlander
Paul J. Curlander
Chairman and chief executive officer
/s/ Gary E. Morin
Gary E. Morin
Executive vice president and chief financial officer
41
44
REPORT OF INDEPENDENT ACCOUNTANTS
To the board of directors and stockholders of Lexmark International Group, Inc.
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of earnings, cash flows and
stockholders' equity appearing on pages 21 through 40 of this annual report on
Form 10-K present fairly, in all material respects, the consolidated financial
position of Lexmark International Group, Inc. and subsidiaries at December 31,
1999 and 1998, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These consolidated financial statements are the responsibility of the company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Lexington, Kentucky
February 11, 2000
42
45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except with respect to information regarding the executive officers of the
Registrant, the information required by Part III, Item 10 of this Form 10-K is
incorporated by reference herein, and made part of this Form 10-K, from the
company's definitive Proxy Statement for its 2000 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission,
pursuant to Regulation 14A, not later than 120 days after the end of the fiscal
year. The information with respect to the executive officers of the Registrant
is included under the heading "Executive Officers of the Registrant" in Item 1
above.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Part III, Item 11 of this Form 10-K is incorporated by
reference herein, and made part of this Form 10-K, from the company's definitive
Proxy Statement for its 2000 Annual Meeting of Stockholders, which will be filed
with the Securities and Exchange Commission, pursuant to Regulation 14A, not
later than 120 days after the end of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Part III, Item 12 of this Form 10-K is incorporated by
reference herein, and made part of this Form 10-K, from the company's definitive
Proxy Statement for its 2000 Annual Meeting of Stockholders, which will be filed
with the Securities and Exchange Commission, pursuant to Regulation 14A, not
later than 120 days after the end of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Part III, Item 13 of this Form 10-K is incorporated by
reference herein, and made part of this Form 10-K, from the company's definitive
Proxy Statement for its 2000 Annual Meeting of Stockholders, which will be filed
with the Securities and Exchange Commission, pursuant to Regulation 14A, not
later than 120 days after the end of the fiscal year.
43
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1 FINANCIAL STATEMENTS:
Financial statements filed as part of this Form 10-K are included under
Part II, Item 8.
(a)2 Financial Statement Schedules:
PAGES IN FORM 10-K
------------------
Report of Independent Accountants 45
For the years ended December 31, 1999, 1998, and 1997:
Schedule II -- Valuation and Qualifying Accounts 46
All other schedules are omitted as the required information is inapplicable or
the information is presented in the Consolidated Financial Statements or related
notes.
44
47
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the board of directors and stockholders of Lexmark International Group, Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 11, 2000 appearing on page 42 of this Annual Report on Form 10-K
also included an audit of the financial statement schedule listed in item
14(a)(2) of this Form 10-K. In our opinion, the financial statement schedule on
page 46 of this Form 10-K presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Lexington, Kentucky
February 11, 2000
45
48
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(DOLLARS IN MILLIONS)
(A) (B) (C) (D) (E)
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ---------- ----------
1997:
Allowance for doubtful accounts....... $18.0 $ 5.1 $-- $ (3.7) $19.4
Inventory reserves.................... 33.6 26.5 -- (20.5) 39.6
Deferred tax assets valuation
allowance.......................... 32.3 3.8 -- (15.3) 20.8
1998:
Allowance for doubtful accounts....... $19.4 $11.0 $-- $ (6.2) $24.2
Inventory reserves.................... 39.6 35.1 -- (36.5) 38.2
Deferred tax assets valuation
allowance.......................... 20.8 0.2 -- (2.6) 18.4
1999:
Allowance for doubtful accounts....... $24.2 $ 6.5 $-- $ (6.6) $24.1
Inventory reserves.................... 38.2 28.4 -- (32.0) 34.6
Deferred tax assets valuation
allowance.......................... 18.4 1.6 -- (18.2) 1.8
46
49
ITEM 14(a)(3). EXHIBITS
Exhibits for the company are listed in the Index to Exhibits beginning on page
E-1.
(b) REPORTS ON FORM 8-K
None.
47
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 in the City of Lexington,
State of Kentucky, on March 20, 2000.
LEXMARK INTERNATIONAL GROUP, INC.
By /s/ Paul J. Curlander
------------------------------------
Name: Paul J. Curlander
Title: Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the following capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Paul J. Curlander Chairman and Chief Executive March 20, 2000
- ------------------------------------------------ Officer (Principal Executive
Paul J. Curlander Officer)
/s/ Gary E. Morin Executive Vice President/Chief March 20, 2000
- ------------------------------------------------ Financial Officer (Principal
Gary E. Morin Financial Officer)
/s/ David L. Goodnight Vice President and Corporate March 20, 2000
- ------------------------------------------------ Controller (Principal Accounting
David L. Goodnight Officer)
* Director March 20, 2000
- ------------------------------------------------
B. Charles Ames
* Director March 20, 2000
- ------------------------------------------------
Frank T. Cary
* Director March 20, 2000
- ------------------------------------------------
William R. Fields
* Director March 20, 2000
- ------------------------------------------------
Ralph E. Gomory
* Director March 20, 2000
- ------------------------------------------------
Stephen R. Hardis
* Director March 20, 2000
- ------------------------------------------------
James F. Hardymon
* Director March 20, 2000
- ------------------------------------------------
Robert Holland, Jr.
* Director March 20, 2000
- ------------------------------------------------
Marvin L. Mann
* Director March 20, 2000
- ------------------------------------------------
Michael J. Maples
* Director March 20, 2000
- ------------------------------------------------
Martin D. Walker
* Vincent J. Cole, Attorney-in-Fact
48
51
INDEX TO EXHIBITS
NUMBER DESCRIPTION OF EXHIBITS
- ----- ------------------------------------------------------------
3.1 Third Restated Certificate of Incorporation of Lexmark
International Group, Inc. (the "company"). (1)
3.2 Amendment to Third Restated Certificate of Incorporation of
the company. (2)
3.3 Company By-Laws as Amended and Restated April 29, 1999. (2)
4.1 Form of Lexmark International, Inc. ("International") 6.75%
Senior Notes due 2008. (3)
4.2 Indenture dated as of May 11, 1998 among International, as
Issuer, and the company, as Guarantor, to the Bank of New
York, as Trustee. (3)
4.3 Amended and Restated Rights Agreement, dated as of February
11, 1999, between the company and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent. (4)
4.4 Specimen of Class A common stock certificate. (1)
10.1 Agreement, dated as of May 31, 1990, between International
and Canon Inc., and Amendment thereto. (5)*
10.2 Agreement, dated as of March 26, 1991, between International
and Hewlett-Packard Company. (5)*
10.3 Patent Cross-License Agreement, effective October 1, 1996,
between Hewlett-Packard Company and International. (6)*
10.4 Amended and Restated Lease Agreement, dated as of January 1,
1991, between IBM and International, and First Amendment
thereto. (7)
10.5 Amended and Restated Receivables Purchase Agreement, dated
as of March 31, 1998, among International, as Servicer,
Lexmark Receivables Corporation ("LRC"), as Seller, Delaware
Funding Corporation, as Buyer, and Morgan Guaranty Trust
Company of New York, as Administrative Agent. (8)
10.6 Amendment to Amended and Restated Receivables Purchase
Agreement, dated as of November 30, 1998, among
International, as Servicer, LRC, as Seller, Delaware Funding
Corporation, as Buyer, and Morgan Guaranty Trust Company of
New York, as Administrative Agent. (9)
10.7 Second Amendment to Amended and Restated Receivables
Purchase Agreement, dated as of October 25, 1999, among
International, as Servicer, LRC, as Seller, Delaware Funding
Corporation, as Buyer, and Morgan Guaranty Trust Company of
New York, as Administrative Agent.
10.8 Amended and Restated Purchase Agreement, dated as of March
31, 1998, between International, as Originator, and LRC, as
Buyer. (8)
10.9 Amendment to Amended and Restated Purchase Agreement, dated
as of November 30, 1998, between International, as
Originator, and LRC, as Buyer. (9)
10.10 Lexmark International Group, Inc. Stock Option Plan for
Executives and Senior Officers. (7)+
10.11 First Amendment to the Stock Option Plan for Executives and
Senior Officers, dated as of October 31, 1994. (1)+
10.12 Second Amendment to the Stock Option Plan for Executives and
Senior Officers, dated as of September 13, 1995. (1)+
10.13 Third Amendment to the Stock Option Plan for Executives and
Senior Officers, dated as of April 29, 1999. (10)+
10.14 Fourth Amendment to the Stock Option Plan for Executives and
Senior Officers, dated as of July 29, 1999. (10)+
10.15 Form of Management Stock Option Agreement, among the
company, International and Named Executive Officers
(including a schedule of Named Executive Officers, grant
dates and number of shares granted pursuant to options).
(1)+
E-1
52
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
10.16 Lexmark International Group, Inc. Stock Incentive Plan,
Amended and Restated Effective April 30, 1998. (8)+
10.17 Amendment No. 1 to the Lexmark International Group, Inc.
Stock Incentive Plan, as Amended and Restated, dated as of
April 29, 1999. (10)+
10.18 Form of Non-Qualified Stock Option Agreement, pursuant to
the company's Stock Incentive Plan. (3)+
10.19 Lexmark International Group, Inc. Nonemployee Director Stock
Plan, Amended and Restated, Effective April 30, 1998. (3)+
10.20 Amendment No. 1 to the Lexmark International Group, Inc.
Nonemployee Director Stock Plan, dated as of February 11,
1999. (2)+
10.21 Amendment No. 2 to the Lexmark International Group, Inc.
Nonemployee Director Stock Plan, dated as of April 29, 1999.
(10)+
10.22 Form of Non-Qualified Stock Option Agreement, pursuant to
the company's Nonemployee Director Stock Plan, Amended and
Restated effective April 30, 1998. (11)+
10.23 Employment Agreement, dated as of March 18, 1997, by and
among Paul J. Curlander, the company and International.
(12)+
10.24 Form of Change in Control Agreement entered into as of April
30, 1998 among the company, International and certain
officers thereof. (11)+
10.25 Form of Indemnification Agreement entered into as of April
30, 1998 among the company, International and certain
officers thereof. (11)+
10.26 Employment Agreement, dated as of April 30, 1998, by and
among Bernard V. Masson, the company and International.
10.27 Employment Agreement, dated as of April 30, 1998, by and
among Thomas B. Lamb, the company and International. (9)+
10.28 Employment Agreement, dated as of April 30, 1998, by and
among Alfred A. Traversi, the company and International.
(9)+
10.29 Employment Agreement, dated as of April 30, 1998, by and
among Gary E. Morin, the company and International. (11)+
10.30 Credit Agreement, dated as of January 27, 1998, among the
company, as Parent Guarantor, International, as Borrower,
the Lenders party thereto, Fleet National Bank, as
Documentation Agent, Morgan Guaranty Trust Company of New
York, as Syndication Agent, and The Chase Manhattan Bank, as
Administrative Agent. (12)
21 Subsidiaries of the company as of December 31, 1999.
23 Consent of PricewaterhouseCoopers LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
- ---------------
* Confidential treatment previously granted by the Securities and Exchange
Commission.
+ Indicates management contract or compensatory plan, contract or arrangement.
(1) Incorporated by reference to the company's Form S-1 Registration Statement,
Amendment No. 1, (Registration No. 33-97218) filed with the Commission on
October 27, 1995.
(2) Incorporated by reference to the company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 (Commission File No. 1-14050).
E-2
53
(3) Incorporated by reference to the company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998 (Commission File No. 1-14050).
(4) Incorporated by reference to the company's Amended Registration Statement
on Form 8-A filed with the Commission on March 12, 1999 (Commission File
No. 1-14050).
(5) Incorporated by reference to the company's Form S-1 Registration Statement,
Amendment No. 2 (Registration No. 33-97218) filed with the Commission on
November 13, 1995.
(6) Incorporated by reference to the company's Quarterly Report on Form 10-Q/A
for the quarter ended September 30, 1996 (Commission File No. 1-14050).
(7) Incorporated by reference to the company's Form S-1 Registration Statement
(Registration No. 33-97218) filed with the Commission on September 22,
1995.
(8) Incorporated by reference to the company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998 (Commission File No. 1-14050).
(9) Incorporated by reference to the company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998 (Commission File No. 1-14050).
(10) Incorporated by reference to the company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999 (Commission File No. 1-14050).
(11) Incorporated by reference to the company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998 (Commission File No. 1-14050).
(12) Incorporated by reference to the company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 (Commission File No. 1-14050).
E-3