Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File No.1-14050
LEXMARK INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1308215
(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)
(859) 232-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
The registrant had 126,140,137 shares outstanding (excluding shares held in
treasury) of Class A common stock, par value $0.01 per share, as of the close of
business on July 31, 2002.
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Page of
Form 10-Q
Part I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (Unaudited)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001...2
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION (Unaudited)
AS OF JUNE 30, 2002, AND DECEMBER 31, 2001.................3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001....................4
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)..5-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (Unaudited)................9-15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........15
Part II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................16
1
Part I - Financial Information
Item 1. Financial Statements
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(In Millions, Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------------------ ----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenue $1,058.0 $980.7 $2,108.1 $1,968.7
Cost of revenue 719.1 644.9 1,459.6 1,310.4
-------- ------ -------- --------
Gross profit 338.9 335.8 648.5 658.3
-------- ------ -------- --------
Research and development 63.5 64.2 124.7 126.4
Selling, general and administrative 152.7 149.5 296.5 292.1
-------- ------ -------- --------
Operating expense 216.2 213.7 421.2 418.5
-------- ------ -------- --------
Operating income 122.7 122.1 227.3 239.8
Interest expense 2.3 3.7 5.4 6.5
Other 0.7 2.2 4.9 6.4
-------- ------ -------- --------
Earnings before income taxes 119.7 116.2 217.0 226.9
Provision for income taxes 30.6 29.1 56.4 60.1
-------- ------ -------- --------
Net earnings $ 89.1 $ 87.1 $ 160.6 $ 166.8
======== ====== ======== ========
Net earnings per share:
Basic $ 0.69 $ 0.67 $ 1.23 $ 1.30
======== ====== ======== ========
Diluted $ 0.67 $ 0.65 $ 1.20 $ 1.25
======== ====== ======== ========
Shares used in per share calculation:
Basic 129.9 129.2 130.2 128.6
======== ====== ======== ========
Diluted 133.4 134.3 133.7 133.5
======== ====== ======== ========
See notes to consolidated condensed financial statements.
2
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In Millions, Except Par Value)
(Unaudited)
June 30 December 31
2002 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 137.0 $ 90.7
Trade receivables, net of allowance of $39.4 in 2002 and $33.3 in 2001 618.8 702.8
Inventories 470.9 455.1
Prepaid expenses and other current assets 282.7 244.5
-------- --------
Total current assets 1,509.4 1,493.1
Property, plant and equipment, net 770.7 800.4
Other assets 155.6 156.4
-------- --------
Total assets $2,435.7 $2,449.9
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 11.2 $ 11.0
Accounts payable 363.9 384.7
Accrued liabilities 639.3 535.4
-------- --------
Total current liabilities 1,014.4 931.1
Long-term debt 149.1 149.1
Other liabilities 276.3 293.8
-------- --------
Total liabilities 1,439.8 1,374.0
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 1.6 shares authorized;
no shares issued and outstanding - -
Common stock, $.01 par value:
Class A, 900.0 shares authorized; 126.7 and
130.4 outstanding in 2002 and 2001 respectively 1.6 1.6
Class B, 10.0 shares authorized; no shares issued and outstanding - -
Capital in excess of par 840.6 806.2
Retained earnings 1,449.7 1,289.1
Treasury stock, at cost; 33.4 and 28.5 shares in 2002
and 2001, respectively (1,158.0) (879.8)
Accumulated other comprehensive loss (138.0) (141.2)
-------- --------
Total stockholders' equity 995.9 1,075.9
-------- --------
Total liabilities and stockholders' equity $2,435.7 $2,449.9
======== ========
See notes to consolidated condensed financial statements.
3
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Six Months Ended
June 30
-----------------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net earnings $160.6 $166.8
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 70.4 59.1
Deferred taxes 0.2 (3.2)
Other 16.9 3.0
------ ------
248.1 225.7
Change in assets and liabilities:
Trade receivables 139.0 35.9
Trade receivables program (55.0) (36.0)
Inventories (15.8) (139.5)
Accounts payable (20.8) (52.8)
Accrued liabilities 103.9 (92.5)
Tax benefits from employee stock plans 16.0 35.3
Other assets and liabilities (66.4) 14.4
------ ------
Net cash provided by (used for) operating activities 349.0 (9.5)
------ ------
Cash flows from investing activities:
Purchases of property, plant and equipment (45.8) (116.4)
Other (0.3) 0.1
------ ------
Net cash used for investing activities (46.1) (116.3)
------ ------
Cash flows from financing activities:
Increase in short-term debt 1.7 106.1
Issuance of treasury stock 0.6 1.2
Purchase of treasury stock (278.8) -
Proceeds from employee stock plans 16.4 19.1
------ ------
Net cash (used for) provided by financing activities (260.1) 126.4
------ ------
Effect of exchange rate changes on cash 3.5 (2.1)
------ ------
Net increase (decrease) in cash and cash equivalents 46.3 (1.5)
Cash and cash equivalents - beginning of period 90.7 68.5
------ ------
Cash and cash equivalents - end of period $137.0 $ 67.0
====== ======
See notes to consolidated condensed financial statements.
4
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited; however,
in the opinion of management of Lexmark International, Inc. (together
with its subsidiaries, the "company"), all adjustments (which comprise
only normal and recurring accruals) necessary for a fair presentation
of the interim financial results have been included. The results for
the interim periods are not necessarily indicative of results to be
expected for the entire year. These financial statements and notes
should be read in conjunction with the company's audited annual
consolidated financial statements for the year ended December 31,
2001.
In 2001, the Emerging Issues Task Force ("EITF") reached a consensus
that consideration from a vendor to a purchaser of the vendor's
products should be characterized as a reduction in revenue as stated
in EITF 00-25, Accounting for Consideration from a Vendor to a
Retailer in Connection with the Purchase or Promotion of the Vendor's
Products, and clarified in EITF 01-9. This EITF consensus was
effective for annual or interim financial statements beginning after
December 15, 2001, with reclassification required for comparative
prior periods. The company adopted this EITF as required in 2002 and
the adoption of this statement had no impact on the company's net
earnings, financial position or cash flows, but did result in a
reclassification of certain prior year reported amounts to conform to
the current year's presentation. Both revenue and selling, general and
administrative expense for the three months and the six months ended
June 30, 2001 were reduced by approximately $7 million and $19
million, respectively, as a result of this reclassification.
2. RESTRUCTURING AND RELATED CHARGES
During the fourth quarter of 2001, Lexmark's management and board of
directors approved a restructuring plan that included an elimination
of up to 1,600 jobs. This plan provided for a reduction in
infrastructure and overhead expenses, the elimination of the company's
business class inkjet printer, and the closure of an electronic card
manufacturing facility in Reynosa, Mexico. Restructuring and related
charges of $58.4 million were expensed during the fourth quarter of
2001. These charges were comprised of $36.0 million of accrued
restructuring costs related to separation and other exit costs, $11.4
million associated with a pension curtailment related to the employee
separations and $11.0 million related to asset impairment charges.
The following table presents a rollforward of the liabilities (in
millions) incurred in connection with the restructuring activities in
2000 and 2001. These liabilities are reflected as accrued liabilities
in the company's consolidated statements of financial position.
-----------------------------------------------------------------------------------
Restructuring Employee Other Exit
Liabilities Separations Costs Total
-----------------------------------------------------------------------------------
December 31, 2001 $ 24.8 $ 9.5 $ 34.3
Additions - - -
Payments (8.3) (1.8) (10.1)
-----------------------------------------------------------------------------------
June 30, 2002 $ 16.5 $ 7.7 $ 24.2
-----------------------------------------------------------------------------------
The accrued restructuring costs for employee separations were
associated with approximately 1,600 employees worldwide from various
business functions and job classes. Employee separation benefits
included severance, medical and other benefits. As of June 30, 2002,
approximately 800
5
employees have exited the business under the restructuring plan. The
other exit costs were primarily related to vendor and lease
cancellation charges.
In connection with the company's plans to exit the electronic card
manufacturing business in Reynosa, Mexico, Lexmark sold the Reynosa
operation to Manufacturers' Services Limited ("MSL") in early July
2002. Approximately 250 Reynosa employees were transferred to MSL as
part of the sale transaction in July 2002 and those employees are
expected to be retained by MSL.
Restructuring activities are expected to be substantially completed
during 2002. There have been no material changes to the plan since its
announcement.
3. INVENTORIES
(In millions)
Inventories consist of the following:
June 30 December 31
2002 2001
------------------- -------------------
Work in process $156.7 $146.9
Finished goods 314.2 308.2
------ ------
$470.9 $455.1
====== ======
4. DEBT
Effective May 29, 2002, the company entered into a new $500 million
unsecured, revolving credit facility with a group of banks, including a
$200 million 364-day portion and a $300 million 3-year portion. Upon
entering into the new credit agreement, the company terminated the existing
$300 million unsecured, revolving credit facility that was due to expire on
January 27, 2003. There were no amounts outstanding under the existing
facility upon its termination.
Under the new credit facility, the company may borrow in dollars, euros,
and other optional currencies. The interest rate ranges from 0.35% to 1.25%
above the London Interbank Offered Rate (LIBOR) for borrowings denominated
in U.S. dollars, the Eurocurrency Interbank Offered Rate (EURIBOR) for
borrowings denominated in euros, or other relevant international interest
rate for borrowings denominated in another currency. The interest rate
spread is based upon the company's debt ratings. In addition, the company
is required to pay a facility fee on the $500 million line of credit of
0.075% to 0.25% based upon the company's debt ratings. The interest and
facility fees are payable quarterly.
The new credit agreement contains customary default provisions, leverage
and interest coverage restrictions and certain restrictions on secured and
subsidiary debt, disposition of assets, liens and mergers and acquisitions.
The 364-day portion of the new $500 million credit facility has a maturity
date of May 28, 2003, with an option to extend an additional 364 days. The
3-year portion of the new credit facility has a maturity date of May 29,
2005. Any amounts outstanding under the new credit facility are due
according to the applicable maturity dates noted above. As of June 30,
2002, there were no amounts outstanding under this credit facility.
5. STOCKHOLDERS' EQUITY
In July 2002, the company received authorization from the board of
directors to repurchase an additional $200 million of its Class A common
stock for a total repurchase authority of $1.4 billion. 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 the second quarter of 2002, the company repurchased approximately
3.5 million shares in the open market at prices ranging from $50.88 per
share to $60.96 per share for a cost of approximately $202 million. During
the first six months of 2002, the
6
company repurchased approximately 5.0 million shares at prices ranging from
$50.00 per share to $60.96 per share for an aggregate cost of approximately
$279 million. As of July 31, 2002, the company had repurchased
approximately 34.2 million shares at prices ranging from $10.63 per share
to $105.38 per share for an aggregate cost of approximately $1,190 million,
leaving $210 million of share repurchase authority.
6. OTHER COMPREHENSIVE EARNINGS (LOSS)
(In millions)
Comprehensive earnings, net of taxes, consists of the following:
Three Months Ended Six Months Ended
June 30 June 30
------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net earnings $89.1 $87.1 $160.6 $166.8
Other comprehensive earnings (loss):
Foreign currency translation adjustment 15.2 (2.1) 14.0 (10.7)
Cash flow hedging, net of reclassifications (13.6) 4.0 (10.6) 15.6
Minimum pension liability adjustment ( 0.2) 0.2 ( 0.2) 0.2
----- ----- ------ ------
Comprehensive earnings $90.5 $89.2 $163.8 $171.9
===== ===== ====== ======
Accumulated other comprehensive earnings (loss) consists of the following:
Accumulated
Minimum Other
Translation Cash Flow Pension Comprehensive
Adjustment Hedges Liability Earnings (Loss)
------------ ---------- ---------- ---------------
Balance, December 31, 2001 $(64.3) $(14.9) $(62.0) $(141.2)
First quarter 2002 change (1.2) 3.0 - 1.8
------ ------ ------ -------
Balance, March 31, 2002 (65.5) (11.9) (62.0) (139.4)
Second quarter 2002 change 15.2 (13.6) ( 0.2) 1.4
------ ------ ------- -------
Balance, June 30, 2002 $(50.3) $(25.5) $(62.2) $(138.0)
====== ====== ====== =======
7
7. EARNINGS PER SHARE (EPS)
(In millions, except per share amounts)
The following is a reconciliation of the weighted average shares used in
the basic and diluted EPS calculations:
Three Months Ended Six Months Ended
June 30 June 30
------------------------ ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net earnings $ 89.1 $ 87.1 $160.6 $166.8
====== ====== ====== ======
Weighted average shares used
for basic EPS 129.9 129.2 130.2 128.6
Effect of dilutive securities
Stock options 3.5 5.1 3.5 4.9
------ ------ ------ ------
Weighted average shares used
for diluted EPS 133.4 134.3 133.7 133.5
====== ====== ====== ======
Basic net EPS $ 0.69 $ 0.67 $ 1.23 $ 1.30
Diluted net EPS $ 0.67 $ 0.65 $ 1.20 $ 1.25
Options to purchase an additional 2.3 million and 2.0 million shares of
Class A common stock for the three and six month periods ended at June 30,
2002 and 2001, respectively, were outstanding but were not included in the
computation of diluted earnings per share because their effect would be
antidilutive.
8. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and
Other Intangible Assets. SFAS 142 no longer permits the amortization of
goodwill and indefinite-lived intangible assets. Instead, these assets must
be reviewed at least annually for impairment. The company adopted SFAS 142
as required on January 1, 2002. During the second quarter of 2002, the
company completed the initial transitional goodwill impairment test, which
did not indicate any goodwill impairment. Since previously reported
goodwill amortization was immaterial for the company in the prior periods
presented, the discontinuation of goodwill amortization will not have a
material impact on the company's financial position, results of operations
or cash flows. Pro forma net earnings and earnings per share are not
presented because such amounts are not materially different than amounts
previously reported for the three and six months ended June 30, 2001.
8
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (Unaudited)
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
Basis of Presentation
- ---------------------
In 2001, the Emerging Issues Task Force ("EITF") reached a consensus that
consideration from a vendor to a purchaser of the vendor's products should be
characterized as a reduction in revenue as stated in EITF 00-25, Accounting for
Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products, and clarified in EITF 01-9. This EITF
consensus was effective for annual or interim financial statements beginning
after December 15, 2001, with reclassification required for comparative prior
periods. The company adopted this EITF as required in 2002 and the adoption of
this statement had no impact on the company's net earnings, financial position
or cash flows, but did result in a reclassification of certain prior year
reported amounts to conform to the current year's presentation. Both revenue and
selling, general and administrative expense for the three months and six months
ended June 30, 2001 were reduced by approximately $7 million and $19 million,
respectively, as a result of this reclassification.
Results of Operations
- ---------------------
Consolidated revenue for the three months ended June 30, 2002 was $1,058
million, an increase of 8% over the same period of 2001. Revenue was positively
affected by foreign currency exchange rates primarily due to strengthening of
European currencies against the U.S. dollar. Revenue growth was 6% for the
quarter on a constant currency basis. Total U.S. revenue increased $52 million
or 12% and international revenue, including exports from the U.S., increased $25
million or 5%.
The quarterly revenue growth was driven by increased sales of laser and inkjet
supplies whose revenue increased 18% over 2001. Laser and inkjet supplies
revenue was $566 million for the second quarter of 2002, versus $482 million for
the same period in 2001, and represents 53% of total revenue versus 49% in 2001.
Laser and inkjet printer revenue was $394 million for the second quarter of
2002, a 9% increase from 2001.
For the six months ended June 30, 2002, consolidated revenue was $2,108 million,
an increase of 7% over the same period of 2001. Revenue growth was also 7% on a
constant currency basis. Total U.S. revenue increased $146 million or 17%, and
international revenue, including exports from the U.S., decreased $7 million or
1%.
The revenue growth for the first half of 2002 was driven by increased sales of
laser and inkjet supplies whose revenue increased 17% over 2001. Laser and
inkjet supplies revenue was $1,112 million for the six months ended June 30,
2002, versus $952 million for the same period in 2001, and represents 53% of
total revenue versus 48% in 2001. Laser and inkjet printer revenue was $795
million for the first half of 2002, a 7% increase over 2001.
Revenue from sales to all original equipment manufacturers ("OEM") customers for
the three and six months ended June 30, 2002, accounted for less than 10% of
consolidated revenue with no single OEM customer accounting for more than 5% of
total revenue.
Consolidated gross profit was $339 million for the three months ended June 30,
2002, an increase of 1% from the same period of 2001. For the six months ended
June 30, 2002, consolidated gross profit was $648 million, a decrease of 1% from
the same period of 2001. Gross profit as a percentage of revenue for the quarter
ended June 30, 2002 decreased to 32.0% from 34.2% in the second quarter of 2001.
Gross profit as a percentage of revenue for the six months ended June 30, 2002
decreased to 30.8% from 33.4% for the same period in 2001. These decreases were
principally due to lower printer margins, partially offset by higher supplies
margins and an increase of supplies in the product mix.
9
Total operating expense increased 1% for both the three and six month periods of
2002 compared to the same periods in 2001. Operating expense as a percentage of
revenue for the quarter was 20.4% compared to 21.8% for the corresponding period
of 2001. Operating expense as a percentage of revenue for the first half of 2002
was 20.0% compared to 21.3% for the same period of 2001. These decreases reflect
the company's continuing focus on expense management and benefits of the
restructuring announced in the fourth quarter of 2001.
Consolidated operating income was $123 million for the second quarter of 2002, a
slight increase over 2001, due to higher revenue with little expense growth. For
the six months ended June 30, 2002, consolidated operating income was $227
million, a decline of $13 million compared to the same period of 2001,
principally due to lower gross profit margins.
Non-operating expenses declined $3 million for both the three and six month
periods of 2002 as compared to the corresponding periods in 2001. The decrease
for the quarter was primarily due to lower borrowings under the company's trade
receivables financing program and revolving credit facility as well as lower
interest rates. The decrease for the first half of the year was also due to
lower borrowings and lower interest rates, partially offset by the write-down of
an investment during the first quarter of 2002.
Net earnings for the second quarter of 2002 were $89 million, up 2% compared to
the second quarter of 2001, due to the decrease in non-operating expenses.
During the second quarter of both 2002 and 2001, the effective income tax rates
were lowered. During the second quarter of 2002, the effective income tax rate
was reduced from 26.5% to 26.0%, resulting in a quarterly effective income tax
rate of 25.6%. During the second quarter of 2001, the effective income tax rate
was reduced from 28.0% to 26.5%, resulting in a quarterly effective income tax
rate of 25.1%. 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 $0.69 for the second quarter of 2002 compared
to $0.67 in the corresponding period of 2001. Diluted net earnings per share
were $0.67 in the second quarter of 2002, compared to $0.65 in 2001, an increase
of 3%. These increases were primarily due to the increase in net earnings.
Net earnings for the first half of 2002 were $161 million, down 4% compared to
the same period of 2001. The decrease was primarily due to lower operating
income. The effective income tax rate was 26.0% for the six months ended June
30, 2002 compared to 26.5% for the same period in 2001. 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 $1.23 for the first six months of 2002
compared to $1.30 in the corresponding period of 2001. Diluted net earnings per
share were $1.20 for the first six months of 2002 compared to $1.25 in the same
period of 2001. These decreases were primarily due to lower net earnings.
Financial Condition
- -------------------
The company's financial position remains strong at June 30, 2002, with working
capital of $495 million compared to $562 million at December 31, 2001. At June
30, 2002, the company had outstanding $11 million of short-term debt and $149
million of long-term debt. The debt to total capital ratio was 14% at June 30,
2002 compared to 13% at December 31, 2001.
Cash provided by operating activities for the six months ended June 30, 2002 was
$349 million compared to $10 million cash used for operating activities for the
same period of 2001. The increase in cash flows from operating activities was
primarily due to favorable changes in working capital accounts, particularly
accrued liabilities, inventories and trade receivables, offset slightly by
unfavorable changes in other assets and liabilities.
10
Effective May 29, 2002, the company entered into a new $500 million unsecured,
revolving credit facility with a group of banks, including a $200 million
364-day portion and a $300 million 3-year portion. Upon entering into the new
credit agreement, the company terminated the existing $300 million unsecured,
revolving credit facility that was due to expire on January 27, 2003. There were
no amounts outstanding under the existing facility upon its termination.
Under the new credit facility, the company may borrow in dollars, euros and
other optional currencies. The interest rate ranges from 0.35% to 1.25% above
the London Interbank Offered Rate (LIBOR) for borrowings denominated in U.S.
dollars, the Eurocurrency Interbank Offered Rate (EURIBOR) for borrowings
denominated in euros, or other relevant international interest rate for
borrowings denominated in another currency. The interest rate spread is based
upon the company's debt ratings. In addition, the company is required to pay a
facility fee on the $500 million line of credit of 0.075% to 0.25% based upon
the company's debt ratings. The interest and facility fees are payable
quarterly.
The new credit agreement contains customary default provisions, leverage and
interest coverage restrictions and certain restrictions on secured and
subsidiary debt, disposition of assets, liens and mergers and acquisitions. The
364-day portion of the new $500 million credit facility has a maturity date of
May 28, 2003, with an option to extend an additional 364 days. The 3-year
portion of the new credit facility has a maturity date of May 29, 2005. Any
amounts outstanding under the new credit facility are due according to the
applicable maturity dates noted above. As of June 30, 2002, there were no
amounts outstanding under this credit facility.
Capital expenditures for the first six months of 2002 were $46 million compared
to $116 million for the same period of 2001. The 2002 capital expenditures were
principally for infrastructure support and new product development. It is
anticipated that capital expenditures for 2002 will be lower than previously
estimated and will be between $125 million and $130 million. The 2002 capital
expenditures are expected to be funded primarily through cash from operations.
In July 2002, the company received authorization from the board of directors to
repurchase an additional $200 million of its Class A common stock for a total
repurchase authority of $1.4 billion. 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 the second quarter of
2002, the company repurchased approximately 3.5 million shares in the open
market at prices ranging from $50.88 per share to $60.96 per share for a cost of
approximately $202 million. During the first six months of 2002, the company
repurchased approximately 5.0 million shares at prices ranging from $50.00 per
share to $60.96 per share for an aggregate cost of approximately $279 million.
As of July 31, 2002, the company had repurchased approximately 34.2 million
shares at prices ranging from $10.63 per share to $105.38 per share for an
aggregate cost of approximately $1,190 million, leaving approximately $210
million of share repurchase authority.
Restructuring and related charges
- ---------------------------------
During the fourth quarter of 2001, Lexmark's management and board of directors
approved a restructuring plan that included an elimination of up to 1,600 jobs.
This plan provided for a reduction in infrastructure and overhead expenses, the
elimination of the company's business class inkjet printer, and the closure of
an electronic card manufacturing facility in Reynosa, Mexico. Restructuring and
related charges of $58.4 million were expensed during the fourth quarter of
2001. These charges were comprised of $36.0 million of accrued restructuring
costs related to separation and other exit costs, $11.4 million associated with
a pension curtailment loss related to the employee separations and $11.0 million
related to asset impairment charges.
11
The following table presents a rollforward of the liabilities (in millions)
incurred in connection with the restructuring activities in 2000 and 2001. These
liabilities are reflected as accrued liabilities in the company's consolidated
statements of financial position.
- -------------------------------------------------------------------------------
Restructuring Employee Other Exit
Liabilities Separations Costs Total
- -------------------------------------------------------------------------------
December 31, 2001 $24.8 $9.5 $34.3
Additions - - -
Payments (8.3) (1.8) (10.1)
- -------------------------------------------------------------------------------
June 30, 2002 $16.5 $7.7 $24.2
- -------------------------------------------------------------------------------
The accrued restructuring costs for employee separations were associated with
approximately 1,600 employees worldwide from various business functions and job
classes. Employee separation benefits included severance, medical and other
benefits. As of June 30, 2002, approximately 800 employees have exited the
business under the restructuring plan. The other exit costs were primarily
related to vendor and lease cancellation charges.
In connection with the company's plans to exit the electronic card manufacturing
business in Reynosa, Mexico, Lexmark sold the Reynosa operation to
Manufacturers' Services Limited ("MSL") in early July 2002. Approximately 250
Reynosa employees were transferred to MSL as part of the sale transaction in
July 2002 and those employees are expected to be retained by MSL.
Restructuring activities are expected to be substantially completed during 2002.
Annual savings from the 2001 restructuring should approximate $55 million, with
about $40 million being achieved in 2002. These savings will be used to offset
competitive pricing impacts and for new investments.
New Accounting Standards
- ------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. SFAS 142 no longer permits the amortization of goodwill and
indefinite-lived intangible assets. Instead, these assets must be reviewed at
least annually for impairment. The company adopted SFAS 142 as required on
January 1, 2002. During the second quarter of 2002, the company completed the
initial transitional goodwill impairment test, which did not indicate any
goodwill impairment. Since previously reported goodwill amortization was
immaterial for the company in the prior periods presented, the discontinuation
of goodwill amortization will not have a material impact on the company's
financial position, results of operations or cash flows. Pro forma net earnings
and earnings per share are not presented because such amounts are not materially
different than amounts previously reported for the three and six months ended
June 30, 2001.
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, and there are a number of
factors that could adversely affect the company's future operating results or
cause the company's actual results to differ materially from the estimates or
expectations reflected in such forward-looking statements, including without
limitation, the factors set forth below:
o Unfavorable global economic conditions may adversely impact the company's
future operating results. Since the second quarter of 2001, the company has
experienced weak markets for its products. Continued softness in these markets
and uncertainty about the timing and extent of the global economic
12
downturn by both corporate and consumer purchasers of the company's products
could result in lower demand for the company's products. Weakness in demand may
result in excessive inventory for the company and/or its reseller channel which
may adversely affect sales, pricing and/or other elements of the company's
operating results.
o The company's performance depends in part upon its ability to successfully
forecast the timing and extent of customer demand and manage worldwide
distribution and inventory levels to support the demand of its customers, and to
address production and supply constraints, particularly delays in the supply of
key components necessary for production, which may result in the company
incurring additional costs to meet customer demand. 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. In addition, the complexity of the company's business requires
ongoing implementation of software and other systems improvements necessary to
support the business, and the failure of any such implementation could have a
material adverse effect on the company's financial results.
o 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 pricing programs, the reaction of competitors to any such new
products or programs, the life cycles of the company's products, as well as
delays in product development and manufacturing, 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.
o 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 laser and inkjet 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 competitive pressure to develop technology and products also
could cause significant changes in the level of the company's operating
expenses. The company's inability to effectively deal with these competitive
issues could have a material adverse effect on the company's financial results.
o The company and its major competitors, many of which have significantly
greater financial, marketing and/or technological resources than the company,
have regularly lowered prices on their printers and are expected to continue to
do so. In particular, both the inkjet and laser printer markets have experienced
and are expected to continue to experience significant price pressure. Price
reductions on inkjet or laser printers, variations in the cost of component
parts, 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.
o The company markets and sells its products through several sales channels to
customers and resellers. The company's future results may be adversely affected
by any conflicts that might arise between or among its various sales channels.
The company has advanced a strategy of forming alliances and OEM arrangements
with many companies. One such OEM customer is Compaq Computer Corporation
("Compaq"), which represented less than three percent of the company's revenue
in 2001, and the consummation of the HP/Compaq merger has resulted in the loss
of Compaq as a customer. Aggressive pricing on laser and inkjet printers and/or
associated supplies from customers and resellers, including, without limitation,
OEM customers, could result in a material adverse impact on the company's
strategy and financial results. In addition, the financial failure or loss of a
key alliance or OEM customer, other customer, or reseller, could have a material
adverse impact on the company's financial results.
o Competition from or claims by supplies remanufacturers and refillers, as well
as various governmental initiatives, may have an adverse impact on the company's
supplies business which would likely have an adverse impact on the company's
profitability. Price reductions on inkjet and laser supplies products are likely
to result in lower profitability and could result in a material adverse impact
on the company's strategy and financial results.
13
o The company relies heavily on its domestic and international production
facilities and manufacturing partners for the manufacture of its products and
key components of its products. Future operating results may be adversely
affected by several factors, including, without limitation, if the company's
domestic or international operations or manufacturing partners are unable to
supply products reliably, if there are disruptions in international trade, if
there are difficulties in transitioning manufacturing activities to other
company operations or manufacturing partners, or if there arise production and
supply constraints which result in additional costs to the company. In addition,
the financial failure or loss of a key supplier could result in a material
adverse impact on the company's financial results.
o 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
or business, as could expenses incurred by the company in obtaining intellectual
property rights, enforcing its intellectual property rights against others or
defending against claims that the company's products infringe the intellectual
property rights of others.
o Terrorist attacks, such as those that took place in the United States on
September 11, 2001, and the potential for future terrorist attacks have created
many political and economic uncertainties, some of which may affect the
company's future operating results. Future terrorist attacks, the national and
international responses to such attacks, and other acts of war or hostility may
affect the company's facilities, employees, suppliers, customers, transportation
networks and supply chains, or may affect the company in ways that are not
capable of being predicted presently.
o Factors unrelated to the company's operating performance, including the loss
of significant customers, manufacturing partners or suppliers; 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, the company's stock price, like that of other
technology companies, can be volatile. Trading activity in the company's common
stock, particularly the trading of large blocks and intraday trading in the
company's common stock, may affect the company's common stock price.
o The company believes that one of its competitive advantages is its exclusive
focus on printing solutions. The entrance of a competitor that is also
exclusively focused on printing solutions could offset this advantage and could
have a material adverse impact on the company's strategy and financial results.
o Revenue derived from international sales make up approximately half of the
company's revenue. Accordingly, the company's future results could be adversely
affected by a variety of factors, including changes in a specific country's or
region's political or economic conditions, foreign currency exchange rate
fluctuations, trade protection measures 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.
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
14
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 June 30, 2002, the fair value of the company's senior notes is estimated at
$151 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. The fair value of the
senior notes exceeded the carrying value as recorded in the statements of
financial position at June 30, 2002 by approximately $2 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 $5 million at
June 30, 2002.
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 revenue and profit translated into U.S. dollars. The primary
currencies to which the company is exposed include the euro, the British pound,
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 eighteen months. The potential loss in fair
value at June 30, 2002, for such contracts resulting from a hypothetical 10%
adverse change in all foreign currency exchange rates is approximately $19
million. This loss would be mitigated by corresponding gains on the underlying
exposures.
15
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The information required to be reported for the company's Annual
Meeting of Stockholders held April 30, 2002, was previously reported
by the company in its Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
A list of exhibits is set forth in the Exhibit Index found on
page 18 of this report.
(b) Reports on Form 8-K:
None
16
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, both on behalf of the registrant and in
his capacity as principal accounting officer of the registrant.
Lexmark International, Inc.
Registrant)
Date: August 7, 2002 By: /s/ Gary D. Stromquist
------------------------
Gary D. Stromquist
Vice President and Corporate Controller
(Chief Accounting Officer)
17
EXHIBIT INDEX
Exhibits:
10 Multicurrency Revolving Credit Agreement, dated as of May 29, 2002, by and
among the company, as Borrower, the Lenders party thereto, Fleet National
Bank, as Administrative Agent, Fleet Securities, Inc. as Arranger, JPMorgan
Chase Bank and Citicorp USA, Inc. as Co-Syndication Agents, and Key
Corporate Capital Inc. and SunTrust Bank as Co-Documentation Agents.
12 Computation of Ratio of Earnings to Fixed Charges.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Purusant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Purusant to
Section 906 of the Sarbanes-Oxley Act of 2002.
18