UNITED STATES
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 September 30, 2003
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 ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No __
The registrant had 128,477,110 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 November 6, 2003.
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 NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002......2
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION (Unaudited)
AS OF SEPTEMBER 30, 2003 AND DECEMBER 31, 2002......................3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002.......................4
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)....5-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited)...........................10-15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........16
ITEM 4. CONTROLS AND PROCEDURES.............................................16
Part II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................17
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 Nine Months Ended
September 30 September 30
-------------------------------- ------------------------------
2003 2002 2003 2002
----- ----- ----- -----
Revenue $1,157.1 $1,041.0 $3,385.2 $3,149.1
Cost of revenue 785.7 702.7 2,276.8 2,162.3
-------- -------- -------- --------
Gross profit 371.4 338.3 1,108.4 986.8
-------- -------- -------- --------
Research and development 66.5 57.9 195.3 182.6
Selling, general and administrative 164.4 156.7 507.0 453.2
-------- -------- -------- --------
Operating expense 230.9 214.6 702.3 635.8
-------- -------- -------- --------
Operating income 140.5 123.7 406.1 351.0
Interest (income)/expense, net (0.3) 2.5 0.3 7.9
Other - (0.2) (0.2) 4.7
-------- -------- -------- --------
Earnings before income taxes 140.8 121.4 406.0 338.4
Provision for income taxes 36.7 31.6 105.6 88.0
-------- -------- -------- --------
Net earnings $ 104.1 $ 89.8 $ 300.4 $ 250.4
======== ======== ======== ========
Net earnings per share:
Basic $ 0.81 $ 0.71 $ 2.35 $ 1.94
======== ======== ======== ========
Diluted $ 0.79 $ 0.70 $ 2.29 $ 1.89
======== ======== ======== ========
Shares used in per share calculation:
Basic 128.5 126.8 127.8 129.1
======== ======== ======== ========
Diluted 131.5 129.2 131.1 132.2
======== ======== ======== ========
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)
September 30 December 31
2003 2002
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 569.9 $ 497.7
Marketable securities 389.8 -
Trade receivables, net of allowance of $53.0 in 2003 and $46.0 in 2002 586.1 600.3
Inventories 427.3 410.3
Prepaid expenses and other current assets 243.1 290.5
--------- ----------
Total current assets 2,216.2 1,798.8
Property, plant and equipment, net 692.9 747.6
Other assets 366.5 261.7
--------- ----------
Total assets $ 3,275.6 $ 2,808.1
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 0.1 $ 12.3
Accounts payable 422.9 378.5
Accrued liabilities 740.0 708.2
--------- ----------
Total current liabilities 1,163.0 1,099.0
Long-term debt 149.3 149.2
Other liabilities 488.0 478.3
--------- ----------
Total liabilities 1,800.3 1,726.5
--------- ----------
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; 128.3 and 126.2 shares
outstanding in 2003 and 2002, respectively 1.6 1.6
Class B, 10.0 shares authorized; no shares issued and outstanding - -
Capital in excess of par 939.3 863.5
Retained earnings 1,956.2 1,655.8
Treasury stock, at cost; 34.4 and 34.5 shares in 2003
and 2002, respectively (1,208.6) (1,209.6)
Accumulated other comprehensive loss (213.2) (229.7)
--------- ---------
Total stockholders' equity 1,475.3 1,081.6
--------- ---------
Total liabilities and stockholders' equity $ 3,275.6 $ 2,808.1
========= =========
See notes to consolidated condensed financial statements.
3
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Nine Months Ended
September 30
-------------------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net earnings $ 300.4 $ 250.4
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 109.8 103.5
Deferred taxes (5.5) 1.3
Other 16.7 37.9
------- -------
421.4 393.1
Change in assets and liabilities:
Trade receivables 14.2 152.5
Trade receivables program - (55.0)
Inventories (17.0) (56.0)
Accounts payable 44.4 39.6
Accrued liabilities 31.8 126.9
Tax benefits from employee stock plans 27.4 17.9
Other assets and liabilities (43.8) (86.9)
------- -------
Net cash provided by operating activities 478.4 532.1
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment (54.9) (71.2)
Purchases of marketable securities (469.6) -
Proceeds from marketable securities 79.8 -
Other 1.3 (2.1)
------- -------
Net cash used for investing activities (443.4) (73.3)
------- -------
Cash flows from financing activities:
(Decrease) increase in short-term debt (13.3) 8.3
Issuance of treasury stock 1.0 0.6
Purchase of treasury stock - (330.7)
Proceeds from employee stock plans 45.7 17.4
------- -------
Net cash provided by (used for) financing activities 33.4 (304.4)
------- -------
Effect of exchange rate changes on cash 3.8 3.3
------- -------
Net increase in cash and cash equivalents 72.2 157.7
Cash and cash equivalents - beginning of period 497.7 90.7
------- -------
Cash and cash equivalents - end of period $ 569.9 $ 248.4
======= =======
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, 2002.
2. STOCK-BASED COMPENSATION
(In millions, except per share amounts)
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation --Transition and Disclosure - an Amendment of SFAS 123, which
provided alternative methods for a voluntary change to the fair value
method of accounting for stock-based employee compensation and amended the
disclosure requirements of SFAS No. 123, Accounting for Stock-Based
Compensation. The company has elected to continue to account for its
stock-based employee compensation plans under APB Opinion 25, Accounting
for Stock Issued to Employees, and related interpretations. Accordingly, no
compensation cost is reflected in net earnings as all options granted have
an exercise price equal to the market value of the underlying common stock
on the date of grant. The following table is provided in accordance with
the disclosure requirements of SFAS 148 and illustrates the effect on net
earnings and earnings per share if the company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation.
Three Months Nine Months
Ended Ended
September 30 September 30
------------------------ ----------------------
2003 2002 2003 2002
---- ---- ---- ----
Net earnings, as reported $104.1 $89.8 $300.4 $250.4
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (10.1) (8.1) (31.1) (24.1)
------ ----- ------- ------
Pro forma net income $ 94.0 $81.7 $269.3 $226.3
====== ===== ====== ======
Net earnings per share:
Basic - as reported $ 0.81 $0.71 $ 2.35 $ 1.94
Basic - pro forma $ 0.73 $0.64 $ 2.11 $ 1.75
Diluted - as reported $ 0.79 $0.70 $ 2.29 $ 1.89
Diluted - pro forma $ 0.72 $0.63 $ 2.05 $ 1.71
5
3. RESTRUCTURING AND RELATED CHARGES
As of December 31, 2002, the company had substantially completed all
restructuring activities. The restructuring liability of $4.7 million
remaining at December 31, 2002 was principally associated with severance
payments, which continued into 2003 for employees who had exited the
business. As of September 30, 2003, all severance payments have been made.
4. MARKETABLE SECURITIES
During September 2003, the company began investing in marketable
securities. The company evaluated its marketable securities in accordance
with SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and determined that all of its investments in marketable
securities to date should be classified as available-for-sale and reported
at fair value, with unrealized gains and losses recorded in other
comprehensive earnings (loss). The fair value of the company's
available-for-sale marketable securities approximates the company's
amortized cost. As of September 30, 2003, there were no realized or
unrealized gains or losses related to marketable securities. The company
expects to use the specific identification method when accounting for the
costs of its available-for-sale marketable securities as sold.
At September 30, 2003, the company's available-for-sale marketable
securities consist of the following:
Gross Gross
Amortized Unrealized Unrealized Estimated
(Dollars in Millions) Cost Gains Losses Fair Value
------------------------------------ ------------------- -------------------- ------------------ ------------------
Municipal debt securities $ 260.1 $ - $ - $ 260.1
Preferred securities 129.7 - - 129.7
----- ---- ---- -------
Total marketable securities $ 389.8 $ - $ - $ 389.8
===================================================================================================================
Although contractual maturities of the company's debt securities are
generally greater than one year, the investments are classified as current
assets in the consolidated statements of financial position due to the
company's expected holding period of less than one year. The contractual
maturities of the company's available-for-sale marketable debt securities
noted above were as follows:
Amortized Estimated Fair
(Dollars in Millions) Cost Value
---------------------------------------------------------------------------------------------------------------
Due in less than one year $ 4.2 $ 4.2
Due in 1 - 5 years 2.1 2.1
Due after 5 years 253.8 253.8
------ ------
Total available-for-sale marketable debt securities $260.1 $260.1
===============================================================================================================
5. INVENTORIES
(Dollars in millions)
Inventories consist of the following:
September 30 December 31
2003 2002
---------------- -----------------
Work in process $118.5 $121.0
Finished goods 308.8 289.3
------ ------
$427.3 $410.3
====== ======
6
6. AGGREGATE WARRANTY LIABILITY
(Dollars in millions)
Changes in the company's aggregate warranty liability, which includes both
warranty and extended warranty (deferred revenue), during the nine months
ended September 30, 2003 are presented below.
------------------------------------------------------------
Balance as of December 31, 2002 $147.0
Accruals for warranties issued during 2003 168.2
Accruals related to pre-existing warranties
(including amortization of deferred
revenue for extended warranties and
changes in estimates) (32.2)
Settlements made (in cash or in kind) during 2003 (122.6)
------------------------------------------------------------
Balance as of September 30, 2003 $160.4
------------------------------------------------------------
Both warranty and the short-term portion of extended warranty are included
on the accrued liabilities line in the consolidated statements of financial
position. The long-term portion of extended warranty is included on the
other liabilities line in the consolidated statements of financial
position.
7. OTHER COMPREHENSIVE EARNINGS (LOSS)
(Dollars in millions)
Comprehensive earnings, net of taxes, consists of the following:
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- ------------------
2003 2002 2003 2002
---- ---- ---- ----
Net earnings $104.1 $89.8 $300.4 $250.4
Other comprehensive earnings (loss):
Foreign currency translation adjustment (1.2) (3.1) 14.1 10.9
Cash flow hedging, net of reclassifications 4.4 5.9 2.5 (4.7)
Minimum pension liability adjustment (0.1) - (0.1) (0.2)
------ ----- ------ ------
Comprehensive earnings $107.2 $92.6 $316.9 $256.4
====== ===== ====== ======
Accumulated other comprehensive loss consists of the following:
Accumulated
Minimum Other
Translation Cash Flow Pension Comprehensive
Adjustment Hedges Liability Loss
---------- --------- --------- -------------
Balance, December 31, 2002 $(43.8) $(20.9) $(165.0) $(229.7)
First quarter 2003 change 2.6 (2.2) 0.5 0.9
------ ------ ------- -------
Balance, March 31, 2003 (41.2) (23.1) (164.5) (228.8)
Second quarter 2003 change 12.7 0.3 (0.5) 12.5
------ ------ ------- -------
Balance, June 30, 2003 (28.5) (22.8) (165.0) (216.3)
Third quarter 2003 change (1.2) 4.4 (0.1) 3.1
------ ------ ------- -------
Balance, September 30, 2003 $(29.7) $(18.4) $(165.1) $(213.2)
====== ====== ======= =======
7
8. EARNINGS PER SHARE (EPS)
(In millions, except per share amounts)
The following table presents a reconciliation of the numerators and
denominators of the basic and diluted EPS calculations:
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
Numerator:
Net earnings $104.1 $89.8 $300.4 $250.4
====== ===== ====== ======
Denominator:
Weighted average shares used
to compute basic EPS 128.5 126.8 127.8 129.1
Effect of dilutive securities
Stock options 3.0 2.4 3.3 3.1
------ ----- ------ ------
Weighted average shares used
to compute diluted EPS 131.5 129.2 131.1 132.2
====== ===== ====== ======
Basic net EPS $0.81 $0.71 $2.35 $1.94
Diluted net EPS $0.79 $0.70 $2.29 $1.89
Options to purchase an additional 1.6 million and 7.8 million shares of
Class A common stock for the three month periods and 1.4 million and 2.2
million shares for the nine month periods ended September 30, 2003 and
September 30, 2002, respectively, were outstanding but were not included in
the computation of diluted earnings per share because their exercise price
was greater than the average market price of the common stock, and
therefore, their effect would be antidilutive.
9. EMPLOYEE PENSION PLANS
During the third quarter of 2003, the company's board of directors
authorized, and the company then made, a contribution to the company's U.S.
pension plan of approximately $108 million. This contribution was made to
improve the funding status of the plan following the negative returns in
capital markets over the past few years, which decreased the value of
pension plan assets. The increase in the other assets line in the
consolidated statements of financial position was due to the pension plan
contribution. Unless there are significant changes to the current
assumptions, no additional contribution is expected through 2004.
10. NEW ACCOUNTING STANDARDS
In November 2002, the Financial Accounting Standards Board ("FASB") issued
EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables,
which addresses revenue recognition accounting by a vendor for arrangements
under which it will perform multiple revenue-generating activities. The
provisions of this pronouncement are effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The company
has evaluated the provisions of this pronouncement and determined that the
pronouncement does not have a material impact on its financial position,
results of operations and cash flows.
In November 2002, the FASB issued FIN 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN 45 elaborates on
8
required disclosures by a guarantor in its financial statements about
obligations under certain guarantees it has issued and clarifies the need
for a guarantor to recognize, at the inception of certain guarantees, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The interpretation is effective for qualified guarantees entered
into or modified after December 31, 2002. The company has evaluated the
provisions of this interpretation and determined that the interpretation
does not have a material impact on its financial position, results of
operations and cash flows. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods ending
after December 15, 2002. Refer to note 6 of the notes to consolidated
financial statements for the quarterly disclosures required by this
pronouncement.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after December 15, 2003. The company has
evaluated the provisions of this interpretation and determined that the
interpretation has no impact on its financial position, results of
operations and cash flows.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, Amendment of Statement No. 133 on Derivative Instruments
and Hedging Activities. SFAS 149 amends and clarifies financial accounting
and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities under
Statement No. 133. SFAS 149 is generally effective for contracts entered
into or modified after June 30, 2003. This statement is not expected to
have a material impact on the company's financial position, results of
operations and cash flows.
11. SUBSEQUENT EVENT
During October 2003, the company entered into interest rate swap contracts
to convert its $150.0 million principal amount of 6.75% senior notes due
2008 from a fixed interest rate to a variable interest rate. Interest rate
swaps with a total notional amount of $150.0 million were executed whereby
the company will receive interest at a fixed rate of 6.75% and pay interest
at a variable rate of approximately 2.76% above the six-month London
Interbank Offered Rate (LIBOR). These interest rate swaps have a maturity
date of May 15, 2008, which is equivalent to the maturity date of the
senior notes.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Unaudited)
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
Results of Operations
---------------------
Consolidated revenue for the three months ended September 30, 2003 was
$1,157 million, an increase of 11% over the same period of 2002. Total U.S.
revenue increased $50 million or 10% and international revenue, including
exports from the U.S., increased $66 million or 12%. The quarterly revenue
growth was driven by increased sales of both laser and inkjet supplies and
printers. Laser and inkjet supplies revenue was $641 million for the third
quarter of 2003, versus $568 million for the same period in 2002, a 13%
increase. Laser and inkjet printer revenue was $430 million for the third
quarter of 2003, a 13% increase from $381 million in 2002.
For the nine months ended September 30, 2003, consolidated revenue was
$3,385 million, an increase of 7% over the same period of 2002. Total U.S.
revenue increased $47 million or 3% and international revenue, including
exports from the U.S., increased $189 million or 12%. The revenue growth
for the first nine months of 2003 was primarily driven by increased sales
of laser and inkjet supplies whose revenue increased 14% over 2002. Laser
and inkjet supplies revenue was $1,913 million for the nine months ended
September 30, 2003, versus $1,681 million for the same period in 2002, and
represented 57% of total revenue versus 53% in 2002. Laser and inkjet
printer revenue was $1,200 million for the nine months ended September 30,
2003, an increase of 2% over the same period of 2002.
Consolidated gross profit was $371 million for the three months ended
September 30, 2003, an increase of 10% from the same period of 2002. For
the nine months ended September 30, 2003, consolidated gross profit was
$1,108 million, an increase of 12% from the same period of 2002. Gross
profit as a percentage of revenue for the quarter ended September 30, 2003
decreased to 32.1% from 32.5% in the third quarter of 2002, a decline of
0.4 percentage points. The decrease was principally due to lower printer
margins (3.2 percentage points), offset somewhat by the absence of an asset
impairment write-off in 2002 (1.5 percentage points) and higher supplies
margins (1.2 percentage points). The 2002 asset impairment write-off of
$15.8 million ($11.7 million, net of taxes) related to the abandonment of a
customer relationship management software project. Gross profit as a
percentage of revenue for the nine months ended September 30, 2003
increased to 32.7% from 31.3% for the same period in 2002, an increase of
1.4 percentage points. The improvement in the gross profit margin was due
to an increase of supplies in the product mix (2.3 percentage points) and
higher supplies margins (1.4 percentage points), somewhat offset by lower
printer margins (2.8 percentage points).
Total operating expense was $231 million for the quarter ended September
30, 2003 compared to $215 million for the same period of 2002. Total
operating expense was $702 million for the nine months ended September 30,
2003 compared to $636 million for the same period of 2002. Operating
expense as a percentage of revenue for the quarter was 20.0% compared to
20.6% for the corresponding period in 2002. The 0.6 percentage point
decrease in 2003 was due to selling, general and administrative expenses
increasing at a rate below the revenue growth rate despite the
strengthening of the euro against the U.S. dollar. Also contributing to the
decrease was the absence of a $3.7 million write-off of design costs
related to a proposed manufacturing facility in the third quarter of 2002.
Operating expense as a percentage of revenue for the first nine months of
2003 was 20.7% compared to 20.2% for the same period of 2002. This increase
of 0.5 percentage points in 2003 principally reflects a strengthening of
the euro against the U.S. dollar and an increased investment in marketing
and sales.
Consolidated operating income was $141 million for the third quarter of
2003, an increase of $17 million from 2002. This increase was due to $33
million higher gross profit, partially offset by a $16 million increase in
operating expense. For the nine months ended September 30, 2003,
consolidated operating income was
10
$406 million, an increase of $55 million from the same period of 2002. This
increase was due to a $122 million increase in gross profit, partially
offset by a $67 million increase in operating expense.
Non-operating income was $0.3 million for the third quarter of 2003,
compared to non-operating expenses of $2.3 million for the same period of
2002. The increase was primarily due to increased interest income on
short-term investments. Non-operating expenses were $0.1 million for the
nine months ended September 30, 2003, a $13 million decrease from the same
period of 2002. The decrease was principally due to a $3.6 million
write-down of a private equity investment in 2002 and additional interest
income during the first nine months of 2003 compared to the same period in
2002.
Net earnings for the third quarter of 2003 were $104 million, compared to
$90 million in the third quarter of 2002. The increase in net earnings was
primarily due to the improved operating income. The effective income tax
rate was 26.0% in 2003 and 2002.
Basic net earnings per share were $0.81 for the third quarter of 2003
compared to $0.71 in the corresponding period in 2002. Diluted net earnings
per share were $0.79 in the third quarter of 2003, compared to $0.70 in
2002, an increase of 14%. The 2002 basic and net earnings per share were
both adversely impacted by approximately $0.09 as a result of the
previously mentioned $15.8 million asset impairment write-off.
Net earnings for the first nine months of 2003 were $300 million, compared
to $250 million for the same period of 2002. The increase in net earnings
was primarily due to improved operating income and lower non-operating
expenses. The effective income tax rate remained at 26.0% for both
nine-month periods.
Basic net earnings per share were $2.35 for the first nine months of 2003,
compared to $1.94 in the corresponding period of 2002. Diluted net earnings
per share were $2.29 for the first nine months of 2003, compared to $1.89
in the same period of 2002. These increases were primarily due to the
increase in net earnings.
Financial Condition
-------------------
The company's financial position remains strong at September 30, 2003, with
working capital of $1,053 million compared to $700 million at December 31,
2002. At September 30, 2003, the company had outstanding $0.1 million of
short-term debt and $149 million of long-term debt. The debt to total
capital ratio was 9% at September 30, 2003, compared to 13% at December 31,
2002. The company had no amounts outstanding under its U.S. trade
receivables financing program or its revolving credit facility at September
30, 2003.
Cash provided by operating activities for the nine months ended September
30, 2003 was $478 million, compared to $532 million for the same period of
2002. These amounts were reduced during 2003 and 2002 by $108 million and
$50 million, respectively, due to contributions to the U.S. pension plan.
See note 9 of the notes to consolidated financial statements for more
information regarding the 2003 pension contribution. Also contributing to
the change in cash flows from operating activities were unfavorable cash
flow changes in trade receivables, offset somewhat by favorable cash flow
changes in inventories as well as increased earnings. Management believes
that cash provided by operations will continue to be sufficient to meet
operating needs.
Cash used for investing activities for the nine months ended September 30,
2003 was $443 million, compared to $73 million for the same period of 2002.
The company began investing in marketable securities during the third
quarter of 2003, which resulted in a net use of cash of $390 million on a
year-to-date basis. The company spent $55 million on capital expenditures
during the first nine months of 2003, compared to $71 million during the
same period of 2002. The 2003 capital expenditures were principally related
to infrastructure support and new product development. It is anticipated
that capital expenditures for 2003 will be under $100 million, and they are
expected to be funded through cash from operations.
11
Cash provided by financing activities was $33 million for the nine months
ended September 30, 2003, compared to $304 million cash used for financing
activities for the same period of 2002. This $337 million increase in cash
from financing activities was due to the purchase of $331 million of
treasury stock in 2002, but no purchases of treasury stock in 2003, on a
year-to-date basis.
As of September 30, 2003, the company's board of directors had authorized a
total repurchase of $1.4 billion of its Class A common stock and there was
approximately $188 million of share repurchase authority remaining. 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. No shares have been repurchased during 2003. As of September 30,
2003, the company had repurchased approximately 34.7 million shares at
prices ranging from $10.63 per share to $105.38 per share for an aggregate
cost of approximately $1.2 billion.
Restructuring and related charges
---------------------------------
As of December 31, 2002, the company had substantially completed all
restructuring activities. The restructuring liability of $4.7 million
remaining at December 31, 2002 was principally associated with severance
payments, which continued into 2003 for employees who had exited the
business. As of September 30, 2003, all severance payments have been made.
New Accounting Standards
------------------------
In November 2002, the Financial Accounting Standards Board ("FASB") issued
EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables,
which addresses revenue recognition accounting by a vendor for arrangements
under which it will perform multiple revenue-generating activities. The
provisions of this pronouncement are effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The company
has evaluated the provisions of this pronouncement and determined that the
pronouncement does not have a material impact on its financial position,
results of operations and cash flows.
In November 2002, the FASB issued FIN 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN 45 elaborates on required disclosures by a
guarantor in its financial statements about obligations under certain
guarantees it has issued and clarifies the need for a guarantor to
recognize, at the inception of certain guarantees, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The
interpretation is effective for qualified guarantees entered into or
modified after December 31, 2002. The company has evaluated the provisions
of this interpretation and determined that the interpretation does not have
a material impact on its financial position, results of operations and cash
flows. The disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002.
Refer to note 6 of the notes to consolidated financial statements for the
quarterly disclosures required by this pronouncement.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after December 15, 2003. The company has
evaluated the provisions of this interpretation and determined that the
interpretation has no impact on its financial position, results of
operations and cash flows.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, Amendment of Statement No. 133 on Derivative Instruments
and Hedging Activities. SFAS 149 amends and clarifies financial accounting
and reporting for derivative instruments, including certain derivative
12
instruments embedded in other contracts and for hedging activities under
Statement No. 133. SFAS 149 is generally effective for contracts entered
into or modified after June 30, 2003. This statement is not expected to
have a material impact on the company's financial position, results of
operations and cash flows.
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 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 products 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 products or
the inability to reduce costs, including warranty costs, contain expenses
or increase or maintain 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'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 of the company and its
resellers. Unexpected fluctuations in reseller inventory levels could
disrupt ordering patterns and may adversely affect the company's financial
results. In addition, the financial failure or loss of a key customer or
reseller could have a material adverse impact on the company's financial
results. The company must also be able to address production and supply
constraints, particularly delays or disruptions in the supply of key
components necessary for production, which may result in lost revenue or 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.
o The company's future operating results may be adversely affected if it is
unable to continue to develop, manufacture and market products that are
reliable, competitive, and meet customers' needs. The markets for laser and
inkjet products and associated supplies are aggressively competitive,
especially with respect to pricing and the introduction of new technologies
and products offering improved features and functionality. The impact of
competitive activities on the sales volumes or revenue of the company, or
the company's inability to effectively deal with these competitive issues,
could have a material adverse effect on the company's ability to maintain
or grow retail shelf space or market share and on its financial results.
o The introduction of products by the company or its competitors, or 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, and variations in
the cost of component parts, may impact sales, 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 and to increase marketing expenditures also could cause
significant changes in the level of the company's operating expenses.
13
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
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 has resulted in intense price competition and may result in
excessive inventory for the company and/or its reseller channel, which may
adversely affect sales, pricing, risk of obsolescence and/or other elements
of the company's operating results.
o The company markets and sells its products through several sales
channels. The company has also advanced a strategy of forming alliances and
OEM arrangements with many companies. The company's future operating
results may be adversely affected by any conflicts that might arise between
or among its various sales channels, the loss of any alliance or OEM
arrangement or the loss of retail shelf space. Aggressive pricing on laser
and inkjet products 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.
o Terrorist attacks 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 Revenue derived from international sales make up about 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.
o The company relies in large part on its international production
facilities and international 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 international operations or manufacturing
partners are unable to supply products reliably, if there are disruptions
in international trade, disruptions at important geographic points of exit
and entry, if there are difficulties in transitioning such manufacturing
activities among the company, its international operations and/or its
manufacturing partners, or if there arise production and supply constraints
which result in additional costs to the company. 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 depends on its information technology systems for the
development, manufacture, distribution, marketing, sales and support of its
products and services. Any failure in such systems, or the systems of a
partner or supplier, may adversely affect the company's operating results.
Furthermore, because vast quantities of the company's products flow through
only a few distribution centers to provide product to various geographic
regions, the failure of information technology systems or any other
disruption affecting those product distribution centers could have a
material adverse impact on the company's ability to deliver product and on
the company's financial results.
o The entrance of additional competitors that are focused on printing
solutions could further intensify competition in the inkjet and laser
printer markets and could have a material adverse impact on the company's
strategy and financial results.
o Although the company is currently the exclusive supplier of new
cartridges for its laser and inkjet
14
products, there can be no assurance that other companies will not develop
new compatible cartridges for the company's products. In addition, refill
and remanufactured alternatives for some of the company's cartridges are
available and compete with the company's supplies business. The company
expects competitive refill and remanufacturing activity to increase.
Various legal challenges and governmental activities may intensify
competition for the company's aftermarket supplies business.
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 materially and 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 The company's inability to perform satisfactorily under service contracts
for managed print services and other customer services may result in the
loss of customers, loss of reputation and/or financial consequences that
may have a material adverse impact on the company's financial results and
strategy.
o Factors unrelated to the company's operating performance, including the
financial failure or loss of significant customers, resellers,
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.
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.
15
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 September 30, 2003, the fair value of the company's senior notes is
estimated at $168 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 September 30, 2003 by
approximately $18 million. Market risk is estimated as the potential change
in fair value resulting from a hypothetical 10% adverse change in interest
rates and amounted to approximately $3 million at September 30, 2003.
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 Canadian dollar, the Japanese yen, the British pound 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 September
30, 2003, for such contracts resulting from a hypothetical 10% adverse
change in all foreign currency exchange rates was approximately $60
million. This loss would be mitigated by corresponding gains on the
underlying exposures.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
The company's management, with the participation of the company's Chairman
and Chief Executive Officer and Executive Vice President and Chief
Financial Officer, have evaluated the effectiveness of the company's
disclosure controls and procedures as of the end of the period covered by
this report. Based upon that evaluation, the company's Chairman and Chief
Executive Officer and Executive Vice President and Chief Financial Officer
have concluded that the company's disclosure controls and procedures are
effective in providing reasonable assurance that the information required
to be disclosed by the company in the reports that it files under the
Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities
and Exchange Commission's rules and forms.
Changes in Internal Control over Financial Reporting
There has been no change in the company's internal control over financial
reporting that occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the
company's internal control over financial reporting.
16
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
None.
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 19 of this report.
(b) Reports on Form 8-K:
A Current Report on Form 8-K was filed by the company with
the Securities and Exchange Commission on July 21, 2003 to
announce the company's second quarter 2003 financial
results.
17
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: November 10, 2003 By: /s/ Gary D. Stromquist
------------------------
Gary D. Stromquist
Vice President and Corporate Controller
(Chief Accounting Officer)
18
EXHIBIT INDEX
Exhibits:
10.1 Amendment No. 2 to Receivables Purchase Agreement, dated as of October 20,
2003, by and among Lexmark Receivables Corporation ("LRC"), as Seller,
CIESCO, LLC (as successor to CIESCO L.P.), as Investor, Citibank, N.A.,
Citicorp North America, Inc., as Agent, and the company, as Collection
Agent and Originator.
10.2 Amendment No. 2 to Purchase and Contribution Agreement, dated as of October
20, 2003, by and between the company, as Seller, and LRC, as Purchaser.
12 Computation of Ratio of Earnings to Fixed Charges.
31.1 Certification of Chairman and Chief Executive Officer pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Executive Vice President and Chief Financial Officer
pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chairman and Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification of Executive Vice President and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
19