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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 March 31, 2004
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 filed (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No __
The registrant had 129,932,383 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 April 30, 2004.
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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 ENDED MARCH 31, 2004 AND 2003...........................2
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION (Unaudited)
AS OF MARCH 31, 2004 AND DECEMBER 31, 2003...........................3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003..........................4
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)......5-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Unaudited).................................9-13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........14
ITEM 4. CONTROLS AND PROCEDURES..............................................14
PART II
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES
OF EQUITY SECURITIES................................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................15
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
March 31
------------------------------------
2004 2003
---- ----
Revenue $1,256.0 $1,107.9
Cost of revenue 845.2 751.7
-------- --------
Gross profit 410.8 356.2
-------- --------
Research and development 72.2 62.1
Selling, general and administrative 173.4 165.5
-------- --------
Operating expense 245.6 227.6
-------- --------
Operating income 165.2 128.6
Interest (income)/expense, net (2.3) 0.7
Other 0.6 -
-------- --------
Earnings before income taxes 166.9 127.9
Provision for income taxes 45.9 33.3
-------- --------
Net earnings $ 121.0 $ 94.6
======== ========
Net earnings per share:
Basic $ 0.93 $ 0.74
======== ========
Diluted $ 0.91 $ 0.73
======== ========
Shares used in per share calculation:
Basic 129.6 127.1
======== ========
Diluted 133.1 130.2
======== ========
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)
March 31 December 31
2004 2003
-------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 749.8 $ 744.6
Marketable securities 612.9 451.5
Trade receivables, net of allowances of $47.6 in 2004 and $48.1 in 2003 571.6 615.4
Inventories 443.0 437.0
Prepaid expenses and other current assets 196.8 195.3
---------- ----------
Total current assets 2,574.1 2,443.8
Property, plant and equipment, net 705.8 715.9
Other assets 315.2 290.7
---------- ----------
Total assets $ 3,595.1 $ 3,450.4
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 3.1 $ 1.1
Accounts payable 474.1 465.7
Accrued liabilities 647.3 716.5
---------- ----------
Total current liabilities 1,124.5 1,183.3
Long-term debt 149.4 149.3
Other liabilities 480.4 474.8
---------- ----------
Total liabilities 1,754.3 1,807.4
---------- ----------
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; 129.7 and
128.6 outstanding in 2004 and 2003, respectively 1.6 1.6
Class B, 10.0 shares authorized; no shares issued and
outstanding - -
Capital in excess of par 1,011.8 956.4
Retained earnings 2,216.0 2,095.0
Treasury stock, at cost; 34.4 and 34.5 shares in 2004
and 2003, respectively (1,213.1) (1,213.5)
Accumulated other comprehensive loss (175.5) (196.5)
---------- ----------
Total stockholders' equity 1,840.8 1,643.0
---------- ----------
Total liabilities and stockholders' equity $ 3,595.1 $ 3,450.4
========== ==========
See notes to consolidated condensed financial statements.
3
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Three Months Ended
March 31
--------------------------
2004 2003
---- ----
Cash flows from operating activities:
Net earnings $ 121.0 $ 94.6
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 35.1 37.3
Deferred taxes 5.9 (2.1)
Other 2.6 10.3
------- -------
164.6 140.1
Change in assets and liabilities:
Trade receivables 43.8 52.3
Inventories (6.0) 41.0
Accounts payable 8.4 10.2
Accrued liabilities (69.2) (65.8)
Tax benefits from employee stock plans 19.3 6.4
Other assets and liabilities (8.6) 52.5
------- -------
Net cash provided by operating activities 152.3 236.7
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment (22.8) (16.1)
Purchases of marketable securities (723.6) -
Proceeds from marketable securities 562.2 -
------- -------
Net cash used for investing activities (184.2) (16.1)
------- -------
Cash flows from financing activities:
Increase (decrease) in short-term debt 2.0 (10.4)
Issuance of treasury stock 0.4 0.1
Proceeds from employee stock plans 34.5 13.1
------- -------
Net cash provided by financing activities 36.9 2.8
------- -------
Effect of exchange rate changes on cash 0.2 1.1
------- -------
Net increase in cash and cash equivalents 5.2 224.5
Cash and cash equivalents - beginning of period 744.6 497.7
------- -------
Cash and cash equivalents - end of period $ 749.8 $ 722.2
======= =======
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 consolidated condensed 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, 2003.
2. STOCK-BASED COMPENSATION (In millions, except per share amounts)
The company accounts 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
Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure - and Amendment of SFAS
123, 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 Ended
March 31
-------------------------
2004 2003
---- ----
Net earnings, as reported $121.0 $ 94.6
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (11.4) (10.6)
------ -------
Pro forma net income $109.6 $ 84.0
====== =======
Net earnings per share:
Basic - as reported $ 0.93 $ 0.74
Basic - pro forma $ 0.85 $ 0.66
Diluted - as reported $ 0.91 $ 0.73
Diluted - pro forma $ 0.82 $ 0.65
5
3. INVENTORIES
(Dollars in millions)
Inventories consist of the following:
March 31 December 31
2004 2003
---------- -----------
Work in process $137.0 $139.4
Finished goods 306.0 297.6
------ ------
$443.0 $437.0
====== ======
4. AGGREGATE WARRANTY LIABILITY (Dollars in millions)
Changes in the company's aggregate warranty liability, which includes both
warranty and extended warranty (deferred revenue), are presented below.
------------------------------------------------------------------------------
2004 2003
------------------------------------------------------------------------------
Balance at January 1 $172.7 $147.0
Accruals for warranties issued 61.3 52.7
Accruals related to pre-existing warranties
(including amortization of deferred revenue
for extended warranties and changes in (14.5) (8.5)
estimates)
Settlements made (in cash or in kind) (42.7) (45.0)
-------------------------------------------------------------------------------
Balance at March 31 $176.8 $146.2
-------------------------------------------------------------------------------
Both warranty and the short-term portion of extended warranty are included
on the accrued liabilities line in the Consolidated Condensed Statements of
Financial Position. The long-term portion of extended warranty is included
on the other liabilities line in the Consolidated Condensed Statements of
Financial Position.
5. OTHER COMPREHENSIVE EARNINGS (LOSS)
(Dollars in millions)
Comprehensive earnings, net of taxes, consists of the following:
Three Months Ended
March 31
----------------------
2004 2003
---- ----
Net earnings $121.0 $94.6
Other comprehensive earnings (loss):
Foreign currency translation adjustment 0.2 2.6
Cash flow hedging, net of reclassifications 22.4 (2.2)
Minimum pension liability adjustment (1.6) 0.5
------ -----
Comprehensive earnings $142.0 $95.5
====== =====
6
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, 2003 $(15.2) $(36.5) $(144.8) $(196.5)
First quarter 2004 change 0.2 22.4 (1.6) 21.0
------ ------ ------- -------
Balance, March 31, 2004 $(15.0) $(14.1) $(146.4) $(175.5)
====== ====== ======= =======
6. 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
March 31
---------------------
2004 2003
---- ----
Numerator:
Net earnings $121.0 $94.6
====== =====
Denominator:
Weighted average shares used
to compute basic EPS 129.6 127.1
Effect of dilutive securities
Stock options 3.5 3.1
------ -----
Weighted average shares used
to compute diluted EPS 133.1 130.2
====== =====
Basic net EPS $ 0.93 $0.74
Diluted net EPS $ 0.91 $0.73
Options to purchase an additional 1.3 million and 1.7 million shares of
Class A common stock for the three month periods ended March 31, 2004 and
2003, respectively, were outstanding but were not included in the
computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common shares and,
therefore, the effect would have been antidilutive.
7
7. EMPLOYEE PENSION AND POSTRETIREMENT PLANS
The components of the net periodic benefit cost for both the pension and
postretirement plans for the three month periods ended March 31, 2004 and
2003, were as follows:
Other Postretirement
Pension Benefits Benefits
----------------------------------------------------------------------------------------------------
2004 2003 2004 2003
----------------------- ------------------------
Service cost $ 3.8 $ 3.3 $ 0.5 $ 0.7
Interest cost 10.6 10.0 0.8 0.8
Expected return on plan assets (13.1) (11.8) - -
Amortization of prior service (benefit)/cost (0.1) (0.3) (0.1) -
Amortization of net loss 3.0 1.6 0.1 -
Settlement or curtailment losses (gains) - - - -
----------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 4.2 $ 2.8 $ 1.3 $ 1.5
----------------------------------------------------------------------------------------------------
The company previously disclosed in its financial statements for the year
ended December 31, 2003, that it expected to contribute approximately $45
million to its pension and postretirement plans in 2004. As of March 31,
2004, approximately $28 million of contributions have been made,
principally related to European pension plans. The company presently
anticipates contributing an additional $17 million, primarily to fund its
European pension plans in 2004.
8. SEGMENT DATA
The company manufactures and sells a variety of printing products and
related supplies and services. The company is primarily managed along
business and consumer market segments. The company evaluates the
performance of its segments based on revenue and operating income, and does
not include segment assets or other income and expense items for management
reporting purposes. Segment operating income includes selling, general and
administrative, research and development and other expenses, certain of
which are allocated to the respective segments based on internal measures
and may not be indicative of amounts that would be incurred on a stand
alone basis or may not be indicative of results of other enterprises in
similar businesses. Additionally, segment operating income excludes
significant expenses that are managed outside of the reporting segments.
The following table includes information about the company's reportable
segments:
Three Months Ended
March 31
----------------------------
2004 2003
---- ----
Revenue:
Business $ 673.0 $ 632.0
Consumer 583.0 475.9
All other - -
-------- ---------
Total revenue $1,256.0 $ 1,107.9
======== =========
Operating income/(loss):
Business $ 174.8 $ 164.4
Consumer 73.3 40.3
All other (82.9) (76.1)
-------- ---------
Total operating income/(loss) $ 165.2 $ 128.6
======== =========
8
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 March 31, 2004 was $1,256
million, an increase of 13% over the same period of 2003. Revenue in the
business market segment was $673 million for the first quarter of 2004 and
increased 6% over the same period of 2003. This growth was principally due to
increases in unit volumes. Revenue in the consumer market segment was $583
million for the first quarter of 2004 and increased 22% over the same period of
2003. This growth was also principally due to increases in unit volumes,
somewhat offset by lower prices. Total U.S. revenue increased $54 million or 11%
and international revenue, including exports from the U.S., increased $94
million or 16%.
Consolidated gross profit was $411 million for the first three months of 2004,
an increase of 15% from the same period of 2003. Gross profit as a percentage of
revenue for the quarter ended March 31, 2004 increased to 32.7% from 32.1% in
the first quarter of 2003, an increase of 0.6 percentage point. The improvement
in the gross profit margin was principally due to improved product margins (1.8
percentage points), somewhat offset by a higher mix of printer revenue (1.2
percentage points).
Total operating expense was $246 million for the quarter ended March 31, 2004
compared to $228 million for the same period of 2003. Operating expense as a
percentage of revenue for the quarter was 19.6% compared to 20.5% for the
corresponding period in 2003. The 0.9 percentage point decrease was primarily
due to revenue growing at a faster rate than selling, general and administrative
expense.
Consolidated operating income was $165 million for the first quarter of 2004 and
increased 29% from 2003. The increase in the consolidated operating income was
due to a $55 million increase in gross profit, partially offset by an $18
million increase in operating expense. Operating income for the business market
segment increased $10 million in the first three months of 2004, compared to the
same period in the prior year, primarily due to increased unit sales. Operating
income for the consumer market segment increased $33 million in the first
quarter of 2004, compared to the first quarter of 2003, principally due to
supplies revenue growth.
Non-operating expenses declined $2 million in the first three months of 2004,
compared to the same period in 2003. The decrease was principally due to
additional interest income in 2004 as a result of the company's cash and
marketable securities investments.
Net earnings for the first quarter of 2004 were $121 million, compared to $95
million in the first quarter of 2003. The increase in net earnings was due to
the improved operating income and lower non-operating expenses, offset slightly
by an increase in the effective income tax rate. The effective income tax rate
was 27.5% in 2004 as compared to 26.0% in 2003. The increase in the effective
income tax rate was primarily due to the expiration of favorable tax laws and
geographical shifts in earnings.
Basic net earnings per share were $0.93 the first quarter of 2004 compared to
$0.74 in the corresponding period in 2003. Diluted net earnings per share were
$0.91 in the first quarter of 2004, compared to $0.73 in 2003, an increase of
25%. This increase was primarily due to the increase in net earnings.
9
Financial Condition
- -------------------
The company's financial position remains strong at March 31, 2004, with working
capital of $1,450 million compared to $1,261 million at December 31, 2003. At
March 31, 2004, the company had outstanding $3 million of short-term debt and
$149 million of long-term debt. The debt to total capital ratio was 8% at March
31, 2004, unchanged from December 31, 2003. The company had no amounts
outstanding under its U.S. trade receivables financing program or its revolving
credit facility at March 31, 2004.
Cash provided by operating activities for the three months ended March 31, 2004
was $152 million, compared to $237 million in the first quarter of 2003. The
decrease in cash flows from operating activities was primarily due to
unfavorable cash flow changes in other assets and liabilities accounts and
inventories, partially offset by increased earnings. Management believes that
cash provided by operations will continue to be sufficient to meet operating and
capital needs.
Cash used for investing activities for the three months ended March 31, 2004 was
$184 million, compared to $16 million for the same period in 2003. The company
began investing in marketable securities during the third quarter of 2003.
During the first quarter of 2004, the investments in marketable securities
resulted in a net use of cash of $161 million. The company spent $23 million on
capital expenditures during the first quarter of 2004, compared to $16 million
during the same period of 2003. The 2004 capital expenditures were principally
related to new product development and infrastructure support. It is anticipated
that capital expenditures for 2004 will be approximately $200 million and are
expected to be funded through cash from operations.
Cash provided by financing activities was $37 million for the three months ended
March 31, 2004, compared to $3 million for the same period of 2003. The increase
in cash from financing activities was principally due to a $21 million increase
in proceeds from employee stock plans during 2004.
As of March 31, 2004, 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 $183 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 the first quarter of 2004. As of March
31, 2004, the company had repurchased approximately 34.8 million shares at
prices ranging from $10.63 per share to $105.38 per share for an aggregate cost
of approximately $1.2 billion.
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 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
10
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.
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, including without
limitation component shortages due to increasing global demand in the company's
industry and other industries. Such delays, disruptions or shortages 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 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 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 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. In
addition, changes in tax laws and the ability to repatriate cash accumulated
outside the United States in a tax efficient manner may adversely affect the
company's financial results, investment flexibility and operations. 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's effective tax rate could be adversely affected by changes in the
mix of earnings in countries with differing statutory tax rates. In addition,
the amount of income tax the company pays is subject to ongoing audits in
various jurisdictions and a material assessment by a taxing authority could
adversely affect the company's profitability.
11
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 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 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. Although the company has seen some
indications of market improvement, 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 Although the company is currently the exclusive supplier of new cartridges for
its laser and inkjet 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. Furthermore, the imposition
of copyright fees or similar fees by copyright owners or collecting societies in
certain jurisdictions, primarily in Europe, could adversely affect the company's
operating results or business.
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 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.
12
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 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 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 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.
13
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 March 31, 2004, 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 Consolidated
Condensed Statements of Financial Position at March 31, 2004 by approximately
$19 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 $2 million at March 31, 2004.
The company has interest rate swaps that serve as a fair value hedge of the
company's senior notes. The fair value of the interest rate swaps at March 31,
2004 was an asset of $4 million. Market risk for the interest rate swaps is
estimated as the potential change in fair value resulting from a hypothetical
10% adverse change in interest rates and amounts to approximately $2 million at
March 31, 2004.
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 March 31, 2004 for such contracts resulting from
a hypothetical 10% adverse change in all foreign currency exchange rates is
approximately $64 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.
14
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
Part II. Other Information
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The company's Annual Meeting of Stockholders was held on April 22,
2004.
(b) At said Annual Meeting, the stockholders voted on the following three
proposals:
(i) The election of four Directors for terms expiring in 2007. The
stockholders elected the Directors by the following votes:
Director Votes For Votes Withheld
-------- --------- --------------
Frank T. Cary 100,608,160 6,453,602
Paul J. Curlander 103,486,485 3,575,277
James F. Hardymon 103,093,463 3,968,299
Martin D. Walker 101,217,032 5,844,730
The terms of office of B. Charles Ames, Teresa Beck, William R.
Fields, Ralph E. Gomory, Stephen R. Hardis, Robert Holland Jr., Marvin
L. Mann and Michael J. Maples continued after the meeting.
(ii) The approval of the company's Senior Executive Incentive
Compensation Plan. The stockholders approved such plan by the
following votes:
Broker
Votes For Votes Against Abstentions Non-Vote
--------- ------------- ----------- ----------
88,867,511 8,042,683 654,457 9,497,111
(iii)The ratification of the appointment of PricewaterhouseCoopers LLP
("PwC") as the company's independent auditors for the company's
fiscal year ending December 31, 2004. The stockholders ratified
the appointment of PwC by the following votes:
Votes For Votes Against Abstentions
--------- ------------- -----------
102,648,548 3,874,043 539,171
15
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
A Current Report on Form 8-K dated January 26, 2004 was filed by
the company with the Securities and Exchange Commission to
announce the company's fourth quarter and full year ended
December 31, 2003 financial results.
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: May 7, 2004 By: /s/ Gary D. Stromquist
----------------------
Gary D. Stromquist
Vice President and Corporate Controller
(Chief Accounting Officer)
17
EXHIBIT INDEX
Exhibits:
10.1 Form of Agreement pursuant to the company's 2004-2006 Long-Term Incentive
Plan. +
10.2 Lexmark International, Inc. Senior Executive Incentive Compensation Plan. +
10.3 Form of Stock Option Agreement pursuant to the company's Stock Incentive
Plan. +
31.1 Certification Pursuant to Rule 13a-4(a) and 15d-14(a), As Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification 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 Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- ---------------------------------
+ Indicates management contract or compensatory plan, contract or arrangement.
18