================================================================================
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 June 30, 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 filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No ___
The registrant had 129,520,133 shares outstanding (excluding shares held in
treasury) of Class A common stock, par value $0.01 per share, as of the close of
business on July 30, 2004.
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Page of
Form 10-Q
---------
Part I
ITEM 1. Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (Unaudited)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003.............2
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION (Unaudited)
AS OF JUNE 30, 2004 AND DECEMBER 31, 2003............................3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003.............................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 1. LEGAL PROCEEDINGS.....................................................17
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES
OF EQUITY SECURITIES................................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................18
1
Part I - Financial Information
Item 1. Financial Statements
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(In Millions, Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------------ ------------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenue $1,247.7 $1,120.2 $2,503.7 $2,228.1
Cost of revenue 807.4 739.4 1,652.6 1,491.1
-------- -------- -------- --------
Gross profit 440.3 380.8 851.1 737.0
-------- -------- -------- --------
Research and development 76.5 66.7 148.7 128.8
Selling, general and administrative 178.0 177.1 351.4 342.6
-------- -------- -------- --------
Operating expense 254.5 243.8 500.1 471.4
-------- -------- -------- --------
Operating income 185.8 137.0 351.0 265.6
Interest (income)/expense, net (2.3) (0.1) (4.6) 0.6
Other (0.3) (0.2) 0.3 (0.2)
-------- -------- -------- --------
Earnings before income taxes 188.4 137.3 355.3 265.2
Provision for income taxes 51.8 35.6 97.7 68.9
-------- -------- -------- --------
Net earnings $ 136.6 $ 101.7 $ 257.6 $ 196.3
======== ======== ======== ========
Net earnings per share:
Basic $ 1.05 $ 0.79 $ 1.98 $ 1.54
======== ======== ======== ========
Diluted $ 1.02 $ 0.77 $ 1.93 $ 1.50
======== ======== ======== ========
Shares used in per share calculation:
Basic 130.3 127.9 130.0 127.5
======== ======== ======== ========
Diluted 134.0 131.6 133.5 130.9
======== ======== ======== ========
See notes to consolidated condensed financial statements.
2
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In Millions, Except Par Value)
(Unaudited)
June 30 December 31
2004 2003
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 820.7 $ 744.6
Marketable securities 586.5 451.5
Trade receivables, net of allowance of $44.4 in 2004 and $48.1 in 2003 572.5 615.4
Inventories 512.0 437.0
Prepaid expenses and other current assets 220.4 195.3
---------- ----------
Total current assets 2,712.1 2,443.8
Property, plant and equipment, net 713.9 715.9
Other assets 314.1 290.7
---------- ----------
Total assets $ 3,740.1 $ 3,450.4
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 3.1 $ 1.1
Accounts payable 494.3 465.7
Accrued liabilities 665.5 716.5
---------- ----------
Total current liabilities 1,162.9 1,183.3
Long-term debt 149.4 149.3
Other liabilities 479.0 474.8
---------- ----------
Total liabilities 1,791.3 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; 129.6 and
128.6 shares 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 1,047.5 956.4
Retained earnings 2,352.6 2,095.0
Treasury stock, at cost; 35.1 and 34.5 shares in 2004
and 2003, respectively (1,281.9) (1,213.5)
Accumulated other comprehensive loss (171.0) (196.5)
---------- ----------
Total stockholders' equity 1,948.8 1,643.0
---------- ----------
Total liabilities and stockholders' equity $ 3,740.1 $ 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)
Six Months Ended
June 30
-------------------------
2004 2003
---- ----
Cash flows from operating activities:
Net earnings $ 257.6 $ 196.3
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 67.0 73.3
Deferred taxes 4.9 (6.6)
Other 5.6 15.4
------- -------
335.1 278.4
Change in assets and liabilities:
Trade receivables 42.9 31.4
Inventories (75.0) 16.9
Accounts payable 28.6 26.4
Accrued liabilities (51.0) (36.4)
Tax benefits from employee stock plans 32.5 21.1
Other assets and liabilities (27.3) 57.8
------- -------
Net cash provided by operating activities 285.8 395.6
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment (63.7) (32.3)
Purchases of marketable securities (1,003.3) -
Proceeds from marketable securities 868.3 -
Other - 0.7
------- -------
Net cash used for investing activities (198.7) (31.6)
------- -------
Cash flows from financing activities:
Increase (decrease) in short-term debt 2.0 (12.3)
Issuance of treasury stock 1.1 0.9
Purchase of treasury stock (69.5) -
Proceeds from employee stock plans 56.3 34.3
Other (0.1) -
------- -------
Net cash (used for) provided by financing activities (10.2) 22.9
------- -------
Effect of exchange rate changes on cash (0.8) 2.9
------- -------
Net increase in cash and cash equivalents 76.1 389.8
Cash and cash equivalents - beginning of period 744.6 497.7
------- -------
Cash and cash equivalents - end of period $ 820.7 $ 887.5
======= =======
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 at least 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 No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure - an 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 Six Months
Ended Ended
June 30 June 30
----------------------- -----------------------
2004 2003 2004 2003
---- ---- ---- ----
Net earnings, as reported $136.6 $101.7 $257.6 $196.3
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (11.1) (10.4) (22.5) (21.0)
------ ------ ------ ------
Pro forma net income $125.5 $ 91.3 $235.1 $175.3
====== ====== ====== ======
Net earnings per share:
Basic - as reported $ 1.05 $ 0.79 $ 1.98 $ 1.54
Basic - pro forma $ 0.96 $ 0.71 $ 1.81 $ 1.37
Diluted - as reported $ 1.02 $ 0.77 $ 1.93 $ 1.50
Diluted - pro forma $ 0.94 $ 0.69 $ 1.76 $ 1.34
5
3. INVENTORIES
(Dollars in millions)
Inventories consist of the following:
June 30 December 31
2004 2003
--------- -----------
Work in process $156.2 $139.4
Finished goods 355.8 297.6
------ ------
$512.0 $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 110.5 110.7
Accruals related to pre-existing warranties
(including amortization of deferred revenue
for extended warranties and changes in (33.4) (19.7)
estimates)
Settlements made (in cash or in kind) (82.9) (83.6)
-----------------------------------------------------------------------------
Balance at June 30 $166.9 $154.4
-----------------------------------------------------------------------------
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. STOCKHOLDER'S EQUITY
As of June 30, 2004, the company's board of directors had authorized a
total repurchase of $1.4 billion of its Class A common stock, of which
approximately $113 million is 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. During the
second quarter of 2004, the company repurchased approximately 0.8 million
shares, at a cost of approximately $70 million, pursuant to a share
repurchase program in compliance with Securities and Exchange Commission
Rule 10b5-1 and Rule 10b-18 of the Securities and Exchange Act of 1934. No
shares were repurchased during the first quarter of 2004. As of June 30,
2004, the company had repurchased approximately 35.5 million shares for an
aggregate cost of approximately $1.3 billion.
6
6. OTHER COMPREHENSIVE EARNINGS (LOSS)
(Dollars in millions)
Comprehensive earnings, net of taxes, consists of the following:
Three Months Ended Six Months Ended
June 30 June 30
---------------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
Net earnings $136.6 $101.7 $257.6 $196.3
Other comprehensive earnings (loss):
Foreign currency translation adjustment (3.1) 12.7 (2.9) 15.3
Cash flow hedging, net of reclassifications 6.8 0.3 29.2 (1.9)
Minimum pension liability adjustment 0.8 (0.5) (0.8) -
------ ------ ------ ------
Comprehensive earnings $141.1 $114.2 $283.1 $209.7
====== ====== ====== ======
Accumulated other comprehensive loss consists of the following:
Accumulated
Minimum Other
Translation Cash Flow Pension Comprehensive
Adjustment Hedges Liability 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)
Second quarter 2004 change (3.1) 6.8 0.8 4.5
------ ------ ------- -------
Balance, June 30, 2004 $(18.1) $ (7.3) $(145.6) $(171.0)
====== ====== ======= =======
7. 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 Six Months Ended
June 30 June 30
----------------------- -----------------------
2004 2003 2004 2003
---- ---- ---- ----
Numerator:
Net earnings $136.6 $101.7 $257.6 $196.3
====== ====== ====== ======
Denominator:
Weighted average shares used
to compute basic EPS 130.3 127.9 130.0 127.5
Effect of dilutive securities
Stock options 3.7 3.7 3.5 3.4
------ ------ ------ ------
Weighted average shares used
to compute diluted EPS 134.0 131.6 133.5 130.9
====== ====== ====== ======
Basic net EPS $1.05 $ 0.79 $ 1.98 $ 1.54
Diluted net EPS $1.02 $ 0.77 $ 1.93 $ 1.50
Options to purchase an additional 1.3 million and 1.4 million shares of
Class A common stock
7
for the three and six month periods ended June 30, 2004 and June 30, 2003,
respectively, were outstanding but were not included in the computation of
diluted earnings per share because their effect would be antidilutive.
8. EMPLOYEE PENSION AND POSTRETIREMENT PLANS
The components of the net periodic benefit cost for both the pension and
postretirement plans were as follows:
Three Months Ended Six Months Ended
Pension Benefits: June 30 June 30
--------------------- ---------------------
2004 2003 2004 2003
---- ---- ---- ----
Service cost $ 3.6 $ 3.4 $ 7.4 $ 6.7
Interest cost 9.9 9.9 20.5 19.9
Expected return on plan assets (12.8) (11.9) (25.9) (23.7)
Amortization of prior service (benefit) (1.1) (0.3) (1.2) (0.6)
Amortization of net loss 1.6 1.7 4.6 3.3
Settlement or curtailment losses - 0.4 - 0.4
------ ------ ------ ------
Net periodic benefit cost $ 1.2 $ 3.2 $ 5.4 $ 6.0
====== ====== ====== ======
Three Months Ended Six Months Ended
Other Postretirement Benefits: June 30 June 30
--------------------- ---------------------
2004 2003 2004 2003
---- ---- ---- ----
Service cost $ 0.5 $ 0.7 $ 1.0 $ 1.4
Interest cost 0.8 0.9 1.6 1.7
Amortization of prior service (benefit) - (0.2) (0.1) (0.2)
Amortization of net loss - 0.1 0.1 0.1
------ ------ ------ ------
Net periodic benefit cost $ 1.3 $ 1.5 $ 2.6 $ 3.0
====== ====== ====== ======
As discussed in Note 10 of the Notes to Consolidated Condensed Financial
Statements, FASB Staff Position No. 106-2 ("FSP 106-2"), Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug
Improvement and Modernization Act of 2003 (the "Act"), is effective for the
first interim or annual period beginning after June 15, 2004. The company
is eligible to receive the subsidy but only for a limited number of retired
individuals who are receiving benefits under a plan provision that is no
longer offered to employees. The effects of the Act are not significant for
the company and therefore, will be incorporated at the next regular plan
measurement date of January 1, 2005.
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 June 30,
2004, approximately $30 million of contributions had been made, and in July
2004 the company contributed approximately $14 million to its European
pension plans. The company presently anticipates contributing an additional
$5 million during the remainder of 2004, for a total of $49 million.
8
9. 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 Six Months Ended
June 30 June 30
------------------------ -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenue:
Business $ 682.7 $ 658.9 $1,355.7 $1,290.9
Consumer 565.0 461.3 1,148.0 937.2
All other - - - -
-------- -------- -------- --------
Total revenue $1,247.7 $1,120.2 $2,503.7 $2,228.1
======== ======== ======== ========
Operating income/(loss):
Business $ 187.2 $ 170.6 $ 362.0 $ 335.0
Consumer 87.8 47.2 161.1 87.5
All other (89.2) (80.8) (172.1) (156.9)
-------- -------- -------- --------
Total operating income/(loss) $ 185.8 $ 137.0 $ 351.0 $ 265.6
======== ======== ======== ========
10. NEW ACCOUNTING STANDARDS
In May 2004, the Financial Accounting Standards Board ("FASB") issued FSP
106-2, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug Improvement and Modernization Act of 2003 (the "Act").
The Act introduces a prescription drug benefit under Medicare as well as a
federal subsidy to sponsors of post-retirement health care benefit plans
that provide a benefit that is at least actuarially equivalent to Medicare
Part D. FSP 106-2 supercedes FSP 106-1, which was issued in January 2004
and permitted a sponsor of a post-retirement health care plan that provides
a prescription drug benefit to make a one-time election to defer accounting
for the effects of the Act until more authoritative guidance on the
accounting for the federal subsidy was issued. The company elected to defer
accounting for the effects of the Act under FSP 106-1. FSP 106-2 is
effective for the first interim or annual period beginning after June 15,
2004. The company has evaluated the provisions of FSP 106-2 and concluded
that it will not have a material impact on the company's financial
position, results of operations and cash flows.
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 June 30, 2004 was $1,248
million, an increase of 11% over the same period of 2003. Revenue in the
business market segment was $683 million for the second quarter of 2004 and
increased 4% over the same period of 2003. This growth was principally due to
increases in unit volumes. Revenue in the consumer market segment was $565
million for the second quarter of 2004 and increased 23% over the same period of
2003. This growth was also principally due to increases in unit volumes. Total
U.S. revenue increased $37 million or 7% and international revenue, including
exports from the U.S., increased $91 million or 15%.
For the six months ended June 30, 2004, consolidated revenue was $2,504 million,
an increase of 12% over the same period of 2003. Revenue in the business market
segment was $1,356 million for the first six months of 2004 and increased 5%
over the same period of 2003. This growth was principally due to increases in
unit volumes. Revenue in the consumer market segment was $1,148 million for the
first half of 2004 and increased 23% over the same period of 2003. This growth
was also principally due to increases in unit volumes. Total U.S. revenue
increased $91 million or 9% and international revenue, including exports from
the U.S., increased $185 million or 15%.
Consolidated gross profit was $440 million for the second quarter of 2004, an
increase of 16% from the same period of 2003. For the six months ended June 30,
2004, consolidated gross profit was $851 million, an increase of 15% from the
same period of 2003. Gross profit as a percentage of revenue for the quarter
ended June 30, 2004 increased to 35.3% from 34.0% in the second quarter of 2003,
an increase of 1.3 percentage points. Gross profit as a percentage of revenue
for the six months ended June 30, 2004 increased to 34.0% from 33.1% in the same
period of 2003, an increase of 0.9 percentage points. The improvement in the
gross profit margin for both the three and six month periods of 2004 over the
same periods of 2003 was principally due to improved product margins (2.2 and
2.0 percentage points, respectively), partially offset by a negative mix among
products (0.9 and 1.0 percentage points, respectively).
Total operating expense was $254 million for the quarter ended June 30, 2004
compared to $244 million for the same period of 2003. Total operating expense
was $500 million for the six months ended June 30, 2004 compared to $471 million
for the same period of 2003. Operating expense as a percentage of revenue for
the quarter was 20.4% compared to 21.8% for the corresponding period in 2003.
Operating expense as a percentage of revenue for the first half of 2004 was
20.0% compared to 21.2% for the corresponding period of 2003. The decrease in
the operating expense as a percentage of revenue for both periods in 2004 was
primarily due to revenue growing at a faster rate than selling, general and
administrative expense, slightly offset by higher research and development
spending.
Consolidated operating income was $186 million for the second quarter of 2004
and increased 36% from 2003. The increase in the consolidated operating income
was due to a $59 million increase in gross profit, partially offset by an $11
million increase in operating expense. Operating income for the business market
segment increased $17 million in the second quarter of 2004, compared to the
same period in the prior year. Operating income for the consumer market segment
increased $41 million in the second quarter of 2004, compared to the second
quarter of 2003. The increases in operating income for both the business and
consumer market segments were principally due to improvements in the gross
profit for those segments.
For the six months ended June 30, 2004, consolidated operating income was $351
million and increased
10
32% from 2003. The increase in consolidated operating income was due to a $114
million increase in gross profit, partially offset by a $29 million increase in
operating expense. Operating income for the business market segment increased
$27 million in the first half of 2004, compared to the same period in the prior
year. Operating income for the consumer market segment increased $74 million in
the first six months of 2004, compared to the same period in 2003. The increases
in operating income for both the business and consumer market segments were
primarily due to improvements in the gross profit for those segments.
Non-operating income increased approximately $2 million in the second quarter of
2004, compared to the same period in 2003. Non-operating income increased
approximately $5 million in the first half of 2004, compared to the prior year.
These increases were principally due to additional interest income in 2004 as a
result of an increase in the level of cash and marketable securities held by the
company.
Net earnings for the second quarter of 2004 were $137 million, compared to $102
million in the second quarter of 2003. Net earnings for the first half of 2004
were $258 million compared to $196 million for the first half of 2003. The
increase in net earnings for both periods was principally due to the improved
operating income, 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 $1.05 for the second quarter of 2004 compared
to $0.79 in the corresponding period in 2003. Diluted net earnings per share
were $1.02 in the second quarter of 2004, compared to $0.77 in 2003, an increase
of 32%. Basic net earnings per share were $1.98 for the first six months of 2004
compared to $1.54 in the corresponding period in 2003. Diluted net earnings per
share were $1.93 for the first six months of 2004 compared to $1.50 in 2003, an
increase of 29%. These increases were primarily due to the increases in net
earnings.
Financial Condition
- -------------------
The company's financial position remains strong at June 30, 2004, with working
capital of $1,549 million compared to $1,261 million at December 31, 2003. At
June 30, 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 7% at June
30, 2004, compared to 8% at December 31, 2003. The company had no amounts
outstanding under its U.S. trade receivables financing program or its revolving
credit facility at June 30, 2004.
Cash provided by operating activities for the six months ended June 30, 2004 was
$286 million, compared to $396 million for the same period of 2003. The decrease
in cash flows from operating activities was primarily due to unfavorable cash
flow changes in inventories and other assets and liabilities accounts, 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 six months ended June 30, 2004 was
$199 million, compared to $32 million for the same period in 2003. The company
began investing in marketable securities during the third quarter of 2003.
During the first six months of 2004, the investments in marketable securities
resulted in a net use of cash of $135 million. During July 2004, the company
invested an additional $400 million in marketable securities. The company spent
$64 million on capital expenditures during the first half of 2004, compared to
$32 million during the same period of 2003. The capital expenditures for the
first six months of 2004 were principally related to infrastructure support, new
product development and manufacturing capacity expansion. It is anticipated that
capital expenditures for 2004 will be approximately $200 million and are
expected to be funded through cash from operations.
Cash used for financing activities was $10 million for the six months ended June
30, 2004, compared
11
to $23 million cash provided by financing activities for the same period of
2003. The $33 million decrease in cash from financing activities was principally
due to the purchase of $70 million of treasury stock in 2004 compared to no
purchases in 2003, offset somewhat by a $22 million increase in proceeds from
employee stock plans during 2004.
As of June 30, 2004, the company's board of directors had authorized a total
repurchase of $1.4 billion of its Class A common stock, of which approximately
$113 million is 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. During the second quarter of 2004, the company
repurchased approximately 0.8 million shares, at a cost of approximately $70
million, pursuant to a share repurchase program in compliance with Securities
and Exchange Commission Rule 10b5-1 and Rule 10b-18 of the Securities Exchange
Act of 1934. No shares were repurchased during the first quarter of 2004. As of
June 30, 2004, the company had repurchased approximately 35.5 million shares for
an aggregate cost of approximately $1.3 billion.
New Accounting Standards
- ------------------------
In May 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff
Position No. 106-2 ("FSP 106-2"), Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the
"Act"). The Act introduces a prescription drug benefit under Medicare as well as
a federal subsidy to sponsors of post-retirement health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part D.
FSP 106-2 supercedes FSP106-1, which was issued in January 2004 and permitted a
sponsor of a post-retirement health care plan that provides a prescription drug
benefit to make a one-time election to defer accounting for the effects of the
Act until more authoritative guidance on the accounting for the federal subsidy
was issued. The company elected to defer accounting for the effects of the Act
under FSP 106-1. FSP 106-2 is effective for the first interim or annual period
beginning after June 15, 2004. The company has evaluated the provisions of FSP
106-2 and concluded that it will not 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 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, any disruption in the supply of new or existing
products due to quality issues, 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.
12
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, including product disruptions caused
by quality issues, and 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 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 global economic conditions 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 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 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.
13
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'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.
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 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. 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
14
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.
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 June 30, 2004, the fair value of the company's senior notes is estimated at
$162 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 June 30, 2004 by approximately $12
million. Market risk is estimated as the potential change in fair value
resulting from a hypothetical 10% adverse change in interest rates and amounted
to approximately $2 million at June 30, 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 June 30,
2004 was a liability of $2.7 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 amounted to approximately $2 million at
June 30, 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 June 30, 2004, for such contracts resulting from
a hypothetical 10% adverse change in all foreign currency exchange rates was
approximately $57 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 1. Legal Proceedings
See "PART I, Item 3, Legal Proceedings" in the Form 10-K for the fiscal year
ended December 31, 2003 for a discussion of legal proceedings affecting the
company. The following is an update to that discussion.
On May 24, 2004, the company and Pitney Bowes, Inc. ("PBI") settled the
litigation accusing the company of infringing PBI's patent 4,386,272 with the
payment by the company to PBI of an immaterial amount. All claims asserted by
each party against the other were dismissed with prejudice by Order of the court
on May 28, 2004.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
- --------------------- ------------- ----------------------- ---------------------------- -------------------------------
Total Total Number of Shares Approximate Dollar Value of
Number of Average Price Paid Purchased as Part of Shares that May Yet Be
Period Shares per Share Publicly Announced Plans Purchased Under the Plans or
Purchased or Programs Programs (in millions) (1)
- --------------------- ------------- ----------------------- ---------------------------- -------------------------------
- --------------------- ------------- ----------------------- ---------------------------- -------------------------------
April 1-30, 2004 100,000 $92.60 100,000 $173.4
- --------------------- ------------- ----------------------- ---------------------------- -------------------------------
- --------------------- ------------- ----------------------- ---------------------------- -------------------------------
May 1-31, 2004 366,500 $92.42 366,500 $139.5
- --------------------- ------------- ----------------------- ---------------------------- -------------------------------
- --------------------- ------------- ----------------------- ---------------------------- -------------------------------
June 1-30, 2004 283,500 $93.01 283,500 $113.1
- --------------------- ------------- ----------------------- ---------------------------- -------------------------------
- --------------------- ------------- ----------------------- ---------------------------- -------------------------------
Total 750,000 $92.67 750,000 ---
- --------------------- ------------- ----------------------- ---------------------------- -------------------------------
(1) As of June 30, 2004, the company's board of directors had authorized a
total repurchase of $1.4 billion of its Class A common stock, of which
approximately $113 million is 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. During the
second quarter of 2004, the company repurchased 750,000 shares, at a cost
of approximately $70 million, pursuant to a share repurchase program in
compliance with Securities and Exchange Commission Rule 10b5-1 and Rule
10b-18 of the Securities and Exchange Act of 1934. No shares were
repurchased during the first quarter of 2004. As of June 30, 2004, the
company had repurchased approximately 35.5 million shares for an aggregate
cost of approximately $1.3 billion.
17
Item 4. Submission of Matters to a Vote of Security Holders
The information required to be reported for the company's Annual
Meeting of Stockholders held April 22, 2004 was previously reported by
the company in its Quarterly Report on Form 10-Q for the quarter ended
March 31, 2004.
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 20 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 dated April 19, 2004 to
announce the company's first quarter 2004 financial results.
18
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, both on behalf of the registrant and in
his capacity as principal accounting officer of the registrant.
Lexmark International, Inc.
(Registrant)
Date: August 6, 2004 By: /s/ Gary D. Stromquist
-----------------------
Gary D. Stromquist
Vice President and Corporate Controller
(Chief Accounting Officer)
19
EXHIBIT INDEX
Exhibits:
10.1 Amendment No. 4 to the Lexmark International, Inc. Nonemployee Director
Stock Plan, dated as of April 22, 2004. +
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.
+ Indicates management contract or compensatory plan, contract or
arrangement.
20