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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1997
OR
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File No.1-14050
LEXMARK INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3074422
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Lexmark Centre Drive
740 New Circle Road NW
Lexington, Kentucky 40550
(Address of principal executive offices) (Zip Code)
(606) 232-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
The number of shares outstanding (excluding shares held in treasury) of each of
the issuer's classes of common stock, as of the close of business on October 31,
1997:
Class Number of Shares
------------------------------------ ----------------
Class A common stock; $.01 par value 70,390,025
Class B common stock; $.01 par value 682,723
================================================================================
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
INDEX
Page of
Form 10-Q
PART I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (Unaudited)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996........2
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION (Unaudited)
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996........................3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996........................4
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)....5-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (Unaudited).....................8-12
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................13
1
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(In Millions, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $618.3 $547.6 $1,758.0 $1,690.7
Cost of revenues 402.7 373.7 1,149.2 1,162.2
------ ------ -------- --------
Gross profit 215.6 173.9 608.8 528.5
Research and development 32.0 28.6 94.4 92.1
Selling, general and administrative 116.6 90.2 334.2 279.3
Amortization of intangibles - - - 5.1
------ ------ -------- --------
Operating expenses 148.6 118.8 428.6 376.5
------ ------ -------- --------
Operating income 67.0 55.1 180.2 152.0
Interest expense, net 1.7 5.5 8.0 16.0
Amortization of deferred financing costs and other 2.2 2.0 6.6 5.8
------ ------ -------- --------
Earnings before income taxes and extraordinary item 63.1 47.6 165.6 130.2
Provision for income taxes 22.1 17.4 59.6 47.6
------ ------ -------- --------
Earnings before extraordinary item 41.0 30.2 106.0 82.6
Extraordinary loss on extinguishment of debt
(net of related tax benefit of $8.4) - - (14.0) -
------ ------ -------- --------
Net earnings $ 41.0 $ 30.2 $ 92.0 $ 82.6
====== ====== ======== ========
Earnings per common and common equivalent share,
primary and fully diluted:
Before extraordinary item $ 0.54 $ 0.40 $ 1.39 $ 1.09
Extraordinary loss - - (0.18) -
------ ------ -------- --------
Net earnings $ 0.54 $ 0.40 $ 1.39 $ 1.09
====== ====== ======== ========
Shares used in per share calculation 75.8 75.7 76.3 75.6
====== ====== ======== ========
</TABLE>
See notes to consolidated condensed financial statements.
2
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In Millions, Except Share Amounts)
(Unaudited)
September 30 December 31
1997 1996
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 55.5 $ 119.3
Trade receivables, net of allowance of $18 307.6 304.7
Inventories 355.1 271.0
Prepaid expenses and other current assets 66.9 70.1
-------- --------
Total current assets 785.1 765.1
Property, plant and equipment, net 415.9 434.1
Other assets 21.3 22.3
-------- --------
Total assets $1,222.3 $1,221.5
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 104.6 $ 2.1
Current maturities of long-term debt 24.5 -
Accounts payable 220.1 197.2
Accrued liabilities 230.4 222.0
-------- --------
Total current liabilities 579.6 421.3
Long-term debt 12.9 163.2
Other liabilities 93.1 96.7
-------- --------
Total liabilities 685.6 681.2
Stockholders' equity:
Preferred stock, $.01 par value, 1,600,000
shares authorized, no shares issued and
outstanding - -
Common stock $.01 par value:
Class A, 160,000,000 shares authorized;
69,991,581 and 70,213,603 outstanding 0.7 0.7
Class B, 10,000,000 shares authorized;
682,723 and 2,446,523 outstanding - -
Capital in excess of par 529.8 519.3
Retained earnings 111.8 19.8
Accumulated translation adjustment (20.0) 0.5
Treasury stock, at cost, 3,221,414 shares (85.6) -
-------- --------
Total stockholders' equity 536.7 540.3
-------- --------
Total liabilities and stockholders' equity $1,222.3 $1,221.5
======== ========
See notes to consolidated condensed financial statements.
3
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Nine Months Ended
September 30
-----------------
1997 1996
---- ----
Cash flows from operating activities:
Net earnings $ 92.0 $ 82.6
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 56.3 50.9
Extraordinary loss on extinguishment of debt 22.4 -
Deferred taxes 8.9 (8.3)
Other non-cash charges to operations 17.4 16.1
------ ------
197.0 141.3
Change in assets and liabilities:
Trade receivables (24.4) (36.0)
Trade receivables programs 21.5 (4.6)
Inventories (84.1) (44.4)
Accounts payable 22.9 (10.7)
Accrued liabilities 8.4 (34.6)
Other assets and liabilities (32.6) 0.4
------ ------
Net cash provided by operating activities 108.7 11.4
------ ------
Cash flows from investing activities:
Purchases of property, plant and equipment (47.8) (106.2)
Proceeds from sale of property, plant and equipment 0.2 3.3
------ ------
Net cash used for investing activities (47.6) (102.9)
------ ------
Cash flows from financing activities:
Increase in short-term debt 102.5 -
Proceeds from long-term debt 0.2 5.5
Principal payments on long-term debt (125.5) (20.0)
Charges related to extinguishment of debt (22.4) -
Purchase of treasury stock (85.6) -
Exercise of stock options and warrants 8.2 11.7
------ ------
Net cash used for financing activities (122.6) (2.8)
------ ------
Effect of exchange rate changes on cash (2.3) ( 0.5)
------ ------
Net decrease in cash and cash equivalents (63.8) (94.8)
Cash and cash equivalents - beginning of period 119.3 150.5
------ ------
Cash and cash equivalents - end of period $ 55.5 $ 55.7
====== ======
See notes to consolidated condensed financial statements.
4
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited; however, in
the opinion of the Company's management, 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, 1996.
Net earnings per common and common equivalent share are computed by using
the weighted-average number of common shares and common equivalent shares
outstanding during each period. Common equivalent shares include stock
options, warrants, restricted stock and deferred stock units. Primary and
fully diluted earnings per share do not differ by a material amount.
2. INVENTORIES
(Dollars in millions) Inventories consist of the following:
September 30 December 31
1997 1996
------------ -----------
Work in process $177.6 $144.6
Finished goods 177.5 126.4
------ ------
$355.1 $271.0
====== ======
3. LONG-TERM DEBT
In March 1997, the Company prepaid its $120 million 14.25 percent senior
subordinated notes due in 2001. The prepayment resulted in an extraordinary
charge of $22.4 million ($14.0 million net of tax benefit) caused by a
prepayment premium and other fees.
In March 1997, the Company entered into three-year interest rate swaps with
a total notional amount of $60 million, whereby the Company pays interest
at a fixed rate of approximately 6.5 percent and receives interest at a
floating rate equal to the three-month London Interbank Offered Rate
(LIBOR). The swaps serve as a hedge of financings based on floating
interest rates.
5
<PAGE>
4. STOCKHOLDERS' EQUITY
In April 1996, the Company's board of directors authorized the repurchase
of up to $50 million of its Class A common stock. In May 1997, the
Company's board of directors authorized the repurchase of an additional
$150 million of its Class A common stock. The 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. As of September
30, 1997, the Company had repurchased 3,221,414 shares in the open market
at prices ranging from $21.25 to $33.75 for an aggregate cost of
approximately $85.6 million.
5. DERIVATIVE FINANCIAL INSTRUMENTS
Instruments used as hedges must be effective at reducing the risk
associated with the exposure being hedged and must be designated as a hedge
at the inception of the contract. Accordingly, changes in market values of
hedge instruments must be highly correlated with changes in market values
of underlying hedged items both at inception of the hedge and over the life
of the hedge contract. Any instrument not qualifying as a hedge or
designated but ineffective as a hedge is marked to market and recognized in
earnings immediately. Gains and losses from terminated forward currency
exchange contracts and interest rate swaps are deferred and recognized
consistent with the terms of the underlying transaction.
6. NEW ACCOUNTING STANDARDS
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No.
125 provides standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings and addresses
programs such as the Company's trade receivables programs in the U.S. and
Germany. With the adoption of SFAS No. 125, the Company continues to
account for the transfer of receivables under both programs as sale
transactions. In response to SFAS No. 125 for purposes of the U.S. program,
the Company formed and sells its receivables to a wholly owned subsidiary,
Lexmark Receivables Corporation ("LRC"), which then sells the receivables
to an unrelated third party. LRC is a separate legal entity with its own
separate creditors who, in a liquidation of LRC, would be entitled to be
satisfied out of LRC's assets prior to any value in LRC becoming available
for equity claims of an LRC stockholder.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, Earnings per Share. This statement is effective for the
Company's 1997 annual financial statements. Restatement of all prior period
earnings per share ("EPS") data presented is required. This statement
replaces the presentation of primary EPS and fully diluted EPS with a
presentation of basic EPS and diluted EPS, respectively. Basic EPS were
$0.57 for the third quarter of 1997, compared to $0.42 for the third
quarter of 1996. Diluted EPS were $0.54 for the quarter ended September 30,
1997, compared to $0.40 for the quarter ended September 30, 1996. Basic EPS
were $1.28, $1.47 before extraordinary item, for the first nine months of
1997, compared to $1.16 for the first nine months of 1996. Diluted EPS were
$1.21, $1.40 before extraordinary item, for the nine months ended September
30, 1997, compared to $1.10 for the nine months ended September 30, 1996.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
effective for fiscal years beginning after December 15, 1997. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This statement does not require a specific format for
that financial statement but requires that an entity display an amount
representing total comprehensive income for the period in that financial
statement. This statement requires that an entity classify
6
<PAGE>
items of other comprehensive income by their nature in a financial
statement. For example, other comprehensive income may include foreign
currency items, minimum pension liability adjustments, and unrealized gains
and losses on certain investments in debt and equity securities. In
addition, the accumulated balance of other comprehensive income must be
displayed separately from retained earnings and additional paid-in capital
in the equity section of a statement of financial position.
Reclassification of financial statements for earlier periods, provided for
comparative purposes, is required. Based on current accounting standards,
this new accounting standard is not expected to have a material impact on
the Company's consolidated financial statements. The Company will adopt
this accounting standard on January 1, 1998, as required.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for reporting
information about operating segments in annual financial statements and
requires selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the enterprise's chief operating decision maker in deciding
how to allocate resources and in assessing performance. This statement
requires reporting segment profit or loss, certain specific revenue and
expense items and segment assets. It also requires reconciliations of total
segment revenues, total segment profit or loss, total segment assets, and
other amounts disclosed for segments to corresponding amounts reported in
the consolidated financial statements. Restatement of comparative
information for earlier periods presented is required in the initial year
of application. Interim information is not required until the second year
of application, at which time comparative information is required. The
Company has not determined the impact that the adoption of this new
accounting standard will have on its consolidated financial statement
disclosures. The Company will adopt this accounting standard on January 1,
1998, as required.
7. SUBSEQUENT EVENT
On October 30, 1997 the Company announced that the public offering of 9
million shares of its Class A common stock by certain of its stockholders
had been priced at $31.00 per share. Those stockholders have also granted
the underwriters 30-day over-allotment options to purchase prior to
November 28, 1997 up to 1.35 million shares. The Company and its management
chose not to sell any shares in the offering and, therefore, did not
receive any proceeds from the offering.
The Company also announced on that date that the price at which it would
repurchase an additional three million shares from certain of the
stockholders participating in the offering was $29.90 per share (which was
equal to the net proceeds per share to be received by the selling
stockholders participating in the offering) for an aggregate purchase price
of $89.7 million. The sale of the shares in the offering and the repurchase
by the Company of the additional three million shares were consummated on
November 4, 1997 and the Company's repurchase was financed with borrowings
under the Company's credit agreement. After giving effect to this
repurchase, the Company had repurchased a total of 6,221,414 shares at
prices ranging from $21.25 to $33.75 for an aggregate cost of approximately
$175.3 million.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (Unaudited)
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
Results of Operations
- ---------------------
Consolidated revenues for the three months ended September 30, 1997 were $618
million, an increase of 13 percent from the same period of 1996. Printers and
associated supplies revenues were $506 million, an increase of 18 percent.
Revenues from other office imaging products were $112 million, a decrease of 4
percent from 1996. Total U.S. revenues were up $24 million or 8 percent, and
international revenues were up $47 million or 20 percent.
For the nine months ended September 30, 1997, consolidated revenues were $1,758
million, an increase of 4 percent from the same period of 1996. Printers and
associated supplies revenues were $1,406 million, an increase of 10 percent from
1996. Revenues from other office imaging products were $352 million, a decrease
of 8 percent from 1996. Excluding the keyboard business in 1996, revenues for
the first nine months of 1997 were up $101 million or 6 percent from 1996. Total
U.S. revenues were down $31 million or 3 percent, and international revenues
were up $98 million or 13 percent.
The Company's results were primarily driven by printers and associated supplies.
The Optra S family of monochrome and color laser printers, introduced in May
1997, accounted for most of the network laser printer sales volume during the
third quarter. The Company also made inkjet product announcements in the second
and third quarter of 1997, with the introduction of the 1000, 3000 and 7000
Color Jetprinters, along with the 7200 series of Color Jetprinters. Even though
the product line was in transition, printer volumes grew at double-digit rates
and printer supplies revenues increased compared to the third quarter of 1996
due primarily to the continued growth of the Company's installed printer base.
Revenues were adversely affected by foreign currency exchange rates. Unfavorable
foreign currency translation effects on revenues were $36 million and $78
million for the quarter and nine months ended September 30, 1997, respectively,
due to the strengthening of the U.S. dollar.
Consolidated gross profit was $216 million for the three months ended September
30, 1997, an increase of 24 percent from the same period of 1996. This was
mainly driven by margin improvements in printers and associated supplies. Gross
profit as a percentage of revenues for the third quarter of 1997 increased to 35
percent from 32 percent in 1996. Gross profit attributable to printers and
associated supplies for the third quarter 1997 increased 35 percent over the
third quarter of 1996, principally due to reductions in product costs and growth
in higher margin associated consumable supplies.
For the nine months ended September 30, 1997, consolidated gross profit was $609
million, an increase of 15 percent over the corresponding period of 1996. Gross
profit as a percentage of revenues increased to 35 percent from 31 percent in
1996. Gross profit attributable to printers and associated supplies increased 23
percent, primarily due to product cost reductions and growth in associated
consumable supplies.
Total operating expenses increased 25 percent and 14 percent in the third
quarter and first nine months of 1997, respectively, compared to the same
periods of 1996. Expenses as a percentage of revenues were 24 percent for both
the third quarter and first nine months of 1997 compared to 22 percent for both
the third quarter and first nine months of 1996. These increases versus 1996
principally reflect increased marketing and sales efforts in support of new
product announcements and planned marketing investments to drive printer growth.
Consolidated operating income was $67 million for the third quarter of 1997 and
$180 million for the nine months ended September 30, 1997, an increase of 22
percent and 19 percent, respectively, over the corresponding period of
8
<PAGE>
1996. This increase was due principally to product cost reductions, growth in
associated consumable supplies and the absence of amortization of intangibles,
which were fully amortized in the first quarter of 1996.
Net earnings for the third quarter of 1997 were $41 million, up 36 percent
compared to the third quarter of 1996. This increase was primarily due to the
improved operating performance and lower interest expense resulting from lower
debt outstanding and lower interest rates. The income tax provision was
approximately 35 percent of earnings before tax in the third quarter of 1997 as
compared to 37 percent in the same period of 1996. This decrease in the third
quarter of 1997 income tax rate brings the nine month rate down to 36 percent,
which is the rate expected for the full year. Net earnings per share were $0.54
per share for the third quarter of 1997, compared to $0.40 per share for the
third quarter of 1996, an increase of 36 percent.
For the first nine months of 1997, earnings before extraordinary item were $106
million, an increase of 28 percent over the corresponding period of 1996,
principally due to the operating performance and lower interest expense as a
result of lower debt levels and lower interest rates. The income tax provision
was approximately 36 percent of earnings before tax for the first nine months of
1997 as compared to 37 percent for the same period of 1996. Earnings per share
before extraordinary item were $1.39 for the nine months ended September 30,
1997, compared to $1.09 for the same period of 1996, an increase of 27 percent.
Net earnings for the first nine months of 1997 were $92 million, an increase of
11 percent compared to the same period of 1996. Net earnings for 1997 were
affected by an extraordinary charge of $22 million ($14 million net of tax
benefit) caused by the prepayment premium and other fees associated with the
prepayment of the Company's senior subordinated notes in the first quarter of
1997. Net earnings per share were $1.21 for the nine months ended September 30,
1997, compared to $1.09 for the same period of 1996, an increase of 10 percent.
Financial Condition
- -------------------
The Company's financial position remains strong, with lower debt levels than at
December 31, 1996, allowing the prepayment of senior subordinated notes in the
principal amount of $120 million in March 1997. At September 30, 1997, the
Company had outstanding $105 million of short-term debt and $37 million of
long-term debt, $25 million of which is due within the next year. The debt to
total capital ratio was 21 percent at the end of the third quarter of 1997
compared to 23 percent at December 31, 1996.
In March 1997, the Company entered into three-year interest rate swaps with a
total notional amount of $60 million, whereby the Company pays interest at a
fixed rate of approximately 6.5 percent and receives interest at a floating rate
equal to the three-month London Interbank Offered Rate (LIBOR). The swaps serve
as a hedge of financings based on floating interest rates.
Cash provided by operating activities for the nine months ended September 30,
1997 was $109 million compared to $11 million cash provided by operating
activities for the same period of 1996, primarily reflecting stronger earnings
before extraordinary loss, the sale of receivables under the trade accounts
receivable programs and favorable changes in working capital accounts.
Capital expenditures were $48 million for the nine months ended September 30,
1997 compared to $106 million for the comparable period of 1996. Capital
expenditures in the first nine months of 1996 were higher due to the Company's
expansion of its inkjet printer products manufacturing capacity. These projects
were substantially completed by the end of 1996, and it is anticipated that
capital expenditures for 1997 will be approximately $70 million and will be
funded primarily through cash from operations.
In April 1996, the Company's board of directors authorized the repurchase of up
to $50 million of its Class A common stock. In May 1997, the Company's board of
directors authorized the repurchase of an additional $150
9
<PAGE>
million of its Class A common stock. The 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. As of September 30, 1997, the Company had repurchased
3,221,414 shares in the open market at prices ranging from $21.25 to $33.75 for
an aggregate cost of approximately $86 million.
On October 30, 1997 the Company announced that the public offering of 9 million
shares of its Class A common stock by certain of its stockholders had been
priced at $31.00 per share. Those stockholders have also granted the
underwriters 30-day over-allotment options to purchase prior to November 28,
1997 up to 1.35 million shares. The Company and its management chose not to sell
any shares in the offering and, therefore, did not receive any proceeds from the
offering.
The Company also announced on that date that the price at which it would
repurchase an additional three million shares from certain of the stockholders
participating in the offering was $29.90 per share (which was equal to the net
proceeds per share to be received by the selling stockholders participating in
the offering) for an aggregate purchase price of approximately $90 million. The
sale of the shares in the offering and the repurchase by the Company of the
additional three million shares were consummated on November 4, 1997 and the
Company's repurchase was financed with borrowings under the Company's credit
agreement. After giving effect to this repurchase, the Company's debt to total
capital ratio was within the Company's target range of 30-40 percent and the
Company had repurchased a total of 6,221,414 shares at prices ranging from
$21.25 to $33.75 for an aggregate cost of approximately $175 million.
New Accounting Standards
- ------------------------
Effective January 1, 1997, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 125, Accounting for the Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. The adoption of this
accounting standard did not have a material impact on the Company's financial
position, results of operations or liquidity.
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, Earnings per Share. This statement establishes standards for computing
and presenting earnings per share ("EPS") and generally applies to all publicly
held companies. This statement replaces the presentation of primary EPS and
fully diluted EPS with a presentation of basic EPS and diluted EPS,
respectively. Basic EPS excludes dilution and is computed by dividing earnings
available to common stockholders by the weighted average number of common shares
outstanding for the period. Similar to fully diluted EPS, diluted EPS reflects
the potential dilution of securities that could share in the earnings. This
statement is effective for the Company's financial statements for the year ended
December 31, 1997. Restatement of all prior period EPS data presented is
required. EPS calculated under SFAS No. 128 are not expected to be materially
different from EPS calculated under the current method.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
effective for fiscal years beginning after December 15, 1997. This statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This statement does not require a specific format for that financial
statement but requires that an entity display an amount representing total
comprehensive income for the period in that financial statement. This statement
requires that an entity classify items of other comprehensive income by their
nature in a financial statement. For example, other comprehensive income may
include foreign currency items, minimum pension liability adjustments, and
unrealized gains and losses on certain investments in debt and equity
securities. In addition, the accumulated balance of other comprehensive income
must be displayed separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position.
Reclassification of financial statements for earlier periods, provided for
comparative purposes, is required.
10
<PAGE>
Based on current accounting standards, this new accounting standard is not
expected to have a material impact on the Company's consolidated financial
statements. The Company will adopt this accounting standard on January 1, 1998,
as required.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, effective for fiscal years beginning after
December 15, 1997. This statement establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the
enterprise's chief operating decision maker in deciding how to allocate
resources and in assessing performance. This statement requires reporting
segment profit or loss, certain specific revenue and expense items and segment
assets. It also requires reconciliations of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed for
segments to corresponding amounts reported in the consolidated financial
statements. Restatement of comparative information for earlier periods presented
is required in the initial year of application. Interim information is not
required until the second year of application, at which time comparative
information is required. The Company has not determined the impact that the
adoption of this new accounting standard will have on its consolidated financial
statement disclosures. The Company will adopt this accounting standard on
January 1, 1998, as required.
Factors That May Affect Future Results and Information Concerning Forward -
- ---------------------------------------------------------------------------
Looking Statements
- ------------------
Certain of the statements contained in this Report may be considered
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, and a number
of factors, including, without limitation, the factors set forth below, could
adversely affect the Company's future operating results or cause the Company's
actual results to differ materially from those estimates or expectations
reflected in such forward-looking statements. Forward-looking statements are
made based upon management's current expectations and belief 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.
The markets for printers and associated supplies are highly competitive,
especially with respect to pricing and the introduction of new technologies and
products offering improved features and functionality. The Company's major
competitors, all of which have significantly greater financial, marketing and
technological resources than the Company, have regularly lowered prices on their
laser and inkjet printers and are expected to continue to do so. The Company has
also regularly lowered prices on its printers and expects to continue to do so.
In particular, the inkjet printer market has experienced and is expected to
continue to experience significant printer price pressure from the Company's
major competitors. Price reductions beyond expectations or the inability to
reduce costs, contain expenses or increase sales as currently expected could
result in lower profitability for the Company and jeopardize the Company's
ability to grow or maintain its market share.
In addition, the life cycles of the Company's products, as well as delays in
product development and manufacturing, variations in the cost of component
parts, delays in customer purchases of existing products in anticipation of new
product introductions by the Company or its competitors and market acceptance of
new products and programs, may cause a build up 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. Further, some of the
Company's newly developed products replace or compete with some of the Company's
existing products. The competitive pressure to develop technology and products
also could cause significant changes in the level of the Company's operating
expenses.
11
<PAGE>
Revenues derived from international sales, including exports from the United
States, make up over half of the Company's revenues. Accordingly, the Company's
future results could be adversely affected by a variety of factors, including
foreign currency exchange rate fluctuations, trade protection measures, changes
in a specific country's or region's political or economic conditions and
unexpected changes in regulatory requirements. Also, margins on international
sales tend to be lower than those on domestic sales. Moreover, the Company
believes that international operations in new geographic markets will be less
profitable than operations in the U.S. and European markets as a result, in
part, of the higher investment levels for marketing, selling and distribution
required to enter these markets.
Factors unrelated to the Company's operating performance, including the
Company's ability to obtain patents, copyrights and trademarks, maintain trade
secret protection and operate without infringing the proprietary rights of
others, as well as expenses incurred by the Company in enforcing its
intellectual property rights; economic and business conditions, both national
and international; the loss of significant customers or suppliers; changes in
and execution of the Company's business strategy, including the impact of
acquisitions; the ability to retain and attract key personnel; and trading
activity in the Company's Class A common stock, particularly in light of the
substantial number of shares owned by the original investor group that are
available for resale, also may affect the Company's results as well as its Class
A common stock price.
12
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
Part II. Other Information
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 15 of this Report.
(b) Reports on Form 8-K:
There were no Reports on Form 8-K filed during the quarter ended
September 30, 1997.
13
<PAGE>
LEXMARK INTERNATIONAL GROUP, 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 Group, Inc.
(Registrant)
Date: November 12, 1997 By: /s/ David L. Goodnight
----------------- -----------------------
David L. Goodnight
Corporate Controller
(Principal Accounting Officer)
14
<PAGE>
EXHIBIT INDEX
10 Stock Disposition Agreement, dated as of October 21, 1997, between Lexmark
International Group, Inc. and The Clayton & Dubilier Private Equity Fund
IV Limited Partnership (Incorporated herein by reference to the Company's
Current Report on Form 8-K dated October 21, 1997 (File No. 1-14050)).
27 Financial Data Schedule.
15
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<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF LEXMARK INTERNATIONAL GROUP, INC. FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
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<FISCAL-YEAR-END> DEC-31-1997
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<PERIOD-END> SEP-30-1997
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<RECEIVABLES> 326
<ALLOWANCES> 18
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