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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
X For the Quarterly Period Ended September 30, 1999
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 West New Circle Road
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 registrant had 127,725,154 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 October 29, 1999.
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<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, 1999 AND 1998.2
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION (Unaudited)
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998.................3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998..................4
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)......5-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (Unaudited)...................11-15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........16
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................17
1
<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
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $845.0 $743.8 $2,449.3 $2,113.2
Cost of revenues 541.4 475.9 1,564.9 1,342.3
------ ------ -------- --------
Gross profit 303.6 267.9 884.4 770.9
Research and development 44.5 44.0 138.5 118.7
Selling, general and administrative 143.3 132.5 414.3 397.6
------ ------ -------- --------
Operating expenses 187.8 176.5 552.8 516.3
------ ------ -------- --------
Operating income 115.8 91.4 331.6 254.6
Interest expense 2.8 3.3 7.6 8.4
Other 1.4 1.2 4.6 4.0
------ ------ -------- --------
Earnings before income taxes 111.6 86.9 319.4 242.2
Provision for income taxes 35.1 29.1 100.6 81.1
------ ------ -------- --------
Net earnings $ 76.5 $ 57.8 $ 218.8 $ 161.1
====== ====== ======== ========
Basic net earnings per share $ 0.59 $ 0.44 $ 1.69 $ 1.20
====== ====== ======== ========
Diluted net earnings per share $ 0.56 $ 0.41 $ 1.58 $ 1.13
====== ====== ======== ========
Shares used in per share calculation:
Basic 129.3 132.5 129.6 133.9
====== ====== ======== ========
Diluted 136.8 142.3 138.1 143.1
====== ====== ======== ========
</TABLE>
All share and per share data have been restated to reflect a two-for-one stock
split effective June 10, 1999.
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)
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
------------ -----------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 122.3 $ 149.0
Trade receivables, net of allowance of $26.8 in 1999 and $24.2 in 1998 487.8 469.4
Inventories 397.0 333.0
Prepaid expenses and other current assets 93.5 68.6
-------- --------
Total current assets 1,100.6 1,020.0
Property, plant and equipment, net 512.0 430.5
Other assets 45.3 32.9
-------- --------
Total assets $1,657.9 $1,483.4
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Short-term debt $ 13.4 $ 11.7
Accounts payable 290.3 267.1
Accrued liabilities 395.9 326.9
-------- --------
Total current liabilities 699.6 605.7
Long-term debt 148.7 148.7
Other liabilities 155.7 150.9
-------- --------
Total liabilities 1,004.0 905.3
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 1,600,000 shares authorized,
no shares issued and outstanding - -
Common stock $.01 par value:
Class A, 450,000,000 shares authorized; 129,043,302 and
130,982,262 outstanding in 1999 and 1998, respectively 1.5 0.8
Class B, 10,000,000 shares authorized; no shares outstanding - -
Capital in excess of par 604.6 564.8
Retained earnings 630.6 411.8
Treasury stock, at cost; 23,753,866 and 20,145,666 shares in 1999
and 1998, respectively (551.6) (370.3)
Accumulated other comprehensive earnings (loss) (31.2) (29.0)
-------- --------
Total stockholders' equity 653.9 578.1
-------- --------
Total liabilities and stockholders' equity $1,657.9 $1,483.4
======== ========
</TABLE>
All share data have been restated to reflect a two-for-one stock split effective
June 10, 1999.
See notes to consolidated condensed financial statements.
3
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------
1999 1998
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net earnings $218.8 $161.1
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 59.3 52.5
Deferred taxes (1.2) (0.3)
Other non-cash charges to operations 16.9 15.2
------ ------
293.8 228.5
Change in assets and liabilities:
Trade receivables (18.4) (90.5)
Trade receivables programs - (12.3)
Inventories (64.0) (57.8)
Accounts payable 23.2 (66.5)
Accrued liabilities 69.0 104.0
Other assets and liabilities (43.6) (19.4)
------ ------
Net cash provided by operating activities 260.0 86.0
------ ------
Cash flows from investing activities:
Purchases of property, plant and equipment (146.6) (61.4)
Proceeds from sales of property, plant and equipment 0.2 0.9
------ ------
Net cash used for investing activities (146.4) (60.5)
------ ------
Cash flows from financing activities:
Increase in short-term debt 6.6 18.0
Principal payments on long-term debt - (207.0)
Proceeds from issuance of long-term debt - 297.2
Purchase of treasury stock (181.3) (154.9)
Exercise of stock options and warrants 35.7 6.4
------ ------
Net cash used for financing activities (139.0) (40.3)
------ ------
Effect of exchange rate changes on cash (1.3) -
------ ------
Net decrease in cash and cash equivalents (26.7) (14.8)
Cash and cash equivalents - beginning of period 149.0 43.0
------ ------
Cash and cash equivalents - end of period $122.3 $ 28.2
====== ======
</TABLE>
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 Lexmark International Group, Inc. (together with its
subsidiaries, the "company") 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, 1998.
2. INVENTORIES
(Dollars in millions)
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
------------ -----------
<S> <C> <C>
Work in process $168.9 $140.3
Finished goods 228.1 192.7
------ ------
$397.0 $333.0
======= ======
</TABLE>
3. DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The company adopted Statement of Financial Accounting Standard ("SFAS")
No. 133, Accounting for Derivative Instruments and Hedging Activities, on
January 1, 1999. SFAS No. 133 requires that all derivatives, including
foreign currency exchange contracts, be recognized on the balance sheet
at fair value. Derivatives that are not hedges must be recorded at fair
value through earnings. If a derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of the derivative are
either offset against the change in fair value of underlying assets or
liabilities through earnings or recognized in other comprehensive
earnings until the underlying hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value is to be
immediately recognized in earnings.
The company recorded a net-of-tax cumulative-effect-type loss adjustment
of $0.4 million in accumulated other comprehensive earnings to recognize
at fair value all derivatives that are designated as cash-flow hedging
instruments upon adoption of SFAS No. 133 on January 1, 1999. This loss
adjustment, which the company expects to reclassify to earnings by March
31, 2000, consists of a $0.6 million loss related to interest rate swaps
and a $0.2 million gain related to foreign currency options.
Derivative Instruments and Hedging Activities
---------------------------------------------
The company's activities expose it to a variety of market risks,
including the effects of changes in foreign currency exchange rates and
interest rates. The financial exposures are monitored and managed by the
company as an integral part of its overall risk management program. The
company's risk management
5
<PAGE>
program seeks to reduce the potentially adverse effects that the
volatility of the markets may have on its operating results.
The company maintains a foreign currency risk management strategy that
uses derivative instruments to protect its interests from unanticipated
fluctuations in earnings and cash flows caused by volatility in currency
exchange rates.
The company maintains an interest rate risk management strategy that uses
derivative instruments to minimize significant, unanticipated earnings
fluctuations caused by interest rate volatility. The company's goal is to
maintain a balance between fixed and floating interest rates on its
financings.
By using derivative financial instruments to hedge exposures to changes
in exchange rates and interest rates the company exposes itself to credit
risk and market risk. The company manages exposure to counterparty credit
risk by entering into derivative financial instruments with highly rated
institutions that can be expected to fully perform under the terms of the
agreement. Market risk is the adverse effect on the value of a financial
instrument that results from a change in currency exchange rates or
interest rates. The market risk associated with interest rate and foreign
exchange contracts is managed by the establishment and monitoring of
parameters that limit the types and degree of market risk that may be
undertaken.
Fair Value Hedges
Fair value hedges are hedges of recognized assets or liabilities. The
company enters into forward exchange contracts to hedge actual purchases
and sales of inventories. The forward contracts used in this program
mature in three months or less, consistent with the related purchase and
sale commitments.
Cash Flow Hedges
Cash flow hedges are hedges of forecasted transactions or of the
variability of cash flows to be received or paid related to a recognized
asset or liability. The company purchases foreign exchange options and
forward exchange contracts expiring within one year as hedges of
anticipated purchases and sales that are denominated in foreign
currencies. These contracts are entered into to protect against the risk
that the eventual cash flows resulting from such transactions will be
adversely affected by changes in exchange rates. The company also uses
interest rate swaps to convert a portion of its variable rate financings
to fixed rates.
As of September 30, 1999, $3.1 million of deferred net gains on
derivative instruments accumulated in other comprehensive earnings are
expected to be reclassified to earnings during the next twelve months.
Accounting for Derivatives and Hedging Activities
-------------------------------------------------
All derivatives are recognized on the balance sheet at their fair value.
On the date the derivative contract is entered into, the company
designates the derivative as either a fair value or cash flow hedge.
Changes in the fair value of a derivative that is highly effective as --
and that is designated and qualifies as -- a fair value hedge, along with
the loss or gain on the hedged asset or liability are recorded in current
period earnings in cost of revenues. Changes in the fair value of a
derivative that is highly effective as -- and that is designated and
qualifies as -- a cash-flow hedge are recorded in other comprehensive
earnings, until the underlying transactions occur.
The company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objective
and strategy for undertaking various hedge items. This process includes
6
<PAGE>
linking all derivatives that are designated as fair value and cash flow
to specific assets and liabilities on the balance sheet or to forecasted
transactions. The company also formally assesses, both at the hedge's
inception and on an ongoing basis, whether the derivatives that are used
in hedging transactions are highly effective in offsetting changes in
fair value or cash flows of hedged items. When it is determined that a
derivative is not highly effective as a hedge or that it has ceased to be
a highly effective hedge, the company discontinues hedge accounting
prospectively, as discussed below.
The company discontinues hedge accounting prospectively when (1) it is
determined that a derivative is no longer effective in offsetting changes
in the fair value or cash flows of a hedged item; (2) the derivative
expires or is sold, terminated, or exercised or (3) the derivative is
discontinued as a hedge instrument, because it is unlikely that a
forecasted transaction will occur.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair value hedge, the
derivative will continue to be carried on the balance sheet at its fair
value. When hedge accounting is discontinued because it is probable that
a forecasted transaction will not occur, the derivative will continue to
be carried on the balance sheet at its fair value, and gains and losses
that were accumulated in other comprehensive earnings will be recognized
immediately in earnings. In all other situations in which hedge
accounting is discontinued, the derivative will be carried at its fair
value on the balance sheet, with changes in its fair value recognized in
current-period earnings.
4. STOCK SPLIT
At the company's Annual Meeting of Stockholders on April 29, 1999, the
stockholders approved an increase in the number of authorized shares of
its Class A common stock from 160 million to 450 million shares.
On April 29, 1999, the company announced a two-for-one stock split. The
stock split was effected in the form of a stock dividend on June 10, 1999
and entitled each stockholder of record on May 20, 1999 to receive one
share of Class A common stock for each share of Class A common stock held
on the record date. All share and per share data included in this filing
have been restated to reflect this stock split.
5. STOCKHOLDERS' EQUITY
On April 29, 1999, the company received authorization from its board of
directors to repurchase an additional $200 million of its Class A common
stock for a total repurchase authority of $800 million. The repurchase
authority allows the company at management's discretion to selectively
repurchase its stock in the open market or in privately negotiated
transactions depending upon market price and other factors. As of
September 30, 1999, the company had repurchased 23,781,628 shares at
prices ranging from $10.63 to $62.94 for an aggregate cost of
approximately $552 million.
7
<PAGE>
6. OTHER COMPREHENSIVE EARNINGS (LOSS)
(Dollars in millions)
Comprehensive earnings consists of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $76.5 $57.8 $218.8 $161.1
Other comprehensive earnings (loss):
Foreign currency translation adjustment 1.7 2.3 (5.5) (0.9)
Cash flow hedging (net of related tax
liability of $0.3 in 1999) (5.4) - 3.1 -
Minimum pension liability adjustment (net
of related tax benefit of $0 in 1999 and
$0.8 in 1998) (0.1) - 0.2 (1.5)
----- ----- ------ ------
Comprehensive earnings $72.7 $60.1 $216.6 $158.7
===== ===== ====== ======
</TABLE>
Accumulated other comprehensive earnings (loss) consists of the
following:
<TABLE>
<CAPTION>
Foreign Minimum Accumulated
Currency Pension Other
Translation Cash Flow Liability Comprehensive
Adjustment Hedging Adjustment Earnings (Loss)
<S> <C> <C> <C> <C>
Balance, December 31, 1998 $(23.9) $ - $(5.1) $(29.0)
Transition adjustment - (0.1) - (0.1)
First quarter 1999 change (5.6) 6.6 0.2 1.2
------ ----- ----- ------
Balance, March 31, 1999 (29.5) 6.5 (4.9) (27.9)
Second quarter 1999 change (1.6) 2.0 0.1 0.5
------ ----- ----- ------
Balance, June 30, 1999 (31.1) 8.5 (4.8) (27.4)
Third quarter 1999 change 1.7 (5.4) (0.1) (3.8)
------ ----- ----- ------
Balance, September 30, 1999 $(29.4) $ 3.1 $(4.9) $(31.2)
====== ===== ===== ======
</TABLE>
8
<PAGE>
7. EARNINGS PER SHARE (EPS) (Dollars in millions, except share amounts)
The following is a reconciliation of the weighted average shares used in
the basic and diluted EPS calculations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $76.5 $57.8 $218.8 $161.1
===== ===== ====== ======
Weighted average shares used
for basic EPS 129,298,364 132,521,442 129,646,861 133,886,694
Effect of dilutive securities
Long-term incentive plan 105,396 84,464 123,059 102,666
Stock options 7,351,880 9,651,828 8,296,511 9,143,960
----------- ----------- ----------- -----------
Weighted average shares used
for diluted EPS 136,755,640 142,257,734 138,066,431 143,133,320
=========== =========== =========== ===========
Basic net EPS $0.59 $0.44 $1.69 $1.20
Diluted net EPS $0.56 $0.41 $1.58 $1.13
</TABLE>
Options to purchase an additional 25,039 and 65,766 shares of Class A
common stock were outstanding at September 30, 1999 and 1998,
respectively, but were not included in the computation of diluted
earnings per share because their effect would be antidilutive.
8. SUMMARIZED FINANCIAL INFORMATION
(Dollars in millions)
The following is consolidated summarized financial information of Lexmark
International, Inc., a wholly-owned subsidiary of Lexmark International
Group, Inc.
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
------------ -----------
Statement of financial position data:
<S> <C> <C>
Current assets $1,100.6 $1,020.0
Noncurrent assets 557.3 463.4
Current liabilities 703.5 609.6
Noncurrent liabilities 304.4 299.6
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
Statement of earnings data:
<S> <C> <C> <C> <C>
Revenues $845.0 $743.8 $2,449.3 $2,113.2
Gross profit 303.6 267.9 884.4 770.9
Net earnings 76.5 57.8 218.8 161.1
</TABLE>
Current liabilities at both September 30, 1999 and December 31, 1998
include $3.9 million that is owed to Lexmark International Group, Inc.
10
<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, 1999 were $845
million, an increase of 14% over the same period of 1998. Without the negative
impact of foreign currency translation, revenue would have been $855 million, an
increase of 15% over the third quarter of 1998. Total U.S. revenues were up $33
million or 9%, and international revenues, including exports from the U.S., were
up $68 million or 18%.
For the nine months ended September 30, 1999, consolidated revenues were $2,449
million, an increase of 16% over the same period of 1998. The impact of foreign
currency translation was insignificant. Total U.S. revenues were up $104 million
or 10%, and international revenues, including exports from the U.S., were up
$232 million or 21%.
The revenue growth for the three and nine months ended September 30, 1999 over
the same periods in 1998 was driven by unit volume increases in printers and
associated consumable supplies whose revenues increased 17% for the third
quarter and 20% for the nine months ended September 30, 1999. Revenues from
sales to original equipment manufacturers ("OEM") for the three months ended
September 30, 1999 accounted for less than 15% of total revenues with no single
OEM customer accounting for more than 5% of total revenues.
Consolidated gross profit was $304 million for the three months ended September
30, 1999, an increase of 13% from the same period of 1998. For the nine months
ended September 30, 1999, consolidated gross profit was $884 million, an
increase of 15% over the corresponding period of 1998. Gross profit as a
percentage of revenues for the third quarter decreased slightly to 35.9% from
36.0% compared to the third quarter of 1998. Gross profit as a percentage of
revenues for the nine months ended September 30, 1999 decreased to 36.1% from
36.5% for the same period in 1998. These decreases were principally due to a mix
shift among products.
Total operating expenses increased 6% for the third quarter and 7% for the nine
months ended September 30, 1999, compared to the same period of 1998 due to
higher sales volume. Expenses as a percentage of revenues for the quarter were
22.2% compared to 23.7% for the corresponding period of 1998. Expenses as a
percentage of revenues for the first nine months of 1999 were 22.6% compared to
24.4% for the same period of 1998. These decreases were principally due to lower
selling, general, and administrative expenses as a percentage of revenues.
Consolidated operating income was $116 million for the third quarter of 1999 and
$332 million for the nine months ended September 30, 1999, an increase of 27%
and 30%, respectively, over the corresponding periods of 1998 reflecting higher
printer and associated supplies sales volumes and lower selling, general, and
administrative expenses as a percentage of revenues.
Net earnings for the third quarter of 1999 were $77 million, up 32% compared to
the third quarter of 1998. This increase reflects the increased revenues, higher
operating margins and a reduction in the tax provision from approximately 34% to
32% of earnings before tax for the same period in 1998 reflecting the effect of
lower tax rates as a result of increases in manufacturing activities in certain
countries.
Basic net earnings per share were $0.59 for the third quarter of 1999 compared
to $0.44 in the corresponding period of 1998, an increase of 36%. Diluted net
earnings per share were $0.56 for the third quarter of 1999 compared to $0.41 in
the comparable period of 1998, an increase of 38%. The increase in basic and
diluted net
11
<PAGE>
earnings per share resulted from increased revenues, higher operating margins,
lower income tax rates and reduced shares outstanding.
Net earnings for the first nine months of 1999 were $219 million, an increase of
36% compared to the same period of 1998. The increase in net earnings was
primarily due to the 30% increase in operating income and the effect of lower
tax rates.
Basic net earnings per share were $1.69 for the first nine months of 1999
compared to $1.20 in the corresponding period of 1998, an increase of 40%.
Diluted net earnings per share were $1.58 for the first nine months of 1999
compared to $1.13 in the comparable period of 1998, an increase of 41%. These
increases in basic and diluted net earnings per share resulted from increased
revenues, higher operating margins, lower income tax rates and reduced shares
outstanding.
Financial Condition
- -------------------
The company's financial position remains strong at September 30, 1999, with
working capital of $401 million compared to $414 million at December 31, 1998.
At September 30, 1999, the company had outstanding $13 million of short-term
debt and $149 million of long-term debt. The debt to total capital ratio was 20%
at September 30, 1999 compared to 22% at December 31, 1998.
Cash provided by operating activities for the nine months ended September 30,
1999 was $260 million compared to $86 million for the same period of 1998. This
increase was attributable primarily to the increase in net earnings and
favorable changes in working capital accounts.
Capital expenditures for the first nine months of 1999 were $147 million
compared to $61 million for the same period of 1998. This increase is primarily
due to expansion of printer and associated supplies manufacturing capacity,
including a manufacturing facility in the Philippines. It is anticipated that
capital expenditures for 1999 will be in excess of $200 million. The 1999
capital expenditures have been and are expected to be funded primarily through
cash from operations.
On April 29, 1999, the company received authorization from the board of
directors to repurchase an additional $200 million of its Class A common stock
for a total repurchase authority of $800 million. 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. During the third
quarter of 1999, the company repurchased 410,000 shares in the open market at
prices ranging from $60.63 to $62.94 for a cost of approximately $25 million.
During the first nine months of 1999, the company repurchased 3,610,200 shares
at prices ranging from $42.82 to $62.94 for a cost of approximately $181
million. As of September 30, 1999, the company had repurchased 23,781,628 shares
at prices ranging from $10.63 to $62.94 for an aggregate cost of approximately
$552 million.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computers, software and other equipment
that fail to utilize the full four-digit representation of a year which would
cause date-sensitive software to recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculations causing disruption of operations, including, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities. In addition, equipment containing embedded
chips could malfunction as a result of this issue. If systems are not modified
to be Year 2000 compliant, such failures could occur and could materially affect
the company's results of operations, liquidity, and financial condition. In
recent years, in order to reduce costs associated with information processing
and to improve access to business information through
12
<PAGE>
common, integrated computing systems, the company converted its major
information technology systems to a network-based integrated processing system.
This system is Year 2000 compliant.
The company has conducted a comprehensive review of its computer and
manufacturing equipment systems to identify the systems that could be affected
by the Year 2000 issue and has developed a comprehensive plan to address the
issues. This plan includes analyzing and identifying systems and equipment that
need to be replaced or upgraded as a result of the Year 2000 issue. This review
was completed during 1998. Required replacements and upgrades of critical
systems and equipment were substantially complete and tested as of December 31,
1998. The Year 2000 issue has not delayed implementation of any other planned
system projects; however, some planned system projects were accelerated to
replace non-compliant systems.
Almost all of the company's products are Year 2000 compliant. There are some
products that are not Year 2000 compliant but can be upgraded to become
compliant. A few products are not Year 2000 compliant and may never be Year 2000
compliant. The company does not expect costs associated with making its own
products compliant to be material.
The company has established communications with its significant suppliers,
customers and others with which it conducts business to help them identify their
own Year 2000 issues. If necessary modifications and conversions by the company
and those with which it conducts business are not completed timely, the Year
2000 issue may have a material adverse effect on the company's results of
operations, liquidity, and financial position. The company has evaluated and
prioritized and is continuing to evaluate and prioritize the responses from
suppliers and establish contingency plans. For significant production suppliers,
contingencies include securing alternate sources or purchasing additional
inventory prior to January 2000. Services provided by various utility companies
are vital to the company, and the company continues to communicate with them
about their plans and progress in addressing the Year 2000 issue. The company
has developed contingency plans for critical business functions to address
possible interruptions in utility services, application systems availability,
telecommunications services, manufacturing equipment and network services. A
freeze on the installation of new systems and modifications to existing systems
is planned for the fourth quarter 1999 and January 2000. Critical systems' Year
2000 readiness will be revalidated during fourth quarter 1999. Worldwide teams
are planned for critical periods to handle any problems in the transition to
year 2000.
Costs
- -----
The total costs associated with the company's required modifications and
conversions to become Year 2000 compliant and to address Year 2000 non-compliant
products are not currently expected to be material to the company's results of
operations, liquidity and financial position and are being expensed as incurred.
The costs of the company's Year 2000 plan and the date on which the company
expects to complete the Year 2000 issue modifications are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
the company's current expectations.
Risks
- -----
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially adversely affect the company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers, including
utility companies, and customers, the company is unable to conclude that the
consequences of Year 2000 failures will not have a material impact on the
company's results of operations, liquidity or financial position.
THE DISCUSSION AND ANALYSIS OF THE YEAR 2000 ISSUE INCLUDED HEREIN CONTAINS
FORWARD-LOOKING STATEMENTS AND ARE BASED ON MANAGEMENT'S BEST ESTIMATES OF
13
<PAGE>
FUTURE EVENTS. RISKS RELATED TO COMPLETING THE COMPANY'S YEAR 2000 PLAN INCLUDE
THE AVAILABILITY OF RESOURCES, THE COMPANY'S ABILITY TO TIMELY DISCOVER AND
CORRECT THE POTENTIAL YEAR 2000 SENSITIVE PROBLEMS WHICH COULD HAVE A SERIOUS
IMPACT ON THE COMPANY'S OPERATIONS, THE ABILITY OF SUPPLIERS TO BRING THEIR
SYSTEMS INTO YEAR 2000 COMPLIANCE, AND THE COMPANY'S ABILITY TO IDENTIFY AND
IMPLEMENT EFFECTIVE CONTINGENCY PLANS TO ADDRESS YEAR 2000 FAILURES.
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:
~ The company's future operating results may be adversely affected by the impact
of the Year 2000 issues on customer spending.
~ The company has conducted a comprehensive review of its computer and
manufacturing equipment systems to identify the systems that could be affected
by the Year 2000 Issue and has developed a comprehensive plan to address the
issues. The company has established communications with its significant
suppliers and others with which it conducts business to help them identify their
own Year 2000 issues and to develop contingency plans. However, the failure to
timely discover and address a material Year 2000 problem could result in an
interruption in, or a failure of, normal business activities or operations. Such
failures could materially adversely affect the company's operating results,
liquidity and financial condition.
~ The company's future operating results may be adversely affected if it is
unable to continue to develop, manufacture and market products that meet
customers' needs. The markets for printers and associated supplies are
increasingly competitive, especially with respect to pricing and the
introduction of new technologies and products offering improved features and
functionality. The company and its major competitors, most of which have
significantly greater financial, marketing and technological resources than the
company, have regularly lowered prices on their printers and are expected 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, as well as price protection measures, could result in lower
profitability and jeopardize the company's ability to grow or maintain its
market share, particularly at a time when the company is increasing its
investment to support product introductions, expand capacity and enter new
geographies.
~ The company's performance depends in part upon its ability to increase printer
and associated supplies manufacturing capacity in line with growing market
demands, to manage inventory levels to support the demands of new customers as
well as its established customer base and to address production and supply
difficulties. 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.
~ 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 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
14
<PAGE>
develop technology and products also could cause significant changes in the
level of the company's operating expenses.
~ 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. 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 as a result, in
part, of the higher investment levels for marketing, selling and distribution
required to enter these markets.
~ The company markets and sells its products through several sales channels. The
company's future results may be adversely affected by any conflicts that might
arise between its various sales channels.
~ The company's success depends in part on its ability to obtain patents,
copyrights and trademarks, maintain trade secret protection and operate without
infringing the proprietary rights of others. Current or future claims of
intellectual property infringement could prevent the company from obtaining
technology of others and could otherwise adversely affect its operating results,
cash flows, financial position or business, as could expenses incurred by the
company in enforcing its intellectual property rights against others or
defending against claims that the company's products infringe the intellectual
property rights of others.
~ Factors unrelated to the company's operating performance, including economic
and business conditions, both national and international; the loss of
significant customers 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, trading activity in the company's common stock, particularly the
trading of large blocks and interday 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 its
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
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The market risk inherent in the company's financial instruments and positions
represents the potential loss arising from adverse changes in interest rates and
foreign currency exchange rates.
Interest Rates
- --------------
At September 30, 1999, the fair value of the company's senior notes is estimated
at $141 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
carrying value exceeded the fair value of debt at September 30, 1999 by
approximately $8 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 $7 million at September 30, 1999.
The company has interest rate swaps that serve as a hedge of financings which
are based on floating interest rates. The fair value at September 30, 1999 was a
liability of less than $1 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 less than $1 million at September 30, 1999.
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 revenues and profits translated into U.S. dollars. The primary
currencies to which the company is exposed include the euro and other European
currencies, the Japanese yen and other Asian and South American currencies.
Exposures are hedged with foreign currency forward contracts, put options, and
call options with maturity dates of less than one year. The potential loss in
fair value at September 30, 1999 for such contracts resulting from a
hypothetical 10% weakening of the U.S. dollar against all foreign currency
exchange rates is approximately $14 million. This loss would be mitigated by
corresponding gains on the underlying exposures.
16
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
A list of exhibits is set forth in the Exhibit Index found on
page 19 of this report.
(b) Reports on Form 8-K:
None.
17
<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 10, 1999 By: /s/ David L. Goodnight
---------------------- ----------------------
David L. Goodnight
Vice President and Corporate Controller
(Chief Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
Exhibits:
27 Financial Data Schedule
19
<PAGE>
<TABLE> <S> <C>
<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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 122
<SECURITIES> 0
<RECEIVABLES> 515
<ALLOWANCES> 27
<INVENTORY> 397
<CURRENT-ASSETS> 1,101
<PP&E> 512
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,658
<CURRENT-LIABILITIES> 700
<BONDS> 149
0
0
<COMMON> 2
<OTHER-SE> 652
<TOTAL-LIABILITY-AND-EQUITY> 1,658
<SALES> 2,449
<TOTAL-REVENUES> 2,449
<CGS> 1,565
<TOTAL-COSTS> 1,565
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> 319
<INCOME-TAX> 100
<INCOME-CONTINUING> 219
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 219
<EPS-BASIC> 1.69
<EPS-DILUTED> 1.58
</TABLE>
