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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 June 30, 2000
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)
Lexmark International Group, Inc.
(Former name, former address and former fiscal year, if changed
since last report)
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 127,453,928 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 August 4, 2000.
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<PAGE>
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, 2000 AND 1999.....2
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION (Unaudited)
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999....................3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999......................4
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited).....5-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (Unaudited).....................9-12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............12
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................14
1
<PAGE>
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)
<TABLE>
Three Months Ended Six Months Ended
June 30 June 30
------------------------------ ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $893.0 $817.3 $1,784.7 $1,604.3
Cost of revenue 584.8 521.7 1,161.4 1,023.5
------ ------ -------- --------
Gross profit 308.2 295.6 623.3 580.8
Research and development 52.9 48.6 106.7 94.0
Selling, general and administrative 141.4 134.9 282.3 271.0
------ ------ -------- --------
Operating expense 194.3 183.5 389.0 365.0
------ ------ -------- --------
Operating income 113.9 112.1 234.3 215.8
Interest expense 3.2 2.6 5.8 4.8
Other (income) expense (2.1) 2.2 0.3 3.2
------ ------ -------- --------
Earnings before income tax 112.8 107.3 228.2 207.8
Provision for income tax 28.7 32.8 63.9 65.5
------ ------ -------- --------
Net earnings $ 84.1 $ 74.5 $ 164.3 $ 142.3
====== ====== ======== ========
Basic net earnings per share $ 0.65 $ 0.58 $ 1.27 $ 1.10
====== ====== ======== ========
Diluted net earnings per share $ 0.62 $ 0.55 $ 1.21 $ 1.03
====== ====== ======== ========
Shares used in per share calculation:
Basic 129.0 129.1 129.0 129.8
====== ====== ======== ========
Diluted 135.7 136.4 136.0 138.7
====== ====== ======== ========
</TABLE>
See notes to consolidated condensed financial statements.
* The financial statements included herein are those of Lexmark International
Group, Inc. Effective July 1, 2000, Lexmark International Group, Inc. was
merged with and into Lexmark International, Inc.
2
<PAGE>
LEXMARK INTERNATIONAL, INC.* AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In Millions, Except Share Amounts)
(Unaudited)
<TABLE>
June 30 December 31
2000 1999
-------------- -----------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 52.6 $ 93.9
Trade receivables, net of allowance of $24.4 in 2000 and $24.1 in 1999 488.8 507.3
Inventories 378.7 387.7
Prepaid expenses and other current assets 122.7 99.8
-------- --------
Total current assets 1,042.8 1,088.7
Property, plant and equipment, net 632.9 561.0
Other assets 76.0 52.9
-------- --------
Total assets $1,751.7 $1,702.6
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 51.8 $ 16.2
Accounts payable 301.0 300.9
Accrued liabilities 389.7 418.4
-------- --------
Total current liabilities 742.5 735.5
Long-term debt 148.8 148.7
Other liabilities 159.4 159.3
-------- --------
Total liabilities 1,050.7 1,043.5
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 1,600,000 shares authorized,
no shares issued and outstanding - -
Common stock, $.01 par value:
Class A, 900,000,000 shares authorized; 127,352,686 and
128,120,358 outstanding in 2000 and 1999, respectively 1.6 1.5
Class B, 10,000,000 shares authorized; no shares outstanding - -
Capital in excess of par 695.9 630.4
Retained earnings 894.6 730.3
Treasury stock, at cost; 27,759,166 and 25,441,266 shares in 2000
and 1999, respectively (846.9) (672.3)
Accumulated other comprehensive loss (44.2) (30.8)
-------- --------
Total stockholders' equity 701.0 659.1
-------- --------
Total liabilities and stockholders' equity $1,751.7 $1,702.6
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
* The financial statements included herein are those of Lexmark International
Group, Inc. Effective July 1, 2000, Lexmark International Group, Inc. was
merged with and into Lexmark International, Inc.
3
<PAGE>
LEXMARK INTERNATIONAL, INC.* AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
<TABLE>
Six Months Ended
June 30
-------------------------
2000 1999
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net earnings $164.3 $142.3
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 42.1 38.9
Deferred taxes 0.4 (0.9)
Other non-cash charges to operations (4.5) 12.4
------ ------
202.3 192.7
Change in assets and liabilities:
Trade receivables 38.6 18.8
Trade receivables program (20.1) -
Inventories 9.0 (31.0)
Accounts payable 0.1 (12.6)
Accrued liabilities (28.7) (4.8)
Other assets and liabilities (37.8) (12.8)
------ ------
Net cash provided by operating activities 163.4 150.3
------ ------
Cash flows from investing activities:
Purchases of property, plant and equipment (127.7) (78.7)
Other (1.0) 0.2
------ ------
Net cash used for investing activities (128.7) (78.5)
------ ------
Cash flows from financing activities:
Increase in short-term debt 35.3 3.6
Purchase of treasury stock (174.6) (155.8)
Exercise of stock options 64.1 23.5
------ ------
Net cash used for financing activities (75.2) (128.7)
------ ------
Effect of exchange rate changes on cash (0.8) (1.3)
------ ------
Net decrease in cash and cash equivalents (41.3) (58.2)
Cash and cash equivalents - beginning of period 93.9 149.0
------ ------
Cash and cash equivalents - end of period $ 52.6 $ 90.8
====== ======
</TABLE>
See notes to consolidated condensed financial statements.
* The financial statements included herein are those of Lexmark International
Group, Inc. Effective July 1, 2000, Lexmark International Group, Inc. was
merged with and into Lexmark International, Inc.
4
<PAGE>
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Effective July 1, 2000, Lexmark International Group, Inc. ("Group")
merged with and into its wholly-owned subsidiary, Lexmark International,
Inc. ("International"), whereby International became the surviving
corporation ("the company"). The financial statements presented are those
of Group prior to the merger, which are substantially identical to
International's financial statements prior to the merger. Pursuant to the
merger, Group's stockholders automatically received one share of the
company's Class A Common Stock for each share of Group Class A Common
Stock, along with the associated rights attaching pursuant to the
Stockholder Rights Plan, to which the company is a successor. The
company's Class A Common Stock and associated rights have the same rights
and privileges as Group's Class A Common Stock and associated rights. The
company also assumed all of Group's benefit plans for employees, retirees
and directors and each outstanding Group stock based award was converted
into an identical stock based award in the company.
The accompanying interim financial statements are unaudited; however, in
the opinion of 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 Group's audited annual consolidated financial
statements for the year ended December 31, 1999.
2. INVENTORIES
(Dollars in millions)
Inventories consist of the following:
<TABLE>
June 30 December 31
2000 1999
---------------- -----------------
<S> <C> <C>
Work in process $ 164.4 $ 169.5
Finished goods 214.3 218.2
------- -------
$ 378.7 $ 387.7
======= =======
</TABLE>
3. STOCKHOLDERS' EQUITY
At Group's Annual Meeting of Stockholders on April 27, 2000, the
stockholders approved an increase in the number of authorized shares of
Group's Class A common stock from 450 million to 900 million shares. As
of June 30, 2000 Group's board of directors had authorized the repurchase
of up to $1.0 billion of its Class A common stock. The repurchase
authorization with respect to Group's Class A common stock remains in
effect with respect to the Class A common stock of the company. 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. As of June 30, 2000, Group had repurchased 27,786,928
shares at prices ranging from $10.63 to $105.38 for an aggregate cost of
approximately $847 million.
5
<PAGE>
4. OTHER COMPREHENSIVE EARNINGS (LOSS)
(Dollars in millions)
Comprehensive earnings consists of the following:
<TABLE>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $84.1 $74.5 $164.3 $142.3
Other comprehensive earnings (loss):
Foreign currency translation adjustment (6.2) (1.6) (12.7) (7.2)
Cash flow hedging (net of related year-to-date
tax liability of $0.1 in 2000 and $0.8 in 1999) (9.5) 2.0 (2.4) 8.5
Minimum pension liability adjustment (net
of related year-to-date tax benefit of $0.0 in
2000 and 1999) - 0.1 1.7 0.3
----- ----- ------ ------
Comprehensive earnings $68.4 $75.0 $150.9 $143.9
===== ===== ====== ======
</TABLE>
Accumulated other comprehensive earnings (loss) consists of the
following:
<TABLE>
Accumulated
Minimum Other
Translation Cash Flow Pension Comprehensive
Adjustment Hedges Liability Earnings (Loss)
--------- ------ --------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1999 $(34.9) $ 8.5 $(4.4) $(30.8)
First quarter 2000 change (6.5) 7.1 1.7 2.3
------ ----- ----- ------
Balance, March 31, 2000 (41.4) 15.6 (2.7) (28.5)
Second quarter 2000 change (6.2) (9.5) - (15.7)
------ ----- ----- ------
Balance, June 30, 2000 $(47.6) $ 6.1 $(2.7) $(44.2)
====== ===== ===== ======
</TABLE>
6
<PAGE>
5. 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>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $84.1 $74.5 $164.3 $142.3
===== ===== ====== ======
Weighted average shares used
for basic EPS 129,015,443 129,107,776 129,016,416 129,823,998
Effect of dilutive securities
Long-term incentive plan 88,973 74,044 80,596 82,340
Stock options 6,580,653 7,261,874 6,882,083 8,768,827
------------ ------------ ------------ ------------
Weighted average shares used
for diluted EPS 135,685,069 136,443,694 135,979,095 138,675,165
=========== =========== =========== ===========
Basic net EPS $0.65 $0.58 $1.27 $1.10
Diluted net EPS $0.62 $0.55 $1.21 $1.03
</TABLE>
Options to purchase an additional 1,567,983 and 26,782 shares of Group's
Class A common stock were outstanding at June 30, 2000 and 1999,
respectively, but were not included in the computation of diluted
earnings per share because their effect would be antidilutive.
6. SUMMARIZED FINANCIAL INFORMATION
(Dollars in millions)
The following is consolidated summarized financial information of
International, which existed as a wholly-owned subsidiary of Group at
June 30, 2000.
<TABLE>
June 30 December 31
2000 1999
---------------- -----------------
Statement of financial position data:
<S> <C> <C>
Current assets $1,042.8 $1,088.7
Noncurrent assets 708.9 613.9
Current liabilities 742.5 739.4
Noncurrent liabilities 308.2 308.0
</TABLE>
7
<PAGE>
<TABLE>
Three Months Ended Six Months Ended
June 30 June 30
------------------------ ----------------------
2000 1999 2000 1999
---- ---- ---- ----
Statement of earnings data:
<S> <C> <C> <C> <C>
Revenue $893.0 $817.3 $1,784.7 $1,604.3
Gross profit 308.2 295.6 623.3 580.8
Net earnings 84.1 74.5 164.3 142.3
</TABLE>
Current liabilities at December 31, 1999 included $3.9 million that was
owed to Group.
7. NEW ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial
statements. Lexmark will adopt SAB 101 as required by December 31, 2000
and is evaluating the effect that such adoption may have on its
consolidated results of operations and financial position.
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 138, which amends
the previously released SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement amends the treatment
of certain transactions discussed in SFAS No. 133, which the company
implemented January 1, 1999. The new amendment did not have a material
impact on Group's financial position, results of operations, or
liquidity.
In July 2000, the FASB's Emerging Issues Task Force ("EITF") issued EITF
00-15, Classification in the Statement of Cash Flows of the Income Tax
Benefit Realized by a Company upon Employee Exercise of a Nonqualified
Stock Option. This statement requires that cash flows realized from an
income tax benefit as a result of employee stock option exercises be
recorded in cash flows from operating activities in the Statement of Cash
Flows. Currently the company records such items in cash flows from
financing activities. This statement is effective for quarters ending
after July 20, 2000 with restatement required for comparative cash flow
statements. The company plans to adopt this statement effective in the
third quarter of 2000. Although it is difficult to estimate the future
impact of EITF 00-15, if it had been effective as of June 30, 2000, $47.5
million and $17.5 million of cash flows provided by financing would have
been considered cash flows provided by operating activities for the six
month periods ended June 30, 2000 and 1999, respectively.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
(Unaudited)
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
Results of Operations
---------------------
Consolidated revenue for the three months ended June 30, 2000 was $893 million,
an increase of 9% over the same period of 1999. Revenue was adversely affected
by foreign currency exchange rates due to weakening of European currencies
against the U.S. dollar. Revenue growth was 13% for the quarter on a constant
currency basis. Total U.S. revenue was down $2 million or less than 1%, and
international revenue, including exports from the U.S., was up $77 million or
18%.
For the six months ended June 30, 2000, consolidated revenue was $1,785 million,
an increase of 11% over the same period of 1999. Revenue growth was 15% for the
period on a constant currency basis. Total U.S. revenue was up $48 million or
7%, and international revenue, including exports from the U.S., was up $132
million or 15%.
The revenue growth for the three and six months ended June 30, 2000 over the
same periods in 1999 was driven by unit volume increases in printers and
associated consumable supplies whose revenue increased 14% and 16% for the three
and six month periods, respectively. Revenue from sales to original equipment
manufacturers ("OEM") for the three and six months ended June 30, 2000 accounted
for less than 15% of total revenue with no single OEM customer accounting for
more than 10% of total revenue.
Consolidated gross profit was $308 million for the three months ended June 30,
2000, an increase of 4% from the same period of 1999. For the six months ended
June 30, 2000, consolidated gross profit was $623 million, an increase of 7%
over the corresponding period of 1999. Gross profit as a percentage of revenue
for the three and six months ended June 30, 2000 decreased to 35% from 36% for
the same period in 1999, principally due to a mix shift among products and lower
printer prices.
Total operating expense increased 6% for the quarter ended June 30, 2000 and
increased 7% for the first six months of 2000, compared to the same periods of
1999. Operating expense as a percentage of revenue for the quarter was 21.8%
compared to 22.5% for the corresponding period of 1999. Operating expense as a
percentage of revenue for the first half of 2000 was also 21.8% compared to
22.8% for the same period of 1999. These decreases were principally due to lower
selling, general, and administrative expense as a percentage of revenue.
Consolidated operating income was $114 million for the second quarter of 2000
and $234 million for the six months ended June 30, 2000, an increase of 2% and
9%, respectively, over the corresponding periods of 1999 reflecting higher
printer and associated supplies unit sales volumes and lower selling, general,
and administrative expense as a percentage of revenue.
Net earnings for the second quarter of 2000 were $84 million, up 13% compared to
the second quarter of 1999. This increase was primarily due to a decrease in the
effective income tax rate, the decrease in non-operating expense resulting from
the sale of an investment and improved operating income. The income tax
provision was 25.4% of earnings before tax for the second quarter of 2000 as
compared to approximately 30.6% in the same period of 1999. During the second
quarter of 2000 the annual effective tax rate was reduced by 2.5% as a result of
continuing increases in manufacturing activities in certain countries.
Basic net earnings per share were $0.65 for the second quarter of 2000 compared
to $0.58 in the corresponding period of 1999, an increase of 13%. Diluted net
earnings per share were $0.62 for the second quarter of 2000 compared to $0.55
in the comparable period of 1999, an increase of 14%. The increase in basic and
diluted net
9
<PAGE>
earnings per share resulted from increased income before tax and lower income
tax rates.
Net earnings for the first half of 2000 were $164 million, an increase of 15%
compared to the same period of 1999. The increase was primarily due to the 9%
increase in operating income and the reduction in the tax provision from 31.5%
of earnings before tax in 1999 to 28.0% in 2000.
Basic net earnings per share were $1.27 for the first six months of 2000
compared to $1.10 in the corresponding period of 1999, an increase of 16%.
Diluted net earnings per share were $1.21 for the first six months of 2000
compared to $1.03 in the comparable period of 1999, an increase of 18%. These
increases in basic and diluted net earnings per share resulted from increased
operating income, lower income tax rates and reduced shares outstanding.
Financial Condition
-------------------
The company's financial position remains strong at June 30, 2000, with working
capital of $300 million compared to $353 million at December 31, 1999. At June
30, 2000, the company had outstanding $52 million of short-term debt and $149
million of long-term debt. The debt to total capital ratio was 22% at June 30,
2000 compared to 20% at December 31, 1999.
Cash provided by operating activities for the six months ended June 30, 2000 was
$163 million compared to $150 million for the same period of 1999. This increase
was primarily due to the increased net earnings.
Capital expenditures for the first half of 2000 were $128 million compared to
$79 million for the same period of 1999. This increase is primarily attributable
to the support of new products and capacity expansion. It is anticipated that
capital expenditures for 2000 will be approximately $300 million. The 2000
capital expenditures are expected to be funded primarily through cash from
operations.
At Group's Annual Meeting of Stockholders on April 27, 2000, the stockholders
approved an increase in the number of authorized shares of Group's Class A
common stock from 450 million to 900 million shares. As of June 30, 2000,
Group's board of directors had authorized the repurchase of up to $1.0 billion
of its Class A common stock. The repurchase authorization with respect to
Group's Class A common stock remains in effect with respect to the Class A
common stock of the company. 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. As of June 30, 2000, Group had repurchased 27,786,928
shares at prices ranging from $10.63 to $105.38 for an aggregate cost of
approximately $847 million.
New Accounting Standards
------------------------
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. SAB
101 provides guidance on applying generally accepted accounting principles to
revenue recognition issues in financial statements. Lexmark will adopt SAB 101
as required by December 31, 2000 and is evaluating the effect that such adoption
may have on its consolidated results of operations and financial position.
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 138, which amends the previously
released SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This statement amends the treatment of certain transactions
discussed in SFAS No. 133, which the company implemented January 1, 1999. The
new amendment did not have a material impact on Group's financial position,
results of operations, or liquidity.
10
<PAGE>
In July 2000, the FASB's Emerging Issues Task Force ("EITF") issued EITF 00-15,
Classification in the Statement of Cash Flows of the Income Tax Benefit Realized
by a Company upon Employee Exercise of a Nonqualified Stock Option. This
statement requires that cash flows realized from an income tax benefit as a
result of employee stock option exercises be recorded in cash flows from
operating activities in the Statement of Cash Flows. Currently the company
records such items in cash flows from financing activities. This statement is
effective for quarters ending after July 20, 2000 with restatement required for
comparative cash flow statements. The company plans to adopt this statement
effective in the third quarter of 2000. Although it is difficult to estimate the
future impact of EITF 00-15, if it had been effective as of June 30, 2000, $47
million and $17 million of cash flows provided by financing would have been
considered cash flows provided by operating activities for the six month periods
ended June 30, 2000 and 1999, respectively.
Factors That May Affect Future Results and Information Concerning Forward -
--------------------------------------------------------------------------------
Looking Statements
------------------
Statements contained in this report which are not statements of historical fact
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are made based upon management's current expectations
and beliefs concerning future developments and their potential effects upon the
company. There can be no assurance that future developments affecting the
company will be those anticipated by management, and there are a number of
factors that could adversely affect the company's future operating results or
cause the company's actual results to differ materially from the estimates or
expectations reflected in such forward-looking statements, including without
limitation, the factors set forth below:
o The company'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 laser and inkjet 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, all 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 on inkjet or laser printer
products 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.
o The company is relying more heavily on foreign manufacturing partners for its
products, and future operating results may be adversely affected by several
factors, including, without limitation, if such partners are unable to reliably
supply products or if there are difficulties in transitioning such manufacturing
activities from the company to such partners.
o Delays in customer purchases of existing products in anticipation of new
product introductions by the company or its competitors and market acceptance of
new products and pricing programs, the reaction of competitors to any such new
products or programs, the life cycles of the company's products, as well as
delays in product development and manufacturing, variations in the cost of
component parts, 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 also could cause significant changes in the
level of the company's operating expenses.
o Revenue derived from international sales, including exports from the United
States, make up over half of the company's revenue. 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
11
<PAGE>
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, in part, because of the higher investment levels for
marketing, selling and distribution required to enter these markets.
o 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.
o 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.
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 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.
o 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, 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 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 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.
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, 2000, the fair value of Group's senior notes is estimated at $137
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 of the
senior notes as recorded in the statement of financial position exceeded the
fair value at June 30, 2000 by approximately $12 million. Market risk
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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
June 30, 2000.
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 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 June 30, 2000 for such contracts resulting from a hypothetical 10%
adverse change in all foreign currency exchange rates is approximately $15
million. This loss would be mitigated by corresponding gains on the underlying
exposures.
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LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The information required to be reported for Group's Annual Meeting of
Stockholders held April 27, 2000, was previously reported by Group in
its Quarterly Report on Form 10-Q for the quarter ended March 31,
2000.
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 16 of this report.
(b) Reports on Form 8-K:
None
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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 financial officer of the registrant.
Lexmark International, Inc.
(Registrant)
Date: August 10, 2000 By: /s/ Gary E. Morin
----------------- -----------------
Gary E. Morin
Executive Vice President and Chief Financial Officer
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EXHIBIT INDEX
Exhibits:
3(i) Restated Certificate of Incorporation of Lexmark International, Inc.
(the "company").
3(ii) Company By-Laws as Amended and Restated June 22, 2000.
4.1 First Supplemental Indenture, dated as of June 22, 2000, by and
among the company, as Issuer, and Lexmark International Group, Inc.
("Group"), as Guarantor, to The Bank of New York, as Trustee.
4.2 Specimen of Class A common stock certificate.
10.1 First Amendment to Credit Agreement, dated as of March 20, 2000, by and
among Group, as Parent Guarantor, the company, as Borrower, the Lenders
party thereto, Fleet National Bank, as Documentation Agent, Morgan
Guaranty Trust Company of New York, as Syndication Agent, and The Chase
Manhattan Bank, as Administrative Agent.
27 Financial Data Schedule
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