================================================================================
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, 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)
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 127,138,455 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 31, 2000.
================================================================================
<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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999...2
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION (Unaudited)
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999...................3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 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).....................9-13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............13
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>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $926.6 $845.0 $2,711.3 $2,449.3
Cost of revenue 631.3 541.4 1,792.7 1,564.9
------ ------ -------- --------
Gross profit 295.3 303.6 918.6 884.4
Research and development 52.8 44.5 159.5 138.5
Selling, general and administrative 144.1 143.3 426.4 414.3
------ ------ -------- --------
Operating expense 196.9 187.8 585.9 552.8
------ ------ -------- --------
Operating income 98.4 115.8 332.7 331.6
Interest expense 3.7 2.8 9.5 7.6
Other 2.9 1.4 3.2 4.6
------ ------ -------- --------
Earnings before income tax 91.8 111.6 320.0 319.4
Provision for income tax 25.7 35.1 89.6 100.6
------ ------ -------- --------
Net earnings $ 66.1 $ 76.5 $ 230.4 $ 218.8
====== ====== ======== ========
Net earnings per share:
Basic $ 0.52 $ 0.59 $ 1.79 $ 1.69
====== ====== ======== ========
Diluted $ 0.50 $ 0.56 $ 1.71 $ 1.58
====== ====== ======== ========
Shares used in per share calculation:
Basic 127.7 129.3 128.6 129.6
====== ====== ======== ========
Diluted 133.1 136.8 135.0 138.1
====== ====== ======== ========
</TABLE>
See notes to consolidated condensed financial statements.
2
<PAGE>
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In Millions, Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
-------------- -------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 68.7 $ 93.9
Trade receivables, net of allowance of $22.3 in 2000 and $24.1 in 1999 540.8 507.3
Inventories 399.1 387.7
Prepaid expenses and other current assets 129.8 99.8
-------- --------
Total current assets 1,138.4 1,088.7
Property, plant and equipment, net 669.3 561.0
Other assets 91.2 52.9
-------- --------
Total assets $1,898.9 $1,702.6
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 96.4 $ 16.2
Accounts payable 317.4 300.9
Accrued liabilities 436.2 418.4
-------- --------
Total current liabilities 850.0 735.5
Long-term debt 148.9 148.7
Other liabilities 155.6 159.3
-------- --------
Total liabilities 1,154.5 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; 127,047,278 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 699.4 630.4
Retained earnings 960.7 730.3
Treasury stock, at cost; 28,353,776 and 25,441,266 shares in 2000
and 1999, respectively (872.0) (672.3)
Accumulated other comprehensive loss (45.3) (30.8)
-------- --------
Total stockholders' equity 744.4 659.1
-------- --------
Total liabilities and stockholders' equity $1,898.9 $1,702.6
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE>
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
---------------------------
2000 1999
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net earnings $230.4 $218.8
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 64.8 59.3
Deferred taxes 0.9 (1.2)
Other non-cash charges to operations (8.2) 16.9
------ ------
287.9 293.8
Change in assets and liabilities:
Trade receivables (28.5) (18.4)
Trade receivables program (5.0) -
Inventories (11.4) (64.0)
Accounts payable 16.5 23.2
Accrued liabilities 17.8 69.0
Tax benefits from employee stock options 50.1 26.9
Other assets and liabilities (57.3) (43.6)
------ ------
Net cash provided by operating activities 270.1 286.9
------ ------
Cash flows from investing activities:
Purchases of property, plant and equipment (193.2) (146.6)
Other (0.9) 0.2
------ ------
Net cash used for investing activities (194.1) (146.4)
------ ------
Cash flows from financing activities:
Increase in short-term debt 80.3 6.6
Purchase of treasury stock (199.7) (181.3)
Exercise of stock options 20.4 8.8
------ ------
Net cash used for financing activities (99.0) (165.9)
------ ------
Effect of exchange rate changes on cash (2.2) (1.3)
------ ------
Net decrease in cash and cash equivalents (25.2) (26.7)
Cash and cash equivalents - beginning of period 93.9 149.0
------ ------
Cash and cash equivalents - end of period $ 68.7 $122.3
====== ======
</TABLE>
See notes to consolidated condensed financial statements.
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"). 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>
<CAPTION>
September 30 December 31
2000 1999
------------------- -------------------
<S> <C> <C>
Work in process $ 163.7 $ 169.5
Finished goods 235.4 218.2
------- -------
$ 399.1 $ 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. The
repurchase authorization of up to $1.0 billion 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 September 30, 2000, the
company, and Group as its predecessor, had repurchased 28,381,928 shares
at prices ranging from $10.63 to $105.38 for an aggregate cost of
approximately $872 million.
5
<PAGE>
4. 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
---------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $66.1 $76.5 $230.4 $218.8
Other comprehensive earnings (loss):
Foreign currency translation adjustment (9.3) 1.7 (22.0) (5.5)
Cash flow hedging (net of related year-to-date
tax liability of $1.7 in 2000 and $0.3 in 1999) 8.1 (5.4) 5.7 3.1
Minimum pension liability adjustment (net
of related year-to-date tax benefit of $0.0 in
2000 and 1999) 0.1 (0.1) 1.8 0.2
----- ----- ------ ------
Comprehensive earnings $65.0 $72.7 $215.9 $216.6
===== ===== ====== ======
</TABLE>
Accumulated other comprehensive earnings (loss) consists of the
following:
<TABLE>
<CAPTION>
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)
Third quarter 2000 change (9.3) 8.1 0.1 (1.1)
------ ----- ----- ------
Balance, September 30, 2000 $(56.9) $14.2 $(2.6) $(45.3)
====== ===== ===== ======
</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>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $66.1 $76.5 $230.4 $218.8
===== ===== ====== ======
Weighted average shares used
for basic EPS 127,746,326 129,298,364 128,589,963 129,646,861
Effect of dilutive securities
Long-term incentive plan 85,494 105,396 56,039 123,059
Stock options 5,226,657 7,351,880 6,330,274 8,296,511
----------- ----------- ----------- -----------
Weighted average shares used
for diluted EPS 133,058,477 136,755,640 134,976,276 138,066,431
=========== =========== =========== ===========
Net EPS:
Basic $0.52 $0.59 $1.79 $1.69
Diluted $0.50 $0.56 $1.71 $1.58
</TABLE>
Options to purchase an additional 1,556,578 and 25,039 shares of the
company's Class A common stock were outstanding at September 30, 2000 and
1999, respectively, but were not included in the computation of diluted
net earnings per share because their effect would be antidilutive.
6. 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 the company'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. This statement is effective for quarters ending after July 20,
2000 with reclassification required for comparative cash flow statements.
The company adopted this statement in the third quarter of 2000 and
7
<PAGE>
has reclassified prior year amounts to conform with the classification of
such items as cash flows from operating activities. The company had
previously recorded such items in cash flows from financing activities.
7. SUBSEQUENT EVENT
On October 23, 2000, the company announced a restructuring plan that will
result in fourth quarter pre-tax charges of $35-45 million. These
non-recurring charges relate to the relocation of manufacturing,
primarily laser printers, to Latin America and Asia, and reductions in
associated support infrastructure. The restructuring plan provides for
the separation of up to 900 employees, related pension costs, and the
write-off of certain assets.
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 September 30, 2000 was $927
million, an increase of 10% 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 15% for the quarter on a
constant currency basis. Total U.S. revenue increased $27 million or 7%, and
international revenue, including exports from the U.S., increased $55 million or
12%.
For the nine months ended September 30, 2000, consolidated revenue was $2,711
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 $75
million or 7%, and international revenue, including exports from the U.S., was
up $187 million or 14%.
The revenue growth for the three and nine months ended September 30, 2000 over
the same periods in 1999 was driven by unit volume increases in printers and
associated supplies whose revenue increased 13% and 15% for the three and nine
month periods, respectively. Revenue from sales to original equipment
manufacturers ("OEM") for the three and nine months ended September 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 $295 million for the three months ended September
30, 2000, a decrease of 3% from the same period of 1999. For the nine months
ended September 30, 2000, consolidated gross profit was $919 million, an
increase of 4% over the corresponding period of 1999. Gross profit as a
percentage of revenue for the third quarter decreased to 31.9% from 35.9%
compared to the third quarter of 1999. Gross profit as a percentage of revenue
for the nine months ended September 30, 2000 decreased to 33.9% from 36.1% for
the same period in 1999. These decreases were principally due to unfavorable
foreign currency impact, lower hardware margins, and a mix shift among products.
Total operating expense increased 5% for the quarter ended September 30, 2000
and increased 6% for the first nine months of 2000, compared to the same periods
of 1999. Operating expense as a percentage of revenue for the quarter was 21.2%
compared to 22.2% for the corresponding period of 1999. Operating expense as a
percentage of revenue for the first nine months of 2000 was 21.6% compared to
22.6% 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 $98 million for the third quarter of 2000, a
decrease of 15% from the same period of 1999 reflecting lower gross profit
margins, and lower selling, general, and administrative expense as a percentage
of revenue. For the nine months ended September 30, 2000, consolidated operating
income increased $1 million to $333 million when compared to the same period of
1999. Higher printer and associated supplies unit volumes and lower selling,
general, and administrative expense as a percentage of revenue were offset by
lower hardware margins and a mix shift among products.
Net earnings for the third quarter of 2000 were $66 million, down 14% compared
to the third quarter of 1999. This decrease was primarily due to lower operating
margins partially offset by a decrease in the effective income tax rate. The
income tax provision was 28.0% of earnings before tax for the three and nine
months ended September 30, 2000 as compared to 31.5% for the same periods in
1999. The decrease in the effective income tax rate was primarily due to lower
tax rates on manufacturing activities in certain countries.
9
<PAGE>
Basic net earnings per share were $0.52 for the third quarter of 2000 compared
to $0.59 in the corresponding period of 1999, a decrease of 13%. Diluted net
earnings per share were $0.50 for the third quarter of 2000 compared to $0.56 in
the comparable period of 1999, a decrease of 11%. The decrease in basic and
diluted net earnings per share resulted from a decrease in income before tax
partially offset by lower income tax rates and reduced shares outstanding.
Net earnings for the first nine months of 2000 were $230 million, an increase of
5% compared to the same period of 1999. The increase was due to 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 $1.79 for the first nine months of 2000
compared to $1.69 in the corresponding period of 1999, an increase of 6%.
Diluted net earnings per share were $1.71 for the first nine months of 2000
compared to $1.58 in the comparable period of 1999, an increase of 8%. These
increases in basic and diluted net earnings per share resulted from lower income
tax rates and reduced shares outstanding.
Financial Condition
-------------------
The company's financial position remains strong at September 30, 2000 with a
debt to total capital ratio of 25% compared to 20% at December 31, 1999. Working
capital at September 30, 2000 was $288 million compared to $353 million at
December 31, 1999. The company had outstanding $96 million of short-term debt
and $149 million of long-term debt. The increase in short-term debt reflects the
financing of certain capital requirements and stock repurchases.
Cash provided by operating activities for the nine months ended September 30,
2000 was $270 million compared to $287 million for the same period of 1999. This
decrease was primarily due to unfavorable changes in working capital accounts
partially offset by the tax benefit related to stock options.
Capital expenditures for the first nine months of 2000 were $193 million
compared to $147 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 total 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. The repurchase
authorization of up to $1.0 billion 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.
During the third quarter of 2000, the company repurchased 595,000 shares in the
open market at prices ranging from $36.88 to $48.81 for a cost of approximately
$25 million. During the first nine months of 2000, the company, and Group as its
predecessor, repurchased 2,912,900 shares at prices ranging from $36.88 to
$105.38 for an aggregate cost of approximately $200 million. As of September 30,
2000, the company, and Group as its predecessor, had repurchased 28,381,928
shares at prices ranging from $10.63 to $105.38 for an aggregate cost of
approximately $872 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
10
<PAGE>
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 the company'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. This statement is effective
for quarters ending after July 20, 2000 with reclassification required for
comparative cash flow statements. The company adopted this statement in the
third quarter of 2000 and has reclassified prior year amounts to conform with
the classification of such items as cash flows from operating activities. The
company had previously recorded such items in cash flows from financing
activities.
Restructuring
-------------
On October 23, 2000, the company announced a restructuring plan that will result
in fourth quarter pre-tax charges of $35-45 million with an impact on diluted
net earnings per share of 19 to 24 cents. These non-recurring charges relate to
the relocation of manufacturing, primarily laser printers, to Latin America and
Asia, and reductions in associated support infrastructure. The restructuring
plan provides for the separation of up to 900 employees, related pension costs,
and the write-off of certain assets. Annual savings from the restructuring
should approximate $100 million by 2002, and will be utilized to strengthen the
company's competitive position.
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.
11
<PAGE>
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 successfully forecast the timing and extent of customer demand and
manage inventory levels to support the demand of its customers, and to address
production and supply constraints, particularly delays in the supply of key
components necessary for production which may result in the company incurring
airfreight charges to meet customer demands. 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 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 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 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 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
12
<PAGE>
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
affectforward-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 September 30, 2000, the fair value of the company's senior notes is estimated
at $135 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 September 30, 2000 by approximately $14
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 $6 million at September 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 September 30, 2000 for such contracts resulting from a
hypothetical 10% adverse change in all foreign currency exchange rates is
approximately $28 million. This loss would be mitigated by corresponding gains
on the underlying exposures.
13
<PAGE>
LEXMARK INTERNATIONAL, 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 16 of this report.
(b) Reports on Form 8-K:
A Current Report on Form 8-K dated July 3, 2000 was filed by the
company with the Securities and Exchange Commission to report the
merger of Lexmark International Group, Inc. with and into its
wholly- owned subsidiary, Lexmark International, Inc.
14
<PAGE>
LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, both on behalf of the registrant and in
his capacity as principal accounting officer of the registrant.
Lexmark International, Inc.
(Registrant)
Date: November 8, 2000 By: /s/ David L. Goodnight
---------------- ----------------------
David L. Goodnight
Vice President and Corporate Controller
(Chief Accounting Officer)
15
<PAGE>
EXHIBIT INDEX
Exhibits:
27 Financial Data Schedule
16
