DEF 14A 1 d664113ddef14a.htm DEF 14A DEF 14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

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x   Definitive Proxy Statement
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¨   Soliciting Material under Rule 14a-12
Lexmark International
(Name of registrant as specified in its charter)
(Name of person(s) filing proxy statement, if other than the registrant)
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LEXMARK INTERNATIONAL, INC.

One Lexmark Centre Drive

Lexington, Kentucky 40550

March 14, 2014

Dear Stockholder:

You are cordially invited to attend the Annual Meeting of Stockholders of Lexmark International, Inc., which will be held on Thursday, April 24, 2014, at 7:30 a.m. Eastern Daylight Time, at the Embassy Suites Hotel, 1801 Newtown Pike, Lexington, Kentucky 40511.

Consistent with prior years, we are taking advantage of the U.S. Securities and Exchange Commission rules that allow us to furnish proxy materials to you via the Internet. Unless you have already requested to receive a printed set of proxy materials, you will receive a Notice Regarding the Availability of Proxy Materials (“Notice”). The Notice contains instructions on how to access proxy materials and vote your shares via the Internet or, if you prefer, to request a printed set of proxy materials, including this Proxy Statement, our 2013 Annual Report and a form of proxy card, at no additional cost to you. We believe that this approach provides a convenient way for you to access your proxy materials and vote your shares, while lowering our printing and delivery costs and reducing the environmental impact associated with our Annual Meeting.

The attached Notice of Meeting and Proxy Statement describe the matters to be acted upon at the meeting. At the Annual Meeting we will also report on our operations and respond to questions from stockholders. It is important that your shares be represented and voted at the meeting whether or not you plan to attend. Therefore, we urge you to vote your shares.

I look forward to seeing you on April 24th.

Sincerely,

 

LOGO

Paul A. Rooke

Chairman and

Chief Executive Officer


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PROXY SUMMARY

  

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

  

PROXY STATEMENT

     1   

QUESTIONS AND ANSWERS ABOUT THE 2014 ANNUAL MEETING AND VOTING

     1   

PROPOSAL 1 ELECTION OF DIRECTORS

     6   

COMPENSATION DISCUSSION & ANALYSIS

     17   

COMPENSATION COMMITTEE REPORT

     35   

EXECUTIVE COMPENSATION

     36   

SUMMARY COMPENSATION TABLE

     36   

GRANTS OF PLAN-BASED AWARDS

     38   

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

     40   

OPTION EXERCISES AND STOCK VESTED

     42   

PENSION BENEFITS

     43   

NONQUALIFIED DEFERRED COMPENSATION

     45   

TERMINATION AND CHANGE IN CONTROL PAYMENTS

     47   

DIRECTOR COMPENSATION

     52   

2013 DIRECTOR COMPENSATION

     53   

SECURITY OWNERSHIP BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS

     55   

EQUITY COMPENSATION PLAN INFORMATION

     58   

REPORT OF THE FINANCE AND AUDIT COMMITTEE

     59   

PROPOSAL 2 RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS

     60   

PROPOSAL 3 STOCKHOLDER ADVISORY (NON-BINDING) VOTE ON EXECUTIVE COMPENSATION

     62   

SUBMISSION OF STOCKHOLDER PROPOSALS

     63   

OTHER MATTERS

     63   


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LEXMARK INTERNATIONAL, INC.

PROXY SUMMARY

This Proxy Summary contains highlights about Lexmark International, Inc. (the “Company”) and the Company’s 2014 Annual Meeting of Stockholders. This summary does not contain all of the information that you should consider in advance of the 2014 Annual Meeting, and we strongly encourage you to read the entire Proxy Statement and the Company’s 2013 Annual Report on Form 10-K carefully before voting.

 

  2013 Financial Performance

Transforming to a Higher Value Portfolio

 

   

2013 was a good year financially for the Company, as we took another important step in our transition from a hardware-centric company to a higher-value end-to-end solutions company.

 

  Ÿ  

The key financial results of the year are summarized below (shown in millions except share price):

 

     2013      2012      2011  

GAAP Revenue

   $ 3,668       $ 3,798       $ 4,173   

GAAP Operating Income*

   $ 409       $ 192       $ 368   

Free Cash Flow**

   $ 313       $ 259       $ 249   

Stock Price (12/31)

   $ 35.52       $ 23.19       $ 33.07   

 

  * Operating Income results for 2011 — 2013 reflect new method of accounting for asset and actuarial gains and losses for its pension and other postretirement benefits adopted by the Company in the fourth quarter of 2013.
  ** Free Cash Flow is defined as net cash flows provided by operating activities minus purchases of property, plant & equipment plus proceeds from the sale of fixed assets. Refer to the Company’s Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012, and 2011 on Page 61 of the Company’s Form 10-K for the fiscal year ended December 31, 2013 for the amounts underlying the Free Cash Flow calculations.

 

   

Revenue declined 3% compared to 2012, primarily due to the decline in inkjet revenue related to the Company’s decision to exit inkjet technology in 2012. Excluding inkjet revenue, the Company’s revenue grew 4% year to year.

 

   

We were encouraged by revenue growth in our strategic focus areas with 22% combined revenue growth year-to-year for Perceptive Software and managed print services. We also delivered a record product gross margin for the fifth consecutive year, as we transition to a higher value portfolio of products.

Working to Increase Profitability

 

   

Operating income increased significantly compared to 2012, principally due to improved laser profitability, reflecting lower operating expenses, combined with lower restructuring costs and a $69.2 million net benefit from the gain on the sale of inkjet-related technology and assets, and the impact of the pension and other postretirement mark-to-market net gain in 2013.

 

   

We delivered $85 million in savings in 2013 from restructuring actions announced in 2012, including the decision to exit inkjet technology.

 

   

We sold the Company’s inkjet-related technology and assets to Funai Electric Co., Ltd. in the second quarter of 2013 for $100 million.

Creating Shareholder Value

 

   

We improved our already strong financial position with $474 million in net cash from operations in 2013, and ended the year with $1.055 billion in cash and current marketable securities.

 


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We continued to aggressively grow our software business, which is a key element of our transition to a solutions company, by acquiring the following four companies in 2013:

 

   

AccessVia, Inc., a provider of industry-leading signage solutions to create and produce retail shelf-edge materials, all from a single platform, which can be directed to a variety of output devices and published to digital signs or electronic shelf tags.

 

   

Twistage, Inc., which offers an industry-leading, cloud enabled software platform for managing video, audio and image content.

 

   

Saperion AG, a European-based leader in enterprise content management solutions, focused on providing document archive and workflow solutions.

 

   

Pacsgear, Inc., a leading provider of connectivity solutions for healthcare providers to capture, manage and share medical images and related documents and integrate them with existing picture archiving and communication systems (“PACS”) and electronic medical record systems.

 

   

We continued to execute on our capital allocation plan, returning $82 million to stockholders in 2013 through share repurchases and an additional $75 million through dividends ($1.20 per share).

 

  Governance Highlights

Recent Updates

 

   

Stockholder approved Board Declassification phase-in begins — Directors elected in 2014 to serve one-year terms.

 

   

Stockholders approved the 2013 Equity Compensation Plan.

Board of Directors

 

   

12 Directors; 11 are independent.

 

   

Committee members are independent (except Executive Committee, which has one management Director).

 

   

Executive sessions of Independent Directors, led by the Presiding Director, at each regularly-scheduled meeting.

 

   

Limited membership on other public company boards.

 

   

All Finance & Audit Committee members are “financial experts.”

 

   

Annual Board and Committee self-assessments.

 

   

No former employees currently serve as Directors.

Stockholders

 

   

Majority voting standard for uncontested Director elections.

 

   

No super-majority voting requirements.

 

   

No shareholder rights plan.

 

   

Annual vote to ratify Independent Auditors.

 

   

Best practices in our executive compensation program discussed below, including annual advisory vote to approve executive compensation (commonly referred to as “Say on Pay”).

 


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  Executive Compensation Program Highlights

We pay for performance.

 

   

We emphasize at-risk, performance-based compensation whereby more than 85% of our Chief Executive Officer’s pay is performance-based and more than 75%, on average, of our other Named Executive Officers’ pay is performance-based.

 

   

We establish performance objectives designed to promote the long-term success of the Company and maximize stockholder returns. The performance measures established for our annual incentive program (revenue, operating income, cash cycle and free cash flow) and long-term incentive program (total shareholder return and return on invested capital, each relative to the S&P MidCap Technology Index, and combined services and software revenue growth) represent key drivers of our success in enhancing stockholder value.

 

   

Target attainment goals are set at a moderate to difficult level and maximum attainment goals are set at a difficult level. Over the past five years, the Company has achieved performance in excess of the target level for annual incentive compensation two times (the 2010 and 2013 performance periods) and for long-term incentive compensation one time (the 2010 performance period).

 

   

Based on our 2013 financial performance, payouts to Named Executive Officers under the corporate objectives for our annual incentive plan were made at slightly above target performance level, further demonstrating the strong alignment between pay and performance.

 

   

To assess the correlation of a Named Executive Officer’s compensation and performance of the Company, the Compensation and Pension Committee believes that a Named Executive Officer’s compensation should be analyzed by looking at the amount realized versus the total compensation opportunity and the correlation of such amounts to Company performance. The following table reflects the CEO’s compensation opportunity from 2011 (Mr. Rooke’s first full year as CEO of the Company) to 2013 versus the amount he has realized as of February 28, 2014 (16% of the total opportunity awarded in 2011; 15% in 2012; and 38% in 2013):

 

CEO Compensation Opportunity

   2011     2012     2013  

Base Salary

   $ 800,000      $ 800,000      $ 850,000   

Performance-Based Annual Bonus

     800,000        960,000        1,020,000   

Performance-Based Cash LTIP (3-Year Performance Period)

     N/A        2,300,000        1,880,000   

Performance-Based RSUs (3-Year Performance Period)

     N/A        2,320,060        1,892,800   

Performance-Based RSUs (1-Year Performance Period)

     3,956,121        N/A        946,400   
  

 

 

   

 

 

   

 

 

 

Total Compensation Opportunity

   $ 5,556,121      $ 6,380,060      $ 6,589,200   

% at Risk

     86     87     87

Amount Received

                  

Base Salary

   $ 800,000      $ 800,000      $ 850,000   

Performance-Based Annual Bonus*

     88,340        163,200        1,104,359   

Performance-Based Cash LTIP (3-Year Performance Period)

     N/A        TBD        TBD   

Performance-Based RSUs (3-Year Performance Period)

     N/A        TBD        TBD   

Performance-Based RSUs (1-Year Performance Period)**

     0        N/A        560,698   
  

 

 

   

 

 

   

 

 

 

Total Received as of 2/28/2014

   $ 888,340      $ 963,200      $ 2,515,057   

Percentage of Total Opportunity Received as of 2/28/2014

     16     15     38

 


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  * Mr. Rooke elected to defer 100% of his 2013 incentive compensation to receive an award of deferred stock units.
  ** The Company failed to achieve the minimum level of performance required to earn the performance-based restricted stock units granted in 2011, and Mr. Rooke forfeited those restricted stock units. For the 2013 performance period, Mr. Rooke earned 38,968 performance-based restricted stock units of which 13,249 units became vested on February 24, 2014. Based on the closing price of the Common Stock on February 28, 2014 ($42.14), the unvested earned 2013 performance-based restricted stock units (25,719 units) had an unrealized value of $1,083,799 as of such date.

 

   

The amount realized for the performance-based compensation elements for the other Named Executive Officers reflects a similar correlation to Company performance.

Our pay practices are stockholder-friendly.

 

   

We require our executive officers to own stock in the Company (five (5) times annual base salary for the CEO and three (3) times annual base salary for other executive officers).

 

   

Stock ownership guidelines exclude unexercised stock options, unvested restricted stock units and unvested deferred stock units and require the CEO to retain 100% and the other executive officers to retain 50% of net after-tax shares until they have met their guidelines.

 

   

Incentive compensation and equity compensation are subject to forfeiture and recoupment under the Company’s Executive Compensation Recovery Policy.

 

   

We provide minimal perquisites and we do not provide tax gross ups on such perquisites.

 

   

The Company and executive officers agreed to eliminate excise tax gross-ups on change in control agreements in 2010.

 

   

The Company terminated its only non-stockholder approved incentive plan in 2011.

 

   

The Company has implemented stockholders’ preference for an annual Say on Pay vote.

 

   

The Company’s 2013 Equity Compensation Plan (the “2013 Plan”), which was approved by stockholders in April 2013 includes the following stockholder-friendly features:

 

   

The 2013 Plan is administered by the Compensation and Pension Committee, all members of which are independent directors.

 

   

The 2013 Plan includes a flexible share pool that reduces the share reserve approximately twice as rapidly when full value awards, such as restricted stock, restricted stock units and performance-based restricted units, are granted.

 

   

The 2013 Plan does not include an “evergreen” feature.

 

   

Any material changes to the 2013 Plan (including any increase to the 2013 Plan’s share reserve, other than in connection with stock splits or other similar recapitalization events) require approval of the Company’s stockholders.

 

   

Stock options and stock appreciation rights may not be “repriced” without stockholder approval.

 

   

“Reload” stock options are prohibited under the 2013 Plan.

 

   

Restricted stock and restricted stock units awarded under the 2013 Plan require a minimum three-year vesting period for service-based awards or a minimum one-year vesting period for performance-based awards.

 

   

The 2013 Plan generally provides for “double-trigger” vesting for awards upon a change in control (i.e, awards generally vest only if a participant’s employment is involuntarily terminated in connection with

 


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a change in control), except in the case where the Company does not survive and the acquiror does not agree to assume or substitute for outstanding awards.

 

   

Dividend equivalents may not be paid on any performance awards under the 2013 Plan unless and until the performance conditions are satisfied.

 

   

Shares that are used to satisfy the exercise price of options, or applicable withholding taxes, may not be recycled and reused under the 2013 Plan.

 

  Voting Matters

 

Management Proposals

   Board vote
Recommendation
   Page reference
(for more  detail)

Proposal 1: Election of four Directors, each for a one-year term expiring in 2015

   FOR EACH

DIRECTOR NOMINEE

   6

Proposal 2: Ratify the appointment of PricewaterhouseCoopers LLP as the Company’s Independent Auditors for 2014

   FOR    60

Proposal 3: Approve an advisory vote on Executive Compensation

   FOR    62

 

  Proposal 1—Election of Directors

The following table provides summary information about our nominees for election to the Board of Directors for a one-year term expiring in 2015. Additional information for each nominee and for continuing Directors may be found beginning on page 6.

 

Name

  Director since   Primary occupation   Independent   # of other public company
boards

Ralph E. Gomory

  1991   President Emeritus of the Alfred
P. Sloan Foundation
  X   0

Jared L. Cohon

  2010   President Emeritus of Carnegie
Mellon University
  X   2

J. Edward Coleman

  2010   Chairman and CEO of Unisys, Inc.   X   1

Sandra L. Helton

  2011   Retired Executive Vice President
& CFO of Telephone & Data
Systems, Inc.
  X   2

 

  Proposal 2—Ratify the Appointment of Independent Auditors

We are asking stockholders to ratify the appointment of PricewaterhouseCoopers LLP (“PwC”) as the Company’s independent registered public accounting firm for 2014. Information concerning PwC’s fees in 2013 and 2012 is set forth in the table below. Additional information for such fees may be found on page 60.

 

Type of Fees

   2013      2012  

Audit Fees

   $ 5,332,000       $ 4,363,000   

Audit-Related Fees

     76,000         37,000   

Tax Fees

     0         0   

All Other Fees

     359,000         754,000   
  

 

 

    

 

 

 

Total

   $ 5,767,000       $ 5,154,000   
  

 

 

    

 

 

 

 

  Proposal 3—Advisory Vote on Executive Compensation

We are asking stockholders to approve an advisory, non-binding vote on the compensation paid to the Company’s Named Executive Officers as disclosed in this Proxy.

 


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The Compensation and Pension Committee’s goal in setting executive compensation is to provide total compensation opportunities that are market competitive and supportive of the Company’s strategy to attract, develop, motivate and retain outstanding executive talent. The Company’s executive compensation programs are centered on a pay-for-performance culture that are designed to reward executive officers for superior Company and individual performance while encouraging behavior that is in the long-term best interests of the Company and its stockholders.

 

  Meeting Information

 

Date and Time:

   April 24, 2014 at 7:30 a.m. Eastern Daylight Time

Place:

  

Embassy Suites Hotel

1801 Newtown Pike

Lexington, KY 40511

Record Date:

   February 28, 2014

Voting:

   Stockholders at the close of business on the record date may vote at the 2014 Annual Meeting. Each share is entitled to one vote on each matter to be voted upon at the 2014 Annual Meeting.

Attendance:

   Stockholders do not require a ticket to attend the 2014 Annual Meeting. However, stockholders wishing to attend the 2014 Annual Meeting should be prepared to present (i) valid photo identification and (ii) if your shares are held in a stock brokerage account or by a bank, trustee or nominee, proof of beneficial ownership as of the Record Date.

 


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LEXMARK INTERNATIONAL, INC.

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

ON THURSDAY, APRIL 24, 2014

March 14, 2014

To the Stockholders:

The Annual Meeting of Stockholders of Lexmark International, Inc. (the “Company”) will be held on Thursday, April 24, 2014, at 7:30 a.m. Eastern Daylight Time, at the Embassy Suites Hotel, 1801 Newtown Pike, Lexington, Kentucky 40511. The registration desk will open at 7:00 a.m. At the Annual Meeting, stockholders will be asked to:

1. Elect four Directors, each for a one-year term expiring in 2015;

2. Ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm (the “Independent Auditors”) for the Company’s fiscal year ending December 31, 2014;

3. Approve an advisory vote on executive compensation; and

4. Transact such other business as may properly come before the meeting or any adjournment or postponement thereof.

Only stockholders of record at the close of business on Thursday, February 28, 2014 will be entitled to notice of, and to vote at, the Annual Meeting or any adjournment or postponement thereof. A list of stockholders entitled to vote will be kept at the Company’s offices at One Lexmark Centre Drive, Lexington, Kentucky 40550 for a period of ten days prior to the Annual Meeting. Please vote before the Annual Meeting in one of the following ways:

1. By Internet — You can vote over the Internet at www.proxyvote.com by entering the control number found on your Notice or proxy card;

2. By Telephone — You can vote by telephone by calling 1-800-690-6903 and entering the control number found on your Notice or proxy card; or

3. By Mail — If you received your proxy materials by mail, you can vote by signing, dating and mailing the proxy card in the pre-paid enclosed envelope.

By Order of the Board of Directors,

 

LOGO

Robert J. Patton

Secretary

PLEASE VOTE YOUR SHARES WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON. YOUR VOTE IS IMPORTANT.

Important Notice Regarding the Availability of Proxy Materials for the

Annual Meeting of Stockholders to be held on April 24, 2014:

The Proxy Statement and 2013 Annual Report are

available at http://investor.lexmark.com.


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LEXMARK INTERNATIONAL, INC.

One Lexmark Centre Drive

Lexington, Kentucky 40550

 

 

PROXY STATEMENT

 

 

Questions and Answers about the 2014 Annual Meeting and Voting

Why did I receive these Proxy Materials?

We are providing these proxy materials in connection with the solicitation by the Board of Directors of Lexmark International, Inc., a Delaware corporation (the “Company”), of proxies to be voted at our 2014 Annual Meeting of Stockholders (the “2014 Annual Meeting”) and at any adjournment or postponement of such Meeting. The 2014 Annual Meeting will take place on Thursday, April 24, 2014, beginning at 7:30 a.m. Eastern Daylight Time, at the Embassy Suites Hotel, 1801 Newtown Pike, Lexington, Kentucky 40511.

Do I need a ticket to attend the 2014 Annual Meeting?

No, an admission ticket is not required to attend the 2014 Annual Meeting. However, the 2014 Annual Meeting is limited to stockholders of the Company or their designated representatives. If you are a stockholder wishing to attend the 2014 Annual Meeting, please be prepared to present: (1) your valid photo identification, such as a driver’s license or passport; and (2) if your shares are held in a stock brokerage account or by a bank, trustee or nominee, you will need to bring proof of beneficial ownership as of the record date, such as your most recent account statement reflecting your stock ownership as of February 28, 2014 or a copy of the voting instruction card provided by your broker, bank, trustee or nominee or similar evidence of ownership.

Who is entitled to vote at the 2014 Annual Meeting?

Only stockholders of record at the close of business on Thursday, February 28, 2014 are entitled to receive the Notice of Annual Meeting and to vote their shares at the 2014 Annual Meeting. As of such date, there were 62,164,997 shares (excluding shares held in treasury) of the Company’s Class A Common Stock, par value $0.01 per share (the “Common Stock”), issued and outstanding and entitled to vote. Each share of Common Stock entitles the holder to one vote on each matter properly brought before the 2014 Annual Meeting.

What is the difference between holding shares as a Stockholder of Record and as a Beneficial Owner?

Most of our stockholders hold their shares through a broker, bank, trustee or other nominee rather than directly in their own name. As summarized below, there are some differences between shares held of record and those owned beneficially.

If your shares are registered directly in your name with the Company’s registrar and transfer agent, Computershare Trust Company, N.A., you are considered the “stockholder of record” with respect to those shares. This Notice of Annual Meeting and Proxy Statement have been provided directly to you by the Company.

If your shares are held in a stock brokerage account, or by a bank, trustee or other nominee, you are considered the “beneficial owner” of those shares, and this Notice of Annual Meeting and Proxy Statement has been forwarded to you by your broker, bank, trustee or nominee who is considered the stockholder of record with respect to those shares. As the beneficial owner, you have the right to direct your broker, bank, trustee or nominee how to vote your shares by using the voting instruction card or by following their instructions for voting by telephone or on the Internet.

 

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What does it mean to give a Proxy and how do I vote if I am a Stockholder of Record?

Giving a proxy means that you authorize the persons named on the proxy card to vote your shares at the 2014 Annual Meeting in the manner directed. To vote by proxy, you may use one of the following methods if you are a stockholder of record (that is, you hold our stock in your own name):

 

   

By Internet — You can vote over the Internet at www.proxyvote.com by entering the control number found on your Notice or proxy card. If you vote by Internet, you do not have to return your proxy or voting instruction card.

 

   

By Telephone — You can vote by telephone by calling 1-800-690-6903 and entering the control number found on your Notice or proxy card. If you vote by telephone, you do not have to return your proxy or voting instruction card.

 

   

By Mail — If you received your proxy materials by mail, you can vote by signing, dating and mailing the proxy card in the pre-paid enclosed envelope. If you are a stockholder of record and you return your signed proxy card but do not indicate your voting preferences, the persons named in the proxy card will vote the shares represented by your proxy card as recommended by the Board of Directors.

Stockholders of record who attend the 2014 Annual Meeting may vote in person at the meeting. You may also be represented by another person at the meeting by executing a proper proxy designating that person.

We request that stockholders vote as soon as possible. When the proxy is properly returned, the shares of stock represented by the proxy will be voted at the 2014 Annual Meeting in accordance with the instructions contained in the proxy.

How do I vote if I am a Beneficial Owner?

If you are the beneficial owner of shares, we recommend that you follow the voting instructions in the materials you receive from your broker, bank, trustee or other nominee.

What can I do if I change my mind after I vote my shares?

If you are a stockholder of record, you have the power to revoke your proxy or change your vote at any time before the proxy is voted at the 2014 Annual Meeting. You can revoke your proxy or change your vote in one of four ways:

 

   

by sending a signed notice of revocation to the Secretary of the Company to revoke your proxy;

 

   

by sending to the Secretary of the Company a completed proxy card bearing a later date than your original proxy indicating the change in your vote;

 

   

by logging on to www.proxyvote.com in the same manner you would to submit your proxy electronically or calling 1-800-690-6903, and in each case following the instructions to revoke or change your vote; or

 

   

by attending the Annual Meeting and voting in person, which will automatically cancel any proxy previously given, or by revoking your proxy in person, but attendance alone will not revoke any proxy that you have given previously.

If you choose any of the first three methods, you must take the described action no later than the beginning of the 2014 Annual Meeting. Once voting on a particular matter is completed at the Annual Meeting, you will not be able to revoke your proxy or change your vote as to that matter.

If you are a beneficial owner of shares, you must contact your broker, bank, trustee or other nominee to change your vote.

What shares are included on the Proxy Card?

If you are a stockholder of record, you will receive one proxy card for all the shares you hold of record in certificate form and in book-entry form. If you are an employee or former employee of the Company and hold shares in the Lexmark Savings Plan, your proxy card also includes those shares.

 

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How do I vote shares held in the Lexmark Savings Plan

If you are an employee or former employee of Lexmark or its subsidiaries who has a right to vote shares acquired through your participation in the Lexmark Savings Plan, a tax-qualified 401(k) plan, you are entitled to instruct the trustee, Fidelity Management Trust Company, how to vote the shares allocated to your account. The trustee will vote those shares as you instruct. Your proxy card covers any shares held in your Lexmark Savings Plan account, as well as any other shares registered in your name as of the record date. To allow sufficient time for the trustee to vote, your voting instructions must be received by no later than 11:59 p.m. Eastern Daylight Time on April 21, 2014. If you do not provide instructions by that time, your shares held in the Lexmark Savings Plan will be voted by the trustee in accordance with the rules of the Lexmark Savings Plan.

What is “householding” and how does it affect me?

We have adopted a procedure approved by the U.S. Securities and Exchange Commission (“SEC”), referred to as “householding.” This procedure allows us to deliver multiple Notices in a single envelope or a single copy of an Annual Report and Proxy Statement to any household where two or more stockholders reside if we believe the stockholders are members of the same family. This rule benefits stockholders by reducing the volume of duplicate information they receive at their households. It also benefits us by reducing our printing and mailing costs.

We are mailing Notices in a single envelope, or a single set of proxy materials, as applicable, to each household this year unless the stockholders in these households provided instructions to the contrary in response to a notice previously mailed to them. However, for stockholders who previously requested a printed set of the proxy materials, we are mailing each stockholder in a single household a separate proxy card or voting instruction form. If you prefer to receive your own copy of the proxy materials for this or future Annual Meetings and you are a registered holder, you may request a duplicate set at no cost to you by writing to Lexmark International, Inc., Attention: Investor Relations, One Lexmark Centre Drive, Lexington, Kentucky 40550 or by calling (859) 232-5568, and we will promptly furnish such materials. If a broker, bank, trustee or other nominee holds your shares, you may instruct such institution to send duplicate mailings by following the instructions on your voting instruction form or by contacting your broker, bank, trustee or other nominee.

If you hold some shares as a registered holder or through the Lexmark Savings Plan, and other shares in the name of a broker, bank, trustee or other nominee, we must send you proxy materials for each account. To avoid receiving duplicate sets of proxy materials, you may consolidate accounts or consent to electronic delivery as described in the following section.

Why did I receive a “Notice of Availability of Proxy Materials” but no Proxy Materials?

As in previous years, we are able to distribute the Annual Report and Proxy Statement to certain stockholders in a fast and efficient manner via the Internet pursuant to the SEC’s “notice and access” rules. This reduces the amount of paper delivered to a stockholder’s address and eliminates the cost of sending these documents by mail. On March 14, 2014, we mailed a “Notice of Availability of Proxy Materials” to participating stockholders, which includes instructions on how to access the Company’s Annual Report and Proxy Statement on the Internet.

You may elect to receive all future Annual Reports and Proxy Statements by mail instead of viewing them via the Internet. To make an election, please log on to www.proxyvote.com and enter your control number.

Can I access the Proxy Statement and Annual Report on the Internet?

Even if you do not participate in “notice and access,” the Proxy Statement and 2013 Annual Report are available on our investor relations website at http://lexmark.investor.com. You may elect to view all future Annual Reports and Proxy Statements on the Internet instead of receiving them by mail. To make an election, please log on to www.proxyvote.com and enter your control number.

 

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Is there a list of Stockholders entitled to vote at the 2014 Annual Meeting?

A list of stockholders of record entitled to vote at the 2014 Annual Meeting will be available at the meeting and for ten days prior to the meeting at the Company’s offices at One Lexmark Centre Drive, Lexington, Kentucky 40550.

What is a Broker Non-Vote?

If you are a beneficial owner whose shares are held of record by a broker, you must instruct the broker how to vote your shares. If you do not provide voting instructions, your shares will not be voted on any proposal for which the broker does not have discretionary authority to vote. This is referred to as a “broker non-vote.” Broker non-votes are counted as present for purposes of determining the existence of a quorum, but will not be able to vote on those matters for which specific authorization is required under the rules of the New York Stock Exchange.

Under the New York Stock Exchange rules, your broker has discretionary authority to vote your shares on the ratification of PricewaterhouseCoopers LLP as the Company’s Independent Auditors, even if your broker does not receive voting instructions from you. However, your broker does not have discretionary authority to vote on the election of Directors or the advisory vote on executive compensation without instructions from you. If you do not instruct your broker on these non-discretionary matters, a broker non-vote will occur and your shares will not be voted on these matters.

What is a quorum for the Annual Meeting?

The presence of stockholders representing a majority of all shares of Common Stock issued and outstanding and entitled to vote at the Annual Meeting, in person or represented by proxy, is necessary to constitute a quorum. Abstentions and broker non-votes are counted as present and entitled to vote for purposes of determining a quorum.

What are the voting requirements to elect the Directors and to approve each of the other Proposals in this Proxy Statement?

Votes may be cast “for” or “against” each respective nominee for Director or you may abstain from voting for one or more nominees for Director. The Directors to be elected at the meeting will be elected by a majority of the votes cast by the stockholders present in person or by proxy and entitled to vote. The affirmative vote of a majority of the shares of Common Stock present in person or by proxy and entitled to vote is required to approve the Company’s proposals other than the election of directors.

Abstentions may be specified on all proposals submitted to a stockholder vote, including the election of Directors. Abstentions will have no effect on the election of Directors because abstentions are not considered a vote cast. Abstentions on proposals other than the election of Directors will have the effect of a vote against such proposals.

How will my shares be voted at the 2014 Annual Meeting?

At the 2014 Annual Meeting, the proxies will vote your shares as you instruct. If you sign your proxy card and return it without indicating how you would like to vote your shares, your shares will be voted as the Board of Directors recommends, which is:

 

   

FOR the election of each of the Director nominees named in Proposal 1 of this Proxy Statement;

 

   

FOR the ratification of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the 2014 fiscal year; and

 

   

FOR the approval of the advisory vote on Executive Compensation.

Could other matters be decided at the 2014 Annual Meeting?

As of the date of this Proxy Statement, we were not aware of any matters to be raised at the 2014 Annual Meeting other than the Proposals set forth in this Proxy Statement.

 

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If you return your signed and completed proxy card or vote by telephone or on the Internet and any other matters are properly presented at the 2014 Annual Meeting for consideration, the proxies named on your proxy card will have the discretion to vote for you.

Who will pay for the cost of this Proxy Solicitation?

The Company is making this proxy solicitation and will bear the cost of soliciting proxies. In addition to the solicitation of proxies by use of the mail, proxies may be solicited by Directors, officers and regularly engaged employees or agents of the Company. The Company has also retained Georgeson Inc., 480 Washington Blvd., 26th Floor, Jersey City, NJ 07310, to assist in the solicitation for estimated fees of approximately $9,000 plus reasonable expenses. Brokers, nominees and other similar record holders will be requested to forward solicitation material and will be reimbursed by the Company upon request for their out-of-pocket expenses.

Who will count the votes?

Votes cast by proxy or in person at the 2014 Annual Meeting will be tabulated by the inspector of elections appointed for the meeting and the inspector will determine whether a quorum is present.

 

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PROPOSAL 1

ELECTION OF DIRECTORS

The Directors are currently divided into three classes. The Company is in the process of declassifying the Board, and beginning at the 2016 Annual Meeting of Stockholders each Director will be elected for a one-year term rather than a three-year term. Action will be taken at the 2014 Annual Meeting to elect four non-classified Directors to serve until the 2015 Annual Meeting of Stockholders. The nominees for election at the 2014 Annual Meeting of Stockholders are Mr. Ralph E. Gomory, a Director since 1991; Dr. Jared L. Cohon, a Director since 2010; Mr. J. Edward Coleman, a Director since 2010; and Ms. Sandra L. Helton, a Director since 2011. The nominees, as well as the Directors who are continuing to serve their remaining three-year terms, are listed below together with certain information about each of them.

Directors are elected by a majority of the votes cast by the shares entitled to vote if a quorum is present at the Annual Meeting. Abstentions and broker non-votes are counted for the purpose of determining whether a quorum exists at the Annual Meeting, but are not counted and have no effect on the determination of whether a majority exists with respect to a given nominee.

Nominees for One-Year Terms that will Expire in 2015

 

 

 

LOGO

Ralph E. Gomory

 

    Age 84

 

  

Mr. Gomory has been a Director of the Company since March 1991. Since 2007, Mr. Gomory has served as a Research Professor at the Stern School of Business at New York University and President Emeritus of the Alfred P. Sloan Foundation. Mr. Gomory served as President of the Alfred P. Sloan Foundation from 1989 through his retirement in 2007. Prior to such time, Mr. Gomory was Senior Vice President for Science and Technology at International Business Machines Corporation (“IBM”).

 

In nominating Mr. Gomory to continue to serve as a Director of the Company, the Board of Directors concluded that the following experience, qualifications and skills qualify Mr. Gomory to serve as a Director of the Company: significant executive management experience as a senior vice president of a Fortune 500 company publicly-traded on the New York Stock Exchange and 18 years as president of a billion dollar not-for-profit organization; significant research and technical background that led to significant developments in the computer industry; strong educational background with a doctorate in Mathematics from Princeton University; valuable understanding of the global economy, as co-author of Global Trade and Conflicting National Interests; financial expertise acquired serving on three audit committees of publicly-traded companies; and broad experience gained as a director of multiple publicly-held companies.

 

 

LOGO

Jared L. Cohon

 

    Age 66

 

  

Dr. Cohon has been a Director of the Company since July 2010. Since July 2013, Dr. Cohon has served as President Emeritus and as a Professor at Carnegie Mellon University. From 1997 to June 2013, Dr. Cohon served as President of Carnegie Mellon University. Prior to such time, Dr. Cohon served as the Dean of the School of Forestry & Environmental Studies and Professor of Environmental Systems Analysis at Yale University from 1992 to 1997; and in various educational and leadership roles, including Associate Dean of Engineering and Vice Provost for Research, at Johns Hopkins University from 1973 to 1992. Dr. Cohon also has been appointed by President George W. Bush to serve on the Homeland Security Advisory Council in 2002 and reappointed by President Barack Obama in 2010. Dr. Cohon was elected to the National Academy of Engineering and the American Academy of Arts and Sciences in 2012. Dr. Cohon has also served as a director of the following companies during the past five years: Ingersoll-Rand plc since 2008; and Unisys, Inc. since 2013.

 

In nominating Dr. Cohon to continue to serve as a Director of the Company, the Board of Directors concluded that the following experience, qualifications and skills qualify Dr. Cohon to serve as a Director of the Company: significant executive management and financial experience gained as President of a major university; unique perspective on technological advancements gained as president of a global research university known for its leadership in technology programs; strong educational background with a bachelor’s degree in Civil Engineering from the University of Pennsylvania and a master’s degree and doctorate in Civil Engineering from the Massachusetts Institute of Technology (“MIT”); and significant experience gained as a director of multiple publicly-traded companies.

 

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LOGO

J. Edward Coleman

    Age 62

  

Mr. Coleman has been a Director of the Company since July 2010. Since 2008, Mr. Coleman has served as Chairman and Chief Executive Officer of Unisys Corporation. Prior to such time, Mr. Coleman served as Chief Executive Officer of Gateway, Inc. from 2006 to 2008; as Senior Vice President and President of Enterprise Computing Solutions at Arrow Electronics from 2005 to 2006; and as Chairman and Chief Executive Officer of CompuCom Systems, Inc. from 2001 to 2004 and as Chief Executive Officer from 1999 to 2001. Prior to that, Mr. Coleman held various leadership and executive positions at Computer Sciences Corporation and IBM. Mr. Coleman has also served as a director of the following companies during the past five years: Unisys Corporation since 2008.

 

In nominating Mr. Coleman to continue to serve as a Director of the Company, the Board of Directors concluded that the following experience, qualifications and skills qualify Mr. Coleman to serve as a Director of the Company: significant executive management and financial experience gained as the Chief Executive Officer of three publicly-traded companies; more than 30 years of experience in the information technology business; extensive merger and acquisition experience, including the sale of Gateway, Inc. to Acer, Inc., while serving as the Chief Executive Officer of Gateway, Inc.; strong educational background with a bachelor’s degree in Economics from the College of William and Mary and an MBA from Indiana University; and significant experience gained as a director of multiple publicly-traded companies.

 

LOGO

Sandra L. Helton

    Age 64

  

Ms. Helton has been a Director of the Company since February 2011. Ms. Helton served as Executive Vice President and Chief Financial Officer of Telephone & Data Systems, Inc., a telecommunications service company (“TDS”), from 2000 through 2006. She joined TDS as Executive Vice President — Finance and Chief Financial Officer in 1998. Prior to joining TDS, Ms. Helton was the Vice President and Corporate Controller of Compaq Computer Corporation between 1997 and 1998. Prior to that time, Ms. Helton was employed by Corning Incorporated. At Corning, Ms. Helton was Senior Vice President and Treasurer between 1994 and 1997 and was Vice President and Treasurer between 1991 and 1994. Ms. Helton has also served as a director of the following companies during the past five years: Covance, Inc. since 2003; and The Principal Financial Group since 2001.

 

In nominating Ms. Helton to continue to serve as a Director of the Company, the Board of Directors concluded that the following experience, qualifications and skills qualify Ms. Helton to serve as a Director of the Company: Ms. Helton’s financial expertise acquired as a Chief Financial Officer and serving on the audit committees of two publicly-traded companies; international experience gained from more than 20 years of service as an executive at Corning and Compaq; significant executive management experience in corporate strategy, finance, accounting and control, treasury, information technology and other corporate administrative functions; as well as extensive corporate governance experience; strong educational background with a bachelor’s degree in mathematics from the University of Kentucky and a master’s degree in Finance and Planning & Control from the MIT Sloan School of Management; and significant experience gained as a director of multiple publicly-traded companies.

 

   

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ELECTION OF EACH OF THE FOREGOING NOMINEES TO THE BOARD OF DIRECTORS.

 

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The following information is submitted concerning the other Directors of the Company whose election is not being sought at this Annual Meeting. The terms of office for such Directors will continue after the 2014 Annual Meeting of Stockholders.

Directors whose Terms will Expire in 2015

 

 

LOGO

Michael J. Maples

    Age 71

  

Mr. Maples has been a Director of the Company since February 1996. Until July 1995, Mr. Maples was Executive Vice President of the Worldwide Products Group and a member of the Office of the President of Microsoft Corporation. Mr. Maples, who joined Microsoft in 1988, has over 40 years of experience in the computer industry. Before joining Microsoft, he was Director of Software Strategy for IBM. Mr. Maples has also served as a director of the following companies during the past five years: Multimedia Games, Inc., as Chairman, from 2004 to 2011, and Sonic Corp. since 2005.

 

The Board of Directors concluded that the following experience, qualifications and skills qualify Mr. Maples to serve as a Director of the Company: more than 30 years of executive management experience at two Fortune 500 companies publicly-traded on the New York Stock Exchange; significant experience in the computer industry, including software strategy; strong educational background with an MBA from Oklahoma City University; financial expertise acquired as an executive officer and serving on the audit committees of four publicly-traded companies; and significant experience gained as a director of more than ten publicly-traded companies.

 

LOGO

Stephen R. Hardis

    Age 78

  

Mr. Hardis has been a Director of the Company since November 1996. In July 2000, Mr. Hardis retired as Chairman and Chief Executive Officer of Eaton Corporation, which he joined in 1979 as Executive Vice President — Finance and Administration. He was elected Vice Chairman and designated Chief Financial and Administrative Officer in 1986. He became Chief Executive Officer of Eaton Corporation in September 1995 and Chairman in January 1996. Mr. Hardis has also served as a director of the following companies during the past five years: Axcelis Technologies, Inc. since 2000, Marsh & McLennan Companies, Inc. from 1998 to 2011, Nordson Corporation from 1984 to 2010, and The Progressive Corporation since 1988.

 

The Board of Directors concluded that the following experience, qualifications and skills qualify Mr. Hardis to serve as a Director of the Company: more than 20 years of executive management experience, including more than five years as chief executive officer and nearly ten years as chief financial officer of a Fortune 500 company that is publicly-traded on the New York Stock Exchange; significant international experience gained as an executive officer of Eaton Corporation, a diversified power management company with more than 70,000 employees that sells its products to customers in more than 150 countries; strong educational background with a bachelor’s degree from Cornell University and a master’s degree in Public and International Affairs from Princeton University; financial expertise gained as a chief executive officer and chief financial officer and serving on the audit committees of six publicly-traded companies; and significant experience gained as a director of multiple publicly-traded companies.

 

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LOGO

William R. Fields

    Age 64

  

Mr. Fields has been a Director of the Company since December 1996. Mr. Fields is Chairman of Intersource Co. Ltd., Chairman of Four Corners International, and General Partner of Origentics. Previously, Mr. Fields served as Chairman and Chief Executive Officer of Factory 2-U Stores, Inc. from 2002 to 2003, President and Chief Executive Officer of Hudson’s Bay Company from 1997 to 1999 and as Chairman and Chief Executive Officer of Blockbuster Entertainment Group, a division of Viacom, Inc., from 1996 to 1997. Mr. Fields has also held numerous positions with Wal-Mart Stores, Inc., which he joined in 1971. He left Wal-Mart in March 1996 as President and Chief Executive Officer of Wal-Mart Stores Division, and Executive Vice President of Wal-Mart Stores, Inc. Mr. Fields has also served as a director of the following companies during the past five years: Car Charging Group, Inc. since 2013; Victory Electronic Cigarette Corporation since 2013; and VitaminSpice LLC from 2009 to 2010.

 

The Board of Directors concluded that the following experience, qualifications and skills qualify Mr. Fields to serve as a Director of the Company: significant executive management experience gained as a chief executive officer of four companies, including three publicly-traded companies; valuable experience in retail, supply chain, and consumer goods marketing; strong international experience gained as an executive officer at Wal-Mart Stores, Inc., one of the largest retail chains in the world, Blockbuster Entertainment Group, and Hudson’s Bay Company, Canada’s largest diversified general merchandise retailer; strong educational background with a bachelor’s degree in Economics and Business from the University of Arkansas; financial expertise acquired as a chief executive officer; and significant experience gained as a director of multiple publicly-held companies.

 

LOGO

Robert Holland, Jr.

    Age 73

  

Mr. Holland has been a Director of the Company since December 1998. Mr. Holland is a Managing Director of Essex Lake Group LLC, a profit enhancement advisory firm, a General Partner of The West Africa Fund and also maintains a consulting practice for strategic development assistance to senior management of Fortune 500 companies. Prior to October 2007, Mr. Holland was a General Partner and Industry Specialist with Cordova, Smart and Williams, a private equity firm. Previously, Mr. Holland served as Chief Executive Officer of WorkPlace Integrators, a company he acquired in June 1997 and sold in April 2001. Prior to that, Mr. Holland was President and Chief Executive Officer of Ben & Jerry’s Homemade, Inc. from February 1995 to December 1996, Chairman and Chief Executive Officer of Rokher-J Inc. from 1991 to 1995 and from 1981 to 1984, Chairman of Gilreath Manufacturing, Inc. from 1987 to 1991 and Chairman and Chief Executive Officer of City Marketing from 1984 to 1987. Mr. Holland is a former partner with McKinsey & Company, Inc. and held various positions at Mobil Oil Corporation from 1962 to 1968. He has also served as a director of the following companies during the past five years: Carver Bancorp, Inc. since 2000, Neptune Orient Lines, LTD from 2004 to 2010, and YUM! Brands, Inc. from 1997 to 2012.

 

The Board of Directors concluded that the following experience, qualifications and skills qualify Mr. Holland to serve as a Director of the Company: more than 20 years of executive management experience, including significant experience gained as a chief executive officer of five companies; significant experience in mergers and acquisitions; strong educational background with a bachelor’s degree in Mechanical Engineering from Union College and an MBA from the Zicklin School of Business at Baruch College (CUNY); financial expertise acquired as a chief executive officer and serving on the audit committees of six publicly-traded companies; and significant experience gained as a director of multiple publicly-traded companies.

 

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Directors whose Terms will Expire in 2016

 

 

LOGO

Kathi P. Seifert

    Age 64

  

Ms. Seifert has been a Director of the Company since April 2006. In June 2004, Ms. Seifert retired as Executive Vice President of Kimberly-Clark Corporation, leading the company’s personal care businesses and sales organization. Previously, Ms. Seifert worked in various marketing positions at The Procter & Gamble Company, Beatrice Foods and Fort Howard Paper Company. Ms. Seifert has also served as a director of the following companies during the past five years: Appvion, Inc. (formerly Appleton Papers, Inc.) since 2004, Eli Lilly & Company since 1995, Revlon, Inc. since 2006, and Supervalu Inc. from 2006 to 2013.

 

The Board of Directors concluded that the following experience, qualifications and skills qualify Ms. Seifert to serve as a Director of the Company: significant executive management experience gained as an executive vice president of a Fortune 500 company publicly traded on the New York Stock Exchange; strong international experience acquired while in charge of Kimberly-Clark Corporation’s global personal care business; more than 30 years of sales and marketing experience; strong educational background with a bachelor’s degree in Business Administration from Valparaiso University; financial expertise acquired as an executive vice president and serving on the audit committees of three publicly-traded companies; and significant experience gained as a director of multiple publicly-traded companies.

 

LOGO

Jean-Paul L. Montupet

    Age 65

  

Mr. Montupet has been a Director of the Company since October 2006, and has served as the Presiding Director since 2010. In December 2012, Mr. Montupet retired as Executive Vice President of Emerson Electric Co., where he had been in charge of the company’s industrial automation business since 2000, and as President of Emerson Europe, a position he had held since 2002. Mr. Montupet joined Emerson Electric Co. and was named Executive Vice President of its industrial motors and drives business with its acquisition in 1990 of Moteurs Leroy Somer SA, where he had been Chairman and Director of North American Operations. Mr. Montupet has also served as a director of the following companies during the past five years: Assurant, Inc. since 2012, IHS, Inc. since 2012, PartnerRe Ltd. since 2002, and as Chairman since 2010, and WABCO Holdings, Inc. since 2012.

 

The Board of Directors concluded that the following experience, qualifications and skills qualify Mr. Montupet to serve as a Director of the Company: more than 20 years of executive management experience, including his recent position as an executive vice president and president of a $4 billion business division of a Fortune 500 company; strong international experience gained as the president of the European division of Emerson Electric Co., a diversified global manufacturing and technology company with more than 250 manufacturing locations worldwide and approximately 129,000 employees, and additional international experience acquired working in Europe, North America and Asia; financial expertise acquired as a president and as a chief financial officer and serving on the audit committees of two publicly-traded companies; strong educational background with an advanced business degree from HEC Paris, and additional experience gained as a director of multiple publicly-traded companies.

 

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LOGO

Paul A. Rooke

    Age 55

  

Mr. Rooke has been a Director of the Company since October 2010. Since April 2011, Mr. Rooke has been Chairman and Chief Executive Officer of the Company. From October 2010 to April 2011, Mr. Rooke served as President and Chief Executive Officer of the Company. Prior to such time, Mr. Rooke served as Executive Vice President of the Company and President of the Company’s former Imaging Solutions Division from July 2007 to October 2010, as Executive Vice President of the Company and President of the Company’s former Printing Solutions and Services Division from November 2002 to July 2007, and in various senior management roles with the Company since its inception in 1991.

 

The Board of Directors concluded that the following experience, qualifications and skills qualify Mr. Rooke to serve as a Director of the Company: significant executive management experience and financial expertise acquired as president and chief executive officer and as a division president; more than 20 years experience as an engineer in the computer peripherals industry; and strong educational background with a bachelor’s degree in Mechanical Engineering from the University of Michigan and an MBA from the University of Kentucky.

 

LOGO

W. Roy Dunbar

    Age 52

  

Mr. Dunbar has been a Director of the Company since April 2011. Mr. Dunbar currently serves as the Chairman of private companies engaged in renewable energy and green construction. Prior to such time, Mr. Dunbar served as the Chief Executive Officer of Network Solutions, Inc. from 2008 to 2009 and as Chairman from 2008 to 2010; as President of Global Technology and Operations of Mastercard International, Inc. from 2004 to 2008; and in various senior leadership roles at Eli Lilly & Company from 1990 to 2004, including President of Eli Lilly’s Intercontinental Region, and Vice President and Chief Information Officer. Mr. Dunbar has also served as a director of the following companies during the past five years: Electronic Data Systems Corporation from 2004 to 2008; Humana, Inc. since 2005; and iGATE Corporation since 2010.

 

The Board of Directors concluded that the following experience, qualifications and skills qualify Mr. Dunbar to serve as a Director: significant experience gained as a director of multiple publicly-traded companies; significant executive management experience gained as a Chief Executive Officer and as a division President; operational and information technology expertise, acquired as an executive officer of two Fortune 500 companies; and a strong educational background with a degree in Pharmacy from Manchester University and an MBA from Manchester Business School.

Composition of Board and Committees

In 2013, the Board of Directors and the stockholders of the Company approved an amendment to the Restated Certificate of Incorporation to declassify the Board of Directors. Pursuant to such amendment, Directors elected for three-year terms at the Company’s Annual Meeting of Stockholders in 2011, 2012, and 2013, respectively, will serve the remainder of their three-year terms. Beginning with the 2014 Annual Meeting, each Director nominee will be elected for a one-year term rather than a three-year term. Directors may be removed from the Board with or without cause, provided, however, any Director serving the remainder of his or her three-year term may only be removed from the Board for cause.

The Board of Directors held seven meetings during 2013. All incumbent members of the Board, other than Mr. Holland, attended at least 75% of the aggregate of the meetings of the Board and committees of the Board on which they served. Mr. Holland attended 7 of the 10 meetings of the Board and the Corporate Governance and Public Policy Committee of the Board. Two of such absences were due to medical reasons in April 2013 and the other absence was due to an unavoidable scheduling conflict. While the Company does not have a formal policy regarding the attendance of Directors at the Annual Meeting of Stockholders, all Directors are strongly urged to attend. All members of the Board of Directors who were serving as Directors at the time of last year’s Annual Meeting of Stockholders, with the exception of Mr. Holland, attended the Annual Meeting. Mr. Holland was unable to attend due to medical reasons in April 2013.

 

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The Board of Directors has adopted the stated requirements for independence under Section 10A of the Securities Exchange Act of 1934, the rules of the Securities and Exchange Commission thereunder and the listing standards of the New York Stock Exchange as categorical standards for determining the independence of individual directors in accordance with guidance received from the New York Stock Exchange, and the Board has determined that all of the Board members, with the exception of Mr. Rooke, are independent on the basis of these requirements. In making its independence determinations, the Board of Directors has considered transactions occurring in each of the preceding three years between the Company and entities associated with the independent directors or their immediate family members. During 2013, Mr. Coleman served as an executive officer at Unisys Corporation (“Unisys”), a company which enters into transactions for the purchase and sale of goods and services in the ordinary course of business with the Company. The amount the Company paid in each of the last three fiscal years to Unisys, and the amount received by the Company in each of the last three fiscal years from Unisys, did not, in any of the previous three fiscal years, exceed the greater of $1 million or 2% of such other company’s consolidated gross revenues. In 2013, the Company purchased approximately $1.9 million of products and services from Unisys, a company with $3.5 billion in revenue for its fiscal year ending December 31, 2013, and Unisys purchased approximately $90,000 in products and services from the Company. All such transactions were made at arms-length, included standard commercial terms, and Mr. Coleman did not personally benefit from any of such transactions. In all instances, the total amount of the transactions represented significantly less than 2% of the Company’s and the other entity’s revenues for the most recent fiscal year. Additionally, the Company has not made any charitable contributions within any of the preceding three years that would exceed the greater of $1 million or 2% of a charitable organization’s consolidated gross revenues to any charitable organization for which a member of the Board of Directors served as an executive officer of the charitable organization.

The Board has four standing committees: an Executive Committee, a Finance and Audit Committee, a Compensation and Pension Committee and a Corporate Governance and Public Policy Committee. Each committee has adopted a written charter, which are available on the Corporate Governance section of the Company’s Investor Relations website at http://investor.lexmark.com. The following chart reflects current committee memberships and the number of meetings held by each committee during 2013.

 

Name of Director

   Executive
Committee
     Finance & Audit
Committee
     Compensation &
Pension Committee
     Corporate
Governance &
Public Policy
Committee
 

Non-Employee Directors

           

Jared L. Cohon

           Member      

J. Edward Coleman

        Member         

W. Roy Dunbar

              Member   

William R. Fields

           Member      

Ralph E. Gomory

              Member   

Stephen R. Hardis

     Member         Chair         

Sandra L. Helton

        Member         

Robert Holland, Jr.

              Member   

Michael J. Maples

        Member         

Jean-Paul L. Montupet

     Member               Chair   

Kathi P. Seifert

     Member            Chair      

Employee Directors

           

Paul A. Rooke

     Chair            

Number of Meetings held in 2013

     0         11         6         3   

In addition, a special committee of the Board, comprised of Messrs. Hardis, Montupet and Rooke, met once in 2013 to review and approve the terms of the Company’s public debt offering.

 

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The Executive Committee is responsible for exercising all of the powers and authority of the Board of Directors during intervals between Board meetings, except for those powers delegated to the other committees of the Board and the powers which pursuant to Delaware law may not be delegated to a committee of the Board.

The Board of Directors has established the Finance and Audit Committee in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The Finance and Audit Committee is responsible for, among other things, assisting the Board of Directors in fulfilling its oversight responsibilities with respect to the systems of internal controls established by management, the integrity and transparency of the Company’s financial statements, the Company’s compliance with legal and regulatory requirements with respect to audit, financial and accounting matters, the Company’s policies related to risk assessment and risk management, the Independent Auditors’ qualifications and independence, the performance of the Independent Auditors’ and the Company’s internal audit functions, and the Company’s financial strategy and policies, capital structure, share repurchase and dividend policy and capital expenditures. The Board of Directors has determined that each member of the Finance and Audit Committee is “independent” and “financially literate” as defined under the listing standards of the New York Stock Exchange. The Board of Directors has also determined that each member of the Finance and Audit Committee is an “audit committee financial expert” as that term is defined by the applicable rules established by the Securities and Exchange Commission. The Board of Directors does not limit the number of other public company audit committees on which members of its Finance and Audit Committee may serve. However, no member of the Finance and Audit Committee is currently serving on more than two other public company audit committees.

The Compensation and Pension Committee is responsible for assuring that the Company has a competitive executive compensation program in order to attract and retain qualified executives and to provide incentives to management of the Company for the attainment of the Company’s goals and objectives. The Compensation and Pension Committee is also responsible for periodically reviewing and approving the Company’s retirement and stock incentive plans. Each member of the Committee is “independent” as defined under the listing standards of the New York Stock Exchange.

The Corporate Governance and Public Policy Committee is responsible for providing counsel to the Board with respect to corporate governance issues, including Board and committee organization, membership and function, and acting in an advisory capacity to the Board and the Company’s management on public policy issues. The Corporate Governance and Public Policy Committee is also responsible for the nomination of persons for election to the Board. Each member of the Committee is “independent” as defined under the listing standards of the New York Stock Exchange.

Nomination of Directors

The Corporate Governance and Public Policy Committee does not set specific, minimum qualifications (including specific requirements for diversity) that nominees must meet in order for the Corporate Governance and Public Policy Committee to recommend them to the Board of Directors for election, but rather believes that each nominee should be evaluated based on his or her individual merits, taking into account the needs and composition of the Board at the time. The Corporate Governance and Public Policy Committee considers candidates for election who would bring a wide range of attributes to the Board. The general criteria that the Corporate Governance and Public Policy Committee looks for in candidates is a person of high integrity with: (i) broad general management experience in a significant organization; (ii) experience with major management, technical, operational, marketing or financial issues; (iii) diversity of background and thought, or experience in areas of special interest to the Company, such as brand development or technology; (iv) strong track record of success; (v) strong international experience; (vi) board experience at other international companies; (vii) ample time to devote to Board duties; and (viii) ability and desire to serve multiple terms as a Board member. With respect to diversity, the Corporate Governance and Public Policy Committee believes that a Director nominee with a diverse background, professional experience, education, skill, and differences of viewpoint fulfills that specific attribute and contributes to a heterogeneous Board. In the past, the Committee has identified director nominees from various sources, including officers, directors and professional search consultants, but the Committee will also consider nominees recommended by stockholders. The Corporate Governance and Public Policy Committee applies the same evaluation for nominees for director whether the nominee is recommended by a stockholder or other source.

 

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The Corporate Governance and Public Policy Committee has from time to time retained SpencerStuart, a third party search firm, to assist the Committee in identifying and evaluating candidates for Board membership who best match the director recruitment criteria described above. SpencerStuart has played an important role in identifying many of the Company’s most recent independent directors for Board membership.

Stockholders wishing to recommend a director candidate for consideration by the Corporate Governance and Public Policy Committee may do so by complying with the procedures and providing the information required by the Company’s By-Laws.

Corporate Governance Matters

The Company has adopted a code of business conduct and ethics for directors, officers (including the Company’s principal executive officer and principal financial and accounting officer) and employees, known as the Code of Business Conduct. The Code of Business Conduct, as well as the Company’s Corporate Governance Principles, Related Person Transaction Policy and the charters of each of the committees of the Board of Directors are available on the Corporate Governance section of the Company’s Investor Relations website at http://investor.lexmark.com. The Company also intends to disclose on the Corporate Governance section of the Investor Relations website any amendments to the Code of Business Conduct and any waivers from the provisions of the Code of Business Conduct that apply to the principal executive officer and principal financial and accounting officer and that relate to any elements of the code of ethics enumerated by the applicable regulation of the Securities and Exchange Commission (Item 406(b) of Regulation S-K).

Related Person Transactions

On the recommendation of the Corporate Governance and Public Policy Committee, the Board of Directors has adopted a written Related Person Transaction Policy (the “Policy”) for the purpose of identifying potential conflicts of interest arising out of a related person transaction between the Company and any related person. Under the Policy, a related person is a Director, nominee for election as a Director, executive officer, beneficial owner of more than 5% of the Company’s common stock or any immediate family member of the foregoing persons. A related person transaction under the Policy is any transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in excess of $120,000 in which the Company or any of its subsidiaries is a party and in which the related person has or will have a direct or indirect material interest.

The Company reviews all transactions, arrangements or relationships between the Company and related persons in excess of $120,000 to determine whether such transactions are permissible under the Policy and, if permissible, whether such persons have a direct or indirect material interest in a transaction that is required to be disclosed by the Company in the Company’s proxy statement. Under the Policy, certain transactions have been pre-approved, as not constituting related person transactions, including, among other transactions, compensation paid to Directors and executive officers in the ordinary course of performing their duties; transactions in the ordinary course of business with another company where a Director is an employee or serves as a director, the Director is not involved in the negotiations of the terms of the transaction and the aggregate amount involved does not exceed the greater of $1 million or 2% of the other company’s gross revenues; and charitable contributions to a charitable organization, foundation or university at which a related person’s only relationship is an employee (other than an executive officer), or a director or trustee and the aggregate amount involved does not exceed the lesser of $1 million or 2% of the charitable organization’s total annual receipts.

Each Director and executive officer is required to complete a questionnaire on an annual basis which requires them to disclose any potential related person transactions with the Company. In addition, under the Policy, each Director and executive officer has a continuing obligation to notify the Corporate Secretary of any potential related person transactions with the Company. With respect to any potential related person transaction reported to the Corporate Secretary, the Corporate Secretary will determine whether the transaction is pre-approved under the Policy, and if it is not pre-approved, will present the transaction for approval to the Corporate Governance and Public Policy Committee at its next meeting, or to the Chair of the Corporate Governance and Public Policy Committee, when it is not practicable to wait until the next meeting. The Corporate Governance and Public Policy, or the Chair of the Corporate Governance and Public Policy Committee, as applicable, will review the material facts and circumstances of each related person transaction and determine whether to approve,

 

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ratify or reject the entry into such transaction. Related person transactions may only be approved if, based on the information presented, the Corporate Governance and Public Policy Committee determines that the transaction is in the best interests of the Company and its stockholders.

As part of its annual independence assessment and review of related person transactions, the Corporate Governance and Public Policy Committee reviewed the transactions between the Company and certain entities in which some of our Directors serve as executive officers or directors, as described more fully above, and determined that the amounts involved in such transactions are not material to the Company nor to the entities involved in the transactions. Consequently, there were no transactions between the Company and any related person in 2013 that were required to be reported under Item 404(a) of Regulation S-K, nor are there any currently proposed.

Compensation Committee Interlocks and Insider Participation

No member of the Compensation and Pension Committee has served as an officer or employee of the Company at any time. No executive officer of the Company serves as a member of the compensation committee or on the board of directors of any company at which a member of the Compensation and Pension Committee or Board of Directors serves as an executive officer.

Leadership Structure

As part of its review of the Company’s overall corporate governance practices, the Board of Directors periodically reviews its leadership structure. Currently, the Board believes that the most effective leadership structure for the Company is for the Company’s Chief Executive Officer to serve as Chairman of the Board of Directors. The Board combined the Chairman and Chief Executive Officer role in 1999 to provide strong leadership and a unified voice for the Company’s management and the Board. The Board has been satisfied with the combined Chairman and Chief Executive Officer and believes it has served the Company’s stockholders well. This leadership structure allows the Chief Executive Officer to establish a Board agenda, with Board input, which focuses on the Company’s strategic challenges, ensures the Board is presented with the necessary information required to fulfill its responsibilities, and allows for productive and effective Board meetings.

Except for Mr. Rooke, the Board is completely comprised of independent Directors who bring a broad range of leadership experience to the Board and regularly contribute to the thoughtful discussion involved in effectively overseeing the business and affairs of the Company. Collegial, yet rigorous, debate at Board meetings is common. Also, the Finance and Audit Committee, the Corporate Governance and Public Policy Committee and the Compensation and Pension Committee are comprised solely of independent Directors and each with a separate independent chair. These Committees perform important roles for the Company as explained in the “Composition of Board and Committees” section. The independent Directors also meet in executive session at each regularly scheduled meeting to voice their observations and to shape future Board agendas. Immediately following each session, the Presiding Director notifies the Chairman of the Board of the independent Directors’ assessment of the meeting and any desired agenda items for future meetings. Thus, the Board has the opportunity to take up issues it believes are important.

When the Chairman of the Board is not an independent Director, the Board also elects a single Presiding Director from the current independent Directors with such duties and for such term as the Board may determine from time to time. At each regularly-scheduled meeting of the Board of Directors, the independent Directors meet in executive session, at which only independent Directors are present. The Presiding Director serves as chairman of those meetings and presides over any meeting of the Board when the Chairman of the Board is not present. In addition, the Presiding Director consults with the Chairman of the Board to plan and set the agenda for meetings of the Board of Directors and serves as the point of contact for members of the Board of Directors to raise issues not readily addressable directly to the Chairman. The Presiding Director also performs such other functions and responsibilities as required by the Board of Directors from time to time. Based on the recommendation of the Corporate Governance and Public Policy Committee, Mr. Montupet was elected as the Presiding Director at the February 2010 meeting and assumed that position at the April 2010 meeting. Mr. Montupet was reelected as Presiding Director at the February 2012 meeting and will continue to serve in that role until the 2014 Annual Meeting.

 

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The Board believes that the leadership structure in which the Company’s Chief Executive Officer serves as Chairman of the Board, the vast majority of the Board is comprised of independent Directors, the Board Committees described above are led by independent Directors, the Company has a Presiding Director with known responsibilities, and the independent Directors hold regular meetings in executive session, remains the optimal leadership structure for the Company and the Company’s stockholders.

Stockholders and other interested parties may communicate directly with the Presiding Director, non-management Directors as a group or any member of the Board of Directors through the Corporate Secretary by writing to him at Lexmark International, Inc., 740 West New Circle Road, Lexington, Kentucky 40550. The Corporate Secretary will review all communications and forward appropriate correspondence to the proper Board member or members.

Board’s Role in Risk Oversight

The Company’s Board of Directors administers its risk oversight function directly and through both its Finance and Audit Committee and Compensation and Pension Committee. The Finance and Audit Committee has oversight responsibility with respect to the Company’s financial risk assessment and financial risk management. The Finance and Audit Committee meets regularly with management to review the Company’s risk exposures, the potential financial impact those risks may have on the Company, the steps management takes to address those risks, and how management monitors emerging risks. With respect to the Company’s compensation plans and programs, the Compensation and Pension Committee structures such plans and programs to balance risk and reward, while mitigating the incentive for excessive risk taking by the Company’s officers and employees, as discussed in the “Risk Assessment” section of the “Compensation Discussion & Analysis.” The full Board of Directors has oversight responsibility of enterprise risk management and periodically has management review the Company’s major enterprise risk exposures, the potential financial or other impact on the Company, and the process for managing such risks.

Political Contribution Policy

In order to provide greater transparency to our stockholders regarding the Company’s involvement in political contributions and to ensure Board-level oversight, the Board of Directors has adopted a political contribution policy. Under this policy, the Company will not make contributions of any kind (money, employee time, goods or services) to political parties or candidates, political committees, including political committees organized under Section 527 of the Internal Revenue Code, or in support of or against ballot measures. This policy applies equally in all countries and all levels of government, even where such contributions are permitted by law. The Company’s political contribution policy is available on the Corporate Governance section of the Company’s Investor Relations website at http://investor.lexmark.com.

 

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COMPENSATION DISCUSSION & ANALYSIS

Compensation Governance

The Compensation and Pension Committee (the “Compensation Committee”) is responsible for setting and administering the policies governing all compensation components, including base salary, incentive compensation, equity-based compensation and other long-term incentive compensation for the Company’s executive officers, including the CEO and other key members of management. The Compensation Committee determines the type, structure and amount of each compensation component awarded under the Company’s compensation plans. They are responsible for approving payments under the compensation plans and making a recommendation to the Board of Directors to approve base salary increases for Section 16 Officers. The process by which the Compensation Committee fulfills these responsibilities is detailed in the discussion that follows.

Named Executive Officers

The Company’s principal executive officer, principal financial officer and the Company’s three most highly compensated executive officers other than the principal executive officer and principal financial officer for 2013 (the “Named Executive Officers”) whose compensation is set forth in the tables and following discussion in accordance with Securities and Exchange Commission rules are as follows:

 

   

Paul A. Rooke, Chairman and Chief Executive Officer

 

   

John W. Gamble, Jr., Executive Vice President and Chief Financial Officer

 

   

Martin S. Canning, Executive Vice President and President of Imaging Solutions and Services

 

   

Scott T.R. Coons, Vice President and President & CEO Perceptive Software

 

   

Robert J. Patton, Vice President, General Counsel and Secretary

Executive Compensation Philosophy

The Compensation Committee has developed a set of principles to guide the design of the compensation plans and programs applicable to the Company’s executive officers, including the Named Executive Officers who were serving as executive officers at the end of 2013.

 

   

Pay for performance where performance criteria are aligned with stockholder interests.

The performance of the Company and individual levels of performance determine the amount of compensation realized by the executive officers. The objectives of the Company’s compensation plans are intended to focus each executive officer on the achievement of key performance goals and the execution of the strategic plan that will promote the long-term success of the Company and maximize stockholder returns.

 

   

Put pay significantly “at risk” and subject to the achievement of strategic business objectives.

The executive officers have roles and responsibilities that directly influence the achievement of the Company’s performance objectives. Therefore, the Compensation Committee believes that they should have a significant portion of their compensation dependent on whether those objectives are achieved. Base salary is the only component of an executive officer’s direct compensation that is fixed. Other components, including annual incentive compensation and long-term incentive compensation, are principally subject to the achievement of strategic business objectives.

 

   

Balance short-term and long-term objectives.

The Company’s compensation programs are balanced between short-term and long-term objectives to ensure that executive officers focus on short-term performance that supports and ensures long-term success and profitability. The Company’s compensation programs also include personal objectives relating to key focus areas and strategic performance objectives.

 

   

Provide total compensation opportunities that are market competitive and supportive of the Company’s strategy to attract, develop, motivate and retain outstanding talent.

The Company benchmarks the components of executive compensation to ensure that they are competitive in or with the marketplace. In evaluating the competitiveness of each executive officer’s target

 

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compensation, the Compensation Committee utilizes survey and peer group data to ensure that each executive officer’s target compensation is comparable to targeted pay levels established by the Compensation Committee. However, the Compensation Committee may use discretion to vary executive officer pay from the targeted levels based on factors such as an executive officer’s performance, responsibilities, experience, or length of time in the position.

Components of the Company’s Executive Compensation Program

Total compensation for each of the Named Executive Officers may consist of the following components which are based on the principles guiding the design of that component:

 

Compensation Component

  

Form of Compensation

   Key Compensation
Objectives to be Achieved

Base Salary

  

•  Cash

   •  Provide a steady source of income
that is market competitive and
supportive of the Company’s
strategy to attract, develop,
motivate and retain outstanding
talent.

 

Annual Incentive Compensation

  

•  Cash

   •  To motivate and reward executive
officers for the Company’s
attainment of performance metrics
required for the Company to be
successful.

 

      •  Put pay significantly “at risk” and
subject to the achievement of
strategic business objectives.

 

      •  Balance short-term and long-term
objectives.

 

Long-Term Incentive Compensation

  

•  Time-Based Restricted Stock Units

•  Performance-Based Restricted Stock Units

•  Stock Options

•  Cash

   •  To retain and motivate executive
officers where performance
criteria are aligned with
stockholder interests.

•  Put pay significantly “at risk” and
subject to the achievement of
strategic business objectives.

•  Balance short-term and long-term
objectives.

 

Retirement Plans and Other Benefits

  

•  401(k) Plan

•  Supplemental Savings & Deferred Compensation Plan

•  Health and Other Welfare Benefits

   •  Provide competitive benefits that
are designed to provide sufficient
retirement income and promote
the welfare of our executive
officers and their families.

 

Perquisites

  

•  Reimbursement for Financial Planning

   •  Provide financial stability and
minimize distractions from an
executive officer’s attention to
important Company initiatives.

 

Determining Executive Compensation

Annually, the Compensation Committee considers whether to recommend to the Board of Directors adjustments to each Named Executive Officer’s base salary and approves the form and amount of equity-based awards. The Compensation Committee also establishes the target compensation opportunity for each of the Named Executive Officers under the annual incentive compensation plan and for any long-term incentive award (either cash and/or equity). To determine the amount of the compensation opportunity to award, the Compensation Committee considers comparative market data and other factors described in more detail in the

 

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discussion that follows. The Compensation Committee does not have a pre-established target allocation for each compensation element nor does it have a pre-established target mix of cash versus equity, short-term incentive compensation versus long-term incentive compensation, or fixed pay versus variable pay. Annually, the Compensation Committee determines the target total direct compensation for each Named Executive Officer by assessing the role of the Named Executive Officer and the comparative market data. The Compensation Committee then determines the appropriate mix of cash and equity for each Named Executive Officer as detailed in the “Compensation Components” section.

The Compensation Committee utilizes the services of Pearl Meyer & Partners, a well-established executive compensation consulting firm, to assess the competitiveness of the Company’s executive compensation plans and programs and to provide other executive compensation consulting services. Pearl Meyer & Partners is retained solely by the Compensation Committee and does not advise management on matters involving executive compensation or on any other matter. Pearl Meyer & Partners’ role in assisting the Compensation Committee is described in more detail in the discussion that follows.

To evaluate the competitiveness of each Named Executive Officer’s total compensation for 2013, the Compensation Committee utilized survey and peer group data, drawn from annual proxy statement disclosures, provided by Pearl Meyer & Partners. Survey data for all the Named Executive Officers, other than Mr. Coons, reflected a broad group of technology firms with generally similar revenues as the Company. Annually, the Compensation Committee reviews and updates the group of peer companies to ensure that each company continues to be appropriate for benchmarking executive compensation. The Compensation Committee utilizes the services of Pearl Meyer & Partners on an annual basis to prepare a peer group analysis and make recommendations to the Compensation Committee on determining the appropriate peer group of companies. Revenue and product similarity are the primary factors for peer group inclusion and market capitalization is a secondary factor. Companies with revenue and/or market capitalization of one-fourth to four times the revenue and/or market capitalization of the Company are targeted. Based on the annual review and analysis prepared by Pearl Meyer & Partners for 2013, the Company maintained the same peer group as 2012, except for the removal of Eastman Kodak Company due to its bankruptcy. The following peer group was approved for 2013 executive compensation benchmarking purposes for all Named Executive Officers, other than Mr. Coons:

 

2013 Peer Group

            Revenue ($M)*  
 

Advanced Micro Devices, Inc.

   Logitech International         Peer Group 75th %   $ 6,259   

Brocade Communications

   NCR          

Diebold, Inc.

   Net App, Inc.         Peer Group Median   $ 4,201   

Imation Corporation

   Polycom, Inc.          

Insight Enterprises, Inc.

   SanDisk Corporation         Peer Group 25th %   $ 2,281   

JDS Uniphase Corporation

   Seagate Technology          

KLA-Tencor Corporation

   Western Digital          

LAM Research Corporation

   Xerox Corporation          
           Lexmark International, Inc.   $ 4,010   

 

* Reflects trailing 4 quarters revenue as of June 2012, in most cases.

Although the Company makes reference to many competitors in its annual report, Xerox Corporation was the only referenced company included in the Company’s peer group of companies used for executive compensation benchmarking purposes. The Company’s other competitors were excluded because their revenue and market capitalization did not meet the criteria set forth above or their headquarters are located outside of the United States. Companies headquartered outside of the United States are generally excluded for benchmarking purposes because (i) executive compensation data is not as readily available or disclosed as fully as is required in the United States, (ii) the Company’s labor market for its executive officers is generally based in the United States, and (iii) compensation practices in other countries can vary dramatically due to local regulations, customs and state-required compensation programs.

To evaluate the competitiveness of Mr. Coons’ compensation, survey data was provided by Pearl Meyer & Partners, reflecting a group of 30 software companies with generally similar revenues as Perceptive Software.

 

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The software peer group had median revenue of $229 million for the previous fiscal year. The Compensation Committee utilized the benchmarking information provided by Pearl Meyer & Partners to evaluate Mr. Coon’s compensation as head of our Perceptive Software segment for 2013.

Role of the Compensation Consultant

Pearl Meyer & Partners has been retained by the Compensation Committee to assist the Committee in assessing the competitiveness of executive compensation, and provides other consulting services as requested by the Committee. In 2013, Pearl Meyer & Partners provided composite data from survey sources and proxy statement disclosure data from the peer group of companies to assist the Compensation Committee in establishing the proper compensation level for executive officers, including the Named Executive Officers. In addition, Pearl Meyer & Partners conducted a competitive assessment review of executive compensation in the first quarter of 2013, which was utilized by the Compensation Committee in determining executive compensation for 2013. Pearl Meyer & Partners also advised the Compensation Committee on a broad spectrum of matters, including, but not limited to:

 

   

Composition of the Company’s peer group for benchmarking executive compensation.

 

   

Review of the Company’s proxy disclosures, including this Compensation Discussion and Analysis.

 

   

Review of management proposals to advise the Compensation & Pension Committee.

 

   

Overview of regulatory updates.

Pearl Meyer & Partners does not advise management on matters involving executive compensation or on any other matter. The Compensation Committee has the sole authority to retain or terminate Pearl Meyer & Partners as the Compensation Committee’s executive compensation consultant and to approve its fees and other terms of engagement. The Compensation Committee annually assesses the independence of Pearl Meyer & Partners and determines whether any related conflicts of interest require disclosure. Based on its independence assessment of Pearl Meyer & Partners, the Compensation Committee determined that no conflict of interest was required to be reported under Item 407(e)(3)(iv) of Regulation S-K for 2013.

Role of the Stockholders

The Company’s Board of Directors and Compensation Committee welcome and value the input of stockholders and other interested parties. There are numerous ways for stockholders and other interested parties to communicate their views to the Board of Directors and the Compensation Committee. Stockholders and other interested parties may communicate directly with the Presiding Director, non-management Directors as a group or any member of the Board of Directors through the Corporate Secretary by writing to him at Lexmark International, Inc., 740 West New Circle Road, Lexington, Kentucky 40550. In addition, the Company has added an e-mail link on the Corporate Governance section of its webpage seeking the input of all of its stockholders and other interested parties on executive compensation and other corporate governance matters.

Consideration of Say on Pay Vote

In 2012 and 2013, more than 93% and 97%, respectively, of the Company’s stockholders who voted on the Company’s advisory, non-binding, vote on executive compensation (commonly referred to as “Say on Pay”) approved the compensation of the Company’s Named Executive Officers. The Compensation Committee believes that the vote of stockholders is an endorsement of the Company’s pay for performance philosophy, which is designed to promote the long-term success of the Company and maximize stockholder returns. The Compensation Committee considered the vote results and due to the significant approval did not make any material changes to the Company’s executive compensation decisions and policies in 2013.

Setting Performance Objectives

The Compensation Committee believes that the Company’s annual business plan and strategic plan appropriately reflect the level of performance required for the Company to be successful in a highly competitive market. Generally, the targeted range for performance objectives is aligned with the corresponding measure in

 

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the Company’s plans for the corresponding performance period. The Compensation Committee believes that minimum attainment goals should be achievable with some level of success, while target attainment goals are set at a moderate to difficult level and maximum attainment goals are set at a difficult level. Over the past five years, the Company has achieved performance in excess of the target level for annual incentive compensation two times (the 2010 and 2013 performance periods) and for long-term incentive compensation one time (the 2010 performance period for performance-based restricted stock units).

COMPENSATION COMPONENTS

Total Direct Compensation

The Compensation Committee determines the form and level of compensation opportunity to award by applying the same principles, policies, and methodologies to each of the Named Executive Officers. The principles, policies and methodologies relating to the decision to utilize each component of compensation, the level of each component, and how one component may influence the Compensation Committee’s decisions with respect to other components is described in further detail in the discussion that follows or was provided in the table in the “Components of the Company’s Executive Compensation Program” section.

Annually, the Compensation Committee reviews the total direct compensation opportunity for each of the Named Executive Officers, as well as the Company’s other Section 16 executive officers. Total direct compensation includes base salary, annual incentive compensation opportunity, and long-term incentive compensation opportunity. The long-term incentive opportunity may be an equity-based award (such as restricted stock units or stock options) or a cash-denominated award. First, the Compensation Committee determines the form and level of each compensation component to award by performing a separate and distinct analysis of base salary, annual incentive compensation and total long-term incentive compensation for each Named Executive Officer. Next, the Compensation Committee reviews the total direct compensation opportunity of each of the Named Executive Officers by a comparison to the total direct compensation of named executive officers of peer companies obtained through their proxy statement disclosures, as described above.

The Compensation Committee has determined that each Named Executive Officer’s total direct compensation opportunity should be nominally targeted at the 50th percentile of the Company’s peer group. The Compensation Committee believes that the 50th percentile aligns a Named Executive Officer’s compensation with that of the Company’s peer group and the interests of the Company’s stockholders, and likewise ensures that the Company remains competitive in attracting and retaining executive officers. However, it should be noted that total direct compensation opportunity for each individual may range above or below the 50th percentile based on a variety of factors, including the executive officer’s skills and experience, the importance of the position to the Company, past and expected future performance, the difficulty of replacement, and the length of time in the position.

The following graphs illustrate the allocation of the 2013 total direct compensation for the Chief Executive Officer and the average total direct compensation of the other Named Executive Officers as a group:

 

LOGO

Base Salary

The Compensation Committee reviews the base salary of each Named Executive Officer on an annual basis. The base salary for each of the Named Executive Officers is determined by the responsibilities of the position

 

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held, the experience of the individual, the individual’s length of time in the position, and by reference to the information compiled from compensation surveys and peer group data regarding the competitive marketplace for executive talent, including a comparison to base salaries for comparable marketplace positions discussed above in the section entitled “Determining Executive Compensation.”

Salary adjustments for each of the Named Executive Officers are based on an evaluation of the performance of the Company and of each of the Named Executive Officers. New responsibilities, as well as changes in the competitive marketplace, are also taken into account when considering an adjustment to base salary. The Compensation Committee determines the amount of any change in base salary to recommend to the Board of Directors for approval. The Board of Directors is ultimately responsible for approving any change in base salary for each of the Named Executive Officers, as well as the Company’s other Section 16 executive officers.

At its meeting on February 20, 2013, the Compensation Committee reviewed management’s recommendations and the competitive assessment review report prepared by Pearl Meyer & Partners, and based on that information they recommended that the Board of Directors approve adjustments to the base salary of the Named Executive Officers, with the timing of the increases delegated to the CEO and/or VP of Human Resources. Based on the recommendation of the Compensation Committee, the Board of Directors approved the adjustments to base salary and the delegations of authority to the CEO and/or VP of Human Resources to implement the base salary increases. The following adjustments to base salary were made effective July 1, 2013:

 

Name

   Base
Salary
Increase
     New Base
Salary
 

P.A. Rooke.

   $ 50,000       $ 850,000   

J.W. Gamble, Jr.

     25,000         575,000   

M.S. Canning

     25,000         525,000   

S.T.R.Coons

     25,000         450,000   

R.J. Patton

     25,000         400,000   

Annual Incentive Compensation

The annual incentive compensation opportunity for each of the Named Executive Officers is made under the Lexmark International, Inc. Senior Executive Incentive Compensation Plan, which was approved by the Company’s stockholders in 2004. The Senior Executive Incentive Compensation Plan has been designed to ensure that the annual incentive compensation awards are paid in a manner to ensure maximum deductibility of the payment of such awards by the Company under Section 162(m) of the Internal Revenue Code. Under the terms of the Senior Executive Incentive Compensation Plan, the maximum award for each Named Executive Officer is six-tenths of one percent of Operating Income, as defined in the plan. The Compensation Committee administers the plan and has negative discretion to reduce, but not increase, the award made to a Named Executive Officer based on any factors it may deem appropriate.

The factors considered by the Compensation Committee for reducing a Named Executive Officer’s annual incentive compensation award under the Senior Executive Incentive Compensation Plan are based on the strategic performance objectives for each of the Named Executive Officers set forth in the 2013 Incentive Compensation Plan.

For 2013, the strategic performance objectives under the 2013 Incentive Compensation Plan included the following:

 

   

Corporate Objectives — measured with reference to annual strategic revenue, operating income and cash cycle, each excluding all acquisition activity.

 

   

Worldwide Business/Geographic Unit Objectives — measured with reference to the applicable worldwide business or geographic unit annual strategic revenue, operating income and cash cycle, each excluding all acquisition activity, or with respect to Perceptive Software measured with reference to Perceptive Software’s revenue, license and subscription revenue, operating income and days sales outstanding, excluding all acquisition activity.

 

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Personal Objectives — established based on key focus areas and strategic performance objectives specific to each individual. The CEO’s personal objective is based on an assessment of his general management of the Company.

 

   

Threshold Objectives — measured with reference to free cash flow, excluding all acquisition activity.

The Compensation Committee selected strategic revenue, operating income and cash cycle, each excluding all acquisition activity, as the performance objectives for 2013, because it believed the achievement of the targets established for these performance measures will drive the long-term success of the Company. The targets established by the Compensation Committee for strategic revenue are designed to motivate employees to grow existing business and focus on customers’ needs to drive increased hardware, supplies, software and services and solutions sales. The Compensation Committee’s selection of operating income as a performance measure is intended to motivate employees of the Company to focus on generating additional earnings by focusing on cost reduction, improved product quality, pricing, expense management and innovation. The Compensation Committee selected cash cycle as a performance measure to motivate employees to reduce the amount of time it takes the Company to convert its cash into product, sell the product to the customer, and collect the account receivable from the customer. The Compensation Committee selected license and subscription revenue and days sales outstanding as additional metrics for Perceptive Software because they are viewed as performance measures that will drive the long-term success of Perceptive Software. Free cash flow, excluding all acquisition activity, was selected by the Compensation Committee as the threshold performance measure to emphasize the importance of cash generation.

The weighting for each objective for the fiscal year ending December 31, 2013 for each of the Named Executive Officers is shown in the table below.

 

Name

   Corporate
Objective
    Worldwide
Business or
Geographic
Unit Objective
    Personal
Objective
 

P.A. Rooke

     80     0     20

J.W. Gamble, Jr.

     80        0        20   

M.S. Canning

     20        60        20   

S.T.R. Coons

     15        65        20   

R.J. Patton

     80        0        20   

The following table shows the corporate performance objectives for the fiscal year ending December 31, 2013, which were approved by the Compensation Committee at its February 20, 2013 meeting as well as the actual attainment that was certified by the Compensation Committee at its February 19, 2014 meeting. All dollar amounts are in millions and include restructuring charges and exclude acquisition related costs and expenses.

 

     Min      Target      Max      2013  Actual
Attainment
 

Corporate

           

Strategic Revenue (40%)

   $ 3,024       $ 3,183       $ 3,342       $ 3,265.7   

Operating Income (40%)

   $ 315       $ 363       $ 399       $ 315.2   

Cash Cycle (days) (20%)

     17         15         14         5.5   

Threshold

           

Free Cash Flow

   $ 200         N/A         N/A       $ 308   

An annual incentive compensation opportunity for each of the Named Executive Officers, other than the CEO, is recommended by the CEO, for approval by the Compensation Committee. The award opportunity may be increased or decreased based on the judgment of the Compensation Committee of the individual’s overall contribution to Lexmark’s business results. The Compensation Committee determines and approves the annual incentive compensation opportunity for the CEO. The annual incentive opportunities for each of the Named

 

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Executive Officers are based on the peer group company data and the survey data for annual incentive awards and each Named Executive Officer’s total compensation target discussed above in the section entitled “Determining Executive Compensation.”

The Compensation Committee establishes annual incentive compensation targets that it believes put annual incentive compensation significantly “at risk” because payments are entirely dependent upon the achievement of strategic performance objectives. At its meeting on February 20, 2013, the Compensation Committee reviewed the information from the peer group company data and the compensation surveys, and also gave consideration to the qualitative factors listed above. Based on this review, the Compensation Committee approved the annual incentive award opportunity for each of the Named Executive Officers for the fiscal year ending December 31, 2013, shown in the table below. The Compensation Committee must review and certify the business results and the incentive compensation plan attainments before any payments can be made. This review is generally performed in the first quarter of each year and the payout typically occurs shortly thereafter.

At its meeting on February 19, 2014, the Compensation Committee reviewed and certified the business results for the fiscal year ending December 31, 2013, and determined that, for the corporate objectives, performance slightly above target had been achieved for the 2013 performance period. Based on such performance (and the performance of ISS for Mr. Canning and the performance of Perceptive Software for Mr. Coons), the Compensation Committee approved the following payment of annual incentive compensation for each of the Named Executive Officers:

 

     2013 Annual Incentive
Compensation Award Opportunity
     2013 Annual Incentive
Compensation Award
 

Name

   Threshold      Target      Maximum     

P.A. Rooke

   $ 153,000       $ 1,020,000       $ 2,040,000       $ 1,104,359   

J.W. Gamble, Jr.

     73,313         488,750         977,500         518,335   

M.S. Canning

     66,938         446,250         892,500         550,115   

S.T.R. Coons

     50,625         337,500         675,000         253,594   

R.J. Patton

     45,000         300,000         600,000         332,810   

Perceptive Software Earn-Out Incentive Compensation Plan

In connection with the Company’s 2010 acquisition of Perceptive Software, the Board of Directors approved the Perceptive Software Incentive Compensation Program (the “2010 IC Program”), a three-year earn-out incentive program for a select group of key employees of Perceptive Software, including Mr. Coons. Under the 2010 IC Program, if Perceptive Software achieves both a threshold level of profitability and threshold revenue level during each of the three one-year performance periods ending on June 30, 2011, 2012 and 2013, respectively, the participants of the 2010 IC Program are entitled to cash payouts. Under the 2010 IC Program, Mr. Coons’ annual target award opportunity is $500,000 for each one-year fiscal performance period, with a maximum award opportunity of $1 million per year. In connection with the 2010 IC Program, Mr. Coons was also granted safety-net restricted stock units on June 7, 2010, with a grant date value equal to approximately one-third of the value of his target payout under the 2010 IC Program. The safety-net restricted stock units are only earned if award amounts are not paid-out under the 2010 IC Program. Threshold performance was not met during the one-year performance-period ending June 30, 2011, and no cash payments were made under the 2010 IC Program for that fiscal year.

In reviewing the performance objectives for fiscal year 2012 and fiscal year 2013 performance periods in the 2010 IC Program, the Compensation Committee, at its meeting held on July 27, 2011, determined that the threshold profitability level and revenue levels for such remaining performance periods were set at unachievable levels based on the Company’s business plan for Perceptive Software. Based on such analysis, the Compensation Committee recommended and the Board of Directors approved the Perceptive Software FY12-FY13 Incentive Compensation Plan (the “2012 IC Plan”), running in parallel to the 2010 IC Program, for the two one-year performance periods ending on June 30, 2012 and 2013. Target annual award opportunities under the 2012 IC Plan were set at a level such that when combined with the value of the safety-net restricted stock units, would

 

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equal the annual target award opportunity under the 2010 IC Program. If awards become payable under both the 2010 IC Program and the 2012 IC Plan, the awards are capped at the maximum payout under the 2010 IC Program. Under the 2012 IC Plan, Mr. Coons’ annual target award opportunity is $308,000 for each one-year fiscal performance period, with a maximum award opportunity of $808,000. At its meeting on July 19, 2012, the Compensation Committee reviewed and certified Perceptive Software’s business results for the fiscal year ending June 30, 2012, and determined that threshold performance was not met during the one-year performance period ending June 30, 2012 for the 2010 IC Program, but determined that performance between target and maximum had been achieved for the one-year performance period ending June 30, 2012 under the 2012 IC Plan. Based on such performance, the Compensation Committee approved a payment in the amount of $659,961 for Mr. Coons. At its meeting on July 24, 2013, the Compensation Committee reviewed and certified Perceptive Software’s business results for the fiscal year ending June 30, 2013, and determined that threshold performance was not met during the one-year performance period ending June 30, 2013 for the 2010 IC Program, but determined that performance slightly below target had been achieved for the one-year performance period ending June 30, 2013 under the 2012 IC Plan. Based on such performance, the Compensation Committee approved a payment in the amount of $248,596 for Mr. Coons. They also reviewed and certified that the safety-net restricted stock units associated with the 2010 IC Plan were earned and Mr. Coons received 16,171 units that became 100% vested on July 25, 2013.

Total Long-Term Incentive Compensation

In consultation with Pearl Meyer & Partners, the Compensation Committee redesigned the Company’s long-term incentive plan in 2012 to strengthen the link between financial goals, stockholder interests and executive compensation by increasing the performance period to three years and adding relative total shareholder return (“TSR”) and relative return on invested capital (“ROIC”) measured against the S&P 500 Technology Index as the performance measures. For the 2013 long-term incentive compensation opportunity, the Compensation Committee wanted to maintain continuity with the stockholder friendly metrics that were established in the previous year, and therefore, determined that approximately 80% of the long-term incentive plan metrics should be based on the Company’s performance relative to the market. In addition, the market comparator was changed from the S&P 500 Technology Index to the S&P MidCap Technology Index for the 2013 long-term incentive compensation opportunity reflecting the Company’s move from the S&P 500 Index to the S&P MidCap 400 Index in September 2012. The Compensation Committee also wanted to focus management on an additional key goal for 2013 that was consistent with the Company’s long-term strategy, but did not want to duplicate metrics already utilized under the short-term incentive plans. Services and software revenue was added as a metric for 2013 performance-based restricted stock units with a one-year performance period.

Under the 2013 long-term incentive plan approved by the Compensation Committee, 100% of Mr. Rooke’s long-term incentive compensation opportunity is performance-based, comprised as follows: (i) a cash-based award based on relative TSR for a three-year performance period, representing 40% of the total award opportunity; (ii) performance-based restricted stock units based on relative ROIC for a three-year performance period, representing 40% of the total award opportunity; and (iii) performance-based restricted stock units based on the Company’s services and software revenue for a one-year performance period, representing 20% of the total award. The other Named Executive Officers have a long-term incentive compensation opportunity for 2013 that is 70% performance-based (a cash-based award based on relative TSR for a three-year performance period, representing 28% of the total award opportunity; performance-based restricted stock units based on relative ROIC for a three-year performance period, representing 28% of the total award opportunity; and performance-based restricted stock units based on the Company’s services and software revenue for a one-year performance period, representing 14% of the total award opportunity) and 30% comprised of time-based restricted stock units.

To determine long-term incentive award levels, the Company utilizes peer group data and market survey data, reviews the value of prior equity awards made to each Named Executive Officer, and evaluates each Named Executive Officer’s expected future contribution to business results. The CEO then makes a long-term incentive award recommendation for each of the Named Executive Officers, other than himself, to the Compensation Committee based on this analysis. The Vice President of Human Resources makes a recommendation to the Compensation Committee for the CEO based on the competitive market data. The Compensation Committee reviews management’s analysis and recommendations and the peer group data and is ultimately responsible for determining the size of the long-term incentive awards and approving the equity grants.

 

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For each of the Named Executive Officers, the Compensation Committee has awarded long-term incentive award opportunities comprised of cash-based and equity-based awards, as set forth in the discussion below. The Company utilizes a combination of cash-based and equity-based compensation to foster and promote the long-term financial success of the Company and to materially increase stockholder value by motivating superior performance by executive officers. By providing executive officers with an ownership interest, their interests are more closely aligned with those of the Company’s stockholders.

 

   

2013 Cash-based Long-Term Incentive Awards.    On March 8, 2013, the Compensation Committee awarded each of the Named Executive Officers a cash-based long-term incentive award opportunity pursuant to the 2013-2015 Long-Term Incentive Plan (the “2013-2015 LTIP”). The performance metric under the 2013-2015 LTIP is the Company’s TSR measured against the TSR of companies in the S&P MidCap Technology Index for the period commencing January 1, 2013 and ending December 31, 2015. At the end of the three-year performance period, the Compensation Committee will measure the Company’s TSR against the companies in the S&P MidCap Technology Index. Payouts under the 2013-2015 LTIP range from 0% if the Company’s TSR rank is at less than the 25th percentile; 25% at the 25th percentile, 50% at the 40th percentile; 100% at the 50th percentile; 150% at the 70th percentile; and 200% at the 90th percentile. If amounts are earned under the 2013-2015 LTIP, the cash payout will occur prior to March 15, 2016.

The Named Executive Officer must be employed on the last day of the performance period to earn an LTIP payout. Termination of employment prior to such time for any reason, other than death, disability or retirement, will result in forfeiture of the award. In the event of a Named Executive Officer’s death, disability (as defined in the Company’s Stock Incentive Plan) or retirement (as defined in the Award Agreement) during the performance period, a pro-rated portion of the award may be earned based on the actual attainment as of the end of the performance period and will be paid to the executive or his estate prior to March 15, 2016.

The Compensation Committee may exercise negative discretion in determining any payout to an executive under the 2013-2015 LTIP applying any factors that it deems appropriate in its sole discretion under the circumstances.

The minimum, target and maximum award opportunities established under the 2013-2015 LTIP for each of the Named Executive Officers are set forth in the following table:

 

Name

   Minimum      Target      Maximum  

P.A. Rooke

   $ 470,000       $ 1,880,000       $ 3,760,000   

J.W. Gamble, Jr.

     98,000         392,000         784,000   

M.S. Canning

     98,000         392,000         784,000   

S.T.R. Coons

     63,000         252,000         504,000   

R.J. Patton

     56,000         224,000         448,000   

 

   

2013 Equity-based Long-Term Incentive Awards.    On March 8, 2013, the Compensation Committee awarded each of the Named Executive Officers an equity-based award comprised of two performance-based restricted stock unit grants, one of which is relative to the market and has a three-year performance period and one of which is based on an internal company metric with a one-year performance period. The performance measure for the relative performance-based restricted stock units is the Company’s relative ROIC measured against the ROIC of the companies in the S&P MidCap Technology Index for the period commencing January 1, 2013 and ending December 31, 2015. The performance-based restricted stock units to be awarded based on the Company’s achievement of its objective, if any, will be determined by the Compensation Committee in 2016, and if earned will be settled on February 24, 2016. The performance-based restricted stock units that may be earned range from 0% if the Company’s ROIC rank is at less than the 25th percentile; 25% at the 25th percentile, 50% at the 40th percentile; 100% at the 50th percentile; 150% at the 70th percentile; and 200% at the 90th percentile.

The Named Executive Officer must be employed on the last day of the performance period to earn the performance-based restricted stock units. Termination of employment prior to such time for any reason,

 

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other than death, disability or retirement, will result in forfeiture of the award. In the event of a Named Executive Officer’s death, disability (as defined in the Company’s Stock Incentive Plan) or retirement (as defined in the Award Agreement) during the performance period, a pro-rated portion of the performance-based restricted stock unit may be earned based on the actual attainment as of the end of the performance period and will be paid to the executive or his estate on February 24, 2016.

The minimum, target and maximum award levels for the three-year performance-based restricted stock unit awards are set forth in the following table. The fair market values are computed using the closing price of the Common Stock on the date of grant ($23.66).

 

     2013-2015 Performance-Based RSU Awards (ROIC)  

Name

   RSUs(#)
Min
     RSUs(#)
Target
     RSUs(#)
Max
     FMV at  Grant
(Target)
 

P.A. Rooke

     20,000         80,000         160,000       $ 1,892,800   

J.W. Gamble, Jr.

     4,175         16,700         33,400         395,122   

M.S. Canning

     4,175         16,700         33,400         395,122   

S.T.R. Coons

     2,700         10,800         21,600         255,528   

R.J. Patton

     2,400         9,600         19,200         227,136   

The performance measure for the performance-based restricted stock units with a one-year performance period (January 1, 2013 through December 31, 2013) is the Company’s services and software revenue. The revenue performance objective is $870 million at minimum attainment, $995 million at target attainment and $1,120 million at maximum attainment. The performance-based restricted stock units to be awarded based on the Company’s achievement of its objective, if any, will be determined by the Compensation Committee in 2014, with vesting and settlement of any earned performance-based restricted stock units to occur in three approximately equal installments (34%, 33% and 33%, respectively) on February 24, 2014, February 24, 2015 and February 24, 2016, based on the Named Executive Officer’s continued employment on each vesting date.

The Named Executive Officer must be employed on the last day of the performance period to earn the performance-based restricted stock units. Termination of employment prior to such time for any reason will result in forfeiture of the award. The vesting of any earned performance-based restricted stock units after the end of the performance period will be accelerated in the event of the Named Executive Officer’s death or disability. In the event of the Named Executive Officer’s retirement occurring after the completion of the performance period, the earned performance-based restricted stock units will continue to vest and settle on the dates set forth in the award agreement.

The minimum, target and maximum award levels for the one-year performance-based restricted stock unit awards are set forth in the following table. The fair market values are computed using the closing price of the Common Stock on the date of grant ($23.66).

 

     2013 Performance-Based RSU Awards  (Services/Software Revenue)         

Name

   RSUs(#)
    Min     
     RSUs(#)
     Target    
     RSUs(#)
    Max     
     FMV at  Grant
(Target)
     Earned
RSUs  (#)
 

P.A. Rooke

     20,000         40,000         80,000       $ 946,400         38,968   

J.W. Gamble, Jr.

     4,200         8,400         16,800         198,744         8,183   

M.S. Canning

     4,200         8,400         16,800         198,744         8,183   

S.T.R. Coons

     2,700         5,400         10,800         127,764         5,261   

R.J. Patton

     2,400         4,800         9,600         113,568         4,676   

At its meeting on February 19, 2014, the Compensation Committee reviewed and certified the business results for the 2013 performance-based restricted stock unit awards and determined that the Company’s services and software revenue for the one-year performance period was $988.6 million (97% of target performance) and awarded the Named Executive Officers a corresponding number of restricted stock units, as set forth in the table above.

 

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The Compensation Committee may exercise negative discretion in determining whether performance-based restricted stock units shall be earned by a Named Executive Officer applying any factors that it deems appropriate in its sole discretion under the circumstances.

On February 20, 2013, the Compensation Committee awarded each of the Named Executive Officers, except for Mr. Rooke, time-based restricted stock units. The Compensation Committee believes that a long-term incentive opportunity comprised of a combination of performance-based and time-based restricted stock units will motivate the Named Executive Officers on the achievement of key performance goals, while maintaining a retention focus. The time-based restricted stock unit awards will vest and settle in three approximately equal installments (34%, 33% and 33%, respectively) on February 24, 2014, February 24, 2015 and February 24, 2016, based on the continued employment of the Named Executive Officer on each vesting date. The time-based restricted stock units awarded are set forth in the following table. The fair market values are computed using the closing price of the Common Stock on the date of grant ($22.13).

 

     Time-Based RSU Awards  

Name

   RSUs(#)      FMV at Grant  

P.A. Rooke

     0       $ 0   

J.W. Gamble, Jr.

     19,100         422,683   

M.S. Canning

     19,100         422,683   

S.T.R. Coons

     12,300         272,199   

R.J. Patton

     11,000         243,430   

 

   

2012 Cash-based Long-Term Incentive Awards.    On February 22, 2012, the Compensation Committee awarded each of the Named Executive Officers a cash-based long-term incentive award opportunity pursuant to the 2012-2014 Long-Term Incentive Plan (the “2012-2014 LTIP”). The performance metric under the 2012-2014 LTIP is the Company’s TSR measured against the TSR of companies in the S&P 500 Technology Index for the period commencing January 1, 2012 and ending December 31, 2014. At the end of the three-year performance period, the Compensation Committee will measure the Company’s TSR against the companies in the S&P 500 Technology Index. Payouts under the 2012-2014 LTIP range from 0% if the Company’s TSR rank is at less than the 25th percentile; 25% at the 25th percentile, 50% at the 40th percentile; 100% at the 50th percentile; 150% at the 70th percentile; and 200% at the 90th percentile. If amounts are earned under the 2012-2014 LTIP, the cash payout will occur prior to March 15, 2015.

The Named Executive Officer must be employed on the last day of the Performance Period to earn an LTIP payout. Termination of employment prior to such time for any reason, other than death, disability or retirement, will result in forfeiture of the award. In the event of a Named Executive Officer’s death, disability or retirement (“disability” and “retirement,” each as defined in the Company’s Stock Incentive Plan) during the performance period, a pro-rated portion of the award may be earned based on the actual attainment as of the end of the performance period and will be paid to the executive or his estate prior to March 15, 2015.

The Compensation Committee may exercise negative discretion in determining any payout to an executive under the 2012-2014 LTIP applying any factors that it deems appropriate in its sole discretion under the circumstances.

The minimum, target and maximum award opportunities established under the 2012-2014 LTIP for each of the Named Executive Officers are set forth in the following table:

 

Name

   Minimum      Target      Maximum  

P.A. Rooke

   $ 575,000       $ 2,300,000       $ 4,600,000   

J.W. Gamble, Jr.

     105,000         420,000         840,000   

M.S. Canning

     105,000         420,000         840,000   

S.T.R. Coons

     56,875         227,500         455,000   

R.J. Patton

     61,250         245,000         490,000   

 

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2012 Equity-based Long-Term Incentive Awards.    On February 22, 2012, the Compensation Committee awarded Mr. Rooke an equity-based award that was in the form of a performance-based restricted stock unit grant. The other Named Executive Officers, were awarded an equity-based long-term incentive opportunity comprised of performance-based restricted stock units and time-based restricted stock units. The Compensation Committee believes that a long-term incentive opportunity comprised of a combination of performance-based and time-based restricted stock units will motivate the Named Executive Officers on the achievement of key performance goals, while maintaining a retention focus. The performance measure for the performance-based restricted stock units is the Company’s relative ROIC measured against the ROIC of the companies in the S&P 500 Technology Index for the period commencing January 1, 2012 and ending December 31, 2014. The performance-based restricted stock units to be awarded based on the Company’s achievement of its objective, if any, will be determined by the Compensation Committee in 2015, and if earned will be settled on February 24, 2015. The performance-based restricted stock units to be earned range from 0% at less than the 25th percentile; 25% at the 25th percentile, 50% at the 40th percentile; 100% at the 50th percentile; 150% at the 70th percentile; and 200% at the 90th percentile. The Named Executive Officer must be employed on the last day of the performance period to earn the performance-based restricted stock units. Termination of employment prior to such time for any reason, other than death, disability or retirement, will result in forfeiture of the award. In the event of a Named Executive Officer’s death, disability or retirement (“disability” and “retirement,” each as defined in the Company’s Stock Incentive Plan) during the performance period, a pro-rated portion of the performance-based restricted stock unit may be earned based on the actual attainment as of the end of the performed period and will be paid to the executive or his estate on February 24, 2015.

The Compensation Committee may exercise negative discretion in determining whether performance-based restricted stock units shall be earned by a Named Executive Officer applying any factors that it deems appropriate in its sole discretion under the circumstances.

The time-based restricted stock unit awards will vest and settle in three approximately equal installments (34%, 33% and 33%, respectively) on February 24, 2013, February 24, 2014 and February 24, 2015, based on the continued employment of the Named Executive Officer on each vesting date.

The time-based restricted stock units awarded, as well as the minimum, target and maximum award levels for the performance-based restricted stock unit awards are set forth in the following table. The fair market values are computed using the closing price of the Common Stock on the date of grant ($37.30).

 

     Time-Based RSU Awards      Performance-Based RSU Awards  

Name

   RSUs(#)      FMV at Grant      RSUs(#)
Min
     RSUs(#)
Target
     RSUs(#)
Max
     FMV at Grant
(Target)
 

P.A. Rooke

     0       $ 0         15,550         62,200         124,400       $ 2,320,060   

J.W. Gamble, Jr.

     9,800         365,540         2,850         11,400         22,800         425,220   

M.S. Canning

     9,800         365,540         2,850         11,400         22,800         425,220   

S.T.R. Coons

     5,300         197,690         1,550         6,200         12,400         231,260   

R.J. Patton

     5,700         212,610         1,675         6,700         13,400         249,910   

 

   

2011 Long-Term Incentive Awards.    On February 23, 2011, the Compensation Committee awarded Mr. Rooke a long-term incentive opportunity that was 100% performance-based. The other Named Executive Officers, were awarded a long-term incentive opportunity comprised 70% of performance-based restricted stock units and 30% of time-based restricted stock units.

The performance measure for the performance-based restricted stock units was worldwide free cash flow, excluding all acquisition activity and pension contributions. The performance period was January 1, 2011 through December 31, 2011. Minimum attainment for free cash flow, excluding all acquisition activity and pension contributions was established at $370 million, target attainment was established at $420 million and maximum attainment was established at $470 million. If earned, the performance-based restricted stock vest and settle in three approximately equal installments (34%, 33% and 33%,

 

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respectively on February 24, 2012, February 24, 2014 and February 24, 2015, based on the Named Executive Officer’s continued employment on each vesting date. To earn the performance-based restricted stock units, the Named Executive Officer must be employed on the last day of the performance period. Termination of employment prior to such time for any reason will result in forfeiture of the award. The vesting of any earned performance-based restricted stock units after the end of the performance period will be accelerated in the event of the Named Executive Officer’s death, disability or retirement occurring after the completion of the performance period. Because the Company failed to attain the minimum performance for free cash flow for the January 1, 2011 through December 31, 2011 performance period, the Compensation Committee determined at its meeting on February 22, 2012 that no performance-based restricted stock units were earned by the Named Executive Officers and the awards were cancelled.

The time-based restricted stock unit awards will vest and settle in three approximately equal installments (34%, 33% and 33%, respectively) on February 24, 2013, February 24, 2014 and February 24, 2015, based on the continued employment of the Named Executive Officer on each vesting date. The time-based restricted stock units awarded, as well as the minimum, target and maximum award levels for the performance-based restricted stock unit awards are set forth in the following table. The fair market values are computed using the closing price of the Common Stock on the date of grant ($37.57).

 

     Time-Based RSU Awards      Performance-Based RSU Awards*  

Name

   RSUs(#)      FMV at Grant      RSUs(#)
Min
     RSUs(#)
Target
     RSUs(#)
Max
     FMV at Grant
(Target)
 

P.A. Rooke

     0       $ 0         52,650         105,300         157,950       $ 3,956,121   

J.W. Gamble, Jr.

     9,480         356,164         11,060         22,120         33,180         831,048   

M.S. Canning

     9,480         356,164         11,060         22,120         33,180         831,048   

S.T.R. Coons

     2,400         90,168         2,800         5,600         8,400         210,392   

R.J. Patton

     5,550         208,514         6,475         12,950         19,425         486,532   

 

  * The Company failed to attain the minimum performance for free cash flow for the 2011 performance period and the Compensation Committee determined that no performance-based restricted stock units were earned by the Named Executive Officers and the awards were cancelled.

 

   

Grant Practice of Equity-Based Awards.    Equity-based awards are granted under the Lexmark International, Inc. Stock Incentive Plan (the 2013 Equity Compensation Plan for awards made after April 30, 2013) and must be approved by the Compensation Committee. Grants of equity-based awards are generally effective on the date that the Compensation Committee approves the award. The Compensation Committee delegated authority to approve awards to each of the CEO and the Vice President of Human Resources, excluding grants made to Section 16 executive officers, on April 26, 2006. The terms of this delegation limit the type and size of each award and all awards in the aggregate made between meetings of the Compensation Committee and the CEO or Vice President of Human Resources is required to present a report of the equity-based awards that have been granted between each Compensation Committee meeting at the next regularly scheduled Compensation Committee meeting. No more than 60,000 shares may be granted between regularly-scheduled Compensation Committee meetings and no more than 15,000 shares may be granted to an individual pursuant to an equity-based award during such period. Restricted stock grants are limited to a maximum value of $350,000 per individual and must include a vesting schedule of not less than three years. Stock option awards must vest over a period of not less than three years, must not have a term that exceeds ten years, and must not have an exercise price lower than the closing price of the Company’s stock on the grant date. Awards are granted on the first business day of the month following approval by the CEO or the Vice President of Human Resources.

 

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Retirement Plans and Other Benefits

The Company provides retirement and other benefit plans in which qualified employees, including each of the Named Executive Officers, are eligible to participate. Each plan is designed to offer competitive benefits in order to attract and retain talent and is described in detail as follows:

 

   

Defined Benefit Retirement Plans.    All employees in the United States, including each of the Named Executive Officers other than Mr. Coons, were eligible to participate in the Lexmark Retirement Growth Account Plan prior to April 3, 2006. The plan is a cash balance defined benefit plan under which benefit accruals were frozen effective April 3, 2006. To the extent that a participant’s eligible compensation was not considered under the Lexmark Retirement Growth Account Plan due to the Internal Revenue Code Section 401(a)(17) limit, the Company maintains a non-qualified, unfunded, noncontributory plan known as the Lexmark Nonqualified Supplemental Retirement Plan. This plan provides for the same benefits that would have been provided under the cash balance defined benefit plan without such limitation. Benefit accruals under the Lexmark Nonqualified Supplemental Retirement Plan were frozen as a result of the Company’s actions to freeze benefits under the Lexmark Retirement Growth Account Plan. A description of the Lexmark Retirement Growth Account Plan and the Lexmark Nonqualified Supplemental Retirement Plan follows the “Pension Benefits” table.

 

   

Defined Contribution Plans.    The Lexmark Savings Plan is a tax-favored 401(k) plan that allows eligible employees, including each of the Named Executive Officers to contribute on a pre-tax basis up to 50% of eligible compensation, as defined in the plan, subject to Internal Revenue Code limitations ($17,500 for pre-tax contributions and $5,500 for catch-up contributions in 2013). The Company makes an automatic Company contribution of 1% of each employee’s eligible compensation and a Company matching contribution of up to 5% of the employee’s eligible compensation.

 

   

Supplemental Deferred Compensation Plan.    The Lexmark Supplemental Savings and Deferred Compensation Plan allows eligible employees, including each of the Named Executive Officers, other than Mr. Coons, to defer up to 100% of eligible compensation in excess of the Internal Revenue Code Section 401(a)(17) limit ($255,000 in 2013) and to receive a Company matching contribution of up to 6% of the participant’s eligible excess compensation. Mr. Coons became eligible to participate in the Lexmark Supplemental Savings and Deferred Compensation Plan effective January 1, 2014. A description of the Lexmark Supplemental Savings and Deferred Compensation Plan follows the “Non-Qualified Deferred Compensation” table.

 

   

Deferred Stock Units.    The Lexmark International, Inc. 2013 Equity Compensation Plan (the Lexmark Stock Incentive Plan for deferrals prior to May 1, 2013) entitles a participant, including each of the Named Executive Officers, to elect to defer receipt of all or a portion of his annual incentive compensation, and receive an award of deferred stock units. These deferred stock units are fully vested at all times and settle on the earlier of the fifth anniversary of the grant date or the termination date due to retirement (subject to a six-month delay as required under Internal Revenue Code Section 409A), death or disability. The participant also receives an additional award of supplemental deferred stock units upon deferral with a value equal to 20% of the compensation deferred. These supplemental deferred stock units vest and settle on the fifth anniversary of the date that the compensation deferred would otherwise have been paid, subject to continued employment from the date of deferral through the settlement date. Supplemental deferred stock units will vest and settle in full upon termination of employment due to death or disability.

 

   

Health and Welfare Benefits.    Each of the Named Executive Officers are eligible to participate in the same health and welfare benefit plans that are available to all eligible employees of the Company or Perceptive Software, as applicable.

Termination and Change in Control Agreements

Each of the Named Executive Officers has entered into a change in control agreement with the Company, effective as of November 1, 2012 (effective as of July 1, 2013 for Mr. Coons). The Compensation Committee believes that these agreements are in the best interest of the Company and its stockholders to ensure the

 

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continued focus and dedication of each Named Executive Officer to the business of the Company without the distraction or personal financial concern if the Company were to be acquired by another company. These agreements ensure that the Named Executive Officers will continue to perform services on behalf of the Company when a change in control is pending, and protects the Named Executive Officers against the potential loss of their positions following a change in control. The agreements provide certain severance benefits only upon a double trigger, meaning severance benefits will only be paid to a Named Executive Officer if the following two events occur: (i) a change in control of the Company, and (ii) within 12 months prior to a change in control, the Named Executive Officer’s employment is terminated by the Company in connection with or in anticipation of the Change in Control, or within 24 months following the change in control of the Company, the Named Executive Officer’s employment is terminated by the Company without “cause” or by the Named Executive Officer with “good reason.” A description of the material terms and potential payments provided under the change in control agreements for each of the Named Executive Officers is included in the narrative of the “Termination and Change in Control Payments” section.

In addition, each of the Named Executive Officers has entered into an employment agreement with the Company, effective as of November 1, 2012 (effective as of July 1, 2013 for Mr. Coons), which provides for a fixed term of employment through October 31, 2014. The agreements for each of the Named Executive Officers provide severance benefits upon an involuntary termination of employment without “cause” or a voluntary termination by a Named Executive Officer with “good reason.” The Compensation Committee believes that the severance benefits offered under the employment agreements represent a significant component of each Named Executive Officer’s total compensation package, are market competitive and not excessive, and are essential to the Company’s ability to attract and retain key executive officers. The benefits offered under the employment agreements allow the executives to continue to focus their efforts and attention on the Company’s business operations and execution of the Company’s strategic plan. A description of the material terms and the payments provided under the employment agreements for each of the Named Executive Officers is included in the narrative of the “Termination and Change in Control Payments” section.

Perquisites

The Company provides each of the Named Executive Officers with perquisites that the Company and the Compensation Committee believe are reasonable, not excessive, and consistent with its overall compensation philosophy. Each of the Named Executive Officers is entitled to reimbursement for qualified payments towards financial planning and may receive up to $6,000 ($12,000 for the Chief Executive Officer) annually.

Stock Ownership

The Compensation Committee believes in aligning the interests of executive officers with the long-term interests of stockholders. Consistent with this philosophy, the Compensation Committee recommended, and the Board approved, stock ownership guidelines for certain executive officers, including each of the Named Executive Officers. These guidelines require that until the ownership goal is reached, each of the Named Executive Officers must retain a percentage of after tax net shares on the exercise of any stock options and the vesting and settlement of any restricted stock units. That percentage is 100% for the Chief Executive Officer and 50% for each of the other Named Executive Officers. The guidelines exclude unexercised stock options, unvested restricted stock units and unvested deferred stock units and require the Chief Executive Officer to hold a minimum of five times base salary and each of the other Named Executive Officers to hold a minimum of three times base salary in value of the Common Stock. The Compensation Committee annually reviews the actual stock ownership of each Named Executive Officer compared to his stock ownership guideline. Information on the number of stock options, unvested restricted stock units and unvested deferred stock units, which are not counted for ownership guidelines, is also presented to the Compensation Committee during the review of stock ownership.

Risk Assessment

In designing compensation plans and programs for executive officers of the Company, including the Named Executive Officers, the Compensation Committee structures such plans and programs to balance risk and reward,

 

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while mitigating the incentive for excessive risk taking. The following characteristics of the Company’s executive compensation plans and programs limit the possibility for excessive risk taking:

 

   

The base salary is a fixed amount, and therefore does not encourage risk taking.

 

   

The annual incentive compensation opportunity for each Named Executive Officer is limited to six-tenths of one percent of Operating Income, in accordance with the Lexmark International, Inc. Senior Executive Incentive Compensation Plan.

 

   

The Company’s annual incentive compensation program and long term incentive compensation program have used metrics such as revenue growth (including license and subscription revenue growth for Perceptive Software employees), operating income, cash cycle, days sales outstanding and free cash flow for many years and the Company has seen no evidence that it encourages unnecessary or excessive risk taking.

 

   

The long-term incentive opportunity is comprised of time-based restricted stock units and one-year performance-based restricted stock units that vest over multiple years and/or performance-based restricted stock units and a cash-based long-term incentive opportunity with three-year relative performance metrics tied to return on invested capital and total shareholder return measured against the companies in the S&P MidCap Technology Index, respectively, which aligns the Named Executive Officer’s interests to long-term stockholder interests.

 

   

Members of the Compensation Committee approve the final incentive compensation awards after reviewing the executive officer’s and the Company’s performance, and may utilize negative discretion to reduce incentive compensation awards based on a variety of performance objectives, thereby diversifying the risk.

 

   

Incentive compensation and equity awards are subject to forfeiture and recoupment as described in the “Executive Compensation Recovery Policy” section.

 

   

The Named Executive Officers are subject to stock ownership guidelines as described in the “Stock Ownership” section.

Tax Deductibility of Pay

Section 162(m) of the Internal Revenue Code generally disallows the deductibility of compensation paid to each of the Named Executive Officers in amounts in excess of $1 million unless the compensation is paid pursuant to pre-determined performance objectives that meet the requirements of Section 162(m), including stockholder approval. To ensure deductibility of non-discretionary annual incentive awards, the Lexmark International, Inc. Senior Executive Incentive Compensation Plan, which was presented to and approved by the Company’s stockholders at the 2004 Annual Meeting of Stockholders, sets forth a maximum annual incentive award to each participant equal to six-tenths of one percent of Operating Income, as defined in the plan. To ensure the deductibility of long-term incentive awards and equity awards, the Lexmark International, Inc. 2013 Equity Compensation Plan, which was presented to and approved by the Company’s stockholders, sets forth a maximum number of shares that may be awarded to a participant as stock options or stock appreciation rights over a five-year period equal to 3,000,000 shares, and further sets forth a maximum long-term incentive award to each participant awarded during a calendar year to $10,000,000, if the award is denominated in cash, or 400,000 shares for stock-based awards. The Compensation Committee and the Board of Directors believe that it is essential to retain the ability to reward and motivate executives based on the assessment of an individual’s performance, even though some or all of any such discretionary payments may not be deductible due to the requirements of Section 162(m). Accordingly, the Compensation Committee reserves the right to award discretionary incentive awards to executive officers and adopt other compensation plans and arrangements which may not be deductible under Section 162(m). Any such incentive payments would be based on the Compensation Committee’s qualitative assessment of the applicable executive’s individual performance and contribution.

Tally Sheets

The Compensation Committee annually reviews tally sheets that set forth the total annual compensation for each of the Named Executive Officers and certain other executive officers. The Compensation Committee

 

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believes that tally sheets are important to maintain visibility to amounts realized by each of the Named Executive Officers annually under various termination and change in control scenarios. The tally sheets include the dollar amount that would be realized by the executive officer under four termination and change in control scenarios. These scenarios include voluntary termination (including retirement), involuntary termination without cause or voluntary termination by the employee for good reason, change in control without a termination of employment, and termination following a change in control.

Executive Compensation Recovery Policy

In February 2009, the Compensation Committee and the Corporate Governance and Public Policy Committee recommended to the Board of Directors the adoption of an Executive Compensation Recovery Policy that is applicable to certain employees, including each of the Named Executive Officers. The Board of Directors adopted the policy on February 19, 2009, and it applies to all incentive compensation and equity awards granted after such date. Under the Executive Compensation Recovery Policy, if a Covered Employee’s fraud, gross negligence or intentional misconduct causes the Company to restate all or a portion of its financial information that has been filed with the Securities and Exchange Commission, the Company, to the extent permitted by applicable law, shall be able to recoup certain payments from the Covered Employee, who engaged in the prohibited conduct, and from certain other executive officers, including each of the Named Executive Officers, who benefited from such misconduct. With respect to a Covered Employee who engages in the prohibited conduct requiring a restatement of financial information, the Company shall recoup (i) 100% of the incentive compensation (annual bonuses, long-term incentive compensation, and performance-based equity awards) paid to the Covered Employee during the period beginning at the time of the initial public disclosure of the misstated financial information and ending 12 months following the date of the initial filing of any financial statement that must be restated (the “Recovery Period”), and (ii) 100% of the gains realized by the Covered Employee from the vesting and settlement of any restricted stock unit or other equity award or the vesting or exercise of any stock option, the sale of any stock acquired pursuant to the vesting and settlement of any restricted stock unit or any other equity award or the vesting and exercise of any stock option, and all cash awards granted under the Company’s equity incentive plans. In addition, the Policy requires the Covered Employee to forfeit any vested and unvested stock options, restricted stock units and any other equity awards. With respect to certain other Covered Employees, including each Named Executive Officer, who benefits from the misconduct, the Policy provides that the Company may recoup from such Covered Employees the excess incentive compensation paid during the Recovery Period over the amount that would have been paid if the financial information had been correctly reported.

In addition, each stock option agreement and restricted stock unit agreement awarded to employees of the Company, including each Named Executive Officer, provides that if the employee violates the non-compete, non-interference, non-disparagement, or non-disclosure restrictions set forth in the agreement or otherwise acts against the best interests of the Company, the employee shall (i) forfeit any unexercised portion of the stock option or unvested portion of the restricted stock unit; and (ii) repay to the Company an amount equal to the stock option gains or the income realized upon vesting of the restricted stock units within 18 months preceding the earlier of the violation of one of the restrictions or the termination of the employee’s employment through the later of 18 months following the violation of one of the restrictions or such period of time it takes the Company to discover the violation.

 

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COMPENSATION COMMITTEE REPORT

The Compensation and Pension Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on the review and discussions with management, the Compensation and Pension Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Kathi P. Seifert, Chair

Jared L. Cohon

William R. Fields

 

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EXECUTIVE COMPENSATION

The information set forth below describes the components of the total compensation of each of the Named Executive Officers. The Named Executive Officers are determined based on 2013 total compensation excluding the change in pension value and nonqualified deferred compensation earnings, as disclosed in the Summary Compensation Table. Also described below are the contracts, plans, and arrangements providing for payments to each of the Named Executive Officers in connection with a termination of the Named Executive Officer, a change in control of the Company or certain changes in the Named Executive Officer’s responsibilities.

The following table sets forth the total compensation for each of the Named Executive Officers during the year ended December 31, 2013.

SUMMARY COMPENSATION TABLE

 

Name and Principal

Position

   Year      Salary
($)
     Bonus
($)(1)
     Stock
Awards ($)
(2)
     Option
Awards ($)
     Non-Equity
Incentive
Plan
Compensation
($)(3)
     Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)(4)
     All
Other
Compensation
($)(5)
     Total
($)
 

P.A. Rooke

     2013       $ 828,462       $ 0       $ 2,839,200       $ 0       $ 1,104,359       $ 0       $ 60,982       $ 4,833,003   

Chairman and Chief Executive

Officer

     2012         803,077         0         2,320,060         0         163,200         57,419         53,734         3,397,490   
     2011         800,000         0         3,956,121         0         88,340         62,336         110,454         5,017,251   

J.W. Gamble, Jr.

     2013         564,808         0         1,016,549         0         518,335         0         37,569         2,137,261   

Executive Vice President and

Chief Financial Officer

     2012         552,115         0         790,760         0         74,983         2,753         36,577         1,457,188   
     2011         541,539         0         1,187,212         0         76,077         3,094         71,890         1,879,812   

M.S. Canning

     2013         514,615         0         1,016,549         0         550,115         0         35,654         2,116,933   

Executive Vice President and

President of Imaging Solutions

and Services

     2012         501,923         0         790,760         0         68,167         31,888         35,815         1,428,553   
     2011         495,769         0         1,187,212         0         84,392         32,665         70,783         1,870,821   
                          

S.T.R. Coons

     2013         439,327         0         655,491         0         502,190         0         15,300         1,612,308   

Vice President and President &

CEO of Perceptive Software

     2012         426,635         0         428,950         0         786,204         0         5,250         1,647,039   

R.J. Patton

     2013         389,135         0         584,134         0         332,810         0         25,454         1,331,533   

Vice President, General

Counsel and Secretary

     2012         376,442         0         462,520         0         44,750         10,680         23,654         918,046   
     2011         363,462         0         695,046         0         31,440         12,166         45,635         1,147,749   

 

 

 

(1) No discretionary bonuses have been awarded to any of the Named Executive Officers during the past three fiscal years. Refer to the Non-Equity Incentive Compensation Plan column for payments awarded based on the achievement of pre-established performance objectives.

 

(2) Consists of the grant date fair value dollar amount computed in accordance with the provisions of the FASB guidance on share-based payments and related interpretations for all restricted stock units granted during the years presented above. The grant date fair value for restricted stock units with time-based vesting is computed by multiplying the number of units by the closing price of a share of Common Stock on the grant date. For the performance-based restricted stock units, the grant date fair value is computed by multiplying the target number of units by the closing price of a share of Common Stock on the grant date, based on the Company’s determination that performance at target would be the probable outcome of the performance condition as of the grant date.

 

     The grant date fair value for the 2013 performance-based restricted stock units for the Named Executive Officers receiving such awards would be as follows if the maximum performance were achieved for the 2013-2015 performance period: Mr. Rooke — $3,785,600; Mr. Gamble — $790,244; Mr. Canning — $790,244; Mr. Coons — $511,056; and Mr. Patton — $454,272. The grant date fair value for the 2013 performance-based restricted stock units for the Named Executive Officers receiving such awards would be as follows if the maximum performance were achieved for the 2013 performance period: Mr. Rooke — $1,892,800; Mr. Gamble — $397,488; Mr. Canning — $397,488; Mr. Coons — $255,528; and Mr. Patton — $227,136. Refer to the Compensation Discussion and Analysis “2013 Long-Term Incentive Awards” section for further detail.

 

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     At its meeting on February 20, 2014, the Compensation Committee reviewed and certified the business results for the performance-based restricted stock unit awards with the 2013 performance period, and determined that 97% of Target performance had been attained for the performance period.

 

     At its meeting on February 22, 2012, the Compensation Committee reviewed and certified the business results for the 2011 performance-based restricted stock unit awards, and determined that minimum performance had not been attained for the 2011 performance period. Therefore, no 2011 performance-based restricted stock units were earned and the awards were cancelled.

 

(3) For 2013, consists of annual incentive compensation under the Lexmark International, Inc. Senior Executive Incentive Compensation Plan for the fiscal year ending December 31, 2013. Pursuant to his deferral election, Mr. Rooke elected to defer 100% of his 2013 incentive compensation to receive an award of elective deferred stock units. Mr. Rooke will also receive a supplemental award of deferred stock units with a value equal to 20% of his elective deferred stock units. Refer to the Nonqualified Deferred Compensation section entitled “Deferred Stock Units” for further information concerning deferred stock unit awards. The amount for Mr. Coons for 2013 also includes $248,596 paid out under the Perceptive Software FY12-FY13 Incentive Compensation Plan. There was no cash-based long-term incentive plan for 2011-2013.

 

     For 2012, consists of annual incentive compensation under the Lexmark International, Inc. Senior Executive Incentive Compensation Plan for the fiscal year ending December 31, 2012. There was no cash-based long-term incentive plan for 2010-2012. The amount for Mr. Coons for 2012 also includes $659,961 paid out under the Perceptive Software FY12-FY13 Incentive Compensation Plan.

 

     For 2011, consists of annual incentive compensation under the Lexmark International, Inc. Senior Executive Incentive Compensation Plan for the fiscal year ending December 31, 2011. There was no cash-based long-term incentive plan for 2009-2011.

 

(4) Consists of the change in pension value during the years presented above under the Lexmark Retirement Growth Account Plan and the Lexmark Nonqualified Supplemental Retirement Plan. See the section entitled “Pension Benefits” for a description of these plans. Lexmark does not pay above-market or preferential earnings on nonqualified deferred compensation. For 2013, the amounts were negative, and therefore, zero was reported in the Summary Compensation Table. The actual change in pension value for the Named Executive Officers was as follows: Mr. Rooke ($94,580); Mr. Gamble ($2,135); Mr. Canning ($24,166); Mr. Coons — N/A; and Mr. Patton ($7,656).

 

(5) For 2013, the following table contains a breakdown of the value of compensation and benefits included in the column entitled “All Other Compensation.”

 

Name

   Financial
Planning
Reimbursement
     Matching
Contribution  under
401(k) Plan
     Matching
Contribution
under the
Supplemental
Deferred
Compensation
Plan
     Other      Total  

P.A. Rooke

   $ 1,805       $ 15,300       $ 43,877       $ 0       $ 60,982   

J.W. Gamble, Jr.

     0         15,300         22,269         0         37,569   

M.S. Canning

     1,200         15,300         19,154         0         35,654   

S.T.R. Coons

     0         15,300         0         0         15,300   

R.J. Patton

     0         15,300         10,154         0         25,454   

 

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GRANTS OF PLAN-BASED AWARDS

 

Name

  Grant Date     Estimated Future Payouts Under
Non-Equity Incentive Plan Awards(1)
    Estimated Future Payouts Under
Equity Incentive Plan Awards(2)
    All Other
Stock
Awards:
Number of
Shares of
Stock or
Units
(#)(3)
    All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)
  Exercise or
Base Price
of Option
Awards
($/Sh)
  Grant Date
Fair Value
of Stock
and Option
Awards ($)
(4)
 
    Threshold
($)
    Target
($)
    Maximum
($)
    Threshold
(#)
    Target
(#)
    Maximum
(#)
         

P.A. Rooke

         $ 153,000      $ 1,020,000      $ 2,040,000                 
           470,000        1,880,000        3,760,000                 
    03/08/2013              20,000        80,000        160,000            $ 1,892,800   
    03/08/2013              20,000        40,000        80,000            $ 946,400   

J.W. Gamble, Jr.

           73,313        488,750        977,500                 
      98,000        392,000        784,000                 
    03/08/2013              4,175        16,700        33,400            $ 395,122   
    03/08/2013              4,200        8,400        16,800            $ 198,744   
    02/20/2013                    19,100          $ 422,683   

M.S. Canning

           66,938        446,250        892,500                 
           98,000        392,000        784,000                 
    03/08/2013              4,175        16,700        33,400            $ 395,122   
    03/08/2013              4,200        8,400        16,800            $ 198,744   
    02/20/2013                    19,100          $ 422,683   

S.T.R. Coons

           50,625        337,500        675,000                 
           63,000        252,000        504,000                 
    03/08/2013              2,700        10,800        21,600            $ 255,528   
    03/08/2013              2,700        5,400        10,800            $ 127,764   
    02/20/2013                    12,300          $ 272,199   

R.J. Patton

           45,000        300,000        600,000                 
           56,000        224,000        448,000                 
    03/08/2013              2,400        9,600        19,200            $ 227,136   
    03/08/2013              2,400        4,800        9,600            $ 113,568   
    02/20/2013                    11,000          $ 243,430   

 

 

 

(1) The award opportunity for the 2013 performance period for each Named Executive Officer under the Lexmark International, Inc. Senior Executive Incentive Compensation Plan (“SEICP”) is 0.6% of the Company’s Operating Income, which may be reduced by the Compensation Committee, in its sole discretion, based on any factors it deems reasonable. For 2013, the Compensation Committee has determined that annual incentive awards under the SEICP may be subject to reduction based on the factors set forth in the Company’s 2013 Incentive Compensation Plan. Based on those possible reduction factors, the first row for each Named Executive Officer in this column, entitled “Estimated Future Payouts Under Non-Equity Incentive Plan Awards,” consists of potential future payments of annual incentive compensation with respect to fiscal year 2013 under the SEICP.

The second row consists of potential future payments under the 2013-2015 Long-Term Incentive Plan (“LTIP”). The performance measure for the 2013-2015 LTIP is the Company’s relative total shareholder return (“TSR”) measured against the TSR of companies in the S&P MidCap Technology Index for the performance period commencing January 1, 2013 and ending December 31, 2015. The Named Executive Officer must be employed on the last day of the performance period to earn an LTIP payout. Termination of employment prior to such time for any reason, other than death, disability or retirement, will result in forfeiture of the award. In the event of a Named Executive Officer’s death, disability or retirement (“disability” and “retirement,” each as defined in the Company’s Stock Incentive Plan) during the performance period, a prorated portion of the award may be earned based on the actual attainment as of the end of the performance period. If earned, the cash payout will occur prior to March 15, 2016.

 

(2)

Performance-based restricted stock unit awards in 2013 are granted under the Company’s Stock Incentive Plan. The performance measure for the first row of awards (the “2013-2015 Performance-Based RSUs”) for each Named Executive Officer in this column, entitled “Estimated Future Payouts Under Equity Incentive Plan Awards, is the Company’s relative Return on Invested Capital (“ROIC”) measured against the ROIC of companies in the S&P MidCap Technology Index for the performance period commencing January 1, 2013 and ending December 31, 2015. Settlement of any earned 2013-2015 Performance-Based RSUs will occur on February 24, 2016. Target levels are set based on 100% achievement of the goal. Threshold represents goal

 

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  achievement at the minimum performance level (25%) and maximum represents goal achievement at the maximum performance level (200%). If threshold performance is not achieved during the performance period, then no 2013-2015 Performance-Based RSUs will be earned. The Named Executive Officer must be employed on the last day of the performance period to earn the 2013-2015 Performance-Based RSUs. Termination of employment prior to such time for any reason, other than death, disability or retirement, will result in forfeiture of the award. In the event of a Named Executive Officer’s death, disability or retirement (“disability” and “retirement,” each as defined in the Company’s Stock Incentive Plan) during the performance period, a prorated portion of the 2013-2015 Performance-Based RSUs may be earned based on the actual attainment as of the end of the performance period.

The performance measure for the second row of awards (the “2013 Performance-Based RSUs”) is the Company’s services and software revenue for the performance period commencing January 1, 2013 and ending December 31, 2013. Settlement of any earned 2013 Performance-Based RSUs will occur in three approximately equal installments (34%, 33% and 33%, respectively) on February 24, 2014, February 24, 2015 and February 24, 2016. Target levels are set based on 100% achievement of the goal. Threshold represents goal achievement at the minimum performance level (50%) and maximum represents goal achievement at the maximum performance level (200%). If threshold performance is not achieved during the performance period, then no 2013 Performance-Based RSUs will be earned. The Named Executive Officer must be employed on the last day of the performance period to earn the 2013 Performance-Based RSUs. Termination of employment prior to such time for any reason will result in forfeiture of the award.

 

(3) Restricted stock unit awards in 2013 are granted under the Stock Incentive Plan. The restricted stock units granted February 20, 2013, vest and settle in three approximately equal installments (34%, 33%, 33%, respectively) on February 24, 2014, February 24, 2015 and February 24, 2016.

 

(4) The grant date fair value for time-based restricted stock units was determined by multiplying the number of restricted stock units granted by the closing price of a share of Common Stock on the grant date. The grant date fair value for performance-based restricted stock units was determined by multiplying the number of performance-based restricted stock units at target, which was determined to be the probable outcome of the performance condition as of the grant date, by the closing price of a share of Common Stock on the grant date.

 

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

    Option Awards     Stock Awards  

Name

  Grant Date     Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
    Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
    Option
Exercise
Price
($)
    Option
Expiration
Date
    Grant Date     Number of
Shares or
Units of
Stock That
Have Not
Vested(1)
(#)
    Market
Value of
Shares
or Units
of Stock
That
Have
Not
Vested
(2) ($)
    Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#)
    Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(2) ($)
 

P.A. Rooke

    02/25/2004 (3)      47,000             $ 81.04        02/25/2014        02/23/2010 (4)      16,023      $ 569,137       
    02/09/2005        47,000               84.80        02/09/2015        02/23/2010 (5)      7,122        252,973       
    02/22/2006        60,000               48.05        02/22/2016        10/26/2010 (6)      7,955        282,562       
    02/21/2007        45,000               63.11        02/21/2017        02/22/2012 (7)          62,200      $ 2,209,344   
    07/26/2007        25,000               42.21        07/26/2017        03/08/2013 (8)      38,968        1,384,143       
    02/20/2008        46,000               33.26        02/20/2018        03/08/2013 (9)          80,000        2,841,600   
    05/15/2009 (10)      115,240        56,760        17.12        05/15/2019             
    10/26/2010 (11)      45,000        15,000        37.71        10/26/2020             

J.W. Gamble, Jr.

    10/26/2005        50,000               40.94        10/26/2015        02/23/2010 (4)      13,013        462,222       
    02/22/2006        60,000               48.05        02/22/2016        02/23/2010 (5)      5,784        205,448       
    02/21/2007        45,000               63.11        02/21/2017        02/23/2011 (5)      6,857        243,561       
    02/20/2008        46,000               33.26        02/20/2018        02/22/2012 (12)      7,035        249,883       
    05/15/2009 (10)      86,430        42,570        17.12        05/15/2019        02/22/2012 (7)          11,400        404,928   
              02/20/2013 (12)      19,871        705,818       
              03/08/2013 (8)      8,183        290,660       
              03/08/2013 (9)          16,700        593,184   

M.S. Canning

    02/25/2004 (3)      18,000               81.04        02/25/2014        02/23/2010 (4)      13,013        462,222       
    02/09/2005        18,000               84.80        02/09/2015        02/23/2010 (5)      5,784        205,448       
    07/26/2007        25,000               42.21        07/26/2017        02/23/2011 (5)      6,857        243,561       
    02/20/2008        46,000               33.26        02/20/2018        02/22/2012 (12)      7,035        249,883       
    05/15/2009 (10)      115,240        56,760        17.12        05/15/2019        02/22/2012 (7)          11,400        404,928   
              02/20/2013 (12)      19,871        705,818       
              03/08/2013 (8)      8,183        290,660       
              03/08/2013 (9)          16,700        593,184   

S.T.R. Coons

              07/19/2010 (13)      560        19,891       
              02/23/2011 (5)      1,736        61,663       
              02/22/2012 (12)      3,805        135,154       
              02/22/2012 (7)          6,200        220,224   
              02/20/2013 (12)      12,796        454,514       
              03/08/2013 (8)      5,261        186,871       
              03/08/2013 (9)          10,800        383,616   

R.J. Patton

    02/25/2004 (3)      5,000               81.04        02/25/2014        02/23/2010 (4)      7,645        271,550       
    02/09/2005        4,500               84.80        02/09/2015        02/23/2010 (5)      3,398        120,697       
              02/23/2011 (5)      4,015        142,613       
              02/22/2012 (12)      4,092        145,348       
              02/22/2012 (7)          6,700        237,984   
              02/20/2013 (12)      11,444        406,491       
              03/08/2013 (8)      4,676        166,092       
              03/08/2013 (9)          9,600        340,992   

 

 

 

(1) Number of shares or units of stock that have not vested include associated dividend equivalent units.

 

(2) Based on the closing price of the Common Stock on December 31, 2013 ($35.52).

 

(3) The stock options expired unexercised on February 25, 2014.

 

(4) Award consists of earned performance-based restricted stock units scheduled to vest and settle in three approximately equal annual installments (34%, 33%, and 33% per year) on February 24, 2011, February 24, 2013 and February 24, 2014, respectively.

 

(5)

Award consists of restricted stock units scheduled to vest and settle in three approximately equal installments (34%, 33%, and 33% per year) on February 24th immediately following the second, third and fourth anniversaries of the grant date, respectively.

 

(6) Award consists of restricted stock units scheduled to vest and settle in three approximately equal annual installments (34%, 33%, and 33% per year) on the second through the fourth anniversaries of the grant date.

 

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(7) Award consists of unearned performance-based restricted stock units at target attainment, which are scheduled to vest and settle on February 24, 2015 if the performance measure is achieved. The performance measure for the performance-based restricted stock units is the Company’s ROIC measured against the ROIC of companies in the S&P 500 Technology Index for the performance period commencing January 1, 2012 and ending December 31, 2014.

 

(8) Award consists of earned performance-based restricted stock units which are scheduled to vest and settle in three approximately equal installments (34%, 33% and 33% per year) on February 24, 2014, February 24, 2015 and February 24, 2016, respectively.

 

(9) Award consists of unearned performance-based restricted stock units at target attainment, which are scheduled to vest and settle on February 24, 2016 if the performance measure is achieved. The performance measure for the performance-based restricted stock units is the Company’s ROIC measured against the ROIC of companies in the S&P MidCap Technology Index for the performance period commencing January 1, 2013 and ending December 31, 2015.

 

(10) Award consists of stock options with performance-based vesting. The stock options will become vested and exercisable only if the performance condition is achieved as of May 15, 2016, otherwise, the stock options shall be forfeited on such date. The stock options become vested and exercisable in three approximately equal installments (34%, 33%, and 33% per year) on the later of the achievement of a specified free cash flow amount or a vesting date applicable to each installment. The vesting dates are on the second, fourth and six anniversaries of the grant date. At its meeting on February 17, 2010, the Compensation Committee reviewed and certified the business results for the performance condition for the stock options, and determined that the performance condition had been attained. Therefore, the stock options will become vested on the second, fourth and six anniversaries of the grant date, subject to continued employment on such dates.

 

(11) The stock options vest and become exercisable in four equal annual installments (25% per year) on the first through the fourth anniversaries of the grant date.

 

(12)

Award consists of restricted stock units scheduled to vest and settle in three approximately equal annual installments (34%, 33%, and 33% per year) on February 24th immediately following the first, second and third anniversaries of the grant date, respectively.

 

(13) Award consists of earned performance-based restricted stock units which are scheduled to vest and settle in three approximately equal installments (34%, 33%, and 33% per year) on July 19, 2011, July 19, 2013 and July 19, 2014, respectively.

 

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OPTION EXERCISES AND STOCK VESTED

 

     Option Awards      Stock Awards  

Name

   Number of
Shares
Acquired
on Exercise
(#)
     Value Realized
on Exercise
($)
     Number of
Shares
Acquired
on
Vesting
(#)
    Value Realized
on Vesting
($)
 

P.A. Rooke

     0       $ 0         39,668 (1)    $ 1,005,503   

J.W. Gamble, Jr.

     0         0         32,356 (2)      736,317   

M.S. Canning

     0         0         32,356 (2)      736,317   

S.T.R. Coons

     0         0         19,460 (3)      670,623   

R.J. Patton

     0         0         18,859 (4)      429,114   

 

 

 

(1) Consists of restricted stock units that vested and settled in 2013 as follows: 9,059 restricted stock units and the associated 479 dividend equivalent units on February 20, 2013, which was the third and final tranche of the 27,450 restricted stock units granted on February 20, 2009; 6,501 restricted stock units and the 344 associated dividend equivalent units on February 24, 2013, which was the second tranche of the 19,700 restricted stock units granted on February 23, 2010; 14,627 performance-based restricted stock units and the 773 associated dividend equivalent units on February 24, 2013, which was the second tranche of the 44,325 performance-based restricted stock units granted on February 23, 2010; and 7,260 restricted stock units and the associated 625 dividend equivalent units on October 26, 2013, which was the second tranche of the 22,000 restricted stock units granted on October 26, 2010.

 

(2) Consists of restricted stock units that vested and settled in 2013 as follows: 7,046 restricted stock units and the associated 373 dividend equivalent units on February 20, 2013, which was the third and final tranche of the 21,350 restricted stock units granted on February 20, 2009; 5,280 restricted stock units and the associated 280 dividend equivalent units on February 24, 2013, which was the second tranche of the 16,000 restricted stock units granted on February 23, 2010; 11,880 performance-based restricted stock units and the 628 associated dividend equivalent units on February 24, 2013, which was the second tranche of the 36,000 performance-based restricted stock units granted on February 23, 2010; 3,223 restricted stock units and the associated 167 dividend equivalent units on February 24, 2013, which was the first tranche of the 9,480 restricted stock units granted on February 23, 2011; and 3,332 restricted stock units and the associated 147 dividend equivalent units on February 24, 2013, which was the first tranche of the 9,800 restricted stock units granted on February 22, 2012.

 

(3) Consists of restricted stock units that vested and settled in 2013 as follows: 816 restricted stock units and the associated 42 dividend equivalent units on February 24, 2013, which was the first tranche of the 2,400 restricted stock units granted on February 23, 2011; 1,802 restricted stock units and the associated 79 dividend equivalent units on February 24, 2013, which was the first tranche of the 5,300 restricted stock units granted on February 22, 2012; 511 performance-based restricted stock units and the associated 39 dividend equivalent units on July 19, 2013, which was the second tranche of the 1,550 performance-based restricted stock units granted on July 19, 2010; and 16,171 performance-based restricted stock units on July 25, 2013, which was the first and only tranche of the performance-based restricted stock units granted on June 7, 2010.

 

(4) Consists of restricted stock units that vested and settled in 2013 as follows: 4,026 restricted stock units and the associated 212 dividend equivalent units on February 20, 2013, which was the third and final tranche of the 12,200 restricted stock units granted on February 20, 2009; 3,102 restricted stock units and the associated 164 dividend equivalent units on February 24, 2013, which was the second tranche of the 9,400 restricted stock units granted on February 23, 2010; 6,979 performance-based restricted stock units and the 369 associated dividend equivalent units on February 24, 2013, which was the second tranche of the 21,150 performance-based restricted stock units granted on February 23, 2010; 1,887 restricted stock units and the associated 97 dividend equivalent units on February 24, 2013, which was the first tranche of the 5,550 restricted stock units granted on February 23, 2011; and 1,938 restricted stock units and the associated 85 dividend equivalent units on February 24, 2013, which was the first tranche of the 5,700 restricted stock units granted on February 22, 2012.

 

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PENSION BENEFITS

 

Name

   Plan Name(1)      Number of Years
Credited Service
(#)(2)
     Present
Value of
Accumulated
Benefit ($)
(3)
     Payments During
Last Fiscal Year ($)
 

P.A. Rooke

     Tax-qualified plan         25.9       $ 680,576       $ 0   
     Non-qualified plan         25.9         145,176         0   

J.W. Gamble, Jr.

     Tax-qualified plan         0.7         21,964         0   
     Non-qualified plan         0.7         0         0   

M.S. Canning

     Tax-qualified plan         7.2         140,930         0   
     Non-qualified plan         7.2         100,647         0   

S.T.R. Coons

     Tax-qualified plan         0.0         0         0   
     Non-qualified plan         0.0         0         0   

R.J. Patton

     Tax-qualified plan         5.2         92,988         0   
     Non-qualified plan         5.2         0         0   

 

 

 

(1) The tax-qualified plan refers to the Lexmark Retirement Growth Account Plan (RGA). The non-qualified plan refers to the Lexmark Nonqualified Supplemental Retirement Plan (SERP). Mr. Coons is not a participant in either the RGA Plan or SERP.

 

(2) Reflects credited service frozen as of April 3, 2006 for benefit accrual purposes for RGA and SERP Plans. Actual years of service through December 31, 2013 are 33.6 for Mr. Rooke, 8.3 for Mr. Gamble, 14.9 for Mr. Canning, and 12.9 for Mr. Patton.

 

(3) The values are based on benefits accrued as of December 31, 2013. Key assumptions used in valuing the benefits are as follows:

 

  Ÿ  

Discount rates were 4.80% for the RGA and 4.55% for the SERP.

 

  Ÿ  

Post-retirement mortality rates were based on the mortality tables used for Pension Protection Act target liability purposes for 2014, as prescribed by the IRS. No pre-retirement mortality rates were assumed.

 

  Ÿ  

The interest crediting rate on a participant’s cash balance account was assumed to be 5.0% in 2014 and later years.

 

  Ÿ  

Retirement is assumed to occur at the age the participant is first eligible for unreduced benefits.

 

  Ÿ  

Benefits were assumed to be paid as a lump sum to participants eligible only for cash balance benefits. Other participants are assumed to elect the payment form (lump sum or annuity) which produces the higher value.

Lexmark Retirement Growth Account Plan

The Lexmark Retirement Plan was amended and restated as the Lexmark Retirement Growth Account Plan effective January 1, 1998. The plan is a defined benefit pension plan that provides all vested eligible employees with retirement income. An initial Retirement Growth Account balance was established for each Lexmark Retirement Plan participant as of January 1, 1998. The cash balance benefit is based on the opening account balance and annual contribution credits of 6% of eligible earnings for up to 35 years of service. Cash balance benefits also include an interest component that is based on the 1-year Constant Treasury Maturity rates plus 1%, subject to a minimum of 4%. Eligible earnings include salary, commission payments and recurring payments under any form of variable compensation plan, short-term incentive pay and exclude compensation deferred under any other nonqualified deferred compensation plan, special awards, long-term incentive compensation, and gains on stock option exercises. Includable earnings are limited by the amount under Internal Revenue Code Section 401(a)(17).

 

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Effective April 3, 2006, annual contribution credits were discontinued and the Retirement Growth Account Plan was frozen. Interest will continue to accrue on individual Retirement Growth Account balances until the participant begins receiving a benefit under the plan. Upon leaving the Company after the participant has become vested, the participant may elect an annuity funded by the Retirement Growth Account balance or a lump sum of the Retirement Growth Account balance. Vesting occurs after 3 years of continuous service. The full annuity benefit is payable in the form of a life annuity. Alternative annuity payment forms, such as joint and survivor annuities and Social Security leveling options, are available on an actuarially equivalent basis. Lump sum amounts are equal to the better of the value of the cash balance account under the Retirement Growth Account Plan or the present value of annuity benefits accrued as of December 31, 1999 under the Lexmark Retirement Plan, with such present value determined using a discount rate based on 30-year Treasury rates, an IRS-prescribed mortality table and an assumed retirement age of 65.

The Lexmark Retirement Plan was designed to provide a monthly retirement income based on service and earnings. Benefits under this plan were frozen on December 31, 1999. The retirement benefit under the Lexmark Retirement Plan is calculated as the sum of a Core Retirement Benefit (for employees hired before January 1, 1993), a career average formula based upon an employee’s credited service and earnings (frozen on December 31, 1999), and a Personal Retirement Provision, which provided annual allocations based upon an employee’s earnings and guaranteed interest credits. Upon retirement, benefits for employees hired before January 1, 1993 are calculated under the prior plan provisions and under the provisions effective January 1, 1998. Participants receive benefits equal to the greater of the two calculations. The prior plan formula generally provided an annuity benefit equal to 1.35% of 5-year average earnings through 1996 times service through 1996 plus 1.35% of pay earned in years 1997 through 1999. In addition, the prior plan provided a cash balance benefit based on contribution credits of 5% of pay in 1991 up to $7,500, 1% of pay in 1992, 2% of pay in 1993 and 3% of pay in 1994 through 1999 plus interest credits based on 1-year Treasury Bill rates plus 1.5%, subject to a minimum of 4%. Participants hired between January 1, 1993 and January 1, 1998 only received the cash balance benefit under the prior plan.

Normal retirement age is the later of age 65 or the completion of 3 years of continuous service, as defined in the plan. Under the prior plan provisions applicable to employees hired before January 1, 1993, early retirement eligibility occurs at the earliest of 30 years of continuous service, age 55 with 15 years of continuous service or age 62 with 5 years of continuous service. There is no early retirement reduction after 30 years of continuous service or attainment of age 60. Prior to 30 years of continuous service or attainment of age 60, the early retirement reduction is 2% per year of early commencement. The only Named Executive Officer who is currently eligible for early retirement benefits under the prior plan provision is Mr. Rooke.

Lexmark Nonqualified Supplemental Retirement Plan

The Company has adopted a Supplemental Retirement Plan to pay retirement benefits which would have been paid under the Lexmark Retirement Growth Account Plan if not for the eligible compensation limits as defined in Internal Revenue Code Section 401(a)(17). These benefits are paid out of the general funds of the Company. Annual contribution credits were discontinued as of April 3, 2006 when the Retirement Growth Account Plan was frozen.

To comply with the requirements of Internal Revenue Code Section 409A and the final regulations issued thereunder, the Company amended and restated the Nonqualified Supplemental Retirement Plan, effective January 1, 2009. In accordance with Internal Revenue Code Section 409A, the Company grandfathered any benefits that were accrued and vested as of December 31, 2004. The distribution of grandfathered benefits shall be made at the same time and in the same form of benefit as the participant’s benefit under the Retirement Growth Account Plan. For administrative purposes, the Company determined that the non-grandfathered benefits (benefits which were accrued but not vested as of January 1, 2005, and benefits that were accrued between January 1, 2005 and the date benefits under the Nonqualified Supplemental Retirement Plan were frozen on April 3, 2006) would be distributed in a single lump sum payment in January 2009 for any Participant who did not have a Core Retirement Benefit under the Lexmark Retirement Plan. Any other non-grandfathered benefits will be distributed in a lump sum distribution on the first day of the seventh month after a participant’s separation from service.

 

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NONQUALIFIED DEFERRED COMPENSATION

 

Name

  Executive
Contributions
in Last FY
($)
    Registrant
Contributions in
Last FY
($)
    Aggregate
Earnings in Last
FY
($)
    Aggregate
Withdrawals/
Distributions
($)
    Aggregate
Balance
at Last
FYE
($)
 

P.A. Rooke

  $ 219,383      $ 43,877      $ 59,177      $ 0      $ 2,255,765   

J.W. Gamble, Jr.

    22,269        22,269        12,722        0        482,993   

M.S. Canning

    19,154        19,154        11,164        0        424,071   

S.T.R. Coons

    0        0        0        0        0   
R.J. Patton     16,923        10,154        4,776        0        191,250   

Deferred Stock Units

The Company permits eligible employees, including each of the Named Executive Officers, to elect to defer up to 100% of their annual incentive compensation under the Lexmark International, Inc. Stock Incentive Plan, and receive an award of deferred stock units. The number of elective deferred stock units credited to a participant’s account shall be determined by dividing the amount of incentive compensation deferred by the participant by the fair market value of one share of Common Stock on the grant date, rounded to the nearest whole share. A participant who makes a deferred stock unit election shall also receive a supplemental award of deferred stock units upon deferral with a value equal to 20% of the incentive compensation deferred. The elective deferred stock units are fully vested at all times. The supplemental deferred stock units awarded to a participant shall become vested on the fifth anniversary of the grant date, subject to the participant’s continued employment. The supplemental deferred stock units shall also become vested upon termination of employment due to the participant’s death or disability. Both the elective and vested supplemental deferred stock units shall settle (i.e., one share of Common Stock shall be issued) on the earlier of the fifth anniversary of the grant date or the date of the participant’s termination of employment due to death, disability, or retirement (or six months and one day after termination of employment due to retirement, if the participant is a “specified employee” within the meaning of Internal Revenue Code Section 409A). None of the Named Executive Officers deferred any of their 2012 annual incentive compensation that was paid in 2013.

Lexmark Supplemental Savings and Deferred Compensation Plan

The Company maintains the Lexmark Supplemental Savings and Deferred Compensation Plan, a non-qualified deferred compensation plan, which permits eligible employees of the Company (employees of Perceptive Software are not currently eligible to participate in the Plan) to voluntarily defer up to 100% of their eligible compensation, including base salary, commission payments and annual incentive compensation, in excess of the Internal Revenue Code Section 401(a)(17) limit ($255,000 in 2013). Each of the Named Executive Officers, other than Mr. Coons, participates in the plan. Participants who elect to defer their eligible compensation receive a Company matching contribution equal to 100% of such deferrals up to 6% of their eligible compensation in excess of the Internal Revenue Code Section 401(a)(17) limit.

Amounts deferred by participants under the plan, and the related Company matching contributions, are fully vested. Any Company matching contributions made for any plan year commencing on or after January 1, 2009, shall be forfeited by a participant for violating the terms of any restrictive covenants set forth in the participant’s employment agreement or change in control agreement or, if the participant is not subject to an employment agreement or change in control agreement, for violating the Company’s Code of Business Conduct.

Each participant’s account maintained under the plan is credited with an annual rate of return that is calculated using the Merrill Lynch 7-10 year A-rated corporate bond index (“Merrill-Lynch Rate”), determined as of the last business day of the month of November of the prior year. However, the annual rate of return shall not exceed 120% of the long-term applicable federal rate (“AFR”) as determined under Internal Revenue Code Section 1274(d) or any other rate above which such earnings would be considered “above-market” or “preferential” pursuant to the rules and regulations of the Securities and Exchange Commission. Because the Merrill-Lynch Rate exceeded the 120% long-term AFR, the rate for crediting interest to participants’ accounts for 2013 was limited to the 120% long-term AFR (2.85%).

 

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On their annual deferral agreement, participants may elect to receive a distribution of amounts deferred under the plan for the year, and related Company matching contributions, in either a lump sum or in annual installments. The distribution for a participant’s elective deferrals shall be made or, with respect to annual installments, commence on any date specified by the participant (subject to a three-year minimum deferral period) or on the first day of the seventh month following the participant’s separation from service, as elected by the participant on his annual deferral agreement. The distribution of a participant’s matching contribution shall be made or, with respect to annual installments, commence on the first day of the seventh month following the participant’s separation from service, or such later date as specified by the participant. In the event of an unforeseeable emergency, as defined in the plan, participants may request a hardship distribution up to an amount necessary to satisfy the emergency need and to pay applicable taxes on the distribution. Participants (or their beneficiaries, as applicable) shall receive a lump sum distribution of their account balance as soon as administratively practicable after the occurrence of their death or disability, or after the effective date of a change in control of the Company.

 

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TERMINATION AND CHANGE IN CONTROL PAYMENTS

The Company has entered into certain arrangements and maintains certain plans that will require the Company to provide compensation to Named Executive Officers in the event of a termination of employment or a change in control of the Company. The Compensation Committee considers the termination and change in control arrangements to be in the best interest of stockholders to ensure that the Company is able to attract outstanding talent to serve in key management positions and to ensure the retention and focus of key management in the event of a change in control of the Company. The table below reflects the estimated amount of compensation payable to each Named Executive Officer in the event of termination of employment under various scenarios. The amount of compensation payable assumes that termination was effective as of December 31, 2013 and includes amounts earned through such time.

 

     Potential Payments Upon Termination and Change in  Control(1)  
     Retirement      Termination by
Employer Without
Cause or
Termination by
Employee for
Good Reason
     Change in
Control
     Termination upon a
Change in Control
by Employer
Without Cause or
by Employee for
Good Reason
 

P.A. Rooke

           

Cash Severance Payment

   $ 1,104,359       $ 1,954,359       $ 0       $ 6,714,359   

Long-Term Incentive Compensation

     626,667         626,667         1,142,021         2,160,000   

Equity-Based Incentive Compensation

     3,412,384         3,412,384         5,989,925         5,989,925   

Benefits and Perquisites

     0         0         0         28,474   
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL

   $ 5,143,410       $ 5,993,410       $ 7,131,946       $ 14,892,758   
  

 

 

    

 

 

    

 

 

    

 

 

 

J.W. Gamble, Jr.

           

Cash Severance Payment

   $ 0       $ 1,093,335       $ 0       $ 2,542,718   

Long-Term Incentive Compensation

     0         0         410,667         410,667   

Equity-Based Incentive Compensation

     0         0         3,416,260         3,416,260   

Benefits and Perquisites

     0         0         0         37,759   
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL

   $ 0       $ 1,093,335       $ 3,826,927       $ 6,407,404   
  

 

 

    

 

 

    

 

 

    

 

 

 

M.S. Canning

           

Cash Severance Payment

   $ 0       $ 1,075,115       $ 0       $ 2,460,207   

Long-Term Incentive Compensation

     0         0         410,667         410,667   

Equity-Based Incentive Compensation

     0         0         3,677,356         3,677,356   

Benefits and Perquisites

     0         0         0         37,702   
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL

   $ 0       $ 1,075,115       $ 4,088,023       $ 6,585,932   
  

 

 

    

 

 

    

 

 

    

 

 

 

S.T.R. Coons

           

Cash Severance Payment

   $ 0       $ 703,594       $ 0       $ 1,912,500   

Long-Term Incentive Compensation

     0         0         235,667         235,667   

Equity-Based Incentive Compensation

     0         0         1,137,700         1,137,700   

Benefits and Perquisites

     0         0         0         24,194   
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL

   $ 0       $ 703,594       $ 1,373,367       $ 3,310,061   
  

 

 

    

 

 

    

 

 

    

 

 

 

R.J. Patton

           

Cash Severance Payment

   $ 0       $ 732,810       $ 0       $ 1,732,810   

Long-Term Incentive Compensation

     0         0         238,000         238,000   

Equity-Based Incentive Compensation

     0         0         1,529,497         1,529,497   

Benefits and Perquisites

     0         0         0         23,939   
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL

   $ 0       $ 732,810       $ 1,767,497       $ 3,524,246   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

(1) Amounts reflected in the table assume payments were triggered on December 31, 2013 and are based on the closing stock price of the Common Stock on that day ($35.52).

 

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Accrued Payments and Retirement Benefits

Potential payments in the table above do not include payments and benefits payable to each Named Executive Officer upon termination or a change in control that are provided on a non-discriminatory basis to employees, including the following:

 

   

Accrued salary,

 

   

Regular pension benefits (see the section entitled “Pension Benefits” for details on these plans),

 

   

Distributions of balances under the Lexmark Savings Plan, a tax-qualified 401(k) plan, and

 

   

Distributions of balances under the Lexmark Supplemental Savings and Deferred Compensation Plan (see the section entitled “Nonqualified Deferred Compensation” for details on this plan).

Retirement

In the event of termination due to retirement, the executive will be entitled to a pro rata portion of annual incentive compensation for the year of termination. The amount of the annual incentive compensation payment shall be based on the actual attainment of the performance objectives for the performance period and the executive’s earnings through the date of retirement. In addition, if the executive retires at any time during the performance period under the 2012-2014 Long-Term Incentive Plan or the 2013-2015 Long-Term Incentive Plan, the executive will be entitled to a pro rata portion of the cash-based long-term incentive compensation for each of the long-term incentive plans in which the executive participates. Payments will be based on actual attainment of the performance objectives for the performance period. See the section entitled “Total Long-Term Incentive Compensation” in the Compensation Discussion and Analysis for details of the long-term incentive plans outstanding for each Named Executive Officer on December 31, 2013. As of December 31, 2013, Mr. Rooke was the only Named Executive Officer to have satisfied the retirement eligibility provisions (retirement on or after age 65 or at age 55 with 15 years of continuous service) of the 2013-2015 Long-Term Incentive Plan. No Named Executive Officer had satisfied the retirement eligibility provisions (retirement on or after age 65) for the 2012-2014 Long-Term Incentive Plan.

Each executive’s outstanding restricted stock unit awards contain retirement eligibility provisions. Time-based restricted stock units granted prior to 2013 provide that the units will become fully vested at retirement and settlement six months and one day after retirement. Time-based restricted stock units awarded in 2013 provide that the units will continue to vest and settle on the dates set forth in the retirement-eligible executive’s award agreement. The earned 2010 performance-based restricted stock units will become fully vested at retirement and settle six months and one day after retirement. With respect to the unearned 2012 and 2013 performance-based restricted stock units with three-year performance periods, a retirement eligible executive shall be entitled to a pro rata portion of the units based on the actual attainment of the performance measure as of the end of the performance period, based on the number of complete months of service performed during the performance period, and such units shall be paid on the original settlement date specified in the award agreement. With respect to the earned 2013 performance-based restricted stock units with a one-year performance period, the earned units shall continue to vest and settle on the dates set forth in the retirement-eligible executive’s award agreement. For outstanding time-based and performance-based restricted stock units awarded prior to 2013, a Named Executive Officer is retirement eligible at age 65. For time-based and performance-based restricted stock units awarded in 2013, a Named Executive Officer is retirement eligible at age 65 or at age 55 with 15 years of continuous service. As of December 31, 2013, no Named Executive Officer had met the age and/or service requirements for retirement vesting of outstanding restricted stock units, except Mr. Rooke had met the age and service requirements for retirement vesting of the performance-based restricted stock units awarded to him in 2013.

In 2009, certain executives, including each Named Executive Officer, other than Messrs. Coons and Patton, received stock option grants with performance-based and service-based vesting conditions that provide, if the performance condition has been satisfied the stock options shall become 100% vested at the Named Executive Officer’s retirement, if at the time of retirement the executive has 30 years of continuous service, is 58 years of age or older and has 10 years of continuous service, or is 65 years of age or older. Mr. Rooke was the only Named Executive Officer to have met the age and/or service requirements for accelerated vesting on retirement as of December 31, 2013.

 

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The amount payable to each executive at retirement in the table above reflects the actual annual incentive compensation payment for the 2013 performance period and assumes the Company achieves target attainment for 2013-2015 Long-Term Incentive Plan. The amount in the table above for equity-based long-term incentive compensation reflects the in-the-money portion of stock options that would become 100% vested on the executive’s retirement date and the 2013 performance-based restricted stock units that a retirement-eligible executive would be entitled to receive, each calculated using the closing price of the Common Stock on December 31, 2013 ($35.52).

Termination by Employer Without Cause or Termination by Employee for Good Reason

Each of the Named Executive Officers has entered into an employment agreement with the Company, effective November 1, 2012 (effective July 1, 2013 for Mr. Coons), which provides for a fixed term of employment through October 31, 2014. Thereafter, each Named Executive Officer’s employment shall continue at will. The employment agreement determines the potential payments due to each Named Executive Officer in the event of an involuntary termination by the Company without Cause and a termination by the Named Executive Officer for Good Reason, as such terms are defined in the employment agreement. If a Named Executive Officer is terminated by the Company without Cause or terminates for Good Reason, the terms of the employment agreement provide that the executive will continue to receive payments of base salary for a period equal to the greater of one year or the remaining term of the employment agreement. The Named Executive Officer may also be entitled to payment of a pro rata portion of the annual incentive compensation for the year of termination, calculated based on the actual achievement of the performance objectives, as certified by the Compensation Committee. The obligation of the Company to make any payments to the Named Executive Officer under each of their employment agreements is conditioned upon the receipt of an approved general release and covenant not to sue.

Change in Control

Each of the Named Executive Officers has entered into a Change in Control Agreement with the Company, effective as of November 1, 2012 (effective July 1, 2013 for Mr. Coons). The Change in Control Agreement for each Named Executive Officer determines the potential payments due to each Named Executive Officer if, within 12 months prior to a Change in Control, the executive’s employment is terminated by the Company in connection with or in anticipation of a Change in Control, or within 24 months after a Change in Control (the “CIC Protection Period”), the executive’s employment is terminated by the Company or the executive under certain circumstances. The Lexmark International, Inc. Stock Incentive Plan determines the potential payments due to each Named Executive Officer upon a Change in Control with respect to Incentive Awards made under such plan.

Generally, a Change in Control is deemed to occur under each of the Change in Control Agreements and the Lexmark International, Inc. Stock Incentive Plan in any of the following events:

 

  (1) A majority of members of the Board at any time cease for any reason other than due to death or disability to be persons who were members of the Board twenty-four months prior to such time;

 

  (2) Any “person,” including a “group” is or becomes the “beneficial owner,” directly or indirectly, including without limitation, by means of a tender or exchange offer, of securities of the Company representing 30% or more of the combined voting power of the Company’s then outstanding securities;

 

  (3) The consummation of a definitive agreement (i) that results in the merger or other business combination of the Company with or into another corporation immediately following which merger or combination (A) the stock of the surviving entity is not readily tradable on an established securities market, (B) a majority of the directors of the surviving entity are persons who (x) were not directors of the Company immediately prior to the merger and (y) are not nominees or representatives of the Company or (C) any “person,” including a “group” is or becomes the “beneficial owner,” directly or indirectly, of 30% or more of the securities of the surviving entity or (ii) for the direct or indirect sale or other disposition of all or substantially all of the assets of the Company; or

 

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  (4) Approval of the stockholders of the Company of a complete liquidation or dissolution of the Company.

A Change in Control will not be deemed to occur in the event the Company or Perceptive Software files for bankruptcy, liquidation or reorganization under the United States Bankruptcy Code, or if any executive, or any entity in which the executive is a partner, officer or more than 50% owner, initiates any transaction or series of transactions that would otherwise constitute a Change in Control and directly or indirectly owns more than 10% of the then outstanding shares of Common Stock resulting from such action, or of the combined voting power of then outstanding voting securities of the Company or such resulting corporation.

With respect to the payment upon a Change in Control of any Section 409A Incentive Award under the Lexmark International, Inc. Stock Incentive Plan, such amount shall become payable only if the event constituting a Change in Control would also constitute a “change in the ownership” of the Company, a “change in the effective control” of the Company, or a “change in the ownership of a substantial portion of the assets” of the Company within the meaning of Internal Revenue Code Section 409A and the regulations issued thereunder.

Cash Severance Payments.    Under the terms of the Change in Control Agreement for each of the Named Executive Officers, the executive will be entitled to receive a lump sum payment, six months and one day following the executive’s involuntary termination by the Company for any reason other than Cause or termination by the executive for Good Reason during the CIC Protection Period, in an amount equal to the sum of the following: (a)(1) the executive’s accrued but unpaid annual base salary as of the date of termination, (2) the executive’s unpaid annual incentive compensation with respect to a completed fiscal year, and (3) a pro rata portion of the annual incentive compensation for the year of termination, calculated assuming the greater of (x) 100% of the Company’s financial objectives are achieved in such fiscal year or (y) the actual attainment of the Company’s financial objectives as of the date of termination are achieved in such fiscal year, in each case without regard to personal attainment, and (b) three times (two times in the case of Messrs. Coons and Patton) the sum of the executive’s annual base salary and 100% of the executive’s annual incentive compensation target, calculated assuming the Company attained its financial targets and disregarding personal attainment goals. The amount reflected in the table is calculated in the same manner as a payment for involuntary termination.

Cash-Denominated Long-Term Incentive Compensation.    Under the terms of the Lexmark International, Inc. Stock Incentive Plan, the amount of the Performance Awards payable to the executive will be calculated using the greater of the target performance level or actual attainment of the performance period from the beginning of the performance period through the effective date of the Change in Control. The Performance Award will be prorated based on the number of complete months of service performed during the performance period prior to the Change in Control divided by 36. The table above assumes that the Company achieved target attainment for each performance period. See the section entitled “Total Long-Term Incentive Compensation” in the Compensation Discussion and Analysis for the details of the cash-denominated long-term incentive plans outstanding for each Named Executive Officer on December 31, 2013.

Equity-Based Long-Term Incentive Compensation.    Under the terms of the Lexmark International, Inc. Stock Incentive Plan, any vested or unvested stock options will be cancelled promptly and a payment in cash for the difference in the exercise price and the Change in Control price will be made to the executive. Any outstanding restricted stock units, including earned performance-based restricted stock units, will become vested and immediately settled in shares of Common Stock. The Compensation Committee may, with the consent of the executive, substitute an Alternative Award, as defined in the plan, instead of making a cash payment for stock options or instead of accelerating vesting for restricted stock units. For unearned performance-based RSUs, including those awarded in 2013, the amount of performance-based RSUs that will be deemed earned by the executive will be calculated using the greater of the target performance level or actual attainment of the performance period from the beginning of the performance period through the effective date of the Change in Control. The number of earned performance-based RSUs will be prorated based on the number of complete months of service performed during the performance period prior to the Change in Control

 

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divided by 36. The table above assumes that the Company achieved target attainment for each performance period for unearned performance-based RSUs. See the section entitled “Total Long-Term Incentive Compensation” in the Compensation Discussion and Analysis for the details of the performance-based RSU awards outstanding for each Named Executive Officer on December 31, 2013.

Benefits and Perquisites.    Under the terms of the Change in Control Agreement for each of the Named Executive Officers, for a period of three years (two years in the case of Messrs. Coons and Patton) following the executive’s termination, the Company will be obligated to continue to provide at least the same level of benefits (including medical, dental, disability, and insurance plans and programs) that were provided during the executive’s employment, or if more favorable to the executive, as in effect thereafter.

Each Change in Control Agreement provides that to the extent that any payments and benefits to the executive under the Change in Control Agreement would trigger an excise tax to the executive, such payments and benefits shall (i) be paid to the executive in full or (ii) reduced to an amount that would result in no portion of the payments and benefits being subject to the excise tax, whichever amount results in the best net after-tax benefit to the executive.

Death or Disability

In the event of termination due to death or disability during the performance period, the executive will be entitled to payment of a pro rata portion of the annual incentive compensation for the year of termination, calculated based on the actual attainment of the performance objectives for the performance period. In the event of termination due to death or disability during the performance period under the 2012-2014 Long-Term Incentive Plan and 2013-2015 Long-Term Incentive Plan, the executive will also be entitled to a pro rata portion of the cash-based long-term incentive plan based on the actual attainment as of the end of the performance period. The vested portion of any stock options outstanding at the time of an executive’s termination due to death or disability will be exercisable for 12 months following termination and the unvested portion will be forfeited. With respect to any earned but unvested performance-based restricted stock units and any unvested restricted stock units, the units will become vested and settle upon the Named Executive Officer’s termination due to death or disability. In the event of termination due to death or disability during the performance period for unearned performance restricted stock units, a pro rata portion of such performance-based restricted stock units may be earned based on the actual attainment of performance objectives as of the end of the performance period.

Material Terms Affecting Payments

The executive is subject to forfeiture of realized and unrealized gains on Stock Incentive Awards for violating certain provisions of the employment agreement, including:

 

  (1) Unauthorized disclosure of any confidential or proprietary non-public information obtained by the executive while employed by the Company;

 

  (2) Becoming employed by, serving as an agent for, or consulting with an entity that competes with the Company within the greater of (a) a period equal to the number of months providing the basis for calculating any severance payments, if such payments are required or (b) a 12 month period following termination; and

 

  (3) Within 36 months from termination, soliciting any person or entity who or which is employed by the Company or intentionally interfering with the Company’s relationship with any person or entity who or which has been a customer, client or supplier of the Company within the previous 36 months.

If the executive violates any of these restrictions then all stock incentive awards held by the executive terminate upon the date of the violation, all gains realized on the vesting of restricted stock, deferred stock units and stock option gains within 18 months preceding the earlier of the violation or the date of termination through the later of 18 months following the violation and such time of the discovery of the violation, shall be paid to the Company. Similar provisions are included in each executive’s Stock Incentive Award agreements, Long-Term Incentive Plan agreements, and Change in Control Agreement.

 

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DIRECTOR COMPENSATION

The Company’s policy is to pay compensation only to those Directors who are not also employees of the Company or any of its subsidiaries or affiliated with any principal stockholder of the Company (each, an “Eligible Director”). All Directors are, however, reimbursed for expenses incurred in attending Board and committee meetings.

Annually, the Corporate Governance and Public Policy Committee reviews the Company’s Director Compensation Policy and peer group data to determine whether to recommend to the Board of Directors any adjustments to the compensation for Eligible Directors. The Board of Directors has determined that each Eligible Director’s total compensation should be nominally targeted at the 50th percentile of the peer group compensation. Based upon its review of peer group data, the Corporate Governance and Public Policy Committee recommended that the Board not amend the Director Compensation Policy for 2013.

The Director Compensation Policy provides that the compensation each Eligible Director of the Company shall receive includes an annual retainer of $60,000. In addition an Eligible Director shall receive an annual committee retainer of $15,000 for membership on the Finance and Audit Committee; $10,000 for membership on the Compensation Committee; and $8,000 for membership on the Corporate Governance and Public Policy Committee. Any such Eligible Director who served as the chair of a committee also received an annual retainer of $20,000 for the Finance and Audit Committee Chair, $12,000 for the Compensation Committee Chair, and $10,000 for the Corporate Governance and Public Policy Committee Chair. The Presiding Director received an annual retainer of $20,000. Cash payments are made to each Eligible Director on a quarterly basis, as calculated on the last day of each calendar quarter.

In addition, each Eligible Director has the opportunity to participate in the Company’s 2005 Nonemployee Director Stock Plan (the “Director Plan”). Upon election to the Board, each Eligible Director of the Company receives a one-time grant of restricted stock units as the initial equity award under the Director Plan. The number of restricted stock units granted as the initial equity award for an Eligible Director elected in any calendar year is reviewed annually by the Board of Directors. The Director Compensation Policy currently provides that the number of restricted stock units to be granted pursuant to the initial equity award is determined by dividing $150,000 by the closing price of the Common Stock on the date of grant, rounded up to the nearest whole unit. The restricted stock units granted pursuant to the initial equity award vest in whole on the sixth anniversary of the Eligible Director joining the Board and settle upon termination of the Eligible Director’s status as a Board member.

Under the Director Plan, each Eligible Director is also eligible to receive an annual equity award on the date of the Annual Meeting of Stockholders for service as a Board member through the next Annual Meeting of Stockholders. The Director Compensation Policy provides that the annual equity award shall be granted in the form of restricted stock units. Under the Director Compensation Policy, the number of restricted stock units to be granted to each Eligible Director pursuant to the annual equity award shall be determined by dividing $135,000 by the closing price of the Common Stock on the date of grant, rounded up to the nearest whole unit. For Eligible Directors appointed to the Board at any time after the Annual Meeting of Stockholders, the annual equity award will be prorated for the remaining months of service until the next scheduled Annual Meeting of Stockholders based on the dollar value of the annual equity award grant granted to Directors at the time of the preceding Annual Meeting of Stockholders. Restricted stock units granted pursuant to the annual equity award become fully vested on the date immediately prior to the next Annual Meeting of Stockholders, based on continued Board service through such date, and 34% of the restricted stock units will settle on the second anniversary of the date of grant and 33% will settle on each of the third and fourth anniversaries of the date of grant, unless an Eligible Director elects to further defer settlement.

In addition, each Eligible Director may elect to defer payment of all or a portion of the annual retainer, committee retainer and chair retainer (the “Annual Fees”) and to receive in lieu thereof a grant of deferred stock units equal to the amount of Annual Fees so deferred, divided by the fair market value of a share of Common Stock on the date of grant of the deferred stock units, rounded up to the nearest whole unit. Deferred stock units are granted to each Eligible Director electing annually to defer retainer and/or attendance fees, with such deferred stock units being granted at the end of each calendar quarter when cash payments would otherwise be made and at the price of the Common Stock at such time.

 

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The Board has implemented stock ownership guidelines encouraging Directors to own at least that number of shares of Common Stock having a value of five times the annual retainer payable to a nonemployee Board member. Each Eligible Director is encouraged to reach this guideline ownership level within two to four years of becoming a member of the Board.

The Company has entered into an indemnification agreement with each of its Directors, which requires the Company to indemnify them against certain liabilities that may arise as a result of their status or service as Directors of the Company. The Company also pays the premiums on the directors’ and officers’ liability insurance policies.

Directors are also eligible to participate in the Lexmark Employee Purchase Program, which provides certain discounts for the purchase of Lexmark printers and printer supplies, on the same basis as employees of the Company.

2013 DIRECTOR COMPENSATION

 

Name

   Fees Earned
or
Paid in Cash
($)
    Stock
Awards(1)
($)
     Option
Awards
($)
     Non-Equity
Incentive Plan
Compensation
($)
     Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
     All Other
Compensation
($)
     Total
($)
 

J. L. Cohon

   $ 70,000 (2)    $ 135,018       $ 0       $ 0       $ 0       $ 0       $ 205,018   

J. E. Coleman

     75,000 (2)      135,018         0         0         0         0         210,018   

W. R. Dunbar

     68,000        135,018         0         0         0         0         203,018   

W. R. Fields

     70,000        135,018         0         0         0         0         205,018   

R. E. Gomory

     68,000        135,018         0         0         0         0         203,018   

S. R. Hardis

     95,000 (3)      135,018         0         0         0         0         230,018   

S. L. Helton

     75,000        135,018         0         0         0         0         210,018   

R. Holland, Jr.

     68,000 (2)      135,018         0         0         0         0         203,018   

M. J. Maples

     75,000        135,018         0         0         0         0         210,018   

J. L. Montupet

     98,000        135,018         0         0         0         0         233,018   

K. P. Seifert

     82,000        135,018         0         0         0         0         217,018   

 

 

(1) Reflects the grant date fair value dollar amount computed in accordance with the provisions of the FASB guidance on share-based payments and related interpretations for the 4,862 restricted stock units granted as the 2013 annual equity award on April 25, 2013. Listed below are the outstanding equity awards for each director as of December 31, 2013:

 

Name

   Restricted Stock Units*      Stock Options  

J. L. Cohon

     20,437         0   

J. E. Coleman

     20,437         0   

W. R. Dunbar

     17,798         0   

W. R. Fields

     15,470         26,700   

R. E. Gomory

     13,585         26,700   

S. R. Hardis

     19,674         26,700   

S. L. Helton

     17,374         0   

R. Holland, Jr.

     21,559         26,700   

M. J. Maples

     13,585         26,700   

J. L. Montupet

     18,711         14,900   

K. P. Seifert

     24,800         14,900   

* Includes associated dividend equivalent units

     

 

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(2) This entire amount was deferred by Dr. Cohon and Messrs. Coleman and Holland into deferred stock units during 2013 pursuant to the 2005 Nonemployee Director Stock Plan, resulting in the following deferred stock units being held by each director at December 31, 2013 based on each director’s service during 2013: Dr. Cohon, 2,260 units; Mr. Coleman, 2,422 units; and Mr. Holland, 2,196 units. Listed below are the outstanding deferred stock units and associated dividend equivalent units for each director as of December 31, 2013:

 

Name

   Deferred Stock Units*  

J. L. Cohon

     7,868   

J. E. Coleman

     8,287   

W. R. Dunbar

     0   

W. R. Fields

     3,475   

R. E. Gomory

     0   

S. R. Hardis

     9,417   

S. L. Helton

     0   

R. Holland, Jr.

     15,762   

M. J. Maples

     0   

J. L. Montupet

     7,332   

K. P. Seifert

     4,167   

* Includes associated dividend equivalent units

  

 

(3) Pursuant to Mr. Hardis’ irrevocable election, 100% of his retainer fees were used to purchase shares of the Company’s Common Stock on the open market.

 

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SECURITY OWNERSHIP BY MANAGEMENT

AND PRINCIPAL STOCKHOLDERS

The following table furnishes certain information, to the best knowledge of the Company, as of December 31, 2013, as to the shares of Common Stock beneficially owned by each entity owning beneficially more than 5% of the outstanding shares of Common Stock.

 

Beneficial Owner

   Amount and
Nature
of Beneficial
Ownership
     Percentage
of Class(1)
 

Artisan Partners Holdings LP(2)

     5,466,797         8.81

875 East Wisconsin Ave.

Suite 800

Milwaukee, WI 53202

     

BlackRock, Inc.(3)

     4,591,400         7.40   

40 East 52nd Street

New York, NY 10022

     

The Vanguard Group, Inc.(4)

     4,236,445         6.83   

100 Vanguard Blvd.

Malvern, PA 19355

     

LSV Asset Management(5)

     3,616,238         5.83   

155 N. Wacker Drive

Suite 4600

Chicago, IL 60606

     

Fairpointe Capital LLC(6)

     3,117,268         5.03   

1 North Franklin Street

Suite 3300

Chicago, IL 60606

     

 

 

 

(1) Based on 62,031,968 shares of Common Stock outstanding as of December 31, 2013.

 

(2) Based on a Schedule 13G/A jointly filed with the Securities and Exchange Commission (“SEC”) on January 30, 2014 by Artisan Partners Limited Partnership (“Artisan Partners”), Artisan Investments GP LLC (“Artisan Investments”), Artisan Partners Holdings LP (“Artisan Holdings”), Artisan Partners Asset Management, Inc. (“APAM”), Artisan Investment Corporation (“Artisan Corp.”), ZFIC, Inc. (“ZFIC”), Andrew A. Ziegler, Carlene M. Ziegler and Artisan Partners Funds, Inc. (“Artisan Funds”) (collectively, the “Artisan Reporting Persons”). Of the shares reported, Artisan Partners, Artisan Investments, Artisan Holdings, APAM, Artisan Corp., ZFIC, Mr. Ziegler and Ms. Ziegler each reported that they have shared dispositive power over 5,466,797 shares and shared voting power over 5,279,327 shares. Artisan Funds reported that it had shared voting and shared dispositive power over 4,027,531 shares. The shares reported were acquired on behalf of discretionary clients of Artisan Partners and Artisan Funds.

 

(3) Based on a Schedule 13G/A filed with the SEC on January 29, 2014. BlackRock, Inc. (“BlackRock”), as parent holding company of investment advisory subsidiaries, BlackRock Advisors (UK) Limited; BlackRock Advisors, LLC; BlackRock Asset Management Canada Limited; BlackRock Asset Management Ireland Limited; BlackRock Financial Management, Inc.; BlackRock Fund Advisors; BlackRock Fund Management Ireland Limited; BlackRock Institutional Trust Company, N.A.; BlackRock International Limited; BlackRock Investment Management (Australia) Limited; BlackRock Investment Management (UK) Ltd; BlackRock Investment Management, LLC; and BlackRock Life Limited, is the beneficial owner of 4,591,400. Of such shares BlackRock has sole voting power over 4,339,205 shares and sole dispositive power over 4,591,400 shares.

 

(4)

Based on a Schedule 13G/A filed with the SEC on February 12, 2014. The Vanguard Group, Inc. (“Vanguard”), an investment adviser, is the beneficial owner of 4,236,445 shares. Of such shares, Vanguard has sole dispositive power over 4,201,744 shares and shared dispositive power over 34,701 shares. Vanguard has sole voting power over 34,701 shares through a wholly-owned subsidiary, Vanguard Fiduciary Trust

 

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  Company, as a result of its serving as an investment manager of collective trust accounts. Vanguard also has sole voting power over 4,100 shares through a wholly-owned subsidiary, Vanguard Investments Australia, Ltd., as a result of its serving as an investment manager of Australian investment offerings.

 

(5) Based on a Schedule 13G filed with the SEC on February 10, 2014. LSV Asset Management (“LSV”), an investment adviser, is the beneficial owner of 3,616,238 shares over which it has sole dispositive power. Of such shares, LSV has sole voting power over 2,334,768 shares.

 

(6) Based on a Schedule 13G/A filed with the SEC on February 7, 2014. Fairpointe Capital LLC (“Fairpointe”), an investment adviser, is the beneficial owner of 3,117,268 shares. Of such shares Fairpointe has sole voting power over 3,063,943 shares, sole dispositive power over 3,107,868 shares and shared dispositive power over 9,400 shares.

The following table furnishes certain information, to the best knowledge of the Company, as of February 28, 2014, as to the shares of Common Stock beneficially owned by (i) each Director of the Company, (ii) each Named Executive Officer of the Company as set forth in the Summary Compensation Table, and (iii) all Directors and executive officers of the Company as a group. The address of each person listed below is the address of the Company.

 

Beneficial Owner

   Amount and
Nature
of Beneficial
Ownership(1)
     Percentage
of Class
 

Jared L. Cohon

     21,981         *   

J. Edward Coleman

     22,400         *   

W. Roy Dunbar

     14,073         *   

William R. Fields

     58,049         *   

Ralph E. Gomory

     64,724         *   

Stephen R. Hardis

     135,206         *   

Sandra L. Helton

     14,073         *   

Robert Holland, Jr.

     75,555         *   

Michael J. Maples

     55,987         *   

Jean-Paul L. Montupet

     55,372         *   

Kathi P. Seifert(2)

     51,555         *   

Paul A. Rooke(3)

     536,138         *   

John W. Gamble, Jr.

     371,557         *   

Martin S. Canning

     307,480         *   

Scott T.R. Coons(4)

     22,106         *   

Robert J. Patton

     47,100         *   

All directors and executive officers as a group (19 persons)

     2,174,670         3.50   

 

 

* Less than 1% of class.

 

(1)

Shares beneficially owned include shares that may be acquired pursuant to the exercise of options that are exercisable within 60 days following February 28, 2014 by the following persons and groups in the following amounts: William R. Fields, 26,700 shares; Ralph E. Gomory, 26,700 shares; Stephen R. Hardis, 26,700 shares; Robert Holland, Jr., 26,700 shares; Michael J. Maples, 26,700 shares; Jean-Paul L. Montupet, 14,900 shares; Kathi P. Seifert, 14,900 shares; Paul A. Rooke 383,240 shares; John W. Gamble, Jr., 287,430 shares; Martin S. Canning, 204,240 shares; Robert J. Patton 4,500 shares; and all Directors and executive officers as a group (19 persons), 1,244,330 shares. Included in these shares are (i) deferred stock units and associated dividend equivalent units granted to Directors as a result of their election to defer all or a portion of their Board fees under the Nonemployee Director Stock Plan and the 2005 Nonemployee Director Stock Plan, (ii) restricted stock units and associated dividend equivalent units granted to Directors which have become fully vested and for which settlement has been deferred or will become fully vested within 60 days following February 28, 2014, and (iii) elective deferred stock units and associated dividend

 

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  equivalent units granted to executive officers as a result of their election to defer all or a portion of their annual incentive compensation under the Stock Incentive Plan. These shares also include shares allocated to executive officers through participation in the Lexmark Savings Plan. The shares held in the Lexmark Savings Plan can be voted by each executive officer, and each executive officer has investment authority over the shares held in his or her account in the plan. In the case of a tender offer, the trustee shall tender or not tender shares as directed by each participant in the plan.

 

(2) Ms. Seifert’s shares include 4,660 shares owned by an investment agency account established by Ms. Seifert for her own benefit.

 

(3) Mr. Rooke’s shares include 131,548 shares owned by a revocable trust established by Mr. Rooke for his own benefit.

 

(4) Mr. Coons’ shares include 2,600 shares owned by a revocable trust established by Mr. Coons for his own benefit.

 

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EQUITY COMPENSATION PLAN INFORMATION

The following table provides information about the Company’s equity compensation plans as of December 31, 2013.

 

Plan Category

   Number of Securities to be
Issued upon Exercise of
Outstanding Options,
Warrants and Rights
    Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights(1)
     Number of Securities
Remaining Available
for Future Issuance
under Equity
Compensation Plans
 
     (Number of securities in millions)  

Equity compensation plans approved by stockholders

     6.0 (2)    $ 60.81         10.2 (3) 

Equity compensation plans not approved by stockholders(4)

     0.1        42.33         0.0   
  

 

 

   

 

 

    

 

 

 

Total

     6.1      $ 60.40         10.2   
  

 

 

   

 

 

    

 

 

 

 

 

 

(1) The numbers in this column represent the weighted average exercise price of stock options only.

 

(2) Of the approximately 6.0 million awards outstanding under the equity compensation plans approved by stockholders, there were approximately 3.2 million stock options (of which 3,033,000 are employee stock options and 180,000 are nonemployee director stock options) and approximately 2.8 million restricted stock units (“RSUs”) and deferred stock units (“DSUs”), including associated dividend equivalent units (of which 2,561,000 are employee RSUs and DSUs and 268,000 are nonemployee director RSUs and DSUs). Performance-based RSUs granted in 2012 and 2013 were included at the target level of achievement.

 

(3) Of the 10.2 million shares available, 9.9 million relate to employee plans (of which 4.8 million may be granted as full-value awards) and 0.3 million relate to the nonemployee director plan.

 

(4) As of December 31, 2013, 72,000 shares remained outstanding (all of which are in the form of stock options) pursuant to awards made under the Lexmark International, Inc. Broad-Based Employee Stock Incentive Plan (the “Broad-Based Plan”), an equity compensation plan which had not been approved by the Company’s stockholders. On February 24, 2011, the Company’s Board of Directors terminated the Broad-Based Plan and cancelled the remaining available shares that had been authorized for issuance under the Broad-Based Plan.

 

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REPORT OF THE FINANCE AND AUDIT COMMITTEE

During 2013, the Finance and Audit Committee (the “Committee”) was comprised of four nonemployee directors, Ms. Helton and Messrs. Coleman, Hardis and Maples.

The Committee operates pursuant to a written charter which can be found on the Company’s Investor Relations website at http://investor.lexmark.com. After reviewing the qualifications of the Committee members, and any relationships that they may have with the Company that might affect their independence from the Company, the Board of Directors has determined that (i) all Committee members are “independent” as that term is defined by Section 10A of the Securities Exchange Act of 1934, the rules of the Securities and Exchange Commission thereunder and the listing standards of the New York Stock Exchange, (ii) all Committee members are “financially literate” as that term is defined by the listing standards of the New York Stock Exchange and (iii) each of Ms. Helton and Messrs. Coleman, Hardis, and Maples is an “audit committee financial expert” as that term is defined by the applicable rules established by the Securities and Exchange Commission.

Company management has primary responsibility for preparing the Company’s financial statements and the financial reporting process, including establishing and maintaining adequate internal control over financial reporting and evaluating the effectiveness of internal control over financial reporting. PricewaterhouseCoopers LLP (“PwC”), the Company’s independent registered public accounting firm (the “Independent Auditors”), is responsible for performing an audit and expressing an opinion on the conformity of the Company’s audited financial statements to generally accepted accounting principles in the United States of America and performing an audit and expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. The Committee’s responsibility is to monitor and review these processes, acting in an oversight capacity. In this context, during 2013 the Committee met 11 times and held separate discussions with management, the Company’s internal auditors and the Independent Auditors. The Committee discussed with the Company’s internal auditors and the Independent Auditors the overall scope and plans for their respective audits. The Committee met regularly with the internal auditors and the Independent Auditors, with and without management present, to discuss the results of their respective examinations, their evaluation of the Company’s internal controls, and the overall quality of the Company’s financial reporting. The Committee discussed with the Independent Auditors the matters required to be discussed by Statement on Auditing Standards No. 61, as amended, (AICPA, Professional Standards, Vol. 1 AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T. The Committee received and reviewed a report prepared by the Independent Auditors describing the firm’s internal quality control procedures and any material issues raised by the firm’s most recent internal quality-control review and peer review of the firm. The Committee received and reviewed the written disclosures and the letter from the Independent Auditors required by the applicable requirements of the Public Company Accounting Oversight Board regarding the Independent Auditors’ communications with the Committee concerning independence, and has discussed with the Independent Auditors the Independent Auditors’ independence. The Committee also considered whether the provision of the non-audit services provided by the Independent Auditors is compatible with the Independent Auditors’ independence.

In discharging its duties, the Committee met with management of the Company and PwC and reviewed and discussed the Company’s audited financial statements for the fiscal year ended December 31, 2013. The Committee also discussed with PwC the critical accounting policies and practices used in the preparation of the Company’s audited financial statements. Management and PwC have represented to the Committee that the audited financial statements for the year ended December 31, 2013 were prepared in accordance with generally accepted accounting principles.

Based on the review and discussions with management, the internal auditors and the Independent Auditors referred to above, and subject to the limitations on the role and responsibilities of the Committee referred to above and in the Committee Charter, the Committee has recommended to the Board of Directors, and the Board has approved, the inclusion of the audited financial statements of the Company in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

The Finance and Audit Committee

of the Board of Directors

Stephen R. Hardis, Chair

J. Edward Coleman

Sandra L. Helton

Michael J. Maples

 

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PROPOSAL 2

RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS

Vote Required

Ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s Independent Auditors for the fiscal year ending December 31, 2014 will require the affirmative vote of the holders of a majority of the shares of Common Stock represented and entitled to vote on this proposal at the Annual Meeting.

The Board of Directors recommends a vote “FOR” this proposal. Signed proxies will be voted “FOR” this Proposal, unless stockholders specify a different choice in their proxies.

Summary

The Finance and Audit Committee of the Board of Directors has appointed PricewaterhouseCoopers LLP as the Company’s Independent Auditors to audit its consolidated financial statements and the effectiveness of the Company’s internal control over financial reporting and express an opinion thereon for the 2014 fiscal year. During the 2013 fiscal year, PricewaterhouseCoopers LLP served as the Company’s Independent Auditors and also provided certain tax services. The aggregate fees billed or to be billed to the Company by PricewaterhouseCoopers LLP for services performed during the fiscal years ended December 31, 2013 and 2012 are as follows:

 

     2013      2012  

Audit Fees(1)

   $ 5,332,000       $ 4,363,000   

Audit-Related Fees(2)

     76,000         37,000   

Tax Fees(3)

     0         0   

All Other Fees(4)

     359,000         754,000   

 

(1) Audit Fees consist of fees for professional services rendered for the audit of the Company’s consolidated annual financial statements and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by PricewaterhouseCoopers LLP in connection with statutory and regulatory filings or engagements.

 

(2) Audit-Related Fees consist of fees for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements and are not reported under “Audit Fees.” These services include certain attest audits and accounting consultations concerning financial accounting and reporting standards.

 

(3) Tax Fees consist of fees for federal, state and international tax compliance, tax consulting and expatriate tax services.

 

(4) For 2013, All Other Fees consists of accounting and tax due diligence services provided in connection with the Company’s acquisitions of AccessVia, Inc. and Saperion GmbH. For 2012, All Other Fees consists of accounting and tax due diligence services provided in connection with the Company’s acquisitions of BDGB Enterprise Software (Lux) S.C.A. (“Brainware”), Nolij Corporation, ISYS Search Software Pty Ltd, and Acuo Technologies, LLC.

All fees for services incurred in 2013 were approved by the Finance and Audit Committee. The Finance and Audit Committee has considered whether the provision of non-audit services is compatible with maintaining the Independent Auditors’ independence. A representative of PricewaterhouseCoopers LLP is expected to be present at the Annual Meeting of Stockholders and will have an opportunity to make a statement and to respond to appropriate questions. Although the Company is not required to seek stockholder approval of this appointment, the Board believes it to be sound corporate governance to do so. If the appointment is not ratified, the Finance and Audit Committee will reconsider the appointment.

Policy Regarding Finance and Audit Committee Preapproval of Audit and Permissible Non-Audit Services

In April 2003, the Finance and Audit Committee adopted a policy regarding the preapproval of all audit and permissible non-audit services to be provided to the Company by the Independent Auditors. The Finance and

 

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Audit Committee amended such policy in February 2006. On an annual basis, the Finance and Audit Committee is required to review and consider for approval the annual audit engagement terms and fees for the coming year, which includes the audit of the Company’s annual financial statements (including required quarterly reviews) and required subsidiary audits. At the same time, the Committee also reviews and considers for approval annually recurring and planned audit-related and tax services to be provided to the Company in the coming year. All of the services reviewed and approved on an annual basis are approved at an estimated fee and require additional preapproval by the Committee during the year if the estimated fee is expected to be exceeded. The authority to preapprove any services exceeding previously approved budgeted amounts by $50,000 or less is delegated to the Chair of the Finance and Audit Committee, provided that such preapprovals are reported to the full Committee at its next regularly scheduled meeting. All other permissible services to be provided by the Independent Auditors at a fee not to exceed $50,000 may be specifically preapproved by the Chair of the Finance and Audit Committee, and reported to the full Committee at its next regularly scheduled meeting.

In considering the preapproval of services to be provided by the Independent Auditors, the Finance and Audit Committee is mindful of the relationship between fees for audit and non-audit services, and may determine for each fiscal year the appropriate ratio between the total amount of fees for audit, audit-related and tax services and the total amount of fees for certain permissible non-audit services classified as all other services.

 

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PROPOSAL 3

STOCKHOLDER ADVISORY (NON-BINDING) VOTE ON EXECUTIVE COMPENSATION

In 2009, the Board of Directors adopted a Corporate Governance Principle, commonly known as a “Say-on-Pay” proposal, to annually provide stockholders with the opportunity to approve the compensation of the Company’s Named Executive Officers through consideration of the following non-binding advisory resolution:

RESOLVED, that the compensation paid to the Company’s Named Executive Officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion is hereby APPROVED.

As discussed in the Compensation Discussion and Analysis section of this Proxy Statement, the Compensation Committee’s goal in setting executive compensation is to provide total compensation opportunities that are market competitive and supportive of the Company’s strategy to attract, develop, motivate and retain outstanding executive talent. The Company’s executive compensation programs are centered on a pay-for-performance culture that are designed to reward executive officers for superior Company and individual performance while encouraging behavior that is in the long-term best interests of the Company and its stockholders. Consistent with this philosophy, a significant portion of each executive officer’s total compensation opportunity is performance-based and dependent upon the Company’s achievement of specified financial goals and the performance of the Common Stock on a long-term basis.

Stockholders are encouraged to read the Compensation Discussion and Analysis section of this Proxy Statement, which discusses the Company’s compensation plans and programs that have been designed to implement the Company’s executive compensation philosophy, as well as the Summary Compensation Table and other related compensation tables and narrative disclosure, which describe the compensation of each of the Named Executive Officers. The Compensation Committee and the Board of Directors believe that the compensation plans and programs articulated in the Compensation Discussion and Analysis section of this Proxy Statement are effective in implementing the Company’s executive compensation philosophy and that the compensation of the Named Executive Officers in 2013 reflects and supports such philosophy.

Because your vote is advisory, it will not be binding on the Board of Directors. However, the Compensation Committee will take into account the outcome of the vote when considering future executive compensation arrangements.

 

   

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ADVISORY VOTE ON EXECUTIVE COMPENSATION SET FORTH IN THIS PROPOSAL THREE.

 

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SUBMISSION OF STOCKHOLDER PROPOSALS

If a holder of the Common Stock wishes to present a proposal for consideration at next year’s Annual Meeting, any such proposal must be received at the Company’s offices at One Lexmark Centre Drive, Lexington, Kentucky 40550, Attention: Corporate Secretary, on or before November 14, 2014. In addition, the Company’s By-Laws provide that in order for any stockholder to nominate a Director or propose to transact any corporate business at an Annual Meeting of Stockholders, the stockholder must have given written notice, by certified mail, to the Secretary of the Company, which must be received by the Secretary of the Company not less than 60 nor more than 120 days prior to the first anniversary of the date on which the Company first mailed its proxy materials for the preceding year’s Annual Meeting of Stockholders. If the date of the Annual Meeting is advanced more than 30 days prior to or delayed by more than 30 days after the first anniversary of the preceding year’s Annual Meeting, the notice must be received by the Secretary not later than the close of business on the later of the 90th day prior to the Annual Meeting or the 10th day following the day on which public announcement of the date of such meeting is first made.

OTHER MATTERS

The management knows of no other matters which are likely to be brought before the meeting, but if any such matters properly come before the meeting, the persons named in the enclosed proxy, or their substitutes, will vote the proxy in accordance with their best judgment.

The Company will furnish to each person whose proxy is being solicited, upon written request, copies of any exhibits to its Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the Securities and Exchange Commission. Requests in writing for copies of any such materials should be directed to Investor Relations, Lexmark International, Inc., One Lexmark Centre Drive, Lexington, Kentucky 40550.

 

LOGO

Robert J. Patton

Secretary

March 14, 2014

 

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