10-Q 1 sub10q2q.txt LEXMARK INTERNATIONAL, INC. FORM 10Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Mark One [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 2002 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No.1-14050 LEXMARK INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 06-1308215 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) One Lexmark Centre Drive 740 West New Circle Road Lexington, Kentucky 40550 (Address of principal executive offices) (Zip Code) (859) 232-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ The registrant had 126,140,137 shares outstanding (excluding shares held in treasury) of Class A common stock, par value $0.01 per share, as of the close of business on July 31, 2002. LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES INDEX Page of Form 10-Q Part I ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (Unaudited) THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001...2 CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION (Unaudited) AS OF JUNE 30, 2002, AND DECEMBER 31, 2001.................3 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) SIX MONTHS ENDED JUNE 30, 2002 AND 2001....................4 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)..5-8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Unaudited)................9-15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........15 Part II ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................16 1 Part I - Financial Information Item 1. Financial Statements LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (In Millions, Except Per Share Amounts) (Unaudited)
Three Months Ended Six Months Ended June 30 June 30 ------------------------------ ---------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Revenue $1,058.0 $980.7 $2,108.1 $1,968.7 Cost of revenue 719.1 644.9 1,459.6 1,310.4 -------- ------ -------- -------- Gross profit 338.9 335.8 648.5 658.3 -------- ------ -------- -------- Research and development 63.5 64.2 124.7 126.4 Selling, general and administrative 152.7 149.5 296.5 292.1 -------- ------ -------- -------- Operating expense 216.2 213.7 421.2 418.5 -------- ------ -------- -------- Operating income 122.7 122.1 227.3 239.8 Interest expense 2.3 3.7 5.4 6.5 Other 0.7 2.2 4.9 6.4 -------- ------ -------- -------- Earnings before income taxes 119.7 116.2 217.0 226.9 Provision for income taxes 30.6 29.1 56.4 60.1 -------- ------ -------- -------- Net earnings $ 89.1 $ 87.1 $ 160.6 $ 166.8 ======== ====== ======== ======== Net earnings per share: Basic $ 0.69 $ 0.67 $ 1.23 $ 1.30 ======== ====== ======== ======== Diluted $ 0.67 $ 0.65 $ 1.20 $ 1.25 ======== ====== ======== ======== Shares used in per share calculation: Basic 129.9 129.2 130.2 128.6 ======== ====== ======== ======== Diluted 133.4 134.3 133.7 133.5 ======== ====== ======== ========
See notes to consolidated condensed financial statements. 2 LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION (In Millions, Except Par Value) (Unaudited)
June 30 December 31 2002 2001 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 137.0 $ 90.7 Trade receivables, net of allowance of $39.4 in 2002 and $33.3 in 2001 618.8 702.8 Inventories 470.9 455.1 Prepaid expenses and other current assets 282.7 244.5 -------- -------- Total current assets 1,509.4 1,493.1 Property, plant and equipment, net 770.7 800.4 Other assets 155.6 156.4 -------- -------- Total assets $2,435.7 $2,449.9 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt $ 11.2 $ 11.0 Accounts payable 363.9 384.7 Accrued liabilities 639.3 535.4 -------- -------- Total current liabilities 1,014.4 931.1 Long-term debt 149.1 149.1 Other liabilities 276.3 293.8 -------- -------- Total liabilities 1,439.8 1,374.0 -------- -------- Stockholders' equity: Preferred stock, $.01 par value, 1.6 shares authorized; no shares issued and outstanding - - Common stock, $.01 par value: Class A, 900.0 shares authorized; 126.7 and 130.4 outstanding in 2002 and 2001 respectively 1.6 1.6 Class B, 10.0 shares authorized; no shares issued and outstanding - - Capital in excess of par 840.6 806.2 Retained earnings 1,449.7 1,289.1 Treasury stock, at cost; 33.4 and 28.5 shares in 2002 and 2001, respectively (1,158.0) (879.8) Accumulated other comprehensive loss (138.0) (141.2) -------- -------- Total stockholders' equity 995.9 1,075.9 -------- -------- Total liabilities and stockholders' equity $2,435.7 $2,449.9 ======== ========
See notes to consolidated condensed financial statements. 3 LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In Millions) (Unaudited)
Six Months Ended June 30 ----------------------------------- 2002 2001 ---- ---- Cash flows from operating activities: Net earnings $160.6 $166.8 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 70.4 59.1 Deferred taxes 0.2 (3.2) Other 16.9 3.0 ------ ------ 248.1 225.7 Change in assets and liabilities: Trade receivables 139.0 35.9 Trade receivables program (55.0) (36.0) Inventories (15.8) (139.5) Accounts payable (20.8) (52.8) Accrued liabilities 103.9 (92.5) Tax benefits from employee stock plans 16.0 35.3 Other assets and liabilities (66.4) 14.4 ------ ------ Net cash provided by (used for) operating activities 349.0 (9.5) ------ ------ Cash flows from investing activities: Purchases of property, plant and equipment (45.8) (116.4) Other (0.3) 0.1 ------ ------ Net cash used for investing activities (46.1) (116.3) ------ ------ Cash flows from financing activities: Increase in short-term debt 1.7 106.1 Issuance of treasury stock 0.6 1.2 Purchase of treasury stock (278.8) - Proceeds from employee stock plans 16.4 19.1 ------ ------ Net cash (used for) provided by financing activities (260.1) 126.4 ------ ------ Effect of exchange rate changes on cash 3.5 (2.1) ------ ------ Net increase (decrease) in cash and cash equivalents 46.3 (1.5) Cash and cash equivalents - beginning of period 90.7 68.5 ------ ------ Cash and cash equivalents - end of period $137.0 $ 67.0 ====== ======
See notes to consolidated condensed financial statements. 4 LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying interim financial statements are unaudited; however, in the opinion of management of Lexmark International, Inc. (together with its subsidiaries, the "company"), all adjustments (which comprise only normal and recurring accruals) necessary for a fair presentation of the interim financial results have been included. The results for the interim periods are not necessarily indicative of results to be expected for the entire year. These financial statements and notes should be read in conjunction with the company's audited annual consolidated financial statements for the year ended December 31, 2001. In 2001, the Emerging Issues Task Force ("EITF") reached a consensus that consideration from a vendor to a purchaser of the vendor's products should be characterized as a reduction in revenue as stated in EITF 00-25, Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products, and clarified in EITF 01-9. This EITF consensus was effective for annual or interim financial statements beginning after December 15, 2001, with reclassification required for comparative prior periods. The company adopted this EITF as required in 2002 and the adoption of this statement had no impact on the company's net earnings, financial position or cash flows, but did result in a reclassification of certain prior year reported amounts to conform to the current year's presentation. Both revenue and selling, general and administrative expense for the three months and the six months ended June 30, 2001 were reduced by approximately $7 million and $19 million, respectively, as a result of this reclassification. 2. RESTRUCTURING AND RELATED CHARGES During the fourth quarter of 2001, Lexmark's management and board of directors approved a restructuring plan that included an elimination of up to 1,600 jobs. This plan provided for a reduction in infrastructure and overhead expenses, the elimination of the company's business class inkjet printer, and the closure of an electronic card manufacturing facility in Reynosa, Mexico. Restructuring and related charges of $58.4 million were expensed during the fourth quarter of 2001. These charges were comprised of $36.0 million of accrued restructuring costs related to separation and other exit costs, $11.4 million associated with a pension curtailment related to the employee separations and $11.0 million related to asset impairment charges. The following table presents a rollforward of the liabilities (in millions) incurred in connection with the restructuring activities in 2000 and 2001. These liabilities are reflected as accrued liabilities in the company's consolidated statements of financial position.
----------------------------------------------------------------------------------- Restructuring Employee Other Exit Liabilities Separations Costs Total ----------------------------------------------------------------------------------- December 31, 2001 $ 24.8 $ 9.5 $ 34.3 Additions - - - Payments (8.3) (1.8) (10.1) ----------------------------------------------------------------------------------- June 30, 2002 $ 16.5 $ 7.7 $ 24.2 -----------------------------------------------------------------------------------
The accrued restructuring costs for employee separations were associated with approximately 1,600 employees worldwide from various business functions and job classes. Employee separation benefits included severance, medical and other benefits. As of June 30, 2002, approximately 800 5 employees have exited the business under the restructuring plan. The other exit costs were primarily related to vendor and lease cancellation charges. In connection with the company's plans to exit the electronic card manufacturing business in Reynosa, Mexico, Lexmark sold the Reynosa operation to Manufacturers' Services Limited ("MSL") in early July 2002. Approximately 250 Reynosa employees were transferred to MSL as part of the sale transaction in July 2002 and those employees are expected to be retained by MSL. Restructuring activities are expected to be substantially completed during 2002. There have been no material changes to the plan since its announcement. 3. INVENTORIES (In millions)
Inventories consist of the following: June 30 December 31 2002 2001 ------------------- ------------------- Work in process $156.7 $146.9 Finished goods 314.2 308.2 ------ ------ $470.9 $455.1 ====== ======
4. DEBT Effective May 29, 2002, the company entered into a new $500 million unsecured, revolving credit facility with a group of banks, including a $200 million 364-day portion and a $300 million 3-year portion. Upon entering into the new credit agreement, the company terminated the existing $300 million unsecured, revolving credit facility that was due to expire on January 27, 2003. There were no amounts outstanding under the existing facility upon its termination. Under the new credit facility, the company may borrow in dollars, euros, and other optional currencies. The interest rate ranges from 0.35% to 1.25% above the London Interbank Offered Rate (LIBOR) for borrowings denominated in U.S. dollars, the Eurocurrency Interbank Offered Rate (EURIBOR) for borrowings denominated in euros, or other relevant international interest rate for borrowings denominated in another currency. The interest rate spread is based upon the company's debt ratings. In addition, the company is required to pay a facility fee on the $500 million line of credit of 0.075% to 0.25% based upon the company's debt ratings. The interest and facility fees are payable quarterly. The new credit agreement contains customary default provisions, leverage and interest coverage restrictions and certain restrictions on secured and subsidiary debt, disposition of assets, liens and mergers and acquisitions. The 364-day portion of the new $500 million credit facility has a maturity date of May 28, 2003, with an option to extend an additional 364 days. The 3-year portion of the new credit facility has a maturity date of May 29, 2005. Any amounts outstanding under the new credit facility are due according to the applicable maturity dates noted above. As of June 30, 2002, there were no amounts outstanding under this credit facility. 5. STOCKHOLDERS' EQUITY In July 2002, the company received authorization from the board of directors to repurchase an additional $200 million of its Class A common stock for a total repurchase authority of $1.4 billion. This repurchase authority allows the company, at management's discretion, to selectively repurchase its stock from time to time in the open market or in privately negotiated transactions depending upon market price and other factors. During the second quarter of 2002, the company repurchased approximately 3.5 million shares in the open market at prices ranging from $50.88 per share to $60.96 per share for a cost of approximately $202 million. During the first six months of 2002, the 6 company repurchased approximately 5.0 million shares at prices ranging from $50.00 per share to $60.96 per share for an aggregate cost of approximately $279 million. As of July 31, 2002, the company had repurchased approximately 34.2 million shares at prices ranging from $10.63 per share to $105.38 per share for an aggregate cost of approximately $1,190 million, leaving $210 million of share repurchase authority. 6. OTHER COMPREHENSIVE EARNINGS (LOSS) (In millions) Comprehensive earnings, net of taxes, consists of the following:
Three Months Ended Six Months Ended June 30 June 30 ------------------------- ------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Net earnings $89.1 $87.1 $160.6 $166.8 Other comprehensive earnings (loss): Foreign currency translation adjustment 15.2 (2.1) 14.0 (10.7) Cash flow hedging, net of reclassifications (13.6) 4.0 (10.6) 15.6 Minimum pension liability adjustment ( 0.2) 0.2 ( 0.2) 0.2 ----- ----- ------ ------ Comprehensive earnings $90.5 $89.2 $163.8 $171.9 ===== ===== ====== ======
Accumulated other comprehensive earnings (loss) consists of the following:
Accumulated Minimum Other Translation Cash Flow Pension Comprehensive Adjustment Hedges Liability Earnings (Loss) ------------ ---------- ---------- --------------- Balance, December 31, 2001 $(64.3) $(14.9) $(62.0) $(141.2) First quarter 2002 change (1.2) 3.0 - 1.8 ------ ------ ------ ------- Balance, March 31, 2002 (65.5) (11.9) (62.0) (139.4) Second quarter 2002 change 15.2 (13.6) ( 0.2) 1.4 ------ ------ ------- ------- Balance, June 30, 2002 $(50.3) $(25.5) $(62.2) $(138.0) ====== ====== ====== =======
7 7. EARNINGS PER SHARE (EPS) (In millions, except per share amounts) The following is a reconciliation of the weighted average shares used in the basic and diluted EPS calculations:
Three Months Ended Six Months Ended June 30 June 30 ------------------------ ------------------------ 2002 2001 2002 2001 ---- ---- ---- ---- Net earnings $ 89.1 $ 87.1 $160.6 $166.8 ====== ====== ====== ====== Weighted average shares used for basic EPS 129.9 129.2 130.2 128.6 Effect of dilutive securities Stock options 3.5 5.1 3.5 4.9 ------ ------ ------ ------ Weighted average shares used for diluted EPS 133.4 134.3 133.7 133.5 ====== ====== ====== ====== Basic net EPS $ 0.69 $ 0.67 $ 1.23 $ 1.30 Diluted net EPS $ 0.67 $ 0.65 $ 1.20 $ 1.25
Options to purchase an additional 2.3 million and 2.0 million shares of Class A common stock for the three and six month periods ended at June 30, 2002 and 2001, respectively, were outstanding but were not included in the computation of diluted earnings per share because their effect would be antidilutive. 8. NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. SFAS 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed at least annually for impairment. The company adopted SFAS 142 as required on January 1, 2002. During the second quarter of 2002, the company completed the initial transitional goodwill impairment test, which did not indicate any goodwill impairment. Since previously reported goodwill amortization was immaterial for the company in the prior periods presented, the discontinuation of goodwill amortization will not have a material impact on the company's financial position, results of operations or cash flows. Pro forma net earnings and earnings per share are not presented because such amounts are not materially different than amounts previously reported for the three and six months ended June 30, 2001. 8 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (Unaudited) LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES Basis of Presentation --------------------- In 2001, the Emerging Issues Task Force ("EITF") reached a consensus that consideration from a vendor to a purchaser of the vendor's products should be characterized as a reduction in revenue as stated in EITF 00-25, Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products, and clarified in EITF 01-9. This EITF consensus was effective for annual or interim financial statements beginning after December 15, 2001, with reclassification required for comparative prior periods. The company adopted this EITF as required in 2002 and the adoption of this statement had no impact on the company's net earnings, financial position or cash flows, but did result in a reclassification of certain prior year reported amounts to conform to the current year's presentation. Both revenue and selling, general and administrative expense for the three months and six months ended June 30, 2001 were reduced by approximately $7 million and $19 million, respectively, as a result of this reclassification. Results of Operations --------------------- Consolidated revenue for the three months ended June 30, 2002 was $1,058 million, an increase of 8% over the same period of 2001. Revenue was positively affected by foreign currency exchange rates primarily due to strengthening of European currencies against the U.S. dollar. Revenue growth was 6% for the quarter on a constant currency basis. Total U.S. revenue increased $52 million or 12% and international revenue, including exports from the U.S., increased $25 million or 5%. The quarterly revenue growth was driven by increased sales of laser and inkjet supplies whose revenue increased 18% over 2001. Laser and inkjet supplies revenue was $566 million for the second quarter of 2002, versus $482 million for the same period in 2001, and represents 53% of total revenue versus 49% in 2001. Laser and inkjet printer revenue was $394 million for the second quarter of 2002, a 9% increase from 2001. For the six months ended June 30, 2002, consolidated revenue was $2,108 million, an increase of 7% over the same period of 2001. Revenue growth was also 7% on a constant currency basis. Total U.S. revenue increased $146 million or 17%, and international revenue, including exports from the U.S., decreased $7 million or 1%. The revenue growth for the first half of 2002 was driven by increased sales of laser and inkjet supplies whose revenue increased 17% over 2001. Laser and inkjet supplies revenue was $1,112 million for the six months ended June 30, 2002, versus $952 million for the same period in 2001, and represents 53% of total revenue versus 48% in 2001. Laser and inkjet printer revenue was $795 million for the first half of 2002, a 7% increase over 2001. Revenue from sales to all original equipment manufacturers ("OEM") customers for the three and six months ended June 30, 2002, accounted for less than 10% of consolidated revenue with no single OEM customer accounting for more than 5% of total revenue. Consolidated gross profit was $339 million for the three months ended June 30, 2002, an increase of 1% from the same period of 2001. For the six months ended June 30, 2002, consolidated gross profit was $648 million, a decrease of 1% from the same period of 2001. Gross profit as a percentage of revenue for the quarter ended June 30, 2002 decreased to 32.0% from 34.2% in the second quarter of 2001. Gross profit as a percentage of revenue for the six months ended June 30, 2002 decreased to 30.8% from 33.4% for the same period in 2001. These decreases were principally due to lower printer margins, partially offset by higher supplies margins and an increase of supplies in the product mix. 9 Total operating expense increased 1% for both the three and six month periods of 2002 compared to the same periods in 2001. Operating expense as a percentage of revenue for the quarter was 20.4% compared to 21.8% for the corresponding period of 2001. Operating expense as a percentage of revenue for the first half of 2002 was 20.0% compared to 21.3% for the same period of 2001. These decreases reflect the company's continuing focus on expense management and benefits of the restructuring announced in the fourth quarter of 2001. Consolidated operating income was $123 million for the second quarter of 2002, a slight increase over 2001, due to higher revenue with little expense growth. For the six months ended June 30, 2002, consolidated operating income was $227 million, a decline of $13 million compared to the same period of 2001, principally due to lower gross profit margins. Non-operating expenses declined $3 million for both the three and six month periods of 2002 as compared to the corresponding periods in 2001. The decrease for the quarter was primarily due to lower borrowings under the company's trade receivables financing program and revolving credit facility as well as lower interest rates. The decrease for the first half of the year was also due to lower borrowings and lower interest rates, partially offset by the write-down of an investment during the first quarter of 2002. Net earnings for the second quarter of 2002 were $89 million, up 2% compared to the second quarter of 2001, due to the decrease in non-operating expenses. During the second quarter of both 2002 and 2001, the effective income tax rates were lowered. During the second quarter of 2002, the effective income tax rate was reduced from 26.5% to 26.0%, resulting in a quarterly effective income tax rate of 25.6%. During the second quarter of 2001, the effective income tax rate was reduced from 28.0% to 26.5%, resulting in a quarterly effective income tax rate of 25.1%. The decrease in the effective income tax rate was primarily due to lower income tax rates on manufacturing activities in certain countries. Basic net earnings per share were $0.69 for the second quarter of 2002 compared to $0.67 in the corresponding period of 2001. Diluted net earnings per share were $0.67 in the second quarter of 2002, compared to $0.65 in 2001, an increase of 3%. These increases were primarily due to the increase in net earnings. Net earnings for the first half of 2002 were $161 million, down 4% compared to the same period of 2001. The decrease was primarily due to lower operating income. The effective income tax rate was 26.0% for the six months ended June 30, 2002 compared to 26.5% for the same period in 2001. The decrease in the effective income tax rate was primarily due to lower income tax rates on manufacturing activities in certain countries. Basic net earnings per share were $1.23 for the first six months of 2002 compared to $1.30 in the corresponding period of 2001. Diluted net earnings per share were $1.20 for the first six months of 2002 compared to $1.25 in the same period of 2001. These decreases were primarily due to lower net earnings. Financial Condition ------------------- The company's financial position remains strong at June 30, 2002, with working capital of $495 million compared to $562 million at December 31, 2001. At June 30, 2002, the company had outstanding $11 million of short-term debt and $149 million of long-term debt. The debt to total capital ratio was 14% at June 30, 2002 compared to 13% at December 31, 2001. Cash provided by operating activities for the six months ended June 30, 2002 was $349 million compared to $10 million cash used for operating activities for the same period of 2001. The increase in cash flows from operating activities was primarily due to favorable changes in working capital accounts, particularly accrued liabilities, inventories and trade receivables, offset slightly by unfavorable changes in other assets and liabilities. 10 Effective May 29, 2002, the company entered into a new $500 million unsecured, revolving credit facility with a group of banks, including a $200 million 364-day portion and a $300 million 3-year portion. Upon entering into the new credit agreement, the company terminated the existing $300 million unsecured, revolving credit facility that was due to expire on January 27, 2003. There were no amounts outstanding under the existing facility upon its termination. Under the new credit facility, the company may borrow in dollars, euros and other optional currencies. The interest rate ranges from 0.35% to 1.25% above the London Interbank Offered Rate (LIBOR) for borrowings denominated in U.S. dollars, the Eurocurrency Interbank Offered Rate (EURIBOR) for borrowings denominated in euros, or other relevant international interest rate for borrowings denominated in another currency. The interest rate spread is based upon the company's debt ratings. In addition, the company is required to pay a facility fee on the $500 million line of credit of 0.075% to 0.25% based upon the company's debt ratings. The interest and facility fees are payable quarterly. The new credit agreement contains customary default provisions, leverage and interest coverage restrictions and certain restrictions on secured and subsidiary debt, disposition of assets, liens and mergers and acquisitions. The 364-day portion of the new $500 million credit facility has a maturity date of May 28, 2003, with an option to extend an additional 364 days. The 3-year portion of the new credit facility has a maturity date of May 29, 2005. Any amounts outstanding under the new credit facility are due according to the applicable maturity dates noted above. As of June 30, 2002, there were no amounts outstanding under this credit facility. Capital expenditures for the first six months of 2002 were $46 million compared to $116 million for the same period of 2001. The 2002 capital expenditures were principally for infrastructure support and new product development. It is anticipated that capital expenditures for 2002 will be lower than previously estimated and will be between $125 million and $130 million. The 2002 capital expenditures are expected to be funded primarily through cash from operations. In July 2002, the company received authorization from the board of directors to repurchase an additional $200 million of its Class A common stock for a total repurchase authority of $1.4 billion. This repurchase authority allows the company, at management's discretion, to selectively repurchase its stock from time to time in the open market or in privately negotiated transactions depending upon market price and other factors. During the second quarter of 2002, the company repurchased approximately 3.5 million shares in the open market at prices ranging from $50.88 per share to $60.96 per share for a cost of approximately $202 million. During the first six months of 2002, the company repurchased approximately 5.0 million shares at prices ranging from $50.00 per share to $60.96 per share for an aggregate cost of approximately $279 million. As of July 31, 2002, the company had repurchased approximately 34.2 million shares at prices ranging from $10.63 per share to $105.38 per share for an aggregate cost of approximately $1,190 million, leaving approximately $210 million of share repurchase authority. Restructuring and related charges --------------------------------- During the fourth quarter of 2001, Lexmark's management and board of directors approved a restructuring plan that included an elimination of up to 1,600 jobs. This plan provided for a reduction in infrastructure and overhead expenses, the elimination of the company's business class inkjet printer, and the closure of an electronic card manufacturing facility in Reynosa, Mexico. Restructuring and related charges of $58.4 million were expensed during the fourth quarter of 2001. These charges were comprised of $36.0 million of accrued restructuring costs related to separation and other exit costs, $11.4 million associated with a pension curtailment loss related to the employee separations and $11.0 million related to asset impairment charges. 11 The following table presents a rollforward of the liabilities (in millions) incurred in connection with the restructuring activities in 2000 and 2001. These liabilities are reflected as accrued liabilities in the company's consolidated statements of financial position.
------------------------------------------------------------------------------- Restructuring Employee Other Exit Liabilities Separations Costs Total ------------------------------------------------------------------------------- December 31, 2001 $24.8 $9.5 $34.3 Additions - - - Payments (8.3) (1.8) (10.1) ------------------------------------------------------------------------------- June 30, 2002 $16.5 $7.7 $24.2 -------------------------------------------------------------------------------
The accrued restructuring costs for employee separations were associated with approximately 1,600 employees worldwide from various business functions and job classes. Employee separation benefits included severance, medical and other benefits. As of June 30, 2002, approximately 800 employees have exited the business under the restructuring plan. The other exit costs were primarily related to vendor and lease cancellation charges. In connection with the company's plans to exit the electronic card manufacturing business in Reynosa, Mexico, Lexmark sold the Reynosa operation to Manufacturers' Services Limited ("MSL") in early July 2002. Approximately 250 Reynosa employees were transferred to MSL as part of the sale transaction in July 2002 and those employees are expected to be retained by MSL. Restructuring activities are expected to be substantially completed during 2002. Annual savings from the 2001 restructuring should approximate $55 million, with about $40 million being achieved in 2002. These savings will be used to offset competitive pricing impacts and for new investments. New Accounting Standards ------------------------ In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. SFAS 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed at least annually for impairment. The company adopted SFAS 142 as required on January 1, 2002. During the second quarter of 2002, the company completed the initial transitional goodwill impairment test, which did not indicate any goodwill impairment. Since previously reported goodwill amortization was immaterial for the company in the prior periods presented, the discontinuation of goodwill amortization will not have a material impact on the company's financial position, results of operations or cash flows. Pro forma net earnings and earnings per share are not presented because such amounts are not materially different than amounts previously reported for the three and six months ended June 30, 2001. Factors That May Affect Future Results and Information Concerning Forward - -------------------------------------------------------------------------------- Looking Statements ------------------ Statements contained in this report which are not statements of historical fact are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are made based upon management's current expectations and beliefs concerning future developments and their potential effects upon the company. There can be no assurance that future developments affecting the company will be those anticipated by management, and there are a number of factors that could adversely affect the company's future operating results or cause the company's actual results to differ materially from the estimates or expectations reflected in such forward-looking statements, including without limitation, the factors set forth below: o Unfavorable global economic conditions may adversely impact the company's future operating results. Since the second quarter of 2001, the company has experienced weak markets for its products. Continued softness in these markets and uncertainty about the timing and extent of the global economic 12 downturn by both corporate and consumer purchasers of the company's products could result in lower demand for the company's products. Weakness in demand may result in excessive inventory for the company and/or its reseller channel which may adversely affect sales, pricing and/or other elements of the company's operating results. o The company's performance depends in part upon its ability to successfully forecast the timing and extent of customer demand and manage worldwide distribution and inventory levels to support the demand of its customers, and to address production and supply constraints, particularly delays in the supply of key components necessary for production, which may result in the company incurring additional costs to meet customer demand. The company's future operating results and its ability to effectively grow or maintain its market share may be adversely affected if it is unable to address these issues on a timely basis. In addition, the complexity of the company's business requires ongoing implementation of software and other systems improvements necessary to support the business, and the failure of any such implementation could have a material adverse effect on the company's financial results. o Delays in customer purchases of existing products in anticipation of new product introductions by the company or its competitors and market acceptance of new products and pricing programs, the reaction of competitors to any such new products or programs, the life cycles of the company's products, as well as delays in product development and manufacturing, may cause a buildup in the company's inventories, make the transition from current products to new products difficult and could adversely affect the company's future operating results. o The company's future operating results may be adversely affected if it is unable to continue to develop, manufacture and market products that meet customers' needs. The markets for laser and inkjet printers and associated supplies are increasingly competitive, especially with respect to pricing and the introduction of new technologies and products offering improved features and functionality. The competitive pressure to develop technology and products also could cause significant changes in the level of the company's operating expenses. The company's inability to effectively deal with these competitive issues could have a material adverse effect on the company's financial results. o The company and its major competitors, many of which have significantly greater financial, marketing and/or technological resources than the company, have regularly lowered prices on their printers and are expected to continue to do so. In particular, both the inkjet and laser printer markets have experienced and are expected to continue to experience significant price pressure. Price reductions on inkjet or laser printers, variations in the cost of component parts, or the inability to reduce costs, contain expenses or increase sales as currently expected, as well as price protection measures, could result in lower profitability and jeopardize the company's ability to grow or maintain its market share. o The company markets and sells its products through several sales channels to customers and resellers. The company's future results may be adversely affected by any conflicts that might arise between or among its various sales channels. The company has advanced a strategy of forming alliances and OEM arrangements with many companies. One such OEM customer is Compaq Computer Corporation ("Compaq"), which represented less than three percent of the company's revenue in 2001, and the consummation of the HP/Compaq merger has resulted in the loss of Compaq as a customer. Aggressive pricing on laser and inkjet printers and/or associated supplies from customers and resellers, including, without limitation, OEM customers, could result in a material adverse impact on the company's strategy and financial results. In addition, the financial failure or loss of a key alliance or OEM customer, other customer, or reseller, could have a material adverse impact on the company's financial results. o Competition from or claims by supplies remanufacturers and refillers, as well as various governmental initiatives, may have an adverse impact on the company's supplies business which would likely have an adverse impact on the company's profitability. Price reductions on inkjet and laser supplies products are likely to result in lower profitability and could result in a material adverse impact on the company's strategy and financial results. 13 o The company relies heavily on its domestic and international production facilities and manufacturing partners for the manufacture of its products and key components of its products. Future operating results may be adversely affected by several factors, including, without limitation, if the company's domestic or international operations or manufacturing partners are unable to supply products reliably, if there are disruptions in international trade, if there are difficulties in transitioning manufacturing activities to other company operations or manufacturing partners, or if there arise production and supply constraints which result in additional costs to the company. In addition, the financial failure or loss of a key supplier could result in a material adverse impact on the company's financial results. o The company's success depends in part on its ability to obtain patents, copyrights and trademarks, maintain trade secret protection and operate without infringing the proprietary rights of others. Current or future claims of intellectual property infringement could prevent the company from obtaining technology of others and could otherwise adversely affect its operating results or business, as could expenses incurred by the company in obtaining intellectual property rights, enforcing its intellectual property rights against others or defending against claims that the company's products infringe the intellectual property rights of others. o Terrorist attacks, such as those that took place in the United States on September 11, 2001, and the potential for future terrorist attacks have created many political and economic uncertainties, some of which may affect the company's future operating results. Future terrorist attacks, the national and international responses to such attacks, and other acts of war or hostility may affect the company's facilities, employees, suppliers, customers, transportation networks and supply chains, or may affect the company in ways that are not capable of being predicted presently. o Factors unrelated to the company's operating performance, including the loss of significant customers, manufacturing partners or suppliers; the outcome of pending and future litigation or governmental proceedings; and the ability to retain and attract key personnel, could also adversely affect the company's operating results. In addition, the company's stock price, like that of other technology companies, can be volatile. Trading activity in the company's common stock, particularly the trading of large blocks and intraday trading in the company's common stock, may affect the company's common stock price. o The company believes that one of its competitive advantages is its exclusive focus on printing solutions. The entrance of a competitor that is also exclusively focused on printing solutions could offset this advantage and could have a material adverse impact on the company's strategy and financial results. o Revenue derived from international sales make up approximately half of the company's revenue. Accordingly, the company's future results could be adversely affected by a variety of factors, including changes in a specific country's or region's political or economic conditions, foreign currency exchange rate fluctuations, trade protection measures and unexpected changes in regulatory requirements. Moreover, margins on international sales tend to be lower than those on domestic sales, and the company believes that international operations in new geographic markets will be less profitable than operations in the U.S. and European markets, in part, because of the higher investment levels for marketing, selling and distribution required to enter these markets. While the company reassesses material trends and uncertainties affecting the company's financial condition and results of operations in connection with the preparation of its quarterly and annual reports, the company does not intend to review or revise, in light of future events, any particular forward-looking statement contained in this report. The information referred to above should be considered by investors when reviewing any forward-looking statements contained in this report, in any of the company's public filings or press releases or in any oral statements made by the company or any of its officers or other persons acting on its behalf. The important factors that could affect forward-looking statements are subject to change, and the company does not intend to update the foregoing list of certain important factors. By means of this cautionary note, the company 14 intends to avail itself of the safe harbor from liability with respect to forward-looking statements that is provided by Section 27A and Section 21E referred to above. Item 3. Quantitative and Qualitative Disclosures About Market Risk The market risk inherent in the company's financial instruments and positions represents the potential loss arising from adverse changes in interest rates and foreign currency exchange rates. Interest Rates -------------- At June 30, 2002, the fair value of the company's senior notes is estimated at $151 million using quoted market prices and yields obtained through independent pricing sources for the same or similar types of borrowing arrangements, taking into consideration the underlying terms of the debt. The fair value of the senior notes exceeded the carrying value as recorded in the statements of financial position at June 30, 2002 by approximately $2 million. Market risk is estimated as the potential change in fair value resulting from a hypothetical 10% adverse change in interest rates and amounts to approximately $5 million at June 30, 2002. Foreign Currency Exchange Rates ------------------------------- The company employs a foreign currency hedging strategy to limit potential losses in earnings or cash flows from adverse foreign currency exchange rate movements. Foreign currency exposures arise from transactions denominated in a currency other than the company's functional currency and from foreign denominated revenue and profit translated into U.S. dollars. The primary currencies to which the company is exposed include the euro, the British pound, the Japanese yen and other Asian and South American currencies. Exposures are hedged with foreign currency forward contracts, put options, and call options with maturity dates of less than eighteen months. The potential loss in fair value at June 30, 2002, for such contracts resulting from a hypothetical 10% adverse change in all foreign currency exchange rates is approximately $19 million. This loss would be mitigated by corresponding gains on the underlying exposures. 15 LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders The information required to be reported for the company's Annual Meeting of Stockholders held April 30, 2002, was previously reported by the company in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: A list of exhibits is set forth in the Exhibit Index found on page 18 of this report. (b) Reports on Form 8-K: None 16 LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, both on behalf of the registrant and in his capacity as principal accounting officer of the registrant. Lexmark International, Inc. Registrant) Date: August 7, 2002 By: /s/ Gary D. Stromquist ------------------------ Gary D. Stromquist Vice President and Corporate Controller (Chief Accounting Officer) 17 EXHIBIT INDEX Exhibits: 10 Multicurrency Revolving Credit Agreement, dated as of May 29, 2002, by and among the company, as Borrower, the Lenders party thereto, Fleet National Bank, as Administrative Agent, Fleet Securities, Inc. as Arranger, JPMorgan Chase Bank and Citicorp USA, Inc. as Co-Syndication Agents, and Key Corporate Capital Inc. and SunTrust Bank as Co-Documentation Agents. 12 Computation of Ratio of Earnings to Fixed Charges. 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Purusant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Purusant to Section 906 of the Sarbanes-Oxley Act of 2002. 18