Derivatives And Risk Management

12 Months Ended

Dec. 31, 2013

Derivatives And Risk Management [Abstract]

Derivatives

18.           DERIVATIVES AND RISK MANAGEMENT

Derivative Instruments and Hedging Activities

Lexmark's activities expose it to a variety of market risks, including the effects of changes in foreign currency exchange rates and interest rates. The Company's risk management program seeks to reduce the potentially adverse effects that market risks may have on its operating results.

Lexmark maintains a foreign currency risk management strategy that uses derivative instruments to protect its interests from unanticipated fluctuations in earnings caused by volatility in currency exchange rates. The Company does not hold or issue financial instruments for trading purposes nor does it hold or issue leveraged derivative instruments. Lexmark maintains an interest rate risk management strategy that may, from time to time use derivative instruments to minimize significant, unanticipated earnings fluctuations caused by interest rate volatility. By using derivative financial instruments to hedge exposures to changes in exchange rates and interest rates, the Company exposes itself to credit risk and market risk. Lexmark manages exposure to counterparty credit risk by entering into derivative financial instruments with highly rated institutions that can be expected to fully perform under the terms of the agreement. Market risk is the adverse effect on the value of a financial instrument that results from a change in currency exchange rates or interest rates. The Company manages exposure to market risk associated with interest rate and foreign exchange contracts by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

Lexmark uses fair value hedges to reduce the potentially adverse effects that market volatility may have on its operating results. Fair value hedges are hedges of recognized assets or liabilities. Lexmark enters into forward exchange contracts to hedge accounts receivable, accounts payable and other monetary assets and liabilities. The forward contracts used in this program generally mature in three months or less, consistent with the underlying asset or liability. Foreign exchange forward contracts may be used as fair value hedges in situations where derivative instruments expose earnings to further changes in exchange rates.

Lexmark entered into a forward starting interest rate swap in December 2012 that was designated as a cash flow hedge. The Company used this instrument to lock in interest rates for a forecasted issuance of debt. The instrument hedged the risk of changes in cash flows attributable to changes in the benchmark three-month LIBOR interest rate for the first seven years of interest payments, on the first $325 million of debt issued in the first quarter of 2013. The instrument was settled at $0.0 million upon the issuance of debt by the Company in the first quarter of 2013.

Net outstanding notional amount of derivative activity as of December 31, 2013 and 2012 is as follows. This activity was driven by fair value hedges of recognized assets and liabilities primarily denominated in the currencies below.

Long (Short) Positions by Currency (in USD)	December 31, 2013
CAD/USD	$	18.5
MXN/USD		17.1
CNY/USD		(15.2	)
Other, net		0.6
Total	$	21.0

Long (Short) Positions by Currency (in USD)	December 31, 2012
EUR/USD	$	(76.5	)
CAD/USD		32.9
ZAR/USD		12.1
Other, net		(19.6	)
Total	$	(51.1	)

Accounting for Derivatives and Hedging Activities

All derivatives are recognized in the Consolidated Statements of Financial Position at their fair value. Fair values for Lexmark's derivative financial instruments are based on pricing models or formulas using current market data, or where applicable, quoted market prices. On the date the derivative contract is entered into, the Company designates the derivative as a fair value hedge. Changes in the fair value of a derivative that is highly effective as — and that is designated and qualifies as — a fair value hedge, along with the loss or gain on the hedged asset or liability are recorded in current period earnings in Cost of revenue or Other expense (income), net on the Consolidated Statements of Earnings. Derivatives qualifying as hedges are included in the same section of the Consolidated Statements of Cash Flows as the underlying assets and liabilities being hedged.

As of December 31, 2013 and 2012, the Company had the following net derivative assets (liabilities) recorded at fair value in Prepaid expenses and other current assets (Accrued liabilities) on the Consolidated Statements of Financial Position:

	Net Asset Position					Net (Liability) Position
Foreign Exchange Contracts	2013		2012			2013		2012
Gross liability position	$	(0.5	)$	(0.1	)	$	(0.4	)$	(0.8	)
Gross asset position		0.6		0.3			0.2		0.2
Net asset (liability) position (1)		0.1		0.2			(0.2	)	(0.6	)
Gross amounts not offset (2)		-		-			-		-
Net amounts	$	0.1	$	0.2		$	(0.2	)$	(0.6	)

(1) Amounts presented in the Consolidated Statements of Financial Position

(2) Amounts not offset in the Consolidated Statements of Financial Position

The Company had the following (gains) and losses related to derivative instruments qualifying and designated as hedging instruments in fair value hedges and related hedged items recorded on the Consolidated Statements of Earnings:

	Recorded in Cost of revenue*						Recorded in Other expense (income), net
Fair Value Hedging Relationships	2013		2012		2011		2013		2012		2011
Foreign Exchange Contracts	$	(2.8	)$	2.0	$	0.1	$	1.7	$	(3.6	)$	(1.5	)
Underlying		15.2		3.6		6.2		(1.3	)	1.5		(0.5	)
Total	$	12.4	$	5.6	$	6.3	$	0.4	$	(2.1	)$	(2.0	)

* Gains and losses recorded in Cost of revenue are included in Product on the Consolidated Statements of Earnings

Lexmark formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge items. This process includes linking all derivatives that are designated as fair value hedges to specific assets and liabilities on the balance sheet. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair value of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively, as discussed below.

Lexmark discontinues hedge accounting prospectively when (1) it is determined that a derivative is no longer effective in offsetting changes in the fair value of a hedged item or (2) the derivative expires or is sold, terminated or exercised. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value hedge, the derivative will continue to be carried on the Consolidated Statements of Financial Position at its fair value. In all other situations in which hedge accounting is discontinued, the derivative will be carried at its fair value on the Consolidated Statements of Financial Position, with changes in its fair value recognized in current period earnings.

Additional information regarding derivatives can be referenced in Note 3 of the Notes to Consolidated Financial Statements.

Concentrations of Risk

Lexmark's main concentrations of credit risk consist primarily of cash equivalent investments, marketable securities and trade receivables. Cash equivalents and marketable securities investments are made in a variety of high quality securities with prudent diversification requirements. The Company seeks diversification among its cash investments by limiting the amount of cash investments that can be made with any one obligor. Credit risk related to trade receivables is dispersed across a large number of customers located in various geographic areas. Collateral such as letters of credit and bank guarantees is required in certain circumstances. In addition, the Company uses credit insurance for specific obligors to limit the impact of nonperformance. Lexmark sells a large portion of its products through third-party distributors and resellers and original equipment manufacturer (“OEM”) customers. If the financial condition or operations of these distributors, resellers and OEM customers were to deteriorate substantially, the Company's operating results could be adversely affected. The three largest distributor, reseller and OEM customers collectively represented $107 million or approximately 18% of the dollar amount of outstanding invoices at December 31, 2013 and $144 million or approximately 22% of the dollar amount of outstanding invoices at December 31, 2012. One OEM customer accounted for $48 million or approximately 8% of the dollar amount of outstanding invoices at December 31, 2013 and $68 million or approximately 10% of the dollar amount of outstanding invoices at December 31, 2012. Lexmark performs ongoing credit evaluations of the financial position of its third-party distributors, resellers and other customers to determine appropriate credit limits.

Lexmark generally has experienced longer accounts receivable cycles in its emerging markets, in particular, Latin America, when compared to its U.S. and European markets. In the event that accounts receivable cycles in these developing markets lengthen further, the Company could be adversely affected.

Lexmark also procures a wide variety of components used in the manufacturing process. Although many of these components are available from multiple sources, the Company often utilizes preferred supplier relationships to better ensure more consistent quality, cost and delivery. The Company also sources some printer engines and finished products from OEMs. Typically, these preferred suppliers maintain alternate processes and/or facilities to ensure continuity of supply. Although Lexmark plans in anticipation of its future requirements, should these components not be available from any one of these suppliers, there can be no assurance that production of certain of the Company's products would not be disrupted.