Lexmark 2007 Annual Report Download - page 35

calculated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based
Compensation. The fair value of the Company’s stock-based awards, less estimated forfeitures, is
amortized over the awards’ vesting periods on a straight-line basis.
Prior to the adoption of SFAS 123R on January 1, 2006, the Company accounted for the costs of its stock-
based employee compensation plans under Accounting Principles Board (“APB”) Opinion No. 25,
Accounting for Stock Issued to Employees (“APB 25”), and related interpretations. Under APB 25,
compensation cost was not recognized for substantially all options granted because the exercise price
was at least equal to the market value of the underlying common stock on the date of grant.
The fair value of each option award on the grant date was estimated using the Black-Scholes option-pricing
model with the following assumptions: expected dividend yield, expected stock price volatility, weighted
average risk-free interest rate and weighted average expected life of the options. Under SFAS 123R, the
Company’s expected volatility assumption used in the Black-Scholes option-pricing model was based
exclusively on historical volatility and the expected life assumption was established based upon an
analysis of historical option exercise behavior. The risk-free interest rate used in the Black-Scholes model
was based on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining
term equal to the Company’s expected term assumption. The Company has never declared or paid any
cash dividends on the Class A Common Stock and has no current plans to pay cash dividends on the
Class A Common Stock. The payment of any future cash dividends will be determined by the Company’s
board of directors in light of conditions then existing, including the Company’s earnings, financial condition
and capital requirements, restrictions in financing agreements, business conditions, tax laws, certain
corporate law requirements and various other factors.
Restructuring
Lexmark records a liability for a cost associated with an exit or disposal activity at its fair value in the period
in which the liability is incurred, except for liabilities for certain employee termination benefit charges that
are accrued over time. Employee termination benefits associated with an exit or disposal activity are
accrued when the obligation is probable and estimable as a postemployment benefit obligation when local
statutory requirements stipulate minimum involuntary termination benefits or, in the absence of local
statutory requirements, termination benefits to be provided are similar to benefits provided in prior
restructuring activities. Specifically for termination benefits under a one-time benefit arrangement, the
timing of recognition and related measurement of a liability depends on whether employees are required to
render service until they are terminated in order to receive the termination benefits and, if so, whether
employees will be retained to render service beyond a minimum retention period. For employees who are
not required to render service until they are terminated in order to receive the termination benefits or
employees who will not provide service beyond the minimum retention period, the Company records a
liability for the termination benefits at the communication date. If employees are required to render service
until they are terminated in order to receive the termination benefits and will be retained to render service
beyond the minimum retention period, the Company measures the liability for termination benefits at the
communication date and recognizes the expense and liability ratably over the future service period. For
contract termination costs, Lexmark records a liability for costs to terminate a contract before the end of its
term when the Company terminates the agreement in accordance with the contract terms or when the
Company ceases using the rights conveyed by the contract. The Company records a liability for other costs
associated with an exit or disposal activity in the period in which the liability is incurred. Once Company
management approves an exit or disposal activity, the Company closely monitors the expenses that are
reported in association with the activity.
Warranty
Lexmark provides for the estimated cost of product warranties at the time revenue is recognized. The
amounts accrued for product warranties is based on the quantity of units sold under warranty, estimated
product failure rates, and material usage and service delivery costs. The estimates for product failure rates
and material usage and service delivery costs are periodically adjusted based on actual results. For
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