Lexmark 2008 Annual Report Download - page 104

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Additional Information
Other postretirement benefits:
For measurement purposes, a 8.5% annual rate of increase in the per capita cost of covered health care
benefits was assumed for 2009. The rate is assumed to decrease gradually to 5.25% in 2015 and remain at
that level thereafter. A one-percentage-point change in the health care cost trend rate would have a
de minimus effect on the benefit cost and obligation since preset caps have been met for the net employer
cost of postretirement medical benefits.
Related to Lexmark’s acquisition of the Information Products Corporation from IBM in 1991, IBM agreed to
pay for its pro rata share (currently estimated at $26.2 million) of future postretirement benefits for all the
Company’s U.S. employees based on pro rated years of service with IBM and the Company.
Cash flows:
In 2009, the Company is currently expecting to contribute approximately $100 million to its pension and
other postretirement plans.
Lexmark estimates that the future benefits payable for the pension and other postretirement plans are as
follows:
Pension Benefits
Other Postretirement
Benefits
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49.6 4.0
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49.0 4.4
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48.7 4.7
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48.6 4.7
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48.5 4.7
2014-2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260.0 24.5
16. DERIVATIVES, FINANCIAL INSTRUMENTS 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 and cash flows 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 the following hedging strategies to reduce the potentially adverse effects that market
volatility may have on its operating results:
Fair Value Hedges: 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,
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