Lexmark 2008 Annual Report Download - page 35

Download and view the complete annual report

Please find page 35 of the 2008 Lexmark annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 124

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124

extended warranty programs, the Company defers revenue in short-term and long-term liability accounts
(based on the extended warranty contractual period) for amounts invoiced to customers for these
programs and recognizes the revenue ratably over the contractual period. Costs associated with
extended warranty programs are expensed as incurred. To minimize warranty costs, the Company
engages in extensive product quality programs and processes, including actively monitoring and
evaluating the quality of its component suppliers. Should actual product failure rates, material usage
or service delivery costs differ from the Company’s estimates, revisions to the estimated warranty liability
may be required.
Inventory Reserves and Adverse Purchase Commitments
Lexmark writes down its inventory for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventory and the estimated market value. The Company estimates the
difference between the cost of obsolete or unmarketable inventory and its market value based upon
product demand requirements, product life cycle, product pricing and quality issues. Also, Lexmark
records an adverse purchase commitment liability when anticipated market sales prices are lower than
committed costs. If actual market conditions are less favorable than those projected by management,
additional inventory write-downs and adverse purchase commitment liabilities may be required.
Pension and Other Postretirement Plans
The Company’s pension and other postretirement benefit costs and obligations are dependent on various
actuarial assumptions used in calculating such amounts. The non-U.S. pension plans are not significant
and use economic assumptions similar to the U.S. pension plan. Significant assumptions the Company
must review and set annually related to its pension and other postretirement benefit obligations are:
• Expected long-term return on plan assets — based on long-term historical actual asset return
information, the mix of investments that comprise plan assets and future estimates of long-term
investment returns by reference to external sources.
• Discount rate — reflects the rates at which benefits could effectively be settled and is based on
current investment yields of high-quality fixed-income investments. The Company uses a yield-
curve approach to determine the assumed discount rate in the U.S. based on the timing of the cash
flows of the expected future benefit payments.
• Rate of compensation increase — based on the Company’s long-term plans for such increases.
Effective April 2006, this assumption is no longer applicable to the U.S. pension plan due to the
benefit accrual freeze in connection with the Company’s 2006 restructuring actions.
Plan assets are invested in equity securities, government and agency securities, mortgage-backed
securities, commercial mortgage-backed securities, asset-backed securities, corporate debt, annuity
contracts and other securities. The U.S. defined benefit plan comprises a significant portion of the assets
and liabilities relating to the defined benefit plans. The investment goal of the U.S. defined benefit plan is to
achieve an adequate net investment return in order to provide for future benefit payments to its
participants. Starting in December 2008, asset allocation percentage is targeted to be 65% equity and
35% fixed income investments. The U.S. defined benefit plan expects to employ professional investment
managers during 2009 to invest in new asset classes, including international developed equity, emerging
market equity, high yield bonds and emerging market debt. Prior to December 2008, the target asset
allocation percentages were 75% U.S. equity investments and 25% U.S. fixed income investments. Each
investment manager operates under an investment management contract that includes specific
investment guidelines, requiring among other actions, adequate diversification, prudent use of
derivatives and standard risk management practices such as portfolio constraints relating to
established benchmarks. The plan currently uses, and intends to use during the asset allocation
transition in 2009 noted above, a combination of both active management and passive index funds to
achieve its investment goals.
29