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2009 Annual Report
Lexmark International, Inc.

Table of contents

  • Page 1
    2009 Annual Report Lexmark International, Inc.

  • Page 2
    ... in millions, except per share data) Statement of Earnings Data: Revenue Cost of revenue (1) Gross profit Research and development Selling, general and administrative (1) Restructuring and related charges (1) Operating expense Operating income (1) (2) Interest (income) expense, net Other (income...

  • Page 3
    ...initiatives in research and development, marketing and sales, and solutions and services. Strengthening our competitive position In 2009, we launched a number of new products improving our competitive position in color lasers, laser MFPs and business inkjets. According to our internal assessment for...

  • Page 4
    ... in 2009 in both our color laser and laser MFP units, signifi cantly outperforming the market. We also continued to have strong growth in 2009 in our managed print services business as we continued to help our enterprise customers optimize their output environment and improve their paper based...

  • Page 5
    ...One Lexmark Centre Drive 740 West New Circle Road Lexington, Kentucky (Address of principal executive offices) 40550 (Zip Code) (859) 232-2000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange...

  • Page 6
    ... ...Item 9B. OTHER INFORMATION ...Item 10. Item 11. Item 12. Item 13. Item 14. Item 15. PART III DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE . EXECUTIVE COMPENSATION...SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ...CERTAIN RELATIONSHIPS...

  • Page 7
    ... two-thirds of international sales. Lexmark's products are sold in more than 150 countries in North and South America, Europe, the Middle East, Africa, Asia, the Pacific Rim and the Caribbean. This geographic diversity offers the Company opportunities to participate in new markets, provides...

  • Page 8
    .... Most shared workgroup products also have sophisticated network management tools and are available as single function printers and multifunction products that print/ copy/fax and scan to network. Color and multifunction products continue to represent a more significant portion of the laser market...

  • Page 9
    inkjet multifunction products designed for office use such as wireless and ethernet connectivity, automatic document feeders and duplex capabilities, as well as web-based applications to automate print and document related work functions. This trend represents an opportunity for the Company to ...

  • Page 10
    ... innovative T656dne monochrome laser printer expands the usefulness of a single-function machine. Leveraging Lexmark's award-winning Embedded Solutions Framework, the T656dne is preloaded with a Forms and Favorites application that allows for the printing of documents stored online, including web 4

  • Page 11
    ... Lexmark Rewards program, which rewards customers with free genuine Lexmark toner and imaging kits for sending their empty cartridges back to Lexmark for recycling or remanufacturing. The Lexmark X730 Series of color laser MFPs combines fast, high-quality color printing, copying, faxing and scanning...

  • Page 12
    ... printers that offer print, copy, scan and fax functionality targeted at SOHO and business users. In 2009, Lexmark continued to advance the technology and value of its inkjet product line. Lexmark introduced nine inkjet AIO printers, eight of which are Wi-Fi CERTIFIEDTM at competitive price points...

  • Page 13
    .... Lexmark's international sales and marketing activities for business customers are organized to meet the needs of the local jurisdictions and the size of their markets. Operations in Europe, Middle East, Africa (EMEA), North America, Latin America and Asia Pacific focus on large-account and SMB...

  • Page 14
    ... as distributors and resellers worldwide. Lexmark's sales and marketing activities are organized to meet the needs of the various geographies and the size of their markets. In North America, products are primarily distributed through large discount store chains, consumer electronics stores, office...

  • Page 15
    ...Lexmark's toner and ink cartridges are available and compete with the Company's supplies business. However, these alternatives may result in inconsistent quality and reliability. As the installed base of laser and inkjet products matures, the Company expects competitive supplies activity to increase...

  • Page 16
    ...on laser and inkjet printers, MFPs, and associated supplies, features, and related technologies. Lexmark's primary research and development activities are conducted in Lexington, Kentucky; Boulder, Colorado; Cebu City, Philippines; and Kolkata, India. In the case of certain products, the Company may...

  • Page 17
    ...Officer Executive Vice President and Chief Financial Officer Executive Vice President and President of Imaging Solutions Division Vice President and President of Printing Solutions and Services Division Vice President of Asia Pacific and Latin America Vice President of Human Resources Vice President...

  • Page 18
    ... claimed in these patents and patent applications cover aspects of the Company's current and potential future products, manufacturing processes, business methods and related technologies. The Company is developing a portfolio of patents that protects its product lines and offers the possibility of...

  • Page 19
    ... other elements of the Company's operating results. Ongoing weakness in demand for the Company's hardware products may also cause erosion of the installed base of products over time, thereby reducing the opportunities for supplies sales in the future. The competitive pricing pressure in the market...

  • Page 20
    ... market and sell its new product line, as well as develop and manufacture additional products, designed for the geographic and customer and product segments of the inkjet market that support higher usage of supplies. Any failure by the Company to execute planned cost reduction measures timely...

  • Page 21
    ... products in anticipation of new product introductions by the Company or its competitors and market acceptance of new products and pricing programs, any disruption in the supply of new or existing products as well as the costs of any product recall or increased warranty, repair or replacement costs...

  • Page 22
    ...to successfully implement new information technology systems, may negatively impact the Company's operating results. • The Company depends on its information technology systems for the development, manufacture, distribution, marketing, sales and support of its products and services. Any failure in...

  • Page 23
    ... its information technology system and application maintenance functions to third-party service providers. The Company is in the process of centralizing certain of its accounting and other finance functions and order-to-cash functions from various countries to shared service centers. The Company is...

  • Page 24
    ... and financial condition and increase our costs and expenses. As the Company continues its consolidation of certain functions into shared service centers and movement of certain functions to lower cost countries, the probability and impact of business disruptions may be increased over time. 18

  • Page 25
    ... and intraday trading in the Company's common stock, may affect the Company's common stock price. Item 1B. UNRESOLVED STAFF COMMENTS Not applicable. Item 2. PROPERTIES Lexmark's corporate headquarters and principal development facilities are located on a 374 acre campus in Lexington, Kentucky. At...

  • Page 26
    Part II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Lexmark's Class A Common Stock is traded on the New York Stock Exchange under the symbol "LXK." As of February 19, 2010, there were 2,877 holders of record...

  • Page 27
    ... graph compares cumulative total stockholder return on the Company's Class A Common Stock with a broad performance indicator, the S&P Composite 500 Stock Index, and an industry index, the S&P 500 Information Technology Index, for the period from December 31, 2004, to December 31, 2009. The graph...

  • Page 28
    ...or meeting fees, that would have otherwise been paid in cash. (3) Of the 6.4 million shares available, 6.1 million relate to employee plans (of which 5.0 million may be granted as full-value awards) and 0.3 million relate to the nonemployee director plan. (4) Lexmark has only one equity compensation...

  • Page 29
    ... under Part II, Item 8 of this Form 10-K. (Dollars in Millions, Except per Share Data) 2009 2008 2007 2006 2005 Statement of Earnings Data: Revenue ...Cost of revenue (1) ...Gross profit ...Research and development ...Selling, general and administrative (1) ...Restructuring and related charges...

  • Page 30
    ... developer, manufacturer and supplier of printing and imaging solutions for the office. Lexmark's products include laser printers, inkjet printers, multifunction devices, dot matrix printers and associated supplies, services and solutions. The Company is primarily managed along divisional lines...

  • Page 31
    ...to purchase output through print and document management software solutions and services that help customers to optimize their document-related infrastructure to improve productivity and cost. The inkjet product market historically has been predominantly a consumer market, but there is an increasing...

  • Page 32
    web-based applications to automate print and document related work functions. This trend represents an opportunity for the Company to pursue revenue growth opportunities with its inkjet products and solutions targeted at SOHO and business market segments. While profit margins on printers and MFPs ...

  • Page 33
    ...business model: • Lexmark is exclusively focused on delivering distributed printing and imaging, and related document solutions and services. • Lexmark internally develops three of the key print technologies associated with distributed printing, including inkjet, monochrome laser and color laser...

  • Page 34
    ...in-transit inventory) as of the date of the price change. If market conditions were to decline, Lexmark may take actions to increase customer incentive offerings or reduce prices, possibly resulting in an incremental reduction of revenue at the time the incentive is offered. The Company also records...

  • Page 35
    ... 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 extended warranty programs, the Company defers...

  • Page 36
    ..., are accumulated and amortized over the estimated future service period of active plan participants. For 2009, a 25 basis point change in the assumptions for asset return and discount rate would not have had a significant impact on the Company's results of operations. The accounting guidance for...

  • Page 37
    ... be used when available. The three levels of the fair value hierarchy are: • Level 1 - Quoted prices (unadjusted) in active markets for identical, unrestricted assets or liabilities that the Company has the ability to access at the measurement date; • Level 2 - Inputs other than quoted prices...

  • Page 38
    ... in discounted cash flow analysis being performed through the legal maturities of these securities, ranging from the year 2032 through 2040, or in the case of the auction rate preferred stock, through the mandatory redemption date of year-end 2021. In contrast, at year-end 2008, the company assumed...

  • Page 39
    ...analysis using the quantitative and qualitative factors described above are then assessed to determine whether the entire net book value basis of each identified security will be recovered. The Company performs this assessment by comparing the present value of the cash flows expected to be collected...

  • Page 40
    ... on driving long-term performance by strategically investing in technology, products and solutions to secure high value product installations and capture profitable supplies and service annuities in document and print intensive segments of the distributed printing market. • The PSSD strategy is...

  • Page 41
    ... in September 2009 of inkjet AIOs (including new Web-connected touch screen AIOs) targeted for small and medium businesses; • An increasing amount of industry recognition and awards for its inkjet products; and • An improvement in the Company's retail presence in U.S. Office Super Stores. By...

  • Page 42
    ...provide a breakdown of the Company's revenue by product category, hardware unit shipments and market segment: Revenue by product: (Dollars in Millions) 2009 2008 % Change 2008 2007 % Change Laser and inkjet printers ...Laser and inkjet supplies ...Other ...Total revenue ... $ 938.8 2,751.8 189...

  • Page 43
    ...% YTY primarily due to lower low-end mono-laser units, partially offset by unit growth in laser MFPs and single function color devices. Laser hardware AUR, which reflects the changes in both pricing and mix, increased approximately 4% YTY due to a positive product mix shift toward workgroup and MFP...

  • Page 44
    ... product mix shift, partially offset by a negative impact of pricing. Revenue by geography: The following table provides a breakdown of the Company's revenue by geography: (Dollars in Millions) United States ...EMEA (Europe, the Middle East & Africa) ...Other International ...Total revenue ... 2009...

  • Page 45
    ... to reduce these operating expenses through platform consolidations and increased productivity. Research and development increased in 2008 compared to the prior year primarily due to the Company's investment to support laser product and solution development. Selling, general and administrative ("SG...

  • Page 46
    ... product mix. Operating income for ISD increased YTY due to increased hardware gross margin, due to lower hardware unit sales, and decreased operating expenses, partially offset by lower supplies revenue. During 2009, the Company incurred total pre-tax restructuring-related charges and project costs...

  • Page 47
    ... the prior year primarily due to lower operating income partially offset by a lower effective tax rate. Net earnings in 2008 included $92.7 million of pre-tax restructuring-related charges and project costs in connection with the Company's restructuring activities versus $52.0 million in 2007. See...

  • Page 48
    ..., with a focus in manufacturing and supply chain, service delivery overhead, marketing and sales support, corporate overhead and development positions as well as reducing cost through consolidation of facilities in supply chain and cartridge manufacturing. The Company expects these actions to be...

  • Page 49
    ... to be incurred in 2010 - 2011. The company expects the total cash cost of this plan to be approximately $105 million. Lexmark expects the October 2009 Restructuring Plan to generate savings of approximately $70 million in 2010, and ongoing savings beginning in 2011 of approximately $110 million...

  • Page 50
    April 2009 Restructuring Plan General As part of Lexmark's ongoing plan to consolidate manufacturing capacity and reduce costs and expenses worldwide, the Company announced on April 21, 2009 the planned closure of its inkjet cartridge manufacturing facility in Juarez, Mexico by the end of the first...

  • Page 51
    ... include general and administrative functions, supply chain and sales support, research and development program consolidation, as well as marketing and sales management. Expected savings are $50.0 million per year, with approximately 95% of the savings expected to benefit operating expense, and the...

  • Page 52
    ... of one of the Company's inkjet supplies manufacturing facilities in Mexico. The 2008 Restructuring Plan was substantially completed by the end of the first quarter of 2009 and any remaining charges to be incurred will be immaterial. Impact to 2009 Financial Results For the year ended December 31...

  • Page 53
    ... Company announced the "2007 Restructuring Plan" which included: • Closing one of the Company's inkjet supplies manufacturing facilities in Mexico and additional optimization measures at the remaining inkjet facilities in Mexico and the Philippines; • Reducing the Company's business support cost...

  • Page 54
    ... year ended December 31, 2008, the Company incurred restructuring and related charges and project costs related to its 2007 Restructuring Plan of $9.2 million in PSSD, $2.9 million in ISD, and $38.2 million in All other. During the third quarter of 2008, the Company sold one of its inkjet supplies...

  • Page 55
    ...of 2006, the Company approved a plan to restructure its workforce, consolidate manufacturing capacity and make certain changes to its U.S. retirement plans (collectively referred to as the "2006 actions"). Except for approximately 100 positions that were eliminated in 2007, activities related to the...

  • Page 56
    ... the total pre-tax cost related to Lexmark's pension and other postretirement plans for the years 2009, 2008 and 2007. Cost amounts are included as an addition to the Company's cost and expense amounts in the Consolidated Statements of Earnings. (Dollars in Millions) 2009 2008 2007 Total cost of...

  • Page 57
    ... table summarizes the results of the Company's Consolidated Statements of Cash Flows for the years indicated: (Dollars in Millions) 2009 2008 2007 Net cash flows provided by (used for): Operating activities ...Investing activities ...Financing activities ...Effect of exchange rate changes on...

  • Page 58
    .... The larger decrease in 2009 was driven by the Company's increased focus on inventory management, particularly actions initiated during the second quarter of 2009 to significantly reduce the production of supplies and purchases of printers, which lowered the Company's purchases during the period...

  • Page 59
    ... the number of days that elapse between the moment the Company pays for materials and the day it collects cash from its customers. Cash conversion days are equal to days of sales outstanding plus days of inventory less days of payables. The days of sales outstanding are calculated using the year-end...

  • Page 60
    ... using an internal discount cash flow valuation model discussed later in this section. The Company also incurred another $1.0 million of charges related to other-than-temporary impairments of certain distressed corporate debt, mortgage-backed and asset-backed securities. The $7.3 million in total...

  • Page 61
    ...million, and auction rate preferred stock valued at $3.9 million. Level 3 recurring fair value measurements were approximately 4% of the Company's total available-for-sale marketable securities portfolio at both December 31, 2009 and December 31, 2008. The valuation techniques for the Company's most...

  • Page 62
    ...cash flow analysis being performed through the legal maturities of these securities, ranging from the year 2032 through 2040, or in the case of the auction rate preferred stock, through the mandatory redemption date of year-end 2021. The projected cash flows were then discounted using the applicable...

  • Page 63
    ... new long-term debt. In 2007, cash flows used for financing were $147.0 million due mostly to $165.0 million of share repurchases offset partially by proceeds from employee stock plans of $15.6 million. Refer to the sections that follow for additional information regarding these financing activities...

  • Page 64
    ... discount of $1.3 million). The 2013 and 2018 senior notes (collectively referred to as the "senior notes") pay interest on June 1 and December 1 of each year. The interest rate payable on the notes of each series is subject to adjustments from time to time if either Moody's Investors Service...

  • Page 65
    ... information related to the 2009 credit agreement can be found in the Form 8-K and Form 8-K/A reports that were filed with the SEC by the Company in August 2009. Trade Receivables Facility In the U.S., the Company transfers a majority of its receivables to its wholly-owned subsidiary, Lexmark...

  • Page 66
    ... the Company's printers and associated supplies and ability to generate sufficient cash flow to service the Company's debt. A downgrade in the Company's credit rating to non-investment grade would decrease the maximum availability under its trade receivables facility, increase the cost of borrowing...

  • Page 67
    ...in 2009, 2008 and 2007, respectively. The capital expenditures for 2009 principally related to infrastructure support (including information technology expenditures) and new product development. The increase in 2009 capital expenditures compared to prior years was driven by internal-use software and...

  • Page 68
    ... on the Company's business. In an effort to minimize the impact on earnings of any such increases, the Company must continually manage its product costs and manufacturing processes. Additionally, monetary assets such as cash, cash equivalents and marketable securities lose purchasing power during...

  • Page 69
    ... "LIQUIDITY AND CAPITAL RESOURCES - Investing Activities:" in Item 7 of this report for a discussion of the Company's auction rate securities portfolio which is incorporated herein by reference. Foreign Currency Exchange Rates The Company has employed, from time to time, a foreign currency hedging...

  • Page 70
    ... STATEMENTS OF EARNINGS For the years ended December 31, 2009, 2008 and 2007 (In Millions, Except Per Share Amounts) 2009 2008 2007 Revenue ...Cost of revenue ...Gross profit ...Research and development ...Selling, general and administrative ...Restructuring and related charges ...Operating expense...

  • Page 71
    ...and 2008 (In Millions) 2009 2008 ASSETS Current assets: Cash and cash equivalents ...Marketable securities ...Trade receivables, net of allowances of $33.7 and $36.1 in 2009 and 2008, respectively ...Inventories ...Prepaid expenses and other current assets ...Total current assets ...Property, plant...

  • Page 72
    ......Increase in short-term debt ...Decrease in short-term debt ...Issuance of treasury stock ...Purchase of treasury stock ...Proceeds from employee stock plans ...Tax windfall from employee stock plans ...Other ...Net cash flows provided by (used for) financing activities . . Effect of exchange rate...

  • Page 73
    ...) related to stock plans ...Stock-based compensation ...Treasury shares purchased ...Treasury shares issued ...Balance at December 31, 2007 ...Comprehensive earnings, net of taxes ...Net earnings ...Other comprehensive earnings (loss): Pension or other postretirement benefits, net of reclass ...Cash...

  • Page 74
    ... developer, manufacturer and supplier of distributed printing and imaging solutions. The Company's products include laser printers, inkjet printers, multifunction devices, and associated supplies, services and solutions. Lexmark also sells dot matrix printers for printing single and multi-part...

  • Page 75
    ...term nature of the instruments. The fair value of Lexmark's marketable securities are based on quoted market prices or other observable market data or in some cases, internally developed inputs and assumptions (discounted cash flow model) when observable market data does not exist. The fair value of...

  • Page 76
    ...analysis using the quantitative and qualitative factors described above are then assessed to determine whether the entire net book value basis of each identified security will be recovered. The Company performs this assessment by comparing the present value of the cash flows expected to be collected...

  • Page 77
    ... are disposed of or otherwise retired. Internal Use Software Costs: Lexmark capitalizes direct costs incurred during the application development and implementation stages for developing, purchasing, or otherwise acquiring software for internal use. These software costs are included in Property...

  • Page 78
    ... 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 extended warranty programs, the Company defers...

  • Page 79
    ... Costs: Lexmark engages in the design and development of new products and enhancements to its existing products. The Company's research and development activity is focused on laser and inkjet printers, multifunction products ("MFPs"), and associated supplies, features and related technologies...

  • Page 80
    ... The fair value of each restricted stock unit award and deferred stock unit award was generally calculated using the closing price of the Company's stock on the date of grant. Restructuring: Lexmark records a liability for a cost associated with an exit or disposal activity at its fair value in the...

  • Page 81
    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...

  • Page 82
    ... in 2009 based on new accounting guidance. Segment Data: Lexmark manufactures and sells a variety of printing and multifunction products and related supplies and services and is primarily managed along divisional lines: the Printing Solutions and Services Division ("PSSD") and the Imaging Solutions...

  • Page 83
    ... by the Company at April 1, 2009 for which OTTI had been previously recognized. This adjustment was calculated by comparing the present value of the cash flows expected to be collected to the amortized cost bases of the debt securities at the transition date. Under the new guidance, the Company has...

  • Page 84
    ...asset in an active market is available, and no adjustment is needed, this is also considered a Level 1 measurement. In the absence of a Level 1 measurement, an entity must use one or more of the following: the quoted price of the identical liability when traded as an asset, quoted prices for similar...

  • Page 85
    ... TPE is available. The vendor's best estimate of selling price is the price at which the vendor would transact if the deliverable were sold by the vendor regularly on a standalone basis and should take into consideration market conditions and entity-specific factors. ASU 2009-13 also expands ongoing...

  • Page 86
    ... Company's overall business. The Company has not yet developed a policy for best estimate of selling price nor has the adoption date and transition method been determined at this time. Additionally, based on Lexmark's current operations, the Company also believes the changes to the software revenue...

  • Page 87
    ... the ability to access at the measurement date; • Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; and • Level 3 - Unobservable inputs used in valuations in which there is little market activity for the...

  • Page 88
    ... less at the Company's date of purchase to be cash equivalents. Investments considered cash equivalents included approximately $301.8 million of money market funds, $34.7 million of agency discount notes and $1.1 million of corporate debt securities at December 31, 2009. The amortized cost of these...

  • Page 89
    ... considered cash equivalents, which closely approximate fair value as described in the Company's policy above, included roughly $129.9 million of money market funds and $36.0 million of US agency discount notes at December 31, 2008. The following table presents additional information about...

  • Page 90
    ...$1.9 million related to auction rate securities, and $1.0 related to distressed corporate debt, mortgage-backed and asset-backed securities. There were no purchases of Level 3 securities in 2009. The Purchases, sales, issuances, and settlements, net total relate to sales of various security types as...

  • Page 91
    ..., or in some cases, unobservable inputs and assumptions such as discounted cash flow models or indicative pricing sources when observable market data does not exist. The Company used multiple third party service providers to report the fair values of the securities in which Lexmark is invested. In...

  • Page 92
    ...cash flow analysis being performed through the legal maturities of these securities, ranging from the year 2032 through 2040, or in the case of the auction rate preferred stock, through the mandatory redemption date of year-end 2021. The projected cash flows were then discounted using the applicable...

  • Page 93
    ... regarding the auction rate market compared to those of 2008. For comparison purposes, a summary of the year-end 2008 valuation techniques and assumptions used to measure auction rate securities is provided in the following paragraph. The Company performed a discounted cash flow analysis on its...

  • Page 94
    ...and cash flows caused by volatility in currency exchange rates. Fair values for the Company's derivative financial instruments are based on pricing models or formulas using current market data. Variables used in the calculations include forward points and spot rates at the time of valuation. Because...

  • Page 95
    ... and used In the fourth quarter of 2008, the Company executed a five year operating lease with a customer whereby Lexmark would install and manage various printing devices over the contract period. In the fourth quarter of 2009, sufficient information was available that indicated the original cash...

  • Page 96
    ... using the income approach, specifically, the discounted cash flow method. Significant assumptions included a two percent revenue growth rate, based on a combination of market research and internal forecasts, with calculations performed over a five-year time frame plus the terminal year. The Company...

  • Page 97
    ...foreign currency translations. April 2009 Restructuring Plan General As part of Lexmark's ongoing plan to consolidate manufacturing capacity and reduce costs and expenses worldwide, the Company announced on April 21, 2009 the planned closure of its inkjet cartridge manufacturing facility in Juarez...

  • Page 98
    ... functions, supply chain and sales support, research and development program consolidation, as well as marketing and sales management. The 2009 Restructuring Plan was substantially completed by the end of 2009. Impact to 2009 Financial Results For the year ended December 31, 2009, the Company...

  • Page 99
    ...closure of one of the Company's inkjet supplies manufacturing facilities in Mexico. The 2008 Restructuring Plan was substantially completed by the end of the first quarter of 2009. Impact to 2009 Financial Results For the year ended December 31, 2009, the Company reversed $1.5 million of previously...

  • Page 100
    ...Company announced the "2007 Restructuring Plan", which included: • Closing one of the Company's inkjet supplies manufacturing facilities in Mexico and additional optimization measures at the remaining inkjet facilities in Mexico and the Philippines; • Reducing the Company's business support cost...

  • Page 101
    ...Employee termination benefit charges ...Contract termination and lease charges ...Total restructuring-related charges ...$17.3 (0.7) 4.9 $21.5 For the year ended December 31, 2008, the Company incurred $9.2 million of accelerated depreciation charges in Cost of revenue and $8.1 million in Selling...

  • Page 102
    ...of 2006, the Company approved a plan to restructure its workforce, consolidate manufacturing capacity and make certain changes to its U.S. retirement plans (collectively referred to as the "2006 actions"). Except for approximately 100 positions that were eliminated in 2007, activities related to the...

  • Page 103
    ... of shares related to its stock incentive plans from the Company's authorized and unissued shares of Class A Common Stock. Approximately 49.3 million shares of Class A Common Stock have been authorized for these stock incentive plans. For the years ended December 31, 2009, 2008 and 2007, the Company...

  • Page 104
    ... during 2009, 2008 and 2007, vest in approximately equal annual installments over a three-year period based upon continued employment or service on the Board of Directors. During 2009, the Company granted a total of 559,000 performance-based stock options to a small number of senior managers. The...

  • Page 105
    ... As of December 31, 2009, the Company had $4.2 million of total unrecognized compensation expense, net of estimated forfeitures, related to unvested stock options that will be recognized over the weighted average period of 2.6 years. Restricted Stock and Deferred Stock Units Lexmark has granted RSUs...

  • Page 106
    ... debt securities, and auction rate securities. The fair values of the Company's available-for-sale marketable securities are based on quoted market prices or other observable market data, discount cash flow analyses, or in some cases, the Company's amortized cost which approximates fair value. As...

  • Page 107
    ... that allow for call or prepayment provisions. 2009 Amortized Estimated Cost Fair Value 2008 Amortized Estimated Cost Fair Value (In Millions) Due in less than one year ...Due in 1-5 years ...Due after 5 years ...Total available-for-sale marketable securities ... $278.9 382.6 70.4 $731.9 $279...

  • Page 108
    Company uses the specific identification method when accounting for the costs of its available-for-sale marketable securities sold. Impairment On April 1, 2009, the Company adopted the amended FASB guidance on the recognition and presentation of OTTI, which requires that credit related other-than-...

  • Page 109
    ....6 45.7 107.4 $311.3 $(2.3) (0.5) (0.8) (0.1) $(3.7) Total ... The following table provides information, at December 31, 2009, about the Company's marketable securities with gross unrealized losses for which other-than-temporary impairment has been incurred, and the length of time that individual...

  • Page 110
    ...to build a model to project future cash flows expected to be collected. These cash flows were then discounted at the current yield used to accrete the beneficial interest, which approximates the effective interest rate implicit in the bond at the date of acquisition for those securities purchased at...

  • Page 111
    ... 863.2 Depreciation expense was $209.1 million, $203.2 million, and $191.0 million in 2009, 2008 and 2007, respectively. The increase in Property, plant and equipment, net was due to a number of factors of which the primary driver was current year expenditures related to internal use software. 105

  • Page 112
    ... of these actions and the impact on earnings. Long-lived assets held for sale Related to the 2008 restructuring plan, one of the Company's inkjet supplies manufacturing facilities in Mexico was made available for sale in the first quarter of 2009. The asset is included in Property, plant and...

  • Page 113
    ...estimates). . Settlements made (in cash or in kind) ... ... $ 50.9 84.1 4.4 (92.8) $ 46.6 $ 62.3 100.6 0.6 (112.6) $ 50.9 Balance at December 31 ...Deferred service revenue: 2009 2008 Balance at January 1...Revenue deferred for new extended warranty contracts ...Revenue recognized ...Balance at...

  • Page 114
    ...dollars, euros, British pounds sterling and Japanese yen. The New Facility replaced the Company's $300 million 5-year multicurrency revolving credit agreement entered into on January 20, 2005. On August 26, 2009, the Company exercised its option to increase the maximum amount available under the New...

  • Page 115
    ... of Earnings are as follows: 2009 2008 2007 Interest (income) ...Interest expense ...Total... $(17.9) 39.3 $ 21.4 $(35.0) 28.9 $ (6.1) $(34.2) 13.0 $(21.2) The Company capitalized interest costs of $3.4 million, $1.4 million and $0.2 million in 2009, 2008 and 2007, respectively. 12. INCOME TAXES...

  • Page 116
    ... tax rate was as follows: 2009 Amount % Amount 2008 % Amount 2007 % Provision for income taxes at statutory rate ...$ 65.4 State and local income taxes, net of federal tax benefit ...3.2 Foreign tax differential ...(20.8) Research and development credit ...(5.1) Tax-exempt interest, net of related...

  • Page 117
    ...December 31 were as follows: 2009 2008 Deferred tax assets: Tax loss carryforwards ...Credit carryforwards ...Inventories ...Restructuring ...Pension ...Warranty ...Postretirement benefits...Equity compensation ...Other compensation ...Foreign exchange ...Other ...Deferred tax liabilities: Property...

  • Page 118
    ... which would affect the Company's effective tax rate. Several tax years are subject to examination by major tax jurisdictions. In the U.S., federal tax years 2006 and after are subject to examination. The Internal Revenue Service ("IRS") is currently auditing tax years 2006 and 2007. In France, tax...

  • Page 119
    ... 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. The Company did not repurchase any shares of its Class A Common Stock in 2009...

  • Page 120
    ...of the shares, or 3.3 million shares at a cost of $85.0 million. The final number of shares to be delivered by the counterparty under the ASR was dependent on the average of the daily volume weighted average price of the Company's common stock over the agreement's trading period, a discount, and the...

  • Page 121
    ... and diluted net EPS calculations for the years ended December 31: 2009 2008 2007 Numerator: Net earnings...Denominator: Weighted average shares used to compute basic EPS ...Effect of dilutive securities - employee stock plans ...Weighted average shares used to compute diluted EPS ...Basic net EPS...

  • Page 122
    ... the Company's accelerated share repurchase agreements. 15. PENSION AND OTHER POSTRETIREMENT PLANS Lexmark and its subsidiaries have defined benefit and defined contribution pension plans that cover certain of its regular employees, and a supplemental plan that covers certain executives. Medical...

  • Page 123
    ... Pension Benefits 2009 2008 Other Postretirement Benefits 2009 2008 Change in Benefit Obligation: Benefit obligation at beginning of year ...Service cost ...Interest cost ...Contributions by plan participants...Actuarial loss (gain) ...Benefits paid ...Foreign currency exchange rate changes ...Plan...

  • Page 124
    ... $391.8 391.6 Components of net periodic benefit cost: Pension Benefits 2009 2008 2007 Other Postretirement Benefits 2009 2008 2007 Net Periodic Benefit Cost: Service cost...Interest cost...Expected return on plan assets ...Amortization of prior service cost (credit) . . Amortization of net loss...

  • Page 125
    ... U.S. defined benefit plan employed 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. Each investment manager operates under an investment management contract that...

  • Page 126
    ... The Company's expense under these plans was $21.4 million, $25.1 million and $25.8 million in 2009, 2008 and 2007, respectively. Additional Information Other postretirement benefits: For measurement purposes, a 8.3% annual rate of increase in the per capita cost of covered health care benefits was...

  • Page 127
    ... 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...

  • Page 128
    ... Value Hedging Relationships 2009 2008 2007 Foreign Exchange Contracts ...Underlying ...Total ... $ 3.6 (5.7) $(2.1) $13.1 5.4 $18.5 $6.0 2.2 $8.2 Lexmark formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for...

  • Page 129
    ... 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...

  • Page 130
    ...Sagem Communications v. Lexmark Sagem Communications (formerly Sagem, S.A.) filed suit against the Company, in the Court of First Instance, Geneva, Switzerland on May 15, 2007. The suit alleges the Company failed to timely develop a series of private label fax machines for Sagem. Sagem's suit seeks...

  • Page 131
    ...to what extent copyright levies should be imposed on single function printers sold by the Company in Germany for the years 2006 and 2007. An agreement was reached in the first quarter of 2009 with the collecting societies in which the Company participated regarding the copyright fees to be levied on...

  • Page 132
    ... as information technology expenses, occupancy costs, stock-based compensation and certain other corporate and regional general and administrative expenses such as finance, legal and human resources. The following table includes information about the Company's reportable segments for the year ended...

  • Page 133
    ... on the location of customers. Other International revenue includes exports from the U.S. and Europe. The following is long-lived asset information by geographic area as of December 31: 2009 2008 2007 Long-lived assets: United States ...EMEA (Europe, the Middle East & Africa) ...Other International...

  • Page 134
    ... calculations. This is in accordance with prescribed reporting requirements. (1) Net earnings for the first quarter of 2009 included $12.8 million of pre-tax restructuring-related charges and project costs in connection with the Company's restructuring plans. Net earnings for the second quarter of...

  • Page 135
    ... cash flows and of stockholders' equity and comprehensive earnings present fairly, in all material respects, the financial position of Lexmark International, Inc. and its subsidiaries at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years...

  • Page 136
    ... evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP Lexington, Kentucky February 26, 2010 130

  • Page 137
    ... communicated to the Company's management, including its principal executive and principal financial officers or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management's Report on Internal Control over Financial Reporting The Company...

  • Page 138
    ... of Business Conduct from: Lexmark International, Inc. Attention: Investor Relations One Lexmark Centre Drive 740 West New Circle Road Lexington, Kentucky 40550 (859) 232-5568 The New York Stock Exchange ("NYSE") requires that the Chief Executive Officer of each listed Company certify annually to...

  • Page 139
    ..." and "Equity Compensation Plan Information." Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information required by Part III, Item 13 of this Form 10-K is incorporated by reference from the Company's definitive Proxy Statement for its 2010 Annual Meeting of...

  • Page 140
    LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2007, 2008 and 2009 (In Millions) (A) (B) Balance at Beginning of Period (C) Additions Charged to Charged to Other Costs and Accounts Expenses (D) (E) Balance at End of ...

  • Page 141
    ... duly authorized in the City of Lexington, Commonwealth of Kentucky, on February 26, 2010. LEXMARK INTERNATIONAL, INC. By /s/ Paul J. Curlander Name: Paul J. Curlander Title: Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has...

  • Page 142

  • Page 143
    ...The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch ("BTMUFJ"), CNAI, as Program Agent, CNAI and BTMUFJ, as Investor Agents, and the Company, as Collection Agent and Originator.(13) Amendment No. 3 to Receivables Purchase Agreement, dated as of March 30, 2007, by and among LRC, as Seller, CIESCO...

  • Page 144
    ... Incentive Plan.(23)+ Form of Performance-Based Restricted Stock Unit Agreement pursuant to the Company's Stock Incentive Plan.(23)+ Company Nonemployee Director Stock Plan, Amended and Restated, effective April 30, 1998. (24)+ Amendment No. 1 to the Company's Nonemployee Director Stock Plan, dated...

  • Page 145
    ... pursuant to the Company's 2005 Nonemployee Director Stock Plan. (13)+ Form of Annual Restricted Stock Unit Agreement pursuant to the Company's 2005 Nonemployee Director Stock Plan.+ Form of Amended and Restated Agreement pursuant to the Company's 2007-2009 Long-Term Incentive Plan.(16)+ Form of...

  • Page 146
    ...14050). (22) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 (Commission File No. 1-14050). (23) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (Commission File No. 1-14050...

  • Page 147
    ...in the size of expected restructuring costs, charges, and savings; entrance into the market of additional competitors focused on printing solutions; inability to perform under managed print services contracts; decreased supplies consumption; increased competition in the aftermarket supplies business...

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    www.lexmark.com One Lexmark Centre Drive Lexington, KY 40550 USA 859.232.2000