Lexmark 2009 Annual Report Download - page 35

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Warranty
Lexmark provides for the estimated cost of product warranties at the time revenue is recognized. The
amounts accrued for product warranties are 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
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, a defined benefit 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. The Company also includes an additional
return for active management, when appropriate, and deducts various expenses.
• 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. pension plan comprises a significant portion of the assets and
liabilities relating to the Company’s pension plans. The investment goal of the U.S. pension plan is to
achieve an adequate net investment return in order to provide for future benefit payments to its
participants. Asset allocation percentages are targeted to be 65% equity and 35% fixed income
investments. The U.S. pension 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
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