Lexmark 2011 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    ... Research and development in the amount of $15.5 million, $5.3 million and $0.4 million, respectively. Other acquisition-related costs and integration expenses are included in Selling, general and administrative. The Company acquired Perceptive Software on June 7, 2010. Perceptive Software Revenue...

  • Page 3
    ... MFP and printer report. These are all strong indicators of our increasing success and presence in the higher usage segments of the market. Lexmark a Recognized Leader in Managed Print Services Lexmark's managed print services (MPS) business continued to deliver in 2011 with revenue growth in excess...

  • Page 4
    ... core supplies, MPS, high end hardware, and software revenue. We believe the growth we're seeing in our core through MPS and business process solutions proves that our value proposition resonates strongly with customers as they look for ways to save time and money. Lexmark's overall revenue in 2011...

  • Page 5
    ... 06-1308215 (I.R.S. Employer Identification No.) 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...

  • Page 6
    ..., EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ...EXECUTIVE COMPENSATION ...SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ...CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE ...PRINCIPAL ACCOUNTANT FEES AND SERVICES ...PART IV...

  • Page 7
    ... of this report. The information referred to above should be considered by investors when reviewing any forward-looking statements contained in this report, in any of the Company's public filings or press releases or in any oral statements made by the Company or any of its officers or other persons...

  • Page 8
    .... The Company operates in the office imaging and enterprise content and business process management ("ECM and BPM") markets. Lexmark's products include laser printers, inkjet printers, multifunction devices, dot matrix printers and the associated supplies/solutions/services, and ECM and BPM software...

  • Page 9
    ... the total addressable market is significantly larger due to relatively low penetration of document and human-centric ECM and BPM solutions worldwide. In general, as the printing industry matures and printer and copier-based product markets converge, the Company's management expects competitive...

  • Page 10
    ... the result being higher productivity, lower costs, and increased customer satisfaction. Strategy Lexmark's strategy is based on a business model of investing in technology to develop and sell imaging and process solutions, including printers, multifunction devices and software including enterprise...

  • Page 11
    ... it to offer customized printing and document workflow solutions. Lexmark is focused on advancing its inkjet technology, products and solutions to address higher usage customers. Lexmark also internally develops its print, content and process management software platforms and tools that enable it...

  • Page 12
    ... of monochrome and color laser printers, laser MFPs, inkjet AIOs and accessories, as well as software applications, software solutions and managed print services to help businesses efficiently capture, manage and access information. ISS laser and inkjet products are core building blocks for enabling...

  • Page 13
    ... Color Laser MFP Series. The new Lexmark X548de and X548dte deliver the high performance, wide-ranging capabilities, time-saving solutions and advanced security features representative of more costly devices in the market, but with a smaller footprint and affordable price point. Both of these models...

  • Page 14
    ... Pro ink cartridges; Printer Command Language and PostScript support; mobile print support for Android and Apple iOS handheld devices; and access to the growing suite of Lexmark SmartSolutions. o Dot Matrix Products ISS continues to market several dot matrix printer models for customers who print...

  • Page 15
    ... of authorized maintenance and repair, technical support, warranty support and parts operations. From basic service coverage to comprehensive support, Lexmark offers a range of plans to meet the specific demands of the customer's output environment and reduce costly downtime. ISS printer products...

  • Page 16
    ... to ISS' business model, such as the manufacture of toner and photoconductors. ISS shares some of its technical expertise with certain manufacturing partners, many of whom have facilities located in China, which collectively provide ISS with substantially all of its printer production capacity. ISS...

  • Page 17
    ...factors such as ISS' ability to negotiate new SMI agreements and future market pricing and product costs. Many components of ISS' products are sourced from sole suppliers, including certain custom chemicals, microprocessors, electro-mechanical components, application specific integrated circuits and...

  • Page 18
    ... services with a broader range of workflow solutions that, in the Company's view, are more functional and easier to implement and use than existing tools available in the market today. o Solutions Designed from Perceptive Software's ECM and BPM technology, including the ImageNow document management...

  • Page 19
    ...industry sector - specifically healthcare, education, public sector/government, and cross industry, which includes areas such as retail, financial services and insurance. With its North American sales force headquartered in Shawnee, Kansas, Perceptive Software also has international business offices...

  • Page 20
    ...can develop the more technologically-advanced products required to remain competitive. Employees As of December 31, 2011, of the approximately 13,300 employees worldwide, 3,900 are located in the U.S. and the remaining 9,400 are located in Europe, Canada, Latin America, Asia Pacific, the Middle East...

  • Page 21
    ... Executive Officer of Perceptive Software Vice President of Asia Pacific and Latin America Vice President of Human Resources Vice President, General Counsel and Secretary Vice President, ISS and Corporate Finance 21 7 13 2 8 21 11 21 Mr. Rooke has been a Director of the Company since October 2010...

  • Page 22
    ... various categories of goods and services. Lexmark also owns a number of trademark applications and registrations for various product names. The Company holds worldwide copyrights in computer code and publications of various types. Other proprietary information is protected through formal procedures...

  • Page 23
    ... is committed to maintaining compliance with all environmental laws applicable to its operations, products and services. Lexmark is also required to have permits from a number of governmental agencies in order to conduct various aspects of its business. Compliance with these laws and regulations has...

  • Page 24
    ... for high usage business customers, 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. The Company's failure to manage inventory levels or production capacity may negatively...

  • Page 25
    ...customer purchases of existing 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...

  • Page 26
    ... and/or use of mobile devices such as tablets and smart phones by businesses could result in a reduction in printing, which could adversely impact consumption of supplies. Any failure by the Company to execute planned cost reduction measures timely and successfully could result in total costs and...

  • Page 27
    ...manufacturing partners and certain key suppliers could negatively impact the Company's operating results. • The Company relies in large part on its international production facilities located in Mexico and the Philippines and international manufacturing partners, many of which are located in China...

  • Page 28
    ... are focused on printing solutions could further intensify competition in the inkjet and laser printer markets and could have a material adverse impact on the Company's strategy and financial results. • The Company acquired Perceptive Software in 2010 and Pallas Athena in 2011 to strengthen its...

  • Page 29
    ...impact the Company's cost structure, access to components and operating results. • Certain countries (primarily in Europe) and/or collecting societies representing copyright owners' interests have commenced proceedings to impose fees on devices (such as scanners, printers and multifunction devices...

  • Page 30
    ...Lexmark's corporate headquarters and principal development facilities are located on a 374 acre campus in Lexington, Kentucky. At December 31, 2011, the Company owned or leased 6.1 million square feet of administrative, sales, service, research and development, warehouse and manufacturing facilities...

  • Page 31
    ... paying dividends quarterly, though future declarations of dividends are subject to Board of Directors' approval and may be adjusted as business needs or market conditions change. Issuer Purchases of Equity Securities Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs...

  • Page 32
    ... 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 29, 2006, to December 30, 2011. The graph...

  • Page 33
    ... Employee Stock Incentive Plan (the "Broad-Based Plan"), an equity compensation plan which had not been approved by the Company's stockholders. On February 24, 2011, the Company's Board of Directors terminated the Broad-Based Plan and cancelled the remaining available shares that had been authorized...

  • Page 34
    ... Research and development in the amount of $15.5 million, $5.3 million and $0.4 million, respectively. Other acquisition-related costs and integration expenses are included in Selling, general and administrative. The Company acquired Perceptive Software on June 7, 2010. Perceptive Software Revenue...

  • Page 35
    ... of $25.7 million relating to employee termination benefit charges are included in Restructuring and related charges. Project costs of $11.9 million and $9.3 million are included in Cost of revenue and Selling, general and administrative, respectively. (3) Amounts in 2011, 2010, 2009, 2008, and...

  • Page 36
    ...management markets. Lexmark's products include laser printers, inkjet printers, multifunction devices, dot matrix printers and the associated supplies/solutions/services, and ECM and BPM software solutions and services. The Company is primarily managed along two segments: ISS and Perceptive Software...

  • Page 37
    ... Lexmark to participate in the growing market to manage unstructured data and processes, and to build upon and strengthen the current industry-focused document workflow solutions and managed print services, the Company acquired Perceptive Software in June of 2010 and Pallas Athena in October of 2011...

  • Page 38
    ... from centralized commercial printing to distributed printing by end users when and where it is convenient to do so; • Continued convergence between printers, scanners, copiers and fax machines into single, integrated multifunction and all-in-one devices; • Increasing ability of multi-function...

  • Page 39
    ... in support of governance and compliance policies. These solutions help businesses understand existing processes, design and manage new processes, and enable the assembly of content into meaningful communications with their customers and partners. These solutions also help companies leverage...

  • Page 40
    ... of growing its installed base of hardware devices and software installations, which drives recurring supplies sales as well as software maintenance and services revenue. The Company's management believes that Lexmark has the following strengths related to this business model: • Lexmark is highly...

  • Page 41
    ... in Part II, Item 8 for information regarding the Company's policy for revenue recognition. For customer programs and incentives, Lexmark records estimated reductions to revenue at the time of sale for customer programs and incentive offerings including special pricing agreements, promotions...

  • Page 42
    ... well as cost drivers that could affect future margins. For multiple element agreements that include software and related service deliverables accounted for under the industry-specific revenue recognition guidance, relative selling price must be determined by VSOE, which is based on company specific...

  • Page 43
    ... which may be different than company-specific intentions. 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...

  • Page 44
    ..., 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...

  • Page 45
    ... countries (primarily in Europe) and/or collecting societies representing copyright owners' interests have taken action to impose fees on devices (such as scanners, printers and multifunction devices) alleging the copyright owners are entitled to compensation because these devices enable reproducing...

  • Page 46
    ...as long-lived assets held for sale. The Company uses third parties to report the fair values of its marketable securities and pension plan assets, though the responsibility remains with the Company's management. The Company utilizes various sources of pricing as well as trading and other market data...

  • Page 47
    ... and best use of an asset from the perspective of market participants can result in fair value measurements that differ from estimates based on the Company's specific intentions for the asset. See Notes 2 and 3 of the Notes to the Consolidated Financial Statements in Part II, Item 8 for information...

  • Page 48
    ... Part II, Item 8 for information regarding the methods used to determine fair value related to the Company's business acquisitions. Goodwill and Intangible Assets Lexmark assesses its goodwill and indefinite-lived intangible assets for impairment each fiscal year as of December 31 or between annual...

  • Page 49
    ... Key Messages Lexmark is focused on driving long-term performance by strategically investing in technology, hardware and software products and solutions to secure high value product installations and capture profitable supplies, software maintenance and service annuities in document-intensive...

  • Page 50
    ... in 2011 versus 2010 driven by laser hardware revenue growth and improved margins. The improvement in ISS operating income was offset by increases in both development and marketing and sales expense principally due to the acquisition of and increased investment in Perceptive Software. Operating...

  • Page 51
    ... parts and service ISS revenue. The 2011 results for Perceptive Software reflect full year financial results while 2010 results reflect activity occurring after Perceptive Software was acquired on June 7, 2010. As indicated earlier, the Company uses the term "legacy" to include hardware and supplies...

  • Page 52
    ... Athena was acquired by the Company on October 18, 2011. Activity occurring after the acquisition of Pallas Athena is included in the Perceptive Software reportable segment. Under the accounting guidance for business combinations, deferred revenue related to service contracts assumed as part of an...

  • Page 53
    ... points due to lower restructuring-related costs YTY. The unfavorable mix shift among products, reflecting a higher percentage of hardware versus supplies, had a 0.7 percentage point negative impact on gross profit percentage versus the prior year. Also, acquisition-related costs incurred in 2010...

  • Page 54
    ... slightly by a decrease in ISS development spending. Research and development decreased in 2010 compared to the prior year as the benefits of the restructuring actions were partially offset by higher result-based compensation as well as the addition of Perceptive Software in the second quarter of...

  • Page 55
    ... driven by an increase in both development and marketing and sales expense ahead of revenue growth. For Perceptive Software, operating income (loss) includes the full year results for 2011 as well as activities subsequent to the acquisition for 2010. The Company acquired Perceptive Software on June...

  • Page 56
    ... products or other assets, the Company's supply chain was impacted, as a number of technology components are sourced from suppliers in northern Japan. However, the Company has identified and implemented alternative sources. For 2011, the Company experienced a limited impact on hardware availability...

  • Page 57
    ... costs. As part of Lexmark's ongoing strategy to increase the focus of its talent and resources on higher usage business platforms, the Company announced restructuring actions (the "January 2012 Restructuring Plan") on January 31, 2012. This action will better align the Company's sales and marketing...

  • Page 58
    ... and project costs related to the Other Restructuring Actions of $1.5 million in ISS and $3.4 million in All other. In 2011, the Company recorded impairment charges of $1.0 million related to its manufacturing facility in Juarez, Mexico, and $3.6 million related to one of its support facilities in...

  • Page 59
    ... in Cost of Revenue and Selling, general and administrative on the Company's Consolidated Statements of Earnings. For the year ended December 31, 2010, the Company incurred restructuring and related charges and project costs related to the October 2009 Restructuring Plan of $27.0 million in ISS and...

  • Page 60
    ... acquired company remained independent. During 2011 and 2010, the Company incurred $15.5 million and $9.1 million, respectively, in Cost of revenue and $5.3 million and $2.9 million, respectively, in Selling, general and administrative, as well as $0.4 million in Research and development during 2011...

  • Page 61
    ... in the Perceptive Software reportable segment. Acquisition and integration costs were recognized in All other. PENSION AND OTHER POSTRETIREMENT PLANS The following table provides the total pre-tax cost related to Lexmark's pension and other postretirement plans for the years 2011, 2010, and 2009...

  • Page 62
    ... program and revolving credit facility or access to the private and public debt markets. The Company may choose to use these sources of liquidity from time to time, including during 2012, to fund strategic acquisitions, dividends, and/or share repurchases. As of December 31, 2011, the Company...

  • Page 63
    .... This $52.5 million fluctuation between the activity in 2011 and that of 2010 is driven by the timing of revenue in the fourth quarter as well as less delinquencies. Inventories decreased $30.6 million in 2011 while they increased $8.8 million in 2010. This $39.4 million fluctuation results from...

  • Page 64
    ... the day the Company pays for materials and the day it collects cash from its customers. Cash conversion days are equal to the days of sales outstanding plus days of inventory less days of payables. The days of sales outstanding are calculated using the period-end Trade receivables balance, net...

  • Page 65
    ...compared to Perceptive Software. Pallas Athena, which was acquired at a purchase price of $41.4 million, is a BPM, DOM, and process mining software company that complements the product range offered by Perceptive Software. In 2010, the YTY increase in cash flows used to acquire businesses was driven...

  • Page 66
    ...on inputs that are unobservable and significant to the overall valuation. Level 3 measurements were 4.5% of the Company's total available-for-sale marketable securities portfolio at December 31, 2011 compared to 3.1% at December 31, 2010. Refer to Part II, Item 8, Note 3 of the Notes to Consolidated...

  • Page 67
    ...repurchase authority from the Board of Directors. This repurchase 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. Refer to Part II...

  • Page 68
    ... the Company's products and services 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, potentially increase the cost of borrowing...

  • Page 69
    ... issued by the European Union require producers of electrical and electronic goods to be financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. The Company's estimated financial obligation related to WEEE Directives is not shown...

  • Page 70
    ... Capital expenditures totaled $156.5 million, $161.2 million, and $242 million in 2011, 2010 and 2009, respectively. The capital expenditures for 2011 principally related to infrastructure support (including internal-use software expenditures) and new product development. The Company expects capital...

  • Page 71
    manage its product costs and manufacturing processes. Additionally, monetary assets such as cash, cash equivalents and marketable securities lose purchasing power during inflationary periods and thus, the Company's cash and marketable securities balances could be more susceptible to the effects of ...

  • Page 72
    ... $9.5 million at December 31, 2011. At December 31, 2010, the fair value of the Company's senior notes was estimated at $693.8 million based on the prices the bonds have recently traded in the market as well as the overall market conditions on the date of valuation. The fair value of the...

  • Page 73
    ... For the years ended December 31, 2011, 2010 and 2009 (In Millions, Except Per Share Amounts) 2011 2010 2009 Revenue ...Cost of revenue ...Gross profit ...Research and development ...Selling, general and administrative ...Restructuring and related charges ...Operating expense ...Operating income...

  • Page 74
    Lexmark International, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As of December 31, 2011 and 2010 (In Millions) 2011 2010 ASSETS Current assets: Cash and cash equivalents ...Marketable securities ...Trade receivables, net of allowances of $28.0 and $32.8 in 2011 and 2010, ...

  • Page 75
    ... sale of facilities ...Other ...Net cash flows used for investing activities ...Cash flows from financing activities: Decrease in short term debt ...Repayment of assumed debt ...Payment of cash dividend ...Issuance of treasury stock ...Purchase of treasury stock ...Proceeds from employee stock plans...

  • Page 76
    ... stock plan compensation . . Deferred stock units granted under deferred compensation election ...Tax benefit (shortfall) related to stock plans ...Stock-based compensation ...Dividends declared on Class A common stock, $0.25 per share (2) ...Treasury shares purchased ...Balance at December 31, 2011...

  • Page 77
    ... The Company operates in the office imaging and enterprise content and business process management ("ECM and BPM") markets. Lexmark's products include laser printers, inkjet printers, multifunction devices, dot matrix printers and the associated supplies/ solutions/services, and ECM and BPM software...

  • Page 78
    ...to a single discounted amount. The Company uses multiple sources of pricing as well as trading and other market data in its process of reporting fair values and testing default level assumptions. The Company assesses the quantity of pricing sources available, variability in pricing, trading activity...

  • Page 79
    ... off uncollectible trade accounts receivable against the allowance for doubtful accounts when collections efforts have been exhausted and/or any legal action taken by the Company has concluded. Inventories: Inventories are stated at the lower of average cost or market, using standard cost which...

  • Page 80
    ...cost and related accumulated depreciation when assets 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...

  • Page 81
    ... indicators are developed by the Company's credit management function, taking into account the customer's net worth, payment history, long term debt ratings and/or other information available from recognized credit rating services. If such information is not available, the Company estimates a rating...

  • Page 82
    ..., the Company provides for the estimated cost of post-sales support, principally product warranty, and reduces revenue for estimated product returns. Lexmark records estimated reductions to revenue at the time of sale for customer programs and incentive offerings including special pricing agreements...

  • Page 83
    ... and Development 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 devices and associated supplies, features and related technologies as well as software. The...

  • Page 84
    ... of net periodic benefit cost over five years. The rate of compensation increase is determined by the Company based upon its long-term plans for such increases. This assumption is no longer applicable to the U.S. and certain non-U.S. pension plans due to benefit accrual freezes. Unrecognized...

  • Page 85
    ... 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...

  • Page 86
    ... to pension or other postretirement benefits, foreign currency exchange rate adjustments, and net unrealized gains and losses on marketable securities including the non-credit loss component of OTTI beginning in 2009 based on the amended accounting guidance. The Company presents each item of other...

  • Page 87
    ...software businesses acquired in 2011 and 2010. Lexmark enters into agreements with customers to provide multi-purpose printing solutions for their businesses that often involve the provisions of hardware, supplies, customized services such as installation, maintenance, and enhanced warranty services...

  • Page 88
    ... level in order to incorporate variances in product pricing across worldwide boundaries. The Company does not typically sell its services on a standalone basis, thus a best estimate of selling price for services is determined using a cost plus margin approach. The Company typically uses third party...

  • Page 89
    ... interim and annual periods, reinstating the reporting requirements related to reclassification adjustments in effect before ASU 2011-05. ASU 2011-05 and ASU 2011-12, collectively, require retrospective application and will be effective for the Company in the first quarter of fiscal 2012. Although...

  • Page 90
    ...the most observable inputs be used when available. Fair Value Hierarchy 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...

  • Page 91
    ... basis: Government & agency debt securities ...$342.1 Corporate debt securities ...377.9 AB & MB securities ...73.3 Total available-for-sale marketable securities - ST ...793.3 Foreign currency derivatives (1) ...0.1 December 31, 2010 Based on Quoted prices Other in active observable Unobservable...

  • Page 92
    ... the year ended December 31, 2011: Available-for-sale marketable securities Twelve Months Ended, Total Level 3 Agency debt Corporate debt AB and MB ARS - muni debt ARS - preferred December 31, 2011 securities securities securities securities securities securities Balance, beginning of period ...$ 27...

  • Page 93
    ... Level 2 to Level 1, on a gross basis, $14.8 million of corporate debt securities due to trading volumes sufficient to indicate an active market for the securities as well as $1.7 million of U.S. agency debt securities due to the securities resuming higher levels of market activity during 2010. 89

  • Page 94
    ... cash flows are converted to a single discounted amount. The Company uses multiple third parties to report the fair values of the securities in which Lexmark is invested, though the responsibility of valuation remains with the Company's management. Most of the securities' fair values are based upon...

  • Page 95
    ... 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 of the very short duration of the Company's transactional hedges there is minimal risk of nonperformance. At December 31, 2011 and 2010...

  • Page 96
    ...nonrecurring basis subsequent to initial recognition during 2010. Long-lived assets held for sale Related to the April 2009 restructuring plan, the Company's inkjet cartridge manufacturing facility in Juarez, Mexico qualified as held for sale in the first quarter of 2010. During the first quarter of...

  • Page 97
    ... fleet management solutions and services with a broader range of workflow solutions. The acquisition also will enable the Company's Perceptive Software segment to expand its presence in EMEA, while concurrently leveraging the Company's growing worldwide sales force to sell these software solutions...

  • Page 98
    ... to the Perceptive Software reportable segment and consisted largely of projected future revenue and profit growth, including benefits from Lexmark's international structure and sales channels and entity-specific synergies expected from combining Pallas Athena with Lexmark's business. None of...

  • Page 99
    ... of cash acquired. Perceptive Software is a leading provider of enterprise content management ("ECM") software and solutions. The acquisition builds upon and strengthens Lexmark's current industry-focused document workflow solutions and managed print services and enables the Company to immediately...

  • Page 100
    ... over their estimated useful lives as of the acquisition date, according to the following schedule. Fair Value Recognized Weighted-Average Useful Life Intangible assets subject to amortization: Customer relationships ...Non-compete agreements ...Purchased technology ...Total ...Intangible assets...

  • Page 101
    ... growth, including benefits from Lexmark's international structure and sales channels, and the synergies expected from combining the businesses. All of the goodwill was assigned to Perceptive Software, which remains a stand-alone business within the Company for purposes of segment reporting. None of...

  • Page 102
    ... part of Lexmark's ongoing strategy to increase the focus of its talent and resources on higher usage business platforms, the Company announced restructuring actions (the "January 2012 Restructuring Plan") on January 31, 2012. This action will better align the Company's sales and marketing resources...

  • Page 103
    ... 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 October 2009 Restructuring Plan is considered...

  • Page 104
    ... 2011, 2010 and 2009, the Company incurred charges (reversals) for the October 2009 Restructuring Plan as follows: 2011 2010 2009 Accelerated depreciation charges ...Employee termination benefit charges (reversals) ...Contract termination and lease charges (reversals) ...Total restructuring-related...

  • Page 105
    ... supplies manufacturing facilities in Mexico as well as impacting positions in the Company's general and administrative functions, supply chain and sales support, marketing and sales management, and consolidation of the Company's research and development programs. The Other Restructuring Actions...

  • Page 106
    ..., general and administrative on the Company's Consolidated Statements of Earnings. This gain is not included in the total restructuring-related charges (reversals) presented in the table above. During 2010, the Company sold one of its inkjet supplies manufacturing facilities in Chihuahua, Mexico for...

  • Page 107
    ...annual installments over a three to four year period based upon continued employment or service on the Board of Directors. No stock options were granted during 2011. During 2009, the Company granted a total of 559,000 performance-based stock options to a small number of executive officers. The terms...

  • Page 108
    ... As of December 31, 2011, the Company had $1.6 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 1.8 years. Restricted Stock and Deferred Stock Units Lexmark has granted RSUs...

  • Page 109
    ...to these tranches. The Company would have incurred total expense of $4.3 million over the requisite service period related to these tranches if the executive officer had vested under the terms of the original award. During 2010, a certain number of executive officers of the Company were also granted...

  • Page 110
    ...December 31, 2010, the Company's available-for-sale Marketable securities consisted of the following: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Auction rate securities - municipal debt ...Corporate debt securities ...Gov't and agency debt securities ...Asset...

  • Page 111
    ... Statements of Earnings. The Company uses the specific identification method when accounting for the costs of its available-for-sale marketable securities sold. For the year ended December 31, 2010, the Company recognized $2.9 million in net gains on its marketable securities, of which $3.2 million...

  • Page 112
    ...Government and Agency ...Total ... $ - 140.4 29.2 121.9 $291.5 $ - (1.4) (0.1) (0.1) $(1.6) $ 9.1 - 2.1 - $11.2 $(2.2) - (0.3) - $(2.5) $ 9.1 140.4 31.3 121.9 $302.7 $(2.2) (1.4) (0.4) (0.1) $(4.1) The following table provides information, at December 31, 2011, about the Company's marketable...

  • Page 113
    ... anticipated recovery. Additionally, if the Company requires capital, the Company has available liquidity through its trade receivables facility and revolving credit facility. Corporate debt securities Unrealized losses on the Company's corporate debt securities are attributable to current economic...

  • Page 114
    ... to be other-thantemporarily impaired at December 31, 2011. 8. TRADE RECEIVABLES The Company's trade receivables are reported in the Consolidated Statements of Financial Position net of allowances for doubtful accounts and product returns. Trade receivables consisted of the following at December 31...

  • Page 115
    ... was $196.0 million, $181.0 million and $209.1 million in 2011, 2010 and 2009, respectively. Leased products refers to hardware leased by Lexmark to certain customers as part of the Company's ISS operations. The cost of the hardware is amortized over the life of the contracts, which have been 111

  • Page 116
    ... as operating leases based on the terms of the arrangements. The accumulated depreciation related to the Company's leased products was $58.3 million and $43.2 million at year-end 2011 and 2010, respectively. The Company accounts for its internal-use software, an intangible asset by nature, in...

  • Page 117
    ... being amortized. Fiscal year: 2012 ...2013 ...2014 ...2015 ...2016 ...Thereafter ...Total ... $ 26.4 26.1 25.8 17.2 9.6 12.6 $117.7 In-process technology refers to research and development efforts that were in process on the dates the Company acquired Perceptive Software and Pallas Athena. Under...

  • Page 118
    ...internal-use software. 12. ACCRUED LIABILITIES AND OTHER LIABILITIES Accrued liabilities, in the current liabilities section of the balance sheet, consisted of the following at December 31: 2011 2010 Deferred revenue ...Compensation ...VAT/Sales taxes payable ...Copyright fees ...Marketing programs...

  • Page 119
    ... sales of assets. There are no sinking fund requirements on the senior notes and they may be redeemed at any time at the option of the Company, at a redemption price as described in the related indenture agreement, as supplemented and amended, in whole or in part. If a "change of control triggering...

  • Page 120
    ... the Company's new credit facility agreement. Short-term Debt Lexmark's Brazilian operation has a short-term, uncommitted line of credit. The interest rate on this line of credit varies based upon the local prevailing interest rates at the time of borrowing. As of December 31, 2011 and 2010, there...

  • Page 121
    ...before income taxes ... $167.1 $178.6 $ 38.3 246.5 242.9 148.7 $413.6 $421.5 $187.0 The Company realized an income tax benefit from the exercise of certain stock options and/or vesting of certain RSUs and DSUs in 2011, 2010 and 2009 of $2.8 million, $4.5 million and $2.8 million, respectively. This...

  • Page 122
    ... taxes using the U.S. statutory rate and the Company's effective tax rate was as follows: 2011 Amount % 2010 Amount % 2009 Amount % Provision for income taxes at statutory rate ...State and local income taxes, net of federal tax benefit ...Foreign tax differential ...Research and development credit...

  • Page 123
    ...) at December 31 were as follows: 2011 2010 Deferred tax assets: Tax loss carryforwards ...Credit carryforwards ...Inventories ...Restructuring ...Pension ...Warranty ...Postretirement benefits ...Equity compensation ...Other compensation ...Foreign exchange ...Other ...Deferred tax liabilities...

  • Page 124
    ... examination. The Company believes that adequate amounts have been provided for any adjustments that may result from those examinations. A reconciliation of the total beginning and ending amounts of unrecognized tax benefits is as follows: 2011 2010 2009 Balance at January 1 Increases / (decreases...

  • Page 125
    ... 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. During 2011, the Company repurchased approximately 7.9 million shares at a cost...

  • Page 126
    ...was dependent on the average, volume weighted average price of the Company's Class A Common Stock over the agreement's trading period, a discount and the initial number of shares delivered. Under the terms of the ASR Agreement, the Company would either receive additional shares from the counterparty...

  • Page 127
    ... into net income upon the sale or redemption of debt securities during the period. In 2011 and 2010, the reclassification adjustment, pre-tax, related to OTTI marketable securities was immaterial. The 2009 activity in Net unrealized gain (loss) on OTTI marketable securities was driven by credit...

  • Page 128
    ... Statements for additional information regarding restricted stock awards with a performance condition. The Company executed two accelerated share repurchase agreements with financial institution counterparties in 2011, resulting in a total of 7.9 million shares repurchased at a cost of $250 million...

  • Page 129
    ... 31: Other Postretirement Benefits 2011 2010 Pension Benefits 2011 2010 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...

  • Page 130
    ....2 Pension Benefits 2011 2010 2009 Other Postretirement Benefits 2011 2010 2009 Net Periodic Benefit Cost: Service cost ...Interest cost ...Expected return on plan assets ...Amortization of prior service cost (credit) ...Amortization of net loss ...Settlement, curtailment or special termination...

  • Page 131
    ... Pension Postretirement Pension Postretirement Benefits Benefits Total Benefits Benefits Total Benefits Benefits Total 2011 2011 2011 2010 2010 2010 2009 2009 2009 New prior service cost ...$ - Net loss (gain) arising during the period ...98.3 Effect of foreign currency exchange rate changes on...

  • Page 132
    Pension Benefits 2011 2010 2009 Other Postretirement Benefits 2011 2010 2009 Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost for Years Ended December 31: Discount Rate ...Expected long-term return on plan assets ...Rate of compensation increase ...Plan assets: 5.2% 5.6% ...

  • Page 133
    ... of employees' contributions. The Company's expense under these plans was $25.6 million, $23.6 million and $21.4 million in 2011, 2010 and 2009, respectively. Additional Information Other postretirement benefits: For measurement purposes, a 7.8% annual rate of increase in the per capita cost of...

  • Page 134
    ... 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 $18.5 million) of future postretirement benefits for all the Company's U.S. employees based on prorated years of service with IBM and the Company. Cash...

  • Page 135
    ... at their fair value. Fair values for Lexmark's derivative financial instruments are based on pricing models or formulas using current market data, or where applicable, quoted market prices. On the date the derivative contract is entered into, the Company designates the derivative as a fair value...

  • Page 136
    .... Credit risk related to trade receivables is dispersed across a large number of customers located in various geographic areas. Collateral such as letters of credit and bank guarantees is required in certain circumstances. In addition, the Company uses credit insurance for specific obligors to limit...

  • Page 137
    ... and proceedings, including those identified below, consisting of intellectual property, commercial, employment, employee benefits and environmental matters that arise in the ordinary course of business. In addition, various governmental authorities have from time to time initiated inquiries and...

  • Page 138
    ...in effect prohibits the forfeiture of vacation time accrued. This statute has been used to invalidate California employers' "use or lose" vacation policies. The class is comprised of less than 200 current and former California employees of the Company. The trial was bifurcated into a liability phase...

  • Page 139
    ... countries (primarily in Europe) and/or collecting societies representing copyright owners' interests have taken action to impose fees on devices (such as scanners, printers and multifunction devices) alleging the copyright owners are entitled to compensation because these devices enable reproducing...

  • Page 140
    ... legal issues in these matters, cannot be reasonably estimated by the Company at this time. As of December 31, 2011, approximately $52 million of the $63.3 million accrued for the pending copyright fee issues was related to single function printer devices sold in Germany prior to December 31, 2007...

  • Page 141
    ... color laser printers, laser multifunction products and inkjet all-in-one devices as well as a wide range of supplies and services covering its printing products and technology solutions. Perceptive Software offers a complete suite of ECM software and document workflow solutions. On October 18, 2011...

  • Page 142
    ... 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: 2011 2010 2009 Long-lived assets: United States ...EMEA (Europe, the Middle East & Africa) ...Other International...

  • Page 143
    ... unit basis or through a managed service agreement Includes laser, inkjet, and dot matrix supplies and associated supplies services sold on a unit basis or through a managed service agreement Includes parts and service related to hardware maintenance and includes software licenses and the associated...

  • Page 144
    ... calculations. This is in accordance with prescribed reporting requirements. (1) Net earnings for the first quarter of 2011 included $2.1 million of pre-tax restructuring-related charges and project costs in connection with the Company's restructuring plans and $5.6 million of pre-tax charges in...

  • Page 145
    ...statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to...

  • Page 146
    ... the Exchange Act is accumulated and 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...

  • Page 147
    ... by management override. • The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. • Over time, controls may...

  • Page 148
    ... Corporate Governance Principles, the charters of each of the committees of the Board of Directors or the Code 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...

  • Page 149
    ... "Related Person Transactions," "Executive Compensation" and "Director Compensation." Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information required by Part III, Item 14 of this Form 10-K is incorporated by reference from the Company's definitive Proxy Statement for its 2012 Annual Meeting of...

  • Page 150
    ...2009, 2010 and 2011: Schedule II - Valuation and Qualifying Accounts ... 141 147 All other schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or related Notes. (3) Exhibits Exhibits for the Company are listed in...

  • Page 151
    LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2009, 2010 and 2011 (In Millions) (A) (B) Balance at Beginning of Period (C) Additions Charged to Charged Costs and to Other Expenses Accounts (D) (E) Balance at End of ...

  • Page 152
    ... duly authorized in the City of Lexington, Commonwealth of Kentucky, on February 28, 2012. LEXMARK INTERNATIONAL, INC. By /s/ Paul A. Rooke Name: Paul A. Rooke Title: Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been...

  • Page 153
    ... Lexmark International, Inc. (the "Company") and Lexmark International Group, Inc. Restated Certificate of Incorporation of the Company. Company By-Laws, as Amended and Restated July 28, 2011 Form of Indenture, dated as of May 22, 2008, between the Company and The Bank of New York Trust Company...

  • Page 154
    ...-Mitsubishi, Ltd., New York Branch ("BTM"), as the Banks; Citicorp North America, Inc. ("CNAI") and BTM, as the Investor Agents; CNAI, as Program Agent for the Investors and Banks; and the Company, as Collection Agent and Originator. Amendment No. 1 to Receivables Purchase Agreement, dated as of...

  • Page 155
    ..., as Seller; Gotham, as an Investor; Fifth Third Bank, as an Investor Agent and a Bank; BTMUFJ, as Program Agent, an Investor Agent and a Bank; and the Company, as Collection Agent and Originator. Amendment No. 9 to Receivables Purchase Agreement, dated as of September 30, 2011, by and among LRC, as...

  • Page 156
    ..., as Purchaser. Company Stock Incentive Plan, as Amended and Restated, effective April 23, 2009.+ Form of Non-Qualified Stock Option Agreement pursuant to the Company's Stock Incentive Plan.+ Form of Performance-Based NonQualified Stock Option Agreement pursuant to the Company's Stock Incentive Plan...

  • Page 157
    ... Restricted Stock Unit Agreement pursuant to the Company's Stock Incentive Plan for the 2010 Performance Period.+ Form of Performance-Based Restricted Stock Unit Agreement pursuant to the Company's Stock Incentive Plan for the 2011 Performance Period.+ Company Nonemployee Director Stock Plan, as...

  • Page 158
    ...42 Company Senior Executive Incentive Compensation Plan, as Amended and Restated, effective January 1, 2009.+ Form of Employment Agreement for Executive Officers.+ Form of Change in Control Agreement for the Chief Executive Officer and Executive Vice Presidents.+ Form of Change in Control Agreement...

  • Page 159
    ... the years ended December 31, 2011, 2010 and 2009, and (v) the Notes to the Consolidated Financial Statements.§ X * + § Confidential treatment previously granted by the Securities and Exchange Commission. Indicates management contract or compensatory plan, contract or arrangement. Pursuant to...

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  • Page 163
    ... to develop new products and enhance existing products to meet customer needs on a cost competitive basis; entrance into the market of additional competitors focused on printing solutions and software solutions, including enterprise content management and business process management solutions...

  • Page 164
    www.lexmark.com One Lexmark Centre Drive Lexington, KY 40550 USA 859.232.2000