Lexmark 2011 Annual Report Download - page 134

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Related to Lexmark’s acquisition of the Information Products Corporation from IBM in 1991, IBM agreed
to pay for its pro rata share (currently estimated at $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 flows:
In 2012, the Company is currently expecting to contribute approximately $45 million to its pension and
other postretirement plans.
Lexmark estimates that the future benefits payable for the pension and other postretirement plans are
as follows:
Pension
Benefits
Other
Postretirement
Benefits
2012 ........................................................... $ 51.2 $ 4.4
2013 ........................................................... 50.6 4.1
2014 ........................................................... 49.7 3.9
2015 ........................................................... 49.1 3.9
2016 ........................................................... 48.7 3.9
2017-2020 ...................................................... 253.2 19.6
18. DERIVATIVES AND RISK MANAGEMENT
Derivative Instruments and Hedging Activities
Lexmark’s activities expose it to a variety of market risks, including the effects of changes in foreign
currency exchange rates and interest rates. The Company’s risk management program seeks to
reduce the potentially adverse effects that market risks may have on its operating results.
Lexmark maintains a foreign currency risk management strategy that uses derivative instruments to
protect its interests from unanticipated fluctuations in earnings caused by volatility in currency
exchange rates. The Company does not hold or issue financial instruments for trading purposes nor
does it hold or issue leveraged derivative instruments. Lexmark maintains an interest rate risk
management strategy that may, from time to time, use derivative instruments to minimize significant,
unanticipated earnings fluctuations caused by interest rate volatility. By using derivative financial
instruments to hedge exposures to changes in exchange rates and interest rates, the Company
exposes itself to credit risk and market risk. Lexmark manages exposure to counterparty credit risk by
entering into derivative financial instruments with highly rated institutions that can be expected to fully
perform under the terms of the agreement. Market risk is the adverse effect on the value of a financial
instrument that results from a change in currency exchange rates or interest rates. The Company
manages exposure to market risk associated with interest rate and foreign exchange contracts by
establishing and monitoring parameters that limit the types and degree of market risk that may be
undertaken.
Lexmark uses fair value hedges to reduce the potentially adverse effects that market volatility may
have on its operating results. Fair value hedges are hedges of recognized assets or liabilities. Lexmark
enters into forward exchange contracts to hedge accounts receivable, accounts payable and other
monetary assets and liabilities. The forward contracts used in this program generally mature in three
months or less, consistent with the underlying asset and liability. Foreign exchange forward contracts
may be used as fair value hedges in situations where derivative instruments expose earnings to further
changes in exchange rates. Although the Company has historically used interest rate swaps to convert
fixed rate financing activities to variable rates, there were no interest rate swaps outstanding as of
December 31, 2011.
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