Lexmark 2011 Annual Report Download - page 46

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develops or circumstances change. Recoveries from other parties are recorded as assets when their
receipt is deemed probable. Although environmental costs and accruals are presently not material to
the Company’s results of operations, financial position, cash flows, statement of changes in
stockholders’ equity and comprehensive earnings, such estimates could change as the processes
draw closer to final resolution.
Waste Obligation
Waste Electrical and Electronic Equipment (“WEEE”) Directives 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
liability for these costs involves a number of uncertainties and takes into account certain assumptions
and judgments including average collection costs, return rates and product lives. During 2011, the
Company reduced its estimated liability and recognized a $10.5 million net benefit to Cost of revenue.
The adjustment was driven by the lower number of products actually returned and collected compared
to the return rate assumption used in the original estimate. In the future, should actual costs and
activities differ from the Company’s estimates and assumptions, revisions to the estimated liability may
be required.
Fair Value
The Company currently uses recurring fair value measurements in several areas including marketable
securities, pension plan assets and derivatives. The Company uses fair value in measuring certain
nonrecurring items as well, such 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 in its process of corroborating fair
values and testing default level assumptions for these investments. The Company also uses third
parties to assist with the valuation of certain illiquid securities as well as the valuation of certain assets
acquired and liabilities assumed in business combinations when it is determined that an income
approach is the most appropriate method to determine fair value.
In certain situations, there may be little or no market data available at the measurement date for the
Company’s fair value measurements, thus requiring the use of significant unobservable inputs. To the
extent that a valuation is based on models, inputs or assumptions that are less observable in the
market, the determination of fair value requires more judgment. Such measurements, when classified
within the fair value hierarchy, are generally classified as Level 3.
The Company’s Level 3 recurring fair value measurements are related mostly to its investments,
including auction rate securities for which recent auctions were unsuccessful. For these securities,
observable pricing data was not available resulting in the Company performing a discounted cash flow
analysis based on inputs that it believes market participants would use with regard to such items as
expected cash flows and discount rates adjusted for liquidity premiums or credit risk. Assumptions
significant to the valuation include assumptions regarding the financial health of the issuer as well as
assumptions regarding the auction rate market in general, such as the market will remain illiquid and
auctions will continue to fail. Valuation of these securities can be very subjective and estimates and
assumptions could be revised in the future depending on market conditions and changes in the
economy or credit standing of the issuer. Fair values of other marketable securities, mainly certain
corporate debt securities and asset-backed and mortgaged-backed securities, are also classified as
Level 3 due to (1) a low number of observed trades or pricing sources or (2) variability in the pricing
data is higher than expected. There is less certainty that the fair values of these securities would be
realized in the market due to the low level of observable market data.
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