This excerpt taken from the LXK 10-K filed Feb 27, 2009.
The Company increased its marketable securities investments by $210.6 million and $112.9 million in 2008 and 2007, respectively. The Company decreased its marketable securities investments in 2006 by $314.8 million, electing to spend more money on share repurchases in that year. The YTY variations in cash flows (used for) provided by investing activities were driven by the Companys marketable securities investment activities.
The Companys investments in marketable securities are classified and accounted for as available-for-sale. At December 31, 2008 and December 31, 2007, the Companys marketable securities portfolio consisted of asset-backed and mortgage-backed securities, corporate debt securities, municipal debt securities, U.S. government and agency debt securities, commercial paper, certificates of deposit and preferred securities, including approximately $25 million and $79 million, respectively, of auction rate securities.
Market conditions continue to indicate significant uncertainty on the part of investors on the economic outlook for the U.S. and for financial institutions. This uncertainty has created reduced liquidity across the fixed income investment market, including the securities in which Lexmark is invested. As a result, some of the Companys investments have experienced reduced liquidity including unsuccessful auctions for its auction rate security holdings as well as temporary and other than temporary impairment of other marketable securities. For the year ended December 31, 2008, the Company recognized $7.9 million in net losses on its marketable securities, including $7.3 million for other-than-temporary impairment of securities held by the Company on December 31, 2008 described in following paragraph.
In 2008 there were several significant market events, including the bankruptcy of Lehman Brothers Holdings and the failure of many auction rate securities. In 2008, Lexmark transferred its Lehman Brothers corporate debt securities into the Level 3 category of the fair value hierarchy, and subsequently took a charge of $4.4 million based on the estimated fair value of the investments determined from indicative pricing sources. Additionally in 2008, the Company recognized a $1.9 million charge for other-than-temporary impairment in connection with its auction rate fixed income securities; the fair value of which was determined 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 losses were recognized in Other (income) expense, net on the Consolidated Statements of Earnings and included in the Companys Level 3 rollforward table in Part II, Item 8, Note 3 of the Notes to Consolidated Financial Statements. In addition, the Company has recognized a cumulative, pre-tax valuation allowance of $1.7 million included in Accumulated other comprehensive loss on the Consolidated Statements of Financial Position, representing a temporary impairment of the overall portfolio. The pre-tax valuation allowance consists of gross unrealized losses of $8.2 million, primarily related to asset-backed and mortgage-backed securities and corporate debt securities, offset partially by $6.5 million of gross unrealized holding gains related mostly to US government and agency securities.
The Company assesses its marketable securities for other-than-temporary declines in value by considering several factors that include, among other things, any events that may affect the creditworthiness of a securitys issuer, current and expected market conditions, the length of time and extent to which fair value is less than cost, and the Companys ability and intent to hold the security until a forecasted recovery of fair value that may include holding the security to maturity. As of February 27, 2009, the Company does not believe that it has a material risk in its current portfolio of investments that would impact its financial condition or liquidity.
Auction rate securities that do not successfully auction reset to the maximum rate as prescribed in the underlying offering statement. During the first quarter of 2008, the Company reclassified $59.4 million in auction rate fixed income securities from Current assets to Noncurrent assets on its Consolidated Condensed Statement of Financial Position due to the fact that the securities had experienced unsuccessful auctions and poor debt market conditions had reduced the likelihood that the securities would successfully auction within the next 12 months. During the next three quarters, $40.5 million of the Companys auction rate securities were either sold or redeemed at par, resulting in no realized losses in 2008. At year-end 2008, the Company performed a discounted cash flow analysis on its remaining auction rate securities that resulted in a mark to market loss adjustment of $2.5 million. Of this $2.5 million loss adjustment, $1.9 million (mentioned previously) was recognized in the Consolidated Statements of Earnings as an other than temporary impairment due to credit events involving the issuer and insurer of one security. The remaining $0.6 million was recognized in Accumulated other comprehensive loss on the Consolidated Statements of Financial Position. Based on Lexmarks assessment of the credit quality of the underlying collateral and credit support available to each of the auction rate securities in which the Company is invested, it believes no additional other than temporary impairment has occurred. The Company has the ability and intent to hold these securities until liquidity in the market or optional issuer redemption occurs and could also hold the securities to maturity. Additionally, if Lexmark required capital, the Company has available liquidity through its accounts receivable program and revolving credit facility.
Recent events have led to an increased focus on fair value accounting, including the practices companies utilize to value financial instruments. The Company uses a third party to provide the fair values of the marketable securities in which Lexmark is invested, though the valuation of its investments is the responsibility of the Company. The Company has performed a reasonable level of due diligence in the way of documenting the pricing methodologies used by the third party as well as a limited amount of sampling of the valuations. Most of the Companys securities are valued using a consensus price method, whereby prices from a variety of industry data providers (multiple quotes) are input into a distribution-curve based algorithm to determine daily market values. Pricing inputs for a select number of securities were provided and compared to the overall valuation for reasonableness. In limited instances, the Company has
adjusted the fair values provided by the third party in order to better reflect the risk adjustments that market participants would make for nonperformance and liquidity risks. Level 3 fair value measurements are based on inputs that are unobservable and significant to the overall valuation. The Companys Level 3 recurring fair value measurements include security types that do not have readily determinable market values and/or are not priced by independent data sources, including failed auction rate securities valued at $24.7 million (discussed previously), certain distressed debt instruments valued at $0.8 million (including Lehman corporate debt valued at $0.5 million) and other thinly traded corporate debt securities and mortgage-backed securities valued at $0.6 million. These measurements were roughly 3.6% of the Companys total available-for-sale marketable securities portfolio.
The discounted cash flow analysis performed by the Company on its auction rate securities at year-end 2008 used current coupon rates, a first quarter 2010 redemption date and a 50 basis point liquidity premium factored into the discount rate. The result was the Companys best estimate of fair value using assumptions that the Company believes market participants would make for nonperformance and liquidity risk at the measurement date. For certain debt instruments that the Company considers distressed due to reasons such as bankruptcy or a significant downgrade in credit rating, the securities are generally valued using non-binding quotes from brokers or other indicative pricing sources. For certain corporate debt and mortgage-backed securities held by the Company, current pricing data was no longer available at the measurement date, representing a decline in the volume and level of trading activity. These securities are also generally valued using non-binding quotes from brokers or other indicative pricing sources.
Refer to Part II, Item 8, Note 3 of the Notes to Consolidated Financial Statements for additional information regarding FAS 157 Fair Value Measurements. Refer to Part II, Item 8, Note 6 of the Notes to Consolidated Financial Statements for additional information regarding marketable securities.
In addition to investing in marketable securities, the Company also invested $217.7 million, $182.7 million and $200.2 million into property, plant and equipment for the years 2008, 2007 and 2006 respectively. Further discussion regarding 2008 capital expenditures as well as anticipated spending for 2009 are provided near the end of Item 7.
Other notable investing cash flows include $4.6 million proceeds received from the sale of the Companys inkjet supplies assembly plant located in Juarez, Mexico in the third quarter of 2008 as well as $8.1 million proceeds received from the sale of the Scotland facility that occurred in the first quarter of 2007. These events are presented in Proceeds from sale of facilities in the Investing section of the Consolidated Statements of Cash Flows for their respective periods.
This excerpt taken from the LXK 10-K filed Feb 27, 2008.
The Company decreased its marketable securities investments in 2005 by $220 million and by $315 million in 2006 due to its share repurchase program activity. In 2007, the Company increased its investment in marketable securities by $113 million. Refer to the section, Stock Repurchase, which follows for further discussion of the Companys stock repurchase program during 2007. The fluctuations in the net cash flows (used for) provided by investing activities for the years provided were principally due to the Companys marketable securities investing activities.
At December 31, 2007, the Companys marketable securities portfolio consisted of asset-backed and mortgage-backed securities, corporate debt securities, municipal debt securities, U.S. government and agency debt securities, and preferred securities, including approximately $79 million of auction rate securities. The Companys marketable securities were reported at fair value with the related unrealized gains and losses included in the Accumulated other comprehensive earnings (loss) section of stockholders equity, net of tax. As of December 31, 2007 the Company had gross unrealized gains and gross unrealized losses of $1.5 million and $1.5 million, respectively. Based upon several factors including events that may affect the creditworthiness of a securitys issuer, the length of time the security has been in a loss position, and the Companys ability and intent to hold the security until a forecasted recovery of fair value, the Company assessed its loss positions as temporary impairments. Substantially all of the unrealized losses and gains as of December 31, 2007, have been in a gain/loss position for less than 12 months.
The Company spent $183 million, $200 million and $201 million on capital expenditures during 2007, 2006 and 2005, respectively. The capital expenditures in 2007 were related to new product development, infrastructure support and manufacturing capacity expansion.
During the first quarter of 2007, the Company sold its Rosyth, Scotland facility for $8.1 million and recognized a $3.5 million pre-tax gain on the sale.
This excerpt taken from the LXK 10-K filed Feb 28, 2007.
The Company began investing in marketable securities during the third quarter of 2003, which resulted in a net use of cash of $490 million in 2004. The Company decreased its marketable securities investments in 2005 by $220 million and by $315 million in 2006 due to its share repurchase program activity. Refer to the section, Stock Repurchase, which follows for further discussion of the Companys stock repurchase program during 2006.
The Company spent $200 million, $201 million and $198 million on capital expenditures during 2006, 2005 and 2004, respectively. The capital expenditures in 2006 were related to new product development, infrastructure support and manufacturing capacity expansion.