Lexmark 2007 Annual Report Download - page 15

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During 2006 and 2007, the Company continued to execute supplier managed inventory (“SMI”)
agreements with its primary suppliers to improve the efficiency of the supply chain. Management
believes these SMI agreements improve Lexmark’s supply chain inventory pipeline and supply chain
flexibility which enhances responsiveness to our customers. In addition, management believes these
agreements improve supplier visibility to product demand and therefore improve suppliers’ timeliness and
management of their inventory pipelines. As of December 31, 2007, a significant majority of printers were
purchased under SMI agreements. Any impact on future operations would depend upon factors such as
the Company’s ability to negotiate new SMI agreements and future market pricing and product costs.
Many components of the Company’s products are sourced from sole suppliers, including certain custom
chemicals, microprocessors, electro-mechanical components, application specific integrated circuits and
other semiconductors. The Company is making changes in sourcing and design to drive commonality of
sub components across product families while increasing dual sourcing for key components. In addition,
Lexmark sources some printer engines and finished products from OEMs. Although Lexmark plans in
anticipation of its future requirements, should these components not be available from any one of these
suppliers, there can be no assurance that production of certain of the Company’s products would not be
disrupted. Such a disruption could interfere with Lexmark’s ability to manufacture and sell products and
materially adversely affect the Company’s business. Conversely, during economic slowdowns, the
Company may build inventory of components as demand decreases.
Research and Development
Lexmark’s research and development activity is focused on laser and inkjet printers, MFPs, and associated
supplies, features, and related technologies. The Company has accelerated its investment in research and
development to support new product initiatives and to advance current technologies and expects this to
continue. Lexmark’s primary research and development activities are conducted in Lexington, Kentucky;
Boulder, Colorado; Cebu City, Philippines; and Kolkata, India. In the case of certain products, the
Company may elect to purchase products or key components from third-party suppliers rather than
develop them internally.
Lexmark is actively engaged in the design and development of new products and enhancements to its
existing products. Its engineering efforts focus on technologies associated with laser, inkjet, connectivity,
document management and other customer facing solutions, as well as design features that will increase
performance, improve ease of use and lower production costs. Lexmark also develops related applications
and tools to enable it to efficiently provide a broad range of services. The process of developing new
products is complex and requires innovative designs that anticipate customer needs and technological
trends. Research and development expenditures were $404 million in 2007, $371 million in 2006 and
$336 million in 2005. The Company must make strategic decisions from time to time as to which
technologies will produce products and solutions in market sectors that will experience the greatest
future growth. There can be no assurance that the Company can develop the more technologically-
advanced products required to remain competitive.
Backlog
Although Lexmark experiences availability constraints from time to time for certain products, the Company
generally fills its orders within 30 days of receiving them. Therefore, Lexmark usually has a backlog of less
than 30 days at any one time, which the Company does not consider material to its business.
Employees
As of December 31, 2007, of the approximately 13,800 employees worldwide, 3,800 are located in the
U.S. and the remaining 10,000 are located in Europe, Canada, Latin America, Asia Pacific, the Middle East
and Africa. None of the U.S. employees are represented by a union. Employees in France are represented
by a Statutory Works Council.
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