Lexmark 2007 Annual Report Download - page 30

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the Consolidated Financial
Statements and Notes thereto presented under Part II, Item 8 of this Form 10-K.
OVERVIEW
Products and Segments
Lexmark makes it easier for businesses and consumers to move information between the digital and paper
worlds. Since its inception in 1991, Lexmark has become a leading developer, manufacturer and supplier
of printing and imaging solutions for offices and homes. Lexmark’s products include laser printers, inkjet
printers, multifunction devices, and associated supplies, services and solutions. Lexmark also sells dot
matrix printers for printing single and multi-part forms by business users.
The Company is primarily managed along Business and Consumer market segments:
• The Business market segment primarily sells laser products and serves business customers but
also include consumers who choose laser products. Laser products can be divided into two major
categories — shared workgroup products and lower-priced desktop products. Lexmark employs
large-account sales and marketing teams, closely supported by its development and product
marketing teams, to generate demand for its business printing solutions and services. The
sales and marketing teams primarily focus on industries such as finance, services, retail,
manufacturing, public sector and health care. Lexmark also markets its laser and inkjet
products increasingly through SMB teams who work closely with channel partners. The
Company distributes and fulfills its laser products primarily through its well-established
distributor and reseller network. Lexmark’s products are also sold through solution providers,
which offer custom solutions to specific markets, and through direct response resellers.
• The Consumer market segment predominantly sells inkjet products to consumers but also includes
business users who may choose inkjet products as a lower-priced alternative or supplement to laser
products for personal desktop use. Also, there is an increasing trend in inkjet products being
designed for business purposes such as SOHO, small business, student and home offices.
Additionally, over the past couple years, the number of consumers seeking productivity-related
features has driven significant growth in AIO products. For the consumer market, Lexmark
distributes its branded inkjet products and supplies primarily through retail outlets worldwide.
Lexmark’s sales and marketing activities are organized to meet the needs of the various
geographies and the size of their markets.
The Company also sells its products through numerous alliances and OEM arrangements.
Refer to Part II, Item 8, Note 17 of the Notes to Consolidated Financial Statements for additional
information regarding the Company’s reportable segments, which is incorporated herein by reference.
Operating Results Summary
2007
Lexmark believes it is experiencing shrinkage in its installed base of inkjet products and an associated
decline in end-user demand for inkjet supplies. The Company sees the potential for continued erosion in
end-user inkjet supplies demand due to the reduction in inkjet hardware unit sales reflecting the
Company’s decision to focus on more profitable printer placements, a mix shift between cartridges
resulting in a higher percentage of moderate use cartridges and the weakness the Company is
experiencing in its OEM business.
Beginning in the second quarter of 2007, the Company’s Consumer segment experienced on-going
declines in inkjet supplies and OEM unit sales, lower average unit revenues (“AURs”) and additional costs
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