Lexmark 2010 Annual Report Download - page 15

market presence may attract more frequent challenges, both legal and commercial, including claims of
possible intellectual property infringement.
The distributed printing market is extremely competitive. The distributed laser printing market is dominated
by Hewlett-Packard (“HP”), which has a widely-recognized brand name and has been identified as the
market leader as measured in annual units shipped. With the convergence of traditional printer and copier
markets, major laser competitors now include traditional copier companies such as Canon, Ricoh and
Xerox. Other laser competitors include Brother, Konica Minolta, Kyocera, Okidata and Samsung.
ISS’ primary competitors in the inkjet product market are HP, Canon and Epson, who together account for
approximately 85% of worldwide inkjet product unit sales. ISS must compete with these same vendors and
other competitors, such as Brother and Kodak, for retail shelf space allocated to printing products and their
associated supplies. Lexmark sees other competitors and the potential for new entrants into the market
possibly having an impact on ISS’ growth and market share. The entrance of a competitor that is also
focused on printing solutions could have a material adverse impact on the Company’s strategy and
financial results.
Refill, remanufactured, clones, counterfeits and other compatible alternatives for some of ISS’ toner and
ink cartridges are available and compete with ISS’ supplies business. However, these alternatives may
result in inconsistent quality and reliability. As the installed base of laser and inkjet products matures, the
Company expects competitive supplies activity to increase.
• Manufacturing and Materials — ISS
ISS operates manufacturing control centers in Lexington, Kentucky; Shenzhen, China; and Geneva,
Switzerland; and has manufacturing sites in Boulder, Colorado; Juarez, Mexico; and Lapu-Lapu City,
Philippines. ISS also has customization centers in each of the major geographies it serves. ISS retains
control over manufacturing processes that are technologically complex, proprietary in nature and central to
ISS’ business model, such as the manufacture of toner and photoconductors. ISS shares some of its
technical expertise with certain manufacturing partners, many of whom have facilities located in China,
which collectively provide ISS with substantially all of its printer production capacity. ISS continually
reviews its manufacturing capabilities and cost structure and makes adjustments as necessary.
Manufacturing operations for toner and photoconductor drums are located in Boulder, Colorado and
Juarez, Mexico. Laser printer cartridges are assembled by a combination of in-house and third-party
contract manufacturing. The manufacturing control center for laser printer supplies is located in Geneva,
Switzerland.
Manufacturing operations for inkjet printer supplies are located in Lapu-Lapu City, Philippines and Juarez,
Mexico. The manufacturing control center for inkjet supplies is located in Geneva, Switzerland.
ISS procures a wide variety of components used in the manufacturing process, including semiconductors,
electro-mechanical components and assemblies, as well as raw materials, such as plastic resins. Although
many of these components are standard off-the-shelf parts that are available from multiple sources, ISS
often utilizes preferred supplier relationships, and in certain cases sole supplier relationships, to better
ensure more consistent quality, cost and delivery. Typically, these preferred suppliers maintain alternate
processes and/or facilities to ensure continuity of supply. ISS occasionally faces capacity constraints when
there has been more demand for its products than initially projected. From time to time, ISS may be
required to use air shipment to expedite product flow, which can adversely impact ISS’ operating results.
Conversely, in difficult economic times, ISS’ inventory can grow as market demand declines.
During 2010, ISS continued to execute supplier managed inventory (“SMI”) agreements with its primary
suppliers to improve the efficiency of the supply chain. Lexmark’s management believes these SMI
agreements improve ISS’ supply chain inventory pipeline and supply chain flexibility which enhances
responsiveness to our customers. In addition, the Company’s 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, 2010, a significant majority of printers were purchased
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