Lexmark 2014 Annual Report Download - page 14

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 company-
owned manufacturing sites in Boulder, Colorado and Juarez, Mexico. 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 strategies, capabilities, and cost structure and makes
adjustments as necessary.
Manufacturing operations for laser printer supplies are located in Boulder, Colorado; Juarez, Mexico; Zary, Poland; and Shenzhen,
China. 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. Inkjet printer
supplies are assembled by a combination of in-house and third-party manufacturing. The manufacturing control center for inkjet
printer 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 single
sourced supplier relationships, to better ensure more consistent quality, cost and delivery. In addition, ISS sources some printer
engines and finished products from OEMs. Typically, these preferred suppliers and OEMs 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 2014, 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, 2014, a significant majority of printers were purchased under SMI agreements. Any impact
on future operations would depend upon factors such as ISS’ ability to negotiate new SMI agreements and future market pricing and
product costs.
• Backlog — ISS
Although ISS experiences availability constraints from time to time for certain products, ISS generally fills its orders within 30 days
of receiving them. Therefore, ISS usually has a product backlog of less than 30 days at any one time, which the Company does not
consider material to its business. Refer to Part II, Item 8, Note 12 of the Notes to Consolidated Financial Statements for information
regarding deferred service revenue, which makes up most of the Company’s service backlog.
• Seasonality — ISS
ISS experiences some seasonal market trends in the sale of its products and services. For example, ISS’ sales are often stronger during
the second half of the year and ISS’ sales in Europe are often weaker in the summer months. The impact of these seasonal trends on
ISS has become less predictable due to the exit of the inkjet business and less consumer exposure.
Segment Information — Perceptive Software
• Products — Perceptive Software
Perceptive Software offers a complete suite of ECM, BPM, DOM, intelligent data capture, search software and medical imaging VNA
software products and solutions.
10