| LEXMARK INTERNATIONAL INC /KY/ Item 1A RISK FACTORS The following significant factors, as well as others of which we are unaware or deem to be immaterial at this time, could materially adversely affect our business, financial condition or operating results in the future |
| Therefore, the following information should be considered carefully together with other information contained in this report |
| Past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods |
| Decreased consumption of supplies could negatively impact the company’s operating results |
| • The company’s future operating results may be adversely affected if the consumption of its supplies by end users of its products is lower than expected |
| The competitive pricing pressure in the market may negatively impact the company’s operating results |
| • The company and its major competitors, many of which have significantly greater financial, marketing and/or technological resources than the company, have regularly lowered prices on their products and are expected to continue to do so |
| In particular, both the inkjet and laser printer markets have experienced and are expected to continue to experience significant price pressure |
| Price reductions on inkjet or laser products or the inability to reduce costs, including warranty costs, to contain expenses or to increase or maintain sales as currently expected, as well as price protection measures or a shift in the mix of products sold, could result in lower profitability and jeopardize the company’s ability to grow or maintain its market share |
| The company’s inability to meet customer product requirements on a cost competitive basis may negatively impact the company’s operating results |
| • The company’s future operating results may be adversely affected if it is unable to continue to develop, manufacture and market products that are reliable, competitive, and meet customers’ needs |
| The markets for laser and inkjet products and associated supplies are aggressively competitive, especially with respect to pricing and the introduction of new technologies and products offering improved features and functionality |
| The impact of competitive activities on the sales volumes or revenue of the company, or the company’s inability to effectively deal with these competitive issues, could have a material adverse effect on the company’s ability to maintain or grow retail shelf space or market share and on its financial results |
| 13 _________________________________________________________________ [66]Table of Contents The company’s failure to manage inventory levels or production capacity may negatively impact the company’s operating results |
| • The company’s performance depends in part upon its ability to successfully forecast the timing and extent of customer demand and manage worldwide distribution and inventory levels of the company and its resellers |
| Unexpected fluctuations in reseller inventory levels could disrupt ordering patterns and may adversely affect the company’s financial results |
| In addition, the financial failure or loss of a key customer or reseller could have a material adverse impact on the company’s financial results |
| The company must also be able to address production and supply constraints, including product disruptions caused by quality issues, and delays or disruptions in the supply of key components necessary for production, including without limitation component shortages due to increasing global demand in the company’s industry and other industries |
| Such delays, disruptions or shortages may result in lost revenue or in the company incurring additional costs to meet customer demand |
| The company’s future operating results and its ability to effectively grow or maintain its market share may be adversely affected if it is unable to address these issues on a timely basis |
| Weak economic conditions could negatively impact sales of the company’s products and future operating results |
| • Unfavorable global economic conditions may adversely impact the company’s future operating results |
| The company continues to experience some weak markets for its products |
| Continued softness in certain markets and uncertainty about global economic conditions could result in lower demand for the company’s products, particularly supplies |
| Weakness in demand has resulted in intense price competition and may result in excessive inventory for the company and/or its reseller channel, which may adversely affect sales, pricing, risk of obsolescence and/or other elements of the company’s operating results |
| The company may experience difficulties in product transitions negatively impacting the company’s performance and operating results |
| • The introduction of products by the company or its competitors, or delays in customer purchases of existing products in anticipation of new product introductions by the company or its competitors and market acceptance of new products and pricing programs, any disruption in the supply of new or existing products due to quality issues, the reaction of competitors to any such new products or programs, the life cycles of the company’s products, as well as delays in product development and manufacturing, and variations in cost, including but not limited to component parts, raw materials, commodities, energy, products, distributors, fuel and variations in supplier terms and conditions, may impact sales, may cause a buildup in the company’s inventories, make the transition from current products to new products difficult and could adversely affect the company’s future operating results |
| The competitive pressure to develop technology and products and to increase marketing expenditures also could cause significant changes in the level of the company’s operating expenses |
| New legislation, fees on the company’s products or litigation costs required to protect the company’s rights may negatively impact the company’s cost structure and operating results |
| • The European Union has adopted the Waste Electrical and Electronic Equipment Directive (the “Directive”) which requires producers of electrical and electronic goods, including printing devices, to be financially responsible for specified collection, recycling, treatment and disposal of past and future covered products |
| The deadline for enacting and implementing the Directive by individual European Union governments was August 13, 2004 (such legislation, together with the Directive, the “WEEE Legislation”), although extensions were granted to some countries |
| Producers are to be financially responsible under the WEEE Legislation beginning in 14 _________________________________________________________________ [67]Table of Contents August 2005 |
| Similar legislation may be enacted in the future in other jurisdictions as well |
| The impact of this legislation could adversely affect the company’s operating results and profitability |
| • Certain countries (primarily in Europe) and/or collecting societies representing copyright owners’ interests have commenced proceedings to impose fees on devices (such as scanners, printers and multifunction devices) alleging the copyright owners are entitled to compensation because these devices enable reproducing copyrighted content |
| Other countries are also considering imposing fees on certain devices |
| The amount of fees, if imposed, would depend on the number of products sold and the amounts of the fee on each product, which will vary by product and by country |
| The financial impact on the company, which will depend in large part upon the outcome of local legislative processes, the company’s and other industry participants’ outcome in contesting the fees and the company’s ability to mitigate that impact by increasing prices, which ability will depend upon competitive market conditions, remains uncertain |
| The outcome of the copyright fee issue could adversely affect the company’s operating results and business |
| Increasing competition in aftermarket supplies could negatively impact the company’s revenue, operating margins and profitability |
| • Although the company is currently the exclusive supplier of new cartridges for its laser and inkjet products, there can be no assurance that other companies will not develop new compatible cartridges for the company’s products |
| In addition, refill and remanufactured alternatives for some of the company’s cartridges are available and compete with the company’s supplies business |
| The company expects competitive refill and remanufacturing activity to increase |
| Various legal challenges and governmental activities may intensify competition for the company’s aftermarket supplies business |
| Due to the international nature of our business, changes in a country’s or region’s political or economic conditions could negatively impact the company’s revenue, financial condition or operating results |
| • Revenue derived from international sales make up about half of the company’s revenue |
| Accordingly, the company’s future results could be adversely affected by a variety of factors, including changes in a specific country’s or region’s political or economic conditions, foreign currency exchange rate fluctuations, trade protection measures and unexpected changes in regulatory requirements |
| In addition, changes in tax laws and the ability to repatriate cash accumulated outside the US in a tax efficient manner may adversely affect the company’s financial results, investment flexibility and operations |
| Moreover, margins on international sales tend to be lower than those on domestic sales, and the company believes that international operations in new geographic markets will be less profitable than operations in the US and European markets, in part, because of the higher investment levels for marketing, selling and distribution required to enter these markets |
| The company’s reliance on international production facilities and international manufacturing partners could negatively impact the company’s operating results |
| • The company relies in large part on its international production facilities and international manufacturing partners, many of which are located in China, for the manufacture of its products and key components of its products |
| China’s revaluation of its currency to no longer peg its currency to the US dollar may have an adverse impact on the company’s cost of goods acquired from China, and could have a material adverse impact on the company’s financial results |
| Future operating results may also be adversely affected by several other factors, including, without limitation, if the company’s international operations or manufacturing partners are unable to perform or supply products reliably, if there are disruptions in international trade, disruptions at important geographic points of exit and entry, if there are difficulties in transitioning such manufacturing activities among the company, its international operations and/or its 15 _________________________________________________________________ [68]Table of Contents manufacturing partners, or if there arise production and supply constraints which result in additional costs to the company |
| The financial failure or loss of a key supplier could result in a material adverse impact on the company’s financial results |
| Conflicts among various sales channels may negatively impact the company’s operating results |
| • The company markets and sells its products through several sales channels |
| The company has also advanced a strategy of forming alliances and OEM arrangements with many companies |
| The company’s future operating results may be adversely affected by any conflicts that might arise between or among its various sales channels, the volume reduction in or loss of any alliance or OEM arrangement or the loss of retail shelf space |
| Aggressive pricing on laser and inkjet products and/or associated supplies from customers and resellers, including, without limitation, OEM customers, could result in a material adverse impact on the company’s strategy and financial results |
| Changes in the company’s tax provisions or tax liabilities could negatively impact the company’s profitability |
| • The company’s effective tax rate could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates |
| In addition, the amount of income tax the company pays is subject to ongoing audits in various jurisdictions |
| A material assessment by a taxing authority or a decision to repatriate foreign cash could adversely affect the company’s profitability |
| The entrance of additional competitors that are focused exclusively on printing solutions could negatively impact the company’s strategy and operating results |
| • The entrance of additional competitors that are focused on printing solutions could further intensify competition in the inkjet and laser printer markets and could have a material adverse impact on the company’s strategy and financial results |
| The company’s inability to perform satisfactorily under service contracts for managed print services may negatively impact the company’s strategy and operating results |
| • The company’s inability to perform satisfactorily under service contracts for managed print services and other customer services may result in the loss of customers, loss of reputation and/or financial consequences that may have a material adverse impact on the company’s financial results and strategy |
| The company’s inability to obtain and protect its intellectual property and defend against claims of infringement by others may negatively impact the company’s operating results |
| • The company’s success depends in part on its ability to obtain patents, copyrights and trademarks, maintain trade secret protection and operate without infringing the proprietary rights of others |
| Current or future claims of intellectual property infringement could prevent the company from obtaining technology of others and could otherwise materially and adversely affect its operating results or business, as could expenses incurred by the company in obtaining intellectual property rights, enforcing its intellectual property rights against others or defending against claims that the company’s products infringe the intellectual property rights of others |
| The failure of information technology systems may negatively impact the company’s operating results |
| • The company depends on its information technology systems for the development, manufacture, distribution, marketing, sales and support of its products and services |
| Any failure in such systems, or the systems of a partner or supplier, may adversely affect the company’s operating results |
| Furthermore, because vast quantities of the company’s products flow through only a few 16 _________________________________________________________________ [69]Table of Contents distribution centers to provide product to various geographic regions, the failure of information technology systems or any other disruption affecting those product distribution centers could have a material adverse impact on the company’s ability to deliver product and on the company’s financial results |
| Terrorist acts, acts of war or other political conflicts may negatively impact the company’s ability to manufacture and sell its products |
| • Terrorist attacks and the potential for future terrorist attacks have created many political and economic uncertainties, some of which may affect the company’s future operating results |
| Future terrorist attacks, the national and international responses to such attacks, and other acts of war or hostility may affect the company’s facilities, employees, suppliers, customers, transportation networks and supply chains, or may affect the company in ways that are not capable of being predicted presently |
| The outbreak of a communicable disease may negatively impact the health and welfare of the company’s employees and those of its manufacturing partners and negatively impact the company’s operating results |
| • The company relies heavily on the health and welfare of its employees and the employees of its manufacturing partners |
| The widespread outbreak of any form of communicable disease affecting a large number of workers could adversely impact the company’s operating results |
| Any variety of factors unrelated to the company’s operating performance may negatively impact the company’s operating results or the company’s stock price |
| • Factors unrelated to the company’s operating performance, including the financial failure or loss of significant customers, resellers, manufacturing partners or suppliers; the outcome of pending and future litigation or governmental proceedings; and the ability to retain and attract key personnel, could also adversely affect the company’s operating results |
| In addition, the company’s stock price, like that of other technology companies, can be volatile |
| Trading activity in the company’s common stock, particularly the trading of large blocks and intraday trading in the company’s common stock, may affect the company’s common stock price |