Lexmark International, Inc. Business Information, Profile, and History

Company Perspectives

Lexmark International, Inc. (NYSE: LXK) makes it easier for businesses and consumers to move information between the digital and paper worlds. In doing so, we are guided by a simple vision: Customers For Life. To earn our customers' loyalty, we listen to them, anticipate their needs and act to create value in their eyes.

History of Lexmark International, Inc.

Lexmark International, Inc. is one of the world's major designers, manufacturers, and suppliers of laser and inkjet printers and related supplies for both the office and home markets. Since being spun off from International Business Machines Corporation (IBM) in 1991, Lexmark has become a leader in the development and production of a broad line of printing and office imaging products, including color and photo inkjet printers, monochrome and color laser printers, inkjet and laser multifunction devices (offering some combination of printing, scanning, copying, and faxing capabilities), dot matrix printers, inkjet and toner cartridges, and other associated supplies and services. In addition to making products marketed under its own brand, Lexmark also produces items for other original equipment manufacturers (OEMs) that are sold under the OEM's name. An alliance with Dell Inc. accounts for fully 15 percent of Lexmark's overall revenues. Lexmark has manufacturing operations in Lexington, Kentucky; Boulder, Colorado; Geneva, Switzerland; Orleans, France; Juarez and Chihuahua, Mexico; and Lapu-Lapu City, Philippines. These sites, however, are mainly involved in the more technologically complex aspects of Lexmark's business, such as the production of toner, photoconductor drums, and inkjet cartridges. The production of the printers themselves is conducted through third-party manufacturers, many of which are located in China. As a spinoff from IBM ("Big Blue"), the company inherited a worldwide distribution network that management has built upon and expanded dramatically. Lexmark sells its products in more than 150 countries around the world, and approximately 55 percent of revenues originate outside the United States, more than 35 percent in Europe alone.

Early History

The birth of Lexmark International was a result of IBM's attempt to remain competitive in the intense atmosphere of the late 1980s, when so many smaller firms began chipping away at Big Blue's market share in the computer industry. When IBM initiated a strategic downsizing campaign to cut its workforce by selling or spinning off its peripheral businesses, the Information Products Division was designated as one of the targets. In the early part of 1991, IBM completed a deal to sell Lexmark ("Lex" as in "lexicon" and "mark" for "marks on paper"), its newly renamed Information Products Division, to the private investment group of Clayton, Dubillier, and Rice for approximately $1.5 billion. The leveraged buyout, arranged largely by Martin Dubillier, one of the founders of the investment firm, was financed mostly through bank loans that left the newly created company $1 billion in debt. Dubillier, knowing that Lexmark required astute and aggressive management if it was to survive and prosper with such a heavy debt load, hired Marvin Mann, an IBM vice-president with 32 years of experience, to serve as Lexmark's chairman, president, and chief executive officer.

Intimately knowledgeable about the successes and failures of IBM's business, Mann jumped into his new position with unbridled enthusiasm. Working 18-hour days, and starting with the outline of an organization, he began to reinvent a $2 billion operation. The leveraged buyout included the transfer of IBM's Lexington, Kentucky, plant to Lexmark. Mann made the plant the focus of the company's production facilities and immediately implemented a strategy to streamline its workforce. By means of generous benefits for voluntary retirements, transfers, or separations, including one-time assistance payments of $25,000, and one-time career retraining payments of $2,500 (also part of the agreement with IBM), Mann was able to reduce the plant's workforce from over 5,000 to only 1,200 employees. This downsizing significantly reduced Lexmark's operating costs.

At the same time, Mann began to hire virtually all of his management team from IBM. Part of the deal with IBM gave Mann the authority to approach IBM employees to work for Lexmark, and the new president had absolutely no qualms about bringing in experienced managers who were willing to reshape the business. Ultimately, Mann managed to recruit the heads of IBM's research and development, sales, marketing, production, and human resources departments. In order to increase efficiency and smooth the workflow, Mann decided not to establish the traditional "contention system," where staff members from different departments within the company challenge each others' proposals, a primary management strategy at IBM and its subsidiaries. Instead, Mann wanted his managers to focus their energies on positive suggestions that would keep Lexmark ahead of its competition.

Perhaps the most innovative management restructuring occurred in the area of manufacturing operations. Initially, small teams of employees were formed in order to make the production lines more efficient and to eliminate problems related to quality control. But the process of transferring responsibility for decision making from management to workers was not always a smooth one. In one instance, early on in the reorganization, a team of employees redesigned the laser printer production process and then presented their recommendations to management who asked the group to sign an approval form for the design. Realizing that the decision-making process, and all the responsibility that goes with it, was completely in their own hands, the group of workers shied away and refused to sign the document that would change the production process. One month later, the same group of workers returned with a more detailed redesign of the laser printer production process, and immediately supported it with their signatures. The two lessons Mann and his management team learned from this experience were that, first, empowerment does not work until workers believe that they can actually take ownership of the production process and, second, that involving employees in decisions that affect the production process takes time. These fundamental changes in management-employee relations went a long way toward establishing a highly motivated and effective workforce at Lexmark.

Growth and Development

After having reduced numerous layers of management, created highly independent product development teams, organized a brand new, extremely aggressive sales force, and discarded IBM's traditional appraisal and suggestion program, Mann was ready to take Lexmark to new heights. In 1992, as the company improved its product development time cycles and made its manufacturing processes more and more efficient, a new dot matrix printer was introduced for use at both work and home, along with an extremely lightweight battery-powered printer for portable personal computer users. Later that year, Lexmark introduced a PostScript-compatible inkjet printer, and also began to make a mark in the field of laser network printing. These laser printers were manufactured for Macintosh and were the first products bearing the Lexmark, rather than the IBM, name. At the same time, however, Lexmark retained its right under a licensing agreement to manufacture printers under the IBM logo.

In addition to expanding its product line with such items as color printers, Lexmark significantly increased the number of its original equipment manufacturer (OEM) printer customers, and was well on the road to doubling that number within its projected timetable of one year. Lexmark also aggressively expanded its IBM PC-compatible keyboard business, which, by the end of 1992, had grown to include over 40 original equipment manufacturers besides IBM. Lexmark was able to double its operating profits after only two years of operation. The company produced $1.8 billion in revenues during 1992 and, with a good cash flow and astute management of its financial resources, Lexmark was able to dramatically reduce its debt from $1.15 billion to approximately $700 million, an impressive accomplishment within such a competitive industry.

In 1993 Lexmark significantly enhanced its presence in the Pacific Rim with the acquisition of Gestetner Lasers. Arranged through its subsidiary, Lexmark Australia, the print maker Gestetner was the company's first acquisition and, like all subsequent purchases, was fully incorporated into the company's manufacturing operations. At this time, the company made a commitment to increase its business operations in the international sector and, after a restructuring plan implemented in 1992, improved manufacturing operations in France and built up distribution, marketing, and administrative operations throughout Europe. As a result of these measures, sales from the company's European business shot up to approximately $500 million. Through astute pricing and product sourcing decisions, management was able to minimize the effects of exchange rate fluctuations on the company's European revenues. Other major events during 1993 included the introduction of a new series of network laser printers, and a licensing agreement with Interlink Electronics to develop joystick technologies for a burgeoning market.

By the beginning of 1994, Lexmark had made its name in the laser printer industry. The sale of inkjet printers increased 27 percent over the previous year, much of this due to the entry of the company into the low-end color inkjet market. Associated printer supplies increased by 28 percent, attributed primarily to the continued growth of the company's installed printer base. Keyboard revenues increased only 6 percent, but the company's notebook computer line proved to be one of its most popular products in the retail market. In fact, Lexmark's presence in retail stores was growing at an astounding rate, with over 20 percent of the company's total revenues generated from retail sales. By the end of the year, Lexmark was ranked fourth in the retail market, closing in on such giants as Hewlett-Packard Company, Epson Corporation, and Canon Inc. in inkjet sales. A study conducted during this time indicated that consumer recognition of Lexmark and its products had grown from 36 percent to 41 percent in just three months.

In addition to the increase in revenues, Lexmark received a major endorsement from Microsoft Corporation when the software titan picked the company as its first partner for the WindowsAtWork printing environment. Pleased with Lexmark's innovative and aggressive style, Microsoft subsequently chose the company to work on a second generation of products which would be optimized to run in a Windows environment. The close of 1994 marked a milestone in Lexmark history as the IBM logo was finally removed from all company products to be replaced by the Lexmark name. Perhaps the most satisfying moment for Mann, however, arrived when Lexmark was able to reduce its debt to a mere fraction of the total amount by the end of 1994.

In 1995 Lexmark introduced one of its most successful products, MarkVision, the most thorough and comprehensive printer management system designed up to that time. Local area network (LAN) users within large corporations significantly increased their efficiency by installing MarkVision, which allowed staff to view all the available printers and check the print job status of each of them without leaving their desk. Another feature of MarkVision provided network administrators with access to the same information so that printer settings could be easily changed through a unique remote operator panel. The click of a mouse gave individuals the ability to remotely perform multiple tasks from their desktop, and simultaneously control and manage all printers across the entire network, regardless of whether the printer was on another floor in the building or across the country. Within a very short time, MarkVision had developed into one of the most popular network and systems management applications, used by many of the leaders in the network industry. With the success of MarkVision, Lexmark was able to introduce related applications such as the MarkNet IR, or infrared adapter. This highly compact product enabled a mobile printer to print, synchronize, and transfer files from an infrared-equipped notebook or laptop computer without the use of switch boxes or cables that required extensive hook-up procedures.

By the end of 1995, Lexmark was able to report nearly $2.2 billion in revenues, with approximately 70 percent of sales generated from printers and associated supplies. Nearly 40 percent of Lexmark revenues came from sales outside the continental United States, mostly derived from countries in Europe and around the Pacific Rim. With international sales up 25 percent over 1994, the company planned to continue expanding its presence overseas through a strategic effort to manufacture more competitive products, improve marketing, and intensify sales efforts. In November 1995 Lexmark went public through an initial public offering. In 1998 Clayton, Dubillier, and Rice divested its remaining 23 percent stake in Lexmark.

Targeting the Consumer and Small Office Market

During the late 1990s, while continuing to go after the corporate market and expanding its offerings for that market to include networkable color inkjet and laser printers, Lexmark began to increasingly target the consumer and small office market. The emphasis here was on affordable inkjet printers, and Lexmark broke new ground in 1997 when it began offering color inkjet printers that retailed for less than $100. The lower prices stimulated demand without affecting the company's bottom line because Lexmark made much of its money selling the cartridges required by its printers, in a replication of the razor-and-blades strategy pioneered by the Gillette Company. Further innovation came in 1998 when Lexmark introduced a color inkjet printer capable of editing, storing, and printing pictures from most digital cameras without needing to be connected to a computer or the camera itself. The company developed additional versions of so-called photo printers over the ensuing years. Also in 1998, Lexmark began supplying inkjets to Compaq Computer Corporation for bundling with Compaq PCs. These printers carried the Compaq brand but still required ink cartridges from Lexmark. In early 1999 Lexmark expanded its presence in the retail market by securing space for its printers on the shelves of three key retailers, CompUSA, Staples, and Office Depot.

The late 1990s also saw the first top management transition at Lexmark. In May 1998 Paul Curlander was named president and CEO, succeeding Mann, who remained chairman until April 1999, when Curlander assumed that position as well. Curlander had a Ph.D. in engineering and had developed IBM's first laser printer, shifting over to Lexmark upon its spinoff. Under Curlander's watch, Lexmark made its biggest product launch yet in late 1999, introducing six new laser printers aimed at the corporate market as well as new multifunction machines offering scanning, faxing, and copying functions in addition to printing.

Over the next two years, however, Lexmark suffered from the tech downturn, which severely depressed corporate information technology purchases. Sales of higher-end black-and-white laser printers in particular suffered, and consumers also cut back on their purchases of inkjet cartridges and printers. A series of restructurings followed. In 2000 the firm cut approximately 900 jobs from its workforce as it shifted production of its Optra line of laser printers from Lexington to plants in northern Mexico and southern China. A further cutback of 1,600 jobs, or about 12 percent of the workforce, followed in 2001. Lexmark was dealt a further blow in May 2002 when archrival Hewlett-Packard (HP) acquired Compaq, thereby ending the Lexmark-Compaq alliance. Despite this series of setbacks, Lexmark between 1998 and 2000 saw its installed base of laser printers increase from 2.9 million to 4.9 million, while the number of Lexmark inkjets skyrocketed from 10 million to 45 million. One result was that during this period revenues derived from the sale of cartridges and other supplies surpassed printer sales for the first time. The supplies business, which generated $836 million in sales in 1998, or 28 percent of the total, accounted for $2.3 billion of revenues in 2002, 54 percent of the record total of $4.36 billion.

Having lost its OEM deal with Compaq, Lexmark inked a pact with HP's archrival on the PC side, Dell. In 2003 Lexmark began supplying printers to Dell that the latter sold under the Dell brand. Revenue from the Dell partnership grew quickly, reaching $782 million by 2005, an amount representing 15 percent of Lexmark's total sales for the year. Overall results for 2005, however, were disappointing as revenues fell 2 percent to $5.22 billion, and profits fell from $568.7 million to $356.3 million. Lexmark blamed the results on a price war with its larger rivals and lower consumer demand, although some analysts contended that the company was not investing enough in research and development and thus not developing innovative new products. It was also possible that the company was beginning to feel the effects of cost-conscious consumers buying replacement cartridges from competitors rather than Lexmark, or having them refilled at the burgeoning number of outlets offering such services. Lexmark responded to the poor results by launching a restructuring in January 2006 that involved the elimination of 1,350 jobs, the closure of its inkjet cartridge manufacturing plant in Rosyth, Scotland, and other cost-cutting initiatives. The program incurred pretax charges of approximately $130 million. The company expected that these actions would result in annual cost savings eventually totaling $80 million.

Principal Subsidiaries

Blue Mark International SA (France); Lexmark Asia Pacific Corporation, Inc.; Lexmark Canada, Inc.; Lexmark Deutschland GmbH (Germany); Lexmark Espana, L.L.C. & Cia, S.R.C. (Spain); Lexmark Europe S.A.R.L. (France); Lexmark Handelsgesellshaft m.b.H. (Austria); Lexmark Internacional Mexicana S. de R.L. de C. V. (Mexico); Lexmark Internacional, S.A. de C.V. (Mexico); Lexmark Internacional Servicios, S. de R.L. de S.A. (Mexico); Lexmark International (Australia) PTY Limited; Lexmark International B.V. (Netherlands); Lexmark International (China) Limited; Lexmark International (Czech) s.r.o. (Czech Republic); Lexmark International de Argentina, Inc.; Lexmark International de Chile Ltda.; Lexmark International de Mexico, Inc.; Lexmark International de Peru, SRL; Lexmark International de Uruguay S.A.; Lexmark International do Brasil Limitada (Brazil); Lexmark International Financial Services Company Ltd. (Ireland); Lexmark International Hungaria Kft (Hungary); Lexmark International (India) Private Limited; Lexmark International, K.K. (Japan); Lexmark International (Korea), Inc.; Lexmark International Logistics, BV (Netherlands); Lexmark International Ltd. (U.K.); Lexmark International Manufacturing BV (Netherlands); Lexmark International (Philippines), Inc.; Lexmark International Polska Sp.Zo.o (Poland); Lexmark International (Portugal) Servicos de Assistencia e Marketing, Unipessoal, Lda.; Lexmark International Puerto Rico; Lexmark International S.A. (Belgium); Lexmark International S.A.S. (France); Lexmark International SCI (France); Lexmark International (Scotland) Ltd.; Lexmark International Service and Support Center Limited (Ireland); Lexmark International (Singapore) PTE LTD.; Lexmark International South Africa (Pty) Limited; Lexmark International S.r.l. (Italy); Lexmark International Technology S.A. (Switzerland); Lexmark Operaciones Mexico S. de R.L. de C.V.; Lexmark Printer (Shenzhen) Company Limited (China); Lexmark Research & Development Corporation (Philippines); Lexmark S.A. (Korea) LTD.; Lexmark (Schweiz) AG (Switzerland); Lexmark Solution Services (Australia) PTY Limited; Lexington Tooling Corporation; Pera Bilgi Islem Urunleri Ticaret A.S. (Turkey); Societe Printmark SA (France); Solution Services Europe GmbH (Germany); Technique Corporate Services (Pty) Ltd. (South Africa); Venture Computer Company (Pty) Ltd. (South Africa).

Principal Competitors

Hewlett-Packard Company; Seiko Epson Corporation; Canon Inc.; Ricoh Company, Ltd.; Xerox Corporation; Brother Industries, Ltd.; Samsung Electronics Co., Ltd.; Konica Minolta Holdings, Inc.; Kyocera Mita Corporation; Oki Data Corporation; Sharp Corporation.

Chronology

• Key Dates
• 1991 International Business Machines Corporation spins off its computer peripherals business as Lexmark International, Inc. through a leveraged buyout; Marvin Mann leads the new company.
• 1994 The use of the IBM brand is discontinued in favor of Lexmark.
• 1995 Company goes public.
• 1998 Paul Curlander succeeds Mann as president and CEO.
• 2003 Lexmark begins supplying Dell Inc. with Dell-branded printers.