LEXMARK SAYS JAPANESE EARTHQUAKE TO IMPACT SUPPLY CHAIN

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Lexmark Says Japanese Earthquake Will Impact Supply Chain

Lexmark’s revealing that it expects some laser hardware to be in short supply as a result of the Tohoku quake demonstrates how just one damaged link in the supply chain can impact the availability of finished hardware manufactured outside Japan. Image source: Photos.com.

Lexmark has revealed more about how the recent earthquake and tsunami in Japan will affect its supply chain and financial results. Rather than standing to benefit because the company is not as reliant as some of its competitors on Japanese-based manufacturing facilities, as we suggested in a recent article (see “Lexmark Reports Revenue and Profit Declines in Q1”), it appears that Lexmark expects to see some minor shortages of laser hardware resulting from the impact of the earthquake on certain partners based in Japan.

According to a May 16 article on the Lexington Herald-Leader website, “The disastrous earthquake and tsunami that ravaged Japan earlier this year is expected to affect Lexington-based printer maker Lexmark International.” While the firm indicates that the impact will be limited, the fact that the disaster is affecting Lexmark at all is indicative of how disruptive the earthquake in Japan may prove to be to the supply chain for imaging hardware and supplies. According to Lexmark’s Form 10-K for fiscal 2010, “[Imaging Solutions and Services] 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.” Although the firm has no manufacturing facilities in Japan, some of the company’s partners for various technology components are based in Japan and were affected by the crisis.

The Lexington Herald-Leader articles cites details from Lexmark’s earnings call, a transcript of which was published on the Seeking Alpha website after Lexmark’s earnings announcement. CEO Paul Rooke commented during the call, “We do not have a manufacturing or logistics presence in Japan. However, we do have a number of partners that were impacted by this crisis. We’ve been working closely with them to understand the impacts to the supply and materials, components, and products and working on alternative solutions as needed.” Mr. Rooke added, “We believe the impact to hardware availability in the second quarter is minor.” Specifically, Lexmark foresees “some limited hardware availability,” although this will be manageable and resolved by year end.” Mr. Rooke stated, “We believe there’ll be no impact to supplies availability in the second quarter from this situation.”

CFO John Gamble, Jr., provided some additional details, pointing out that Japan accounted for only 1 percent or $16 million of Lexmark’s total sales in 2010. Mr. Gamble said he expects some limited impact to sales in Japan in the second quarter and that any shortages will be “minor” and limited to laser hardware.

In the question-and-answer potion of the conference call, Morgan Stanley’s Katy Huberty asked a question that has been on our minds since the disaster in Japan occurred: “Given the Lexmark has arguably less exposure to the supply chain in Japan and should see better product availability over the next year, why shouldn’t we assume there’s an opportunity to take share in laser?”

Mr. Rooke responded, “As we mentioned, we do have some impacts there coming from Japan … At the same time we said second quarter would be minor … we don’t expect any large impacts on the hardware side. Supplies seem to be fine there. But I’d characterize that Japan’s situation is going to be temporary. I mean this is going to be a blip in the long scheme of things, and so while there may be some shifting going on, I don’t expect anything here to be permanent of nature.” He added, “We don’t know where our competitors stand at the moment relative to their supply chains. I mean, time will tell. But I would view this as a temporary situation in terms of the supply-chain disruption.” Thus, in other words, Lexmark does not believe any product shortages that may affect competitors following the earthquake, such as those affecting HP (see “HP Warns Distributors That Japanese Earthquake Will Impact Toner Cartridge Availability”), will be significant or long-lasting enough for Lexmark to gain share.

Printer OEMs are continuing to do their utmost to assure investors that any product shortages and financial impact from the earthquake in Japan will be minor. We suspect that in Lexmark’s case, this may prove to be true. Still, Lexmark’s shares hit a new 52-week low of $29.96 yesterday. Obviously, this is not due as much to the potential impact the earthquake may have on Lexmark’s results but to overall economic conditions worldwide and to growing investor disenchantment with printer OEMs as print volumes continue to erode. We will eagerly be reviewing the financial results of various printer OEMs over the next year to see if they can demonstrate that the impact from Japan will be temporary and limited and, perhaps, restore some investor confidence.

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May 18, 2011 at 10:55 AM