lexmark - Grey Value Management

Transcription

L EXMARK (LXK):
D ISAPPEARING I NK … P ROFITS
2009 / $89 (S H OR T )
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© PROPERTY OF GREY VALUE MANAGEMENT, LLC
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Synopsis
Warren Buffet once suggested that the long-term prospects of a company are largely determined by the degree to
which it can be characterized as a franchise or a commodity business. Lexmark’s position on that spectrum of relative
pricing power is the centerpiece of this analysis.
Lexmark (“LXK,” or the “Company”) wandered onto my radar back in 2003, after I happened across a brief article
about the Company’s litigation with a small North Carolina entity called Static Control Components (“SCC”). A detailed
discussion of that litigation follows herein, but what struck me at the outset was how intensely Lexmark was pursuing a
tiny southern company I had never heard of. It didn’t take much digging to discover that a profound change was
sweeping across the printer supply industry.
I began shorting LXK shares at the $89 level during the first week of December 2004. It’s very important to note that I
did so despite recognizing that, based upon the financial fundamentals, Lexmark was anything but an obvious short. It
had excellent cash flow and a balance sheet enviably devoid of debt. However, the industry within which it competed
was experiencing a tectonic shift which would dramatically impact LXK’s business fundamentals: Ordinary printer
consumables (ink, toner, etc.), the source of 80% of its profits, had begun what appeared to be an inexorable slide
from being unique, franchise products to commodities. It could only be a matter of time before the financials reflected
this transition.
It was my thesis that going forward a great fissure would cleave the industry in two. The high-margin, premium
product market would be dominated by a small handful of companies investing enormous sums in R&D, while those
without billion-dollar research budgets would struggle to distinguish products their customers would increasingly be
inclined to view as commodities, causing pricing power and margins to decline accordingly. This was already in
evidence, catalyzed by the remarkable growth of the aftermarket in remanufactured parts and generic ink.
And yet, although store-brand and generic ink substitutes were readily available, most retail customers hadn’t begun
basing their purchase decisions on the “true” cost of printing – the cost per page, which included ink and paper as well
as the printer itself. This metric was already common among commercial buyers, who were applying the same costbenefit analysis they’d been utilizing for copying service contracts for years. Consumers however remained largely
unaware, for the most part choosing products based on simple sticker price comparisons. It seemed inevitable that, as
the price of ink continued to rise and all categories of buyers became more savvy, purchases would increasingly be
driven by some form of page-based pricing. With the OEMs aggressively pursuing advertising campaigns and
promotional strategies such as bundling ink with other products (premium papers, etc.), the cost-per-page mentality
naturally wouldn’t be adopted uniformly or in linear fashion. The OEMs would fight it tooth and nail. But the
commoditization of printer consumables, excluding high end products, was here to stay.
While Lexmark’s R&D talent might save the day, Hewlett-Packard had already very publicly committed its vast financial
resources to seizing the high ground, and they weren’t alone. With Dell and others migrating into the low-price
territory, Lexmark faced a fierce battle at almost every price point. The likelihood of accruing above-average returns
on capital in either scenario was quite low; LXK was gradually devolving from a strong franchise into a weak one, or
worse.
Notwithstanding all of the above, faltering fundamentals alone are never sufficient to justify a short position. Two
further elements are absolutely essential: (1) a substantial mispricing and (2) a catalyst.
There was no question that Lexmark was dramatically mispriced relative to the transparent deterioration in its core
business. In many respects it was priced for perfection; at nearly $90 per share, it was trading at 22.5 times estimated
earnings. By way of comparison, General Electric, everyone’s favorite blue chip at the time, was trading at 17.5 times
earnings. And unlike some purely speculative internet company that could trade at any conceivable price, because
Lexmark was a real business with a substantial operating history, its valuation was for the most part a hostage to
conventional investment metrics. If the “E” didn’t continue to justify the “P” of the P/E ratio, the price would recalibrate
lower to reflect the decline in performance.
As for the catalyst, all of the research described herein confirmed that pricing pressure had escalated to the point that
the Company wouldn’t merely miss earnings, but would deliver a disappointment of such scope that even its most
ardent fans would have to concede that the business was fundamentally in trouble, and that its entire enterprise value
would have to be revisited and ultimately revised down. The Company had arguably signaled that bad news was
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imminent; a close read of its SEC filings revealed countless, very explicit portents. But by all indications – especially
the price – investors either weren’t paying attention or refused to acknowledge the underlying reality.
In summary:
1. Even in a benign competitive environment, Lexmark was fundamentally overvalued. Of course, a company that is
merely overvalued can become much more overvalued (Amazon, et.al.), but…
2. The industry within which it competed was undergoing a margin-crushing shift, which Lexmark couldn’t possibly
escape. The bottom line would take a hit, and the stock price along with it.
Peak of Investor Denial
December 2004:
Began Shorting LXK
Disclosure
This document summarizes a much longer analysis originally generated in 2004. Excluding
historical stock price data, it has not been updated to reflect subsequent developments. Please see
Disclaimer on the final page.
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A Sidebar on Shorting
It may seem out of character for an avowed disciple of the Graham-Dodd-Buffett Value Investing Trinity to be shorting
a stock, but the two practices are less conflicted than they might seem.
To begin with, whether a stock is under- or over-priced relative to its intrinsic value has no bearing on the calculation of
that intrinsic value. The current trading price only serves as a reference point for gauging the premium or discount to
intrinsic value; it doesn’t influence that value.
If the risks inherent in shorting are misunderstood or overstated, it’s likely because most investors aren’t sufficiently
rigorous whether they’re going long or short. Warren Buffett has said that the bargain in buying a stock should be so
obvious that it’s like seeing a bag of money in the corner of the room and simply picking it up. The same standard
applies to going short. In the end, neither is advisable unless the outcome appears ordained. The threshold of rigour
and certainty is the same.
There are certainly challenges unique to shorting. Markets generally tend to rise over time, and stocks that are
overvalued can remain so for a very long stretch. They can also become even more overvalued, particularly when the
investment community has decided that the conventional value metrics for some reason no longer apply (think of the
tech bubble, the Nifty Fifty, etc.). These, among others, are all good reasons to never break the cardinal rule of
shorting:
Never short overvaluation alone – there must be a foreseeable, material, inescapable catalyst.
This catalyst must be sufficiently significant to compel a re-pricing of the company, and thus should have all the
subtlety of a grand piano dropping 10 stories onto a gopher. It can be as dramatic as fraud, or as basic as a
fundamental breakdown in the business model. However the event might be described, the key is that it represent an
inarguable and very significant impairment of value.
As described above, in the case of Lexmark the catalyst came down to an earnings miss, the size and cause of which
would make it impossible to deny that the business model was falling victim to a tectonic, irreversible industry shift.
Investors would be forced to acknowledge that the franchise they thought they owned was rapidly becoming a
commodity business. Both their expectations and the stock price would accordingly have to adjust.
It is important to note the margin of safety inherent in Lexmark’s lofty price was absolutely critical to the construction of
this trade. The risk/reward that made the trade advisable at $90 was absent at $70. Every short position is subject to
interim rallies; the key is to short the stock at a price so elevated that the risk of permanent or even substantial interim
losses is minimal. Following this last piece of advice frequently requires not pursuing the trade at all; LXK was truly a
unique opportunity.
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Background: A Catalyst to Curiosity
As mentioned in the Synopsis, my interest in Lexmark as a possible short emerged in early 2003. One morning I came
across an article recounting a development in litigation between the Company and a small North Carolina enterprise
called Static Control Components. Though I didn’t immediately realize it, viewing Lexmark through the lens of this
litigation was fundamental to fully comprehending the threats it faced.
Lexmark operates under a classic razor/razor blades business paradigm. That is, like a company that produces razors
but makes most of its profits selling blades, LXK manufactured printers but made most of its money on the ink and
toner that its customers burned through with speedy regularity. The Company's filings at the time explicitly stated that
56% of its revenue and a full 80% of LXK’s profit came from ink and toner supplies. Needless to say, any
developments that might cause their ink/toner supply business to materially deteriorate would undermine those profits.
The market had bestowed a very rich multiple (as high as approximately 27.5X) on a company whose growth, while
hardly anemic, was less than overwhelming. It was, however, generating significant amounts of cash, and it certainly
didn’t possess the balance sheet of an obvious short; LXK had almost no debt, and with a demonstrated ability to
generate impressive free cash flow, it fit the profile of the kind of stock capable of crushing the careless skeptic. Even
if I was right about the Company being overvalued, I nonetheless had to be wary of it escalating in price, a suspicion
fulfilled when the stock cleared $90 even as I had begun shorting it. The short interest was about 7.3 million shares at
the time, but many of those shares could have been components of hedges or arbitrage strategies rather than outright
short positions. Still, the fissure I perceived in the foundation of the business model kept me digging.
2002
--------
2001
--------
2000
--------
1999
--------
1998
--------
STATEMENT OF EARNINGS DATA:
---------------------------------------------------------------------------------------------------------------Revenue (1)........................................... $4,356.4
$4,104.3
$3,767.3
$3,413.7
$2,978.2
Compound Revenue growth of 8% over the last 5 years?
Cost of revenue (2)...................................
2,985.8
2,865.3
2,550.9
2,222.8
1,934.4
---------------------------------------------------------------------------------------------------------------Gross profit..........................................
1,370.6
1,239.0
1,216.4
1,190.9
1,043.8
Compound Gross Profit growth of 5.6% over the last 5 years in a market experiencing slowing growth overall?
---------------------------------------------------------------------------------------------------------------Research and development..............................
247.9
246.2
216.5
183.6
158.5
Selling, general and administrative (1)...............
617.8
593.4
542.9
530.7
502.5
Restructuring and related (reversal) charges (2) (3)
(4).................................................
(5.9)
58.4
41.3
-----------------------------------------------------------------------------------------------------------------Operating expense.....................................
859.8
898.0
800.7
714.3
661.0
---------------------------------------------------------------------------------------------------------------Operating income......................................
510.8
341.0
415.7
476.6
382.8
Compound Operating Income growth of 6% over the last 5 years?
Interest expense......................................
9.0
14.8
12.8
10.7
11.0
Other.................................................
6.2
8.4
6.5
7.0
6.4
---------------------------------------------------------------------------------------------------------------Earnings before income taxes..........................
495.6
317.8
396.4
458.9
365.4
Provision for income taxes (5)........................
128.9
44.2
111.0
140.4
122.4
---------------------------------------------------------------------------------------------------------------Net earnings.......................................... $ 366.7
$ 273.6
$ 285.4
$ 318.5
$ 243.0
Compound Net Profit growth of 8.5% over the last 5 years?
Diluted net earnings per common share (6)............. $
2.79
$
2.05
$
2.13
$
2.32
$
1.70
Shares used in per share calculation (6)..............
131.6
133.8
134.3
137.5
142.8
STATEMENT OF FINANCIAL POSITION DATA:
---------------------------------------------------------------------------------------------------------------Working capital....................................... $ 699.8
$ 562.0
$ 264.7
$ 353.2
$ 414.3
Total assets..........................................
2,808.1
2,449.9
2,073.2
1,702.6
1,483.4
Total debt............................................
161.5
160.1
148.9
164.9
160.4
Stockholders' equity..................................
1,081.6
1,075.9
777.0
659.1
578.1
OTHER KEY DATA:
---------------------------------------------------------------------------------------------------------------Cash from operations (7).............................. $ 815.6
$ 195.7
$ 476.3
$ 448.2
$ 300.3
Capital expenditures.................................. $ 111.7
$ 214.4
$ 296.8
$ 220.4
$ 101.7
Debt to total capital ratio (8).......................
13%
13%
16%
20%
22%
Number of employees (9)...............................
12,068
12,724
13,035
10,933
8,835
----------------------------------------------------------------------------------------------------------------
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There were naturally specific datapoints in the filings that drew my interest. Per the below, the footnotes to the 2002
10K included the following: "(7) Cash flows from investing and financing activities, which are not presented, are integral
components of total cash flow activity" (emphasis mine). The phrase "integral components" in particular caught my
eye. How much of total cash flow came from investing and financing activities, versus the business they were actually
in?
The market for printer supplies, the fountainhead of Lexmark’s profits, is fundamentally divided between the OEMs and
the generics/off-market competitors. Beneath that basic dichotomy, the market fragments into a vast and very
specialized ecosystem, including but not limited to:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
The companies that manufacture the chips necessary for non-OEM cartridges to function with OEM printers
Sellers of toner cartridges that are remanufactured in house
Sellers of remanufactured toner cartridges purchased from an outsourcer
Sellers of inkjet cartridges that are recycled in house
Sellers of recycled/compatible inkjet cartridges purchased from an outsourcer
Sellers of new or remanufactured ribbons
Sellers of new OEM cartridges (either toner or ink)
Sellers of components for cartridges or printers
Providers of printer/copier/computer service
Sellers of new hardware (printers, copiers, faxes, etc.)
Sellers of refurbished hardware (printers, copiers, faxes, etc.)
Sellers of MICR products
Brokers for empties/cores
In addition to Lexmark’s SEC filings, my investigation of the industry included many hours immersed in the archives of
Recharger Magazine, the industry bible of the aftermarket providers. After reading every back issue I could access, I
followed up by visiting and/or speaking with as many industry participants as I could, including the storefront cartridge
refillers that were cropping up quietly but quickly on side streets and strip malls across the US. I made it a point to
speak with as many of the refiller’s customers as I could, canvassing them in the guise of a fellow customer (which
technically I was – I started using refilled cartridges as well) to find out if they were satisfied, likely to return as
customers, etc.
Altogether I spent over 200 hours analyzing every aspect of Lexmark’s predicament. To some this may sound like an
investor version of Stockholm Syndrome, but any accusations of overkill must be weighed against the potential losses
arising from an overlooked but critical piece of information or insight. As I’ve mentioned elsewhere, few habits in
investing are as dangerous as dismissing what is unknown as unimportant. Provided the investor is able to distinguish
material facts from general information, there’s little downside to learning what in retrospect proves to be informative
but ancillary. It’s just work.
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A Fading Franchise: Lexmark and Its Industry
In the course of my research it very quickly became clear that Lexmark was fighting a rearguard legal action against
SCC in order to defend its pricing power. A resilient franchise offers many advantages over a commodity business. In
addition to the ability to withstand not immodest management missteps (remember New Coke? American Express?),
franchises typically enjoy higher margins than their competition. Put another way, the strength of any franchise is a
reflection of its pricing power, or susceptibility to commoditization. As the graphic below illustrates, this is of course a
matter of degree. The question was: Where did Lexmark sit along that spectrum of pricing strength, and where was it
headed?
Commodity
Low Margins
High Margins
Numerous
Substitute
Products
Few or No
Substitute
Products
Less Pricing
Flexibility
More Pricing
Flexibility
Franchise
Although the razor/razor blades analogy was endlessly cited in explaining Lexmark’s business model, in many
respects it was not only an oversimplification but dangerously misleading. The fact that printer cartridges were
consumable did not make them a consumer product with the same brand affinity and characteristics as a razor blade
one slides across the jugular. Lexmark was at war with SCC precisely because substitute products were succeeding.
This was why its revenue was rising on increasing unit volumes rather than higher prices. While it might be difficult to
pinpoint Lexmark’s position on the commodity/franchise spectrum, the quality of its revenue and earnings clearly
indicated where it was trending.
The impressive top-line growth that apparently for some obscured Lexmark’s declining earnings quality was facilitated
by the rapid expansion of what was already a massive market. When I began my research in 2002 the ink and toner
market in the US alone was worth $28.5 billion, and in 2003 estimated worldwide revenue for the office and home
printing hardware and associated supplies market, including monochrome (black) and color laser, inkjet and dot matrix
printers, exceeded $40 billion. At the time H-P was by far the largest supplier, with 41% of the market, although it
purchased its laser engines and cartridges from a third party. The aftermarket ink suppliers were coming on strong,
capturing as much as 20% of the global market, with competition in the supplies business and lower yields overall
pushing US inkjet prices down about 15 per cent over the preceding two years.
The trends in the installed hardware base were naturally critical because they drove the consumables market. In the
laser printer market H-P dominated, holding approximately 50% market share, with Lexmark second and Canon,
Xerox, Brother and Minolta sharing the remainder. In inkjet printers, Hewlett-Packard, Epson and Canon together
accounted for approximately 80% of worldwide sales. Large, well-heeled competitors were also moving in from
adjacent markets, especially as the multi-function machines (or “all-in-one” products) now common were just beginning
to gain traction. As LXK observed in its 2002 10-K:
As the output environment continues to evolve to include print/copy/scan and fax, Lexmark is
encountering new competitors as copier companies move into the distributed print market space. This
converging marketplace is highly competitive and includes traditional laser competitors and large
copier companies such as Canon, Ricoh and Xerox.
Fueled by expanding aggregate demand, Lexmark wasn’t struggling to deliver unit growth. At the end of 2002 LXK
estimated its installed base of laser printers at 4.9 million units versus 4.4 million units at year-end 2001, and its
installed base of inkjet printers had expanded to 45 million units versus 37 million units during the same period. And
Lexmark had in fact doubled its unit market share in inkjets over the preceding four years. But that growth had come
at a cost; management acknowledged not only that price reductions had caused color inkjet printer revenue growth to
trail unit growth, but that they expected that trend to continue. And the same dynamic was at work in the laser printer
market.
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Lexmark was far from “growing broke,” but its entire business had fallen into a vise. Both the hardware and
consumables it sold were experiencing margin compression, and the competition was only getting worse – especially
at the low- and middle-tiers of the market, where the hardware increasingly came to be viewed not as a source of profit
but a cost of maintaining ink and toner demand. Seen through the prism of this phenomenon, there was no
questioning why Lexmark was on the front foot with SCC and the aftermarket in general.
The most obvious strategic response to the market trend was to cut costs as aggressively as possible on the low end
and, if possible, try to seize some of the high ground. But the cost of competing in the premium segment was
escalating very quickly; by 2004 H-P was spending about $1 billion annually on printing R&D. The Vivera ink that it
introduced at that time cost approximately $8,000 per gallon, making it one of the most expensive liquids on Earth.
The H-P plan was ostensibly to assert superior quality across the product spectrum, but ultimately compete on price
toward the low end and premium quality on the high end. If the former sounds like a commodity business, H-P’s
Vyomesh Joshi, head of its printing and imaging unit, conceded as much when he said that H-P could sustain its ink
margins over the long term “if we can continue to drive our cost of operations lower.” Isn’t that the definition of a
commodity business?
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


2003 - 2008
60%
Decline

LXK Warns of
Weak Demand
GVM Begins Shorting
Barron’s article re. SCC
Insiders sell 23% of holdings

LXK Net Falls 47%,
Restructuring Announced
LXK Jobs Cut,
$1 BN Buyback
Confirming the Variant Perception
 = Analyst Upgrade
 = Analyst Downgrade
To the best of my knowledge, hedge fund legend Michael Steinhardt deserves credit for coining the term “variant
perception,” which essentially refers to having a carefully contemplated view that significantly departs from the market
consensus. Market perception is key with any investment because significant price adjustment, and thus profit, only
occurs when the prevailing viewpoint is disrupted. In this sense, investing – and especially shorting – entails fully
comprehending both perceptions.
The consensus view is a culmination of many different information sources: Wall Street analyst recommendations, the
company’s own guidance, media coverage, the stock price, etc. The price is important not necessarily because, as
many Efficient Market theorists hold, it reflects all information available at that moment, but because the price
response to developments reflects the conviction level of the consensus.
On July 19th 2004 the Financial Times ran an article entitled "Lexmark's shares fall on worry over pricing." As the
article indicated:
Lexmark International, the US computer printer manufacturer, reported a sharp rise in quarterly earnings
yesterday, reflecting strong sales of inkjet and laser printers and supplies that make up the bulk of revenues. But
a cautious earnings forecast for the current quarter based on concerns about pricing pressures disappointed
investors, sending Lexmark's shares tumbling by more than 6 per cent in early trading in New York.
Sales increased by 11 per cent to $1.25bn, the fourth consecutive quarter of double-digit revenue growth at
Lexmark, which ranks second after Hewlett-Packard in the US printer market and fourth in the world after HP,
Epson and Canon.
Lexmark's growth was driven by a 14 per cent increase in its core laser and inkjet supplies business and an 11
per cent increase in revenues from sales of laser and inkjet printers.
Paul Curlander, chief executive, said the results reflected solid unit growth in both consumer and business
market segments. However, he noted that significant pricing pressures and a shift towards lower-priced products
in the business laser printer market meant revenue growth in this segment lagged unit growth.
Inkjet printer makers are cutting prices ahead of the introduction of new machines from HP, the market leader,
later this quarter. As a result, Lexmark said it now expected profit in the current third quarter to be between 90
cents and $1 a share on sales that are expected to rise in the "high-single to low-double digits" from the yearearlier quarter.
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rd
Two weeks later, on August 3 , the Wall Street Journal ran an article entitled "Fill It Up, With Color - Ink-Jet Cartridge
Refillers Spread to Malls, Main Streets; Going After H-P's Lifeblood." It included an interview with the owner of
Cartridge World, who pressed the point that his company charged customers $15 for a refilled cartridge vs. the $30
cost of a new one. The article focused on the efforts of several businesses to penetrate the market to the point that
they would be a ubiquitous presence. As the article states (subject to my edits; text is omitted but not altered):
The fast growth of franchisers such as Cartridge World marks a new twist in the multibillion-dollar ink and toner
business. While refilling cartridges isn't a new concept, consumers haven't had easy access to it. But since
setting up shop in the U.S. in January 2003, Australia-based Cartridge World Inc. has opened about 50 stores
and currently is selling new franchises at the rate of five a week. Meanwhile, Canada's Island Ink-Jet Systems
Inc., of Courtenay, British Columbia, is opening four new franchises a month, mainly shopping-mall kiosks, in
states including Nebraska, Ohio and Oregon. And Caboodle Cartridge
Retail
Refill At
Inc., of Sunnyvale, Calif., with four franchise locations now open, plans to
Caboodle
have 60 stores around the country by year end.
Canon i80 Ink-jet Printer
The idea behind the franchises is simple: Customers bring in their empty
ink and toner cartridges from H-P, Canon or other branded printer or
copier makers. The store refills the cartridge while the customer waits, at
prices 30% to 50% below the cost of a new branded cartridge.
"We want to be the McDonald's of ink and toner," says Burt Yarkin, chief
executive of Cartridge World North America, based in Emeryville, Calif.
"We're going right into people's neighborhoods and becoming part of their
daily lives."
Black
$11.95
$4.99
Color
21.95
7.99
HP 1100D Color Ink-jet Printer
Black, Cyan, Magenta
or Yellow
33.99
18.99
Lexmark Z816 Ink-jet Printer
Black
22.89
9.99
Color
25.19
9.99
It's a good idea that may be bad news for big printer and copier makers,
who count on sales of ink and toner cartridges for a dependable revenue stream. As recently as two years ago,
100% of H-P's profits were derived from recurring cartridge sales, although other sectors of its business have
since become profitable. Cartridge-refillers, driven in large part by the aggressive franchisers, are ramping up
sales at a rate of 10% a year, compared with growth for big tech companies along the lines of 6% a year,
according to Lyra Research Inc., a Newtonville, Mass., research firm.
Daniel Wencel, president of Caboodle Cartridge, says H-P and other manufacturers are "gouging" consumers
who buy new branded cartridges to replace their spent ones. "When we refill, it costs us just 60 cents to 70 cents
a cartridge, so we can sell the refills for half off regular cartridge prices," he says.
As the chart below illustrates, LXK shares immediately recovered a significant portion of the decline triggered by
management’s warning and, after trending further down, again rallied less than a month later when Morgan Stanley
raised the stock to outperform on August 13.
June – Aug 2004
Earnings Released
8/13: Morgan Stanley
Upgrades to “Outperform”
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There were of course other datapoints to consider, but the fact that LXK shares immediately recovered after selling off
despite an explicit warning directly from the Company itself confirmed that there was a critical disconnect between the
investment community and the challenges facing Lexmark. Shareholders were either in oblivion or in denial, but in
either case there would be a radical repricing when the prevailing perception was forced to reconcile with reality.
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The Litigation
Why exactly was Lexmark making the effort to sue SCC? To the extent that the litigation could dramatically impact the
competitive landscape, Lexmark’s future was inseparable from the legal action. It took some time to wade through the
legal arguments and filings, but it proved worth the effort.
SCC, which generated approx. $300 mil. in annual revenue at the time, supplied computer chips that enabled
replacement cartridges made by 3rd party remanufacturers to work in Lexmark printers designed to accept only LXK’s
cartridges. It was these chips that were facilitating the commoditization of Lexmark's business; they were the only
rd
factor standing between 3 party competitors and LXK's fat margins. If it was to defend its franchise, Lexmark had to
quarantine the chip technology enabling its generic competition, and the only avenue for doing so was litigation.
In a lawsuit filed in December 2002 Lexmark contended that by duplicating a code programmed into its cartridges SCC
violated the Digital Millenium Copyright Act of 1998 (DMCA). In February 2003 the US District Court (Judge Karl
Forester presiding) found that SCC violated the DMCA by copying Lexmark’s computer chips wholesale. SCC
responded by:

Appealing the decision

Asking for a clarification of the order

Filing an antitrust suit against Lexmark and Dallas Semi contending that the 2 were engaging in anticompetitive acts and attempting to monopolize the market

Petitioning the US Copyright Office (USCO) for guidance on whether the DMCA applied, and also requesting
that in the event that the USCO determined that the DMCA did indeed apply that computer programs that
enabled one part of a machine to function with another be exempted

SCC went before the 5-person panel of the USCO on May 9

The USCO was due to issue its decision by October 28
th
th
Many of LXK's legal arguments were very specific. Lexmark wasn’t disputing use of the chips themselves, but rather
was alleging infringement of the code that SCC had reverse engineered from LXK's own chips. That code, which was
a basic computer algorithm, performed what in software terms is called a "digital handshake." In essence, Lexmark
designed its printers and cartridges such that when a cartridge was popped into a printer, tiny chips within each
component would digitally communicate, confirming that each was in fact a Lexmark product. Interoperability between
the devices was achieved via the mutual recognition of a code generated by LXK's embedded, proprietary
algorithm. No handshake, and the printer wouldn't print.
SCC's counterarguments were equally to the point. They claimed that the code LXK asserted was infringed acted as a
“lock-out code,” which under established case law could not be protected by copyright and thus could be freely
reverse-engineered and copied under both copyright law and the DMCA. SCC asserted that it was “lawful reverse
engineering for purposes of attaining interoperability.”
In terms of the broader ramifications, if Lexmark succeeded in establishing that a simple algorithmic code - and it was
quite simple - was protected under established copyright law, the consequences were potentially breathtaking.
rd
Consider the manufacturer's perspective. If any OEM could pre-empt 3 party competition simply by installing
extremely inexpensive chips into every product, what would they do? They would install those cheap little digital
handshaking chips in everything they possibly could. Imagine a car where every major part contained a chip that
ensured that products even as mundane as oil filters could be purchased only from the manufacturer. If it’s only the
"copyrightability" of the software in the chip that is required, and anyone can write a software program that is
sufficiently unique to trigger that protection, what prevents every producer of every machine from installing a chip with
“protected software” into every unit they produce? Effectively, nothing.
As is typically the case, there were issues of fact to resolve. SCC asserted that what LXK was calling a sophisticated
program didn't even qualify as a program because it was comprised of only a handful of bytes. By way of analogy,
SCC's position was that LXK was trying to call a few sentences a novel. What exactly was it? The answer to that
question was critical because much of SCC’s argument hinged on the code being interpreted not as software but as a
simple lock-out code not entitled to copyright protection. SCC did distinguish that there are copyrightable functions
WWW.GREYVM.COM
12
and non-copyrightable functions, and argued that it only wanted to duplicate the non-copyrightable lock-out code, but
was forced to copy it all because LXK left it no alternative (p.19, Motion Opposing PI).
In trying to handicap the outcome, it is worth noting that the EU had already passed a law prohibiting embedded chips
in printer cartridges (at least those of the nature discussed herein). But shorting the stock because the US would
"inevitably" follow the EU's reasoning was ill-advised; the US and EU disregard one another’s court rulings and the
reasoning behind them not infrequently. One spectacular example that caused the arbitrageurs to literally lose billions
was the EU antitrust authority's rejection of the GE-Honeywell merger, which at the time had already been approved by
the US Department of Justice. Ultimately, determination of the outcome had to rely on the facts and theories at hand.
The Legal Timeline / Outcome
The synopsis of events is as follows:




December 2002: Lexmark files suit against SCC
February: US District Court (Judge Karl Forester) finds SCC violated the DMCA by copying Lexmark’s computer
chips wholesale. SCC:

Appealed the decision

Asked for a clarification of the order

Filed an antitrust suit against Lexmark and Dallas Semi contending that the 2 are engaging in anticompetitive acts and attempting to monopolize the market

Petitioned the Copyright Office for guidance on whether the DMCA applies; in the event that it does,
SCC requested that the CO exempt computer programs that enable one part of a machine to function
with another

The USCO issues its decision by Oct. 28
May 9: SCC went before 5-person panel of US Copyright Office
Oct 28: USCO issues its decision
The best resource for information on the legal case, stem to stern, including links to the legal briefs as well as the
Copyright Office documents, is http://www.scc-inc.com/special/oemwarfare/lexmark_vs_scc.htm. Much of what follows
can be traced to documents accessible therein.
Regarding the outcome, SCC summarized it nicely on their website (this information was released November 7, 2003):
The Copyright Office, experts in interpreting the copyright law, recently ruled on Static Control Components’ petition for an
exemption to the Digital Millennium Copyright Act of 1998 (DMCA). The Copyright Office interpreted critical portions of the
DMCA consistently with the positions taken in the courts by Static Control Components, and contrary to arguments by
Lexmark. We will strongly encourage the courts to adopt the interpretation given the DMCA by the Copyright Office. If
Lexmark is willing to accede to the Copyright Office's interpretation, then we believe that much of the controversy with
Lexmark over replacement toner cartridge chips already will have been resolved in our favor.
Lexmark is absolutely right that our request for an exemption, which Lexmark fought against, was not granted; HOWEVER,
the basis for the denial was fundamentally good news for Static Control Components -- the government found that Static
Control Components did not need an
Aug ’03 – Aug ‘04
exemption because the statute itself (when
properly interpreted) could provide
appropriately-designed Static Control
Components’ chips with an even broader
exemption for fair use and reverseengineering.
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13
The exemption that SCC argued for was not granted. However, in this type of legal battle, each side as a matter of
course will assert every legal theory in their favor. Thus, the fact that they were not granted an exemption was less
meaningful than the Copyright Office confirming that they didn't need an exemption to begin with.
There remained the issue of the courts adopting the ruling of the Copyright Office, but this is typically a matter of
course. The Copyright Office doesn't have the same enforcement powers as a court of law; its strength lies in its
expertise in intellectual property matters, which the judiciary tends to embrace.
How did the market react to these legal developments?
In the space of 5 months the stock went from trading in the mid-$70s to north of $95 (above right), a move of
approximately 30%, despite the company-specific news as well as the relatively flat performance of the S&P
(right). As that trajectory indicates, the market had a long way to go before it assimilated the fracture in LXK's
business model. But the higher it went, the more violent the eventual correction would be. To the careful, adroit short,
this appreciation in contradiction of the facts and their obvious implications delivered the margin of safety that made
the trade work.
Nov ‘03 – Aug ‘04
LXK continues rising despite legal
decision and a basically flat market
2004
LXK
S&P 500
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14
An Aside on Options
In yet another apparent betrayal of the Value Investing Brotherhood, it is incumbent upon me to point out that the
nature of the Lexmark mispricing created an attractive opportunity in the options as well as the equity. Specifically, the
persistent optimism and extended period of low price volatility had the effect of driving the price of the long-dated outof-the-money puts to ridiculously cheap levels. (By the way, anyone insisting that value investing is limited to simply
owning stocks and bonds is politely reminded that between July 1997 and January 1998 Warren Buffett bought 129
million ounces of silver. He has also actively participated in arbitrage – value is an assessment, not a definition.)
It can be argued that the options were mispriced for the same simple reason that the equity was: Misperception. Given
the mechanics of the Black-Scholes option pricing model, the misguided but unrelenting optimism that held the share
price aloft in a relatively narrow range (between $80 and $90 for the most of the preceding 6 months) naturally reduced
the volatility component of the options prices, making the far-calendar out-of-the-money put options irresistibly cheap.
Put another way, the options were attractive only because their principal drawback – the time value premium – was
unusually low.
It is important to point out that while the option component of the position delivered a handsome return, both in gross
and annualized terms, it was conservatively sized and intended only as a return enhancer.
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15
Orchestrating the Exit
Although as a matter of policy I never provide specifics regarding the size of my positions or trade execution, this
discussion would not be complete without touching on the mechanics of my exit.
Every trade has a price at which, provided the basic facts do not change, unwinding or exiting the position makes
sense. The exit may of course be influenced by unpredictable factors – a sudden surge in trading volume based upon
unanticipated developments (such as an analyst upgrade/downgrade, etc.) or “gapping” of the price, where overnight
developments cause the price to open at a level significantly different than the prior day’s close. Short positions
arguably require a market vigilance that long-term holds do not.
Theoretically every stock that is overvalued can, provided the company isn’t going bankrupt, decline to a price at which
it is undervalued. That is, the price at which the buyer is fully compensated for every imaginable risk. While Lexmark
was anything but destined to go out of business, the short was predicated upon the fundamentals of its business
deteriorating in a manner that was largely beyond its control. What multiple should be assigned to its declining
earnings, and what would those earnings look like?
While the answer was more art than science, I found it difficult to imagine that the Company would finish 2005 with
earnings above $3, and rising much above that level would be extremely difficult going forward. Even once
management gave up the ghost and began to downsize, bolstering earnings per share by cutting overhead or reducing
EPS denominator through buybacks would at best only support a lower floor on the share price, not prevent it from
falling to that much lower valuation plateau. There were sporadic rumors of a takeover or buyout, but I couldn’t fathom
why any of the obvious strategic buyers would want to go near it, and it didn’t appear that incumbent management was
prepared to step down from the helm.
Based on the fundamentals and the geologic pressure the competition was exerting on its margins, I concluded that it
would be generous to value LXK at a mid-teens market multiple. At 15X, $3 in earnings dictated a $30 share price.
However, the cash on hand, lack of debt, and cash flow generation also meant that Lexmark could decrease the
shares outstanding by a substantial amount, and taking those elements into account it seemed advisable to unwind the
position closer to the $40 level.
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16
Closing Comments
Lexmark wasn’t an investment; it was a rational speculation. It was also an illustration of how much easier it is to profit
when we confine ourselves to only those opportunities at the extremes, where risk and reward are most profoundly
slanted in our favor. The research effort described herein may seem daunting or even excessive, but the results speak
for themselves.
As for the future, at this point in time it's clear that the generic/off-market competitors must continue to improve the
quality of their offerings if they are to pose a long-term credible threat to OEMs such as LXK. The aftermarket is
evolving aggressively, but perhaps Lexmark will prevail. The mispricing I profited from was predicated on a
misperception regarding the challenges facing the company, not its outright failure. It will be interesting to see how
effectively they defend their margins in the years to come.
Steven R. Grey (2009)
WWW.GREYVM.COM
17
DISCLAIMER
These materials shall not constitute an offer to sell or the solicitation of an offer to buy any interests in Grey Value
Management or any of its affiliates. Such an offer to sell or solicitation to buy interests may only be made pursuant to
a definitive agreement between Grey Value Management and an investor.
The information set forth in this synopsis has been obtained from publicly-available sources. It is provided for
informational purposes only and should not be deemed as a recommendation to buy or sell the securities mentioned or
to invest in any investment product. The information has not been independently verified by Grey Value Management
or any of its affiliates. Neither Grey Value Management nor any of its affiliates makes any representations or
warranties regarding, nor do they assume any responsibility for the accuracy, reliability, completeness or applicability
of, any information, calculations, estimates or projections contained or reflected herein.
The information in this synopsis is provided as of the date hereof and is subject to change at any time thereafter.
Grey Value Management may have a position in any of the securities discussed in this presentation. Grey Value
Management may reevaluate its holdings thereof and purchase, sell or cover certain positions.
WWW.GREYVM.COM
18
A PPENDICES
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19
Lexmark (LXK) Annual Income Statement
YE 12/31
1994
1,852.3
1,298.8
553.5
1995
2,157.8
1,487.9
669.9
1996
2,377.6
1,630.2
747.4
Research & Development
SG&A
Option compensation related to IPO
Amortization of Intangibles
Restructuring and related (reversal) charges
Operating expenses
101.0
292.9
0.0
44.7
116.1
359.1
60.6
25.6
123.9
388.0
438.6
561.4
Operating income
114.9
Revenue
Cost of Revenue
Gross Profit
1997
2,493.5
1623.5
870.0
1998
3,020.6
1934.4
1,086.2
1999
3,452.3
2222.8
1,229.5
2000
3,807.0
2550.9
1,256.1
2001
4,142.8
2865.3
1,277.5
2002
4,356.4
2985.8
1,370.6
2003
4,754.7
3209.6
1,545.1
2004
5,313.8
3522.4
1,791.4
2005
5,221.5
3585.9
1,635.6
2006
5,108.1
3462.1
1,646.0
128.9
466.5
158.5
544.9
183.6
569.3
216.5
582.6
246.2
631.9
247.9
617.8
265.7
685.5
312.7
746.6
336.4
765.5
517.0
595.4
703.4
752.9
41.3
840.4
58.4
936.5
(5.9)
859.8
951.2
1,059.3
1,101.9
108.5
230.4
274.6
382.8
476.6
415.7
341.0
510.8
593.9
732.1
533.7
442.5
50.6
35.1
20.9
10.8
11.0
10.7
12.8
14.8
9.0
(0.4)
(14.5)
(26.5)
(22.1)
13.6
10.1
7.9
9.1
6.4
7.0
6.5
8.4
6.2
0.8
0.1
6.5
5.3
50.7
63.3
201.6
254.7
365.4
458.9
396.4
317.8
495.6
593.5
746.5
553.7
459.3
6.1
15.2
73.8
91.7
122.4
140.4
111.0
44.2
128.9
154.3
177.8
197.4
120.9
44.6
48.1
127.8
163.0
243.0
318.5
285.4
273.6
366.7
439.2
568.7
356.3
338.4
0.0
(15.7)
Net Earnings
44.6
32.4
127.8
149.0
243.0
318.5
285.4
273.6
366.7
439.2
568.7
356.3
338.4
Preferred dividends
Preferred stock redemption premium
11.8
61.3
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
(28.5)
32.4
127.8
149.0
243.0
318.5
285.4
273.6
366.7
439.2
568.7
356.3
338.4
74,932,103
76,221,843
71.3
75.2
66.6
71.4
129.4
137.5
128.4
134.3
129.6
133.8
128.5
131.6
128.1
131.4
129.7
132.9
121.0
122.3
102.8
103.5
Interest Expense, net
Amortization of deferred financing
costs and other
Earnings before income taxes,
extraordinary items
Provision for income taxes
Earnings before extraordinary items
Extraordinary item
Net earnings (loss) attributable to
common stock
Shares outstanding (mil.)
61,430,896
5.1
0.0
Dilution
Dilution as a % of basic
3.9
4.8
5.4%
$
EPS, reported
Restated
$
(0.46) $
(0.46) $
0.43
0.43
$
$
1.68
1.68
71.2
1,203.5
(14.0)
Shares used in per share calculation:
Basic
Diluted
EPS, net
EPS, Basic
EPS, Diluted
370.5
761.8
$
$
$
8.2
7.2%
6.0
6.3%
4.2
4.6%
3.1
3.2%
3.3
2.4%
3.2
2.6%
1.3
2.5%
0.7
1.1%
0.7%
1.98
1.98
0.99
$
$
3.65
3.40
$
$
2.46
2.32
$
$
2.22
2.12
$
$
$
$
3.40
1.70
$
2.32
$
2.13
$
2.11
2.04
-
$
$
2.85
2.79
$
$
3.43
3.34
$
$
4.38
4.28
$
$
2.94
2.91
$
$
3.29
3.27
$
2.79
$
3.34
$
4.28
$
2.91
$
3.27
1994, 1995, & 1996 annual results from 1996 10-K (earliest available)
WWW.GREYVM.COM
1
Lexmark (LXK) Revenue vs. Income
Revenue vs. Income
6,000
5,000
Mil.
4,000
Revenue
Gross Profit
3,000
Net Earnings
2,000
1,000
0
1994
WWW.GREYVM.COM
1995
1996
1997
1998
1999
2000
Year
2001
2002
2003
2004
2005
2006
2
Lexmark (LXK) Annual Balance Sheet
YE 12/31
ASSETS
Cash and cash equivalents
Marketable securities
Trade receivables
Trade receivable allowance
Trade receivables, net
Inventory
Prepaid expenses and other assets
646.3
46.0
600.3
410.3
290.5
2003
744.6
451.5
663.5
48.1
615.4
437.0
195.3
2004
626.2
940.5
784.9
40.5
744.4
464.9
224.9
2005
168.3
720.5
688.3
37.4
650.9
409.2
220.7
2006
144.6
406.3
622.3
38.0
584.3
457.8
237.0
1,493.1
1,798.8
2,443.8
3,000.9
2,169.6
1,830.0
730.6
98.9
800.4
156.4
747.6
261.7
715.9
290.7
792.2
331.2
832.2
328.3
846.8
172.2
1,702.6
2,073.2
2,449.9
2,808.1
3,450.4
4,124.3
3,330.1
2,849.0
11.7
16.2
0.0
11.0
12.3
1.1
1.5
302.0
227.5
267.1
326.9
300.9
418.4
426.1
552.9
384.7
535.4
378.5
708.2
465.7
716.5
670.6
795.6
572.8
660.9
600.3
723.7
421.3
547.5
605.7
735.5
979.0
931.1
1,099.0
1,183.3
1,467.7
1,233.7
1,324.0
175.0
89.7
163.2
96.7
57.0
103.0
148.7
150.9
148.7
159.3
148.9
168.3
149.1
293.8
149.2
478.3
149.3
474.8
149.5
424.2
149.6
518.1
149.8
340.0
752.7
681.2
707.5
905.3
1,043.5
1,296.2
1,374.0
1,726.5
1,807.4
2,041.4
1,901.4
1,813.8
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
160,000,000
160,000,000
160,000,000
160,000,000
450,000,000
900,000,000
900,000,000
900,000,000
900,000,000
900,000,000
900,000,000
900,000,000
64,303,619
70,213,603
67,539,935
65,491,131
128,120,358
127,086,660
130.4
126.2
128.6
127.6
111.9
97.0
0.6
0.7
0.7
0.8
1.5
1.6
1.6
1.6
1.6
1.7
1.2
1.1
10,000,000
10,000,000
10,000,000
10,000,000
10,000,000
10,000,000
10,000,000
10,000,000
10,000,000
10,000,000
10,000,000
10,000,000
5,888,623
2,446,523
410,357
0
0
0
0
0
0
0
0
0
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Capital in excess of par
494.6
519.3
537.2
564.8
630.4
715.7
806.2
863.5
956.4
1,076.0
832.5
827.3
Retained earnings (deficit)
(108.0)
19.8
168.8
411.8
730.3
1,015.7
1,289.1
1,655.8
2,095.0
2,663.7
988.8
627.5
0.5
(23.8)
(29.0)
(30.8)
(74.9)
(141.2)
(229.7)
(196.5)
(165.3)
(163.3)
(130.9)
(182.2)
(370.3)
(672.3)
(881.1)
(879.8)
28.5
(1,209.6)
34.5
(1,213.5)
34.5
(1,493.2)
37.6
(230.5)
10.5
(289.8)
10.9
Total current assets
Property, plant and equipment, net
Other assets
Total assets
Short-term debt
Current portion of long-term debt
Accounts payable
Accrued liabilities
Total current liabilities
Long-term debt
Other liabilities
Total liabilities
Preferred stock, $0.01 par value, 1,600,000 authorized
none issued or outstanding
Common stock par $0.01 value
Class A authorized
Class A outstanding
Class A Outstanding: Value
Class B authorized
Class B outstanding
Class B Outstanding: Value
Accumulated translation adjustment / Accumulated
other comprehensive loss (after 1999)
1995
150.5
1996
119.3
1997
43.0
1998
149.0
1999
93.9
2000
68.5
2001
90.7
2002
497.7
240.6
27.0
213.6
296.3
55.3
322.7
18.0
304.7
271.0
70.1
337.9
19.0
318.9
353.8
60.4
493.6
24.2
469.4
333.0
68.6
531.4
24.1
507.3
387.7
99.8
616.2
22.2
594.0
412.3
168.9
736.1
33.3
702.8
455.1
244.5
715.7
765.1
776.1
1,020.0
1,088.7
1,243.7
361.2
66.0
434.1
22.3
409.6
22.5
430.5
32.9
561.0
52.9
1,142.9
1,221.5
1,208.2
1,483.4
0.0
20.0
209.6
258.4
2.1
18.0
197.2
222.0
488.0
2.9
Treasury stock
Treasury stock shares (mil.)
Total stockholders' equity
Total liabilities and stockholders' equity
390.2
540.3
500.7
578.1
659.1
777.0
1,075.9
1,081.6
1,643.0
2,082.9
1,428.7
1,035.2
1,142.9
1,221.5
1,208.2
1,483.4
1,702.6
2,073.2
2,449.9
2,808.1
3,450.4
4,124.3
3,330.1
2,849.0
1995 numbers from 1996 10-K
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3
Lexmark (LXK) Annual Cash Flow Statement
YE 12/31
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Cash flows from operating activities:
Net Earnings
Adjustments to reconcile net
earnings to net cash provided by
(used for) operating activities:
Depreciation & amortization
Option compensation related to IPO
Extraordinary loss
Deferred taxes
Stock-based compensation expense
Restructuring and related (reversal) charges
Tax shortfall from employee stock plans
Tax benefits from employee stock plans
Other non-cash charges to operations
44.6
32.4
127.8
149.0
243.0
318.5
285.4
273.6
366.7
439.2
568.7
356.3
338.4
127.3
99.1
60.6
15.7
(30.8)
69.2
77.5
75.6
80.1
91.2
125.6
138.2
148.9
134.9
158.5
200.9
12.3
22.4
40.7
3.0
(8.9)
(3.2)
(56.4)
12.3
63.5
(22.3)
(21.9)
43.2
41.3
87.7
(5.9)
0.0
(6.7)
(0.7)
54.2
226.1
45.5
222.5
22.6
231.9
24.6
314.2
26.5
348.1
67.9
457.6
6.0
420.7
28.8
459.3
40.8
552.1
23.7
675.3
11.1
708.0
15.8
38.8
547.1
(39.7)
70.0
28.5
17.0
29.2
(52.5)
30.0
(17.3)
71.3
76.5
(70.1)
(21.0)
25.3
(12.4)
(36.4)
(47.5)
33.3
(82.8)
104.8
5.5
(138.2)
(12.3)
20.8
(34.9)
99.4
(77.9)
40.0
(54.7)
33.8
91.5
(48.6)
27.5
62.0
(89.9)
(27.9)
204.9
79.1
43.6
(103.3)
55.7
(97.8)
(134.7)
(52.6)
(15.1)
0.0
(26.7)
87.2
8.3
37.2
(18.6)
66.6
0.7
187.5
(85.0)
44.8
(6.2)
172.8
31.3
(81.7)
93.5
(23.0)
(23.8)
(85.0)
(42.8)
(41.4)
(17.5)
54.7
(107.8)
(129.0)
30.8
(116.7)
30.0
(24.6)
125.2
134.5
61.2
(154.0)
112.6
0.2
361.9
307.5
118.0
274.9
289.0
400.4
476.3
195.7
815.6
747.6
775.4
576.4
670.9
(58.1)
2.2
(106.8)
6.6
(145.0)
3.6
(69.5)
1.1
(101.7)
2.0
(220.4)
0.2
(296.8)
(1.3)
(214.4)
(0.2)
(111.7)
(93.8)
(198.3)
(201.3)
(200.2)
(2.1)
(1,113.8)
662.3
1.4
(2,927.8)
2,437.9
0.1
(1,604.3)
1,824.7
(14.2)
(1,406.2)
1,721.0
(1.9)
(113.8)
(543.9)
(688.1)
3.3
563.2
Change in assets & liabilities:
Trade receivables
Trade receivables program
Inventories
Accounts payable
Accrued liabilities
Tax benefits from employee stock options
Other assets & liabilities
Net cash provided by (used for) operating activities
Cash flows from investing activities:
Purchases of PP&E
Proceeds from sale of PP&E
Purchases of marketable securities
Proceeds from marketable securities
Other
Net cash used for investing activities
Cash flows from financing activities:
Increase (decrease) in short-term debt
Proceeds from issuance of long-term debt
Principal payments on long-term debt
Charges related to extinguishment of debt
Issuance of treasury stock
Purchase of treasury stock
Common stock transactions, net
Preferred dividends paid
Exercise of stock options and warrants
Proceeds from employee stock plans
Tax windfall from employee tax plans
Other
Net cash provided by (used for) financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents - beginning of period
Cash and cash equivalents - end of period
WWW.GREYVM.COM
6.1
(55.9)
(100.2)
(141.4)
(68.4)
(99.7)
0.0
0.0
(360.7)
0.0
147.2
(245.0)
2.1
5.7
(38.0)
35.8
0.2
(125.5)
(22.4)
(6.3)
297.2
(207.0)
(182.2)
(188.5)
(302.0)
15.2
20.7
60.2
(0.1)
(9.5)
(2.2)
(220.2)
8.2
(298.1)
(214.6)
(16.2)
11.0
0.3
(1.5)
0.9
(330.7)
1.3
(5.2)
1.5
(281.2)
0.5
(1,069.9)
0.5
(871.0)
30.1
22.3
52.2
71.5
37.0
(1.5)
(3.0)
52.8
12.5
(3.5)
(209.4)
(1,036.9)
(808.7)
23.0
0.0
(7.2)
(278.9)
1.2
(0.6)
(3.9)
(63.0)
105.0
108.5
42.0
(31.2)
150.5
42.0
150.5
119.3
1.3
(100.0)
(12.3)
112.7
1.3
(208.8)
23.8
(370.3)
5.7
4.9
(83.9)
(233.6)
(201.2)
0.6
(1.7)
(2.4)
(1.3)
(76.3)
119.3
106.0
43.0
(55.1)
149.0
(25.4)
93.9
43.0
149.0
93.9
68.5
42.4
(301.8)
36.0
7.0
7.2
3.7
(2.3)
1.4
22.2
68.5
407.0
90.7
246.9
497.7
(118.4)
744.6
(457.9)
626.2
(23.7)
168.3
90.7
497.7
744.6
626.2
168.3
144.6
4

lexmark - Grey Value Management

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