Lexmark International, Inc. sells printers and supplies around the world, but one of its most important markets is Europe. According to the complaint, the company made misleading statements about end-user demand, inventory, and the possibilities for growth, particularly related to its European wholesalers, in order to provide a false image of its prospects, in violation of the Securities Exchange Act of 1934.
The class for this action is all persons or entities who acquired the publicly-traded securities of Lexmark between August 1, 2014 and July 20, 2015.
Lexmark makes printers and related supplies, such as ink cartridges, which it sells to wholesalers and large retail chains in ninety countries. In 2014, 37% of its total revenues came from its Europe, Middle East, and Africa (EMEA) segment, with Europe being particularly important.
Lexmark maintains fixed-price supplies contracts that lock in prices for its customers, usually for a period of from one to five years. When Lexmark announces price rises, customers with fixed-price contracts buy supplies ahead at the lower prices guaranteed by their contracts, so that they can build up their supply inventory before they have to pay the higher prices.
During the class period, according to the complaint, Lexmark made misleading public statements attributing the growth in supplies sales to end-user demand. For example, on a conference call after it announced its fourth-quarter 2014 results, the company’s CFO said that “we continued to see good end-user demand for laser supplies…”
Also, in a February 2015 Goldman Sachs Technology & Internet Conference, another company official again claimed that supplies figures were due to end-user demand, even saying, “We see competition sometimes waiting to see which way the customer is going to do it. We’re full-out driving it.”
In these kinds of public statements, the complaint alleges, the company was not disclosing important facts. First, it says, the growth in supplies sales was not due to end users but to its European customers buying ahead to avoid price increases. Second, it says, the fact that they were doing this meant that they were building up inventory and would not need to make purchases of the same size again soon. The complaint says that this meant that the growth in supplies sales was not in fact growth at all and would be followed by a drop in sales as the European companies sold down their inventories.
According to the complaint, Lexmark only finally revealed this on July 21, 2015, when it had to report poor results for its second quarter of 2015 and lower its guidance. At this point, the complaint says, the company admitted that the disappointing results came from lower-than-expected supplies sales from its European customers, due to previous price increases. At this news, the company’s stock price fell by over 20%.
The complaint claims that the company’s public statements during the class period violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.