File Number: 0-29174
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO
RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2001
LOGITECH INTERNATIONAL S.A.
(Exact name of Registrant as specified in its charter)
__________________
Not Applicable
(Translation of Registrant's name into English)
Canton of Vaud, Switzerland
(Jurisdiction of incorporation or organization)
__________________
Logitech International S.A.
Apples, Switzerland
c/o Logitech Inc.
6505 Kaiser Drive
Fremont, California 94555
(510) 795-8500
(Address and telephone number of principal executive offices)
__________________
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
[X] Form 20-F Form 40-F
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [X] No
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b).
Not applicable
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LOGITECH INTERNATIONAL S.A.
Form 6-K
Table of Contents
Page
----
Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 2001 and March 31, 2001......................................... 3
Consolidated Statements of Income for the three and six months ended September 30, 2001 and 2000............. 4
Consolidated Statements of Cash Flows for the six months ended September 30, 2001 and 2000................... 5
Notes to Consolidated Financial Statements................................................................... 6
Operating and Financial Review and Prospects...................................................................... 11
Quantitative and Qualitative Disclosure About Market Risk......................................................... 22
Signatures........................................................................................................ 24
2
LOGITECH INTERNATIONAL S.A.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
September 30, March 31,
2001 2001
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 53,448 $ 44,142
Accounts receivable ................................................. 175,515 144,781
Inventories ......................................................... 107,975 111,612
Other current assets ................................................ 41,281 29,558
--------- ---------
Total current assets ......................................... 378,219 330,093
Investments ............................................................. 11,908 16,649
Property, plant and equipment ........................................... 36,994 38,160
Intangible assets:
Goodwill ............................................................ 95,197 95,197
Other intangible assets ............................................. 16,871 18,726
Other assets ............................................................ 10,205 6,291
--------- ---------
Total assets ................................................. $ 549,394 $ 505,116
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt ..................................................... $ 7,074 $ 62,986
Accounts payable .................................................... 106,083 91,267
Accrued liabilities ................................................. 61,428 59,054
--------- ---------
Total current liabilities .................................... 174,585 213,307
Convertible and long-term debt .......................................... 108,526 26,908
Other liabilities ....................................................... 5,539 8,847
--------- ---------
Total liabilities ............................................ 288,650 249,062
--------- ---------
Shareholders' equity:
Registered shares, par value CHF 1 - 53,860,294 authorized,
9,239,706 conditionally authorized, 47,827,414 issued and
outstanding at September 30, 2001; 53,176,490 authorized,
9,923,510 conditionally authorized, 44,418,610 issued and
outstanding at March 31, 2001 ..................................... 33,324 31,396
Additional paid-in capital .......................................... 123,498 118,740
Less registered shares in treasury, at cost, 3,192,126 at
September 30, 2001 and 164,750 at March 31, 2001 .................. (11,456) (627)
Retained earnings ................................................... 149,695 129,435
Accumulated other comprehensive loss ................................ (34,317) (22,890)
--------- ---------
Total shareholders' equity ................................... 260,744 256,054
--------- ---------
Total liabilities and shareholders' equity ................... $ 549,394 $ 505,116
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
3
LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
Three months ended Six months ended
September 30, September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(unaudited) (unaudited)
Net sales ............................... $ 227,829 $ 190,565 $ 405,696 $ 331,981
Cost of goods sold ...................... 146,896 126,385 264,286 220,510
------------ ------------ ------------ ------------
Gross profit ............................ 80,933 64,180 141,410 111,471
Operating expenses:
Marketing and selling ................. 42,326 34,817 75,896 61,265
Research and development .............. 11,077 8,794 21,546 17,303
General and administrative ............ 8,814 8,596 17,091 16,862
------------ ------------ ------------ ------------
Total operating expenses ................ 62,217 52,207 114,533 95,430
------------ ------------ ------------ ------------
Operating income ........................ 18,716 11,973 26,877 16,041
Interest income (expense), net .......... (69) (159) (1,237) 37
Other income (expense), net ............. (1,209) (103) (313) 1,864
------------ ------------ ------------ ------------
Income before income taxes .............. 17,438 11,711 25,327 17,942
Provision for income taxes .............. 3,497 2,343 5,067 3,588
------------ ------------ ------------ ------------
Net income .............................. $ 13,941 $ 9,368 $ 20,260 $ 14,354
============ ============ ============ ============
Net income per share and ADS:
Basic ................................. $ .31 $ .22 $ .45 $ .34
Diluted ............................... $ .28 $ .20 $ .42 $ .31
Shares used to compute net income
per share and ADS:
Basic ................................. 44,892,233 42,086,620 44,712,981 41,810,200
Diluted ............................... 51,281,164 47,141,770 48,499,015 46,967,090
The accompanying notes are an integral part of these
consolidated financial statements.
4
LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six months ended September 30,
--------------------------------
2001 2000
----------- ----------
(unaudited)
Cash flows from operating activities:
Net income ................................................................... $ 20,260 $ 14,354
Non-cash items included in net income:
Depreciation ................................................................ 14,752 8,188
Amortization of goodwill .................................................... -- 490
Amortization of other intangible assets ..................................... 1,855 1,390
Gain on disposal of property, plant and equipment ........................... -- (1,922)
Gain on sale of investments ................................................. (554) (442)
Equity in net losses of affiliated companies ................................ 1,370 449
Accreted interest on convertible bond ....................................... 327 --
Other ....................................................................... (182) 326
Changes in current assets and liabilities:
Accounts receivable ......................................................... (28,401) (25,341)
Inventories ................................................................. 6,208 (62,899)
Other assets ................................................................ (8,198) 469
Accounts payable ............................................................ 14,534 44,028
Accrued liabilities ......................................................... (1,458) (8,386)
----------- ----------
Net cash provided by (used in) operating activities ....................... 20,513 (29,296)
----------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment ................................... (13,173) (11,143)
Sales of investments ......................................................... 1,577 526
Sales of property, plant and equipment ....................................... -- 3,637
Acquisitions and investments ................................................. (5,398) (5,562)
----------- ----------
Net cash used in investing activities ..................................... (16,994) (12,542)
----------- ----------
Cash flows from financing activities:
Net borrowing (repayment) of short-term debt ................................. (53,994) 11,150
Repayment of long-term debt .................................................. (26,985) (245)
Borrowing of convertible and long-term debt, net of issuance costs ........... 93,130 760
Purchase of treasury shares .................................................. (9,887) (1,064)
Proceeds from sale of treasury shares ........................................ 567 935
Proceeds from issuance of registered shares .................................. 4,181 4,963
----------- ----------
Net cash provided by financing activities ................................. 7,012 16,499
----------- ----------
Effect of exchange rate changes on cash and cash equivalents ................... (1,225) (1,887)
----------- ----------
Net increase (decrease) in cash and cash equivalents ........................... 9,306 (27,226)
Cash and cash equivalents at beginning of period ............................... 44,142 49,426
----------- ----------
Cash and cash equivalents at end of period ..................................... $ 53,448 $ 22,200
=========== ==========
Supplemental cash flow information:
Interest paid.................................................................. $ 1,247 $ 96
Income taxes paid ............................................................. $ 1,252 $ 1,382
Non-cash investing and financing activities:
Acquisition of additional Labtec shares through issuance of treasury shares... $ 863 $ --
The accompanying notes are an integral part of these consolidated
financial statements.
5
LOGITECH INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- The Company:
Logitech International S.A. designs, manufactures and markets human
interface devices and supporting software that serve as the primary physical
interface between people and their personal computers and the internet. The
Company's products include corded and cordless mice, trackballs, and keyboards;
joysticks, gamepads and racing systems; internet video cameras; and PC speakers,
headsets and microphones. The Company sells its products to both original
equipment manufacturers ("OEMs") and to a network of retail distributors and
resellers.
Logitech was founded in Switzerland in 1981, and in 1988 listed its
registered shares in an initial public offering in Switzerland. In 1997, the
Company sold shares in a U.S. initial public offering in the form of American
Depository Shares ("ADSs") and listed the ADSs on the Nasdaq National Market
system. The Company's headquarters are in Fremont, California through its U.S.
subsidiary, with regional headquarters in Romanel, Switzerland and Hsinchu,
Taiwan through local subsidiaries. The Company has manufacturing operations in
China, and distribution facilities in the U.S., Europe and Asia.
Note 2 -- Interim Financial Data:
The accompanying consolidated financial statements should be read in
conjunction with the Company's 2001 Annual Report on Form 20-F as filed with the
Securities and Exchange Commission. In the opinion of management, the
accompanying financial information includes all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
position, results of operations and cash flows for the interim periods. The
results of operations and cash flows for the interim periods presented are not
necessarily indicative of the results of any future period.
The Company reports quarterly results on thirteen-week periods, each ending
on a Friday. For purposes of presentation, the Company has indicated its
quarterly periods as ending on the month end. Certain amounts reported in prior
quarters' financial statements have been reclassified to conform to the current
quarter's presentation.
Note 3 -- Stock Split:
In June 2001, the Company's shareholders approved a ten-for-one stock split
that was effected on August 2, 2001. The stock split related only to shares
traded on the Swiss Exchange. ADSs traded on Nasdaq were not affected. As a
result, the ratio of ten ADSs to one registered share changed to a new ratio of
one ADS to one registered share. All references to share and per-share data for
all periods presented have been adjusted to give effect to this ten-for-one
stock split.
Note 4 -- Net Income per Share:
Basic earnings per share is computed by dividing net income by the weighted
average number of outstanding registered shares. Diluted earnings per share is
computed using weighted average registered shares and, if dilutive, weighted
average registered share equivalents. The registered share equivalents are
registered shares issuable upon the exercise of stock options and stock purchase
plan agreements (using the treasury stock method), and upon the conversion of
convertible debt (using the if-converted method). For the six months ended
September 30, 2001, the conversion of convertible debt was excluded from the
registered share equivalents due to its antidilutive effect. For the three
months ended September 30, 2001, the conversion of convertible debt was included
in the registered share equivalents due to its dilutive effect.
Note 5 -- Acquisition of Labtec:
In March 2001, the Company purchased substantially all outstanding shares
of Labtec Inc. for $76.3 million, including transaction costs. The principal
business of Labtec has been combined with the Company's audio division to offer
a complete array of PC audio and telephony products. The acquisition was
accounted for using the
6
purchase method of accounting. The results of operations of the acquired
business from the date of acquisition have been included in the consolidated
financial statements.
In connection with the acquisition, the Company recorded $91.9 million in
goodwill and $11.0 million in other intangible assets. During the six months
ended September 30, 2001, the Company purchased the remaining outstanding shares
of Labtec for $2.6 million in cash and stock.
Note 6 - Balance Sheet Components:
September 30, March 31,
2001 2001
--------------- -----------
(in thousands)
Accounts receivable:
Accounts receivable........................... $ 197,427 $ 163,240
Allowance for doubtful accounts............... (5,791) (7,502)
Allowance for returns and other............... (16,121) (10,957)
------------- -----------
$ 175,515 $ 144,781
============= ===========
Inventories:
Raw materials.................................. $ 15,495 $ 26,002
Work-in-process................................ 580 225
Finished goods................................. 91,900 85,385
------------- -----------
$ 107,975 $ 111,612
============= ===========
Note 7 -- Investment in 3Dconnexion:
In June 1998, the Company acquired 49% of the outstanding shares of
3Dconnexion (formerly LogiCad 3D Group), the German-based provider of Logitech's
Magellan 3D Controller. In September 2001, the Company acquired an additional 2%
of the outstanding shares and a controlling interest in 3Dconnexion. In
addition, under the terms of the purchase agreement, the Company has an option
to acquire the remaining outstanding shares of 3Dconnexion. The Company may
exercise the option in April 2002 which is payable in Logitech shares in July
2003. If the option is not exercised by July 2003, the sellers have the right to
require Logitech to purchase the remaining outstanding shares with Logitech
shares. The number of Logitech shares to be issued will be calculated using the
average share price of the Logitech shares for the 30 trading days preceding the
payment date. Management does not expect the acquisition to have a material
impact on results of operations, financial position or earnings per share.
The 3Dconnexion business has been combined with the 3D input device
business acquired with the Labtec acquisition to offer a complete line of 3D
input devices utilizing the market strengths, engineering resources and global
presence of both entities.
The assets and liabilities of 3Dconnexion have been included in the
Company's consolidated balance sheet as of September 30, 2001. 3Dconnexion's
results of operations from the September 14, 2001 acquisition date were not
significant.
Note 8 -- Investments:
In November 1999, Logitech announced the formation of a new company,
Spotlife Inc., whose business is to enhance video communications using the
internet infrastructure. Logitech has invested $7 million in Spotlife, and has
agreed to guarantee up to a maximum of $5.3 million of the company's capital
lease obligation. As of September 30, 2001, the outstanding balance of the lease
obligation, and therefore the Company's guarantee, was $2.5 million. As of
September 30, 2001, Logitech owned approximately 34.2% of Spotlife's outstanding
shares on a fully diluted basis, with outside investors having the ability to
exercise significant influence over the management of the company. Logitech
accounts for its investment in this company using the equity method.
In April 1998, the Company acquired 10% of the then outstanding stock of
Immersion Corporation, a developer of force feedback technology for PC
peripherals and software applications. During the six months ended
7
September 30, 2001, the Company sold a partial interest in Immersion and
recognized a gain of $.6 million in other income. The Company accounts for its
investment in Immersion as available-for-sale and, therefore, carries its
investment at market value and records changes in market value as a component of
shareholders' equity. As of September 30, 2001, Logitech owned approximately
4.4% of Immersion. The cost of these securities was $3.5 million and the
unrealized loss was $.6 million net of taxes.
The Company uses the cost method of accounting for all other investments,
all of which are less than 20% owned by Logitech.
Note 9 -- Goodwill and Other Intangible Assets:
Effective April 1, 2001, the Company adopted Statement of Financial
Accounting Standard No. 142, "Goodwill and Intangible Assets" and No. 141,
"Business Combinations", which were issued by the Financial Accounting Standards
Board in July 2001. Under these standards, the Company ceased amortizing
goodwill totaling $95.2 million (including $3.1 million of goodwill previously
classified as other intangible assets) as of April 1, 2001. Adoption of the new
standards resulted in not recognizing $1.6 million and $3.1 million in
amortization expense for the three and six months ended September 30, 2001, that
would have been recognized had the old standards been in effect. The comparable
three and six month periods last year included $.2 million and $.5 million in
amortization expense under the old standards.
The following table presents the impact of the new standards on operating
income, net income and earnings per share, as if they had been in effect for the
three and six months ended September 30, 2000.
Three months ended September 30, Six months ended September 30,
----------------------------------------------- ----------------------------------------------
2001 2000 2001 2000
--------------- -------------- -----------------------------
As Reported As Reported As Adjusted As Reported As Reported As Adjusted
--------------- --------------- -------------- --------------- --------------- -------------
(in thousands, except per share amounts) (in thousands, except per share amounts)
Operating income.............. $ 18,716 $ 11,973 $ 12,218 $ 26,877 $ 16,041 $ 16,531
Net income.................... $ 13,941 $ 9,368 $ 9,613 $ 20,260 $ 14,354 $ 14,844
Basic earnings per share...... $ .31 $ .22 $ .23 $ .45 $ .34 $ .36
Diluted earnings per share.... $ .28 $ .20 $ .20 $ .42 $ .31 $ .32
Acquired other intangible assets subject to amortization were as follows:
September 30, 2001 March 31, 2001
------------------------------------ ------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amounts Amortization Amounts Amortization
------------------- --------------- ------------------ ----------------
(in thousands)
Trademark...................... $ 15,002 $ 4,102 $ 14,975 $ 3,155
Existing technology............ 10,423 4,452 10,423 3,600
Other.......................... 500 500 500 417
------------------- --------------- ------------------ ----------------
$ 25,925 $ 9,054 $ 25,898 $ 7,172
=================== =============== ================== ================
For the three months ended September 30, 2001 and 2000, amortization
expense for other intangible assets was $1.0 million and $.8 million. For the
six months ended September 30, 2001 and 2000, amortization expense for other
intangible assets was $1.9 million and $1.4 million. The estimated future annual
amortization expense for other intangible assets is $3.7 million, $3.6 million,
$3.6 million, $3.6 million and $1.9 million for the years 2002, 2003, 2004,
2005, and 2006.
In accordance with these standards, the Company completed an impairment
test of all goodwill and intangible assets as of September 30, 2001 and has
determined that goodwill and other intangible assets are not impaired.
8
Note 10 -- Long Term Convertible Debt:
On June 8, 2001, Logitech sold CHF 170,000,000 (US $95,625,000) aggregate
principal amount of its 1% Convertible Bonds 2001-2006 with maturity in five
years. The net proceeds of the convertible bond offering were used to refinance
debt associated with the acquisition of Labtec Inc., including repaying a $90
million short-term bridge loan. The Company registered the convertible bonds for
resale with the Swiss Stock Exchange. The convertible bonds were issued in
denominations of CHF 5,000 at par value, with interest at 1.00% payable
annually, and final redemption in June 2006 at 105%, representing a yield to
maturity of 1.96%. The convertible bonds are convertible at any time into shares
of Logitech registered shares at the conversion price of CHF 62.4 (US $38.60)
per share. Early redemption is permitted at any time at the accreted redemption
amount, subject to certain requirements. As of September 30, 2001, the carrying
amount of the convertible bonds was CHF 170,387,000 (US $105,487,000) and the
fair value based upon quoted market value was $97,272,000.
Note 11 -- Comprehensive Income (Loss):
Comprehensive income (loss) is defined as the total change in shareholders'
equity during the period other than from transactions with shareholders. For the
Company, comprehensive income (loss) consists of net income plus the net change
in accumulated other comprehensive loss, an element of shareholders' equity.
Accumulated other comprehensive loss consists of the net change in the
accumulated foreign currency translation adjustment account, the net change in
unrealized gains on marketable equity securities, and the net change in realized
and unrealized gains and losses in hedging activity. For the three months ended
September 30, 2001 and 2000, comprehensive loss was $2.2 million and $13.0
million. For the six months ended September 30, 2001 and 2000, comprehensive
income was $8.8 million and $21.8 million.
Note 12 -- Derivative Financial Instruments - Foreign Exchange Hedging:
In April 2001, the Company adopted "Statement of Financial Accounting
Standards No.133, Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"), as amended by SFAS 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." These standards require the Company
to measure derivatives at fair value and recognize them as assets or liabilities
in the balance sheet. The Company enters into forward foreign exchange contracts
(cash flow hedges) to hedge against exposure to changes in foreign currency
exchange rates related to forecasted inventory purchases by subsidiaries.
Hedging contracts generally mature within three months. Gains and losses in the
fair value of the effective portion of the contracts are deferred as a component
of accumulated other comprehensive income until the hedged inventory purchases
are sold, at which time the gains or losses are reclassified to cost of goods
sold. If the underlying transaction being hedged fails to occur or if a portion
of the hedge is ineffective, the Company immediately recognizes the gain or loss
on the associated financial instrument in other income (expense). The Company
did not record any gains or losses due to hedge ineffectiveness during the first
six months of fiscal 2002.
The notional amount of foreign exchange contracts outstanding at September
30, 2001 was $12 million. There were no contracts outstanding at March 31, 2001.
The notional amount represents the future cash flows under contracts to purchase
foreign currencies. Unrealized gains on the fair value of hedging contracts in
accumulated other comprehensive income was $.1 million as of September 30, 2001.
Deferred realized losses, net of deferred realized gains, totaled $.4 million at
September 30, 2001 and is expected to be classified into cost of goods sold
within two months. Realized net gains and losses classified to cost of goods
sold during the three months ended September 30, 2001 was not significant.
Note 13 -- Contingencies:
In December 1996, the Company was advised of the intention to begin
implementing a value-added tax ("VAT") on goods manufactured in certain parts of
China since July 1995, including where the Company's operations are located, and
intended for export. In January 1999, the Company was advised that the VAT would
not be applied to goods manufactured during calendar 1999 and subsequent years.
With respect to prior years, the Company is in ongoing discussions with Chinese
officials and has been assured that, notwithstanding statements made by tax
authorities, the VAT for these prior periods would not be charged to the
Company. The Company believes the ultimate resolution of this matter will not
have a material adverse effect on the Company's financial position, cash flows
or results of operations.
9
The Company is involved in a number of lawsuits relating to patent
infringement and intellectual property rights. The Company believes the lawsuits
are without merit and intends to defend against them vigorously. However, there
can be no assurances that the defense of any of these actions will be
successful, or that any judgment in any of these lawsuits would not have a
material adverse impact on the Company's business, financial condition and
results of operations.
10
LOGITECH INTERNATIONAL S.A.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
Logitech designs, manufactures and markets human interface devices and
supporting software that serve as the primary physical interface between people
and their personal computers and the internet. The Company's products include
corded and cordless mice, trackballs and keyboards; joysticks, gamepads, and
racing systems; internet video cameras; and PC speakers, headsets and
microphones. The Company sells its products through two primary channels,
original equipment manufacturers ("OEMs") and a network of retail distributors
and resellers ("retail").
Recent Developments
Acquisition of Labtec
In March 2001, the Company purchased substantially all outstanding shares
of Labtec Inc. for $76.3 million, including transaction costs. The principal
business of Labtec has been combined with the Company's audio division to offer
a complete array of PC audio and telephony products. The acquisition was
accounted for using the purchase method of accounting. The results of operations
of the acquired business from the date of acquisition have been included in the
consolidated financial statements. During the six months ended September 30,
2001, the Company purchased the remaining outstanding shares of Labtec for $2.6
million in cash and stock.
Issuance of Convertible Bonds
In June 2001, the Company sold CHF 170,000,000 (US $95,625,000) aggregate
principal amount of its 1% Convertible Bonds 2001-2006 with maturity in five
years. The net proceeds of the convertible bond offering were used to refinance
debt associated with the acquisition of Labtec Inc., including repayment of a
$90 million short-term bridge loan. The convertible bonds are convertible at any
time into shares of Logitech registered shares at the conversion price of CHF
62.4 (US $38.60) per share.
Goodwill and Other Intangible Assets
Effective April 1, 2001, the Company adopted Statement of Financial
Accounting Standard No. 142, "Goodwill and Intangible Assets" and No. 141,
"Business Combinations", which were issued by the Financial Accounting Standards
Board in July 2001. Under these standards, the Company ceased amortizing
goodwill totaling $95.2 million (including $3.1 million of goodwill previously
classified as other intangible assets) as of April 1, 2001. Adoption of the new
standards resulted in not recognizing $1.6 and $3.1 million in amortization
expense for the three and six months ended September 30, 2001, that would have
been recognized had the old standards been in effect. The same periods last year
included $.2 and $.5 million in amortization expense under the old standards. In
accordance with these standards, the Company completed an impairment test of all
goodwill and intangible assets as of September 30, 2001 and has determined that
these intangible assets are not impaired.
11
Results of Operations
The following table sets forth certain consolidated financial statement
amounts as a percentage of net sales for the periods indicated:
Three months ended Six months ended
September 30, September 30,
------------------------- ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net sales.............................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold..................... 64.5 66.3 65.1 66.4
---------- ---------- ---------- ----------
Gross profit........................... 35.5 33.7 34.9 33.6
Operating expenses:
Marketing and selling.................. 18.5 18.3 18.7 18.5
Research and development............... 4.9 4.6 5.3 5.2
General and administrative............. 3.9 4.5 4.2 5.1
---------- ---------- ---------- ----------
Total operating expenses............... 27.3 27.4 28.2 28.8
---------- ---------- ---------- ----------
Operating income....................... 8.2 6.3 6.7 4.8
Interest (expense) income, net......... - (.1) (.3) -
Other income (expense), net............ (.5) (.1) (.1) .6
---------- ---------- ---------- ----------
Income before income taxes............. 7.7 6.1 6.3 5.4
Provision for income taxes............. 1.5 1.2 1.2 1.1
---------- ---------- ---------- ----------
Net income............................. 6.2% 4.9% 5.1% 4.3%
========== ========== ========== ==========
Comparison of three months ended September 30, 2001 and 2000
Net Sales
Net sales for the three months ended September 30, 2001 increased $37
million or 20% to $228 million, over the same quarter last year. This growth was
generally shared across all product categories, but primarily came from the
Company's pointing device products, the audio products associated with the
acquisition of Labtec, and to a lesser extent, from the Company's interactive
entertainment products. With approximately 50% of the Company's sales
denominated in currencies other than the US dollar, the dollar's strength
compared to the same quarter last year relative to the Euro, Japanese Yen and
Taiwanese Dollar had the effect of reducing reported revenue growth for the
quarter by approximately $6 million.
Retail sales grew by 41% over the same quarter last year. This growth was
shared across all product categories. Retail sales of the Company's traditional
pointing devices, which include mice and trackballs, grew by 17% while unit
volumes grew by 27%. Driven by the Company's new cordless optical wheel mouse,
cordless mice were a significant source of this strong growth, with 60% growth
in sales and 52% growth in unit volumes. Sales of desktop products (a keyboard
and mouse sold together) grew by 65% over the same quarter last year with the
majority of the growth in the Company's cordless desktop product. In the PC
video camera business, retail sales grew 31% and unit volumes increased by 50%
over the same quarter last year. Sales of interactive entertainment products
grew by 30% while unit volumes grew by 2%. This small unit volume increase
reflects volume decreases in sales of joysticks and gamepads which were offset
by the strong sales of the higher value GT Force Steering Wheel for PlayStation
2. The Company's newly acquired audio products, including a full range of PC
headsets, speakers and headphones, added eleven percentage points of absolute
growth to retail sales during the quarter.
OEM sales declined by 37% compared to the same quarter last year,
principally due to the significant sales of PC video cameras in the second
quarter of fiscal 2001 coupled with sluggish sales of new PCs in this fiscal
year. The Company believes that revenue and unit volumes for OEM in total will
decline on a year-over-year basis through fiscal 2002.
12
Gross Profit
Gross profit consists of net sales, less cost of goods sold which consists
of materials, direct labor and related overhead costs, costs of manufacturing
facilities, costs of purchasing finished products from outside suppliers,
distribution costs and inventory write-offs. Gross profit increased 26% to $81
million, due primarily to significantly higher sales volume.
Gross margin (gross profit as a percentage of net sales) increased from
33.7% to 35.5%. This increase reflects continued operational efficiencies
achieved throughout the supply chain and a higher mix of higher margin retail
sales compared to OEM sales.
Operating Expenses
Total operating expenses increased 19%, from $52.2 million to $62.2
million. As a percentage of net sales, operating expenses remained consistent at
27%. The increase in sales and marketing expenses is directly related to the
Company's increased sales performance and marketing initiatives aimed at
strengthening the Company's retail presence. The Company continues to make
significant investments in advertising, channel marketing, and brand awareness.
The increase in research and development expenses is related to new product
development and cost reductions on existing products. General and administrative
expenses increased slightly for the three months ended September 30, 2001, but
decreased as a percentage of net sales.
Interest Expense, Net
Net interest expense was $.1 million for the three months ended September
30, 2001 compared to $.2 million for the same period last year. Interest expense
increased due to the issuance of the five year convertible bonds to finance the
Labtec acquisition. This more than offset the increased interest income from
higher cash balances for the three months ended September 30, 2001.
Other Expense, Net
Other expense was $1.2 million for the three months ended September 30,
2001, compared to $.1 million for the same period last year. Other expense this
year was primarily due to losses recorded for investments accounted for under
the equity method as well as currency exchange losses.
Provision for Income Taxes
The provision for income taxes consists of income and withholding taxes and
is based on factors such as management's expectations as to payments of
withholding taxes on amounts repatriated through dividends, the jurisdictions in
which taxable income and losses are generated, changes in local tax laws and
changes in valuation allowances based upon the likelihood of realizing deferred
tax assets. The provision for income taxes for the three months ended September
30, 2001 was $3.5 million, compared to $2.3 million for the comparable period in
2000. The effective tax rate remained at approximately 20% for both periods. The
Company's effective tax rate is dependent on achieving expected income levels in
a number of jurisdictions. If the Company is unable to achieve expected income
levels in those jurisdictions, the Company's effective tax rate could change
significantly.
Comparison of six months ended September 30, 2001 and 2000
Net Sales
Net sales for the six months ended September 30, 2001 increased 22% to $406
million. This growth was shared across all product categories, but primarily
came from the Company's cordless mouse, desktop products and audio, as well as
increases from the Company's corded mice and interactive entertainment business.
Retail sales grew by 43%. This growth was shared across all product
categories. Sales of the Company's traditional retail pointing devices, which
include mice and trackballs, grew by 33% while unit volumes grew by 22%. The
Company's cordless optical mice drove this growth. In our interactive
entertainment business, retail sales grew by 53% with unit volume increases of
19%. Strong sales of the GT Force Steering Wheel for
13
PlayStation 2 drove the significant sales growth. Sales of desktop products
increased by 25% over the same period last year. Sales growth is primarily from
the cordless desktop line.
OEM sales decreased by 32% compared to the same period last year,
principally due to the significant sales of PC video cameras in the second
quarter of fiscal 2001, as well as sluggish sales of new PCs in fiscal 2002.
Gross Profit
Gross profit increased 27% to $141 million in the six months ended
September 30, 2001. Gross profit as a percentage of net sales increased from
33.6% to 34.9%. The increase was primarily due to cost reductions impacting
retail and OEM product offerings and a higher mix of higher margin retail sales
compared to OEM sales.
Operating Expenses
Total operating expenses increased 20%, from $95 million to $115 million.
These increases are directly related to the Company's increased sales
performance, marketing initiatives aimed at strengthening the Company's retail
presence, and development of new products. As a percentage of sales, operating
expenses decreased slightly from 28.8% to 28.2% for the six months ended
September 30, 2001.
Interest Income (Expense), Net
Interest expense for the six months ended September 30, 2001 was $1.2
million, compared to interest income of $.03 million in the same period last
year. Interest expense increased substantially due to the short-term borrowing
and subsequent issuance of the five-year convertible bonds to finance the Labtec
acquisition. The Company borrowed $35 million in March 2001 and $55 million in
April 2001 to finance the acquisition and repay Labtec obligations and credit
lines. This debt was repaid in June 2001 using proceeds from the issuance of the
convertible bonds.
Other Income (Expense), Net
Other expense was $.3 million, compared to other income of $1.9 million
last year. The decrease in other income was primarily due to the fiscal 2001
first quarter gain recognized from the sale of a building.
Provision for Income Taxes
The provision for income taxes for the six months ended September 30, 2001
and 2000 represented a 20% effective tax rate.
Liquidity and Capital Resources
Cash Balances, Available Borrowings, and Capital Resources
At September 30, 2001, net working capital was $204 million, compared to
$117 million at March 31, 2001. Cash and cash equivalents totaled $53 million,
an increase of $9 million from March 31, 2001. The increase in cash was due to
profitable operations and effective management of receivables and inventory, as
well as excess proceeds from net long-term borrowings over acquisition needs.
The Company has financed its operations and capital requirements primarily
through cash flow from operations and, to a lesser extent, capital markets and
bank borrowings. The Company's normal short-term liquidity and long-term capital
resource requirements will be provided from three sources: ongoing cash flow
from operations, cash and cash equivalents on hand and borrowings, as needed,
under the credit facilities.
The Company had credit lines with several European and Asian banks totaling
$53 million as of September 30, 2001. As is common for business in European
countries, these credit lines are uncommitted and unsecured. Despite the lack of
formal commitments from its banks, the Company believes that these lines of
credit will continue to be made available because of its long-standing
relationships with these banks. As of September 30, 2001, $47 million was
available under these facilities.
14
Cash Flow from Operating Activities
The Company's operating activities provided net cash of $20.5 million for
the six months ended September 30, 2001, and used cash of $29.3 million in the
same period last year. The Company made a concerted effort to reduce inventory
levels, net of payables, during fiscal 2002. As a result, the Company invested
significantly less cash in inventory this year, as inventory levels decreased
slightly from March 31 to September 30, 2001, while in the same period last year
inventory levels and the use of cash for inventory increased significantly.
Inventory levels increased last year due principally to additional purchases
made to meet anticipated demand for PC video cameras.
Cash Flow from Investing Activities
The Company's investing activities used cash of $17 million and $12.5
million for the six months ended September 30, 2001 and 2000. During the six
months ended September 30, 2001, cash of $5.4 million was used to acquire
additional Labtec shares and to acquire a non-marketable equity investment and
$13.2 million was used for purchases of property and equipment. These
expenditures were partially offset by cash proceeds of $1.6 million from the
sale of available-for-sale securities. Included in the first six months last
year was cash proceeds of $3.6 million for the sale of a building in Europe that
was no longer being used in the Company's operations, expenditures of $5.0
million for an additional investment in Spotlife and property and equipment
purchases totaling $11.1 million.
Cash Flow from Financing Activities
The Company's financing activities provided cash of $7 million and $16.5
million for the six months ended September 30, 2001 and 2000. In April 2001, the
Company borrowed an additional bridge loan of $55 million to finance the Labtec
acquisition, bringing the total bridge loan for the Labtec acquisition to $90
million. During the first quarter, the Company repaid short-term Labtec
borrowings of $19 million and long term Labtec borrowings of $27 million. In
June 2001, the Company sold 1% convertible bonds in a registered offering. Net
proceeds of $93 million were used to repay the $90 million bridge loan. The
Company also realized $4.8 million of proceeds from the issuance of registered
shares and sale of treasury shares to fulfill employee stock option and stock
purchase plan requirements. In August and September 2001, under a previously
announced registered share buyback program the Company purchased 460,801
Logitech shares for $9.9 million. In October 2001, an additional 221,901
registered shares were purchased for $5 million.
Net cash provided by financing activities during the six months ended
September 30, 2000 included borrowings of $11.7 million to finance inventory and
other working capital needs, $5.9 million of proceeds from the issuance of
registered shares and sale of treasury shares to fulfill employee stock option
and stock purchase plan requirements, and $1.1 million to purchase treasury
shares as part of a stock buy-back program in the first quarter.
Capital Commitments
The Company believes that it will continue to make capital expenditures in
the future to support product development activities and ongoing and expanded
operations. Fixed commitments with contract manufacturers totaled $5 million at
September 30, 2001. Fixed commitments for capital expenditures, primarily for
manufacturing equipment, approximated $.5 million at September 30, 2001. In
addition, the Company has agreed to guarantee up to a maximum of $5.3 million of
Spotlife's capital lease obligation. As of September 30, 2001, the outstanding
balance of the lease obligation, and therefore the Company's guarantee, was $2.5
million. The Company believes that its cash and cash equivalents, cash from
operations, and available borrowings under its bank lines of credit will be
sufficient to fund capital expenditures and working capital needs for the
foreseeable future.
15
Risk Factors
Certain Factors Affecting Operating Results
This quarterly report on Form 6-K contains "forward-looking statements"
within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.
Such forward-looking statements include, but are not limited to, i) the targeted
range of our gross margin, ii) the sufficiency of our cash and cash equivalents,
cash from operations and available borrowings under bank lines of credit to fund
cash needs, iii) our expectation of continued strong growth in retail sales, and
iv) the outcome of the Chinese VAT and other contingencies. The words
"anticipate," "believe," "estimate," "expect," "forecast," "intend," "may,"
"plan," "project," "predict," "should," "will" and similar expressions are
intended to identify forward-looking statements. All forward-looking statements
are subject to various risks and uncertainties that could cause actual results
to differ materially from those described in the statements. The factors that
could cause actual results to differ include those discussed more fully below
and elsewhere in this Form 6-K. Undue reliance should not be placed on these
forward-looking statements, which speak only as of the dates of their filings.
We undertake no obligation to publicly update or revise any forward-looking
statements.
Our quarterly operating results are difficult to predict. This means that
our results could fall below investors' expectations, which could cause the
price of Logitech ADSs and registered shares to decline significantly.
Our operating results in the past have varied significantly from quarter to
quarter and these fluctuations are expected to continue in the future. Future
quarterly operating results may vary significantly due to a number of factors,
including:
. the volume and timing of orders received during the quarter;
. the maturation of product lines;
. the timing of new product introductions by us and our competitors and
their acceptance by the market;
. the impact of competition on our average selling prices and operating
expenses;
. our inventory levels or inventory levels in the distribution channels;
. changes in laws or regulations;
. fluctuations in exchange rates;
. changes in product or distribution channel mix;
. price protection charges;
. product returns from customers;
. deferrals of customer orders in anticipation of new products or
otherwise;
. changes in technologies and their acceptance by the market;
. the performance of our suppliers and third-party product
manufacturers; and
. the rate of economic growth in our principal geographic markets.
Many of these factors are beyond our control. In addition, due to the short
product life cycles inherent in our markets, our failure to introduce new,
competitive products consistently and in a timely manner would adversely affect
results of operations for one or more product cycles.
In addition, the volume and timing of orders received during a quarter are
difficult to forecast. Customers generally order on an as-needed basis.
Accordingly, we have operated with a relatively small backlog, and net sales in
any quarter depend primarily on orders booked and shipped in that quarter. In
spite of the difficulty in forecasting sales in advance of a quarter and the
relatively small backlog at any given time, we generally must plan production,
order components and enter into development, sales and marketing, and other
operating commitments well before each quarter begins. This is particularly
acute because substantially all of our products are manufactured in Asia, and we
rely on suppliers who are located in many other parts of the world.
Consequently, any shortfall in net sales in a given quarter may negatively
impact our results of operations due to an inability to
16
adjust expenses during such quarter. Excess inventory may negatively impact cash
flows and result in charges associated with inventory write-offs. The foregoing
means that our operating results could fall below investors' expectations, which
could cause the price of Logitech ADSs and registered shares to decline
significantly.
Our success depends on the continued viability and financial stability of
our distributors, resellers and OEM customers, as well as continued demand by
consumers and our customers for our products. Potential economic and political
developments that cause a decline in consumer buying may adversely impact our
financial results.
We sell our products through a domestic and international network of
distributors, resellers and OEM customers, and our success depends on the
continued viability and financial stability of these customers, as well as
continued demand by consumers and these customers for our products. The OEM,
distribution and reseller industries have been historically characterized by
rapid change, including periods of widespread financial difficulties and
consolidations, and the emergence of alternative distribution channels. Our
distributor and reseller customers generally offer products of several different
companies, including products competitive with our products. Accordingly, there
is a risk that these distributors and resellers may give higher priority,
including greater retail shelf space, to products of other suppliers, which
would reduce demand for, and sales of, our products.
Our business is subject to general economic and political uncertainties in
the United States and globally, and in particular, retail consumer confidence
and market conditions in the PC peripherals industry. Lack of improvement or a
worsening in the economic and political conditions in the United States and
globally, or a worsening in the global economic slowdown, or terrorist acts or
acts of war (wherever located) that disrupt our business, or a continued
weakening of consumer confidence, may adversely impact our business, financial
condition or results of operations.
Product returns and effects of price protection that exceed our accruals
may significantly impact our financial results.
As a manufacturer of consumer products, we are exposed to the risk of
product returns, either through the exercise by customers of contractual return
rights or as a result of our assistance in balancing inventories of retailers
and distributors. In addition, we offer price protection to our distributors and
retailers. A portion of our net sales has in the past resulted and may in the
future result in increased inventory at our distributors and resellers, which
has led and could lead to reduced orders by these customers in future periods.
As a result, historical net sales may not be indicative of future net sales.
Overstocking by our distributors and retailers has in the past led and may in
the future lead to higher than normal returns. The short product life cycles of
certain of our products and the difficulty in predicting future sales increase
the risk that new product introductions, price reductions or other factors
affecting the computer industry would result in significant product returns. In
addition, we continuously introduce product upgrades, enhancements and improved
packaging, and thus may experience higher rates of return on our older products.
We recognize revenue upon transfer of title and risk of loss, which is
generally when products are shipped. Because we are exposed to the risk of
product returns and price protection, we provide allowances for these risks upon
recognition of revenue. Amounts provided for returns and price protection are
estimated based upon historical and anticipated experience and our assessment of
inventory in the channels. We review and adjust the amounts provided
periodically, based upon changes in historical and anticipated experience and
channel inventory. Although we believe that we have provided adequate amounts
for projected returns, from time to time we have experienced return levels in
excess of amounts provided and our amounts provided may not be sufficient for
actual returns in future periods. In addition, our accruals for price protection
may not be sufficient in future periods, and any future price changes may have a
significant adverse effect on our results of operations.
To continue to be successful, we will need to effectively respond to future
changes in technology and customer demands.
17
The market for our products is characterized by rapidly changing technology
and frequent new product introductions. Our success will depend to a substantial
degree on our ability to develop and introduce in a timely manner new products
and enhancements that meet changing customer requirements and emerging industry
standards. The development of new, technologically advanced products and
enhancements is a complex and uncertain process requiring high levels of
innovation as well as the anticipation of technology and market trends. We may
not be able to identify, develop, manufacture, market, sell, or support new
products and enhancements successfully, new products or enhancements may not
achieve market acceptance, or we may not be able to respond effectively to
technology changes, emerging industry standards or product announcements by
competitors. In addition, some of our competitors may have patents or
intellectual property rights that prevent us from being able to respond
effectively to new or emerging technologies and changes in customer
requirements. New product announcements by us could cause our customers to defer
purchases of existing products or cause distributors to request price protection
credits or stock rotations. Any of these events could materially harm our
business, financial condition and results of operations.
A significant amount of our manufacturing operations are located in China,
which exposes us to risks associated with doing significant business in that
country.
A significant amount of our manufacturing operations are located in China.
These operations could be severely impacted by economic or political instability
in China, including instability which may occur in connection with a change in
leadership in China, by evolving interpretation and enforcement of legal
standards, by strains on Chinese transportation, communications, trade and other
infrastructures related to the rapid industrialization of an agrarian economy,
by conflicts, embargoes, increased tensions or escalation of hostilities between
China and Taiwan, and by other trade customs and practices that are dissimilar
to those in the United States. Interpretation and enforcement of China's laws
and regulations continue to evolve and we expect differences in interpretation
and enforcement to continue in the foreseeable future. In addition, our Chinese
employees in our Suzhou, China facilities are subject to a number of government
regulations regarding employment practices and customs that are fundamentally
different in many respects from those in the United States and Europe. The
Suzhou facilities are managed by several of our key Taiwanese expatriate
employees. The loss of these employees, either voluntarily or because of a
deterioration in relations between China and Taiwan, may diminish the
productivity and effectiveness of our Suzhou manufacturing operations.
The effect of business, legal and political risks associated with foreign
countries and markets may negatively affect us.
We transact a substantial portion of our business outside the United
States. There are risks inherent in doing business in international markets,
including:
. tariffs, customs, duties and other trade barriers;
. difficulties in staffing and managing foreign operations;
. environmental and other related regulations;
. political instability, expropriation, nationalization and other
political risks;
. foreign exchange controls; and
. delays from customs brokers or government agencies.
Any of these risks could adversely impact the success of our international
operations and, in turn, have a material adverse effect on our business,
financial condition and results of operations.
Competition
Our business is characterized by intense competition, a trend of declining
average selling prices in OEM and performance enhancements and new features of
competing retail products. We expect that competition will continue to be
intense and may increase from current or future competitors.
18
We compete primarily with Altec Lansing, Creative Labs, Ezonics
Corporation, Guillemot Corporation, Intel, Interact Multimedia,
Kensington/Advanced Gravis, KYE/Mouse Systems, Memorex, Microsoft, Mitsumi,
Philips, Plantronics, Primax, Saitek Industries Ltd., Telex Communications and
Xirlink Inc. Many of our current and potential competitors have longer operating
histories and significantly greater financial, technical, sales, marketing and
other resources, as well as greater name recognition and larger customer bases,
than us.
Our main competitor in the market for pointing devices, gaming devices and
keyboards is Microsoft. In late, 1999, Microsoft began shipping two new mouse
products that were based on an optical sensing technology. We responded to
Microsoft with optical offerings in the summer of 2000. In addition, we
continued to focus on the advantages of our cordless offerings to the end user.
Microsoft entered into the cordless mouse category in the fall of 2000. In early
2001, we began shipping cordless optical mice. Microsoft responded with a
cordless optical mouse with an enhanced sensor in the fall of 2001. In the same
quarter, we introduced a dual sensor mouse and a value priced cordless optical
mouse. We expect Microsoft to add a cordless keyboard to their line in the near
future. We are also starting to see increased competition for cordless desktops
from less established brands, in the lower price segments.
Microsoft is also a leading producer of operating systems and applications
with which our pointing and gaming devices are designed to operate. As a result
of their position, Microsoft may be able to make improvements in the
functionality of its pointing and gaming devices to correspond with ongoing
modifications and enhancements to its operating systems and software
applications before we are able to make such improvements. This ability could
provide Microsoft with significant lead time advantages for product development.
In addition, Microsoft may be able to offer pricing advantages on bundled
hardware and software products that we are not able to offer.
Our main competitor in the market for PC video cameras is Intel. In October
2001, Intel announced its intention to exit the market for PC video cameras and
other hardware peripherals. If Intel decides to liquidate their remaining
product or channel inventory at lower prices, this could have a short term
negative impact our sales and margins on competing products.
Competitors in the market for audio devices vary by product line. In the PC
speaker business, competitors include Altec Lansing and Creative Labs. In the
headset, microphone, and telephony markets, competitors include Altec Lansing,
Plantronics and Telex Communications. For the personal audio market, the primary
competitor is Sony. This market is intensely competitive and market leadership
changes frequently as a result of new products, designs and pricing.
We expect to continue to experience competition and price pressures in the
OEM mouse business, and performance enhancements of competing products in
retail. This could result in decreased revenue, decreased gross margin, loss of
market share and lack of acceptance of our products. In the event of significant
price competition in the market for our products, we would be required to
decrease costs at least proportionately to any price decreases in order to
maintain our existing margin levels and would be at a significant disadvantage
compared to competitors with substantially greater resources, which could more
readily withstand an extended period of downward pricing pressure. We may not be
able to compete successfully in the future, and competition may significantly
harm our business, financial condition and results of operations.
Our effective tax rates may increase in the future, which would adversely
affect our results.
We operate in multiple jurisdictions and our profits are taxed pursuant to
the tax laws of these jurisdictions. If our effective tax rate increases in a
future period, our results in general will be adversely impacted, and
specifically our net income and earnings per ADS and per registered share, will
decrease. Our effective tax rate may be affected by changes in or
interpretations of tax laws in any given jurisdiction, utilization of net
operating losses and tax credit carry forwards, changes in geographical
allocation of income and expense, and changes in our management's assessment of
matters such as the realizability of deferred tax assets. In the past, we have
experienced substantial fluctuations in our effective income tax rate. Our
effective income tax rates in a given fiscal year reflect a variety of factors
that may not be present in the succeeding fiscal year or years. As a result, our
effective income tax rate may increase in future periods.
19
We may be unable to protect our proprietary rights. Unauthorized use of our
technology may result in development of products that compete with our products.
Our future success depends in part on our proprietary technology, technical
know-how and other intellectual property. We rely on a combination of patent,
trade secret, copyright, trademark and other intellectual property laws, and
confidentiality procedures and contractual provisions such as nondisclosure
agreements and licenses, to protect our intellectual property.
We hold various United States patents, together with corresponding patents
from other countries, relating to some of the same inventions. We also have
various United States patent applications pending, together with corresponding
applications from other countries relating to some of the same inventions.
Despite these patents and patent applications, it is possible that any patent
owned by us will be invalidated, deemed unenforceable, circumvented or
challenged, that the rights granted thereunder will not provide competitive
advantages to us, or that any of our pending or future patent applications will
not be issued with claims of the scope sought by us. In addition, other
intellectual property laws, or our confidentiality procedures and contractual
provisions, may not adequately protect our intellectual property. Also, our
competitors may independently develop similar technology, duplicate our
products, or design around our patents or other intellectual property rights. In
addition, unauthorized parties may attempt to copy aspects of our products or to
obtain and use information that we regard as proprietary. Any of these events
could significantly damage our business, financial condition and results of
operations.
We also rely on certain technologies that we license or acquire from
others. We may find it necessary or desirable in the future to obtain licenses
or other rights relating to one or more of our products or to current or future
technologies. These licenses or other rights may not be available on
commercially reasonable terms, or at all.
Pending lawsuits could adversely impact us.
There has been substantial litigation in the technology industry regarding
rights to intellectual property, and we are subject to the risk of claims
against us for alleged infringement of the intellectual property rights of
others. Through our U.S. subsidiary, we are currently involved in several
pending lawsuits with respect to, among other things, patent infringement claims
by third parties. We believe that all of these pending lawsuits are without
merit and intend to defend against them vigorously. However, the defense of any
of these actions may not be successful. Any judgment in or settlement of any of
these lawsuits may have a material adverse impact on our business, financial
condition and results of operations.
Pending and future litigation involving us, whether as plaintiff or
defendant, regardless of outcome, may result in significant diversion of effort
by our technical and management personnel, result in costly litigation, cause
product shipment delays or require us to enter into royalty or licensing
agreements, any of which could have a material adverse effect on our business,
financial condition and results of operations. Royalty or licensing agreements,
if required, may not be available on terms acceptable to us, or at all. In
addition, our efforts to protect our intellectual property through litigation
may not prevent duplication of our technology or products.
We depend on original design manufacturers and subcontract manufacturers
which may not have adequate capacity to fulfill our needs and which may not meet
our quality and delivery objectives.
We rely on original design manufacturers to supply a portion of our
keyboard and gamepad product lines, and a portion of our mice and entertainment
products are sourced from subcontract manufacturers. Our reliance on original
design manufacturers and subcontract manufacturers involves significant risks,
including reduced control over quality and delivery schedules, the potential
lack of adequate capacity and discontinuance or phase-out of the contractors'
assembly processes. These manufacturers and subcontractors may also choose to
discontinue building our products for a variety of reasons. Since the majority
of these manufacturers and subcontractors are located in Asia, we are subject to
risks generally associated with foreign suppliers, including political and
economic uncertainty, currency exchange fluctuations, trade restrictions and
changes in tariff rates. Consequently, we may experience delay in the
timeliness, quality and adequacy in product deliveries, any of which may have an
adverse impact on our results of operations.
Certain key components used in the manufacture of our products, as well as
certain products, are currently purchased from single or limited sources that
specialize in such components or products. At present, single-
20
sourced components include certain of our ASICs, sensors, certain other
integrated circuits and components, and balls used in certain of our trackballs.
We generally do not have long-term agreements with our single or limited sources
of supply. Lead times for materials and components ordered by us or our contract
manufacturers can vary significantly and depend on factors such as the specific
supplier, contract terms and demand for a component at a given time. From time
to time we have experienced supply shortages and fluctuation in component
prices. Shortages or interruptions in the supply of components or subcontracted
products, or our inability to procure these components or products from
alternate sources at acceptable prices in a timely manner, could delay shipment
of our products or increase our production costs, which could decrease our
revenue or gross margin. Delays could also have a material adverse effect upon
our business, financial condition and results of operations.
We may not be successful in integrating the business and operations of the
Labtec acquisition.
We acquired the business, products and technologies of Labtec with a view
to combine them with our existing business and customer base to achieve
synergistic benefits. The Labtec acquisition offers us the platform to enter new
markets in personal audio and telephony products and it strengthens our existing
offering in the computer speaker product line. To realize the benefits of this
acquisition we must successfully integrate the products offering, research and
development efforts, sourcing and supply chain as well as sales and marketing
activities. The difficulties of such integration may be complicated by our
separate organizational structures, operation models, geographical locations and
corporate cultures. The success of the acquisition may also depend on factors
not entirely within our control, such as market acceptance of the combined
product line. The inability to successfully integrate our acquisition of Labtec
may harm our business and impair investor confidence in our company.
We may be required to recognize additional non-cash charges against
earnings if our management were to determine in the future that the amount of
goodwill arising from the Labtec acquisition was impaired.
If our management were to determine in the future that the amount of
goodwill was impaired, we would be required to recognize non-cash charges that
would reduce our earnings.
We depend on a few key personnel to manage and operate us.
Our success depends to a significant degree on the continued contributions
of our senior management and other key design, development, manufacturing,
marketing and sales personnel. The loss of any of these personnel could harm our
business. Assimilation and retention of personnel may be made more difficult by
the fact that our management and other key personnel are dispersed throughout
various locations worldwide, thus requiring the coordination of organizations
separated by geography and time zone and the integration of personnel with
disparate business backgrounds, cultures and languages. In addition, we believe
that our future success will depend on our ability to attract and retain highly
skilled managerial, engineering, operations, marketing and sales personnel, for
whom competition is intense. We may not be successful in attracting and
retaining these personnel, and the failure to attract and retain key personnel
could harm our business.
21
LOGITECH INTERNATIONAL S.A.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk
Market risk represents the potential for loss due to adverse changes in the
fair value of financial instruments. As a global concern, the Company faces
exposure to adverse movements in foreign currency exchange rates and interest
rates. These exposures may change over time as business practices evolve and
could have a material adverse impact on the Company's financial results.
Foreign Currency Exchange Rates
Currently, the Company's primary exposures relate to non-U.S. dollar
denominated sales in Europe and Asia and non-dollar denominated operating
expenses, inventory costs and long term debt in Europe and Asia. The principal
currencies creating foreign exchange rate risk for the Company are the Euro,
Taiwan Dollar, Swiss Franc and Japanese Yen.
For the three months ended September 30, 2001 and 2000, approximately 50%
and 44%, respectively, of the Company's sales were denominated in non-U.S.
currencies. With the exception of its manufacturing subsidiaries in Ireland and
China, which use the U.S. dollar as their functional currency, the Company
primarily uses the local currencies of its foreign subsidiaries as the
functional currency. Accordingly, unrealized foreign currency gains or losses
resulting from the translation of net assets denominated in foreign currencies
to the U.S. dollar are accumulated in the cumulative translation adjustment
component of other comprehensive income in shareholders' equity.
On June 8, 2001 the Company sold CHF 170 million (US $95.6 million) Swiss
Franc denominated 1% Convertible Bonds which mature in five years. Although the
Company is exposed to foreign exchange risks on this long-term obligation, the
Swiss Franc liability serves to partially offset the effect of exchange rate
fluctuations on assets held in European currencies. Unrealized gains or losses
resulting from translation of the bonds to the U.S. dollar are accumulated in
the cumulative translation adjustment component of other comprehensive loss in
shareholders' equity. If the U.S. dollar strengthened by 10% in comparison to
the Swiss Franc, an approximate $9.6 million increase would have occurred in the
cumulative translation adjustment component of shareholders' equity. If the U.S.
dollar weakened by 10% in comparison to the Swiss Franc, an approximate $11.7
million decrease would have occurred in the cumulative translation adjustment
component of shareholders' equity.
From time to time, certain subsidiaries enter into forward exchange
contracts to hedge inventory purchase exposures denominated in U.S. dollars.
These forward exchange contracts are denominated in the same currency as the
underlying transactions. Logitech does not use derivative financial instruments
for trading or speculative purposes. At September 30, 2001, the notional amount
of forward foreign exchange contracts outstanding was $12 million. These forward
contracts generally mature within three months. As of September 30, 2001,
unrealized gains on the fair value of outstanding foreign exchange hedging
contracts were $0.1 million. If there is a 10% increase in the rate at which a
foreign currency is exchanged for U.S. dollars, an approximate $1.1 million
unrealized loss in the Company's forward foreign exchange contract portfolio
would have occurred. If there is a 10% decrease in the rate at which a foreign
currency is exchanged for U.S. dollars, an approximate $1.3 million unrealized
gain in the Company's forward foreign exchange contract portfolio would have
occurred.
The Company estimates that if the U.S. dollar had appreciated by an
additional 10% as compared to the functional currencies used by its foreign
subsidiaries, net income would have been adversely impacted by approximately
$5.7 million and $5.9 million for the six months ended September 30, 2001 and
2000.
Interest Rates
In order to limit the effect of interest rate changes on earnings and cash
flows, the Company's long term debt portfolio is composed of fixed rate debt. A
change in interest rates, therefore, has no impact on interest expense or cash
flows.
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Changes in interest rates could impact the Company's anticipated interest
income on its cash equivalents and interest expense on variable rate short-term
debt. The Company prepared sensitivity analyses of its interest rate exposures
to assess the impact of hypothetical changes in interest rates. Based on the
results of these analyses, a 100 basis point decrease or increase in interest
rates from March 31, 2001 and the September 30, 2001 quarter end rates would not
have a material effect on the Company's results of operations or cash flows.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
Logitech International S.A.
By: /s/ Guerrino De Luca
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Guerrino De Luca
President and Chief Executive Officer
By: /s/ Kristen M. Onken
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Kristen M. Onken
Chief Finance Officer,
Chief Accounting Officer,
and U.S. Representative
November 14, 2001
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