File Number: 0-29174
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 December 31, 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)
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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 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 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 (unaudited):
Consolidated Balance Sheets at December 31, 2001 and
March 31, 2001 .................................................... 3
Consolidated Statements of Income for the three and nine months ended
December 31, 2001 and 2000 ........................................ 4
Consolidated Statements of Cash Flows for the nine months ended
December 31, 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 ............................................................... 23
2
LOGITECH INTERNATIONAL S.A.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31, March 31,
2001 2001
-------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 85,389 $ 44,142
Accounts receivable ............................................ 205,913 144,781
Inventories .................................................... 109,244 111,612
Other current assets ........................................... 40,563 29,558
-------------- -------------
Total current assets ...................................... 441,109 330,093
Investments ......................................................... 11,013 16,649
Property, plant and equipment ....................................... 33,451 38,160
Intangible assets:
Goodwill ....................................................... 95,197 95,197
Other intangible assets ........................................ 16,199 18,726
Other assets ........................................................ 17,682 6,291
-------------- -------------
Total assets .............................................. $ 614,651 $ 505,116
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt ................................................ $ 5,850 $ 62,986
Accounts payable ............................................... 126,477 91,267
Accrued liabilities ............................................ 75,434 59,054
-------------- -------------
Total current liabilities ................................. 207,761 213,307
Convertible and long-term debt ...................................... 104,518 26,908
Other liabilities ................................................... 6,288 8,847
-------------- -------------
Total liabilities ......................................... 318,567 249,062
-------------- -------------
Shareholders' equity:
Registered shares, par value CHF 1 - 53,934,535 authorized,
9,165,465 conditionally authorized, 47,901,655 issued and
outstanding at December 31, 2001; 53,176,490 authorized,
9,923,510 conditionally authorized, 44,418,610 issued and
outstanding at March 31, 2001 ............................... 33,369 31,396
Additional paid-in capital ..................................... 127,452 118,740
Less registered shares in treasury, at cost, 2,790,863 at
December 31, 2001 and 164,750 at March 31, 2001 ............. (16,235) (627)
Retained earnings .............................................. 182,868 129,435
Accumulated other comprehensive loss ........................... (31,370) (22,890)
-------------- -------------
Total shareholders' equity ................................ 296,084 256,054
-------------- -------------
Total liabilities and shareholders' equity ................ $ 614,651 $ 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 Nine months ended
December 31, December 31,
-------------------------- ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(unaudited) (unaudited)
Net sales ................................... $ 314,174 $ 231,982 $ 719,870 $ 563,963
Cost of goods sold .......................... 195,237 151,673 459,523 372,183
---------- ---------- ---------- ----------
Gross profit ................................ 118,937 80,309 260,347 191,780
Operating expenses:
Marketing and selling .................... 54,294 36,907 130,190 98,172
Research and development ................. 12,353 9,456 33,899 26,760
General and administrative ............... 10,036 8,412 27,127 25,274
---------- ---------- ---------- ----------
Total operating expenses .................... 76,683 54,775 191,216 150,206
---------- ---------- ---------- ----------
Operating income ............................ 42,254 25,534 69,131 41,574
Interest expense, net ....................... (553) (396) (1,790) (359)
Other income (expense), net ................. (236) (263) (549) 1,602
---------- ---------- ---------- ----------
Income before income taxes .................. 41,465 24,875 66,792 42,817
Provision for income taxes .................. 8,292 4,975 13,359 8,563
---------- ---------- ---------- ----------
Net income .................................. $ 33,173 $ 19,900 $ 53,433 $ 34,254
========== ========== ========== ==========
Net income per share and ADS:
Basic .................................... $ .74 $ .47 $ 1.20 $ .82
Diluted .................................. $ .66 $ .42 $ 1.09 $ .73
Shares used to compute net income per
share and ADS:
Basic .................................... 44,782,059 42,425,440 44,558,939 42,016,030
Diluted .................................. 51,291,165 46,984,030 50,358,990 46,973,400
The accompanying notes are an integral part of these
consolidated financial statements.
4
LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine months ended December 31,
------------------------------
2001 2001
-------------- -------------
(unaudited)
Cash flows from operating activities:
Net income ....................................................... $ 53,433 $ 34,254
Non-cash items included in net income:
Depreciation ................................................... 21,417 14,630
Amortization of goodwill ....................................... -- 597
Amortization of other intangible assets ........................ 2,745 1,817
Write-off of investments ....................................... 1,220 --
Gain on sales of investments ................................... (859) (442)
Equity in net losses of affiliated companies ................... 2,026 447
Gain on disposal of property, plant and equipment .............. -- (1,922)
Accretion of interest on convertible bond ...................... 568 --
Other .......................................................... 214 430
Changes in current assets and liabilities:
Accounts receivable ............................................ (62,511) (56,744)
Inventories .................................................... 3,254 (55,139)
Other assets ................................................... (14,093) (3,709)
Accounts payable ............................................... 34,928 30,616
Accrued liabilities ............................................ 15,117 12,754
-------------- -------------
Net cash provided by (used in) operating activities ......... 57,459 (22,411)
-------------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment ....................... (16,635) (14,470)
Sales of property, plant and equipment ........................... -- 3,637
Acquisitions and investments ..................................... (6,303) (5,616)
Sales of investments ............................................. 3,233 526
-------------- -------------
Net cash used in investing activities ....................... (19,705) (15,923)
-------------- -------------
Cash flows from financing activities:
Net repayment of short-term debt ................................. (54,621) --
Repayment of long-term debt ...................................... (27,144) --
Borrowing of convertible and long-term debt, net of
issuance costs .................................................. 93,197 366
Purchase of treasury shares ...................................... (15,043) (1,064)
Proceeds from sale of treasury shares ............................ 944 935
Proceeds from issuance of registered shares ...................... 8,180 6,671
-------------- -------------
Net cash provided by financing activities ................... 5,513 6,908
-------------- -------------
Effect of exchange rate changes on cash and cash equivalents ........ (2,020) (2,734)
-------------- -------------
Net increase (decrease) in cash and cash equivalents ................ 41,247 (34,160)
Cash and cash equivalents at beginning of period .................... 44,142 49,426
-------------- -------------
Cash and cash equivalents at end of period .......................... $ 85,389 $ 15,266
============== =============
Supplemental cash flow information:
Interest paid .................................................... $ 1,658 $ 117
Income taxes paid ................................................ $ 2,481 $ 356
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; PC speakers,
headsets and microphones; and 3D controllers. 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 three and nine months
ended December 31, 2001, the conversion of convertible debt was included in the
registered share equivalents.
Note 5 -- Acquisition of Labtec:
In March 2001, the Company purchased substantially all outstanding shares
of Labtec Inc. for $76.3 million in cash and stock, including transaction costs.
In April 2001, the Company repaid $46 million of Labtec's short and long-term
debt. 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.
6
In connection with the acquisition, the Company recorded $91.9 million in
goodwill and $11.0 million in other intangible assets. In fiscal 2002, the
Company purchased the remaining outstanding shares of Labtec for $2.6 million in
cash and stock.
Note 6 -- Balance Sheet Components:
December 31, March 31,
2001 2001
---------------- ------------------
(in thousands)
Accounts receivable:
Accounts receivable .............................. $ 241,931 $ 163,240
Allowance for doubtful accounts .................. (7,444) (5,402)
Allowance for returns and other .................. (28,574) (13,057)
---------------- ------------------
$ 205,913 $ 144,781
================ ==================
Inventories:
Raw materials .................................... $ 16,812 $ 26,002
Work-in-process .................................. 150 225
Finished goods ................................... 92,282 85,385
---------------- ------------------
$ 109,244 $ 111,612
================ ==================
Other current assets:
Tax and VAT refunds receivables................... $ 19,450 $ 11,811
Deferred taxes.................................... 7,000 7,466
Prepaid expenses.................................. 7,489 5,296
Other current..................................... 6,624 4,985
---------------- ------------------
$ 40,563.00 $ 29,558.00
================ ==================
Other assets:
Additional Labtec acquisition costs............... $ 7,096 $ --
Deferred taxes.................................... 5,387 4,953
Deposits.......................................... 2,738 1,079
Debt issuance costs............................... 2,406 --
Other............................................. 55 259
---------------- ------------------
$ 17,682 $ 6,291
================ ==================
Note 7 -- Investment in 3Dconnexion:
In June 1998, the Company acquired 49% of the outstanding shares of
3Dconnexion, the German-based provider of Logitech's SpaceMouse and Magellan 3D
Controller. In September 2001, the Company acquired an additional 2% of the
outstanding shares and a controlling interest in 3Dconnexion. The Company will
purchase the remaining outstanding shares within the next eighteen months, using
Logitech stock. Management does not expect the number of Logitech shares to be
issued to be material to the number of shares outstanding.
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.
3Dconnexion's assets and liabilities have been included in the Company's
consolidated financial statements since September 30, 2001, and its results of
operations have been included since October 1, 2001. The impact of 3Dconnexion's
assets, liabilities and results of operations were not material to the Company's
sales, results of operations, financial position or earnings per share.
7
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 December 31, 2001, the outstanding balance of the lease
obligation, and therefore the Company's guarantee, was $2.2 million. As of
December 31, 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 nine months ended December 31,
2001, the Company sold a partial interest in Immersion and recognized a gain of
$.9 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 December 31, 2001, Logitech owned approximately 2.0% of Immersion.
The cost of these securities was $2.2 million and the unrealized gain was $.7
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 as of April 1, 2001. Adoption of the new
standards resulted in not recognizing $1.5 million and $4.6 million in
amortization expense for the three and nine months ended December 31, 2001, that
would have been recognized had the old standards been in effect. The comparable
three and nine month periods last year included $.2 million and $.7 million in
amortization expense under the old standards.
The following table presents net income on a comparable basis, after
adjustment for goodwill amortization:
Three months ended Nine months ended
December 31, December 31,
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
(in thousands, except per share amounts)
Net income:
As reported................ $ 33,173 $ 19,900 $ 53,433 $ 34,254
As adjusted................ $ 33,173 $ 20,145 $ 53,433 $ 35,007
Basic earnings per share:
As reported................ $ .74 $ .47 $ 1.20 $ .82
As adjusted................ $ .74 $ .47 $ 1.20 $ .83
Diluted earnings per share:
As reported................ $ .66 $ .42 $ 1.09 $ .73
As adjusted................ $ .66 $ .43 $ 1.09 $ .75
8
Acquired other intangible assets subject to amortization were as follows:
December 31, 2001 March 31, 2001
------------------------------------ ------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amounts Amortization Amounts Amortization
---------------- ------------------ ----------------- -----------------
(in thousands)
Trademark ................... $ 15,198 $ 4,543 $ 14,975 $ 3,155
Existing technology ......... 10,423 4,879 10,423 3,600
Other ....................... 500 500 500 417
---------------- ------------------ ----------------- -----------------
$ 26,121 $ 9,922 $ 25,898 $ 7,172
================ ================== ================= =================
For the three months ended December 31, 2001 and 2000, amortization expense
for other intangible assets was $.9 million and $.4 million. For the nine months
ended December 31, 2001 and 2000, amortization expense for other intangible
assets was $2.7 million and $1.8 million. The estimated future annual
amortization expense for other intangible assets is $3.6 million, $3.6 million,
$3.6 million, $1.9 million and $1.1 million for the years 2003, 2004, 2005, 2006
and 2007.
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. As the
Company has fully integrated the acquired companies into Logitech following the
consummation of the acquisitions, discrete financial information for the
acquisitions is no longer available. As a result, the Company has completed the
impairment test on a consolidated basis.
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, 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. The Company accounts for the redemption
premium over the term of the loan by recording interest expense and increasing
the carrying value of the loan. As of December 31, 2001, the carrying amount of
the convertible bonds was CHF 170,954,000 (US $101,599,000) and the fair value
based upon quoted market value was $113,411,000.
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
unrealized gains and losses in hedging activity. For the three months ended
December 31, 2001 and 2000, comprehensive income was $36.1 million and $12.2
million. For the nine months ended December 31, 2001 and 2000, comprehensive
income was $45.0 million and $34.1 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
9
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 nine months of fiscal 2002.
There were no hedging contracts outstanding at December 31, 2001 and March
31, 2001. Realized net gains and losses classified to cost of goods sold during
the three months ended December 31, 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.
In the normal course of business, 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; PC speakers, headsets and microphones;
and 3D controllers. 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 for $76.3 million in cash and stock, including transaction costs. In
April 2001, the Company repaid $46 million of Labtec's short and long-term debt.
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. In fiscal year 2002, 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, 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 $1.5 and $4.6 million in amortization
expense for the three and nine months ended December 31, 2001, that would have
been recognized had the old standards been in effect. The same periods last year
included $.2 and $.7 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 goodwill and other intangible assets are not impaired. As the
Company has fully integrated the acquired companies into Logitech following the
consummation of the acquisitions, discrete financial information for the
acquisitions is no longer available. As a result, the Company has completed the
impairment test on a consolidated basis.
Recent Accounting Pronouncements
In April 2001, the Financial Accounting Standards Board's ("FASB") Emerging
Issues Task Force released Issue No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products"
("EITF 00-25"). EITF 00-25 requires consideration from a vendor to a reseller to
be classified in the vendor's income statement as a reduction of revenue unless
there is sufficient evidence of the fair value of the separate benefits received
from the reseller. EITF 00-25 is effective for annual or interim financial
statements for periods beginning after December 15, 2001. Upon application of
the provisions of EITF 00-25, financial statements
11
for prior periods presented will be reclassified to comply with these
provisions. The Company typically provides funds for cooperative advertising,
marketing development, and similar purposes to its distributors and retailers,
which it currently classifies as sales and marketing expenses. The
reclassifications will decrease net sales and marketing and selling expenses by
the same amount. The reclassifications will not impact operating income or net
income.
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 Nine months ended
December 31, December 31,
------------------------ -----------------------
2001 2000 2001 2000
---------- ----------- ---------- ----------
Net sales ............................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold .................... 62.1 65.4 63.8 66.0
---------- ----------- ---------- ----------
Gross profit .......................... 37.9 34.6 36.2 34.0
Operating expenses:
Marketing and selling .............. 17.3 15.9 18.1 17.4
Research and development ........... 3.9 4.1 4.7 4.7
General and administrative ......... 3.2 3.6 3.8 4.5
---------- ----------- ---------- ----------
Total operating expenses .............. 24.4 23.6 26.6 26.6
---------- ----------- ---------- ----------
Operating income ...................... 13.5 11.0 9.6 7.4
Interest expense, net ................. (.2) (.2) (.2) (.1)
Other income (expense), net ........... (.1) (.1) (.1) .3
---------- ----------- ---------- ----------
Income before income taxes ............ 13.2 10.7 9.3 7.6
Provision for income taxes ............ 2.6 2.1 1.9 1.5
---------- ----------- ---------- ----------
Net income ............................ 10.6% 8.6% 7.4% 6.1%
========== =========== ========== ==========
Comparison of three months ended December 31, 2001 and 2000
Net Sales
Net sales for the three months ended December 31, 2001 increased $82
million or 35% to $314 million. If the Company had acquired Labtec at the
beginning of fiscal 2001 and Labtec sales were included in the quarter ended
December 31, 2000, the sales growth would have been $52 million or 20% for the
quarter ended December 31,2001. 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 from
the Company's desktop products (a keyboard and mouse sold together). With
approximately 50% of the Company's sales denominated in currencies other than
the US dollar, the Euro's strength compared to the same quarter last year
relative to the dollar, partially offset by the dollar's strength relative to
the Japanese Yen and Taiwanese Dollar, resulted in a net increase of reported
revenue by $3.4 million.
Retail sales grew by 45% over the same quarter last year. This growth was
shared across all product categories. Retail sales of the Company's pointing
devices, which include mice and trackballs, grew by 25% while unit volumes grew
by 20%. Driven by the Company's new cordless optical wheel mouse, cordless mice
were a significant source of this strong growth, with 147% growth in sales and
113% growth in unit volumes. Sales of desktop products grew by 49%, with the
majority of the growth in the Company's cordless desktop product. In the PC
video camera business, retail sales grew 32% and unit volumes increased by 50%
over the same quarter last year. Their growth was driven primarily by two new
dual-cam offerings which began shipping early this quarter. Sales of interactive
entertainment products grew by 20% while unit volumes declined by 16%. This unit
volume decrease reflects volume decreases in sales of joysticks and gamepads
which were offset by the strong sales of the higher value GT Force(TM) Steering
Wheel for PlayStation(R) 2. The Company's newly acquired audio products,
including a full range
12
of PC headsets, speakers and headphones, added ten percentage points of absolute
growth to retail sales during the quarter.
OEM sales declined by 14% compared to the same quarter last year,
principally due to the significant sales of PC video cameras in the third
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 in fiscal 2002 compared to fiscal 2001.
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 48% to $119
million, due primarily to significantly higher sales volume.
Gross margin (gross profit as a percentage of net sales) increased from 35%
to 38%. This increase reflects increased product margins in retail pointing
devices and video, 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 40%, from $55 million to $77 million. As
a percentage of net sales, operating expenses remained consistent at 24%. 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
$1.6 million for the three months ended December 31, 2001, but decreased as a
percentage of net sales.
Interest Expense, Net
Net interest expense was $.6 million for the three months ended December
31, 2001 compared to $.4 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 December 31, 2001.
Other Income (Expense), Net
Other expense was $.2 million for the three months ended December 31, 2001,
compared to $.3 million for the same period last year. Other expense for the
current quarter was primarily due to the $1.2 million write-off of an investment
and $.7 million of losses recorded for investments accounted for under the
equity method, offset by the $.3 million gain on the sale of an investment and
net currency exchange gains of $1.2 million. Other expense for the quarter ended
December 31, 2000 related primarily to net 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 December
31, 2001 was $8 million, compared to $5 million for the same period last year.
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.
13
Comparison of nine months ended December 31, 2001 and 2000
Net Sales
Net sales for the nine months ended December 31, 2001 increased 28% to $720
million. If the Company had acquired Labtec at the beginning of fiscal 2001 and
Labtec sales were included in the nine months ended December 31, 2000, the sales
growth would have been $78 million or 12% for the nine months ended December
31,2001. 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 44%. This growth was shared across all product
categories. Sales of the Company's retail pointing devices, which include mice
and trackballs, grew by 29% while unit volumes grew by 23%. The Company's
cordless optical mice drove this growth. Sales of desktop products increased by
36% over the same period last year. Sales growth is primarily from the cordless
desktop line. In our interactive entertainment business, retail sales grew by
35% while unit volume decreased 11%. Strong sales of the GT Force(TM) steering
wheel for PlayStation(R) 2 drove the significant sales growth. The unit volume
decreases reflects volume decreases in sales of joysticks and gamepads which
were offset by the strong sales of the higher value GT Force(TM) steering wheel.
The Company's newly acquired audio products added eleven percentage points of
absolute growth to retail sales during the nine months ended December 31, 2001.
OEM sales decreased by 26% compared to the same period last year,
principally due to the significant sales of PC video cameras in the second and
third quarters of fiscal 2001, as well as sluggish sales of new PCs in fiscal
2002.
Gross Profit
Gross profit increased 36% to $260 million in the nine months ended
December 31, 2001. Gross profit as a percentage of net sales increased from 34%
to 36%. 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 27%, from $150 million to $191 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 remained flat at 27% for the nine months ended December 31, 2001.
Interest Expense, Net
Interest expense for the nine months ended December 31, 2001 was $1.8
million, compared to $.4 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 $.5 million for the nine months ended December 31, 2001,
compared to other income of $1.6 million last year. Other expense this year
includes the $1.2 million write-off of an investment and $2.1 million of losses
recorded for investments accounted for under the equity method, partially offset
by the $.9 million gain on the sale of an investment, $.5 million of proceeds
from a property loss insurance claim, and $1.1 million of net currency exchange
gains. Other income last year was primarily due to gains of $1.9 million
recognized $.4 million from the sale of a building and from the sale of shares
in an investment, partially offset by $.6 million of losses recorded for
investments accounted for under the equity method.
Provision for Income Taxes
The provision for income taxes for the nine months ended December 31, 2001
and 2000 represented a 20% effective tax rate.
14
Liquidity and Capital Resources
Cash Balances, Available Borrowings, and Capital Resources
At December 31, 2001, net working capital was $233 million, compared to
$117 million at March 31, 2001. Cash and cash equivalents totaled $85 million,
an increase of $41 million from March 31, 2001. The increase in cash was due to
profitable operations and effective management of receivables, inventory and
payables. 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
$62 million as of December 31, 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 December 31, 2001, $57 million was
available under these facilities.
Cash Flow from Operating Activities
The Company's operating activities provided net cash of $57.5 million for
the nine months ended December 31, 2001, and used cash of $22.4 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 December 31, 2001. In the same period last year,
inventory levels and the use of cash for inventory increased significantly, 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 $19.7 million and $15.9
million for the nine months ended December 31, 2001 and 2000. During the nine
months ended December 31, 2001, cash of $16.6 million was used for purchases of
property and equipment and $6.3 million was used for additional acquisition
costs related to the purchase of Labtec and to acquire a non-marketable equity
investment. These expenditures were partially offset by cash proceeds of $3.2
million from the sale of available-for-sale securities. Included in the first
nine 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 $14.5 million.
Cash Flow from Financing Activities
The Company's financing activities provided cash of $5.5 million and $6.9
million for the nine months ended December 31, 2001 and 2000. In April 2001, the
Company borrowed an additional $55 million under the bridge loan, bringing the
total bridge loan for the Labtec acquisition to $90 million. During the first
quarter of fiscal 2002, 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 $8.2 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 through October 2001, under a previously announced
registered share buyback program, the Company repurchased 628,704 Logitech
shares for $15.0 million in open market transactions. The Company has no further
obligations to repurchase Logitech shares.
Net cash provided by financing activities during the nine months ended
December 31, 2000 includes $7.6 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.
15
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 for capital expenditures, primarily for
manufacturing equipment and computer software, approximated $1.2 million at
December 31, 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 December
31, 2001, the outstanding balance of the lease obligation, and therefore the
Company's guarantee, was $2.2 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.
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, the sufficiency
of our cash and cash equivalents, cash from operations and available borrowings
under bank lines of credit to fund cash needs, and 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:
o the volume and timing of orders received during the quarter;
o the maturation of product lines;
o the timing of new product introductions by us and our competitors and
their acceptance by the market;
o the impact of competition on our average selling prices and operating
expenses;
o our inventory levels or inventory levels in the distribution channels;
o changes in laws or regulations;
o fluctuations in exchange rates;
o changes in product or distribution channel mix; o price protection
charges;
o product returns from customers;
o deferrals of customer orders in anticipation of new products or
otherwise;
o changes in technologies and their acceptance by the market;
o the performance of our suppliers and third-party product
manufacturers;
o the rate of economic growth in our principal geographic markets; and
16
o deterioration of the financial strength of our larger customers.
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 a substantial portion 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 adjust expenses during
such quarter. Excess inventory may negatively impact cash flows and result in
charges associated with inventory write-offs. This 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.
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 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.
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.
17
To continue to be successful, we will need to effectively respond to future
changes in technology and customer demands.
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:
o tariffs, customs, duties and other trade barriers;
o difficulties in staffing and managing foreign operations;
o environmental and other related regulations;
o political instability, expropriation, nationalization and other
political risks;
o foreign exchange controls; and
o 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.
18
Our market is highly competitive and competition could harm our ability to
sell products and could reduce our market share.
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.
We compete primarily with Aiptek, Altec Lansing, Creative Labs, D-Link,
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. Microsoft also introduced a cordless desktop offering into the European
market in the late fall of 2001 which is expected to launch in the United States
in the winter of 2002. We are also starting to see increased competition for
cordless mice and 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. These markets are 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
19
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.
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 contract 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 and all of our speaker, PC voice access and telephony product are
manufactured by contract manufacturers. Our reliance on original design
manufacturers and contract 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 and other countries outside
the U.S., 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.
20
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-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 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.
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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 foreign exchange rate
risk 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 December 31, 2001 and 2000, approximately 50%
and 47%, respectively, of the Company's sales were denominated in non-U.S.
currencies. With the exception of its manufacturing subsidiary in 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 June 2006. 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 $9.2 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 $11.2
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 December 31, 2001, there were no forward
foreign exchange contracts outstanding.
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
$5.8 million and $3.1 million for the three months ended December 31, 2001 and
2000.
Interest Rates
The Company's long term debt is fixed rate. A change in interest rates,
therefore, has no impact on interest expense or cash flows.
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 December 31, 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
------------------------------------------
Guerrino De Luca
President and Chief Executive Officer
By: /s/ Kristen M. Onken
------------------------------------------
Kristen M. Onken
Chief Finance Officer,
Chief Accounting Officer,
and U.S. Representative
February 14, 2002
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