During the first half of 2001, sales outside of the U.S. represented 40 percent of total revenue compared to 34 percent of total revenue in the first half of 2000.
At June 30, 2001, the Company had backlog of approximately $18.5 million, compared to approximately $27.4 million at June 30, 2000 and $36.3 million at December 31, 2000. Certain illumination components were constrained during the fourth quarter of 2000, which increased backlog at December 31, 2000 over what it would have otherwise been. Given current supply and demand estimates, it is anticipated that a majority of the current backlog will turn over by the end of the third quarter of 2001.* However, should InFocus not receive components as forecasted, some of the backlog orders at June 30, 2001 may be canceled and therefore not result in revenue for InFocus. The stated backlog is not necessarily indicative of sales for any future period nor is a backlog any assurance that InFocus will realize a profit from filling the orders.
InFocus achieved gross margins of 26.9 percent in the first six months of 2001, with 26.0 percent achieved in the second quarter of 2001, compared to 29.2 percent in the first six months of 2000 and 27.7 percent in the second quarter of 2000. Gross margins for the six months ended June 30, 2000, excluding the Pixelworks license fee revenue, were 28.5 percent. The decreases in the gross margin percentages from the three and six month periods ended June 30, 2000 were primarily due to pricing actions in the value segment of the market in response to the weak Japanese Yen and overall excess polysilicon inventory levels in the market. The negative effect of these pricing actions were offset in part by favorable product mix and cost reductions.
During the second quarter of 2001, InFocus began a contract manufacturing arrangement with Flextronics, a Singapore based corporation. InFocus currently has one product being manufactured by Flextronics at its Malaysian manufacturing facility and anticipates transferring two additional product platforms to Flextronics in the third quarter of 2001. In addition to cost savings anticipated with this arrangement, InFocus anticipates gaining efficiencies at its internal manufacturing sites in the second half of 2001.*
Marketing and sales expense was $22.1 million and $44.7 million, respectively (11.9 percent and 11.5 percent of revenue, respectively), for the three and six month periods ended June 30, 2001, compared to $22.0 million and $43.8 million, respectively (9.9 percent and 10.1 percent of revenue, respectively), for the comparable periods of 2000. The increase in dollars spent in the first half of 2001 is associated with the launch of several new products, which was partially offset by cost control measures that were put in place in the second quarter of 2001. The increase as a percent of revenue is primarily a result of a lower revenue base.
Research and development expense was $9.1 million and $17.7 million, respectively (4.9 percent and 4.6 percent of revenue, respectively), for the three and six month periods ended June 30, 2001 compared to $8.8 million and $17.9 million, respectively (4.0 percent and 4.1 percent of revenue, respectively), for the comparable periods of 2000. The Company continues to invest in research and development, including the ramping of new product introductions, and our new wireless and Home Entertainment initiatives. The increases as a percentage of sales are primarily a result of lower sales in the first half of 2001 compared to the first half of 2000.
General and administrative expense was $6.5 million and $17.0 million, respectively (3.5 percent and 4.4 percent of revenue, respectively), for the three and six month periods ended June 30, 2001, compared to $7.6 million and $16.8 million, respectively (3.5 percent and 3.9 percent of revenue, respectively), for the comparable periods of 2000. The decrease for the second quarter of 2001 compared to the second quarter of 2000 was due to reductions in staffing and related expense control as well as decreased requirements for delinquent account charges. The increase for the first half of 2001 compared to the first half of 2000 was primarily a result of additional allowance for doubtful accounts in the first quarter of 2001.
Merger related costs of $7.8 million in the first six months of 2001 represent costs incurred with the consolidation of the Company’s global supply chain, including distribution, logistics and service operations, which are directly related to the Company’s business combination with Proxima ASA in June 2000. The charge was evenly split between employee-reduction costs, asset write-offs and advisory fees/other. The Company anticipates additional merger related charges in the second half of 2001 totaling approximately $4.0 million.*
In July 2001, the Company announced an additional related restructuring plan. The plan includes proposed actions to streamline the U.S. Sales and Marketing organization and increase the Company’s manufacturing outsourcing initiative with Flextronics. The Company believes charges relating to this plan will approximate $6.0 to $8.0 million and will be incurred in the second half of 2001.* As a restructuring plan was not finalized or approved as of June 30, 2001, there were no amounts expensed or accrued for in the six month period ended June 30, 2001. In total, InFocus anticipates incurring approximately $8.0 to $12.0 million of merger and related restructuring charges in the second half of 2001.* See also Note 5. Merger Related Charges.
Income from operations was $7.8 million and $16.6 million, respectively (4.2 percent and 4.3 percent of revenue, respectively), for the three and six month periods ended June 30, 2001, compared to $9.6 million and $35.1 million, respectively (4.3 percent and 8.1 percent of revenue, respectively) for the comparable periods of 2000. The decreases for the three and six month periods ended June 30, 2001 compared to the same periods for 2000 are a result of lower revenues and gross margin percentages, offset in part by lower operating expenses.
Without merger related costs, income from operations would have been $10.1 million and $24.4 million, respectively (5.4 percent and 6.3 percent of revenue, respectively) for the three and six month periods ended June 30, 2001, compared to $22.3 million and $47.9 million, respectively (10.1 percent and 11.0 percent of revenue, respectively) for the comparable periods of 2000.
Other income was $3.5 million and $4.9 million, respectively (1.9 percent and 1.3 percent of revenue, respectively), for the three and six month periods ended June 30, 2001 compared to $1.4 million and $3.0 million, respectively (0.6 percent and 0.7 percent of revenue, respectively), for the comparable periods of 2000. The increases in the second quarter of 2001 and in the first half of 2001 compared to the comparable periods in 2000 were primarily due to the sale of eighty thousand shares of Pixelworks stock in the second quarter of 2001 at a gain of $1.7 million.
Income taxes through June 30, 2001 are based on an estimated rate of 31.0 percent, which decreased from 35.5 percent in the first six months of 2000. The decrease is primarily a result of sustainable merger related tax consolidation benefits.
Liquidity and Capital Resources
Total cash and marketable securities, including long-term marketable securities, were $90.6 million at June 30, 2001. At June 30, 2001, the Company had working capital of $284.2 million, which included $63.7 million of cash and cash equivalents and $18.3 million of short-term marketable securities. The current ratio at both June 30, 2001 and December 31, 2000 was 2.9 to 1.
Cash and cash equivalents decreased $3.4 million primarily due to $10.9 million used for the purchase of property and equipment, partially offset by $2.5 million provided from operations, the $8.2 million provided by the net maturity and sale of marketable securities and $1.0 million provided by the exercise of stock options.
Accounts receivable decreased $22.9 million to $174.6 million at June 30, 2001 compared to $197.5 million at December 31, 2000. Days sales outstanding increased to 85 days at June 30, 2001 compared to 79 days at December 31, 2000. The increase in days sales outstanding is primarily due to the reduction in sales level combined with slower collections. The decrease in accounts receivable is primarily due to decreased sales in the second quarter of 2001 compared to the fourth quarter of 2000 and increases in the accounts receivable reserves in the first half of 2001.
Inventories increased $49.5 million to $144.7 million at June 30, 2001 compared to $95.2 million at December 31, 2000. The increase in inventories was primarily a result of slowing demand experienced within vendor lead times. Annualized inventory turns were approximately 4.2 times for the quarter ended June 30, 2001 compared to approximately 7.4 times for the fourth quarter of 2000 on an annualized basis. The Company anticipates the forces that increased inventory in the first half of 2001 will correct over the next two quarters and that inventory balances will be reduced by December 31, 2001.* The Company believes it is adequately reserved for any obsolete or excess inventory.*
Accounts payable increased $7.5 million to $102.1 million at June 30, 2001 from $94.6 million at December 31, 2000 primarily due to increases in inventories.
Accrued warranty decreased $3.2 million to $6.6 million at June 30, 2001 from $9.8 million at December 31, 2000 primarily due to improved failure rates for products under warranty.
Expenditures for property and equipment totaled $10.9 million in the first half of 2001, and included purchases for new product tooling, engineering design and test equipment and information systems. Total expenditures for property and equipment are expected to total approximately $25.0 to $30.0 million in 2001, primarily for leasehold improvements, product tooling, engineering equipment, manufacturing equipment and information systems infrastructure.*
New Accounting Pronouncements
In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS 138”). In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 137”). SFAS 137 is an amendment to Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS 137 and 138 establish accounting and reporting standards for all derivative instruments. SFAS 137 and 138 are effective for fiscal years beginning after June 15, 2000. The adoption of these pronouncements in the first quarter of 2001 did not have a material impact on InFocus’ financial position or results of operations.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interest method will be prohibited on a prospective basis only. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of that Statement, which for the Company will be fiscal 2002. The Company expects that the adoption of SFAS No. 142 will result in a pre-tax increase of approximately $1.5 million for the fiscal year 2002 and does not expect to recognize any impairments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
InFocus’ financial market risk arises from fluctuations in foreign currencies and interest rates.
InFocus has significant operations in Norway, and therefore, is exposed to currency rate risk. For InFocus, a weakening of the Norwegian Kroner relative to the U.S. Dollar has a positive effect on the cost of operating in Norway but has a negative foreign currency translation effect.
InFocus’ net investment in foreign subsidiaries with a functional currency other than the U.S. Dollar is not hedged. The net assets in foreign subsidiaries translated into U.S. Dollars using the period-end exchange rates were approximately $74.0 million. The potential loss in fair value resulting from a hypothetical 10 percent adverse change in foreign exchange rates would be approximately $7.4 million at June 30, 2001. Any loss in fair value would be reflected as a cumulative translation adjustment and would not reduce reported net income of the Company.
The Company’s exposure to market risk for changes in interest rates relates primarily to our investment portfolio. InFocus mitigates this risk by diversifying investments among high credit quality securities in accordance with the Company’s investment policy. As of June 30, 2001, the Company’s investment portfolio included marketable debt securities of $23.1 million and equity securities of $3.8 million. The debt securities are subject to interest rate risk, and will decline in value if the interest rates increase. Due to the short duration of the Company’s investment portfolio, an immediate 10 percent increase in interest rates would not have a material effect on its financial condition or the results of operations.
The Company is exposed to changes in exchange rates through the purchase of production materials and the sale of products denominated in foreign currencies. The Company limits its exposure by engaging in forward exchange contracts. There were no outstanding contracts at June 30, 2001.
PART II – OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the shareholders of the Company was held on April 18, 2001, at which the following actions were taken:
| 1. | The shareholders elected the seven nominees for director to the Board of Directors of the Company. The seven directors elected, along with the voting results are as follows: |
| | |
| | Name | | No. of Shares Voting For | | No. of Shares Withheld Voting | | |
| |
| |
| |
| | |
| | Peter D. Behrendt | | 36,122,981 | | 113,836 | | |
| | Ole J. Fredriksen | | 33,384,877 | | 2,851,940 | | |
| | Einar J. Greve | | 36,120,731 | | 116,086 | | |
| | Michael R. Hallman | | 36,121,800 | | 115,017 | | |
| | John V. Harker | | 33,399,101 | | 2,837,716 | | |
| | Svein S. Jacobsen | | 36,118,928 | | 117,889 | | |
| | Nobuo Mii | | 36,121,487 | | 115,330 | | |
| | |
| 2. | The shareholders approved the appointment of Arthur Andersen LLP as the independent accountants of the Company for the year ending December 31, 2001. |
| | |
| | No. of Shares Voting For: | | No. of Shares Voting Against: | | No. of Shares Abstaining: | | No. of Broker Non-Votes: | |
| |
| |
| |
| |
| |
| | 35,783,198 | | 442,468 | | 11,151 | | - | |
| | | | | | | | | | | | | | |
Item 6. Exhibits and Reports on Form 8–K
(a) Exhibits
No exhibits are required to be filed as part of this report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended June 30, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: August 10, 2001 | INFOCUS CORPORATION |
| | | |
| | By: | /s/ E. Scott Hildebrandt |
| | |
|
| | E. Scott Hildebrandt |
| | Senior Vice President, Finance, Chief Financial Officer
and Secretary/Treasurer |
| | (Principal Financial Officer) |
