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| INFS > SEC Filings for INFS > Form 10-K on 16-Mar-2009 | All Recent SEC Filings |
16-Mar-2009
Annual Report
Overview
Our results of operations were negatively affected in the second half of 2008 by the unexpected degree of economic turmoil. After four consecutive quarters of gross margins above 18%, gross margins were 16.1% in the third quarter of 2008 and 16.8% in the fourth quarter of 2008. As economic conditions deteriorated, we experienced softening demand for our products, especially in the U.S.
During the fourth quarter of 2008, we made a decision to return to our core business of not just projectors, but differentiated projectors, which positively affected our average selling prices and helped differentiate us from the more than 40 commodity projector companies. This return to our core business contributed to a 33% decline in projector unit sales in the fourth quarter of 2008 compared to the third quarter of 2008 and a 7% decline in projector unit sales in all of 2008 compared to all of 2007.
In the near-term, we expect that the economic challenges will create an even more aggressive competitive environment, resulting in lower world-wide demand and continuing pricing and margin pressures. Our strategy for mitigating such factors is to introduce new products with differentiated features to improve gross margins, as described below.
During the third and fourth quarters of 2008, we began shipping four new projector platforms:
• The InFocus IN1100 series projectors, for mobile professionals and teams, simplify computer-to-projector connectivity with new DisplayLink™ technology to connect over USB instead of a traditional VGA cable. This differentiated feature is a key element in our strategy to reclaim our leadership position in the mobile segment;
• The InFocus IN2100 series projectors consist of three 2,500 lumen mainstream portable projectors using DLP technology available in three resolutions: SVGA, XGA and WXGA;
• The InFocus IN3100 series projectors are also available with DisplayLink™ and are marketed for conference and classroom use. This addition to our portable lineup can be used on a tabletop or mounted on the ceiling; and
• The InFocus IN5100 series installation projectors feature the new SplitScreen™ technology, which allows side-by-side projection from two different sources. SplitScreen™ has been well received by our higher education and corporate customers, for use in distance learning and videoconferencing. These applications are receiving increased interest as enterprises seek to reduce transportation costs and schools extend their reach beyond the main campus.
All of these platforms have been well received by our channel partners and customers. According to Pacific Media Associates, as of December 31, 2008, the IN2100 series was the number one selling projector overall and the IN5100 was the top selling installation model in the IT channel in North America.
With these new projectors, we are transforming our business from one that has been offering commodity products to one that provides innovative, value-added, differentiated solutions. Our ongoing investments in product development resources support our strategy of creating value-added solutions and differentiation in our products and our brand name. The evolving features of our products are intended to address the changing needs of our customers and the evolving usage model for displaying visual content. We are addressing the commoditization in our industry by bringing back innovation to the InFocus brand. In addition to differentiated products, we are differentiating ourselves by improving our supply chain and striving for service excellence.
During 2008, we redefined our internal projector categories to better reflect the converging usage models between the commercial and home market segments. We now classify our projectors into the categories "Portable," "Mobile" and "Installation." Portable represents what was previously referred to as our meeting room category and better represents our projectors used in meeting or classrooms. The mobile projector category has not changed and includes all of our projectors that weigh less than 4.4 pounds and are
easily adaptable for travel. Installation now includes our home projectors, as well as our business installation projectors.
Our patent portfolio remains strong and is growing as we continue to invest in advanced development for new projection opportunities and applications. We currently have approximately 245 issued U.S. patents and numerous corresponding foreign patents. Additionally, we will seek to partner with third parties where a solution may be more readily available. In the first quarter of 2008, we announced a partnership with DisplayLink Corporation to utilize DisplayLink™ USB graphics connection technology, which is now being used in our products. This addition improves ease of use of our products and allows for application innovations for new projector solutions. We expect to explore other opportunities to leverage third parties' technology and products where there are market opportunities outside of our core competencies or a solution is more readily available for incorporation into our overall solution.
We continue to streamline our Sales, Marketing and General and Administration functions to drive greater efficiencies and eliminate redundant activities. Operating expenses in the fourth quarter of 2008, exclusive of charges for restructuring and long-lived asset impairment, were at the lowest level in approximately 10 years.
Restructuring charges totaled $5.5 million in 2008 and included the following:
• a $0.9 million charge in the second quarter of 2008, primarily related to employee severance;
• a $0.4 million charge in the third quarter of 2008, primarily related to employee severance and charges related to facilities that had previously been abandoned but whose leases were terminated during the quarter; and
• a $4.2 million charge in the fourth quarter of 2008. Of this amount, $1.6 million related to headcount reductions, and consisted primarily of severance payments, and $2.6 million related to lease losses for vacated and unutilized facilities located at our headquarters in Wilsonville, Oregon. A portion of this charge relates to revisions of estimated sublease income that could be reasonably obtained over the remaining lease term.
Of the 2008 charge, $1.5 million was paid out in 2008 with the majority of the remaining severance of $1.5 million expected to be paid in the first half of 2009 and $2.5 million related to lease losses over the remaining life of the leases through 2011. We expect to incur an additional charge of approximately $1.2 million related to these actions in 2009 for facility consolidations. The anticipated reduction in costs resulting from our restructuring actions will allow us to continue to invest in sales and product development activities while maintaining the desired operating expense levels.
We also recorded a long-lived asset impairment charge of $2.6 million in the fourth quarter of 2008 to fully write off our property and equipment. In accordance with SFAS No. 144, we determined that this charge was necessary as a result of continuing operating losses and a significant decline in our market capitalization.
Engagement of Investment Advisor
In December 2008, we announced that we have engaged Thomas Weisel Partners LLC ("TWP"), an investment banking firm headquartered in San Francisco, California, to provide us with advisory services, including advice related to unsolicited offers recently received by us. We decided to evaluate alternatives that will best serve the interest of all of our shareholders given our depressed share price.
Results of Operations
Year Ended December 31, (1)
2008 2007 2006
% of % of % of
(Dollars in thousands) Dollars revenues Dollars revenues Dollars revenues
Revenues $ 255,685 100.0 % $ 308,181 100.0 % $ 374,752 100.0 %
Cost of revenues 209,991 82.1 257,426 83.5 320,866 85.6
Gross margin 45,694 17.9 50,755 16.5 53,886 14.4
Operating expenses:
Marketing and sales 32,248 12.6 35,777 11.6 49,107 13.1
Research and development 11,287 4.4 14,135 4.6 17,997 4.8
General and administrative 16,688 6.5 19,938 6.5 21,730 5.8
Restructuring costs 5,530 2.2 8,375 2.7 5,425 1.4
Impairment of long-lived assets 2,628 1.0 - - - -
Regulatory assessments - - - - 9,392 2.5
68,381 26.7 78,225 25.4 103,651 27.7
Loss from operations (22,687 ) (8.9 ) (27,470 ) (8.9 ) (49,765 ) (13.3 )
Other income (expense):
Interest expense (417 ) (0.2 ) (507 ) (0.2 ) (401 ) (0.1 )
Interest income 1,318 0.5 2,715 0.9 2,446 0.7
Other, net (89 ) - (349 ) (0.1 ) (13,451 ) (3.6 )
Loss before income taxes (21,875 ) (8.6 ) (25,611 ) (8.3 ) (61,171 ) (16.3 )
Provision (benefit) for income taxes 1,078 0.4 (29 ) - 749 0.2
Net loss $ (22,953 ) (9.0 )% $ (25,582 ) (8.3 )% $ (61,920 ) (16.5 )%
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(1) Percentages may not add due to rounding.
Revenues
Revenues decreased $52.5 million, or 17.0%, in 2008 compared to 2007 and decreased $66.6 million, or 17.8%, in 2007 compared to 2006.
The decrease in revenue in 2008 compared to 2007 was due primarily to a 10% decrease in ASPs. This decrease in ASPs was primarily due to a higher percentage of our overall revenue being derived from lower-margin, entry-level products in 2008 compared to 2007, as well as price reductions made on products reaching their end of life. In addition, the turmoil experienced in the economic and financial markets and the strengthening of the U.S. dollar against the euro placed additional pressures on ASPs. These factors were partially offset by the introduction of several new, higher ASP products that began shipping in the third quarter of 2008.
We sold 317,000 units in 2008 compared to 342,000 units in 2007, a 7.3% decrease. This decrease was primarily due to a decline in total units sold in the industry as global economic turmoil worsened in the second half of 2008.
The decrease in revenue in 2007 compared to 2006 was due primarily to an 18% decrease in ASPs, due to both lower overall pricing across various products and a shift toward a greater weighting of overall sales being derived from our lower-priced entry-level meeting room, classroom and home products. In the first quarter of 2007, compounding the pressure on ASPs already experienced due to the above, we recognized a higher volume of sales of our IN24 and IN26 products at lower margins, as we worked to deplete existing inventory in order to transition the market to the higher-margin and better featured IN24+ and IN26+. Also contributing to the ASP declines in 2007 was increased unit sales of the IN72 entry level home entertainment product. In the first half of 2007, we aggressively sold a large quantity of the IN72 product to deplete existing inventory as the product moved to end of life.
The decrease in revenue attributable to the lower ASPs was partially offset by an increase in total projector units sold to 342,000 units in 2007 compared to 331,000 units in 2006. This increase was primarily due to the increase in sales of entry-level meeting room and classroom products discussed above.
Geographic Revenues
Revenue by geographic area and as a percentage of total revenue, based on
shipment destination, was as follows (dollars in thousands):
Year Ended December 31,
2008 2007 2006
U.S. $ 123,979 48.5 % $ 175,219 56.9 % $ 239,258 63.9 %
Europe 79,097 30.9 % 81,999 26.6 % 81,825 21.8 %
Asia 36,167 14.2 % 34,926 11.3 % 27,701 7.4 %
Other 16,442 6.4 % 16,037 5.2 % 25,968 6.9 %
$ 255,685 $ 308,181 $ 374,752
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U.S. revenues in 2008 decreased 29.2% compared to 2007. This decrease was primarily due to a decline in unit sales of 28.4%, which resulted primarily from deteriorating economic conditions and exiting the "brick and mortar" retail sector of the market during 2008. Slightly impacting U.S. revenues in 2008 compared to 2007 was an ASP decline due to an increase in the percentage of the overall sales coming from the entry-level products sold primarily into the education sector as well as sales of end of life products in the first part of the year. These factors were partially offset by our launch of several higher-margin follow-on products late in the third quarter of 2008.
U.S. revenues in 2007 decreased 26.8% compared to 2006, primarily due to a 7.6% decline in unit sales and a 21.6% decline in ASPs. The ASP decline was affected by the greater weighting towards sales of lower-margin entry-level meeting room, classroom and home entertainment products in 2007 compared to 2006. The overall declines in units and ASPs in 2007 compared to 2006 reflected the continued industry dynamics including intense competition from our Asian competitors and a decline in revenue in the value added reseller channel.
European revenues decreased 3.5% in 2008 compared to 2007, primarily due to an 18.3% decline in ASPs, offset by an increase in units sold of 18.0%. The increase in units sold in 2008 compared to 2007 was driven by new product introductions targeted at specific channels and markets where we had identified strong growth potential. The decline in ASPs in 2008 compared to 2007 was affected by the greater weighting towards sales of lower-margin products. In addition, the strengthening of the U.S. dollar against the euro and deteriorating economic conditions in specific regions of Europe during the third and fourth quarters of 2008 negatively affected our revenues and ASPs.
European revenues were relatively flat in 2007 compared to 2006, primarily due to a 23.1% increase in unit sales, mostly offset by a 15.4% decline in ASPs.
Asian revenues increased 3.6% in 2008 compared to 2007, primarily due to a 23.6% increase in units sold, partially offset by a 16.2% decline in ASPs. The increase in units sold in 2008 compared to 2007 was driven by new product introductions targeted at specific channels and markets where we had identified strong growth potential.
Asian revenues increased 26.1% in 2007 compared to 2006 as we focused more of our sales efforts in this region, which contributed to increases in unit sales and market share. The increase in unit sales of 55% was partially offset by a decrease in ASPs of 18.6%.
Other revenues primarily consist of sales in Canada and Latin America. Other revenues increased 2.5% in 2008 compared to 2007, primarily due to a 15.0% increase in unit sales, partially offset by an 11.0% decrease in ASPs. The decrease in ASPs was primarily attributable to a shift in mix to our lower-margin entry-level products.
Other revenues decreased 38.2% in 2007 compared to 2006. Unit sales decreased 23.0% in 2007 compared to 2006, primarily due to the sale of 8,500 units, which resulted in $6.2 million of revenue, in the first quarter of 2006 related to an education tender order in Mexico that did not reoccur in 2007. Revenue in 2007 was also impacted by a 19.8% decrease in ASPs compared to 2006.
Backlog
At December 31, 2008, we had backlog of approximately $5.2 million, compared to approximately $6.6 million at December 31, 2007. Given current supply and demand estimates, it is anticipated that a majority of the current backlog will turn over by the end of the first quarter of 2009. The stated backlog is not necessarily indicative of sales for any future period, nor is a backlog any assurance that we will realize a profit from filling the orders.
Gross Margin
We achieved a gross margin percentage of 17.9% in 2008, 16.5% in 2007 and 14.4% in 2006.
The increase in gross margin in 2008 compared to 2007 was primarily due to the introduction of several new, higher-margin product platforms. We also realized decreases in other costs of goods sold primarily due to efficiencies achieved within our supply chain and lower costs associated with warranty repair activities. Charges for inventory related write-downs totaled $4.3 million in 2008 compared to $5.1 million in 2007.
These factors were partially offset by sales of end-of-life products in the first half of 2008, softening in the global markets, increasing competition and a relatively high mix of our revenues coming from lower-priced products in the first half of 2008. Margins were also negatively affected in 2008 by the strengthening of the U.S. dollar against the euro and other currencies, which essentially lowers our realizable ASPs for our products priced in local currencies.
The improvement in our gross margin percentage in 2007 compared to 2006 was due primarily to the introduction of new products with improved gross margins, improved product mix and efficiency improvements in supply chain management, resulting in lower warranty repair and improved inventory management. Charges for inventory related write-downs totaled $5.1 million in 2007 compared to $8.7 million in 2006.
These improvements were offset by price reductions across our product portfolio as discussed above.
The charge for inventory write-downs in 2008 related primarily to write-downs on service parts inventory, declines in market values on specific slow moving parts and accruals for end-of-life costs for various product platforms. The charge for inventory write-downs in 2007 related primarily to declines in market value on specific slow moving finished goods inventory and write-downs on service parts inventory. The write-downs for service parts inventory related to the decline in usage of service parts for warranty and non-warranty repair activities, as our warranty repair activities were significantly reduced in 2007. The charge for inventory write-downs in 2006 related primarily to end-of-life costs for various product platforms and a decline in market value on slow moving finished goods. The inventory write-downs reduced our gross margin percentage by 1.7 percentage points in 2008, 1.6 percentage points in 2007 and 2.3 percentage points in 2006.
We continue to focus on improving our gross margin percentage through managing the mix of products sold, our emphasis on our new, differentiated products and continuing to improve our supply chain efficiencies by working closely with our contract manufacturers to control product costs, improve quality and reduce product freight, handling and storage costs.
Stock-based compensation included as a component of cost of sales totaled $298,000 in 2008, $302,000 in 2007 and $145,000 in 2006.
Marketing and Sales Expense
Marketing and sales expense decreased $3.6 million, or 9.9%, to $32.2 million in 2008 compared to $35.8 million in 2007 and decreased $13.3 million, or 27.1%, in 2007 compared to $49.1 million in 2006.
The decrease in marketing and sales expense in 2008 compared to 2007 was primarily due to lower variable expenses resulting from lower revenue levels and more focused marketing programs in our effort
to better align the cost structure with revenue and gross margin levels. The majority of the reductions were made in our marketing programs, such as promotions, direct mail programs, advertising and public relations. We have continued to reduce our personnel related expenses along with discretionary spending. Also contributing to the decrease was a reduction in the amount of IT and facilities expenses allocated to sales and marketing as a result of facility consolidations and reductions in the IT cost structure.
The decrease in marketing and sales expense in 2007 compared to 2006 was primarily due to lower discretionary spending as a result of our previous restructuring activities and continued focus on management of expenses. These actions included reductions in personnel related costs and other discretionary spending. We also achieved decreases in overall spending for sales and marketing programs and advertising related spending.
Stock-based compensation included as a component of marketing and sales totaled $427,000 in 2008, $391,000 in 2007 and $359,000 in 2006.
Research and Development Expense
Research and development expense decreased $2.8 million, or 20.1%, to $11.3 million in 2008 compared to $14.1 million in 2007 and decreased $3.9 million, or 21.5%, in 2007 compared to $18.0 million in 2006.
The decreases in research and development expense in 2008 compared to 2007 and in 2007 compared to 2006 were primarily due to a reduced cost structure related to our restructuring activities, including a decrease in personnel related costs, and other discretionary spending. We have shifted our research and development model to rely more on our contract manufacturing partners for the core projection design, allowing us to reduce our in-house research and development resources. These decreases were partially offset by our increased investment in advanced development research to support our strategy of creating differentiation in our products and our brand name. Also contributing to the decrease was a reduction in the amount of IT and facilities expenses allocated to research and development.
Stock-based compensation included as a component of research and development totaled $277,000 in 2008, $304,000 in 2007 and $151,000 in 2006.
General and Administrative Expense
General and administrative expense decreased $3.2 million, or 16.3%, to $16.7 million in 2008 compared to $19.9 million in 2007, and decreased $1.8 million, or 8.2%, in 2007 from $21.7 million in 2006.
The decrease in general and administrative expense from 2007 to 2008 was due to significant decreases in personnel related costs and consulting services, along with decreases in rent, travel, legal fees, internal audit fees and general insurance expenses. These decreases were partially offset by an increase in tax strategy fees.
Included in general and administrative expense in 2007 was $1.3 million of costs incurred for various external advisors engaged as part of our strategic alternatives evaluation process and $0.4 million of costs related to the hiring of a new Chief Executive Officer. General and administrative expense in 2008 included $0.1 million of costs related to the engagement of an investment advisor in the fourth quarter of 2008.
Included in general and administrative expense in 2006 was $1.8 million of costs related to our audit committee investigations, which concluded in the second quarter of 2006. We also realized decreased overall spending in 2007 compared to 2006 as a result of our previous restructuring activities.
Stock-based compensation included as a component of general and administrative totaled $685,000 in 2008, $416,000 in 2007 and $489,000 in 2006.
Restructuring
Restructuring charges totaled $5.5 million in 2008 and included the following:
• a $0.9 million charge in the second quarter of 2008, primarily related to employee severance;
• a $0.4 million charge in the third quarter of 2008, primarily related to employee severance and charges related to facilities that had previously been abandoned but whose leases were terminated during the quarter; and
• a $4.2 million charge in the fourth quarter of 2008. Of this amount, $1.6 million related to headcount reductions, and consisted primarily of severance payments, and $2.6 million related to lease losses for vacated and unutilized facilities located at our headquarters in Wilsonville, Oregon. A portion of this charge relates to revisions of estimated sublease income that could be reasonably obtained over the remaining lease term.
At December 31, 2008, $5.8 million of the restructuring charges were included on our balance sheet as other accrued liabilities. We expect to incur approximately $1.2 million of additional charges related to facility consolidations in 2009. See Note 3 of Notes to Consolidated Financial Statements for additional information related to accrued restructuring charges.
Restructuring charges totaled $8.4 million in 2007 and included the following:
• a $2.4 million charge in the first quarter of 2007 primarily related to estimated lease losses on vacated or partially vacated facilities at our corporate headquarters and various European office locations;
• a $2.1 million charge in the second quarter of 2007 primarily related to severance costs for personnel reductions;
• a $0.2 million charge in the third quarter of 2007 for estimated employee severance costs; and
• a $3.7 million charge in the fourth quarter of 2007 for estimated lease losses on vacated or partially vacated facilities. Included in the $3.7 million charge was a $2.7 million charge for changes in estimates of prior period sub-lease assumptions and the remaining $1.0 million charge was for remaining obligations for facilities space that was vacated in the fourth quarter of 2007;
A portion of the $2.1 million charge recorded in the second quarter of 2007 for severance costs was related to a shift in our research and development model to outsource more of the design functions to our contract manufacturers, which allows us to reduce necessary in-house research and development resources.
Restructuring charges totaled $5.4 million in 2006 and included the following:
• a $1.1 million charge related to international facility consolidation activities that were completed during the first quarter of 2006;
• an $850,000 charge in the second quarter of 2006 primarily related to our contractual obligation for severance for former InFocus employees terminated by SMT during the second quarter of 2006;
• an $850,000 charge in the third quarter of 2006 for severance costs primarily related to the decision to outsource our U.S. call center to a third party as well as other headcount reductions initiated during the third quarter; and
• a $2.7 million charge in the fourth quarter of 2006 for headcount reductions and for changes in estimates for prior period sub-lease . . .
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