0001104659-12-074325.txt : 20121106 0001104659-12-074325.hdr.sgml : 20121106 20121105190334 ACCESSION NUMBER: 0001104659-12-074325 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20120930 FILED AS OF DATE: 20121106 DATE AS OF CHANGE: 20121105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LOGITECH INTERNATIONAL SA CENTRAL INDEX KEY: 0001032975 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 000000000 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-29174 FILM NUMBER: 121181398 BUSINESS ADDRESS: STREET 1: 6505 KAISER DR STREET 2: C/O LOGITECH INC CITY: FREMONT STATE: CA ZIP: 94555 BUSINESS PHONE: 5107958500 MAIL ADDRESS: STREET 1: 6505 KAISER DR CITY: FREMONT STATE: CA ZIP: 94555 10-Q 1 a12-20171_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

Or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from          to         

 

Commission File Number: 0-29174

 

LOGITECH INTERNATIONAL S.A.

(Exact name of registrant as specified in its charter)

 

Canton of Vaud, Switzerland

(State or other jurisdiction

of incorporation or organization)

 

None

(I.R.S. Employer

Identification No.)

 

Logitech International S.A.

Apples, Switzerland

c/o Logitech Inc.

7600 Gateway Boulevard

Newark, California 94560

(Address of principal executive offices and zip code)

 

(510) 795-8500

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x

 

As of November 1, 2012, there were 157,523,165 shares of the Registrant’s share capital outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

Part I

FINANCIAL INFORMATION

3

 

 

 

 

 

Item 1.

Consolidated Financial Statements (Unaudited)

3

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

53

 

 

 

 

 

Item 4.

Controls and Procedures

56

 

 

 

 

Part II

OTHER INFORMATION

57

 

 

 

 

 

Item 1.

Legal Proceedings

57

 

 

 

 

 

Item 1A.

Risk Factors

57

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

69

 

 

 

 

 

Item 6.

Exhibit Index

71

 

 

 

 

Signatures

 

72

 

 

 

 

Exhibits

 

 

 

In this document, unless otherwise indicated, references to the “Company” or “Logitech” are to Logitech International S.A., its consolidated subsidiaries and predecessor entities. Unless otherwise specified, all references to U.S. dollar, dollar or $ are to the United States dollar, the legal currency of the United States of America. All references to CHF are to the Swiss franc, the legal currency of Switzerland.

 

Logitech, the Logitech logo, and the Logitech products referred to herein are either the trademarks or the registered trademarks of Logitech. All other trademarks are the property of their respective owners.

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

Page

 

Financial Statement Description

 

 

 

 

·

Unaudited Consolidated Statements of Operations for the three and six months ended September 30, 2012 and 2011

4

 

 

 

·

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended September 30, 2012 and 2011

5

 

 

 

·

Unaudited Consolidated Balance Sheets as of September 30, 2012 and March 31, 2012

6

 

 

 

·

Unaudited Consolidated Statements of Cash Flows for the six months ended September 30, 2012 and 2011

7

 

 

 

·

Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the six months ended September 30, 2012 and 2011

8

 

 

 

·

Notes to Unaudited Consolidated Financial Statements

9

 

3



Table of Contents

 

LOGITECH INTERNATIONAL S.A.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

 

 

 

Three months ended

 

Six months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

547,693

 

$

589,204

 

$

1,016,297

 

$

1,069,645

 

Cost of goods sold

 

351,698

 

390,783

 

676,050

 

745,617

 

Gross profit

 

195,995

 

198,421

 

340,247

 

324,028

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Marketing and selling

 

110,522

 

107,446

 

211,419

 

207,239

 

Research and development

 

38,019

 

39,491

 

76,947

 

79,472

 

General and administrative

 

25,980

 

27,989

 

58,460

 

58,854

 

Restructuring charges (credits), net

 

(2,671

)

 

28,556

 

 

Total operating expenses

 

171,850

 

174,926

 

375,382

 

345,565

 

Operating income (loss)

 

24,145

 

23,495

 

(35,135

)

(21,537

)

Interest income, net

 

153

 

601

 

537

 

1,291

 

Other income (expense), net

 

(509

)

(1,763

)

(668

)

3,428

 

Income (loss) before income taxes

 

23,789

 

22,333

 

(35,266

)

(16,818

)

Provision for (benefit from) income taxes

 

(31,076

)

4,888

 

(37,986

)

(4,657

)

Net income (loss)

 

$

54,865

 

$

17,445

 

$

2,720

 

$

(12,161

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.35

 

$

0.10

 

$

0.02

 

$

(0.07

)

Diluted

 

$

0.35

 

$

0.10

 

$

0.02

 

$

(0.07

)

 

 

 

 

 

 

 

 

 

 

Shares used to compute net income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

156,736

 

176,878

 

158,723

 

178,111

 

Diluted

 

157,932

 

177,277

 

159,853

 

178,111

 

 

 

 

 

 

 

 

 

 

 

Cash dividend per share:

 

$

0.85

 

$

 

$

0.85

 

$

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

LOGITECH INTERNATIONAL S.A.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

 

 

 

Three Months Ended
September 30,

 

Six Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

54,865

 

$

17,445

 

$

2,720

 

$

(12,161

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

4,970

 

(6,154

)

(1,295

)

(4,824

)

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan adjustments during the period:

 

 

 

 

 

 

 

 

 

Foreign currency exchange rate changes

 

6,457

 

1,126

 

7,920

 

(115

)

Amortization included in net income (loss):

 

 

 

 

 

 

 

 

 

Transition obligation for the period

 

1

 

1

 

2

 

2

 

Prior service cost for the period

 

38

 

38

 

76

 

77

 

Net actuarial loss for the period

 

262

 

359

 

678

 

459

 

Pension liability adjustments, net of tax

 

6,758

 

1,524

 

8,676

 

423

 

 

 

 

 

 

 

 

 

 

 

Deferred hedging gain (loss)

 

(5,466

)

8,758

 

(4,261

)

11,918

 

Less reclassification adjustment for gain (loss) included in net income (loss)

 

(1,683

)

1,539

 

(1,577

)

4,017

 

Net deferred hedging gain (loss)

 

(3,783

)

7,219

 

(2,684

)

7,901

 

 

 

 

 

 

 

 

 

 

 

Reversal of unrealized gains previously recognized in accumulated other comprehensive income

 

 

 

(343

)

 

Net change in accumulated other comprehensive income (loss)

 

7,945

 

2,589

 

4,354

 

3,500

 

Total comprehensive income (loss)

 

$

62,810

 

$

20,034

 

$

7,074

 

$

(8,661

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5



Table of Contents

 

LOGITECH INTERNATIONAL S.A.

UNADUITED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

 

 

 

September 30, 2012

 

March 31, 2012

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

237,033

 

$

478,370

 

Accounts receivable, net

 

284,451

 

223,104

 

Inventories

 

321,307

 

297,072

 

Other current assets

 

69,016

 

65,990

 

Total current assets

 

911,807

 

1,064,536

 

Non-current assets:

 

 

 

 

 

Property, plant and equipment, net

 

93,854

 

94,884

 

Goodwill

 

561,080

 

560,523

 

Other intangible assets, net

 

41,108

 

53,518

 

Other assets

 

84,563

 

83,033

 

Total assets

 

$

1,692,412

 

$

1,856,494

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

368,509

 

$

301,111

 

Accrued liabilities

 

190,234

 

186,680

 

Total current liabilities

 

558,743

 

487,791

 

Non-current liabilities

 

187,372

 

218,462

 

Total liabilities

 

746,115

 

706,253

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Shares, par value CHF 0.25 - 191,606 issued and authorized and 50,000 conditionally authorized at September 30, 2012 and March 31, 2012

 

33,370

 

33,370

 

Additional paid-in capital

 

 

 

Less shares in treasury, at cost, 34,138 at September 30, 2012 and 27,173 at March 31, 2012

 

(384,780

)

(343,829

)

Retained earnings

 

1,389,282

 

1,556,629

 

Accumulated other comprehensive loss

 

(91,575

)

(95,929

)

Total shareholders’ equity

 

946,297

 

1,150,241

 

Total liabilities and shareholders’ equity

 

$

1,692,412

 

$

1,856,494

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6



Table of Contents

 

LOGITECH INTERNATIONAL S.A.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Six months ended September 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

2,720

 

$

(12,161

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

22,307

 

24,593

 

Amortization of other intangible assets

 

12,257

 

13,556

 

Inventory valuation adjustment

 

 

34,074

 

Share-based compensation expense

 

13,437

 

16,453

 

Gain on disposal of property and plant

 

 

(4,904

)

Gain on sale of available-for-sale securities

 

(831

)

 

Excess tax benefits from share-based compensation

 

(22

)

(30

)

Deferred income taxes and other

 

(3,806

)

(8,554

)

Changes in assets and liabilities, net of acquisition:

 

 

 

 

 

Accounts receivable

 

(58,272

)

(36,517

)

Inventories

 

(30,733

)

(59,589

)

Other assets

 

(7,339

)

(6,886

)

Accounts payable

 

68,875

 

45,088

 

Accrued liabilities

 

(9,498

)

(3,489

)

Net cash provided by operating activities

 

9,095

 

1,634

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(30,522

)

(20,921

)

Acquisition, net of cash acquired

 

 

(18,814

)

Investment in privately-held company

 

(3,970

)

 

Proceeds from sale of property and plant

 

 

4,904

 

Proceeds from sale of available-for-sale securities

 

917

 

 

Purchases of trading investments for deferred compensation plan

 

(1,648

)

(4,536

)

Proceeds from sales of trading investments for deferred compensation plan

 

1,638

 

4,522

 

Net cash used in investing activities

 

(33,585

)

(34,845

)

Cash flows from financing activities:

 

 

 

 

 

Payment of cash dividends

 

(133,462

)

 

Purchases of treasury shares

 

(89,955

)

(73,134

)

Proceeds from sale of shares upon exercise of options and purchase rights

 

9,008

 

9,764

 

Tax withholdings related to net share settlements of restricted stock units

 

(635

)

(185

)

Excess tax benefits from share-based compensation

 

22

 

30

 

Net cash used in financing activities

 

(215,022

)

(63,525

)

Effect of exchange rate changes on cash and cash equivalents

 

(1,825

)

(1,745

)

Net decrease in cash and cash equivalents

 

(241,337

)

(98,481

)

Cash and cash equivalents at beginning of period

 

478,370

 

477,931

 

Cash and cash equivalents at end of period

 

$

237,033

 

$

379,450

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7



Table of Contents

 

LOGITECH INTERNATIONAL S.A.

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

other

 

 

 

 

 

Registered shares

 

paid-in

 

Treasury shares

 

Retained

 

comprehensive

 

 

 

 

 

Shares

 

Amount

 

capital

 

Shares

 

Amount

 

earnings

 

loss

 

Total

 

March 31, 2011

 

191,606

 

$

33,370

 

$

 

12,433

 

$

(264,019

)

$

1,514,168

 

$

(78,518

)

$

1,205,001

 

Total comprehensive loss

 

 

 

 

 

 

(12,161

)

3,500

 

(8,661

)

Purchase of treasury shares

 

 

 

 

7,609

 

(73,134

)

 

 

(73,134

)

Tax benefit from exercise of stock options

 

 

 

9

 

 

 

 

 

9

 

Shares issued for director services

 

 

 

(643

)

(33

)

844

 

 

 

201

 

Sale of shares upon exercise of options and purchase rights

 

 

 

(13,390

)

(1,220

)

33,850

 

(10,679

)

 

9,781

 

Issuance of shares upon vesting of restricted stock units

 

 

 

(2,303

)

(78

)

2,118

 

 

 

(185

)

Share-based compensation expense

 

 

 

16,327

 

 

 

 

 

16,327

 

September 30, 2011

 

191,606

 

$

33,370

 

$

 

18,711

 

$

(300,341

)

$

1,491,328

 

$

(75,018

)

$

1,149,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

191,606

 

$

33,370

 

$

 

27,173

 

$

(343,829

)

$

1,556,629

 

$

(95,929

)

$

1,150,241

 

Total comprehensive income

 

 

 

 

 

 

2,720

 

4,354

 

7,074

 

Purchase of treasury shares

 

 

 

 

8,600

 

(89,955

)

 

 

(89,955

)

Tax benefit from exercise of stock options

 

 

 

(9,331

)

 

 

 

 

(9,331

)

Deferred tax asset adjustment related to share-based compensation expense

 

 

 

6,320

 

 

 

(6,320

)

 

 

Sale of shares upon exercise of options and purchase rights

 

 

 

(1,756

)

(1,347

)

41,058

 

(30,285

)

 

9,017

 

Issuance of shares upon vesting of restricted stock units

 

 

 

(8,526

)

(288

)

7,946

 

 

 

(580

)

Share-based compensation expense

 

 

 

13,293

 

 

 

 

 

13,293

 

Cash dividends

 

 

 

 

 

 

 

 

 

 

 

(133,462

)

 

 

(133,462

)

September 30, 2012

 

191,606

 

$

33,370

 

$

 

34,138

 

$

(384,780

)

$

1,389,282

 

$

(91,575

)

$

946,297

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

8



Table of Contents

 

LOGITECH INTERNATIONAL S.A.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 — Basis of Presentation

 

The consolidated financial statements include the accounts of Logitech and its subsidiaries (“Logitech” or “the Company”). All intercompany balances and transactions have been eliminated. The consolidated financial statements are presented in accordance with U.S. GAAP (accounting principles generally accepted in the United States of America) for interim financial information and therefore do not include all the information required by U.S. GAAP for complete financial statements. They should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended March 31, 2012 included in its Annual Report on Form 10-K.

 

In the quarter ended June 30, 2012, the Company recorded a reduction in deferred tax assets and a decrease to retained earnings of $6.3 million, related to vested unexercised non-qualified stock options for former employees who terminated in fiscal year 2012 and prior.  The Company reviewed this accounting error utilizing SEC Staff Accounting Bulletin No. 99, Materiality, and SEC Staff Accounting Bulletin No. 108, Effects of Prior Year Misstatements on Current Year Financial Statements, and determined the impact of the error to be immaterial to any period presented.

 

Certain prior period financial statement amounts have been reclassified to conform to the current period presentation with no impact on previously reported net income.

 

In the opinion of management, these consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the periods presented. Operating results for the three and six months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending March 31, 2013, or any future periods.

 

Fiscal Year

 

The Company’s fiscal year ends on March 31. Interim quarters are 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.

 

Changes in Significant Accounting Policies

 

There have been no substantial changes in the Company’s significant accounting policies during the three and six months ended September 30, 2012 compared with the significant accounting policies described in its Annual Report on Form 10-K for the fiscal year ended March 31, 2012.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect reported amounts of assets, liabilities, net sales and expenses, and the disclosure of contingent assets and liabilities. Although these estimates are based on management’s best knowledge of current events and actions that may impact the Company in the future, actual results could differ from those estimates.

 

9



Table of Contents

 

Note 2 — Net Income (Loss) per Share

 

The computations of basic and diluted net income (loss) per share were as follows (in thousands, except per share amounts):

 

 

 

Three months ended

 

Six months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

54,865

 

$

17,445

 

$

2,720

 

$

(12,161

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares - basic

 

156,736

 

176,878

 

158,723

 

178,111

 

Effect of potentially dilutive share equivalents

 

1,196

 

399

 

1,130

 

 

Weighted average shares - diluted

 

157,932

 

177,277

 

159,853

 

178,111

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share - basic

 

$

0.35

 

$

0.10

 

$

0.02

 

$

(0.07

)

Net income (loss) per share - diluted

 

$

0.35

 

$

0.10

 

$

0.02

 

$

(0.07

)

 

Employee stock options, restricted stock units and similar share-based compensation awards granted by the Company are treated as potential shares in computing diluted net income per share. Diluted shares outstanding include the dilutive effect of in-the-money share-based awards which is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount that the employee must pay for exercising share-based awards, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax impact that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.

 

Share equivalents attributable to outstanding stock options and RSUs (restricted stock units) of 14,929,137 and 17,054,444 for the three months ended September 30, 2012 and 2011, and 15,127,253 and 17,601,198 for the six months ended September 30, 2012 and 2011 were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive.

 

Note 3 — Employee Benefit Plans

 

Employee Share Purchase Plans and Stock Incentive Plans

 

As of September 30, 2012, the Company offers the 2006 ESPP (2006 Employee Share Purchase Plan (Non-U.S.)), the 1996 ESPP (1996 Employee Share Purchase Plan (U.S.)), the 2006 Plan (2006 Stock Incentive Plan) and the 2012 Plan (2012 Stock Inducement Equity Plan). The 2012 Plan was approved by the Board of Directors in April 2012. On April 13, 2012, the Company filed Registration Statements to register 5.0 million additional shares to be issued pursuant to the 2006 ESPP, and 1.8 million shares under the 2012 Plan. On September 5, 2012, at the fiscal year 2012 Annual General Meeting of Shareholders, Logitech shareholders approved amendments to and restatement of the 2006 Stock Incentive Plan, which included the increase of 7.3 million additional shares to be issued under this plan and to prohibit the repricing of options or stock appreciation rights. On October 25, 2012, the Company filed a registration statement to register the 7.3 million additional shares under the 2006 Stock Incentive Plan. Shares issued to employees as a result of purchases or exercises under these plans are generally issued from shares held in treasury.

 

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Table of Contents

 

The following table summarizes share-based compensation expense and related tax benefit recognized for the three and six months ended September 30, 2012 and 2011 (in thousands):

 

 

 

Three months ended

 

Six months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

$

608

 

$

950

 

$

1,397

 

$

2,110

 

Share-based compensation expense included in gross profit

 

608

 

950

 

1,397

 

2,110

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Marketing and selling

 

2,644

 

3,448

 

4,424

 

6,965

 

Research and development

 

1,763

 

1,754

 

3,588

 

3,562

 

General and administrative

 

2,251

 

586

 

4,028

 

3,816

 

Share-based compensation expense included in operating expenses

 

6,658

 

5,788

 

12,040

 

14,343

 

Total share-based compensation expense

 

7,266

 

6,738

 

13,437

 

16,453

 

Income tax benefit

 

(1,671

)

(2,276

)

(3,047

)

(4,665

)

Share-based compensation expense, net of income tax

 

$

5,595

 

$

4,462

 

$

10,390

 

$

11,788

 

 

Share-based compensation expense for the three and six months ended September 30, 2012 includes a reduction of $0.6 million and $2.2 million in expense applicable to employees terminated as a result of the restructuring plan announced in April 2012. As of September 30, 2012 and 2011, $0.6 million and $0.9 million of share-based compensation cost were capitalized to inventory.

 

Defined Contribution Plans

 

Certain of the Company’s subsidiaries have defined contribution employee benefit plans covering all or a portion of their employees. Contributions to these plans are discretionary for certain plans and are based on specified or statutory requirements for others. The charges to expense for these plans for the three months ended September 30, 2012 and 2011 were $1.8 million and $2.4 million and for the six months ended September 30, 2012 and 2011 were $4.6 million and $5.5 million.

 

Defined Benefit Plans

 

Certain of the Company’s subsidiaries sponsor defined benefit pension plans or non-retirement post-employment benefits covering substantially all of their employees. Benefits are provided based on employees’ years of service and earnings, or in accordance with applicable employee benefit regulations. The Company’s practice is to fund amounts sufficient to meet the requirements set forth in the applicable employee benefit and tax regulations.

 

During the quarter ended September 30, 2012, the Company’s Swiss defined benefit pension plan was subject to re-measurement due to the number of plan participants affected by the April 2012 restructuring described in Note 13. The re-measurement resulted in the realization of $2.2 million in previously unrecognized losses which resided within accumulated other comprehensive loss and which the Company entirely recognized during the three months ended September 30, 2012.

 

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The net periodic benefit cost for defined benefit pension plans and non-retirement post-employment benefit obligations for the three and six months ended September 30, 2012 and 2011 were as follows (in thousands):

 

 

 

Three months ended

 

Six months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

1,726

 

$

1,937

 

$

3,601

 

$

3,232

 

Interest cost

 

418

 

632

 

912

 

1,137

 

Expected return on plan assets

 

(525

)

(235

)

(618

)

(653

)

Amortization of net transition obligation

 

1

 

1

 

2

 

2

 

Amortization of net prior service cost

 

38

 

38

 

76

 

77

 

Recognized net actuarial loss

 

262

 

359

 

678

 

459

 

Settlement cost

 

2,254

 

 

2,254

 

 

Net periodic benefit cost

 

$

4,174

 

$

2,732

 

$

6,905

 

$

4,254

 

 

Note 4 — Income Taxes

 

The Company is incorporated in Switzerland but operates in various countries with differing tax laws and rates. Further, a portion of the Company’s income before taxes and the provision for income taxes are generated outside of Switzerland.

 

On April 25, 2012, Logitech announced a restructuring plan to simplify the Company’s organization, to better align costs with its current business, and to free up resources to pursue growth opportunities.  A majority of the restructuring was completed during the three months ended June 30, 2012.  Remaining restructuring not completed during the three months ended September 30, 2012 will be completed in the remainder of the fiscal year.  In determining the annual effective tax rate, the restructuring was treated as a discrete event as it was significantly unusual and infrequent in nature.  As such, restructuring-related charges and costs were excluded from ordinary income in determining the annual effective tax rate.  The tax benefit associated with the restructuring is approximately $0.2 million.

 

The income tax benefit for the three months ended September 30, 2012 was $31.1 million based on an effective income tax rate of 130.6% of pre-tax income.  For the three months ended September 30, 2011, the income tax provision was $4.9 million based on an effective income tax rate of 21.9% of pre-tax income.  For the six months ended September 30, 2012 and September 30, 2011, the income tax benefit was $38.0 million and $4.7 million based on an effective income tax rate of 107.7% and 27.7% of pre-tax loss.  The change in the effective income tax rate for the three and six months ended September 30, 2012 compared with the same periods in fiscal year 2011 is primarily due to the mix of income and losses in the various tax jurisdictions in which the Company operates, and a discrete tax benefit of $32.1 million in the three months ended September 30, 2012 primarily related to the reversal of uncertain tax positions resulting from the closure of federal income tax examinations in the United States.

 

As of September 30 and March 31, 2012, the total amount of unrecognized tax benefits and related accrued interest and penalties due to uncertain tax positions was $107.6 million and $143.3 million, of which $93.3 million and $125.4 million would affect the effective income tax rate if recognized.  The decline in unrecognized tax benefits associated with uncertain tax positions in the amount of $35.7 million is primarily due to $33.8 million from the settlement of income tax examinations in the United States with the remaining from the expiration of statutes of limitations.  The Company classified the unrecognized tax benefits as non-current income taxes payable.

 

The Company continues to recognize interest and penalties related to unrecognized tax positions in income tax expense. As of September 30 and March 31, 2012, the Company had approximately $7.7 million and $7.5 million, respectively, of accrued interest and penalties related to uncertain tax positions.

 

The Company files Swiss and foreign tax returns. For all these tax returns, the Company is generally not subject to tax examinations for years prior to 2000.  During fiscal year 2012, the IRS (U.S. Internal Revenue Service) completed its field examinations of tax returns for the Company’s U.S. subsidiary for fiscal years 2006 and 2007, and issued NOPAs (notices of proposed adjustment) related to international tax

 

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Table of Contents

 

issues for those years.  The Company disagreed with the NOPAs and contested through the administrative process for the IRS claims regarding 2006 and 2007.  On July 2, 2012, the IRS issued an RAR (Revenue Agent’s Report) for fiscal years 2006 and 2007 proposing revised assessments resulting from the administrative process.  Subsequent to the Company’s acceptance of the RAR on July 12, 2012, the Company received the final letter from the IRS dated August 8, 2012 which effectively settled the examinations.  As a result of the closure of income tax examinations for fiscal years 2006 and 2007, the Company reversed $33.8 million of unrecognized tax benefits associated with uncertain tax positions and recorded $1.7 million tax provision from the proposed revised assessments, resulting in a net tax benefit of $32.1 million.

 

In addition, the IRS completed its field examination of the Company’s U.S. subsidiary for fiscal years 2008 and 2009 during the quarter.  The Company received NOPAs related to various domestic and international tax issues on August 15, 2012.  After the close of the fiscal quarter ended September 30, 2012, the Company received final letters dated October 17, 2012 which effectively settled the examinations.  As a result of the closure of income tax examinations for fiscal years 2008 and 2009, the Company estimates it will reverse $9.0 million of unrecognized tax benefits associated with uncertain tax positions and record a $5.5 million tax provision from the assessments, resulting in a net estimated tax benefit of $3.5 million.

 

The Company is also under examination and have received assessment notices in other tax jurisdictions. At this time, the Company is not able to estimate the potential impact that these examinations may have on income tax expense. If the examinations are resolved unfavorably, there is a possibility they may have a material negative impact on the Company’s consolidated operating results.

 

Although the Company has adequately provided for uncertain tax positions, the provisions on these positions may change as revised estimates are made or the underlying matters are settled or otherwise resolved.  With the exception of the resolution of the IRS examinations, it is not possible at this time to reasonably estimate the decrease of the unrecognized tax benefits within the next twelve months.

 

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Table of Contents

 

Note 5 — Balance Sheet Components

 

The following table presents the components of certain balance sheet asset amounts as of September 30 and March 31, 2012 (in thousands):

 

 

 

September 30, 2012

 

March 31, 2012

 

Accounts receivable, net:

 

 

 

 

 

Accounts receivable

 

$

450,108

 

$

376,917

 

Allowance for doubtful accounts

 

(2,239

)

(2,472

)

Allowance for returns

 

(24,519

)

(24,599

)

Allowances for cooperative marketing arrangements

 

(27,657

)

(24,109

)

Allowances for customer incentive programs

 

(41,785

)

(42,262

)

Allowances for pricing programs

 

(69,457

)

(60,371

)

 

 

$

284,451

 

$

223,104

 

Inventories:

 

 

 

 

 

Raw materials

 

$

42,682

 

$

38,613

 

Work-in-process

 

49

 

73

 

Finished goods

 

278,576

 

258,386

 

 

 

$

321,307

 

$

297,072

 

Other current assets:

 

 

 

 

 

Tax and value-added tax refund receivables

 

$

16,765

 

$

19,360

 

Deferred taxes

 

31,252

 

25,587

 

Prepaid expenses and other

 

20,999

 

21,043

 

 

 

$

69,016

 

$

65,990

 

Property, plant and equipment, net:

 

 

 

 

 

Plant, buildings and improvements

 

$

67,595

 

$

48,555

 

Equipment

 

158,149

 

148,059

 

Computer equipment

 

43,539

 

40,353

 

Computer software

 

75,969

 

75,758

 

 

 

345,252

 

312,725

 

Less: accumulated depreciation

 

(262,887

)

(249,657

)

 

 

82,365

 

63,068

 

Construction-in-progress

 

8,629

 

28,968

 

Land

 

2,860

 

2,848

 

 

 

$

93,854

 

$

94,884

 

Other assets:

 

 

 

 

 

Deferred taxes

 

$

58,884

 

$

61,358

 

Trading investments

 

14,805

 

14,301

 

Deposits and other

 

10,874

 

7,374

 

 

 

$

84,563

 

$

83,033

 

 

In the three months ended June 30, 2011, an inventory valuation adjustment of $34.1 million was charged to cost of goods sold, as the result of management’s decision in early July 2011 to reduce the retail price of Logitech Revue.  The reduction in construction-in-progress balance from March 31, 2012 to September 30, 2012 was from leasehold improvement costs related to the new Americas headquarters which were placed into service during this period.

 

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Table of Contents

 

The following table presents the components of certain balance sheet liability amounts as of September 30 and March 31, 2012 (in thousands):

 

 

 

September 30, 2012

 

March 31, 2012

 

Accrued liabilities:

 

 

 

 

 

Accrued personnel expenses

 

$

44,787

 

$

42,809

 

Accrued marketing expenses

 

9,531

 

7,097

 

Indirect customer incentive programs

 

25,340

 

26,112

 

Accrued restructuring

 

5,786

 

 

Deferred revenue

 

21,200

 

19,358

 

Accrued freight and duty

 

13,116

 

11,376

 

Value-added tax payable

 

6,213

 

7,140

 

Accrued royalties

 

4,161

 

6,243

 

Warranty accrual

 

4,243

 

5,184

 

Non-retirement post-employment benefit obligations

 

4,244

 

4,129

 

Income taxes payable - current

 

4,510

 

6,047

 

Other accrued liabilities

 

47,103

 

51,185

 

 

 

$

190,234

 

$

186,680

 

Non-current liabilities:

 

 

 

 

 

Income taxes payable - non-current

 

$

105,128

 

$

137,319

 

Obligation for deferred compensation

 

14,950

 

14,393

 

Defined benefit pension plan liability

 

33,930

 

39,337

 

Deferred rent

 

20,853

 

16,042

 

Other long-term liabilities

 

12,511

 

11,371

 

 

 

$

187,372

 

$

218,462

 

 

The following table presents the changes in the allowance for doubtful accounts during the three and six months ended September 30, 2012 and 2011 (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts, beginning of period

 

$

(2,321

)

$

(4,036

)

$

(2,472

)

$

(4,086

)

Bad debt expense

 

103

 

(355

)

189

 

46

 

Write-offs, net of recoveries

 

(21

)

665

 

44

 

314

 

Allowance for doubtful accounts, end of period

 

$

(2,239

)

$

(3,726

)

$

(2,239

)

$

(3,726

)

 

Note 6 — Financial Instruments

 

Fair Value Measurements

 

The Company considers fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The Company utilizes the following three-level fair value hierarchy to establish the priorities of the inputs used to measure fair value:

 

·                    Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

·                    Level 2 — Observable inputs other than quoted market prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

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Table of Contents

 

·                    Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

 

The following table presents the Company’s financial assets and liabilities that were accounted for at fair value, excluding assets related to the Company’s defined benefit pension plans, classified by the level within the fair value hierarchy on a recurring basis (in thousands):

 

 

 

September 30, 2012

 

March 31, 2012

 

 

 

Level 1

 

Level 2

 

Level 3

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

237,033

 

$

 

$

 

$

478,370

 

$

 

$

 

Trading investments for deferred compensation plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

3,466

 

 

 

3,383

 

 

 

Mutual funds

 

11,339

 

 

 

10,918

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized debt obligations

 

 

 

 

 

 

429

 

Foreign exchange derivative assets

 

 

363

 

 

 

658

 

 

Total assets at fair value

 

$

251,838

 

$

363

 

$

 

$

492,671

 

$

658

 

$

429

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange derivative liabilities

 

$

 

$

3,375

 

$

 

$

 

$

245

 

$

 

Total liabilities at fair value

 

$

 

$

3,375

 

$

 

$

 

$

245

 

$

 

 

The following table presents the changes in the Company’s Level 3 financial assets during the six months ended September 30, 2012 and 2011 (in thousands):

 

 

 

September 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Available-for-sale securities, beginning balance

 

$

429

 

$

1,695

 

Proceeds from sales of securities

 

(917

)

 

Realized gain on sales of securities

 

831

 

 

Reversal of unrealized gains previously recognized in accumulated other comprehensive income

 

(343

)

 

Available-for-sale securities, ending balance

 

$

 

$

1,695

 

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of bank demand deposits and time deposits. The time deposits have original maturities of three months or less. Cash and cash equivalents are carried at cost, which approximates fair value.

 

Investment Securities

 

The Company’s investment securities portfolio currently consists of marketable securities (money market and mutual funds) related to a deferred compensation plan and previously also included auction rate securities collateralized by residential and commercial mortgages.

 

The marketable securities related to the deferred compensation plan are classified as non-current other assets. Since participants in the deferred compensation plan may select the mutual funds in which their compensation deferrals are invested within the confines of the Rabbi Trust which holds the marketable securities, the Company has designated these marketable securities as trading investments, although there is no stated intent to actively buy and sell securities with the objective of generating profits on short-term differences in market prices.  Management has classified the investments as non-current assets because final sale of the investments or realization of proceeds by plan participants is not expected within the

 

16



Table of Contents

 

Company’s normal operating cycle of one year. The marketable securities are recorded at a fair value of $14.8 million and $14.3 million as of September 30 and March 31, 2012, based on quoted market prices. Quoted market prices are observable inputs that are classified as Level 1 within the fair value hierarchy. Earnings, gains and losses on trading investments are included in other income (expense), net. Unrealized trading gains of $0.5 million and $0.2 million are included in other income (expense), net for the three and six months ended September 30, 2012 and relate to trading securities held at September 30, 2012.

 

Derivative Financial Instruments

 

The following table presents the fair values of the Company’s derivative instruments and their locations on its consolidated balance sheets as of September 30 and March 31, 2012 (in thousands):

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

 

 

Fair Value

 

 

 

Fair Value

 

 

 

 

 

September 30,

 

March 31,

 

 

 

September 30,

 

March 31,

 

 

 

Location

 

2012

 

2012

 

Location

 

2012

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

Other assets

 

$

52

 

$

250

 

Other liabilities

 

$

3,045

 

$

 

 

 

 

 

52

 

250

 

 

 

3,045

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

Other assets

 

311

 

341

 

Other liabilities

 

75

 

148

 

Foreign exchange swap contracts

 

Other assets

 

 

67

 

Other liabilities

 

255

 

97

 

 

 

 

 

311

 

408

 

 

 

330

 

245

 

 

 

 

 

$

363

 

$

658

 

 

 

$

3,375

 

$

245

 

 

The following table presents the amounts of gains and losses on the Company’s derivative instruments for the three months ended September 30, 2012 and 2011 and their locations on its consolidated statements of operations (in thousands):

 

 

 

Net amount of gain/(loss)
deferred as a component of
accumulated other
comprehensive loss

 

Location of
gain/(loss)
reclassified from
accumulated other
comprehensive
loss into income

 

Amount of gain/(loss)
reclassified from
accumulated other
comprehensive loss into
income

 

Location of
gain/(loss)
recognized in income
immediately

 

Amount of gain/(loss)
recognized in income
immediately

 

 

 

2012

 

2011

 

 

 

2012

 

2011

 

 

 

2012

 

2011

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

$

(3,783

)

$

7,219

 

Cost of goods sold

 

$

(1,683

)

$

1,539

 

Other income/expense

 

$

120

 

$

(161

)

 

 

(3,783

)

7,219

 

 

 

(1,683

)

1,539

 

 

 

120

 

(161

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

 

 

 

 

 

 

Other income/expense

 

(92

)

246

 

Foreign exchange swap contracts

 

 

 

 

 

 

 

Other income/expense

 

(390

)

(403

)

 

 

 

 

 

 

 

 

 

 

(482

)

(157

)

 

 

$

(3,783

)

$

7,219

 

 

 

$

(1,683

)

$

1,539

 

 

 

$

(362

)

$

(318

)

 

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Table of Contents

 

The following table presents the amounts of gains and losses on the Company’s derivative instruments for the six months ended September 30, 2012 and 2011 and their locations on its consolidated statements of operations (in thousands):

 

 

 

Net amount of gain/(loss)
deferred as a component of 
accumulated other
comprehensive loss

 

Location of
gain/(loss)
reclassified from
accumulated other
comprehensive
loss into income

 

Amount of gain/(loss)
reclassified from
accumulated other
comprehensive loss into
income

 

Location of
gain/(loss)
recognized in income
immediately

 

Amount of gain/(loss)
recognized in income
immediately

 

 

 

2012

 

2011

 

 

 

2012

 

2011

 

 

 

2012

 

2011

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

$

(2,684

)

$

7,901

 

Cost of goods sold

 

$

(1,577

)

$

4,017

 

Other income/expense

 

$

172

 

$

(258

)

 

 

(2,684

)

7,901

 

 

 

(1,577

)

4,017

 

 

 

172

 

(258

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

 

 

 

 

 

 

Other income/expense

 

(837

)

194

 

Foreign exchange swap contracts

 

 

 

 

 

 

 

Other income/expense

 

435

 

(620

)

 

 

 

 

 

 

 

 

 

 

(402

)

(426

)

 

 

$

(2,684

)

$

7,901

 

 

 

$

(1,577

)

$

4,017

 

 

 

$

(230

)

$

(684

)

 

Cash Flow Hedges

 

The Company enters into foreign exchange forward contracts to hedge against exposure to changes in foreign currency exchange rates related to its subsidiaries’ forecasted inventory purchases.  The Company has one entity with a euro functional currency that purchases inventory in U.S. dollars.  The Company is currently hedging against a weaker euro relative to U.S. dollars in that entity.  The primary risk managed by using derivative instruments is the foreign currency exchange rate risk. The Company has designated these derivatives as cash flow hedges. Logitech does not use derivative financial instruments for trading or speculative purposes. These hedging contracts mature within four months, and are denominated in the same currency as the underlying transactions. Gains and losses in the fair value of the effective portion of the hedges are deferred as a component of accumulated other comprehensive loss until the hedged inventory purchases are sold, at which time the gains or losses are reclassified to cost of goods sold. The Company assesses the effectiveness of the hedges by comparing changes in the spot rate of the currency underlying the forward contract with changes in the spot rate of the currency in which the forecasted transaction will be consummated. If the underlying transaction being hedged fails to occur or if a portion of the hedge does not generate offsetting changes in the foreign currency exposure of forecasted inventory purchases, the Company immediately recognizes the gain or loss on the associated financial instrument in other income (expense), net. Such gains and losses were immaterial during the three and six months ended September 30, 2012 and 2011. Cash flows from such hedges are classified as operating activities in the consolidated statements of cash flows. The notional amounts of foreign exchange forward contracts outstanding related to forecasted inventory purchases were $94.5 million (€73.0 million) and $77.4 million (€57.3 million) at September 30, 2012 and 2011. The notional amount represents the future cash flows under contracts to purchase foreign currencies.

 

Other Derivatives

 

The Company also enters into foreign exchange forward contracts to reduce the short-term effects of foreign currency fluctuations on certain foreign currency receivables or payables. These forward contracts generally mature within three months. The Company may also enter into foreign exchange swap contracts to economically extend the terms of its foreign exchange forward contracts. The primary risk managed by using forward and swap contracts is the foreign currency exchange rate risk. The gains or losses on foreign exchange forward contracts are recognized in earnings based on the changes in fair value.

 

The notional amounts of foreign exchange forward contracts outstanding at September 30, 2012 and 2011 relating to foreign currency receivables or payables were $25.6 million and $22.3 million. Open forward contracts as of September 30, 2012 consisted of contracts in euros to sell British pounds, contracts in Australian dollars to purchase U.S. dollars and contracts in Taiwanese dollars to sell U.S. dollars at future dates at pre-determined exchange rates. Open forward contracts as of September 30, 2011 consisted of contracts in euros to purchase or sell British pounds and contracts in Australian dollars to purchase U.S. dollars at future dates at pre-determined exchange rates. The notional amounts of foreign exchange swap contracts outstanding at September 30, 2012 and 2011 were $11.5 million and $25.6 million. Swap contracts outstanding at September 30, 2012 consisted of contracts in Mexican pesos and Japanese yen.

 

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Swap contracts outstanding at September 30, 2011 consisted of contracts in Taiwanese dollar Non-Deliverable Forwards, Mexican pesos, Japanese yen and Canadian dollars.

 

The fair value of all our foreign exchange forward contracts and foreign exchange swap contracts is determined based on observable market transactions of spot currency rates and forward rates. Cash flows from these contracts are classified as operating activities in the consolidated statements of cash flows.

 

Financial Instruments Measured at Fair Value on a Nonrecurring Basis

 

During the second quarter of fiscal year 2013, the Company invested $4.0 million in a privately-held company in exchange for convertible preferred stock.  The Company accounts for this investment under the cost method of accounting since it has less than a 20% ownership interest and it lacks the ability to exercise significant influence over the operating and financial policies of the investee.  The Company will periodically assess the investment for other-than-temporary impairment.  If it determines that an other-than-temporary impairment has occurred, it will write down this investment to its fair value. The Company will estimate fair value of this investment considering all available information such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data.

 

Note 7 — Goodwill and Other Intangible Assets

 

The Company evaluates the goodwill of each reporting unit for impairment at least annually as of December 31, or more frequently if events or circumstances warrant. The Company’s reporting units consist of peripherals and video conferencing. On April 25, 2012, the Company announced a restructuring plan as described in Note 13, and as a result, management performed a test during the first quarter of fiscal year 2013 to evaluate the recoverability of goodwill after implementation of the restructuring. The Company measures the recoverability of goodwill at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the estimated fair value of the reporting unit. The fair value is estimated using a discounted cash flow model, which considers estimates of projected future operating results and cash flows, discounted at an estimated after-tax weighted-average cost of capital. In addition, market-based valuation techniques are used to test the reasonableness of the value indicated by the discounted cash flow model. In the market-based valuation technique, the implied premium of the aggregate fair value over the market capitalization is considered attributable to an acquisition control premium, which is the price in excess of a stock’s market price that investors would typically pay to gain control of an entity. The discounted cash flow model and the market-based valuation techniques require the exercise of significant judgment, including assumptions about appropriate discount rates, long-term growth rates for purposes of determining a terminal value at the end of the discrete forecast period, economic expectations, timing of expected future cash flows, and expectations of returns on equity that will be achieved. Such assumptions are subject to change as a result of changing economic and competitive conditions. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired, and a second test is performed to measure the amount of impairment loss by allocating the reporting unit’s fair value to its assets and liabilities other than goodwill, comparing the resulting implied fair value of goodwill with its carrying amount, and recording an impairment charge for the difference. The goodwill impairment evaluation performed by management as of June 30, 2012 indicated that the fair value of its peripherals reporting unit exceeded the carrying value of the reporting unit by more than 70% of the carrying value, and the fair value of its video conferencing reporting unit exceeded the carrying value of the reporting unit by more than 100% of the carrying value.

 

Our acquisition of Mirial S.r.l. on July 18, 2011 added $14.1 million to goodwill during the second quarter of fiscal year 2012. Mirial’s business has been fully integrated into the Company’s video conferencing reporting unit, and discrete financial information for Mirial is not maintained. Accordingly, the acquired goodwill related to Mirial is evaluated for impairment at the video conferencing reporting unit level.

 

As of September 30, 2012, the carrying value of goodwill attributable to the peripherals and video conferencing reporting units was $221.9 million and $339.2 million.

 

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In connection with the restructuring, management also reviewed long-lived assets, such as property and equipment, and intangible assets, for recoverability by comparing the projected undiscounted net cash flows associated with those assets to their carrying values. No impairment of long-lived assets was required as a result of the review during the first quarter of fiscal year 2013.

 

Management continues to evaluate and monitor all key factors impacting the carrying value of the Company’s recorded goodwill and long-lived assets. Further adverse changes in the Company’s actual or expected operating results, market capitalization, business climate, economic factors or other negative events that may be outside the control of management could result in a material non-cash impairment charge in the future.

 

The Company’s acquired other intangible assets subject to amortization were as follows (in thousands):

 

 

 

September 30, 2012

 

March 31, 2012

 

 

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

 

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademark/tradename

 

$

32,075

 

$

(27,474

)

$

4,601

 

$

32,104

 

$

(26,095

)

$

6,009

 

Technology

 

91,831

 

(69,882

)

21,949

 

91,954

 

(62,548

)

29,406

 

Customer contracts

 

40,131

 

(25,573

)

14,558

 

39,926

 

(21,823

)

18,103

 

 

 

$

164,037

 

$

(122,929

)

$

41,108

 

$

163,984

 

$

(110,466

)

$

53,518

 

 

Amortization expense for other intangible assets was $6.0 million and $6.9 million for the three months ended September 30, 2012 and 2011 and $12.2 million and $13.6 million for the six months ended September 30, 2012 and 2011. The Company expects that amortization expense for the remaining six months of fiscal year 2013 will be $12.1 million, and annual amortization expense for fiscal years 2014, 2015 and 2016 will be $18.2 million, $9.1 million, and $1.2 million, and $0.5 million thereafter.

 

Note 8 — Financing Arrangements

 

In December 2011, the Company entered into a Senior Revolving Credit Facility Agreement with a group of primarily Swiss banks that provides for a revolving multicurrency unsecured credit facility in an amount of up to $250.0 million. The Company may, upon notice to the lenders and subject to certain requirements, arrange with existing or new lenders to provide up to an aggregate of $150.0 million in additional commitments, for a total of $400.0 million of unsecured revolving credit. The credit facility may be used for working capital, general corporate purposes, and acquisitions. There were no outstanding borrowings under the credit facility at September 30, 2012.

 

The credit facility matures on October 31, 2016. The Company may prepay the loans under the credit facility in whole or in part at any time without premium or penalty. Borrowings under the credit facility will accrue interest at a per annum rate based on LIBOR (London Interbank Offered Rate), or EURIBOR (Euro Interbank Offered Rate) in the case of loans denominated in euros, plus a variable margin determined quarterly based on the ratio of senior debt-to-earnings before interest, taxes, depreciation and amortization for the preceding four-quarter period, plus, if applicable, an additional rate per annum intended to compensate the lenders for the cost of compliance with regulatory reserve requirements and other banking regulations. The Company also pays a quarterly commitment fee of 40% of the applicable margin on the available commitment. In connection with entering into the credit facility, the Company incurred non-recurring fees totaling $1.5 million, which are amortized on a straight-line basis over the term of the credit facility.

 

The facility agreement contains representations, covenants, including threshold financial covenants, and events of default customary in Swiss credit markets. Affirmative covenants include covenants regarding reporting requirements, maintenance of insurance, maintenance of properties and compliance with applicable laws and regulations, and financial covenants that require the maintenance of net senior debt, interest cover and adjusted equity ratios determined in accordance with the terms of the facility. Negative covenants limit the ability of the Company and its subsidiaries, among other things, to grant liens,

 

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Table of Contents

 

make investments, incur debt, make restricted payments, enter into a merger or acquisition, or sell, transfer or dispose of assets, in each case subject to certain exceptions.  As of September 30, 2012, the Company was not in compliance with the adjusted equity ratio of this facility. This situation resulted from the Company’s $133.5 million cash dividend payment to its shareholders on September 18, 2012. The Company believes that this is only a short-term situation.  Until the Company is in compliance with the covenants, this facility may not be available for its use.

 

This facility stipulates that, upon an uncured event of default under the facility, the lenders may declare all or a portion of the outstanding obligations payable by the Company to be immediately due and payable, terminate their commitments and exercise other rights and remedies provided for under the facility. The events of default under the facility include, among other things, payment defaults, covenant defaults, inaccuracy of representations and warranties, cross defaults with certain other indebtedness, bankruptcy and insolvency events and events that have a material adverse effect (as defined in the facility). Upon a change of control of the Company, lenders whose commitments aggregate more than two-thirds of the total commitments under the facility may terminate the commitments and declare all outstanding obligations to be due and payable.

 

The Company had several uncommitted, unsecured bank lines of credit aggregating $76.2 million at September 30, 2012. There are no financial covenants or cross default provisions under these lines of credit with which the Company must comply. At September 30, 2012, the Company had no outstanding borrowings under these lines of credit. The Company also had available credit lines related to corporate credit cards totaling $29.9 million as of September 30, 2012. The outstanding borrowings under these credit lines are recorded in other current liabilities. There are no financial covenants or cross default provisions under these credit lines.

 

Note 9 — Commitments and Contingencies

 

Operating Leases

 

The Company leases facilities under operating leases, certain of which require it to pay property taxes, insurance and maintenance costs. Operating leases for facilities are generally renewable at the Company’s option and usually include escalation clauses linked to inflation. Future minimum annual rentals under non-cancelable operating leases at September 30, 2012 amounted to $104.3 million. In the six months ended September 30, 2012, the Company recognized additional rent expense of $3.4 million, representing the fair value of future rent obligations on its former Americas headquarters, which are no longer used by the Company.

 

In connection with its leased facilities, the Company has recognized a liability for asset retirement obligations representing the present value of estimated remediation costs to be incurred at lease expiration. The following table describes changes to the Company’s asset retirement obligation liability for the three and six months ended September 30, 2012 and 2011 (in thousands):

 

 

 

Three months ended

 

Six months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Asset retirement obligations, beginning of period

 

$

2,001

 

$

1,670

 

$

1,918

 

$

1,636

 

Liabilities incurred

 

 

38

 

 

38

 

Liabilities settled

 

 

(9

)

 

(26

)

Accretion expense

 

4

 

20

 

16

 

39

 

Foreign currency translation

 

(135

)

(40

)

(64

)

(8

)

Asset retirement obligations, end of period

 

$

1,870

 

$

1,679

 

$

1,870

 

$

1,679

 

 

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Table of Contents

 

Product Warranties

 

Certain of the Company’s products are covered by warranty to be free from defects in material and workmanship for periods ranging from one year to five years. At the time of sale, the Company accrues a warranty liability for estimated costs to provide products, parts or services to repair or replace products in satisfaction of the warranty obligation. The Company’s estimate of costs to fulfill its warranty obligations is based on historical experience and expectations of future conditions. When the Company experiences changes in warranty claim activity or costs associated with fulfilling those claims, the warranty liability is adjusted accordingly. Changes in the Company’s warranty liability for the three and six months ended September 30, 2012 and 2011 were as follows (in thousands):

 

 

 

Three months ended

 

Six months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Warranty liability, beginning of period

 

$

4,821

 

$

4,633

 

$

5,184

 

$

4,970

 

Provision for warranties issued during the period

 

(215

)

4,991

 

1,417

 

9,412

 

Settlements made during the period

 

(363

)

(4,792

)

(2,358

)

(9,550

)

Warranty liability, end of period

 

$

4,243

 

$

4,832

 

$

4,243

 

$

4,832

 

 

Purchase Commitments

 

At September 30, 2012, the Company had the following outstanding purchase commitments (in thousands):

 

 

 

September 30, 2012

 

 

 

 

 

Inventory purchases

 

$

166,212

 

Operating expenses

 

66,402

 

Capital expenditures

 

19,000

 

Total purchase commitments

 

$

251,614

 

 

Commitments for inventory purchases are made in the normal course of business to original design manufacturers, contract manufacturers and other suppliers and are expected to be fulfilled by December 2012. Operating expense commitments are for consulting services, marketing arrangements, advertising, outsourced customer services, information technology maintenance and support services, and other services. Fixed purchase commitments for capital expenditures primarily related to commitments for computer hardware and leasehold improvements. Although open purchase orders are considered enforceable and legally binding, the terms generally allow the Company the option to reschedule and adjust its requirements based on the business needs prior to delivery of goods or performance of services.

 

Guarantees

 

Logitech International S.A., the parent holding company, has guaranteed payment of the purchase obligations of various subsidiaries from certain component suppliers. These guarantees generally have an unlimited term. The maximum potential future payment under the guarantee arrangements is limited to $36.0 million. At September 30, 2012, there were no purchase obligations outstanding for which the parent holding company was required to guarantee payment.

 

Logitech Europe S.A., a subsidiary of the parent holding company, has guaranteed the purchase obligations of another Logitech subsidiary and third-party contract manufacturers under three guarantee agreements. Two of these guarantees do not specify a maximum amount. The remaining guarantee has a total limit of $7.0 million. As of September 30, 2012, $2.6 million of guaranteed purchase obligations were outstanding under these guarantees. Logitech Europe S.A. has also guaranteed payment of the purchase obligations of a third-party contract manufacturer under three guarantee agreements. The maximum amount of these guarantees was $3.7 million as of September 30, 2012. As of September 30, 2012, $2.0 million of guaranteed purchase obligations were outstanding under these agreements.

 

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Table of Contents

 

Logitech International S.A. and Logitech Europe S.A. have guaranteed certain contingent liabilities of various subsidiaries related to transactions occurring in the normal course of business. The maximum amount of the guarantees was $36.9 million as of September 30, 2012. As of September 30, 2012, $10.0 million of guaranteed liabilities were subject to these guarantees.

 

Indemnifications

 

Logitech indemnifies some of its suppliers and customers for losses arising from matters such as intellectual property disputes and product safety defects, subject to certain restrictions. The scope of these indemnities varies, but in some instances, includes indemnification for damages and expenses, including reasonable attorneys’ fees. No amounts have been accrued for indemnification provisions at September 30, 2012. The Company does not believe, based on historical experience and information currently available, that it is probable that any material amounts will be required to be paid under its indemnification arrangements.

 

Logitech also indemnifies its current and former directors and certain of its current and former officers. Certain costs incurred for providing such indemnification may be recoverable under various insurance policies. Logitech is unable to reasonably estimate the maximum amount that could be payable under these arrangements because these exposures are not capped, the obligations are conditional in nature, and the facts and circumstances involved in any situation that might arise are variable.

 

Legal Proceedings

 

On May 23, 2011, a class action complaint was filed against Logitech International S.A. and certain of its officers in the United States District Court for the Southern District of New York on behalf of individuals who purchased Logitech shares between October 28, 2010 and April 1, 2011. The complaint relates to Logitech’s disclosure on March 31, 2011 that its results for fiscal year 2011 would fall below expectations and seeks unspecified monetary damages and other relief against the defendants. The action was transferred to the United States District Court for the Northern District of California on July 28, 2011. The California Court appointed a lead plaintiff on October 27, 2011. The plaintiff filed an amended complaint on January 9, 2012 which expanded the alleged class period to between October 28, 2010 and September 22, 2011. On July 13, 2012, the California Court granted defendants’ motion to dismiss the amended complaint, with leave to amend.  On September 28, 2012, the Court approved a stipulation and proposed order submitted by the parties dismissing the case with prejudice.

 

On July 15, 2011, a complaint was filed against Logitech International S.A. and two of its subsidiaries in the United States District Court for the Central District of California by Universal Electronics, Inc. (UEI). On November 3, 2011, the Company filed a counter suit against UEI. On July 18, 2012, Logitech and UEI signed a nonbinding settlement and license agreement term sheet, and the District Court thereafter dismissed the suits without prejudice to the right, upon good cause shown within 60 days, to reopen the action if a settlement is not consummated.  The parties subsequently finalized the settlement.

 

In addition, from time to time the Company is involved in claims and legal proceedings which arise in the ordinary course of its business.  The Company is currently subject to several such claims and a small number of legal proceedings.  The Company believes that these matters lack merit and intends to vigorously defend against them.  Based on currently available information, the Company does not believe that resolution of pending matters will have a material adverse effect on its financial condition, cash flows or results of operations.  However, litigation is subject to inherent uncertainties, and there can be no assurances that the Company’s defenses will be successful or that any such lawsuit or claim would not have a material adverse impact on the Company’s business, financial condition, cash flows and results of operations in a particular period.  Any claims or proceedings against us, whether meritorious or not, can have an adverse impact because of defense costs, diversion of management and operational resources, negative publicity and other factors.  Any failure to obtain necessary license or other rights, or litigation arising out of intellectual property claims, could adversely affect our business.

 

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Table of Contents

 

Note 10 — Shareholders’ Equity

 

Dividends

 

On September 5, 2012, the Company’s shareholders approved a cash dividend of CHF 125.7 million out of retained earnings to Logitech shareholders who owned shares on September 17, 2012.  Eligible shareholders were paid CHF 0.79 per share ($0.85 per share in U.S. dollars), totaling $133.5 million in U.S. dollars on September 18, 2012.

 

Share Repurchases

 

During the three and six months ended September 30, 2012 and 2011, the Company had in place the approved share buyback programs shown in the following table (in thousands, excluding transaction costs). The amended September 2008 share buyback program enables the Company to repurchase shares for cancellation.

 

Date of Announcement