q2fy1010q.htm





 
 
 
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 quarter ended September 30, 2009
   
 
or
   
 
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.
6505 Kaiser Drive
Fremont, California 94555
(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  ¨
 
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 ¨      No ¨
 
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  ¨
Non-accelerated filer    (Do not check if a smaller reporting company) ¨
Smaller reporting company  ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes   ¨  No x
 
As of  October 30, 2009, there were 175,385,728 shares of the Registrant’s share capital outstanding.

 

 


 

 

TABLE OF CONTENTS
 
   
 
Part I
FINANCIAL INFORMATION
 
     
Item 1.
Consolidated Financial Statements (Unaudited)
3
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
25 
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
42
 
 
 
Item 4.
Controls and Procedures
44
     
Part II
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings   
45 
 
 
 
Item 1A.
Risk Factors
45
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
53
     
Item 4.
Submission of Matters to a Vote of Security Holders
53
     
Item 6.
Exhibit Index
55
   
Signatures
56
   
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.
 

 
1

 

PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
Financial Statement Description
Page
     
Consolidated Statements of Operations for the three and six months ended September 30, 2009 and 2008
3
     
Consolidated Balance Sheets as of September 30, 2009 and March 31, 2009
4
     
Consolidated Statements of Cash Flows for the six months ended September 30, 2009 and 2008
5
 
 
 
Consolidated Statements of Changes in Shareholders’ Equity for the six months ended September 30, 2009 and 2008
6
     
Notes to Consolidated Financial Statements
7
 
 
 




 
2

 

LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)



 
Three months ended
 
Six months ended
 
 
September 30,
 
September 30,
 
 
2009
 
2008
 
2009
 
2008
 
 
(Unaudited)
 
                 
Net sales
$ 498,093   $ 664,707   $ 824,203   $ 1,173,418  
Cost of goods sold
  346,305     436,633     594,593     771,772  
Gross profit
  151,788     228,074     229,610     401,646  
Operating expenses:
                       
Marketing and selling
  68,835     84,740     127,773     162,020  
Research and development
  31,825     33,351     63,185     66,610  
General and administrative
  23,739     29,620     44,920     62,929  
Restructuring charges
  45     -     1,494     -  
         Total operating expenses
  124,444     147,711     237,372     291,559  
Operating income (loss)
  27,344     80,363     (7,762 )   110,087  
Interest income, net
  639     2,775     1,231     5,327  
Other expense, net
  (1,438 )   (853 )   (636 )   (292 )
Income (loss) before income taxes
  26,545     82,285     (7,167 )   115,122  
Provision for income taxes
  5,802     9,974     9,455     13,505  
Net income (loss)
$ 20,743   $ 72,311   $ (16,622 ) $ 101,617  
                         
Net income (loss) per share:
                       
Basic
$ 0.12   $ 0.41   $ (0.09 ) $ 0.57  
Diluted
$ 0.11   $ 0.39   $ (0.09 ) $ 0.55  
                         
Shares used to compute net income (loss) per share:
                   
Basic
  178,395     178,630     179,058     178,835  
Diluted
  180,989     183,509     179,058     184,154  


















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

 
3

 

LOGITECH INTERNATIONAL S.A.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)


             
   
September 30,
   
March 31,
 
   
2009
   
2009
 
   
(Unaudited)
       
ASSETS
 
Current assets:
           
Cash and cash equivalents
  $ 524,844     $ 492,759  
Short-term investments
    -       1,637  
Accounts receivable
    259,776       213,929  
Inventories
    239,904       233,467  
Other current assets
    60,104       56,884  
Total current assets
    1,084,628       998,676  
Property, plant and equipment
    97,664       104,132  
Goodwill
    243,108       242,909  
Other intangible assets
    27,505       32,109  
Other assets
    49,092       43,704  
Total assets
  $ 1,501,997     $ 1,421,530  
                 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
                 
Current liabilities:
               
Accounts payable
  $ 291,661     $ 157,798  
Accrued liabilities
    154,529       131,496  
Total current liabilities
    446,190       289,294  
Other liabilities
    142,370       134,528  
Total liabilities
    588,560       423,822  
                 
Commitments and contingencies
               
                 
Shareholders' equity:
               
Shares, par value CHF 0.25 - 191,606,620 issued and authorized
               
and 50,000,000 conditionally authorized at September 30, 2009 and
               
March 31, 2009
    33,370       33,370  
Additional paid-in capital
    24,091       45,012  
Less shares in treasury, at cost, 16,281,115 at September 30, 2009
               
and 12,124,078 at March 31, 2009
    (395,995 )     (341,454 )
Retained earnings
    1,325,039       1,341,661  
Accumulated other comprehensive loss
    (73,068 )     (80,881 )
Total shareholders' equity
    913,437       997,708  
Total liabilities and shareholders' equity
  $ 1,501,997     $ 1,421,530  






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

 
4

 

LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)


   
Six months ended
 
   
September 30,
 
   
2009
   
2008
 
   
(Unaudited)
 
             
Cash flows from operating activities:
           
Net income (loss)
  $ (16,622 )   $ 101,617  
Non-cash items included in net income (loss):
               
Depreciation
    26,057       22,501  
Amortization of other intangible assets
    4,603       3,470  
Share-based compensation expense related to options, RSUs and
               
  purchase rights
    11,166       11,710  
Write-down of investments
    -       979  
Excess tax benefits from share-based compensation
    (1,346 )     (6,032 )
Loss (gain) on cash surrender value of life insurance policies
    (402 )     363  
Deferred income taxes and other
    (274 )     3,434  
Changes in assets and liabilities:
               
Accounts receivable
    (39,896 )     (99,553 )
Inventories
    (1,011 )     (83,760 )
Other assets
    (8,585 )     (13,611 )
Accounts payable
    130,803       118,930  
Accrued liabilities
    28,407       23,359  
Net cash provided by operating activities
    132,900       83,407  
                 
Cash flows from investing activities:
               
Purchases of property, plant and equipment
    (18,144 )     (25,047 )
Proceeds from cash surrender of life insurance policies
    813       -  
Acquisitions and investments, net of cash acquired
    (200 )     (31,832 )
Premiums paid on cash surrender value life insurance policies
    -       (427 )
Net cash used in investing activities
    (17,531 )     (57,306 )
                 
Cash flows from financing activities:
               
Purchases of treasury shares
    (101,267 )     (76,017 )
Proceeds from sale of shares upon exercise of options and purchase rights
    12,972       22,355  
Excess tax benefits from share-based compensation
    1,346       6,032  
Net cash used in financing activities
    (86,949 )     (47,630 )
                 
Effect of exchange rate changes on cash and cash equivalents
    3,665       (5,592 )
Net increase (decrease) in cash and cash equivalents
    32,085       (27,121 )
Cash and cash equivalents at beginning of period
    492,759       482,352  
Cash and cash equivalents at end of period   $ 524,844     $ 455,231  







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

 
5

 

LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)

(Unaudited)

                                       
Accumulated
       
               
Additional
                     
other
       
   
Registered shares
   
paid-in
   
Treasury shares
   
Retained
   
comprehensive
       
   
Shares
   
Amount
   
capital
   
Shares
   
Amount
   
earnings
   
loss
   
Total
 
March 31, 2008
    191,606     $ 33,370     $ 49,821       12,431     $ (338,293 )   $ 1,234,629     $ (19,483 )   $ 960,044  
Net income
    -       -       -       -       -       101,617       -       101,617  
Cumulative translation
                                                               
adjustment
    -       -       -       -       -       -       (13,772 )     (13,772 )
Minimum pension liability adjustment
    -       -       -       -       -       -       148       148  
Unrealized gain on investment
    -       -       -       -       -       -       457       457  
Total comprehensive income
                                                            88,450  
Tax benefit from exercise of
                                                               
stock options
    -       -       6,527       -       -       -       -       6,527  
Purchase of treasury shares
    -       -       -       2,603       (76,017 )     -       -       (76,017 )
Sale of shares upon exercise of
                                                               
options and purchase rights
    -       -       (18,375 )     (1,876 )     40,730       -       -       22,355  
Share-based compensation expense
                                                               
related to employee stock options
                                                               
and stock purchase rights
    -       -       11,824       -       -       -       -       11,824  
September 30, 2008
    191,606     $ 33,370     $ 49,797       13,158     $ (373,580 )   $ 1,336,246     $ (32,650 )   $ 1,013,183  
                                                                 
March 31, 2009
    191,606     $ 33,370     $ 45,012       12,124     $ (341,454 )   $ 1,341,661     $ (80,881 )   $ 997,708  
Net loss
    -       -       -       -       -       (16,622 )             (16,622 )
Cumulative translation
                                                               
adjustment
    -       -       -       -       -       -       12,046       12,046  
Minimum pension liability adjustment
    -       -       -       -       -       -       30       30  
Net deferred hedging loss
    -       -       -       -       -       -       (4,263 )     (4,263 )
Total comprehensive loss
                                                            (8,809 )
Purchase of treasury shares
    -       -       -       5,838       (101,267 )     -       -       (101,267 )
Tax benefit from exercise of
                                                               
stock options
    -       -       1,811       -       -       -       -       1,811  
Sale of shares upon exercise of
                                                               
options and purchase rights
    -       -       (33,754 )     (1,681 )     46,726       -       -       12,972  
Share-based compensation expense
                                                               
related to employee stock options,
                                                               
RSUs and stock purchase rights
    -       -       11,022       -       -       -       -       11,022  
September 30, 2009
    191,606     $ 33,370     $ 24,091       16,281     $ (395,995 )   $ 1,325,039     $ (73,068 )   $ 913,437  














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

 
6

 

LOGITECH INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1 — The Company
 
Logitech International S.A. is a global leader in peripherals for personal computers and other digital platforms, developing and marketing innovative products in PC navigation, Internet communications, digital music, home-entertainment control, video security, interactive gaming and wireless devices. For the PC, the Company’s products include mice, trackballs, keyboards, gaming controllers, multimedia speakers, headsets, webcams and 3D control devices. For digital music devices, the Company’s products include speakers, headphones, earphones and custom in-ear monitors. For gaming consoles, the Company offers a range of controllers and other accessories. In addition, Logitech offers wireless music solutions for the home, advanced remote controls for home entertainment systems and PC-based video security systems for a home or small business.  The Company generates revenues from sales of its products to a worldwide network of retail distributors and resellers and to original equipment manufacturers (“OEMs”). The Company’s sales to its retail channels comprise the large majority of its revenues.
 
Logitech was founded in Switzerland in 1981, and Logitech International S.A. has been the parent holding company of Logitech since 1988.  Logitech International S.A. is a Swiss holding company with its registered office in Apples, Switzerland, which conducts its business through subsidiaries in the Americas, Europe, Middle East, Africa (“EMEA”) and Asia Pacific. Shares of Logitech International S.A. are listed on both the Nasdaq Global Select Market, under the trading symbol LOGI, and the SIX Swiss Exchange, under the trading symbol LOGN.

Note 2 — Summary of Significant Accounting Policies
 
Basis of Presentation
 
The consolidated financial statements include the accounts of Logitech and its subsidiaries. All intercompany balances and transactions have been eliminated. The consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) 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, 2009 included in its Annual Report on Form 10-K.

Net loss for the six months ended September 30, 2009 includes $2.2 million in pretax charges related to restructuring accruals, bonus accruals, and revenue related adjustments from fiscal year 2009. We reviewed the accounting errors 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 errors to be immaterial to the current and prior quarterly and annual periods.

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

Subsequent events were evaluated through the time of filing this Form 10-Q with the SEC on November 4, 2009 and are disclosed as applicable in the notes to the consolidated financial statements.

In the opinion of management, these 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, 2009 are not necessarily indicative of the results that may be expected for the year ending March 31, 2010 or any future periods.
 
 
7

 
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 our significant accounting policies during the three and six months ended September 30, 2009 compared with the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.

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.

Recent Accounting Pronouncements
 
In October 2009, the Financial Accounting Standards Board (“FASB”) published FASB Accounting Standards Update (“ASU”) 2009-14, Certain Revenue Arrangements That Include Software Elements, to provide guidance for revenue arrangements that include both tangible products and software elements.  Under this guidance, tangible products containing software components and non-software components that function together to deliver the product’s essential functionality are excluded from the software revenue guidance in Accounting Standards Codification (“ASC”) Subtopic 985-605, Software-Revenue Recognition. In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance. ASU 2009-14 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are currently evaluating the appropriate timing for the adoption of ASU 2009-14 and its potential impact on the Company’s consolidated financial statements.
 
In October 2009, the FASB published ASU 2009-13, Multiple Deliverable Revenue Arrangements, which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. This guidance amends the criteria in Subtopic 605-25, Revenue Recognition--Multiple-Element Arrangements, to establish a selling price hierarchy for determining the selling price of a deliverable, based on vendor specific objective evidence, acceptable third party evidence, or estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, the disclosures required for multiple-deliverable revenue arrangements are expanded. ASU 2009-13 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are currently evaluating the appropriate timing for the adoption of ASU 2009-13 and its potential impact on the Company’s consolidated financial statements and disclosures.


 
8

 

Note 3 — Net Income (Loss) per Share

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

   
Three months ended
   
Six months ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
             
Net income (loss)
  $ 20,743     $ 72,311     $ (16,622 )   $ 101,617  
              .                  
Weighted average shares - basic
    178,395       178,630       179,058       178,835  
Effect of potentially dilutive stock options
                               
  and stock purchase rights
    2,594       4,879       -       5,319  
Weighted average shares - diluted
    180,989       183,509       179,058       184,154  
                                 
Net income (loss) per share - basic
  $ 0.12     $ 0.41     $ (0.09 )   $ 0.57  
Net income (loss) per share - diluted
  $ 0.11     $ 0.39     $ (0.09 )   $ 0.55  

    Share equivalents attributable to outstanding stock options and restricted stock units (“RSUs”) of 9,961,610 and 4,997,925 for the three months ended September 30, 2009 and 2008 and 4,635,060 for the six months ended September 30, 2008 were excluded from the calculation of diluted net income per share because the combined exercise price, average unamortized fair value and assumed tax benefits upon exercise of these options and RSUs were greater than the average market price of the Company’s shares, and therefore their inclusion would have been anti-dilutive. Potentially dilutive share equivalents were not considered in the computation of diluted net loss per share for the six months ended September 30, 2009 because their inclusion in calculating a net loss per share would have been anti-dilutive.

Employee equity share options, non-vested shares and similar equity instruments 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 options 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 stock options, 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.
 

Note 4 — 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.
 
 
 
9

 
·  
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 as of September 30, 2009, classified by the level within the fair value hierarchy (in thousands):
 
   
Level 1
   
Level 2
   
Level 3
 
Cash and cash equivalents
  $ 524,844     $ -     $ -  
Investment securities
    -       -       1,637  
Foreign exchange derivative assets
    954       -       -  
Total assets at fair value
  $ 525,798     $ -     $ 1,637  
Foreign exchange derivative liabilities
  $ 2,162     $ -     $ -  
Total liabilities at fair value
  $ 2,162     $ -     $ -  
 
The following table presents the Company’s financial assets and liabilities that were accounted for at fair value as of March 31, 2009, classified by the level within the fair value hierarchy (in thousands):
 
                   
   
Level 1
   
Level 2
   
Level 3
 
Cash and cash equivalents
  $ 492,759     $ -     $ -  
Investment securities
    -       -       1,637  
Foreign exchange derivative assets
    208       -       -  
Total assets at fair value
  $ 492,967     $ -     $ 1,637  
Foreign exchange derivative liabilities
  $ 1,849     $ -     $ -  
Total liabilities at fair value
  $ 1,849     $ -     $ -  

Notes 5 and 14 describe the inputs and valuation techniques used to determine fair value.

 
Note 5 — Cash and Cash Equivalents and Investment Securities

Cash and cash equivalents consist of bank demand deposits and time deposits. The time deposits have terms of less than 30 days. Cash and cash equivalents are carried at cost, which is equivalent to fair value.

The Company’s investment securities portfolio as of September 30, 2009 and March 31, 2009 consisted of auction rate securities collateralized by residential and commercial mortgages. The investment securities are classified as available-for-sale and are reported at estimated fair value. Auction rate securities generally have maturity dates greater than 10 years, with interest rates that typically reset through an auction every 28 days. All our investment securities as of September 30, 2009 have maturity dates in excess of 10 years. Since August 2007, auctions for these investments have failed. Consequently, the investments are not currently liquid and the Company will not be able to realize the proceeds, if any, from these investments until a future auction of these investments is successful or a buyer is found outside of the auction process. Management has determined that sale or realization of proceeds from the sale of these investment securities is not expected within the Company’s normal operating cycle of one year, and hence the investment securities were reclassified to non-current assets as of June 30, 2009.
 
 
10

 
The fair value of our auction rate securities is determined by estimating the values of the underlying collateral using published mortgage indices or interest rate spreads for comparably-rated collateral and applying discounted cash flow or option pricing methods to the estimated collateral value. The mortgage indices and spreads are adjusted for factors such as the issuance date of the auction rate security and the rating of the underlying assets. In addition, inputs to the valuation methods include factors such as the timing and amount of cash flow streams, the default risk underlying the collateral, discount rates, and overall capital market liquidity. Such adjustments indicate the inputs fall within Level 3 of the fair value hierarchy.

The following table presents the change in fair value of the Company’s investment securities during the six months ended September 30, 2009:

Balance as of March 31, 2009
  $ 1,637  
Unrealized loss
    -  
Balance as of June 30, 2009
    1,637  
Unrealized loss
    -  
Balance as of September 30, 2009
  $ 1,637  

The par value of our investment securities portfolio at September 30, 2009 and March 31, 2009 was $47.5 million.
 
 
11


Note 6 — Balance Sheet Components

            The following provides the components of certain balance sheet amounts (in thousands):
 
   
September 30,
   
March 31,
 
   
2009
   
2009
 
             
Accounts receivable:
           
Accounts receivable
  $ 383,611     $ 339,903  
Allowance for doubtful accounts
    (6,398 )     (6,705 )
Allowance for returns
    (14,216 )     (25,470 )
Cooperative marketing arrangements
    (50,267 )     (41,082 )
Customer incentive programs
    (43,457 )     (40,369 )
Price protection
    (9,497 )     (12,348 )
    $ 259,776     $ 213,929  
Inventories:
               
Raw materials
  $ 36,747     $ 30,959  
Work-in-process
    3       19  
Finished goods
    203,154       202,489  
    $ 239,904     $ 233,467  
Other current assets:
               
Tax and VAT refund receivables
  $ 21,956     $ 17,275  
Deferred taxes
    22,855       25,546  
Prepaid expenses and other
    15,293       14,063  
    $ 60,104     $ 56,884  
Property, plant and equipment:
               
Plant and buildings
  $ 59,009     $ 56,211  
Equipment
    113,305       108,779  
Computer equipment
    55,138       49,532  
Computer software
    64,055       60,259  
      291,507       274,781  
Less: accumulated depreciation
    (210,027 )     (188,371 )
      81,480       86,410  
Construction-in-progress
    13,058       14,708  
Land
    3,126       3,014  
    $ 97,664     $ 104,132  
Other assets:
               
Deferred taxes
  $ 31,251     $ 27,718  
Cash surrender value of life insurance contracts
    10,275       10,685  
Investment securities
    1,637       -  
Deposits and other
    5,929       5,301  
    $ 49,092     $ 43,704  
Accrued liabilities:
               
Accrued marketing expenses
  $ 25,940     $ 21,984  
            Accrued personnel expenses
    52,452       34,373  
Income taxes payable - current
    5,950       6,828  
Accrued freight and duty
    13,050       9,048  
Accrued restructuring
    423       3,794  
Other accrued liabilities
    56,714       55,469  
    $ 154,529     $ 131,496  
Long-term liabilities:
               
Income taxes payable - non-current
  $ 109,386     $ 101,463  
Obligation for management deferred compensation
    9,788       10,499  
Defined benefit pension plan liability
    20,477       19,822  
Other long-term liabilities
    2,719       2,744  
    $ 142,370     $ 134,528  

 
12

 
The following table presents the changes in the allowance for doubtful accounts during the six months ended September 30, 2009 and 2008 (in thousands):
 
   
September 30,
 
   
2009
   
2008
 
Balance as of March 31, 2009
  $ 6,705     $ 2,497  
Bad debt expense
    (1,194 )     821  
Write-offs net of recoveries
    446       (161 )
Balance as of June 30, 2009
  $ 5,957     $ 3,157  
Bad debt expense
    599       20  
Write-offs net of recoveries
    (158 )     (369 )
Balance as of September 30, 2009
  $ 6,398     $ 2,808  


Note 7 —Goodwill and Other Intangible Assets

The following table summarizes the activity in the Company’s goodwill account during the six months ended September 30, 2009 (in thousands):
 
Balance as of March 31, 2009
  $ 242,909  
Additions
    199  
Balance as of September 30, 2009
  $ 243,108  

Additions to goodwill represented an adjustment related to our acquisition of Ultimate Ears.

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

   
September 30, 2009
   
March 31, 2009
 
   
Gross Carrying
   
Accumulated
   
Net Carrying
   
Gross Carrying
   
Accumulated
   
Net Carrying
 
   
Amount
   
Amortization
   
Amount
   
Amount
   
Amortization
   
Amount
 
             
Trademark/tradename
  $ 24,472     $ (19,333 )   $ 5,139     $ 24,398     $ (18,559 )   $ 5,839  
Technology
    49,267       (30,009 )     19,258       49,268       (26,598 )     22,670  
Customer contracts
    7,018       (3,910 )     3,108       7,018       (3,418 )     3,600  
    $ 80,757     $ (53,252 )   $ 27,505     $ 80,684     $ (48,575 )   $ 32,109  

During the six months ended September 30, 2009, changes in the gross carrying value of other intangible assets related to foreign currency translation adjustments.

For the three months ended September 30, 2009 and 2008, amortization expense for other intangibles was $2.2 million and $1.9 million. For the six months ended September 30, 2009 and 2008, amortization expense for other intangible assets was $4.6 million and $3.5 million. The Company expects that amortization expense for the six-month period ending March 31, 2010 will be $4.2 million, and annual amortization expense for fiscal years 2011, 2012, 2013 and 2014 will be $8.5 million, $7.6 million, $5 million and $2.2 million.

Note 8 — Financing Arrangements
 
The Company had several uncommitted, unsecured bank lines of credit aggregating $143.2 million at September 30, 2009. There are no financial covenants under these lines of credit with which the Company must comply. At September 30, 2009, the Company had no outstanding borrowings under these lines of credit.
 

 
13

 
Note 9 — Shareholders’ Equity

Share Repurchases

During the three and six months ended September 30, 2009 and 2008, the Company had the following approved share buyback program in place (in thousands):

Date of Announcement
 
Approved Buyback Amount
 
Expiration Date
 
Completion Date
   
Amount Remaining
 
June 2007
  $ 250,000  
 June 2010
    -     $ 24,985  
 
In September 2008, the Company’s Board of Directors approved a share buyback program which authorizes the Company to invest up to $250 million to purchase its own shares. The September 2008 program is subject to the approval of the Swiss Takeover Board and the completion of the current share buyback program of $250 million.

During the three and six months ended September 30, 2009 and 2008, the Company repurchased shares under its share buyback program as follows (in thousands):
 
   
Three months ended September 30, (1)
   
Six months ended September 30, (1)
 
Date of
 
2009
   
2008
   
2009
   
2008
 
Announcement
 
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
 
June 2007
    5,838     $ 101,267       1,051     $ 27,000       5,838     $ 101,267       2,603     $ 76,017  


 
 (1) Represents the amount in U.S. dollars, calculated based on exchange rates on the repurchase dates.

Note 10 — Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss were as follows (in thousands):
 
             
   
September 30,
   
March 31,
 
   
2009
   
2009
 
Cumulative translation adjustment
  $ (54,353 )   $ (66,399 )
Pension liability adjustments, net of tax of $990 and $990
    (15,092 )     (15,122 )
Unrealized gain on investment
    424       424  
Net deferred hedging gains (losses)
    (4,047 )     216  
    $ (73,068 )   $ (80,881 )


Note 11 — Restructuring

In January 2009, Logitech initiated a restructuring plan (“2009 Restructuring Plan”) in order to reduce operating expenses and improve financial results in response to deteriorating global economic conditions. We completed a majority of the restructuring activity during the fourth quarter of fiscal year 2009. Restructuring activities primarily consisted of a reduction in salaried workforce, abandonment of projects, and facilities closures. All charges related to the 2009 Restructuring Plan are presented as restructuring charges in our consolidated statements of operations.
 

 
14

 
The following table summarizes restructuring related activities during the six months ended September 30, 2009 (in thousands):
 
   
Total
   
Termination Benefits
   
Contract Termination Costs
   
Other
 
Balance at March 31, 2009
  $ 3,794     $ 3,779     $ 15     $ -  
Charges
    1,449       1,366       83       -  
Cash payments
    (4,245 )     (4,220 )     (25 )     -  
Other
    (8 )     (4 )     (4 )     -  
Foreign exchange
    91       91       -       -  
Balance at June 30, 2009
  $ 1,081     $ 1,012     $ 69     $ -  
Charges
    45       (22 )     9       58  
Cash payments
    (718 )     (698 )     (20 )     -  
Other
    (4 )     63       -       (67 )
Foreign exchange
    19       19       -       -  
Balance at September 30, 2009
  $ 423     $ 374     $ 58     $ (9 )


Termination benefits incurred pursuant to the 2009 Restructuring Plan are calculated based on regional benefit practices and local statutory requirements. Contract termination costs relate to exit costs associated with the closure of existing facilities.

The Company recorded a total of $22.0 million in restructuring charges in the period from January 1, 2009 to September 30, 2009, which included $17.8 million for termination benefits, $0.5 million for asset impairments, $0.3 million for contract termination costs and $3.4 million for other charges, primarily consisting of pension curtailment and settlement costs. In addition, we expect to record approximately $0.6 million in contract termination costs during the remainder of fiscal year 2010. We expect to complete the restructuring in fiscal year 2010.

Note 12 — Employee Benefit Plans

Employee Share Purchase Plans and Stock Option Plans

As of September 30, 2009, the Company offers the 2006 Employee Share Purchase Plan (Non-U.S.) (“2006 ESPP”), the 1996 Employee Share Purchase Plan (U.S.) (“1996 ESPP”), and the 2006 Stock Incentive Plan. Share-based awards granted to employees and directors include stock options, RSUs granted under the 2006 Stock Incentive Plan and share purchase rights granted under the 2006 ESPP and 1996 ESPP. Shares issued to employees as a result of purchases or exercises under these plans are generally issued from shares held in treasury.
 

 
15

 
The following table summarizes the share-based compensation expense and related tax benefit included in the Company’s consolidated statements of operations for the three and six months ended September 30, 2009 and 2008 (in thousands).


 
Three months ended
   
Six months ended
 
 
September 30,
   
September 30,
 
 
2009
   
2008
   
2009
   
2008
 
           
Cost of goods sold
$ 628     $ 669     $ 1,426     $ 1,400  
Share-based compensation expense included in gross profit
  628       669       1,426       1,400  
                               
Operating expenses:
                             
   Marketing and selling
  2,154       1,989       3,913       3,838  
   Research and development
  1,068       1,147       1,909       2,109  
   General and administrative
  1,908       2,018       3,918       4,363  
Share-based compensation expense included in operating expenses
  5,130       5,154       9,740       10,310  
Total share-based compensation expense related to employee
                         
   stock options, RSUs and employee stock purchases
  5,758       5,823       11,166       11,710  
Tax benefit
  449       1,241       833       2,198  
Share-based compensation expense related to employee stock
                         
    options, RSUs and employee stock purchases, net of tax
$ 5,309     $ 4,582     $ 10,333     $ 9,512  

As of  September 30, 2009 and 2008, $0.6 million and $0.8 million of share-based compensation cost was capitalized to inventory. As of September 30, 2009, total compensation cost related to non-vested stock options not yet recognized was $45 million, which is expected to be recognized over the next 34 months on a weighted-average basis.

The fair value of employee stock options granted and shares purchased under the Company’s employee purchase plans was estimated using the Black-Scholes-Merton option-pricing valuation model applying the following assumptions and values:

   
Three Months Ended September 30,
   
Six Months Ended September 30,
 
   
Purchase Plans
   
Stock Option Plans
   
Purchase Plans
   
Stock Option Plans
 
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
 
                                                 
Dividend yield
    0 %     0 %     0 %     0 %     0 %     0 %     0 %     0 %
Expected life
 
6 months
   
6 months
   
3.9 years
   
3.7 years
   
6 months
   
6 months
   
3.9 years
   
3.7 years
 
Expected volatility
    71 %     41 %     48 %     35 %     71 %     45 %     48 %     34 %
Risk-free interest rate
    0.21 %     1.96 %     2.18 %     2.97 %     0.21 %     2.38 %     2.13 %     2.31 %

The dividend yield assumption is based on the Company’s history and future expectations of dividend payouts. The Company has not paid dividends since 1996.

The expected option life represents the weighted-average period the stock options or purchase offerings are expected to remain outstanding. The expected life is based on historical settlement rates, which the Company believes are most representative of future exercise and post-vesting termination behaviors.

Expected share price volatility is based on historical volatility using daily prices over the term of past options or purchase offerings.  The Company considers historical share price volatility as most representative of future stock option volatility. The risk-free interest rate assumptions are based upon the implied yield of U.S. Treasury zero-coupon issues appropriate for the term of the Company’s stock options or purchase offerings.

 
16

 
The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records share-based compensation expense only for those awards that are expected to vest.

The following table represents the weighted average grant-date fair values of options granted and the expected forfeiture rates:


   
Three Months Ended September 30,
   
Six Months Ended September 30,
 
   
Purchase Plans
   
Stock Option Plans
   
Purchase Plans
   
Stock Option Plans
 
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
 
Expected forfeitures
    0 %     0 %     10 %     7 %     0 %     0 %     10 %     7 %
Weighted average grant-date
                                                         
  fair value of options granted
  $ 4.20     $ 7.01     $ 14.10     $ 7.39     $ 4.20     $ 7.94     $ 13.87     $ 7.87  

A summary of activity under the stock option plans is as follows (in thousands, except per share data; exercise prices are weighted averages):


   
Three Months ended September 30,
   
Six Months ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
Number
   
Exercise Price
   
Number
   
Exercise Price
   
Number
   
Exercise Price
   
Number
   
Exercise Price
 
                                                 
Outstanding, beginning of period
    17,751     $ 18       17,033     $ 18       18,897     $ 18       17,952     $ 17  
Granted
    2,200     $ 14       146     $ 25       2,389     $ 14       452     $ 28  
Exercised
    (365 )   $ 9       (492 )   $ 9       (1,034 )   $ 7       (1,544 )   $ 10  
Cancelled or expired
    (456 )   $ 22       (101 )   $ 26       (1,122 )   $ 23       (276 )   $ 24  
Outstanding, end of period
    19,130     $ 18       16,586     $ 18       19,130     $ 18       16,584     $ 18  
                                                                 
Exercisable, end of period
    10,029     $ 15       10,357     $ 12       10,029     $ 15       10,357     $ 12  


The total pretax intrinsic value of options exercised during the three months ended September 30, 2009 and 2008 was $3.1 million and $ 7.8 million and the tax benefit realized for the tax deduction from options exercised during those periods was $0.7 million and $2.6 million. The total pretax intrinsic value of options exercised during the six months ended September 30, 2009 and 2008 was $7.9 million and $29.2 million and the tax benefit realized for the tax deduction from options exercised during those periods was $1.3 million and $7.8 million. The total fair value of options vested as of September 30, 2009 and 2008 was $54.1 million and $44.5 million.

During the three months ended September 30, 2009, the Company granted time-based RSUs to employees and board members pursuant to the 2006 Stock Incentive Plan. The time-based RSUs vest ratably over service periods of four years for employees and one year for non-executive board members. The Company estimates the fair value of these RSUs based on the share market price on the date of grant. Compensation expense related to time-based RSUs is recognized over the vesting period and is included in the total share-based compensation expense disclosed above. As of September 30, 2009, total compensation cost related to time-based RSUs not yet recognized was $3.0 million, which is expected to be recognized over the next 45 months.
 
 
17

 
The Company has also granted performance RSUs to certain senior company executives pursuant to the 2006 Stock Incentive Plan. The RSUs vest at the end of two years from the grant date upon meeting certain share price performance criteria measured against market conditions. Compensation expense related to these RSUs is recognized over the two year performance period and is included in the total share-based compensation expense disclosed above. As of September 30, 2009, total compensation cost related to performance RSUs not yet recognized was $3.0 million, which is expected to be recognized over the next 21 months.
 
    The fair value of performance RSUs granted was estimated using the Monte-Carlo simulation method applying the following assumptions:


   
FY 2009 Grants
   
FY 2010 Grants
 
Dividend yield
    0 %     0 %
Expected life
 
2 years
   
2 years
 
Expected volatility
    41 %     58 %
Risk-free interest rate
    1.82 %     1.11 %


The dividend yield assumption is based on the Company’s history and future expectations of dividend payouts. The expected life of performance RSUs is the service period at the end of which the RSUs will vest if the minimum performance is achieved. The volatility assumption is based on the actual volatility of Logitech’s daily closing share price over a look-back period of two years. The risk free interest rate is derived from the yield on U.S. Treasury Bonds for a two year term.

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, 2009 and 2008 were $1.9 million and $2.0 million and during the six months ended September 30, 2009 and 2008 were $3.5 million and $4.3 million.
 
Defined Benefit Plans
 
Certain of the Company’s subsidiaries sponsor defined benefit pension plans covering substantially all of their employees. Retirement 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.

The net periodic benefit cost for the three and six months ended September 30, 2009 and 2008 was as follows (in thousands):

   
Three months ended
   
Six months ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Service cost
  $ 874     $ 614     $ 1,712     $ 1,248  
Interest cost
    352       373       674       758  
Expected return on plan assets
    (320 )     (383 )     (586 )     (779 )
Amortization of net transition obligation
    1       1       2       2  
Amortization of net prior service cost
    34       -       68       -  
Recognized net actuarial loss
    189       112       414       227  
Net periodic benefit cost
  $ 1,130     $ 717     $ 2,284     $ 1,456  


18

 
Note 13 — 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. Prior to the first quarter of fiscal year 2010, the Company’s effective tax rate was calculated using an estimate of its annual pre-tax income. Due to the impact of the economic downturn, management has determined that a reliable estimate of its annual pre-tax income and related annual effective tax rate cannot be made. Therefore, Logitech used the actual year-to-date effective income tax rate for the three and six months ended September 30, 2009. For the three months ended September 30, 2009 and 2008, the income tax provision was $5.8 million and $10.0 million based on effective income tax rates of 21.9% and 12.1%. For the six months ended September 30, 2009 and 2008, the income tax provision was $9.5 million and $13.5 million based on effective income tax rates of 131.9% of net loss and 11.7% of net income. The change in effective tax rates for the three and six months ended September 30, 2009 compared with the same periods in 2008 is primarily due to the mix of income and losses in the various tax jurisdictions in which the Company operates.
 
As of September 30, 2009 and March 31, 2009, the total amount of unrecognized tax benefits and related accrued interest and penalties due to uncertain tax positions was $116.2 million and $108.2 million, of which $91.9 million and $88.1 million would affect the effective tax rate if recognized.

The Company continues to recognize interest and penalties related to unrecognized tax positions in income tax expense. As of September 30, 2009 and March 31, 2009, the Company had approximately $11.6 million and $10.7 million of accrued interest and penalties related to uncertain tax positions.

On February 20, 2009, California budget legislation was enacted that will affect the methodology used by corporate taxpayers to apportion income to California. These changes will become effective for the Company's fiscal year ending March 31, 2012. The Company believes that these changes will not have a material impact on its results of operations or financial condition.

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 1999. In fiscal year 2009, the Internal Revenue Service initiated an examination of the Company’s U.S. subsidiary for fiscal year 2006. At this time it is not possible to estimate the potential impact that the examination may have on income tax expense.

Although timing of the resolution or closure on audits is highly uncertain, the Company does not believe it is reasonably possible that the unrecognized tax benefits would materially change in the next 12 months.
 
 
19

 
Note 14 — Derivative Financial Instruments – Foreign Exchange Hedging
 
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 primary risk managed by using derivative instruments is the foreign currency exchange rate risk. The Company has designated these derivatives as cash flow hedges. These hedging contracts generally mature within six months. 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). Such losses were immaterial during the three and six months ended September 30, 2009. The notional amounts of foreign exchange forward contracts outstanding related to forecasted inventory purchases were $60.5 million (42.2 million euros) at September 30, 2009. There were no such contracts outstanding at September 30, 2008. 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 one to 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, 2009 and 2008 relating to foreign currency receivables or payables were $19.3 million and $15.0 million. Open forward contracts as of September 30, 2009 consisted of contracts in British pounds and Canadian dollars to purchase euros and U.S. dollars at a future date at a pre-determined exchange rate. The notional amounts of foreign exchange swap contracts outstanding at September 30, 2009 and 2008 were $26.1 million and $19.1 million. Swap contracts outstanding at September 30, 2009 consisted of contracts in Mexican pesos, Japanese yen, Canadian dollars and British pounds.

The fair value of all our foreign exchange forward contracts and foreign exchange swap contracts is determined based on quoted foreign exchange forward rates. Quoted foreign exchange forward rates are observable inputs that are classified as Level 1 within the fair value hierarchy.
 
 
20

 
The following table presents the fair values of the Company’s derivative instruments and their locations on the Balance Sheet as of September 30, 2009 (in thousands):
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Location
 
Fair Value
 
Location
 
Fair Value
 
Derivatives designated as hedging
               
instruments:
               
Cash Flow Hedges
 Other assets
  $ -  
 Other liabilities
  $ 1,424  
        -         1,424  
                     
Derivatives not designated as hedging
                   
instruments:
                   
Foreign Exchange Forward Contracts
 Other assets
    715