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 December 31, 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) |
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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
(Registrants 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 |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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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 February 1, 2013, there were 158,003,097 shares of the Registrants share capital outstanding.
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Page |
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3 | ||
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
31 | |
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57 | ||
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60 | ||
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61 | ||
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61 | ||
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73 | ||
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75 | ||
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76 | |
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Exhibits |
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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.
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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Page |
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Financial Statement Description |
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· |
4 | |
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5 | |
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Unaudited Consolidated Balance Sheets as of December 31, 2012 and March 31, 2012 |
6 |
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Unaudited Consolidated Statements of Cash Flows for the nine months ended December 31, 2012 and 2011 |
7 |
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8 | |
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9 |
LOGITECH INTERNATIONAL S.A.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
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Three months ended |
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Nine months ended |
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December 31, |
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December 31, |
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2012 |
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2011 |
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2012 |
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2011 |
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Net sales |
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$ |
614,500 |
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$ |
714,596 |
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$ |
1,630,797 |
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$ |
1,784,241 |
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Cost of goods sold |
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404,402 |
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455,922 |
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1,080,452 |
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1,201,539 |
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Gross profit |
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210,098 |
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258,674 |
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550,345 |
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582,702 |
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Operating expenses: |
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Marketing and selling |
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112,698 |
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116,313 |
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324,117 |
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323,552 |
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Research and development |
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40,393 |
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41,911 |
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117,340 |
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121,383 |
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General and administrative |
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26,382 |
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30,673 |
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84,842 |
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89,527 |
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Goodwill impairment |
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211,000 |
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211,000 |
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Restructuring charges (credits), net |
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(358 |
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28,198 |
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Total operating expenses |
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390,115 |
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188,897 |
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765,497 |
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534,462 |
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Operating income (loss) |
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(180,017 |
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69,777 |
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(215,152 |
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48,240 |
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Interest income, net |
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114 |
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917 |
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651 |
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2,208 |
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Other income (expense), net |
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(3,670 |
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6,713 |
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(4,338 |
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10,141 |
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Income (loss) before income taxes |
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(183,573 |
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77,407 |
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(218,839 |
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60,589 |
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Provision for (benefit from) income taxes |
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11,370 |
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22,074 |
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(26,616 |
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17,417 |
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Net income (loss) |
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$ |
(194,943 |
) |
$ |
55,333 |
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$ |
(192,223 |
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$ |
43,172 |
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Net income (loss) per share: |
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Basic |
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$ |
(1.24 |
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$ |
0.32 |
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$ |
(1.21 |
) |
$ |
0.24 |
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Diluted |
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$ |
(1.24 |
) |
$ |
0.32 |
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$ |
(1.21 |
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$ |
0.24 |
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Shares used to compute net income (loss) per share: |
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Basic |
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157,706 |
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173,003 |
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158,383 |
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176,414 |
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Diluted |
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157,706 |
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173,656 |
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158,383 |
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177,201 |
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The accompanying notes are an integral part of these consolidated financial statements.
LOGITECH INTERNATIONAL S.A.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
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Three Months Ended |
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Nine Months Ended |
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2012 |
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2011 |
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2012 |
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2011 |
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Net income (loss) |
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$ |
(194,943 |
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$ |
55,333 |
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$ |
(192,223 |
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$ |
43,172 |
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Other comprehensive income (loss): |
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Foreign currency translation |
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(321 |
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(5,854 |
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(1,617 |
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(10,677 |
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Defined benefit pension plan adjustments during the period: |
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Foreign currency exchange rate changes |
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(389 |
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535 |
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7,531 |
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420 |
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Amortization included in net income (loss): |
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Transition obligation for the period |
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1 |
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1 |
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3 |
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3 |
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Prior service cost for the period |
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39 |
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37 |
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115 |
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114 |
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Net actuarial loss for the period |
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271 |
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210 |
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950 |
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669 |
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Pension liability adjustments, net of tax |
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(78 |
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783 |
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8,599 |
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1,206 |
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Deferred hedging gain (loss) |
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1,359 |
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(3,083 |
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(2,902 |
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8,834 |
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Less: reclassification adjustment for gain (loss) included in net income (loss) |
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1,137 |
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(1,672 |
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(440 |
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2,345 |
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Net deferred hedging gain (loss) |
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222 |
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(1,411 |
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(2,462 |
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6,489 |
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Unrealized losses on investment recognized in earnings |
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(68 |
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(68 |
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Reversal of unrealized gains previously recognized in accumulated other comprehensive income (loss) |
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(343 |
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Net change in accumulated other comprehensive income (loss) |
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(177 |
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(6,550 |
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4,177 |
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(3,050 |
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Total comprehensive income (loss) |
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$ |
(195,120 |
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$ |
48,783 |
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$ |
(188,046 |
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$ |
40,122 |
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The accompanying notes are an integral part of these consolidated financial statements.
LOGITECH INTERNATIONAL S.A.
UNADUITED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
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December 31, 2012 |
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March 31, 2012 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
321,999 |
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$ |
478,370 |
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Accounts receivable, net |
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264,589 |
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223,104 |
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Inventories |
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277,477 |
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297,072 |
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Other current assets |
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59,808 |
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65,990 |
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Assets held for sale |
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17,697 |
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Total current assets |
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941,570 |
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1,064,536 |
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Non-current assets: |
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Property, plant and equipment, net |
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89,128 |
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94,884 |
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Goodwill |
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345,313 |
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560,523 |
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Other intangible assets, net |
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35,033 |
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53,518 |
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Other assets |
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78,021 |
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83,033 |
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Total assets |
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$ |
1,489,065 |
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$ |
1,856,494 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
339,283 |
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$ |
301,111 |
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Accrued liabilities |
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204,528 |
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186,680 |
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Liabilities held for sale |
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2,020 |
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Total current liabilities |
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545,831 |
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487,791 |
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Non-current liabilities |
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186,663 |
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218,462 |
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Total liabilities |
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732,494 |
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706,253 |
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Commitments and contingencies |
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Shareholders equity: |
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Shares, par value CHF 0.25 - 173,106 issued and authorized and 50,000 conditionally authorized at December 31, 2012 and 191,606 issued and authorized at March 31, 2012 and 50,000 conditionally authorized at March 31, 2012 |
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30,148 |
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33,370 |
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Additional paid-in capital |
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Less: shares in treasury, at cost, 15,113 at December 31, 2012 and 27,173 at March 31, 2012 |
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(200,514 |
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(343,829 |
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Retained earnings |
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1,018,689 |
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1,556,629 |
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Accumulated other comprehensive loss |
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(91,752 |
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(95,929 |
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Total shareholders equity |
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756,571 |
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1,150,241 |
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Total liabilities and shareholders equity |
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$ |
1,489,065 |
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$ |
1,856,494 |
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The accompanying notes are an integral part of these consolidated financial statements.
LOGITECH INTERNATIONAL S.A.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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Nine months ended December 31, |
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2012 |
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2011 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
(192,223 |
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$ |
43,172 |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation |
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33,861 |
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35,201 |
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Amortization of other intangible assets |
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17,914 |
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20,209 |
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Goodwill impairment |
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211,000 |
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Investment impairment in privately-held company |
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3,600 |
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Inventory valuation adjustment |
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34,074 |
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Share-based compensation expense |
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18,659 |
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23,380 |
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Gain on disposal of property and plant |
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(4,904 |
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Gain on sale of available-for-sale securities |
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(831 |
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(6,118 |
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Excess tax benefits from share-based compensation |
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(26 |
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(33 |
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Deferred income taxes and other |
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9,398 |
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(998 |
) | ||
Changes in assets and liabilities, net of acquisition: |
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Accounts receivable |
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(41,310 |
) |
(63,092 |
) | ||
Inventories |
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1,444 |
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(35,720 |
) | ||
Other assets |
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(2,201 |
) |
(11,853 |
) | ||
Accounts payable |
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39,673 |
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81,973 |
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Accrued liabilities |
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5,238 |
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38,877 |
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Net cash provided by operating activities |
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104,196 |
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154,168 |
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Cash flows from investing activities: |
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Purchases of property, plant and equipment |
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(39,737 |
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(31,417 |
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Acquisition, net of cash acquired |
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(18,814 |
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Investment in privately-held company |
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(3,970 |
) |
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Proceeds from sale of property and plant |
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4,904 |
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Proceeds from sale of available-for-sale securities |
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917 |
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6,550 |
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Purchases of trading investments for deferred compensation plan |
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(2,294 |
) |
(5,577 |
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Proceeds from sales of trading investments for deferred compensation plan |
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2,309 |
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5,520 |
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Net cash used in investing activities |
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(42,775 |
) |
(38,834 |
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Cash flows from financing activities: |
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Payment of cash dividends |
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(133,462 |
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Purchases of treasury shares |
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(89,955 |
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(73,134 |
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Proceeds from sale of shares upon exercise of options and purchase rights |
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8,843 |
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9,852 |
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Tax withholdings related to net share settlements of restricted stock units |
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(1,995 |
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(890 |
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Excess tax benefits from share-based compensation |
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26 |
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33 |
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Net cash used in financing activities |
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(216,543 |
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(64,139 |
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Effect of exchange rate changes on cash and cash equivalents |
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(1,249 |
) |
(5,793 |
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Net increase (decrease) in cash and cash equivalents |
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(156,371 |
) |
45,402 |
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Cash and cash equivalents at beginning of period |
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478,370 |
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477,931 |
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Cash and cash equivalents at end of period |
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$ |
321,999 |
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$ |
523,333 |
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The accompanying notes are an integral part of these consolidated financial statements.
LOGITECH INTERNATIONAL S.A.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(In thousands)
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Accumulated |
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Additional |
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other |
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Registered shares |
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paid-in |
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Treasury shares |
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Retained |
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comprehensive |
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Shares |
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Amount |
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capital |
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Shares |
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Amount |
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earnings |
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loss |
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Total |
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March 31, 2011 |
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191,606 |
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$ |
33,370 |
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$ |
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12,433 |
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$ |
(264,019 |
) |
$ |
1,514,168 |
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$ |
(78,518 |
) |
$ |
1,205,001 |
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Total comprehensive income |
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43,172 |
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(3,050 |
) |
40,122 |
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Purchase of treasury shares |
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7,609 |
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(73,134 |
) |
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(73,134 |
) | ||||||
Tax benefit from exercise of stock options |
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|
468 |
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|
468 |
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Shares issued for director services |
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(643 |
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(33 |
) |
844 |
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|
201 |
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Sale of shares upon exercise of options and purchase rights |
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(13,818 |
) |
(1,240 |
) |
34,373 |
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(10,679 |
) |
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9,876 |
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Issuance of shares upon vesting of restricted stock units |
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(7,963 |
) |
(276 |
) |
7,073 |
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(890 |
) | ||||||
Share-based compensation expense |
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|
22,862 |
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22,862 |
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December 31, 2011 |
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191,606 |
|
$ |
33,370 |
|
$ |
906 |
|
18,493 |
|
$ |
(294,863 |
) |
$ |
1,546,661 |
|
$ |
(81,568 |
) |
$ |
1,204,506 |
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March 31, 2012 |
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191,606 |
|
$ |
33,370 |
|
$ |
|
|
27,173 |
|
$ |
(343,829 |
) |
$ |
1,556,629 |
|
$ |
(95,929 |
) |
$ |
1,150,241 |
|
Total comprehensive loss |
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|
|
|
|
|
|
|
|
|
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(192,223 |
) |
4,177 |
|
(188,046 |
) | ||||||
Purchase of treasury shares |
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|
|
|
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|
8,600 |
|
(89,955 |
) |
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|
|
|
(89,955 |
) | ||||||
Tax benefit from exercise of stock options |
|
|
|
|
|
(2,984 |
) |
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|
|
|
|
|
|
|
(2,984 |
) | ||||||
Deferred tax asset adjustment related to share -based compensation expense |
|
|
|
|
|
(4,272 |
) |
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|
|
|
|
|
|
|
(4,272 |
) | ||||||
Deferred tax asset adjustment related to share-based compensation expense from prior years |
|
|
|
|
|
6,320 |
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|
|
|
|
(6,320 |
) |
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|
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| ||||||
Sale of shares upon exercise of options and purchase rights |
|
|
|
|
|
3,508 |
|
(1,377 |
) |
41,646 |
|
(36,300 |
) |
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|
8,854 |
| ||||||
Issuance of shares upon vesting of restricted stock units |
|
|
|
|
|
(20,709 |
) |
(783 |
) |
18,767 |
|
|
|
|
|
(1,942 |
) | ||||||
Share-based compensation expense |
|
|
|
|
|
18,137 |
|
|
|
|
|
|
|
|
|
18,137 |
| ||||||
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
(133,462 |
) |
|
|
(133,462 |
) | ||||||
Cancellation of treasury shares |
|
(18,500 |
) |
(3,222 |
) |
|
|
(18,500 |
) |
172,857 |
|
(169,635 |
) |
|
|
|
| ||||||
December 31, 2012 |
|
173,106 |
|
$ |
30,148 |
|
$ |
|
|
15,113 |
|
$ |
(200,514 |
) |
$ |
1,018,689 |
|
$ |
(91,752 |
) |
$ |
756,571 |
|
The accompanying notes are an integral part of these consolidated financial statements.
LOGITECH INTERNATIONAL S.A.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
The consolidated financial statements include the accounts of Logitech International S.A. 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 Companys 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 (loss).
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 nine months ended December 31, 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 Companys 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 significant changes to the nature of the critical accounting policies, and no significant changes in the critical accounting estimates that were disclosed in the Managements Discussion and Analysis of Financial Condition and Results of Operations in the Companys Annual Report on Form 10-K for the fiscal year ended March 31, 2012, except for Valuation of Long-Lived Assets described in the Managements Discussion and Analysis of Financial Condition and Results of Operations section of this Form 10-Q.
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 managements best knowledge of current events and actions that may impact the Company in the future, actual results could differ from those estimates.
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 |
|
Nine months ended |
| ||||||||
|
|
December 31, |
|
December 31, |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
|
$ |
(194,943 |
) |
$ |
55,333 |
|
$ |
(192,223 |
) |
$ |
43,172 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average shares - basic |
|
157,706 |
|
173,003 |
|
158,383 |
|
176,414 |
| ||||
Effect of potentially dilutive share equivalents |
|
|
|
653 |
|
|
|
787 |
| ||||
Weighted average shares - diluted |
|
157,706 |
|
173,656 |
|
158,383 |
|
177,201 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) per share - basic |
|
$ |
(1.24 |
) |
$ |
0.32 |
|
$ |
(1.21 |
) |
$ |
0.24 |
|
Net income (loss) per share - diluted |
|
$ |
(1.24 |
) |
$ |
0.32 |
|
$ |
(1.21 |
) |
$ |
0.24 |
|
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 15,951,244 for the three months ended December 31, 2011, and 17,505,162 for the nine months ended December 31, 2011, respectively, were excluded from the calculation of diluted net income 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 December 31, 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.
The following table summarizes share-based compensation expense and related tax benefit recognized for the three and nine months ended December 31, 2012 and 2011 (in thousands):
|
|
Three months ended |
|
Nine months ended |
| ||||||||
|
|
December 31, |
|
December 31, |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cost of goods sold |
|
$ |
704 |
|
$ |
948 |
|
$ |
2,101 |
|
$ |
3,058 |
|
Share-based compensation expense included in gross profit |
|
704 |
|
948 |
|
2,101 |
|
3,058 |
| ||||
Operating expenses: |
|
|
|
|
|
|
|
|
| ||||
Marketing and selling |
|
953 |
|
2,380 |
|
5,377 |
|
9,345 |
| ||||
Research and development |
|
2,430 |
|
1,802 |
|
6,018 |
|
5,364 |
| ||||
General and administrative |
|
1,135 |
|
1,797 |
|
5,163 |
|
5,613 |
| ||||
Share-based compensation expense included in operating expenses |
|
4,518 |
|
5,979 |
|
16,558 |
|
20,322 |
| ||||
Total share-based compensation expense |
|
5,222 |
|
6,927 |
|
18,659 |
|
23,380 |
| ||||
Income tax provision (benefit) |
|
(1,043 |
) |
70 |
|
(4,090 |
) |
(4,595 |
) | ||||
Share-based compensation expense, net of income tax |
|
$ |
4,179 |
|
$ |
6,997 |
|
$ |
14,569 |
|
$ |
18,785 |
|
Share-based compensation expense for the three and nine months ended December 31, 2012 includes a reduction of $0 and $2.2 million in expense applicable to employees terminated as a result of the restructuring plan announced in April 2012. As of December 31, 2012 and 2011, $0.2 million and $0.5 million of share-based compensation cost were capitalized in inventory.
Defined Contribution Plans
Certain of the Companys 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 December 31, 2012 and 2011 were $2.0 million and $2.5 million and for the nine months ended December 31, 2012 and 2011 were $6.6 million and $8.1 million.
Defined Benefit Plans
Certain of the Companys 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 Companys 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 Companys 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.
The net periodic benefit cost for defined benefit pension plans and non-retirement post-employment benefit obligations for the three and nine months ended December 31, 2012 and 2011 were as follows (in thousands):
|
|
Three months ended |
|
Nine months ended |
| ||||||||
|
|
December 31, |
|
December 31, |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Service cost |
|
$ |
1,770 |
|
$ |
1,520 |
|
$ |
5,371 |
|
$ |
4,752 |
|
Interest cost |
|
440 |
|
531 |
|
1,351 |
|
1,668 |
| ||||
Expected return on plan assets |
|
(378 |
) |
(277 |
) |
(996 |
) |
(930 |
) | ||||
Amortization of net transition obligation |
|
1 |
|
1 |
|
3 |
|
3 |
| ||||
Amortization of net prior service cost |
|
39 |
|
37 |
|
115 |
|
114 |
| ||||
Recognized net actuarial loss |
|
271 |
|
210 |
|
950 |
|
669 |
| ||||
Settlement cost |
|
|
|
|
|
2,254 |
|
|
| ||||
Net periodic benefit cost |
|
$ |
2,143 |
|
$ |
2,022 |
|
$ |
9,048 |
|
$ |
6,276 |
|
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 Companys income before taxes and the provision for income taxes are generated outside of Switzerland.
In determining the annual effective tax rate, both the restructuring described in Note 13 and the goodwill impairment described in Note 7 were treated as discrete events as they were significantly unusual and infrequent in nature. As such, 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. There was no tax benefit associated with goodwill impairment as the goodwill is not tax-deductible.
The income tax provision for the three months ended December 31, 2012 was $11.4 million based on an effective income tax rate of 6.2% of pre-tax loss. For the three months ended December 31, 2011, the income tax provision was $22.1 million based on an effective income tax rate of 28.5% of pre-tax income. The income tax benefit for the nine months ended December 31, 2012 was $26.6 million based on an effective income tax rate of 12.2% of pre-tax loss. For the nine months ended December 31, 2011, the income tax provision was $17.4 million based on an effective income tax rate of 28.7% of pre-tax income. The change in the effective income tax rate for the three and nine months ended December 31, 2012 compared with the same periods in fiscal year 2012 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 and $3.5 million during the fiscal quarter ended September 30, 2012 and December 31, 2012, respectively, related to the reversal of uncertain tax positions resulting from the closure of federal income tax examinations in the United States.
The American Taxpayer Relief Act of 2012, which was enacted on January 2, 2013, extends the Federal research tax credit retroactively for two years from January 1, 2012 through December 31, 2013. An estimated tax benefit of approximately $2.5 million from the extension of the Federal research tax credit will be reflected in the income tax provision in the quarter ending March 31, 2013.
As of December 31 and March 31, 2012, the total amount of unrecognized tax benefits and related accrued interest and penalties due to uncertain tax positions was $102.5 million and $143.3 million, of which $89.2 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 $40.8 million is primarily due to $42.8 million from the settlement of income tax examinations in the United States.
The Company continues to recognize interest and penalties related to unrecognized tax positions in income tax expense. As of December 31 and March 31, 2012, the Company had approximately $6.8 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. In the fiscal quarter ended September 30, 2012, the Company effectively settled the examinations of fiscal years 2006 and 2007 with the IRS (U.S. Internal Revenue Service). The Company reversed $33.8 million of unrecognized tax benefits associated with uncertain tax positions and recorded a $1.7 million tax provision from the proposed revised assessments as a result of the closure, resulting in a net tax benefit of $32.1 million. There was no cash tax liability from the settlement due to utilization of net operating loss carryforwards.
In addition, the IRS completed its field examination of the Companys U.S. subsidiary for fiscal years 2008 and 2009 during the fiscal quarter ended September 30, 2012. The Company received Notices of Proposed Adjustments related to various domestic and international tax issues on August 15, 2012 and subsequently, 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 reversed $9.0 million of unrecognized tax benefits associated with uncertain tax positions and recorded a $5.5 million tax provision from the assessments, resulting in a net tax benefit of $3.5 million. There was no cash tax liability from the settlement due to utilization of net operating loss carryforwards.
The Company is also under examination and has 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 Companys 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. It is not possible at this time to reasonably estimate the decrease of the unrecognized tax benefits within the next twelve months.
Note 5 Balance Sheet Components
The following table presents the components of certain balance sheet asset amounts as of December 31 and March 31, 2012 (in thousands):
|
|
December 31, 2012 |
|
March 31, 2012 |
| ||
Accounts receivable, net: |
|
|
|
|
| ||
Accounts receivable |
|
$ |
450,376 |
|
$ |
376,917 |
|
Allowance for doubtful accounts |
|
(2,368 |
) |
(2,472 |
) | ||
Allowance for returns |
|
(23,509 |
) |
(24,599 |
) | ||
Allowances for cooperative marketing arrangements |
|
(32,129 |
) |
(24,109 |
) | ||
Allowances for customer incentive programs |
|
(55,488 |
) |
(42,262 |
) | ||
Allowances for pricing programs |
|
(72,293 |
) |
(60,371 |
) | ||
|
|
$ |
264,589 |
|
$ |
223,104 |
|
Inventories: |
|
|
|
|
| ||
Raw materials |
|
$ |
33,408 |
|
$ |
38,613 |
|
Work-in-process |
|
4 |
|
73 |
| ||
Finished goods |
|
244,065 |
|
258,386 |
| ||
|
|
$ |
277,477 |
|
$ |
297,072 |
|
Other current assets: |
|
|
|
|
| ||
Tax and value-added tax refund receivables |
|
$ |
18,292 |
|
$ |
19,360 |
|
Deferred taxes |
|
22,647 |
|
25,587 |
| ||
Prepaid expenses and other |
|
18,869 |
|
21,043 |
| ||
|
|
$ |
59,808 |
|
$ |
65,990 |
|
Property, plant and equipment, net: |
|
|
|
|
| ||
Plant, buildings and improvements |
|
$ |
68,749 |
|
$ |
48,555 |
|
Equipment |
|
162,671 |
|
148,059 |
| ||
Computer equipment |
|
43,989 |
|
40,353 |
| ||
Computer software |
|
79,445 |
|
75,758 |
| ||
|
|
354,854 |
|
312,725 |
| ||
Less: accumulated depreciation |
|
(276,946 |
) |
(249,657 |
) | ||
|
|
77,908 |
|
63,068 |
| ||
Construction-in-progress |
|
8,343 |
|
28,968 |
| ||
Land |
|
2,877 |
|
2,848 |
| ||
|
|
$ |
89,128 |
|
$ |
94,884 |
|
Other assets: |
|
|
|
|
| ||
Deferred taxes |
|
$ |
55,925 |
|
$ |
61,358 |
|
Trading securities |
|
15,135 |
|
14,301 |
| ||
Deposits and other |
|
6,961 |
|
7,374 |
| ||
|
|
$ |
78,021 |
|
$ |
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 managements 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 December 31, 2012 was from leasehold improvement costs related to the new Americas headquarters which were placed into service during this period.
The following table presents the components of certain balance sheet liability amounts as of December 31 and March 31, 2012 (in thousands):
|
|
December 31, 2012 |
|
March 31, 2012 |
| ||
Accrued liabilities: |
|
|
|
|
| ||
Accrued personnel expenses |
|
$ |
52,133 |
|
$ |
42,809 |
|
Accrued marketing expenses |
|
11,006 |
|
7,097 |
| ||
Indirect customer incentive programs |
|
33,570 |
|
26,112 |
| ||
Accrued restructuring |
|
917 |
|
|
| ||
Deferred revenue |
|
21,778 |
|
19,358 |
| ||
Accrued freight and duty |
|
11,624 |
|
11,376 |
| ||
Value-added tax payable |
|
8,659 |
|
7,140 |
| ||
Accrued royalties |
|
4,986 |
|
6,243 |
| ||
Warranty accrual |
|
3,397 |
|
5,184 |
| ||
Non-retirement post-employment benefit obligations |
|
4,490 |
|
4,129 |
| ||
Income taxes payable - current |
|
4,554 |
|
6,047 |
| ||
Other accrued liabilities |
|
47,414 |
|
51,185 |
| ||
|
|
$ |
204,528 |
|
$ |
186,680 |
|
Non-current liabilities: |
|
|
|
|
| ||
Income taxes payable - non-current |
|
$ |
100,358 |
|
$ |
137,319 |
|
Obligation for deferred compensation |
|
15,199 |
|
14,393 |
| ||
Defined benefit pension plan liability |
|
34,435 |
|
39,337 |
| ||
Deferred rent |
|
23,931 |
|
16,042 |
| ||
Other long-term liabilities |
|
12,740 |
|
11,371 |
| ||
|
|
$ |
186,663 |
|
$ |
218,462 |
|
Assets Held for Sale
During the third quarter of fiscal year 2013, the Company made a strategic decision to divest its remote controls and digital video security product categories by the end of calendar year 2013, both of which are included in the Companys peripherals operating segment. This decision primarily resulted from the Companys belief that these product categories would not make a meaningful contribution to improving either the Companys growth or profitability because they are not critical to the Companys plans for improved future performance. As a result, assets and liabilities of the remote controls and digital video security product categories have been classified as held for sale as of December 31, 2012. The components of assets and liabilities held for sale at December 31, 2012 were as follows:
|
|
December 31, 2012 |
| |
|
|
|
| |
Assets held for sale: |
|
|
| |
Inventory |
|
$ |
12,561 |
|
Property, plant and equipment, net |
|
520 |
| |
Goodwill |
|
4,116 |
| |
Other intangible assets, net |
|
500 |
| |
|
|
$ |
17,697 |
|
|
|
|
| |
Liabilities held for sale: |
|
|
| |
Warranty and other liabilities |
|
$ |
2,020 |
|
|
|
$ |
2,020 |
|
Allowance for Doubtful Accounts
The following table presents the changes in the allowance for doubtful accounts during the three and nine months ended December 31, 2012 and 2011 (in thousands):
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
December 31, |
|
December 31, |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Allowance for doubtful accounts, beginning of period |
|
$ |
(2,239 |
) |
$ |
(3,726 |
) |
$ |
(2,472 |
) |
$ |
(4,086 |
) |
Bad debt expense (credit) |
|
(141 |
) |
267 |
|
48 |
|
313 |
| ||||
Write-offs, net |
|
12 |
|
399 |
|
56 |
|
713 |
| ||||
Allowance for doubtful accounts, end of period |
|
$ |
(2,368 |
) |
$ |
(3,060 |
) |
$ |
(2,368 |
) |
$ |
(3,060 |
) |
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.
· 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 Companys financial assets and liabilities that were accounted for at fair value, excluding assets related to the Companys defined benefit pension plans, classified by the level within the fair value hierarchy on a recurring basis (in thousands):
|
|
December 31, 2012 |
|
March 31, 2012 |
| ||||||||||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash and cash equivalents |
|
$ |
321,999 |
|
$ |
|
|
$ |
|
|
$ |
478,370 |
|
$ |
|
|
$ |
|
|
Trading investments for deferred compensation plan: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Money market funds |
|
3,319 |
|
|
|
|
|
3,383 |
|
|
|
|
| ||||||
Mutual funds |
|
11,816 |
|
|
|
|
|
10,918 |
|
|
|
|
| ||||||
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Collateralized debt obligations |
|
|
|
|
|
|
|
|
|
|
|
429 |
| ||||||
Foreign exchange derivative assets |
|
|
|
518 |
|
|
|
|
|
658 |
|
|
| ||||||
Total assets at fair value |
|
$ |
337,134 |
|
$ |
518 |
|
$ |
|
|
$ |
492,671 |
|
$ |
658 |
|
$ |
429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign exchange derivative liabilities |
|
$ |
|
|
$ |
1,088 |
|
$ |
|
|
$ |
|
|
$ |
245 |
|
$ |
|
|
Total liabilities at fair value |
|
$ |
|
|
$ |
1,088 |
|
$ |
|
|
$ |
|
|
$ |
245 |
|
$ |
|
|
The following table presents the changes in the Companys Level 3 financial assets for the three and nine months ended December 31, 2012 and 2011 (in thousands):
|
|
Three months ended |
|
Nine months ended |
| ||||||||
|
|
December 31, |
|
December 31, |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Available-for-sale securities, beginning balance |
|
$ |
|
|
$ |
1,695 |
|
$ |
429 |
|
$ |
1,695 |
|
Proceeds from sales of securities |
|
|
|
(6,550 |
) |
(917 |
) |
(6,550 |
) | ||||
Realized gain on sales of securities |
|
|
|
6,050 |
|
831 |
|
6,050 |
| ||||
Reversal of unrealized gains previously recognized in accumulated other comprehensive income |
|
|
|
|
|
(343 |
) |
|
| ||||
Available-for-sale securities, ending balance |
|
$ |
|
|
$ |
1,195 |
|
$ |
|
|
$ |
1,195 |
|
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 Companys investment securities portfolio currently consists of marketable securities (money market and mutual funds) related to a deferred compensation plan.
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 Companys normal operating cycle of one year. The marketable securities are recorded at a fair value of $15.1 million and $14.3 million as of December 31 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 (losses) of $(0.1) million and $0.1 million are included in other income (expense), net for the three and nine months ended December 31, 2012 and relate to trading securities held at December 31, 2012.
Derivative Financial Instruments
The following table presents the fair values of the Companys derivative instruments and their locations on its consolidated balance sheets as of December 31 and March 31, 2012 (in thousands):
|
|
Asset Derivatives |
|
Liability Derivatives |
| ||||||||||||
|
|
|
|
Fair Value |
|
|
|
Fair Value |
| ||||||||
|
|
|
|
December 31, |
|
March 31, |
|
|
|
December 31, |
|
March 31, |
| ||||
|
|
Location |
|
2012 |
|
2012 |
|
Location |
|
2012 |
|
2012 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flow hedges |
|
Other assets |
|
$ |
24 |
|
$ |
250 |
|
Other liabilities |
|
$ |
984 |
|
$ |
|
|
|
|
|
|
24 |
|
250 |
|
|
|
984 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign exchange forward contracts |
|
Other assets |
|
174 |
|
341 |
|
Other liabilities |
|
31 |
|
148 |
| ||||
Foreign exchange swap contracts |
|
Other assets |
|
320 |
|
67 |
|
Other liabilities |
|
73 |
|
97 |
| ||||
|
|
|
|
494 |
|
408 |
|
|
|
104 |
|
245 |
| ||||
|
|
|
|
$ |
518 |
|
$ |
658 |
|
|
|
$ |
1,088 |
|
$ |
245 |
|
The following table presents the amounts of gains and losses on the Companys derivative instruments for the three months ended December 31, 2012 and 2011 and their locations on its consolidated statements of operations (in thousands):
|
|
Net amount of gain/(loss) |
|
Location of |
|
Amount of gain/(loss) |
|
Location of |
|
Amount of gain/(loss) |
| ||||||||||||
|
|
2012 |
|
2011 |
|
loss into income |
|
2012 |
|
2011 |
|
immediately |
|
2012 |
|
2011 |
| ||||||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash flow hedges |
|
$ |
222 |
|
$ |
(1,411 |
) |
Cost of goods sold |
|
$ |
1,137 |
|
$ |
(1,672 |
) |
Other income/expense |
|
$ |
70 |
|
$ |
21 |
|
|
|
222 |
|
(1,411 |
) |
|
|
1,137 |
|
(1,672 |
) |
|
|
70 |
|
21 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign exchange forward contracts |
|
|
|
|
|
|
|
|
|
|
|
Other income/expense |
|
122 |
|
(1,535 |
) | ||||||
Foreign exchange swap contracts |
|
|
|
|
|
|
|
|
|
|
|
Other income/expense |
|
744 |
|
227 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
866 |
|
(1,308 |
) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
$ |
222 |
|
$ |
(1,411 |
) |
|
|
$ |
1,137 |
|
$ |
(1,672 |
) |
|
|
$ |
936 |
|
$ |
(1,287 |
) |
The following table presents the amounts of gains and losses on the Companys derivative instruments for the nine months ended December 31, 2012 and 2011 and their locations on its consolidated statements of operations (in thousands):
|
|
Net amount of gain/(loss) |
|
Location of |
|
Amount of gain/(loss) |
|
Location of |
|
Amount of gain/(loss) |
| ||||||||||||
|
|
2012 |
|
2011 |
|
loss into income |
|
2012 |
|
2011 |
|
immediately |
|
2012 |
|
2011 |
| ||||||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash flow hedges |
|
$ |
(2,462 |
) |
$ |
6,489 |
|
Cost of goods sold |
|
$ |
(440 |
) |
$ |
2,345 |
|
Other income/expense |
|
$ |
242 |
|
$ |
(237 |
) |
|
|
(2,462 |
) |
6,489 |
|
|
|
(440 |
) |
2,345 |
|
|
|
242 |
|
(237 |
) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign exchange forward contracts |
|
|
|
|
|
|
|
|
|
|
|
Other income/expense |
|
(715 |
) |
(1,341 |
) | ||||||
Foreign exchange swap contracts |
|
|
|
|
|
|
|
|
|
|
|
Other income/expense |
|
1,179 |
|
(393 |
) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
464 |
|
(1,734 |
) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
$ |
(2,462 |
) |
$ |
6,489 |
|
|
|
$ |
(440 |
) |
$ |
2,345 |
|
|
|
$ |
706 |
|
$ |
(1,971 |
) |
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 nine months ended December 31, 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 $49.7 million (37.7 million) and $54.9 million (42.4 million) at December 31, 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 December 31, 2012 and March 31, 2012 relating to foreign currency receivables or payables were $38.6 million and $18.7 million. Open forward contracts as of December 31, 2012 consisted of contracts in euros to sell British pounds, contracts in Australian dollars to purchase U.S. dollars, contracts in Taiwanese dollars to sell U.S. dollars and contracts in Canadian dollars to purchase U.S. dollars at future dates at pre-determined exchange rates. Open forward contracts as of March 31, 2012 consisted of contracts in euros to 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 December 31, 2012 and March 31, 2012 were $14.4 million and $22.4 million. Swap contracts outstanding at December 31, 2012 consisted of contracts in Mexican pesos and Japanese yen. Swap contracts outstanding at March 31, 2012 consisted of contracts in Taiwanese dollars, Mexican pesos and Japanese yen.
The fair value of all 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. During the third quarter of fiscal 2013, the Company performed an impairment assessment of this investment due to significant deterioration of its financial results and financial position, determining that an other-than-temporary impairment had occurred and, consequently recorded a $3.6 million investment impairment charge during this period.
Note 7 Goodwill and Other Intangible Assets
The Company performs its annual goodwill impairment test of each reporting unit as of December 31 and completes the assessment during its fiscal fourth quarter, or more frequently, if certain events or circumstances warrant. Events or changes in circumstances which might indicate potential impairment in goodwill include the company-specific factors, including, but not limited to, stock price volatility, market capitalization relative to net book value, and projected revenue, market growth and operating results. Determining the number of reporting units and the fair value of a reporting unit requires the Company to make judgments and involves the use of significant estimates and assumptions. The Company has two reporting units: peripherals and video conferencing. The allocation of assets and liabilities to each of its reporting units also involves judgment and assumptions.
The goodwill impairment assessment involves three tests, Step 0, Step 1 and Step 2. The Step 0 test involves performing an initial qualitative assessment to determine whether it is more likely than not that the asset is impaired and thus whether it is necessary to proceed to Step 1 and calculate the fair value of the respective reporting unit. The Company may proceed directly to the Step 1 test without performing the Step 0 test. The Step 1 test involves measuring the recoverability of goodwill at the reporting unit level by comparing the reporting units carrying amount, including goodwill, to the fair value of the reporting unit. The fair value is estimated using an income approach employing both a discounted cash flow (DCF) and a market-based model. The DCF model is based on projected cash flows from the Companys most recent forecast (assessment forecast) developed in connection with each of its reporting units to perform the goodwill impairment assessment. The assessment forecast is based on a number of key assumptions, including, but not limited to, discount rate, compound annual growth rate (CAGR) during the forecast period, and terminal value. The terminal value is based on an exit price at the end of the assessment forecast using an earnings multiple applied to the final year of the assessment forecast. The discount rate is applied to the projected cash flows to reflect the risks inherent in the timing and amount of the projected cash flows, including the terminal value, and is derived from the weighted average cost of capital of market participants in similar businesses. The market approach model is based on applying certain revenue and earnings multiples of comparable companies relevant to each of its reporting units to the respective revenue and earnings metrics of the Companys reporting units. To test the reasonableness of the fair values indicated by the income approach and the market-based approach, the Company also assess the implied premium of the aggregate fair value over the market capitalization considered attributable to an acquisition control premium, which is the price in excess of a stock markets price that investors would typically pay to gain control of an entity. The discounted cash flow model and the market approach model 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 as determined by these assessments, goodwill is considered impaired, and the Step 2 test is performed to measure the amount of impairment loss. The Step 2 test measures the impairment loss by allocating the reporting units 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 Company performed its annual goodwill impairment analysis of each of its reporting units as of December 31, 2012 using the income approach and market approach described above. The Company chose not to perform the Step 0 test and to proceed directly to the Step 1 test. This assessment resulted in the Company determining that its peripherals reporting unit passed the Step 1 test because the estimated fair value exceeded its carrying value by more than 75%. By contrast, the video conferencing reporting unit failed the Step 1 test because the estimated fair value was less than its carrying value, thus requiring a Step 2 assessment of this reporting unit. This impairment primarily resulted from a decrease in the expected CAGR during the assessment forecast period based on greater evidence of the overall enterprise video conferencing industry experiencing a slowdown in recent quarters, combined with lower demand related to new product launches, increased competition in fiscal year 2013 and other market data. These factors had an adverse effect on the Companys recent video conferencing operating results and are anticipated to have an adverse effect on its future outlook. The Company was unable to fully complete the Step 2 analysis prior to filing of this Form 10-Q due to the complexities of determining the implied fair value of goodwill of its video conferencing reporting unit. Based on the work performed as of this filing date, the Company recorded a non-cash goodwill impairment charge estimate of $211.0 million related to its video conferencing reporting unit. The accounting write down, which was performed as part of this annual impairment test, was required to reflect the carrying amount of the reporting unit had exceeded its implied fair value due to the slowdown in the enterprise video conferencing industry in recent quarters.
The video conferencing reporting unit encompasses the integrated operations of the Companys acquisitions of SightSpeed Inc., LifeSize Communications, Inc., Paradial AS and Mirial S.r.l.
Management continues to evaluate and monitor all key factors impacting the carrying value of the Companys recorded goodwill and long-lived assets. Further adverse changes in the Companys 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 following table summarizes the activity in the Companys goodwill balance during the nine months ended December 31, 2012:
|
|
Peripheral |
|
Video Conferencing |
|
Total |
| |||
Balance at March 31, 2012 |
|
$ |
220,860 |
|
$ |
339,663 |
|
$ |
560,523 |
|
Impairment |
|
|
|
(211,000 |
) |
(211,000 |
) | |||
Foreign currency movements |
|
78 |
|
(172 |
) |
(94 |
) | |||
|
|
$ |
220,938 |
|
$ |
128,491 |
|
$ |
349,429 |
|
Reclassified to Assets Held for Sale: |
|
|
|
|
|
|
| |||
Goodwill - Digital Video Security and Remote Controls |
|
(4,116 |
) |
|
|
(4,116 |
) | |||
Balance at December 31, 2012 |
|
$ |
216,822 |
|
$ |
128,491 |
|
$ |
345,313 |
|
The Companys acquired other intangible assets subject to amortization were as follows (in thousands):
|
|
December 31, 2012 |
|
March 31, 2012 |
| ||||||||||||||
|
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
| ||||||
|
|
Amount |
|
Amortization |
|
Amount |
|
Amount |
|
Amortization |
|
Amount |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Trademark/tradename |
|
$ |
32,085 |
|
$ |
(28,162 |
) |
$ |
3,923 |
|
$ |
32,104 |
|
$ |
(26,095 |
) |
$ |
6,009 |
|
Technology |
|
91,904 |
|
(73,114 |
) |
18,790 |
|
91,954 |
|
(62,548 |
) |
29,406 |
| ||||||
Customer contracts |
|
39,908 |
|
(27,088 |
) |
12,820 |
|
39,926 |
|
(21,823 |
) |
18,103 |
| ||||||
|
|
$ |
163,897 |
|
$ |
(128,364 |
) |
$ |
35,533 |
|
$ |
163,984 |
|
$ |
(110,466 |
) |
$ |
53,518 |
|
Reclassified to Assets Held for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Trademark/tradename - Digital Video Security |
|
(1,300 |
) |
1,300 |
|
|
|
|
|
|
|
|
| ||||||
Technology - Digital Video Security |
|
(6,700 |
) |
6,200 |
|
(500 |
) |
|
|
|
|
|
| ||||||
Customer contracts - Digital Video Security |
|
(200 |
) |
200 |
|
|
|
|
|
|
|
|
| ||||||
|
|
$ |
155,697 |