Logitech 10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2014
 
Or
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period from                to                
 
Commission File Number: 0-29174
 
LOGITECH INTERNATIONAL S.A.
(Exact name of registrant as specified in its charter)
 
Canton of Vaud, Switzerland
(State or other jurisdiction
of incorporation or organization)
 
None
(I.R.S. Employer
Identification No.)
 
Logitech International S.A.
Apples, Switzerland
c/o Logitech Inc.
7600 Gateway Boulevard
Newark, California 94560
(Address of principal executive offices and zip code)
 
(510) 795-8500
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ý 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  ý  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.
 

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Table of Contents

Large accelerated filer  x
 
Accelerated filer  o
 
 
 
Non-accelerated filer  o
 
Smaller reporting company  o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o  No ý
 
As of January 15, 2015, there were 164,233,065 shares of the Registrant’s share capital outstanding.


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Table of Contents

TABLE OF CONTENTS
 
 
 
Page
 
 
 
Part I
FINANCIAL INFORMATION
 
 
 
 
 
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.

      

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Table of Contents

PART I — FINANCIAL INFORMATION
 
ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 
 
Page
 
Financial Statement Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents


LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
 
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2014
 
2013
 
2014
 
2013
Net sales
 
$
634,204

 
$
628,719

 
$
1,646,718

 
$
1,638,392

Cost of goods sold
 
402,921

 
414,418

 
1,028,905

 
1,071,867

Gross profit
 
231,283

 
214,301

 
617,813

 
566,525

Operating expenses:
 
 

 
 

 
 

 
 

Marketing and selling
 
103,307

 
94,273

 
290,215

 
288,817

Research and development
 
33,616

 
34,577

 
97,257

 
108,589

General and administrative
 
29,808

 
31,998

 
100,957

 
90,247

Restructuring charges (credits), net
 
(146
)
 
822

 
(146
)
 
8,621

Total operating expenses
 
166,585

 
161,670

 
488,283

 
496,274

Operating income
 
64,698

 
52,631

 
129,530

 
70,251

Interest income (expense), net
 
224

 
(1,022
)
 
837

 
(862
)
Other income (expense), net
 
(3,016
)
 
1,082

 
(4,099
)
 
1,361

Income before income taxes
 
61,906

 
52,691

 
126,268

 
70,750

Provision for (benefit from) income taxes
 
(878
)
 
4,807

 
7,718

 
7,064

Net income
 
$
62,784

 
$
47,884

 
$
118,550

 
$
63,686

 
 
 
 
 
 
 
 
 
Net income per share:
 
 

 
 

 
 

 
 

Basic
 
$
0.38

 
$
0.30

 
$
0.73

 
$
0.40

Diluted
 
$
0.38

 
$
0.29

 
$
0.71

 
$
0.39

 
 
 
 
 
 
 
 
 
Shares used to compute net income per share :
 
 

 
 

 
 

 
 

Basic
 
163,533

 
160,871

 
163,261

 
160,051

Diluted
 
166,321

 
163,388

 
166,076

 
161,509

 
 
 
 
 
 
 
 
 
Cash dividends per share
 
$
0.27

 
$

 
$
0.27

 
$
0.22

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


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Table of Contents

LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(unaudited)
 
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2014
 
2013
 
2014
 
2013
Net income
 
$
62,784

 
$
47,884

 
$
118,550

 
$
63,686

Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Foreign currency translation (loss) gain
 
(4,400
)
 
682

 
(8,051
)
 
4,109

Defined benefit pension plans:
 
 

 
 

 
 

 
 

Net gain (loss) and prior service costs, net of tax
 
529

 
(384
)
 
1,476

 
(623
)
Amortization included in operating expenses
 
101

 
318

 
323

 
1,712

Hedging gain (loss):
 
 

 
 

 
 

 
 

Unrealized hedging gain (loss)
 
1,286

 
(1,198
)
 
5,038

 
(3,484
)
Reclassification of hedging loss (gain) included in cost of goods sold
 
(2,025
)
 
1,342

 
(1,840
)
 
1,526

Other comprehensive income (loss):
 
(4,509
)
 
760

 
(3,054
)
 
3,240

Total comprehensive income
 
$
58,275

 
$
48,644

 
$
115,496

 
$
66,926

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


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Table of Contents

LOGITECH INTERNATIONAL S.A.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)
 
 
 
December 31,
2014
 
March 31,
2014
Assets
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
516,613

 
$
469,412

Accounts receivable, net
 
306,866

 
182,029

Inventories
 
245,740

 
222,402

Other current assets
 
65,613

 
59,157

Total current assets
 
1,134,832

 
933,000

Non-current assets:
 
 

 
 

Property, plant and equipment, net
 
90,777

 
88,391

Goodwill
 
343,437

 
345,010

Other intangible assets
 
2,728

 
10,529

Other assets
 
67,005

 
74,460

Total assets
 
$
1,638,779

 
$
1,451,390

Liabilities and Shareholders’ Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
350,335

 
$
242,815

Accrued and other current liabilities
 
224,650

 
211,972

Total current liabilities
 
574,985

 
454,787

Non-current liabilities:
 
 

 
 

Income taxes payable
 
79,417

 
93,126

Other non-current liabilities
 
93,463

 
99,349

Total liabilities
 
747,865

 
647,262

Commitments and contingencies (note 11)
 


 


Shareholders’ equity:
 
 

 
 

Registered shares, CHF 0.25 par value:
 
30,148

 
30,148

Issued and authorized shares —173,106 at December 31, 2014 and March 31, 2014
 

 

Conditionally authorized shares — 50,000 at December 31, 2014 and March 31, 2014
 

 

Additional paid-in capital
 

 

Less shares in treasury, at cost —8,909 at December 31, 2014 and 10,206 at March 31, 2014
 
(93,671
)
 
(116,510
)
Retained earnings
 
1,043,293

 
976,292

Accumulated other comprehensive loss
 
(88,856
)
 
(85,802
)
Total shareholders’ equity
 
890,914

 
804,128

Total liabilities and shareholders’ equity
 
$
1,638,779

 
$
1,451,390

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


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Table of Contents

LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
 
 
Nine Months Ended
December 31,
 
 
2014
 
2013
Operating activities:
 
 

 
 

Net income
 
$
118,550

 
$
63,686

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation
 
29,559

 
32,755

Amortization of other intangible assets
 
7,624

 
14,990

Share-based compensation expense
 
20,046

 
17,412

Impairment of investment
 
2,259

 
568

Loss (gain) on disposal of property, plant and equipment
 
(44
)
 
3,878

Excess tax benefits from share-based compensation
 
(2,533
)
 
(572
)
Deferred income taxes
 
(3,151
)
 
(3,561
)
Changes in operating assets and liabilities, net of acquisitions:
 
 

 
 

Accounts receivable, net
 
(131,026
)
 
(130,871
)
Inventories
 
(30,171
)
 
13,496

Other assets
 
(6,592
)
 
(2,968
)
Accounts payable
 
111,310

 
61,423

Accrued and other liabilities
 
21,227

 
40,463

Net cash provided by operating activities
 
137,058

 
110,699

Investing activities:
 
 

 
 

Purchases of property, plant and equipment
 
(34,777
)
 
(34,910
)
Investment in privately held companies
 
(2,550
)
 

Acquisitions, net of cash acquired
 

 
(650
)
Proceeds from return of investment from strategic investment
 

 
261

Purchase of trading investments
 
(3,463
)
 
(7,831
)
Proceeds from sales of trading investments
 
3,856

 
8,311

Net cash used in investing activities
 
(36,934
)
 
(34,819
)
Financing activities:
 
 

 
 

Payment of cash dividends
 
(43,767
)
 
(36,123
)
Contingent consideration related to prior acquisition
 
(100
)
 

Repurchase of ESPP awards
 
(1,078
)
 

Proceeds from sales of shares upon exercise of options and purchase rights
 
2,466

 
8,465

Tax withholdings related to net share settlements of restricted stock units
 
(7,456
)
 
(2,937
)
Excess tax benefits from share-based compensation
 
2,533

 
572

Net cash used in financing activities
 
(47,402
)
 
(30,023
)
Effect of exchange rate changes on cash and cash equivalents
 
(5,521
)
 
184

Net increase in cash and cash equivalents
 
47,201

 
46,041

Cash and cash equivalents, beginning of the period
 
469,412

 
333,824

Cash and cash equivalents, end of the period
 
$
516,613

 
$
379,865

Non-cash investing activities:
 
 

 
 

Property, plant and equipment purchased during the period and included in period end liability accounts
 
$
2,990

 
$
4,134

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

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Table of Contents

LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)
(unaudited)
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
Accumulated
Other
 
Total
 
 
Registered Shares
 
Paid-in
 
Treasury Shares
 
Retained
 
Comprehensive
 
Shareholders’
 
 
Shares
 
Amount
 
Capital
 
Shares
 
Amount
 
Earnings
 
Income (Loss)
 
Equity
March 31, 2013
 
173,106

 
$
30,148

 
$

 
13,855

 
$
(179,990
)
 
$
966,924

 
$
(95,129
)
 
$
721,953

Total comprehensive income
 

 

 

 

 

 
63,686

 
3,240

 
66,926

Tax effects from share-based awards
 

 

 
(2,569
)
 

 

 

 

 
(2,569
)
Sales of shares upon exercise of options and purchase rights
 

 

 
1,892

 
(1,327
)
 
22,501

 
(15,943
)
 

 
8,450

Issuance of shares upon vesting of restricted stock units
 

 

 
(16,886
)
 
(817
)
 
13,964

 

 

 
(2,922
)
Share-based compensation expense
 

 

 
17,563

 

 

 

 

 
17,563

Cash dividends
 

 

 

 

 

 
(36,123
)
 

 
(36,123
)
December 31, 2013
 
173,106

 
$
30,148

 
$

 
11,711

 
$
(143,525
)
 
$
978,544

 
$
(91,889
)
 
$
773,278

 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
Accumulated Other
 
Total
 
 
Registered Shares
 
Paid-in
 
Treasury Shares
 
Retained
 
Comprehensive
 
Shareholders’
 
 
Shares
 
Amount
 
Capital
 
Shares
 
Amount
 
Earnings
 
Income (Loss)
 
Equity
March 31, 2014
 
173,106

 
$
30,148

 
$

 
10,206

 
$
(116,510
)
 
$
976,292

 
$
(85,802
)
 
$
804,128

Total comprehensive income (loss)
 

 

 

 

 

 
118,550

 
(3,054
)
 
115,496

Tax effects from share-based awards
 

 

 
842

 

 

 

 

 
842

Sales of shares upon exercise of options
 

 

 
(1,609
)
 
(238
)
 
4,075

 

 

 
2,466

Issuance of shares upon vesting of restricted stock units
 

 

 
(18,438
)
 
(1,059
)
 
18,764

 
(7,782
)
 

 
(7,456
)
Share-based compensation expense
 

 

 
20,283

 

 

 

 

 
20,283

Repurchase of ESPP awards
 

 

 
(1,078
)
 

 

 

 

 
(1,078
)
Cash dividends
 

 

 

 

 

 
(43,767
)
 

 
(43,767
)
December 31, 2014
 
173,106

 
$
30,148

 
$

 
8,909

 
$
(93,671
)
 
$
1,043,293

 
$
(88,856
)
 
$
890,914

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


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Table of Contents

LOGITECH INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
Note 1 — The Company
 
Logitech International S.A, together with its consolidated subsidiaries, (“Logitech” or the “Company”) develops and markets innovative hardware and software products that enable or enhance digital navigation, music and video entertainment, gaming, social networking, and audio and video communication over the Internet.
 
The Company has two operating segments, peripherals and video conferencing. Logitech’s peripherals segment encompasses the design, manufacturing and marketing of peripherals for personal computers (“PCs”), tablets and other digital platforms. The Company’s video conferencing segment offers scalable high-definition (“HD”) video communications endpoints, HD video conferencing systems, a Software-as-a-Service (“SaaS”) video service infrastructure software and appliance to support large-scale video deployments, and services to support these products.
 
The Company sells its peripherals products to a network of distributors, retailers and original equipment manufacturers (“OEMs”). The Company sells its video conferencing products and provides services to distributors, value-added resellers, OEMs and, occasionally, direct enterprise customers. The large majority of the Company’s net sales have historically been derived from peripherals products for use by consumers.
 
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 —Revision of Previously Issued Financial Statements
 
As disclosed in the Company’s Annual Report on Form 10-K for the year ended March 31, 2014 and in the audited consolidated financial statements contained therein, the Company has restated and revised its financial statements for the fiscal years ended March 31, 2012 and 2013, respectively. The impact of the adjustments also immaterially impact the financial statements for the first three quarters of the fiscal year ended March 31, 2014 as previously included in the Company’s quarterly reports on Form 10-Q for Fiscal 2014. The financial statements for the three and nine months ended December 31, 2013 included in this Form 10-Q are revised as described below for those adjustments and should be read in conjunction with Item 8, “Financial Statements and Supplementary Data” disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2014, filed with the SEC on November 13, 2014.
 
The adjustments included in these financial statements for the three and nine months ended December 31, 2013 primarily related to a correction to revenue that was previously recorded as an out-of-period adjustment and is now being reported in the correct period, capitalization of property, plant and equipment which was previously incorrectly expensed, pension obligation, other misstatements, and the tax impact of these adjustments.















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Table of Contents

Consolidated Statements of Operations.
 
The following table presents the impact of the correcting adjustments on the Company’s previously reported consolidated statement of operations for the three and nine months ended December 31, 2013 (in thousands, except for per share amount):
 
 
Three Months Ended
December 31, 2013
 
Nine Months Ended
December 31, 2013
 
 
As Reported
 
Adjustments*
 
As Revised
 
As Reported
 
Adjustments*
 
As Revised
Net sales
 
$
627,890

 
$
829

 
$
628,719

 
$
1,637,786

 
$
606

 
$
1,638,392

Cost of goods sold
 
414,528

 
(110
)
 
414,418

 
1,072,656

 
(789
)
 
1,071,867

Gross profit
 
213,362

 
939

 
214,301

 
565,130

 
1,395

 
566,525

Operating expenses:
 
 

 
 

 
 

 
 

 
 

 
 

Marketing and selling
 
93,624

 
649

 
94,273

 
287,969

 
848

 
288,817

Research and development
 
34,103

 
474

 
34,577

 
107,927

 
662

 
108,589

General and administrative
 
31,560

 
438

 
31,998

 
90,103

 
144

 
90,247

Restructuring charges, net
 
822

 

 
822

 
8,621

 

 
8,621

Total operating expenses
 
160,109

 
1,561

 
161,670

 
494,620

 
1,654

 
496,274

Operating income
 
53,253

 
(622
)
 
52,631

 
70,510

 
(259
)
 
70,251

Interest expense, net
 
(1,022
)
 

 
(1,022
)
 
(862
)
 

 
(862
)
Other income, net
 
1,082

 

 
1,082

 
1,361

 

 
1,361

Income before income taxes
 
53,313

 
(622
)
 
52,691

 
71,009

 
(259
)
 
70,750

Provision for income taxes
 
4,810

 
(3
)
 
4,807

 
7,065

 
(1
)
 
7,064

Net income
 
$
48,503

 
$
(619
)
 
$
47,884

 
$
63,944

 
$
(258
)
 
$
63,686

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share:
 
 

 
 

 
 

 
 

 
 

 
 

Basic
 
$
0.30

 
$

 
$
0.30

 
$
0.40

 
$

 
$
0.40

Diluted
 
$
0.30

 
$
(0.01
)
 
$
0.29

 
$
0.40

 
$
(0.01
)
 
$
0.39

 
 
 
 
 
 
 
 
 
 
 
 
 
Shares used to compute net income per share:
 
 

 
 
 
 

 
 

 
 
 
 

Basic
 
160,871

 

 
160,871

 
160,051

 

 
160,051

Diluted
 
163,388

 

 
163,388

 
161,509

 

 
161,509


* The adjustments included in these financial statements for the three and nine months ended December 31, 2013 primarily related to a correction to revenue that was previously recorded as an out-of-period adjustment and is now being reported in the correct period, capitalization of property, plant and equipment which was previously incorrectly expensed, pension obligation, other misstatements, and the tax impact of these adjustments.
 
















11

Table of Contents

Consolidated Statements of Comprehensive Income
 
The following table presents the impact of the correcting adjustments on the Company’s previously reported consolidated statement of comprehensive income for the three and nine months ended December 31, 2013 (in thousands):
 
 
Three Months Ended
December 31, 2013
 
Nine Months Ended
December 31, 2013
 
 
As Reported
 
Adjustments*
 
As Revised
 
As Reported
 
Adjustments*
 
As Revised
Net income
 
$
48,503

 
$
(619
)
 
$
47,884

 
$
63,944

 
$
(258
)
 
$
63,686

Other comprehensive income:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency translation gain
 
682

 

 
682

 
3,511

 
598

 
4,109

Defined benefit pension plans:
 
 

 
 

 
 

 
 

 
 
 
 
Net loss and prior service costs, net of taxes
 
(384
)
 

 
(384
)
 
(1,384
)
 
761

 
(623
)
Amortization included in operating expenses
 
318

 

 
318

 
933

 
779

 
1,712

Hedging gain (loss):
 
 

 
 

 
 

 
 

 
 

 
 

Unrealized hedging loss
 
(1,198
)
 

 
(1,198
)
 
(3,484
)
 

 
(3,484
)
Reclassification of hedging loss included in cost of goods sold
 
1,342

 

 
1,342

 
1,526

 

 
1,526

Other comprehensive income:
 
760

 

 
760

 
1,102

 
2,138

 
3,240

Total comprehensive income
 
$
49,263

 
$
(619
)
 
$
48,644

 
$
65,046

 
$
1,880

 
$
66,926

 
* The adjustments included in these financial statements for the three and nine months ended December 31, 2013 primarily related to a correction to revenue that was previously recorded as an out-of-period adjustment and is now being reported in the correct period, capitalization of property, plant and equipment which was previously incorrectly expensed, pension obligation, other misstatements, and the tax impact of these adjustments.



























12

Table of Contents

Consolidated Statement of Cash Flows
 
The following table presents the impact of the correcting adjustments on the Company’s previously reported consolidated statement of cash flows for the nine months ended December 31, 2013 (in thousands): 
 
 
Nine Months Ended December 31, 2013
 
 
As Reported
 
Adjustments*
 
As Revised
Cash flows from operating activities:
 
 

 
 

 
 

Net income
 
$
63,944

 
(258
)
 
$
63,686

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

 
 

Depreciation
 
28,756

 
3,999

 
32,755

Amortization of other intangible assets
 
14,990

 

 
14,990

Share-based compensation expense
 
17,412

 

 
17,412

Impairment of investments
 
568

 

 
568

Loss on disposal of property, plant and equipment
 
3,878

 

 
3,878

Excess tax benefits from share- based compensation
 
(572
)
 

 
(572
)
Deferred income taxes
 
(3,559
)
 
(2
)
 
(3,561
)
Changes in assets and liabilities, net of acquisitions:
 
 

 
 

 
 

Accounts receivable, net
 
(130,265
)
 
(606
)
 
(130,871
)
Inventories
 
14,652

 
(1,156
)
 
13,496

Other assets
 
(2,968
)
 

 
(2,968
)
Accounts payable
 
62,931

 
(1,508
)
 
61,423

Accrued and other liabilities
 
38,118

 
2,345

 
40,463

Net cash provided by operating activities
 
107,885

 
2,814

 
110,699

Cash flows from investing activities:
 
 

 
 

 
 

Purchases of property, plant and equipment
 
(32,096
)
 
(2,814
)
 
(34,910
)
Acquisitions, net of cash acquired
 
(650
)
 

 
(650
)
Proceeds from return of investment from strategic investment
 
261

 

 
261

Purchases of trading investments
 
(7,831
)
 

 
(7,831
)
Proceeds from sales of trading investments
 
8,311

 

 
8,311

Net cash used in investing activities
 
(32,005
)
 
(2,814
)
 
(34,819
)
Cash flows from financing activities:
 
 

 
 

 
 

Payment of cash dividends
 
(36,123
)
 

 
(36,123
)
Proceeds from sales of shares upon exercise of options and purchase rights
 
8,465

 

 
8,465

Tax withholdings related to net share settlements of restricted stock units
 
(2,937
)
 

 
(2,937
)
Excess tax benefits from share-based compensation
 
572

 

 
572

Net cash used in financing activities
 
(30,023
)
 

 
(30,023
)
Effect of exchange rate changes on cash and cash equivalents
 
184

 

 
184

Net increase in cash and cash equivalents
 
46,041

 

 
46,041

Cash and cash equivalents at beginning of period
 
333,824

 

 
333,824

Cash and cash equivalents at end of period
 
$
379,865

 
$

 
$
379,865

Property, plant and equipment purchased during the period and included in period end liability accounts
 
$
4,134

 
$

 
$
4,134

 
* The adjustments included in these financial statements for the nine months ended December 31, 2013 primarily related to a correction to revenue that was previously recorded as an out-of-period adjustment and is now being reported in the correct period, capitalization of property, plant and equipment which was previously incorrectly expensed, pension obligation, other misstatements, and the tax impact of these adjustments.

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Note 3 — Summary of Significant Accounting Policies
 
Basis of Presentation
 
The consolidated interim 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 (“GAAP”) for interim financial information and therefore do not include all the information required by 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, 2014, included in its Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on November 13, 2014.  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, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2015, or any future periods.
 
Fiscal Year
 
The Company’s fiscal year ends on March 31. Interim quarters are thirteen week periods, each ending on last Friday of the quarters.  For purposes of presentation, the Company has indicated its quarterly periods as ending on the quarter end.
 
Changes in Significant Accounting Policies
 
There have been no substantial changes in the Company’s significant accounting policies during the nine months ended December 31, 2014 compared with the significant accounting policies described in its Annual Report on Form 10-K for the fiscal year ended March 31, 2014.
 
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. Examples of significant estimates and assumptions made by management involve the fair value of goodwill, accruals for customer programs, inventory valuation, valuation allowances for deferred tax assets and warranty accruals. 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 May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2014-09”). ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The new standard will be effective for the Company beginning April 1, 2017.  Early application is prohibited.  The Company is currently evaluating the impact that adopting this new guidance will have on its consolidated financial statements.

In November 2014, the FASB issued Accounting Standards Update No. 2014-17, "Business Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force)" ("ASU 2014-17"). ASU 2014-17 provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. The new standard is effective on November 18, 2014.  Early application is prohibited.  After the effective date, an acquired entity can make an election to apply the guidance to
future change-in-control events or to its most recent change-in-control event. However, if the financial statements for the period in which the most recent change-in-control event occurred already have been issued or made available to be issued, the application of this guidance would be a change in accounting principle. The Company has adopted this new guidance and there's no impact on its consolidated financial statements.

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Note 4 — Net Income per Share
 
The computations of basic and diluted net income per share for the Company were as follows (in thousands, except per share amounts):
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2014
 
2013
 
2014
 
2013
Net income
 
$
62,784

 
$
47,884

 
$
118,550

 
$
63,686

Shares used in net income per share computation:
 
 

 
 

 
 

 
 

Weighted average shares outstanding - basic
 
163,533

 
160,871

 
163,261

 
160,051

Effect of potentially dilutive equivalent shares
 
2,788

 
2,517

 
2,815

 
1,458

Weighted average shares outstanding - diluted
 
166,321

 
163,388

 
166,076

 
161,509

Net income per share:
 
 

 
 

 
 

 
 

Basic
 
$
0.38

 
$
0.30

 
$
0.73

 
$
0.40

Diluted
 
$
0.38

 
$
0.29

 
$
0.71

 
$
0.39

 
Share equivalents attributable to outstanding stock options and RSUs of 8,079,134 and 11,080,000 for the three months ended December 31, 2014 and 2013 and 8,079,134 and 15,874,000 for the nine months ended December 31, 2014 and 2013 were excluded from the calculation of diluted net income per share because to do so would have been anti-dilutive for the periods indicated.
 
Note 5 — Employee Benefit Plans
 
Employee Share Purchase Plans and Stock Incentive Plans
 
As of December 31, 2014, 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). Please refer to our fiscal year 2014 Form 10-K for additional information regarding the Employee Share Purchase Plans and Stock Incentive Plans.
 
The Company was not current with its periodic reports required to be filed with the SEC and was therefore unable to issue any shares under its Registration Statements on Form S-8 from July 31, 2014 to November 26, 2014. Given the proximity of the unavailability of those registration statements and the end of the then-current ESPP offering period, also on July 31, 2014, the Compensation Committee authorized the termination of the then-current ESPP offering period and a one-time payment to each participant in an amount equal to the fifteen percent (15%) discount at which shares would otherwise have been repurchased pursuant to the then-current period of the ESPPs. This one-time payment was accounted for as a repurchase of equity awards that reduced additional paid in capital, resulting in no additional compensation cost. No new ESPP offering periods were initiated during the three months ended December 31, 2014.

The following table summarizes the share-based compensation expense and related tax benefit recognized for the three and nine months ended December 31, 2014 and 2013 (in thousands):
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2014
 
2013
 
2014
 
2013
Cost of goods sold
 
$
560

 
$
672

 
$
1,724

 
$
1,843

Marketing and selling
 
2,786

 
3,057

 
6,995

 
5,980

Research and development
 
1,066

 
1,906

 
2,462

 
3,840

General and administrative
 
2,635

 
3,278

 
8,865

 
5,749

Total share-based compensation expense
 
7,047

 
8,913

 
20,046

 
17,412

Income tax benefit
 
(1,623
)
 
(168
)
 
(4,720
)
 
(2,343
)
Total share-based compensation expense, net of income tax
 
$
5,424

 
$
8,745

 
$
15,326

 
$
15,069

 
During the three months ended December 31, 2014 and 2013, the Company capitalized $0.6 million and $0.5 million of stock-based compensation expenses as inventory, respectively.
 

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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 December 31, 2014 and 2013 were $1.6 million and $1.4 million, and for the nine months ended December 31, 2014 and 2013 were $4.3 million and $4.7 million, respectively.
 
Defined Benefit Plans
 
Certain of the Company’s subsidiaries sponsor defined benefit pension plans or non-retirement post-employment benefits covering substantially all of their employees. Benefits are provided based on employees’ years of service and earnings, or in accordance with applicable employee benefit regulations. The Company’s practice is to fund amounts sufficient to meet the requirements set forth in the applicable employee benefit and tax regulations. The cost recorded of $1.8 million and $2.4 million for the three months ended December 31, 2014 and 2013 and $5.7 million and $7.6 million for the nine months ended December 31, 2014 and 2013 was primarily related to service costs.
 
Note 6 — 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 (loss) before taxes and the provision for (benefit from) income taxes are generated outside of Switzerland.
 
The income tax benefit for the three months ended December 31, 2014 was $0.9 million based on an effective income tax rate of (1.4)% of pre-tax income, compared to an income tax provision of $4.8 million based on an effective income tax rate of 9.1% of pre-tax income for the three months ended December 31, 2013. The income tax provision for the nine months ended December 31, 2014 was $7.7 million based on an effective income tax rate of 6.1% of pre-tax income, compared to an income tax provision of $7.1 million based on an effective income tax rate of 10.0% of pre-tax income for the nine months ended December 31, 2013.  The change in the effective income tax rate for the three and nine months ended December 31, 2014, compared to the three and nine months ended December 31, 2013, was primarily due to the mix of income and losses in the various tax jurisdictions in which the Company operates. There was a discrete tax benefit of $9.0 million and $11.1 million in the three and nine months ended December 31, 2014, respectively, from the reversal of uncertain tax positions resulting from expiration of the statutes of limitations. In the three and nine months ended December 31, 2013, the discrete tax benefit from the reversal of uncertain tax positions resulting from expiration of the statutes of limitations was $10.0 million and $12.0 million, respectively.
 
        On December 19, 2014, the enactment in the U.S. of the Tax Increase Prevention Act of 2014 extended the U.S. federal research and development tax credit through December 31, 2014 which had previously expired on December 31, 2013. The income tax benefit and income tax provision in the three and nine months ended December 31, 2014 reflected a $0.8 million tax benefit, respectively, as a result of the extension of the tax credit.

As of December 31 and March 31, 2014, the total amount of unrecognized tax benefits due to uncertain tax positions was $85.1 million and $91.0 million, respectively, of which $83.9 million and $86.1 million would affect the effective income tax rate if recognized.
 
As of December 31, 2014, the Company had $79.4 million in non-current income taxes payable and $0.1 million in current income taxes payable, including interest and penalties, related to our income tax liability for uncertain tax positions. As of March 31, 2014, the Company had $93.1 million in non-current income taxes payable and $0.3 million in current income taxes payable.  Pursuant to ASU 2013-11, which became effective in the first quarter of fiscal year 2015, the Company reclassified $9.8 million of unrecognized tax benefits previously presented as non-current income taxes payable as a reduction to non-current deferred tax assets for tax credit carryforwards.
 
The Company continues to recognize interest and penalties related to unrecognized tax positions in income tax expense. As of December 31 and March 31, 2014, the Company had $5.2 million and $5.6 million of accrued interest and penalties related to uncertain tax positions, respectively.
 
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. During fiscal year 2015, the Company will continue to review its tax positions and provide for or reverse unrecognized tax benefits as issues arise. During the next 12 months, it is reasonably possible that the amount of unrecognized tax benefits could increase or decrease significantly due to

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changes in tax law in various jurisdictions, new tax audits and changes in the U.S. dollar as compared to foreign currencies. Excluding these factors, uncertain tax positions may decrease by as much as $16.0 million from the lapse of the statutes of limitations in various jurisdictions during the next 12 months.

Note  7— Balance Sheet Components
 
The following table presents the components of certain balance sheet asset amounts as of December 31 and March 31, 2014 (in thousands): 
 
 
December 31,
2014
 
March 31,
2014
Accounts receivable, net:
 
 

 
 

Accounts receivable
 
$
537,240

 
$
338,194

Allowance for doubtful accounts
 
(1,576
)
 
(1,712
)
Allowance for sales returns
 
(17,706
)
 
(19,472
)
Allowance for cooperative marketing arrangements
 
(36,764
)
 
(24,135
)
Allowance for customer incentive programs
 
(74,096
)
 
(41,400
)
Allowance for pricing programs
 
(100,232
)
 
(69,446
)
 
 
$
306,866

 
$
182,029

Inventories:
 
 

 
 

Raw materials
 
$
31,006

 
$
24,031

Work-in-process
 
29

 
42

Finished goods
 
214,705

 
198,329

 
 
$
245,740

 
$
222,402

Other current assets:
 
 

 
 

Income tax and value-added tax receivables
 
$
21,729

 
$
18,252

Deferred tax assets
 
26,863

 
27,013

Prepaid expenses and other assets
 
17,021

 
13,892

 
 
$
65,613

 
$
59,157

Property, plant and equipment, net:
 
 

 
 

Plant, buildings and improvements
 
$
70,174

 
$
69,897

Equipment
 
138,979

 
134,975

Computer equipment
 
41,106

 
40,610

Software
 
81,787

 
81,179

 
 
332,046

 
326,661

Less accumulated depreciation
 
(268,828
)
 
(256,424
)
 
 
63,218

 
70,237

Construction-in-process
 
24,832

 
15,362

Land
 
2,727

 
2,792

 
 
$
90,777

 
$
88,391

Other assets:
 
 

 
 

Deferred tax assets
 
$
43,778

 
$
52,883

Trading investments
 
17,483

 
16,611

Other assets
 
5,744

 
4,966

 
 
$
67,005

 
$
74,460







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The following table presents the components of certain balance sheet liability amounts as of December 31 and March 31, 2014 (in thousands): 
 
 
December 31,
2014
 
March 31,
2014
Accrued and other current liabilities:
 
 

 
 

Accrued personnel expenses
 
$
54,803

 
$
55,165

Accrued marketing expenses
 
13,259

 
12,844

Indirect customer incentive programs
 
35,868

 
31,737

Accrued restructuring
 
1,772

 
2,121

Deferred revenue
 
22,862

 
22,529

Accrued freight and duty
 
11,723

 
6,276

Value-added taxes payable
 
9,825

 
9,354

Accrued royalties
 
3,387

 
2,653

Warranty accrual
 
12,799

 
13,905

Employee benefit plan obligation
 
1,498

 
1,100

Income taxes payable
 
8,894

 
7,701

Other current liabilities
 
47,960

 
46,587

 
 
$
224,650

 
$
211,972

Non-current liabilities:
 
 

 
 

Warranty accrual
 
$
9,293

 
$
10,475

Obligation for deferred compensation
 
17,483

 
16,611

Long term restructuring
 
4,391

 
5,440

Employee benefit plan obligation
 
34,917

 
37,899

Deferred rent
 
14,200

 
15,555

Deferred tax liability
 
1,964

 
2,304

Long term deferred revenue
 
9,692

 
9,350

Other non-current liabilities
 
1,523

 
1,715

 
 
$
93,463

 
$
99,349

 
Note  8— Fair Value Measurements
 
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 uses 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.


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The following table presents the Company’s financial assets and liabilities, that were accounted for at fair value, excluding assets related to the Company’s defined benefit pension plans, classified by the level within the fair value hierarchy (in thousands): 
 
 
December 31, 2014
 
March 31, 2014
 
 
Level 1
 
Level 2
 
Level 1
 
Level 2
Cash equivalents:
 
 

 
 
 
 

 
 

Cash equivalents
 
$
274,552

 
$

 
$
200,641

 
$

 
 
$
274,552

 

 
$
200,641

 
$

Trading investments for deferred compensation plan:
 
 

 
 
 
 

 
 

Money market funds
 
$
2,981

 

 
$
3,139

 
$

Mutual funds
 
14,502

 

 
13,472

 

 
 
$
17,483

 

 
$
16,611

 
$

Foreign exchange derivative assets
 
$

 
$
697

 
$

 
$
155

Foreign exchange derivative liabilities
 
$

 
$
38

 
$

 
$
701

 
There were no significant Level 3 financial assets as of December 31, 2014 or March 31, 2014.
 
Cash and Cash Equivalents
 
Cash equivalents consist of bank demand deposits and time deposits. The time deposits have original maturities of three months or less. Cash equivalents are carried at cost, which approximates fair value.
 
Investment Securities
 
The Company’s investment securities portfolio consists of marketable securities (money market and mutual funds) related to a deferred compensation plan at December 31, 2014 and March 31, 2014.
 
The marketable securities related to the deferred compensation plan are classified as non-current 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 intent to actively buy and sell securities within the objective of generating profits on short-term difference 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 Company’s normal operating cycle of one year. The marketable securities are recorded at a fair value of $17.5 million and $16.6 million as of December 31, 2014 and March 31, 2014, respectively, based on quoted market prices. Quoted market prices are observable inputs that are classified as Level 1 securities. Earnings, gains and losses on trading investments are included in other income (expense), net.
 
Derivative Financial Instruments
 
Under the agreements with the respective counterparties to the Company’s derivative contracts, subject to applicable requirements, the Company does not net settle transactions with any single net amount payable by one party to the other. In accordance with ASU 2011-11, the Company presents its derivative instruments at gross fair values in the Consolidated Balance Sheets as of December 31, 2014 and March 31, 2014.


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The following table presents the fair values of the Company’s derivative instruments and their accounting line presentation on its Consolidated Balance Sheets as of December 31, 2014 and March 31, 2014 (in thousands):
 
 
Derivatives
 
 
Asset
 
Liability
 
 
December 31,
2014
 
March 31,
2014
 
December 31,
2014
 
March 31,
2014
Designed as hedging instruments:
 
 

 
 

 
 

 
 

Cash flow hedges
 
$
693

 
$
4

 
$

 
$
243

Not designed as hedging instruments:
 
 

 
 

 
 

 
 

Foreign exchange contracts
 
4

 
151

 
38

 
458

 
 
$
697

 
$
155

 
$
38

 
$
701

 
The following table presents the amounts of gains and losses on the Company’s derivative instruments for the three and nine months ended December 31, 2014 and 2013 (in thousands):
 
 
Three Months Ended
December 31,
 
 
Net Amount of
Gain (Loss) Deferred as a
Component of Accumulated
Other Comprehensive Income
 
Amount of Loss (Gain)
Reclassified from Accumulated
Other Comprehensive Income to
Costs of Goods Sold
 
Amount of Gain (Loss)
Immediately Recognized in
Other Income (Expense), Net
 
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Designed as hedging instruments:
 
 

 
 

 
 

 
 

 
 

 
 

Cash flow hedges
 
$
(739
)
 
$
144

 
$
(2,025
)
 
$
1,342

 
$
36

 
$
8

Not designed as hedging instruments:
 
 

 
 

 
 

 
 

 
 

Foreign exchange contracts
 

 

 

 

 
1,585

 
899

 
 
$
(739
)
 
$
144

 
$
(2,025
)
 
$
1,342

 
$
1,621

 
$
907

 
 
 
Nine Months Ended
December 31,
 
 
Net Amount of
Gain (Loss) Deferred as a
Component of Accumulated
Other Comprehensive Income
 
Amount of Loss (Gain)
Reclassified from Accumulated
Other Comprehensive Income to
Costs of Goods Sold
 
Amount of Gain (Loss)
Immediately Recognized in
Other Income (Expense), Net
 
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Designed as hedging instruments:
 
 

 
 

 
 

 
 

 
 

 
 

Cash flow hedges
 
$
3,198

 
$
(1,958
)
 
$
(1,840
)
 
$
1,526

 
$
(20
)
 
$
54

Not designed as hedging instruments:
 
 

 
 

 
 

 
 

 
 

Foreign exchange contracts
 

 

 

 

 
1,908

 
1,807

 
 
$
3,198

 
$
(1,958
)
 
$
(1,840
)
 
$
1,526

 
$
1,888

 
$
1,861

 
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 primary risk managed by using derivative instruments is the foreign currency exchange rate risk. The Company has designated these derivatives as cash flow hedges. The Company 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). Such gains and losses were immaterial during the three and nine months ended December 31, 2014 and 2013. Cash flows from such hedges are classified as operating activities in the consolidated statements of cash flows. The notional amounts

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of foreign exchange forward contracts outstanding related to forecasted inventory purchases were $41.4 million (€33.9 million) and $51.8 million (€37.6 million) at December 31, 2014 and March 31, 2014. The notional amount represents the future cash flows under contracts to purchase foreign currencies.
 
Other Derivatives
 
The Company also enters into foreign exchange forward and swap contracts to reduce the short-term effects of foreign currency fluctuations on certain foreign currency receivables or payables. These contracts generally have one month maturity. The primary risk managed by using forward and swap contracts is the foreign currency exchange rate risk. The gains or losses on foreign exchange contracts are recognized in other income (expense), net based on the changes in fair value.
 
The notional amounts of foreign exchange contracts outstanding as of December 31 and March 31, 2014 relating to foreign currency receivables or payables were $42.7 million and $53.6 million, respectively. The contracts outstanding at December 31, 2014 and March 31, 2014 consisted of contracts in Mexican pesos, Japanese yen, British pounds, Taiwanese dollars and Australian dollars.
 
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.
 
Note 9 — Goodwill and Other Intangible Assets
 
The Company conducts a goodwill impairment analysis annually at December 31 or more frequently if indicators of impairment exist or if a decision is made to sell or exit a business. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include deterioration in general economic conditions, negative developments in equity and credit markets, adverse changes in the markets in which an entity operates, increases in input costs that have a negative effect on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods, among others. The fair value that could be realized in an actual transaction may differ from that used to evaluate the impairment of goodwill.

In reviewing goodwill for impairment, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (greater than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform the two-step quantitative impairment test, otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test. The ultimate outcome of the goodwill impairment review for a reporting unit should be the same whether an entity chooses to perform the qualitative assessment or proceeds directly to the two-step quantitative impairment test.
Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. The Company has two reporting units, Peripherals and Video Conferencing.
Peripherals

The Company performed its annual impairment analysis of the goodwill for its peripherals reporting unit at December 31, 2014 by performing a qualitative assessment and concluded that it was more likely than not that the fair value of its peripherals reporting unit exceeded its carrying amount.  In assessing the qualitative factors, the Company considered the impact of these key factors: change in industry and competitive environment, growth in market capitalization of $2.3 billion as of December 31, 2014 from $2.2 billion a year ago, and budgeted-to-actual revenue performance from prior year. The peripherals reporting unit has seen an improvement in operating income from $64.8 million and $117.8 million for the three and nine months ended December 31, 2013 to $76.1 million and $160.3 million for three and nine months ended December 31, 2014, respectively.

Video Conferencing

The Company proceeded directly to the two-step quantitative impairment test for the video conferencing reporting unit and performed Step 1 assessment at December 31, 2014. The Company used a market approach and income approach (discounted cash flow model) to estimate the current fair value of the video conferencing reporting unit when testing for impairment. A number of significant assumptions and estimates are involved in the application of the market approach and income approach.

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The market approach utilizes the identification of comparable companies and applying certain revenue multiples or earnings multiples of these comparable companies to the respective revenue and earnings metrics of the reporting unit.

The income approach utilizes forecasted operating cash flows, which includes certain assumptions and estimates related to markets and market share, sales volumes and prices, production costs, tax rates, capital spending, discount rate, and working capital changes. Cash flow forecasts are based on approved business unit operating plans. The Company uses a third party valuation expert in the development of our market and income approach models.
    
Key assumptions used in the Step 1 income approach analysis included , the estimated compound annual growth rate (“CAGR”) during the forecast period, use of the appropriate discount rate, and long-term growth rates for purposes of determining a terminal value at the end of the discrete forecast period. A sensitivity assessment of key assumptions for the video conferencing reporting unit Step 1 test is presented below:

 CAGR assumption was 6.9% through fiscal year 2022, with a flat forecast in the remainder of fiscal year 2015, and higher growth rates from fiscal years 2016 through 2020, reducing to a growth rate of 4.0% in fiscal year 2022. The forecasted growth contrasts with the recent performance of the video conferencing reporting unit, when the Company experienced a decline in revenue (see Note 13 for further details). The video conferencing reporting unit is in the process of transitioning its product portfolio to the recently announced Lifesize Cloud, a software-as-a-service (SaaS) offering. Sales of Lifesize Cloud are growing rapidly, offsetting a shift from it's on-premise infrastructure products.  Video systems sales are growing and are expected to continue growing as an integral part of the full Lifesize solution. The Company has been investing in the Lifesize Cloud within video conferencing reporting unit. If the CAGR rate were decreased to 2.3%, holding all other assumptions constant, the fair value of the video conferencing reporting unit would decrease, under income approach, to below its carrying value.

Discount rate assumption was 14.0%. If the discount rate were increased to 17.0%, holding all other assumptions constant, it would result in fair value of the video conferencing reporting unit decrease to below its carrying value under income approach.
 
Terminal growth rate assumption was 4.0%. If the terminal growth rate were decreased to (2.2)%, holding all other assumptions constant, it would result in fair value of the video conferencing reporting unit decrease to below its carrying value under income approach.
 
The assumptions used also included a reduction in future operating expenses as a percentage of revenue, driven by increases in forecasted revenue as described above, combined with reduced operating expenses related to cost cutting initiatives.

The annual Step 1 assessment resulted in the Company determining that the video conferencing reporting unit passed the Step 1 test because the estimated fair value of video conferencing reporting unit from Step 1 assessment exceeded its carrying value by approximately 38.0%, thus not requiring a Step 2 assessment of this reporting unit. This result presents a future video conferencing reporting unit goodwill impairment risk to the Company since the margin it cleared the current Step 1 assessment was not significant.

In the event the estimated fair value of a reporting unit is less than the carrying value, additional analysis would be required. The additional analysis would compare the carrying amount of the reporting unit's goodwill with the implied fair value of that goodwill, which may involve the use of valuation experts. The implied fair value of goodwill is the excess of the fair value of the reporting unit over the fair value amounts assigned to all of the assets and liabilities of that unit as if the reporting unit was acquired in a business combination and the fair value of the reporting unit represented the purchase price. If the carrying value of goodwill exceeds its implied fair value, an impairment loss equal to such excess would be recognized, which could significantly and adversely impact reported results of operations and shareholders' equity.

Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates and future market conditions, among others. It is reasonably possible that changes in the judgments, assumptions and estimates that the Company used in assessing the fair value of the video conferencing reporting unit result in the goodwill to become impaired. A goodwill impairment charge would have the effect of decreasing the Company’s earnings or increasing its losses in such period. If the Company is required to take a substantial impairment charge, its operating results would be materially and adversely affected in such period.

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As a result of the Company’s annual goodwill impairment assessments, there was no impairment of goodwill as of December 31, 2014.

The following table summarizes the activity in the Company’s goodwill balance during the nine months ended December 31, 2014 (in thousands):
 
 
December 31, 2014
 
 
 
 
Video
 
 
 
 
Peripherals
 
Conferencing
 
Total
Beginning of the period
 
$
219,415

 
$
125,595

 
$
345,010

Foreign currency impact
 

 
(1,573
)
 
(1,573
)
End of the period
 
$
219,415

 
$