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LOGITECH INTERNATIONAL SA - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion in conjunction with the interim
unaudited Consolidated Financial Statements and related notes.
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements include, among other things, statements regarding our
business strategy, the impact of investment prioritization decisions, product
offerings, sales and marketing initiatives, trends in consumer demand affecting
our products and markets, trends in the composition of our customer base, our
current or future revenue and revenue mix by product, among our lower- and
higher-margin products and by geographic region, our expectations regarding the
potential growth opportunities for our products and in emerging markets, our
expectations regarding trends in global economic conditions and consumer demand
for PCs and mobile, tablet, gaming, audio, video, digital home and other
computer devices and the interoperability of our products with such third party
platforms, our competitive position and the effect of pricing, product,
marketing and other initiatives by us and our competitors, the impact of our
restructuring plan on future costs, expenses and financial performance and the
timing thereof, our estimates of future charges related to our restructuring
plan, our expectations regarding the recoverability of our goodwill, goodwill
impairment charge estimates and the potential for future impairment charges, the
impact of our current and proposed product divestitures and the timing thereof,
significant fluctuations in currency exchange rates, the impact of new product
introductions and product innovation on future performance or anticipated costs
and expenses and the timing thereof, cash flows, the sufficiency of our cash and
cash equivalents, cash generated and available borrowings (including the
availability of our uncommitted lines of credit) to fund future cash
requirements, our expectations regarding share repurchases and share
cancellations, our expectations regarding our future working capital
requirements and our anticipated capital expenditures needed to support our
product development and expanded operations, our expectations regarding our
future tax benefits and the adequacy of our provisions for uncertain tax
positions, our expectations regarding our potential indemnification obligations,
and the outcome of pending or future legal proceedings and tax audits, and
Logitech's ability to achieve renewed growth, profitability and future success.
Forward-looking statements also include, among others, those statements
including the words "anticipate," "believe," "could," "estimate," "expect,"
"forecast," "intend," "may," "plan," "project," "predict," "should," "will," and
similar language. These forward-looking statements involve risks and
uncertainties that could cause our actual performance to differ materially from
that anticipated in the forward-looking statements. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
in the section titled "Risk Factors" in Part II, Item 1A of this quarterly
report on Form 10-Q. You are cautioned not to place undue reliance on the
forward-looking statements, which speak only as of the date of this Quarterly
Report on Form 10-Q. We undertake no obligation to publicly release any
revisions to the forward-looking statements or reflect events or circumstances
after the date of this document.
Overview of Our Company
Logitech is a world leader in products that connect people to the digital
experiences they care about. Spanning multiple computing, communication and
entertainment platforms, we develop and market innovative hardware and software
products that enable or enhance digital navigation, music and video
entertainment, gaming, social networking, audio and video communication over the
Internet, video security and home-entertainment control. We have two operating
segments, peripherals and video conferencing.
Our peripherals segment encompasses the design, manufacturing and marketing of
peripherals for PCs (personal computers), tablets and other digital platforms.
Our products for home and business PCs include mice, trackballs, keyboards,
interactive gaming controllers, multimedia speakers, headsets and webcams. Our
tablet accessories include keyboards, keyboard cases and covers, headsets,
wireless speakers, earphones and stands. Our Internet communications products
include webcams, headsets, video
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communications services, and digital video security systems. Our digital music
products include speakers, earphones, custom in-ear monitors and Smart Radios.
For home entertainment systems, we offer the Harmony line of advanced remote
controls. Our gaming products include a range of gaming controllers and
microphones, as well as other accessories. During the third quarter of fiscal
year 2013, we identified a number of product categories that no longer fit with
our current strategic direction. As a result, we made a strategic decision to
divest our remote controls and digital video security product categories, and we
plan to discontinue other non-strategic products, such as speaker docks and
console gaming peripherals, by the end of calendar year 2013. This decision
primarily resulted from our belief that these categories of products would not
make a meaningful contribution to improving our growth or profitability because
they are not critical to our plans for improved future performance and in some
cases we believe they may no longer be relevant in today's markets.
Our brand, portfolio management, product definition and engineering teams in our
peripherals segment are responsible for product strategy, technological
innovation, product design and development, and bringing our products to market.
Our business groups are organized by product categories. Our global marketing
organization is responsible for developing and building the Logitech brand,
consumer insight, public relations and social media, customer care and digital
marketing. Our regional retail sales and marketing activities are organized into
three geographic areas: Americas (including North and South America), EMEA
(Europe-Middle East-Africa), and Asia Pacific (including, among other countries,
China, Taiwan, Japan, India and Australia).
We sell our peripheral products to a network of distributors, retailers, and
OEMs. Our worldwide retail network includes wholesale distributors, consumer
electronics retailers, mass merchandisers, specialty electronics stores,
computer and telecommunications stores, value-added resellers, and online
merchants. Sales of peripherals to our retail channels were 87% and 86% of our
net sales for the nine months ended December 31, 2012 and 2011. The large
majority of our revenues have historically been derived from sales of our
peripheral products for use by consumers. Our OEM customers include the majority
of the world's largest PC manufacturers. Sales to OEM customers were 7% and 8%
of our net sales for the nine months ended December 31, 2012 and 2011.
Our video conferencing segment encompasses the design, manufacturing and
marketing of video conferencing products, infrastructure, and services for the
enterprise, public sector, and other business markets. Video conferencing
products include scalable HD (high-definition) video communication endpoints, HD
video conferencing systems with integrated monitors, video bridges and other
infrastructure software and hardware to support large-scale video deployments,
and services to support these products. The video conferencing segment maintains
a separate marketing and sales organization, which sells LifeSize products and
services worldwide. Video conferencing product development and product
management organizations are separate, but coordinated with our peripherals
business, particularly our Consumer Computing Platforms group. We sell our
LifeSize products and services to distributors, value-added resellers, OEMs,
and, occasionally, direct enterprise customers. Sales of LifeSize products were
6% of our net sales for the nine months ended December 31, 2012 and 2011. As
discussed in Note 7, during the quarter ended December 31, 2012 we recorded a
non-cash goodwill impairment charge estimate of $211.0 million related to our
video conferencing segment.
We seek to fulfill the increasing demand for interfaces between people and the
expanding digital world across multiple platforms and user environments. The
interface evolves as platforms, user models and our target markets evolve. As
access to digital information has expanded, we have extended our focus to mobile
devices, the digital home, and the enterprise as access points to the Internet
and the digital world. All of these platforms require interfaces that are
customized according to how the devices are used. We believe that continued
investment in product research and development is critical to creating the
innovation required to strengthen our competitive advantage and to drive future
sales growth. We are committed to identifying and meeting current and future
customer trends with new and improved product technologies, partnering with
others where our strengths are complementary, as well as leveraging the value of
the Logitech and LifeSize brands from a competitive, channel partner and
consumer experience perspective. We believe innovation and product quality are
important to gaining market acceptance and maintaining market leadership.
We are developing new categories of products, such as tablet accessories,
expanding in emerging retail markets, such as China, Russia and Latin America,
increasing our presence in digital music, and entering new product arenas, such
as hosted video conferencing as a service, and peripherals and services for UC
(unified communications). As we do so, we are confronting new competitors, many
of which have
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more experience in the categories or markets and have greater marketing
resources and brand name recognition than we have. In addition, because of the
continuing convergence of the markets for computing devices and consumer
electronics, we expect greater competition in the future from well-established
consumer electronics companies in our new categories as well as future ones we
might enter. Many of these companies have greater financial, technical, sales,
marketing and other resources than we have.
Our peripherals and video conferencing industries are intensely competitive. The
peripherals industry is characterized by platform evolution, short product life
cycles, continual performance enhancements, and rapid adoption of technological
and product advancements by competitors in our retail markets, and price
sensitivity in the OEM market. We experience aggressive price competition and
other promotional activities from our primary competitors and from less
established brands, including brands owned by some retail customers known as
house brands, in response to declining consumer demand in both mature retail
markets and OEM markets. We may also encounter more competition if any of our
competitors in one or more categories decide to enter other categories in which
we currently operate.
As we address the current and future market challenges we face, we are
simplifying our current product portfolio and roadmap to align our resources,
prioritize our investments, and focus on fewer, more compelling products. From
time to time, we may seek to partner with or acquire, when appropriate,
companies that have products, personnel, and technologies that complement our
strategic direction. We continually review our product offerings and our
strategic direction in light of our profitability targets, competitive
conditions, changing consumer trends, and the evolving nature of the interface
between the consumer and the digital world.
Summary of Financial Results
Our total net sales for the nine months ended December 31, 2012 decreased 9%,
compared with the nine months ended December 31, 2011, due to the continued
sharp decline in OEM sales, and from declines in retail and video conferencing.
The most significant decline was in OEM, with sales decreasing by 25% in the
nine months ended December 31, 2012, compared with the same period of the prior
fiscal year, and OEM units sold decreasing by 12%, primarily in
keyboard/desktops and pointing devices.
Retail sales during the nine months ended December 31, 2012 decreased 7% and
retail units decreased 6%, compared with the nine months ended December 31,
2011. We experienced declines in all retail regions, 9% in the Americas region,
7% in the EMEA region, and 6% in the Asia Pacific region. If foreign currency
exchange rates had been the same in the nine months ended December 31, 2012 and
2011, the percentage changes in our constant dollar retail sales would have been
a decrease of 8% in the Americas, 2% in EMEA, and 6% in the Asia Pacific region.
Sales incentive spending (including pricing discounts) during the nine months
ended December 31, 2012, compared with the same period of the prior fiscal year,
decreased by 5% due to lower sell-through during this period. Sales returns
expense during the nine months ended December 31, 2012, compared with the same
period of the prior fiscal year, decreased by 2% due to improved channel
inventory aging during this period.
Sales of video conferencing products, which were 6% of total net sales in each
of the nine months ended December 31, 2012 and 2011, decreased by 3% in the nine
months ended December 31, 2012, compared with the same period of the prior
fiscal year, due to sales declines in all geographic regions.
Our gross margin for the nine months ended December 31, 2012 improved to 33.7%
compared with 32.7% in the same period of the prior fiscal year. The gross
margin improvement primarily resulted from the absence of a $34.1 million
inventory valuation adjustment related to Logitech Revue and related peripherals
which occurred during the nine months ended December 31, 2011, and from
improvements to our channel pricing program and global supply chain process,
offset in part by an unfavorable change in retail product mix, the negative
impact of a weaker euro, $4.5 million in pricing actions related to the
simplification of our product portfolio and $3.0 million in
restructuring-related costs.
Operating expenses for the nine months ended December 31, 2012 were 47% of net
sales compared with 30% in the same period of the prior fiscal year. This
increase was primarily attributable to an estimated $211.0 million goodwill
impairment charge related to our video conferencing reporting unit and from
$28.2 million in costs related to the restructuring plan initiated in
April 2012.
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Net loss for the nine months ended December 31, 2012 was $192.2 million,
compared with net income of $43.2 million in the nine months ended December 31,
2011. This decline primarily resulted from the estimated $211.0 million goodwill
impairment charge and $28.2 million in restructuring charges, offset in part by
a discrete tax benefit of $32.1 million from the closure of federal income tax
examinations in the United States.
Trends in Our Business
Our sales of PC peripherals for use by consumers in the Americas and Europe have
historically made up the large majority of our revenues. In the last two years,
the PC market has changed dramatically and there continues to be significant
weakness in the global market for new PCs. This weakness has had a negative
impact on our net sales in all of our PC-related categories. We believe that
this weakness reflects the growing popularity of tablets and smartphones as
mobile computing devices. We believe Logitech's future growth will be determined
by our ability to rapidly create innovative products across multiple digital
platforms, especially accessories for mobility-related products, including
tablets, smartphones and other mobile devices, and for digital music, including
wireless speakers and wearables such as earphones and headphones, to limit and
offset the decline in our PC peripherals and to pursue growth opportunities in
emerging markets, mobility-related products, products for digital music and
sales to enterprise markets. The following discussion represents key trends
specific to each of our two operating segments, peripherals and video
conferencing.
Trends Specific to our Peripherals Segment
Emerging Markets. In our traditional, mature markets, such as North America,
Western and Northern Europe, Japan, and Australia, although the installed base
of PC users is large, consumer demand for PCs has declined in recent months and
may potentially continue to decline in future years. As a consequence, consumer
demand for PC peripherals is slowing, or in some case declining. While we
continue to pursue growth opportunities in selected PC peripheral product lines
in mature markets, we believe there are large growth opportunities for our PC
peripherals outside the mature markets. We have invested significantly in
growing the number of our sales, marketing and administrative personnel in
China, our largest target emerging market, with the result that China was our
third-largest country in retail sales for the nine months ended December 31,
2012. We are also expanding our presence and our sales in Russia and Latin
America.
Enterprise Market. We are increasing our efforts on creating and selling
products and services to enterprises. We believe the preferences of employees
increasingly drive companies' choices in the information technologies they
deploy to their employee base, and this "consumerization" of information
technology has made the enterprise market open to embracing consumer technology
and design. We are still in the early stages of our enterprise market team's
efforts for our productivity peripherals. Growing our enterprise peripherals
business will continue to require investment in selected business-specific
products, targeted product marketing, and sales channel development.
Tablets, Smartphones and Other Mobile Devices. The increasing popularity of
smaller, mobile computing devices, such as tablets and smartphones with touch
interfaces, have created new markets and usage models for peripherals and
accessories. Logitech has begun to offer products to enhance the use of mobile
devices. For example, we are experiencing strong demand for our tablet
keyboards, led by strong initial demand for our Logitech Ultrathin Keyboard
Cover.
Digital Music. We believe that digital music, the seamless consumption of audio
content on home and mobile devices, presents a significant growth opportunity
for Logitech, based on our history of successful earphone, headset and speaker
products. Many consumers listen to music as a pervasive entertainment activity,
fueled by the growth in smartphones, tablets, music services and Internet radio.
Logitech has a solid foundation of audio solutions to satisfy consumers' needs
for music consumption, including Logitech UE earphones, headphones, and digital
music speakers.
OEM business. Sales of our OEM mice and keyboards have historically made up the
bulk of our OEM sales. In recent years, there has been a dramatic shift away
from desktop PCs and there continues to be significant weakness in the global
market for PCs which has adversely affected our sales of OEM mice and keyboards,
all of which are sold with name-brand desktop PCs. We expect this trend to
continue and for OEM sales to comprise a smaller percentage of our total
revenues in the future.
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Trends in Other Peripheral Product Categories. Some of our other peripherals
product categories are experiencing significant market challenges. As the
quality of PC-embedded webcams improves, we expect future sales of our
PC-connected webcams in mature consumer markets to continue declining. We intend
to address this market decline by enhancing our webcam product line-up to enable
experiences that cannot be easily achieved with an embedded webcam and by
targeting webcam applications on non-PC platforms. We believe the recent
disappointing sales results for Harmony reflect the aging of our Harmony
products at the mid- and high-level price points as we previously directed
significant digital home engineering and marketing resources towards our
Logitech Revue and related peripherals for Google TV. We have since exited the
Google TV product category. We recently released two new products, Logitech TV
Cam HD with built-in Skype capability as well as our long-awaited Harmony Touch
remote control which features an intuitive, color touch-screen enabling users
the ability to personalize their screens. During the third quarter of fiscal
year 2013, we identified a number of product categories that no longer fit with
our current strategic direction. As a result, we made a strategic decision to
divest our remote controls and digital video security product categories, and we
plan to discontinue other non-strategic products, such as speaker docks and
console gaming peripherals, by the end of calendar year 2013.
Trends Specific to our Video Conferencing Segment
The trend among businesses and institutions to use video conferencing offers a
key growth opportunity for Logitech. However, the overall video conferencing
industry has experienced a slowdown in recent quarters. In addition, there has
been an increase in the competitive environment in fiscal year 2013 and we have
experienced lower demand related to our new product launches. This resulted in
an estimated $211.0 million non-cash goodwill impairment charge in the quarter
ended December 31, 2012. We believe the growth in our video conferencing
segment depends in part on our ability to increase sales to enterprises with
existing installed bases of equipment supplied by our competitors, and to
enterprises that may purchase such competitor equipment in the future. We
believe the ability of our LifeSize products to interoperate with the equipment
of other telecommunications, video conferencing or telepresence equipment
suppliers to be a key factor in purchasing decisions by current or prospective
LifeSize customers. In addition, LifeSize has broadened its product portfolio to
include infrastructure, cloud services and other offerings which require
different approaches to developing customer solutions. We also are seeking to
offer LifeSize products designed to enhance the use of mobile devices in video
conferencing applications.
Emerging Market. China also represents a significant targeted emerging market
for our video conferencing segment. We have invested significantly in growing
the number of our video conferencing sales, marketing and administrative
personnel in China.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity
with U.S. GAAP (generally accepted accounting principles in the United States of
America) requires the Company 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.
We consider an accounting estimate critical if it: (i) requires management to
make judgments and estimates about matters that are inherently uncertain; and
(ii) is important to an understanding of Logitech's financial condition and
operating results.
We base our estimates on historical experience and on various other assumptions
we believe to be reasonable under the circumstances. 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. Management has discussed the development, selection and disclosure of
these critical accounting estimates with the Audit Committee of the Board of
Directors.
There have been no significant changes to the nature of the critical accounting
policies, and no significant changes to the critical accounting estimates that
were disclosed in the Management's Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form 10-K for the
fiscal year ended March 31, 2012, except for Valuation of Long-Lived Assets
described below, during the nine months ended December 31, 2012.
Valuation of Long-Lived Assets
We perform our annual goodwill impairment test of each reporting unit as of
December 31 and complete the assessment during our 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 us to make
judgments and involves the use of significant estimates and assumptions. We
have two reporting units: peripherals and video conferencing. The allocation of
assets and liabilities to each of our reporting units also involves judgment and
assumptions.
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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. We 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 unit's 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 our most recent forecast ("assessment
forecast") developed in connection with each of our 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
was based on applying certain revenue and earnings multiples of comparable
companies relevant to each of our reporting units to the respective revenue and
earnings metrics of our reporting units. To test the reasonableness of the fair
values indicated by the income approach and the market-based approach, we also
assessed 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 market's price that investors would typically
pay to gain control of an entity. The discounted cash flow model and the market
approach 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 unit's fair value to its assets and
liabilities other than goodwill, comparing the resulting implied fair value of
goodwill with its carrying amount, and recording an impairment charge for the
difference.
We performed our annual goodwill impairment analysis of each of our reporting
units as of December 31, 2012 using the income approach and market approach
described above. We chose not to perform the Step 0 test and to proceed
directly to the Step 1 test. This assessment resulted in us determining that our
peripherals reporting unit passed the Step 1 test because the estimated fair
value exceeded its carrying value by more than 75%. By contrast, our 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 our
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 our recent video conferencing operating results and are
anticipated to have an adverse effect on its future business.
Peripherals
Key assumptions used in the Step 1 income approach analyses for our peripherals
reporting unit included the appropriate discount rates, CAGR during the forecast
period, and long-term growth rates for purposes of determining a terminal value
at the end of the discrete forecast period. Sensitivity assessment of key
assumptions for the peripherals reporting unit Step 1 test is presented below.
†Discount rate assumptions. A hypothetical percentage increase of
approximately 108% in the discount rate, holding all other assumptions constant,
would not have decreased the fair value of the peripherals reporting unit below
its carrying value, and thus it would not result in the reporting unit failing
Step 1 of the goodwill impairment test.
†CAGR assumptions. A hypothetical percentage decrease of approximately
600% in the CAGR rate, holding all other assumptions constant, would not have
decreased the fair value of the peripherals reporting unit below its carrying
value.
†Terminal value assumptions. A hypothetical percentage decrease of
approximately 110% in the terminal value, holding all other assumptions
constant, would not have decreased the fair value of the peripherals reporting
unit below its carrying value.
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Video Conferencing
Key assumptions used in the Step 1 income approach analyses for our video
conferencing reporting unit also included the appropriate discount rates, CAGR
during the forecast period, and long-term growth rates for purposes of
determining a terminal value at the end of the discrete forecast period. Both
the income and market approaches arrived at estimated fair values within a
relatively close range, which supported the reasonableness of each assessment.
We proceeded with a Step 2 assessment because the estimated fair value of our
video conferencing reporting unit was less than its carrying value. The Step 2
test required us to fair value all assets and liabilities of our video
conferencing reporting unit to determine the implied fair value of this
reporting unit's goodwill. We were unable to fully complete the Step 2 analysis
prior to filing of this Form 10-Q for the quarterly period ended December 31,
2012 due to the complexities of determining the implied fair value of goodwill
of our video conferencing reporting unit. Based on the work performed as of
this filing date, we recorded an estimated goodwill impairment charge of $211.0
million. This impairment charge had no cash flow impact. Additional
adjustments to this estimated goodwill impairment charge may be required during
the fourth quarter of fiscal year 2013 when our Step 2 assessment is finalized.
Applicable to Both Reporting Units
We continue to evaluate and monitor all key factors impacting the carrying value
of our recorded goodwill, as well as other long-lived assets. There are a number
of uncertainties associated with the key assumptions described above based
primarily on the difficulty of predicting our revenues and profitability. Our
revenues and profitability are difficult to predict due to the nature of the
markets in which we compete, fluctuating end-user demand, the uncertainty of
current and future global economic conditions, and for many other reasons,
including, but not limited to:
†Our revenues are impacted by end-user consumer demand and future
global conditions, which could fluctuate abruptly and significantly during
periods of uncertain economic conditions or geographic distress, as well as from
shifts in consumer buying patterns.
†We must incur a large portion of our costs in advance of sales orders,
because we must plan research and production, order components, buy tooling
equipment, and enter into development, sales and marketing, and other operating
commitments prior to obtaining firm commitments from our customers. This makes
it difficult for us to rapidly adjust our costs in response to a revenue
shortfall.
†Fluctuations in currency exchange rates can impact our revenues,
expenses and profitability because we report our financial statements in U.S.
dollars, whereas a significant portion of our revenues and expenses are in other
currencies.
†The peripherals industry is characterized by short product life
cycles, frequent new product introductions, rapidly changing technology, dynamic
consumer demand and evolving industry standards. As a result, we must
continually innovate in our new and existing product categories, introduce new
products and technologies, and enhance existing products in order to remain
competitive.
†The video conferencing industry is characterized by continual
performance enhancements and large, well-financed competitors. There is
increased participation in the video conferencing market by companies such as
Cisco Systems, Inc. and Polycom, Inc., and as a result, we expect competition in
the industry to further intensify.
Should the actual outcome of some or all of these assumptions differ
significantly from the current assumptions, revisions to current cash flow
assumptions could cause the fair value of the reporting units to be
significantly different in future periods.
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Results of Operations
Net Sales
Net sales by channel 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 Change % 2012 2011 Change %
Peripherals
Retail $ 542,388 $ 630,873 (14 )% $ 1,413,968 $ 1,527,385 (7 )%
OEM 35,300 45,527 (22 )% 108,693 144,966 (25 )%
Total Peripherals 577,688 676,400 (15 )% 1,522,661 1,672,351 (9 )%
Video Conferencing 36,812 38,196 (4 )% 108,136 111,890 (3 )%
Total net sales $ 614,500 $ 714,596 (14 )% $ 1,630,797 $ 1,784,241 (9 )%
Although our financial results are reported in U.S. dollars, a portion of our
sales for the three and nine months ended December 31, 2012 were made in
currencies other than the U.S. dollar, such as the euro, Chinese renminbi,
Japanese yen, Canadian dollar and Australian dollar. The following table
presents the approximate percentage of our total net sales that were denominated
in currencies other than the U.S. dollar in the three and nine months ended
December 31, 2012 and 2011:
Three months ended December 31, Nine months ended December 31,
2012 2011 2012 2011
Currencies other than USD 48 % 49 % 47 % 44 %
If foreign currency exchange rates had been the same in the three and nine
months ended December 31, 2012 and 2011, the percentage change in our constant
dollar net sales would have been:
Three Months Ended Nine months ended
December 31, 2012 December 31, 2012
Peripherals
Retail (13 )% (5 )%
OEM (22 )% (25 )%
Video Conferencing (4 )% (3 )%
Total net sales (13 )% (7 )%
Our retail sales in the three and nine months ended December 31, 2012 declined
by 14% and 7%, compared with the same periods of the prior fiscal year. We
experienced declines in all three regions during these periods. Retail units
sold decreased 15% during the three months ended December 31, 2012, and
decreased 6% in the nine months ended December 31, 2012, compared with the same
periods of the prior fiscal year. Our overall retail average selling price
declined 2% in the three and nine months ended December 31, 2012, compared with
the same periods in the prior fiscal year. Products priced below $40 represented
50% and 54% of retail sales in the three and nine months ended December 31,
2012, compared with 53% and 55% of retail sales in the three and nine months
ended December 31, 2011. Sales of our retail products priced above $100
represented 15% and 13% of retail sales in the three and nine months ended
December 31, 2012, compared with 16% and 15% of total retail sales in the three
and nine months ended December 31, 2011. If foreign currency exchange rates had
been the same in the three and nine months ended December 31, 2012 and 2011, our
constant dollar retail sales would have been decreases of 13% and 5%.
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OEM net sales decreased 22% and 25% and units sold decreased 13% and 12% in the
three and nine months ended December 31, 2012, compared with the same periods in
the prior fiscal year. These declines were primarily due to lower sales in the
keyboard/desktop category due to product mix changes with a large customer, and
lower sales of OEM mice.
Video conferencing net sales decreased 4% and 3% in the three and nine months
ended December 31, 2012, compared with the same periods in the prior fiscal
year, due to sales declines in all geographic regions, and were impacted by the
slowdown in the overall video conferencing industry in recent quarters, together
with the competitive environment in fiscal year 2013 and lower demand related to
new product launches. Foreign currency exchange rates did not affect video
conferencing sales.
We refer to our net sales excluding the impact of foreign currency exchange
rates as constant dollar sales. Constant dollar sales are a non-GAAP financial
measure, which is information derived from consolidated financial information
but not presented in our financial statements prepared in accordance with U.S.
GAAP. Our management uses these non-GAAP measures in its financial and
operational decision-making, and believes these non-GAAP measures when
considered in conjunction with the corresponding GAAP measures, facilitate a
better understanding of changes in net sales. Constant dollar sales are
calculated by translating current period sales in each local currency at the
prior period's average exchange rate for that currency.
Retail Sales by Region
The following table presents the changes in retail units sold, retail sales and
constant dollar retail sales by region for the three and nine months ended
December 31, 2012 compared with the three and nine months ended December 31,
2011.
Three months ended December 31, 2012 Nine months ended December 31, 2012
Change in Change in Change in Change in
Retail Units Change in Constant Dollar Retail Units Change in Constant Dollar
Sold Retail Sales Retail Sales Sold Retail Sales Retail Sales
EMEA (22 )% (20 )% (18 )% (7 )% (7 )% (2 )%
Asia Pacific (15 )% (11 )% (11 )% (5 )% (6 )% (6 )%
Americas (7 )% (8 )% (9 )% (5 )% (9 )% (8 )%
Total retail sales (15 )% (14 )% (13 )% (6 )% (7 )% (5 )%
Retail sales in our EMEA region experienced a significant decrease during the
three months ended December 31, 2012, compared with the same period of the prior
fiscal year. This decrease resulted from double-digit percentage sales declines
in all of our product categories, except tablet accessories where sales
increased by 172% due to continued strong demand for our Logitech Ultrathin
Keyboard Cover for the iPad. Retail sales decreased in our EMEA region during
the nine months ended December 31, 2012, compared with the same period of the
prior fiscal year, resulted from double-digit percentage sales declines in our
other, audio-PC and remote categories, single-digit percentage sales declines in
pointing devices and video, offset in part by a 275% sales increase in tablet
accessories. Sales results varied by country, with significant sales decreases
during the three months ended December 31, 2012 in Germany, France, Switzerland,
Netherlands, Spain, Poland, United Kingdom and Czech Republic, offset in part by
significant increases in Italy, Turkey and Belarus. During the nine months ended
December 31, 2012, we experienced significant sales decreases in Germany,
France, Poland, Spain, Netherlands, Switzerland, Czech Republic, Russia and
Greece, offset in part by significant increases in Italy, Turkey, Belarus,
Denmark and Slovakia. Retail sell-through in the EMEA region decreased 14% in
the three and nine months ended December 31, 2012, compared with the same
periods in the prior fiscal year.
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Asia Pacific region retail sales decreased by 11% during the three months ended
December 31, 2012, compared with the same period in the prior fiscal year. This
decrease resulted from double-digit percentage declines in retail other, PC
gaming, audio-PC and PC keyboards and desktops, offset in part by a 162%
increase in tablet accessories and a 81% increase in audio-wearables and
wireless categories. Declines by country within the Asia Pacific region during
the three months ended December 31, 2012 were from weakness in Australia, Japan,
Taiwan, India and South Korea, offset in part by continued growth in China.
Asia Pacific region retail sales decreased by 6% during the nine months ended
December 31, 2012, compared with the same period of the prior fiscal year. This
decrease resulted from double-digit percentage declines in retail other, PC
gaming and video, single-digit percentage declines in PC keyboards and desktops,
audio-PC and pointing devices, partially offset by a 192% increase in tablet
accessories and by a 130% increase in the audio-wearables and wireless
categories. Declines by country within the Asia Pacific region during the nine
months ended December 31, 2012 were primarily from weakness in Australia, India,
Taiwan and South Korea, offset in part by significant sales increases in China,
New Zealand, Indonesia, Thailand and Vietnam. Retail sales in China increased
by 7% during the three months ended December 31, 2012, with declines in all
categories except tablet accessories where sales increased by 486%,
audio-wearables and wireless where sales increased by 165%, and PC keyboards and
desktops with a 10% increase. For the nine months ended December 31, 2012,
retail sales in China increased by 4%, primarily from a 478% increase in tablet
accessories, a 528% increase in audio-wearables and wireless, and by a 5%
increase in PC keyboards and desktops, offset in part by double-digit declines
in audio-PC and video, and by single-digit declines in pointing devices and PC
gaming. China was our third-largest country in terms of net revenue during the
three and nine months ended December 31, 2012, compared to the same periods of
the prior fiscal year. Retail sell-through in China increased 20% and 13% in
the three and nine months ended December 31, 2012 compared with the same periods
in the prior fiscal year, while retail sell-through in the rest of the Asia
Pacific region decreased 5% and 4% during the same periods.
The 8% decline in retail sales in the Americas region for the three months ended
December 31, 2012, compared with the same period in the prior fiscal year, was
driven by declines in most categories except tablet accessories where sales
increased by 85% and PC keyboards and desktops where sales increased by 8%. The
Americas region experienced a 9% decline in retail sales during the nine months
ended December 31, 2012, compared with the same period in the prior fiscal year,
due to declines in most categories except tablet accessories where sales
increased by 89%, audio-wearables and wireless where sales increased by 34%, as
well as a 6% increase in PC keyboards and desktops. During the three months
ended December 31, 2012, compared to the same period of the prior fiscal year,
we experienced weakness in the United States and Canada, which was offset in
part by improvement in Brazil. During the nine months ended December 31, 2012,
we experienced weakness in the United States and Canada, which was offset in
part by improvement in Mexico and Brazil. Retail sell-through in the Americas
region decreased 7% in the three and nine months ended December 31, 2012,
compared with the same periods in the prior fiscal year.
We use retail sell-through data, which represents sales of our products by our
retailer customers to consumers, and by our distributor customers to their
customers, along with other metrics, to assess consumer demand for our products.
Sell-through data is subject to limitations due to collection methods and the
third party nature of the data. Although the sell-through data we obtain
typically represents a majority of our retail sales, the customers supplying
sell-through data vary by geographic region and from period to period. As a
result of these limitations, sell-through data may not be an accurate indicator
of actual consumer demand for our products.
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Net Retail Sales by Product Category
Net retail sales by product category during the three and six ended December 31,
2012 and 2011 were as follows (in thousands):
Three months ended Nine months ended
December 31, December 31,
2012 2011 Change % 2012 2011 Change %
Retail - Pointing
Devices $ 153,921 $ 171,920 (10 )% $ 392,274 $ 427,031 (8 )%
Retail - PC
Keyboards &
Desktops 110,671 117,507 (6 )% 302,299 302,840 0 %
Retail - Tablet
Accessories 39,398 17,976 119 % 89,021 36,565 143 %
Retail - Audio -
PC 75,366 92,766 (19 )% 214,158 238,932 (10 )%
Retail - Audio -
Wearables &
Wireless 23,577 23,233 1 % 57,284 39,071 47 %
Retail - Video 51,664 58,343 (11 )% 138,276 166,370 (17 )%
Retail - PC Gaming 45,111 56,177 (20 )% 118,567 129,839 (9 )%
Retail - Remotes 30,094 39,706 (24 )% 60,260 74,105 (19 )%
Retail - Other 12,586 53,245 (76 )% 41,829 112,632 (63 )%
Total net retail
sales $ 542,388 $ 630,873 (14 )% $ 1,413,968 $ 1,527,385 (7 )%
In the third quarter of fiscal year 2013, we changed the product category
classification for a number of our retail products in an effort to help
investors more clearly track the progress of our various product initiatives.
Products within the retail product categories as presented in the three and nine
months ended December 31, 2011 have been reclassified to conform to the fiscal
year 2013 presentation, with no impact on previously reported total net retail
sales. During the third quarter of fiscal year 2013, we identified a number of
product categories that no longer fit with our current strategic direction. As
a result, we made a strategic decision to divest our remote controls, which
represents our retail remotes category, and digital video security categories,
included within our retail video category, and we plan to discontinue other
non-strategic products, such as speaker docks and console gaming peripherals, by
the end of calendar year 2013.
Net sales reflect accruals for product returns, cooperative marketing
arrangements, customer incentive programs and pricing programs.
Retail Pointing Devices
Our retail pointing device category is comprised of PC-related mice, trackpads,
touchpads and presenters. Retail sales of our pointing devices decreased 10%
and 8% in the three and nine months ended December 31, 2012, compared with the
same period in the prior fiscal year, while retail units sold decreased 12% and
4% during these periods. The continued weakness in the global PC market was a
major factor in the sales declines in this category across all regions,
particularly EMEA. The primary weakness during the three and nine months ended
December 31, 2012, compared to the same periods of the prior fiscal year, was in
our low and mid-range product offerings which experienced double-digit declines,
offset in part by our high-end product offerings which increased by 90% and 32%
during these periods. The high-end sales growth was driven by our TouchMouse
T620 and our new Wireless Rechargeable Touchpad T650. Sales of all cordless
mice decreased 10% and 7% in the three and nine months ended December 31, 2012,
while units sold decreased 10% and 2% during the same period. Corded mice sales
decreased 18% and 13% and units sold decreased 16% and 9% in the three and nine
months ended December 31, 2012 compared with the same periods in the prior
fiscal year.
Retail PC Keyboards and Desktops
Our retail PC keyboard and desktop category is comprised of PC keyboards and
keyboard/mice combo products. Retail sales of PC keyboards and desktops
decreased 6% and remained constant during the three and nine months ended
December 31, 2012, compared with the same periods in the prior fiscal year,
while units sold decreased 10% and 1% during these periods. This category also
continued to be affected by the global PC market, particularly in the EMEA and
APAC regions. Sales of corded and cordless desktops decreased 27% and 10% in
sales and 25% and 4% in units during the three months ended December 31, 2012,
compared with the same period in the prior fiscal year. During the nine months
ended December 31, 2012, compared with the same period in the prior fiscal year,
corded and cordless desktops decreased 15% and increased 2% in sales and
decreased 10% and increased 7% in units. Sales of corded and cordless keyboards
increased 9% and 18% in sales and decreased 16% and increased 29% in units
during the three and nine months ended December 31, 2012, compared with the same
periods in the prior fiscal year. The primary driver of the increase in sales
of corded and cordless keyboards during both periods was from strong sales of
Logitech Wireless Touch Keyboard K400.
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Retail Tablet Accessories
Our retail table accessory is comprised of our tablet keyboards and
accessories. Retail sales of tablets and accessories increased 119% and 143%
during the three and nine months ended December 31, 2012, compared with the same
periods in the prior fiscal year, while units sold increased 119% and 116%
during these periods. These increases were driven by continued strong demand
for the Logitech Ultrathin Keyboard Cover during both the three and nine months
ended December 31, 2012, compared to the same periods in the prior fiscal year.
Retail Audio - PC
Our retail audio-PC category is comprised of PC speakers and PC headsets. Retail
audio-PC sales decreased 19% and 10% in the three and nine months ended
December 31, 2012, compared with the same periods in the prior fiscal year,
while retail units sold decreased 22% and 11% during these periods. The
decrease during the three months ended December 31, 2012, compared to the same
period of the prior fiscal year, was due to a 16% decline in PC speakers and a
25% decline in PC headsets. For the nine months ended December 31, 2012, PC
speakers declined by 11% and PC headsets declined by 9%. These declines were
primarily due to the overall weakness in PCs and a market shift towards mobile
audio devices.
Retail Audio - Wearables & Wireless
Our retail audio-wearables and wireless category is comprised of non-PC audio
products, including ear and headphones, and wireless speakers. Retail
audio-wearables and wireless sales increased 1% and 47% in the three and nine
months ended December 31, 2012, compared with the same periods in the prior
fiscal year, while retail units sold decreased 15% and increased 24% during
these periods. The increase in sales during the three and nine months ended
December 31, 2012, compared to the same period of the prior fiscal year, was
driven by 29% and 98% increases in our wireless speakers for smartphones and
tablets during these periods. We continued to experience strong sales from our
new wireless speakers including Logitech UE Mobile Boombox and Logitech UE
Boombox, both of which began shipping late in the second quarter of fiscal year
2013. Our audio wearables product category experienced a 26% decline in sales
during the three months ended December 31, 2012, almost entirely due to our
participation in an aggressive Black Friday promotion of our UE earphones with a
large U.S. online retailer in the same period of the prior fiscal year. This
year we chose not to participate in similarly aggressive promotions for our new
music products launched under the Logitech UE brand, which caused our sales to
decline substantially during the three months ended December 31, 2012, as
compared to the same period of the prior fiscal year. For the nine months ended
December 31, 2012, compared to the same period of the prior fiscal year, our
audio wearables product category experienced a 12% increase in sales, driven in
part by the strong initial sales of the new Logitech UE products which were
initially available exclusively through Apple stores during the second quarter
of fiscal year 2013.
Retail Video
Our retail video category is comprised of webcams, digital video security
systems and TV Cams. Retail sales of our video products declined 11% and 17% in
the three and nine months ended December 31, 2012, compared with the same
periods in the prior fiscal year, while retail units sold decreased 29% and 23%
during these periods. The sales decrease was mainly due to weakness in our
webcam product line, which declined by 21% and 22% during both periods, and
which continued to be negatively impacted by the combination of market trends,
including the popularity of embedded webcams in mobile devices, and the overall
weakness of the PC market. We expect future sales of our USB cable connected
consumer webcams in the consumer market to continue declining, as the embedded
webcam experience appears to be sufficient to meet the needs of many retail
consumers. We are enhancing our webcam product line-up to enable experiences
that cannot be easily achieved with an embedded webcam. For example, we
experienced strong growth in the high-end category driven by the Logitech HD Pro
Webcam C920, which
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offers full HD 1080p video calls on Skype, and from Logitech BCC950 Conference
Cam for the enterprise market during both the three and nine months ended
December 31, 2012. The retail video sales decrease was also due to 6% and 3%
declines in our digital video security products during both the three and nine
months ended December 31, 2012. These decreases were offset in part by 74% and
22% increase in sales of Logitech TV Cam HD during both the three and nine
months ended December 31, 2012. We made a strategic decision to divest our
digital video security category of products, included within our retail video
category by the end of calendar year 2013.
Retail PC Gaming
Our retail PC gaming category is comprised of PC gaming mice, gamepads,
headsets, joysticks and steering wheels. Retail sales of our PC gaming
peripherals declined 20% and 9% in the three and nine months ended December 31,
2012, compared with the same periods in the prior fiscal year, while retail
units sold decreased 10% and increased 5% during these periods. During the
three months ended December 31, 2012, we experienced declines across most
product categories, with the most significant decline in our steering wheel
products, offset in part by strong sales of Logitech G600 MMO Gaming Mouse.
For
the nine months ended December 31, 2012, we experienced significant sales
decline in our steering wheel products, offset in part by increased sales from
gaming mice, due primarily to strong sales of Logitech G600 MMO Gaming Mouse,
and gaming headsets, due to strong sales of Logitech G35 and G930 Wireless
Gaming Headsets. The difference between the decline in PC gaming sales and the
increase in units during the nine months ended December 31, 2012 reflects a
product mix shift away from steering wheels to lower-priced mice, keyboards and
gamepads.
Retail Remotes
Retail sales of our remotes category, comprised of our Harmony remotes,
decreased 24% and 19% in the three and nine months ended December 31, 2012,
compared with the same periods in the prior fiscal year, while retail units sold
decreased 55% and 36% during these periods. Sales decline was concentrated in
the low and mid-range remotes during both the three and nine months ended
December 31, 2012. The high-end category experienced a modest increase of 4%
during the three months ended December 31, 2012 due to the launch of Harmony
Touch in October 2012, our first new high-end remote in over four years. The
significantly steeper decline in units, relative to sales, primarily reflects
our transition over the last several quarters away from selling low to mid-range
remotes. We made a strategic decision to divest our remotes category by the end
of calendar year 2013.
Retail Other
This category is comprised of a variety of products that we currently intend to
transition out of, or have already transitioned out of, as they are no longer
strategic to our business. Products currently included in this category include
speaker docks, streaming media systems, console gaming peripherals and Logitech
Revue for Google TV products. Retail sales of this category decreased by 76% and
63% in the three and nine months ended December 31, 2012, compared with same
periods in the prior fiscal year, while retail units sold decreased 68% and 48%
during these periods. Speaker docks decreased by 74% and 60%, streaming media
systems decreased by 83% and 38%, Logitech Revue for Google TV decreased by 100%
and 93%, and console gaming peripherals decreased by 60% and 76%, during the
three and nine months ended December 31, 2012, compared to the same periods of
the prior fiscal year. We plan to discontinue other non-strategic products, such
as speaker docks and console gaming peripherals, by the end of calendar year
2013.
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Gross Profit
Gross profit for the three and nine months ended December 31, 2012 and 2011 was
as follows (in thousands):
Three months ended Nine months ended
December 31, December 31,
2012 2011 Change 2012 2011 Change
Net sales $ 614,500 $ 714,596 (14 )% $ 1,630,797 $ 1,784,241 (9 )%
Cost of goods sold 404,402 455,922 (11 )% 1,080,452 1,201,539 (10 )%
Gross profit $ 210,098 $ 258,674 (19 )% $ 550,345 $ 582,702 (6 )%
Gross margin 34.2 % 36.2 % 33.7 % 32.7 %
Gross profit consists of net sales, less cost of goods sold which includes
materials, direct labor and related overhead costs, costs of manufacturing
facilities, costs of purchasing components from outside suppliers, distribution
costs, write-down of inventories and amortization of intangible assets.
The decline in gross margin for the three months ended December 31, 2012,
compared with the same period of the prior fiscal year, was primarily a result
of an unfavorable change in retail product mix and the negative impact of a
weaker euro, offset in part by tight management of channel pricing programs and
a variety of efficiency improvements in our global supply chain process. The
improvement in gross margin for the nine months ended December 31, 2012,
compared with the same period of the prior fiscal year, primarily resulted from
a $34.1 million valuation adjustment to cost of goods sold which occurred during
the three months ended June 30, 2011, and from the improvements to our channel
pricing programs and global supply chain process, offset in part by an
unfavorable change in retail product mix and the negative impact of a weaker
euro. The $34.1 million valuation adjustment reflected the lower of cost or
market on our inventory of Logitech Revue and related peripherals on hand and at
our suppliers. The gross margin for the nine months ended December 31, 2012 was
also negatively impacted by $4.5 million in pricing actions related to the
simplification of our product portfolio in the Americas and EMEA regions, $3.0
million in costs related to product development efforts that were discontinued
as a result of the restructuring, a provision for a patent dispute, and changes
in our product mix.
Operating Expenses
Operating expenses 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 Change 2012 2011 Change
Marketing and selling $ 112,698 $ 116,313 (3 )% $ 324,117 $ 323,552 0 %
% of net sales 18 % 16 % 20 % 18 %
Research and
development 40,393 41,911 (4 )% 117,340 121,383 (3 )%
% of net sales 7 % 6 % 7 % 7 %
General and
administrative 26,382 30,673 (14 )% 84,842 89,527 (5 )%
% of net sales 4 % 4 % 5 % 5 %
Goodwill impairment 211,000 - 100 % 211,000 - 100 %
% of net sales 34 % 0 % 13 % 0 %
Restructuring charges
(credits) (358 ) - 100 % 28,198 - 100 %
% of net sales 0 % 0 % 2 % 0 %
Total operating
expenses $ 390,115 $ 188,897 107 % $ 765,497 $ 534,462 43 %
The increase in total operating expenses as a percentage of net sales was
primarily attributable to the estimated $211.0 million goodwill impairment
charge related to our video conferencing reporting unit and from $28.2 million
in costs related to the restructuring plan initiated in April 2012.
Our operating expenses are incurred in U.S. dollars, Chinese renminbi, Swiss
francs, euros, and, to a lesser extent, 28 other currencies. To the extent that
the U.S. dollar significantly increases or decreases in value relative to the
currencies in which our operating expenses are denominated, the reported dollar
amounts of our sales and expenses may decrease or increase. We refer to our
operating expenses excluding the impact of foreign currency exchange rates as
constant dollar operating expenses. Constant dollar operating expenses are a
non-GAAP financial measure, which is information derived from consolidated
financial information but not presented in our financial statements prepared in
accordance with U.S.
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GAAP. Our management uses these non-GAAP measures in its financial and
operational decision-making, and believes these non-GAAP measures, when
considered in conjunction with the corresponding GAAP measures, facilitate a
better understanding of changes in operating expenses. Constant dollar operating
expenses are calculated by translating current period operating expenses in each
local currency at the prior period's average exchange rate for that currency.
Marketing and Selling
Marketing and selling expense consists of personnel and related overhead costs,
corporate and product marketing, promotions, advertising, trade shows, customer
and technical support and facilities costs.
Marketing and selling expense decreased by 3% in the three months ended
December 31, 2012, compared with the same period in the prior fiscal year,
primarily due to decreases in personnel-related expenses, share-based
compensation expense and facility-related costs from the reduction in worldwide
workforce resulting from the restructuring plan initiated in the first quarter
of fiscal year 2013. These decreases were offset in part by an increase in
product design, consulting and marketing expenses associated with the launch of
new products.
Marketing and selling expense remained relatively constant during the nine
months ended December 31, 2012, compared with same period of the prior fiscal
year. We experienced increased product design, advertising, consulting and
marketing expenses associated with the launch of new products, which were offset
by decreases in personnel-related expenses and share-based compensation expense
from our recent restructuring plan initiated in the first quarter of fiscal year
2013.
Foreign currency exchange rates did not have a material effect on marketing and
sales expense during the three months ended December 31, 2012, compared to the
same period of the prior fiscal year. If foreign currency exchange rates had
been the same in the nine months ended December 31, 2012 and 2011, the
percentage change in constant dollar marketing and sales expense would have been
an increase of 3% instead of a less than 1% increase.
Research and Development
Research and development expense consists of personnel and related overhead
costs, contractors and outside consultants, supplies and materials, equipment
depreciation and facilities costs, all associated with the design and
development of new products and enhancements of existing products.
Although we continued to make investments in product development, we experienced
4% and 3% decreases in research and development expense during the three and
nine months ended December 31, 2012, compared with the same periods of the prior
fiscal year, primarily from a decline in personnel-related expenses due to the
reduction in worldwide workforce resulting from our recent restructuring plan.
Foreign currency exchange rates did not have a material effect on research and
development expense during the three months ended December 31, 2012, compared to
the same period of the prior fiscal year. For the nine months ended December 31,
2012 and 2011, the percentage change in constant dollar research and development
expense would have been a 1% decrease instead of a 3% decrease.
General and Administrative
General and administrative expense consists primarily of personnel and related
overhead and facilities costs for the finance, information systems, executive,
human resources and legal functions.
General and administrative expense decreased by 14% from the three months ended
December 31, 2011 to 2012, primarily from the decline in personnel-related
expenses and share-based compensation expense due to the reduction in worldwide
workforce from our recent restructuring plan.
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General and administrative expense decreased by 5% from the nine months ended
December 31, 2011 to 2012, primarily from the decline in personnel-related
expenses and share-based compensation expense due to the reduction in worldwide
workforce from our recent restructuring plan, offset in part by the write-off of
the remaining lease obligations resulting from the exit of our former corporate
headquarters.
Foreign currency exchange rates did not have a material effect on general and
administrative expense during the three months ended December 31, 2012, compared
to the same period of the prior fiscal year. If foreign currency exchange rates
had been the same in the nine months ended December 31, 2012 and 2011, the
percentage change in constant dollar general and administrative expense would
have been a decrease of 3% instead of a decrease of 5%.
Goodwill Impairment
While performing our annual goodwill impairment analysis of each of our
reporting units as of December 31, 2012, we determined that our video
conferencing reporting unit's 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 our 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. The Step 2 test requires us to fair
value all assets and liabilities of our video conferencing reporting unit to
determine the implied fair value of this reporting unit's goodwill. We were
unable to complete the Step 2 analysis prior to filing of this Form 10-Q for the
quarterly period ended December 31, 2012 due to the complexities of determining
the implied fair value of goodwill of our video conferencing reporting unit.
Based on the work performed as of this filing date, we recorded an estimated
goodwill impairment charge of $211.0 million. We will not be required to make
any current or future cash payments as a result of this impairment charge.
Additional adjustments to this estimated goodwill impairment charge may be
required during the fourth quarter of fiscal year 2013 when our Step 2
assessment is finalized.
Restructuring Charges
Restructuring charges consist of termination benefits, lease exit costs and
other charges associated with the restructuring plan initiated in April 2012.
The restructuring plan reduced our worldwide non-direct-labor workforce by
approximately 340 employees. During the current quarter, we incurred a $0.2
million credit in termination benefits to affected employees due to the further
refinement of estimates which were previously accrued during the three months
ended June 30, 2012. For the nine months ended December 31, 2012, we incurred a
$24.7 million charge in termination benefits to affected employees under this
plan. Termination benefits are calculated based on regional benefit practices
and local statutory requirements. In addition, we incurred legal, consulting,
and other costs of $2.2 million as a result of the terminations during the three
and nine months ended December 31, 2012. We also incurred $0.2 million credit
and $1.3 million charge in lease exit costs primarily related to costs
associated with the closure of existing facilities during the three and nine
months ended December 31, 2012. We believe we will complete the restructuring
plan by the end of our fiscal year 2013.
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The following table summarizes restructuring-related activities during the three
and nine months ended December 31, 2012 (in thousands):
Termination Lease Exit
Total Benefits Costs Other
Accrual balance at March 31, 2012 $ - $ - $ - $ -
Charges 31,227 28,655 1,472 1,100
Cash payments (5,195 ) (4,766 ) - (429 )
Foreign exchange 63 63 - -
Accrual balance at June 30, 2012 $ 26,095 $ 23,952 $ 1,472 $ 671
Charges (credits) (2,671 ) (3,816 ) 48 1,097
Cash payments (17,652 ) (16,642 ) (52 ) (958 )
Foreign exchange 14 - - 14
Accrual balance at September 30, 2012 $ 5,786 $ 3,494 $ 1,468 $ 824
Charges (credits) (358 ) (188 ) (182 ) 12
Cash payments (4,511 ) (2,633 ) (1,104 ) (774 )
Foreign exchange - - - -
Accrual balance at December 31, 2012 $ 917 $ 673 $ 182 $ 62
Interest Income, Net
Interest income and expense 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 Change 2012 2011 Change
Interest income $ 427 $ 1,020 (58 )% $ 1,654 $ 2,312 (28 )%
Interest expense (313 ) (103 ) 204 % (1,003 ) (104 ) 864 %
Interest income, net` $ 114 $ 917 (88 )% $ 651 $ 2,208 (71 )%
The changes in interest income for the three and nine months ended December 31,
2012, compared with the same period in the prior fiscal year, primarily resulted
from lower invested balances resulting from the $133.5 million cash dividend
payment made on September 18, 2012.
Interest expense for the three and nine months ended December 31, 2012
represents commitment fees and non-recurring fees related to the revolving
credit facility entered into in December 2011.
Other Income (Expense), Net
Other income and expense 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 Change 2012 2011 Change
Investment impairment $ (3,600 ) $ - 100 % $ (3,600 ) $ - 100 %
Foreign currency
exchange gain (loss),
net 26 32 (19 )% (1,582 ) (681 ) 132 %
Gain (loss) on sale of
property and plant (165 ) - 100 % (165 ) 4,904 (103 )%
Investment income
(loss) related to
deferred compensation
plan 261 40 553 % 360 (488 ) (174 )%
Gain on sale of
investments - 6,118 0 % 831 6,118 (86 )%
Other, net (192 ) 523 (137 )% (182 ) 288 (163 )%
Other income
(expense), net $ (3,670 ) $ 6,713 (155 )% $ (4,338 ) $ 10,141 (143 )%
The $3.6 million investment impairment resulted from the write-down of an
investment in a privately-held company.
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Foreign currency exchange gains or losses relate to balances denominated in
currencies other than the functional currency of a particular subsidiary, to the
sale of currencies, and to gains or losses recognized on foreign exchange
forward contracts. We do not speculate in currency positions, but we are alert
to opportunities to maximize foreign exchange gains.
The $4.9 million gain on sale of property and plant for the nine months ended
December 31, 2011 relates to the sale of an unused manufacturing facility in
China.
Investment income (loss) for the three and nine months ended December 31, 2012
and 2011 represents earnings, gains, and losses on trading investments related
to a deferred compensation plan offered by one of our subsidiaries.
During the nine months ended December 31, 2012, we sold the remaining two of our
available-for-sale securities with a total carrying value of $0.4 million and a
total par value of $15.2 million for $0.9 million. This sale resulted in $0.8
million of gain recognized in other income (expense), net, $0.3 million of which
resulted from the recognition of a temporary increase in fair value previously
recorded in accumulated other comprehensive loss.
Provision for (Benefit from) Income Taxes
The provision for (benefit from) income taxes and effective tax rates 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
Provision for (benefit from) income taxes $ 11,370 $ 22,074 $ (26,616 ) $ 17,417
Effective income tax rate
(6.2 )% 28.5 % 12.2 % 28.7 %
The provision for (benefit from) income taxes consists of income and withholding
taxes. We operate in multiple jurisdictions and our profits are taxed pursuant
to the tax laws of these jurisdictions. Our effective income tax rate may be
affected by changes in or interpretations of tax laws in any given jurisdiction,
utilization of net operating loss and tax credit carryforwards, changes in
geographical mix of income and expense, and changes in management's assessment
of matters such as the ability to realize deferred tax assets.
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 we operate, 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.
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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 our 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.
We continue to recognize interest and penalties related to unrecognized tax
positions in income tax expense. As of December 31 and March 31, 2012, we had
approximately $6.8 million and $7.5 million, respectively, of accrued interest
and penalties related to uncertain tax positions.
We file Swiss and foreign tax returns. For all these tax returns, we are
generally not subject to tax examinations for years prior to 2000. In the
fiscal quarter ended September 30, 2012, we effectively settled the examinations
of fiscal years 2006 and 2007 with the IRS (U.S. Internal Revenue Service).
We
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 our U.S. subsidiary for
fiscal years 2008 and 2009 during the fiscal quarter ended September 30, 2012.
We received Notices of Proposed Adjustments ("NOPAs") 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, we 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.
We are also under examination and have received assessment notices in other tax
jurisdictions. At this time, we are 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 our consolidated operating results.
Although we have 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.
Liquidity and Capital Resources
Cash Balances, Available Borrowings, and Capital Resources
At December 31, 2012, our working capital was $395.7 million, compared with
$576.7 million at March 31, 2012. This decrease in working capital was primarily
due to lower cash balances, primarily resulting from the $133.5 million cash
dividend payment paid on September 18, 2012.
During the nine months ended December 31, 2012, we generated $104.2 million from
operating activities. Our main sources of operating cash flows were net loss
after adding non-cash expenses of depreciation, amortization, goodwill
impairment, investment impairment and share-based compensation expense, and from
an increase in accounts payables and accrued liabilities. These sources of
operating cash
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flows were offset in part by an increase in accounts receivables and other
assets during this period. Net cash used in investing activities was $42.8
million, primarily from $39.7 million of investments in leasehold improvements,
computer hardware and software, tooling and equipment and from a $4.0 million
investment in a privately-held company. Net cash used by financing activities
was $216.5 million, primarily from the $133.5 million cash dividend payment and
from the $90.0 million used to repurchase 8.6 million shares under our share
buyback program, offset in part by $8.8 million in proceeds received from sale
of shares upon exercise of options and purchase rights.
At December 31, 2012, we had cash and cash equivalents of $322.0 million. Our
cash and cash equivalents are comprised of bank demand deposits and short-term
time deposits carried at cost, which is equivalent to fair value. Approximately
52% of our cash and cash equivalents are held by our Swiss-based entities, and
approximately 32% is held by our subsidiaries in Hong Kong and China. We do not
believe we would be subject to any material adverse tax impact or significantly
inhibited by any country in which we do business from the repatriation of funds
to Switzerland, our home domicile.
In December 2011, we entered into a Senior Revolving Credit Facility Agreement
with a group of primarily Swiss banks that provides for a revolving
multicurrency unsecured credit facility in an amount of up to $250.0 million. We
may, upon notice to the lenders and subject to certain requirements, arrange
with existing or new lenders to provide up to an aggregate of $150.0 million in
additional commitments, for a total of $400.0 million of unsecured revolving
credit. The credit facility may be used for working capital, general corporate
purposes, and acquisitions. There were no outstanding borrowings under the
credit facility at December 31, 2012.
The credit facility matures on October 31, 2016. We may prepay the loans under
the credit facility in whole or in part at any time without premium or penalty.
Borrowings under the credit facility will accrue interest at a per annum rate
based on LIBOR (London Interbank Offered Rate), or EURIBOR (Euro Interbank
Offered Rate) in the case of loans denominated in euros, plus a variable margin
determined quarterly based on the ratio of senior debt to earnings before
interest, taxes, depreciation and amortization for the preceding four-quarter
period, plus, if applicable, an additional rate per annum intended to compensate
the lenders for the cost of compliance with regulatory reserve requirements and
other banking regulations. We also pay a quarterly commitment fee of 40% of the
applicable margin on the available commitment. In connection with entering into
the credit facility, we incurred non-recurring fees totaling $1.5 million, which
are amortized on a straight-line basis over the term of the credit facility.
The facility agreement contains representations, covenants, including threshold
financial covenants, and events of default customary in Swiss credit markets.
Affirmative covenants include covenants regarding reporting requirements,
maintenance of insurance, maintenance of properties and compliance with
applicable laws and regulations, and financial covenants that require the
maintenance of net senior debt, interest cover and adjusted equity ratios
determined in accordance with the terms of the facility. Negative covenants
limit the ability of the Company and its subsidiaries, among other things, to
grant liens, make investments, incur debt, make restricted payments, enter into
a merger or acquisition, or sell, transfer or dispose of assets, in each case
subject to certain exceptions. As of December 31, 2012, we were in compliance
with all covenants and conditions of this facility.
This facility stipulates that, upon an uncured event of default under the
facility, the lenders may declare all or a portion of the outstanding
obligations payable by us to be immediately due and payable, terminate their
commitments and exercise other rights and remedies provided for under the
facility. The events of default under the facility include, among other things,
payment defaults, covenant defaults, inaccuracy of representations and
warranties, cross defaults with certain other indebtedness, bankruptcy and
insolvency events and events that have a material adverse effect (as defined in
the facility). Upon a change of control of the Company, lenders whose
commitments aggregate more than two-thirds of the total commitments under the
facility may terminate the commitments and declare all outstanding obligations
to be due and payable.
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We have credit lines with several European and Asian banks totaling $76.8
million as of December 31, 2012. As is common for businesses in European and
Asian countries, these credit lines are uncommitted and unsecured. Despite the
lack of formal commitments from the banks, we believe that these lines of credit
will continue to be made available because of our long-standing relationships
with these banks and our current financial condition. At December 31, 2012,
there were no outstanding borrowings under these lines of credit. There are no
financial covenants or cross default provisions under these facilities. We also
have available credit lines related to corporate credit cards totaling $30.2
million as of December 31, 2012. The outstanding borrowings under these credit
lines are recorded in other current liabilities. There are no financial
covenants or cross default provisions under these credit lines.
Cash Flow from Operating Activities
The following table presents selected financial information and statistics as of
December 31, 2012 and 2011 (dollars in thousands):
December 31,
2012 2011
Accounts receivable, net $ 264,589 $ 318,678
Inventories 277,477 295,749
Working capital 395,739 621,034Days sales in accounts receivable (DSO) (1) 39 days 40 days
Inventory turnover (ITO) (2)
5.6x 6.2x
Net cash provided by operating activities $ 104,196 $ 154,168
--------------------------------------------------------------------------------
(1) DSO is determined using ending accounts receivable as of the most
recent quarter-end and net sales for the most recent quarter.
(2) ITO is determined using ending inventories and annualized cost of
goods sold (based on the most recent quarterly cost of goods sold).
During the nine months ended December 31, 2012, we generated net cash of $104.2
million from operating activities, compared to $154.2 million for the same
period in the prior fiscal year. The primary drivers of this decrease involved a
net loss of $192.2 million generated in the nine months ended December 31, 2012
compared with net income of $43.2 million in the nine months ended December 31,
2011, and from a $39.7 million increase in accounts payables, a $5.2 million
increase in accrued liabilities and a $1.4 million decrease in inventories.
These increases to operating activities were offset in part by a $41.3 million
increase in accounts receivables and a $2.2 million increase in other assets.
DSO for the current quarter decreased by 1 day compared with the same period of
the prior fiscal year primarily from increased cash collections. Typical
payment terms require customers to pay for product sales generally within 30 to
60 days. However, terms may vary by customer type, by country and by selling
season. Extended payment terms are sometimes offered to a limited number of
customers during the second and third fiscal quarters. We do not modify payment
terms on existing receivables, but may offer discounts for early payment.
Inventory turnover between the nine months ended December 31, 2012 and 2011
decreased due to lower annualized cost of goods sold between the two periods.
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Cash Flow from Investing Activities
Cash flows from investing activities during the nine months ended December 31,
2012 and 2011 were as follows (in thousands):
Nine months ended December 31,
2012 2011
Purchases of property, plant and equipment $ (39,737 ) $ (31,417 )
Acquisition, net of cash acquired - (18,814 )
Investment in privately-held company (3,970 ) -
Proceeds from sale of property and plant - 4,904
Proceeds from sale of available-for-sale securities 917 6,550
Purchases of trading investments (2,294 ) (5,577 )
Proceeds from sale of trading investments 2,309 5,520
Net cash used in investing activities $ (42,775 ) $ (38,834 )
Our expenditures for property, plant and equipment during the nine months ended
December 31, 2012 and 2011 were principally normal expenditures for leasehold
improvements, computer hardware and software, tooling and equipment.
During the second quarter of fiscal year 2013, we invested $4.0 million in a
privately-held company in exchange for convertible preferred stock. We account
for this investment under the cost method of accounting since we have less than
a 20% ownership interest and we lack the ability to exercise significant
influence over the operating and financial policies of the investee.
Proceeds from the sale of property and plant were related to the sale of an
unused manufacturing facility in China in the three months ended June 30, 2011.
During the nine months ended December 31, 2012, we sold our two remaining
available-for-sale securities with a total carrying value of $0.4 million and a
total par value of $15.2 million for $0.9 million. This sale resulted in $0.8
million of gain recognized in other income (expense), net, $0.3 million of which
resulted from the recognition of a temporary increase in fair value previously
recorded in accumulated other comprehensive income.
The purchases and sales of trading investments in the nine months ended
December 31, 2012 and 2011 represent mutual fund activity directed by
participants in a deferred compensation plan offered by one of the Company's
subsidiaries. The mutual funds are held by a Rabbi Trust.
Cash Flow from Financing Activities
The following table presents information on our cash flows from financing
activities during the nine months ended December 31, 2012 and 2011 (in
thousands):
Nine months ended December 31,
2012 2011
Cash dividend payment $ (133,462 ) $ -
Purchase of treasury shares (89,955 ) (73,134 )
Proceeds from sale of shares upon exercise of options
and purchase rights
8,843 9,852
Tax withholdings related to net share settlements of
RSUs
(1,995 ) (890 )
Excess tax benefits from share-based compensation 26 33
Net cash used in financing activities $ (216,543 ) $ (64,139 )
Nine months ended December 31,
2012 2011
Number of shares repurchased 8,600 7,609
Value of shares repurchased $ 89,955 $ 73,134
Average price per share $ 10.46 $ 9.61
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On September 5, 2012, our shareholders approved a cash dividend payment of CHF
125.7 million out of retained earnings to Logitech shareholders who owned shares
on September 17, 2012. Eligible shareholders were paid CHF 0.79 per share
($0.85 per share in U.S. dollars), totaling $133.5 million in U.S. dollars on
September 18, 2012.
During the nine months ended December 31, 2012, we repurchased 8.6 million
shares for $90.0 million under the Company's amended September 2008 buyback
program, compared with the nine months ended December 31, 2011, during which we
repurchased 7.6 million shares for $73.1 million. There were no repurchases
during the three months ended December 31, 2012. The amounts of the repurchases
include transaction costs incurred as part of the repurchase.
Cash of $8.8 million and $9.9 million was provided during the nine months ended
December 31, 2012 and 2011 from the sale of shares upon exercise of options and
purchase rights pursuant to the Company's stock plans. The payment of tax
withholdings related to net share settlements of RSUs (restricted stock units)
required the use of $2.0 million and $0.9 million in cash in the nine month
periods ended December 31, 2012 and 2011.
Cash Outlook
Our principal sources of liquidity are our cash and cash equivalents, cash flow
generated from operations and, to a lesser extent, capital markets and
borrowings. Our future working capital requirements and capital expenditures may
increase to support investment in product innovations and growth opportunities,
or to acquire or invest in complementary businesses, products, services, and
technologies.
In December 2011, the Company entered into a Senior Revolving Credit Facility
Agreement with a group of primarily Swiss banks that provides for a revolving
multicurrency unsecured credit facility in an amount of up to $250.0 million.
The Company may, upon notice to the lenders and subject to certain requirements,
arrange with existing or new lenders to provide up to an aggregate of $150.0
million in additional commitments, for a total of $400.0 million of unsecured
revolving credit. The credit facility may be used for working capital, general
corporate purposes, and acquisitions. The credit facility matures on October 31,
2016. The Company may prepay the loans under the credit facility in whole or in
part at any time without premium or penalty. The facility agreement contains
representations, covenants, including threshold financial covenants, and events
of default customary in Swiss credit markets. There were no outstanding
borrowings under the credit facility at December 31, 2012. As of December 31,
2012, we were in compliance with all covenants and conditions related to this
facility.
In September 2008, our Board of Directors approved a share buyback program,
which authorizes the Company to invest up to $250 million to purchase its own
shares. In November 2011, we received approval from the Swiss regulatory
authorities for an amendment to the September 2008 share buyback program to
enable future repurchases of shares for cancellation. In fiscal year 2012, we
repurchased 7.6 million shares for $73.1 million under the September 2008
program. Under the amended September 2008 program, we repurchased 9.9 million
shares for $82.9 million in fiscal year 2012 and 8.6 million shares for $90.0
million in the first quarter of fiscal year 2013. As of December 31, 2012, the
approved amount remaining under the amended September 2008 program was $4.4
million. On September 5, 2012, our shareholders approved the cancellation of
18.5 million shares repurchased under the September 2008 amended share buyback
program. These shares were legally cancelled during the third quarter of fiscal
year 2013.
We file Swiss and foreign tax returns. For all these tax returns, we are
generally not subject to tax examinations for years prior to 2000. In the
fiscal quarter ended September 30, 2012, we effectively settled the examinations
of fiscal years 2006 and 2007 with the IRS (U.S. Internal Revenue Service).
We
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.
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In addition, the IRS completed its field examination of our U.S. subsidiary for
fiscal years 2008 and 2009 during the fiscal quarter ended September 30, 2012.
We received NOPAs 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, we 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.
We are also under examination and have received assessment notices in other tax
jurisdictions. At this time, we are 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 our consolidated operating results.
Although we have 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.
On April 25, 2012, we announced a restructuring plan to reduce operating costs
and improve financial results. We believe we will complete the restructuring
plan by the end of our fiscal year 2013.
Our other contractual obligations and commitments which require cash are
described in the following sections.
For over ten years, we have generated positive cash flows from our operating
activities, including cash from operations of $196.1 million in fiscal year
2012. During the nine months ended December 31, 2012, our normal level of cash
and cash equivalents was significantly reduced by the cash dividend payment of
CHF 125.7 million (U.S. dollar amount of $133.5 million at the time it was paid)
out of retained earnings, and by share repurchases during this period. If we do
not generate sufficient operating cash flows to support our operations and
future planned cash requirements, our operations could be harmed and our access
to credit facilities could be restricted or eliminated. However, we believe
that the trend of our historical cash flow generation, our projections of future
operations and reduced expenses, our available cash balances, credit lines and
credit facility will provide sufficient liquidity to fund our operations for at
least the next 12 months.
Although we believe that we can meet our liquidity needs, if we fail to meet our
operating forecast or market conditions negatively affect our cash flows or
ability to fund growth opportunities, we may be required to seek additional
funding. If we seek additional funding, adequate funds may not be available on
favorable terms, or at all. If adequate funds are not available on acceptable
terms, or at all, we may be unable to adequately fund our business plans and it
could have a negative effect on our business, operating cash flows and financial
condition.
Contractual Obligations and Commitments
As of December 31, 2012, our outstanding contractual obligations and commitments
included: (i) facilities leased under operating lease commitments, (ii) purchase
commitments and obligations, (iii) long-term liabilities for income taxes
payable, and (iv) defined benefit pension plan and non-retirement
post-employment benefit obligations.
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The following summarizes our contractual obligations and commitments at
December 31, 2012 (in thousands):
December 31, 2012
Operating leases $ 102,406
Purchase commitments - inventory 131,990
Purchase obligations - capital expenditures 18,608
Purchase obligations - operating expenses 63,986
Income taxes payable - non-current 100,358
Obligation for deferred compensation 15,199
Pension and post-employment obligations 38,925
Other long-term liabilities 12,740
Total contractual obligations and commitments $ 484,212
Operating Leases
We lease facilities under operating leases, certain of which require us to pay
property taxes, insurance and maintenance costs. Operating leases for facilities
are generally renewable at our option and usually include escalation clauses
linked to inflation. The remaining terms on our non-cancelable operating leases
expire in various years through 2028. Our asset retirement obligations on these
leases as of December 31, 2012 were $1.8 million.
Purchase Commitments
At December 31, 2012, we have fixed purchase commitments of $132.0 million for
inventory purchases made in the normal course of business to original design
manufacturers, contract manufacturers and other suppliers, which are expected to
be fulfilled by March 2013. We also had commitments of $64.0 million for
consulting services, marketing arrangements, advertising, outsourced customer
services, information technology maintenance and support services, and other
services. Fixed purchase commitments for capital expenditures amounted to $18.6
million at December 31, 2012, and primarily relate to commitments for computer
hardware and leasehold improvements. We expect to continue making capital
expenditures in the future to support product development activities and ongoing
and expanded operations. Although open purchase commitments are considered
enforceable and legally binding, the terms generally allow us the option to
reschedule and adjust our requirements based on business needs prior to delivery
of goods or performance of services.
Income Taxes Payable
At December 31, 2012, we had $100.4 million in non-current income taxes payable,
including interest and penalties, related to our income tax liability for
recognized uncertain tax positions, compared with $137.3 million in non-current
taxes payable as of March 31, 2012. The decline in income tax liability
associated with uncertain tax positions in the amount of $36.9 million is
primarily due to $38.9 million from the closure of income tax examinations in
the United States.
Obligation for Deferred Compensation
At December 31, 2012, we had $15.2 million in liabilities related to a deferred
compensation plan offered by one of our subsidiaries. For more information,
please refer to our Annual Report on Form 10-K for the fiscal year ended
March 31, 2012.
Pension and Post-Employment Obligations
At December 31, 2012, we had $38.9 million in liabilities related to our defined
benefit pension plans and non-retirement post-employment benefit obligations.
For more information, please refer to our Annual Report on Form 10-K for the
fiscal year ended March 31, 2012.
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Other Contractual Obligations and Commitments
For further detail about our contractual obligations and commitments, please
refer to our Annual Report on Form 10-K for the fiscal year ended March 31,
2012.
Off-Balance Sheet Arrangements
We have not entered into any transactions with unconsolidated entities whereby
we have financial guarantees, subordinated retained interests, derivative
instruments or other contingent arrangements that expose us to material
continuing risks, contingent liabilities, or any other obligation under a
variable interest in an unconsolidated entity that provides financing,
liquidity, market risk or credit risk support to us.
Guarantees
Logitech International S.A., the parent holding company, has guaranteed payment
of the purchase obligations of various subsidiaries from certain component
suppliers. These guarantees generally have an unlimited term. The maximum
potential future payment under the guarantee arrangements is limited to $36.0
million. At December 31, 2012, there were no purchase obligations outstanding
for which the parent holding company was required to guarantee payment.
Logitech Europe S.A., a subsidiary of the parent holding company, has guaranteed
the purchase obligations of another Logitech subsidiary under three guarantee
agreements. Two of these guarantees do not specify a maximum amount. The
remaining guarantee has a total limit of $7.0 million. As of December 31, 2012,
$0.1 million of guaranteed purchase obligations were outstanding under these
guarantees. Logitech Europe S.A. has also guaranteed payment of the purchase
obligations of a third-party contract manufacturer under three guarantee
agreements. The maximum amount of these guarantees was $5.3 million as of
December 31, 2012. As of December 31, 2012, $0.6 million of guaranteed purchase
obligations were outstanding under these agreements.
Logitech International S.A. and Logitech Europe S.A. have guaranteed certain
contingent liabilities of various subsidiaries related to transactions occurring
in the normal course of business. The maximum amount of the guarantees was $36.4
million as of December 31, 2012. As of December 31, 2012, $9.9 million of
guaranteed liabilities were subject to these guarantees.
Indemnifications
Logitech indemnifies certain of its suppliers and customers for losses arising
from matters such as intellectual property disputes and product safety defects,
subject to certain restrictions. The scope of these indemnities varies, but in
some instances, includes indemnification for damages and expenses, including
reasonable attorneys' fees. No amounts have been accrued for indemnification
provisions at December 31, 2012. We do not believe, based on historical
experience and information currently available, that it is probable that any
material amounts will be required to be paid under our indemnification
arrangements.
Logitech also indemnifies its current and former directors and certain of its
current and former officers. Certain costs incurred for providing such
indemnification may be recoverable under various insurance policies. Logitech is
unable to reasonably estimate the maximum amount that could be payable under
these arrangements because these exposures are not capped, the obligations are
conditional in nature, and the facts and circumstances involved in any situation
that might arise.
56
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Table of Contents
Legal Proceedings
From time to time the Company is involved in claims and legal proceedings which
arise in the ordinary course of its business. The Company is currently subject
to several such claims and a small number of legal proceedings. The Company
believes that these matters lack merit and intends to vigorously defend against
them. Based on currently available information, the Company does not believe
that resolution of pending matters will have a material adverse effect on its
financial condition, cash flows or results of operations. However, litigation
is subject to inherent uncertainties, and there can be no assurances that the
Company's defenses will be successful or that any such lawsuit or claim would
not have a material adverse impact on the Company's business, financial
condition, cash flows and results of operations in a particular period. Any
claims or proceedings against us, whether meritorious or not, can have an
adverse impact because of defense costs, diversion of management and operational
resources, negative publicity and other factors. Any failure to obtain necessary
license or other rights, or litigation arising out of intellectual property
claims, could adversely affect our business.
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