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EX-31.2 - EXHIBIT 31.2 - LOGITECH INTERNATIONAL SAexhibit312q216.htm
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EX-32.1 - EXHIBIT 32.1 - LOGITECH INTERNATIONAL SAexhibit321q216.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015
 
Or
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period from                to                
 
Commission File Number: 0-29174
 
LOGITECH INTERNATIONAL S.A.
(Exact name of registrant as specified in its charter)
 
Canton of Vaud, Switzerland
(State or other jurisdiction
of incorporation or organization)
 
None
(I.R.S. Employer
Identification No.)
 
Logitech International S.A.
Apples, Switzerland
c/o Logitech Inc.
7700 Gateway Boulevard
Newark, California 94560
(Address of principal executive offices and zip code)
 
(510) 795-8500
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ý  No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  ý   No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 

1


Large accelerated filer  ý
 
Accelerated filer  o
 
 
 
Non-accelerated filer  o
 
Smaller reporting company  o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o
  No  ý
 
As of October 14, 2015, there were 162,381,177 shares of the Registrant’s share capital outstanding.


2


TABLE OF CONTENTS
 
 
 
Page
 
 
 
Part I
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
Exhibits
 
In this document, unless otherwise indicated, references to the “Company” or “Logitech” are to Logitech International S.A., its consolidated subsidiaries and predecessor entities. Unless otherwise specified, all references to U.S. Dollar, Dollar or $ are to the United States Dollar, the legal currency of the United States of America. All references to CHF are to the Swiss Franc, the legal currency of Switzerland.
 
Logitech, the Logitech logo, and the Logitech products referred to herein are either the trademarks or the registered trademarks of Logitech. All other trademarks are the property of their respective owners.

      

3


PART I — FINANCIAL INFORMATION 

ITEM 1.   FINANCIAL STATEMENTS (UNAUDITED) 


LOGITECH INTERNATIONAL S.A.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
 
 
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
 
2015
 
2014
 
2015
 
2014
Net sales
 
$
539,862

 
$
530,311

 
$
1,010,182

 
$
1,012,514

Cost of goods sold
 
353,851

 
325,533

 
652,442

 
625,984

Gross profit
 
186,011

 
204,778

 
357,740

 
386,530

Operating expenses:
 
 

 
 

 
 

 
 

Marketing and selling
 
89,877

 
95,862

 
177,304

 
186,908

Research and development
 
34,898

 
32,325

 
68,731

 
63,641

General and administrative
 
26,851

 
34,470

 
57,355

 
71,149

Restructuring charges, net
 
8,696

 

 
21,691

 

Total operating expenses
 
160,322

 
162,657

 
325,081

 
321,698

Operating income
 
25,689

 
42,121

 
32,659

 
64,832

Interest income, net
 
192

 
355

 
456

 
613

Other expense, net
 
(780
)
 
(885
)
 
(1,901
)
 
(1,083
)
Income before income taxes
 
25,101

 
41,591

 
31,214

 
64,362

Provision for income taxes
 
7,004

 
5,501

 
5,680

 
8,596

Net income
 
$
18,097

 
$
36,090

 
$
25,534

 
$
55,766

 
 
 
 
 
 
 
 
 
Net income per share:
 
 

 
 

 
 

 
 

Basic
 
$
0.11

 
$
0.22

 
$
0.16

 
$
0.34

Diluted
 
$
0.11

 
$
0.22

 
$
0.15

 
$
0.34

 
 
 
 
 
 
 
 
 
Weighted average shares used to compute net income per share :
 
 

 
 

 
 

 
 

Basic
 
163,515

 
163,230

 
163,957

 
163,121

Diluted
 
165,841

 
166,065

 
166,352

 
165,949

 
 
 
 
 
 
 
 
 
Cash dividends per share
 
$
0.53

 
$

 
$
0.53

 
$

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


4


LOGITECH INTERNATIONAL S.A.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(unaudited)
 
 
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
 
2015
 
2014
 
2015
 
2014
Net income
 
$
18,097

 
$
36,090

 
$
25,534

 
$
55,766

Other comprehensive income (loss):
 
 

 
 

 
 
 
 
Currency translation gain (loss), net of taxes
 
(8
)
 
(3,852
)
 
2,610

 
(3,651
)
Defined benefit pension plans:
 
 

 
 

 
 
 
 
Net gain and prior service costs, net of taxes
 
1,322

 
807

 
192

 
946

Amortization included in operating expenses
 
417

 
109

 
833

 
222

Hedging gain (loss):
 
 

 
 

 
 
 
 
Deferred hedging gain (loss), net of taxes
 
1,088

 
3,505

 
(1,174
)
 
3,753

Reclassification of hedging loss (gain) included in cost of goods sold
 
(28
)
 
(215
)
 
(2,488
)
 
185

Other comprehensive income (loss):
 
2,791

 
354

 
(27
)
 
1,455

Total comprehensive income
 
$
20,888

 
$
36,444

 
$
25,507

 
$
57,221

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


5


LOGITECH INTERNATIONAL S.A.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
 
 
 
September 30,
2015
 
March 31,
2015
Assets
 
(unaudited)

 
 
Current assets:
 
 

 
 

Cash and cash equivalents
 
$
365,774

 
$
537,038

Accounts receivable, net
 
274,730

 
179,823

Inventories
 
328,054

 
270,730

Other current assets
 
73,504

 
64,429

Total current assets
 
1,042,062

 
1,052,020

Non-current assets:
 
 

 
 

Property, plant and equipment, net
 
108,184

 
91,593

Goodwill
 
218,207

 
218,213

Other intangible assets
 
666

 
1,866

Other assets
 
60,656

 
62,988

Total assets
 
$
1,429,775

 
$
1,426,680

Liabilities and Shareholders’ Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
356,686

 
$
299,995

Accrued and other current liabilities
 
231,688

 
194,912

Total current liabilities
 
588,374

 
494,907

Non-current liabilities:
 
 

 
 

Income taxes payable
 
74,374

 
72,107

Other non-current liabilities
 
98,054

 
101,532

Total liabilities
 
760,802

 
668,546

Commitments and contingencies (Note 9)
 


 


Shareholders’ equity:
 
 

 
 

Registered shares, CHF 0.25 par value:
 
30,148

 
30,148

Issued and authorized shares —173,106 at September 30 and March 31, 2015
 


 


Conditionally authorized shares — 50,000 at September 30 and March 31, 2015
 


 


Additional paid-in capital
 
1,633

 

Less shares in treasury, at cost — 10,729 at September 30, 2015 and 8,625 at March 31, 2015
 
(119,337
)
 
(88,951
)
Retained earnings
 
869,793

 
930,174

Accumulated other comprehensive loss
 
(113,264
)
 
(113,237
)
Total shareholders’ equity
 
668,973

 
758,134

Total liabilities and shareholders’ equity
 
$
1,429,775

 
$
1,426,680

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


6


LOGITECH INTERNATIONAL S.A.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
 
 
Six Months Ended
September 30,
 
 
2015
 
2014
Operating activities:
 
 

 
 

Net income
 
$
25,534

 
$
55,766

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

 
 

Depreciation
 
22,237

 
19,692

Amortization of other intangible assets
 
1,226

 
5,358

Share-based compensation expense
 
13,257

 
12,999

Impairment of investment
 
180

 
105

Gain on disposal of property, plant and equipment
 

 
(10
)
Excess tax benefits from share-based compensation
 
(1,163
)
 
(666
)
Deferred income taxes
 
952

 
(2,358
)
Changes in operating assets and liabilities, net of acquisitions:
 
 

 
 

Accounts receivable, net
 
(95,403
)
 
(73,561
)
Inventories
 
(55,442
)
 
(26,984
)
Other assets
 
(8,511
)
 
(5,640
)
Accounts payable
 
50,361

 
60,112

Accrued and other liabilities
 
31,910

 
15,891

Net cash provided by (used in) operating activities
 
(14,862
)
 
60,704

Investing activities:
 
 

 
 

Purchases of property, plant and equipment
 
(31,277
)
 
(24,964
)
Investment in privately held companies
 
(480
)
 
(2,550
)
Purchase of trading investments
 
(2,649
)
 
(2,230
)
Proceeds from sales of trading investments
 
2,855

 
2,545

Net cash used in investing activities
 
(31,551
)
 
(27,199
)
Financing activities:
 
 

 
 

Payment of cash dividends
 
(85,915
)
 

Contingent consideration related to prior acquisition
 

 
(100
)
Repurchases of ESPP awards
 

 
(1,078
)
Purchases of treasury shares
 
(48,802
)
 

Proceeds from sales of shares upon exercise of options and purchase rights
 
11,103

 
1,533

Tax withholdings related to net share settlements of restricted stock units
 
(3,502
)
 
(1,323
)
Excess tax benefits from share-based compensation
 
1,163

 
666

Net cash used in financing activities
 
(125,953
)
 
(302
)
Effect of exchange rate changes on cash and cash equivalents
 
1,102

 
(2,393
)
Net increase (decrease) in cash and cash equivalents
 
(171,264
)
 
30,810

Cash and cash equivalents, beginning of the period
 
537,038

 
469,412

Cash and cash equivalents, end of the period
 
$
365,774

 
$
500,222

 
 
 
 
 
Non-cash investing activities:
 
 

 
 

Property, plant and equipment purchased during the period and included in period end liability accounts
 
$
12,981

 
$
1,568

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

7


LOGITECH INTERNATIONAL S.A.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)
(unaudited)
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
Accumulated
Other
 
Total
 
Registered Shares
 
Paid-in
 
Treasury Shares
 
Retained
 
Comprehensive
 
Shareholders’
 
Shares
 
Amount
 
Capital
 
Shares
 
Amount
 
Earnings
 
Income (Loss)
 
Equity
March 31, 2014
173,106

 
$
30,148

 
$

 
10,206

 
$
(116,510
)
 
$
976,292

 
$
(85,802
)
 
$
804,128

Total comprehensive income

 

 

 

 

 
55,766

 
1,455

 
57,221

Tax effects from share-based awards

 

 
825

 

 

 

 

 
825

Sales of shares upon exercise of options and purchase rights

 

 
(881
)
 
(134
)
 
2,414

 

 

 
1,533

Issuance of shares upon vesting of restricted stock units

 

 
(5,443
)
 
(225
)
 
4,120

 

 

 
(1,323
)
Share-based compensation expense

 

 
13,055

 

 

 

 

 
13,055

Repurchase of ESPP awards

 

 
(1,078
)
 

 

 

 

 
(1,078
)
September 30, 2014
173,106

 
$
30,148

 
$
6,478

 
9,847

 
$
(109,976
)
 
$
1,032,058

 
$
(84,347
)
 
$
874,361

 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
Accumulated Other
 
Total
 
Registered Shares
 
Paid-in
 
Treasury Shares
 
Retained
 
Comprehensive
 
Shareholders’
 
Shares
 
Amount
 
Capital
 
Shares
 
Amount
 
Earnings
 
Income (Loss)
 
Equity
March 31, 2015
173,106

 
$
30,148

 
$

 
8,625

 
$
(88,951
)
 
$
930,174

 
$
(113,237
)
 
$
758,134

Total comprehensive income (loss)

 

 

 

 

 
25,534

 
(27
)
 
25,507

Tax effects from share-based awards

 

 
(727
)
 

 

 

 

 
(727
)
Sales of shares upon exercise of options and purchase rights

 

 
(2,452
)
 
(987
)
 
13,555

 

 

 
11,103

Issuance of shares upon vesting of restricted stock units

 

 
(8,363
)
 
(411
)
 
4,861

 

 

 
(3,502
)
Share-based compensation expense

 

 
13,175

 

 

 

 

 
13,175

Purchases of treasury shares

 

 

 
3,502

 
(48,802
)
 

 

 
(48,802
)
Cash dividends

 

 

 

 

 
(85,915
)
 

 
(85,915
)
September 30, 2015
173,106

 
$
30,148

 
$
1,633

 
10,729

 
$
(119,337
)
 
$
869,793

 
$
(113,264
)
 
$
668,973

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


8


LOGITECH INTERNATIONAL S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
Note 1 — Summary of Significant Accounting Policies
 
Basis of Presentation
 
The condensed consolidated interim financial statements include the accounts of Logitech and its subsidiaries. All intercompany balances and transactions have been eliminated. The condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and therefore do not include all the information required by GAAP for complete financial statements. They should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended March 31, 2015, included in its Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 5, 2015.  In the opinion of management, these condensed consolidated financial statements include all adjustments, consisting of only normal and recurring adjustments, necessary and in all material aspects, for a fair statement of the results of operations, financial position, comprehensive income, cash flows and changes in shareholders' equity for the periods presented. Operating results for the three and six months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2016, or any future periods.
 
Fiscal Year
 
The Company’s fiscal year ends on March 31. Interim quarter ends on last Friday of each quarter.  For purposes of presentation, the Company has indicated its quarterly periods as ending on the quarter end.
 
Changes in Significant Accounting Policies
 
There have been no substantial changes in the Company’s significant accounting policies during the six months ended September 30, 2015 compared with the significant accounting policies described in its Annual Report on Form 10-K for the fiscal year ended March 31, 2015.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Examples of significant estimates and assumptions made by management involve the fair value of goodwill, warranty liabilities, accruals for discretionary customer programs, sales return reserves, allowance for doubtful accounts, inventory valuation, restructuring charges, contingent liabilities, uncertain tax positions, and valuation allowances for deferred tax assets. 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 materially from those estimates.
 
Recent Accounting Pronouncements 

In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2015-11, "Simplifying the Measurement of Inventory (Topic 330)", ("ASU 2015-11"). Topic 330, Inventory, currently requires an entity to measure inventory at the lower of cost or market, with market value represented by replacement cost, net realizable value or net realizable value less a normal profit margin. The amendments in ASU 2015-11 require an entity to measure inventory at the lower of cost or net realizable value. ASU 2015-11 is effective in the first quarter of fiscal year 2018 for the Company, with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.

In May 2014, the FASB issued Accounting Standards Update No. 2014-9, "Revenue from Contracts with Customers (Topic 606)," ("ASU 2014-9"). ASU 2014-9 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to

9


which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 was originally to be effective for the Company on April 1, 2017. In July 2015, the FASB affirmed a one-year deferral of the effective date of the new revenue standard. The new standard will become effective for the Company on April 1, 2018. Early application is permitted but not before the original effective date of annual periods beginning after December 15, 2016. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. The Company has not yet selected a transition method nor has it determined the impact of the new standard on its condensed consolidated financial statements.

Note 2 — Net Income per Share
 
The computations of basic and diluted net income per share for the Company were as follows (in thousands, except per share amounts):
 
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
 
2015
 
2014
 
2015
 
2014
Net income
 
$
18,097

 
$
36,090

 
$
25,534

 
$
55,766

Shares used in net income per share computation:
 
 

 
 

 
 

 
 

Weighted average shares outstanding - basic
 
163,515

 
163,230

 
163,957

 
163,121

Effect of potentially dilutive equivalent shares
 
2,326

 
2,835

 
2,395

 
2,828

Weighted average shares outstanding - diluted
 
165,841

 
166,065

 
166,352

 
165,949

Net income per share:
 
 

 
 

 
 

 
 

Basic
 
$
0.11

 
$
0.22

 
$
0.16

 
$
0.34

Diluted
 
$
0.11

 
$
0.22

 
$
0.15

 
$
0.34

 
Share equivalents attributable to outstanding stock options and restricted stock units (RSUs) of 7.8 million and 8.3 million for the three months ended September 30, 2015 and 2014, respectively, and 7.6 million and 8.1 million for the six months ended September 30, 2015 and 2014, were anti-dilutive and excluded from the calculation of diluted net income per share.
 
Note 3 — Employee Benefit Plans
 
Employee Share Purchase Plans and Stock Incentive Plans
 
As of September 30, 2015, the Company offers the 2006 ESPP (2006 Employee Share Purchase Plan (Non-U.S.)), the 1996 ESPP (1996 Employee Share Purchase Plan (U.S.)), the 2006 Plan (2006 Stock Incentive Plan) and the 2012 Plan (2012 Stock Inducement Equity Plan).

The following table summarizes the share-based compensation expense and related tax benefit recognized for the three and six months ended September 30, 2015 and 2014 (in thousands):
 
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
 
2015
 
2014
 
2015
 
2014
Cost of goods sold
 
$
580

 
$
627

 
$
1,185

 
$
1,165

Marketing and selling
 
2,062

 
1,653

 
4,180

 
4,209

Research and development
 
756

 
552

 
1,543

 
1,396

General and administrative
 
3,110

 
3,229

 
6,342

 
6,229

Restructuring
 

 

 
7

 

Total share-based compensation expense
 
6,508

 
6,061

 
13,257

 
12,999

Income tax provision (benefit)
 
304

 
(1,913
)
 
(1,033
)
 
(3,097
)
Total share-based compensation expense, net of income tax
 
$
6,812

 
$
4,148

 
$
12,224

 
$
9,902

 
As of September 30, 2015 and March 31, 2015, the Company capitalized $0.4 million and $0.5 million of stock-based compensation expenses as inventory, respectively.

10


 
Defined Benefit Plans
 
Certain of the Company’s subsidiaries sponsor defined benefit pension plans or non-retirement post-employment benefits covering substantially all of their employees. Benefits are provided based on employees’ years of service and earnings, or in accordance with applicable employee benefit regulations. The Company’s practice is to fund amounts sufficient to meet the requirements set forth in the applicable employee benefit and tax regulations. The cost recorded of $2.9 million and $1.9 million for the three months ended September 30, 2015 and 2014, respectively, and $5.8 million and $3.9 million for the six months ended September 30, 2015 and 2014, respectively, was primarily related to service costs.
 
Note 4 — Income Taxes
 
The Company is incorporated in Switzerland but operates in various countries with differing tax laws and rates. Further, a portion of the Company’s income before taxes and the provision for (benefit from) income taxes are generated outside of Switzerland.
 
The income tax provision for the three months ended September 30, 2015 was $7.0 million based on an effective income tax rate of 27.9% of pre-tax income, compared to an income tax provision of $5.5 million based on an effective income tax rate of 13.2% of pre-tax income for the three months ended September 30, 2014. The income tax provision for the six months ended September 30, 2015 was $5.7 million based on an effective income tax rate of 18.2% of pre-tax income, compared to an income tax provision of $8.6 million based on an effective income tax rate of 13.4% of pre-tax income for the six months ended September 30, 2014.

The change in the effective income tax rate for the three and six months ended September 30, 2015, compared to the three and six months ended September 30, 2014, is due to the mix of income and losses in the various tax jurisdictions in which the Company operates. In addition, in determining the annual effective tax rate of fiscal year 2016, there is no tax benefit recognized for ordinary losses related to the video conferencing business as realization of the tax benefit of the losses is not assured beyond any reasonable doubt. In the three months ended September 30, 2015, a discrete tax provision of $1.5 million resulting from a write-off to a deferred tax asset related to stock equity awards for the video conferencing business was largely offset by a discrete tax benefit from the reversal of uncertain tax positions from the expiration of statutes of limitations. In the three months ended September 30, 2014, there was a discrete tax benefit of $1.7 million, primarily from the reversal of uncertain tax positions resulting from the expiration of statues of limitations and audit settlements in certain jurisdictions.

There was a discrete tax benefit of $2.2 million and $0.8 million in the six months ended September 30, 2015 and 2014, respectively, resulting from the preferential income tax rate reduction pursuant to the High and New Technology Enterprise Program in China.

As of September 30 and March 31, 2015, the total amount of unrecognized tax benefits due to uncertain tax positions was $80.4 million and $79.0 million, respectively, all of which would affect the effective income tax rate if recognized.
 
The Company had $74.4 million in non-current income taxes payable and $0.1 million in current income taxes payable, including interest and penalties, related to our income tax liability for uncertain tax positions as of September 30, 2015, compared to $72.1 million in non-current income taxes payable and $0.1 million in current income taxes payable as of March 31, 2015.
 
The Company recognizes interest and penalties related to unrecognized tax positions in income tax expense. As of September 30 and March 31, 2015, the Company had $4.7 million and $4.9 million of accrued interest and penalties related to uncertain tax positions, respectively.
 
Although the Company has adequately provided for uncertain tax positions, the provisions on these positions may change as revised estimates are made or the underlying matters are settled or otherwise resolved. During fiscal year 2016, the Company will continue to review its tax positions and provide for or reverse unrecognized tax benefits as issues arise. During the next 12 months, it is reasonably possible that the amount of unrecognized tax benefits could increase or decrease significantly due to changes in tax law in various jurisdictions, new tax audits and changes in the U.S. dollar as compared to other currencies. Excluding these factors, uncertain tax positions

11


may decrease by as much as $17.2 million from the lapse of the statutes of limitations in various jurisdictions during the next 12 months.

Note 5— Balance Sheet Components
 
The following table presents the components of certain balance sheet asset amounts as of September 30 and March 31, 2015 (in thousands): 
 
 
September 30,
2015
 
March 31,
2015
Accounts receivable, net:
 
 

 
 

Accounts receivable
 
$
492,274

 
$
344,455

Allowance for doubtful accounts
 
(1,078
)
 
(1,093
)
Allowance for sales returns
 
(20,185
)
 
(17,901
)
Allowance for cooperative marketing arrangements
 
(34,938
)
 
(25,700
)
Allowance for customer incentive programs
 
(65,055
)
 
(48,497
)
Allowance for pricing programs
 
(96,288
)
 
(71,441
)
 
 
$
274,730

 
$
179,823

Inventories:
 
 

 
 

Raw materials
 
$
59,286

 
$
36,376

Finished goods
 
268,768

 
234,354

 
 
$
328,054

 
$
270,730

Other current assets:
 
 

 
 

Income tax and value-added tax receivables
 
$
25,662

 
$
19,403

Deferred tax assets
 
28,879

 
27,790

Prepaid expenses and other assets
 
18,963

 
17,236

 
 
$
73,504

 
$
64,429

Property, plant and equipment, net:
 
 

 
 

Property, plant and equipment
 
376,795

 
349,235

Less: accumulated depreciation and amortization
 
(268,611
)
 
(257,642
)
 
 
$
108,184

 
$
91,593

Other assets:
 
 

 
 

Deferred tax assets
 
$
36,799

 
$
39,310

Trading investments for deferred compensation plan
 
15,577

 
17,237

Other assets
 
8,280

 
6,441

 
 
$
60,656

 
$
62,988







12


The following table presents the components of certain balance sheet liability amounts as of September 30 and March 31, 2015 (in thousands): 
 
 
September 30,
2015
 
March 31,
2015
Accrued and other current liabilities:
 
 

 
 

Accrued personnel expenses
 
$
55,703

 
$
50,015

Indirect customer incentive programs
 
26,660

 
19,730

Accrued restructuring
 
11,661

 
966

Deferred revenue
 
24,552

 
24,987

Warranty accrual
 
12,091

 
12,630

Employee benefit plan obligation
 
1,717

 
1,232

Income taxes payable
 
4,264

 
5,794

Other current liabilities
 
95,040

 
79,558

 
 
$
231,688

 
$
194,912

Non-current liabilities:
 
 

 
 

Warranty accrual
 
$
8,308

 
$
9,080

Obligation for deferred compensation plan
 
15,577

 
17,237

Long term restructuring
 
71

 
73

Employee benefit plan obligation
 
50,195

 
51,181

Deferred rent
 
10,767

 
11,519

Deferred tax liability
 
1,823

 
1,936

Long term deferred revenue
 
9,663

 
9,109

Other non-current liabilities
 
1,650

 
1,397

 
 
$
98,054

 
$
101,532

 
Note 6— Fair Value Measurements
 
Fair Value Measurements
 
The Company considers fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The Company utilizes the following three-level fair value hierarchy to establish the priorities of the inputs used to measure fair value:
 
Level 1 — Quoted prices in active markets for identical assets or liabilities.
 
Level 2 — Observable inputs other than quoted market prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.


13


The following table presents the Company’s financial assets and liabilities, that were accounted for at fair value, excluding assets related to the Company’s defined benefit pension plans, classified by the level within the fair value hierarchy (in thousands): 
 
 
September 30, 2015
 
March 31, 2015
 
 
Level 1
 
Level 2
 
Level 1
 
Level 2
Cash equivalents:
 
 

 
 
 
 

 
 

Cash equivalents
 
$
35,050

 
$

 
$
264,647

 
$

 
 
$
35,050

 
$

 
$
264,647

 
$

Trading investments for deferred compensation plan:
 
 

 
 
 
 

 
 

Money market funds
 
$
3,326

 
$

 
$
2,936

 
$

Mutual funds
 
12,251

 

 
14,301

 

 
 
$
15,577

 
$

 
$
17,237

 
$

Foreign exchange derivative assets
 
$

 
$
806

 
$

 
$
2,080

Foreign exchange derivative liabilities
 
$

 
$
88

 
$

 
$
75

 
There were no material Level 3 financial assets as of September 30 or March 31, 2015.
 
Investment Securities
 
The marketable securities for the Company's deferred compensation plan are recorded at a fair value of $15.6 million and $17.2 million as of September 30, 2015 and March 31, 2015, respectively, based on quoted market prices. Quoted market prices are observable inputs that are classified as Level 1 within the fair value hierarchy. Unrealized trading gains / (losses) related to trading securities for the three or six months ended September 30, 2015 and 2014 were not significant and are included in other expense, net.
 
Derivative Financial Instruments
 
Under certain agreements with the respective counterparties to the Company’s derivative contracts, subject to applicable requirements, the Company is allowed to net settle transactions of the same type with a single net amount payable by one party to the other. However, the Company presents its derivative assets and derivative liabilities on a gross basis on the Condensed Consolidated Balance Sheets as of September 30, 2015 and March 31, 2015.

The fair values of the Company’s derivative instruments not designated as hedging instruments were not material as of September 30, 2015 or March 31, 2015. The following table presents the fair values of the Company’s derivative instruments designated as hedging instruments and their accounting line presentation on its Condensed Consolidated Balance Sheets as of September 30, 2015 and March 31, 2015 (in thousands):
 
 
Derivatives
 
 
Asset
 
 
September 30,
2015
 
March 31,
2015
Cash flow hedges
 
$
806

 
$
2,080


14


 
The amount of gain (loss) recognized on derivatives not designated as hedging instruments were not material in all periods presented herein. The following table presents the amounts of gains (losses) on the Company’s derivative instruments designated as hedging instruments and their locations on its condensed consolidated statements of operations and condensed consolidated statements of comprehensive income for the three and six months ended September 30, 2015 and 2014 (in thousands):

 
 
Three Months Ended
September 30,
 
 
Amount of
Gain (Loss) Deferred as 
a Component of 
Accumulated Other 
Comprehensive Loss After Reclassification to Costs of Goods Sold
 
Amount of Loss (Gain)
Reclassified from Accumulated Other Comprehensive Loss to
Costs of Goods Sold
 
Amount of Gain (Loss) Immediately Recognized in
Other Expense, Net
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Cash flow hedges
 
$
1,060

 
$
3,290

 
$
(28
)
 
$
(215
)
 
$
75

 
$
(1
)

 
 
Six Months Ended
September 30,
 
 
Amount of
Gain (Loss) Deferred as 
a Component of 
Accumulated Other 
Comprehensive Loss After Reclassification to Costs of Goods Sold
 
Amount of Loss (Gain)
Reclassified from Accumulated Other Comprehensive Loss to
Costs of Goods Sold
 
Amount of Gain (Loss) Immediately Recognized in
Other Expense, Net
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Cash flow hedges
 
$
(3,662
)
 
$
3,938

 
$
(2,488
)
 
$
185

 
$
143

 
$
(56
)
 
Cash Flow Hedges
 
The Company enters into currency exchange forward contracts to hedge against exposure to changes in currency exchange rates related to its subsidiaries’ forecasted inventory purchases. The Company has one entity with a euro functional currency that purchases inventory in U.S. Dollars. The primary risk managed by using derivative instruments is the currency exchange rate risk. However, there can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in currency exchange rates. The Company has designated these derivatives as cash flow hedges. These hedging contracts mature within four months, and are denominated in the same currency as the underlying transactions. Gains and losses in the fair value of the effective portion of the hedges are deferred as a component of accumulated other comprehensive loss until the hedged inventory purchases are sold, at which time the gains or losses are reclassified to cost of goods sold. The Company assesses the effectiveness of the hedges by comparing changes in the spot rate of the currency underlying the forward contract with changes in the spot rate of the currency in which the forecasted transaction will be consummated. If the underlying transaction being hedged fails to occur or if a portion of the hedge does not generate offsetting changes in the currency exposure of forecasted inventory purchases, the Company immediately recognizes the gain or loss on the associated financial instrument in other expense, net. Such gains and losses were not material during the three or six months ended September 30, 2015 and 2014. Cash flows from such hedges are classified as operating activities in the condensed consolidated statements of cash flows. The notional amounts of currency exchange forward contracts outstanding related to forecasted inventory purchases were $63.4 million and $43.5 million at September 30, 2015 and March 31, 2015, respectively. The Company estimates that $0.3 million of net gains related to its cash flow hedges included in accumulated other comprehensive loss as of September 30, 2015 will be reclassified into earnings within the next 12 months.
 
Other Derivatives
 
The Company also enters into currency exchange forward and swap contracts to reduce the short-term effects of currency exchange rate fluctuations on certain foreign currency receivables or payables. These contracts generally mature within one month. The primary risk managed by using forward and swap contracts is the currency exchange rate risk. The gains or losses on currency exchange contracts are recognized in other expense, net based on the changes in fair value.
 

15


The notional amounts of currency exchange forward and swap contracts outstanding as of September 30 and March 31, 2015 relating to foreign currency receivables or payables were $60.8 million and $61.7 million, respectively. Open forward and swap contracts outstanding at September 30, 2015 and March 31, 2015 consisted of contracts in Mexican Pesos, Japanese Yen, British Pounds, Taiwanese Dollars and Australian Dollars to be settled at future dates at pre-determined exchange rates.
 
The fair value of all currency exchange forward and swap contracts is determined based on observable market transactions of spot currency rates and forward rates. Cash flows from these contracts are classified as operating activities in the Condensed Consolidated Statements of Cash Flows.

Note 7 — Goodwill and Other Intangible Assets
  
In accordance with ASC Topic 350-10 (“ASC 350-10”), the Company conducts a goodwill impairment analysis annually at December 31 and as necessary if changes in facts and circumstances indicate that it is more likely than not that the fair value of the Company’s reporting units may be less than its carrying amount. There have been no events or circumstances during the six months ended September 30, 2015 that have required the Company to perform an interim assessment of goodwill.
 
As of September 30, 2015 and March 31, 2015, all of the Company's goodwill is related to the Peripheral reporting unit. The following table summarizes the activity in the Company’s goodwill balance during the six months ended September 30, 2015 (in thousands):
As of March 31, 2015
 
$
218,213

Currency impact
 
(6
)
As of September 30, 2015
 
$
218,207


Other Intangible Assets

Amortization expense for other intangible assets was $0.5 million and $2.6 million for the three months ended September 30, 2015 and 2014, respectively, and $1.2 million and $5.4 million for the six months ended September 30, 2015 and 2014, respectively.
 
Note 8— Financing Arrangements
 
The Company had several uncommitted, unsecured bank lines of credit aggregating $46.7 million as of September 30, 2015. There are no financial covenants under these lines of credit with which the Company must comply. As of September 30, 2015, the Company had outstanding bank guarantees of $18.2 million under these lines of credit. There was no borrowing outstanding under these lines of credit as of September 30, 2015 or March 31, 2015.

Note 9 — Commitments and Contingencies
 
Product Warranties
 
All of the Company’s peripherals products are covered by warranty to be free from defects in material and workmanship for periods ranging from one year to five years. At the time of sale, the Company accrues a warranty liability for estimated costs to provide products, parts or services to repair or replace products in satisfaction of the warranty obligation. The Company’s estimate of costs to fulfill its warranty obligations is based on historical experience and expectations of future conditions. When the Company experiences changes in warranty claim activity or costs associated with fulfilling those claims, the warranty liability is adjusted accordingly.
 

16


Changes in the Company’s warranty liability for the three and six months ended September 30, 2015 and 2014 were as follows (in thousands): 
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Beginning of the period
$
21,284

 
$
23,420

 
$
21,710

 
$
24,380

Provision
1,792

 
2,020

 
3,934

 
4,226

Settlements
(2,677
)
 
(3,236
)
 
(5,245
)
 
(6,402
)
End of the period
$
20,399

 
$
22,204

 
$
20,399

 
$
22,204

 
Other Contingencies
 
The Company is subject to an ongoing formal investigation by the Enforcement Division of the U.S. Securities and Exchange Commission ("SEC"), relating to certain issues including the accounting for Revue inventory valuation reserves that resulted in the restatement described in the Fiscal 2014 Form 10-K, revision to the Company’s consolidated financial statements concerning warranty accruals and amortization of intangible assets presented in the Company’s Amended Annual Report on Form10-K/A, filed on August 7, 2013, and the Company’s transactions with a distributor for Fiscal Year 2007 through Fiscal Year 2009. The Company has entered into an agreement with the Enforcement Staff to extend the statute of limitations. The Company is cooperating with the investigation and, after discussions with the Enforcement Staff, the Company recently made an offer of settlement to resolve the matter, which is subject to approval by the SEC.  The proposed settlement would be entered into by the Company without admitting or denying the SEC’s findings and would resolve alleged violations of certain provisions of the Securities Exchange Act of 1934 and related rules, including the anti-fraud provisions.  Under the terms of the proposed settlement, the Company would pay $7.5 million in a civil penalty and agree not to commit or cause any violations of certain provisions of the Securities Exchange Act of 1934 and related rules. There is no assurance that the proposal will be approved by the SEC. In accordance with U.S. GAAP, the Company has made a corresponding accrual in its financial statements.
 
Guarantees
 
Logitech Europe S.A. guaranteed payments of certain third-party contract manufacturers’ purchase obligations. As of September 30, 2015, the maximum amount of this guarantee was $3.8 million, of which $0.9 million of guaranteed purchase obligations were outstanding.

Indemnifications
 
The Company 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. As of September 30, 2015, no amounts have been accrued for these indemnification provisions. The Company does not believe, based on historical experience and information currently available, that it is probable that any material amounts will be required to be paid under its indemnification arrangements.
 
The Company 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. The Company is unable to reasonably estimate the maximum amount that could be payable under these arrangements because these exposures are not limited, the obligations are conditional in nature and the facts and circumstances involved in any situation that might arise are variable.
 

17


Legal Proceedings
 
From time to time the Company is involved in claims and legal proceedings that 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 or results of operations in a particular period. Any claims or proceedings against the Company, 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 the Company’s business.

Note 10— Shareholders’ Equity
 
Share Repurchase Program

In March 2014, the Company’s Board of Directors approved the 2014 share buyback program, which authorizes the Company to use up to $250.0 million to purchase its own shares. The Company’s share buyback program is expected to remain in effect for a period of three years. Shares may be repurchased from time to time on the open market with consideration given to Logitech’s stock price, market conditions and other factors. During the three and six months ended September 30, 2015, 2.9 million and 3.5 million shares were repurchased for $40.0 million and $48.8 million, respectively. There were no share repurchases during the three or six months ended September 30, 2014.
 
Cash Dividends on Shares of Common Stock

During the three and six months ended September 30, 2015, the Company declared and paid cash dividends of CHF0.51 (USD equivalent of $0.53 ) per common share, totaling $85.9 million, on the Company’s outstanding common stock.

Any future dividends will be subject to the approval of the Company's shareholders.

Accumulated Other Comprehensive Income (Loss)
 
The components of accumulated other comprehensive income (loss) was as follows (in thousands):
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
Cumulative
Translation
Adjustment (1)
 
Defined
Benefit
Plan (1)
 
Deferred
Hedging
Gains (Losses)
 
Total
March 31, 2015
 
$
(90,224
)
 
$
(26,964
)
 
$
3,951

 
$
(113,237
)
Other comprehensive income (loss)
 
2,610

 
1,025

 
(3,662
)
 
(27
)
September 30, 2015
 
$
(87,614
)
 
$
(25,939
)
 
$
289

 
$
(113,264
)
 
(1)        Tax effect was not significant as of September 30 or March 31, 2015.
 
Note 11 — Segment Information
 
The Company has two reporting segments, peripherals and video conferencing, based on product markets and internal organizational structure. The peripherals segment encompasses the design, manufacturing and marketing of peripherals for PCs, tablets and other digital platforms. The video conferencing segment offers scalable high-definition, or HD, video communication endpoints, HD video conferencing systems with integrated monitors, video bridges, a cloud-based video conferencing solution and other infrastructure software and hardware to support large-scale video deployments and services to support these products. The Company’s reporting segments do not record revenue on sales between segments.
 

18


Operating performance measures for the peripherals segment and the video conferencing segment are reported separately to the Company's Chief Executive Officer (“CEO”), who is considered to be the Company’s Chief Operating Decision Maker (“CODM”). The CEO periodically reviews information such as net sales and operating income (loss) for each operating segment to make business decisions. These operating performance measures do not include restructuring charges, net, share-based compensation expense and amortization of intangible assets, which are presented in the following financial information by operating segment as “other income (expense)”. Assets by operating segment are not presented since the Company does not present such data to the CODM.

Net sales and operating income (loss) for the Company’s operating segments for the three and six months ended September 30, 2015 and 2014 were as follows (in thousands): 
 
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
 
2015
 
2014
 
2015
 
2014
Net sales:
 
 

 
 

 
 

 
 

Peripherals
 
$
518,494

 
$
501,857

 
$
966,180

 
$
958,303

Video conferencing
 
21,368

 
28,454

 
44,002

 
54,211

 
 
$
539,862

 
$
530,311

 
$
1,010,182

 
$
1,012,514

Segment operating income (loss):
 
 

 
 

 
 

 
 

Peripherals
 
$
46,191

 
$
50,587

 
$
78,031

 
$
84,154

Video conferencing
 
(4,804
)
 
171

 
(9,205
)
 
(965
)
 
 
41,387

 
50,758

 
68,826

 
83,189

Other income (expense):
 
 

 
 

 
 

 
 

Restructuring charges, net
 
(8,696
)
 

 
(21,691
)
 

Share-based compensation
 
(6,508
)
 
(6,061
)
 
(13,250
)
 
(12,999
)
Amortization of intangibles
 
(494
)
 
(2,576
)
 
(1,226
)
 
(5,358
)
Interest income, net
 
192

 
355

 
456

 
613

Other expense, net
 
(780
)
 
(885
)
 
(1,901
)
 
(1,083
)
Income before income taxes
 
$
25,101

 
$
41,591

 
$
31,214

 
$
64,362


Restructuring charges for Peripherals and Video conferencing segments were $3.2 million and $5.5 million, respectively, for the three months ended September 30, 2015. Restructuring charges for Peripherals and Video conferencing segments were $14.7 million and $7.0 million, respectively, for the six months ended September 30, 2015.


19


Net sales by product categories and sales channels, excluding intercompany transactions, for the three and six months ended September 30, 2015 and 2014 were as follows (in thousands):
 
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
 
2015
 
2014
 
2015
 
2014
Peripherals:
 
 

 
 

 
 

 
 

Mobile Speakers
 
$
80,550

 
$
48,538

 
$
121,094

 
$
77,367

Gaming
 
67,624

 
47,506

 
111,294

 
94,382

Video Collaboration
 
20,059

 
13,808

 
41,235

 
29,033

Tablet & Other Accessories
 
18,549

 
28,158

 
37,358

 
59,874

Growth
 
186,782

 
138,010

 
310,981

 
260,656

Pointing Devices
 
124,668

 
127,693

 
241,653

 
240,735

Keyboards & Combos
 
102,098

 
105,677

 
207,927

 
211,166

Audio-PC & Wearables
 
46,342

 
57,191

 
92,041

 
105,739

PC Webcams
 
23,360

 
25,282

 
45,041

 
45,745

Home Control
 
12,610

 
18,776

 
22,864

 
31,108

Profit Maximization
 
309,078

 
334,619

 
609,526

 
634,493

Retail Strategic Sales
 
495,860

 
472,629

 
920,507

 
895,149

Non-Strategic
 
403

 
834

 
1,144

 
2,127

Retail
 
496,263

 
473,463

 
921,651

 
897,276

OEM
 
22,231

 
28,394

 
44,529

 
61,027

 
 
518,494

 
501,857

 
966,180

 
958,303

Video conferencing
 
21,368

 
28,454

 
44,002

 
54,211

 
 
$
539,862

 
$
530,311

 
$
1,010,182

 
$
1,012,514


Certain products within the retail product categories presented in prior periods have been reclassified to conform to the current periods' presentation.
 
Net sales to unaffiliated customers by geographic region (based on the customers’ location) for the three and six months ended September 30, 2015 and 2014 were as follows (in thousands):
 
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
 
2015
 
2014
 
2015
 
2014
Americas
 
$
239,742

 
$
226,091

 
$
466,429

 
$
437,622

EMEA
 
173,148

 
189,571

 
300,514

 
343,271

Asia Pacific
 
126,972

 
114,649

 
243,239

 
231,621

Total net sales
 
$
539,862

 
$
530,311

 
$
1,010,182

 
$
1,012,514

 
Sales are attributed to countries on the basis of the customers’ locations. The United States represented 37% and 36% of the Company’s total consolidated net sales for the three months ended September 30, 2015 and 2014, respectively. No other single country represented more than 10% of the Company’s total consolidated net sales during those periods. One customer group of the Company’s peripheral operating segment represented 15% and 17% of sales for the three months ended September 30, 2015 and 2014, respectively.

The United States represented 38% and 36% of the Company’s total consolidated net sales for the six months ended September 30, 2015 and 2014, respectively. No other single country represented more than 10% of the Company’s total consolidated net sales during those periods. One customer group of the Company’s peripheral operating segment represented 14% and 16% of sales for the six months ended September 30, 2015 and 2014, respectively.

Revenues from sales to customers in Switzerland, the Company’s home domicile, represented 2% of the Company’s total consolidated net sales for all the periods presented herein.
 

20


Long-lived assets by geographic region were as follows (in thousands):
 
 
September 30,
2015
 
March 31,
2015
Americas
 
$
46,990

 
$
48,527

EMEA
 
2,993

 
3,584

Asia Pacific
 
58,201

 
39,482

 
 
$
108,184

 
$
91,593

 
Long-lived assets in the United States and China were $46.8 million and $53.5 million as of September 30, 2015, respectively, and $48.3 million and $34.0 million at March 31, 2015, respectively. No other countries represented more than 10% of the Company’s total consolidated long-lived assets as of September 30 or March 31, 2015. Long-lived assets in Switzerland, the Company’s home domicile, were $1.3 million and $1.5 million at September 30 and March 31, 2015, respectively.
 
Note 12 — Restructuring

Restructuring Charges
 
During the first quarter of fiscal year 2016, the Company implemented a restructuring plan to exit the OEM business, reorganize Lifesize to sharpen its focus on its cloud-based offering, and streamline the Company's overall cost structure through product, overhead and infrastructure cost reductions with a targeted resource realignment. Restructuring charges incurred during the six months ended September 30, 2015 under this plan primarily consisted of severance and other ongoing and one-time termination benefits. Charges and other costs related to the workforce reduction and structure realignment are presented as restructuring charges in the Condensed Consolidated Statements of Operations. The Company expects to incur approximately $22 million to $25 million under this restructuring plan, including approximately $20.3 million to 23.3 million for cash severance and other personnel costs, and expects to substantially complete this restructuring within the next 6 months.

The following tables summarize restructuring related activities during the three and six months ended September 30, 2015:

 
 
Restructuring
 
 
Termination
Benefits
 
Lease Exit
Costs
 
Other
 
Total
Accrual balance at March 31, 2015
 
$

 
$
1,039

 
$

 
$
1,039

Charges, net
 
12,794

 

 
201

 
12,995

Cash payments
 
(4,675
)
 
(796
)
 
(151
)
 
(5,622
)
Accrual balance at June 30, 2015
 
$
8,119

 
$
243

 
$
50

 
$
8,412

Charges, net
 
8,566

 
38

 
92

 
8,696

Cash payments
 
(5,112
)
 
(122
)
 
(142
)
 
(5,376
)
Accrual balance at September 30, 2015
 
$
11,573

 
$
159

 
$

 
$
11,732



21


ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion in conjunction with the interim unaudited Condensed 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, strategic investments, addressing execution challenges, 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 in mature and emerging markets and the enterprise market, our expectations regarding economic conditions in international markets, including China, Russia and Ukraine, our expectations regarding trends in global economic conditions and consumer demand for PCs and mobile devices, tablets, gaming, audio, video and video conferencing, pointing devices, wearables, remotes and other accessories and computer devices and the interoperability of our products with such third party platforms, our expectations regarding the convergence of markets for computing devices and consumer electronics, our expectations regarding the growth of cloud-based services, our expected reduction in size of our product portfolio and dependence on new products, our competitive position and the effect of pricing, product, marketing and other initiatives by us and our competitors, the potential that our new products will overlap with our current products, our expectations regarding competition from well-established consumer electronics companies in existing and new markets, our expectations regarding the timing of our restructuring, its impact on our financial results and its composition, 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, changes in our planned divestitures, and the timing thereof, significant fluctuations in currency exchange rates and commodity prices, 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 future sales compared to actual sales, our expectations regarding share repurchases, dividend payments 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, remediation of our material weaknesses, our belief that our disclosure controls and procedures are effective at the reasonable assurance level, the results of any inquiry of the SEC and/or potential litigation related to the restatement of our consolidated financial statements and potential settlement thereof, our expectations regarding the impact of new accounting pronouncements on our operating results, and our ability to achieve and sustain 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,”, "seek", “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 and home-entertainment control. We have two reporting segments: peripherals and video conferencing.
 
Our peripherals segment encompasses the design, manufacturing and marketing of peripherals for PCs, tablets and other digital platforms. Within our peripherals segment, we classify our retail product categories as growth,

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profit maximization, and non-strategic. Our growth product categories are: Mobile Speakers, Gaming, Video Collaboration and Tablet & Other Accessories. Our profit maximization categories are: Pointing Devices, Keyboards & Combos, Audio-PC & Wearables, PC Webcams, and Home Control.
 
Our brand, portfolio management, product development and engineering teams in our peripherals segment are responsible for product strategy, technological innovation, product design and development and to bring our products to market.
 
Our design organization is responsible for developing and building the Logitech brand, consumer insights and digital marketing. Our regional retail sales and marketing activities are organized into three geographic areas: Americas (North and South America), EMEA (Europe, Middle East and Africa) and Asia Pacific (including, among other countries, China, Taiwan, Japan and Australia).
 
We sell our peripherals products to a network of retailers including direct sales to retailers and indirect sales through distributors. Our worldwide retail network includes wholesale distributors, consumer electronics retailers, mass merchandisers, specialty electronics, computers and telecommunications stores, value-added resellers and online merchants. Sales of our retail peripherals were 91% and 89% of our net sales for the six months ended September 30, 2015 and 2014, respectively. The large majority of our revenues have historically been derived from sales of our peripherals products for use by consumers. Sales to OEM customers were 4% and 6% of our net sales for the six months ended September 30, 2015 and 2014, respectively. In April 2015, we announced our intent to exit the OEM business. We plan to exit our OEM business by the end of December 2015.
 
Our video conferencing segment encompasses the cloud-based video conferencing solution and design, manufacturing and marketing of Lifesize branded video conferencing products, infrastructure and services for the enterprise, public sector and other small to medium business markets. Video conferencing products include scalable high-definition, or HD, 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, product development and product management. In April 2015, we started reorganizing Lifesize with the goal of de-emphasizing Lifesize’s legacy offerings more quickly to enable maximum traction with Lifesize Cloud. We plan to shrink our Lifesize business to grow the cloud opportunity faster. Also, as part of this restructuring, we are completing a structural separation of Lifesize from the rest of Logitech, which is designed to give us more flexibility with this business in the future. We sell our video conferencing products and services to distributors, value-added resellers, OEMs and, occasionally, direct enterprise customers. Sales of video conferencing products were 5% and 5% of our net sales in the six months ended September 30, 2015 and 2014, respectively.
 
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 consumer trends with new and improved product technologies, as well as leveraging the value of the Logitech and Lifesize brands from a competitive, channel partner and consumer experience perspective.
 
We believe that innovation, design, and product quality are important to gaining market acceptance and maintaining market leadership. 

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.
 

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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 us 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 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 us 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 new or material changes to the critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2015 that are of significance, or potential significance to the Company.

Summary of Financial Results
 
Our total net sales for the three months ended September 30, 2015 increased 2% compared to the three months ended September 30, 2014, due to stronger retail sales, partially offset by declines in OEM and video conferencing sales.

Our total net sales for the six months ended September 30, 2015 remained flat compared to the six months ended September 30, 2014.

Total retail sales increased 5% and units sold decreased 4% during the three months ended September 30, 2015, compared to the three months ended September 30, 2014. We experienced an increase in sales of 7% in the Americas region, an increase in sales of 18% in the Asia Pacific region, and a decrease in sales of 5% in the EMEA region.

Total retail sales increased 3% and units sold decreased 1%, during the six months ended September 30, 2015, compared to the six months ended September 30, 2014. We experienced an increase in sales of 8% in the Americas region, an increase in sales of 11% in the Asia Pacific region, and a decrease in sales of 9% in the EMEA region.

OEM net sales decreased 22% and 27%, in the three and six months ended months ended September 30, 2015, respectively, compared to the three and six months ended September 30, 2014. The decline was expected as we announced, in April 2015, our plan to exit the OEM business.
 
Sales of video conferencing products in the three and six months ended September 30, 2015 decreased 25% and 19%, respectively, compared to the three and six months ended September 30, 2014. Lifesize is in the process of transitioning its product portfolio to the Lifesize Cloud, a software-as-a-service (SaaS) offering launched in fiscal year 2015. While sales of the cloud offering are growing, they are not yet large enough to offset the combination of the short-term portfolio transition and soft market conditions for video conferencing infrastructure.
 
Our gross margin for the three months ended September 30, 2015 decreased to 34.5% from 38.6% for the three months ended September 30, 2014. Our gross margin for the six months ended September 30, 2015 decreased to 35.4% from 38.2% for the six months ended September 30, 2014. The decrease in gross margin primarily reflects the unfavorable currency impact, partially offset by product cost savings and price increases during the three and six months ended September 30, 2015.
 
Operating expenses for the three months ended September 30, 2015 were 29.7% of net sales, compared to 30.7% in the same period of the prior fiscal year. The decrease was primarily due to the savings from marketing and general and administration expenses, favorable currency impact, reduction related to the prior year's independent Audit committee investigation and related expenses, partially offset by the restructuring charges related to the restructuring plan announced in April 2015.


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Operating expenses for the six months ended September 30, 2015 were 32.2% of net sales, compared to 31.8% in the same period of the prior fiscal year. The increase was primarily due to restructuring charges related to the restructuring plan announced in April 2015, partially offset by the savings from marketing expenses, favorable currency impact, and reduction related to the prior year's independent Audit committee investigation and related expenses.
 
Net income for the three and six months ended September 30, 2015 was $18.1 million and $25.5 million, respectively, compared to net income of $36.1 million and $55.8 million in the three and six months ended September 30, 2014, respectively.

Given our global sales presence and the reporting of our financial results in U.S. Dollars, our financial results for the first half of fiscal year 2016 were affected by significant shifts in currency exchange rates compared to the first half of fiscal year 2015. See “Results of Operations” for information on the effect of currency exchange results on our net sales. If the U.S. Dollar remains at its current strong levels in comparison to other currencies, this will affect our results of operations in future periods as well.
 
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 several years, the PC market has changed dramatically and there continues to be significant weakness in the global market for new PCs. This weakness had a negative impact on our net sales in all of our PC-related categories with the exception of PC Gaming.

We believe our future growth will be determined by our ability to create innovative products in a timely manner across multiple digital platforms -in our growth categories such as tablets and smartphones, gaming, digital music devices and video collaboration, to offset the decline in our PC peripherals categories. The following discussion represents key trends specific to each of our two operating segments: peripherals and video conferencing.
Trends Specific to our Peripherals Segment
Mobile Speakers:    The mobile speaker market grew throughout fiscal year 2015 and the first half of fiscal year 2016 driven by growing consumption of music through mobile devices such as smartphones and tablets. This market growth, together with our investments in the UE brand, our introduction of new products and our ability to gain market share during fiscal year 2015 and the first half of fiscal year 2016, have driven our growth in Mobile Speakers.

Gaming:    The PC Gaming platform continues to show strong growth as online gaming and multi-platform gain greater popularity and gaming content becomes increasingly more demanding. We believe Logitech is well positioned to benefit from the PC Gaming market growth.

PC Peripherals (Pointing Devices, Keyboards & Combos, PC Webcams and Audio PC & Wearables):    Although the installed base of PC users is large, consumer demand for new PCs has declined in recent years, and we believe it will continue to decline in future years. As a consequence, consumer demand for PC peripherals is slowing, or in some cases declining. Our PC speakers sales are expected to decline as consumers migrate towards mobile speaker solutions such as UE Boom.

Enterprise Market:    We are continuing our efforts to create and sell products and services to enterprises, with our Video Collaboration products. For example, we have introduced the Logitech ConferenceCam Connect and PTZ Pro camera video collaboration products. Growing our enterprise peripherals business will continue to require investment in selected business-specific products, targeted sales force, product marketing, and sales channel development.

Tablets and Other Accessories:    Smaller mobile computing devices, such as tablets with touch interfaces, have created new markets and usage models for peripherals and accessories. We offer a variety of products for the Apple and Android platforms, including keyboard and folios that enhance the consumers mobile device experiences. We have also introduced keyboard folios for the Samsung Galaxy tablet. We have seen the market decline through fiscal year 2015 with continued declines in the first half of fiscal year 2016 for the iPad platform, which has impacted the sales of our tablet peripherals.


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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 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. As previously announced, we plan to exit the OEM business by the end of December 2015 as we see limited opportunities for profitable growth.

Trends in Non-Strategic Peripherals Product Categories:    We continue to evaluate our product offerings and exit those which no longer support our strategic direction.
Trends Specific to our Video Conferencing Segment
The overall video conferencing industry has experienced a slowdown in recent quarters. In addition, there has been an increase in the competitive environment. Lifesize is in the process of transitioning its product portfolio to Lifesize Cloud. While sales of this software-as-a-service offering are growing, they are not yet large enough to offset the combination of the short-term portfolio transition and soft market conditions for video conferencing infrastructure. Looking at this growth opportunity, in April 2015, we decided to reorganize Lifesize with the goal of de-emphasizing Lifesize’s legacy offerings more quickly to enable maximum traction with Lifesize Cloud. We plan to shrink our legacy Lifesize business to grow the cloud opportunity faster.
 
Non-GAAP Measures

We refer to our net sales excluding the impact of currency exchange rate fluctuations as "constant dollar" sales. Constant dollar sales is 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. Percentage of constant dollar sales growth is calculated by translating prior period sales in each local currency at the current period’s average exchange rate for that currency and comparing that to current period sales.  

Results of Operations
 
Net Sales
 
Net sales by channel for the three and six months ended September 30, 2015 and 2014 were as follows (Dollars in thousands):
 
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Retail
 
$
496,263

 
$
473,463

 
5
 %
 
$
921,651

 
$
897,276

 
3
 %
OEM
 
22,231

 
28,394

 
(22
)
 
44,529

 
61,027

 
(27
)
Video conferencing
 
21,368

 
28,454

 
(25
)
 
44,002

 
54,211

 
(19
)
Total net sales
 
$
539,862

 
$
530,311

 
2

 
$
1,010,182

 
$
1,012,514

 

 
Retail:
 
Our net retail sales in the three and six months ended September 30, 2015 increased 5% and 3%, respectively, compared to the same periods of the prior fiscal year. Sales increases in the Americas and Asia pacific regions, partially offset by a decrease in the EMEA region during the three and six months ended September 30, 2015. If currency exchange rates had been constant in the three and six months ended September 30, 2015 and 2014, our constant dollar retail sales would have increased by 12% and 10%, respectively.


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 OEM:
 
OEM net sales decreased 22% and 27% in the three and six months ended September 30, 2015, respectively, compared to the same periods of the prior fiscal year. Given our heightened focus on our growing Retail Strategic business, we plan to exit the OEM business. If currency exchange rates had been constant in the three and six months ended September 30, 2015 and 2014, our constant dollar OEM net sales would have decreased by 21% and 27%, respectively.

Video Conferencing:
 
Video conferencing net sales decreased 25% and 19%, respectively, for the three and six months ended September 30, 2015, compared to the same periods of the prior fiscal year. If currency exchange rates had been constant in the three and six months ended September 30, 2015 and 2014, our constant dollar video conferencing net sales would have decreased 25% and 19%, respectively. Lifesize is in the process of transitioning its product portfolio to the recently announced Lifesize Cloud, a software-as-a-service (SaaS) offering that provides an affordable, simple and scalable video conferencing solution with little to no need for information technology (IT) involvement. While sales of the cloud offering are growing, they are not yet large enough to offset the combination of the short-term portfolio transition and soft market conditions for video conferencing infrastructure. The global restructuring plan we announced in April 2015 also covers Lifesize business to align our refocus on Lifesize Cloud offering and transition from Lifesize legacy business.
 
Retail Sales by Region
 
The following table presents the change in retail sales by region for the three and six months ended September 30, 2015, compared to the three and six months ended September 30, 2014:
 
 
Three Months Ended
September 30, 2015
Change in Sales
 
Six Months Ended
September 30, 2015
Change in Sales
Americas
 
7
 %
 
8
 %
EMEA
 
(5
)
 
(9
)
Asia Pacific
 
18

 
11

 
Americas:
 
Retail sales in the Americas region increased 7% and 8%, respectively, during the three and six months ended September 30, 2015, compared to the same periods of the prior fiscal year. If currency exchange rates had been constant in the three and six months ended September 30, 2015 and 2014, our constant dollar retail sales would have increased 9% and 10%, respectively. We achieved sales increases in all strategic categories except Audio - PC & Wearables, Home Control, and Tablets & Other Accessories. This increase was led by over 70% growth in Mobile Speakers.
 
EMEA:
 
Retail sales in the EMEA region decreased 5% and 9%, respectively, during the three and six months ended September 30, 2015, compared to the same periods of the prior fiscal year. If currency exchange rates had been constant in the three and six months ended September 30, 2015 and 2014, our constant dollar retail sales would have increased 7% and 4%, respectively. The decline in sales was impacted by continued market weakness in Russia and Ukraine

Asia Pacific:
 
Retail sales in the Asia Pacific region increased 18% and 11% during the three and six months ended September 30, 2015, compared to the same periods of the prior fiscal year. If currency exchange rates had been constant in the three and six months ended September 30, 2015 and 2014, our constant dollar retail sales would have increased 26% and 18%, respectively. We achieved sales increases in Video Collaboration, Mobile Speakers, Gaming, Keyboards & Combos, and PC Webcams during the three and six months ended September 30, 2015.


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Net Sales by Product Category
 
Net sales by product category for the three and six months ended September 30, 2015 and 2014 were as follows (Dollars in thousands):
 
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Peripherals: