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EX-32.1 - EXHIBIT 32.1 - LOGITECH INTERNATIONAL SAexhibit321q3fy18.htm
EX-31.2 - EXHIBIT 31.2 - LOGITECH INTERNATIONAL SAexhibit312q3fy18.htm
EX-31.1 - EXHIBIT 31.1 - LOGITECH INTERNATIONAL SAexhibit311q3fy18.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 December 31, 2017
 
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.
EPFL - Quartier de l'Innovation
Daniel Borel Innovation Center
1015 Lausanne, 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, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 

1


 
 
 
 
 
 
 
 
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
 Emerging Growth Company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard s provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No  ý
 
As of January 12, 2018, there were 164,110,890 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.

The Company’s fiscal year ends on March 31. Interim quarters are generally thirteen-week periods, each ending on a Friday of each quarter. The third quarter of fiscal year 2018 ended on December 29, 2017. The same quarter in the prior fiscal year ended on December 30, 2016. For purposes of presentation, the Company has indicated its quarterly periods ending on the last day of the calendar quarter.


      

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
December 31,
 
Nine Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Net sales
 
$
812,021

 
$
666,707

 
$
1,974,437

 
$
1,710,875

Cost of goods sold
 
533,631

 
418,015

 
1,271,127

 
1,083,908

Amortization of intangible assets and purchase accounting effect on inventory
 
2,789

 
1,929

 
6,304

 
4,705

Gross profit
 
275,601

 
246,763

 
697,006

 
622,262

 
 
 
 
 
 
 
 
 
Operating expenses:
 
 

 
 

 
 

 
 

Marketing and selling
 
116,153

 
102,036

 
325,917

 
279,700

Research and development
 
34,398

 
32,284

 
106,144

 
96,867

General and administrative
 
22,291

 
24,598

 
72,850

 
75,543

Amortization of intangible assets and acquisition-related costs
 
2,496

 
1,494

 
6,377

 
4,535

Change in fair value of contingent consideration for business acquisition
 

 
(9,925
)
 
(4,908
)
 
(9,925
)
Total operating expenses
 
175,338

 
150,487

 
506,380

 
446,720

Operating income
 
100,263

 
96,276

 
190,626

 
175,542

Interest income
 
874

 
202

 
3,097

 
263

Other income (expense), net
 
(324
)
 
2,634

 
(894
)
 
943

Income before income taxes
 
100,813

 
99,112

 
192,829

 
176,748

Provision for income taxes
 
20,040

 
1,647

 
18,691

 
10,297

Net income
 
$
80,773

 
$
97,465

 
$
174,138

 
$
166,451


 
 
 
 
 
 
 
 
Net income per share:
 
 

 
 

 
 

 
 

Basic
 
$
0.49

 
$
0.60

 
$
1.06

 
$
1.03

Diluted
 
$
0.48

 
$
0.59

 
$
1.03

 
$
1.01

 
 
 
 
 
 
 
 
 
Weighted average shares used to compute net income per share:
 
 

 
 

 
 

 
 

Basic
 
164,248

 
161,977

 
163,924

 
162,070

Diluted
 
169,079

 
165,901

 
168,832

 
165,211

 
 
 
 
 
 
 
 
 
Cash dividend per share
 
$

 
$

 
$
0.63

 
$
0.57

 
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
December 31,
 
Nine Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Net income
 
$
80,773

 
$
97,465

 
$
174,138

 
$
166,451

Other comprehensive income (loss):
 
 

 
 

 
 
 
 
Currency translation gain (loss), net of taxes
 
1,535

 
(7,968
)
 
5,176

 
(7,714
)
Defined benefit pension plans:
 
 

 
 

 


 
 
Net gain and prior service costs, net of taxes
 
479

 
1,193

 
859

 
1,520

Amortization included in operating expenses
 
51

 
424

 
153

 
1,289

Hedging gain (loss):
 
 

 
 

 
 
 
 
Deferred hedging gain (loss), net of taxes
 
(677
)
 
2,497

 
(6,026
)
 
4,026

Reclassification of hedging loss (gain) included in cost of goods sold
 
2,248

 
(463
)
 
5,377

 
432

Other comprehensive income (loss):
 
3,636

 
(4,317
)
 
5,539

 
(447
)
Total comprehensive income
 
$
84,409

 
$
93,148

 
$
179,677

 
$
166,004

 
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)
(unaudited)
 
 
December 31,
2017
 
March 31,
2017
Assets
 


 
 
Current assets:
 
 

 
 

Cash and cash equivalents
 
$
564,888

 
$
547,533

Accounts receivable, net
 
351,753

 
185,179

Inventories
 
278,979

 
253,401

Other current assets
 
57,530

 
41,732

Total current assets
 
1,253,150

 
1,027,845

Non-current assets:
 
 

 
 

Property, plant and equipment, net
 
86,901

 
85,408

Goodwill
 
275,563

 
249,741

Other intangible assets, net
 
92,371

 
47,564

Other assets
 
122,839

 
88,119

Total assets
 
$
1,830,824

 
$
1,498,677

Liabilities and Shareholders’ Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
429,119

 
$
274,805

Accrued and other current liabilities
 
278,055

 
232,273

Total current liabilities
 
707,174

 
507,078

Non-current liabilities:
 
 

 
 

Income taxes payable
 
34,410

 
51,797

Other non-current liabilities
 
82,004

 
83,691

Total liabilities
 
823,588

 
642,566

Commitments and contingencies (Note 11)
 


 


Shareholders’ equity:
 
 

 
 

Registered shares, CHF 0.25 par value:
 
30,148

 
30,148

Issued and authorized shares — 173,106 at December 31 and March 31, 2017
 


 


Conditionally authorized shares — 50,000 at December 31 and March 31, 2017
 


 


Additional paid-in capital
 
38,902

 
26,596

Shares in treasury, at cost — 8,899 at December 31, 2017 and 10,727 at March 31, 2017
 
(164,559
)
 
(174,037
)
Retained earnings
 
1,197,912

 
1,074,110

Accumulated other comprehensive loss
 
(95,167
)
 
(100,706
)
Total shareholders’ equity
 
1,007,236

 
856,111

Total liabilities and shareholders’ equity
 
$
1,830,824

 
$
1,498,677

 
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)
 
 
Nine Months Ended
December 31,
 
 
2017
 
2016
Cash flows from operating activities:
 
 

 
 

Net income
 
$
174,138

 
$
166,451

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

 
 

Depreciation
 
30,218

 
32,479

Amortization of intangible assets
 
10,653

 
6,618

Gain on investments in privately held companies
 
(550
)
 
(547
)
Loss on disposal of property, plant and equipment
 
7

 

Share-based compensation expense
 
33,239

 
26,354

Deferred income taxes
 
6,728

 
(473
)
Change in fair value of contingent consideration for business acquisition
 
(4,908
)
 
(9,925
)
Changes in assets and liabilities, net of acquisitions:
 
 

 
 

Accounts receivable, net
 
(164,028
)
 
(139,414
)
Inventories
 
(5,692
)
 
(15,194
)
Other assets
 
(18,953
)
 
(6,346
)
Accounts payable
 
151,711

 
109,095

Accrued and other liabilities
 
43,521

 
71,549

Net cash provided by operating activities
 
256,084

 
240,647

Cash flows from investing activities:
 
 

 
 

Purchases of property, plant and equipment
 
(27,593
)
 
(23,372
)
Investment in privately held companies
 
(880
)
 
(640
)
Acquisitions, net of cash acquired
 
(88,323
)
 
(66,987
)
Proceeds from return of investment in privately held companies
 
237

 

Changes in restricted cash
 

 
715

Purchases of short-term investments
 
(6,789
)
 

Sales of short-term investments
 
6,789

 

Purchases of trading investments
 
(2,842
)
 
(5,868
)
Proceeds from sales of trading investments
 
3,209

 
5,912

Net cash used in investing activities
 
(116,192
)
 
(90,240
)
Cash flows from financing activities:
 
 

 
 

Payment of cash dividends
 
(104,248
)
 
(93,093
)
Payment of contingent consideration for business acquisition
 
(5,000
)
 

Purchases of registered shares
 
(20,408
)
 
(63,764
)
Proceeds from exercises of stock options and purchase rights
 
30,947

 
20,355

Tax withholdings related to net share settlements of restricted stock units
 
(25,505
)
 
(13,054
)
Net cash used in financing activities
 
(124,214
)
 
(149,556
)
Effect of exchange rate changes on cash and cash equivalents
 
1,677

 
(6,468
)
Net increase (decrease) in cash and cash equivalents
 
17,355

 
(5,617
)
Cash and cash equivalents, beginning of the period
 
547,533

 
519,195

Cash and cash equivalents, end of the period
 
$
564,888

 
$
513,578

Supplementary Cash Flow Disclosures:
 
 
 
 
Non-cash investing activities:
 
 

 
 

Property, plant and equipment purchased during the period and included in period end liability accounts
 
$
5,779

 
$
4,044

Unpaid purchase price for business acquisition
 
$
1,000

 
$

 
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 Paid-in Capital
 
 
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
Total Shareholders’ Equity
 
Registered Shares
 
 
Treasury Shares
 
Retained Earnings
 
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
March 31, 2016
173,106

 
$
30,148

 
$
6,616

 
10,697

 
$
(128,407
)
 
$
963,576

 
$
(111,985
)
 
$
759,948

Total comprehensive income

 

 

 

 

 
166,451

 
(447
)
 
166,004

Purchases of registered shares

 

 

 
3,321

 
(63,764
)
 

 

 
(63,764
)
Tax effects from share-based awards

 

 
(1,463
)
 

 

 

 

 
(1,463
)
Sales of shares upon exercise of stock options and purchase rights

 

 
6,435

 
(1,524
)
 
13,920

 

 

 
20,355

Issuance of shares upon vesting of restricted stock units

 

 
(21,714
)
 
(1,196
)
 
10,909

 
(2,249
)
 

 
(13,054
)
Share-based compensation

 

 
26,462

 

 

 

 

 
26,462

Cash dividends

 

 

 

 

 
(93,093
)
 

 
(93,093
)
December 31, 2016
173,106

 
$
30,148

 
$
16,336

 
11,298

 
$
(167,342
)
 
$
1,034,685

 
$
(112,432
)
 
$
801,395

 
 
 
 
 
 
Additional Paid-in Capital
 
 
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
Total Shareholders’ Equity
 
Registered Shares
 
 
Treasury Shares
 
Retained Earnings
 
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
March 31, 2017
173,106

 
$
30,148

 
$
26,596

 
10,727

 
$
(174,037
)
 
$
1,074,110

 
$
(100,706
)
 
$
856,111

Cumulative effect of adoption of new accounting standard (Note 1)

 

 
3,293

 

 

 
53,912

 

 
57,205

Total comprehensive income

 

 

 

 

 
174,138

 
5,539

 
179,677

Purchases of registered shares

 

 

 
581

 
(20,408
)
 

 

 
(20,408
)
Sales of shares upon exercise of stock options and purchase rights

 

 
15,958

 
(1,126
)
 
14,989

 

 

 
30,947

Issuance of shares upon vesting of restricted stock units

 

 
(40,402
)
 
(1,283
)
 
14,897

 

 

 
(25,505
)
Share-based compensation

 

 
33,457

 

 

 

 

 
33,457

Cash dividends

 

 

 


 


 
(104,248
)
 

 
(104,248
)
December 31, 2017
173,106

 
$
30,148

 
$
38,902

 
8,899

 
$
(164,559
)
 
$
1,197,912

 
$
(95,167
)
 
$
1,007,236

 
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 — The Company and Summary of Significant Accounting Policies and Estimates

The Company
 
Logitech International S.A, together with its consolidated subsidiaries, ("Logitech" or the "Company") designs, manufactures and markets products that allow people to connect through music, gaming, video, computing, and other digital platforms.
The Company sells its products to a broad network of domestic and international customers, including direct sales to retailers and indirect sales through distributors.
Logitech was founded in Switzerland in 1981 and Logitech International S.A. has been the parent holding company of Logitech since 1988. Logitech International S.A. is a Swiss holding company with its registered office in Apples, Switzerland and headquarters in Lausanne, Switzerland, which conducts its business through subsidiaries in the Americas, Europe, Middle East and Africa ("EMEA") and Asia Pacific. Shares of Logitech International S.A. are listed on both the SIX Swiss Exchange under the trading symbol LOGN and the Nasdaq Global Select Market under the trading symbol LOGI.

Business Acquisitions

In August 2017, the Company acquired the ASTRO Gaming business. In November 2017, the Company also made a small acquisition. See "Note 2 - Business Acquisitions" for more information.

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, 2017, included in its Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on May 26, 2017. 

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, comprehensive income, financial position, cash flows and changes in shareholders' equity for the periods presented. Operating results for the three and nine months ended December 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2018, or any future periods.

Reclassification

Certain amounts from the comparative period in the accompanying unaudited condensed consolidated financial statements have been reclassified to conform to the condensed consolidated financial statement presentation as of and for the three and nine months ended December 31, 2017.

Changes in Significant Accounting Policies
 
Other than the recent accounting pronouncements adopted and discussed below, there have been no substantial changes in the Company’s significant accounting policies during the nine months ended December 31, 2017 compared with the significant accounting policies described in its Annual Report on Form 10-K for the fiscal year ended March 31, 2017.
 

9


Use of Estimates
 
The preparation of financial statements in conformity with 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. Significant estimates and assumptions made by management involve the fair value of goodwill, intangible assets acquired from business acquisitions, warranty liabilities, accruals for customer programs and related breakage when appropriate, sales return reserves, allowance for doubtful accounts, inventory valuation, contingent consideration from business acquisitions and periodical reassessment of its fair value, share-based compensation expense, 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 Adopted

In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-11, "Simplifying the Measurement of Inventory (Topic 330)" ("ASU 2015-11"). Topic 330 previously required 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. ASU 2015-11 requires an entity to measure inventory at the lower of cost or net realizable value and is effective for fiscal years beginning after December 15, 2016. The Company adopted this standard effective April 1, 2017, which has not had a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 simplifies several aspects of the accounting for share-based payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees' maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for the excess tax benefits and employee taxes paid when an employer withholds shares for tax withholding purposes. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016. The Company adopted this standard effective April 1, 2017. Changes to the statements of cash flows related to the classification of excess tax benefits were implemented on a retroactive basis and accordingly, to conform to the current year presentation, the Company reclassified $6.4 million of excess tax benefits previously reported under financing activities to operating activities for the nine months ended December 31, 2016 on its condensed consolidated statements of cash flows. Under the new standard, the Company accounts for forfeitures as they occur. The change in accounting for forfeitures resulted in a cumulative-effect adjustment to decrease retained earnings as of March 31, 2017 by $3.3 million. The Company further recognized a cumulative-effect adjustment to increase retained earnings as of March 31, 2017 by $57.2 million upon adoption of the new guidance to account for gross excess tax benefits of $75.2 million that were previously not recognized because the related tax deduction had not reduced current income taxes, offset by a valuation allowance of $18.0 million to reduce the deferred tax assets to amounts that are more likely than not to be realized.

In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment (Topic
350)" ("ASU 2017-04"), which removes Step 2 from the goodwill impairment test. ASU 2017-04 is effective for annual or any interim goodwill impairments in annual periods beginning December 15, 2019, with early adoption permitted. The Company adopted this standard effective April 1, 2017, which has not had a material impact on its consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of
Modification Accounting" ("ASU 2017-09"), which provides guidance about which changes to the terms or conditions
of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is
effective for annual periods beginning after December 15, 2017, with early adoption permitted, including adoption in any interim period for which financial statements have not yet been issued. The Company adopted this standard effective April 1, 2017, which has not had a material impact on its consolidated financial statements.


10


Recent Accounting Pronouncements to be Adopted

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09") which supersedes the revenue recognition requirements under Accounting Standard Codification ("ASC") 605, Revenue Recognition. ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. 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 which the entity expects to be entitled in exchange for those goods or services. The new standard requires reporting companies to disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard will become effective for the Company on April 1, 2018. The Company will adopt Topic 606 utilizing the modified retrospective transition method, which recognizes the cumulative effect of initially applying Topic 606 as an adjustment to retained earnings at the adoption date. The Company continues to evaluate the impact this new standard will have on the current contracts with customers and the accruals of various sales and marketing programs the Company offers and has identified the following areas that are impacted:

Accrual for cooperative marketing arrangements and customer incentive programs: At the end of every quarter, the Company estimates accruals for cooperative marketing arrangements and customer incentive programs based on negotiated terms, consideration of historical experience, and inventory levels in the channel. Under ASC 605, these programs are recognized as a reduction of revenue at the later of when the related revenue is recognized or when the program is offered to the customer. Under Topic 606, these programs qualify as variable consideration and are recorded as a reduction of the transaction price at the contract inception based on the expected value method. Certain of these programs will reflect such change which will lead to the recognition of the accruals sooner as compared to the guidance in ASC 605.

Breakage estimates: The Company applies a breakage rate to reduce its accruals of customer incentive, cooperative marketing, and pricing programs based on the estimated percentage of these customer programs that will not be claimed or earned. The breakage rate is applied when the Company is able to reasonably estimate the amounts that will be ultimately claimed by customers, which generally occurs up to one quarter after the program is accrued. Under Topic 606, variable consideration must be estimated at the outset of the arrangement, subject to the constraint guidance to ensure that a significant revenue reversal will not occur. As a result, upon adoption of Topic 606, revenue will be recognized sooner as compared to the existing revenue guidance.

The Company expects to complete its analysis of Topic 606 and reasonably estimate the impact to its consolidated financial statements when its Annual Report on Form 10-K for the fiscal year ending March 31, 2018 is filed. The Company will continue to monitor additional changes, modifications, clarifications or interpretations being undertaken by the FASB, which may impact its current conclusions. It is possible that during the fourth quarter of fiscal year 2018, the Company may identify additional areas which may result in material impact on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments-Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10)" ("ASU 2016-01"). ASU 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted. The Company does not believe that the adoption of ASU 2016-01 will have a material impact on its consolidated financial statements and will adopt this standard effective April 1, 2018.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), which requires the recognition of lease assets and lease liabilities arising from operating leases in the statement of financial position. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the full effect that ASU 2016-02 will have on its consolidated financial statements and will adopt this standard effective April 1, 2019.

In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory" ("ASU 2016-16"), which eliminates the deferral of income tax effects of intra-entity asset transfers until the transferred asset is sold to an unrelated party or recovered through use. However, this standard does not apply to intra-entity transfer of inventory.  ASU 2016-16 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted but only in the first interim period of an annual period. The cumulative effect of change on equity upon adoption is to be quantified under the modified retrospective approach and recorded as of the beginning of the period of adoption. 

11


The Company does not expect the adoption of ASU 2016-16 will have a material impact on its consolidated financial statements and will adopt this standard effective April 1, 2018.

In December 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash" ("ASU 2016-18"), which requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted. The adoption of this standard should be applied using a retrospective transition method to each period presented. The Company does not expect that the adoption of ASU 2016-18 will have a material impact on its consolidated financial statements and will adopt this standard effective April 1, 2018.

In January 2017, the FASB issued ASU 2017-01, "Business Combination (Topic 805): Clarifying the Definition of a Business" ("ASU 2017-01"), which changes the definition of a business to assist with evaluating when a set of transferred assets and activities is a business. ASU 2017-01 is effective for annual or any interim periods in annual periods beginning after December 15, 2017, with early adoption permitted. The Company does not expect that the adoption of ASU 2017-01 will have a material impact on its consolidated financial statements and will adopt this standard effective April 1, 2018.

In March 2017, the FASB issued ASU 2017-07, "Compensation-Retirement Benefit (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" ("ASU 2017-07"), which requires that the Company disaggregate the service cost component from the other components of net benefit cost, and also provides guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted. The Company does not expect that the adoption of ASU 2017-07 will have a material impact on its consolidated financial statements and will adopt this standard effective April 1, 2018.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"), which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and simplifies the application of the hedge accounting guidance. ASU 2017-12 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. The Company does not expect that the adoption of ASU 2017-12 will have a material impact on its consolidated financial statements and will adopt this standard effective April 1, 2019.

Note 2 — Business Acquisitions

ASTRO Acquisition

On August 11, 2017 (the "Acquisition Date"), the Company acquired certain assets and liabilities constituting the ASTRO Gaming business ("ASTRO") from AG Acquisition Corporation for a purchase price of $85.0 million in cash (the "ASTRO Acquisition"). ASTRO is a leading console gaming accessory brand with a history of producing award-winning headsets for professional gamers and enthusiasts. ASTRO provides a strong growth platform in the console gaming accessories market.


12


ASTRO meets the definition of a business, and its acquisition is accounted for using the acquisition method. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the Acquisition Date (in thousands):
 
 
Estimated Fair Value
Inventories
 
$
10,331

Property, plant and equipment
 
2,760

Intangible assets
 
52,520

Other assets
 
605

Total identifiable assets acquired
 
$
66,216

Accrued liabilities
 
(2,982
)
Net identifiable assets acquired
 
$
63,234

Goodwill
 
21,766

Net assets acquired
 
$
85,000


Goodwill related to the transaction is primarily attributable to opportunities and economies of scale from combining the operations and technologies of Logitech and ASTRO. Goodwill is expected to be deductible for tax purposes.

The fair value of the inventory acquired is estimated at its net realizable value, which uses the estimated selling prices, less the cost of disposal and a reasonable profit allowance for the selling efforts. The difference between the fair value of the inventories and the amount recorded by ASTRO immediately before the acquisition date is $0.8 million, which will be recognized in "amortization of intangibles assets and purchase accounting effect on inventory" in the condensed consolidated statements of operations upon the sale of the acquired inventory.

The Company included ASTRO's estimated fair value of assets acquired and liabilities assumed in its condensed consolidated balance sheets beginning on the Acquisition Date. The results of operations for ASTRO for this partial quarter have been included in, but are not material to, the Company's condensed consolidated statements of operations from the Acquisition Date. Pro forma results of operations for the ASTRO Acquisition have not been presented because they are not material to the condensed consolidated statements of operations. 

The following table summarizes the estimated fair values and estimated useful lives of the components of identifiable intangible assets acquired as of the Acquisition Date (Dollars in thousands):
 
Fair Value
 
Estimated Useful Life (years)
Developed technology
$
12,540

 
4.0
Customer relationships
33,100

 
8.0
Trade name
6,880

 
6.0
Total intangible assets acquired
$
52,520

 
6.8

Intangible assets acquired as a result of the ASTRO Acquisition are being amortized over their estimated useful lives using the straight-line method of amortization. Amortization of acquired developed technology of $0.8 million and $1.2 million, respectively, during the three and nine months ended December 31, 2017 is included in "amortization of intangible assets and purchase accounting effect of inventory" in the condensed consolidated statements of operations. Amortization of the acquired customer relationships and trade name of $1.3 million and $2.0 million, respectively, during the three and nine months ended December 31, 2017 is included in "amortization of intangible assets and acquisition-related costs" in the condensed consolidated statements of operations.

Developed technology relates to existing ASTRO gaming headset products. The economic useful life was determined based on the technology cycle related to developed technology of existing products, as well as the cash flows anticipated over the forecasted periods.


13


Customer relationships represent the fair value of future projected revenue that will be derived from sales of products to existing customers of ASTRO. The economic useful life was determined based on historical customer turnover rates and industry benchmarks.

Trade name relates to the “ASTRO” trade name. The economic useful life was determined based on the expected life of the trade name and the cash flows anticipated over the forecasted periods.

The fair values of developed technology and trade name were estimated using the relief-from-royalty method, an income approach (Level 3), which estimates the cost savings that accrue to the owner of the intangible assets that would otherwise be payable as royalties or license fees on revenues earned through the use of the asset. A royalty rate is applied to the projected revenues associated with the intangible assets to determine the amount of savings, which is then discounted to determine the fair value. The developed technology and trade name were valued using royalty rates of 10% and 2%, respectively, and both were discounted at a rate of 13%.

The fair value of customer relationships was estimated using the excess earnings method, an income approach (Level 3), which converts projected revenues and costs into cash flows. To reflect the fact that certain other assets contributed to the cash flows generated, the returns for these contributory assets were removed to arrive at estimated cash flows solely attributable to the customer relationships, which were discounted at a rate of 13%.

The Company believes the value of purchased intangible assets recorded above represents the fair values of, and approximates the amounts a market participant would pay for, these intangible assets as of the Acquisition Date.

The Company incurred acquisition-related costs for the ASTRO Acquisition of approximately $0.3 million and $1.3 million for the three and nine months ended December 31, 2017, respectively. The acquisition-related costs are included in "amortization of intangible assets and acquisition-related costs" in the condensed consolidated statements of operations.

For the three and nine months ended December 31, 2017, ASTRO contributed $33.5 million and $36.2 million to net sales, respectively, representing approximately 4% of the net sales of the Company for the three-month period and 2% for the nine-month period.

In November 2017, the Company also made a small acquisition for a total consideration of $5.2 million, including cash acquired of $0.9 million. $1.0 million of the total consideration was retained by the Company for the purpose of ensuring the seller's representations, warranties and covenants.

Note 3 — Net Income Per Share
 
The computations of basic and diluted net income per share for the Company were as follows (in thousands, except per share amounts):
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Net Income
 
$
80,773

 
$
97,465

 
$
174,138

 
$
166,451

 
 
 
 
 
 
 
 
 
Shares used in net income per share computation:
 
 

 
 

 
 

 
 

Weighted average shares outstanding - basic
 
164,248

 
161,977

 
163,924

 
162,070

Effect of potentially dilutive equivalent shares
 
4,831

 
3,924

 
4,908

 
3,141

Weighted average shares outstanding - diluted
 
169,079

 
165,901

 
168,832

 
165,211

 
 
 
 
 
 
 
 
 
Net income per share:
 
 

 
 

 
 

 
 

Basic
 
$
0.49

 
$
0.60

 
$
1.06

 
$
1.03

Diluted
 
$
0.48

 
$
0.59

 
$
1.03

 
$
1.01

 

14


Share equivalents attributable to outstanding stock options and restricted stock units of 0.5 million and 1.7 million for the three months ended December 31, 2017 and 2016, respectively, and 1.1 million and 2.8 million for the nine months ended December 31, 2017 and 2016, respectively, were anti-dilutive and excluded from the calculation of diluted net income per share.
 
Note 4 — Employee Benefit Plans
 
Employee Share Purchase Plans and Stock Incentive Plans
 
As of December 31, 2017, 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), each as amended.

The following table summarizes the share-based compensation expense and total income tax provision (benefit) recognized for share-based awards for the three and nine months ended December 31, 2017 and 2016 (in thousands):
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Cost of goods sold
 
$
960

 
$
617

 
$
2,762

 
$
1,930

Marketing and selling
 
4,624

 
4,006

 
13,348

 
10,687

Research and development
 
1,621

 
1,176

 
4,797

 
3,007

General and administrative
 
4,351

 
3,588

 
12,332

 
10,730

Total share-based compensation expense
 
11,556

 
9,387

 
33,239

 
26,354

Income tax provision (benefit)
 
3,038

 
(2,391
)
 
(11,921
)
 
(6,092
)
Total share-based compensation expense, net of income tax
 
$
14,594

 
$
6,996

 
$
21,318

 
$
20,262


The income tax benefit in the respective period primarily consists of tax benefit related to the share-based compensation expense for the period and direct tax benefit realized, including net excess tax benefits recognized from share-based awards vested or exercised during the period. The income tax benefit is reduced by income tax provision resulting from remeasurement of applicable federal deferred tax assets due to the enactment of H.R.1, also known as the "Tax Cuts and Jobs Act" ("the Tax Act") in the United States on December 22, 2017. See "Note 5 - Income Taxes" for more information.

As of December 31, 2017 and 2016, the Company capitalized $0.8 million and $0.6 million of share-based compensation expense to inventory, respectively.
 
Defined Benefit Plans
 
Certain of the Company’s subsidiaries sponsor defined benefit pension plans or non-retirement post-employment benefits covering substantially all of their employees. Benefits are provided based on employees’ years of service and earnings, or in accordance with applicable employee benefit regulations. The Company’s practice is to fund amounts sufficient to meet the requirements set forth in the applicable employee benefit and tax regulations. The cost recorded of $2.3 million and $2.8 million for the three months ended December 31, 2017 and 2016, respectively, and $6.9 million and $8.4 million for the nine months ended December 31, 2017 and 2016, respectively, was primarily related to service costs.
 
Note 5 — 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 December 31, 2017 was $20.0 million based on an effective income tax rate of 19.9% of pre-tax income, compared to an income tax provision of $1.6 million based on an effective income tax rate of 1.7% of pre-tax income for the three months ended December 31, 2016. The income

15


tax provision for the nine months ended December 31, 2017 was $18.7 million based on an effective income tax rate of 9.7% of pre-tax income, compared to an income tax provision of $10.3 million based on an effective income tax rate of 5.8% for the nine months ended December 31, 2016

On December 22, 2017, the Tax Act was signed into law in the United States. The Tax Act introduced a broad range of tax reform measures that significantly change the federal income tax regime. Among other things, the Tax Act permanently reduces the corporate income tax rate from 35% to 21% effective for tax years including or commencing on January 1, 2018, repeals corporate alternative minimum tax, limits various business deductions, modifies the maximum deduction of net operating loss with no carryback but indefinite carryforward provision and includes various international tax provisions. Many provisions in the Tax Act are generally effective in tax years beginning after December 31, 2017.

ASC 740 requires recognition of the effects of tax law changes in the period of enactment. Notwithstanding that the effective date of the Tax Act for most provisions is January 1, 2018, such effects must be recognized in December 2017 financial statements. In accordance to the new tax legislation, the Company applied a blended federal income tax rate of 31.6% to its operations in the United States effective at the beginning of the fiscal year based on a pro-rated percentage of the number of days before and after January 1, 2018. Furthermore, the Company recorded an income tax charge of $19.9 million from the estimated remeasurement of federal deferred tax assets and liabilities as of December 31, 2017 to reflect the effects of the enacted changes in tax rate and an income tax benefit of $4.1 million from assessment of valuation allowance against tax credits due to changes in tax laws. These amounts account for the change in the effective income tax rate in the three months ended December 31, 2017 compared to the same period of the prior fiscal year.

The estimated remeasurement of deferred tax assets and liabilities was based on tax rates generally at 31.6% and 21% depending on the timing of when the individual deferred tax assets and liabilities are expected to recover or settle in the future. The net provisional charge from deferred tax remeasurement and assessment of valuation allowance is based on currently available information and interpretations which are continuing to evolve. The Company continues to analyze additional information and guidance related to certain aspects of the Tax Act, such as limitations on the deductibility of executive compensation, conformity or changes by state taxing authorities in response to the Tax Act, and the final determination of the net deferred tax assets subject to the remeasurement and related impacts to the assessment of valuation allowance. The prospects of supplemental legislation or regulatory processes to address questions that arise because of the Tax Act, or evolving technical interpretations of the tax law, may cause the final impact from the Tax Act to differ from the recorded amounts. The Company continues to appropriately refine such amounts within the measurement period allowed by Staff Accounting Bulletin (“SAB”) No.118, which will be completed no later than the third quarter of fiscal year 2019.

The change in the effective income tax rate in the nine months ended December 31, 2017 compared to the same period of the prior fiscal year is primarily due to the recognition of excess tax benefits of $10.8 million after adoption of ASU 2016-09 and income tax benefit from the reversal of uncertain tax positions from the expiration of statutes of limitations are largely offset by income tax provision from the remeasurement of deferred tax assets and liabilities in the third quarter. In the three and nine months ended December 31, 2017, there was a discrete income tax benefit of $6.0 million and $7.9 million, respectively, from the reversal of uncertain tax positions from the expiration of statutes of limitations. In the same periods ended December 31, 2016, the income tax benefit from the reversal of uncertain tax positions from the expiration of statutes of limitations was $9.4 million and $11.1 million, respectively.

As of December 31 and March 31, 2017, the total amount of unrecognized tax benefits due to uncertain tax positions was $67.3 million and $63.7 million, respectively, all of which would affect the effective income tax rate if recognized.
 
The Company had $34.4 million in non-current income taxes payable and $0.1 million in current income taxes payable, including interest and penalties, related to its income tax liability for uncertain tax positions as of December 31, 2017, compared to $51.8 million in non-current income taxes payable and $1.5 million in current income taxes payable as of March 31, 2017. The Company applied to a settlement program and paid $1.9 million to the tax authorities in a foreign jurisdiction in the third quarter of fiscal year 2018.
 
The Company recognizes interest and penalties related to unrecognized tax positions in income tax expense. As of December 31 and March 31, 2017, the Company had $2.1 million and $3.0 million, respectively, of accrued interest and penalties related to uncertain tax positions.

16


 
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 2018, the Company continues to review its tax positions and provide for or reverse unrecognized tax benefits as issues arise. During the next twelve 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 may decrease by as much as $21.4 million from the lapse of the statutes of limitations in various jurisdictions during the next twelve months.

Note 6 — Balance Sheet Components
 
The following table presents the components of certain balance sheet asset amounts as of December 31 and March 31, 2017 (in thousands): 
 
 
December 31,
2017
 
March 31,
2017
Accounts receivable, net:
 
 

 
 

Accounts receivable
 
$
668,811

 
$
395,754

Allowance for doubtful accounts
 
(233
)
 
(607
)
Allowance for sales returns
 
(25,008
)
 
(18,800
)
Allowance for cooperative marketing arrangements *
 
(44,033
)
 
(28,022
)
Allowance for customer incentive programs *
 
(102,974
)
 
(60,857
)
Allowance for pricing programs *
 
(144,810
)
 
(102,289
)
 
 
$
351,753

 
$
185,179

Inventories:
 
 

 
 

Raw materials
 
$
35,752

 
$
30,582

Finished goods
 
243,227

 
222,819

 
 
$
278,979

 
$
253,401

Other current assets:
 
 

 
 

Value-added tax receivables
 
$
29,620

 
$
23,132

Prepaid expenses and other assets
 
27,910

 
18,600

 
 
$
57,530

 
$
41,732

Property, plant and equipment, net:
 
 

 
 

Property, plant and equipment at cost
 
$
362,809

 
$
348,760

Less: accumulated depreciation and amortization
 
(275,908
)
 
(263,352
)
 
 
$
86,901

 
$
85,408

Other assets:
 
 

 
 

Deferred tax assets **
 
$
86,518

 
$
57,303

Trading investments for deferred compensation plan
 
17,998

 
15,043

Investments in privately held companies
 
11,969

 
10,776

Other assets
 
6,354

 
4,997

 
 
$
122,839

 
$
88,119


17



The following table presents the components of certain balance sheet liability amounts as of December 31 and March 31, 2017 (in thousands): 
 
 
December 31,
2017
 
March 31,
2017
Accrued and other current liabilities:
 
 

 
 

Accrued personnel expenses
 
$
73,124

 
$
88,346

Indirect customer incentive programs *
 
69,921

 
36,409

Warranty accrual
 
15,640

 
13,424

Employee benefit plan obligation
 
2,164

 
1,266

Income taxes payable
 
4,387

 
6,232

Contingent consideration for business acquisition - current portion
 

 
2,889

Other current liabilities
 
112,819

 
83,707

 
 
$
278,055

 
$
232,273

Other non-current liabilities:
 
 

 
 

Warranty accrual
 
$
10,624

 
$
8,487

Obligation for deferred compensation plan
 
17,998

 
15,043

Employee benefit plan obligation
 
43,110

 
41,998

Deferred tax liability
 
1,789

 
1,789

Contingent consideration for business acquisition - non-current portion
 

 
7,019

Other non-current liabilities
 
8,483

 
9,355

 
 
$
82,004

 
$
83,691


*The increases in the allowances for cooperative marketing arrangements, customer incentive programs, pricing programs and indirect customer incentive programs as of December 31, 2017 compared with March 31, 2017 were primarily the result of seasonality in the Company's business and increases in these marketing and promotional activities.

**The increase in deferred tax assets was primarily due to the adoption of ASU 2016-09 effective April 1, 2017, partially offset by the remeasurement of federal deferred tax assets as a result of the enactment of the Tax Act in the third quarter of fiscal year 2018. See "Note 5 - Income Taxes" for more information.

Note 7 — 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.


18


The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis, excluding assets related to the Company’s defined benefit pension plans, classified by the level within the fair value hierarchy (in thousands): 
 
 
December 31, 2017
 
March 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 
 
 
 
 

 
 

 
 

Cash equivalents
 
$
402,983

 
$

 
$

 
$
448,742

 
$

 
$

 
 
 

 
 

 
 

 
 

 
 

 
 

Trading investments for deferred compensation plan included in other assets:
 
 

 
 
 
 
 
 

 
 

 
 

Money market funds
 
$
4,229

 
$

 
$

 
$
2,813

 
$

 
$

Mutual funds
 
13,769

 

 

 
12,230

 

 

Total of trading investments for deferred compensation plan
 
$
17,998

 
$

 
$

 
$
15,043

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
Currency exchange derivative assets
included in other current assets
 
$

 
$
235

 
$

 
$

 
$
48

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent
consideration included in accrued and
other current liabilities and other non-current liabilities
 
$

 
$

 
$

 
$

 
$

 
$
9,908

Currency exchange derivative liabilities
included in accrued and other current liabilities
 
$

 
$
1,392

 
$

 
$

 
$
443

 
$

 
The following table summarizes the changes in fair value of the Company’s contingent consideration balance measured with Level 3 inputs during the three and nine months ended December 31, 2017 and 2016 (in thousands):
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Beginning of the period
 
$

 
$
18,000

 
$
9,908

 
$

Fair value of contingent consideration upon acquisition
 

 

 

 
18,000

Change in fair value of contingent consideration
 

 
(9,925
)
 
(4,908
)
 
(9,925
)
Expected payment (see below)
 

 

 
(5,000
)
 

End of the period
 
$

 
$
8,075

 
$

 
$
8,075


Acquisition-related contingent consideration

On April 20, 2016 (the "Jaybird Acquisition Date"), the Company acquired all of the equity interests of Jaybird, LLC (“Jaybird”). The acquisition-related contingent consideration liability arising from the Jaybird acquisition represented the future potential earn-out payments of up to $45.0 million based on the achievement of certain net revenue targets over approximately a two-year period. If the net revenue targets were met, the Company would have paid a maximum of $25.0 million and $20.0 million in fiscal years 2018 and 2019, respectively. The fair value of the earn-out as of the Jaybird Acquisition Date was $18.0 million, which was determined by using a Monte Carlo Simulation that includes significant unobservable inputs such as a risk-adjusted discount rate of 16% and projected net sales of Jaybird over the earn-out period. The fair value was remeasured at each reporting period based on the inputs on the date of remeasurement, with the change in fair value recognized as "change in fair value of contingent consideration for business acquisition" in the operating expense section in the condensed consolidated statements of operations. Projected net sales were based on the Company's internal projections, including analysis of the target markets. In October 2017, before the issuance of the condensed financial statements for the three months ended September 30, 2017, the Company and the sellers of Jaybird entered into an agreement fully, irrevocably and unconditionally releasing the Company from the earn-out rights and payments in exchange for $5.0 million in cash, which approximated the fair value of the contingent consideration as of September 30, 2017. As a result, the

19


contingent consideration was transferred out from financial liability with Level 3 inputs as of September 30, 2017 as fair value measurement was no longer required. The Company paid the $5.0 million in November 2017 and included the same as financing activities on its condensed consolidated statements of cash flows.
 
Investment Securities
 
The marketable securities for the Company's deferred compensation plan are recorded at a fair value of $18.0 million and $15.0 million, respectively, as of December 31, 2017 and March 31, 2017, 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 and nine months ended December 31, 2017 and 2016 were not material and are included in other income (expense), net in the Company's condensed consolidated statements of operations.

Assets Measured at Fair Value on a Nonrecurring Basis

The Company’s non-marketable cost method investments, and non-financial assets, such as goodwill, intangible assets and property, plant and equipment, are recorded at fair value only upon initial recognition or if an impairment is recognized. There were no material impairments of long-lived assets during the three and nine months ended December 31, 2017 or 2016.

Non-marketable cost method investments. These investments are classified as Level 3 due to the absence of quoted market prices, the inherent lack of liquidity, and the fact that inputs used to measure fair value are unobservable and require management's judgment. When certain events or circumstances indicate that impairment may exist, the Company revalues the investments using various assumptions, including the financial metrics and ratios of comparable public companies.

The primary investment included in non-marketable investments is the Company’s investment in Series A Preferred Stock of Lifesize Inc. ("Lifesize") recorded at the fair value of $5.6 million on the date of the Lifesize divestiture.
 
The aggregate recorded amount of cost method investments included in other assets as of December 31, 2017 and March 31, 2017 was $7.1 million and $7.4 million, respectively.

Note 8 — 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 December 31, 2017 and March 31, 2017.

The fair values of the Company’s derivative instruments not designated as hedging instruments were not material as of December 31, 2017 or March 31, 2017. The following table presents the fair values of the Company’s derivative instruments designated as hedging instruments on a gross basis in other current assets or accrued and other current liabilities on its condensed consolidated balance sheets as of December 31, 2017 and March 31, 2017 (in thousands):
 
 
Derivatives
 
 
Asset
 
Liability
 
 
December 31,
2017
 
March 31,
2017
 
December 31,
2017
 
March 31,
2017
Cash flow hedges
 
$
235

 
$
48

 
$
1,327

 
$
402


20


 
The amount of gain (loss) recognized on derivatives not designated as hedging instruments was 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 nine months ended December 31, 2017 and 2016 (in thousands):
 
 
Three Months Ended
December 31,
 
 
Amount of Gain (Loss)
Deferred as a Component of Accumulated
Other Comprehensive Loss
 
Amount of Loss (Gain)
Reclassified from Accumulated Other Comprehensive Loss to
Costs of Goods Sold
 
 
2017
 
2016
 
2017
 
2016
Cash flow hedges
 
$
(677
)
 
$
2,497

 
$
2,248

 
$
(463
)
 
 
Nine Months Ended
December 31,
 
 
Amount of Gain (Loss)
Deferred as a Component of Accumulated
Other Comprehensive Loss
 
Amount of Loss
Reclassified from Accumulated Other Comprehensive Loss to
Costs of Goods Sold
 
 
2017
 
2016
 
2017
 
2016
Cash flow hedges
 
$
(6,026
)
 
$
4,026

 
$
5,377

 
$
432


Cash Flow Hedges
 
The Company enters into cash flow hedge contracts to protect against exchange rate exposure of forecasted inventory purchases. These hedging contracts mature within four months. Gains and losses in the fair value of the effective portion of the hedges are deferred as a component of accumulated other comprehensive loss until the hedged inventory purchases are sold, at which time the gains or losses are reclassified to cost of goods sold. Cash flows from such hedges are classified as operating activities in the condensed consolidated statements of cash flows.  Hedging relationships are discontinued when hedging contract is no longer eligible for hedge accounting, or is sold, terminated or exercised, or when Company removes hedge designation for the contract. Gains and losses in the fair value of the effective portion of the discontinued hedges continue to be reported in accumulated other comprehensive loss until the hedged inventory purchases are sold, unless it is probable that the forecasted inventory purchases will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter. In all periods presented herein, there have been no forecasted inventory purchases that were probable to not occur by the end of the originally specified time period or within an additional two-month period of time thereafter. The notional amounts of foreign currency exchange forward contracts outstanding related to forecasted inventory purchases were $135.0 million and $59.4 million as of December 31, 2017 and March 31, 2017, respectively. The Company estimates that $1.2 million of net losses related to its cash flow hedges included in accumulated other comprehensive loss as of December 31, 2017 will be reclassified into earnings within the next 12 months.
 
Other Derivatives
 
The Company also enters into foreign currency exchange forward and swap contracts to reduce the short-term effects of currency exchange rate fluctuations on certain receivables or payables denominated in currencies other than the functional currencies of its subsidiaries. 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 these contracts are recognized in other income (expense), net in the condensed consolidated statements of operations based on the changes in fair value. The notional amounts of these contracts outstanding as of December 31, 2017 and March 31, 2017 were $89.0 million and $56.7 million, respectively. Open forward and swap contracts outstanding as of December 31, 2017 and March 31, 2017 consisted of contracts in Mexican Pesos, Japanese Yen, British Pounds, Taiwanese Dollars, Canadian Dollars, Australian Dollars and Chinese Renminbi to be settled at future dates at pre-determined exchange rates.
 
The fair value of all foreign 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.

21



Note 9 — Goodwill and Other Intangible Assets

The Company conducts its impairment analysis of the goodwill 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.

The Company performed its annual impairment analysis of the goodwill as of December 31, 2017 by performing a qualitative assessment and concluded that it was more likely than not that the fair value of its peripherals reporting unit, the only reportable segment of the Company, exceeded its carrying amount. In assessing the qualitative factors, the Company considered the impact of the following key factors: change in industry and competitive environment, growth in the Company's market capitalization and budgeted-to-actual revenue performance from the last twelve months.

The following table summarizes the activities in the Company’s goodwill balance during the nine months ended December 31, 2017 (in thousands):
As of March 31, 2017
 
$
249,741

Business acquisitions
 
25,800

Currency translation
 
22

As of December 31, 2017
 
$
275,563

The Company's acquired intangible assets subject to amortization were as follows (in thousands):
 
 
December 31, 2017
 
March 31, 2017
 
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Net Carrying Amount
Trademark and trade names
 
$
23,790

 
$
(8,719
)
 
$
15,071

 
$
16,500

 
$
(6,933
)
 
$
9,567

Developed Technology
 
76,875

 
(48,352
)
 
28,523

 
63,285

 
(42,831
)
 
20,454

Customer contracts/relationships
 
59,760

 
(10,983
)
 
48,777

 
25,180

 
(7,637
)
 
17,543

Total
 
$
160,425

 
$
(68,054
)
 
$
92,371

 
$
104,965

 
$
(57,401
)
 
$
47,564

    

Note 10 — Financing Arrangements
 
The Company had several uncommitted, unsecured bank lines of credit aggregating $62.1 million as of December 31, 2017. There are no financial covenants under these lines of credit with which the Company must comply. As of December 31, 2017, the Company had outstanding bank guarantees of $44.2 million under these lines of credit. There was no borrowing outstanding under these lines of credit as of December 31, 2017 or March 31, 2017.

Note 11 — Commitments and Contingencies
 
Product Warranties
 
All of the Company’s peripherals products sold are covered by warranty to be free from defects in material and workmanship. The warranty period varies by product and by region.
 

22


Changes in the Company’s warranty liability for the three and nine months ended December 31, 2017 and 2016 were as follows (in thousands): 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
2017
 
2016
 
2017
 
2016
Beginning of the period
$
24,349

 
$
21,612

 
$
21,911

 
$
20,380

Assumed from business acquisition

 

 
1,230

 
1,963

Provision
7,820

 
4,521

 
17,535

 
10,861

Settlements
(6,050
)
 
(3,550
)
 
(15,229
)
 
(10,430
)
Currency translation
145

 
(462
)
 
817

 
(653
)
End of the period
$
26,264

 
$
22,121

 
$
26,264

 
$
22,121

 
Guarantees
 
Logitech Europe S.A., one of our wholly-owned subsidiaries, guaranteed payments of certain third-party contract manufacturers’ purchase obligations. As of December 31, 2017, the maximum amount of this guarantee was $3.8 million, of which $1.7 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 December 31, 2017, 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.

The stock purchase agreement entered on December 28, 2015 in connection with the investment by three venture capital firms in Lifesize contains representations, warranties and covenants of Logitech and Lifesize, Inc. to the Investors. Logitech has agreed, subject to certain limitations, to indemnify the Investors and certain persons related to the Investors for certain losses resulting from breaches of or inaccuracies in such representations, warranties and covenants as well as certain other obligations, including third-party expenses, restructuring costs and pre-closing tax obligations of Lifesize.
 
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 a necessary license or other rights, or litigation arising out of intellectual property claims, could adversely affect the Company’s business.


23


Note 12 — 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. This share buyback program expired in April 2017.

In March 2017, the Company's Board of Directors approved the 2017 share buyback program, which authorizes the Company to use up to $250.0 million to purchase up to 17.3 million shares of its own shares following the expiration date of the 2014 share buyback program. 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, through block trades or otherwise. Purchases may be started or stopped at any time without prior notice depending on market conditions and other factors.

During the nine months ended December 31, 2017 and 2016, 0.6 million and 3.3 million shares, respectively, were repurchased for $20.4 million and $63.8 million, respectively.

Cash Dividend on Shares of Common

During the nine months ended December 31, 2017, the Company declared and paid cash dividends of CHF 0.61 (USD equivalent of $0.63) per common share, totaling $104.2 million on the Company's outstanding common stock. During the nine months ended December 31, 2016, the Company declared and paid cash dividends of CHF 0.56 (USD equivalent of $0.57) per common share, totaling $93.1 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 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
Losses
 
Total
March 31, 2017
 
$
(89,708
)
 
$
(10,480
)
 
$
(518
)
 
$
(100,706
)
Other comprehensive income (loss)
 
5,176

 
1,012

 
(649
)
 
5,539

December 31, 2017
 
$
(84,532
)
 
$
(9,468
)
 
$
(1,167
)
 
$
(95,167
)
 
(1)        Tax effect was not significant as of December 31 or March 31, 2017.
 

24


Note 13 — Segment Information
 
The Company has determined that it operates in a single operating segment that encompasses the design, manufacturing and marketing of peripherals for PCs, tablets and other digital platforms. Operating performance measures are provided directly 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) to make business decisions. These operating performance measures do not include restructuring charges (credits), net, share-based compensation expense, amortization of intangible assets, charges from the purchase accounting effect on inventory, acquisition-related costs, investigation and related expenses, or change in fair value of contingent consideration from business acquisition.

Net sales by product categories, excluding intercompany transactions, for the three and nine months ended December 31, 2017 and 2016 were as follows (in thousands):
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Pointing Devices
 
$
140,983

 
$
142,166

 
$
386,700

 
$
382,249

Keyboards & Combos
 
126,372

 
125,289

 
361,685

 
359,824

PC Webcams
 
27,280

 
30,503

 
80,371

 
80,072

Tablet & Other Accessories
 
26,648

 
24,852

 
80,650

 
59,351

Video Collaboration
 
46,252

 
35,807

 
128,008

 
88,298

Mobile Speakers
 
147,377

 
106,578

 
300,843

 
261,046

Audio-PC & Wearables
 
84,435

 
67,225

 
197,082

 
186,058

Gaming
 
173,802

 
107,181

 
365,232

 
242,874

Smart Home
 
38,692

 
26,942

 
73,481

 
49,916

Other (1)
 
180

 
164

 
385

 
1,187

Total net sales
 
$
812,021

 
$
666,707

 
$
1,974,437

 
$
1,710,875


(1) Other category includes products that the Company currently intends to transition out of, or has already transitioned out of, because they are no longer strategic to the Company's business.
Net sales by geographic region (based on the customers’ locations) for the three and nine months ended December 31, 2017 and 2016 were as follows (in thousands):
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Americas
 
$
380,130

 
$
290,724

 
$
887,523

 
$
753,179

EMEA
 
253,767

 
233,251

 
622,681

 
576,809

Asia Pacific
 
178,124

 
142,732

 
464,233

 
380,887

Total net sales
 
$
812,021

 
$
666,707

 
$
1,974,437

 
$
1,710,875

 
Sales are attributed to countries on the basis of the customers’ locations.

The United States and Germany each represented more than 10% of the total consolidated net sales for each of the periods presented herein. No other countries represented more than 10% of the Company’s total consolidated net sales for the periods presented herein.

Switzerland, the Company’s home domicile, represented 1% and 2% of the Company’s total consolidated net sales for the three and nine months ended December 31, 2017, respectively, and 2% for each of the three and nine months ended December 31, 2016.

Two customer groups of the Company each represented more than 10% of the total consolidated net sales for each of the periods presented herein.
 

25


Property, plant and equipment, net by geographic region were as follows (in thousands):
 
 
December 31,
2017
 
March 31,
2017
Americas
 
$
36,688

 
$
37,242

EMEA
 
4,604

 
4,006

Asia Pacific
 
45,609

 
44,160

Total Property, plant and equipment, net
 
$
86,901

 
$
85,408

 
Property, plant and equipment, net in the United States and China were $36.6 million and $37.8 million, respectively, as of December 31, 2017, and $37.1 million and $37.2 million, respectively, as of March 31, 2017. No other countries represented more than 10% of the Company’s total consolidated property, plant and equipment, net as of December 31, 2017 or March 31, 2017. Property, plant and equipment, net in Switzerland, the Company’s home domicile, were $2.0 million and $2.1 million as of December 31, 2017 and March 31, 2017, respectively.
 

26


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 strategy for growth, future revenues, earnings, cash flow, uses of cash and other measures of financial performance, and market position, 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, our new product introductions 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, 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 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, our expectations regarding the success of our strategic acquisitions, including integration of acquired operations, products, technology, internal controls, personnel and management teams, 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, resolution of our North American distribution center issues, 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, tax settlements, the adequacy of our provisions for uncertain tax positions, the impact of the Tax Cuts and Jobs Act on our overall effective income tax rate, our expectations regarding our potential indemnification obligations, and the outcome of pending or future legal proceedings and tax audits, our remediation efforts to address our material weaknesses, our belief that our disclosure controls and procedures will become effective at the reasonable assurance level by the end of fiscal year 2018, 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 designing, manufacturing and marketing products that have an everyday place in people's lives, connecting them to the digital experiences they care about. More than 35 years ago Logitech created products to improve experiences around the PC platform, and now it is designing products that enable better experiences consuming, sharing and creating any digital content (e.g., music, gaming, video), whether it is on a computer, mobile device or in the cloud. Logitech's brands include Logitech, Jaybird, ASTRO, Logitech G and Ultimate Ears.

27



Our products participate in five large markets that all have growth opportunities: Music, Gaming, Video Collaboration, Smart Home and Creativity & Productivity. We sell our products to a broad network of domestic and international customers, including direct sales to retailers and e-tailers, and indirect sales through distributors. Our worldwide channel network includes consumer electronics distributors, retailers, mass merchandisers, specialty electronics stores, computer and telecommunications stores, value-added resellers and online merchants.
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.
On August 11, 2017 (the "Acquisition Date"), we acquired certain assets and liabilities constituting the ASTRO Gaming business ("ASTRO") from AG Acquisition Corporation for a purchase price of $85.0 million in cash (the "ASTRO Acquisition"). ASTRO is a leading console gaming brand with a history of producing award-winning headsets for professional gamers and enthusiasts.

Summary of Financial Results

Our net sales for the three and nine months ended December 31, 2017 increased 22% and 15%, respectively, compared to the three and nine months ended December 31, 2016, due to stronger net sales across all regions. The results of operations for ASTRO have been included in our condensed consolidated statements of operations from the Acquisition Date. The ASTRO business is highly seasonal and it typically generates approximately half of its fiscal year sales in the third quarter.

For the three and nine months ended December 31, 2017, ASTRO contributed $33.5 million and $36.2 million to net sales, respectively, representing approximately 4% of our net sales for the three-month period and 2% for the nine-month period. For the nine months ended December 31, 2017, Saitek, which was acquired on September 15, 2016, contributed $8.4 million of sales increase, compared with the nine months ended December 31, 2016.

Our net sales for the three months ended December 31, 2017 increased 31%9% and 25% in the Americas, EMEA and Asia Pacific, respectively, compared to the same period of the prior fiscal year. Our net sales for the nine months ended December 31, 2017 increased 18%8% and 22% in the Americas, EMEA and Asia Pacific, respectively, compared to the same period of the prior fiscal year.

Given our global sales presence and the reporting of our financial results in U.S. Dollars, our financial results could be affected by shifts in currency exchange rates. See “Results of Operations” for information on the effect of currency exchange results on our net sales. If the U.S. Dollar becomes stronger or weaker in comparison to other currencies, it will also affect our results of operations in future periods.

We added a new third-party logistics provider and distribution center in North America in the second half of the second quarter of fiscal year 2018 to support our growth. We experienced significant challenges in the transition from one distribution center to two, operating procedures at the newer distribution center, and in ramping fulfillment in the second quarter and early third quarter of fiscal year 2018. As a result, we incurred additional cost on freight and warehouse-related expense. We have started transition back to only one distribution center for North America and the process is expected to be completed during the fourth quarter of fiscal year 2018.

Our gross margin for the three months ended December 31, 2017 decreased to 33.9% from 37.0% for the three months ended December 31, 2016. Approximately 150 basis points of the decrease in gross margin was driven by an increase in logistics costs including additional costs from the transition of the distribution center in North America and the remaining decrease was primarily due to an increase in promotions related to product transition, and product mix, partially offset by lower variable compensation based on operational metrics.

Our gross margin for the nine months ended December 31, 2017 decreased to 35.3% from 36.4% for the nine months ended December 31, 2016. The decrease in gross margin was primarily driven by an increase in logistics costs including additional costs from the transition of the distribution center in North America, an increase in promotions related to product transition, and product mix, partially offset by product cost reductions and lower variable compensation based on operational metrics in the recent quarter.

28



Operating expenses for the three months ended December 31, 2017 were $175.3 million, or 21.6% of net sales, compared to $150.5 million, or 22.6% of net sales, in the same period of the prior fiscal year. Operating expenses for the nine months ended December 31, 2017 were $506.4 million, or 25.6% of net sales, compared to $446.7 million, or 26.1% of net sales, in the same period of the prior fiscal year. The increase for the three-month period was primarily driven by higher external expenses to support the advertising and marketing efforts for our new products, higher personnel related cost due to additional headcount from ASTRO Acquisition, and a credit from change in fair value of contingent consideration from the Jaybird Acquisition in the prior year, partially offset by lower variable compensation for fiscal year 2018 based on operational metrics. The increase for the nine-month period was mainly due to increases in marketing and selling expenses and research and development expenses from higher personnel-related costs due to increased headcount and higher external expenses to support the advertising and marketing efforts for our new products, in addition to a lower credit from the change in fair value of contingent consideration for business acquisition, partially offset by lower variable compensation based on operational metrics.

We recorded an income tax charge of $19.9 million from the provisional remeasurement of federal deferred tax assets and liabilities as of December 31, 2017 to reflect the effects of the enacted changes in tax rate and a provisional income tax benefit of $4.1 million from the reduction in federal valuation allowance against tax credits as a result of the tax reform.

Net income for the three and nine months ended December 31, 2017 was $80.8 million and $174.1 million, respectively, compared to $97.5 million and $166.5 million for the three and nine months ended December 31, 2016, respectively.
 
Trends in Our Business
 
Our strategy focuses on five large multi-category markets, including Music, Gaming, Video Collaboration, Smart Home and Creativity & Productivity. We see opportunities to deliver growth in all these markets.

We believe our future growth will be determined by our ability to rapidly create innovative products across multiple digital platforms, including gaming, digital music devices, video and computing. The following discussion represents key trends specific to our market opportunities.
Trends Specific to Our Five Market Opportunities
Music: The music market grew during the first nine months of fiscal year 2018, driven by growing consumption of music through mobile devices such as smartphones and tablets. According to the Recording Industry Association of America (RIAA), revenues from streaming music platforms grew significantly in the first nine months of 2017. This market growth, together with our investments in the Ultimate Ears and Jaybird brands, new channel expansion, integration of personal voice assistants, such as Google Home and Amazon Alexa, and our new product introductions, has driven our growth in this market. The integration of personal voice assistants has become increasingly competitive in the speaker categories.

Gaming: The PC gaming and console gaming platforms continue to show strong growth as online gaming, multi-platform experiences, and eSports gain greater popularity and gaming content becomes increasingly more demanding. We believe Logitech is well positioned to benefit from the PC gaming market growth. With the ASTRO Acquisition, we are also strengthening our portfolio in adjacent categories, such as the console gaming market.

Video Collaboration: The near and long-term structural growth opportunities in the video collaboration market is still significant. We are continuing our efforts to create and sell innovative products to accommodate the increasing demand from medium-sized meeting rooms to small-sized rooms such as huddle rooms. We will continue to invest in select business-specific products, targeted product marketing and sales channel development.

Smart Home: This market increased in fiscal year 2017 and has continued to grow in the first nine months of fiscal year 2018. In October 2016, we integrated Amazon Alexa and Google Assistant voice capabilities into our Logitech Harmony Hub that enables voice control of the living room entertainment experience when used with an Amazon Echo or Echo Dot or a Google Home device. Our Ultimate Ears MEGABLAST and BLAST come with Amazon Alexa built-in, featuring voice-controlled music and the full range of Alexa’s skills. Through Harmony, Alexa can turn on/off and control a TV and AV system. We have also seen success with the professional installer channel

29


through the recent introduction of the Harmony Pro. We will continue to explore other innovative experiences for the Smart Home. 

Creativity & Productivity: Although new PC shipments continue to decline, the installed base of PC users remains large. We believe that innovative PC peripherals, such as our mice and keyboards, can renew the PC usage experience, providing growth opportunities. Smaller mobile computing devices, such as tablets, have created new markets and usage models for peripherals and accessories. We offer a number of products to enhance the use of mobile devices, including keyboard folios for the iPad Pro and iPad Mini, and keyboard covers and folios for the iPad Air.
Business Seasonality, Product Introductions and Acquisitions
We have historically experienced higher net sales in our third fiscal quarter ending December 31, compared to other fiscal quarters in our fiscal year, due in part to seasonal holiday demand. Additionally, new product introductions and business acquisitions can significantly impact net sales, product costs and operating expenses. Product introductions can also impact our net sales to our distribution channels as these channels are filled with new product inventory following a product introduction, and often channel inventory of an earlier model product declines as the next related major product launch approaches. Net sales can also be affected when consumers and distributors anticipate a product introduction or changes in business circumstances. However, neither historical seasonal patterns nor historical patterns of product introductions should be considered reliable indicators of our future pattern of product introductions, future net sales or financial performance.

Critical Accounting Estimates

 The preparation of financial statements and related disclosures in conformity with GAAP requires us to make judgments, estimates and assumptions that affect reported amounts of assets, liabilities, goodwill and intangible assets from business acquisitions, contingent consideration from business acquisitions, and net sales and expenses.

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 our 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 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.
 
Other than the recent accounting pronouncement adoptions discussed below, there have been no substantial changes in the Company’s significant accounting policies during the nine months ended December 31, 2017, compared with the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017.

Adoption of New Accounting Guidance

In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory (Topic 330)" ("ASU 2015-11"). Topic 330, previously required 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. ASU 2015-11 requires an entity to measure inventory at the lower of cost or net realizable value and effective for fiscal years beginning after December 15, 2016. We adopted this standard effective April 1, 2017, which has not had a material impact on our condensed consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 simplifies several aspects of the accounting for share-based payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees' maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the

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statement of cash flows for the excess tax benefits and employee taxes paid when an employer withholds shares for tax withholding purposes. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016. We adopted this standard effective April 1, 2017. Changes to the statements of cash flows related to the classification of excess tax benefits were implemented on a retroactive basis and accordingly, to conform to the current year presentation, we reclassified $6.4 million of excess tax benefits previously reported under financing activities to operating activities for the nine months ended December 31, 2016 on our condensed consolidated statements of cash flows. Under the new standard, we account for forfeitures as they occur. The change in accounting for forfeitures resulted in a cumulative-effect adjustment to decrease retained earnings as of March 31, 2017 by $3.3 million. We further recognized a cumulative-effect adjustment to increase retained earnings as of March 31, 2017 by $57.2 million upon adoption of the new guidance to account for gross excess tax benefits of $75.2 million that were previously not recognized because the related tax deduction had not reduced current income taxes, offset by a valuation allowance of $18.0 million to reduce the deferred tax assets to amounts that are more likely than not to be realized.

In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment (Topic 350)" ("ASU 2017-04"), which removes Step 2 from the goodwill impairment test. ASU 2017-04 is effective for annual or any interim goodwill impairments in annual periods beginning December 15, 2019, with early adoption permitted. We adopted this standard effective April 1, 2017, which has not had a material impact on our condensed consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting" ("ASU 2017-09"), which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for annual periods beginning after December 15, 2017, with early adoption permitted, including adoption in any interim period for which financial statements have not yet been issued. We adopted this standard effective April 1, 2017, which has not had a material impact on our condensed consolidated financial statements.

Refer to Note 1 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for recent accounting pronouncements to be adopted.

Impact of Constant Currency

We refer to our net sales growth rates excluding the impact of currency exchange rate fluctuations as "constant dollar" sales growth rates. 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.

Given our global sales presence and the reporting of our financial results in U.S. Dollars, our financial results could be affected by significant shifts in currency exchange rates. See “Results of Operations” for information on the effect of currency exchange results on our net sales. If the U.S. Dollar appreciates or depreciates in comparison to other currencies in future periods, this will affect our results of operations in future periods as well.

Sales Denominated in Other Currencies

Although our financial results are reported in U.S. Dollars, a portion of our sales was generated in currencies other than the U.S. Dollar, such as the Euro, Chinese Renminbi, Japanese Yen, Canadian Dollar, Taiwan New Dollar, British Pound and Australian Dollar. During the three months ended December 31, 2017, 47% of our net sales were denominated in currencies other than the U.S. Dollar.

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Results of Operations
Net Sales
Net sales for the three and nine months ended December 31, 2017 and 2016 were as follows (Dollars in thousands):
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Net Sales
 
$
812,021

 
$
666,707

 
22
%
 
$
1,974,437

 
$
1,710,875

 
15
%

Our net sales in the three and nine months ended December 31, 2017 increased 22% and 15%, respectively, compared to the same periods of the prior fiscal year. Sales increased across all three regions during the three and nine months ended December 31, 2017. If currency exchange rates had been constant in the three and nine months ended December 31, 2017 and 2016, our constant dollar sales growth rates would have been 18% and 14%, respectively. We grew across most of our product categories, with Gaming, Smart Home, Video Collaboration and Mobile Speakers growing double digits for both periods presented above compared to the same periods of the prior fiscal year.

Net Sales by Reg