LOGITECH INTERNATIONAL S.A. 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, includingChina ,Russia andUkraine , 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, potential tariffs, their effects and our ability to mitigate their effects, 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, restructuring of our organizational structure 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, 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 effective tax rate, future tax benefits, tax settlements, the adequacy of our provisions for uncertain tax positions, our expectations regarding our potential indemnification obligations, and the outcome of pending or future legal proceedings and tax audits, 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 help connect people to digital and cloud experiences. More than 35 years
ago, Logitech created products to improve experiences around the personal PC
platform, and today it is a multi-brand, multi-category company designing
products that enable better experiences consuming, sharing and creating any
digital content such as music, gaming, video and computing, whether it is on a
computer, mobile device or in the cloud. Logitech's brands include Logitech,
Logitech G, ASTRO Gaming, Streamlabs, Ultimate Ears, Jaybird, and Blue
Microphones. Our Company's website is www.logitech.com.
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Our products participate in five large markets that all have growth opportunities: Creativity & Productivity, Gaming, Video Collaboration, Music, and Smart Home. 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 stores, computer and telecommunications stores, value-added resellers and online merchants. OnOctober 31, 2019 (the "Acquisition Date"), we acquired all equity interests ofGeneral Workings, Inc. ("Streamlabs") for a total consideration of$105.7 million , which included a working capital adjustment, plus an additional earn-out of$29.0 million payable in stock only upon the achievement of certain net revenues for the period beginning onJanuary 1, 2020 and ending onJune 30, 2020 (the "Streamlabs Acquisition"). Streamlabs is a leading provider of software and tools for professional streamers. The Streamlabs Acquisition will supplement our portfolio opportunities. From time to time, we may seek to partner with, or acquire when appropriate, companies that have products, personnel, and technologies that complement our strategic direction. We continually review our product offerings and our strategic direction in light of our profitability targets, competitive conditions, changing consumer trends and the evolving nature of the interface between the consumer and the digital world. Summary of Financial Results
Our sales for the three and nine months ended
Our sales for the three months endedDecember 31, 2019 decreased 1% in theAmericas and increased 15% and 2% in EMEA andAsia Pacific , respectively, compared to the same period of the prior fiscal year. Our sales for the nine months endedDecember 31, 2019 increased 3%, 11%, and 1% in theAmericas , EMEA, andAsia Pacific , respectively, compared to the same period of the prior fiscal year. Our gross margin for the three months endedDecember 31, 2019 decreased 40 basis points to 37.1% from 37.5% for the three months endedDecember 31, 2018 . The decrease in gross margin was primarily driven by unfavorable currency exchange rates and an increase inU.S. -China tariffs, partially offset by the benefits from cost savings and favorable shifts in product mix. Our gross margin for the nine months endedDecember 31, 2019 increased 10 basis points to 37.3% from 37.2% for the nine months endedDecember 31, 2018 . Our gross margin benefited from cost savings and product mix, partially offset by unfavorable currency exchange rates and an increase inU.S. -China tariffs. We expect a negative impact in the fourth quarter of fiscal year 2020 from these tariffs, net of our ongoing mitigation efforts. Operating expenses for the three months endedDecember 31, 2019 increased to$205.6 million , compared to$200.6 million in the same period of the prior fiscal year. Operating expenses were 22.8% of sales for the three months endedDecember 31, 2019 , compared to 23.2% of sales in the same period of the prior fiscal year. Operating expenses for the nine months endedDecember 31, 2019 increased to$601.2 million , compared to$583.1 million in the same period of the prior fiscal year. Operating expenses were 26.5% of sales for the nine months endedDecember 31, 2019 , compared to 26.9% of sales in the same period of the prior fiscal year.
Net income for the three and nine months ended
Trends in Our Business
Our strategy focuses on five large multi-category markets, including Creativity & Productivity, Gaming, Video Collaboration, Music, and Smart Home. 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.
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Trends Specific to Our Five Market Opportunities Creativity & Productivity: New PC shipments are modestly growing and, 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, thus providing growth opportunities. Increasing adoption of various cloud-based applications has led to multiple new consumer use cases, which we are addressing with our innovative product portfolio. The increasing popularity of streaming and broadcasting provides additional growth opportunities for our Webcam products, as well as other products in our portfolio. 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 a combo backlit keyboard case for the iPad Pro and keyboard folios for other iPad models. In fiscal year 2019, we saw a recovery of the iPad tablet market, and our Tablet & Other Accessories category benefited from the recovery along with our innovative products. Gaming: The PC gaming and console gaming platforms continue to show strong structural growth opportunities as online gaming, multi-platform experiences, and esports gain greater popularity and gaming content becomes increasingly more demanding and social. In the past year, the gaming headset market has declined due to challenging comparisons against the launch of Fortnite in fiscal year 2019. We believe Logitech is well positioned to benefit from the overall gaming market growth. With ASTRO Gaming, we also strengthened our portfolio in adjacent categories, such as the console controller market. Video Collaboration: The near and long-term structural growth opportunities in the video collaboration market are significant and, as a result, that market is continuing to attract more competition. Video meetings are on the rise, and companies increasingly want lower-cost, cloud-based solutions. We are continuing our efforts to create and sell innovative products to accommodate the increasing demand from medium and large-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. Music: The mobile speaker market has remained lackluster, although the consumption of music continues to grow. The integration of personal voice assistants has become increasingly competitive in the speaker categories, but the market for third-party, voice-enabled speakers has not yet gained traction. Moreover, the market for mobile speakers appears to be maturing, which led to a decline in Ultimate Ears sales in fiscal year 2019. In fiscal year 2019, the wireless headphone industry continued to flourish with strong revenue growth. The largest growth was in true wireless headphones where the market tripled year-over-year while traditional wireless headphones have started to decline. Continued growth in the wireless headphone market is expected for the next several years as consumers increasingly adopt wireless headphones over wired headphones. With Blue Microphones, we strengthened our portfolio in adjacent categories, such as the microphones market. Smart Home: Our remote business declined substantially in fiscal year 2019 as the attachment to the voice assistants ofHarmony Hub -based remote controls was not a sustainable trend. In general, the space is under pressure as the way people consume content is changing. We will continue to explore other innovative experiences for the Smart Home category. Business Seasonality, Product Introductions and Acquisitions We have historically experienced higher sales in our third fiscal quarter endingDecember 31 , compared to other fiscal quarters in our fiscal year, primarily due to the increased consumer demand for our products during the year-end holiday buying season and year-end spending by enterprises. Additionally, new product introductions and business acquisitions can significantly impact sales, product costs and operating expenses. Product introductions can also impact our 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. 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 sales or financial performance. Swiss Federal Tax Reform OnMay 19, 2019 , the Swiss electorate approved TRAF, a major reform to better align the Swiss tax system with international tax standards. The legislation was subsequently published in the federal register onAugust 6, 2019 to take effect onJanuary 1, 2020 . As ofDecember 31, 2019 , TRAF has not been enacted in all cantons, including the canton ofVaud , as the cantonal legislative procedures are in process. We have benefited from a longstanding tax ruling from the canton ofVaud throughDecember 31, 2019 . We continue to monitor the enactment 29
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process and our transitional measures to comply with federal and cantonal tax
reform provisions. We anticipate an increase in our cash tax payments in
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 the reported amounts of goodwill, intangible assets acquired from business acquisitions, contingent consideration for business acquisition and periodical reassessment of its fair value, operating right-of-use assets, warranty liabilities, accruals for customer incentives, cooperative marketing, and pricing programs and related breakage when appropriate, accrued sales return liability, allowance for doubtful accounts, inventory, share-based compensation expense, uncertain tax positions, and valuation allowances for deferred tax assets. 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 in Note 1 to the condensed consolidated financial statements, there have been no substantial changes in our significant accounting policies during the nine months endedDecember 31, 2019 , compared with the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2019 .
Adoption of New Accounting Pronouncements
Refer to Note 1 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for recent accounting pronouncements adopted and to be adopted.
Impact of Constant Currency
We refer to our 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 inU.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 rate on our sales. If theU.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.
References to Sales
References to "sales" mean net sales, except as otherwise specified, and the
sales growth discussion and sales growth rate percentages are based on
Sales Denominated in Other Currencies
Although our financial results are reported inU.S. Dollars, a portion of our sales was generated in currencies other than theU.S. Dollar, such as the Euro, Chinese Renminbi, Japanese Yen, Canadian Dollar,Taiwan New Dollar , British Pound and Australian Dollar. During the three months endedDecember 31, 2019 , approximately 52% of our sales were denominated in currencies other than theU.S. Dollar. 30
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Results of OperationsNet Sales Our sales in the three and nine months endedDecember 31, 2019 increased 4% and 5%, respectively, compared to the same periods of the prior fiscal year, driven primarily by strong sales increase in the EMEA region. For the three-month period presented, strong growth in Video Collaboration, Gaming and Keyboards & Combos was partially offset by a decline in sales for Audio & Wearables, Tablet & Other Accessories, and Smart Home. For the nine-month period presented, strong growth in the same categories was partially offset by a decline in sales for Mobile Speakers, Audio & Wearables, and Smart Home. If currency exchange rates had been constant in the three and nine months endedDecember 31, 2019 and 2018, our constant dollar sales growth rates would have been 5% and 7%, respectively.
Sales by Region
The following table presents the change in sales by region for the three and nine months endedDecember 31, 2019 , compared with the three and nine months endedDecember 31, 2018 : Constant Dollar Sales Growth Rate Sales Growth Rate Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended December 31, 2019 December 31, 2019 December 31, 2019 December 31, 2019 Americas (1 )% 3 % (1 )% 3 % EMEA 15 % 11 % 16 % 14 % Asia Pacific 2 % 1 % 3 % 4 % Americas: The decrease in sales in ourAmericas region for the three-month ended period presented above was primarily driven by a decline in sales in Mobile Speakers and Audio & Wearables, partially offset by growth in Video Collaboration and Gaming. The increase in sales in ourAmericas region for the nine-month period presented above was primarily driven by growth in Video Collaboration and Tablet & Other Accessories, partially offset by a decline in Mobile Speakers and PC Webcams. EMEA: The increase in sales in our EMEA region for both the three- and nine-month ended periods presented above was primarily driven by growth in sales across a majority of our product categories, partially offset by a decline in Tablet & Other Accessories and Audio & Wearables.
The increase in sales in ourAsia Pacific region for the three-month ended period presented above was primarily driven by growth in Keyboards & Combos and Gaming, partially offset by a decline in Audio & Wearables, Pointing Devices and Tablet & Other Accessories. The increase in sales in ourAsia Pacific region for the nine-month period presented above was primarily driven by growth in Video Collaboration, Gaming and Keyboards & Combos, partially offset by a decline in Mobile Speakers and Audio & Wearables. 31
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Sales by Product Categories
Sales by product categories for the three and nine months ended
Three Months Ended Nine Months Ended
December 31, December 31,
2019 2018 Change 2019 2018 Change
Pointing Devices $ 154,540 $ 149,123 4 % $ 409,293 $ 405,250 1 %
Keyboards & Combos 156,333 144,169 8 424,061 404,263 5
PC Webcams 32,165 33,021 (3 ) 89,041 90,916 (2 )
Tablet & Other
Accessories 31,256 35,757 (13 ) 103,442 104,903 (1 )
Video Collaboration 91,964 74,186 24 254,941 190,154 34
Mobile Speakers 92,969 96,263 (3 ) 200,617 207,690 (3 )
Audio & Wearables 81,934 98,629 (17 ) 208,576 212,343 (2 )
Gaming 245,736 213,663 15 541,265 510,481 6
Smart Home 15,790 19,577 (19 ) 35,088 37,829 (7 )
Other (1) - - - 279 185 51
Total sales $ 902,687 $ 864,388 4 % $ 2,266,603 $ 2,164,014 5 %
(1) Other category includes products that we currently intend to phase out, or have already phased out, because they are no longer strategic to our business.
Pointing Devices
Our Pointing Devices category comprises PC- and Mac-related mice, including trackballs, touchpads and presenters.
Sales of Pointing Devices increased 4% and 1% in the three and nine months endedDecember 31, 2019 , respectively, compared to the same periods of the prior fiscal year. The increases in both periods were primarily driven by growth in sales of our cordless mice, partially offset by a decline in sales of our corded mice. Keyboards & Combos
Our Keyboards & Combos category comprises PC keyboards, living room keyboards and keyboard/mice combo products.
Sales of Keyboards & Combos increased 8% and 5% in the three and nine months endedDecember 31, 2019 , respectively, compared to the same periods of the prior fiscal year. The increases were across all regions for both periods and primarily driven by increases in sales of our cordless and corded keyboards and keyboard/mice combos, partially offset by a decline in sales of our living room keyboard products. PC Webcams
Our PC Webcams category comprises PC-based webcams targeted primarily at consumers.
PC Webcams sales decreased 3% and 2% in the three and nine months endedDecember 31, 2019 , respectively, compared to the same periods of the prior fiscal year. The decrease in sales for the three-month period was primarily driven by a decline in sales of our Webcam C170, HD PRO Webcam C920, and HD Webcam C525, partially offset by an increase in the sales of our C270i IPTV CAM. The decrease in sales for the nine-month period was primarily driven by a decline in sales of our HD PRO Webcam C920, Webcam C170 and HD Webcam C525 partially offset by an increase in sales of our Webcam C260, C270i IPTV CAM and BRIO 4K Stream Edition. 32
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Our Tablet & Other Accessories category primarily comprises keyboards for tablets.
Sales of Tablet & Other Accessories products decreased 13% and 1% in the three and nine months endedDecember 31, 2019 , respectively, compared to the same periods of the prior fiscal year. The decrease in sales for the three-month period was primarily driven by a decline in sales of ourSlim Folio for the 2017/2018 iPad and CRAYON, partially offset by an increase in sales of ourSlim Folio Pro for the 11" and 12.9" iPad Pro introduced in the first quarter of fiscal year 2020 and sales of our Rugged Folio andSlim Folio for a newer generation of iPads introduced in the third quarter of fiscal year 2020. The decrease in sales for the nine-month period was primarily driven by a decline in sales of our Slim Combo keyboard cases for iPad Pro andSlim Folio keyboard cases for 10.5" iPad, partially offset by growth in sales of ourSlim Folio Pro for the 11" and 12.9" iPad Pro and Rugged Folio for the newer generation of iPads.
Gaming market:
Our Gaming category comprises gaming mice, keyboards, headsets, gamepads, steering wheels, simulation controllers, console gaming headsets, console gaming controllers, and Streamlabs services.
Gaming sales increased 15% and 6% in the three and nine months endedDecember 31, 2019 , respectively, compared to the same periods of the prior fiscal year. The increase in both periods was primarily driven by growth in sales of our gaming mice, gaming keyboards, gaming steering wheels, and console gaming controllers and sales from Streamlabs services as a result of our business combination (see Note 2 to the condensed consolidated financial statements). The growth was partially offset by a decline in sales of our gaming headsets and console gaming headsets.
Video Collaboration market:
Our Video Collaboration category primarily includes Logitech's ConferenceCams, which combines affordable enterprise-quality audio and high definition (HD) 1080p video to bring video conferencing to businesses of any size. Sales of Video Collaboration products increased 24% and 34% in the three and nine months endedDecember 31, 2019 , respectively, compared to the same periods of the prior fiscal year. The increases were across all regions for both periods. The increase for the three-month period was primarily driven by the sales of our Rally Ultra-HD PTZ Conference Camera introduced in the third quarter of fiscal year 2019 and our Tap Touch Controller introduced in the first quarter of fiscal year 2020, partially offset by a decrease in sales of Group Expansion Mic. The increase for the nine-month period was primarily driven by the sales of our Rally Ultra-HD PTZ Conference Camera introduced in the third quarter of fiscal year 2019, an increase in the sales of our MeetUp video conference camera, and sales of our Tap Touch Controller introduced in the first quarter of fiscal year 2020, partially offset by a decrease in sales of older generation products. Music market: Mobile Speakers
Our Mobile Speakers category is made up entirely of Bluetooth wireless speakers.
Sales of Mobile Speakers decreased 3% for both the three and nine months endedDecember 31, 2019 , compared to the same periods of the prior fiscal year. The decrease for the three-month period was primarily due to a decline in sales of our WONDERBOOM, BOOM 2 and MEGABOOM mobile speakers, partially offset by sales of our WONDERBOOM 2 introduced in the first quarter of fiscal year 2020. The decrease for the nine-month period was primarily due to a decline in sales of our WONDERBOOM, BOOM 2, and MEGABLAST mobile speakers, partially offset by sales of WONDERBOOM 2 and an increase in sales of our BOOM 3 and MEGABOOM 3 mobile speakers. 33
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Audio & Wearables
Our Audio & Wearables category comprises PC speakers, PC headsets, in-ear headphones, premium wireless audio wearables and studio-quality microphones for professionals and consumers.
Audio & Wearables sales decreased 17% and 2% for the three and nine months endedDecember 31, 2019 , respectively, compared to the same periods of the prior fiscal year. The decrease for the three-month period was primarily driven by the decrease in sales of our PC speakers, Blue Microphone products, and Jaybird traditional wireless products, partially offset by the increase in sales ofJaybird True Wireless products. The decrease for the nine-month period was primarily driven by a decline in the sales of our PC speakers and Jaybird traditional wireless products, partially offset primarily by the growth in sales of our Blue Microphones products, as a result of our business combination in the second quarter of fiscal year 2019, and Jaybird True wireless products.
Smart Home market:
Our Smart Home category mainly comprises our Harmony line of advanced home entertainment controllers and home security cameras.
Smart Home sales decreased 19% and 7% during the three and nine months endedDecember 31, 2019 , respectively, compared to the same periods of the prior fiscal year. The decrease in sales for the three-month and nine-month periods was primarily driven by an overall decline in sales in our Harmony remote products, partially offset by an increase in sales of our home security products. 34
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Gross Profit
Gross profit for the three and nine months ended
Three Months Ended Nine Months Ended
December 31, December 31,
2019 2018 Change 2019 2018 Change
Net sales $ 902,687 $ 864,388 4 % $ 2,266,603 $ 2,164,014 5 %
Gross profit $ 334,453 $ 323,982 3 $ 845,505 $ 804,036 5
Gross margin 37.1 % 37.5 % 37.3 % 37.2 %
Gross profit consists of sales less cost of goods sold (which includes
materials, direct labor and related overhead costs, costs of manufacturing
facilities, royalties, costs of purchasing components from outside suppliers,
distribution costs, warranty costs, customer support, shipping and handling
costs, outside processing costs and write-down of inventories), amortization of
intangible assets and purchase accounting effect on inventory.
Operating Expenses
Operating expenses for the three and nine months ended
Three Months Ended Nine Months Ended
December 31, December 31,
2019 2018 2019 2018
Marketing and selling $ 134,950 $ 132,250 $ 392,138 $ 368,635
% of sales 14.9 % 15.3 % 17.3 % 17.0 %
Research and development 43,292 40,591 127,499 119,120
% of sales 4.8 % 4.7 % 5.6 % 5.5 %
General and administrative 22,344 24,496 68,551 75,175
% of sales 2.5 % 2.8 % 3.0 % 3.5 %
Amortization of intangible
assets and acquisition-related
costs 5,084 3,539 12,898 10,377
% of sales 0.6 % 0.4 % 0.6 % 0.5 %
Restructuring charges (credits),
net (45 ) (278 ) 69 9,762
% of sales - % (1) - % - % (1) 0.5 %
Total operating expenses $ 205,625 $ 200,598 $ 601,155 $ 583,069
% of sales 22.8 % 23.2 % 26.5 % 26.9 %
(1) Absolute value for % of sales is less than 0.1%.
Marketing and Selling
Marketing and selling expenses consist of personnel and related overhead costs, corporate and product marketing, promotions, advertising, trade shows, technical support for customer experiences and facilities costs. During the three and nine months endedDecember 31, 2019 , marketing and selling expenses increased$2.7 million and$23.5 million , respectively, compared to the same periods of the prior fiscal year. The increases were primarily driven by higher personnel-related costs due to increased headcount, partly resulting from the Blue Microphones and Streamlabs acquisitions, partially offset by reduced marketing expenses. Research and Development
Research and development expenses consist of personnel and related overhead costs, contractors and outside consultants, supplies and materials, equipment depreciation and facilities costs, all associated with the design and development of new products and enhancements of existing products.
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During the three and nine months ended
General and Administrative
General and administrative expenses consist primarily of personnel and related overhead, information technology, and facilities costs for the infrastructure functions such as finance, information systems, executives, human resources, and legal.
During the three and nine months ended
Amortization of Intangible Assets and Acquisition-Related Costs
Amortization of intangible assets and acquisition-related costs during the three and nine months endedDecember 31, 2019 and 2018 were as follows (in thousands): Three Months Ended Nine Months Ended December 31, December 31, 2019 2018 2019 2018 Amortization of intangible assets$ 4,272 $ 3,539 $ 11,465 $ 8,921 Acquisition-related costs 812 - 1,433 1,456 Total$ 5,084 $ 3,539 $ 12,898 $ 10,377
Amortization of intangible assets consists of amortization of acquired intangible assets, including customer relationships and trade names. Acquisition-related costs include legal expense, due diligence costs, and other professional costs incurred for business acquisitions.
During the three and nine months endedDecember 31, 2019 , amortization of intangible assets and acquisition-related costs increased$1.5 million and$2.5 million , respectively, compared to the same period of the prior fiscal year, primarily driven by the intangible assets acquired through the Blue Microphones acquisition in the second quarter of fiscal year 2019 and the Streamlabs Acquisition in the third quarter of fiscal year 2020.
Restructuring Charges, Net
During the first quarter of fiscal year 2019, we implemented a restructuring plan to streamline and realign our overall organizational structure and reallocate resources to support our long-term growth opportunities. In July, 2018, our Board of Directors approved additional costs under this restructuring plan, totaling pre-tax charges of approximately$10.0 million to$15.0 million , of which$11.4 million has been recognized cumulatively as ofDecember 31, 2019 . The total charges consisted of cash severance and other personnel costs and are presented as restructuring charges (credit), net in the condensed consolidated statements of operations. As ofJune 30, 2019 , the Company had substantially completed this restructuring plan. 36
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The following table summarizes restructuring-related activities during the three
and nine months ended
Termination
Benefits
Accrual balance at
478
Cash payments (1,956 )
Accrual balance at June 30, 2019 2,911
Charges (364 )
Cash payments (1,140 )
Accrual balance at
(45 )
Cash payments (308 )
Accrual balance at
Other Income (Expense), Net
Other income (expense), net for the three and nine months ended
Three Months Ended Nine Months Ended
December 31, December 31,
2019 2018 2019 2018
Investment income (loss) related to
a deferred compensation plan $ 1,045 $ (1,887 ) $ 1,836 $ (1,077 )
Currency exchange gain (loss), net 203 (1,715 ) 702 (1,801 )
Gain (loss) on investments (709 ) 207 (772 ) 589
Other 562 648 1,086 1,360
Total $ 1,101 $ (2,747 ) $ 2,852 $ (929 ) Investment income (loss) represents earnings, gains, and losses on trading investments related to a deferred compensation plan offered by one of our subsidiaries.
Currency exchange gain (loss), net relates to balances denominated in currencies other than the functional currency in our subsidiaries, as well as to the sale of currencies, and gains or losses recognized on currency exchange forward contracts. We do not speculate in currency positions, but we are alert to opportunities to maximize currency exchange gains and minimize currency exchange losses.
Gain (loss) on investments represents the unrealized gain (loss) from the fair value change from the available-for-sale securities and equity-method investments during the periods presented.
Provision for (Benefit from) Income Taxes
The provision for (benefit from) income taxes and effective tax rates for the three and nine months endedDecember 31, 2019 and 2018 were as follows (Dollars in thousands): Three Months Ended Nine Months Ended December 31, December 31, 2019 2018 2019 2018
Provision for income taxes
The change in the effective income tax rate for the three and nine months endedDecember 31, 2019 , compared to the same periods endedDecember 31, 2018 , was primarily due to the mix of income and losses in the various tax jurisdictions in which we operate and the transitional income tax impact inSwitzerland . We have 37
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benefited from a longstanding tax ruling from the canton ofVaud throughDecember 31, 2019 . The transitional income tax impact represents income tax provision at the current full statutory income tax rate of 13.67% without taking account of other elements of the tax reform yet to be enacted. Furthermore, there was a discrete tax benefit of$1.7 million from adjusting deferred tax assets and liabilities inSwitzerland in the nine months endedDecember 31, 2019 . There were discrete tax benefits of$6.0 million and$2.7 million from the recognition of net excess tax benefits inthe United States and reversal of uncertain tax positions from the expiration of statutes of limitations, respectively, in the nine-month period endedDecember 31, 2019 , compared with$9.5 million and$2.3 million , respectively, in the nine-month period endedDecember 31, 2018 . As ofDecember 31, 2019 andMarch 31, 2019 , the total amounts of unrecognized tax benefits due to uncertain tax positions were$85.0 million and$76.5 million , respectively, all of which would affect the effective income tax rate if recognized.
Liquidity and Capital Resources
Cash Balances, Available Borrowings, and Capital Resources
As ofDecember 31, 2019 , we had cash and cash equivalents of$656.0 million , compared to$604.5 million as ofMarch 31, 2019 . As ofDecember 31, 2019 , 69% of the cash and cash equivalents were held inSwitzerland and 17% held inHong Kong andChina . We do not expect to incur any material adverse tax impact except for what has been recognized, or be significantly inhibited by any country in which we do business from the repatriation of funds toSwitzerland , our home domicile. The increase in cash and cash equivalents for the nine months endedDecember 31, 2019 , was primarily due to an increase in net cash provided by operating activities, partially offset by payment of cash dividends, cash paid for the Streamlabs Acquisition (see Note 2 to the condensed consolidated financial statements), purchases of property, plant and equipment, tax withholdings related to settlements of restricted stock units and shares repurchased under our share buyback program. As ofDecember 31, 2019 , our working capital was$680.4 million , compared to$632.6 million as ofMarch 31, 2019 . The increase was primarily driven by higher cash and cash equivalents, higher accounts receivables, net, higher inventories, and higher other current assets; partially offset by higher accounts payable and higher accrued and other current liabilities. Our working capital increased by$110.9 million compared to$569.5 million as ofDecember 31, 2018 , which was primarily driven by higher cash and cash equivalents, higher accounts receivable, net, and lower accrued and other current liabilities, partially offset by lower inventories and higher accounts payable. We had several uncommitted, unsecured bank lines of credit aggregating$78.4 million as ofDecember 31, 2019 . There are no financial covenants under these lines of credit with which we must comply. As ofDecember 31, 2019 , we had outstanding bank guarantees of$17.1 million under these lines of credit. The following table summarizes our condensed consolidated statements of cash flows (in thousands): Nine Months Ended December 31, 2019 2018 Net cash provided by operating activities$ 324,154 $ 273,443 Net cash used in investing activities (119,441 ) (165,756 ) Net cash used in financing activities (150,863 ) (155,401 ) Effect of exchange rate changes on cash and cash equivalents (2,320 ) (9,745 ) Net increase (decrease) in cash and cash equivalents$ 51,530 $ (57,459 ) 38
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The following tables present selected financial information and statistics as of and for the three months endedDecember 31, 2019 and 2018 (Dollars in thousands): As of December 31, 2019 2018 Accounts receivable, net$ 531,309 $ 484,204 Accounts payable$ 439,035 $ 435,764 Inventories$ 307,494 $ 342,031 Three Months Ended December 31, 2019 2018 Days sales in accounts receivable ("DSO") (Days) (1) 53
50
Days accounts payable outstanding ("DPO") (Days) (2) 70 73
Inventory turnover ("ITO") (x)(3) 7.4 6.3
(1) DSO is determined using ending accounts receivable, net as of the most recent quarter end and sales for the most recent quarter. (2) DPO is determined using ending accounts payable as of the most recent quarter end and cost of goods sold for the most recent quarter. (3) ITO is determined using ending inventories as of the most recent quarter end and annualized cost of goods sold (based on the most recent quarterly cost of goods sold). DSO for the three months endedDecember 31, 2019 increased by 3 days to 53 days, compared to 50 days for the same period of the prior fiscal year, primarily due to timing of customer payments.
DPO for the three months ended
ITO for the three months endedDecember 31, 2019 increased to 7.4 compared to 6.3 in the same period of the prior fiscal year, primarily due to higher sales growth, resulting to lower inventories at the period end. If we are not successful in launching and phasing in our new products, or market competition increases, or we are not able to sell the new products at the prices planned, it could have a material adverse impact on our sales, gross profit margin, operating results including operating cash flow, and inventory turnover in the future. During the nine months endedDecember 31, 2019 , we generated$324.2 million of cash from operating activities. Our main sources of operating cash flows were from net income, after adding back non-cash expenses of depreciation, amortization and share-based compensation expense, and from changes in operating assets and liabilities. The increase in accounts receivable, net was primarily driven by sales growth and timing of customer payments. The increase in inventories was primarily driven by seasonality. The increase in accounts payable was primarily driven by the timing of purchases and related payments.
Net cash used in investing activities was
Net cash used in financing activities was$150.9 million , primarily due to$124.2 million payment of cash dividend,$15.1 million used for repurchases of our registered shares, and$23.1 million tax withholdings related to net share settlements of restricted stock units, partially offset by$11.5 million in proceeds received from exercises of stock options and ESPP rights. During the nine months endedDecember 31, 2019 , there was a$2.3 million loss from effect of currency exchange rate changes on cash and cash equivalents, compared to a loss of$9.7 million during the same period of the prior fiscal year. The loss from effect of currency exchange rate changes during the nine months ended 39
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December 31, 2019 was primarily due to the weakening of the Euro, Chinese Renminbi and Brazilian Real against theU.S. Dollar by 1%, 4%, and 4% respectively. The loss from effect of currency exchange rate changes during the nine months endedDecember 31, 2018 was primarily due to the weakening of the Euro and Chinese Renminbi against theU.S. Dollar by 7% and 8%, respectively, during the period. Cash Outlook Our principal sources of liquidity are our cash and cash equivalents, cash flow generated from operations and, to a much lesser extent, capital markets and borrowings. Our future working capital requirements and capital expenditures may increase to support investment in product innovations and growth opportunities, or to acquire or invest in complementary businesses, products, services, and technologies. In fiscal year 2020, we paid a cash dividend ofCHF 121.8 million (U.S. Dollar amount of$124.2 million ) out of retained earnings available at the end of fiscal year 2019. In fiscal year 2019, we paid a cash dividend ofCHF 110.7 million (U.S. Dollar amount of$114.0 million ) out of retained earnings available at the end of fiscal year 2018. Any future dividends will be subject to the approval of our shareholders. InMarch 2017 , our Board of Directors approved our 2017 share buyback program, which authorizes us to purchase up to$250.0 million of our outstanding shares over a three-year period. The program was approved by the Swiss Takeover Board inMay 2017 . Although we enter into trading plans for systematic repurchases (e.g., 10b5-1 trading plans) from time to time, our share buyback program provides us with the opportunity to make repurchases during periods of favorable market conditions and 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. Opportunistic purchases may be started or stopped at any time without prior notice depending on market conditions and other factors. As ofDecember 31, 2019 ,$172.4 million is still available for repurchase under the 2017 share buyback program. If we do not generate sufficient operating cash flows to support our operations and future planned cash requirements, our operations could be harmed and our access to credit could be restricted or eliminated. However, we believe that the trend of our historical cash flow generation, our projections of future operations and our available cash balances will provide sufficient liquidity to fund our operations for at least the next 12 months.
Operating Leases Obligation
We lease facilities under operating leases, certain of which require us to pay property taxes, insurance and maintenance costs. Operating leases for facilities are generally renewable at our option and usually include escalation clauses linked to inflation. The remaining terms of our non-cancelable operating leases expire in various years through 2031.
Purchase Commitments
As ofDecember 31, 2019 , we had non-cancelable purchase commitments for inventory purchases made in the normal course of business to original design manufacturers, contract manufacturers and other suppliers, the majority of which are expected to be fulfilled within the next 12 months. Non-cancelable purchase commitments for capital expenditures primarily relate to commitments for tooling for new and existing products, computer hardware, leasehold and improvements. We expect to continue making capital expenditures in the future to support product development activities and ongoing and expanded operations. Although open purchase commitments are considered enforceable and legally binding, the terms generally allow us to reschedule or adjust our requirements based on business needs prior to delivery of goods or performance of services.
Other Contractual Obligations and Commitments
For further detail about our contractual obligations and commitments, refer to
our Annual Report on Form 10-K for the fiscal year ended
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Indemnifications
We indemnify certain 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 ofDecember 31, 2019 , no amounts have been accrued for indemnification provisions. We do not believe, based on historical experience and information currently available, that it is probable that any material amounts will be required to be paid under our indemnification arrangements. We also indemnify our current and former directors and certain current and former officers. Certain costs incurred for providing such indemnification may be recoverable under various insurance policies. We are unable to reasonably estimate the maximum amount that could be payable under these arrangements because these exposures are not capped, the obligations are conditional in nature, and the facts and circumstances involved in any situation that might arise are variable. Legal Proceedings From time to time we are involved in claims and legal proceedings that arise in the ordinary course of our business. We are currently subject to several such claims and a small number of legal proceedings. We believe that these matters lack merit and we intend to vigorously defend against them. Based on currently available information, we do not believe that resolution of pending matters will have a material adverse effect on our financial condition, cash flows or results of operations. However, litigation is subject to inherent uncertainties, and there can be no assurances that our defenses will be successful or that any such lawsuit or claim would not have a material adverse impact on our business, financial condition, cash flows and results of operations in a particular period. Any claims or proceedings against us, whether meritorious or not, can have an adverse impact because of defense costs, diversion of management and operational resources, negative publicity and other factors. Any failure to obtain necessary licenses or other rights, or litigation arising out of intellectual property claims, could adversely affect our business. 41
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