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MarketScreener Homepage  >  Equities  >  Swiss Exchange  >  Logitech International S.A.    LOGN   CH0025751329

LOGITECH INTERNATIONAL S.A.

(LOGN)
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LOGITECH INTERNATIONAL S A : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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10/25/2019 | 06:05am EST

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, 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 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, 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.
On September 26, 2019, we entered into an agreement to acquire all equity
interests of General Workings, Inc. ("Streamlabs") for a total consideration of
$89 million in cash, subject to a working capital adjustment, plus an additional
earn-out of up to $29 million in stock based on the achievement of certain net
revenues for the period beginning on January 1, 2020 and ending on June 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. The transaction is subject to various closing
conditions and is expected to close in late October 2019.
From time to time, we may seek to partner with, or acquire when appropriate,
companies that have products, personnel, and technologies that complement our
strategic direction. We continually review our product offerings and our
strategic direction in light of our profitability targets, competitive
conditions, changing consumer trends and the evolving nature of the interface
between the consumer and the digital world.
Summary of Financial Results

Our total sales for the three and six months ended September 30, 2019 increased 4% and 5%, respectively, compared to the three and six months ended September 30, 2018, supported by stronger sales in the Americas and EMEA.

Our sales for the three months ended September 30, 2019 increased 5%, 6%, and 1% in the Americas, EMEA, and Asia Pacific, respectively, compared to the same period of the prior fiscal year. Our sales for the six months ended September 30, 2019 increased 5%, 8%, and 1% in the Americas, EMEA, and Asia Pacific, respectively, compared to the same period of the prior fiscal year.


Our gross margin for the three months ended September 30, 2019 increased 70
basis points to 37.8% from 37.1% for the three months ended September 30, 2018.
Our gross margin for the six months ended September 30, 2019 increased 60 basis
points to 37.5% from 36.9% for the six months ended September 30, 2018. Our
gross margin for both periods benefited from cost savings, tariff mitigation
efforts and product mix, partially offset by unfavorable currency exchange and
an increase in U.S.-China tariffs. We expect a negative impact in the third
quarter of fiscal year 2020 from these tariffs, net of our ongoing mitigation
efforts.

Operating expenses for the three months ended September 30, 2019 increased to
$204.0 million compared to $191.0 million in the same period of the prior fiscal
year. Operating expenses were 28.3% of sales for the three months ended
September 30, 2019, compared to 27.6% of sales in the same period of the prior
fiscal year.

Operating expenses for the six months ended September 30, 2019 increased to
$395.5 million compared to $382.5 million in the same period of the prior fiscal
year. Operating expenses were 29.0% of sales for the six months ended
September 30, 2019, compared to 29.4% of sales in the same period of the prior
fiscal year.

Net income for the three and six months ended September 30, 2019 was $72.9 million and $118.3 million, respectively, compared to $64.2 million and $102.6 million for the three and six months ended September 30, 2018, respectively.

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:  Although new PC shipments continue to be weak, 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. 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 the iPad and iPad mini.
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. We believe Logitech is well positioned to benefit from the 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 music market grew during fiscal year 2019, driven by growing
consumption of music through mobile devices such as smartphones and tablets. 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 headphone industry continued to flourish with strong
revenue growth. The largest growth was seen in wireless headphones where the
market tripled year-over-year and where there was a substantial increase to
average selling prices. Continued growth in the 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 of Harmony 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 ending
December 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
On May 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 on August 6, 2019 to take effect
on January 1, 2020. As of September 30, 2019, TRAF has not been enacted in all
cantons, including the canton of Vaud, as the cantonal legislative procedures
are in process. We have benefited from a longstanding tax ruling from the canton
of Vaud through March 31, 2019. During the second quarter ended September 30,
2019, the canton of Vaud concluded the longstanding cantonal tax ruling will
only continue to apply

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through December 31, 2019. We continue to monitor the enactment process and our
transitional measures to comply with federal and cantonal tax reform provisions.
We anticipate an increase in our cash tax payments in Switzerland beginning in
fiscal year 2020.

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, 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 and Summary of
Significant Accounting Policies discussed in Note 1 to the condensed
consolidated financial statements, there have been no substantial changes in our
significant accounting policies during the six months ended September 30, 2019,
compared with the significant accounting policies described in our Annual Report
on Form 10-K for the fiscal year ended March 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 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 rate results on our 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.

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 U.S. Dollars, except as otherwise specified.

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 September 30, 2019,
approximately 51% of our sales were denominated in currencies other than the
U.S. Dollar.

Results of Operations
Net Sales
Our sales in the three and six months ended September 30, 2019 increased 4% and
5%, respectively, compared to the same period of the prior fiscal year, driven
by sales increases in the Americas and EMEA regions. Strong growth in Video
Collaboration, Keyboards & Combos and Audio & Wearables was partially offset by
a decline in sales for Mobile Speakers for both periods presented. If currency
exchange rates had been constant in the three and six months ended September 30,
2019 and 2018, our constant dollar sales growth rates would have been 6% and 7%,
respectively.


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Sales by Region


The following table presents the change in sales by region for the three and six
months ended September 30, 2019, compared with the three and six months ended
September 30, 2018:
                                    Sales Growth Rate                              Constant Dollar
                                                                                  Sales Growth Rate
                         Three Months
                             Ended
                         September 30,          Six Months Ended       Three Months Ended    Six Months Ended
                             2019              September 30, 2019      September 30, 2019   September 30, 2019
Americas                           5 %                      5 %                   5 %                   6 %
EMEA                               6 %                      8 %                  10 %                  13 %
Asia Pacific                       1 %                      1 %                   3 %                   4 %



Americas:

The increase in sales in our Americas region for the three-month ended period
presented above was primarily driven by growth in Video Collaboration, Audio &
Wearables, and Tablet and Other Accessories, partially offset by a decline in
sales in Mobile Speakers and Gaming. The increase in sales in our Americas
region for the six-month period presented above was primarily driven by the same
categories, partially offset by a decline in sales for Gaming and Pointing
Devices.

EMEA:


The increase in sales in our EMEA region for the three-month ended period
presented above was primarily driven by growth in Video Collaboration and
Pointing Devices, partially offset by a decline in sales in Tablet and Other
Accessories and Mobile Speakers. The increase in sales in our EMEA region for
the six-month period presented above was primarily driven by growth in Video
Collaboration, Mobile Speakers, Pointing Devices and Smart Home.

Asia Pacific:


The increase in sales in our Asia Pacific region for both the three and six
-month ended periods presented above was primarily driven by growth in Video
Collaboration, Gaming and Keyboards & Combos, partially offset by a decline in
sales in Mobile Speakers and Audio & Wearables.
Sales by Product Categories

Sales by product categories for the three and six months ended September 30, 2019 and 2018 were as follows (Dollars in thousands):

                                 Three Months Ended                         Six Months Ended
                                   September 30,                              September 30,
                           2019           2018        Change        2019            2018         Change
Pointing Devices       $  132,770$  128,337         3  %   $   254,753$   256,127        (1 )%
Keyboards & Combos        139,049        131,872         5          267,728         260,094         3
PC Webcams                 28,748         28,221         2           56,876          57,895        (2 )
Tablet & Other
Accessories                33,847         36,710        (8 )         72,186          69,146         4
Video Collaboration        89,553         57,176        57          162,977         115,968        41
Mobile Speakers            57,232         77,100       (26 )        107,648         111,427        (3 )
Audio & Wearables          68,018         61,560        10          126,642         113,714        11
Gaming                    161,014        160,792         -          295,529         296,818         -
Smart Home                  9,434          9,241         2           19,298          18,252         6
Other (1)                      26            137       (81 )            279             185        51
Total sales            $  719,691$  691,146         4  %   $ 1,363,916$ 1,299,626         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.

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Creativity & Productivity Market:

Pointing Devices

Our Pointing Devices category comprises PC- and Mac-related mice, including trackballs, touchpads and presenters.


Sales of Pointing Devices increased 3% and decreased 1% in the three and six
months ended September 30, 2019, respectively, compared to the same periods of
the prior fiscal year. The increase in sales for the three-month period was
primarily driven by growth in cordless mice, partially offset by a decline in
corded mice. The decline in sales for the six-month period was primarily driven
by a decrease in corded mice and presentation tools, partially offset by growth
in cordless mice.

Keyboards & Combos

Our Keyboards & Combos category comprises PC keyboards, living room keyboards and keyboard/mice combo products.

Sales of Keyboards & Combos increased 5% and 3% in the three and six months ended September 30, 2019, respectively, compared to the same periods of the prior fiscal year. The increases were across all regions for both periods and driven by increases in sales of cordless and corded keyboards and cordless keyboard/mice combos.

PC Webcams

Our PC Webcams category comprises PC-based webcams targeted primarily at consumers.


PC Webcams sales increased 2% and decreased 2% in the three and six months ended
September 30, 2019, respectively, compared to the same periods of the prior
fiscal year. The increase in sales for the three-month period was primarily
driven by an increase in the sales of our Webcam C260, 1080P Pro Stream Webcam,
BRIO 4K Stream Edition and C270i IPTV CAM, partially offset by a decline in
sales of our HD Pro Webcam C920 and Webcam C170. The decrease in sales for the
six-month period was primarily driven by a decline in sales of our HD PRO Webcam
C920 and Webcam C170, partially offset by an increase in sales of our Webcam
C260, 1080P Pro Stream Webcam, BRIO 4K Stream Edition and C270i IPTV CAM.

Tablet & Other Accessories

Our Tablet & Other Accessories category primarily comprises keyboards for tablets.


Sales of Tablet & Other Accessories products decreased 8% and increased 4% in
the three and six months ended September 30, 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 Slim Combos for the
iPad Pro and Slim Folio for the iPad, partially offset by sales increases of
Rugged Combo 2 and sales of Slim Folio for iPad Pro introduced in the first
quarter of fiscal year 2020. The increase in sales for the six-month period was
primarily driven by an increase in sales of our Rugged Combo 2 and Slim Folio
for iPad and Slim Folio keyboard cases for the iPad Pro, partially offset by a
decline in sales of our Slim Combo keyboard cases for the iPad Pro and Slim
Folio for the iPad.

Gaming market:

Our Gaming category comprises gaming mice, keyboards, headsets, gamepads, steering wheels, simulation controllers, console gaming headsets and console gaming controllers.


Gaming sales remained flat for the three and six months ended September 30,
2019, compared to the same periods of the prior fiscal year. Increases in the
sales of gaming mice, PC gaming keyboard and console gaming controllers were
offset by declines in the sales of our gaming headsets and console gaming
headsets for both periods presented above.

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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 57% and 41% in the three and six
months ended September 30, 2019, respectively, compared to the same periods of
the prior fiscal year. The increase for both periods 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 our Tap Touch Controller introduced in the first quarter
of fiscal year 2020.

Music market:

Mobile Speakers

Our Mobile Speakers category is made up entirely of Bluetooth wireless speakers.


Sales of Mobile Speakers decreased 26% and 3% for the three and six months ended
September 30, 2019, respectively, compared to the same periods of the prior
fiscal year. The decrease for the three-month period was primarily due to the
decline in sales of our BOOM 3, MEGABOOM 3, WONDERBOOM, and BOOM 2 mobile
speakers, partially offset by sales of our WONDERBOOM 2 introduced in the first
quarter of fiscal year 2020. The decrease for the six-month period is 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 mobile speakers.

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 increased 10% and 11% for the three and six months ended
September 30, 2019, respectively, compared to the same periods of the prior
fiscal year. The increase for the three-month period was primarily driven by the
sales of our Blue Microphones products as a result of our business combination
in the second quarter of fiscal year 2019. The increase for the six-months
period was primarily driven by the sales of our Blue Microphones products,
partially offset by a decline in the sales of our PC speakers and Jaybird
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 increased 2% and 6% during the three and six months ended
September 30, 2019, respectively, compared to the same periods of the prior
fiscal year. The increase for both periods was primarily due to an increase in
the sales of our home security products, partially offset by a decline in sales
of our Harmony remote products.


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Gross Profit

Gross profit for the three and six months ended September 30, 2019 and 2018 was as follows (Dollars in thousands):

                       Three Months Ended                       Six Months Ended
                          September 30,                           September 30,
                  2019          2018       Change        2019            2018        Change
Net sales      $ 719,691$ 691,146       4 %     $ 1,363,916$ 1,299,626       5 %
Gross profit   $ 272,076$ 256,117       6       $   511,052$   480,054       6
Gross margin        37.8 %        37.1 %                    37.5 %          36.9 %



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 six months ended September 30, 2019 and 2018 were as follows (Dollars in thousands):

                                          Three Months Ended                  Six Months Ended
                                             September 30,                     September 30,
                                        2019               2018            2019              2018
Marketing and selling               $  134,155$  121,801$  257,188$  236,385
% of sales                                18.6  %            17.6 %          18.9 %            18.2 %
Research and development                41,964             39,542          84,207            78,529
% of sales                                 5.8  %             5.7 %           6.2 %             6.0 %
General and administrative              24,048             25,206          46,207            50,679
% of sales                                 3.3  %             3.6 %           3.4 %             3.9 %
Amortization of intangible assets
and acquisition-related costs            4,218              4,317           7,814             6,838
% of sales                                 0.6  %             0.6 %           0.6 %             0.5 %
Restructuring charges (credits),
net                                       (364 )              119             114            10,040
% of sales                                   -  % (1)           - %             - % (1)         0.8 %
Total operating expenses            $  204,021$  190,985$  395,530$  382,471
% of sales                                28.3  %            27.6 %          29.0 %            29.4 %


(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 six months ended September 30, 2019, marketing and selling
expenses increased $12.4 million and $20.8 million, respectively, compared to
the same periods of the prior fiscal year. The increases were primarily driven
by higher advertising and marketing expenses and higher personnel-related costs
due to increased headcount, partly resulting from the Blue Microphones
acquisition.

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 six months ended September 30, 2019, research and development expenses increased $2.4 million and $5.7 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 acquisition.

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 six months ended September 30, 2019, general and administrative expenses decreased $1.2 million and $4.5 million, respectively, compared to the same periods of the prior fiscal year. The decrease was primarily driven by lower personnel-related costs.

Amortization of Intangible Assets and Acquisition-Related Costs

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 months ended September 30, 2019, amortization of intangible
assets and acquisition-related costs remained relatively flat compared to the
same period of the prior fiscal year. During the six months ended September 30,
2019, amortization of intangible assets and acquisition-related costs increased
$1.0 million 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, partially offset by a
decrease in acquisition-related costs.

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 of September 30,
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 of June 30, 2019, the Company has
substantially completed this restructuring plan.

The following table summarizes restructuring-related activities during the three and six months ended September 30, 2019 (in thousands):

                                         Termination
                                          Benefits

Accrual balance at March 31, 2019$ 4,389 Charges

                                         478
Cash payments                                (1,956 )

Accrual balance at June 30, 2019$ 2,911 Charges

                                        (364 )
Cash payments                                (1,140 )

Accrual balance at September 30, 2019$ 1,407

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Other Income (Expense), Net

Other income (expense), net for the three and six months ended September 30, 2019 and 2018 was as follows (in thousands):

                                              Three Months Ended               Six Months Ended
                                                September 30,                   September 30,
                                             2019             2018           2019            2018
Investment income related to a
deferred compensation plan              $       202$      596$       791$      810
Currency exchange gain (loss), net             (319 )          1,788             499            (86 )
Gain (loss) on investments                     (274 )            395             (63 )          382
Other                                           281              610             524            712
Total                                   $      (110 )$    3,389$     1,751$    1,818

Investment income 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 to 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.

Provision for (Benefit from) Income Taxes


The provision for (benefit from) income taxes and effective tax rates for the
three and six months ended September 30, 2019 and 2018 were as follows (Dollars
in thousands):
                                               Three Months Ended         Six Months Ended
                                                 September 30,             September 30,
                                                2019         2018          2019        2018
Provision for (benefit from) income taxes   $  (2,598 )$ 6,203$    3,938$ 986
Effective income tax rate                        (3.7 )%       8.8 %          3.2 %     1.0 %



The change in the effective income tax rate for the three months ended
September 30, 2019, compared to the same period ended September 30, 2018, was
primarily due to the transitional income tax impact in Switzerland. We have
benefited from a longstanding tax ruling from the canton of Vaud through March
31, 2019. During the second quarter, the canton of Vaud concluded the
longstanding cantonal tax ruling will only continue to apply through December
31, 2019. The transitional income tax impact, which represents income tax
provision at the current full statutory income tax rate of 13.63% without taking
account of the tax reform yet to be enacted, resulted in a tax benefit of $5.9
million in the three-month period ended September 30, 2019. In addition, there
was a discrete tax benefit of $4.0 million from adjusting deferred tax assets
and liabilities in Switzerland in the three months ended September 30, 2019.

The change in the effective income tax rate for the six months ended September
30, 2019, compared to the same period ended September 30, 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 in Switzerland discussed above.
In the six months ended September 30, 2019, there was a discrete tax benefit of
$1.7 million from adjusting deferred tax assets and liabilities in Switzerland.
Furthermore, there were discrete tax benefits of $6.7 million and $1.8 million
from the recognition of excess tax benefits in the United States and reversal of
uncertain tax positions from the expiration of statutes of limitations,
respectively, in the six-month period ended September 30, 2019, compared with
$9.0 million and $1.4 million, respectively, in the six-month period ended
September 30, 2018.

As of September 30, 2019 and March 31, 2019, the total amounts of unrecognized
tax benefits due to uncertain tax positions were $78.9 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 of September 30, 2019, we had cash and cash equivalents of $574.5 million,
compared to $604.5 million as of March 31, 2019. As of September 30, 2019, 48%
of the cash and cash equivalents were held in Switzerland and 12% held in Hong
Kong and China. 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 to Switzerland, our home
domicile.

The decrease in cash and cash equivalents for the six months ended September 30,
2019, was primarily due to payment of cash dividends, purchases of property,
plant and equipment, tax withholdings related to settlements of restricted stock
units and shares repurchased under our share buyback program, partially offset
by proceeds from exercises of stock options and purchase rights and net cash
provided by operating activities.

As of September 30, 2019, our working capital was $622.4 million, compared to
$632.6 million as of March 31, 2019. The decrease was primarily driven by lower
cash and cash equivalents and higher accounts payable, partially offset by
higher accounts receivable, net, higher inventories, higher other current assets
and lower accrued and other current liabilities. Our working capital increased
by $183.8 million compared to $438.6 million as of September 30, 2018, which was
primarily driven by higher cash and cash equivalents, higher accounts
receivable, net, lower accounts payable, and lower accrued and other current
liabilities, partially offset by lower inventories.

We had several uncommitted, unsecured bank lines of credit aggregating $77.5
million as of September 30, 2019. There are no financial covenants under these
lines of credit with which we must comply. As of September 30, 2019, we had
outstanding bank guarantees of $20.6 million under these lines of credit.

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The following table summarizes our condensed consolidated statements of cash
flows (in thousands):
                                                                    Six Months Ended
                                                                      September 30,
                                                                   2019           2018
Net cash provided by operating activities                      $  143,019$   97,220
Net cash used in investing activities                             (18,582 )     (153,815 )
Net cash used in financing activities                            (150,884 )     (151,245 )
Effect of exchange rate changes on cash and cash equivalents       (3,605 )       (9,157 )
Net decrease in cash and cash equivalents                      $  (30,052 )

$ (216,997 )




The following table presents selected financial information and statistics as of
and for the three months ended September 30, 2019 and 2018 (Dollars in
thousands):
                              As of September 30,
                               2019          2018
Accounts receivable, net   $   465,969$ 459,689
Accounts payable           $   411,043$ 440,564
Inventories                $   338,314$ 358,774



                                                            Three Months Ended
                                                              September 30,
                                                               2019           2018
Days sales in accounts receivable ("DSO") (Days) (1)         58             

60

Days accounts payable outstanding ("DPO") (Days) (2)         83             

91

Inventory turnover ("ITO") (x)(3)                           5.3             

4.9

(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 and annualized cost of goods sold (based on the most recent quarterly cost of goods sold).

DSO for the three months ended September 30, 2019 decreased by 2 days to 58 days, compared to 60 days for the same period of the prior fiscal year, primarily due to timing of customer payments and claims.

DPO for the three months ended September 30, 2019 decreased by 8 days, compared to the same period of the prior fiscal year, primarily due to the timing of purchases and related payments.


ITO for the three months ended September 30, 2019 increased to 5.3 compared to
4.9 in the same period of the prior fiscal year, primarily due to higher sales
growth (hence higher cost of goods sold) than inventory increase.

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 impact on our sales, gross profit margin,
operating results including operating cash flow, and inventory turnover in the
future.

During the six months ended September 30, 2019, we generated $143.0 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 growth and timing of customer payments and claims. The increase in
inventories was primarily driven by the expectation of increased sales for the
holidays in the third quarter. The increase in accounts payable was primarily
driven by the timing of purchases and related payments.


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Net cash used in investing activities was $18.6 million, primarily due to $18.1 million of purchases of property, plant and equipment.


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 $20.9 million tax withholdings related to net share
settlements of restricted stock units, partially offset by $9.3 million in
proceeds received from exercises of stock options and purchase rights.

During the six months ended September 30, 2019, there was a $3.6 million loss
from effect of currency exchange rate changes on cash and cash equivalents,
compared to a loss of $9.2 million during the same period of the prior fiscal
year. The loss from effect of currency exchange rate changes during the six
months ended September 30, 2019 was primarily due to the weakening of the Euro,
Chinese Renminbi and Brazilian Real against the U.S.Dollar by 3%, 5%, 7%
respectively. The loss from effect of currency exchange rate changes during the
six months ended September 30, 2018 was primarily due to the weakening of the
Euro, Chinese Renminbi, Brazilian Real, and Japanese Yen against the U.S. Dollar
by 6%, 9%, 18% and 6%, 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.

On September 26, 2019, we entered into an agreement to acquire all equity
interests of Streamlabs for a total consideration of $89 million in cash,
subject to a working capital adjustment, plus an additional earn-out of up to
$29 million in stock based on the achievement of certain net revenues for the
period beginning on January 1, 2020 and ending on June 30, 2020. The transaction
is subject to various closing conditions and is expected to close in late
October 2019.

In fiscal year 2020, we paid a cash dividend of CHF 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 of CHF 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.

In March 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
in May 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 of September 30, 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.


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Purchase Commitments


As of September 30, 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 March 31, 2019.

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 of September 30, 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.

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