LOGITECH INTERNATIONAL S.A. This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on beliefs of our management as of the filing date of this Quarterly Report on Form 10-Q. These forward-looking statements include, among other things, statements related to:
•Our strategy for growth, future revenues, earnings, cash flow, uses of cash and other measures of financial performance, and market position; •Our business strategy and investment priorities in relation to competitive offerings and evolving consumer demand trends affecting our products and markets, worldwide economic and capital market conditions, fluctuations in currency exchange rates, and current and future general regional economic conditions for fiscal year 2023 and beyond; •The scope, nature or impact of acquisition, strategic alliance, and divestiture activities and restructuring of our organizational structure; •Our expectations regarding the success of our strategic acquisitions, including integration of acquired operations, products, technology, internal controls, personnel and management teams; •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 business and product plans and development and product innovation and their impact on future operating results and anticipated operating costs for fiscal year 2023 and beyond; •Opportunities for growth and our ability to execute on and take advantage of them, market opportunities, and marketing initiatives and strategy and our expectations regarding the success thereof; •Potential tariffs, their effects and our ability to mitigate their effects; •Capital investments and research and development; •Our expectations regarding our share repurchase and dividend programs; •Our expectations regarding our restructuring efforts, including the timing thereof; •The sufficiency of our cash and cash equivalents, cash generated from operations, and available borrowings under our bank lines of credit to fund capital expenditures and working capital needs; •The effects of environmental and other laws and regulations inthe United States and other countries in which we operate; and •The impact of global and regional events, such as the coronavirus ("COVID-19") pandemic, inflation and the war inUkraine , and any associated economic downturn and impacts to our business and future operating and financial performance. Forward-looking statements also include, among others, those statements including the words "anticipate," "believe," "could," "estimate," "expect," "forecast," "intend," "may," "plan," "project," "predict," "should," "will," and similar language. These statements reflect our views and assumptions as of the date of this Quarterly Report on Form 10-Q. All forward-looking statements involve risks and uncertainties that could cause our actual performance to differ materially from those anticipated in the forward-looking statements depending on a variety of factors. Important information as to these factors can be found in this Quarterly Report on Form 10-Q under the headings of "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Overview of our Company," "Critical Accounting Estimates," and "Liquidity and Capital Resources," among others. Factors that might cause or contribute to such differences include, but are not limited to, those discussed under Part II, Item 1A "Risk Factors" as well as elsewhere in this Quarterly Report on Form 10-Q and in our other filings with theU.S. Securities and Exchange Commission , or "SEC ." 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.
You should read the following discussion in conjunction with the interim unaudited condensed consolidated financial statements and related notes.
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Overview of Our Company
Logitech is a world leader in designing, manufacturing and marketing products
that help connect people to digital and cloud experiences. Over forty years ago,
Logitech created products to improve experiences around the personal computer
("PC") platform, and today it is a multi-brand, multi-category company designing
products that enable people to pursue their passions and connect to the
world. Logitech's products align with several large secular trends including
work and learn from anywhere, video everywhere, the increasing popularity of
gaming as a spectator and participant sport, and the democratization of content
creation. Logitech's brands include Logitech, Logitech G, ASTRO Gaming,
Streamlabs, Blue Microphones, and Ultimate Ears. Our Company's website is
www.logitech.com.
Our products participate primarily in four large market opportunities:
Creativity & Productivity, Gaming, Video Collaboration and Music. We sell our
products to a broad network of domestic and international customers, including
direct sales to retailers, e-tailers and enterprise customers and indirect sales
through distributors. Our worldwide channel network includes consumer
electronics distributors, retailers, e-tailers, mass merchandisers, specialty
stores, computer and telecommunications stores, value-added resellers and online
merchants. We primarily sell our services directly to end customers.
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.
Impacts of Macroeconomic and Geopolitical Conditions and Other Factors on our Business
InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the world. The COVID-19 pandemic has resulted in industry-wide global supply chain challenges, including manufacturing, transportation and logistics. We purchase certain products and key components from a limited number of sources, and depends on the supply chain, including freight, to receive components, transport finished goods and deliver our products across the world. More recently, we have also been impacted by adverse macroeconomic and geopolitical conditions. These conditions include but are not limited to inflation, foreign currency fluctuations, slow down of economic activity around the globe, in part due to rising interest rates, and lower consumer spending. In addition, the war inUkraine has further increased existing global supply chain, logistics, and inflationary challenges. Such global or regional economic and political conditions adversely affect demand for our products. These conditions also have an impact on our suppliers, contract manufacturers, logistics providers, and distributors, causing increases in cost of materials and higher shipping and transportation rates, and as a result impacting the pricing of our products. Price increases may not successfully offset cost increases or may cause us to lose market share and in turn adversely impact our results of operations. While global supply chain challenges improved during the second quarter of fiscal 2023, including logistics costs, shipping lead times, and component availability, if macroeconomic and geopolitical conditions and COVID-19 related factors do not improve or worsen, our results of operations may be adversely impacted. For additional information, see "Liquidity and Capital Resources" below and Part II item 1A "Risk Factors," including under the caption "Adverse global and regional economic and geopolitical conditions can materially adversely affect our business, results of operations and financial condition," "We purchase key components and products from a limited number of sources, and our business and operating results could be adversely affected if supply were delayed or constrained or if there were shortages of required components," "Our principal manufacturing operations and third-party contract manufacturers are located inChina andSoutheast Asia , which exposes us to risks associated with doing business in that geographic area as well as potential tariffs, adverse trade regulations, adverse tax consequences and pressure to move or diversify our manufacturing locations," "If we do not accurately forecast market demand for our products, our business and operating results could be adversely affected," "The full effect of the COVID-19 pandemic is still uncertain and cannot be predicted, and could adversely affect our business, results of operations and financial condition" and "If we do not successfully coordinate the worldwide manufacturing and distribution of our products, we could lose sales." 24 -------------------------------------------------------------------------------- Table of Contents Summary of Financial Results Our total sales for each of the three and six months endedSeptember 30, 2022 decreased 12% compared to the same periods of the prior fiscal year, driven by a decline in sales for all of our product categories other than Video Collaboration. Sales for the three months endedSeptember 30, 2022 decreased 26%, 9%, and 2% in the EMEA,Americas and theAsia Pacific regions, respectively, compared to the same period of the prior fiscal year. Sales for the six months endedSeptember 30, 2022 , increased 3% in theAsia Pacific region, and decreased 22% and 14% in the EMEA andAmericas regions, respectively, compared to the same period of the prior fiscal year.
Gross margin was 38.2% and 38.9% for the three and six months ended
Operating expenses for the three months endedSeptember 30, 2022 were$311.4 million , or 27.1% of sales, compared to$362.8 million , or 27.8% of sales, in the same period of the prior fiscal year. Operating expenses for the six months endedSeptember 30, 2022 were$655.5 million , or 28.4% of sales, compared to$728.6 million or 27.8% of sales, in the same period of the prior fiscal year.
Net income for the three and six months ended
Trends in Our Business
Our products participate primarily in four large multi-category market opportunities, including Creativity & Productivity, Gaming, Video Collaboration and Music. The following discussion represents key trends specific to our market opportunities.
Trends Specific to Our Market Opportunities
Creativity & Productivity: In the past few years, mice and keyboard shipments
have been strong due to work-from-home, learn-from-home and hybrid work trends.
We believe that innovative personal workspace peripherals, such as our mice and
keyboards, can refresh the design of personal workspaces and help improve the
productivity and engagement of remote work and learning, thus providing growth
opportunities. Hybrid work culture is also expanding the number of new
workspaces to which we can attach our personal workspace peripherals. Increasing
adoption of various cloud-based applications has led to multiple unique consumer
use cases, which we are addressing with our innovative product portfolio and a
deep understanding of our customer base. The popularity of streaming coupled
with hybrid work trends, provide 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 our peripherals and
accessories.
Gaming: Despite recent declines in the gaming market, PC gaming and console
gaming platforms have strong long-term structural growth opportunities driven
largely by the popularity of social gaming through online gaming, multi-platform
experiences, and esports. We expect gaming will increasingly become one of the
largest participant and spectator sports in the world. We believe Logitech is
well positioned to benefit from overall gaming market growth. In addition, our
acquisition of Streamlabs provides a solid platform to deliver recurring
services and subscriptions to gamers and streamers.
Video Collaboration: The long-term structural growth opportunities in the video
collaboration market continue to drive commercial and consumer adoption of video
conferencing. Video meetings continue to be an opportunity as companies want
lower-cost, cloud-based solutions that can provide their employees with the
ability to work from anywhere. We are continuing our efforts to create and sell
innovative products to accommodate the increasing demand from home offices and
small-size meeting rooms, such as huddle rooms, to medium and large-sized
meeting rooms. We will continue to invest in the development of select
business-specific products (both hardware and software), targeted product
marketing and sales channel development. We believe the continued digitization
of learning and hybrid learning environments is a future growth opportunity.
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Music: Consumers are optimizing their audio experiences on their tablets and smartphones with a variety of music peripherals including wireless mobile speakers and in-ear and other headphones. However, the mobile speaker market has matured and the integration of personal voice assistants has increased competition in the speaker category leading to a decline in our Mobile Speakers category sales in the past few years. In addition, we will continue developing true wireless audio products as growth in this category of the wireless audio market continues to be strong.
Business Seasonality and Product Introductions
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 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. Furthermore, cash flow is correspondingly lower in the first half of our fiscal year as we typically build inventories in advance for the third quarter and we pay an annual dividend following our Annual General Meeting, which is typically in September.
Capitalization and amortization of research and development expenses in the
Pursuant to the Tax Cuts and Jobs Act of 2017, research and development expenses are required to be capitalized and amortized over five years forU.S. tax purposes if the research and development activities are performed inthe United States , effective for tax year beginning afterDecember 31, 2021 . Absent a change in legislation, the provision is effective for us beginning in fiscal year 2023 which delays the deductibility of research and development expenses. As a result, cash tax payments inthe United States have generally increased beginning in fiscal year 2023 compared to prior years.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity withU.S. GAAP requires us to make assumptions, judgments, and estimates, that affect reported amounts of assets, liabilities, sales and expenses, and the disclosure of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors. We believe that the assumptions, judgments and estimates involved in the accounting for accruals for customer incentives and related breakage when appropriate, accrued sales return liability, inventory valuation, uncertain tax positions, and business acquisitions have the greatest potential impact on our condensed consolidated financial statements. These areas are key components of our results of operations and are based on complex rules requiring us to make judgments and estimates and consequently, we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. There have been no material changes in our critical accounting estimates during the six months endedSeptember 30, 2022 compared with the critical accounting estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 .
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.
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Constant Currency
We refer to our net sales growth rates excluding the impact of currency exchange
rate fluctuations as "constant currency" sales growth rates. Percentage of
constant currency sales growth is calculated by translating prior period sales
in each local currency at the current period's average exchange rate for that
currency and comparing that to current period sales.
Given our global sales presence and the reporting of our financial results in
U.S. Dollars, our financial results could be affected by significant shifts in
currency exchange rates. See "Results of Operations" for information on the
effect of currency exchange results on our 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
The term "sales" means net sales, except as otherwise specified and the sales growth discussion and sales growth rate percentages are inU.S. Dollars, except as otherwise specified. Results of OperationsNet Sales Our sales for each of the three and six months endedSeptember 30, 2022 decreased 12%, compared to the same periods of the prior fiscal year, which was primarily driven by a decline in sales for all of our product categories other than Video Collaboration. Our sales for the three and six month periods were also negatively impacted from lower demand and unfavorable changes in currency exchange rates. If currency exchange rates had been constant in the three and six months endedSeptember 30, 2022 and 2021, our constant dollar sales reduction rates would have been 7% and 8%, respectively.
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, Australian Dollar, Canadian Dollar, Japanese Yen, Pound Sterling and NewTaiwan Dollar . During the three months endedSeptember 30, 2022 , approximately 50% of our sales were denominated in currencies other than theU.S. Dollar. Sales by Region The following table presents the change in sales by region for the three and six months endedSeptember 30, 2022 , compared with the three and six months endedSeptember 30, 2021 : Sales Growth Rate Constant Dollar Sales Growth Rate Three Months Ended Six Months Ended Three Months Ended Six Months Ended September 30, 2022 September 30, 2022 September 30, 2022 September 30, 2022 Americas (9) % (14) % (9) % (14) % EMEA (26) % (22) % (16) % (14) % Asia Pacific (2) % 3 % 4 % 8 % Americas:
The decrease in sales in the
EMEA:
The decrease in sales in our EMEA region for the three-and-six-month periods was primarily driven by the decrease in sales of all of our product categories except Video Collaboration.
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The decrease in sales in our
Sales by Product Categories
Sales by product categories for the three and six months ended
Three Months Ended Six Months Ended
September 30, September 30,
2022 2021 Change 2022 2021 Change
Pointing Devices $ 185,200 $ 189,014 (2) % $ 368,483 $ 371,892 (1) %
Keyboards & Combos 200,853 236,272 (15) 428,573 454,629 (6)
PC Webcams 60,166 94,471 (36) 119,552 204,389 (42)
Tablet & Other Accessories 54,203 80,801 (33) 120,788 160,073 (25)
Gaming (1) 297,676 330,777 (10) 580,482 666,174 (13)
Video Collaboration 236,180 231,653 2 482,422 466,538 3
Mobile Speakers 39,195 39,492 (1) 61,505 67,976 (10)
Audio & Wearables 73,271 98,078 (25) 142,717 214,685 (34)
Other (2) 2,207 5,709 (61) 4,294 11,969 (64)
Total Sales $ 1,148,951 $ 1,306,267 (12) % $ 2,308,816 $ 2,618,325 (12) %
(1) Gaming includes streaming services revenue generated by Streamlabs. (2) Other includes Smart Home.
Pointing Devices
Our Pointing Devices category comprises PC- and Mac-related mice including trackballs, touchpads and presentation tools.
Sales of Pointing Devices remained flat for the three and six months ended
Keyboards & Combos
Our Keyboards & Combos category comprises PC keyboards, keyboard/mice combo products, and living room keyboards.
Sales of Keyboards & Combos decreased 15% for the three months endedSeptember 30, 2022 compared to the same period of the prior fiscal year, primarily driven by the decrease in sales of our cordless combos and corded PC keyboards. Sales of Keyboards & Combos decreased 6% for the six months endedSeptember 30, 2022 , compared to the same period of the prior fiscal year, primarily driven by the decrease in sales of our cordless combos and corded PC keyboards, partially offset by the increase in sales of our cordless PC keyboards.
PC Webcams
Our PC Webcams category comprises PC-based webcams targeted primarily at consumers, including streaming cameras.
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Sales of PC Webcams decreased 36% and 42% for the three and six months ended
September 30, 2022 , respectively, compared to the same periods of the prior
fiscal year, primarily driven by the decrease in sales of our HD Pro Webcam
C920, 1080p Pro Stream Webcam, and Webcam C260.
Tablet & Other Accessories
Our Tablet & Other Accessories category primarily comprises keyboards for tablets.
Sales of Tablet & Other Accessories products decreased 33% and 25% for the three and six months endedSeptember 30, 2022 , respectively, compared to the same periods of the prior fiscal year, primarily driven by the decrease in sales of most of our products, partially offset by increases in sales of our Rugged Combo 3 Touch and Combo Touch for iPad Air.
Gaming market:
Gaming
Our Gaming category comprises gaming mice, keyboards, headsets, gamepads, steering wheels, simulation controllers, console gaming headsets, console gaming controllers, and Streamlabs services.
Sales of Gaming decreased 10% and 13% for the three and six months endedSeptember 30, 2022 , respectively, compared to the same periods of the prior fiscal year, primarily driven by the decrease in sales of most of the gaming sub-categories, partially offset by an increase in sales of our gaming steering wheels. Video Collaboration market: Video Collaboration Our Video Collaboration category includes Logitech's conference room cameras, which combine affordable enterprise-quality audio and high definition 4K video to bring video conferencing to businesses of any size, as well as webcams and headsets that turn any desktop into an instant collaboration space. Sales of Video Collaboration products increased 2% and 3% for the three and six months endedSeptember 30, 2022 , respectively, compared to the same periods of the prior fiscal year, primarily due to an increase in sales of conference room cameras, headsets, and docks, partially offset by a decline in sales of webcams. Music market: Mobile Speakers
Our Mobile Speakers category is made up entirely of Bluetooth wireless speakers.
Sales of Mobile Speakers remained flat for the three months endedSeptember 30, 2022 , compared to the same period of the prior fiscal year. Sales of Mobile Speakers decreased 10% for the six months endedSeptember 30, 2022 compared to the same period of the prior fiscal year primarily due to a decrease in sales of most of our Mobile speaker sub-categories, partially offset by the sales of our Ultimate Ears Wonderboom 3 mini speakers, introduced in the second quarter of fiscal year 2023, and an increase in sales of our Hyperboom mobile speakers.
Audio & Wearables
Our Audio & Wearables category comprises PC speakers, PC headsets, in-ear headphones, premium wireless audio wearables and studio-quality Blue Microphones for professionals and consumers.
Sales of Audio & Wearables decreased 25% and 34% for the three and six months
ended
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Gross Profit
Gross profit for the three and six months ended
Three Months Ended Six Months Ended
September 30, September 30,
2022 2021 Change 2022 2021 ChangeNet sales$ 1,148,951 $ 1,306,267 (12) %$ 2,308,816 $ 2,618,325 (12) % Gross profit$ 438,780 $ 542,163 (19) %$ 898,383 $ 1,111,089 (19) % Gross margin 38.2 % 41.5 % 38.9 % 42.4 % 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 costs, shipping and handling costs, outside processing costs and write-down of inventories), and amortization of intangible assets. Gross margin for the three and six months endedSeptember 30, 2022 decreased by 330 basis points and 350 basis points, respectively, compared to the same periods of the prior fiscal year, primarily due to higher material costs and unfavorable impacts from changes in currency exchange rates.
Operating Expenses
Operating expenses for the three and six months ended
Three Months Ended Six Months Ended
September 30, September 30,
2022 2021 2022 2021
Marketing and selling $ 202,091 $ 256,627 $ 431,469 $ 508,941
% of sales 17.6 % 19.6 % 18.7 % 19.4 %
Research and development 69,009 68,661 144,526 137,907
% of sales 6.0 % 5.3 % 6.3 % 5.3 %
General and administrative 26,589 33,271 62,449 73,813
% of sales 2.3 % 2.5 % 2.7 % 2.8 %
Amortization of intangible assets and acquisition-related
costs 2,873 5,107 6,242 10,324
% of sales 0.3 % 0.4 % 0.3 % 0.4 %
Change in fair value of contingent consideration for
business acquisition - (925) - (2,399)
% of sales N/A (0.1) % N/A (0.1) %
Restructuring charges, net 10,817 11 10,817 11
% of sales 0.9 % - % 0.5 % - %
Total operating expenses $ 311,379 $ 362,752 $ 655,503 $ 728,597
% of sales 27.1 % 27.8 % 28.4 % 27.8 %
The decrease in total operating expenses during the three and six months ended
September 30, 2022 , compared to the same periods of the prior fiscal year, were
mainly due to decreases in marketing and selling expenses and general and
administrative expenses, partially offset by an increase in restructuring
expenses.
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.
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During the three and six months ended September 30, 2022 , marketing and selling
expenses decreased $54.5 million and $77.5 million , respectively, compared to
the same periods of the prior fiscal year, primarily driven by lower third-party
marketing and advertising spend.
Research and Development
Research and development expenses consist of personnel and related overhead costs for 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.
During the three months endedSeptember 30, 2022 , research and development expenses remained flat, compared to the same period of the prior fiscal year. During the six months endedSeptember 30, 2022 , research and development expenses increased$6.6 million , compared to the same period of the prior fiscal year, primarily driven by higher outsourcing expenses, and higher travel and entertainment expenses. 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 endedSeptember 30, 2022 , general and administrative expenses decreased$6.7 million and$11.4 million , respectively, compared to the same periods of the prior fiscal year, 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 trademarks and trade names. Acquisition-related costs include legal expenses, due diligence costs, and other professional costs incurred for business acquisitions. During the three and six months endedSeptember 30, 2022 , amortization of intangible assets and acquisition-related costs decreased$2.2 million and$4.1 million , respectively, compared to the same periods of the prior fiscal year, primarily due to certain acquired intangible assets becoming fully amortized and the write-off of Jaybird intangible assets in the third quarter of fiscal year 2022. Restructuring Charges,Net During the second quarter of fiscal year 2023, we initiated a restructuring plan to realign our business group and engineering structure with our go-to-market strategy to more effectively compete within the enterprise market and to better serve end-users. As a result, we recorded pre-tax restructuring charges of$10.8 million , related to employee severance and other termination benefits, for the three and six months endedSeptember 30, 2022 . We expect to substantially complete this restructuring within the next twelve months.
Interest Income
Interest income for the three and six months ended
Three Months Ended Six Months Ended
September 30, September 30,
2022 2021 2022 2021
Interest income $ 3,459 $ 201 $ 4,908 $ 517
We invest in highly liquid instruments with an original maturity of three months
or less at the date of purchase, which are classified as cash equivalents.
During the three and six months ended September 30, 2022 interest income
increased $3.3 million and $4.4 million , respectively, compared to the same
periods of the prior fiscal year, primarily driven by the increase in interest
rates.
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Other income (expense), net for the three and six months ended
Three Months Ended Six Months Ended
September 30, September 30,
2022 2021 2022 2021Investment income (expense) related to the deferred compensation plan
$ (762) $ (73) $ (4,148) $ 1,095 Currency exchange gain (loss), net (2,052) (4,979) (5,012) 738 Loss on investments, net (22,934) (2,032) (11,577) (961) Other 351 381 964 860 Total$ (25,397) $ (6,703) $ (19,773) $ 1,732 Investment income related to the deferred compensation plan represents earnings, gains, and losses on marketable securities related to a deferred compensation plan offered by one of our subsidiaries. The decrease in investment income for three and six months endedSeptember 30, 2022 compared to the same periods of the prior fiscal year primarily relates to the change in market performance of the underlying securities. 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. The loss for the three months endedSeptember 30, 2022 was primarily due to the weakening of the Australian Dollar, and the Brazilian Real against theU.S. Dollar offset by gains in the Swiss Franc. The loss for the three months endedSeptember 30, 2021 was primarily due to the weakening of the Brazilian Real against theU.S. Dollar. The loss for the six months endedSeptember 30, 2022 was primarily due to the weakening of the Brazilian Real, Australian Dollar, and the Japanese Yen, offset by the gain from the weakening of the Chinese Renminbi against theU.S Dollar. The gain for the six months endedSeptember 30, 2021 was primarily due to the strengthening of the Brazilian Real offset by the loss from the strengthening of the Chinese Renminbi against theU.S Dollar. Loss on investments, net, represents unrealized gain (loss) from the fair value change of investment, gain (loss) on equity-method investments and impairment of investments during the periods presented, as applicable. The loss for the three and six months endedSeptember 30, 2022 were primarily due to the impairment charges related to one of our equity method investments. The loss for the six months endedSeptember 30, 2022 was partially offset by an unrealized gain related to one of our equity investments without readily determinable fair value resulting from observable price changes. See Note 6 to our condensed consolidated financial statements for additional information.
Provision for Income Taxes
The provision for income taxes and effective income tax rates for the three and six months endedSeptember 30, 2022 and 2021 were as follows (Dollars in thousands): Three Months Ended Six Months Ended September 30, September 30, 2022 2021 2022 2021 Provision for income taxes$ 23,372 $ 33,453 $ 45,088 $ 58,444 Effective income tax rate 22.2 % 19.3 % 19.8 % 15.2 % The change in the effective income tax rate for the three and six months endedSeptember 30, 2022 was primarily due to the mix of income and losses in the various tax jurisdictions in which we operate. There was a discrete tax provision of$0.2 million and a discrete tax benefit of$1.2 million from the recognition of shortfalls and excess tax benefits, respectively, inthe United States in the three and six months endedSeptember 30, 2022 . In addition, there were discrete tax benefits of$0.3 million and$1.5 million from the reversal of uncertain tax positions from the expiration of statutes of limitations, respectively, in the three and six month period endedSeptember 30, 2022 . The change in the effective income tax rate for the three and six months endedSeptember 30, 2021 was primarily due to the mix of income and losses in the various tax jurisdictions in which we operate. There were 32 -------------------------------------------------------------------------------- Table of Contents discrete tax benefits of$0.6 million and$14.3 million from the recognition of excess tax benefits inthe United States in the three and six months endedSeptember 30, 2021 , respectively. Furthermore, there were discrete tax benefits of$0.5 million and$1.5 million from the reversal of uncertain tax positions from the expiration of statutes of limitations, respectively, in the three and six month period endedSeptember 30, 2021 . As ofSeptember 30, 2022 andMarch 31, 2022 , the total amount of unrecognized tax benefits due to uncertain tax positions was$174.9 million and$176.0 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 ofSeptember 30, 2022 , we had cash and cash equivalents of$868.5 million , compared with$1,328.7 million as ofMarch 31, 2022 . Our cash and cash equivalents consist of bank demand deposits and short-term time deposits, of which 66% is held inSwitzerland and 17% were held inChina (includingHong Kong ). We do not expect to incur any material adverse tax impact except for what has already been recognized, or to be significantly inhibited by any country in which we do business from the repatriation of funds toSwitzerland , our home domicile. As ofSeptember 30, 2022 , our working capital was$1,448.0 million , compared to$1,651.8 million as ofMarch 31, 2022 . The decrease was primarily driven by lower cash balances, resulting from higher share repurchases and payments of cash dividends, and lower inventories, partially offset by decreases in accrued liabilities and accounts payable, and an increase in accounts receivable, net. We had several uncommitted, unsecured bank lines of credit aggregating$176.0 million as ofSeptember 30, 2022 . There are no financial covenants under these lines of credit with which we must comply. As ofSeptember 30, 2022 , we had outstanding bank guarantees of$22.2 million under these lines of credit. The following tables present selected financial information and statistics as of and for the three months endedSeptember 30, 2022 and 2021 (Dollars in thousands): As of September 30, 2022 2021 Accounts receivable, net$ 772,731 $ 728,074 Accounts payable$ 546,563 $ 660,720 Inventories$ 879,979 $ 827,710 Three Months Ended September 30, 2022 2021 Days sales in accounts receivable ("DSO") (Days)(1) 61 50 Days accounts payable outstanding ("DPO") (Days)(2) 69 78 Inventory turnover ("ITO") (x)(3) 3.2 3.7
(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 endedSeptember 30, 2022 increased by 11 days to 61 days, compared to 50 days for the same period of the prior fiscal year, primarily due to a comparatively higher percentage of sales in the last month of the current quarter. 33 -------------------------------------------------------------------------------- Table of Contents DPO for the three months endedSeptember 30, 2022 decreased by 9 days, compared to 78 days for the same period of the prior fiscal year, primarily due to lower inventory purchases than prior year resulting from softened demand and lower marketing spend. ITO for the three months endedSeptember 30, 2022 decreased by 0.5, compared to 3.7 for the same period of the prior fiscal year, primarily due to lower demand and higher inventory balance than prior year. 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.
The following table summarizes our condensed consolidated statements of cash flows (Dollars in thousands):
Six Months Ended
September 30,
2022 2021
Net cash provided by (used in) operating activities $ 37,256 $ (177,848)
Net cash used in investing activities (53,561) (63,208)
Net cash used in financing activities (416,087) (371,905)
Effect of exchange rate changes on cash and cash equivalents (27,823) (70)
Net decrease in cash and cash equivalents $
(460,215)
For the six months endedSeptember 30, 2022 , net cash provided by operating activities was$37.3 million resulting from net income of$182.9 million , a favorable impact from adding back non-cash expenses totaling$100.2 million , and an unfavorable net change in operating assets and liabilities of$245.9 million . Non-cash expenses were primarily related to depreciation and amortization, share-based compensation expenses, and loss on investments. The increase in accounts receivable, net was primarily driven by timing of sales within the quarter. The decrease in inventories was primarily driven by lower inventory purchases. The decrease in accounts payable was primarily driven by lower inventory purchases and marketing spend. The decrease in accrued and other liabilities was primarily driven by payment of the fiscal year 2022 annual bonus. For the six months endedSeptember 30, 2022 , net cash used in investing activities was$53.6 million , primarily due to$45.4 million of purchases of property, plant, and equipment and$5.8 million payments for acquisitions, net of cash acquired. For the six months endedSeptember 30, 2022 , net cash used in financing activities was$416.1 million , resulting from repurchases of our registered shares of$237.6 million , payment of cash dividends of$158.7 million , and tax withholdings related to net share settlements of restricted stock units of$26.7 million . For the six months endedSeptember 30, 2022 , there was a$27.8 million loss from currency exchange rate effect on cash and cash equivalents, primarily due to the weakening of the Euro, Chinese Renminbi, Swiss Franc, Australian Dollar, NewTaiwan Dollar and the Japanese Yen versus theU.S. Dollar by 12%, 11%, 6%, 14%, 10% and 16%, respectively. The loss from the effect of currency rate changes was immaterial during the six months endedSeptember 30, 2021 .
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 investments in product innovations and growth opportunities or to acquire or invest in complementary businesses, products, services, and technologies. The current market volatility and future impact of COVID-19 cannot be predicted with certainty and may increase our costs of capital and otherwise adversely affect our business, results of operations, financial condition and liquidity. In fiscal year 2023, we paid a cash dividend ofCHF 156.1 million (U.S. Dollar amount of$158.7 million based on the exchange rate on the date of payment) out of fiscal year 2022 retained earnings. In fiscal year 2022, we paid a cash dividend ofCHF 147.0 million (U.S. Dollar amount of$159.4 million ) out of fiscal year 2021 retained earnings.
In
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InApril 2021 , our Board of Directors approved an increase of$750.0 million of the 2020 share repurchase program, to an aggregate amount of$1.0 billion . The Swiss Takeover Board approved this increase and it became effective onMay 21, 2021 . InJuly 2022 , our Board of Directors approved an increase of$500 million to the 2020 share repurchase program to an aggregate amount of up to$1.5 billion . The Swiss Takeover Board approved this increase and it became effective onAugust 19, 2022 . As ofSeptember 30, 2022 ,$686.3 million was available for repurchase under the 2020 repurchase program. Although we enter into trading plans for systematic repurchases (e.g., 10b5-1 trading plans) from time to time, our share repurchase program provides us with the opportunity to make opportunistic repurchases during periods of favorable market conditions and is expected to remain in effect for a period of three years throughJuly 27, 2023 . 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. If we do not generate sufficient operating cash flows to support our operations and future planned cash requirements, our operations could be harmed and our access to credit facilities could be restricted or eliminated. However, we believe that the trend of our historical cash flow generation, our projections of future operations and our available cash balances will provide sufficient liquidity to fund our operations for at least the next 12 months.
Operating Leases Obligations
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. During the six months endedSeptember 30, 2022 , our operating lease obligations increased approximately$50.0 million , primarily related to newly commenced operating leases for office spaces in theAmericas and EMEA regions. There have been no other material changes to our contractual obligations as previously disclosed in our Annual Report on Form 10-K for the year endedMarch 31, 2022 . The remaining terms of our non-cancelable operating leases expire in various years through 2033.
Purchase Commitments
As ofSeptember 30, 2022 , we had non-cancelable purchase commitments of$589.5 million for inventory purchases made in the normal course of business from original design manufacturers, contract manufacturers and other suppliers, the majority of which are expected to be fulfilled within the next 12 months. We recorded a liability for firm, non-cancelable, and unhedged inventory purchase commitments in excess of anticipated demand or net realizable value consistent with our valuation of excess and obsolete inventory. As ofSeptember 30, 2022 , the liability for these purchase commitments was$46.1 million and is recorded in accrued and other current liabilities in the condensed consolidated balance sheet. We have firm purchase commitments of$20.0 million for capital expenditures primarily related to commitments for tooling and equipment for new and existing products. 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
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 ofSeptember 30, 2022 , 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. 35 -------------------------------------------------------------------------------- Table of Contents 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. For more information about Legal Proceedings, see Part II Item 1 Legal Proceedings of this quarterly report on Form 10-Q for the period endedSeptember 30, 2022 . 36
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