LOGITECH INTERNATIONAL SA - FORM 10-Q - February 2, 2010

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
            (Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarter ended December 31, 2009
   
 
or
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period from          to

Commission File Number: 0-29174

LOGITECH INTERNATIONAL S.A.
(Exact name of registrant as specified in its charter)
Logitech Logo

Canton of Vaud, Switzerland
(State or other jurisdiction
of incorporation or organization)
None
(I.R.S. Employer
Identification No.)

Logitech International S.A.
Apples, Switzerland
c/o Logitech Inc.
6505 Kaiser Drive
Fremont, California 94555
(Address of principal executive offices and zip code)
 
(510) 795-8500
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      No  
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  
Accelerated filer  
Non-accelerated filer    (Do not check if a smaller reporting company)
Smaller reporting company  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes      No
 
As of January 22, 2010, there were 175,771,554 shares of the Registrant’s share capital outstanding.

 
 
 


 

 

TABLE OF CONTENTS
 
Part I
FINANCIAL INFORMATION
 Page
     
Item 1.
Consolidated Financial Statements (Unaudited)
3
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
30
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
48
 
 
  
Item 4.
Controls and Procedures
50
     
Part II
OTHER INFORMATION
  
     
Item 1.
Legal Proceedings
51
 
 
  
Item 1A.
Risk Factors
51
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
60
     
Item 6.
Exhibit Index
61
   
Signatures
62
   
Exhibits
  
 
In this document, unless otherwise indicated, references to the “Company” or “Logitech” are to Logitech International S.A., its consolidated subsidiaries and predecessor entities. Unless otherwise specified, all references to U.S. dollar, dollar or $ are to the United States dollar, the legal currency of the United States of America. All references to CHF are to the Swiss franc, the legal currency of Switzerland.
 
Logitech, the Logitech logo, and the Logitech products referred to herein are either the trademarks or the registered trademarks of Logitech. All other trademarks are the property of their respective owners.
 

 
2
 

PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
Financial Statement Description
Page
     
•
Consolidated Statements of Income for the three and nine months ended December 31, 2009 and 2008
4
     
•
Consolidated Balance Sheets as of December 31, 2009 and March 31, 2009
5
     
•
Consolidated Statements of Cash Flows for the nine months ended December 31, 2009 and 2008
6
 
 
  
•
Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended December 31, 2009 and 2008
7
     
•
Notes to Consolidated Financial Statements
8
 
 
  




 
3
 

LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)



   
Three months ended
    
Nine months ended
  
   
December 31,
    
December 31,
  
   
2009
    
2008
    
2009
    
2008
  
   
(Unaudited)
  
                         
Net sales
   $ 617,101     $ 627,466     $ 1,441,304     $ 1,800,884  
Cost of goods sold
     408,137       439,970       1,002,730       1,211,742  
Gross profit
     208,964       187,496       438,574       589,142  
Operating expenses:
                                
Marketing and selling
     87,322       86,046       215,095       248,066  
Research and development
     32,931       32,401       96,116       99,011  
General and administrative
     30,284       26,273       75,204       89,202  
Restructuring charges
     -       -       1,494       -  
         Total operating expenses
     150,537       144,720       387,909       436,279  
Operating income
     58,427       42,776       50,665       152,863  
Interest income, net
     414       2,212       1,645       7,539  
Other income, net
     3,052       8,101       2,416       7,809  
Income before income taxes
     61,893       53,089       54,726       168,211  
Provision for income taxes
     4,807       12,596       14,262       26,101  
Net income
   $ 57,086     $ 40,493     $ 40,464     $ 142,110  
                                 
Net income per share:
                                
Basic
   $ 0.33     $ 0.23     $ 0.23     $ 0.80  
Diluted
   $ 0.32     $ 0.22     $ 0.22     $ 0.77  
                                 
Shares used to compute net income per share:
                                
Basic
     175,426       178,497       177,829       178,721  
Diluted
     177,668       181,145       179,866       183,484  


















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

 
4
 

LOGITECH INTERNATIONAL S.A.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)


   
December 31,
    
March 31,
  
   
2009
    
2009
  
   
(Unaudited)
        
ASSETS
  
Current assets:
            
Cash and cash equivalents
   $ 281,052     $ 492,759  
Short-term investments
     -       1,637  
Accounts receivable
     248,625       213,929  
Inventories
     235,012       233,467  
Other current assets
     71,803       56,884  
Total current assets
     836,492       998,676  
Property, plant and equipment
     92,452       104,132  
Goodwill
     547,816       242,909  
Other intangible assets
     102,307       32,109  
Other assets
     66,798       43,704  
Total assets
   $ 1,645,865     $ 1,421,530  
                 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
  
                 
Current liabilities:
                
Accounts payable
   $ 316,651     $ 157,798  
Accrued liabilities
     192,234       131,496  
Total current liabilities
     508,885       289,294  
Other liabilities
     155,811       134,528  
Total liabilities
     664,696       423,822  
                 
Commitments and contingencies
                
                 
Shareholders' equity:
                
Shares, par value CHF 0.25 - 191,606,620 issued and authorized
                
and 50,000,000 conditionally authorized at December 31, 2009 and
                
March 31, 2009
     33,370       33,370  
Additional paid-in capital
     25,982       45,012  
Less shares in treasury, at cost, 15,981,692 at December 31, 2009
                
and 12,124,078 at March 31, 2009
     (387,833 )     (341,454 )
Retained earnings
     1,382,125       1,341,661  
Accumulated other comprehensive loss
     (72,475 )     (80,881 )
Total shareholders' equity
     981,169       997,708  
Total liabilities and shareholders' equity
   $ 1,645,865     $ 1,421,530  







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

 
5
 

LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)


   
Nine months ended
  
   
December 31,
  
   
2009
    
2008
  
   
(Unaudited)
  
             
Cash flows from operating activities:
            
Net income
   $ 40,464     $ 142,110  
Non-cash items included in net income:
                
Depreciation
     41,852       33,850  
Amortization of other intangible assets
     7,602       5,808  
Share-based compensation expense related to options, RSUs and
                
  purchase rights
     17,249       17,952  
Write-down of investments
     -       1,764  
Excess tax benefits from share-based compensation
     (1,708 )     (6,641 )
Loss (gain) on cash surrender value of life insurance policies
     (1,216 )     1,440  
In-process research and development
     -       1,000  
Deferred income taxes and other
     (23,414 )     (3,495 )
Changes in assets and liabilities:
                
Accounts receivable
     (22,470 )     (10,916 )
Inventories
     19,405       (100,063 )
Other assets
     12,314       (7,058 )
Accounts payable
     151,042       75,945  
Accrued liabilities
     58,230       23,273  
Net cash provided by operating activities
     299,350       174,969  
                 
Cash flows from investing activities:
                
Purchases of property, plant and equipment
     (26,438 )     (38,631 )
Proceeds from cash surrender of life insurance policies
     813       -  
Acquisitions and investments, net of cash acquired
     (388,807 )     (64,430 )
Premiums paid on cash surrender value life insurance policies
     -       (427 )
Net cash used in investing activities
     (414,432 )     (103,488 )
                 
Cash flows from financing activities:
                
Repayment of short and long-term debt
     (13,601 )     -  
Purchases of treasury shares
     (101,267 )     (78,870 )
Proceeds from sale of shares upon exercise of options and purchase rights
     15,979       23,496  
Excess tax benefits from share-based compensation
     1,708       6,641  
Net cash used in financing activities
     (97,181 )     (48,733 )
                 
Effect of exchange rate changes on cash and cash equivalents
     556       (24,924 )
Net decrease in cash and cash equivalents
     (211,707 )     (2,176 )
Cash and cash equivalents at beginning of period
     492,759       482,352  
Cash and cash equivalents at end of period
   $ 281,052     $ 480,176  





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

 
6
 

LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)


                                       
Accumulated
        
               
Additional
                      
other
        
   
Registered shares
    
paid-in
    
Treasury shares
    
Retained
    
comprehensive
        
   
Shares
    
Amount
    
capital
    
Shares
    
Amount
    
earnings
    
loss
    
Total
  
March 31, 2008
     191,606     $ 33,370     $ 49,821       12,431     $ (338,293 )   $ 1,234,629     $ (19,483 )   $ 960,044  
Net income
     -       -       -       -       -       142,110       -       142,110  
Cumulative translation
                                                                
adjustment
     -       -       -       -       -       -       (34,987 )     (34,987 )
Minimum pension liability adjustment
     -       -       -       -       -       -       261       261  
Deferred hedging loss
     -       -       -       -       -       -       (191 )     (191 )
Total comprehensive income
                                                             107,193  
Tax benefit from exercise of stock options
     -       -       12,245       -       -       -       -       12,245  
Purchase of treasury shares
     -       -       -       2,803       (78,870 )     -       -       (78,870 )
Sale of shares upon exercise of options and purchase rights
     -       -       (25,042 )     (2,164 )     48,538       -       -       23,496  
Share-based compensation expense related to
employee stock options and stock purchase rights
     -       -       18,052       -       -       -       -       18,052  
December 31, 2008
     191,606     $ 33,370     $ 55,076       13,070     $ (368,625 )   $ 1,376,739     $ (54,400 )   $ 1,042,160  
                                                                 
March 31, 2009
     191,606     $ 33,370     $ 45,012       12,124     $ (341,454 )   $ 1,341,661     $ (80,881 )   $ 997,708  
Net income
     -       -       -       -       -       40,464               40,464  
Cumulative translation adjustment
     -       -       -       -       -       -       7,519       7,519  
Minimum pension liability adjustment
     -       -       -       -       -       -       347       347  
Net deferred hedging loss
     -       -       -       -       -       -       540       540  
Total comprehensive loss
                                                             48,870  
Purchase of treasury shares
     -       -       -       5,838       (101,267 )     -       -       (101,267 )
Tax benefit from exercise of stock options
     -       -       2,576       -       -       -       -       2,576  
Sale of shares upon exercise of options and purchase rights
     -       -       (38,909 )     (1,981 )     54,888       -       -       15,979  
Share-based compensation expense
related to employee stock options,
RSUs and stock purchase rights
     -       -       17,303       -       -       -       -       17,303  
December 31, 2009
     191,606     $ 33,370     $ 25,982       15,981     $ (387,833 )   $ 1,382,125     $ (72,475 )   $ 981,169  














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

 
7
 

LOGITECH INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1 — The Company
 
Logitech is a world leader in personal peripherals for computers and other digital platforms. We develop and market innovative products in PC navigation, Internet communications, digital music, home-entertainment control, gaming and wireless devices. For the PC, our products include mice, trackballs, keyboards, interactive gaming controllers, multimedia speakers, headsets, webcams, 3D control devices and lapdesks. Our Internet communications products include webcams, headsets, video communications services, and digital video security systems for a home or small business. Also, in December 2009 we acquired LifeSize Communications, Inc., which provides scalable high-definition enterprise video conferencing solutions. Our digital music products include speakers, earphones, and custom in-ear monitors. For home entertainment systems, we offer the Harmony line of advanced remote controls and the Squeezebox and Transporter wireless music solutions for the home. For gaming consoles, we offer a range of gaming controllers, including racing wheels, wireless guitar and drum controllers, and microphones, as well as other accessories. We sell our products to a network of distributors and resellers (“retail”) and to original equipment manufacturers (“OEMs”). The large majority of our revenues are derived from sales of our products for use by consumers.

Logitech was founded in Switzerland in 1981, and Logitech International S.A. has been the parent holding company of Logitech since 1988. Logitech International S.A. is a Swiss holding company with its registered office in Apples, Switzerland, which conducts its business through subsidiaries in the Americas, Europe, Middle East, Africa (“EMEA”) and Asia Pacific. Shares of Logitech International S.A. are listed on both the Nasdaq Global Select Market, under the trading symbol LOGI, and the SIX Swiss Exchange, under the trading symbol LOGN.

Note 2 — Summary of Significant Accounting Policies
 
Basis of Presentation
 
The consolidated financial statements include the accounts of Logitech and its subsidiaries. All intercompany balances and transactions have been eliminated. The consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and therefore do not include all the information required by U.S. GAAP for complete financial statements. They should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended March 31, 2009 included in its Annual Report on Form 10-K.

Net income for the nine months ended December 31, 2009 includes $2.2 million in pretax charges related to restructuring accruals, bonus accruals, and revenue related adjustments from fiscal year 2009. We reviewed the accounting errors utilizing SEC Staff Accounting Bulletin No. 99, Materiality and SEC Staff Accounting Bulletin No. 108, Effects of Prior Year Misstatements on Current Year Financial Statements, and determined the impact of errors to be immaterial to the current and prior quarterly and annual periods.

Certain prior year financial statement amounts have been reclassified to conform to the current year presentation with no impact on previously reported net income.

Subsequent events were evaluated through the time of filing this Form 10-Q with the SEC on February 2, 2010 and are disclosed as applicable in the notes to the consolidated financial statements.

In the opinion of management, these financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the periods presented. Operating results for the three and nine months ended December 31, 2009 are not necessarily indicative of the results that may be expected for the year ending March 31, 2010 or any future periods.
 
Fiscal Year
  
The Company’s fiscal year ends on March 31. Interim quarters are thirteen-week periods, each ending on a Friday. For purposes of presentation, the Company has indicated its quarterly periods as ending on the month end.
 
Changes in Significant Accounting Policies

There have been no substantial changes in our significant accounting policies during the three and nine months ended December 31, 2009 compared with the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.

Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect reported amounts of assets, liabilities, net sales and expenses, and the disclosure of contingent assets and liabilities. Although these estimates are based on management’s best knowledge of current events and actions that may impact the Company in the future, actual results could differ from those estimates.

Recent Accounting Pronouncements
 
In October 2009, the Financial Accounting Standards Board (“FASB”) published FASB Accounting Standards Update (“ASU”) 2009-14, Certain Revenue Arrangements That Include Software Elements, to provide guidance for revenue arrangements that include both tangible products and software elements.  Under this guidance, tangible products containing software components and non-software components that function together to deliver the product’s essential functionality are excluded from the software revenue guidance in Accounting Standards Codification (“ASC”) Subtopic 985-605, Software-Revenue Recognition. In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance. ASU 2009-14 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are currently evaluating the appropriate timing for the adoption of ASU 2009-14 and its potential impact on the Company’s consolidated financial statements.
 
In October 2009, the FASB published ASU 2009-13, Multiple Deliverable Revenue Arrangements, which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. This guidance amends the criteria in Subtopic 605-25, Revenue Recognition--Multiple-Element Arrangements, to establish a selling price hierarchy for determining the selling price of a deliverable, based on vendor specific objective evidence, acceptable third party evidence, or estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, the disclosures required for multiple-deliverable revenue arrangements are expanded. ASU 2009-13 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are currently evaluating the appropriate timing for the adoption of ASU 2009-13 and its potential impact on the Company’s consolidated financial statements and disclosures.


 
8
 

Note 3 — Net Income per Share

The computations of basic and diluted net income per share for the Company were as follows (in thousands except per share amounts):
 

   
Three months ended
    
Nine months ended
  
   
December 31,
    
December 31,
  
   
2009
    
2008
    
2009
    
2008
  
             
Net income
   $ 57,086     $ 40,493     $ 40,464     $ 142,110  
              .                  
Weighted average shares - basic
     175,426       178,497       177,829       178,721  
Effect of potentially dilutive stock options
                                
  and stock purchase rights
     2,242       2,648       2,037       4,763  
Weighted average shares - diluted
     177,668       181,145       179,866       183,484  
                                 
Net income per share - basic
   $ 0.33     $ 0.23     $ 0.23     $ 0.80  
Net income per share - diluted
   $ 0.32     $ 0.22     $ 0.22     $ 0.77  

Basic and diluted weighted average shares outstanding for the three and nine months ended December 31, 2009, as reported in the Company’s earnings release included in its current report on Form 8-K filed on January 21, 2009, were adjusted subsequent to the filing. The adjustment increased the basic net income per share for the three months ended December 31, 2009 from $0.32 per share as previously reported to $0.33 per share. The adjustment did not impact the basic net income per share for the nine months ended December 31, 2009 and diluted net income per share for the three and nine months ended December 31, 2009.

Share equivalents attributable to outstanding stock options and restricted stock units (“RSUs”) of 12,677,929 and 11,941,055 for the three months ended December 31, 2009 and 2008 and 13,277,283 and 8,711,837 for the nine months ended December 31, 2009 and 2008 were excluded from the calculation of diluted net income per share because the combined exercise price, average unamortized fair value and assumed tax benefits upon exercise of these options and RSUs were greater than the average market price of the Company’s shares, and therefore their inclusion would have been anti-dilutive.

Employee equity share options, non-vested shares and similar equity instruments granted by the Company are treated as potential shares in computing diluted net income per share. Diluted shares outstanding include the dilutive effect of in-the-money options which is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount that the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax impact that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.
 

Note 4 — Fair Value Measurements

The Company considers fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The Company utilizes the following three-level fair value hierarchy to establish the priorities of the inputs used to measure fair value:

·  
Level 1 – Quoted prices in active markets for identical assets or liabilities.

·  
Level 2 – Observable inputs other than quoted market prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

·  
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The following table presents the Company’s financial assets and liabilities that were accounted for at fair value as of December 31, 2009, classified by the level within the fair value hierarchy (in thousands):


   
Level 1
    
Level 2
    
Level 3
  
Cash and cash equivalents
   $ 281,052     $ -     $ -  
Investment securities
     -       -       1,637  
Foreign exchange derivative assets
     2,168       -       -  
Total assets at fair value
   $ 283,220     $ -     $ 1,637  
Foreign exchange derivative liabilities
   $ 453     $ -     $ -  
Total liabilities at fair value
   $ 453     $ -     $ -  


The following table presents the Company’s financial assets and liabilities that were accounted for at fair value as of March 31, 2009, classified by the level within the fair value hierarchy (in thousands):


   
Level 1
    
Level 2
    
Level 3
  
Cash and cash equivalents
   $ 492,759     $ -     $ -  
Investment securities
     -       -       1,637  
Foreign exchange derivative assets
     208       -       -  
Total assets at fair value
   $ 492,967     $ -     $ 1,637  
Foreign exchange derivative liabilities
   $ 1,849     $ -     $ -  
Total liabilities at fair value
   $ 1,849     $ -     $ -  


Notes 5 and 15 describe the inputs and valuation techniques used to determine fair value.

9
Note 5 — Cash and Cash Equivalents and Investment Securities

Cash and cash equivalents consist of bank demand deposits and time deposits. The time deposits have terms of less than 30 days. Cash and cash equivalents are carried at cost, which is equivalent to fair value.

The Company’s investment securities portfolio as of December 31, 2009 and March 31, 2009 consisted of auction rate securities collateralized by residential and commercial mortgages. The investment securities are classified as available-for-sale and are reported at estimated fair value. Auction rate securities generally have maturity dates greater than 10 years, with interest rates that typically reset through an auction every 28 days. All our investment securities as of December 31, 2009 have maturity dates in excess of 10 years. Since August 2007, auctions for these investments have failed. Consequently, the investments are not currently liquid and the Company will not be able to realize the proceeds, if any, from these investments until a future auction of these investments is successful or a buyer is found outside of the auction process. Management has determined that sale or realization of proceeds from the sale of these investment securities is not expected within the Company’s normal operating cycle of one year, and hence the investment securities were reclassified to non-current assets as of April 1, 2009.

The fair value of our auction rate securities is determined by estimating the values of the underlying collateral using published mortgage indices or interest rate spreads for comparably-rated collateral and applying discounted cash flow or option pricing methods to the estimated collateral value. The mortgage indices and spreads are adjusted for factors such as the issuance date of the auction rate security and the rating of the underlying assets. In addition, inputs to the valuation methods include factors such as the timing and amount of cash flow streams, the default risk underlying the collateral, discount rates, and overall capital market liquidity. Such adjustments indicate the inputs fall within Level 3 of the fair value hierarchy.

The following table presents the change in fair value of the Company’s investment securities during the nine months ended December 31, 2009:


Balance as of March 31, 2009
   $ 1,637  
Unrealized loss
     -  
Balance as of June 30, 2009
     1,637  
Unrealized loss
     -  
Balance as of September 30, 2009
     1,637  
Unrealized loss
     -  
Balance as of December 31, 2009
   $ 1,637  


The par value of our investment securities portfolio at December 31, 2009 and March 31, 2009 was $47.5 million.


 
10
 

Note 6 — Acquisitions

LifeSize

On December 11, 2009, pursuant to a merger agreement signed November 10, 2009, Logitech acquired LifeSize Communications, Inc. (“LifeSize”), an Austin, Texas based privately-held company specializing in high definition video communication solutions. Logitech expects the acquisition to drive growth in video communication for the enterprise and small-to-medium business markets by leveraging the two companies’ technology expertise, including camera design, firewall traversal, video compression and bandwidth management.

The total consideration paid to acquire LifeSize was $382.8 million, not including cash acquired of $3.7 million. Logitech paid $382.3 million in cash to the holders of all outstanding shares of LifeSize capital stock, all vested options issued by LifeSize, and all outstanding warrants to purchase LifeSize stock. As part of the acquisition, Logitech assumed all outstanding unvested LifeSize stock options and unvested restricted stock held by continuing LifeSize employees at December 11, 2009. The assumed options are exercisable for a total of approximately 1.0 million Logitech shares and the assumed restricted stock was exchanged for 0.1 million Logitech shares. The stock options and restricted stock continue to have the same terms and conditions as under LifeSize’s option plan. The fair value attributable to precombination employee services for the stock options assumed, which is part of the consideration paid to acquire LifeSize, was $0.5 million. The weighted average fair value of $12.07 per share for the stock options assumed was determined using a Black-Scholes-Merton option-pricing valuation model with the following weighted-average assumptions: expected term of 2.0 years, expected volatility of 57%, and risk-free interest rate of 0.7%.
 
 
The total cash consideration paid of $382.3 million included $37.0 million deposited into an escrow account as security for indemnification claims under the merger agreement and $0.5 million deposited in a stockholder representative expense fund. The escrow fund will be disbursed by the escrow trustee to the former holders of LifeSize capital stock, vested options and warrants with 50% disbursed in December 2010 and the remaining fifty percent in June 2011, subject in each case to indemnification claims.

In connection with the merger, Logitech also agreed to establish a cash and stock option retention and incentive plan for certain LifeSize employees, linked to the achievement of LifeSize performance targets. The duration of the plan’s performance period is two years, from January 1, 2010 to December 31, 2011. The total available cash incentive is $9.0 million over the two year performance period. In December 2009, options to purchase 850,000 shares of Logitech stock were issued in connection with the retention and incentive plan.

 The acquisition has been accounted for using the purchase method of accounting. Accordingly, the total consideration was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. Fair values were determined by Logitech management based on information available at the date of acquisition. The results of operations of LifeSize were included in Logitech’s consolidated financial statements from the date of acquisition, and were not material to the Company’s reported results.

The preliminary allocation of total consideration to the assets acquired and liabilities assumed based on the estimated fair value of LifeSize was as follows (in thousands):


   
December 11, 2009
    
Estimated Life
  
             
Tangible assets acquired
   $ 33,635        
Deferred tax asset, net
     13,460        
Intangible assets acquired
              
Existing technology
     30,000    
4 years
  
Patents and core technology
     4,500    
3 years
  
Trademark/trade name
     7,600    
5 years
  
Customer relationships and other
     31,500    
5 years
  
Goodwill
     302,670       -  
      423,365          
Liabilities assumed
     (27,047 )        
Debt assumed
     (13,504 )        
Total consideration
   $ 382,814          


The deferred tax asset primarily relates to the tax benefit of a net operating loss carryforward, net of the deferred tax liability related to intangible assets. The existing technology of LifeSize relates to the platform technology used in LifeSize’s high-definition video conferencing systems. The value of the technology was determined based on the present value of estimated expected cash flows attributable to the technology, assuming the highest and best use by a market participant. The patents and core technology represent awarded patents, filed patent applications and core architectures, trade secrets or processes used in LifeSize’s current and planned future products. Trademark/trade name relates to the LifeSize brand names. The value of the patents, core technology and trademark/trade name was estimated by capitalizing the estimated profits saved as a result of acquiring or licensing the asset. Customer relationships and other relates to the ability to sell existing, in-process, and future versions of the technology and services to LifeSize’s existing customer base, valued based on projected discounted cash flows generated from customers in place. The intangible assets acquired are amortized on a straight-line basis over their estimated useful lives. The goodwill associated with the acquisition is primarily attributable to the opportunities and economies of scale from combining the operations and technologies of Logitech and LifeSize. This goodwill is not subject to amortization and is not expected to be deductible for income tax purposes. The debt that Logitech assumed as part of the acquisition was repaid in full on December 18, 2009.
 
TV Compass

On November 27, 2009, Logitech acquired certain assets from TV Compass, Inc. (“TV Compass”), a Chicago-based company providing video software and services for the Web and mobile devices. The acquisition has been treated as an acquisition of a business and has been accounted for using the purchase method of accounting. The total consideration paid of $10.0 million was allocated based on estimated fair values to $4.2 million of identifiable intangible assets, with the balance allocated to goodwill. Fair values were determined by Company management based on information available at the date of acquisition. The intangible assets acquired are amortized on a straight-line basis over their estimated useful lives of 6 years. The goodwill results from expected incremental revenue from the use of the acquired technology in enhancing our products. The goodwill is not subject to amortization and is not expected to be deductible for income tax purposes.

11
Unaudited pro forma financial information

The unaudited pro forma financial information in the table below summarizes the combined results of operations of Logitech and LifeSize during the three and nine months ended December 31, 2009 as though the acquisition took place as of the beginning of fiscal years 2010 and 2009. The pro forma financial information also includes certain adjustments such as amortization expense from acquired intangible assets, share-based compensation expense related to unvested stock options assumed, depreciation adjustments from alignment of the companies’ policies related to property, plant and equipment, interest expense related to debt assumed, expense related to retention bonuses, pre-acquisition transaction costs, and the income tax impact of the pro forma adjustments. The pro forma financial information presented below (in thousands) is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the periods presented.


   
Three months ended
    
Nine months ended
  
   
December 31,
    
December 31,
  
   
2009
    
2008
    
2009
    
2008
  
   
(Unaudited)
  
                         
Net sales
   $ 630,505     $ 647,808     $ 1,497,189     $ 1,854,641  
Net income
   $ 45,694     $ 38,856     $ 19,912     $ 124,768  
Net income per share - basic
   $ 0.26      $ 0.22      $ 0.11      $ 0.70   
Net income per share - diluted   $ 0.26      $ 0.21      $ 0.11      $ 0.68   


 
12
 

Note 7 — Balance Sheet Components

            The following provides the components of certain balance sheet amounts (in thousands):


   
December 31,
    
March 31,
  
   
2009
    
2009
  
             
Accounts receivable:
            
Accounts receivable
   $ 413,416     $ 339,903  
Allowance for doubtful accounts
     (6,688 )     (6,705 )
Allowance for returns
     (17,908 )     (25,470 )
Cooperative marketing arrangements
     (32,038 )     (33,892 )
Customer incentive programs
     (96,772 )     (47,559 )
Price protection
     (11,385 )     (12,348 )
    $ 248,625     $ 213,929  
Inventories:
                
Raw materials
   $ 36,801     $ 30,959  
Work-in-process
     74       19  
Finished goods
     198,137       202,489  
    $ 235,012     $ 233,467  
Other current assets:
                
Tax and VAT refund receivables
   $ 24,306     $ 17,275  
Deferred taxes
     33,076       25,546  
Prepaid expenses and other
     14,421       14,063  
    $ 71,803     $ 56,884  
Property, plant and equipment:
                
Plant and buildings
   $ 58,969     $ 56,211  
Equipment
     114,541       108,779  
Computer equipment
     59,475       49,532  
Computer software
     70,805       60,259  
      303,790       274,781  
Less: accumulated depreciation
     (221,545 )     (188,371 )
      82,245       86,410  
Construction-in-progress
     7,082       14,708  
Land
     3,125       3,014  
    $ 92,452     $ 104,132  
Other assets:
                
Deferred taxes
   $ 43,906     $ 27,718  
Cash surrender value of life insurance contracts
     11,090       10,685  
Investment securities
     1,637       -  
Deposits and other
     10,165       5,301  
    $ 66,798     $ 43,704  
Accrued liabilities:
                
Accrued marketing expenses
   $ 33,521     $ 21,984  
Accrued personnel expenses
     53,050       34,373  
Income taxes payable - current
     5,950       6,828  
Accrued freight and duty
     19,064       9,048  
Accrued restructuring
     210       3,794  
Other accrued liabilities
     80,439       55,469  
    $ 192,234     $ 131,496  
Long-term liabilities:
                
Income taxes payable - non-current
   $ 116,064     $ 101,463  
Obligation for management deferred compensation
     10,504       10,499  
Defined benefit pension plan liability
     20,375       19,822  
Other long-term liabilities
     8,868       2,744  
    $ 155,811     $ 134,528  
 
    The following table presents the changes in the allowance for doubtful accounts during the nine months ended December 31, 2009 and 2008 (in thousands):


   
December 31,
  
   
2009
    
2008
  
Balance as of March 31
   $ 6,705     $ 2,497  
Bad debt expense
     (1,194 )     821  
Write-offs net of recoveries
     446       (161 )
Balance as of June 30
   $ 5,957     $ 3,157  
Bad debt expense
     599       20  
Write-offs net of recoveries
     (158 )     (369 )
Balance as of September 30
   $ 6,398     $ 2,808  
Bad debt expense
     505       643  
Write-offs, net of recoveries
     (215 )     (265 )
Balance as of December 31
   $ 6,688     $ 3,186  


13
Note 8 —Goodwill and Other Intangible Assets

The following table summarizes the activity in the Company’s goodwill account during the nine months ended December 31, 2009 (in thousands):


Balance as of March 31, 2009
   $ 242,909  
Additions
     308,669  
Adjustment
     (3,762 )
Balance as of December 31, 2009
   $ 547,816  

Additions to goodwill primarily related to our acquisitions of LifeSize and TV Compass. Logitech will maintain discrete financial information for LifeSize and accordingly, the acquired goodwill related to the LifeSize acquisition will be evaluated for impairment separately. TV Compass’s business will be fully integrated into the Company’s existing operations, and discrete financial information for TV Compass will not be maintained. Accordingly, the acquired goodwill related to TV Compass will be evaluated for impairment at the total enterprise level. The Company performs its annual goodwill impairment test during its fiscal fourth quarter. The adjustment to goodwill represents an adjustment of the deferred tax asset recognized in connection with the acquisition of SightSpeed, Inc.

The Company’s acquired other intangible assets subject to amortization were as follows (in thousands):


   
December 31, 2009
    
March 31, 2009
  
   
Gross Carrying
    
Accumulated
    
Net Carrying
    
Gross Carrying
    
Accumulated
    
Net Carrying
  
   
Amount
    
Amortization
    
Amount
    
Amount
    
Amortization
    
Amount
  
             
Trademark/tradename
   $ 32,062     $ (19,718 )   $ 12,344     $ 24,398     $ (18,559 )   $ 5,839  
Technology
     87,968       (32,070 )     55,898       49,268       (26,598 )     22,670  
Customer contracts
     38,518       (4,453 )     34,065       7,018       (3,418 )     3,600  
    $ 158,548     $ (56,241 )   $ 102,307     $ 80,684     $ (48,575 )   $ 32,109  

During the nine months ended December 31, 2009, changes in the gross carrying value of other intangible assets related to our acquisitions of LifeSize and TV Compass.

For the three months ended December 31, 2009 and 2008, amortization expense for other intangibles was $3.0 million and $2.3 million. For the nine months ended December 31, 2009 and 2008, amortization expense for other intangible assets was $7.6 million and $5.8 million. The Company expects that amortization expense for the three-month period ending March 31, 2010 will be $5.8 million, and annual amortization expense for fiscal years 2011, 2012, 2013 and 2014 will be $26.9 million, $24.7 million, $21.7 million and $15.8 million; and $7.4 million thereafter.

Note 9 — Financing Arrangements
 
The Company had several uncommitted, unsecured bank lines of credit aggregating $148.6 million at December 31, 2009. There are no financial covenants under these lines of credit with which the Company must comply. At December 31, 2009, the Company had no outstanding borrowings under these lines of credit.

Note 10 — Shareholders’ Equity

Share Repurchases

During the three and nine months ended December 31, 2009 and 2008, the Company had the following approved share buyback program in place (in thousands):

Date of Announcement
  
Approved Buyback Amount
  
Expiration Date
  
Completion Date
    
Amount Remaining
  
June 2007
   $ 250,000  
 June 2010
     -     $ 24,985  
 
In September 2008, the Company’s Board of Directors approved a share buyback program which authorizes the Company to invest up to $250 million to purchase its own shares. The September 2008 program is subject to the approval of the Swiss Takeover Board and the completion of the current share buyback program of $250 million.
 
    During the three and nine months ended December 31, 2009 and 2008, the Company repurchased shares under its share buyback program as follows (in thousands):

   
Three months ended December 31, (1)
    
Nine months ended December 31, (1)
  
Date of
  
2009
    
2008
    
2009
    
2008
  
Announcement
  
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
  
June 2007
     -     $ -       200     $ 2,853       5,838     $ 101,267       2,803     $ 78,870  

 
 (1) Represents the amount in U.S. dollars, calculated based on exchange rates on the repurchase dates.
14

Note 11 — Comprehensive Income

Comprehensive income is defined as the total change in shareholders’ equity during the period other than from transactions with shareholders. Comprehensive income consists of net income and other comprehensive income, a component of shareholders’ equity.

Comprehensive income for the three and nine months ended December 31, 2009 and 2008 was as follows (in thousands):


   
Three months ended
    
Nine months ended
  
   
December 31
    
December 31
  
   
2009
    
2008
    
2009
    
2008
  
                         
Net income
   $ 57,086     $ 40,493     $ 40,464     $ 142,110  
Other comprehensive income (loss), net of tax:
                                
Cumulative translation adjustment
     (4,527 )     (21,216 )     7,519       (34,987 )
Minimum pension liability adjustment
     317       113       347       261  
Reversal of unrealized gain on investment
     -       (457 )     -       -  
Net deferred hedging gains (losses)
     4,803       (191 )     540       (191 )
Comprehensive income
   $ 57,679     $ 18,742     $ 48,870     $ 107,193  


The components of accumulated other comprehensive loss were as follows (in thousands):


   
December 31,
    
March 31,
  
   
2009
    
2009
  
Cumulative translation adjustment
   $ (58,880 )   $ (66,399 )
Pension liability adjustments, net of tax of $990 and $990
     (14,775 )     (15,122 )
Unrealized gain on investment
     424       424  
Net deferred hedging gains
     756       216  
    $ (72,475 )   $ (80,881 )


Note 12 — Restructuring

In January 2009, Logitech initiated a restructuring plan (“2009 Restructuring Plan”) in order to reduce operating expenses and improve financial results in response to deteriorating global economic conditions. We completed a majority of the restructuring activity during the fourth quarter of fiscal year 2009. Restructuring activities primarily consisted of a reduction in salaried workforce, abandonment of projects, and facilities closures. All charges related to the 2009 Restructuring Plan are presented as  restructuring charges in our consolidated statements of income.

The following table summarizes restructuring related activities during the nine months ended December 31, 2009 (in thousands):

   
Total
    
Termination Benefits
    
Contract Termination Costs
    
Other
  
Balance at March 31, 2009
   $ 3,794     $ 3,779     $ 15     $ -  
Charges
     1,449       1,366       83       -  
Cash payments
     (4,245 )     (4,220 )     (25 )     -  
Other
     (8 )     (4 )     (4 )     -  
Foreign exchange
     91       91       -       -  
                                 
Balance at June 30, 2009
   $ 1,081     $ 1,012     $ 69     $ -  
Charges
     45       (22 )     9       58  
Cash payments
     (718 )     (698 )     (20 )     -  
Other
     (4 )     63       -       (67 )
Foreign exchange
     19       19       -       -  
                                 
Balance at September 30, 2009
   $ 423     $ 374     $ 58     $ (9 )
Charges
     -       -       -       -  
Cash payments
     (200 )     (180 )     (20 )     -  
Other
     (6 )     (6 )     -       -  
Foreign exchange
     (7 )     (4 )     -       (3 )
                                 
Balance at December 31, 2009
   $ 210     $ 184     $ 38     $ (12 )

Termination benefits incurred pursuant to the 2009 Restructuring Plan are calculated based on regional benefit practices and local statutory requirements. Contract termination costs relate to exit costs associated with the closure of existing facilities.
 
    The Company recorded a total of $22.0 million in restructuring charges in the period from January 1, 2009 to December 31, 2009, which included $17.8 million for termination benefits, $0.5 million for asset impairments, $0.3 million for contract termination costs and $3.4 million for other charges, primarily consisting of pension curtailment and settlement costs. In addition, we expect to record approximately $0.5 million in contract termination costs during the remainder of fiscal year 2010. We expect to complete the restructuring in fiscal year 2010.



 
15
 

Note 13 — Employee Benefit Plans

Employee Share Purchase Plans and Stock Option Plans

As of December 31, 2009, the Company offers the 2006 Employee Share Purchase Plan (Non-U.S.) (“2006 ESPP”), the 1996 Employee Share Purchase Plan (U.S.) (“1996 ESPP”), and the 2006 Stock Incentive Plan. Share-based awards granted to employees and directors include stock options, RSUs granted under the 2006 Stock Incentive Plan and share purchase rights granted under the 2006 ESPP and 1996 ESPP. Shares issued to employees as a result of purchases or exercises under these plans are generally issued from shares held in treasury.

The following table summarizes the share-based compensation expense and related tax benefit included in the Company’s consolidated statements of income for the three and nine months ended December 31, 2009 and 2008 (in thousands).


   
Three months ended
    
Nine months ended
  
   
December 31
    
December 31
  
   
2009
    
2008
    
2009
    
2008
  
             
Cost of goods sold
   $ 709     $ 888     $ 2,135     $ 2,288  
Share-based compensation expense included in gross profit
     709       888       2,135       2,288  
                                 
Operating expenses:
                                
   Marketing and selling
     2,018       2,070       5,931       5,908  
   Research and development
     1,139       1,157       3,048       3,266  
   General and administrative
     2,217       2,126       6,135       6,490  
Share-based compensation expense included in
                                
   operating expenses
     5,374       5,353       15,114       15,664  
Total share-based compensation expense related to employee
                                
   stock options, RSUs and employee stock purchases
     6,083       6,241       17,249       17,952  
Tax benefit
     3,324       2,386       4,157       4,584  
Share-based compensation expense related to employee stock
                                
    options, RSUs and employee stock purchases, net of tax
   $ 2,759     $ 3,855     $ 13,092     $ 13,368  

As of December 31, 2009 and 2008, $0.8 million and $0.8 million of share-based compensation cost was capitalized to inventory. As of December 31, 2009, total compensation cost related to non-vested stock options not yet recognized was $61.8 million, which is expected to be recognized over the next 33 months on a weighted-average basis.

The fair value of employee stock options granted and shares purchased under the Company’s employee purchase plans was estimated using the Black-Scholes-Merton option-pricing valuation model applying the following assumptions and values:


 
Three Months Ended December 31,
  
Nine Months Ended December 31,
 
2009
  
2008
  
2009
  
2008
  
2009
  
2008
  
2009
  
2008
 
Purchase Plans
  
Stock Option Plans
  
Purchase Plans
  
Stock Option Plans
                               
Dividend yield
0%
  
0%
  
0%
  
0%
  
0%
  
0%
  
0%
  
0%
Expected life
6 months
  
6 months
  
2.9 years
  
3.7 years
  
6 months
  
6 months
  
3.4 years
  
3.7 years
Expected volatility
59%
  
41%
  
53%
  
36%
  
70%
  
45%
  
50%
  
35%
Risk-free interest rate
0.07%
  
1.96%
  
1.28%
  
2.48%
  
0.21%
  
2.38%
  
1.72%
  
2.46%

The dividend yield assumption is based on the Company’s history and future expectations of dividend payouts. The Company has not paid dividends since 1996.

The expected option life represents the weighted-average period the stock options or purchase offerings are expected to remain outstanding. The expected life is based on historical settlement rates, which the Company believes are most representative of future exercise and post-vesting termination behaviors.

Expected share price volatility is based on historical volatility using daily prices over the term of past options or purchase offerings.  The Company considers historical share price volatility as most representative of future stock option volatility. The risk-free interest rate assumptions are based upon the implied yield of U.S. Treasury zero-coupon issues appropriate for the term of the Company’s stock options or purchase offerings.

The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records share-based compensation expense only for those awards that are expected to vest.

The following table represents the weighted average grant-date fair values of options granted and the expected forfeiture rates:


   
Three Months Ended December 31,
    
Nine Months Ended December 31,
  
   
2009
    
2008
    
2009
    
2008
    
2009
    
2008
    
2009
    
2008
  
   
Purchase Plans
    
Stock Option Plans
    
Purchase Plans
    
Stock Option Plans
  
                                                 
Expected forfeitures
     0 %     0 %     10 %     7 %     0 %     0 %     10 %     7 %
Weighted average grant-date
                                                          
  fair value of options granted
   $ 5.29     $ 7.01     $ 9.10     $ 6.23     $ 4.25     $ 7.94     $ 7.14     $ 6.42  

16
A summary of activity under the stock option plans is as follows (in thousands, except per share data; exercise prices are weighted averages):


   
Three Months ended December 31,
    
Nine Months ended December 31,
  
   
2009
    
2008
    
2009
    
2008
  
   
Number
    
Exercise Price
    
Number
    
Exercise Price
    
Number
    
Exercise Price
    
Number
    
Exercise Price
  
                                                 
Outstanding, beginning of period
     19,130     $ 18       16,585     $ 18       18,897     $ 18       17,952     $ 17  
Granted
     2,179     $ 11       3,484     $ 21       4,568     $ 12       3,936     $ 21  
Exercised
     (275 )   $ 10       (304 )   $ 4       (1,310 )   $ 8       (1,847 )   $ 9  
Cancelled or expired
     (191 )   $ 22       (184 )   $ 25       (1,312 )   $ 21       (460 )   $ 25  
Outstanding, end of period
     20,843     $ 17       19,581     $ 18       20,843     $ 17       19,581     $ 18  
                                                                 
Exercisable, end of period
     11,751     $ 16       11,203     $ 14       11,751     $ 16       11,203     $ 14  

The total pretax intrinsic value of options exercised during the three months ended December 31, 2009 and 2008 was $1.9 million and $3.3 million and the tax benefit realized for the tax deduction from options exercised during those periods was $0.7 million and $0.6 million. The total pretax intrinsic value of options exercised during the nine months ended December 31, 2009 and 2008 was $9.8 million and $32.5 million and the tax benefit realized for the tax deduction from options exercised during those periods was $2.0 million and $8.4 million. The total fair value of op