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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2017
 
Or
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period from                to                
 
Commission File Number: 0-29174
 
LOGITECH INTERNATIONAL S.A.
(Exact name of registrant as specified in its charter)
 
Canton of Vaud, Switzerland
(State or other jurisdiction
of incorporation or organization)
 
None
(I.R.S. Employer
Identification No.)
 
Logitech International S.A.
EPFL - Quartier de l'Innovation
Daniel Borel Innovation Center
1015 Lausanne, Switzerland
c/o Logitech Inc.
7700 Gateway Boulevard
Newark, California 94560
(Address of principal executive offices and zip code)
 
(510) 795-8500
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ý  No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  ý  No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard s provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No  ý
 
As of July 14, 2017, there were 163,909,945 shares of the Registrant’s share capital outstanding.
 

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TABLE OF CONTENTS
 
 
 
Page
 
 
 
Part I
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
Exhibits
 
In this document, unless otherwise indicated, references to the “Company” or “Logitech” are to Logitech International S.A., its consolidated subsidiaries and predecessor entities. Unless otherwise specified, all references to U.S. Dollar, Dollar or $ are to the United States Dollar, the legal currency of the United States of America. All references to CHF are to the Swiss Franc, the legal currency of Switzerland.
 
Logitech, the Logitech logo, and the Logitech products referred to herein are either the trademarks or the registered trademarks of Logitech. All other trademarks are the property of their respective owners.

The Company’s fiscal year ends on March 31. Interim quarters are generally thirteen-week periods, each ending on a Friday of each quarter. The first quarter of fiscal year 2018 ended on June 30, 2017. The same quarter in the prior fiscal year ended on July 1, 2016. For purposes of presentation, the Company has indicated its quarterly periods ending on the last day of the calendar quarter.


      

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PART I — FINANCIAL INFORMATION 

ITEM 1.   FINANCIAL STATEMENTS (UNAUDITED) 

LOGITECH INTERNATIONAL S.A.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
 
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
Net sales
 
$
529,946

 
$
479,864

Cost of goods sold
 
334,774

 
309,625

Amortization of intangible assets and purchase accounting effect on inventory
 
1,504

 
1,613

Gross profit
 
193,668

 
168,626

Operating expenses:
 
 

 
 

Marketing and selling
 
102,378

 
83,872

Research and development
 
35,099

 
31,951

General and administrative
 
25,354

 
25,655

Amortization of intangible assets and acquisition-related costs
 
1,390

 
1,293

Change in fair value of contingent consideration for business acquisition
 
(1,978
)
 
—

Total operating expenses
 
162,243

 
142,771

Operating income
 
31,425

 
25,855

Interest income, net
 
1,175

 
151

Other expense, net
 
(1,029
)
 
(1,008
)
Income before income taxes
 
31,571

 
24,998

Provision for (benefit from) income taxes
 
(5,436
)
 
3,057

Net income
 
$
37,007

 
$
21,941


 
 
 
 
Net income per share:
 
 

 
 

Basic
 
$
0.23

 
$
0.14

Diluted
 
$
0.22

 
$
0.13


 
 
 
 
Weighted average shares used to compute net income per share:
 
 

 
 

Basic
 
163,407

 
162,130

Diluted
 
168,339

 
164,303

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

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LOGITECH INTERNATIONAL S.A.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(unaudited)
 
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
Net income
 
$
37,007

 
$
21,941

Other comprehensive income (loss):
 
 

 
 

Currency translation gain (loss), net of taxes
 
1,456

 
(296
)
Defined benefit pension plans:
 
 

 
 

Net gain (loss) and prior service costs, net of taxes
 
(152
)
 
310

Amortization included in operating expenses
 
50

 
433

Hedging gain (loss):
 
 

 
 

Deferred hedging gain (loss), net of taxes
 
(3,209
)
 
965

Reclassification of hedging loss included in cost of goods sold
 
533

 
740

Other comprehensive income (loss):
 
(1,322
)
 
2,152

Total comprehensive income
 
$
35,685

 
$
24,093

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


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LOGITECH INTERNATIONAL S.A.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)
 
 
June 30,
2017
 
March 31,
2017
Assets
 


 
 
Current assets:
 
 

 
 

Cash and cash equivalents
 
$
527,657

 
$
547,533

Accounts receivable, net
 
221,340

 
185,179

Inventories
 
279,405

 
253,401

Other current assets
 
42,675

 
41,732

Total current assets
 
1,071,077

 
1,027,845

Non-current assets:
 
 

 
 

Property, plant and equipment, net
 
85,135

 
85,408

Goodwill
 
249,780

 
249,741

Other intangible assets, net
 
44,971

 
47,564

Other assets
 
136,516

 
88,119

Total assets
 
$
1,587,479

 
$
1,498,677

Liabilities and Shareholders’ Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
312,722

 
$
274,805

Accrued and other current liabilities
 
205,059

 
232,273

Total current liabilities
 
517,781

 
507,078

Non-current liabilities:
 
 

 
 

Income taxes payable
 
32,147

 
51,797

Other non-current liabilities
 
87,213

 
83,691

Total liabilities
 
637,141

 
642,566

Commitments and contingencies (Note 10)
 


 


Shareholders’ equity:
 
 

 
 

Registered shares, CHF 0.25 par value:
 
30,148

 
30,148

Issued and authorized shares —173,106 at June 30 and March 31, 2017
 


 


Conditionally authorized shares — 50,000 at June 30 and March 31, 2017
 


 


Additional paid-in capital
 
14,519

 
26,596

Shares in treasury, at cost — 9,197 at June 30, 2017 and 10,727 at March 31, 2017
 
(157,330
)
 
(174,037
)
Retained earnings
 
1,165,029

 
1,074,110

Accumulated other comprehensive loss
 
(102,028
)
 
(100,706
)
Total shareholders’ equity
 
950,338

 
856,111

Total liabilities and shareholders’ equity
 
$
1,587,479

 
$
1,498,677

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


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LOGITECH INTERNATIONAL S.A.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
Cash flows from operating activities:
 
 

 
 

Net income
 
$
37,007

 
$
21,941

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 

 
 

Depreciation
 
9,148

 
13,105

Amortization of intangible assets
 
2,593

 
1,708

Loss (gain) on investments in privately held companies
 
259

 
(1
)
Gain on disposal of property, plant and equipment
 
(3
)
 
—

Share-based compensation expense
 
10,705

 
8,517

Deferred income taxes
 
(9,879
)
 
(1,048
)
Change in fair value of contingent consideration for business acquisition
 
(1,978
)
 
—

Changes in assets and liabilities, net of acquisitions:
 
 

 
 

Accounts receivable, net
 
(35,702
)
 
(48,661
)
Inventories
 
(20,389
)
 
(10,007
)
Other assets
 
(3,088
)
 
(1,171
)
Accounts payable
 
38,647

 
42,769

Accrued and other liabilities
 
(28,203
)
 
(10,135
)
Net cash provided by (used in) operating activities
 
(883
)
 
17,017

Cash flows from investing activities:
 
 

 
 

Purchases of property, plant and equipment
 
(10,035
)
 
(8,135
)
Investment in privately held companies
 
(360
)
 
(320
)
Acquisitions, net of cash acquired
 
—

 
(53,987
)
Changes in restricted cash
 
—

 
715

Purchases of trading investments
 
(609
)
 
(4,229
)
Proceeds from sales of trading investments
 
647

 
4,231

Net cash used in investing activities
 
(10,357
)
 
(61,725
)
Cash flows from financing activities:
 
 

 
 

Purchases of registered shares
 
(624
)
 
(24,422
)
Proceeds from exercises of stock options
 
12,569

 
599

Tax withholdings related to net share settlements of restricted stock units
 
(21,683
)
 
(9,185
)
Net cash used in financing activities
 
(9,738
)
 
(33,008
)
Effect of exchange rate changes on cash and cash equivalents
 
1,102

 
(1,368
)
Net decrease in cash and cash equivalents
 
(19,876
)
 
(79,084
)
Cash and cash equivalents, beginning of the period
 
547,533

 
519,195

Cash and cash equivalents, end of the period
 
$
527,657

 
$
440,111

Supplementary Cash Flow Disclosures:
 
 
 
 
Non-cash investing activities:
 
 

 
 

Property, plant and equipment purchased during the period and included in period end liability accounts
 
$
3,713

 
$
3,502

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

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LOGITECH INTERNATIONAL S.A.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)
(unaudited)
 
 
 
 
 
 
Additional Paid-in Capital
 
 
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
Total Shareholders’ Equity
 
Registered Shares
 
 
Treasury Shares
 
Retained Earnings
 
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
March 31, 2016
173,106

 
$
30,148

 
$
6,616

 
10,697

 
$
(128,407
)
 
$
963,576

 
$
(111,985
)
 
$
759,948

Total comprehensive income
—

 
—

 
—

 
—

 
—

 
21,941

 
2,152

 
24,093

Purchases of registered shares
—

 
—

 
—

 
1,590

 
(24,422
)
 
—

 
—

 
(24,422
)
Tax effects from share-based awards
—

 
—

 
(704
)
 
—

 
—

 
—

 
—

 
(704
)
Sales of shares upon exercise of stock options
—

 
—

 
206

 
(52
)
 
393

 
—

 
—

 
599

Issuance of shares upon vesting of restricted stock units
—

 
—

 
(14,709
)
 
(861
)
 
7,773

 
(2,249
)
 
—

 
(9,185
)
Share-based compensation expense
—

 
—

 
8,591

 
—

 
—

 
—

 
—

 
8,591

June 30, 2016
173,106

 
$
30,148

 
$
—

 
11,374

 
$
(144,663
)
 
$
983,268

 
$
(109,833
)
 
$
758,920

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

 
$
30,148

 
$
26,596

 
10,727

 
$
(174,037
)
 
$
1,074,110

 
$
(100,706
)
 
$
856,111

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

 
—

 
3,293

 
—

 
—

 
53,912

 
—

 
57,205

Total comprehensive income
—

 
—

 
—

 
—

 
—

 
37,007

 
(1,322
)
 
35,685

Purchases of registered shares
—

 
—

 
—

 
20

 
(624
)
 
—

 
—

 
(624
)
Sales of shares upon exercise of stock options
—

 
—

 
7,452

 
(452
)
 
5,117

 
—

 
—

 
12,569

Issuance of shares upon vesting of restricted stock units
—

 
—

 
(33,897
)
 
(1,098
)
 
12,214

 
—

 
—

 
(21,683
)
Share-based compensation expense
—

 
—

 
11,075

 
—

 
—

 
—

 
—

 
11,075

June 30, 2017
173,106

 
$
30,148

 
$
14,519

 
9,197

 
$
(157,330
)
 
$
1,165,029

 
$
(102,028
)
 
$
950,338

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


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

Note 1 — The Company and Summary of Significant Accounting Policies and Estimates

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

Basis of Presentation
 
The condensed consolidated interim financial statements include the accounts of Logitech and its subsidiaries. All intercompany balances and transactions have been eliminated. The condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and therefore do not include all the information required by GAAP for complete financial statements. They should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended March 31, 2017, included in its Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on May 26, 2017. 

In the opinion of management, these condensed consolidated financial statements include all adjustments, consisting of only normal and recurring adjustments, necessary and in all material aspects, for a fair statement of the results of operations, comprehensive income, financial position, cash flows and changes in shareholders' equity for the periods presented. Operating results for the three months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2018, or any future periods.

Reclassification

Certain amounts from the comparative period in the accompanying unaudited condensed consolidated financial statements have been reclassified to conform to the condensed consolidated financial statement presentation as of and for the three months ended June 30, 2017.

Changes in Significant Accounting Policies
 
Other than the recent accounting pronouncements adopted, discussed below, there have been no substantial changes in the Company’s significant accounting policies during the three months ended June 30, 2017 compared with the significant accounting policies described in its Annual Report on Form 10-K for the fiscal year ended March 31, 2017.
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Significant estimates and assumptions made by management involve the fair value of goodwill, intangible assets acquired from business acquisitions, warranty liabilities, accruals for customer programs and related breakage when appropriate, sales return reserves, allowance for doubtful accounts, inventory valuation,

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contingent consideration from business acquisitions and periodical reassessment of its fair value, share-based compensation expense, uncertain tax positions, and valuation allowances for deferred tax assets. Although these estimates are based on management’s best knowledge of current events and actions that may impact the Company in the future, actual results could differ materially from those estimates.
 
Recent Accounting Pronouncements Adopted

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

In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 simplifies several aspects of the accounting for share-based payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees' maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for the excess tax benefits and employee taxes paid when an employer withholds shares for tax withholding purposes. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company has adopted this standard effective April 1, 2017. Changes to the statements of cash flows related to the classification of excess tax benefits were implemented on a retroactive basis and accordingly, to conform to the current year presentation, the Company reclassified $3.3 million of excess tax benefits previously reported under financing activities to operating activities for the three months ended June 30, 2016 on its condensed consolidated statements of cash flows. Under the new standard, the Company accounts for forfeitures as they occur. The change in accounting for forfeitures resulted in a cumulative-effect adjustment to decrease retained earnings as of March 31, 2017 by $3.3 million. The Company further recognized a cumulative-effect adjustment to increase retained earnings as of March 31, 2017 by $57.2 million upon adoption of the new guidance to account for gross excess tax benefits of $75.2 million that were previously not recognized because the related tax deduction had not reduced current income taxes, offset by a valuation allowance of $18.0 million to reduce the deferred tax assets to amounts that are more likely than not to be realized.

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

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

Recent Accounting Pronouncements To Be Adopted

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09") which supersedes the revenue recognition requirements under ASC 605, Revenue Recognition. ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard requires reporting companies to disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard

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will become effective for the Company on April 1, 2018. The standard allows for either a "full retrospective" adoption, meaning the standard is applied to all of the periods presented subject to practical expedients, or a "modified retrospective" adoption, meaning the standard is applied only in the initial year, or interim period in year of initial application with a cumulative adjustment to opening retained earnings for existing contracts. The Company currently expects to utilize the modified retrospective transition method. The Company continues to evaluate the impact this new standard could have on the current contracts with customers and the accruals of various sales and marketing programs the Company offers and on the related breakage estimates. The Company has not completed its analysis of the impact to its condensed consolidated financial statements and this information will not be available until the Company completes its full assessment. It is possible that during the fiscal year 2018, the Company may identify certain areas which may result in material impact on the Company’s condensed consolidated financial statements, or the Company may revise its adoption method.

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

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

In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory"  ("ASU 2016-16"), which eliminates the deferral of income tax effects of intra-entity asset transfers until the transferred asset is sold to an unrelated party or recovered through use however, this standard does not apply to intra-entity transfer of inventory.  ASU 2016-16 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted but only in the first interim period of an annual period.  The cumulative effect of change on equity upon adoption is to be quantified under the modified retrospective approach and recorded as of the beginning of the period of adoption.  The Company is evaluating the full effect that ASU 2016-16 will have on its condensed consolidated financial statements and will adopt this standard effective April 1, 2018.

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

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


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Note 2 — 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
June 30,
 
 
2017
 
2016
Net Income
 
$
37,007

 
$
21,941

 
 
 
 
 
Shares used in net income per share computation:
 
 

 
 

Weighted average shares outstanding - basic
 
163,407

 
162,130

Effect of potentially dilutive equivalent shares
 
4,932

 
2,173

Weighted average shares outstanding - diluted
 
168,339

 
164,303

 
 
 
 
 
Net income per share:
 
 

 
 

Basic
 
$
0.23

 
$
0.14

Diluted
 
$
0.22

 
$
0.13

 
Share equivalents attributable to outstanding stock options and restricted stock units of 1.4 million and 5.7 million for the three months ended June 30, 2017 and 2016, respectively, were anti-dilutive and excluded from the calculation of diluted net income per share.
 
Note 3 — Employee Benefit Plans
 
Employee Share Purchase Plans and Stock Incentive Plans
 
As of June 30, 2017, the Company offers the 2006 ESPP (2006 Employee Share Purchase Plan (Non-U.S.)), the 1996 ESPP (1996 Employee Share Purchase Plan (U.S.)), the 2006 Plan (2006 Stock Incentive Plan) and the 2012 Plan (2012 Stock Inducement Equity Plan).

The following table summarizes the share-based compensation expense and total income tax benefit recognized for share-based awards for the three months ended June 30, 2017 and 2016 (in thousands):
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
Cost of goods sold
 
$
711

 
$
675

Marketing and selling
 
4,381

 
3,437

Research and development
 
1,543

 
914

General and administrative
 
4,070

 
3,491

Total share-based compensation expense
 
10,705

 
8,517

Income tax benefit
 
(11,282
)
 
(1,815
)
Total share-based compensation expense (credit), net of income tax
 
$
(577
)
 
$
6,702


The income tax benefit in the respective period primarily consists of tax benefit related to the share-based compensation expense for the period and direct tax benefit realized, including net excess tax benefits recognized, from stock-based awards vested or exercised during the period.

As of June 30, 2017 and 2016, the Company capitalized $0.9 million and $0.5 million of stock-based compensation expense to inventory, respectively.
 

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Defined Benefit Plans
 
Certain of the Company’s subsidiaries sponsor defined benefit pension plans or non-retirement post-employment benefits covering substantially all of their employees. Benefits are provided based on employees’ years of service and earnings, or in accordance with applicable employee benefit regulations. The Company’s practice is to fund amounts sufficient to meet the requirements set forth in the applicable employee benefit and tax regulations. The cost recorded of $2.3 million and $2.8 million for the three months ended June 30, 2017 and 2016, respectively, was primarily related to service costs.
 
Note 4 — Income Taxes
 
The Company is incorporated in Switzerland but operates in various countries with differing tax laws and rates. Further, a portion of the Company’s income before taxes and the provision for (benefit from) income taxes are generated outside of Switzerland.
 
The income tax benefit for the three months ended June 30, 2017 was $5.4 million based on an effective income tax rate of (17.2)% of pre-tax income, compared to an income tax provision of $3.1 million based on an effective income tax rate of 12.2% of pre-tax income for the three months ended June 30, 2016.

The change in the effective income tax rate for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, is primarily due to the recognition of $9.9 million of excess tax benefits, offset by valuation allowance of $1.3 million for federal tax credit carryforwards after adoption of ASU 2016-09. In the three months ended June 30, 2017 and June 30, 2016, there was a discrete tax benefit of $0.7 million for both periods from the reversal of uncertain tax positions from the expiration of statutes of limitations.

As of June 30 and March 31, 2017, the total amount of unrecognized tax benefits due to uncertain tax positions was $65.0 million and $63.7 million, respectively, all of which would affect the effective income tax rate if recognized.
 
The Company had $32.1 million in non-current income taxes payable and $1.5 million in current income taxes payable, including interest and penalties, related to its income tax liability for uncertain tax positions as of June 30, 2017 compared to $51.8 million in non-current income taxes payable and $1.5 million in current income taxes payable as of March 31, 2017. The Company anticipates a settlement of approximately $1.4 million with the tax authorities in a foreign jurisdiction in the next twelve months.
 
The Company recognizes interest and penalties related to unrecognized tax positions in income tax expense. As of June 30 and March 31, 2017, the Company had $3.2 million and $3.0 million, respectively, of accrued interest and penalties related to uncertain tax positions.
 
Although the Company has adequately provided for uncertain tax positions, the provisions on these positions may change as revised estimates are made or the underlying matters are settled or otherwise resolved. During fiscal year 2018, the Company will continue to review its tax positions and provide for or reverse unrecognized tax benefits as issues arise. During the next twelve months, it is reasonably possible that the amount of unrecognized tax benefits could increase or decrease significantly due to changes in tax law in various jurisdictions, new tax audits and changes in the U.S. dollar as compared to other currencies. Excluding these factors, uncertain tax positions may decrease by as much as $8.5 million from the lapse of the statutes of limitations in various jurisdictions during the next twelve months.


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Note 5— Balance Sheet Components
 
The following table presents the components of certain balance sheet asset amounts as of June 30 and March 31, 2017 (in thousands): 
 
 
June 30,
2017
 
March 31,
2017
Accounts receivable, net:
 
 

 
 

Accounts receivable
 
$
452,141

 
$
395,754

Allowance for doubtful accounts
 
(644
)
 
(607
)
Allowance for sales returns
 
(20,094
)
 
(18,800
)
Allowance for cooperative marketing arrangements
 
(32,761
)
 
(28,022
)
Allowance for customer incentive programs
 
(67,994
)
 
(60,857
)
Allowance for pricing programs
 
(109,308
)
 
(102,289
)
 
 
$
221,340

 
$
185,179

Inventories:
 
 

 
 

Raw materials
 
$
42,532

 
$
30,582

Finished goods
 
236,873

 
222,819

 
 
$
279,405

 
$
253,401

Other current assets:
 
 

 
 

Value-added tax receivables
 
$
22,423

 
$
23,132

Prepaid expenses and other assets
 
20,252

 
18,600

 
 
$
42,675

 
$
41,732

Property, plant and equipment, net:
 
 

 
 

Property, plant and equipment at cost
 
$
350,862

 
$
348,760

Less: accumulated depreciation and amortization
 
(265,727
)
 
(263,352
)
 
 
$
85,135

 
$
85,408

Other assets:
 
 

 
 

Deferred tax assets
 
$
103,203

 
$
57,303

Trading investments for deferred compensation plan
 
16,914

 
15,043

Investments in privately held companies
 
10,877

 
10,776

Other assets
 
5,522

 
4,997

 
 
$
136,516

 
$
88,119






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The following table presents the components of certain balance sheet liability amounts as of June 30 and March 31, 2017 (in thousands): 
 
 
June 30,
2017
 
March 31,
2017
Accrued and other current liabilities:
 
 

 
 

Accrued personnel expenses
 
$
58,218

 
$
88,346

Indirect customer incentive programs
 
40,003

 
36,409

Warranty accrual
 
13,478

 
13,424

Employee benefit plan obligation
 
1,541

 
1,266

Income taxes payable
 
6,767

 
6,232

Contingent consideration for business acquisition - current portion
 
455

 
2,889

Other current liabilities
 
84,597

 
83,707

 
 
$
205,059

 
$
232,273

Other non-current liabilities:
 
 

 
 

Warranty accrual
 
$
8,578

 
$
8,487

Obligation for deferred compensation plan
 
16,914

 
15,043

Employee benefit plan obligation
 
43,405

 
41,998

Deferred tax liability
 
1,789

 
1,789

Contingent consideration for business acquisition - non-current portion
 
7,475

 
7,019

Other non-current liabilities
 
9,052

 
9,355

 
 
$
87,213

 
$
83,691


Note 6— Fair Value Measurements
 
Fair Value Measurements
 
The Company considers fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The Company utilizes the following three-level fair value hierarchy to establish the priorities of the inputs used to measure fair value:
 
•Level 1 — Quoted prices in active markets for identical assets or liabilities.
 
•Level 2 — Observable inputs other than quoted market prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
•Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.


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The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis, excluding assets related to the Company’s defined benefit pension plans, classified by the level within the fair value hierarchy (in thousands): 
 
 
June 30, 2017
 
March 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 
 
 
 
 

 
 

 
 

Cash equivalents
 
$
426,910

 
$
—

 
$
—

 
$
448,742

 
$
—

 
$
—

 
 
 

 
 

 
 

 
 

 
 

 
 

Trading investments for deferred compensation plan included in other assets:
 
 

 
 
 
 
 
 

 
 

 
 

Money market funds
 
$
3,107

 
$
—

 
$
—

 
$
2,813

 
$
—

 
$
—

Mutual funds
 
13,807

 
—

 
—

 
12,230

 
—

 
—

Total of trading investments for deferred compensation plan
 
$
16,914

 
$
—

 
$
—

 
$
15,043

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Currency exchange derivative assets
included in other current assets
 
$
—

 
$
104

 
$
—

 
$
—

 
$
48

 
$
—

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

 
$
—

 
$
7,475

 
$
—

 
$
—

 
$
9,908

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

 
$
1,711

 
$
—

 
$
—

 
$
443

 
$
—

 
The following table summarizes the change in fair value of the Company’s contingent consideration balance during the three months ended June 30, 2017 and 2016 (in thousands):
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
Beginning of the period
 
$
9,908

 
$
—

Fair value of contingent consideration upon acquisition
 
—

 
18,000

Change in fair value of contingent consideration
 
(1,978
)
 
—

Expected payment for first earn-out period(1)
 
(455
)
 
—

End of the period
 
$
7,475

 
$
18,000


(1) As of June 30, 2017, the first twelve month earn-out period is complete and the earn-out payment of $0.5 million is based on the actual net sales of Jaybird products and no longer subject to fair value measurement.

Investment Securities
 
The marketable securities for the Company's deferred compensation plan are recorded at a fair value of $16.9 million and $15.0 million, respectively, as of June 30, 2017 and March 31, 2017, based on quoted market prices. Quoted market prices are observable inputs that are classified as Level 1 within the fair value hierarchy. Unrealized trading gains / (losses) related to trading securities for the three months ended June 30, 2017 and 2016 were not material and are included in other expense, net in the Company's condensed consolidated statements of operations.

Acquisition-related contingent consideration

On April 20, 2016 (the "Acquisition Date"), the Company acquired all of the equity interest of JayBird, LLC (“Jaybird”). Pursuant to the purchase agreement, there is an additional earn-out of up to $45.0 million based on the achievement of certain net revenue growth targets over approximately a two-year period (the "Jaybird Acquisition"). The acquisition-related contingent consideration liability arising from the Jaybird Acquisition represents the future potential earn-out payments of up to $45.0 million based on the achievement of certain net revenue targets over

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approximately a two year period. If the net revenue targets are met, the Company will pay a maximum of $25.0 million and $20.0 million in fiscal years 2018 and 2019, respectively. The fair value of the earn-out as of the Acquisition Date was $18.0 million, which was determined by using a Monte Carlo Simulation that includes significant unobservable inputs such as a risk-adjusted discount rate of 16% and projected net sales of Jaybird over the earn-out period. The fair value is remeasured at each reporting period at the estimated fair value based on the inputs on the date of remeasurement, with the change in fair value recognized as "change in fair value of contingent consideration for business acquisition" in the operating expense section in the condensed consolidated statements of operations. Projected net sales are based on the Company's internal projections, including analysis of the target markets. The fair value of the contingent consideration was $7.9 million and $9.9 million as of June 30, 2017 and March 31, 2017, respectively. The decrease in fair value of contingent consideration for the three months ended June 30, 2017 results primarily from Jaybird's lower-than-expected net sales, partially offset by the change in the time value of money. As of June 30, 2017, the first twelve month earn-out period is complete and the expected earn-out payment of $0.5 million is included in the accrued and other current liabilities.

Although these estimates are based on management’s best knowledge of current events, the estimates could change significantly from period to period. Any changes to the significant unobservable inputs used, including change in the forecast of net sales for the earn-out periods, may result in change in the fair value of contingent consideration, and could have a material impact on future results of operations. Actual payment of contingent consideration in the future could be different from the current estimated fair value of the contingent consideration.
 
Assets Measured at Fair Value on a Nonrecurring Basis

The Company’s non-marketable cost method investments, and non-financial assets, such as goodwill, intangible assets and property, plant and equipment, are recorded at fair value only upon initial recognition or if an impairment is recognized. There were no material impairments of long-lived assets during the three months ended June 30, 2017 or 2016.

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

The primary investment included in non-marketable investments is the Company’s investment in Series A Preferred Stock of Lifesize Inc. ("Lifesize") recorded at the fair value of $5.6 million on the date of the Lifesize divestiture.
 
The aggregate recorded amount of cost method investments included in other assets as of June 30, 2017 and March 31, 2017 was $7.1 million and $7.4 million, respectively.

Note 7 - Derivative Financial Instruments
 
Under certain agreements with the respective counterparties to the Company’s derivative contracts, subject to applicable requirements, the Company is allowed to net settle transactions of the same type with a single net amount payable by one party to the other. However, the Company presents its derivative assets and derivative liabilities on a gross basis on the condensed consolidated balance sheets as of June 30, 2017 and March 31, 2017.

The fair values of the Company’s derivative instruments not designated as hedging instruments were not material as of June 30, 2017 or March 31, 2017. The following table presents the fair values of the Company’s derivative instruments designated as hedging instruments on a gross basis in other current assets or accrued and other current liabilities on its condensed consolidated balance sheets as of June 30, 2017 and March 31, 2017 (in thousands):
 
 
Derivatives
 
 
Asset
 
Liability
 
 
June 30,
2017
 
March 31,
2017
 
June 30,
2017
 
March 31,
2017
Cash flow hedges
 
$
104

 
$
48

 
$
1,664

 
$
402


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The amount of gain (loss) recognized on derivatives not designated as hedging instruments were not material in all periods presented herein. The following table presents the amounts of gains (losses) on the Company’s derivative instruments designated as hedging instruments and their locations on its condensed consolidated statements of operations and condensed consolidated statements of comprehensive income for the three months ended June 30, 2017 and 2016 (in thousands):
 
 
Three Months Ended
June 30,
 
 
Amount of Gain (Loss)
Deferred as a Component of Accumulated
Other Comprehensive Loss
 
Amount of Loss
Reclassified from Accumulated Other Comprehensive Loss to
Costs of Goods Sold
 
 
2017
 
2016
 
2017
 
2016
Cash flow hedges
 
$
(3,209
)
 
$
965

 
$
533

 
$
740

 
Cash Flow Hedges
 
The Company enters into cash flow hedge contracts to protect against exchange rate exposure of forecasted inventory purchases. These hedging contracts mature within four months. Gains and losses in the fair value of the effective portion of the hedges are deferred as a component of accumulated other comprehensive loss until the hedged inventory purchases are sold, at which time the gains or losses are reclassified to cost of goods sold. Cash flows from such hedges are classified as operating activities in the condensed consolidated statements of cash flows. The notional amounts of foreign currency exchange forward contracts outstanding related to forecasted inventory purchases were $84.7 million and $59.4 million at June 30, 2017 and March 31, 2017, respectively. The Company estimates that $3.2 million of net losses related to its cash flow hedges included in accumulated other comprehensive loss as of June 30, 2017 will be reclassified into earnings within the next 12 months.
 
Other Derivatives
 
The Company also enters into foreign currency exchange forward and swap contracts to reduce the short-term effects of currency exchange rate fluctuations on certain receivables or payables denominated in currencies other than the functional currencies of its subsidiaries. These contracts generally mature within one month. The primary risk managed by using forward and swap contracts is the currency exchange rate risk. The gains or losses on these contracts are recognized in other expense, net in the condensed consolidated statements of operations based on the changes in fair value. The notional amounts of these contracts outstanding as of June 30, 2017 and March 31, 2017 were $65.4 million and $56.7 million, respectively. Open forward and swap contracts outstanding as of June 30, 2017 and March 31, 2017 consisted of contracts in Mexican Pesos, Japanese Yen, British Pounds, Taiwanese Dollars, Canadian Dollars and Australian Dollars to be settled at future dates at pre-determined exchange rates.
 
The fair value of all foreign currency exchange forward and swap contracts is determined based on observable market transactions of spot currency rates and forward rates. Cash flows from these contracts are classified as operating activities in the condensed consolidated statements of cash flows.

Note 8 — Goodwill and Other Intangible Assets

The Company conducts its impairment analysis of the goodwill annually at December 31 and as necessary if changes in facts and circumstances indicate that it is more likely than not that the fair value of the Company’s reporting units may be less than its carrying amount. There have been no events or circumstances during the three months ended June 30, 2017 that have required the Company to perform an interim assessment of goodwill.
 
The following table summarizes the activities in the Company’s goodwill balance during the three months ended June 30, 2017 (in thousands):
As of March 31, 2017
 
$
249,741

Currency impact
 
39

As of June 30, 2017
 
$
249,780


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The Company's acquired intangible assets subject to amortization were as follows (in thousands):
 
 
June 30, 2017
 
March 31, 2017
 
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Net Carrying Amount
Trademark and tradenames
 
$
16,500

 
$
(7,399
)
 
$
9,101

 
$
16,500

 
$
(6,933
)
 
$
9,567

Technology
 
63,285

 
(44,337
)
 
18,948

 
63,285

 
(42,831
)
 
20,454

Customer contracts/relationships
 
25,180

 
(8,258
)
 
16,922

 
25,180

 
(7,637
)
 
17,543

Total
 
$
104,965

 
$
(59,994
)
 
$
44,971

 
$
104,965

 
$
(57,401
)
 
$
47,564


Note 9 — Financing Arrangements
 
The Company had several uncommitted, unsecured bank lines of credit aggregating $38.9 million as of June 30, 2017. There are no financial covenants under these lines of credit with which the Company must comply. As of June 30, 2017, the Company had outstanding bank guarantees of $23.3 million under these lines of credit. There was no borrowing outstanding under these lines of credit as of June 30, 2017 or March 31, 2017.

Note 10 — Commitments and Contingencies
 
Product Warranties
 
All of the Company’s peripherals products sold are covered by warranty to be free from defects in material and workmanship. For products launched prior to April 1, 2014, the standard warranty period was up to five years. Starting from April 1, 2014, the standard warranty for all new products launched was changed to two years from the date of purchase for European Countries and generally one year from date of purchase for all other countries.
 
Changes in the Company’s warranty liability for the three months ended June 30, 2017 and 2016 were as follows (in thousands): 
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
Beginning of the period
 
$
21,911

 
$
20,380

Assumed from business acquisition
 
—

 
1,813

Provision
 
5,124

 
3,177

Settlements
 
(4,567
)
 
(3,428
)
Currency translation
 
(412
)
 
(190
)
End of the period
 
$
22,056

 
$
21,752

 
Guarantees
 
Logitech Europe S.A., one of our wholly-owned subsidiaries, guaranteed payments of certain third-party contract manufacturers’ purchase obligations. As of June 30, 2017, the maximum amount of this guarantee was $3.8 million, of which $0.9 million of guaranteed purchase obligations were outstanding.

Indemnifications
 
The Company indemnifies certain of its suppliers and customers for losses arising from matters such as intellectual property disputes and product safety defects, subject to certain restrictions. The scope of these indemnities varies, but in some instances, includes indemnification for damages and expenses, including reasonable attorneys’ fees. As of June 30, 2017, no amounts have been accrued for these indemnification provisions. The Company does not believe, based on historical experience and information currently available, that it is probable that any material amounts will be required to be paid under its indemnification arrangements.
 

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Table of Contents

The Company also indemnifies its current and former directors and certain of its current and former officers. Certain costs incurred for providing such indemnification may be recoverable under various insurance policies. The Company is unable to reasonably estimate the maximum amount that could be payable under these arrangements because these exposures are not limited, the obligations are conditional in nature and the facts and circumstances involved in any situation that might arise are variable.

The stock purchase agreement entered on December 28, 2015 in connection with the investment by three venture capital firms in Lifesize contains representations, warranties and covenants of Logitech and Lifesize, Inc. to the Investors. Logitech has agreed, subject to certain limitations, to indemnify the Investors and certain persons related to the Investors for certain losses resulting from breaches of or inaccuracies in such representations, warranties and covenants as well as certain other obligations, including third-party expenses, restructuring costs and pre-closing tax obligations of Lifesize.
 
Legal Proceedings
 
From time to time the Company is involved in claims and legal proceedings that arise in the ordinary course of its business. The Company is currently subject to several such claims and a small number of legal proceedings. The Company believes that these matters lack merit and intends to vigorously defend against them. Based on currently available information, the Company does not believe that resolution of pending matters will have a material adverse effect on its financial condition, cash flows or results of operations. However, litigation is subject to inherent uncertainties, and there can be no assurances that the Company’s defenses will be successful or that any such lawsuit or claim would not have a material adverse impact on the Company’s business, financial condition, cash flows or results of operations in a particular period. Any claims or proceedings against the Company, whether meritorious or not, can have an adverse impact because of defense costs, diversion of management and operational resources, negative publicity and other factors. Any failure to obtain a necessary license or other rights, or litigation arising out of intellectual property claims, could adversely affect the Company’s business.

Note 11 — Shareholders’ Equity
 
Share Repurchase Program

In March 2014, the Company’s Board of Directors approved the 2014 share buyback program, which authorizes the Company to use up to $250.0 million to purchase its own shares. This share buyback program expired in April 2017.

In March 2017, the Company's Board of Directors approved the 2017 share buyback program, which authorizes the Company to use up to $250.0 million to purchase its own shares following the expiration date of the 2014 buyback program. The Company's share buyback program is expected to remain in effect for a period of three years. Shares may be repurchased from time to time on the open market, through block trades or otherwise. Purchases may be started or stopped at any time without prior notice depending on market conditions and other factors.

During the three months ended June 30, 2017 and 2016, 20 thousand and 1.6 million shares were repurchased for $0.6 million and $24.4 million, respectively.

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Accumulated Other Comprehensive Loss
 
The components of accumulated other comprehensive loss were as follows (in thousands):
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
Cumulative
Translation
Adjustment (1)
 
Defined
Benefit
Plan (1)
 
Deferred
Hedging
Losses
 
Total
March 31, 2017
 
$
(89,708
)
 
$
(10,480
)
 
$
(518
)
 
$
(100,706
)
Other comprehensive income (loss)
 
1,456

 
(102
)
 
(2,676
)
 
(1,322
)
June 30, 2017
 
$
(88,252
)
 
$
(10,582
)
 
$
(3,194
)
 
$
(102,028
)
 
(1)        Tax effect was not significant as of June 30 or March 31, 2017.
 
Note 12 — Segment Information
 
The Company has determined that it operates in a single operating segment that encompasses the design, manufacturing and marketing of peripherals for PCs, tablets and other digital platforms. Operating performance measures are provided directly to the Company's Chief Executive Officer (“CEO”), who is considered to be the Company’s Chief Operating Decision Maker (“CODM”). The CEO periodically reviews information such as net sales and operating income (loss) to make business decisions. These operating performance measures do not include restructuring charges (credits), net, share-based compensation expense, amortization of intangible assets, charges from the purchase accounting effect on inventory, acquisition-related costs, investigation and related expenses, or change in fair value of contingent consideration from business acquisition.


21
Table of Contents

Net sales by product categories, excluding intercompany transactions, for the three months ended June 30, 2017 and 2016 were as follows (in thousands):
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
Mobile Speakers
 
$
62,918

 
$
57,296

Audio-PC & Wearables
 
50,202

 
56,579

Gaming
 
77,708

 
56,500

Video Collaboration
 
35,617

 
23,910

Smart Home
 
16,466

 
11,167

Pointing Devices
 
122,074

 
116,783

Keyboards & Combos
 
116,113

 
118,019

Tablet & Other Accessories
 
23,218

 
13,885

PC Webcams
 
25,625

 
25,262

Other (1)
 
5

 
463

Total net sales
 
$
529,946

 
$
479,864


(1) Other category includes products that the Company currently intends to transition out of, or has already transitioned out of, because they are no longer strategic to the Company's business.
Net sales by geographic region (based on the customers’ locations) for the three months ended June 30, 2017 and 2016 were as follows (in thousands):
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
Americas
 
$
245,400

 
$
222,625

EMEA
 
150,591

 
142,922

Asia Pacific
 
133,955

 
114,317

Total net sales
 
$
529,946

 
$
479,864

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

The United States and Germany each represented more than 10% of the Company’s total consolidated net sales for the three months ended June 30, 2017. The United States represented more than 10% of the Company’s total consolidated net sales for the three months ended June 30, 2016.

Switzerland, the Company’s home domicile, represented 1% and 2% of the Company’s total consolidated net sales for the three months ended June 30, 2017 and June 30, 2016, respectively.

Two customer groups of the Company each represented more than 10% of the total consolidated sales for all the periods presented herein.
 
Long-lived assets by geographic region were as follows (in thousands):
 
 
June 30,
2017
 
March 31,
2017
Americas
 
$
36,679

 
$
37,242

EMEA
 
4,130

 
4,006

Asia Pacific
 
44,326

 
44,160

Total long-lived assets
 
$
85,135

 
$
85,408

 
Long-lived assets in the United States and China were $36.6 million and $37.3 million, respectively, as of June 30, 2017, and $37.1 million and $37.2 million, respectively, as of March 31, 2017. No other countries represented more than 10% of the Company’s total consolidated long-lived assets as of June 30 or March 31, 2017.

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Long-lived assets in Switzerland, the Company’s home domicile, were $2.0 million and $2.1 million as of June 30 and March 31, 2017, respectively.
 
Note 13 — Subsequent Event

On July 10, 2017, the Company signed an agreement to acquire certain assets and liabilities constituting the Astro Gaming business from AG Acquisition Corporation for $85 million in cash. Astro Gaming is a leading console gaming brand and has a history of producing award-winning headsets for professional gamers and enthusiasts. The transaction is expected to close in early August, 2017 and is subject to receipt of regulatory approvals in various jurisdictions and other closing conditions.


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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion in conjunction with the interim unaudited condensed consolidated financial statements and related notes.
 
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include, among other things, statements regarding our strategy for growth, future revenues, earnings, cash flow, uses of cash and other measures of financial performance, and market position, our business strategy, the impact of investment prioritization decisions, product offerings, sales and marketing initiatives, strategic investments, addressing execution challenges, trends in consumer demand affecting our products and markets, trends in the composition of our customer base, our current or future revenue and revenue mix by product, among our lower- and higher-margin products, our new product introductions and by geographic region, our expectations regarding the potential growth opportunities for our products in mature and emerging markets and the enterprise market, our expectations regarding economic conditions in international markets, including China, Russia and Ukraine, our expectations regarding trends in global economic conditions and consumer demand for PCs and mobile devices, tablets, gaming, audio, pointing devices, wearables, remotes and other accessories and computer devices and the interoperability of our products with such third party platforms, our expectations regarding the convergence of markets for computing devices and consumer electronics, our expectations regarding the growth of cloud-based services, our expected reduction in size of our product portfolio and dependence on new products, our competitive position and the effect of pricing, product, marketing and other initiatives by us and our competitors, the potential that our new products will overlap with our current products, our expectations regarding competition from well-established consumer electronics companies in existing and new markets, our expectations regarding the recoverability of our goodwill, goodwill impairment charge estimates and the potential for future impairment charges, the impact of our current and proposed product divestitures, changes in our planned divestitures, and the timing thereof, our expectations regarding the success of our strategic acquisitions, including integration of acquired operations, products, technology, internal controls, personnel and management teams, the closing and the timing of the closing of the ASTRO Gaming acquisition, significant fluctuations in currency exchange rates and commodity prices, the impact of new product introductions and product innovation on future performance or anticipated costs and expenses and the timing thereof, cash flows, the sufficiency of our cash and cash equivalents, cash generated and available borrowings (including the availability of our uncommitted lines of credit) to fund future cash requirements, our expectations regarding future sales compared to actual sales, our expectations regarding share repurchases, dividend payments and share cancellations, our expectations regarding our future working capital requirements and our anticipated capital expenditures needed to support our product development and expanded operations, our expectations regarding our future tax benefits and 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 remediation efforts to address our material weaknesses, our belief that our disclosure controls and procedures will become effective at the reasonable assurance level by the end of fiscal year 2018, our expectations regarding the impact of new accounting pronouncements on our operating results, and our ability to achieve and sustain renewed growth, profitability and future success. Forward-looking statements also include, among others, those statements including the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “project,” “predict,”, "seek", “should,” “will,” and similar language. These forward-looking statements involve risks and uncertainties that could cause our actual performance to differ materially from that anticipated in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.
 
Overview of Our Company
 
Logitech is a world leader in designing, manufacturing and marketing products that have an everyday place in people's lives, connecting them to the digital experiences they care about. More than 35 years ago Logitech created products to improve experiences around the PC platform, and now it is designing products that enable better experiences consuming, sharing and creating any digital content (e.g. music, gaming, video), whether it is on a computer, mobile device or in the cloud. Logitech's brands include Logitech, Jaybird, Logitech G and Ultimate Ears.


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Our products participate in five large markets that all have growth opportunities: Music, Gaming, Video Collaboration, Smart Home and Creativity & Productivity. We sell our products to a broad network of domestic and international customers, including direct sales to retailers and e-tailers, and indirect sales through distributors. Our worldwide channel network includes consumer electronics distributors, retailers, mass merchandisers, specialty electronics stores, computer and telecommunications stores, value-added resellers and online merchants.
From time to time, we may seek to partner with, or acquire when appropriate, companies that have products, personnel, and technologies that complement our strategic direction. We continually review our product offerings and our strategic direction in light of our profitability targets, competitive conditions, changing consumer trends and the evolving nature of the interface between the consumer and the digital world.
On July 10, 2017, we signed an agreement to acquire certain assets and liabilities constituting the Astro Gaming business from AG Acquisition Corporation for $85 million in cash. Astro Gaming is a leading console gaming brand and has a history of producing award-winning headsets for professional gamers and enthusiasts. The transaction is expected to close in early August, 2017 and is subject to receipt of regulatory approvals in various jurisdictions and other closing conditions.

Summary of Financial Results

Our net sales for the three months ended June 30, 2017 increased 10% compared to the three months ended June 30, 2016, due to stronger net sales across all regions. Net sales increased 10%, 5% and 17% in the Americas, EMEA and Asia Pacific, respectively.

Our gross margin for the three months ended June 30, 2017 increased to 36.5% from 35.1% for the three months ended June 30, 2016. The increase in gross margin was primarily driven by product cost reductions as well as greater supply chain efficiencies, partially offset by an increase of promotions and an unfavorable fluctuation in currency exchange rates.

Operating expenses for the three months ended June 30, 2017 were $162.2 million, or 30.6% of net sales, compared to $142.8 million, or 29.8% of net sales in the same period of the prior fiscal year. The increase was primarily driven by higher personnel-related costs due to increased headcount and higher external expenses to support the advertising and marketing efforts for our new products, partially offset by a credit from change in fair value of contingent consideration from the Jaybird Acquisition.

Net income from continuing operations for the three months ended June 30, 2017 was $37.0 million, compared to $21.9 million for the three months ended June 30, 2016.

Given our global sales presence and the reporting of our financial results in U.S. Dollars, our financial results could be affected by shifts in currency exchange rates. See “Results of Operations” for information on the effect of currency exchange results on our net sales. If the U.S. Dollar becomes stronger in comparison to other currencies, it will also affect our results of operations in future periods.
 
Trends in Our Business
 
Our strategy focuses on five large multi-category markets, including Music, Gaming, Video Collaboration, Smart Home and Creativity & Productivity. We see opportunities to deliver growth in all these markets.

We believe our future growth will be determined by our ability to rapidly create innovative products across multiple digital platforms, including gaming, digital music devices, video and computing. The following discussion represents key trends specific to our market opportunities.
Trends Specific to Our Five Market Opportunities
Music: The music market grew during the first quarter of fiscal year 2018 driven by growing consumption of music through mobile devices such as smartphones and tablets. This market growth, together with our investments in the UE brand and Jaybird brand, new channel expansion, acquisitions of new portfolios and our ability to gain market share during fiscal year 2017, has driven our growth in this market.

Gaming: The PC Gaming platform continues to show strong growth as online gaming, multi-platform experiences, and eSports gain greater popularity and gaming content becomes increasingly more demanding. We

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believe Logitech is well positioned to benefit from the gaming market growth, together with strengthening our portfolio in the console-gaming market.

Video Collaboration: We are continuing our efforts to create and sell innovative products, including Video Collaboration products, to accommodate the increasing demand from medium-sized meeting rooms to small-sized rooms such as huddle rooms. We will continue to invest in select business-specific products, targeted product marketing and sales channel development.

Smart Home: This market increased in fiscal year 2017 and has continued growing in the first quarter of fiscal year 2018. In October 2016, we introduced a new Amazon Alexa skill that enables voice control of the living room entertainment experience using a Logitech Harmony Hub with Alexa-enabled devices such as the Amazon Echo or Echo Dot. Through Harmony, Alexa can turn on/off and control a TV and AV system. We have also seen early success with the professional installer channel through the recent introduction of the Harmony Pro. We will continue to explore other innovative experiences for the Smart Home. 

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

Critical Accounting Estimates

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

We consider an accounting estimate critical if it: (i) requires management to make judgments and estimates about matters that are inherently uncertain; and (ii) is important to an understanding of our financial condition and operating results.

We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Although these estimates are based on management's best knowledge of current events and actions that may impact us in the future, actual results could differ from those estimates. Management has discussed the development, selection and disclosure of these critical accounting estimates with the Audit Committee of the Board of Directors.
 
Other than the recent accounting pronouncement adoptions discussed below, there have been no substantial changes in the Company’s significant accounting policies during the three months ended June 30, 2017 compared with the significant accounting policies described in its Annual Report on Form 10-K for the fiscal year ended March 31, 2017.


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Adoption of New Accounting Guidance

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

In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 simplifies several aspects of the accounting for share-based payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees' maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for the excess tax benefits and employee taxes paid when an employer withholds shares for tax withholding purposes. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We have adopted this standard effective April 1, 2017. Changes to the statements of cash flows related to the classification of excess tax benefits were implemented on a retroactive basis and accordingly, to conform to the current year presentation, we reclassified $3.3 million of excess tax benefits previously reported under financing activities to operating activities for the three months ended June 30, 2016 on its condensed consolidated statements of cash flows. Under the new standard, we account for forfeitures as they occur. The change in accounting for forfeitures resulted in a cumulative-effect adjustment to decrease retained earnings as of March 31, 2017 by $3.3 million. We further recognized a cumulative-effect adjustment to increase retained earnings as of March 31, 2017 by $57.2 million upon adoption of the new guidance to account for gross excess tax benefits of $75.2 million that were previously not recognized because the related tax deduction had not reduced current income taxes, offset by a valuation allowance of $18.0 million to reduce the deferred tax assets to amounts that are more likely than not to be realized.

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

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

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

Impact of Constant Currency

We refer to our net sales growth rates excluding the impact of currency exchange rate fluctuations as "constant dollar" sales growth rates. Percentage of constant dollar sales growth is calculated by translating prior period sales in each local currency at the current period’s average exchange rate for that currency and comparing that to current period sales.

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

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Results of Operations
 Net Sales
Net sales for the three months ended June 30, 2017 and 2016 were as follows (Dollars in thousands):
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
 
Change
Net Sales
 
$
529,946

 
$
479,864

 
10
%

Our net sales in the three months ended June 30, 2017 increased 10%, compared to the same period of the prior fiscal year. Sales increased across all three regions during the three months ended June 30, 2017. If currency exchange rates had been constant in the three months ended June 30, 2017 and 2016, our constant dollar sales growth rates would have been 13%. We grew across most of our product categories, out of which Gaming, Video Collaboration, Tablet and Other Accessories, and Smart Home grew double digits.
Sales Denominated in Other Currencies
Although our financial results are reported in U.S. Dollars, a portion of our sales was generated in currencies other than the U.S. Dollar, such as the Euro, Chinese Renminbi, Japanese Yen, Canadian Dollar, Taiwan New Dollar, British Pound and Australian Dollar. During the three months ended June 30, 2017, 47% of our net sales were denominated in currencies other than the U.S. Dollar.

Net Sales by Region
 
The following table presents the change in net sales by region for the three months ended June 30, 2017, compared with the three months ended June 30, 2016:
 
 
Three Months Ended
June 30, 2017
Change in Sales
Americas
 
10
%
EMEA
 
5

Asia Pacific
 
17

 
Americas:
 
Net sales in the Americas increased 10% during the three months ended June 30, 2017, compared to the same period of the prior fiscal year. If currency exchange rates had been constant in the three months ended June 30, 2017 and 2016, our constant dollar sales growth rate would have been 11% in the Americas. The increase in the period was driven by growth in Tablet and Other Accessories, Video Collaboration, Mobile Speakers, Gaming and Smart Home, partially offset by declines in sales for Audio PC & Wearables.
 
EMEA:
 
Net sales in the EMEA increased 5% during the three months ended June 30, 2017, compared to the same period of the prior fiscal year. If currency exchange rates had been constant in the three months ended June 30, 2017 and 2016, our constant dollar retail sales growth rates would have been 11%. The growth in the periods was driven by Video Collaboration and Gaming, partially offset by a decline in sales for Audio PC & Wearables.

Asia Pacific:
 
Net sales in the Asia Pacific increased 17% during the three months ended June 30, 2017, compared to the same period of the prior fiscal year. If currency exchange rate had been constant in the three months ended June 30, 2017 and 2016, our constant dollar sales growth rate would have been 19%. The growth in the period was driven by Gaming, Video Collaboration, Mobile Speakers, Pointing Devices and Audio PC & Wearables, partially offset by a decline in sales for Keyboards and Combos.


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Net Sales by Product Categories
 
Net sales by product category for the three months ended June 30, 2017 and 2016 were as follows (Dollars in thousands):
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
 
Change
Mobile Speakers
 
$
62,918

 
$
57,296

 
10
 %
Audio-PC & Wearables
 
50,202

 
56,579

 
(11
)
Gaming
 
77,708

 
56,500

 
38

Video Collaboration
 
35,617

 
23,910

 
49

Smart Home
 
16,466

 
11,167

 
47

Pointing Devices
 
122,074

 
116,783

 
5

Keyboards & Combos
 
116,113

 
118,019

 
(2
)
Tablet & Other Accessories
 
23,218

 
13,885

 
67

PC Webcams
 
25,625

 
25,262

 
1

Other (1)
 
5

 
463

 
(99
)
Total net sales
 
$
529,946

 
$
479,864

 
10


(1) Other category includes products that we currently intend to transition out of, or have already transitioned out of, because they are no longer strategic to our business.
Net Sales by Product Categories
Music market:
 
Mobile Speakers
 
Our Mobile Speakers category is made up entirely of bluetooth wireless speakers.

Net sales of Mobile Speakers increased 10% for the three months ended June 30, 2017, compared to the same period of the prior fiscal year. Mobile Speaker sales increased primarily due to the introduction of the UE WonderBoom in the first quarter of fiscal year 2018.

Audio-PC & Wearables
 
Our Audio-PC & Wearables category comprises PC speakers, PC headsets, in-ear headphones and premium wireless audio wearables.

Audio-PC & Wearables net sales decreased 11% for the three months ended June 30, 2017, compared to the same period of the prior fiscal year. The decrease was primarily driven by a decline in sales for Jaybird Freedom X2 wireless earbuds, which was phased out in the third quarter of fiscal year 2017, and PC speakers systems, partially offset by an increase in sales of Jaybird X3 Sport Bluetooth earbuds, which was introduced in the third quarter of fiscal year 2017.

Gaming market:

Gaming
 
Our Gaming category comprises gaming mice, keyboards, headsets, gamepads, steering wheels and Saitek simulation controllers.
 
Gaming net sales increased 38% for the three months ended June 30, 2017, compared to the same period of the prior fiscal year. The significant increase was primarily driven by the continued success of our G502 Proteus Spectrum gaming mouse, G29 Driving Force Race Wheel, and the introductions of our G413 Prodigy Mechanical Gaming Keyboard and G203 Prodigy gaming mouse, partially offset by a decline in sales of the G430 gaming headset.

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Video Collaboration market:

Video Collaboration

Our Video Collaboration category primarily includes products which combine audio and video and other products that can connect small- and medium-sized user groups.

Net sales of Video Collaboration increased 49% in the three months ended June 30, 2017, compared to the same period of the prior fiscal year. The increase was primarily due to the continued success of our Logitech Group conference camera, as well as the introduction of Brio 4K Pro Webcam and Logitech Smart Dock in the first quarter of fiscal year 2018.

Smart Home market:

Smart Home
 
Our Smart Home category includes our Harmony line of advanced home entertainment controllers and new products dedicated to controlling emerging categories of connected smart home devices such as lighting, thermostats and door locks.
 
Smart Home net sales increased 47% during the three months ended June 30, 2017, compared to the same period of the prior fiscal year. The increase was primarily due to continued success of our Harmony Elite remote and Harmony Home Hub, as well as the introduction of a new Amazon Alexa skill that enables voice control of the living room entertainment experience using a Logitech Harmony Hub with Alexa-enabled devices in the third quarter of fiscal year 2017.
 
Creativity & Productivity Market:

Pointing Devices
 
Our Pointing Devices category comprises PC and Mac-related mice, touchpads and presenters.
 
Net sales of Pointing Devices increased 5% during the three months ended June 30, 2017, compared to the same periods of the prior fiscal year. The growth was driven by the success of our MX Master 2S wireless mouse launched in the first quarter of fiscal year 2018.

Keyboards & Combos
 
Our Keyboards & Combos category comprises PC keyboards and keyboard/mice combo products.
 
Net sales of Keyboards & Combos decreased 2% in the three months ended June 30, 2017, compared to the same period of the prior fiscal year. The decrease was primarily driven by a decline in sales of our K400 Plus wireless touch keyboard, and MK710 and MK320 wireless keyboard and mouse combo, partially offset by an increase in sales for the MK550 wireless keyboard and mouse combo.

Tablet & Other Accessories
 
Our Tablet & Other Accessories category comprises keyboards and covers for tablets and smartphones as well as other accessories for mobile devices.
 
Net sales of Tablet & Other Accessories increased 67% in the three months ended June 30, 2017, compared to the same period of the prior fiscal year. The significant growth is the result of the continued success of our Create tablet keyboard case and Rugged Combo case for iPad Pro, which were both introduced in the fourth quarter of fiscal year 2017.


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PC Webcams
 
Our PC Webcams category comprises PC-based webcams targeted primarily at consumers.
 
PC Webcams net sales remained relatively flat for the three months ended June 30, 2017, compared to the same period of the prior fiscal year.

Gross Profit
 
Gross profit for the three months ended June 30, 2017 and 2016 was as follows (Dollars in thousands):
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
Net sales
 
$
529,946

 
$
479,864

Gross profit
 
$
193,668

 
$
168,626

Gross margin
 
36.5
%
 
35.1
%
 
Gross profit consists of net sales, less cost of goods sold (which includes materials, direct labor and related overhead costs, costs of manufacturing facilities, royalties, costs of purchasing components from outside suppliers, distribution costs, warranty costs, customer support, shipping and handling cost, outside processing costs and write-down of inventories), amortization of intangible assets and purchase accounting effect on inventory.
 
Gross margin increased by 140 basis points for the three months ended June 30, 2017, compared to the same period of the prior fiscal year. The increase in gross margin was primarily driven by product cost reductions as well as greater supply chain efficiencies, partially offset by an increase of promotions and an unfavorable fluctuation in currency exchange rates.

Operating Expenses
 
Operating expenses for the three months ended June 30, 2017 and 2016 were as follows (Dollars in thousands):
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
Marketing and selling
 
$
102,378

 
$
83,872

% of net sales
 
19.3
 %
 
17.5
%
Research and development
 
35,099

 
31,951

% of net sales
 
6.6
 %
 
6.7
%
General and administrative
 
25,354

 
25,655

% of net sales
 
4.8
 %
 
5.3
%
Amortization of intangible assets and acquisition-related costs
 
1,390

 
1,293

% of net sales
 
0.3
 %
 
0.3
%
Change in fair value of contingent consideration for business acquisition
 
(1,978
)
 
—

% of net sales
 
(0.4
)%
 
—
%
Total operating expenses
 
$
162,243

 
$
142,771

% of net sales
 
30.6
 %
 
29.8
%

The increase in total operating expenses for the three months ended June 30, 2017, compared to the same period of the prior fiscal year, was mainly due to increases in marketing and selling expenses and research and development expenses from higher personnel-related costs due to increased headcount and higher external expenses to support the advertising and marketing efforts for our new products, partially offset by a credit from the change in fair value of contingent consideration for business acquisition.


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Marketing and Selling
 
Marketing and selling expenses consist of personnel and related overhead cost, corporate and product marketing, promotions, advertising, trade shows, customer and technical support, and facilities costs.
 
During the three months ended June 30, 2017, marketing and selling expenses increased $18.5 million, compared to the same period of the prior fiscal year. The increase was primarily driven by $6.1 million higher personnel-related costs due to increased headcount in addition to $8.9 million higher external expenses to support the advertising and marketing efforts for our new products, including new products introduced under the Jaybird brand.

 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 ended June 30, 2017, research and development expenses increased $3.1 million, compared to the same period in the prior fiscal year. The increase was primarily driven by higher personnel-related costs due to increased headcount to support the development and launch of our new products and capabilities.
 
General and Administrative
 
General and administrative expenses consist primarily of personnel and related overhead and facilities costs for the finance, information systems, executives, human resources, and legal functions.

During the three months ended June 30, 2017, general and administrative expenses remained relatively flat, compared to the same period in the prior fiscal year. Lower information technology cost was partially offset by higher personnel-related costs due to a slight increase in headcount.

Amortization of Intangibles and Acquisition-Related Costs

Amortization of intangibles and acquisition-related costs during the three months ended June 30, 2017 and 2016 were as follows (in thousands):
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
Amortization of intangible assets
 
$
1,089

 
$
798

Acquisition-related costs
 
301

 
495

Total
 
$
1,390

 
$
1,293


Amortization of intangible assets consists of amortization of acquired intangible assets including customer relationships and trade names. Acquisition-related costs include legal expense, due diligence costs, and other professional costs incurred for business acquisitions.

Change in Fair Value of Contingent Consideration for Business Acquisition

The change in fair value of contingent consideration is primarily due to lower-than-expected net sales of Jaybird products, partially offset by the change in the time value of money. (see Note 6 – Fair Value Measurement). Although these estimates are based on management’s best knowledge of current events, the estimates could change significantly from period to period. Any changes to the significant unobservable inputs used, including change in the forecast of net sales of the earn-out periods, may result in change in the fair value of contingent consideration, and could have a material impact on future results of operations. Actual payment of contingent consideration in the future could be different from the current estimated fair value of the contingent consideration.


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Other Expense, Net
 
Other expense, net for the three months ended June 30, 2017 and 2016 was as follows (in thousands):
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
Investment income related to a deferred compensation plan
 
$
408

 
$
192

Currency exchange loss, net
 
(964
)
 
(999
)
Other
 
(473
)
 
(201
)
Total
 
$
(1,029
)
 
$
(1,008
)

Investment income related to a deferred compensation plan for the three months ended June 30, 2017 and 2016 represents earnings and gains on trading investments related to a deferred compensation plan offered by one of our subsidiaries.

Currency exchange losses relate to balances denominated in currencies other than the functional currency in our subsidiaries, as well as to the sale of currencies, and to gains or losses recognized on foreign currency exchange forward contracts. We do not speculate in currency positions, but we are alert to opportunities to maximize currency exchange gains and minimize currency exchange losses.
 
Provision for (Benefit from) Income Taxes
 
The provision for (benefit from) income taxes and effective tax rates for the three months ended June 30, 2017 and 2016 were as follows (Dollars in thousands):
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
Provision for (benefit from) income taxes
 
$
(5,436
)
 
$
3,057

Effective income tax rate
 
(17.2
)%
 
12.2
%
 
The change in the effective income tax rate for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, is primarily due to the recognition of $9.9 million of excess tax benefits, net of valuation allowance of $1.3 million for federal tax credit carryforwards after adoption of ASU 2016-09. In the three months ended June 30, 2017 and June 30, 2016, there was a discrete tax benefit of $0.7 million for both periods from the reversal of uncertain tax positions from the expiration of statutes of limitations.

As of June 30 and March 31, 2017, the total amount of unrecognized tax benefits due to uncertain tax positions was $65.0 million and $63.7 million, respectively, all of which would affect the effective income tax rate if recognized.

Liquidity and Capital Resources
 
Cash Balances, Available Borrowings, and Capital Resources
 
As of June 30, 2017, we had cash and cash equivalents of $527.7 million, compared to $547.5 million as of March 31, 2017. Our cash and cash equivalents consist of bank demand deposits and short-term time deposits, of which 42% is held in Switzerland, 37% is held in Germany, and 10% is held in Hong Kong and China. We do not expect to incur any material adverse tax impact except for what has been recognized, or be significantly inhibited by any country in which we do business from the repatriation of funds to Switzerland, our home domicile.
 
As of June 30, 2017, our working capital was $553.3 million, compared to $520.8 million as of March 31, 2017. The increase was primarily due to higher accounts receivable, net, higher inventories and lower accrued and other current liabilities, partially offset by higher accounts payable.


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We had several uncommitted, unsecured bank lines of credit aggregating $38.9 million as of June 30, 2017. There are no financial covenants under these lines of credit with which we must comply. As of June 30, 2017, we had outstanding bank guarantees of $23.3 million under these lines of credit.
 
The following table summarizes our Condensed Consolidated Statements of Cash Flows (in thousands) on a total company basis:
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
Net cash provided by (used in) operating activities
 
$
(883
)
 
$
17,017

Net cash used in investing activities
 
(10,357
)
 
(61,725
)
Net cash used in financing activities
 
(9,738
)
 
(33,008
)
Effect of exchange rate changes on cash and cash equivalents
 
1,102

 
(1,368
)
Net decrease in cash and cash equivalents
 
$
(19,876
)
 
$
(79,084
)

The following table presents selected financial information and statistics as of June 30, 2017 and 2016 (Dollars in thousands): 
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
Accounts receivable, net
 
$
221,340

 
$
192,242

Accounts payable
 
$
312,722

 
$
292,664

Inventories
 
$
279,405

 
$
247,792

Days sales in accounts receivable (“DSO”) (Days) (1)
 
38

 
36

Days accounts payable outstanding (“DPO”) (Days) (2)
 
84

 
85

Inventory turnover (“ITO”) (x)(3)
 
4.8

 
5.0


(1) DSO is determined using ending accounts receivable, net as of the most recent quarter-end and net sales for the most recent quarter.
(2) DPO is determined using ending accounts payable as of the most recent quarter-end and cost of goods sold for the most recent quarter. 
(3) ITO is determined using ending inventories and annualized cost of goods sold (based on the most recent quarterly cost of goods sold).

DSO for the three months ended June 30, 2017 increased two days, compared to June 30, 2016, primarily due to timing of net sales and customer payments.

DPO for the three months ended June 30, 2017 was consistent compared to the same period of the prior fiscal year.

ITO for the three months ended June 30, 2017 was slightly lower, compared to the same period of the prior fiscal year. The increase in inventories compared with June 30, 2016 was primarily driven by the purchase of inventories for planned new product launches in the next three to six months.

If we are not successful in launching and phasing in our new products during the current fiscal year, or we are not able to sell the new products at the prices planned, it could have a material impact on our net sales, gross profit margin, operating results including operating cash flow, and inventory turnover in the future.

During the three months ended June 30, 2017, we used $0.9 million cash in operating activities. Our main sources of operating cash flows were from net income after adding back non-cash expenses of depreciation, amortization, and share-based compensation expense, and from the increases in accounts payable, offset by the increases in accounts receivable, net and inventories and the decrease in accrued and other liabilities. The increases in accounts receivable, net and accounts payable were primarily driven by higher business volumes and timing of payments. The increase in inventories was primarily driven by the purchase of inventories for planned new product launches. The decrease in accrued and other liabilities was primarily due to payments of annual cash bonuses for fiscal year 2017.

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Net cash used in investing activities was $10.4 million, primarily due to $10.0 million of purchases of property, plant, and equipment, and $0.4 million of investments in privately held companies.

Net cash used in financing activities was $9.7 million, primarily for the $21.7 million tax withholdings related to net share settlements of restricted stock units, partially offset by $12.6 million in proceeds received from the exercises of stock options.

Our expenditures for property, plant and equipment during the three months ended June 30, 2017 increased, compared to the same period of the prior fiscal year, mainly due to the higher amount of tooling purchases.

The purchases and sales of trading investments during the three months ended June 30, 2017 and 2016 represented mutual fund and money market fund activities directed by participants in a deferred compensation plan offered by one of our subsidiaries. The mutual funds and money market funds are held in a Rabbi trust.
 
During the three months ended June 30, 2017, there was a $1.1 million gain of currency translation exchange rate effect on cash and cash equivalents, compared to a loss of $1.4 million during the same period of the prior fiscal year. The gain from currency translation exchange effect during the three months ended June 30, 2017 was primarily due to the strengthening of the Euro against the U.S. Dollar by 7% during the period while the loss during the three months ended June 30, 2016 was primarily due to weakening of the Euro against the U.S. Dollar by 2% during the period, which had an adverse impact on our cash and cash equivalents balances in subsidiaries with Euro as their functional currency.

Cash Outlook
 
Our principal sources of liquidity are our cash and cash equivalents, cash flow generated from operations and, to a much lesser extent, capital markets and borrowings. Our future working capital requirements and capital expenditures may increase to support investment in product innovations and growth opportunities, or to acquire or invest in complementary businesses, products, services, and technologies.

In May 2017, the Board of Directors recommended that the Company pay approximately CHF 100.0 million (approximately $100.0 million based on the exchange rate on March 31, 2017) in cash dividends for fiscal year 2017. During fiscal year 2017, we paid a cash dividend of CHF 90.2 million (U.S. Dollar amount of $93.1 million) out of retained earnings.

In March 2017, our Board of Directors approved another share buyback program, which authorizes us to invest up to $250.0 million to purchase our own shares, following the expiration date of the 2014 buyback program. The new program was approved by the Swiss Takeover Board in May 2017. Although we enter into trading plans for systematic repurchases (e.g., 10b5-1 trading plans) from time to time, our share buyback program provides us with the opportunity to make opportunistic repurchases during periods of favorable market conditions and is expected to remain in effect for a period of three years. Shares may be repurchased from time to time on the open market, through block trades or otherwise. Opportunistic purchases may be started or stopped at any time without prior notice depending on market conditions and other factors. The March 2014 program expired in April 2017 and there have been no repurchases under the March 2017 program.

As noted in "Note 6 - Fair Value Measurements" to our condensed consolidated financial statements, we acquired all of the equity interest of Jaybird with an additional earn-out of up to $45.0 million in cash based on the achievement of certain net revenue growth targets over two years starting July 2016. If the net revenue growth targets are met, the Company will pay a maximum of $25.0 million and $20.0 million in fiscal years 2018 and 2019, respectively. The fair value of the contingent consideration was $7.9 million as of June 30, 2017. As of June 30, 2017, the first twelve month earn-out period is complete and the expected earn-out payment of $0.5 million is included in the accrued and other current liabilities.

We have changed the payment frequency of our employee performance bonus plan from semi-annual payment to annual payment. The full year bonus is expected to be made in the first quarter of the following fiscal year, and the operating cash flow for that period will be negatively affected as a result.

If we do not generate sufficient operating cash flows to support our operations and future planned cash requirements, our operations could be harmed and our access to credit could be restricted or eliminated. However,

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we believe that the trend of our historical cash flow generation, our projections of future operations and our available cash balances will provide sufficient liquidity to fund our operations for at least the next 12 months.
 
Operating Leases Obligation
 
We lease facilities under operating leases, certain of which require us to pay property taxes, insurance and maintenance costs. Operating leases for facilities are generally renewable at our option and usually include escalation clauses linked to inflation. The remaining terms on our non-cancelable operating leases expire in various years through 2030.
 
Purchase Commitments
 
As of June 30, 2017, we had non-cancelable purchase commitments for inventory purchases made in the normal course of business to original design manufacturers, contract manufacturers and other suppliers, the majority of which are expected to be fulfilled within the next 12 months. Non-cancelable purchase commitments for capital expenditures primarily relate to commitments for tooling for new and existing products, computer hardware, leasehold and improvements. We expect to continue making capital expenditures in the future to support product development activities and ongoing and expanded operations. Although open purchase commitments are considered enforceable and legally binding, the terms generally allow us to reschedule or adjust our requirements based on business needs prior to delivery of goods or performance of services.

Other Contractual Obligations and Commitments
 
For further detail about our contractual obligations and commitments, refer to our Annual Report on Form 10-K for the fiscal year ended March 31, 2017.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Guarantees
 
Logitech Europe S.A., one of our wholly-owned subsidiaries, guaranteed payments of two third-party contract manufacturers' purchase obligations. As of June 30, 2017, the maximum amount of this guarantee was $3.8 million, of which $0.9 million of guaranteed purchase obligations were outstanding.

Indemnifications
 
We indemnify certain of our suppliers and customers for losses arising from matters such as intellectual property disputes and product safety defects, subject to certain restrictions. The scope of these indemnities varies, but in some instances includes indemnification for damages and expenses, including reasonable attorneys’ fees. As of June 30, 2017, no amounts have been accrued for indemnification provisions. We do not believe, based on historical experience and information currently available, that it is probable that any material amounts will be required to be paid under our indemnification arrangements.
 
We also indemnify our current and former directors and certain of our 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.

The stock purchase agreement that we entered into in connection with the investment by three venture capital firms in Lifesize contains representations, warranties and covenants of Logitech and Lifesize to the Investors. Subject to certain limitations, we have agreed to indemnify the Investors and certain persons related to the Investors for certain losses resulting from breaches of or inaccuracies in such representations, warranties and covenants as well as certain other obligations, including third party expenses, restructuring costs and pre-closing tax obligations of Lifesize.

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Legal Proceedings
 
From time to time we are involved in claims and legal proceedings that arise in the ordinary course of our business. We are currently subject to several such claims and a small number of legal proceedings. We believe that these matters lack merit and we intend to vigorously defend against them. Based on currently available information, we do not believe that resolution of pending matters will have a material adverse effect on our financial condition, cash flows or results of operations. However, litigation is subject to inherent uncertainties, and there can be no assurances that our defenses will be successful or that any such lawsuit or claim would not have a material adverse impact on our business, financial condition, cash flows and results of operations in a particular period. Any claims or proceedings against us, whether meritorious or not, can have an adverse impact because of defense costs, diversion of management and operational resources, negative publicity and other factors. Any failure to obtain necessary license or other rights, or litigation arising out of intellectual property claims, could adversely affect our business. 

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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Market Risk
 
Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. As a global concern, we face exposure to adverse movements in currency exchange rates and interest rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results.
 
Currency Exchange Rates
 
We report our results in U.S. Dollars. Changes in currency exchange rates compared to the U.S. Dollar can have a material impact on our results when the financial statements of our non-U.S. subsidiaries are translated into U.S. Dollars. The functional currency of our operations is primarily the U.S. Dollar. Certain operations use the Swiss Franc or the local currency of the country as their functional currencies. Accordingly, unrealized currency gains or losses resulting from the translation of net assets or liabilities denominated in other currencies to the U.S. Dollar are accumulated in the cumulative translation adjustment component of other comprehensive income (loss) in shareholders' equity.

We are exposed to currency exchange rate risk as we transact business in multiple currencies, including exposure related to anticipated sales, anticipated purchases and assets and liabilities denominated in currencies other than the U.S. Dollar. We transact business in over 30 currencies worldwide, of which the most significant to operations are the Euro, Chinese Renminbi, Australian Dollar, Taiwanese Dollar, British Pound, Canadian Dollar, Japanese Yen and Mexican Peso. For the three months ended June 30, 2017, approximately 47% of our sales were in non-U.S. denominated currencies, with 22% of our sales denominated in Euro. The mix of our operating expenses by currency is significantly different from the mix of our sales, with a larger portion denominated in U.S. Dollar and less denominated in Euro and other currencies. A strengthening U.S. Dollar has more unfavorable impact on our sales compare to the favorable impact on our operating expense, resulting in an adverse impact on our operating results. 


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If the U.S. Dollar remains at its current strong levels in comparison to other currencies, this will affect our results of operations in future periods as well. The table below provides information about our underlying transactions that are sensitive to currency exchange rate changes, primarily assets and liabilities denominated in currencies other than the base currency, where the net exposure is greater than $0.5 million as of June 30, 2017. The table also presents the U.S. Dollar impact on earnings of a 10% appreciation and a 10% depreciation of the base currency as compared with the transaction currency (in thousands):
Base
Currency
 
Transaction
Currency
 
Net
Exposed
Long
(Short)
Currency
Position
 
FX Gain
(Loss) From
10%
Appreciation
of Base
Currency
 
FX Gain
(Loss) From
10%
Depreciation
of Base
Currency
U.S. Dollar
 
Mexican Peso
 
$
10,817

 
$
(983
)
 
$
1,202

U.S. Dollar
 
Canadian Dollar
 
12,881

 
(1,171
)
 
1,431

U.S. Dollar
 
Australian Dollar
 
9,670

 
(879
)
 
1,074

U.S. Dollar
 
Japanese Yen
 
5,528

 
(503
)
 
614

U.S. Dollar
 
Russian Ruble
 
608

 
(55
)
 
68

U.S. Dollar
 
Argentina
 
601

 
(55
)
 
67

U.S. Dollar
 
Korean Wan
 
(942
)
 
86

 
(105
)
U.S. Dollar
 
Swiss Franc
 
(3,332
)
 
303

 
(370
)
U.S. Dollar
 
Singapore Dollar
 
(9,904
)
 
900

 
(1,100
)
U.S. Dollar
 
Taiwanese Dollar
 
(13,167
)
 
1,197

 
(1,463
)
U.S. Dollar
 
Chinese Renminbi
 
(30,149
)
 
2,741

 
(3,350
)
Swiss Franc
 
British Pound
 
(861
)
 
78

 
(96
)
Euro
 
Turkish Lira
 
2,770

 
(252
)
 
308

Euro
 
Swiss Franc
 
(539
)
 
49

 
(60
)
Euro
 
U.S. Dollar
 
876

 
(80
)
 
97

Euro
 
Croatian Kuna
 
1,086

 
(99
)
 
121

Euro
 
Arab Emirates Dirham
 
(530
)
 
48

 
(59
)
Euro
 
Polish Zloty
 
(1,007
)
 
92

 
(112
)
Euro
 
Swedish Krona
 
(2,598
)