Edgar Filing: LOGITECH INTERNATIONAL SA

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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 September 30, 2018

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 October 10, 2018, there were 165,670,205 shares of the Registrant’s share capital outstanding.

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		Page

Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	4
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2018 and 2017	4
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended September 30, 2018 and 2017	5
	Condensed Consolidated Balance Sheets as of September 30, 2018 and March 31, 2018	6
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2018 and 2017	7
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended September 30, 2018 and 2017	8
	Notes to the Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	48
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 3.	Defaults Upon Senior Securities	66
Item 4.	Mine Safety Disclosures	66
Item 5.	Other Information	66
Item 6.	Exhibit Index	67
Signatures

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 second quarter of fiscal year 2019 ended on September 28, 2018. The same quarter in the prior fiscal year ended on September 29, 2017. 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 September 30,					Six Months Ended September 30,
	2018		2017			2018		2017
Net sales	$	691,146	$	632,470		$	1,299,626	$	1,162,416
Cost of goods sold	432,063		402,722			814,234		737,496
Amortization of intangible assets and purchase accounting effect on inventory	2,966		2,011			5,338		3,515
Gross profit	256,117		227,737			480,054		421,405

Operating expenses:
Marketing and selling	121,801		107,386			236,385		209,764
Research and development	39,542		36,647			78,529		71,746
General and administrative	25,206		25,266			50,679		50,675
Amortization of intangible assets and acquisition-related costs	4,317		2,491			6,838		3,881
Change in fair value of contingent consideration for business acquisition	—		(2,930		)	—		(4,908		)
Restructuring charges (credits), net	119		(61		)	10,040		(116		)
Total operating expenses	190,985		168,799			382,471		331,042

Operating income	65,132		58,938			97,583		90,363
Interest income	1,858		1,048			4,227		2,223
Other income (expense), net	3,389		459			1,818		(570		)
Income before income taxes	70,379		60,445			103,628		92,016
Provision for (benefit from) income taxes	6,203		4,087			986		(1,349		)
Net income	$	64,176	$	56,358		$	102,642	$	93,365

Net income per share:
Basic	$	0.39	$	0.34		$	0.62	$	0.57
Diluted	$	0.38	$	0.33		$	0.61	$	0.55

Weighted average shares used to compute net income per share:
Basic	165,630		164,120			165,474		163,765
Diluted	169,234		169,078			168,996		168,710

Cash dividend per share	$	0.69	$	0.63		$	0.69	$	0.63

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 September 30,						Six Months Ended September 30,
	2018			2017			2018			2017
Net income	$	64,176		$	56,358		$	102,642		$	93,365
Other comprehensive income (loss):
Currency translation gain (loss), net of taxes	(2,863		)	2,185			(7,826		)	3,641
Defined benefit pension plans:
Net gain and prior service costs, net of taxes	192			532			98			380
Amortization included in other income (expense), net	(69		)	52			(139		)	102
Hedging gain (loss):
Deferred hedging gain (loss), net of taxes	298			(2,140		)	485			(5,349		)
Reclassification of hedging loss included in cost of goods sold	218			2,596			3,069			3,129
Other comprehensive income (loss)	(2,224		)	3,225			(4,313		)	1,903
Total comprehensive income	$	61,952		$	59,583		$	98,329		$	95,268

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)



	September 30, 2018			March 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	424,950		$	641,947
Accounts receivable, net	459,689			214,885
Inventories	358,774			259,906
Other current assets	70,412			56,362
Total current assets	1,313,825			1,173,100
Non-current assets:
Property, plant and equipment, net	83,731			86,304
Goodwill	346,548			275,451
Other intangible assets, net	130,538			87,547
Other assets	131,565			120,755
Total assets	$	2,006,207		$	1,743,157
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	440,564		$	293,988
Accrued and other current liabilities	434,615			281,732
Total current liabilities	875,179			575,720
Non-current liabilities:
Income taxes payable	34,456			34,956
Other non-current liabilities	84,408			81,924
Total liabilities	994,043			692,600
Commitments and contingencies (Note 11)
Shareholders’ equity:
Registered shares, CHF 0.25 par value:	30,148			30,148
Issued shares — 173,106 at September 30 and March 31, 2018
Additional shares that may be issued out of conditional capitals — 50,000 at September 30 and March 31, 2018
Additional shares that may be issued out of authorized capital — 34,621 at September 30, 2018 and none at March 31, 2018
Additional paid-in capital	33,160			47,234
Shares in treasury, at cost — 7,384 at September 30, 2018 and 8,527 at March 31, 2018	(163,481		)	(165,686		)
Retained earnings	1,210,105			1,232,316
Accumulated other comprehensive loss	(97,768		)	(93,455		)
Total shareholders’ equity	1,012,164			1,050,557
Total liabilities and shareholders’ equity	$	2,006,207		$	1,743,157

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)



	Six Months Ended September 30,
	2018			2017
Cash flows from operating activities:
Net income	$	102,642		$	93,365
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	21,895			19,368
Amortization of intangible assets	10,341			6,238
Gain on investments in privately held companies	(382		)	(436		)
Share-based compensation expense	25,308			21,683
Deferred income taxes	(9,815		)	(11,933		)
Change in fair value of contingent consideration for business acquisition	—			(4,908		)
Other	75			12
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net	(133,475		)	(91,718		)
Inventories	(84,401		)	(58,078		)
Other assets	(11,056		)	(8,490		)
Accounts payable	138,186			110,136
Accrued and other liabilities	37,902			(7,739		)
Net cash provided by operating activities	97,220			67,500
Cash flows from investing activities:
Purchases of property, plant and equipment	(18,368		)	(17,188		)
Investment in privately held companies	(506		)	(520		)
Acquisitions, net of cash acquired	(133,908		)	(85,000		)
Proceeds from return of investment in privately held companies	—			237
Purchases of short-term investments	(1,505		)	(6,789		)
Purchases of trading investments	(3,722		)	(999		)
Proceeds from sales of trading investments	4,194			1,057
Net cash used in investing activities	(153,815		)	(109,202		)
Cash flows from financing activities:
Payment of cash dividends	(113,971		)	(104,248		)
Purchases of registered shares	(19,901		)	(10,682		)
Proceeds from exercises of stock options	10,007			30,000
Tax withholdings related to net share settlements of restricted stock units	(27,380		)	(23,706		)
Net cash used in financing activities	(151,245		)	(108,636		)
Effect of exchange rate changes on cash and cash equivalents	(9,157		)	1,653
Net decrease in cash and cash equivalents	(216,997		)	(148,685		)
Cash and cash equivalents, beginning of the period	641,947			547,533
Cash and cash equivalents, end of the period	$	424,950		$	398,848
Supplementary Cash Flow Disclosures:
Non-cash investing activities:
Property, plant and equipment purchased during the period and included in period end liability accounts	$	4,267		$	6,219

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			Retained Earnings
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	—	—		3,293			—		—			53,912			—			57,205
Total comprehensive income	—	—		—			—		—			93,365			1,903			95,268
Purchases of registered shares	—	—		—			307		(10,682		)	—			—			(10,682		)
Sales of shares upon exercise of stock options	—	—		15,628			(1,084	)	14,372			—			—			30,000
Issuance of shares upon vesting of restricted stock units	—	—		(37,464		)	(1,205	)	13,758			—			—			(23,706		)
Share-based compensation	—	—		21,887			—		—			—			—			21,887
Cash dividends	—	—		—			—		—			(104,248		)	—			(104,248		)
September 30, 2017	173,106	$	30,148	$	29,940		8,745		$	(156,589	)	$	1,117,139		$	(98,803	)	$	921,835



				Additional Paid-in Capital											Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
	Registered Shares						Treasury Shares					Retained Earnings
	Shares	Amount					Shares		Amount			Retained Earnings
March 31, 2018	173,106	$	30,148	$	47,234		8,527		$	(165,686	)	$	1,232,316		$	(93,455	)	$	1,050,557
Cumulative effect of adoption of new accounting standard (Note 1)	—	—		—			—		—			(10,882		)	—			(10,882		)
Total comprehensive income	—	—		—			—		—			102,642			(4,313		)	98,329
Purchases of registered shares	—	—		—			474		(19,901		)							(19,901		)
Sales of shares upon exercise of stock options	—	—		5,951			(311	)	4,056			—			—			10,007
Issuance of shares upon vesting of restricted stock units	—	—		(45,430		)	(1,306	)	18,050			—			—			(27,380		)
Share-based compensation	—	—		25,405			—		—			—			—			25,405
Cash dividends	—	—		—			—		—			(113,971		)	—			(113,971		)
September 30, 2018	173,106	$	30,148	$	33,160		7,384		$	(163,481	)	$	1,210,105		$	(97,768	)	$	1,012,164

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 help connect people to digital and cloud experiences. More than 35 years ago, Logitech created products to improve experiences around the personal PC platform, and today it is a multi-brand, multi-category company designing products that enable better experiences consuming, sharing and creating any digital content such as music, gaming, video and computing, whether it is on a computer, mobile device or in the cloud.

The Company sells its products to a broad network of domestic and international customers, including direct sales to retailers and e-tailers 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.

Business Acquisition

In August 2018, the Company acquired Blue Microphones Holding Corporation. See "Note 2 - Business Acquisition" for more information.

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, 2018, included in its Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on May 21, 2018.

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 and six months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2019, or any future periods.

Reclassification

Certain amounts from the comparative period in the accompanying condensed consolidated financial statements have been reclassified to conform to the condensed consolidated financial statement presentation as of and for the three and six months ended September 30, 2018.

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Changes in Significant Accounting Policies

Other than the recent accounting pronouncements adopted and discussed below under Recent Accounting Pronouncements Adopted and Summary of Significant Accounting Policies, there have been no changes in the Company’s significant accounting policies during the six months ended September 30, 2018 compared with the significant accounting policies described in its Annual Report on Form 10-K for the fiscal year ended March 31, 2018.

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 incentives, cooperative marketing, and pricing programs ("Customer Programs") and related breakage when appropriate, accrued revenue reserve from returns, allowance for doubtful accounts, inventory valuation, 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 these estimates.

Recent Accounting Pronouncements Adopted

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09" or “Topic 606”) which supersedes the revenue recognition requirements under ASC 605 (“Topic 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 existing revenue recognition guidance, including industry-specific guidance. Under the new guidance, 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. On April 1, 2018, the Company adopted the new standard and all related amendments using the modified retrospective method applied to those contracts which were not completed as of April 1, 2018. Results for reporting periods beginning after April 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with historic accounting standards under Topic 605.

As result of the adoption of the new standard, the Company recorded: a) a reduction to retained earnings as of April 1, 2018; and b) reclassifications of certain allowances for sales returns and certain other Customer Programs from accounts receivable, net to accrued and other current liabilities and other current assets.

The cumulative effect of the changes to the condensed consolidated balance sheet from the adoption of Topic 606 was as follows (in thousands):



	As of March 31, 2018		Effect of Adoption of Topic 606			As of April 1, 2018
Accounts receivable, net	$	214,885	$	105,768		$	320,653
Other current assets	56,362		6,195			62,557
Accrued and other current liabilities	281,732		122,845			404,577
Retained earnings	1,232,316		(10,882		)	1,221,434

Net Reduction to Retained Earnings as of April 1, 2018


•	Under Topic 605, accruals for certain Customer Programs were recognized as a reduction of revenue at the later of when the related revenue is recognized or when the program is offered to the customer. Under Topic 606, these programs qualify as variable consideration and are recorded as a reduction of the

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transaction price at the contract inception based on the expected value method. The Company is required to estimate the accruals for these programs ahead of commitment date if customary business practice creates an implied expectation that such activities will occur in the future.


•	Under Topic 606, variable consideration must be estimated at the outset of the arrangement, subject to the constraint guidance to ensure that a significant revenue reversal will not occur. As a result, upon adoption of Topic 606, estimated breakage for accruals of certain Customer Programs is recognized sooner as compared to Topic 605.

Balance Sheet Reclassifications

•

Under Topic 605, the gross amount of accrued revenue reserves for sales returns of $31.4 million, net of expected returned inventory of $11.4 million was included within accounts receivable, net as of March 31, 2018. Expected scrap cost of $5.2 million for such expected returned inventory was included in accrued and other current liabilities as of March 31, 2018. Subsequent to the adoption of Topic 606, such balances are presented on a gross basis as accrued revenue reserve from returns of $31.4 million included in accrued and other current liabilities and as return assets of $6.2 million included in other current assets.

•

Under Topic 605, revenue reserves for certain Customer Programs totaling $76.7 million, which were estimated using portfolio approach based on aggregated customer level, were included within accounts receivable, net as of March 31, 2018. Subsequent to the adoption of Topic 606, such balances are presented as accrued customer marketing, pricing and incentive programs included in accrued and other current liabilities.

Certain balances of allowances for sales return and accruals for Customer Programs which were accrued based on Customer Program offers made to individual customers, met the right of offset criteria in accordance with ASC 210-20, "Balance Sheet (Topic 210)", and are still included within accounts receivable, net.

The adoption of Topic 606 did not have an impact over the total cash flows from operating, investing, or financing activities.

The following tables summarize the impacts of adopting Topic 606 on the Company’s condensed consolidated statements of operations for the three and six months ended September 30, 2018 and condensed consolidated balance sheet as of September 30, 2018 (in thousands):



	Three Months Ended September 30,2018							Six Months Ended September 30, 2018
	As Reported Under ASC 606		If Reported Under ASC 605		Effect of Change			As Reported Under ASC 606		If Reported Under ASC 605		Effect of Change
Net sales	$	691,146	$	696,090	$	(4,944	)	$	1,299,626	$	1,304,704	$	(5,078	)



	As of September 30,2018
	As Reported Under ASC 606	Balance Under ASC 605	Effect of Change
Accounts receivable, net	459,689	327,131	132,558
Other current assets	70,412	61,092	9,320
Accrued and other current liabilities	434,615	276,777	157,838
Retained earnings	1,210,105	1,226,065	(15,960	)

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 requires entities to measure equity instruments at fair value and recognize any changes in fair value within the statement of operations. The Company adopted ASU 2016-01 effective April 1, 2018 on a prospective basis for its privately held strategic equity securities without readily determinable fair values. The Company elected the measurement alternative to record these investments at cost and to adjust for impairments and observable price changes with a same or similar security from the same issuer within the statement of operations. The adoption of ASU 2016-01 did not have a material impact on the Company's condensed consolidated financial statements.

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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. The Company adopted this standard effective April 1, 2018 on a modified retrospective basis, and the adoption of ASU 2016-16 did not have a material impact on its condensed consolidated financial statements.

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. The Company adopted this standard effective April 1, 2018, utilizing the retrospective transition method to each period presented and the adoption of ASU 2016-18 did not have an impact on its condensed consolidated financial statements as the Company did not have restricted cash for either periods presented.

In January 2017, the FASB issued ASU 2017-01, "Business Combination (Topic 805): Clarifying the Definition of a Business" ("ASU 2017-01"), which changes the definition of a business to assist with evaluating when a set of transferred assets and activities is a business. The Company adopted this standard effective April 1, 2018, and the adoption of ASU 2017-01 did not have a material impact on its condensed consolidated financial statements.

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. The Company adopted this standard effective April 1, 2018 using a retrospective adoption method. Other than the revised statement of operations presentation for the periods in the current year, the adoption of ASU 2017-07 did not have an impact on the Company’s condensed consolidated financial statements. The impact to the comparative period was immaterial and therefore the prior period statements of operations was not revised.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"), which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and simplifies the application of the hedge accounting guidance. The Company adopted this standard prospectively on April 1, 2018, and the adoption of ASU 2017-12 did not have a material impact on its condensed consolidated financial statements. In accordance with ASU 2017-12, the Company has started presenting the earnings impact from forward points in cost of goods sold line item, which is used to present the earnings impact of the hedged item.

Recent Accounting Pronouncements to be Adopted

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" ("ASU 2016-02" or "Topic 842"), which generally requires companies to recognize right-of-use assets and lease liabilities arising from operating and financing leases with terms longer than 12 months in the consolidated balance sheets. The Company will adopt the new guidance in the first quarter of fiscal year 2020 on a modified retrospective basis, which recognizes the cumulative effect of initially applying Topic 842 as an adjustment to retained earnings at the adoption date. Although the Company expects to record significant amounts of right-of-use assets and liabilities on its condensed consolidated balance sheets, the Company is still evaluating the full impact that ASU 2016-02 will have on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements" ("ASU 2018-13"), which aims to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing fair value measurement disclosures. ASU 2018-13 is effective for annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted. Retrospective adoption is required, except for certain disclosures which will be required to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. The Company is evaluating the full effect that ASU 2018-13 will have on its condensed consolidated financial statements and the timing of adoption.

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In August 2018, the FASB issued ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefits Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans" ("ASU 2018-14"), which aims to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing defined benefit plan disclosures. ASU 2018-14 is effective for annual periods in fiscal years ending after December 15, 2021. Retrospective adoption is required and early adoption is permitted. The Company is evaluating the full effect that ASU 2018-14 will have on its condensed consolidated financial statements and the timing of adoption.

In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" ("ASU 2018-15"), which clarifies that implementation costs incurred by customers in cloud computing arrangements are deferred if they would be capitalized by customers in software licensing arrangements under the internal-use software guidance. ASU 2018-15 is effective for annual and interim periods in fiscal years beginning after December 15, 2019, with early adoption permitted. Entities have the option to apply the guidance prospectively to all implementation costs incurred after the date of adoption or retrospectively. The Company is evaluating the full effect that ASU 2018-15 will have on its condensed consolidated financial statements and the timing of adoption.

Summary of Significant Accounting Policies

Revenue Recognition

Revenue is recognized when a customer obtains control of promised goods or service in an amount that reflects the transaction price the Company expects to receive in exchange for those goods or services.

Substantially all revenue recognized by the Company relates to the contracts with customers to sell products that allow people to connect through music, gaming, video, computing, and other digital platforms. These products are hardware devices, which may include embedded software, and these functions together are considered as one performance obligation. Hardware devices are generally plug and play, requiring no configuration and little or no installation. Revenue is recognized at a point in time when control of the products is transferred to the customer which generally occurs upon shipment. The Company’s contracts with its customers generally have a term of no more than one year. The Company applies the practical expedient of not disclosing the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

The Company also provides post-contract customer support (“PCS”) for products and related software, which includes unspecified software updates and upgrades, bug fixes and maintenance. The transaction price is allocated to two performance obligations in such contracts, based on a relative standalone selling price. The transaction price allocated to PCS is recognized as revenue on a straight-line basis over the estimated term of the support, which is between one to two years, and is not material for the periods presented herein. Deferred revenue associated with remaining PCS performance obligation is not material as of September 30, 2018 and March 31, 2018.

The Company normally requires payments from customers within thirty to sixty days from invoice date. However, terms may vary by customer type, by country and by selling season. Extended payment terms are sometimes offered to a limited number of customers during the second and third fiscal quarters. The Company does not modify payment terms on existing receivables. The Company's contracts with customers typically do not include significant financing components as the period between the satisfaction of performance obligations and timing of payment are generally within one year.

The transaction price received by the Company from sales to its distributors, retail companies ("retailers"), and authorized resellers is calculated as selling price net of variable consideration which may include product returns, price protection, and the Company’s payments for Customer Programs related to current period product revenue. The estimated impact of these programs is recorded as a reduction of sales or as an operating expense if the Company receives a distinct good or service from the customer and can reasonably estimate the fair value of that good or service received. Significant management judgment and estimates are used to determine the impact of these programs in any accounting period. Certain Customer Programs require management to estimate the percentage of those programs which will not be claimed or will not be earned by customers based on historical experience and on the specific terms and conditions of particular programs. The percentage of these customer programs that will not be claimed or earned is commonly referred to as "breakage". The Company accounts for breakage as part of variable consideration, subject to constraint, and records the estimated impact in the same

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period when revenue is recognized at the expected value considering constraints. Significant management judgments and estimates are used to determine the breakage of the programs in any accounting period.

The Company enters into cooperative marketing arrangements with many of its customers and with certain indirect partners, allowing customers to receive a credit equal to a set percentage of their purchases of the Company's products, or a fixed dollar credit for various marketing and incentive programs. The objective of these arrangements is to encourage advertising and promotional events to increase sales of the Company's products.

Customer incentive programs include consumer rebates and performance-based incentives. Consumer rebates are offered to the Company's customers and indirect partners at the Company's discretion for the primary benefit of end-users. In addition, the Company offers performance-based incentives to many of its customers and indirect partners based on predetermined performance criteria. At management's discretion, the Company also offers special pricing discounts to certain customers. Special pricing discounts are usually offered only for limited time periods or for sales of selected products to specific indirect partners.

Estimates of required accruals for cooperative marketing arrangements and customer incentive programs are determined based on negotiated terms, consideration of historical experience, forecasted incentives, anticipated volume of future purchases, and inventory levels in the channel.

The Company has agreements with certain customers that contain terms allowing price protection credits to be issued in the event of a subsequent price reduction. Management's decision to make price reductions is influenced by product life cycle stage, market acceptance of products, the competitive environment, new product introductions and other factors. Accruals for estimated expected future pricing actions are recognized at the time of sale based on analyses of historical pricing actions by customer and by product, inventories owned by and located at customers, current customer demand, current operating conditions, and other relevant customer and product information, such as stage of product life-cycle.

Product return rights vary by customer. Estimates of expected future product returns qualify as variable consideration and are recorded as a reduction of the transaction price of the contract at the time of sale based on analyses of historical return trends by customer and by product, inventories owned by and located at customers, current customer demand, current operating conditions, and other relevant customer and product information. The Company assesses the estimated returned asset value for impairment, and adjusts the value of the asset if it becomes impaired. Return trends are influenced by product life cycle status, new product introductions, market acceptance of products, sales levels, product sell-through, the type of customer, seasonality, product quality issues, competitive pressures, operational policies and procedures, and other factors. Return rates can fluctuate over time but are sufficiently predictable to allow the Company to estimate expected future product returns.

Typically, variable consideration does not need to be constrained as estimates are based on predictive historical data or future commitments that are planned and controlled by the Company. However, the Company continues to assess variable consideration estimates such that it is probable that a significant reversal of revenue will not occur.

The Company regularly evaluates the adequacy of its estimates for Customer Programs and product returns. Future market conditions and product transitions may require the Company to take action to change such programs and related estimates. When the variables used to estimate these costs change, or if actual costs differ significantly from the estimates, the Company would be required to record incremental increases or reductions to sales or operating expenses.

Sales taxes and value added taxes (“VAT”) collected from customers, if applicable, which are remitted to governmental authorities are not included in revenue, and are reflected as a liability on the condensed consolidated balance sheets. The Company has elected to exclude sales taxes from the revenue recognized from contracts with customers.

Shipping and Handling Costs

The Company's shipping and handling costs are included in cost of goods sold in the condensed consolidated statements of operations for all periods presented.

Contract Balances

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The Company records accounts receivable from contracts with customers when it has an unconditional right to consideration, as accounts receivable, net on the condensed consolidated balance sheet.

The Company records contract liabilities when cash payments are received or due in advance of performance, primarily for implied support and subscriptions. Contract liabilities are included in accrual and other current liabilities on the condensed consolidated balance sheets.

As of September 30, 2018 and for the period then ended, and as of April 1, 2018, the Company did not have any material contract liabilities balances or changes.

Contract Costs

The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that otherwise would have been recognized is one year or less. These costs are included in marketing and selling expenses in the condensed consolidated statements of operations. As of September 30, 2018 and for the period then ended, and as of April 1, 2018, the Company did not have material deferred contract costs or changes.

Allowances for Doubtful Accounts

Allowances for doubtful accounts are maintained for estimated losses resulting from the Company's customers' inability to make required payments. The allowances are based on the Company's regular assessment of the financial condition of specific customers, as well as its historical experience with bad debts and customer deductions, receivables aging, current economic trends, geographic or country specific risks and the financial condition of its distribution channels.

Note 2 — Business Acquisition

Blue Microphones Acquisition

On August 21, 2018 (the "Acquisition Date"), the Company acquired all equity interests in Blue Microphones Holding Corporation ("Blue Microphones") for a total consideration of $134.9 million in cash (the "Blue Microphones Acquisition"), which includes a working capital adjustment and repayment of debt on behalf of Blue Microphones.

Blue Microphones is a leading audio manufacturer that designs and produces microphones, headphones, recording tools, and accessories for audio professionals, musicians and consumers. The Blue Microphones Acquisition is consistent with Logitech's merger and acquisition strategy and will supplement the Company's portfolio opportunities.

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Blue Microphones meets the definition of a business, and therefore the acquisition is accounted for using the acquisition method. The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the Acquisition Date (in thousands):



	Estimated Fair Value
Cash and cash equivalents	$	1,110
Accounts receivable	10,979
Inventories	20,206
Other current assets	997
Property, plant and equipment	1,103
Intangible assets	53,267
Total identifiable assets acquired	$	87,662
Accounts payable	(10,322		)
Accrued liabilities	(13,316		)
Other long-term liabilities	(271		)
Net identifiable assets acquired	$	63,753
Goodwill	71,116
Net assets acquired	$	134,869

Goodwill related to the acquisition is primarily attributable to opportunities and economies of scale from combining the operations and technologies of Logitech and Blue Microphones and is not deductible for tax purposes.

The fair value of the inventory acquired is estimated at its net realizable value, which uses the estimated selling prices, less the cost of disposal and a reasonable profit allowance for the selling efforts. The difference between the fair value of the inventories and the amount recorded by Blue Microphones immediately before the acquisition date is $1.8 million, which will be recognized in "amortization of intangibles assets and purchase accounting effect on inventory" in the condensed consolidated statements of operations upon the sale of the acquired inventory.

The following table summarizes the preliminary estimated fair values and estimated useful lives of the components of identifiable intangible assets acquired as of the Acquisition Date (Dollars in thousands):



	Preliminary Fair Value		Estimated Useful Life (years)
Developed technology	$	17,967	5.0
Customer relationships	22,800		10.0
Trade name	12,500		7.0
Total intangible assets acquired	$	53,267	7.6

Intangible assets acquired as a result of the Blue Microphones Acquisition are being amortized over their estimated useful lives using the straight-line method of amortization, which materially approximates the distribution of the economic value of the identified intangible assets. Amortization of acquired developed technology of $0.2 million during the three months ended September 30, 2018 is included in "amortization of intangible assets and purchase accounting effect of inventory" in the condensed consolidated statements of operations. Amortization of the acquired customer relationships and trade name of $0.3 million during the three months ended September 30, 2018 is included in "amortization of intangible assets and acquisition-related costs" in the condensed consolidated statements of operations.

Developed technology relates to existing Blue Microphones products. The economic useful life was determined based on the technology cycle related to developed technology of existing products, as well as the cash flows anticipated over the forecasted periods.

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Customer relationships represent the fair value of future projected revenue that will be derived from sales of products to existing customers of Blue Microphones. The economic useful life was determined based on historical customer turnover rates and industry benchmarks.

Trade name relates to the “Blue Microphones” trade name. The economic useful life was determined based on the expected life of the trade name and the cash flows anticipated over the forecasted periods.

The fair values of developed technology and trade name were estimated using the relief-from-royalty method, an income approach (Level 3), which estimates the cost savings that accrue to the owner of the intangible assets that would otherwise be payable as royalties or license fees on revenues earned through the use of the asset. A royalty rate is applied to the projected revenues associated with the intangible assets to determine the amount of savings, which is then discounted to determine the fair value. The developed technology and trade name were valued using royalty rates of 10% and 3%, respectively, and both were discounted at a rate of 11%.

The fair value of customer relationships was estimated using the excess earnings method, an income approach (Level 3), which converts projected revenues and costs into cash flows. To reflect the fact that certain other assets contributed to the cash flows generated, the returns for these contributory assets were removed to arrive at estimated cash flows solely attributable to the customer relationships, which were discounted at a rate of 11%.

The Company believes the preliminary fair values of purchased intangible assets recorded above represents their fair values and approximates the amounts a market participant would pay for these intangible assets as of the Acquisition Date.

The fair value of identifiable intangible assets acquired was based on estimates and assumptions made by management at the time of the acquisition. As additional information becomes available, such as finalization of the estimated fair value of the assets acquired and liabilities assumed, and working capital adjustments that may affect the total consideration transferred, the Company may revise its preliminary estimates of fair values during the remainder of the measurement periods (which will not exceed 12 months from the Acquisition Date). Any such revisions or changes may be material as we finalize the fair values of the tangible and intangible assets acquired and liabilities assumed.

The Company incurred acquisition-related costs for the Blue Microphones Acquisition of approximately $1.5 million for the three months ended September 30, 2018. The acquisition-related costs are included in "amortization of intangible assets and acquisition-related costs" in the condensed consolidated statements of operations.

The Company included Blue Microphones' estimated fair value of assets acquired and liabilities assumed in its condensed consolidated balance sheet beginning on the Acquisition Date. The results of operations for Blue Microphones subsequent to the Acquisition Date have been included in, but are not material to, the Company's condensed consolidated statements of operations. Pro forma results of operations for the Blue Microphones Acquisition have not been presented because they are not material to the condensed consolidated statements of operations. For the three months ended September 30, 2018, Blue Microphones, the acquisition of which was closed on August 21, 2018, contributed $7.7 million to net sales, representing approximately 1% of the net sales of the Company for the three-month period.

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Note 3 — Net Income Per Share

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



	Three Months Ended September 30,				Six Months Ended September 30,
	2018		2017		2018		2017
Net income	$	64,176	$	56,358	$	102,642	$	93,365

Shares used in net income per share computation:
Weighted average shares outstanding - basic	165,630		164,120		165,474		163,765
Effect of potentially dilutive equivalent shares	3,604		4,958		3,522		4,945
Weighted average shares outstanding - diluted	169,234		169,078		168,996		168,710

Net income per share:
Basic	$	0.39	$	0.34	$	0.62	$	0.57
Diluted	$	0.38	$	0.33	$	0.61	$	0.55

Share equivalents attributable to outstanding stock options, restricted stock units ("RSUs") and ESPP totaling 0.8 million and 0.6 million for the three months ended September 30, 2018 and 2017, respectively, and 1.2 million and 1.2 million for the six months ended September 30, 2018 and 2017, respectively, were excluded from the calculation of diluted net income per share because the combined exercise price and average unamortized grant date fair value upon exercise of these options and ESPP or vesting of RSUs were greater than the average market price of the Company's shares during the periods presented herein, and therefore their inclusion would have been anti-dilutive.

Note 4 — Employee Benefit Plans

Employee Share Purchase Plans and Stock Incentive Plans

As of September 30, 2018, 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), each as amended.

The following table summarizes the share-based compensation expense and total income tax benefit recognized for share-based awards for the three and six months ended September 30, 2018 and 2017 (in thousands):



	Three Months Ended September 30,						Six Months Ended September 30,
	2018			2017			2018			2017
Cost of goods sold	$	791		$	1,091		$	1,921		$	1,802
Marketing and selling	4,864			4,343			10,650			8,724
Research and development	1,935			1,633			3,484			3,176
General and administrative	4,459			3,911			9,253			7,981
Total share-based compensation expense	12,049			10,978			25,308			21,683
Income tax benefit	(2,650		)	(3,677		)	(12,179		)	(14,959		)
Total share-based compensation expense, net of income tax	$	9,399		$	7,301		$	13,129		$	6,724

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 share-based awards vested or exercised during the period.

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As of September 30, 2018 and 2017, the balances of capitalized share-based compensation included in inventory were both $0.8 million.

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 $2.2 million and $2.3 million for the three months ended September 30, 2018 and 2017, respectively, and $4.5 million and $4.6 million for the six months ended September 30, 2018 and 2017, respectively, was primarily related to service costs.

Note 5 — 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 Company has not adjusted the net provisional charge from remeasuring deferred tax assets related to the Tax Cuts and Jobs Act (the "Tax Act") in the United States in fiscal year 2018. The Company continues to refine the estimate based on ongoing analysis and available information and interpretations through the third quarter of fiscal year 2019.

The income tax provision for the three months ended September 30, 2018 was $6.2 million based on an effective income tax rate of 8.8% of pre-tax income, compared to an income tax provision of $4.1 million based on an effective income tax rate of 6.8% of pre-tax income for the three months ended September 30, 2017. The income tax provision for the six months ended September 30, 2018 was $1.0 million based on an effective income tax rate of 1.0% of pre-tax income, compared to an income tax benefit of $1.3 million based on an effective income tax rate of (1.5)% of pre-tax income for the six months ended September 30, 2017.

The changes in the effective income tax rate for the three and six months ended September 30, 2018, compared to the three and six months ended September 30, 2017, were primarily due to the mix of income and losses in the various tax jurisdictions which the Company operates and less excess tax benefits recognized in the United States in the three and six months ended September 30, 2018. The Company recognized excess tax benefits of $0.7 million and $9.0 million, respectively, at 21% federal corporate income tax rate post the Tax Act in the three and six months ended September 30, 2018. In the same periods in fiscal year 2018, the Company recognized $1.1 million and $11.0 million of excess tax benefits, respectively, at 35% federal corporate income tax rate, after adoption of ASU 2016-09. In the three and six months ended September 30, 2018, there were discrete tax benefits of $0.5 million and $1.4 million, respectively, from the reversal of uncertain tax positions from the expiration of statutes of limitations. In the same periods ended September 30, 2017, the tax benefits from reversal of uncertain tax positions from the expiration of statutes of limitations were $0.7 million and $1.3 million, respectively.

As of September 30, 2018 and March 31, 2018, the total amount of unrecognized tax benefits due to uncertain tax positions was $70.4 million and $69.1 million, respectively, all of which would affect the effective income tax rate if recognized.

As of September 30, 2018 and March 31, 2018, the Company had $34.5 million and $35.0 million, respectively, in non-current income taxes payable including interest and penalties, related to the Company's income tax liability for uncertain tax positions.

The Company recognizes interest and penalties related to unrecognized tax positions in income tax expense. As of September 30, 2018 and March 31, 2018, the Company had $2.5 million and $2.3 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 2019, the Company continues to review its tax positions and provide for or reverse unrecognized tax

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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 $3.3 million from the lapse of the statutes of limitations in various jurisdictions during the next twelve months.

Note 6 — Balance Sheet Components

The following table presents the components of certain balance sheet asset amounts as of September 30 and March 31, 2018 (in thousands):



	September 30, 2018			March 31, 2018
Accounts receivable, net:
Accounts receivable	$	639,479		$	482,872
Allowance for doubtful accounts	(645		)	(122		)
Allowance for sales returns (1)	(5,165		)	(25,515		)
Allowance for cooperative marketing arrangements (1)	(33,879		)	(30,389		)
Allowance for customer incentive programs (1)	(55,972		)	(70,592		)
Allowance for pricing programs (1)	(84,129		)	(141,369		)
	$	459,689		$	214,885
Inventories:
Raw materials	$	31,756		$	33,603
Finished goods	327,018			226,303
	$	358,774		$	259,906
Other current assets:
Value-added tax receivables	$	34,597		$	29,477
Prepaid expenses and other assets (1)	35,815			26,885
	$	70,412		$	56,362
Property, plant and equipment, net:
Property, plant and equipment at cost	$	359,335		$	346,588
Less: accumulated depreciation and amortization	(275,604		)	(260,284		)
	$	83,731		$	86,304
Other assets:
Deferred tax assets	$	92,833		$	84,651
Trading investments for deferred compensation plan	20,645			17,748
Investments in privately held companies	13,283			12,448
Other assets	4,804			5,908
	$	131,565		$	120,755

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The following table presents the components of certain balance sheet liability amounts as of September 30 and March 31, 2018 (in thousands):



	September 30, 2018		March 31, 2018
Accrued and other current liabilities:
Accrued personnel expenses	$	80,554	$	82,330
Accrued revenue reserve from returns (1)	38,359		—
Accrued customer marketing, pricing and incentive programs (1)	173,992		71,962
Warranty accrual	18,470		16,279
Employee benefit plan obligation	2,243		1,763
Income taxes payable	5,741		4,354
Other current liabilities	115,256		105,044
	$	434,615	$	281,732
Other non-current liabilities:
Warranty accrual	$	13,284	$	11,294
Obligation for deferred compensation plan	20,645		17,748
Employee benefit plan obligation	40,857		42,434
Deferred tax liability	1,980		1,980
Other non-current liabilities	7,642		8,468
	$	84,408	$	81,924

(1) Certain allowances for sales return and certain other Customer Programs were included within accounts receivable, net balance as of March 31, 2018. Upon adoption of Topic 606, such balances are presented as accrued revenue reserve from returns and accrued customer marketing, pricing and incentive programs included in accrued and other current liabilities, and as return assets included in other current assets, respectively, on the condensed consolidated balance sheet as of September 30, 2018. Refer to Note 1 to the condensed consolidated financial statements for more information.

Note 7 — 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):



	September 30, 2018						March 31, 2018
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	304,627	$	—	$	—	$	492,535	$	—	$	—

Trading investments for deferred compensation plan included in other assets:
Money market funds	$	4,252	$	—	$	—	$	2,881	$	—	$	—
Mutual funds	16,393		—		—		14,867		—		—
Total of trading investments for deferred compensation plan	$	20,645	$	—	$	—	$	17,748	$	—	$	—

Currency exchange derivative assets included in other current assets	$	—	$	244	$	—	$	—	$	—	$	—

Liabilities:
Currency exchange derivative liabilities included in accrued and other current liabilities	$	—	$	50	$	—	$	—	$	34	$	—

Investment Securities

The marketable securities for the Company's deferred compensation plan were recorded at a fair value of $20.6 million and $17.7 million, as of September 30, 2018 and March 31, 2018, respectively, 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 and six months ended September 30, 2018 and 2017 were not material and are included in other income (expense), net in the Company's condensed consolidated statements of operations.

Non-marketable Investments

The Company has certain non-marketable investments included in other assets that are accounted for under the equity method of accounting, with carrying value of $5.8 million and $5.1 million as of September 30, 2018 and March 31, 2018, respectively.

In addition, the Company has certain investments without readily determinable fair values 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 carrying value is also adjusted for observable price changes with a same or similar security from the same issuer. The amount of these investments included in other assets as of September 30, 2018 and March 31, 2018 was $7.5 million and $7.3 million, respectively.

Assets Measured at Fair Value on a Nonrecurring Basis

The Company’s non-financial assets, such as intangible assets and acquisition-related property, plant and equipment, are recorded at fair value only upon initial recognition or if an impairment is recognized. There was no impairment of these assets during the three and six months ended September 30, 2018 or 2017.

Note 8 — 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

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liabilities on a gross basis on the condensed consolidated balance sheets as of September 30, 2018 and March 31, 2018.

The fair values of the Company’s derivative instruments were not material as of September 30, 2018 or March 31, 2018. The amount of gain (loss) recognized on derivatives not designated as hedging instruments was 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 and six months ended September 30, 2018 and 2017 (in thousands):



	Three Months Ended September 30,
	Amount of Gain (Loss) Deferred as a Component of Accumulated Other Comprehensive Loss					Amount of Loss (Gain) Reclassified from Accumulated Other Comprehensive Loss to Costs of Goods Sold
	2018		2017			2018		2017
Cash flow hedges	$	298	$	(2,140	)	$	218	$	2,596



	Six Months Ended September 30,
	Amount of Gain (Loss) Deferred as a Component of Accumulated Other Comprehensive Loss					Amount of Loss (Gain) Reclassified from Accumulated Other Comprehensive Loss to Costs of Goods Sold
	2018		2017			2018		2017
Cash flow hedges	$	485	$	(5,349	)	$	3,069	$	3,129

Upon adoption of ASU 2017-12, the Company has started presenting the earnings impact from forward points in the same line item that is used to present the earnings impact of the hedged item, i.e. cost of goods sold, for hedging forecasted inventory purchases and such amount is not material for all periods presented.

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. Hedging relationships are discontinued when hedging contract is no longer eligible for hedge accounting, or is sold, terminated or exercised, or when Company removes hedge designation for the contract. Gains and losses in the fair value of the effective portion of the discontinued hedges continue to be reported in accumulated other comprehensive loss until the hedged inventory purchases are sold, unless it is probable that the forecasted inventory purchases will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter. In all periods presented herein, there have been no forecasted inventory purchases that were probable to not occur by the end of the originally specified time period or within an additional two-month period of time thereafter. The notional amounts of foreign currency exchange forward contracts outstanding related to forecasted inventory purchases were $89.1 million as of September 30, 2018. As of March 31, 2018, there were no currency forward contracts outstanding related to forecasted inventory purchases. The Company had $0.3 million of net gains related to its cash flow hedges included in accumulated other comprehensive loss as of September 30, 2018 which 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 income (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 September 30, 2018

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and March 31, 2018 were $71.5 million and $47.2 million, respectively. Open forward and swap contracts outstanding as of September 30, 2018 and March 31, 2018 consisted of contracts in Mexican Pesos, Japanese Yen, Canadian Dollars, Taiwan New 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 9 — Goodwill and Other Intangible Assets

The Company conducts its impairment analysis of 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 six months ended September 30, 2018 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 six months ended September 30, 2018 (in thousands):



As of March 31, 2018	$	275,451
Acquisition (Note 2)	71,116
Currency translation	(19		)
As of September 30, 2018	$	346,548

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



	September 30, 2018							March 31, 2018
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Trademark and trade names	$	36,370	$	(11,199	)	$	25,171	$	23,870	$	(9,482	)	$	14,388
Developed technology	95,207		(55,722		)	39,485		77,175		(50,755		)	26,420
Customer contracts/relationships	82,310		(16,428		)	65,882		59,510		(12,771		)	46,739
Total	$	213,887	$	(83,349	)	$	130,538	$	160,555	$	(73,008	)	$	87,547

Note 10 — Financing Arrangements

The Company had several uncommitted, unsecured bank lines of credit aggregating $79.3 million as of September 30, 2018. There are no financial covenants under these lines of credit with which the Company must comply. As of September 30, 2018, the Company had outstanding bank guarantees of $26.3 million under these lines of credit. There was no borrowing outstanding under these lines of credit as of September 30, 2018 or March 31, 2018.

Note 11 — Commitments and Contingencies

Product Warranties

All of the Company's products are covered by warranty to be free from defects in material and workmanship for periods ranging from one year to five years. The Company’s warranty doesn’t provide a service beyond assuring that the product complies with agreed-upon specifications and is not sold separately. The warranty the Company provides qualifies as an assurance warranty and is not treated as a separate performance obligation. The Company estimates cost of product warranties at the time the related revenue is recognized based on historical warranty claim rates, historical costs, and knowledge of specific product failures that are outside of the Company's typical experience. The Company accrues a warranty liability for estimated costs to provide products, parts or services to repair or replace products in satisfaction of the warranty obligation. Each quarter, the Company reevaluates estimates to assess the adequacy of recorded warranty liabilities considering the size of the installed base of

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products subject to warranty protection and adjusts the amounts as necessary. When the Company experiences changes in warranty claim activity or costs associated with fulfilling those claims, the warranty liability is adjusted accordingly. If actual product failure rates or repair costs differ from estimates, revisions to the estimated warranty liabilities would be required and could materially affect the Company's results of operations.

Changes in the Company’s warranty liability for the three and six months ended September 30, 2018 and 2017 were as follows (in thousands):



	Three Months Ended September 30,						Six Months Ended September 30,
	2018			2017			2018			2017
Beginning of the period	$	28,853		$	22,056		$	27,573		$	21,911
Assumed from business acquisition	351			1,230			351			1,230
Provision	11,020			5,414			19,320			9,715
Settlements	(8,330		)	(4,611		)	(14,882		)	(9,179		)
Currency translation	(140		)	260			(608		)	672
End of the period	$	31,754		$	24,349		$	31,754		$	24,349

Guarantees

Logitech Europe S.A., one of the Company's wholly-owned subsidiaries, guaranteed payments of certain third-party contract manufacturers’ purchase obligations. As of September 30, 2018, the maximum amount of this guarantee was $3.8 million, of which $1.5 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 September 30, 2018, 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.

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.

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.

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Note 12 — Shareholders’ Equity

Share Repurchase Program

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 up to 17.3 million shares of its own shares. 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. As of September 30, 2018, $200.0 million is still available for repurchase under the 2017 buyback program.

Cash Dividend on Shares of Common

During the three and six months ended September 30, 2018, the Company declared and paid cash dividends of CHF 0.67 (USD equivalent of $0.69) per common share, totaling $114.0 million on the Company's outstanding common stock. During the three and six months ended September 30, 2017, the Company declared and paid cash dividends of CHF 0.61 (USD equivalent of $0.63) per common share, totaling $104.2 million on the Company's outstanding common stock.

Any future dividends will be subject to the approval of the Company's shareholders.

Additional Authorized and Conditional Shares

The Company has reserved conditional capital of 25,000,000 shares for potential issuance on the exercise of rights granted under the Company's employee equity incentive plans and additional conditional capital for financing purposes, representing the issuance of up to 25,000,000 shares to cover any conversion rights under a future convertible bond issuance. During the 2018 Annual General Meeting, the shareholders of the Company authorized the Board of Directors to issue up to an additional 34,621,324 shares of the Company until September 5, 2020.

Accumulated Other Comprehensive Income (Loss)

The accumulated other comprehensive income (loss) was as follows (in thousands):



	Accumulated Other Comprehensive Income (Loss)
	Cumulative Translation Adjustment (1)			Defined Benefit Plan (1)			Deferred Hedging Losses (1)			Total
March 31, 2018	$	(83,848	)	$	(6,398	)	$	(3,209	)	$	(93,455	)
Other comprehensive income (loss)	(7,826		)	(41		)	3,554			(4,313		)
September 30, 2018	$	(91,674	)	$	(6,439	)	$	345		$	(97,768	)

(1) Tax effect was not significant as of September 30 or March 31, 2018.

Note 13 — 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 CEO, who is considered to be the Company’s Chief Operating Decision Maker. The CEO periodically reviews information such as net sales and adjusted 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, change in fair value of contingent consideration from business acquisition, or gain (loss) from investments in privately held companies.

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Net sales by product categories and sales channels, excluding intercompany transactions, for the three and six months ended September 30, 2018 and 2017 were as follows (in thousands):



	Three Months Ended September 30,				Six Months Ended September 30,
	2018		2017		2018		2017
Pointing Devices	$	128,337	$	123,643	$	256,127	$	245,717
Keyboards & Combos	131,872		119,200		260,094		235,313
PC Webcams	28,221		27,466		57,895		53,091
Tablet & Other Accessories	36,710		30,784		69,146		54,002
Video Collaboration	57,176		46,139		115,968		81,756
Mobile Speakers	77,100		90,548		111,427		153,466
Audio & Wearables	61,560		62,445		113,714		112,647
Gaming	160,792		113,722		296,818		191,430
Smart Home	9,241		18,323		18,252		34,789
Other (1)	137		200		185		205
Total net sales	$	691,146	$	632,470	$	1,299,626	$	1,162,416

(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 and six months ended September 30, 2018 and 2017 were as follows (in thousands):



	Three Months Ended September 30,				Six Months Ended September 30,
	2018		2017		2018		2017
Americas	$	283,714	$	261,993	$	560,642	$	507,393
EMEA	218,300		218,323		378,932		368,914
Asia Pacific	189,132		152,154		360,052		286,109
Total net sales	$	691,146	$	632,470	$	1,299,626	$	1,162,416

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

The United States and Germany each represented more than 10% of the total consolidated net sales for each of the periods presented herein. China represented more than 10% of the total consolidated net sales for the three and six months ended September 30, 2018. No other countries represented 10% or more of the Company’s total consolidated net sales for the periods presented herein.

Switzerland, the Company’s home domicile, represented 4% and 3% of the Company's total consolidated net sales for the three and six months ended September 30, 2018, respectively, and 2% for each of the three and six months ended September 30, 2017.

Two customer groups of the Company each represented more than 10% of the total consolidated net sales for each of the periods presented herein.

Property, plant and equipment, net by geographic region were as follows (in thousands):



	September 30, 2018		March 31, 2018
Americas	$	33,508	$	35,404
EMEA	4,327		4,690
Asia Pacific	45,896		46,210
Total property, plant and equipment, net	$	83,731	$	86,304

Property, plant and equipment, net in the United States and China were $33.5 million and $38.2 million, respectively, as of September 30, 2018, and $35.3 million and $37.9 million, respectively, as of March 31, 2018. No

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other countries represented more than 10% of the Company’s total consolidated property, plant and equipment, net as of September 30, 2018 or March 31, 2018. Property, plant and equipment, net in Switzerland, the Company’s home domicile, were $1.6 million and $1.9 million as of September 30, 2018 and March 31, 2018, respectively.

Note 14 — Restructuring

During the first quarter of fiscal year 2019, the Company implemented a restructuring plan to streamline and realign the Company's overall organizational structure and reallocate resources to support long-term growth opportunities. In July 2018, the Company's Board of Directors approved to allow additional costs under this restructuring plan, totaling pre-tax charges of approximately $10.0 million to $15.0 million, of which $10.0 million was recognized during the first half of fiscal year 2019. The total charges consisted of cash severance and other personnel costs and are presented as restructuring charges (credit), net in the condensed consolidated statements of operations, and the accrual balances are presented in accrued and other current liabilities in the condensed consolidated balance sheets. The Company expects to substantially complete this restructuring within the next six to nine months.

The following table summarizes restructuring related activities during the three and six months ended September 30, 2018 (in thousands):



	Termination Benefits
Accrual balance at March 31, 2018	$	—
Charges	9,921
Cash payments	(2,014		)
Accrual balance at June 30, 2018	7,907
Charges	119
Cash payments	(1,945		)
Accrual balance at September 30, 2018	$	6,081

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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, potential tariffs, their effects and our ability to mitigate their effects, our expectations regarding the recoverability of our goodwill, goodwill impairment charge estimates and the potential for future impairment charges, the impact of our current and proposed product divestitures, changes in our planned divestitures, restructuring of our organizational structure and the timing thereof, our expectations regarding the success of our strategic acquisitions, including integration of acquired operations, products, technology, internal controls, personnel and management teams, significant fluctuations in currency exchange rates and commodity prices, the impact of new product introductions and product innovation on future performance or anticipated costs and expenses and the timing thereof, resolution of our North American distribution center issues, cash flows, the sufficiency of our cash and cash equivalents, cash generated and available borrowings (including the availability of our uncommitted lines of credit) to fund future cash requirements, our expectations regarding future sales compared to actual sales, our expectations regarding share repurchases, dividend payments and share cancellations, our expectations regarding our future working capital requirements and our anticipated capital expenditures needed to support our product development and expanded operations, our expectations regarding our future tax benefits, tax settlements, the adequacy of our provisions for uncertain tax positions, the impact of the Tax Cuts and Jobs Act on our overall effective income tax rate, our expectations regarding our potential indemnification obligations, and the outcome of pending or future legal proceedings and tax audits, our expectations regarding the impact of new accounting pronouncements on our operating results, and our ability to achieve and sustain renewed growth, profitability and future success. Forward-looking statements also include, among others, those statements including the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “project,” “predict,”, "seek", “should,” “will,” and similar language. These forward-looking statements involve risks and uncertainties that could cause our actual performance to differ materially from that anticipated in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

Overview of Our Company

Logitech is a world leader in designing, manufacturing and marketing products that help connect people to digital and cloud experiences. More than 35 years ago, Logitech created products to improve experiences around the personal PC platform, and today it is a multi-brand, multi-category company designing products that enable better experiences consuming, sharing and creating any digital content such as music, gaming, video and computing, whether it is on a computer, mobile device or in the cloud. Logitech's brands include Logitech, Ultimate Ears, Jaybird, Blue Microphones, Logitech G and ASTRO Gaming.

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Our products participate in five large markets that all have growth opportunities: Gaming, Video Collaboration, Smart Home, Music, 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 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 August 21, 2018 (the "Acquisition Date"), we acquired all equity interests in Blue Microphones Holding Corporation ("Blue Microphones") for a total consideration of $134.9 million in cash (the "Blue Microphones Acquisition"), which includes a working capital adjustment and repayment of a debt on behalf of Blue Microphones. Blue Microphones is a leading audio manufacturer that designs and produces microphones, headphones, recording tools, and accessories for audio professionals, musicians and consumers. The Blue Microphones Acquisition is consistent with Logitech's merger and acquisition strategy and will supplement the Company's portfolio opportunities. For the three months ended September 30, 2018, Blue Microphones contributed one percentage point of the net sales growth rate.

Summary of Financial Results

Our net sales for the three and six months ended September 30, 2018 increased 9% and 12%, respectively, compared to the three and six months ended September 30, 2017, mainly due to stronger net sales in the Americas and Asia Pacific.

Our net sales for the three months ended September 30, 2018 increased 8% and 24% in the Americas and Asia Pacific, respectively, compared to the same period of the prior fiscal year. Our net sales for the three months ended September 30, 2018 in EMEA remained flat, compared to the same period of the prior fiscal year. Our net sales for the six months ended September 30, 2018 increased 10%, 3% and 26% in the Americas, EMEA and Asia Pacific, respectively, compared to the same period of the prior fiscal year.

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 or weaker in comparison to other currencies, it will also affect our results of operations in future periods.

Our gross margin for the three months ended September 30, 2018 increased 110 basis points to 37.1% from 36.0% for the three months ended September 30, 2017. Our gross margin benefited from a one-time tariff duty refund of approximately $7.1 million, favorable exchange rates, cost reduction efforts and product mix, partially offset by unfavorable impact from adoption of ASC 606, increase in spending in Customer Programs to support our growth, as well as U.S. tariffs implemented in July 2018 for certain of our products imported into the United States.

Our gross margin for the six months ended September 30, 2018 increased 60 basis points to 36.9% from 36.3% for the six months ended September 30, 2017 as a result of a one-time tariff duty refund of approximately $7.1 million, and a one-time benefit from a legal settlement with our prior distribution center supplier in the Americas, as well as favorable exchange rates and cost reduction efforts. Those benefits were partially offset by unfavorable impact from adoption of ASC 606 and increase in spending in Customer Programs.

We have various initiatives being implemented to mitigate the impact of recently implemented and announced U.S. tariffs, such as product reclassifications, tactical inventory pull-ins, supply chain or production shifts, and potential pricing adjustments. As some of these mitigating initiatives take time to implement, there could be an adverse impact to our gross margin in the future periods as we adjust to tariffs and other trade restrictions.

Operating expenses for the three months ended September 30, 2018 were $191.0 million, or 27.6% of net sales, compared to $168.8 million, or 26.7% of net sales, in the same period of the prior fiscal year. Operating expenses for the six months ended September 30, 2018 were $382.5 million, or 29.4% of net sales, compared to $331.0 million, or 28.5% of net sales, in the same period of the prior fiscal year. The increase in operating expenses for the three months ended September 30, 2018 was primarily driven by $8.8 million higher advertising and

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marketing expenses to support our new product introductions, $5.2 million higher personnel-related cost due to additional headcount from business acquisition and increased performance based variable compensation, and $3.0 million from the prior year's credit for change in fair value of contingent consideration from an acquisition. The increase in operating expenses for the six months ended September 30, 2018 was primarily driven by $32.2 million higher personnel-related cost due to restructuring charges in the current period, increased performance based variable compensation and additional headcount from business acquisitions, $9.6 million higher advertising and marketing expenses to support our new product introduction,and $4.9 million from the prior year's credit for change in fair value of contingent consideration from an acquisition.

Net income for the three and six months ended September 30, 2018 was $64.2 million and $102.6 million, compared to $56.4 million and $93.4 million for the three and six months ended September 30, 2017.

Trends in Our Business

Our strategy focuses on five large multi-category markets, including Gaming, Video Collaboration, Music, 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

Gaming: The PC gaming and console 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 believe Logitech is well positioned to benefit from the PC gaming market growth. With ASTRO Gaming, we are also strengthening our portfolio in adjacent categories, such as the console gaming market.

Video Collaboration: The near and long-term structural growth opportunities in the video collaboration market are significant. Video meetings are on the rise, and companies increasingly want lower-cost, cloud-based solutions. We are continuing our efforts to create and sell innovative products to accommodate the increasing demand from medium-sized meeting rooms to small-sized rooms such as huddle rooms. We will continue to invest in select business-specific products, targeted product marketing and sales channel development.

Music: The music market grew during fiscal year 2018, driven by growing consumption of music through mobile devices such as smartphones and tablets. The integration of personal voice assistants has become increasingly competitive in the speaker categories and the market for third-party, voice-enabled speakers has not yet gained traction. Moreover, the market for mobile speakers appears to be maturing with slower growth. While we continue to introduce new products for improved experiences, we're adjusting our investments to match the slower market growth outlook. With Blue Microphones, we are also strengthening our portfolio in adjacent categories, such as the microphones market.

Smart Home: This market grew in fiscal year 2018 due to the integration of Amazon Alexa and Google Assistant voice capabilities into our Logitech Harmony Hub that enables voice control of the living room entertainment experience when used with an Amazon Echo or Google Home device. Through Harmony, Alexa can turn on/off and control a TV and AV system. While the market so far in fiscal year 2019 has slowed due to more difficult comparisons, we continue to see various long-term opportunities in the broader smart home market. Accordingly, we will be prudent in how we deploy our resources in the near term.

Creativity & Productivity: New PC shipments continue to be stable and the installed base of PC users remains large. We believe that innovative PC peripherals, such as our mice and keyboards, can renew the PC usage experience, 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. In fiscal year 2018, we saw the recovery of the iPad tablet market and our Tablet & Other Accessories category has benefited from the recovery along with our innovative products.

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

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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 or changes in business circumstances. However, neither historical seasonal patterns nor historical patterns of product introductions should be considered reliable indicators of our future pattern of product introductions, future 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, contingent consideration from business acquisitions, and net sales and expenses.

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 and Summary of Significant Accounting Policies discussed in Note 1 to the condensed consolidated financial statements, there have been no substantial changes in the Company’s significant accounting policies during the six months ended September 30, 2018, compared with the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2018.

Adoption of New Accounting Guidance

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09" or “Topic 606”) which supersedes the revenue recognition requirements under ASC 605 (“Topic 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 existing revenue recognition guidance, including industry-specific guidance. Under the new guidance, 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. On April 1, 2018, we adopted the new standard and all related amendments using the modified retrospective method applied to those contracts which were not completed as of April 1, 2018. Results for reporting periods beginning after April 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with historic accounting standards under Topic 605.

Refer to Note 1 to the condensed consolidated financial statements for further details of the impact of adoption of Topic 606.

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 requires entities to measure equity instruments at fair value and recognize any changes in fair value within the statement of operations. We adopted ASU 2016-01 effective April 1, 2018 on a prospective basis for our privately held strategic equity securities without readily determinable fair values. We elected the measurement alternative to record these investments at cost and to adjust for impairments and observable price changes with a same or similar security from the same issuer within the statement of operations. The adoption of ASU 2016-01 did not have a material impact on our condensed consolidated financial statements.

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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. We adopted this standard effective April 1, 2018 on a modified retrospective basis, and the adoption of ASU 2016-16 did not have a material impact on our condensed consolidated financial statements.

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. We adopted this standard effective April 1, 2018 utilizing the retrospective transition method to each period presented, and the adoption of ASU 2016-18 did not have an impact on our condensed consolidated financial statements as we did not have restricted cash for either periods presented.

In January 2017, the FASB issued ASU 2017-01, "Business Combination (Topic 805): Clarifying the Definition of a Business" ("ASU 2017-01"), which changes the definition of a business to assist with evaluating when a set of transferred assets and activities is a business. We adopted this standard effective April 1, 2018, and the adoption of ASU 2017-01 did not have a material impact on our condensed consolidated financial statements.

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. We adopted this standard effective April 1, 2018 using a retrospective adoption method. Other than the revised statement of operations presentation for the periods in the current year, the adoption of ASU 2017-07 did not have an impact on our condensed consolidated financial statements. The impact to the comparative period was immaterial and therefore prior period statements of operations was not revised.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"), which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and simplifies the application of the hedge accounting guidance. We adopted this standard effective April 1, 2018, and the adoption of ASU 2017-12 did not have a material impact on our condensed consolidated financial statements. In accordance with ASU 2017-12, we have started presenting the earnings impact from forward points in cost of goods sold line item, which is used to present the earnings impact of the hedged item.

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 or depreciates in comparison to other currencies in future periods, this will affect our results of operations in future periods as well.

Sales Denominated in Other Currencies

Although our financial results are reported in U.S. Dollars, a portion of our sales was generated in currencies other than the U.S. Dollar, such as the Euro, Chinese Renminbi, Japanese Yen, Canadian Dollar, Taiwan New Dollar, British Pound and Australian Dollar. During the three months ended September 30, 2018, 51% of our net sales were denominated in currencies other than the U.S. Dollar.

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Results of Operations

Net Sales

Our net sales in the three and six months ended September 30, 2018 increased 9% and 12%, respectively, compared to the same periods of the prior fiscal year. Sales increased in the Americas and Asia Pacific during the three and six months ended September 30, 2018. If currency exchange rates had been constant in the three and six months ended September 30, 2018 and 2017, our constant dollar sales growth rates would have been 10% and 11%, respectively. We grew double digits in our Gaming, Video Collaboration, Keyboards & Combos, and Tablets and Other Accessories. Sales for Mobile Speaker and Smart Home declined across the regions. The adoption of Topic 606 lowered the net sales for the three or six months ended September 30, 2018 by $4.9 million and $5.1 million, respectively.

Net Sales by Region

The following table presents the change in net sales by region for the three and six months ended September 30, 2018, compared with the three and six months ended September 30, 2017:



	Sales Growth Rate				Constant Dollar Sales Growth Rate
	Three Months Ended September 30, 2018		Six Months Ended September 30, 2018		Three Months Ended September 30, 2018		Six Months Ended September 30, 2018
Americas	8	%	10	%	9	%	11	%
EMEA	—	%	3	%	1	%	1	%
Asia Pacific	24	%	26	%	26	%	25	%

Americas:

The increases in net sales in our Americas region for the three-month period presented above was primarily driven by growth in Gaming, Keyboards and Combos, Video Collaboration and Pointing Devices, partially offset by a decline in sales for Mobile Speakers and Smart Home. The increases in net sales in our Americas region for the six-month period presented above was primarily driven by the same categories. In addition, Tablets and Other Accessories and PC Webcams also contributed to the increase for the six-month period.

EMEA:

The net sales in our EMEA region remained flat for the three-month period presented above. The net sales in our EMEA region increased 3% for the six-month period presented above, which was primarily driven by growth in Gaming, Tablets and Other Accessories and Video Collaboration, partially offset by a decline in sales for Mobile Speakers and Smart Home.

Asia Pacific:

The growth in our Asia Pacific region during both periods presented above were primarily driven by growth in Gaming, Keyboards and Combos, Video Collaboration, Pointing Devices and Mobile Speakers.