Edgar Filing: LOGITECH INTERNATIONAL SA

q2fy1110q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarter ended September 30, 2010

	or

£	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.

Apples, Switzerland

c/o Logitech Inc.

6505 Kaiser Drive

Fremont, California 94555

(Address of principal executive offices and zip code)

(510) 795-8500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x 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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x	Accelerated filer o
Non-accelerated filer (Do not check if a smaller reporting company) o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes o No x

As of November 2, 2010, there were 175,875,123 shares of the Registrant’s share capital outstanding.

TABLE OF CONTENTS

		Page
Part I	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited)	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4.	Controls and Procedures	41

Part II	OTHER INFORMATION

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Item 6.	Exhibit Index

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.

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	Financial Statement Description	Page

•	Consolidated Statements of Operations for the three and six months ended September 30, 2010 and 2009	4

•	Consolidated Balance Sheets as of September 30, 2010 and March 31, 2010	5

•	Consolidated Statements of Cash Flows for the six months ended September 30, 2010 and 2009	6

•	Consolidated Statements of Changes in Shareholders’ Equity for the six months ended September 30, 2010 and 2009	7

•	Notes to Consolidated Financial Statements	8

LOGITECH INTERNATIONAL S.A.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

	Three months ended						Six months ended
	September 30,						September 30,
	2010			2009			2010		2009
				(Unaudited)

Net sales	$	581,884		$	498,093		$	1,061,214	$	824,203
Cost of goods sold		364,950			346,305			675,251		594,593
Gross profit		216,934			151,788			385,963		229,610
Operating expenses:
Marketing and selling		97,412			68,835			188,889		127,773
Research and development		40,927			31,825			79,316		63,185
General and administrative		27,420			23,739			54,780		44,920
Restructuring charges		-			45			-		1,494
Total operating expenses		165,759			124,444			322,985		237,372
Operating income (loss)		51,175			27,344			62,978		(7,762	)
Interest income, net		635			639			1,156		1,231
Other income (expense), net		(1,794	)		(1,438	)		2		(636	)
Income (loss) before income taxes		50,016			26,545			64,136		(7,167	)
Provision for income taxes		8,856			5,802			3,454		9,455
Net income (loss)	$	41,160		$	20,743		$	60,682	$	(16,622	)

Net income (loss) per share:
Basic	$	0.23		$	0.12		$	0.34	$	(0.09	)
Diluted	$	0.23		$	0.11		$	0.34	$	(0.09	)

Shares used to compute net income (loss) per share:
Basic		176,359			178,395			175,921		179,058
Diluted		177,958			180,989			177,588		179,058

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

LOGITECH INTERNATIONAL S.A.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

	September 30,			March 31,
	2010			2010
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	307,679		$	319,944
Accounts receivable		304,998			195,247
Inventories		343,021			219,593
Other current assets		63,482			58,877
Total current assets		1,019,180			793,661
Property, plant and equipment		91,122			91,229
Goodwill		553,794			553,462
Other intangible assets		88,389			95,396
Other assets		66,877			65,930
Total assets	$	1,819,362		$	1,599,678


LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable	$	370,033		$	257,955
Accrued liabilities		198,727			182,336
Total current liabilities		568,760			440,291
Other liabilities		160,521			159,672
Total liabilities		729,281			599,963

Commitments and contingencies

Shareholders' equity:
Shares, par value CHF 0.25 - 191,606 issued and authorized
and 50,000 conditionally authorized at September 30, 2010 and
March 31, 2010		33,370			33,370
Additional paid-in capital		3,548			14,880
Less shares in treasury at cost, 14,799 shares at September 30, 2010
and 16,435 shares at March 31, 2010		(338,078	)		(382,512	)
Retained earnings		1,467,300			1,406,618
Accumulated other comprehensive loss		(76,059	)		(72,641	)
Total shareholders' equity		1,090,081			999,715
Total liabilities and shareholders' equity	$	1,819,362		$	1,599,678

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

LOGITECH INTERNATIONAL S.A.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Six months ended
	September 30,
	2010			2009
	(Unaudited)
Cash flows from operating activities:
Net income (loss)	$	60,682		$	(16,622	)
Non-cash items included in net income (loss):
Depreciation		23,343			26,057
Amortization of other intangible assets		14,027			4,603
Share-based compensation expense		16,720			11,166
Gain on disposal of fixed assets		(838	)		-
Excess tax benefits from share-based compensation		(676	)		(1,346	)
Loss (gain) on cash surrender value of life insurance policies		169			(402	)
Deferred income taxes and other		1,804			(274	)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable		(99,615	)		(39,896	)
Inventories		(129,497	)		(1,011	)
Other assets		(5,511	)		(8,585	)
Accounts payable		110,775			130,803
Accrued liabilities		13,316			28,407
Net cash provided by operating activities		4,699			132,900
Cash flows from investing activities:
Purchases of property, plant and equipment		(25,419	)		(18,144	)
Acquisitions, net of cash acquired		(7,300	)		(200	)
Proceeds from sale of property, plant and equipment		2,688			-
Proceeds from cash surrender of life insurance policies		-			813
Net cash used in investing activities		(30,031	)		(17,531	)
Cash flows from financing activities:
Purchases of treasury shares		-			(101,267	)
Proceeds from sale of shares upon exercise of options and purchase rights		16,538			12,972
Excess tax benefits from share-based compensation		676			1,346
Net cash provided by (used in) financing activities		17,214			(86,949	)
Effect of exchange rate changes on cash and cash equivalents		(4,147	)		3,665
Net increase (decrease) in cash and cash equivalents		(12,265	)		32,085
Cash and cash equivalents at beginning of period		319,944			492,759
Cash and cash equivalents at end of period	$	307,679		$	524,844

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

LOGITECH INTERNATIONAL S.A.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

																	Accumulated
					Additional												other
	Registered shares				paid-in			Treasury shares						Retained			comprehensive
	Shares		Amount		capital			Shares			Amount			earnings			loss			Total
March 31, 2009		191,606	$	33,370	$	45,012			12,124		$	(341,454	)	$	1,341,661		$	(80,881	)	$	997,708
Net loss		-		-		-			-			-			(16,622	)		-			(16,622	)
Cumulative translation
adjustment		-		-		-			-			-			-			12,046			12,046
Pension liability adjustment		-		-		-			-			-			-			30			30
Net deferred hedging loss		-		-		-			-			-			-			(4,263	)		(4,263	)
Total comprehensive loss																					(8,809	)
Purchase of treasury shares		-		-		-			5,838			(101,267	)		-			-			(101,267	)
Tax benefit from exercise of
stock options		-		-		1,811			-			-			-			-			1,811
Sale of shares upon exercise of
options and purchase rights		-		-		(33,754	)		(1,681	)		46,726			-			-			12,972
Share-based compensation expense		-		-		11,022			-			-			-			-			11,022
September 30, 2009		191,606	$	33,370	$	24,091			16,281		$	(395,995	)	$	1,325,039		$	(73,068	)	$	913,437

March 31, 2010		191,606	$	33,370	$	14,880			16,435		$	(382,512	)	$	1,406,618		$	(72,641	)	$	999,715
Net income		-		-		-			-			-			60,682			-			60,682
Cumulative translation
adjustment		-		-		-			-			-			-			7,164			7,164
Pension liability adjustment		-		-		-			-			-			-			(556	)		(556	)
Net deferred hedging loss		-		-		-			-			-			-			(10,026	)		(10,026	)
Total comprehensive income																					57,264
Tax benefit from exercise of
stock options		-		-		(189	)		-			-			-			-			(189	)
Sale of shares upon exercise of
options and purchase rights		-		-		(27,896	)		(1,636	)		44,434			-			-			16,538
Share-based compensation expense		-		-		16,753			-			-			-			-			16,753
September 30, 2010		191,606	$	33,370	$	3,548			14,799		$	(338,078	)	$	1,467,300		$	(76,059	)	$	1,090,081

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

LOGITECH INTERNATIONAL S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — The Company

Logitech is a world leader in products that connect people to digital experiences. We develop and market innovative hardware and software products that enable or enhance digital navigation, music and video entertainment, gaming, social networking, audio and video communication over the Internet, video security and home-entertainment control. We have two operating segments, peripherals and video conferencing.

For the PC (personal computer), our products include mice, trackballs, keyboards, interactive gaming controllers, multimedia speakers, headsets, webcams, 3D control devices and lapdesks. Our Internet communications products include webcams, headsets, video communications services, and digital video security systems for a home or small business. Our LifeSize division offers scalable HD (high-definition) video communication products, support and services. Our digital music products include speakers, earphones, and custom in-ear monitors. For home entertainment systems, we offer the Harmony line of advanced remote controls, Squeezebox wireless music solutions and, beginning in October 2010 in the United States, a line of Logitech products for Google TV, including the Logitech Revue companion box. For gaming consoles, we offer a range of gaming controllers and microphones, as well as other accessories.

We sell our peripheral products to a network of retail distributors and resellers and to OEMs. Our worldwide retail network for our peripherals includes wholesale distributors, consumer electronics retailers, mass merchandisers, specialty electronics stores, computer and telecommunications stores, value-added resellers and online merchants. The large majority of our revenues have historically been derived from sales of our peripheral products for use by consumers.

We sell our LifeSize video communication products and services to distributors, value-added resellers, OEMs and direct enterprise customers. The large majority of LifeSize revenues have historically been derived from sales to large enterprises, small-to-medium businesses, and public healthcare, education and government organizations.

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

Note 2 — Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Logitech and its subsidiaries. All intercompany balances and transactions have been eliminated. The consolidated financial statements are presented in accordance with U.S. GAAP (accounting principles generally accepted in the United States of America) for interim financial information and therefore do not include all the information required by U.S. GAAP for complete financial statements. They should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended March 31, 2010 included in its Annual Report on Form 10-K.

Net income for the six months ended September 30, 2009 includes $2.2 million in pretax charges related to restructuring accruals, bonus accruals and revenue-related adjustments from fiscal year 2009. We reviewed the accounting errors utilizing SEC Staff Accounting Bulletin No. 99, Materiality and SEC Staff Accounting Bulletin No. 108, Effects of Prior Year Misstatements on Current Year Financial Statements, and determined the impact of the errors to be immaterial to the current and prior quarterly and annual periods.

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

In the opinion of management, these financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the periods presented. Operating results for the three and six months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending March 31, 2011 or any future periods.

Fiscal Year

The Company’s fiscal year ends on March 31. Interim quarters are thirteen-week periods, each ending on a Friday. For purposes of presentation, the Company has indicated its quarterly periods as ending on the month end.

Changes in Significant Accounting Policies

There have been no substantial changes in our significant accounting policies during the three and six months ended September 30, 2010 compared with the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010.

Use of Estimates

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

Recent Accounting Pronouncements

In October 2009, the FASB (Financial Accounting Standards Board) published ASU (Accounting Standards Update) 2009-13, Multiple Deliverable Revenue Arrangements, which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. This guidance amends the criteria in ASC (Accounting Standards Codification) Subtopic 605-25, Revenue Recognition--Multiple-Element Arrangements, to establish a selling price hierarchy for determining the selling price of a deliverable, based on vendor specific objective evidence, acceptable third party evidence, or estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, the disclosures required for multiple-deliverable revenue arrangements are expanded. ASU 2009-13 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We plan to adopt ASU 2009-13 prior to March 31, 2011 and are currently evaluating its potential impact on the Company’s consolidated financial statements and disclosures.

In October 2009, the FASB published ASU 2009-14, Certain Revenue Arrangements That Include Software Elements, to provide guidance for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and non-software components that function together to deliver the product’s essential functionality are excluded from the software revenue guidance in ASC Subtopic 985-605, Software-Revenue Recognition. In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance. ASU 2009-14 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We plan to adopt ASU 2009-14 prior to March 31, 2011 and are currently evaluating its potential impact on the Company’s consolidated financial statements.

Note 3 — Net Income (Loss) per Share

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

	Three months ended				Six months ended
	September 30,				September 30,
	2010		2009		2010		2009

Net income (loss)	$	41,160	$	20,743	$	60,682	$	(16,622	)

Weighted average shares - basic		176,359		178,395		175,921		179,058
Effect of potentially dilutive share equivalents		1,599		2,594		1,667		-
Weighted average shares - diluted		177,958		180,989		177,588		179,058

Net income (loss) per share - basic	$	0.23	$	0.12	$	0.34	$	(0.09	)
Net income (loss) per share - diluted	$	0.23	$	0.11	$	0.34	$	(0.09	)

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

Share equivalents attributable to outstanding stock options and RSUs (restricted stock units) of 13,195,403 and 9,961,610 for the three months ended September 30, 2010 and 2009, and 13,738,650 for the six months ended September 30, 2010 were excluded from the calculation of diluted net income (loss) per share because the combined exercise price, average unamortized fair value and assumed tax benefits upon exercise of these options and RSUs were greater than the average market price of the Company’s shares, and therefore their inclusion would have been anti-dilutive. For the six months ended September 30, 2009, potentially dilutive share equivalents of 2,145,224 were excluded from the computation of diluted net loss per share because their inclusion in calculating a net loss per share would have been anti-dilutive.

Note 4 — Fair Value Measurements

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

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

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

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

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

	September 30, 2010						March 31, 2010
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3

Cash and cash equivalents	$	307,679	$	-	$	-	$	319,944	$	-	$	-
Investment securities		-		-		994		-		-		994
Foreign exchange derivative assets		436		-		-		599		-		-
Total assets at fair value	$	308,115	$	-	$	994	$	320,543	$	-	$	994

Foreign exchange derivative liabilities	$	8,024	$	-	$	-	$	366	$	-	$	-
Total liabilities at fair value	$	8,024	$	-	$	-	$	366	$	-	$	-

Cash and cash equivalents consist of bank demand deposits and time deposits. The time deposits have original terms of less than 40 days. Cash and cash equivalents are carried at cost, which is equivalent to fair value.

The Company’s investment securities portfolio as of September 30, 2010 and March 31, 2010 consisted of auction rate securities collateralized by residential and commercial mortgages. The investment securities are classified as available-for-sale and are carried in non-current assets. The estimated fair value of the securities was determined by estimating future cash flows, either through discounted cash flow or option pricing methods, incorporating assumptions of default and other future conditions. Such valuation methods fall within Level 3 of the fair value hierarchy. The par value of our investment securities portfolio at September 30 and March 31, 2010 was $47.5 million.

Note 5 — Acquisitions

On July 6, 2010, Logitech acquired substantially all of the assets and employees of Paradial AS, a Norwegian company providing firewall and NAT (network address translation) traversal solutions for video communications. The acquisition will allow the Company to closely integrate firewall and NAT traversal across its video communications product portfolio, enabling end-to-end HD video calling over highly protected networks. The acquisition has been treated as an acquisition of a business and has been accounted for using the purchase method of accounting. The total consideration paid of $7.3 million was allocated based on estimated fair values to $7.0 million of identifiable intangible assets and $0.1 million of assumed liabilities, with the remaining balance allocated to goodwill. The intangible assets acquired are amortized on a straight-line basis over their estimated useful lives of 5 years. The goodwill associated with the acquisition is not subject to amortization and is not expected to be deductible for income tax purposes.

Note 6 — Balance Sheet Components

The following provides a breakout of certain balance sheet components (in thousands):

	September 30,			March 31,
	2010			2010
Accounts receivable:
Accounts receivable	$	460,006		$	349,722
Allowance for doubtful accounts		(3,934	)		(5,870	)
Allowance for returns		(26,942	)		(23,657	)
Cooperative marketing arrangements		(25,511	)		(17,527	)
Customer incentive programs		(40,178	)		(44,306	)
Pricing programs		(58,443	)		(63,115	)
	$	304,998		$	195,247
Inventories:
Raw materials	$	36,030		$	31,630
Work-in-process		2			86
Finished goods		306,989			187,877
	$	343,021		$	219,593
Other current assets:
Tax and VAT refund receivables	$	22,133		$	20,305
Deferred taxes		25,650			27,064
Prepaid expenses and other		15,699			11,508
	$	63,482		$	58,877
Property, plant and equipment:
Plant and buildings	$	49,806		$	58,629
Equipment		128,673			112,454
Computer equipment		58,963			53,576
Computer software		81,396			78,156
		318,838			302,815
Less: accumulated depreciation		(236,376	)		(224,485	)
		82,462			78,330
Construction-in-progress		5,896			9,751
Land		2,764			3,148
	$	91,122		$	91,229
Other assets:
Deferred taxes	$	46,250		$	45,257
Cash surrender value of life insurance contracts		10,949			11,097
Deposits and other		9,678			9,576
	$	66,877		$	65,930
Accrued liabilities:
Accrued personnel expenses	$	50,540		$	48,617
Accrued marketing expenses		33,034			28,052
Accrued freight and duty		15,999			12,696
Income taxes payable - current		4,090			8,875
Non-retirement post-employment benefit obligations		3,068			2,761
Accrued restructuring		81			399
Other accrued liabilities		91,915			80,936
	$	198,727		$	182,336
Long-term liabilities:
Income taxes payable - non-current	$	114,949		$	116,456
Obligation for management deferred compensation		10,644			10,307
Defined benefit pension plan liability		20,321			19,343
Other long-term liabilities		14,607			13,566
	$	160,521		$	159,672

The following table presents the changes in the allowance for doubtful accounts during the six months ended September 30, 2010 and 2009 (in thousands):

	September 30,
	2010			2009

Balance as of March 31, 2010	$	5,870		$	6,705
Bad debt expense		422			(1,194	)
Write-offs net of recoveries		(597	)		446
Balance as of June 30, 2010	$	5,695		$	5,957
Bad debt expense		(140	)		599
Write-offs net of recoveries		(1,621	)		(158	)
Balance as of September 30, 2010	$	3,934		$	6,398

Note 7 —Goodwill and Other Intangible Assets

The following table summarizes the activity in the Company’s goodwill account during the six months ended September 30, 2010 (in thousands):

	September 30,
	2010

Balance as of March 31, 2010	$	553,462
Additions		332
Balance as of September 30, 2010	$	553,794

Additions to goodwill relate to our acquisition of Paradial. Paradial’s business will be fully integrated into the Company’s LifeSize division, and discrete financial information for Paradial will not be maintained. Accordingly, the acquired goodwill related to Paradial will be evaluated for impairment at the LifeSize reporting unit level. The Company performs its annual goodwill impairment test during its fiscal fourth quarter, or more frequently if certain events or circumstances warrant. No events or circumstances occurred during the six months ended September 30, 2010 which warranted a goodwill impairment test.

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

	September 30, 2010							March 31, 2010
	Gross Carrying		Accumulated			Net Carrying		Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount		Amount		Amortization			Amount

Trademark/tradename	$	32,116	$	(21,912	)	$	10,204	$	32,051	$	(20,421	)	$	11,630
Technology		94,968		(44,173	)		50,795		87,968		(36,033	)		51,935
Customer contracts		38,538		(11,148	)		27,390		38,517		(6,686	)		31,831
	$	165,622	$	(77,233	)	$	88,389	$	158,536	$	(63,140	)	$	95,396

During the six months ended September 30, 2010, changes in the gross carrying value of other intangible assets related primarily to our acquisition of Paradial.

For the three months ended September 30, 2010 and 2009, amortization expense for other intangible assets was $7.1 million and $2.2 million. For the six months ended September 30, 2010 and 2009, amortization expense for other intangible assets was $14.0 million and $4.6 million. The Company expects that amortization expense for the six-month period ending March 31, 2011 will be $14.5 million, and annual amortization expense for fiscal years 2012, 2013, 2014 and 2015 will be $26.1 million, $23.0 million, $16.9 million and $7.5 million, and $0.4 million thereafter.

Note 8 — Financing Arrangements

The Company had several uncommitted, unsecured bank lines of credit aggregating $114.3 million at September 30, 2010. There are no financial covenants under these lines of credit with which the Company must comply. At September 30, 2010, the Company had no outstanding borrowings under these lines of credit.

Note 9 — Shareholders’ Equity

Share Repurchases

During the three and six months ended September 30, 2010 and 2009, the Company had the following approved share buyback programs in place (in thousands):

Date of Announcement	Approved Buyback Amount		Expiration Date	Completion Date		Amount Remaining

June 2007	$	250,000	September 2010	March 2010		$	-
September 2008	$	250,000	September 2012		-	$	250,000

The Company did not repurchase any shares during the three and six months ended September 30, 2010. During the three and six months ended September 30, 2009, the Company repurchased shares under the June 2007 share buyback program as follows (in thousands):

Three months ended

Six months ended

Date of

September 30, 2009

Announcement

Amount (1)

June 2007

5,838

101,267

5,838

101,267

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

Accumulated Other Comprehensive Loss

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

	September 30,			March 31,
	2010			2010

Cumulative translation adjustment	$	(56,479	)	$	(63,646	)
Pension liability adjustments, net of tax of $792 and $936		(11,369	)		(10,813	)
Unrealized gain on investments		424			424
Net deferred hedging gains (losses)		(8,635	)		1,394
	$	(76,059	)	$	(72,641	)

Note 10 — Restructuring

In January 2009, Logitech initiated a restructuring plan in order to reduce operating expenses and improve financial results in response to deteriorating global economic conditions. We completed the restructuring plan in fiscal year 2010. The following table summarizes restructuring related activities during the six months ended September 30, 2010 and 2009 (in thousands):

	Total			Termination Benefits			Contract Termination Costs			Other

Balance at March 31, 2009	$	3,794		$	3,779		$	15		$	-
Charges		1,449			1,366			83			-
Cash payments		(4,245	)		(4,220	)		(25	)		-
Other		(8	)		(4	)		(4	)		-
Foreign exchange		91			91			-			-
Balance at June 30, 2009	$	1,081		$	1,012		$	69		$	-
Charges		45			(22	)		9			58
Cash payments		(718	)		(698	)		(20	)		-
Other		(4	)		63			-			(67	)
Foreign exchange		19			19			-			-
Balance at September 30, 2009	$	423		$	374		$	58		$	(9	)


Balance at March 31, 2010	$	399		$	158		$	334		$	(93	)
Cash payments		(168	)		-			(168	)		-
Other		(74	)		(149	)		-			75
Foreign exchange		(3	)		-			-			(3	)
Balance at June 30, 2010	$	154		$	9		$	166		$	(21	)
Cash payments		(73	)		-			(73	)		-
Balance at September 30, 2010	$	81		$	9		$	93		$	(21	)

Termination benefits incurred pursuant to the 2009 Restructuring Plan are calculated based on regional benefit practices and local statutory requirements. Contract termination costs relate to exit costs associated with the closure of existing facilities.

Note 11 — Employee Benefit Plans

Employee Share Purchase Plans and Stock Incentive Plans

As of September 30, 2010, the Company offers the 2006 ESPP (2006 Employee Share Purchase Plan (Non-U.S.)), the 1996 ESPP (1996 Employee Share Purchase Plan (U.S.)) and the 2006 Stock Incentive Plan. Shares issued to employees as a result of purchases or exercises under these plans are generally issued from shares held in treasury.

The following table summarizes the share-based compensation expense and related tax benefit included in the Company’s consolidated statements of operations for the three and six months ended September 30, 2010 and 2009 (in thousands).

	Three months ended						Six months ended
	September 30,						September 30,
	2010			2009			2010			2009

Cost of goods sold	$	919		$	628		$	1,910		$	1,426
Share-based compensation expense included in gross profit		919			628			1,910			1,426

Operating expenses:
Marketing and selling		3,091			2,154			6,168			3,913
Research and development		1,776			1,068			3,552			1,909
General and administrative		2,472			1,908			5,090			3,918
Share-based compensation expense included in
operating expenses		7,339			5,130			14,810			9,740
Total share-based compensation expense		8,258			5,758			16,720			11,166
Income tax benefit		(2,442	)		(449	)		(4,337	)		(833	)
Share-based compensation expense, net of income tax	$	5,816		$	5,309		$	12,383		$	10,333

As of September 30, 2010 and 2009, $0.9 million and $0.6 million of share-based compensation cost was capitalized to inventory. As of September 30, 2010, total compensation cost related to non-vested stock options not yet recognized was $40.6 million, which is expected to be recognized over the next 29 months on a weighted-average basis.

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

	Three Months Ended September 30,				Six Months Ended September 30,
	2010	2009	2010	2009	2010	2009	2010	2009
	Purchase Plans		Stock Options		Purchase Plans		Stock Options

Dividend yield	0%	0%	0%	0%	0%	0%	0%	0%
Expected life	6 months	6 months	4.0 years	3.9 years	6 months	6 months	4.0 years	3.9 years
Expected volatility	36%	71%	48%	48%	36%	71%	48%	48%
Risk-free interest rate	0.17%	0.21%	1.16%	2.18%	0.17%	0.21%	1.63%	2.13%

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

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

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

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

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

	Three Months Ended September 30,												Six Months Ended September 30,
	2010			2009			2010			2009			2010			2009			2010			2009
	Purchase Plans						Stock Options						Purchase Plans						Stock Options

Weighted average grant-date
fair value of options granted	$	3.96		$	4.20		$	5.92		$	14.10		$	3.96		$	4.20		$	5.85		$	13.87
Expected forfeitures		0	%		0	%		9	%		10	%		0	%		0	%		9	%		10	%

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

	Three Months Ended September 30,										Six Months Ended September 30,
	2010					2009					2010					2009
	Number			Exercise Price		Number			Exercise Price		Number			Exercise Price		Number			Exercise Price

Outstanding, beginning of period		19,669		$	17		17,751		$	18		20,551		$	17		18,897		$	18
Granted		143		$	7		2,200		$	14		329		$	12		2,389		$	14
Exercised		(516	)	$	8		(365	)	$	9		(1,127	)	$	8		(1,034	)	$	7
Cancelled or expired		(375	)	$	17		(456	)	$	22		(832	)	$	19		(1,122	)	$	23
Outstanding, end of period		18,921		$	18		19,130		$	18		18,921		$	18		19,130		$	18

Exercisable, end of period		11,595		$	18		10,029		$	15		11,595		$	18		10,029		$	15

The total pretax intrinsic value of options exercised during the three months ended September 30, 2010 and 2009 was $3.2 million and $3.1 million and the tax benefit realized for the tax deduction from options exercised during those periods was $1.1 million and $0.7 million. The total pretax intrinsic value of options exercised during the six months ended September 30, 2010 and 2009 was $6.7 million and $7.9 million and the tax benefit realized for the tax deduction from options exercised during those periods was $2.1 million and $1.3 million. The total fair value of options vested as of September 30, 2010 and 2009 was $72.9 million and $54.1 million.

During fiscal year 2010 and the six months ended September 30, 2010, the Company granted 266,560 and 74,700 time-based RSUs to employees and board members pursuant to the 2006 Stock Incentive Plan. These RSUs had a weighted average grant date fair value of $14.83 per unit for fiscal year 2010 and $15.87 per unit for fiscal year 2011. The time-based RSUs granted to employees vest in four equal annual installments on the grant date anniversary. The time-based RSUs granted to non-executive board members vest in one annual installment on the grant date anniversary. The non-executive board members’ fiscal year 2010 grants were vested in the three months ended September 30, 2010, and new annual grants were issued. The Company estimates the fair value of these RSUs based on the share market price on the date of grant. Compensation expense related to time-based RSUs is recognized over the vesting period and is included in the total share-based compensation expense disclosed above. As of September 30, 2010, total compensation cost related to time-based RSUs not yet recognized was $3.1 million, which is expected to be recognized over the next 48 months.

During fiscal years 2010 and 2009, the Company granted 115,000 and 93,750 RSUs to certain executives pursuant to the 2006 Stock Incentive Plan. These RSUs had a grant date fair value of $18.18 and $27.90 per unit. The RSUs vest at the end of two years from the grant date upon meeting certain share price performance criteria measured against market conditions. Compensation expense related to these RSUs will be recognized over the two year performance period and is included in the total share-based compensation expense disclosed above. As of September 30, 2010, total compensation cost not yet recognized related to the 2010 RSUs was $0.8 million, which is expected to be recognized over the next 9 months. The performance period for the RSUs granted in fiscal year 2009 was completed as of September 30, 2010 with no vesting as the minimum performance condition was not satisfied.

The fair value of these RSUs granted was estimated using the Monte-Carlo simulation method applying the following assumptions:

	FY 2010 Grants	FY 2009 Grants

Dividend yield	0%	0%
Expected life	2 years	2 years
Expected volatility	58%	41%
Risk-free interest rate	1.11%	1.82%

The dividend yield assumption is based on the Company’s history and future expectations of dividend payouts. The expected life of these RSUs is the performance period at the end of which the RSUs will vest if the minimum performance condition is satisfied. The volatility assumption is based on the actual volatility of Logitech’s daily closing share price over a look-back period of two years. The risk free interest rate is derived from the yield on U.S. Treasury Bonds for a two year term.

Defined Contribution Plans

Certain of the Company’s subsidiaries have defined contribution employee benefit plans covering all or a portion of their employees. Contributions to these plans are discretionary for certain plans and are based on specified or statutory requirements for others. The charge to expense for these plans for the three months ended September 30, 2010 and 2009 was $2.0 million and $1.9 million. During the six months ended September 30, 2010 and 2009, the charge to expense for these plans was $3.9 million and $3.5 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 net periodic benefit cost for defined benefit pension plans and non-retirement post-employment benefit obligations for the three and six months ended September 30, 2010 and 2009 was as follows (in thousands):

	Three months ended						Six months ended
	September 30,						September 30,
	2010			2009			2010			2009

Service cost	$	1,081		$	989		$	2,100		$	1,942
Interest cost		425			364			827			698
Expected return on plan assets		(444	)		(320	)		(859	)		(586	)
Amortization of net transition
obligation and prior service cost		36			35			73			70
Recognized net actuarial loss		92			189			179			414
Net periodic benefit cost	$	1,190		$	1,257		$	2,320		$	2,538

Note 12 — 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 income taxes are generated outside of Switzerland.

The income tax provision for the three months ended September 30, 2010 and 2009 was $8.9 million and $5.8 million based on effective income tax rates of 17.7% and 21.9% of pre-tax income. For the six months ended September 30, 2010 and 2009, the income tax provision was $3.5 million and $9.5 million based on effective income tax rates of 5.4% of pre-tax income and 131.9% of pre-tax loss. The change in the effective income tax rate for the three months ended September 30, 2010 compared with the three months ended September 30, 2009 is primarily due to the mix of income and losses in the various tax jurisdictions in which the Company operates. The change in the effective income tax rate for the six months ended September 30, 2010 compared with the six months ended September 30, 2009 is primarily due to discrete tax benefits of $8.9 million from the expiration of statutes of limitations and the closure of income tax audits in certain foreign jurisdictions.

For the three and six months ended September 30, 2010, Logitech’s effective income tax rate was calculated using an estimate of its annual pre-tax income. For the three and six months ended September 30, 2009, management determined that a reliable estimate of its annual pre-tax income and related annual effective income tax rate could not be made, due to the impact of the economic downturn. Therefore, Logitech used the actual year-to-date effective income tax rate for the three and six months ended September 30, 2009.

As of September 30, 2010 and March 31, 2010, the total amount of unrecognized tax benefits and related accrued interest and penalties due to uncertain tax positions was $121.4 million and $125.2 million, of which $100.8 million and $101.4 million would affect the effective income tax rate if recognized. The decrease in income tax liability associated with uncertain tax positions in the six-month period is primarily due to the expiration of statutes of limitations and the closure of income tax audits in certain foreign jurisdictions.

The Company continues to recognize interest and penalties related to unrecognized tax positions in income tax expense. As of September 30, 2010 and March 31, 2010, the Company had approximately $9.6 million and $12.5 million of accrued interest and penalties related to uncertain tax positions.

The Company files Swiss and foreign tax returns. For all these tax returns, the Company is generally not subject to tax examinations for years prior to 1999. The Internal Revenue Service is in the process of examining the Company’s U.S. subsidiary for fiscal years 2006 and 2007. At this time it is not possible to estimate the potential impact that the examination may have on income tax expense. The Company is also under examination in other tax jurisdictions. Although the timing of the resolution or closure on audits is highly uncertain, the Company does not believe it is reasonably possible that the unrecognized tax benefits would materially change in the next twelve months.

Note 13 — Derivative Financial Instruments – Foreign Exchange Hedging

Cash Flow Hedges

The Company enters into foreign exchange forward contracts to hedge against exposure to changes in foreign currency exchange rates related to its subsidiaries’ forecasted inventory purchases. The primary risk managed by using derivative instruments is the foreign currency exchange rate risk. The Company has designated these derivatives as cash flow hedges. Logitech does not use derivative financial instruments for trading or speculative purposes. These hedging contracts generally mature within six months, and are denominated in the same currency as the underlying transactions. 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. The Company assesses the effectiveness of the hedges by comparing changes in the spot rate of the currency underlying the forward contract with changes in the spot rate of the currency in which the forecasted transaction will be consummated. If the underlying transaction being hedged fails to occur or if a portion of the hedge does not generate offsetting changes in the foreign currency exposure of forecasted inventory purchases, the Company immediately recognizes the gain or loss on the associated financial instrument in other income (expense). Such losses were immaterial during the three and six months ended September 30, 2010 and 2009. The notional amounts of foreign exchange forward contracts outstanding related to forecasted inventory purchases at September 30, 2010 and 2009 were $98.7 million (€71.9 million) and $60.5 million (€42.2 million). The notional amount represents the future cash flows under contracts to purchase foreign currencies.

Other Derivatives

The Company also enters into foreign exchange forward contracts to reduce the short-term effects of foreign currency fluctuations on certain foreign currency receivables or payables. These forward contracts generally mature within one to three months. The Company may also enter into foreign exchange swap contracts to economically extend the terms of its foreign exchange forward contracts. The primary risk managed by using forward and swap contracts is the foreign currency exchange rate risk. The gains or losses on foreign exchange forward contracts are recognized in earnings based on the changes in fair value.

The notional amounts of foreign exchange forward contracts outstanding at September 30, 2010 and 2009 relating to foreign currency receivables or payables were $14.3 million and $19.3 million. Open forward contracts as of September 30, 2010 consisted of contracts in British pounds to purchase euros at a future date at a pre-determined exchange rate. The notional amounts of foreign exchange swap contracts outstanding at September 30, 2010 and 2009 were $26.6 million and $26.1 million. Swap contracts outstanding at September 30, 2010 consisted of contracts in Canadian dollars, Japanese yen, and Mexican pesos.

The fair value of all our foreign exchange forward contracts and foreign exchange swap contracts is determined based on quoted foreign exchange forward rates. Quoted foreign exchange forward rates are observable inputs that are classified as Level 1 within the fair value hierarchy.

The following table presents the fair values of the Company’s derivative instruments and their locations on the Balance Sheet as of September 30 and March 31, 2010 (in thousands):

	Asset Derivatives					Liability Derivatives
		Fair Value					Fair Value
		September 30,		March 31,			September 30,		March 31,
	Location	2010		2010		Location	2010		2010

Derivatives designated as hedging
instruments:
Cash Flow Hedges	Other assets	$	27	$	136	Other liabilities	$	7,111	$	10
			27		136			7,111		10

Derivatives not designated as hedging
instruments:
Foreign Exchange Forward Contracts	Other assets		409		11	Other liabilities		-		-
Foreign Exchange Swap Contracts	Other assets		-		452	Other liabilities		913		356
			409		463			913		356
		$	436	$	599		$	8,024	$	366

The following table presents the amounts of gains and losses on the Company’s derivative instruments for the three months ended September 30, 2010 and their locations on its Financial Statements (in thousands):

Net amount of gain (loss) deferred as a component of accumulated other comprehensive loss

Location of gain (loss) reclassified from accumulated other comprehensive loss into income

Amount of gain (loss) reclassified from accumulated other comprehensive loss into income

Location of gain (loss) recognized in income immediately

Amount of gain (loss) recognized in income immediately

Derivatives designated as hedging

instruments: