LOGITECH INTERNATIONAL S.A. 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 and by geographic region, our new product introductions, our expectations regarding the potential growth opportunities for our products in mature and emerging markets and the enterprise market, our expectations regarding the impact of COVID-19 on our business and results of operations, our expectations regarding economic conditions in international markets, includingChina ,Russia andUkraine , our expectations regarding trends in global economic conditions and consumer demand for PCs and mobile devices, tablets, gaming, video collaboration, audio, pointing devices, wearables, remotes, microphones, streaming and other accessories and computer devices and related software and services, the interoperability of our products with 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 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, 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, 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 below and 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. Almost 40 years ago, Logitech created products to improve experiences around the personal computer (PC) platform, and today it is a multi-brand, multi-category company designing products that enable better experiences when consuming, sharing and creating digital content such as computing, gaming, video and music, whether it is on a computer, mobile device or in the cloud. Logitech's brands include Logitech, Logitech G, ASTRO Gaming, Streamlabs, Ultimate Ears, Jaybird, and Blue Microphones. Our Company's website is www.logitech.com. 24
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Our products participate in five large market opportunities: Creativity & Productivity, Gaming, Video Collaboration, Music and Smart Home. 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. Impacts of COVID-19 to Our Business InMarch 2020 , theWorld Health Organization declared the outbreak of a novel coronavirus ("COVID-19") as a pandemic, which continues to spread throughout the world. The spread of COVID-19 has caused public health officials to recommend precautions to mitigate the spread of the virus and, in certain markets in which we operate, government authorities have from time to time issued orders that require the closure of or restrictions on non-essential businesses and people to be quarantined or to shelter-at-home. The COVID-19 pandemic has significantly curtailed global economic activity, caused significant volatility and disruption in global financial and commercial markets, and is likely to continue to lead to recessionary pressures for an indeterminate amount of time. We are conducting our business with substantial modifications, such as employee remote work in non-manufacturing facilities and travel limitations, among other changes. We are continuing to actively monitor the situation and may take further actions that could alter our business operations as may be required by federal, state or local authorities in the countries in which we operate, or that we determine are in the best interest of our employees, customers, partners, suppliers or shareholders. It is not clear what the potential effects of COVID-19 or any such modifications or alterations may have on our business, results of operations, financial operations, financial condition and stock price. DuringFebruary 2020 , following the initial outbreak of COVID-19 inChina , we experienced disruptions to our manufacturing, supply chain and logistics services, resulting in temporary inventory declines and an increase in logistics costs. We continued to see disruptions to our supply chain and logistics services, inventory constraints and increased logistics costs during the remainder of the fourth quarter of fiscal year 2020 and the first, second, and third quarters of fiscal year 2021 as we attempted to address the effects of COVID-19, including health-related issues, changing regulations, and increased demand for and depleted inventories of some of our products. At the same time, due to the ongoing shelter-at-home requirements or recommendations in many countries, there has been acceleration of the work-from-home, study-from-home, gaming, video collaboration and streaming trends and high demand and consumption of certain of our products that have led to increased sales and operating income. While it is not yet clear how long the positive demand dynamics will continue, we expect the increased logistics costs and other adverse effects on our gross margins from COVID-19 to continue through the remainder of fiscal year 2021. It is difficult to predict the progression, the duration and all of the effects of COVID-19, when business restrictions and shelter-at-home guidelines may be eased or lifted, and how consumer demand, inventory and logistical effects and costs may evolve over time, or the impact on our future sales and results of operations. Some of this impact will undoubtedly occur over multiple financial periods and may have a lag effect between periods, such as what we are able to manufacture in one period affecting sales, channel inventory or logistics costs in subsequent periods. The full extent of the impact of COVID-19 on our business and our operational and financial performance is currently uncertain and will depend on many factors outside our control. For additional information, see "Liquidity and Capital resources" below and "Item IA: Risk Factors", including under the caption "The full effect of the COVID-19 pandemic is uncertain and cannot be predicted, and it could adversely affect the Company's business, results of operations and financial condition." Summary of Financial Results Our total sales for the three and nine months endedDecember 31, 2020 increased 85% and 64%, respectively, compared to the three and nine months endedDecember 31, 2019 , due to stronger sales across all regions and several of our product categories from increased remote work and distance learning trends, accelerated adoption of video communications, and greater gaming viewership, creation, and participation from home, as a result of COVID-19. The results of operations for Streamlabs have been included in our consolidated statement of operations from the acquisition date. 25 -------------------------------------------------------------------------------- Table of Contents Our sales for the three months endedDecember 31, 2020 increased 85%, 77%, and 95% in theAmericas , EMEA andAsia Pacific , respectively, compared to the same period of the prior fiscal year. Our sales for the nine months endedDecember 31, 2020 increased 65%, 59%, and 68% in theAmericas , EMEA andAsia Pacific , respectively, compared to the same period of the prior fiscal year. Our gross margin for the three months endedDecember 31, 2020 increased by 780 basis points to 44.9% from 37.1% for the three months endedDecember 31, 2019 . Our gross margin for the nine months endedDecember 31, 2020 increased by 640 basis points to 43.7% from 37.3% for the nine months endedDecember 31, 2019 . Our gross margin for both periods benefited from higher sales volume, continued restrained promotional spending, favorable product mix, and favorable exchange rates, which more than offset higher logistics operations costs.
Operating expenses for the three months ended
Operating expenses for the nine months ended
Net income for the three and nine months ended
Trends in Our Business
Our products participate in five large multi-category market opportunities,
including Creativity & Productivity, Gaming, Video Collaboration, Music and
Smart Home. We see opportunities to deliver growth with products in all these
markets. The following discussion represents key trends specific to our market
opportunities.
Trends Specific to Our Five Market Opportunities
Creativity & Productivity: New PC shipments have continued to be strong
recently due to work-from-home and learn-from-home trends. We believe that
innovative PC peripherals, such as our mice and keyboards, can renew the PC
usage experience and help improve the productivity and engagement of remote
work, distance learning, and telemedicine, thus providing growth opportunities.
Increasing adoption of various cloud-based applications has led to multiple
unique consumer use cases, which we are addressing with our innovative product
portfolio and a deep understanding of our customer base. The increasing
popularity of streaming and broadcasting, as well as the rising work-from-home
trend, provides additional growth opportunities for our webcam products as well
as other products in our portfolio. Smaller mobile computing devices, such as
tablets, have created new markets and usage models for peripherals and
accessories. We offer a number of products to enhance the use of mobile devices,
including a combo backlit keyboard case for the iPad Pro and keyboard folios for
other iPad models. Hybrid and distance learning environments have also created
demand and growth opportunities for our education tablet keyboards and
accessories.
Gaming: The PC gaming and console gaming platforms continue to show strong
structural growth opportunities as online gaming, multi-platform experiences,
and esports gain greater popularity and gaming content becomes increasingly more
demanding and social, particularly as other recreational activities have been
curtailed or restricted during shelter-at-home mandates. The new console refresh
cycle during the holiday season of 2020 could drive subsequent growth
opportunities over the coming years for our ASTRO family of headsets and
controllers. We believe Logitech is well positioned to benefit from the overall
gaming market growth. Our acquisition of Streamlabs provides a solid platform to
deliver recurring services and subscriptions to gamers.
Video Collaboration: The near and long-term structural growth opportunities in
the video collaboration market (VC) have never been more relevant than in
today's environment, as commercial and consumer adoption of video has seen
explosive growth since the start of the COVID-19 pandemic. Video meetings
continue to be on the rise, and companies increasingly want lower-cost,
cloud-based solutions that can provide their employees with the ability to work
from anywhere. We are continuing our efforts to create and sell innovative
products to accommodate the increasing demand from home offices and small-size
meeting rooms, such as huddle rooms, to medium and large-sized meeting rooms. We
are also experiencing significant demand for our enterprise-grade VC webcams and
headsets. We will continue to invest in select business-specific products (both
hardware and software), targeted product marketing and sales channel
development.
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Music: The mobile speaker market has remained soft, and has further weakened as
physical retail stores have been recently closed and the retail footprint has
decreased significantly due to the COVID-19 pandemic. 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, which led to a decline in Ultimate Ears sales in the past two years.
In fiscal year 2020, the wireless headphone industry continued to flourish with
strong revenue growth but has slowed in recent months. The largest growth is in
true wireless headphones while traditional wireless headphones have declined
significantly. Continued growth in the wireless headphone market is expected for
the next several years as consumers increasingly adopt wireless headphones over
wired headphones. Blue Microphones has experienced strong demand as musicians,
performers and streamers increasingly look to entertain and engage with their
fans on various online platforms like YouTube, Twitch, and Facebook.
Smart Home: Our remote Harmony business declined substantially in fiscal year
2020, offset by growth in our Circle 2 family of security cameras. This trend
continued during the nine months of fiscal year 2021. In general, our Harmony
and Circle 2 products are under pressure as the way people consume content is
changing and as retail stores have been closed or subject to restrictions. The
smart home market opportunity is broad and we will continue to explore other
innovative experiences to drive growth in the Smart Home category.
Business Seasonality, Product Introductions and Acquisitions
We have historically experienced higher sales in our third fiscal quarter ending
December 31 , compared to other fiscal quarters in our fiscal year, primarily due
to the increased consumer demand for our products during the year-end holiday
buying season and year-end spending by enterprises. Due to the spike in the
number of cases from the COVID-19 pandemic, and the ongoing shelter-at-home
requirements, the third fiscal quarter experienced an even higher demand and
consumption of most of our products. Additionally, new product introductions and
business acquisitions can significantly impact sales, product costs and
operating expenses. Product introductions can also impact our sales to
distribution channels as these channels are filled with new product inventory
following a product introduction, and often channel inventory of an earlier
model product declines as the next related major product launch approaches.
Sales can also be affected when consumers and distributors anticipate a product
introduction or changes in business circumstances. However, neither historical
seasonal patterns nor historical patterns of product introductions should be
considered reliable indicators of our future pattern of product introductions,
future sales or financial performance. Furthermore, cash flow is correspondingly
lower in the first half of the fiscal year as we typically build inventories in
advance for the third quarter and we pay an annual dividend following our Annual
General Meeting, which is typically in September.
Swiss Federal Tax Reform
As described in our Annual Report on Form 10-K for the fiscal year ended
March 31, 2020 , the canton of Vaud in Switzerland enacted TRAF on March 10, 2020
that took effect as of January 1, 2020 . Our cash tax payments have increased in
Switzerland beginning in fiscal year 2020 as a result of our transition out of
our longstanding tax ruling from the canton of Vaud .
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with GAAP and pursuant to the rules and regulations of theSEC , requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors. 27 -------------------------------------------------------------------------------- Table of Contents We believe that the assumptions, judgments and estimates involved in the accounting for accruals for customer incentives, cooperative marketing, and pricing programs (Customer Programs) and related breakage when appropriate, accrued sales return liability, inventory valuation and uncertain tax positions have the greatest potential impact on our condensed consolidated financial statements. These areas are key components of our results of operations and are based on complex rules requiring us to make judgments and estimates and consequently, we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. There have been no material changes in our critical accounting policies and estimates during the nine months endedDecember 31, 2020 compared with the critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 .
Adoption of New Accounting Pronouncements
Refer to Note 1 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for recent accounting pronouncements adopted and to be adopted.
Impact of Constant Currency
We refer to our 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 inU.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 rate results on our sales. If theU.S. Dollar appreciates or depreciates in comparison to other currencies in future periods, this will affect our results of operations in future periods as well.
References to Sales
References to "sales" mean net sales, except as otherwise specified, and the
sales growth discussion and sales growth rate percentages are based on
Sales Denominated in Other Currencies
Although our financial results are reported inU.S. Dollars, a portion of our sales was generated in currencies other than theU.S. Dollar, such as the Euro, Chinese Renminbi, Japanese Yen, Canadian Dollar,Taiwan New Dollar , British Pound and Australian Dollar. During the three months endedDecember 31, 2020 , approximately 54% of our sales were denominated in currencies other than theU.S. Dollar. Results of OperationsNet Sales Our sales in the three and nine months endedDecember 31, 2020 increased 85% and 64%, respectively, compared to the same period of the prior fiscal year, driven by sales increases in all regions and several of our product categories from increased work-from-home and study-from-home trends, as a result of various shelter-at-home mandates. Strong sales growth in Video Collaboration, Gaming, PC Webcams, Tablet and Other Accessories, Keyboards & Combos, Audio & Wearables, and Pointing Devices was partially offset by a decline in sales of Mobile Speakers and Smart Home. If currency exchange rates had been constant in the three and nine months endedDecember 31, 2020 and 2019, our constant dollar sales growth rate would have been 80% and 63%, respectively. 28 -------------------------------------------------------------------------------- Table of Contents Sales by Region The following table presents the change in sales by region for the three and nine months endedDecember 31, 2020 , compared with the three and nine months endedDecember 31, 2019 : Sales Growth Rate Constant Dollar Sales Growth Rate Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended December 31, 2020 December 31, 2020 December 31, 2020 December 31, 2020 Americas 85 % 65 % 87 % 67 % EMEA 77 % 59 % 67 % 55 % Asia Pacific 95 % 68 % 89 % 66 % Americas: The increase in sales in ourAmericas region for both the three and nine month periods was primarily driven by growth in sales across a majority of our product categories, partially offset by a decline in sales of Mobile Speakers and Smart Home. EMEA: The increase in sales in our EMEA region for both the three and nine month periods was primarily driven by growth in sales across a majority of our product categories, partially offset by a decline in sales of Mobile Speakers and Smart Home. Asia Pacific: The increase in sales in ourAsia Pacific region for both the three and nine month periods was driven by growth in sales across a majority of our product categories, partially offset by a decline in sales of Mobile Speakers and Smart Home. Sales by Product Categories
Sales by product categories for the three and nine months ended
Three Months Ended Nine Months Ended
December 31, December 31,
2020 2019 Change 2020 2019 Change
Pointing Devices $ 213,638 $ 154,540 38 % $ 503,228 $ 409,293 23 %
Keyboards & Combos 218,269 156,333 40 565,246 424,061 33
PC Webcams 131,700 32,165 309 295,020 89,041 231
Tablet & Other Accessories 138,052 31,256 342 267,186 103,442 158
Gaming (1) 436,426 245,736 78 916,040 541,265 69
Video Collaboration 292,500 91,964 218 659,278 254,941 159
Mobile Speakers 72,566 92,969 (22) 145,156 200,617 (28)
Audio & Wearables 152,952 81,934 87 338,592 208,576 62
Smart Home 10,593 15,790 (33) 25,976 35,088 (26)
Other (2) 606 - - 632 279 127
Total sales $ 1,667,302 $ 902,687 85 %$ 3,716,354 $ 2,266,603 64 %
(1) Gaming includes streaming services revenue generated by Streamlabs. (2) Other includes products that we currently intend to phase out, or have already phased out, because they are no longer strategic to our business.
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Pointing Devices
Our Pointing Devices category comprises PC- and Mac-related mice including trackballs, touchpads and presenters.
Sales of Pointing Devices increased 38% and 23% in the three and nine months endedDecember 31, 2020 , respectively, compared to the same period of the prior fiscal year. The increases in both periods were primarily driven by the increase in sales of cordless and trackball mice, partially offset by a decline in sales of our presentation tools, as most conferences, events, and other large-scale presentations remained prohibited.
Keyboards & Combos
Our Keyboards & Combos category comprises PC keyboards, living room keyboards and keyboard/mice combo products.
Sales of Keyboards & Combos increased 40% and 33% in the three and nine months endedDecember 31, 2020 , respectively, compared to the same periods of the prior fiscal year. The increases in both periods were driven by an increase in sales of our cordless keyboards and wireless keyboards/mice combos, partially offset by a decline in sales of our living room keyboards. The increase in the nine-month period was further partially offset by a decline in sales of our corded keyboards/mice combos.
PC Webcams
Our PC Webcams category comprises PC-based webcams targeted primarily at consumers.
PC Webcams sales increased 309% and 231% in the three and nine months endedDecember 31, 2020 , respectively, compared to the same periods of the prior fiscal year. The increases for both periods were across all product sub-categories, primarily driven by an increase in sales of our HD Pro Webcam C920, 1080P PRO Stream Webcam, Webcam C60, and Logitech Streamcam, mostly due to more remote work adoption and learning-from-home.
Tablet & Other Accessories
Our Tablet & Other Accessories category primarily comprises keyboards for tablets.
Sales of Tablet & Other Accessories products increased 342% and 158% in the three and nine months endedDecember 31, 2020 , respectively, compared to the same periods of the prior fiscal year. The increase for both periods was primarily driven by an increase in the sales of our Rugged Folio keyboard cases for a newer generation of iPads andSlim Folio keyboard for iPad 7th generation, both introduced in the third quarter of fiscal year 2020, and our Powered Wireless Charging 3-in-1 Dock, introduced in the fourth quarter of fiscal year 2020. We have seen strong demand for Tablet keyboards, partly due to schools embracing various technology devices to better educate students in learning-from-home environments.
Gaming market:
Our Gaming category comprises gaming mice, keyboards, headsets, gamepads, steering wheels, simulation controllers, console gaming headsets, and Streamlabs services.
Gaming sales increased 78% and 69% for the three and nine months endedDecember 31, 2020 , respectively, compared to the same periods of the prior fiscal year. The increase for both periods was primarily driven by increases in the sales of nearly all our product sub-categories, including Streamlabs services, our business acquisition in the third quarter of fiscal year 2020. The increases for both periods was partially offset by a decline in the sales of our console gaming controllers. 30 -------------------------------------------------------------------------------- Table of Contents Video Collaboration market: Our Video Collaboration category primarily includes Logitech's ConferenceCams, which combine affordable enterprise-quality audio and high definition (HD) 1080p video to bring video conferencing to businesses of any size. Sales of Video Collaboration products increased 218% and 159% in the three and nine months endedDecember 31, 2020 , respectively, compared to the same periods of the prior fiscal year. The increases for both periods were primarily driven by the sales of our Rally Ultra-HD conference camera system, BRIO 4K Pro Webcam, Webcam C390e, and Webcam C925E as video communications become more critical for a more location-flexible workforce.
Music market:
Mobile Speakers
Our Mobile Speakers category is made up entirely of Bluetooth wireless speakers.
Sales of Mobile Speakers decreased 22% and 28% for the three and nine months endedDecember 31, 2020 , compared to the same periods of the prior fiscal year. The decreases for both periods were primarily driven by a decrease in the sales of our BOOM 3, BOOM 2, UE MEGABOOM, and UE WONDERBOOM mobile speakers, in part due to limited outdoor activities and social gatherings. The decreases were partially offset by sales of our WONDERBOOM 2 speakers, and the introduction of our HYPERBOOM speaker in the fourth quarter of fiscal year 2020.
Audio & Wearables
Our Audio & Wearables category comprises PC speakers, PC headsets, in-ear headphones, premium wireless audio wearables and studio-quality microphones for professionals and consumers.
Audio & Wearables sales increased 87% and 62% for the three and nine months endedDecember 31, 2020 , respectively, compared to the same periods of the prior fiscal year. The increases for both periods were primarily driven by increases in the sales of both our corded and cordless headsets and Blue Microphones products, partially offset by a decline in the sales of our Jaybird products.
Smart Home market:
Our Smart Home category mainly comprises our Harmony line of advanced home entertainment controllers and home security cameras.
Smart Home sales decreased 33% and 26% during the three and nine months ended
Gross Profit
Gross profit for the three and nine months ended
Three Months Ended Nine Months Ended
December 31, December 31,
2020 2019 Change 2020 2019 Change
Net sales
Gross profit
$ 845,505 92 Gross margin 44.9 % 37.1 % 43.7 % 37.3 %
Gross profit consists of sales less cost of goods sold (which includes materials, direct labor and related overhead costs, costs of manufacturing facilities, royalties, costs of purchasing components from outside suppliers,
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distribution costs, warranty costs, customer support, shipping and handling
costs, outside processing costs and write-down of inventories), amortization of
intangible assets.
Gross margin increased by 780 and 640 basis points for the three and nine months
ended December 31, 2020 , respectively, compared to the same periods of the prior
fiscal year. Gross margin benefited from higher sales volume, continued
restrained promotional spending, favorable product mix, and favorable exchange
rates, which more than offset the higher logistics operations costs.
Operating Expenses
Operating expenses for the three and nine months ended
Three Months Ended Nine Months Ended
December 31, December 31,
2020 2019 2020 2019
Marketing and selling $ 204,485 $ 134,950 $ 496,520 $ 392,138
% of sales 12.3 % 14.9 % 13.4 % 17.3 %
Research and development 53,910 43,292 157,014 127,499
% of sales 3.2 % 4.8 % 4.2 % 5.6 %
General and administrative 37,606 22,344 98,341 68,551
% of sales 2.3 % 2.5 % 2.6 % 3.0 %
Amortization of intangible assets and
acquisition-related costs 4,946 5,084 13,886 12,898
% of sales 0.3 % 0.6 % 0.4 % 0.6 %
Change in fair value of contingent consideration for business acquisition
- - 5,716 -
% of sales - % - % 0.2 % - %
Restructuring charges (credits), net - (45) (54) 69
% of sales - % (1) - % - % (1) - %
Total operating expenses $ 300,947 $ 205,625 $ 771,423 $ 601,155
% of sales 18.0 % 22.8 % 20.8 % 26.5 %
(1) Absolute value for % of sales is less than 0.1%.
Marketing and Selling
Marketing and selling expenses consist of personnel and related overhead costs, corporate and product marketing, promotions, advertising, trade shows, technical support for customer experiences and facilities costs. During the three and nine months endedDecember 31, 2020 , marketing and selling expenses increased$69.5 million , and$104.4 million , respectively, compared to the same periods of the prior fiscal year. The increases were primarily driven by higher advertising expenses, personnel-related costs due to increased headcount, increased performance-based variable compensation linked to stronger performance, and increased shared-based compensation.
Research and Development
Research and development expenses consist of personnel and related overhead costs, contractors and outside consultants, supplies and materials, equipment depreciation and facilities costs, all associated with the design and development of new products and enhancements of existing products.
During the three and nine months endedDecember 31, 2020 , research and development expenses increased$10.6 million and$29.5 million , respectively, compared to the same periods of the prior fiscal year. The increases were primarily driven by higher personnel-related costs due to increased headcount, increased performance-based variable expense linked to stronger performance, and higher investment in new product development. 32
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General and Administrative
General and administrative expenses consist primarily of personnel and related overhead, information technology, and facilities costs for the infrastructure functions such as finance, information systems, executives, human resources, and legal. During the three and nine months endedDecember 31, 2020 , general and administrative expenses increased$15.3 million and$29.8 million , respectively, compared to the same periods of the prior fiscal year. The increases were primarily driven by higher personnel-related costs due to increased headcount, increased performance-based variable compensation linked to stronger performance, and increased shared-based compensation.
Amortization of Intangible Assets and Acquisition-Related Costs
Amortization of intangible assets consists of amortization of acquired intangible assets, including customer relationships and trade names. Acquisition-related costs include legal expense, due diligence costs, and other professional costs incurred for business acquisitions.
During the three months endedDecember 31, 2020 , amortization of intangible assets and acquisition-related costs decreased$0.1 million compared to the same period of the prior fiscal year, primarily driven by intangibles assets that were fully amortized. For the nine months endedDecember 31, 2020 , amortization of intangible assets and acquisition-related costs increased$1.0 million , compared to the same period of the prior fiscal year, primarily driven by amortization of the intangible assets acquired through the Streamlabs acquisition in the third quarter of fiscal year 2020.
Change in Fair Value of Contingent Consideration for Business Acquisition
The change in fair value of contingent consideration was$5.7 million for the nine months endedDecember 31, 2020 , primarily due to growth in Streamlabs' net sales and the achievement of the net sales targets during the six-month earn-out period endedJune 30, 2020 . Other Income, Net
Other income, net for the three and nine months ended
Three Months Ended Nine Months Ended
December 31, December 31,
2020 2019 2020 2019Investment income related to a deferred compensation plan
$ 1,049
7,344 203 9,070 702
Loss on investments (2,173) (709) (4,692) (772)
Other 263 562 899 1,086
Total $ 6,483 $ 1,101 $ 9,661 $ 2,852 Investment income represents earnings, gains, and losses on trading investments related to a deferred compensation plan offered by one of our subsidiaries.
Currency exchange gain, net relates to balances denominated in currencies other than the functional currency in our subsidiaries, as well as to the sale of currencies, and to gains or losses recognized on currency exchange forward contracts. We do not speculate in currency positions, but we are alert to opportunities to maximize currency exchange gains and minimize currency exchange losses.
Loss on investments represents the unrealized loss from the fair value change on the available-for-sale securities and equity-method investments during the periods presented.
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Provision for Income Taxes
The provision for income taxes and effective tax rates for the three and nine
months ended December 31, 2020 and 2019 were as follows (Dollars in thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
2020 2019 2020 2019
Provision for income taxes $ 72,334 $ 14,467 $ 142,638 $ 18,405
Effective income tax rate 15.9 % 11.0 % 16.5 % 7.2 %
The change in the effective income tax rate for the three and nine months ended
December 31, 2020 , compared to the same periods ended December 31, 2019 was
primarily due to the mix of income and losses in the various tax jurisdictions
in which we operate. The Swiss income tax provision in the three and nine months
ended December 31, 2020 represents the income tax provision at the full
statutory income tax rate of 13.63%. In the same periods ended December 31, 2019
when TRAF was yet to be enacted at the federal and cantonal levels, the
transition income tax provision reflects the application of the longstanding tax
ruling through December 31, 2019 . Furthermore, there was a discrete tax benefit
of $1.7 million from adjusting deferred tax assets and liabilities in
Switzerland in the nine months ended December 31, 2019 . There were discrete tax
benefits of $7.2 million and $2.9 million from the recognition of excess tax
benefits in the United States and reversal of uncertain tax positions from the
expiration of statutes of limitations, respectively, in the nine-month period
ended December 31, 2020 , compared with $6.0 million and $2.7 million ,
respectively, in the nine-month period ended December 31, 2019 .
As of December 31, 2020 and March 31, 2020 , the total amount of unrecognized tax
benefits due to uncertain tax positions was $158.8 million and $140.8 million ,
respectively, all of which would affect the effective income tax rate if
recognized.
Liquidity and Capital Resources
Cash Balances, Available Borrowings, and Capital Resources
As ofDecember 31, 2020 , we had cash and cash equivalents of$1,388.7 million , compared to$715.6 million as ofMarch 31, 2020 . As ofDecember 31, 2020 , 71% of the cash and cash equivalents were held inSwitzerland , 13% were held inGermany , and 9% were held inHong Kong andChina . We do not expect to incur any material adverse tax impact except for what has already been recognized, or be significantly inhibited by any country in which we do business from the repatriation of funds toSwitzerland , our home domicile. The increase in cash and cash equivalents for the nine months endedDecember 31, 2020 , was primarily due to an increase in net cash provided by operating activities and proceeds from exercises of stock options and purchase rights, partially offset by payment of cash dividends, purchases of property, plant and equipment, tax withholdings related to settlements of restricted stock units, and shares repurchased under our share buyback program. As ofDecember 31, 2020 , our working capital was$1,361.9 million , compared to$700.3 million as ofMarch 31, 2020 . The increase was primarily driven by higher cash and cash equivalents, higher accounts receivable, net, higher inventories and higher other current assets, partially offset by higher accounts payable and accrued and other current liabilities. Our working capital increased by$681.5 million compared to$680.4 million as ofDecember 31, 2019 , which was primarily driven by higher cash and cash equivalents, higher accounts receivable, net, higher inventories and higher other current assets, partially offset by higher accounts payable and accrued and other current liabilities. We had several uncommitted, unsecured bank lines of credit aggregating$82.6 million as ofDecember 31, 2020 . There are no financial covenants under these lines of credit with which we must comply. As ofDecember 31, 2020 , we had outstanding bank guarantees of$37.8 million under these lines of credit. 34 -------------------------------------------------------------------------------- Table of Contents The following table summarizes our condensed consolidated statements of cash flows (Dollars in thousands): Nine Months Ended December 31, 2020 2019 Net cash provided by operating activities$ 928,419 $ 324,154 Net cash used in investing activities (46,454) (119,441) Net cash used in financing activities (219,196) (150,863) Effect of exchange rate changes on cash and cash equivalents 10,408
(2,320)
Net increase in cash and cash equivalents$ 673,177
The following table presents selected financial information and statistics as of and for the three months endedDecember 31, 2020 and 2019 (Dollars in thousands): As of December 31, 2020 2019 Accounts receivable, net$ 894,937 $ 531,309 Accounts payable$ 811,786 $ 439,035 Inventories$ 476,802 $ 307,494 Three Months Ended December 31, 2020 2019 Days sales in accounts receivable ("DSO") (Days) (1) 48 53 Days accounts payable outstanding ("DPO") (Days) (2) 80 70 Inventory turnover ("ITO") (x)(3) 7.7 7.4
(1) DSO is determined using ending accounts receivable, net as of the most recent quarter end and sales for the most recent quarter. (2) DPO is determined using ending accounts payable as of the most recent quarter end and cost of goods sold for the most recent quarter. (3) ITO is determined using ending inventories and annualized cost of goods sold (based on the most recent quarterly cost of goods sold).
DSO for the three months endedDecember 31, 2020 decreased by 5 days to 48 days, compared to 53 days for the same period of the prior fiscal year, primarily due to timing of sales, customer payments and sales linearity. DPO for the three months endedDecember 31, 2020 increased by 10 days, compared to 70 days for the same period of the prior fiscal year, primarily due to the timing of purchases and related payments and an increase in cost of goods sold due to higher sales growth. ITO for the three months endedDecember 31, 2020 increased by 0.3, compared to 7.4 for the same period of the prior fiscal year, primarily due to higher sales growth as a result of higher demand for certain of our products due to the COVID-19 impact. If we are not successful in launching and phasing in our new products, or market competition increases, or we are not able to sell the new products at the prices planned, it could have a material impact on our sales, gross profit margin, operating results including operating cash flow, and inventory turnover in the future. During the nine months endedDecember 31, 2020 , we generated$928.4 million of cash from operating activities. Our main sources of operating cash flows were from net income, after adding back non-cash expenses of depreciation, amortization and share-based compensation expense, from change in fair value of contingent considerations, and from changes in operating assets and liabilities. The increase in accounts receivable, net was primarily driven by growth and timing of sales. The increase in inventories was primarily driven by an increase in inventory purchases in anticipation of continued high demand for certain of our products during the nine months 35 -------------------------------------------------------------------------------- Table of Contents endedDecember 31, 2020 . The increase in accounts payable was primarily driven by the timing of purchases and related payments. The increase in accrued liabilities was primarily driven by an increase in customer marketing, pricing, and incentive programs, freight and duty due to higher logistic costs, and income taxes payable due to stronger performance.
Net cash used in investing activities was
Net cash used in financing activities was$219.2 million , primarily due to the$146.7 million payment of a cash dividend,$72.7 million used for repurchases of our registered shares, and$29.5 million for tax withholdings related to net share settlements of restricted stock units, partially offset by$29.7 million in proceeds received from exercises of stock options and purchase rights. During the nine months endedDecember 31, 2020 , there was a$10.4 million gain from currency exchange rate effect on cash and cash equivalents, compared to a loss of$2.3 million during the same period of the prior fiscal year. The gain from currency translation exchange effect during the nine months endedDecember 31, 2020 was primarily due to the strengthening of the Australian Dollar, Euro, Chinese Renmingbi, and Swiss Franc against theU.S. Dollar by 24%, 11%, and 8%, respectively, during the period. The loss from effect of currency exchange rate changes during the nine months endedDecember 31, 2019 was primarily due to the weakening of the Euro, Chinese Renminbi and Brazilian Real against theU.S. Dollar by 1%, 4%, and 4%, respectively. Cash Outlook Our principal sources of liquidity are our cash and cash equivalents, cash flow generated from operations and, to a much lesser extent, capital markets and borrowings. Our future working capital requirements and capital expenditures may increase to support investments in product innovations and growth opportunities or to acquire or invest in complementary businesses, products, services, and technologies. The future impact of COVID-19 cannot be predicted with certainty and may increase our costs of capital and otherwise adversely affect our business, results of operations, financial conditions and liquidity. In fiscal year 2021, we paid an annual cash dividend ofCHF 134.0 million (U.S. Dollar amount of$146.7 million ) out of fiscal year 2020 retained earnings. In fiscal year 2020, we paid an annual cash dividend ofCHF 121.8 million (U.S. Dollar amount of$124.2 million ) out of fiscal year 2019 retained earnings. Any future dividends will be subject to the approval of our shareholders. InMay 2020 , our Board of Directors approved a new share buyback program, which authorizes us to invest up to$250.0 million to purchase our own shares, following the expiration date of the 2017 share buyback program. Although we enter into trading plans for systematic repurchases (e.g., 10b5-1 trading plans) from time to time, our share buyback program provides us with the opportunity to make opportunistic repurchases during periods of favorable market conditions and is expected to remain in effect for a period of three years. Shares may be repurchased from time to time on the open market, through block trades or otherwise. Opportunistic purchases may be started or stopped at any time without prior notice depending on market conditions and other factors. As ofDecember 31, 2020 ,$177.6 million is still available for repurchase under the 2020 share buyback program. If we do not generate sufficient operating cash flows to support our operations and future planned cash requirements, our operations could be harmed and our access to credit could be restricted or eliminated. However, we believe that the trend of our historical cash flow generation, our projections of future operations and our available cash balances will provide sufficient liquidity to fund our operations for at least the next 12 months.
Operating Leases Obligation
We lease facilities under operating leases, certain of which require us to pay property taxes, insurance and maintenance costs. Operating leases for facilities are generally renewable at our option and usually include escalation clauses linked to inflation. The remaining terms of our non-cancelable operating leases expire in various years through 2031.
Purchase Commitments
As of
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other suppliers, as well as due to strong sales growth in the nine months ended
December 31, 2020 , the majority of which are expected to be fulfilled within the
next 12 months. The increase of inventory purchase commitment from March 31,
2020 is to replenish the inventory due to business growth. We recorded a
liability for firm, non-cancelable, and unhedged inventory purchase commitments
in excess of anticipated demand or net realizable value consistent with our
valuation of excess and obsolete inventory. As of December 31, 2020 , the
liability for these purchase commitments was $5.6 million and is recorded in
accrued and other current liabilities.
We have firm purchase commitments of $32.8 million for capital expenditures,
primarily related to commitments for equipment and tooling for new and existing
products. We expect to continue making capital expenditures in the future to
support product development activities and ongoing and expanded operations.
Although open purchase commitments are considered enforceable and legally
binding, the terms generally allow us to reschedule or adjust our requirements
based on business needs prior to delivery of goods or performance of services.
Other Contractual Obligations and Commitments
For further detail about our contractual obligations and commitments, refer to
our Annual Report on Form 10-K for the fiscal year ended
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Indemnifications
We indemnify certain suppliers and customers for losses arising from matters such as intellectual property disputes and product safety defects, subject to certain restrictions. The scope of these indemnities varies, but in some instances includes indemnification for damages and expenses, including reasonable attorneys' fees. As ofDecember 31, 2020 , no amounts have been accrued for indemnification provisions. We do not believe, based on historical experience and information currently available, that it is probable that any material amounts will be required to be paid under our indemnification arrangements. We also indemnify our current and former directors and certain current and former officers. Certain costs incurred for providing such indemnification may be recoverable under various insurance policies. We are unable to reasonably estimate the maximum amount that could be payable under these arrangements because these exposures are not capped, the obligations are conditional in nature, and the facts and circumstances involved in any situation that might arise are variable. Legal Proceedings From time to time we are involved in claims and legal proceedings that arise in the ordinary course of our business. We are currently subject to several such claims and a small number of legal proceedings. We believe that these matters lack merit and we intend to vigorously defend against them. Based on currently available information, we do not believe that resolution of pending matters will have a material adverse effect on our financial condition, cash flows or results of operations. However, litigation is subject to inherent uncertainties, and there can be no assurances that our defenses will be successful or that any such lawsuit or claim would not have a material adverse impact on our business, financial condition, cash flows and results of operations in a particular period. Any claims or proceedings against us, whether meritorious or not, can have an adverse impact because of defense costs, diversion of management and operational resources, negative publicity and other factors. Any failure to obtain necessary licenses or other rights, or litigation arising out of intellectual property claims, could adversely affect our business. 37
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