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 duration and overall impact of COVID-19 on our business and results of operations, including as a result of global supply chain challenges, 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. Forty 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 people to pursue their passions and connect to the world. Logitech's products align with several large secular trends including work and learn from anywhere, video everywhere, the increasing popularity of gaming as a spectator and participant sport, and the democratization of content creation. Logitech's brands include Logitech, 28 -------------------------------------------------------------------------------- Table of Contents Logitech G, ASTRO Gaming, Streamlabs, Blue Microphones, and Ultimate Ears. Our Company's website is www.logitech.com. 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, e-tailers and enterprise customers, 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. We primarily sell our services directly to end customers. 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 curtailed global economic activity, caused volatility and disruption in global financial and commercial markets, and is likely to continue to cause uncertainty for an indeterminate amount of time. While most of our offices have at least partially reopened or will be reopening in the near future, we are conducting our business with substantial modifications, such as employee remote work in many non-manufacturing facilities and travel limitations, among other changes. We are continuing to actively monitor the situation and may take further actions that 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. In fiscal year 2021, we experienced disruptions to our supply chain and logistics, inventory constraints, and increased logistics costs, as we attempted to address the effects of COVID-19. At the same time, due to the shelter-at-home requirements or other restrictions in many countries, there was an acceleration of work-from-anywhere, learn-from-anywhere, gaming, video collaboration and streaming trends and high demand and consumption of certain of our products that led to increased sales and operating income. While we continued to experience increased sales in the first nine months of fiscal year 2022 compared to the first nine months of fiscal year 2021, we also experienced supply and demand volatility, as the COVID-19 pandemic and related safety measures and restrictions have evolved differently across the world. Further, the demand volatility has led to, and could continue to lead to in the future, higher promotions and marketing expenses, or excess inventories, or both, which could have an adverse impact on our results of operations. In addition, the continued COVID-19 pandemic has resulted in industry-wide global supply chain challenges, including manufacturing, transportation and logistics. We purchase certain products and key components from a limited number of sources, and depend on the supply chain, including freight, to receive components, transport finished goods and deliver our products across the world. While we proactively manage our supply chain, we expect to continue to be impacted by higher logistics and component costs, prolonged delays, and challenges with component availability. We believe that our long-term supplier relationships, as well as our hybrid model that includes in-house manufacturing inSuzhou, China , will help to mitigate the effects of these supply chain challenges. It is difficult to predict the progression, the duration and all of the effects of COVID-19, how business restrictions and shelter-at-home guidelines may evolve on a global basis, how consumer demand, supply chain challenges, including inventory and logistical effects and costs, may change over time, and the impact on our future sales and results of operations. 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 1A "Risk Factors," including under the caption "The full effect of the COVID-19 pandemic is still uncertain and cannot be predicted, and could adversely affect our business, results of operations and financial condition," "If we do not successfully coordinate the worldwide manufacturing and distribution of our products, we could lose sales" and "We purchase key components and products from a limited number of sources, and our business and operating results could be adversely affected if supply were delayed or constrained or if there were shortages of required components." 29
--------------------------------------------------------------------------------
Table of Contents
Summary of Financial Results
Our total sales for the three and nine months endedDecember 31, 2021 decreased 2% and increased 14%, respectively, compared to the three and nine months endedDecember 31, 2020 . Our condensed consolidated statements of operations for the three and nine months endedDecember 31, 2021 include the results of operations for our first quarter acquisition from its date of acquisition. Sales for the three months endedDecember 31, 2021 increased 1% in the EMEA region, and decreased 4% and 2% in theAmericas andAsia Pacific regions, respectively, compared to the same period of the prior fiscal year. Sales for the nine months endedDecember 31, 2021 increased 14%, 14%, and 15% in theAmericas , EMEA andAsia Pacific , respectively, compared to the same period of the prior fiscal year. Gross margin for the three months endedDecember 31, 2021 decreased by 460 basis points to 40.3% from 44.9% for the three months endedDecember 31, 2020 . Gross margin for the nine months endedDecember 31, 2021 decreased by 210 basis points to 41.6% from 43.7% for the nine months endedDecember 31, 2020 . Operating expenses for the three months endedDecember 31, 2021 were$395.3 million , or 24.2% of sales, compared to$300.9 million , or 18.0% of sales, in the same period of the prior fiscal year. Operating expenses for the nine months endedDecember 31, 2021 were$1,123.9 million , or 26.4% of sales, compared to$771.4 million , or 20.8% of sales, in the same period of the prior fiscal year. Net income for the three and nine months endedDecember 31, 2021 was$210.0 million and$536.3 million , respectively, compared to$382.5 million and$721.5 million for the three and nine months endedDecember 31, 2020 , respectively.
Trends in Our Business
Our products participate in five large multi-category market opportunities,
including Creativity & Productivity, Gaming, Video Collaboration, Music and
Smart Home. 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 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 and learning,
thus providing growth opportunities. Hybrid work culture will also greatly
expand the number of new workspaces to which we can attach our PC peripherals.
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 continuing
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 with trackpad for the
iPad.
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 becomes more social, particularly
as other recreational activities have been curtailed or restricted during the
COVID-19 pandemic. We expect gaming will increasingly become one of the largest
participant and spectator sports in the world. We believe Logitech is well
positioned to benefit from the overall gaming market growth. In addition, our
acquisition of Streamlabs provides a solid platform to deliver recurring
services and subscriptions to gamers and streamers.
Video Collaboration: The near and long-term structural growth opportunities in
the video collaboration market ("VC") have never been more prevalent than in
today's environment, as commercial and consumer adoption of video has seen
substantial growth since the start of the COVID-19 pandemic. Video meetings
continue to be an opportunity as companies 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
30
--------------------------------------------------------------------------------
Table of Contents
increasing demand from home offices and small-size meeting rooms, such as huddle
rooms, to medium and large-sized meeting rooms. We will continue to invest in
the development of select business-specific products (both hardware and
software), targeted product marketing and sales channel development. The
digitization of learning and hybrid learning environments have also created
demand and growth opportunities in the education market.
Music: Consumers are optimizing their audio experiences on their tablets and
smartphones with a variety of music peripherals including wireless mobile
speakers and in-ear and other headphones. However, the mobile speaker market has
matured and the integration of personal voice assistants has increased
competition in the speaker category. In addition, the retail footprint has
decreased significantly due to the COVID-19 pandemic. These factors have led to
a decline in our Mobile Speakers category sales in the past three years. In the
wireless headphone industry, the largest growth in recent years has been in true
wireless headphones while traditional wireless headphones have declined
significantly. We will continue developing wireless audio products as growth in
the wireless headphone market is expected for the next several years.
Smart Home: Sales of our Harmony universal remote and Circle security family of
products declined substantially in the three and nine months ended December 31,
2021 . In general, our sales of Harmony and Circle 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 and Product Introductions
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. 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 our 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, 2021 , the canton of Vaud in Switzerland enacted the Tax Reform and AHV
Financing ("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 U.S. GAAP requires us to make assumptions, judgments, and estimates, that
affect reported amounts of assets, liabilities, sales and expenses, and the
disclosure 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.
We believe that the assumptions, judgments and estimates involved in the
accounting for accruals for customer incentives and related breakage when
appropriate, accrued sales return liability, inventory valuation, uncertain tax
positions, and business acquisitions 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.
31
--------------------------------------------------------------------------------
Table of Contents
There have been no material changes in our critical accounting policies and
estimates during the nine months ended December 31, 2021 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 ended March 31, 2021 .
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 net sales growth rates excluding the impact of currency exchange rate fluctuations as "constant currency" sales growth rates. Percentage of constant currency 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 significant shifts in currency exchange rates. See "Results of Operations" for information on the effect of currency exchange 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 The term "sales" means net sales, except as otherwise specified and the sales growth discussion and sales growth rate percentages are inU.S. Dollars, except as otherwise specified.
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, 2021 , approximately 53% of our sales were denominated in currencies other than theU.S. Dollar. Results of OperationsNet Sales Our sales in the three months endedDecember 31, 2021 , decreased 2% and increased 14% for the nine months endedDecember 31, 2021 , compared to the same periods of the prior fiscal year. The decrease in sales for the three month period was primarily driven by a decline in sales for Tablet and Other Accessories, Audio & Wearables, Mobile Speakers and PC Webcams, partially offset by an increase in sales for Keyboards & Combos, Gaming and Pointing Devices. For the nine months endedDecember 31, 2021 , strong sales growth in Gaming, Keyboards & Combos, and Pointing Devices was partially offset by a decline in sales of Mobile Speakers and Tablet and Other Accessories. Our sales in both the three and nine month periods were negatively impacted by higher promotions and industry-wide supply chain challenges, including supply availability and logistics delays, as compared to the same periods in the prior fiscal year. If currency exchange rates had been constant in the three and nine months endedDecember 31, 2021 and 2020, our constant dollar sales growth rate would have been a decrease of 2% for the three months ended and an increase of 13% for the nine months endedDecember 31, 2021 . 32 -------------------------------------------------------------------------------- Table of Contents Sales by Region The following table presents the change in sales by region for the three and nine months endedDecember 31, 2021 , compared with the three and nine months endedDecember 31, 2020 : Sales Growth Rate Constant Dollar Sales Growth Rate Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended December 31, 2021 December 31, 2021 December 31, 2021 December 31, 2021 Americas (4) % 14 % (5) % 13 % EMEA 1 % 14 % 3 % 12 % Asia Pacific (2) % 15 % (2) % 13 % Americas: The decrease in sales in theAmericas region for the three-month period presented above was primarily driven by a decrease in sales of Tablet and Other Accessories, Audio & Wearables, Mobile Speakers and PC Webcams, partially offset by an increase in sales of Keyboards & Combos and Video Collaboration. The increase in sales for the nine-month period was primarily driven by growth in sales of Video Collaboration, Keyboards & Combos and Gaming, partially offset by a decline in sales of Mobile Speakers.
EMEA:
The increase in sales in our EMEA region for the three-month period was primarily driven by growth in sales of Keyboards & Combos, Tablets and Other Accessories, Gaming and Pointing Devices, partially offset by a decline in sales of the other product categories. The increase in sales for the nine-months ended period was primarily driven by growth in sales of Tablets and Other Accessories, Keyboards & Combos, Gaming, Pointing Devices, and PC Webcams, partially offset by a decline in sales of the other product categories.
The decrease in sales in ourAsia Pacific region for the three-month period presented above was primarily driven by a decrease in sales of Tablet and Other Accessories, Mobile Speakers, and Audio & Wearables, partially offset by an increase in sales of the other product categories. The increase in sales for the nine-month period was primarily driven by growth in sales across a majority of our product categories, partially offset by a decline in sales of Tablet & Other Accessories. 33
-------------------------------------------------------------------------------- Table of Contents 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,
2021 2020 Change 2021 2020 Change
Pointing Devices $ 231,090 $ 213,638 8 % $ 602,982 $ 503,228 20 %
Keyboards & Combos 281,608 218,269 29 736,237 565,246 30
PC Webcams 115,115 131,700 (13) 319,504 295,020 8
Tablet & Other Accessories 82,859 138,052 (40) 242,932 267,186 (9)
Gaming (1) 469,282 436,426 8 1,135,456 916,040 24
Video Collaboration 287,187 292,500 (2) 753,725 659,278 14
Mobile Speakers 56,748 72,566 (22) 124,724 145,156 (14)
Audio & Wearables 104,280 152,952 (32) 318,965 338,592 (6)
Smart Home 4,559 10,593 (57) 16,380 25,976 (37)
Other (2) 54 606 (91) 202 632 (68)
Total Sales $ 1,632,782 $ 1,667,302 (2) % $ 4,251,107 $ 3,716,354 14 %
(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.
Pointing Devices Our Pointing Devices category comprises PC- and Mac-related mice including trackballs, touchpads and presentation tools.
Sales of Pointing Devices increased 8% and 20% in the three and nine months endedDecember 31, 2021 , respectively, compared to the same periods of the prior fiscal year. The increases in both periods were primarily driven by the increase in sales for cordless and corded mice, and presentation tools. Trackball mice also contributed to the increase in sales for the nine-month period.
Keyboards & Combos Our Keyboards & Combos category comprises PC keyboards, keyboard/mice combo products, and living room keyboards.
Sales of Keyboards & Combos increased 29% and 30% in the three and nine months endedDecember 31, 2021 , respectively, compared to the same periods of the prior fiscal year. The increases for both periods were primarily driven by an increase in sales of our keyboard/mice combos as well as our cordless and corded PC keyboards.
PC Webcams Our PC Webcams category comprises PC-based webcams targeted primarily at consumers, including streaming cameras.
Sales of PC Webcams decreased 13% for the three months ended and increased 8% for the nine months endedDecember 31, 2021 , compared to the same periods of the prior fiscal year. The decrease in sales for the three-month period was primarily driven by a decline in sales of our Streamcam, HD Webcam C505, HD Pro Webcam C920, and 1080 PRO Stream Webcam, partially offset by an increase in sales of our BRIO 4K Stream Edition, and HD Webcam C615. 34 -------------------------------------------------------------------------------- Table of Contents The increase for the nine-month period was driven by sales of our HD Webcam 505, BRIO 4K Stream Edition, and 1080P PRO Stream Webcam, partially offset by a decrease in sales of our Streamcam and HD Webcam C615.
Tablet & Other Accessories Our Tablet & Other Accessories category primarily comprises keyboards for tablets.
Sales of Tablet & Other Accessories products decreased 40% and 9% for the three and nine months endedDecember 31, 2021 , compared to the same periods of the prior fiscal year. The decrease for both periods were primarily driven by decrease in sales of our Rugged Folio and Slim Folio Products, partially offset by an increase in sales of our Combo Touch for iPad Pro 12.9-inch, introduced in the second quarter of fiscal year 2022, Combo Touch for iPad Pro 11-inch and Combo Touch for iPad Air, introduced in the first quarter of fiscal year 2022 and POWERED (a wireless 3-in-1 charging dock for Apple products). Gaming market: Gaming Our Gaming category comprises gaming mice, keyboards, headsets, gamepads, steering wheels, simulation controllers, console gaming headsets, console gaming controllers, and Streamlabs services. Sales of Gaming increased 8% and 24% for the three and nine months endedDecember 31, 2021 , respectively, compared to the same periods of the prior fiscal year. The increase for both periods was primarily driven by strong performance in nearly all of our Gaming sub-categories, including our gaming mice, PC gaming headsets, gaming steering wheels, gaming keyboards, and Streamlabs services, partially offset by a decline in the sales of our console gaming controllers, and console gaming headsets. Video Collaboration market: Video Collaboration Our Video Collaboration category includes Logitech's ConferenceCams, which combine affordable enterprise-quality audio and high definition 1080p video to bring video conferencing to businesses of any size. Sales of Video Collaboration products decreased 2% for three months ended and increased 14% for the nine months endedDecember 31, 2021 , compared to the same periods of the prior fiscal year. The decrease for the three-month period was primarily due to a decrease in sales of our Webcam C930e, Webcam 925E, BRIO 4k Pro Webcam and Rally Bar conference camera, partially offset by an increase in sales of our MeetUp conference camera. The increase in sales for the nine-month period was primarily driven by an increase in sales of our MeetUp conference camera, Webcam 925E and our Rally Bar conference camera, partially offset by a decline in sales of our Webcam C930e, Brio 4K Pro Webcam and GROUP video conferencing solution for mid to large-sized meeting rooms.
Music market:
Mobile Speakers Our Mobile Speakers category is made up entirely of Bluetooth wireless speakers.
Sales of Mobile Speakers decreased 22% and 14% for the three and nine months endedDecember 31, 2021 , respectively, compared to the same periods of the prior fiscal year. The decrease for both periods was primarily due to a decrease in sales of UE WONDERBOOM, UE Megaboom, BOOM 2 and WONDERBOOM 2 mobile speakers partially offset by an increase in sales of our BOOM 3 mobile speakers. The decrease in sales for the nine-month period was further offset by an increase in sales of our Blast mobile speakers. 35 -------------------------------------------------------------------------------- Table of Contents 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. Sales of Audio & Wearables decreased 32% and 6% for the three and nine months endedDecember 31, 2021 , compared to the same periods of the prior fiscal year. The decrease for both periods was primarily due to a decrease in sales of our Blue Microphone products, cordless headsets and Jaybird products, partially offset by an increase in sales of our Ultimate Ears custom headsets. The decrease in sales for the nine-month period was further offset by an increase in sales of our corded headsets. In the third quarter of fiscal 2022, we made a decision to cease future product launches under the Jaybird brand, but plan to continue developing wireless audio products such as Ultimate Ears. Smart Home market: Smart Home Our Smart Home category mainly comprises our Harmony line of advanced home entertainment controllers and home security cameras. Sales of Smart Home decreased 57% and 37% for the three and nine months endedDecember 31, 2021 , respectively, compared to the same periods of the prior fiscal year. The decreases for both periods were primarily due to a decline in sales of most of our Harmony remotes and our home video products, partially offset by increases in sales of our Circle View Doorbell, introduced in the third quarter of fiscal year 2021.
Gross Profit
Gross profit for the three and nine months ended
Three Months Ended Nine Months Ended
December 31, December 31,
2021 2020 Change 2021 2020 ChangeNet sales$ 1,632,782 $ 1,667,302 (2) %$ 4,251,107 $ 3,716,354 14 % Gross profit$ 658,010 $ 749,010 (12) %$ 1,769,099 $ 1,624,466 9 % Gross margin 40.3 % 44.9 % 41.6 % 43.7 % 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, distribution costs, warranty costs, customer support costs, shipping and handling costs, outside processing costs and write-down of inventories), and amortization of intangible assets. Gross margin decreased by 460 and 210 basis points for the three and nine months endedDecember 31, 2021 , respectively, compared to the same periods of the prior fiscal year. Our gross margin for both periods declined due to increased promotional spending, increased logistics costs, higher reserves for excess inventories including Jaybird exit costs, partially offset by favorable currency exchange rates and favorable product mix. 36 -------------------------------------------------------------------------------- Table of Contents Operating Expenses
Operating expenses for the three and nine months ended
Three Months Ended Nine Months Ended
December 31, December 31,
2021 2020 2021 2020
Marketing and selling $ 269,941 $ 204,485 $ 778,882 $ 496,520
% of sales 16.5 % 12.3 % 18.3 % 13.4 %
Research and development 75,529 53,910 213,436 157,014
% of sales 4.6 % 3.2 % 5.0 % 4.2 %
General and administrative 38,478 37,606 112,291 98,341
% of sales 2.4 % 2.3 % 2.6 % 2.6 %
Amortization of intangible assets and
acquisition-related costs 3,662 4,946 13,986 13,886
% of sales 0.2 % 0.3 % 0.3 % 0.4 %
Impairment of intangible assets 7,000 - 7,000 -
% of sales 0.4 % - % 0.2 % - %
Change in fair value of contingent consideration for business acquisition
(1,110) - (3,509) 5,716
% of sales (0.1) % - % (0.1) % 0.2 %
Restructuring charges (credits), net 1,759 - 1,770 (54)
% of sales 0.1 % - % - % - %
Total operating expenses $ 395,259 $ 300,947 $ 1,123,856 $ 771,423
% of sales 24.2 % 18.0 % 26.4 % 20.8 %
The increase in total operating expenses during the three and nine months ended
December 31, 2021 , compared to the same periods of the prior fiscal year, were
mainly due to increases in marketing and selling expenses, research and
development expenses, and impairment of intangible assets and restructuring
charges related to the Jaybird exit. The increase in the nine month period was
also attributable to increased general and administrative expenses, partially
offset by the change in fair value of contingent consideration for business
acquisition.
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 ended December 31, 2021 , marketing and selling
expenses increased $65.5 million and $282.4 million , respectively, compared to
the same periods of the prior fiscal year. The increases for both periods were
primarily driven by higher advertising and marketing expenses, including
third-party costs and increased headcount, to support our investment in brand
awareness and consideration.
Research and Development
Research and development expenses consist of personnel and related overhead
costs for contractors and outside consultants, supplies and materials, equipment
depreciation and facilities costs, all associated with the design and
development of new products and enhancements of existing products.
During the three and nine months ended December 31, 2021 , research and
development expenses increased $21.6 million and $56.4 million , respectively,
compared to the same periods of the prior fiscal year. The increases for both
periods were primarily driven by higher personnel-related costs due to increased
headcount and higher third-party costs to support innovations in both hardware
and software.
37
--------------------------------------------------------------------------------
Table of Contents
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 ended December 31, 2021 , general and
administrative expenses increased $0.9 million and $14.0 million , respectively,
compared to the same periods of the prior fiscal year. The increase for both
periods were primarily driven by higher personnel-related costs due to
investment in additional headcount in Information Technology ("IT") and other
functions to support business growth.
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 . 2021, amortization of intangible assets and acquisition-related costs decreased$1.3 million , and increased$0.1 million for the nine months endedDecember 31, 2021 , compared to the same periods of the prior fiscal year. The decrease for the three-month period was primarily due to the write-off of Jaybird intangible assets, partially offset by intangible assets acquired through acquisitions completed in the fourth quarter of fiscal year 2021. The increase for the nine-month period was primarily due to the intangibles acquired through acquisitions. Impairment of Intangible Assets During the three and nine months endedDecember 31, 2021 , we recognized a pre-tax impairment charge of$7.0 million , related to the intangibles acquired as part of the Jaybird acquisition due to our decision to cease future product launches under the Jaybird brand.
Restructuring Charges (Credits), Net
During the three and nine months endedDecember 31, 2021 , we recorded restructuring charges of$1.8 million , related to our decision to exit Jaybird-branded products. The total charges consisted of$1.3 million , primarily related to costs of production cancellation and$0.5 million related to cash severance and termination benefits. We expect to complete the restructuring within the next twelve months.
Other Income, Net
Other income, net for the three and nine months ended
Three Months Ended Nine Months Ended
December 31, December 31,
2021 2020 2021 2020
Investment income (loss) related to a deferred
compensation plan $ 890 $ 1,049 $ 1,985 $ 4,384
Currency exchange gain (loss), net (4,562) 7,344 (3,824) 9,070
Gain (loss) on investments (460) (2,173) (1,421) (4,692)
Other 459 263 1,319 899
Total $ (3,673) $ 6,483 $ (1,941) $ 9,661 Investment income (loss) represents earnings, gains, and losses on trading investments related to a deferred compensation plan offered by one of our subsidiaries.
Currency exchange gain (loss), 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
38
--------------------------------------------------------------------------------
Table of Contents
maximize currency exchange gains and minimize currency exchange losses. The loss
for the three months ended December 31, 2021 was primarily due to the weakening
of the Brazilian Real against the U.S. Dollar. The loss for the nine months
ended December 31, 2021 was primarily related to the strengthening of the
Chinese Renminbi against the U.S. Dollar.
Gain (loss) on investments represents the unrealized gain (loss) from the fair
value change on the available-for-sale securities and equity-method investments
during the periods presented.
Provision for Income Taxes
The provision for income taxes and effective income tax rates for the three and nine months endedDecember 31, 2021 and 2020 were as follows (Dollars in thousands): Three Months Ended Nine Months Ended December 31, December 31, 2021 2020 2021 2020 Provision for income taxes$ 49,345 $ 72,334 $ 107,789 $ 142,638 Effective income tax rate 19.0 % 15.9 % 16.7 % 16.5 % The change in the effective income tax rate for the three and nine months endedDecember 31, 2021 , compared to the same periods endedDecember 31, 2020 was primarily due to the mix of income and losses in the various tax jurisdictions in which we operate. There were discrete tax benefits of$0.8 million and$1.3 million from the recognition of excess tax benefits inthe United States and reversal of uncertain tax positions from the expiration of statutes of limitations, respectively, in the three-month period endedDecember 31, 2021 , compared with$1.3 million and$1.4 million , respectively, in the three-month period endedDecember 31, 2020 . There were discrete tax benefits of$15.2 million and$2.8 million from the recognition of excess tax benefits inthe United States and reversal of uncertain tax positions from the expiration of statutes of limitations, respectively, in the nine-month period endedDecember 31, 2021 , compared with$7.2 million and$2.9 million , respectively, in the nine-month period endedDecember 31, 2020 . As ofDecember 31, 2021 andMarch 31, 2021 , the total amount of unrecognized tax benefits due to uncertain tax positions was$178.6 million and$160.3 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, 2021 , we had cash and cash equivalents of$1,364.4 million , compared to$1,750.3 million as ofMarch 31, 2021 . As ofDecember 31, 2021 , 73% of the cash and cash equivalents were held inSwitzerland , and 15% 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 decrease in cash and cash equivalents for the nine months endedDecember 31, 2021 compared to the same period in the prior year, primarily resulted from a decrease in net cash provided by operating activities, despite positive net income, and an increase in net cash used in financing activities. The decrease in net cash provided by operating activities was mainly due to a decline in accounts payable due to the timing of purchases and related payments and the timing of an annual income tax payment for fiscal year 2021, partially offset by timing of sales within the quarter. The increase in net cash used in financing activities was driven by higher shares repurchased under our share repurchase program compared to the same period of the prior fiscal year. As ofDecember 31, 2021 , our working capital was$1,637.1 million , compared to$1,477.5 million as ofMarch 31, 2021 . The increase was primarily driven by higher accounts receivable, net, higher inventories and lower accounts payable, partially offset by lower cash and cash equivalents. Our working capital increased by$275.2 million compared to$1,361.9 million as ofDecember 31, 2020 , which was primarily driven by higher inventories and higher other current assets, partially offset by higher accrued and other current liabilities and lower accounts receivable, net. 39 -------------------------------------------------------------------------------- Table of Contents We had several uncommitted, unsecured bank lines of credit aggregating$194.4 million as ofDecember 31, 2021 . There are no financial covenants under these lines of credit with which we must comply. As ofDecember 31, 2021 , we had outstanding bank guarantees of$11.8 million under these lines of credit.
The following table summarizes our condensed consolidated statements of cash flows (Dollars in thousands):
Nine Months Ended
December 31,
2021 2020
Net cash provided by operating activities $ 198,728 $ 928,419
Net cash used in investing activities (89,006) (46,454)
Net cash used in financing activities (492,799) (219,196)
Effect of exchange rate changes on cash and cash equivalents (2,839) 10,408
Net increase / (decrease) in cash and cash equivalents $
(385,916)
The following tables present selected financial information and statistics as of and for the three months endedDecember 31, 2021 and 2020 (Dollars in thousands): As of December 31, 2021 2020 Accounts receivable, net$ 845,836 $ 894,937 Accounts payable$ 738,992 $ 811,786 Inventories$ 834,534 $ 476,802 Three Months Ended December 31, 2021 2020 Days sales in accounts receivable ("DSO") (Days) (1) 47 48 Days accounts payable outstanding ("DPO") (Days) (2) 68 80 Inventory turnover ("ITO") (x)(3) 4.7 7.7
(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, 2021 decreased by 1 days to 47 days, compared to 48 days for the same period of the prior fiscal year, primarily due to timing of sales within the quarter and a continued focus on collections efficiency. DPO for the three months endedDecember 31, 2021 decreased by 12 days, compared to 80 days for the same period of the prior fiscal year, primarily due to the timing of purchases and related payments. ITO for the three months endedDecember 31, 2021 decreased by 3, compared to 7.7 for the same period of the prior fiscal year, primarily due to lower demand than prior year and industry wide logistic delays. 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, 2021 , net cash provided by operating activities was$198.7 million . The increase in accounts receivable, net was primarily driven by timing of sales. The increase in inventories was primarily driven by higher inventory levels compared to the previously constrained supply from COVID-19 40 -------------------------------------------------------------------------------- Table of Contents impacts and industry wide logistic delays. The decrease in accounts payable was primarily driven by the timing of purchases and related payments. The decrease in accrued liabilities was primarily driven by payment of the fiscal year 2021 annual bonus and an annual payment for fiscal year 2021 income taxes.
Net cash used in investing activities was
Net cash used in financing activities was$492.8 million , primarily due to$290.6 million used for repurchases of our registered shares,$159.4 million payment of the annual cash dividend, and$58.5 million for tax withholdings related to net share settlements of restricted stock units, partially offset by$16.6 million in proceeds received from exercises of stock options and purchase rights. During the nine months endedDecember 31, 2021 , there was a$2.8 million loss from currency exchange rate effect on cash and cash equivalents, compared to a gain of$10.4 million during the same period of the prior fiscal year. The loss from the effect of currency rate changes during the nine months endedDecember 31, 2021 was primarily due to the strengthening of the Chinese Renminbi against theU.S. Dollar by 3%. The gain from the effect of currency rate changes during the nine months endedDecember 31, 2020 was primarily due to the strengthening of the Australian Dollar, Chinese Renminbi, and Swiss Franc against theU.S. Dollar by 24%, 11%, and 8%, respectively, during the period. 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 2022, we paid a cash dividend ofCHF 147.0 million (U.S. Dollar amount of$159.4 million ) out of fiscal year 2021 retained earnings. In fiscal year 2021, we paid a cash dividend ofCHF 134.0 million (U.S. Dollar amount of$146.7 million ) out of fiscal year 2020 retained earnings. InMay 2020 , our Board of Directors approved a new share repurchase program, which authorized us to invest up to$250.0 million to purchase our own shares, following the expiration date of the 2017 share repurchase program. InApril 2021 , our Board of Directors approved an increase of$750.0 million of the 2020 share repurchase program, to an aggregate amount of$1.0 billion . The Swiss Takeover Board approved this increase and it became effective onMay 21, 2021 . As ofDecember 31, 2021 ,$545.0 million is still available for repurchase under the 2020 repurchase program. Although we enter into trading plans for systematic repurchases (e.g., 10b5-1 trading plans) from time to time, our share repurchase 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. 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. 41 -------------------------------------------------------------------------------- Table of Contents Operating Leases Obligations 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. During the nine months endedDecember 31, 2021 , our operating lease obligations increased$6.6 million , which primarily was related to renewals of existing office spaces. There have been no other material changes to our contractual obligations as previously disclosed in our Annual Report on Form 10-K for the year endedMarch 31, 2021 . The remaining terms of our non-cancelable operating leases expire in various years through 2031.
Purchase Commitments
As ofDecember 31, 2021 , we had non-cancelable purchase commitments of$822.1 million for inventory purchases made in the normal course of business from original design manufacturers, contract manufacturers and other suppliers, the majority of which are expected to be fulfilled within the next 12 months. 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 ofDecember 31, 2021 , the liability for these purchase commitments was$40.5 million and is recorded in accrued and other current liabilities. We have firm purchase commitments of$27.0 million for capital expenditures primarily related to commitments for tooling and equipment 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
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, 2021 , 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. For more information about Legal Proceedings, see Part II Item 1 Legal Proceedings of this quarterly report on Form 10-Q for the period endedDecember 31, 2021 . 42
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
