LOGITECH INTERNATIONAL S.A. - Annual Report: 2010 (Form 10-K)

FORM 10-K

x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended March 31, 2010
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the Transition Period from         to

 

Canton of Vaud, Switzerland	None
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)

Logitech International S.A.
Apples, Switzerland
c/o Logitech Inc.
6505 Kaiser Drive
Fremont, California 94555
(Address of principal executive offices and zip code)
(510) 795-8500
(Registrant’s telephone number, including area code)

 

Title of each class	Name of each exchange on which registered
Registered Shares par value CHF 0.25 per share	The NASDAQ Global Select Market
	SIX Swiss Exchange

 

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

	Large accelerated filer x	Accelerated filer o
	Non-accelerated filer o	Smaller reporting company o

     (Do not check if a smaller reporting company)
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
     The aggregate market value of the voting shares held by non-affiliates of the registrant, based upon the closing sale price of the shares on September 25, 2009, the last business day of the registrant’s second fiscal quarter on the NASDAQ Global Select Market, was approximately $2,430,631,788. For purposes of this disclosure, voting shares held by persons known to the Registrant to beneficially own more than 5% of the Registrant’s shares and shares held by officers and directors of the Registrant have been excluded because such persons may be deemed to be affiliates. This determination is not necessarily a conclusive determination for other purposes.
     As of May 3, 2010, there were 175,458,482 shares of the Registrant’s share capital outstanding.

     Portions of the registrant’s Proxy Statement for the 2010 Annual Meeting of Shareholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended March 31, 2010.

 

			Page
Part I
Item 1.		Business	4
Item 1A.		Risk Factors	22
Item 1B.		Unresolved Staff Comments	30
Item 2.		Properties	31
Item 3.		Legal Proceedings	32
Item 4.		(Removed and Reserved)	32
Part II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
		of Equity Securities	33
Item 6.		Selected Financial Data	37
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk	61
Item 8.		Financial Statements and Supplementary Data	63
Item 9.		Changes in and Disagreements With Accountants on Accounting and Financial
		Disclosure	63
Item 9A.		Controls and Procedures	63
Item 9B.		Other Information	64
Part III
Item 10.		Directors, Executive Officers and Corporate Governance	65
Item 11.		Executive Compensation	65
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
		Matters	65
Item 13.		Certain Relationships and Related Transactions, and Director Independence	66
Item 14.		Principal Accountant Fees and Services	66
Part IV
Item 15.		Exhibits and Financial Statement Schedules	66
Signatures			69
Financial Statements and Notes to Consolidated Financial Statements			71
Exhibits

     In this document, unless otherwise indicated, references to the “Company” or “Logitech” are to Logitech International S.A., its consolidated subsidiaries and predecessor entities. Unless otherwise specified, all references to U.S. dollar, dollar or $ are to the United States dollar, the legal currency of the United States of America. All references to CHF are to the Swiss franc, the legal currency of Switzerland.

 

     Logitech, the Logitech logo, and the Logitech products referred to herein are either the trademarks or the registered trademarks of Logitech. All other trademarks are the property of their respective owners.

 

 

 

     This Annual Report on Form 10-K contains forward-looking statements based on beliefs of our management as of the filing date of this Form 10-K. These forward-looking statements include statements related to:

     Forward-looking statements also include, among others, those statements including the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “project,” “predict,” “should,” “will” and similar language. These statements reflect our views and assumptions as of the date of this Annual Report on Form 10-K. All forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those projected in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed under Item 1A “Risk Factors,” as well as elsewhere in this Annual Report on Form 10-K and in our other filings with the U.S. Securities and Exchange Commission. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. 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.

 

 

 

 

 

     Logitech is a world leader in personal peripherals for computers and other digital platforms. We develop and market innovative products in PC navigation, Internet communications, digital music, home-entertainment control, gaming and wireless devices. With our acquisition of LifeSize Communications, Inc. in December 2009, we entered the market for enterprise video conferencing products and services. Our products combine essential core technologies, continuing innovation, and award-winning industrial design.

 

     For the PC, our products include mice, trackballs, keyboards, interactive gaming controllers, multimedia speakers, headsets, webcams, 3D control devices and lapdesks. Our Internet communications products include webcams, headsets, video communications services, and digital video security systems for a home or small business. Our LifeSize division offers scalable high-definition (“HD”) video communication products, support and services. Our digital music products include speakers, earphones, and custom in-ear monitors. For home entertainment systems, we offer the Harmony line of advanced remote controls and the Squeezebox and Transporter wireless music solutions for the home. For gaming consoles, we offer a range of gaming controllers, including racing wheels, wireless guitar and drum controllers, and microphones, as well as other accessories.

 

     We sell our peripheral products to a network of retail distributors and resellers and to original equipment manufacturers, or OEMs. We sell our LifeSize products and services to distributors, value-added resellers, OEMs and direct enterprise customers. The large majority of our revenues are derived from sales of our personal peripheral products for use by consumers.

 

     For the fiscal year ended March 31, 2010, we generated net sales of $2.0 billion, operating income of $78.4 million, net income of $65.0 million, employed approximately 10,000 employees and conducted business in approximately 100 countries.

 

     Logitech was founded in Switzerland in 1981, and Logitech International S.A. has been the parent holding company of Logitech since 1988. Logitech International S.A. is a Swiss holding company with its registered office in Apples, Switzerland, which conducts its business through subsidiaries in the Americas, Europe, Middle East, Africa and Asia Pacific. Shares of Logitech International S.A. are listed on both the Nasdaq Global Select Market, under the trading symbol LOGI, and the SIX Swiss Exchange, under the trading symbol LOGN. References in this Form 10-K to the “Company,” “Logitech,” “we,” “our,” and “us” refer to Logitech International S.A. and its consolidated subsidiaries.

 

     Logitech operates in two industry segments, personal peripherals and video conferencing. Our personal peripherals segment encompasses the design, manufacturing and marketing of personal peripherals for personal computers and other digital platforms. Our research and product management teams are organized along product lines, and are responsible for product strategy, industrial design and development, and technological innovation. Our global marketing and sales organization helps define product opportunities and bring our products to market, and is responsible for building the Logitech brand and consumer awareness of our products. This organization is comprised of retail and OEM sales and marketing groups. Our retail sales and marketing activities are organized into three geographic regions: Americas (including North and South America), Europe-Middle East-Africa (“EMEA”), and Asia Pacific. Our OEM sales team is a worldwide organization with representatives in each of our three regions. Our OEM customers include the majority of the world’s largest PC manufacturers. Our video conferencing segment encompasses the design, manufacturing and marketing of LifeSize video conferencing products and services for the enterprise and small-to-medium business markets. The LifeSize segment maintains a separate marketing and sales organization. The LifeSize product development and product management organizations are separate, but coordinated with our personal peripherals business, particularly our webcam and video communications groups. Based on financial measurements for the fiscal year ended March 31, 2010 as evaluated by Logitech’s Chief Executive Officer, the LifeSize operating segment does not meet the quantitative threshold for separate disclosure of financial information required by generally accepted accounting principles in the United States.

 

 

     A summary of our net sales and long-lived assets by geographic region can be found in Note 18 to the Consolidated Financial Statements in Item 15, which is incorporated herein by reference. A discussion of factors potentially affecting our operations is set forth in Item 1A Risk Factors, which is incorporated herein by reference.

 

     Since 1994, we have had our own manufacturing operations in Suzhou, China, which currently handle approximately half of our total production of peripheral products. We outsource the remaining production to contract manufacturers and original design manufacturers located in Asia. Both our in-house and outsourced manufacturing is managed by our worldwide operations group. The worldwide operations group also supports the business units and marketing and sales organizations through management of distribution centers and of the product supply chain, and the provision of technical support, customer relations and other services. Our LifeSize video communications products are manufactured in Malaysia under contract with a third-party manufacturer.

 

 

     Affordable prices and wider availability of business, consumer, education, and communication applications have created a very large installed base of desktop and notebook personal computers. We believe that market penetration of PCs, Mac computers and other information access devices, already high in developed countries, will eventually increase worldwide.

 

     In addition, continuing growth in processing power and communications bandwidth, the increased accessibility of digital content, and the pervasive access and use of the Internet, create opportunities for new applications, new users and dramatically richer interactions between users and digital information. These developments create new demands by users who want to take full advantage of the increased processing power, new applications and new technologies in an intuitive, productive, comfortable and convenient manner.

 

     Today’s desktop and notebook PCs and Mac computers have evolved into affordable multimedia appliances or “digital hubs” capable of creating and manipulating vast amounts of graphics, sound and video. Logitech believes the expanded capabilities of PCs and Mac computers and the large installed base present a significant opportunity for companies that provide innovative personal peripheral products for the computer, since basic input devices alone do not fully enable many of the newest applications, or are not as convenient or comfortable as the peripheral upgrades and add-ons sold separately from the basic PC or Mac computer. We believe the potential demand for our products grows as consumers demand more function-rich personal peripheral tools, and as the PC or Mac computer play an increasing role in the new digital lifestyle.

 

     In addition, we believe that trends established in the consumer technology market – such as brand identity, affordability, ease of installation and use as well as visual appeal – have become important aspects of the purchase decision when buying a desktop or notebook PC or Mac computer and personal peripherals.

 

     We also believe that similar industry dynamics and personal peripheral device opportunities exist for non-PC platforms that are connected to the Internet, such as home-entertainment systems, smartphones, tablets and video conferencing platforms. As these additional platforms deliver new functionality, increased processing power and growing communications capabilities, we expect demand to increase for add-on, complementary devices connected to these platforms. The product expertise Logitech has developed around the PC extends to these other platforms as well and provides further opportunity for growth and leverage.

 

 

     In the video conferencing industry, we believe there is potential for growth in the sales of video communications products and services both in the enterprise markets and among consumers. The technological and economic trends creating this growth include the increased availability of high-bandwidth internet connections in enterprises and homes, improvements in video processing speeds, wide geographic distribution of employees, customers and families, and a desire to lower travel costs. These trends also generate increased interest in the video conferencing market by large, well-financed competitors, such as Cisco Systems, Inc. and Hewlett-Packard Company and, as a result, we expect competition in the industry to further intensify.

 

 

     The impact of the global macroeconomic recession on buying behavior in consumer electronics has been significant. In the current environment, we believe that consumers have become more discerning and more value-oriented and are increasingly moving online both to research and purchase products. Our strategy is to continue to stay close to consumers and adapt rapidly to their changing needs, which is exemplified by our greater emphasis on integrating consumer insights into our product and marketing strategies. We believe that a deeper understanding of the consumer is one of the major drivers that has enabled Logitech to emerge stronger from the downturn.

 

     The mission of our customer experience organization is to focus on understanding and improving the consumer’s overall experience with Logitech products. This group’s goal is to ensure optimal levels of experience in all Logitech products and at each consumer touch point. We use metrics and consumer feedback mechanisms to drive meaningful and measurable improvements in our products. We believe that these improvements increase consumer loyalty over time. In addition, by focusing on maximizing the number of consumers who actively recommend Logitech products, we are fueling brand preference within and across our many product categories. This is especially important because we believe today’s consumer exhibits increasing skepticism toward manufacturers, yet is more trusting of personal recommendations.

 

 

     Logitech’s objective is to strengthen our leadership in the market for personal peripherals, linking people to the digital world wherever and whenever they need to access digital information for work or play. Our current business is focused on the installed and still-growing base of desktop, notebook and netbook PCs and Mac computers by offering innovative personal peripherals to address needs for comfort and productivity as well as entertainment and communication. Historically, the PC has been the main interface to the digital world and the Internet. As access to digital information expands beyond the PC platform, we are also extending our vision to the living room, meeting room and other platforms as access points to the Internet and the digital world. We believe that the market for PC personal peripherals will continue to present significant opportunities. However, we are increasingly focusing our efforts on other platforms and devices that will allow consumers to easily access information, communicate conveniently, and enjoy multiple media.

 

     In addition, as part of our corporate strategy, we plan to increase investments in and realign resources to focus on certain market adjacencies, geographic markets or new categories, including video communications and the China market. We also plan to increase our investment in applications and peripherals for open platforms, which do not require direct collaboration and agreement with the platform owner.

 

     We continually evaluate our product offerings and our strategic direction in light of current global economic conditions, changing consumer trends, and the evolving nature of the interface between the consumer and the digital world.

 

 

     We have placed an increasing emphasis on strengthening the competitiveness of our entry level products. We have always participated at the entry level, but given the increased price sensitivity among a growing number of consumers and what we believe is a resulting shift by consumers to lower priced products, we are taking action to ensure that we are also the consumer’s first choice at lower price points.

 

 

     Beyond the entry level, we have heightened our focus on providing the consumer with the strongest possible overall value across all price points. Our goal, using the lessons we have learned from our customer experience initiatives, is to maximize the product’s benefits and the value the consumer associates with those benefits. Maximizing the consumer’s perceived value of our products is one of the guiding principles of our product strategy above the entry level.

 

     To capitalize on the many opportunities in the growing digital marketplace, Logitech’s product strategy focuses on personal peripherals around four platforms or environments: the PC, the living room, the meeting room, and other platforms.

 

 

     Logitech continues to provide new, more innovative, high-performance PC and Mac computer navigation devices. In addition, we are also a leading brand for video imaging products, keyboards and PC audio products.

 

 

     The dramatic proliferation of digital content available for the home provides a significant source of new opportunities for Logitech. We believe that the new digital home – with a broad and evolving selection of digital entertainment and information content available from multiple sources, and the innovation in affordably priced digital-technology equipment – will over time allow us to play a significant role in the home entertainment experience for a much wider audience.

 

     Our product portfolio includes a line of advanced remote controls for home entertainment, the Squeezebox network music system that allows people to enjoy digital music in any room of the house, the diNovo Mini keyboard and the WiLife video security solution. These products represent part of our strategy to pursue new opportunities in the digital home environment, positioning Logitech at the convergence of consumer electronics and personal computing in the digital home. Logitech also offers a broad spectrum of products to enhance gaming consoles. We continue to innovate and develop new product offerings focused around the TV screen.

 

 

     With our acquisition of LifeSize in December 2009, we entered the video conferencing market. LifeSize represents our focused investment in the growth of the video communications market, as well as an opportunity to gain greater access to enterprise customers. Together, Logitech and LifeSize plan to pursue existing and new relationships with unified communications, collaboration and voice-over Internet protocol (“VoIP”) industry partners and competitors to drive the development of an open eco-system for interoperable video communications.

 

 

     The significant growth of smartphones, tablets and other mobile devices that have the same or better processing capability as computers from a few years ago provides opportunities for Logitech to support these increasingly powerful platforms. Our current product portfolio includes portable digital music players and the Ultimate Ears line-up of earphones. We believe there will be additional demand for complementary personal peripherals for mobile and small form factor devices.

 

 

     We believe that the market penetration for Logitech products is low in developing markets such as China, India, Latin America and Eastern Europe. We are committing resources to capitalize on the growth opportunities in key emerging countries, including securing new channel partners, strengthening relationships with existing partners, expanding our sales force and investing in product and marketing initiatives. As part of our business strategy, we plan to selectively increase investments and realign resources in certain key geographic markets, such as China.

 

 

 

     To effectively respond to rapidly changing demand and to leverage economies of scale, we intend to continue our hybrid model of in-house manufacturing and third-party contract manufacturers to supply our products. Through our high-volume manufacturing operations for personal peripherals located in Suzhou, China, we believe we have been able to maintain strong quality process controls and have realized significant cost efficiencies. Our Suzhou operation provides for increased production capacity and greater flexibility in responding to product demand. Further, by outsourcing the manufacturing of certain products, we seek to reduce volatility in production volumes as well as improve time to market.

 

 

     Logitech seeks to fulfill the increasing demand for interfaces between people and the expanding digital world across multiple platforms and user environments. The interface evolves as platforms, user models and our target markets evolve. As access to digital information has expanded, we have extended our focus to the living room, the meeting room, and other platforms, in addition to the PC, as access points to the Internet and the digital world. All of these platforms require interfaces that are customized according to how the devices are used. We believe this expansion of access points provides additional attractive and sizable opportunities for Logitech because the relevance and importance of navigation, interaction, video and audio interfaces and applications remains substantially the same across platforms.

 

     To capitalize on market opportunities for personal peripherals, we recognize that continued investment in product research and development is critical to facilitating innovation of new and improved products and technologies. Beyond updating our existing line of personal peripherals and video conferencing products and services, we intend to continue to lead the development of new technologies and to create product innovations, such as those introduced in fiscal years 2010 and 2009, which include the Logitech Performance Mouse MX, the Logitech Anywhere Mouse MX with Logitech Darkfield Laser Tracking technology, the Logitech Wireless Desktop MK710 with three-year battery life, the Harmony 900 remote with RF technology which lets you control your devices through cabinets, the Webcam Pro 9000 with Zeiss optics and a true 2-megapixel HD sensor, VID software which allows video calling with Logitech webcams, the Z320, Z323, Z520 and Z523 speakers with 360-degree speaker technology, the Logitech Speaker Lapdesk N700 with built-in high definition speakers, the Ultimate Ears 18 Pro Customer In-Ear Monitors featuring a six-speaker design, and the unifying Nano-receiver, which can connect multiple wireless mice and keyboards. The Nano-receiver was first introduced to the market in the VX Nano mouse and has since proliferated across a wide range of our mice.

 

     Logitech is committed to meeting consumers’ needs for personal peripheral devices and believes that innovation, value and product quality are important elements to gaining market acceptance and strengthening our market position.

 

 

     Logitech operates in two industry segments, personal peripherals and video conferencing. Our personal peripherals segment encompasses the design, manufacturing and marketing of personal peripherals for personal computers and other digital platforms. We sell our peripheral products to a network of retail distributors and resellers and to original equipment manufacturers, or OEMs. The large majority of our revenues are derived from sales of our personal peripheral products for use by consumers. The video conferencing segment encompasses the design, manufacturing and marketing of LifeSize video conferencing products and services. We sell our LifeSize products and services to distributors, value-added resellers, OEMs and direct enterprise customers.

 

 

 

 

     Logitech offers many varieties of computer mice, sold through retail and OEM channels. Some of our major mice products include:

     Our mice products also include an expanded line of gaming mice, including the customizable G9x, which gives PC gamers the ability to modify the mouse for the best personal fit, feel and performance. In addition, we sell both corded and cordless mice designed specifically for OEM customers.

 

 

 

     Logitech offers a variety of corded and cordless keyboards and desktops (keyboard-and-mouse combinations). Some of our major keyboards and desktops include:

 

     Logitech offers a range of personal peripherals that help improve the laptop-computing experience. Our products include notebook mice, webcams, speakers, headsets, presentation tools, numeric pads, lapdesks, cooling pads and notebook risers.

 

 

 

 

     Our premium webcams feature lenses designed in an exclusive collaboration with Carl Zeiss, a premium autofocus system, and a true 2-megapixel HD sensor. These webcams also leverage High Quality Video from Skype, a video calling functionality offered through our collaboration with Skype. Our mid-range webcams feature glass lenses, auto focus technology, and RightSound and RightLight2 Technology. These webcams record video at up to 30 frames per second and support the 720p HD video format.

 

     Logitech has also developed Vid, easy-to-use software that enables clear, simple video calling. Vid can be downloaded from the Logitech website and is powered by the Logitech SightSpeed network. Logitech’s entire family of webcams works with most popular video messaging applications, including Skype, Windows Live Messenger, Yahoo! Messenger and AIM. In addition, our Logitech Video Effects software has become a favorite application for users wishing to record and post video on the Internet.

 

     Logitech also offers the SightSpeed video calling service, as a result of the acquisition of privately-held SightSpeed Inc. in November 2008.

 

 

     Logitech’s WiLife video security systems use a PC and special video cameras to provide remote security monitoring of a home or small business. The WiLife solution includes monitoring cameras that use the HomePlug Powerline technology to transfer video over standard electrical wiring. The cameras can record video on a scheduled basis, at all times, or when they detect motion. The video is stored locally on a computer and can be played back locally on the PC. For an additional fee, the solution offers Platinum Digital Video Security which is an internet-based security system with the ability to monitor video feeds remotely on a PC, Windows-based PDAs, or cell phones.

 

 

 

 

     The Ultimate Ears product line offers a range of custom stage earphones for professional musicians and sound engineers, as well as in-ear consumer or universal fit earphones for portable music enthusiasts.

 

 

     Building on our platform and product development expertise, Logitech offers a portfolio of affordable network music systems that make it easier to enjoy and control digital music anywhere in the home. In fiscal year 2010, we expanded our line of streaming music products with the introduction of the Logitech Squeezebox Radio and Logitech Squeezebox Touch. The Squeezebox Radio allows you to connect to your home network, and access internet radio, your personal music collection or subscription services. The Squeezebox Touch, with its 4.3-inch color touch screen, connects to your existing stereo system and speakers and supports sampling rates of up to 24 bits at 96 kHz, delivering rich sound with very little distortion.

 

     To expand the home network music system, Logitech also offers other players, including the Logitech Squeezebox Boom, Logitech Squeezebox Duet network music system, and the hi-end Transporter network music player.

 

 

     We offer headsets and microphones designed for applications such as PC voice communications, VoIP applications and online gaming. Some of our major products in this category include the ClearChat PC Wireless headset, the ClearChat Pro USB Headset, the USB Headset H360, the Notebook Headset H165, and the USB Desktop Microphone.

 

 

 

     Logitech offers a full range of dedicated game controllers for PC gamers including joysticks, steering wheels, gamepads, mice and keyboards, and headsets.

 

 

     Our PC gaming products include:

 

     We offer gaming products for console platforms such as PlayStation2, PlayStation3, PSP (PlayStation Portable), Xbox, Xbox 360 and Nintendo Wii. Products include the Wireless Guitar Controller, Wireless Drum Controller, Driving Force GT Wheel and Vantage USB headset for PlayStation 3, and the USB Microphone for all platforms.

 

 

     Our gaming headsets include the Logitech G35 Surround Sound Headset, a CES Innovations Winner, which offers 7.1 channel surround sound, a proprietary ear-enclosing design and three customizable G keys for one-touch command over music, voice morphing and more. The Logitech Gaming Headset G330 features an adjustable behind-the-head design and silicone-lined headband for a comfortable fit.

 

 

     Our current line of Harmony advanced remote controls uses our patented Smart State Technology. The Logitech family of remotes includes:

 

     In December 2009, Logitech acquired LifeSize Communications, Inc., which offers HD video communication solutions that provide a productive, true-to-life experience.

 

 

     LifeSize’s video conferencing solutions include HD video communications products, HD audio conference telephones, hardware infrastructure solutions, video management software, and services to support reliable video and audio communications and help users connect to any network securely and with ease.

 

 

     We believe the key competitive strengths that allow Logitech to be successful and competitive in the markets for personal peripherals include:

     We believe that we have competed successfully based on these factors. We believe that Logitech’s future lies with our ability to continue to capitalize on these strengths.

 

 

     We believe that continued investment in product research and development is critical to Logitech’s success. Our international structure provides advantages and synergies to our overall product development efforts. We have development centers in the United States, Switzerland, Ireland, Canada, Germany, India and Taiwan.

 

     Our research and development expenses for fiscal years 2010, 2009, and 2008 were $135.8 million, $128.8 million, and $124.5 million. We expect to continue to devote significant resources to research and development, including devices for the digital home, video communications, wireless technologies, power management, user interfaces and device database management to sustain our competitive position.

 

 

 

 

 

		Year ended March 31,
		2010			2009			2008
EMEA		$	882,635		$	1,001,337		$	1,117,060
Americas			729,473			785,862			888,529
Asia Pacific			354,640			421,633			364,907
Total net sales		$	1,966,748		$	2,208,832		$	2,370,496

     Revenues from sales to customers in Switzerland, our home domicile, represented a small portion of our total consolidated net sales in fiscal years 2010, 2009 and 2008. The United States and Germany each represented more than 10% of our total consolidated net sales for fiscal year 2010. In fiscal years 2009 and 2008, no single country other than the United States represented more than 10% of our total consolidated net sales.

 

     In fiscal year 2010, Ingram Micro Inc. and its affiliated entities together accounted for 13% of our net sales; in fiscal years 2009 and 2008, the same customer represented 14% of net sales. No other customer individually accounted for more than 10% of our net sales during fiscal years 2010, 2009 and 2008. The material terms of our distribution agreements with Ingram Micro and its affiliated entities are summarized as follows:

 

     Logitech builds awareness of our products and recognition of our brand through targeted advertising, public relations efforts, distinct packaging of our retail products, in-store promotions and merchandising, a Worldwide Web site and other efforts. We also acquire knowledge of our users through customer feedback and market research, including focus groups, product registrations, user questionnaires, primary and multi-client surveys and other techniques. In addition, manufacturers of PCs and other products also receive customer feedback and perform user market research, which sometimes results in requests to Logitech for specific products, features or enhancements.

 

 

 

     Logitech sells its personal peripherals through many distribution channels, including distributors, OEMs and regional and national retail chains, including online retailers. We support these retail channels with third-party distribution centers located in North America, Europe and Asia Pacific. These centers perform final configuration of products and product localization with local language manuals, packaging, software CDs and power plugs. In addition, Logitech’s distribution mix includes e-commerce in the U.S. as well as e-commerce capabilities in several European countries.

 

     In retail channels, Logitech’s direct sales force sells to distributors and large retailers. Our distributor customers typically resell products to retailers, value-added resellers, and systems integrators with whom Logitech does not have a direct relationship. These distributors in the U.S. include Ingram Micro, Tech Data Corporation and D&H Distributing. In Europe, pan-European distributors include Ingram Micro, Tech Data and Gem Distribution. We also sell to many regional distributors such as Actebis GmbH in Germany, Copaco Dc B.V. in the Netherlands, Vinzeo Informatica, SLU in Spain and Channel Distribution in the United Arab Emirates.

 

     Logitech’s products can be purchased in most major retail chains, where we typically have access to significant shelf space. These chains in the U.S. include Best Buy, Office Depot, Staples, Target and Wal-Mart, and in Europe include Metro Group (MediaMarkt and Saturn), Carrefour Group, Kesa Electricals, Fnac, Dixons Stores Group PLC and most key national consumer electronics chains. Logitech products can also be purchased at the top online e-tailers, which include Amazon.com, TigerDirect.com, Buy.com, CDW, Insight Enterprises, Inc., and others.

 

     Logitech’s OEM products are sold to large OEM customers through a direct sales force, and we support smaller OEM customers through distributors. We count the majority of the world’s largest PC manufacturers among our customers.

 

     Our Life Size division maintains a separate marketing and sales organization that sells LifeSize products and services to distributors, value-added resellers, OEMs and direct enterprise customers. The large majority of LifeSize revenues are derived from sales of products for use by large enterprises, small-to-medium businesses and public healthcare, education and government organizations.

 

 

 

     We typically have a relatively small amount of orders at the end of our fiscal periods that we have received but have not shipped, which is referred to as backlog. In our experience, the amount of backlog at any particular fiscal period-end is not a meaningful indication of our future business prospects. Our backlog often increases in anticipation of or immediately following new product introductions as retailers anticipate shortages and is often reduced once retailers and customers believe they can obtain sufficient supply. Our net sales in any fiscal year depend primarily on orders booked and shipped in that year, and our customers generally order on an as-needed basis. In addition, our backlog is occasionally subject to cancellation or rescheduling by customers. Therefore, there is a lack of meaningful correlation between backlog at the end of a fiscal year and the following fiscal year’s net sales. Similarly, there is a lack of meaningful correlation between year-over-year changes in backlog as compared with year-over-year changes in net sales. As a result, we believe that backlog information is not material to an understanding of our overall business.

 

 

     Logitech maintains customer service and technical support operations in the United States, Canada, Europe, Asia and Australia. Customer service and technical personnel provide support services to retail purchasers of products through telephone, e-mail, facsimile and the Logitech Web site. The Logitech Web site is designed to expedite overall response time while minimizing the resources required for effective customer support. In general, OEMs provide customer service and technical support for their products, including components purchased from suppliers such as Logitech. Logitech provides warranties on our branded products which range from one to five years.

 

 

 

     Logitech’s manufacturing operations consist principally of final assembly and testing. Our high-volume manufacturing facility for personal peripherals products is located in Suzhou, China. The Suzhou facilities are designed to allow production growth as well as flexibility in responding to changing demands for Logitech’s products. We continue to focus on ensuring the efficiency of the Suzhou facilities, through the implementation of quality management and employee involvement programs.

 

     New product launches, process engineering, commodities management, logistics, quality assurance, operations management and management of Logitech’s contract manufacturers occur in Hsinchu, Taiwan, Suzhou, China, Shenzhen, China and Hong Kong, China. Certain components are manufactured to Logitech’s specifications by vendors in Asia, the United States and Europe. We also use contract manufacturers to supplement internal capacity and to reduce volatility in production volumes. In addition, some products, including most keyboards, certain gaming devices and audio products, and video conferencing equipment are manufactured by third-party suppliers to Logitech’s specifications. Retail product localization with local language manuals, packaging, software CDs and power plugs is performed at distribution centers in North America, Europe and Asia Pacific.

 

 

     Our personal peripherals and video conferencing industries are intensely competitive. The personal peripherals industry is characterized by short product life cycles, continual performance enhancements, and rapid adoption of technological and product advancements by competitors in our retail markets, and price sensitivity in the OEM market. We experience aggressive price competition and other promotional activities from our primary competitors and from less-established brands, including brands owned by some retail customers known as house brands, in response to declining consumer demand in both the retail and OEM markets. We may also encounter more competition if any of our competitors in one or more categories decide to enter other categories in which we currently operate.

 

     In addition, we have been expanding the categories of products we sell, and entering new markets, such as the market for enterprise video conferencing. We remain alert to opportunities in new categories and markets. As we do so, we are confronting new competitors, many of which have more experience in the categories or markets and have greater marketing resources and brand name recognition than we have. In addition, because of the continuing convergence of the markets for computing devices and consumer electronics, we expect greater competition in the future from well-established consumer electronics companies in our developing categories, as well as future ones we might enter. Many of these companies have greater financial, technical, sales, marketing and other resources than we have.

 

     We expect continued competitive pressure in both our retail and OEM business, including in the terms and conditions that our competitors offer customers, which may be more favorable than our terms and conditions and may require us to take actions to increase our customer incentive programs, which could impact our revenues and operating margins.

 

     Pointing Devices, Keyboards and Desktops. Microsoft Corporation is our main competitor in our mice, keyboard and desktop product lines. We also experience competition and pricing pressure for corded and cordless mice and desktops from less-established brands, including house brands, which we believe have impacted our market share. The notebook peripheral category is also an area where we face aggressive pricing and promotions, as well as new competitors that have broader notebook product offerings than we do.

 

 

     Video. Our competitors for PC Web cameras include Microsoft, Creative Labs, Inc., Royal Philips Electronics NV and Hewlett-Packard. We are encountering aggressive pricing practices and promotions on a worldwide basis, which have impacted our revenues and margins. The worldwide market for PC webcams has been very competitive, and as a result, pricing practices and promotions by our competitors have become more aggressive.

 

     Audio. Competitors in audio devices vary by product line. In the PC, mobile entertainment and communication platform speaker business, competitors include Plantronics, Inc., Altec Lansing LLC, Creative Labs and Bose Corporation. In the PC headset and microphone business, our main competitors include Plantronics and Altec Lansing. We have expanded our audio product portfolio to include network-based audio systems for digital music, an emerging market with several small competitors as well as larger established consumer electronics companies, like Sony Corporation and Philips.

 

     Gaming. Competitors for our interactive entertainment products include Intec, Razer USA Ltd., Performance Designed Products, LLC (Pelican Accessories), Mad Catz Interactive, Inc. and its Saitek brand. Our controllers for PlayStation also compete against controllers offered by Sony.

 

     Remotes. Our competitors for remotes include, among others, Philips, Universal Remote Control, Inc., Universal Electronics Inc., RCA and Sony. We expect that the growth in recent years in consumer demand for personal peripheral devices for home entertainment systems will likely result in increased competition.

 

     Video Conferencing. Our primary competitors in the enterprise video conferencing market are Tandberg ASA and Polycom, Inc. These companies have longer experience and a larger customer installed base than LifeSize. Cisco and Hewlett-Packard also compete with us for sales of higher-end systems. Cisco and Hewlett-Packard have substantially greater financial, sales and marketing, and engineering resources than we do. We also expect Cisco’s recent purchase of Tandberg to further intensify competition. In addition, there are a number of smaller competitors which compete with LifeSize, along with Polycom, Cisco and Hewlett-Packard, for new accounts, OEM relationships, and installations.

 

 

     Intellectual property rights that apply to Logitech’s products and services include patents, trademarks, copyrights and trade secrets.

 

     We hold various United States patents and pending applications, together with corresponding patents and pending applications from other countries. While we believe that patent protection is important, we also believe that patents are of less competitive significance than factors such as technological expertise and innovation, ease of use, and quality design. No single patent is in itself essential to Logitech as a whole. From time to time we receive claims that we may be infringing on patents or other intellectual property rights of others. Claims are referred to counsel, and current claims are in various stages of evaluation and negotiation. If necessary or desirable, we may seek licenses for certain intellectual property rights. Refer also to the discussion in Item 1A Risk Factors – “We may be unable to protect our proprietary rights. Unauthorized use of our technology may result in the development of products that compete with our products.” and “Claims by others that we infringe their proprietary technology could harm our business.”

 

     To distinguish genuine Logitech products from competing products and counterfeit products, Logitech has used, registered, or applied to register certain trademarks and trade names in the U.S. and in foreign countries and jurisdictions. Logitech enforces its trademark and trade name rights in the U.S. and abroad. In addition, the software for Logitech’s products and services is entitled to copyright protection, and we generally require our customers to obtain a software license before providing them with that software. We also protect details about our products and services as trade secrets through employee training, license and non-disclosure agreements and technical measures.

 

 

 

     We are subject to laws and regulations in many jurisdictions regulating the materials used in our products and, increasingly, product related energy consumption, the recycling of our products and of their packaging.

 

     Europe. In Europe we are subject to the European Union’s (“EU”) Directive on the Restriction of Use of Certain Hazardous Substances in Electrical and Electronics Equipment (“RoHS”). This directive restricts the placement into the EU market of electrical and electronic equipment containing certain hazardous materials including lead, mercury, cadmium, chromium, and halogenated flame-retardants. Most Logitech products are covered by the directive and have been modified, if necessary, to be RoHS compliant. Logitech has an active program to ensure compliance with the RoHS directive and continues to source and introduce the use of RoHS compliant components and manufacturing methods in order to comply with the requirements of the directive.

 

     Logitech is also subject to the Energy-related Products Directive (“ErP”), which aims to encourage manufacturers and importers to produce products designed to minimize overall environmental impact. Under the directive, manufacturers must ensure that their energy-related products comply with applicable requirements, issue a declaration of conformity and mark the product with the ‘CE’ mark. The directive does not have binding requirements for specific products, but does define conditions and criteria for setting, through subsequent implementing measures, requirements regarding environmentally relevant product characteristics. To date the following implementing measures within the ErP directive are active and applicable to Logitech products:

     Logitech has assessed the applicability of these implementing measures on relevant product lines and has taken steps to ensure that our products meet the requirements. Adoption of the ErP directive will be aligned in all EU member states and conformity will be demonstrated by Logitech in conjunction with current CE conformity marking requirements.

 

     We are also subject to a number of End of Life (“EOL”) Stewardship directives including the EU’s Waste Electrical and Electronic Equipment Directive (“WEEE”), the EU Packaging Directive and the EU Battery Directive, which require producers of electrical goods, packaging and batteries to be financially responsible for costs of specified collection, recycling, treatment and disposal of covered products. Where applicable, we have provided for the estimated costs, which are not material, of managing and recycling historical and future waste equipment, packaging and batteries.

 

     Logitech has also assessed the applicability of the European REACH directive (Regulation (EC) No. 1907/2006 for Registration, Evaluation, Authorization, and Restrictions of Chemicals). This directive does not currently impact Logitech due to our current manufacturing structure and product content. If the directive impacts Logitech in the future, we intend to comply with the applicable requirements.

 

     China. In China we are subject to China’s law on Management Methods on the Control of Pollution Caused by Electronic Information Products (“China RoHS”). This is substantially similar to the EU RoHS directive and as such, Logitech products are already compliant. China RoHS requires additional labelling of product that will be shipped in China and Logitech has taken steps to help ensure we comply with these requirements.

 

     United States and Canada. In the U.S., we are subject to, among other laws, Appliance Efficiency Regulations adopted via the U.S. Energy Independence and Security Act of 2007. The regulations set out standards for the energy consumption performance of products within the scope of the regulations, which includes some of Logitech’s products. The standards apply to appliances sold or offered for sale throughout the U.S., and Logitech has redesigned or changed products to comply with these regulations. We are also subject to California’s Proposition 65, which requires that clear and reasonable warnings be given to consumers who are exposed to certain chemicals deemed by the state of California to be dangerous, such as lead.

 

 

     In Canada, we are subject to laws in various Canadian provinces that impose fees to cover the cost of recycling packaging.

 

     Australia and New Zealand. In Australia and New Zealand, we are subject to the Minimum Energy Performance Standards (“MEPS”) regulations. These regulations set out standards for the energy consumption performance of products within the scope of the regulations, which includes some of Logitech’s products. We have taken steps to modify products to ensure they are in compliance with MEPS.

 

     We expect further laws governing product and packaging recycling to be introduced in other jurisdictions, many or most of which could impose fees to cover recycling costs, the cumulative impact of which could be significant. If such legislation is enacted in other countries, Logitech intends to develop compliance programs as necessary. However, until that time, we are not able to estimate any possible impact.

 

     The effects on Logitech’s business of complying with other government regulations are limited to the cost of allocation of the appropriate resources for agency fees and testing as well as the time required to obtain agency approvals. There are also stewardship costs associated with the end of life collection, recycling and recovery of Logitech products, packaging and batteries where Logitech is recognized as the Steward and participates in relevant schemes. The costs and schedule requirements are industry requirements and therefore do not represent an undue burden relative to Logitech’s competitive position. As regulations change, we will seek to modify our products or processes to address those changes.

 

 

     Our retail personal peripheral product sales are typically seasonal. Sales are generally highest during our third fiscal quarter (October to December), due primarily to the increased demand for our products during the year-end holiday buying season, and to a lesser extent in the fourth fiscal quarter (January to March). Our sales in the first and second quarters can vary significantly as a result of new product introductions and other factors. Accordingly, we believe that year-over-year comparisons are more indicative of variability in our results of operations than current quarter to prior quarter comparisons. The deteriorating retail environment in the second half of fiscal year 2009 resulted in an atypical sales pattern, with sales declining in the second half of fiscal year 2009 compared with the first half.

 

 

 

     We purchase some of our products and the key components used in our products from a limited number of sources. If the supply of these products or key components, such as micro-controllers, optical sensors and LifeSize hardware products, were to be delayed or constrained, or if one or more of our single-source suppliers goes out of business, we might be unable to find a new supplier on acceptable terms, or at all, and our product shipments to our customers could be delayed. Due to the recent global economic downturn, we are subject to a higher risk of insolvency of our key suppliers, possibly resulting in product delays. In addition, lead times for materials, components and products ordered by us or by our contract manufacturers can vary significantly and depend on factors such as contract terms, demand for a component, and supplier capacity. From time to time, we have experienced component shortages and extended lead times on semiconductors, such as micro-controllers and optical sensors, and base metals used in our products. Shortages or interruptions in the supply of components or subcontracted products, or our inability to procure these components or products from alternate sources at acceptable prices in a timely manner, could delay shipment of our products or increase our production costs.

 

 

 

     As of March 31, 2010, we employed 9,944 people. None of Logitech’s U.S. employees are represented by a labor union or are subject to a collective bargaining agreement. Certain foreign countries, such as China, provide by law for employee rights, which include requirements similar to collective bargaining agreements. We believe that our employee relations are good.

 

 

 

Name			Age		Nationality		Position
Guerrino De Luca			57		Italian		Chairman of the Board
Gerald P. Quindlen			50		U.S.		President and Chief Executive Officer
Erik Bardman			43		U.S.		Sr. Vice President, Finance and Chief
							Financial Officer
Werner Heid			51		German		Sr. Vice President, Worldwide Sales and
							Marketing
David Henry			53		U.S.		Sr. Vice President, Customer Experience
							and Chief Marketing Officer
Junien Labrousse			52		French		Executive Vice President, Products
L. Joseph Sullivan			56		U.S.		Sr. Vice President, Worldwide Operations

     Guerrino De Luca has served as Chairman of the Logitech Board of Directors since January 2008. Previously, Mr. De Luca served as Logitech’s President and Chief Executive Officer from February 1998, when he joined the Company, to January 2008. He has been an executive member of the Board of Directors since June 1998. Prior to joining Logitech, Mr. De Luca served as Executive Vice President of Worldwide Marketing for Apple, Inc. from February 1997 to September 1997, and as President of Claris Corporation, a U.S. personal computing software vendor, from May 1994 to February 1997. Prior to joining Claris, Mr. De Luca held various positions with Apple in the United States and in Europe. Mr. De Luca holds a BS degree in Electronic Engineering from the University of Rome, Italy.

 

     Gerald P. Quindlen has been Logitech’s President and Chief Executive Officer since January 2008, previously serving as Logitech’s Senior Vice President, Worldwide Sales and Marketing since he joined the Company in October 2005. From August 1987 to September 2004, Mr. Quindlen worked for Eastman Kodak Company where he was most recently Vice President of Global Sales and Operations for the Consumer and Professional Imaging Division and previously held senior sales or marketing management positions in the United States, Japan and Asia Pacific. From September 2004 to September 2005, Mr. Quindlen was a private consultant. Prior to his 17 year tenure at Eastman Kodak, he worked for Mobil Oil Corporation in engineering. Mr. Quindlen holds a BS degree in chemical engineering from Villanova University in Pennsylvania, and an MBA degree in Finance from the University of Pennsylvania’s Wharton School.

 

     Erik Bardman joined Logitech as Senior Vice President, Finance and Chief Financial Officer in October 2009. Prior to joining Logitech, Mr. Bardman served as a financial consultant to Zillion TV, an interactive television service company. Previously, he had been with eBay from 2003 to 2008, most recently as the chief financial officer for eBay Marketplaces, the company’s largest portfolio of businesses. At eBay, Mr. Bardman led a large global team focused on financial strategy, acquisitions, resource allocation and performance analysis. Prior to joining eBay, Mr. Bardman was with General Electric Company for 15 years in a variety of roles, developing broad expertise in consumer financial services, international finance and mergers and acquisitions. Mr. Bardman earned a BA degree from Dickinson College in Pennsylvania, with a major in history and a minor in economics. He is a graduate of GE’s intensive Financial Management Program.

 

 

     Werner Heid joined Logitech as Senior Vice President, Worldwide Sales & Marketing, in February 2009. Prior to joining Logitech, Mr. Heid was a consultative CEO to private equity firms from 2006 to 2009. Previously, he served as the president and chief executive officer of Iomega Corporation, the provider of consumer and small-business data-storage solutions, from 2001 to 2006. Before joining Iomega, Mr. Heid was the executive vice president of global sales, marketing and service for InFocus Corporation, a leading supplier of multimedia projection systems for consumers and business, from 2000 to 2001. He joined InFocus when it acquired Proxima Corporation, where Mr. Heid served as president from 1998 to 2000. Prior to taking on his leadership role at Proxima, Mr. Heid was with Hewlett-Packard Company for 14 years, in both Europe and the United States. At Hewlett-Packard, he led the business definition and the successful global market launch of the company’s All-In-One and color copier product businesses. Mr. Heid holds a masters degree in electrical engineering from University Karlsruhe in Germany.

 

     David Henry joined Logitech as Senior Vice President, Control Devices Business Unit, in August 2001 and was named Senior Vice President, Customer Experience and Chief Marketing Officer in March 2007. From January 2000 to June 2001, Mr. Henry served as Vice President of Business Development and Product Management of Xigo Inc., a U.S. on-line intelligence software company. From November 1997 to January 2000, Mr. Henry held various positions with Iomega, a U.S. portable storage company. His last position with Iomega was Vice President and General Manager of Magnetic Products. Mr. Henry holds a BS degree in Mechanical Engineering from Union College of New York.

 

     Junien Labrousse joined Logitech as Vice President of the Video Division in 1997. He was named Senior Vice President, Video Business Unit in April 2001, Senior Vice President, Entertainment and Communications in July 2005 and Executive Vice President, Products in March 2007. Prior to joining Logitech, he was Vice President of Engineering from 1995 to 1997 at Winnov LP, a U.S. company engaged in the development and marketing of multimedia products. For more than 10 years he held several engineering and management positions at Royal Philips Electronics NV, a global electronics company, in research and in the semiconductor business division. Mr. Labrousse holds an MS degree in Electrical Engineering from the Ecole Superieure d’Ingenieurs de Marseille, France and an MBA degree from Santa Clara University in California.

 

     L. Joseph Sullivan joined Logitech in October 2005 as Vice President, Operations Strategy, and was appointed Senior Vice President, Worldwide Operations in April 2006. Prior to joining Logitech, Mr. Sullivan was Vice President of Operational Excellence and Quality for Carrier Corporation, a subsidiary of United Technologies, from 2001 to 2005. Previously, he was with ACCO Brands, Inc. in engineering and manufacturing management roles from 1998 to 2001. Mr. Sullivan holds a BS degree in Marketing Management and an MBA degree in Operations Management from Suffolk University in Massachusetts.

 

 

     Our Investor Relations Web site is located at http://ir.logitech.com. We post and maintain an archive of our earnings and other press releases, current reports, annual and quarterly reports, earnings release schedule, information regarding annual general meetings, further information on corporate governance, and other information regarding the Company on the Investor Relations Web site. The information we post includes, and in the future will include, filings we make with the U.S. Securities and Exchange Commission (“SEC”), including reports on Forms 10-K, 10-Q, 20-F, 6-K, 8-K, our proxy statement related to our annual shareholders’ meeting and any amendments to those reports or statements filed or furnished pursuant to U.S. securities laws. All such filings and information are available free of charge on the web site, and we make them available on the web site as soon as reasonably possible after we file or furnish them with the SEC. The contents of these web sites are not intended to be incorporated by reference into this report or in any other report or document we file and our references to these Web sites are intended to be inactive textual references only.

 

     In addition, Logitech publishes press releases upon occurrence of significant events within Logitech. Shareholders and members of the public may elect to receive e-mails when Logitech issues press releases upon occurrence of significant events within Logitech or other press releases by subscribing through http://ir.logitech.com/alerts.cfm.

 

 

     As a Swiss company traded on the SIX Swiss Exchange, and as a company subject to the provisions of Section 16 of the Securities Exchange Act of 1934, as amended, we file reports on transactions in Logitech securities by members of Logitech’s board of directors and executive officers. The reports that we file with the Securities and Exchange Commission on Forms 3, 4 and 5 may be accessed on our website or on the Securities and Exchange Commission’s website at http://www.sec.gov, and the reports we file that are published by the SIX Swiss Exchange may be accessed at: http://www.six-exchange-regulation.com/obligations/management_transactions_en.html.

 

     For no charge, a copy of our filings made with the SEC can be requested by contacting our Investor Relations department: Logitech Investor Relations, 6505 Kaiser Drive, Fremont, CA 94555 USA, Main 510-795-8500, email: investorrelations@logitech.com

 

     The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

 

     The strength and timing of the anticipated improvement of our business is uncertain, and economic conditions have and could continue to significantly harm our operating results.

 

     The global economic recession has had a significant negative impact on our business. We anticipate that our business and operating results will continue to improve, in part as a result of the steps we have taken in response to general economic conditions. However, the strength and precise timing of future improvement of our business is uncertain. In addition, the recession may continue to have the following negative effects on our business, operating results, and financial condition:

     If our business does not improve as we expect, or if global economic conditions deteriorate, our operating results in a given quarter could be below the expectations of financial analysts and investors, which could cause the price of our shares to decline.

 

 

     Our operating results are difficult to predict and fluctuations in results may cause volatility in the price of our shares.

 

     Our revenues and profitability are difficult to predict due to the nature of the markets in which we compete and for many other reasons, including the following:

     Because our operating results are difficult to predict, our results may be below the expectations of financial analysts and investors, which could cause the price of our shares to decline.

 

     We may encounter difficulties with our acquisition of LifeSize Communications, and may not realize the anticipated benefits of the acquisition.

 

     In December 2009, we acquired LifeSize Communications, Inc., a privately-held company providing high definition video communication solutions. This acquisition is part of the Company’s strategy to acquire, when appropriate, companies that have products, personnel and technologies that complement our strategic direction and roadmap.

 

 

     In addition, through our acquisition of LifeSize, we have entered the market for enterprise video conferencing. Although we plan to maintain the LifeSize enterprise sales organization, we have little experience with selling to enterprise accounts, or in marketing to large enterprises. We will also be exposed to additional competitors in the video conferencing market, some of which may have greater resources, including technical and engineering resources, than we do. Additionally, as customers complete video conferencing installations, they may require greater levels of service and support than we have provided in the past. Demand for these types of services and support may increase in the future. There can be no assurance that we can provide products, services and support to effectively compete for these market opportunities. Further, provision of greater levels of services and support by us may result in a delay in the timing of revenue recognition.

 

     Any of these and other factors, many of which are out of our control, could prevent us from realizing the anticipated benefits of the acquisition and could adversely affect our business, operating results or financial condition. There can be no assurance that LifeSize product enhancements will be made in a timely fashion or that pre-acquisition due diligence will have identified all possible issues that might arise with respect to LifeSize products.

 

     Acquisitions are inherently risky, and no assurance can be given that our acquisition of LifeSize or other future acquisitions will be successful and will not adversely affect our business, operating results or financial condition.

 

     If we fail to successfully innovate in our current and emerging product categories, our business and operating results could suffer.

 

     The personal peripherals industry is characterized by short product life cycles, frequent new product introductions, rapidly changing technology and evolving industry standards. As a result, we must continually innovate in our current and emerging product categories, introduce new products and technologies, and enhance existing products in order to remain competitive.

 

     If we do not execute on these factors successfully, products that we introduce or technologies or standards that we adopt may not gain widespread commercial acceptance, and our business and operating results could suffer. In addition, if we do not continue to distinguish our products, particularly our retail products, through distinctive, technologically advanced features, designs, and services, as well as continue to build and strengthen our brand recognition and our access to distribution channels, our business could be harmed.

 

     If we do not successfully innovate and market products for notebook PCs, tablets and other mobile devices, our business and results of operations may suffer.

 

     We have historically targeted peripherals for the PC platform, a market that is dynamically changing as a result of the declining popularity of desktop PCs and the increasing popularity of notebook PCs and mobile devices, such as netbooks, tablets, mobile phones and smaller form factor devices with computing or web surfing capabilities. In our OEM channel, this shift has adversely affected our sales of OEM mice, which are sold with name-brand desktop PCs. Our OEM mice sales have historically made up the bulk of our OEM sales, and our OEM sales accounted for 10% and 15% of total revenues during fiscal years 2010 and 2009. If the desktop PC market continues to experience slower growth or decline, and if we do not successfully diversify our OEM business, our OEM revenues could be adversely affected.

 

 

     In our retail channels, notebook PCs and mobile devices are sold by retailers without peripherals. We believe this creates opportunities to sell products to consumers to help make their devices more productive and comfortable. However, consumer acceptance and demand for peripherals for use with smaller form factor computing devices such as notebook PCs and mobile devices is still uncertain. The increasing popularity of notebook PCs and mobile devices may result in a decreased demand by consumers for keyboards and speakers, which could negatively affect our sales of these products. The increasing popularity of mobile devices has coincided with a steadily decreasing average sales price for computing devices, including for desktop and notebook PCs. As a result, there is a risk that the demand for those of our products that have a relatively high average sales price in relation to the price of a desktop or notebook PC will decline. If we do not successfully innovate and market products designed for notebook PCs and other mobile devices, or if general consumer demand for peripherals for use with notebook PCs and mobile devices does not increase, our business and results of operations could be significantly harmed.

 

     If we do not compete effectively, demand for our products could decline and our business and operating results could be adversely affected.

 

 

     The personal peripherals industry is characterized by short product life cycles, continual performance enhancements, and rapid adoption of technological and product advancements by competitors in our retail markets, and price sensitivity in the OEM market. We experience aggressive price competition and other promotional activities from our primary competitors and from less-established brands, including brands owned by retail customers known as house brands, in response to declining consumer demand in both the retail and OEM markets. In addition, our competitors may offer customers terms and conditions which may be more favorable than our terms and conditions and may require us to take actions to increase our customer incentive programs, which could impact our revenues and operating margins.

 

     The video conferencing industry is characterized by continual performance enhancements and increasing consolidation. There is heightened interest in the video conferencing market by large, well-financed competitors, such as Cisco Systems, Inc. and Hewlett-Packard Company, and as a result, we expect competition in the industry to further intensify.

 

     In recent years, we have expanded the categories of products we sell, and entered new markets, such as the market for enterprise video conferencing. We remain alert to opportunities in new categories and markets. As we do so, we are confronting new competitors, many of which have more experience in the categories or markets and have greater marketing resources and brand name recognition than we have. In addition, because of the continuing convergence of the markets for computing devices and consumer electronics, we expect greater competition in the future from well-established consumer electronics companies in our developing categories, as well as in future categories we might enter. Many of these companies, such as Microsoft Corporation, Cisco, Sony Corporation, Hewlett-Packard, Polycom, Inc., Tandberg ASA and others, have greater financial, technical, sales, marketing and other resources than we have.

 

     Microsoft is a leading producer of operating systems and applications with which our mice, keyboards and webcams are designed to operate. In addition, Microsoft has significantly greater financial, technical, sales, marketing and other resources than Logitech, as well as greater name recognition and a larger customer base. As a result, Microsoft may be able to improve the functionality of its own peripherals to correspond with ongoing enhancements to its operating systems and software applications before we are able to make such improvements. This ability could provide Microsoft with significant lead-time advantages. In addition, Microsoft may be able to offer pricing advantages on bundled hardware and software products that we may not be able to offer, and may be financially positioned to exert significant downward pressure on product prices and upward pressure on promotional incentives in order to gain market share.

 

 

     Pointing Devices, Keyboards and Desktops. Microsoft is our main competitor in the mice, keyboard and desktop product lines. We also experience competition and pricing pressure for corded and cordless mice and desktops from less-established brands, including house brands, which has impacted our market share in some sales geographies and which could potentially further impact our market share. The notebook peripheral category is also an area where we face aggressive pricing and promotions, as well as new competitors that have broader notebook product offerings than we do.

 

     Video. Our competitors for PC Web cameras include Microsoft, Creative Labs, Royal Philips Electronics NV and Hewlett-Packard. We are encountering aggressive pricing practices and promotions on a worldwide basis, which have impacted our revenues and margins. The worldwide market for PC webcams has been very competitive, and as a result, pricing practices and promotions by our competitors have become more aggressive.

 

     Audio. Competitors in audio devices vary by product line. In the PC, mobile entertainment and communication platform speaker business, competitors include Plantronics, Inc., Altec Lansing LLC, Creative Labs, and Bose Corporation. In the PC headset and microphone business, our main competitors include Plantronics and Altec Lansing. We have expanded our audio product portfolio to include network-based audio systems for digital music, an emerging market with several small competitors as well as larger established consumer electronics companies, like Sony and Philips.

 

     Gaming. Competitors for our interactive entertainment products include Intec, Razer USA Ltd., Performance Designed Products, LLC (Pelican Accessories), Mad Catz Interactive, Inc., and its Saitek brand. Our controllers for PlayStation also compete against controllers offered by Sony.

 

     Remotes. Our competitors for remotes include, among others, Philips, Universal Remote Control, Inc., Universal Electronics Inc., RCA and Sony. We expect that the growth in recent years in consumer demand for personal peripheral devices for home entertainment systems will likely result in increased competition.

 

     Video Conferencing. Our primary competitors in the enterprise video conferencing market are Tandberg and Polycom. These companies have longer experience and a larger customer installed base than LifeSize. Cisco and Hewlett-Packard also compete with us for sales of higher-end systems. Cisco and Hewlett-Packard have substantially greater financial, sales and marketing, and engineering resources than we do. In addition, there are a number of smaller competitors which compete with LifeSize, along with Tandberg, Polycom, Cisco and Hewlett-Packard, for new accounts, OEM relationships, and installations.

 

     We also expect Cisco’s recent purchase of Tandberg to further intensify competition. Cisco is a leading producer of networking, switching and other telecommunications infrastructure products and end-points, such as phones, that are frequently used within enterprises. The growth of our LifeSize division depends in part on our ability to increase sales to enterprises with installed bases of Cisco and Tandberg equipment, and to enterprises that may purchase their equipment in the future. We believe the ability of our LifeSize products to interoperate with Cisco and Tandberg equipment, and with the equipment of other telecommunications, video conferencing or telepresence equipment suppliers, to be a key factor in purchasing decisions by current or prospective LifeSize customers. Cisco and Tandberg may be able to improve the functionality of their own videoconferencing equipment to correspond with ongoing enhancements to Cisco’s networking, switching and other telecommunications equipment before we are able to make such improvements, or may restrict the interoperability of their products with ours. This could significantly harm the sales of our LifeSize division. As a result, the growth of our LifeSize division, and the growth of Logitech as a whole, could be significantly harmed.

 

     If we do not compete effectively, demand for our products could decline, our gross margin could decrease, we could lose market share and our revenues could decline.

 

 

     If we do not accurately forecast product demand, our business and operating results could be adversely affected.

 

     We use our forecasts of product demand to make decisions regarding investments of our resources and production levels of our products. Although we receive forecasts from our customers, many are not obligated to purchase the forecasted demand. Also, actual sales volumes for individual products in our retail distribution channel can be volatile due to changes in consumer preferences and other reasons. In addition, our retail products have short product life cycles, so a failure to accurately predict high demand for a product can result in lost sales that we may not recover in subsequent periods, or higher product costs if we meet demand by paying higher costs for materials, production and delivery. We could also frustrate our customers and lose shelf space. Our failure to predict low demand for a product can result in excess inventory, lower cash flows and lower margins if we are required to reduce product prices in order to reduce inventories.

 

     Over the past few years, we have expanded the number and types of products we sell, and the geographic markets in which we sell them, and we will endeavor to further expand our product portfolio and sales reach. The growth of our product portfolio and our sales markets has increased the difficulty of accurately forecasting product demand.

 

     We have experienced large differences between our forecasts and actual demand for our products and expect differences to arise in the future. If we do not accurately predict product demand, our business and operating results could be adversely affected.

 

     Our gross margins can vary significantly depending on multiple factors, which can result in unanticipated fluctuations in our operating results.

 

     Our gross margins can vary due to consumer demand, competition, product life cycle, new product introductions, unit volumes, commodity and supply chain costs, geographic sales mix, foreign currency exchange rates, and the complexity and functionality of new product innovations. In particular, if we are not able to introduce new products in a timely manner at the product cost we expect, or if consumer demand for our products is less than we anticipate, or if there are product pricing, marketing and other initiatives by our competitors to which we need to react that lower our margins, then our overall gross margin will be less than we project. For example, in the second half of fiscal year 2009 and the first half of fiscal year 2010, economic uncertainty caused our customers to reduce purchases of our products below what we had forecasted, and also led us to increase our customer incentives to stimulate demand, which significantly lowered our overall gross margin in those periods.

 

     In addition, our gross margins may vary significantly by product line, sales geography and customer type, as well as within product lines. When the mix of products sold shifts from higher margin product lines to lower margin product lines, to lower margin sales geographies, or to lower margin products within product lines, our overall gross margins and our profitability may be adversely affected.

 

     The impact of these factors on gross margins can create unanticipated fluctuations in our operating results, which may cause volatility in the price of our shares.

 

     Our business depends in part on access to third-party platforms or technologies, and if the access is withdrawn, denied, or is not available on terms acceptable to us, or if the platforms or technologies change without notice to us, our business and operating results could be adversely affected.

 

     Our product portfolio includes products designed for use with third-party platforms, such as Apple iPod, Microsoft Xbox, Sony PlayStation, and Nintendo Wii. Our business in these categories relies on our access to the platforms of third parties, which can be withdrawn, denied or not be available on terms acceptable to us.

 

 

     Our access to third-party platforms may require paying a royalty, which lowers our product margins, or may otherwise be on terms that are not acceptable to us. In addition, the third-party platforms or technologies used to interact with our product portfolio can change without prior notice to us, which can result in our having excess inventory or lower margins.

 

     If we are unable to access third-party platforms or technologies, or if our access is withdrawn, denied, or is not available on terms acceptable to us, or if the platforms or technologies change without notice to us, our business and operating results could be adversely affected.

 

     Our principal manufacturing operations and third-party contract manufacturers are located in China, which exposes us to risks associated with doing business in that country.

 

     Our principal manufacturing operations and third-party contract manufacturers are located in China. Our manufacturing operations in Suzhou, China could be severely impacted by changes in the interpretation and enforcement of legal standards, by strains on China’s transportation, communications, trade, public health and other infrastructures, by conflicts, embargoes, disagreements or increased tensions between China and Taiwan, by labor unrest, and by other trade customs and practices that are dissimilar to those in the United States and Europe. Interpretation and enforcement of China’s laws and regulations continue to evolve and we expect differences in interpretation and enforcement to continue in the foreseeable future.

 

     Further, we may be exposed to fluctuations in the value of the Chinese renminbi (“CNY”), the local currency of China. Significant future appreciation of the CNY could increase our component and other raw material costs, as well as our labor costs, and could adversely affect our financial results.

 

     We purchase key components and products from a limited number of sources, and our business and operating results could be harmed if supply were delayed or constrained or if there were shortages of required components.

 

     We purchase certain products and key components from a limited number of sources. If the supply of these products or key components, such as micro-controllers, optical sensors and LifeSize hardware products, were to be delayed or constrained, or if one or more of our single-source suppliers goes out of business as a result of adverse global economic conditions, we might be unable to find a new supplier on acceptable terms, or at all, and our product shipments to our customers could be delayed, which could harm our business, financial condition and operating results.

 

     Lead times for materials, components and products ordered by us or by our contract manufacturers can vary significantly and depend on factors such as contract terms, demand for a component, and supplier capacity. From time to time, we have experienced component shortages and extended lead times on semiconductors, such as micro-controllers and optical sensors, and base metals used in our products. Shortages or interruptions in the supply of components or subcontracted products, or our inability to procure these components or products from alternate sources at acceptable prices in a timely manner, could delay shipment of our products or increase our production costs, which could adversely affect our business and operating results.

 

     If we do not successfully coordinate the worldwide manufacturing and distribution of our products, we could lose sales.

 

     Our business requires us to coordinate the manufacture and distribution of our products over much of the world. We rely on third parties to manufacture many of our products, manage centralized distribution centers, and transport our products. If we do not successfully coordinate the timely manufacturing and distribution of our products, we may have insufficient supply of products to meet customer demand and we could lose sales, or we may experience a build-up in inventory.

 

 

     A significant portion of our quarterly retail orders and product deliveries generally occur in the last weeks of the fiscal quarter. This places pressure on our supply chain and could adversely impact our revenues and profitability if we are unable to successfully fulfill customer orders in the quarter.

 

     We conduct operations in a number of countries and the effect of business, legal and political risks associated with international operations could significantly harm us.

 

     We conduct operations in a number of countries. There are risks inherent in doing business in international markets, including:

     Any of these risks could significantly harm our business, financial condition and operating results.

 

     We may be unable to protect our proprietary rights. Unauthorized use of our technology may result in the development of products that compete with our products.

 

     Our future success depends in part on our proprietary technology, technical know-how and other intellectual property. We rely on a combination of patent, trade secret, copyright, trademark and other intellectual property laws, and confidentiality procedures and contractual provisions such as nondisclosure terms and licenses, to protect our intellectual property.

 

     We hold various United States patents and pending applications, together with corresponding patents and pending applications from other countries. It is possible that any patent owned by us will be invalidated, deemed unenforceable, circumvented or challenged, that the patent rights granted will not provide competitive advantages to us, or that any of our pending or future patent applications will not be granted. In addition, other intellectual property laws or our confidentiality procedures and contractual provisions may not adequately protect our intellectual property. Also, others may independently develop similar technology, duplicate our products, or design around our patents or other intellectual property rights. Unauthorized parties have copied and may in the future attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Any of these events could significantly harm our business, financial condition and operating results.

 

 

 

     We have been expanding the categories of products we sell, and entering new markets, such as the market for enterprise video conferencing. We expect to continue to enter new categories and markets. As we do so, we face an increased risk that claims that we infringe the patent or other intellectual property rights of others, regardless of the merit of the claims, may increase in number and significance. Infringement claims against us may also increase as the functionality of video, voice, data and conferencing products begin to overlap. This risk is heightened by the increase in lawsuits brought by holders of patents that do not have an operating business. Intellectual property lawsuits are subject to inherent uncertainties due to the complexity of the technical issues involved, and we cannot be certain that we will be successful in defending ourselves against intellectual property claims. A successful claimant could secure a judgment that requires us to pay substantial damages or prevents us from distributing certain products or performing certain services. We might also be required to seek a license for the use of such intellectual property, which may not be available on commercially acceptable terms or at all. Alternatively, we may be required to develop non-infringing technology, which could require significant effort and expense and may ultimately not be successful. Any claims or proceedings against us, whether meritorious or not, could be time consuming, result in costly litigation, result in the diversion of significant operational resources, or require us to enter into royalty or licensing agreements, any of which could materially and adversely affect our business and results of operations.

 

 

     The market for our products is characterized by rapidly changing technology and evolving industry standards. To remain competitive, we must continually introduce new products and technologies. The products that we sell could contain defects in design or manufacture. Defects could also occur in the products or components that are supplied to us. There can be no assurance we will be able to detect and remedy all defects in the hardware and software we sell. Failure to do so could result in product recalls, product redesign efforts, lost revenue, loss of reputation, and significant warranty and other expenses to remedy.

 

 

     We operate in multiple jurisdictions and our profits are taxed pursuant to the tax laws of these jurisdictions. Our effective income tax rate may be affected by changes in or interpretations of tax laws in any given jurisdiction, utilization of net operating loss and tax credit carryforwards, changes in geographical allocation of income and expense, and changes in management’s assessment of matters such as the realizability of deferred tax assets. In the past, we have experienced fluctuations in our effective income tax rate. Our effective income tax rate in a given fiscal year reflects a variety of factors that may not be present in the succeeding fiscal year or years. There is no assurance that our effective income tax rate will not change in future periods. We are currently subject to ongoing audits in various jurisdictions and a material assessment by a governing tax authority could adversely affect our profitability. If our effective income tax rate increases in future periods, our net income could be adversely affected.

 

 

 

 

 

     The table below represents our principal locations, their approximate square footage and their purposes as of March 31, 2010:

 

					Approximate
					Square
Location			Purpose		Footage				Ownership
Americas:
Fremont, California			Americas headquarters, research and			194,000			Leased
			development, product marketing,
			sales management, technical
			support, administration
Austin, Texas			LifeSize Division			54,000			Leased
Vancouver, Washington			Audio Business Unit			38,000			Leased
Mississauga, Canada			Remote Controls Group			20,000			Leased
Irvine, California			Ultimate Ears Group			13,500			Leased
Draper, Utah			Video Security Group			7,000			Leased
Olive Branch, Mississippi			Distribution center			397,000			Contracted(1)
Mexico City, Mexico			Distribution center			17,000			Contracted(1)
EMEA:
Romanel-sur-Morges, Switzerland			Research and development, product			33,300			Owned
			marketing and technical support
Morges, Switzerland			EMEA headquarters, sales and			62,300			Leased
			marketing management, technical
			support, administration
Nijmegen, Netherlands			Finance, administration, distribution			29,000			Leased
			center support
Cork, Ireland			Finance, administration, research and			18,000			Leased
			development
Seefeld, Germany			Research and development, manufacturing			15,000			Leased
Oostrum, Netherlands			Distribution center			183,000			Contracted(1)
Asia Pacific:
Hsinchu, Taiwan			Asia Pacific headquarters, mechanical			112,000			Leased
			engineering, new product launches,
			process engineering, commodities
			management, logistics, quality
			assurance, and administration
Suzhou, China			High-volume manufacturing			854,000			Owned
Suzhou, China			Vertical integration, molding operations			277,000			Leased
Tokyo, Japan			Sales, logistics, finance, administration			10,100			Leased
			and human resources
Bangalore, India			LifeSize Business Division research and			9,000			Leased
			development
Beijing, China			Distribution center			57,000			Contracted(1)
Tokyo, Japan			Distribution center			39,000			Contracted(1)
Hong Kong, China			Distribution center			65,000			Contracted(1)
Singapore, Singapore			Distribution center			50,000			Contracted(1)
Dayuan Township, Taiwan			Distribution center			28,000			Contracted(1)

(1)

Contracted through a third-party warehouse management company

 

     Logitech also contracts with various distribution services throughout the world for additional warehouses in which we store inventory.

 

     We also have leased sales offices in more than 60 locations in 38 countries, with various expiration dates from 2010 to 2028.

 

     We believe that Logitech’s manufacturing and distribution facilities are adequate for our ongoing needs and we continue to evaluate the need for facilities to meet current and anticipated future requirements.

 

 

     From time to time, we become involved in claims and legal proceedings which arise in the ordinary course of our business. We are currently subject to several such claims and a small number of legal proceedings. We presently do not believe that the resolution of these claims and legal proceedings will have a material impact on our results of operations, cash flows or financial condition.

 

 

 

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

     Logitech’s shares are listed and traded on both the SIX Swiss Exchange, where the share price is denominated in Swiss francs, and on the Nasdaq Global Select Market, where the share price is denominated in U.S. dollars. Prior to October 2006, Logitech’s American Depositary Shares (“ADSs”) traded on the Nasdaq Global Select Market, with each ADS representing one registered share. In October 2006, we exchanged Logitech shares for our ADSs on a one-for-one basis, so that the same Logitech shares trade on the Nasdaq Global Select Market as on the SIX Swiss Exchange.

 

     The trading symbol for Logitech shares is LOGI on Nasdaq and LOGN on the SIX Swiss Exchange. As of May 3, 2010, there were 191,606,620 shares issued (including 16,148,138 shares held as treasury stock) held by 20,527 holders of record, and the closing price of our shares was CHF 17.83 ($16.45 based on exchange rates on such date) per share on the SIX Swiss Exchange and $16.44 per share as reported by the Nasdaq Stock Market.

 

 

     The following table sets forth certain historical share price information for the Company’s shares traded on the SIX Swiss Exchange, as reported by the SIX Swiss Exchange. The U.S. dollar equivalent is based on the noon buying rate on the trading day of the month in which the high or low closing sales price occurred. The noon buying rate is the rate in New York City for cable transfers in selected currencies as certified for customs purposes by the Federal Reserve Bank of New York.

 

		Price per share on the
		SIX Swiss Exchange
		High		Low		High		Low
		CHF		CHF		$		$
Quarterly Highs and Lows:
Fiscal year 2009:
First quarter		34.22		24.18		32.65		24.13
Second quarter		30.46		24.56		27.92		22.35
Third quarter		25.14		14.29		22.43		11.68
Fourth quarter		18.01		9.00		16.26		7.74
Fiscal year 2010:
First quarter		16.80		11.94		14.85		10.41
Second quarter		20.10		14.30		19.21		13.17
Third quarter		19.21		16.44		18.95		15.87
Fourth quarter		19.23		16.40		18.40		15.10

 

 

     The following table sets forth certain historical share price information for the Company’s shares traded on the Nasdaq Global Select Market.

 

		Price per share on Nasdaq
		High				Low
		$				$
Quarterly Highs and Lows:
Fiscal year 2009:
First quarter			33.34				24.13
Second quarter			27.91				21.98
Third quarter			22.59				11.17
Fourth quarter			16.11				7.64
Fiscal year 2010:
First quarter			15.19				10.64
Second quarter			19.15				13.32
Third quarter			18.95				15.85
Fourth quarter			18.49				15.40

 

     Under Swiss law, a corporation may only pay dividends upon a vote of its shareholders. This vote typically follows the recommendation of the corporation’s board of directors. Logitech has not paid dividends since 1996 in order to retain earnings for use in the operation and expansion of the business and, in more recent years, to repurchase its shares.

 

     Dividends paid and similar cash or in-kind distributions made by Logitech to a holder of Logitech shares (including dividends or liquidation proceeds and stock dividends) are subject to a Swiss federal anticipatory tax at a rate of 35%. The anticipatory tax must be withheld by Logitech from the gross distribution, and paid to the Swiss Federal Tax Administration.

 

     A Swiss resident holder and beneficial owner of Logitech shares may qualify for a full refund of the Swiss anticipatory tax withheld from such dividends. A holder and beneficial owner of Logitech shares who is a nonresident of Switzerland, but a resident of a country that maintains a double tax treaty with Switzerland, may qualify for a full or partial refund of the Swiss anticipatory tax withheld from such dividends by virtue of the provisions of the applicable treaty between Switzerland and the country of residence of the holder and beneficial owner of the Logitech shares.

 

     In accordance with the tax convention between the United States and the Swiss Confederation (“Treaty”), a mechanism is provided whereby a United States resident (as determined under the Treaty), and United States corporations, other than U.S. corporations having a “permanent establishment” or a fixed base, as defined in the Treaty, in Switzerland, generally can obtain a refund of the Swiss anticipatory tax withheld from dividends in respect of Logitech shares, to the extent that 15% of the gross dividend is withheld as final withholding tax (i.e. 20% of the gross dividend may generally be refunded). In specific cases, U.S. companies not having a “permanent establishment” or a fixed base in Switzerland owning at least 10% of Logitech registered shares may receive a refund of the Swiss anticipatory tax withheld from dividends to the extent it exceeds 5% of the gross dividend (i.e. 30% of the gross dividend may be refunded). To get the benefit of a refund, holders must beneficially own Logitech shares at the time such dividend becomes due.

 

 

 

     The following table sets forth certain information related to purchases made by Logitech of its equity securities (in thousands, except per share amounts):

 

     In fiscal year 2010, we repurchased shares pursuant to our buyback program announced in June 2007 authorizing the purchase of $250 million of our shares. The June 2007 program was completed in March 2010. All share repurchases by the Company during fiscal year 2010 were made as part of publicly announced programs. In September 2008, our Board of Directors approved a new share buyback program, which authorizes the Company to invest up to $250 million to purchase its own shares. As of May 27, 2010, we have not started repurchases under the September 2008 program.

 

															Approximate
															Dollar Value of
			Total												Shares That May
			Number				Average Price Paid								Yet Be Purchased
			of Shares				Per Share								Under the
Period			Purchased				in USD				in CHF				Program
April 2009				—				—				—				$	125,746
May 2009				—				—				—					125,746
June 2009				—				—				—					125,746
July 2009				—				—				—					125,746
August 2009				3,325				16.82				17.99					69,820
September 2009				2,513				18.04				19.09					24,479
October 2009				—				—				—					24,479
November 2009				—				—				—					24,479
December 2009				—				—				—					24,479
January 2010				—				—				—					24,479
February 2010				230				15.58				16.21					20,896
March 2010				1,357				15.81				17.14					—
Total				7,425

 

 

     The information contained in the Performance Graph shall not be deemed to be “soliciting material” or “ filed” with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act.

 

     The following graph compares the cumulative total stockholder return on our shares, the Nasdaq Composite Index, and the S&P 500 Information Technology Index. The graph assumes that $100 was invested in our shares, the Nasdaq Composite Index and the S&P 500 Information Technology Index on March 31, 2005, and calculates the annual return through March 31, 2010. The stock price performance on the following graph is not necessarily indicative of future stock price performance.

 

 

		March 31,
		2005			2006			2007			2008			2009			2010
Logitech		$	100		$	131		$	183		$	167		$	68		$	107
Nasdaq Composite Index		$	100		$	117		$	121		$	114		$	76		$	120
S&P 500 Index		$	100		$	110		$	120		$	112		$	68		$	99

 

 

     The financial data below should be read in conjunction with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These historical results are not necessarily indicative of the results to be expected in the future.

 

		Year ended March 31,
		2010			2009			2008			2007			2006(1)
		(In thousands, except per share amounts)
Consolidated statements of operations and        cash flow data:
Net sales		$	1,966,748		$	2,208,832		$	2,370,496		$	2,066,569		$	1,796,715
Gross profit			626,896			691,226			849,118			709,525			574,110
Operating expenses:
Marketing and selling			304,788			319,167			324,451			272,264			221,504
Research and development			135,813			128,755			124,544			108,256			87,953
General and administrative			106,147			113,103			113,443			98,143			65,742
Restructuring charges			1,784			20,547			—			—			—
Total operating expenses			548,532			581,572			562,438			478,663			375,199
Operating income			78,364			109,654			286,680			230,862			198,911
Net income		$	64,957		$	107,032		$	231,026		$	229,848		$	181,105
Net income per share:
Basic		$	0.37		$	0.60		$	1.27		$	1.26		$	1.00
Diluted		$	0.36		$	0.59		$	1.23		$	1.20		$	0.92
Shares used to compute net income per share:
Basic			177,279			178,811			181,362			182,635			181,361
Diluted			179,340			182,911			187,942			190,991			198,769
Net cash provided by operating activities		$	365,259		$	200,587		$	393,079		$	303,825		$	152,217

		March 31,
		2010			2009			2008			2007			2006(1)
		(In thousands)
Consolidated balance sheet data:
Cash and cash equivalents		$	319,944		$	492,759		$	482,352		$	196,197		$	245,014
Short-term investments		$	—		$	1,637		$	3,940		$	214,625		$	—
Total assets		$	1,599,678		$	1,421,530		$	1,526,932		$	1,327,463		$	1,057,064
Long-term debt, net of current maturities		$	—		$	—		$	—		$	—		$	4
Shareholders’ equity		$	999,715		$	997,708		$	960,044		$	844,524		$	685,176

(1)

Net income for fiscal year 2006 does not include the effect of share-based compensation expense, because Logitech changed its method of accounting for share-based compensation expense effective April 1, 2006.

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those anticipated in these statements as a result of certain factors, including those set forth above in Item 1A “Risk Factors,” and below in Item 7A “Quantitative and Qualitative Disclosures about Market Risk.”

 

 

     Logitech is a world leader in personal peripherals for computers and other digital platforms. We develop and market innovative products in PC navigation, Internet communications, digital music, home-entertainment control, gaming and wireless devices. With our acquisition of LifeSize Communications, Inc. in December 2009, we entered the market for enterprise video conferencing products and services. Our products combine essential core technologies, continuing innovation, and award-winning industrial design.

 

 

     Our personal peripherals segment encompasses the design, manufacturing and marketing of personal peripherals for personal computers and other digital platforms. Our research and product management teams are organized along product lines, and are responsible for product strategy, industrial design and development, and technological innovation. Our global marketing and sales organization helps define product opportunities and bring our products to market, and is responsible for building the Logitech brand and consumer awareness of our products. This organization is comprised of retail and OEM (original equipment manufacturer) sales and marketing groups. Our retail sales and marketing activities are organized into three geographic regions: Americas (including North and South America), Europe-Middle East-Africa (“EMEA”), and Asia Pacific. Our OEM sales team is a worldwide organization with representatives in each of our three regions. Our OEM customers include the majority of the world’s largest PC manufacturers.

 

     Our video conferencing segment encompasses the design, manufacturing and marketing of LifeSize video conferencing products and services for the enterprise and small-to-medium business markets. The LifeSize segment maintains a separate marketing and sales organizations. The LifeSize product development and product management organizations are separate, but coordinated with our personal peripherals business, particularly our webcam and video communications groups. Based on the financial measurements for the fiscal year ended March 31, 2010 as evaluated by Logitech’s Chief Executive Officer, the LifeSize operating segment does not meet the quantitative threshold for separate disclosure of financial information required by generally accepted accounting principles in the United States.

 

     For the PC, our products include mice, trackballs, keyboards, interactive gaming controllers, multimedia speakers, headsets, webcams, 3D control devices and lapdesks. Our Internet communications products include webcams, headsets, video communications services, and digital video security systems for a home or small business. Our LifeSize division offers scalable high-definition (“HD”) video communication products, support and services. Our digital music products include speakers, earphones, and custom in-ear monitors. For home entertainment systems, we offer the Harmony line of advanced remote controls and the Squeezebox and Transporter wireless music solutions for the home. For gaming consoles, we offer a range of gaming controllers, including racing wheels, wireless guitar and drum controllers, and microphones, as well as other accessories.

 

     We sell our peripheral products to a network of retail distributors and resellers and to OEMs. Our worldwide retail network for our peripherals includes wholesale distributors, consumer electronics retailers, mass merchandisers, specialty electronics stores, computer and telecommunications stores, value-added resellers and online merchants. Our sales to our retail channels for our peripherals were 89% and 85% of our net sales for the fiscal years ended March 31, 2010 and 2009. The large majority of our revenues have historically been derived from sales of our personal peripheral products for use by consumers.

 

 

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

 

     Our markets are extremely competitive. The personal peripherals market is characterized by short product life cycles, frequent new product introductions, rapidly changing technology, evolving customer demands, and aggressive promotional and pricing practices. We believe that the global economic downturn has further increased competition in our markets, as competitors with larger financial resources, such as Microsoft Corporation, Sony Corporation and others, seek to gain market share by discounting prices or offering more favorable terms to customers, and competitors with smaller financial resources also discount prices or engage in other promotional practices in order to maintain their market share.

 

     The video conferencing market is characterized by continual performance enhancements and increasing consolidation. There is heightened interest in the video conferencing market by large, well-financed competitors, such as Cisco Systems, Inc. and Hewlett-Packard Company, and as a result, we expect competition in the market to further intensify.

 

     We believe continued investment in product research and development is critical to creating the innovation required to strengthen our competitive advantage and to drive future sales growth. We are committed to identifying and meeting current and future customer trends with new and improved product technologies, as well as leveraging the value of the Logitech brand from a competitive, channel partner and consumer experience perspective. We believe innovation and product quality are important to gaining market acceptance and maintaining market leadership.

 

     The broadening of our product lines has been primarily organic. However we also seek to acquire, when appropriate, companies that have products, personnel, and technologies that complement our strategic direction. As access to digital information expands beyond the PC platform, we are also extending our vision to other platforms, such as the living room, meeting room and other platforms as access points to the Internet and the digital world. For example, with our acquisition of LifeSize in December 2009, we entered the video conferencing market. Together, Logitech and LifeSize plan to pursue existing and new relationships with unified communications, collaboration and voice-over Internet protocol (“VoIP”) industry partners and competitors to drive the development of an open eco-system for interoperable video communications. In addition, as part of our corporate strategy, we plan to increase investments in and realign resources to focus on certain market adjacencies, geographic markets or new categories, including video communications and the China market. We also plan to increase our investment in applications and peripherals for open platforms, which do not require direct collaboration and agreement with the platform owner.

 

     We continually evaluate our product offerings and our strategic direction in light of current global economic conditions, changing consumer trends, and the evolving nature of the interface between the consumer and the digital world.

 

 

     Our total net sales for the fiscal year ended March 31, 2010 decreased 11% compared with the fiscal year ended March 31, 2009. Net sales in the second half of fiscal year 2010 increased 10% over the same period in 2009, after decreasing 30% in the first six months of the year. While not yet resuming the sales levels in fiscal year 2008, the improvement in net sales in the last six months of fiscal year 2010 reflects more stable global economic conditions.

 

 

     Retail sales in fiscal year 2010 decreased 8% compared with 2009. Retail unit sales decreased 2%, less than the decrease in sales dollars, reflecting the shift by consumers towards value-priced products as a result of the economic downturn.

 

     Retail sales in our Asia Pacific and EMEA regions decreased 16% and 11% in fiscal year 2010 compared with fiscal year 2009. Retail sales in our Americas region increased 1% in the same period. Retail sales in the last six months of fiscal year 2010 increased in the EMEA and Americas region, and decreased slightly in the Asia Pacific region, indicating an improvement in the sales trend.

 

     OEM sales decreased 38% in fiscal year 2010 compared with fiscal year 2009. OEM units sold decreased 25% in the same period. The substantial decline in OEM sales was related to console microphones, which sold well in the prior fiscal year, but have reached the latter stages of the typical gaming sales cycle in fiscal year 2010.

 

     The sales of LifeSize Communications, Inc., which we acquired on December 11, 2009, are included in our financial results from the date of acquisition to the end of the fiscal year.

 

     Our gross margin for fiscal year 2010 was 31.9% compared with 31.3% in the prior fiscal year, primarily due to the impact of operational efficiencies across our supply chain and a favorable shift in product mix towards products with higher margins.

 

     Net income for the year ended March 31, 2010 was $65.0 million, compared with net income of $107.0 million in fiscal year 2009. The decline in net income in 2010 resulted primarily from the decline in net sales. Net income also included the negative impact of $1.8 million in fiscal year 2010 and $20.5 million in fiscal year 2009 of costs related to the restructuring plan initiated in January 2009 in response to deteriorating global economic conditions.

 

 

     We have a large and varied portfolio of product lines for personal peripherals, grouped in several product families. In addition to changes resulting from general economic trends, we believe that normal increases or decreases in the retail sales level of a product family reflect the innovation we have designed into the product, customer acceptance of the product line, the popularity of the digital platforms the product line relates to, competitive activity in the product family, and the prices at which products are available. Historically, sales of individual product lines rise and fall over time, causing our overall product mix to shift both between and within product lines, and we expect these types of trends to continue.

 

     We have historically targeted peripherals for the PC platform, a market that is dynamically changing as a result of the declining popularity of desktop PCs and the increasing popularity of notebook PCs and mobile devices, such as netbooks, smartphones, tablets and smaller form factor devices with computing or web surfing capabilities. In our retail channels, notebook PCs and mobile devices are sold by retailers without peripherals. We believe this creates opportunities to sell products to consumers to help make their devices more productive and comfortable. However, consumer acceptance and demand for peripherals for use with smaller form factor computing devices such as notebook PCs and mobile devices is still uncertain. The increasing popularity of notebook PCs and mobile devices may result in decreased demand by consumers for personal peripherals, which could negatively affect our business. The increasing popularity of mobile devices has coincided with a steadily decreasing average sales price for computing devices, including for desktop and notebook PCs. As a result, there is a risk that the demand for those of our products that have a relatively high average sales price in relation to the price of a desktop or notebook PC will decline. We believe our future sales growth will be significantly affected by our ability to develop sales and innovations in our current products for notebook PCs and other mobile devices, as well as for emerging product categories which are not PC-dependent.

 

 

     In our OEM channel, the shift away from desktop PCs has adversely affected our sales of OEM mice, which are sold with name-brand desktop PCs. Our OEM mice sales have historically made up the bulk of our OEM sales. Our OEM sales accounted for 10% and 15% of total revenues during fiscal years 2010 and 2009. We expect the trend of slowing OEM mice sales to continue.

 

     Most of our revenue comes from sales to our retail channels, which resell to consumers and other retailers. As a result, our customers’ demand for our products depends in substantial part on trends in consumer confidence and consumer spending, as well as the levels of inventory which our customers choose to maintain. We use sell-through data, which represents sales of our products by our retailer customers to consumers and by our distributor customers to retailers, along with other metrics to indicate consumer demand for our products. Sell-through data is subject to limitations due to collection methods and the third-party nature of the data and thus may not be an entirely accurate indicator of actual consumer demand for our products. In addition, the customers supplying sell-through data vary by geographic region and from period to period, but typically represent a majority of our retail sales.

 

     The acquisition of LifeSize in December 2009 expands our video communication product portfolio beyond webcams and video calling into the enterprise meeting room. We believe our video conferencing segment offers significant growth opportunities for our business. However, the segment currently represents a small part of our net sales and will require continuing investments in product development and sales and marketing.

 

     We will continue to evaluate potential acquisitions to enhance the breadth and depth of our expertise in engineering and other functional areas, our technologies and our product offerings. We also intend to continue to invest in video communications, in products for the digital home, and in growing our sales in China by increasing hiring in related engineering and sales and marketing functions.

 

     Although our financial results are reported in U.S. dollars, approximately half of our sales are made in currencies other than the U.S. dollar, such as the euro, British pound, Japanese yen, Chinese renminbi and Canadian dollar. Our product costs are primarily in U.S. dollars and Chinese renminbi. Our operating expenses are incurred in U.S. dollars, euros, Chinese renminbi, Swiss francs, Taiwanese dollars, and, to a lesser extent, 25 other currencies. To the extent that the U.S. dollar significantly increases or decreases in value relative to the currencies in which our sales and operating expenses are denominated, the reported dollar amounts of our sales and expenses may decrease or increase. In fiscal year 2010 the impact of foreign currency exchange rates on our operating income was not material.

 

     Our gross margins vary with the mix of products sold, competitive activity, product life cycle, new product introductions, unit volumes, commodity and supply chain costs, foreign currency exchange rate fluctuations, geographic sales mix, and the complexity and functionality of new product introductions. Changes in consumer demand affect the need for us to undertake promotional efforts, such as cooperative marketing arrangements, customer incentive programs or price protection, which alters our product gross margins. Gross margins for the fiscal year ended March 31, 2010 were 31.9%, compared with 31.3% in fiscal year 2009, primarily due to the impact of operational efficiencies across our supply chain and a favorable shift in product mix towards products with higher margins. We currently anticipate our gross margins to be higher in fiscal year 2011 compared with fiscal year 2010.

 

     Logitech is incorporated in Switzerland but operates in various countries with differing tax laws and rates. A portion of our income before taxes and the provision for income taxes are generated outside of Switzerland. Therefore, our effective income tax rate depends on the amount of profits generated in each of the various tax jurisdictions in which we operate. For fiscal years 2010 and 2009, the income tax provision was $18.7 million and $19.8 million based on effective income tax rates of 22.3% and 15.6%. The change in effective income tax rate between fiscal years 2010 and 2009 is primarily due to the mix of income and losses in the various tax jurisdictions in which the Company operates. We expect future effective income tax rates to fluctuate for similar reasons.

 

 

     In the fiscal quarter ended March 31, 2009, we implemented a restructuring plan which included a reduction in Logitech’s salaried workforce and other actions aimed at reducing operating expenses. We incurred $20.5 million in pre-tax restructuring charges in the fourth quarter of fiscal year 2009 and $1.8 million in the twelve months ended March 31, 2010 related to employee termination costs, contract termination costs and other associated costs. The restructuring plan was expected to generate annual personnel cost savings beginning in fiscal year 2010 of approximately $50 million, and approximately $50 million additional variable cost savings through efforts to limit production costs and operating expenses. The cost savings realized from the restructuring are partially offset in the operating results of fiscal year 2010 by the addition of LifeSize’s operating expenses and by increased spending to support the return to revenue growth.

 

 

     The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”) requires the Company to make judgments, estimates and assumptions that affect reported amounts of assets, liabilities, net sales and expenses, and the disclosure of contingent assets and liabilities.

 

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

 

     We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Although these estimates are based on management’s best knowledge of current events and actions that may impact the Company in the future, actual results could differ from those estimates. Management has discussed the development, selection and disclosure of these critical accounting estimates with the Audit Committee of the Board of Directors.

 

     We believe the following accounting estimates are most critical to our business operations and to an understanding of our financial condition and results of operations, and reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

 

 

     We record accruals for product returns, cooperative marketing arrangements, customer incentive programs and pricing programs. The estimated cost of these programs is accrued in the period the Company sells the product or commits to the program as a reduction of revenue or as an operating expense, if we receive a separately identifiable benefit from the customer and can reasonably estimate the fair value of that benefit. Significant management judgment and estimates must be used to determine the cost of these programs in any accounting period.

 

     Returns. The Company grants limited rights to return product. Return rights vary by customer, and range from just the right to return defective product to stock rotation rights to return a limited percentage of the previous quarter’s purchases. Estimates of expected future product returns are recognized at the time of sale based on analyses of historical return trends by customer and by product, inventories owned by and located at distributors and retailers, current customer demand, current operating conditions, and other relevant customer and product information, such as stage of product life-cycle. Return trends are influenced by the timing of the sale, the type of customer, operational policies and procedures, product sell-through, product quality issues, sales levels, market acceptance of products, competitive pressures, new product introductions, product life cycle status, and other factors. Return rates can fluctuate over time, but are sufficiently predictable to allow us to estimate expected future product returns.

 

     Cooperative Marketing Arrangements. The Company’s cooperative marketing arrangements include contractual customer marketing and sales incentive programs. We enter into customer marketing programs with many of our distribution and retail customers allowing customers to receive a credit equal to a set percentage of their purchases of the Company’s products, or a fixed dollar credit for various marketing programs. The objective of these programs is to encourage advertising and promotional events to increase sales of our products. Accruals for the estimated costs of these marketing programs are recorded based on the contractual percentage of product purchased in the period we recognize revenue. The Company also offers rebates and discounts for certain types of sell-through programs. Accruals for these sales incentive programs are recorded at the time of sale, or time of commitment, based on negotiated terms, historical experience and inventory levels in the channel.

 

 

     Customer Incentive Programs. Customer incentive programs include volume and consumer rebates. We offer volume rebates to our distribution and retail customers related to purchase volumes or sales of specific products by distributors to specified retailers. Reserves for volume rebates are recognized as a reduction of the sale price at the time of sale. Estimates of required reserves are determined based on negotiated terms, consideration of historical experience, anticipated volume of future purchases, and inventory levels in the channel. Consumer rebates are offered from time to time at the Company’s discretion directly to end-users. Estimated costs of consumer rebates and similar incentives are recorded at the time the incentive is offered, based on the specific terms and conditions. Certain incentive programs, including consumer rebates, require management to estimate the number of customers who will actually redeem the incentive based on historical experience and the specific terms and conditions of particular programs.

 

     Price Protection and Special Pricing. We have contractual agreements with certain of our customers that contain terms allowing price protection credits to be issued in the event of a subsequent price reduction (contractual price protection). At management’s discretion, we also offer special pricing discounts to certain customers. Special pricing discounts are usually offered only for limited time periods or for sales to specific indirect partners. Our decision to make price reductions is influenced by channel inventory levels, product life cycle stage, market acceptance of products, the competitive environment, new product introductions and other factors. Credits are issued for units that customers have on hand or in transit at the date of the price reduction. Reserves for the estimated amounts to be reimbursed to qualifying customers are established quarterly based on planned price reductions, analyses of qualified inventories on hand with distributors and retailers and historical trends by customer and by product.

 

     We regularly evaluate the adequacy of our accruals for product returns, cooperative marketing arrangements, customer incentive programs and pricing programs. Future market conditions and product transitions may require the Company to take action to increase such programs. In addition, when the variables used to estimate these costs change, or if actual costs differ significantly from the estimates, we would be required to record incremental reductions to revenue or increase operating expenses. If, at any future time, the Company becomes unable to reasonably estimate these costs, recognition of revenue might be deferred until products are sold to end-users, which would adversely impact revenue in the period of transition.

 

 

     Our investment securities portfolio as of March 31, 2010 and 2009 consisted of auction rate securities collateralized by residential and commercial mortgages. The estimated fair value of our investment securities was $1.0 million and $1.6 million at March 31, 2010 and 2009. Estimated fair value was determined by estimating values of the underlying collateral using analogous published indices or by estimating future cash flows, either through discounted cash flow or option pricing methods, incorporating assumptions of default and other future conditions. The investments are classified as available-for-sale, and were reclassified from current to non-current assets as of April 1, 2009, as sale or realization of proceeds from sale is not expected within our normal operating cycle of one year.

 

 

     We sell our products through a worldwide network of distributors, retailers and OEM customers. Logitech generally does not require any collateral from its customers. However, we seek to control our credit risk through ongoing credit evaluations of our customers’ financial condition.

 

 

     We regularly evaluate the collectibility of our accounts receivable and maintain allowances for doubtful accounts. The allowances are based on management’s assessment of the collectibility of specific customer accounts, including their credit worthiness and financial condition, as well as the Company’s historical experience with bad debts and customer deductions, receivables aging, current economic trends and geographic or country-specific risks and the financial condition of our distribution channel. If management determines that a customer’s accounts receivable balance is uncollectible, recognition of revenue from that customer is deferred until collectibility is reasonably assured.

 

     As of March 31, 2010, one customer represented 14% of total accounts receivable. The customers comprising the ten highest outstanding trade receivable balances accounted for approximately 58% of total accounts receivable as of March 31, 2010. A deterioration of a significant customer’s financial condition could cause actual write-offs to be materially different from the estimated allowance. If any of these customers’ receivable balances should be deemed uncollectible or if actual write-offs are higher than historical experience, we would have to make adjustments to our allowance for doubtful accounts, which could result in an increase in the Company’s operating expenses.

 

 

     The Company must order components for its products and build inventory in advance of customer orders. Further, our industry is characterized by rapid technological change, short-term customer commitments and rapid changes in demand.

 

     We record inventories at the lower of cost or market value and record write-downs of inventories which are obsolete or in excess of anticipated demand or market value. A review of inventory is performed each fiscal quarter that considers factors including the marketability and product life cycle stage, product development plans, component cost trends, demand forecasts and current sales levels. We identify inventory exposures by comparing inventory on hand, in the channel and on order to historical and forecasted sales over six month periods. Inventory on hand which is not expected to be sold or utilized based on review of forecasted sales and utilization is considered excess, and we recognize the write-off in cost of sales at the time of such determination. At the time of loss recognition, a new, lower-cost basis for that inventory is established and subsequent changes in facts and circumstances would not result in an increase in the cost basis. If there were an abrupt and substantial decline in demand for Logitech’s products or an unanticipated change in technological or customer requirements, we may be required to record additional write-downs which could adversely affect gross margins in the period when the write-downs are recorded.

 

 

     Share-based compensation expense includes compensation expense, reduced for estimated forfeitures, for awards granted after April 1, 2006 based on the grant-date fair value. The grant date fair value for stock options and stock purchase rights is estimated using the Black-Scholes-Merton option-pricing valuation model. The grant date fair value of restricted stock units (“RSUs”) which vest upon meeting certain market conditions is estimated using the Monte-Carlo simulation method. The grant date fair value of time-based RSUs is calculated based on the share market price on the date of grant. For stock options and restricted stock assumed by Logitech when LifeSize was acquired, the grant date used to estimate fair value is deemed to be December 11, 2009, the date of acquisition. Compensation expense for awards granted or assumed after April 1, 2006 is recognized on a straight-line basis over the service period of the award. For share-based compensation awards granted prior to but not yet vested as of April 1, 2006, share-based compensation expense is based on the grant-date fair value estimated using the Black-Scholes-Merton option-pricing valuation model reduced for estimated forfeitures, and recognized on a straight-line basis over the service period for each separately vesting portion of the award. See Note 13-Employee Benefit Plans in the Notes to Consolidated Financial Statements for further discussion of share-based compensation.

 

 

     Our estimates of share-based compensation expense require a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns, future forfeitures, dividend yield, related tax effects and the selection of an appropriate fair value model. We estimate expected share price volatility based on historical volatility using daily prices over the term of past options, RSUs or purchase offerings, as we consider historical share price volatility as most representative of future volatility. We estimate expected life based on historical settlement rates, which we believe are most representative of future exercise and post-vesting termination behaviors. We use historical data to estimate pre-vesting forfeitures, and we record share-based compensation expense only for those awards that are expected to vest. The dividend yield assumption is based on the Company’s history and future expectations of dividend payouts.

 

     The assumptions used in calculating the fair value of share-based compensation expense and related tax effects represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, or if we decide to use a different valuation model, our share-based compensation expense could be materially different in the future from what we have recorded in the current period, which could materially affect our results of operations.

 

 

     Logitech operates in multiple jurisdictions and its profits are taxed pursuant to the tax laws of these jurisdictions. The Company’s effective income tax rate may be affected by the changes in or interpretations of tax laws in any given jurisdiction, utilization of net operating loss and tax credit carryforwards, changes in geographical mix of income and expense, and changes in management’s assessment of matters such as the ability to realize deferred tax assets. As a result of these considerations, we must estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating current tax exposure together with assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet.

 

     We assess the likelihood that our deferred tax assets will be recovered from future taxable income, considering all available evidence such as historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax strategies. We believe it is more likely than not such assets will be realized; however, ultimate realization could be negatively impacted by market conditions and other variables not known or anticipated at this time. In the event we determine that we would not be able to realize all or part of our deferred tax assets, an adjustment would be charged to earnings in the period such determination is made. Likewise, if we later determine that it is more likely than not that the deferred tax assets would be realized, the previously provided valuation allowance would be reversed.

 

     We make certain estimates and judgments about the application of tax law, the expected resolution of uncertain tax positions and other matters surrounding the recognition and measurement of uncertain tax benefits. In the event that uncertain tax positions are resolved for amounts different than our estimates, or the related statutes of limitations expire without the assessment of additional income taxes, we will be required to adjust the amounts of the related assets and liabilities in the period in which such events occur. Such adjustments may have a material impact on our income tax provision and our results of operations.

 

 

     We review long-lived assets, such as investments, property, plant and equipment, and goodwill and other intangible assets for impairment whenever events indicate that the carrying amount of these assets might not be recoverable. Factors considered important which could require us to review an asset for impairment include the following:

 

     Recoverability of investments, property, plant and equipment, and other intangible assets is measured by comparing the projected undiscounted cash flows the asset is expected to generate with its carrying amount. If an asset is considered impaired, the impairment to be recognized is measured by the excess of the carrying amount of the asset over its fair value.

 

     We evaluate goodwill for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable from our estimated future cash flows. Recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired, and a second test is performed to measure the amount of impairment loss. We continue to maintain discrete financial information for 3Dconnexion and LifeSize, and accordingly determine impairment for the goodwill acquired with these acquisitions at the entity level. All other acquired goodwill is evaluated for impairment at a total enterprise level.

 

     In determining fair value, we consider various factors including estimates of future market growth and trends, forecasted revenue and costs, expected periods over which our assets will be utilized, and other variables. We calculate the Company’s fair value based on the present value of projected cash flows using a discount rate determined by management to be commensurate to the risk inherent in the Company’s current business model. To date, we have not recognized any impairment of goodwill. Logitech bases its fair value estimates on assumptions it believes to be reasonable, but which are inherently uncertain.

 

 

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

 

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

 

 

     In January 2010, the FASB published ASU 2010-06, Improving Disclosures about Fair Value Measurement, which requires additional disclosures regarding the activity in fair value measurements classified as Level 3 in the fair value hierarchy. Disclosure of activity in Level 3 fair value measurements is required for fiscal years beginning after December 15, 2010. Early adoption is permitted. We will provide these disclosures beginning in the first quarter of fiscal year 2011, when such activity occurs.

 

     In April 2010, the FASB published ASU 2010-13, Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. The ASU provides that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Earlier adoption is permitted. Our adoption of ASU 2010-13 in the first quarter of fiscal year 2011 will not impact the Company’s consolidated financial statements.

 

 

 

 

											Change %
		Year Ended March 31,									2010 vs					2009 vs
		2010			2009			2008			2009					2008
Net sales by channel:
Retail		$	1,745,152		$	1,887,343		$	2,067,288			(8	)%				(9	)%
OEM			198,364			321,489			303,208			(38	)%				6	%
LifeSize			23,232			—			—			0	%				0	%
Total net sales		$	1,966,748		$	2,208,832		$	2,370,496			(11	)%				(7	)%

     The decreases in retail sales in fiscal years 2009 and 2010 reflected the global economic downturn. The impact began in the third quarter of fiscal year 2009 and continued through the second quarter of fiscal year 2010. During this period, our retail sales were affected by consumers’ reluctance to spend, their buying preference for lower-price products and their strong response to promotions, as well as our customers’ alignment of inventory levels with the declining consumer demand. Sales of products priced below $40 represented 57% of retail sales in fiscal year 2010, compared with 50% in fiscal year 2009 and 49% in fiscal year 2008. Retail units decreased 2% in fiscal year 2010, compared with a 5% decrease in 2009, indicating the beginnings of economic stabilization. Foreign currency exchange rates did not affect the retail sales decline.

 

     The significant decline in OEM sales for fiscal year 2010 compared with 2009 was attributable to the popularity of our console microphones in fiscal year 2008 and the first three quarters of fiscal year 2009. These products reached the latter stages of the typical gaming sales cycle in the fourth quarter of fiscal year 2009. OEM units sold decreased 25% during fiscal year 2010 and increased 2% in fiscal year 2009, compared with the prior fiscal years. Foreign currency exchange rates did not significantly affect the OEM sales decline.

 

     LifeSize net sales represent sales of video conferencing units and related software and services for the period from December 11, 2009, the date of acquisition, to the end of the fiscal year. Although we consider LifeSize a separate operating segment, based on financial measurements for the fiscal year ended March 31, 2010 and our near-term expectations, the LifeSize segment does not meet the quantitative threshold for separate disclosure of financial information required by generally accepted accounting principles in the United States.

 

 

     Approximately 51%, 46% and 45% of the Company’s total net sales were denominated in currencies other than the U.S. dollar in fiscal years 2010, 2009 and 2008. If foreign currency exchange rates had been the same in fiscal years 2010 and 2009, our constant dollar sales decline would have been 12%. If foreign currency exchange rates had been the same in fiscal years 2009 and 2008, our constant dollar sales decrease would have been 6%.

 

     We refer to our net sales excluding the impact of foreign currency exchange rates as constant dollar sales. Constant dollar sales are a non-GAAP financial measure, which is information derived from consolidated financial information but not presented in our financial statements prepared in accordance with U.S. GAAP. Our management uses these non-GAAP measures in its financial and operational decision-making, and believes these non-GAAP measures, when considered in conjunction with the corresponding GAAP measures, facilitate a better understanding of changes in net sales. Constant dollar sales are calculated by translating prior period sales in each local currency at the current period’s average exchange rate for that currency.

 

 

     The following table presents the change in retail sales by region for fiscal year 2010 compared with fiscal year 2009, and fiscal year 2009 compared with fiscal year 2008:

 

		Year Ended March 31,
		2010 vs 2009					2009 vs 2008
	Change in retail sales by region:
	EMEA		(11	)%				(11	)%
	Americas		1	%				(15	)%
	Asia Pacific		(16	)%				16	%
	Total retail sales		(8	)%				(9	)%

     Sales in the EMEA region decreased in all product families except audio in fiscal year 2010 compared with 2009, reflecting the effects of the global economic downturn. For the same reason in fiscal year 2009, the EMEA region experienced sales decreases in all product families compared with the prior year. Retail units sold declined 5% and 8% in fiscal years 2010 and 2009 compared with the prior year. In both fiscal years 2010 and 2009, sales in Eastern Europe and other emerging markets were depressed, reflecting the economic downturn, customers’ lack of available credit to finance purchases of inventory, and currency volatility. The percentage decline in retail sell-through in the EMEA region for fiscal year 2010 was less than the decline in sell-in, which indicates comparatively stronger consumer demand for our products than our sales results reflected, as well as a continuance of the realignment of our channel partners’ weeks of supply levels. If foreign currency exchange rates had been the same in fiscal years 2010 and 2009, our EMEA constant dollar retail sales decline would have been 12%. If foreign currency exchange rates had been the same in fiscal years 2009 and 2008, our EMEA constant dollar retail sales decrease would have been 8%.

 

     Retail sales were essentially flat in the Americas region in fiscal year 2010 compared with 2009, reflecting modest economic stability in the region. Sales of pointing devices, keyboards and desktops, and remotes increased. The 15% decrease in sales in fiscal year 2009 compared with 2008 was driven by declines in all product families except video. Total retail units sold in the Americas region in fiscal year 2010 increased 7% over the prior year, an indication of consumers’ preference for value-segment products, compared with a 5% decrease in fiscal year 2009. Retail sell-through in fiscal year 2010 was also essentially flat compared with the prior year, as our channel partners, during the first half of the year, completed the realignment of their weeks of supply levels. Foreign currency exchange rates had no significant effect on retail sales in the Americas region in either fiscal year 2010 or fiscal year 2009.

 

     Retail sales in the Asia Pacific region declined in all product families during fiscal year 2010 compared with 2009, as our channel partners completed their alignment of inventory levels with consumer demand. This alignment activity was also reflected by positive sell-through compared with the sell-in decline. In fiscal year 2009, before the economic downturn affected the region, retail sales increased in all product families compared with the prior year. Correspondingly, total retail units sold in the Asia Pacific region declined 10% in fiscal year 2010 and increased 11% in fiscal year 2009 compared with the prior years. If foreign currency exchange rates had been the same in fiscal years 2010 and 2009, our Asia Pacific constant dollar retail sales decline would have been 17%. If foreign currency exchange rates had been the same in fiscal years 2009 and 2008, our Asia Pacific constant dollar retail sales increase would have been 12%.

 

 

 

     Net retail sales by product family for fiscal years 2010, 2009 and 2008 were as follows (in thousands):

 

											Change %
		Year Ended March 31,									2010 vs			2009 vs
		2010			2009			2008			2009			2008
	Net retail sales by product family:
	Retail — Pointing Devices	$	528,236		$	579,775		$	615,524		(9	)%		(6	)%
	Retail — Keyboards & Desktops		329,038			384,809			464,984		(14	)%		(17	)%
	Retail — Audio		454,957			445,362			478,455		2	%		(7	)%
	Retail — Video		228,344			248,339			238,728		(8	)%		4	%
	Retail — Gaming		107,595			127,052			146,016		(15	)%		(13	)%
	Retail — Remotes		96,982			102,006			123,581		(5	)%		(17	)%
	Total net retail sales	$	1,745,152		$	1,887,343		$	2,067,288		(8	)%		(9	)%

     Logitech’s Pointing Devices product family includes our mice, trackballs and other pointing devices. Keyboards and desktops (mouse and keyboard combined) include cordless and corded keyboards and desktops. Audio includes speakers and headset products for the PC, the home, and mobile entertainment platforms, and wireless music systems. Our video product family is comprised of PC webcams and WiLife video security systems. Gaming includes console and PC gaming peripherals. The Remotes product family is comprised of our advanced remote controls. Net sales reflect accruals for product returns, cooperative marketing arrangements, customer incentive programs and pricing programs.

 

 

     Retail unit sales of our pointing devices decreased 2% in both fiscal years 2010 and 2009 compared with the prior fiscal years. Sales of corded mice declined 19% in fiscal year 2010 and 13% in fiscal year 2009, with units decreasing 11% and 8%. Sales of cordless mice decreased 3% in fiscal year 2010 and increased 4% in fiscal year 2009. Unit sales of cordless mice increased 15% in fiscal year 2010 and 10% in fiscal year 2009, driven by sales of our notebook mice, including in 2010 the Performance Mouse MX and the Anywhere Mouse MX, both with Darkfield Laser Tracking, and in 2009 the V450 Nano Cordless Mouse and the V220 Cordless Optical Mouse. The slower decline or higher increase in unit sales compared with dollar sales for cordless and corded mice indicates consumers’ current preference for the value segment of our product lines.

 

 

     Retail unit sales of keyboards and desktops decreased 11% and 10% during fiscal years 2010 and 2009. Sales of corded keyboards and desktops decreased 11% and 5% in fiscal years 2010 and 2009, while units decreased 17% and 7%. In fiscal year 2010, cordless keyboards and desktops decreased 20% in sales and 5% in units. Sales of the MK300 wireless desktop and the EX 100 cordless desktop were strong, but were offset by declines in sales of the EX 110 cordless desktop. In fiscal year 2009, sales of cordless keyboards and desktops decreased 21%, with a 17% decline in units. Strong sales of our cordless desktops EX 100 and MX 5500 were offset by declines in sales of the MX5000 Laser and EX 110 cordless desktops.

 

 

 

     Retail audio unit sales increased 11% in fiscal year 2010 and decreased 2% in fiscal year 2009. PC speaker sales decreased 7% in dollars, but increased 7% in units in fiscal year 2010, following a decline of 20% in dollars and 8% in units in fiscal year 2009. The decline in PC speaker sales was primarily attributable to product transitions and the weak demand environment. Sales of our iPod speakers increased 1% in dollars and 8% in units in fiscal year 2010 compared with increases of 22% and 8% in fiscal year 2009. Sales of our PureFi Anywhere 2 speakers made strong contributions to the increases in both fiscal years 2010 and 2009. In fiscal year 2010, the S315i Rechargeable Speaker and the S215i Portable Speaker also made positive contributions to sales. PC headset sales grew 23% in fiscal year 2010 and 9% in fiscal year 2009, with units increasing 22% and 3%. Ultimate Ears products also provided positive contributions to retail audio sales in both fiscal years 2010 and 2009.

 

 

     Video sales decreased 8% in fiscal year 2010 after increasing 4% in fiscal year 2009, compared with the previous years. Units sold increased 2% and 3% in fiscal years 2010 and 2009. The sales fluctuations were primarily attributable to our WiLife video security products, which sold well in fiscal year 2009, and were negatively affected in fiscal year 2010 by a planned future product transition. Strong sellers in our webcam family included the value-priced C250 and C200 webcams in fiscal year 2010, and our Communicate MP and QuickCam Connect webcams in fiscal year 2009.

 

 

     Retail unit sales of our gaming peripherals decreased 26% in fiscal year 2010, compared with a decrease of 22% in fiscal year 2009. PC gaming sales decreased 12% and 13% in fiscal years 2010 and 2009 compared with the previous year. Unit sales of PC gaming peripherals decreased 25% and 18% in fiscal years 2010 and 2009. In the cyclical manner typical of gaming peripherals, sales of our G25 Racing Wheel, popular in fiscal year 2009, were replaced by our G27 Racing Wheel, with lower sales of the G15 Gaming Keyboard in both years. Console gaming sales declined 27% and 12%, with unit declines of 27% and 28% in fiscal years 2010 and 2009.

 

 

     Retail remote sales decreased 5% in fiscal year 2010 compared with the decline of 17% in fiscal year 2009. Unit sales decreased 14% in fiscal year 2010 compared with an 8% increase in fiscal year 2009, reflecting strong sales of our lower-priced Harmony One remote control and increased promotional activity in both years, and our newer Harmony 900 and Harmony 700 Advanced Universal Remote in fiscal year 2010.

 

 

 

														Change %
		Year Ended March 31,												2010 vs			2009 vs
		2010				2009				2008				2009			2008
	Net sales	$	1,966,748			$	2,208,832			$	2,370,496			(11	)%		(7	)%
	Cost of goods sold		1,339,852				1,517,606				1,521,378			(12	)%		0	%
	Gross profit	$	626,896			$	691,226			$	849,118			(9	)%		(19	)%
	Gross margin		31.9	%			31.3	%			35.8	%

     Gross profit consists of net sales, less cost of goods sold which includes materials, direct labor and related overhead costs, costs of manufacturing facilities, costs of purchasing components from outside suppliers, distribution costs and write-down of inventories.

 

 

     The improvement in the gross margin percentage in fiscal year 2010 over fiscal year 2009 was primarily due to operational efficiencies across our supply chain, including lower product costs as well as faster inventory turnover, and a favorable shift in product mix towards products with higher margins. Gross profit in fiscal year 2009 decreased 19% in dollars and declined as a percentage of revenue compared with fiscal year 2008 primarily due to the decline in net sales, an increasingly promotional environment, the mix of products sold, and higher freight and intangible amortization costs.

 

 

 

														Change %
		Year Ended March 31,												2010 vs			2009 vs
		2010				2009				2008				2009			2008
	Marketing and selling	$	304,788			$	319,167			$	324,451			(5	)%		(2	)%
	% of net sales		15.5	%			14.4	%			13.7	%
	Research and development		135,813				128,755				124,544			5	%		3	%
	% of net sales		6.9	%			5.8	%			5.3	%
	General and administrative		106,147				113,103				113,443			(6	)%		0	%
	% of net sales		5.4	%			5.1	%			4.8	%
	Restructuring charges		1,784				20,547				—			(91	)%		0	%
	% of net sales		0.1	%			0.9	%			0.0	%
	Total operating expenses	$	548,532			$	581,572			$	562,438			(6	)%		3	%
	% of net sales		27.9	%			26.3	%			23.7	%

     Total operating expenses for fiscal year 2009, excluding the impact of restructuring charges, were comparable to fiscal year 2008. In fiscal year 2010, operating expenses declined less than net sales declined, as the Company continued to invest in product development and other areas to help ensure we were positioned for the resumption of revenue growth when economic conditions improved. We expect to limit future growth in operating expenses below the growth rate in revenues, restraining or reducing non-critical expenses while investing in activities that will sustain and drive revenue growth.

 

     We refer to our operating expenses excluding the impact of foreign currency exchange rates as constant dollar operating expenses. Constant dollar operating expenses are a non-GAAP financial measure, which is information derived from consolidated financial information but not presented in our financial statements prepared in accordance with U.S. GAAP. Our management uses these non-GAAP measures in its financial and operational decision-making, and believes these non-GAAP measures, when considered in conjunction with the corresponding GAAP measures, facilitate a better understanding of changes in operating expenses. Constant dollar operating expenses are calculated by translating prior period operating expenses in each local currency at the current period’s average exchange rate for that currency.

 

 

     Marketing and selling expense consists of personnel and related overhead costs, corporate and product marketing, promotions, advertising, trade shows, customer and technical support and facilities costs.

 

     The decline in marketing and selling expenses in fiscal year 2010 compared with fiscal year 2009 resulted primarily from lower spending in marketing development funds, travel expenses and consulting fees. The decrease in spending between fiscal years 2009 and 2008 was the result of lower spending in advertising, marketing development funds, and travel expenses. These decreases in marketing costs related to the alignment of promotional expenditures with current sales levels and targeted product promotion activities which occurred in fiscal year 2008.

 

 

     Personnel costs increased in fiscal years 2010 and 2009 over the preceding fiscal years partially due to the addition of LifeSize sales and marketing personnel in fiscal year 2010 and the WiLife product marketing group in fiscal year 2009, and partially relating to the comparison of periods in which discretionary personnel costs were reduced. Bad debt expense declined significantly in fiscal year 2010 as economic conditions stabilized, after increasing significantly in fiscal year 2009 as a result of customers’ financial difficulties related to the economic downturn.

 

     If foreign currency exchange rates had been the same in fiscal years 2010 and 2009, the percentage decrease in constant dollar marketing and selling expense for fiscal year 2010 would not have changed. The impact of year-over-year exchange rate changes on translation of foreign currency marketing and selling expenses to our U.S. dollar financial statements was not material in fiscal year 2009 compared with fiscal year 2008.

 

 

     Research and development expense consists 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.

 

     The increases in research and development expenses in fiscal years 2010 and 2009 resulted from the addition of research and development costs of companies acquired in fiscal years 2010, 2009 and 2008. Personnel costs were approximately the same in fiscal years 2009 and 2008, but increased in fiscal year 2010 in comparison with fiscal year 2009, when discretionary personnel costs were reduced.

 

     If foreign currency exchange rates had been the same in fiscal years 2010 and 2009, the change in constant dollar research and development expense would have been 5%, the same as the change in U.S. dollars. In fiscal year 2009, exchange rate changes, particularly from the stronger Swiss franc and Taiwanese dollar relative to the U.S. dollar, contributed to the increase in research and development expense.

 

 

     General and administrative expense consists primarily of personnel and related overhead and facilities costs for the finance, information systems, executive, human resources and legal functions.

 

     General and administrative expense was approximately the same in fiscal years 2009 and 2008, and declined in fiscal year 2010. The decline in fiscal year 2010 was primarily due to a decrease of 5% in personnel costs, as headcount was reduced, although the headcount reduction was offset by the addition of LifeSize personnel in the fourth fiscal quarter. Personnel costs increased 2% during fiscal year 2009 primarily due to an increase in share-based compensation expense. Decreases in travel and infrastructure expenses in fiscal year 2010 were partially offset by $6.6 million in transaction costs related to the acquisition of LifeSize. Consulting fees and travel expenses decreased in fiscal year 2009 compared with fiscal year 2008 as a result of cost containment efforts.

 

     If foreign currency exchange rates had been the same in fiscal years 2010 and 2009, the percentage decrease in constant dollar general and administrative expense for fiscal year 2010 would have been 7%. Exchange rate changes, particularly from the stronger Swiss franc relative to the U.S. dollar, contributed to the increase in general and administrative expense in fiscal year 2009.

 

 

     Restructuring charges consist of termination benefits, asset impairment charges, contract termination costs and other charges associated with the restructuring plan initiated in January 2009. In the period from January 2009 to March 31, 2010, we incurred pre-tax restructuring charges of $22.3 million.

 

 

     The restructuring plan reduced our salaried workforce by approximately 500 employees, resulting in $17.8 million in termination benefits to those employees. Termination benefits were calculated based on regional benefit practices and local statutory requirements. An additional $3.4 million in pension plan curtailment and settlement costs were incurred in fiscal year 2009 as a result of the terminations. Restructuring charges also included exit costs associated with the closure of existing facilities and write downs of fixed assets that were not placed in service due to the abandonment of the related projects.

 

     The restructuring was completed as of March 31, 2010. The cost savings realized from the restructuring are partially offset in the operating results of fiscal year 2010 by the addition of LifeSize’s operating expenses and by increased spending to support the return to revenue growth.

 

     The following table summarizes restructuring-related activities during fiscal years 2010 and 2009 (in thousands). No restructuring costs were incurred in fiscal year 2008.

 

																Contract
							Termination				Asset					Termination
		Total					Benefits				Impairments					Costs					Other
	Balance at March 31, 2008		$	—			$	—				$	—				$	—			$	—
	Charges			20,547				16,427					556					200				3,364
	Cash payments			(12,764	)			(12,579	)				—					(185	)			—
	Charges against assets			(556	)			—					(556	)				—				—
	Other			(3,485	)			(121	)				—					—				(3,364	)
	Foreign exchange			52				52					—					—				—
	Balance at March 31, 2009		$	3,794			$	3,779				$	—				$	15			$	—
	Charges			1,784				1,318					—					419				47
	Cash payments			(5,194	)			(5,098	)				—					(96	)			—
	Charges against assets			—				—					—					—				—
	Other			(86	)			53					—					(4	)			(135	)
	Foreign exchange			101				106					—					—				(5	)
	Balance at March 31, 2010		$	399			$	158				$	—				$	334			$	(93	)

 

     Interest income and expense for fiscal years 2010, 2009 and 2008 were as follows (in thousands):

 

														Change %
		Year Ended March 31,												2010 vs					2009 vs
		2010				2009				2008				2009					2008
	Interest income	$	2,406			$	8,648			$	15,752				(72	)%				(45	)%
	Interest expense		(286	)			(20	)			(244	)			1330	%				(92	)%
	Interest income, net	$	2,120			$	8,628			$	15,508				(75	)%				(44	)%

     Interest income declined in fiscal years 2010 and 2009 compared with 2008 due to lower invested balances and significantly lower interest rates.

 

 

 

     Other income and expense for fiscal years 2010, 2009 and 2008 were as follows (in thousands):

 

														Change %
		Year Ended March 31,												2010 vs					2009 vs
		2010				2009				2008				2009					2008
	Foreign currency exchange gains, net	$	1,720			$	13,680			$	10,616				(87	)%				29	%
	Write-down of investments		(643	)			(2,727	)			(79,823	)			(76	)%				(97	)%
	Gain on sale of investments, net		—				—				27,761				0	%				(100	)%
	Insurance investment income (loss)		1,221				(2,883	)			710				(142	)%				(506	)%
	Other, net		841				441				1,362				91	%				(68	)%
	Other income (expense), net	$	3,139			$	8,511			$	(39,374	)			(63	)%				(122	)%

     Foreign currency exchange gains or losses relate to balances denominated in currencies other than the functional currency of a particular subsidiary, to the sale of currencies, and to gains or losses recognized on foreign exchange forward contracts. The higher foreign exchange gains during fiscal year 2009 were due to gains on sales of euros for U.S. dollars. The gains on currency sales in fiscal year 2010 were offset by losses on foreign exchange forward contracts intended to reduce the short-term effects of foreign currency fluctuations on foreign currency receivables or payables. We do not speculate in currency positions, but we are alert to opportunities to maximize foreign exchange gains.

 

     We recorded write-downs of $0.6 million, $2.7 million and $79.8 million in fiscal years 2010, 2009 and 2008 related to other-than-temporary declines in the estimated fair value of our investment securities. During fiscal year 2008, we also recorded a realized gain of $33.7 million on investments sold as part of a confidential settlement agreement, and a realized loss of $6.0 million on the sale of investments collateralized by corporate debt.

 

     Insurance investment income or loss represents changes in the cash surrender value of Company-owned life insurance contracts related to a management deferred compensation plan offered by one of our subsidiaries.

 

     Other income in fiscal year 2008 also includes a gain of $1.0 million on the sale of our ioPen retail product line.

 

 

     The provision for income taxes and effective income tax rate for fiscal years 2010, 2009 and 2008 were as follows (in thousands):

 

		Year Ended March 31,
		2010				2009				2008
	Provision for income taxes	$	18,666			$	19,761			$	31,788
	Effective income tax rate		22.3	%			15.6	%			12.1	%

     The provision for income taxes consists of income and withholding taxes. Logitech operates in multiple jurisdictions and its profits are taxed pursuant to the tax laws of these jurisdictions. The Company’s effective income tax rate may be affected by the changes in or interpretations of tax laws in any given jurisdiction, utilization of net operating loss and tax credit carryforwards, changes in geographical mix of income and expense, and change in management’s assessment of matters such as the ability to realize deferred tax. The increase in the effective income tax rate to 22.3% compared with 15.6% in fiscal year 2009 is due to the mix of income and losses in the various tax jurisdictions in which we operate. The increase in the effective income tax rate to 15.6% in fiscal year 2009 compared with 12.1% in fiscal year 2008 is primarily due to the mix of income and losses in the various tax jurisdictions in which we operate and the decrease in income before income taxes.

 

 

     The U.S. Federal research tax credit expired as of December 31, 2009. The U.S. House of Representatives in December 2009 and the U.S. Senate in March 2010 passed different draft legislation which would extend the tax credit for an additional year, however the extension has not yet passed into law as of March 31, 2010. Accordingly, our income tax provision for fiscal year 2010 includes a tax benefit for the Federal research tax credit of $0.9 million calculated through December 31, 2009.

 

     The U.S. state of California has enacted legislation affecting the methodology which must be used by corporate taxpayers to apportion income to California. These changes will become effective for our fiscal year ending March 31, 2012. Although the Company has significant operations in California, we believe these changes will not have a material impact on our results of operations or financial condition.

 

 

 

     At March 31, 2010, our working capital was $353.4 million, compared with $709.4 million at March 31, 2009. The decrease in working capital over the prior year was due to the cash paid for the acquisition of LifeSize, offset by decreases in accounts receivable and inventories, and increases in accounts payable and accrued liabilities.

 

     During fiscal year 2010, operating activities provided net cash of $365.3 million, generated from cash collections on accounts receivable, inventory management efforts, and increases in short-term liabilities. We used $427.8 million in investing activities, including $378.6 million for the acquisition of LifeSize, net of cash acquired of $3.7 million, $10.0 million for certain assets of TV Compass, and $39.8 million for investments in tooling, computer hardware, and software. Net cash used in financing activities was $108.2 million, primarily for the repurchase of shares under our share buyback programs and the repayment of short and long-term debt assumed in the LifeSize acquisition, partially offset by proceeds from employee stock purchases and the exercise of stock options.

 

     At March 31, 2010, we had cash and cash equivalents of $319.9 million, comprised of bank demand deposits and short-term time deposits. Cash and cash equivalents are carried at cost, which is equivalent to fair value. In addition, we hold investments consisting of auction rate securities with an estimated fair value of $1.0 million, which are carried in non-current assets, as sale or realization of proceeds from the sale of these securities is not expected within our normal operating cycle of one year. The fair value of these securities at March 31, 2010 was determined by estimating future cash flows, either through discounted cash flow or option pricing methods, incorporating assumptions of default and other future conditions. During fiscal year 2010, we recorded an impairment loss of $0.6 million related to the other-than-temporary decline in the fair value of these securities. Further changes in the fair value of our investment securities would not materially affect our liquidity or capital resources.

 

     The Company has credit lines with several European and Asian banks totaling $151.9 million as of March 31, 2010. As is common for businesses in European and Asian countries, these credit lines are uncommitted and unsecured. Despite the lack of formal commitments from the banks, we believe that these lines of credit will continue to be made available because of our long-standing relationships with these banks and our current financial condition. At March 31, 2010, there were no outstanding borrowings under these lines of credit. There are no financial covenants under these facilities.

 

     We provide various third parties with irrevocable letters of credit in the normal course of business to secure our obligations to pay or perform pursuant to the requirements of an underlying agreement or the provision of goods and services. These standby letters of credit are cancelable only at the option of the beneficiary who is authorized to draw drafts on the issuing bank up to the face amount of the standby letter of credit in accordance with its terms. At March 31, 2010, we had $3.4 million of letters of credit in place, of which $0.3 million was outstanding. These letters of credit related primarily to equipment purchases by a subsidiary in China, and expire between April and June 2010.

 

 

     The Company has financed its operating and capital requirements primarily through cash flow from operations and, to a lesser extent, from capital markets and bank borrowings. Our normal short-term liquidity and long-term capital resource requirements are provided from three sources: cash flow generated from operations, cash and cash equivalents on hand, and borrowings, as needed, under our credit facilities.

 

     Based upon our available cash balances and credit lines, and the trend of our historical cash flow generation, we believe we have sufficient liquidity to fund operations for the foreseeable future.

 

 

     The following table presents selected financial information and statistics for fiscal years 2010, 2009 and 2008 (dollars in thousands):

 

	Year Ended March 31,
	2010			2009			2008
Accounts receivable, net	$	195,247		$	213,929		$	373,619
Inventories	$	219,593		$	233,467		$	245,737
Working capital	$	353,370		$	709,382		$	723,221
Days sales in accounts receivable (DSO)(1)		33 days			47 days			56 days
Inventory turnover (ITO)(2)		6.1x			5.2x			6.3x
Net cash provided by operating activities	$	365,259		$	200,587		$	393,079

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

 

     During fiscal year 2010, the Company’s operating activities generated net cash of $365.3 million, compared with $200.6 million in 2009 and $393.1 million in 2008. The increase in 2010 was due primarily to targeted management of working capital, reflected in the lower DSO and higher ITO.

 

     DSO for fiscal year 2010 improved by 14 days compared with fiscal year 2009 and 23 days over fiscal year 2008, due to improved cash collections and increased order and shipment linearity. Typical payment terms require customers to pay for product sales generally within 30 to 60 days; however, terms may vary by customer type, by country and by selling season. Extended payment terms are sometimes offered to a limited number of customers during the second and third fiscal quarters. The Company does not modify payment terms on existing receivables, but may offer discounts for early payment.

 

     Inventory turnover for fiscal year 2010 increased compared with 2009. Inventory turnover declined between fiscal years 2009 and 2008 because sales decreased at a faster rate than inventory was reduced.

 

 

 

     Cash flows from investing activities during fiscal years 2010, 2009 and 2008 were as follows (in thousands):

 

	Year Ended March 31,
	2010				2009				2008
Acquisitions and investments, net of cash acquired	$	(388,809	)		$	(64,430	)		$	(59,722	)
Purchases of property, plant and equipment		(39,834	)			(48,263	)			(57,900	)
Purchases of investment securities		—				—				(379,793	)
Sales of investment securities		—				—				538,479
Sale of investment		—				—				13,308
Proceeds from cash surrender of life insurance policies		813				—				—
Premiums paid on cash surrender value life insurance policies		—				(427	)			(1,151	)
Net cash provided by (used in) investing activities	$	(427,830	)		$	(113,120	)		$	53,221

     In fiscal year 2010, we acquired LifeSize Communications for $378.6 million, net of cash acquired of $3.7 million, and certain assets of TV Compass for $10 million. In fiscal year 2009, we acquired the Ultimate Ears companies for $32.3 million, net of cash acquired of $0.2 million, including transaction costs of $0.5 million and excluding a $1.8 million holdback provision which was recorded as a liability in the consolidated financial statements. We also acquired SightSpeed in fiscal year 2009 for $30.9 million in cash including transaction costs of $0.8 million. In addition, we paid $2.0 million for a pre-acquisition contingency recorded during the third quarter of fiscal year 2009 related to our WiLife acquisition and $0.4 million for patent rights acquired pursuant to a patent settlement agreement. In fiscal year 2008, we acquired WiLife, Inc. for $22.0 million, net of cash acquired of $0.1 million and including $0.5 million in transaction costs. We also paid a deferred payment in fiscal year 2008 of $37.7 million to the former shareholders of Intrigue Technologies, Inc., which we acquired in May 2004.

 

     Our purchases of plant and equipment during fiscal years 2010 and 2009 were principally for computer hardware and software purchases, machinery and equipment and normal expenditures for tooling. In fiscal year 2008, we also purchased machinery and equipment for two new production and manufacturing facilities, including a new surface mount technology factory in China, and leasehold improvements for a new office facility in Switzerland. Purchasing activity was lower in fiscal years 2010 and 2009 as we focused our cash outlays on critical capital needs.

 

     During the third quarter of fiscal year 2008, we sold 50% of our investment securities as part of a confidential settlement agreement and received $84.3 million in cash. In addition, we sold our remaining investments collateralized by corporate debt for $28.3 million, at a realized loss of $6.0 million. We also reinvested $130.9 million into short-term bank deposits, which are classified as cash equivalents in the Company’s balance sheet. The balance of the activity in investments related to purchases and sales made during the first quarter of fiscal year 2008. The Company no longer invests in auction rate securities.

 

     We received $11.3 million during fiscal year 2008 from the sale in fiscal year 2007 of the balance of our investment in Anoto Group A.B. We also received $2.0 million from the sale of our ioPen retail product line in fiscal year 2008.

 

     The proceeds from cash surrender and the premiums paid on life insurance relate to investments of a management deferred compensation plan offered by one of the Company’s subsidiaries.

 

 

 

     The following tables present information on our cash flows from financing activities, including information on our share repurchases during fiscal years 2010, 2009 and 2008 (in thousands except per share amounts):

 

	Year Ended March 31,
	2010				2009				2008
Purchases of treasury shares	$	(126,301	)		$	(78,870	)		$	(219,742	)
Proceeds from sale of shares upon exercise of options
and purchase rights		28,917				31,119				50,603
Repayments of debt		(13,630	)			—				(11,739	)
Excess tax benefits from share-based compensation		2,814				6,592				15,231
Net cash used in financing activities	$	(108,200	)		$	(41,159	)		$	(165,647	)

	Year Ended March 31,
	2010			2009			2008
Number of shares repurchased		7,425			2,803			7,784
Value of shares repurchased	$	126,301		$	78,870		$	219,742
Average price per share	$	17.01		$	28.14		$	28.23