What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-10-22 compared with 2020-07-23 · 140 added, 104 removed, 220 unchanged (53% of the section changed)

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This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934.

These forward-looking statements include, among other things, statements regarding our strategy for growth, future revenues, earnings, cash flow, uses of cash and other measures of financial performance, and market position, our business strategy, the impact of investment prioritization decisions, product offerings, sales and marketing initiatives, strategic investments, addressing execution challenges, trends in consumer demand affecting our products and markets, trends in the composition of our customer base, our current or future revenue and revenue mix by product, among our lower- and higher-margin products, our new product introductions and by geographic region, our expectations regarding the potential growth opportunities for our products in mature and emerging markets and the enterprise market, our expectations regarding the impact of COVID-19 on our business and results of operations, our expectations regarding economic conditions in international markets, including China, Russia and Ukraine, our expectations regarding trends in global economic conditions and consumer demand for PCs and mobile devices, tablets, gaming, audio, pointing devices, wearables, remotes and other accessories and computer devices and the interoperability of our products with such third party platforms, our expectations regarding the convergence of markets for computing devices and consumer electronics, our expectations regarding the growth of cloud-based services, our expected reduction in size of our product portfolio and dependence on new products, our competitive position and the effect of pricing, product, marketing and other initiatives by us and our competitors, the potential that our new products will overlap with our current products, our expectations regarding competition from well-established consumer electronics companies in existing and new markets, potential tariffs, their effects and our ability to mitigate their effects, our expectations regarding the recoverability of our goodwill, goodwill impairment charge estimates and the potential for future impairment charges, the impact of our current and proposed product divestitures, changes in our planned divestitures, restructuring of our organizational structure and the timing thereof, our expectations regarding the success of our strategic acquisitions, including integration of acquired operations, products, technology, internal controls, personnel and management teams, significant fluctuations in currency exchange rates and commodity prices, the impact of new product introductions and product innovation on future performance or anticipated costs and expenses and the timing thereof, resolution of our North American distribution center issues, cash flows, the sufficiency of our cash and cash equivalents, cash generated and available borrowings (including the availability of our uncommitted lines of credit) to fund future cash requirements, our expectations regarding future sales compared to actual sales, our expectations regarding share repurchases, dividend payments and share cancellations, our expectations regarding our future working capital requirements and our anticipated capital expenditures needed to support our product development and expanded operations, our expectations regarding our future tax benefits, tax settlements, the adequacy of our provisions for uncertain tax positions, our expectations regarding our potential indemnification obligations, and the outcome of pending or future legal proceedings and tax audits, our expectations regarding the impact of new accounting pronouncements on our operating results, and our ability to achieve and sustain renewed growth, profitability and future success.

These forward-looking statements include, among other things, statements regarding our strategy for growth, future revenues, earnings, cash flow, uses of cash and other measures of financial performance, and market position, our business strategy, the impact of investment prioritization decisions, product offerings, sales and marketing initiatives, strategic investments, addressing execution challenges, trends in consumer demand affecting our products and markets, trends in the composition of our customer base, our current or future revenue and revenue mix by product, among our lower- and higher-margin products and by geographic region, our new product introductions, our expectations regarding the potential growth opportunities for our products in mature and emerging markets and the enterprise market, our expectations regarding the impact of COVID-19 on our business and results of operations, our expectations regarding economic conditions in international markets, including China, Russia and Ukraine, our expectations regarding trends in global economic conditions and consumer demand for PCs and mobile devices, tablets, gaming, video collaboration, audio, pointing devices, wearables, remotes, microphones, streaming and other accessories and computer devices and related software and services, the interoperability of our products with third party platforms, our expectations regarding the convergence of markets for computing devices and consumer electronics, our expectations regarding the growth of cloud-based services, our dependence on new products, our competitive position and the effect of pricing, product, marketing and other initiatives by us and our competitors, the potential that our new products will overlap with our current products, our expectations regarding competition from well-established consumer electronics companies in existing and new markets, potential tariffs, their effects and our ability to mitigate their effects, our expectations regarding the recoverability of our goodwill, goodwill impairment charge estimates and the potential for future impairment charges, the impact of our current and proposed product divestitures, changes in our planned divestitures, restructuring of our organizational structure and the timing thereof, our expectations regarding the success of our strategic acquisitions, including integration of acquired operations, products, technology, internal controls, personnel and management teams, significant fluctuations in currency exchange rates and commodity prices, the impact of new product introductions and product innovation on future performance or anticipated costs and expenses and the timing thereof, cash flows, the sufficiency of our cash and cash equivalents, cash generated and available borrowings (including the availability of our uncommitted lines of credit) to fund future cash requirements, our expectations regarding future sales compared to actual sales, our expectations regarding share repurchases, dividend payments and share cancellations, our expectations regarding our future working capital requirements and our anticipated capital expenditures needed to support our product development and expanded operations, our expectations regarding our future tax benefits, tax settlements, the adequacy of our provisions for uncertain tax positions, our expectations regarding our potential indemnification obligations, and the outcome of pending or future legal proceedings and tax audits, our expectations regarding the impact of new accounting pronouncements on our operating results, and our ability to achieve and sustain renewed growth, profitability and future success.

Forward-looking statements also include, among others, those statements including the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “project,” “predict,”, "seek", “should,” “will,” and similar language.

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Logitech is a world leader in designing, manufacturing and marketing products that help connect people to digital and cloud experiences.

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

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

Logitech's brands include Logitech, Logitech G, ASTRO Gaming, Streamlabs, Ultimate Ears, Jaybird, and Blue Microphones.

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The COVID-19 pandemic has significantly curtailed global economic activity, caused significant volatility and disruption in global financial and commercial markets, and is likely to lead to recessionary pressures for an indeterminate amount of time.

We are conducting our business with substantial modifications, such as employee work locations and remote work among other changes.

We are conducting our business with substantial modifications, such as employee remote work and travel limitations among other changes.

We are continuing to actively monitor the situation and may take further actions that could alter our business operations as may be required by federal, state or local authorities in the countries in which we operate, or that we determine are in the best interest of our employees, customers, partners, suppliers or shareholders.

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During February 2020, following the initial outbreak of COVID-19 in China, we experienced disruptions to our manufacturing, supply chain and logistics services, resulting in temporary inventory declines and an increase in logistics costs.

We continued to see disruptions to our supply chain and logistics services, inventory constraints and increased logistics costs during the remainder of the fourth quarter of fiscal year 2020 and the first quarter of fiscal year 2021 as we attempted to address the effects of COVID-19, including health-related issues, changing regulations, and increased demand for and depleted inventories of some of our products.

At the same time, due to the ongoing shelter-at-home requirements or recommendations in many countries, there was high demand and consumption of certain of our products that led to increased sales and operating income .

We continued to see disruptions to our supply chain and logistics services, inventory constraints and increased logistics costs during the remainder of the fourth quarter of fiscal year 2020 and the first and second quarters of fiscal year 2021 as we attempted to address the effects of COVID-19, including health-related issues, changing regulations, and increased demand for and depleted inventories of some of our products.

At the same time, due to the ongoing shelter-at-home requirements or recommendations in many countries, there has been acceleration of the work-from-home, study-from-home, gaming, video collaboration and streaming trends and high demand and consumption of certain of our products that have led to increased sales and operating income .

While it is not yet clear how long the positive demand dynamics will continue, we expect the increased logistics costs and other adverse effects on our gross margins from COVID-19 to continue through the remainder of fiscal year 2021.

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Summary of Financial Results

Our total sales for the three months ended June 30, 2020 increased 23% , compared to the three months ended June 30, 2019 , due to stronger sales across all regions and several of our product categories from increased remote work and distance learning set-ups, related to various shelter-at-home mandates.

Our total sales for the three and six months ended September 30, 2020 increased 75% and 50% , respectively, compared to the three and six months ended September 30, 2019 , due to stronger sales across all regions and several of our product categories from increased remote work and distance learning trends, related to various shelter-at-home mandates, as well as gaming from home, as a result of COVID-19.

The results of operations for Streamlabs have been included in our consolidated statement of operations from the acquisition date.

Streamlabs contributed 2 points to the sales growth during the period.

Our sales for the three months ended June 30, 2020 increased 21% , 18% and 31% in the Americas, EMEA and Asia Pacific, respectively, compared to the same period of the prior fiscal year.

Our gross margin for the three months ended June 30, 2020 increased by 150 basis points to 38.6% from 37.1% for the three months ended June 30, 2019 .

The increase in gross margin was driven by lower customer incentive programs, favorable product mix and benefits from cost savings and operational efficiencies, partially offset by COVD-19 related costs primarily due to higher logistics operations costs and unfavorable currency exchange rates.

Operating expenses for the three months ended June 30, 2020 were $222.3 million , or 28.1% of sales, compared to $191.5 million , or 29.7% of sales in the same period of the prior fiscal year.

Net income for the three months ended June 30, 2020 was $72.1 million , compared to $45.3 million for the three months ended June 30, 2019 .

Our sales for the three months ended September 30, 2020 increased 83% , 68% , and 70% in the Americas, EMEA and Asia Pacific, respectively, compared to the same period of the prior fiscal year.

Our sales for the six months ended September 30, 2020 increased 52% , 46% , and 52% in the Americas, EMEA and Asia Pacific, respectively, compared to the same period of the prior fiscal year.

Our gross margin for the three months ended September 30, 2020 increased by 750 basis points to 45.3% from 37.8% for the three months ended September 30, 2019 .

Our gross margin for the six months ended September 30, 2020 increased by 520 basis points to 42.7% from 37.5% for the six months ended September 30, 2019 .

Our gross margin for both periods benefited from higher sales volume, continued restrained promotional spending, and favorable product mix, which more than offset the higher logistics operations costs and unfavorable currency exchange rates.

Operating expenses for the three months ended September 30, 2020 were $248.2 million , or 19.7% of sales, compared to $204.0 million , or 28.3% of sales in the same period of the prior fiscal year.

Operating expenses for the six months ended September 30, 2020 were $470.5 million , or 23.0% of sales, compared to $395.5 million , or 29.0% of sales in the same period of the prior fiscal year.

Net income for the three and six months ended September 30, 2020 was $266.9 million and $339.0 million , respectively, compared to $72.9 million and $118.3 million for the three and six months ended September 30, 2019 , respectively.

Trends in Our Business

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Creativity & Productivity:

New PC shipments remain lackluster but the installed base of PC users remains large.

New PC shipments have been strong recently due to work-from-home and study-from-home trends.

We believe that innovative PC peripherals, such as our mice and keyboards, can renew the PC usage experience and help improve the productivity and engagement of remote work, distance learning, and telemedicine, thus providing growth opportunities.

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Hybrid and distance learning environments have also created demand and growth opportunities for our education tablet keyboards and accessories.

The PC gaming and console gaming platforms continue to show strong structural growth opportunities as online gaming, multi-platform experiences, and esports gain greater popularity and gaming content becomes increasingly more demanding and social particularly as other recreational activities have been curtained or restricted during stay-at-home mandates.

The new console refresh cycle during the holiday season of 2020 could drive subsequent growth opportunities over the coming years for our ASTRO family of headsets and controllers.

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Video Collaboration :

The near and long-term structural growth opportunities in the video collaboration market have never been more relevant than in today’s environment, as commercial and consumer adoption of video has seen explosive growth in recent months.

The near and long-term structural growth opportunities in the video collaboration market (VC) have never been more relevant than in today’s environment, as commercial and consumer adoption of video has seen explosive growth in recent months.

Video meetings are on the rise, and companies increasingly want lower-cost, cloud-based solutions that can provide their employees with the ability to work from anywhere.

We are continuing our efforts to create and sell innovative products to accommodate the increasing demand from small-size meeting rooms, such as huddle rooms, to medium and large-sized meeting rooms.

We are continuing our efforts to create and sell innovative products to accommodate the increasing demand from home offices and small-size meeting rooms, such as huddle rooms, to medium and large-sized meeting rooms.

We are also experiencing significant demand for our enterprise-grade VC webcams and headsets.

We will continue to invest in select business-specific products (both hardware and software), targeted product marketing and sales channel development.

The mobile speaker market has remained soft, and has further weakened as physical retail stores have been recently closed and retail footprint has decreased significantly due to the COVID-19 pandemic.

The mobile speaker market has remained soft, and has further weakened as physical retail stores have been recently closed and the retail footprint has decreased significantly due to the COVID-19 pandemic.

The integration of personal voice assistants has become increasingly competitive in the speaker categories, but the market for third-party, voice-enabled speakers has not yet gained traction.

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Our remote Harmony business declined substantially in fiscal year 2020, offset by growth in our Circle 2 family of security cameras.

In general, the space is under pressure as the way people consume content is changing and as retail stores have been closed.

We will continue to explore other innovative experiences for the Smart Home category.

This trend continued during the first half of fiscal year 2021.

In general, our Harmony and Circle 2 products are under pressure as the way people consume content is changing and as retail stores have been closed.

The smart home market opportunity is broad and we will continue to explore other innovative experiences to drive growth in the Smart Home category.

Business Seasonality, Product Introductions and Acquisitions

We have historically experienced higher sales in our third fiscal quarter ending December 31, compared to other fiscal quarters in our fiscal year, primarily due to the increased consumer demand for our products during the year-end holiday buying season and year-end spending by enterprises.

It is not clear to what extent the COVID-19 pandemic will affect this pattern.

Additionally, new product introductions and business acquisitions can significantly impact sales, product costs and operating expenses.

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Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.

There have been no material changes in our critical accounting policies and estimates during the three months ended June 30, 2020 compared with the critical accounting policies and estimates disclosed in Management's Discussions and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020 .

There have been no material changes in our critical accounting policies and estimates during the six months ended September 30, 2020 compared with the critical accounting policies and estimates disclosed in Management's Discussions and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020 .

Adoption of New Accounting Pronouncements

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Dollar, such as the Euro, Chinese Renminbi, Japanese Yen, Canadian Dollar, Taiwan New Dollar, British Pound and Australian Dollar.

During the three months ended June 30, 2020 , approximately 48% of our sales were denominated in currencies other than the U.S.

During the three months ended September 30, 2020 , approximately 50% of our sales were denominated in currencies other than the U.S.

Results of Operations

Our sales in the three months ended June 30, 2020 increased 23% compared to the same period of the prior fiscal year, driven by sales increases in all regions and several of our product categories from increased remote work and distance learning set-ups, as well as from various stay-at-home mandates.

Strong growth sales for in Video Collaboration, Gaming, PC Webcams, Keyboards & Combos, Audio PC & Wearables, and Tablet and other Accessories and Keyboards & Combos was partially offset by a decline in sales for Mobile Speakers, Smart Home, and Pointing Devices.

If currency exchange rates had been constant in the three months ended June 30, 2020 and 2019 , our constant dollar sales growth rate would have been 25% .

Our sales in the three and six months ended September 30, 2020 increased 75% and 50% , respectively, compared to the same period of the prior fiscal year, driven by sales increases in all regions and several of our product categories from increased remote work and distance learning trends, as a result of various shelter-at-home mandates.

Strong sales growth in Video Collaboration, Gaming, PC Webcams, Keyboards & Combos, Audio PC & Wearables, Tablet and Other Accessories, and Pointing Devices was partially offset by a decline in sales for Mobile Speakers and Smart Home.

If currency exchange rates had been constant in the three and six months ended September 30, 2020 and 2019 , our constant dollar sales growth rate would have been 73% and 51% , respectively.

Sales by Region

The following table presents the change in sales by region for the three months ended June 30, 2020 , compared with the three months ended June 30, 2019 :

The following table presents the change in sales by region for the three and six months ended September 30, 2020 , compared with the three and six months ended September 30, 2019 :

Sales Growth Rate

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Sales Growth Rate

The increase in sales in our Americas region was primarily driven by growth in sales for Video Collaboration, Gaming, PC Webcams, and Audio PC & Wearables, partially offset by a decline in sales for Mobile Speakers.

The increase in sales in our EMEA region was primarily driven by growth in sales for PC Webcams, Video Collaboration, and Gaming, partially offset by a decline in sales for Mobile Speakers and Smart Home.

Three Months Ended September 30, 2020

Six Months Ended September 30, 2020

Three Months Ended September 30, 2020

Six Months Ended September 30, 2020

The increase in sales in our Americas region for both the three and six month periods was primarily driven by growth in sales across a majority of our product categories, partially offset by a decline in sales for Mobile Speakers and Smart Home.

The increase in sales in our EMEA region for both the three and six month periods was primarily driven by growth in sales across a majority of our product categories, partially offset by a decline in sales for Mobile Speakers and Smart Home.

Asia Pacific:

The increase in sales in our Asia Pacific region was primarily driven by growth in sales for PC Webcams, Video Collaboration, Gaming, and Keyboards & Combos, partially offset by a decline in sales for Mobile Speakers.

The increase in sales in our Asia Pacific region for both the three and six month periods was driven by all product categories.

Sales by Product Categories

Sales by product categories for the three months ended June 30, 2020 and 2019 were as follows (Dollars in thousands):

Sales by product categories for the three and six months ended September 30, 2020 and 2019 were as follows (Dollars in thousands):

Three Months Ended

September 30,

Six Months Ended

September 30,

Pointing Devices

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Our Pointing Devices category comprises PC- and Mac-related mice including trackballs, touchpads and presenters.

Sales of Pointing Devices decreased 1% in the three months ended June 30, 2020 , compared to the same period of the prior fiscal year, primarily driven by declines in EMEA and Asia Pacific regions.

The decrease was primarily driven by the decrease in sales of presentation tools and corded mice, partially offset by an increase in sales of our cordless mice.

Sales of Pointing Devices increased 27% and 14% in the three and six months ended September 30, 2020 , respectively, compared to the same period of the prior fiscal year.

The increases in both periods were primarily driven by the increase in sales for cordless and trackball mice, partially offset by a decline in sales of our presentation tools, as most conferences, events, and other large-scale presentations remained prohibited.

Keyboards & Combos

Our Keyboards & Combos category comprises PC keyboards, living room keyboards and keyboard/mice combo products.

Sales of Keyboards & Combos increased 13% in the three months ended June 30, 2020 , compared to the same period of the prior fiscal year.

The increase was driven by an increase in sales for our cordless keyboards and wireless keyboards/mice combos, partially offset by a decline in sales of our living room keyboard and corded keyboard/mice combos.

Sales of Keyboards & Combos increased 45% and 30% in the three and six months ended September 30, 2020 , respectively, compared to the same periods of the prior fiscal year.

The increases in both periods were driven by an increase in sales for our cordless keyboards and wireless keyboards/mice combos.

The increase for the six month period was partially offset by a decline in sales for our living room keyboards and corded keyboards/mice combos.

Our PC Webcams category comprises PC-based webcams targeted primarily at consumers.

PC Webcams sales increased 116% in the three months ended June 30, 2020 , compared to the same period of the prior fiscal year.

The increase was across all regions and all product types, primarily driven by an increase in sales of our HD Pro Webcam C920, Webcam C60, HD Webcam C615, and Logitech StreamCam partly due to remote work and distance learning.

PC Webcams sales increased 256% and 187% in the three and six months ended September 30, 2020 , respectively, compared to the same periods of the prior fiscal year.

The increases for both periods were across all product sub-categories, primarily driven by an increase in sales of our HD Pro Webcam C920, 1080 PRO Stream Webcam, Webcam C60, and Logitech Streamcam, partly due to more remote work adoption and distance learning.

Tablet & Other Accessories

Our Tablet & Other Accessories category primarily comprises keyboards for tablets.

Sales of Tablet & Other Accessories products increased 20% in the three months ended June 30, 2020 , compared to the same period of the prior fiscal year .

The increase was primarily driven by the sales of our Rugged Folio keyboard cases for a newer generation of iPads and Slim Folio keyboard for iPad 7th generation, both introduced in the third quarter of fiscal year 2020.

Sales of Tablet & Other Accessories products increased 145% and 79% in the three and six months ended September 30, 2020 , respectively, compared to the same periods of the prior fiscal year.

The increase for both periods was primarily driven by an increase in the sales of our Rugged Folio keyboard cases for a newer generation of iPads and Slim Folio keyboard for iPad 7th generation, both introduced in the third quarter of fiscal year 2020, and our Powered Wireless Charging 3-in-1 Dock, introduced in the fourth quarter of fiscal year 2020, partly due to schools embracing various technology devices to better educate students in distance learning environments.

Gaming market:

Our Gaming category compris es gaming mice, keyboards, headsets, gamepads, steering wheels, simulation controllers, console gaming headsets, console gaming controllers, and Streamlabs services.

Gaming sales increased 35% for the three months ended June 30, 2020 , compared to the same period of the prior fiscal year.

The increase was primarily driven by increases in the sales of all our product types, including Streamlabs services as a result of our business combination in the third quarter of fiscal year 2020, except for console gaming controllers.

T he decrease in console gaming controllers was primarily driven by decline in the sales of C40 controllers and controller accessories.

Our Gaming category comprises gaming mice, keyboards, headsets, gamepads, steering wheels, simulation controllers, console gaming headsets, console gaming controllers, and Streamlabs services.

Gaming sales increased 85% and 62% for the three and six months ended September 30, 2020 , respectively, compared to the same periods of the prior fiscal year.

The increase for both periods was primarily driven by increases in the sales of nearly all our product sub-categories, including Streamlabs services as a result of our business acquisition in the third quarter of fiscal year 2020.

Video Collaboration market:

Our Video Collaboration category primarily includes Logitech’s ConferenceCams, which combine affordable

enterprise-quality audio and high definition (HD) 1080p video to bring video conferencing to businesses of any size.

Sales of Video Collaboration products increased 77% in the three months ended June 30, 2020 , compared to the same period of the prior fiscal year.

The increase was primarily driven by the sales of our BRIO 4K Pro Webcam, MeetUp video conferencing camera, Rally Ultra-HD conference camera system, and Pro Webcam Ultra Wide Angle HD Webcam partly due to remote work setups, partially offset by a decline in sales of our BCC950 video conferencing system and older generation products.

Our Video Collaboration category primarily includes Logitech’s ConferenceCams, which combine affordable enterprise-quality audio and high definition (HD) 1080p video to bring video conferencing to businesses of any size.

Sales of Video Collaboration products increased 164% and 125% in the three and six months ended September 30, 2020 , respectively, compared to the same periods of the prior fiscal year.

The increases for both periods were primarily driven by the sales of our MeetUp video conferencing camera, Rally Ultra-HD conference camera system, and BRIO 4K Pro Webcam, from continued deployment of video in the office as some countries started reopening work locations and employees started returning to work.

Music market:

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Our Mobile Speakers category is made up entirely of Bluetooth wireless speakers.

Sales of Mobile Speakers decreased 42% for the three months ended June 30, 2020 , compared to the same period of the prior fiscal year.

The decrease was primarily due to a decrease in sales of our BOOM 3, WONDERBOOM, BOOM 2, and WONDERBOOM 2 mobile speakers, partially offset by an increase in sales from the introduction of our HYPERBOOM speaker in the fourth quarter of fiscal year 2020 and an increase in sales of our MEGABOOM 3 speakers.

Sales of Mobile Speakers decreased 24% and 33% for the three and six months ended September 30, 2020 , compared to the same periods of the prior fiscal year.

The decreases for both periods were primarily driven by a decrease in the sales of our UE MEGABOOM, BOOM 3, MEGABOOM 3 and UE WONDERBOOM mobile speakers.

The decreases were partially offset by sales from the introduction of our HYPERBOOM speaker in the fourth quarter of fiscal year 2020.

Audio & Wearables

Our Audio & Wearables category comprises PC speakers, PC headsets, in-ear headphones, premium wireless audio wearables and studio-quality microphones for professionals and consumers.

Audio & Wearables sales increased 22% for the three months ended June 30, 2020 , compared to the same period of the prior fiscal year.

Th e increase wa s primarily driven by the sales of both our corded and cordless headsets and Blue Microphones products, partially offset by a decline in the sales of our Jaybird traditional wireless products.

Audio & Wearables sales increased 68% and 47% for the three and six months ended September 30, 2020 , respectively, compared to the same periods of the prior fiscal year.

Th e increases for both periods were primarily driven by increases in the sales of both our corded and cordless headsets and Blue Microphones products, partially offset by a decline in the sales of our Jaybird products.

Smart Home market:

Our Smart Home category mainly comprises our Harmony line of advanced home entertainment controllers and home security cameras.

Smart Home sales decreased 31% during the three months ended June 30, 2020 , compared to the same period of the prior fiscal year .

The decrease was primarily driven by an overall decline in sales in our Harmony remote products and our home security products.

Gross profit for the three months ended June 30, 2020 and 2019 was as follows (Dollars in thousands):

Smart Home sales decreased 9% and 20% during the three and six months ended September 30, 2020 , respectively, compared to the same periods of the prior fiscal year.

The decrease for the three-month period was primarily due to the decline in sales of our home video products, partially offset by an increase in sales of our Harmony remotes.

The decrease for the six month period was primarily driven by an overall decline in sales of our Harmony remotes and our home video products.

Gross profit for the three and six months ended September 30, 2020 and 2019 was as follows (Dollars in thousands):

Three Months Ended

September 30,

Six Months Ended

September 30,

Gross profit consists of sales less cost of goods sold (which includes materials, direct labor and related overhead costs, costs of manufacturing facilities, royalties, costs of purchasing components from outside suppliers, distribution costs, warranty costs, customer support, shipping and handling costs, outside processing costs and write-down of inventories), amortization of intangible assets and purchase accounting effect on inventory.

Gross margin increased by 150 basis points for the three months ended June 30, 2020 , compared to the same period of the prior fiscal year.

The increase in gross margin was primarily driven by lower customer incentive programs, favorable product mix and benefits from cost savings and operational efficiencies, partially offset by COVD-19 related costs primarily due to higher logistics operations costs and unfavorable currency exchange rates.

Gross margin increased by 750 and 520 basis points for the three and six months ended September 30, 2020 , respectively, compared to the same periods of the prior fiscal year.

Gross margin benefited from higher sales volume, continued restrained promotional spending, and favorable product mix, which more than offset the higher logistics operations costs and unfavorable currency exchange rates.

Operating Expenses

Operating expenses for the three months ended June 30, 2020 and 2019 were as follows (Dollars in thousands):

Operating expenses for the three and six months ended September 30, 2020 and 2019 were as follows (Dollars in thousands):

Three Months Ended

September 30,

Six Months Ended

September 30,

Marketing and selling

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Marketing and selling expenses consist of personnel and related overhead costs, corporate and product marketing, promotions, advertising, trade shows, technical support for customer experiences and facilities costs.

During the three months ended June 30, 2020 , marketing and selling expenses increased $10.2 million compared to the same period of the prior fiscal year.

The increase was primarily driven by higher personnel-related costs due to increased headcount, partially resulting from the Streamlabs acquisition and increased performance-based variable compensation, partially offset by lower marketing related expenses.

During the three and six months ended September 30, 2020 , marketing and selling expenses increased $24.6 million and $34.8 million , respectively, compared to the same periods of the prior fiscal year.

The increases were primarily driven by higher personnel-related costs due to increased headcount, partly from the Streamlabs acquisition and increased performance-based variable compensation, partially offset by lower marketing-related expenses.

Research and Development

Research and development expenses consist of personnel and related overhead costs, contractors and outside consultants, supplies and materials, equipment depreciation and facilities costs, all associated with the design and development of new products and enhancements of existing products.

During the three months ended June 30, 2020 , research and development expenses increased $7.5 million compared to the same period of the prior fiscal year.

During the three and six months ended September 30, 2020 , research and development expenses increased $11.4 million and $18.9 million , respectively, compared to the same periods of the prior fiscal year.

The increases were primarily driven by higher personnel-related costs due to increased headcount.

General and Administrative

General and administrative expenses consist primarily of personnel and related overhead, information technology, and facilities costs for the infrastructure functions such as finance, information systems, executives, human resources, and legal.

During the three months ended June 30, 2020 , general and administrative expenses increased $6.9 million , compared to the same period of the prior fiscal year.

The increase was primarily driven by higher personnel-related costs due to increased headcount and increased share-based compensation.

During the three and six months ended September 30, 2020 , general and administrative expenses increased $7.6 million and $14.5 million , respectively, compared to the same periods of the prior fiscal year.

The increases were primarily driven by higher personnel-related costs and increased share-based compensation.

Amortization of Intangible Assets and Acquisition-Related Costs

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Acquisition-related costs include legal expense, due diligence costs, and other professional costs incurred for business acquisitions.

The increase in amortization of intangible assets during the three months ended June 30, 2020 , compared with the same period of the prior fiscal year, was primarily driven by the intangible assets acquired through the Streamlabs acquisition in the third quarter of fiscal year 2020.

During the three and six months ended , September 30, 2020 , amortization of intangible assets and acquisition-related costs increased $0.1 million and $1.1 million , respectively, compared to the same period of the prior fiscal year.

The increase for the six months ended September 30, 2020 was primarily driven by amortization of the intangible assets acquired through the Streamlabs acquisition in the third quarter of fiscal year 2020.

Change in Fair Value of Contingent Consideration for Business Acquisition

The change in fair value of contingent consideration was $5.7 million for the three months ended June 30, 2020 , primarily due to growth in Streamlabs' net sales and the achievement of the net sales targets during the six-month earn-out period.

The change in fair value of contingent consideration was $5.7 million for the six months ended September 30, 2020 , primarily due to growth in Streamlabs' net sales and the achievement of the net sales targets during the six-month earn-out period.

Other Income (Expense), Net

Other income (expense), net for the three months ended June 30, 2020 and 2019 was as follows (in thousands):

Other income (expense), net for the three and six months ended September 30, 2020 and 2019 was as follows (Dollars in thousands):

Three Months Ended

September 30,

Six Months Ended

September 30,

Investment income related to a deferred compensation plan

Currency exchange gain, net

Gain on investments

Currency exchange gain (loss), net

Loss on investments

Investment income represents earnings, gains, and losses on trading investments related to a deferred compensation plan offered by one of our subsidiaries.

Currency exchange gain, net relates to balances denominated in currencies other than the functional currency in our subsidiaries, as well as to the sale of currencies, and to gains or losses recognized on currency exchange forward contracts.

Currency exchange gain (loss), net relates to balances denominated in currencies other than the functional currency in our subsidiaries, as well as to the sale of currencies, and to gains or losses recognized on currency exchange forward contracts.

We do not speculate in currency positions, but we are alert to opportunities to maximize currency exchange gains and minimize currency exchange losses.

Loss on investments represents the unrealized loss from the fair value change on the available-for-sale securities and equity-method investments during the periods presented.

Provision for (Benefit from) Income Taxes

The provision for (benefit from) income taxes and effective tax rates for the three months ended June 30, 2020 and 2019 were as follows (Dollars in thousands):

The provision for (benefit from) income taxes and effective tax rates for the three and six months ended September 30, 2020 and 2019 were as follows (Dollars in thousands):

Three Months Ended

Provision for income taxes

September 30,

Six Months Ended

September 30,

Provision for (benefit from) income taxes

Effective income tax rate

The change in the effective income tax rate for the three months ended June 30, 2020 , compared to the same period ended June 30, 2019 , was primarily due to the mix of income and losses in the various tax jurisdictions in which we operate.

The Swiss income tax provision in each period represents the income tax provision at the full statutory income tax rate of 13.63%.

In the three months ended June 30, 2019 when TRAF was yet to be enacted at the federal and cantonal levels, the transition income tax provision was quantified at the full statutory income tax rate of 13.63% because at the time the canton of Vaud permitted the application of the longstanding tax ruling only through March 31, 2019.

There were discrete tax benefits of $5.0 million and $1.0 million from the recognition of excess tax benefits in the United States and reversal of uncertain tax positions from the expiration of statutes of limitations, respectively, in the three-month period ended June 30, 2020 , compared with $5.8 million and $1.2 million, respectively, in the three-month period ended June 30, 2019 .

As of June 30, 2020 and March 31, 2020 , the total amounts of unrecognized tax benefits due to uncertain tax positions were $144.2 million and $140.8 million, respectively, all of which would affect the effective income tax rate if recognized.

The change in the effective income tax rate for the three months ended September 30, 2020 , compared to the same period ended September 30, 2019 was primarily due to the mix of income and losses in the various tax jurisdictions in which we operate.

The Swiss income tax provision in the three months ended September 30, 2020 represents the income tax provision at the full statutory income tax rate of 13.63% .

In the same period ended September 30, 2019 when TRAF was yet to be enacted at the federal and cantonal levels, the transition income tax provision reflects the application of the longstanding tax ruling through December 31, 2019, including a retroactive adjustment made to the preceding three-month period ended June 30, 2019 when the transition income tax provision was quantified at the full statutory income tax rate of 13.63% because at the time the canton of Vaud permitted the application of the longstanding tax ruling only through March 31, 2019.

The retroactive adjustment resulted in a tax benefit of $5.9 million in the three months ended September 30, 2019.

In addition, there was a discrete tax benefit of $4.0 million from adjusting deferred tax assets and liabilities in Switzerland in the three months ended September 30, 2019.

The change in the effective income tax rate for the six months ended September 30, 2020 , compared to the same period ended September 30, 2019 was primarily due to the mix of income and losses in the various tax jurisdictions in which we operate.

The Swiss income tax provision in the six months ended September 30, 2020 represents the income tax provision at the full statutory income tax rate of 13.63%.

The income tax provision in the six months ended September 30, 2019 reflects the application of the longstanding tax ruling through December 31, 2019 as stated above.

In the six months ended September 30, 2019, there was a discrete tax benefit of $1.7 million from adjusting deferred tax assets and liabilities in Switzerland.

Furthermore, there were discrete tax benefits of $5.8 million and $1.5 million from the recognition of excess tax benefits in the United States and reversal of uncertain tax positions from the expiration of statutes of limitations, respectively, in the six-month period ended September 30, 2020 , compared with $6.7 million and $1.8 million, respectively, in the six-month period ended September 30, 2019 .

As of September 30, 2020 and March 31, 2020 , the total amount of unrecognized tax benefits due to uncertain tax positions was $152.5 million and $140.8 million , respectively, all of which would affect the effective income tax rate if recognized.

Liquidity and Capital Resources

Cash Balances, Available Borrowings, and Capital Resources

As of June 30, 2020 , we had cash and cash equivalents of $809.4 million , compared to $715.6 million as of March 31, 2020 .

As of June 30, 2020 , 57% of the cash and cash equivalents were held in Switzerland, 21% held in Germany, and 14% held in Hong Kong and China.

We do not expect to incur any material adverse tax impact except for what has been recognized, or be significantly inhibited by any country in which we do business from the repatriation of funds to Switzerland, our home domicile.

The increase in cash and cash equivalents for the three months ended June 30, 2020 , was primarily due to an increase in net cash provided by operating activities and proceeds from exercises of stock options and purchase rights, partially offset by payment of annual bonus during the period, purchases of property, plant and equipment, and tax withholdings related to settlements of restricted stock units.

As of June 30, 2020 , our working capital was $788.8 million , compared to $700.3 million as of March 31, 2020 .

The increase was primarily driven by higher cash and cash equivalents, higher accounts receivable, net, higher inventories and lower accrued and other current liabilities, partially offset by higher accounts payable.

Our working capital increased by $140.5 million compared to $648.3 million as of June 30, 2019 , which was primarily driven by higher cash and cash equivalents, higher accounts receivable, net, and higher other current assets, partially offset by lower inventories and higher accounts payable and accrued and other current liabilities.

We had several uncommitted, unsecured bank lines of credit aggregating $81.9 million as of June 30, 2020 .

As of September 30, 2020 , we had cash and cash equivalents of $917.2 million , compared to $715.6 million as of March 31, 2020 .

As of September 30, 2020 , 51% of the cash and cash equivalents were held in Switzerland, 21% were held in Germany, and 15% were held in Hong Kong and China.

We do not expect to incur any material adverse tax impact except for what has already been recognized, or be significantly inhibited by any country in which we do business from the repatriation of funds to Switzerland, our home domicile.

The increase in cash and cash equivalents for the six months ended September 30, 2020 , was primarily due to an increase in net cash provided by operating activities and proceeds from exercises of stock options and purchase rights, partially offset by payment of cash dividends, purchases of property, plant and equipment, tax withholdings related to settlements of restricted stock units, and shares repurchased under our share buyback program.

As of September 30, 2020 , our working capital was $952.6 million , compared to $700.3 million as of March 31, 2020 .

The increase was primarily driven by higher cash and cash equivalents, higher accounts receivable, net, higher inventories and higher other current assets, partially offset by higher accounts payable and accrued and other current liabilities.

Our working capital increased by $330.2 million compared to $622.4 million as of September 30, 2019 , which

was primarily driven by higher cash and cash equivalents, higher accounts receivable, net, higher inventories and higher other current assets, partially offset by higher accounts payable and accrued and other current liabilities.

We had several uncommitted, unsecured bank lines of credit aggregating $84.2 million as of September 30, 2020 .

There are no financial covenants under these lines of credit with which we must comply.

As of June 30, 2020 , we had outstanding bank guarantees of $28.5 million under these lines of credit.

As of September 30, 2020 , we had outstanding bank guarantees of $22.9 million under these lines of credit.

The following table summarizes our condensed consolidated statements of cash flows (Dollars in thousands):

Three Months Ended

Six Months Ended

September 30,

Net cash provided by operating activities

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Net increase (decrease) in cash and cash equivalents

The following table presents selected financial information and statistics as of and for the three months ended June 30, 2020 and 2019 (Dollars in thousands):

As of June 30,

The following table presents selected financial information and statistics as of and for the three months ended September 30, 2020 and 2019 (Dollars in thousands):

As of September 30,

Accounts receivable, net

1 unchanged sentence

Three Months Ended

September 30,

Days sales in accounts receivable (“DSO”) (Days) (1)

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(3) ITO is determined using ending inventories and annualized cost of goods sold (based on the most recent quarterly cost of goods sold).

DSO for the three months ended June 30, 2020 decreased by 2 days to 57 days, compared to 59 days for the same period of the prior fiscal year, primarily due to timing of sales, customer payments and sales linearity.

DPO for the three months ended June 30, 2020 increased by 5 days, compared to 75 days for the same period of the prior fiscal year, primarily due to the timing of purchases and related payments.

ITO for the three months ended June 30, 2020 increased by 1.7 , compared to 5.5 for the same period of the prior fiscal year, primarily due to higher sales growth as a result of higher demand due to the COVID-19 impact.

DSO for the three months ended September 30, 2020 decreased by 4 days to 54 days, compared to 58 days for the same period of the prior fiscal year, primarily due to timing of sales, customer payments and sales linearity.

DPO for the three months ended September 30, 2020 increased by 4 days, compared to 83 days for the same period of the prior fiscal year, primarily due to the timing of purchases and related payments.

ITO for the three months ended September 30, 2020 increased by 1.7 , compared to 5.3 for the same period of the prior fiscal year, primarily due to higher sales growth as a result of higher demand for certain of our products

due to the COVID-19 impact.

If we are not successful in launching and phasing in our new products, or market competition increases, or we are not able to sell the new products at the prices planned, it could have a material impact on our sales, gross profit margin, operating results including operating cash flow, and inventory turnover in the future.

During the three months ended June 30, 2020 , we generated $118.8 million of cash from operating activities.

Our main sources of operating cash flows were from net income, after adding back non-cash expenses of depreciation, amortization and share-based compensation expense, change in fair value of contingent considerations, and from changes in operating assets and liabilities.

During the six months ended September 30, 2020 , we generated $398.5 million of cash from operating activities.

Our main sources of operating cash flows were from net income, after adding back non-cash expenses of depreciation, amortization and share-based compensation expense, from change in fair value of contingent considerations, and from changes in operating assets and liabilities.

The increase in accounts receivable, net was primarily driven by growth and timing of sales.

The increase in inventories was primarily driven by an increase in inventory purchases during the first quarter of fiscal year 2021.

The increase in inventories was primarily driven by an increase in inventory purchases, in anticipation of continued high demand for certain of our products, during the six months ended September 30, 2020.

The increase in accounts payable was primarily driven by the timing of purchases and related payments.

The decrease in accrued and other liabilities was primarily due to payment of annual bonus during the period.

Net cash used in investing activities was $ 30.5 million , primarily due to $27.8 million of purchases of property, plant and equipment.

Net cash used in financing activities was $13.1 million , primarily due to $23.1 million tax withholdings related to net share settlements of restricted stock units, partially offset by $10.0 million in proceeds received from exercises of stock options and purchase rights.

During the three months ended June 30, 2020 , there was a $0.5 million gain from currency exchange rate effect on cash and cash equivalents, compared to a loss of $0.5 million during the same period of the prior fiscal year.

The gain from currency translation exchange effect during the three months ended June 30, 2020 was primarily due to the strengthening of the Australian Dollar, Japanese Yen, and Taiwanese Dollar against the U.S.

Net cash used in financing activities was $168.8 million , primarily due to the $146.7 million payment of a cash dividend, $22.5 million used for repurchases of our registered shares, and $25.7 million for tax withholdings related to net share settlements of restricted stock units, partially offset by $26.1 million in proceeds received from exercises of stock options and purchase rights.

During the six months ended September 30, 2020 , there was a $2.5 million gain from currency exchange rate effect on cash and cash equivalents, compared to a loss of $3.6 million during the same period of the prior fiscal year.

The gain from currency translation exchange effect during the six months ended September 30, 2020 was primarily due to the strengthening of the Australian Dollar, Chinese Renminbi, and Japanese Yen against the U.S.

Dollar by 15% , 4% , and 3% , respectively, during the period.

The loss from effect of currency exchange rate changes during the six months ended September 30, 2019 was primarily due to the weakening of the Euro, Chinese Renminbi and Brazilian Real against the U.S.Dollar by 3% , 5% , and 7% , respectively.

Our principal sources of liquidity are our cash and cash equivalents, cash flow generated from operations and, to a much lesser extent, capital markets and borrowings.

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The future impact of COVID-19 cannot be predicted with certainty and may increase our costs of capital and otherwise adversely affect our business, results of operations, financial conditions and liquidity.

In May 2020, the Board of Directors recommended that we pay cash dividends for fiscal year 2020 of CHF 134.0 million ( $138.7 million based on the exchange rate on March 31, 2020).

In fiscal year 2020, we paid a cash dividend of CHF 121.8 million (U.S.

In fiscal year 2021, we paid an annual cash dividend of CHF 134.0 million (U.S.

Dollar amount of $146.7 million ) out of fiscal year 2020 retained earnings.

The dividend to be paid in fiscal year 2020 and any future dividends will be subject to the approval of our shareholders.

In fiscal year 2020, we paid an annual cash dividend of CHF 121.8 million (U.S.

Dollar amount of $124.2 million ) out of fiscal year 2019 retained earnings.

Any future dividends will be subject to the approval of our shareholders.

In May 2020, our Board of Directors approved a new share buyback program, which authorizes us to invest up to $250.0 million to purchase our own shares, following the expiration date of the 2017 share buyback program.

2 unchanged sentences

Opportunistic purchases may be started or stopped at any time without prior notice depending on market conditions and other factors.

Our 2017 share buyback program, which authorized us to invest up to $250.0 million to purchase our own shares, expired at the end of April 2020.

There was no share buyback during the three months ended June 30, 2020 .

As of September 30, 2020 , $227.6 million is still available for repurchase under the 2020 share buyback program.

If we do not generate sufficient operating cash flows to support our operations and future planned cash requirements, our operations could be harmed and our access to credit could be restricted or eliminated.

5 unchanged sentences

Purchase Commitments

As of June 30, 2020, we had non-cancelable purchase commitments of $401.0 million for inventory purchases made in the normal course of business from original design manufacturers, contract manufacturers and other suppliers, as well as due to strong sales growth in the first quarter of fiscal year 2021 and the reduced level of our customers’ inventories, the majority of which are expected to be fulfilled within the next 12 months.

As of September 30, 2020 , we had non-cancelable purchase commitments of $628.6 million for inventory purchases made in the normal course of business from original design manufacturers, contract manufacturers and other suppliers, as well as due to strong sales growth in the six months ended September 30, 2020 and the reduced level of our customers’ inventories, the majority of which are expected to be fulfilled within the next 12 months.

The increase of inventory purchase commitment from March 31, 2020 is to replenish the inventory due to business growth as well as a mitigation of supply constraint in the fourth quarter of fiscal year 2020.

3 unchanged sentences

We recorded a liability for firm, non-cancelable, and unhedged inventory purchase commitments in excess of anticipated demand or net realizable value consistent with our valuation of excess and obsolete inventory.

As of June 30, 2020, the liability for these purchase commitments was $ 10.0 million and is recorded in accrued and other current liabilities.

As of September 30, 2020 , the liability for these purchase commitments was $ 8.4 million and is recorded in accrued and other current liabilities.

Although open purchase commitments are considered enforceable and legally binding, the terms generally allow us the option to reschedule and adjust our requirements based on business needs prior to delivery of goods.

6 unchanged sentences

The scope of these indemnities varies, but in some instances includes indemnification for damages and expenses, including reasonable attorneys’ fees.

As of June 30, 2020 , no amounts have been accrued for indemnification provisions.

As of September 30, 2020 , no amounts have been accrued for indemnification provisions.

We do not believe, based on historical experience and information currently available, that it is probable that any material amounts will be required to be paid under our indemnification arrangements.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis