What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-01-21 compared with 2020-10-22 · 156 added, 143 removed, 217 unchanged (58% of the section changed)

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These forward-looking statements involve risks and uncertainties that could cause our actual performance to differ materially from that anticipated in the forward-looking statements.

Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Factors that might cause or contribute to such differences include, but are not limited to, those discussed below and in the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q.

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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 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.

Almost 40 years ago, Logitech created products to improve experiences around the personal computer (PC) platform, and today it is a multi-brand, multi-category company designing products that enable better experiences when consuming, sharing and creating digital content such as computing, gaming, video and music, whether it is on a computer, mobile device or in the cloud.

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

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In March 2020, the World Health Organization declared the outbreak of a novel coronavirus ("COVID-19") as a pandemic, which continues to spread throughout the world.

The spread of COVID-19 has caused public health officials to recommend precautions to mitigate the spread of the virus and, in certain markets in which we operate, government authorities have issued orders that require the closure of non-essential businesses and people to be quarantined or to shelter-at-home.

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

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

The spread of COVID-19 has caused public health officials to recommend precautions to mitigate the spread of the virus and, in certain markets in which we operate, government authorities have from time to time issued orders that require the closure of or restrictions on non-essential businesses and people to be quarantined or to shelter-at-home.

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

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

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

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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 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.

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

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

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

It is difficult to predict the progression, the duration and all of the effects of COVID-19, when business closure and shelter-at-home guidelines may be eased or lifted, and how consumer demand, inventory and logistical effects and costs may evolve over time, or the impact on our future sales and results of operations.

It is difficult to predict the progression, the duration and all of the effects of COVID-19, when business restrictions and shelter-at-home guidelines may be eased or lifted, and how consumer demand, inventory and logistical effects and costs may evolve over time, or the impact on our future sales and results of operations.

Some of this impact will undoubtedly occur over multiple financial periods and may have a lag effect between periods, such as what we are able to manufacture in one period affecting sales, channel inventory or logistics costs in subsequent periods.

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For additional information, see " Liquidity and Capital resources " below and " Item IA:

Risk Factors ", including under the caption " The full effect of the COVID-19 pandemic is uncertain and cannot be predicted, and the Company's business, results of operations and financial condition could be adversely affected by the COVID-19 pandemic."

Risk Factors ", including under the caption " The full effect of the COVID-19 pandemic is uncertain and cannot be predicted, and it could adversely affect the Company's business, results of operations and financial condition."

Summary of Financial Results

Our total sales for the three and 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.

Our total sales for the three and nine months ended December 31, 2020 increased 85% and 64%, respectively, compared to the three and nine months ended December 31, 2019, due to stronger sales across all regions and several of our product categories from increased remote work and distance learning trends, accelerated adoption of video communications, and greater gaming viewership, creation, and participation from home, as a result of COVID-19.

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

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.

Our sales for the three months ended December 31, 2020 increased 85%, 77%, and 95% in the Americas, EMEA and Asia Pacific, respectively, compared to the same period of the prior fiscal year.

Our sales for the nine months ended December 31, 2020 increased 65%, 59%, and 68% 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 December 31, 2020 increased by 780 basis points to 44.9% from 37.1% for the three months ended December 31, 2019.

Our gross margin for the nine months ended December 31, 2020 increased by 640 basis points to 43.7% from 37.3% for the nine months ended December 31, 2019.

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

Operating expenses for the three months ended December 31, 2020 were $300.9 million, or 18.0% of sales, compared to $205.6 million, or 22.8% of sales in the same period of the prior fiscal year.

Operating expenses for the nine months ended December 31, 2020 were $771.4 million, or 20.8% of sales, compared to $601.2 million, or 26.5% of sales in the same period of the prior fiscal year.

Net income for the three and nine months ended December 31, 2020 was $382.5 million and $721.5 million, respectively, compared to $117.5 million and $235.8 million for the three and nine months ended December 31, 2019, respectively.

Trends in Our Business

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Creativity & Productivity:

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

New PC shipments have continued to be strong recently due to work-from-home and learn-from-home trends.

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

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We believe Logitech is well positioned to benefit from the overall gaming market growth.

With ASTRO Gaming, we also strengthened our portfolio in adjacent categories, such as the console controller market.

Our acquisition of Streamlabs provides a solid platform to deliver recurring services and subscriptions to gamers.

Video Collaboration :

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

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

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

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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.

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

Moreover, the market for mobile speakers appears to be maturing, which led to a decline in Ultimate Ears sales in the past two years.

In fiscal year 2020, the wireless headphone industry continued to flourish with strong revenue growth but has slowed in recent months due to physical retail store closures.

The largest growth was in true wireless headphones while traditional wireless headphones have declined significantly.

In fiscal year 2020, the wireless headphone industry continued to flourish with strong revenue growth but has slowed in recent months.

The largest growth is in true wireless headphones while traditional wireless headphones have declined significantly.

Continued growth in the wireless headphone market is expected for the next several years as consumers increasingly adopt wireless headphones over wired headphones.

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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.

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.

This trend continued during the nine months of fiscal year 2021.

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

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

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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.

Due to the spike in the number of cases from the COVID-19 pandemic, and the ongoing shelter-at-home requirements, the third fiscal quarter experienced an even higher demand and consumption of most of our products.

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

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Swiss Federal Tax Reform

As we described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020 , the canton of Vaud in Switzerland enacted TRAF on March 10, 2020, effective as of January 1, 2020.

As described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020, the canton of Vaud in Switzerland enacted TRAF on March 10, 2020 that took effect as of January 1, 2020.

Our cash tax payments have increased in Switzerland beginning in fiscal year 2020 as a result of our transition out of our longstanding tax ruling from the canton of Vaud.

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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 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 .

There have been no material changes in our critical accounting policies and estimates during the nine months ended December 31, 2020 compared with the critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year 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 September 30, 2020 , approximately 50% of our sales were denominated in currencies other than the U.S.

During the three months ended December 31, 2020, approximately 54% of our sales were denominated in currencies other than the U.S.

Results of Operations

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.

Our sales in the three and nine months ended December 31, 2020 increased 85% and 64%, respectively, compared to the same period of the prior fiscal year, driven by sales increases in all regions and several of our product categories from increased work-from-home and study-from-home trends, as a result of various shelter-at-home mandates.

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

If currency exchange rates had been constant in the three and nine months ended December 31, 2020 and 2019, our constant dollar sales growth rate would have been 80% and 63%, respectively.

Sales by Region

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

Constant Dollar

The following table presents the change in sales by region for the three and nine months ended December 31, 2020, compared with the three and nine months ended December 31, 2019:

Sales Growth Rate Constant Dollar

Sales Growth Rate

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.

Three Months Ended

December 31, 2020 Nine Months Ended

December 31, 2020 Three Months Ended

December 31, 2020 Nine Months Ended

December 31, 2020

Americas 85 % 65 % 87 % 67 %

EMEA 77 % 59 % 67 % 55 %

Asia Pacific 95 % 68 % 89 % 66 %

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

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

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

Asia Pacific:

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

Sales by Product Categories

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

Sales by product categories for the three and nine months ended December 31, 2020 and 2019 were as follows (Dollars in thousands):

Three Months Ended

September 30,

Six Months Ended

September 30,

December 31, Nine Months Ended

2020 2019 Change 2020 2019 Change

Pointing Devices $ 213,638 $ 154,540 38 % $ 503,228 $ 409,293 23 %

Keyboards & Combos 218,269 156,333 40 565,246 424,061 33

PC Webcams 131,700 32,165 309 295,020 89,041 231

Tablet & Other Accessories 138,052 31,256 342 267,186 103,442 158

436,426 245,736 78 916,040 541,265 69

Video Collaboration 292,500 91,964 218 659,278 254,941 159

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Audio & Wearables 152,952 81,934 87 338,592 208,576 62

(1) Other category includes products that we currently intend to phase out, or have already phased out, because they are no longer strategic to our business.

Smart Home 10,593 15,790 (33) 25,976 35,088 (26)

606 — — 632 279 127

Total sales $ 1,667,302 $ 902,687 85 % $ 3,716,354 $ 2,266,603 64 %

(1) Gaming includes streaming services revenue generated by Streamlabs.

(2) Other includes products that we currently intend to phase out, or have already phased out, because they are no longer strategic to our business.

Creativity & Productivity Market:

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

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.

Sales of Pointing Devices increased 38% and 23% in the three and nine months ended December 31, 2020, respectively, compared to the same period of the prior fiscal year.

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

Keyboards & Combos

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

Sales of Keyboards & Combos increased 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.

Sales of Keyboards & Combos increased 40% and 33% in the three and nine months ended December 31, 2020, respectively, compared to the same periods of the prior fiscal year.

The increases in both periods were driven by an increase in sales of our cordless keyboards and wireless keyboards/mice combos, partially offset by a decline in sales of our living room keyboards.

The increase in the nine-month period was further partially offset by a decline in sales of our corded keyboards/mice combos.

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

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.

PC Webcams sales increased 309% and 231% in the three and nine months ended December 31, 2020, respectively, compared to the same periods of the prior fiscal year.

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

Tablet & Other Accessories

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

Sales of Tablet & Other Accessories products increased 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.

Sales of Tablet & Other Accessories products increased 342% and 158% in the three and nine months ended December 31, 2020, respectively, compared to the same periods of the prior fiscal year.

We have seen strong demand for Tablet keyboards, partly due to schools embracing various technology devices to better educate students in learning-from-home environments.

Gaming market:

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

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

Gaming sales increased 78% and 69% for the three and nine months ended December 31, 2020, respectively, compared to the same periods of the prior fiscal year.

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

The increases for both periods was partially offset by a decline in the sales of our console gaming controllers.

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 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.

Sales of Video Collaboration products increased 218% and 159% in the three and nine months ended December 31, 2020, respectively, compared to the same periods of the prior fiscal year.

The increases for both periods were primarily driven by the sales of our Rally Ultra-HD conference camera system, BRIO 4K Pro Webcam, Webcam C390e, and Webcam C925E as video communications become more critical for a more location-flexible workforce.

Music market:

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

Sales of Mobile Speakers decreased 22% and 28% for the three and nine months ended December 31, 2020, compared to the same periods of the prior fiscal year.

The decreases for both periods were primarily driven by a decrease in the sales of our BOOM 3, BOOM 2, UE MEGABOOM, and UE WONDERBOOM mobile speakers, in part due to limited outdoor activities and social gatherings.

The decreases were partially offset by sales of our WONDERBOOM 2 speakers, and the introduction of our HYPERBOOM speaker in the fourth quarter of fiscal year 2020.

Audio & Wearables

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

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

Audio & Wearables sales increased 87% and 62% for the three and nine months ended December 31, 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.

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

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):

Smart Home sales decreased 33% and 26% during the three and nine months ended December 31, 2020, respectively, compared to the same periods of the prior fiscal year.

The decrease for both periods was primarily due to an overall decline in sales of our Harmony remotes and our home video products.

Gross profit for the three and nine months ended December 31, 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 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.

December 31, Nine Months Ended

2020 2019 Change 2020 2019 Change

Net sales $ 1,667,302 $ 902,687 85 % $ 3,716,354 $ 2,266,603 64 %

Gross profit $ 749,010 $ 334,453 124 $ 1,624,466 $ 845,505 92

Gross margin 44.9 % 37.1 % 43.7 % 37.3 %

distribution costs, warranty costs, customer support, shipping and handling costs, outside processing costs and write-down of inventories), amortization of intangible assets.

Gross margin increased by 780 and 640 basis points for the three and nine months ended December 31, 2020, respectively, compared to the same periods of the prior fiscal year.

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

Operating Expenses

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

Operating expenses for the three and nine months ended December 31, 2020 and 2019 were as follows (Dollars in thousands):

Three Months Ended

September 30,

Six Months Ended

September 30,

December 31, Nine Months Ended

2020 2019 2020 2019

Marketing and selling $ 204,485 $ 134,950 $ 496,520 $ 392,138

% of sales 12.3 % 14.9 % 13.4 % 17.3 %

Research and development 53,910 43,292 157,014 127,499

% of sales 3.2 % 4.8 % 4.2 % 5.6 %

General and administrative 37,606 22,344 98,341 68,551

% of sales 2.3 % 2.5 % 2.6 % 3.0 %

Amortization of intangible assets and acquisition-related costs 4,946 5,084 13,886 12,898

% of sales 0.3 % 0.6 % 0.4 % 0.6 %

Change in fair value of contingent consideration for business acquisition — — 5,716 —

% of sales — % — % 0.2 % — %

Restructuring charges (credits), net — (45) (54) 69

% of sales — % (1)

Total operating expenses $ 300,947 $ 205,625 $ 771,423 $ 601,155

% of sales 18.0 % 22.8 % 20.8 % 26.5 %

(1) Absolute value for % of sales is less than 0.1%.

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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 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.

During the three and nine months ended December 31, 2020, marketing and selling expenses increased $69.5 million, and $104.4 million, respectively, compared to the same periods of the prior fiscal year.

The increases were primarily driven by higher advertising expenses, personnel-related costs due to increased headcount, increased performance-based variable compensation linked to stronger performance, and increased shared-based compensation.

Research and Development

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

During the three and 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.

During the three and nine months ended December 31, 2020, research and development expenses increased $10.6 million and $29.5 million, respectively, compared to the same periods of the prior fiscal year.

The increases were primarily driven by higher personnel-related costs due to increased headcount, increased performance-based variable expense linked to stronger performance, and higher investment in new product development.

General and Administrative

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

During the three and 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.

During the three and nine months ended December 31, 2020, general and administrative expenses increased $15.3 million and $29.8 million, respectively, compared to the same periods of the prior fiscal year.

The increases were primarily driven by higher personnel-related costs due to increased headcount, increased performance-based variable compensation linked to stronger performance, and increased shared-based compensation.

Amortization of Intangible Assets and Acquisition-Related Costs

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

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.

During the three months ended December 31, 2020, amortization of intangible assets and acquisition-related costs decreased $0.1 million compared to the same period of the prior fiscal year, primarily driven by intangibles assets that were fully amortized.

For the nine months ended December 31, 2020, amortization of intangible assets and acquisition-related costs increased $1.0 million, compared to the same period of the prior fiscal year, primarily driven by amortization of the intangible assets acquired through the Streamlabs acquisition in the third quarter of fiscal year 2020.

Change in Fair Value of Contingent Consideration for Business Acquisition

The change in fair value of contingent consideration was $5.7 million for the 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 and six months ended September 30, 2020 and 2019 was as follows (Dollars in thousands):

The change in fair value of contingent consideration was $5.7 million for the nine months ended December 31, 2020, primarily due to growth in Streamlabs' net sales and the achievement of the net sales targets during the six-month earn-out period ended June 30, 2020.

Other Income, Net

Other income, net for the three and nine months ended December 31, 2020 and 2019 was as follows (Dollars in thousands):

Three Months Ended

September 30,

Six Months Ended

September 30,

December 31, Nine Months Ended

2020 2019 2020 2019

Investment income related to a deferred compensation plan $ 1,049 $ 1,045 $ 4,384 $ 1,836

Currency exchange gain (loss), net

Currency exchange gain, net 7,344 203 9,070 702

Loss on investments (2,173) (709) (4,692) (772)

Other 263 562 899 1,086

Total $ 6,483 $ 1,101 $ 9,661 $ 2,852

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

Currency exchange gain (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.

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

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

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

Provision for (Benefit from) Income Taxes

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):

Provision for Income Taxes

The provision for income taxes and effective tax rates for the three and nine months ended December 31, 2020 and 2019 were as follows (Dollars in thousands):

Three Months Ended

September 30,

Six Months Ended

September 30,

Provision for (benefit from) income taxes

December 31, Nine Months Ended

2020 2019 2020 2019

Provision for income taxes $ 72,334 $ 14,467 $ 142,638 $ 18,405

Effective income tax rate 15.9 % 11.0 % 16.5 % 7.2 %

The change in the effective income tax rate for the three 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.

The change in the effective income tax rate for the three and nine months ended December 31, 2020, compared to the same periods ended December 31, 2019 was primarily due to the mix of income and losses in the various tax jurisdictions in which we operate.

The Swiss income tax provision in the three and nine months ended December 31, 2020 represents the income tax provision at the full statutory income tax rate of 13.63%.

In the same periods ended December 31, 2019 when TRAF was yet to be enacted at the federal and cantonal levels, the transition income tax provision reflects the application of the longstanding tax ruling through December 31, 2019.

Furthermore, there was a discrete tax benefit of $1.7 million from adjusting deferred tax assets and liabilities in Switzerland in the nine months ended December 31, 2019.

There were discrete tax benefits of $7.2 million and $2.9 million from the recognition of excess tax benefits in the United States and reversal of uncertain tax positions from the expiration of statutes of limitations, respectively, in the nine-month period ended December 31, 2020, compared with $6.0 million and $2.7 million, respectively, in the nine-month period ended December 31, 2019.

As of December 31, 2020 and March 31, 2020, the total amount of unrecognized tax benefits due to uncertain tax positions was $158.8 million and $140.8 million, respectively, all of which would affect the effective income tax rate if recognized.

Liquidity and Capital Resources

Cash Balances, Available Borrowings, and Capital Resources

As 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.

As of December 31, 2020, we had cash and cash equivalents of $1,388.7 million, compared to $715.6 million as of March 31, 2020.

As of December 31, 2020 , 71% of the cash and cash equivalents were held in Switzerland, 13% were held in Germany, and 9% 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 in cash and cash equivalents for the nine months ended December 31, 2020, was primarily due to an increase in net cash provided by operating activities and proceeds from exercises of stock options and purchase rights, partially offset by payment of cash dividends, purchases of property, plant and equipment, tax withholdings related to settlements of restricted stock units, and shares repurchased under our share buyback program.

As of December 31, 2020, our working capital was $1,361.9 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 .

Our working capital increased by $681.5 million compared to $680.4 million as of December 31, 2019, which was primarily driven by higher cash and cash equivalents, higher accounts receivable, net, higher inventories and higher other current assets, partially offset by higher accounts payable and accrued and other current liabilities.

We had several uncommitted, unsecured bank lines of credit aggregating $82.6 million as of December 31, 2020.

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

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

As of December 31, 2020, we had outstanding bank guarantees of $37.8 million under these lines of credit.

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

Six Months Ended

September 30,

Nine Months Ended

Net cash provided by operating activities $ 928,419 $ 324,154

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Effect of exchange rate changes on cash and cash equivalents 10,408 (2,320)

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 September 30, 2020 and 2019 (Dollars in thousands):

As of September 30,

Net increase in cash and cash equivalents $ 673,177 $ 51,530

The following table presents selected financial information and statistics as of and for the three months ended December 31, 2020 and 2019 (Dollars in thousands):

As of December 31,

Accounts receivable, net $ 894,937 $ 531,309

Accounts payable $ 811,786 $ 439,035

Inventories $ 476,802 $ 307,494

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 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

DSO for the three months ended December 31, 2020 decreased by 5 days to 48 days, compared to 53 days for the same period of the prior fiscal year, primarily due to timing of sales, customer payments and sales linearity.

DPO for the three months ended December 31, 2020 increased by 10 days, compared to 70 days for the same period of the prior fiscal year, primarily due to the timing of purchases and related payments and an increase in cost of goods sold due to higher sales growth.

ITO for the three months ended December 31, 2020 increased by 0.3, compared to 7.4 for the same period of the prior fiscal year, primarily due to higher sales growth as a result of higher demand for certain of our products

due to the COVID-19 impact.

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

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

During the nine months ended December 31, 2020, we generated $928.4 million of cash from operating activities.

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

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

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

The increase in inventories was primarily driven by an increase in inventory purchases in anticipation of continued high demand for certain of our products during the nine months

ended December 31, 2020.

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

The increase in accrued liabilities was primarily driven by an increase in customer marketing, pricing, and incentive programs, freight and duty due to higher logistic costs, and income taxes payable due to stronger performance.

Net cash used in investing activities was $46.5 million, primarily due to $46.2 million of purchases of property, plant and equipment.

Net cash used in financing activities was $219.2 million, primarily due to the $146.7 million payment of a cash dividend, $72.7 million used for repurchases of our registered shares, and $29.5 million for tax withholdings related to net share settlements of restricted stock units, partially offset by $29.7 million in proceeds received from exercises of stock options and purchase rights.

During the 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.

During the nine months ended December 31, 2020, there was a $10.4 million gain from currency exchange rate effect on cash and cash equivalents, compared to a loss of $2.3 million during the same period of the prior fiscal year.

The gain from currency translation exchange effect during the nine months ended December 31, 2020 was primarily due to the strengthening of the Australian Dollar, Euro, Chinese Renmingbi, and Swiss Franc against the U.S.

Dollar by 24%, 11%, and 8%, 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.

The loss from effect of currency exchange rate changes during the nine months ended December 31, 2019 was primarily due to the weakening of the Euro, Chinese Renminbi and Brazilian Real against the U.S.

Dollar by 1%, 4%, and 4%, 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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Opportunistic purchases may be started or stopped at any time without prior notice depending on market conditions and other factors.

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

As of December 31, 2020, $177.6 million is still available for repurchase under the 2020 share buyback program.

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

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Purchase Commitments

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.

Non-cancelable purchase commitments for capital expenditures primarily relate to commitments for tooling for new and existing products, computer hardware, leasehold and improvements.

As of December 31, 2020, we had non-cancelable purchase commitments of $853.1 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 nine months ended December 31, 2020, the majority of which are expected to be fulfilled within the next 12 months.

The increase of inventory purchase commitment from March 31, 2020 is to replenish the inventory due to business growth.

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

As of December 31, 2020, the liability for these purchase commitments was $5.6 million and is recorded in accrued and other current liabilities.

We have firm purchase commitments of $32.8 million for capital expenditures, primarily related to commitments for equipment and tooling for new and existing products.

We expect to continue making capital expenditures in the future to support product development activities and ongoing and expanded operations.

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

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.

Other Contractual Obligations and Commitments

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

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

As of December 31, 2020, no amounts have been accrued for indemnification provisions.

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

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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