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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2017
 
Or
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period from                to                
 
Commission File Number: 0-29174
 
LOGITECH INTERNATIONAL S.A.
(Exact name of registrant as specified in its charter)
 
Canton of Vaud, Switzerland
(State or other jurisdiction
of incorporation or organization)
 
None
(I.R.S. Employer
Identification No.)
 
Logitech International S.A.
EPFL - Quartier de l'Innovation
Daniel Borel Innovation Center
1015 Lausanne, Switzerland
c/o Logitech Inc.
7700 Gateway Boulevard
Newark, California 94560
(Address of principal executive offices and zip code)
 
(510) 795-8500
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ý  No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  ý  No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 

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Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
 Emerging Growth Company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard s provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No  ý
 
As of January 12, 2018, there were 164,110,890 shares of the Registrant’s share capital outstanding.
 

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TABLE OF CONTENTS
 
 
 
Page
 
 
 
Part I
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
Exhibits
 
In this document, unless otherwise indicated, references to the “Company” or “Logitech” are to Logitech International S.A., its consolidated subsidiaries and predecessor entities. Unless otherwise specified, all references to U.S. Dollar, Dollar or $ are to the United States Dollar, the legal currency of the United States of America. All references to CHF are to the Swiss Franc, the legal currency of Switzerland.
 
Logitech, the Logitech logo, and the Logitech products referred to herein are either the trademarks or the registered trademarks of Logitech. All other trademarks are the property of their respective owners.

The Company’s fiscal year ends on March 31. Interim quarters are generally thirteen-week periods, each ending on a Friday of each quarter. The third quarter of fiscal year 2018 ended on December 29, 2017. The same quarter in the prior fiscal year ended on December 30, 2016. For purposes of presentation, the Company has indicated its quarterly periods ending on the last day of the calendar quarter.


      

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PART I — FINANCIAL INFORMATION 

ITEM 1.   FINANCIAL STATEMENTS (UNAUDITED) 

LOGITECH INTERNATIONAL S.A.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
 
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Net sales
 
$
812,021

 
$
666,707

 
$
1,974,437

 
$
1,710,875

Cost of goods sold
 
533,631

 
418,015

 
1,271,127

 
1,083,908

Amortization of intangible assets and purchase accounting effect on inventory
 
2,789

 
1,929

 
6,304

 
4,705

Gross profit
 
275,601

 
246,763

 
697,006

 
622,262

 
 
 
 
 
 
 
 
 
Operating expenses:
 
 

 
 

 
 

 
 

Marketing and selling
 
116,153

 
102,036

 
325,917

 
279,700

Research and development
 
34,398

 
32,284

 
106,144

 
96,867

General and administrative
 
22,291

 
24,598

 
72,850

 
75,543

Amortization of intangible assets and acquisition-related costs
 
2,496

 
1,494

 
6,377

 
4,535

Change in fair value of contingent consideration for business acquisition
 
—

 
(9,925
)
 
(4,908
)
 
(9,925
)
Total operating expenses
 
175,338

 
150,487

 
506,380

 
446,720

Operating income
 
100,263

 
96,276

 
190,626

 
175,542

Interest income
 
874

 
202

 
3,097

 
263

Other income (expense), net
 
(324
)
 
2,634

 
(894
)
 
943

Income before income taxes
 
100,813

 
99,112

 
192,829

 
176,748

Provision for income taxes
 
20,040

 
1,647

 
18,691

 
10,297

Net income
 
$
80,773

 
$
97,465

 
$
174,138

 
$
166,451


 
 
 
 
 
 
 
 
Net income per share:
 
 

 
 

 
 

 
 

Basic
 
$
0.49

 
$
0.60

 
$
1.06

 
$
1.03

Diluted
 
$
0.48

 
$
0.59

 
$
1.03

 
$
1.01

 
 
 
 
 
 
 
 
 
Weighted average shares used to compute net income per share:
 
 

 
 

 
 

 
 

Basic
 
164,248

 
161,977

 
163,924

 
162,070

Diluted
 
169,079

 
165,901

 
168,832

 
165,211

 
 
 
 
 
 
 
 
 
Cash dividend per share
 
$
—

 
$
—

 
$
0.63

 
$
0.57

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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LOGITECH INTERNATIONAL S.A.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(unaudited)
 
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Net income
 
$
80,773

 
$
97,465

 
$
174,138

 
$
166,451

Other comprehensive income (loss):
 
 

 
 

 
 
 
 
Currency translation gain (loss), net of taxes
 
1,535

 
(7,968
)
 
5,176

 
(7,714
)
Defined benefit pension plans:
 
 

 
 

 


 
 
Net gain and prior service costs, net of taxes
 
479

 
1,193

 
859

 
1,520

Amortization included in operating expenses
 
51

 
424

 
153

 
1,289

Hedging gain (loss):
 
 

 
 

 
 
 
 
Deferred hedging gain (loss), net of taxes
 
(677
)
 
2,497

 
(6,026
)
 
4,026

Reclassification of hedging loss (gain) included in cost of goods sold
 
2,248

 
(463
)
 
5,377

 
432

Other comprehensive income (loss):
 
3,636

 
(4,317
)
 
5,539

 
(447
)
Total comprehensive income
 
$
84,409

 
$
93,148

 
$
179,677

 
$
166,004

 
The accompanying notes are an integral part of these condensed consolidated financial statements.


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LOGITECH INTERNATIONAL S.A.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)
 
 
December 31,
2017
 
March 31,
2017
Assets
 


 
 
Current assets:
 
 

 
 

Cash and cash equivalents
 
$
564,888

 
$
547,533

Accounts receivable, net
 
351,753

 
185,179

Inventories
 
278,979

 
253,401

Other current assets
 
57,530

 
41,732

Total current assets
 
1,253,150

 
1,027,845

Non-current assets:
 
 

 
 

Property, plant and equipment, net
 
86,901

 
85,408

Goodwill
 
275,563

 
249,741

Other intangible assets, net
 
92,371

 
47,564

Other assets
 
122,839

 
88,119

Total assets
 
$
1,830,824

 
$
1,498,677

Liabilities and Shareholders’ Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
429,119

 
$
274,805

Accrued and other current liabilities
 
278,055

 
232,273

Total current liabilities
 
707,174

 
507,078

Non-current liabilities:
 
 

 
 

Income taxes payable
 
34,410

 
51,797

Other non-current liabilities
 
82,004

 
83,691

Total liabilities
 
823,588

 
642,566

Commitments and contingencies (Note 11)
 


 


Shareholders’ equity:
 
 

 
 

Registered shares, CHF 0.25 par value:
 
30,148

 
30,148

Issued and authorized shares — 173,106 at December 31 and March 31, 2017
 


 


Conditionally authorized shares — 50,000 at December 31 and March 31, 2017
 


 


Additional paid-in capital
 
38,902

 
26,596

Shares in treasury, at cost — 8,899 at December 31, 2017 and 10,727 at March 31, 2017
 
(164,559
)
 
(174,037
)
Retained earnings
 
1,197,912

 
1,074,110

Accumulated other comprehensive loss
 
(95,167
)
 
(100,706
)
Total shareholders’ equity
 
1,007,236

 
856,111

Total liabilities and shareholders’ equity
 
$
1,830,824

 
$
1,498,677

 
The accompanying notes are an integral part of these condensed consolidated financial statements.


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LOGITECH INTERNATIONAL S.A.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
 
Nine Months Ended
December 31,
 
 
2017
 
2016
Cash flows from operating activities:
 
 

 
 

Net income
 
$
174,138

 
$
166,451

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation
 
30,218

 
32,479

Amortization of intangible assets
 
10,653

 
6,618

Gain on investments in privately held companies
 
(550
)
 
(547
)
Loss on disposal of property, plant and equipment
 
7

 
—

Share-based compensation expense
 
33,239

 
26,354

Deferred income taxes
 
6,728

 
(473
)
Change in fair value of contingent consideration for business acquisition
 
(4,908
)
 
(9,925
)
Changes in assets and liabilities, net of acquisitions:
 
 

 
 

Accounts receivable, net
 
(164,028
)
 
(139,414
)
Inventories
 
(5,692
)
 
(15,194
)
Other assets
 
(18,953
)
 
(6,346
)
Accounts payable
 
151,711

 
109,095

Accrued and other liabilities
 
43,521

 
71,549

Net cash provided by operating activities
 
256,084

 
240,647

Cash flows from investing activities:
 
 

 
 

Purchases of property, plant and equipment
 
(27,593
)
 
(23,372
)
Investment in privately held companies
 
(880
)
 
(640
)
Acquisitions, net of cash acquired
 
(88,323
)
 
(66,987
)
Proceeds from return of investment in privately held companies
 
237

 
—

Changes in restricted cash
 
—

 
715

Purchases of short-term investments
 
(6,789
)
 
—

Sales of short-term investments
 
6,789

 
—

Purchases of trading investments
 
(2,842
)
 
(5,868
)
Proceeds from sales of trading investments
 
3,209

 
5,912

Net cash used in investing activities
 
(116,192
)
 
(90,240
)
Cash flows from financing activities:
 
 

 
 

Payment of cash dividends
 
(104,248
)
 
(93,093
)
Payment of contingent consideration for business acquisition
 
(5,000
)
 
—

Purchases of registered shares
 
(20,408
)
 
(63,764
)
Proceeds from exercises of stock options and purchase rights
 
30,947

 
20,355

Tax withholdings related to net share settlements of restricted stock units
 
(25,505
)
 
(13,054
)
Net cash used in financing activities
 
(124,214
)
 
(149,556
)
Effect of exchange rate changes on cash and cash equivalents
 
1,677

 
(6,468
)
Net increase (decrease) in cash and cash equivalents
 
17,355

 
(5,617
)
Cash and cash equivalents, beginning of the period
 
547,533

 
519,195

Cash and cash equivalents, end of the period
 
$
564,888

 
$
513,578

Supplementary Cash Flow Disclosures:
 
 
 
 
Non-cash investing activities:
 
 

 
 

Property, plant and equipment purchased during the period and included in period end liability accounts
 
$
5,779

 
$
4,044

Unpaid purchase price for business acquisition
 
$
1,000

 
$
—

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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LOGITECH INTERNATIONAL S.A.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)
(unaudited)
 
 
 
 
 
 
Additional Paid-in Capital
 
 
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
Total Shareholders’ Equity
 
Registered Shares
 
 
Treasury Shares
 
Retained Earnings
 
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
March 31, 2016
173,106

 
$
30,148

 
$
6,616

 
10,697

 
$
(128,407
)
 
$
963,576

 
$
(111,985
)
 
$
759,948

Total comprehensive income
—

 
—

 
—

 
—

 
—

 
166,451

 
(447
)
 
166,004

Purchases of registered shares
—

 
—

 
—

 
3,321

 
(63,764
)
 
—

 
—

 
(63,764
)
Tax effects from share-based awards
—

 
—

 
(1,463
)
 
—

 
—

 
—

 
—

 
(1,463
)
Sales of shares upon exercise of stock options and purchase rights
—

 
—

 
6,435

 
(1,524
)
 
13,920

 
—

 
—

 
20,355

Issuance of shares upon vesting of restricted stock units
—

 
—

 
(21,714
)
 
(1,196
)
 
10,909

 
(2,249
)
 
—

 
(13,054
)
Share-based compensation
—

 
—

 
26,462

 
—

 
—

 
—

 
—

 
26,462

Cash dividends
—

 
—

 
—

 
—

 
—

 
(93,093
)
 
—

 
(93,093
)
December 31, 2016
173,106

 
$
30,148

 
$
16,336

 
11,298

 
$
(167,342
)
 
$
1,034,685

 
$
(112,432
)
 
$
801,395

 
 
 
 
 
 
Additional Paid-in Capital
 
 
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
Total Shareholders’ Equity
 
Registered Shares
 
 
Treasury Shares
 
Retained Earnings
 
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
March 31, 2017
173,106

 
$
30,148

 
$
26,596

 
10,727

 
$
(174,037
)
 
$
1,074,110

 
$
(100,706
)
 
$
856,111

Cumulative effect of adoption of new accounting standard (Note 1)
—

 
—

 
3,293

 
—

 
—

 
53,912

 
—

 
57,205

Total comprehensive income
—

 
—

 
—

 
—

 
—

 
174,138

 
5,539

 
179,677

Purchases of registered shares
—

 
—

 
—

 
581

 
(20,408
)
 
—

 
—

 
(20,408
)
Sales of shares upon exercise of stock options and purchase rights
—

 
—

 
15,958

 
(1,126
)
 
14,989

 
—

 
—

 
30,947

Issuance of shares upon vesting of restricted stock units
—

 
—

 
(40,402
)
 
(1,283
)
 
14,897

 
—

 
—

 
(25,505
)
Share-based compensation
—

 
—

 
33,457

 
—

 
—

 
—

 
—

 
33,457

Cash dividends
—

 
—

 
—

 


 


 
(104,248
)
 
—

 
(104,248
)
December 31, 2017
173,106

 
$
30,148

 
$
38,902

 
8,899

 
$
(164,559
)
 
$
1,197,912

 
$
(95,167
)
 
$
1,007,236

 
The accompanying notes are an integral part of these condensed consolidated financial statements.


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LOGITECH INTERNATIONAL S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1 — The Company and Summary of Significant Accounting Policies and Estimates

The Company
 
Logitech International S.A, together with its consolidated subsidiaries, ("Logitech" or the "Company") designs, manufactures and markets products that allow people to connect through music, gaming, video, computing, and other digital platforms.
The Company sells its products to a broad network of domestic and international customers, including direct sales to retailers and indirect sales through distributors.
Logitech was founded in Switzerland in 1981 and Logitech International S.A. has been the parent holding company of Logitech since 1988. Logitech International S.A. is a Swiss holding company with its registered office in Apples, Switzerland and headquarters in Lausanne, Switzerland, which conducts its business through subsidiaries in the Americas, Europe, Middle East and Africa ("EMEA") and Asia Pacific. Shares of Logitech International S.A. are listed on both the SIX Swiss Exchange under the trading symbol LOGN and the Nasdaq Global Select Market under the trading symbol LOGI.

Business Acquisitions

In August 2017, the Company acquired the ASTRO Gaming business. In November 2017, the Company also made a small acquisition. See "Note 2 - Business Acquisitions" for more information.

Basis of Presentation
 
The condensed consolidated interim financial statements include the accounts of Logitech and its subsidiaries. All intercompany balances and transactions have been eliminated. The condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and therefore do not include all the information required by GAAP for complete financial statements. They should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended March 31, 2017, included in its Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on May 26, 2017. 

In the opinion of management, these condensed consolidated financial statements include all adjustments, consisting of only normal and recurring adjustments, necessary and in all material aspects, for a fair statement of the results of operations, comprehensive income, financial position, cash flows and changes in shareholders' equity for the periods presented. Operating results for the three and nine months ended December 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2018, or any future periods.

Reclassification

Certain amounts from the comparative period in the accompanying unaudited condensed consolidated financial statements have been reclassified to conform to the condensed consolidated financial statement presentation as of and for the three and nine months ended December 31, 2017.

Changes in Significant Accounting Policies
 
Other than the recent accounting pronouncements adopted and discussed below, there have been no substantial changes in the Company’s significant accounting policies during the nine months ended December 31, 2017 compared with the significant accounting policies described in its Annual Report on Form 10-K for the fiscal year ended March 31, 2017.
 

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Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Significant estimates and assumptions made by management involve the fair value of goodwill, intangible assets acquired from business acquisitions, warranty liabilities, accruals for customer programs and related breakage when appropriate, sales return reserves, allowance for doubtful accounts, inventory valuation, contingent consideration from business acquisitions and periodical reassessment of its fair value, share-based compensation expense, uncertain tax positions, and valuation allowances for deferred tax assets. Although these estimates are based on management’s best knowledge of current events and actions that may impact the Company in the future, actual results could differ materially from those estimates.
 
Recent Accounting Pronouncements Adopted

In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-11, "Simplifying the Measurement of Inventory (Topic 330)" ("ASU 2015-11"). Topic 330 previously required an entity to measure inventory at the lower of cost or market, with market value represented by replacement cost, net realizable value or net realizable value less a normal profit margin. ASU 2015-11 requires an entity to measure inventory at the lower of cost or net realizable value and is effective for fiscal years beginning after December 15, 2016. The Company adopted this standard effective April 1, 2017, which has not had a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 simplifies several aspects of the accounting for share-based payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees' maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for the excess tax benefits and employee taxes paid when an employer withholds shares for tax withholding purposes. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016. The Company adopted this standard effective April 1, 2017. Changes to the statements of cash flows related to the classification of excess tax benefits were implemented on a retroactive basis and accordingly, to conform to the current year presentation, the Company reclassified $6.4 million of excess tax benefits previously reported under financing activities to operating activities for the nine months ended December 31, 2016 on its condensed consolidated statements of cash flows. Under the new standard, the Company accounts for forfeitures as they occur. The change in accounting for forfeitures resulted in a cumulative-effect adjustment to decrease retained earnings as of March 31, 2017 by $3.3 million. The Company further recognized a cumulative-effect adjustment to increase retained earnings as of March 31, 2017 by $57.2 million upon adoption of the new guidance to account for gross excess tax benefits of $75.2 million that were previously not recognized because the related tax deduction had not reduced current income taxes, offset by a valuation allowance of $18.0 million to reduce the deferred tax assets to amounts that are more likely than not to be realized.

In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment (Topic
350)" ("ASU 2017-04"), which removes Step 2 from the goodwill impairment test. ASU 2017-04 is effective for annual or any interim goodwill impairments in annual periods beginning December 15, 2019, with early adoption permitted. The Company adopted this standard effective April 1, 2017, which has not had a material impact on its consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of
Modification Accounting" ("ASU 2017-09"), which provides guidance about which changes to the terms or conditions
of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is
effective for annual periods beginning after December 15, 2017, with early adoption permitted, including adoption in any interim period for which financial statements have not yet been issued. The Company adopted this standard effective April 1, 2017, which has not had a material impact on its consolidated financial statements.


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Recent Accounting Pronouncements to be Adopted

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09") which supersedes the revenue recognition requirements under Accounting Standard Codification ("ASC") 605, Revenue Recognition. ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard requires reporting companies to disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard will become effective for the Company on April 1, 2018. The Company will adopt Topic 606 utilizing the modified retrospective transition method, which recognizes the cumulative effect of initially applying Topic 606 as an adjustment to retained earnings at the adoption date. The Company continues to evaluate the impact this new standard will have on the current contracts with customers and the accruals of various sales and marketing programs the Company offers and has identified the following areas that are impacted:

Accrual for cooperative marketing arrangements and customer incentive programs: At the end of every quarter, the Company estimates accruals for cooperative marketing arrangements and customer incentive programs based on negotiated terms, consideration of historical experience, and inventory levels in the channel. Under ASC 605, these programs are recognized as a reduction of revenue at the later of when the related revenue is recognized or when the program is offered to the customer. Under Topic 606, these programs qualify as variable consideration and are recorded as a reduction of the transaction price at the contract inception based on the expected value method. Certain of these programs will reflect such change which will lead to the recognition of the accruals sooner as compared to the guidance in ASC 605.

Breakage estimates: The Company applies a breakage rate to reduce its accruals of customer incentive, cooperative marketing, and pricing programs based on the estimated percentage of these customer programs that will not be claimed or earned. The breakage rate is applied when the Company is able to reasonably estimate the amounts that will be ultimately claimed by customers, which generally occurs up to one quarter after the program is accrued. Under Topic 606, variable consideration must be estimated at the outset of the arrangement, subject to the constraint guidance to ensure that a significant revenue reversal will not occur. As a result, upon adoption of Topic 606, revenue will be recognized sooner as compared to the existing revenue guidance.

The Company expects to complete its analysis of Topic 606 and reasonably estimate the impact to its consolidated financial statements when its Annual Report on Form 10-K for the fiscal year ending March 31, 2018 is filed. The Company will continue to monitor additional changes, modifications, clarifications or interpretations being undertaken by the FASB, which may impact its current conclusions. It is possible that during the fourth quarter of fiscal year 2018, the Company may identify additional areas which may result in material impact on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments-Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10)" ("ASU 2016-01"). ASU 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted. The Company does not believe that the adoption of ASU 2016-01 will have a material impact on its consolidated financial statements and will adopt this standard effective April 1, 2018.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), which requires the recognition of lease assets and lease liabilities arising from operating leases in the statement of financial position. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the full effect that ASU 2016-02 will have on its consolidated financial statements and will adopt this standard effective April 1, 2019.

In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory" ("ASU 2016-16"), which eliminates the deferral of income tax effects of intra-entity asset transfers until the transferred asset is sold to an unrelated party or recovered through use. However, this standard does not apply to intra-entity transfer of inventory.  ASU 2016-16 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted but only in the first interim period of an annual period. The cumulative effect of change on equity upon adoption is to be quantified under the modified retrospective approach and recorded as of the beginning of the period of adoption. 

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The Company does not expect the adoption of ASU 2016-16 will have a material impact on its consolidated financial statements and will adopt this standard effective April 1, 2018.

In December 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash" ("ASU 2016-18"), which requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted. The adoption of this standard should be applied using a retrospective transition method to each period presented. The Company does not expect that the adoption of ASU 2016-18 will have a material impact on its consolidated financial statements and will adopt this standard effective April 1, 2018.

In January 2017, the FASB issued ASU 2017-01, "Business Combination (Topic 805): Clarifying the Definition of a Business" ("ASU 2017-01"), which changes the definition of a business to assist with evaluating when a set of transferred assets and activities is a business. ASU 2017-01 is effective for annual or any interim periods in annual periods beginning after December 15, 2017, with early adoption permitted. The Company does not expect that the adoption of ASU 2017-01 will have a material impact on its consolidated financial statements and will adopt this standard effective April 1, 2018.

In March 2017, the FASB issued ASU 2017-07, "Compensation-Retirement Benefit (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" ("ASU 2017-07"), which requires that the Company disaggregate the service cost component from the other components of net benefit cost, and also provides guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted. The Company does not expect that the adoption of ASU 2017-07 will have a material impact on its consolidated financial statements and will adopt this standard effective April 1, 2018.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"), which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and simplifies the application of the hedge accounting guidance. ASU 2017-12 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. The Company does not expect that the adoption of ASU 2017-12 will have a material impact on its consolidated financial statements and will adopt this standard effective April 1, 2019.

Note 2 — Business Acquisitions

ASTRO Acquisition

On August 11, 2017 (the "Acquisition Date"), the Company acquired certain assets and liabilities constituting the ASTRO Gaming business ("ASTRO") from AG Acquisition Corporation for a purchase price of $85.0 million in cash (the "ASTRO Acquisition"). ASTRO is a leading console gaming accessory brand with a history of producing award-winning headsets for professional gamers and enthusiasts. ASTRO provides a strong growth platform in the console gaming accessories market.


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ASTRO meets the definition of a business, and its acquisition is accounted for using the acquisition method. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the Acquisition Date (in thousands):
 
 
Estimated Fair Value
Inventories
 
$
10,331

Property, plant and equipment
 
2,760

Intangible assets
 
52,520

Other assets
 
605

Total identifiable assets acquired
 
$
66,216

Accrued liabilities
 
(2,982
)
Net identifiable assets acquired
 
$
63,234

Goodwill
 
21,766

Net assets acquired
 
$
85,000


Goodwill related to the transaction is primarily attributable to opportunities and economies of scale from combining the operations and technologies of Logitech and ASTRO. Goodwill is expected to be deductible for tax purposes.

The fair value of the inventory acquired is estimated at its net realizable value, which uses the estimated selling prices, less the cost of disposal and a reasonable profit allowance for the selling efforts. The difference between the fair value of the inventories and the amount recorded by ASTRO immediately before the acquisition date is $0.8 million, which will be recognized in "amortization of intangibles assets and purchase accounting effect on inventory" in the condensed consolidated statements of operations upon the sale of the acquired inventory.

The Company included ASTRO's estimated fair value of assets acquired and liabilities assumed in its condensed consolidated balance sheets beginning on the Acquisition Date. The results of operations for ASTRO for this partial quarter have been included in, but are not material to, the Company's condensed consolidated statements of operations from the Acquisition Date. Pro forma results of operations for the ASTRO Acquisition have not been presented because they are not material to the condensed consolidated statements of operations. 

The following table summarizes the estimated fair values and estimated useful lives of the components of identifiable intangible assets acquired as of the Acquisition Date (Dollars in thousands):
 
Fair Value
 
Estimated Useful Life (years)
Developed technology
$
12,540

 
4.0
Customer relationships
33,100

 
8.0
Trade name
6,880

 
6.0
Total intangible assets acquired
$
52,520

 
6.8

Intangible assets acquired as a result of the ASTRO Acquisition are being amortized over their estimated useful lives using the straight-line method of amortization. Amortization of acquired developed technology of $0.8 million and $1.2 million, respectively, during the three and nine months ended December 31, 2017 is included in "amortization of intangible assets and purchase accounting effect of inventory" in the condensed consolidated statements of operations. Amortization of the acquired customer relationships and trade name of $1.3 million and $2.0 million, respectively, during the three and nine months ended December 31, 2017 is included in "amortization of intangible assets and acquisition-related costs" in the condensed consolidated statements of operations.

Developed technology relates to existing ASTRO gaming headset products. The economic useful life was determined based on the technology cycle related to developed technology of existing products, as well as the cash flows anticipated over the forecasted periods.


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Customer relationships represent the fair value of future projected revenue that will be derived from sales of products to existing customers of ASTRO. The economic useful life was determined based on historical customer turnover rates and industry benchmarks.

Trade name relates to the “ASTRO” trade name. The economic useful life was determined based on the expected life of the trade name and the cash flows anticipated over the forecasted periods.

The fair values of developed technology and trade name were estimated using the relief-from-royalty method, an income approach (Level 3), which estimates the cost savings that accrue to the owner of the intangible assets that would otherwise be payable as royalties or license fees on revenues earned through the use of the asset. A royalty rate is applied to the projected revenues associated with the intangible assets to determine the amount of savings, which is then discounted to determine the fair value. The developed technology and trade name were valued using royalty rates of 10% and 2%, respectively, and both were discounted at a rate of 13%.

The fair value of customer relationships was estimated using the excess earnings method, an income approach (Level 3), which converts projected revenues and costs into cash flows. To reflect the fact that certain other assets contributed to the cash flows generated, the returns for these contributory assets were removed to arrive at estimated cash flows solely attributable to the customer relationships, which were discounted at a rate of 13%.

The Company believes the value of purchased intangible assets recorded above represents the fair values of, and approximates the amounts a market participant would pay for, these intangible assets as of the Acquisition Date.

The Company incurred acquisition-related costs for the ASTRO Acquisition of approximately $0.3 million and $1.3 million for the three and nine months ended December 31, 2017, respectively. The acquisition-related costs are included in "amortization of intangible assets and acquisition-related costs" in the condensed consolidated statements of operations.

For the three and nine months ended December 31, 2017, ASTRO contributed $33.5 million and $36.2 million to net sales, respectively, representing approximately 4% of the net sales of the Company for the three-month period and 2% for the nine-month period.

In November 2017, the Company also made a small acquisition for a total consideration of $5.2 million, including cash acquired of $0.9 million. $1.0 million of the total consideration was retained by the Company for the purpose of ensuring the seller's representations, warranties and covenants.

Note 3 — Net Income Per Share
 
The computations of basic and diluted net income per share for the Company were as follows (in thousands, except per share amounts):
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Net Income
 
$
80,773

 
$
97,465

 
$
174,138

 
$
166,451

 
 
 
 
 
 
 
 
 
Shares used in net income per share computation:
 
 

 
 

 
 

 
 

Weighted average shares outstanding - basic
 
164,248

 
161,977

 
163,924

 
162,070

Effect of potentially dilutive equivalent shares
 
4,831

 
3,924

 
4,908

 
3,141

Weighted average shares outstanding - diluted
 
169,079

 
165,901

 
168,832

 
165,211

 
 
 
 
 
 
 
 
 
Net income per share:
 
 

 
 

 
 

 
 

Basic
 
$
0.49

 
$
0.60

 
$
1.06

 
$
1.03

Diluted
 
$
0.48

 
$
0.59

 
$
1.03

 
$
1.01

 

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Share equivalents attributable to outstanding stock options and restricted stock units of 0.5 million and 1.7 million for the three months ended December 31, 2017 and 2016, respectively, and 1.1 million and 2.8 million for the nine months ended December 31, 2017 and 2016, respectively, were anti-dilutive and excluded from the calculation of diluted net income per share.
 
Note 4 — Employee Benefit Plans
 
Employee Share Purchase Plans and Stock Incentive Plans
 
As of December 31, 2017, the Company offers the 2006 ESPP (2006 Employee Share Purchase Plan (Non-U.S.)), the 1996 ESPP (1996 Employee Share Purchase Plan (U.S.)), the 2006 Plan (2006 Stock Incentive Plan) and the 2012 Plan (2012 Stock Inducement Equity Plan), each as amended.

The following table summarizes the share-based compensation expense and total income tax provision (benefit) recognized for share-based awards for the three and nine months ended December 31, 2017 and 2016 (in thousands):
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Cost of goods sold
 
$
960

 
$
617

 
$
2,762

 
$
1,930

Marketing and selling
 
4,624

 
4,006

 
13,348

 
10,687

Research and development
 
1,621

 
1,176

 
4,797

 
3,007

General and administrative
 
4,351

 
3,588

 
12,332

 
10,730

Total share-based compensation expense
 
11,556

 
9,387

 
33,239

 
26,354

Income tax provision (benefit)
 
3,038

 
(2,391
)
 
(11,921
)
 
(6,092
)
Total share-based compensation expense, net of income tax
 
$
14,594

 
$
6,996

 
$
21,318

 
$
20,262


The income tax benefit in the respective period primarily consists of tax benefit related to the share-based compensation expense for the period and direct tax benefit realized, including net excess tax benefits recognized from share-based awards vested or exercised during the period. The income tax benefit is reduced by income tax provision resulting from remeasurement of applicable federal deferred tax assets due to the enactment of H.R.1, also known as the "Tax Cuts and Jobs Act" ("the Tax Act") in the United States on December 22, 2017. See "Note 5 - Income Taxes" for more information.

As of December 31, 2017 and 2016, the Company capitalized $0.8 million and $0.6 million of share-based compensation expense to inventory, respectively.
 
Defined Benefit Plans
 
Certain of the Company’s subsidiaries sponsor defined benefit pension plans or non-retirement post-employment benefits covering substantially all of their employees. Benefits are provided based on employees’ years of service and earnings, or in accordance with applicable employee benefit regulations. The Company’s practice is to fund amounts sufficient to meet the requirements set forth in the applicable employee benefit and tax regulations. The cost recorded of $2.3 million and $2.8 million for the three months ended December 31, 2017 and 2016, respectively, and $6.9 million and $8.4 million for the nine months ended December 31, 2017 and 2016, respectively, was primarily related to service costs.
 
Note 5 — Income Taxes
 
The Company is incorporated in Switzerland but operates in various countries with differing tax laws and rates. Further, a portion of the Company’s income before taxes and the provision for (benefit from) income taxes are generated outside of Switzerland.
 
The income tax provision for the three months ended December 31, 2017 was $20.0 million based on an effective income tax rate of 19.9% of pre-tax income, compared to an income tax provision of $1.6 million based on an effective income tax rate of 1.7% of pre-tax income for the three months ended December 31, 2016. The income

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tax provision for the nine months ended December 31, 2017 was $18.7 million based on an effective income tax rate of 9.7% of pre-tax income, compared to an income tax provision of $10.3 million based on an effective income tax rate of 5.8% for the nine months ended December 31, 2016. 

On December 22, 2017, the Tax Act was signed into law in the United States. The Tax Act introduced a broad range of tax reform measures that significantly change the federal income tax regime. Among other things, the Tax Act permanently reduces the corporate income tax rate from 35% to 21% effective for tax years including or commencing on January 1, 2018, repeals corporate alternative minimum tax, limits various business deductions, modifies the maximum deduction of net operating loss with no carryback but indefinite carryforward provision and includes various international tax provisions. Many provisions in the Tax Act are generally effective in tax years beginning after December 31, 2017.

ASC 740 requires recognition of the effects of tax law changes in the period of enactment. Notwithstanding that the effective date of the Tax Act for most provisions is January 1, 2018, such effects must be recognized in December 2017 financial statements. In accordance to the new tax legislation, the Company applied a blended federal income tax rate of 31.6% to its operations in the United States effective at the beginning of the fiscal year based on a pro-rated percentage of the number of days before and after January 1, 2018. Furthermore, the Company recorded an income tax charge of $19.9 million from the estimated remeasurement of federal deferred tax assets and liabilities as of December 31, 2017 to reflect the effects of the enacted changes in tax rate and an income tax benefit of $4.1 million from assessment of valuation allowance against tax credits due to changes in tax laws. These amounts account for the change in the effective income tax rate in the three months ended December 31, 2017 compared to the same period of the prior fiscal year.

The estimated remeasurement of deferred tax assets and liabilities was based on tax rates generally at 31.6% and 21% depending on the timing of when the individual deferred tax assets and liabilities are expected to recover or settle in the future. The net provisional charge from deferred tax remeasurement and assessment of valuation allowance is based on currently available information and interpretations which are continuing to evolve. The Company continues to analyze additional information and guidance related to certain aspects of the Tax Act, such as limitations on the deductibility of executive compensation, conformity or changes by state taxing authorities in response to the Tax Act, and the final determination of the net deferred tax assets subject to the remeasurement and related impacts to the assessment of valuation allowance. The prospects of supplemental legislation or regulatory processes to address questions that arise because of the Tax Act, or evolving technical interpretations of the tax law, may cause the final impact from the Tax Act to differ from the recorded amounts. The Company continues to appropriately refine such amounts within the measurement period allowed by Staff Accounting Bulletin (“SAB”) No.118, which will be completed no later than the third quarter of fiscal year 2019.

The change in the effective income tax rate in the nine months ended December 31, 2017 compared to the same period of the prior fiscal year is primarily due to the recognition of excess tax benefits of $10.8 million after adoption of ASU 2016-09 and income tax benefit from the reversal of uncertain tax positions from the expiration of statutes of limitations are largely offset by income tax provision from the remeasurement of deferred tax assets and liabilities in the third quarter. In the three and nine months ended December 31, 2017, there was a discrete income tax benefit of $6.0 million and $7.9 million, respectively, from the reversal of uncertain tax positions from the expiration of statutes of limitations. In the same periods ended December 31, 2016, the income tax benefit from the reversal of uncertain tax positions from the expiration of statutes of limitations was $9.4 million and $11.1 million, respectively.

As of December 31 and March 31, 2017, the total amount of unrecognized tax benefits due to uncertain tax positions was $67.3 million and $63.7 million, respectively, all of which would affect the effective income tax rate if recognized.
 
The Company had $34.4 million in non-current income taxes payable and $0.1 million in current income taxes payable, including interest and penalties, related to its income tax liability for uncertain tax positions as of December 31, 2017, compared to $51.8 million in non-current income taxes payable and $1.5 million in current income taxes payable as of March 31, 2017. The Company applied to a settlement program and paid $1.9 million to the tax authorities in a foreign jurisdiction in the third quarter of fiscal year 2018.
 
The Company recognizes interest and penalties related to unrecognized tax positions in income tax expense. As of December 31 and March 31, 2017, the Company had $2.1 million and $3.0 million, respectively, of accrued interest and penalties related to uncertain tax positions.

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Although the Company has adequately provided for uncertain tax positions, the provisions on these positions may change as revised estimates are made or the underlying matters are settled or otherwise resolved. During fiscal year 2018, the Company continues to review its tax positions and provide for or reverse unrecognized tax benefits as issues arise. During the next twelve months, it is reasonably possible that the amount of unrecognized tax benefits could increase or decrease significantly due to changes in tax law in various jurisdictions, new tax audits and changes in the U.S. dollar as compared to other currencies. Excluding these factors, uncertain tax positions may decrease by as much as $21.4 million from the lapse of the statutes of limitations in various jurisdictions during the next twelve months.

Note 6 — Balance Sheet Components
 
The following table presents the components of certain balance sheet asset amounts as of December 31 and March 31, 2017 (in thousands): 
 
 
December 31,
2017
 
March 31,
2017
Accounts receivable, net:
 
 

 
 

Accounts receivable
 
$
668,811

 
$
395,754

Allowance for doubtful accounts
 
(233
)
 
(607
)
Allowance for sales returns
 
(25,008
)
 
(18,800
)
Allowance for cooperative marketing arrangements *
 
(44,033
)
 
(28,022
)
Allowance for customer incentive programs *
 
(102,974
)
 
(60,857
)
Allowance for pricing programs *
 
(144,810
)
 
(102,289
)
 
 
$
351,753

 
$
185,179

Inventories:
 
 

 
 

Raw materials
 
$
35,752

 
$
30,582

Finished goods
 
243,227

 
222,819

 
 
$
278,979

 
$
253,401

Other current assets:
 
 

 
 

Value-added tax receivables
 
$
29,620

 
$
23,132

Prepaid expenses and other assets
 
27,910

 
18,600

 
 
$
57,530

 
$
41,732

Property, plant and equipment, net:
 
 

 
 

Property, plant and equipment at cost
 
$
362,809

 
$
348,760

Less: accumulated depreciation and amortization
 
(275,908
)
 
(263,352
)
 
 
$
86,901

 
$
85,408

Other assets:
 
 

 
 

Deferred tax assets **
 
$
86,518

 
$
57,303

Trading investments for deferred compensation plan
 
17,998

 
15,043

Investments in privately held companies
 
11,969

 
10,776

Other assets
 
6,354

 
4,997

 
 
$
122,839

 
$
88,119


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The following table presents the components of certain balance sheet liability amounts as of December 31 and March 31, 2017 (in thousands): 
 
 
December 31,
2017
 
March 31,
2017
Accrued and other current liabilities:
 
 

 
 

Accrued personnel expenses
 
$
73,124

 
$
88,346

Indirect customer incentive programs *
 
69,921

 
36,409

Warranty accrual
 
15,640

 
13,424

Employee benefit plan obligation
 
2,164

 
1,266

Income taxes payable
 
4,387

 
6,232

Contingent consideration for business acquisition - current portion
 
—

 
2,889

Other current liabilities
 
112,819

 
83,707

 
 
$
278,055

 
$
232,273

Other non-current liabilities:
 
 

 
 

Warranty accrual
 
$
10,624

 
$
8,487

Obligation for deferred compensation plan
 
17,998

 
15,043

Employee benefit plan obligation
 
43,110

 
41,998

Deferred tax liability
 
1,789

 
1,789

Contingent consideration for business acquisition - non-current portion
 
—

 
7,019

Other non-current liabilities
 
8,483

 
9,355

 
 
$
82,004

 
$
83,691


*The increases in the allowances for cooperative marketing arrangements, customer incentive programs, pricing programs and indirect customer incentive programs as of December 31, 2017 compared with March 31, 2017 were primarily the result of seasonality in the Company's business and increases in these marketing and promotional activities.

**The increase in deferred tax assets was primarily due to the adoption of ASU 2016-09 effective April 1, 2017, partially offset by the remeasurement of federal deferred tax assets as a result of the enactment of the Tax Act in the third quarter of fiscal year 2018. See "Note 5 - Income Taxes" for more information.

Note 7 — Fair Value Measurements
 
Fair Value Measurements
 
The Company considers fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The Company utilizes the following three-level fair value hierarchy to establish the priorities of the inputs used to measure fair value:
 
•Level 1 — Quoted prices in active markets for identical assets or liabilities.
 
•Level 2 — Observable inputs other than quoted market prices included in Level 1, such as: quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
•Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.


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The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis, excluding assets related to the Company’s defined benefit pension plans, classified by the level within the fair value hierarchy (in thousands): 
 
 
December 31, 2017
 
March 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 
 
 
 
 

 
 

 
 

Cash equivalents
 
$
402,983

 
$
—

 
$
—

 
$
448,742

 
$
—

 
$
—

 
 
 

 
 

 
 

 
 

 
 

 
 

Trading investments for deferred compensation plan included in other assets:
 
 

 
 
 
 
 
 

 
 

 
 

Money market funds
 
$
4,229

 
$
—

 
$
—

 
$
2,813

 
$
—

 
$
—

Mutual funds
 
13,769

 
—

 
—

 
12,230

 
—

 
—

Total of trading investments for deferred compensation plan
 
$
17,998

 
$
—

 
$
—

 
$
15,043

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Currency exchange derivative assets
included in other current assets
 
$
—

 
$
235

 
$
—

 
$
—

 
$
48

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent
consideration included in accrued and
other current liabilities and other non-current liabilities
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
9,908

Currency exchange derivative liabilities
included in accrued and other current liabilities
 
$
—

 
$
1,392

 
$
—

 
$
—

 
$
443

 
$
—

 
The following table summarizes the changes in fair value of the Company’s contingent consideration balance measured with Level 3 inputs during the three and nine months ended December 31, 2017 and 2016 (in thousands):
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Beginning of the period
 
$
—

 
$
18,000

 
$
9,908

 
$
—

Fair value of contingent consideration upon acquisition
 
—

 
—

 
—

 
18,000

Change in fair value of contingent consideration
 
—

 
(9,925
)
 
(4,908
)
 
(9,925
)
Expected payment (see below)
 
—

 
—

 
(5,000
)
 
—

End of the period
 
$
—

 
$
8,075

 
$
—

 
$
8,075


Acquisition-related contingent consideration

On April 20, 2016 (the "Jaybird Acquisition Date"), the Company acquired all of the equity interests of Jaybird, LLC (“Jaybird”). The acquisition-related contingent consideration liability arising from the Jaybird acquisition represented the future potential earn-out payments of up to $45.0 million based on the achievement of certain net revenue targets over approximately a two-year period. If the net revenue targets were met, the Company would have paid a maximum of $25.0 million and $20.0 million in fiscal years 2018 and 2019, respectively. The fair value of the earn-out as of the Jaybird Acquisition Date was $18.0 million, which was determined by using a Monte Carlo Simulation that includes significant unobservable inputs such as a risk-adjusted discount rate of 16% and projected net sales of Jaybird over the earn-out period. The fair value was remeasured at each reporting period based on the inputs on the date of remeasurement, with the change in fair value recognized as "change in fair value of contingent consideration for business acquisition" in the operating expense section in the condensed consolidated statements of operations. Projected net sales were based on the Company's internal projections, including analysis of the target markets. In October 2017, before the issuance of the condensed financial statements for the three months ended September 30, 2017, the Company and the sellers of Jaybird entered into an agreement fully, irrevocably and unconditionally releasing the Company from the earn-out rights and payments in exchange for $5.0 million in cash, which approximated the fair value of the contingent consideration as of September 30, 2017. As a result, the

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contingent consideration was transferred out from financial liability with Level 3 inputs as of September 30, 2017 as fair value measurement was no longer required. The Company paid the $5.0 million in November 2017 and included the same as financing activities on its condensed consolidated statements of cash flows.
 
Investment Securities
 
The marketable securities for the Company's deferred compensation plan are recorded at a fair value of $18.0 million and $15.0 million, respectively, as of December 31, 2017 and March 31, 2017, based on quoted market prices. Quoted market prices are observable inputs that are classified as Level 1 within the fair value hierarchy. Unrealized trading gains (losses) related to trading securities for the three and nine months ended December 31, 2017 and 2016 were not material and are included in other income (expense), net in the Company's condensed consolidated statements of operations.

Assets Measured at Fair Value on a Nonrecurring Basis

The Company’s non-marketable cost method investments, and non-financial assets, such as goodwill, intangible assets and property, plant and equipment, are recorded at fair value only upon initial recognition or if an impairment is recognized. There were no material impairments of long-lived assets during the three and nine months ended December 31, 2017 or 2016.

Non-marketable cost method investments. These investments are classified as Level 3 due to the absence of quoted market prices, the inherent lack of liquidity, and the fact that inputs used to measure fair value are unobservable and require management's judgment. When certain events or circumstances indicate that impairment may exist, the Company revalues the investments using various assumptions, including the financial metrics and ratios of comparable public companies.

The primary investment included in non-marketable investments is the Company’s investment in Series A Preferred Stock of Lifesize Inc. ("Lifesize") recorded at the fair value of $5.6 million on the date of the Lifesize divestiture.
 
The aggregate recorded amount of cost method investments included in other assets as of December 31, 2017 and March 31, 2017 was $7.1 million and $7.4 million, respectively.

Note 8 — Derivative Financial Instruments
 
Under certain agreements with the respective counterparties to the Company’s derivative contracts, subject to applicable requirements, the Company is allowed to net settle transactions of the same type with a single net amount payable by one party to the other. However, the Company presents its derivative assets and derivative liabilities on a gross basis on the condensed consolidated balance sheets as of December 31, 2017 and March 31, 2017.

The fair values of the Company’s derivative instruments not designated as hedging instruments were not material as of December 31, 2017 or March 31, 2017. The following table presents the fair values of the Company’s derivative instruments designated as hedging instruments on a gross basis in other current assets or accrued and other current liabilities on its condensed consolidated balance sheets as of December 31, 2017 and March 31, 2017 (in thousands):
 
 
Derivatives
 
 
Asset
 
Liability
 
 
December 31,
2017
 
March 31,
2017
 
December 31,
2017
 
March 31,
2017
Cash flow hedges
 
$
235

 
$
48

 
$
1,327

 
$
402


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The amount of gain (loss) recognized on derivatives not designated as hedging instruments was not material in all periods presented herein. The following table presents the amounts of gains (losses) on the Company’s derivative instruments designated as hedging instruments and their locations on its condensed consolidated statements of operations and condensed consolidated statements of comprehensive income for the three and nine months ended December 31, 2017 and 2016 (in thousands):
 
 
Three Months Ended
December 31,
 
 
Amount of Gain (Loss)
Deferred as a Component of Accumulated
Other Comprehensive Loss
 
Amount of Loss (Gain)
Reclassified from Accumulated Other Comprehensive Loss to
Costs of Goods Sold
 
 
2017
 
2016
 
2017
 
2016
Cash flow hedges
 
$
(677
)
 
$
2,497

 
$
2,248

 
$
(463
)
 
 
Nine Months Ended
December 31,
 
 
Amount of Gain (Loss)
Deferred as a Component of Accumulated
Other Comprehensive Loss
 
Amount of Loss
Reclassified from Accumulated Other Comprehensive Loss to
Costs of Goods Sold
 
 
2017
 
2016
 
2017
 
2016
Cash flow hedges
 
$
(6,026
)
 
$
4,026

 
$
5,377

 
$
432


Cash Flow Hedges
 
The Company enters into cash flow hedge contracts to protect against exchange rate exposure of forecasted inventory purchases. These hedging contracts mature within four months. Gains and losses in the fair value of the effective portion of the hedges are deferred as a component of accumulated other comprehensive loss until the hedged inventory purchases are sold, at which time the gains or losses are reclassified to cost of goods sold. Cash flows from such hedges are classified as operating activities in the condensed consolidated statements of cash flows.  Hedging relationships are discontinued when hedging contract is no longer eligible for hedge accounting, or is sold, terminated or exercised, or when Company removes hedge designation for the contract. Gains and losses in the fair value of the effective portion of the discontinued hedges continue to be reported in accumulated other comprehensive loss until the hedged inventory purchases are sold, unless it is probable that the forecasted inventory purchases will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter. In all periods presented herein, there have been no forecasted inventory purchases that were probable to not occur by the end of the originally specified time period or within an additional two-month period of time thereafter. The notional amounts of foreign currency exchange forward contracts outstanding related to forecasted inventory purchases were $135.0 million and $59.4 million as of December 31, 2017 and March 31, 2017, respectively. The Company estimates that $1.2 million of net losses related to its cash flow hedges included in accumulated other comprehensive loss as of December 31, 2017 will be reclassified into earnings within the next 12 months.
 
Other Derivatives
 
The Company also enters into foreign currency exchange forward and swap contracts to reduce the short-term effects of currency exchange rate fluctuations on certain receivables or payables denominated in currencies other than the functional currencies of its subsidiaries. These contracts generally mature within one month. The primary risk managed by using forward and swap contracts is the currency exchange rate risk. The gains or losses on these contracts are recognized in other income (expense), net in the condensed consolidated statements of operations based on the changes in fair value. The notional amounts of these contracts outstanding as of December 31, 2017 and March 31, 2017 were $89.0 million and $56.7 million, respectively. Open forward and swap contracts outstanding as of December 31, 2017 and March 31, 2017 consisted of contracts in Mexican Pesos, Japanese Yen, British Pounds, Taiwanese Dollars, Canadian Dollars, Australian Dollars and Chinese Renminbi to be settled at future dates at pre-determined exchange rates.
 
The fair value of all foreign currency exchange forward and swap contracts is determined based on observable market transactions of spot currency rates and forward rates. Cash flows from these contracts are classified as operating activities in the condensed consolidated statements of cash flows.

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Note 9 — Goodwill and Other Intangible Assets

The Company conducts its impairment analysis of the goodwill annually at December 31 and as necessary, if changes in facts and circumstances indicate that it is more likely than not that the fair value of the Company’s reporting units may be less than its carrying amount.

The Company performed its annual impairment analysis of the goodwill as of December 31, 2017 by performing a qualitative assessment and concluded that it was more likely than not that the fair value of its peripherals reporting unit, the only reportable segment of the Company, exceeded its carrying amount. In assessing the qualitative factors, the Company considered the impact of the following key factors: change in industry and competitive environment, growth in the Company's market capitalization and budgeted-to-actual revenue performance from the last twelve months.

The following table summarizes the activities in the Company’s goodwill balance during the nine months ended December 31, 2017 (in thousands):
As of March 31, 2017
 
$
249,741

Business acquisitions
 
25,800

Currency translation
 
22

As of December 31, 2017
 
$
275,563

The Company's acquired intangible assets subject to amortization were as follows (in thousands):
 
 
December 31, 2017
 
March 31, 2017
 
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Net Carrying Amount
Trademark and trade names
 
$
23,790

 
$
(8,719
)
 
$
15,071

 
$
16,500

 
$
(6,933
)
 
$
9,567

Developed Technology
 
76,875

 
(48,352
)
 
28,523

 
63,285

 
(42,831
)
 
20,454

Customer contracts/relationships
 
59,760

 
(10,983
)
 
48,777

 
25,180

 
(7,637
)
 
17,543

Total
 
$
160,425

 
$
(68,054
)
 
$
92,371

 
$
104,965

 
$
(57,401
)
 
$
47,564

    

Note 10 — Financing Arrangements
 
The Company had several uncommitted, unsecured bank lines of credit aggregating $62.1 million as of December 31, 2017. There are no financial covenants under these lines of credit with which the Company must comply. As of December 31, 2017, the Company had outstanding bank guarantees of $44.2 million under these lines of credit. There was no borrowing outstanding under these lines of credit as of December 31, 2017 or March 31, 2017.

Note 11 — Commitments and Contingencies
 
Product Warranties
 
All of the Company’s peripherals products sold are covered by warranty to be free from defects in material and workmanship. The warranty period varies by product and by region.
 

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Changes in the Company’s warranty liability for the three and nine months ended December 31, 2017 and 2016 were as follows (in thousands): 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
2017
 
2016
 
2017
 
2016
Beginning of the period
$
24,349

 
$
21,612

 
$
21,911

 
$
20,380

Assumed from business acquisition
—

 
—

 
1,230

 
1,963

Provision
7,820

 
4,521

 
17,535

 
10,861

Settlements
(6,050
)
 
(3,550
)
 
(15,229
)
 
(10,430
)
Currency translation
145

 
(462
)
 
817

 
(653
)
End of the period
$
26,264

 
$
22,121

 
$
26,264

 
$
22,121

 
Guarantees
 
Logitech Europe S.A., one of our wholly-owned subsidiaries, guaranteed payments of certain third-party contract manufacturers’ purchase obligations. As of December 31, 2017, the maximum amount of this guarantee was $3.8 million, of which $1.7 million of guaranteed purchase obligations were outstanding.

Indemnifications
 
The Company indemnifies certain of its suppliers and customers for losses arising from matters such as intellectual property disputes and product safety defects, subject to certain restrictions. The scope of these indemnities varies, but in some instances, includes indemnification for damages and expenses, including reasonable attorneys’ fees. As of December 31, 2017, no amounts have been accrued for these indemnification provisions. The Company does 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 its indemnification arrangements.
 
The Company also indemnifies its current and former directors and certain of its current and former officers. Certain costs incurred for providing such indemnification may be recoverable under various insurance policies. The Company is unable to reasonably estimate the maximum amount that could be payable under these arrangements because these exposures are not limited, the obligations are conditional in nature and the facts and circumstances involved in any situation that might arise are variable.

The stock purchase agreement entered on December 28, 2015 in connection with the investment by three venture capital firms in Lifesize contains representations, warranties and covenants of Logitech and Lifesize, Inc. to the Investors. Logitech has agreed, subject to certain limitations, to indemnify the Investors and certain persons related to the Investors for certain losses resulting from breaches of or inaccuracies in such representations, warranties and covenants as well as certain other obligations, including third-party expenses, restructuring costs and pre-closing tax obligations of Lifesize.
 
Legal Proceedings
 
From time to time the Company is involved in claims and legal proceedings that arise in the ordinary course of its business. The Company is currently subject to several such claims and a small number of legal proceedings. The Company believes that these matters lack merit and intends to vigorously defend against them. Based on currently available information, the Company does not believe that resolution of pending matters will have a material adverse effect on its financial condition, cash flows or results of operations. However, litigation is subject to inherent uncertainties, and there can be no assurances that the Company’s defenses will be successful or that any such lawsuit or claim would not have a material adverse impact on the Company’s business, financial condition, cash flows or results of operations in a particular period. Any claims or proceedings against the Company, whether meritorious or not, can have an adverse impact because of defense costs, diversion of management and operational resources, negative publicity and other factors. Any failure to obtain a necessary license or other rights, or litigation arising out of intellectual property claims, could adversely affect the Company’s business.


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Note 12 — Shareholders’ Equity
 
Share Repurchase Program

In March 2014, the Company’s Board of Directors approved the 2014 share buyback program, which authorizes the Company to use up to $250.0 million to purchase its own shares. This share buyback program expired in April 2017.

In March 2017, the Company's Board of Directors approved the 2017 share buyback program, which authorizes the Company to use up to $250.0 million to purchase up to 17.3 million shares of its own shares following the expiration date of the 2014 share buyback program. The Company's share buyback program is expected to remain in effect for a period of three years. Shares may be repurchased from time to time on the open market, through block trades or otherwise. Purchases may be started or stopped at any time without prior notice depending on market conditions and other factors.

During the nine months ended December 31, 2017 and 2016, 0.6 million and 3.3 million shares, respectively, were repurchased for $20.4 million and $63.8 million, respectively.

Cash Dividend on Shares of Common

During the nine months ended December 31, 2017, the Company declared and paid cash dividends of CHF 0.61 (USD equivalent of $0.63) per common share, totaling $104.2 million on the Company's outstanding common stock. During the nine months ended December 31, 2016, the Company declared and paid cash dividends of CHF 0.56 (USD equivalent of $0.57) per common share, totaling $93.1 million on the Company's outstanding common stock.

Any future dividends will be subject to the approval of the Company's shareholders.

Accumulated Other Comprehensive Income (Loss)
 
The accumulated other comprehensive income (loss) was as follows (in thousands):
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
Cumulative
Translation
Adjustment (1)
 
Defined
Benefit
Plan (1)
 
Deferred
Hedging
Losses
 
Total
March 31, 2017
 
$
(89,708
)
 
$
(10,480
)
 
$
(518
)
 
$
(100,706
)
Other comprehensive income (loss)
 
5,176

 
1,012

 
(649
)
 
5,539

December 31, 2017
 
$
(84,532
)
 
$
(9,468
)
 
$
(1,167
)
 
$
(95,167
)
 
(1)        Tax effect was not significant as of December 31 or March 31, 2017.
 

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Note 13 — Segment Information
 
The Company has determined that it operates in a single operating segment that encompasses the design, manufacturing and marketing of peripherals for PCs, tablets and other digital platforms. Operating performance measures are provided directly to the Company's Chief Executive Officer (“CEO”), who is considered to be the Company’s Chief Operating Decision Maker (“CODM”). The CEO periodically reviews information such as net sales and operating income (loss) to make business decisions. These operating performance measures do not include restructuring charges (credits), net, share-based compensation expense, amortization of intangible assets, charges from the purchase accounting effect on inventory, acquisition-related costs, investigation and related expenses, or change in fair value of contingent consideration from business acquisition.

Net sales by product categories, excluding intercompany transactions, for the three and nine months ended December 31, 2017 and 2016 were as follows (in thousands):
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Pointing Devices
 
$
140,983

 
$
142,166

 
$
386,700

 
$
382,249

Keyboards & Combos
 
126,372

 
125,289

 
361,685

 
359,824

PC Webcams
 
27,280

 
30,503

 
80,371

 
80,072

Tablet & Other Accessories
 
26,648

 
24,852

 
80,650

 
59,351

Video Collaboration
 
46,252

 
35,807

 
128,008

 
88,298

Mobile Speakers
 
147,377

 
106,578

 
300,843

 
261,046

Audio-PC & Wearables
 
84,435

 
67,225

 
197,082

 
186,058

Gaming
 
173,802

 
107,181

 
365,232

 
242,874

Smart Home
 
38,692

 
26,942

 
73,481

 
49,916

Other (1)
 
180

 
164

 
385

 
1,187

Total net sales
 
$
812,021

 
$
666,707

 
$
1,974,437

 
$
1,710,875


(1) Other category includes products that the Company currently intends to transition out of, or has already transitioned out of, because they are no longer strategic to the Company's business.
Net sales by geographic region (based on the customers’ locations) for the three and nine months ended December 31, 2017 and 2016 were as follows (in thousands):
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Americas
 
$
380,130

 
$
290,724

 
$
887,523

 
$
753,179

EMEA
 
253,767

 
233,251

 
622,681

 
576,809

Asia Pacific
 
178,124

 
142,732

 
464,233

 
380,887

Total net sales
 
$
812,021

 
$
666,707

 
$
1,974,437

 
$
1,710,875

 
Sales are attributed to countries on the basis of the customers’ locations.

The United States and Germany each represented more than 10% of the total consolidated net sales for each of the periods presented herein. No other countries represented more than 10% of the Company’s total consolidated net sales for the periods presented herein.

Switzerland, the Company’s home domicile, represented 1% and 2% of the Company’s total consolidated net sales for the three and nine months ended December 31, 2017, respectively, and 2% for each of the three and nine months ended December 31, 2016.

Two customer groups of the Company each represented more than 10% of the total consolidated net sales for each of the periods presented herein.
 

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Property, plant and equipment, net by geographic region were as follows (in thousands):
 
 
December 31,
2017
 
March 31,
2017
Americas
 
$
36,688

 
$
37,242

EMEA
 
4,604

 
4,006

Asia Pacific
 
45,609

 
44,160

Total Property, plant and equipment, net
 
$
86,901

 
$
85,408

 
Property, plant and equipment, net in the United States and China were $36.6 million and $37.8 million, respectively, as of December 31, 2017, and $37.1 million and $37.2 million, respectively, as of March 31, 2017. No other countries represented more than 10% of the Company’s total consolidated property, plant and equipment, net as of December 31, 2017 or March 31, 2017. Property, plant and equipment, net in Switzerland, the Company’s home domicile, were $2.0 million and $2.1 million as of December 31, 2017 and March 31, 2017, respectively.
 

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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion in conjunction with the interim unaudited condensed consolidated financial statements and related notes.
 
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include, among other things, statements regarding our strategy for growth, future revenues, earnings, cash flow, uses of cash and other measures of financial performance, and market position, our business strategy, the impact of investment prioritization decisions, product offerings, sales and marketing initiatives, strategic investments, addressing execution challenges, trends in consumer demand affecting our products and markets, trends in the composition of our customer base, our current or future revenue and revenue mix by product, among our lower- and higher-margin products, 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 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, 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, 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, the impact of the Tax Cuts and Jobs Act on our overall effective income tax rate, our expectations regarding our potential indemnification obligations, and the outcome of pending or future legal proceedings and tax audits, our remediation efforts to address our material weaknesses, our belief that our disclosure controls and procedures will become effective at the reasonable assurance level by the end of fiscal year 2018, our expectations regarding the impact of new accounting pronouncements on our operating results, and our ability to achieve and sustain renewed growth, profitability and future success. Forward-looking statements also include, among others, those statements including the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “project,” “predict,”, "seek", “should,” “will,” and similar language. These forward-looking statements involve risks and uncertainties that could cause our actual performance to differ materially from that anticipated in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.
 
Overview of Our Company
 
Logitech is a world leader in designing, manufacturing and marketing products that have an everyday place in people's lives, connecting them to the digital experiences they care about. More than 35 years ago Logitech created products to improve experiences around the PC platform, and now it is designing products that enable better experiences consuming, sharing and creating any digital content (e.g., music, gaming, video), whether it is on a computer, mobile device or in the cloud. Logitech's brands include Logitech, Jaybird, ASTRO, Logitech G and Ultimate Ears.

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Table of Contents


Our products participate in five large markets that all have growth opportunities: Music, Gaming, Video Collaboration, Smart Home and Creativity & Productivity. We sell our products to a broad network of domestic and international customers, including direct sales to retailers and e-tailers, and indirect sales through distributors. Our worldwide channel network includes consumer electronics distributors, retailers, mass merchandisers, specialty electronics stores, computer and telecommunications stores, value-added resellers and online merchants.
From time to time, we may seek to partner with, or acquire when appropriate, companies that have products, personnel, and technologies that complement our strategic direction. We continually review our product offerings and our strategic direction in light of our profitability targets, competitive conditions, changing consumer trends and the evolving nature of the interface between the consumer and the digital world.
On August 11, 2017 (the "Acquisition Date"), we acquired certain assets and liabilities constituting the ASTRO Gaming business ("ASTRO") from AG Acquisition Corporation for a purchase price of $85.0 million in cash (the "ASTRO Acquisition"). ASTRO is a leading console gaming brand with a history of producing award-winning headsets for professional gamers and enthusiasts.

Summary of Financial Results

Our net sales for the three and nine months ended December 31, 2017 increased 22% and 15%, respectively, compared to the three and nine months ended December 31, 2016, due to stronger net sales across all regions. The results of operations for ASTRO have been included in our condensed consolidated statements of operations from the Acquisition Date. The ASTRO business is highly seasonal and it typically generates approximately half of its fiscal year sales in the third quarter.

For the three and nine months ended December 31, 2017, ASTRO contributed $33.5 million and $36.2 million to net sales, respectively, representing approximately 4% of our net sales for the three-month period and 2% for the nine-month period. For the nine months ended December 31, 2017, Saitek, which was acquired on September 15, 2016, contributed $8.4 million of sales increase, compared with the nine months ended December 31, 2016.

Our net sales for the three months ended December 31, 2017 increased 31%, 9% and 25% in the Americas, EMEA and Asia Pacific, respectively, compared to the same period of the prior fiscal year. Our net sales for the nine months ended December 31, 2017 increased 18%, 8% and 22% in the Americas, EMEA and Asia Pacific, respectively, compared to the same period of the prior fiscal year.

Given our global sales presence and the reporting of our financial results in U.S. Dollars, our financial results could be affected by shifts in currency exchange rates. See “Results of Operations” for information on the effect of currency exchange results on our net sales. If the U.S. Dollar becomes stronger or weaker in comparison to other currencies, it will also affect our results of operations in future periods.

We added a new third-party logistics provider and distribution center in North America in the second half of the second quarter of fiscal year 2018 to support our growth. We experienced significant challenges in the transition from one distribution center to two, operating procedures at the newer distribution center, and in ramping fulfillment in the second quarter and early third quarter of fiscal year 2018. As a result, we incurred additional cost on freight and warehouse-related expense. We have started transition back to only one distribution center for North America and the process is expected to be completed during the fourth quarter of fiscal year 2018.

Our gross margin for the three months ended December 31, 2017 decreased to 33.9% from 37.0% for the three months ended December 31, 2016. Approximately 150 basis points of the decrease in gross margin was driven by an increase in logistics costs including additional costs from the transition of the distribution center in North America and the remaining decrease was primarily due to an increase in promotions related to product transition, and product mix, partially offset by lower variable compensation based on operational metrics.

Our gross margin for the nine months ended December 31, 2017 decreased to 35.3% from 36.4% for the nine months ended December 31, 2016. The decrease in gross margin was primarily driven by an increase in logistics costs including additional costs from the transition of the distribution center in North America, an increase in promotions related to product transition, and product mix, partially offset by product cost reductions and lower variable compensation based on operational metrics in the recent quarter.

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Operating expenses for the three months ended December 31, 2017 were $175.3 million, or 21.6% of net sales, compared to $150.5 million, or 22.6% of net sales, in the same period of the prior fiscal year. Operating expenses for the nine months ended December 31, 2017 were $506.4 million, or 25.6% of net sales, compared to $446.7 million, or 26.1% of net sales, in the same period of the prior fiscal year. The increase for the three-month period was primarily driven by higher external expenses to support the advertising and marketing efforts for our new products, higher personnel related cost due to additional headcount from ASTRO Acquisition, and a credit from change in fair value of contingent consideration from the Jaybird Acquisition in the prior year, partially offset by lower variable compensation for fiscal year 2018 based on operational metrics. The increase for the nine-month period was mainly due to increases in marketing and selling expenses and research and development expenses from higher personnel-related costs due to increased headcount and higher external expenses to support the advertising and marketing efforts for our new products, in addition to a lower credit from the change in fair value of contingent consideration for business acquisition, partially offset by lower variable compensation based on operational metrics.

We recorded an income tax charge of $19.9 million from the provisional remeasurement of federal deferred tax assets and liabilities as of December 31, 2017 to reflect the effects of the enacted changes in tax rate and a provisional income tax benefit of $4.1 million from the reduction in federal valuation allowance against tax credits as a result of the tax reform.

Net income for the three and nine months ended December 31, 2017 was $80.8 million and $174.1 million, respectively, compared to $97.5 million and $166.5 million for the three and nine months ended December 31, 2016, respectively.
 
Trends in Our Business
 
Our strategy focuses on five large multi-category markets, including Music, Gaming, Video Collaboration, Smart Home and Creativity & Productivity. We see opportunities to deliver growth in all these markets.

We believe our future growth will be determined by our ability to rapidly create innovative products across multiple digital platforms, including gaming, digital music devices, video and computing. The following discussion represents key trends specific to our market opportunities.
Trends Specific to Our Five Market Opportunities
Music: The music market grew during the first nine months of fiscal year 2018, driven by growing consumption of music through mobile devices such as smartphones and tablets. According to the Recording Industry Association of America (RIAA), revenues from streaming music platforms grew significantly in the first nine months of 2017. This market growth, together with our investments in the Ultimate Ears and Jaybird brands, new channel expansion, integration of personal voice assistants, such as Google Home and Amazon Alexa, and our new product introductions, has driven our growth in this market. The integration of personal voice assistants has become increasingly competitive in the speaker categories.

Gaming: The PC gaming and console gaming platforms continue to show strong growth as online gaming, multi-platform experiences, and eSports gain greater popularity and gaming content becomes increasingly more demanding. We believe Logitech is well positioned to benefit from the PC gaming market growth. With the ASTRO Acquisition, we are also strengthening our portfolio in adjacent categories, such as the console gaming market.

Video Collaboration: The near and long-term structural growth opportunities in the video collaboration market is still significant. We are continuing our efforts to create and sell innovative products to accommodate the increasing demand from medium-sized meeting rooms to small-sized rooms such as huddle rooms. We will continue to invest in select business-specific products, targeted product marketing and sales channel development.

Smart Home: This market increased in fiscal year 2017 and has continued to grow in the first nine months of fiscal year 2018. In October 2016, we integrated Amazon Alexa and Google Assistant voice capabilities into our Logitech Harmony Hub that enables voice control of the living room entertainment experience when used with an Amazon Echo or Echo Dot or a Google Home device. Our Ultimate Ears MEGABLAST and BLAST come with Amazon Alexa built-in, featuring voice-controlled music and the full range of Alexa’s skills. Through Harmony, Alexa can turn on/off and control a TV and AV system. We have also seen success with the professional installer channel

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through the recent introduction of the Harmony Pro. We will continue to explore other innovative experiences for the Smart Home. 

Creativity & Productivity: Although new PC shipments continue to decline, the installed base of PC users remains large. We believe that innovative PC peripherals, such as our mice and keyboards, can renew the PC usage experience, providing growth opportunities. Smaller mobile computing devices, such as tablets, have created new markets and usage models for peripherals and accessories. We offer a number of products to enhance the use of mobile devices, including keyboard folios for the iPad Pro and iPad Mini, and keyboard covers and folios for the iPad Air.
Business Seasonality, Product Introductions and Acquisitions
We have historically experienced higher net sales in our third fiscal quarter ending December 31, compared to other fiscal quarters in our fiscal year, due in part to seasonal holiday demand. Additionally, new product introductions and business acquisitions can significantly impact net sales, product costs and operating expenses. Product introductions can also impact our net sales to our distribution channels as these channels are filled with new product inventory following a product introduction, and often channel inventory of an earlier model product declines as the next related major product launch approaches. Net sales can also be affected when consumers and distributors anticipate a product introduction or changes in business circumstances. However, neither historical seasonal patterns nor historical patterns of product introductions should be considered reliable indicators of our future pattern of product introductions, future net sales or financial performance.

Critical Accounting Estimates

 The preparation of financial statements and related disclosures in conformity with GAAP requires us to make judgments, estimates and assumptions that affect reported amounts of assets, liabilities, goodwill and intangible assets from business acquisitions, contingent consideration from business acquisitions, and net sales and expenses.

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

We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Although these estimates are based on management's best knowledge of current events and actions that may impact us in the future, actual results could differ from those estimates. Management has discussed the development, selection and disclosure of these critical accounting estimates with the Audit Committee of the Board of Directors.
 
Other than the recent accounting pronouncement adoptions discussed below, there have been no substantial changes in the Company’s significant accounting policies during the nine months ended December 31, 2017, compared with the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017.

Adoption of New Accounting Guidance

In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory (Topic 330)" ("ASU 2015-11"). Topic 330, previously required an entity to measure inventory at the lower of cost or market, with market value represented by replacement cost, net realizable value or net realizable value less a normal profit margin. ASU 2015-11 requires an entity to measure inventory at the lower of cost or net realizable value and effective for fiscal years beginning after December 15, 2016. We adopted this standard effective April 1, 2017, which has not had a material impact on our condensed consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 simplifies several aspects of the accounting for share-based payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees' maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the

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statement of cash flows for the excess tax benefits and employee taxes paid when an employer withholds shares for tax withholding purposes. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016. We adopted this standard effective April 1, 2017. Changes to the statements of cash flows related to the classification of excess tax benefits were implemented on a retroactive basis and accordingly, to conform to the current year presentation, we reclassified $6.4 million of excess tax benefits previously reported under financing activities to operating activities for the nine months ended December 31, 2016 on our condensed consolidated statements of cash flows. Under the new standard, we account for forfeitures as they occur. The change in accounting for forfeitures resulted in a cumulative-effect adjustment to decrease retained earnings as of March 31, 2017 by $3.3 million. We further recognized a cumulative-effect adjustment to increase retained earnings as of March 31, 2017 by $57.2 million upon adoption of the new guidance to account for gross excess tax benefits of $75.2 million that were previously not recognized because the related tax deduction had not reduced current income taxes, offset by a valuation allowance of $18.0 million to reduce the deferred tax assets to amounts that are more likely than not to be realized.

In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment (Topic 350)" ("ASU 2017-04"), which removes Step 2 from the goodwill impairment test. ASU 2017-04 is effective for annual or any interim goodwill impairments in annual periods beginning December 15, 2019, with early adoption permitted. We adopted this standard effective April 1, 2017, which has not had a material impact on our condensed consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting" ("ASU 2017-09"), which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for annual periods beginning after December 15, 2017, with early adoption permitted, including adoption in any interim period for which financial statements have not yet been issued. We adopted this standard effective April 1, 2017, which has not had a material impact on our condensed consolidated financial statements.

Refer to Note 1 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for recent accounting pronouncements to be adopted.

Impact of Constant Currency

We refer to our net sales growth rates excluding the impact of currency exchange rate fluctuations as "constant dollar" sales growth rates. Percentage of constant dollar sales growth is calculated by translating prior period sales in each local currency at the current period’s average exchange rate for that currency and comparing that to current period sales.

Given our global sales presence and the reporting of our financial results in U.S. Dollars, our financial results could be affected by significant shifts in currency exchange rates. See “Results of Operations” for information on the effect of currency exchange results on our net sales. If the U.S. Dollar appreciates or depreciates in comparison to other currencies in future periods, this will affect our results of operations in future periods as well.

Sales Denominated in Other Currencies

Although our financial results are reported in U.S. Dollars, a portion of our sales was generated in currencies other than the U.S. Dollar, such as the Euro, Chinese Renminbi, Japanese Yen, Canadian Dollar, Taiwan New Dollar, British Pound and Australian Dollar. During the three months ended December 31, 2017, 47% of our net sales were denominated in currencies other than the U.S. Dollar.

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Results of Operations
Net Sales
Net sales for the three and nine months ended December 31, 2017 and 2016 were as follows (Dollars in thousands):
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Net Sales
 
$
812,021

 
$
666,707

 
22
%
 
$
1,974,437

 
$
1,710,875

 
15
%

Our net sales in the three and nine months ended December 31, 2017 increased 22% and 15%, respectively, compared to the same periods of the prior fiscal year. Sales increased across all three regions during the three and nine months ended December 31, 2017. If currency exchange rates had been constant in the three and nine months ended December 31, 2017 and 2016, our constant dollar sales growth rates would have been 18% and 14%, respectively. We grew across most of our product categories, with Gaming, Smart Home, Video Collaboration and Mobile Speakers growing double digits for both periods presented above compared to the same periods of the prior fiscal year.

Net Sales by Region
 
The following table presents the change in net sales by region for the three and nine months ended December 31, 2017, compared with the three and nine months ended December 31, 2016:
 
 
Three Months Ended
December 31, 2017 Change in Sales
 
Nine Months Ended
December 31, 2017
Change in Sales
Americas
 
31
%
 
18
%
EMEA
 
9

 
8

Asia Pacific
 
25

 
22

 
Americas:
 
Net sales in the Americas increased 31% and 18% during the three and nine months ended December 31, 2017, respectively, compared to the same periods of the prior fiscal year. If currency exchange rates had been constant in the three and nine months ended December 31, 2017 and 2016, our constant dollar sales growth rate would have been 30% and 18% in the Americas, respectively. The increase for the three-month period was primarily driven by increases in sales of Gaming (including ASTRO), Mobile Speakers, Audio PC & Wearables and Smart Home. The increase for the nine-month period was driven by increases in sales of all categories, led by Gaming, Mobile Speakers, Tablet & Other Accessories and Smart Home.
 
EMEA:
 
Net sales in EMEA increased 9% and 8% during the three and nine months ended December 31, 2017, respectively, compared to the same periods of the prior fiscal year. If currency exchange rates had been constant in the three and nine months ended December 31, 2017 and 2016, our constant dollar sales growth rates would have been 2% and 5%, respectively. The growth in both periods was driven by sales increases in Gaming, Mobile Speakers, Smart Home, and Video Collaboration, partially offset by declines in Pointing Devices and PC Webcams.

Asia Pacific:
 
Net sales in Asia Pacific increased 25% and 22% during the three and nine months ended December 31, 2017, respectively, compared to the same periods of the prior fiscal year. If currency exchange rates had been constant in the three and nine months ended December 31, 2017 and 2016, our constant dollar sales growth rates would have been 23% and 22%, respectively. The growth in both periods was driven by Gaming, Video Collaboration, Mobile Speakers, Pointing Devices and Audio PC & Wearables.


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Net Sales by Product Categories
 
Net sales by product category for the three and nine months ended December 31, 2017 and 2016 were as follows (Dollars in thousands):
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Pointing Devices
 
$
140,983

 
$
142,166

 
(1
)%
 
$
386,700

 
$
382,249

 
1
 %
Keyboards & Combos
 
126,372

 
125,289

 
1

 
361,685

 
359,824

 
1

PC Webcams
 
27,280

 
30,503

 
(11
)
 
80,371

 
80,072

 
—

Tablet & Other Accessories
 
26,648

 
24,852

 
7

 
80,650

 
59,351

 
36

Video Collaboration
 
46,252

 
35,807

 
29

 
128,008

 
88,298

 
45

Mobile Speakers
 
147,377

 
106,578

 
38

 
300,843

 
261,046

 
15

Audio-PC & Wearables
 
84,435

 
67,225

 
26

 
197,082

 
186,058

 
6

Gaming
 
173,802

 
107,181

 
62

 
365,232

 
242,874

 
50

Smart Home
 
38,692

 
26,942

 
44

 
73,481

 
49,916

 
47

Other (1)
 
180

 
164

 
10

 
385

 
1,187

 
(68
)
Total net sales
 
$
812,021

 
$
666,707

 
22

 
$
1,974,437

 
$
1,710,875

 
15


(1) Other category includes products that we currently intend to transition out of, or have already transitioned out of, because they are no longer strategic to our business.
Net Sales by Product Categories

Creativity & Productivity Market:

Pointing Devices
 
Our Pointing Devices category comprises PC and Mac-related mice, touchpads and presenters.
 
Net sales of Pointing Devices decreased 1% for the three months ended and increased 1% for the nine months ended December 31, 2017, respectively, compared to the same periods of the prior fiscal year. The decrease for the three-month period was primarily driven by a decrease in sales of mice, partially offset by an increase in sales of trackball and presentation tools. The increase for the nine-month period was driven by an increase in sales of trackball and presentation tools, partially offset by the decrease in the sales of mice and other pointing devices.

Keyboards & Combos
 
Our Keyboards & Combos category comprises PC keyboards and keyboard/mice combo products.
 
Net sales of Keyboards & Combos increased 1% in the three and nine months ended December 31, 2017, compared to the same periods of the prior fiscal year. The increases for both periods were primarily driven by an increase in sales for cordless keyboards, partially offset by a decrease in sales of living room keyboards.

PC Webcams
 
Our PC Webcams category comprises PC-based webcams targeted primarily at consumers.
 
PC Webcams net sales decreased 11% and remained flat in the three and nine months ended December 31, 2017, respectively, compared to the same periods of the prior fiscal year. The decrease for the three-month period was primarily driven by the decreases in sales across most webcam products within this product category.

Tablet & Other Accessories
 
Our Tablet & Other Accessories category comprises keyboards and covers for tablets and smartphones as well as other accessories for mobile devices.

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Net sales of Tablet & Other Accessories products increased 7% and 36% in the three and nine months ended December 31, 2017, respectively, compared to the same periods of the prior fiscal year. The increases for both periods were primarily driven by an increase in sales of tablet keyboards, including the introduction of the Slim Folio, 10.5-inch and 12.9-inch Slim Combo keyboard cases, partially offset by a decrease in sales for tablet covers and other accessories. Rugged Combo also contributed to the growth for the nine-month period.

Video Collaboration market:

Video Collaboration

Our Video Collaboration category primarily includes products which combine audio and video and other products that can connect small- and medium-sized user groups.

Net sales of Video Collaboration products increased 29% and 45% in the three and nine months ended December 31, 2017, respectively, compared to the same periods of the prior fiscal year. The increases for both periods were primarily due to the introduction of the Brio 4K Pro Webcam, PTZ Pro 2 group camera, and Meetup video conference camera in the first half of fiscal year 2018. Logitech Group video conference system also contributed to the growth for the nine-month period.
Music market:
 
Mobile Speakers
 
Our Mobile Speakers category is made up entirely of Bluetooth wireless speakers.

Net sales of Mobile Speakers increased 38% and 15% for the three and nine months ended December 31, 2017, respectively, compared to the same period of the prior fiscal year. The increases for both periods were primarily due to the introduction of Ultimate Ears WONDERBOOM in early fiscal year 2018, and the launch of MEGABLAST and BLAST in the third quarter of fiscal year 2018.

Audio PC & Wearables
 
Our Audio PC & Wearables category comprises PC speakers, PC headsets, in-ear headphones and premium wireless audio wearables.

Audio-PC & Wearables net sales increased 26% and 6% for the three and nine months ended December 31, 2017, respectively, compared to the same periods of the prior fiscal year. The increases were primarily driven by a sales increase of Jaybird products, partially offset by a sales decrease of PC speakers and other headsets. Jaybird posted strong growth this quarter, with good contribution from Jaybird Run, our first true wireless earphone, and from our other Jaybird product lines.

Gaming market:

Gaming
 
Our Gaming category comprises gaming mice, keyboards, headsets, gamepads, steering wheels, Saitek simulation controllers and ASTRO console gaming headsets.
 
Gaming net sales increased 62% and 50% for the three and nine months ended December 31, 2017, respectively, compared to the same periods of the prior fiscal year. The significant increases for both periods were primarily driven by the strong performance of console gaming headsets from the acquisition of ASTRO, as well as the continuing success of our gaming mice, steering wheels, keyboards, headsets and Saitek simulation products.


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Smart Home market:

Smart Home
 
Our Smart Home category includes our Harmony line of advanced home entertainment controllers, home security cameras and new products, incorporating voice assistants, dedicated to controlling emerging categories of connected smart home devices such as lighting, thermostats and door locks.
 
Smart Home net sales increased 44% and 47% during the three and nine months ended December 31, 2017, respectively, compared to the same periods of the prior fiscal year. The increases were primarily due to the continued success of our Harmony Smart home remote, as well as the introduction of Circle 2 Wired and Circle 2 Wireless security cameras in the second quarter of fiscal year 2018.

Gross Profit
 
Gross profit for the three and nine months ended December 31, 2017 and 2016 was as follows (Dollars in thousands):
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Net sales
 
$
812,021

 
$
666,707

 
22
%
 
$
1,974,437

 
$
1,710,875

 
15
%
Gross profit
 
$
275,601

 
$
246,763

 
12

 
$
697,006

 
$
622,262

 
12

Gross margin
 
33.9
%
 
37.0
%
 
 
 
35.3
%
 
36.4
%
 
 

 
Gross profit consists of net 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.
 
Our gross margin for the three months ended December 31, 2017 decreased by 310 basis points compared to the three months ended December 31, 2016. Approximately 150 basis points of the decrease in gross margin was driven by an increase in logistics costs including additional costs from the transition of the distribution center in North America and the remaining decrease was primarily due to an increase in promotions related to product transition, and product mix, partially offset by lower variable compensation based on operational metrics.

Our gross margin for the nine months ended December 31, 2017 decreased by 110 basis points compared to the nine months ended December 31, 2016. The decrease in gross margin was primarily driven by an increase in logistics costs including additional costs from the transition of the distribution center in North America, an increase in promotions related to product transition, and product mix, partially offset by product cost reductions and lower variable compensation based on operational metrics.

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Operating Expenses
 
Operating expenses for the three and nine months ended December 31, 2017 and 2016 were as follows (Dollars in thousands):
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Marketing and selling
 
$
116,153

 
$
102,036

 
$
325,917

 
$
279,700

% of net sales
 
14.3
%
 
15.3
 %
 
16.5
 %
 
16.3
 %
Research and development
 
34,398

 
32,284

 
106,144

 
96,867

% of net sales
 
4.2
%
 
4.8
 %
 
5.4
 %
 
5.7
 %
General and administrative
 
22,291

 
24,598

 
72,850

 
75,543

% of net sales
 
2.7
%
 
3.7
 %
 
3.7
 %
 
4.4
 %
Amortization of intangible assets and acquisition-related costs
 
2,496

 
1,494

 
6,377

 
4,535

% of net sales
 
0.3
%
 
0.2
 %
 
0.3
 %
 
0.3
 %
Change in fair value of contingent consideration for business acquisition
 
—

 
(9,925
)
 
(4,908
)
 
(9,925
)
% of net sales
 
—
%
 
(1.5
)%
 
(0.2
)%
 
(0.6
)%
Total operating expenses
 
$
175,338

 
$
150,487

 
$
506,380

 
$
446,720

% of net sales
 
21.6
%
 
22.6
 %
 
25.6
 %
 
26.1
 %

The increase in total operating expenses for the three months ended December 31, 2017, compared to the same period of the prior fiscal year, was mainly due to increases in marketing and selling expenses from higher external expenses to support the advertising and marketing efforts for our new products and higher personnel related costs from additional headcount and from ASTRO Acquisition, partially offset by lower variable compensation based on operational metrics. In addition, there was a $9.9 million credit from the change in fair value of contingent consideration for a business acquisition in the prior year, which did not exist in the current year.

The increase in total operating expenses for the nine months ended December 31, 2017, compared to the same period of the prior fiscal year, was mainly due to higher external expenses to support the advertising and marketing efforts for our new products, increases in marketing and selling expenses and research and development expenses from higher personnel-related costs due to increased headcount, in addition to a lower credit from the change in fair value of contingent consideration for business acquisition, partially offset by lower variable compensation based on operational metrics.

Marketing and Selling
 
Marketing and selling expenses consist of personnel and related overhead cost, corporate and product marketing, promotions, advertising, trade shows, customer and technical support, and facilities costs.
 
During the three months ended December 31, 2017, marketing and selling expenses increased $14.1 million, compared to the same period of the prior fiscal year. The increase was primarily driven by $11.2 million higher external expenses to support the advertising and marketing efforts for our new products and $1.6 million higher personnel-related costs due to increased headcount and from ASTRO Acquisition, partially offset by lower variable compensation based on operational metrics.

During the nine months ended December 31, 2017, marketing and selling expenses increased $46.2 million compared to the same period of the prior fiscal year. The increase was primarily driven by $29.7 million higher external expenses to support the advertising and marketing efforts for our new products and $14.8 million higher personnel-related costs due to increased headcount, partially offset by lower variable compensation based on operational metrics.



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 Research and Development 

Research and development expenses consist of personnel and related overhead costs for contractors and outside consultants, supplies and materials, equipment depreciation and facilities costs, all associated with the design and development of new products and enhancements of existing products.
 
During the three months ended December 31, 2017, research and development expenses increased $2.1 million compared to the same period in the prior fiscal year. The increase was primarily driven by higher personnel-related costs due to increased headcount to support the development and launch of new products and capabilities and from ASTRO Acquisition, partially offset by lower variable compensation based on operational metrics.

During the nine months ended December 31, 2017, research and development expenses increased $9.3 million compared to the same period in the prior fiscal year. The increase was primarily driven by $9.7 million higher personnel-related costs due to increased headcount to support the development and launch of new products and capabilities, partially offset by lower variable compensation based on operational metrics.
 
General and Administrative
 
General and administrative expenses consist primarily of personnel and related overhead and facilities costs for the finance, information systems, executives, human resources, and legal functions.

During the three and nine months ended December 31, 2017, general and administrative expenses decreased $2.3 million and $2.7 million, respectively, compared to the same periods in the prior fiscal year, primarily due to lower variable compensation based on operational metrics.

Amortization of Intangibles and Acquisition-Related Costs

Amortization of intangibles and acquisition-related costs during the three and nine months ended December 31, 2017 and 2016 were as follows (in thousands):
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Amortization of intangible assets
 
$
2,126

 
$
1,279

 
$
4,965

 
$
3,074

Acquisition-related costs
 
370

 
215

 
1,412

 
1,461

Total
 
$
2,496

 
$
1,494

 
$
6,377

 
$
4,535


Amortization of intangible assets consists of amortization of acquired intangible assets, including customer relationships and trade names. Acquisition-related costs include legal expense, due diligence costs, and other professional costs incurred for business acquisitions.

Change in Fair Value of Contingent Consideration for Business Acquisition

During the nine months ended December 31, 2017, the fair value of the contingent consideration for business acquisition decreased $4.9 million. The decrease in fair value of contingent consideration is primarily due to the agreement we reached with the sellers of Jaybird. In October 2017, we entered into an agreement with the sellers of Jaybird fully, irrevocably and unconditionally releases the Company from the earn-out rights and payments in the Jaybird Acquisition agreement in exchange for $5.0 million in cash, which approximates the fair value of the contingent consideration as of September 30, 2017. See "Note 7 - Fair Value Measurements" to our condensed consolidated financial statements for further details.


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Provision for (Benefit from) Income Taxes
 
The provision for (benefit from) income taxes and effective tax rates for the three and nine months ended December 31, 2017 and 2016 were as follows (Dollars in thousands):
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Provision for income taxes
 
$
20,040

 
$
1,647

 
$
18,691

 
$
10,297

Effective income tax rate
 
19.9
%
 
1.7
%
 
9.7
%
 
5.8
%

The change in the effective income tax rate in the three months ended December 31, 2017 compared to the same period of the prior fiscal year is primarily due to $19.9 million of income tax provision from the provisional remeasurement of deferred tax assets and liabilities in the United States based on the applicable enacted federal income tax rates when the temporary differences and tax attribute carryforwards are expected to recover or settle. The remeasurement charge is offset by $4.1 million of provisional income tax benefit from the reduction in federal valuation allowance against tax credits as a result of the tax reform.

The change in the effective income tax rate in the nine months ended December 31, 2017 compared to the same period of the prior fiscal year is primarily due to the recognition of excess tax benefits of $10.8 million after adoption of ASU 2016-09 and income tax benefit from the reversal of uncertain tax positions from the expiration of statutes of limitations are largely offset by income tax provision from the provisional remeasurement of deferred tax assets and liabilities in the third quarter. In the three and nine months ended December 31, 2017, there was a discrete income tax benefit of $6.0 million and $7.9 million, respectively, from the reversal of uncertain tax positions from the expiration of statutes of limitations. In the same periods ended December 31, 2016, the income tax benefit from the reversal of uncertain tax positions from the expiration of statutes of limitations was $9.4 million and $11.1 million, respectively.

As of December 31 and March 31, 2017, the total amount of unrecognized tax benefits due to uncertain tax positions was $67.3 million and $63.7 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 December 31, 2017, we had cash and cash equivalents of $564.9 million, compared to $547.5 million as of March 31, 2017, of which 38% is held in Switzerland, 30% is held in Germany, and 14% is held in Hong Kong and China as of December 31, 2017. 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 was primarily due to the net income and proceeds from exercises of stock options and purchase rights partially offset by the payment of cash dividends, cash paid for acquisitions, purchases of property, plant and equipment, tax withholdings related to settlements of restricted stock units and the purchases of our shares.

As of December 31, 2017, our working capital was $546.0 million, compared to $520.8 million as of March 31, 2017. The increase was primarily due to higher accounts receivable, net, partially offset by higher accounts payable, higher accruals and other liabilities. Our working capital increased compared to $478.7 million as of December 31, 2016, which was primarily driven by higher accounts receivable, net and higher inventories, partially offset by higher accounts payable and higher accruals and other liabilities.

We had several uncommitted, unsecured bank lines of credit aggregating $62.1 million as of December 31, 2017. There are no financial covenants under these lines of credit with which we must comply. As of December 31, 2017, we had outstanding bank guarantees of $44.2 million under these lines of credit.
 

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The following table summarizes our Condensed Consolidated Statements of Cash Flows (in thousands):
 
 
Nine Months Ended
December 31,
 
 
2017
 
2016
Net cash provided by operating activities
 
$
256,084

 
$
240,647

Net cash used in investing activities
 
(116,192
)
 
(90,240
)
Net cash used in financing activities
 
(124,214
)
 
(149,556
)
Effect of exchange rate changes on cash and cash equivalents
 
1,677

 
(6,468
)
Net increase (decrease) in cash and cash equivalents
 
$
17,355

 
$
(5,617
)

The following table presents selected financial information and statistics as of December 31, 2017 and 2016 (Dollars in thousands): 
 
 
Three Months Ended
December 31,
 
 
2017
 
2016
Accounts receivable, net
 
$
351,753

 
$
277,677

Accounts payable
 
$
429,119

 
$
358,196

Inventories
 
$
278,979

 
$
250,286

Days sales in accounts receivable (“DSO”) (Days) (1)
 
39

 
37

Days accounts payable outstanding (“DPO”) (Days) (2)
 
72

 
77

Inventory turnover (“ITO”) (x)(3)
 
7.7

 
6.7


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

DSO for the three months ended December 31, 2017 increased two days, compared to December 31, 2016, primarily due to the introduction of breakage model for EMEA marketing and incentive programs during the fourth quarter of fiscal year 2017.
 
DPO for the three months ended December 31, 2017 decreased five days, compared to December 31, 2016, primarily due to the timing of purchases.

ITO for the three months ended December 31, 2017 was higher, compared to the same period of the prior fiscal year. The increase in inventories compared with December 31, 2016 was primarily driven by higher net sales.

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

During the nine months ended December 31, 2017, we generated $256.1 million cash in 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, and from the increases in accounts payable and accrued and other liabilities, offset by the increase in accounts receivable, net. The increase in accounts receivable, net was primarily due to higher sales and timing of customer payments, and the increase in accounts payable and accrued and other liabilities was primarily driven by the timing of payments.

Net cash used in investing activities was $116.2 million, primarily due to $85.0 million of purchase price for the acquisition of the ASTRO business (refer to "Note 2- Business Acquisition" to the condensed consolidated financial statements) and $27.6 million of purchases of property, plant and equipment.


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Our expenditures for property, plant and equipment during the nine months ended December 31, 2017 increased by $4.2 million, compared to the same period of the prior fiscal year, mainly due to the higher amount of tooling purchases.

Net cash used in financing activities was $124.2 million, primarily for the $104.2 million cash dividends paid, $20.4 million repurchases of our registered shares, $25.5 million tax withholdings related to net share settlements of restricted stock units, and $5.0 million payment of contingent consideration in connection with the Jaybird acquisition, partially offset by $30.9 million in proceeds received from the exercises of stock options.

During the nine months ended December 31, 2017, there was a $1.7 million gain of currency translation exchange rate effect on cash and cash equivalents, compared to a loss of $6.5 million during the same period of the prior fiscal year. The gain from currency translation exchange effect during the nine months ended December 31, 2017 was primarily due to the strengthening of the Euro against the U.S. Dollar by 12% during the period. The loss from currency translation exchange effect during the nine months ended December 31, 2016 was primarily due to the weakening of the Euro against the U.S. Dollar by 8% during the period, which had an adverse impact on our cash and cash equivalents balances in subsidiaries with Euro as their functional currency.

Cash Outlook
 
Our principal sources of liquidity are our cash and cash equivalents, cash flow generated from operations and, to a much lesser extent, capital markets and borrowings. Our future working capital requirements and capital expenditures may increase to support investment in product innovations and growth opportunities, or to acquire or invest in complementary businesses, products, services, and technologies.

During the nine months ended December 31, 2017, we declared and paid cash dividends of approximately CHF 0.61 (USD equivalent of $0.63) per common share, totaling $104.2 million on our outstanding common stock. During the nine months ended December 31, 2016, we declared and paid cash dividends of approximately CHF 0.56 (USD equivalent of $0.57) per common share, totaling $93.1 million on our outstanding common stock. Any future dividends will be subject to the approval of our shareholders.

In March 2017, our Board of Directors approved another share buyback program, which authorizes us to purchase up to $250.0 million of our own shares, following the expiration date of our 2014 buyback program. The new program was approved by the Swiss Takeover Board in May 2017. Although we enter into trading plans for systematic repurchases (e.g., 10b5-1 trading plans) from time to time, our share buyback program provides us with the opportunity to make opportunistic repurchases during periods of favorable market conditions and is expected to remain in effect for a period of three years. Shares may be repurchased from time to time on the open market, through block trades or otherwise. Opportunistic purchases may be started or stopped at any time without prior notice depending on market conditions and other factors. As of December 31, 2017, $230.2 million is still available for repurchase under the 2017 buyback program.

As noted in "Note 7 - Fair Value Measurements" to our condensed consolidated financial statements, we acquired all of the equity interest of Jaybird with an additional earn-out of up to $45.0 million in cash based on the achievement of certain net revenue growth targets over two years starting July 2016. If the net revenue growth targets were met, the Company would have paid a maximum of $25.0 million and $20.0 million in fiscal years 2018 and 2019, respectively. In October 2017, we entered into an agreement with the sellers of Jaybird which fully, irrevocably and unconditionally releases us from the earn-out rights and payments in the Jaybird purchase agreement in exchange for $5.0 million in cash. In November 2017, we made the payment of $5.0 million to the sellers of Jaybird.

We have changed the payment frequency of our employee performance bonus plan from semi-annual payment to annual payment. The full year bonus is expected to be made in the first quarter of the following fiscal year, and the operating cash flow for that period will be negatively affected as a result.

If we do not generate sufficient operating cash flows to support our operations and future planned cash requirements, our operations could be harmed and our access to credit could be restricted or eliminated. However, we believe that the trend of our historical cash flow generation, our projections of future operations and our available cash balances will provide sufficient liquidity to fund our operations for at least the next 12 months.
 

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Operating Leases Obligation
 
We lease facilities under operating leases, certain of which require us to pay property taxes, insurance and maintenance costs. Operating leases for facilities are generally renewable at our option and usually include escalation clauses linked to inflation. The remaining terms of our non-cancelable operating leases expire in various years through 2030.
 
Purchase Commitments
 
As of December 31, 2017, we had non-cancelable purchase commitments for inventory purchases made in the normal course of business to original design manufacturers, contract manufacturers and other suppliers, the majority of which are expected to be fulfilled within the next 12 months. Non-cancelable purchase commitments for capital expenditures primarily relate to commitments for tooling for new and existing products, computer hardware, leasehold and improvements. We expect to continue making capital expenditures in the future to support product development activities and ongoing and expanded operations. Although open purchase commitments are considered enforceable and legally binding, the terms generally allow us to reschedule or adjust our requirements based on business needs prior to delivery of goods or performance of services.

Other Contractual Obligations and Commitments
 
For further detail about our contractual obligations and commitments, refer to our Annual Report on Form 10-K for the fiscal year ended March 31, 2017.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Guarantees
 
Logitech Europe S.A., one of our wholly-owned subsidiaries, guaranteed payments of two third-party contract manufacturers' purchase obligations. As of December 31, 2017, the maximum amount of this guarantee was $3.8 million, of which $1.7 million of guaranteed purchase obligations were outstanding.

Indemnifications
 
We indemnify certain suppliers and customers for losses arising from matters such as intellectual property disputes and product safety defects, subject to certain restrictions. The scope of these indemnities varies, but in some instances includes indemnification for damages and expenses, including reasonable attorneys’ fees. As of December 31, 2017, no amounts have been accrued for indemnification provisions. We do not believe, based on historical experience and information currently available, that it is probable that any material amounts will be required to be paid under our indemnification arrangements.
 
We also indemnify our current and former directors and certain current and former officers. Certain costs incurred for providing such indemnification may be recoverable under various insurance policies. We are unable to reasonably estimate the maximum amount that could be payable under these arrangements because these exposures are not capped, the obligations are conditional in nature, and the facts and circumstances involved in any situation that might arise are variable.

The stock purchase agreement that we entered into in connection with the investment by three venture capital firms in Lifesize contains representations, warranties and covenants of Logitech and Lifesize to the Investors. Subject to certain limitations, we have agreed to indemnify the Investors and certain persons related to the Investors for certain losses resulting from breaches of or inaccuracies in such representations, warranties and covenants as well as certain other obligations, including third-party expenses, restructuring costs and pre-closing tax obligations of Lifesize.
 

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Legal Proceedings
 
From time to time we are involved in claims and legal proceedings that arise in the ordinary course of our business. We are currently subject to several such claims and a small number of legal proceedings. We believe that these matters lack merit and we intend to vigorously defend against them. Based on currently available information, we do not believe that resolution of pending matters will have a material adverse effect on our financial condition, cash flows or results of operations. However, litigation is subject to inherent uncertainties, and there can be no assurances that our defenses will be successful or that any such lawsuit or claim would not have a material adverse impact on our business, financial condition, cash flows and results of operations in a particular period. Any claims or proceedings against us, whether meritorious or not, can have an adverse impact because of defense costs, diversion of management and operational resources, negative publicity and other factors. Any failure to obtain necessary license or other rights, or litigation arising out of intellectual property claims, could adversely affect our business. 

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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Market Risk
 
Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. As a global concern, we face exposure to adverse movements in currency exchange rates and interest rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results.
 
Currency Exchange Rates
 
We report our results in U.S. Dollars. Changes in currency exchange rates compared to the U.S. Dollar can have a material impact on our results when the financial statements of our non-U.S. subsidiaries are translated into U.S. Dollars. The functional currency of our operations is primarily the U.S. Dollar. Certain operations use the Swiss Franc or the local currency of the country as their functional currencies. Accordingly, unrealized currency gains or losses resulting from the translation of net assets or liabilities denominated in other currencies to the U.S. Dollar are accumulated in the cumulative translation adjustment component of other comprehensive income (loss) in shareholders' equity.

We are exposed to currency exchange rate risk as we transact business in multiple currencies, including exposure related to anticipated sales, anticipated purchases and assets and liabilities denominated in currencies other than the U.S. Dollar. We transact business in over 30 currencies worldwide, of which the most significant to operations are the Euro, Chinese Renminbi, Australian Dollar, Taiwanese Dollar, British Pound, Canadian Dollar, Japanese Yen and Mexican Peso. For the three months ended December 31, 2017, approximately 47% of our sales were in non-U.S. denominated currencies, with 25% of our sales denominated in Euro. The mix of our operating expenses by currency is significantly different from the mix of our sales, with a larger portion denominated in U.S. Dollar and less denominated in Euro and other currencies. A strengthening U.S. Dollar has more unfavorable impact on our sales compare to the favorable impact on our operating expense, resulting in an adverse impact on our operating results. 


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If the U.S. Dollar remains at its current strong levels in comparison to other currencies, this will affect our results of operations in future periods as well. The table below provides information about our underlying transactions that are sensitive to currency exchange rate changes, primarily assets and liabilities denominated in currencies other than the base currency, where the net exposure is greater than $0.5 million as of December 31, 2017. The table also presents the U.S. Dollar impact on earnings of a 10% appreciation and a 10% depreciation of the base currency as compared with the transaction currency (in thousands):
Base
Currency
 
Transaction
Currency
 
Net
Exposed
Long
(Short)
Currency
Position
 
FX Gain
(Loss) From
10%
Appreciation
of Base
Currency
 
FX Gain
(Loss) From
10%
Depreciation
of Base
Currency
U.S. Dollar
 
Chinese Renminbi
 
$
(44,492
)
 
$
4,045

 
$
(4,944
)
U.S. Dollar
 
Canadian Dollar
 
20,802

 
(1,891
)
 
2,311

U.S. Dollar
 
Australian Dollar
 
17,791

 
(1,617
)
 
1,977

U.S. Dollar
 
Brazilian Real
 
14,538

 
(1,322
)
 
1,615

U.S. Dollar
 
Singapore Dollar
 
(11,982
)
 
1,089

 
(1,331
)
U.S. Dollar
 
Mexican Peso
 
10,813

 
(983
)
 
1,201

U.S. Dollar
 
Taiwanese Dollar
 
(9,516
)
 
865

 
(1,057
)
U.S. Dollar
 
Japanese Yen
 
3,749

 
(341
)
 
417

U.S. Dollar
 
Swiss Franc
 
1,453

 
(132
)
 
161

U.S. Dollar
 
Korean Wan
 
(1,129
)
 
103

 
(125
)
U.S. Dollar
 
Indian Rupee
 
(933
)
 
85

 
(104
)
U.S. Dollar
 
Hong Kong Dollar
 
(920
)
 
84

 
(102
)
U.S. Dollar
 
Russian Ruble
 
646

 
(59
)
 
72

Euro
 
British Pound
 
(3,959
)
 
360

 
(440
)
Euro
 
Swedish Krona
 
(3,163
)
 
288

 
(351
)
Euro
 
Turkish Lira
 
3,115

 
(283
)
 
346

Euro
 
U.S. Dollar
 
1,424

 
(129
)
 
158

Euro
 
Croatian Kuna
 
1,305

 
(119
)
 
145

Euro
 
Swiss Franc
 
(979
)
 
89

 
(109
)
Euro
 
Polish Zloty
 
(953
)
 
87

 
(106
)
Euro
 
Arab Emirates Dirham
 
(563
)
 
51

 
(63
)
 
 
 
 
$
(2,953
)
 
$
270

 
$
(329
)
 
Long currency positions represent net assets being held in the transaction currency while short currency positions represent net liabilities being held in the transaction currency.
 
Our principal manufacturing operations are located in China, with much of our component and raw material costs transacted in Chinese Renminbi ("CNY"). As of December 31, 2017, net liabilities held in CNY totaled $44.5 million.
  
Derivatives
 
We enter into​ cash flow hedge​ contracts to ​protect​ against exchange rate exposure​ of ​forecasted inventory purchases. These hedging contracts mature within four months. Gains and losses in the fair value of the effective portion of the hedges are deferred as a component of accumulated other comprehensive loss until the hedged inventory purchases are sold, at which time the gains or losses are reclassified to cost of goods sold. Cash flows from such hedges are classified as operating activities in the condensed consolidated statements of cash flows. As of December 31, 2017 and March 31, 2017, the notional amounts of currency exchange forward contracts outstanding related to forecasted inventory purchases were $135.0 million and $59.4 million, respectively. Deferred realized gains of $0.1 million were recorded in accumulated other comprehensive loss as of December 31, 2017, and are expected to be reclassified to cost of goods sold when the related inventory is sold. Deferred unrealized losses of $1.3 million related to open cash flow hedges were recorded in accumulated other comprehensive loss as of December 31, 2017, and these forward contracts will be revalued in future periods until the related inventory is sold, at which time the resulting gains or losses will be reclassified to cost of goods sold.

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We also enter into foreign currency exchange forward and swap contracts to reduce the short-term effects of currency exchange rate fluctuations on certain currency receivables or payables denominated in currencies other than the functional currencies of our subsidiaries. These contracts generally mature within one month. The primary risk managed by using forward and swap contracts is the currency exchange rate risk. The gains or losses on these currency exchange contracts are recognized in earnings based on the changes in fair value. Cash flows from these contracts are classified as operating activities in the condensed consolidated statements of cash flows. The notional amounts of currency exchange contracts outstanding as of December 31, 2017 and March 31, 2017 relating to foreign currency receivables or payables were $89.0 million and $56.7 million, respectively. Open forward and swap contracts as of December 31, 2017 and March 31, 2017 consisted of contracts in Mexican Pesos, Japanese Yen, British Pounds, Taiwanese Dollars, Canadian Dollars, Australian Dollars and Chinese Renminbi to be settled at future dates at pre-determined exchange rates.



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ITEM 4.   CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
The Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (“Disclosure Controls”) as of the end of the period covered by this Quarterly Report on Form 10-Q (this “Report”) required by Exchange Act Rules 13a-15(b) or 15d-15(b). The controls evaluation was conducted under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Disclosure controls and procedures are designed to reasonably assure that information required to be disclosed in our reports filed or submitted under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures are also designed to reasonably assure that this information is accumulated and communicated to our management, including the CEO and CFO, to allow timely decisions regarding required disclosure. Based on this evaluation, the CEO and CFO have concluded that, as of the end of the period covered by this Report, the Company’s Disclosure Controls and procedures were not effective as a result of the material weakness that existed in our internal control over financial reporting as described below.

Notwithstanding the material weakness discussed below, management, including our CEO and CFO, believes the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly represent, in all material respects, our financial condition, results of operations and cash flows for the periods presented in accordance with U.S. generally accepted accounting principles.

Material Weakness in Internal Controls over Financial Reporting

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Management identified the following material weakness as of March 31, 2017 that continued to exist as of December 31, 2017:

In connection with the Company’s sales growth strategy in EMEA, the Company expanded its use of performance-based customer programs in the region in fiscal years 2016 and 2017. As a result, the allowances and accruals for customer incentive, cooperative marketing and pricing programs increased in those years. In prior periods, the Company did not have sufficient historical data on customer breakage patterns in the EMEA region to allow for a reliable estimation of future customer breakage attributable to these allowances and accruals. However, by the fourth quarter of fiscal year 2017, sufficient historical data was available to establish a model to reliably estimate the expected future customer breakage. As of March 31, 2017, the Company did not identify that sufficient historical data existed to estimate future customer breakage and, as a result, the Company did not modify the design of the control activities related to the accuracy of the allowance and accruals to respond to the change in relevant data. Our management has concluded that this deficiency constitutes a material weakness in our internal control over financial reporting.

Management concluded that the allowances and accrued liabilities relating to customer programs in the EMEA region were overstated at March 31, 2017 as future breakage was not estimated. This overstatement of allowances and accrued liabilities relating to customer programs in the EMEA region has been corrected in our consolidated financial statements included in our Annual Report on Form 10-K. While the control deficiency did not result in a misstatement of our current or previously issued consolidated financial statements, the material weakness resulted in changes to our preliminary results of operations for the quarter and year ended March 31, 2017 furnished to the United States Securities and Exchange Commission (“SEC”) in the Current Report on Form 8-K on April 26, 2017.

Management’s Plan to Remediate the Material Weakness
In May 2017, management began implementing a remediation plan to address the material weakness. The remediation plan includes:
•
The development and implementation of a new estimation model of breakage related to customer incentive, cooperative marketing and pricing programs in the EMEA region;
•
The design and implementation of related controls over the new estimation model; and

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•
Enhancements to the process to periodically evaluate and appropriately respond to changing business circumstances that may impact control activities, specifically in the area of the accuracy of the allowances and accruals.
Our management believes the foregoing efforts will effectively remediate the material weakness; however, the material weakness cannot be considered remediated until the control has operated for a sufficient period of time and until management has concluded, through testing of several instances, that the control is operating effectively. The Company expects to remediate this material weakness by the end of fiscal year 2018.

Limitations on the Effectiveness of Controls

The Company's management, including the CEO and CFO, does not expect that the Company's disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. Internal control over financial reporting, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives will be met. Because of the inherent limitations in internal control over financial reporting, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Control over Financial Reporting
 
The changes in the Company’s internal control over financial reporting during the three months ended December 31, 2017, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, are discussed above in Management’s Plan to Remediate the Material Weakness.
 
PART II — OTHER INFORMATION
 
ITEM 1.   LEGAL PROCEEDINGS
 
From time-to-time we are involved in claims and legal proceedings that arise in the ordinary course of our business. We are currently subject to several such claims and a small number of legal proceedings. We believe that these matters lack merit and we intend to vigorously defend against them. Based on currently available information, we do not believe that resolution of pending matters will have a material adverse effect on our financial condition, cash flows or results of operations. However, litigation is subject to inherent uncertainties, and there can be no assurances that our defenses will be successful or that any such lawsuit or claim would not have a material adverse impact on our business, financial condition, cash flows and results of operations in a particular period. Any claims or proceedings against us, whether meritorious or not, can have an adverse impact because of defense costs, diversion of management and operational resources, negative publicity and other factors. Any failure to obtain necessary licenses or other rights, or litigation arising out of intellectual property claims, could adversely affect our business. 


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ITEM 1A.    RISK FACTORS
Our operating results are difficult to predict and fluctuations in results may cause volatility in the price of our shares.
 
Our revenues and profitability are difficult to predict due to the nature of the markets in which we compete, fluctuating user demand, the uncertainty of current and future global economic conditions, and for many other reasons, including the following:
 
•Our operating results are highly dependent on the volume and timing of orders received during the quarter, which are difficult to forecast. Customers generally order on an as-needed basis and we typically do not obtain firm, long-term purchase commitments from our customers. As a result, our revenues in any quarter depend primarily on orders booked and shipped in that quarter.
 
•A significant portion of our quarterly retail sales typically occurs in the last weeks of each quarter, further increasing the difficulty in predicting quarterly revenues and profitability.
 
•Our sales are impacted by consumer demand and current and future global economic and political conditions, and can therefore fluctuate abruptly and significantly during periods of uncertain economic conditions or geographic distress, as well as from shifts in distributor inventory practices and consumer buying patterns.

•We must incur a large portion of our costs in advance of sales orders, because we must plan research and production, order components, buy tooling equipment, and enter into development, sales and marketing, and other operating commitments prior to obtaining firm commitments from our customers. This makes it difficult for us to rapidly adjust our costs during the quarter in response to a revenue shortfall, which could adversely affect our operating results.

•We engage in acquisitions and divestitures, and such activity varies from period to period. Such variance may affect our growth, our previous outlook and expectations, and comparisons of our operating results and financial statements between periods.

•We have attempted to simplify our organization, to reduce operating costs through expense reduction and global workforce reductions, to reduce the complexity of our product portfolio, and to better align costs with our current business as we expand from PC accessories to growth opportunities in accessories and other products for music, gaming, video collaboration, digital home, mobile devices and other product categories. We may not achieve the cost savings or other anticipated benefits from these efforts, and the success or failure of such efforts may cause our operating results to fluctuate and to be difficult to predict.

•Fluctuations in currency exchange rates can impact our revenues, expenses and profitability because we report our financial statements in U.S. Dollars, whereas a significant portion of our revenues and expenses are in other currencies. We attempt to adjust product prices over time to offset the impact of currency movements. However, over short periods of time, during periods of weakness in consumer spending or given high levels of competition in many product categories, our ability to change local currency prices to offset the impact of currency fluctuations is limited.
 
Because our operating results are difficult to predict, our results may be below the expectations of financial analysts and investors, which could cause the price of our shares to decline.
 
If we fail to innovate and develop new products in a timely and cost-effective manner for our new and existing product categories, our business and operating results could be adversely affected.
 
Our product categories are characterized by short product life cycles, frequent new product introductions, rapidly changing technology, dynamic consumer demand and evolving industry standards. As a result, we must continually innovate in our new and existing product categories, introduce new products and technologies, and enhance existing products in order to remain competitive.
 
The success of our product portfolio depends on several factors, including our ability to:


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•Identify new features, functionality and opportunities;
 
•Anticipate technology, market trends and consumer preferences;

•
Develop innovative, high-quality, and reliable new products and enhancements in a cost-effective and timely manner;
 
•Distinguish our products from those of our competitors; and
 
•Offer our products at prices and on terms that are attractive to our customers and consumers.
 
If we do not execute on these factors successfully, products that we introduce or technologies or standards that we adopt may not gain widespread commercial acceptance, and our business and operating results could suffer. In addition, if we do not continue to differentiate our products through distinctive, technologically advanced features, designs, and services that are appealing to our customers and consumers, as well as continue to build and strengthen our brand recognition and our access to distribution channels, our business could be adversely affected.
 
The development of new products and services is very difficult and requires high levels of innovation. The development process is also lengthy and costly. There are significant initial expenditures for research and development, tooling, manufacturing processes, inventory and marketing, and we may not be able to recover those investments. If we fail to accurately anticipate technological trends or our users’ needs or preferences, are unable to complete the development of products and services in a cost-effective and timely fashion or are unable to appropriately increase production to fulfill customer demand, we will be unable to successfully introduce new products and services into the market or compete with other providers. Even if we complete the development of our new products and services in a cost-effective and timely manner, they may not be competitive with products developed by others, they may not achieve acceptance in the market at anticipated levels or at all, they may not be profitable or, even if they are profitable, they may not achieve margins as high as our expectations or as high as the margins we have achieved historically.
 
As we introduce new or enhanced products, integrate new technology into new or existing products, or reduce the overall number of products offered, we face risks including, among other things, disruption in customers’ ordering patterns, excessive levels of new and existing product inventories, revenue deterioration in our existing product lines, insufficient supplies of new products to meet customers’ demand, possible product and technology defects, and a potentially different sales and support environment. Premature announcements or leaks of new products, features or technologies may exacerbate some of these risks by reducing the effectiveness of our product launches, reducing sales volumes of current products due to anticipated future products, making it more difficult to compete, shortening the period of differentiation based on our product innovation, straining relationships with our partners or increasing market expectations for the results of our new products before we have had an opportunity to demonstrate the market viability of the products. Our failure to manage the transition to new products or the integration of new technology into new or existing products could adversely affect our business, results of operations, operating cash flows and financial condition.
 
We believe sales of PCs will continue to decline, and that our future growth will depend on our diversified product growth opportunities beyond the PC, and if we do not successfully execute on our growth opportunities, if our growth opportunities are more limited than we expect or if our sales of PC peripherals are less than we expect, our operating results could be adversely affected.
 
We have historically targeted peripherals for the PC platform. Consumer demand for PCs, especially in our traditional, mature markets such as North America, Western and Nordic Europe, Japan and Australia, has been declining and we expect it to continue to decline in the future. As a result, consumer demand for PC peripherals in many of our markets is slowing and in some cases declining and we expect this trend may continue.
 
Our sales of PC peripherals might be less than we expect due to a decline in business or economic conditions in one or more of the countries or regions, a greater decline than we expect in demand for our products, our inability to successfully execute our sales and marketing plans, or for other reasons. Global economic concerns, such as the varying pace of global economic recovery, political uncertainties created by policy changes such as Brexit, the impact of sovereign debt issues in Europe, the impact of low oil prices on Russia and conflicts with either local or

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global financial implications in places such as Russia and Ukraine, and economic slowdown in China, create unpredictability and add risk to our future outlook.

As a result, we are focusing more of our attention, which may include the personnel, financial resources and management attention, on product innovations and growth opportunities, including products for the consumption of digital music, products for gaming, products for video collaboration, products for the digital home, and on other potential growth opportunities. Our investments may not result in the growth we expect, or when we expect it, for a variety of reasons including those described below.

 Music. We are focused on products for the consumption of digital music as a sales growth area. Competition in the mobile speaker and headphone categories is intense, and we expect it to increase. If we are not able to grow our existing and acquired product lines, introduce differentiated product and marketing strategies to separate ourselves from competitors, our mobile speaker and audio headphone efforts will not be successful, and our business and results of operations could be adversely affected.
 
Gaming.  We are building a diverse business that features a variety of gaming peripherals. The rapidly evolving and changing market and increasing competition increase the risk that we do not allocate our resources in line with the market and our business and our results of operations could be adversely affected.

Video Collaboration. While we view the small and medium sized user groups' opportunity to be large and relatively unaddressed, this is a new and evolving market segment that we are developing. If the market opportunity proves to exist, we expect increasing competition from the large competitors in the video conferencing market as well as potential new entrants.
 
Smart Home. While we are a leader in programmable, performance remote controls for home entertainment, the smart home market is still in its early stages and it is not yet clear when the category will produce dynamic growth or which products will succeed and be able to take advantage of market growth or to help define and grow the market. Despite its early stages, the smart home market already is experiencing increasing competition from strong competitors.

In addition to our current growth opportunities, our future growth may be reliant on our ability to identify and develop potential new growth opportunities. This process is inherently risky and will result in investments in time and resources for which we do not achieve any return or value.

Each of these growth categories and many of the growth opportunities that we may pursue are subject to constant and rapidly changing and evolving technologies and evolving industry standards and may be replaced by new technology concepts or platforms. Some of these growth categories and opportunities are also characterized by short product cycles, frequent new product introductions and enhancements and rapidly changing and evolving consumer preferences with respect to design and features that require calculated risk-taking and fast responsiveness and result in short opportunities to establish a market presence. In addition, some of these growth categories and opportunities are characterized by price competition, erosion of premium-priced segments and average selling prices, and sensitivity to general economic conditions and cyclical downturns. If we do not develop innovative and reliable peripherals and enhancements in a cost-effective and timely manner that are attractive to consumers in these markets, if we are otherwise unsuccessful entering and competing in these growth categories or responding to the rapidly changing conditions in these growth categories, if the growth categories in which we invest our limited resources do not emerge as the opportunities or do not produce the growth or profitability we expect, or when we expect it, or if we do not correctly anticipate changes and evolutions in technology and platforms, our business and results of operations could be adversely affected.

If we are not able to maintain and enhance our brands, or if our brands or reputation are damaged, our reputation, business and operating results could be adversely affected.

We have developed long-term value in our brands and have invested significantly in design and in our existing and new brands over the past several years. We believe that our design and brands have significantly contributed to the success of our business and that maintaining and enhancing our brands is very important to our future growth and success. Maintaining and enhancing our brands will require significant investments and will depend largely on our future design, products and marketing, which may not be successful and may damage our brands. Our brands and reputation are also dependent on third parties, such as suppliers, manufacturers, distributors, retailers, product

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reviewers and the media as well as consumer recommendations and referrals. Any negative effect on our brands, regardless of whether it is in our control, could adversely affect our reputation, business and results of operations.

If we do not compete effectively, demand for our products could decline and our business and operating results could be adversely affected.
 
The peripherals industry is intensely competitive. Most of our product categories are characterized by large, well-financed competitors, short product life cycles, continual performance enhancements, and rapid adoption of technological and product advancements by competitors in our retail markets. We experience aggressive price competition and other promotional activities from our primary competitors and from less-established brands, including brands owned by retail customers known as house brands. In addition, our competitors may offer customers terms and conditions that may be more favorable than our terms and conditions and may require us to take actions to increase our customer incentive programs, which could impact our revenues and operating margins.

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

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

 Music

Mobile Speakers.  Our competitors for Bluetooth wireless speakers include Bose, JBL, Harmon Kardon, and Beats Electronics. Bose is our largest competitor. Apple's ownership of Beats Electronics may impact our access to shelf space in Apple retail stores and adversely impact our ability to succeed in this important growth market. Personal assistance and other devices that offer music, such as Amazon's Echo, may also compete with our products. Amazon is also a significant distributor for our products.

Audio-PC & Wearables. In the PC speakers category, our competitors include Bose, Cyber Acoustics, Phillips and Creative Labs, Inc. In the PC headset business, our main competitors include Plantronics and Altec Lansing. In-ear headphones competitors include Skull Candy, Sennheiser, Sony, Beats, and others.

Gaming

Competitors for our Gaming products include Razer USA Ltd., Corsair, SteelSeries, and Turtle Beach.

Video Collaboration

Our competitors for Video Collaboration products include Cisco Systems, Inc., Polycom, Inc., and AVer Information Inc.


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Smart Home

Direct competitors in the remote control market include pro-installer-focused Universal Remote Control Inc., and new “DIY” entrants from Savant Systems and Ray Enterprises. Indirect competition exists in the form of low-end “replacement remotes” such as Sony, RCA, GE, pure app-based solutions for smartphones and other mobile devices such as Peel, as well as device and/or subscriber-specific solutions from TV makers such as Samsung and Vizio and multisystem operators, or MSOs, such as Comcast and DirecTV.
Competition in the home control market also exists in form of home automation platforms such as Smart Things (owned by Samsung), Amazon with their Echo product, Google Home and Nest (owned by Alphabet), Wink and many other startups. Many of these products and brands are partners with Logitech as well via integrations with Harmony remotes.
Creativity & Productivity

Pointing Devices. Microsoft Corporation and HP Inc. are our main competitors. We also experience competition and pricing pressure from less-established brands, including house brands, which we believe have impacted our market share in some sales geographies.

Keyboards & Combo. Microsoft Corporation and Apple Inc. are our main competitors in our keyboard and combo product lines. We also experience competition and pricing pressure for keyboard and combos from less-established brands, including house brands.

Tablet & Other Accessories. Competitors in the tablet keyboard market are Apple, Zagg, Kensington, Belkin, Targus and other less-established brands. Although we are one of the leaders in the tablet keyboard market and continue to bring innovative offerings to the market, we expect the competition will increase. Competitors in the tablet case market include Apple, Otter, Speck and a large number of small brands.

PC Webcams.  Our primary competitors for PC webcams are Microsoft Corporation and HP Inc. with various other manufacturers taking smaller market share. The worldwide market for consumer PC webcams has been declining, and as a result, fewer competitors have entered the market.
 
Our business depends in part on access to third-party platforms or technologies, and if the access is withdrawn, denied, or is not available on terms acceptable to us, or if the platforms or technologies change without notice to us, our business and operating results could be adversely affected.
 
Our peripherals business has historically been built largely around the PC platform, which over time became relatively open, and its inputs and operating system standardized. With the growth of mobile, tablet, gaming and other computer devices, the number of platforms has grown, and with it the complexity and increased need for us to have business and contractual relationships with the platform owners in order to produce products compatible with these platforms. Our product portfolio includes current and future products designed for use with third-party platforms or software, such as the Apple iPad, iPod, iPhone and Siri, the Android phones and tablets, Google Home and Amazon Alexa. Our business in these categories relies on our access to the platforms of third parties, some of whom are our competitors. Platform owners that are competitors have a competitive advantage in designing products for their platforms and may produce peripherals or other products that work better, or are perceived to work better, than our products in connection with those platforms. As we expand the number of platforms and software applications with which our products are compatible, we may not be successful in launching products for those platforms or software applications, we may not be successful in establishing strong relationships with the new platform or software owners, or we may negatively impact our ability to develop and produce high-quality products on a timely basis for those platforms and software applications or we may otherwise adversely affect our relationships with existing platform or software owners.

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


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

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

If our sales channel partners have excess inventory of our products or decide to decrease their inventories for any reason, they may decrease the amount of products they acquire in subsequent periods, causing disruption in our business and adversely affecting our forecasts and sales.

Over the past few years, we have expanded the types of products we sell, and the geographic markets in which we sell them. The changes in our product portfolio and the expansion of our sales markets have increased the difficulty of accurately forecasting product demand.

In addition, during fiscal year 2016 we increased the percentage of our products that we manufacture in our own facilities. This increases the inventory that we purchase and maintain to support such manufacturing. We are also utilizing sea shipments more extensively than air delivery, which will cause us to build and ship products to our distribution centers earlier and will also result in increases in inventory. These operational shifts increase the risk that we have excess or obsolete inventory if we do not accurately forecast product demand.

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

Our success largely depends on our ability to hire, retain, integrate and motivate sufficient numbers of qualified personnel, including senior management. Our strategy and our ability to innovate, design and produce new products, sell products, maintain operating margins and control expenses depend on key personnel that may be difficult to replace.
 
Our success depends on our ability to attract and retain highly skilled personnel, including senior management and international personnel. From time to time, we experience turnover in some of our senior management positions.

We compensate our employees through a combination of salary, bonuses, benefits and equity compensation. Recruiting and retaining skilled personnel, including software and hardware engineers, is highly competitive. If we fail to provide competitive compensation to our employees, it will be difficult to retain, hire and integrate qualified employees and contractors, and we may not be able to maintain and expand our business. If we do not retain our senior managers or other key employees for any reason, we risk losing institutional knowledge, experience, expertise and other benefits of continuity as well as the ability to attract and retain other key employees. In addition, we must carefully balance the size of our employee base with our current infrastructure, management resources and anticipated operating cash flows. If we are unable to manage the size of our employee base, particularly engineers, we may fail to develop and introduce new products successfully and in a cost-effective and timely manner. If our revenue growth or employee levels vary significantly, our operating cash flows and financial condition could be adversely affected. Volatility or lack of positive performance in our stock price, including declines in our stock prices in the past year, may also affect our ability to retain key employees, many of whom have been granted equity incentives. Logitech’s practice has been to provide equity incentives to its employees, but the number of shares available for equity grants is limited. We may find it difficult to provide competitive equity incentives, and our ability to hire, retain and motivate key personnel may suffer.

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Recently and in past years, we have initiated reductions in our workforce to align our employee base with our business strategy, our anticipated revenue base or with our areas of focus. We have also experienced turnover in our workforce. These reductions and turnover have resulted in reallocations of duties, which could result in employee uncertainty and discontent. Reductions in our workforce could make it difficult to attract, motivate and retain employees, which could adversely affect our business.
 
Our gross margins can vary significantly depending on multiple factors, which can result in unanticipated fluctuations in our operating results.
 
Our gross margins can vary due to consumer demand, competition, product pricing, product life cycle, product mix, new product introductions, unit volumes, acquisitions and divestitures, commodity, supply chain and logistics costs, capacity utilization, geographic sales mix, currency exchange rates, and the complexity and functionality of new product innovations. In particular, if we are not able to introduce new products in a timely manner at the product cost we expect, or if consumer demand for our products is less than we anticipate, or if there are product pricing, marketing and other initiatives by our competitors to which we need to react or that are initiated by us to drive sales that lower our margins, then our overall gross margin will be less than we project.

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

As we expand within and into new product categories, our products in those categories may have lower gross margins than in our traditional product categories. Consumer demand in these product categories, based on style, color and other factors, tends to be less predictable and tends to vary more across geographic markets. As a result, we may face higher up-front investments, inventory costs associated with attempting to anticipate consumer preferences, and increased inventory write-offs. If we are unable to offset these potentially lower margins by enhancing the margins in our more traditional product categories, our profitability may be adversely affected.

The impact of these factors on gross margins can create unanticipated fluctuations in our operating results, which may cause volatility in the price of our shares.
 
As we continue our efforts to lower our costs and improve our operating leverage, we may or may not fully realize our goals.
 
Our strategy over the past several years has been based in part on simplifying the organization, reducing operating costs through global workforce reductions and a reduction in the complexity of our product portfolio, with the goal of better aligning costs with our current business. We restructured our business in fiscal years 2014 through 2016, and we may continue to divest or discontinue non-strategic product categories. During the third quarter of fiscal year 2016, we divested our Lifesize video conferencing business and completed our exit from the OEM business. In addition, we are continuing the rationalization of our general and administrative expense, infrastructure and indirect procurement to reduce operating expenses.

Our ability to achieve the desired and anticipated cost savings and other benefits from these simplification, cost-cutting and restructuring activities, and within our desired and expected timeframes, are subject to many estimates and assumptions, and the actual savings and timing for those savings may vary materially based on factors such as local labor regulations, negotiations with third parties, and operational requirements. These estimates and assumptions are also subject to significant economic, competitive and other uncertainties, some of which are beyond our control. There can be no assurance that we will fully realize the desired and anticipated benefits from these activities. To the extent that we are unable to improve our financial performance, further restructuring measures may be required in the future. Furthermore, we are expecting to be able to use the anticipated cost savings from these activities to fund and support our current growth opportunities and incremental investments for future growth. If the cost-savings do not materialize as anticipated, or within our expected timeframes, our ability to invest in growth may be limited and our business and operating results may be adversely affected. As we grow, explore new opportunities and markets, hire new management and other personnel, and fund research and development, marketing, brand development, sales, operations, investments in intellectual property and acquisitions to support this growth and our new opportunities, some or all of which may not succeed, we expect to experience continued pressure on our cost structure and expenses.

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As part of the restructuring plans, we reduced the size of our product portfolio and the assortment of similar products at similar price points within each product category over the past several fiscal years. While we are constantly replacing products and are dependent on the success of our new products, this product portfolio simplification has made us even more dependent on the success of the new products that we are introducing.
 
As we focus on growth opportunities, we are divesting or discontinuing non-strategic product categories and pursuing strategic acquisitions and investments, which could have an adverse impact on our business.
 
We continue to review our product portfolio and update our non-strategic product categories and products. During the third quarter of fiscal year 2016, we divested our Lifesize video conferencing business and completed our exit from the OEM business. If we are unable to effect sales on favorable terms or if realignment is more costly or distracting than we expect or has a negative effect on our organization, employees and retention, then our business and operating results may be adversely affected. Discontinuing products with service components may also cause us to continue to incur expenses to maintain services within the product life cycle or to adversely affect our customer and consumer relationships and brand. Divestitures may also involve warranties, indemnification or covenants that could restrict our business or result in litigation, additional expenses or liabilities. In addition, discontinuing product categories, even categories that we consider non-strategic, reduces the size and diversification of our business and causes us to be more dependent on a smaller number of product categories.

As we attempt to grow our business in strategic product categories and emerging market geographies, we will consider growth through acquisition or investment. We will evaluate acquisition opportunities that could provide us with additional product or service offerings or with additional industry expertise, assets and capabilities. For example, we acquired ASTRO Gaming to expand into the console gaming market, we acquired Jaybird to expand into the wireless audio wearables market, and we acquired Saitek to expand into the gaming flight simulation and farm simulation market. Acquisitions could result in difficulties integrating acquired operations, products, technology, internal controls, personnel and management teams and result in the diversion of capital and management’s attention away from other business issues and opportunities. If we fail to successfully integrate acquisitions, our business could be harmed. Acquisitions could also result in the assumption of known and unknown liabilities, dilutive issuances of our equity securities, the incurrence of debt, disputes over earn-outs or other litigation, and adverse effects on relationships with our and our target’s employees, customers and suppliers. Moreover, our acquisitions may not be successful in achieving our desired strategy, product, financial or other objectives or expectations, which would also cause our business to suffer. Acquisitions can also lead to large non-cash charges that can have an adverse effect on our results of operations as a result of write-offs for items such as future impairments of intangible assets and goodwill or the recording of share-based compensation. Several of our past acquisitions have not been successful and have led to impairment charges, including $122.7 million and $214.5 million non-cash goodwill impairment charges in fiscal years 2015 and 2013, respectively, related to our Lifesize video conferencing business which is reported in discontinued operations. Acquisitions and divestitures may also cause our operating results to fluctuate and make it difficult for investors to compare operating results and financial statements between periods. In addition, from time to time we make strategic venture investments in other companies that provide products and services that are complementary to ours. If these investments are unsuccessful, this could have an adverse impact on our results of operations, operating cash flows and financial condition.
 
We rely on third parties to sell and distribute our products, and we rely on their information to manage our business. Disruption of our relationship with these channel partners, changes in or issues with their business practices, their failure to provide timely and accurate information, changes in distribution partners, practices or models or conflicts among our channels of distribution could adversely affect our business, results of operations, operating cash flows and financial condition.
 
While most of our sales are made to sales channel partners, we are dependent on those distributors and retailers to distribute and sell our products to other sales channel partners and ultimately to consumers. The sales and business practices of such sales channel partners, their compliance with laws and regulations, and their reputations - of which we may or may not be aware - may affect our business and our reputation.

The impact of economic conditions, evolving consumer preferences, and purchasing patterns on our distribution partners, or competition between our sales channels, could result in sales channel disruption. For example, if sales at large retail stores are displaced as a result of bankruptcy, competition from Internet sales

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channels or otherwise, our product sales could be adversely affected. Any loss of a major partner or distribution channel or other channel disruption could make us more dependent on alternate channels, increase pricing and promotional pressures from other partners and distribution channels, increase our marketing costs, or adversely impact buying and inventory patterns, payment terms or other contractual terms.

Our sales channel partners, the distributors and retailers who distribute and sell our products, also sell products offered by our competitors and, in the case of retailer house brands, may also be our competitors. If product competitors offer our sales channel partners more favorable terms, have more products available to meet their needs, or utilize the leverage of broader product lines sold through the channel, or if our retailer channel partners show preference for their own house brands, our sales channel partners may de-emphasize or decline to carry our products. In addition, certain of our sales channel partners could decide to de-emphasize the product categories that we offer in exchange for other product categories that they believe provide them with higher returns. If we are unable to maintain successful relationships with these sales channel partners or to maintain our distribution channels, our business will suffer.

As we expand into new product categories and markets in pursuit of growth, we will have to build relationships with new channel partners and adapt to new distribution and marketing models. These new partners, practices and models may require significant management attention and operational resources and may affect our accounting, including revenue recognition, gross margins, and the ability to make comparisons from period to period. Entrenched and more experienced competitors will make these transitions difficult. If we are unable to build successful distribution channels or successfully market our products in these new product categories, we may not be able to take advantage of the growth opportunities, and our business and our ability to grow our business could be adversely affected.

We reserve for cooperative marketing arrangements, direct and indirect customer incentive programs and pricing programs with our sales channel partners. These reserves are based on judgments and estimates, using historical experience rates, inventory levels in distribution, current trends and other factors. There could be significant differences between the actual costs of such arrangements and programs and our estimates.

We use retail sell-through data, which represents sales of our products by our direct retailer customers to consumers, and by our distributor customers to their customers, along with other metrics, to assess consumer demand for our products. Sell-through data is subject to limitations due to collection methods and the third-party nature of the data and thus may not be an accurate indicator of actual consumer demand for our products. In addition, the customers supplying sell-through data vary by geographic region and from period to period, but typically represent a majority of our retail sales. In addition, we rely on channel inventory data from our retailer and distributor customers. If we do not receive this information on a timely and accurate basis, or if we do not properly interpret this information, our results of operations and financial condition may be adversely affected.
 
Our principal manufacturing operations and third-party contract manufacturers are located in China and Southeast Asia, which exposes us to risks associated with doing business in that geographic area.
 
We produce approximately half of our products at facilities we own in China. The majority of our other production is performed by third-party contract manufacturers, including other design manufacturers, in China and Malaysia.

Our manufacturing operations in China could be adversely affected by changes in the interpretation and enforcement of legal standards, strains on China’s available labor pool, changes in labor costs and other employment dynamics, high turnover among Chinese employees, infrastructure issues, import-export issues, currency transfer restrictions, natural disasters, conflicts or disagreements between China and Taiwan or China and the United States, labor unrest, and other trade customs and practices that are dissimilar to those in the United States and Europe. Interpretation and enforcement of China’s laws and regulations continue to evolve and we expect differences in interpretation and enforcement to continue in the foreseeable future.

Our manufacturing operations at third-party contractors could be adversely affected by contractual disagreements, by labor unrest, by natural disasters, by strains on local communications, trade, and other infrastructures, by competition for the available labor pool or manufacturing capacity, by increasing labor and other costs, and by other trade customs and practices that are dissimilar to those in the United States and Europe.


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Further, we may be exposed to fluctuations in the value of the local currency in the countries in which manufacturing occurs. Future appreciation of these local currencies could increase our component and other raw material costs. In addition, our labor costs could continue to rise as wage rates increase and the available labor pool declines. These conditions could adversely affect our financial results.

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

Lead times for materials, components and products ordered by us or by our contract manufacturers can vary significantly and depend on factors such as contract terms, demand for a component, and supplier capacity. From time to time, we have experienced component shortages and extended lead times on semiconductors, such as micro-controllers and optical sensors, and base metals used in our products. Shortages or interruptions in the supply of components or subcontracted products, or our inability to procure these components or products from alternate sources at acceptable prices in a timely manner, could delay shipment of our products or increase our production costs, which could adversely affect our business and operating results.
 
The moral and regulatory imperatives to avoid purchasing conflict minerals are causing us to incur additional expenses, could limit the supply and increase the cost of certain metals used in manufacturing our products and could adversely affect the distribution and sales of our products.
 
As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC adopted disclosure requirements regarding the use of certain minerals, known as conflict minerals, which are mined from the Democratic Republic of Congo and adjoining countries, as well as procedures regarding a manufacturer’s efforts to identify and prevent the sourcing of such minerals and metals produced from those minerals. Additional reporting obligations are being considered by the European Union. The implementation of the existing U.S. requirements and any additional requirements in Europe could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products. The number of suppliers who provide conflict-free minerals may be limited, and the implementation of these requirements may decrease the number of suppliers capable of supplying our needs for certain metals.  In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to the due diligence process of determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. As our supply chain is complex and we use contract manufacturers for some of our products, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence procedures that we implement, which may adversely affect our reputation. We may also encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could, if we are unable to satisfy their requirements or pass through any increased costs associated with meeting their requirements place us at a competitive disadvantage, adversely affect our business and operating results, or both. We filed our report for the calendar year 2016 with the SEC on May 30, 2017.
 
If we do not successfully coordinate the worldwide manufacturing and distribution of our products, we could lose sales.
 
Our business requires us to coordinate the manufacture and distribution of our products over much of the world. We rely on third parties to manufacture many of our products, manage centralized distribution centers, and transport our products. If we do not successfully coordinate the timely manufacturing and distribution of our products, if our manufacturers, distribution logistics providers or transport providers are not able to successfully and timely process our business or if we do not receive timely and accurate information from such providers, and especially if we expand into new product categories or our business grows in volume, we may have an insufficient supply of products to meet customer demand, we could lose sales, we may experience a build-up in inventory, we may incur additional costs, and our financial performance and reporting may be adversely affected.

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By locating our manufacturing in China and Southeast Asia, we are reliant on third parties to get our products to distributors around the world. Transportation costs, fuel costs, labor unrest, natural disasters and other adverse effects on our ability, timing and cost of delivering products can increase our inventory, decrease our margins, adversely affect our relationships with distributors and other customers and otherwise adversely affect our results of operations and financial condition.

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

We conduct operations in a number of countries, and have invested significantly in growing our sales and marketing activities in China, and the effect of business, legal and political risks associated with international operations could adversely affect us.
 
We conduct operations in a number of countries, and have invested significantly in growing our personnel and sales and marketing activities in China and, to a lesser extent, other emerging markets. We may also increase our investments to grow sales in other emerging markets, such as Latin America, Eastern Europe, the Middle East and Africa. There are risks inherent in doing business in international markets, including:

•Difficulties in staffing and managing international operations;

•Compliance with laws and regulations, including environmental, tax, import/export and anti-corruption laws, which vary from country to country and over time, increasing the costs of compliance and potential risks of non-compliance;

•Varying laws, regulations and other legal protections, uncertain and varying enforcement of those laws and regulations, dependence on local authorities, and the importance of local networks and relationships;

•Exposure to political and financial instability, especially with the uncertainty associated with the ongoing sovereign debt crisis in certain Euro zone countries and the stability of the European Union, which may lead to reduced sales, currency exchange losses and collection difficulties or other losses;

•Political and economic uncertainty around the world, including uncertainty resulting from the recent United States presidential and congressional elections, change of administration in the United States and the United Kingdom's referendum in June 2016, and other national elections and policy shifts;

•Import or export restrictions or licensing requirements that could affect some of our products, including those with encryption technology;

•Trade protection measures, custom duties, tariffs, import or export duties, and other trade barriers, restrictions and regulations;

•Lack of infrastructure or services necessary or appropriate to support our products and services;

•Exposure to fluctuations in the value of local currencies;

•Difficulties and increased costs in establishing sales and distribution channels in unfamiliar markets, with their own market characteristics and competition, including entrenched local competition;

•Weak protection of our intellectual property rights;

•Higher credit risks;

•Changes in VAT (value-added tax) or VAT reimbursement;

•Imposition of currency exchange controls;

•Delays from customs brokers or government agencies; and

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•A broad range of customs, consumer trends, and more.

Any of these risks could adversely affect our business, financial condition and operating results.

Sales growth in key markets, including China, is an important part of our expectations for our business. As a result, if economic, political or business conditions deteriorate in these markets, or if one or more of the risks described above materializes in these markets, our overall business and results of operations will be adversely affected.

We have also invested significantly in our manufacturing facilities in China. Policy changes in the United States or other countries, given our lack of manufacturing in those countries or for other protectionist reasons, could result in tariffs or other adverse tax consequences or may cause us to change the structure of how we currently operate, any of which could adversely affect our business and results of operations.
 
Our financial performance is subject to risks associated with fluctuations in currency exchange rates.
 
A significant portion of our business is conducted in currencies other than the U.S. Dollar. Therefore, we face exposure to movements in currency exchange rates.

Our primary exposure to movements in currency exchange rates relates to non-U.S. Dollar denominated sales and operating expenses worldwide. For the three months ended December 31, 2017, approximately 47% of our revenue was in non-U.S. denominated currencies. The weakening of currencies relative to the U.S. Dollar adversely affects the U.S. Dollar value of our non-U.S. Dollar-denominated sales and earnings. If we raise international pricing to compensate, it could potentially reduce demand for our products, adversely affecting our sales and potentially having an adverse impact on our market share. Margins on sales of our products in non-U.S. Dollar denominated countries and on sales of products that include components obtained from suppliers in non-U.S. Dollar denominated countries could be adversely affected by currency exchange rate fluctuations. In some circumstances, for competitive or other reasons, we may decide not to raise local prices to fully offset the U.S. Dollar’s strengthening, which would adversely affect the U.S. Dollar value of our non-U.S. Dollar-denominated sales and earnings. Competitive conditions in the markets in which we operate may also limit our ability to increase prices in the event of fluctuations in currency exchange rates. Conversely, strengthening of currency rates may also increase our product component costs and other expenses denominated in those currencies, adversely affecting operating results. We further note that a larger portion of our sales than of our expenses are denominated in non-U.S. denominated currencies.

We use derivative instruments to hedge certain exposures to fluctuations in currency exchange rates. The use of such hedging activities may not offset any, or more than a portion, of the adverse financial effects of unfavorable movements in currency exchange rates over the limited time the hedges are in place and do not protect us from long term shifts in currency exchange rates.

As a result, fluctuations in currency exchange rates could adversely affect our business, operating results and financial condition. Moreover, these exposures may change over time.

As a company operating in many markets and jurisdictions and expanding into new growth categories, and as a Swiss, dual - listed company, we are subject to risks associated with new, existing and potential future laws and regulations.
 
Based on our current business model and as we expand into new markets and product categories, we must comply with a wide variety of laws, standards and other requirements governing, among other things, health and safety, hazardous materials usage, product-related energy consumption, packaging, recycling and environmental matters. Our products may be required to obtain regulatory approvals and satisfy other regulatory concerns in the various jurisdictions where they are manufactured, sold or both. These requirements create procurement and design challenges, which, among other things, require us to incur additional costs identifying suppliers and contract manufacturers who can provide or obtain compliant materials, parts and end products. Failure to comply with such requirements can subject us to liability, additional costs, and reputational harm and, in severe cases, force us to recall products or prevent us from selling our products in certain jurisdictions.


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As a Swiss company with shares listed on both the SIX Swiss Exchange and the Nasdaq Global Select Market, we are also subject to both Swiss and United States corporate governance and securities laws and regulations. In addition to the extra costs and regulatory burdens of our dual regulatory obligations, the two regulatory regimes may not always be compatible and may impose disclosure obligations, operating restrictions or tax effects on our business to which our competitors and other companies are not subject.  For example, on January 1, 2014, subject to certain transitional provisions, the Swiss Federal Council Ordinance Against Excessive Compensation at Public Companies (the “Ordinance”) became effective in connection with the Minder initiative approved by Swiss voters during 2013.  The Ordinance, among other things, (a) requires a binding shareholder “say on pay” vote with respect to the compensation of members of our executive management and Board of Directors, (b) generally prohibits the making of severance, advance, transaction premiums and similar payments to members of our executive management and Board of Directors, (c) imposes other restrictive compensation practices, and (d) requires that our articles of incorporation specify various compensation-related matters. In addition, during 2013, Swiss voters considered an initiative to limit pay for a chief executive officer to a multiple of no more than twelve times the salary of the lowest-paid employee. Although voters rejected that initiative, it did receive substantial voter support. The Ordinance, potential future initiatives relating to corporate governance or executive compensation, and Swiss voter sentiment in favor of such regulations may increase our non-operating costs and adversely affect our ability to attract and retain executive management and members of our Board of Directors.

We prepare our consolidated financial statements in accordance with GAAP which are subject to interpretation or changes by the FASB, the SEC, and other various bodies formed to promulgate and interpret appropriate accounting principles. New accounting pronouncements and changes in accounting principles have occurred in the past and are expected to occur in the future which may have a significant effect on our financial results or our compliance with regulations.

As a result of changes in tax laws, treaties, rulings, regulations or agreements, or their interpretation, of Switzerland or any other country in which we operate, the loss of a major tax dispute or a successful challenge to our operating structure, intercompany pricing policies or the taxable presence of our key subsidiaries in certain countries, or other factors, our effective income tax rates may increase in the future, which could adversely affect our net income and cash flows.
 
We operate in multiple jurisdictions and our profits are taxed pursuant to the tax laws of these jurisdictions. Our effective income tax rate may be affected by changes in or interpretations of tax laws, treaties, rulings, regulations or agreements in any given jurisdiction, utilization of net operating loss and tax credit carryforwards, changes in geographical allocation of income and expense, and changes in management’s assessment of matters such as the realizability of deferred tax assets. In the past, we have experienced fluctuations in our effective income tax rate. Our effective income tax rate in a given fiscal year reflects a variety of factors that may not be present in the succeeding fiscal year or years. There is no assurance that our effective income tax rate will not change in future periods.

We are incorporated in the Canton of Vaud in Switzerland and our effective income tax rate benefits from a longstanding ruling from the Canton of Vaud. The tax rules in Switzerland are expected to change in response to certain guidance and demands from both the European Union and the Organization for Economic Co-operation and Development and that could have an adverse effect on our tax ruling and effective income tax rate. Switzerland’s implementation of any material change in tax laws or policies or its adoption of new interpretations of existing tax laws and rulings, or changes in our tax ruling from the Canton of Vaud, could result in a higher effective income tax rate on our worldwide earnings and such change could adversely affect our net income.

We file Swiss and foreign tax returns. We are frequently subject to tax audits, examinations and assessments in various jurisdictions. If any tax authority successfully challenges our operational structure, intercompany pricing policies or the taxable presence of our key subsidiaries in certain countries, if the terms of certain income tax treaties are interpreted in a manner that is adverse to our structure, or if we lose a material tax dispute in any country, our effective income tax rate could increase. For example, policy changes in the United States or China predicated on our presence in those countries could adversely affect where we recognize profit and our effective income tax rate. A material assessment by a governing tax authority could adversely affect our profitability. If our effective income tax rate increases in future periods, our net income and cash flows could be adversely affected.
 
Claims by others that we infringe their proprietary technology could adversely affect our business.
 

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

We may be unable to protect our proprietary rights. Unauthorized use of our technology may result in the development of products that compete with our products.
 
Our future success depends in part on our proprietary technology, technical know-how and other intellectual property. We rely on a combination of patent, trade secret, copyright, trademark and other intellectual property laws, and confidentiality procedures and contractual provisions such as nondisclosure terms and licenses, to protect our intellectual property.

We hold various United States patents and pending applications, together with corresponding patents and pending applications from other countries. It is possible that any patent owned by us will be invalidated, deemed unenforceable, circumvented or challenged, that the patent rights granted will not provide competitive advantages to us, or that any of our pending or future patent applications will not be granted. In addition, other intellectual property laws or our confidentiality procedures and contractual provisions may not adequately protect our intellectual property. Also, others may independently develop similar technology, duplicate our products, or design around our patents or other intellectual property rights. Unauthorized parties have copied and may in the future attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Any of these events could adversely affect our business, financial condition and operating results.
 
Product quality issues could adversely affect our reputation, business and our operating results.
 
The market for our products is characterized by rapidly changing technology and evolving industry standards. To remain competitive, we must continually introduce new products and technologies. The products that we sell could contain defects in design or manufacture. Defects could also occur in the products or components that are supplied to us. There can be no assurance we will be able to detect and remedy all defects in the hardware and software we sell. Failure to do so could result in product recalls, product liability claims and litigation product redesign efforts, lost revenue, loss of reputation, and significant warranty and other expenses to remedy.

While we maintain reserves for reasonably estimable liabilities and purchase liability insurance, our reserves may not be adequate to cover such claims and liabilities and our insurance is subject to deductibles and may not be adequate to cover such claims and liabilities. Furthermore, our contracts with distributors and retailers may contain warranty, indemnification and other provisions related to product quality issues, and claims under those provisions may adversely affect our business and operating results.

Significant disruptions in, or breaches in security of, our websites or information technology systems could adversely affect our business.

As a consumer electronics company, our websites are an important presentation of our company, identity and brands and an important means of interaction with and source of information for consumers of our products. We also rely on our centralized information technology systems for product-related information and to store intellectual property, forecast our business, maintain financial records, manage operations and inventory, and operate other

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critical functions. We allocate significant resources to maintain our information technology systems and deploy network security, data encryption, training and other measures to protect against unauthorized access or misuse. Nevertheless, our websites and information technology systems are susceptible to damage, disruptions or shutdowns due to power outages, hardware failures, structural or operational failures, computer viruses, attacks by computer hackers, other data security issues, telecommunication failures, user error, malfeasance, catastrophes, system or software upgrades, integration or migration, or other foreseeable and unforeseen events. Breaches or disruptions of our websites or information technology systems, breaches of confidential information, data corruption or other data security issues could adversely affect our brands, reputation, relationships with customers or business partners, or consumer or investor perception of our company, business or products or result in disruptions of our operations, loss of intellectual property or our customers’ or our business partners’ data, reduced value of our investments in our brands, design, research and development or engineering, or costs to address regulatory inquiries or actions or private litigation, to respond to customers or partners or to rebuild or restore our websites or information technology systems.

We have identified a material weakness in our internal control over financial reporting which, if not remediated, could adversely affect investor confidence in our financial reports, our business and our stock price.

As disclosed in Part 1, Item 4 of this report, we identified a material weakness in our internal control over financial reporting. The material weakness was identified during the preparation of our audited financial statements for the year ended March 31, 2017. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of the material weakness identified, our management concluded that our internal control over financial reporting was not effective as of March 31, 2017, based on criteria established in the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We are actively engaged in implementing a remediation plan designed to address this material weakness. In the past, we have identified material weaknesses in our internal control over financial reporting, as described in our previous Annual Reports on Form 10-K. If our remediation measures are insufficient to address this material weakness, or if additional material weaknesses in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements, and we could be required to restate our financial results. In addition to potentially adversely affecting investors' confidence, any restatement of our consolidated financial statements could lead to potential litigation against us, which, whether meritorious or not, could be time-consuming, costly or divert significant operational resources, any of which could adversely affect our business and results of our operations.
 
The collection, storage, transmission, use and distribution of user data could give rise to liabilities and additional costs of operation as a result of laws, governmental regulation and risks of security breaches.
 
In connection with certain of our products, we collect data related to our consumers. This information is increasingly subject to legislation and regulations in numerous jurisdictions around the world, and especially in Europe. Government actions are typically intended to protect the privacy and security of personal information and its collection, storage, transmission, use and distribution in or from the governing jurisdiction. In addition, because various jurisdictions have different laws and regulations concerning the use, storage and transmission of such information, we may face requirements that pose compliance challenges in existing markets as well as new international markets that we seek to enter. The collection of user data heightens the risk of security breaches and other data security issues related to our IT systems and the systems of third-party data storage and other service and IT providers. Such laws and regulations, and the variation between jurisdictions, as well as additional security measures and risk, could subject us to costs, liabilities or negative publicity that could adversely affect our business.

We recently upgraded our worldwide business application suite, and difficulties, distraction or disruptions may interrupt our normal operations and adversely affect our business and operating results.
 
During fiscal years 2014 and 2015, we devoted significant resources to the upgrade of our worldwide business application suite to Oracle’s version R12. We implemented that upgrade in fiscal year 2016 and will continue to review the success of that implementation during fiscal year 2018. As a result of our transition to the new business application suite, we may experience difficulties with our systems, management distraction, lack of visibility into our business operations and results, and significant business disruptions. Difficulties with our systems may interrupt our normal operations, including our enterprise resource planning, forecasting, demand planning, supply planning,

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intercompany processes, promotion management, internal financial controls, pricing, and our ability to provide quotes, process orders, ship products, provide services and support to our customers and consumers, bill and track our customers, fulfill contractual obligations, and otherwise run and track our business. For example, the transition has resulted in delays in processing customer claims for claims accruals. In addition, we may need to expend significant attention, time and resources to correct problems or find alternative sources for performing these functions. Any such difficulty or disruption may adversely affect our business and operating results.
 
We cannot ensure that our recently announced share repurchase program will be fully utilized or that it will enhance long-term shareholder value. Share repurchases may also increase the volatility of the trading price of our shares and diminish our cash reserves.

In March 2017, our Board of Directors authorized a three-year $250 million repurchase program of our registered shares. This program does not obligate us to repurchase all or any of the dollar-value of shares authorized for repurchase. The program could also increase the volatility of the trading price of our shares, and any announcement of a termination or suspension of the program may result in a decrease in our share price. The program could also diminish our cash reserves that may be needed for investments in our business, acquisitions or other purposes.

Goodwill impairment charges could have an adverse effect on the results of our operations. 

Goodwill associated with a number of previous acquisitions could result in impairment charges. The slowdown in the overall video conferencing industry together with the competitive environment in fiscal year 2013 resulted in a $214.5 million non-cash goodwill impairment charge in fiscal year 2013, which substantially impacted results of discontinued operations. We recorded an additional impairment charge of goodwill of $122.7 million related to our Lifesize video conferencing discontinued operations in fiscal year 2015, reducing its goodwill to zero, which substantially impacted results of discontinued operations again. If we divest or discontinue product categories or products that we previously acquired, or if the value of those parts of our business become impaired, we may need to evaluate the carrying value of our goodwill. Additional impairment charges could adversely affect our results of operations.


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ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Share Repurchases
In fiscal year 2018, the following approved share buyback programs were in place (in thousands):
Share Buyback Program
Shares
 
Approved Amounts
March 2014
17,311

 
$
250,000

March 2017
17,311

 
$
250,000

The following table presents certain information related to purchases made by Logitech of its equity securities under the March 2017 share buyback program above (in thousands, except per share amounts):
 
 
Total Number of Shares
Repurchased
 
Weighted Average Price Paid Per Share
 
Remaining Amount that May Yet Be
Repurchased under the Program *
During the three months ended
 
 
CHF (LOGN)
 
USD (LOGI)
 
Month 1
 
 
 
 
 
 
 
 
September 30, 2017 to October 27, 2017
 
187

 
35.4

 
—

 
$
233,104

Month 2
 
 
 
 
 
 
 
 
October 28, 2017 to November 24, 2017
 
—

 
—

 
—

 
233,104

Month 3
 
 
 
 
 
 
 
 
November 25, 2017 to December 29, 2017
 
87

 
33.39

 
—

 
230,159

Total
 
274

 
34.76

 
—

 
$
230,159

* The March 2014 program expired in April 2017.
ITEM 3.   DEFAULTS UPON SENIOR SECURITIES
 
Not applicable.
 
ITEM 4.   MINE SAFETY DISCLOSURES
 
None.
 
ITEM 5.   OTHER INFORMATION

None.


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ITEM 6.   EXHIBITS
 
Exhibit Index
 
Exhibit No.
 
Description
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Definition Linkbase Document
 
*                 This exhibit is furnished herewith, but not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that we explicitly incorporate it by reference.





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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
LOGITECH INTERNATIONAL S.A.
 
 
 
 
 
 
 
 
January 25, 2018
 
/s/ Bracken Darrell
Date
 
Bracken Darrell
 
 
 
President and
 
 
 
Chief Executive Officer
 
 
 
 
 
 
 
 
January 25, 2018
 
/s/ Vincent Pilette
Date
 
Vincent Pilette
 
 
 
Chief Financial Officer
 
 
 
 
 
 
 
 


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