Logitech(US:LOGI)2021-10-27 16:00Part I Item 1. Financial Statements (Unaudited) This section presents Logitech's unaudited condensed consolidated financial statements, showing increased six-month sales but decreased net income year-over-year Condensed Consolidated Statements of Operations Net sales increased for both three and six-month periods, but operating and net income declined significantly year-over-year Consolidated Statements of Operations Highlights (In thousands, except per share amounts) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | YoY Change | Six Months Ended Sep 30, 2021 | Six Months Ended Sep 30, 2020 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $1,306,267 | $1,257,158 | 4% | $2,618,325 | $2,049,052 | 28% | | Gross profit | $542,163 | $569,723 | -5% | $1,111,089 | $875,456 | 27% | | Operating income | $179,411 | $321,553 | -44% | $382,492 | $404,980 | -6% | | Net income | $139,456 | $266,914 | -48% | $326,297 | $338,987 | -4% | | Diluted EPS | $0.81 | $1.56 | -48% | $1.90 | $1.99 | -5% | Condensed Consolidated Balance Sheets Total assets decreased to $3.86 billion due to reduced cash, while inventories increased and total liabilities decreased Balance Sheet Highlights (In thousands) | Account | September 30, 2021 | March 31, 2021 | | :--- | :--- | :--- | | Current Assets | | | | Cash and cash equivalents | $1,137,296 | $1,750,327 | | Inventories | $827,710 | $661,116 | | Total Assets | $3,856,164 | $4,142,378 | | Current Liabilities | | | | Accounts payable | $660,720 | $823,233 | | Total Liabilities | $1,593,481 | $1,880,589 | | Total Shareholders' Equity | $2,262,683 | $2,261,789 | Condensed Consolidated Statements of Cash Flows Operating activities resulted in a $177.8 million cash outflow, contrasting prior year's inflow, driven by inventory and payment timing Cash Flow Summary (In thousands) | Cash Flow Activity | Six Months Ended Sep 30, 2021 | Six Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash provided by / (used in) operating activities | $(177,848) | $398,519 | | Net cash used in investing activities | $(63,208) | $(30,539) | | Net cash used in financing activities | $(371,905) | $(168,837) | | Net decrease in cash and cash equivalents | $(613,031) | $201,655 | Notes to the Condensed Consolidated Financial Statements Detailed notes cover accounting policies, segment performance, income taxes, and goodwill, highlighting sales growth by category and region Sales by Product Category (Six Months Ended Sep 30, In thousands) | Product Category | 2021 Sales | 2020 Sales | YoY Change | | :--- | :--- | :--- | :--- | | Pointing Devices | $371,892 | $289,590 | 28% | | Keyboards & Combos | $454,629 | $346,977 | 31% | | PC Webcams | $204,389 | $163,320 | 25% | | Gaming | $666,174 | $479,614 | 39% | | Video Collaboration | $466,538 | $366,778 | 27% | | Audio & Wearables | $214,685 | $185,640 | 16% | Sales by Geographic Region (Six Months Ended Sep 30, In thousands) | Region | 2021 Sales | 2020 Sales | YoY Change | | :--- | :--- | :--- | :--- | | Americas | $1,154,081 | $898,503 | 28% | | EMEA | $757,409 | $600,349 | 26% | | Asia Pacific | $706,835 | $550,200 | 28% | - The effective income tax rate for the six months ended September 30, 2021 was 15.2%, down from 17.2% in the prior year period, primarily due to the mix of income across jurisdictions and a discrete tax benefit of $14.3 million from excess tax benefits in the U.S5051 - Goodwill increased from $429.6 million at March 31, 2021 to $449.4 million at September 30, 2021, primarily due to a $20.7 million addition from an immaterial technology acquisition made on May 19, 202180 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 28% sales increase driven by secular trends, offset by decreased gross margin and higher operating expenses Summary of Financial Results and Business Trends Sales grew 28% driven by secular trends, while gross margin slightly decreased and operating expenses increased - Total sales for the six months ended September 30, 2021, increased by 28% compared to the same period in the prior year109 - The company identifies five large market opportunities driving its business: Creativity & Productivity, Gaming, Video Collaboration, Music, and Smart Home114 - Key business trends include strong demand driven by work-from-home, remote learning, the increasing popularity of gaming and esports, and the growth of video meetings115116117 Results of Operations Sales grew 28% driven by Gaming and Keyboards, while gross margin slightly decreased and marketing expenses significantly increased Sales Growth by Region (Six Months Ended Sep 30, 2021) | Region | Sales Growth Rate | Constant Dollar Sales Growth Rate | | :--- | :--- | :--- | | Americas | 28% | 27% | | EMEA | 26% | 21% | | Asia Pacific | 28% | 24% | Sales Growth by Product Category (Six Months Ended Sep 30, 2021) | Product Category | YoY Change | | :--- | :--- | | Gaming | 39% | | Keyboards & Combos | 31% | | Pointing Devices | 28% | | Video Collaboration | 27% | | PC Webcams | 25% | - Gross margin for the six months ended Sep 30, 2021, decreased by 30 basis points to 42.4%, attributed to increased promotional spending, higher inventory reserves, and increased logistics costs, partially offset by favorable currency rates and product mix158 - Marketing and selling expenses for the six-month period increased by $216.9 million, driven by higher advertising and marketing spend to support investment in brand awareness and consideration162 Liquidity and Capital Resources Cash and equivalents decreased by $613 million due to operating cash outflow and increased financing activities including share repurchases - Cash and cash equivalents decreased from $1.75 billion at March 31, 2021, to $1.14 billion at September 30, 2021174 - Net cash used in operating activities was $177.8 million for the six-month period, primarily due to increased inventory to support future demand and timing of tax and bonus payments175183 - The company's share repurchase program was increased by $750.0 million in April 2021 to an aggregate of $1.0 billion. As of September 30, 2021, $661.0 million remained available for repurchase189 Key Working Capital Metrics (as of Sep 30) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | DSO (Days) | 50 | 54 | | DPO (Days) | 78 | 87 | | Inventory Turnover (x) | 3.7 | 7.0 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from currency fluctuations, with 50% of sales in non-USD currencies, mitigated by hedging strategies - Approximately 50% of sales for the three months ended September 30, 2021, were denominated in currencies other than the U.S. Dollar, with the Euro accounting for 23% of total sales201 - The company uses currency forward and swap contracts to hedge short-term receivables and payables, and cash flow hedges for forecasted inventory purchases202204 - A hypothetical adverse 10% foreign currency exchange rate change would have resulted in an adverse effect on income before taxes of approximately $25.5 million as of September 30, 2021203 Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective with no material changes in internal control - The CEO and CFO concluded that as of September 30, 2021, the company's disclosure controls and procedures are effective at the reasonable assurance level206 - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls209 Part II Item 1. Legal Proceedings The company is involved in ordinary course legal proceedings, not expecting a material adverse financial impact - Logitech is subject to several claims and a small number of legal proceedings arising from the ordinary course of business210 - The company does not believe that the resolution of these pending matters will have a material adverse effect on its financial position or results of operations210 Item 1A. Risk Factors Logitech faces significant risks including innovation challenges, supply chain disruptions, brand reputation, and global operational complexities Risks Related to our Business Business risks include intense competition, innovation demands, COVID-19 impacts, supply chain disruptions, and reliance on key partners - Failure to innovate and develop new products in a timely and cost-effective manner could adversely affect business results due to short product life cycles and intense competition221 - The full effect of the COVID-19 pandemic remains uncertain and could adversely affect business, including disruptions to manufacturing, supply chain, and logistics239240 - The company purchases key components and products from a limited number of sources, and supply delays, constraints, or shortages could adversely affect operating results246 - Over a quarter of gross sales are concentrated with two customers, Amazon Inc. and Ingram Micro, and any adverse change in these relationships could have a significant impact255 Risks Related to Global Operations and Regulatory Environment Global operations face risks from political instability, diverse regulations, trade policy changes, currency fluctuations, and evolving tax laws - The company faces risks from international operations, including political instability, varying legal and regulatory requirements, and difficulties in managing a global workforce279 - Changes in U.S. and other countries' trade policies, including the imposition of tariffs, may have adverse impacts on business, results of operations, and financial condition283 - Financial performance is subject to risks from currency exchange rate fluctuations, as a significant portion of business is conducted in currencies other than the U.S. Dollar286 - Changes in tax laws or a successful challenge to the company's operating structure, particularly following Swiss tax reform (TRAF), could increase effective income tax rates296297 Risks Related to Intellectual Property, Cyber Security and Privacy Risks include IT system breaches, data privacy liabilities under evolving laws, and intellectual property infringement claims - Significant disruptions or security breaches of websites or IT systems could adversely affect the business, brand, and reputation300 - The collection and use of user data could lead to liabilities and increased costs due to evolving privacy laws like GDPR and the risk of data breaches302303 - The company faces an increased risk of claims alleging infringement of others' intellectual property rights, which could result in costly litigation or substantial damages304 Risks Related to our Financial Results Financial results are unpredictable due to fluctuating demand, variable gross margins, and discretionary share repurchase/dividend policies - Operating results are difficult to predict due to fluctuating demand, the timing of orders, and the impact of global economic conditions, which may cause share price volatility309 - Gross margins can vary significantly due to factors like product mix, competition, commodity costs, and currency exchange rates, leading to unanticipated fluctuations in operating results312 - The share repurchase program and dividend payments are not guaranteed and may be affected by business conditions, diminishing cash reserves that could be used for other purposes316 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Logitech repurchased 1.151 million shares during Q2 FY2022 under its expanded $1.0 billion share repurchase program Share Repurchase Activity (Q2 FY2022) | Period | Total Shares Repurchased (thousands) | Remaining Amount for Repurchase (thousands) | | :--- | :--- | :--- | | July 3 - Oct 1, 2021 | 1,151 | $661,023 | - In April 2021, the Board of Directors approved an increase of $750.0 million to the 2020 share repurchase program, bringing the aggregate amount to $1.0 billion317 Item 3. Defaults Upon Senior Securities Not applicable, the company reports no defaults upon senior securities - Not applicable319 Item 4. Mine Safety Disclosures None, the company has no mine safety disclosures to report - None320 Item 5. Other Information None, the company reports no other information for this item - None321 Item 6. Exhibit Index This section lists exhibits filed with the Form 10-Q, including CEO/CFO certifications and XBRL data - Lists exhibits filed with the report, including Rule 13a-14(a)/15d-14(a) certifications for the CEO and CFO, Section 1350 certifications, and XBRL data files324