Logitech International S.A. — Q3 FY2018 Form 10-Q
Reporting period: Fiscal third quarter ended December 29, 2017 (presented as December 31), and nine months ended December 31, 2017. Comparisons are with the corresponding prior-year periods. Amounts below are U.S. dollars.
Business context and results
Logitech designs, manufactures and markets peripherals and products for computing, gaming, music, video collaboration and smart home markets. It reports one operating segment. Q3 sales benefited from seasonal holiday demand and included ASTRO Gaming, acquired in August 2017.
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Net sales | $812.0m | $666.7m | $1,974.4m | $1,710.9m |
| Gross profit | $275.6m | $246.8m | $697.0m | $622.3m |
| Gross margin | 33.9% | 37.0% | 35.3% | 36.4% |
| Operating income | $100.3m | $96.3m | $190.6m | $175.5m |
| Net income | $80.8m | $97.5m | $174.1m | $166.5m |
| Diluted EPS | $0.48 | $0.59 | $1.03 | $1.01 |
Q3 sales rose 22% (18% constant currency); nine-month sales rose 15% (14% constant currency). Q3 operating expenses were $175.3m, up from $150.5m, but declined as a share of sales to 21.6% from 22.6%. Nine-month operating expenses were $506.4m, or 25.6% of sales, versus $446.7m, or 26.1%.
Material changes and financial position
- Q3 sales growth was led by Gaming (+62%), Smart Home (+44%), Mobile Speakers (+38%) and Video Collaboration (+29%). Gaming included ASTRO; ASTRO contributed $33.5m of Q3 sales and $36.2m for the nine-month period.
- Gross margin fell 310 basis points in Q3 and 110 basis points for nine months. Management cited higher logistics costs—including North American distribution-center transition costs—promotions and product mix; product cost reductions partly offset the nine-month decline.
- Q3 net income declined despite higher sales and operating income, largely reflecting a $20.0m tax provision versus $1.6m a year earlier. The nine-month net income increase included tax benefits and other tax effects.
- At December 31, cash and cash equivalents were $564.9m, current assets $1,253.2m, current liabilities $707.2m, working capital $546.0m, total assets $1,830.8m and total liabilities $823.6m. The filing reports no borrowings under its $62.1m uncommitted credit lines; $44.2m of bank guarantees were outstanding.
- Nine-month operating cash flow was $256.1m, versus $240.6m. Investing cash use was $116.2m, mainly ASTRO acquisition spending and capital expenditures; financing cash use was $124.2m, mainly dividends, share repurchases, tax withholdings and Jaybird consideration. Cash increased $17.4m from March 31.
Outlook, commentary and risks
- No specific revenue or earnings guidance is stated in the provided filing text. Management said cash, operating cash generation and projections should fund operations for at least 12 months. It expected the transition back to one North American distribution center to be completed in Q4 FY2018.
- The December 2017 U.S. Tax Cuts and Jobs Act resulted in a provisional $19.9m deferred-tax remeasurement charge, partly offset by a $4.1m tax benefit from a valuation-allowance reduction. The company said its estimates were still being refined.
- Management identified risks including competition and pricing pressure, demand and product-launch execution, product mix and margins, supply-chain and distribution execution, currency movements, and acquisition integration. The company also noted seasonality and that interim results are not necessarily indicative of full-year results.
- Disclosure controls were deemed ineffective because a material weakness remained in controls over estimating EMEA customer-program allowances and breakage. Management was implementing remediation and expected to address the weakness by fiscal year-end, subject to testing.
- The filing describes several ordinary-course legal claims and proceedings; management did not believe their resolution would materially affect results, while noting litigation uncertainty. It also reports contingent indemnification obligations and purchase commitments.
Most important facts for investors to verify
- Whether distribution-center remediation resolved added logistics costs and whether gross margins recover.
- Whether sales growth and product-category momentum persist, particularly in Gaming, Music, Video Collaboration and Smart Home, and how much growth reflects acquisitions or currency.
- The final tax-reform accounting impact and future effective tax rate, alongside the $67.3m of unrecognized tax benefits disclosed at quarter-end.
- Whether the EMEA customer-program control weakness is remediated and disclosure controls become effective.
- Working-capital and cash-flow trends, including receivables growth, inventory, dividends, repurchases and planned investment needs.