Logitech International S.A. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first half of FY2018, ended September 29, 2017; financial statements present the periods as ended September 30. Comparisons are with the corresponding FY2017 periods. Amounts below are in U.S. dollars and rounded to millions unless noted. Logitech designs, manufactures and markets peripherals for computing, music, gaming, video collaboration and smart-home uses; it reports one operating segment.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $632.5m | $564.3m | $1,162.4m | $1,044.2m |
| Gross profit | $227.7m | $206.9m | $421.4m | $375.5m |
| Gross margin | 36.0% | 36.7% | 36.3% | 36.0% |
| Operating income | $58.9m | $53.4m | $90.4m | $79.3m |
| Net income | $56.4m | $47.0m | $93.4m | $69.0m |
| Diluted EPS | $0.33 | $0.28 | $0.55 | $0.42 |
- Q2 sales increased 12% (11% in constant currency); first-half sales increased 11% (12% constant currency). Sales grew across all regions. Asia Pacific was the fastest-growing region: up 23% in Q2 and 20% for the half.
- Q2 gross margin fell 70 basis points year over year, reflecting product-transition promotions, mix and U.S. distribution-center transition costs, partly offset by product cost reductions. First-half gross margin rose 30 basis points.
- Operating expenses rose to $168.8m from $153.5m in Q2 and to $331.0m from $296.2m for the half. Increased headcount and product advertising, marketing and R&D spending were the main drivers; credits from lower Jaybird contingent consideration partly offset expenses.
- Reported tax was $4.1m in Q2 (6.8% effective rate) and a $1.3m benefit for the first half (-1.5% rate), versus provisions of $5.6m and $8.7m in the comparative periods. FY2018 results benefited from adopted share-based-payment tax accounting and reversals of uncertain tax positions.
Cash flow, balance sheet and capital
- First-half operating cash flow was $67.5m, down from $91.9m. Investing used $109.2m, including the $85.0m ASTRO acquisition and $17.2m of capital expenditures. Financing used $108.6m, including $104.2m of dividends, $10.7m of share repurchases and $23.7m of tax withholding on equity awards, partly offset by $30.0m of option-exercise proceeds.
- Cash and cash equivalents were $398.8m at September 30, versus $547.5m at March 31; short-term investments were $6.8m. Working capital was $445.5m, down from $520.8m at March 31.
- Current assets were $1,061.6m and current liabilities $616.1m. The balance sheet reported no borrowings; $68.2m of uncommitted, unsecured credit lines were available, with $39.8m of bank guarantees outstanding and no financial covenants.
- Accounts receivable increased to $277.8m and inventory to $330.4m from $185.2m and $253.4m, respectively, at March 31. Inventory turnover was 4.9x versus 5.3x a year earlier. Management attributed inventory growth partly to planned Q3 product launches and ASTRO inventory.
- The company paid a dividend of $0.63 per share, up from $0.57 in the prior-year period. A three-year $250m buyback program was authorized; $239.9m remained available at September 30.
Material changes, outlook and risks
- Product performance: Q2 sales rose sharply in Video Collaboration (+61%), Smart Home (+55%), Tablet and Other Accessories (+49%), and Gaming (+44%). Mobile Speakers declined 7%, partly as customers anticipated new products. Management said growth reflected product launches and demand across its strategic markets.
- Acquisition and unusual items: Logitech acquired ASTRO Gaming in August for preliminary cash consideration of $85.0m to expand in console gaming. ASTRO contributed to reported sales from the acquisition date but was not material to consolidated results. The purchase-price allocation remained preliminary. In October, after quarter-end, Logitech agreed to pay $5.0m to release Jaybird earn-out obligations; the liability was remeasured before quarter-end and the payment was expected in FY2018 Q3.
- Execution and seasonality: A new U.S. logistics provider and distribution center caused transition and fulfillment challenges, adding costs in Q2 and early Q3. Management noted that Q3 typically has higher seasonal holiday sales, but cautioned that past seasonality is not a reliable predictor. The filing provides no numerical revenue or earnings guidance. Management said cash balances, projected operations and historical cash generation should fund operations for at least 12 months.
- Working-capital and product risk: Management warned that unsuccessful product launches, weaker demand or inability to sell at planned prices could hurt sales, margins, operating cash flow and inventory turnover. Foreign exchange, competition, channel and supplier dependence, and the short life cycles of products are also significant risks.
- Controls: Disclosure controls were deemed ineffective because a material weakness remained in controls over estimates of EMEA customer-program allowances and accruals, including breakage. Management began remediation and expected to address the weakness by FY2018 year-end, subject to testing. Management stated the weakness had not misstated the reported financial statements.
- Other exposures: Unrecognized tax benefits were $68.7m, all of which would affect the effective tax rate if recognized; management said these positions could change. The company disclosed ordinary-course claims and a small number of legal proceedings, which it did not expect to have a material adverse effect based on available information. It also described currency risk; 51% of Q2 sales were denominated in currencies other than the U.S. dollar.
Important facts for investors to verify
- Whether the EMEA customer-program control weakness is remediated on schedule and whether controls operate effectively.
- Whether U.S. distribution-center transition costs ease and fulfillment performance normalizes.
- Whether elevated inventory converts to sales as planned, especially around Q3 launches, without requiring discounting or write-downs.
- How much sales and profit growth is organic versus attributable to acquired businesses, and whether ASTRO integration and preliminary purchase accounting change.
- How sustainable reported tax benefits are, given share-based tax effects, uncertain tax positions and possible tax-law changes.
- Whether cash generation supports dividends, buybacks, acquisitions and investment while working capital and inventory remain elevated.