LOGITECH INTERNATIONAL S.A. quarterly report, Q3 FY2019

Logitech International S.A. — Form 10-Q Summary

Reporting period: Fiscal 2019 third quarter, ended December 28, 2018 (presented as December 31); comparisons are with the corresponding prior-year period. Nine-month figures cover the periods ended December 31. Amounts are U.S. dollars unless noted.

Financial performance

MetricThree monthsNine months
Net sales$864.4 million, +6% year over year$2,164.0 million, +10%
Gross profit / margin$324.0 million / 37.5%, versus 33.9%$804.0 million / 37.2%, versus 35.3%
Operating income$123.4 million, versus $100.3 million$221.0 million, versus $190.6 million
Net income$112.8 million, versus $80.8 million$215.5 million, versus $174.1 million
Diluted EPS$0.67, versus $0.48$1.28, versus $1.03
Operating / net margin14.3% / 13.1%10.2% / 10.0%

For the quarter, constant-currency sales growth was 8%, compared with reported growth of 6%. Topic 606 adoption increased reported sales by $10.8 million for the quarter and $5.7 million for the nine months; prior-year figures were not recast. Gross-margin gains reflected favorable product mix, cost reductions and supply-chain efficiencies, partly offset by U.S. tariffs. The prior-year quarter also bore approximately 150 basis points of additional North American distribution-center transition costs.

  • Growth and declines: Q3 Gaming sales rose 23%, Video Collaboration 60%, and Keyboards & Combos 14%. Mobile Speakers fell 35% and Smart Home fell 49%. Asia Pacific sales increased 18% in the quarter and 23% over nine months.
  • Expenses: Operating expenses rose to $200.6 million (23.2% of sales) from $175.3 million (21.6%) in Q3; nine-month expenses were $583.1 million (26.9%) versus $506.4 million (25.6%). Higher personnel, marketing and product-development costs contributed.

Cash flow, balance sheet and capital

  • Nine-month operating cash flow was $273.4 million, versus $256.1 million. Investing cash use was $165.8 million, including $133.9 million for Blue Microphones and $28.3 million of capital expenditures. Financing cash use was $155.4 million, including $114.0 million of dividends, $22.5 million of share repurchases and $29.1 million of tax withholding on share settlements.
  • Cash and cash equivalents were $584.5 million at December 31, down from $641.9 million at March 31. Working capital was $569.5 million; current assets were $1,483.9 million and current liabilities $914.4 million.
  • No bank-line borrowings were outstanding. Uncommitted, unsecured credit lines totaled $79.4 million, with $30.1 million of bank guarantees outstanding. The filing reports no material off-balance-sheet arrangements.
  • Total liabilities were $1,033.7 million; the balance sheet reports no outstanding debt borrowings. Cash dividends paid during the nine months were $0.69 per share. $197.4 million remained available under the $250 million repurchase authorization.
  • Receivables and inventory increased; inventory turnover fell to 6.3 from 7.7. Management attributed inventory growth partly to new products, tariff mitigation and the acquisition. Topic 606 presentation changes raised reported DSO to 50 days; management said the accounting change added 14 days.

Outlook, management commentary and risks

  • Management stated that cash, operating cash generation and available borrowings are expected to fund operations for at least the next 12 months. The filing does not provide a specific quarterly or full-year revenue or earnings forecast.
  • Management cited growth opportunities in Gaming and Video Collaboration, while describing slower growth in mobile speakers and a more difficult Smart Home market. It plans to deploy resources prudently in Smart Home and adjust investment to the slower mobile-speaker outlook.
  • U.S. tariffs were already affecting some products. Mitigation measures include earlier imports, supply-chain or production shifts and possible pricing changes; management cautioned that implementation could take time and future gross margins could be adversely affected.
  • Foreign exchange remains material: approximately half of sales were denominated in currencies other than the U.S. dollar. The company uses currency hedges but said they may not offset longer-term currency movements.
  • In August 2018, Logitech acquired Blue Microphones for approximately $134.8 million in cash. Blue contributed $24.8 million of Q3 sales; its post-acquisition results were described as not material to consolidated results. Purchase-price allocation remained preliminary.
  • A restructuring plan carries estimated total pretax charges of $10–15 million; $9.8 million was recognized in the first nine months, and completion was expected substantially within six months. Q3 recorded a $0.3 million restructuring credit.
  • Effective tax rates were 7.6% for Q3 and 4.6% for nine months, versus 19.9% and 9.7% in the prior-year periods. Rates reflected jurisdictional income mix and prior-year Tax Act effects; discrete benefits from expiring uncertain tax positions also contributed. Unrecognized tax benefits were $74.6 million.
  • Key disclosed risks include tariffs and trade restrictions, currency volatility, demand and forecasting uncertainty, product-launch execution, competition, channel and supply-chain dependencies, and integration of acquisitions. Pending ordinary-course legal matters were not expected by management to have a material adverse effect, though outcomes remain uncertain.

Important facts for investors to verify

  • How much sales and margin growth came from underlying demand, currency, Topic 606 accounting, and acquisitions—especially Blue Microphones?
  • Whether tariff mitigation and any pricing actions can protect gross margin without weakening demand.
  • Whether inventory levels, lower turnover and longer reported DSO normalize as product launches and tariff planning progress.
  • Whether growth in Gaming and Video Collaboration can offset continued weakness in Mobile Speakers and Smart Home.
  • The final Blue Microphones purchase-price allocation, restructuring costs and completion, and the evolution of uncertain tax positions.