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EX-31.1 - EXHIBIT 31.1 RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CHIEF EXECUTIVE OFFICER - LOGITECH INTERNATIONAL SAex31_1.htm
EX-10.1 - EXHIBIT 10.1 RESIGNATION AND SEVERANCE AGREEMENT BETWEEN LOGITECH INC. AND DAVID HENRY DATED JUNE 8, 2010 - LOGITECH INTERNATIONAL SAex10_1.htm
EX-31.2 - EXHIBIT 31.2 RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CHIEF FINANCIAL OFFICER - LOGITECH INTERNATIONAL SAex31_2.htm
EX-32.1 - EXHIBIT 32.1 SECTION 1350 CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER - LOGITECH INTERNATIONAL SAex32_1.htm




 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
    (Mark One)

  x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarter ended June 30, 2010
   
 
or
   
£
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.
Apples, Switzerland
c/o Logitech Inc.
6505 Kaiser Drive
Fremont, California 94555
(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  x    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  o    No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer    (Do not check if a smaller reporting company)  o
Smaller reporting company  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes  o    No  x
 
As of August 3, 2010, there were 175,875,123 shares of the Registrant’s share capital outstanding.

 
 

 


 

 

TABLE OF CONTENTS
 
   
Page
Part I
FINANCIAL INFORMATION
 
     
Item 1.
Consolidated Financial Statements (Unaudited)
3
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
40
 
 
 
Item 4.
Controls and Procedures
42
     
Part II
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
43
 
 
 
Item 1A.
Risk Factors
43
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
52
     
Item 6.
Exhibit Index
53
   
Signatures
54
   
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.
 

 
2

 

PART I – FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
Financial Statement Description
Page
     
Consolidated Statements of Operations for the three months ended June 30, 2010 and 2009
4
     
Consolidated Balance Sheets as of June 30, 2010 and March 31, 2010
5
     
Consolidated Statements of Cash Flows for the three months ended June 30, 2010 and 2009
6
 
 
 
Consolidated Statements of Changes in Shareholders’ Equity for the three months ended June 30, 2010 and 2009
7
     
Notes to Consolidated Financial Statements
8
 
 
 




 
3

 

LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)


   
Three months ended
 
   
June 30,
 
   
2010
   
2009
 
   
(Unaudited)
 
             
Net sales
  $ 479,330     $ 326,110  
Cost of goods sold
    310,301       248,288  
Gross profit
    169,029       77,822  
Operating expenses:
               
Marketing and selling
    91,477       58,938  
Research and development
    38,389       31,360  
General and administrative
    27,360       21,181  
Restructuring charges
    -       1,449  
         Total operating expenses
    157,226       112,928  
Operating income (loss)
    11,803       (35,106 )
Interest income, net
    521       592  
Other income, net
    1,796       802  
Income (loss) before income taxes
    14,120       (33,712 )
Provision (benefit) for income taxes
    (5,402 )     3,653  
Net income (loss)
  $ 19,522     $ (37,365 )
                 
Net income (loss) per share:
               
Basic
  $ 0.11     $ (0.21 )
Diluted
  $ 0.11     $ (0.21 )
                 
Shares used to compute net income (loss) per share:
               
Basic
    175,492       179,751  
Diluted
    177,358       179,751  




















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

 
4

 

LOGITECH INTERNATIONAL S.A.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)



   
June 30,
   
March 31,
 
   
2010
   
2010
 
   
(Unaudited)
       
ASSETS
 
Current assets:
           
Cash and cash equivalents
  $ 317,315     $ 319,944  
Accounts receivable
    213,567       195,247  
Inventories
    279,800       219,593  
Other current assets
    63,031       58,877  
Total current assets
    873,713       793,661  
Property, plant and equipment
    87,692       91,229  
Goodwill
    553,462       553,462  
Other intangible assets
    88,486       95,396  
Other assets
    68,137       65,930  
Total assets
  $ 1,671,490     $ 1,599,678  
                 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
                 
Current liabilities:
               
Accounts payable
  $ 316,881     $ 257,955  
Accrued liabilities
    175,090       182,336  
Total current liabilities
    491,971       440,291  
Other liabilities
    152,049       159,672  
Total liabilities
    644,020       599,963  
                 
Commitments and contingencies
               
                 
Shareholders' equity:
               
Shares, par value CHF 0.25 - 191,606,620 issued and authorized
               
and 50,000,000 conditionally authorized at June 30, 2010 and
               
March 31, 2010
    33,370       33,370  
Additional paid-in capital
    12,168       14,880  
Less shares in treasury, at cost, 15,843,442 at June 30, 2010
               
and 16,435,528 at March 31, 2010
    (366,459 )     (382,512 )
Retained earnings
    1,426,140       1,406,618  
Accumulated other comprehensive loss
    (77,749 )     (72,641 )
Total shareholders' equity
    1,027,470       999,715  
Total liabilities and shareholders' equity
  $ 1,671,490     $ 1,599,678  





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

 
5

 

LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)


 

   
Three months ended June 30,
 
   
2010
   
2009
 
   
(Unaudited)
 
Cash flows from operating activities:
           
Net income (loss)
  $ 19,522     $ (37,365 )
Non-cash items included in net income (loss):
               
Depreciation
    12,338       11,477  
Amortization of other intangible assets
    6,911       2,333  
Share-based compensation expense
    8,462       5,409  
Gain on disposal of fixed assets
    (838 )     -  
Excess tax benefits from share-based compensation
    (421 )     (288 )
Loss (gain) on cash surrender value of life insurance policies
    (440 )     384  
Deferred income taxes and other
    (292 )     (568 )
Changes in assets and liabilities:
               
Accounts receivable
    (18,404 )     46,433  
Inventories
    (66,019 )     317  
Other assets
    (4,945 )     1,142  
Accounts payable
    60,525       45,066  
Accrued liabilities
    (10,297 )     1,195  
Net cash provided by operating activities
    6,102       75,535  
Cash flows from investing activities:
               
Purchases of property, plant and equipment
    (11,918 )     (7,702 )
Proceeds from sale of property, plant and equipment
    2,688       -  
Net cash used in investing activities
    (9,230 )     (7,702 )
Cash flows from financing activities:
               
Proceeds from sale of shares upon exercise of options and purchase rights
    5,122       4,399  
Excess tax benefits from share-based compensation
    421       288  
Net cash provided by financing activities
    5,543       4,687  
Effect of exchange rate changes on cash and cash equivalents
    (5,044 )     2,138  
Net increase (decrease) in cash and cash equivalents
    (2,629 )     74,658  
Cash and cash equivalents at beginning of period
    319,944       492,759  
Cash and cash equivalents at end of period
  $ 317,315     $ 567,417  








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

 
6

 

LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)

 
                                       
Accumulated
       
               
Additional
                     
other
       
   
Registered shares
   
paid-in
   
Treasury shares
   
Retained
   
comprehensive
       
   
Shares
   
Amount
   
capital
   
Shares
   
Amount
   
earnings
   
loss
   
Total
 
March 31, 2009
    191,606     $ 33,370     $ 45,012       12,124     $ (341,454 )   $ 1,341,661     $ (80,881 )   $ 997,708  
Net loss
    -       -       -       -       -       (37,365 )     -       (37,365 )
Cumulative translation
                                                               
adjustment
    -       -       -       -       -       -       6,484       6,484  
Pension liability adjustment
    -       -       -       -       -       -       (441 )     (441 )
Net deferred hedging loss
    -       -       -       -       -       -       (5,528 )     (5,528 )
Total comprehensive loss
                                                            (36,850 )
Tax benefit from exercise of
                                                               
stock options
    -       -       784       -       -       -       -       784  
Sale of shares upon exercise of
                                                               
options and purchase rights
    -       -       (15,115 )     (677 )     19,514       -       -       4,399  
Share-based compensation expense
    -       -       5,182       -       -       -       -       5,182  
June 30, 2009
    191,606     $ 33,370     $ 35,863       11,447     $ (321,940 )   $ 1,304,296     $ (80,366 )   $ 971,223  
                                                                 
March 31, 2010
    191,606     $ 33,370     $ 14,880       16,435     $ (382,512 )   $ 1,406,618     $ (72,641 )   $ 999,715  
Net income
    -       -       -       -       -       19,522       -       19,522  
Cumulative translation
                                                               
adjustment
    -       -       -       -       -       -       (4,353 )     (4,353 )
Pension liability adjustment
    -       -       -       -       -       -       230       230  
Net deferred hedging loss
    -       -       -       -       -       -       (985 )     (985 )
Total comprehensive income
                                                            14,414  
Tax provision from exercise of
                                                               
stock options
    -       -       (212 )     -       -       -       -       (212 )
Sale of shares upon exercise of
                                                               
options and purchase rights
    -       -       (10,931 )     (592 )     16,053       -       -       5,122  
Share-based compensation expense
    -       -       8,431       -       -       -       -       8,431  
June 30, 2010
    191,606     $ 33,370     $ 12,168       15,843     $ (366,459 )   $ 1,426,140     $ (77,749 )   $ 1,027,470  













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

 
7

 

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




Note 1 — The Company
 
Logitech is a world leader in products that connect people to digital experiences. We develop and market innovative hardware and software products that enable or enhance digital navigation, music and video entertainment, gaming, social networking, audio and video communication over the Internet, video security and home-entertainment control. We have two operating segments, peripherals and video conferencing.

For the PC (personal computer), our products include mice, trackballs, keyboards, interactive gaming controllers, multimedia speakers, headsets, webcams, 3D control devices and lapdesks. Our Internet communications products include webcams, headsets, video communications services, and digital video security systems for a home or small business. Our LifeSize division offers scalable HD (high-definition) video communication products, support and services. Our digital music products include speakers, earphones, and custom in-ear monitors. For home entertainment systems, we offer the Harmony line of advanced remote controls and the Squeezebox wireless music solutions for the home. For gaming consoles, we offer a range of gaming controllers and microphones, as well as other accessories.

We sell our peripheral products to a network of retail distributors and resellers and to OEMs. Our worldwide retail network for our peripherals includes wholesale distributors, consumer electronics retailers, mass merchandisers, specialty electronics stores, computer and telecommunications stores, value-added resellers and online merchants. The large majority of our revenues have historically been derived from sales of our peripheral products for use by consumers.

We sell our LifeSize video communication products and services to distributors, value-added resellers, OEMs and direct enterprise customers. The large majority of LifeSize revenues have historically been derived from sales to large enterprises, small-to-medium businesses, and public healthcare, education and government organizations.

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, which conducts its business through subsidiaries in the Americas, EMEA (Europe, Middle East, Africa) and Asia Pacific. Shares of Logitech International S.A. are listed on both the Nasdaq Global Select Market, under the trading symbol LOGI, and the SIX Swiss Exchange, under the trading symbol LOGN.

Note 2 — Summary of Significant Accounting Policies
 
Basis of Presentation
 
The consolidated financial statements include the accounts of Logitech and its subsidiaries. All intercompany balances and transactions have been eliminated. The consolidated financial statements are presented in accordance with U.S. GAAP (accounting principles generally accepted in the United States of America) for interim financial information and therefore do not include all the information required by U.S. 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, 2010 included in its Annual Report on Form 10-K.

 
8

 
Net loss for the three months ended June 30, 2009 includes $2.2 million in pretax charges related to restructuring accruals, bonus accruals and revenue-related adjustments from fiscal year 2009. We reviewed the accounting errors utilizing SEC Staff Accounting Bulletin No. 99, Materiality and SEC Staff Accounting Bulletin No. 108, Effects of Prior Year Misstatements on Current Year Financial Statements, and determined the impact of the errors to be immaterial to the current and prior quarterly and annual periods.

Certain prior year financial statement amounts have been reclassified to conform to the current year presentation with no impact on previously reported net loss.

In the opinion of management, these financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the periods presented. Operating results for the three months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending March 31, 2011 or any future periods.
 
Fiscal Year
  
The Company’s fiscal year ends on March 31. Interim quarters are thirteen-week periods, each ending on a Friday. For purposes of presentation, the Company has indicated its quarterly periods as ending on the month end.
 
Changes in Significant Accounting Policies

There have been no substantial changes in our significant accounting policies during the three months ended June 30, 2010 compared with the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010.

Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect reported amounts of assets, liabilities, net sales and expenses, and the disclosure of contingent assets and liabilities. 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 from those estimates.

 Recent Accounting Pronouncements

In October 2009, the FASB (Financial Accounting Standards Board) published ASU (Accounting Standards Update) 2009-13, Multiple Deliverable Revenue Arrangements, which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. This guidance amends the criteria in ASC (Accounting Standards Codification) Subtopic 605-25, Revenue Recognition--Multiple-Element Arrangements, to establish a selling price hierarchy for determining the selling price of a deliverable, based on vendor specific objective evidence, acceptable third party evidence, or estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, the disclosures required for multiple-deliverable revenue arrangements are expanded. ASU 2009-13 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We will adopt ASU 2009-13 on April 1, 2011 and are currently evaluating its potential impact on the Company’s consolidated financial statements and disclosures.

In October 2009, the FASB published ASU 2009-14, Certain Revenue Arrangements That Include Software Elements, to provide guidance for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and non-software components that function together to deliver the product’s essential functionality are excluded from the software revenue guidance in ASC Subtopic 985-605, Software-Revenue Recognition. In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance. ASU 2009-14 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We will adopt ASU 2009-14 on April 1, 2011 and are currently evaluating its potential impact on the Company’s consolidated financial statements.
 
 
9

 
Note 3 — Net Income (Loss) per Share
 
The computations of basic and diluted net income (loss) per share for the Company were as follows (in thousands except per share amounts):
 

   
Three months ended June 30,
 
   
2010
   
2009
 
       
Net income (loss)
  $ 19,522     $ (37,365 )
                 
Weighted average shares - basic
    175,492       179,751  
Effect of potentially dilutive share equivalents
    1,866       -  
Weighted average shares - diluted
    177,358       179,751  
                 
Net income (loss) per share - basic
  $ 0.11     $ (0.21 )
Net income (loss) per share - diluted
  $ 0.11     $ (0.21 )


Employee equity share options, non-vested shares and similar share-based compensation awards granted by the Company are treated as potential shares in computing diluted net income or loss per share. Diluted shares outstanding include the dilutive effect of in-the-money share-based awards which is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount that the employee must pay for exercising share-based awards, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax impact that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.
 

During the three months ended June 30, 2010 and 2009, 12,991,196 and 11,504,963 share equivalents attributable to outstanding stock options and RSUs (restricted stock units) were excluded from the calculation of diluted net income (loss) per share because the combined exercise price, average unamortized fair value and assumed tax benefits upon exercise of these options and RSUs were greater than the average market price of the Company’s shares, and therefore their inclusion would have been anti-dilutive. For the three months ended June 30, 2009, potentially dilutive share equivalents were excluded from the computation of diluted net loss per share because their inclusion in calculating a net loss per share would have been anti-dilutive.

Note 4 — 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.

The following table presents the Company’s financial assets and liabilities that were accounted for at fair value, classified by the level within the fair value hierarchy (in thousands):


   
June 30, 2010
   
March 31, 2010
 
   
Level 1
   
Level 2
   
Level 3
   
Level 1
   
Level 2
   
Level 3
 
                                     
Cash and cash equivalents
  $ 317,315     $ -     $ -     $ 319,944     $ -     $ -  
Investment securities
    -       -       994       -       -       994  
Foreign exchange derivative assets
    346       -       -       599       -       -  
Total assets at fair value
  $ 317,661     $ -     $ 994     $ 320,543     $ -     $ 994  
                                                 
Foreign exchange derivative liabilities
  $ 1,742     $ -     $ -     $ 366     $ -     $ -  
Total liabilities at fair value
  $ 1,742     $ -     $ -     $ 366     $ -     $ -  

Cash and cash equivalents consist of bank demand deposits and time deposits. The time deposits have terms of less than 30 days. Cash and cash equivalents are carried at cost, which is equivalent to fair value.

The Company’s investment securities portfolio as of June 30, 2010 and March 31, 2010 consisted of auction rate securities collateralized by residential and commercial mortgages. The investment securities are classified as available-for-sale and are carried in non-current assets. The estimated fair value of the securities was determined by estimating future cash flows, either through discounted cash flow or option pricing methods, incorporating assumptions of default and other future conditions. Such valuation methods fall within Level 3 of the fair value hierarchy. The par value of our investment securities portfolio at June 30 and March 31, 2010 was $47.5 million.
 
 

 
10

 

Note 5 — Balance Sheet Components
 
The following provides a breakout of certain balance sheet components (in thousands):


   
June 30,
   
March 31,
 
   
2010
   
2010
 
Accounts receivable:
           
Accounts receivable
  $ 346,502     $ 349,722  
Allowance for doubtful accounts
    (5,695 )     (5,870 )
Allowance for returns
    (23,925 )     (23,657 )
Cooperative marketing arrangements
    (19,672 )     (17,527 )
Customer incentive programs
    (34,974 )     (44,306 )
Pricing programs
    (48,669 )     (63,115 )
    $ 213,567     $ 195,247  
Inventories:
               
Raw materials
  $ 40,378     $ 31,630  
Work-in-process
    32       86  
Finished goods
    239,390       187,877  
    $ 279,800     $ 219,593  
Other current assets:
               
Tax and VAT refund receivables
  $ 21,953     $ 20,305  
Deferred taxes
    26,497       27,064  
Prepaid expenses and other
    14,581       11,508  
    $ 63,031     $ 58,877  
Property, plant and equipment:
               
Plant and buildings
  $ 47,118     $ 58,629  
Equipment
    119,484       112,454  
Computer equipment
    54,648       53,576  
Computer software
    79,457       78,156  
      300,707       302,815  
Less: accumulated depreciation
    (222,164 )     (224,485 )
      78,543       78,330  
Construction-in-progress
    6,451       9,751  
Land
    2,698       3,148  
    $ 87,692     $ 91,229  
Other assets:
               
Deferred taxes
  $ 47,101     $ 45,257  
Cash surrender value of life insurance contracts
    11,537       11,097  
Deposits and other
    9,499       9,576  
    $ 68,137     $ 65,930  
Accrued liabilities:
               
Accrued personnel expenses
  $ 47,168     $ 48,617  
Accrued marketing expenses
    27,437       28,052  
Accrued freight and duty
    15,367       12,696  
Income taxes payable - current
    4,545       8,875  
Non-retirement post-employment benefit obligations
    2,859       2,761  
Accrued restructuring
    154       399  
Other accrued liabilities
    77,560       80,936  
    $ 175,090     $ 182,336  
Long-term liabilities:
               
Income taxes payable - non-current
  $ 107,580     $ 116,456  
Obligation for management deferred compensation
    11,134       10,307  
Defined benefit pension plan liability
    19,135       19,343  
Other long-term liabilities
    14,200       13,566  
    $ 152,049     $ 159,672  

 
11

 

The following table presents the changes in the allowance for doubtful accounts during the three months ended June 30, 2010 and 2009 (in thousands):


   
June 30,
 
   
2010
   
2009
 
             
Beginning balance
  $ 5,870     $ 6,705  
Bad debt expense
    422       (1,194 )
Write-offs net of recoveries
    (597 )     446  
Ending balance
  $ 5,695     $ 5,957  
 

Note 6 —Other Intangible Assets

The Company’s acquired other intangible assets subject to amortization were as follows (in thousands):

 
   
June 30, 2010
   
March 31, 2010
 
   
Gross Carrying
   
Accumulated
   
Net Carrying
   
Gross Carrying
   
Accumulated
   
Net Carrying
 
   
Amount
   
Amortization
   
Amount
   
Amount
   
Amortization
   
Amount
 
                                     
Trademark/tradename
  $ 32,052     $ (21,137 )   $ 10,915     $ 32,051     $ (20,421 )   $ 11,630  
Technology
    87,968       (39,994 )     47,974       87,968       (36,033 )     51,935  
Customer contracts
    38,517       (8,920 )     29,597       38,517       (6,686 )     31,831  
    $ 158,537     $ (70,051 )   $ 88,486     $ 158,536     $ (63,140 )   $ 95,396  

During the three months ended June 30, 2010, changes in the gross carrying value of other intangible assets related to foreign currency translation adjustments.

For the three months ended June 30, 2010 and 2009, amortization expense for other intangible assets was $6.9 million and $2.3 million. The Company expects that amortization expense for the nine-month period ending March 31, 2011 will be $20.2 million, and annual amortization expense for fiscal years 2012, 2013, 2014 and 2015 will be $24.7 million, $21.6 million, $15.5 million and $6.1 million, and $0.4 million thereafter.

Note 7 — Financing Arrangements
 
The Company had several uncommitted, unsecured bank lines of credit aggregating $152.3 million at June 30, 2010. There are no financial covenants under these lines of credit with which the Company must comply. At June 30, 2010, the Company had no outstanding borrowings under these lines of credit.

Note 8 — Shareholders’ Equity

Share Repurchases

During the three months ended June 30, 2010 and 2009, the Company had the following approved share buyback program in place (in thousands):

Date of Announcement
 
Approved Buyback Amount
 
Expiration Date
Completion Date
 
Amount Remaining
 
June 2007
  $ 250,000  
September  2010
March 2010
  $ -  

 
During the three months ended June 30, 2010 and 2009, the Company did not repurchase any shares.

In September 2008, the Company’s Board of Directors approved a share buyback program which authorizes the Company to invest up to $250 million to purchase its own shares. No shares have been repurchased under this program.

 
12

 
Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss were as follows (in thousands):
 
   
June 30,
   
March 31,
 
   
2010
   
2010
 
             
Cumulative translation adjustment
  $ (67,999 )   $ (63,646 )
Pension liability adjustments, net of tax of $936 and $936
    (10,583 )     (10,813 )
Unrealized gain on investments
    424       424  
Net deferred hedging gains
    409       1,394  
    $ (77,749 )   $ (72,641 )

Note 9 — Restructuring

In January 2009, Logitech initiated a restructuring plan in order to reduce operating expenses and improve financial results in response to deteriorating global economic conditions. We completed the restructuring plan in fiscal year 2010. The following table summarizes restructuring related activities during the three months ended June 30, 2010 and 2009 (in thousands):


   
Total
   
Termination Benefits
   
Contract Termination Costs
   
Other
 
                         
Balance at March 31, 2009
  $ 3,794     $ 3,779     $ 15     $ -  
Charges
    1,449       1,366       83       -  
Cash payments
    (4,245 )     (4,220 )     (25 )     -  
Other
    (8 )     (4 )     (4 )     -  
Foreign exchange
    91       91       -       -  
Balance at June 30, 2009
  $ 1,081     $ 1,012     $ 69     $ -  
                                 
Balance at March 31, 2010
  $ 399     $ 158     $ 334     $ (93 )
Charges
    -       -       -       -  
Cash payments
    (168 )     -       (168 )     -  
Other
    (74 )     (149 )     -       75  
Foreign exchange
    (3 )     -       -       (3 )
Balance at June 30, 2010
  $ 154     $ 9     $ 166     $ (21 )


Termination benefits incurred pursuant to the 2009 Restructuring Plan are calculated based on regional benefit practices and local statutory requirements. Contract termination costs relate to exit costs associated with the closure of existing facilities.


 
13

 

Note 10 — Employee Benefit Plans

Employee Share Purchase Plans and Stock Incentive Plans

As of June 30, 2010, the Company offers the 2006 ESPP (2006 Employee Share Purchase Plan (Non-U.S.)), the 1996 ESPP (1996 Employee Share Purchase Plan (U.S.)) and the 2006 Stock Incentive Plan. Shares issued to employees as a result of purchases or exercises under these plans are generally issued from shares held in treasury.

The following table summarizes the share-based compensation expense and related tax benefit included in the Company’s consolidated statements of operations for the three months ended June 30, 2010 and 2009 (in thousands).


   
Three months ended
 
   
June 30,
 
   
2010
   
2009
 
       
Cost of goods sold
  $ 991     $ 798  
Share-based compensation expense included in gross profit
    991       798  
Operating expenses:
               
   Marketing and selling
    3,077       1,759  
   Research and development
    1,776       842  
   General and administrative
    2,618       2,010  
Share-based compensation expense included in
               
   operating expenses
    7,471       4,611  
Total share-based compensation expense
    8,462       5,409  
Income tax benefit
    (1,895 )     (384 )
Share-based compensation expense, net of income tax
  $ 6,567     $ 5,025  


As of June 30, 2010 and 2009, $0.8  million and $0.5 million of share-based compensation cost was capitalized to inventory. As of June 30, 2010, total compensation cost related to non-vested stock options not yet recognized was $46.3 million, which is expected to be recognized over the next 32 months on a weighted-average basis.

The fair value of employee stock options granted and shares purchased under the Company’s employee purchase plans was estimated using the Black-Scholes-Merton option-pricing valuation model applying the following assumptions and values:


   
Three Months Ended June 30,
   
2010
 
2009
 
2010
 
2009
   
Purchase Plans
 
Stock Option Plans
                 
Dividend yield
 
0%
 
0%
 
0%
 
0%
Expected life
 
6 months
 
6 months
 
 4.0 years
 
3.9 years
Expected volatility
 
34%
 
78%
 
48%
 
46%
Risk-free interest rate
 
0.15%
 
0.31%
 
1.80%
 
1.60%


The dividend yield assumption is based on the Company’s history and future expectations of dividend payouts. The Company has not paid dividends since 1996.

The expected option life represents the weighted-average period the stock options or purchase offerings are expected to remain outstanding. The expected life is based on historical settlement rates, which the Company believes are most representative of future exercise and post-vesting termination behaviors.

 
14

 
Expected share price volatility is based on historical volatility using daily prices over the term of past options or purchase offerings.  The Company considers historical share price volatility as most representative of future volatility. The risk-free interest rate assumptions are based upon the implied yield of U.S. Treasury zero-coupon issues appropriate for the term of the Company’s stock options or purchase offerings.

The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records share-based compensation expense only for those awards that are expected to vest.

The following table represents the weighted average grant-date fair values of options granted and the expected forfeiture rates:


   
Three Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
Purchase Plans
   
Stock Option Plans
 
                         
Weighted average grant-date
                       
  fair value of options granted
  $ 4.18     $ 3.48     $ 5.82     $ 3.94  
Expected forfeitures
    0 %     0 %     9 %     10 %


A summary of activity under the share-based compensation plans is as follows (in thousands, except per share data; exercise prices are weighted averages):


   
Three Months ended June 30,
 
   
2010
   
2009
 
   
Number
   
Exercise Price
   
Number
   
Exercise Price
 
                         
Outstanding, beginning of period
    20,551     $ 17       18,897     $ 18  
Granted
    186     $ 15       189     $ 11  
Exercised
    (611 )   $ 9       (669 )   $ 7  
Cancelled or expired
    (457 )   $ 21       (666 )   $ 24  
Outstanding, end of period
    19,669     $ 17       17,751     $ 18  
                                 
Exercisable, end of period
    11,505     $ 17       10,524     $ 15  

The total pretax intrinsic value of options exercised during the three months ended June 30, 2010 and 2009 was $3.4 million and $4.8 million and the tax benefit realized for the tax deduction from options exercised during those periods was $1.0 million and $0.6 million. The total fair value of options vested as of June 30, 2010 and 2009 was $74.3 million and $56.5 million.

During fiscal year 2010, the Company granted 266,560 time-based RSUs to employees and board members pursuant to the 2006 Stock Incentive Plan. These RSUs had a weighted average grant date fair value of $14.83 per unit. The time-based RSUs granted to employees vest in four equal annual installments on the grant date anniversary. The time-based RSUs granted to non-executive board members vest in one annual installment on the grant date anniversary. The Company estimates the fair value of these RSUs based on the share market price on the date of grant. Compensation expense related to time-based RSUs is recognized over the vesting period and is included in the total share-based compensation expense disclosed above. As of June 30, 2010, total compensation cost related to time-based RSUs not yet recognized was $1.9 million, which is expected to be recognized over the next 36 months.

 
15

 
During fiscal years 2010 and 2009, the Company granted 115,000 and 93,750 RSUs to certain senior executives pursuant to the 2006 Stock Incentive Plan. These RSUs had a grant date fair value of $18.18 and $27.90 per unit. The RSUs vest at the end of two years from the grant date upon meeting certain share price performance criteria measured against market conditions. Compensation expense related to these RSUs will be recognized over the two year vesting period and is included in the total share-based compensation expense disclosed above. As of June 30, 2010, total compensation cost not yet recognized related to these RSUs was $1.3 million, which is expected to be recognized over the next 12 months.

The fair value of these RSUs granted was estimated using the Monte-Carlo simulation method applying the following assumptions:


   
FY 2010 Grants
 
FY 2009 Grants
         
Dividend yield
 
0%
 
0%
Expected life
 
2 years
 
2 years
Expected volatility
 
58%
 
41%
Risk-free interest rate
 
1.11%
 
1.82%


The dividend yield assumption is based on the Company’s history and future expectations of dividend payouts. The expected life of these RSUs is the service period at the end of which the RSUs will vest if the performance conditions are satisfied. The volatility assumption is based on the actual volatility of Logitech’s daily closing share price over a look-back period of two years. The risk free interest rate is derived from the yield on U.S. Treasury Bonds for a two year term.

Defined Contribution Plans
 
Certain of the Company’s subsidiaries have defined contribution employee benefit plans covering all or a portion of their employees. Contributions to these plans are discretionary for certain plans and are based on specified or statutory requirements for others. The charges to expense for these plans for the three months ended June 30, 2010 and 2009 were $2.1 million and $1.7 million.
 
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.

 
16

 
The net periodic benefit cost for defined benefit pension plans and non-retirement post-employment benefit obligations for the three months ended June 30, 2010 and 2009 was as follows (in thousands):


   
Three months ended June 30,
 
   
2010
   
2009
 
             
Service cost
  $ 1,019     $ 953  
Interest cost
    402       334  
Expected return on plan assets
    (415 )     (266 )
Amortization of net transition obligation
    1       1  
Amortization of net prior service cost
    36       34  
Recognized net actuarial loss
    87       225  
Net periodic benefit cost
  $ 1,130     $ 1,281  


Note 11 — 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 income taxes are generated outside of Switzerland.

The income tax benefit for the three months ended June 30, 2010 was $5.4 million based on an effective income tax rate of 38.3% of pre-tax income. For the three months ended June 30, 2009, the income tax provision was $3.7 million based on an effective income tax rate of 10.8% of pre-tax loss. The change in the effective income tax rate for the three months ended June 30, 2010 compared with the same period in fiscal year 2010 is primarily due to a discrete tax benefit of $7.2 million from the closure of income tax audits in certain foreign jurisdictions.

For the three months ended June 30, 2010, Logitech’s effective income tax rate was calculated using an estimate of its annual pre-tax income. For the three months ended June 30, 2009, management determined that a reliable estimate of its annual pre-tax income and related annual effective income tax rate could not be made, due to the impact of the economic downturn. Therefore, Logitech used the actual year-to-date effective income tax rate for the three months ended June 30, 2009.

As of June 30, 2010 and March 31, 2010, the total amount of unrecognized tax benefits and related accrued interest and penalties due to uncertain tax positions was $114.0 million and $125.2 million, of which $95.6 million and $101.4 million would affect the effective income tax rate if recognized. The decline in the income tax liability associated with uncertain tax benefits of $11.2 million is due to the expiration of statutes of limitations and the closure of income tax audits in certain foreign jurisdictions.

The Company continues to recognize interest and penalties related to unrecognized tax positions in income tax expense. As of June 30, 2010 and March 31, 2010, the Company had approximately $9.4 million and $12.5 million of accrued interest and penalties related to uncertain tax positions.

The Company files Swiss and foreign tax returns. For all these tax returns, the Company is generally not subject to tax examinations for years prior to 1999. In fiscal year 2009, the Internal Revenue Service initiated an examination of the Company’s U.S. subsidiary for fiscal year 2006. During the third quarter of fiscal year 2010, the Internal Revenue Service expanded its examination to include fiscal year 2007. At this time it is not possible to estimate the potential impact that the examination may have on income tax expense. The Company is also under examination in other tax jurisdictions. Although the timing of the resolution or closure on audits is highly uncertain, the Company does not believe it is reasonably possible that the unrecognized tax benefits would materially change in the next twelve months.

 
17

 
Note 12 — Derivative Financial Instruments – Foreign Exchange Hedging
 
Cash Flow Hedges

The Company enters into foreign exchange forward contracts to hedge against exposure to changes in foreign currency exchange rates related to its subsidiaries’ forecasted inventory purchases. The primary risk managed by using derivative instruments is the foreign currency exchange rate risk. The Company has designated these derivatives as cash flow hedges. Logitech does not use derivative financial instruments for trading or speculative purposes. These hedging contracts generally mature within six months, and are denominated in the same currency as the underlying transactions. 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. The Company assesses the effectiveness of the hedges by comparing changes in the spot rate of the currency underlying the forward contract with changes in the spot rate of the currency in which the forecasted transaction will be consummated. If the underlying transaction being hedged fails to occur or if a portion of the hedge does not generate offsetting changes in the foreign currency exposure of forecasted inventory purchases, the Company immediately recognizes the gain or loss on the associated financial instrument in other income (expense). Such losses were immaterial during the three months ended June 30, 2010 and 2009. The notional amounts of foreign exchange forward contracts outstanding related to forecasted inventory purchases at June 30, 2010 and 2009 were $72.7 million (€57.9 million) and $54.7 million (€41.1 million). The notional amount represents the future cash flows under contracts to purchase foreign currencies.

Other Derivatives

The Company also enters into foreign exchange forward contracts to reduce the short-term effects of foreign currency fluctuations on certain foreign currency receivables or payables. These forward contracts generally mature within one to three months. The Company may also enter into foreign exchange swap contracts to economically extend the terms of its foreign exchange forward contracts. The primary risk managed by using forward and swap contracts is the foreign currency exchange rate risk. The gains or losses on foreign exchange forward contracts are recognized in earnings based on the changes in fair value.

The notional amounts of foreign exchange forward contracts outstanding at June 30, 2010 and 2009 relating to foreign currency receivables or payables were $7.3 million and $10.7 million. Open forward contracts as of June 30, 2010 consisted of contracts in British pounds to purchase euros at a future date at a pre-determined exchange rate. The notional amounts of foreign exchange swap contracts outstanding at June 30, 2010 and 2009 were $37.7 million and $28.8 million. Swap contracts outstanding at June 30, 2010 consisted of contracts in Japanese yen, Canadian dollars, British pounds, and Mexican pesos.

The fair value of all our foreign exchange forward contracts and foreign exchange swap contracts is determined based on quoted foreign exchange forward rates. Quoted foreign exchange forward rates are observable inputs that are classified as Level 1 within the fair value hierarchy.

 
18

 
The following table presents the fair values of the Company’s derivative instruments and their locations on the Balance Sheet as of June 30 and March 31, 2010 (in thousands):


 
Asset Derivatives
 
Liability Derivatives
 
     
Fair Value
     
Fair Value
 
 
Location
    June 30, 2010       March 31, 2010  
Location
    June 30, 2010       March 31, 2010  
                                     
Derivatives designated as hedging
                                   
instruments:
                                   
Cash Flow Hedges
 Other assets
  $ 46     $ 136  
 Other liabilities
  $ 1,063     $ 10  
        46       136         1,063       10  
                                     
Derivatives not designated as hedging
                                   
instruments:
                                   
Foreign Exchange Forward Contracts
 Other assets
    -       11  
 Other liabilities
    37       -  
Foreign Exchange Swap Contracts
 Other assets
    300       452  
 Other liabilities
    642       356  
        300       463         679       356  
      $ 346     $ 599       $ 1,742     $ 366  

 The following table presents the amounts of gains and losses on the Company’s derivative instruments for the three months ended June 30, 2010 and their locations on its Financial Statements (in thousands):


   
Net amount of gain (loss) deferred as a component of accumulated other comprehensive loss
 
Location of gain (loss) reclassified from accumulated other comprehensive loss into income
 
Amount of gain (loss) reclassified from accumulated other comprehensive loss into income
 
Location of gain (loss) recognized in income immediately
 
Amount of gain (loss) recognized in income immediately
 
                       
Derivatives designated as hedging
                     
instruments:
                     
Cash Flow Hedges
  $ (986 )
Cost of goods sold
  $ (1,375 )
Other income/expense
  $ 46  
      (986 )       (1,375 )       46  
                             
Derivatives not designated as hedging
                           
instruments:
                           
Foreign Exchange Forward Contracts
    -         -  
Other income/expense
    (507 )
Foreign Exchange Swap Contracts
    -         -  
Other income/expense
    (918 )
      -         -         (1,425 )
    $ (986 )     $ (1,375 )     $ (1,379 )


 
19

 
The following table presents the amounts of gains and losses on the Company’s derivative instruments for the three months ended June 30, 2009 and their locations on its Financial Statements (in thousands):


   
Net amount of gain (loss) deferred as a component of accumulated other comprehensive loss
 
Location of gain (loss) reclassified from accumulated other comprehensive loss into income
 
Amount of gain (loss) reclassified from accumulated other comprehensive loss into income
 
Location of gain (loss) recognized in income immediately
 
Amount of gain (loss) recognized in income immediately
 
                       
Derivatives designated as hedging
                     
instruments:
                     
Cash Flow Hedges
  $ (5,528 )
Cost of goods sold
  $ 1,430  
Other income/expense
  $ (31 )
      (5,528 )       1,430         (31 )
                             
Derivatives not designated as hedging
                           
instruments:
                           
Foreign Exchange Forward Contracts
    -         -  
Other income/expense
    (246 )
Foreign Exchange Swap Contracts
    -         -  
Other income/expense
    69  
      -         -         (177 )
    $ (5,528 )     $ 1,430       $ (208 )


Note 13 — Commitments and Contingencies
 
The Company leases facilities under operating leases, certain of which require it to pay property taxes, insurance and maintenance costs. Operating leases for facilities are generally renewable at the Company’s option and usually include escalation clauses linked to inflation. Total future minimum annual rentals under non-cancelable operating leases at June 30, 2010 amounted to $68.7 million. The increase in future minimum annual rentals as of June 30, 2010 compared with March 31, 2010 was due to a new research and development office in Lausanne, Switzerland, new facilities for our LifeSize division in Austin, Texas and a new office for our audio business unit in Vancouver, Washington.

In connection with its operating leases for facilities, the Company has recognized asset retirement obligations of $1.3 million and $1.4 million at June 30 and March 31, 2010, representing the estimated remediation costs to be incurred at lease expiration.  No significant changes occurred in these obligations in the three months ended June 30, 2010.

At June 30, 2010, fixed purchase commitments for capital expenditures amounted to $17.3 million, and primarily related to commitments for manufacturing equipment, tooling, and telecommunications equipment. Also, the Company has commitments for inventory purchases made in the normal course of business to original design manufacturers, contract manufacturers and other suppliers. At June 30, 2010, fixed purchase commitments for inventory amounted to $201.6 million, which are expected to be fulfilled by December 31, 2010. The Company also had other commitments totaling $34.6 million for consulting services, marketing arrangements, advertising and other services. Although open purchase orders are considered enforceable and legally binding, the terms generally allow the Company the option to reschedule and adjust its requirements based on the business needs prior to delivery of goods or performance of services.
 
The Company has guaranteed the purchase obligations of some of its contract manufacturers and original design manufacturers to certain component suppliers. These guarantees generally have a term of one year and are automatically extended for one or more years as long as a liability exists. The amount of the purchase obligations of these manufacturers varies over time, and therefore the amounts subject to Logitech’s guarantees similarly vary. At June 30, 2010, there were no outstanding guaranteed purchase obligations. The maximum potential future payments under three of the five guarantee arrangements is limited to $30.8 million. The remaining two guarantees are limited to purchases of specified components from the named suppliers. The Company does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these guarantee arrangements.

 
20

 
Logitech International S.A., the parent holding company, has guaranteed certain contingent liabilities of various subsidiaries related to specific transactions occurring in the normal course of business. The maximum amount of the guarantees was $8.0 million as of June 30, 2010. As of June 30, 2010, $7.6 million was outstanding under these guarantees. The parent holding company has also guaranteed the purchases of one of its subsidiaries under two guarantee agreements. These guarantees do not specify a maximum amount. As of June 30, 2010, $9.7 million was outstanding under these guarantees.
 
Logitech indemnifies some of its suppliers and customers for losses arising from matters such as intellectual property rights 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. No amounts have been accrued for indemnification provisions at June 30, 2010. The Company does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under its indemnification arrangements.

In November 2007, the Company acquired WiLife, Inc., a privately held company offering PC-based video cameras for self-monitoring a home or a small business. The purchase agreement provides for a possible performance-based payment, payable in the first calendar quarter of 2011. The performance-based payment is based on net revenues attributed to WiLife during calendar 2010. No payment is due if the applicable net revenues total $40 million or less. The maximum performance-based payment is $64.0 million.  The total performance-based payment amount, if any, will be recorded in goodwill and will not be known until the end of calendar year 2010. As of June 30, 2010, no amounts were accrued towards performance-based payments under the WiLife acquisition agreement.

The Company is involved in a number of lawsuits and claims relating to matters that arise in the normal course of business. The Company believes these lawsuits and claims are without merit and intends to vigorously defend against them. However, there can be no assurances that its defenses will be successful, or that any judgment or settlement in any of these lawsuits would not have a material adverse impact on the Company's business, financial condition, cash flows and results of operations. The Company’s accruals for lawsuits and claims as of June 30, 2010 were not material.
 
Note 14 — Segment Information
 
The Company has two operating segments, peripherals and video conferencing, based on product markets and internal organizational structure. The peripherals segment encompasses the design, manufacturing and marketing of peripheral products for the PC and other digital platforms. The video conferencing segment consists of the LifeSize division, and encompasses the design, manufacturing and marketing of HD video and audio communication products for the enterprise and small-to-medium business markets. The video conferencing operating segment does not meet the quantitative thresholds required for separate disclosure of financial information.

Net sales by product family, excluding intercompany transactions, were as follows (in thousands):


   
Three months ended June 30,
 
   
2010
   
2009
 
             
Retail - Pointing Devices
  $ 131,846     $ 90,236  
Retail - Keyboards & Desktops
    76,166       58,009  
Retail - Audio
    95,646       72,120  
Retail - Video
    47,057       42,814  
Retail - Gaming
    14,566       17,149  
Retail - Remotes
    28,586       3,438  
OEM
    58,335       42,344  
Peripherals
    452,202       326,110  
LifeSize
    27,128       -  
Total net sales
  $ 479,330     $ 326,110  


Geographic net sales information in the table below is based on the location of the selling entity. Long-lived assets, primarily fixed assets, are reported below based on the location of the asset.

 
21

 
 Net sales to unaffiliated customers by geographic region were as follows (in thousands):


   
Three months ended
 
   
June 30,
 
   
2010
   
2009
 
             
EMEA
  $ 154,629     $ 125,152  
Americas
    221,966       120,415  
Asia Pacific
    102,735       80,543  
   Total net sales
  $ 479,330     $ 326,110  


No single country other than the United States represented more than 10% of the Company’s total consolidated net sales for the three months ended June 30, 2010 and 2009. One customer represented 13% and 10% of net sales in the three months ended June 30, 2010 and 2009.

Long-lived assets by geographic region were as follows (in thousands):


   
June 30, 2010
   
March 31, 2010
 
       
EMEA
  $ 8,934     $ 11,053  
Americas
    38,285       40,165  
Asia Pacific
    44,407       43,765  
   Total long-lived assets
  $ 91,626     $ 94,983  

 
Long-lived assets in China and the United States each represented more than 10% of the Company’s total consolidated long-lived assets at June 30, 2010 and March 31, 2010.

Note 15 — Subsequent Event
 
On July 6, 2010, Logitech acquired, in a business combination, substantially all of the assets and employees of Paradial AS, a Norwegian company, for $7.3 million in cash. Paradial provides firewall and NAT (network address translation) traversal solutions for video communication. The acquisition will allow the Company to closely integrate firewall and NAT traversal across its video communication product portfolio, enabling end-to-end HD video calling over highly protected networks.
.

 
22

 

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 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 the strength of improvement in our business, operating results and financial condition, trends in consumer demand for our products, plans, strategies and objectives of management for future operations, our current or future revenue mix, our competitive position, the impact of new product introductions and product innovation on future performance, or our anticipated costs and expenses. Forward-looking statements also include, among others, those statements including the words “expects,” “anticipates,” “intends,” “believes” and similar language. These forward-looking statements involve risks and uncertainties that could cause our results to differ materially from those 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 should carefully review the risks described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q or Current Reports on Form 8-K that we file in fiscal year 2011 and our fiscal year 2010 Form 10-K, which was filed on May 27, 2010, which discuss our business in greater detail. 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 products that connect people to digital experiences. Spanning multiple computing, communication and entertainment platforms, we develop and market innovative hardware and software products that enable or enhance digital navigation, music and video entertainment, gaming, social networking, audio and video communication over the Internet, video security and home-entertainment control. We have two operating segments, peripherals and video conferencing.

Our peripherals segment encompasses the design, manufacturing and marketing of peripheral products for the PC (personal computer) and other digital platforms. Our research and product management teams are organized along product lines, and are responsible for product strategy, industrial design and development, and technological innovation. Our global marketing and sales organization helps define product opportunities and bring our products to market, and is responsible for building the Logitech brand and consumer awareness of our products. This organization is comprised of retail and OEM (original equipment manufacturer) sales and marketing groups. Our retail sales and marketing activities are organized into three geographic regions: Americas (including North and South America), EMEA (Europe-Middle East-Africa), and Asia Pacific (including, among other countries, China, Japan and Australia). Our OEM sales team is a worldwide organization with representatives in each of our three regions. Our OEM customers include the majority of the world’s largest PC manufacturers.

Our video conferencing segment encompasses the design, manufacturing and marketing of LifeSize video conferencing products and services for the enterprise and small-to-medium business markets. The LifeSize segment maintains separate marketing and sales organizations. The LifeSize product development and product management organizations are separate, but coordinated with our peripherals business, particularly our webcam and video communications groups. The LifeSize operating segment does not meet the quantitative threshold for separate disclosure of financial information required by generally accepted accounting principles in the United States.

 
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For the PC, our products include mice, trackballs, keyboards, interactive gaming controllers, multimedia speakers, headsets, webcams, 3D control devices and lapdesks. Our Internet communications products include webcams, headsets, video communications services, and digital video security systems for a home or small business. Our LifeSize division offers scalable HD (high-definition) video communication products, support and services. Our digital music products include speakers, earphones, and custom in-ear monitors. For home entertainment systems, we offer the Harmony line of advanced remote controls and the Squeezebox wireless music solutions for the home. For gaming consoles, we offer a range of gaming controllers and microphones, as well as other accessories.

We sell our peripheral products to a network of retail distributors and resellers and to OEMs. Our worldwide retail network for our peripherals includes wholesale distributors, consumer electronics retailers, mass merchandisers, specialty electronics stores, computer and telecommunications stores, value-added resellers and online merchants. Our sales to our retail channels for our peripherals were 82% and 87% of our net sales for the three months ended June 30, 2010 and 2009. The large majority of our revenues have historically been derived from sales of our peripheral products for use by consumers.

We sell our LifeSize products and services to distributors, value-added resellers, OEMs and direct enterprise customers. The large majority of LifeSize revenues have historically been derived from sales to large enterprises, small-to-medium businesses, and public healthcare, education and government organizations.

Our markets are extremely competitive. The peripherals market is characterized by short product life cycles, frequent new product introductions, rapidly changing technology, evolving customer demands, and aggressive promotional and pricing practices. We believe the global economic downturn has further increased competition in our markets, as competitors with larger financial resources, such as Microsoft Corporation, Sony Corporation and others, seek to gain market share by discounting prices or offering more favorable terms to customers, and competitors with smaller financial resources also discount prices or engage in other promotional practices in order to maintain their market share.

The video conferencing market is characterized by continual performance enhancements and increasing consolidation. There is heightened interest in the video conferencing market by large, well-financed competitors, such as Cisco Systems, Inc. and Hewlett-Packard Company, and as a result, we expect competition in the market to further intensify.

We believe continued investment in product research and development is critical to creating the innovation required to strengthen our competitive advantage and to drive future sales growth. We are committed to identifying and meeting current and future customer trends with new and improved product technologies, as well as leveraging the value of the Logitech and LifeSize brands from a competitive, channel partner and consumer experience perspective. We believe innovation and product quality are important to gaining market acceptance and maintaining market leadership.

The broadening of our product lines has been primarily organic. However we also seek to acquire, when appropriate, companies that have products, personnel, and technologies that complement our strategic direction. As access to digital information expands beyond the PC platform, we are also extending our vision to other platforms, such as the living room, meeting room and other platforms as access points to the Internet and the digital world. In addition, as part of our corporate strategy, we plan to increase investments in and realign resources to focus on certain market adjacencies, geographic markets or new categories, including video communications and the China market. We also plan to increase our investment in applications and peripherals for open platforms, such as the planned Google TV platform, which do not require direct collaboration and agreement with the platform owner.

We continually evaluate our product offerings and our strategic direction in light of current global economic conditions, changing consumer trends, and the evolving nature of the interface between the consumer and the digital world.

 
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Summary of Financial Results

Our total net sales for the three months ended June 30, 2010 increased 47% to $479.3 million compared with total net sales of $326.1 million in the same period of the prior fiscal year. We believe the increase is primarily due to more stable economic conditions resulting in improved consumer demand, as well as the sales of our LifeSize products, which were not included in net sales for the three months ended June 30, 2009. Retail sales and units increased 39%, while OEM sales and units increased 38% and 35%. Retail sales in our Americas, EMEA and Asia Pacific regions increased 65%, 21% and 24% in the three months ended June 30, 2010 compared with the three months ended June 30, 2009.

We achieved double-digit growth in retail sales of all product lines except gaming during the three months ended June 30, 2010 compared with the same period in the prior fiscal year. The remotes product line was our fastest growing category, with growth in sales of both our high-end as well as our value-priced products. The increase in sales in the remotes category in the quarter was attributable to increased consumer demand as well as depressed sales from the economic downturn in the comparative three months ended June 30, 2009. Pointing devices was our second fastest growing category, driven primarily by sales of cordless mice. Our gross margin for the three months ended June 30, 2010 increased to 35.3% compared with 23.9% in the same period of the prior fiscal year, primarily due to favorable product mix shifts, continued efficiencies in our supply chain, and the higher gross margin contributed by LifeSize product sales. Net income for the three months ended June 30, 2010 was $19.5 million, compared with net loss of $37.4 million in the three months ended June 30, 2009.

Trends in Our Business

We have a large and varied portfolio of product lines for peripherals, grouped in several product families. In addition to changes resulting from general economic trends, we believe that normal increases or decreases in the retail sales level of a product family reflect the innovation we have designed into the product, customer acceptance of the product line, the popularity of the digital platforms the product line relates to, competitive activity in the product family, and the prices at which products are available. Historically, sales of individual product lines rise and fall over time, causing our overall product mix to shift both between and within product lines, and we expect these types of trends to continue.

In our peripherals segment, we have historically targeted peripherals for the PC platform, a market that is dynamically changing as a result of the declining popularity of desktop PCs and the increasing popularity of notebook PCs and mobile devices, such as netbooks, smartphones, tablets and smaller form factor devices with computing or web surfing capabilities. In our retail channels, notebook PCs and mobile devices are sold by retailers without peripherals. We believe this creates opportunities to sell products to consumers to help make their devices more productive and comfortable. However, consumer acceptance and demand for peripherals for use with smaller form factor computing devices such as notebook PCs and mobile devices is still uncertain. Notebook PCs are also often equipped with embedded webcams, which could reduce the demand for Logitech webcams that are sold separately. The increasing popularity of notebook PCs and mobile devices may result in decreased demand by consumers for peripherals, which could negatively affect our business. The increasing popularity of mobile devices has coincided with a steadily decreasing average sales price for computing devices, including for desktop and notebook PCs. As a result, there is a risk that the demand for those of our products that have a relatively high average sales price in relation to the price of a desktop or notebook PC will decline. We believe our future sales growth will be significantly affected by our ability to develop sales and innovations in our current products for notebook PCs and other mobile devices, as well as for emerging product categories which are not PC-dependent.

In our OEM channel in the past several quarters, the shift away from desktop PCs adversely affected our sales of OEM mice, which are sold with name-brand desktop PCs. However in the three months ended June 30, 2010, we achieved double-digit growth in sales of our OEM mice compared with the same period in the prior fiscal year, with sales increasing 22% and units increasing 27%. Our OEM mice sales have historically made up the bulk of our OEM sales. Our OEM sales accounted for 12% and 13% of total revenues during the three months ended June 30, 2010 and 2009.

 
25

 
Most of our revenue comes from sales to our retail channels, which resell to consumers and other retailers. As a result, our customers’ demand for our products depends in substantial part on trends in consumer confidence and consumer spending, as well as the levels of inventory which our customers choose to maintain. We use multiple metrics to evaluate consumer demand for our products. One of those metrics is the analysis of sell-through data, which represents sales of our products by our retailer customers to consumers and by our distributor customers to retailers. 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 entirely 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.

The acquisition of LifeSize in December 2009 expands our video communication product portfolio beyond webcams and video calling into the enterprise meeting room. We believe our video conferencing segment offers significant growth opportunities for our business. However, the segment represents 6% of our net sales for the three months ended June 30, 2010, and will require continuing investments in product development and sales and marketing to stimulate and support future growth.

We continue to evaluate potential acquisitions to enhance the breadth and depth of our expertise in engineering and other functional areas, our technologies and our product offerings. We also intend to continue to invest in video communications, in products for the digital home, and in growing our sales in China by increasing hiring in related engineering and sales and marketing functions.

In May 2010, we announced our collaboration with Google, Inc., along with other partners, to support the new Google TV platform. We plan to introduce Logitech Revue, a companion box that will incorporate Logitech’s Harmony remote control technology, and will include a controller that combines keyboard and remote control capabilities. We also plan to introduce an HDTV camera and video chat for Google TV. We believe that the Google TV platform has the potential to provide us with another sizable and growing installed base to generate incremental sales over an extended period of time, and we are investing significantly in the development and marketing of our products for the platform to enable future growth.

Although our financial results are reported in U.S. dollars, approximately 39% of our sales are made in currencies other than the U.S. dollar, such as the euro, British pound, Japanese yen, Chinese renminbi and Canadian dollar. Our product costs are primarily in U.S. dollars and Chinese renminbi. Our operating expenses are incurred in U.S. dollars, euros, Chinese renminbi, Swiss francs, Taiwanese dollars, and, to a lesser extent, 25 other currencies. To the extent that the U.S. dollar significantly increases or decreases in value relative to the currencies in which  our sales and operating expenses are denominated, the reported dollar amounts of our sales and expenses may decrease or increase.

Our gross margins vary with the mix of products sold, competitive activity, product life cycle, new product introductions, unit volumes, commodity and supply chain costs, foreign currency exchange rate fluctuations, geographic sales mix, and the complexity and functionality of new product introductions. Changes in consumer demand affect the need for us to undertake promotional efforts, such as cooperative marketing arrangements, customer incentive programs or other pricing programs, which alter our product gross margins.

Logitech is incorporated in Switzerland but operates in various countries with differing tax laws and rates. A portion of our income before taxes and the provision for income taxes are generated outside of Switzerland. Therefore, our effective income tax rate depends on the amount of profits generated in each of the various tax jurisdictions in which we operate. For the three months ended June 30, 2010, the income tax benefit was $5.4 million based on an effective income tax rate of 38.3% of pre-tax income. For the three months ended June 30, 2009, the income tax provision was $3.7 million based on an effective income tax rate of 10.8% of pre-tax loss. The change in effective income tax rate for the three months ended June 30, 2010 compared with the same period in fiscal year 2010 was primarily due to a discrete tax benefit of $7.2 million from the closure of income tax audits in certain foreign jurisdictions. In future, we expect effective income tax rates to fluctuate based on the mix of income and losses in the various tax jurisdictions in which the Company operates.

 
26

 
Critical Accounting Estimates
 
The preparation of financial statements and related disclosures in conformity with U.S. GAAP (generally accepted accounting principles in the United States of America) requires the Company to make judgments, estimates and assumptions that affect reported amounts of assets, liabilities, net sales and expenses, and the disclosure of contingent assets and liabilities.
 
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 Logitech’s 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 the Company 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.

There have been no significant changes during the three months ended June 30, 2010 to the nature of the critical accounting estimates disclosed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010.
 
  Recent Accounting Pronouncements

 In October 2009, the FASB (Financial Accounting Standards Board) published ASU (Accounting Standards Update) 2009-13, Multiple Deliverable Revenue Arrangements, which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. This guidance amends the criteria in ASC (Accounting Standards Codification) Subtopic 605-25, Revenue Recognition--Multiple-Element Arrangements, to establish a selling price hierarchy for determining the selling price of a deliverable, based on vendor specific objective evidence, acceptable third party evidence, or estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, the disclosures required for multiple-deliverable revenue arrangements are expanded. ASU 2009-13 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We will adopt ASU 2009-13 on April 1, 2011 and are currently evaluating its potential impact on the Company’s consolidated financial statements and disclosures.

In October 2009, the FASB published ASU 2009-14, Certain Revenue Arrangements That Include Software Elements, to provide guidance for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and non-software components that function together to deliver the product’s essential functionality are excluded from the software revenue guidance in ASC Subtopic 985-605, Software-Revenue Recognition. In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance. ASU 2009-14 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We will adopt ASU 2009-14 on April 1, 2011 and are currently evaluating its potential impact on the Company’s consolidated financial statements and disclosures.


 
27

 
Results of Operations

Net Sales

Net sales by channel for the three months ended June 30, 2010 and 2009 were as follows (in thousands):


   
Three Months Ended June 30,
       
   
2010
   
2009
   
Change %
 
                   
Retail
  $ 393,867     $ 283,766       39 %
OEM
    58,335       42,344       38 %
LifeSize
    27,128       -       -  
      Total net sales
  $ 479,330     $ 326,110       47 %


Our total net sales increased 47% during the three months ended June 30, 2010 compared with the same period in the prior fiscal year, with strong, double-digit growth in all retail regions, led by the Americas, as well as in OEM. We also experienced continued improvements in sell-through growth across all regions, with the strongest growth in the EMEA region.
 
    OEM sales and units increased 38% and 35% during the quarter ended June 30, 2010 compared with the same period in the prior fiscal year, primarily due to sales of our OEM mice, keyboards and microphones for console singing games. Sales of our OEM mice increased 22% and units increased 27% during the quarter compared with the same period in the prior fiscal year. OEM keyboard sales more than doubled in dollars as well as in units during the quarter compared with the prior year. Sales of our microphones for console singing games also made a strong contribution to the growth in OEM sales.
   
    LifeSize net sales represent sales of video conferencing units and related software and services. Sales of our LifeSize products gained momentum during the three months ended June 30, 2010 and increased 30% compared with the three months ended March 31, 2010. Although we consider LifeSize a separate operating segment, based on financial measurements for the fiscal year ended March 31, 2010 and for the three months ended June 30, 2010, and our near-term expectations, the LifeSize segment does not meet the quantitative threshold for separate disclosure of financial information required by generally accepted accounting principles in the United States.

Approximately 39% and 46% of the Company’s total net sales were denominated in currencies other than the U.S. dollar in the three months ended June 30, 2010 and 2009. If foreign currency exchange rates had been the same in three months ended June 30, 2010 and 2009, our constant dollar sales increase would have been 50%.

We refer to our net sales excluding the impact of foreign currency exchange rates as constant dollar sales. Constant dollar sales are a non-GAAP financial measure, which is information derived from consolidated financial information but not presented in our financial statements prepared in accordance with U.S. GAAP. Our management uses these non-GAAP measures in its financial and operational decision-making, and believes these non-GAAP measures, when considered in conjunction with the corresponding GAAP measures, facilitate a better understanding of changes in net sales. Constant dollar sales are calculated by translating prior period sales in each local currency at the current period’s average exchange rate for that currency.

Retail Sales by Region

The following table presents the change in retail sales by region for the three months ended June 30, 2010 compared with the three months ended June 30, 2009.


   
Three months ended June 30, 2010
     
   EMEA
 
21%
   Americas
 
65%
   Asia Pacific
 
24%
      Total retail sales
 
39%

 
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Sales in the EMEA region increased in all product families except gaming in the three months ended June 30, 2010 compared with the same period in the prior fiscal year, driven primarily by sales of pointing devices, remotes and audio products. Retail units sold during the three months ended June 30, 2010 increased 42% compared with the prior year. The unit percentage increase was higher than the sales percentage increase primarily due to a shift in consumer demand towards value-priced products. Sell-through growth in the EMEA region continued to improve, reflecting improved consumer demand for our products. If foreign currency exchange rates had been the same in the three months ended June 30, 2010 and 2009, our EMEA constant dollar retail sales increase would have been 31%.

Retail sales increased 65% and retail units sold increased 33% in the Americas region in the three months ended June 30, 2010 compared with the same period in the prior fiscal year, reflecting improved economic stability in the region as well as increased demand for our higher-priced product lines. Sales of all product lines increased. Retail sell-through in the region increased during the three months ended June 30, 2010 compared with the prior year. Foreign currency exchange rates had no significant effect on retail sales in the Americas region in the three months ended June 30, 2010.

Retail sales in the Asia Pacific region increased 24% during the quarter ended June 30, 2010 compared with the prior year, with growth in all product lines except gaming. Retail sell-through increased during the quarter compared with the prior year. Total retail units sold in the Asia Pacific region increased 45% during the quarter ended June 30, 2010 compared with the prior year. The unit percentage increase was higher than the sales percentage increase primarily due to higher sales of our value-priced products in the region. If foreign currency exchange rates had been the same in the three months ended June 30, 2010 and 2009, our Asia Pacific constant dollar retail sales increase would have been 22%.


Net Retail Sales by Product Family

Net retail sales by product family during the three months ended June 30, 2010 and 2009 were as follows (in thousands):


   
Three Months Ended June 30,
       
   
2010
   
2009
   
Change %
 
                   
Retail - Pointing Devices
  $ 131,846     $ 90,236       46 %
Retail - Keyboards & Desktops
    76,166       58,009       31 %
Retail - Audio
    95,646       72,120       33 %
Retail - Video
    47,057       42,814       10 %
Retail - Gaming
    14,566       17,149       (15 %)
Retail - Remotes
    28,586       3,438       731 %
Total net retail sales
  $ 393,867     $ 283,766       39 %


Logitech’s Pointing Devices product family includes our mice, trackballs and other pointing devices. Keyboards and desktops (mouse and keyboard combined) include cordless and corded keyboards and desktops. Audio includes speakers and headset products for the PC, the home, and mobile entertainment platforms, and wireless music systems. Our video product family is comprised of PC webcams and WiLife video security systems. Gaming includes console and PC gaming peripherals. The Remotes product family is comprised of our advanced remote controls. Net sales reflect accruals for product returns, cooperative marketing arrangements, customer incentive programs and pricing programs.

Retail Pointing Devices

Retail unit sales of our pointing devices increased 60% in the three months ended June 30, 2010 compared with the same period in the prior fiscal year. The growth in dollar sales was driven by sales of cordless mice which increased 57%, while units increased 91% over the same period in the prior fiscal year. We achieved strong sales and unit growth in both our high-end as well as our value-priced cordless mice. Sales in the high-end category benefited from the continued strength of our two high performance MX mice, the Performance Mouse MX and the Anywhere Mouse MX, while sales in the value-priced category were led by two of our wireless mice for notebooks, the M215 and M305. Sales and units of corded mice increased 15% and 36% in the three months ended June 30, 2010 compared with the prior year, driven by sales of our M100 mouse and our gaming mouse G500.

 
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Retail Keyboards and Desktops

Retail unit sales of keyboards and desktops increased 26% during the quarter ended June 30, 2010 compared with the prior year, due primarily to strong contributions from our cordless keyboards and desktops. Sales of cordless desktops increased 50% in dollars, with growth in both the high-end and especially the value-priced end of the cordless desktop category. Sales of cordless keyboards nearly tripled in dollars compared with the prior year. Two of our wireless desktops, the MK250 and the MK300, and our K340 wireless keyboard were the major contributors to the sales growth.

Retail Audio

Retail audio unit sales increased 17% in the three months ended June 30, 2010 compared with the same period in the prior year. PC speaker sales increased 37% in dollars and 21% in units, primarily due to increased sales of our Z-5500 digital speakers. Sales of our iPod speakers increased 14% in dollars and 39% in units in the three months ended June 30, 2010 compared with the prior year, with continued positive contribution from sales of our S315i Rechargeable Speakers. PC headset sales grew 24% in dollars in the quarter ended June 30, 2010 compared with the same quarter last year, with units increasing 12%. Our Slim Devices products also made positive contributions to retail audio sales during the quarter.
 
    Retail Video

Our retail sales in the Video category increased 10%, while units increased 41%. The difference between dollar and unit sales growth was primarily due to the phase-out of several older products in favor of our new high-definition webcams that were announced late in the quarter. Two of our value-priced webcams, the C250 and the C200, were the primary drivers of the sales increase during the quarter.

Retail Gaming

Retail unit sales of our gaming peripherals decreased 16% during the quarter ended June 30, 2010 compared with the same period in the prior year. PC gaming sales decreased 19% in dollars and 11% in units, primarily due to lower sales of gaming keyboards. Console gaming sales decreased 17% during the three months ended June 30, 2010 compared with the prior year, with a decrease in units of 26%.

Retail Remotes

Retail sales of remotes increased nearly eight times and units sold increased nearly four times during the quarter ended June 30, 2010 compared with the same quarter in the prior year. The growth was driven by multiple products, with the Harmony One being the primary contributor, followed by Harmony 300 and Harmony 900. The increase in sales in the remotes category in the quarter was attributable to increased consumer demand as well as depressed sales from the economic downturn in the comparative three months ended June 30, 2009.

 
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Gross Profit
 
Gross profit for the three months ended June 30, 2010 and 2009 was as follows (in thousands):


   
Three Months Ended June 30,
       
   
2010
   
2009
   
Change
 
                   
   Net sales
  $ 479,330     $ 326,110       47 %
   Cost of goods sold
    310,301       248,288       25 %
   Gross profit
  $ 169,029     $ 77,822       117 %
   Gross margin
    35.3 %     23.9 %        


Gross profit consists of net sales, less cost of goods sold which includes materials, direct labor and related overhead costs, costs of manufacturing facilities, costs of purchasing components from outside suppliers, distribution costs, write-down of inventories and amortization of intangible assets.

Gross margin increased to 35.3% in the three months ended June 30, 2010 compared with 23.9% in the same period in the prior year. The increase in gross margin, despite a significantly stronger U.S. dollar, was due primarily to favorable shifts in our retail product mix, continued operational efficiencies in our supply chain and the higher gross margin contributed by LifeSize product sales.

Operating Expenses
 
Operating expenses for the three months ended June 30, 2010 and 2009 were as follows (in thousands):


   
Three Months Ended June 30,
       
   
2010
   
2009
   
Change