Case 2.3 Logitech

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Case 2.3 Logitech

International S.A.

The following are excerpts from the 2010 Logitech International S.A. Form 10-K:

LOGITECH INTERNATIONAL S.A.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

March 31,

2010 2009

Assets

Current assets:

Cash and cash equivalents $ 319,944 $ 492,759

Short-term investments — 1,637

Accounts receivable 195,247 213,929

Inventories 219,593 233,467

Other current assets 58,877 56,884

Total current assets 793,661 998,676

Property, plant, and equipment 91,229 104,132

Goodwill 553,462 242,909

Other intangible assets 95,396 32,109

Other assets 65,930 43,704

Total assets $ 1,599,678 $ 1,421,530

Liabilities and shareholders’ equity

Current liabilities:

Accounts payable $ 257,955 $ 157,798

Accrued liabilities 182,336 131,496

Total current liabilities 440,291 289,294

Other liabilities 159,672 134,528

Total liabilities 599,963 423,822

Commitments and contingencies

Shareholders’ equity:

Share, par value CHF 0.25 – 191,606,620 issued and

authorized and 50,000,000 conditionally authorized

at March 31, 2010 and 2009 33,370 33,370

Additional paid-in capital 14,880 45,012

Shares in treasury, at cost, 16,435,528 at March 31, 2010

and 12,124,078 at March 31, 2009 (382,512) (341,454)

Retained earnings 1,406,618 1,341,661

Accumulated other comprehensive loss (72,641) (80,881)

Total shareholders’ equity 999,715 997,708

Total liabilities and shareholders’ equity $ 1,599,678 $ 1,421,530

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

Logitech International S.A.

Notes to Consolidated Financial Statements

Note 1 – The Company

Logitech is a world leader in personal peripherals for computers and other digital platforms. We develop and market innovative products in PC navigation, Internet communications, digital music, home-entertainment control, gaming and wireless devices. 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 high-definition video communications 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 and Transporter wireless music solutions for the home. For gaming consoles, we offer a range of gaming controllers, including racing wheels, wireless guitar and drum controllers, and microphones, as well as other accessories.

Note 2 – Summary of Significant Accounting Policies

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company maintains cash and cash equivalents with various financial institutions to limit exposure with any one financial institution.

The Company sells to large OEMs, distributors and key retailers and, as a result, maintains individually significant receivable balances with such customers. As of March 31, 2010, one customer represented 14% of total accounts receivable. As of March 31, 2009, two customers represented 18% and 10% of total accounts receivable. Typical payment terms require customers to pay for product sales generally within 30 to 60 days; however, terms may vary by customer type, by country, and by selling season. Extended payment terms are sometimes offered to a limited number of customers during the second and third fiscal quarters. The Company does not modify payment terms on existing receivables.

The Company’s OEM customers tend to be well-capitalized, multi-national companies, while distributors and key retailers may be less well-capitalized. The Company manages its accounts receivable credit risk through ongoing credit evaluation of its customers’ financial condition. The Company general does not require collateral from its customers.

Allowances for Doubtful Accounts

Allowances for doubtful accounts are maintained for estimated losses resulting from the inability of the Company’s customers to make required payments. The allowances are based on the Company’s regular assessment of the creditworthiness and financial condition of specific customers, as well as its historical experience with bad debts and customer deductions, receivables aging, current economic trends, geographic or country-specific risks and the financial conditions of its distribution channels.

Inventories

Inventories are stated at the lower of cost or market. Cost is computed on a first-in, first-out basis. The Company records write-downs of inventories which are obsolete or in excess of anticipated demand or market value based on a consideration of marketability and product life cycle stage, product development plans, component cost trends, demand forecasts, historical sales, and assumptions about future demand and market conditions.

Note 7 — Balance Sheet Components

The following provides the components of certain balance sheet amounts (in thousands):

March 31,

2010 2009

Long-term liabilities

Income taxes payable — noncurrent $ 116,456 $ 101,463

Obligations for management deferred compensation 10,307 10,499

Defined benefit pension plan liability 19,343 19,822

Other long-term liabilities 13,566 2,744

$ 159,672 $ 134,528

Note 8 – Goodwill and Other Intangible Assets

The following table summarizes the activity in the Company’s goodwill account during fiscal years ended March 31, 2010 and 2009 (in thousands):

March 31,

2010 2009

Beginning balance $ 242,909 $ 194,383

Additions 313,041 48,526

Other adjustments (2,488) —

Ending balance $ 553,462 $ 242,909

Additions to goodwill during fiscal year 2010 primarily related to our acquisitions of LifeSize and TV Compass. Logitech will maintain discrete financial information for LifeSize and accordingly, the acquired goodwill related to the LifeSize acquisition will be separately evaluated for impairment. TV Compass’s business was fully integrated into the Company’s existing operations, and discrete financial information for TV Compass is not maintained. Accordingly, the acquired goodwill related to TV Compass is evaluated for impairment at the total enterprise level. The adjustment to goodwill represents an adjustment of the deferred tax asset recognized in connection with the acquisitions of SightSpeed, Inc. and the Ultimate Ears companies.

Additions to goodwill during fiscal year 2009 were primarily related to our acquisitions of SightSpeed and Ultimate Ears, as well as $2.0 million pre-acquisition contingency related to our WiLife acquisition.

Note 9 – Financing Arrangements

The Company had several uncommitted, unsecured bank lines of credit aggregating $151.9 million at March 31, 2010. There are no financial covenants under these lines of credit with which the Company must comply. At March 31, 2010, the Company had no outstanding borrowings under these lines of credit.

Note 16 – 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. Future minimum annual rentals under non-cancelable operating leases at March 31, 2010 are as follows (in thousands):

Year ending March 31,

2011 $ 13,679

2012 9,666

2013 8,204

2014 4,171

2015 3,473

Thereafter 7,503

$ 46,696

Rent expense was $16.3 million, $15.5 million, and $13.8 million for the years ended March 31, 2010, 2009, and 2008. The Company’s asset retirement obligations for its leased facilities as of March 31, 2010, were not material.

At March 31, 2010, fixed purchase commitments for capital expenditures amounted to $12.9 million, and primarily related to commitments for manufacturing equipment, tooling, computer software, and computer hardware. Also, the Company has commitments for inventory purchases made in the normal course of business to original design manufacturers, contract manufacturers, and to other suppliers. At March 31, 2010, fixed purchase commitments for inventory amounted to $183.6 million, which are expected to be fulfilled by December 31, 2010. The Company also had other commitments totaling $33.3 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 good 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 March 31, 2010, there were no outstanding guaranteed purchase obligations. The maximum total 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 is probable, that any amounts will be required to be paid under these guarantee arrangements.

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 $8.2 million as of March 31, 2010. As of March 31, 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 March 31, 2010, $8.7 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 March 31, 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.

The Company provides various third parties with irrevocable letters of credit in the normal course of business to secure its obligations to pay or perform pursuant to the requirements of an underlying agreement or the provision of goods and services. These standby letters of credit are cancelable only at the option of the beneficiary who is authorized to draw drafts on the issuing bank up to the face amount of the standby letter of credit in accordance with its terms. At March 31, 2010, the Company had $3.4 million of letters of credit in place, of which $0.3 million was outstanding. These letters of credit relate primarily to equipment purchases by a subsidiary in China, and expire between April and June 2010. At March 31, 2009, the Company had $0.4 million of letters of credit in place, with no balance outstanding.

In November 2007, the Company acquired WiLife Inc., a privately held company offering PC-based video camera 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 year 2010. No payment is due if the applicable net revenues total $40.0 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 the calendar year 2010. As of March 31, 2010, no amounts were payable towards performance-based payments under the WiLife acquisition agreement.

The Company is involved in a number of lawsuits and claims relating to commercial 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 March 31, 2010, were not material.

LOGITECH INTERNATIONAL S.A.

VALUATION AND QUALIFYING ACCOUNTS

For the Fiscal Years Ended March 31, 2010, 2009, and 2008 (in thousands)

Balance at Charged Write-offs charged Balance

Fiscal beginning (credited) to (recovered against) at end of

Year Description of period to Income Statement allowance period

2010 Allowance for

doubtful accounts $ 6,705 $ (72) $ (763) $5,870

2009 Allowance for

doubtful accounts $2,497 $ 5,102 $ (894) $6,705

2008 Allowance for

Doubtful accounts $3,322 $ 603 $ (1,428) $2,497

LOGITECH INTERNATIONAL S.A.

INFORMATION FROM CONSOLIDATED INCOME STATEMENTS

For the Fiscal Years Ended March 31, 2010, 2009, and 2008 (in thousands)

2010 2009 2008

Sales $1,966,748 $2,208,832 $2,370,496

Net Income $ 64,957 $ 107,032 $ 231,026

Required:

1. Using the Consolidated Balance Sheets for Logitech International S.A. (Logitech) for March 31, 2010 and 2009, prepare a common-size balance sheet.

2. Evaluate the asset, debt, and equity structure of Logitech, and explain trends and changes found on the common-size balance sheet.

3. Analyze accounts receivable and allowance for doubtful accounts.

4. What inventory method is used to value inventories? Does this method reflect current cost at year-end?

5. Discuss the commitments and contingencies of Logitech and the significance of these items.

6. Explain what has caused the change in the retained earnings account from March 31, 2009 to March 31, 2010.

7. Discuss any positive items learned about Logitech from the balance sheet and excerpts from the Form 10-K.

8. What concerns would investors and creditors have based on only this information?

9. What additional financial and nonfinancial information would investors and creditors need to make good investing and lending decisions for Logitech?

Understanding Financial Statements, Fraser and Ormiston