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TMCNet:  LOGITECH INTERNATIONAL SA - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[November 06, 2012]

LOGITECH INTERNATIONAL SA - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) 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 our business strategy, the impact of investment prioritization decisions, product offerings, sales and marketing initiatives, trends in consumer demand affecting our products and markets, trends in the composition of our customer base, our current or future revenue and revenue mix by product, among our lower- and higher-margin products and by geographic region, our expectations regarding the potential growth opportunities for our products and in emerging markets, our expectations regarding trends in consumer demand for PCs and mobile, tablet, gaming, audio, video, digital home and other computer devices and the interoperability of our products with such third party platforms, our competitive position and the effect of pricing, product, marketing and other initiatives by us and our competitors, the impact of our restructuring plan on future costs, expenses and financial performance and the timing thereof, our estimates of future charges related to our restructuring plan, our expectations regarding the recoverability of our goodwill and the potential for future impairment charges, significant fluctuations in currency exchange rates, the impact of new product introductions and product innovation on future performance or anticipated costs and expenses and the timing thereof, cash flows, the sufficiency of our cash and cash equivalents, cash generated and available borrowings (including the availability of our uncommitted lines of credit) to fund future cash requirements, compliance with our credit facilities, our expectations regarding share repurchases and share cancellations, our expectations regarding our future working capital requirements and our anticipated capital expenditures needed to support our product development and expanded operations, our expectations regarding our future tax benefits and the adequacy of our provisions for uncertain tax positions, our expectations regarding our potential indemnification obligations, and the outcome of pending or future legal proceedings and tax audits, and Logitech's ability to achieve renewed growth, profitability and future success. Forward-looking statements also include, among others, those statements including the words "anticipate," "believe," "could," "estimate," "expect," "forecast," "intend," "may," "plan," "project," "predict," "should," "will," and similar language. These forward-looking statements involve risks and uncertainties that could cause our actual performance to differ materially from that 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 2013 and our fiscal year 2012 Form 10-K, which was filed on May 30, 2012, 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 the digital experiences they care about. 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 peripherals for PCs (personal computers), tablets and other digital platforms.

Our products for home and business PCs include mice, trackballs, keyboards, interactive gaming controllers, multimedia speakers, headsets and webcams. Our tablet accessories include keyboards, keyboard cases and covers, headsets, wireless speakers, earphones and stands. Our Internet communications products include webcams, headsets, video 29 -------------------------------------------------------------------------------- Table of Contents communications services, and digital video security systems. Our digital music products include speakers, earphones, custom in-ear monitors and Smart Radios.

For home entertainment systems, we offer the Harmony line of advanced remote controls. Our gaming products include a range of gaming controllers and microphones, as well as other accessories.

Our brand, portfolio management, product definition and engineering teams in our peripherals segment are responsible for product strategy, technological innovation, product design and development, and bringing our products to market.

Our business groups are organized by product categories. Our global marketing organization is responsible for developing and building the Logitech brand, consumer insight, public relations and social media, customer care and digital marketing. Our regional retail sales and marketing activities are organized into three geographic areas: Americas (including North and South America), EMEA (Europe-Middle East-Africa), and Asia Pacific (including, among other countries, China, Taiwan, Japan, India and Australia).

We sell our peripheral products to a network of distributors, retailers, and OEMs. Our worldwide retail network includes wholesale distributors, consumer electronics retailers, mass merchandisers, specialty electronics stores, computer and telecommunications stores, value-added resellers, and online merchants. Sales of peripherals to our retail channels were 86% and 84% of our net sales for the six months ended September 30, 2012 and 2011. The large majority of our revenues have historically been derived from sales of our peripheral products for use by consumers. Our OEM customers include the majority of the world's largest PC manufacturers. Sales to OEM customers were 7% and 9% of our net sales for the six months ended September 30, 2012 and 2011.

Our video conferencing segment encompasses the design, manufacturing and marketing of LifeSize video conferencing products, infrastructure, and services for the enterprise, public sector, and other business markets. LifeSize products include scalable HD (high-definition) video communication endpoints, HD video conferencing systems with integrated monitors, video bridges and other infrastructure software and hardware to support large-scale video deployments, and services to support these products. The LifeSize division maintains a separate marketing and sales organization, which sells LifeSize products and services worldwide. LifeSize product development and product management organizations are separate, but coordinated with our peripherals business, particularly our Consumer Computing Platforms group. We sell our LifeSize products and services to distributors, value-added resellers, OEMs, and, occasionally, direct enterprise customers. Sales of LifeSize products were 7% of our net sales in each of the six months ended September 30, 2012 and 2011.

We seek to fulfill the increasing demand for interfaces between people and the expanding digital world across multiple platforms and user environments. The interface evolves as platforms, user models and our target markets evolve. As access to digital information has expanded, we have extended our focus to mobile devices, the digital home, and the enterprise as access points to the Internet and the digital world. All of these platforms require interfaces that are customized according to how the devices are used. We believe that 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, partnering with others where our strengths are complementary, 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.

We are developing new categories of products, such as tablet accessories, expanding in emerging retail markets, such as China, Russia, India and Latin America, increasing our presence in digital music, and entering new product arenas, such as hosted video conferencing as a service, and peripherals and services for UC (unified communications). As we do so, we are confronting new competitors, many of which have more experience in the categories or markets and have greater marketing resources and brand name recognition than we have. In addition, because of the continuing convergence of the markets for computing devices and consumer electronics, we expect greater competition in the future from well-established consumer electronics companies in our new categories as well as future ones we might enter.

30 -------------------------------------------------------------------------------- Table of Contents Many of these companies have greater financial, technical, sales, marketing and other resources than we have.

Our peripherals and video conferencing industries are intensely competitive. The peripherals industry is characterized by platform evolution, short product life cycles, continual performance enhancements, and rapid adoption of technological and product advancements by competitors in our retail markets, and price sensitivity in the OEM market. We experience aggressive price competition and other promotional activities from our primary competitors and from less established brands, including brands owned by some retail customers known as house brands, in response to declining consumer demand in both mature retail markets and OEM markets. We may also encounter more competition if any of our competitors in one or more categories decide to enter other categories in which we currently operate.

As we address the current and future market challenges we face, we are simplifying our current product portfolio and roadmap to align our resources, prioritize our investments, and focus on fewer, more compelling products. From time to time, we may seek to partner with or acquire, when appropriate, companies that have products, personnel, and technologies that complement our strategic direction. We continually review our product offerings and our strategic direction in light of our profitability targets, competitive conditions, changing consumer trends, and the evolving nature of the interface between the consumer and the digital world.

Summary of Financial Results Our total net sales for the six months ended September 30, 2012 decreased 5% compared with the six months ended September 30, 2011 due to a sharp decline in OEM sales, and from modest declines in retail and video conferencing. OEM sales decreased 26% in the six months ended September 30, 2012 compared with the same period of the prior fiscal year, and OEM units sold decreased 11%, primarily in keyboard/desktops and pointing devices.

Retail sales during the six months ended September 30, 2012 decreased 3% and retail units increased 1% compared with the six months ended September 30, 2011. We experienced modest growth in our EMEA region of 4%, led by keyboards/desktops, decline in our Americas region of 9% overall and in most categories, and decline in our Asia Pacific region of 4% primarily from video and gaming. If foreign currency exchange rates had been the same in the six months ended September 30, 2012 and 2011, the percentage changes in our constant dollar retail sales would have been an increase of 13% in EMEA, a decrease of 4% in Asia Pacific, and a decrease of 8% in the Americas. Sales incentive spending (including pricing discounts) during the six months ended September 30, 2012, compared with the same period of the prior fiscal year, decreased 12% due to controlled spending for customer incentive programs as well as lower sell-through during this period. Sales returns expense during the six months ended September 30, 2012, compared with the same period of the prior fiscal year, decreased 27% due to lower return trends and better channel inventory aging during this period.

Sales of video conferencing products, which were 7% of total net sales in each of the six months ended September 30, 2012 and 2011, decreased by 3% in the six months ended September 30, 2012, compared with the same period of the prior fiscal year, due to sales declines in all geographic regions.

Our gross margin for the six months ended September 30, 2012 improved to 33.5% compared with 30.3% in the same period of the prior fiscal year. The gross margin improvement primarily resulted from the absence of a $34.1 million inventory valuation adjustment related to Logitech Revue and related peripherals which occurred during the six months ended September 30, 2011, and from improvements to our channel pricing program and global supply chain process, offset in part by the negative impact of a weaker euro, $4.5 million in pricing actions related to the simplification of our product portfolio and $3.0 million in restructuring-related costs.

Operating expenses for the six months ended September 30, 2012 were 37% of net sales compared with 32% in the same period of the prior fiscal year. This increase was primarily attributable to the $28.6 million in costs related to the restructuring plan initiated in April 2012.

Net income for the six months ended September 30, 2012 was $2.7 million compared with net loss of $12.2 million in the six months ended September 30, 2011. This improvement was primarily from a discrete tax benefit of $32.1 million from the closure of federal income tax examinations in the United States, offset in part by restructuring charges.

31 -------------------------------------------------------------------------------- Table of Contents Our balance sheet includes goodwill of $221.9 million related to various past acquisitions which are part of our peripherals reporting unit, and $339.2 million related to our video conferencing reporting unit. We perform our annual goodwill impairment test annually as of December 31, or more frequently, if certain events or circumstances warrant. Events or changes in circumstances which might indicate potential impairment in goodwill include the company specific factors described in our Annual Report on Form 10-K, volatility in stock price, a sustained decline in market capitalization relative to net book value, and lower than projected revenue, market growth, or operating results. On April 25, 2012, the Company announced a restructuring plan as described in Note 13, and as a result, we performed an impairment test during the first quarter of fiscal year 2013 to evaluate the recoverability of goodwill after implementation of the restructuring. The goodwill impairment evaluation we performed indicated that the fair value of our peripherals reporting unit exceeded the carrying value of the reporting unit by more than 70% of the carrying value, and the fair value of our video conferencing reporting unit exceeded the carrying value of the reporting unit by more than 100% of the carrying value. Also in connection with the restructuring, we reviewed long-lived assets, such as property, equipment, and intangible assets, for recoverability by comparing the projected undiscounted net cash flows associated with those assets to their carrying values. No impairment of long-lived assets was required as a result of the review. We continue to evaluate and monitor all key factors impacting the carrying value of our recorded goodwill and long-lived assets. Further adverse changes in our actual or expected operating results, market capitalization, business climate, economic factors or other negative events that may be outside the control of management could result in a material non-cash impairment charge in the future.

Trends in Our Business Our sales of PC peripherals for use by consumers in the Americas and Europe have historically made up the large majority of our revenues. We believe Logitech's future growth will be determined by our ability to create innovative products across multiple digital platforms, to sustain the growth of our PC peripherals, or in some cases to limit their decline, and to pursue growth opportunities in emerging markets, products for tablets, smartphones and other mobile devices, products for digital music, sales to enterprise markets, and LifeSize video conferencing. The following discussion represents key trends specific to each of our two operating segments, peripherals and video conferencing.

Trends Specific to our Peripherals Segment Emerging Markets. In our traditional, mature markets, such as North America, Western and Northern Europe, Japan, and Australia, although the installed base of PC users is large, consumer demand for PCs has declined in recent months and may potentially continue to decline in future years. As a consequence, consumer demand for PC peripherals is slowing, or in some case declining. While we continue to pursue growth opportunities in selected PC peripheral product lines in mature markets, we believe there are larger growth opportunities for our PC peripherals outside the mature markets. We have invested significantly in growing the number of our sales, marketing and administrative personnel in China, our largest target emerging market, with the result that China was our third-largest country in retail sales for the six months ended September 30, 2012. We are also expanding our presence and our sales in Russia, India and Latin America.

Enterprise Market. We are increasing our efforts on creating and selling products and services to enterprises. We believe the preferences of employees increasingly drive companies' choices in the information technologies they deploy to their employee base, and this "consumerization" of information technology has made the enterprise market open to embracing consumer technology and design. We are still in the early stages of our enterprise market team's efforts for our productivity peripherals. Growing our enterprise peripherals business will continue to require investment in selected business-specific products, targeted product marketing, and sales channel development.

32 -------------------------------------------------------------------------------- Table of Contents Tablets, Smartphones and Other Mobile Devices. The increasing popularity of smaller, mobile computing devices, such as tablets and smartphones with touch interfaces, have created new markets and usage models for peripherals and accessories. Logitech has begun to offer products to enhance the use of mobile devices. For example, we are experiencing strong demand for our tablet keyboards, led by strong initial demand for our Logitech Ultrathin Keyboard Cover.

Digital Music. We believe that digital music, the seamless consumption of audio content on home and mobile devices, presents a significant growth opportunity for Logitech, based on our history of successful earphone, headset and speaker products. Many consumers listen to music as a pervasive entertainment activity, fueled by the growth in smartphones, tablets, music services and Internet radio.

Logitech has a solid foundation of audio solutions to satisfy consumers' needs for music consumption, including Logitech UE earphones, headphones, digital music speakers, and Smart Radios.

OEM business. Sales of our OEM mice and keyboards have historically made up the bulk of our OEM sales. In recent years, the shift away from desktop PCs adversely affected our sales of OEM mice and keyboards, which are sold with name-brand desktop PCs. We expect this trend to continue and for OEM sales to comprise a smaller percentage of our total revenues in the future.

Trends in Other Peripheral Product Categories. Some of our other peripherals product categories are experiencing significant market challenges. As the quality of PC embedded webcams improves, we expect future sales of our PC-connected webcams in mature consumer markets to continue declining. We intend to address this market decline by enhancing our webcam product line-up to enable experiences that cannot be easily achieved with an embedded webcam and by targeting webcam applications on non-PC platforms. Sales in our digital home category have declined significantly. We believe the recent disappointing sales results for Harmony reflect the aging of our Harmony products at the mid- and high-level price points as we previously directed significant digital home engineering and marketing resources towards our Logitech Revue and related peripherals for Google TV. We have since exited the Google TV product category.

During the current quarter we released two new products, Logitech TV Cam HD with built-in Skype capability as well as our long-awaited Harmony Touch remote control which features an intuitive, color touch-screen enabling users the ability to personalize their screens.

Trends Specific to our Video Conferencing Segment The trend among businesses and institutions to use video conferencing offers a key growth opportunity for Logitech. However, the growth of our video conferencing segment depends in part on our ability to increase sales to enterprises with existing installed bases of equipment supplied by our competitors, and to enterprises that may purchase such competitor equipment in the future. We believe the ability of our LifeSize products to interoperate with the equipment of other telecommunications, video conferencing or telepresence equipment suppliers to be a key factor in purchasing decisions by current or prospective LifeSize customers. In addition, LifeSize has broadened its product portfolio to include infrastructure, cloud services and other offerings which require different approaches to developing customer solutions. We also are seeking to offer LifeSize products designed to enhance the use of mobile devices in video conferencing applications.

Emerging Market. China also represents a significant targeted emerging market for our video conferencing segment. We have invested significantly in growing the number of our video conferencing sales, marketing and administrative personnel in China.

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.

33 -------------------------------------------------------------------------------- Table of Contents 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 six months ended September 30, 2012 to the nature of the critical accounting estimates and other accounting policies 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, 2012.

Results of Operations Net Sales Net sales by channel for the three and six months ended September 30, 2012 and 2011 were as follows (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2012 2011 Change % 2012 2011 Change % Peripherals Retail $ 476,479 $ 501,735 (5 )% $ 871,580 $ 896,511 (3 )% OEM 36,718 50,261 (27 )% 73,393 99,439 (26 )% Total peripherals 513,197 551,996 (7 )% 944,973 995,950 (5 )% Video Conferencing 34,496 37,208 (7 )% 71,324 73,695 (3 )% Total net sales $ 547,693 $ 589,204 (7 )% $ 1,016,297 $ 1,069,645 (5 )% Although our financial results are reported in U.S. dollars, a portion of our sales for the three and six months ended September 30, 2012 were made in currencies other than the U.S. dollar, such as the euro, Chinese renminbi, Japanese yen, Canadian dollar and Australian dollar. The following table presents the approximate percentage of our total net sales that were denominated in currencies other than the U.S. dollar in the three and six months ended September 30, 2012 and 2011: Three Months Ended September 30, Six Months Ended September 30, 2012 2011 2012 2011 Currencies other than USD 49 % 47 % 47 % 41 % If foreign currency exchange rates had been the same in the three and six months ended September 30, 2012 and 2011, the percentage change in our constant dollar net sales would have been: Three Months Ended Six Months Ended September 30, 2012 September 30, 2012 Peripherals Retail (2 )% 1 % OEM (27 )% (26 )% Video Conferencing (7 )% (3 )% Total net sales (4 )% (2 )% 34 -------------------------------------------------------------------------------- Table of Contents Our retail sales in the three and six months ended September 30, 2012 declined compared with the same periods of the prior fiscal year. Retail sales declined in all three regions during the three months ended September 30, 2012, and increased in EMEA and declined in the Americas and Asia Pacific regions during the six months ended September 30, 2012, compared with the same periods of the prior fiscal year. Retail units sold decreased 2% during the three months ended September 30, 2012, and increased 1% in the six months ended September 30, 2012, compared with the same periods of the prior fiscal year. Our overall retail average selling price declined 3% in the three and six months ended September 30, 2012, compared with the same periods in the prior fiscal year.

Products priced below $40 represented 54% and 57% of retail sales in the three and six months ended September 30, 2012, compared with 55% and 56% of retail sales in the three and six months ended September 30, 2011. Sales of our retail products priced above $100 represented 14% and 13% of retail sales in the three and six months ended September 30, 2012, compared with 15% and 16% of total retail sales in the three and six months ended September 30, 2011. If foreign currency exchange rates had been the same in the three and six months ended September 30, 2012 and 2011, our constant dollar retail sales would have been a decrease of 2% and an increase of 1%.

OEM net sales decreased 27% and 26% and units sold decreased 15% and 11% in the three and six months ended September 30, 2012, compared with the same periods in the prior fiscal year. These declines were primarily due to lower sales in the keyboard/desktop category due to product mix changes with a large customer, and lower sales of OEM mice.

Video conferencing net sales decreased 7% and 3% in the three and six months ended September 30, 2012, compared with the same periods in the prior fiscal year, due to sales declines in all geographic regions. Foreign currency exchange rates did not affect video conferencing sales.

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 changes in retail units sold, retail sales and constant dollar retail sales by region for the three and six months ended September 30, 2012 compared with the three and six months ended September 30, 2011.

Three months ended September 30, 2012 Six months ended September 30, 2012 Change in Change in Change in Change in Retail Units Change in Constant Dollar Retail Units Change in Constant Dollar Sold Retail Sales Retail Sales Sold Retail Sales Retail Sales EMEA 1 % (3 )% 5 % 5 % 4 % 13 % Asia Pacific (4 )% (7 )% (7 )% 1 % (4 )% (4 )% Americas (4 )% (6 )% (6 )% (5 )% (9 )% (8 )% Total retail sales (2 )% (5 )% (2 )% 1 % (3 )% 1 % Retail sales in our EMEA region experienced a modest decrease during the three months ended September 30, 2012, compared with the same period of the prior fiscal year. This decrease resulted from double-digit percentage sales declines in audio and digital home, and by a single-digit decline in video, offset in part by double-digit sales increase in keyboards/desktops and gaming product categories, and by a single-digit increase in video. Retail sales increase in our EMEA region during the six months ended September 30, 2012, compared with the same period of the prior fiscal year, resulted from a double-digit percentage increase in keyboards/desktops and by a single-digit increase in gaming, offset in part by a double-digit decrease in digital home and by a single-digit decrease in audio and pointing devices. Sales results varied by country, with increased sales during the three months ended September 30, 2012 in 35 -------------------------------------------------------------------------------- Table of Contents Turkey, Ukraine, Italy, Belarus, Norway and Switzerland, and declining sales in Netherlands, Germany, France, Sweden, Spain and the United Kingdom. During the six months ended September 30, 2012, we experienced increased sales in Italy, Germany, Switzerland, Denmark and Ukraine, and declining sales in Poland, Greece, France and Croatia. Retail sell-through in the EMEA region decreased 6% and 2% in the three and six months ended September 30, 2012, compared with the same periods in the prior fiscal year.

Asia Pacific region retail sales decreased by 7% during the three months ended September 30, 2012, compared with the same period in the prior fiscal year.

This decrease resulted from double-digit percentage declines in video and gaming, single-digit declines in pointing devices and keyboard/desktops, offset by sales more than tripling in digital home and with single-digit improvement in audio. Declines by country within the Asia Pacific region during the three months ended September 30, 2012 were from weakness in India, Australia, Taiwan, China and South Korea. Asia Pacific region retail sales decreased by 4% during the six months ended September 30, 2012, compared with the same period of the prior fiscal year. This decrease resulted from double-digit percentage declines in video, gaming, and digital home, offset by single-digit improvement in audio, desktop/keyboards and pointing devices. Declines by country within the Asia Pacific region during the six months ended September 30, 2012 were from weakness in Australia and India, offset in part by increased sales in Japan and China.

Retail sales in China decreased by 4% during the three months ended September 30, 2012, with declines in all categories except audio where sales more than tripled. For the six months ended September 30, 2012, retail sales in China increased by 3% primarily from strong audio and keyboard/desktop sales.

China was our third-largest country in terms of net revenue during the three and six months ended September 30, 2012, compared to the same periods of the prior fiscal year. Retail sell-through in China increased 1% and 9% in the three and six months ended September 30, 2012 compared with the same periods in the prior fiscal year, while retail sell-through in the rest of the Asia Pacific region decreased 8% and 4% during the same periods.

The decline in retail sales in the Americas region for the three and six months ended September 30, 2012, compared with the same periods in the prior fiscal year, was driven by double-digit percentage sales declines in digital home, video, gaming and pointing devices, and by a single-digit sale decline in audio.

These declines were offset in part by a double-digit percentage sales increase in desktop/keyboards during the three and six months ended September 30, 2012, compared to the same periods of the prior fiscal year, driven by strong demand for the Logitech Ultrathin Keyboard Cover for the iPad. During the three months ended September 30, 2012, compared to the same period of the prior fiscal year, we experienced weakness in the United States, which was offset in part by improvement in Canada and Mexico. During the six months ended September 30, 2012, the weakness in the United States was offset in part by improvement in Mexico. Retail sell-through in the Americas region decreased 9% and 7% in the three and six months ended September 30, 2012, compared with the same periods in the prior fiscal year.

We use retail sell-through data, which represents sales of our products by our retailer customers to consumers, and by our distributor customers to their customers, along with other metrics, to assess consumer demand for our products.

Sell-through data is subject to limitations due to collection methods and the third party nature of the data. Although the sell-through data we obtain typically represents a majority of our retail sales, the customers supplying sell-through data vary by geographic region and from period to period. As a result of these limitations, sell-through data may not be an accurate indicator of actual consumer demand for our products.

36 -------------------------------------------------------------------------------- Table of Contents Net Retail Sales by Product Category Net retail sales by product category during the three and six ended September 30, 2012 and 2011 were as follows (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2012 2011 Change % 2012 2011 Change % Retail - Pointing Devices $ 122,490 $ 133,165 (8 )% $ 238,217 $ 254,915 (7 )% Retail - Keyboards & Desktops 130,806 109,325 20 % 241,251 203,921 18 % Retail - Audio 109,831 126,967 (13 )% 199,878 204,640 (2 )% Retail - Video 47,352 57,276 (17 )% 84,232 106,862 (21 )% Retail - Gaming 47,302 47,836 (1 )% 74,576 85,002 (12 )% Retail - Digital Home 18,698 27,166 (31 )% 33,426 41,171 (19 )% Total net retail sales $ 476,479 $ 501,735 (5 )% $ 871,580 $ 896,511 (3 )% Logitech's pointing devices product category includes our mice, trackballs and other pointing devices. Keyboards and desktops (mouse and keyboard combined) include cordless and corded keyboards and desktops, and tablet keyboards. Audio includes headsets, unified communications products, and digital music products including docks, speakers, earphones, headphones, and Smart Radios. Our video product category is comprised of PC webcams and Alert video security systems.

Gaming includes console, tablet, and PC gaming peripherals, including gaming mice and keyboards. The digital home product category combines our Harmony Remote controls and Logitech Revue with related peripherals. Net sales reflect accruals for product returns, cooperative marketing arrangements, customer incentive programs and pricing programs.

In the first quarter of fiscal year 2013, we changed the product category classification for a number of our retail products, in order to include all of our gaming-related retail sales in the gaming product category. The product categories impacted by this change included pointing devices, audio and gaming.

Products within the retail product categories as presented in the three and six months ended September 30, 2011 have been reclassified to conform to the fiscal year 2013 presentation, with no impact on previously reported total net retail sales.

37 -------------------------------------------------------------------------------- Table of Contents Retail Pointing Devices Retail sales of our pointing devices decreased 8% and 7% in the three and six months ended September 30, 2012, compared with the same period in the prior fiscal year, while retail units sold increased 2% and 1% during these periods.

The primary weakness during the three and six months ended September 30, 2012, compared to the same periods of the prior fiscal year, was in our mid-priced and high-priced offerings which experienced double-digit declines, offset in part by single-digit growth in our low-priced offerings. Sales of all cordless mice decreased 4% and 6% in the three and six months ended September 30, 2012, while units sold increased 7% and 4% during the same period. Corded mice sales decreased 14% and 10% and units sold decreased 3% and 5% in the three and six months ended September 30, 2012 compared with the same periods in the prior fiscal year. In October 2012, we introduced several new products designed to enhance the touch and navigation capabilities of the new Windows 8 operating system.

Retail Keyboards and Desktops Retail sales of keyboards and desktops increased 20% and 18% during the three and six months ended September 30, 2012, compared with the same periods in the prior fiscal year, while units sold increased 4% and 9% during these periods.

The primary driver of this increase was from continued strong demand for the Logitech Ultrathin Keyboard Cover which experienced sales more than tripling during the three months ended September 30, 2012 and nearly tripling during the six months ended September 30, 2012, compared to the same periods in the prior fiscal year. Sales of cordless keyboards and desktops increased 4% in sales and 8% in units while sales of corded keyboards and desktops decreased 10% in sales and 8% in units during the three months ended September 30, 2012, compared with the same period in the prior fiscal year. Sales of cordless keyboards and desktops increased 13% in sales and 22% in units while sales of corded keyboards and desktops decreased 11% in sales and 6% in units during the six months ended September 30, 2012, compared with the same period in the prior fiscal year.

Retail Audio Retail audio sales decreased 13% and 2% in the three and six months ended September 30, 2012 compared with the same periods in the prior fiscal year, while retail units sold decreased 8% and 1% during these periods. The decrease during the three months ended September 30, 2012, compared to the same period of the prior fiscal year, was driven by double-digit sales declines in our PC speaker, PC headset and speaker dock categories. The sales decline in PC-related products is consistent with the decline in our other PC categories, while the decline in speaker docks is consistent with our product development efforts focusing on wireless speakers for smartphones and tablets rather than speaker docks. These declines were offset in part by strong initial sales from our new wireless speakers including Logitech Mini Boombox, which we began shipping in the latter part of fiscal year 2012, and from Logitech UE Mobile Boombox and Logitech UE Boombox, both of which began shipping late in the current quarter. We also had strong initial sales from our new Logitech UE products which were initially available exclusively through Apple stores. The sales decrease during the six months ended September 30, 2012, compared to the same period of the prior fiscal year, was primarily from a single-digit decline in PC speakers and from a double-digit decline in speaker docks. These declines were partially offset by initial sales success from new products including Logitech Mini Boombox, Logitech UE Mobile Boombox and Logitech UE Boombox and from new Logitech UE products initially available exclusively through Apple stores.

Retail Video Retail sales of our video products declined 17% and 21% in the three and six months ended September 30, 2012 compared with the same periods in the prior fiscal year, while retail units sold decreased 21% and 19% during these periods.

The sales decrease was mainly due to weakness in our webcam product line, which continued to be negatively impacted by the combination of market trends, including the popularity of embedded webcams in mobile devices, and the overall weakness of the PC market. We expect future sales of our USB cable connected consumer webcams in the consumer market to continue declining, as the embedded webcam experience appears to be sufficient to meet the needs of many 38 -------------------------------------------------------------------------------- Table of Contents retail consumers. We are enhancing our webcam product line-up to enable experiences that cannot be easily achieved with an embedded webcam. For example, we experienced strong growth in the high-end category driven by the Logitech HD Pro Webcam C920, which offers full HD 1080p video calls on Skype, and from Logitech BCC950 Conference Cam for the enterprise market.

Retail Gaming Retail sales of our gaming peripherals declined 1% and 12% in the three and six months ended September 30, 2012 compared with the same periods in the prior fiscal year, while retail units sold increased 10% during these periods. The decrease during both periods was from console gaming sales which declined by 85% in sales and 67% in units during the three months ended September 30, 2012 and by 89% in sales and 75% in units during the six months ended September 30, 2012. In contrast, PC gaming sales increased by 12% in sales and 17% in units during the three months ended September 30, 2012 and declined by 1% in sales and increased by 17% in units during the six months ended September 30, 2012. The improvement in PC gaming sales during the current quarter was driven by gaming mice, particularly from strong sales of Logitech G600 MMO Gaming Mouse, and by gaming headsets. The difference between the decline in PC gaming sales and the increase in units during the six months ended September 30, 2012 reflects a mix shift away from steering wheels to lower-priced mice, keyboards and gamepads.

Retail Digital Home Retail sales of our digital home category, which includes Harmony remotes and our discontinued Google TV peripherals, decreased 31% and 19% in the three and six months ended September 30, 2012, compared with same periods in the prior fiscal year, while retail units sold decreased 41% and 22% during these periods.

Sales of Harmony remotes declined 14% in dollars and declined 31% in units in the three months ended September 30, 2012, compared with same period in the prior fiscal year. For the six months ended September 30, 2012, Harmony remotes declined 12% in dollars and 15% in units in the six months ended September 30, 2012, compared with same period in the prior fiscal year. We recently released two significant digital home products, Logitech TV Cam HD with built-in Skype capability during the three months ended September 30, 2012, and our long-awaited Harmony Touch remote control in October 2012, which features an intuitive, color touch-screen enabling users the ability to personalize their screens.

Gross Profit Gross profit for the three and six months ended September 30, 2012 and 2011 was as follows (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2012 2011 Change 2012 2011 Change Net sales $ 547,693 $ 589,204 (7 )% $ 1,016,297 $ 1,069,645 (5 )% Cost of goods sold 351,698 390,783 (10 )% 676,050 745,617 (9 )% Gross profit $ 195,995 $ 198,421 (1 )% $ 340,247 $ 324,028 5 % Gross margin 35.8 % 33.7 % 33.5 % 30.3 % 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.

The improvement in gross margin for the three months ended September 30, 2012, compared with the same period of the prior fiscal year, was primarily a result of tight management of channel pricing programs and a variety of efficiency improvements in our global supply chain process, offset in part by the negative impact of a weaker euro. The improvement in gross margin for the six months ended September 30, 2012, compared with the same period of the prior fiscal year, primarily resulted from a $34.1 million valuation adjustment to cost of goods sold which occurred during the three months ended June 30, 2011, from the improvements to our channel pricing programs and global supply chain process, offset in part by the negative impact of a weaker euro. The $34.1 million valuation adjustment reflected the lower of cost or 39 -------------------------------------------------------------------------------- Table of Contents market on our inventory of Logitech Revue and related peripherals on hand and at our suppliers. The gross margin for the six months ended September 30, 2012 was also negatively impacted by $4.5 million in pricing actions related to the simplification of our product portfolio in the Americas and EMEA regions, $3.0 million in costs related to product development efforts that were discontinued as a result of the restructuring, a provision for a patent dispute which was settled during the current quarter, typical sales seasonality, and changes in our product mix.

Operating Expenses Operating expenses for the three and six months ended September 30, 2012 and 2011 were as follows (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2012 2011 Change 2012 2011 Change Marketing and selling $ 110,522 $ 107,446 3 % $ 211,419 $ 207,239 2 % % of net sales 20 % 18 % 21 % 19 % Research and development 38,019 39,491 (4 )% 76,947 79,472 (3 )% % of net sales 7 % 7 % 8 % 7 % General and administrative 25,980 27,989 (7 )% 58,460 58,854 (1 )% % of net sales 5 % 5 % 6 % 6 % Restructuring charges (2,671 ) - 100 % 28,556 - 100 % % of net sales 0 % 0 % 3 % 0 % Total operating expenses $ 171,850 $ 174,926 (2 )% $ 375,382 $ 345,565 9 % The increase in total operating expenses as a percentage of net sales was primarily due to the restructuring plan initiated in April 2012, which resulted in net of $28.6 million in expenses incurred during the six months ended September 30, 2012.

Our operating expenses are incurred in U.S. dollars, Chinese renminbi, Swiss francs, euros, and, to a lesser extent, 28 other currencies. To the extent that the U.S. dollar significantly increases or decreases in value relative to the currencies in which our operating expenses are denominated, the reported dollar amounts of our sales and expenses may decrease or increase. We refer to our operating expenses excluding the impact of foreign currency exchange rates as constant dollar operating expenses. Constant dollar operating expenses 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 operating expenses. Constant dollar operating expenses are calculated by translating prior period operating expenses in each local currency at the current period's average exchange rate for that currency.

Marketing and Selling Marketing and selling expense consists of personnel and related overhead costs, corporate and product marketing, promotions, advertising, trade shows, customer and technical support and facilities costs.

Marketing and selling expense increased 3% and 2% in the three and six months ended September 30, 2012 compared with the same periods of the prior fiscal year, primarily from the product design, advertising, consulting and marketing expenses associated with the launch of new products. These increases were substantially offset by decreases in personnel-related expenses and share-based compensation expense due to the reduction in worldwide workforce resulting from our recent restructuring plan initiated in the first quarter of fiscal year 2013.

If foreign currency exchange rates had been the same in the three months ended September 30, 2012 and 2011, the percentage change in constant dollar marketing and sales expense would have been an increase of 7% instead of 3%. If foreign currency exchange rates had been the same in the six months ended September 30, 2012 and 2011, the percentage change in constant dollar marketing and sales expense would have been an increase of 6% instead of 2%.

40 -------------------------------------------------------------------------------- Table of Contents Research and Development Research and development expense consists of personnel and related overhead costs, contractors and outside consultants, supplies and materials, equipment depreciation and facilities costs, all associated with the design and development of new products and enhancements of existing products.

Although we continued to make investments in product development, we experienced a 4% and 3% decrease in research and development expense during the three and six months ended September 30, 2012, compared with the same periods of the prior fiscal year, primarily from a decline in personnel-related expenses due to the reduction in worldwide workforce resulting from our recent restructuring plan.

If foreign currency exchange rates had been the same in the three months ended September 30, 2012 and 2011, the percentage change in constant dollar research and development expense would have been a less than 1% decrease instead of a 4% decrease. For the six months ended September 30, 2012 and 2011, the percentage change in constant dollar research and development expense would have been a less than 1% decrease instead of a 3% decrease.

General and Administrative General and administrative expense consists primarily of personnel and related overhead and facilities costs for the finance, information systems, executive, human resources and legal functions.

General and administrative expense decreased by 7% from the three months ended September 30, 2011 to 2012, primarily from the decline in personnel-related expenses and share-based compensation expense due to the reduction in worldwide workforce from our recent restructuring plan.

General and administrative expense decreased by 1% from the six months ended September 30, 2011 to 2012, primarily from the decline in personnel-related expenses and share-based compensation expense due to the reduction in worldwide workforce from our recent restructuring plan, offset in part by the write-off of the remaining lease obligations resulting from the exit of our former corporate headquarters.

If foreign currency exchange rates had been the same in the three months ended September 30, 2012 and 2011, the percentage change in constant dollar general and administrative expense would have been a decrease of 4% instead of 7%. If foreign currency exchange rates had been the same in the six months ended September 30, 2012 and 2011, the percentage change in constant dollar general and administrative expense would have been an increase of 2% instead of a decrease of 1%.

Restructuring Charges Restructuring charges consist of termination benefits, lease exit costs and other charges associated with the restructuring plan initiated in April 2012.

The restructuring plan reduced our worldwide non-direct-labor workforce by approximately 340 employees. During the current quarter, we incurred a $3.8 million credit in termination benefits to affected employees due to the further refinement of estimates which were previously accrued during the three months ended June 30, 2012. For the six months ended September 30, 2012, we incurred $24.8 million in termination benefits to affected employees under this plan.

Termination benefits are calculated based on regional benefit practices and local statutory requirements. In addition, we incurred legal, consulting, and other costs of $1.1 million and $2.2 million as a result of the terminations during the three and six months ended September 30, 2012. We also incurred $1.5 million in lease exit costs primarily related to costs associated with the closure of existing facilities during the six months ended September 30, 2012.

We believe we will complete the restructuring plan during fiscal year 2013, and will incur additional pre-tax restructuring charges related to employee termination costs, lease exit costs, and other associated costs of less than $3 million during the remaining six months of fiscal year 2013.

41 -------------------------------------------------------------------------------- Table of Contents The following table summarizes restructuring-related activities during the three and six months ended September 30, 2012 (in thousands): Termination Lease Exit Total Benefits Costs Other Balance at March 31, 2012 $ - $ - $ - $ - Charges 31,227 28,655 1,472 1,100 Cash payments (5,195 ) (4,766 ) - (429 ) Foreign exchange 63 63 - - Balance at June 30, 2012 $ 26,095 $ 23,952 $ 1,472 $ 671 Charges (credits) (2,671 ) (3,816 ) 48 1,097 Cash payments (17,652 ) (16,642 ) (52 ) (958 ) Foreign exchange 14 - - 14 Balance at September 30, 2012 $ 5,786 $ 3,494 $ 1,468 $ 824 Interest Income, Net Interest income and expense for the three and six months ended September 30, 2012 and 2011 were as follows (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2012 2011 Change 2012 2011 Change Interest income $ 495 $ 601 (18 )% $ 1,227 $ 1,291 (5 )% Interest expense (342 ) - 100 % (690 ) - 100 % Interest income, net` $ 153 $ 601 (75 )% $ 537 $ 1,291 (58 )% The changes in interest income for the three and six months ended September 30, 2012 compared with the same period in the prior fiscal year primarily resulted from lower invested balances resulting from the $133.5 million cash dividend payment made on September 18, 2012.

Interest expense for the three and six months ended September 30, 2012 represents commitment fees and non-recurring fees related to the revolving credit facility entered into in December 2011.

Other Income (Expense), Net Other income and expense for the three and six months ended September 30, 2012 and 2011 were as follows (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2012 2011 Change 2012 2011 Change Foreign currency exchange gain (loss), net $ (937 ) $ (1,053 ) (11 )% $ (1,608 ) $ (713 ) 126 % Gain on sale of property and plant - - 0 % - 4,904 (100 )% Investment income (loss) related to deferred compensation plan 510 (716 ) (171 )% 99 (528 ) (119 )% Gain on sale of investments - - 100 % 831 - 100 % Other, net (82 ) 6 (1467 )% 10 (235 ) (104 )% Other income (expense), net $ (509 ) $ (1,763 ) (71 )% $ (668 ) $ 3,428 (119 )% Foreign currency exchange gains or losses relate to balances denominated in currencies other than the functional currency of a particular subsidiary, to the sale of currencies, and to gains or losses recognized on foreign exchange forward contracts. We do not speculate in currency positions, but we are alert to opportunities to maximize foreign exchange gains.

42 -------------------------------------------------------------------------------- Table of Contents The $4.9 million gain on sale of property and plant for the six months ended September 30, 2011 relates to the sale of an unused manufacturing facility in China.

Investment income (loss) for the three and six months ended September 30, 2012 and 2011 represents earnings, gains, and losses on trading investments related to a deferred compensation plan offered by one of our subsidiaries.

During the six months ended September 30, 2012, we sold the remaining two of our available-for-sale securities with a total carrying value of $0.4 million and a total par value of $15.2 million for $0.9 million. This sale resulted in $0.8 million of gain recognized in other income (expense), net, $0.3 million of which resulted from the recognition of a temporary increase in fair value previously recorded in accumulated other comprehensive loss.

Provision for (Benefit from) Income Taxes The provision for (benefit from) income taxes and effective tax rates for the three and six months ended September 30, 2012 and 2011 were as follows (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2012 2011 2012 2011 Provision for (benefit from) income taxes $ (31,076 ) $ 4,888 $ (37,986 ) $ (4,657 ) Effective income tax rate (130.6 )% 21.9 % 107.7 % 27.7 % The provision for (benefit from) income taxes consists of income and withholding taxes. We operate in multiple jurisdictions and our profits are taxed pursuant to the tax laws of these jurisdictions. Our effective income tax rate may be affected by changes in or interpretations of tax laws in any given jurisdiction, utilization of net operating loss and tax credit carryforwards, changes in geographical mix of income and expense, and changes in management's assessment of matters such as the ability to realize deferred tax assets.

On April 25, 2012, we announced a restructuring plan to simplify our organization, to better align costs with our current business, and to free up resources to pursue growth opportunities. A majority of the restructuring was completed during the three months ended June 30, 2012. Remaining restructuring not completed during the three months ended September 30, 2012 will be completed in the remainder of the fiscal year. In determining the annual effective tax rate, the restructuring was treated as a discrete event as it was significantly unusual and infrequent in nature. As such, restructuring-related charges and costs were excluded from ordinary income in determining the annual effective tax rate. The tax benefit associated with the restructuring is approximately $0.2 million.

The income tax benefit for the three months ended September 30, 2012 was $31.1 million based on an effective income tax rate of 130.6% of pre-tax income. For the three months ended September 30, 2011, the income tax provision was $4.9 million based on an effective income tax rate of 21.9% of pre-tax income. For the six months ended September 30, 2012 and September 30, 2011, the income tax benefit was $38.0 million and $4.7 million based on an effective income tax rate of 107.7% and 27.7% of pre-tax loss. The change in the effective income tax rate for the three and six months ended September 30, 2012 compared with the same periods in fiscal year 2011 is primarily due to the mix of income and losses in the various tax jurisdictions in which we operate, and a discrete tax benefit of $32.1 million in the three months ended September 30, 2012 primarily related to the reversal of uncertain tax positions resulting from the closure of federal income tax examinations in the United States.

43 -------------------------------------------------------------------------------- Table of Contents As of September 30 and March 31, 2012, the total amount of unrecognized tax benefits and related accrued interest and penalties due to uncertain tax positions was $107.6 million and $143.3 million, of which $93.3 million and $125.4 million would affect the effective income tax rate if recognized. The decline in unrecognized tax benefits associated with uncertain tax positions in the amount of $35.7 million is primarily due to $33.8 million from the settlement of income tax examinations in the United States with the remaining from the expiration of statutes of limitations. We classified the unrecognized tax benefits as non-current income taxes payable.

We continue to recognize interest and penalties related to unrecognized tax positions in income tax expense. As of September 30 and March 31, 2012, we had approximately $7.7 million and $7.5 million, respectively, of accrued interest and penalties related to uncertain tax positions.

We file Swiss and foreign tax returns. For all these tax returns, we are generally not subject to tax examinations for years prior to 2000. During fiscal year 2012, the IRS (U.S. Internal Revenue Service) completed its field examinations of tax returns for our U.S. subsidiary for fiscal years 2006 and 2007, and issued NOPAs (notices of proposed adjustment) related to international tax issues for those years. We disagreed with the NOPAs and contested through the administrative process for the IRS claims regarding 2006 and 2007. On July 2, 2012, the IRS issued an RAR (Revenue Agent's Report) for fiscal years 2006 and 2007 proposing revised assessments resulting from the administrative process. Subsequent to our acceptance of the RAR on July 12, 2012, we received the final letter from the IRS dated August 8, 2012 which effectively settled the examinations. As a result of the closure of income tax examinations for fiscal years 2006 and 2007, we reversed $33.8 million of unrecognized tax benefits associated with uncertain tax positions and recorded $1.7 million tax provision from the proposed revised assessments, resulting in a net tax benefit of $32.1 million.

In addition, the IRS completed its field examination of our U.S. subsidiary for fiscal years 2008 and 2009 during the quarter. We received NOPAs related to various domestic and international tax issues on August 15, 2012. After the close of the fiscal quarter ended September 30, 2012, we received final letters dated October 17, 2012 which effectively settled the examinations. As a result of the closure of income tax examinations for fiscal years 2008 and 2009, we estimate we will reverse $9.0 million of unrecognized tax benefits associated with uncertain tax positions and record a $5.5 million tax provision from the assessments, resulting in a net estimated tax benefit of $3.5 million.

We are also under examination and have received assessment notices in other tax jurisdictions. At this time, we are not able to estimate the potential impact that these examinations may have on income tax expense. If the examinations are resolved unfavorably, there is a possibility they may have a material negative impact on our consolidated operating results.

Although we have adequately provided for uncertain tax positions, the provisions on these positions may change as revised estimates are made or the underlying matters are settled or otherwise resolved. With the exception of the resolution of the IRS examinations, it is not possible at this time to reasonably estimate the decrease of the unrecognized tax benefits within the next twelve months.

Liquidity and Capital Resources Cash Balances, Available Borrowings, and Capital Resources At September 30, 2012, our working capital was $353.1 million, compared with $576.7 million at March 31, 2012. The decrease in working capital over the prior year was primarily due to lower cash balances, which primarily resulted from a $133.5 million cash dividend payment. This dividend was approved on September 5, 2012 by our shareholders at the Annual General Meeting of Shareholders.

During the six months ended September 30, 2012, we generated $9.1 million from operating activities. Our main sources of operating cash flows were net income after adding non-cash expenses of depreciation, amortization, and share-based compensation expense, and from an increase in accounts payables. These sources of operating cash flows were offset in part by an increase in accounts receivables and inventories and by a decrease in accrued liabilities during this period. Net cash used in investing activities was $33.6 million, primarily from $30.5 million of investments in leasehold improvements, computer hardware and 44 -------------------------------------------------------------------------------- Table of Contents software, tooling and equipment and from a $4.0 million investment in a privately-held company. Net cash used by financing activities was $215.0 million, primarily from the $133.5 million cash dividend payment and from the $90.0 million used to repurchase 8.6 million shares under our share buyback program, offset in part by $9.0 million in proceeds received from sale of shares upon exercise of options and purchase rights.

At September 30, 2012, we had cash and cash equivalents of $237.0 million. Our cash and cash equivalents are comprised of bank demand deposits and short-term time deposits carried at cost, which is equivalent to fair value. Approximately 35% of our cash and cash equivalents are held by our Swiss-based entities, and approximately 53% is held by our subsidiaries in Hong Kong and China. We do not believe we would be subject to any material adverse tax impact or significantly inhibited by any country in which we do business from the repatriation of funds to Switzerland, our home domicile.

In December 2011, we entered into a Senior Revolving Credit Facility Agreement with a group of primarily Swiss banks that provides for a revolving multicurrency unsecured credit facility in an amount of up to $250.0 million. We may, upon notice to the lenders and subject to certain requirements, arrange with existing or new lenders to provide up to an aggregate of $150.0 million in additional commitments, for a total of $400.0 million of unsecured revolving credit. The credit facility may be used for working capital, general corporate purposes, and acquisitions. There were no outstanding borrowings under the credit facility at September 30, 2012.

The credit facility matures on October 31, 2016. We may prepay the loans under the credit facility in whole or in part at any time without premium or penalty.

Borrowings under the credit facility will accrue interest at a per annum rate based on LIBOR (London Interbank Offered Rate), or EURIBOR (Euro Interbank Offered Rate) in the case of loans denominated in euros, plus a variable margin determined quarterly based on the ratio of senior debt to earnings before interest, taxes, depreciation and amortization for the preceding four-quarter period, plus, if applicable, an additional rate per annum intended to compensate the lenders for the cost of compliance with regulatory reserve requirements and other banking regulations. We also pay a quarterly commitment fee of 40% of the applicable margin on the available commitment. In connection with entering into the credit facility, we incurred non-recurring fees totaling $1.5 million, which are amortized on a straight-line basis over the term of the credit facility.

The facility agreement contains representations, covenants, including threshold financial covenants, and events of default customary in Swiss credit markets.

Affirmative covenants include covenants regarding reporting requirements, maintenance of insurance, maintenance of properties and compliance with applicable laws and regulations, and financial covenants that require the maintenance of net senior debt, interest cover and adjusted equity ratios determined in accordance with the terms of the facility. Negative covenants limit the ability of the Company and its subsidiaries, among other things, to grant liens, make investments, incur debt, make restricted payments, enter into a merger or acquisition, or sell, transfer or dispose of assets, in each case subject to certain exceptions. As of September 30, 2012, we were not in compliance with the adjusted equity ratio of this facility. This situation resulted from our $133.5 million cash dividend payment to our shareholders on September 18, 2012. We believe that this is only a short-term situation. Until we are in compliance with the covenants, this facility may not be available for our use.

This facility stipulates that, upon an uncured event of default under the facility, the lenders may declare all or a portion of the outstanding obligations payable by us to be immediately due and payable, terminate their commitments and exercise other rights and remedies provided for under the facility. The events of default under the facility include, among other things, payment defaults, covenant defaults, inaccuracy of representations and warranties, cross defaults with certain other indebtedness, bankruptcy and insolvency events and events that have a material adverse effect (as defined in the facility). Upon a change of control of the Company, lenders whose commitments aggregate more than two-thirds of the total commitments under the facility may terminate the commitments and declare all outstanding obligations to be due and payable.

45 -------------------------------------------------------------------------------- Table of Contents We have credit lines with several European and Asian banks totaling $76.2 million as of September 30, 2012. As is common for businesses in European and Asian countries, these credit lines are uncommitted and unsecured. Despite the lack of formal commitments from the banks, we believe that these lines of credit will continue to be made available because of our long-standing relationships with these banks and our current financial condition. At September 30, 2012, there were no outstanding borrowings under these lines of credit. There are no financial covenants or cross default provisions under these facilities. We also have available credit lines related to corporate credit cards totaling $29.9 million as of September 30, 2012. The outstanding borrowings under these credit lines are recorded in other current liabilities. There are no financial covenants or cross default provisions under these credit lines.

Cash Flow from Operating Activities The following table presents selected financial information and statistics as of September 30, 2012 and 2011 (dollars in thousands): September 30, 2012 2011 Accounts receivable, net $ 284,451 $ 294,691 Inventories 321,307 325,053 Working capital 353,064 555,111Days sales in accounts receivable (DSO) (1) 47 days 45 days Inventory turnover (ITO) (2) 4.4x 4.8x Net cash provided by operating activities $ 9,095 $ 1,634 -------------------------------------------------------------------------------- (1) DSO is determined using ending accounts receivable as of the most recent quarter-end and net sales for the most recent quarter.

(2) ITO is determined using ending inventories and annualized cost of goods sold (based on the most recent quarterly cost of goods sold).

During the six months ended September 30, 2012, we generated net cash of $9.1 million from operating activities, compared to $1.6 million for the same period in the prior fiscal year. The primary drivers of this increase includes net income of $2.7 million generated in the six months ended September 30, 2012 compared with a net loss of $12.2 million in the six months ended September 30, 2011, and from a $68.9 million increase in accounts payables. These increases to operating activities were offset in part by a $58.3 million increase in accounts receivables, a $30.7 million increase in inventories, a $7.3 million increase in other assets, and from a $9.5 million decrease in accrued liabilities.

DSO for the current quarter increased by 2 days compared with the same period of the prior fiscal year primarily from higher accounts receivable balance due to decreased cash collections. 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. We do not modify payment terms on existing receivables, but may offer discounts for early payment.

Inventory turnover between the six months ended September 30, 2012 and 2011 decreased due to higher inventory levels between the two periods.

46 -------------------------------------------------------------------------------- Table of Contents Cash Flow from Investing Activities Cash flows from investing activities during the six months ended September 30, 2012 and 2011 were as follows (in thousands): Six months ended September 30, 2012 2011 Purchases of property, plant and equipment $ (30,522 ) $ (20,921 ) Acquisition, net of cash acquired - (18,814 ) Investment in privately-held company (3,970 ) - Proceeds from sale of property and plant - 4,904 Proceeds from sale of available-for-sale securities 917 - Purchases of trading investments (1,648 ) (4,536 ) Proceeds from sale of trading investments 1,638 4,522 Net cash used in investing activities $ (33,585 ) $ (34,845 ) Our expenditures for property, plant and equipment during the six months ended September 30, 2012 and 2011 were principally normal expenditures for leasehold improvements, computer hardware and software, tooling and equipment.

During the second quarter of fiscal year 2013, we invested $4.0 million in a privately-held company in exchange for convertible preferred stock. We account for this investment under the cost method of accounting since we have less than a 20% ownership interest and we lack the ability to exercise significant influence over the operating and financial policies of the investee.

Proceeds from the sale of property and plant were related to the sale of an unused manufacturing facility in China in the six months ended September 30, 2011.

During the six months ended September 30, 2012, we sold our two remaining available-for-sale securities with a total carrying value of $0.4 million and a total par value of $15.2 million for $0.9 million. This sale resulted in $0.8 million of gain recognized in other income (expense), net, $0.3 million of which resulted from the recognition of a temporary increase in fair value previously recorded in accumulated other comprehensive income.

The purchases and sales of trading investments in the six months ended September 30, 2012 and 2011 represent mutual fund activity directed by participants in a deferred compensation plan offered by one of the Company's subsidiaries. The mutual funds are held by a Rabbi Trust.

Cash Flow from Financing Activities The following table presents information on our cash flows from financing activities during the six months ended September 30, 2012 and 2011 (in thousands): Six months ended September 30, 2012 2011 Cash dividend payment $ (133,462 ) $ - Purchase of treasury shares (89,955 ) (73,134 ) Proceeds from sale of shares upon exercise of options and purchase rights 9,008 9,764 Tax withholdings related to net share settlements of RSUs (635 ) (185 ) Excess tax benefits from share-based compensation 22 30 Net cash used in financing activities $ (215,022 ) $ (63,525 ) Six months ended September 30, 2012 2011 Number of shares repurchased 8,600 7,609 Value of shares repurchased $ 89,955 $ 73,134 Average price per share $ 10.46 $ 9.61 47 -------------------------------------------------------------------------------- Table of Contents On September 5, 2012, our shareholders approved a cash dividend payment of CHF 125.7 million out of retained earnings to Logitech shareholders who owned shares on September 17, 2012. Eligible shareholders were paid CHF 0.79 per share ($0.85 per share in U.S. dollars), totaling $133.5 million in U.S. dollars on September 18, 2012.

During the six months ended September 30, 2012, we repurchased 8.6 million shares for $90.0 million under the Company's amended September 2008 buyback program, compared with the six months ended September 30, 2011, during which we repurchased 7.6 million shares for $73.1 million. The amounts of the repurchases include transaction costs incurred as part of the repurchase.

Cash of $9.0 million and $9.8 million was provided during the six months ended September 30, 2012 and 2011 from the sale of shares upon exercise of options and purchase rights pursuant to the Company's stock plans. The payment of tax withholdings related to net share settlements of RSUs (restricted stock units) required the use of $0.6 million and $0.2 million in cash in the six month periods ended September 30, 2012 and 2011.

Cash Outlook Our principal sources of liquidity are our cash and cash equivalents, cash flow generated from operations and, to a lesser extent, capital markets and borrowings. Our future working capital requirements and capital expenditures may increase to support investment in product innovations and growth opportunities, or to acquire or invest in complementary businesses, products, services, and technologies.

In December 2011, the Company entered into a Senior Revolving Credit Facility Agreement with a group of primarily Swiss banks that provides for a revolving multicurrency unsecured credit facility in an amount of up to $250.0 million.

The Company may, upon notice to the lenders and subject to certain requirements, arrange with existing or new lenders to provide up to an aggregate of $150.0 million in additional commitments, for a total of $400.0 million of unsecured revolving credit. The credit facility may be used for working capital, general corporate purposes, and acquisitions. The credit facility matures on October 31, 2016. The Company may prepay the loans under the credit facility in whole or in part at any time without premium or penalty. The facility agreement contains representations, covenants, including threshold financial covenants, and events of default customary in Swiss credit markets. There were no outstanding borrowings under the credit facility at September 30, 2012. As of September 30, 2012, we were not in compliance with the adjusted equity ratio of this facility.

This situation resulted from our $133.5 million cash dividend payment to our shareholders on September 18, 2012. We believe that this is only a short-term situation. Until we are in compliance with the covenants, this facility may not be available for our use.

In September 2008, our Board of Directors approved a share buyback program, which authorizes the Company to invest up to $250 million to purchase its own shares. In November 2011, we received approval from the Swiss regulatory authorities for an amendment to the September 2008 share buyback program to enable future repurchases of shares for cancellation. In fiscal year 2012, we repurchased 7.6 million shares for $73.1 million under the September 2008 program. Under the amended September 2008 program, we repurchased 9.9 million shares for $82.9 million in fiscal year 2012 and 8.6 million shares for $90.0 million in the three months ended June 30, 2012. As of September 30, 2012, the approved amount remaining under the amended September 2008 program was $4.4 million. On September 5, 2012, our shareholders approved the cancellation of 18.5 million shares repurchased under the September 2008 amended share buyback program. These shares are expected to be legally cancelled during the third quarter of fiscal year 2013.

We file Swiss and foreign tax returns. For all these tax returns, we are generally not subject to tax examinations for years prior to 2000. During fiscal year 2012, the IRS (U.S. Internal Revenue Service) completed its field examinations of tax returns for our U.S. subsidiary for fiscal years 2006 and 2007, and issued NOPAs (notices of proposed adjustment) related to international tax issues for those years. We disagreed with the NOPAs and contested through the administrative process for the IRS claims regarding 2006 and 2007. On July 2, 2012, the IRS issued an RAR (Revenue Agent's Report) for fiscal years 2006 and 2007 proposing revised assessments resulting from the administrative process. Subsequent to our 48 -------------------------------------------------------------------------------- Table of Contents acceptance of the RAR on July 12, 2012, we received the final letter from the IRS dated August 8, 2012 which effectively settled the examinations. As a result of the closure of income tax examinations for fiscal years 2006 and 2007, we reversed $33.8 million of unrecognized tax benefits associated with uncertain tax positions and recorded $1.7 million tax provision from the proposed revised assessments, resulting in a net tax benefit of $32.1 million.

In addition, the IRS completed its field examination of our U.S. subsidiary for fiscal years 2008 and 2009 during the quarter. We received NOPAs related to various domestic and international tax issues on August 15, 2012. After the close of the fiscal quarter ended September 30, 2012, we received final letters dated October 17, 2012 which effectively settled the examinations. As a result of the closure of income tax examinations for fiscal years 2008 and 2009, we estimate we will reverse $9.0 million of unrecognized tax benefits associated with uncertain tax positions and record a $5.5 million tax provision from the assessments, resulting in a net estimated tax benefit of $3.5 million.

We are also under examination and have received assessment notices in other tax jurisdictions. At this time, we are not able to estimate the potential impact that these examinations may have on income tax expense. If the examinations are resolved unfavorably, there is a possibility they may have a material negative impact on our consolidated operating results.

Although we have adequately provided for uncertain tax positions, the provisions on these positions may change as revised estimates are made or the underlying matters are settled or otherwise resolved. With the exception of the resolution of the IRS examinations, it is not possible at this time to reasonably estimate the decrease of the unrecognized tax benefits within the next twelve months.

On April 25, 2012, we announced a restructuring plan to reduce operating costs and improve financial results. We estimate completing the restructuring plan during fiscal year 2013 and incurring additional pre-tax restructuring charges related to employee termination costs and other associated costs of less than $3 million during the remaining six months of fiscal year 2013.

Our other contractual obligations and commitments which require cash are described in the following sections.

For over ten years, we have generated positive cash flows from our operating activities, including cash from operations of $196.1 million in fiscal year 2012. During the six months ended September 30, 2012, our normal level of cash and cash equivalents was significantly reduced by the cash dividend payment of CHF 125.7 million (U.S. dollar amount of $133.5 million at the time it was paid during the current quarter) out of retained earnings, and by share repurchases during this period. If we do not generate sufficient operating cash flows to support our operations and future planned cash requirements, our operations could be harmed and our access to credit facilities could be restricted or eliminated. However, we believe that the trend of our historical cash flow generation, our projections of future operations and reduced expenses, our available cash balances, credit lines and credit facility will provide sufficient liquidity to fund our operations for at least the next 12 months.

Although we believe that we can meet our liquidity needs, if we fail to meet our operating forecast or market conditions negatively affect our cash flows or ability to fund growth opportunities, we may be required to seek additional funding. If we seek additional funding, adequate funds may not be available on favorable terms, or at all. If adequate funds are not available on acceptable terms, or at all, we may be unable to adequately fund our business plans and it could have a negative effect on our business, operating cash flows and financial condition.

49 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations and Commitments As of September 30, 2012, our outstanding contractual obligations and commitments included: (i) facilities leased under operating lease commitments, (ii) purchase commitments and obligations, (iii) long-term liabilities for income taxes payable, and (iv) defined benefit pension plan and non-retirement post-employment benefit obligations. The following summarizes our contractual obligations and commitments at September 30, 2012 (in thousands): September 30, 2012 Operating leases $ 104,275 Purchase commitments - inventory 166,212 Purchase obligations - capital expenditures 19,000 Purchase obligations - operating expenses 66,402 Income taxes payable - non-current 105,128 Obligation for deferred compensation 14,950 Pension and post-employment obligations 38,174 Other long-term liabilities 12,511 Total contractual obligations and commitments $ 526,652 Operating Leases We lease 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 our option and usually include escalation clauses linked to inflation. The remaining terms on our non-cancelable operating leases expire in various years through 2028. Our asset retirement obligations on these leases as of September 30, 2012 were $1.9 million.

Purchase Commitments At September 30, 2012, we have fixed purchase commitments of $166.2 million for inventory purchases made in the normal course of business to original design manufacturers, contract manufacturers and other suppliers, which are expected to be fulfilled by December 2012. We also had commitments of $66.4 million for consulting services, marketing arrangements, advertising, outsourced customer services, information technology maintenance and support services, and other services. Fixed purchase commitments for capital expenditures amounted to $19.0 million at September 30, 2012, and primarily relate to commitments for computer hardware and leasehold improvements. We expect to continue making capital expenditures in the future to support product development activities and ongoing and expanded operations. Although open purchase commitments are considered enforceable and legally binding, the terms generally allow us the option to reschedule and adjust our requirements based on business needs prior to delivery of goods or performance of services.

Income Taxes Payable At September 30, 2012, we had $105.1 million in non-current income taxes payable, including interest and penalties, related to our income tax liability for recognized uncertain tax positions, compared with $137.3 million in non-current taxes payable as of March 31, 2012. The decline in income tax liability associated with uncertain tax positions in the amount of $32.2 million is primarily due to $30.3 million from the closure of income tax examinations in the United States with the remaining from the expiration of statutes of limitations.

We file Swiss and foreign tax returns. For all these tax returns, we are generally not subject to tax examinations for years prior to 2000. During fiscal year 2012, the IRS (U.S. Internal Revenue Service) completed its field examinations of tax returns for our U.S. subsidiary for fiscal years 2006 and 2007, and issued NOPAs (notices of proposed adjustment) related to international tax issues for those years. We disagreed with the NOPAs and contested through the administrative process for the IRS claims regarding 2006 and 2007. On July 2, 2012, the IRS issued an RAR (Revenue Agent's Report) for fiscal years 2006 and 2007 proposing revised assessments resulting from the administrative process. Subsequent to our acceptance of the RAR on July 12, 2012, we received the final letter from the IRS dated August 8, 2012 50 -------------------------------------------------------------------------------- Table of Contents which effectively settled the examinations. As a result of the closure of income tax examinations for fiscal years 2006 and 2007, we reversed $33.8 million of unrecognized tax benefits associated with uncertain tax positions and recorded $1.7 million tax provision from the proposed revised assessments, resulting in a net tax benefit of $32.1 million.

In addition, the IRS completed its field examination of our U.S. subsidiary for fiscal years 2008 and 2009 during the quarter. We received NOPAs related to various domestic and international tax issues on August 15, 2012. After the close of the fiscal quarter ended September 30, 2012, we received final letters dated October 17, 2012 which effectively settled the examinations. As a result of the closure of income tax examinations for fiscal years 2008 and 2009, we estimate we will reverse $9.0 million of unrecognized tax benefits associated with uncertain tax positions and record a $5.5 million tax provision from the assessments, resulting in a net estimated tax benefit of $3.5 million.

We are also under examination and have received assessment notices in other tax jurisdictions. At this time, we are not able to estimate the potential impact that these examinations may have on income tax expense. If the examinations are resolved unfavorably, there is a possibility they may have a material negative impact on our consolidated operating results.

Although we have adequately provided for uncertain tax positions, the provisions on these positions may change as revised estimates are made or the underlying matters are settled or otherwise resolved. With the exception of the resolution of the IRS examinations, it is not possible at this time to reasonably estimate the decrease of the unrecognized tax benefits within the next twelve months.

Obligation for Deferred Compensation At September 30, 2012, we had $15.0 million in liabilities related to a deferred compensation plan offered by one of our subsidiaries. For more information, please refer to our Annual Report on Form 10-K for the fiscal year ended March 31, 2012.

Pension and Post-Employment Obligations At September 30, 2012, we had $38.2 million in liabilities related to our defined benefit pension plans and non-retirement post-employment benefit obligations. For more information, please refer to our Annual Report on Form 10-K for the fiscal year ended March 31, 2012.

Other Contractual Obligations and Commitments For further detail about our contractual obligations and commitments, please refer to our Annual Report on Form 10-K for the fiscal year ended March 31, 2012.

Off-Balance Sheet Arrangements We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us.

Guarantees Logitech International S.A., the parent holding company, has guaranteed payment of the purchase obligations of various subsidiaries from certain component suppliers. These guarantees generally have an unlimited term. The maximum potential future payment under the guarantee arrangements is limited to $36.0 million. At September 30, 2012, there were no purchase obligations outstanding for which the parent holding company was required to guarantee payment.

51 -------------------------------------------------------------------------------- Table of Contents Logitech Europe S.A., a subsidiary of the parent holding company, has guaranteed the purchase obligations of another Logitech subsidiary and third-party contract manufacturers under three guarantee agreements. Two of these guarantees do not specify a maximum amount. The remaining guarantee has a total limit of $7.0 million. As of September 30, 2012, $2.6 million of guaranteed purchase obligations were outstanding under these guarantees. Logitech Europe S.A. has also guaranteed payment of the purchase obligations of a third-party contract manufacturer under three guarantee agreements. The maximum amount of these guarantees was $3.7 million as of September 30, 2012. As of September 30, 2012, $2.0 million of guaranteed purchase obligations were outstanding under these agreements.

Logitech International S.A. and Logitech Europe S.A. have guaranteed certain contingent liabilities of various subsidiaries related to transactions occurring in the normal course of business. The maximum amount of the guarantees was $36.9 million as of September 30, 2012. As of September 30, 2012, $10.0 million of guaranteed liabilities were subject to these guarantees.

Indemnifications Logitech indemnifies some of its suppliers and customers for losses arising from matters such as intellectual property disputes 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 September 30, 2012. We do not believe, based on historical experience and information currently available, that it is probable that any material amounts will be required to be paid under our indemnification arrangements.

Logitech also indemnifies its current and former directors and certain of its current and former officers. Certain costs incurred for providing such indemnification may be recoverable under various insurance policies. Logitech is unable to reasonably estimate the maximum amount that could be payable under these arrangements because these exposures are not capped, the obligations are conditional in nature, and the facts and circumstances involved in any situation that might arise.

Legal Proceedings On May 23, 2011, a class action complaint was filed against Logitech International S.A. and certain of its officers in the United States District Court for the Southern District of New York on behalf of individuals who purchased Logitech shares between October 28, 2010 and April 1, 2011. The complaint relates to Logitech's disclosure on March 31, 2011 that its results for fiscal year 2011 would fall below expectations and seeks unspecified monetary damages and other relief against the defendants. The action was transferred to the United States District Court for the Northern District of California on July 28, 2011. The California Court appointed a lead plaintiff on October 27, 2011. The plaintiff filed an amended complaint on January 9, 2012 which expanded the alleged class period to between October 28, 2010 and September 22, 2011. On July 13, 2012, the California Court granted defendants' motion to dismiss the amended complaint, with leave to amend. On September 28, 2012, the Court approved a stipulation and proposed order submitted by the parties dismissing the case with prejudice.

On July 15, 2011, a complaint was filed against Logitech International S.A. and two of its subsidiaries in the United States District Court for the Central District of California by Universal Electronics, Inc. (UEI). On November 3, 2011, the Company filed a counter suit against UEI. On July 18, 2012, Logitech and UEI signed a nonbinding settlement and license agreement term sheet, and the District Court thereafter dismissed the suits without prejudice to the right, upon good cause shown within 60 days, to reopen the action if a settlement is not consummated. The parties subsequently finalized the settlement.

In addition, from time to time the Company is involved in claims and legal proceedings which arise in the ordinary course of its business. The Company is currently subject to several such claims and a small number of legal proceedings. The Company believes that these matters lack merit and intends to vigorously defend against them. Based on currently available information, the Company does not believe that resolution of pending matters will have a material adverse effect on its financial condition, cash flows 52 -------------------------------------------------------------------------------- Table of Contents or results of operations. However, litigation is subject to inherent uncertainties, and there can be no assurances that the Company's defenses will be successful or that any such lawsuit or claim would not have a material adverse impact on the Company's business, financial condition, cash flows and results of operations in a particular period. Any claims or proceedings against us, whether meritorious or not, can have an adverse impact because of defense costs, diversion of management and operational resources, negative publicity and other factors. Any failure to obtain necessary license or other rights, or litigation arising out of intellectual property claims, could adversely affect our business.

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