Logitech 2006 Annual Report Download - page 93

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The Company also enters into cooperative marketing arrangements with most of its distribution and retail
customers allowing customers to receive a credit equal to a set percentage of their purchases of the Company’s
products for various marketing programs. The objective of these programs is to encourage advertising and
promotional events to increase sales of the Company’s products. Accruals for the estimated costs of these
marketing programs are recorded based on the contractual percentage of product purchased in the period the
Company recognizes revenue.
The Company regularly evaluates the adequacy of its accruals for customer programs and incentive
offerings. Future market conditions and product transitions may require the Company to take action to increase
such programs. In addition, when the variables used to estimate these costs change, or if actual costs differ
significantly from the estimates, the Company would be required to record incremental reductions to revenue or
increased operating expenses. If, at any future time, the Company becomes unable to reasonably estimate the cost
of customer programs and incentive offerings, recognition of revenue might be deferred until products are sold to
end-users, which would adversely impact revenue in the period of transition.
Allowance for Doubtful Accounts
The Company sells its products through a domestic and international network of distributors, retailers and
OEM customers. Logitech generally does not require any collateral from its customers. However, the Company
seeks to control its credit risk through ongoing credit evaluations of its customers’ financial condition and by
purchasing credit insurance on U.S. and European retail accounts receivable balances.
The Company regularly evaluates the collectibility of its accounts receivable and maintains allowances for
doubtful accounts. The allowances are based on management’s assessment of the collectibility of specific
customer accounts, including their credit worthiness and financial condition, as well as the Company’s historical
experience with bad debts and customer deductions, receivables aging, current economic trends and geographic
or country-specific risks.
As of March 31, 2006, three customers represented 14%, 13% and 10% of total accounts receivable. The
customers comprising the ten highest outstanding trade receivable balances accounted for approximately 60% of
total accounts receivable as of March 31, 2006. A deterioration of a significant customer’s financial condition
could cause actual write-offs to be materially different from the estimated allowance. If any of these customers’
receivable balances should be deemed uncollectible or if actual write-offs are higher than historical experience,
the Company would have to make adjustments to its allowance for doubtful accounts, which could result in an
increase in the Company’s operating expenses.
Inventory Valuation
The Company must order components for its products and build inventory in advance of customer orders.
Further, the Company’s industry is characterized by rapid technological change, short-term customer
commitments and rapid changes in demand.
The Company records inventories at the lower of cost or market value and records write-downs of
inventories which are obsolete or in excess of anticipated demand or market value. A review of inventory is
performed each period that considers factors including the marketability and product life cycle stage, product
development plans, component cost trends, demand forecasts and current sales levels. Inventory exposures are
identified by comparing inventory on hand and on order to forecasted sales over the next six, nine and twelve
month periods. Inventory on hand which is not expected to be sold or utilized based on review of forecasted sales
and utilization is considered excess, and the Company recognizes the write-off in cost of sales at the time of such
determination. At the time of loss recognition, a new, lower-cost basis for that inventory is established and
subsequent changes in facts and circumstances would not result in an increase in the cost basis. If there were an
abrupt and substantial decline in demand for Logitech’s products or an unanticipated change in technological or
customer requirements, the Company may be required to record additional write-downs which could adversely
affect gross margins in the period when the write-downs are recorded.
35
CG
LISA