Logitech 2012 Annual Report Download - page 174

risks and the financial condition of our distribution channel. If management determines that a customer’s accounts
receivable balance is uncollectible, recognition of revenue from that customer is deferred until collectibility is
reasonably assured.
As of March 31, 2012, one customer group represented 14% of total accounts receivable. The customers
comprising the ten highest outstanding trade receivable balances accounted for approximately 55% of total accounts
receivable as of March 31, 2012. 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, we would have to
make adjustments to our 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, our industry is characterized by rapid technological change, short-term customer commitments and rapid
changes in demand.
We record inventories at the lower of cost or market value and record write-downs of inventories which
are obsolete or in excess of anticipated demand or market value. A review of inventory is performed each fiscal
quarter that considers factors including the marketability and product life cycle stage, product development plans,
component cost trends, demand forecasts and current sales levels. We identify inventory exposures by comparing
inventory on hand, in the channel and on order to historical and forecasted sales over six 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 we recognize the write-off in cost of sales at the time of such determination. The write-off is determined
by comparison of the current replacement cost with the estimated selling price less any costs of completion and
disposal (net realizable value) and the net realizable value less an allowance for normal profit. 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, we may
be required to record additional write-downs which could adversely affect gross margins in the period when the
write-downs are recorded.
Share-Based Compensation Expense
Share-based compensation expense includes compensation expense, reduced for estimated forfeitures, for
awards granted after April 1, 2006 based on the grant-date fair value. The grant date fair value for stock options and
stock purchase rights is estimated using the Black-Scholes-Merton option-pricing valuation model. The grant date
fair value of RSUs (restricted stock units) which vest upon meeting certain market conditions is estimated using
the Monte-Carlo simulation method. The grant date fair value of time-based RSUs is calculated based on the share
market price on the date of grant. For stock options and restricted stock assumed by Logitech when LifeSize was
acquired, the grant date used to estimate fair value was deemed to be December 11, 2009, the date of acquisition.
Compensation expense for awards granted or assumed after April 1, 2006 is recognized on a straight-line basis
over the service period of the award. For share-based compensation awards granted prior to but not yet vested as of
April 1, 2006, share-based compensation expense is based on the grant-date fair value estimated using the Black-
Scholes-Merton option-pricing valuation model reduced for estimated forfeitures, and recognized on a straight-line
basis over the service period for each separately vesting portion of the award. See Note 4—Employee Benefit Plans
in the Notes to Consolidated Financial Statements for further discussion of share-based compensation.
Our estimates of share-based compensation expense require a number of complex and subjective assumptions
including our stock price volatility, employee exercise patterns, future forfeitures, dividend yield, related tax effects
and the selection of an appropriate fair value model. We estimate expected share price volatility based on historical
volatility using daily prices over the term of past options, RSUs or purchase offerings, as we consider historical share
price volatility as most representative of future volatility. We estimate expected life based on historical settlement
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