10-K 1 plt-2011402x10k.htm PLANTRONICS INC 10-K 4-2-2011 form10kFY2011.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-K
 
 
(MARK ONE)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 2, 2011
 OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to _____________
 
Commission file number: 1-12696
 
Plantronics, Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
77-0207692
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
345 Encinal Street, Santa Cruz, California
 
95060
(Address of principal executive offices)
 
(Zip Code)
 
(831) 426-5858
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
 
 
 
COMMON STOCK, $.01 PAR VALUE
 
NEW YORK STOCK EXCHANGE
 
 
 
PREFERRED SHARE PURCHASE RIGHTS
 
NEW YORK STOCK EXCHANGE
 
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  
Yes S No £
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   
Yes £ No S

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes S No £
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes S No £
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K  is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. £
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one).
Large Accelerated Filer S
Accelerated Filer £
 
 
Non-accelerated Filer £ (Do not check if a smaller reporting company)
Smaller Reporting Company £
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes £ No S
 
The aggregate market value of the common stock held by non-affiliates of the Registrant, based upon the closing price of $33.91 for shares of the Registrant's common stock on October 1, 2010, the last trading day of the registrant’s most recently completed second fiscal quarter as reported by the New York Stock Exchange, was approximately $1,602,180,651.  In calculating such aggregate market value, shares of common stock owned of record or beneficially by officers, directors, and persons known to the Registrant to own more than five percent of the Registrant's voting securities as of October 1, 2010 (other than such persons of whom the Registrant became aware only through the filing of a Schedule 13G filed with the Securities and Exchange Commission) were excluded because such persons may be deemed to be affiliates.  This determination of affiliate status is for purposes of this calculation only and is not conclusive.
 
As of April 30, 2011, 48,103,129 shares of common stock were outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 2011 Annual Meeting of Stockholders to be held on or about August 5, 2011 are incorporated by reference into Part III of this Annual Report on Form 10-K.
 
 
 

Plantronics, Inc.
FORM 10-K
For the Year Ended March 31, 2011
TABLE OF CONTENTS
 
Part I.
 
 
Page
Item 1.
 
Item 1A.
 
Item 1B.
 
Item 2.
 
Item 3.
 
Item 4.
 
Part II.
 
 
 
Item 5.
 
Item 6.
 
Item 7.
 
Item 7A.
 
Item 8.
 
Item 9.
 
Item 9A.
 
Item 9B.
 
Part III.
 
 
 
Item 10.
 
Item 11.
 
Item 12.
 
Item 13.
 
Item 14.
 
Part IV.
 
 
 
Item 15.
 
 
Plantronics, Clarity, and Simply Smarter Communications are trademarks or registered trademarks of Plantronics, Inc.
 
DECT™ is a trademark of ETSI registered for the benefit of its members in France and other jurisdictions.
 
The Bluetooth name and the Bluetooth trademarks are owned by Bluetooth SIG, Inc. and are used by Plantronics, Inc. under license.
 
All other trademarks are the property of their respective owners.
 


PART I
 
This Annual Report on Form 10-K is filed with respect to our fiscal year 2011. Each of our fiscal years ends on the Saturday closest to the last day of March. Fiscal year 2011 ended on April 2, 2011, fiscal year 2010 ended on April 3, 2010, and fiscal year 2009 ended on March 28, 2009.  Fiscal year 2011 consisted of 52 weeks, and fiscal years 2010 and 2009 consisted of 53 and 52 weeks, respectively.  For purposes of consistent presentation, we have indicated in this report that each fiscal year ended "March 31" of the given year, even though the actual fiscal year end may have been on a different date.
 
CERTAIN FORWARD-LOOKING INFORMATION
 
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These statements may generally be identified by the use of such words as "expect," "anticipate," "believe," "intend," "plan," "will," or "shall," and are based on current expectations and entail various risks and uncertainties.  Our actual results could differ materially from those anticipated in such forward-looking statements as a result of a number of factors, including, but not limited to the factors discussed in the subsection entitled "Risk Factors" in Item 1A of this Form 10-K.  This Annual Report on Form 10-K and our Annual Report to Stockholders should be read in conjunction with these risk factors.  We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
 
ITEM 1.  BUSINESS
COMPANY BACKGROUND
 
Plantronics, Inc. (“Plantronics,” “the Company,” “we”, “our,” or “us”) is a leading worldwide designer, manufacturer, and marketer of lightweight communications headsets, telephone headset systems, and accessories for the business and consumer markets under the Plantronics brand.  In addition, we manufacture and market, under our Clarity brand, specialty telephone products, such as telephones for the hearing impaired, and other related products for people with special communication needs.
 
Our headsets are communications tools, providing freedom to use your hands while staying connected to your communication or entertainment device, freedom to move around, and freedom from using keyboards by enhancing speech recognition capabilities.  We apply a variety of technologies to develop high quality products to meet the needs of our customers, whether it is for communications or personal entertainment.  Our headsets are widely used with mobile phones, in contact centers, in the office, in the home, for applications such as Unified Communications (“UC”), with Voice over Internet Protocol (“VoIP”), for gaming, and for other specialty applications.  Our major product categories include Office and Contact Center (“OCC”), which includes corded and cordless communication headsets, audio processors and telephone systems; Mobile, which includes Bluetooth® and corded products for mobile phone applications; Gaming and Computer Audio, which includes personal computer ("PC") and gaming headsets; and Clarity, which includes specialty products marketed for hearing impaired individuals.  All products are generally sold under the Plantronics and Clarity brands.
 
We ship our products to approximately 65 countries through a worldwide network of distributors, retailers, wireless carriers, original equipment manufacturers (“OEMs”), and telephony service providers.  We have well-developed distribution channels in North America, Europe, Australia and New Zealand, where use of our products is widespread.  Our distribution channels in other regions of the world are less mature, and while we primarily serve the contact center markets in those regions, we continue to expand into the office, mobile and entertainment, digital audio, and specialty telephone markets in those regions and additional international locations.  Revenues from our retail channel are cyclical, with our third fiscal quarter typically being the strongest quarter due to holiday seasonality.
 
Plantronics was founded and incorporated in the State of California in 1961 and initially became a public company in 1977. We then became a private company in a leveraged buyout in 1989 and subsequently reincorporated in the State of Delaware. In 1994, Plantronics again became a public company listed on the New York Stock Exchange ("NYSE") under the ticker symbol "PLT".
 
On August 18, 2005, we acquired Altec Lansing Technologies, Inc. (“Altec Lansing”), a market leader in docking and PC audio systems, and it subsequently became our Audio Entertainment Group (“AEG”) segment.  On December 1, 2009, we sold Altec Lansing, our AEG segment.  
 
We provide access free of charge directly on our website (www.plantronics.com) or through a link on our website to the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13 (a) or 15(d) of the Securities Exchange Act of 1934.

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Our principal executive offices are located at 345 Encinal Street, Santa Cruz, California, 95060.  Our telephone number is (831) 426-5858.  Our internet address is www.plantronics.com.  Our Investor Relations website, which contains, among other things, documents regarding our corporate governance and the charters of the standing committees of our Board of Directors, is also accessible through www.plantronics.com.
 
BUSINESS SEGMENTS AND MARKET INFORMATION
 
Prior to December 1, 2009, we operated as two segments, the Audio Communications Group (“ACG”) and AEG.  As previously noted, we completed the sale of Altec Lansing, which comprised our AEG segment, effective December 1, 2009; therefore, it is no longer included in continuing operations, and we operate as one segment.  We have classified the AEG operating results, including the loss on sale of AEG, as discontinued operations in the Consolidated statement of operations for all periods presented.
 
General Industry Background
 
Plantronics operates predominantly in the consumer electronics market and focuses on the design, manufacture, and distribution of headsets for business and consumer applications, and other specialty products for the hearing impaired.  We develop enhanced communications for offices and contact centers, mobile and cordless phones, and computers and gaming consoles.  We offer our products primarily under two brands – Plantronics and Clarity.
 
On a long-term basis, the demand for headsets has generally grown in both of our traditional markets which include the enterprise market and the consumer market.  The trend towards wireless products has been a significant factor in each of these markets.  Our business is sensitive to economic cycles, and we experienced a decrease in demand in fiscal 2009 and 2010 due to the global economic recession.  We experienced some recovery in our revenues beginning in the second half of fiscal 2010 which continued into fiscal 2011; however, there can be no assurance that this recovery will be sustained. Our headset products enhance communications by providing the following benefits:
 
better sound quality that provides clearer conversations on both ends of a call through a variety of features and technologies, including noise-canceling microphones, Digital Signal Processing (“DSP”), and more;
wireless freedom allowing people to take and make calls as they move freely without cords or cables around their office or home, or easily from public to private space when privacy is required;
multi-tasking benefits which allow people to use computers and mobile devices including smartphones or other devices, take notes and organize files while talking hands free;
enabling emerging UC integration for telephony, mobile, cloud and PC across varied applications, and providing greater privacy than speakerphones;
contributing to greater driving safety and enabling a motor vehicle operator to comply with hands-free legislation by having both hands free to drive while talking on a mobile phone;
voice command and control that let people take advantage of voice dialing and/or other voice-based features to make communications and the human/electronic interface more natural and convenient;
providing ergonomic relief from repetitive stress injuries and discomfort associated with placing a telephone handset between the shoulder and neck;
providing greater comfort and convenience than a telephone alone on longer duration calls;
providing a convenient means for connecting between various applications and voice networks, whether that be between land line and mobile phones, or between PC-based communications and other networks; and
sensor technology which allows calls to automatically be answered when the user attaches the headset, transfers calls from the headset to the mobile phone when the user removes the headset, and, with some softphone applications, updates the user's presence.
The proliferation of desktop computing makes communications headsets a product of choice in many occupations because they permit users to be more efficient in an ergonomically comfortable environment by allowing them to verbally communicate without holding traditional handset devices.  Growing awareness of driver safety and impending or existing hands-free legislation mandating hands-free devices for telephonic communications while driving has led to increased headset adoption for mobile phone users.  The increased adoption of new and existing technologies, such as UC, Bluetooth, VoIP, DSP, and Digital Enhanced Cordless Telecommunications (“DECT”), each of which is described below, contributes to demand for our headsets and audio solutions in the future:

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UC is the integration of voice, data and video-based communications systems enhanced with software applications and IP networks.  It may include the integration of devices and media associated with a variety of business workflows and applications, including e-mail, instant messaging, presence, audio, video and web conferencing and unified messaging.  UC seeks to provide seamless connectivity and user experience for enterprise workers regardless of their location and environment, improving the overall business efficiency and providing more effective collaboration among an increasingly distributed workforce.  
Bluetooth wireless technology is a short-range communications technology intended to replace the cables connecting portable and/or fixed devices while maintaining high levels of security.  The key features of Bluetooth technology are robustness, low power, and low cost.  The Bluetooth specification defines a uniform structure for a wide range of devices to connect and communicate with each other.  Bluetooth technology has achieved global acceptance such that any Bluetooth enabled device, almost anywhere in the world, can connect to other Bluetooth enabled devices in proximity.
VoIP is a technology that allows a person to communicate using a broadband Internet connection instead of a regular (or analog) telephone line.  VoIP converts the voice signal into a digital signal that travels over the Internet or other packet-switched networks and then converts it back at the other end so that the caller can speak to anyone with another VoIP connection or a regular (or analog) phone line.
DSP is a technology that delivers acoustic protection and optimal sound quality through noise reduction, echo cancellation, and other algorithms to improve both transmit and receive quality.
DECT is a technology that optimizes audio quality, lowers interference with other wireless devices, and is digitally encrypted for heightened call security.
Markets
 
Our products are designed to meet the needs of specific markets and applications such as offices (ranging from enterprise to home offices), contact centers, mobile devices (such as mobile phones and smartphones), computer and gaming, residential, and other specialty applications.  These markets and applications are increasingly overlapping as work styles and lifestyles change, and people use devices for multiple applications such as communication, music, and video entertainment.  We serve these markets through our product categories listed below.
 
Office and Contact Center
 
The office market comprises our largest revenue stream and we offer a broad range of communications headsets, including high-end, ergonomically designed headsets, audio processors, and telephone systems.  Our end-users consist of enterprise employees as well as small office, home office, and remote workers.  Growth in this market comes from three main factors:
 
the adoption of wireless solutions and the freedom they allow;
increasing deployment of UC systems; and
growing awareness of the benefits of using headsets.
 
We believe the office market represents our largest revenue and profit growth opportunity.  The contact center market is our most mature market, and we expect this market to grow slowly over the long-term.  We expect that contact centers will increasingly adopt UC to help improve productivity and reduce costs.  We develop audio endpoints tailored specifically to UC, and as UC adoption continues to increase, we will continue to lead in new product performance by creating solutions that combine hardware and software for improved customer solutions.
 
Mobile
 
Use of headsets with mobile phones has grown worldwide. Mobile represents a large unit volume market and is our second largest revenue stream.  Use of headsets with mobile phones has grown worldwide, particularly due to continued Bluetooth technology adoption and hands-free legislation regarding the use of mobile phones while driving.  As headsets become more widely used, users are becoming more fashion conscious and style has become as important as functionality and technology.  Our mobile headsets merge technological innovations with style.  The mobile headset market is beginning to slow in the United States ("U.S."). We believe this market is likely to grow more slowly in the future than it has in the past as it continues to mature.
 
Entertainment and Computer Audio
Entertainment and computer audio headsets, whether they are used for interactive on-line gaming or switching between music and phone calls for multi-functional devices, represent an emerging market opportunity for us.

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We believe that a number of fundamental factors are likely to increase our customers’ need for PC-compatible headsets in the future, including the convergence of telephony and entertainment, internet multimedia applications such as streaming audio and video, VoIP, gaming, and video conferencing.  As devices providing these users’ needs converge, our headsets need to be PC-compatible, mobile phone compatible, MP3 compatible and various combinations of these.  We believe our product roadmaps address the convergence brought about by these needs.
 
Specialty Products
 
Our specialty products sold under our Clarity brand address the unique needs of various consumer groups, one of which is the increasing number of people worldwide suffering from hearing loss.  We offer a comprehensive range of communications products that serves customers with mild, moderate, and severe hearing loss as well as the deaf community.
 
FOREIGN OPERATIONS
 
In fiscal 2011, 2010 and 2009 net revenues outside the U.S. accounted for approximately 41%, 38%, and 37%, respectively, of our total net revenues.  Revenues derived from foreign sales generally are subject to additional risks such as fluctuations in exchange rates, increased tariffs, the imposition of other trade barriers, and potential currency restrictions.  In fiscal 2011, we continued to engage in hedging activities to limit our transaction and economic exposures, and to mitigate our exchange rate risks.  We hedged our economic exposure by hedging a portion of our anticipated Euro and Great Britain Pound denominated sales and our Mexican Peso denominated expenditures, which together constitute the most significant portion of our currency exposure.  In addition, we hedged our balance sheet exposure by hedging Euro, Great Britain Pound and Australian Dollar denominated cash balances, accounts receivable and accounts payable. The U.S. Dollar has recently declined in value relative to the Euro and Great Britain Pound. While our existing hedges cover a certain amount of exposure for our fiscal 2012, any long-term weakening of the Euro and Great Britain Pound relative to the U.S. Dollar may have a material adverse impact on our financial results.
 
Further information regarding our foreign operations, as required by Item 101(d) of Regulation S-K, can be found in the Consolidated Financial Statements and related notes herein.
 
COMPETITION
 
The market for our products is very competitive and some of our competitors have greater financial resources than we do, as well as production, marketing, engineering and other capabilities to develop, manufacture, market and sell their products.
 
One of our primary competitors is GN Netcom, a subsidiary of GN Store Nord A/S., a Danish telecommunications conglomerate, who competes with us in the office, contact center, and mobile markets and on a limited scale, in the PC market.  In addition, Motorola, Logitech, and Aliph are significant competitors in the consumer headset market and Sennheiser Communications is a competitor in the computer, office, and contact center markets.  We also believe there may be increased competition from the major mobile phone device makers such as Nokia, Motorola, LG Electronics, Samsung and Sony.
 
We believe the principal factors to be successful and competitive in each of the markets we serve are:
 
our understanding of emerging markets and new technologies, such as UC, and our ability to react quickly to the opportunities that they provide;
our ability to bring to market products that deliver on performance, product design, style, comfort, features, sound quality, simplicity, price and reliability;
maintenance of our brand name recognition and reputation;
superior customer service, support and warranty terms; and
effective and efficient distribution channels that allow us to market and sell our products.
 
We believe that our products and our strategy enable us to compete based on these factors.
 
RESEARCH AND DEVELOPMENT
 
We believe that the future success of our business depends upon our ability to enhance our existing products, to develop compelling new products, to develop cost effective products, to have our products qualified by our technology partners and customers, to successfully introduce these products to existing and new markets on a timely basis, and to commence and sustain volume production to meet customer demands.
 

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During fiscal 2011, we developed and introduced innovative products that enabled us to better address changing customer demands and emerging market trends.  Our goal is to bring the right products to market at the right time and have best in class development processes.
 
Our core research and development focus in fiscal 2012 continues to be on UC which will require incremental investments in firmware and software engineering to enhance the broad compatibility of our products in the enterprise systems with which they will be deployed and to develop value-added software application for business users.  The products that we are developing require significant technological know-how and may be protected by intellectual property. Separately or together this technological know-how and intellectual property may create increased barriers to entry for many competitors. We are continually improving the efficiency of our development processes through strategic architecting, common platforms, and increased use of software and test tools among other factors.
 
The success of new product introductions is dependent on a number of factors including appropriate new product selection, timely completion and introduction to the market, cost-effective manufacturing, quality, acceptance of new technologies and general market acceptance.  Traditionally, the technology of telephone headsets has evolved slowly, and our product life cycles have historically been relatively long.  The next generation products historically included stylistic changes and quality improvements but were based on technology similar to the previous generation. Our newer emerging technology products, particularly in the mobile and computer markets, exhibit shorter life cycles more similar to the consumer electronics market and are consequently more sensitive to market trends and fashion.  In addition, we believe that changes in technology will come at a faster pace; therefore, to avoid product obsolescence, we will continue to monitor technological changes in telephony, as well as users' demands for new technologies.
 
During fiscal 2011, 2010 and 2009, we incurred approximately $63.2 million, $57.8 million, and $63.8 million, respectively, in research, development and engineering expenses.  Historically, we have conducted most of our research, development and engineering with an in-house staff, with limited use of contractors.  Key locations for our research, development and engineering staff are our facilities in the U.S., Mexico, China, and the United Kingdom.  
 
SALES AND DISTRIBUTION
 
We maintain a direct sales force worldwide to provide ongoing customer support and service globally.  We have a well-established, multi-level distribution network in North America, Europe, Australia and New Zealand where use of our products is widespread to support our customers' needs. Our distribution channels in other regions of the world are less mature, and while we primarily serve the contact center markets in those regions, we are expanding into the office, mobile and entertainment, digital audio, and specialty telephone markets in those locations.
 
Our commercial distributors include headset specialists, national wholesalers, and regional wholesalers.  The wholesalers typically offer a wide variety of products from multiple vendors to both resellers and end users.  Our commercial distribution channel generally maintains inventory of our products.  Our distribution of specialty products includes specialized distributors, retail, government programs, audiologists, and other health care professionals.
 
We use commissioned manufacturers' representatives to assist in selling through the retail channel. Our retail channel consists of (1) consumer electronics retailers, consumer products retailers, and office supply distributors; (2) wireless carrier stores; (3) catalog and mail order companies; (4) mass merchants; and (5) warehouse clubs.  Our headsets are sold through retailers who sell headsets to corporate customers, small businesses, and to individuals who use them for a variety of personal and professional purposes.  Revenues from this channel are cyclical with our third fiscal quarter typically being the strongest quarter due to holiday seasonality.  A portion of our retail partners manage inventories on consignment.
 
We have a broad, diverse group of customers whose businesses are located throughout the world.  Our principal customers are distributors, retailers, carriers, and OEMs.  Our commercial distributors and retailers represent our first and second largest sales channels in terms of net revenues, respectively.  No customer accounted for more than 10% of our consolidated net revenues in fiscal 2011, 2010 or 2009.
 
Our telephony OEMs, manufacturers of automatic call distributor systems and other telecommunications, and computer equipment providers also resell our headsets.  Contact center equipment OEMs do not typically manufacture their own peripheral products and, therefore, distribute our headsets under their own private label or as a Plantronics-branded product.  Wireless carriers do not manufacture headsets but sell our headsets as a Plantronics-branded product or under their own private label.  Telephone service providers purchase headsets from us for use by their own agents.  Certain service providers also resell headsets to their customers.
 

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Computer OEMs include both manufacturers of computer hardware (including PCs and specialized components and accessories for PCs) and software.  Most computer OEMs do not manufacture headsets but look for manufacturers such as Plantronics to supply headsets that can be used with their products. We supply certain headsets to computer OEMs particularly for use in UC systems.
 
We also make direct sales as a General Services Administration (“GSA”) contractor to certain government agencies, including the National Aeronautics and Space Administration ("NASA") and the Federal Aviation Administration ("FAA").  In addition, certain distributors are authorized resellers under a GSA schedule price list and sell our products to government customers pursuant to that agreement.  These sales did not comprise a significant portion of our net revenues in fiscal 2011.
 
Our products may also be purchased directly from our website at www.plantronics.com.
 
We continue to evaluate our logistics processes and implement new strategies to further reduce our transportation costs and improve lead-times to customers. Currently, we have distribution centers located in the following locations:
 
Tijuana, Mexico, which provides logistics services for products destined for customers in the U.S., Canada, Asia Pacific, and Latin America regions;
Prague, Czech Republic, which provides logistics services for products shipped to customers in our Europe, Middle East and Africa regions;
Suzhou, China, which provides logistics services for products which are shipped within Mainland China;
Melbourne, Australia, which provides logistics services for products which are shipped to the retail channel in Australia and New Zealand;
Sao Paulo, Brazil, which provides logistics services for products which are shipped to customers within Brazil; and
Tokyo, Japan, which provides logistics services for products which are shipped to customers within Japan.
 
With respect to the above locations, we use third party warehouses in the Czech Republic, Australia, Brazil, and Japan. We operate all other warehouse facilities.
 
BACKLOG
 
Our backlog of unfilled orders was $29.6 million at March 31, 2011 compared to $31.4 million at March 31, 2010.  We include all purchase orders scheduled for delivery over the next 12 months in backlog.  We have a “book and ship” business model whereby we fulfill the majority of our orders within 48 hours of our receipt of the order.  Our backlog is occasionally subject to cancellation or rescheduling by the customer on short notice with little or no penalty.  Because of our “book and ship” model, as well as the uncertainty of order cancellations or rescheduling, we do not believe our backlog as of any particular date is indicative of actual sales for any future period and, therefore, should not be used as a measure of future revenue.
 
MANUFACTURING AND SOURCES OF MATERIALS
 
Manufacturing operations consist primarily of assembly and testing which is performed in our manufacturing facilities in Tijuana, Mexico, and we maintain a small assembly operation in California primarily for custom products.  In March 2009, we entered into an agreement with GoerTek, Inc., an existing third party contract manufacturer, to outsource the manufacturing of our Bluetooth products in China which resulted in the discontinuance of manufacturing of our Bluetooth products at the Suzhou, China facility in fiscal 2010.  In addition, we outsource the manufacturing of a limited number of our other products to third parties, typically in China and other countries in Asia.  See further discussion on our business risks associated with our manufacturers under the risk titled “We depend on original design manufacturers and contract manufacturers who may not have adequate capacity to fulfill our needs or may not meet our quality and delivery objectives which could have an adverse effect on our business” within Item 1A Risk Factors of this 10-K.
 
We purchase the components for our products, including proprietary semi-custom integrated circuits, amplifier boards and other electrical components, primarily from suppliers in Asia, Mexico, the U.S., and Europe.  The majority of our components and sub-assemblies used in our manufacturing operations are obtained, or are reasonably available, from dual-source suppliers, although we do have a certain number of sole-source suppliers. The earthquake, tsunami and nuclear issues arising in Japan in March 2011 have not materially interfered with our supply chain; however, we cannot predict what impact, if any, these events may have in the future.
 

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We procure materials to meet forecasted customer requirements.  Special products and certain large orders are quoted for delivery after receipt of orders at specific lead times.  We maintain minimum levels of finished goods based on market demand in addition to inventories of raw materials, work in process, and sub-assemblies and components.  In addition, certain vendors maintain inventories on consignment which primarily consist of raw materials and components.  We write-down inventory items determined to be either excess or obsolete to the lower of cost or market value.
 
ENVIRONMENTAL MATTERS
 
We are required to comply and are currently in compliance with the European Union and other Directives on the Restrictions of the use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”) and on Waste Electrical and Electronic Equipment requirements.  Additionally, we are compliant with the RoHS initiatives in China and Korea.
 
We are subject to various federal, state, local, and foreign environmental laws and regulations, including those governing the use, discharge, and disposal of hazardous substances in the ordinary course of our manufacturing process.  We believe that our current manufacturing and other operations comply in all material respects with applicable environmental laws and regulations; however, it is possible that future environmental legislation may be enacted or current environmental legislation may be interpreted to create environmental liability with respect to our facilities, operations, or products.
 
We continue our efforts toward environmental and social responsibility. In Spring 2011, our solar panel installation project will be completed, and it will be the largest solar installation in Santa Cruz County. Upwards of 80% of our Santa Cruz corporate site utility costs are expected to be offset by our solar installation.
 
INTELLECTUAL PROPERTY
 
We maintain a program of seeking patent protection for our technologies when we believe it is commercially appropriate.  As of March 31, 2011, we had 534 worldwide patents in force, expiring between 2011 and 2035.
 
Our success will depend in part on our ability to obtain patents and preserve other intellectual property rights covering the design and operation of our products.  We intend to continue to seek patents on our inventions when commercially appropriate.  The process of seeking patent protection can be lengthy and expensive, and there can be no assurance that patents will be issued for currently pending or future applications or that our existing patents or any new patents issued will be of sufficient scope or strength or provide meaningful protection or any commercial advantage to us.  We may be subject to, or may initiate, litigation or patent office interference proceedings, which may require significant financial and management resources.  The failure to obtain necessary licenses or other rights or the advent of litigation arising out of any such intellectual property claims could have a material adverse effect on our operations.
 
We own trademark registrations in the U.S. and a number of other countries with respect to the Plantronics and Clarity trademarks as well as the names of many of our products and product features.  We currently have U.S. and foreign trademark applications pending in connection with certain new products and product features.  We also attempt to protect our trade secrets and other proprietary information through comprehensive security measures, including agreements with customers and suppliers, and proprietary information agreements with employees and consultants.  We may seek copyright protection where we believe it is applicable.  We own a number of domain name registrations and intend to seek more as appropriate.  There can be no assurance that our existing or future copyright registrations, trademarks, trade secrets, or domain names will be of sufficient scope or strength or provide meaningful protection or any commercial advantage to us.
 
 

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EMPLOYEES
 
On March 31, 2011, we employed approximately 3,200 people worldwide, including approximately 2,200 employees at our manufacturing facility in Tijuana, Mexico.  To our knowledge, no employees are currently covered by collective bargaining agreements.
 
EXECUTIVE OFFICERS OF THE REGISTRANT
 
Set forth below is certain information regarding the executive team of Plantronics and their ages as of March 31, 2011.
 
NAME
 
AGE
 
POSITION
Ken Kannappan *
 
51
 
President and Chief Executive Officer
Don Houston *
 
56
 
Senior Vice President, Sales
Barry Margerum
 
59
 
Chief Strategy Officer
Renee Niemi *
 
46
 
Senior Vice President, Communication Solutions
Mike Perkins
 
52
 
Vice President, Product Development & Technology
Barbara Scherer *
 
55
 
Senior Vice President, Finance & Administration and Chief Financial Officer
Carsten Trads
 
55
 
President, Clarity
Ingrid Van Den Hoogen
 
48
 
Chief Marketing Officer
Philip Vanhoutte *
 
55
 
Managing Director, Europe, Middle East & Africa
Patricia Wadors
 
46
 
Senior Vice President, Human Resources
Larry Wuerz
 
53
 
Senior Vice President, Worldwide Operations
*    Executive is also considered an Executive Officer as defined under Regulation S-K Item 401(b).
 
Mr. Kannappan joined Plantronics in 1995 as Vice President of Sales and was promoted to various positions prior to being named President and Chief Operating Officer in March 1998.  In 1999, he was promoted to Chief Executive Officer and appointed to the Board of Directors.  Prior to joining Plantronics, Mr. Kannappan was Senior Vice President of Investment Banking for Kidder, Peabody & Co. Incorporated, where he was employed from 1985 to 1995.  Mr. Kannappan has a Bachelor of Arts degree in Economics from Yale University and a Master of Business Administration from Stanford University.  Mr. Kannappan also serves as Chairman of the Board of Directors at Mattson Technology, Inc., a supplier of advanced process equipment for the semiconductor industry.
 
Mr. Houston joined Plantronics in 1996 as Vice President of Sales and was promoted to Senior Vice President of Sales in 1998.  From 1995 through 1996, Mr. Houston served as Vice President of Worldwide Sales for Proxima Corporation, a designer, developer, manufacturer, and marketer of multi-media projection products.  From 1985 to 1995, Mr. Houston held a number of positions at Calcomp, Inc., which is engaged in the business of manufacturing computer peripherals for the CAD and graphic market, including Regional Sales Manager and Vice President of Sales, Service and Marketing.  Prior to 1985, Mr. Houston held various sales and marketing management positions with IBM Corporation.  Mr. Houston graduated from the University of Arizona with a Bachelor of Science degree in Business/Marketing.
 
Mr. Margerum joined Plantronics in 1994 as Vice President of Marketing and was promoted in 1996 to President and General Manager of the Computer and Mobile Systems Group.  In 1997, he left Plantronics to become President and CEO of Euphonix, Inc., a public company in the high-end audio equipment space.  In 2000, he re-joined Plantronics and, in 2004, became Vice President of Strategy and Business Development and, in 2008, he was named Chief Strategy Officer.  In October 2009, Mr. Margerum was also named the acting Chief Marketing Officer on an interim basis.  Prior to joining Plantronics, from 1989 to 1994, Mr. Margerum was CEO of Mitem Corporation, a middleware software company.  From 1980 to 1989, he held a variety of marketing and sales positions including Vice President of Marketing for GRiD Systems Corporation, a laptop computer manufacturer.  Mr. Margerum also worked for Apple, Inc. and IBM Corporation.  Mr. Margerum holds a Bachelor of Science in Engineering from Princeton University and a Master of Business Administration from Stanford University. Mr. Margerum also serves on the Board of Directors of Mitem Corporation.
 

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Ms. Niemi joined Plantronics in 2005 as Vice President and General Manager, Mobile and Entertainment with nearly 20 years experience in the mobile computing and communications industries.  In 2009, she was promoted to Senior Vice President, Communications Solutions.  Prior to joining Plantronics, Ms. Niemi held senior positions with companies such as Visto Corporation, Mobilesys, Inc., Xircom, and NEC Technologies and was most recently at Danger, Inc.  Ms. Niemi graduated from Santa Clara University with a Bachelor of Science degree in Electrical Engineering.  She also earned a certificate in General Management for High Technology from Stanford University’s IEEE Joint Program.
 
Mr. Perkins joined Plantronics in 2008 as Vice President, Product Development and Technology.  Prior to joining Plantronics, he held various positions during his 25 years at Hewlett-Packard Company (“HP”) including Vice President/General Manager of HP’s Voodoo Business Unit and several Research and Development Vice President roles in HP’s locations in California and Grenoble, France.  He was also Senior Vice President Research and Development at LeapFrog Enterprises from 2002 to 2005.  Mr. Perkins holds Bachelor of Science degrees in Applied Mechanics and in Biomedical Engineering from the University of California at San Diego.
 
Ms. Scherer joined Plantronics in 1997 as Vice President of Finance & Administration and Chief Financial Officer.  In 1998, Ms. Scherer was promoted to Senior Vice President of Finance & Administration and Chief Financial Officer.  Prior to joining Plantronics, Ms. Scherer held various executive management positions in the data storage industry principally with Micropolis Corporation, did strategic planning with the Boston Consulting Group, and was a member of the corporate finance team at ARCO.  In September 2004, Ms. Scherer joined the Board of Directors of Keithley Instruments, a test and measurement company, on which she served until the company was acquired in December 2010. Ms. Scherer has Bachelor degrees in Economics and in Environmental Studies from the University of California, Santa Barbara and received a Master of Business Administration from the Yale School of Organization and Management.  
 
Mr. Trads joined Clarity (formerly Walker-Ameriphone) in 2003 as President.  From 1994 until joining Plantronics, Mr. Trads held various positions within GN ReSound, a manufacturer of hearing aids and audiological measurement equipment.  From 1998 to 2003, Mr. Trads served as President of GN ReSounds’ North American operation and, from 1994 until 1998, he served as a Senior Vice President at its headquarters in Copenhagen, Denmark, where he was a member of the executive management committee and the global management group and also led the sales and marketing organization.  From 1991 to 1994, Mr. Trads was Vice President of Sales and Marketing for Dancall Radio A/S, a manufacturer of cell phones and cordless phones.  From 1985 to 1991, he held management positions in the distribution and marketing divisions of Bang and Olufsen Group, a global manufacturer of consumer electronics.  Mr. Trads holds a degree in Business Administration and Management from the Copenhagen Business School in Denmark.
 
Ms. Van Den Hoogen joined Plantronics in 2010 as Chief Marketing Officer. Prior to joining Plantronics, Ms. Van Den Hoogen was the Senior Vice President of Corporate Marketing at Sun Microsystems, Inc. ("Sun") where she led the global brand, advertising, communications, and marketing teams. With more than 20 years of marketing experience at Sun, Ms. Van Den Hoogen led branding for Sun and Java, drove eco-responsibility and open source marketing initiatives, and various product and strategic marketing roles throughout her tenure. Prior to joining Sun, Ms. Van Den Hoogen held roles in software development at Megatek, United Technologies and GTE Government Systems. She holds a Bachelor of Arts degree in Math and Computer Science from San Jose State University. Ms. Van Den Hoogen is also Vice President of the Board of Directors of Alaska Dance Theater, a non-profit organization.
 
Mr. Vanhoutte joined Plantronics in 2003 as Managing Director of Europe, Middle East, and Africa (“EMEA”).  From 2001 until 2003, he served as Corporate Vice President of Marketing at Sony Ericsson Mobile Communications.  From 2000 to 2001, Mr. Vanhoutte served as Vice President of Strategic Market Development at Ericsson’s Personal Communications Division.  From 1998 until 2000, he served as Senior Vice President of Products, Marketing and Sales at MCI WorldCom’s International Division in London.  From 1994 until 1998, Mr. Vanhoutte held various marketing and general management positions at Dell Computer Corporation including, General Manager for the Business Systems Division in the U.S., Managing Director for Dell Direct in the United Kingdom and Ireland, and Vice President of Products, Marketing & Services for EMEA.  Beginning in 1991, he worked for Nokia Data as Vice President of Marketing, which was merged into Fujitsu-ICL Systems Inc. where he continued as Vice President of Marketing, Personal Systems and Client-Server Division until 1994.  From 1985 until 1991, Mr. Vanhoutte worked in various European marketing and division manager roles with Wang Laboratories.  He started his career at Arthur Andersen’s Benelux Information Consulting Division in 1977 where he specialized in structured programming and office automation.  Mr. Vanhoutte studied Applied Economics and Engineering at the University of Leuven, Belgium.
 

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Ms. Wadors joined Plantronics in 2010 as Senior Vice President of Human Resources. Prior to joining Plantronics, she held various human resource management positions with such companies as Yahoo! Inc., where she was the Senior Vice President of Human Resources, Align Technology, Inc., Applied Materials, Inc., Merck & Co., Inc. and Viacom, Inc. Currently Ms. Wadors is on the Development Committee of Second Harvest Food Bank of Santa Cruz County. Ms. Wadors graduated from Ramapo College with a Bachelor of Science degree in Business Management with a focus in Human Resource Management.
 
Mr. Wuerz joined Plantronics in 2007 as Senior Vice President of Worldwide Operations.  Prior to Plantronics, Mr. Wuerz spent 28 years at HP where he held several senior positions.  Most recently, Mr. Wuerz was the Worldwide Vice President of Operations and Supply Chain for the Desktop Personal Computer organization, including consumer, commercial and workstation PCs. Prior to this role, Mr. Wuerz held the same title for HP’s Consumer Desktop Personal Computer organization.  In addition to Mr. Wuerz’s operations roles at HP, he also held senior positions in other functional areas, including Research and Development and Human Resources.  Mr. Wuerz holds a Bachelor of Science degree in Electrical Engineering from the University of Missouri – Rolla and a Master of Science in Electrical Engineering degree from Stanford University.
 
Executive officers serve at the discretion of the Board of Directors.  There are no family relationships between any of the directors and executive officers of Plantronics.
 

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ITEM 1A.  RISK FACTORS
 
Investors in our stock should carefully consider the following risk factors in connection with any investment in our stock.  Our stock price will reflect the performance of our business relative to, among other things, our competition, expectations of securities analysts or investors, and general economic market conditions and industry conditions.  Our business, financial condition and results of operations could be materially adversely affected if any of the following risks occur.  Accordingly, the trading price of our stock could decline, and investors could lose all or part of their investment.
 
Our operating results are difficult to predict, and fluctuations may cause volatility in the trading price of our common stock.
 
Given the nature of the markets in which we compete, our revenues and profitability are difficult to predict for many reasons, including the following:
 
Our operating results are highly dependent on the volume and timing of orders received during the quarter, which are difficult to forecast. Customers generally order on an as-needed basis, and we typically do not obtain firm, long-term purchase commitments from our customers. As a result, our revenues in any quarter depend primarily on orders booked and shipped in that quarter.
 
We incur a large portion of our costs in advance of sales orders because we must plan research and production, order components and enter into development, incur sales and marketing expenditures, and other operating commitments prior to obtaining firm commitments from our customers. In the event we acquire too much inventory for certain products, the risk of future inventory write-downs increases. Conversely, in the event we have inadequate inventory to meet the demand for particular products, we may miss significant revenue opportunities or incur significant expenses such as air freight, costs for expediting shipments, and other negative variances in our manufacturing processes as we attempt to make up for the shortfall.  When a significant portion of our revenue is derived from new products, forecasting the appropriate volumes of production is even more difficult.
 
Fluctuations in our operating results may cause volatility in the trading price of our common stock.
 
Economic conditions may materially adversely affect the Company.
 
Our results of operations and financial performance depend significantly on continued improvement in worldwide economic conditions. Uncertainty regarding the global economic recovery continues to pose risks to our business. Reductions in spending in response to tighter credit, negative financial news and/or declines in income or asset values, and strength or weakness of the economies of sovereign nations around the world may have a material negative effect on demand for our products. Other factors that influence demand include job loss and creation, volatility in fuel and other energy costs, conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence, and other macroeconomic factors affecting consumer spending behavior. These and other economic factors have had a material adverse effect on demand for our products and on our financial condition and operating results and may continue to have such an effect in the future if economic conditions do not improve.
 
Our profitability is very sensitive to the level of revenues and, in particular, to revenues from our highest margin products, which have historically been corded OCC products for contact center applications. Demand for our products is cyclical with respect to economic cycles, and our OCC business in total contracted when the U.S. recession and global economic slowdown manifested itself in late calendar 2008. During each of the quarters of fiscal 2011, we experienced revenue growth over the same respective quarters in fiscal 2010, and our revenues in the fourth quarter of fiscal 2011 are near pre-recessionary levels. Although we have experienced revenue growth from the decline in the fourth quarter of fiscal 2009, there is no assurance that the economy will fully recover or that there will not be another economic slowdown or downturn. If worldwide economic conditions do not improve or if they weaken below current levels, our forecasted demand may not materialize to the levels we require to achieve our anticipated financial results, which, in turn, could have a material adverse effect on our revenue, profitability and the market price of our stock. Failure to meet our anticipated demand projections could create excess levels of inventory, which would result in additional reserves for excess and obsolete inventory, negatively impacting our financial results.
 
Uncertainty regarding future economic conditions also makes it more challenging for us to forecast operating results, make business decisions, and identify the risks that may affect our business, sources and uses of cash, financial condition and results of operations. Further, fluctuations in foreign currency exchange rates impact our revenues and profitability because we report our financial statements in U.S. Dollars, whereas a significant portion of our sales to customers are transacted in other currencies, particularly the Euro and the Great Britain Pound (“GBP”). We hedge a portion of our Euro and GBP forecasted revenue exposure for the future 12 month period. Although we have employed these hedging techniques to minimize these risks, we can offer no assurance that such strategies will be effective. If the Euro and GBP fall against the U.S. Dollar, our revenues, gross profit and profitability in the future could be negatively affected.

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See also our risk titled “We are exposed to fluctuations in foreign currency exchange rates which may adversely affect our revenues, gross profit, and profitability.”
 
The success of our business depends heavily on our ability to effectively market our UC products, and our business could be materially adversely affected if markets do not develop as we expect.
 
We compete in the business market for the sale of our office and contact center products.  We believe that our greatest long-term opportunity for profit growth is in the UC office market, and our foremost strategic objective for this segment is to increase headset adoption. To this end, we are investing in creating new products that are more appealing in functionality and design as well as targeting certain vertical segments to increase sales.  We continue to believe that the implementation of UC technologies by large corporations will be a significant long-term driver of office headset adoption, and, as a result, a key long-term driver of revenue and product growth. UC is the integration of voice and video-based communications systems enhanced with software applications and Internet Protocol (“IP”) networks. It may include the integration of devices and media associated with a variety of business workflows and applications, including e-mail, instant messaging, presence, audio, video and web conferencing, and unified messaging. UC seeks to provide seamless connectivity and user experience for enterprise workers regardless of their location and environment, improving overall business efficiency and providing more effective collaboration among an increasingly distributed workforce. Despite weak economic conditions, trial deployments of UC solutions and headsets continue to grow, with some evidence that the cost savings and productivity enhancements derived from UC are driving the expansion of existing deployments in both the U.S. and Europe. We can give no assurance that significant growth in UC will occur or that we will be able to take advantage of any growth that does occur.
 
Our ability to realize our UC plans and to achieve the financial results projected to arise from UC adoption could be adversely affected by the following factors: (i) the risk that, as UC becomes more widely adopted, competitors will offer solutions that will effectively commoditize our headsets which, in turn, will reduce the sales prices for our headsets; (ii) our plans are dependent upon the market success of major platform providers such as Microsoft Corporation, Cisco Systems, Inc., Avaya, Inc., Alcatel-Lucent, and IBM, and we have a limited ability to influence such providers with respect to the functionality of their platforms, their rate of deployment, and their willingness to integrate their platforms with our solutions; (iii) the development of UC solutions is technically complex and this may delay or obstruct our ability to introduce solutions to the market on a timely basis and that are cost effective, feature-rich, stable and attractive to our customers; (iv) our development of UC solutions is dependent on our ability to design, develop and manufacture complex electronic systems comprised of hardware, firmware and software that must work in a wide variety of environments and multiple variations; (v) as UC becomes more widely adopted we anticipate that competition for market share will increase, and some competitors may have superior technical and economic resources; (vi) UC solutions may not be adopted with the breadth and speed in the marketplace that we currently anticipate; and (vii) UC may evolve rapidly and unpredictably and our ability to adapt to those changes and future requirements may impact our profitability in this market and our overall margins.
 
Because the major providers of UC software utilize complex and proprietary platforms in which our UC products will be integrated, it will be necessary for us to expand our technical support capabilities. This expansion will result in additional expenses to hire the personnel and develop the infrastructure necessary to adequately serve our UC customers. Our support expenditures may substantially increase over time as these platforms evolve and as UC becomes more commonly adopted.
 
If these investments do not generate incremental revenue, our business could be materially affected.  In addition, the UC market is intensively competitive; failure to adapt to pricing pressures could impact our business.
 
The failure of our suppliers to provide quality components or services in a timely manner could adversely affect our results of operations.
 
Our growth and ability to meet customer demand depends in part on our ability to obtain timely deliveries of raw materials, components, sub-assemblies, and products from our suppliers. We buy raw materials, components and sub-assemblies from a variety of suppliers and assemble them into finished products. We also have certain of our components and products manufactured for us by third party suppliers. The cost, quality, and availability of such goods are essential to the successful production and sale of our products. Obtaining raw materials, components, sub-assemblies, and finished products entails various risks, including the following:
 
Rapid increases in production levels to meet unanticipated demand for our products could result in higher costs for components and sub-assemblies, increased expenditures for freight to expedite delivery of required materials, and higher overtime costs and other expenses. These higher expenditures could reduce our profit margins. Further, if production is increased rapidly, there may be decreased manufacturing yields, which may also reduce our margins.

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We obtain certain raw materials, sub-assemblies, components and products from single suppliers, including substantially all of our Bluetooth products from GoerTek, Inc. Alternate sources for these items may not be readily available. Any failure of GoerTek, Inc. or our other suppliers to remain in business, to provide us with the quantity of components or products that we need or to purchase the raw materials, subcomponents and parts required by them to produce and provide to us the components or products we need could materially adversely affect our business, financial condition and results of operations.
 
Although we generally use standard raw materials, parts and components for our products, the high development costs associated with emerging wireless and other technologies may require us to work with only a single source of silicon chips, chip-sets or other components or materials (“components or materials”) on any particular new product. We, or our supplier(s) of components or materials, may experience challenges in designing, developing and manufacturing components or materials using these new technologies which could affect our ability to meet market schedules.  Our components or materials suppliers may decide for commercial reasons to discontinue components or materials that we have designed into our products. Due to our dependence on single suppliers for certain components or materials, we could experience higher prices, a delay in development of the components or materials, or the inability to meet our customer demand for these new products.  Additionally, these suppliers or other suppliers may enter into bankruptcy, discontinue production of the components or materials we depend on, or may not be able to produce for their own commercial reasons due to financial difficulties or global economic conditions.  If this occurs, we may have difficulty obtaining sufficient product to meet our needs.  This could cause us to fail to meet customer expectations.  If customers cease purchasing our products or turn to our competitors to meet their needs, there could be a long-term adverse impact on our revenues and profitability.  Our business, financial condition and results of operations could therefore be materially adversely affected as a result of these factors.
 
We were apprised by one of our sole sourced suppliers that a wafer fabrication foundry it uses to produce integrated circuits for certain of our call center and office headsets is no longer producing those integrated circuit products.  The production of these products was shifted to a different wafer fabrication foundry that previously produced these integrated circuits on our behalf.  We expect to have new products before our supply of integrated circuits is depleted; however, the new foundry could have difficulties re-establishing the process and re-qualifying the integrated circuits that they are producing on our behalf.  If the new wafer fabrication foundry cannot produce these integrated circuits with good quality and in the quantities we require in a timely manner, it is possible that we will not have product available to meet demand.  Our revenue might decrease as a result and our customers might be forced to turn to alternative suppliers.  A failure to properly produce the integrated circuits in the re-qualified foundry could materially affect our business, financial condition and results of operations. 
 
Because of the lead times required to obtain certain raw materials, sub-assemblies, components and products from certain suppliers, we may not be able to react quickly to changes in demand, potentially resulting in either excess inventories of such goods or shortages of the raw materials, sub-assemblies, components, and products. Lead times are particularly long on silicon-based components incorporating radio frequency and digital signal processing technologies and such components are an increasingly important part of our product costs.  In particular, many consumer product orders have shorter lead times than the component lead times, making it increasingly necessary to carry more inventory in anticipation of those orders, which may not materialize.  Failure in the future to match the timing of purchases of raw materials, sub-assemblies, components and products to demand could increase our inventories and/or decrease our revenues and could materially adversely affect our business, financial condition and results of operations.
 
Most of our suppliers are not obligated to continue to provide us with raw materials, components, and sub-assemblies. Rather, we buy most of our raw materials, components and subassemblies on a purchase order basis. Prices for many commodities are rising and are increasing our costs. Additionally, if our suppliers experience increased demand or shortages, it could affect deliveries to us. Any such shortages or further increases in prices could materially adversely affect our business, financial condition, and results of operations.
 
As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the U.S. Securities and Exchange Commission ("SEC") has proposed disclosure requirements regarding the use of certain minerals, known as conflict minerals, which are mined from the Democratic Republic of Congo and adjoining countries, as well as procedures regarding a manufacturer’s efforts to prevent the sourcing of such minerals and metals produced from those minerals. The implementation of these requirements could affect the sourcing and availability of metals used in the manufacture of a limited number of raw material parts contained in our products. This may reduce the number of suppliers who provide conflict free metals, and may affect our ability to obtain products in sufficient quantities or at competitive prices. Our material sourcing is broad based and multi-tiered, and we may not be able to conclusively verify the origins for all metals used in our products.

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If we do not match production to demand, we may lose business or our gross margins could be materially adversely affected.
 
Our industry is characterized by technological changes, frequent new product introductions, short-term customer commitments and changes in demand. We determine production levels based on our forecasts of demand for our products. Actual demand for our products depends on many factors, which makes it difficult to forecast. We have experienced differences between our actual and our forecasted demand in the past and expect differences to arise in the future.
 
Some of our products utilize long-lead time parts which are available from a limited set of vendors. The combined effects of variability of demand among the customer base and significant long-lead time of single sourced materials has historically contributed to significant inventory write-downs, particularly in inventory for consumer products. For OCC products, long life-cycles periodically necessitate last-time buys of raw materials that may be used over the course of several years. We routinely review inventory for usage potential, including fulfillment of customer warranty obligations and spare part requirements. We write down to market value the excess and obsolete inventory. We evaluate the future realizable value of inventories and impact on gross margins, taking into consideration product life cycles, technological and product changes, demand visibility and other market conditions. We believe our current process for writing down inventory appropriately balances the risk in the marketplace with a fair representation of the realizable value of our inventory.
 
In view of the uncertainties inherent in the recovery from the global recession, it is particularly difficult to make accurate forecasts in this business environment. Significant unanticipated fluctuations in supply or demand and the global trend towards consignment of products could cause the following operating problems, among others:
 
If forecasted demand does not develop, we could have excess inventory and excess capacity.  Over-forecast of demand could result in higher inventories of finished products, components, and sub-assemblies. In addition, because our retail customers have pronounced seasonality, we must build inventory well in advance of the December quarter in order to stock up for the anticipated future demand.  If we were unable to sell these inventories, we would have to write off some or all of our inventories of excess products and unusable components and sub-assemblies. Excess manufacturing capacity could lead to higher production costs and lower margins.
 
If demand increases beyond that forecasted, we may have to rapidly increase production. We currently depend on suppliers to provide additional volumes of components and sub-assemblies, and we are experiencing greater dependence on single source suppliers; therefore, we might not be able to increase production rapidly enough to meet unexpected demand.  There could be short-term losses of sales while we are trying to increase production. In addition, we may incur increased costs for expediting products.
 
The production and distribution of Bluetooth and other wireless headsets presents many significant manufacturing, marketing and other operational risks and uncertainties including:
 
our dependence on third parties to supply key components, many of which have long lead times;
our ability to forecast demand for the variety of new products within this product category for which relevant data is incomplete or unavailable; and
longer lead times with suppliers than commitments from some of our customers.
 
If we are unable to deliver products on time to meet the market window of our retail customers, we will lose opportunities to increase revenues and profits, or we may incur penalties for late delivery.  We may also be unable to sell these finished goods, which would result in excess or obsolete inventory.
 
Any of the foregoing problems could materially and adversely affect our business, financial condition, and results of operations.
 
Prices of certain raw materials, components and sub-assemblies may rise or fall depending upon global market conditions.
 
We have experienced volatility in costs from our suppliers, particularly in light of the price fluctuations of oil, gold, silver and other commodities and products in the U.S. and around the world. We may continue to experience volatility, which could affect profitability and/or market share. If we experience cost increases and are unable to pass these on to our customers or to achieve operating efficiencies that offset these increases, our business, financial condition and results of operations may be materially and adversely affected.
 

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We depend on original design manufacturers and contract manufacturers who may not have adequate capacity to fulfill our needs or may not meet our quality and delivery objectives which could have an adverse effect on our business.
 
Original design manufacturers and contract manufacturers produce key portions of our product lines for us, including the majority of our Bluetooth products. Our reliance on these original design manufacturers and contract manufacturers involves significant risks, including reduced control over quality and logistics management, the potential lack of adequate capacity and loss of services. Financial instability of our manufacturers or contractors resulting from the global recession or otherwise could result in our having to find new suppliers which could increase our costs and delay our product deliveries. These manufacturers and contractors may also choose to discontinue manufacturing our products for a variety of reasons. Consequently, we may experience delays in the timeliness, quality and adequacy of product deliveries, any of which could harm our business and operating results.
 
Currently, the majority of our Bluetooth products are manufactured by GoerTek, a contract manufacturer located in Weifang, China; therefore, the manufacturing of these products is heavily dependent upon GoerTek's ability to deliver the quantities of products that we demand in a timely manner and to meet our quality standards. In the event that GoerTek is unable or unwilling to meet our demand, delivery or price requirements, our Bluetooth business could be severely and materially affected as it may be difficult to ramp-up a new manufacturer on a timely and cost effective basis.
 
We have strong competitors and expect to face additional competition in the future. If we are unable to compete effectively, our results of operations may be adversely affected.
 
All of our markets are intensely competitive. We could experience a decline in average selling prices, competition on sales terms and conditions, or continual performance, technical and feature enhancements from our competitors in the retail market. Also, aggressive industry pricing practices may result in downward pressure on margins.
 
Currently, our single largest competitor is GN Store Nord A/S (“GN”), a Danish telecommunications conglomerate with whom we experience price competition in the business markets. Motorola is a significant competitor in the consumer headset market, primarily in the mobile Bluetooth market, and has a brand name that is very well known and supported with significant marketing investments. Motorola also benefits from the ability to bundle other offerings with its headsets.  We are also experiencing competition from other consumer electronics companies that currently manufacture and sell mobile phones or computer peripheral equipment. These competitors generally are larger, offer broader product lines, bundle or integrate with other products' communications headset tops and bases manufactured by them or others, offer products containing bases that are incompatible with our headset tops and have substantially greater financial, marketing and other resources than we do.
 
Competitors in audio devices vary by product line.  The most competitive product line is headsets for cell phones where we compete with Motorola, Nokia, Aliph's Jawbone brand, Samsung, GN's Jabra brand, Bose, BlueAnt Wireless, and Sony Ericsson among many others.  Many of these competitors have substantially greater resources than we have, and each of them has established market positions in this business. In the office and contact center market, the largest competitors are GN and Sennheiser Communications. For the entertainment and computer audio market, our primary competitors are Logitech and Sennheiser.  Our product markets are intensely competitive, and market leadership changes frequently as a result of new products, designs and pricing.  We are facing additional competition from companies, principally located in the Asia Pacific region, which offer very low cost headset products including products that are modeled on or are direct copies of our products. These new competitors are offering very low cost products which results in pricing pressure in the market. If market prices are substantially reduced by such new entrants into the headset market, our business, financial condition or results of operations could be materially adversely affected.
 
If we do not distinguish our products, particularly our retail products, through distinctive, technologically advanced features and design, as well as continue to build and strengthen our brand recognition, our business could be harmed.   If we do not otherwise compete effectively, demand for our products could decline, our revenues and gross margins could decrease, we could lose market share, and our earnings could decline.
 
We also compete in the consumer market for the sale of our mobile, gaming, and Clarity products.  We believe that effective product promotion is highly relevant in the consumer market, which is dominated by large brands that have significant consumer mindshare.  We have invested in marketing initiatives to raise awareness and consideration of Plantronics' products. We believe this will help increase preference for Plantronics and promote headset adoption overall.  The consumer market is characterized by relatively rapid product obsolescence, and we are at risk if we do not have the right products at the right time to meet consumer needs.  In addition, some of our competitors have significant brand recognition, and we are experiencing more competition in pricing actions which can result in significant losses and excess inventory.
 

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If we are unable to stimulate growth in our business, if our costs to stimulate demand do not generate incremental profit, or if we experience significant price competition, our business, financial condition, results of operations and cash flows could suffer.  In addition, failure to effectively market our products to customers could lead to lower and more volatile revenue and earnings, excess inventory and the inability to recover the associated development costs, any of which could also have a material adverse effect on our business, financial condition, results of operations and cash flows.
 
Our consumer business is volatile and failure to compete successfully in this business may have an adverse effect on our financial condition.
 
Our consumer business, which consists primarily of Bluetooth headsets and computer and gaming headsets, is highly competitive. The risks faced in connection with this include the following:
 
interest in the consumer headset category may be lessening due to current weakening conditions in the consumer market and reduced attach rates of headsets to many popular mobile smartphones in the U.S.;
competition may increase more than we expect and result in product pricing pressures;
our ability to meet the market windows for consumer products;
difficulties retaining or obtaining shelf space for consumer products in our sales channel;
difficulties in achieving or maintaining a sufficient gross margin and uncertainties in the demand for Bluetooth headsets and computer and gaming headsets;
the varying pace of global economic recovery creates uncertainty and unpredictability about the demand for consumer products; and
our focus on UC products may weaken our competitive position.
 
Our business will be materially adversely affected if we are not able to develop, manufacture, and market new products in response to changing customer requirements and new technologies.
 
The market for our products is characterized by rapidly changing technology, evolving industry standards, short product life cycles and frequent new product introductions. As a result, we must continually introduce new products and technologies and enhance existing products in order to remain competitive.
 
The technology used in our products is evolving more rapidly now than it has historically, and we anticipate that this trend may accelerate. Historically, the technology used in lightweight communications headsets has evolved slowly. New products have primarily offered stylistic changes and quality improvements rather than significant new technologies. Our increasing reliance and focus on the UC market has resulted in a growing portion of our products that integrate significant new technology. In addition, our increasing participation in the consumer market requires us to adopt new technology and, thus, our consumer products experience shorter lifecycles. We believe this is particularly true for our newer emerging technology products especially in the mobile, computer, residential and certain parts of the office markets.  In particular, we anticipate a trend towards more integrated solutions that combine audio, video, and software functionality, while historically our focus was limited to audio products.
 
In the past, we have experienced a trend away from corded headsets to cordless products.  In general, our corded headsets have had higher gross margins than our cordless products, but the margin on cordless headsets is trending higher.  In addition, office phones have begun to incorporate Bluetooth functionality which has opened the market to consumer Bluetooth headsets and reduce the demand for our traditional office telephony headsets and adapters as well as impacting potential revenues from our own wireless headset systems, resulting in lost revenue and lower margins. Should we not be able to maintain the higher margins on our cordless products that we recently achieved, our revenue and profits will decrease.
 
In addition, innovative technologies such as UC have moved the platform for certain of our products from our customers' closed proprietary systems to open platforms such as the PC. In turn, the PC has become more open as a result of such technologies as cloud computing and open source code development. As a result, we are exposed to the risk that current and potential competitors could enter our markets and commoditize our products by offering similar products.
 
The success of our products depends on several factors, including our ability to:
 
anticipate technology and market trends;
develop innovative new products and enhancements on a timely basis;
distinguish our products from those of our competitors;
create industrial design that appeals to our customers and end-users;
manufacture and deliver high-quality products in sufficient volumes; and
price our products competitively.
 

16


If we are unable to develop, manufacture, market and introduce enhanced or new products in a timely manner in response to changing market conditions or customer requirements, including changing fashion trends and styles, it will materially adversely affect our business, financial condition and results of operations.  Furthermore, as we develop new generations of products more quickly, we expect that the pace of product obsolescence will increase concurrently.  The disposition of inventories of excess or obsolete products may result in reductions to our operating margins and materially adversely affect our earnings and results of operations.
 
We have significant foreign manufacturing operations and rely on third party manufacturers that are inherently risky, and a significant amount of our revenues are generated internationally.
 
We have a manufacturing facility in Tijuana, Mexico. We also have suppliers and other vendors throughout Asia, including GoerTek, Inc. located in Weifang, China, which is the manufacturer of the majority of our Bluetooth products. We also generate a significant amount of our revenues from foreign customers.
 
The types of risks faced in connection with international operations and sales include, among others:
 
fluctuations in foreign currency exchange rates;
cultural differences in the conduct of business;
greater difficulty in accounts receivable collection and longer collection periods;
the impact of recessionary, volatile or adverse global economic conditions;
reduced protection for intellectual property rights in some countries;
unexpected changes in regulatory requirements;
tariffs and other trade barriers;
political conditions, health epidemics, civil unrest or criminal activities within each country;
the management and operation of an enterprise spread over various countries;
the burden and administrative costs of complying with a wide variety of foreign laws and regulations;
currency restrictions; and
compliance with anti-bribery laws, including, without limitation, compliance with the Foreign Corrupt Practices Act (“FCPA”).
 
The above-listed and other inherent risks of international operations could materially adversely affect our business, financial condition and results of operations.
 
We sell our products through various channels of distribution that can be volatile, and failure to establish and maintain successful relationships with our channel partners could materially adversely affect our business, financial condition, or results of operations. In addition, bankruptcies or financial difficulties of our customers may impact our business.
 
We sell substantially all of our products through distributors, retailers, OEMs, and telephony service providers. Our existing relationships with these parties are not exclusive and can be terminated by either party without cause. These customers also sell or may sell products offered by our competitors. To the extent that our competitors offer these customers more favorable terms or more compelling products, such customers may decline to carry, de-emphasize, or discontinue carrying our products. In the future, we may not be able to retain or attract a sufficient number of qualified distributors, retailers, OEMs, and telephony service providers. Further, such customers may not recommend or may stop recommending our products. In the future, our OEMs or potential OEMs may elect to manufacture their own products that are similar to those we currently sell to them. The inability to establish or maintain successful relationships with distributors, OEMs, retailers and telephony service providers or to expand our distribution channels could materially adversely affect our business, financial condition, or results of operations. Finally, as a result of the global economic weakness we have experienced the bankruptcy of certain customers, and it is not possible to predict whether additional bankruptcies of our customers may occur.
 
As a result of the evolution of our consumer business, our customer mix is changing, and certain retailers, OEMs, and wireless carriers are more significant.  This reliance on certain large channel partners could increase the volatility of our revenues and earnings. In particular, we have several large customers whose order patterns are difficult to predict. Offers and promotions by these customers may result in significant fluctuations of their purchasing activities over time.  If we are unable to anticipate the purchase requirements of these customers, our revenues may be adversely affected, or we may be exposed to large volumes of inventory that cannot be immediately resold to other customers.
 

17


We are exposed to fluctuations in foreign currency exchange rates which may adversely affect our revenues, gross profit, and profitability.
 
Fluctuations in foreign currency exchange rates impact our revenues and profitability because we report our financial statements in U.S. Dollars, whereas a significant portion of our sales to customers are transacted in other currencies, particularly the Euro and the Great Britain Pound (“GBP”). Furthermore, fluctuations in foreign currency rates impact our global pricing strategy resulting in our lowering or raising selling prices in one or more currencies in order to avoid disparity with U.S. Dollar prices and to respond to currency-driven competitive pricing actions. We also have significant manufacturing operations in Mexico and fluctuations in the Mexican Peso exchange rate can impact our gross profit and profitability. Currency exchange rates are volatile, and while we hedge our major exposures, changes in exchange rates in the future may still have a negative impact on our financial results. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation, and political developments.
 
We hedge a portion of our Euro and GBP forecasted revenue exposures for the future 12 month period. In addition, we hedge a portion of our Peso forecasted cost of revenues. Although we have employed these hedging techniques to minimize these risks, we can offer no assurance that such strategies will be effective. If the Euro and GBP fall against the U.S. Dollar, our revenues, gross profit and profitability in the future could be negatively affected.
 
We also have foreign currency forward contracts denominated in Euros, GBP and Australian Dollars which hedge against a portion of our foreign-currency denominated assets and liabilities. Our foreign currency forward contracts reduce, but do not eliminate, the impact of currency exchange rate movements. For example, we do not execute forward contracts in all currencies in which we conduct business.
 
Our corporate tax rate may increase, which could adversely impact our cash flow, financial condition and results of operations.
 
We have significant operations in various tax jurisdictions throughout the world, and a substantial portion of our taxable income has been generated historically in jurisdictions outside of the U.S. Currently, some of our operations are taxed at rates substantially lower than U.S. tax rates. If our income in these lower tax jurisdictions were no longer to qualify for these lower tax rates, the applicable tax laws were rescinded or changed, or the mix of our earnings shifts from lower rate jurisdictions to higher rate jurisdictions, our operating results could be materially adversely affected. If U.S. or other foreign tax authorities change applicable tax laws or successfully challenge the manner in which our profits are currently recognized, our overall taxes could increase, and our business, cash flow, financial condition, and results of operations could be materially adversely affected.
 
Our Board of Directors has authorized the repurchase of up to 7,000,000 shares of our common stock to enhance stockholder value which enhanced value may not be realized. Stock repurchases may not prove to be the best use of our cash resources and may require us to draw funds on our new credit agreement.
 
In May 2011, our Board of Directors authorized the repurchase of up to 7,000,000 shares of our outstanding common stock. On May 9, 2011, we entered into two separate Master Confirmation and Supplemental Confirmations with Goldman, Sachs & Co. (“Goldman”) pursuant to an accelerated share repurchase program (the “ASR Program”) under which we will repurchase shares of our common stock for an aggregate purchase price of $100 million, which was paid to Goldman in May 2011. To augment our financial flexibility to facilitate this share repurchase program, on May 9, 2011, we entered into a credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association which provides for a $100 million unsecured revolving credit facility. At the closing of the Credit Agreement and through the filing of this Form 10-K, we did not draw any funds under the facility as we used domestic cash on hand to make the payment to Goldman.
 
There can be no assurance of the following:
 
the impact on our stock price as a result of the ASR Program; and
when or if we will repurchase additional shares under the 7,000,000 share authorization or to make additional stock repurchases thereafter;
 
Also, we will require additional funds to repurchase shares over and above those in the ASR Program. If we do not generate further domestic cash flow from operations, to make our repurchases, we may be required to draw funds on the Credit Agreement at which time we would incur interest expense. The Credit Agreement contains affirmative and negative covenants with which we must comply. These restrictions apply regardless of whether any loans are outstanding and could adversely impact how we operate our business.
 

18


We are subject to environmental laws and regulations that expose us to a number of risks and could result in significant liabilities and costs.
 
There are multiple initiatives in several jurisdictions regarding the removal of certain potential environmentally sensitive materials from our products to comply with the European Union (“EU”) and other Directives on the Restrictions of the use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”) and on Waste Electrical and Electronic Equipment (“WEEE”).  In certain jurisdictions, the RoHS legislation was enacted as of July 1, 2006; however, other jurisdictions have delayed implementation. While we believe that we will have the resources and ability to fully meet the requirements of the RoHS and WEEE directives universally, if unusual occurrences arise or we are wrong in our assessment of what it will take to fully comply, there is a risk that we will not be able to comply with the legislation as passed by the EU member states or other global jurisdictions. If this were to happen, a material negative effect on our financial results may occur.
 
We are subject to various federal, state, local, and foreign environmental laws and regulations on a global basis, including those governing the use, discharge, and disposal of hazardous substances in the ordinary course of our manufacturing process. Although we believe that our current manufacturing operations comply in all material respects with applicable environmental laws and regulations, it is possible that future environmental legislation may be enacted or current environmental legislation may be interpreted in any given country to create environmental liability with respect to our facilities, operations, or products.  To the extent that we incur claims for environmental matters exceeding reserves or insurance for environmental liability, our operating results could be negatively impacted.
 
We have intellectual property rights that could be infringed on by others, and we may infringe on the intellectual property rights of others. Even if we prevail, claims and lawsuits are costly and time consuming to pursue or defend and may divert management's time from our business.
 
Our success depends in part on our ability to protect our copyrights, patents, trademarks, trade dress, trade secrets, and other intellectual property, including our rights to certain domain names. We rely primarily on a combination of nondisclosure agreements and other contractual provisions as well as patent, trademark, trade secret, and copyright laws to protect our proprietary rights. Effective trademark, patent, copyright, and trade secret protection may not be available in every country in which our products and media properties are distributed to customers. The process of seeking intellectual property protection can be lengthy and expensive. Patents may not be issued in response to our applications, and any patents that may be issued may be invalidated, circumvented, or challenged by others. If we are required to enforce our intellectual property or other proprietary rights through litigation, the costs and diversion of management's attention could be substantial. In addition, the rights granted under any intellectual property may not provide us competitive advantages or be adequate to safeguard and maintain our proprietary rights. Moreover, the laws of certain countries do not protect our proprietary rights to the same extent as do the laws of the U.S. If we do not enforce and protect our intellectual property rights, it could materially adversely affect our business, financial condition, and results of operations.
 
Patents, copyrights, trademarks, and trade secrets are owned by individuals or entities that may make claims or commence litigation based on allegations of infringement or other violations of intellectual property rights. As we have grown, the intellectual property rights claims against us have increased. There has also been a general trend of increasing intellectual property assertion against corporations that make and sell products. Our products and technologies may be subject to certain third-party claims and, regardless of the merits of the claim, intellectual property claims are often time-consuming and expensive to litigate, settle, or otherwise resolve. In addition, to the extent claims against us are successful, we may have to pay substantial monetary damages or discontinue the manufacture and distribution of products that are found to be in violation of another party's rights. We also may have to obtain, or renew on less favorable terms, licenses to manufacture and distribute our products, which may significantly increase our operating expenses. In addition, many of our agreements with our distributors and resellers require us to indemnify them for certain third-party intellectual property infringement claims. Discharging our indemnity obligations may involve time-consuming and expensive litigation and result in substantial settlements or damages awards, our products being enjoined, and the loss of a distribution channel or retail partner.
 

19


Our products are subject to various regulatory requirements, and changes in such regulatory requirements may adversely impact our gross margins as we comply with such changes or reduce our ability to generate revenues if we are unable to comply.
 
Our products must meet the requirements set by regulatory authorities in the numerous jurisdictions in which we sell them. For example, certain of our office and contact center products must meet certain standards to work with local phone systems. Certain of our wireless office and mobile products must work within existing frequency ranges permitted in various jurisdictions. As regulations and local laws change, we must modify our products to address those changes. Regulatory restrictions may increase the costs to design, manufacture, and sell our products, resulting in a decrease in our margins or a decrease in demand for our products if the costs are passed along. Compliance with regulatory restrictions may impact the technical quality and capabilities of our products reducing their marketability. If we do not comply with these regulations, our products might interfere with other devices that properly use the frequency ranges in which our products operate, and we may be responsible for the damages that our products cause. This could result in our having to alter the performance of our products and make payment of substantial monetary damages or penalties.
 
We are exposed to potential lawsuits alleging defects in our products and/or other claims related to the use of our products.
 
The sales of our products expose us to the risk of product liability and hearing loss claims. These claims have in the past been, and are currently being, asserted against us. None of the previously resolved claims have materially affected our business, financial condition, or results of operations, nor do we believe that any of the pending claims will have such an effect. Although we maintain product liability insurance, the coverage provided under our policies could be unavailable or insufficient to cover the full amount of any such claim. Therefore, successful product liability or hearing loss claims brought against us could have a material adverse effect upon our business, financial condition, and results of operations.
 
Our mobile headsets are used with mobile telephones. There has been continuing public controversy over whether the radio frequency emissions from mobile phones are harmful to users of mobile phones. We believe that there is no conclusive proof of any health hazard from the use of mobile phones but research in this area is incomplete. We have tested our headsets through independent laboratories and have found that use of our corded headsets reduces radio frequency emissions at the user's head to virtually zero. Our Bluetooth and other wireless headsets emit significantly less powerful radio frequency emissions than mobile phones. However, if research establishes a health hazard from the use of mobile phones or public controversy grows even in the absence of conclusive research findings, there could be an adverse impact on the demand for mobile phones, which could reduce demand for headset products.  Likewise, should research establish a link between radio frequency emissions and wireless headsets and public concern in this area grows, demand for our wireless headsets could be reduced creating a material adverse effect on our financial results.
 
There is also continuing and increasing public controversy over the use of mobile phones by operators of motor vehicles. While we believe that our products enhance driver safety by permitting a motor vehicle operator to generally be able to keep both hands free to operate the vehicle, there is no certainty that this is the case, and we may be subject to claims arising from allegations that use of a mobile phone and headset contributed to a motor vehicle accident. We maintain product liability insurance and general liability insurance that we believe would cover any such claims; however, the coverage provided under our policies could be unavailable or insufficient to cover the full amount of any such claim. Therefore, successful product liability claims brought against us could have a material adverse effect upon our business, financial condition, and results of operations.
 
We have $14.9 million of goodwill and intangible assets recorded on our balance sheet, and we have incurred significant impairment losses over the last two fiscal years recorded in discontinued operations.  If the carrying value of our goodwill or intangible assets is not recoverable, an impairment loss may be recognized, which would adversely affect our financial results.
 
As a result of past acquisitions, the Company has $14.9 million of goodwill and intangible assets on the consolidated balance sheets as of March 31, 2011.  It is not possible at this time to determine if any future impairment charge would result or, if it does, whether such charge would be material related to these remaining assets. If such a charge is necessary, it may have a material adverse affect our financial results.
 

20


Our stock price may be volatile and the value of your investment in Plantronics stock could be diminished.
 
The market price for our common stock has been affected and may continue to be affected by a number of factors, including:
 
uncertain economic conditions, including the length of the recovery from the domestic and global recession, inflationary pressures, and a potential decline in investor confidence in the market place;
changes in our published forecasts of future results of operations;
quarterly variations in our or our competitors' results of operations and changes in market share;
the announcement of new products or product enhancements by us or our competitors;
repurchases of our common shares under our repurchase plans, including our accelerated share repurchase program;
our decision to declare dividends;
the loss of services of one or more of our executive officers or other key employees;
changes in earnings estimates or recommendations by securities analysts;
developments in our industry;
sales of substantial numbers of shares of our common stock in the public market;
general economic, political, and market conditions, including market volatility; and
other factors unrelated to our operating performance or the operating performance of our competitors.
 
Our business could be materially adversely affected if we lose the benefit of the services of key personnel.
 
Our success depends to a large extent upon the services of a limited number of executive officers and other key employees. The unanticipated loss of the services of one or more of our executive officers or key employees could have a material adverse effect upon our business, financial condition, and results of operations.
 
We also believe that our future success will depend in large part upon our ability to attract and retain additional highly skilled technical, management, sales and marketing personnel. Competition for such personnel is intense. We may not be successful in attracting and retaining such personnel, and our failure to do so could have a material adverse effect on our business, operating results or financial condition.
 
We may still be subject to certain liabilities from our discontinued AEG business segment.
 
Under the terms of the Asset Purchase Agreement, dated October 2, 2009, a First Amendment to the Asset Purchase Agreement, dated November 30, 2009, a Side Letter to the Asset Purchase Agreement, dated January 8, 2010, and a second Side Letter to the Asset Purchase Agreement, dated February 15, 2010 (collectively, the “Purchase Agreement”), we retained certain assets and liabilities of Altec Lansing as of the closing date, December 1, 2009 and may be required to indemnify the Purchaser for certain losses they may incur.  If the Purchaser incurs certain losses, the Purchaser may make an indemnification claim and we may be required to pay certain expenses or reimburse Purchaser for losses they incur, which could harm our operating results.  In addition, our ability to defend ourselves may be impaired because most of our former AEG employees are employees of the Purchaser and our management may have to devote a substantial amount of time to resolving the claim, and, as we are no longer in the AEG business, we may not be able to readily offer products, service and intellectual property in settlement.  In addition, these indemnity claims may divert management attention from our continued business.  It may also be difficult to determine whether a claim from a third party stemmed from actions taken by us or the Purchaser and we may expend substantial resources trying to determine which party has responsibility for the claim.
 
We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.
 
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting. We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements.
 
We have and will continue to consume management resources and incur significant expenses for Section 404 compliance on an ongoing basis. In the event that our chief executive officer, chief financial officer, or independent registered public accounting firm determines in the future that our internal control over financial reporting is not effective as defined under Section 404, investor perceptions may be adversely affected and could cause a decline in the market price of our stock.
 

21


War, terrorism, public health issues, natural disasters, or other business interruptions could disrupt supply, delivery, or demand of products, which could negatively affect our operations and performance.
 
War, terrorism, public health issues, or other business interruptions whether in the U.S. or abroad, have caused or could cause damage or disruption to international commerce by creating economic and political uncertainties that may have a strong negative impact on the global economy, our company, and our suppliers or customers.  Our major business operations are subject to interruption by earthquake, flood, volcanic eruptions or other natural disasters, fire, power shortages, terrorist attacks and other hostile acts, public health issues, flu or similar epidemics, and other events beyond our control.  Our corporate headquarters, information technology, manufacturing, certain research and development activities, and other critical business operations are located near major seismic faults or flood zones.  While we are partially insured for earthquake-related losses or floods, our operating results and financial condition could be materially affected in the event of a major earthquake or other natural or manmade disaster.
 
We have a limited number of suppliers based in Japan who appear to have been directly affected by the earthquake, tsunami and nuclear crisis that occurred in Japan in March 2011. While their impact on our business does not appear to be material at this time, if that were to change, our business could be adversely affected.
 
Although it is impossible to predict the occurrences or consequences of any of the events described above, such events could significantly disrupt our operations.  In addition, should major public health issues arise, including pandemics, we could be negatively impacted by the need for more stringent employee travel restrictions, limitations in the availability of freight services, governmental actions limiting the movement of products between various regions, delays in production ramps of new products, and disruptions in the operations of our manufacturing vendors and component suppliers.  Our operating results and financial condition could be adversely affected by these events.
 
Provisions in our charter documents and Delaware law and our adoption of a stockholder rights plan may delay or prevent a third party from acquiring us, which could decrease the value of our stock.
 
Our Board of Directors has the authority to issue preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting and conversion rights, of those shares without any further vote or action by the stockholders. The issuance of our preferred stock could have the effect of making it more difficult for a third party to acquire us. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which could also have the effect of delaying or preventing our acquisition by a third party. Further, certain provisions of our Certificate of Incorporation and bylaws could delay or make more difficult a merger, tender offer or proxy contest, which could adversely affect the market price of our common stock.
 
In 2002, our Board of Directors adopted a stockholder rights plan, pursuant to which we distributed one right for each outstanding share of common stock held by stockholders of record as of April 12, 2002. Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our Board of Directors, the plan could make it more difficult for a third party to acquire us, or a significant percentage of our outstanding capital stock, without first negotiating with our Board of Directors regarding such acquisition.

22


ITEM 1B.  UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2.  PROPERTIES
 
Our principal executive offices are located in Santa Cruz, California.  Our facilities are located throughout the Americas, Europe, and Asia.  The table below lists the major facilities owned or leased as of March 31, 2011:
 
Location
Square Footage
Lease/Own
Primary Use
 
Chattanooga, Tennessee
16,650
Lease
Light Assembly, Sales and Marketing, Engineering, Administration
Hoofddorp, Netherlands
14,788
Lease
Administrative
San Diego, California
13,400
Lease
Industrial and Office Space
Santa Cruz, California
79,253
Own
Light Assembly, Sales and Marketing, Engineering, Administration
Santa Cruz, California
44,183
Own
Light Assembly, Sales, Engineering, Administration
Santa Cruz, California
39,892
Own
Light Assembly, Sales, Engineering, Administration
Santa Cruz, California
18,250
Lease
Light Assembly, Sales, Engineering, Administration
Santa Cruz, California
20,325
Lease
Light Assembly, Sales, Engineering, Administration
Suzhou, China
42,012
Lease
Sales, Engineering, Administration, Design Center
Tijuana, Mexico
95,980
Lease
Engineering, Assembly, Administration
Tijuana, Mexico
61,785
Lease
Engineering, Assembly
Tijuana, Mexico
289,589
Lease
Logistic and Distribution Center
Tijuana, Mexico
53,732
Lease
Engineering, Design Center, Call Center
Wootton Bassett, UK
21,824
Own
Light Assembly, Sales, Engineering, Administration
Wootton Bassett, UK
15,970
Own
Vacant (leased to a third party in fiscal 2012)
Wootton Bassett, UK
5,445
Lease
Sales, Marketing, Administration
 
We believe that our existing properties are suitable and generally adequate for our current business; however, future growth may require that we obtain additional space.
 
 
 

23


ITEM 3.  LEGAL PROCEEDINGS
 
Six class action lawsuits have been filed against the Company alleging that our Bluetooth headsets may cause noise-induced hearing loss.  Shannon Wars et al. vs. Plantronics, Inc. was filed on November 14, 2006 in the U.S. District Court for the Eastern District of Texas.  Lori Raines, et al. vs. Plantronics, Inc. was filed on October 20, 2006 in the U.S. District Court, Central District of California.  Kyle Edwards, et al vs. Plantronics, Inc. was filed on October 17, 2006 in the U.S. District Court, Middle District of Florida.  Ralph Cook vs. Plantronics, Inc. was filed on February 8, 2007 in the U.S. District Court for the Eastern District of Virginia.  Randy Pierce vs. Plantronics, Inc. was filed on January 10, 2007 in the U.S. District Court for the Eastern District of Arkansas.  Bruce Schiller, et al vs. Plantronics, Inc. was filed on October 10, 2006 in the Superior Court of the State of California in and for the County of Los Angeles.  The complaints state that they do not seek damages for personal injury to any individual.  These complaints seek various remedies, including injunctive relief requiring the Company to include certain additional warnings with its Bluetooth headsets and to redesign the headsets to limit the volume produced, or, alternatively, to provide the user with the ability to determine the level of sound emitted from the headset.  Plaintiffs also seek unspecified general, special, and punitive damages, as well as restitution.  The federal cases have been consolidated for all pre-trial purposes in the U.S. District Court for the Central District of Los Angeles before Judge Fischer.  The California State Court case was dismissed by the plaintiffs.  The parties agreed in principle to settle their claims.  The U.S. District Court for the Central District of Los Angeles signed an order approving the final settlement of the lawsuit entitled In Re Bluetooth Headset Products Liability Litigation brought against Plantronics, Inc., Motorola, Inc. and GN Netcom, Inc. alleging that the three companies failed to adequately warn consumers of the potential for long term noise induced hearing loss if they used Bluetooth headsets.  The companies contested the claims of the lawsuit but settled the lawsuit on a nationwide basis for an amount which we believe is less than the cost of litigating and winning the lawsuit.  On September 25, 2009, the Court signed a judgment in the case resolving all matters except the issue of outstanding attorneys’ fees, which will be split among the three defendants.  On October 22, 2009, the Court issued an order setting the class counsel’s attorneys’ fees and costs and the incentive award at the maximum amounts agreed to by the parties in their settlement.  The objectors to the settlement have filed a notice of appeal, and the appeal is in process. We believe that any loss related to these proceedings would not be material and have adequately reserved for these costs in the consolidated financial statements.
 
In addition, we are presently engaged in various legal actions arising in the normal course of our business.  We believe that it is unlikely that any of these actions will have a material adverse impact on our operating results; however, because of the inherent uncertainties of litigation, the outcome of any of these actions could be unfavorable and could have a material adverse effect on our financial condition, results of operations or cash flows.
 
ITEM 4.  (REMOVED AND RESERVED)

24


PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES
 
Price Range of Common Stock
 
Our common stock is publicly traded on the NYSE under the symbol “PLT”.  The following table sets forth the low and high sales prices as reported on the NYSE for each period indicated.
 
Low
 
High
Fiscal 2011
 
 
 
 
First Quarter
$
27.80
 
 
$
34.17
 
Second Quarter
26.79
 
 
34.28
 
Third Quarter
33.30
 
 
38.20
 
Fourth Quarter
33.75
 
 
38.04
 
Fiscal 2010
 
 
 
 
 
First Quarter
$
11.40
 
 
$
18.31
 
Second Quarter
17.28
 
 
28.07
 
Third Quarter
23.15
 
 
27.23
 
Fourth Quarter
24.45
 
 
32.13
 
 
As of April 30, 2011, there were approximately 70 holders of record of our common stock.  Because many of our shares of common stock are held by brokers and other institutions on behalf of beneficial owners, we are unable to estimate the total number of beneficial owners.  On April 1, 2011, the last trading day of fiscal 2011, the last sale reported on the NYSE for Plantronics’ common stock was $36.60 per share.
 
Cash Dividends
 
In fiscal 2011 and 2010, we declared quarterly cash dividends of $0.05 per share resulting in total dividends declared of $9.7 million and $9.8 million, respectively.
 
On May 3, 2011, the Company announced that the Board of Directors had declared the Company’s twenty-eighth quarterly cash dividend of $0.05 per share of the Company’s common stock, payable on June 10, 2011 to stockholders of record on May 20, 2011.
 
The actual declaration of future dividends and the establishment of record and payment dates are subject to final determination by the Audit Committee of the Board of Directors of Plantronics each quarter after its review of our financial performance and financial position.
 
Share Repurchase Programs
 
From time to time, the Board of Directors authorizes plans under which we may repurchase shares of our common stock in the open market, depending on the market conditions.
 
During fiscal 2009, we repurchased in the open market 1,007,500 shares of our common stock which were remaining under the 1,000,000 repurchase plans each authorized by the Board of Directors on January 25, 2008 and November 10, 2008 The total cost of these repurchases was $17.8 million with an average price of $17.68 per share.
 
During fiscal 2010, we repurchased in the open market 1,935,100 shares of our common stock which were under repurchase plans authorized by the Board of Directors on the following dates: November 10, 2008, November 27, 2009 and March 1, 2010 for 1,000,000 shares each. The total cost of these repurchases was $49.7 million with an average price of $25.66 per share.
 
During fiscal 2011, we repurchased in the open market 3,315,000 shares of our common stock which were under repurchase plans authorized by the Board of Directors on the following dates: March 1, 2010, June 4, 2010, August 27, 2010 and March 1, 2011 for 1,000,000 shares each. The total cost of these repurchases was $105.5 million with an average price of $31.83 per share.
 

25


As of March 31, 2011, there were 660,900 remaining shares authorized for repurchase under the March 1, 2011 authorized plan.
 
On May 2, 2011, subsequent to the end of our fiscal year, the Board of Directors authorized the repurchase of up to 7,000,000 shares of our outstanding common stock. As part of this authorization, on May 9, 2011, we entered into two separate Master Confirmation and Supplemental Confirmations with Goldman, Sachs & Co. to repurchase an aggregate of $100 million of our common stock under an accelerated share repurchase program.
 
The following table presents a month-to-month summary of the stock purchase activity in the fourth quarter of fiscal 2011:
 
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 2, 2011 to January 29, 2011
133,400
 
 
$
36.78
 
 
133,400
 
 
524,600
 
January 30, 2011 to March 5, 2011
517,624
 
1 
$
35.28
 
 
516,000
 
 
1,008,600
 
March 6, 2011 to April 2, 2011
347,700
 
 
$
35.10
 
 
347,700
 
 
660,900
 
 
See Note 12 of our Notes to Consolidated Financial Statements for more information regarding our stock repurchase programs.
 
1    Includes 1,624 shares that were tendered to us in satisfaction of tax withholding obligations upon the vesting of restricted stock granted under our employee stock plans.

26


ITEM 6.  SELECTED FINANCIAL DATA
 
SELECTED FINANCIAL DATA
 
The following selected financial information has been derived from our consolidated financial statements.  The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and notes thereto included in Item 8 of this Form 10-K in order to fully understand factors that may affect the comparability of the information presented below.
 
 
Fiscal Year Ended March 31,
 
2011 2
 
2010 1,2,5
 
2009 1,2,4
 
2008 1,3
 
2007 1
 
($ in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net revenues
$
683,602
 
 
$
613,837
 
 
$
674,590
 
 
$
747,935
 
 
$
676,514
 
Operating income
$
140,712
 
 
$
97,635
 
 
$
61,461
 
 
$
115,166
 
 
$
84,677
 
Operating margin
20.6
%
 
15.9
%
 
9.1
%
 
15.4
%
 
12.5
%
Income from continuing operations
$
140,656
 
 
$
100,740
 
 
$
57,917
 
 
$
121,020
 
 
$
88,766
 
Income from continuing operations, net of tax
$
109,243
 
 
$
76,453
 
 
$
45,342
 
 
$
92,012
 
 
$
67,267
 
Basic earnings per share - continuing operations
$
2.29
 
 
$
1.58
 
 
$
0.93
 
 
$
1.91
 
 
$
1.42
 
Diluted earnings per share - continuing operations
$
2.21
 
 
$
1.55
 
 
$
0.93
 
 
$
1.87
 
 
$
1.40
 
Loss on discontinued operations, net of tax
$
 
 
$
(19,075
)
 
$
(110,241
)
 
$
(23,617
)
 
$
(17,124
)
Cash dividends declared per common share
$
0.20
 
 
$
0.20
 
 
$
0.20
 
 
$
0.20
 
 
$
0.20
 
Shares used in basic per share calculations
47,713
 
 
48,504
 
 
48,589
 
 
48,232
 
 
47,361
 
Shares used in diluted per share calculations
49,344
 
 
49,331
 
 
48,947
 
 
49,090
 
 
48,020
 
BALANCE SHEET DATA:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents, and short-term investments
$
429,956
 
 
$
369,192
 
 
$
218,180
 
 
$
163,091
 
 
$
103,365
 
Total assets
$
744,647
 
 
$
655,351
 
 
$
633,120
 
 
$
741,393
 
 
$
651,304
 
Long-term obligations
$
12,667
 
 
$
13,850
 
 
$
13,698
 
 
$
14,989
 
 
$
696
 
Total stockholders' equity
$
634,852
 
 
$
571,334
 
 
$
525,367
 
 
$
578,620
 
 
$
496,807
 
OTHER DATA:
 
 
 
 
 
 
 
 
 
 
 
 
Cash provided from operating activities
$
158,232
 
 
$
143,729
 
 
$
99,150
 
 
$
102,900
 
 
$
73,048
 
 
1 
On December 1, 2009, we completed the sale of Altec Lansing, our AEG segment, and, therefore, its results are no longer included in continuing operations for all periods presented.  Accordingly, we have classified the AEG operating results, including the loss on sale, as discontinued operations in the Consolidated statement of operations for all periods presented.  See Note 4 of the Consolidated Financial Statements and related notes, included elsewhere, herein.
2 
During fiscal 2009, we announced several restructuring plans which included reductions in force including the planned closure of our Suzhou, China Bluetooth manufacturing facility in fiscal March 31, 2010.  As a result of these activities, $11.0 million in restructuring and other related charges has been included in our consolidated income from continuing operations for the year ended March 31, 2009.  In fiscal 2010, we recorded an additional $1.9 million of Restructuring and other related charges consisting of $0.8 million of severance and benefits and $1.1 million of non-cash charges including $0.7 million for the acceleration of depreciation on building and equipment associated with research and development and administrative functions due to the change in the assets’ useful lives as a result of the assets being taken out of service prior to their original service period and $0.4 million of additional loss on Assets held for sale.  In addition, in fiscal 2010, we recorded non-cash charges of $5.2 million for accelerated depreciation related to the building and equipment associated with manufacturing operations which is included in Cost of revenues. There were no charges in fiscal 2011; however, we completed the sale of our Suzhou facility, which was classified as Assets held for sale, resulting in an immaterial net gain which was recorded in Restructuring and other related charges. See Note 10 of the Consolidated Financial Statements and related notes, included elsewhere, herein.
3 
In the first quarter of fiscal 2008, we adopted new accounting principles for recognizing and measuring uncertain tax positions; as a result, the liability for uncertain tax provisions not expected to be paid within the next twelve months of $13.5 million was reclassified to long-term income taxes payable.  See Note 16 of the Consolidated Financial Statements and related notes, included elsewhere, herein.
4 
As originally reported in fiscal 2009, potentially dilutive common shares attributable to employee stock plans diluted shares were excluded from the diluted share calculation as they would have been anti-dilutive and would have reduced the net loss per share however, as a result of reporting our AEG segment as discontinued operations, the anti-dilution of these potentially dilutive common shares is now based on income from continuing operations as compared to net income (loss) and are now included in the shares used in diluted per share calculation.
5 
Fiscal year 2010 consisted of 53 weeks. All other fiscal years presented consisted of 52 weeks.

27


ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and related notes thereto included elsewhere in this report.  This discussion contains forward-looking statements.  Please see the "Cautionary Statement" and "Risk Factors" above for discussions of the uncertainties, risks, and assumptions associated with these statements.  Our fiscal year-end financial reporting periods are a 52 or 53 week year ending on the Saturday closest to March 31st.  Fiscal year 2011 had 52 weeks and ended on April 2, 2011. Fiscal year 2010 had 53 weeks, with the extra week occurring in the fourth quarter of the year, and ended on April 3, 2010.  Fiscal year 2009 had 52 weeks and ended on March 28, 2009.  Except as noted, financial results are for continuing operations; Altec Lansing, our former AEG segment, was sold effective December 1, 2009 and is reported as discontinued operations.
 
OVERVIEW
 
We are a leading worldwide designer, manufacturer, and marketer of lightweight communications headsets, telephone headset systems, and accessories for the business and consumer markets under the Plantronics brand.  In addition, we manufacture and market, under our Clarity brand, specialty telephone products, such as telephones for the hearing impaired, and other related products for people with special communication needs.
 
We ship a broad range of products to approximately 65 countries through a worldwide network of distributors, retailers, wireless carriers, original equipment manufacturers (“OEMs”), and telephony service providers.  We have well-developed distribution channels in North America, Europe, Australia and New Zealand, where use of our products is widespread.  Our distribution channels in other regions of the world are less mature, and, while we primarily serve the contact center markets in those regions, we continue to expand into the office, mobile and entertainment, digital audio, and specialty telephone markets in those regions and additional international locations.
 
On December 1, 2009, we sold Altec Lansing, our AEG business segment.  We have classified the AEG operating results, including the loss on sale of AEG, as discontinued operations for all periods presented and we now operate as one segment.
 
Consolidated net revenues in fiscal 2011 were $683.6 million, which is an increase of 11.4% from fiscal 2010 net revenues of $613.8 million.  The year-over-year increase was driven by increased demand for headsets designed for Unified Communications ("UC") together with higher sales volumes of our Office and Contact Center ("OCC") products as a result of a stronger overall economic environment.
 
We had income from continuing operations, net of tax, of $109.2 million in fiscal 2011 as compared to $76.5 million in fiscal 2010, an increase of $32.8 million, due primarily to increased net revenues and higher margins due to a stronger overall product mix driven by increased OCC net revenues as OCC products generally have higher margins along with a full year effect of outsourcing our Bluetooth product manufacturing in the second quarter of fiscal 2010 offset in part by an increase in operating expenses as a result of our investment in UC.
 
UC is widely expected to increase the adoption and use of headsets in enterprise applications.  Headsets help to enable voice to be delivered naturally in the UC environment.  As UC is adopted by enterprises to reduce costs and improve collaboration, headsets are expected to be an important part of the UC environment.
 
In the Mobile market, particularly for consumer applications, margins are typically lower than for our enterprise applications due to the level of competition and pricing pressures.  Our strategy for improving the profitability of mobile consumer products is to differentiate our products from our competitors and to provide compelling solutions under our brand with regard to features, design, ease of use and performance.  
 
Throughout fiscal 2011, we remained focused on our long-term strategy to invest in UC as a key long-term driver of revenue and profit growth, maintain profitability in our consumer Bluetooth products and earn a return on invested capital in excess of the cost of capital.  While staying focused on our long-term strategy, we continued to distribute capital to stockholders through repurchases of our common stock, and, subsequent to our fiscal year end, on May 2, 2011, our Board of Directors authorized the repurchase of up to 7,000,000 shares of our outstanding common stock.
 

28


Looking forward into fiscal 2012, we continue to believe that UC is a key long-term driver of revenue and profit growth.  In fiscal 2011, we introduced new products and generated $53 million in revenues from our UC product portfolio. We continue to focus on innovative product development, including the use of software and services as part of our products. Our investment also includes growing our sales force and increasing marketing and other support costs as we expand our key strategic partnerships to market UC products.  Our goal is to be the world leader in audio solutions for the UC market and we feel we are well positioned as we enter fiscal 2012 with a strong UC product portfolio.
 
We intend for the following discussion of our financial condition and results of operations to provide information that will assist in understanding our financial statements and therefore, this discussion should be read in conjunction with the financial statements and accompanying notes.  
 
RESULTS OF OPERATIONS
 
The following tables set forth, for the periods indicated, the consolidated statements of operations data.  The financial information and the ensuing discussion should be read in conjunction with the accompanying consolidated financial statements and notes thereto.  Except as noted, financial results are for continuing operations.  Altec Lansing, our former AEG segment, was sold effective December 1, 2009.  We have classified the AEG operating results as discontinued operations in the Consolidated statement of operations for all periods presented.
 
(in thousands)
 
Fiscal Year Ended March 31,
 
 
2011
 
2010
 
2009
Net revenues
 
$
683,602
 
 
100.0
 %
 
$
613,837
 
 
100.0
 %
 
$
674,590
 
 
100.0
 %
Cost of revenues
 
321,846
 
 
47.1
 %
 
312,767
 
 
51.0
 %
 
382,659
 
 
56.7
 %
Gross profit
 
361,756
 
 
52.9
 %
 
301,070
 
 
49.0
 %
 
291,931
 
 
43.3
 %
Operating expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research, development and engineering
 
63,183
 
 
9.2
 %
 
57,784
 
 
9.4
 %
 
63,840
 
 
9.5
 %
Selling, general and administrative
 
163,389
 
 
23.9
 %
 
143,784
 
 
23.4
 %
 
155,678
 
 
23.1
 %
Gain from litigation settlement
 
(5,100
)
 
(0.7
)%
 
 
 
 
 
 
 
 
Restructuring and other related charges
 
(428
)
 
(0.1
)%
 
1,867
 
 
0.3
 %
 
10,952
 
 
1.6
 %
Total operating expenses
 
221,044
 
 
32.3
 %
 
203,435
 
 
33.1
 %
 
230,470
 
 
34.2
 %
Operating income
 
140,712
 
 
20.6
 %
 
97,635
 
 
15.9
 %
 
61,461
 
 
9.1
 %
Interest and other income (expense), net
 
(56
)
 
 
 
3,105
 
 
0.5
 %
 
(3,544
)
 
(0.5
)%
Income from continuing operations before income taxes
 
140,656
 
 
20.6
 %
 
100,740
 
 
16.4
 %
 
57,917
 
 
8.6
 %
Income tax expense from continuing operations
 
31,413
 
 
4.6
 %
 
24,287
 
 
4.0
 %
 
12,575
 
 
1.9
 %
Income from continuing operations, net of tax
 
109,243
 
 
16.0
 %
 
76,453
 
 
12.4
 %
 
45,342
 
 
6.7
 %
Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from operations of discontinued AEG segment (including loss on sale)
 
 
 
 
 
(30,468
)
 
(5.0
)%
 
(142,633
)
 
(21.1
)%
Income tax benefit on discontinued operations
 
 
 
 
 
(11,393
)
 
(1.9
)%
 
(32,392
)
 
(4.8
)%
Loss on discontinued operations
 
 
 
 
 
(19,075
)
 
(3.1
)%
 
(110,241
)
 
(16.3
)%
Net income (loss)
 
$
109,243
 
 
16.0
 %
 
$
57,378
 
 
9.3
 %
 
$
(64,899
)
 
(9.6
)%
 

29


Net Revenues
 
 
Fiscal Year Ended
 
 
 
 
 
Fiscal Year Ended
 
 
 
 
(in thousands)
 
March 31, 2011
 
March 31, 2010
 
Increase (Decrease)
 
March 31, 2010
 
March 31, 2009
 
Increase (Decrease)
Net revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office and Contact Center
 
$
490,472
 
 
$
404,397
 
 
$
86,075
 
 
21.3
 %
 
$
404,397
 
 
$
429,669
 
 
$
(25,272
)
 
(5.9
)%
Mobile
 
137,530
 
 
149,756
 
 
(12,226
)
 
(8.2
)%
 
149,756
 
 
187,419
 
 
(37,663
)
 
(20.1
)%
Gaming and Computer Audio
 
36,736
 
 
39,260
 
 
(2,524
)
 
(6.4
)%
 
39,260
 
 
34,052
 
 
5,208
 
 
15.3
 %
Clarity
 
18,864
 
 
20,424
 
 
(1,560
)
 
(7.6
)%
 
20,424
 
 
23,450
 
 
(3,026
)
 
(12.9
)%
Total net revenues
 
$
683,602
 
 
$
613,837
 
 
$
69,765
 
 
11.4
 %
 
$
613,837
 
 
$
674,590
 
 
$
(60,753
)
 
(9.0
)%
 
Our consolidated net revenues increased in fiscal 2011 as compared to fiscal 2010 driven by growth in OCC product revenues as a result of improved global economic conditions and growth in demand for UC.  While we experienced foreign exchange fluctuations in our net revenues during the first half of the fiscal year, the overall foreign exchange impact for the entire fiscal year was not material. 
Our consolidated net revenues decreased in fiscal 2010 as compared to fiscal 2009 primarily in our Mobile and OCC product revenues as a result of global economic weakness due to the global recession especially in the first half of fiscal 2010 in comparison to the prior year. While we experienced foreign exchange fluctuations in our net revenues during the first half of fiscal 2010, the overall foreign exchange impact for the entire fiscal year was not material.
 
Net revenues may vary due to the timing of the introduction of new products, discounts and other incentives and channel mix.  In addition, we typically experience seasonality in our quarterly revenues which occurs in the third quarter of our fiscal year. Our OCC products represent our largest source of revenues while our Mobile products represent our largest unit volumes.
 
Primary fluctuations in the net revenues in fiscal 2011 compared to fiscal 2010 were as follows:
 
OCC product net revenues increased $86.1 million as a result of higher volumes due to improved global economic conditions and growth in demand for UC products.
 
Mobile net revenues decreased $12.2 million mostly due to overall weakness in the product category which resulted in a lower unit volume of sales. We believe we have maintained our share of the total global market, although gains achieved internationally were partially offset by a reduction in U.S. market share.
 
Primary fluctuations in the net revenues in fiscal 2010 compared to fiscal 2009 were as follows:
 
Mobile product net revenues decreased by $37.7 million due primarily to lower volumes as a result of the global recession along with the benefit realized in fiscal 2009 from Bluetooth headset revenues attributable to hands-free driving legislation enacted in the states of California and Washington in the U.S. in fiscal 2009.
 
OCC product net revenues decreased by $25.3 million as a result of lower volumes due to weakness in economic conditions as a result of the global recession.
 
Gaming and Computer Audio net revenues increased by $5.2 million due to higher sales of UC products and the overall strength of the product portfolio.
 
Clarity net revenues decreased by $3.0 million due primarily to lower purchases under state government programs as a result of the impact of the recession on state budgets and lower OEM sales in Europe.
 

30


Geographical Information
 
 
Fiscal Year Ended
 
 
 
 
 
Fiscal Year Ended
 
 
 
 
(in thousands)
 
March 31, 2011
 
March 31, 2010
 
Increase (Decrease)
 
March 31, 2010
 
March 31, 2009
 
Increase (Decrease)
Net revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
$
400,292
 
 
$
378,119
 
 
$
22,173
 
 
5.9
%
 
$
378,119
 
 
$
424,290
 
 
$
(46,171
)
 
(10.9
)%
As a percentage of net revenues
 
58.6
%
 
61.6
%
 
(3.0
)
 
ppt.
 
61.6
%
 
62.9
%
 
(1.3
)
 
ppt.
Europe, Middle East and Africa
 
169,521
 
 
148,070
 
 
21,451
 
 
14.5
%
 
148,070
 
 
162,697
 
 
(14,627
)
 
(9.0
)%
Asia Pacific
 
62,697
 
 
46,494
 
 
16,203
 
 
34.8
%
 
46,494
 
 
41,846
 
 
4,648
 
 
11.1
 %
Americas, excluding United States
 
51,092
 
 
41,154
 
 
9,938
 
 
24.1
%
 
41,154
 
 
45,757
 
 
(4,603
)
 
(10.1
)%
Total international net revenues
 
283,310
 
 
235,718
 
 
47,592
 
 
20.2
%
 
235,718
 
 
250,300
 
 
(14,582
)
 
(5.8
)%
As a percentage of net revenues
 
41.4
%
 
38.4
%
 
3.0
 
 
ppt.
 
38.4
%
 
37.1
%
 
1.3
 
 
ppt.
Total consolidated net revenues
 
$
683,602
 
 
$
613,837
 
 
$
69,765
 
 
11.4
%
 
$
613,837
 
 
$
674,590
 
 
$
(60,753
)
 
(9.0
)%
 
Consolidated U.S. net revenues, as a percentage of total net revenues, decreased by 3.0 percentage points to 59% in fiscal 2011 from 62% in fiscal 2010 mostly due to the weakness in the Mobile product category. Consolidated international net revenues, as a percentage of total net revenues, increased to 41% in fiscal 2011 from 38% in fiscal 2010. The increase in absolute dollars in the U.S. revenues was a result of increased OCC revenues due to improved global economic conditions and growth in demand for UC. The increase in absolute dollars in international revenues was also due to increased OCC revenues along with an increase in Mobile revenues as we gained market share in the overall region.
 
Consolidated U.S. net revenues, as a percentage of total net revenues, decreased by 1.0 percentage point to 62% in fiscal 2010 from 63% in fiscal 2009 due mostly to the Bluetooth product attributable to hands-free driving legislation enacted in the states of California and Washington in the U.S. in fiscal 2009. Accordingly, consolidated international net revenues, as a percentage of total net revenues, increased to 38% in fiscal 2010 from 37% in fiscal 2009. The decrease in absolute dollars in both the U.S. and international revenues was a result of the global economic recession.
 
Cost of Revenues and Gross Profit
 
Cost of revenues consists primarily of direct manufacturing and contract manufacturer costs, including material and direct labor, our operations management team and indirect labor such as supervisors and warehouse workers, freight expense, warranty expense, depreciation, royalties, reserves for excess and obsolete inventory, and an allocation of overhead expenses, including facilities and IT costs.
 
 
Fiscal Year Ended
 
 
 
 
 
Fiscal Year Ended
 
 
 
 
(in thousands)
 
March 31, 2011
 
March 31, 2010
 
Increase (Decrease)
 
March 31, 2010
 
March 31, 2009
 
Increase (Decrease)
Net revenues
 
$
683,602
 
 
$
613,837
 
 
$
69,765
 
 
11.4
%
 
$
613,837
 
 
$
674,590
 
 
$
(60,753
)
 
(9.0
)%
Cost of revenues
 
321,846
 
 
312,767
 
 
9,079
 
 
2.9
%
 
312,767
 
 
382,659
 
 
(69,892
)
 
(18.3
)%
Consolidated gross profit
 
$
361,756
 
 
$
301,070
 
 
$
60,686
 
 
20.2
%
 
$
301,070
 
 
$
291,931
 
 
$
9,139
 
 
3.1
 %
Consolidated gross profit %
 
52.9
%
 
49.0
%
 
3.9
 
 
ppt.
 
49.0
%
 
43.3
%
 
5.7
 
 
ppt.
 

31


The increase in gross profit in fiscal 2011 compared to fiscal 2010 was due primarily to increased revenues of $69.8 million along with improved margins on these revenues.  As a percentage of net revenues, gross profit increased 3.9 percentage points due primarily to the following:
 
a 1.6 percentage point benefit from higher product margins driven mostly by a favorable product mix consisting of a higher proportion of OCC revenues which generally have a higher gross margin than other product categories;
a 1.3 percentage point benefit from improved Bluetooth product margins mostly related to continued lower costs as a result of the outsourcing of our manufacturing which began in July 2009; and
a 1.0 percentage point benefit from lower depreciation expenses as we incurred accelerated depreciation expenses in the prior fiscal year related to the closure of our Suzhou, China manufacturing facility in July 2009.
 
The increase in gross profit in fiscal 2010 compared to fiscal 2009, despite the decline in net revenues, was due to improved margins.  As a percentage of net revenues, gross profit increased 5.7 percentage points due primarily to the following:
 
a 2.2 percentage point benefit from lower requirements for excess and obsolete inventory and warranty provisions;
a 1.9 percentage point benefit from improved product margins on Bluetooth and OCC headsets mostly due to cost reductions;
a 1.2 percentage point benefit from higher product margins driven mostly by a favorable product mix consisting of a higher proportion of OCC revenues which generally have a higher gross margin than other product categories;
a 0.8 percentage point benefit from lower freight costs mostly due to fewer material receipts as a result of improved inventory management and reduced shipping rates as we experienced fuel surcharges in the prior year; and
a 0.4 percentage point benefit from lower manufacturing costs mostly due to cost reductions.
 
Product mix has a significant impact on gross profit as there can be significant variances between our higher and our lower margin products; therefore, small variations in product mix, which can be difficult to predict, can have a significant impact on gross profit. In addition, if we do not properly anticipate changes in demand, we have in the past, and may in the future, incur significant costs associated with writing off excess and obsolete inventory or incur charges for adverse purchase commitments. Gross profit may also vary based on distribution channel, return rates, the amount of product sold for which royalties are required to be paid, the rate at which royalties are calculated, and other factors.
 
Research, Development and Engineering
 
Research, development, and engineering costs are expensed as incurred and consist primarily of compensation costs, outside services, including legal fees associated with protecting our intellectual property, expensed materials, depreciation, and an allocation of overhead expenses, including IT, facilities, and human resources costs.
 
 
Fiscal Year Ended
 
 
 
 
 
Fiscal Year Ended
 
 
 
 
(in thousands)
 
March 31, 2011
 
March 31, 2010
 
Increase (Decrease)
 
March 31, 2010
 
March 31, 2009
 
Increase (Decrease)
Research, development and engineering
 
$
63,183
 
 
$
57,784
 
 
$
5,399
 
 
9.3
%
 
$
57,784
 
 
$
63,840
 
 
$
(6,056
)
 
(9.5
)%
% of total consolidated net revenues
 
9.2
%
 
9.4
%
 
(0.2
)
 
ppt.
 
9.4
%
 
9.5
%
 
(0.1
)
 
ppt.
 
In fiscal 2011, compared to fiscal 2010, consolidated research, development and engineering expenses increased in absolute dollars but declined as a percentage of net revenues by 0.2 percentage points. The increase in absolute dollars of $5.4 million was due primarily to the following:
 
increased compensation costs of $2.6 million, primarily from higher performance-based compensation costs from higher profits, increased headcount, and annual merit increases; and
an increase of $2.0 million from higher project expenses mostly related to UC development.
 
Projects that we focused on during fiscal 2011 were:
 
UC products and software;
wireless office system products and technology;
Bluetooth products and technology; and
developing common architectures across multiple products and increasing the use of common components across product lines.

32


 
In fiscal 2010, compared to fiscal 2009, consolidated research, development, and engineering expenses decreased in absolute dollars and as a percentage of net revenues as a result of cost reduction efforts.  The decrease in absolute dollars was due primarily to the following:
 
lower compensation costs of $2.7 million as a result of reductions in our workforce; and
a decrease of $1.7 million of lower research and development project expenses as a result of efficiency improvements, including the benefit of lower project material and equipment expenses from outsourcing our Bluetooth headset manufacturing.
 
We anticipate that our consolidated research, development and engineering expenses in fiscal 2012 will increase slightly in comparison to fiscal 2011 as we continue to develop solutions for the UC market opportunity and to refresh and extend our product offerings for contact centers, traditional offices and mobile applications.
 
Selling, General and Administrative
 
Selling, general and administrative expense consists primarily of compensation costs, marketing costs, professional service fees, travel expenses, litigation costs, bad debt expense, and allocations of overhead expenses, including facilities, human resources and IT costs.
 
 
Fiscal Year Ended
 
 
 
 
 
Fiscal Year Ended
 
 
 
 
(in thousands)
 
March 31, 2011
 
March 31, 2010
 
Increase (Decrease)
 
March 31, 2010
 
March 31, 2009
 
Increase (Decrease)
Selling, general and administrative
 
$
163,389
 
 
$
143,784
 
 
$
19,605
 
 
13.6
%
 
$
143,784
 
 
$
155,678
 
 
$
(11,894
)
 
(7.6
)%
% of total consolidated net revenues
 
23.9
%
 
23.4
%
 
0.5
 
 
ppt.
 
23.4
%
 
23.1
%
 
0.3
 
 
ppt.
 
In fiscal 2011, compared to fiscal 2010, consolidated selling, general and administrative expenses increased due primarily to the following:
 
higher compensation expenses of $8.9 million as a result of higher performance-based compensation on higher revenues and profits, increased headcount, and annual merit increases;
an increase in marketing and sales promotions of $3.0 million in support of increased revenue opportunities;
an increase in travel-related expenses of $2.6 million mostly in support of increased revenue opportunities;
an increase in legal costs of $2.5 million mostly due to additional litigation that was settled favorably in fiscal 2011 and is discussed below in "Gain from Litigation Settlement"; and
an increase in external sales representative fees and commissions of $1.5 million associated with higher revenues.
 
These increases were offset in part by a decrease of $1.1 million in depreciation expenses due to assets being fully depreciated during fiscal 2010 and a majority of the current capital projects were not completed as of the end of fiscal 2011.
 
In fiscal 2010, compared to fiscal 2009, consolidated selling, general and administrative expenses decreased due primarily to the following:
a decrease in marketing and sales promotions of $6.2 million due to lower advertising, public relations, trade show, and market research expenses as a result of cost reduction and containment efforts;
a decrease in professional service fees of $4.4 million mostly due to lower external sales representative fees as a result of lower revenues, consulting costs, and recruiting costs;
a decrease of $1.8 million for provisions on doubtful accounts receivable due to higher expenses in fiscal 2009 as we experienced unexpected customer bankruptcies as a result of the global recession; and
a decrease of $1.8 million in travel and entertainment related expenses as a result of our cost reduction initiatives.
 
These decreases were offset in part by an increase of $1.4 million in legal fees mostly as a result of litigation activity related to cases where Plantronics is the plaintiff.
 
We anticipate that our consolidated selling, general and administrative expenses will increase slightly in fiscal 2012 in comparison to fiscal 2011 as we continue to invest in support of the growing UC market.
 

33


Gain from Litigation Settlement
 
 
Fiscal Year Ended
 
 
 
 
 
Fiscal Year Ended
 
 
 
 
(in thousands)
 
March 31, 2011
 
March 31, 2010
 
Increase (Decrease)
 
March 31, 2010
 
March 31, 2009
 
Increase (Decrease)
Gain from Litigation Settlement
 
$
(5,100
)
 
$
 
 
$
(5,100
)
 
100.0
%
 
$
 
 
$
 
 
$
 
 
 
% of total consolidated net revenues
 
(0.7
)%
 
 
 
(0.7
)
 
ppt.
 
 
 
 
 
 
 
ppt.
 
During the fourth quarter of fiscal 2011, we entered into a binding settlement agreement to dismiss litigation involving the alleged theft of our trade secrets by a competitor in mobile headsets, and in the same quarter, pursuant to the settlement agreement, we received a payment of $5.1 million in exchange for a full release and settlement of the claims.
 
Restructuring and Other Related Charges
 
 
Fiscal Year Ended
 
 
 
 
 
Fiscal Year Ended
 
 
 
 
(in thousands)
 
March 31, 2011
 
March 31, 2010
 
Increase (Decrease)
 
March 31, 2010
 
March 31, 2009
 
Increase (Decrease)
Restructuring and other related charges
 
$
(428
)
 
$
1,867
 
 
$
(2,295
)
 
(122.9
)%
 
$
1,867
 
 
$
10,952
 
 
$
(9,085
)
 
(83.0
)%
% of total consolidated net revenues
 
(0.1
)%
 
0.3
%
 
(0.4
)
 
ppt.
 
0.3
%
 
1.6
%
 
(1.3
)
 
ppt.
 
We announced various restructuring activities in fiscal 2009 in an effort to reduce our cost structure in light of the expected impact of the global economic recession on our business and revenues. These actions consisted of reductions in force throughout all of our geographies along with a plan to close our manufacturing operations in our Suzhou, China facility due to the decision to outsource the manufacturing of our Bluetooth products to a third party supplier in China. We exited the manufacturing portion of the facility in July 2009 at which time the remaining assets were classified as Assets held for sale on the Consolidated balance sheet. Approximately 1,500 employees from functions across the Company were notified of their termination under these actions and substantially all of these employees have been terminated as of March 31, 2011.
 
As a result of these restructuring actions, we recorded approximately $1.9 million and $11.0 million of Restructuring and other related charges during the years ended March 31, 2010 and 2009, respectively, consisting of severance and benefits along with facilities and equipment charges. In addition, during the year ended March 31, 2010, we recorded non-cash charges of $5.2 million for accelerated depreciation related to the building and equipment associated with manufacturing operations which is included in Cost of revenues. There were no charges during the year ended March 31, 2011; however, in the third quarter of fiscal 2011, we completed the sale of our Suzhou facility, which was classified as Assets held for sale, resulting in an immaterial net gain which was recorded in Restructuring and other related charges.
 
As of March 31, 2011, we have recorded a total of $17.7 million of costs related to these actions, which includes $11.2 million of severance and benefits and $6.9 million in non-cash charges related to accelerated depreciation charges, the write-off of facilities and equipment and impairment loss on Assets held for sale, offset in part by a $0.4 million gain on the final sale of our Suzhou facility. All of these costs and the gain on sale were recorded in Restructuring and other related charges, with the exception of $5.2 million of accelerated depreciation which was recorded in Cost of revenues. All the costs related to these actions have been paid as of March 31, 2011.
 
Operating Income 
 
 
Fiscal Year Ended
 
 
 
 
 
Fiscal Year Ended
 
 
 
 
(in thousands)
 
March 31, 2011
 
March 31, 2010
 
Increase (Decrease)
 
March 31, 2010
 
March 31, 2009
 
Increase (Decrease)
Operating income
 
$
140,712
 
 
$
97,635
 
 
$
43,077
 
 
44.1
%
 
$
97,635
 
 
$
61,461
 
 
$
36,174
 
 
58.9
%
% of total consolidated net revenues
 
20.6
%
 
15.9
%
 
4.7
 
 
ppt.
 
15.9
%
 
9.1
%
 
6.8
 
 
ppt.
 

34


In fiscal 2011, we reported operating income of $140.7 million compared to $97.6 million in fiscal 2010 due to increased revenues and higher margins resulting mostly from a favorable product mix consisting of a greater proportion of OCC revenues which generally have higher gross margins than other product categories. In addition, we experienced improved Bluetooth margins resulting primarily from lower costs as a result of outsourcing our manufacturing facility in China which began in July 2009.
 
In fiscal 2010, we had an operating income of $97.6 million compared to $61.5 million in fiscal 2009 due to higher margins on lower revenues as a result of our fiscal 2009 restructuring actions in which we reduced our worldwide workforce and outsourced our Bluetooth manufacturing in China along with lower costs as a result of cost savings programs.
 
Operating margins may vary based on product mix shifts, product life cycles, and seasonality.  We believe our operating income will increase in fiscal 2012 due to growth in revenues driven primarily as a result of capitalizing on the UC opportunity as well as expected continued moderate economic growth.
 
Interest and Other Income (Expense), Net 
 
 
Fiscal Year Ended
 
 
 
 
 
Fiscal Year Ended
 
 
 
 
(in thousands)
 
March 31, 2011
 
March 31, 2010
 
Increase (Decrease)
 
March 31, 2010
 
March 31, 2009
 
Increase (Decrease)
Interest and other income (expense), net
 
$
(56
)
 
$
3,105
 
 
$
(3,161
)
 
(101.8
)%
 
$
3,105
 
 
$
(3,544
)
 
$
6,649
 
 
187.6
%
% of total net revenues
 
 
 
0.5
%
 
(0.5
)
 
ppt.
 
0.5
%
 
(0.5
)%
 
1.0
 
 
ppt.
 
Interest and other income (expense), net in fiscal 2011 decreased from fiscal 2010 due primarily to greater foreign currency exchange gains in the prior year as a result of a weaker U.S. Dollar in fiscal 2010 than in fiscal 2011 in addition to penalties and interest recorded in fiscal 2011 related to the settlement of an indirect tax matter in Brazil. In addition, included in the prior year was income from a one-time government stimulus program in Mexico.
 
In comparison to fiscal 2009, interest and other income (expense), net in fiscal 2010 increased due primarily to foreign exchange gains in fiscal 2010 as compared to foreign currency losses in the prior year as a result of the strength of the U.S. Dollar, a stimulus grant received from the Mexican government and reimbursement from Altec Lansing for routine expenses incurred on their behalf under the Transition Service Agreement entered into in conjunction with the sale of the AEG business in December 2009.  These increases were offset in part by lower interest income as a result of declining interest rates despite higher average cash and investment balances in fiscal 2010.
 
Income Tax Expense
 
 
Fiscal Year Ended
 
 
 
Fiscal Year Ended
 
 
(in thousands)
 
March 31, 2011
 
March 31, 2010
 
Increase (Decrease)
 
March 31, 2010
 
March 31, 2009
 
Increase (Decrease)
Income from continuing operations before income taxes
 
$
140,656
 
 
$
100,740
 
 
$
39,916
 
 
39.6
%
 
$
100,740
 
 
$
57,917
 
 
$
42,823
 
 
73.9
%
Income tax expense from continuing operations
 
31,413
 
 
24,287
 
 
7,126
 
 
29.3
%
 
24,287
 
 
12,575
 
 
11,712
 
 
93.1
%
Income from continuing operations, net of tax
 
$
109,243
 
 
$
76,453
 
 
$
32,790
 
 
42.9
%
 
$
76,453
 
 
$
45,342
 
 
$
31,111
 
 
68.6
%
Effective tax rate
 
22.3
%
 
24.1
%
 
(1.8
)
 
ppt.
 
24.1
%
 
21.7
%
 
2.4
 
 
ppt.
 
In comparison to fiscal 2010, the decrease in the effective tax rate for fiscal 2011 was due primarily to the increased benefit from the U.S. federal research tax credit in fiscal 2011 as the credit was reinstated in December 2010 retroactively to January 1, 2010; therefore, the effective tax rate in fiscal 2011 includes the impact of credits earned in our fourth quarter of fiscal 2010.
 
In comparison to fiscal 2009, the increase in the effective tax rate for fiscal 2010 was due primarily to the incremental benefit associated with the release of a higher amount of tax reserves resulting from the lapse of the statute of limitations in certain jurisdictions in fiscal 2009. In addition, the effective tax rate for fiscal 2009 included the impact of credits earned in the fourth quarter of fiscal 2008 because the U.S. federal research tax credit was reinstated in October 2008 retroactively to January 1, 2008.
 

35


Our effective tax rate for fiscal years 2011, 2010 and 2009 differs from the statutory rate due to the impact of foreign operations taxed at different statutory rates, income tax credits, state taxes, and other factors.  The future tax rate could be impacted by a shift in the mix of domestic and foreign income, tax treaties with foreign jurisdictions, changes in tax laws in the U.S. or internationally or a change in estimate of future taxable income which could result in a valuation allowance being required.
 
As of March 31, 2011, we had $10.5 million of unrecognized tax benefits compared to $11.2 million as of March 31, 2010 and $11.1 million as of March 31, 2009. The unrecognized tax benefits as of the end of fiscal 2011 would favorably impact the effective tax rate in future periods if recognized.
 
It is our continuing practice to recognize interest and/or penalties related to income tax matters in income tax expense. As of March 31, 2011 and 2010, we had approximately $1.7 million of accrued interest related to uncertain tax positions, compared to $1.6 million as of March 31, 2009. No penalties have been accrued.
  
Although the timing and outcome of income tax audits is highly uncertain, it is possible that certain unrecognized tax benefits may be reduced as a result of the lapse of the applicable statutes of limitations in federal, state, and foreign jurisdictions within the next twelve months.  Currently, we cannot reasonably estimate the amount of reductions, if any, during the next twelve months.  Any such reduction could be impacted by other changes in unrecognized tax benefits.
 
We are subject to taxation in various foreign and state jurisdictions as well as in the U.S. We are no longer subject to U.S. federal tax examinations by tax authorities for years prior to 2008. We are under examination by the California Franchise Tax Board for our 2007 and 2008 tax years. Foreign income tax matters for material tax jurisdictions have been concluded for tax years prior to fiscal 2006, except for the United Kingdom which has been concluded for tax years prior to fiscal 2009.
 
Discontinued Operations
 
We entered into an Asset Purchase Agreement (“APA”) on October 2, 2009, as subsequently amended, to sell Altec Lansing, our AEG segment.  The sale was completed effective December 1, 2009.  All of the revenues in the AEG segment were derived from sales of Altec Lansing products.  All operations of AEG have been classified as discontinued operations in the Consolidated statement of operations for all periods presented.
 
The results from discontinued operations in fiscal 2010 include a loss of $0.6 million on sale of Altec Lansing which is calculated as follows (in thousands):
Proceeds received upon close
$
11,075
 
Escrow payments received to date
2,065
 
Remaining escrow payments to be received (subsequently received in fiscal 2011)
1,625
 
Payment to purchaser for adjustment for final value of net assets under APA
(3,956
)
Total estimated proceeds
10,809
 
Book value of net assets sold
(11,057
)
Costs incurred upon closing
(363
)
Loss on sale of AEG
$
(611
)
 
There was no income or loss from discontinued operations for the year ended March 31, 2011. The results from discontinued operations for the years ended March 31, 2010 and 2009 are as follows:
(in thousands)
 
Year Ended March 31,
 
 
2010
 
2009
Net revenues
 
$
64,916
 
 
$
91,029
 
Cost of revenues
 
(53,127
)
 
(86,932
)
Operating expenses
 
(16,433
)
 
(28,144
)
Impairment of goodwill and long-lived assets
 
(25,194
)
 
(117,464
)
Restructuring and other related charges
 
(19
)
 
(1,122
)
Loss on sale of AEG
 
(611
)
 
 
Loss from operations of discontinued AEG segment (including loss on sale of AEG)
 
(30,468
)
 
(142,633
)
Tax benefit from discontinued operations
 
(11,393
)
 
(32,392
)
Loss on discontinued operations, net of tax
 
$
(19,075
)
 
$
(110,241
)

36


FINANCIAL CONDITION
 
The table below provides selected consolidated cash flow information for the periods indicated:
(in thousands)
 
March 31, 2011
 
March 31, 2010
 
March 31, 2009
Cash provided by operating activities
 
$
158,232
 
 
$
143,729
 
 
$
99,150
 
 
 
 
 
 
 
 
Capital expenditures and other assets
 
$
(18,567
)
 
$
(6,262
)
 
$
(23,682
)
Cash (used for purchases) provided by maturities and sales of investments, net
 
(161,935
)
 
64,760
 
 
(59,896
)
Proceeds received from sale of AEG segment
 
1,625
 
 
9,121
 
 
 
Cash provided by other investing activities
 
8,966
 
 
277
 
 
406
 
Cash provided by (used for) investing activities
 
$
(169,911
)
 
$
67,896
 
 
$
(83,172
)
 
 
 
 
 
 
 
Repurchase of common stock including taxes paid related to net share settlement on equity awards
 
$
(105,716
)
 
$
(49,652
)
 
$
(17,817
)
Proceeds from issuance of common stock
 
50,109
 
 
32,581
 
 
6,899
 
Payment of cash dividends
 
(9,703)
 
 
(9,781)
 
 
(9,787)
 
Cash provided by other financing activities
 
9,939
 
 
5,870
 
 
5,790
 
Cash used for financing activities
 
$
(55,371
)
 
$
(20,982
)
 
$
(14,915
)
 
Cash Flows from Operating Activities
 
Cash flows from operating activities in fiscal 2011 were $158.2 million and consisted of our net income of $109.2 million, non-cash charges of $29.1 million and working capital sources of cash of $19.9 million. Non-cash charges consisted primarily of $16.3 million of depreciation and amortization, $15.9 million of stock-based compensation and a $6.2 million income tax benefit associated with stock option exercises, offset in part by $5.7 million in excess tax benefits from stock-based compensation expense and a $5.2 million benefit from deferred income taxes. Working capital sources of cash consisted primarily of a decrease in inventory of $13.0 million as we continued to improve the management of our inventory levels, increases in accounts payable and accrued liabilities of $10.2 million and $9.9 million, respectively, due to timing of payments along with a benefit from income taxes of $4.2 million. Working capital uses of cash consisted primarily of an increase in accounts receivable of $15.1 million due to higher revenues in the fourth quarter of fiscal 2011 than in the prior year quarter. Inventory turns increased to 5.8 as of March 31, 2011 from 4.2 as of March 31, 2010 as a result of our lower inventory balances on higher cost of revenues in the fourth quarter of fiscal 2011 compared to the same period in fiscal 2010. Days Sales Outstanding ("DSO") increased to 54 days as of March 31, 2011 from 49 days as of March 31, 2010 as a result of a higher accounts receivable balance due to timing of revenues earned during the fourth quarter of fiscal 2011 as compared to the fourth quarter of fiscal 2010. While our accounts receivable balance has increased since March 31, 2010, we have improved the quality of our aging of the balance as of March 31, 2011.
 
Cash flows from operating activities in fiscal 2010 were $143.7 million and consisted of our net income of $57.4 million, non-cash charges of $54.3 million and working capital sources of cash of $32.0 million.  Non-cash charges consisted primarily of $25.2 million related to the AEG impairment charge on long-lived assets recorded in discontinued operations, $18.1 million of depreciation and amortization, $14.6 million of stock-based compensation, and non-cash restructuring charges of $6.3 million offset in part by a $12.5 million benefit from deferred income taxes.  Working capital sources of cash consisted primarily of a decrease in inventory of $27.6 million as we continued to improve the management of our inventory levels, income tax refunds received along with decreases in other assets.  Working capital uses of cash consisted primarily of decreases in accounts payable and accrued liabilities from reduced spending during the fiscal year as a result of the sale of Altec Lansing in December 2009.  Inventory turns, which is calculated using Cost of revenues from continuing operations only and consolidated inventory balances, increased to 4.2 as of March 31, 2010 from 3.1 as of March 31, 2009 as a result of our lower inventory balances on higher revenues in the fourth quarter of fiscal 2010 compared to the same period in fiscal 2009.  Accounts receivable remained relatively flat from fiscal 2009 to fiscal 2010; however, DSO, which is calculated using Net revenues from continuing operations only and consolidated accounts receivable balances, decreased to 49 days as of March 31, 2010 from 59 days as of March 31, 2009 as a result of collections of the accounts receivable related to our AEG business which were retained by us upon the sale of Altec Lansing on December 1, 2009.  
 

37


Cash flows from operating activities in fiscal 2009 were $99.2 million and consisted of our net loss of $64.9 million offset by non-cash charges of $147.6 million and working capital sources of cash of $16.4 million.  Non-cash charges consisted primarily of $117.5 million related to the AEG impairment of goodwill and long-lived assets recorded in discontinued operations, $25.8 million of depreciation and amortization, $15.7 million of stock-based compensation, $11.4 million of provisions for excess and obsolete inventory, and $2.7 million of provisions for sales allowances and doubtful accounts offset in part by a $26.9 million benefit from deferred income taxes.  Working capital sources of cash consisted primarily of a decrease in accounts receivable of $50.7 million due to cash collections and lower revenues.  DSO, which is calculated using Net revenues from continuing operations only and consolidated accounts receivable balances, as of March 31, 2009 was 59 days compared to 64 as of March 31, 2008.  Working capital uses of cash consisted primarily of decreases in accounts payable and accrued liabilities as we reduced our spending during the fiscal year, decreases in gross inventory as we improved management of our inventory levels, and increases in other assets.  Inventory turns, which is calculated using Cost of revenues from continuing operations only and consolidated inventory balances, decreased slightly to 3.1 as of March 31, 2009 from 3.2 as of March 31, 2008 as a result of our higher inventory balances and lower revenues.
 
We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors including fluctuations in our net revenues and operating results, collection of accounts receivable, changes to inventory levels and timing of payments.
 
Cash Flows from Investing Activities
 
In fiscal 2011, net cash flows used for investing activities were $169.9 million, consisting primarily of $256.3 million and $48.9 million for the purchase of short-term and long-term investments, respectively, along with capital expenditures of $18.6 million. These uses of cash were offset in part by net proceeds of $142.5 million from sales and maturities of short-term investments, $9.1 million from the sale of our Suzhou facility classified as Assets held for sale and $1.6 million in net proceeds from release of the escrow from the sale of Altec Lansing, our AEG segment. Capital expenditures during fiscal 2011 related primarily to building and leasehold improvements including the installation of an expanded solar energy system in our headquarters in Santa Cruz, California, tooling and various IT projects and equipment.
 
In fiscal 2010, net cash flows provided from investing activities were $67.9 million, consisting primarily of net maturities and sales of short-term investments of $64.0 million and $9.1 million in net proceeds from the sale of Altec Lansing offset in part by capital expenditures of $6.3 million.  Capital expenditures during fiscal 2010 primarily related to tooling and various IT projects.
 
In fiscal 2009, net cash flows used for investing activities were $83.2 million, consisting primarily of capital expenditures of $23.7 million and net purchases of short-term investments of $59.9 million.  Significant capital expenditures during fiscal 2009 primarily related to $4.3 million in costs to complete construction of the new corporate data center in our Santa Cruz, California headquarters, $3.2 million for the construction of our engineering center in Santa Cruz, California and $2.3 million for various IT projects.
 
We anticipate our capital expenditures in fiscal 2012 to be in the range of $18.0 million to $20.0 million consisting primarily of building and leasehold improvements both in our U.S. and Europe offices, IT related expenditures and tooling for new products. We will continue to evaluate new business opportunities and new markets; as a result, future growth within the existing business or new opportunities and markets may dictate the need for additional facilities and capital expenditures to support that growth.
 
Cash Flows from Financing Activities 
 
Net cash flows used for financing activities in fiscal 2011 were $55.4 million and consisted of $105.7 million used for the repurchase of common stock and $9.7 million in dividend payments, which were partially offset by $50.1 million in proceeds from the exercise of employee stock options, $4.2 million in proceeds from the sale of treasury stock issued for purchases under our Employee Stock Purchase Plan (“ESPP”) and $5.7 million of excess tax benefits from stock-based compensation.
 
Net cash flows used for financing activities in fiscal 2010 were $21.0 million and consisted of $49.7 million related to repurchases of common stock and $9.8 million in dividend payments, which were partially offset by $32.6 million in proceeds from the exercise of employee stock options, $3.6 million in proceeds from the sale of treasury stock issued for purchases under our ESPP and $2.2 million of excess tax benefits from stock-based compensation.
 
Net cash flows used for financing activities in fiscal 2009 were $14.9 million and consisted of $17.8 million related to repurchases of common stock and $9.8 million in dividend payments, which were partially offset by $6.9 million in proceeds from the exercise of employee stock options and $5.2 million in proceeds from the sale of treasury stock issued for purchases under our ESPP.
 

38


On May 3, 2011, we announced that our Board of Directors had declared a cash dividend of $0.05 per share of our common stock, payable on June 10, 2011 to stockholders of record on May 20, 2011.  We expect to continue our quarterly dividend of $0.05 per common share. The actual declaration of future dividends, and the establishment of record and payment dates, is subject to final determination by the Audit Committee of the Board of Directors of Plantronics each quarter after its review of our financial condition and financial performance.
 
Liquidity and Capital Resources
 
Our primary discretionary cash requirements historically have been to repurchase stock.  At March 31, 2011, we had working capital of $524.1 million, including $430.0 million of cash, cash equivalents and short-term investments, compared with working capital of $500.0 million, including $369.2 million of cash, cash equivalents and short-term investments at March 31, 2010.  The increase in working capital from March 31, 2010 to March 31, 2011 is a result of our cash generated from operating activities during fiscal 2011 which is mostly a result of our net income of $109.2 million.  As of March 31, 2011, of our $430.0 million of cash, cash equivalents and short-term investment portfolio, $143.0 million is held in the U.S. while $287.0 million is held internationally and would be subject to U.S. tax if we repatriate back to the U.S.
 
From time to time, we repurchase shares of our common stock in the open market in accordance with repurchase plans approved by our Board of Directors. During the years ended March 31, 2011, 2010 and 2009, we repurchased 3,315,000, 1,935,100 and 1,007,500 shares, respectively, of our common stock in the open market as part of these publicly announced repurchase programs for a total cost of $105.5 million, $49.7 million and $17.8 million, respectively. As of March 31, 2011, there were a total of 660,900 remaining shares authorized for repurchase, all of which are under our plan approved by the Board of Directors on March 1, 2011.
 
On December 7, 2010, December 2, 2009 and January 13, 2009, we retired 4.0 million shares, 2.0 million shares and 16.0 million shares of treasury stock, respectively, which were returned to the status of authorized but unissued shares.  These were non-cash equity transactions in which the cost of the reacquired shares was recorded as a reduction to both Retained earnings and Treasury stock.
 
Our cash and cash equivalents as of March 31, 2011 consist of U.S. Treasury Bills or Treasury-Backed funds and bank deposits with third party financial institutions.  While we monitor bank balances in our operating accounts and adjust the balances as appropriate, these balances could be impacted if the underlying financial institutions fail or there are other adverse conditions in the financial markets.  Cash balances are held throughout the world, including substantial amounts held outside of the U.S.  Most of the amounts held outside of the U.S. could be repatriated to the U.S., but, under current law, would be subject to U.S. federal income taxes, less applicable foreign tax credits, upon repatriation.
 
Our investments are intended to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations, and delivers an appropriate yield in relationship to our investment guidelines and market conditions.  As of March 31, 2011, our investments are composed of U.S. Treasury Bills, Government Agency Securities, Commercial Paper, U.S. Corporate Bonds and Certificates of Deposit ("CDs").
 
We enter into foreign currency forward-exchange contracts, which typically mature in one month intervals, to hedge our exposure to foreign currency fluctuations of Euro, Great Britain Pound and Australian Dollar denominated cash balances, receivables and payables.  We record in the Consolidated balance sheet at each reporting period the fair value of our forward-exchange contracts and record any fair value adjustments in our Consolidated statement of operations.  Gains and losses associated with currency rate changes on contracts are recorded within Interest and other income (expense), net, offsetting transaction gains and losses on the related assets and liabilities. Please see Item 7A Quantitative and Qualitative Disclosures About Market Risk for additional information.
 
We also have a hedging program to hedge a portion of forecasted revenues denominated in the Euro and Great Britain Pound with put and call option contracts used as collars.  We also hedge a portion of the forecasted expenditures in Mexican Pesos with a cross-currency swap.  At each reporting period, we record the net fair value of our unrealized option contracts in the Consolidated balance sheet with related unrealized gains and losses as a component of Accumulated other comprehensive income, a separate element of Stockholders’ equity.  Gains and losses associated with realized option contracts and swap contracts are recorded within Net revenues and Cost of revenues, respectively. Please see Item 7A Quantitative and Qualitative Disclosures About Market Risk for additional information.
 

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Our liquidity, capital resources, and results of operations in any period could be affected by the exercise of outstanding stock options, restricted stock grants to employees, and the issuance of common stock under our employee stock purchase plan.  Further, the resulting increase in the number of outstanding shares could affect our per share earnings; however, we cannot predict the timing or amount of proceeds from the sale or exercise of these securities or whether they will be exercised at all.  On May 2, 2011, subsequent to the end of our fiscal year, the Board of Directors authorized the repurchase of up to 7,000,000 shares of our outstanding common stock.  As part of this authorization, on May 9, 2011, we entered into two separate Master Confirmation and Supplemental Confirmations with Goldman, Sachs & Co. to repurchase an aggregate of $100 million of our common stock under an accelerated share repurchase program. 
 
Subsequent to our fiscal year end, we entered into a Credit Agreement with Wells Fargo Bank, National Association which provides for a $100 million unsecured revolving credit facility.   If requested by us and agreed to by the Bank, the Bank may increase its commitment thereunder by up to $100 million, for a total facility size of up to $200 million.  At the closing of the Credit Agreement, we did not draw any funds under the facility.
 
We believe that our current cash and cash equivalents, short-term investments, and cash provided by operations along with the availability of funds under our $100 million Credit Agreement will be sufficient to fund operations for at least the next twelve months; however, any projections of future financial needs and sources of working capital are subject to uncertainty.  
 
See “Certain Forward-Looking Information” and “Risk Factors” in this Annual Report on Form 10-K for factors that could affect our estimates for future financial needs and sources of working capital.
 
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 and liquidity support or market risk or credit risk support to the Company.
 
CONTRACTUAL OBLIGATIONS
 
The following table summarizes the contractual obligations that we were reasonably likely to incur as of March 31, 2011 and the effect that such obligations are expected to have on our liquidity and cash flows in future periods.
 
 
Payments Due by Period
(in thousands)
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
Operating leases
 
$
13,912
 
 
$
4,340
 
 
$
7,367
 
 
$
2,118
 
 
$
87
 
Unconditional purchase obligations
 
40,841
 
 
40,841
 
 
 
 
 
 
 
Total contractual cash obligations
 
$
54,753
 
 
$
45,181
 
 
$
7,367
 
 
$
2,118
 
 
$
87
 
 
As of March 31, 2011, the unrecognized tax benefits and related interest under the Income Tax Topic of the FASB ASC were $10.5 million and $1.7 million, respectively which is included in Long-term income taxes payable in our Consolidated balance sheet.  We are unable to reliably estimate the timing of future payments related to unrecognized tax benefits which is not included in the table above.  We do not anticipate any material cash payments associated with our unrecognized tax benefits to be made within the next twelve months.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
Management’s discussion and analysis of financial condition and results of operations are based upon Plantronics’ consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  On an ongoing basis, we base estimates and judgments on historical experience and on various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.  Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.  Actual results may differ from those estimates under different assumptions or conditions.
 

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We believe our most critical accounting policies and estimates include the following:
Revenue Recognition
Inventory and Related Reserves
Product Warranty Obligations
Fair Value
Income Taxes
Goodwill and Intangibles
 
Revenue Recognition
 
Our revenue is derived primarily from the sale of headsets, telephone headset systems and accessories for the business and consumer markets. We recognize revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists, delivery of the product or service has occurred, the sales price is fixed or determinable and collection is reasonably assured. These criteria are usually met at the time of product shipment; however, we defer revenue when any significant obligations remain. Customer purchase orders and/or contracts are generally used to determine the existence of an arrangement. Product is considered delivered once it has been shipped and title and risk of loss have been transferred to the customer. We assess whether a price is fixed or determinable based upon the selling terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectibility based on a customer's credit quality as well as subjective factors and trends including historical experience, the age of any existing accounts receivable balances, and geographic or country-specific risks and economic conditions that may affect a customer's ability to pay. 
 
For multiple-element arrangements, we allocate revenue to each element based upon the relative selling price of each deliverable. When applying the relative selling price method, we determine the selling price for each deliverable using vendor-specific objective evidence ("VSOE") of selling price, if it exists, or third-party evidence ("TPE") of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, we use the estimated selling price ("ESP") for that deliverable. Revenue allocated to each element is then recognized when the other revenue recognition criteria are met for each element. We regularly review our basis for establishing VSOE, TPE and ESP. We do not expect a material impact in the near term from changes in VSOE, TPE or ESP.
 
Product Returns
We record reductions to revenue for expected future product returns based on historical return rates and other relevant factors such as assumptions regarding the rate of sell-through to end users from our various channels based on historical sell-through rates. Such estimates may need to be revised and could have an adverse impact on revenues if product lives vary significantly from management estimates, a particular sales channel experiences a higher than estimated return rate, or sell-through rates are slower causing inventory build-up.
 
Customer Programs
We record reductions to revenue for estimated commitments related to cooperative advertising, marketing development funds, volume rebates and special pricing programs. These estimated commitments are based on actual expenses incurred during the period, estimates for what is due to resellers for estimated credits earned during the period, any adjustments for credits based on actual activity, and estimates for any increased promotional programs or decreased pricing on inventory in the channel. If the actual payments exceed management's estimates, this could result in an adverse impact on our revenues.
 
Inventory and Related Reserves
 
Inventories are valued at the lower of cost or market.  Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis.  Costs such as idle facility expense, double freight, and re-handling costs are accounted for as current-period charges.  Fixed production overhead is allocated to the costs of conversion based on the normal capacity of the production facilities.  All shipping and handling costs incurred in connection with the sale of products are included in the Cost of revenues.
 
Our products require long-lead time parts available from a limited number of vendors and, occasionally, last-time buys of raw materials for products with long lifecycles. The effects of demand variability, long-lead times and last-time buys have historically contributed to inventory write-downs.  Our demand forecast considers projected future shipments, market conditions, inventory on hand, purchase commitments, product development plans and product life expectancy, inventory on consignment and other competitive factors.  If the demand forecast is greater than actual demand and we believe we can no longer sell our inventory above cost or at all, we write that inventory down to market value or write-off the excess or obsolete inventory. We routinely review inventory for usage potential, including fulfillment of customer warranty obligations and spare part requirements; however, failure to accurately forecast demand or manage our supply chain accordingly could result in the write down of additional inventory which would negatively impact our gross profit.

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Once inventory is written down, subsequent changes in facts and circumstances do not result in the restoration to the original cost or an increase in the new, lower-cost basis.
 
Product Warranty Obligations
 
We provide for product warranties in accordance with the underlying contractual terms given to the customer or end user of the product.  The contractual terms vary depending upon the geographic region in which the customer is located, the type of product sold, and other conditions, which affect or limit the customer’s rights to return product under warranty.  Where specific warranty return rights are given to customers, we accrue for the estimated cost of those warranties at the time revenue is recognized.  Generally, warranties start at the delivery date to the customer or end user and continue for one or two years.  Where specific warranty return rights are not given to the customers but where the customers are granted limited rights of return or discounts in lieu of warranty, we record these rights of return or discounts as adjustments to revenue.  Factors that affect the warranty obligation include sales terms, which obligate us to provide warranty, product failure rates, estimated return rates, material usage, and service delivery costs incurred in correcting product failures.  We assess the adequacy of the recorded warranty obligation quarterly and make adjustments to the obligation based on actual experience and changes in estimated future return rates.  If our estimates are less than the actual costs of providing warranty related services, we could be required to record additional warranty reserves, which would have a negative impact on our gross profit.
 
Fair Value
 
Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As the basis for considering such assumptions, a three-tier value hierarchy prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require us to develop our own assumptions. This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, we measure certain financial assets and liabilities at fair value, including our marketable securities and foreign currency contracts.
 
Our cash and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using inputs such as quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include cash, money market funds and U.S. Treasury Bills. Such instruments are generally classified within Level 1 of the fair value hierarchy.
 
The types of instruments valued based on other observable inputs include Government Agency Securities, Commercial Paper, U.S. Corporate Bonds and CDs. Such instruments are generally classified within Level 2 of the fair value hierarchy.
 
The principal market where we execute our foreign currency contracts is the retail market in an over-the-counter environment with a relatively high level of price transparency. Our counterparties are large money center banks. Our foreign currency contracts valuation inputs are based on quoted prices and quoted pricing intervals from public data sources. These contracts are typically classified within Level 2 of the fair value hierarchy.
 
Income Taxes
 
We are subject to income taxes both in the U.S. as well as in several foreign jurisdictions.  We must make certain estimates and judgments in determining income tax expense for the financial statements.  These estimates occur in the calculation of tax benefits and deductions, tax credits, and tax assets and liabilities which are generated from differences in the timing of when items are recognized for book purposes and when they are recognized for tax purposes.
 
The impact of an uncertain income tax position on income tax expense must be recognized at the largest amount that is more-likely-than-not to be sustained.  An uncertain income tax position will not be recognized unless it has a greater than 50% likelihood of being sustained.  We continue to follow the practice of recognizing interest and penalties related to income tax matters as a part of the provision for income taxes.
 
We account for income taxes under an asset and liability approach that requires the expected future tax consequences of temporary differences between book and tax bases of assets and liabilities to be recognized as deferred tax assets and liabilities.  Valuation allowances are established to reduce deferred tax assets when, based on available objective evidence, it is more likely than not that the benefit of such assets will not be realized.
 

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Goodwill and Intangibles
 
Goodwill and intangible assets with indefinite lives are not amortized.  At least annually, in the fourth quarter of each fiscal year or more frequently if indicators of impairment exist, management performs a review to determine if the carrying values of goodwill and indefinite lived intangible assets are impaired.
 
Goodwill has been measured as the excess of the cost of acquisition over the amount assigned to tangible and identifiable intangible assets acquired less liabilities assumed.  The identification and measurement of goodwill impairment involves the estimation of fair value at our reporting unit level.  We determine our reporting units by assessing whether discrete financial information is available and if segment management regularly reviews the results of that component. Such impairment tests for goodwill include comparing the fair value of the reporting unit with its carrying value, including goodwill.  The estimate of the fair value of the reporting unit is based on the best information available as of the date of the assessment which primarily incorporate management assumptions about expected future cash flows, discount rates, overall market growth and our percentage of that market and growth rates in terminal values, estimated costs and other factors, which utilize historical data, internal estimates, and, in some cases, outside data.  If the carrying value of the reporting unit exceeds management’s estimate of fair value, goodwill may become impaired, and we may be required to record an impairment charge, which would negatively impact our operating results. 
 
The fair value measurement of purchased intangible assets with indefinite lives involves the estimation of the fair value which is based on management assumptions about expected future cash flows, discount rates, growth rates, estimated costs and other factors which utilize historical data, internal estimates, and, in some cases, outside data.  If the carrying value of the indefinite lived intangible asset exceeds management’s estimate of fair value, the asset may become impaired, and we may be required to record an impairment charge which would negatively impact our operating results.
 
Purchased intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets.  Long-lived assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.  Such conditions may include an economic downturn or a change in the assessment of future operations.  Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition.  Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the amount that the carrying value of the asset exceeds its fair value.  Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.  When testing long-lived assets for recoverability, we also review depreciation and/or amortization estimates and methods to assess whether the assets' remaining useful lives are still appropriate or should be revised.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
Recently Adopted Pronouncements
 
In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition (Topic 605)-Multiple Deliverable Revenue Arrangements (“ASU 2009-13”). ASU 2009-13 eliminates the residual method of allocation and requires the relative selling price method when allocating deliverables of a multiple-deliverable revenue arrangement. The determination of the selling price for each deliverable requires the use of a hierarchy designed to maximize the use of available objective evidence including VSOE, TPE, or ESP.
 
In October 2009, the FASB also issued ASU No. 2009-14, Software (Topic 985)-Certain Revenue Arrangements That Include Software Elements (“ASU 2009-14”). ASU 2009-14 excludes tangible products containing software and non-software components that function together to deliver the product's essential functionality, from the scope of ASC 605-985, Software-Revenue Recognition.
 
ASU 2009-13 and ASU 2009-14 are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and must be adopted in the same period using the same transition method. If adoption is elected in a period other than the beginning of a fiscal year, the amendments in these standards must be applied retrospectively to the beginning of the fiscal year. Full retrospective application of these amendments to prior fiscal years is optional. We implemented both ASU 2009-13 and ASU 2009-14 in the second quarter of fiscal 2011 with retrospective application to the beginning of fiscal 2011 for transactions that were initiated or materially modified during fiscal 2011. Implementation of these ASUs did not have a material impact on reported net revenues as compared to net revenues under previous guidance as we do not typically enter into multiple element arrangements. In addition, the new guidance did not change the units of accounting within sales arrangements and the elimination of the residual method for the allocation of arrangement consideration had no material impact on the amount and timing of reported net revenues. We do not believe that the effect of adopting these standards will have a material impact on future financial periods.

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Recently Issued Pronouncements
 
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs ("ASU 2011-04"), which amends ASC 820, Fair Value Measurement. ASU 2011-04 does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within U.S. GAAP or International Financial Reporting Standards (“IFRSs”). ASU 2011-14 changes the wording used to describe many requirements in U.S. GAAP for for measuring fair value and for disclosing information about fair value measurements. Additionally, ASU 2011-14 clarifies the FASB's intent about the application of existing fair value measurements. ASU  2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively; therefore, we will adopt ASU 2011-04 in our fourth quarter of fiscal 2012. We do not expect the adoption of ASU 2011-04 to have a material impact on our consolidated financial statements.
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The following discusses our exposure to market risk related to changes in interest rates and foreign currency exchange rates.  This discussion contains forward-looking statements that are subject to risks and uncertainties.  Actual results could vary materially as a result of a number of factors including those set forth in "Risk Factors Affecting Future Operating Results."
 
INTEREST RATE AND MARKET RISK
 
We had cash and cash equivalents totaling $284.4 million at March 31, 2011 compared to $350.0 million at March 31, 2010.  We had short-term investments totaling $145.6 million as of March 31, 2011 compared to $19.2 million at