10-Q 1 form10qq1fy2012.htm PLANTRONICS, INC. 10-Q 7-2-2011 form10Q.Q1FY2012
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 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)

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 Web site, 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 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.

Large accelerated filer S
Accelerated filer £
Non-accelerated filer £
Smaller reporting company £
 
 
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No S

As of July 30, 2011, 46,698,969 shares of common stock were outstanding.


1

Plantronics, Inc.
FORM 10-Q
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 

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.



2


Part I -- FINANCIAL INFORMATION

Item 1. Financial Statements.

PLANTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)

 
June 30,
2011
 
March 31,
2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
202,747

 
$
284,375

Short-term investments
127,058

 
145,581

Accounts receivable, net
108,516

 
103,289

Inventory, net
57,697

 
56,473

Deferred income taxes
11,753

 
11,349

Other current assets
15,073

 
16,653

Total current assets
522,844

 
617,720

Long-term investments
56,462

 
39,332

Property, plant and equipment, net
71,542

 
70,622

Goodwill and purchased intangibles, net
14,665

 
14,861

Other assets
2,056

 
2,112

Total assets
$
667,569

 
$
744,647

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
27,311

 
$
33,995

Accrued liabilities
53,769

 
59,607

Total current liabilities
81,080

 
93,602

Deferred tax liability
3,550

 
3,526

Long-term income taxes payable
13,036

 
11,524

Other long-term liabilities
1,112

 
1,143

Total liabilities
98,778

 
109,795

 
 
 
 
Stockholders' equity:
 

 
 

Common stock
729

 
720

Additional paid-in capital
498,056

 
499,027

Accumulated other comprehensive income
3,443

 
1,473

Retained earnings
216,772

 
192,468

Total stockholders' equity before treasury stock
719,000

 
693,688

Less:  Treasury stock, at cost
(150,209
)
 
(58,836
)
Total stockholders' equity
568,791

 
634,852

Total liabilities and stockholders' equity
$
667,569

 
$
744,647


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


3


PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)

 
Three Months Ended
 
June 30,
 
2011
 
2010
Net revenues
$
175,600

 
$
170,685

Cost of revenues
81,542

 
81,237

Gross profit
94,058

 
89,448

Operating expenses:
 

 
 

Research, development and engineering
16,906

 
14,901

Selling, general and administrative
42,116

 
38,686

Total operating expenses
59,022

 
53,587

Operating income
35,036

 
35,861

Interest and other income (expense), net
641

 
(382
)
Income before income taxes
35,677

 
35,479

Income tax expense
8,946

 
9,533

Net income
$
26,731

 
$
25,946

 
 
 
 
Earnings per common share:
 

 
 

Basic
$
0.57

 
$
0.54

Diluted
$
0.56

 
$
0.52

 
 
 
 
Shares used in computing earnings per common share:
 

 
 

Basic
46,688

 
48,128

Diluted
48,060

 
49,714

 
 
 
 
Cash dividends declared per common share
$
0.05

 
$
0.05


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


4


PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
Three Months Ended
 
June 30,
 
2011
 
2010
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
26,731

 
$
25,946

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
3,462

 
3,992

Stock-based compensation
4,179

 
3,777

Provision for (benefit from) sales allowances and doubtful accounts
(41
)
 
115

Provision for (benefit from) excess and obsolete inventories
322

 
(273
)
Benefit from deferred income taxes
(2,144
)
 
(1,249
)
Income tax benefit associated with stock option exercises
1,381

 
797

Excess tax benefit from stock-based compensation
(2,570
)
 
(648
)
Amortization of premium on investments, net
431

 

Other operating activities
172

 
41

 
 
 
 
Changes in assets and liabilities:
 

 
 

Accounts receivable, net
(5,607
)
 
(7,264
)
Inventory, net
(1,453
)
 
(7,509
)
Current and other assets
(2,420
)
 
(928
)
Accounts payable
(6,684
)
 
6,728

Accrued liabilities
(5,067
)
 
102

Income taxes
8,531

 
8,420

Cash provided by operating activities
19,223

 
32,047

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Proceeds from sales of short-term investments
62,968

 
23,250

Proceeds from maturities of short-term investments
31,300

 

Purchase of short-term investments
(63,061
)
 

Proceeds from sales of long-term investments
4,936

 

Purchase of long-term investments
(35,145
)
 

Capital expenditures and other assets
(3,935
)
 
(3,007
)
Cash (used for) provided by investing activities
(2,937
)
 
20,243

 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Repurchase of common stock
(90,668
)
 
(43,706
)
Equity forward contract related to accelerated share repurchase program
(18,872
)
 

Proceeds from sale of treasury stock

 
13

Proceeds from issuance of common stock
11,515

 
7,666

Payment of cash dividends
(2,427
)
 
(2,456
)
Employees' tax withheld and paid for restricted stock and restricted stock units
(705
)
 

Excess tax benefit from stock-based compensation
2,570

 
648

Cash used for financing activities
(98,587
)
 
(37,835
)
Effect of exchange rate changes on cash and cash equivalents
673

 
(1,386
)
Net (decrease) increase in cash and cash equivalents
(81,628
)
 
13,069

Cash and cash equivalents at beginning of period
284,375

 
349,961

Cash and cash equivalents at end of period
$
202,747

 
$
363,030


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

5


PLANTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited Condensed consolidated financial statements (“financial statements”) of Plantronics, Inc. (“Plantronics” or the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information.  Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  In the opinion of management, the financial statements have been prepared on a basis consistent with the March 31, 2011 audited consolidated financial statements and include all adjustments, consisting of normal recurring adjustments, necessary to fairly state the information set forth herein.  The financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011, which was filed with the SEC on May 31, 2011.  The results of operations for the interim period ended June 30, 2011 are not indicative of the results to be expected for the entire fiscal year or any future period.

The financial statements include the accounts of Plantronics and its wholly owned subsidiaries.  All intercompany balances and transactions have been eliminated.

The Company’s fiscal year ends on the Saturday closest to the last day of March.  The Company’s current fiscal year ends on March 31, 2012 and consists of 52 weeks and the prior fiscal year ended on April 2, 2011 and also consisted of 52 weeks.  The Company’s results of operations for the three months ended July 2, 2011 and July 3, 2010 each contain 13 weeks.  For purposes of presentation, the Company has indicated its accounting year as ending on March 31 and its interim quarterly periods as ending on the applicable month end.

Certain financial statement reclassifications have been made to previously reported amounts to conform to the current year presentation.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Pronouncements

There are no recently adopted accounting pronouncements other than as described in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2011.

Recently Issued Pronouncements

In June 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-05, Presentation of Comprehensive Income. This ASU is intended to increase the prominence of other comprehensive income in financial statements by presenting the components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders' equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011; therefore, the Company will adopt ASU 2011-05 in its fourth quarter of fiscal 2012. The Company does not expect the adoption of ASU 2011-05 to have a material impact on its consolidated financial statements.

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 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, the Company will adopt ASU 2011-04 in its fourth quarter of fiscal 2012. The Company does not expect the adoption of ASU 2011-04 to have a material impact on its consolidated financial statements.

6



3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS

Accounts receivable, net:
 
 
June 30,
 
March 31,
(in thousands)
 
2011
 
2011
Accounts receivable
 
$
131,232

 
$
125,137

Provisions for returns
 
(8,800
)
 
(10,437
)
Provisions for promotions, rebates and other
 
(13,390
)
 
(10,460
)
Provision for doubtful accounts and sales allowances
 
(526
)
 
(951
)
Accounts receivable, net
 
$
108,516

 
$
103,289


Inventory, net:
 
 
June 30,
 
March 31,
(in thousands)
 
2011
 
2011
Raw materials
 
$
16,659

 
$
15,315

Work in process
 
2,871

 
2,558

Finished goods
 
38,167

 
38,600

Inventory, net
 
$
57,697

 
$
56,473


Accrued Liabilities:
 
 
June 30,
 
March 31,
(in thousands)
 
2011
 
2011
Employee compensation and benefits
 
$
22,687

 
$
27,478

Warranty obligation accrual
 
12,936

 
11,016

Accrued advertising and sales and marketing
 
2,669

 
2,873

Accrued other
 
15,477

 
18,240

Accrued liabilities
 
$
53,769

 
$
59,607


Changes during the three months ended June 30, 2011 in the warranty obligation accrual, which is included as a component of Accrued liabilities in the Condensed consolidated balance sheets, are as follows:
 
Three Months Ended
(in thousands)
June 30, 2011
 
 
Warranty obligation accrual at March 31, 2011
$
11,016

Warranty provision relating to products shipped
4,720

Deductions for warranty claims processed
(2,800
)
Warranty obligation accrual at June 30, 2011
$
12,936




7


4. CASH, CASH EQUIVALENTS AND INVESTMENTS

The following table represents the Company’s cash, cash equivalents and investments as of June 30, 2011 and March 31, 2011:

(in thousands)
 
June 30, 2011
 
March 31, 2011
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
121,226

 
$

 
$

 
$
121,226

 
$
136,804

 
$

 
$

 
$
136,804

Cash equivalents
 
81,521

 

 

 
81,521

 
147,573

 
1

 
(3
)
 
147,571

Total Cash and cash equivalents
 
$
202,747

 
$

 
$

 
$
202,747

 
$
284,377

 
$
1

 
$
(3
)
 
$
284,375

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
$
61,770

 
$
27

 
$
(4
)
 
$
61,793

 
$
98,845

 
$
17

 
$
(1
)
 
$
98,861

Commercial Paper
 
45,768

 
10

 

 
45,778

 
30,071

 
5

 
(1
)
 
30,075

Corporate Bonds
 
16,969

 
6

 
(4
)
 
16,971

 
11,212

 
4

 

 
11,216

Certificates of Deposit ("CDs")
 
2,513

 
3

 

 
2,516

 
5,420

 
9

 

 
5,429

Total Short-term investments
 
$
127,020

 
$
46

 
$
(8
)
 
$
127,058

 
$
145,548

 
$
35

 
$
(2
)
 
$
145,581

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
$
13,533

 
$
4

 
$
(2
)
 
$
13,535

 
$
17,387

 
$
4

 
$

 
$
17,391

Corporate Bonds
 
38,005

 
56

 
(17
)
 
38,044

 
19,086

 
8

 
(35
)
 
19,059

CDs
 
4,881

 
3

 
(1
)
 
4,883

 
2,879

 
3

 

 
2,882

Total Long-term investments
 
$
56,419

 
$
63

 
$
(20
)
 
$
56,462

 
$
39,352

 
$
15

 
$
(35
)
 
$
39,332

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total cash, cash equivalents and investments
 
$
386,186

 
$
109

 
$
(28
)
 
$
386,267

 
$
469,277

 
$
51

 
$
(40
)
 
$
469,288


As of June 30, 2011 and March 31, 2011, all of the Company’s investments are classified as available-for-sale securities.  

The following table summarizes the amortized cost and fair value of the Company’s cash equivalents, short-term investments and long-term investments, classified by stated maturity as of June 30, 2011 and March 31, 2011:
(in thousands)
 
June 30, 2011
 
March 31, 2011
 
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Due in 1 year or less
 
$
208,541

 
$
208,579

 
$
293,121

 
$
293,152

Due in 1 to 3 years
 
56,419

 
56,462

 
39,352

 
39,332

Total
 
$
264,960

 
$
265,041

 
$
332,473

 
$
332,484


The Company did not incur any material realized or unrealized net gains or losses in the three months ended June 30, 2011 or 2010.



8


5. FAIR VALUE MEASUREMENTS

The following tables represent the Company’s fair value hierarchy for its financial assets and liabilities:

Fair Values as of June 30, 2011:
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash
 
$
121,226

 
$

 
$

 
$
121,226

Money Market Accounts
 
41,500

 

 

 
41,500

U.S. Treasury Bills and Government Agency Securities
 
61,688

 
43,662

 

 
105,350

Commercial Paper
 

 
55,776

 

 
55,776

Corporate Bonds
 

 
55,016

 

 
55,016

CDs
 

 
7,399

 

 
7,399

Derivative assets
 

 
777

 

 
777

Total assets measured at fair value
 
$
224,414

 
$
162,630

 
$

 
$
387,044

 
 
 
 
 
 
 
 
 
Derivative liabilities
 
$
37

 
$
3,279

 
$

 
$
3,316


Fair Values as of March 31, 2011:
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash
 
$
136,804

 
$

 
$

 
$
136,804

Money Market Accounts
 
38,000

 

 

 
38,000

U.S. Treasury Bills and Government Agency Securities
 
154,703

 
43,543

 

 
198,246

Commercial Paper
 

 
52,568

 

 
52,568

Corporate Bonds
 

 
33,358

 

 
33,358

CDs
 

 
10,312

 

 
10,312

Derivative assets
 

 
360

 

 
360

Total assets measured at fair value
 
$
329,507

 
$
140,141

 
$

 
$
469,648

 
 
 
 
 
 
 
 
 
Derivative liabilities
 
$
27

 
$
4,174

 
$

 
$
4,201


Level 1 financial assets consist of cash, money market funds and U.S. Treasury Bills.  Level 1 financial liabilities consist of foreign exchange forward contracts not designated as hedges.  The fair value of Level 1 financial instruments is measured based on the quoted market price of identical securities.

Level 2 financial assets and liabilities consist of Government Agency Securities, Commercial Paper, Corporate Bonds, CDs and derivative foreign currency call and put option contracts.  Fair value is determined using inputs that are observable, either directly or indirectly, such as quoted market prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations, such as the Black Scholes valuation model, in which all significant inputs are observable or can be derived principally from or corroborated with observable market data covering substantially the full term of the assets or liabilities. During the three months ended June 30, 2011 or March 31, 2011, the Company did not have any transfers between Level 1 and Level 2 fair value instruments.

The Company had no Level 3 financial assets or liabilities as of June 30, 2011 or March 31, 2011.



9


6. GOODWILL AND PURCHASED INTANGIBLE ASSETS

Goodwill as of June 30, 2011 and March 31, 2011 was $14.0 million.

The following tables present the carrying value of acquired intangible assets with remaining net book values as of each period:
 
 
June 30, 2011
 
March 31, 2011
 
 
 
 
 
Gross
 
Accumulated
 
Net
 
Gross
 
Accumulated
 
Net
 
 
 
(in thousands)
 
Amount
 
Amortization
 
Amount
 
Amount
 
Amortization
 
Amount
 
Useful Life
Technology
 
$
3,000

 
$
(2,938
)
 
$
62

 
$
3,000

 
$
(2,812
)
 
$
188

 
6
years
Customer relationships
 
1,705

 
(1,113
)
 
592

 
1,705

 
(1,044
)
 
661

 
8
years
OEM relationships
 
27

 
(21
)
 
6

 
27

 
(20
)
 
7

 
7
years
Total
 
$
4,732

 
$
(4,072
)
 
$
660

 
$
4,732

 
$
(3,876
)
 
$
856

 
 
 

The aggregate amortization expense relating to purchased intangible assets was immaterial for the three months ended June 30, 2011 and 2010.

7. STOCK-BASED COMPENSATION

The following table summarizes the amount of stock-based compensation expense included in the Condensed consolidated statements of operations:
 
 
Three Months Ended
 
 
June 30,
(in thousands)
 
2011
 
2010
Cost of revenues
 
$
546

 
$
533

 
 
 
 
 
Research, development and engineering
 
947

 
937

Selling, general and administrative
 
2,686

 
2,307

Stock-based compensation expense included in operating expenses
 
3,633

 
3,244

 
 
 
 
 
Total stock-based compensation
 
4,179

 
3,777

Income tax benefit
 
(1,282
)
 
(1,041
)
Total stock-based compensation, net of tax
 
$
2,897

 
$
2,736


Stock Options

The following is a summary of the Company’s stock option activity during the three months ended June 30, 2011:
 
Options Outstanding
 
Number of
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual Life
 
Aggregate
Intrinsic
Value
 
(in thousands)
 
 
 
(in years)
 
(in thousands)
Outstanding at March 31, 2011
5,360

 
$
25.58

 
 
 
 
Options granted
327

 
$
36.51

 
 
 
 
Options exercised
(552
)
 
$
20.87

 
 
 
 
Options forfeited or expired
(52
)
 
$
36.87

 
 
 
 
Outstanding at June 30, 2011
5,083

 
$
26.68

 
3.2

 
$
55,305

Vested and expected to vest at June 30, 2011
4,968

 
$
26.56

 
3.2

 
$
54,715

Exercisable at June 30, 2011
3,778

 
$
25.89

 
2.3

 
$
44,704



10


The total intrinsic value of options exercised during the three months ended June 30, 2011 and 2010 was $9.1 million and $3.7 million, respectively.  Intrinsic value is defined as the amount by which the fair value of the underlying stock exceeds the exercise price at the time of option exercise. The total cash received as a result of stock option exercises during the three months ended June 30, 2011 was $11.5 million.

As of June 30, 2011, total unrecognized compensation cost related to unvested stock options was $11.0 million which is expected to be recognized over a weighted average period of 1.9 years.

Restricted Stock

The following is a summary of the Company’s restricted stock activity during the three months ended June 30, 2011:
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
(in thousands)
 
 
Non-vested at March 31, 2011
688

 
$
29.52

Restricted stock granted
366

 
$
36.60

Restricted stock vested
(46
)
 
$
29.02

Restricted stock forfeited
(3
)
 
$
33.01

Non-vested at June 30, 2011
1,005

 
$
32.23


The weighted average grant-date fair value of awards of restricted stock and restricted stock units is based on the quoted market price of the Company's common stock on the date of grant. The weighted average grant-date fair value of restricted stock awards granted during the three months ended June 30, 2011 and 2010 was $36.60 and $30.20, respectively. The total fair value of restricted stock awards that vested during the three months ended June 30, 2011 and 2010 was $1.3 million and $0.3 million, respectively.

As of June 30, 2011, total unrecognized compensation cost related to non-vested restricted stock awards was $22.5 million, which is expected to be recognized over a weighted average period of 3.1 years.  

Valuation Assumptions

The Company estimates the fair value of stock options and Employee Stock Purchase Plan (“ESPP”) shares using a Black-Scholes option valuation model.  The fair value of stock option and ESPP shares granted during the respective periods is estimated on the date of grant using the following weighted average assumptions:
 
 
Three Months Ended
 
 
June 30,
Employee Stock Options
 
2011
 
2010
Expected volatility
 
44.4
%
 
46.1
%
Risk-free interest rate
 
1.4
%
 
1.9
%
Expected dividends
 
0.6
%
 
0.7
%
Expected life (in years)
 
4.0

 
4.2

Weighted-average grant date fair value
 
$
12.58

 
$
11.26


The Company recognizes the grant-date fair value of stock-based compensation as compensation expense in the Condensed consolidated statements of operations using the straight-line attribution approach over the service period for which the stock-based compensation is expected to vest.

No purchase rights were granted under the ESPP during the three months ended June 30, 2011 and 2010.



11


8. COMMON STOCK REPURCHASES

From time to time, the Board of Directors authorizes plans under which the Company may repurchase shares of its common stock in the open market, depending on market conditions. During the quarter ended June 30, 2011, the Company repurchased in the open market 270,000 shares of its common stock which was under a repurchase plan authorized by the Board of Directors on March 1, 2011 for 1,000,000 shares. The total cost of these repurchases was $9.5 million with an average price of $35.34 per share. As of June 30, 2011, there were 390,900 remaining shares authorized for repurchase under this authorized plan. In addition, the Company withheld shares worth $0.7 million in satisfaction of employee tax withholding obligations upon the vesting of restricted stock granted under the Company's stock plans. The amounts withheld were equivalent to the employees' minimum statutory tax withholding requirements and are reflected as a financing activity within the Company's Condensed consolidated statements of cash flows. These share withholdings had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company.

On May 3, 2011, the Company's Board of Directors authorized the repurchase of up to 7,000,000 shares of the Company's outstanding common stock through open market or privately negotiated transactions. In connection with this stock repurchase authorization and pursuant to an accelerated share repurchase program (the “ASR Program”), the Company entered into two separate Master Confirmation and Supplemental Confirmations (the “ASR Agreements”) with Goldman, Sachs & Co. (“Goldman”) consisting of a Collared ASR and an Uncollared ASR. Under the ASR Agreements, the Company will repurchase shares of its common stock for an aggregate purchase price of $100 million. Goldman borrowed the shares that were delivered to the Company as described below, and is obligated to purchase sufficient shares of the Company's common stock in the open market to return to lenders over the terms of the agreements. The ASR Program is expected to conclude no later than January 9, 2012, although in certain circumstances the termination date may be accelerated at Goldman's option. The actual number of shares repurchased will be determined at the completion of the ASR Program. As discussed in greater detail below, the Company received a total of 2,183,014 shares under the ASR Program during the three months ended June 30, 2011. As of June 30, 2011, there were 4,816,986 remaining shares authorized for repurchase under the May 3, 2011 authorization. Repurchased shares are held as treasury stock.

In accordance with the Equity topic of the FASB Accounting Standards Codification ("ASC"), the Company accounted for the ASR Agreements as two separate transactions: (a) as shares of common stock acquired in a treasury stock transaction recorded on the acquisition date and (b) as a forward contract indexed to the Company’s own common stock. As such, the Company accounted for the shares that it received under the ASR Program as a repurchase of its common stock for the purpose of calculating earnings per common share. The Company has determined that the forward contract indexed to the Company’s common stock met all of the applicable criteria for equity classification in accordance with the Derivatives and Hedging topic of the FASB ASC, and, therefore, the ASR Agreements were not accounted for as derivative instruments.

Collared ASR Agreement

Under the first agreement (the "Collared ASR Agreement"), the number of shares to ultimately be repurchased by the Company is based generally on the volume-weighted average price ("VWAP") of the Company's common stock during the term of the Collared ASR Agreement, subject to collar provisions that established minimum and maximum numbers of shares based on the average VWAP over an initial hedge period. On May 12, 2011, the Company paid Goldman $50 million in exchange for an initial delivery to the Company of 867,690 shares on May 23, 2011, valued at the closing price of the Company's common stock of $37.56 on May 9, 2011, which was the date the major terms of the agreement to purchase the shares was reached.

Pursuant to the terms of the Collared ASR Agreement, the hedge period for determining the minimum and maximum number of shares to be purchased ended on May 23, 2011. The minimum has been set at 1,228,555 shares and the maximum has been set at 1,501,567 shares. Goldman delivered an additional 360,865 shares to the Company on May 26, 2011, valued at the closing price of the Company's common stock of $35.16 on May 23, 2011, which was the date the initial hedge period ended. Accordingly, the Company has received a total of 1,228,555 shares from Goldman as of June 30, 2011, equivalent to the minimum number of shares to be delivered under the terms of the Collared ASR Agreement. At the conclusion of the Collared ASR Agreement, the Company may receive additional shares based on the VWAP of the Company's common stock during the term of the agreement, up to the maximum of 1,501,567 shares. Based on the minimum number of shares delivered and the value of the Company's common stock on the relevant dates described above, the total consideration allocated to stock repurchases under the Collared ASR Agreement was $45.3 million. The remaining $4.7 million was recorded as an equity forward contract and was included in Additional paid-in capital in the Condensed consolidated balance sheet as of June 30, 2011.


12


Uncollared ASR Agreement

Under the second agreement, (the "Uncollared ASR Agreement"), the number of shares to be repurchased by the Company is based generally on the VWAP of the Company's common stock during the term of the ASR Agreement. On May 12, 2011, the Company paid Goldman $50 million in exchange for an initial delivery to the Company of 954,459 shares on May 23, 2011, representing approximately 72% of the shares expected to be repurchased based on the closing price of the Company's common stock of $37.56 on May 9, 2011, which was the date the major terms of the agreement to purchase the shares was reached. At the conclusion of the ASR Agreement, the Company may receive additional shares, or may be required to pay additional cash or shares (at the Company's election), based on the VWAP of the Company's common stock during the term of the agreement. Based on the number of shares delivered and the Company's stock price on the date at which the major terms of the agreement to purchase the shares were reached, the total consideration allocated to stock repurchases under the Uncollared ASR Agreement was $35.8 million. The remaining $14.2 million was recorded as an equity forward contract and was included in Additional paid-in capital in the Condensed consolidated balance sheet as of June 30, 2011.

9. CREDIT AGREEMENT

In May 2011, the Company entered into a credit agreement (the "Credit Agreement") with Wells Fargo Bank, National Association ("the Bank"). The Credit Agreement provides for a $100 million unsecured revolving credit facility. If requested by the Company 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. The Company has not yet drawn any funds under the facility.

Loans will bear interest at the election of the Company (1) at the Bank's announced prime rate less 1.50% per annum, (2) at a daily one month LIBOR rate plus 1.10% per annum or (3) at an adjusted LIBOR rate, for a term of one, three or six months, plus 1.10% per annum. Interest on the loans is payable quarterly in arrears. In addition, the Company agreed to pay a fee equal to 0.20% per annum on the average daily unused amount of the line of credit, which is payable quarterly in arrears.

Principal, together with accrued and unpaid interest, is due on the maturity date, May 9, 2014. The Company may prepay the loans and terminate the commitments in whole at any time, without premium or penalty, subject to reimbursement of certain costs in the case of LIBOR loans.

The Company's obligations under the Credit Agreement are required to be guaranteed by the Company's domestic subsidiaries, subject to certain exceptions.

The credit facility requires the Company to comply with a maximum ratio of funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") and a minimum EBITDA coverage ratio, in each case at each fiscal quarter end and determined on a rolling four-quarter basis. In addition, the Company and its subsidiaries are required to maintain unrestricted cash, cash equivalents and marketable securities plus availability under the Credit Agreement at the end of each fiscal quarter of at least $200 million.

The credit facility contains affirmative covenants, including covenants regarding the payment of taxes and other liabilities, maintenance of insurance, reporting requirements and compliance with applicable laws and regulations. The credit facility contains negative covenants, among other things, limiting, subject to certain monetary thresholds, the ability of the Company to incur debt, make capital expenditures, grant liens, make acquisitions and make investments. The events of default under the credit facility include payment defaults, cross defaults with certain other indebtedness, breaches of covenants, judgment defaults and bankruptcy and insolvency events involving the Company or any of its subsidiaries. The Company was in compliance with all covenants at June 30, 2011.



13


10. COMPREHENSIVE INCOME

The components of comprehensive income for the three months ended June 30, 2011 and 2010 are as follows:
 
 
Three Months Ended
 
 
June 30,
(in thousands)
 
2011
 
2010
Net income
 
$
26,731

 
$
25,946

Unrealized gain on cash flow hedges, net of tax
 
1,265

 
932

Foreign currency translation gain (loss), net of tax
 
652

 
(302
)
Unrealized gain on investments, net of tax
 
53

 

Comprehensive income
 
$
28,701

 
$
26,576


11. FOREIGN CURRENCY DERIVATIVES

Non-Designated Hedges

The Company enters into foreign exchange forward contracts to reduce the impact of foreign currency fluctuations on assets and liabilities denominated in currencies other than the functional currency of the reporting entity.  These foreign exchange forward contracts are not subject to the hedge accounting provisions of the Derivatives and Hedging Topic of the FASB ASC, but are carried at fair value with changes in the fair value recorded within Interest and other income, net, on the Condensed consolidated statement of operations in accordance with the Foreign Currency Matters Topic of the FASB ASC.  Gains and losses on these contracts are intended to offset the impact of foreign exchange rate changes on the underlying foreign currency denominated assets and liabilities, and therefore, do not subject the Company to material balance sheet risk.  The Company does not enter into foreign currency forward contracts for trading purposes.

As of June 30, 2011, the Company had foreign currency forward contracts denominated in Euros ("EUR"), Great Britain Pounds ("GBP"), and Australian Dollars ("AUD").  These forward contracts hedge against a portion of the Company’s foreign currency-denominated cash balances, receivables and payables. The following table summarizes the notional value of the Company’s outstanding foreign exchange currency contracts and approximate U.S. dollar equivalent (“USD Equivalent”) at June 30, 2011:
 
Local Currency
 
USD Equivalent
 
Position
 
Maturity
 
(in thousands)
 
(in thousands)
 
 
 
 
EUR
15,000

 
$
21,744

 
Sell EUR
 
1 month
GBP
4,700

 
$
7,548

 
Sell GBP
 
1 month
AUD
4,700

 
$
5,038

 
Sell AUD
 
1 month

Foreign currency transactions, net of the effect of forward contract hedging activity, resulted in immaterial net gains in the three months ended June 30, 2011 and immaterial net losses in the three months ended June 30, 2010, which are included in Interest and other income, net, in the Condensed consolidated statement of operations.

Cash Flow Hedges

The Company’s hedging activities include a hedging program to hedge the economic exposure from anticipated EUR and GBP denominated sales.  The Company hedges a portion of these forecasted foreign denominated sales with put and call currency option contracts used as collars.  These transactions are designated as cash flow hedges and are accounted for under the hedge accounting provisions of the Derivatives and Hedging Topic of the FASB ASC.  The effective portion of the hedge gain or loss is initially reported as a component of Accumulated other comprehensive income and subsequently reclassified into Net revenues when the hedged exposure affects earnings.  Any ineffective portion of related gains or losses is recorded in the Condensed consolidated statements of operations immediately.  On a monthly basis, the Company enters into option contracts with a one-year term.  The Company does not purchase options for trading purposes.  As of June 30, 2011, the Company had foreign currency put and call option contracts of approximately €58.3 million and £16.6 million.  As of March 31, 2011, the Company had foreign currency put and call option contracts of approximately €52.7 million and £14.5 million.


14


In the three months ended June 30, 2011, realized losses on cash flow hedges of $2.0 million were recognized in Net revenues in the Condensed consolidated statements of operations compared to realized gains of $1.0 million for the same period in the prior year.  The Company expects to reclassify the entire loss of $3.1 million, net of tax, in Accumulated other comprehensive income to Net revenues during the next 12 months due to the recognition of the hedged forecasted sales.

The Company hedges expenditures denominated in Mexican Peso (“MX$”), which are designated as cash flow hedges and are accounted for under the hedge accounting provisions of the Derivatives and Hedging Topic of the FASB ASC.  The Company hedges a portion of the forecasted MX$ denominated expenditures with a cross-currency swap.  The effective portion of the hedge gain or loss is initially reported as a component of Accumulated other comprehensive income and subsequently reclassified into Cost of revenues when the hedged exposure affects operations.  Any ineffective portion of related gains or losses is recorded in the Condensed consolidated statements of operations immediately.  As of June 30, 2011 and March 31, 2011, the Company had foreign currency swap contracts of approximately MX$268.9 million and MX$343.9 million, respectively.

In the three months ended June 30, 2011 and 2010, there were no material realized gains on MX$ cash flow hedges recognized in Cost of revenues in the Condensed consolidated statements of operations.  The Company expects to reclassify the entire gain of $0.6 million, net of tax, in Accumulated other comprehensive income to Cost of revenues during the next 12 months due to the recognition of the hedged forecasted expenditures.

The following table summarizes the notional value of the Company’s outstanding MX$ currency swaps and approximate USD Equivalent at June 30, 2011:
 
Local Currency
 
USD Equivalent
 
Position
 
Maturity
 
(in thousands)
 
(in thousands)
 
 
 
 
MX$
268,850

 
$
21,858

 
Buy MX$
 
Monthly over 9 months

The amounts in the tables below include fair value adjustments related to the Company’s own credit risk and counterparty credit risk.

Fair Value of Derivative Contracts

Fair value of derivative contracts under the Derivatives and Hedging Topic of the FASB ASC were as follows:
 
 
Derivative Assets
Reported in Other Current Assets
 
Derivative Liabilities
Reported in Accrued Liabilities
 
 
June 30,
 
March 31,
 
June 30,
 
March 31,
(in thousands)
 
2011
 
2011
 
2011
 
2011
Foreign exchange contracts designated as cash flow hedges
 
$
777

 
$
360

 
$
3,316

 
$
4,201

Foreign exchange contracts not designated
 

 

 

 

Total derivatives
 
$
777

 
$
360

 
$
3,316

 
$
4,201


Effect of Designated Derivative Contracts on Accumulated Other Comprehensive Income

The following table represents only the balance of designated derivative contracts under the Derivatives and Hedging Topic of the FASB ASC as of June 30, 2011 and March 31, 2011, and the impact of designated derivative contracts before tax on Accumulated other comprehensive income for the three months ended June 30, 2011:
(in thousands)
 
March 31, 2011
 
Amount of gain (loss)
recognized in OCI
(effective portion)
 
Amount of gain (loss)
reclassified from OCI
to income (loss)
(effective portion)
 
June 30, 2011
Foreign exchange contracts designated as cash flow hedges
 
$
(3,841
)
 
$
(312
)
 
$
(1,614
)
 
$
(2,539
)


15


Effect of Designated Derivative Contracts on the Condensed Consolidated Statements of Operations

The effect of designated derivative contracts under the Derivatives and Hedging Topic of the FASB ASC on results of operations recognized in gross profit in the Condensed consolidated statements of operations was as follows:
 
 
Three Months Ended
 
 
June 30,
(in thousands)
 
2011
 
2010
Gain (loss) on foreign exchange contracts designated as cash flow hedges
 
$
(1,614
)
 
$
1,092


Effect of Non-Designated Derivative Contracts on the Condensed Consolidated Statements of Operations

The effect of non-designated derivative contracts under the Derivatives and Hedging Topic of the FASB ASC on results of operations recognized in Interest and other income (expense), net in the Condensed consolidated statement of operations was as follows:
 
 
Three Months Ended
 
 
June 30,
(in thousands)
 
2011
 
2010
Gain (loss) on foreign exchange contracts
 
$
(797
)
 
$
2,046


12. INCOME TAXES

The effective tax rate for the three months ended June 30, 2011 was 25.1%, compared to 26.9% for the same period a year ago.  The lower effective tax rate for the three months ended June 30, 2011 compared to the same period a year ago is due primarily to a larger proportion of income earned in foreign jurisdictions during the quarter which is taxed at lower rates, as well as the reinstatement of the United States (“U.S.”) federal research tax credit in December 2010 which was extended through December 2011 and was not available in the same period a year ago. The effective tax rate differs from the statutory rate due to the impact of foreign operations taxed at different statutory rates, 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 estimates of future taxable income which could result in a valuation allowance being required.

As of June 30, 2011, the Company had $11.2 million of unrecognized tax benefits, compared to $10.5 million at March 31, 2011, recorded in Long-term income taxes payable on the Condensed consolidated balance sheet, all of which would favorably impact the effective tax rate in future periods if recognized.

The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in Income tax expense.  The accrued interest related to unrecognized tax benefits is $1.8 million as of June 30, 2011 as compared to $1.7 million as of March 31, 2011.  No penalties have been accrued.

The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations; however, the outcome of such examinations cannot be predicted with certainty. If any issues addressed in the tax examinations are resolved in a manner inconsistent with the Company's expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. Although timing of the resolution and/or closure of tax examinations is not certain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next twelve months.

The Company and its subsidiaries are subject to taxation in various foreign and state jurisdictions as well as in the U.S.  The Company is no longer subject to U.S. federal tax examinations by tax authorities for tax years prior to 2008.  The Company is under examination by the California Franchise Tax Board for its 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.



16


13. COMPUTATION OF EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per common share:

 
 
Three Months Ended
 
 
June 30,
(in thousands, except per share data)
 
2011
 
2010
Numerator:
 
 
 
 
Net income
 
$
26,731

 
$
25,946

 
 
 
 
 
Denominator:
 
 
 
 
Weighted average common shares-basic
 
46,688

 
48,128

Dilutive effect of employee equity incentive plans
 
1,372

 
1,586

Weighted average common shares-diluted
 
48,060

 
49,714

 
 
 
 
 
Earnings per common share-basic
 
$
0.57

 
$
0.54

 
 
 
 
 
Earnings per common share-diluted
 
$
0.56

 
$
0.52

 
 
 
 
 
Potentially dilutive securities excluded from earnings per common share-diluted because their effect is anti-dilutive
 
1,489

 
2,334


14. REVENUE AND MAJOR CUSTOMERS

The Company designs, manufactures, markets and sells headsets for business and consumer applications, and other specialty products for the hearing impaired.  With respect to headsets, it makes products for use in offices and contact centers, with mobile and cordless phones, and with computers and gaming consoles.  Major product categories include “Office and Contact Center”, 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 PC and gaming headsets; and “Clarity”, which includes specialty telephone products marketed for hearing impaired individuals.

The following table presents net revenues by product group:
 
 
Three Months Ended
 
 
June 30,
(in thousands)
 
2011
 
2010
Net revenues from unaffiliated customers:
 
 
 
 
Office and Contact Center
 
$
130,999

 
$
117,580

Mobile
 
32,164

 
38,657

Gaming and Computer Audio
 
7,395

 
9,325

Clarity
 
5,042

 
5,123

Total net revenues
 
$
175,600

 
$
170,685



17


The following table presents net revenues by geography:
 
 
Three Months Ended
 
 
June 30,
(in thousands)
 
2011
 
2010
Net revenues from unaffiliated customers:
 
 
 
 
U.S.
 
$
100,291

 
$
103,992

 
 
 
 
 
Europe, Middle East and Africa
 
43,162

 
38,782

Asia Pacific
 
19,237

 
16,263

Americas, excluding U.S.
 
12,910

 
11,648

Total international net revenues
 
75,309

 
66,693

Total net revenues
 
$
175,600

 
$
170,685


No customer accounted for 10% or more of total net revenues for the three months ended June 30, 2011 and 2010, nor did any one customer account for 10% or more of accounts receivable, net, at June 30, 2011 and March 31, 2011.

15. SUBSEQUENT EVENTS

On August 1, 2011, the Company's Board of Directors declared a cash dividend of $0.05 per share of the Company's common stock, payable on September 9, 2011 to stockholders of record at the close of business on August 19, 2011.


18


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

CERTAIN FORWARD-LOOKING INFORMATION:

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”).  Forward-looking statements may generally be identified by the use of such words as “expect,” “anticipate,” “believe,” “intend,” “plan,” “will,” or “shall” and similar expressions, or the negative of these terms.  Specific forward-looking statements contained within this Form 10-Q include statements containing our expectations regarding (i) the launch of additional Unified Communications ("UC") products and new Mobile products, (ii) our long-term strategy to invest for UC, (iii) the future of UC technologies, including the effect on headset adoption and use, the effects on enterprises that adopt UC and our expectation concerning our revenue opportunity from UC, (iv) our expenses, including research and development expenses and sales, general and administrative expenses, (v) our future tax rate, (vi) our anticipated capital expenditures for the remainder of fiscal 2012, (vii) the sufficiency of our cash, cash equivalents and cash from operations, (viii) our ability to draw funds on our credit facility as needed, and (ix) the outcome and effect of legal proceedings, as well as other statements regarding our future operations, financial condition and prospects and business strategies.  Such forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements.  Factors that could cause actual results and events to differ materially from such forward-looking statements are included, but not limited to, those discussed in the section entitled “Risk Factors” herein and other documents filed with the Securities and Exchange Commission (“SEC”) including our annual Report on Form 10-K for the fiscal year ended March 31, 2011.  We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.  Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

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 60 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 continued to expand into the office, mobile and entertainment, digital audio and specialty telephone markets in those regions and additional international locations.

Unified Communications ("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 fiscal 2012, we remain focused on our long-term strategy to invest in UC as a key long-term driver of revenue and profit growth. We continue to focus on innovative product development, including the use of software and services as part of our products.

Consolidated net revenues increased to $175.6 million in the first quarter of fiscal 2012 from $170.7 million in the first quarter of fiscal 2011 driven by higher sales of our Office and Contact Center (“OCC”) products which increased $13.4 million or 11% from the same quarter a year ago.  The increase in net revenues from these products in the current quarter was primarily from increased demand for headsets designed for UC and our participation in the UC market.  This increase was offset in part by lower Mobile revenues which decreased by $6.5 million or 17% over the same quarter a year ago due to declines in the U.S. as a result of some market share loss in the U.S. and overall weakness in the product category offset in part by revenue growth in Asia Pacific ("APAC") and Europe, Middle East and Africa ("EMEA").

Our gross profit as a percentage of net revenue increased to 53.6% in the first quarter of fiscal 2012 from 52.4% in the first quarter of fiscal 2011 due to a shift in revenue mix to our higher margin OCC products which represented 75% of our net revenues in the first quarter of fiscal 2012 compared to 69% in the same quarter a year ago. 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.



19


RESULTS OF OPERATIONS

The following tables set forth, for the periods indicated, the Condensed consolidated statements of operations data, which is derived from the accompanying unaudited Condensed consolidated financial statements.  The financial information and ensuing discussion should be read in conjunction with the accompanying unaudited Condensed consolidated financial statements and notes thereto.  
 
 
Three Months Ended June 30,
(in thousands except percentages)
 
2011
 
2010
Net revenues
 
$
175,600

 
100.0
%
 
$
170,685

 
100.0
 %
Cost of revenues
 
81,542

 
46.4
%
 
81,237

 
47.6
 %
Gross profit
 
94,058

 
53.6
%
 
89,448

 
52.4
 %
Operating expenses:
 


 
 

 
 
 
 

Research, development and engineering
 
16,906

 
9.6
%
 
14,901

 
8.7
 %
Selling, general and administrative
 
42,116

 
24.0
%
 
38,686

 
22.7
 %
Total operating expenses
 
59,022

 
33.6
%
 
53,587

 
31.4
 %
Operating income
 
35,036

 
20.0
%
 
35,861

 
21.0
 %
Interest and other income (expense), net
 
641

 
0.4
%
 
(382
)
 
(0.2
)%
Income before income taxes
 
35,677

 
20.4
%
 
35,479

 
20.8
 %
Income tax expense
 
8,946

 
5.1
%
 
9,533

 
5.6
 %
Net income
 
26,731

 
15.3
%
 
25,946

 
15.2
 %

NET REVENUES
 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands except percentages)
 
2011
 
2010
 
(Decrease)
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
Office and Contact Center
 
$
130,999

 
$
117,580

 
$
13,419

 
11.4
 %
Mobile
 
32,164

 
38,657

 
(6,493
)
 
(16.8
)%
Gaming and Computer Audio
 
7,395

 
9,325

 
(1,930
)
 
(20.7
)%
Clarity
 
5,042

 
5,123

 
(81
)
 
(1.6
)%
Total net revenues
 
$
175,600

 
$
170,685

 
$
4,915

 
2.9
 %

OCC products represent our largest source of revenues, while Mobile products represent large unit volume opportunities.  Revenues may vary due to seasonality, the timing of new product introductions, discounts and other incentives and channel mix.

Net revenues increased to $175.6 million in the first quarter of fiscal 2012 from $170.7 million in the first quarter of fiscal 2011 as a result of higher OCC revenues, growth in emerging markets and the benefit of a weaker U.S. dollar ("USD") primarily against the Euro, offset in part by a decline in the Mobile market. The growth in OCC revenues was due primarily to continued growth in UC revenues.

Fluctuations in net revenues for the three months ended June 30, 2011 compared to the same quarter a year ago resulted primarily from the following:

OCC net revenues increased by $13.4 million due primarily to growth in UC revenues and growth in emerging markets.
Mobile net revenues decreased $6.5 million due to declines in the U.S. as a result of some market share loss and overall weakness in the product category, offset in part by international growth driven by market share gains in the APAC and EMEA regions.


20


Geographical Information
 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands except percentages)
 
2011
 
2010
 
(Decrease)
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
U.S.
 
$
100,291

 
$
103,992

 
$
(3,701
)
 
(3.6
)%
As a percentage of net revenues
 
57.1
%
 
60.9
%
 
(3.8
)
 
ppt.
EMEA
 
43,162

 
38,782

 
4,380

 
11.3
 %
APAC
 
19,237

 
16,263

 
2,974

 
18.3
 %
Americas, excluding U.S.
 
12,910

 
11,648

 
1,262

 
10.8
 %
Total international net revenues
 
75,309

 
66,693

 
8,616

 
12.9
 %
As a percentage of net revenues
 
42.9
%
 
39.1
%
 
3.8

 
ppt.
Total net revenues
 
$
175,600

 
$
170,685

 
$
4,915

 
2.9
 %

Consolidated U.S. net revenues as a percentage of total net revenues were 57% in the first quarter of fiscal 2012 and 61% in the same quarter of the prior year.  U.S. net revenues decreased 3.6% in the three months ended June 30, 2011, due primarily to a decline in revenues for Mobile products due to some market share loss and overall weakness in the product category, partially offset by growth in OCC products due primarily to growth in UC revenues.  International net revenues increased to 43% of total net revenues in the first quarter of fiscal 2012, as compared to 39% in the same prior year quarter. International net revenues increased by 12.9% for the quarter ended June 30, 2011 compared to the same prior year quarter.  The EMEA region increased due to improved demand for OCC products and increased product placements in the Mobile market.  APAC region revenues increased mostly from higher Mobile revenues due to increased product placements, and growth in OCC product revenues as a result of growth in emerging markets and increased channel resources.

COST OF REVENUES AND GROSS PROFIT

Cost of revenues consists primarily of direct manufacturing and contract manufacturer costs, warranty expense, and reserves for excess and obsolete inventory.  These costs include material and direct labor, our operations management team and indirect labor such as supervisors and warehouse workers, freight expense, depreciation, royalties, and an allocation of overhead expenses including IT, facilities, human resources, and legal costs.
 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands except percentages)
 
2011
 
2010
 
(Decrease)
Net revenues
 
$
175,600

 
$
170,685

 
$
4,915

 
2.9
%
Cost of revenues
 
81,542

 
81,237

 
305

 
0.4
%
Consolidated gross profit
 
$
94,058

 
$
89,448

 
$
4,610

 
5.2
%
Consolidated gross profit %
 
53.6
%
 
52.4
%
 
1.2

 
ppt.

As a percentage of net revenues, the increase in gross profit in the quarter ended June 30, 2011 as compared to the same quarter a year ago was due primarily to the following:

a 1.2 percentage point benefit from higher product margins driven mostly by a favorable product mix consisting of a higher portion of OCC revenues which generally have a higher gross margin than other product categories;
a 0.7 percentage point benefit from a weaker USD; and
a 0.4 percentage point benefit from lower freight costs.

These benefits were partially offset by the following:

a 0.9 percentage point decrease from higher commodity and sourcing costs; and
a 0.5 percentage point decrease from higher requirements for warranty provisions.


21


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 facilities, IT, human resources, and legal costs.
 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands except percentages)
 
2011
 
2010
 
(Decrease)
Research, development and engineering
 
$
16,906

 
$
14,901

 
$
2,005

 
13.5
%
% of total net revenues
 
9.6
%
 
8.7
%
 
0.9

 
ppt.

For the three months ended June 30, 2011, research, development and engineering expenses increased as compared to the same period a year ago due primarily to $1.0 million in higher compensation expenses mostly as a result of increased headcount to support development of UC products, along with increased outsourced project costs to support our UC and other product portfolios.  
We anticipate that our research, development and engineering expenses will increase in the remaining quarters of fiscal 2012 due to increased UC and software investments.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses consist primarily of compensation costs, marketing costs, travel expenses, litigation and professional service fees, and allocations of overhead expenses, including IT costs, facilities, human resources, and bad debt expense.
 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands except percentages)
 
2011
 
2010
 
(Decrease)
Selling, general and administrative
 
$
42,116

 
$
38,686

 
$
3,430

 
8.9
%
% of total net revenues
 
24.0
%
 
22.7
%
 
1.3

 
ppt.

In the three months ended June 30, 2011, compared to the same year ago quarter, selling, general and administrative expenses increased due mostly to higher compensation expenses of $2.0 million primarily as a result of increased headcount and $1.0 million due to higher travel expense, as well as marketing promotional costs related primarily to our integrated marketing programs which promote our brand and capabilities for the UC market and our global sales training and communication events.

We anticipate our selling, general and administrative expenses will remain relatively stable in the remaining quarters of fiscal 2012.

OPERATING INCOME
 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands except percentages)
 
2011
 
2010
 
(Decrease)
Operating income
 
$
35,036

 
$
35,861

 
$
(825
)
 
(2.3
)%
% of total net revenues
 
20.0
%
 
21.0
%
 
(1.0
)
 
ppt.

In the three months ended June 30, 2011, compared to the same prior year period, consolidated operating income decreased slightly primarily as a result of higher operating expenses to support future expected growth.

22


INTEREST AND OTHER INCOME (EXPENSE), NET
 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands except percentages)
 
2011
 
2010
 
(Decrease)
Interest and other income (expense), net
 
$
641

 
$
(382
)
 
$
1,023

 
(267.8
)%
% of total net revenues
 
0.4
%
 
(0.2
)%
 
0.6

 
ppt.

In the three months ended June 30, 2011, compared to the same prior year period, interest and other income (expense), net increased due primarily to greater foreign currency exchange gains and increased interest income from our investment portfolio. 

INCOME TAX EXPENSE
 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands except percentages)
 
2011
 
2010
 
(Decrease)
Income before income taxes
 
$
35,677

 
$
35,479

 
$
198

 
0.6
 %
Income tax expense
 
8,946

 
9,533

 
(587
)
 
(6.2
)%
Net income
 
$
26,731

 
$
25,946

 
$
785

 
3.0
 %
Effective tax rate
 
25.1
%
 
26.9
%
 
(1.8
)
 
ppt.

Our effective tax rate for the three months ended June 30, 2011 was 25.1%, compared to 26.9% for the same period a year ago.  The lower effective tax rate for the three months ended June 30, 2011 compared to the same period a year ago is due primarily to a larger proportion of income earned in foreign jurisdictions during the quarter which is taxed at lower rates, as well as the reinstatement of the United States (“U.S.”) federal research tax credit in December 2010 which was extended through December 2011 and was not available in the same period a year ago. The effective tax rate differs from the statutory rate due to the impact of foreign operations taxed at different statutory rates, 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 estimates of future taxable income which could result in a valuation allowance being required.

As of June 30, 2011, we had $11.2 million of unrecognized tax benefits, compared to $10.5 million at March 31, 2011, recorded in Long-term income taxes payable on the Condensed consolidated balance sheet, all of which would favorably impact the effective tax rate in future periods if recognized.

Our continuing practice is to recognize interest and/or penalties related to income tax matters in Income tax expense.  The accrued interest related to unrecognized tax benefits is $1.8 million as of June 30, 2011 as compared to $1.7 million as of March 31, 2011.  No penalties have been accrued.

We believe that an adequate provision has been made for any adjustments that may result from tax examinations; however, the outcome of such examinations cannot be predicted with certainty. If any issues addressed in the tax examinations are resolved in a manner inconsistent with our expectations, we could be required to adjust our provision for income tax in the period such resolution occurs. Although timing of the resolution and/or closure of tax examinations is not certain, we do not believe it is reasonably possible that our unrecognized tax benefits would materially change in the next twelve months.

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 tax years prior to 2008.  We under examination by the California Franchise Tax Board for its 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.



23


FINANCIAL CONDITION

The table below provides selected Condensed consolidated cash flow information for the periods presented:
 
 
Three Months Ended
 
 
June 30,
(in thousands)
 
2011
 
2010
Cash provided by operating activities
 
$
19,223

 
$
32,047

 
 


 


Capital expenditures and other assets
 
$
(3,935
)
 
$
(3,007
)
Cash provided by maturities and sales of investments, net
 
998

 
23,250

Cash (used for) provided by investing activities
 
$
(2,937
)
 
$
20,243

 
 
 
 
 
Repurchase of common stock
 
$
(90,668
)
 
$
(43,706
)
Equity forward contract related to accelerated share repurchase program
 
(18,872
)
 

Proceeds from issuance of common stock
 
11,515

 
7,666

Payment of cash dividends
 
(2,427
)
 
(2,456
)
Cash (used for) provided by other financing activities
 
1,865

 
661

Cash used for financing activities
 
$
(98,587
)
 
$
(37,835
)

Cash Flows from Operating Activities

Cash flows from operating activities for the three months ended June 30, 2011 consisted of net income of $26.7 million, non-cash charges of $5.2 million and working capital uses of cash of $12.7 million.  Non-cash charges consisted primarily of $4.2 million of stock-based compensation, $3.5 million of depreciation and amortization and a $1.4 million income tax benefit associated with stock option exercises, offset in part by $2.6 million in excess tax benefits from stock-based compensation expense and a $2.1 million benefit from deferred income taxes.  Working capital uses of cash consisted primarily of an increase in accounts receivable and inventory and decreases in accounts payable and accrued liabilities.  The days sales outstanding (“DSO”) as of June 30, 2011 increased to 56 days from 51 days as of June 30, 2010 which was primarily a result of the timing of when revenues were earned in the quarter resulting in an increase in the accounts receivable balance as of June 30, 2011 in comparison to the same period in the prior year. Inventory turns increased to 5.7 for the three months ended June 30, 2011 as compared to 4.2 for the same period in the prior year due to lower inventory levels as of June 30, 2011 than as of June 30, 2010. The working capital uses of cash were offset in part by working capital sources of cash, primarily from a decrease in prepaid income taxes.

Cash flows from operating activities for the three months ended June 30, 2010 consisted of net income of $25.9 million, non-cash charges of $6.6 million and working capital uses of cash of $0.5 million.  Non-cash charges related primarily to $4.0 million of depreciation and amortization and $3.8 million of stock-based compensation, offset in part by a $1.2 million benefit from deferred income taxes.  Working capital uses of cash consisted primarily of increases in inventory and accounts receivable.  The working capital uses of cash were offset in part by working capital sources of cash, primarily from an increase in accounts payable related to the increase in inventory and an increase in income taxes payable.

Cash Flows from Investing Activities

Net cash flows used for investing activities for the three months ended June 30, 2011 consisted primarily of $63.1 million and $35.1 million for the purchase of short-term and long-term investments, respectively, along with capital expenditures of $3.9 million related primarily to building improvements, IT projects and tooling.  These uses of cash were offset in part by net proceeds of $99.2 million from sales and maturities of short-term and long-term investments.

Net cash flows provided by investing activities for the three months ended June 30, 2010 consisted primarily of net proceeds of $23.3 million from the sale of our Auction Rate Securities (“ARS”) short-term investments at par value and capital expenditures of $3.0 million primarily related to tooling and IT projects.


24


Cash Flows used for Financing Activities

Net cash flows used for financing activities for the three months ended June 30, 2011 consisted primarily of $90.7 million related to the repurchase of common stock including repurchases under our accelerated share repurchase program ("ASR Program"), $18.9 million for equity forward contracts related to the ASR Program, and dividend payments of $2.4 million which were partially offset by $11.5 million in proceeds from the exercise of stock options.

Net cash flows used in financing activities for the three months ended June 30, 2010 consisted primarily of $43.7 million related to the repurchase of common stock and dividend payments of $2.5 million which were partially offset by $7.7 million in proceeds from the sale of treasury stock issued for purchases under our Employee Stock Purchase Plan ("ESPP").

Liquidity and Capital Resources

Our primary discretionary cash requirements have historically been to repurchase our common stock.  At June 30, 2011, we had working capital of $441.8 million, including $329.8 million of cash, cash equivalents and short-term investments, compared with working capital of $524.1 million, including $430.0 million of cash, cash equivalents and short-term investments at March 31, 2011.  The decrease in working capital at June 30, 2011 compared to March 31, 2011 is a result of the decrease in cash and cash equivalents due to significant payments made for repurchases of our common stock in the quarter ended June 30, 2011 which were funded from cash and cash equivalents on hand at March 31, 2011.  As of June 30, 2011, of our $329.8 million of cash, cash equivalents and short-term investments, $69.1 million is held in the U.S. while $260.7 million is held internationally and would be subject to U.S. tax if we repatriate it back to the U.S.

For the remainder of fiscal 2012, we expect to spend an additional $14.0 million to $16.0 million in capital expenditures, consisting primarily of building improvements, 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.

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 market conditions. During the quarter ended June 30, 2011, we repurchased in the open market 270,000 shares of our common stock which was under a repurchase plan authorized by the Board of Directors on March 1, 2011 for 1,000,000 shares. The total cost of these repurchases was $9.5 million with an average price of $35.34 per share. As of June 30, 2011, there were 390,900 remaining shares authorized for repurchase under this authorized plan. In addition, the Company withheld 18,126 shares totaling $0.7 million in satisfaction of employee tax withholding obligations upon the vesting of restricted stock granted under the Company's stock plans.

On May 3, 2011, 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. ("Goldman") to repurchase an aggregate of $100 million of our common stock under an accelerated share repurchase program (the "ASR Program"). Goldman borrowed the shares that were delivered to us, and is expected to purchase sufficient shares of our common stock in the open market to return to lenders over the terms of the agreements. The ASR Program is expected to conclude no later than January 9, 2012, although in certain circumstances the termination date may be accelerated at Goldman's option. During the first three months of fiscal 2012, we repurchased 2,183,014 shares of our common stock under the ASR Program and the actual number of shares repurchased will be determined at the completion of the ASR Program. The final cost of these shares will be determined at the conclusion of the ASR Program. For additional information regarding the ASR Program, including the ASR Agreements, refer to Note 8, Common Stock Repurchases, of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Our cash and cash equivalents as of June 30, 2011 consist of U.S. Treasury Bills or Treasury-Backed funds, Commercial Paper 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 if 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 June 30, 2011, our investments were composed of U.S. Treasury Bills, Government Agency Securities, Commercial Paper, Corporate Bonds, and Certificates of Deposit (“CDs”).


25


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 Condensed consolidated balance sheet at each reporting period the fair value of our forward-exchange contracts and record any fair value adjustments in our Condensed 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 3 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 Condensed 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 3 Quantitative and Qualitative Disclosures About Market Risk for additional information.

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 ESPP.  Further, the resulting increase in the number of outstanding shares could affect our earnings per share; 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. 

In May 2011, we entered into a Credit Agreement with Wells Fargo Bank, National Association which provides for a $100 million unsecured revolving credit facility to augment our financial flexibility to facilitate the ASR Program.   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.  Principal, together with accrued and unpaid interest, is due on the maturity date, May 9, 2014 and our obligations under the Credit Agreement are required to be guaranteed by our domestic subsidiaries, subject to certain exceptions. We have not yet drawn any funds under the credit facility. Loans will bear interest at the election of the Company (1) at the Bank's announced prime rate less 1.50% per annum, (2) at a daily one month LIBOR rate plus 1.10% per annum or (3) at an adjusted LIBOR rate, for a term of one, three or six months, plus 1.10% per annum. The credit facility requires us to comply with a maximum ratio of funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") and a minimum EBITDA coverage ratio, in each case at each fiscal quarter end and determined on a rolling four-quarter basis. In addition, the Company and its subsidiaries are required to maintain unrestricted cash, cash equivalents and marketable securities plus availability under the Credit Agreement at the end of each fiscal quarter of at least $200 million. The credit facility contains covenants including covenants regarding the payment of taxes and other liabilities, maintenance of insurance, reporting requirements and compliance with applicable laws and regulations. The credit facility also contains negative covenants, among other things, limiting our ability to incur debt, make capital expenditures, grant liens, make acquisitions and make investments. The events of default under the credit facility include payment defaults, cross defaults with certain other indebtedness, breaches of covenants, judgment defaults and bankruptcy and insolvency events involving us or any of our subsidiaries. We are currently in compliance with all covenants under the credit 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 Quarterly Report on Form 10-Q 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.


26


CONTRACTUAL OBLIGATIONS

There have been no material changes in our contractual obligations outside the normal course of business since the fiscal year ended March 31, 2011.  At June 30, 2011, unrecognized tax benefits and related interest were $11.2 million and $1.8 million, respectively.  We are unable to reliably estimate the timing of future payments related to unrecognized tax benefits; however, Long-term income taxes payable on our Condensed consolidated balance sheet includes these unrecognized tax benefits.  We do not anticipate any material cash payments associated with our unrecognized tax benefits to be made within the next 12 months.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a complete description of what we believe to be the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our financial statements, refer to our Annual Report on Form 10-K for the fiscal year ended March 31, 2011.  There have been no changes to our critical accounting policies during the three months ended June 30, 2011.

Recent Accounting Pronouncements

Recently Adopted Pronouncements

There are no recently adopted accounting pronouncements other than as described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011.

Recently Issued Pronouncements

In June 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-05, Presentation of Comprehensive Income. This ASU is intended to increase the prominence of other comprehensive income in financial statements by presenting the components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders' equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011; therefore, we will adopt ASU 2011-05 in our fourth quarter of fiscal 2012. We do not expect the adoption of ASU 2011-05 to have a material impact on our consolidated financial statements.

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 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, the Company will adopt ASU 2011-04 in its 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 3. 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.”

INTEREST RATE RISK

We had cash and cash equivalents totaling $202.7 million at June 30, 2011 compared to $284.4 million at March 31, 2011.  We had short-term investments totaling $127.1 million at June 30, 2011, compared to $145.6 million at March 31, 2011.  We had long-term investments of $56.5 million at June 30, 2011, compared to $39.3 million at March 31, 2011.  Cash equivalents have a remaining maturity of three months or less at the date of purchase; short-term securities have a remaining maturity of greater than three months at the date of purchase and an effective maturity of less than one year; and long-term investments have effective maturities greater than one year, or we do not currently have the ability to liquidate the investment.  As of June 30, 2011, our investments were composed of U.S. Treasury Bills, Government Agency Securities, Commercial Paper, Corporate Bonds and Certificates of Deposit ("CDs").

27



Our investment policy and strategy are focused on preservation of capital and supporting our liquidity requirements. A portion of our cash is managed by external managers within the guidelines of our investment policy. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We typically invest in highly rated securities and our policy generally limits the amount of credit exposure to any one issuer. Our investment policy requires investments to be high credit quality, primarily rated A or A2, with the objective of minimizing the potential risk of principal loss. All highly liquid investments with initial maturities of three months or less at the date of purchase are classified as cash equivalents. We classify our investments as either short-term or long-term based on each instrument's underlying maturity date. All short-term investments have effective maturities less than 12 months, while all long-term investments have effective maturities greater than 12 months. We may sell our investments prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or for duration management. We recognized no material realized or unrealized net gains or losses during the three months ended June 30, 2011 and 2010.

Interest rates increased in the three months ended June 30, 2011 compared to the same prior year quarter. During the quarter ended June 30, 2011, we generated no significant interest income from our portfolio of cash equivalents and investments. A hypothetical increase or decrease in our interest rates by 10 basis points would have a minimal impact on our interest income.

FOREIGN CURRENCY EXCHANGE RATE RISK

We are exposed to currency fluctuations, primarily in the Euro ("EUR"), Great Britain Pound ("GBP"), Australian Dollar ("AUD") and the Mexican Peso ("MX$"). We use a hedging strategy to diminish, and make more predictable, the effect of currency fluctuations. All of our hedging activities are entered into with large financial institutions, which we periodically evaluate for credit risks. We hedge our balance sheet exposure by hedging EUR, GBP and AUD denominated cash balances, receivables, and payables, and our economic exposure by hedging a portion of anticipated EUR and GBP denominated sales and our MX$ denominated expenditures. We can provide no assurance that our strategy will be successful in the future and that exchange rate fluctuations will not materially adversely affect our business.

We experienced immaterial net foreign currency gains in the three months ended June 30, 2011. Although we hedge a portion of our foreign currency exchange exposure, the weakening of certain foreign currencies, particularly the Euro and the Great Britain Pound in comparison to the U.S. Dollar ("USD"), could result in material foreign exchange losses in future periods.

Non-designated Hedges

We hedge our EUR, GBP and AUD denominated cash, receivables and payables balances by entering into foreign exchange forward contracts. The table below presents the impact on the foreign exchange gain (loss) of a hypothetical 10% appreciation and a 10% depreciation of the USD against the forward currency contracts as of June 30, 2011 (in millions):
Currency - forward contracts
Position
 
USD Value of Net Foreign Exchange Contracts
 
Foreign Exchange Gain From 10% Appreciation of USD
 
Foreign Exchange Loss From 10% Depreciation of USD
EUR
Sell Euro
 
$
21.7

 
$
2.2

 
$
(2.2
)
GBP
Sell GBP
 
7.5

 
0.8

 
(0.8
)
AUD
Sell AUD
 
5.0

 
0.5

 
(0.5
)

Cash Flow Hedges

In the first quarter of fiscal 2012, approximately 43% of our net revenue was derived from sales outside of the U.S., which were denominated primarily in EUR and GBP.


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As of June 30, 2011, we had foreign currency put and call option contracts with notional amounts of approximately €58.3 million and £16.6 million denominated in EUR and GBP, respectively. Collectively, our option contracts hedge against a portion of our forecasted foreign currency denominated sales. If the USD is subjected to either a 10% appreciation or 10% depreciation versus these net exposed currency positions, we could incur a gain of $8.1 million or a loss of $9.3 million, respectively. The table below presents the impact on the Black-Scholes valuation of our currency option contracts of a hypothetical 10% appreciation and a 10% depreciation of the USD against the indicated option contract type for cash flow hedges as of June 30, 2011(in millions):
Currency - option contracts
USD Value of Net Foreign Exchange Contracts
 
Foreign Exchange Gain From 10% Appreciation of USD
 
Foreign Exchange Loss From 10% Depreciation of USD
Call options
$
110.7

 
$
4.0

 
$
(8.1
)
Put options
102.8

 
4.1

 
(1.2
)

Collectively, our swap contracts hedge against a portion of our forecasted MS$ denominated expenditures. As of June 30, 2011, we had cross currency swap contracts with notional amounts of approximately MX$268.9 million. The table below presents the impact on the valuation of our cross-currency swap contracts of a hypothetical 10% appreciation and a 10% depreciation of the USD as of June 30, 2011 (in millions):
Currency - cross-currency swap contracts
USD Value of Net Foreign Exchange Contracts
 
Foreign Exchange Loss From 10% Appreciation of USD
 
Foreign Exchange Gain From 10% Depreciation of USD
Position: Buy MX$
$
21.9

 
$
(2.0
)
 
$
2.5


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