10-Q 1 form10qq2fy2012.htm FORM 10Q Q2 FY2012 form10Q.Q2FY2012
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 October 1, 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 No.)

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 (§232.405 of this chapter) 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 October 29, 2011, 43,507,296 shares of the registrant's 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)
 
September 30,
2011
 
March 31,
2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
185,377

 
$
284,375

Short-term investments
104,582

 
145,581

Accounts receivable, net
103,026

 
103,289

Inventory, net
60,717

 
56,473

Deferred tax asset
12,264

 
11,349

Other current assets
14,356

 
16,653

Total current assets
480,322

 
617,720

Long-term investments
59,030

 
39,332

Property, plant and equipment, net
74,249

 
70,622

Goodwill and purchased intangibles, net
14,531

 
14,861

Other assets
2,108

 
2,112

Total assets
$
630,240

 
$
744,647

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
25,112

 
$
33,995

Accrued liabilities
51,329

 
59,607

Total current liabilities
76,441

 
93,602

Deferred tax liability
5,632

 
3,526

Long-term income taxes payable
13,436

 
11,524

Revolving line of credit
17,500

 

Other long-term liabilities
1,080

 
1,143

Total liabilities
114,089

 
109,795

Commitments and contingencies (Note 10)


 


Stockholders' equity:
 

 
 

Common stock
732

 
720

Additional paid-in capital
509,611

 
499,027

Accumulated other comprehensive income
4,932

 
1,473

Retained earnings
242,000

 
192,468

Total stockholders' equity before treasury stock
757,275

 
693,688

Less:  Treasury stock, at cost
(241,124
)
 
(58,836
)
Total stockholders' equity
516,151

 
634,852

Total liabilities and stockholders' equity
$
630,240

 
$
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
 
Six Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Net revenues
$
176,948

 
$
158,255

 
$
352,548

 
$
328,940

Cost of revenues
77,982

 
72,296

 
159,524

 
153,533

Gross profit
98,966

 
85,959

 
193,024

 
175,407

Operating expenses:
 
 
 
 
 
 
 
Research, development and engineering
17,651

 
15,206

 
34,557

 
30,107

Selling, general and administrative
44,418

 
36,742

 
86,534

 
75,428

Total operating expenses
62,069

 
51,948

 
121,091

 
105,535

Operating income
36,897

 
34,011

 
71,933

 
69,872

Interest and other income (expense), net
(58
)
 
1,017

 
583

 
635

Income before income taxes
36,839

 
35,028

 
72,516

 
70,507

Income tax expense
9,318

 
9,599

 
18,264

 
19,132

Net income
$
27,521

 
$
25,429

 
$
54,252

 
$
51,375

 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 
 
 
Basic
$
0.62

 
$
0.54

 
$
1.19

 
$
1.08

Diluted
$
0.60

 
$
0.52

 
$
1.16

 
$
1.05

 
 
 
 
 
 
 
 
Shares used in computing earnings per common share:
 

 
 
 
 
 
 
Basic
44,556

 
47,087

 
45,664

 
47,607

Diluted
45,717

 
48,524

 
46,950

 
49,148

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.05

 
$
0.05

 
$
0.10

 
$
0.10


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)
 
Six Months Ended
 
September 30,
 
2011
 
2010
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
54,252

 
$
51,375

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

 


Depreciation and amortization
6,849

 
7,765

Stock-based compensation
8,688

 
7,789

Provisions for sales allowances and doubtful accounts
100

 
238

Provision for excess and obsolete inventories
1,321

 
242

Benefit from deferred income taxes
(5,765
)
 
(2,846
)
Income tax benefit associated with stock option exercises
1,924

 
1,457

Excess tax benefit from stock-based compensation
(3,360
)
 
(907
)
Amortization of premium on investments, net
849

 

Other operating activities
289

 
189

 
 
 
 
Changes in assets and liabilities:
 

 
 
Accounts receivable, net
246

 
(6,802
)
Inventory, net
(5,390
)
 
334

Current and other assets
(408
)
 
(1,212
)
Accounts payable
(8,883
)
 
(4,064
)
Accrued liabilities
(6,762
)
 
(945
)
Income taxes
12,630

 
4,672

Cash provided by operating activities
56,580

 
57,285

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 
Proceeds from sales of short-term investments
66,060

 
23,250

Proceeds from maturities of short-term investments
83,108

 

Purchase of short-term investments
(88,783
)
 
(64,842
)
Proceeds from sales of long-term investments
4,936

 

Purchase of long-term investments
(45,194
)
 
(14,739
)
Capital expenditures and other assets
(10,044
)
 
(6,227
)
Cash provided by (used for) investing activities
10,083

 
(62,558
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 
Repurchase of common stock
(184,067
)
 
(59,979
)
Equity forward contract related to accelerated share repurchase program
(15,000
)
 

Proceeds from sale of treasury stock
2,519

 
2,022

Proceeds from issuance of common stock
16,664

 
11,079

Proceeds from revolving line of credit
17,500

 

Payment of cash dividends
(4,720
)
 
(4,838
)
Employees' tax withheld and paid for restricted stock and restricted stock units
(880
)
 
(62
)
Excess tax benefit from stock-based compensation
3,360

 
907

Cash used for financing activities
(164,624
)
 
(50,871
)
Effect of exchange rate changes on cash and cash equivalents
(1,037
)
 
612

Net decrease in cash and cash equivalents
(98,998
)
 
(55,532
)
Cash and cash equivalents at beginning of period
284,375

 
349,961

Cash and cash equivalents at end of period
$
185,377

 
$
294,429


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 Company's 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 September 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 and six months ended October 1, 2011 and October 2, 2010 each contain 13 weeks and 26 weeks, respectively.  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 calendar 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 September 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This ASU amends existing guidance by allowing an entity to first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If this is the case, the entity will need to perform a more detailed two-step goodwill impairment test that is used to identify potential goodwill impairments and to measure the amount of goodwill impairment losses, if any, to be recognized. This new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company expects to early adopt ASU 2011-8 in its fourth quarter of fiscal 2012. The Company does not expect the adoption of ASU 2011-08 to have a material impact on its consolidated financial statements.

In June 2011, the FASB issued 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 within those years, beginning after December 15, 2011, which would be the Company's first quarter of fiscal 2013. The Company does not expect the adoption of ASU 2011-05 to have a material impact on its consolidated financial statements.


6


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, 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 2011-04 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 2011-04 clarifies the FASB's intent about the application of existing fair value measurements. This new guidance is effective during interim and annual periods beginning after December 15, 2011, which would be the Company's 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.

3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS

Accounts receivable, net:
 
 
September 30,
 
March 31,
(in thousands)
 
2011
 
2011
Accounts receivable
 
$
125,245

 
$
125,137

Provisions for returns
 
(8,176
)
 
(10,437
)
Provisions for promotions, rebates and other
 
(13,394
)
 
(10,460
)
Provisions for doubtful accounts and sales allowances
 
(649
)
 
(951
)
Accounts receivable, net
 
$
103,026

 
$
103,289


Inventory, net:
 
 
September 30,
 
March 31,
(in thousands)
 
2011
 
2011
Raw materials
 
$
16,176

 
$
15,315

Work in process
 
3,026

 
2,558

Finished goods
 
41,515

 
38,600

Inventory, net
 
$
60,717

 
$
56,473


Accrued Liabilities:
 
 
September 30,
 
March 31,
(in thousands)
 
2011
 
2011
Employee compensation and benefits
 
$
23,396

 
$
27,478

Warranty obligation accrual
 
13,379

 
11,016

Accrued advertising and sales and marketing
 
2,071

 
2,873

Accrued other
 
12,483

 
18,240

Accrued liabilities
 
$
51,329

 
$
59,607


Changes during the six months ended September 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:
 
Six Months Ended
(in thousands)
September 30, 2011
 
 
Warranty obligation accrual at March 31, 2011
$
11,016

Warranty provision relating to products shipped
9,139

Deductions for warranty claims processed
(6,776
)
Warranty obligation accrual at September 30, 2011
$
13,379


7



4. CASH, CASH EQUIVALENTS AND INVESTMENTS

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

(in thousands)
 
September 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
 
$
168,875

 
$

 
$

 
$
168,875

 
$
136,804

 
$

 
$

 
$
136,804

Cash equivalents
 
16,500

 
2

 

 
16,502

 
147,573

 
1

 
(3
)
 
147,571

Total Cash and cash equivalents
 
$
185,375

 
$
2

 
$

 
$
185,377

 
$
284,377

 
$
1

 
$
(3
)
 
$
284,375

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
$
61,988

 
$
27

 
$
(4
)
 
$
62,011

 
$
98,845

 
$
17

 
$
(1
)
 
$
98,861

Commercial Paper
 
17,988

 
1

 

 
17,989

 
30,071

 
5

 
(1
)
 
30,075

Corporate Bonds
 
22,070

 
6

 
(12
)
 
22,064

 
11,212

 
4

 

 
11,216

Certificates of Deposit ("CDs")
 
2,517

 
1

 

 
2,518

 
5,420

 
9

 

 
5,429

Total Short-term investments
 
$
104,563

 
$
35

 
$
(16
)
 
$
104,582

 
$
145,548

 
$
35

 
$
(2
)
 
$
145,581

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
$
21,071

 
$
8

 
$
(24
)
 
$
21,055

 
$
17,387

 
$
4

 
$

 
$
17,391

Corporate Bonds
 
33,316

 
17

 
(249
)
 
33,084

 
19,086

 
8

 
(35
)
 
19,059

CDs
 
4,881

 
11

 
(1
)
 
4,891

 
2,879

 
3

 

 
2,882

Total Long-term investments
 
$
59,268

 
$
36

 
$
(274
)
 
$
59,030

 
$
39,352

 
$
15

 
$
(35
)
 
$
39,332

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total cash, cash equivalents and investments
 
$
349,206

 
$
73

 
$
(290
)
 
$
348,989

 
$
469,277

 
$
51

 
$
(40
)
 
$
469,288


As of September 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 September 30, 2011 and March 31, 2011:
(in thousands)
 
September 30, 2011
 
March 31, 2011
 
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Due in 1 year or less
 
$
121,063

 
$
121,084

 
$
293,121

 
$
293,152

Due in 1 to 3 years
 
59,268

 
59,030

 
39,352

 
39,332

Total
 
$
180,331

 
$
180,114

 
$
332,473

 
$
332,484


The Company did not incur any material realized or unrealized net gains or losses in the three or six months ended September 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 September 30, 2011:
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash
 
$
168,875

 
$

 
$

 
$
168,875

U.S. Treasury Bills and Government Agency Securities
 

 
5,004

 

 
5,004

Commercial Paper
 

 
4,998

 

 
4,998

Money Market Accounts
 
6,500

 

 

 
6,500

Short-term investments:
 
 
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
34,016

 
27,995

 

 
62,011

Commercial Paper
 

 
17,989

 

 
17,989

Corporate Bonds
 

 
22,064

 

 
22,064

CDs
 

 
2,518

 

 
2,518

Long-term investments:
 
 
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 

 
21,055

 

 
21,055

Corporate Bonds
 

 
33,084

 

 
33,084

CDs
 

 
4,891

 

 
4,891

Other current assets:
 
 
 
 
 
 
 
 
Derivative assets
 

 
2,619

 

 
2,619

Total assets measured at fair value
 
$
209,391

 
$
142,217

 
$

 
$
351,608

 
 
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
 
Derivative liabilities
 
$
23

 
$
2,292

 
$

 
$
2,315


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

 
$

 
$

 
$
136,804

U.S. Treasury Bills and Government Agency Securities
 
74,991

 
7,002

 

 
81,993

Commercial Paper
 

 
22,495

 

 
22,495

Corporate Bonds
 

 
3,082

 

 
3,082

CDs
 

 
2,001

 


 
2,001

Money Market Accounts
 
38,000

 

 

 
38,000

Short-term investments:
 
 
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
71,756

 
27,105

 

 
98,861

Commercial Paper
 

 
30,075

 

 
30,075

Corporate Bonds
 

 
11,216

 

 
11,216

CDs
 

 
5,429

 

 
5,429

Long-term investments:
 
 
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
7,955

 
9,436

 

 
17,391

Corporate Bonds
 

 
19,059

 

 
19,059

CDs
 

 
2,882

 

 
2,882

Other current assets:
 
 
 
 
 
 
 
 
Derivative assets
 

 
360

 

 
360

Total assets measured at fair value
 
$
329,506

 
$
140,142

 
$

 
$
469,648

 
 
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
 
Derivative liabilities
 
$
27

 
$
4,174

 
$

 
$
4,201



9


Level 1 financial assets consist of cash, money market accounts and United States ("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 six months ended September 30, 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 September 30, 2011 or March 31, 2011.

6. GOODWILL AND PURCHASED INTANGIBLE ASSETS

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

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

 
$
(3,000
)
 
$

 
$
3,000

 
$
(2,812
)
 
$
188

 
6

years
Customer relationships
 
1,705

 
(1,184
)
 
521

 
1,705

 
(1,044
)
 
661

 
8

years
OEM relationships
 
27

 
(22
)
 
5

 
27

 
(20
)
 
7

 
7

years
Total
 
$
4,732

 
$
(4,206
)
 
$
526

 
$
4,732

 
$
(3,876
)
 
$
856

 
 
 

The aggregate amortization expense relating to purchased intangible assets was immaterial for the three and six months ended September 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
 
Six Months Ended
 
 
September 30,
 
September 30,
(in thousands)
 
2011
 
2010
 
2011
 
2010
Cost of revenues
 
$
559

 
$
565

 
$
1,105

 
$
1,098

 
 


 


 


 


Research, development and engineering
 
1,028

 
967

 
1,975

 
1,904

Selling, general and administrative
 
2,921

 
2,480

 
5,608

 
4,787

Stock-based compensation expense included in operating expenses
 
3,949

 
3,447

 
7,583

 
6,691

 
 


 


 


 


Total stock-based compensation expense
 
4,508

 
4,012

 
8,688

 
7,789

Income tax benefit
 
(1,441
)
 
(1,305
)
 
(2,723
)
 
(2,346
)
Total stock-based compensation expense, net of tax
 
$
3,067

 
$
2,707

 
$
5,965

 
$
5,443



10


Stock Options

The following is a summary of the Company’s stock option activity during the six months ended September 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
424

 
$
35.54

 
 
 
 
Options exercised
(795
)
 
$
20.95

 
 
 
 
Options forfeited or expired
(703
)
 
$
39.33

 
 
 
 
Outstanding at September 30, 2011
4,286

 
$
25.17

 
3.6

 
$
21,669

Vested and expected to vest at September 30, 2011
4,186

 
$
24.99

 
3.5

 
$
21,573

Exercisable at September 30, 2011
3,119

 
$
23.18

 
2.7

 
$
19,052


The total intrinsic value of options exercised during the six months ended September 30, 2011 and 2010 was $11.7 million and $5.1 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 six months ended September 30, 2011 was $16.7 million.

As of September 30, 2011, total unrecognized compensation cost related to unvested stock options was $10.0 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 six months ended September 30, 2011:
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
(in thousands)
 
 
Unvested at March 31, 2011
688

 
$
29.52

Restricted stock granted
390

 
$
36.36

Restricted stock vested
(68
)
 
$
27.90

Restricted stock forfeited
(28
)
 
$
29.64

Unvested at September 30, 2011
982

 
$
32.47


The weighted average grant-date fair value of awards of restricted stock and restricted stock units (collectively "restricted stock") 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 granted during the six months ended September 30, 2011 and 2010 was $36.36 and $30.16, respectively. The total fair value of restricted stock that vested during the six months ended September 30, 2011 and 2010 was $1.9 million and $0.7 million, respectively.

As of September 30, 2011, total unrecognized compensation cost related to unvested restricted stock was $21.0 million which is expected to be recognized over a weighted average period of 2.9 years.  


11


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 options and ESPP shares granted during the respective periods is estimated on the date of grant using the following weighted average assumptions:
 
 
Three Months Ended
 
Six Months Ended
 
 
September 30,
 
September 30,
Employee Stock Options
 
2011
 
2010
 
2011
 
2010
Expected volatility
 
44.7
%
 
46.6
%
 
44.4
%
 
46.3
%
Risk-free interest rate
 
0.6
%
 
1.2
%
 
1.2
%
 
1.7
%
Expected dividends
 
0.6
%
 
0.7
%
 
0.6
%
 
0.7
%
Expected life (in years)
 
4.0

 
4.2

 
4.0

 
4.2

Weighted-average grant date fair value
 
$
10.85

 
$
11.14

 
$
12.18

 
$
11.22

ESPP
 
 
 
 
 
 
 
 
Expected volatility
 
38.7
%
 
41.8
%
 
38.7
%
 
41.8
%
Risk-free interest rate
 
0.1
%
 
0.2
%
 
0.1
%
 
0.2
%
Expected dividends
 
0.6
%
 
0.7
%
 
0.6
%
 
0.7
%
Expected life (in years)
 
0.5

 
0.5

 
0.5

 
0.5

Weighted-average grant date fair value
 
$
8.00

 
$
8.02

 
$
8.00

 
$
8.02


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.

8. COMMON STOCK REPURCHASES

From time to time, the Company's Board of Directors (the "Board") authorizes programs under which the Company may repurchase shares of its common stock, depending on market conditions, in the open market or through privately negotiated transactions. Repurchased shares are held as treasury stock. Repurchases by the Company pursuant to the Board authorized programs during the six months ended September 30, 2011 and 2010 are discussed below. As of September 30, 2011, there were 2,163,034 remaining shares authorized for repurchase.

Open Market Repurchases

Under the Board authorized programs, in the six months ended September 30, 2011 and 2010, respectively, the Company repurchased 1,529,983 and 2,034,700 shares of its common stock in the open market for a total cost of $49.1 million and $60.0 million and an average price per share of $32.07 and $29.48.

In addition, the Company withheld shares valued at $0.9 million in the six months ended September 30, 2011, compared to an immaterial amount in the six months ended September 30, 2010, 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 have the effect of share repurchases by the Company as they reduce the number of shares outstanding as a result of the vesting and do not represent an expense to the Company.

Privately Negotiated Transactions

In May 2011, pursuant to a Board authorized accelerated share repurchase ("ASR") program, the Company entered into two separate Master Confirmation and Supplemental Confirmations (the “May 2011 ASR Agreements”) with Goldman, Sachs & Co. (“Goldman”) consisting of a "Collared ASR Agreement" and an "Uncollared ASR Agreement". In August 2011, the Company entered into an additional Supplemental Confirmation with Goldman, consisting of an uncollared ASR (the "August 2011 Uncollared ASR Agreement"). Details of these transactions are described further below.


12


In accordance with the Equity topic of the FASB Accounting Standards Codification ("ASC"), the Company accounted for each agreement with Goldman as two separate transactions: (i) as shares of common stock acquired in a treasury stock transaction recorded on the acquisition date and (ii) 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 May 2011 ASR Agreements and the August 2011 Uncollared ASR Agreement as a repurchase of its common stock for the purpose of calculating earnings per common share. The Company has determined that the forward contracts 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, were not accounted for as derivative instruments.

May 2011 ASR Agreements

Under the May 2011 ASR Agreements, the Company paid Goldman $100.0 million in May 2011, and, during the six months ended September 30, 2011, Goldman delivered 2,831,519 shares of the Company's common stock.

Under the Collared ASR Agreement, the number of shares repurchased by the Company was 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. In May 2011, the Company paid Goldman $50.0 million in exchange for an initial delivery to the Company of 867,690 shares 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 were known. Goldman delivered an additional 360,865 shares to the Company in May 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. 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 until settlement.

In August 2011, Goldman accelerated the end of the repurchase period and the Company received an additional 170,370 shares of its common stock upon the settlement of the Collared ASR Agreement. Accordingly, the Company received a total of 1,398,925 shares from Goldman under the Collared ASR through September 30, 2011 at a total cost of $50.0 million and an average price per share of $35.74 based on the VWAP of the Company's common stock during the term of the Collared ASR Agreement, less a discount. As of September 30, 2011, the entire repurchase price of $50.0 million is reflected as Treasury stock, at cost, in the Condensed consolidated balance sheet.

Under the Uncollared ASR Agreement, the number of shares repurchased by the Company was based generally on the VWAP of the Company's common stock during the term of the Uncollared ASR Agreement. In May 2011, the Company paid Goldman $50.0 million in exchange for an initial delivery to the Company of 954,459 shares, 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 were known. Accordingly, 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 until settlement. In August 2011, Goldman accelerated the end of the repurchase period and the Company received an additional 478,135 shares of its common stock upon the settlement of the Uncollared ASR Agreement. Accordingly, the Company received a total of 1,432,594 shares from Goldman under the Uncollared ASR Agreement through September 30, 2011 at a total cost of $50.0 million and an average price per share of $34.90 based on the VWAP of the Company's common stock during the term of the Uncollared ASR Agreement, less a discount. As of September 30, 2011, the entire repurchase price of $50.0 million is reflected as Treasury stock, at cost, in the Condensed consolidated balance sheet.
 
August 2011 Uncollared ASR Agreement

Under the August 2011 Uncollared ASR Agreement, the Company will repurchase shares of its common stock for an aggregate purchase price of $50.0 million. The $50.0 million was paid in August 2011, and the Company received an initial delivery of 1,136,364 shares. Goldman borrowed the shares that were delivered to the Company and is obligated to purchase sufficient shares of the Company's common stock in the open market to return to lenders over the term of the agreement. The initial delivery to the Company represented approximately 70% of the shares expected to be repurchased based on the closing price of the Company's common stock of $30.80 on August 19, 2011, which was the date the major terms of the agreement to purchase the shares were known.

The August 2011 Uncollared ASR Agreement is expected to conclude no later than March 27, 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 August 2011 ASR Agreement. The Company received a total of 1,136,364 shares under the August 2011 Uncollared ASR Agreement during the three months ended September 30, 2011.


13


Under the August 2011 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 contractual term. At the conclusion of the August 2011 Uncollared ASR Agreement, the Company, at its election, may receive additional shares or may be required to pay additional cash or shares based generally on the VWAP of the Company's common stock during the term of the agreement. Based on the initial 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 known, the total consideration allocated to stock repurchases under the August 2011 Uncollared ASR Agreement was $35.0 million. The remaining $15.0 million was recorded as an equity forward contract and was included in Additional paid-in capital in the Condensed consolidated balance sheet as of September 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 line of credit (the "line of credit") and if requested by the Company, the Bank may increase its commitment thereunder by up to $100 million, for a total facility size of up to $200 million. As of September 30, 2011, the Company had outstanding borrowings of $17.5 million under the line of credit.

Loans under the Credit Agreement bear interest at the election of the Company (i) at the Bank's announced prime rate less 1.50% per annum, (ii) at a daily one month LIBOR rate plus 1.10% per annum or (iii) 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 pays 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 guaranteed by the Company's domestic subsidiaries, subject to certain exceptions.

The line of credit 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 line of credit 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 line of credit also 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 line of credit 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 September 30, 2011.



14


10. COMMITMENTS AND CONTINGENCIES

Minimum Future Rental Payments

The Company leases certain equipment and facilities under operating leases expiring in various years through fiscal 2017.  Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of one year as of September 30, 2011 are as follows:

Fiscal Year Ending March 31,
 
(in thousands)
2012 (remaining 6 months)
 
$
2,218

2013
 
3,874

2014
 
3,370

2015
 
1,284

2016
 
564

Thereafter
 
49

Total minimum future rental payments
 
$
11,359

Total consolidated rent expense for operating leases for the three and six months ended September 30, 2011 was approximately $1.4 million and $2.8 million, respectively, compared to $1.3 million and $2.7 million, respectively, for the three and six months ended September 30, 2010.

Unconditional Purchase Obligations

The Company purchases components from a variety of suppliers and manufacturers. During the normal course of business and to manage manufacturing lead times and ensure adequate component supply, the Company may enter into firm, non-cancelable and unconditional purchase obligations for which the terms exceed one year and for which amounts are not recorded in the Condensed consolidated balance sheets. As of September 30, 2011, such unconditional purchase obligations with remaining terms exceeding one year totaled $13.4 million. As of March 31, 2011, there were no arrangements with remaining terms exceeding one year.

Indemnifications

Under the terms of the Asset Purchase Agreement, dated October 2, 2009, a First Amendment to the Asset Purchase Agreement, dated November 30, 2009, a Side Letter to the Asset Purchase Agreement, dated January 8, 2010, and a second Side Letter to the Asset Purchase Agreement, dated February 15, 2010 (collectively, the “Purchase Agreement”) to sell Altec Lansing, the Company’s Audio Entertainment Group ("AEG") segment, the Company made representations and warranties to the purchaser about the condition of AEG, including matters relating to intellectual property, employee, tax and environmental laws.  No indemnification costs have been incurred as of September 30, 2011 or March 31, 2011.

Other Guarantees and Obligations

The Company sells substantially all of its products to end users through distributors, retailers, OEMs, and telephony service providers (collectively "customers"). As is customary in the Company’s industry, as provided for in local law in the U.S. and other jurisdictions, Plantronics’ standard contracts provide remedies to its customers, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of its products.  From time to time, the Company indemnifies customers against combinations of loss, expense, or liability arising from various trigger events relating to the sale and use of its products and services.  In addition, Plantronics also provides protection to customers against claims related to undiscovered liabilities, additional product liability, or environmental obligations.  In the Company’s experience, claims made under these indemnifications are rare and the associated estimated fair value of the liability is not material.

Claims and Litigation

The Company is presently engaged in various legal actions arising in the normal course of business.  The Company believes that it is unlikely that any of these actions will have a material adverse impact on its operating results; however, because of the inherent uncertainties of litigation, the outcome of any of these actions could be unfavorable and could have a material adverse effect on the Company's financial condition, results of operations or cash flows.  

15



In the six (6) lawsuits that were consolidated for all pre-trial purposes in the United States District Court for the Central District of California (District Court) and renamed In Re Bluetooth Headset Products Liability Litigation, the United States Court of Appeals for the Ninth Circuit (Ninth Circuit) on August 19, 2011, issued a decision vacating and remanding the case to the District Court. On remand, the District Court is instructed to properly exercise its discretion in accordance with the principles set forth in the decision by the Ninth Circuit. In re-examining this case, the District Court may re-affirm its prior approval of the settlement, disapprove the settlement or approve a modified settlement. The District Court must properly analyze the conduct of the parties in accordance with the instructions of the Ninth Circuit. The District Court will set a schedule to accomplish this analysis and to re-issue its decision and judgment. The Company will continue to defend its interests throughout this process and the remainder of the case. Other than this item, there were no material developments in litigation since the filing of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2011. 

11. COMPREHENSIVE INCOME

The components of comprehensive income for the three and six months ended September 30, 2011 and 2010 are as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
September 30,
 
September 30,
(in thousands)
 
2011
 
2010
 
2011
 
2010
Net income
 
$
27,521

 
$
25,429

 
$
54,252

 
$
51,375

Unrealized gain (loss) on cash flow hedges, net of tax
 
2,768

 
(4,946
)
 
4,033

 
(4,014
)
Foreign currency translation gain (loss), net of tax
 
(1,059
)
 
1,024

 
(407
)
 
722

Unrealized gain (loss) on investments, net of tax
 
(220
)
 
42

 
(167
)
 
42

Comprehensive income
 
$
29,010

 
$
21,549

 
$
57,711

 
$
48,125


12. 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 statements 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 September 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 September 30, 2011:
 
Local Currency
 
USD Equivalent
 
Position
 
Maturity
 
(in thousands)
 
(in thousands)
 
 
 
 
EUR
17,000

 
$
22,841

 
Sell EUR
 
1 month
GBP
3,900

 
$
6,092

 
Sell GBP
 
1 month
AUD
4,900

 
$
4,755

 
Sell AUD
 
1 month

Foreign currency transactions, net of the effect of forward contract hedging activity, resulted in immaterial net losses in the three and six months ended September 30, 2011 and 2010, which are included in Interest and other income (expense), net, in the Condensed consolidated statements of operations.


16


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 in the Condensed consolidated balance sheets and subsequently reclassified into Net revenues in the Condensed consolidated statements of operations 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 September 30, 2011, the Company had foreign currency put and call option contracts of approximately €62.6 million and £18.2 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.

In the three and six months ended September 30, 2011, realized losses on cash flow hedges of $0.6 million and $2.6 million, respectively, were recognized in Net revenues, compared to realized gains of $0.9 million and $1.9 million, respectively, for the same periods in the prior year.  The Company expects to reclassify the entire gain of $2.4 million, net of tax, in Accumulated other comprehensive income to Net revenues during the next twelve 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 in the Condensed consolidated balance sheets 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 September 30, 2011 and March 31, 2011, the Company had foreign currency swap contracts of approximately MX$480.7 million and MX$343.9 million, respectively.

In the three and six months ended September 30, 2011 and 2010, there were no material realized gains or losses on MX$ cash flow hedges recognized in Cost of revenues.  Of the entire loss of $2.1 million, net of tax, recorded in Accumulated other comprehensive income, the Company expects to reclassify $1.9 million to Cost of revenues during the next twelve 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 September 30, 2011:
 
Local Currency
 
USD Equivalent
 
Position
 
Maturity
 
(in thousands)
 
(in thousands)
 
 
 
 
MX$
480,650

 
$
36,775

 
Buy MX$
 
Monthly over 17 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
 
 
September 30,
 
March 31,
 
September 30,
 
March 31,
(in thousands)
 
2011
 
2011
 
2011
 
2011
Foreign exchange contracts designated as cash flow hedges
 
$
2,619

 
$
360

 
$
2,315

 
$
4,201



17


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 September 30, 2011 and March 31, 2011, and the impact of designated derivative contracts before tax on Accumulated other comprehensive income ("OCI") for the six months ended September 30, 2011:
(in thousands)
 
Gain (loss) included in OCI as of March 31, 2011
 
Amount of gain (loss)
recognized in OCI
(effective portion)
 
Amount of gain (loss)
reclassified from OCI
to income (loss)
(effective portion)
 
Gain (loss) included in OCI as of September 30, 2011
Foreign exchange contracts designated as cash flow hedges
 
$
(3,841
)
 
$
2,127

 
$
(2,018
)
 
$
304


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
 
Six Months Ended
 
 
September 30,
 
September 30,
(in thousands)
 
2011
 
2010
 
2011
 
2010
Gain (loss) on foreign exchange contracts designated as cash flow hedges
 
$
(404
)
 
$
847

 
$
(2,018
)
 
$
1,939


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 statements of operations was as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
September 30,
 
September 30,
(in thousands)
 
2011
 
2010
 
2011
 
2010
Gain (loss) on foreign exchange contracts
 
$
2,096

 
$
(2,574
)
 
$
1,299

 
$
(528
)

13. INCOME TAXES

The effective tax rate for both the three and six months ended September 30, 2011 was 25.3% and 25.2%, respectively, compared to 27.4% and 27.1%, respectively, in the same periods in the prior year.  The lower effective tax rate for both the three and six months ended September 30, 2011 compared to the same periods in the prior year is due primarily to a larger proportion of income earned in foreign jurisdictions during these periods which is taxed at lower rates, as well as the reinstatement in December 2010 of the U.S. federal research tax credit which was not available in the three and six months ended September 2010. The effective tax rates differ 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 September 30, 2011, the Company had $11.6 million of unrecognized tax benefits compared to $10.5 million at March 31, 2011 recorded in Long-term income taxes payable in the Condensed consolidated balance sheets, 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 in the Condensed consolidated statements of operations.  The accrued interest related to unrecognized tax benefits is $1.9 million as of September 30, 2011 as compared to $1.7 million as of March 31, 2011.  No penalties have been accrued.


18


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.

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 any 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.

14. COMPUTATION OF EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per common share for the three and six months ended September 30, 2011 and 2010:
 
 
Three Months Ended
 
Six Months Ended
 
 
September 30,
 
September 30,
(in thousands, except per share data)
 
2011
 
2010
 
2011
 
2010
Numerator:
 
 
 
 
 
 
 
 
Net income
 
$
27,521

 
$
25,429

 
$
54,252

 
$
51,375

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares-basic
 
44,556

 
47,087

 
45,664

 
47,607

Dilutive effect of employee equity incentive plans
 
1,161

 
1,437

 
1,286

 
1,541

Weighted average common shares-diluted
 
45,717

 
48,524

 
46,950

 
49,148

 
 
 
 
 
 
 
 
 
Earnings per common share-basic
 
$
0.62

 
$
0.54

 
$
1.19

 
$
1.08

 
 
 
 
 
 
 
 
 
Earnings per common share-diluted
 
$
0.60

 
$
0.52

 
$
1.16

 
$
1.05

 
 
 
 
 
 
 
 
 
Potentially dilutive securities excluded from earnings per common share-diluted because their effect is anti-dilutive
 
1,946

 
2,254

 
1,781

 
2,214


15. 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.


19


The following table presents net revenues by product group for the three and six months ended September 30, 2011 and 2010:
 
 
Three Months Ended
 
Six Months Ended
 
 
September 30,
 
September 30,
(in thousands)
 
2011
 
2010
 
2011
 
2010
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
Office and Contact Center
 
$
136,395

 
$
117,951

 
$
267,394

 
$
235,531

Mobile
 
28,341

 
27,581

 
60,505

 
66,238

Gaming and Computer Audio
 
8,381

 
8,179

 
15,776

 
17,504

Clarity
 
3,831

 
4,544

 
8,873

 
9,667

Total net revenues
 
$
176,948

 
$
158,255

 
$
352,548

 
$
328,940


The following table presents net revenues by geography for the three and six months ended September 30, 2011 and 2010:
 
 
Three Months Ended
 
Six Months Ended
 
 
September 30,
 
September 30,
(in thousands)
 
2011
 
2010
 
2011
 
2010
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
U.S.
 
$
101,196

 
$
96,100

 
$
201,487

 
$
200,092

 
 
 
 
 
 
 
 
 
Europe, Middle East and Africa
 
43,596

 
36,299

 
86,758

 
75,081

Asia Pacific
 
19,993

 
14,642

 
39,230

 
30,905

Americas, excluding U.S.
 
12,163

 
11,214

 
25,073

 
22,862

Total international net revenues
 
75,752

 
62,155

 
151,061

 
128,848

Total net revenues
 
$
176,948

 
$
158,255

 
$
352,548

 
$
328,940


No customer accounted for 10% or more of Net revenues for the three or six months ended September 30, 2011 and 2010, nor did any one customer account for 10% or more of Accounts receivable, net in the Condensed consolidated balance sheets at September 30, 2011 and March 31, 2011.

16. SUBSEQUENT EVENTS

On November 1, 2011, the Board declared a cash dividend of $0.05 per share of the Company's common stock, payable on December 9, 2011 to stockholders of record at the close of business on November 18, 2011.


20


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, development and engineering 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.

UC is widely expected to increase the adoption and use of headsets in enterprise applications.  Headsets help to enable voice communications 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.

In the second quarter of fiscal 2012, our consolidated net revenues of $176.9 million increased $18.7 million or 12% from $158.3 million in the second quarter of fiscal 2011 driven by higher sales of our Office and Contact Center (“OCC”) products which increased $18.4 million or 16% from the same quarter a year ago.  The increase in net revenues from these products in the current quarter was primarily due to increased demand for headsets designed for UC and our participation in the UC market.  

Our gross profit as a percentage of net revenues increased to 55.9% in the second quarter of fiscal 2012 from 54.3% in the second quarter of fiscal 2011 due to a shift in revenue mix to our higher margin OCC products which represented 77% of our net revenues in the second quarter of fiscal 2012 compared to 75% in the same quarter a year ago. In the Mobile market, particularly consumer applications, margins are typically lower than for enterprise applications due to the level of competition and pricing pressures.

Operating income was $36.9 million in the second quarter of fiscal 2012, an increase of $2.9 million or 9% from $34.0 million in the second quarter of fiscal 2011 due to the increase in revenues and higher margins offset in part by higher operating expenses to support our overall business growth and future opportunities.

21


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 September 30,
 
Six Months Ended September 30,
(in thousands except percentages)
 
2011
 
2010
 
2011
 
2010
Net revenues
 
$
176,948

 
100.0
%
 
$
158,255

 
100.0
%
 
$
352,548

 
100.0
%
 
$
328,940

 
100.0
%
Cost of revenues
 
77,982

 
44.1
%
 
72,296

 
45.7
%
 
159,524

 
45.2
%
 
153,533

 
46.7
%
Gross profit
 
98,966

 
55.9
%
 
85,959

 
54.3
%
 
193,024

 
54.8
%
 
175,407

 
53.3
%
Operating expenses:
 


 
 

 


 
 

 


 
 

 


 
 

Research, development and engineering
 
17,651

 
10.0
%
 
15,206

 
9.6
%
 
34,557

 
9.8
%
 
30,107

 
9.2
%
Selling, general and administrative
 
44,418

 
25.1
%
 
36,742

 
23.2
%
 
86,534

 
24.5
%
 
75,428

 
22.9
%
Total operating expenses
 
62,069

 
35.1
%
 
51,948

 
32.8
%
 
121,091

 
34.3
%
 
105,535

 
32.1
%
Operating income
 
36,897

 
20.9
%
 
34,011

 
21.5
%
 
71,933

 
20.4
%
 
69,872

 
21.2
%
Interest and other income (expense), net
 
(58
)
 
%
 
1,017

 
0.6
%
 
583

 
0.2
%
 
635

 
0.2
%
Income before income taxes
 
36,839

 
20.8
%
 
35,028

 
22.1
%
 
72,516

 
20.6
%
 
70,507

 
21.4
%
Income tax expense
 
9,318

 
5.3
%
 
9,599

 
6.1
%
 
18,264

 
5.2
%
 
19,132

 
5.8
%
Net income
 
$
27,521

 
15.6
%
 
$
25,429

 
16.1
%
 
$
54,252

 
15.4
%
 
$
51,375

 
15.6
%

NET REVENUES
 
 
Three Months Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
 
 
September 30,
 
Increase
 
September 30,
 
Increase
(in thousands except percentages)
 
2011
 
2010
 
(Decrease)
 
2011
 
2010
 
(Decrease)
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
 
 
 
 
 
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