10-Q 1 form10qq1fy2013.htm FORM 10Q Q1 FY2013 form10Q.Q1FY2013
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 June 30, 2012

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 July 28, 2012, 42,282,751 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®, BackBeat® GO, and Simply Smarter Communications™ are trademarks or registered trademarks of
Plantronics, Inc.

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,
2012
 
March 31,
2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
204,639

 
$
209,335

Short-term investments
150,734

 
125,177

Accounts receivable, net
108,300

 
111,771

Inventory, net
58,932

 
53,713

Deferred tax assets
10,669

 
11,090

Other current assets
15,854

 
13,088

Total current assets
549,128

 
524,174

Long-term investments
29,310

 
55,347

Property, plant and equipment, net
88,750

 
76,159

Goodwill and purchased intangibles, net
14,318

 
14,388

Other assets
2,491

 
2,402

Total assets
$
683,997

 
$
672,470

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
29,664

 
$
34,126

Accrued liabilities
50,604

 
51,845

Income taxes payable
4,929

 
222

Total current liabilities
85,197

 
86,193

Deferred tax liabilities
2,074

 
8,673

Long-term income taxes payable
12,714

 
12,150

Revolving line of credit
42,000

 
37,000

Other long-term liabilities
1,199

 
1,210

Total liabilities
143,184

 
145,226

Commitments and contingencies (Note 6)


 


Stockholders' equity:
 

 
 

Common stock
746

 
741

Additional paid-in capital
569,051

 
557,218

Accumulated other comprehensive income
6,535

 
6,357

Retained earnings
134,674

 
115,358

Total stockholders' equity before treasury stock
711,006

 
679,674

Less:  Treasury stock, at cost
(170,193
)
 
(152,430
)
Total stockholders' equity
540,813

 
527,244

Total liabilities and stockholders' equity
$
683,997

 
$
672,470


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,
 
2012
 
2011
Net revenues
$
181,365

 
$
175,600

Cost of revenues
83,669

 
81,542

Gross profit
97,696

 
94,058

Operating expenses:
 
 
 
Research, development and engineering
19,696

 
16,906

Selling, general and administrative
45,904

 
42,116

Total operating expenses
65,600

 
59,022

Operating income
32,096

 
35,036

Interest and other income, net
12

 
641

Income before income taxes
32,108

 
35,677

Income tax expense
8,545

 
8,946

Net income
$
23,563

 
$
26,731

 
 
 
 
Earnings per common share:
 
 
 
Basic
$
0.57

 
$
0.57

Diluted
$
0.55

 
$
0.56

 
 
 
 
Shares used in computing earnings per common share:
 

 
 
Basic
41,660

 
46,688

Diluted
42,570

 
48,060

 
 
 
 
Cash dividends declared per common share
$
0.10

 
$
0.05





















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


4


PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)

 
Three Months Ended
 
June 30,
 
2012
 
2011
Net income
$
23,563

 
$
26,731

Other comprehensive income, net of tax:

 

Change in net unrealized (loss) gain on cash flow hedges
(336
)
 
1,265

Change in net foreign currency translation adjustments
502

 
652

Change in net unrealized gain on investments
12

 
53

Other comprehensive income
178

 
1,970

Comprehensive income
$
23,741

 
$
28,701







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


5


PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
Three Months Ended
 
June 30,
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
23,563

 
$
26,731

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

 
 

Depreciation and amortization
3,786

 
3,462

Stock-based compensation
4,620

 
4,179

Provision for excess and obsolete inventories
250

 
322

Deferred income taxes
(1,737
)
 
(2,143
)
Income tax benefit associated with stock option exercises
1,299

 
1,381

Excess tax benefit from stock-based compensation
(140
)
 
(2,570
)
Amortization of premium on investments, net
320

 
431

Other operating activities
252

 
131

Changes in assets and liabilities:
 

 
 
Accounts receivable, net
4,451

 
(5,607
)
Inventory, net
(5,153
)
 
(1,453
)
Current and other assets
(2,681
)
 
(2,421
)
Accounts payable
(4,462
)
 
(6,684
)
Accrued liabilities
(1,434
)
 
(5,067
)
Income taxes
5,262

 
8,531

Cash provided by operating activities
28,196

 
19,223

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 
Proceeds from sales of short-term investments
15,857

 
62,948

Proceeds from maturities of short-term investments
27,595

 
38,317

Purchase of short-term investments
(35,062
)
 
(68,077
)
Proceeds from sales of long-term investments

 
4,936

Purchase of long-term investments
(8,423
)
 
(35,145
)
Capital expenditures and other assets
(16,577
)
 
(3,935
)
Cash used for investing activities
(16,610
)
 
(956
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 
Repurchase of common stock
(16,473
)
 
(90,668
)
Equity forward contract related to accelerated share repurchase program

 
(18,872
)
Proceeds from issuance of common stock
1,319

 
11,515

Proceeds from revolving line of credit
18,000

 

Repayments of revolving line of credit
(13,000
)
 

Payment of cash dividends
(4,247
)
 
(2,427
)
Employees' tax withheld and paid for restricted stock and restricted stock units
(1,290
)
 
(705
)
Excess tax benefit from stock-based compensation
140

 
2,570

Cash used for financing activities
(15,551
)
 
(98,587
)
Effect of exchange rate changes on cash and cash equivalents
(731
)
 
673

Net decrease in cash and cash equivalents
(4,696
)
 
(79,647
)
Cash and cash equivalents at beginning of period
209,335

 
277,373

Cash and cash equivalents at end of period
$
204,639

 
$
197,726





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

6


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 financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") 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, 2012 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, 2012, which was filed with the SEC on May 25, 2012.  The results of operations for the interim period ended June 30, 2012 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 30, 2013 and consists of 52 weeks. The Company's prior fiscal year ended on March 31, 2012 and also consisted of 52 weeks.  The Company’s results of operations for the three months ended June 30, 2012 and June 30, 2011 both 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 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

In June 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income, as amended, which requires the Company to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted certain provisions of ASU 2011-05 in the first quarter of fiscal year 2013, and it elected to present the total of comprehensive income, the components of income, and the components of other comprehensive income in two separate and consecutive statements.

Recently Issued Pronouncements

In July, 2012, the FASB issued ASU 2012-02, Intangibles – Goodwill and Other (Topic 350) which allows the Company the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that an indefinite-lived intangible asset is impaired, then the entity is not required to take further action. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. The amendments in this update are effective the Company's first quarter of fiscal year 2014. The Company does not expect the adoption of ASU 2012-02 to have a material impact on its consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. This ASU requires the Company to disclose both net and gross information about assets and liabilities that have been offset, if any, and the related arrangements. The disclosures under this new guidance are required to be provided retrospectively for all comparative periods presented. The Company is required to implement this guidance effective the Company's first quarter of fiscal year 2014. The Company does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements.

7


3. CASH, CASH EQUIVALENTS AND INVESTMENTS

The following table represents the Company’s cash, cash equivalents and investments as of June 30, 2012 and March 31, 2012:

(in thousands)
 
June 30, 2012
 
March 31, 2012
 
 
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
 
$
159,846

 
$

 
$

 
$
159,846

 
$
147,338

 
$

 
$

 
$
147,338

Cash equivalents
 
44,792

 
1

 

 
44,793

 
61,996

 
2

 
(1
)
 
61,997

Total Cash and cash equivalents
 
$
204,638

 
$
1

 
$

 
$
204,639

 
$
209,334

 
$
2

 
$
(1
)
 
$
209,335

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
$
85,564

 
$
22

 
$
(15
)
 
$
85,571

 
$
61,898

 
$
22

 
$
(24
)
 
$
61,896

Commercial Paper
 
14,124

 
6

 
(1
)
 
14,129

 
20,041

 
1

 
(3
)
 
20,039

Corporate Bonds
 
46,111

 
53

 
(14
)
 
46,150

 
38,300

 
60

 
(4
)
 
38,356

Certificates of Deposit ("CDs")
 
4,882

 
2

 

 
4,884

 
4,883

 
3

 

 
4,886

Total Short-term investments
 
$
150,681

 
$
83

 
$
(30
)
 
$
150,734

 
$
125,122

 
$
86

 
$
(31
)
 
$
125,177

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
$
10,146

 
$
9

 
$
(2
)
 
$
10,153

 
$
29,814

 
$
24

 
$
(1
)
 
$
29,837

Corporate Bonds
 
19,118

 
42

 
(3
)
 
19,157

 
25,507

 
29

 
(26
)
 
25,510

Total Long-term investments
 
$
29,264

 
$
51

 
$
(5
)
 
$
29,310

 
$
55,321

 
$
53

 
$
(27
)
 
$
55,347

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total cash, cash equivalents and investments
 
$
384,583

 
$
135

 
$
(35
)
 
$
384,683

 
$
389,777

 
$
141

 
$
(59
)
 
$
389,859


As of June 30, 2012 and March 31, 2012, 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, 2012 and March 31, 2012:

(in thousands)
 
June 30, 2012
 
March 31, 2012
 
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Due in 1 year or less
 
$
195,473

 
$
195,527

 
$187,118
 
$187,174
Due in 1 to 3 years
 
29,264

 
29,310

 
55,321

 
55,347

Total
 
$
224,737

 
$
224,837

 
$242,439
 
$242,521

The Company did not incur any material realized or unrealized net gains or losses in the three months ended June 30, 2012 or 2011.


8


4. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS

Accounts receivable, net:

 
 
June 30,
 
March 31,
(in thousands)
 
2012
 
2012
Accounts receivable
 
$
130,269

 
$
133,233

Provisions for returns
 
(7,700
)
 
(7,613
)
Provisions for promotions, rebates and other
 
(13,451
)
 
(12,756
)
Provisions for doubtful accounts and sales allowances
 
(818
)
 
(1,093
)
Accounts receivable, net
 
$
108,300

 
$
111,771


Inventory, net:

 
 
June 30,
 
March 31,
(in thousands)
 
2012
 
2012
Raw materials
 
$
13,920

 
$
14,062

Work in process
 
2,825

 
2,740

Finished goods
 
42,187

 
36,911

Inventory, net
 
$
58,932

 
$
53,713


Property, plant and equipment, net:

 
 
June 30,
 
March 31,
(in thousands)
 
2012
 
2012
Land
 
$
13,961

 
$
6,531

Buildings and improvements (useful life: 7-30 years)
 
71,571

 
67,417

Machinery and equipment (useful life: 2-10 years)
 
89,459

 
90,643

Software (useful life: 5-6 years)
 
28,617

 
28,951

Construction in progress
 
4,376

 
2,323

 
 
207,984

 
195,865

Accumulated depreciation and amortization
 
(119,234
)
 
(119,706
)
   Property, plant and equipment, net
 
$
88,750

 
$
76,159


Depreciation and amortization for the three months ended June 30, 2012 and 2011 was $3.7 million and $3.3 million, respectively.

Included in Software are unamortized capitalized software costs of $6.2 million and $6.7 million at June 30, 2012 and March 31, 2012, respectively. Amortization related to capitalized software costs was immaterial for the three months ended June 30, 2012 and 2011.

Accrued Liabilities:

 
 
June 30,
 
March 31,
(in thousands)
 
2012
 
2012
Employee compensation and benefits
 
$
24,040

 
$
24,458

Warranty obligation
 
13,042

 
13,346

Accrued advertising and sales and marketing
 
1,614

 
1,317

Accrued other
 
11,908

 
12,724

Accrued liabilities
 
$
50,604

 
$
51,845


9



Changes in the warranty obligation during the three months ended June 30, 2012, which are included as a component of Accrued liabilities in the Condensed consolidated balance sheets, are as follows:

 
Three Months Ended
(in thousands)
June 30, 2012
 
 
Warranty obligation at March 31, 2012
$
13,346

Warranty provision relating to products shipped
3,729

Deductions for warranty claims processed
(4,033
)
Warranty obligation at June 30, 2012
$
13,042


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, 2012:

(in thousands)
 
Level 1
 
Level 2
 
Total
Cash and cash equivalents:
 
 
 
 
 
 
Cash
 
$
159,846

 
$

 
$
159,846

U.S. Treasury Bills
 
25,000

 

 
25,000

Commercial Paper
 

 
19,793

 
19,793

Short-term investments:
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
1,501

 
84,070

 
85,571

Commercial Paper
 

 
14,129

 
14,129

Corporate Bonds
 

 
46,150

 
46,150

CDs
 

 
4,884

 
4,884

Long-term investments:
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
5,150

 
5,003

 
10,153

Corporate Bonds
 

 
19,157

 
19,157

Other current assets:
 
 
 
 
 
 
Derivative assets
 

 
3,029

 
3,029

Total assets measured at fair value
 
$
191,497

 
$
196,215

 
$
387,712

 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
Derivative liabilities
 
$
14

 
$
580

 
$
594



10


Fair Values as of March 31, 2012:

(in thousands)
 
Level 1
 
Level 2
 
Total
Cash and cash equivalents:
 
 
 
 
 
 
Cash
 
$
147,338

 
$

 
$
147,338

U.S. Treasury Bills
 
50,000

 

 
50,000

Commercial Paper
 

 
11,997

 
11,997

Short-term investments:
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
12,898

 
48,998

 
61,896

Commercial Paper
 

 
20,039

 
20,039

Corporate Bonds
 

 
38,356

 
38,356

CDs
 

 
4,886

 
4,886

Long-term investments:
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
6,647

 
23,190

 
29,837

Corporate Bonds
 

 
25,510

 
25,510

Other current assets:
 
 
 
 
 
 
Derivative assets
 

 
2,658

 
2,658

Total assets measured at fair value
 
$
216,883

 
$
175,634

 
$
392,517

 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
Derivative liabilities
 
$
7

 
$
714

 
$
721


Refer to Note 11, Foreign Currency Derivatives, which discloses the nature of the Company's derivative assets and liabilities as of June 30, 2012 and March 31, 2012.

Level 1 financial assets consist of cash and U.S. Treasury Bills. Level 1 financial liabilities consist of derivative contracts that have closed but have not settled. 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. The fair value of Level 2 investment securities is determined based on other observable inputs, including multiple non-binding quotes from independent pricing services. Non-binding quotes are based on proprietary valuation models that are prepared by the independent pricing services and use algorithms based on inputs such as observable market data, quoted market prices for similar securities, issuer spreads and internal assumptions of the broker. The Company corroborates the reasonableness of non-binding quotes received from the independent pricing services using a variety of techniques depending on the underlying instrument, including: (i) comparing them to actual experience gained from the purchases and maturities of investment securities, (ii) comparing them to internally developed cash flow models based on observable inputs, and (iii) monitoring changes in ratings of similar securities and the related impact on fair value. The fair value of Level 2 derivative foreign currency call and put option contracts is determined using pricing models that use observable market inputs.

During the three months ended June 30, 2012, the Company did not have any transfers between Level 1 and Level 2 fair value instruments.


11


6. COMMITMENTS AND CONTINGENCIES

Minimum Future Rental Payments

The Company leases certain equipment and facilities under operating leases expiring in various years through fiscal year 2022.  Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of one year as of June 30, 2012 are as follows:

Fiscal Year Ending March 31,
 
(in thousands)
2013 (remaining 9 months)
 
$
3,915

2014
 
4,329

2015
 
1,657

2016
 
917

2017
 
229

Thereafter
 
633

Total minimum future rental payments
 
$
11,680

Total rent expense for operating leases was $1.4 million for the three months ended June 30, 2012 and 2011.

Indemnifications

The Company entered into an Asset Purchase Agreement ("Agreement") on October 2, 2009 to sell Altec Lansing, its AEG segment. Under the Agreement, as amended, the Company made representations and warranties to the purchaser about the condition of AEG, including matters relating to intellectual property, taxes, employee or environmental matters, and fraud.  No indemnification costs have been recorded as of June 30, 2012 or March 31, 2012.

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 and 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 involved in various legal proceedings arising in the normal course of conducting business. For such legal proceedings, where applicable, the Company has accrued an amount that reflects the aggregate liability deemed probable and estimable, but this amount is not material to the Company's consolidated financial condition, results of operations or cash flows. The Company is not able to estimate an amount or range of any reasonably possible additional losses because of the preliminary nature of many of these proceedings, the difficulty in ascertaining the applicable facts relating to many of these proceedings, the variable treatment of claims made in many of these proceedings and the difficulty of predicting the settlement value of many of these proceedings; however, based upon the Company's historical experience, the resolution of these proceedings is not expected to have a material effect on the Company's consolidated financial condition, results of operations or cash flows.

7. CREDIT AGREEMENT

On May 9, 2011, the Company entered into a credit agreement with Wells Fargo Bank, National Association ("Bank"), which was most recently amended in August 2012 (as amended, the "Credit Agreement"). The Credit Agreement provides for a $100.0 million unsecured revolving line of credit ("line of credit") and if requested by the Company, the Bank may increase its commitment thereunder by up to $100.0 million, for a total facility size of up to $200.0 million.


12


As of June 30, 2012, the Company had outstanding borrowings of $42.0 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, 2015. 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 $200.0 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 June 30, 2012.

8. STOCK-BASED COMPENSATION

The following table summarizes the amount of stock-based compensation included in the Condensed consolidated statements of operations:

 
 
Three Months Ended
 
 
June 30,
(in thousands)
 
2012
 
2011
Cost of revenues
 
$
596

 
$
546

 
 


 


Research, development and engineering
 
1,124

 
947

Selling, general and administrative
 
2,900

 
2,686

Stock-based compensation included in operating expenses
 
4,024

 
3,633

Total stock-based compensation
 
4,620

 
4,179

Income tax benefit
 
(1,382
)
 
(1,282
)
Total stock-based compensation, net of tax
 
$
3,238

 
$
2,897



13


Stock Options

The following is a summary of the Company’s stock option activity during the three months ended June 30, 2012:

 
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, 2012
3,304

 
$
26.47

 
 
 
 
Options granted
200

 
$
33.27

 
 
 
 
Options exercised
(63
)
 
$
20.83

 
 
 
 
Options forfeited or expired
(97
)
 
$
34.76

 
 
 
 
Outstanding at June 30, 2012
3,344

 
$
26.75

 
3.7
 
$
24,187

Vested and expected to vest at June 30, 2012
3,303

 
$
26.66

 
3.6
 
$
24,148

Exercisable at June 30, 2012
2,427

 
$
24.26

 
2.8
 
$
22,900


The total intrinsic value of options exercised during the three months ended June 30, 2012 and 2011 was $0.8 million and $9.1 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 three months ended June 30, 2012 was $1.3 million.

As of June 30, 2012, total unrecognized compensation cost related to unvested stock options was $9.7 million, which is expected to be recognized over a weighted average period of 2.0 years.

Restricted Stock

The following is a summary of the Company’s restricted stock activity dring the three months ended June 30, 2012:

 
Number of
Shares
 
Weighted Average Grant Date Fair Value
 
(in thousands)
 
 
Non-vested at March 31, 2012
815

 
$
33.37

Restricted stock granted
441

 
$
31.10

Restricted stock vested
(110
)
 
$
33.75

Restricted stock forfeited
(37
)
 
$
31.79

Non-vested at June 30, 2012
1,109

 
$
32.48


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 three months ended June 30, 2012 and 2011 was $31.10 and $36.60, respectively. The total fair value of restricted stock that vested during the three months ended June 30, 2012 and 2011 was $3.7 million and $1.3 million, respectively.

As of June 30, 2012, total unrecognized compensation cost related to unvested restricted stock was $25.4 million, which is expected to be recognized over a weighted average period of 2.9 years.  


14


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 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
 
 
2012
 
2011
Expected volatility
 
 
41.7
%
 
44.4
%
Risk-free interest rate
 
 
0.6
%
 
1.4
%
Expected dividends
 
 
1.3
%
 
0.6
%
Expected life (in years)
 
 
4.3

 
4.0

Weighted-average grant date fair value
 
 
$
10.30

 
$
12.58


The Company recognizes the grant-date fair value of stock-based compensation as compensation expense 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, 2012 and 2011.

9. COMMON STOCK REPURCHASES

From time to time, the Company's Board of Directors ("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 until such time as they are retired or re-issued. Repurchases by the Company pursuant to the Board authorized programs during the three months ended June 30, 2012 and 2011 are discussed below. As of June 30, 2012, there were 104,613 remaining shares authorized for repurchase.

Open Market Repurchases

Under the Board authorized programs, in the three months ended June 30, 2012 and 2011, respectively, the Company repurchased 529,000 and 270,000 shares of its common stock in the open market for a total cost of $16.5 million and $9.5 million, respectively, and an average price per share of $31.14 and $35.34, respectively. The Company financed the repurchases using a combination of funds generated from operations and borrowings under its revolving line of credit.

In addition, the Company withheld shares valued at $1.3 million in the three months ended June 30, 2012, compared to $0.7 million in the three months ended June 30, 2011, 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 that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company.

Privately Negotiated Transactions

During the three months ended June 30, 2011, pursuant to a Board authorized accelerated share repurchase ("ASR") program, the Company entered into two separate Master Confirmation and Supplemental Confirmations ("ASR Agreements") with Goldman, Sachs & Co. (“Goldman”). Under these ASR Agreements, the Company paid Goldman $100.0 million in exchange for an initial delivery of 2,183,014 shares during the three months ended June 30, 2011. Based on the number of shares delivered and the Company's closing stock price on the date at which the major terms of the ASR Agreements was reached, the total consideration allocated to stock repurchases as of June 30, 2011 was $81.1 million. The remaining $18.9 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.


15


10. ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive income, net of tax, are as follows:

(in thousands)
June 30, 2012
 
March 31, 2012
Accumulated unrealized gain on cash flow hedges
$
2,405

 
$
1,904

Accumulated foreign currency translation adjustments
4,056

 
4,392

Accumulated unrealized gain on investments
74

 
61

Accumulated other comprehensive income
$
6,535

 
$
6,357


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 in 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. Refer to Note 5, Fair Value Measurements, for disclosure of the Company's fair value hierarchy for its derivative instruments.

As of June 30, 2012, 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 ("USD") equivalent at June 30, 2012:

 
Local Currency
 
USD Equivalent
 
Position
 
Maturity
 
(in thousands)
 
(in thousands)
 
 
 
 
EUR
16,400

 
$
20,765

 
Sell EUR
 
1 month
GBP
2,600

 
$
4,077

 
Sell GBP
 
1 month
AUD
6,600

 
$
6,733

 
Sell AUD
 
1 month

Foreign currency transactions, net of the effect of forward contract hedging activity, resulted in immaterial net losses in the three months ended June 30, 2012 compared to immaterial gains in the three months ended June 30, 2011, which are included in Interest and other income, net in the Condensed consolidated statements 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 currency options.  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 ("AOCI") 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, 2012, the Company had foreign currency put and call option contracts of approximately €60.1 million and £19.6 million.  As of March 31, 2012, the Company had foreign currency put and call option contracts of approximately €63.7 million and £20.0 million.


16


In the three months ended June 30, 2012, realized gains on cash flow hedges of $1.9 million were recognized in Net revenues, compared to realized losses of $2.0 million for the same period in the prior year. The Company expects to reclassify the entire gain of $2.6 million, net of tax, in AOCI as of June 30, 2012 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 AOCI 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, 2012 and March 31, 2012, the Company had foreign currency swap contracts of approximately MX$237.5 million and MX$317.5 million, respectively.

In the three months ended June 30, 2012 and 2011, there were no material realized gains or losses on MX$ cash flow hedges recognized in Cost of revenues in the Condensed consolidated statement of operations and there were no material losses in AOCI as of June 30, 2012 to be recognized 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$ cross-currency swaps and approximate USD Equivalent at June 30, 2012:

 
Local Currency
 
USD Equivalent
 
Position
 
Maturity
 
(in thousands)
 
(in thousands)
 
 
 
 
 
MX$
237,500

 
$
17,332

 
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

The fair value of derivative contracts under the Derivatives and Hedging Topic of the FASB ASC was 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)
 
2012
 
2012
 
2012
 
2012
Foreign exchange contracts designated as cash flow hedges
 
$
3,029

 
$
2,658

 
$
594

 
$
721


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, 2012 and March 31, 2012, and the pre-tax impact of designated derivative contracts on AOCI for the three months ended June 30, 2012:

(in thousands)
 
Gain (loss) included in AOCI as of March 31, 2012
 
Amount of gain (loss)
recognized in AOCI
(effective portion)
 
Amount of gain (loss)
reclassified from AOCI
to income (loss)
(effective portion)
 
Gain (loss) included in AOCI as of June 30, 2012
Foreign exchange contracts designated as cash flow hedges
 
$
1,937

 
$
2,192

 
$
1,694

 
$
2,435



17


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)
 
2012
 
2011
Gain (loss) on foreign exchange contracts designated as cash flow hedges
 
$
1,694

 
$
(1,614
)

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, net in the Condensed consolidated statements of operations was as follows:

 
 
Three Months Ended
 
 
June 30,
(in thousands)
 
2012
 
2011
Gain (loss) on foreign exchange contracts
 
$
1,467

 
$
(797
)

12. INCOME TAXES

The effective tax rate for the three months ended June 30, 2012 was 26.6%, compared to 25.1% for the same period in the prior year.  The higher effective tax rate for the three months ended June 30, 2012 is due primarily to a smaller proportion of income earned in foreign jurisdictions during the quarter which is taxed at lower rates and the expiration of the federal tax research credit in December 2011. 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.

The Company's provision for income taxes does not include provisions for U.S. income taxes and foreign withholding taxes associated with the repatriation of undistributed earnings of certain foreign operations that the Company intends to reinvest indefinitely in the foreign operations. If these earnings were distributed to the U.S. in the form of dividends or otherwise, the Company would be subject to additional U.S. income taxes, subject to an adjustment for foreign tax credits, and foreign withholding taxes. The Company's current plans do not require repatriation of earnings from foreign operations to fund the U.S. operations because it generates sufficient domestic operating cash flow and has access to external funding under its line of credit. As a result, the Company does not expect a material impact on its business or financial flexibility with respect to undistributed earnings of its foreign operations.

As of June 30, 2012, the Company had $11.5 million of unrecognized tax benefits, compared to $11.1 million at March 31, 2012 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 June 30, 2012 as compared to $1.7 million as of March 31, 2012.  No penalties have been accrued.

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 under examination by the Internal Revenue Service for its 2010 tax year and 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 year 2006, except for the United Kingdom which has been concluded for tax years prior to fiscal year 2010.


18


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.

13. COMPUTATION OF EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per common share for the three months ended June 30, 2012 and 2011:

 
 
Three Months Ended
 
 
June 30,
(in thousands, except per share data)
 
2012
 
2011
Numerator:
 
 
 
 
Net income
 
$
23,563

 
$
26,731

 
 
 
 
 
Denominator:
 
 
 
 

Weighted average common shares-basic
 
41,660

 
46,688

Dilutive effect of employee equity incentive plans
 
910

 
1,372

Weighted average common shares-diluted
 
42,570

 
48,060

 
 
 
 
 
Basic earnings per common share
 
$
0.57

 
$
0.57

 
 
 
 
 
Diluted earnings per common share
 
$
0.55

 
$
0.56

 
 
 
 
 
Potentially dilutive securities excluded from diluted earnings per common share because their effect is anti-dilutive
 
1,100

 
1,489


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 personal computer ("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 for the three months ended June 30, 2012 and 2011:

 
 
Three Months Ended
 
 
June 30,
(in thousands)
 
2012
 
2011
Net revenues from unaffiliated customers:
 
 
 
 
Office and Contact Center
 
$
134,033

 
$
130,999

Mobile
 
36,157

 
32,164

Gaming and Computer Audio
 
6,789

 
7,395

Clarity
 
4,386

 
5,042

Total net revenues
 
$
181,365

 
$
175,600



19


For reporting purposes, revenue is attributed to each geographic region based on the location of the customer. Prior to the first quarter of fiscal year 2013, net revenues from the Middle East were included in Europe, Middle East and Africa ("EMEA"). In the first quarter of fiscal year 2013, net revenues from the Middle East were included in Asia Pacific and prior period net revenues have been reclassified to conform to this presentation. The following table presents Net revenues by geography for the three months ended June 30, 2012 and 2011:

 
 
Three Months Ended
 
 
June 30,
(in thousands)
 
2012
 
2011
Net revenues from unaffiliated customers:
 
 
 
 
U.S.
 
$
104,078

 
$
100,291

 
 
 
 
 
Europe and Africa
 
41,576

 
42,141

Asia Pacific
 
23,579

 
20,258

Americas, excluding U.S.
 
12,132

 
12,910

Total international net revenues
 
77,287

 
75,309

Total net revenues
 
$
181,365

 
$
175,600


No customer accounted for 10% or more of Net revenues for the three months ended June 30, 2012 and 2011, nor did any one customer account for 10% or more of Accounts receivable, net in the Condensed consolidated balance sheets at June 30, 2012 and March 31, 2012.

15. SUBSEQUENT EVENTS

On August 6, 2012, the Board declared a cash dividend of $0.10 per share of the Company's common stock, payable on September 10, 2012 to stockholders of record at the close of business on August 20, 2012.

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 (“Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”).  Forward-looking statements may generally be identified by the use of such words as “expect,” “anticipate,” “believe,” “intend,” “plan,” "potential," “will,” “shall” or variations of such words 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 selling, general and administrative expenses, (v) our future tax rate, (vi) our anticipated capital expenditures for the remainder of fiscal year 2013, (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, 2012.  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 designer, manufacturer, and marketer of lightweight communications headsets, telephone headset systems, and accessories for the worldwide 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 55 countries through a worldwide network of distributors, retailers, wireless carriers, original equipment manufacturers (“OEMs”), and telephony service providers. We have well-developed distribution channels in North America, Europe, Australia and New Zealand, where use of our products is widespread. Our distribution channels in other regions of the world are less mature and, while we primarily serve the contact center markets in those regions, we continue to expand into the office, mobile and entertainment, digital audio and specialty telephone markets in those regions and additional international locations.

We believe Unified Communications (“UC”) represents the key long-term driver of our revenue and profit growth, and it continues to be our primary focus area. Business communications are being transformed from voice-centric systems supported by traditional PBX infrastructure to communication systems that are fully integrated with voice, video, and data and are supported by feature rich UC software. With this transformation, the requirement for a traditional headset used only for voice communications continues to evolve into the need for a device that delivers contextual intelligence, providing the ability to reach people using the mode of communication that is most effective, on the device that is most convenient, and with control over when and how they can be reached. Our portfolio of UC solutions combines hardware with advanced sensor technology and capitalizes on contextual intelligence, addressing the needs of the constantly changing business environments and evolving work styles to make connecting easier and by sharing presence information to convey user availability and other contextual information. We believe UC systems will become more commonly adopted by enterprises to reduce costs and improve collaboration, and we believe our solutions with Simply Smarter CommunicationsTM technology will be an important part of the UC environment.

The contact center is the most mature market in which we participate, and we expect this market to grow slowly over the long-term. Given the migration to UC by enterprises globally, we also expect the market for headsets for non-UC enterprise applications to grow very slowly. We believe the growth of UC will increase overall headset adoption in enterprise environments and we therefore expect most of the growth in Office and Contact Center ("OCC") over the next five years to come from headsets designed for UC.


21


In the Mobile Bluetooth market, following a period of market share loss due to a less competitive product portfolio as a result of prioritizing UC investments, we introduced several new products at the end of our fiscal year 2012. The Bluetooth market in U.S. retail markets shows a small growth overall, with a doubling of the stereo product category compared to a year ago mostly offset by a decline in the mono product category. With the new products we launched, we gained market share in the mono product category and held share in the fast-growing stereo category. We believe our recent and planned investments will help position us to maintain share in the overall market for Bluetooth headsets.

Integral to our core research and development have been investments in firmware and software engineering to enhance the broad compatibility of our products in the enterprise systems with which they will be deployed, and development of value-added software applications for business users has been the focus of our core research and development efforts. We believe our investments in strategic architecting may allow us to differentiate our products and sustain strong long-term gross margins. We continue to strengthen our strategic partnerships with platform suppliers to ensure that our products are compatible with all major platforms as UC usage becomes an essential part of a unified work environment.

We remain cautious about the macroeconomic environment and will monitor our expenditures accordingly; however, we will continue to invest strategically in our long-term growth opportunities. We will continue focusing on innovative product development through our core research and development efforts, including the use of software and services as part of our portfolio. As part of our commitment to UC, in May 2012, we announced the Plantronics Developer Connection (the “PDC”), which provides a software developer kit allowing registered developers access to a rich set of tools and providing a forum to interact, share ideas and develop innovative applications. We believe the PDC is a valuable resource for application developers to leverage the contextual intelligence built into our headsets, ultimately providing a broad array of capabilities such as user authentication, customer information retrieval based on incoming mobile calls, and connection of a user's physical actions in the real world to the virtual world. We will also continue to grow our sales force and increase marketing and other customer service and support as we expand key strategic partnerships to market our UC products.  We believe we have an excellent position in the UC market and a well-deserved reputation for quality and service that we will continually strive to earn through ongoing investment and strong execution.

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)
 
2012
 
2011
Net revenues
 
$
181,365

 
100.0
%
 
$
175,600

 
100.0
%
Cost of revenues
 
83,669

 
46.1
%
 
81,542

 
46.4
%
Gross profit
 
97,696

 
53.9
%
 
94,058

 
53.6
%
Operating expenses:
 
 
 
 

 
 
 
 

Research, development and engineering
 
19,696

 
10.9
%
 
16,906

 
9.6
%
Selling, general and administrative
 
45,904

 
25.3
%
 
42,116

 
24.0
%
Total operating expenses
 
65,600

 
36.2
%
 
59,022

 
33.6
%
Operating income
 
32,096

 
17.7
%
 
35,036

 
20.0
%
Interest and other income, net
 
12

 
%
 
641

 
0.4
%
Income before income taxes
 
32,108

 
17.7
%
 
35,677

 
20.4
%
Income tax expense
 
8,545

 
4.7
%
 
8,946

 
5.1
%
Net income
 
$
23,563

 
13.0
%
 
$
26,731

 
15.3
%


22


NET REVENUES

 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands except percentages)
 
2012
 
2011
 
(Decrease)
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
Office and Contact Center
 
$
134,033

 
$
130,999

 
$
3,034

 
2.3
 %
Mobile
 
36,157

 
32,164

 
3,993

 
12.4
 %
Gaming and Computer Audio
 
6,789

 
7,395

 
(606
)
 
(8.2
)%
Clarity
 
4,386

 
5,042

 
(656
)
 
(13.0
)%
Total net revenues
 
$
181,365

 
$
175,600

 
$
5,765

 
3.3
 %

OCC products represent our largest source of revenues, while Mobile products represent our largest unit volumes.  Net revenues may vary due to seasonality, the timing of new product introductions and discontinuation of existing products, discounts and other incentives, and channel mix. Net revenues derived from sales into the retail channel typically account for a seasonal increase in our net revenues in the third quarter of our fiscal year.

Net revenues increased in the first quarter of fiscal year 2013 from the first quarter of fiscal year 2012 as a result of higher Mobile revenues due to market share gains in Asia Pacific, additional product placements in U.S. retail markets, and growth in OCC revenues due to continued growth in UC revenues, offset in part by an unfavorable currency impact resulting primarily from a stronger U.S. Dollar ("USD") against the Euro.

Geographical Information
 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands except percentages)
 
2012
 
2011
 
(Decrease)
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
U.S.
 
$
104,078

 
$
100,291

 
$
3,787

 
3.8
 %
As a percentage of net revenues
 
57.4
%
 
57.1
%
 
0.3

 
ppt.
Europe and Africa
 
41,576

 
42,141

 
(565
)
 
(1.3
)%
Asia Pacific
 
23,579

 
20,258

 
3,321

 
16.4
 %
Americas, excluding U.S.
 
12,132

 
12,910

 
(778
)
 
(6.0
)%
Total international net revenues
 
77,287

 
75,309

 
1,978

 
2.6
 %
As a percentage of net revenues
 
42.6
%
 
42.9
%
 
(0.3
)
 
ppt.
Total net revenues
 
$
181,365

 
$
175,600

 
$
5,765

 
3.3
 %

Prior to the first quarter of fiscal year 2013, net revenues from the Middle East were included in Europe, Middle East and Africa ("EMEA"). In the first quarter of fiscal year 2013, net revenues from the Middle East were included in Asia Pacific and prior period net revenues have been reclassified to conform to this presentation.

U.S. net revenues as a percentage of total net revenues remained flat in the three months ended June 30, 2012, compared to the same period in the prior year.  U.S. net revenues increased in the three months ended June 30, 2012, compared to the same period in the prior year, due primarily to an increase in OCC net revenues, primarily as a result of increased UC revenues, as well as an increase in Mobile net revenues due to increased product placements in U.S. retail markets. In the U.S. retail markets, the overall Bluetooth product category grew by only 1% compared to the same quarter a year ago.  

International net revenues remained flat as a percentage of total net revenues in the three months ended June 30, 2012, compared to the same period in the prior year. International net revenues increased in the three months ended June 30, 2012, compared to the same period in the prior year due to growth in Asia Pacific in both the Mobile and OCC product categories, partially offset by small decreases in revenues in the Americas, excluding U.S. and Europe and Africa. Mobile net revenues increased due to increased product placements in several emerging market countries, and OCC net revenues increased due mainly to growth in UC.


23


COST OF REVENUES AND GROSS PROFIT

Cost of revenues consists primarily of direct manufacturing and contract manufacturer costs, warranty expense, freight expense, depreciation, duty expense, reserves for excess and obsolete inventory, royalties, and an allocation of overhead expenses, including IT and facilities costs.  

 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands except percentages)
 
2012
 
2011
 
(Decrease)
Net revenues
 
$
181,365

 
$
175,600

 
$
5,765

 
3.3
%
Cost of revenues
 
83,669

 
81,542

 
2,127

 
2.6
%
Gross profit
 
$
97,696

 
$
94,058

 
$
3,638

 
3.9
%
Gross profit %
 
53.9
%
 
53.6
%
 
0.3

 
ppt.

As a percentage of net revenues, gross profit increased slightly in the three months ended June 30, 2012 compared to the same quarter a year ago due primarily to lower warranty and freight costs compared to the same quarter a year ago. The decrease in warranty and freight costs was partially offset by lower product margins associated with an unfavorable product mix reflecting proportionately lower OCC revenues and an unfavorable currency impact from a stronger USD, particularly against the Euro, and slightly higher manufacturing costs compared to the three months ended June 30, 2011.

There are significant variances in gross profit percentages 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 accurately 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, 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, travel expenses, 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)
 
2012
 
2011
 
(Decrease)
Research, development and engineering
 
$
19,696

 
$
16,906

 
$
2,790

 
16.5
%
% of net revenues
 
10.9
%
 
9.6
%
 
1.3

 
ppt.

For the three months ended June 30, 2012, research, development and engineering expenses increased compared to the same quarter a year ago due primarily to a $2.1 million increase in compensation expenses mostly as a result of increased headcount, as well as slightly higher outsourced project expenses to support our software and product development and our UC strategy.


24


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, facilities, legal costs, and human resources.

 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands except percentages)
 
2012
 
2011
 
(Decrease)
Selling, general and administrative
 
$
45,904

 
$
42,116

 
$
3,788

 
9.0
%
% of net revenues
 
25.3
%
 
24.0
%
 
1.3

 
ppt.

In the three months ended June 30, 2012, compared to the same quarter a year ago, the increase in selling, general and administrative expenses was driven primarily by $3.6 million in higher compensation costs from increased headcount as well as additional promotional costs, both of which support our revenue growth and UC strategy.

OPERATING INCOME

 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands except percentages)
 
2012
 
2011
 
(Decrease)
Operating income
 
$
32,096

 
$
35,036

 
$
(2,940
)
 
(8.4
)%
% of net revenues
 
17.7
%
 
20.0
%
 
(2.3
)
 
ppt.

In the three months ended June 30, 2012, compared to the same quarter a year ago, operating income decreased due to higher operating expenses related to our investments in software and UC to support our long-term strategy, offset in part by the increase in Net revenues.

INTEREST AND OTHER INCOME, NET

 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands except percentages)
 
2012
 
2011
 
(Decrease)
Interest and other income, net
 
$
12

 
$
641

 
$
(629
)
 
(98.1
)%
% of net revenues
 
%
 
0.4
%
 
(0.4
)
 
ppt.

In the three months ended June 30, 2012, compared to the same period a year ago, interest and other income decreased due to foreign exchange losses, while in the prior year we experienced foreign exchange gains primarily as a result of fluctuations in the U.S. Dollar against the Great Britain Pound and the Euro.


25


INCOME TAX EXPENSE

 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands except percentages)
 
2012
 
2011
 
(Decrease)
Income before income taxes
 
$
32,108

 
$
35,677

 
$
(3,569
)
 
(10.0
)%
Income tax expense
 
8,545

 
8,946

 
(401
)
 
(4.5
)%
Net income
 
$
23,563

 
$
26,731

 
$
(3,168
)
 
(11.9
)%
Effective tax rate
 
26.6
%
 
25.1
%
 
1.5

 
ppt.

The higher effective tax rate for the three months ended June 30, 2012 is due primarily to smaller proportion of income earned in foreign jurisdictions during the quarter which is taxed at lower rates and the expiration of the federal tax research credit in December 2011. Our 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.  Our 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.

Our provision for income taxes does not include provisions for U.S. income taxes and foreign withholding taxes associated with the repatriation of undistributed earnings of certain foreign operations that we intend to reinvest indefinitely in our foreign operations. If these earnings were distributed to the U.S. in the form of dividends or otherwise, we would be subject to additional U.S. income taxes, subject to an adjustment for foreign tax credits, and foreign withholding taxes. Our current plans do not require repatriation of earnings from foreign operations to fund our U.S. operations because we generate sufficient domestic operating cash flow and have access to external funding under our line of credit. As a result, we do not expect a material impact on our business or financial flexibility with respect to undistributed earnings of our foreign operations.

As of June 30, 2012, we had $11.5 million of unrecognized tax benefits compared to $11.1 million at March 31, 2012 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.

Our 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 June 30, 2012 as compared to $1.7 million as of March 31, 2012.  No penalties have been accrued.

We and our subsidiaries are subject to taxation in various foreign and state jurisdictions as well as in the U.S.  We are under examination by the Internal Revenue Service for our 2010 tax year and the California Franchise Tax Board for our 2007 and 2008 tax years.  Foreign income tax matters for material tax jurisdictions have been concluded for tax years prior to fiscal year 2006, except for the United Kingdom which has been concluded for tax years prior to fiscal year 2010.

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 any 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.


26


FINANCIAL CONDITION

The table below provides selected Condensed consolidated cash flow information for the periods presented:

 
 
Three Months Ended
 
 
June 30,
(in thousands)
 
2012
 
2011
Cash provided by operating activities
 
$
28,196

 
$
19,223

 
 
 
 
 
Capital expenditures and other assets
 
$
(16,577
)
 
$
(3,935
)
Cash provided by maturities and sales of investments, net of investment purchases
 
(33
)
 
2,979

Cash used for investing activities
 
$
(16,610
)
 
$
(956
)
 
 
 
 
 
Repurchase of common stock, including equity forward contract
 
$
(16,473
)
 
$
(109,540
)
Proceeds from issuance of common stock
 
1,319

 
11,515

Net proceeds from revolving line of credit
 
5,000

 

Payment of cash dividends
 
(4,247
)
 
(2,427
)
Cash provided by (used for) other financing activities
 
(1,150
)
 
1,865

Cash used for financing activities
 
$
(15,551
)
 
$
(98,587
)

Cash Provided by Operating Activities

Cash provided by operating activities for the three months ended June 30, 2012 consisted of net income of $23.6 million, non-cash charges of $8.7 million and working capital uses of cash of $4.0 million.  Non-cash charges consisted primarily of $4.6 million of stock-based compensation, $3.8 million of depreciation and amortization and a $1.3 million income tax benefit associated with stock option exercises, offset in part by a $1.7 million use from the change in deferred income taxes. Working capital uses of cash consisted primarily of a decrease in accounts payable related to the timing of payments made to vendors, and an increase in inventory primarily for a last time buy of certain components to support our OCC product line.  The working capital uses of cash were offset in part by working capital sources of cash primarily from an increase in income taxes payable due to the timing of tax payments and a decrease in accounts receivable. The days sales outstanding (“DSO”) as of June 30, 2012 decreased to 54 days from 56 days as of June 30, 2011 primarily as a result of higher net revenues and lower average accounts receivable in the three months ended June 30, 2012 than during the same period in the prior year. Inventory turns were 5.7 for both the three months ended June 30, 2012 and 2011.

Cash provided by 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 and a $2.1 million use 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 working capital uses of cash were offset in part by working capital sources of cash, primarily from a decrease in prepaid income taxes.

Cash Used for Investing Activities

Net cash used for investing activities for the three months ended June 30, 2012 consisted primarily of $35.1 million for the purchase of short-term and $8.4 million for the purchase of long-term investments, together with capital expenditures of $16.6 million, of which $11.0 million related to the acquisition of land and a new manufacturing facility in Mexico that will replace and consolidate our existing leased facilities, as well as building improvements, IT projects and tooling.  These uses of cash were offset in part by proceeds of $43.5 million from sales and maturities of short-term investments.

Net cash used for investing activities for the three months ended June 30, 2011 consisted primarily of $68.1 million for the purchase of short-term and $35.1 million for the purchase of long-term investments, together 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 $106.2 million from sales and maturities of short-term and long-term investments.


27


For the remainder of fiscal year 2013, we expect to spend approximately $33.0 million in capital expenditures, consisting primarily of building improvements and additional capital expenditures related to the purchase of our new facility in Tijuana, Mexico, 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 require expenditures for additional facilities and other capital expenditures to support that growth.

Cash Used for Financing Activities

Net cash used for financing activities for the three months ended June 30, 2012 consisted primarily of $16.5 million related to the repurchase of our common stock in the open market, which is described in Note 9, Common Stock Repurchases, of the Notes to Condensed consolidated financial statements in this Quarterly Report on Form 10-Q, and dividend payments of $4.2 million. These uses of cash were partially offset by $5.0 million in net proceeds from our revolving line of credit which were used to fund the common stock repurchases and $1.3 million in proceeds from the exercise of stock options.

Net cash 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, partially offset by $11.5 million in proceeds from the exercise of stock options.

Liquidity and Capital Resources

Our primary discretionary cash requirements have historically been for repurchases of our common stock.  At June 30, 2012, we had working capital of $463.9 million, including $355.4 million of cash, cash equivalents and short-term investments, compared with working capital of $438.0 million, including $334.5 million of cash, cash equivalents and short-term investments at March 31, 2012.  The increase in working capital at June 30, 2012 compared to March 31, 2012 is due primarily to the increase in short-term investments.

Our cash and cash equivalents as of June 30, 2012 consist of U.S. Treasury Bills, Commercial Paper and bank deposits with third party financial institutions.  We monitor bank balances in our operating accounts and adjust the balances as appropriate.  Cash balances are held throughout the world, including substantial amounts held outside of the U.S.  As of June 30, 2012, of our $355.4 million of cash, cash equivalents and short-term investments, $13.0 million is held domestically while $342.4 million is held by foreign subsidiaries. The costs to repatriate our foreign earnings to the U.S. would likely be material; however, our intent is to permanently reinvest our earnings from foreign operations and our current plans do not require us to repatriate them to fund our U.S. operations because we generate sufficient domestic operating cash flow and have access to external funding under our revolving line of credit. For information regarding tax considerations surrounding the undistributed earnings of our foreign operations, refer to Note 12, Income Taxes, of the Notes to Condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

Our investments are intended to establish a high-quality portfolio that preserves principal and meets liquidity needs.  As of June 30, 2012, our investments were composed of U.S. Treasury Bills, Government Agency Securities, Commercial Paper, Corporate Bonds, and Certificates of Deposit (“CDs”).

From time to time, our Board of Directors ("Board") authorizes plans under which we may repurchase shares of our common stock, depending on market conditions, in the open market or through privately negotiated transactions. During the first three months of fiscal year 2012, we repurchased in the open market 529,000 shares of our common stock as part of these publicly announced repurchase programs. The total cost of these repurchases was $16.5 million, with an average price of $31.14 per share. In addition, we withheld 41,947 shares totaling $1.3 million in satisfaction of employee tax withholding obligations upon the vesting of restricted stock granted under our stock plans. There were no privately negotiated transactions during the three months ended June 30, 2012.

As of June 30, 2012, there were 104,613 remaining shares authorized for repurchase, all of which are under the program approved by the Board on March 8, 2012. Refer to Note 9, Common Stock Repurchases, of our Notes to Condensed consolidated financial statements in this form 10-Q for more information regarding our stock repurchase program.


28


In May 2011, we entered into a credit agreement with Wells Fargo Bank, National Association ("Bank"), as most recently amended in August 2012 (as amended, the "Credit Agreement"). The Credit Agreement provides for a $100.0 million unsecured revolving line of credit (the "line of credit") to augment our financial flexibility and if requested by us, the Bank may increase its commitment thereunder by up to $100.0 million, for a total facility of up to $200.0 million.  Principal, together with accrued and unpaid interest, is due on the maturity date, May 9, 2015, and our obligations under the Credit Agreement are guaranteed by our domestic subsidiaries, subject to certain exceptions. As of June 30, 2012, we had outstanding borrowings of $42.0 million under the line of credit. Loans under the Credit Agreement 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 line of credit requires us to comply with the following two financial covenant ratios, in each case at each fiscal quarter end and determined on a rolling four-quarter basis:

maximum ratio of funded debt to earnings before interest, taxes, depreciation and amortization ("EBIDTA"); and,
minimum EBIDTA coverage ratio, which is calculated as interest payments divided by EBIDTA.

As of June 30, 2012, we were in compliance with these ratios by a substantial margin.

In addition, we and our subsidiaries are required to maintain, on a consolidated basis, unrestricted cash, cash equivalents and marketable securities plus availability under the Credit Agreement at the end of each fiscal quarter of at least $200.0 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 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 line of credit 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. As of June 30, 2012, we were in compliance with all covenants under the line of credit.

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, accounts receivable and accounts payable balances.  We record the fair value of our forward-exchange contracts in the Condensed consolidated balance sheets at each reporting period and record any fair value adjustments in our Condensed consolidated statements of operations.  Gains and losses associated with currency rate changes on contracts are recorded within Interest and other income, net in our Condensed consolidated statements of operations, 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 sheets 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, in our Condensed consolidated statements of operations.  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 repurchases of our common stock, the exercise of outstanding stock options, restricted stock grants to employees and the issuance of common stock under our ESPP.  The resulting increase in the number of outstanding shares from these equity grants and issuances 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. 

We believe that our current cash and cash equivalents, short-term investments, cash provided by operations and the availability of additional funds under the 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 us.

29



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, 2012.  At June 30, 2012, unrecognized tax benefits and related interest were $11.5 million and $1.9 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 sheets includes these unrecognized tax benefits.  We do not anticipate making any material cash payments associated with our unrecognized tax benefits within the next 12 months.

CRITICAL ACCOUNTING ESTIMATES

For a complete description of what we believe to be the critical accounting estimates used in the preparation of our Condensed consolidated financial statements, refer to our Annual Report on Form 10-K for the fiscal year ended March 31, 2012, filed with the Securities and Exchange Commission on May 25, 2012.  There have been no changes to our critical accounting estimates during the three months ended June 30, 2012.

Recent Accounting Pronouncements

Recently Adopted Pronouncements

In June 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income, as amended, which requires us to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. We adopted certain provisions of ASU 2011-05 in the first quarter of fiscal year 2013, and we elected to present the total of comprehensive income, the components of income, and the components of other comprehensive income in two separate and consecutive statements.

Recently Issued Pronouncements

In July, 2012, the FASB issued ASU 2012-02, Intangibles – Goodwill and Other (Topic 350) which allows us the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, it is concluded that it is not more likely than not that an indefinite-lived intangible asset is impaired, further action is not required. This ASU also allows us the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. We are required to implement this guidance effective our first quarter of fiscal year 2014. We do not expect the adoption of ASU 2012-02 to have a material impact on our consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. This ASU requires us to disclose both net and gross information about assets and liabilities that have been offset, if any, and the related arrangements. The disclosures under this new guidance are required to be provided retrospectively for all comparative periods presented. We are required to implement this guidance effective our first quarter of fiscal year 2014. We do not expect the adoption of ASU 2011-11 to have a material impact on our consolidated financial statements.


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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

As of June 30, 2012 and March 31, 2012, we reported the following balances in cash and cash equivalents, short-term investments and long-term investments:

(in millions)
 
June 30, 2012
 
March 31, 2012
Cash and cash equivalents
 
$
204.6

 
$
209.3

Short-term investments
 
150.7

 
125.2

Long-term investments
 
29.3

 
55.3


As of June 30, 2012, our investments were composed of U.S. Treasury Bills, Government Agency Securities, Commercial Paper, Corporate Bonds and CDs.

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 and above, 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 effective 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 or we do not currently have the ability to liquidate the investment. We may sell our investments prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or for duration management. No material realized or unrealized net gains or losses were recognized during the three months ended June 30, 2012 and 2011.

Interest rates were relatively unchanged in the three months ended June 30, 2012 compared to the same prior year quarter. During the three months ended June 30, 2012, we generated no significant interest income from our portfolio of cash equivalents and investments and incurred no significant interest expense from our revolving line of credit. A hypothetical increase or decrease in our interest rates by 10 basis points would have a minimal impact on our interest income or expense.

FOREIGN CURRENCY EXCHANGE RATE RISK

We are exposed to currency fluctuations, primarily in the Euro ("EUR"), Great Britain Pound ("GBP"), Australian Dollar ("AUD"), Mexican Peso ("MX$") and the Chinese Renminbi ("RMB"). We use a hedging strategy to diminish, and make more predictable, the effect of currency fluctuations. All of our hedging activities are entered into with large financial institutions, which we periodically evaluate for credit risks. We hedge our balance sheet exposure by hedging EUR, GBP and AUD denominated cash, accounts receivable, and accounts payable balances, and our economic exposure by hedging a portion of anticipated EUR and GBP denominated sales and our MX$ 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 losses in the three months ended June 30, 2012. Although we hedge a portion of our foreign currency exchange exposure, the weakening of certain foreign currencies, particularly the EUR and the GBP in comparison to the U.S. Dollar ("USD"), could result in material foreign exchange losses in future periods.


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Non-designated Hedges

We hedge our EUR, GBP and AUD denominated cash, accounts receivable and accounts payable 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, 2012 (in millions):

Currency - forward contracts
Position
 
USD Value of Net Foreign Exchange Contracts
 
Foreign Exchange Gain From 10% Appreciation of USD