10-Q 1 form10qq2fy2013.htm 10-Q form10Q.Q2FY2013
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 September 29, 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 October 27, 2012, 42,675,562 shares of the registrant's common stock were outstanding.


1


Plantronics, Inc.
FORM 10-Q
TABLE OF CONTENTS

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

Plantronics®, Clarity®, and Simply Smarter Communications™ are trademarks or registered trademarks of Plantronics, Inc.

The Bluetooth name and the Bluetooth® trademarks are owned by Bluetooth SIG, Inc. and are used by Plantronics, Inc. under
license.

All other trademarks are the property of their respective owners.

2


Part I -- FINANCIAL INFORMATION

Item 1. Financial Statements.

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

 
September 30,
2012
 
March 31,
2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
207,929

 
$
209,335

Short-term investments
152,500

 
125,177

Accounts receivable, net
108,070

 
111,771

Inventory, net
61,639

 
53,713

Deferred tax assets
11,218

 
11,090

Other current assets
13,131

 
13,088

Total current assets
554,487

 
524,174

Long-term investments
38,775

 
55,347

Property, plant and equipment, net
89,766

 
76,159

Goodwill and purchased intangibles, net
16,692

 
14,388

Other assets
2,694

 
2,402

Total assets
$
702,414

 
$
672,470

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
30,435

 
$
34,126

Accrued liabilities
53,449

 
52,067

Total current liabilities
83,884

 
86,193

Deferred tax liabilities
2,494

 
8,673

Long-term income taxes payable
13,115

 
12,150

Revolving line of credit
29,000

 
37,000

Other long-term liabilities
1,141

 
1,210

Total liabilities
129,634

 
145,226

Commitments and contingencies (Note 7)


 


Stockholders' equity:
 

 
 

Common stock
749

 
741

Additional paid-in capital
582,104

 
557,218

Accumulated other comprehensive income
5,101

 
6,357

Retained earnings
156,355

 
115,358

Total stockholders' equity before treasury stock
744,309

 
679,674

Less:  Treasury stock, at cost
(171,529
)
 
(152,430
)
Total stockholders' equity
572,780

 
527,244

Total liabilities and stockholders' equity
$
702,414

 
$
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
 
Six Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Net revenues
$
179,280

 
$
176,948

 
$
360,645

 
$
352,548

Cost of revenues
82,052

 
77,982

 
165,721

 
159,524

Gross profit
97,228

 
98,966

 
194,924

 
193,024

Operating expenses:
 
 
 
 
 
 
 
Research, development and engineering
19,581

 
17,651

 
39,277

 
34,557

Selling, general and administrative
43,130

 
44,418

 
89,034

 
86,534

Total operating expenses
62,711

 
62,069

 
128,311

 
121,091

Operating income
34,517

 
36,897

 
66,613

 
71,933

Interest and other income (expense), net
275

 
(58
)
 
287

 
583

Income before income taxes
34,792

 
36,839

 
66,900

 
72,516

Income tax expense
8,868

 
9,318

 
17,413

 
18,264

Net income
$
25,924

 
$
27,521

 
$
49,487

 
$
54,252

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.62

 
$
0.62

 
$
1.19

 
$
1.19

Diluted
$
0.61

 
$
0.60

 
$
1.16

 
$
1.16

 
 
 
 
 
 
 
 
Shares used in computing earnings per common share:
 

 
 
 
 
 
 
Basic
41,482

 
44,556

 
41,571

 
45,664

Diluted
42,403

 
45,717

 
42,521

 
46,950

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.10

 
$
0.05

 
$
0.20

 
$
0.10




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
 
Six Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Net income
$
25,924

 
$
27,521

 
$
49,487

 
$
54,252

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Change in net unrealized gain (loss) on cash flow hedges
(1,697
)
 
2,768

 
(1,195
)
 
4,033

Change in net foreign currency translation adjustments
217

 
(1,059
)
 
(119
)
 
(407
)
Change in net unrealized gain (loss) on investments
46

 
(220
)
 
58

 
(167
)
Other comprehensive income (loss)
(1,434
)
 
1,489

 
(1,256
)
 
3,459

Comprehensive income
$
24,490

 
$
29,010

 
$
48,231

 
$
57,711







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)
 
Six Months Ended
 
September 30,
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
49,487

 
$
54,252

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

 
 

Depreciation and amortization
7,880

 
6,849

Stock-based compensation
9,482

 
8,688

Provision for excess and obsolete inventories
899

 
1,321

Deferred income taxes
(3,651
)
 
(5,765
)
Income tax benefit associated with stock option exercises
2,749

 
1,924

Excess tax benefit from stock-based compensation
(679
)
 
(3,360
)
Amortization of premium on investments, net
606

 
849

Other operating activities
659

 
389

Changes in assets and liabilities, net of effect of acquisition:
 

 
 
Accounts receivable, net
5,008

 
246

Inventory, net
(8,230
)
 
(5,390
)
Current and other assets
(1,218
)
 
(408
)
Accounts payable
(3,854
)
 
(8,883
)
Accrued liabilities
(559
)
 
(6,762
)
Income taxes
1,445

 
12,630

Cash provided by operating activities
60,024

 
56,580

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 
Proceeds from sales of short-term investments
25,057

 
66,060

Proceeds from maturities of short-term investments
60,890

 
83,108

Purchase of short-term investments
(65,411
)
 
(88,783
)
Proceeds from sales of long-term investments
2,000

 
4,936

Purchase of long-term investments
(33,951
)
 
(45,194
)
Acquisition, net of cash acquired
(1,723
)
 

Capital expenditures and other assets
(21,526
)
 
(10,044
)
Cash (used for) provided by investing activities
(34,664
)
 
10,083

CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 
Repurchase of common stock
(19,930
)
 
(184,067
)
Equity forward contract related to accelerated share repurchase program

 
(15,000
)
Proceeds from sale of treasury stock
2,485

 
2,519

Proceeds from issuance of common stock
9,403

 
16,664

Proceeds from revolving line of credit
18,000

 
17,500

Repayments of revolving line of credit
(26,000
)
 

Payment of cash dividends
(8,490
)
 
(4,720
)
Employees' tax withheld and paid for restricted stock and restricted stock units
(1,729
)
 
(880
)
Excess tax benefit from stock-based compensation
679

 
3,360

Cash used for financing activities
(25,582
)
 
(164,624
)
Effect of exchange rate changes on cash and cash equivalents
(1,184
)
 
(1,037
)
Net decrease in cash and cash equivalents
(1,406
)
 
(98,998
)
Cash and cash equivalents at beginning of period
209,335

 
284,375

Cash and cash equivalents at end of period
$
207,929

 
$
185,377



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 September 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 and six months ended September 29, 2012 and October 1, 2011 both contain 13 and 26 weeks, respectively. For purposes of presentation, the Company has indicated its accounting year as ending on March 31 and its interim quarterly periods as ending on the applicable calendar month end.

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

2. RECENT ACCOUNTING PRONOUNCEMENTS

Recent accounting pronouncements issued by the Financial Accounting Standards Board ("FASB") and the SEC did not or are not expected by the Company to have a material impact on the Company's present or future consolidated financial statements.


7


3. CASH, CASH EQUIVALENTS AND INVESTMENTS

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

(in thousands)
 
September 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
 
$
122,790

 
$

 
$

 
$
122,790

 
$
147,338

 
$

 
$

 
$
147,338

Cash equivalents
 
85,139

 

 

 
85,139

 
61,996

 
2

 
(1
)
 
61,997

Total Cash and cash equivalents
 
$
207,929

 
$

 
$

 
$
207,929

 
$
209,334

 
$
2

 
$
(1
)
 
$
209,335

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
$
75,270

 
$
29

 
$
(4
)
 
$
75,295

 
$
61,898

 
$
22

 
$
(24
)
 
$
61,896

Commercial Paper
 
25,715

 
8

 
(2
)
 
25,721

 
20,041

 
1

 
(3
)
 
20,039

Corporate Bonds
 
46,535

 
66

 

 
46,601

 
38,300

 
60

 
(4
)
 
38,356

Certificates of Deposit ("CDs")
 
4,882

 
1

 

 
4,883

 
4,883

 
3

 

 
4,886

Total Short-term investments
 
$
152,402

 
$
104

 
$
(6
)
 
$
152,500

 
$
125,122

 
$
86

 
$
(31
)
 
$
125,177

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
$
24,154

 
$
26

 
$

 
$
24,180

 
$
29,814

 
$
24

 
$
(1
)
 
$
29,837

Corporate Bonds
 
13,556

 
33

 

 
13,589

 
25,507

 
29

 
(26
)
 
25,510

CDs
 
1,003

 
3

 

 
1,006

 

 

 

 

Total Long-term investments
 
$
38,713

 
$
62

 
$

 
$
38,775

 
$
55,321

 
$
53

 
$
(27
)
 
$
55,347

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Cash, cash equivalents and investments
 
$
399,044

 
$
166

 
$
(6
)
 
$
399,204

 
$
389,777

 
$
141

 
$
(59
)
 
$
389,859


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

(in thousands)
 
September 30, 2012
 
March 31, 2012
 
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Due in 1 year or less
 
$
237,541

 
$
237,639

 
$
187,118

 
$
187,174

Due in 1 to 3 years
 
38,713

 
38,775

 
55,321

 
55,347

Total
 
$
276,254

 
$
276,414

 
$
242,439

 
$
242,521


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


8


4. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS

Accounts receivable, net:
 
 
September 30,
 
March 31,
(in thousands)
 
2012
 
2012
Accounts receivable
 
$
128,961

 
$
133,233

Provisions for returns
 
(7,681
)
 
(7,613
)
Provisions for promotions, rebates and other
 
(12,790
)
 
(12,756
)
Provisions for doubtful accounts and sales allowances
 
(420
)
 
(1,093
)
Accounts receivable, net
 
$
108,070

 
$
111,771


Inventory, net:
 
 
September 30,
 
March 31,
(in thousands)
 
2012
 
2012
Raw materials
 
$
28,438

 
$
21,246

Work in process
 
551

 
367

Finished goods
 
32,650

 
32,100

Inventory, net
 
$
61,639

 
$
53,713


Property, plant and equipment, net:
 
 
September 30,
 
March 31,
(in thousands)
 
2012
 
2012
Land
 
$
13,961

 
$
6,531

Buildings and improvements (useful life: 7-30 years)
 
71,746

 
67,417

Machinery and equipment (useful life: 2-10 years)
 
84,617

 
90,643

Software (useful life: 5-6 years)
 
29,116

 
28,951

Construction in progress
 
4,968

 
2,323

 
 
204,408

 
195,865

Accumulated depreciation and amortization
 
(114,642
)
 
(119,706
)
   Property, plant and equipment, net
 
$
89,766

 
$
76,159


Depreciation and amortization was $4.0 million and $7.7 million, respectively, for the three and six months ended September 30, 2012, and $3.3 million and $6.5 million, respectively, for the same periods in the prior year.

Included in Software are unamortized capitalized software costs of $6.0 million and $6.7 million at September 30, 2012 and March 31, 2012, respectively. Amortization related to capitalized software costs was immaterial for the three months ended September 30, 2012 and 2011 and $1.5 million and $1.6 million for the six months ended September 30, 2012 and 2011, respectively.

Accrued Liabilities:
 
 
September 30,
 
March 31,
(in thousands)
 
2012
 
2012
Employee compensation and benefits
 
$
24,044

 
$
24,458

Warranty obligation
 
12,722

 
13,346

Accrued advertising and sales and marketing
 
2,335

 
1,152

Accrued other
 
14,348

 
13,111

Accrued liabilities
 
$
53,449

 
$
52,067



9


Changes in the warranty obligation during the six months ended September 30, 2012, which are included as a component of Accrued liabilities in the Condensed consolidated balance sheets, are as follows:
 
 
Six Months Ended
(in thousands)
 
September 30, 2012
Warranty obligation at March 31, 2012
 
$
13,346

Warranty provision relating to products shipped
 
7,440

Deductions for warranty claims processed
 
(8,064
)
Warranty obligation at September 30, 2012
 
$
12,722


5. GOODWILL AND PURCHASED INTANGIBLE ASSETS

Goodwill as of September 30, 2012 and March 31, 2012 was $15.5 million and $14.0 million, respectively. The increase in Goodwill relates to the Company's acquisition of all the equity interests in Tonalite B.V. ("Tonalite"), a product and design company that specialized in wireless wearable products and miniaturization technology, during the three months ended September 30, 2012. This acquisition was not material to the Company's consolidated financial statements.

The following table presents the carrying value of acquired intangible assets with remaining net book values as of September 30, 2012 and March 31, 2012:

 
 
September 30, 2012
 
March 31, 2012
 
 
 
(in thousands)
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
 
Useful Life
Technology
 
$
1,000

 
$
(34
)
 
$
966

 
$

 
$

 
$

 
5
years
Customer relationships
 
1,705

 
(1,462
)
 
243

 
1,705

 
(1,322
)
 
383

 
8
years
Total
 
$
2,705

 
$
(1,496
)
 
$
1,209

 
$
1,705

 
$
(1,322
)
 
$
383

 
 
 

The increase in the gross carrying value of acquired intangible assets relates to the acquisition of Tonalite. Aggregate amortization expense was immaterial for the three and six months ended September 30, 2012 and 2011.


10


6. FAIR VALUE MEASUREMENTS

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

Fair Values as of September 30, 2012:

(in thousands)
 
Level 1
 
Level 2
 
Total
Cash and cash equivalents:
 
 
 
 
 
 
Cash
 
$
122,790

 
$

 
$
122,790

U.S. Treasury Bills
 
74,991

 

 
74,991

Commercial Paper
 

 
10,148

 
10,148

Short-term investments:
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
1,504

 
73,791

 
75,295

Commercial Paper
 

 
25,721

 
25,721

Corporate Bonds
 

 
46,601

 
46,601

CDs
 

 
4,883

 
4,883

Long-term investments:
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
5,116

 
19,064

 
24,180

Corporate Bonds
 

 
13,589

 
13,589

CDs
 

 
1,006

 
1,006

Other current assets:
 
 
 
 
 
 
Derivative assets
 

 
1,726

 
1,726

Total assets measured at fair value
 
$
204,401

 
$
196,529

 
$
400,930

 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
Derivative liabilities
 
$
4

 
$
1,005

 
$
1,009


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 12, Foreign Currency Derivatives, which discloses the nature of the Company's derivative assets and liabilities as of September 30, 2012 and March 31, 2012.


11


Level 1 financial assets consist of cash and U.S. Treasury Bills. Level 1 financial liabilities consist of forward points on derivative contracts. 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 six months ended September 30, 2012, the Company did not have any transfers between Level 1 and Level 2 fair value instruments.

7. 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 September 30, 2012 are as follows:

Fiscal Year Ending March 31,
 
(in thousands)
2013 (remaining 6 months)
 
$
2,491

2014
 
4,402

2015
 
1,750

2016
 
1,013

2017
 
360

Thereafter
 
775

Total minimum future rental payments
 
$
10,791


Total rent expense for operating leases was $1.4 million and $2.8 million for the three and six months ended September 30, 2012 and 2011, respectively.

Indemnifications

The Company entered into an Asset Purchase Agreement ("Agreement") on October 2, 2009 to sell Altec Lansing, its Audio Entertainment Group ("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 September 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, the Company's standard contracts provide remedies to its customers, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of the Company's 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, the Company also provides protection to customers against claims related to undiscovered liabilities, additional product liability, and environmental obligations.  In the Company’s experience, claims made under these indemnifications are rare and the associated estimated fair value of the liability has not been material.


12


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 accrued 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.

8. 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 to extend its term to May 2015 (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.

As of September 30, 2012, the Company had outstanding borrowings of $29.0 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 amended 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 September 30, 2012.


13


9. STOCK-BASED COMPENSATION

The following table summarizes the amount of stock-based compensation included in the Condensed consolidated statements of operations:
 
 
Three Months Ended
 
Six Months Ended
 
 
September 30,
 
September 30,
(in thousands)
 
2012
 
2011
 
2012
 
2011
Cost of revenues
 
$
526

 
$
559

 
$
1,122

 
$
1,105

 
 


 


 
 
 
 
Research, development and engineering
 
1,256

 
1,028

 
2,380

 
1,975

Selling, general and administrative
 
3,080

 
2,921

 
5,980

 
5,608

Stock-based compensation included in operating expenses
 
4,336

 
3,949

 
8,360

 
7,583

Total stock-based compensation
 
4,862

 
4,508

 
9,482

 
8,688

Income tax benefit
 
(1,532
)
 
(1,441
)
 
(2,914
)
 
(2,723
)
Total stock-based compensation, net of tax
 
$
3,330

 
$
3,067

 
$
6,568

 
$
5,965


Stock Options

The following is a summary of the Company’s stock option activity during the six months ended September 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
266

 
$
33.40

 
 
 
 
Options exercised
(390
)
 
$
24.11

 
 
 
 
Options forfeited or expired
(140
)
 
$
34.91

 
 
 
 
Outstanding at September 30, 2012
3,040

 
$
27.00

 
3.7
 
$
26,109

Vested and expected to vest at September 30, 2012
3,005

 
$
26.91

 
3.6
 
$
26,038

Exercisable at September 30, 2012
2,200

 
$
24.45

 
2.8
 
$
24,183


The total intrinsic value of options exercised during the six months ended September 30, 2012 and 2011 was $4.5 million and $11.7 million, respectively.  Intrinsic value is defined as the amount by which the fair value of the underlying stock exceeds the exercise price at the time of option exercise. The total cash received as a result of stock option exercises during the six months ended September 30, 2012 was $9.4 million.

As of September 30, 2012, total unrecognized compensation cost related to unvested stock options was $7.9 million, which is expected to be recognized over a weighted average period of 2.0 years.


14


Restricted Stock

Restricted stock consists of awards of restricted stock and restricted stock units ("RSUs"). The following is a summary of the Company’s restricted stock activity during the six months ended September 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
552

 
$
32.05

Restricted stock vested
(150
)
 
$
32.80

Restricted stock forfeited
(51
)
 
$
31.73

Non-vested at September 30, 2012
1,166

 
$
32.89


The weighted average grant-date fair value of awards of restricted stock is based on the quoted market price of the Company's common stock on the date of grant. The weighted average grant-date fair value of restricted stock granted during the six months ended September 30, 2012 and 2011 was $32.05 and $36.36, respectively. The total fair value of restricted stock that vested during the six months ended September 30, 2012 and 2011 was $4.9 million and $1.9 million, respectively.

As of September 30, 2012, total unrecognized compensation cost related to unvested restricted stock was $26.5 million, which is expected to be recognized over a weighted average period of 2.8 years.  

Restricted stock granted for the six months ended September 30, 2012 includes 74,298 shares of RSUs granted under a special stock inducement plan to Tonalite employees in connection with the Company's acquisition of all the equity interests in Tonalite during the three months ended September 30, 2012. The RSUs vest annually over four years, subject to the continued employment of the RSU holder on the vesting date. As future services are required, the fair value of the restricted stock units was not included in the purchase price accounting for the acquisition and will be expensed over the post-acquisition requisite service period.

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, and purchase rights under the ESPP, during the respective periods, are estimated on the date of grant using the following weighted average assumptions:
 
 
Three Months Ended
 
Six Months Ended
 
 
September 30,
 
September 30,
Employee Stock Options
 
2012
 
2011
 
2012
 
2011
Expected volatility
 
43.5
%
 
44.7
%
 
42.2
%
 
44.4
%
Risk-free interest rate
 
0.5
%
 
0.6
%
 
0.6
%
 
1.2
%
Expected dividends
 
1.3
%
 
0.6
%
 
1.3
%
 
0.6
%
Expected life (in years)
 
4.3
 
4.0
 
4.3
 
4.0
Weighted-average grant date fair value
 
$
10.84

 
$
10.85

 
$
10.43

 
$
12.18

ESPP
 
 
 
 
 
 
 
 
Expected volatility
 
38.4
%
 
38.7
%
 
38.4
%
 
38.7
%
Risk-free interest rate
 
0.1
%
 
0.1
%
 
0.1
%
 
0.1
%
Expected dividends
 
1.1
%
 
0.6
%
 
1.1
%
 
0.6
%
Expected life (in years)
 
0.5

 
0.5

 
0.5

 
0.5

Weighted-average grant date fair value
 
$
8.95

 
$
8.00

 
$
8.95

 
$
8.00


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.


15


10. COMMON STOCK REPURCHASES

From time to time, the Company's Board of Directors ("Board") has authorized 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 they are retired or re-issued. Repurchases by the Company pursuant to Board authorized programs during the six months ended September 30, 2012 and 2011 are discussed below. As of September 30, 2012, there remained 1,000,000 shares authorized for repurchase under the program approved by the Board on August 6, 2012 and no other shares authorized under previously approved programs.

Open Market Repurchases

Under the Board authorized programs, in the six months ended September 30, 2012 and 2011, the Company repurchased 633,613 shares and 1,529,983 shares, respectively, of its common stock in the open market for a total cost of $19.9 million and $49.1 million, respectively, and at an average price per share of $31.45 and $32.07, 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 $1.7 million in the six months ended September 30, 2012, compared to $0.9 million in the six months ended September 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 in connection with the vesting of shares subject to the restricted stock grants and did not represent an expense to the Company.

Privately Negotiated Transactions

During the six months ended September 30, 2011, pursuant to a Board authorized accelerated share repurchase ("ASR") program, the Company entered into three separate Master Confirmation and Supplemental Confirmations ("ASR Agreements") with Goldman, Sachs & Co. ("Goldman"). Under these ASR Agreements, the Company paid Goldman $150.0 million in exchange for delivery of 3,967,883 shares during the six months ended September 30, 2011. Based on the number of shares delivered and the Company's closing stock price on the dates at which the major terms of the ASR Agreements were reached, the total consideration allocated to stock repurchases as of September 30, 2011 was $135.0 million. The remaining $15.0 million was recorded as an equity forward contract and was included in Additional paid-in-capital in the Condensed consolidated balance sheet as of September 30, 2011.

11. ACCUMULATED OTHER COMPREHENSIVE INCOME

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

(in thousands)
 
September 30, 2012
 
March 31, 2012
Accumulated unrealized gain on cash flow hedges
 
$
708

 
$
1,904

Accumulated foreign currency translation adjustments
 
4,274

 
4,392

Accumulated unrealized gain on investments
 
119

 
61

Accumulated other comprehensive income
 
$
5,101

 
$
6,357



16


12. FOREIGN CURRENCY DERIVATIVES

The Company's foreign currency derivatives consist primarily of foreign currency forward exchange contracts, option contracts and cross-currency swaps.  The derivatives expose the Company to credit risk to the extent the counterparties may be unable to meet the terms of the derivative instrument.  The Company's maximum exposure to loss due to credit risk that it would incur if parties to derivative contracts failed completely to perform according to the terms of the contracts was equal to the carrying value of the Company's derivative contracts as of September 30, 2012.  The Company seeks to mitigate such risk by limiting its counterparties to large financial institutions.  In addition, the Company monitors the potential risk of loss with any one counterparty resulting from this type of credit risk on an ongoing basis.

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 (expense), 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 6, Fair Value Measurements, for disclosure of the Company's fair value hierarchy for its derivative instruments.

As of September 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 September 30, 2012:

 
Local Currency
 
USD Equivalent
 
Position
 
Maturity
 
(in thousands)
 
(in thousands)
 
 
 
 
EUR
17,400

 
$
22,414

 
Sell EUR
 
1 month
GBP
1,600

 
$
2,582

 
Sell GBP
 
1 month
AUD
3,700

 
$
3,836

 
Sell AUD
 
1 month

Foreign currency transactions, net of the effect of forward contract hedging activity, resulted in immaterial net gains and immaterial net losses, respectively, in the three and six months ended September 30, 2012 and immaterial net losses in both the three and six months ended September 30, 2011, which are included in Interest and other income (expense), 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 September 30, 2012, the Company had foreign currency put and call option contracts of approximately €55.8 million and £19.8 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.

In the three and six months ended September 30, 2012, realized gains on cash flow hedges of $1.2 million and $3.1 million, respectively, were recognized in Net revenues, compared to immaterial losses and losses of $2.6 million for the three and six month periods in the prior year, respectively. An immaterial loss, net of tax, in AOCI as of September 30, 2012 is expected to be reclassified to Net revenues during the next 12 months due to the recognition of the hedged forecasted sales.


17


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 September 30, 2012 and March 31, 2012, the Company had foreign currency swap contracts of approximately MX$159.2 million and MX$317.5 million, respectively.

In the three and six months ended September 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 gains in AOCI as of September 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 September 30, 2012:

 
Local Currency
 
USD Equivalent
 
Position
 
Maturity
 
(in thousands)
 
(in thousands)
 
 
 
 
 
MX$
159,200

 
$
11,438

 
Buy MX$
 
Monthly over
6 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
 
 
September 30,
 
March 31,
 
September 30,
 
March 31,
(in thousands)
 
2012
 
2012
 
2012
 
2012
Foreign exchange contracts designated as cash flow hedges
 
$
1,726

 
$
2,658

 
$
1,009

 
$
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 September 30, 2012 and March 31, 2012, and the pre-tax impact of designated derivative contracts on AOCI for the six months ended September 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 September 30, 2012
Foreign exchange contracts designated as cash flow hedges
 
$
1,937

 
$
1,548

 
$
2,768

 
$
717



18


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

The effect of designated derivative contracts under the Derivatives and Hedging Topic of the FASB ASC on results of operations recognized in Gross profit in the Condensed consolidated statements of operations was as follows:

 
 
Three Months Ended
 
Six Months Ended
 
 
September 30,
 
September 30,
(in thousands)
 
2012
 
2011
 
2012
 
2011
Gain (loss) on foreign exchange contracts designated as cash flow hedges
 
$
1,074

 
$
(404
)
 
$
2,768

 
$
(2,018
)

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

The effect of non-designated derivative contracts under the Derivatives and Hedging Topic of the FASB ASC on results of operations recognized in Interest and other income (expense), net in the Condensed consolidated statements of operations was as follows:

 
 
Three Months Ended
 
Six Months Ended
 
 
September 30,
 
September 30,
(in thousands)
 
2012
 
2011
 
2012
 
2011
Gain (loss) on foreign exchange contracts
 
$
(648
)
 
$
2,096

 
$
819

 
$
1,299


13. INCOME TAXES

The effective tax rate for the three and six months ended September 30, 2012 was 25.5% and 26.0%, respectively, compared to 25.3% and 25.2%, respectively, for the same periods in the prior year.  The higher effective tax rate for the three and six months ended September 30, 2012 is due primarily to 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 September 30, 2012, the Company had $11.8 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 $2.0 million as of September 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 including 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 the United Kingdom for which tax matters have been concluded for tax years prior to fiscal year 2011.


19


14. COMPUTATION OF EARNINGS PER COMMON SHARE

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

 
 
Three Months Ended
 
Six Months Ended
 
 
September 30,
 
September 30,
(in thousands, except per share data)
 
2012
 
2011
 
2012
 
2011
Numerator:
 
 
 
 
 
 
 
 
Net income
 
$
25,924

 
$
27,521

 
$
49,487

 
$
54,252

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 

 
 
 
 
Weighted average common shares-basic
 
41,482

 
44,556

 
41,571

 
45,664

Dilutive effect of employee equity incentive plans
 
921

 
1,161

 
950

 
1,286

Weighted average common shares-diluted
 
42,403

 
45,717

 
42,521

 
46,950

 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.62

 
$
0.62

 
$
1.19

 
$
1.19

 
 
 
 
 
 
 
 
 
Diluted earnings per common share
 
$
0.61

 
$
0.60

 
$
1.16

 
$
1.16

 
 
 
 
 
 
 
 
 
Potentially dilutive securities excluded from diluted earnings per common share because their effect is anti-dilutive
 
1,061

 
1,946

 
1,081

 
1,781


15. REVENUE AND MAJOR CUSTOMERS

The Company designs, manufactures, markets and sells headsets for business and consumer applications, and other specialty products for the hearing impaired.  With respect to headsets, it makes products for use in offices and contact centers, with mobile and cordless phones, and with computers and gaming consoles.  Major product categories include “Office and Contact Center” ("OCC") , which includes corded and cordless communication headsets, audio processors and telephone systems; “Mobile”, which includes Bluetooth and corded products for mobile phone applications; “Gaming and Computer Audio”, which includes personal computer ("PC") and gaming headsets; and “Clarity”, which includes specialty telephone products marketed for hearing impaired individuals. Revenues from products designed, sold and marketed for the unified communications market are considered to be a part of the office category and are included as part of the Company's OCC net revenues.

The following table presents Net revenues by product group for the three and six months ended September 30, 2012 and 2011:

 
 
Three Months Ended
 
Six Months Ended
 
 
September 30,
 
September 30,
(in thousands)
 
2012
 
2011
 
2012
 
2011
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
Office and Contact Center
 
$
133,119

 
$
136,395

 
$
267,152

 
$
267,394

Mobile
 
33,305

 
28,341

 
69,462

 
60,505

Gaming and Computer Audio
 
7,797

 
8,381

 
14,586

 
15,776

Clarity
 
5,059

 
3,831

 
9,445

 
8,873

Total net revenues
 
$
179,280

 
$
176,948

 
$
360,645

 
$
352,548



20


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"). Effective 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 the current year presentation. The following table presents Net revenues by geography for the three and six months ended September 30, 2012 and 2011:

 
 
Three Months Ended
 
Six Months Ended
 
 
September 30,
 
September 30,
(in thousands)
 
2012
 
2011
 
2012
 
2011
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
U.S.
 
$
107,513

 
$
101,196

 
$
211,591

 
$
201,487

 
 
 
 
 
 
 
 
 
Europe and Africa
 
38,951

 
42,383

 
80,527

 
84,523

Asia Pacific
 
19,839

 
21,206

 
43,418

 
41,464

Americas, excluding U.S.
 
12,977

 
12,163

 
25,109

 
25,074

Total international net revenues
 
71,767

 
75,752

 
149,054

 
151,061

Total net revenues
 
$
179,280

 
$
176,948

 
$
360,645

 
$
352,548


One customer accounted for 10% of Net revenues for the three months ended September 30, 2012. No customer accounted for 10% or more of Net revenues for the six months ended September 30, 2012, or for the three and six months ended September 30, 2011.

No customer accounted for 10% or more of Accounts receivable, net in the Condensed consolidated balance sheets at September 30, 2012 and March 31, 2012.

16. SUBSEQUENT EVENTS

On October 30, 2012, the Company's Board of Directors declared a cash dividend of $0.10 per share of the Company's common stock, payable on December 10, 2012 to stockholders of record at the close of business on November 20, 2012.

21


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 regarding (i) the launch of additional Unified Communications ("UC") products and new Mobile products, (ii) our long-term strategy to invest in 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 research and development strategy, including our investments in strategic architecting and strategic partnerships, (v) the Plantronics Developer Connection, (vi) our expectations regarding our sales force and customer service operations, (vii) our expenses, including research, development and engineering expenses and selling, general and administrative expenses, (viii) our future tax rate, (ix) our anticipated capital expenditures for the remainder of fiscal year 2013, (x) the sufficiency of our cash, cash equivalents and cash from operations, (xi) our planned investment of and need for our foreign cash and our ability to repatriate that cash, (xii) our ability to draw funds on our credit facility as needed, and (xiii) 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, except as required by applicable law.  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 60 countries through a worldwide network of distributors, retailers, wireless carriers, original equipment manufacturers (“OEMs”), and telephony service providers. We have well-developed distribution channels in North America, Europe, Australia and New Zealand, where use of our products is widespread. Our distribution channels in other regions of the world are less mature and, while we primarily serve the contact center markets in those regions, we continue to expand into the office, mobile and entertainment, digital audio and specialty telephone markets.

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. UC is the integration of voice and video based communications systems enhanced with software applications and Internet Protocol ("IP") networks. 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 others 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. 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.


22


The Mobile Bluetooth market has been impacted by economic conditions and consumer confidence, and while the retail market in the U.S. has been slowing, international markets have been growing, particularly in emerging market countries. Overall, we expect this category to show modest growth over the long term. Within the overall market, the stereo product category shows significant growth, while the mono category is slowing or declining. Following a period of market share loss due to a less competitive product portfolio as a result of prioritizing UC investments, we believe our new product launches and recent planned investments will help position us to maintain share in the Mobile Bluetooth market.

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, based on increasingly mixed economic signs in the U.S. and the recurrence of recession in many parts of Europe and Asia Pacific which makes it difficult for us to predict what impact the economy may have on our future business. We will continue to monitor our expenditures and prioritize expenditures that further our strategic long-term growth opportunities such as innovative product development in our core research and development efforts, including the use of software and services as part of our portfolio. In furtherance 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 connecting a user's physical actions in the real world to the virtual world. We will also continue to grow and develop 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 maintain 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 September 30,
 
Six Months Ended September 30,
(in thousands except percentages)
 
2012
 
2011
 
2012
 
2011
Net revenues
 
$
179,280

 
100.0
%
 
$
176,948

 
100.0
%
 
$
360,645

 
100.0
%
 
$
352,548

 
100.0
%
Cost of revenues
 
82,052

 
45.8
%
 
77,982

 
44.1
%
 
165,721

 
46.0
%
 
159,524

 
45.2
%
Gross profit
 
97,228

 
54.2
%
 
98,966

 
55.9
%
 
194,924

 
54.0
%
 
193,024

 
54.8
%
Operating expenses:
 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 
Research, development and engineering
 
19,581

 
10.9
%
 
17,651

 
10.0
%
 
39,277

 
10.9
%
 
34,557

 
9.8
%
Selling, general and administrative
 
43,130

 
24.1
%
 
44,418

 
25.1
%
 
89,034

 
24.7
%
 
86,534

 
24.5
%
Total operating expenses
 
62,711

 
35.0
%
 
62,069

 
35.1
%
 
128,311

 
35.6
%
 
121,091

 
34.3
%
Operating income
 
34,517

 
19.3
%
 
36,897

 
20.9
%
 
66,613

 
18.5
%
 
71,933

 
20.4
%
Interest and other income (expense), net
 
275

 
0.2
%
 
(58
)
 
%
 
287

 
0.1
%
 
583

 
0.2
%
Income before income taxes
 
34,792

 
19.4
%
 
36,839

 
20.8
%
 
66,900

 
18.6
%
 
72,516

 
20.6
%
Income tax expense
 
8,868

 
4.9
%
 
9,318

 
5.3
%
 
17,413

 
4.8
%
 
18,264

 
5.2
%
Net income
 
$
25,924

 
14.5
%
 
$
27,521

 
15.6
%
 
$
49,487

 
13.7
%
 
$
54,252

 
15.4
%


23


NET REVENUES

 
 
Three Months Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
 
 
September 30,
 
Increase
 
September 30,
 
Increase
(in thousands except percentages)
 
2012
 
2011
 
(Decrease)
 
2012
 
2011
 
(Decrease)
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office and Contact Center
 
$
133,119

 
$
136,395

 
$
(3,276
)
 
(2.4
)%
 
$
267,152

 
$
267,394

 
$
(242
)
 
(0.1)%
Mobile
 
33,305

 
28,341

 
4,964

 
17.5
 %
 
69,462

 
60,505

 
8,957

 
14.8%
Gaming and Computer Audio
 
7,797

 
8,381

 
(584
)
 
(7.0
)%
 
14,586

 
15,776

 
(1,190
)
 
(7.5)%
Clarity
 
5,059

 
3,831

 
1,228

 
32.1
 %
 
9,445

 
8,873

 
572