10-Q 1 form10qq1fy2014.htm FORM 10-Q form10Q.Q1FY2014
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 29, 2013

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 27, 2013, 43,856,328 shares of the registrant's common stock were outstanding.


1



Plantronics, Inc.
FORM 10-Q
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Page No.
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2013 and 2012
 
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 

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

DECT™ is a trademark of ETSI registered for the benefit of its members in France and other jurisdictions.

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

All other trademarks are the property of their respective owners.

2


Part I -- FINANCIAL INFORMATION

Item 1. Financial Statements.

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

 
June 30,
2013
 
March 31,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
256,343

 
$
228,776

Short-term investments
101,610

 
116,581

Accounts receivable, net
120,903

 
128,209

Inventory, net
65,314

 
67,435

Deferred tax assets
10,193

 
10,120

Other current assets
13,909

 
15,369

Total current assets
568,272

 
566,490

Long-term investments
85,904

 
80,261

Property, plant, and equipment, net
107,814

 
99,111

Goodwill and purchased intangibles, net
16,349

 
16,440

Other assets
2,181

 
2,303

Total assets
$
780,520

 
$
764,605

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
32,727

 
$
37,067

Accrued liabilities
57,394

 
66,419

Total current liabilities
90,121

 
103,486

Deferred tax liabilities
3,861

 
1,742

Long-term income taxes payable
12,145

 
12,005

Other long-term liabilities
824

 
925

Total liabilities
106,951

 
118,158

Commitments and contingencies (Note 7)


 


Stockholders' equity:
 

 
 

Common stock
767

 
757

Additional paid-in capital
633,988

 
612,283

Accumulated other comprehensive income
3,181

 
5,567

Retained earnings
50,929

 
28,344

Total stockholders' equity before treasury stock
688,865

 
646,951

Less:  Treasury stock, at cost
(15,296
)
 
(504
)
Total stockholders' equity
673,569

 
646,447

Total liabilities and stockholders' equity
$
780,520

 
$
764,605


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


3


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

 
Three Months Ended
 
June 30,
 
2013
 
2012
Net revenues
$
202,818

 
$
181,365

Cost of revenues
97,186

 
83,669

Gross profit
105,632

 
97,696

Operating expenses:


 


Research, development, and engineering
20,863

 
19,696

Selling, general, and administrative
48,097

 
45,904

Restructuring and other related charges
723

 

Total operating expenses
69,683

 
65,600

Operating income
35,949

 
32,096

Interest and other income (expense), net
(486
)
 
12

Income before income taxes
35,463

 
32,108

Income tax expense
8,510

 
8,545

Net income
$
26,953

 
$
23,563

 
 
 
 
Earnings per common share:
 
 
 
Basic
$
0.63

 
$
0.57

Diluted
$
0.62

 
$
0.55

 
 
 
 
Shares used in computing earnings per common share:
 

 
 
Basic
42,692

 
41,660

Diluted
43,650

 
42,570

 
 
 
 
Cash dividends declared per common share
$
0.10

 
$
0.10




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





4


PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
 
Three Months Ended
 
June 30,
 
2013
 
2012
Net income
$
26,953

 
$
23,563

Other comprehensive income, net of tax:
 
 
 
Foreign currency translation adjustments
(352
)
 
(336
)
Unrealized gains (losses) on cash flow hedges:
 
 
 
Unrealized cash flow hedge gains (losses) arising during the period
(1,627
)
 
2,166

Net (gains) losses reclassified into income for revenue hedges
16

 
(1,861
)
Net (gains) losses reclassified into income for cost of revenues hedges
(265
)
 
197

Net unrealized gains (losses) on cash flow hedges
(1,876
)
 
502

Unrealized gains (losses) on investments:
 
 
 
Unrealized holding gains (losses) during the period
(158
)
 
12

Other comprehensive income (loss)
(2,386
)
 
$
178

Comprehensive income
$
24,567

 
$
23,741




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





5


PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
Three Months Ended
 
June 30,
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
26,953

 
$
23,563

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

 
 

Depreciation and amortization
4,108

 
3,786

Stock-based compensation
4,988

 
4,620

Provision for excess and obsolete inventories
1,783

 
250

Deferred income taxes
5,703

 
(438
)
Excess tax benefit from stock-based compensation
(3,573
)
 
(140
)
Amortization of premium on investments, net
227

 
320

Non-cash charges for restructuring and other related items
723

 

Other operating activities
115

 
252

Changes in assets and liabilities:
 

 
 
Accounts receivable, net
5,916

 
4,451

Inventory, net
228

 
(5,153
)
Current and other assets
703

 
(2,681
)
Accounts payable
(4,340
)
 
(4,462
)
Accrued liabilities
(7,277
)
 
(1,434
)
Income taxes
(2,117
)
 
5,262

Cash provided by operating activities
34,140

 
28,196

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 
Proceeds from sales of short-term investments
26,031

 
15,857

Proceeds from maturities of short-term investments
35,200

 
27,595

Purchase of short-term investments
(34,015
)
 
(35,062
)
Proceeds from sales of long-term investments
4,784

 

Purchase of long-term investments
(23,106
)
 
(8,423
)
Capital expenditures
(13,014
)
 
(16,577
)
Cash used for investing activities
(4,120
)
 
(16,610
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 
Repurchase of common stock
(10,766
)
 
(16,473
)
Proceeds from issuances under stock-based compensation plans
13,163

 
1,319

Employees' tax withheld and paid for restricted stock and restricted stock units
(4,026
)
 
(1,290
)
Proceeds from revolving line of credit

 
18,000

Repayments of revolving line of credit

 
(13,000
)
Payment of cash dividends
(4,368
)
 
(4,247
)
Excess tax benefit from stock-based compensation
3,573

 
140

Cash used for financing activities
(2,424
)
 
(15,551
)
Effect of exchange rate changes on cash and cash equivalents
(29
)
 
(731
)
Net increase (decrease) in cash and cash equivalents
27,567

 
(4,696
)
Cash and cash equivalents at beginning of period
228,776

 
209,335

Cash and cash equivalents at end of period
$
256,343

 
$
204,639

SUPPLEMENTAL DISCLOSURES
 
 
 
Property, plant, and equipment purchases unpaid and included in accounts payable
$
2,709

 
$
1,619

Transfers from long-term investments to short-term investments
$
12,615

 
$
34,507


The accompanying notes are an integral part of these 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, 2013 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, 2013, which was filed with the SEC on May 24, 2013.  The results of operations for the interim period ended June 30, 2013 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 29, 2014 and consists of 52 weeks. The Company's prior fiscal year ended on March 30, 2013 and also consisted of 52 weeks.  The Company’s results of operations for the three months ended June 30, 2013 and June 30, 2012 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.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Recently Issued Pronouncements

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU requires the Company to present a liability related to an unrecognized tax benefit as a reduction of the related tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such a settlement is required or expected in the event the uncertain tax position is disallowed. The Company is required to implement this guidance effective the Company's first quarter of fiscal 2015. The Company does not expect the adoption of ASU 2013-11 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, 2013 and March 31, 2013:

(in thousands)
 
June 30, 2013
 
March 31, 2013
 
 
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
 
$
242,348

 
$

 
$

 
$
242,348

 
$
118,881

 
$

 
$

 
$
118,881

Cash equivalents
 
13,995

 

 

 
13,995

 
109,895

 

 

 
109,895

Total cash and cash equivalents
 
$
256,343

 
$

 
$

 
$
256,343

 
$
228,776

 
$

 
$

 
$
228,776

 
 


 


 


 


 


 


 


 


Short-term investments:
 


 


 


 


 


 


 


 


U.S. Treasury Bills and Government Agency Securities
 
$
37,465

 
$
9

 
$
(57
)
 
$
37,417

 
$
66,092

 
$
18

 
$
(3
)
 
$
66,107

Commercial paper
 
39,743

 
16

 
(1
)
 
39,758

 
15,670

 
9

 

 
15,679

Corporate bonds
 
24,419

 
18

 
(2
)
 
24,435

 
34,766

 
31

 
(2
)
 
34,795

Total short-term investments
 
$
101,627

 
$
43

 
$
(60
)
 
$
101,610

 
$
116,528

 
$
58

 
$
(5
)
 
$
116,581

 
 


 


 


 


 


 


 


 


Long-term investments:
 


 


 


 


 


 


 


 


U.S. Treasury Bills and Government Agency Securities
 
$
42,892

 
$
19

 
$
(10
)
 
$
42,901

 
$
55,317

 
$
42

 
$
(1
)
 
$
55,358

Corporate bonds
 
42,089

 
12

 
(102
)
 
41,999

 
23,878

 
23

 
(3
)
 
23,898

Certificates of deposit ("CDs")
 
1,002

 
2

 

 
1,004

 
1,002

 
3

 

 
1,005

Total long-term investments
 
$
85,983

 
$
33

 
$
(112
)
 
$
85,904

 
$
80,197

 
$
68

 
$
(4
)
 
$
80,261

 
 

 

 

 

 

 

 

 

Total cash, cash equivalents and investments
 
$
443,953

 
$
76

 
$
(172
)
 
$
443,857

 
$
425,501

 
$
126

 
$
(9
)
 
$
425,618


As of June 30, 2013 and March 31, 2013, all of the Company’s investments are classified as available-for-sale securities.  The carrying value of available-for-sale securities included in cash equivalents approximates fair value because of the short maturity of those instruments.

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, 2013 and March 31, 2013:

(in thousands)
 
June 30, 2013
 
March 31, 2013
 
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Due in 1 year or less
 
$
115,621


$
115,605

 
$
226,423


$
226,476

Due in 1 to 3 years
 
85,984


85,904

 
80,197


80,261

Total
 
$
201,605


$
201,509

 
$
306,620


$
306,737


The Company did not incur any material realized or unrealized net gains or losses in the three months ended June 30, 2013 and 2012.


8


4. 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, 2013:

(in thousands)
 
Level 1
 
Level 2
 
Total
Cash and cash equivalents:
 
 
 
 
 
 
Cash
 
$
242,348

 
$

 
$
242,348

Commercial paper
 

 
13,995

 
13,995

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

 
37,417

 
37,417

Commercial paper
 

 
39,758

 
39,758

Corporate bonds
 

 
24,435

 
24,435

Long-term investments:
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
13,082

 
29,819

 
42,901

Corporate bonds
 

 
41,999

 
41,999

CDs
 

 
1,004

 
1,004

Other current assets:
 
 
 
 
 
 
Derivative assets
 

 
593

 
593

Total assets measured at fair value
 
$
255,430

 
$
189,020

 
$
444,450

 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
Derivative liabilities
 
$
9

 
$
1,130

 
$
1,139


Fair Values as of March 31, 2013:

(in thousands)
 
Level 1
 
Level 2
 
Total
Cash and cash equivalents:
 
 
 
 
 
 
Cash
 
$
118,881

 
$

 
$
118,881

U.S. Treasury Bills
 
104,995

 

 
104,995

Commercial paper
 

 
4,900

 
4,900

Short-term investments:
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
7,243

 
58,864

 
66,107

Commercial paper
 

 
15,679

 
15,679

Corporate bonds
 

 
34,795

 
34,795

Long-term investments:
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
22,904

 
32,454

 
55,358

Corporate bonds
 

 
23,898

 
23,898

CDs
 

 
1,005

 
1,005

Other current assets:
 
 
 
 
 
 
Derivative assets
 

 
1,665

 
1,665

Total assets measured at fair value
 
$
254,023

 
$
173,260

 
$
427,283

 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
Derivative liabilities
 
$
3

 
$
291

 
$
294


There were no transfers between fair value measurement levels during the three months ended June 30, 2013 and 2012.

Refer to Note 12, Foreign Currency Derivatives, which discloses the nature of the Company's derivative assets and liabilities as of June 30, 2013 and March 31, 2013.

9


All financial assets and liabilities and non-financial assets and liabilities are recognized or disclosed at fair value in the financial statements. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1
The Company's Level 1 financial assets consist of 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
The Company's 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.

Level 3
The fair value of Level 3 financial instruments is determined using inputs that are unobservable and reflect the Company's estimate of assumptions that market participants would use in pricing the asset or liability. The Company had no Level 3 assets or liabilities as of June 30, 2013 or March 31, 2013.

5. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS

Accounts receivable, net:
 
 
June 30,
 
March 31,
(in thousands)
 
2013
 
2013
Accounts receivable
 
$
146,280

 
$
151,250

Provisions for returns
 
(8,836
)
 
(8,957
)
Provisions for promotions, rebates, and other
 
(16,119
)
 
(13,675
)
Provisions for doubtful accounts and sales allowances
 
(422
)
 
(409
)
Accounts receivable, net
 
$
120,903

 
$
128,209


Inventory, net:
 
 
June 30,
 
March 31,
(in thousands)
 
2013
 
2013
Raw materials
 
$
28,389

 
$
28,743

Work in process
 
177

 
82

Finished goods
 
36,748

 
38,610

Inventory, net
 
$
65,314

 
$
67,435



10


Property, plant, and equipment, net:
 
 
June 30,
 
March 31,
(in thousands)
 
2013
 
2013
Land
 
$
13,961

 
$
13,961

Buildings and improvements (useful life: 7-30 years)
 
72,488

 
72,263

Machinery and equipment (useful life: 2-10 years)
 
88,810

 
88,538

Software (useful life: 5-6 years)
 
31,054

 
30,538

Construction in progress
 
27,035

 
16,101

 
 
233,348

 
221,401

Accumulated depreciation and amortization
 
(125,534
)
 
(122,290
)
   Property, plant, and equipment, net
 
$
107,814

 
$
99,111


Depreciation and amortization was $4.0 million and $3.7 million for the three months ended June 30, 2013 and 2012, respectively.

Included in Software are unamortized capitalized software costs of $5.9 million and $6.1 million at June 30, 2013 and March 31, 2013, respectively. Amortization related to capitalized software costs was immaterial for the three months ended June 30, 2013 and 2012.

Accrued Liabilities:
 
 
June 30,
 
March 31,
(in thousands)
 
2013
 
2013
Employee compensation and benefits
 
$
22,855

 
$
29,796

Warranty obligation
 
13,217

 
13,410

Accrued advertising, sales, and marketing
 
3,782

 
3,735

Deferred revenue
 
3,731

 
3,072

Income taxes payable
 
1,091

 
3,376

Restructuring and other related charges (1)
 
255

 
1,165

Accrued other
 
12,463

 
11,865

Accrued liabilities
 
$
57,394

 
$
66,419

(1) Refer to Note 16, Restructuring and Other Related Charges, for more information on the Company's restructuring activity.  

The Company's warranty obligation is included as a component of accrued liabilities in the condensed consolidated balance sheets. Changes in the warranty obligation during the three months ended June 30, 2013 were as follows:

 
 
Three Months Ended
(in thousands)
 
June 30, 2013
Warranty obligation at March 31, 2013
 
$
13,410

Warranty provision relating to products shipped
 
4,523

Deductions for warranty claims processed
 
(4,716
)
Warranty obligation at June 30, 2013
 
$
13,217



11


6. GOODWILL AND PURCHASED INTANGIBLE ASSETS

Goodwill as of June 30, 2013 and March 31, 2013 was $15.5 million, net of accumulated impairment of $54.6 million.
 
The following table presents the carrying value of purchased intangible assets with remaining net book values as of June 30, 2013 and March 31, 2013:

 
 
June 30, 2013
 
March 31, 2013
 
 
 
(in thousands)
 
Gross carrying amount
 
Accumulated Amortization
 
Net amount
 
Gross carrying amount
 
Accumulated Amortization
 
Net amount
 
Useful Life
Technology
 
$
1,000

 
$
(183
)
 
$
817

 
$
1,000

 
$
(133
)
 
$
867

 
5
years
Customer relationships
 
1,705

 
(1,670
)
 
35

 
1,705

 
(1,624
)
 
81

 
8
years
Total
 
$
2,705

 
$
(1,853
)
 
$
852

 
$
2,705

 
$
(1,757
)
 
$
948

 
 
 

Amortization expense related to purchased intangible assets was immaterial for the three months ended June 30, 2013 and 2012.

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 June 30, 2013 are as follows:

Fiscal Year Ending March 31,
 
(in thousands)
2014 (remaining 9 months)
 
$
3,326

2015
 
1,920

2016
 
1,341

2017
 
730

2018
 
652

Thereafter
 
1,576

Total minimum future rental payments
 
$
9,545


Total rent expense for operating leases was $1.5 million and $1.4 million for the three months ended June 30, 2013 and 2012, respectively.

Unconditional Purchase Obligations

The Company purchases services and components from a variety of suppliers and manufacturers. During the normal course of business and to manage manufacturing operations and general and administrative activities, the Company may enter into firm, non-cancelable, and unconditional purchase obligations for which amounts are not recorded in the consolidated balance sheets. Such unconditional purchase obligations totaled $183.0 million as of June 30, 2013.


12


Other Guarantees and Obligations

In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, purchasers of assets or subsidiaries and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company's breach of agreements or representations and warranties made by the Company, services to be provided by the Company, intellectual property infringement claims made by third parties or, with respect to the sale of assets or a subsidiary, matters related to the Company's conduct of business and tax matters prior to the sale. From time to time, the Company indemnifies customers against combinations of loss, expense, or liability arising from various triggering 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 addition, the Company has entered into indemnification agreements with its directors and certain of its officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors and officers in certain circumstances. It is not possible to determine the aggregate maximum potential loss under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements might not be subject to maximum loss clauses. Historically, the Company has not incurred material costs as a result of obligations under these agreements and it has not accrued any liabilities related to such indemnification obligations in the consolidated financial statements.

Claims and Litigation

On October 12, 2012, GN Netcom, Inc. sued Plantronics, Inc. in the U.S. District Court for the District of Delaware, alleging violations of the Sherman Act, the Clayton Act, and Delaware common law. In its complaint, GN specifically alleges four causes of action: monopolization, attempted monopolization, concerted action in restraint of trade, and tortious interference with business relations. GN claims that Plantronics dominates the market for headsets sold into contact centers in the United States and that a critical channel for sales of headsets to contact centers is through a limited network of specialized independent distributors (“SIDs”). GN asserts that Plantronics attracts SIDs through Plantronics only distributor agreements and the use of these agreements is allegedly illegal. The Company denies each of the allegations in the complaint and is vigorously defending itself. Given the preliminary nature of the case, the Company is unable to estimate an amount or range of any reasonably possible losses resulting from these allegations.

In addition, 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 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 financial condition, results of operations or cash flows. The Company may incur substantial legal fees, which are expensed as incurred, in defending against these legal proceedings.

8. CREDIT AGREEMENT

On May 9, 2011, the Company entered into a credit agreement with Wells Fargo Bank, National Association ("the Bank"), which was most recently amended on May 3, 2013 to extend its term to May 9, 2016 (as amended, "the Credit Agreement") with the Bank. 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 June 30, 2013 and March 31, 2013, the Company had no outstanding borrowings 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, 2016. 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.


13


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, 2013.

9. STOCK-BASED COMPENSATION

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. 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)
 
2013
 
2012
Cost of revenues
 
$
535

 
$
596

 
 


 


Research, development and engineering
 
1,368

 
1,124

Selling, general and administrative
 
3,085

 
2,900

Stock-based compensation included in operating expenses
 
4,453

 
4,024

Total stock-based compensation
 
4,988

 
4,620

Income tax benefit
 
(1,437
)
 
(1,382
)
Total stock-based compensation, net of tax
 
$
3,551

 
$
3,238


Stock Options

The following is a summary of the Company’s stock option activity during the three months ended June 30, 2013:
 
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, 2013
2,415

 
$
27.96

 
 
 
 
Options granted
151

 
$
45.68

 
 
 
 
Options exercised
(549
)
 
$
23.97

 
 
 
 
Options forfeited or expired
(8
)
 
$
31.63

 
 
 
 
Outstanding at June 30, 2013
2,009

 
$
30.36

 
4.2
 
$
27,517

Vested and expected to vest at June 30, 2013
1,960

 
$
30.17

 
4.2
 
$
27,178

Exercisable at June 30, 2013
1,298

 
$
27.09

 
3.3
 
$
21,844



14


The total intrinsic value of options exercised during the three months ended June 30, 2013 and 2012 was $12.2 million and $0.8 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, 2013 was $13.2 million, net of taxes.

As of June 30, 2013, total unrecognized compensation cost related to unvested stock options was $6.6 million, which is expected to be recognized over a weighted average period of 2.0 years.

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 three months ended June 30, 2013:
 
Number of
Shares
 
Weighted Average Grant Date Fair Value
 
(in thousands)
 
 
Non-vested at March 31, 2013
1,025

 
$
33.34

Restricted stock granted
517

 
$
46.11

Restricted stock vested
(226
)
 
$
32.35

Restricted stock forfeited
(11
)
 
$
36.29

Non-vested at June 30, 2013
1,305

 
$
38.55


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 three months ended June 30, 2013 and 2012 was $46.11 and $31.10, respectively. The total fair value of restricted stock that vested during the three months ended June 30, 2013 and 2012 was $7.3 million and $3.7 million, respectively.

As of June 30, 2013, total unrecognized compensation cost related to unvested restricted stock was $37.5 million, which is expected to be recognized over a weighted average period of 2.6 years.  

Valuation Assumptions

The Company estimates the fair value of stock options and Employee Stock Purchase Plan (“ESPP”) shares using a Black-Scholes option valuation model.  At the date of grant, the Company estimated the fair value of each stock option grant and purchase right granted under the ESPP using the following weighted average assumptions:

 
 
Three Months Ended
 
 
June 30,
Employee Stock Options
 
2013
 
2012
Expected volatility
 
34.0
%
 
41.7
%
Risk-free interest rate
 
0.6
%
 
0.6
%
Expected dividends
 
0.9
%
 
1.3
%
Expected life (in years)
 
4.2

 
4.3

Weighted-average grant date fair value
 
$
11.86

 
$
10.30


No purchase rights were granted under the ESPP during the three months ended June 30, 2013 and 2012.


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 three months ended June 30, 2013 and 2012 are discussed below. As of June 30, 2013, there remained 646,439 shares authorized for repurchase under the program approved by the Board on August 6, 2012 and there were no remaining shares authorized under previously approved programs.

Open Market Repurchases

Under Board authorized programs, in the three months ended June 30, 2013 and 2012, the Company repurchased 235,468 shares and 529,000 shares, respectively, of its common stock in the open market for a total cost of $10.8 million and $16.5 million, respectively, and at an average price per share of $45.72 and $31.14, respectively.

In addition, the Company withheld shares valued at $4.0 million in the three months ended June 30, 2013, compared to $1.3 million in the three months ended June 30, 2012, 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.

11. ACCUMULATED OTHER COMPREHENSIVE INCOME

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

(in thousands)
 
June 30, 2013
 
March 31, 2013
Accumulated unrealized gain (loss) on cash flow hedges
 
$
(528
)
 
$
1,349

Accumulated foreign currency translation adjustments
 
3,780

 
4,131

Accumulated unrealized gain (loss) on investments
 
(71
)
 
87

Accumulated other comprehensive income
 
$
3,181

 
$
5,567


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 June 30, 2013.  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.

Refer to Note 4, Fair Value Measurements, for disclosure of the Company's fair value hierarchy for its derivative instruments.


16


Non-Designated Hedges

As of June 30, 2013, the Company had foreign currency forward contracts denominated in Euros ("EUR"), British Pound Sterling ("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, 2013:

 
Local Currency
 
USD Equivalent
 
Position
 
Maturity
 
(in thousands)
 
(in thousands)
 
 
 
 
EUR
16,000

 
$
20,808

 
Sell EUR
 
1 month
GBP
£
2,200

 
$
3,341

 
Sell GBP
 
1 month
AUD
A$
5,400

 
$
4,918

 
Sell AUD
 
1 month

Foreign currency transactions, net of the effect of forward contract hedging activity, resulted in immaterial net losses in the three ended June 30, 2013 and 2012. These immaterial net losses are included in interest and other income (expense), net in the condensed consolidated statements of operations.

Cash Flow Hedges

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, 2013, the Company had foreign currency option contracts of approximately €48.6 million and £20.1 million.  As of March 31, 2013, the Company had foreign currency option contracts of approximately €50.2 million and £19.9 million.

In the three months ended June 30, 2013, an immaterial loss on cash flow hedges was recognized in net revenues in the consolidated statement of operations, compared to a $1.9 million gain on cash flow hedges recognized in net revenues in the consolidated statements of operations for the three months ended June 30, 2012.  An immaterial gain, net of tax, in accumulated other comprehensive income ("AOCI") as of June 30, 2013 is expected to be reclassified 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, 2013 and March 31, 2013, the Company had foreign currency swap contracts of approximately MX$437.7 million and MX$325.4 million, respectively.

In the three months ended June 30, 2013 and 2012, 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 or losses in AOCI as of June 30, 2013 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, 2013:

 
Local Currency
 
USD Equivalent
 
Position
 
Maturity
 
(in thousands)
 
(in thousands)
 
 
 
 
 
MX$
$
437,700

 
$
33,411

 
Buy MX$
 
Monthly over
18 months


17


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 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)
 
2013
 
2013
 
2013
 
2013
Foreign exchange contracts designated as cash flow hedges
 
$
593

 
$
1,665

 
$
1,139

 
$
294



Effect of Designated Derivative Contracts on Accumulated Other Comprehensive Income

The following table represents the balance of designated derivative contracts as of June 30, 2013 and March 31, 2013, and the pre-tax impact of designated derivative contracts on AOCI for the three months ended June 30, 2013:

(in thousands)
 
Gain (loss) included in AOCI as of March 31, 2013
 
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, 2013
Foreign exchange contracts designated as cash flow hedges
 
$
1,371

 
$
(1,663
)
 
$
254

 
$
(546
)


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

The effect of designated derivative contracts 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)
 
2013
 
2012
Gain on foreign exchange contracts designated as cash flow hedges
 
$
254

 
$
1,694



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

The effect of non-designated derivative contracts 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)
 
2013
 
2012
Gain on foreign exchange contracts
 
$
74

 
$
1,467



18


13. INCOME TAXES

The Company and its subsidiaries are subject to taxation in the U.S. and in various foreign and state jurisdictions. The effective tax rate for the three months ended June 30, 2013 was 24.0% compared to 26.6% for the same period in the prior year. 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 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. The determination of the tax liability that would be incurred if these amounts were remitted back to the U.S. is not practical but would likely be material. 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.

Included in long-term income taxes payable in the condensed consolidated balance sheets as of June 30, 2013 and March 31, 2013 were unrecognized tax benefits of $11.4 million and $11.1 million, respectively, 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 $1.8 million as of June 30, 2013 as compared to $2.0 million as of March 31, 2013.  No penalties have been accrued.

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 2006, except for the United Kingdom, which has been concluded for tax years prior to fiscal year 2012.

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.


19


14. COMPUTATION OF EARNINGS PER COMMON SHARE

The Company has a share-based compensation plan under which employees may be granted share-based awards, including shares of restricted stock on which non-forfeitable dividends are paid on unvested shares. As such, shares of restricted stock are considered participating securities under the two-class method of calculating earnings per share as described in the Earnings per Share Topic of the FASB ASC. The two-class method of calculating earnings per share did not have a material impact on the Company's earnings per share calculation for the three month periods ending June 30, 2013 or 2012.

The following table sets forth the computation of basic and diluted earnings per common share for the three months ended June 30, 2013 and 2012:
 
 
Three Months Ended
 
 
June 30,
(in thousands, except per share data)
 
2013
 
2012
Numerator:
 
 
 
 
Net income
 
$
26,953

 
$
23,563

 
 

 

Denominator:
 

 

Weighted average common shares-basic
 
42,692

 
41,660

Dilutive effect of employee equity incentive plans
 
958

 
910

Weighted average common shares-diluted
 
43,650

 
42,570

 
 
 
 
 
Basic earnings per common share
 
$
0.63

 
$
0.57

Diluted earnings per common share
 
$
0.62

 
$
0.55

 
 
 
 
 
Potentially dilutive securities excluded from diluted earnings per common share because their effect is anti-dilutive
 
292

 
1,100


15. REVENUE AND MAJOR CUSTOMERS

The Company designs, manufactures, markets, and sells headsets for business and consumer applications, and other specialty products for the hearing impaired.  With respect to headsets, it makes products for use in offices and contact centers, with mobile and cordless phones, and with computers and gaming consoles.  Major product categories include “Office and Contact Center”, which includes corded and cordless communication headsets, audio processors, and telephone systems; “Mobile”, which includes Bluetooth and corded products for mobile phone applications; “Gaming and Computer Audio”, which includes personal computer ("PC") and gaming headsets; and “Clarity”, which includes specialty products marketed for hearing impaired individuals.

The following table presents net revenues by product group for the three months ended June 30, 2013 and 2012:
 
 
Three Months Ended
 
 
June 30,
(in thousands)
 
2013
 
2012
Net revenues from unaffiliated customers:
 
 
 
 
Office and Contact Center
 
$
151,183

 
$
134,033

Mobile
 
41,624

 
36,157

Gaming and Computer Audio
 
6,451

 
6,789

Clarity
 
3,560

 
4,386

Total net revenues
 
$
202,818

 
$
181,365



20


For reporting purposes, revenue is attributed to each geographic region based on the location of the customer. Other than the U.S., no country accounted for 10% or more of the Company's net revenues for the three months ended June 30, 2013 and 2012. The following table presents net revenues by geography:

 
 
Three Months Ended
 
 
June 30,
(in thousands)
 
2013
 
2012
Net revenues from unaffiliated customers:
 
 
 
 
U.S.
 
$
121,318

 
$
104,078

 
 


 


Europe and Africa
 
44,385

 
41,576

Asia Pacific
 
23,880

 
23,579

Americas, excluding U.S.
 
13,235

 
12,132

Total international net revenues
 
81,500

 
77,287

Total net revenues
 
$
202,818

 
$
181,365


One customer accounted for 10.5% of net revenues for the three months ended June 30, 2013 and no customer accounted for 10% or more of net revenues for the three months ended June 30, 2012.

One customer accounted for 12.3% and 10.3% of accounts receivable, net in the condensed consolidated balance sheets at June 30, 2013 and March 31, 2013, respectively.

16. RESTRUCTURING AND OTHER RELATED CHARGES

The Company accounts for restructuring costs in accordance with the Exit or Disposal Cost Obligations and Compensation - Nonretirement Postemployment Benefits Topics of the FASB ASC. The Company initiated a restructuring plan during the third quarter of fiscal year 2013.  Under the plan, the Company eliminated certain positions in the U.S., Mexico, China, and Europe, and transitioned some of these positions to lower cost locations.  As part of this plan, the Company also vacated a leased facility at its corporate headquarters in the first quarter of fiscal year 2014.  In connection with this plan, the Company incurred cumulative pre-tax charges of approximately $3.0 million.
 
The pre-tax charges incurred during the three months ended June 30, 2013 included approximately $0.7 million in lease termination costs and accelerated amortization expense on leasehold improvement assets with no alternative future use. The plan is substantially complete as of June 30, 2013, with an immaterial amount of restructuring-related severance costs remaining to be paid in the second quarter of fiscal year 2014.

17. SUBSEQUENT EVENTS

On August 6, 2013, the Company's Board of Directors declared a cash dividend of $0.10 per share of the Company's common stock, payable on September 10, 2013 to stockholders of record at the close of business on August 20, 2013.



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 Unified Communications ("UC") markets, (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) the Mobile Bluetooth market and the stereo and mono product categories, (v) our position in the Mobile Bluetooth market and the effect of our new products on our position in that market, (vi) our research and development strategy, including our investments in firmware and software engineering and value-added software applications, as well as our strategic partnerships, (vii) the Plantronics Developer Connection, (viii) our expectations regarding our sales force and customer service operations, (ix) the maintenance of our reputation in the industry, (x) our expenses, including research, development and engineering expenses and selling, general and administrative expenses, (xi) our future tax rate, (xii) our anticipated capital expenditures for the remainder of fiscal year 2013 and the sufficiency of our cash, cash equivalents and cash from operations, (xiii) our planned investment of and need for our foreign cash and our ability to repatriate that cash, (xiv) our ability to draw funds on our credit facility as needed, (xv) future fluctuations in our cash provided by operating activities, (xvi) the timing for implementation of our new ERP system, and (xvii) 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, 2013.  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 our products to approximately 60 countries through a network of distributors, retailers, wireless carriers, original equipment manufacturers (“OEMs”), and telephony service providers.  We have well-developed distribution channels in North America, Europe, and in some parts of the Asia Pacific region, particularly in China, Australia, Japan, and New Zealand, where use of our products is widespread.  Our distribution channels in other geographic regions are less mature, and while we primarily serve the contact center markets in those regions, we continue to expand into the office, mobile, gaming and computer audio, and specialty telephone markets in those regions and other international locations.  Revenues from our retail channel are typically seasonal, with the December quarter (our third fiscal quarter) typically being the strongest.

Our priorities for fiscal year 2014 are to deliver profitable growth in Unified Communications and all other areas of our business, extend our brand, expand our consumer reach, scale for growth, and optimize the culture. In order to execute on the first two priorities, our operating plan for the fiscal year includes significant new investments in our global sales force and research and development capabilities. To expand our consumer reach, our fiscal year 2014 product development roadmap includes expected launches of new products targeted toward the fastest-growing segments of the consumer headset market, as well as development efforts for more new consumer products to be launched in fiscal year 2015 and beyond. We are making major capital investments in order to scale for growth. We are building a new manufacturing facility in Tijuana, Mexico, which will consolidate several existing leased facilities that we use today. We believe the new manufacturing facility will be fully operational in our second fiscal quarter of fiscal year 2014.


22


Total net revenues increased to $202.8 million in the first quarter growing 12% over the first quarter of the prior year. UC product revenues increased, growing by 52% over the prior-year quarter to $42.1 million and we believe our innovation and breakthroughs in contextual intelligence and other product features and enhancements spurred this growth. Our increased investments in research and development versus a year ago yielded increased functionality for UC endpoints and successful launches of new consumer products in key markets.  We also continued to invest in our global sales force in order to bring these and other products to the marketplace. Our financial results in the first quarter were strong, resulting in $27.0 million in net income, or 13% of our net revenues, the same percentage as a year ago.

We believe UC represents our key long-term driver of 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 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 Communications® 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 corporations globally, we also expect the market for headsets for non-UC enterprise applications to grow very slowly, if at all. 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.

In the first quarter of our fiscal year 2014, our strong Bluetooth product portfolio included Voyager Legend and Marque in the mono Bluetooth category, and BackBeat GO in the stereo Bluetooth category. These products led a strong performance across our Mobile Bluetooth portfolio in the quarter, allowing us to participate fully in market opportunities around the world. We anticipate that our planned investments in these categories will help position us to maintain share as opportunities in these markets continue to expand.

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. We believe our investments in strategic architecting may allow us to differentiate our products and maintain long-term gross margins within our business model. We continue to strengthen our strategic partnerships with UC platform suppliers to ensure that our products remain compatible with all major platforms as UC usage becomes an essential part of a unified work environment.

Looking forward, we continue to believe that UC is a key long-term driver of revenue and profit growth. 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. 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 market and a well-deserved reputation for quality and service that we will continually strive to earn through ongoing investment and strong execution.


23


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)
 
2013
 
2012
Net revenues
 
$
202,818

 
100.0
 %
 
$
181,365

 
100.0
%
Cost of revenues
 
97,186

 
47.9
 %
 
83,669

 
46.1
%
Gross profit
 
105,632

 
52.1
 %
 
97,696

 
53.9
%
Operating expenses:
 


 
 

 


 
 

Research, development, and engineering
 
20,863

 
10.3
 %
 
19,696

 
10.9
%
Selling, general, and administrative
 
48,097

 
23.7
 %
 
45,904

 
25.3
%
Restructuring and other related charges
 
723

 
0.4
 %
 

 
%
Total operating expenses
 
69,683

 
34.4
 %
 
65,600

 
36.2
%
Operating income
 
35,949

 
17.7
 %
 
32,096

 
17.7
%
Interest and other income (expense), net
 
(486
)
 
(0.2
)%
 
12

 
%
Income before income taxes
 
35,463

 
17.5
 %
 
32,108

 
17.7
%
Income tax expense
 
8,510

 
4.2
 %
 
8,545

 
4.7
%
Net income
 
$
26,953

 
13.3
 %
 
$
23,563

 
13.0
%


NET REVENUES
 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands, except percentages)
 
2013
 
2012
 
(Decrease)
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
Office and Contact Center
 
$
151,183

 
$
134,033

 
$
17,150

 
12.8
 %
Mobile
 
41,624

 
36,157

 
5,467

 
15.1
 %
Gaming and Computer Audio
 
6,451

 
6,789

 
(338
)
 
(5.0
)%
Clarity
 
3,560

 
4,386

 
(826
)
 
(18.8
)%
Total net revenues
 
$
202,818

 
$
181,365

 
$
21,453

 
11.8
 %

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 net revenues in the third quarter of our fiscal year.

Net revenues increased in the first quarter of fiscal year 2014 over the same period a year ago as a result of higher OCC revenues driven by growth in both UC and core OCC products, as well as from higher Mobile revenues driven by a stronger product portfolio that was well received in the retail market.


24


Geographic Information
 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands, except percentages)
 
2013
 
2012
 
(Decrease)
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
U.S.
 
$
121,318

 
$
104,078

 
$
17,240

 
16.6
%
As a percentage of net revenues
 
59.8
%
 
57.4
%
 


 
 
Europe and Africa
 
44,385

 
41,576

 
2,809

 
6.8
%
Asia Pacific
 
23,880

 
23,579

 
301

 
1.3
%
Americas, excluding U.S.
 
13,235

 
12,132

 
1,103

 
9.1
%
Total international net revenues
 
81,500

 
77,287

 
4,213

 
5.5
%
As a percentage of net revenues
 
40.2
%
 
42.6
%
 


 
 
Total net revenues
 
$
202,818

 
$
181,365

 
$
21,453

 
11.8
%

U.S. net revenues increased in the three months ended June 30, 2013, as compared to the same periods in the prior year, with growth in OCC revenue led by UC products, but also including growth in revenue from core OCC products. US Mobile product revenues also increased driven by a stronger product portfolio.   

In the three months ended June 30, 2013, international net revenues increased due to significant growth in Mobile revenues in the E&A and APAC regions driven by a stronger product portfolio as well as the effects of hands-free legislation in the People's Republic of China ("PRC"). OCC revenues also increased modestly, with growth in UC revenues partially offset by a decline in core OCC revenues.


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 facilities, IT, and human resources. 

 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands, except percentages)
 
2013
 
2012
 
(Decrease)
Net revenues
 
$
202,818

 
$
181,365

 
$
21,453

 
11.8
%
Cost of revenues
 
97,186

 
83,669

 
13,517

 
16.2
%
Gross profit
 
$
105,632

 
$
97,696

 
$
7,936

 
8.1
%
Gross profit %
 
52.1
%
 
53.9
%
 


 
 

As a percentage of net revenues, gross profit decreased in the three months ended June 30, 2013 compared to the same period a year ago due primarily to two drivers. First, we recorded a provision for excess and obsolete inventory of $1.8 million in the first quarter of fiscal year 2014 which is higher than the $0.3 million we recorded in the prior year. Second, we are experiencing a shift in our product mix in our OCC category of products to a higher proportion of revenues from UC products which, generally, have lower gross margins than our traditional OCC products. This is a shift and a gross profit impact that we have expected over time and a trend that we expect to continue as our revenues from UC products grow. Over the long term, we expect our gross profit percentage to range from 50% to 52%.

There are significant variances in gross profit percentages between our higher and 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.



25


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)
 
2013
 
2012
 
(Decrease)
Research, development, and engineering
 
$
20,863

 
$
19,696

 
$
1,167

 
5.9
%
% of net revenues
 
10.3
%
 
10.9
%
 


 
 

During the three months ended June 30, 2013, research, development, and engineering expenses increased as compared to the same period a year ago due primarily to an increase in our investment in software development and other capabilities related to UC product development. This investment consisted primarily of engineering headcount, resulting in increased compensation and other employee-related expenses.


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 facilities, IT, human resources, and legal costs.

 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands, except percentages)
 
2013
 
2012
 
(Decrease)
Selling, general, and administrative
 
$
48,097

 
$
45,904

 
$
2,193

 
4.8
%
% of net revenues
 
23.7
%
 
25.3
%
 


 
 

In the three months ended June 30, 2013, compared to the same period a year ago, selling, general, and administrative expenses increased, primarily as a result of increased compensation expense, related to increased investment in our sales force and marketing organizations to support the UC opportunity and growth in emerging markets.


RESTRUCTURING AND OTHER RELATED CHARGES

 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands, except percentages)
 
2013
 
2012
 
(Decrease)
Restructuring and other related charges
 
$
723

 
$

 
$
723

 
100
%
% of net revenues
 
0.4
%
 
%
 


 
 

We initiated a restructuring plan during the third quarter of fiscal year 2013.  Under the plan, we reallocated costs by eliminating certain positions in the U.S., Mexico, China, and Europe, and transitioned some of these positions to lower cost locations.  We also vacated a portion of a leased facility at our corporate headquarters.   

The pre-tax charges incurred during the three months ended June 30, 2013 were due to lease termination costs and accelerated amortization expense on leasehold improvement assets with no alternative future use. The plan is substantially complete as of June 30, 2013, with an immaterial amount of restructuring-related severance costs remaining to be paid in the second quarter of fiscal year 2014.




26


INTEREST AND OTHER INCOME (EXPENSE), NET

 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands except percentages)
 
2013
 
2012
 
(Decrease)
Interest and other income (expense), net
 
$
(486
)
 
$
12

 
$
(498
)
 
(4,150.0
)%
% of net revenues
 
(0.2
)%
 
%
 


 
 

In the three months ended June 30, 2013, compared to the same period a year ago, interest and other income (expense), net decreased due primarily to an increase in foreign exchange losses.


INCOME TAX EXPENSE

 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase
(in thousands except percentages)
 
2013
 
2012
 
(Decrease)
Income before income taxes
 
$
35,463

 
$
32,108

 
$
3,355

 
10.4
 %
Income tax expense
 
8,510

 
8,545

 
(35
)
 
(0.4
)%
Net income
 
$
26,953

 
$
23,563

 
$
3,390

 
14.4
 %
Effective tax rate
 
24.0
%
 
26.6
%
 


 


The lower effective tax rate for the three months ended June 30, 2013 is due primarily to the release of tax reserves in the current period, a shift in income resulting from a transfer pricing adjustment, and the reinstatement of the United States (“U.S.”) federal tax research credit which was extended through December 2013 and was not available in the same period a year ago. 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 rates 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.

We are subject to taxation in various foreign and state jurisdictions including the U.S.  We are 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 2006, except for the United Kingdom, which has been concluded for tax years prior to fiscal year 2012.


27


NON-GAAP FINANCIAL MEASURES

To supplement our consolidated financial statements presented on a GAAP basis, Plantronics uses non-GAAP measures of operating results, which are adjusted to exclude non-recurring and non-cash expenses and charges, such as stock-based compensation related to stock options, restricted stock and employee stock purchases, accelerated depreciation, lease termination charges, purchase accounting amortization, restructuring and other related charges, all net of the associated tax impact, tax benefits from the release of tax reserves, transfer pricing adjustments, and the impact of the retroactive reinstatement of the U.S. federal R&D tax credit. Plantronics does not believe these expenses and charges are reflective of ongoing operating results and are not part of our target operating model. The non-GAAP financial measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP and the reconciliations to those financial statements should be carefully evaluated. The non-GAAP financial measures used by Plantronics may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies.

We believe that such non-GAAP measures provide meaningful information to assist shareholders in understanding our financial results and assessing our prospects for future performance. These non-GAAP financial measures are an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the reconciliations to corresponding GAAP financial measures within our discussion of consolidated performance, below, provide a more complete understanding of our business. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.

The following tables reconcile gross profit, operating expenses, operating income, net income, income before taxes, tax expense, and diluted earnings per share for the periods presented (GAAP financial measures) to their equivalent non-GAAP financial measure counterparts for the periods presented.

 
Three Months Ended
 
June 30,

2013

2012
GAAP Gross profit
$
105,632


$
97,696

Stock-based compensation expense
535


596

Accelerated depreciation
220


124

Lease termination charges
262



Non-GAAP Gross profit
$
106,649


$
98,416

Non-GAAP Gross profit %
52.6
%

54.3
%






GAAP Research, development, and engineering
$
20,863


$
19,696

Stock-based compensation expense
(1,368
)

(1,124
)
Accelerated depreciation
(151
)

(57
)
Purchase accounting amortization
(50
)


Non-GAAP Research, development, and engineering
$
19,294


$
18,515