10-Q 1 form10qq2fy2014.htm FORM 10-Q form10Q.Q2FY2014

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 28, 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 October 26, 2013, 43,774,566 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 Six Months Ended September 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)

 
September 30,
2013
 
March 31,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
245,980

 
$
228,776

Short-term investments
113,143

 
116,581

Accounts receivable, net
123,748

 
128,209

Inventory, net
69,150

 
67,435

Deferred tax assets
10,065

 
10,120

Other current assets
15,289

 
15,369

Total current assets
577,375

 
566,490

Long-term investments
79,475

 
80,261

Property, plant, and equipment, net
118,318

 
99,111

Goodwill and purchased intangibles, net
16,265

 
16,440

Other assets
2,240

 
2,303

Total assets
$
793,673

 
$
764,605

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
29,500

 
$
37,067

Accrued liabilities
60,926

 
66,419

Total current liabilities
90,426

 
103,486

Deferred tax liabilities
2,833

 
1,742

Long-term income taxes payable
12,685

 
12,005

Other long-term liabilities
1,686

 
925

Total liabilities
107,630

 
118,158

Commitments and contingencies (Note 7)


 


Stockholders' equity:
 

 
 

Common stock
769

 
757

Additional paid-in capital
645,169

 
612,283

Accumulated other comprehensive income
1,858

 
5,567

Retained earnings
69,670

 
28,344

Total stockholders' equity before treasury stock
717,466

 
646,951

Less:  Treasury stock, at cost
(31,423
)
 
(504
)
Total stockholders' equity
686,043

 
646,447

Total liabilities and stockholders' equity
$
793,673

 
$
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
 
Six Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Net revenues
$
193,980

 
$
179,280

 
$
396,798

 
$
360,645

Cost of revenues
94,366

 
82,052

 
191,552

 
165,721

Gross profit
99,614

 
97,228

 
205,246

 
194,924

Operating expenses:


 


 


 


Research, development, and engineering
20,447

 
19,581

 
41,310

 
39,277

Selling, general, and administrative
48,507

 
43,130

 
96,604

 
89,034

Restructuring and other related charges
(176
)
 

 
547

 

Total operating expenses
68,778

 
62,711

 
138,461

 
128,311

Operating income
30,836

 
34,517

 
66,785

 
66,613

Interest and other income (expense), net
359

 
275

 
(127
)
 
287

Income before income taxes
31,195

 
34,792

 
66,658

 
66,900

Income tax expense
8,057

 
8,868

 
16,567

 
17,413

Net income
$
23,138

 
$
25,924

 
$
50,091

 
$
49,487

 

 
 
 

 

Earnings per common share:

 
 
 

 

Basic
$
0.54

 
$
0.62

 
$
1.17

 
$
1.19

Diluted
$
0.53

 
$
0.61

 
$
1.15

 
$
1.16

 
 
 
 
 
 
 
 
Shares used in computing earnings per common share:
 
 
 
 
 
 
Basic
42,810

 
41,482

 
42,751

 
41,571

Diluted
43,597

 
42,403

 
43,667

 
42,521

 


 


 


 


Cash dividends declared per common share
$
0.10

 
$
0.10

 
$
0.20

 
$
0.20




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
 
Six Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
23,138

 
$
25,924

 
$
50,091

 
$
49,487

Other comprehensive income (loss), net of tax:

 

 

 

Foreign currency translation adjustments
311

 
217

 
(41
)
 
(119
)
Unrealized gains (losses) on cash flow hedges:

 

 

 

Unrealized cash flow hedge gains (losses) arising during the period
(1,949
)
 
(632
)
 
(3,576
)
 
1,534

Net (gains) losses reclassified into income for revenue hedges
128

 
(1,158
)
 
144

 
(3,019
)
Net (gains) losses reclassified into income for cost of revenues hedges
26

 
93

 
(239
)
 
290

Net unrealized losses on cash flow hedges
(1,795
)
 
(1,697
)
 
(3,671
)
 
(1,195
)
Unrealized gains (losses) on investments:
 
 
 
 
 
 
 
Unrealized holding gains during the period
164

 
46

 
6

 
58

Other comprehensive (loss)
(1,320
)
 
$
(1,434
)
 
(3,706
)
 
$
(1,256
)
Comprehensive income
$
21,818

 
$
24,490

 
$
46,385

 
$
48,231




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)
 
Six Months Ended
 
September 30,
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
50,091

 
$
49,487

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


 


Depreciation and amortization
7,891

 
7,880

Stock-based compensation
10,953

 
9,482

Provision for excess and obsolete inventories
3,281

 
899

Deferred income taxes
5,293

 
(902
)
Excess tax benefit from stock-based compensation
(4,086
)
 
(679
)
Other operating activities
1,200

 
1,265

Changes in assets and liabilities:
 

 
 
Accounts receivable, net
3,082

 
5,008

Inventory, net
(4,552
)
 
(8,230
)
Current and other assets
(659
)
 
(1,218
)
Accounts payable
(7,567
)
 
(3,854
)
Accrued liabilities
(3,885
)
 
(559
)
Income taxes
(3,436
)
 
1,445

Cash provided by operating activities
57,606

 
60,024

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 
Proceeds from sales of short-term investments
50,118

 
25,057

Proceeds from maturities of short-term investments
54,970

 
60,890

Purchase of short-term investments
(41,634
)
 
(65,411
)
Proceeds from sales of long-term investments
15,012

 
2,000

Purchase of long-term investments
(74,720
)
 
(33,951
)
Acquisitions, net of cash acquired

 
(1,723
)
Capital expenditures
(27,213
)
 
(21,526
)
Cash used for investing activities
(23,467
)
 
(34,664
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 
Repurchase of common stock
(27,313
)
 
(19,930
)
Proceeds from issuances under stock-based compensation plans
18,637

 
11,888

Employees' tax withheld and paid for restricted stock and restricted stock units
(4,369
)
 
(1,729
)
Proceeds from revolving line of credit

 
18,000

Repayments of revolving line of credit

 
(26,000
)
Payment of cash dividends
(8,765
)
 
(8,490
)
Excess tax benefit from stock-based compensation
4,086

 
679

Cash used for financing activities
(17,724
)
 
(25,582
)
Effect of exchange rate changes on cash and cash equivalents
789

 
(1,184
)
Net increase (decrease) in cash and cash equivalents
17,204

 
(1,406
)
Cash and cash equivalents at beginning of period
228,776

 
209,335

Cash and cash equivalents at end of period
$
245,980

 
$
207,929

SUPPLEMENTAL DISCLOSURES
 
 
 
Transfers of long-term investments to short-term investments
$
60,424

 
$
48,574


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 September 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 and six months ended September 28, 2013 and September 29, 2012 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.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Recently Issued Pronouncements

Recent accounting pronouncements issued by the Financial Accounting Standards Board ("FASB") and the SEC did not and 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, 2013 and March 31, 2013:

(in thousands)
 
September 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
 
$
236,372

 
$

 
$

 
$
236,372

 
$
118,881

 
$

 
$

 
$
118,881

Cash equivalents
 
9,607

 
1

 

 
9,608

 
109,895

 

 

 
109,895

Total cash and cash equivalents
 
$
245,979

 
$
1

 
$

 
$
245,980

 
$
228,776

 
$

 
$

 
$
228,776

 
 


 


 


 


 


 


 


 


Short-term investments:
 


 


 


 


 


 


 


 


U.S. Treasury Bills and Government Agency Securities
 
$
56,964

 
$
33

 
$
(15
)
 
$
56,982

 
$
66,092

 
$
18

 
$
(3
)
 
$
66,107

Commercial paper
 
30,835

 
12

 
(1
)
 
30,846

 
15,670

 
9

 

 
15,679

Corporate bonds
 
24,294

 
19

 
(1
)
 
24,312

 
34,766

 
31

 
(2
)
 
34,795

Certificates of deposit ("CDs")
 
1,002

 
1

 

 
1,003

 

 

 

 

Total short-term investments
 
$
113,095

 
$
65

 
$
(17
)
 
$
113,143

 
$
116,528

 
$
58

 
$
(5
)
 
$
116,581

 
 


 


 


 


 


 


 


 


Long-term investments:
 


 


 


 


 


 


 


 


U.S. Treasury Bills and Government Agency Securities
 
$
15,473

 
$
18

 
$
(4
)
 
$
15,487

 
$
55,317

 
$
42

 
$
(1
)
 
$
55,358

Corporate bonds
 
63,926

 
85

 
(23
)
 
63,988

 
23,878

 
23

 
(3
)
 
23,898

 CDs
 

 

 

 

 
1,002

 
3

 

 
1,005

Total long-term investments
 
$
79,399

 
$
103

 
$
(27
)
 
$
79,475

 
$
80,197

 
$
68

 
$
(4
)
 
$
80,261

 
 

 

 

 

 

 

 

 

Total cash, cash equivalents and investments
 
$
438,473

 
$
169

 
$
(44
)
 
$
438,598

 
$
425,501

 
$
126

 
$
(9
)
 
$
425,618


As of September 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 September 30, 2013 and March 31, 2013:

(in thousands)
 
September 30, 2013
 
March 31, 2013
 
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Due in 1 year or less
 
$
122,702


$
122,751

 
$
226,423


$
226,476

Due in 1 to 3 years
 
79,399


79,475

 
80,197


80,261

Total
 
$
202,101


$
202,226

 
$
306,620


$
306,737


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


8


4. FAIR VALUE MEASUREMENTS

The following tables present the Company’s financial assets and liabilities, measured at fair value, by level within the fair value hierarchy as of September 30, 2013 and March 31, 2013.

Fair Values as of September 30, 2013:
(in thousands)
 
Level 1
 
Level 2
 
Total
Cash and cash equivalents:
 
 
 
 
 
 
Cash
 
$
236,372

 
$

 
$
236,372

Mutual funds
 
609

 

 
609

Commercial paper
 

 
8,999

 
8,999

Short-term investments:
 
 
 
 
 
 
Government Agency Securities
 

 
56,982

 
56,982

Commercial paper
 

 
30,846

 
30,846

Corporate bonds
 

 
24,312

 
24,312

CDs
 

 
1,003

 
1,003

Long-term investments:
 
 
 
 
 
 
Government Agency Securities
 

 
15,487

 
15,487

Corporate bonds
 

 
63,988

 
63,988

Other current assets:
 
 
 
 
 
 
Derivative assets
 

 
70

 
70

Total assets measured at fair value
 
$
236,981

 
$
201,687

 
$
438,668

 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
Derivative liabilities
 
$
8

 
$
2,435

 
$
2,443


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 and six months ended September 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 September 30, 2013 and March 31, 2013.

9


All 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 Mutual Funds. 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.

5. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS

Accounts receivable, net:
 
 
September 30,
 
March 31,
(in thousands)
 
2013
 
2013
Accounts receivable
 
$
147,581

 
$
151,250

Provisions for returns
 
(7,756
)
 
(8,957
)
Provisions for promotions, rebates, and other
 
(15,771
)
 
(13,675
)
Provisions for doubtful accounts and sales allowances
 
(306
)
 
(409
)
Accounts receivable, net
 
$
123,748

 
$
128,209


Inventory, net:
 
 
September 30,
 
March 31,
(in thousands)
 
2013
 
2013
Raw materials
 
$
33,659

 
$
28,743

Work in process
 
432

 
82

Finished goods
 
35,059

 
38,610

Inventory, net
 
$
69,150

 
$
67,435



10


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

 
$
13,961

Buildings and improvements (useful life: 7-30 years)
 
89,434

 
72,263

Machinery and equipment (useful life: 2-10 years)
 
94,737

 
88,538

Software (useful life: 5-6 years)
 
31,268

 
30,538

Construction in progress
 
17,892

 
16,101

 
 
247,292

 
221,401

Accumulated depreciation and amortization
 
(128,974
)
 
(122,290
)
   Property, plant, and equipment, net
 
$
118,318

 
$
99,111


Depreciation and amortization was $3.7 million and $7.7 million for the three and six months ended September 30, 2013, respectively, and $4.0 million and $7.7 million for the same periods in the prior year, respectively.

Included in Software are unamortized capitalized software costs of $5.6 million and $6.1 million at September 30, 2013 and March 31, 2013, respectively. Amortization related to capitalized software costs was immaterial for the three months ended September 30, 2013 and 2012, and was $1.2 million and $1.5 million for the six months ended September 30, 2013 and 2012, respectively.

Accrued Liabilities:
 
 
September 30,
 
March 31,
(in thousands)
 
2013
 
2013
Employee compensation and benefits
 
$
23,164

 
$
29,796

Warranty obligation
 
12,881

 
13,410

Accrued advertising, sales, and marketing
 
4,245

 
3,735

Deferred revenue
 
3,994

 
3,072

Liabilities related to derivatives contracts
 
2,443

 
294

Income taxes payable
 

 
3,376

Restructuring and other related charges (1)
 
47

 
1,165

Accrued other
 
14,152

 
11,571

Accrued liabilities
 
$
60,926

 
$
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 six months ended September 30, 2013 were as follows:

 
 
Six Months Ended
 
Six Months Ended
(in thousands)
 
September 30, 2013
 
September 30, 2012
Warranty obligation at March 31, 2013
 
$
13,410

 
$
13,346

Warranty provision relating to products shipped
 
4,154

 
7,440

Deductions for warranty claims processed
 
(4,683
)
 
(8,064
)
Warranty obligation at September 30, 2013
 
$
12,881

 
$
12,722



11


6. GOODWILL

Goodwill as of September 30, 2013 and March 31, 2013 was $15.5 million, net of accumulated impairment of $54.6 million.

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, 2013 are as follows:

Fiscal Year Ending March 31,
 
(in thousands)
2014 (remaining 6 months)
 
$
1,997

2015
 
1,920

2016
 
1,341

2017
 
730

2018
 
652

Thereafter
 
1,576

Total minimum future rental payments
 
$
8,216


Total rent expense for operating leases for the three and six months ended September 30, 2013 was $2.6 million and $4.1 million, respectively, which included $1.2 million and $1.5 million, respectively, related to early exit lease charges. Total rent expense for operating leases for the three and six months ended September 30, 2012 was $1.4 million and $2.8 million, respectively.

Unconditional Purchase Obligations

The Company utilizes several outsourcing partners to manufacture sub-assemblies for the Company’s products. These outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods up to 270 days. The Company also obtains individual components for its products from a wide variety of individual suppliers. Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. As of September 30, 2013, the Company had outstanding off-balance sheet third-party manufacturing, component purchase, and other general and administrative commitments of $244.5 million.

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 condensed consolidated financial statements.



12


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"). 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, 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.

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, 2013.



13


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
 
Six Months Ended
 
 
September 30,
 
September 30,
(in thousands)
 
2013
 
2012
 
2013
 
2012
Cost of revenues
 
$
638

 
$
526

 
$
1,173

 
$
1,122

 
 


 


 


 


Research, development and engineering
 
1,652

 
1,256

 
3,020

 
2,380

Selling, general and administrative
 
3,675

 
3,080

 
6,760

 
5,980

Stock-based compensation included in operating expenses
 
5,327

 
4,336

 
9,780

 
8,360

Total stock-based compensation
 
5,965

 
4,862

 
10,953

 
9,482

Income tax benefit
 
(1,838
)
 
(1,532
)
 
(3,275
)
 
(2,914
)
Total stock-based compensation, net of tax
 
$
4,127

 
$
3,330

 
$
7,678

 
$
6,568


Stock Options

The following is a summary of the Company’s stock option activity during the six months ended September 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
176

 
$
45.98

 
 
 
 
Options exercised
(667
)
 
$
24.09

 
 
 
 
Options forfeited or expired
(10
)
 
$
32.74

 
 
 
 
Outstanding at September 30, 2013
1,914

 
$
30.94

 
4.2
 
$
29,739

Vested and expected to vest at September 30, 2013
1,872

 
$
30.76

 
4.2
 
$
29,419

Exercisable at September 30, 2013
1,275

 
$
27.85

 
3.4
 
$
23,735


The total intrinsic value of options exercised during the six months ended September 30, 2013 and 2012 was $14.5 million and $4.5 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, 2013 was $16.1 million, net of taxes.

As of September 30, 2013, total unrecognized compensation cost related to unvested stock options was $5.8 million, which is expected to be recognized over a weighted average period of 1.9 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, 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
541

 
$
46.10

Restricted stock vested
(274
)
 
$
32.61

Restricted stock forfeited
(31
)
 
$
36.86

Non-vested at September 30, 2013
1,261

 
$
38.88


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, 2013 and 2012 was $46.10 and $32.05, respectively. The total fair value of restricted stock that vested during the six months ended September 30, 2013 and 2012 was $8.9 million and $4.9 million, respectively.

As of September 30, 2013, total unrecognized compensation cost related to unvested restricted stock was $34.4 million, which is expected to be recognized over a weighted average period of 2.3 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
 
Six Months Ended
 
 
September 30,
 
September 30,
Employee Stock Options
 
2013

2012
 
2013
 
2012
Expected volatility
 
30.7
%
 
43.5
%
 
33.5
%
 
42.2
%
Risk-free interest rate
 
1.2
%
 
0.5
%
 
0.7
%
 
0.6
%
Expected dividends
 
0.8
%
 
1.3
%
 
0.9
%
 
1.3
%
Expected life (in years)
 
4.2

 
4.3

 
4.2

 
4.3

Weighted-average grant date fair value
 
$
11.64

 
$
10.84

 
$
11.83

 
$
10.43

ESPP
 
 
 
 
 
 
 
 
Expected volatility
 
24.9
%
 
38.4
%
 
24.9
%
 
38.4
%
Risk-free interest rate
 
0.1
%
 
0.1
%
 
0.1
%
 
0.1
%
Expected dividends
 
0.9
%
 
1.1
%
 
0.9
%
 
1.1
%
Expected life (in years)
 
0.5

 
0.5

 
0.5

 
0.5

Weighted-average grant date fair value
 
$
9.58

 
$
8.95

 
$
9.58

 
$
8.95


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, 2013 and 2012 are discussed below. As of September 30, 2013, there remained 274,874 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 six months ended September 30, 2013 and 2012, the Company repurchased 607,033 shares and 633,613 shares, respectively, of its common stock in the open market for a total cost of $27.3 million and $19.9 million, respectively, and at an average price per share of $44.99 and $31.45, respectively.

In addition, the Company withheld shares valued at $4.4 million in the six months ended September 30, 2013, compared to $1.7 million in the six months ended September 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 ("AOCI"), net of immaterial tax effects, are as follows:

(in thousands)
 
September 30, 2013
 
March 31, 2013
Accumulated unrealized gain (loss) on cash flow hedges
 
$
(2,325
)
 
$
1,349

Accumulated foreign currency translation adjustments
 
4,091

 
4,131

Accumulated unrealized gain on investments
 
92

 
87

Accumulated other comprehensive income
 
$
1,858

 
$
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 September 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.

The Company enters into master netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions. A master netting arrangement may allow each counterparty to net settle amounts owed between Plantronics and the counterparty as a result of multiple, separate derivative transactions. As of September 30, 2013, the Company has International Swaps and Derivatives Association (ISDA) agreements with three applicable banks and financial institutions which contain netting provisions. Plantronics has elected to present the fair value of derivative assets and liabilities within the Company's consolidated balance sheet on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. However, the following tables provide information as if the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria in the event of default or termination as stipulated by the terms of netting arrangements with each of the counterparties. For each counterparty, if netted, the Company would offset the asset and liability balances of all derivatives at the end of the reporting period. Derivatives not subject to master netting agreements are not eligible for net presentation. As of the applicable dates presented below, no cash collateral had been received or pledged related to these derivative instruments.



16


Offsetting of Financial Assets/Liabilities under Master Netting Agreements with Derivative Counterparties

As of September 30, 2013:

 
Gross Amount of Derivative Assets Presented in the Condensed Consolidated Balance Sheets
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet that are Subject to Master Netting Agreements
 
(in thousands)
Gross Amount of Eligible Offsetting Recognized Derivative Liabilities
Cash Collateral Received
Net Amount of Derivative Assets
Derivatives subject to master netting agreements
$
70

$
(70
)
$

$

Derivatives not subject to master netting agreements




Total
$
70



$


 
Gross Amount of Derivative Liabilities Presented in the Condensed Consolidated Balance Sheets
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet that are Subject to Master Netting Agreements
 
(in thousands)
Gross Amount of Eligible Offsetting Recognized Derivative Assets
Cash Collateral Received
Net Amount of Derivative Liabilities
Derivatives subject to master netting agreements
$
(1,577
)
$
70

$

$
(1,507
)
Derivatives not subject to master netting agreements
(866
)


(866
)
Total
$
(2,443
)


$
(2,373
)


As of March 31, 2013:

 
Gross Amount of Derivative Assets Presented in the Condensed Consolidated Balance Sheets
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet that are Subject to Master Netting Agreements
 
(in thousands)
Gross Amount of Eligible Offsetting Recognized Derivative Liabilities
Cash Collateral Received
Net Amount of Derivative Assets
Derivatives subject to master netting agreements
$
1,005

$
(215
)
$

$
790

Derivatives not subject to master netting agreements
660



660

Total
$
1,665



$
1,450


 
Gross Amount of Derivative Liabilities Presented in the Condensed Consolidated Balance Sheets
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet that are Subject to Master Netting Agreements
 
(in thousands)
Gross Amount of Eligible Offsetting Recognized Derivative Assets
Cash Collateral Received
Net Amount of Derivative Liabilities
Derivatives subject to master netting agreements
$
(215
)
$
215

$

$

Derivatives not subject to master netting agreements
(79
)


(79
)
Total
$
(294
)


$
(79
)


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


17


Non-Designated Hedges

As of September 30, 2013, the Company had foreign currency forward contracts denominated in Euros ("EUR"), British Pound Sterling ("GBP"), and Australian Dollars ("AUD").  The Company does not elect to obtain hedge accounting for these forward contracts. 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, 2013:

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

 
$
21,632

 
Sell EUR
 
1 month
GBP
£
2,600

 
$
4,191

 
Sell GBP
 
1 month
AUD
A$
4,600

 
$
4,276

 
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, 2013 and immaterial net gains and immaterial net losses, respectively, in the three and six months ended September 30, 2012, which 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 September 30, 2013, the Company had foreign currency option contracts of approximately €50.8 million and £21.0 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 and six months ended September 30, 2013, an immaterial loss on cash flow hedges was recognized in net revenues in the condensed consolidated statement of operations, compared to realized gains of $1.2 million and $3.1 million for the three and six months periods in the prior year, respectively.  A loss of $2.0 million, net of tax, in accumulated other comprehensive income ("AOCI") as of September 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 September 30, 2013 and March 31, 2013, the Company had foreign currency swap contracts of approximately MX$361.1 million and MX$325.4 million, respectively.

In the three and six months ended September 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 September 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 September 30, 2013:

 
Local Currency
 
USD Equivalent
 
Position
 
Maturity
 
(in thousands)
 
(in thousands)
 
 
 
 
 
MX$
$
361,100

 
$
27,500

 
Buy MX$
 
Monthly over
15 months


18


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
 
 
September 30,
 
March 31,
 
September 30,
 
March 31,
(in thousands)
 
2013
 
2013
 
2013
 
2013
Foreign exchange contracts designated as cash flow hedges
 
$
70

 
$
1,665

 
$
2,443

 
$
294



Effect of Designated Derivative Contracts on AOCI

The following table represents the balance of designated derivative contracts as of September 30, 2013 and March 31, 2013, and the pre-tax impact of designated derivative contracts on AOCI for the six months ended September 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 September 30, 2013
Foreign exchange contracts designated as cash flow hedges
 
$
1,371

 
$
(3,646
)
 
$
98

 
$
(2,373
)


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
 
Six Months Ended
 
 
September 30,
 
September 30,
(in thousands)
 
2013
 
2012
 
2013
 
2012
Gain (loss) on foreign exchange contracts designated as cash flow hedges
 
$
(156
)
 
$
1,074

 
$
98

 
$
2,768



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 (expense), net in the condensed consolidated statements of operations was as follows:

 
 
Three Months Ended
 
Six Months Ended
 
 
September 30,
 
September 30,
(in thousands)
 
2013
 
2012
 
2013
 
2012
Gain (loss) on foreign exchange contracts
 
$
(1,266
)
 
$
(648
)
 
$
(1,193
)
 
$
819



19


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 and six months ended September 30, 2013 was 25.8% and 24.9%, respectively, compared to 25.5% and 26.0%, respectively, for the same periods 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.  

Included in long-term income taxes payable in the condensed consolidated balance sheets as of September 30, 2013 and March 31, 2013 were unrecognized tax benefits of $11.8 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 $1.9 million as of September 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 2007, 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.


20


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 and six month periods ending September 30, 2013 or 2012.

The following table sets forth the computation of basic and diluted earnings per common share for the three and six months ended September 30, 2013 and 2012:
 
 
Three Months Ended
 
Six Months Ended
 
 
September 30,
 
September 30,
(in thousands, except per share data)
 
2013

2012
 
2013
 
2012
Numerator:
 
 
 
 
 
 
 
 
Net income
 
$
23,138

 
$
25,924

 
$
50,091

 
$
49,487

 
 

 

 

 

Denominator:
 

 

 

 

Weighted average common shares-basic
 
42,810

 
41,482

 
42,751

 
41,571

Dilutive effect of employee equity incentive plans
 
787

 
921

 
916

 
950

Weighted average common shares-diluted
 
43,597

 
42,403

 
43,667

 
42,521

 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.54

 
$
0.62

 
$
1.17

 
$
1.19

Diluted earnings per common share
 
$
0.53

 
$
0.61

 
$
1.15

 
$
1.16

 
 
 
 
 
 

 

Potentially dilutive securities excluded from diluted earnings per common share because their effect is anti-dilutive
 
183

 
1,061

 
162

 
1,081


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 and six months ended September 30, 2013 and 2012:
 
 
Three Months Ended
 
Six Months Ended
 
 
September 30,
 
September 30,
(in thousands)
 
2013

2012
 
2013
 
2012
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
Office and Contact Center
 
$
139,945

 
$
133,119

 
$
291,128

 
$
267,152

Mobile
 
42,685

 
33,305

 
84,309

 
69,462

Gaming and Computer Audio
 
8,156

 
7,797

 
14,607

 
14,586

Clarity
 
3,194

 
5,059

 
6,754

 
9,445

Total net revenues
 
$
193,980

 
$
179,280

 
$
396,798

 
$
360,645



21


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 and six months ended September 30, 2013 and 2012. The following table presents net revenues by geography:

 
 
Three Months Ended
 
Six Months Ended
 
 
September 30,
 
September 30, 2013
(in thousands)
 
2013

2012
 
2013
 
2012
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
U.S.
 
$
115,795

 
$
107,513

 
$
237,113

 
$
211,591

 
 


 


 


 


Europe and Africa
 
43,094

 
38,951

 
87,479

 
80,527

Asia Pacific
 
23,280

 
19,839

 
47,160

 
43,418

Americas, excluding U.S.
 
11,811

 
12,977

 
25,046

 
25,109

Total international net revenues
 
78,185

 
71,767

 
159,685

 
149,054

Total net revenues
 
$
193,980

 
$
179,280

 
$
396,798

 
$
360,645


One customer, Ingram Micro, accounted for 10.1% and 10.3%, respectively of net revenues for the three and six months ended September 30, 2013. This customer also 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.

Ingram Micro also accounted for 11.7% and 10.3% of net accounts receivable in the condensed consolidated balance sheets at September 30, 2013 and March 31, 2013, respectively.

16. SUBSEQUENT EVENTS

On October 29, 2013, 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, 2013 to stockholders of record at the close of business on November 20, 2013.



22


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) our expectations regarding the slow long-term growth of the traditional office and contact center market and its correlation to gross domestic product in the United States and Western Europe, (v) the growth of UC in enterprises and the impact to our sales in the office and contact center market, (vi) our expectations for new product launches and new consumer product development efforts in fiscal year 2015 and beyond, (vii) the Mobile Bluetooth market and the stereo and mono product categories, (viii) our position in the Mobile Bluetooth market and the effect of our new products on our position in that market, (ix) our research and development strategy, including our investments in software development, (x) our expectations regarding our sales force and customer service operations, (xi) the maintenance of our reputation in the industry, (xii) our expenses, including research, development and engineering expenses and selling, general and administrative expenses, (xiii) our future tax rate, (xiv) our anticipated capital expenditures for the remainder of fiscal year 2014 and the sufficiency of our cash, cash equivalents and cash from operations, (xv) our planned investment of and need for our foreign cash and our ability to repatriate that cash, (xvi) our ability to draw funds on our credit facility as needed, (xvii) future fluctuations in our cash provided by operating activities, (xviii) the timing for implementation of our new ERP system, and (xix) 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, value-add resellers ("VARs"), 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, and gaming and computer audio 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.

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.


23


The traditional office and contact center market ("Core OCC") is the most mature in which we participate. Given the migration to UC by corporations globally, we 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 expect most of the growth in our Office and Contact Center ("OCC") category over the next five years to come from headsets designed for UC.

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.

Total net revenues increased to $194.0 million in the second quarter growing 8% over the second quarter of the prior year. UC product revenues increased, growing by 22% over the prior-year quarter to $36.9 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.
   
In the second quarter of our fiscal year 2014, our Bluetooth product portfolio included Voyager Legend and Marque in the mono Bluetooth category, and BackBeat GO 2 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 these investments in software development will help us to differentiate our products and maintain long-term gross margins within our business model. We continue to strengthen our strategic partnerships with Unified Communications platform suppliers to ensure that our products remain compatible with all major platforms as UC usage becomes an essential part of a the enterprise communications landscape.

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. 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.


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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)
 
2013
 
2012
 
2013
 
2012
Net revenues
 
$
193,980

 
100.0
 %
 
$
179,280

 
100.0
%
 
$
396,798

 
100.0
%
 
$
360,645

 
100.0
%
Cost of revenues
 
94,366

 
48.6
 %
 
82,052

 
45.8
%
 
191,552

 
48.3
%
 
165,721

 
46.0
%
Gross profit
 
99,614

 
51.4
 %
 
97,228

 
54.2
%
 
205,246

 
51.7
%
 
194,924

 
54.0
%
Operating expenses:
 


 
 

 


 
 

 


 
 
 


 
 
Research, development, and engineering
 
20,447

 
10.5
 %
 
19,581

 
10.9
%
 
41,310

 
10.4
%
 
39,277

 
10.9
%
Selling, general, and administrative
 
48,507

 
25.0
 %
 
43,130

 
24.1
%
 
96,604

 
24.3
%
 
89,034

 
24.7
%
Restructuring and other related charges
 
(176
)
 
(0.1
)%
 

 
%
 
547

 
0.1
%
 

 
%
Total operating expenses
 
68,778

 
35.5
 %
 
62,711

 
35.0
%
 
138,461

 
34.9
%
 
128,311

 
35.6
%
Operating income
 
30,836

 
15.9
 %
 
34,517

 
19.3
%
 
66,785

 
16.8
%
 
66,613

 
18.5
%
Interest and other income (expense), net
 
359