10-Q 1 form10qq3fy2014.htm 10-Q form10Q.Q3FY2014

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 December 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 January 25, 2014, 42,998,159 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 Nine Months Ended December 31, 2013 and 2012
 
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
 
 
 
 
Item 6. Exhibits
 
 

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)

 
December 31,
2013
 
March 31,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
235,534

 
$
228,776

Short-term investments
86,397

 
116,581

Accounts receivable, net
133,379

 
128,209

Inventory, net
66,569

 
67,435

Deferred tax assets
14,351

 
10,120

Other current assets
16,875

 
15,369

Total current assets
553,105

 
566,490

Long-term investments
106,800

 
80,261

Property, plant, and equipment, net
124,933

 
99,111

Goodwill and purchased intangibles, net
16,215

 
16,440

Other assets
2,317

 
2,303

Total assets
$
803,370

 
$
764,605

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
26,728

 
$
37,067

Accrued liabilities
66,615

 
66,419

Total current liabilities
93,343

 
103,486

Deferred tax liabilities
2,024

 
1,742

Long-term income taxes payable
13,460

 
12,005

Other long-term liabilities
2,295

 
925

Total liabilities
111,122

 
118,158

Commitments and contingencies (Note 7)


 


Stockholders' equity:
 

 
 

Common stock
768

 
757

Additional paid-in capital
652,503

 
612,283

Accumulated other comprehensive income
1,773

 
5,567

Retained earnings
99,713

 
28,344

Total stockholders' equity before treasury stock
754,757

 
646,951

Less:  Treasury stock, at cost
(62,509
)
 
(504
)
Total stockholders' equity
692,248

 
646,447

Total liabilities and stockholders' equity
$
803,370

 
$
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
 
Nine Months Ended
 
December 31,
 
December 31,
 
2013
 
2012
 
2013
 
2012
Net revenues
$
212,739

 
$
197,402

 
$
609,537

 
$
558,047

Cost of revenues
102,412

 
95,238

 
293,964

 
260,959

Gross profit
110,327

 
102,164

 
315,573

 
297,088

Operating expenses:


 


 


 


Research, development, and engineering
21,018

 
20,248

 
62,328

 
59,525

Selling, general, and administrative
51,467

 
45,442

 
148,071

 
134,476

Restructuring and other related charges

 
1,868

 
547

 
1,868

Total operating expenses
72,485

 
67,558

 
210,946

 
195,869

Operating income
37,842

 
34,606

 
104,627

 
101,219

Interest and other income, net
186

 
177

 
59

 
464

Income before income taxes
38,028

 
34,783

 
104,686

 
101,683

Income tax expense
3,645

 
6,577

 
20,212

 
23,990

Net income
$
34,383

 
$
28,206

 
$
84,474

 
$
77,693

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.81

 
$
0.68

 
$
1.98

 
$
1.87

Diluted
$
0.80

 
$
0.66

 
$
1.94

 
$
1.82

 
 
 
 
 
 
 
 
Shares used in computing earnings per common share:
 
 
 
 
 
 
Basic
42,441

 
41,745

 
42,647

 
41,629

Diluted
43,228

 
42,618

 
43,554

 
42,579

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.10

 
$
0.10

 
$
0.30

 
$
0.30




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
 
Nine Months Ended
 
December 31,
 
December 31,
 
2013
 
2012
 
2013
 
2012
Net income
$
34,383

 
$
28,206

 
$
84,474

 
$
77,693

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(73
)
 
61

 
(114
)
 
(58
)
Unrealized gains (losses) on cash flow hedges:
 
 
 
 
 
 
 
Unrealized cash flow hedge gains (losses) arising during the period
(218
)
 
(944
)
 
(3,794
)
 
590

Net (gains) losses reclassified into income for revenue hedges
114

 
(262
)
 
258

 
(3,281
)
Net (gains) losses reclassified into income for cost of revenue hedges
63

 
(399
)
 
(176
)
 
(109
)
Net unrealized losses on cash flow hedges
(41
)
 
(1,605
)
 
(3,712
)
 
(2,800
)
Unrealized gains (losses) on investments:
 
 
 
 
 
 
 
Unrealized holding gains (losses) during the period
(1
)
 
(33
)
 
5

 
25

Other comprehensive loss
(115
)
 
$
(1,577
)
 
(3,821
)
 
$
(2,833
)
Comprehensive income
$
34,268

 
$
26,629

 
$
80,653

 
$
74,860




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)
 
Nine Months Ended
 
December 31,
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
84,474

 
$
77,693

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
11,671

 
12,104

Stock-based compensation
16,996

 
14,173

Provision for excess and obsolete inventories
4,419

 
1,306

Deferred income taxes
530

 
(1,030
)
Excess tax benefit from stock-based compensation
(4,434
)
 
(930
)
Other operating activities
1,345

 
1,639

Changes in assets and liabilities:
 

 
 
Accounts receivable, net
(6,539
)
 
(1,215
)
Inventory, net
(3,135
)
 
(13,943
)
Current and other assets
826

 
(4,928
)
Accounts payable
(10,339
)
 
1,723

Accrued liabilities
1,388

 
3,840

Income taxes
(5,080
)
 
2,822

Cash provided by operating activities
92,122

 
93,254

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 
Proceeds from sales of investments
89,682

 
38,078

Proceeds from maturities of investments
95,210

 
117,665

Purchase of investments
(181,836
)
 
(188,062
)
Acquisitions, net of cash acquired

 
(1,926
)
Capital expenditures
(37,657
)
 
(29,378
)
Cash used for investing activities
(34,601
)
 
(63,623
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 
Repurchase of common stock
(56,754
)
 
(23,626
)
Proceeds from issuances under stock-based compensation plans
19,599

 
13,091

Employees' tax withheld and paid for restricted stock and restricted stock units
(6,014
)
 
(2,848
)
Proceeds from revolving line of credit

 
18,000

Repayments of revolving line of credit

 
(35,000
)
Payment of cash dividends
(13,105
)
 
(12,756
)
Excess tax benefit from stock-based compensation
4,434

 
930

Cash used for financing activities
(51,840
)
 
(42,209
)
Effect of exchange rate changes on cash and cash equivalents
1,077

 
(101
)
Net increase (decrease) in cash and cash equivalents
6,758

 
(12,679
)
Cash and cash equivalents at beginning of period
228,776

 
209,335

Cash and cash equivalents at end of period
$
235,534

 
$
196,656


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 December 31, 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 the Company 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 nine months ended December 28, 2013 and December 29, 2012 both contain 13 and 39 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.

Out of Period Corrections of Immaterial Errors

During the third quarter of fiscal 2014, the Company identified immaterial out of period errors related to its estimated warranty obligation and return material authorization ("RMA") reserves, the correction of which decreased its cost of revenues by approximately $2.4 million and increased net income by approximately $2.1 million. The Company recorded these corrections in the quarter ended December 31, 2013 because the errors were not material, either individually or in the aggregate, to any of the prior reporting periods. In addition, the Company expects the cumulative amount of these adjustments, both individually and in the aggregate, will not be material for the fiscal year ending March 31, 2014.

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 December 31, 2013 and March 31, 2013:

(in thousands)
 
December 31, 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
 
$
225,310

 
$

 
$

 
$
225,310

 
$
118,881

 
$

 
$

 
$
118,881

Cash equivalents
 
10,223

 
1

 

 
10,224

 
109,895

 

 

 
109,895

Total cash and cash equivalents
 
$
235,533

 
$
1

 
$

 
$
235,534

 
$
228,776

 
$

 
$

 
$
228,776

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments (due in 1 year or less):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
$
19,227

 
$
6

 
$
(1
)
 
$
19,232

 
$
66,092

 
$
18

 
$
(3
)
 
$
66,107

Commercial paper
 
43,792

 
13

 

 
43,805

 
15,670

 
9

 

 
15,679

Corporate bonds
 
22,353

 
6

 
(2
)
 
22,357

 
34,766

 
31

 
(2
)
 
34,795

Certificates of deposit ("CDs")
 
1,002

 
1

 

 
1,003

 

 

 

 

Total short-term investments
 
$
86,374

 
$
26

 
$
(3
)
 
$
86,397

 
$
116,528

 
$
58

 
$
(5
)
 
$
116,581

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term investments (due in 1 to 3 years):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury Bills and Government Agency Securities
 
$
36,929

 
$
23

 
$
(14
)
 
$
36,938

 
$
55,317

 
$
42

 
$
(1
)
 
$
55,358

Corporate bonds
 
69,772

 
116

 
(26
)
 
69,862

 
23,878

 
23

 
(3
)
 
23,898

 CDs
 

 

 

 

 
1,002

 
3

 

 
1,005

Total long-term investments
 
$
106,701

 
$
139

 
$
(40
)
 
$
106,800

 
$
80,197

 
$
68

 
$
(4
)
 
$
80,261

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total cash, cash equivalents and investments
 
$
428,608

 
$
166

 
$
(43
)
 
$
428,731

 
$
425,501

 
$
126

 
$
(9
)
 
$
425,618


As of December 31, 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 Company did not incur any material realized or unrealized net gains or losses in the three and nine months ended December 31, 2013 and 2012.


8


4. FAIR VALUE MEASUREMENTS

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

Fair Values as of December 31, 2013:
(in thousands)
 
Level 1
 
Level 2
 
Total
Cash and cash equivalents:
 
 
 
 
 
 
Cash
 
$
225,310

 
$

 
$
225,310

Mutual funds
 
1,227

 

 
1,227

Commercial paper
 

 
8,997

 
8,997

Short-term investments:
 
 
 
 
 
 
Government Agency Securities
 

 
19,232

 
19,232

Commercial paper
 

 
43,805

 
43,805

Corporate bonds
 

 
22,357

 
22,357

CDs
 

 
1,003

 
1,003

Long-term investments:
 
 
 
 
 
 
Government Agency Securities
 

 
36,938

 
36,938

Corporate bonds
 

 
69,862

 
69,862

Other current assets:
 
 
 
 
 
 
Derivative assets
 

 
967

 
967

Total assets measured at fair value
 
$
226,537

 
$
203,161

 
$
429,698

 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
Derivative liabilities
 
$

 
$
3,841

 
$
3,841


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 nine months ended December 31, 2013 and 2012.

Refer to Note 12, Foreign Currency Derivatives, which discloses the nature of the Company's derivative assets and liabilities as of December 31, 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. 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 and cross-currency swaps. 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 contracts is determined using pricing models that use observable market inputs.

5. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS

Accounts receivable, net:
 
 
December 31,
 
March 31,
(in thousands)
 
2013
 
2013
Accounts receivable
 
$
159,317

 
$
151,250

Provisions for returns
 
(8,912
)
 
(8,957
)
Provisions for promotions, rebates, and other
 
(16,814
)
 
(13,675
)
Provisions for doubtful accounts and sales allowances
 
(212
)
 
(409
)
Accounts receivable, net
 
$
133,379

 
$
128,209


Inventory, net:
 
 
December 31,
 
March 31,
(in thousands)
 
2013
 
2013
Raw materials
 
$
34,258

 
$
28,743

Work in process
 
432

 
82

Finished goods
 
31,879

 
38,610

Inventory, net
 
$
66,569

 
$
67,435

  
Accrued Liabilities:
 
 
December 31,
 
March 31,
(in thousands)
 
2013
 
2013
Employee compensation and benefits
 
$
31,779

 
$
29,796

Warranty obligation
 
7,963

 
13,410

Accrued advertising, sales, and marketing
 
4,847

 
3,735

Accrued other
 
22,026

 
19,478

Accrued liabilities
 
$
66,615

 
$
66,419



10


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 nine months ended December 31, 2013 were as follows:

 
 
Nine Months Ended
 
Nine Months Ended
(in thousands)
 
December 31, 2013
 
December 31, 2012
Warranty obligation at beginning of period
 
$
13,410

 
$
13,346

Correction of immaterial prior period error (2)
 
(5,042
)
 

Warranty provision relating to products shipped
 
6,851

 
11,856

Deductions for warranty claims processed
 
(7,256
)
 
(12,147
)
Warranty obligation at end of period
 
$
7,963

 
$
13,055

(2)Refer to Note 1, Basis of Presentation, for details about the prior period error corrected in the quarter ended December 31, 2013.

6. GOODWILL

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

7. COMMITMENTS AND CONTINGENCIES

Unconditional Purchase Obligations

The Company contracts with 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 December 31, 2013, the Company had outstanding off-balance sheet third-party manufacturing, component purchase, and other general and administrative commitments of $215.7 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, the Company 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 of the Company. 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.


11


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 the Company 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 the Company attracts SIDs through exclusive distributor agreements and alleges that the use of these agreements is 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. With respect to proceedings for which no accrual has been made, 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 January 27, 2014 to extend its term to May 9, 2017 (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 December 31, 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, 2017. 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 December 31, 2013.



12


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
 
Nine Months Ended
 
 
December 31,
 
December 31,
(in thousands)
 
2013
 
2012
 
2013
 
2012
Cost of revenues
 
$
686

 
$
507

 
$
1,859

 
$
1,629

 
 


 


 


 


Research, development and engineering
 
1,688

 
1,336

 
4,708

 
3,715

Selling, general and administrative
 
3,669

 
2,848

 
10,429

 
8,829

Stock-based compensation included in operating expenses
 
5,357

 
4,184

 
15,137

 
12,544

Total stock-based compensation
 
6,043

 
4,691

 
16,996

 
14,173

Income tax benefit
 
(1,788
)
 
(1,342
)
 
(5,063
)
 
(4,256
)
Total stock-based compensation, net of tax
 
$
4,255

 
$
3,349

 
$
11,933

 
$
9,917


Stock Options

The following is a summary of the Company’s stock option activity during the nine months ended December 31, 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
297

 
$
44.75

 
 
 
 
Options exercised
(702
)
 
$
24.27

 
 
 
 
Options forfeited or expired
(13
)
 
$
33.28

 
 
 
 
Outstanding at December 31, 2013
1,997

 
$
31.71

 
4.2
 
$
29,100

Vested and expected to vest at December 31, 2013
1,952

 
$
31.52

 
4.1
 
$
28,834

Exercisable at December 31, 2013
1,364

 
$
28.40

 
3.4
 
$
24,373


The total intrinsic value of options exercised during the nine months ended December 31, 2013 and 2012 was $15.1 million and $5.1 million, respectively.  Intrinsic value is defined as the amount by which the fair value of the underlying stock exceeds the exercise price at the time of option exercise. The total cash received as a result of stock option exercises during the nine months ended December 31, 2013 was $17.0 million, net of taxes.

As of December 31, 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 2.0 years.


13


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 nine months ended December 31, 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
570

 
$
46.09

Restricted stock vested
(373
)
 
$
33.09

Restricted stock forfeited
(36
)
 
$
37.07

Non-vested at December 31, 2013
1,186

 
$
39.43


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 nine months ended December 31, 2013 and 2012 was $46.09 and $32.13, respectively. The total fair value of restricted stock that vested during the nine months ended December 31, 2013 and 2012 was $12.3 million and $6.5 million, respectively.

As of December 31, 2013, total unrecognized compensation cost related to unvested restricted stock was $31.8 million, which is expected to be recognized over a weighted average period of 2.2 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
 
Nine Months Ended
 
 
December 31,
 
December 31,
Employee Stock Options
 
2013

2012
 
2013
 
2012
Expected volatility
 
30.1
%
 
41.2
%
 
32.2
%
 
41.8
%
Risk-free interest rate
 
1.1
%
 
0.6
%
 
0.9
%
 
0.6
%
Expected dividend yield
 
0.9
%
 
1.2
%
 
0.9
%
 
1.2
%
Expected life (in years)
 
4.2

 
4.3

 
4.2

 
4.3

Weighted-average grant date fair value
 
$
10.15

 
$
10.10

 
$
11.15

 
$
10.31

ESPP (1)
 
 
 
 
 
 
 
 
Expected volatility
 
 
 
 
 
24.9
%
 
38.4
%
Risk-free interest rate
 
 
 
 
 
0.1
%
 
0.1
%
Expected dividend yield
 
 
 
 
 
0.9
%
 
1.1
%
Expected life (in years)
 
 
 
 
 
0.5

 
0.5

Weighted-average grant date fair value
 
 
 
 
 
$
9.58

 
$
8.95

(1) No purchase rights were granted under the ESPP during the three months ended December 31, 2013 or 2012.



14


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 nine months ended December 31, 2013 and 2012 are discussed below. As of December 31, 2013, there remained 600,000 shares authorized for repurchase under the program approved by the Board on November 11, 2013 and there were no remaining shares authorized under previously approved programs.

Open Market Repurchases

In the nine months ended December 31, 2013 and 2012, the Company repurchased 1,281,907 shares and 743,818 shares, respectively, of its common stock in the open market for a total cost of $56.8 million and $23.6 million, respectively, and at an average price per share of $44.27 and $31.76, respectively.

In addition, the Company withheld shares valued at $6.0 million and $2.8 million in the nine months ended December 31, 2013, and 2012, respectively, 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)
 
December 31, 2013
 
March 31, 2013
Accumulated unrealized gain (loss) on cash flow hedges (1)
 
$
(2,335
)
 
$
1,349

Accumulated foreign currency translation adjustments
 
4,017

 
4,131

Accumulated unrealized gain on investments
 
91

 
87

Accumulated other comprehensive income
 
$
1,773

 
$
5,567

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

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 assets as of December 31, 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 December 31, 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. 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 December 31, 2013 and March 31, 2013, no cash collateral had been received or pledged related to these derivative instruments.


15


Refer to Note 4, Fair Value Measurements, for disclosure of the Company's fair value hierarchy for its derivative instruments and Note 11, Accumulated Other Comprehensive Income, for further discussion.

Non-Designated Hedges

As of December 31, 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 December 31, 2013:
 (in thousands)
Local Currency
 
USD Equivalent
 
Position
 
Maturity
EUR
24,000

 
$
33,045

 
Sell EUR
 
1 month
GBP
£
1,300

 
$
2,144

 
Sell GBP
 
1 month
AUD
A$
3,350

 
$
2,971

 
Sell AUD
 
1 month

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
 
Nine Months Ended
 
 
December 31,
 
December 31,
(in thousands)
 
2013
 
2012
 
2013
 
2012
Gain (loss) on foreign exchange contracts
 
$
(372
)
 
$
(618
)
 
$
(1,564
)
 
$
202


Cash Flow Hedges

On a monthly basis, the Company enters into option contracts with a one-year term.  The Company hedges a portion of the forecasted EUR and GBP denominated revenues with costless collars. The Company does not purchase options for trading purposes.  As of December 31, 2013, the Company had foreign currency option contracts of approximately €53.4 million and £22.2 million.  As of March 31, 2013, the Company had foreign currency option contracts of approximately €50.2 million and £19.9 million. A loss of $2.4 million, net of tax, in accumulated other comprehensive income ("AOCI") as of December 31, 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 a portion of the forecasted Mexican Peso (“MXN”) denominated expenditures with a cross-currency swap.  There were no material gains or losses in AOCI as of December 31, 2013 expected to be reclassified into cost of revenues during the next 12 months due to the recognition of the hedged forecasted expenditures. As of December 31, 2013 and March 31, 2013, the Company had foreign currency swap contracts of approximately MXN278.4 million and MXN325.4 million, respectively.

The following table summarizes the notional value of the Company’s outstanding MXN cross-currency swaps and approximate USD Equivalent at December 31, 2013:
 (in thousands)
Local Currency
 
USD Equivalent
 
Position
 
Maturity
MXN
278,350

 
$
21,060

 
Buy MXN
 
Monthly over
12 months



16


Effect of Designated Derivative Contracts on AOCI and Condensed Consolidated Statements of Operations

The following table presents the pre-tax effects of derivative instruments designated as cash flow hedges on the accumulated other comprehensive income and condensed consolidated statements of income for the three and nine months ended December 31, 2013 and 2012:
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
(in thousands)
 
2013
 
2012
 
2013
 
2012
Gain (loss) included in AOCI as of beginning of period
 
$
(2,373
)
 
$
717

 
$
1,371

 
$
1,937

 
 
 
 
 
 
 
 
 
Amount of gain (loss) recognized in OCI (effective portion)
 
(222
)
 
(961
)
 
(3,869
)
 
587

 
 
 
 
 
 
 
 
 
Amount of gain (loss) reclassified from OCI into net revenues (effective portion)
 
(116
)
 
266

 
(262
)
 
3,329

Amount of gain (loss) reclassified from OCI into cost of revenues (effective portion)
 
(64
)
 
404

 
179

 
109

Total amount of gain (loss) reclassified from AOCI to income (loss) (effective portion)
 
(180
)
 
670

 
(83
)
 
3,438

 
 
 
 
 
 
 
 
 
Loss included in AOCI as of end of period
 
$
(2,415
)
 
$
(914
)
 
$
(2,415
)
 
$
(914
)

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 nine months ended December 31, 2013 was 9.6% and 19.3%, respectively, compared to 18.9% and 23.6%, respectively, for the same periods in the prior year. The effective tax rates differ from the statutory rate due primarily to the generation of a foreign tax credit carryover, changes in Mexican tax law that resulted in the reversal of a valuation allowance, a first time tax deduction for qualifying domestic production activities that were not in the same period a year ago, and a larger proportion of income in foreign jurisdictions taxed at lower rates.  

Included in long-term income taxes payable in the condensed consolidated balance sheets as of December 31, 2013 and March 31, 2013 were unrecognized tax benefits of $12.7 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 December 31, 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.

14. COMPUTATION OF EARNINGS PER COMMON SHARE

The Company has a share-based compensation plan under which employees, non-employee directors, and consultants 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 nine month periods ending December 31, 2013 or 2012.


17


The following table sets forth the computation of basic and diluted earnings per common share for the three and nine months ended December 31, 2013 and 2012:
 
 
Three Months Ended
 
Nine Months Ended
 
 
December 31,
 
December 31,
(in thousands, except per share data)
 
2013

2012
 
2013
 
2012
Numerator:
 
 
 
 
 
 
 
 
Net income
 
$
34,383

 
$
28,206

 
$
84,474

 
$
77,693

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares-basic
 
42,441

 
41,745

 
42,647

 
41,629

Dilutive effect of employee equity incentive plans
 
787

 
873

 
907

 
950

Weighted average common shares-diluted
 
43,228

 
42,618

 
43,554

 
42,579

 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.81

 
$
0.68

 
$
1.98

 
$
1.87

Diluted earnings per common share
 
$
0.80

 
$
0.66

 
$
1.94

 
$
1.82

 
 
 
 
 
 
 
 
 
Potentially dilutive securities excluded from diluted earnings per common share because their effect is anti-dilutive
 
268

 
1,210

 
173

 
1,125


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 nine months ended December 31, 2013 and 2012:

 
 
Three Months Ended
 
Nine Months Ended
 
 
December 31,
 
December 31,
(in thousands)
 
2013

2012
 
2013
 
2012
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
Office and Contact Center
 
$
146,636

 
$
139,449

 
$
437,764

 
$
406,601

Mobile
 
52,804

 
44,138

 
137,113

 
113,600

Gaming and Computer Audio
 
9,360

 
9,024

 
23,967

 
23,610

Clarity
 
3,939

 
4,791

 
10,693

 
14,236

Total net revenues
 
$
212,739

 
$
197,402

 
$
609,537

 
$
558,047



18


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 nine months ended December 31, 2013 and 2012. The following table presents net revenues by geography:

 
 
Three Months Ended
 
Nine Months Ended
 
 
December 31,
 
December 31, 2013
(in thousands)
 
2013

2012
 
2013
 
2012
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
U.S.
 
$
113,042

 
$
111,847

 
$
350,155

 
$
323,438

 
 
 
 
 
 
 
 
 
Europe and Africa
 
58,997

 
51,095

 
146,476

 
131,622

Asia Pacific
 
25,917

 
20,637

 
73,077

 
64,055

Americas, excluding U.S.
 
14,783

 
13,823

 
39,829

 
38,932

Total international net revenues
 
99,697

 
85,555

 
259,382

 
234,609

Total net revenues
 
$
212,739

 
$
197,402

 
$
609,537

 
$
558,047


No customer accounted for more than 10% of net revenues for the three and nine months ended December 31, 2013. One customer, Ingram Micro, accounted for 10% of net revenues for the three months ended December 31, 2012. No customer accounted for 10% or more of net revenues for the nine months ended December 31, 2012.

Ingram Micro also accounted for 10.5% and 10.3% of net accounts receivable at December 31, 2013 and March 31, 2013, respectively.

16. SUBSEQUENT EVENTS

On January 27, 2014, the Company's Board of Directors declared a cash dividend of $0.10 per share of the Company's common stock, payable on March 10, 2014 to stockholders of record at the close of business on February 20, 2014.



19


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 to sustain future 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.  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.


20


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. To execute on the first two priorities, our operating plan for the fiscal year included significant new investments in our global sales force and research and development capabilities, which have largely occurred. To expand our consumer reach, our fiscal year 2014 product development roadmap included 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 $212.7 million in the third quarter of fiscal 2014, growing 7.8% over the third quarter of the prior year. UC product revenues increased, growing by 20% over the prior-year quarter to $43.2 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 third quarter of 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 maintain compatibility of our products with all major platforms as UC usage becomes an essential part of a the enterprise communications landscape.

Looking forward to fiscal 2015, we continue to believe that UC is a key long-term driver of revenue and profit growth. We remain cautious about the macroeconomic environment but note the general improvement in the worldwide economy. We will continue to invest prudently 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.


21


RESULTS OF OPERATIONS

The following tables set forth, for the periods indicated, the condensed consolidated statements of operations data, which is derived from the accompanying unaudited condensed consolidated financial statements.  The financial information and ensuing discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto. 
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
(in thousands, except percentages)
 
2013
 
2012
 
2013
 
2012
Net revenues
 
$
212,739

 
100.0
%
 
$
197,402

 
100.0
%
 
$
609,537

 
100.0
%
 
$
558,047

 
100.0
%
Cost of revenues
 
102,412

 
48.1
%
 
95,238

 
48.2
%
 
293,964

 
48.2
%
 
260,959

 
46.8
%
Gross profit
 
110,327

 
51.9
%
 
102,164

 
51.8
%
 
315,573

 
51.8
%
 
297,088

 
53.2
%
Operating expenses:
 


 
 

 


 
 

 


 
 
 


 
 
Research, development, and engineering
 
21,018

 
9.9
%
 
20,248

 
10.3
%
 
62,328

 
10.2
%
 
59,525

 
10.7
%
Selling, general, and administrative
 
51,467

 
24.2
%
 
45,442

 
23.0
%
 
148,071

 
24.3
%
 
134,476

 
24.1
%
Restructuring and other related charges
 

 
%
 
1,868

 
0.9
%
 
547

 
0.1
%
 
1,868

 
0.3
%
Total operating expenses
 
72,485

 
34.1
%
 
67,558

 
34.2
%
 
210,946

 
34.6
%
 
195,869

 
35.1
%
Operating income
 
37,842

 
17.8
%
 
34,606

 
17.5
%
 
104,627

 
17.2
%
 
101,219

 
18.1
%
Interest and other income, net
 
186

 
0.1
%
 
177

 
0.1
%
 
59

 
%
 
464

 
0.1
%
Income before income taxes
 
38,028

 
17.9
%
 
34,783

 
17.6
%
 
104,686

 
17.2
%
 
101,683

 
18.2
%
Income tax expense
 
3,645

 
1.7
%
 
6,577

 
3.3
%
 
20,212

 
3.3
%
 
23,990

 
4.3
%
Net income
 
$
34,383

 
16.2
%
 
$
28,206

 
14.3
%
 
$
84,474

 
13.9
%
 
$
77,693

 
13.9
%


NET REVENUES
 
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
 
December 31,
 
Increase
 
December 31,
 
Increase
(in thousands, except percentages)
 
2013

2012
 
(Decrease)
 
2013
 
2012
 
(Decrease)
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office and Contact Center
 
$
146,636

 
$
139,449

 
$
7,187

 
5.2
 %
 
$
437,764

 
$
406,601

 
$
31,163

 
7.7
 %
Mobile
 
52,804

 
44,138

 
8,666

 
19.6
 %
 
137,113

 
113,600

 
23,513

 
20.7
 %
Gaming and Computer Audio
 
9,360

 
9,024

 
336

 
3.7
 %
 
23,967

 
23,610

 
357

 
1.5
 %
Clarity
 
3,939

 
4,791

 
(852
)
 
(17.8
)%
 
10,693

 
14,236

 
(3,543
)
 
(24.9
)%
Total net revenues
 
$
212,739

 
$
197,402

 
$
15,337

 
7.8
 %
 
$
609,537

 
$
558,047

 
$
51,490

 
9.2
 %

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 third quarter of fiscal year 2014 over the same period a year ago due primarily to higher Mobile revenues, driven by a stronger product portfolio that was well received in the retail market. We also continued to see increased demand for Mobile products in our Asia Pacific ("APAC") region resulting from hands-free legislation in the People's Republic of China ("PRC"), which was introduced into law in January 2013. In addition, OCC revenues increased due to growth in UC product sales. Revenues from our Clarity business have declined, largely as a result of funding weakness among public-sector services that distribute products for the hearing-impaired.

Net revenues increased in the nine months ended December 31, 2013 over the same period a year ago primarily as a result of higher OCC revenues, driven by 30% year on year growth in UC product sales and to a smaller extent, growth in Core OCC product sales. Mobile revenues also increased, resulting from the same factors discussed above for the three-month period. Growth in these areas was partially offset by declines in revenues from our Clarity product line, due to the same reasons discussed above.


22


Geographic Information
 
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
December 31,
 
Increase
 
December 31,
 
Increase
(in thousands, except percentages)
 
2013

2012
 
(Decrease)
 
2013

2012
 
(Decrease)
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
 
$
113,042

 
$
111,847

 
$
1,195

 
1.1
%
 
$
350,155

 
$
323,438

 
$
26,717

8.3
%
As a percentage of net revenues
 
53.1
%
 
56.7
%
 


 
 
 
57.4
%
 
58.0
%
 




Europe and Africa
 
58,997

 
51,095

 
7,902

 
15.5
%
 
146,476

 
131,622

 
14,854

11.3
%
Asia Pacific
 
25,917

 
20,637

 
5,280

 
25.6
%
 
73,077

 
64,055

 
9,022

14.1
%
Americas, excluding U.S.
 
14,783

 
13,823

 
960

 
6.9
%
 
39,829

 
38,932

 
897

2.3
%
Total international net revenues
 
99,697

 
85,555

 
14,142

 
16.5
%
 
259,382

 
234,609

 
24,773

10.6
%
As a percentage of net revenues