10-Q 1 form10-qq315.htm FORM 10-Q Form 10-Q (Q3'15)

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 27, 2014

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 February 3, 2015, 42,997,860 shares of the registrant's common stock were outstanding.


1



Plantronics, Inc.
FORM 10-Q
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
 
 
 
 
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,
2014
 
March 31,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
280,350

 
$
232,704

Short-term investments
90,647

 
102,717

Accounts receivable, net
157,322

 
138,301

Inventory, net
57,724

 
57,132

Deferred tax assets
11,349

 
11,776

Other current assets
25,597

 
13,657

Total current assets
622,989

 
556,287

Long-term investments
112,796

 
100,342

Property, plant, and equipment, net
139,292

 
134,402

Goodwill and purchased intangibles, net
16,140

 
16,165

Other assets
3,173

 
4,619

Total assets
$
894,390

 
$
811,815

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
33,151

 
$
30,756

Accrued liabilities
65,598

 
66,851

Total current liabilities
98,749

 
97,607

Long-term income taxes payable
13,814

 
12,719

Other long-term liabilities
5,662

 
2,825

Total liabilities
$
118,225

 
$
113,151

Commitments and contingencies (Note 5)


 


Stockholders' equity:
 

 
 

Common stock
782

 
770

Additional paid-in capital
704,403

 
663,483

Accumulated other comprehensive income
5,924

 
2,638

Retained earnings
190,569

 
123,389

Total stockholders' equity before treasury stock
901,678

 
790,280

Less:  Treasury stock, at cost
(125,513
)
 
(91,616
)
Total stockholders' equity
776,165

 
698,664

Total liabilities and stockholders' equity
894,390

 
$
811,815


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 
 December 31,
 
Nine Months Ended 
 December 31,
 
2014
 
2013
 
2014
 
2013
Net revenues
$
231,781

 
$
212,739

 
$
664,248

 
$
609,537

Cost of revenues
111,865

 
102,412

 
311,795

 
293,964

Gross profit
119,916

 
110,327

 
352,453

 
315,573

Operating expenses:
 
 
 
 
 
 
 
Research, development, and engineering
22,991

 
21,018

 
69,280

 
62,328

Selling, general, and administrative
57,977

 
51,467

 
174,756

 
148,071

Gain from litigation settlements
(1,666
)
 

 
(7,816
)
 

Restructuring and other related charges

 

 

 
547

Total operating expenses
79,302

 
72,485

 
236,220

 
210,946

Operating income
40,614

 
37,842

 
116,233

 
104,627

Interest and other income (expense), net
(2,018
)
 
186

 
(1,683
)
 
59

Income before income taxes
38,596

 
38,028

 
114,550

 
104,686

Income tax expense
8,212

 
3,645

 
28,073

 
20,212

Net income
$
30,384

 
$
34,383

 
$
86,477

 
$
84,474

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.73

 
$
0.81

 
$
2.07

 
$
1.98

Diluted
$
0.71

 
$
0.80

 
$
2.03

 
$
1.94

 
 
 
 
 
 
 
 
Shares used in computing earnings per common share:
 
 
 
 
 
 
Basic
41,901

 
42,441

 
41,780

 
42,647

Diluted
42,700

 
43,228

 
42,674

 
43,554

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.15

 
$
0.10

 
$
0.45

 
$
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 
 December 31,
 
Nine Months Ended 
 December 31,
 
2014
 
2013
 
2014
 
2013
Net income
$
30,384

 
$
34,383

 
$
86,477

 
$
84,474

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
54

 
(73
)
 
128

 
(114
)
Unrealized gains (losses) on cash flow hedges:
 
 
 
 
 
 
 
Unrealized cash flow hedge gains (losses) arising during the period
508

 
(222
)
 
3,604

 
(3,868
)
Net (gains) losses reclassified into income for revenue hedges
(1,220
)
 
116

 
(61
)
 
262

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

 
64

 
(149
)
 
(180
)
Net unrealized gains (losses) on cash flow hedges
(649
)
 
(42
)
 
3,394

 
(3,786
)
Unrealized gains (losses) on investments:
 
 
 
 
 
 
 
Unrealized holding gains (losses) during the period
(258
)
 
(2
)
 
(223
)
 
5

 
 
 
 
 
 
 
 
Aggregate income tax benefit (expense) of the above items
66

 
$
2

 
(13
)
 
$
74

Other comprehensive income (loss)
(787
)
 
$
(115
)
 
3,286

 
$
(3,821
)
Comprehensive income
$
29,597

 
$
34,268

 
$
89,763

 
$
80,653




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,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
86,477

 
$
84,474

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
13,975

 
11,671

Stock-based compensation
21,122

 
16,996

Provision for excess and obsolete inventories
992

 
4,419

Deferred income taxes
1,654

 
530

Excess tax benefit from stock-based compensation
(2,988
)
 
(4,434
)
Other operating activities
484

 
1,345

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

 
 
Accounts receivable, net
(18,479
)
 
(6,539
)
Inventory, net
(920
)
 
(3,135
)
Current and other assets
(4,680
)
 
826

Accounts payable
2,395

 
(10,339
)
Accrued liabilities
3,464

 
1,388

Income taxes
(3,120
)
 
(5,080
)
Cash provided by operating activities
100,376

 
92,122

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 
Proceeds from sales of investments
72,564

 
89,682

Proceeds from maturities of investments
102,175

 
95,210

Purchase of investments
(172,757
)
 
(181,836
)
Acquisition, net of cash acquired
(150
)
 

Capital expenditures
(19,214
)
 
(37,657
)
Cash used for investing activities
(17,382
)
 
(34,601
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 
Repurchase of common stock
(27,443
)
 
(56,754
)
Proceeds from issuances under stock-based compensation plans
17,821

 
19,599

Employees' tax withheld and paid for restricted stock and restricted stock units
(7,306
)
 
(6,014
)
Payment of cash dividends
(19,296
)
 
(13,105
)
Excess tax benefit from stock-based compensation
2,988

 
4,434

Cash used for financing activities
(33,236
)
 
(51,840
)
Effect of exchange rate changes on cash and cash equivalents
(2,112
)
 
1,077

Net increase in cash and cash equivalents
47,646

 
6,758

Cash and cash equivalents at beginning of period
232,704

 
228,776

Cash and cash equivalents at end of period
$
280,350

 
$
235,534


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

In the opinion of management, the accompanying unaudited condensed consolidated financial statements ("financial statements") of Plantronics, Inc. ("Plantronics" or "the Company") have been prepared on a basis consistent with the Company's March 31, 2014 audited consolidated financial statements and include all adjustments, consisting of normal recurring adjustments, necessary to fairly state the information set forth herein.  Certain information and footnote disclosures normally included in financial statements prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to interim financial information and 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. 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, 2014, which was filed with the SEC on May 16, 2014.  The results of operations for the interim period ended December 31, 2014 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 28, 2015 and consists of 52 weeks. The Company's prior fiscal year ended on March 29, 2014 and also consisted of 52 weeks.  The Company’s results of operations for the three and nine months ended December 27, 2014 and December 28, 2013 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.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Recently Issued Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued additional guidance to clarify the principles used to recognize revenue for all entities. This guidance will be effective for the Company in the first quarter of its fiscal year ending March 31, 2018. The Company is currently evaluating the impact, if any, the adoption of this guidance will have on its financial position, results of operations, and cash flows.


7


3. CASH, CASH EQUIVALENTS, AND INVESTMENTS

The following tables summarize the Company’s cash and available-for-sale securities’ adjusted cost, gross unrealized gains, gross unrealized losses, and fair value by significant investment category recorded as cash and cash equivalents, short-term, or long-term investments as of December 31, 2014 and March 31, 2014 (in thousands):

December 31, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash & Cash Equivalents
 
Short-term investments (due in 1 year or less)
 
Long-term investments (due in 1 to 3 years)
Cash
 
$
275,851

 
$

 
$

 
$
275,851

 
$
275,851

 
$

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual Funds
 
4,757

 
121

 
(75
)
 
4,803

 

 
4,803

 

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government Agency Securities
 
85,139

 
14

 
(67
)
 
85,086

 

 
32,235

 
52,851

Commercial Paper
 
18,589

 
3

 

 
18,592

 
4,499

 
14,093

 

Corporate Bonds
 
99,414

 
104

 
(57
)
 
99,461

 

 
39,516

 
59,945

Subtotal
 
203,142

 
121

 
(124
)
 
203,139

 
4,499

 
85,844

 
112,796

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total cash, cash equivalents
and investments measured at fair value
 
$
483,750

 
$
242

 
$
(199
)
 
$
483,793

 
$
280,350

 
$
90,647

 
$
112,796


March 31, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash & Cash Equivalents
 
Short-term investments (due in 1 year or less)
 
Long-term investments (due in 1 to 3 years)
Cash
 
$
232,704

 
$

 
$

 
$
232,704

 
$
232,704

 
$

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual Funds
 
1,779

 
31

 
(3
)
 
1,807

 

 
1,807

 

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government Agency Securities
 
53,976

 
43

 
(9
)
 
54,010

 

 
21,325

 
32,685

Commercial Paper
 
47,766

 
7

 

 
47,773

 

 
47,773

 

Corporate Bonds
 
98,289

 
195

 
(17
)
 
98,467

 

 
30,810

 
67,657

CDs
 
1,002

 

 

 
1,002

 

 
1,002

 

Subtotal
 
201,033

 
245

 
(26
)
 
201,252

 

 
100,910

 
100,342

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total cash, cash equivalents
and investments measured at fair value
 
$
435,516

 
$
276

 
$
(29
)
 
$
435,763

 
$
232,704

 
$
102,717

 
$
100,342


As of December 31, 2014 and March 31, 2014, 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 gains or losses in the three and nine months ended December 31, 2014 and 2013.

There were no transfers between fair value measurement levels during the three and nine months ended December 31, 2014 and 2013.



8


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, and derivative foreign currency 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 contracts is determined using pricing models that use observable market inputs. For more information regarding the Company's derivative assets and liabilities, refer to Note 10, Foreign Currency Derivatives, of the accompanying notes to condensed consolidated financial statements (unaudited) in this Quarterly Report on Form 10-Q.

4. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS

Accounts receivable, net:
 
 
December 31,
 
March 31,
(in thousands)
 
2014
 
2014
Accounts receivable
 
$
182,103

 
$
159,592

Provisions for returns
 
(7,623
)
 
(6,201
)
Provisions for promotions, rebates, and other
 
(15,934
)
 
(14,803
)
Provisions for doubtful accounts and sales allowances
 
(1,224
)
 
(287
)
Accounts receivable, net
 
$
157,322

 
$
138,301


Inventory, net:
 
 
December 31,
 
March 31,
(in thousands)
 
2014
 
2014
Raw materials
 
$
26,385

 
$
28,071

Work in process
 
1,609

 
985

Finished goods
 
29,730

 
28,076

Inventory, net
 
$
57,724

 
$
57,132

  
Accrued Liabilities:
 
 
December 31,
 
March 31,
(in thousands)
 
2014
 
2014
Employee compensation and benefits
 
$
33,844

 
$
32,280

Warranty obligation
 
8,324

 
7,965

Income taxes payable
 

 
3,092

Accrued other
 
23,430

 
23,514

Accrued liabilities
 
$
65,598

 
$
66,851



9


The Company's warranty obligation is included as a component of accrued liabilities on the condensed consolidated balance sheets. Changes in the warranty obligation during the nine months ended December 31, 2014 and 2013 were as follows:

 
 
Nine Months Ended
 
Nine Months Ended
 
(in thousands)
 
December 31, 2014
 
December 31, 2013
 
Warranty obligation at beginning of period
 
$
7,965

 
$
13,410

 
Warranty provision related to products shipped
 
7,880

 
7,234

 
Deductions for warranty claims processed
 
(6,960
)
 
(7,272
)
 
Adjustments related to preexisting warranties
 
(561
)
 
(5,409
)
(1 
) 
Warranty obligation at end of period
 
$
8,324

 
$
7,963

 
(1) During the third quarter of fiscal 2014, the Company identified an immaterial out of period error related to its estimated warranty obligation. The Company recorded a $5.0 million correction in the quarter ended December 31, 2013 which decreased its cost of revenues by approximately $2.4 million and increased net income by approximately $2.1 million.


5. COMMITMENTS AND CONTINGENCIES

Unconditional Purchase Obligations

The Company purchases services and components from a variety of suppliers and manufacturers. During the normal course of business and to manage manufacturing operations and general and administrative activities, the Company may enter into firm, non-cancelable, and unconditional purchase obligations for which amounts are not recorded on the consolidated balance sheets.  As of December 31, 2014, the Company had outstanding off-balance sheet third-party manufacturing, component purchase, and other general and administrative commitments of $132.4 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 of 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 agreements due to the limited history of prior claims and the unique facts and circumstances involved in each particular claim. Such indemnification obligations 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.

Claims and Litigation

On October 12, 2012, GN Netcom, Inc. ("GN") sued Plantronics, Inc. in the United States ("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 U.S. 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.


10


In March 2014, the Company settled pending patent litigation with Aliph, Inc. and AliphCom, Inc. (collectively, “Aliph”).  As part of this settlement, the Company granted to Aliph a non-exclusive, non-transferable license under the licensed patent and released Aliph from all claims in exchange for a settlement payment of $8.0 million, payable in four equal installments of $2.0 million, commencing in May 2014 and ending in January 2015.  The Company will recognize the gain upon receipt of the settlement proceeds, net of immaterial legal contingency fees, within operating income.

In July 2014, the Company resolved an insurance coverage dispute with one of its insurance carriers.  Under the terms of the agreement, the Company received $2.2 million, which was recognized within operating income in the second quarter of its fiscal year 2015.

In addition to the specific matters discussed above, 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.

6. 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 22, 2015 to extend its term to May 9, 2018 (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, 2014 and March 31, 2014, 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.

The principal, together with accrued and unpaid interest, is due on the amended maturity date of May 9, 2018. 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, 2014.



11


7. 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 
 December 31,
 
Nine Months Ended December 31,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Cost of revenues
 
$
685

 
$
686

 
$
1,888

 
$
1,859

 
 
 
 
 
 
 
 
 
Research, development and engineering
 
2,068

 
1,688

 
5,934

 
4,708

Selling, general and administrative
 
4,677

 
3,669

 
13,300

 
10,429

Stock-based compensation included in operating expenses
 
6,745

 
5,357

 
19,234

 
15,137

Total stock-based compensation
 
7,430

 
6,043

 
21,122

 
16,996

Income tax benefit
 
(2,188
)
 
(1,788
)
 
(6,216
)
 
(5,063
)
Total stock-based compensation, net of tax
 
$
5,242

 
$
4,255

 
$
14,906

 
$
11,933


Stock Options

The following is a summary of the Company’s stock option activity during the nine months ended December 31, 2014:

 
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, 2014
1,934

 
$
31.91

 
 
 
 
Options granted
298

 
$
47.11

 
 
 
 
Options exercised
(544
)
 
$
27.49

 
 
 
 
Options forfeited or expired
(40
)
 
$
39.83

 
 
 
 
Outstanding at December 31, 2014
1,648

 
$
35.92

 
4.2
 
$
29,375

Vested or expected to vest at December 31, 2014
1,610

 
$
35.68

 
4.1
 
$
29,097

Exercisable at December 31, 2014
1,117

 
$
31.97

 
3.3
 
$
24,315


The total intrinsic value of options exercised during the nine months ended December 31, 2014 and 2013 was $11.6 million and $15.1 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, 2014 was $14.9 million, net of taxes.

As of December 31, 2014, total unrecognized compensation cost related to unvested stock options was $4.7 million, which is expected to be recognized over a weighted average period of 2.0 years.


12


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, 2014:

 
Number of
Shares
 
Weighted Average Grant Date Fair Value
 
(in thousands)
 
 
Non-vested at March 31, 2014
1,172

 
$
39.52

Restricted stock granted
653

 
$
45.16

Restricted stock vested
(441
)
 
$
38.63

Restricted stock forfeited
(82
)
 
$
40.99

Non-vested at December 31, 2014
1,302

 
$
42.55


The weighted average grant-date fair value of awards of restricted stock is based on the quoted market price of the Company's common stock on the date of grant. The weighted average grant-date fair value of restricted stock granted during the nine months ended December 31, 2014 and 2013 was $45.16 and $46.09, respectively. The total fair value of restricted stock that vested during the nine months ended December 31, 2014 and 2013 was $17.0 million and $12.3 million, respectively.

As of December 31, 2014, total unrecognized compensation cost related to unvested restricted stock was $37.9 million, which is expected to be recognized over a weighted average period of 1.9 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 
 December 31,
 
Nine Months Ended December 31,
Employee Stock Options
 
2014

2013
 
2014
 
2013
Expected volatility
 
28.4
%
 
30.1
%
 
28.4
%
 
32.2
%
Risk-free interest rate
 
1.4
%
 
1.1
%
 
1.4
%
 
0.9
%
Expected dividend yield
 
1.2
%
 
0.9
%
 
1.3
%
 
0.9
%
Expected life (in years)
 
4.2

 
4.2

 
4.2

 
4.2

Weighted-average grant date fair value
 
$
11.53

 
$
10.15

 
$
10.33

 
$
11.15

ESPP (1)
 
 
 
 
 
 
 
 
Expected volatility
 
 
 
 
 
24.8
%
 
24.9
%
Risk-free interest rate
 
 
 
 
 
0.1
%
 
0.1
%
Expected dividend yield
 
 
 
 
 
1.3
%
 
0.9
%
Expected life (in years)
 
 
 
 
 
0.5

 
0.5

Weighted-average grant date fair value
 
 
 
 
 
$
10.13

 
$
9.58


(1) No purchase rights were granted under the ESPP during the three months ended December 31, 2014 and 2013.



13


8. COMMON STOCK REPURCHASES

From time to time, the Company's Board of Directors (the "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, 2014 and 2013 are discussed below. As of December 31, 2014, there remained 336,210 shares authorized for repurchase under a repurchase program approved by the Board on February 20, 2014 and there were no remaining shares authorized under previously approved programs.

Open Market Repurchases

In the nine months ended December 31, 2014 and 2013, the Company repurchased 596,290 shares and 1,281,907 shares, respectively, of its common stock in the open market for a total cost of $27.4 million and $56.8 million, respectively, and at an average price per share of $46.02 and $44.27, respectively.

In addition, the Company withheld shares valued at $7.3 million and $6.0 million in the nine months ended December 31, 2014, and 2013, 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.

9. ACCUMULATED OTHER COMPREHENSIVE INCOME

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

(in thousands)
 
December 31, 2014
 
March 31, 2014
Accumulated unrealized gain (loss) on cash flow hedges (1)
 
$
1,912

 
$
(1,411
)
Accumulated foreign currency translation adjustments
 
4,015

 
3,887

Accumulated unrealized gain (loss) on investments
 
(3
)
 
162

Accumulated other comprehensive income
 
$
5,924

 
$
2,638

(1)Refer to Note 10, Foreign Currency Derivatives, which discloses the nature of the Company's derivative assets and liabilities as of December 31, 2014 and March 31, 2014.  

10. 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 that it would incur due to credit risk 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, 2014.  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 the Company and the counterparty as a result of multiple, separate derivative transactions. As of December 31, 2014, 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 on the Company's condensed 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, 2014 and March 31, 2014, no cash collateral had been received or pledged related to these derivative instruments.


14


The gross fair value of our outstanding derivative contracts at the end of each period was as follows:
(in thousands)
 
December 31, 2014
 
March 31, 2014
Derivative Assets (recorded in 'Other current assets')

 
 
 
 
Non-designated hedges
 
$
1,019

 
$
153

Cash flow hedges
 
6,280

 
973

Total Derivative Assets
 
$
7,299

 
$
1,126

 
 
 
 
 
Derivative Liabilities (recorded in 'Other accrued liabilities')

 
 
 
 
Non-designated hedges
 
$
1

 
$
80

Cash flow hedges
 
3,617

 
2,804

Total Derivative Liabilities
 
$
3,618

 
$
2,884


Non-Designated Hedges

As of December 31, 2014, 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, 2014:
 (in thousands)
Local Currency
 
USD Equivalent
 
Position
 
Maturity
EUR
29,400

 
$
35,824

 
Sell EUR
 
1 month
GBP
£
8,000

 
$
12,408

 
Sell GBP
 
1 month
AUD
A$
7,400

 
$
5,982

 
Sell AUD
 
1 month

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

The effect of non-designated derivative contracts recognized in interest and other income, net in the condensed consolidated statements of operations was as follows:
 
 
Three Months Ended 
 December 31,
 
Nine Months Ended December 31,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Gain (loss) on foreign exchange contracts
 
$
2,183

 
$
(372
)
 
$
5,160

 
$
(1,564
)

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, 2014, the Company had foreign currency option contracts of approximately €64.6 million and £28.9 million.  As of March 31, 2014, the Company had foreign currency option contracts of approximately €55.7 million and £23.9 million.

The Company hedges a portion of the forecasted Mexican Peso (“MXN”) denominated expenditures with a cross-currency swap.  As of December 31, 2014 and March 31, 2014, the Company had foreign currency swap contracts of approximately MXN525.1 million and MXN204.6 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, 2014:
 (in thousands)
Local Currency
 
USD Equivalent
 
Position
 
Maturity
MXN
525,120

 
$
38,334

 
Buy MXN
 
Monthly over
17 months


15


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 accumulated other comprehensive income and the condensed consolidated statements of operations for the three and nine months ended December 31, 2014 and 2013:
 
 
Three Months Ended 
 December 31,
 
Nine Months Ended December 31,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Gain (loss) included in AOCI as of beginning of period
 
$
2,601

 
$
(2,373
)
 
$
(1,442
)
 
$
1,371

 
 
 
 
 
 
 
 
 
Amount of gain (loss) recognized in OCI (effective portion)
 
508

 
(222
)
 
3,604

 
(3,868
)
 
 
 
 
 
 
 
 
 
Amount of gain (loss) reclassified from OCI into net revenues (effective portion)
 
1,220

 
(116
)
 
61

 
(262
)
Amount of gain (loss) reclassified from OCI into cost of revenues (effective portion)
 
(63
)
 
(64
)
 
149

 
180

Total amount of gain (loss) reclassified from AOCI to income (loss) (effective portion)
 
1,157

 
(180
)
 
210

 
(82
)
 
 
 
 
 
 
 
 
 
Gain (loss) included in AOCI as of end of period
 
$
1,952

 
$
(2,415
)
 
$
1,952

 
$
(2,415
)

The Company will reclassify all amounts accumulated in other comprehensive income into earnings within the next twelve months. During the three and nine months ended December 31, 2014, the Company recognized an immaterial gain on the ineffective portion of its cash flow hedges, which is reported in interest and other income (expense), net in the condensed consolidated statements of operations. There was no ineffective portion of hedges designated as cash flow hedging instruments during the three and nine months ended December 31, 2013.

11. INCOME TAXES

The Company and its subsidiaries are subject in 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, 2014 was 21.3% and 24.5% compared to 9.6% and 19.3% for the same period in the prior year. The effective tax rates differ from the statutory rate due primarily 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 December 31, 2014 and March 31, 2014 were unrecognized tax benefits of $13.5 million and $12.6 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 was $1.8 million as of December 31, 2014 as compared to $1.7 million as of March 31, 2014.  No penalties have been accrued.

The Company is currently under examination by the Internal Revenue Service for its 2010 tax year. The California Franchise Tax Board completed its examination of the Company's 2007 and 2008 tax years. The Company received a Notice of Proposed Assessment and responded by filing a protest letter. The amount of the proposed assessment is not material. Foreign income tax matters for material tax jurisdictions have been concluded for tax years prior to fiscal year 2011, except in the United Kingdom where tax matters have been concluded for tax years prior to fiscal year 2013.

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. The timing of any resolution and/or closure of tax examinations is not certain.



16


12. 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. 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, 2014 and 2013.

The following table sets forth the computation of basic and diluted earnings per common share for the three and nine months ended December 31, 2014 and 2013:
 
 
Three Months Ended 
 December 31,
 
Nine Months Ended 
 December 31,
(in thousands, except per share data)
 
2014

2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
 
Net income
 
$
30,384

 
$
34,383

 
$
86,477

 
$
84,474

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares-basic
 
41,901

 
42,441

 
41,780

 
42,647

Dilutive effect of employee equity incentive plans
 
799

 
787

 
894

 
907

Weighted average common shares-diluted
 
42,700

 
43,228

 
42,674

 
43,554

 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.73

 
$
0.81

 
$
2.07

 
$
1.98

Diluted earnings per common share
 
$
0.71

 
$
0.80

 
$
2.03

 
$
1.94

 
 
 
 
 
 
 
 
 
Potentially dilutive securities excluded from diluted earnings per common share because their effect is anti-dilutive
 
130

 
268

 
442

 
173


13. 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.  Beginning in the first quarter of fiscal year 2015, major product categories were revised to include “Enterprise” (formerly Office and Contact Center), which includes corded and cordless communication headsets, audio processors, and telephone systems; and “Consumer” (formerly Mobile, Gaming and Computer Audio, and Clarity), which includes Bluetooth and corded products for mobile phone applications, personal computer ("PC") and gaming headsets, and specialty products marketed for hearing impaired individuals. Prior period net revenues have been reclassified to conform to this presentation. 

The following table presents net revenues by product group for the three and nine months ended December 31, 2014 and 2013:
 
 
Three Months Ended 
 December 31,
 
Nine Months Ended December 31,
(in thousands)
 
2014

2013
 
2014
 
2013
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
Enterprise
 
$
161,591

 
$
146,636

 
$
470,624

 
$
437,764

Consumer
 
70,190

 
66,103

 
193,624

 
171,773

Total net revenues
 
$
231,781

 
$
212,739

 
$
664,248

 
$
609,537



17


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, 2014 and 2013. The following table presents net revenues by geography:
 
 
Three Months Ended 
 December 31,
 
Nine Months Ended December 31,
(in thousands)
 
2014

2013
 
2014
 
2013
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
U.S.
 
$
123,092

 
$
113,042

 
$
371,256

 
$
350,155

 
 
 
 
 
 
 
 
 
Europe and Africa
 
63,940

 
58,997

 
164,760

 
146,476

Asia Pacific
 
28,778

 
25,917

 
84,011

 
73,077

Americas, excluding U.S.
 
15,971

 
14,783

 
44,221

 
39,829

Total international net revenues
 
108,689

 
99,697

 
292,992

 
259,382

Total net revenues
 
$
231,781

 
$
212,739

 
$
664,248

 
$
609,537


No customer accounted for more than 10% of net revenues for the three and nine months ended December 31, 2014 or 2013.

One customer, Ingram Micro, accounted for 11% of net accounts receivable at December 31, 2014. No customer accounted for more than 10% of net accounts receivables at March 31, 2014.

14. SUBSEQUENT EVENTS

On January 26, 2015, the Company announced that the Audit Committee had declared and approved the payment of a dividend of $0.15 per share on March 10, 2015 to holders of record on February 20, 2015.









18


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 "anticipate," "believe," “could,” "expect," "intend," “may,” "plan," "potential," "shall," "will," “would,” 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, but are not limited to, statements regarding (i) our expectations for new product launches and new Consumer product development efforts in fiscal year 2015 and beyond, (ii) the Unified Communications ("UC") markets and our position in these markets, (iii) our belief that our innovation and breakthroughs in contextual intelligence for and other product features and enhancements in UC has spurred the growth in the Enterprise market and UC product revenues, (iv) our long-term strategy to invest in UC and the relationship of added functionality to successful product launches, (v) the future of UC technologies, including the transition of businesses to UC-supported systems, the effect on headset adoption and use, the effects on enterprises that adopt UC and our expectations concerning our revenue opportunity and profit growth, (vi) our belief that our technology capitalizes on the needs of enterprise users in changing business environments and evolving work styles and that our solutions will be an important part of future enterprise UC environments, (vii) our expectations regarding the slow long-term growth of the traditional office and contact center category and the impact of UC on the growth of enterprise headset adoption overall, (viii) the Mobile Bluetooth market and the stereo and mono product categories, (ix) our position in the Mobile Bluetooth market and the effect of our new products on our position in that market, (x) our research and development strategy, including our investments in software development and the effect of such investments on our business, (xi) our expectations regarding the worldwide economy, as well as our investment strategies and focus, (xii) the maintenance of our reputation in the industry, (xiii) our expenses, including research, development and engineering expenses and selling, general and administrative expenses, (xiv) our future tax rate and payments related to unrecognized tax benefits, (xv) our anticipated capital expenditures for the remainder of fiscal year 2015 and the sufficiency of our cash, cash equivalents, and cash from operations to sustain future operations and discretionary cash requirements, (xvi) our planned investment of and need for our foreign cash and our ability to repatriate that cash, (xvii) our ability to draw funds on our credit facility as needed, (xviii) future fluctuations in our cash provided by operating activities, (xix) the sufficiency of our capital resources to fund operations, and (xx) 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 this Quarterly Report on Form 10-Q; in Part I, "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended March 31, 2014, filed with the Securities and Exchange Commission (“SEC”) on May 16, 2014; and other documents filed with the SEC.  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, other communication endpoints, and accessories for the worldwide business and consumer markets under the Plantronics brand.  In addition, under our Clarity brand we manufacture and market 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 75 countries through a network of distributors, retailers, wireless carriers, original equipment manufacturers (“OEMs”), and telephony service providers.  We have well-developed distribution channels in North America, Europe, and in some parts of the Asia Pacific region where use of our products is widespread.  Our distribution channels in other geographic regions are less mature, and while we primarily serve contact centers in those regions, we continue to expand into the office, mobile, and gaming and computer audio markets in those regions and other international locations.  Beginning in the first quarter of our fiscal year 2015, our major product categories were revised to include “Enterprise” (formerly Office and Contact Center), which includes Unified Communications ("UC"), corded and cordless communication headsets, audio processors, and telephone systems; and “Consumer” (formerly Mobile, Gaming and Computer Audio, and Clarity), which includes Bluetooth and corded products for mobile phone applications, personal computer ("PC") and gaming headsets, and specialty products marketed for hearing impaired individuals. Prior period net revenues have been reclassified to conform to this presentation.  While not always the case, revenues from our Consumer products channel are typically seasonal, with the December quarter (our third fiscal quarter) typically being the strongest.


19


Total net revenues increased to $231.8 million in the third quarter of our fiscal year 2015, growing 9.0% over the third quarter of the prior year. UC product revenues also increased, growing by 24% over the prior-year quarter to $53.5 million; 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 as compared to the same period in the prior year 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.

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 transforming 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 need for a device that delivers contextual intelligence, providing the ability to reach people using the mode of communication that is most effective, on the device that is most convenient, and with control over when and how they can be reached. Our portfolio of UC solutions combines hardware with advanced sensor technology and capitalizes on contextual intelligence, addressing the needs of constantly changing business environments and evolving work styles to make connecting easier and by sharing presence information to convey user availability and other contextual information. We believe UC systems will become more commonly adopted by enterprises to reduce costs and improve collaboration, and we believe our solutions with Simply Smarter Communications® technology will be an important part of the UC environment.

The contact center category is the most mature in which we participate, and we expect this category to grow slowly over the long-term. 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. While we experienced year on year growth of approximately 4% in net revenues from non-UC Enterprise products in the three months ended December 31, 2014, over the full nine-month period ending December 31, 2014 net revenues from non-UC Enterprise products were approximately 1% higher than the same period a year ago. We believe the growth of UC will increase overall headset adoption in enterprise environments and we expect most of the growth in our Enterprise product category over the next five years to come from headsets designed for UC.
 
Our Consumer products include headsets for mobile communications and entertainment as well as gaming headsets for the console and personal computer categories.  In the third quarter of fiscal year 2015, our Consumer product portfolio benefited from continuing strong performance of the Voyager Edge and Voyager Legend in the mono Bluetooth category, and robust initial sales of BackBeat Fit and BackBeat Pro in the stereo Bluetooth category. These products contributed to the strong performance of our Mobile communications portfolio in the quarter. We anticipate that our planned investments in these Consumer product categories will help position us to maintain market 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 differentiate our products and maintain long-term gross margins within our business model. We continue to strengthen our strategic partnerships with UC platform suppliers to maintain compatibility of our products with all major platforms as UC usage becomes an essential part of the enterprise communications landscape.

Looking forward, we remain cautious about the macroeconomic environment noting the general improvement in the U.S. economy with uncertainty in much of the worldwide economy. We will continue to invest prudently in long-term growth opportunities and we will continue to focus on innovative product development through our core research and development efforts. 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.



20


RESULTS OF OPERATIONS

NET REVENUES
 
 
Three Months Ended 
 December 31,
 
Increase
 
Nine Months Ended 
 December 31,
 
Increase
(in thousands, except percentages)
 
2014

2013
 
(Decrease)
 
2014
 
2013
 
(Decrease)
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Enterprise
 
$
161,591

 
$
146,636

 
$
14,955

 
10.2
%
 
$
470,624

 
$
437,764

 
$
32,860

 
7.5
%
Consumer
 
70,190

 
66,103

 
4,087

 
6.2
%
 
193,624

 
171,773

 
21,851

 
12.7
%
Total net revenues
 
$
231,781

 
$
212,739

 
$
19,042

 
9.0
%
 
$
664,248

 
$
609,537

 
$
54,711

 
9.0
%

Enterprise products represent our largest source of revenues, while Consumer 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 Consumer products 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 our fiscal year 2015 over the same period a year ago due primarily to higher revenues within our Enterprise product category, led by 24% year-on-year growth in UC product sales driven by continued adoption of Unified Communications solutions in the marketplace. Revenues from traditional office and contact center products also increased 4%, driven by strength in our popular cordless system ("CS") wireless products, as well as in our popular EncorePro and SupraPlus corded headset models. In addition, Consumer revenues increased by more than 6%, driven by enhancements to our product portfolio during the year, such as BackBeat Fit and BackBeat Pro in our stereo Bluetooth category and Voyager Edge in our mono Bluetooth category.

Net revenues increased in the nine months ended December 31, 2014 over the same period a year ago due primarily to higher Enterprise revenues, driven by 23% growth in UC product sales due to continued adoption of UC solutions in the marketplace, with non-UC Enterprise revenues up 1%, consistent with our long-term expectations for that category. Consumer revenues also increased due primarily to continued strength in Mobile revenues, driven by enhancements to our product portfolio that have been well-received in the retail market.

Geographic Information
 
 
Three Months Ended 
 December 31,
 
Increase
 
Nine Months Ended 
 December 31,
 
Increase
(in thousands, except percentages)
 
2014

2013
 
(Decrease)
 
2014
 
2013
 
(Decrease)
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
 
$
123,092

 
$
113,042

 
$
10,050

 
8.9%
 
$
371,256

 
$
350,155

 
$
21,101

 
6.0%
As a percentage of net revenues
 
53.1
%
 
53.1
%
 


 
 
 
55.9
%
 
57.4
%
 
 
 
 
Europe and Africa
 
63,940

 
58,997

 
4,943

 
8.4%
 
164,760

 
146,476

 
18,284

 
12.5%
Asia Pacific
 
28,778

 
25,917

 
2,861

 
11.0%
 
84,011

 
73,077

 
10,934

 
15.0%
Americas, excluding U.S.
 
15,971

 
14,783

 
1,188

 
8.0%
 
44,221

 
39,829

 
4,392

 
11.0%
Total international net revenues
 
108,689

 
99,697

 
8,992

 
9.0%
 
292,992

 
259,382

 
33,610

 
13.0%
As a percentage of net revenues
 
46.9
%
 
46.9
%
 


 
 
 
44.1
%
 
42.6
%
 
 
 
 
Total net revenues
 
$
231,781

 
$
212,739

 
$
19,042

 
9.0%
 
$
664,248

 
$
609,537

 
$
54,711

 
9.0%

Compared to the same period in the prior year, U.S. net revenues increased in the three months ended December 31, 2014 due to growth in Enterprise product revenue, driven by strength in UC revenues due to the continued adoption of UC in the marketplace, and in traditional office and contact center revenues, driven by strength in our CS wireless products. International net revenues increased in the three months ended December 31, 2014 mainly due to growth in Enterprise revenues, which was driven by strength in both UC and traditional office and contact center product sales. Consumer revenue in international markets also increased, driven largely by strength in our Europe and Africa region within the Mobile Bluetooth category.


21


In the nine months ended December 31, 2014, the increase in U.S. net revenues was driven in equal measure by Enterprise and Consumer revenues. Within the Consumer category the increase was due to enhancements to our product portfolio. Enterprise net revenue growth was driven primarily by UC, though partly offset by a decline in traditional office and contact center revenues. International net revenues increased due primarily to growth in our Enterprise category driven mainly by double-digit year-on-year growth in UC products as well as by a moderate increase in net revenues from non-UC enterprise products, which performed well in all international regions. Consumer net revenues also grew internationally with the majority of the increase coming from Bluetooth Mobile products in our Asia Pacific region, with healthy growth in Europe and Africa as well.

COST OF REVENUES AND GROSS PROFIT

Cost of revenues consists primarily of direct manufacturing and contract manufacturer costs, warranty expense, freight expense, depreciation, duty expense, charge for excess and obsolete inventory, royalties, and an allocation of overhead expenses, including facilities, IT, and human resources. 
 
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
December 31,
 
Increase
 
December 31,
 
Increase
(in thousands, except percentages)
 
2014
 
2013
 
(Decrease)
 
2014
 
2013
 
(Decrease)
Net revenues
 
$
231,781

 
$
212,739

 
$
19,042

 
9.0
%
 
$
664,248

 
$
609,537

 
$
54,711

 
9.0
%
Cost of revenues
 
111,865

 
102,412

 
9,453

 
9.2
%
 
311,795

 
293,964

 
17,831

 
6.1
%
Gross profit
 
$
119,916

 
$
110,327

 
$
9,589

 
8.7
%
 
$
352,453

 
$
315,573

 
$
36,880

 
11.7
%
Gross profit %
 
51.7
%
 
51.9
%
 


 
 
 
53.1
%
 
51.8
%
 
 
 
 

As a percentage of net revenues, gross profit decreased slightly in the three months ended December 31, 2014, compared to the same prior year period due primarily to two large offsetting items. First, in the year-ago period we identified immaterial out-of-period errors related to our estimated warranty obligation and return material authorization ("RMA") reserves, which resulted in a $2.4 million benefit in the prior year that did not recur in the current quarter ended December 31, 2014. The effect of the non-recurrence was unfavorable to gross margin. Second, and largely offsetting this effect, were the positive effects of lower product costs both as the result of lower component costs and as the result of spreading our fixed manufacturing costs over a larger revenue base versus a year ago.

As a percentage of net revenues, gross profit increased in the nine months ended December 31, 2014, compared to the same prior year period due primarily to the positive effects of lower product costs both as a result of lower component costs and as the result of spreading our fixed manufacturing costs over a larger revenue base versus a year ago. We also had positive margin effects from lower charges for excess and obsolete inventory, and from favorable mix within our Enterprise and Consumer products.

There are significant variances in gross profit percentages between our higher and lower margin products; therefore, small variations in product mix, which can be difficult to predict, can have a significant impact on gross profit.  Gross profit may also vary based on distribution channel, return rates, and other factors.

RESEARCH, DEVELOPMENT, AND ENGINEERING

Research, development, and engineering costs are expensed as incurred and consist primarily of compensation costs, outside services, including legal fees associated with protecting our intellectual property, expensed materials, travel expenses, depreciation, and an allocation of overhead expenses, including facilities, IT, and human resources.
 
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
December 31,
 
Increase
 
December 31,
 
Increase
(in thousands, except percentages)
 
2014
 
2013
 
(Decrease)
 
2014
 
2013
 
(Decrease)
Research, development, and engineering
 
$
22,991

 
$
21,018

 
$
1,973

 
9.4
%
 
$
69,280

 
$
62,328

 
$
6,952

 
11.2
%
% of net revenues
 
9.9
%
 
9.9
%
 


 
 
 
10.4
%
 
10.2
%
 
 
 
 

During the three and nine months ended December 31, 2014, research, development, and engineering expenses increased compared to the same prior year periods due primarily to an increase in our investment in software and other capabilities related to product development. This investment consisted primarily of engineering headcount, resulting in increased compensation and other employee-related expenses.


22


SELLING, GENERAL, AND ADMINISTRATIVE

Selling, general, and administrative expenses consist primarily of compensation costs, marketing costs, travel expenses, litigation and professional service fees, and allocations of overhead expenses, including facilities, IT, and human resources.
 
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
December 31,
 
Increase
 
December 31,
 
Increase
(in thousands, except percentages)
 
2014
 
2013
 
(Decrease)
 
2014
 
2013
 
(Decrease)
Selling, general, and administrative
 
$
57,977

 
$
51,467

 
$
6,510

 
12.6
%
 
$
174,756

 
$
148,071

 
$
26,685

 
18.0
%
% of net revenues
 
25.0
%
 
24.2
%
 


 
 
 
26.3
%
 
24.3
%
 
 
 
 

Compared to the same period a year ago, selling, general, and administrative expenses increased in the three months ended December 31, 2014 due primarily to increased headcount and employee-related expenses of $2.7 million related mainly to increased investment in headcount to support the UC opportunity and other growth opportunities, as well as in increase in stock-based compensation. In addition, legal expenses increased by $2.2 million driven by ongoing litigation. Refer to Note 5, Commitments and Contingencies, of our Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for more information regarding our ongoing litigation matters.

During the nine month period ended December 31, 2014 compared to the same period a year ago, selling, general, and administrative expenses increased due primarily to increased headcount and employee-related expenses of $10.7 million, related mainly to increased investment in headcount to support the UC opportunity and other growth opportunities. We also experienced an increase of $6.5 million in legal expenses driven mainly by ongoing litigation, and $2.6 million higher depreciation related to capital investments made in the past year.

INCOME TAX EXPENSE
 
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
 
December 31,
 
Increase
 
December 31,
 
Increase
(in thousands except percentages)
 
2014
 
2013
 
(Decrease)
 
2014
 
2013
 
(Decrease)
Income before income taxes
 
$
38,596

 
$
38,028

 
$
568

 
1.5
 %
 
$
114,550

 
$
104,686

 
$
9,864

 
9.4
%
Income tax expense
 
8,212

 
3,645

 
4,567

 
125.3
 %
 
28,073

 
20,212

 
7,861

 
38.9
%
Net income
 
$
30,384

 
$
34,383

 
$
(3,999
)
 
(11.6
)%
 
$
86,477

 
$
84,474

 
$
2,003

 
2.4
%
Effective tax rate
 
21.3
%
 
9.6
%
 


 


 
24.5
%
 
19.3
%
 
 
 
 

Our effective tax rate for the three and nine months ended December 31, 2014 was 21.3% and 24.5%, respectively, compared to 9.6% and 19.3%, respectively, in the same prior year period. The effective tax rate for the three and nine months ended December 31, 2014 was higher compared to the same period in the prior year because the rate in the prior year benefited from a higher domestic production activities deduction, a foreign tax credit, and the recognition of Mexican research credit carryforwards resulting from a change in Mexican tax law.
 
We and our subsidiaries are subject to taxation in the U.S. and in various foreign and state jurisdictions. We are currently under examination by the Internal Revenue Service for our 2010 tax year. The California Franchise Tax Board completed its examination of our 2007 and 2008 tax years. We received a Notice of Proposed Assessment and responded by filing a protest letter. The amount of the proposed assessment is not material. Foreign income tax matters for material tax jurisdictions have been concluded for tax years prior to fiscal year 2011, except in the United Kingdom where tax matters have been concluded for tax years prior to fiscal year 2013.



23


FINANCIAL CONDITION

The table below provides a summary of our condensed consolidated cash flow information for the periods presented:
 
 
Nine Months Ended
 
 
 
 
December 31,
 
 
(in thousands)
 
2014
 
2013
 
Change
Net cash provided by operating activities
 
$
100,376

 
$
92,122

 
$
8,254

Net cash used for investing activities
 
(17,382
)
 
(34,601
)
 
17,219

Net cash used for financing activities
 
(33,236
)
 
(51,840
)
 
18,604

Effect of exchange rate changes on cash and cash equivalents
 
(2,112
)
 
1,077

 
(3,189
)
Net increase in cash and cash equivalents
 
$
47,646

 
$
6,758

 
$
40,888


Our primary source of liquidity is cash provided by operating activities. We expect that cash provided by operating activities will fluctuate in future periods as a result of a number of factors, including fluctuations in our revenues and operating expenses, the timing of product shipments during the quarter, accounts receivable collections, inventory and supply chain management, and the timing and amount of tax and other payments. 

Operating Activities

Net cash provided by operating activities during the nine months ended December 31, 2014 increased from the same prior year period primarily due to a net increase in accounts payable and accrued liabilities, which was driven by the timing of payments made during the third quarter compared to the same prior year period. Higher non-cash adjustments driven by stock-based compensation and depreciation in our first three quarters of fiscal year 2015 compared to the same prior year period also contributed to the increase. These increases were partially offset by a net increase in accounts receivable due primarily to higher shipments during the third quarter of our fiscal year 2015 compared to the same prior year period.

Investing Activities

Net cash used for investing activities during the nine months ended December 31, 2014 decreased from the same prior year period due primarily to lower capital expenditures.

We estimate total capital expenditures for fiscal year 2015 will be approximately $30 million compared to our fiscal year 2014 capital expenditures of $51 million. We made significant capital investments in the prior year associated primarily with the purchase of a new manufacturing facility in Tijuana, Mexico and costs incurred to implement a new ERP system. During fiscal year 2015 our capital expenditures related to costs associated with the enhancement of our U.S. and European headquarters, the build-out of our new Mexican facility, and investment of manufacturing capabilities including tooling for new products. We will continue to evaluate new business opportunities and new markets; as a result, our future growth within the existing business or new opportunities and markets may dictate the need for additional facilities and capital expenditures to support that growth.

Financing Activities

Net cash used for financing activities during the nine months ended December 31, 2014 decreased from the same prior year period.  This decrease was driven by lower stock repurchases, partially offset by lower proceeds from stock issuances under stock-based compensation plans and higher dividend payments.

On January 26, 2015, we announced that our Audit Committee of the Board ("the Audit Committee") had declared a cash dividend of $0.15 per share, payable on March 10, 2015 to stockholders of record at the close of business on February 20, 2015.  We expect to continue paying a quarterly dividend of $0.15 per share; however, the actual declaration of dividends and the establishment of record and payment dates are subject to final determination by the Audit Committee each quarter after its review of our financial performance and financial position.


24


Liquidity and Capital Resources

Our primary discretionary cash requirements have historically been for repurchases of our common stock and to fund stockholder dividends.  At December 31, 2014, we had working capital of $524.2 million, including $371.0 million of cash, cash equivalents and short-term investments, compared with working capital of $458.7 million, including $335.4 million of cash, cash equivalents and short-term investments at March 31, 2014.  

Our cash and cash equivalents as of December 31, 2014 consisted of bank deposits with third party financial institutions and Commercial Paper.  We monitor bank balances in our operating accounts and adjust the balances as appropriate.  Cash balances are held throughout the world, including substantial amounts held outside of the U.S.  As of December 31, 2014, of our $371.0 million of cash, cash equivalents and short-term investments, $41.3 million was held domestically while $329.7 million was held by foreign subsidiaries, approximately 90% of which were based in U.S. dollar-denominated holdings. The costs to repatriate our foreign earnings to the U.S. would be material; however, our intent is to permanently reinvest earnings from foreign operations and our current plans do not require us to repatriate earnings from foreign operations to fund our U.S. operations because we generate sufficient domestic operating cash flow and have access to external funding under our revolving line of credit.

Our short and long-term investments are intended to establish a high-quality portfolio that preserves principal and meets liquidity needs.  As of December 31, 2014, our investments were composed of Mutual Funds, Government Agency Securities, Commercial Paper, and Corporate Bonds.

From time to time, our Board has authorized plans under which we may repurchase shares of our common stock, depending on market conditions, in the open market or through privately negotiated transactions. During the first nine months of fiscal year 2015, we repurchased 596,290 shares of our common stock in the open market as part of these publicly announced repurchase programs. The total cost of these repurchases was $27.4 million, with an average price of $46.02 per share. In addition, we withheld 158,267 shares with a total value of $7.3 million in satisfaction of employee tax withholding obligations upon the vesting of restricted stock granted under our stock plans.

As of December 31, 2014, there remained 336,210 shares authorized for repurchase under the stock repurchase program approved by the Board on February 20, 2014. For more information regarding our stock repurchase programs, refer to Note 8, Common Stock Repurchases, of the accompanying notes to condensed consolidated financial statements (unaudited) in this Quarterly Report on Form 10-Q.

In May 2011, we entered into a credit agreement with Wells Fargo Bank, National Association ("the Bank"), as most recently amended in January 2015 to extend its term to May 2018 (as amended, "the Credit Agreement"). The Credit Agreement provides for a $100.0 million unsecured revolving line of credit (the "line of credit") to augment our financial flexibility and, if requested by us, the Bank may increase its commitment thereunder by up to $100.0 million, for a total facility of up to $200.0 million.  Any outstanding principal, together with accrued and unpaid interest, is due on the amended maturity date, May 9, 2018, and our obligations under the Credit Agreement are guaranteed by our domestic subsidiaries, subject to certain exceptions. As of December 31, 2014, the Company had no outstanding borrowings under the line of credit. Loans under the Credit Agreement bear interest at our election (1) at the Bank's announced prime rate less 1.50% per annum, (2) at a daily one month LIBOR rate plus 1.10% per annum or (3) at an adjusted LIBOR rate, for a term of one, three or six months, plus 1.10% per annum. The line of credit requires us to comply with the following two financial covenant ratios, in each case at each fiscal quarter end and determined on a rolling four-quarter basis:

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

In addition, we and our subsidiaries are required to maintain, on a consolidated basis, unrestricted cash, cash equivalents and marketable securities plus availability under the Credit Agreement at the end of each fiscal quarter of at least $200.0 million. The line of credit contains affirmative covenants including covenants regarding the payment of taxes and other liabilities, maintenance of insurance, reporting requirements and compliance with applicable laws and regulations. The credit facility also contains negative covenants, among other things, limiting our ability to incur debt, make capital expenditures, grant liens, make acquisitions and make investments. The events of default under the line of credit include payment defaults, cross defaults with certain other indebtedness, breaches of covenants, judgment defaults and bankruptcy and insolvency events involving us or any of our subsidiaries. As of December 31, 2014, we were in compliance with all ratios and covenants by a substantial margin.