10-Q 1 q31710-q.htm 10-Q Document
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 31, 2016

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: 001-12696

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 x No o

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 x No o

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 x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(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 o No x

As of January 27, 2017, 33,182,548 shares of the registrant's common stock were outstanding.


1


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Plantronics, Inc.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 

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

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Part I -- FINANCIAL INFORMATION

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 belief that our revenues may be materially affected by fluctuations in exchange rates, the global economy and consumer spending,(ii) how our new cloud-based service offerings complement our existing and future hardware offerings, (iii) our belief that our "as-a-service" offerings will expand the reach of our solutions portfolio and grow our business, (iv) our intention to provide customer data insight through software and service solutions, (v) the Unified Communications ("UC") market, including adoption of UC products, our position, and timing and growth expectations in this market, (vi) our expectations regarding the impact of our "as a service" offerings on the UC market, (vii) our intentions regarding investments in long-term growth opportunities and our core research and development efforts, (viii) our intentions regarding the focus of our sales, marketing and customer services and support teams on UC, (ix) the future of UC technologies, including the transition of businesses to UC-supported systems and the effects on headset adoption and use, enterprises that adopt UC and our revenue opportunity and profit growth, (x) our expenses, including research, development and engineering expenses and selling, general and administrative expenses, (xi) fluctuations in our cash provided by operating activities as a result of various factors, including fluctuations in revenues and operating expenses, timing of product shipments, accounts receivable collections, inventory and supply chain management, and the timing and amount of taxes and other payments, (xii) our future tax rate and payments related to unrecognized tax benefits, (xiii) our anticipated range of capital expenditures for the remainder of fiscal year 2017 and the sufficiency of our cash, cash equivalents, and cash from operations to sustain future operations and discretionary cash requirements, (xiv) our ability to pay future stockholder dividends, (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 sufficiency of our capital resources to fund operations, and (xiv) the outcome and effect of legal proceedings, in particular our litigation with GN Netcom, Inc. (“GN”), 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, 2016, filed with the Securities and Exchange Commission (“SEC”) on May 16, 2016; and other documents we have 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, we manufacture and market specialty telephone products under our Clarity brand, such as telephones for the hearing impaired, and other related products for people with special communication needs. Our major product categories are Enterprise, which includes headsets optimized for Unified Communications (“UC”), other corded and cordless communication headsets, audio processors, and telephone systems; and Consumer, which includes Bluetooth and corded products for mobile device applications, personal computer and gaming headsets, and specialty products marketed for hearing impaired individuals.

We ship our products to approximately 80 countries through a network of distributors, retailers, resellers, wireless carriers, original equipment manufacturers, 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.

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   Net Revenues (in millions)
  Operating Income (in millions)
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Compared to the first three quarters of fiscal year 2016, net revenues increased 3.9% to $672.2 million. The increase in net revenues was driven by higher revenues within our Consumer product category, which grew 15.7% or $27.8 million from the year ago period, partially offset by a decrease within our Enterprise product category which declined 0.6% or $2.7 million from the year ago period.
 
Operating income for the first three quarters of fiscal year 2017 was $95.1 million and 14.1% of net revenue, compared to $90.1 million and 13.9% of net revenue in the prior year period.

Net income for the first three quarters of fiscal year 2017 increased 13.8% to $63.1 million, representing 9.4% of our net revenues, compared to $55.4 million and 8.6% in the year ago period.
   
Revenues from our Consumer products are seasonal and typically strongest in our third fiscal quarter, which includes the majority of the holiday shopping season. Additionally, other factors directly impact our Consumer product category performance, such as the market acceptance of new product introductions, product life-cycles (including the introduction and pace of adoption of new technology), consumer preferences and the competitive retail environment, changes in consumer confidence and other macroeconomic factors, and fluctuations in foreign currency rates relative to the USD. In addition, retailer placements can cause volatility in quarter to quarter results.

When compared to the same prior year period, the growth in Consumer revenues in the first three quarters of fiscal year 2017 was attributable to increased sales volume in both our stereo Bluetooth and gaming product portfolios. Growth in stereo Bluetooth was driven primarily by the newly launched version of the BackBeat FIT and growth in gaming was driven by newly launched products, primarily in our RIG line. In addition, while our Consumer business has been impacted in recent years by a decline in sales volumes of our mono Bluetooth products as the category matures and declines, we experienced nominal growth year-to-date, driven by the launch of our premium Voyager 5200 model.

Our Enterprise revenues were down slightly in the first three quarters of fiscal year 2017 when compared to the same prior year period, resulting from healthy growth in our UC product sales offset by a decline in sales from our Core Enterprise (non-UC products) category. Our competitive and strategic position in Core Enterprise remains strong and we expect shipments to return to normal levels, but over the long term we believe this market is flat to slightly up. We believe the continued 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. As such, UC remains the central focus of our sales, marketing, and support functions and we will continue investing in key strategic alliances and integrations with major UC vendors.
    
In addition, in fiscal year 2017 we launched our new data insights "as-a-service" offering. As we move toward a hybrid business model of hardware, software, and services, we believe this cloud-based service offering will complement our existing and future suites of hardware products, allowing us to expand the reach of our solutions portfolio and grow our business.  We believe this offering, in conjunction with the increased adoption of UC, will allow us to offer previously unavailable data insights that customers deem valuable.  Revenues associated with this new offering remain nominal as many customers are currently in a trial period and we cannot be assured of future market acceptance of our cloud-based service or increased adoption of UC.

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RESULTS OF OPERATIONS


Year-over-Year Increase (Q3 FY17 compared to Q3 FY16)

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Net Revenues (in millions)                  Revenue by Product Category (percent)
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Year-to-date vs. Year-to-date Increase (Q3 FY17 YTD compared to Q3 FY16 YTD)

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Net Revenues (in millions)                  Revenue by Product Category (percent)
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Enterprise products represent our largest source of both revenues and 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. Additionally, a portion of our Consumer revenues may vary significantly between quarters due to the timing of large placements with certain retail channel partners.

Net revenues increased in the three and nine months ended December 31, 2016 compared to the same periods a year ago due to higher revenues within our Consumer product category driven by the launch of new and updated products. Net revenues within our Enterprise product category decreased slightly, driven by a decline in our Core Enterprise product category, partially offset by solid growth in our UC product category. The impact to net revenues resulting from changes in foreign exchange rates was not material for the three and nine months ended December 31, 2016.


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Geographic Information (in millions) Revenue by Region (percent)

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Compared to the same prior year periods, U.S. net revenues increased in both the three and nine months ended December 31, 2016 due to a double digit increase in Consumer product sales volumes, driven by new versions of our stereo Bluetooth products, newly launched gaming products, and solid growth in our domestic UC product revenues. These increases were partially offset by lower sales volumes in our Core Enterprise category.
 
We typically generate approximately 40% to 45% of our revenues from international sales; therefore, the impact of currency movements on our net revenues can be significant. In addition, in some international locations where sales are denominated in United States Dollar ("USD"), we also face additional pricing pressure, discounting, and lost business as a stronger USD negatively impacts buying decisions. While the overall impact of foreign exchange fluctuations on our net revenues was not material, unfavorable impacts from the global economy and consumer spending, together with exchange rate fluctuations, could negatively impact our net revenues in future periods.

International net revenues for the three months ended December 31, 2016 increased from the same year ago period due to solid growth in our UC product revenues and Consumer product sales, driven by newly launched gaming products. International net revenues for the nine months ended December 31, 2016 increased from the same year ago period due to solid growth in our UC product revenues and Consumer product sales. In both the three and nine month periods, these increases were partially offset by lower sales volumes in our Core Enterprise category.


7




COST OF REVENUES AND GROSS PROFIT

Cost of revenues consists primarily of direct manufacturing and contract manufacturer costs, warranty, freight, depreciation, and duties expense, charges 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)
 
2015
 
2016
 
(Decrease)
 
2015
 
2016
 
(Decrease)
Net revenues
 
$
225,735

 
$
232,933

 
$
7,198

 
3.2
%
 
$
647,110

 
$
672,222

 
$
25,112

 
3.9
%
Cost of revenues
 
116,219

 
122,753

 
6,534

 
5.6
%
 
319,266

 
338,523

 
19,257

 
6.0
%
Gross profit
 
$
109,516

 
$
110,180

 
$
664

 
0.6
%
 
$
327,844

 
$
333,699

 
$
5,855

 
1.8
%
Gross profit %
 
48.5
%
 
47.3
%
 


 
 
 
50.7
%
 
49.6
%
 
 
 
 

Compared to the same prior year periods, gross profit as a percentage of net revenues decreased in the three and nine months ended December 31, 2016 due primarily to a product mix shift from Enterprise to Consumer and a product mix shift within Enterprise away from Core Enterprise sales, which carry higher margins than our UC products. These decreases were partially offset by reductions in material costs.

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 our 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)
 
2015
 
2016
 
(Decrease)
 
2015
 
2016
 
(Decrease)
Research, development, and engineering
 
$
20,811

 
$
21,393

 
$
582

 
2.8
%
 
$
66,614

 
$
66,116

 
$
(498
)
 
(0.7
)%
% of net revenues
 
9.2
%
 
9.2
%
 


 
 
 
10.3
%
 
9.8
%
 
 
 
 

During the three and nine months ended December 31, 2016, research, development, and engineering expenses remained relatively flat when compared to the same prior year periods. Funding for our annual incentive bonus plans increased in both the three and nine months ended December 31, 2016, resulting from better achievement against corporate goals than in the prior year comparative periods. This increase is offset in the nine months ended December 31, 2016 by cost reductions from our restructuring action initiated at the end of the year ago quarter.

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)
 
2015
 
2016
 
(Decrease)
 
2015
 
2016
 
(Decrease)
Selling, general, and administrative
 
$
53,715

 
$
56,919

 
$
3,204

 
6.0
%
 
$
163,689

 
$
169,581

 
$
5,892

 
3.6
%
% of net revenues
 
23.8
%

24.4
%
 


 
 
 
25.3
%

25.2
%
 
 
 
 


8


Compared to the same periods a year ago, selling, general, and administrative expenses increased in the three and nine months ended December 31, 2016 due primarily to an increase in funding for our annual incentive bonus plans resulting from better achievement against corporate targets, partially offset by cost reductions achieved through the prior year restructuring action. In addition, the nine months ended December 31, 2016 included executive transition costs that were not incurred in the comparable prior year period.

(GAIN) LOSS, NET FROM LITIGATION SETTLEMENTS
 
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
December 31,
 
Increase
 
December 31,
 
Increase
(in thousands, except percentages)
 
2015
 
2016
 
(Decrease)
 
2015
 
2016
 
(Decrease)
(Gain) loss, net from litigation settlements
 
$
(91
)
 
$
(103
)
 
$
(12
)
 
13.2
%
 
$
(998
)
 
$
4,287

 
$
5,285

 
(529.6
)%
% of net revenues
 
%
 
%
 
 
 
 
 
(0.2
)%
 
0.6
%
 
 
 
 

In the first quarter of fiscal year 2017 we recorded a $5 million litigation charge within operating income related to discovery sanctions ordered by the court in the GN anti-trust case. This charge was partially offset by immaterial gains from unrelated intellectual property cases. See Note 6, Commitments and Contingencies for further information regarding on-going litigation.

RESTRUCTURING AND OTHER RELATED CHARGES/ADJUSTMENTS

Restructuring charges were $8.4 million for both the three and nine month prior year periods, and are described more fully in our Annual Report on Form 10-K for the fiscal year ended March 31, 2016, which was filed with the SEC on May 16, 2016. During the current three and nine months ended December 31, 2016, we recorded an immaterial expense and an approximate $1.4 million favorable adjustment, respectively, resulting from changes to the estimates recorded last fiscal year.

INTEREST EXPENSE

Interest expense for the three months ended December 31, 2015 and 2016 was $7.2 million and $7.3 million. Interest expense for the nine months ended December 31, 2015 and 2016 was $17.3 million and $21.9 million, respectively. Such costs are primarily related to the 5.50% Senior Notes and include an immaterial amount in amortization of debt issuance costs.

OTHER NON-OPERATING INCOME AND (EXPENSE), NET
 
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
December 31,
 
Increase
 
December 31,
 
Increase
(in thousands, except percentages)
 
2015
 
2016
 
(Decrease)
 
2015
 
2016
 
(Decrease)
Other non-operating income and (expense), net

 
$
398

 
$
427

 
$
29

 
7.3
%
 
$
(2,025
)
 
$
4,119

 
$
6,144

 
(303.4
)%
% of net revenues
 
0.2
%
 
0.2
%
 
 
 
 
 
(0.3
)%
 
0.6
%
 
 
 
 

Other non-operating income and (expense), net for the three months ended December 31, 2016 was flat compared to the prior year period due primarily to immaterial increases in interest income offset by immaterial net losses from fluctuations in foreign currency exchange rates. In the nine months ended December 31, 2016, other non-operating income and (expense), net increased primarily due to an immaterial net foreign currency gain compared to a $3.0 million net foreign currency loss in the year ago period on more volatile foreign currency exchange rate fluctuations. In addition, interest income increased due to slightly higher interest rates on a higher average investment portfolio when compared to the nine months ended December 31, 2015.

INCOME TAX EXPENSE
 
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
 
December 31,
 
Increase
 
December 31,
 
Increase
(in thousands except percentages)
 
2015

2016
 
(Decrease)
 
2015

2016
 
(Decrease)
Income before income taxes
 
$
19,829

 
$
24,963

 
$
5,134

 
25.9
 %
 
$
70,803

 
$
77,317

 
$
6,514

 
9.2
 %
Income tax expense
 
3,541

 
2,742

 
(799
)
 
(22.6
)%
 
15,391

 
14,235

 
(1,156
)
 
(7.5
)%
Net income
 
$
16,288

 
$
22,221

 
$
5,933

 
36.4
 %
 
$
55,412

 
$
63,082

 
$
7,670

 
13.8
 %
Effective tax rate
 
17.9
%
 
11.0
%
 


 


 
21.7
%
 
18.4
%
 
 
 
 


9


The decreases in the effective tax rates for the three and nine months ended December 31, 2016 are due primarily to a shift in our geographic mix of income from higher tax jurisdictions to lower tax jurisdictions, as our restructuring charges incurred during the three months ended December 31, 2015 resulted in proportionately more income in higher tax jurisdictions in that period.

We and our subsidiaries are subject to taxation in the U.S. as well as various foreign and state jurisdictions. All U.S. federal tax matters have been concluded for tax years prior to fiscal year 2013. The California Franchise Tax Board completed its examination of our 2007 and 2008 tax years. We have 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 for the United Kingdom, which has been concluded for tax years prior to fiscal year 2015.

FINANCIAL CONDITION
Operating Cash Flow (in millions)
Investing Cash Flow (in millions)
Financing Cash Flow (in millions)
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Our primary source of liquidity is cash provided by operating activities and, on occasion, financing obtained from capital markets, and other debt sources, such as our revolving credit line. We believe that internally generated cash flows are generally sufficient to support our businesses operations, capital expenditures, restructuring activities, principal and interest payment of debt, income tax payments and the payment of stockholder dividends, in addition to investments and share repurchases. 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, interest, annual bonus, and other payments. 

As of December 31, 2016, we had a revolving credit facility available to provide up to $100.0 million of additional financing. The credit facility expires in May 2019.

Operating Activities

Compared to the same year ago period, net cash provided by operating activities during the nine months ended December 31, 2016 decreased primarily from making two interest payments on our 5.50% Senior Notes compared to only one such payment last year, in addition to payments resulting from restructuring activities and the GN discovery sanctions, neither of which impacted cash in the year ago period. These items were partially offset by increased customer collections on higher revenues, lower cash payments related to our annual incentive bonus plans, and lower cash payments for income taxes when compared to the year ago period.

Investing Activities

Compared to the same year ago period, we used less cash for investing activities during the nine months ended December 31, 2016, due to a net increase in cash proceeds from investment sales and maturities and a lower level of cash paid for capital expenditures.


10


We estimate total capital expenditures for fiscal year 2017 will be approximately $23.0 million to $26.0 million. Large capital expenditures during the year include costs associated with the purchase and related construction of our new European headquarters in the Netherlands as well as costs associated with building improvements at our U.S. headquarters, the implementation of a manufacturing execution system at our facility in Mexico, and other IT-related expenditures. The remainder of the anticipated capital expenditures for fiscal year 2017 consist primarily of capital investment in our manufacturing capabilities, including tooling for new products. We will continue to evaluate new business opportunities and new markets. Our future growth within the existing business or new opportunities and markets may require us to obtain additional financing or make additional capital expenditures to support such growth.

Financing Activities

Net cash used for financing activities during the nine months ended December 31, 2016 increased from the prior year period.  In the prior year period we received net proceeds from the issuance of our $500.0 million aggregate principal amount of 5.50% senior notes (the “5.50% Senior Notes”), which was substantially offset by common stock repurchases, and made net repayments of $34.5 million against our revolving credit facility. In the current year period we repurchased $34.2 million of common stock and had no debt financing transactions.

On January 31, 2017, we announced that the Audit Committee of our Board ("the Audit Committee") had declared a cash dividend of $0.15 per share, payable on March 10, 2017 to stockholders of record at the close of business on February 21, 2017.  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.

Liquidity and Capital Resources

Our primary discretionary cash requirements have historically been for repurchases of our common stock and to fund stockholder dividends.  As a result of the issuance of the 5.50% Senior Notes, we are required to make interest payments of approximately $13.8 million each November and May through the life of the notes. These payments require use of our domestic cash.

At December 31, 2016, we had working capital of $538.9 million, including $419.9 million of cash, cash equivalents and short-term investments, compared with working capital of $487.8 million, including $395.3 million of cash, cash equivalents and short-term investments at March 31, 2016.  

Our cash and cash equivalents as of December 31, 2016 consisted of bank deposits with third party financial institutions.  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, 2016, of our $419.9 million of cash, cash equivalents, and short-term investments, $31.7 million was held domestically while $388.2 million was held by foreign subsidiaries, approximately 90% of which were based in USD-denominated investments. The costs to repatriate our foreign earnings to the U.S. would be material; however, our intent is to indefinitely 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, 2016, our investments were composed of Mutual Funds, US Treasury Notes, Government Agency Securities, Commercial Paper, Corporate Bonds, and Certificates of Deposits ("CDs").

From time to time, depending on market conditions, our Board has authorized plans under which we may repurchase shares of our common stock in the open market or through privately negotiated transactions. During the nine months ended December 31, 2016, we repurchased 764,176 shares of our common stock in the open market as part of these publicly announced repurchase programs. The total cost of these repurchases was $34.2 million, with an average price of $44.80 per share. In addition, we withheld 212,763 shares with a total value of $9.4 million in satisfaction of employee tax withholding obligations upon the vesting of restricted stock granted under our stock plans.

As of December 31, 2016, there remained 869,835 shares authorized for repurchase under the stock repurchase program approved by the Board on July 29, 2016. For more information regarding our stock repurchase programs, refer to Note 9, Common Stock Repurchases, of the accompanying notes to condensed consolidated financial statements (unaudited) in this Quarterly Report on Form 10-Q.


11


In May 2011, we entered into a credit agreement with Wells Fargo Bank, National Association ("the Bank"), which was most recently amended in May 2016 (as amended, the "Amended Credit Agreement") to extend the term of the Credit Agreement by one year to May 9, 2019, and to waive a default under the Credit Agreement in effect as of March 31, 2016 in which our debt to EBITDA ratio minimally exceeded the previously agreed upon ratio of 3:1. The breach of the covenant was primarily a result of the restructuring expenses recorded in the third and fourth quarters of fiscal year 2016.

The Amended Credit Agreement provides for a $100.0 million unsecured revolving credit facility. Revolving loans under the Credit Agreement will bear interest, at our election, at (i) the Bank’s announced prime rate less 1.20% per annum or (ii) a daily one-month LIBOR rate plus 1.40% per annum. Principal, together with all accrued and unpaid interest, on the revolving loans is due and payable on May 9, 2019. We are also obligated to pay a commitment fee of 0.37% per annum on the average daily unused amount of the revolving line of credit, which fee shall be payable quarterly in arrears. We may prepay the loans and terminate the commitments under the Credit Agreement at any time, without premium or penalty, subject to the reimbursement of certain costs. As of December 31, 2016, we had no outstanding borrowings under the line of credit. 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 unrestricted cash, cash equivalents, and marketable securities plus availability under the Credit Agreement at the end of each fiscal quarter of at least $300.0 million. The Credit Agreement contains customary events of default that include, among other things, payment defaults, covenant defaults, cross-defaults with certain other indebtedness, bankruptcy and insolvency defaults, and judgment defaults. The occurrence of an event of default could result in the acceleration of the obligations under the Credit Agreement.

On May 2, 2016, we received a waiver from the lender for noncompliance with the minimum EBITDA covenant at March 31, 2016. Pursuant to the terms of the waiver and amendment to the Credit Agreement, the $16.2 million of restructuring charges recorded in our fiscal year 2016 will be excluded from the lender’s rolling four-quarter EBITDA calculation.  This exclusion of restructuring charges does not automatically extend to any such future charges, should they be incurred. The breach was not considered to be a cross-default on our 5.50% Senior Notes and as such had no impact on the amount or timing of amounts payable related to those debt instruments. As of December 31, 2016, we were in compliance with all ratios and covenants by a substantial margin.

Our liquidity, capital resources, and results of operations in any period could be affected by repurchases of our common stock, the payment of cash dividends, the exercise of outstanding stock options, restricted stock grants under stock plans, and the issuance of common stock under our Employee Stock Purchase Plan (“ESPP”).  We receive cash from the exercise of outstanding stock options under our stock plan and the issuance of shares under our ESPP. However, the resulting increase in the number of outstanding shares from these equity grants and issuances could affect our earnings per share. We cannot predict the timing or amount of proceeds from the sale or exercise of these securities or whether they will be exercised, forfeited, canceled, or will expire. 

We believe that our current cash and cash equivalents, short-term investments, cash provided by operations, and the availability of additional funds under the Credit Agreement will be sufficient to fund operations for at least the next 12 months; however, any projections of future financial needs and sources of working capital are subject to uncertainty.  Readers are cautioned to review the risks, uncertainties, and assumptions set forth in this Quarterly Report on Form 10-Q, including the section entitled “Certain Forward-Looking Information” and the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended March 31, 2016, filed with the SEC on May 16, 2016, and other periodic filings with the SEC, any of which could affect our estimates for future financial needs and sources of working capital.



12


OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

We have not entered into any transactions with unconsolidated entities giving rise to financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides us with financing and liquidity support, market risk, or credit risk support.

A substantial portion of the raw materials, components, and subassemblies used in our products are provided by our suppliers on a consignment basis. These consigned inventories are not recorded on our consolidated balance sheet until we take title to the raw materials, components, and subassemblies, which occurs when they are consumed in the production process. Prior to consumption in the production process, our suppliers bear the risk of loss and retain title to the consigned inventory. The terms of the agreements allow us to return parts in excess of maximum order quantities to the suppliers at the supplier’s expense. Returns for other reasons are negotiated with the suppliers on a case-by-case basis and to date have been immaterial. If our suppliers were to discontinue financing consigned inventory, it would require us to make cash outlays and we could incur expenses which, if material, could negatively affect our business and financial results. As of March 31, 2016 and December 31, 2016, we had off-balance sheet consigned inventories of $41.1 million and $58.7 million, respectively.

Unconditional Purchase Obligations

We utilize several contract manufacturers to procure raw materials, components, and subassemblies for our products. We provide these contract manufacturers with demand information that typically covers periods up to 13 weeks, and they use this information to acquire components and build products. We also obtain individual components for our products from a wide variety of individual suppliers. Consistent with industry practice, we acquire components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. As of December 31, 2016, we had outstanding off-balance sheet third-party manufacturing, component purchase, and other general and administrative commitments of $164.8 million, including off-balance sheet consigned inventories of $58.7 million as discussed above.

Except as described above, there have been no material changes in our contractual obligations as described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2016.

CRITICAL ACCOUNTING ESTIMATES

For a complete description of what we believe to be the critical accounting estimates used in the preparation of our condensed consolidated financial statements, refer to our Annual Report on Form 10-K for the fiscal year ended March 31, 2016, filed with the SEC on May 16, 2016.  There have been no changes to our critical accounting estimates during the nine months ended December 31, 2016.

Recent Accounting Pronouncements

For more information regarding the Recent Accounting Pronouncements that may impact us, refer to Note 2, Recent Accounting Pronouncements, of the accompanying notes to condensed consolidated financial statements (unaudited) in this Quarterly Report on Form 10-Q.


13


Financial Statements.

PLANTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
 
March 31,
2016
 
December 31,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
235,266

 
$
242,461

Short-term investments
160,051

 
177,442

Accounts receivable, net
128,219

 
141,297

Inventory, net
53,162

 
58,026

Other current assets
20,297

 
26,400

Total current assets
596,995

 
645,626

Long-term investments
145,623

 
134,951

Property, plant, and equipment, net
149,735

 
150,650

Goodwill and purchased intangibles, net
15,827

 
15,640

Deferred tax and other assets
25,257

 
25,874

Total assets
$
933,437

 
$
972,741

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
39,133

 
$
40,680

Accrued liabilities
70,034

 
66,057

Total current liabilities
109,167

 
106,737

Long term debt, net of issuance costs
489,609

 
490,696

Long-term income taxes payable
11,968

 
11,726

Other long-term liabilities
10,294

 
13,462

Total liabilities
$
621,038

 
$
622,621

Commitments and contingencies (Note 6)


 


Stockholders' equity:
 

 
 

Common stock
$
793

 
$
802

Additional paid-in capital
769,489

 
801,213

Accumulated other comprehensive income
3,759

 
4,438

Retained earnings
257,291

 
305,425

Total stockholders' equity before treasury stock
1,031,332

 
1,111,878

Less:  Treasury stock, at cost
(718,933
)
 
(761,758
)
Total stockholders' equity
312,399

 
350,120

Total liabilities and stockholders' equity
$
933,437

 
$
972,741


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


14


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

 
Three Months Ended 
 December 31,
 
Nine Months Ended 
 December 31,
 
2015
 
2016
 
2015
 
2016
Net revenues
$
225,735

 
$
232,933

 
$
647,110

 
$
672,222

Cost of revenues
116,219

 
122,753

 
319,266

 
338,523

Gross profit
109,516

 
110,180

 
327,844

 
333,699

Operating expenses:
 
 
 
 
 
 
 
Research, development, and engineering
20,811

 
21,393

 
66,614

 
66,116

Selling, general, and administrative
53,715

 
56,919

 
163,689

 
169,581

(Gain) loss, net from litigation settlements
(91
)
 
(103
)
 
(998
)
 
4,287

Restructuring and other related charges (credits)
8,433

 
113

 
8,433

 
(1,350
)
Total operating expenses
82,868

 
78,322

 
237,738

 
238,634

Operating income
26,648

 
31,858

 
90,106

 
95,065

Interest expense
(7,217
)
 
(7,322
)
 
(17,278
)
 
(21,867
)
Other non-operating income and (expense), net
398

 
427

 
(2,025
)
 
4,119

Income before income taxes
19,829

 
24,963

 
70,803

 
77,317

Income tax expense
3,541

 
2,742

 
15,391

 
14,235

Net income
$
16,288

 
$
22,221

 
$
55,412

 
$
63,082

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.50

 
$
0.69

 
$
1.60

 
$
1.96

Diluted
$
0.49

 
$
0.68

 
$
1.56

 
$
1.92

 
 
 
 
 
 
 
 
Shares used in computing earnings per common share:
 
 
 
 
 
 
 
Basic
32,579

 
32,242

 
34,723

 
32,260

Diluted
33,259

 
32,826

 
35,588

 
32,895

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.15

 
$
0.15

 
$
0.45

 
$
0.45




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





15


PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
 
Three Months Ended 
 December 31,
 
Nine Months Ended 
 December 31,
 
2015
 
2016
 
2015
 
2016
Net income
$
16,288

 
$
22,221

 
$
55,412

 
$
63,082

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
34

 
82

 
585

 
(168
)
Unrealized gains (losses) on cash flow hedges:
 
 
 
 
 
 
 
Unrealized cash flow hedge gains (losses) arising during the period
1,330

 
2,090

 
(3,484
)
 
2,394

Net (gains) losses reclassified into income for revenue hedges
(1,739
)
 
(2,178
)
 
(7,474
)
 
(3,163
)
Net (gains) losses reclassified into income for cost of revenue hedges
1,238

 
756

 
3,182

 
2,072

Net unrealized gains (losses) on cash flow hedges
829

 
668

 
(7,776
)
 
1,303

Unrealized gains (losses) on investments:
 
 
 
 
 
 
 
Unrealized holding gains (losses) during the period
(637
)
 
(628
)
 
(845
)
 
(586
)
 
 
 
 
 
 
 
 
Aggregate income tax benefit of the above items
150

 
156

 
348

 
130

Other comprehensive income (loss)
376

 
278

 
(7,688
)
 
679

Comprehensive income
$
16,664

 
$
22,499

 
$
47,724

 
$
63,761




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





16


PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
Nine Months Ended
 
December 31,
 
2015
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
55,412

 
$
63,082

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
14,838

 
15,624

Amortization of debt issuance costs
845

 
1,087

Stock-based compensation
24,599

 
25,005

Excess tax benefit from stock-based compensation
(3,300
)
 
(1,019
)
Deferred income taxes
2,185

 
(753
)
Provision for excess and obsolete inventories
1,319

 
1,292

Restructuring charges (credits)
8,433

 
(1,350
)
Cash payments for restructuring charges

 
(3,793
)
Other operating activities
5,896

 
633

Changes in assets and liabilities:
 
 
 

Accounts receivable, net
1,279

 
(13,448
)
Inventory, net
(352
)
 
(5,990
)
Current and other assets
(264
)
 
(2,346
)
Accounts payable
5,744

 
3,626

Accrued liabilities
(3,841
)
 
6,191

Income taxes
(8,770
)
 
(1,141
)
Cash provided by operating activities
104,023

 
86,700

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 

Proceeds from sales of investments
56,890

 
143,631

Proceeds from maturities of investments
51,895

 
97,253

Purchase of investments
(206,110
)
 
(247,491
)
Capital expenditures
(20,977
)
 
(19,603
)
Cash used for investing activities
(118,302
)
 
(26,210
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 

Repurchase of common stock
(482,776
)
 
(34,236
)
Employees' tax withheld and paid for restricted stock and restricted stock units
(10,804
)
 
(9,444
)
Proceeds from issuances under stock-based compensation plans
9,854

 
6,516

Proceeds from revolving line of credit
155,749

 

Repayments of revolving line of credit
(190,249
)
 

Proceeds from bonds issuance, net of issuance costs
488,401

 

Payment of cash dividends
(16,034
)
 
(14,947
)
Excess tax benefit from stock-based compensation
3,300

 
1,019

Other financing activity

 
761

Cash used for financing activities
(42,559
)
 
(50,331
)
Effect of exchange rate changes on cash and cash equivalents
(921
)
 
(2,964
)
Net increase (decrease) in cash and cash equivalents
(57,759
)
 
7,195

Cash and cash equivalents at beginning of period
276,850

 
235,266

Cash and cash equivalents at end of period
$
219,091

 
$
242,461


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

17


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, 2016 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, 2016, which was filed with the SEC on May 16, 2016.  The results of operations for the interim period ended December 31, 2016 are not necessarily 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 April 1, 2017 and consists of 52 weeks. The Company's prior fiscal year ended on April 2, 2016 and consisted of 53 weeks.  The Company’s results of operations for the three and nine months ended December 31, 2016 and December 26, 2015 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 June 2016, the FASB issued additional guidance regarding the measurement of credit losses on financial instruments, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses.  The guidance is effective for the Company's fiscal year ending March 31, 2021 with early adoption permitted beginning in the first quarter of fiscal year 2020. The Company is currently evaluating the impact the adoption of this standard will have on its results of operations, financial position, and cash flows.

In March 2016, the FASB issued additional guidance regarding share-based compensation, which outlines new provisions intended to simplify various aspects related to accounting for share-based payments and their presentation in the financial statements. The guidance is effective for the Company's fiscal year ending March 31, 2018. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this standard will have on its results of operations, financial position, and cash flows.

In February 2016, the FASB issued additional guidance regarding both operating and financing leases, requiring lessees to recognize on their balance sheets “right-of-use assets” and corresponding lease liabilities, measured on a discounted basis over the lease term. Virtually all leases will be subject to this treatment except leases that meet the definition of a “short-term lease.”  For expense recognition, the dual model requiring leases to be classified as either operating or finance leases has been retained from the prior standard. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. Classification will use criteria very similar to those applied in current lease accounting, but without explicit bright lines. The new lease guidance will essentially eliminate off-balance sheet financing. The guidance is effective for the Company's fiscal year ending March 31, 2020. The new standard must be adopted using a modified retrospective transition that provides for certain practical expedients and requires the new guidance to be applied at the beginning of the earliest comparative period presented. While we are not yet in a position to assess the full impact of the application of the new standard, the Company expects that the impact of recording the lease liabilities and the corresponding right-to-use assets may have a significant impact on its total assets and liabilities with a minimal impact on its equity.


18


In January 2016, the FASB issued additional guidance regarding the recognition and measurement of financial assets and liabilities. Changes to the current GAAP model primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The Company is required to adopt the standard in the first quarter of its fiscal year ending March 31, 2019, but may elect to adopt earlier as permitted under the standard. The Company is currently evaluating what impact, if any, the adoption of this standard will have on its results of operations, financial position, and cash flows.

In July 2015, the FASB issued additional guidance regarding the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. The Company is required to adopt the standard in the first quarter of its fiscal year ending March 31, 2018, but may elect to adopt earlier as permitted under the standard. The adoption is not expected to have a material impact on the Company's results of operations, financial position, or cash flows.

In May 2014, the FASB issued additional guidance regarding revenue from contracts with customers. While the standard supersedes existing revenue recognition guidance, it closely aligns with current GAAP. Under the new standard, revenue will be recognized at the time control of a good or service is transferred to a customer for the amount of consideration received or to be received for that specific good or service. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. In March 2016, the FASB issued additional guidance concerning "Principal versus Agent" considerations (reporting revenue gross versus net); in April 2016, the FASB issued additional guidance on identifying performance obligations and licensing; and in May 2016, the FASB issued additional guidance on collectability, noncash consideration, presentation of sales tax, and transition. These updates are intended to improve the operability and understandability of the implementation guidance and have the same effective date and transition requirements as the greater "contracts with customers" standard. The Company will adopt the standard, as amended, in the first quarter of its fiscal year ending March 31, 2019.  The Company has not yet completed its final review of the impact of this guidance, although it currently does not anticipate a material impact on its revenue recognition practices. The Company continues to review variable consideration, potential disclosures, and its method of adoption to complete its evaluation of the impact on its consolidated financial statements. In addition, the Company will continue to monitor additional changes, modifications, clarifications or interpretations being undertaken by the FASB, which may impact its current conclusions.



19


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, 2016 and March 31, 2016 (in thousands):
December 31, 2016
 
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
 
$
242,461

 
$

 
$

 
$
242,461

 
$
242,461

 
$

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual Funds
 
11,970

 
177

 
(97
)
 
12,050

 

 
12,050

 

US Treasury Notes
 
25,610

 

 
(41
)
 
25,569

 

 
13,519

 
12,050

Subtotal
 
37,580

 
177

 
(138
)
 
37,619

 

 
25,569

 
12,050

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government Agency Securities
 
59,332

 
6

 
(144
)
 
59,194

 

 
15,226

 
43,968

Commercial Paper
 
49,904

 

 

 
49,904

 

 
49,904

 

Corporate Bonds
 
144,291

 
8

 
(269
)
 
144,030

 

 
68,804

 
75,226

Certificates of Deposits ("CDs")
 
21,646

 

 

 
21,646

 

 
17,939

 
3,707

Subtotal
 
275,173

 
14

 
(413
)
 
274,774

 

 
151,873

 
122,901

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total cash, cash equivalents
and investments measured at fair value
 
$
555,214

 
$
191

 
$
(551
)
 
$
554,854

 
$
242,461

 
$
177,442

 
$
134,951


March 31, 2016
 
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
 
$
232,600

 
$

 
$

 
$
232,600

 
$
232,600

 
$

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual Funds
 
10,025

 
32

 
(548
)
 
9,509

 

 
9,509

 

US Treasury Notes
 
25,051

 
21

 
(9
)
 
25,063

 

 
12,993

 
12,070

Subtotal
 
35,076

 
53

 
(557
)
 
34,572

 

 
22,502

 
12,070

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government Agency Securities
 
72,698

 
24

 
(20
)
 
72,702

 

 
10,521

 
62,181

Commercial Paper
 
37,628

 

 

 
37,628

 
650

 
36,978

 

Corporate Bonds
 
147,662

 
234

 
(97
)
 
147,799

 
2,016

 
77,115

 
68,668

Certificates of Deposits ("CDs")
 
15,639

 

 

 
15,639

 

 
12,935

 
2,704

Subtotal
 
273,627

 
258

 
(117
)
 
273,768

 
2,666

 
137,549

 
133,553

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total cash, cash equivalents
and investments measured at fair value
 
$
541,303

 
$
311

 
$
(674
)
 
$
540,940

 
$
235,266

 
$
160,051

 
$
145,623


As of December 31, 2016 and March 31, 2016, with the exception of assets related to the Company's deferred compensation plan, 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. For more information regarding the Company's deferred compensation plan, refer to Note 4, Deferred Compensation.

The Company did not incur any material realized or unrealized gains or losses in the three and nine months ended December 31, 2015 and 2016.

20



There were no transfers between fair value measurement levels during the three and nine months ended December 31, 2015 and 2016.

All financial assets and liabilities are recognized or disclosed at fair value in the financial statements or the accompanying notes thereto. 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 and US Treasury Notes. 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 Certificates of Deposits ("CDs"), derivative foreign currency contracts, and long-term debt. 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 11, Foreign Currency Derivatives, of the accompanying notes to condensed consolidated financial statements (unaudited) in this Quarterly Report on Form 10-Q. The fair value of Level 2 long-term debt is determined based on inputs that were observable in the market, including the trading price of the notes when available. For more information regarding the Company's 5.50% Senior Notes, refer to Note 7, Debt.

Level 3
The Company's unsecured revolving credit facility falls under the Level 3 hierarchy. The fair value of the Company’s line of credit approximates its carrying value because the interest rate is variable and approximates rates currently available to the Company. 

4.  DEFERRED COMPENSATION

As of December 31, 2016, the Company held bank deposits of $0.8 million and investments in mutual funds totaling $12.1 million, all of which related to debt and equity securities that are held in rabbi trusts under non-qualified deferred compensation plans. The total related deferred compensation liability was $13.4 million at December 31, 2016. The fair value of debt and equity securities held in the rabbi trusts at March 31, 2016 was $9.5 million. The total related deferred compensation liability at March 31, 2016 was $10.7 million.

The bank deposits are recorded on the condensed consolidated balance sheets under "Cash and cash equivalents". The securities are classified as trading securities and are recorded on the condensed consolidated balance sheets under "Short-term investments". The liability is recorded on the condensed consolidated balance sheets under “Other long-term liabilities” and "Accrued liabilities".


21


5. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS

Accounts receivable, net:
 
 
March 31,
 
December 31,
(in thousands)
 
2016
 
2016
Accounts receivable
 
$
163,834

 
$
188,234

Provisions for returns
 
(7,314
)
 
(11,922
)
Provisions for promotions, rebates, and other
 
(27,737
)
 
(34,545
)
Provisions for doubtful accounts and sales allowances
 
(564
)
 
(470
)
Accounts receivable, net
 
$
128,219

 
$
141,297


Inventory, net:
 
 
March 31,
 
December 31,
(in thousands)
 
2016
 
2016
Raw materials
 
$
21,612

 
$
23,586

Work in process
 
527

 
254

Finished goods
 
31,023

 
34,186

Inventory, net
 
$
53,162

 
$
58,026

 
Accrued Liabilities:
 
 
March 31,
 
December 31,
(in thousands)
 
2016
 
2016
Employee compensation and benefits
 
$
22,955

 
$
31,110

Accrued interest on 5.50% Senior Notes
 
10,501

 
3,494

Warranty obligation
 
8,537

 
8,947

VAT/Sales tax payable
 
4,894

 
4,656

Restructuring and other related charges
 
5,783

 
441

Accrued other
 
17,364

 
17,409

Accrued liabilities
 
$
70,034

 
$
66,057


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, 2015 and 2016 were as follows:
 
 
Nine Months Ended 
 December 31,
(in thousands)
 
2015
 
2016
Warranty obligation at beginning of period
 
$
7,717

 
$
8,537

Warranty provision related to products shipped
 
6,942

 
7,248

Deductions for warranty claims processed
 
(6,490
)
 
(7,246
)
Adjustments related to preexisting warranties
 
552

 
408

Warranty obligation at end of period
 
$
8,721

 
$
8,947




22


6. COMMITMENTS AND CONTINGENCIES

Unconditional Purchase Obligations

The Company purchases materials and services 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, 2016, the Company had outstanding off-balance sheet third-party manufacturing, component purchase, and other general and administrative commitments of $164.8 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.  The Company has also entered into indemnification agreements with its directors, officers and certain other personnel 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 or certain of its affiliated entities. The Company maintains director and officer liability insurance, which may cover certain liabilities arising from its obligation to indemnify its directors, officers and certain other personnel 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 the Company 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.

On July 6, 2016, the Court in GN Netcom, Inc. v. Plantronics, Inc. ordered the following sanctions against the Company as they relate to certain discovery matters in the litigation: (1) monetary sanctions in the form of reasonable fees and costs incurred by GN in connection with the discovery disputes leading to the motion for sanctions; (2) punitive sanctions in the amount of $3 million; (3) possible evidentiary sanctions; and (4) instructions to the jury that it may draw an adverse inference that emails destroyed by the Company would have been favorable to GN’s case and/or unfavorable to the Company's defense. As a result, during the three months ended June 30, 2016, the Company accrued $3 million for the punitive sanctions and an additional $2 million, representing the Company’s best estimate of reasonable fees and costs incurred by GN in connection with the disputes leading to the motion for sanctions, for a total of $5 million.  The Company paid the $3 million in punitive damages to GN on or about September 1, 2016 and paid the remaining balance, which was reduced to $1.9 million, on December 7, 2016.

The Company believes that the underlying antitrust action is without merit and is vigorously defending itself. However, following the court order described above, there exists an increased risk of the jury finding in favor of the plaintiff. The Company is unable to provide an estimate of the possible loss or range of possible loss resulting from these allegations and has not accrued any financial damages relating to the antitrust case. The trial for the underlying antitrust case is currently scheduled to commence in October 2017.
 

23


In addition to the specific matter 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.

7. DEBT

5.50% Senior Notes

In May 2015, the Company issued $500.0 million aggregate principal amount of 5.50% senior notes (the “5.50% Senior Notes”). The 5.50% Senior Notes mature on May 31, 2023, and bear interest at a rate of 5.50% per annum, payable semi-annually on May 15 and November 15 of each year, commencing on November 15, 2015. The Company received net proceeds of $488.4 million from the issuance of the 5.50% Senior Notes, net of issuance costs of $11.6 million which are being amortized to interest expense over the term of the 5.50% Senior Notes using the effective interest method.

The fair value of the 5.50% Senior Notes was determined based on inputs that were observable in the market, including the trading price of the 5.50% Senior Notes when available (Level 2). The estimated fair value and carrying value of the 5.50% Senior Notes were as follows:
 
March 31, 2016
 
December 31, 2016
(in thousands)
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
5.50% Senior Notes
$
493,440

 
$
489,609

 
$
507,105

 
$
490,696


The Company may redeem all or a part of the 5.50% Senior Notes, upon not less than 30 or more than a 60 day notice; however, the applicable redemption price will be determined as follows:
 
Redemption Period Requiring Payment of:
 
Redemption Up To 35% Using Cash Proceeds From An Equity Offering(3):

 
Make-Whole(1)
 
Premium(2)
 
Date
 
Specified Price
5.50% Senior Notes
Prior to May 15, 2018
 
On or after May 15, 2018
 
Prior to May 15, 2018
 
105.500%
(1) If the Company redeems the notes prior to the applicable date, the redemption price is principal plus a make-whole premium equal to the present value of the remaining scheduled interest payments as described in the applicable indenture, together with accrued and unpaid interest.
(2) If the Company redeems the notes on or after the applicable date, the price is principal plus a premium which declines over time as specified in the applicable indenture, together with accrued and unpaid interest.
(3) If the Company redeems the notes prior to the applicable date with net cash proceeds of one or more equity offerings, the price is equal to the amount specified above, together with accrued and unpaid interest, subject to a maximum redemption of 35% of the aggregate principal amount of the respective note being redeemed.

In addition, upon the occurrence of certain change of control triggering events, the Company may be required to repurchase the 5.50% Senior Notes, at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. The 5.50% Senior Notes contain restrictive covenants that, among other things, limit the Company's ability to create certain liens and enter into sale and leaseback transactions; create, assume, incur, or guarantee additional indebtedness of its subsidiaries without such subsidiary guaranteeing the 5.50% Senior Notes on an unsecured unsubordinated basis; and consolidate or merge with, or convey, transfer or lease all or substantially all of the assets of the Company and its subsidiaries to another person. As of December 31, 2016, the Company was in compliance with all covenants.


24


Revolving Credit Agreement

On May 9, 2011, the Company entered into a credit agreement with Wells Fargo Bank, National Association ("the Bank"), which was most recently amended on May 2, 2016 (as amended, the "Amended Credit Agreement") to extend the term of the Credit Agreement by one year to May 9, 2019, and to waive a default under the Credit Agreement in effect as of March 31, 2016 in which the Company's debt to EBITDA ratio minimally exceeded the previously agreed upon ratio of 3:1. The breach of the covenant was primarily a result of the restructuring expenses recorded in the third and fourth quarters of fiscal year 2016.

The Amended Credit Agreement provides for a $100.0 million unsecured revolving credit facility. Revolving loans under the Credit Agreement will bear interest, at the Company’s election, at (i) the Bank’s announced prime rate less 1.20% per annum or (ii) a daily one-month LIBOR rate plus 1.40% per annum. Interest is payable quarterly in arrears on the first day of each April, July, October and January, commencing July 1, 2016. Principal, together with all accrued and unpaid interest, on the revolving loans is due and payable on May 9, 2019. The Company is also obligated to pay a commitment fee of 0.37% per annum on the average daily unused amount of the revolving line of credit, which fee shall be payable quarterly in arrears on the first day of each April, July, October and January, commencing July 1, 2016.

The Company may prepay the loans and terminate the commitments under the Credit Agreement at any time, without premium or penalty, subject to the reimbursement of certain costs. As of March 31, 2016 and December 31, 2016, the Company had no outstanding borrowings under the line of credit.

The Credit Agreement contains customary affirmative and negative covenants, including, among other things, covenants limiting the ability of the Company to incur debt, make capital expenditures, grant liens, merge or consolidate, and make investments. The Credit Agreement also requires the Company to comply with certain financial covenants, including (i) a maximum ratio of funded debt to EBITDA and (ii) a minimum EBITDA coverage ratio, in each case, tested as of each fiscal quarter 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 $300.0 million. The Credit Agreement contains customary events of default that include, among other things, payment defaults, covenant defaults, cross-defaults with certain other indebtedness, bankruptcy and insolvency defaults, and judgment defaults. The occurrence of an event of default could result in the acceleration of the obligations under the Credit Agreement.

On May 2, 2016, the Company received a waiver from the lender for noncompliance with the minimum EBITDA covenant at March 31, 2016. Pursuant to the terms of the waiver and amendment to the Credit Agreement, the $16.2 million of restructuring charges recorded in the Company's fiscal year 2016 will be excluded from the lender’s rolling four-quarter EBITDA calculation.  This exclusion of restructuring charges does not automatically extend to any such future charges, should they be incurred. The breach was not considered to be a cross-default on the Company's 5.50% Senior Notes and as such had no impact on the amount or timing of amounts payable related to those debt instruments. As of December 31, 2016, the Company was in compliance with all ratios and covenants.

8. 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)
 
2015
 
2016
 
2015
 
2016
Cost of revenues
 
$
811

 
$
794

 
$
2,469

 
$
2,414

 
 
 
 
 
 
 
 
 
Research, development, and engineering
 
2,286

 
1,771

 
7,264

 
6,663

Selling, general, and administrative
 
4,620

 
6,124

 
14,866

 
15,928

Stock-based compensation included in operating expenses
 
6,906

 
7,895

 
22,130

 
22,591

Total stock-based compensation
 
7,717

 
8,689

 
24,599

 
25,005

Income tax benefit
 
(2,238
)
 
(2,986
)
 
(7,202
)
 
(8,635
)
Total stock-based compensation, net of tax
 
$
5,479

 
$
5,703

 
$
17,397

 
$
16,370



25


9. 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, 2015 and 2016 are discussed below. As of December 31, 2016, there remained 869,835 shares authorized for repurchase under the repurchase program approved by the Board on July 29, 2016. There were no remaining shares authorized under previously approved programs.

In the nine months ended December 31, 2015 and 2016, the Company repurchased 8,673,366 shares and 764,176 shares, respectively, of its common stock in the open market for a total cost of $482.8 million and $34.2 million, respectively, and at an average price per share of $55.66 and $44.80, respectively. In addition, the Company withheld shares valued at $10.8 million and $9.4 million in the nine months ended December 31, 2015 and 2016, 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 same effect as 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.

10. ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive income ("AOCI"), net of immaterial tax effects, are as follows:
(in thousands)
 
March 31, 2016
 
December 31, 2016
Accumulated unrealized gain (loss) on cash flow hedges (1)
 
$
(1,087
)
 
$
180

Accumulated foreign currency translation adjustments
 
4,739

 
4,571

Accumulated unrealized gain (loss) on investments
 
107

 
(313
)
Accumulated other comprehensive income
 
$
3,759

 
$
4,438

(1)Refer to Note 11, Foreign Currency Derivatives, which discloses the nature of the Company's derivative assets and liabilities as of March 31, 2016 and December 31, 2016.  

11. FOREIGN CURRENCY DERIVATIVES

The Company's foreign currency derivatives consist primarily of foreign currency forward exchange contracts, option contracts, and cross-currency swaps.  The Company does not purchase derivative financial instruments for speculative trading purposes.  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, 2016.  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, 2016, the Company had International Swaps and Derivatives Association (ISDA) agreements with four applicable banks and financial institutions which contained 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 March 31, 2016 and December 31, 2016, no cash collateral had been received or pledged related to these derivative instruments.


26


The gross fair value of the Company's outstanding derivative contracts at the end of each period was as follows:
(in thousands)
 
March 31, 2016
 
December 31, 2016
Derivative Assets (recorded in 'Other current assets')
 
 
 
 
Non-designated hedges
 
$
33

 
$
410

Cash flow hedges
 
1,952

 
4,321

Total Derivative Assets
 
$
1,985

 
$
4,731

 
 
 
 
 
Derivative Liabilities (recorded in 'Accrued liabilities')
 
 
 
 
Non-designated hedges
 
$
1,163

 
$
24

Cash flow hedges
 
3,255

 
3,028

Total Derivative Liabilities
 
$
4,418

 
$
3,052


Non-Designated Hedges

As of December 31, 2016, the Company had foreign currency forward contracts denominated in Euros ("EUR"), British Pound Sterling ("GBP"), Australian Dollars ("AUD"), and Canadian Dollars ("CAD").  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, 2016:
 (in thousands)
Local Currency
 
USD Equivalent
 
Position
 
Maturity
EUR
35,900

 
$
37,955

 
Sell EUR
 
1 month
GBP
£
5,900

 
$
7,281

 
Sell GBP
 
1 month
AUD
A$
13,200

 
$
9,537

 
Sell AUD
 
1 month
CAD
C$
3,750

 
$
2,793

 
Sell CAD
 
1 month

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

The effect of non-designated derivative contracts recognized in other non-operating income and (expense), net in the condensed consolidated statements of operations was as follows:
 
 
Three Months Ended 
 December 31,
 
Nine Months Ended 
 December 31,
(in thousands)
 
2015
 
2016
 
2015
 
2016
Gain (loss) on foreign exchange contracts
 
$
960

 
$
3,801

 
$
1,108

 
$
5,551


Cash Flow Hedges

Costless Collars

The Company hedges a portion of the forecasted EUR and GBP denominated revenues with costless collars. On a monthly basis, the Company enters into option contracts with a six to eleven month term.  Collar contracts are scheduled to mature at the beginning of each fiscal quarter, at which time the instruments convert to forward contracts. The Company also enters into cash flow forwards with a three month term. Once the hedged revenues are recognized, the forward contracts become non-designated hedges to protect the resulting foreign monetary asset position for the Company. 

The notional value of the Company's outstanding EUR and GBP option and forward contracts at the end of each period was as follows:
(in millions)
 
March 31, 2016
 
December 31, 2016
 
 
EUR
 
GBP
 
EUR
 
GBP
Option contracts
 
€59.4
 
£18.4
 
€66.7
 
£23.2
Forward contracts
 
€23.9
 
£9.1
 
€15.2
 
£2.8

The Company will reclassify all amounts accumulated in other comprehensive income into earnings within the next twelve months.


27


Cross-currency Swaps

The Company hedges a portion of the forecasted Mexican Peso (“MXN”) denominated expenditures with a cross-currency swap. A loss of $2.0 million, net of tax, in AOCI as of December 31, 2016 is expected to be reclassified to cost of revenues during the next 12 months due to the recognition of the hedged forecasted expenditures. As of March 31, 2016 and December 31, 2016, the Company had foreign currency swap contracts of approximately MXN 481.0 million and MXN 382.6 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, 2016:
 (in thousands)
Local Currency
 
USD Equivalent
 
Position
 
Maturity
MXN
382,590

 
$
20,476

 
Buy MXN
 
Monthly over
21 months

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, 2015 and 2016:
 
 
Three Months Ended 
 December 31,
 
Nine Months Ended 
 December 31,
(in thousands)
 
2015
 
2016
 
2015
 
2016
Gain (loss) included in AOCI as of beginning of period
 
$
(2,900
)
 
$
(471
)
 
$
5,705

 
$
(1,106
)
 
 
 
 
 
 
 
 
 
Amount of gain (loss) recognized in other comprehensive income (“OCI”)
 (effective portion)
 
1,330

 
2,090

 
(3,484
)
 
2,394

 
 
 
 
 
 
 
 
 
Amount of gain (loss) reclassified from OCI into net revenues (effective portion)
 
1,739

 
2,178

 
7,474

 
3,163

Amount of gain (loss) reclassified from OCI into cost of revenues (effective portion)
 
(1,238
)
 
(756
)
 
(3,182
)
 
(2,072
)
Total amount of gain (loss) reclassified from AOCI to income (loss) (effective portion)
 
501

 
1,422

 
4,292

 
1,091

 
 
 
 
 
 
 
 
 
Gain (loss) included in AOCI as of end of period
 
$
(2,071
)
 
$
197

 
$
(2,071
)
 
$
197


During the three and nine months ended December 31, 2015 and 2016 the Company recognized an immaterial gain on the ineffective portion of its cash flow hedges, which is reported in other non-operating income and (expense), net in the condensed consolidated statements of operations.

12. 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 rates for the three and nine months ended December 31, 2015 were 17.9% and 21.7%, respectively compared to 11.0% and 18.4%, respectively for the three and nine months ended December 31, 2016.

The decreases in the effective tax rates for the three and nine months ended December 31, 2016 are due primarily to a shift in the Company's geographic mix of income from higher tax jurisdictions to lower tax jurisdictions, as restructuring charges incurred during the three months ended December 31, 2015 resulted in proportionately more income in higher tax jurisdictions in that period.

Included in long-term income taxes payable in the condensed consolidated balance sheets as of March 31, 2016 and December 31, 2016 were unrecognized tax benefits of $12.7 million, 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 $1.6 million and $1.7 million as of March 31, 2016 and December 31, 2016, respectively.  No penalties have been accrued.


28


The Company and its subsidiaries are subject to taxation in the U.S. and various foreign and state jurisdictions. All U.S. federal tax matters have been concluded for tax years prior to fiscal year 2013. 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 for the United Kingdom, which has been concluded for tax years prior to fiscal year 2015.

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.

13. 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, 2015 and 2016.

The following table sets forth the computation of basic and diluted earnings per common share for the three and nine months ended December 31, 2015 and 2016:
 
 
Three Months Ended 
 December 31,
 
Nine Months Ended 
 December 31,
(in thousands, except per share data)
 
2015
 
2016
 
2015
 
2016
Numerator:
 
 
 
 
 
 
 
 
Net income
 
$
16,288

 
$
22,221

 
$
55,412

 
$
63,082

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares-basic
 
32,579

 
32,242

 
34,723

 
32,260

Dilutive effect of employee equity incentive plans
 
680

 
584

 
865

 
635

Weighted average common shares-diluted
 
33,259

 
32,826

 
35,588

 
32,895

 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.50

 
$
0.69

 
$
1.60

 
$
1.96

Diluted earnings per common share
 
$
0.49

 
$
0.68

 
$
1.56

 
$
1.92

 
 
 
 
 
 
 
 
 
Potentially dilutive securities excluded from diluted earnings per common share because their effect is anti-dilutive
 
353

 
473

 
289

 
573


14. 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 and, with mobile devices, cordless phones, computers, and gaming consoles. 

The following table presents net revenues by product group for the three and nine months ended December 31, 2015 and 2016:
 
 
Three Months Ended 
 December 31,
 
Nine Months Ended 
 December 31,
(in thousands)
 
2015
 
2016
 
2015
 
2016
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
Enterprise
 
$
158,251

 
$
157,345

 
$
470,476

 
$
467,784

Consumer
 
67,484

 
75,588

 
176,634

 
204,438

Total net revenues
 
$
225,735

 
$
232,933

 
$
647,110

 
$
672,222



29


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, 2015 and 2016. The following table presents net revenues by geography:
 
 
Three Months Ended 
 December 31,
 
Nine Months Ended 
 December 31,
(in thousands)
 
2015
 
2016
 
2015
 
2016
Net revenues from unaffiliated customers:
 
 
 
 
 
 
 
 
U.S.
 
$
122,075

 
$
123,719

 
$
363,456

 
$
371,019

 
 
 
 
 
 
 
 
 
Europe and Africa
 
62,292

 
63,233

 
164,117

 
168,722

Asia Pacific
 
27,506

 
27,164

 
82,240

 
81,979

Americas, excluding U.S.
 
13,862

 
18,817

 
37,297

 
50,502

Total international net revenues
 
103,660

 
109,214

 
283,654

 
301,203

Total net revenues
 
$
225,735

 
$
232,933

 
$
647,110

 
$
672,222


No customer accounted for more than 10% of net revenues for the three and nine months ended December 31, 2015. One customer, Ingram Micro Group, accounted for 10.5% and 10.6%, respectively, of net revenues for the three and nine months ended December 31, 2016, respectively.

One customer, SYNNEX Corporation, accounted for 11.2% of total net accounts receivable at March 31, 2016. One customer, Ingram Micro Group, accounted for 11.9% of total net accounts receivable at December 31, 2016.

15. SUBSEQUENT EVENTS

On January 31, 2017, the Company announced that its Audit Committee had declared and approved the payment of a dividend of $0.15 per share on March 10, 2017 to holders of record on February 21, 2017.


30


Quantitative and Qualitative Disclosures About Market Risk

The discussion of our exposure to market risk related to changes in interest rates and foreign currency exchange rates contains forward-looking statements that are subject to risks and uncertainties.  Actual results could vary materially as a result of a number of factors including those discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended March 31, 2016, filed with the SEC on May 16, 2016.

INTEREST RATE RISK

We reported the following balances in cash and cash equivalents, short-term investments, and long-term investments as follows:
(in millions)
 
March 31, 2016
 
December 31, 2016
Cash and cash equivalents
 
$
235.3

 
$
242.5

Short-term investments
 
$
160.1

 
$
177.4

Long-term investments
 
$
145.6

 
$
135.0


As of December 31, 2016, our investments were composed of Mutual Funds, US Treasury Notes, Government Agency Securities, Commercial Paper, Corporate Bonds, and Certificates of Deposits ("CDs").

Our investment policy and strategy are focused on preservation of capital and supporting our liquidity requirements. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. Our investment policy generally limits the amount of credit exposure to any one issuer and requires investments to be high credit quality, primarily rated A or A2 and above, with the objective of minimizing the potential risk of principal loss. All highly liquid investments with initial maturities of three months or less at the date of purchase are classified as cash equivalents. We classify our investments as either short-term or long-term based on each instrument's underlying effective maturity date. All short-term investments have effective maturities of less than 12 months, while all long-term investments have effective maturities greater than 12 months or we do not currently have the ability to liquidate the investment. We may sell our investments prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or for duration management. No material realized or unrealized gains or losses were recognized during the three and nine months ended December 31, 2015 and 2016.

Interest rates were relatively unchanged in the three and nine months ended December 31, 2016 compared to the same period in the prior year. We generated immaterial interest income in the three months ended December 31, 2016, and $2.6 million in interest income in the nine months ended December 31, 2016. We incurred no significant interest expense from our revolving line of credit in the three and nine months ended December 31, 2016. The 5.50% Senior Notes are at a fixed interest rate and we have not elected the fair value option for these instruments; accordingly we are not exposed to any economic interest rate risk related to this indebtedness; however, the fair value of this instrument fluctuates as market interest rates change. The increase in interest expense caused by a 10 basis point increase in the interest rates of our variable-rate revolving line of credit indebtedness would not be significant. A hypothetical 10 basis points increase or decrease on market interest rates related to our investment portfolio would have an immaterial impact on our results of operations.

FOREIGN CURRENCY EXCHANGE RATE RISK

We are a net receiver of currencies other than the U.S. dollar ("USD").  Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, could negatively affect our net revenues and gross margins as expressed in U.S. dollars.  There is a risk that we will have to adjust local currency product pricing due to competitive pressures if there is significant volatility in foreign currency exchange rates.

The primary currency fluctuations to which we are exposed are the Euro ("EUR"), British Pound Sterling ("GBP"), Australian Dollar ("AUD"), Canadian Dollar ("CAD"), Mexican Peso ("MXN"), and the Chinese Renminbi ("RMB"). We use a hedging strategy to diminish, and make more predictable, the effect of currency fluctuations. All of our hedging activities are entered into with large financial institutions, which we periodically evaluate for credit risks. We hedge our balance sheet exposure by hedging EUR, GBP, AUD, and CAD denominated cash, accounts receivable, and accounts payable balances, and our economic exposure by hedging a portion of anticipated EUR and GBP denominated sales and our MXN denominated expenditures. We can provide no assurance that our strategy will be successful in the future or that exchange rate fluctuations will not materially adversely affect our business. We do not hold or issue derivative financial instruments for speculative trading purposes.


31


We experienced $0.6 million and $3.0 million in net foreign currency losses in the three and nine months ended December 31, 2015, respectively, compared to $0.9 million in net foreign currency losses in the three months ended December 31, 2016 and $0.6 million in net foreign currency gains in the nine months ended December 31, 2016. Although we hedge a portion of our foreign currency exchange exposure, the weakening of certain foreign currencies, particularly the EUR and GBP in comparison to the USD, could result in material foreign exchange losses in future periods.

Non-designated Hedges

We hedge our EUR, GBP, AUD, and CAD denominated cash, accounts receivable, and accounts payable balances by entering into foreign exchange forward contracts. The table below presents the impact on the foreign exchange gain (loss) of a hypothetical 10% appreciation and a 10% depreciation of the USD against the forward currency contracts as of December 31, 2016 (in millions):
Currency - forward contracts
Position
 
USD Value of Net Foreign Exchange Contracts
 
Foreign Exchange Gain From 10% Appreciation of USD
 
Foreign Exchange Loss From 10% Depreciation of USD
EUR
Sell EUR
 
$
38.0

 
$
3.8

 
$
(3.8
)
GBP
Sell GBP
 
$