UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended July 2, 2022
or
| 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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address of principal executive offices)
(Zip Code)
(831 ) 420-3002
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 8, 2022, 43,993,852 shares of the registrant's common stock were outstanding.
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PLANTRONICS, INC.
FORM 10-Q
TABLE OF CONTENTS
| Page | ||||||||
| PART I | FINANCIAL INFORMATION | |||||||
| PART II | OTHER INFORMATION | |||||||
Plantronics, Poly, the Propeller design, the Poly logo, and Polycom are trademarks of Plantronics, Inc.
All other trademarks are the property of their respective owners.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLANTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
| July 2, 2022 | April 2, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Accounts receivable, net | |||||||||||
| Inventory, net | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Non-current assets | |||||||||||
| Property, plant, and equipment, net | |||||||||||
| Purchased intangibles, net | |||||||||||
| Goodwill | |||||||||||
| Deferred tax assets | |||||||||||
| Other non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Non-current liabilities | |||||||||||
| Long-term debt, net | |||||||||||
| Long-term income taxes payable | |||||||||||
| Other non-current liabilities | |||||||||||
| Total liabilities | |||||||||||
Commitments and contingencies (Note 6) | |||||||||||
| Stockholders' (deficit) equity | |||||||||||
| Common stock | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive income | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders' equity before treasury stock | |||||||||||
| Less: Treasury stock, at cost | ( | ( | |||||||||
| Total stockholders' (deficit) equity | ( | ||||||||||
| Total liabilities and stockholders' (deficit) equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
| Three Months Ended | |||||||||||
| July 2, 2022 | July 3, 2021 | ||||||||||
| Net revenues | |||||||||||
| Net product revenues | $ | $ | |||||||||
| Net service revenues | |||||||||||
| Total net revenues | |||||||||||
| Cost of revenues | |||||||||||
| Cost of product revenues | |||||||||||
| Cost of service revenues | |||||||||||
| Total cost of revenues | |||||||||||
| Gross profit | |||||||||||
| Operating expenses | |||||||||||
| Research, development, and engineering | |||||||||||
| Selling, general, and administrative | |||||||||||
| Restructuring and other related charges | ( | ||||||||||
| Total operating expenses | |||||||||||
| Operating loss | ( | ( | |||||||||
| Interest expense | |||||||||||
| Other non-operating expense (income), net | ( | ||||||||||
| Loss before income taxes | ( | ( | |||||||||
| Income tax benefit | ( | ( | |||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Per share data | |||||||||||
| Basic and diluted loss per common share | $ | ( | $ | ( | |||||||
| Basic and diluted shares used in computing loss per common share | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(Unaudited)
| Three Months Ended | |||||||||||
| July 2, 2022 | July 3, 2021 | ||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Other comprehensive income, before tax | |||||||||||
| Unrealized gains (losses) on cash flow hedges | |||||||||||
| Unrealized cash flow hedge gains | |||||||||||
| Net (gains) losses reclassified into net revenues | ( | ||||||||||
| Net gains reclassified into cost of revenues | ( | ( | |||||||||
| Net losses reclassified into interest expense | |||||||||||
| Net unrealized gains on cash flow hedges | |||||||||||
| Income tax expense in other comprehensive income | ( | ( | |||||||||
| Other comprehensive income | |||||||||||
| Comprehensive loss | $ | ( | $ | ( | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| Three Months Ended | |||||||||||
| July 2, 2022 | July 3, 2021 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Stock-based compensation | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Provision for excess and obsolete inventories | |||||||||||
| Restructuring and other related charges | ( | ||||||||||
| Cash payments for restructuring charges | ( | ( | |||||||||
| Other operating activities | |||||||||||
| Changes in assets and liabilities | |||||||||||
| Accounts receivable, net | ( | ||||||||||
| Inventory, net | ( | ||||||||||
| Current and other assets | ( | ||||||||||
| Accounts payable | |||||||||||
| Accrued liabilities | ( | ( | |||||||||
| Income taxes | ( | ( | |||||||||
| Net cash (used in) provided by operating activities | ( | ||||||||||
| Cash flows from investing activities | |||||||||||
| Purchases of short-term investments | ( | ( | |||||||||
| Capital expenditures | ( | ( | |||||||||
| Other investing activities | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities | |||||||||||
| Employees' tax withheld and paid for restricted stock and restricted stock units | ( | ( | |||||||||
| Proceeds from issuances under stock-based compensation plans | |||||||||||
| Repayments of long-term debt | ( | ||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash and cash equivalents and restricted cash | ( | ||||||||||
| Net decrease in cash and cash equivalents and restricted cash | ( | ( | |||||||||
| Cash and cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash and cash equivalents and restricted cash at end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(in thousands)
(Unaudited)
| Three Months Ended July 2, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income | Accumulated Deficit | Treasury Stock | Total Stockholders' (Deficit) Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balances at April 2, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Net unrealized gains on cash flow hedges, net of tax | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Proceeds from issuances under stock-based compensation plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Employees' tax withheld and paid for restricted stock units | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||
| Balances at July 2, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||
| Three Months Ended July 3, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Treasury Stock | Total Stockholders' Deficit | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balances at April 3, 2021 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Net unrealized gains on cash flow hedges, net of tax | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Proceeds from issuances under stock-based compensation plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Employees' tax withheld and paid for restricted stock and restricted stock units | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||
| Balances at July 3, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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PLANTRONICS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BACKGROUND AND BASIS OF PRESENTATION
Plantronics, Inc. (“Poly,” the “Company”) is a leading global communications company that designs, manufactures, and markets integrated communications and collaboration solutions for professionals. The Company has two operating and reportable segments, Products and Services, and offers its products under the 
, Plantronics and Polycom brands.
, Plantronics and Polycom brands.Acquisition by HP Inc.
On March 25, 2022, Poly entered into an Agreement and Plan of Merger (the “Merger Agreement”) with HP Inc. (“HP”) and Prism Subsidiary Corp. (“Merger Sub”), a wholly owned subsidiary of HP, providing for Poly’s acquisition in an all-cash transaction for $40.00 per share of Poly's common stock by way of a merger of Merger Sub with and into Poly (the “Merger”), with Poly continuing as a wholly owned subsidiary of HP. The Merger Agreement and transactions contemplated by the Merger Agreement were approved by Poly's Board of Directors (the “Board”). On June 23, 2022, Poly stockholders voted to adopt the Merger Agreement. The Merger is expected to close, subject to receipt of required regulatory clearances and the satisfaction of other customary closing conditions, in calendar year 2022.
Under the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of Poly’s common stock (except as otherwise set forth in the Merger Agreement) will be canceled and automatically converted into the right to receive $40.00 in cash, without interest and less any applicable withholding taxes. Upon consummation of the Merger, Poly’s common stock will no longer be listed on any public market.
The descriptions of the Merger Agreement and the transactions contemplated thereby contained in this Quarterly Report are summaries only and are qualified in their entirety by reference to the full text of the Merger Agreement, which is attached as Annex A to the definitive proxy statement on Schedule 14A filed by Poly with the SEC on May 17, 2022, as amended.
Basis of Presentation
Certain prior year amounts have been reclassified for consistency with current year presentation. Each of the reclassifications was immaterial and had no effect on the Company's results of operations or cash flows.
2. RECENT ACCOUNTING PRONOUNCEMENTS
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3. DEFERRED COMPENSATION
4. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Accounts receivable, net
| (in thousands) | July 2, 2022 | April 2, 2022 | ||||||||||||
| Accounts receivable | $ | $ | ||||||||||||
| Provisions for promotions and rebates | ( | ( | ||||||||||||
| Provisions for doubtful accounts and sales allowances | ( | ( | ||||||||||||
| Accounts receivable, net | $ | $ | ||||||||||||
Inventory, net
| (in thousands) | July 2, 2022 | April 2, 2022 | ||||||||||||
| Raw materials | $ | $ | ||||||||||||
| Work in process | ||||||||||||||
| Finished goods | ||||||||||||||
| Inventory, net | $ | $ | ||||||||||||
| (in thousands) | July 2, 2022 | April 2, 2022 | ||||||||||||
| Short-term deferred revenue | $ | $ | ||||||||||||
| Employee compensation and benefits | ||||||||||||||
| Provision for returns | ||||||||||||||
| Accrued other | ||||||||||||||
| Accrued liabilities | $ | $ | ||||||||||||
The Company's warranty obligation is recorded in accrued liabilities and other non-current liabilities in the condensed consolidated balance sheets. Changes in the warranty obligation during the three months ended July 2, 2022 and July 3, 2021 were as follows:
| Three Months Ended | ||||||||||||||
| (in thousands) | July 2, 2022 | July 3, 2021 | ||||||||||||
| Warranty obligation at beginning of period | $ | $ | ||||||||||||
| Warranty provision related to products shipped | ||||||||||||||
| Deductions for warranty claims processed | ( | ( | ||||||||||||
| Adjustments related to preexisting warranties | ||||||||||||||
| Warranty obligation at end of period | $ | $ | ||||||||||||
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5. PURCHASED INTANGIBLE ASSETS
As of July 2, 2022 and April 2, 2022, the carrying value of purchased intangible assets is as follows:
| July 2, 2022 | April 2, 2022 | |||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Remaining Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||||||||||
| Amortizing Assets | ||||||||||||||||||||||||||||||||||||||||||||
| Existing technology | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Customer relationships | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Trade name/Trademarks | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
During the three months ended July 2, 2022 and July 3, 2021, the Company recognized amortization expense of $28.0 million and $30.4 million, respectively.
Future amortization expense attributable to purchased intangible assets as of July 2, 2022 was as follows:
| (in thousands) | Amount | |||||||
| 2023 (remaining nine months) | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total | $ | |||||||
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6. COMMITMENTS AND CONTINGENCIES
Future Minimum Lease Payments
Future minimum lease payments under non-cancelable operating leases as of July 2, 2022 were as follows:
| (in thousands) | Operating Leases(1) | |||||||
| 2023 (remaining nine months) | $ | |||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
Less: Imputed interest(2) | ( | |||||||
| Present value of lease liabilities | $ | |||||||
(1) The weighted average remaining lease term was 4.9 years as of July 2, 2022.
(2) The weighted average discount rate was 4.5 % as of July 2, 2022.
Unconditional Purchase Obligations
The Company's off-balance sheet unconditional purchase obligations are comprised of third-party manufacturing, component purchases, and other general and administrative commitments.
We use several contract manufacturers to manufacture raw materials, components, and subassemblies for our products through our supply and demand information that can cover periods up to 78 weeks. The contract manufacturers use this information to acquire components and build products. We also obtain individual components for our products from a wide variety of individual suppliers using a combination of purchase orders, supplier contracts, including annual minimum purchase obligations, and open orders based on projected demand information.
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 sheets 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 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 July 2, 2022, the Company had outstanding off-balance sheet unconditional purchase obligations of $687.6 million, including third-party manufacturing and component purchases of $557.0 million net of consigned inventories of $77.4 million. We expect to consume unconditional purchase obligations in the normal course of business, net of an immaterial purchase commitments reserve. In certain instances, these agreements allow us the option to cancel, reschedule, and adjust our requirements based on our business needs in partnering with our suppliers given the current environment.
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 indemnification to customers against claims related to undiscovered liabilities, additional product liability, or environmental obligations. The Company has also entered into indemnification agreements with
11
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.
As of July 2, 2022, the Company had $28.7 million in off balance-sheet contractual obligations related to advisory services performed in connection with the Merger Agreement which are contingent upon the close of the Merger.
Claims and Litigation
On January 23, 2018, FullView, Inc. filed a complaint in the United States District Court of the Northern District of California against Polycom, Inc. (“Polycom”) alleging infringement of two patents and thereafter filed a similar complaint in connection with the counterpart patents in Canada. Polycom thereafter filed petitions for inter parties review (“IPR”) of both patents U.S. Patent Trial and Appeal Board (“PTAB”), the results of which were appealed to the Court of Appeals for the Federal Circuit. Litigation in both matters in the United States and Canada, respectively, were stayed pending the results of that appeal. Subsequent to the appeal, FullView initiated arbitration proceedings under a terminated license agreement with Polycom alleging that Polycom had failed to pay certain royalties due under that agreement. The arbitration panel awarded an immaterial amount to FullView. FullView filed a First and Second Amended Complaint and Polycom filed a motion to dismiss. The Court granted Polycom's partial motion to dismiss without prejudice and invalidated one of the patents in suit and granted FullView's motion of validity on the second patent. On June 30, 2022, FullView filed a motion for summary judgment on infringement of the ‘143 patent and the Company filed its opposition in July. These motions currently are tentatively scheduled to be heard by the Court on September 29, 2022. Discovery continues in this matter.
On June 21, 2018, directPacket Research Inc. (“directPacket”) filed a complaint alleging patent infringement by Polycom in the United States District Court for the Eastern District of Virginia, Norfolk Division. The Court granted Polycom’s Motion to Transfer Venue to the Northern District of California. Polycom filed petitions for IPR of the asserted patents which were granted by the PTAB. The District Court matter was stayed pending resolution of the IPRs. After oral argument, the PTAB issued final written decisions invalidating two of the asserted patents. The remaining claims of the third patent were unasserted against the Company. directPacket appealed the PTAB decision regarding the '588 patent and Polycom appealed the PTAB's decision on the '978 patent to the United States Court of Appeals for the Federal Circuit. On December 13, 2021, the Court issued an affirmance of the decision regarding the invalidity of all asserted claims of the ‘978 patent. On January 27, 2022, the Court vacated the PTAB’s finding that certain claims of the '588 patent were invalid as obvious and remanded the case for further proceedings at the PTAB. The PTAB agreed with Polycom that additional briefing was needed to decide the issue of invalidity in light of the Federal Circuit’s revised claim construction. The district court case remains stayed pending the PTAB decision.
On November 15, 2019, Felice Bassuk, individually and on behalf of others similarly situated, filed a complaint against the Company, its former CEO, Joseph Burton, its CFO, Charles Boynton, and its former CFO, Pamela Strayer, alleging various securities law violations. The Company disputes the allegations. The Court appointed lead plaintiff and lead counsel and renamed the action “In re Plantronics, Inc. Securities Litigation” on February 13, 2020. Plaintiffs filed the amended complaint on June 5, 2020 and the Company filed a Motion to Dismiss the Amended Complaint on August 7, 2020. The hearing scheduled for January 13, 2021 was vacated and on March 29, 2021, the Court issued its order granting the Company’s motion to dismiss, but allowing the Plaintiffs leave to amend their complaint. The Plaintiff filed its second amended complaint on June 22, 2021 and the Company filed its Motion to Dismiss on September 7, 2021. The court is expected to rule based on the briefs without a hearing and the parties are awaiting the court's ruling.
On December 17, 2019, Cisco Systems, Inc. (“Cisco”) filed a First Amended Complaint for Trade Secret Misappropriation against Plantronics, Inc. and certain individuals which amends a previously filed complaint against certain other individuals. The Company disputes the allegations. The Company filed a Motion to Dismiss and the Court granted the Motion with leave to amend as to defendants He, Chung and Williams, granted the Motion to Compel Arbitration for defendant Williams and granted in part and denied in part the Motion to Dismiss by defendants Puorro and the Company. Cisco filed an Amended Complaint and the defendants moved to dismiss or strike portions of the Amended Complaint. The Court granted in part and denied in part the Motion to Dismiss. On September 10, 2020, the Company filed a Motion for Protective Order and a Motion to Strike and Challenge the Sufficiency of Cisco’s Trade Secret Disclosure. On December 21, 2020, the Court granted in part and denied in part such Motions. On December 30, 2020, Cisco filed a motion for leave to file a Motion for Reconsideration. On January 11,
12
2021 the Company filed its opposition. The Court issued its Case Management and Pretrial order setting a settlement conference which occurred on April 1, 2021. During such mediation conference, the parties were unable to reach settlement. The Texas arbitration proceeding between Mr. Williams and Cisco was settled pursuant to an agreement by the parties, and Mr. Williams was dismissed with prejudice from both that proceeding and from the district court action. On August 13, 2021, Mr. He settled with Cisco pursuant to which he will be permanently enjoined and forever prohibited from receiving, using, and/or distributing Cisco Confidential Business Information except in limited circumstances. Discovery is ongoing.
On July 22, 2020, Koss Corporation filed a complaint alleging patent infringement by the Company and Polycom in the United States District Court for the Western District of Texas, Waco Division. The Company answered the Complaint on October 1, 2020 disputing the claims. On December 18, 2020, the Company filed a Motion to Transfer Venue to the Northern District of California which was granted on May 20, 2021. On November 1, 2021, the Company filed a Motion to Dismiss the suit with the District Court on the grounds of non-patentable subject matter. The Court will rule based on the briefs without a hearing and the parties are awaiting the Court's ruling.
During the months of May through June 2022, seven purported stockholders commenced separate actions against the Company and its directors related to the Merger. Those cases were: Stein v. Plantronics, Inc., et al., Civil Action No. 22-cv-03574, filed in the United States District Court for the Southern District of New York on May 3, 2022; Whitfield v. Plantronics, Inc., et al., Civil Action No. 22-cv-02583, filed in the United States District Court for the Eastern District of New York on May 5, 2022; Vicknair v. Plantronics, Inc., et al., Civil Action No. 1:22-cv-02753, filed in the United States District Court for the Eastern District of New York on May 11, 2022; Justice, II v. Plantronics, Inc., et al., No. 2:22-cv-01861, filed in United States District Court for the Eastern District of Pennsylvania on May 12, 2022; Hansen v. Plantronics, Inc., et al., Civil Action No. 5:22-cv-02989-VKD, filed in the United States District Court for the Northern District of California on May 20, 2022; Nathan v. Plantronics, Inc., et al., Civil Action No. 1:22-cv-04461, filed in the United States District Court for the Southern District of New York on May 31, 2022; and Finger v. Plantronics, Inc., et al., Civil Action No. 1:22-cv-03288, filed in the United States District Court for the Eastern District of New York on June 3, 2022. We refer to the complaints referenced in this paragraph collectively as the “Complaints.” The Complaints asserted claims against all defendants under Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder, and against the individual defendants under Section 20(a) of the Exchange Act for alleged “control person” liability, with respect to allegedly false or misleading statements in the Company’s preliminary proxy statement filed on May 2, 2022 and/or the Company’s definitive proxy statement filed on May 17, 2022. The Complaints sought, among other relief (1) to enjoin defendants from consummating the Merger; (2) to rescind the Merger or recover damages, if the Merger is completed; (3) to require the individual defendants to issue a revised proxy statement; (4) declaratory relief; and (5) attorneys’ fees and costs. All of the Complaints were voluntarily dismissed with prejudice in June and July 2022 prior to the consummation of the Merger.
In addition to the specific matters discussed above, the Company is involved in various legal proceedings and investigations arising in the normal course of conducting business. Where applicable, in relation to the matters described above, the Company has accrued an amount that reflects the aggregate liability deemed probable and estimable, but this amount is not material to the Company's financial condition, results of operations, or cash flows. The Company is not able to estimate an amount or range of any reasonably possible loss, including in excess of any amount accrued, 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
The carrying value of the Company's outstanding debt as of July 2, 2022 and April 2, 2022 was as follows:
| (in thousands) | July 2, 2022 | April 2, 2022 | |||||||||
| 4.75% Senior Notes | $ | $ | |||||||||
| Term loan facility | |||||||||||
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As of July 2, 2022 and April 2, 2022, the net unamortized discount, premium, and debt issuance costs on the Company's outstanding debt were $15.5 million and $16.5 million, respectively.
On March 4, 2021, the Company issued $500.0 million aggregate principal amount of 4.75 % Senior Notes. The 4.75 % Senior Notes mature on March 1, 2029 and bear interest at a rate of 4.75 % per annum, payable semi-annually on March 1 and September 1 of each year, commencing on September 1, 2021. The Company received proceeds of $493.9 million from issuance of the 4.75 % Senior Notes, net of issuance costs of $6.1 million, which are presented in the condensed consolidated balance sheets as a reduction to the outstanding amount payable and are being amortized to interest expense using the straight-line method, which approximates the effective interest method for this debt, over the term of the 4.75 % Senior Notes. A portion of the proceeds was used to repay the outstanding principal of the 5.50 % Senior Notes on May 17, 2021.
The Company may redeem all or part of the 4.75 % Senior Notes, upon not less than a 15 -day 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 40% Using Cash Proceeds From An Equity Offering (3) | ||||||||||||||||||||||
Make-Whole (1) | Premium (2) | Date | Specific Price | ||||||||||||||||||||
| 4.75% Senior Notes | Prior to March 1, 2024 | On or after March 1, 2024 | Prior to March 1, 2024 | ||||||||||||||||||||
(1) If the Company redeems the notes prior to the applicable date, the price is principal plus a make-whole premium, which means, the greater of (i) 1.0% of the principal or (ii) the excess of the present value of the redemption price at March 1, 2024 plus interest through March 1, 2024 over the principal amount.
(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.
In addition, upon the occurrence of certain change of control triggering events, the Company may be required to repurchase the 4.75 % Senior Notes, at a price equal to 101 % of their principal amount, plus accrued and unpaid interest to the date of repurchase. The 4.75 % Senior Notes contain restrictive covenants that, among other things, limit the ability of the Company and its restricted subsidiaries to incur or guarantee additional indebtedness, make certain investments and other restricted payments, transfer and sell assets, create liens, enter into transactions with affiliates, and engage in mergers, consolidations, or sales of assets.
On June 27, 2022, in connection with the Merger, HP announced that it commenced (i) an offer to exchange (the “Exchange Offer”) any and all outstanding 4.75% Senior Notes issued by Poly for up to $500,000,000 aggregate principal amount of new notes to be issued by HP and cash and (ii) the related solicitation of consents (the “Consent Solicitation” and, together with the Exchange Offer, the “Exchange Offer and Consent Solicitation”) to adopt the Amendments (as defined below) to the indenture (the “Indenture”) governing the 4.75% Senior Notes. On July 19, 2022, HP announced that the requisite number of consents have been received to adopt the Amendments with respect to all outstanding 4.75% Senior Notes. On July 25, 2022, Poly entered into a supplemental indenture (the “Supplemental Indenture”) to the Indenture implementing the Amendments.
The proposed amendments (the “Amendments”) contained in the Supplemental Indenture will amend the Indenture to, among other things, eliminate from the Indenture (i) substantially all of the restrictive covenants, (ii) certain of the events which may lead to an “Event of Default”, (iii) the restrictions on Poly consolidating with or merging into another person or conveying, transferring or leasing all or any of its properties and assets to any person, (iv) the reporting covenant and (v) the obligation to offer to purchase the 4.75% Senior Notes upon certain change of control transactions (including the Merger). The Amendments will only become operative upon the settlement of the Exchange Offer, which is expected to occur promptly after the Expiration Date (as defined in the exchange offer memorandum and consent solicitation statement, dated June 27, 2022 and as amended from time to time) and no earlier than the closing date of the Merger.
The foregoing description of the Supplemental Indenture does not purport to be complete and is qualified in its entirety by reference to the Supplemental Indenture, a copy of which is attached as Exhibit 4.1 to the Current Report on Form 8-K filed by Poly with the SEC on July 27, 2022.
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In May 2015, the Company issued $500.0 million aggregate principal amount of 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 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 straight-line method, which approximates the effective interest method for this debt. A portion of the proceeds was used to repay all then-outstanding amounts under the Company's revolving line of credit agreement with Wells Fargo Bank and the remaining proceeds were used primarily for share repurchases.
On May 17, 2021, the Company used a portion of the proceeds from the 4.75 % Senior Notes to redeem the outstanding principal and accrued interest of the 5.50 % Senior Notes of $493.9 million.
Term Loan Facility
In connection with the acquisition of Polycom completed on July 2, 2018, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto (the “Credit Agreement.”) The Credit Agreement replaced the Company’s prior revolving credit facility in its entirety. The Credit Agreement provides for (i) a revolving credit facility with an initial maximum aggregate amount of availability of $100 million that matures in July 2023 and (ii) a $1.275 billion term loan facility priced at LIBOR plus 2.50% due in quarterly principal installments commencing on the last business day of March, June, September and December beginning with the first full fiscal quarter ending after the closing date under the Credit Agreement for the aggregate principal amount funded on the closing date under the Credit Agreement multiplied by 0.25 % (subject to prepayments outlined in the Credit Agreement) and all remaining outstanding principal due at maturity in July 2025. The Company has paid the full amount of term debt principal due prior to maturity. The Company borrowed the full amount available under the term loan facility of $1.245 billion, net of approximately $30 million of discounts and issuance costs which are being amortized to interest expense over the term of the Credit Agreement using the straight-line method, which approximates the effective interest method for this debt. The proceeds from the initial borrowing under the Credit Agreement were used to finance the acquisition of Polycom, to refinance certain debt of Polycom, and to pay related fees, commissions and transaction costs. The Company has additional borrowing capacity under the Credit Agreement through the revolving credit facility, which could be used to provide ongoing working capital and capital for other general corporate purposes of the Company and its subsidiaries. The Company’s obligations under the Credit Agreement are currently guaranteed by Polycom and will from time to time be guaranteed by, subject to certain exceptions, any domestic subsidiaries that may become material in the future. Subject to certain exceptions, the Credit Agreement is secured by first-priority perfected lien on, and security interests in, substantially all of the personal property of the Company and each subsidiary guarantor and will from time to time also be secured by certain material real property that the Company or any subsidiary guarantor may acquire. Borrowings under the Credit Agreement bear interest due on a quarterly basis at a variable rate equal to (i) LIBOR plus a specified margin, or (ii) the base rate (which is the highest of (a) the prime rate publicly announced from time to time by Wells Fargo Bank, National Association, (b) the federal funds rate plus 0.50 % or (c) the sum of 1 % plus one-month LIBOR) plus a specified margin. The Company must also pay (i) an unused commitment fee ranging from 0.200 % to 0.300 % per annum of the average daily unused portion of the aggregate revolving credit commitments under the Credit Agreement, and (ii) a per annum fee equal to (a) for each performance standby letter of credit outstanding under the Credit Agreement with respect to non-financial contractual obligations, 50 % of the applicable margin over LIBOR under the revolving credit facility in effect from time to time multiplied by the daily amount available to be drawn under such letter of credit, and (b) for each other letter of credit outstanding under the Credit Agreement, the applicable margin over LIBOR under the revolving credit facility in effect from time to time multiplied by the daily amount available to be drawn under such letter of credit.
On December 29, 2021, the Company entered into Amendment No. 3 to Credit Agreement (“Amendment No. 3”) by and among the Company, the financial institutions party thereto as lenders, and Wells Fargo Bank, National Association, as administrative agent. Amendment No. 3 amended the Credit Agreement, as previously amended, to (i) increase the maximum Secured Net Leverage Ratio (as defined in the Credit Agreement) permitted to 3.75 to 1.00 as of the end of any fiscal quarter ending during the period beginning on January 2, 2022 through December 31, 2022 and to 3.00 to 1.00 as of the end of any fiscal quarter ending thereafter, except that the maximum Secured Net Leverage Ratio shall be deemed to be 3.00 to 1.00 at all times for purposes of determining pro forma compliance with each Specified Pro Forma Financial Covenant Test (as defined in the Credit Agreement).
Additionally, Amendment No. 3 modified the calculation of the Secured Net Leverage Ratio solely for purposes of determining compliance with Section 7.11(a) of the Credit Agreement for any fiscal quarter ending between January 2, 2022 through December 31, 2022 by amending the definition of Consolidated EBITDA to (a) limit the aggregate amount added back pursuant
15
to clause (vii) thereof (relating to certain acquisition expenses) to the greater of $30,000,000 and 10 % of Consolidated EBITDA for such Measurement Period (as defined in the Credit Agreement) (calculated before giving effect to any such expenses to be added back pursuant to such clause (vii) for such Measurement Period), (b) limit the aggregate amount added back pursuant to clause (vii) thereof in respect of integration expenses related to the Polycom Acquisition (as defined in the Credit Agreement) to $30,000,000 , and (c) limit the aggregate amount added back pursuant to clause (viii) thereof (relating to certain non-recurring or unusual items reducing consolidated net income) to the greater of $30,000,000 and 10 % of Consolidated EBITDA for such Measurement Period (calculated before giving effect to any such items to be added back pursuant to such clause (viii) for such Measurement Period).
The financial covenants under the Credit Agreement, as amended, are for the benefit of the revolving credit lenders only and do not apply to any other debt of the Company. The Credit Agreement also contains various other restrictions and covenants, some of which have become more stringent over time, including restrictions on our, and certain of our subsidiaries, ability to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, consummate acquisitions, make investments, and pay dividends and other distributions. The Company has the unilateral ability to terminate the revolving line of credit such that the financial covenants described above are no longer applicable. The Credit Agreement also contains customary events of default. If an event of default under the Credit Agreement occurs and is continuing, then the lenders may declare any outstanding obligations under the Credit Agreement to be immediately due and payable; provided, however, that the occurrence of an event of default as a result of a breach of a financial covenant under the Credit Agreement does not constitute a default or event of default with respect to any term facility under the Credit Agreement unless and until the required revolving lenders shall have terminated their revolving commitments and declared all amounts outstanding under the revolving credit facility to be due and payable. In addition, if the Company, any subsidiary guarantor or, with certain exceptions, any other subsidiary becomes the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency or similar law, then any outstanding obligations under the Credit Agreement will automatically become immediately due and payable. Loans outstanding under the Credit Agreement will bear interest at a rate of 2.00 % per annum in excess of the otherwise applicable rate (i) while a payment or bankruptcy event of default exists or (ii) upon the lenders’ request, during the continuance of any other event of default. As of July 2, 2022, the Company was in compliance with all financial covenants.
The Company may prepay the loans and terminate the commitments under the Credit Agreement at any time without penalty. Additionally, the Company is subject to mandatory debt repayments five business days after the filing of its consolidated financial statements for any annual period in which the Company generates Excess Cash (as defined in the Credit Agreement). In accordance with the terms of the Credit Agreement, the Company did not generate Excess Cash during the fiscal year ended April 2, 2022 and therefore is not required to make any debt repayments in the fiscal year ended April 1, 2023. During the three months ended July 2, 2022, the Company did not prepay any aggregate principal amount of the term loan facility. As of July 2, 2022, the Company had three letters of credit outstanding under the revolving credit facility for a total of $2.4 million.
8. RESTRUCTURING AND OTHER RELATED CHARGES
The Company has committed to actions to reduce expenses to enable strategic investments in revenue growth. These actions include severance benefits related to headcount reductions in the Company's global workforce, facility related charges due to the closure or consolidation of offices, and legal entity rationalization.
Restructuring and other related charges recognized in the Company's condensed consolidated statements of operations is as follows:
| Three Months Ended | |||||||||||
| (in thousands) | July 2, 2022 | July 3, 2021 | |||||||||
| Severance | $ | ( | $ | ||||||||
| Facility | ( | ||||||||||
Other (1) | |||||||||||
| Total cash charges | ( | ||||||||||
Non-cash charges (2) | |||||||||||
| Total restructuring and other related charges | $ | ( | $ | ||||||||
(1) Other costs primarily represent associated legal and advisory services.
(2) Non-cash charges primarily represent accelerated depreciation due to the closure or consolidation of facilities.
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Changes in the Company's restructuring liabilities during the three months ended July 2, 2022 are as follows:
| (in thousands) | As of April 2, 2022 | Accruals (1) | Cash Payments | As of July 2, 2022 | ||||||||||
| Severance | $ | $ | ( | $ | ( | $ | ||||||||
| Facility | ( | |||||||||||||
| Other | ( | |||||||||||||
| Total | $ | $ | ( | $ | ( | $ | ||||||||
(1) Excludes non-cash charges recorded in restructuring and other related charges in the condensed consolidated statements of operations for the three months ended July 2, 2022.
9. ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income, net of tax, are as follows:
| (in thousands) | July 2, 2022 | April 2, 2022 | |||||||||||||||
| Accumulated unrealized gain on cash flow hedges | $ | $ | |||||||||||||||
| Accumulated foreign currency translation adjustments | |||||||||||||||||
| Accumulated other comprehensive income | $ | $ | |||||||||||||||
10. DERIVATIVES
Foreign Currency Derivatives
The Company's foreign currency derivatives consist primarily of foreign currency forward and option contracts. 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 as a result of credit risk was equal to the carrying value of the Company's derivative assets as of July 2, 2022 and April 2, 2022. 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 to mitigate credit risk in derivative transactions, when possible. 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 July 2, 2022, the Company had International Swaps and Derivatives Association agreements with five applicable banks and financial institutions which contained netting provisions. The Company has elected to present the fair value of derivative assets and liabilities within the Company's condensed consolidated balance sheets on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. Derivatives not subject to master netting agreements are not eligible for net presentation. As of July 2, 2022 and April 2, 2022, no cash collateral had been received or pledged related to these derivative instruments.
Offsetting of Financial Assets/Liabilities under Master Netting Agreements with Derivative Counterparties
As of July 2, 2022
| Gross Amount of Derivative Assets Presented in the Condensed Consolidated Balance Sheets | Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet that are Subject to Master Netting Agreements | |||||||||||||
| (in thousands) | Gross Amount of Eligible Offsetting Recognized Derivative Liabilities | Cash Collateral Received | Net Amount of Derivative Assets | |||||||||||
| Derivatives subject to master netting agreements | $ | $ | ( | $ | $ | |||||||||
| Derivatives not subject to master netting agreements | ||||||||||||||
| Total | $ | $ | ||||||||||||
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| Gross Amount of Derivative Liabilities Presented in the Condensed Consolidated Balance Sheets | Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet that are Subject to Master Netting Agreements | |||||||||||||
| (in thousands) | Gross Amount of Eligible Offsetting Recognized Derivative Assets | Cash Collateral Received | Net Amount of Derivative Liabilities | |||||||||||
| Derivatives subject to master netting agreements | $ | ( | $ | $ | $ | |||||||||
| Derivatives not subject to master netting agreements | ||||||||||||||
| Total | $ | ( | $ | |||||||||||
As of April 2, 2022
| Gross Amount of Derivative Assets Presented in the Condensed Consolidated Balance Sheets | Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet that are Subject to Master Netting Agreements | |||||||||||||
| (in thousands) | Gross Amount of Eligible Offsetting Recognized Derivative Liabilities | Cash Collateral Received | Net Amount of Derivative Assets | |||||||||||
| Derivatives subject to master netting agreements | $ | $ | ( | $ | $ | |||||||||
| Derivatives not subject to master netting agreements | ||||||||||||||
| Total | $ | $ | ||||||||||||
| Gross Amount of Derivative Liabilities Presented in the Condensed Consolidated Balance Sheets | Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet that are Subject to Master Netting Agreements | |||||||||||||
| (in thousands) | Gross Amount of Eligible Offsetting Recognized Derivative Assets | Cash Collateral Received | Net Amount of Derivative Liabilities | |||||||||||
| Derivatives subject to master netting agreements | $ | ( | $ | $ | $ | |||||||||
| Derivatives not subject to master netting agreements | ||||||||||||||
| Total | $ | ( | $ | |||||||||||
The gross fair value of the Company's outstanding derivative contracts at July 2, 2022 and April 2, 2022 was as follows:
| (in thousands) | July 2, 2022 | April 2, 2022 | ||||||||||||
Derivative assets(1) | ||||||||||||||
| Non-designated hedges | $ | $ | ||||||||||||
| Cash flow hedges | ||||||||||||||
| Interest rate swaps | ||||||||||||||
| Total derivative assets | $ | $ | ||||||||||||
Derivative liabilities(2) | ||||||||||||||
| Non-designated hedges | $ | $ | ||||||||||||
| Cash flow hedges | ||||||||||||||
| Interest rate swaps | ||||||||||||||
| Accrued interest | ( | |||||||||||||
| Total derivative liabilities | $ | $ | ||||||||||||
(1) Short-term derivative assets are recorded in other current assets and long-term derivative assets are recorded in other non-current assets on the condensed consolidated balance sheets. As of July 2, 2022, the portion of derivative assets classified as long-term was $11.6 million. As of April 2, 2022, the portion of derivative assets classified as long-term was $16.1 million.
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Non-Designated Hedges
As of July 2, 2022, the Company had foreign currency forward contracts denominated in Euro ("EUR") and Great Britain Pound Sterling ("GBP.") 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, accounts receivables, and accounts payables. The following table summarizes the notional value of the Company’s outstanding foreign exchange currency contracts and approximate USD equivalent at July 2, 2022:
| (in thousands) | Local Currency | USD Equivalent | Position | Maturity | |||||||||||||||||||
| EUR | € | $ | |||||||||||||||||||||
| GBP | £ | $ | |||||||||||||||||||||
Effect of Non-Designated Derivative Contracts on the Condensed Consolidated Statements of Operations
The effect of non-designated derivative contracts on results of operations recognized in other non-operating income, net in the condensed consolidated statements of operations was as follows:
| Three Months Ended | ||||||||||||||
| (in thousands) | July 2, 2022 | July 3, 2021 | ||||||||||||
| Gain (loss) on foreign exchange contracts | $ | $ | ( | |||||||||||
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 to twelve-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:
| July 2, 2022 | April 2, 2022 | |||||||||||||||||||||||||
| (in millions) | EUR | GBP | EUR | GBP | ||||||||||||||||||||||
| Option contracts | € | £ | € | £ | ||||||||||||||||||||||
| Forward contracts | € | £ | € | £ | ||||||||||||||||||||||
The Company will reclassify all related amounts in accumulated other comprehensive income into earnings within the next twelve months.
Cross-currency Swaps
The Company hedges a portion of the forecasted Mexican Peso (“MXN”) denominated expenditures with a cross-currency swap. As of July 2, 2022, and April 2, 2022, the Company had foreign currency swap contracts of approximately MXN 363.0 million and MXN 572.4 million, respectively.
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| (in thousands) | Local Currency | USD Equivalent | Position | Maturity | |||||||||||||||||||
| MXN | $ | Buy MXN | Monthly over a nine month period | ||||||||||||||||||||
The Company will reclassify all related amounts in accumulated other comprehensive income into earnings within the next twelve months.
Interest Rate Swaps
On June 15, 2021, the Company entered into a three-year amortizing interest rate swap agreement with Bank of America, N.A. The swap has an initial notional amount of $680 million and matures on July 31, 2024. The swap involves the receipt of floating-rate interest payments for fixed interest rate payments at a rate of 0.39 % over the life of the agreement. Additionally, on July 30, 2018, the Company entered into a four-year amortizing interest rate swap agreement with Bank of America, N.A. The swap has an initial notional amount of $831 million and matures on July 31, 2022. The swap involves the receipt of floating-rate interest payments for fixed interest rate payments at a rate of 2.78 % over the life of the agreement.
The Company has designated the interest rate swaps as cash flow hedges. The purpose of the interest rate swaps is to hedge against changes in cash flows (interest payments) attributable to fluctuations in the Company's variable rate debt. The swaps are valued based on prevailing LIBOR rate curves on the date of measurement. The Company also evaluates counterparty credit risk when it calculates the fair value of the interest rate swaps. Changes in the fair value of the interest rate swaps are recorded to other comprehensive income and are reclassified to interest expense over the life of the underlying debt as interest is accrued. During the three months ended July 2, 2022, the Company reclassified into interest expense $0.6 million and had a $28.3 million unrealized gain on its interest rate swaps derivatives designated as cash flow hedges.
The Company will reclassify approximately $16.9 million in accumulated other comprehensive income into earnings within the next twelve months.
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Effect of Designated Derivative Contracts on Accumulated Other Comprehensive Income (Loss) 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 (loss) and the condensed consolidated statements of operations for the three months ended July 2, 2022 and July 3, 2021:
| Three Months Ended | ||||||||||||||
| (in thousands) | July 2, 2022 | July 3, 2021 | ||||||||||||
| Loss included in accumulated other comprehensive income (loss), as of beginning of period | $ | $ | ( | |||||||||||
| Gain (loss) recognized in other comprehensive income (loss) | ||||||||||||||
| Amount of (gain) loss reclassified from accumulated other comprehensive income (loss) into net revenues | ( | |||||||||||||
| Amount of gain reclassified from accumulated other comprehensive income (loss) into cost of revenues | ( | ( | ||||||||||||
| Amount of loss reclassified from accumulated other comprehensive income (loss) into interest expense | ||||||||||||||
| Total amount of (gain) loss reclassified from accumulated other comprehensive income to the condensed consolidated statements of operations | ( | |||||||||||||
| Gain (loss) included in accumulated other comprehensive income (loss), as of end of period | $ | $ | ( | |||||||||||
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11. FAIR VALUE MEASUREMENTS
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The authoritative guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. In determining fair value, we use various valuation approaches. The hierarchy of those valuation approaches is in three levels based on the reliability of inputs. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following is a summary of the hierarchy levels:
•Level 1: Inputs are quoted prices in active markets for identical assets or liabilities.
•Level 2: Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly.
•Level 3: Inputs are unobservable for the asset or liability.
| Carrying Value at July 2, 2022 | Fair Value at July 2, 2022 Using Inputs Considered as: | ||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | ||||||||||||||
| Assets: | |||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | |||||||||||||
| Short-term investments | |||||||||||||||||
| Derivative instruments | |||||||||||||||||
| Liabilities: | |||||||||||||||||
| Derivative instruments | $ | $ | $ | $ | |||||||||||||
| Long-term debt | |||||||||||||||||
| Carrying Value at April 2, 2022 | Fair Value at April 2, 2022 Using Inputs Considered as: | ||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | ||||||||||||||
| Assets: | |||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | |||||||||||||
| Short-term investments | |||||||||||||||||
| Derivative instruments | |||||||||||||||||
| Liabilities: | |||||||||||||||||
| Derivative instruments | $ | $ | $ | $ | |||||||||||||
| Long-term debt | |||||||||||||||||
Valuation Techniques
•Cash and cash equivalents, short-term investments, and restricted cash are classified within Level 1 of the fair value hierarchy. Financial instruments classified as Level 1 are based on quoted market prices in active markets. The types of financial instruments the Company classifies within Level 1 include bank deposits, money market securities, and publicly traded mutual funds.
•The Company estimates the fair value of derivatives using pricing models that use observable market inputs. The significant Level 2 inputs used in the valuation of derivatives include spot rates and forward rates. These inputs were obtained from pricing services, broker quotes, and other sources.
•The fair value of long-term debt was determined based on inputs that were observable in the market, including the trading price, when available.
There were no transfers between fair value hierarchy levels during the three months ended July 2, 2022 or July 3, 2021.
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12. INCOME TAXES
The Company and its subsidiaries are subject to taxation in the U.S. and in various foreign and state jurisdictions. The Company's income tax benefit is determined using an estimated annual effective tax rate, adjusted for discrete items arising during the period. The effective tax rates for the three months ended July 2, 2022 and July 3, 2021 were 3.0 % and 10.4 %, respectively.
Income tax benefit for the three months ended July 2, 2022 and July 3, 2021 was $1.0 million and $4.3 million, respectively.
The difference between the effective tax rate and the U.S. federal statutory rate primarily relates to the excess stock tax benefit, U.S. and foreign income mix, and the valuation allowance on the U.S. federal and state deferred tax assets (“DTAs”) that continues to be maintained as of July 2, 2022.
A significant portion of the Company's DTAs relate to the IP transfer between wholly-owned subsidiaries. At this time, based on evidence currently available, the Company considers it more likely than not that it will have sufficient taxable income in the future that will allow the Company to realize the DTAs; however, failure to generate sufficient future taxable income could result in some or all DTAs not being utilized in the future. If the Company is unable to generate sufficient future taxable income, a substantial valuation allowance to reduce the Company's DTAs may be required.
The Company is subject to the examination of its income tax returns by the Internal Revenue Service and other tax authorities. Significant judgment is required in evaluating our uncertain tax positions and determining the Company's provision for income taxes. During the three months ended July 2, 2022, the amount of gross unrecognized tax benefits decreased by $1.1 million. As of July 2, 2022, the Company has $14.3 million of unrecognized tax benefits, all of which could result in a reduction of the Company’s effective tax rate if recognized. The reduction in gross unrecognized tax benefits is primarily attributable to the lapse of applicable statute of limitations.
In September 2021, we transferred certain non-Americas intellectual property (“IP”) rights between our wholly-owned subsidiaries (“IP transfer”) to align with our evolving business operations, resulting in the derecognition of a deferred tax asset (“DTA”) of $91.1 million and the recognition of a new DTA of $204.5 million, which represents the book and tax basis difference in the IP and was based on the fair value of the IP, in the respective subsidiaries. This results in a net discrete deferred tax benefit of $113.4 million.
Management has concluded that an impairment for local statutory and tax reporting to the aforementioned IP exists and the impairment loss is deductible for local tax purposes. As such, a DTA related to net operating loss carryforward of $48.0 million was recognized, offset by a corresponding decrease in the DTA related to the intangible asset by the same amount as of April 2, 2022. Because the IP intangible asset is the result of an intercompany transfer, there is no intangible asset recognized in the consolidated balance sheets. Accordingly, there is no net impact to the Company’s consolidated statements of operations, balance sheet, or cash flows.
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13. COMPUTATION OF LOSS PER COMMON SHARE
Basic (loss) earnings per share is calculated by dividing net (loss) income by the weighted-average number of common shares outstanding during the period. Diluted (loss) earnings per share assumes the issuance of additional shares of common stock by the Company upon exercise of all outstanding stock options and vesting of restricted stock, if the effect is dilutive, in accordance with the treasury stock method. The potentially dilutive effect of outstanding stock options and restricted stock has been excluded from the computation of diluted loss per share in periods where the Company had a net loss, as their effect is anti-dilutive.
The following table sets forth the computation of basic and diluted (loss) earnings per common share for the three months ended July 2, 2022 and July 3, 2021:
| Three Months Ended | ||||||||||||||
| (in thousands, except per share data) | July 2, 2022 | July 3, 2021 | ||||||||||||
| Numerator: | ||||||||||||||
| Net loss | $ | ( | $ | ( | ||||||||||
| Denominator: | ||||||||||||||
| Weighted-average basic shares outstanding | ||||||||||||||
| Weighted-average diluted shares outstanding | ||||||||||||||
| Basic and diluted loss per common share | $ | ( | $ | ( | ||||||||||
| Diluted loss per common share | $ | ( | $ | ( | ||||||||||
| Potentially dilutive securities excluded from diluted loss per common share because their effect is anti-dilutive | ||||||||||||||
14. REVENUE AND GEOGRAPHIC INFORMATION
The Company’s major product categories are Headsets, Voice, Video, and Services. Product revenue is largely comprised of sales of hardware devices, peripherals, and platform software licenses used in communication and collaboration in offices and contact centers, with mobile devices, cordless phones, and computers. Services revenue primarily includes support on hardware devices, professional, hosted and managed services, and solutions to the Company's customers.
The following table disaggregates revenues by major product category for the three months ended July 2, 2022 and July 3, 2021:
| Three Months Ended | ||||||||||||||
| (in thousands) | July 2, 2022 | July 3, 2021 | ||||||||||||
| Net revenues | ||||||||||||||
| Headsets | $ | $ | ||||||||||||
| Voice | ||||||||||||||
| Video | ||||||||||||||
| Services | ||||||||||||||
| Total net revenues | $ | $ | ||||||||||||
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For reporting purposes, revenue is attributed to each geographic region based on the location of the customer. The following table presents total net revenues by geography:
| Three Months Ended | ||||||||||||||
| (in thousands) | July 2, 2022 | July 3, 2021 | ||||||||||||
| Net product revenues | ||||||||||||||
| U.S. | $ | $ | ||||||||||||
| Europe, Middle East, and Africa | ||||||||||||||
| Asia Pacific | ||||||||||||||
| Americas, excluding U.S. | ||||||||||||||
| Total international net product revenues | ||||||||||||||
| Total net product revenues | $ | $ | ||||||||||||
| Net service revenues | ||||||||||||||
| U.S. | $ | $ | ||||||||||||
| Europe, Middle East, and Africa | ||||||||||||||
| Asia Pacific | ||||||||||||||
| Americas, excluding U.S. | ||||||||||||||
| Total international net service revenues | ||||||||||||||
| Total net service revenues | $ | $ | ||||||||||||
| Total net revenues | $ | $ | ||||||||||||
The Company's deferred revenue represents the aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of period end and is comprised of non-cancelable maintenance support performance obligations on hardware devices which are typically billed in advance and recognized ratably over the contract term as the services are delivered. As of July 2, 2022 and April 2, 2022, the Company's deferred revenue balance was $183.6 million and $193.1 million, respectively, of which $122.4 million and $64.7 million, respectively, was classified as current. During the three months ended July 2, 2022, the Company recognized $42.9 million in total net revenues that were recorded in deferred revenue at the beginning of the period.
Upon establishment of creditworthiness, the Company may extend credit terms to its customers which typically ranges between 30 and 90 days from the date of invoice depending on geographic region and type of customer. The Company typically bills upon product hardware shipment, at time of software activation, upon the start of service entitlement, or upon completion of services. The balance of contract assets was $3.5 million and $4.3 million as of July 2, 2022 and April 2, 2022, respectively. None of the Company's contracts are deemed to have significant financing components.
For certain arrangements, the Company pays commissions, bonuses and taxes associated with obtaining the contracts. The Company capitalizes such costs if they are deemed to be incremental and recoverable. The capitalized amount of incremental and recoverable costs of obtaining contracts and related amortization was not material as of and for the three months ended July 2, 2022.
15. SEGMENT REPORTING
The Company's Chief Executive Officer is identified as its Chief Operating Decision Maker (“CODM.”) The CODM has organized the Company, manages resource allocations, and measures performance among its two operating segments: Products and Services.
The Products reportable segment includes the Headsets, Voice and Video product lines. The Services reportable segment includes maintenance support on hardware devices as well as professional, managed and cloud services and solutions.
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In managing the two operating segments the CODM uses information about their revenue and gross margin after adjustments to exclude certain non-cash transactions and activities that are not reflective of the Company's ongoing or core operations as further described below. The CODM does not review asset information by segment.
Purchase accounting amortization: Represents the amortization of purchased intangible assets recorded in connection with the acquisition of Polycom.
Deferred revenue purchase accounting: Represents the impact of fair value purchase accounting adjustments related to deferred revenue recorded in connection with the acquisition of Polycom. The Company's deferred revenue primarily relates to service revenue associated with non-cancelable maintenance support on hardware devices which are typically billed in advance and recognized ratably over the contract term as those services are delivered. This adjustment represents the amount of additional revenue that would have been recognized during the period absent the write-down to fair value required under purchase accounting guidelines.
Acquisition costs: Represents charges incurred in connection with the pending Merger with HP.
Stock-based compensation: Represents the non-cash expense associated with the Company's grant of stock-based awards to employees and non-employee directors.
The following table presents segment results for revenue and gross margin, as reviewed by the CODM, and the related reconciliation to the Company's condensed consolidated GAAP results:
| Three Months Ended | ||||||||||||||
| (in thousands) | July 2, 2022 | July 3, 2021 | ||||||||||||
| Segment revenues, as reviewed by CODM | ||||||||||||||
| Products | $ | $ | ||||||||||||
| Services | ||||||||||||||
| Total segment revenues, as reviewed by CODM | $ | $ | ||||||||||||
| Segment gross profit, as reviewed by CODM | ||||||||||||||
| Products | $ | $ | ||||||||||||
| Services | ||||||||||||||
| Total segment gross profit, as reviewed by CODM | $ | $ | ||||||||||||
| Three Months Ended | ||||||||||||||
| (in thousands) | July 2, 2022 | July 3, 2021 | ||||||||||||
| Total segment revenues, as reviewed by CODM | $ | $ | ||||||||||||
| Deferred revenue purchase accounting | ( | ( | ||||||||||||
| GAAP net revenues | $ | $ | ||||||||||||
Total segment gross profit, as reviewed by CODM (1) | $ | $ | ||||||||||||
| Purchase accounting amortization | ( | ( | ||||||||||||
| Deferred revenue purchase accounting | ( | ( | ||||||||||||
| Acquisition costs | ( | |||||||||||||
| Stock-based compensation | ( | ( | ||||||||||||
| GAAP gross profit | $ | $ | ||||||||||||
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements relating to our intentions, beliefs, projections, outlook, analyses or current expectations that are subject to many risks and uncertainties. All of our forward-looking statements are subject to risks and uncertainties relating to our pending merger (the “Merger”) with HP Inc. (“HP”) and Prism Subsidiary Corp. pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated March 25, 2022, and corresponding impacts on our business, including (i) that the consummation of the Merger with HP is contingent upon the satisfaction of a number of conditions, including regulatory approvals, that may be outside of our or HP’s control and that we and HP may be unable to satisfy or obtain or that may delay the consummation of the Merger or cause the parties to abandon the Merger; (ii) while the Merger is pending, we are subject to business uncertainties and contractual restrictions that could harm our financial condition, operating results, and business; (iii) uncertainty about the Merger may adversely affect relationships with our customers, suppliers and employees, whether or not the Merger is completed; (iv) as a result of the Merger, our current and prospective employees could experience uncertainty about their future with us, which may result in key employees departing because of issues relating to such uncertainty or a desire not to remain with HP following the completion of the Merger; and (v) the ability to complete the Merger is subject to the receipt of consents and approvals from government entities, which may impose conditions that could have an adverse effect on us or could cause us and/or HP to abandon the Merger. Additionally, such forward-looking statements and the associated risks and uncertainties include, but are not limited to: (i) our beliefs with respect to the length and severity of the COVID-19 pandemic, and its impact across our businesses, our operations and global supply chain, including, our expectations that the virus has caused, and will continue to cause, a shift to a hybrid work environment and that the elevated demand we have experienced in certain product lines, including our Video and Voice devices, will continue over the long term; (ii) risks related to global supply chain disruptions, including continued uncertainty and potential impact on future quarters relating to a shortage of adequate component supply, including integrated circuits and manufacturing capacity, long lead times for raw materials and components, increased costs to us and increased pass-through costs to our customers, increased purchase commitments and a delay in our ability to fulfill orders, including as a result of Russia's conflict with Ukraine, all of which has had, and may continue to have, an adverse impact on our business and operating results and which could continue to negatively affect our profitability and/or market share; (iii) expectations related to our ability to manage profitability and improve margins in light of supply chain challenges, including our efforts to implement productivity improvements in our Tijuana manufacturing facility, while making investments for long-term growth, including investments in strategic alliances and/or acquisitions, in light of the supply chain challenges; (iv) our expectations regarding growth objectives related to our strategic initiatives designed to expand our product and service offerings, including our expectations related to increased demand for our solutions to facilitate hybrid working in and out of offices for our enterprise customers, as well as our expectations related to building strategic alliances and key partnerships with providers of collaboration tools and platforms to drive revenue growth and market share, including expectations related to our expansion of our presence in China; (v) our belief that we will continue to experience increased customer and partner demand in collaboration endpoints, and that we will be able to design new product offerings to meet changes in demand due to a global hybrid work environment; (vi) expectations related to our ability to fulfill the backlog generated by supply constraints and to timely supply the number of products to fulfill current and future customer demand in a timely manner to satisfy perishable demand; (vii) risks associated with our dependence on manufacturing operations conducted in our own facility in Tijuana, Mexico and through contract manufacturers, original design manufacturers, and suppliers to manufacture our products, to timely obtain sufficient quantities of materials and/or finished products of acceptable quality, at acceptable prices, and in the quantities necessary for us to meet critical schedules for the delivery of our own products and services and fulfill our anticipated customer demand; (viii) risks associated with our ability to secure critical components from sole source suppliers or identify alternative suppliers and/or buy component parts on the open market or completed goods in quantities sufficient to meet our requirements on a timely basis, affecting our ability to deliver products and services to our customers; (ix) risks related to increased cost of goods sold, including increased freight and other costs associated with expediting shipment and delivery of high-demand products to key markets in order to meet customer demand; (x) risks associated with passing on increased costs through price increases to customers; (xi) the impact if global or regional economic conditions deteriorate further, on our customers and/or partners, including increased demand for pricing accommodations, delayed payments, delayed deployment plans, insolvency or other issues which may increase credit losses; (xii) risks associated with significant and/or abrupt changes in product demand which increases the complexity of management’s evaluation of potential excess or obsolete inventory; (xiii) expectations related to our Services reportable segment revenues, particularly as we introduce next-generation, less complex, product solutions, or as companies shift from on premises to work from home options for their workforce, which have resulted and may continue to result in decreased demand for our professional, installation and/or managed service offerings; (xiv) expectations related to our efforts to drive sales and sustainable profitable revenue growth, to improve our profitability and cash
27
flow, and accelerate debt reduction and de-levering; (xv) risks associated with forecasting sales and procurement demands, which are inherently difficult, particularly with continuing uncertainty in regional and global economic conditions; (xvi) our expectations regarding our ability to control costs, streamline operations and successfully implement our various cost-reduction activities and realize anticipated cost savings under such cost-reduction initiatives; (xvii) expectations relating to our financial projections, particularly as economic uncertainty, including, without limitation, uncertainty related to the continued impact of COVID-19, the current constraints in our ability to source key components for our products, continued uncertainty in the macro-economic climate and other external factors, puts further pressure on management judgments used to develop prospective financial information; (xviii) expectations related to U.S. GAAP and non-GAAP financial results for the full Fiscal Year 2022, including total net revenues, adjusted earnings before interest, tax, depreciation, and amortization (EBITDA), tax rates, intangibles amortization, diluted weighted average shares outstanding, and diluted earnings per share (EPS); (xix) our forecast and estimates with respect to tax matters, including expectations with respect to the valuation of our intellectual property or expectations regarding utilization of our deferred tax assets; and (xx) our expectations regarding pending and potential future litigation, in addition to other matters discussed in this Quarterly Report on Form 10-Q that are not purely historical data. 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 April 2, 2022, filed with the SEC on May 27, 2022; 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
Poly is a leading global communications technology company that designs, manufactures, and markets integrated communications and collaboration solutions for professionals. We offer a comprehensive selection of premium audio and video products designed to work in an era where work is no longer a place and enterprise work forces are increasingly distributed. Our products and services are designed and engineered to connect people with high fidelity and incredible clarity. They are professional-grade, easy to use, and work seamlessly with major video and audio-conferencing platforms.
Our major product categories are Headsets, Voice, Video, and Services. Headsets include wired and wireless communication headsets; Voice includes open Session Initiation Protocol (“SIP”) and native ecosystem desktop phones, as well as conference room phones and speakerphones; Video includes conferencing solutions and peripherals, such as cameras, speakers, and microphones; Services includes a broad portfolio of offerings including video interoperability, maintenance and troubleshooting support for our solutions, as well as professional, hosted, and managed services that are grounded in our deep expertise aimed at helping our customers achieve their collaboration goals. Additionally, our cloud management and analytics software enable Information Technology (“IT”) administrators to configure and update firmware, monitor device usage, troubleshoot, and gain a deep understanding of user behavior.
All of our solutions are designed to integrate seamlessly with a wide range of Unified Communications & Collaboration (“UC&C”), Unified Communication as a Service (“UCaaS”), and Video as a Service (“VaaS”) platforms, allowing our customers the flexibility to use the communications platform of their choice.
We sell our products through a well-developed global network of distributors and channel partners, including value-added resellers, integrators, direct marketing resellers, and service providers, as well as through both traditional and online retailers, office supply distributors, and e-commerce channels. We have well-established distribution channels in the Americas, Europe, Middle East, Africa, and Asia Pacific, where use of our products is widespread.
Our fiscal year ends on the Saturday closest to the last day of March. The years ended April 1, 2023 (“Fiscal Year 2023”) and April 2, 2022 (“Fiscal Year 2022”) have 52 weeks. The three months ended July 2, 2022 (“first quarter Fiscal Year 2023”) and July 3, 2021 (“first quarter Fiscal Year 2022”) each have 13 weeks.
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Acquisition by HP Inc.
On March 25, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with HP Inc. (“HP”) and Prism Subsidiary Corp. (“Merger Sub”), a wholly owned subsidiary of HP, providing for Poly's acquisition by HP in an all-cash transaction for $40.00 per share by way of a merger of Merger Sub with and into Poly (the “Merger”), with Poly continuing as a wholly owned subsidiary of HP. On June 23, 2022, Poly stockholders voted to adopt the Merger Agreement. The Merger is expected to close, subject to receipt of required regulatory clearances and the satisfaction of other customary closing conditions, in calendar year 2022.
Impact of the Current Environment, Supply Chain Disruptions, and COVID-19 on Our Business
We have experienced and continue to monitor limited supply and longer lead times for certain key components, such as semiconductor chips, necessary to complete production and meet customer demand, including fulfillment of our backlog. We do not manufacture these component parts and currently purchase certain parts, including semiconductor chips and sub-assemblies that require semiconductor chips, from single or limited sources. Additionally, constrained supply has resulted in price inflation for certain components, including semiconductor chips, increased spot market prices and purchases, increased transportation costs, inefficiencies at our owned manufacturing facility in Tijuana, Mexico, entry into multi-year commitments at increased cost to secure supply, and inability to fulfill backlog for certain products timely. For certain of our products, our additional supply increases our exposure to risks associated with significant and/or abrupt changes in product demand, which could result in potential excess of obsolete inventory. Additionally, to the extent we pass through increased costs to our customers, this may result in reduced demand. These factors, among others, are affecting and are expected to continue to affect total net revenue and gross margin rates. We continue to monitor our supply chain and are taking action to mitigate future disruption including outreach to critical suppliers, migration of multiple product lines to newer technologies, and incorporating supply chain design concepts into the earliest phases of product development.
In addition, COVID-19 has continued to spread globally and continues to add uncertainty and influence global economic activity, the global supply chain, and financial markets. The impact of the pandemic on our operations has varied by local conditions, government mandates, and business limitations, including travel bans, remote work, and other restrictions. The COVID-19 pandemic led to a massive increase in remote and hybrid work driving elevated demand for certain of our products and solutions. However, the impact of COVID-19 is fluid and uncertain, and it has caused, and may continue to cause, various negative effects as we continue to experience constraints in our supply chain, specifically the sourcing of certain components and raw materials, and increased logistics costs to meet customer demand, which, in turn, adversely impacts our gross margins. As a result, the impact of COVID-19 to date has had mixed effects on our results of operations.
The full extent and duration of the impact of the COVID-19 pandemic on our business continues to be uncertain and difficult to predict and will depend on many factors outside of our control, including the extent and duration of the pandemic, mutations, and variants of the virus, the development and availability of effective treatments, including the availability of vaccines for our global workforce, mandates of protective public safety measures, and the impact of the pandemic on the global economy, global supply chains, and demand for our products. It is not possible at this time to foresee whether or when the outbreak of COVID-19 or other events beyond our control will be effectively contained, nor can we estimate the entirety of the impact that COVID-19 or such other pandemics or natural or man-made disaster will have on the global economy, our business, customers, suppliers, or other business partners. As such, impacts from such events on Poly are highly uncertain and we will continue to assess the impact from such events on our condensed consolidated financial statements.
First Quarter Fiscal Year 2023 Highlights
Total net revenues for the first quarter of Fiscal Year 2023 were $415.6 million, a decrease of $15.6 million or 3.6%, compared to the first quarter of Fiscal Year 2022, primarily driven by declines in our Video and Services product categories. Products gross margin rate for the first quarter of Fiscal Year 2023 decreased from 36.6% in the first quarter of Fiscal Year 2022 to 36.4%, primarily driven by increased component costs as well as transportation costs. We continued to experience the effects of the current supply environment including constrained supply and longer lead times for certain components, such as semiconductor chips.
During the first quarter of Fiscal Year 2023, Poly continues to expand its portfolio of smart devices with the introduction of the Poly Studio R30 video bar, the Poly Sync 10 speakerphone, and enhancements to the Poly Lens platform. These pro-grade solutions, combined with developments to Poly DirectorAI smart camera technology help deliver meeting equity for hybrid and office workers alike. These products were available during the first quarter of Fiscal Year 2023 and did not have a material impact on total net revenues.
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RESULTS OF OPERATIONS
The Company’s reportable segments are Products and Services. Our Products reportable segment includes the Headsets, Voice, and Video product lines. Our Services reportable segment includes maintenance support on hardware devices, as well as professional, managed, and cloud services and solutions.
Total Net Revenues
The following table sets forth total net revenues by reportable segment for the three months ended July 2, 2022 and July 3, 2021:
| Three Months Ended | ||||||||||||||||||||
| (in thousands, except percentages) | July 2, 2022 | July 3, 2021 | Change | |||||||||||||||||
| Products | $ | 364,208 | $ | 371,203 | (1.9) | % | ||||||||||||||
| Services | 51,351 | 59,969 | (14.4) | % | ||||||||||||||||
| Total net revenues | $ | 415,559 | $ | 431,172 | (3.6) | % | ||||||||||||||
Products
Total product net revenues decreased in the first quarter of Fiscal Year 2023 compared to the first quarter of Fiscal Year 2022, due to a decline in our Video product category primarily due to constrained supply of certain components, such as semiconductor chips.
Services
Total services net revenues decreased in the first quarter of Fiscal Year 2023 compared to the first quarter of Fiscal Year 2022, primarily due to a mix shift within our Video product category away from legacy platforms to our recently launched video bars, which are less complex, less expensive, and easier to install and operate.
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Geographic Region
The following table sets forth total net revenues by geographic region for the three months ended July 2, 2022 and July 3, 2021:
| Three Months Ended | ||||||||||||||||||||
| (in thousands, except percentages) | July 2, 2022 | July 3, 2021 | Change | |||||||||||||||||
| United States | $ | 192,448 | $ | 198,728 | (3.2) | % | ||||||||||||||
| International net revenues: | ||||||||||||||||||||
| Europe, Middle East, and Africa | 119,990 | 126,121 | (4.9) | % | ||||||||||||||||
| Asia Pacific | 70,430 | 76,758 | (8.2) | % | ||||||||||||||||
| Americas, excluding United States | 32,691 | 29,565 | 10.6 | % | ||||||||||||||||
| Total international net revenues | 223,111 | 232,444 | (4.0) | % | ||||||||||||||||
| Total net revenues | $ | 415,559 | $ | 431,172 | (3.6) | % | ||||||||||||||
United States
U.S. total net revenues decreased in the first quarter of Fiscal Year 2023 compared to the first quarter of Fiscal Year 2022, primarily due to decreased net sales in the Video and Services product category, partially offset by increases in Voice and Headsets.
International
International total net revenues decreased in the first quarter of Fiscal Year 2023 compared to the first quarter of Fiscal Year 2022, primarily due to decreased net sales in Video and Services product categories, partially offset by increases in Voice and Headsets.
During the first quarter of Fiscal Year 2023, changes in foreign exchange rates unfavorably impacted total net revenues by $6.3 million, net of the effects of hedging, compared to a $9.6 million favorable impact on revenue in the first quarter of Fiscal Year 2022.
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Cost of Revenues and Gross Profit
Cost of revenues consists primarily of direct and contract manufacturing costs, amortization of acquired technology, freight, warranty, charges for excess and obsolete inventory, depreciation, duties, royalties, and overhead expenses.
| (in thousands, except percentages) | Three Months Ended | |||||||||||||||||||
| July 2, 2022 | July 3, 2021 | Change | ||||||||||||||||||
| Products: | ||||||||||||||||||||
| Net revenues | $ | 364,208 | $ | 371,203 | (1.9) | % | ||||||||||||||
| Cost of revenues | 231,677 | 235,196 | (1.5) | % | ||||||||||||||||
| Gross profit | $ | 132,531 | $ | 136,007 | (2.6) | % | ||||||||||||||
| Gross profit % | 36.4 | % | 36.6 | % | ||||||||||||||||
| Services: | ||||||||||||||||||||
| Net revenues | $ | 51,351 | $ | 59,969 | (14.4) | % | ||||||||||||||
| Cost of revenues | 15,841 | 20,787 | (23.8) | % | ||||||||||||||||
| Gross profit | $ | 35,510 | $ | 39,182 | (9.4) | % | ||||||||||||||
| Gross profit % | 69.2 | % | 65.3 | % | ||||||||||||||||
| Total: | ||||||||||||||||||||
| Net revenues | $ | 415,559 | $ | 431,172 | (3.6) | % | ||||||||||||||
| Cost of revenues | 247,518 | 255,983 | (3.3) | % | ||||||||||||||||
| Gross profit | $ | 168,041 | $ | 175,189 | (4.1) | % | ||||||||||||||
| Gross profit % | 40.4 | % | 40.6 | % | ||||||||||||||||
Products
Gross profit as a percentage of total product net revenues decreased in the first quarter of Fiscal Year 2023 compared to the first quarter of Fiscal Year 2022, primarily due to increased component costs, unfavorable product mix, and increased transportation costs, partially offset by higher average selling price. The increase in component costs was primarily driven by increased spot market purchases of certain key components, such as semiconductor chips, due to global supply shortages. Transportation costs increased as a result of high global demand and limited capacity of air freight carriers and increased air freight usage to mitigate longer component lead times to meet our commitments to customers.
Services
Gross profit as a percentage of total services net revenues increased in the first quarter of Fiscal Year 2023 compared to the first quarter of Fiscal Year 2022 due to lower support costs including compensation and other headcount related expenses.
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Operating Expenses
Operating expenses for the three months ended July 2, 2022 and July 3, 2021 were as follows:
| Three Months Ended | ||||||||||||||||||||
| (in thousands, except percentages) | July 2, 2022 | July 3, 2021 | Change | |||||||||||||||||
| Research, development, and engineering | $ | 51,269 | $ | 45,466 | 12.8 | % | ||||||||||||||
| % of total net revenues | 12.3 | % | 10.5 | % | ||||||||||||||||
| Selling, general, and administrative | 131,903 | 120,734 | 9.3 | % | ||||||||||||||||
| % of total net revenues | 31.7 | % | 28.0 | % | ||||||||||||||||
| Restructuring and other related charges | (49) | 28,972 | (100.2) | % | ||||||||||||||||
| % of total net revenues | — | % | 6.7 | % | ||||||||||||||||
| Total operating expenses | $ | 183,123 | $ | 195,172 | (6.2) | % | ||||||||||||||
| % of total net revenues | 44.1 | % | 45.3 | % | ||||||||||||||||
Research, Development, and Engineering
Research, development, and engineering costs are expensed as incurred and consist primarily of compensation costs, outside services, expensed materials, and overhead expenses. Research, development, and engineering expenses increased during the first quarter of Fiscal Year 2023 compared to the first quarter of Fiscal Year 2022, primarily due to higher incentive compensation.
Selling, General, and Administrative
Selling, general, and administrative costs are expensed as incurred and consist primarily of compensation costs, marketing costs, travel expenses, professional service fees, and overhead expenses. Selling, general and administrative expenses increased during the first quarter of Fiscal Year 2023 compared to the first quarter of Fiscal Year 2022, primarily due to higher incentive compensation, travel expenses and charges incurred in connection with the pending Merger with HP partially offset by lower advertising expense.
Restructuring and Other Related Charges
Restructuring and other related charges decreased during the first quarter of Fiscal Year 2023 compared to the first quarter of Fiscal Year 2022. During the three months ended July 3, 2021 we recorded restructuring and other related charges to reduce expenses and optimize our cost structure. These actions consisted of headcount reductions and office closures.
Interest Expense
Interest expense for the three months ended July 2, 2022 and July 3, 2021 was as follows:
| Three Months Ended | ||||||||||||||||||||
| (in thousands, except percentages) | July 2, 2022 | July 3, 2021 | Change | |||||||||||||||||
| Interest expense | $ | 16,121 | $ | 21,782 | 26.0 | % | ||||||||||||||
| % of total net revenues | 3.9 | % | 5.1 | % | ||||||||||||||||
Interest expense decreased during the first quarter of Fiscal Year 2023 compared to the first quarter of Fiscal Year 2022, primarily due to lower outstanding balance of Senior Notes. During the first quarter of Fiscal Year 2022 we incurred interest expense related to the 2025 Senior Notes as well as the amortization of the remaining debt issuance costs upon their redemption in May 2021.
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Other Non-Operating Expense (Income), Net
Other non-operating income, net for the three months ended July 2, 2022 and July 3, 2021 was as follows:
| Three Months Ended | ||||||||||||||||||||
| (in thousands, except percentages) | July 2, 2022 | July 3, 2021 | Change | |||||||||||||||||
| Other non-operating expense (income), net | $ | 2,922 | $ | (692) | (522.3) | % | ||||||||||||||
| % of total net revenues | 0.7 | % | (0.2) | % | ||||||||||||||||
Other non-operating expense, net increased during the first quarter of Fiscal Year 2023 compared to the first quarter of Fiscal Year 2022, primarily due to unrealized losses on the deferred compensation asset portfolio and higher immaterial foreign exchange losses.
Income Tax Benefit
| Three Months Ended | ||||||||||||||||||||
| (in thousands except percentages) | July 2, 2022 | July 3, 2021 | Change | |||||||||||||||||
| Loss before income taxes | $ | (34,125) | $ | (41,073) | 16.9 | % | ||||||||||||||
| Income tax benefit | (1,038) | (4,262) | 75.6 | % | ||||||||||||||||
| Net loss | $ | (33,087) | $ | (36,811) | 10.1 | % | ||||||||||||||
| Effective tax rate | 3.0 | % | 10.4 | % | ||||||||||||||||
The Company and its subsidiaries are subject to taxation in the U.S. and in various foreign and state jurisdictions. The Company's income tax benefit is determined using an estimated annual effective tax rate, adjusted for discrete items arising during the period.
The difference between the effective tax rate and the U.S. federal statutory rate primarily relates to the excess stock tax benefit, U.S. and foreign income mix, and the valuation allowance on the U.S. federal and state DTAs that continues to be maintained as of July 2, 2022.
In September 2021, we transferred certain non-Americas intellectual property (“IP”) rights between our wholly-owned subsidiaries (“IP transfer”) to align with our evolving business operations, resulting in the derecognition of a deferred tax asset (“DTA”) of $91.1 million and the recognition of a new DTA of $204.5 million, which represents the book and tax basis difference in the IP and was based on the fair value of the IP, in the respective subsidiaries. This results in a net discrete deferred tax benefit of $113.4 million.
Management has concluded that an impairment for local statutory and tax reporting to the aforementioned IP exists and the impairment loss is deductible for local tax purposes. As such, a DTA related to net operating loss carryforward of $48.0 million was recognized, offset by a corresponding decrease in the DTA related to the intangible asset by the same amount as of April 2, 2022. Because the IP intangible asset is the result of an intercompany transfer, there is no intangible asset recognized in the consolidated balance sheets. Accordingly, there is no net impact to the Company’s consolidated statements of operations, balance sheet, or cash flows.
Valuation allowances are established when necessary to reduce DTA's to the amounts that are more-likely-than-not expected to be realized. Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing DTA's. Valuation allowances are established when necessary to reduce DTA's to the amounts that are more-likely-than-not to be realized. On the basis of this evaluation, as of July 2, 2022, a valuation allowance against our U.S. federal and state DTA's continues to be maintained.
A significant portion of the Company's DTAs relate to internal intellectual property restructuring between wholly owned subsidiaries. At this time, based on evidence currently available, the Company considers it more likely than not that it will have sufficient taxable income in the future that will allow the Company to realize the DTAs. The amount of the DTA's considered realizable, however, could be adjusted if estimates of future taxable income increase or decrease, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence, such as our future projections.
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The Company is subject to the examination of its income tax returns by the Internal Revenue Service and other tax authorities. Significant judgment is required in evaluating our uncertain tax positions and determining the Company's provision for income taxes. During the three months ended July 2, 2022, the amount of gross unrecognized tax benefits decreased by $1.1 million. As of July 2, 2022, the Company has $14.3 million of unrecognized tax benefits, all of which could result in a reduction of the Company’s effective tax rate if recognized. The reduction in gross unrecognized tax benefits is primarily attributable to the lapse of applicable statutes of limitations.
FINANCIAL CONDITION
Liquidity and Capital Resources
The following tables present selected financial information and statistics as of July 2, 2022 and April 2, 2022 and for the three months ended July 2, 2022 and July 3, 2021 (in thousands):
| July 2, 2022 | April 3, 2021 | |||||||||||||
| Cash and cash equivalents and short-term investments | $ | 154,270 | $ | 183,703 | ||||||||||
| Property, plant, and equipment, net | 124,052 | 127,021 | ||||||||||||
| Long-term debt, net | 1,501,337 | 1,500,283 | ||||||||||||
| Working capital | 274,845 | 271,691 | ||||||||||||
| Three Months Ended | ||||||||||||||
| July 2, 2022 | July 3, 2021 | |||||||||||||
| Cash (used in) provided by operating activities | $ | (2,981) | $ | 849 | ||||||||||
| Cash used in investing activities | (7,197) | (10,456) | ||||||||||||
| Cash used in financing activities | (14,233) | (490,905) | ||||||||||||
Our cash and cash equivalents as of July 2, 2022 consisted of bank deposits with third-party financial institutions. As of July 2, 2022, of our $154.3 million of cash and cash equivalents and short-term investments, $59.6 million was held domestically while $94.7 million was held by foreign subsidiaries, and approximately 64% was based in USD-denominated instruments. As of July 2, 2022, our short-term investments were composed of mutual funds. An additional source of liquidity is $97.6 million of availability from our revolving credit facility, net of outstanding letters of credit.
Historically, we use cash provided by operating activities as our primary source of liquidity. We expect that cash provided by operating activities will fluctuate in future periods, including the current quarter as a result of a number of factors, including fluctuations in our revenues, the timing of compensation-related payments, such as our annual bonus/variable compensation plan, interest payments on our long-term debt, product shipments, accounts receivable collections, inventory and supply chain management, and the timing and amount of tax and other payments.
During the first quarter of Fiscal Year 2023, cash used in operating activities of $(3.0) million was a result of a $(33.1) million net loss, $(22.8) million of cash used in net working capital and $(2.9) million of cash payments for restructuring charges, partially offset by $55.8 million in net favorable non-cash adjustments. Cash used in investing activities of $(7.2) million consisted primarily of capital expenditures. Cash used in financing activities of $(14.2) million consisted of employees' tax withheld and paid for restricted stock units.
During the first quarter of Fiscal Year 2022, cash provided by operating activities of $0.8 million was a result of non-cash adjustments to net loss of $66.3 million, partially offset by $(36.8) million of net loss and a decrease in the net change in operating assets and liabilities of $(28.7) million. Cash used in investing activities of ($10.4) million consisted primarily of capital expenditures of ($6.1) million and other investing activities of ($4.0) million. Cash used in financing activities consisted primarily of ($480.7) million of repayments of long-term debt and $($10.2) million of employees' tax withheld and paid for restricted stock and restricted stock units.
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Capital Expenditures
We anticipate our current cash and cash flows from operating activities will be sufficient to fund our capital expenditures in Fiscal Year 2023, relating primarily to investments in our manufacturing capabilities, including tooling for new products, new IT investments, and facilities upgrades. We will continue to evaluate new business opportunities and new markets. As a result, our future growth within the existing business or new opportunities and markets may dictate the need for additional facilities and capital expenditures to support that growth.
Debt
In July 2018, in connection with the acquisition of Polycom, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto and borrowed the full amount available under the term loan facility of $1.245 billion, net of approximately $30 million of discounts and issuance costs. During the first three months of Fiscal Year 2023, we did not repay any of our outstanding principal. As of July 2, 2022, we had $1.0 billion of principal outstanding.
In December 2021, the Company entered into an Amendment to the Credit Agreement in order to relax certain financial covenants on the revolving line of credit. The financial covenants under the Credit Agreement are for the benefit of the revolving credit lenders only and do not apply to any other debt of the Company. As of July 2, 2022, the Company has three outstanding letters of credit on the revolving credit facility for a total of $2.4 million and had $97.6 million available under the revolving credit facility. As of July 2, 2022, the Company was in compliance with the financial covenants.
In July 2018, the Company entered into a 4-year amortizing interest rate swap agreement with Bank of America, N.A. The swap has an initial notional amount of $831 million and matures on July 31, 2022. In June 2021, the Company entered into a three-year amortizing interest rate swap agreement with Bank of America, N.A. The swap has an initial notional amount of $680 million and matures on July 31, 2024. During the three months ended July 2, 2022, the Company reclassified into interest expense $0.6 million and recorded a $28.3 million unrealized gain on its interest rate swaps derivatives designated as a cash flow hedge.
In March 2021, the Company issued $500.0 million aggregate principal amount of 4.75% Senior Notes. The 4.75% Senior Notes mature in March 2029 and bear interest at a rate of 4.75% per annum, payable semi-annually on March 1 and September 1 of each year. A portion of the proceeds from the 4.75% Senior Notes was used to redeem the outstanding principal and accrued interest on the 5.50% Senior Notes of $493.9 million in May 2021. As of July 2, 2022, $500 million of principal was outstanding. On July 25, 2022, the Company entered into a supplemental indenture to, among other changes, eliminate substantially all of the restrictive covenants with respect to certain change of control triggering events, effective no earlier than the closing date of the Merger with HP. See Note 7, Debt, of the accompanying notes to the condensed consolidated financial statements included within “Part I. Item 1. Financial Statements” of this Quarterly Report on Form 10-Q.
Our ability to make scheduled payments or to refinance our obligations with respect to the Senior Notes and our other indebtedness under our Credit Agreement will depend on our financial and operating performance, which, in turn, is subject to prevailing economic and industry conditions and other factors, including the availability of financing in the banking and capital markets, beyond our control. In addition, any refinancing of our indebtedness may be at higher interest rates, particularly in the current environment of rising interest rates, and may require us to comply with more onerous covenants, which could further restrict our operations.
We may at any time and from time to time, depending on market conditions and prices, continue to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Under the terms of the Merger Agreement, from the date of the Merger Agreement to the termination or consummation of the Merger, we are restricted in our ability to drawdown or incur additional indebtedness, under certain conditions, without the prior written consent of HP.
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In addition, our liquidity, capital resources, and results of operations in any period could be affected by repurchases of our common stock, the payment in the future of cash dividends if the Board determines to reinstate the dividend program, the exercise of outstanding stock options, restricted stock grants under stock plans, and the issuance of common stock under the Employee Stock Purchase Program (“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.
For further information regarding our debt issuances and related hedging activity refer to Note 7, Debt, and Note 10, Derivatives, of the accompanying notes to the condensed consolidated financial statements included within “Part I. Item 1. Financial Statements” of this Quarterly Report on Form 10-Q.
We believe that our current cash and cash equivalents, short-term investments, cash provided by operations, and availability of additional funds under the Credit Agreement, as amended from time to time, will be sufficient to fund our operations for one year from the date of issuance of these financial statements; however, any projections of future financial needs and sources of working capital are subject to uncertainty, particularly in light of the uncertainty resulting from the impact of COVID-19 on our financial results. 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 April 2, 2022, filed with the SEC on May 27, 2022, and other periodic filings with the SEC, any of which could affect our estimates for future financial needs and sources of working capital.
OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
We have not entered into any transactions with unconsolidated entities whereby we have 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.
Unconditional Purchase Obligations
The Company's off-balance sheet unconditional purchase obligations are comprised of third-party manufacturing, component purchases, and other general and administrative commitments.
We use several contract manufacturers to manufacture raw materials, components, and subassemblies for our products through our supply and demand information that can cover periods up to 78 weeks. The contract manufacturers use this information to acquire components and build products. We also obtain individual components for our products from a wide variety of individual suppliers using a combination of purchase orders, supplier contracts, including annual minimum purchase obligations, and open orders based on projected demand information.
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 condensed consolidated balance sheets 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 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 July 2, 2022, our unconditional purchase obligations were primarily comprised of third-party manufacturing and component purchase commitments, including $77.4 million of consigned inventories. We expect to consume unconditional purchase obligations in the normal course of business, net of an immaterial purchase commitments reserve. In certain instances, these agreements allow us the option to cancel, reschedule, and adjust our requirements based on our business needs in partnering with our suppliers given the current environment.
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 April 2, 2022.
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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 April 2, 2022. There have been no material changes to our critical accounting estimates during Fiscal Year 2023.
Recent Accounting Pronouncements
Recent accounting pronouncements issued by the FASB did not and are not expected to have a material impact on the Company's financial position, results of operations, or cash flows.
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ITEM 3. 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 April 2, 2022, which could materially affect our business, financial position, or future results of operations.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily to our floating-rate interest payments under our $1.275 billion term loan facility. Borrowings under the Credit Agreement bear interest at a variable rate equal to (i) LIBOR plus a specified margin, or (ii) the base rate (which is the highest of (a) the prime rate publicly announced from time to time by Wells Fargo Bank, National Association, (b) the federal funds rate plus 0.50% or (c) the sum of 1% plus one-month LIBOR plus a specified margin.
On July 30, 2018, we entered into a four-year amortizing interest rate swap agreement, and on June 15, 2021, we entered into a three-year amortizing interest rate swap agreement, both with Bank of America, N.A., as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates on the $1.275 billion term loan facility. As a matter of policy, we only enter into transactions that we believe will be highly effective at offsetting the underlying risk and we do not use derivatives for trading or speculative purposes. Our objective is to mitigate the impact of interest expense fluctuations on our profitability related to interest rate changes by minimizing movements in future debt payments with these interest rate swaps.
The first swap has an initial notional amount of $831 million and matures on July 31, 2022. The second swap has an initial notional amount of $680 million and matures on July 31, 2024. The swaps involve the receipt of floating-rate interest payments for fixed interest rate payments over the life of the agreement. We have designated these interest rate swaps as cash flow hedges. Changes in the fair value of the derivatives are recorded to other comprehensive income on the condensed consolidated statements of comprehensive (loss) income and are reclassified to interest expense over the life of the agreements. For additional details, refer to Note 10, Derivatives, of the accompanying notes to the condensed consolidated financial statements within “Part I. Item 1. Financial Statements” of this Quarterly Report on Form 10-Q. During the three months ended July 2, 2022, we made payments of approximately $0.7 million on our interest rate swaps and recognized $0.6 million within interest expense on the condensed consolidated statement of operations. As of July 2, 2022, we had an immaterial amount of interest accrued within accrued liabilities on the condensed consolidated balance sheet. A hypothetical 10% increase or decrease on market interest rates could result in a corresponding immaterial increase or decrease in annual interest expense due to the two interest rate swaps.
Interest rates were higher in the three months ended July 2, 2022 compared to the same period in the prior year. Interest income was not material in the three months ended July 2, 2022 and July 3, 2021.
FOREIGN CURRENCY EXCHANGE RATE RISK
We are a net receiver of currencies other than the United States Dollar (“USD.”) Accordingly, changes in exchange rates, and in particular a strengthening of the USD, could negatively affect our total net revenues and gross margins, as expressed in USD. 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”), Great Britain Pound Sterling (“GBP”), and Mexican Peso (“MXN.”) 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 and GBP 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 and that exchange rate fluctuations will not materially adversely affect our business. We do not hold or issue derivative financial instruments for speculative trading purposes. While our existing hedges cover a certain amount of exposure for the upcoming fiscal year, long-term strengthening of the USD relative to the currencies of other countries in which we sell may have a material adverse impact on our financial results. In addition, our results may be adversely impacted by future changes in foreign currency exchange rates relative to original hedging contracts.
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The impact of changes in foreign currency rates recognized in other non-operating income, net was immaterial in the three months ended July 2, 2022. 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 and GBP 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 July 2, 2022 (in millions):
| Currency - forward contracts | Position | USD Notional 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 | $ | 54.1 | $ | 5.4 | $ | (5.4) | ||||||||||||||||
| GBP | Sell GBP | 8.7 | 0.9 | (0.9) | |||||||||||||||||||
Cash Flow Hedges
In the three months ended July 2, 2022, approximately 54% of our total net revenues were derived from sales outside of the U.S. and were denominated primarily in EUR and GBP.
As of July 2, 2022, we had foreign currency put and call option contracts with notional amounts of approximately €84.4 million and £17.3 million denominated in EUR and GBP, respectively. Collectively, our option contracts hedge against a portion of our forecasted foreign currency denominated sales. If the USD is subjected to either a 10% appreciation or 10% depreciation versus these net exposed currency positions, we could realize a gain of $10.8 million or incur a loss of $3.6 million, respectively.
The table below presents the impact on the Black-Scholes valuation of our currency option contracts of a hypothetical 10% appreciation and a 10% depreciation of the USD against the indicated option contract type for cash flow hedges as of July 2, 2022 (in millions):
| Derivative | USD Notional Value of Net Foreign Exchange Contracts | Foreign Exchange Gain From 10% Appreciation of USD | Foreign Exchange (Loss) From 10% Depreciation of USD | |||||||||||||||||
| Call options | $ | 119.5 | $ | 0.5 | $ | (3.7) | ||||||||||||||
| Put options | 110.1 | 7.7 | (2.6) | |||||||||||||||||
| Forwards | 94.6 | 8.8 | (8.8) | |||||||||||||||||
Collectively, our swap contracts hedge against a portion of our forecasted MXN denominated expenditures. As of July 2, 2022, we had cross-currency swap contracts with notional amounts of approximately MXN 363.0 million.
The table below presents the impact on the valuation of our cross-currency swap contracts of a hypothetical 10% appreciation and a 10% depreciation of the USD as of July 2, 2022 (in millions):
| Derivative | USD Notional Value of Cross-Currency Swap Contracts | Foreign Exchange (Loss) From 10% Appreciation of USD | Foreign Exchange Gain From 10% Depreciation of USD | |||||||||||||||||
| Position: Buy MXN | $ | 17.3 | $ | (1.7) | $ | 1.7 | ||||||||||||||
Except as described above, there have been no material changes in our market risk as described in our Annual Report on Form 10-K for the fiscal year ended April 2, 2022.
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ITEM 4. CONTROLS AND PROCEDURES
(a)Evaluation of disclosure controls and procedures
Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b)Changes in internal control over financial reporting
There have been no changes in the Company’s internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are presently engaged in various legal actions arising in the normal course of business. We do not expect that any of these actions will have a material adverse impact on our operating results; however, because of the inherent uncertainties of litigation, the outcome of any of these actions could be unfavorable and could have a material adverse effect on our financial condition, results of operations, or cash flows. For additional information about our material legal proceedings, please see Note 6, Commitments and Contingencies, of the accompanying notes to the condensed consolidated financial statements within “Part I. Item 1. Financial Statements” of this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
You should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended April 2, 2022, each of which could materially affect our business, financial position, or future results of operations.
The risks described within this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K for the fiscal year ended April 2, 2022 are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial position, or future results of operations.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended July 2, 2022, we did not repurchase any shares of our common stock. As of July 2, 2022, there remained 1,369,014 shares authorized for repurchase under the existing stock repurchase program. The following table presents information with respect to shares that were tendered to us in satisfaction of employee tax withholding obligations upon the vesting of restricted stock grants under our stock plans during the three months ended July 2, 2022:
Total Number of Shares Purchased (4) | Average Price Paid per Share (2) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (3) | ||||||||||||||||||||
| April 3, 2022 to April 30, 2022 | 0 | N/A | — | 1,369,014 | |||||||||||||||||||
| May 1, 2022 to May 28, 2022 | 356,765 | N/A | — | 1,369,014 | |||||||||||||||||||
| May 29, 2022 to July 2, 2022 | 4,676 | N/A | — | 1,369,014 | |||||||||||||||||||
| (1) | On November 28, 2018, our Board approved a 1.0 million shares repurchase program expanding our capacity to repurchase shares to approximately 1.7 million shares. We may repurchase shares from time to time in open market transactions or through privately negotiated transactions. There is no expiration date associated with the repurchase activity. | ||||
| (2) | "Average Price Paid per Share" reflects open market repurchases of common stock only. | ||||
| (3) | These shares reflect the available shares authorized for repurchase under the expanded repurchase program approved by the Board on November 28, 2018. | ||||
| (4) | Represents only shares that were tendered to us in satisfaction of employee tax withholding obligations upon the vesting of restricted stock grants under our stock plans. | ||||
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ITEM 6. EXHIBITS
We have filed the following documents as Exhibits to this Quarterly Report on Form 10-Q:
EXHIBITS INDEX
| Exhibit Number | Incorporation by Reference | Filed Herewith | ||||||||||||||||||||||||||||||||||||
| Exhibit Description | Form | File No. | Exhibit | Filing Date | ||||||||||||||||||||||||||||||||||
| 4.1 | 8-K | 001-12696 | 4.1 | 7/27/2022 | ||||||||||||||||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||||||||||||||||||||
| 31.2 | X | |||||||||||||||||||||||||||||||||||||
| 32.1 | X | |||||||||||||||||||||||||||||||||||||
| 101.INS | XBRL Instance Document - the XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | X | ||||||||||||||||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Definition Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File, (formatted as Inline XBRL and contained in Exhibit 101) | X | ||||||||||||||||||||||||||||||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| PLANTRONICS, INC. | |||||||||||
| Date: | August 11, 2022 | By: | /s/ Charles D. Boynton | ||||||||
| Name: | Charles D. Boynton | ||||||||||
| Title: | Executive Vice President and Chief Financial Officer (on behalf of the Registrant and as principal financial officer and principal accounting officer) | ||||||||||
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