NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed consolidated financial statements ("financial statements") of Plantronics, Inc. ("Plantronics" or "the Company") have been prepared on a basis consistent with the Company's
March 31, 2016
audited consolidated financial statements and include all adjustments, consisting of normal recurring adjustments, necessary to fairly state the information set forth herein. Certain information and footnote disclosures normally included in financial statements prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to interim financial information and in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. The financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 2016
, which was filed with the SEC on
May 16, 2016
. The results of operations for the interim period ended
December 31, 2016
are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.
The financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
The Company’s fiscal year ends on the Saturday closest to the last day of March. The Company’s current fiscal year ends on
April 1,
2017
and consists of
52
weeks. The Company's prior fiscal year ended on
April 2,
2016
and consisted of
53
weeks. The Company’s results of operations for the
three and nine
months ended
December 31, 2016
and
December 26, 2015
both contain
13
and
39
weeks, respectively. For purposes of presentation, the Company has indicated its accounting year as ending on March 31 and its interim quarterly periods as ending on the applicable calendar month end.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Recently Issued Pronouncements
In June 2016, the FASB issued additional guidance regarding the measurement of credit losses on financial instruments, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. The guidance is effective for the Company's fiscal year ending March 31, 2021 with early adoption permitted beginning in the first quarter of fiscal year 2020. The Company is currently evaluating the impact the adoption of this standard will have on its results of operations, financial position, and cash flows.
In March 2016, the FASB issued additional guidance regarding share-based compensation, which outlines new provisions intended to simplify various aspects related to accounting for share-based payments and their presentation in the financial statements. The guidance is effective for the Company's fiscal year ending March 31, 2018. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this standard will have on its results of operations, financial position, and cash flows.
In February 2016, the FASB issued additional guidance regarding both operating and financing leases, requiring lessees to recognize on their balance sheets “right-of-use assets” and corresponding lease liabilities, measured on a discounted basis over the lease term. Virtually all leases will be subject to this treatment except leases that meet the definition of a “short-term lease.” For expense recognition, the dual model requiring leases to be classified as either operating or finance leases has been retained from the prior standard. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. Classification will use criteria very similar to those applied in current lease accounting, but without explicit bright lines. The new lease guidance will essentially eliminate off-balance sheet financing. The guidance is effective for the Company's fiscal year ending March 31, 2020. The new standard must be adopted using a modified retrospective transition that provides for certain practical expedients and requires the new guidance to be applied at the beginning of the earliest comparative period presented. While we are not yet in a position to assess the full impact of the application of the new standard, the Company expects that the impact of recording the lease liabilities and the corresponding right-to-use assets may have a significant impact on its total assets and liabilities with a minimal impact on its equity.
In January 2016, the FASB issued additional guidance regarding the recognition and measurement of financial assets and liabilities. Changes to the current GAAP model primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The Company is required to adopt the standard in the first quarter of its fiscal year ending March 31, 2019, but may elect to adopt earlier as permitted under the standard. The Company is currently evaluating what impact, if any, the adoption of this standard will have on its results of operations, financial position, and cash flows.
In July 2015, the FASB issued additional guidance regarding the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. The Company is required to adopt the standard in the first quarter of its fiscal year ending March 31, 2018, but may elect to adopt earlier as permitted under the standard. The adoption is not expected to have a material impact on the Company's results of operations, financial position, or cash flows.
In May 2014, the FASB issued additional guidance regarding revenue from contracts with customers. While the standard supersedes existing revenue recognition guidance, it closely aligns with current GAAP. Under the new standard, revenue will be recognized at the time control of a good or service is transferred to a customer for the amount of consideration received or to be received for that specific good or service. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. In March 2016, the FASB issued additional guidance concerning "Principal versus Agent" considerations (reporting revenue gross versus net); in April 2016, the FASB issued additional guidance on identifying performance obligations and licensing; and in May 2016, the FASB issued additional guidance on collectability, noncash consideration, presentation of sales tax, and transition. These updates are intended to improve the operability and understandability of the implementation guidance and have the same effective date and transition requirements as the greater "contracts with customers" standard. The Company will adopt the standard, as amended, in the first quarter of its fiscal year ending March 31, 2019. The Company has not yet completed its final review of the impact of this guidance, although it currently does not anticipate a material impact on its revenue recognition practices. The Company continues to review variable consideration, potential disclosures, and its method of adoption to complete its evaluation of the impact on its consolidated financial statements. In addition, the Company will continue to monitor additional changes, modifications, clarifications or interpretations being undertaken by the FASB, which may impact its current conclusions.
3. CASH, CASH EQUIVALENTS, AND INVESTMENTS
The following tables summarize the Company’s cash and available-for-sale securities’ adjusted cost, gross unrealized gains, gross unrealized losses, and fair value by significant investment category recorded as cash and cash equivalents, short-term, or long-term investments as of
December 31, 2016
and
March 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Cash & Cash Equivalents
|
|
Short-term investments (due in 1 year or less)
|
|
Long-term investments (due in 1 to 3 years)
|
Cash
|
|
$
|
242,461
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
242,461
|
|
|
$
|
242,461
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual Funds
|
|
11,970
|
|
|
177
|
|
|
(97
|
)
|
|
12,050
|
|
|
—
|
|
|
12,050
|
|
|
—
|
|
US Treasury Notes
|
|
25,610
|
|
|
—
|
|
|
(41
|
)
|
|
25,569
|
|
|
—
|
|
|
13,519
|
|
|
12,050
|
|
Subtotal
|
|
37,580
|
|
|
177
|
|
|
(138
|
)
|
|
37,619
|
|
|
—
|
|
|
25,569
|
|
|
12,050
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Agency Securities
|
|
59,332
|
|
|
6
|
|
|
(144
|
)
|
|
59,194
|
|
|
—
|
|
|
15,226
|
|
|
43,968
|
|
Commercial Paper
|
|
49,904
|
|
|
—
|
|
|
—
|
|
|
49,904
|
|
|
—
|
|
|
49,904
|
|
|
—
|
|
Corporate Bonds
|
|
144,291
|
|
|
8
|
|
|
(269
|
)
|
|
144,030
|
|
|
—
|
|
|
68,804
|
|
|
75,226
|
|
Certificates of Deposits ("CDs")
|
|
21,646
|
|
|
—
|
|
|
—
|
|
|
21,646
|
|
|
—
|
|
|
17,939
|
|
|
3,707
|
|
Subtotal
|
|
275,173
|
|
|
14
|
|
|
(413
|
)
|
|
274,774
|
|
|
—
|
|
|
151,873
|
|
|
122,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents
and investments measured at fair value
|
|
$
|
555,214
|
|
|
$
|
191
|
|
|
$
|
(551
|
)
|
|
$
|
554,854
|
|
|
$
|
242,461
|
|
|
$
|
177,442
|
|
|
$
|
134,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Cash & Cash Equivalents
|
|
Short-term investments (due in 1 year or less)
|
|
Long-term investments (due in 1 to 3 years)
|
Cash
|
|
$
|
232,600
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
232,600
|
|
|
$
|
232,600
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual Funds
|
|
10,025
|
|
|
32
|
|
|
(548
|
)
|
|
9,509
|
|
|
—
|
|
|
9,509
|
|
|
—
|
|
US Treasury Notes
|
|
25,051
|
|
|
21
|
|
|
(9
|
)
|
|
25,063
|
|
|
—
|
|
|
12,993
|
|
|
12,070
|
|
Subtotal
|
|
35,076
|
|
|
53
|
|
|
(557
|
)
|
|
34,572
|
|
|
—
|
|
|
22,502
|
|
|
12,070
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Agency Securities
|
|
72,698
|
|
|
24
|
|
|
(20
|
)
|
|
72,702
|
|
|
—
|
|
|
10,521
|
|
|
62,181
|
|
Commercial Paper
|
|
37,628
|
|
|
—
|
|
|
—
|
|
|
37,628
|
|
|
650
|
|
|
36,978
|
|
|
—
|
|
Corporate Bonds
|
|
147,662
|
|
|
234
|
|
|
(97
|
)
|
|
147,799
|
|
|
2,016
|
|
|
77,115
|
|
|
68,668
|
|
Certificates of Deposits ("CDs")
|
|
15,639
|
|
|
—
|
|
|
—
|
|
|
15,639
|
|
|
—
|
|
|
12,935
|
|
|
2,704
|
|
Subtotal
|
|
273,627
|
|
|
258
|
|
|
(117
|
)
|
|
273,768
|
|
|
2,666
|
|
|
137,549
|
|
|
133,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents
and investments measured at fair value
|
|
$
|
541,303
|
|
|
$
|
311
|
|
|
$
|
(674
|
)
|
|
$
|
540,940
|
|
|
$
|
235,266
|
|
|
$
|
160,051
|
|
|
$
|
145,623
|
|
As of
December 31, 2016
and
March 31, 2016
, with the exception of assets related to the Company's deferred compensation plan, all of the Company's investments are classified as available-for-sale securities. The carrying value of available-for-sale securities included in cash equivalents approximates fair value because of the short maturity of those instruments. For more information regarding the Company's deferred compensation plan, refer to
Note 4
,
Deferred Compensation
.
The Company did not incur any material realized or unrealized gains or losses in the
three and nine
months ended
December 31, 2015
and
2016
.
There were no transfers between fair value measurement levels during the
three and nine
months ended
December 31, 2015
and
2016
.
All financial assets and liabilities are recognized or disclosed at fair value in the financial statements or the accompanying notes thereto. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1
The Company's Level 1 financial assets consist of Mutual Funds and US Treasury Notes. The fair value of Level 1 financial instruments is measured based on the quoted market price of identical securities.
Level 2
The Company's Level 2 financial assets and liabilities consist of
Government Agency Securities, Commercial Paper, Corporate Bonds, and Certificates of Deposits ("CDs")
, derivative foreign currency contracts, and long-term debt. The fair value of Level 2 investment securities is determined based on other observable inputs, including multiple non-binding quotes from independent pricing services. Non-binding quotes are based on proprietary valuation models that are prepared by the independent pricing services and use algorithms based on inputs such as observable market data, quoted market prices for similar securities, issuer spreads, and internal assumptions of the broker. The Company corroborates the reasonableness of non-binding quotes received from the independent pricing services using a variety of techniques depending on the underlying instrument, including: (i) comparing them to actual experience gained from the purchases and maturities of investment securities, (ii) comparing them to internally developed cash flow models based on observable inputs, and (iii) monitoring changes in ratings of similar securities and the related impact on fair value. The fair value of Level 2 derivative foreign currency contracts is determined using pricing models that use observable market inputs. For more information regarding the Company's derivative assets and liabilities, refer to
Note 11
,
Foreign Currency Derivatives
, of the accompanying notes to condensed consolidated financial statements (unaudited) in this Quarterly Report on Form 10-Q. The fair value of Level 2 long-term debt is determined based on inputs that were observable in the market, including the trading price of the notes when available. For more information regarding the Company's 5.50% Senior Notes, refer to
Note 7
,
Debt.
Level 3
The Company's unsecured revolving credit facility falls under the Level 3 hierarchy. The fair value of the Company’s line of credit approximates its carrying value because the interest rate is variable and approximates rates currently available to the Company.
4. DEFERRED COMPENSATION
As of
December 31, 2016
, the Company held bank deposits of
$0.8 million
and investments in mutual funds totaling
$12.1 million
, all of which related to debt and equity securities that are held in rabbi trusts under non-qualified deferred compensation plans. The total related deferred compensation liability was
$13.4 million
at
December 31, 2016
. The fair value of debt and equity securities held in the rabbi trusts at
March 31, 2016
was
$9.5 million
. The total related deferred compensation liability at
March 31, 2016
was
$10.7 million
.
The bank deposits are recorded on the condensed consolidated balance sheets under "Cash and cash equivalents". The securities are classified as trading securities and are recorded on the condensed consolidated balance sheets under "Short-term investments". The liability is recorded on the condensed consolidated balance sheets under “Other long-term liabilities” and "Accrued liabilities".
5. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in thousands)
|
|
2016
|
|
2016
|
Accounts receivable
|
|
$
|
163,834
|
|
|
$
|
188,234
|
|
Provisions for returns
|
|
(7,314
|
)
|
|
(11,922
|
)
|
Provisions for promotions, rebates, and other
|
|
(27,737
|
)
|
|
(34,545
|
)
|
Provisions for doubtful accounts and sales allowances
|
|
(564
|
)
|
|
(470
|
)
|
Accounts receivable, net
|
|
$
|
128,219
|
|
|
$
|
141,297
|
|
Inventory, net:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in thousands)
|
|
2016
|
|
2016
|
Raw materials
|
|
$
|
21,612
|
|
|
$
|
23,586
|
|
Work in process
|
|
527
|
|
|
254
|
|
Finished goods
|
|
31,023
|
|
|
34,186
|
|
Inventory, net
|
|
$
|
53,162
|
|
|
$
|
58,026
|
|
Accrued Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in thousands)
|
|
2016
|
|
2016
|
Employee compensation and benefits
|
|
$
|
22,955
|
|
|
$
|
31,110
|
|
Accrued interest on 5.50% Senior Notes
|
|
10,501
|
|
|
3,494
|
|
Warranty obligation
|
|
8,537
|
|
|
8,947
|
|
VAT/Sales tax payable
|
|
4,894
|
|
|
4,656
|
|
Restructuring and other related charges
|
|
5,783
|
|
|
441
|
|
Accrued other
|
|
17,364
|
|
|
17,409
|
|
Accrued liabilities
|
|
$
|
70,034
|
|
|
$
|
66,057
|
|
The Company's warranty obligation is included as a component of accrued liabilities on the condensed consolidated balance sheets. Changes in the warranty obligation during the
nine
months ended
December 31, 2015
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
December 31,
|
(in thousands)
|
|
2015
|
|
2016
|
Warranty obligation at beginning of period
|
|
$
|
7,717
|
|
|
$
|
8,537
|
|
Warranty provision related to products shipped
|
|
6,942
|
|
|
7,248
|
|
Deductions for warranty claims processed
|
|
(6,490
|
)
|
|
(7,246
|
)
|
Adjustments related to preexisting warranties
|
|
552
|
|
|
408
|
|
Warranty obligation at end of period
|
|
$
|
8,721
|
|
|
$
|
8,947
|
|
6. COMMITMENTS AND CONTINGENCIES
Unconditional Purchase Obligations
The Company purchases materials and services from a variety of suppliers and manufacturers. During the normal course of business and to manage manufacturing operations and general and administrative activities, the Company may enter into firm, non-cancelable, and unconditional purchase obligations for which amounts are not recorded on the consolidated balance sheets. As of
December 31, 2016
, the Company had outstanding off-balance sheet third-party manufacturing, component purchase, and other general and administrative commitments of
$164.8 million
.
Other Guarantees and Obligations
In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, purchasers of assets or subsidiaries and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company's breach of agreements or representations and warranties made by the Company, services to be provided by the Company, intellectual property infringement claims made by third parties or, with respect to the sale of assets of a subsidiary, matters related to the Company's conduct of business and tax matters prior to the sale. From time to time, the Company indemnifies customers against combinations of loss, expense, or liability arising from various triggering events relating to the sale and use of its products and services.
In addition, the Company also provides protection to customers against claims related to undiscovered liabilities, additional product liability, or environmental obligations. The Company has also entered into indemnification agreements with its directors, officers and certain other personnel that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers of the Company or certain of its affiliated entities. The Company maintains director and officer liability insurance, which may cover certain liabilities arising from its obligation to indemnify its directors, officers and certain other personnel in certain circumstances. It is not possible to determine the aggregate maximum potential loss under these agreements due to the limited history of prior claims and the unique facts and circumstances involved in each particular claim. Such indemnification obligations might not be subject to maximum loss clauses. Historically, the Company has not incurred material costs as a result of obligations under these agreements and it has not accrued any liabilities related to such indemnification obligations in the condensed consolidated financial statements.
Claims and Litigation
On October 12, 2012, GN Netcom, Inc. ("GN") sued the Company in the United States ("U.S.") District Court for the District of Delaware, alleging violations of the Sherman Act, the Clayton Act, and Delaware common law. In its complaint, GN specifically alleges four causes of action: monopolization, attempted monopolization, concerted action in restraint of trade, and tortious interference with business relations. GN claims that the Company dominates the market for headsets sold into contact centers in the U.S. and that a critical channel for sales of headsets to contact centers is through a limited network of specialized independent distributors (“SIDs”). GN asserts that the Company attracts SIDs through exclusive distributor agreements and alleges that the use of these agreements is illegal.
On July 6, 2016, the Court in GN Netcom, Inc. v. Plantronics, Inc. ordered the following sanctions against the Company as they relate to certain discovery matters in the litigation: (1) monetary sanctions in the form of reasonable fees and costs incurred by GN in connection with the discovery disputes leading to the motion for sanctions; (2) punitive sanctions in the amount of
$3 million
; (3) possible evidentiary sanctions; and (4) instructions to the jury that it may draw an adverse inference that emails destroyed by the Company would have been favorable to GN’s case and/or unfavorable to the Company's defense. As a result, during the three months ended June 30, 2016, the Company accrued
$3 million
for the punitive sanctions and an additional
$2 million
, representing the Company’s best estimate of reasonable fees and costs incurred by GN in connection with the disputes leading to the motion for sanctions, for a total of
$5 million
. The Company paid the
$3 million
in punitive damages to GN on or about September 1, 2016 and paid the remaining balance, which was reduced to
$1.9 million
, on December 7, 2016.
The Company believes that the underlying antitrust action is without merit and is vigorously defending itself. However, following the court order described above, there exists an increased risk of the jury finding in favor of the plaintiff. The Company is unable to provide an estimate of the possible loss or range of possible loss resulting from these allegations and has not accrued any financial damages relating to the antitrust case. The trial for the underlying antitrust case is currently scheduled to commence in October 2017.
In addition to the specific matter discussed above, the Company is involved in various legal proceedings arising in the normal course of conducting business. For such legal proceedings, where applicable, the Company has accrued an amount that reflects the aggregate liability deemed probable and estimable, but this amount is not material to the Company's financial condition, results of operations, or cash flows. With respect to proceedings for which no accrual has been made, the Company is not able to estimate an amount or range of any reasonably possible additional losses because of the preliminary nature of many of these proceedings, the difficulty in ascertaining the applicable facts relating to many of these proceedings, the variable treatment of claims made in many of these proceedings, and the difficulty of predicting the settlement value of many of these proceedings. However, based upon the Company's historical experience, the resolution of these proceedings is not expected to have a material effect on the Company's financial condition, results of operations or cash flows. The Company may incur substantial legal fees, which are expensed as incurred, in defending against these legal proceedings.
7. DEBT
5.50% Senior Notes
In May 2015, the Company issued
$500.0 million
aggregate principal amount of
5.50%
senior notes (the “5.50% Senior Notes”). The 5.50% Senior Notes mature on May 31, 2023, and bear interest at a rate of
5.50%
per annum, payable semi-annually on May 15 and November 15 of each year, commencing on November 15, 2015. The Company received net proceeds of
$488.4 million
from the issuance of the
5.50%
Senior Notes, net of issuance costs of
$11.6 million
which are being amortized to interest expense over the term of the
5.50%
Senior Notes using the effective interest method.
The fair value of the
5.50%
Senior Notes was determined based on inputs that were observable in the market, including the trading price of the 5.50% Senior Notes when available (Level 2). The estimated fair value and carrying value of the
5.50%
Senior Notes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2016
|
(in thousands)
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
5.50% Senior Notes
|
$
|
493,440
|
|
|
$
|
489,609
|
|
|
$
|
507,105
|
|
|
$
|
490,696
|
|
The Company may redeem all or a part of the
5.50%
Senior Notes, upon not less than
30
or more than a
60
day notice; however, the applicable redemption price will be determined as follows:
|
|
|
|
|
|
|
|
|
|
Redemption Period Requiring Payment of:
|
|
Redemption Up To 35% Using Cash Proceeds From An Equity Offering
(3)
:
|
|
Make-Whole
(1)
|
|
Premium
(2)
|
|
Date
|
|
Specified Price
|
5.50% Senior Notes
|
Prior to May 15, 2018
|
|
On or after May 15, 2018
|
|
Prior to May 15, 2018
|
|
105.500%
|
(1)
If the Company redeems the notes prior to the applicable date, the redemption price is principal plus a make-whole premium equal to the present value of the remaining scheduled interest payments as described in the applicable indenture, together with accrued and unpaid interest.
(2)
If the Company redeems the notes on or after the applicable date, the price is principal plus a premium which declines over time as specified in the applicable indenture, together with accrued and unpaid interest.
(3)
If the Company redeems the notes prior to the applicable date with net cash proceeds of one or more equity offerings, the price is equal to the amount specified above, together with accrued and unpaid interest, subject to a maximum redemption of
35%
of the aggregate principal amount of the respective note being redeemed.
In addition, upon the occurrence of certain change of control triggering events, the Company may be required to repurchase the
5.50%
Senior Notes, at a price equal to
101%
of their principal amount, plus accrued and unpaid interest to the date of repurchase. The
5.50%
Senior Notes contain restrictive covenants that, among other things, limit the Company's ability to create certain liens and enter into sale and leaseback transactions; create, assume, incur, or guarantee additional indebtedness of its subsidiaries without such subsidiary guaranteeing the 5.50% Senior Notes on an unsecured unsubordinated basis; and consolidate or merge with, or convey, transfer or lease all or substantially all of the assets of the Company and its subsidiaries to another person. As of
December 31, 2016
, the Company was in compliance with all covenants.
Revolving Credit Agreement
On
May 9, 2011
, the Company entered into a credit agreement with Wells Fargo Bank, National Association ("the Bank"), which was most recently amended on
May 2, 2016
(as amended, the "Amended Credit Agreement") to extend the term of the Credit Agreement by one year to
May 9, 2019
, and to waive a default under the Credit Agreement in effect as of
March 31, 2016
in which the Company's debt to EBITDA ratio minimally exceeded the previously agreed upon ratio of 3:1. The breach of the covenant was primarily a result of the restructuring expenses recorded in the third and fourth quarters of fiscal year 2016.
The Amended Credit Agreement provides for a
$100.0 million
unsecured revolving credit facility. Revolving loans under the Credit Agreement will bear interest, at the Company’s election, at (i) the Bank’s announced prime rate less
1.20%
per annum or (ii) a daily one-month LIBOR rate plus
1.40%
per annum. Interest is payable quarterly in arrears on the first day of each April, July, October and January, commencing July 1, 2016. Principal, together with all accrued and unpaid interest, on the revolving loans is due and payable on
May 9, 2019
. The Company is also obligated to pay a commitment fee of
0.37%
per annum on the average daily unused amount of the revolving line of credit, which fee shall be payable quarterly in arrears on the first day of each April, July, October and January, commencing July 1, 2016.
The Company may prepay the loans and terminate the commitments under the Credit Agreement at any time, without premium or penalty, subject to the reimbursement of certain costs. As of
March 31, 2016
and
December 31, 2016
, the Company had
no
outstanding borrowings under the line of credit.
The Credit Agreement contains customary affirmative and negative covenants, including, among other things, covenants limiting the ability of the Company to incur debt, make capital expenditures, grant liens, merge or consolidate, and make investments. The Credit Agreement also requires the Company to comply with certain financial covenants, including (i) a maximum ratio of funded debt to EBITDA and (ii) a minimum EBITDA coverage ratio, in each case, tested as of each fiscal quarter and determined on a rolling four-quarter basis. In addition, the Company and its subsidiaries are required to maintain unrestricted cash, cash equivalents and marketable securities plus availability under the Credit Agreement at the end of each fiscal quarter of at least
$300.0 million
. The Credit Agreement contains customary events of default that include, among other things, payment defaults, covenant defaults, cross-defaults with certain other indebtedness, bankruptcy and insolvency defaults, and judgment defaults. The occurrence of an event of default could result in the acceleration of the obligations under the Credit Agreement.
On May 2, 2016, the Company received a waiver from the lender for noncompliance with the minimum EBITDA covenant at March 31, 2016. Pursuant to the terms of the waiver and amendment to the Credit Agreement, the
$16.2 million
of restructuring charges recorded in the Company's fiscal year 2016 will be excluded from the lender’s rolling four-quarter EBITDA calculation. This exclusion of restructuring charges does not automatically extend to any such future charges, should they be incurred. The breach was not considered to be a cross-default on the Company's
5.50%
Senior Notes and as such had no impact on the amount or timing of amounts payable related to those debt instruments. As of
December 31, 2016
, the Company was in compliance with all ratios and covenants.
8. STOCK-BASED COMPENSATION
The Company recognizes the grant-date fair value of stock-based compensation as compensation expense using the straight-line attribution approach over the service period for which the stock-based compensation is expected to vest. The following table summarizes the amount of stock-based compensation included in the condensed consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
(in thousands)
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
Cost of revenues
|
|
$
|
811
|
|
|
$
|
794
|
|
|
$
|
2,469
|
|
|
$
|
2,414
|
|
|
|
|
|
|
|
|
|
|
Research, development, and engineering
|
|
2,286
|
|
|
1,771
|
|
|
7,264
|
|
|
6,663
|
|
Selling, general, and administrative
|
|
4,620
|
|
|
6,124
|
|
|
14,866
|
|
|
15,928
|
|
Stock-based compensation included in operating expenses
|
|
6,906
|
|
|
7,895
|
|
|
22,130
|
|
|
22,591
|
|
Total stock-based compensation
|
|
7,717
|
|
|
8,689
|
|
|
24,599
|
|
|
25,005
|
|
Income tax benefit
|
|
(2,238
|
)
|
|
(2,986
|
)
|
|
(7,202
|
)
|
|
(8,635
|
)
|
Total stock-based compensation, net of tax
|
|
$
|
5,479
|
|
|
$
|
5,703
|
|
|
$
|
17,397
|
|
|
$
|
16,370
|
|
9. COMMON STOCK REPURCHASES
From time to time, the Company's Board of Directors (the "Board") has authorized programs under which the Company may repurchase shares of its common stock, depending on market conditions, in the open market or through privately negotiated transactions. Repurchased shares are held as treasury stock until they are retired or re-issued. Repurchases by the Company pursuant to Board-authorized programs during the
nine
months ended
December 31, 2015
and
2016
are discussed below. As of
December 31, 2016
, there remained
869,835
shares authorized for repurchase under the repurchase program approved by the Board on
July 29, 2016
. There were no remaining shares authorized under previously approved programs.
In the
nine
months ended
December 31, 2015
and
2016
, the Company repurchased
8,673,366
shares and
764,176
shares, respectively, of its common stock in the open market for a total cost of
$482.8 million
and
$34.2 million
, respectively, and at an average price per share of
$55.66
and
$44.80
, respectively. In addition, the Company withheld shares valued at
$10.8 million
and
$9.4 million
in the
nine
months ended
December 31, 2015
and
2016
, respectively, in satisfaction of employee tax withholding obligations upon the vesting of restricted stock granted under the Company's stock plans. The amounts withheld were equivalent to the employees' minimum statutory tax withholding requirements and are reflected as a financing activity within the Company's condensed consolidated statements of cash flows. These share withholdings have the same effect as share repurchases by the Company as they reduce the number of shares that would have otherwise been issued in connection with the vesting of shares subject to the restricted stock grants.
10. ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income ("AOCI"), net of immaterial tax effects, are as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
March 31, 2016
|
|
December 31, 2016
|
Accumulated unrealized gain (loss) on cash flow hedges
(1)
|
|
$
|
(1,087
|
)
|
|
$
|
180
|
|
Accumulated foreign currency translation adjustments
|
|
4,739
|
|
|
4,571
|
|
Accumulated unrealized gain (loss) on investments
|
|
107
|
|
|
(313
|
)
|
Accumulated other comprehensive income
|
|
$
|
3,759
|
|
|
$
|
4,438
|
|
(1)
Refer to
Note 11
, Foreign Currency Derivatives, which discloses the nature of the Company's derivative assets and liabilities as of
March 31, 2016
and
December 31, 2016
.
11. FOREIGN CURRENCY DERIVATIVES
The Company's foreign currency derivatives consist primarily of foreign currency forward exchange contracts, option contracts, and cross-currency swaps. The Company does not purchase derivative financial instruments for speculative trading purposes. The derivatives expose the Company to credit risk to the extent the counterparties may be unable to meet the terms of the derivative instrument. The Company's maximum exposure to loss that it would incur due to credit risk if parties to derivative contracts failed completely to perform according to the terms of the contracts was equal to the carrying value of the Company's derivative assets as of
December 31, 2016
. The Company seeks to mitigate such risk by limiting its counterparties to large financial institutions. In addition, the Company monitors the potential risk of loss with any one counterparty resulting from this type of credit risk on an ongoing basis.
The Company enters into master netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions. A master netting arrangement may allow each counterparty to net settle amounts owed between the Company and the counterparty as a result of multiple, separate derivative transactions. As of
December 31, 2016
, the Company had International Swaps and Derivatives Association (ISDA) agreements with
four
applicable banks and financial institutions which contained netting provisions. Plantronics has elected to present the fair value of derivative assets and liabilities on the Company's condensed consolidated balance sheet on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. For each counterparty, if netted, the Company would offset the asset and liability balances of all derivatives at the end of the reporting period. Derivatives not subject to master netting agreements are not eligible for net presentation. As of
March 31, 2016
and
December 31, 2016
, no cash collateral had been received or pledged related to these derivative instruments.
The gross fair value of the Company's outstanding derivative contracts at the end of each period was as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
March 31, 2016
|
|
December 31, 2016
|
Derivative Assets (recorded in 'Other current assets')
|
|
|
|
|
Non-designated hedges
|
|
$
|
33
|
|
|
$
|
410
|
|
Cash flow hedges
|
|
1,952
|
|
|
4,321
|
|
Total Derivative Assets
|
|
$
|
1,985
|
|
|
$
|
4,731
|
|
|
|
|
|
|
Derivative Liabilities (recorded in 'Accrued liabilities')
|
|
|
|
|
Non-designated hedges
|
|
$
|
1,163
|
|
|
$
|
24
|
|
Cash flow hedges
|
|
3,255
|
|
|
3,028
|
|
Total Derivative Liabilities
|
|
$
|
4,418
|
|
|
$
|
3,052
|
|
Non-Designated Hedges
As of
December 31, 2016
, the Company had foreign currency forward contracts denominated in Euros ("EUR"), British Pound Sterling ("GBP"), Australian Dollars ("AUD"), and Canadian Dollars ("CAD"). The Company does not elect to obtain hedge accounting for these forward contracts. These forward contracts hedge against a portion of the Company’s foreign currency-denominated cash balances, receivables, and payables. The following table summarizes the notional value of the Company’s outstanding foreign exchange currency contracts and approximate U.S. Dollar ("USD") equivalent at
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Local Currency
|
|
USD Equivalent
|
|
Position
|
|
Maturity
|
EUR
|
€
|
35,900
|
|
|
$
|
37,955
|
|
|
Sell EUR
|
|
1 month
|
GBP
|
£
|
5,900
|
|
|
$
|
7,281
|
|
|
Sell GBP
|
|
1 month
|
AUD
|
A$
|
13,200
|
|
|
$
|
9,537
|
|
|
Sell AUD
|
|
1 month
|
CAD
|
C$
|
3,750
|
|
|
$
|
2,793
|
|
|
Sell CAD
|
|
1 month
|
Effect of Non-Designated Derivative Contracts on the Condensed Consolidated Statements of Operations
The effect of non-designated derivative contracts recognized in other non-operating income and (expense), net in the condensed consolidated statements of operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
(in thousands)
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
Gain (loss) on foreign exchange contracts
|
|
$
|
960
|
|
|
$
|
3,801
|
|
|
$
|
1,108
|
|
|
$
|
5,551
|
|
Cash Flow Hedges
Costless Collars
The Company hedges a portion of the forecasted EUR and GBP denominated revenues with costless collars. On a monthly basis, the Company enters into option contracts with a
six
to
eleven
month term. Collar contracts are scheduled to mature at the beginning of each fiscal quarter, at which time the instruments convert to forward contracts. The Company also enters into cash flow forwards with a
three
month term. Once the hedged revenues are recognized, the forward contracts become non-designated hedges to protect the resulting foreign monetary asset position for the Company.
The notional value of the Company's outstanding EUR and GBP option and forward contracts at the end of each period was as follows:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
March 31, 2016
|
|
December 31, 2016
|
|
|
EUR
|
|
GBP
|
|
EUR
|
|
GBP
|
Option contracts
|
|
€59.4
|
|
£18.4
|
|
€66.7
|
|
£23.2
|
Forward contracts
|
|
€23.9
|
|
£9.1
|
|
€15.2
|
|
£2.8
|
The Company will reclassify all amounts accumulated in other comprehensive income into earnings within the next twelve months.
Cross-currency Swaps
The Company hedges a portion of the forecasted Mexican Peso (“MXN”) denominated expenditures with a cross-currency swap. A loss of
$2.0 million
, net of tax, in AOCI as of
December 31, 2016
is expected to be reclassified to cost of revenues during the next 12 months due to the recognition of the hedged forecasted expenditures. As of
March 31, 2016
and
December 31, 2016
, the Company had foreign currency swap contracts of approximately MXN
481.0 million
and MXN
382.6 million
, respectively.
The following table summarizes the notional value of the Company’s outstanding MXN cross-currency swaps and approximate USD Equivalent at
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Local Currency
|
|
USD Equivalent
|
|
Position
|
|
Maturity
|
MXN
|
382,590
|
|
|
$
|
20,476
|
|
|
Buy MXN
|
|
Monthly over
|
21 months
|
Effect of Designated Derivative Contracts on AOCI and Condensed Consolidated Statements of Operations
The following table presents the pre-tax effects of derivative instruments designated as cash flow hedges on accumulated other comprehensive income and the condensed consolidated statements of operations for the
three and nine
months ended
December 31, 2015
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
(in thousands)
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
Gain (loss) included in AOCI as of beginning of period
|
|
$
|
(2,900
|
)
|
|
$
|
(471
|
)
|
|
$
|
5,705
|
|
|
$
|
(1,106
|
)
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) recognized in other comprehensive income (“OCI”)
(effective portion)
|
|
1,330
|
|
|
2,090
|
|
|
(3,484
|
)
|
|
2,394
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) reclassified from OCI into net revenues (effective portion)
|
|
1,739
|
|
|
2,178
|
|
|
7,474
|
|
|
3,163
|
|
Amount of gain (loss) reclassified from OCI into cost of revenues (effective portion)
|
|
(1,238
|
)
|
|
(756
|
)
|
|
(3,182
|
)
|
|
(2,072
|
)
|
Total amount of gain (loss) reclassified from AOCI to income (loss) (effective portion)
|
|
501
|
|
|
1,422
|
|
|
4,292
|
|
|
1,091
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) included in AOCI as of end of period
|
|
$
|
(2,071
|
)
|
|
$
|
197
|
|
|
$
|
(2,071
|
)
|
|
$
|
197
|
|
During the
three and nine
months ended
December 31, 2015
and
2016
the Company recognized an immaterial gain on the ineffective portion of its cash flow hedges, which is reported in other non-operating income and (expense), net in the condensed consolidated statements of operations.
12. INCOME TAXES
The Company and its subsidiaries are subject to taxation in the U.S. and in various foreign and state jurisdictions. The effective tax rates for the
three and nine
months ended
December 31, 2015
were
17.9%
and
21.7%
, respectively compared to
11.0%
and
18.4%
, respectively for the
three and nine
months ended
December 31, 2016
.
The decreases in the effective tax rates for the
three and nine
months ended
December 31, 2016
are due primarily to a shift in the Company's geographic mix of income from higher tax jurisdictions to lower tax jurisdictions, as restructuring charges incurred during the three months ended
December 31, 2015
resulted in proportionately more income in higher tax jurisdictions in that period.
Included in long-term income taxes payable in the condensed consolidated balance sheets as of
March 31, 2016
and
December 31, 2016
were unrecognized tax benefits of
$12.7 million
, which would favorably impact the effective tax rate in future periods if recognized. The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense in the condensed consolidated statements of operations. The accrued interest related to unrecognized tax benefits was
$1.6 million
and
$1.7 million
as of
March 31, 2016
and
December 31, 2016
, respectively.
No
penalties have been accrued.
The Company and its subsidiaries are subject to taxation in the U.S. and various foreign and state jurisdictions. All U.S. federal tax matters have been concluded for tax years prior to fiscal year 2013. The California Franchise Tax Board completed its examination of the Company's 2007 and 2008 tax years. The Company received a Notice of Proposed Assessment and responded by filing a protest letter. The amount of the proposed assessment is not material. Foreign income tax matters for material tax jurisdictions have been concluded for tax years prior to fiscal year 2011, except for the United Kingdom, which has been concluded for tax years prior to fiscal year 2015.
The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations; however, the outcome of such examinations cannot be predicted with certainty. If any issues addressed in the tax examinations are resolved in a manner inconsistent with the Company's expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. The timing of any resolution and/or closure of tax examinations is not certain.
13. COMPUTATION OF EARNINGS PER COMMON SHARE
The Company has a share-based compensation plan under which employees, non-employee directors, and consultants may be granted share-based awards, including shares of restricted stock on which non-forfeitable dividends are paid on unvested shares. As such, shares of restricted stock are considered participating securities under the two-class method of calculating earnings per share. The two-class method of calculating earnings per share did not have a material impact on the Company's earnings per share calculation for the
three and nine
month periods ending
December 31, 2015
and
2016
.
The following table sets forth the computation of basic and diluted earnings per common share for the
three and nine
months ended
December 31, 2015
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
(in thousands, except per share data)
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
16,288
|
|
|
$
|
22,221
|
|
|
$
|
55,412
|
|
|
$
|
63,082
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares-basic
|
|
32,579
|
|
|
32,242
|
|
|
34,723
|
|
|
32,260
|
|
Dilutive effect of employee equity incentive plans
|
|
680
|
|
|
584
|
|
|
865
|
|
|
635
|
|
Weighted average common shares-diluted
|
|
33,259
|
|
|
32,826
|
|
|
35,588
|
|
|
32,895
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.50
|
|
|
$
|
0.69
|
|
|
$
|
1.60
|
|
|
$
|
1.96
|
|
Diluted earnings per common share
|
|
$
|
0.49
|
|
|
$
|
0.68
|
|
|
$
|
1.56
|
|
|
$
|
1.92
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive securities excluded from diluted earnings per common share because their effect is anti-dilutive
|
|
353
|
|
|
473
|
|
|
289
|
|
|
573
|
|
14. REVENUE AND MAJOR CUSTOMERS
The Company designs, manufactures, markets, and sells headsets for business and consumer applications, and other specialty products for the hearing impaired. With respect to headsets, it makes products for use in offices and contact centers and, with mobile devices, cordless phones, computers, and gaming consoles.
The following table presents net revenues by product group for the
three and nine
months ended
December 31, 2015
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
(in thousands)
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
Net revenues from unaffiliated customers:
|
|
|
|
|
|
|
|
|
Enterprise
|
|
$
|
158,251
|
|
|
$
|
157,345
|
|
|
$
|
470,476
|
|
|
$
|
467,784
|
|
Consumer
|
|
67,484
|
|
|
75,588
|
|
|
176,634
|
|
|
204,438
|
|
Total net revenues
|
|
$
|
225,735
|
|
|
$
|
232,933
|
|
|
$
|
647,110
|
|
|
$
|
672,222
|
|
For reporting purposes, revenue is attributed to each geographic region based on the location of the customer. Other than the U.S., no country accounted for 10% or more of the Company's net revenues for the
three and nine
months ended
December 31, 2015
and
2016
. The following table presents net revenues by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
(in thousands)
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
Net revenues from unaffiliated customers:
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
122,075
|
|
|
$
|
123,719
|
|
|
$
|
363,456
|
|
|
$
|
371,019
|
|
|
|
|
|
|
|
|
|
|
Europe and Africa
|
|
62,292
|
|
|
63,233
|
|
|
164,117
|
|
|
168,722
|
|
Asia Pacific
|
|
27,506
|
|
|
27,164
|
|
|
82,240
|
|
|
81,979
|
|
Americas, excluding U.S.
|
|
13,862
|
|
|
18,817
|
|
|
37,297
|
|
|
50,502
|
|
Total international net revenues
|
|
103,660
|
|
|
109,214
|
|
|
283,654
|
|
|
301,203
|
|
Total net revenues
|
|
$
|
225,735
|
|
|
$
|
232,933
|
|
|
$
|
647,110
|
|
|
$
|
672,222
|
|
No customer accounted for more than 10% of net revenues for the
three and nine
months ended
December 31, 2015
.
One
customer, Ingram Micro Group, accounted for
10.5%
and
10.6%
, respectively, of net revenues for the
three and nine
months ended
December 31, 2016
, respectively.
One customer, SYNNEX Corporation, accounted for
11.2%
of total net accounts receivable at
March 31, 2016
.
One
customer, Ingram Micro Group, accounted for
11.9%
of total net accounts receivable at
December 31, 2016
.
15. SUBSEQUENT EVENTS
On
January 31, 2017
, the Company announced that its Audit Committee had declared and approved the payment of a dividend of
$0.15
per share on
March 10, 2017
to holders of record on
February 21, 2017
.