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PLT > SEC Filings for PLT > Form 10-Q on 1-Nov-2012All Recent SEC Filings

Show all filings for PLANTRONICS INC /CA/

Form 10-Q for PLANTRONICS INC /CA/


1-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

CERTAIN FORWARD-LOOKING INFORMATION:

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 ("Securities Act") and
Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"). Forward-looking statements may generally be identified by the use of such words as "expect," "anticipate," "believe," "intend," "plan," "potential," "will," "shall" or variations of such words and similar expressions, or the negative of these terms. Specific forward-looking statements contained within this Form 10-Q include statements regarding (i) the launch of additional Unified Communications ("UC") products and new Mobile products, (ii) our long-term strategy to invest in UC, (iii) the future of UC technologies, including the effect on headset adoption and use, the effects on enterprises that adopt UC and our expectation concerning our revenue opportunity from UC, (iv) our research and development strategy, including our investments in strategic architecting and strategic partnerships, (v) the Plantronics Developer Connection, (vi) our expectations regarding our sales force and customer service operations, (vii) our expenses, including research, development and engineering expenses and selling, general and administrative expenses, (viii) our future tax rate, (ix) our anticipated capital expenditures for the remainder of fiscal year 2013, (x) the sufficiency of our cash, cash equivalents and cash from operations, (xi) our planned investment of and need for our foreign cash and our ability to repatriate that cash, (xii) our ability to draw funds on our credit facility as needed, and (xiii) the outcome and effect of legal proceedings, as well as other statements regarding our future operations, financial condition and prospects and business strategies. Such forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. Factors that could cause actual results and events to differ materially from such forward-looking statements are included, but not limited to, those discussed in the section entitled "Risk Factors" herein and other documents filed with the Securities and Exchange Commission ("SEC") including our Annual Report on Form 10-K for the fiscal year ended March 31, 2012. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

OVERVIEW

We are a leading designer, manufacturer, and marketer of lightweight communications headsets, telephone headset systems, and accessories for the worldwide business and consumer markets under the Plantronics brand. In addition, we manufacture and market, under our Clarity brand, specialty telephone products, such as telephones for the hearing impaired, and other related products for people with special communication needs.

We ship a broad range of products to approximately 60 countries through a worldwide network of distributors, retailers, wireless carriers, original equipment manufacturers ("OEMs"), and telephony service providers. We have well-developed distribution channels in North America, Europe, Australia and New Zealand, where use of our products is widespread. Our distribution channels in other regions of the world are less mature and, while we primarily serve the contact center markets in those regions, we continue to expand into the office, mobile and entertainment, digital audio and specialty telephone markets.

We believe Unified Communications ("UC") represents the key long-term driver of our revenue and profit growth, and it continues to be our primary focus area. UC is the integration of voice and video based communications systems enhanced with software applications and Internet Protocol ("IP") networks. Business communications are being transformed from voice-centric systems supported by traditional PBX infrastructure to communication systems that are fully integrated with voice, video, and data and are supported by feature rich UC software. With this transformation, the requirement for a traditional headset used only for voice communications continues to evolve into the need for a device that delivers contextual intelligence, providing the ability to reach others using the mode of communication that is most effective, on the device that is most convenient, and with control over when and how they can be reached. Our portfolio of UC solutions combines hardware with advanced sensor technology and capitalizes on contextual intelligence, addressing the needs of the constantly changing business environments and evolving work styles to make connecting easier and by sharing presence information to convey user availability and other contextual information. We believe UC systems will become more commonly adopted by enterprises to reduce costs and improve collaboration, and we believe our solutions with Simply Smarter CommunicationsTM technology will be an important part of the UC environment.

The contact center is the most mature market in which we participate, and we expect this market to grow slowly over the long-term. We believe the growth of UC will increase overall headset adoption in enterprise environments and we therefore expect most of the growth in Office and Contact Center ("OCC") over the next five years to come from headsets designed for UC.


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The Mobile Bluetooth market has been impacted by economic conditions and consumer confidence, and while the retail market in the U.S. has been slowing, international markets have been growing, particularly in emerging market countries. Overall, we expect this category to show modest growth over the long term. Within the overall market, the stereo product category shows significant growth, while the mono category is slowing or declining. Following a period of market share loss due to a less competitive product portfolio as a result of prioritizing UC investments, we believe our new product launches and recent planned investments will help position us to maintain share in the Mobile Bluetooth market.

Integral to our core research and development have been investments in firmware and software engineering to enhance the broad compatibility of our products in the enterprise systems with which they will be deployed, and development of value-added software applications for business users has been the focus of our core research and development efforts. We believe our investments in strategic architecting may allow us to differentiate our products and sustain strong long-term gross margins. We continue to strengthen our strategic partnerships with platform suppliers to ensure that our products are compatible with all major platforms as UC usage becomes an essential part of a unified work environment.

We remain cautious about the macroeconomic environment, based on increasingly mixed economic signs in the U.S. and the recurrence of recession in many parts of Europe and Asia Pacific which makes it difficult for us to predict what impact the economy may have on our future business. We will continue to monitor our expenditures and prioritize expenditures that further our strategic long-term growth opportunities such as innovative product development in our core research and development efforts, including the use of software and services as part of our portfolio. In furtherance of our commitment to UC, in May 2012, we announced the Plantronics Developer Connection (the "PDC"), which provides a software developer kit allowing registered developers access to a rich set of tools and providing a forum to interact, share ideas and develop innovative applications. We believe the PDC is a valuable resource for application developers to leverage the contextual intelligence built into our headsets, ultimately providing a broad array of capabilities such as user authentication, customer information retrieval based on incoming mobile calls, and connecting a user's physical actions in the real world to the virtual world. We will also continue to grow and develop our sales force and increase marketing and other customer service and support as we expand key strategic partnerships to market our UC products. We believe we have an excellent position in the UC market and a well-deserved reputation for quality and service that we will maintain through ongoing investment and strong execution.

RESULTS OF OPERATIONS

The following tables set forth, for the periods indicated, the Condensed
consolidated statements of operations data, which is derived from the
accompanying unaudited Condensed consolidated financial statements. The
financial information and ensuing discussion should be read in conjunction with
the accompanying unaudited Condensed consolidated financial statements and notes
thereto.

                                  Three Months Ended September 30,                 Six Months Ended September 30,
(in thousands except
percentages)                        2012                    2011                    2012                    2011
Net revenues                $ 179,280     100.0 %   $ 176,948     100.0 %   $ 360,645     100.0 %   $ 352,548     100.0 %
Cost of revenues               82,052      45.8 %      77,982      44.1 %     165,721      46.0 %     159,524      45.2 %
Gross profit                   97,228      54.2 %      98,966      55.9 %     194,924      54.0 %     193,024      54.8 %
Operating expenses:
Research, development and
engineering                    19,581      10.9 %      17,651      10.0 %      39,277      10.9 %      34,557       9.8 %
Selling, general and
administrative                 43,130      24.1 %      44,418      25.1 %      89,034      24.7 %      86,534      24.5 %
Total operating expenses       62,711      35.0 %      62,069      35.1 %     128,311      35.6 %     121,091      34.3 %
Operating income               34,517      19.3 %      36,897      20.9 %      66,613      18.5 %      71,933      20.4 %
Interest and other income
(expense), net                    275       0.2 %         (58 )       - %         287       0.1 %         583       0.2 %
Income before income
taxes                          34,792      19.4 %      36,839      20.8 %      66,900      18.6 %      72,516      20.6 %
Income tax expense              8,868       4.9 %       9,318       5.3 %      17,413       4.8 %      18,264       5.2 %
Net income                  $  25,924      14.5 %   $  27,521      15.6 %   $  49,487      13.7 %   $  54,252      15.4 %


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NET REVENUES

                                  Three Months Ended                                  Six Months Ended
                                    September 30,                Increase               September 30,              Increase
(in thousands except
percentages)                      2012          2011            (Decrease)           2012          2011           (Decrease)
Net revenues from
unaffiliated customers:
Office and Contact Center     $  133,119     $ 136,395     $ (3,276 )   (2.4 )%   $ 267,152     $ 267,394     $  (242 )   (0.1)%
Mobile                            33,305        28,341        4,964     17.5  %      69,462        60,505       8,957     14.8%
Gaming and Computer Audio          7,797         8,381         (584 )   (7.0 )%      14,586        15,776      (1,190 )   (7.5)%
Clarity                            5,059         3,831        1,228     32.1  %       9,445         8,873         572      6.4%
Total net revenues            $  179,280     $ 176,948     $  2,332      1.3  %   $ 360,645     $ 352,548     $ 8,097      2.3%

OCC products include UC products and represent our largest source of revenues, while Mobile products represent our largest unit volumes. Net revenues may vary due to seasonality, the timing of new product introductions and discontinuation of existing products, discounts and other incentives, and channel mix. Net revenues derived from sales into the retail channel typically account for a seasonal increase in our total net revenues in the third quarter of our fiscal year.

Net revenues increased in the second quarter of fiscal year 2013 over the same period a year ago as a result of higher Mobile revenues driven by increased product placements, partly offset by lower OCC revenue resulting from economic weakness in international markets including a stronger U.S. Dollar ("USD") primarily against the Euro. UC revenues have continued to grow, offset by declines in other OCC products due primarily to weak economic conditions in international markets.

Net revenues increased in the six months ended September 30, 2012 over the same period a year ago primarily as a result of higher Mobile revenues due to increased product placements. UC revenues have continued to grow, offset by declines in other OCC products due primarily to weak economic conditions in international markets.

Geographical Information

                           Three Months Ended                                  Six Months Ended
                              September 30,               Increase               September 30,               Increase
(in thousands except
percentages)               2012          2011            (Decrease)           2012          2011            (Decrease)
Net revenues from
unaffiliated
customers:
U.S.                    $ 107,513     $ 101,196     $ 6,317       6.2  %   $ 211,591     $ 201,487     $ 10,104       5.0  %
As a percentage of
net revenues                 60.0 %        57.2 %       2.8     ppt.            58.7 %        57.2 %        1.5     ppt.
Europe and Africa          38,951        42,383      (3,432 )    (8.1 )%      80,527        84,523       (3,996 )    (4.7 )%
Asia Pacific               19,839        21,206      (1,367 )    (6.4 )%      43,418        41,464        1,954       4.7  %
Americas, excluding
U.S.                       12,977        12,163         814       6.7  %      25,109        25,074           35       0.1  %
Total international
net revenues               71,767        75,752      (3,985 )    (5.3 )%     149,054       151,061       (2,007 )    (1.3 )%
As a percentage of
net revenues                 40.0 %        42.8 %      (2.8 )   ppt.            41.3 %        42.8 %       (1.5 )   ppt
Total net revenues      $ 179,280     $ 176,948     $ 2,332       1.3  %   $ 360,645     $ 352,548     $  8,097       2.3  %

Prior to the first quarter of fiscal year 2013, net revenues from the Middle East were included in Europe and Africa ("E&A"), formerly referred to as Europe, Middle East and Africa ("EMEA"). In the first quarter of fiscal year 2013, net revenues from the Middle East were included in Asia Pacific ("APAC") and prior period net revenues have been reclassified to conform to the current period presentation.

U.S. net revenues increased in the three and six months ended September 30, 2012, as compared to the same periods in the prior year, due primarily to growth in OCC and Mobile product revenues.


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International net revenues decreased in the three and six months ended September 30, 2012 as compared to the same periods in the prior year. Net revenues in the E&A region decreased due to economic weakness in Europe which resulted in lower demand primarily for OCC products and a stronger USD primarily against the Euro. Net revenues in the APAC region decreased in the three months ended September 30, 2012 as compared to the same period in the prior year, due primarily to lower demand for OCC products, offset by increased revenue from sales of Mobile products as a result of increased product placements. In the six months ended September 30, 2012 as compared to the same period in the prior year, APAC revenues increased due mostly to an increase in Mobile product placements.

COST OF REVENUES AND GROSS PROFIT

Cost of revenues consists primarily of direct manufacturing and contract
manufacturer costs, warranty expense, freight expense, depreciation, duty
expense, reserves for excess and obsolete inventory, royalties, and an
allocation of overhead expenses, including IT and facilities costs.

                               Three Months Ended                                  Six Months Ended
                                  September 30,               Increase               September 30,              Increase
(in thousands except
percentages)                   2012          2011            (Decrease)           2012          2011           (Decrease)
Net revenues                $ 179,280     $ 176,948     $  2,332      1.3  %   $ 360,645     $ 352,548     $ 8,097      2.3 %
Cost of revenues               82,052        77,982        4,070      5.2  %     165,721       159,524       6,197      3.9 %
Gross profit                $  97,228     $  98,966     $ (1,738 )   (1.8 )%   $ 194,924     $ 193,024     $ 1,900      1.0 %
Gross profit %                   54.2 %        55.9 %       (1.7 )   ppt.         54.0%      54.8%            (0.8 )   ppt.

As a percentage of net revenues, gross profit decreased slightly in the three and six months ended September 30, 2012 compared to the same periods a year ago due primarily to an unfavorable product mix with a lower proportion of overall revenue in OCC products and a stronger USD primarily against the Euro. In the six months ended September 30, 2012 compared to the same period a year ago, these unfavorable effects were partly offset by lower warranty requirements and favorable variable manufacturing costs.

There are significant variances in gross profit percentages between our higher and our lower margin products; therefore, small variations in product mix, which can be difficult to predict, can have a significant impact on gross profit. In addition, if we do not accurately anticipate changes in demand, we have in the past, and may in the future, incur significant costs associated with writing off excess and obsolete inventory or incur charges for adverse purchase commitments. Gross profit may also vary based on distribution channel, return rates, and other factors.

RESEARCH, DEVELOPMENT AND ENGINEERING

Research, development and engineering costs are expensed as incurred and consist
primarily of compensation costs, outside services, including legal fees
associated with protecting our intellectual property, expensed materials, travel
expenses, depreciation, and an allocation of overhead expenses, including
facilities, IT, human resources, and legal costs.

                             Three Months Ended                               Six Months Ended
                               September 30,              Increase              September 30,             Increase
(in thousands except
percentages)                 2012          2011          (Decrease)           2012         2011          (Decrease)
Research, development
and engineering           $  19,581     $ 17,651     $ 1,930      10.9 %   $ 39,277     $ 34,557     $ 4,720     13.7 %
% of net revenues              10.9 %       10.0 %       0.9     ppt.          10.9 %        9.8 %       1.1     ppt.

During the three and six months ended September 30, 2012, research, development and engineering expenses increased as compared to the same period a year ago due primarily to an increase in our investment in UC products and other product categories. This investment consisted primarily of engineering headcount resulting in increased compensation expenses of $1.2 million and $3.3 million, respectively, and higher project expenses associated with new products.


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SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses consist primarily of compensation
costs, marketing costs, travel expenses, litigation and professional service
fees, and allocations of overhead expenses, including IT, facilities, legal
costs, and human resources.

                            Three Months Ended                                 Six Months Ended
                              September 30,               Increase               September 30,             Increase
(in thousands except
percentages)                2012          2011           (Decrease)            2012         2011          (Decrease)
Selling, general and
administrative           $  43,130     $ 44,418     $ (1,288 )    (2.9 )%   $ 89,034     $ 86,534     $ 2,500       2.9 %
% of net revenues             24.1 %       25.1 %       (1.0 )   ppt.           24.7 %       24.5 %       0.2     ppt.

In the three months ended September 30, 2012, compared to the same period a year ago, selling, general and administrative expenses decreased slightly, primarily as a result of a $1.1 million decrease in promotional expenses.

In the six months ended September 30, 2012, compared to the same period a year ago, selling, general and administrative expenses increased slightly primarily as a result of higher compensation costs of $3.8 million primarily as a result of increased headcount in our field sales functions to support UC and growth in emerging markets, partially offset by lower professional service fees.

INTEREST AND OTHER INCOME (EXPENSE), NET

                            Three Months Ended                                 Six Months Ended
                               September 30,               Increase              September 30,             Increase
(in thousands except
percentages)                2012           2011           (Decrease)           2012          2011         (Decrease)
Interest and other
income (expense), net    $    275       $    (58 )   $  333     (574.1 )%   $    287       $  583      (296 )   (50.8 )%
% of net revenues             0.2 %            - %      0.2     ppt.             0.1 %        0.2 %    (0.1 )   ppt.

In the three months ended September 30, 2012, compared to the same period a year ago, interest and other income (expense), net increased due primarily to lower foreign exchange losses resulting from fluctuations in the USD against the Great Britain Pound and the Euro.

In the six months ended September 30, 2012, compared to the same period a year ago, interest and other income (expense), net decreased due primarily to higher cumulative interest expense on our revolving line of credit in the six months ended September 30, 2012.

INCOME TAX EXPENSE

                            Three Months Ended                                 Six Months Ended
                              September 30,               Increase               September 30,              Increase
(in thousands except
percentages)                2012          2011           (Decrease)            2012         2011           (Decrease)
Income before income
taxes                    $  34,792     $ 36,839     $ (2,047 )    (5.6 )%   $ 66,900     $ 72,516     $ (5,616 )    (7.7 )%
Income tax expense           8,868        9,318         (450 )    (4.8 )%     17,413       18,264         (851 )    (4.7 )%
Net income               $  25,924     $ 27,521     $ (1,597 )    (5.8 )%   $ 49,487     $ 54,252     $ (4,765 )    (8.8 )%
Effective tax rate            25.5 %       25.3 %        0.2     ppt.           26.0 %       25.2 %        0.8     ppt.

The higher effective tax rate for the three and six months ended September 30, 2012 is due primarily to the expiration of the federal tax research credit in December 2011. Our effective tax rates differ from the statutory rate due to the impact of foreign operations taxed at different statutory rates, tax credits, state taxes and other factors. Our future tax rates could be impacted by a shift in the mix of domestic and foreign income, tax treaties with foreign jurisdictions, changes in tax laws in the U.S. or internationally, or a change in estimates of future taxable income which could result in a valuation allowance being required.


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We and our subsidiaries are subject to taxation in various foreign and state jurisdictions including the U.S. We are under examination by the Internal Revenue Service for our 2010 tax year and the California Franchise Tax Board for our 2007 and 2008 tax years. Foreign income tax matters for material tax jurisdictions have been concluded for tax years prior to fiscal year 2006, except the United Kingdom for which tax matters have been concluded for tax years prior to fiscal year 2011.

FINANCIAL CONDITION

The table below provides selected Condensed consolidated cash flow information
for the periods presented:

                                                             Six Months Ended
                                                              September 30,           Increase
(in thousands)                                              2012         2011        (Decrease)
Cash provided by operating activities                    $ 60,024     $  56,580     $     3,444
Cash (used for) provided by investing activities          (34,664 )      10,083         (44,747 )
Cash used for financing activities                        (25,582 )    (164,624 )       139,042
Effect of exchange rate changes on cash and cash
equivalents                                                (1,184 )      (1,037 )          (147 )
Net decrease in cash and cash equivalents                $ (1,406 )   $ (98,998 )   $    97,592

Cash Provided by Operating Activities

For the six months ended September 30, 2012, the primary source of our $60.0 million net cash provided by operating activities was net income of $49.5 million, increased by the effect of non-cash expenses of $17.4 million associated with depreciation and amortization and stock-based compensation, and a $2.7 million income tax benefit associated with stock option exercises, offset in part by a $3.7 million benefit from the change in deferred income taxes. In addition, net cash flows provided by changes in operating assets and liabilities was $7.4 million. The primary sources of cash from changes in operating assets and liabilities related to a decrease in accounts receivable from customer payments and an increase in income taxes payable due to the timing of payments remitted to tax authorities. The primary uses of cash from changes in operating assets and liabilities were for payments of our accounts payable and increased inventory levels. Our days sales outstanding ("DSO") as of September 30, 2012 increased to 54 days from 52 days in September 30, 2011 due primarily to the impact of foreign currency fluctuations. Inventory turns increased to 5.3 as of September 30, 2012 from 5.1 in the same period in the prior year due primarily to increased cost of revenues in line with our increased revenues, partly driven by new product launches.

For the six months ended September 30, 2011, the primary source of our $56.6 million net cash provided by operating activities was net income of $54.3 million increased by the effect of non-cash expenses of $15.5 million associated with depreciation and amortization and stock-based compensation, and a $1.9 . . .

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