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PLT > SEC Filings for PLT > Form 10-K on 16-May-2014All Recent SEC Filings

Show all filings for PLANTRONICS INC /CA/

Form 10-K for PLANTRONICS INC /CA/


16-May-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to help you understand our results of operations and financial condition. It is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements. Please see the sections entitled "Certain Forward Looking Information" and "Risk Factors" above for discussions of the uncertainties, risks, and assumptions associated with these statements. Our fiscal year-end financial reporting periods end on the Saturday closest to March 31st. Fiscal years 2014, 2013, and 2012 each had 52 weeks and ended on March 29, 2014, March 30, 2013, and March 31, 2012, respectively. For purposes of presentation, we have indicated our accounting fiscal year as ending on March 31.

OVERVIEW

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

Our priorities during fiscal year 2014 were to deliver profitable growth in Unified Communications ("UC") and all other areas of our business, extend our brand, expand our consumer reach, scale for growth, and optimize our culture. To execute on the first two priorities, our operating plan for the fiscal year included significant new investments in our global sales force and research and development capabilities, which have largely occurred. To expand our consumer reach, our fiscal year 2014 product development roadmap included the launches of new products targeted toward the fastest-growing segments of the consumer headset market, such as the stereo headset market, as well as development efforts for additional new consumer products to be launched in fiscal year 2015 and beyond. We made major capital investments in our infrastructure to scale for growth with a new manufacturing facility in Tijuana, Mexico and a reimplementation of our global ERP system. We also invested in our workspaces around the world to enable Smarter Working and promote innovation, productivity and employee well-being.

Net revenues increased to $818.6 million in fiscal year 2014, growing 7.4% over the prior year. UC product revenues increased, growing by 26.7% over the prior year to $165.8 million. We believe our innovation and breakthroughs in contextual intelligence and other product features and enhancements spurred this growth. Our increased investments in research and development versus a year ago yielded increased functionality for UC endpoints and successful launches of new consumer products in key markets.

We also continued to invest in our global sales force in order to bring these and other products to the marketplace. Despite macroeconomic headwinds in some of our key markets, we achieved strong financial results, delivering $112.4 million in net income, representing approximately 14% of our net revenues.

We believe UC represents our key long-term driver of revenue and profit growth, and it continues to be our primary focus area. Business communications are 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 a device that delivers contextual intelligence, providing the ability to reach people using the mode of communication that is most effective, on the device that is most convenient, and with control over when and how they can be reached. Our portfolio of UC solutions combines hardware with advanced sensor technology and capitalizes on contextual intelligence, addressing the needs of 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 Communications® 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. Given the migration to UC by corporations globally, we also expect the market for headsets for non-UC enterprise applications to grow very slowly, if at all. 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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In fiscal year 2014, we built on the traction gained during fiscal year 2013 in our Bluetooth product portfolio, which included Voyager Legend and Marque in the mono Bluetooth category, and BackBeat GO 2 in the stereo Bluetooth category. These products led a strong performance across our Mobile Bluetooth portfolio in the year, allowing us to participate fully in market opportunities around the world. We believe we gained share in both stereo and mono Bluetooth categories during fiscal year 2014 and we anticipate that our planned investments in these categories will help position us to maintain or grow share as opportunities in these markets continue to expand.

Integral to our core research and development in fiscal year 2014 were investments in firmware and software engineering to enhance the broad compatibility of our products in the enterprise systems with which they will be deployed, and development of value-added software applications for business users. We believe these investments in software development will help us to differentiate our products and maintain long-term gross margins within our business model. We continue to strengthen our strategic partnerships with Unified Communications platform suppliers to maintain compatibility of our products with all major platforms as UC usage becomes an essential part of a the enterprise communications landscape.

Looking forward to fiscal year 2015, we continue to believe that UC is a key long-term driver of revenue and profit growth. We remain cautious about the macroeconomic environment but note the general improvement in the worldwide economy. We will continue to invest prudently in our long-term growth opportunities. We will continue focusing on innovative product development through our core research and development efforts. We will also continue to grow 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 market and a well-deserved reputation for quality and service that we will continually strive to earn through ongoing investment and strong execution.

RESULTS OF OPERATIONS

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

(in thousands)                                     Fiscal Year Ended March 31,
                                        2014                   2013                   2012
Net revenues                    $ 818,607    100.0 %   $ 762,226    100.0 %   $ 713,368    100.0 %
Cost of revenues                  391,979     47.9 %     359,045     47.1 %     329,017     46.1 %
Gross profit                      426,628     52.1 %     403,181     52.9 %     384,351     53.9 %
Operating expenses:
Research, development and
engineering                        84,781     10.4 %      80,373     10.5 %      69,664      9.8 %
Selling, general and
administrative                    201,176     24.6 %     182,445     23.9 %     173,334     24.3 %
Restructuring and other
related charges                       547      0.1 %       2,266      0.3 %           -        - %
Total operating expenses          286,504     35.0 %     265,084     34.8 %     242,998     34.1 %
Operating income                  140,124     17.1 %     138,097     18.1 %     141,353     19.8 %
Interest and other income
(expense), net                      1,015      0.1 %         328        - %       1,249      0.2 %
Income before income taxes        141,139     17.2 %     138,425     18.2 %     142,602     20.0 %
Income tax expense                 28,722      3.5 %      32,023      4.2 %      33,566      4.7 %
Net income                      $ 112,417     13.7 %   $ 106,402     14.0 %   $ 109,036     15.3 %


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Net Revenues

                        Fiscal Year Ended                                     Fiscal Year Ended
                    March 31,      March 31,                              March 31,      March 31,
(in thousands)         2014           2013              Change               2013           2012              Change
Net revenues:
OCC                $  588,265     $  549,301     $ 38,964       7.1  %   $  549,301     $  531,709     $ 17,592      3.3  %
Mobile                186,206        163,460       22,746      13.9  %      163,460        131,825       31,635     24.0  %
Gaming and
Computer Audio         29,674         30,747       (1,073 )    (3.5 )%       30,747         31,855       (1,108 )   (3.5 )%
Clarity                14,462         18,718       (4,256 )   (22.7 )%       18,718         17,979          739      4.1  %
Total net
revenues           $  818,607     $  762,226     $ 56,381       7.4  %   $  762,226     $  713,368     $ 48,858      6.8  %

OCC products 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 of consumer goods into the retail channel typically account for a seasonal increase in net revenues in the third quarter of our fiscal year.

Our net revenues increased in fiscal year 2014 compared to fiscal year 2013 driven by growth in OCC revenues, which was mainly attributable to growth in demand for UC products, although our core OCC business also grew slightly. We also enjoyed substantial growth in Mobile product revenues as a result of our stronger portfolio of Mobile products, which drove strong double-digit growth in the Americas. A weaker U.S. Dollar ("USD") compared to the Euro ("EUR") and British Pound Sterling ("GBP") increased net revenues by approximately $2.3 million in fiscal year 2014 compared to fiscal year 2013, net of the effects of hedging.

Our net revenues increased in fiscal year 2013 compared to fiscal year 2012 driven by growth in Mobile product revenues as a result of our stronger portfolio of Mobile products and increased demand attributable to hands-free laws enacted in the People's Republic of China (PRC) during the fiscal year. OCC product revenues also increased, primarily as a result of growth in demand for UC. Unfavorable foreign exchange fluctuations in the EUR and GBP reduced net revenues by approximately $6.1 million in fiscal year 2013 compared to fiscal year 2012, net of the effects of hedging.

Geographic Information

                               Fiscal Year Ended                                         Fiscal Year Ended
(in thousands)         March 31, 2014     March 31, 2013         Change          March 31, 2013     March 31, 2012          Change
Net revenues:
United States         $      475,278     $      436,447     $ 38,831     8.9%   $      436,447     $      406,233     $ 30,214     7.4%
As a percentage of
net revenues                    58.1 %             57.3 %                                 57.3 %             56.9 %
Europe and Africa            195,385            181,439       13,946     7.7%          181,439            177,157        4,282     2.4%
Asia Pacific                  94,455             92,193        2,262     2.5%           92,193             78,853       13,340     16.9%
Americas, excluding
United States                 53,489             52,147        1,342     2.6%           52,147             51,125        1,022     2.0%
Total international
net revenues                 343,329            325,779       17,550     5.4%          325,779            307,135       18,644     6.1%
As a percentage of
net revenues                    41.9 %             42.7 %                                 42.7 %             43.1 %
Total net revenues    $      818,607     $      762,226     $ 56,381     7.4%   $      762,226     $      713,368     $ 48,858     6.8%

As a percentage of total net revenues, U.S. net revenues increased slightly in fiscal year 2014 compared to fiscal year 2013, with international revenues, as a percentage of total net revenues, correspondingly decreasing. The increase in absolute dollars in U.S. net revenues resulted in roughly equal measure from increased OCC net revenues due to continued growth in demand for UC and increased Mobile revenues as a result of an improved product portfolio. The increase in absolute dollars in international revenues was also due almost entirely to increased OCC net revenues due to continued growth in demand for UC. A weaker US Dollar compared to the EUR and GBP resulted in increased international net revenues of approximately $2.3 million in fiscal year 2014 compared to fiscal year 2013, net of the effects of hedging.


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As a percentage of total net revenues, U.S. net revenues remained flat in fiscal year 2013 compared to fiscal year 2012. As a percentage of total net revenues, international net revenues also remained flat in fiscal year 2013 compared to fiscal year 2012. The increase in absolute dollars in U.S. net revenues resulted from increased OCC net revenues due to continued growth in demand for UC. The increase in absolute dollars in international revenues was due primarily to increased Mobile net revenues, driven mainly by increased demand attributable to hands-free laws enacted in the PRC during the fiscal year and to a lesser extent, the benefit of a stronger portfolio, especially in Europe and Africa. International revenues were reduced by approximately $6.1 million in fiscal year 2013 compared to fiscal year 2012, due to unfavorable foreign exchange fluctuations in the EUR and GBP, net of the effects of hedging.

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 facilities, IT, and human resources
costs.

                            Fiscal Year Ended                                           Fiscal Year Ended
(in thousands)      March 31, 2014     March 31, 2013          Change           March 31, 2013     March 31, 2012           Change
Net revenues       $      818,607     $      762,226     $ 56,381      7.4 %   $      762,226     $      713,368     $ 48,858       6.8 %
Cost of revenues          391,979            359,045       32,934      9.2 %          359,045            329,017       30,028       9.1 %
Gross profit       $      426,628     $      403,181     $ 23,447      5.8 %   $      403,181     $      384,351     $ 18,830       4.9 %
Gross profit %               52.1 %             52.9 %                                   52.9 %             53.9 %

The increase in gross profit in fiscal year 2014 compared to fiscal year 2013 was due primarily to the increase in net revenues. As a percentage of net revenues, gross profit decreased primarily from our UC revenues growing faster than our overall OCC revenues. UC products carry lower margins than our other OCC products. Secondarily, revenues from Mobile products, which carry lower margins than our weighted average margin, grew faster than our overall revenues.

The increase in gross profit in fiscal year 2013 compared to fiscal year 2012 was due primarily to the increase in net revenues. As a percentage of net revenues, gross profit decreased primarily from the effect of product mix being weighted more heavily to Mobile products, resulting from demand attributable to hands-free laws enacted in the PRC during the fiscal year and to a lesser extent, from the effect of a stronger U.S. dollar.

There are significant variances in gross profit percentages between our higher and lower margin products; therefore, small variations in product mix, which can be difficult to predict, can have a significant impact on gross profit. 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,
depreciation, and an allocation of overhead expenses, including facilities, IT,
and human resources costs.

                           Fiscal Year Ended                                           Fiscal Year Ended
(in thousands)     March 31, 2014     March 31, 2013          Change           March 31, 2013     March 31, 2012           Change
Research,
development and
engineering       $       84,781     $       80,373     $ 4,408       5.5 %   $       80,373     $       69,664     $ 10,709      15.4 %
% of total net
revenues                    10.4 %             10.5 %                                   10.5 %              9.8 %


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The increase in research, development and engineering expenses in fiscal year 2014 compared to fiscal year 2013 was due primarily to $4.0 million in headcount-related costs, including increased salary expense, and performance-based compensation, including an increase to equity-based compensation resulting from restricted stock grants made after May 2013 which vest over three years, compared to restricted stock granted prior to May 2013 which vests over four years.

The increase in research, development and engineering expenses in fiscal year 2013 compared to fiscal year 2012 was due primarily to $9.1 million in headcount-related costs, including increased salary expense, higher levels of performance-based compensation related to stronger achievement against targets and, to a lesser extent, various other support costs related to higher headcount.

Selling, General, and Administrative

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

                            Fiscal Year Ended                                           Fiscal Year Ended
(in thousands)      March 31, 2014     March 31, 2013          Change           March 31, 2013     March 31, 2012          Change
Selling, general
and
administrative     $      201,176     $      182,445     $ 18,731     10.3 %   $      182,445     $      173,334     $ 9,111      5.3 %
% of total net
revenues                     24.6 %             23.9 %                                   23.9 %             24.3 %

The increase in selling, general and administrative expenses in fiscal year 2014 compared to fiscal year 2013 was due primarily to $12.7 million in higher costs resulting from increased headcount, mainly resulting from our investment in Plantronics' global sales presence, and from higher performance-based compensation, including sales commissions, reflecting higher net revenues and higher overall achievement against targets. We also made investments in marketing programs of $4.6 million, including product launch activities and brand awareness campaigns.

The increase in selling, general and administrative expenses in fiscal year 2013 compared to fiscal year 2012 was due primarily to $9.3 million in higher compensation costs resulting from increased headcount, mainly resulting from our investment in Plantronics' global sales presence, and from higher performance-based compensation, including sales commissions, reflecting higher net revenues and higher overall achievement against targets. We also made investments in marketing programs of $3.7 million, including product launch activities and brand awareness campaigns.

Restructuring and Other Related Charges

                            Fiscal Year Ended                                                Fiscal Year Ended
(in thousands)     March 31, 2014       March 31, 2013           Change            March 31, 2013        March 31, 2012            Change
Restructuring
and other
related charges   $        547         $       2,266      $ (1,719 )   (75.9 )%   $        2,266       $          -         $ 2,266       100.0 %
% of total net
revenues                   0.1 %                 0.3 %                                       0.3 %                - %

We initiated a restructuring plan during the third quarter of fiscal year 2013. Under the plan, we eliminated certain positions in the U.S., Mexico, China, and Europe, and transitioned some of these positions to lower cost locations. We also vacated a portion of a leased facility at our corporate headquarters in the first quarter of fiscal year 2014. We incurred total pre-tax charges of approximately $2.8 million in connection with this plan. Going forward, savings from this plan will allow us to increase investments in areas that we believe will improve our business growth, particularly sales and marketing, by $4.0 million annually.

The pre-tax charges incurred during fiscal year 2013 included $1.9 million for severance and related benefits and an immaterial amount of accelerated amortization expense on leasehold improvement assets with no alternative future use. We recorded an immaterial amount for lease termination costs and the remaining accelerated depreciation on leasehold improvements when we exited the facility in the first quarter of fiscal year 2014. The plan was substantially complete by the end of the first quarter of fiscal year 2014.


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Income Tax Expense

                             Fiscal Year Ended                                            Fiscal Year Ended
(in thousands)       March 31, 2014     March 31, 2013           Change           March 31, 2013     March 31, 2012           Change
Income before
income taxes        $      141,139     $      138,425     $ 2,714       2.0  %   $      138,425     $      142,602     $ (4,177 )   (2.9 )%
Income tax
expense                     28,722             32,023      (3,301 )   (10.3 )%           32,023             33,566       (1,543 )   (4.6 )%
Net income          $      112,417     $      106,402     $ 6,015       5.7  %   $      106,402     $      109,036     $ (2,634 )   (2.4 )%
Effective tax
rate                          20.4 %             23.1 %                                    23.1 %             23.5 %

In comparison to fiscal year 2013, the decrease in the effective tax rate for fiscal year 2014 was due primarily to changes in Mexican tax law that resulted in the reversal of a valuation allowance, a deduction for qualifying domestic production activities, and the generation of a foreign tax credit carryover, offset by a decrease in the benefit from the U.S. federal research tax credit. The U.S. federal research tax credit expired December 31, 2013 and was therefore only available for three quarters in our fiscal year 2014, compared to fiscal year 2013, which included a full five quarters of benefit. Five quarters of benefit was recorded in fiscal year 2013 due to the timing of the retroactive reinstatement of the U.S. federal research tax credit. On January 2, 2013, the American Taxpayer Relief Act of 2012, which included a provision that retroactively extended the federal tax research credit to January 1, 2012 for two years, was signed into law. We recognized an approximate $1.8 million discrete tax benefit in the fourth quarter of fiscal year 2013 for the previously expired period from January 1, 2012 to December 31, 2012.

In comparison to fiscal year 2012, the decrease in the effective tax rate for fiscal year 2013, as described above, was due primarily to the increased benefit from the U.S. federal research tax credit in fiscal 2013 offset by a smaller proportion of income earned in foreign jurisdictions that is taxed at lower rates.

Our effective tax rate for fiscal years 2014, 2013, and 2012 differs from the statutory rate due to the impact of foreign operations taxed at different statutory rates, income tax credits, state taxes, and other factors. Our future tax rate 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 estimate of future taxable income, which could result in a valuation allowance being required.

We had $12.6 million of unrecognized tax benefits as of March 31, 2014 compared to $11.1 million and $11.1 million as of March 31, 2013 and 2012, respectively. The unrecognized tax benefits as of the end of fiscal year 2014 would favorably impact the effective tax rate in future periods, if recognized.

It is our continuing practice to recognize interest and/or penalties related to income tax matters in income tax expense. As of March 31, 2014, we had approximately $1.7 million of accrued interest related to uncertain tax positions, compared to $2.0 million and $1.7 million as of March 31, 2013 and 2012, respectively. No penalties have been accrued.

The liability for uncertain tax positions may be reduced for liabilities that are settled with taxing authorities or on which the statute of limitations could expire without assessment from tax authorities. Currently, we cannot reasonably estimate the amount of reductions, if any, during the next twelve months.

We and our subsidiaries are subject to taxation in various foreign and state jurisdictions, including the U.S. We are currently under examination by the Internal Revenue Service for our 2010 tax year. The California Franchise Tax Board completed its examination of our 2007 and 2008 tax years. We received a Notice of Proposed Assessment and responded by filing a protest letter. The amount of the proposed assessment is not material. Foreign income tax matters for material tax jurisdictions have been concluded for tax years prior to fiscal year 2007, except the United Kingdom for which tax matters have been concluded for tax years prior to fiscal year 2013.

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