UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
| (Mark One) | ||||
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
For the quarterly period ended December 31, 2003 | ||||
OR | ||||
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
For the transition period from ________to _________ | ||||
Commission file number 1-12696
Plantronics, Inc.
(Exact name of Registrantregistrant as Specifiedspecified in its Charter)charter)
Delaware | 77-0207692 | |
| ||
| (State or | (I.R.S. Employer Identification Number) |
345 Encinal Street
(831) 426-5858(Registrant's Telephone Number, Including Area Code)
| 345 Encinal Street | ||
| Santa Cruz, California 95060 | ||
(Address of principal executive offices) (Zip Code) | ||
| (831) 426-5858 | ||
| (Registrant's telephone number, including area code) | ||
| N/A | ||
| (Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X ] NO [ ]
Yesx Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) YES [X ] NO [ ].
Yesx Noo
The number of shares outstanding of Plantronics'Plantronics’ common stock as of October 24, 2003January 23, 2004 was 44,421,485.45,933,780.
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Plantronics, Inc.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION | Page No. |
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32 | |
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| 33 | |
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Item 1. FINANCIAL STATEMENTS
Financial Statements
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, September 30, 2003 2003 ------------ ------------ ASSETS Current assets: Cash, cash equivalents and marketable securities .. $ 59,725 $ 92,105 Accounts receivable, net .......................... 50,503 52,033 Inventory, net .................................... 33,758 37,764 Deferred income taxes ............................. 6,357 6,357 Other current assets .............................. 2,674 2,536 ------------ ------------ Total current assets .......................... 153,017 190,795 Property, plant and equipment, net ..................... 36,957 35,815 Intangibles, net ....................................... 3,682 3,355 Goodwill, net .......................................... 9,386 9,386 Other assets, net ...................................... 2,167 2,617 ------------ ------------ Total assets ................................... $ 205,209 $ 241,968 ============ ============LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities: Accounts payable .................................. $ 13,596 $ 18,243 Accrued liabilities ............................... 27,235 32,540 Income taxes payable .............................. 8,581 2,752 ------------ ------------ Total current liabilities ..................... 49,412 53,535 Deferred tax liability ................................. 8,867 8,867 ------------ ------------ Total liabilities .............................. 58,279 62,402 ------------ ------------ Stockholders' equity: Preferred stock, $0.01thousands, except par valueper share; 1,000 shares authorized, no shares outstanding......... -- -- Common stock, $0.01 par value per share; 100,000 shares authorized, 59,728 and 60,409 shares outstanding at March 31, 2003 and September 30, 2003, respectively............................... 597 604 Additional paid-in capital ........................ 158,160 169,031 Accumulated other comprehensive income (loss)...... 209 (552) Retained earnings ................................. 285,350 309,064 ------------ ------------ 444,316 478,147 Less: Treasury stock (common: 16,090 and 16,104 shares at March 31, 2003 and September 30, 2003, respectively) at cost ........................... (297,386) (298,581) ------------ ------------ Total stockholders' equity .................... 146,930 179,566 ------------ ------------ Total liabilities and stockholders' equity .... $ 205,209 $ 241,968 ============ ============
amounts)
March 31, | December 31, | ||||||
2003 | 2003 | ||||||
ASSETS | |||||||
| Current assets: | |||||||
Cash, cash equivalents and marketable securities | $ | 59,725 | $ | 107,329 | |||
Accounts receivable, net | 50,503 | 64,425 | |||||
Inventory, net | 33,758 | 39,178 | |||||
Deferred income taxes | 6,357 | 5,974 | |||||
Other current assets | 2,674 | 2,230 | |||||
Total current assets | 153,017 | 219,136 | |||||
Property, plant and equipment, net | 36,957 | 41,109 | |||||
Intangibles, net | 3,682 | 3,191 | |||||
Goodwill, net | 9,386 | 9,386 | |||||
Other assets, net | 2,167 | 2,642 | |||||
Total assets | $ | 205,209 | $ | 275,464 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
| Current liabilities: | |||||||
Accounts payable | $ | 13,596 | $ | 16,985 | |||
Accrued liabilities | 27,235 | 38,686 | |||||
Income taxes payable | 8,581 | 4,947 | |||||
Total current liabilities | 49,412 | 60,618 | |||||
| Deferred tax liability | 8,867 | 8,076 | |||||
Total liabilities | 58,279 | 68,694 | |||||
| Stockholders' equity: | |||||||
Preferred stock, $0.01 par value per share; 1,000 shares authorized, no shares outstanding | - | - | |||||
Common stock, $0.01 par value per share; 100,000 shares authorized, 59,728 and 61,022 shares outstandingat March 31, 2003 and December 31, 2003, respectively | 597 | 610 | |||||
Additional paid-in capital | 158,160 | 179,411 | |||||
Accumulated other comprehensive income (loss) | 209 | (1,433 | ) | ||||
Retained earnings | 285,350 | 326,683 | |||||
| 444,316 | 505,271 | ||||||
Less: Treasury stock (common: 16,090 and 16,091 shares at March 31, 2003 and December 31, 2003,respectively) at cost | (297,386 | ) | (298,501 | ) | |||
| Total stockholders' equity | 146,930 | 206,770 | |||||
| Total liabilities and stockholders' equity | $ | 205,209 | $ | 275,464 | |||
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended Six Months Ended September 30, September 30, -------------------- -------------------- 2002 2003 2002 2003 --------- --------- --------- --------- Net sales ........................................ $ 82,370 $ 95,117 $ 162,638 $ 187,903 Cost of sales .................................... 40,735 46,351 79,545 93,670 --------- --------- --------- --------- Gross profit ................................. 41,635 48,766 83,093 94,233 --------- --------- --------- --------- Operating expenses: Research, development and engineering ........ 8,164 8,247 16,414 16,852 Selling, general and administrative .......... 19,763 22,984 39,369 44,137 --------- --------- --------- --------- Total operating expenses ................ 27,927 31,231 55,783 60,989 --------- --------- --------- --------- Operating income ................................. 13,708 17,535 27,310 33,244 Interest and other income, net ................... 272 141 1,205 633 --------- --------- --------- --------- Income before income taxes ....................... 13,980 17,676 28,515 33,877 Income tax expense ............................... 2,450 5,303 6,811 10,163 --------- --------- --------- --------- Net income ....................................... $ 11,530 $ 12,373 $ 21,704 $ 23,714 ========= ========= ========= ========= Basic earnings per common share (Note 5) ......... $ 0.25 $ 0.28 $ 0.47 $ 0.54 ========= ========= ========= ========= Shares used in basic per share calculations....... 45,773 44,052 45,828 43,861 ========= ========= ========= ========= Diluted earnings per common share (Note 5) ....... $ 0.24 $ 0.27 $ 0.46 $ 0.52 ========= ========= ========= ========= Shares used in diluted per share calculations..... 47,298 46,372 47,522 45,672 ========= ========= ========= =========
See Notes to Unaudited Condensed Consolidated Financial Statements
| Three Months Ended | Nine Months Ended | ||||||||||||
| December 31, | December 31, | ||||||||||||
| 2002 | 2003 | 2002 | 2003 | ||||||||||
| Net sales | $ | 86,811 | $ | 107,622 | $ | 249,449 | $ | 295,525 | |||||
| Cost of sales | 44,290 | 51,381 | 123,835 | 145,051 | |||||||||
Gross profit | 42,521 | 56,241 | 125,614 | 150,474 | |||||||||
| Operating expenses: | |||||||||||||
Research, development and engineering | 9,004 | 8,834 | 25,418 | 25,686 | |||||||||
Selling, general and administrative | 20,939 | 23,649 | 60,308 | 67,786 | |||||||||
Total operating expenses | 29,943 | 32,483 | 85,726 | 93,472 | |||||||||
| Operating income | 12,578 | 23,758 | 39,888 | 57,002 | |||||||||
| Interest and other income, net | 566 | 1,412 | 1,771 | 2,045 | |||||||||
| Income before income taxes | 13,144 | 25,170 | 41,659 | 59,047 | |||||||||
| Income tax expense | 3,943 | 7,551 | 10,754 | 17,714 | |||||||||
| Net income | $ | 9,201 | $ | 17,619 | $ | 30,905 | $ | 41,333 | |||||
| Basic earnings per common share (Note 5) | $ | 0.20 | $ | 0.39 | $ | 0.68 | $ | 0.94 | |||||
| Shares used in basic per share calculations | 44,939 | 44,628 | 45,531 | 44,116 | |||||||||
| Diluted earnings per common share (Note 5) | $ | 0.20 | $ | 0.37 | $ | 0.66 | $ | 0.89 | |||||
| Shares used in diluted per share calculations | 46,197 | $ | 47,501 | $ | 47,096 | 46,305 | |||||||
PLANTRONICS, INC.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)
Six Months Ended September 30, ---------------------- 2002 2003 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income .................................................... $ 21,704 $ 23,714 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ...................... 5,572 6,350 Deferred income taxes .............................. (55) -- Income tax benefit associated with stock options ... 725 3,087 Loss on disposal of fixed assets ................... 14 12 Changes in assets and liabilities: Accounts receivable, net ........................... (7,465) (1,530) Inventory, net ..................................... 444 (4,006) Other current assets ............................... (475) 138 Other assets ....................................... 302 51 Accounts payable ................................... (241) 4,647 Accrued liabilities ................................ 392 5,305 Income taxes payable ............................... (1,070) (5,829) ---------- ---------- Cash provided by operating activities ......................... 19,847 31,939 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of marketable securities ....... 10,000 5,020 Purchase of marketable securities ....................... (13,020) -- Purchase of equity investment............................ -- (450) Capital expenditures .................................... (6,631) (4,946) ---------- ---------- Cash (used in) investing activities ........................... (9,651) (376) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury stock .............................. (9,571) (1,833) Proceeds from sale of treasury stock .................... 812 1,564 Proceeds from exercise of stock options ................. 771 6,868 ---------- ---------- Cash (used in) provided by financing activities ............... (7,988) 6,599 Effect of exchange rate changes on cash and cash equivalents... 1,033 (761) ---------- ---------- Net increase in cash and cash equivalents ..................... 3,241 37,401 Cash and cash equivalents at beginning of period .............. 43,048 54,704 ---------- ---------- Cash and cash equivalents at end of period .................... $ 46,289 $ 92,105 ========== ========== Supplemental disclosures of cash flow information: Cash paid for: Interest ........................................... $ 67 $ 65 Income taxes ....................................... $ 7,418 $ 12,932
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Nine Months Ended | |||||||
| December 31, | |||||||
| 2002 | 2003 | ||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
| Net income | $ | 30,905 | $ | 41,333 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 8,425 | 9,519 | |||||
Deferred income taxes | (55 | ) | (408 | ) | |||
Income tax benefit associated with stock options | 1,296 | 5,232 | |||||
Loss on disposal of fixed assets | 17 | 148 | |||||
Changes in assets and liabilities: | |||||||
Accounts receivable, net | (8,089 | ) | (13,922 | ) | |||
Inventory, net | 1,219 | (5,420 | ) | ||||
Other current assets | (22 | ) | 444 | ||||
Other assets | 551 | (138 | ) | ||||
Accounts payable | (1,614 | ) | 3,389 | ||||
Accrued liabilities | 3,036 | 11,451 | |||||
Income taxes payable | (1,589 | ) | (3,634 | ) | |||
| Cash provided by operating activities | 34,080 | 47,994 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
Proceeds from maturities of marketable securities | 22,500 | 5,020 | |||||
Purchase of marketable securities | (13,020 | ) | - | ||||
Purchase of equity investment | - | (450 | ) | ||||
Capital expenditures | (9,513 | ) | (13,217 | ) | |||
| Cash used in investing activities | (33 | ) | (8,647 | ) | |||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Purchase of treasury stock | (25,306 | ) | (1,833 | ) | |||
Proceeds from sale of treasury stock | 1,102 | 1,889 | |||||
Proceeds from exercise of stock options | 1,647 | 14,864 | |||||
| Cash (used in) provided by financing activities | (22,557 | ) | 14,920 | ||||
| Effect of exchange rate changes on cash and cash equivalents | 1,492 | (1,642 | ) | ||||
| Net increase in cash and cash equivalents | 12,982 | 52,625 | |||||
| Cash and cash equivalents at beginning of period | 43,048 | 54,704 | |||||
| Cash and cash equivalents at end of period | $ | 56,030 | $ | 107,329 | |||
| Supplemental disclosures of cash flow information: | |||||||
| Cash paid for: | |||||||
Interest | $ | 100 | $ | 93 | |||
Income taxes | $ | 11,339 | $ | 16,679 | |||
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PLANTRONICS, INC.
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Plantronics, Inc. ("Plantronics," "we," or "our") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, consistent in all material respects with those applied in our Annual Report on Form 10-K for the fiscal year ended March 31, 2003. The interim financial information is unaudited, but reflects all normal recurring adjustments which are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. Certain information and footnote disclosures normally included in financial statements preparedprepa red in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Certain prior period balances have been reclassified to co nformconform to the current period presentation. The interim financial statements should be read in connection with the financial statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2003.
2. PERIODS PRESENTED
Our fiscal year-end is the Saturday closest to March 31 and the secondthird fiscal quarter-end is the last Saturday in September.December. For purposes of presentation, we have indicated our accounting year as ending on March 31, and our interim quarterly periods as ending on the applicable month-end. Our fiscal quarters ended September 30,December 31, 2002, and September 30,December 31, 2003, each consisted of thirteen weeks.
3. DETAILS OF CERTAIN BALANCE SHEET COMPONENTS (IN THOUSANDS)
March 31, September 30, 2003 2003 ------------ ------------Cash, cash equivalents and marketable securities: Cash and cash equivalents ........................... $ 54,704 $ 92,105 Marketable securities ............................... 5,021 -- ------------ ------------ $ 59,725 $ 92,105 ============ ============ Accounts receivable, net: Accounts receivable from customers .................. $ 65,931 $ 66,717 Less: sales returns, promotions and rebates ......... (12,067) (11,043) Less: allowance for doubtful accounts ............... (3,361) (3,641) ------------ ------------ $ 50,503 $ 52,033 ============ ============ Inventory, net: Finished goods ...................................... $ 22,664 $ 23,701 Work in process ..................................... 1,229 1,681 Purchased parts ..................................... 18,273 21,901 Less: provision for excess and obsolete inventory ... (8,408) (9,519) ------------ ------------ $ 33,758 $ 37,764 ============ ============
March 31, September 30, 2003 2003 ------------ ------------Property, plant and equipment, net: Land ................................................ $ 4,693 $ 4,693 Buildings and improvements (useful lives: 7-30 years) 19,189 20,564 Machinery and equipment (useful lives: 2-10 years) .. 61,496 64,885 ------------ ------------ 85,378 90,142 Less: accumulated depreciation ...................... (48,421) (54,327) ------------ ------------ $ 36,957 $ 35,815 ============ ============ Accrued liabilities: Employee benefits ................................... $ 12,283 $ 12,086 Accrued advertising and sales and marketing ......... 2,150 4,285 Warranty accrual .................................... 5,905 6,590 Accrued other ....................................... 6,897 9,579 ------------ ------------ $ 27,235 $ 32,540 ============ ============
March 31, | December 31, | ||||||
2003 | 2003 | ||||||
| Cash, cash equivalents and marketable securities: | |||||||
Cash and cash equivalents | $ | 54,704 | $ | 107,329 | |||
Marketable securities | 5,021 | - | |||||
| $ | 59,725 | $ | 107,329 | ||||
| Accounts receivable, net: | |||||||
Accounts receivable from customers | $ | 65,931 | $ | 83,148 | |||
Less: sales returns, promotions and rebates | (12,067 | ) | (14,996 | ) | |||
Less: allowance for doubtful accounts | (3,361 | ) | (3,727 | ) | |||
| $ | 50,503 | $ | 64,425 | ||||
| Inventory, net: | |||||||
Finished goods | $ | 14,712 | $ | 17,397 | |||
Work in process | 1,229 | 1,271 | |||||
Purchased parts | 17,817 | 20,510 | |||||
| $ | 33,758 | $ | 39,178 | ||||
| 6 | ||
March 31, | December 31, | ||||||
2003 | 2003 | ||||||
| Property, plant and equipment, net: | |||||||
Land | $ | 4,693 | $ | 6,031 | |||
Buildings and improvements (useful lives: 7-30 years) | 19,189 | 25,575 | |||||
Machinery and equipment (useful lives: 2-10 years) | 61,496 | 62,671 | |||||
| 85,378 | 94,277 | ||||||
Less: accumulated depreciation | (48,421 | ) | (53,168 | ) | |||
| $ | 36,957 | $ | 41,109 | ||||
| Accrued liabilities: | |||||||
Employee benefits | $ | 12,283 | $ | 14,767 | |||
Accrued advertising and sales and marketing | 2,150 | 3,476 | |||||
Warranty accrual | 5,905 | 6,560 | |||||
Accrued losses on hedging instruments | - | 5,230 | |||||
Accrued other | 6,897 | 8,653 | |||||
| $ | 27,235 | $ | 38,686 | ||||
4. FOREIGN CURRENCY TRANSACTIONS
The functional currency of our Mexican manufacturing operations and European sales and logistics headquarters is the U.S. dollar. Accordingly, all revenues and cost of sales related to these foreign operations are recorded using the U.S. dollar as functional currency. The functional currency of our foreign sales and marketing offices and research and development facilities is the local currency of the respective operations. The assets and liabilities of the subsidiaries whose functional currencies are other than the U.S. dollar are translated into U.S. dollars at the current exchange rate in effect at the balance sheet date. Income and expense items are translated using the average exchange rate for the period. Cumulative translation adjustments are included in accumulated other comprehensive incomei ncome (loss), which is reflected as a separate component of stockholders' equity. Foreign currency transaction gains and losses are included in the results of operations.
Plantronics has entered into foreign currency forward contracts, which typically mature in one month, to hedge a portion of our exposure to foreign currency fluctuations in forecasted foreign currency-denominated receivables, payables and cash balances. We record on the balance sheet at each reporting period the fair value of our forward contracts and record any fair value adjustments in results of operations. Gains and losses associated with currency rate changes on the contracts are recorded in results of operations, as other income (expense), offsetting transaction gains and losses on the related assets and liabilities. Plantronics does not enter into foreign currency forward contracts for trading purposes.
As of September 30,December 31, 2003, we had foreign currency forward contracts of approximately $4.4$6.3 and $1.3 million denominated in the Euro as aEuros and Great British Pounds, respectively. These forward contracts hedge against a portion of our forecasted foreign currency-denominated receivables, payables and cash balances. The following table summarizes our net currency position, and approximate U.S. dollar equivalent, (inat December 31, 2003 (currency and dollar amounts in thousands), at September 30, 2003:
Local USD Currency Equivalent Position Maturity ----------------- ------------ ----------- -----------Forward Contracts EUR € 3,829 $ 4,400 Sell 1 month
:
| Local | U.S. Dollar | ||||||
| Currency | Equivalent | Position | Maturity | ||||
| Euro | € | 5,057 | $ | 6,300 | Sell | 1 month | |
| Great British Pound | £ | 733 | $ | 1,300 | Sell | 1 month | |
Foreign currency transactions, net of the effect of hedging activity on forward contracts, resulted in neither a net gain nor lossof approximately $1.2 million for the fiscal quarter ended September 30,December 31, 2003, compared to a net lossgain of approximately $35,000$0.3 million in the fiscal quarter ended September 30,December 31, 2002, which is included in interest and other income in the results of operations
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Plantronics periodically hedges foreign currency forecasted transactions related to sales with currency options. These transactions are designated as cash flow hedges. The effective portion of the hedge gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into earnings when the hedged exposure affects earnings. Any ineffective
Balance Sheet Income Statement ------------------------- ------------ ----------- As of September 30, 2003 September 30, 2003 Accumulated Other Three Months Six Months Comprehensive Ended Ended Income/(Loss) Net Sales Net Sales ------------------------- ------------ ----------- Realized loss on closed transactions............... $ -- (326) (510) Recognized but unrealized loss on open transactions.. (1,617) -- -- ------------------------- ------------ ----------- (1,617) (326) (510) ========================= ============ ===========
Balance Sheet | Income Statement | |||||||||
| December 31, 2003 | ||||||||||
As of December 31, 2003 | Three Months | Nine Months | ||||||||
Accumulated Other | Ended | Ended | ||||||||
Comprehensive Income/(Loss) | Net Sales | Net Sales | ||||||||
| Realized loss on closed transactions | $ | - | $ | (1,255 | ) | $ | (1,764 | ) | ||
| Recognized but unrealized loss on open transactions | (3,693 | ) | - | - | ||||||
| $ | (3,693 | ) | $ | (1,255 | ) | $ | (1,764 | ) | ||
Foreign currency transactions related to hedging activities on option contracts resulted in a net reduction to revenue of $0.3$1.3 million and $0.5$1.8 million for the three and sixnine months ended September 30,December 31, 2003, respectively. There were no such option contracts in place for the three and sixnine months ended September 30,December 31, 2002.
5. COMPUTATION OF EARNINGS PER COMMON SHARE
Basic Earnings Per Share ("EPS") is computed by dividing net income available to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Basic EPS excludes the dilutive effect of stock options. Diluted EPS gives effect to all dilutive potential common shares outstanding during a period. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased using the proceeds from the exercise of stock options. The riseincrease in the value of Plantronics' overall common stock value during the fiscal quarter ended September 30,December 31, 2003 contributed to the increased number of dilutive potential common shares included in the diluted earnings per share calculation.
| 8 | ||
The following table sets forth the computation of basic and diluted earnings per share for the three and sixnine months ended September 30,December 31, 2002 and 2003 (in thousands, except earnings per share):
Three Months Ended Six Months Ended September 30, September 30, -------------------- -------------------- 2002 2003 2002 2003 --------- --------- --------- ---------Net income........................................ $ 11,530 $ 12,373 $ 21,704 $ 23,714 Weighted average shares outstanding: Weighted average shares - basic................... 45,773 44,052 45,828 43,861 Effect of dilutive securities - employee stock options.................................. 1,525 2,320 1,694 1,811 --------- --------- --------- --------- Weighted average shares - diluted................. 47,298 46,372 47,522 45,672 ========= ========= ========= ========= Earnings per common share-basic................... $ 0.25 $ 0.28 $ 0.47 $ 0.54 Earnings per common share-diluted................. $ 0.24 $ 0.27 0.46 $ 0.52
Three Months Ended | Nine Months Ended | ||||||||||||
| December 31, | December 31, | ||||||||||||
| 2002 | 2003 | 2002 | 2003 | ||||||||||
| Net income | $ | 9,201 | $ | 17,619 | $ | 30,905 | $ | 41,333 | |||||
| Weighted average shares outstanding: | |||||||||||||
| Weighted average shares - basic | 44,939 | 44,628 | 45,531 | 44,116 | |||||||||
| Effect of dilutive securities - employee stock options | 1,258 | 2,873 | 1,565 | 2,189 | |||||||||
| Weighted average shares - diluted | 46,197 | 47,501 | 47,096 | 46,305 | |||||||||
| Earnings per common share-basic | $ | 0.20 | $ | 0.39 | $ | 0.68 | $ | 0.94 | |||||
| Earnings per common share-diluted | $ | 0.20 | $ | 0.37 | $ | 0.66 | $ | 0.89 | |||||
Dilutive potential common shares consist of outstanding employee stock options. Outstanding stock options to purchase approximately 5.58.5 million and 2.11.5 million shares of Plantronics' common stock at September 30,December 31, 2002 and September 30,December 31, 2003, respectively, were excluded from the computation of diluted earnings per share because their effect would have been antidilutive andthey were out of the money.
money and therefore anti-dilutive. Dilution from stock options is highly sensitive to our stock price. During the quarter ended December 31, 2003, the effect of the increase in our stock price compared to the prior quarter ended September 30, 2003 on weighted average dilutive shares was approximately 0.8 million shares.
6.PRO FORMA EFFECTS OF STOCK -– BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans based on the fair value of options granted. We have elected to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations, and to provide additional disclosures with respect to the pro forma effects of adoption had we recorded compensation expense as provided in SFAS 123 and Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure as it Relates to Interim Disclosures".
Disclos ures."
All options in the quartersthree and nine months ended September 30,December 31, 2002 and 2003, respectively, were granted at an exercise price equal to the market value of Plantronics' Common Stock atPlantronics’ common stock on the date of grant. The following table sets forth net income and earnings per share amounts that would have been reported as if Plantronics had applied the fair value recognition provisions of SFAS No. 123 "Accounting for Stock-Based Compensation", to stock-based employee compensation for the three and sixnine months ended September 30,December 31, 2002 and 2003 (in thousands, except earnings per share):
Three Months Ended Six Months Ended September 30, September 30, -------------------- -------------------- 2002 2003 2002 2003 --------- --------- --------- --------- Net income - as reported.......................... $ 11,530 $ 12,373 21,704 $ 23,714 Less stock based employee compensation determined under fair value based method, net of tax ..... (3,507) (3,193) (6,720) (6,633) --------- --------- --------- --------- Net income - pro forma............................ 8,023 9,180 14,984 17,081 ========= ========= ========= ========= Earnings per common share: Basic net income per share - as reported.......... $ 0.25 $ 0.28 0.47 $ 0.54 Basic net income per share - pro forma........... $ 0.18 $ 0.21 0.33 $ 0.39 Diluted net income per share - as reported....... $ 0.24 $ 0.27 0.46 $ 0.52 Diluted net income per share - proforma........... $ 0.17 $ 0.20 0.32 $ 0.37
Three Months Ended | Nine Months Ended | ||||||||||||
December 31, | December 31, | ||||||||||||
| 2002 | 2003 | 2002 | 2003 | ||||||||||
| Net income - as reported | $ | 9,201 | $ | 17,619 | $ | 30,905 | $ | 41,333 | |||||
| Less stock based employee compensation determined under fair value based method, net of tax | (3,699 | ) | (3,919 | ) | (10,419 | ) | (10,573 | ) | |||||
| Net income - pro forma | $ | 5,502 | $ | 13,700 | $ | 20,486 | $ | 30,760 | |||||
| Earnings per common share: | |||||||||||||
| Basic net income per share - as reported | $ | 0.20 | $ | 0.39 | $ | 0.68 | $ | 0.94 | |||||
| Basic net income per share - pro forma | $ | 0.12 | $ | 0.31 | $ | 0.45 | $ | 0.70 | |||||
| Diluted net income per share - as reported | $ | 0.20 | $ | 0.37 | $ | 0.66 | $ | 0.89 | |||||
| Diluted net income per share - proforma | $ | 0.12 | $ | 0.29 | $ | 0.43 | $ | 0.66 | |||||
| 9 | ||
The fair value of options at the date of grant was estimated using the Black-Scholes model. The following assumptions were used and the following weighted-average fair values resulted:
Employee Stock Employee Stock Stock Option Plans Stock Option Plans Purchase Plan Purchase Plan Three Months Ended Six Months Ended Three Months Ended Six Months Ended September 30, September 30, September 30, September 30, 2002 2003 2002 2003 2002 2003 2002 2003------ ------ ------ ------ ------ ------ ------ ------ Expected dividend yield........... 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Expected life (in years).......... 6.0 6.0 6.0 6.0 0.5 0.5 0.5 0.5 Expected volatility............... 59.4% 55.6% 59.4% 55.7% 46.2% 31.7% 46.2% 31.7% Risk-free interest rate........... 3.4% 3.3% 3.4% 3.2% 1.2% 1.0% 1.2% 1.0% Weighted-average fair value....... $ 9.72 $ 14.38 $ 9.72 $ 14.29 $ 3.02 $ 2.58 $ 3.02 $ 2.58
| Stock Option Plans | Stock Option Plans | Employee Stock Purchase Plan | Employee Stock Purchase Plan | ||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
December 31, | December 31, | December 31, | December 31, | ||||||||||||||||||||||
| 2002 | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | 2003 | ||||||||||||||||||
| Expected dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | |||||||||
| Expected life (in years) | 6.0 | 6.0 | 6.0 | 6.0 | 0.5 | 0.5 | 0.5 | 0.5 | |||||||||||||||||
| Expected volatility | 59.4 | % | 55.5 | % | 59.4 | % | 55.7 | % | 46.2 | % | 31.7 | % | 46.2 | % | 31.7 | % | |||||||||
| Risk-free interest rate | 2.8 | % | 3.3 | % | 3.5 | % | 3.2 | % | 1.2 | % | 1.0 | % | 1.2 | % | 1.0 | % | |||||||||
| Weighted-average fair value | $ | 9.85 | $ | 16.55 | $ | 9.97 | $ | 14.31 | $ | 3.02 | $ | 2.58 | $ | 3.02 | $ | 2.58 | |||||||||
7. PRODUCT WARRANTY OBLIGATIONS
Plantronics provides for the estimated costs of product warranties at the time revenue is recognized. The specific terms and conditions of those warranties vary depending upon the product sold. In the case of products manufactured by us, our warranties generally start from the delivery date and continue for up to two years depending on the product purchased. Factors that affect our warranty obligation include product failure rates, material usage, and service delivery costs incurred in correcting product failures. We assess the adequacy of our recorded warranty liabilities quarterly and make adjustments to the liability if necessary.
Changes in warranty obligation,obligations, which is included as a component of "Accrued liabilities" on the condensed consolidated balance sheets, during the three and sixnine months ended September 30,December 31, 2003, are as follows (in thousands):
Warranty liability at March 31, 2003............................... $ 5,905 Warranty provision relating to product shipped during the quarter.. 2,647 Deductions for warranty claims processed........................... (2,229) --------- Warranty liability at June 30, 2003................................ 6,323 ========= Warranty provision relating to product shipped during the quarter.. 2,231 Deductions for warranty claims processed........................... (1,964) --------- Warranty liability at September 30, 2003........................... $ 6,590 =========
For the Three Months Ended December 31, 2003 | ||||
| $ | 6,590 | |||
| Warranty provision relating to product shipped during the quarter | 2,053 | |||
| Deductions for warranty claims processed | (2,083 | ) | ||
| Adjustments | - | |||
| Warranty liability at December 31, 2003 | $ | 6,560 | ||
For the Nine Months Ended December 31, 2003 | ||||
| Warranty liability at March 31, 2003 | $ | 5,905 | ||
| Warranty provision relating to products shipped during the nine month period | 7,262 | |||
| Deductions for warranty claims processed | (6,276 | ) | ||
| Adjustments | (331 | ) | ||
| Warranty liability at December 31, 2003 | $ | 6,560 | ||
| 10 | ||
8. COMPREHENSIVE INCOME
Comprehensive income includes charges or credits to equity that are not the result of transactions with owners. The components of comprehensive income, net of tax, are as follows (in thousands):
Three Months Ended Six Months Ended September 30, September 30, -------------------- -------------------- 2002 2003 2002 2003 --------- --------- --------- ---------Net income................................................ $ 11,530 $ 12,373 $ 21,704 $ 23,714 Unrealized (loss) on hedges, for the three and six months ended September 30, 2002 and 2003,
Three Months Ended | Nine Months Ended | ||||||||||||
December 31, | December 31, | ||||||||||||
| 2002 | 2003 | 2002 | 2003 | ||||||||||
| Net income | $ | 9,201 | $ | 17,619 | $ | 30,905 | $ | 41,333 | |||||
Unrealized (loss) on hedges, for the three and nine months ended December 31, 2002 and 2003, net of tax of $0 and ($623), $0 and ($1,108), respectively | - | (1,453 | ) | - | (2,585 | ) | |||||||
Foreign currency translation, for the three and nine months ended December 31, 2002 and 2003, net of tax of $138 and $359, $448 and $616 , respectively | 321 | 837 | 1,044 | 1,436 | |||||||||
| Other comprehensive income | $ | 9,522 | $ | 17,003 | $ | 31,949 | $ | 40,184 | |||||
The net of tax
of $0 and ($95), $0 and ($485), respectively.......... -- (222) -- (1,132)
Foreign currency translation, for the three and
months ended September 30, 2002 and 2003, net of tax
of $44 and $34, $310 and $256 , respectively ......... 103 79 723 597
--------- --------- --------- ---------
Other comprehensive income................................ $ 11,633 $ 12,230 $ 22,427 $ 23,179
========= ========= ========= =========
The decrease in the components of foreign currency translation adjustmentother comprehensive income in the current quarter ended December 31, 2003 was primarily due to unfavorable fair value adjustments related to cash flow hedges of $0.3$2.1 million offset by favorable increases in exchange rates of $0.1$1.2 million. The increase in the year ago quarter was due solely due to favorable exchange rates. DuringFrom the three months endedend of the September 30, 2003 quarter, compared to the end of the December 2003 quarter, the exchange rate for the Euro and the Great British Pound relative to the U.S. dollar increased 1%8.4% and 1%7.8%, respectively. ForFrom the six months ended September 30,prior fiscal year end to the end of the December 2003 quarter, the exchange rate for the Euro and Great British Pound relative to the U.S. dollar increased 7%15.7% and 5%12.8%, respectively. Also, there was athe strengthening of foreign currencies in countriescountrie s where the local currency is the functional currency of the entity, further accountingaccounted for the increase.
9. SEGMENTS AND ENTERPRISE-WIDE DISCLOSURES
SEGMENTS. We are engaged in the design, manufacture, marketing and sales of telecommunications equipment including headsets, telephone headset systems, and other specialty telecommunications products. Plantronics considers itself to operate in one business segment.
PRODUCTS AND SERVICES. We organize our operations to focus on three principal markets:headsets for business and consumer applications, and other specialty products for the hearing impaired. With respect to headsets, we make products for office and contact center products,use, for use with mobile phones and computer products, and other specialty products.for use with computers. The following table presents net revenue by marketproduct group (in thousands):
Three Months Ended Six Months Ended September 30, September 30, -------------------- -------------------- 2002 2003 2002 2003 --------- --------- --------- ---------Net revenues from unaffiliated customers: Office and contact center...................... $ 59,742 $ 64,192 $ 121,310 $ 126,272 Mobile and computer............................ 16,208 24,049 28,938 48,030 Other specialty products....................... 6,420 6,876 12,390 13,601 --------- --------- --------- --------- $ 82,370 $ 95,117 $ 162,638 $ 187,903 ========= ========= ========= =========
Three Months Ended | Nine Months Ended | ||||||||||||
December 31, | December 31, | ||||||||||||
| 2002 | 2003 | 2002 | 2003 | ||||||||||
| Net revenues from unaffiliated customers: | |||||||||||||
Office and contact center | $ | 58,644 | $ | 66,776 | $ | 179,954 | $ | 193,048 | |||||
Mobile | 16,145 | 29,528 | 38,049 | 66,416 | |||||||||
Computer audio | 5,679 | 5,807 | 12,713 | 16,949 | |||||||||
Other specialty products | 6,343 | 5,511 | 18,733 | 19,112 | |||||||||
| $ | 86,811 | $ | 107,622 | $ | 249,449 | $ | 295,525 | ||||||
MAJOR CUSTOMERS. No customer accounted for 10% or more of total revenue for the three and sixnine months ended September 30,December 31, 2002 and 2003, nor did any customer account for 10% or more of accounts receivable from consolidated sales at the end of such periods.
| 11 | ||
GEOGRAPHIC INFORMATION. In geographical reporting, revenues are attributed to the geographical location of the sales and service organizations. The following table presents net revenues and long-lived assets by geographic area (in thousands) but may not actually reflect end-user markets:
Three Months Ended Six Months Ended September 30, September 30, ------------------------ -----------------------markets (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||
December 31, | December 31, | ||||||||||||
| 2002 | 2003 | 2002 | 2003 | ||||||||||
| Net revenues from unaffiliated customers: | |||||||||||||
United States | $ | 57,013 | $ | 66,484 | $ | 170,053 | $ | 196,337 | |||||
Europe, Middle East and Africa | 21,852 | 31,688 | 56,287 | 72,697 | |||||||||
Asia Pacific and Latin America | 4,927 | 5,679 | 14,514 | 17,084 | |||||||||
Canada and Other International | 3,019 | 3,771 | 8,595 | 9,407 | |||||||||
| Total International | 29,798 | 41,138 | 79,396 | 99,188 | |||||||||
| $ | 86,811 | $ | 107,622 | $ | 249,449 | $ | 295,525 | ||||||
March 31, | December 31, | |||||
| 2003 | 2003 | |||||
| Long-lived assets: | ||||||
United States | $ | 23,907 | $ | 23,540 | ||
International | 13,050 | 17,569 | ||||
| $ | 36,957 | $ | 41,109 | |||
10. INTANGIBLES
Aggregate amortization expense on intangibles for the three and nine months ended December 31, 2002 was $0.2 million and $0.7 million, respectively. For the three and nine months ended December 31, 2003, 2002 2003
----------- ----------- ---------- -----------
Net revenues from unaffiliated customers:
United States.................................. $ 57,426 $ 64,929 $ 113,040 $ 129,853
Europe, Middle Eastamortization expense was $0.2 million and Africa............... 17,934 21,826 34,435 41,009
Asia Pacific and Latin America............... 4,734 6,010 9,587 11,405
Other International.......................... 2,276 2,352 5,576 5,636
----------- ----------- ---------- -----------
Total International............................ 24,944 30,188 49,598 58,050
----------- ----------- ---------- -----------
$ 82,370 $ 95,117 $ 162,638 $ 187,903
=========== =========== ========== ===========
March 31, September 30,
2003 2003
----------- -----------
Long-lived assets:
United States.................................. $ 23,907 $ 23,861
International.................................. 13,050 11,954
----------- -----------
$ 36,957 $ 35,815
=========== ===========
10.$0.5 million, respectively. The following table presents information on acquired intangible assets (in thousands):
March 31, 2003 | December 31, 2003 | ||||||||||||
Gross Carrying | Accumulated | Gross Carrying | Accumulated | ||||||||||
Intangible assets | Amount | Amortization | Amount | Amortization | |||||||||
| Technology | $ | 2,460 | $ | (817 | ) | $ | 2,460 | $ | (1,032 | ) | |||
| State contracts | 1,300 | (232 | ) | 1,300 | (371 | ) | |||||||
| Patents | 700 | (125 | ) | 700 | (200 | ) | |||||||
| Trademarks | 300 | (54 | ) | 300 | (86 | ) | |||||||
| Non-compete agreements | 200 | (50 | ) | 200 | (80 | ) | |||||||
| Total | $ | 4,960 | $ | (1,278 | ) | $ | 4,960 | $ | (1,769 | ) | |||
| 12 | ||
11. RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002,May 2003, the Emerging Issues Task ForceFASB issued Statement No. 150 ("EITF"SFAS No. 150") reached, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for classification and measurement of certain financial instruments with characteristics of both liabilities and equity. It requires financial instruments within its scope be classified as a consensus on Issueliability (or an asset in some circumstances). Many of those financial instruments were previously classified as equity. SFAS No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 were150 is effective for Plantronics beginningfinancial instruments entered into or modified after May 31, 2003 and is effective for the Company in the second quarter of fiscalperiod ending March 31, 2004. The adoption of this standard didis not expected to have a material impact on ourthe Company’s financial statements.
position or results of operations.
In January 2003, the Financial Accounting Standards Board ("FASB")FASB issued FinancialFASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," an Interpretation of ARB No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired2003 and in the quarter ending March 31, 2004 for arrangements entered into prior to February 1, 2003, the provisions of FIN 46 must2003. The Company has not entered into any arrangements with entities it consi ders to be applied for the first interim or annual period beginning after December 15, 2003. We believevariable interest entities and as such believes that the adoption of FIN 46 (as revised December 2003) will not have a material impact on ourthe Company's financial position or results of operations.
In April 2003, the FASB issued Statement of Financial Accounting StandardsSFAS No. 149, ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. This Statement is generally effective for contracts entered into or modified after September 30, 2003 and is not expected to have a material impact on our financial statements.
In May 2003, the FASB issued Statement
Item 2.Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
EXECUTIVE SUMMARY:
We are a leading worldwide designer, manufacturer and marketer of Financial Accounting Standards No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilitieslightweight communications headsets, telephone headset systems, and Equity." SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after September 15, 2003. The adoption of this standard did not have a material impact on our financial position or results of operations.
11. INTANGIBLES
Aggregate amortization expense on intangiblesaccessories for the threebusiness and six months ended September 30, 2002 was $0.2 million and $0.5 million, respectively. For the three and six months ended September 30, 2003, aggregate amortization expense was $0.2 million and $0.4 million, respectively. The following table presents information on acquired intangible assets (in thousands):
March 31, 2003 September 30, 2003 ----------------------------- ----------------------------- Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization -------------- ------------- -------------- -------------Intangible assets Technology........................ $ 2,460 $ (817) $ 2,460 $ (960) State contracts................... 1,300 (232) 1,300 (325) Patents........................... 700 (125) 700 (175) Trademarks........................ 300 (54) 300 (75) Non-compete agreements............ 200 (50) 200 (70) -------------- ------------- ------------- -------------- Total............................. $ 4,960 $ (1,278) $ 4,960 $ (1,605) ============== ============= ============= ==============
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 (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act").consumer markets. In addition, we may from time to time make oral forward-looking statements. These statements may generally be identified bymanufacture and market specialty telephone products, such as telephones for the hearing-impaired and other related products for people with special communications needs.
We are a global company, and sell our broad range of communications products into more than 70 countries through a worldwide network of distributors, original equipment manufacturers ("OEM's"), wireless carriers, retailers and telephony service providers. We have well-developed distribution channels in North America and Europe, where headset use of such words as "expect," "anticipate," "believe," "intend," "plan," "will," or "shall," and include, but are not necessarily limited to, allis fairly widespread. Our distribution channels in other regions of the statements marked below with an asterisk ("*"). These forward-looking statementsworld are basedless mature and primarily serve the contact center market in those regions.
During the first nine months of fiscal year 2004, governmental legislation and increased adoption of our new products increased our net sales. A portion of that growth was attributable to our mobile products, which we believe may not be sustainable.*
| 13 | ||
Our revenues have grown during the nine month period ended December 31, 2003, primarily on current expectationsthe strength of new products in general, and entail various risks and uncertainties. Our actual results could differ materially from those anticipatedthe mobile products in these forward-looking statements as a result ofparticular. The mobile market has experienced strong growth due to a number of factors including "hands-free" legislation in the U.K. and Italy, wireless number portability in the U.S., and a strong assortment of new mobile phones on the market. In addition, we believe our market share for headsets for mobile phone applications has increased and that the level of market share we experienced recently is likely to be unsustainable.* We have several large customers whose order patterns are difficult to predict. Offers and promotions by these customers may result in significant fluctuations of their purchasing activities over time. If w e are unable to anticipate the purchase requirements of these customers, our quarterly revenues may be adversely affected and/or we may be exposed to large volumes of inventory that cannot be immediately resold to other customers.
We have been working to improve our productivity and cost effectiveness and have made progress towards our operating margin goals. During the fiscal quarter and the nine month period ended December 31, 2003, our overhead costs in absolute dollars remained fairly constant due to productivity improvements, which resulted in an increase in our gross margin percentage as compared to the third quarter and the first nine months of the previous fiscal year. Increases in our operating expenses as compared to the year ago quarter and the first nine month period of the previous fiscal year were primarily driven by variable marketing and sales expenses commensurate with our overall increase in sales. As a percentage of sales, our operating expenses decreased in the comparable quarter and nine month period of the previous fiscal year, which contributed to our overall increase in operating income. For the nine months ended December 31, 2003, our operating margins improved to 19.3% from 16.0% in the comparable period a year ago. We have established a target of 21% for operating margin for our fiscal year 2005 as whole.*
In addition, during the nine month period ended December 31, 2003, we generated $48.0 million in operating cash flows, which in part contributed to the increase in our liquidity and cash balances at December 31, 2003.
We intend for the following discussion of our financial condition and results of operations to provide information that will assist in understanding our financial statements.*
RESULTS OF OPERATIONS:
The following table sets forth items from the Unaudited Condensed Consolidated Statements of Operations as a percentage of net sales:
Three Months Ended | Nine Months Ended | ||||||||||||
December 31, | December 31, | ||||||||||||
| 2002 | 2003 | 2002 | 2003 | ||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||
| Cost of sales | 51.0 | 47.7 | 49.6 | 49.1 | |||||||||
Gross profit | 49.0 | 52.3 | 50.4 | 50.9 | |||||||||
| Operating expenses: | |||||||||||||
Research, development and engineering | 10.4 | 8.2 | 10.2 | 8.7 | |||||||||
Selling, general and administrative | 24.1 | 22.0 | 24.2 | 22.9 | |||||||||
Total operating expenses | 34.5 | 30.2 | 34.4 | 31.6 | |||||||||
| Operating income | 14.5 | 22.1 | 16.0 | 19.3 | |||||||||
| Interest and other income, net | 0.6 | 1.2 | 0.7 | 0.7 | |||||||||
| Income before income taxes | 15.1 | 23.3 | 16.7 | 20.0 | |||||||||
| Income tax expense | 4.5 | 6.9 | 4.3 | 6.0 | |||||||||
| Net income | 10.6 | % | 16.4 | % | 12.4 | % | 14.0 | % | |||||
NET SALES. Net sales for the quarter ended December 31, 2003, increased by 24.0% to $107.6 million, compared to $86.8 million for the quarter ended December 31, 2002. Net sales for the nine months ended December 31, 2003 were $295.5 million compared to $249.4 million for the nine months ended December 31, 2002, an increase of 18.5%.
In comparison to the fiscal quarter ended December 31, 2002, revenues for the fiscal quarter ended December 31, 2003 were stronger for all product lines with the exception of our specialty products. Domestic and international revenue growth was led by increased demand for headsets for mobile phones and for wireless headsets for the office. For mobile products, this included both corded headsets sold to U.S. wireless carriers and Bluetooth based headsets sold primarily for use in Europe, with quarterly sales up 83% over the same quarter in the prior year. Our worldwide office and contact center products business grew 14% over the same quarter in the prior year. This growth was primarily in international revenue, which was primarily driven by the continued ramp of our CS60 product in Europe, a wi reless headset for DECT-based office phones. In the U.S., office and contact center product sales were favorably affected by the launch of our CS50 product, a wireless headset for 900MHz-based office phones. Computer audio product sales were relatively flat, increasing 2% over the same quarter in the prior year. Sales of our specialty products were down by 13% compared to the same quarter in the prior year, primarily due to timing of orders.
| 14 | ||
For the nine month period ended December 31, 2003, in comparison with the nine month period for the prior year, net sales were up in all product lines, both domestically by 15% and internationally by 25%, primarily driven by favorable exchange rates and by demand for mobile products including our wireless Bluetooth headsets and the continued demand for the MX150 mobile corded headset. Our office and contact center sales rose by 7% over the same period for the prior year on higher product sales due to favorable exchange rates and the launch of the CS60 and CS50 wireless headsets.
Our fourth quarter of fiscal year 2004 is comprised of 14 weeks compared to 13 weeks in the same quarter last year. The extra week in the fourth quarter of fiscal year 2004 will affect the comparability with the third quarter of fiscal year 2004, the fourth quarter of fiscal year 2003 and the comparability of the full fiscal year to both the prior and upcoming fiscal years. We believe the extra week in the fourth quarter can be expected to negatively affect the comparison between the fourth quarter of fiscal year 2004 and the first quarter of fiscal year 2005.*
GROSS PROFIT. Gross profit for the quarter ended December 31, 2003 increased by 32.3% to $56.2 million (52.3% of net sales), compared to $42.5 million (49.0% of net sales) for the quarter ended December 31, 2002. Gross profit for the nine months ended December 31, 2003 increased to $150.5 million (50.9% of net sales) from $125.6 million (50.4% of net sales) for the comparable period of fiscal year 2003.
As a percent of revenue, gross margin for the quarter ended December 31, 2003 increased by 3.3 percentage points compared to the year ago quarter, primarily due to economies of scale achieved on increased volume. Our productivity improvements have enabled us to hold manufacturing overhead costs fairly constant compared to a year ago despite significant increases in unit volume. In addition, a weaker U.S. dollar compared to the Euro and Great British Pound favorably affected revenues and thus the margin, along with lower discounts that net against revenue. Partially offsetting these favorable factors was a change in product mix, with a higher percentage of revenues coming from lower margin mobile products as compared to the year ago period.
Gross profit for the first nine months of fiscal year 2004 increased as a percent of revenue by 0.5 percentage points compared to the first nine months of fiscal year 2003 as better manufacturing efficiencies on higher volumes, component cost reductions, and favorable foreign exchange rates offset a less favorable product mix with higher sales of lower margin mobile and computer products.
RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and engineering expenses for the quarter ended December 31, 2003, were $8.8 million (8.2% of net sales), compared to $9.0 million (10.4% of net sales) for the quarter ended December 31, 2002, reflecting continuing process improvements. During the quarter we identified some incremental new product opportunities that looked promising and initiated work on those set forth belownew products. In the fourth quarter of fiscal year 2004, we expect significant progress on those programs and we also expect spending and the ratio of expense to revenues to increase somewhat.* Research, development and engineering expenses for the first nine months of fiscal year 2004 increased by 1.1% to $25.7 million (8.7% of net sales) compared to $25.4 million (10.2% of net sales) in the first nine months of fiscal year 2003. The increase in absolute dollars was anticipated, as well as the reduction as a percent of revenues, as we continue to invest in a broad portfolio of products to address customer needs in all the markets we serve, while improving our development process with the goal of making it more cost effective.* A portion of our research and development is conducted in Europe, where the decline of the U.S. dollar relative to the Great British Pound has increased the dollar reported cost of that portion of our research and development spending.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses for the quarter ended December 31, 2003, increased 12.9% to $23.6 million (22.0% of net sales), compared to $20.9 million (24.1% of net sales) for the quarter ended December 31, 2002. Compared to the year ago quarter, costs were higher as a result of increased sales and marketing programs both domestically and internationally and due to unfavorable foreign exchange rates driving costs higher. We also had higher commission costs on higher revenues. In general, we have increased our overall level of marketing programs related to new product launches and intend to increase those further throughout the remainder of fiscal year 2004.*
Selling, general and administrative expenses for the first nine months of fiscal year 2004 increased 12.4% to $67.8 million, compared to $60.3 million in the first nine months of fiscal year 2003, which was driven primarily by foreign exchange rates and the increased level of spending to support new product launches and ongoing programs.
| 15 | ||
OPERATING INCOME. Operating income for the quarter ended December 31, 2003, increased by 88.9% to $23.8 million (22.1% of net sales), compared to $12.6 million (14.5% of net sales) for the quarter ended December 31, 2002. The increase in absolute dollars was driven primarily by the increase in revenues and gross margins.
Operating income for the first nine months of fiscal year 2004 increased by 42.9% to $57.0 million compared to $39.9 million in the first nine month of fiscal year 2003 which increase was driven primarily by higher revenues and lower operating expenses as a percent of revenues.
INTEREST AND OTHER INCOME, NET. Interest and other income for the quarter ended December 31, 2003, was $1.4 million compared to $0.6 million for the quarter ended December 31, 2002. The increase from the quarter ended December 31, 2002, was driven primarily by favorable foreign exchange gains.
Interest and other income for the first nine months of fiscal year 2004 was $2.0 million compared to $1.8 million for the first nine months of fiscal year 2003. Compared to the prior year, the increase was primarily due to balance sheet based foreign exchange translation gains, offset by lower interest income, with lower prevailing rates.
INCOME TAX EXPENSE. Income tax expense for the quarter ended December 31, 2003 was $7.6 million compared to $3.9 million for the quarter ended December 31, 2002 and represented tax rates of 30.0% in each period.
Income tax expense for the first nine months of fiscal year 2004 was $17.7 million or 30.0% of net income before taxes compared to $10.8 million or 25.8% of net income before taxes for the first nine months of fiscal year 2003 reflecting the release of tax reserves for expiration of a statute of limitations in that period.
FINANCIAL CONDITION:
OPERATING ACTIVITIES. During the nine months ended December 31, 2003, we generated $48.0 million in cash from operating activities, primarily from $41.3 million in net income, increases in accounts payable and accrued liabilities of $14.8 million in the aggregate, depreciation and amortization of $9.5 million, and an income tax benefit from stock option exercises of $5.2 million, offset by an increase in accounts receivable of $13.9 million, an increase in inventory of $5.4 million and a decrease in taxes payable of $3.6 million. In comparison, during the nine months ended December 31, 2002, we generated $34.1 million in cash from operating activities, primarily from $30.9 million in net income, depreciation and amortization of $8.4 million, and an increase in accrued liabilities of $3 million offset by an increase in accounts receivable of $8.1 million.
INVESTING ACTIVITIES. During the nine months ended December 31, 2003, we received $5.0 million from maturities of marketable securities. We incurred capital expenditures of $13.2 million principally for purchase of facilities that we previously leased in the United Kingdom, leasehold improvements, machinery and equipment, tooling and computers. In comparison, during the nine months ended December 31, 2002, we received $22.5 million in proceeds from the sale of marketable securities and purchased $13.0 million in marketable securities. We incurred capital expenditures of $9.5 million principally for building and leasehold improvements, tooling, and machinery and equipment.
FINANCING ACTIVITIES. During the nine months ended December 31, 2003, we repurchased 122,800 shares of our common stock under our stock repurchase plan for $1.8 million and reissued through employee benefit plans 121,729 shares of our treasury stock for $1.9 million. As of December 31, 2003, 142,600 shares remained available for repurchase under our stock repurchase plan. We received $14.9 million in proceeds from the exercise of stock options during the nine months ended December 31, 2003. In comparison, during the nine months ended December 31, 2002, we repurchased 1,522,400 shares of our common stock under our stock repurchase plan for $25.3 million and reissued through employee benefit plans 62,320 shares of our treasury stock for $1.1 million. We received $1.6 million in pr oceeds from the exercise of stock options during the nine months ended December 31, 2002.
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LIQUIDITY AND CAPITAL RESOURCES. As of December 31, 2003, we had working capital of $158.5 million, including $107.3 million of cash and cash equivalents, compared to working capital of $103.6 million, including $59.7 million of cash, cash equivalents and marketable securities at March 31, 2003. During the quarter ended December 31, 2003, we purchased land and facilities that we previously leased in Swindon, U.K. The purchase price was approximately $5.6 million and we believe the purchase will yield an attractive return on investment as well as lower our annual operating costs in comparison to continuing to lease.* During the next 12 to 18 months, we are planning or considering certain other capital expenditures related to facilities, including, among other things, an upgrade o f our corporate offices in Santa Cruz, the purchase of certain of our manufacturing facilities in Mexico which are currently leased and the purchase of land and construction of a factory and development center in China. The potential purchase in Mexico is currently highly uncertain and the planning for China in the very early stages and thus the total capital cost of these initiative is uncertain and could range from $10 to $20 million.*
We have a revolving credit facility with a major bank for $75 million, including a letter of credit subfacility. The facility and subfacility both expire on July 31, 2005. As of January 23, 2004, we had no cash borrowings under the revolving credit facility and $1.3 million outstanding under the letter of credit subfacility. The amounts outstanding under the letter-of-credit subfacility were principally associated with purchases of inventory. The terms of the credit facility contain covenants that materially limit our ability to incur debt and pay dividends, among other matters. These covenants may adversely affect us to the extent we cannot comply with them. We are currently in compliance with the covenants under this agreement.
We believe that our current cash and cash equivalents balance and cash provided by operations, will be sufficient to fund operations for at least the next twelve months.* However, any projections of future financial needs and sources of working capital are subject to uncertainty. See "Certain Forward-Looking Information" and "Risk Factors Affecting Future Operating Results ." When reading the sections titled "Results of Operations" and "Financial Condition," you should also read our unaudited condensed consolidated financial statements and related notes included elsewhere herein, our Annual Report on Form 10-K, and the section below entitled "Risk Factors Affecting Future Operating Results." We disclaim any obligation to update any forward-looking statements as a result of developments occurring after the date ofResults" in this Quarterly Report.
Report for factors that could affect our estimates for future financial needs and sources of working capital.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management'sESTIMATES:
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon Plantronics'Plantronics’ consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets andan d liabilities. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
REVENUE RECOGNITION. We recognize revenue net of estimated product returns and expected payments to resellers for customer programs including cooperative advertising, marketing development funds, volume rebates, and special pricing programs. ProductEstimated product returns are provided againstdeducted from revenues upon shipment, based on historical return rates, the product stage relative to its expected life cycle, and assumptions regarding the rate of sell-through to end users from our various channels based on historical sell-through rates. Should product lives vary significantly from our estimates, or should a particular selling channel experience a higher than estimated return rate, or a slower sell-through rate causing inventory build-up, then our estimated returns, which net against revenue, may need to be revised.r evised. Reductions to revenue for expected and actual payments to resellers for volume rebates and pricing protection are based on actual expenses incurred during the period, on estimates for what is due to resellers for estimated credits earned during the period and any adjustments for credits based on actual activity. If market conditions warrant, Plantronics may take action to stimulate demand, which could include increasing promotional programs, decreasing prices, or increasing discounts. Such actions could result in incremental reductions to revenue and marginmargins at the time such incentives are offered. To the extent that we reduce pricing, we may incur reductions to revenue for price protection based on our estimate of inventory in the channel that is subject to such pricing actions.
ACCOUNTS RECEIVABLE. We perform ongoing credit evaluations of our customers' financial condition and generally require no collateral from our customers. Plantronics maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is reviewed monthly and adjusted if deemed necessary. If the financial condition of our customers should deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
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INVENTORY. We maintain reserveswrite-down the cost basis of our inventory for estimated excess and obsolete inventory based on projected future shipments using historical selling rates, and taking into account market conditions, inventory on-hand, purchase commitments, product development plans and life expectancy, and competitive factors. If markets for Plantronics'Plantronics’ products and corresponding demand in such markets decline, then additional reserveswrite-downs may be necessary.
WARRANTY. We provide for the estimated cost of warranties at the time revenue is recognized. Our warranty obligation is affected by product failure rates and our costs to repair or replace the products. Should actual failure rates and costs differ from our estimates, revisions to the warranty obligation may be required.
GOODWILL AND INTANGIBLES. As a result of acquisitions we have made, we have goodwill and intangible assets on our balance sheet. These assets affect the amount of future amortization expense and possible impairment charges that we may incur. The determination of the value of goodwill and intangible assets, as well as the useful lifelives of amortizable intangible assets, requires management to make estimates and assumptions that affect our financial statements. We perform an annual impairment review of goodwill. If actual or expected revenue significantly declines, we may be required to record an impairment charge.
DEFERRED TAXES. We record deferred tax assets at the amounts estimated to be realizable. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the value of the corresponding assets, if we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, then an adjustment would be required.
RESULTS OF OPERATIONS:
The following table sets forth items
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 (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), and we may from time to time make oral forward-looking statements. These forward-looking statements may generally be identified by the Unaudited Condensed Consolidated Statementsuse of Operationssuch words as "expect," "anticipate," "believe," "intend," "plan," "will," or "shall," and include, among others, all of the statements marked in this Quarterly Report on Form 10-Q with an asterisk ("*"). These forward-looking statements are based on current expectations and entail various risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a percentageresul t of net sales:
Three Months Ended Six Months Ended September 30, September 30, -------------------- -------------------- 2002 2003 2002 2003 --------- --------- --------- ---------Net sales ........................................ 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales .................................... 49.5 48.7 48.9 49.9 --------- --------- --------- --------- Gross profit ................................. 50.5 51.3 51.1 50.1 --------- --------- --------- --------- Operating expenses: Research, developmentrisks andengineering ........ 9.9 8.7 10.1 9.0 Selling, general and administrative .......... 24.0 24.2 24.2 23.4 --------- --------- --------- --------- Total operating expenses ................ 33.9 32.9 34.3 32.4 --------- --------- --------- --------- Operating income ................................. 16.6 18.4 16.8 17.7 Interestuncertainties and otherincome, net ................... 0.4 0.1 0.7 0.3 --------- --------- --------- --------- Income before income taxes ....................... 17.0 18.5 17.5 18.0 Income tax expense ............................... 3.0 5.5 4.2 5.4 --------- --------- --------- --------- Net income ....................................... 14.0 % 13.0 % 13.3 % 12.6 % ========= ========= ========= =========
NET SALES. Net sales for the quarter ended September 30, 2003, increased by 15.5% to $95.1 million, compared to $82.4 million for the quarter ended September 30, 2002. Net sales for the six months ended September 30, 2003 were $187.9 million compared to $162.6 million for the six months ended September 30, 2002, an increase of 15.5%. For the quarter ended September 30, 2003, compared to the same period in the prior year, net sales in all product groups grew with the largest increase coming from new headsets for mobile phones. Net sales in this product group were up 56% in comparison to the year-ago quarter. The launch of the M3000, a wireless Bluetooth headset with 8-hour average talk time, and continued growth in demand for the MX150, were the key drivers of the mobile products growth versus a year ago. Our Office and Contact Center products business grew 7% versus the year ago quarter. This growth was primarily international and was fueled by the successful introduction of the CS60, a wireless headset for DECT-based office phones.
For the six month period, net sales increased domestically by 14.9% and internationally by 17.0%, with the increase in international sales in the European, Asia Pacific and Latin American regions, driven by increased unit sales of new office and contact center products, headsets sales for computers and favorable currency exchange rates. Domestic sales for the first six months of fiscal 2004 also increased due to strong sales of new headsets for mobile and computer products and sales of our Walker and Ameriphone products for the hearing impaired.
Overall, we remain cautiously optimistic regarding sales growth, based primarily on the strength of demand for new products.* While our net sales have grown over the last quarter, it is not clear the market is growing and that we can sustain our current level of growth. In addition, macro-economic factors, remain uncertain and the sales growth in Europe was favorably affected by exchange rates on the Euro and Great British Pound relative to the U.S. Dollar.
GROSS PROFIT. Gross profit for the quarter ended September 30, 2003, increased by 17.1% to $48.8 million (51.3% of net sales), compared to $41.6 million (50.5% of net sales) for the quarter ended September 30, 2002. Gross profit for the six months ended September 30, 2003 increased to $94.2 million (50.1% of net sales) from $83.1 million (51.1% of net sales) for the comparable period of fiscal 2003. As a percent of revenue, gross margins increased by 0.8 percentage points compared to the year ago quarter, due to favorable product mix, favorable foreign exchange rates and continued cost reductions, partially offset by increased provisions for excess and obsolete inventory.
Gross profit for the first six months of fiscal 2004 decreased as a percent of revenue by 1 percentage point compared to the first six months of fiscal 2003 due to product mix, with higher sales of lower margin mobile and computer products in the current fiscal year.
RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and engineering expenses for the quarter ended September 30, 2003, were flat at $8.2 million (8.7% of net sales), compared to $8.2 million (9.9% of net sales) for the quarter ended September 30, 2002, reflecting improved efficiencies in our research and development efforts with process improvements contributing to better ratios of expense to revenue.
Research, development and engineering expenses for the first six months of fiscal 2004 increased by 2.7% to $16.9 million (9.0% of net sales) compared to $16.4 million (10.1% of net sales) in the first six months of fiscal 2003. The increase in absolute dollars was anticipated, as well as the reduction as a percent of revenues, as we continue to expend R&D dollars in Europe where exchange rates are driving costs up, but also continue to make process improvements.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses for the quarter ended September 30, 2003, increased 16.3% to $23.0 million (24.2% of net sales), compared to $19.8 million (24.0% of net sales) for the quarter ended September 30, 2002. Compared to the year ago quarter, costs were higher in part, as a result of exchange rates. In addition, we had significant marketing spending domestically for planned marketing programs including test advertising, PR campaigns and catalog expenses, and in Europe, to support recently passed U.K. hands-free legislation. We have also increased our overall level of marketing programs related to new product launches and intend to increase those further throughout our fiscal year 2004.*
Selling, general and administrative expenses for the first six months of fiscal 2004 increased 12.1% to $44.1 million, compared to $39.4 million in the first six months of fiscal 2003, also driven by foreign exchange rates and the increased level of spending to support new product launches.
OPERATING INCOME. Operating income for the quarter ended September 30, 2003, increased by 27.9% to $17.5 million (18.4% of net sales), compared to $13.7 million (16.6% of net sales) for the quarter ended September 30, 2002. The increase in absolute dollars was driven primarily by the increase in revenues and gross margins.
Operating income for the first six months of fiscal 2004 increased by 21.7% to $33.2 million compared to $27.3 million in the first six month of fiscal 2003 driven by higher revenues and lower operating expenses as a percent of revenues.
INTEREST AND OTHER INCOME, NET. Interest and other income for the quarter ended September 30, 2003, was $0.1 million compared to $0.3 million for the quarter ended September 30, 2002, representing a decrease of 48.2%. Compared to the year ago-quarter, interest income decreased commensurate with lower prevailing interest rates. Foreign exchange gains were down only slightly compared to the year ago quarter.
Interest and other income for the first six months of fiscal 2004 was $0.6 million compared to $1.2 million in the first six months of fiscal 2003. Interest and other income also decreased during the first six months of fiscal 2004, in part due to an insurance refund received in fiscal 2003.
INCOME TAX EXPENSE. Income tax expense for the quarter ended September 30, 2003 was $5.3 million compared to $2.5 million for the quarter ended September 30, 2002 and represented tax rates of 30.0% compared the prior year's unusually low rate of 17.5% reflecting a release of tax reserves for expiration of a statute of limitations that year.
Income tax expense for the first six months of fiscal 2004 was $10.2 million or 30% of net income before taxes compared to $6.8 million or 23.9% of net income before taxes, in the first six months of fiscal 2003 reflecting the same release of reserves.
Financial Condition:
OPERATING ACTIVITIES. During the six months ended September 30, 2003, we generated $31.9 million in cash from operating activities, primarily from $23.7 million in net income, increases in accounts payable and accrued liabilities aggregating $10.0 million, depreciation and amortization of $6.4 million, and an income tax benefit from stock option exercises of $3.1 million, offset by a decrease in taxes payable of $5.8 million, an increase in inventory of $4.0 million and an increase in accounts receivable of $1.5 million. In comparison, in the six months ended September 30, 2002, we generated $19.8 million in operating activities, primarily from $21.7 million in net income.
INVESTING ACTIVITIES. During the six months ended September 30, 2003 we received $5.0 million from maturities of marketable securities. We incurred capital expenditures of $4.9 million principally for building and leasehold improvements, machinery and equipment, andtooling and computers. In comparison, during the six months ended September 30, 2002, we received $10 million in proceeds from the sale of marketable securities and purchased $13.0 million in marketable securities. We incurred capital expenditures of $6.6 million principally for building and leasehold improvements, tooling, and machinery and equipment..
FINANCING ACTIVITIES. In the six months ended September 30, 2003, we repurchased 122,800 shares of our common stock for $1.8 million and reissued through employee benefit plans 108,088 shares of our treasury stock for $1.6 million. As of September 30, 2003, 142,600 shares remained available for repurchaseset forth below under our stock repurchase plan. We received $6.9 million in proceeds from the exercise of stock options during the six months ended September 30, 2003. In comparison, during the six months ended September 30, 2002, we repurchased 526,200 shares of our common stock for $9.6 million and reissued through employee benefit plans 43,118 shares of our treasury stock for $0.8 million. We received $0.8 million in proceeds from the exercise of stock options during the six months ended September 30, 2002.
EFFECT OF EXCHANGE RATE ON NET CHANGES IN CASH AND CASH EQUIVALENTS. During the six month ended September 30, 2003, we recorded ($0.8) million in unfavorable currency translation adjustments relating to the recording of the fair value of cash flow hedges of ($1.6) million offset by favorable exchange rate gains of $0.8 million due to strengthening of the Euro and Great British Pound values relative to the U.S. dollar. During the six months ended September 30, 2002, we recorded $1.0 million in favorable currency translation adjustments related to foreign currency translation gains.
LIQUIDITY AND CAPITAL RESOURCES. As of September 30, 2003, we had working capital of $137.3 million, including $92.1 million of cash, cash equivalents and marketable securities, compared to working capital of $103.6 million, including $59.7 million of cash, cash equivalents and marketable securities at March 31, 2003. As of September 30, 2003, we expect to spend an additional $13 million for capital expenditures for the remainder of the fiscal year relating to purchase of tooling, machinery and equipment, furniture and fixtures and building and leasehold improvements.* Of the $13 million mentioned above, we expect to spend approximately $5 million to purchase buildings for our UK subsidiary. We expect that any capital expenditure commitments will be funded by cash from operations.*
We have a revolving credit facility with a major bank for $75 million, including a letter of credit subfacility. The facility and subfacility both expire on July 31, 2005. As of October 24, 2003 we had no cash borrowings under the revolving credit facility and $0.8 million outstanding under the letter of credit subfacility. The amounts outstanding under the letter-of-credit subfacility were principally associated with purchases of inventory. The terms of the credit facility contain covenants that materially limit our ability to incur debt and pay dividends, among other matters. These covenants may adversely affect us to the extent we cannot comply with them. We are currently in compliance with the covenants under this agreement.
We believe that our current cash, cash equivalents and marketable securities balances and cash provided by operations, will be sufficient to fund operations for at least the next twelve months.* However, any projections of future financial needs and sources of working capital are subject to uncertainty. See "Certain Forward-Looking Information" and "Risk Factors Affecting Future Operating Results" inResults." When reading the sections titled "Results of Operations" and "Financial Condition," you should also read our unaudited condensed consolidated financial statements and related notes included elsewhere herein, our Annual Report on Form 10-K, and the section below entitled "Risk Factors Affecting Future Operating Results." We undertake no obligation to update any forward-looking statements to reflect any developments or events occurring after the date of this Quarterly Report for factors that could affect our estimates for future financial needs and sources of working capital.
Report.
RISK FACTORS AFFECTING FUTURE OPERATING RESULTS:
Investors or potential investors in our stock should carefully consider the risks described below. Our stock price will reflect the performance of our business relative to, among other things, our competition, expectations of securities analysts or investors, general economic and market conditions and industry conditions. You should carefully consider the following factors in connection with any investment in our stock. Our business, financial condition and results of operations could be materially adversely affected if any of the risks occur. Should any or all of the following risks materialize, the trading price of our stock could decline and investors could lose all or part of their investment.
We may face reductions in overall demand for our products if thethere is a strong decline in national or international economic growth declines or experiences a "double-dip" recession.
growth.
Our markets have exhibited cyclical behavior since the fourth quarter of fiscal 2001. Our business is affected by general economic conditions in the U.S. and globally, which have led to reduced demand for a variety of goods and services, including many technology products. While certain economic indicators have improved, the overall economic and geopolitical environment continues to be challenging and unpredictableWeunpredictable. We remain uncertain about the overall level of demand for our products and, consequently, our level of future profitability. In particular, we believe our business is heavily influenced by employment levelslevels. If employment levels do not improve, we may not achieve the level of sales required to achieve our projected financial results, which could in turn materially adversely affect thet he market price of our stock.
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A substantialsignificant portion of our sales come from the contact center market and a further decline in demand in that market could materially adversely affect our results.
We have historically derived, and continue to derive a substantialsignificant portion of our net sales from the contact center market. Although we saw a slight increase in sales in this market in the second half of fiscal year 2003, this market has shown signs of saturation in the past year. There was a general reduction in the level of overall market demand for contact center products, and there may also be a surplus of existing inventory in use at contact centers that will slow future demand for our products. While we believe that this market may grow in future periods, this growth could be slow or revenues from this market could continue tobe flat or decline in response to various factors. For example, legislation enabling consumers to block telemarketing calls is upheld, it may adversely affect growth in the contact center market. A deterioration in general economic conditions could result in a reduction in the establishment of new contact centers and in capital investments to expand or upgrade e xistingexisting centers, and we believe this is in fact currently negatively affecting our business. Because of our reliance on the contact center market, we will be affected more by changes in the rate of contact centerce nter establishment and expansion and the communications products that contact center agents use than would a company serving a broader market. Any decrease in the demand for contact centers and related headset products could cause a decrease in the demand for our products, which would materially adversely affect our business, financial condition and results of operations.
New product development is risky, and we will be materially adversely affected if we do not respond to changing customer requirements and new technologies.
Our product development efforts historically have been directed toward enhancement of existing products and development of new products that capitalize on our core capabilities. The success of new product introductions is dependent on a number of factors, including the proper selection of new technologies, product features, timely completion and introduction of new product designs, cost-effective manufacture of such products, quality of new products and market acceptance. Although we attempt to determine the specific needs of headset users in our target markets, because almost all of our sales are indirect, we may not always be able to timely and accurately predict end-user requirements. As a result, our products, specifically, our range of Bluetoothproducts, may not be timely developed, designed to address current or future end-user requirements, offered at competitive prices or achieve broad customer acceptance among end-users, which could materially adversely affect our business, financial condition and results of operations. Demand for new wireless headsets may not develop as we anticipate. Moreover, we generally incur substantial research and development costs before the technical feasibility and commercial viability of a new product can be ascertained. Accordingly, revenue growth rates and operating margins from new products may not be sufficient to recover the associated development costs.
Historically, the technology used in lightweight communications headsets has evolved slowly. New products have primarily offered stylistic changes and quality improvements, rather than significant new technologies. The technology used in hands-free communications devices, including our products, is evolving more rapidly now than it has historically and we anticipate that this trend may accelerate.* We believe this is particularly true for our newer emerging technology products especially in the mobile, computer, residential and certain parts of the office markets. We believe products designed to serve these markets generally exhibit shorter lifecycles and are increasingly based on open standards and protocols. The end markets served are much larger than the traditional contact center market. ThisTh is combination of factors may lead to increased commoditization, as a greater number of competitors attempt to introduce products, or reverse engineer our products and offer similar but lower quality products at lower price points.
Our success depends upon our ability to enhance existing products, to respond to changing market requirements, and to develop and introduce in a timely manner new products that keep pace with technological developments. Although we strive to be a leader in developing new technologies, products and solutions, the technologies, products and solutions that we choose to pursue may not become as commercially successful as we planned. We may experience difficulties in realizing the expected benefits from our investments in new technologies. If we are unable to develop and introduce enhanced or new products in a timely manner in response to changing market conditions or customer requirements, it will materially adversely affect our business, financial condition and results of operations.
With the historically slow evolution of our products, we have generally been able to phase out obsolete products without significant impact to our operating margins. As we develop new generations of products more quickly, we expect that the pace of product obsolescence will increase concurrently. The disposition of inventories of obsolete products may result in reductions to our operating margins and materially adversely affect our earnings and results of operations.
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Increased adoption of speech-activated and voice interactive software products by businesses could limit our ability to grow in the contact center market.
We are seeing a proliferation of speech-activated and voice interactive software in the market place. We have been re-assessing long-term growth prospects for the contact center market given the growth rate and the advancement of these new voice recognition-based technologies. Businesses that first embraced them to resolve labor shortages at the peak of the last economic up cycle are now increasing spending on these technologies in hopes of reducing total costs. We may experience a decline in our sales to the contact center market if businesses increase their adoption of speech-activated and voice interactive software as an alternative to customer service agents. Should this trend continue, it could cause a net reduction in contact center agents and our revenues to this market segment could declinedec line rather than grow in future years.
We are counting on the office, mobile, computer and residential markets to develop, and we could be materially adversely affected if they do not develop as we expect.
While the contact center market is still a substantial portion of our business, we believe that our future prospects will depend in large part on the growth in demand for headsets in the office, mobile, computer and residential markets.* These communications headset markets are relatively new and continue to be developed.* Moreover, we do not have extensive experience in selling headset products to customers in these markets. If the demand for headsets in these markets fails to develop, or develops more slowly than we currently anticipate, or if we are unable to effectively market our products to customers in these markets, it would have a material adverse effect on the potential demand for our products and on our business, financial condition, results of operations and cash flows.
These headset markets are also subject to general economic conditions and if there is a slowing of national or international economic growth, these markets may not materialize to the levels we require to achieve our anticipated financial results, which could in turn materially adversely affect the market price of our stock. In particular, we may beare under obligation to absorb from our retailers products which have failed to sell as expected, and in some instances, such products may be returned to our inventory. Should product returns vary significantly from our estimate, then our estimated returns which net against revenue, may need to be revised.
Our quarterly operating results may fluctuate significantly from a number of causes outside our control.
Our quarterly results of operations may vary significantly in the future for a variety of reasons, including the following:
general economic conditions, compounded by the events on and following September 11, 2001;changes in demand for our products, including order cancellation by customers;impact of acquired businesses and technologies;insolvency of purchasers of our products or failure of purchasers of our products to pay amounts due to us;timing and size of orders from customers;price erosion;inability to ramp production or delays in deliveries of components and subassemblies by our suppliers;inability to compete with the pricing pressures in the mobile headset category;penalties for cancellation or inability to cancel custom components;changes in the mix of products sold by us;variances in the timing and amount of engineering and operating expenses;distribution channel mix variations;changes in the levels of cooperative advertising or market development funding required by retail resellers of our products;delays in shipments of our products;material product returns and customer credits;new product introductions by us or our competitors;entrance of new competitors;changes in actual or target inventory levels of our channel partners;changes in the costs of our raw materials, components and subassemblies;seasonal fluctuations in demand and linearity of sales within the quarter; andthe impact on the U.S. economy due to the continued presence of US troops in Iraq and geopolitical risk factors in Africa, the Middle East and North Korea.
| · | general economic conditions, compounded by the events on and following September 11, 2001; | ||
| · | changes in demand for our products, including order cancellation by customers; | ||
| · | impact of acquired businesses and technologies; | ||
| · | insolvency of purchasers of our products or failure of purchasers of our products to pay amounts due to us; | ||
| · | timing and size of orders from customers; | ||
| · | price erosion; | ||
| · | inability to ramp production or delays in deliveries of components and subassemblies by our suppliers; | ||
| · | inability to compete with the pricing pressures in the mobile headset category; | ||
| · | penalties for cancellation or inability to cancel custom components; | ||
| · | changes in the mix of products sold by us; | ||
| · | variances in the timing and amount of engineering and operating expenses; |
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| · | distribution channel mix variations; | ||
| · | changes in the levels of cooperative advertising or market development funding required by retail resellers of our products; | ||
| · | delays in shipments of our products; | ||
| · | material product returns and customer credits; | ||
| · | new product introductions by us or our competitors; | ||
| · | entrance of new competitors; | ||
| · | changes in actual or target inventory levels of our channel partners; | ||
| · | changes in the costs of our raw materials, components and subassemblies; | ||
| · | seasonal fluctuations in demand and linearity of sales within the quarter; and | ||
| · | the impact on the U.S. economy due to the continued presence of U.S. troops in Iraq and geopolitical risk factors in Africa, the Middle East and North Korea. |
Each of the above factors is difficult to forecast and thus could have a material adverse effect on our business, financial condition and results of operations.
We generally ship most orders during the quarter in which they are received. As a result, quarterly net sales and operating results depend primarily on the volume and timing of orders received during the quarter. It is difficult to forecast orders for a given quarter. Since a large portion of our operating expenses, including rent, salaries and certain manufacturing expenses, are fixed and difficult to reduce or modify, if net sales do not meet our expectations, our business, financial condition and results of operations could be materially adversely affected.
We believe that period-to-period comparisons of our operating results are not necessarily meaningful and should not be relied upon as indicative of future operating results. In addition, our operating results in a future quarter or quarters may fall below the expectations of securities analysts or investors, and, as a result, the price of our common stock might fall.
If we are not able to collect on our accounts receivable due to the general economic conditions, we may be materially adversely affected.
If the overall economy slows, further, it could affect the financial health of certain purchasers of our products, potentially resulting in the failure of such purchasers to pay amounts that they owe to us. Due to the decline in the economy, the credit risks relating to these resellers/customers have increased. We generally offer our customers certain credit terms, allowing them to pay for products purchased from us between 30 and 60 days or more after we ship the products. Receipt of payment for our products depends on the financial liquidity of those customers. If significant customers, or a significant number of customers, experience liquidity problems, this could affect our ability to collect our accounts receivable, which could materially adversely affect our business, financial condition or results of operations. While we have implemented certain programs to assist us in monitoring and mitigating thesethes e risks, there can be no assurance that such programs will be effective in r educingreducing our credit risks. We also continue to monitor credit exposures from weakened financial conditions in certain geographic regions and the impact that such conditions may have on the worldwide economy. We have experienced losses due to defaults by our customers on their accounts payable. Although these losses have not been significant, future payment defaults by customers could harm our business and have a material adverse effect on our operating results, financial condition and cash flows.
We have strong competitors and will likely face additional competition in the future.
The markets for our products are highly competitive. We compete with a variety of companies in the various markets for communications headsets. OurCurrently, our single largest competitor is GN Netcom, a subsidiary of GN Great Nordic Ltd., a Danish telecommunications conglomerate.
| 21 | ||
GN Netcom has made a number of acquisitions over the years, most recently, Claria Headsets, an Australian based manufacturer of office, contact center and mobile headsets.years. We believe the acquisitions of Unex, ACS Wireless, Nortel Liberation, AB Transistor, Jabra, Hello Direct, Sensortech, QuBit and Claria have provided GN Netcom with a broader product line and greater marketing presence than it had prior to these acquisitions. We believe it is reasonable to anticipate that GN Netcom may continue to make additional acquisitions.
We currently operate principally in a multilevel distribution model -- we sell most of our products to distributors who, in turn, resell to dealers or end-customers. GN Netcom's acquisitions indicate it may be moving towards a direct sales model, since six of the nine acquisitions were of companies employing direct sales and marketing models. While we believe that our business and our customers benefit from our current distribution structure, if GN Netcom or other competitors sell directly, they may offer lower prices which could materially adversely affect our business and results of operations.
Labtec, Inc. was acquired by Logitech International S.A. in March 2001 and is a significant competitor in the computer headset market. Logitech is a manufacturer and seller of computer accessory products. Following this acquisition, Labtec gained greater resources with which to compete with us than it had prior to the acquisition. In addition, it has expanded its product offerings to include mobile headsets to address the changing regulatory environment regarding driver safety and mobile phone usage.
We anticipate that we will face additional competition from companies that currently do not offer communications headsets. ThisWe believe that this is particularly true in the office, mobile, computer and residential markets. TheIn addition, the Sony-Ericsson joint venture has also announced the launch of several Bluetooth handsfreehands free solutions.
On October 25, 2002, Danish manufacturer of audiology products, William Demant Holdings A/S, and Germany'sGermany’s maker of professional electroacousticelectro acoustic products, Sennheiser Electronics Gmbh & Co. KG, announced the establishment of a joint venture in the telecommunication headset industry, Sennheiser Communications A/S.We expect the combination of William Demant Holdings'Holdings’ technology expertise with Sennheiser'sSennheiser’s established distribution channels will create additional competition.
We anticipate other competition from consumer electronics companies that currently manufacture and sell mobile phones or computer peripheral equipment. These new competitors are likely to be larger, offer broader product lines, bundle or integrate with other products communications headset tops and bases manufactured by them or others, offer products containing bases that are incompatible with our headset tops and have substantially greater financial, marketing and other resources than we do.
We anticipate that we will also face additional competition from companies, principally located in the Far East, which offer very low cost headset products, including products which are modeled on, or are direct copies of our products.* These new competitors are likely to offer very low cost products which may result in price pressure in the market.* If market prices are substantially reduced by such new entrants into the headset market, our business, financial condition or results of operations could be materially adversely affected.
We believe that the market for lightweight communications headsets is showing some signs of commoditization. In particular, we believe that our competitors, especially GN Netcom, have chosen to compete more on price than they have historically. While this has long been true of competitors from the Far East, and has been true of GN for the last two years or so, we think the trend remains and that customers are also more receptive to lower cost products, even when the quality, service or total value of the offer may be notably lower as well. In April 2003, GN announced the closing of Hello Direct'sDirect’s headquarters in San Jose, California and the consolidation of that subsidiary into GN'sGN’s North American headquarters in Nashua, New Hampshire, while moving substantially all of Hello Direct'sDirect 46;s manufacturing operations to Asia. This move may enable GN to drive their prices down even further.
Historically, our expertise in acoustics and design has allowed us to design, develop and manufacture products with the levels of sound quality enabling us to meet the needs of our customers. Due to technological advances such as better digital signal processing, our current and future competitors may be able to develop products with the same or better audio quality at lower costs. These competitors could then be able to compete more effectively in terms of product quality or price that could materially adversely affect our business and results of operations.
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We believe that important competitive factors for us are:
price;product reliability;product features;product mix;customer service and support;marketing;reputation;distribution;ability to meet delivery schedules; andwarranty terms and product life.
| · | price; | ||
| · | product reliability; | ||
| · | product features; | ||
| · | product mix; | ||
| · | customer service and support; | ||
| · | marketing; | ||
| · | reputation; | ||
| · | distribution; | ||
| · | ability to meet delivery schedules; and | ||
| · | warranty terms and product life. |
If we do not compete successfully with respect to any of these or other factors it could materially adversely affect our business, financial condition and results of operations. Further, if we do not successfully develop and market products that compete successfully with those of our competitors, it would materially adversely affect our business, financial condition and results of operations.
If we do not match production to demand, we will be at risk of losing business or our gross margins could be materially adversely affected.
Historically, we have generally been able to increase production to meet increasing demand. However, the demand for our products is dependent on many factors and such demand is inherently difficult to forecast. We have experienced sharp fluctuations in demand, especially for headsets for wireless and cellular phones. Significant unanticipated fluctuations in demand and the global trend towards consignment of products could cause the following operating problems, among others:
If forecasted demand does not develop, we could have excess production or excess capacity. Excess production could result in higher inventories of finished products, components and subassemblies. If we were unable to sell these inventories, we would have to write off some or all of our inventories of excess products and unusable components and subassemblies. Excess manufacturing capacity could lead to higher production costs and lower margins.Significant reduction in production levels to address decreases in demand may leave us unprepared to meet a rapid increase in demand for our products.If demand increases beyond that forecasted, we would have to rapidly increase production. We depend on suppliers to provide additional volumes of components and subassemblies, and are experiencing greater dependencies on single source suppliers. Therefore, we might not be able to increase production rapidly enough to meet unexpected demand. This could cause us to fail to meet customer expectations. There could be short-term losses of sales while we are trying to increase production. If customers turn to competitive sources of supply to meet their needs, there could be a long-term impact on our revenues.Rapid increases in production levels to meet unanticipated demand could result in higher costs for components and subassemblies, increased expenditures for freight to expedite delivery of required materials, and higher overtime costs and other expenses. These higher expenditures could lower our profit margins. Further, if production is increased rapidly, there may be decreased manufacturing yields, which may also lower our margins.The introduction of the new Bluetooth headsets presents many significant manufacturing, marketing and other operational risks and uncertainties, including: developing and marketing these wireless headset products; unforeseen delays or difficulties in introducing and achieving volume production of such products; our dependence on third parties to supply key components, many of which have long lead times; and our ability to forecast demand and customer return rates accurately for this new product category for which relevant data is incomplete or not available. We have longer lead times with certain suppliers than commitments from some of our customers. In particular, a major customer only provides us with a 45 day commitment while we commit to over $2 million of inventory purchases beyond this time period. As this inventory is unique to this customer and we have no alternative means of selling any finished products, this could potentially result in significant write-downs of excess inve ntories.
| · | If forecasted demand does not develop, we could have excess production or excess capacity. Excess production could result in higher inventories of finished products, components and subassemblies. If we were unable to sell these inventories, we would have to write off some or all of our inventories of excess products and unusable components and subassemblies. Excess manufacturing capacity could lead to higher production costs and lower margins. | ||
| · | Significant reduction in production levels to address decreases in demand may leave us unprepared to meet a rapid increase in demand for our products. | ||
| · | If demand increases beyond that forecasted, we would have to rapidly increase production. We depend on suppliers to provide additional volumes of components and subassemblies, and are experiencing greater dependencies on single source suppliers. Therefore, we might not be able to increase production rapidly enough to meet unexpected demand. This could cause us to fail to meet customer expectations. There could be short-term losses of sales while we are trying to increase production. If customers turn to competitive sources of supply to meet their needs, there could be a long-term impact on our revenues. | ||
| · | Rapid increases in production levels to meet unanticipated demand could result in higher costs for components and subassemblies, increased expenditures for freight to expedite delivery of required materials, and higher overtime costs and other expenses. These higher expenditures could lower our profit margins. Further, if production is increased rapidly, there may be decreased manufacturing yields, which may also lower our margins. |
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| · | The introduction of Bluetooth and other wireless headsets presents many significant manufacturing, marketing and other operational risks and uncertainties, including: developing and marketing these wireless headset products; unforeseen delays or difficulties in introducing and achieving volume production of such products; our dependence on third parties to supply key components, many of which have long lead times; and our ability to forecast demand and customer return rates accurately for this new product category for which relevant data is incomplete or not available. We have longer lead times with certain suppliers than commitments from some of our customers. In particular, a major customer only provides us with a 45 day commitment while we commit to inventory purchases beyond this time period. As this inventory is unique to this customer and we have no alternative means of selling any finished products, this could potentially result in significant write-downs of excess inve ntories. |
Any of the foregoing problems could materially adversely affect our business, financial condition and results of operations.
We expect to make future acquisitions and acquisitions involve material risks.
On January 2, 2002, we acquired Ameriphone, a manufacturer of specialty products for the hearing impaired community. We may in the future acquire other companies. There are inherent risks in the acquisition of another company that could materially adversely affect our business, financial condition and results of operations. The types of risks faced in connection with acquisitions include:
cultural differences in the conduct of business;difficulties inand integrationof the operations, technologies, and products of the acquired company;the risk of diverting management's attention from normal daily operations of the business;potential difficulties in completing projects associated with purchased in-process research and development;risks of entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;the abilities of representatives, distributors, OEM customers and other resellers which are retained by the acquired company or customers of the acquired company;differences in the business information systems of the companies;difficulties in integrating the transactions and business information systems of the acquired company; andthe potential loss of key employees of the acquired company.
include, among others:
| · | cultural differences in the conduct of business; | ||
| · | difficulties in integration of the operations, technologies, and products of the acquired company; | ||
| · | the risk that the consolidation of the specialty product group in Chattanooga, Tennessee may not produce the enhanced efficiencies or be as successful as we expect; | ||
| · | the risk of diverting management's attention from normal daily operations of the business; | ||
| · | potential difficulties in completing projects associated with purchased in-process research and development; | ||
| · | risks of entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions; | ||
| · | the abilities of representatives, distributors, OEM customers and other resellers which are retained by the acquired company or customers of the acquired company; | ||
| · | differences in the business information systems of the companies; | ||
| · | difficulties in integrating the transactions and business information systems of the acquired company; and | ||
| · | the potential loss of key employees of the acquired company. |
Mergers and acquisitions, particularly those of high-technology companies, are inherently risky, and no assurance can be given that the Ameriphone acquisition, or future acquisitions, will be successful and will not materially adversely affect our business, operating results or financial condition. We must also manage any suchacquisition related growth effectively. Failure to manage growth effectively and successfully integrate acquisitions made by us could materially harm our business and operating results.
We depend on our suppliers and failure of our suppliers to provide quality components or services in a timely manner could adversely affect our results.
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Our growth and ability to meet customer demands depend in part on our capability to obtain timely deliveries of raw materials, components, subassemblies and products from our suppliers. We buy raw materials, components and subassemblies from a variety of suppliers and assemble them into finished products. We also have certain of our products manufactured for us by third party suppliers. The cost, quality, and availability of such goods are essential to the successful production and sale of our products. Obtaining raw materials, components, subassemblies and finished products entails various risks, including the following:
We obtain certain raw materials, subassemblies, components and products from single suppliers, and alternate sources for these items are not readily available. To date, we have experienced only minor interruptions in the supply of these raw materials, subassemblies, components and products, none of which has significantly affected our results of operations. Current adverse economic conditions could lead to a higher risk of failure of our suppliers to remain in business or to be able to purchase the raw materials, subcomponents and parts required by them to produce and provide to us the parts we need. An interruption in supply from any of our single source suppliers in the future would materially adversely affect our business, financial condition and results of operations.Prices of raw materials, components and subassemblies may rise. If this occurs and we are not able to pass these increases on to our customers or to achieve operating efficiencies that would offset the increases, it would have a material adverse effect on our business, financial condition and results of operations.Due to the lead times required to obtain certain raw materials, subassemblies, components and products from certain foreign suppliers, we may not be able to react quickly to changes in demand, potentially resulting in either excess inventories of such goods or shortages of the raw materials, subassemblies, components and products. Lead times are particularly long on silicon-based components incorporating radio frequency and digital signal processing technologies and such components are an increasingly important part of our product costs. Failure in the future to match the timing of purchases of raw materials, subassemblies, components and products to demand could increase our inventories and/or decrease our revenues, consequently materially adversely affecting our business, financial condition and results of operations.Most of our suppliers are not obligated to continue to provide us with raw materials, components and subassemblies. Rather, we buy most raw materials, components and subassemblies on a purchase order basis. If our suppliers experience increased demand or shortages, it could affect deliveries to us. In turn, this would affect our ability to manufacture and sell products that are dependent on those raw materials, components and subassemblies. This would materially adversely affect our business, financial condition and results of operations.Although we generally use standard raw materials, parts and components for our products, the high development costs associated with emerging wireless technologies permits us to work with only a single source of silicon chip-sets on any particular new product. We, or our chosen supplier of chip-sets, may experience challenges in designing, developing and manufacturing components in these new technologies which could affect our ability to meet time to market schedules. Due to our dependence on single suppliers for certain chip sets, we could experience higher prices, a delay in development of the chip-set, and/or the inability to meet our customer demand for these new products. Our business, operating results and financial condition could therefore be materially adversely affected as a result of these factors.
| · | We obtain certain raw materials, subassemblies, components and products from single suppliers, and alternate sources for these items are not readily available. To date, we have experienced only minor interruptions in the supply of these raw materials, subassemblies, components and products, none of which has significantly affected our results of operations. Current adverse economic conditions could lead to a higher risk of failure of our suppliers to remain in business or to be able to purchase the raw materials, subcomponents and parts required by them to produce and provide to us the parts we need. An interruption in supply from any of our single source suppliers in the future would materially adversely affect our business, financial condition and results of operations. | ||
| · | Prices of raw materials, components and subassemblies may rise. If this occurs and we are not able to pass these increases on to our customers or to achieve operating efficiencies that would offset the increases, it would have a material adverse effect on our business, financial condition and results of operations. | ||
| · | Due to the lead times required to obtain certain raw materials, subassemblies, components and products from certain foreign suppliers, we may not be able to react quickly to changes in demand, potentially resulting in either excess inventories of such goods or shortages of the raw materials, subassemblies, components and products. Lead times are particularly long on silicon-based components incorporating radio frequency and digital signal processing technologies and such components are an increasingly important part of our product costs. Failure in the future to match the timing of purchases of raw materials, subassemblies, components and products to demand could increase our inventories and/or decrease our revenues, consequently materially adversely affecting our business, financial condition and results of operations. | ||
| · | Most of our suppliers are not obligated to continue to provide us with raw materials, components and subassemblies. Rather, we buy most raw materials, components and subassemblies on a purchase order basis. If our suppliers experience increased demand or shortages, it could affect deliveries to us. In turn, this would affect our ability to manufacture and sell products that are dependent on those raw materials, components and subassemblies. This would materially adversely affect our business, financial condition and results of operations. | ||
| · | Although we generally use standard raw materials, parts and components for our products, the high development costs associated with emerging wireless technologies permits us to work with only a single source of silicon chip-sets on any particular new product. We, or our chosen supplier of chip-sets, may experience challenges in designing, developing and manufacturing components in these new technologies which could affect our ability to meet time to market schedules. Due to our dependence on single suppliers for certain chip sets, we could experience higher prices, a delay in development of the chip-set, and/or the inability to meet our customer demand for these new products. Our business, operating results and financial condition could therefore be materially adversely affected as a result of these factors. |
We sell our products through various channels of distribution and a failurecertain of thosethese channels to operate as we expect could decrease our revenues.
are becoming volatile.
We sell substantially all of our products through distributors, retailers, OEMsOEM's and telephony service providers. Our existing relationships with these parties are not exclusive and can be terminated by either party without cause. Our channel partners also sell or can potentially sell products offered by our competitors. To the extent that our competitors offer our channel partners more favorable terms, such partners may decline to carry, de-emphasize or discontinue carrying our products. In the future, we may not be able to retain or attract a sufficient number of qualified channel partners. Further, such partners may not recommend, or continue to recommend, our products. In the future, our OEM customers or potential OEM customers may elect to manufacture their own products, similar to those wew e currently sell to them. The inability to establish or maintain successful relationships with distributors, OEMs,OEM's, retailers and telephony service providers or to expand our distribution chann elschannels could materially adversely affect our business, financial condition or results of operations.
| 25 | ||
As a result of the growth of our mobile headset business, our customer mix is changing and certain OEMsOEM's and wireless carriers are becoming significant. This greater reliance on certain large customers could increase the volatility of our revenues and earnings.
In particular, we have several large customers whose order patterns are difficult to predict. Offers and promotions by these customers may result in significant fluctuations of their purchasing activities over time. If we are unable to anticipate the purchase requirements of these customers, our quarterly revenues may be adversely affected and/or we may be exposed to large volumes of inventory that cannot be immediately resold to other customers.
Our distribution channels generally hold inventories of our products, determined in their own business judgment to be sufficient to meet their customer's delivery requirements. Such inventory levels are subject to market conditions, business judgment by the reseller and our ability to meet their time-to-ship needs. Rapid reductions by our distributors, OEMs,OEM's, retailers and other customers in the levels of inventories held in our products could materially adversely affect our business, financial condition or results of operations. We are also exposed to long lead termtime commitments with certain suppliers for a key component while such exposure is not similarly passed through to our customers. We may be at risk for these components if our customers reject or cancel orders unexpectedly or with inadequateinade quate notice.
Our stock price may be volatile and the value of your investment in Plantronics stock could be lost.
diminished.
The market price for our common stock may continue to be affected by a number of factors, including:
uncertain economic conditions and the decline in investor confidence in the market place;the announcement of new products or product enhancements by us or our competitors;the loss of services of one or more of our executive officers or other key employees;quarterly variations in our or our competitors' results of operations;changes in our published forecasts of future results of operations;changes in earnings estimates or recommendations by securities analysts;developments in our industry;sales of substantial numbers of shares of our common stock in the public market;general market conditions; andother factors unrelated to our operating performance or the operating performance of our competitors.
| · | uncertain economic conditions and the decline in investor confidence in the market place; | |
| · | the announcement of new products or product enhancements by us or our competitors; | |
| · | the loss of services of one or more of our executive officers or other key employees; | |
| · | quarterly variations in our or our competitors' results of operations; | |
| · | changes in our published forecasts of future results of operations; | |
| · | changes in earnings estimates or recommendations by securities analysts; | |
| · | developments in our industry; | |
| · | sales of substantial numbers of shares of our common stock in the public market; | |
| · | general market conditions; and | |
| · | other factors unrelated to our operating performance or the operating performance of our competitors. |
In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many technology companies, in particular, and that have often been unrelated to the operating performance of these companies. Such factors and fluctuations, as well as general economic, political and market conditions, such as recessions, could materially adversely affect the market price of our common stock.
If there are problems that affect our principal manufacturing facility in Mexico, we could face losses in revenues or material increases in costs of our operations.
The majority of our manufacturing operationsrevenues come from products currently produced in our facilities in Tijuana, Mexico.
The majority of our revenues come from products that are currently performedproduced in a single facilityour facilities in Tijuana, Mexico. A fire, flood or earthquake, political unrest or other disaster or condition affecting our facilityfacilities could have a material adverse effect on our business, financial condition and results of operations. The prospect of such unscheduled interruptions may continue for the foreseeable future and we are unable to predict their occurrence, duration or cessation. While we have developed a disaster recovery plan and believe we are adequately insured with respect to this facility,these facilities, we may not be able to implement the plan effectively or on a timely basis or recover under applicable insurance policies.
| 26 | ||
We have significant foreign operations and there are inherent risks in operating abroad.
During our secondthird quarter of fiscal year 2004, approximately 32%38% of our net sales were derived from customers outside the United States. In addition, we conduct the majority of our headset assembly operations in our manufacturing facility located in Mexico, and we obtain most of the components and subassemblies used in our products from various foreign suppliers. We also purchase a growing number of turn-key products directly from Asia. The inherent risks of international operations, either in Mexico or in Asia, could materially adversely affect our business, financial condition and results of operations. The types of risks faced in connection with international operations and sales include:
cultural differences in the conduct of business;greater difficulty in accounts receivable collection;unexpected changes in regulatory requirements;tariffs and other trade barriers;economic and political conditions in each country;management and operation of an enterprise spread over various countries; andthe burden of complying with a wide variety of foreign laws.
include, among others:
| · | cultural differences in the conduct of business; | ||
| · | greater difficulty in accounts receivable collection; | ||
| · | unexpected changes in regulatory requirements; | ||
| · | tariffs and other trade barriers; | ||
| · | economic and political conditions in each country; | ||
| · | management and operation of an enterprise spread over various countries; and | ||
| · | the burden of complying with a wide variety of foreign laws. |
Our foreign operations put us at risk of loss if there are material changes in currency values as compared to the U.S. dollar.
A significant portion
Approximately 26% of our business is conducted in currencies other than the U.S. dollar. Substantially all of our sales outside of North America are transacted in the Euro or local currencies. We are therefore exposed to risks associated with fluctuations in exchange rates that can affect our revenue and gross margins and can also generate currency transaction gains and losses.
We administer programs designed to reduce our foreign currency net asset exposure and our economic exposure. However, there can be no assurance that our hedging policy will be effective in reducing transaction and/or economic gains and losses. There can be no assurance that we will not continue to experience currency losses in the future, nor can we predict the effects of future exchange rate fluctuations on future operating results. To the extent that sales to our foreign customers increase or transactions in foreign currencies increase, our business, financial condition and results of operations could be materially adversely affected by exchange rate fluctuations.
Changes in regulatory requirements may adversely impact our gross margins as we comply with such changes or reduce our ability to generate revenues if we are unable to comply.
Our products must meet the requirements set by regulatory authorities in the numerous jurisdictions in which we sell them. As regulations and local laws change, we must modify our products to address those changes. Regulatory restrictions may increase the costs to design and manufacture our products, resulting in a decrease in our margins or a decrease in demand for our products if the costs are passed along or a decrease in our margins.along. Compliance with regulatory restrictions may impact the technical quality and capabilities of our products, reducing their marketability.
The terrorist attacks on New York City on September 11, 2001, marked a turning point in current U.S. political, military and security strategies which we believe have, and may continue to, adversely impact our business, both directly and indirectly.
The events of September 11,th, 2001 and its aftermath contributed to a slowing in the economy. We believe that one direct impact of the attacks is the reduction of contact center agents in the travel and leisure industries. We are indirectly affected by the continuing concern onof future terrorist attacks on U.S. soil. We are unable to estimate the impact these threats and their consequences have on our business, however, we expect that as these events adversely affect the global economy in general, our financial condition, our operations and our prospects will be similarly adversely affected.
| 27 | ||
We have intellectual property rights that could be infringed by others and we are potentially at risk of infringement of the intellectual property rights of others.
Our success will depend in part on our ability to protect our copyrights, patents, trademarks, trade dress, trade secrets, and similarother intellectual property, including our rights to certain domain names. We rely primarily on a combination of nondisclosure agreements and other contractual provisions as well as patent, trademark, trade secret, and copyright laws to protect our proprietary rights. Effective trademark, patent, copyright, and trade secret protection may not be available in every country in which our products and media properties are distributed to customers worldwide. We currently hold 7780 United States patents and additional foreign patents and will continue to seek patents on our inventions when we believe it to be appropriate. The process of seeking patent protection can be lengthy and expensive. Patents may not be issued in response to our applications, and patents that are issued may be invalidated, circumvented or challenged by others. If we are required to enforce our patents or other proprietary rights through litigation, the costs and diversion of management's attention could be substantial. In addition, the rights granted under any patents may not provide us competitive advantages or be adequate to safeguard and maintain our proprietary rights. Moreover, the laws of certain countries do not protect our proprietary rights to the same extent as do the laws of the United States. If we do not enforce and protect our intellectual property rights, it could materially adversely affect our business, financial condition and results of operations.
We are exposed to potential lawsuits alleging defects in our products and/or hearing loss caused by our products.
The use of our products exposes us to the risk of product liability and hearing loss claims. These claims have in the past been, and are currently being, asserted against us. None of the previously resolved claims have materially affected our business, financial condition or results of operations, nor do we believe that any of the pending claims will have such an effect.* Although we maintain product liability insurance, the coverage provided under our policies could be unavailable or insufficient to cover the full amount of any such claim. Therefore, successful product liability or hearing loss claims brought against us could have a material adverse effect upon our business, financial condition and results of operations.
Our mobile headsets are used with mobile telephones. There has been continuing public controversy over whether the radio frequency emissions from mobile telephones are harmful to users of mobile phones. We believe that there is no conclusive proof of any health hazard from the use of mobile telephones but that research in this area is incomplete.* We have tested our headsets through independent laboratories and have found that use of our headsets reduces radio frequency emissions at the user's head to virtually zero. However, if research was to establish a health hazard from the use of mobile telephones or public controversy grows even in the absence of conclusive research findings, there could be an adverse impact on the demand for our mobile phones, which reduces demands for headset products.
There is also continuing and increasing public controversy over the use of mobile telephones by operators of motor vehicles. While we believe that our products enhance driver safety by permitting a motor vehicle operator to generally be able to keep both hands-free to operate the vehicle, there is no certainty that this is the case and we may be subject to claims arising from allegations that use of a mobile telephone and headset contributed to a motor vehicle accident. We maintain product liability insurance and general liability insurance that we believe would cover any such claims.* However, the coverage provided under our policies could be unavailable or insufficient to cover the full amount of any such claim. Therefore, successful product liability claims brought against us could have a materialma terial adverse effect upon our business, financial condition and results of operations.
We are exposed to potential litigation from third parties which is costly to defend and consumes management'smanagement’s time and could possibly divert focus away from our business.
From time to time, third parties, including our competitors, may assert intellectual property rights or other commercial claims against us. These claims, if they are asserted, could result in costly litigation and diversion of management's attention regardless of the merit of a claim. In addition, we may not ultimately prevail in any such litigation or be able to license any valid and infringed patents from such third parties on commercially reasonable terms, if at all. Any infringement claim or other litigation against us could materially adversely affect our business, financial condition and results of operations.
| 28 | ||
While we believe we comply with environmental laws and regulations, we are still exposed to potential risks from environmental matters.
We are subject to various federal, state, local and foreign environmental laws and regulations, including those governing the use, discharge and disposal of hazardous substances in the ordinary course of our manufacturing process. Although we believe that our current manufacturing operations comply in all material respects with applicable environmental laws and regulations, environmental legislation has been enacted and may in the future be enacted or interpreted to create environmental liability with respect to our facilities or operations. We have included in our financial statements a reserve of $1.5 million for possible environmental remediation of the site of one of our previous businesses. While no claims have been asserted against us in connection with this matter, such claims could be asserteda sserted in the future and any liability that might result could exceed the amount of the reserve.
We have several significant stockholders, and given
Given the low trading volume of our stock, if theyour significant shareholders sell their shares in a short period of time wethere could seebe an adverse effect on the market price of our stock.
As of October 24, 2003,January 23, 2004, we had 44,421,48545,933,780 shares of common stock outstanding. These shares are freely tradable except for approximately 1,132,9871,018,202 shares held by affiliates of Plantronics. These approximately 1,132,9871,018,202 shares may be sold in reliance onaccordance with Rule 144 under the Securities Act (to the extent permitted by the provisions of Rule 144), or pursuant to an effective registration statement filed with the Securities and Exchange Commission.
Approximately 11,801,4199,542,862 additional shares are subject to outstanding stock options as of October 24, 2003.January 23, 2004. The shares that would be issued upon exercise of stock options hashave been registered. Accordingly, to the extent that these options vest and shares of our common stock are issued in the future, they may be freely resold by stockholders who are not our affiliates. Our affiliates may resell these shares to the extent permitted by Rule 144 under the Securities Act.
Our stock is not heavily traded. The average daily trading volume of our stock in the secondthird quarter of fiscal 2004 was approximately 298,971296,542 shares per day with a median volume in that period of 263,300273,200 shares per day. Our directors, officers and employees are subject to trading black-out periods which prohibit them from trading in our stock. As a result of this, during open trading periods, and particularly when our stock is trading at appreciated values, we may see an unusual amount of trading of our stock by our directors, officers and employees. Sales of a substantial number of shares of our common stock in the public market by any of our officers, directors or other stockholders could adversely affect the prevailing market price of our common stock and impair our ability to raise capital throught hrough the sale of equity securities.
Our business could be materially adversely affected if we lose the benefit of the services of Ken Kannappan or other key personnel.
Our success depends to a significant extent upon the services of a limited number of executive officers and other key employees. The unanticipated loss of the services of our president and chief executive officer, Mr. Kannappan, or one or more of our other executive officers or key employees could have a material adverse effect upon our business, financial condition and results of operations.
We also believe that our future success will depend in large part upon our ability to attract and retain additional highly skilled technical, management, sales and marketing personnel. Competition for such personnel is intense. We may not be successful in attracting and retaining such personnel, and our failure to do so could have a material adverse effect on our business, operating results or financial condition.
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Provisions in our charter documents and Delaware law and our adoption of a stockholder rights plan may delay or prevent a third party from acquiring us, which could decrease the value of our stock.
Our board of directors has the authority to issue preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting and conversion rights, of those shares without any further vote or action by the stockholders. The issuance of our preferred stock could have the effect of making it more difficult for a third party to acquire us. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which could also have the effect of delaying or preventing our acquisition by a third party. Further, certain provisions of our Certificate of Incorporation and bylaws could delay or make more difficult a merger, tender offer or proxy contest, which could adversely affect the market price of our common stock.
Our board of directors adopted a stockholders rightstockholder rights plan in 2002, pursuant to which we distributed one right for each outstanding share of common stock held by stockholders of record as of April 12, 2002. Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our board of directors, the plan could make it more difficult for a third party to acquire us, or a significant percentage of our outstanding capital stock, without first negotiating with our board of directors regarding such acquisition
ITEM
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative And Qualitative Disclosures About Market Risk
The following discusses our exposure to market risk related to changes in interest rates and foreign currency exchange rates. This discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors including those set forth in "Risk Factors Affecting Future Operating Results."
INTEREST RATE RISK
At September 30,December 31, 2003, we had cash and cash equivalents totaling $92.1$107.3 million, compared to $54.7 million at March 31, 2003. At September 30,December 31, 2003, we had no marketable securities compared to $5.0 million at March 31, 2003. Cash equivalents have an original or remaining maturity when purchased of ninety days or less; marketable securities have an original or remaining maturity when purchased of greater than ninety days, but less than one year. We believe we are not currently exposed to significant interest rate risk as the majority of our cash and marketable securities werewas invested in securities or interest bearing accounts with maturities of less than ninety days. The average maturity period for our investments at September 30,December 31, 2003, was less than three months. The taxable equivalent interest rates locked in on those investments averagesaverage s approximately 1.5%1.8%. Our investment policy requires that we only invest in deposit accounts, certificates of deposit or commercial paper with minimum ratings of A1/P1 and money market mutual fund sfunds with minimum ratings of AAA.
Our $75 million revolving credit facility and letter of credit subfacility both expire on July 31, 2005. As of October 24, 2003,January 23, 2004, we had no cash borrowings under the revolving credit facility and $0.8$1.3 million outstanding under the letter of credit subfacility. If we choose to borrow under this facility in the future, and market interest rates rise, then our interest payments would increase accordingly.
FOREIGN CURRENCY EXCHANGE RATE RISK
In the secondthird quarter of fiscal 2004, approximately 32%38.2% of our net sales were derived from customers outside the United States, with approximately 20.7%25.7% of total revenues denominated in foreign currencies, predominately the Euro and the Great British Pound. In fiscal year 2002, we implemented a hedging strategy to minimize the effect of these currency fluctuations. Specifically, we began to hedge our European transaction exposure, hedging both our Euro and Great British Pound positions. However, we havecan provide no assurance that exchange rate fluctuations will not materially adversely affect our business in the future.
As of September 30,December 31, 2003, we had foreign currency exchangeforward contracts of approximately $4.4$6.3 and $1.3 million denominated in the Euro as aEuros and Great British Pounds, respectively. These forward contracts hedge against a portion of our forecasted foreign currency-denominated receivables, payables and cash balances. The table below provides information about our financial instruments and underlying transactions that are sensitive to foreign currency exchange rates, including foreign currency forward-exchange contracts and nonfunctional currency-denominated receivables and payables. IfFor example, if these net exposed currency positions are subjected to either a 10% appreciation or 10% depreciation versus the U.S. dollar we could incur a loss of $1.0$1.8 million or a gain of $0.8$1.5 million.
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The table below presents the impact on our foreign currency transaction exposure of a hypothetical 10% appreciation and a 10% depreciation of the U.S. dollar against the indicated currencies.
September 30, 2003 (in millions) Net Underlying Net FX FX Foreign Exposed Gain (Loss) Gain (Loss) USD Value Currency Long (Short) From 10% From 10% of Net FX Transaction Currency Appreciation Depreciation Currency - forward contracts Contracts Exposures Position of USD of USD - ---------------------------- ----------- ----------- ----------- ----------- -----------Euro........................ $ 4.4 $ 10.3 $ 5.9 $ 0.5 $ (0.7) Great British Pound......... -- 3.1 3.1 0.3 (0.3) ----------- ----------- ----------- ----------- ----------- Net position $ 4.4 $ 13.4 $ 9.0 $ 0.8 $ (1.0) =========== =========== =========== =========== ===========
| (in millions) | Net | |||||||||||||||
Underlying | Net | FX | FX | |||||||||||||
Foreign | Exposed | Gain (Loss) | Gain (Loss) | |||||||||||||
| USD Value | Currency | Long (Short) | From 10% | From 10% | ||||||||||||
| of Net FX | Transaction | Currency | Appreciation | Depreciation | ||||||||||||
| Currency - forward contracts | Contracts | Exposures | Position | of USD | of USD | |||||||||||
| Euro | $ | 6.3 | $ | 13.5 | $ | 7.2 | $ | (0.8 | ) | $ | 0.7 | |||||
| Great British Pound | 1.3 | 10.1 | 8.8 | (1.0 | ) | 0.8 | ||||||||||
| Net position | $ | 7.6 | $ | 23.6 | $ | 16.0 | $ | (1.8 | ) | $ | 1.5 | |||||
As of September 30,December 31, 2003, we had foreign currency call option contracts of approximately €22.8 €21.6million and £8.7£8.4 million denominated in Euros and Great British Pounds, respectively. As of September 30,December 31, 2003, we also had foreign currency put option contracts of approximately €22.8€21.6 million and £8.7£8.4 million denominated in Euros and Great British Pounds, respectively. Collectively our option contracts hedge against a portion of our forecasted foreign denominated sales. The table below provides information about our financial instruments and underlying transactions that are sensitive to foreign currency exchange rates, including foreign currency option contracts. If these net exposed currency positions are subjected to either a 10% appreciation or 10% depreciation versus the U.S. dollar we could incur a gain of $3.7 million or a loss of $3.8$4.0 million.
The table below presents the impact on our currency option contracts of a hypothetical 10% appreciation and a 10% depreciation of the U.S. dollar against the indicated option contract type for cash flow hedges:
September 30, 2003 (in millions) FX FX Gain (Loss) Gain (Loss) USD Value From 10% From 10% of Net FX Appreciation Depreciation Currency - option contracts Contracts of USD of USD - --------------------------- ------------ ----------- -----------Call options............... $ (39.6) $ 1.8 $ (3.5) Put options................ 39.2 1.9 (0.3) ------------ ----------- ----------- $ (0.4) $ 3.7 $ (3.8) ============ =========== ===========
ITEM
| December 31, 2003 | ||||||||||
| (in millions) | ||||||||||
FX | FX | |||||||||
Gain (Loss) | Gain (Loss) | |||||||||
USD Value | From 10% | From 10% | ||||||||
of Net FX | Appreciation | Depreciation | ||||||||
| Currency - option contracts | Contracts | of USD | of USD | |||||||
| Call options | $ | (38.5 | ) | $ | 2.9 | $ | (3.9 | ) | ||
| Put options | 37.0 | 0.8 | (0.1 | ) | ||||||
| Net position | $ | (1.5 | ) | $ | 3.7 | $ | (4.0 | ) | ||
Item 4. DISCLOSURE CONTROLS AND PROCEDURES Disclosure Controls And Procedures
(a) Evaluation of disclosure controls and procedures.Our management, evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are10-Q, were effective to ensurein ensuring that information we are required to disclosedisclosed in reports that we file or submit under theth e Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange CommissionCommission’s rules and forms.
(b) Changes in internal control over financial reporting.There was no change in our internal control over financial reporting (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934)that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits. The following exhibits are filed as part of this Quarterly Report on Form 10-Q.
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99.1 | ||
(b)Reports on Form 8-K
On August 12,October 15, 2003, the Company filedfurnished a Current Report on Form 8-K announcingreporting under Item 12 of the Company's issuance of a press release announcing its financial results for the quarter ended September 30, 2003.
31, 2003 and including such press release as an exhibit.
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Pursuant to the requirements of the Securities Exchange Act Plantronicsof 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PLANTRONICS, INC. | |||
(Registrant) | |||
| Date: February 6, 2004 | By: | /s/ Barbara V. Scherer | |
| Barbara V. Scherer | |||
Senior Vice President - Finance and Administration and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer of the Registrant) | |||
Date: November 7, 2003
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EXHIBITS
Exhibits
The following exhibits are filed as part of this Quarterly Report on Form 10-Q.
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| Rule 13a-14(a)/15d-14(a) Certification |
| Rule 13a-14(a)/15d-14(a) Certification of | |
| 32 | Section 1350 | |
99.1 | Audit Committee Charter, as amended on | |
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