Washington, D.C. 20549

FORM 10-Q

 

The accompanying notes are an integral part of these unaudited condensedCondensed consolidated financial statements.

The accompanying notes are an integral part of these unaudited condensedCondensed consolidated financial statements.

The accompanying notes are an integral part of these unaudited condensedCondensed consolidated financial statements.

1. BASIS OF PRESENTATION

The accompanying unaudited condensedCondensed consolidated financial statements (“financial statements”) of Plantronics, Inc. (“Plantronics” or the “Company”“the Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information.  Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  In the opinion of management, the financial statements have been prepared on a basis consistent with the March 31, 20082009 audited consolidated financial statements and include all adjustments, consisting of normal recurring adjustments, necessary to fairly state the information set forth herein.  The financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2008,2009, which was filed with the SEC on May 27, 2008.26, 2009.  The results of operations for the interim period ended December 31, 2008June 30, 2009 are not indicative of the results to be expected for the entire fiscal year and any future period.

The financial statements include the accounts of Plantronics and its wholly owned subsidiaries.  All intercompany balances and transactions have been eliminated.

The Company has two reportable segments, the Audio Communications Group (“ACG”) and the Audio Entertainment Group (“AEG”).  Management allocates resources to and assesses the performance of each operating segment using several metrics including information about segment revenues, gross profit, operating income (loss) and certain product line information.

The Company’s fiscal year ends on the Saturday closest to the last day of March.  The Company’s current and prior fiscal years consist of 52 weeks and each fiscal quarter consists of 13 weeks.  The current fiscal year ends on March 28, 2009,April 3, 2010 and consists of 53 weeks and the prior fiscal year ended on March 29, 2008.28, 2009 and consisted of 52 weeks.  The Company’s interim periods for the thirdfirst quarters of fiscal 20082010 and 2009 ended on December 29, 2007June 27, 2009 and December 27,June 28, 2008, respectively.respectively and each consisted of 13 weeks.  For purposes of presentation, the Company has indicated its accounting year as ending on March 31 and its interim quarterly periods as ending on the applicable month end.

The Condensed consolidated statement of operations for the three months ended June 30, 2009 includes a correcting adjustment of approximately $1.3 million in Cost of revenues related to an overstatement of duty expense in prior periods, beginning in the third quarter of fiscal 2005 through the fourth quarter of fiscal 2009.  The Company assessed the materiality of the error utilizing SEC Staff Accounting Bulletin No. 99, “Materiality” (“SAB No. 99”) and SEC Staff Accounting Bulletin No. 108, “Effects of Prior Year Misstatements on a recurring basis (at least annually).  SFASCurrent Year Financial Statements” (“SAB No. 157108”), and determined that the impact of the correcting adjustment will not be material to its projected full year results for fiscal 2010.  In addition, the Company does not require any new fair value measurements but rather eliminates inconsistenciesbelieve the error is material to the amounts reported in guidance found in various prior accounting pronouncements. The partial adoption of SFAS No. 157 has not had a material impact on the Company’s consolidated financial statements.periods.

In June 2009, the FASB issued FSP No. 157-3, “Determiningapproved the Fair Value of a Financial Asset When the Market for That Asset is Not Active” (“FSP 157-3”“FASB Accounting Standards Codification” (the “Codification”) that clarifies the application of No. SFAS 157 in situations where the market for that asset is not active.  The Company adopted of FSP 157-3 during the three month period ended September 30, 2008 and its adoption did not have a material impact on the Company’s consolidated financial statements.

3. DETAILS OF CERTAIN BALANCE SHEET COMPONENTS

If forecasted revenue and gross margin rates of either the ACG or AEG segment are not achieved, it is reasonably possible that the Company may have increased requirements for inventory provisions.

Changes in the warranty obligation, which are included as a component of accrued liabilities on the condensedCondensed consolidated balance sheets, during the three months ended June 30, 2009 are as follows (in thousands):follows:

4. INVESTMENTS AND FAIR VALUE MEASUREMENTS

The following table represents the Company’s investments at March 31, 20082009 and December 31, 2008:June 30, 2009:

At DecemberJune 30, 2009 and March 31, 2008,2009, all of the Company’s short-term investments consisted of U.S. Treasury Bills and were classified as available-for-sale.  There were no short-term investments as ofAt June 30, 2009 and March 31, 2008.  At March 31, 2008 and December 31, 2008,2009, all of the Company’s long-term investments consisted of auction rate securities (“ARS”).  The ARS and were classified as available-for-sale as of March 31, 2008.   During the three months ended December 31, 2008, the ARS were transferred to trading securities.  In the three and nine months ended December 31, 2008, the Company recorded unrealized losses of $4.0 million related to its ARS within Interest and other income (expense) net in the condensed consolidated statement of operations.  The Company did not incur any material realized gains or losses in the three or nine months ended December 31, 2007June 30, 2009 or December 31,2008.  In the quarter ended June 30, 2009, the Company incurred an unrealized loss on the ARS of $3.3 million which was recorded to Interest and other income, net in the Condensed consolidated statement of operations.  There were no unrealized losses recorded in the statement of operations for the quarter ended June 30, 2008.

In accordance with SFAS No. 157,”Fair Value Measurements”, the following table representstables represent the Company’s fair value hierarchy for its financial assets and liabilitiesliabilities:

Level 1 assets and liabilities consist of money market funds and derivative foreign currency forward contracts that are traded in an active market with sufficient volume and frequency of transactions.  Fair value is measured based on the quoted market price of identical securities.

Level 2 assets and liabilities consist of derivative foreign currency call and put option contracts.  Fair value is determined using a Black-Scholes valuation model using inputs that are observable in the market.

Level 3 assets consist mainly of ARSauction rate securities (“ARS”), primarily comprised of interest bearing state sponsored student loan revenue bonds guaranteed by the Department of Education.  TheseHistorically, these ARS investments are designed to providehave provided liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, typically every 7 or 35 days. However, theThe recent uncertainties in the credit markets have affected all of the Company’s holdings, and, as a consequence, these investments are not currently liquid.  As a result, the Company will not be able to access these funds until a future auction of these investments is successful, the underlying securities are redeemed by the issuer, or a buyer is found outside of the auction process.  Maturity dates for these ARS investments range from 2029 to 2039.  All of the ARS investments were investment grade quality and were in compliance with the Company’s investment policy at the time of acquisition.

As of June 30, 2009 and March 31, 2008 and December 31, 2008,2009, the Company has used a discounted cash flow model to determine an estimated fair value of the Company’s investment in ARS.  The key assumptions used in preparing the discounted cash flow model include current estimates for interest rates, timing and amount of cash flows, credit and liquidity premiums and expected holding periods of the ARS.

In November 2008, the Company accepted an agreement (the “Agreement”) from UBS AG (“UBS”), the investment provider for its $28.0 million par value ARS portfolio, providing the Company with certain rights related to its ARS (the “Rights”).  The Rights permit the Company to require UBS to purchase the Company’s ARS at par value, which is defined as the price equal to the liquidation preference of the ARS plus accrued but unpaid dividends or interest, at any time during the period from June 30, 2010 through July 2, 2012.  Conversely, UBS has the right, in its discretion, to purchase or sell the Company’s ARS at any time until July 2, 2012, soas long as the Company receives payment at par value upon any sale or liquidation.  The Company expects to sell its ARS under the Right.  However,Rights; however, if the Rights are not exercised before July 2, 2012, they will expire and UBS will have no further rights or obligation to buy the Company’s ARS.  SoAs long as the Company holds the Rights, it will continue to accrue interest as determined by the auction process or the terms of the ARS if the auction process fails.  UBS’s obligations under the Rights are not secured and do not require UBS to obtain any financing to support its performance obligations under the Rights.  UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Rights.

The Rights represent a firm agreement in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”).  The enforceability of the Rights results in a put option and should beis recognized as a free standing asset separate from the ARS.  Upon acceptance of the offer from UBS in November 2008, the Company valuedrecorded the put option at fair value of $3.9 million using the Black-Scholes options pricing model and recorded an assetmodel.  As of $3.9 million within Other assets asJune 30, 2009, the fair value of the put option was $7.5 million compared to the $4.2 million fair value as of March 31, 2009, resulting in an unrealized gain of $3.3 million for the quarter ended June 30, 2009.  The fair value of the put option is recorded within Other assets in the Condensed consolidated balance sheets with athe corresponding credit tounrealized gain included in Interest and other income, (expense), net in the condensedCondensed consolidated statementsstatement of operations for the three and nine months ended December 31, 2008.operations.  The put option does not meet the definition of a derivative instrument under SFAS No. 133.  Therefore,133; therefore, the Company has elected to measure the put option at fair value under SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”) in order to match the changes in the fair value of the ARS.  As a result, unrealized gains and losses on the Rights are and will be included in earnings in future periods.

As a result of the Company’s ability to hold its ARS investments to either maturity or until it exercises its put option to UBS, the Company has classified the entire ARS investment balance as long-termLong-term investments on its condensedCondensed consolidated balance sheetsheets as of June 30, 2009 and March 31, 2008.2009.  Prior to accepting the UBS offer, the Company recorded its ARS investments as available-for-sale and any unrealized gains or losses were recorded to Accumulated other comprehensive income (loss) within Stockholders’ Equity.  In connection with the acceptance of the UBS offer in November 2008, resulting in the right to require UBS to purchase the ARS at par value beginning on June 30, 2010, the Company transferred its ARS from long-term investments available-for-sale to long-term trading securities.  The transfer to trading securities in November 2008 reflects management’s intent to exercise its put option during the period from June 30, 2010 to July 3, 2012.  Prior to the Agreement with UBS, the intent was to hold the ARS until the market recovered.  At the time of transfer in November 2008, the Company recognized a loss on the ARS of approximately $4.0 million in Interest and other income, (expense), net fornet.   In the three months ended December 31, 2008,first quarter of fiscal 2010, an increase of $0.8 million from theadditional unrealized loss of $3.2$3.3 million was recorded in Accumulated other comprehensive income (loss) within Stockholders’ Equity as of September 30, 2008.  

The following table provides a summary of changes in fair value of the Company’s Level 3 financial assets: assets during the three months ended June 30, 2009:

5. GOODWILL AND PURCHASED INTANGIBLE ASSETS

The following table presentstables present the carrying value of acquired intangible assets with remaining net book values as of the periods:each period:

The aggregate amortization expense relating to purchased intangible assets for the three and nine months ended December 31, 2007 was $2.0 million and $6.2 million, respectively and $1.6 million and $5.6$0.6 million for the three and nine months ended December 31,June 30, 2008 and 2009, respectively.  Based on theThe estimated future amortization expense of purchased intangible assets recorded as of December 31, 2008, and assuming no subsequent additions to, or impairment of the underlying assets, the remaining estimated amortization expenseJune 30, 2009 is expected to be as follows (in thousands):follows:

Goodwill was $69.2 million as of March 31, 20082009 and June 30, 2009 was $14.0 million as of December 31, 2008.million.

The Company reviews goodwill and purchased intangible assets with indefinite lives for impairment annually during the fourth quarter of the fiscal year or more frequently if indicators ofevents or circumstances indicate that an impairment exist.loss may have occurred.  In the fourth quarter of fiscal 2008,2009, the Company completed the annual impairment test of goodwill and the indefinite lived intangible assets, consisting of the Altec Lansing trademark and trade name, which indicated that there was no impairment.  However, duringAccounting principles generally accepted in the third quarterU.S. require goodwill be tested at least annually using a two-step process that begins with identifying potential impairment.  Potential impairment is identified if the fair value of fiscalthe reporting unit to which goodwill applies is less than the recognized or book value of the related reporting unit, including such goodwill.  Where the book value of the reporting unit, including related goodwill, is greater than the reporting unit’s fair value, the second step of the goodwill impairment is performed to measure the amount of impairment loss, if any.  For the three months ended June 30, 2009 and June 30, 2008, the Company considered the effect of the current economic environment and determined that sufficient indicators existed requiring itdid not identify any potential impairment related to perform an interim impairment review of the Company’s two reporting segments, ACG and AEG.  The indicators primarily consisted of (1) a decline in revenue and operating margins during the current quarter and the projected future operating results, (2) deteriorating industry and economic trends, and (3) the decline in the Plantronics’ stock price for a sustained period.its goodwill.

In accordance with SFAS No. 142, “GoodwillThe Company evaluates the recoverability of its property and Other Intangible Assets” (“SFAS No. 142”),equipment and other assets, including purchased intangible assets, whenever events or changes in circumstances indicate an impairment has occurred.  An impairment loss is recognized when the Company utilized a two-step method for determining goodwill impairment.  In step one,net book value of such assets exceeds the estimated future undiscounted cash flows attributable to the assets or the business to which the assets relate.  Impairment losses, if any, are measured as the amount by which the carrying value exceeds the fair value of each reporting unit, which the Company has determined to be consistent with its operating segments, is determinedassets.  For the three months ended June 30, 2009 and compared to the carrying value.  The fair value of the ACG reporting unit was determined using an equal weighting of the income approach and the market approach.  Based on this review, the fair value exceeded the carrying value indicating that there wasJune 30, 2008, no potential impairment related to the ACG reporting unit.  The fair valueCompany’s long-lived assets was identified.

As a result of certain alternatives being considered by management for the AEG segment or if the assumptions regarding forecasted revenue or margin growth rates of the AEG reporting unit was determined using an equal weighting of the income approach and the underlying asset approach.  For the income approach,are not achieved, it is reasonably possible the Company made the following assumptions: the current economic downturn would continue through fiscal 2010, followed by a recovery period in fiscal 2011 and 2012 and then growth in line with industry estimated revenues for ACG and each of the major AEG product lines (Docking Audio and PC Audio).  Gross margin assumptions for ACG are consistent with historical trends and for AEG reflect improved margins as the revenue grows.  A 5% growth factor was used to calculate the terminal value of its reporting units, consistent with the rate used in the prior year.  The discount rate was adjusted from 14% to 15% for AEG and from 13% to 14% for ACG reflecting the current volatility of the stock prices of public companies within the consumer electronics industry.  The sum of the fair values of the reporting units was reconciled to the Company's current market capitalization plus an estimated control premium.

The Company recorded the restructuring activities discussed below in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”) and SFAS No. 112, “Employees’ Accounting for Post-employment Benefits” (“SFAS No. 112”).

In June 2008, the Company announced a reduction in force at AEG’s operations in Milford, Pennsylvania as part of the strategic initiative designed to reduce costs.  A total of 31 employees were notified of their termination, all of which have beenwhom were terminated as of December 31, 2008.  In the nine month period ended December 31, 2008,The Company recognized $0.2 million of restructuring charges were recorded related to this activity in the first quarter of fiscal 2009, consisting solely of severance, of which substantiallyand all costs have beenwere recorded and paid as of DecemberMarch 31, 2008.  Substantially all restructuring and other related charges under this plan have been recorded as of December 31, 2008.2009.

In the third quarter of fiscal 2009, the Company had a reduction in force at AEG’s operations in Luxemburg and Shenzhen, China and ACG’s operations in China as part of the strategic initiative designed to reduce costs.  A total of 624 employees were notified of their termination, 621all of which had beenwhom were terminated as of December 31, 2008, and the remaining 3 employees are expected to terminate in the fourth quarter of fiscal 2009.  In the three and nine month period ended December 31, 2008, $1.0 million of restructuring charges were recorded related to this activity of which $0.7 million related to the AEG segment and $0.3 million related to the ACG segment.  These charges consisted solely of severance and benefits, of which $0.6 million related to the AEG segment was unpaid as of December 31, 2008.  On January 14, 2009, the Company announced additional reductions in force related to this restructuring plan for awhich included termination of an additional 199 employees located in ACG’s Tijuana, Mexico, U.S., and other global locations.  An additional three employees were notified of their termination in the first quarter of fiscal 2010.  A total reduction of approximately 800 employees.  Total costs826 employees, primarily in operations positions but also including other functions, were notified of their termination under this plan are estimatedrestructuring action, all except four employees had been terminated as of June 30, 2009.  To date, the Company recorded $8.8 million of restructuring charges related to these activities, of which $0.8 million related to the AEG segment and $8.0 million related to the ACG segment.  These costs consisted of $8.1 million in severance and benefits, $0.6 million for the rangewrite-off of $7.7leasehold improvements due to consolidation of facilities, and $0.1 million to $8.2 million, consisting primarily of employee termination benefits, including the $1.0 millionin other associated costs.  No additional charges were incurred to date infor the three months ended December 31, 2008.June 30, 2009.  The Company believes that substantially all of the AEG costs have been incurred as of December 31, 2008June 30, 2009, $0.2 million of which relates to ACG had not been paid as of June 30, 2009 and is expected to be paid in the second quarter of fiscal 2010.

In fiscal 2009, the Company recorded $3.0 million of restructuring charges in the ACG business segment, primarily consisting of severance and benefits.  During the three months ended June 30, 2009, the Company recorded an additional $0.6 million of Restructuring and other related charges in the ACG segment consisting of $0.3 million of severance and benefits and $0.3 million non-cash charges related to the ACG segment.acceleration of depreciation on building and equipment associated with research and development and administrative functions due to the change in the assets’ useful lives as a result of this restructuring action.  In addition, in the three months ended June 30, 2009, the Company recorded non-cash charges of $3.5 million for accelerated depreciation related to the building and equipment associated with manufacturing operations which is included in Cost of revenues in the Condensed consolidated statement of operations.  To date, the Company has recorded a total of $7.1 million of costs related to this action: $3.6 million in Restructuring and related charges which includes $3.3 million of severance and benefits, and $0.3 million of accelerated depreciation charges and $3.5 million in Cost of revenues for accelerated depreciation.  As of June 30, 2009, $2.0 million was accrued and not paid and is expected to be paid in the second quarter of fiscal 2010.  

 

If forecasted revenue and gross margin growth rates of either the ACG or AEG segment are not achieved, it is reasonably possible that the Company will need to take further restructuring actions which may result in additional restructuring and other related charges in future periods.  In addition, the Company continues to review the AEG cost structure and may implement additional cost reduction initiatives in the future.

The following table summarizes allthe movement in the Company’s restructuring activities foraccrual during the ninethree months ended December 31, 2008:June 30, 2009:

The restructuring accrual is included in Accrued liabilities in the Company’s condensedCondensed consolidated balance sheet.

7. STOCK-BASED COMPENSATION

The following table summarizes the amount of stock-based compensation expense recorded under SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”) included in the condensedCondensed consolidated statements of operations:

8. COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income (loss) for the three and nine months ended December 31, 2007June 30, 2008 and 20082009 are as follows:

9. FOREIGN CURRENCY TRANSACTIONSDERIVATIVES

Non-Designated Hedges

As of December 31, 2008,June 30, 2009, the Company had foreign currency forward contracts of €17.0€18.6 million and ₤5.2₤6.2 million denominated in Euros (“EUR” or “€”) and Great Britain Pounds, (“GBP” or “£”), respectively.  These forward contracts hedge against a portion of the Company’s foreign currency-denominated receivables, payables and cash balances.

The following table summarizes the Company’s outstanding foreign exchange currency contracts, and approximate U.S. dollar equivalent (“USD”), at December 31, 2008 (local currency and dollar amounts in thousands):June 30, 2009:

Foreign currency transactions, net of the effect of hedging activity on forward contracts, resulted in a net gain of $0.5 million and $1.7$1.0 million in the three and nine months ended December 31, 2007,June 30, 2008 and 2009, respectively and aare included in Interest and other income, net loss of $1.9 million and $5.4 million in the three and nine months ended December 31, 2008, respectively.Condensed consolidated statement of operations.

Cash Flow Hedges

The Company’s hedging activities include a hedging program to hedge the economic exposure from anticipated Euro and Great Britain Pound denominated sales from ACG.  The Company hedges a portion of these forecasted foreign denominated sales with currency options.  These transactions are designated as cash flow hedges and are accounted for under the hedge accounting provisions of SFAS No. 133.  The effective portion of the hedge gain or loss is initially reported as a component of Accumulated other comprehensive income and subsequently reclassified into Net revenues when the hedged exposure affects earnings.  Any ineffective portion of related gains or losses are recorded in the Condensed consolidated statements of operations immediately.  On a monthly basis, the Company enters into option contracts with a one-year term.  It does not purchase options for trading purposes.  As of December 31, 2008,June 30, 2009, the Company had foreign currency put and call option contracts of €49.7approximately €46.3 million and £16.3£12.1 million.  As of March 31, 2008, the Company2009, it had foreign currency put and call option contracts of approximately €48.4 million and £18.7£14.4 million.  Collectively, the Company’s option contracts are collars to hedge against a portion of its forecasted foreign currency denominated sales.

In the three and nine months ended December 31,June 30, 2008 and 2009, realized losses of $2.1 million and realized gains of $3.1$3.5 million, and $0.5 millionrespectively, on cash flow hedges were recognized in Net revenues in the condensedCondensed consolidated statements of operations compared to $1.4 million and $2.5 million in realized losses for the same periods a year ago.  Should foreign exchange rates remain the same, theoperations.  The Company expects to reclassify the entire amount of $7.0$2.3 million of gainslosses accumulated in Accumulated other comprehensive income (loss) to Net revenues during the next 12twelve months due to the recognition of the hedged forecasted sales.