UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FORM
10-Q
(Mark One)
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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 28, 201926, 2020
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| ☐ | 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: 001-12696
Plantronics, Inc.
(Exact name of registrant as specified in its charter)
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| Delaware | 77-0207692 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
345 Encinal Street
Santa Cruz,, California95060
(Address of principal executive offices)
(Zip Code)
(831) (831) 426-5858
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
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| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.01 par value | PLT | New York Stock Exchange |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | ☒ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of January 29, 2020, 39,927,953 February 1, 2021, 41,262,484 shares of the registrant's common stock were outstanding.
Plantronics, Inc.
FORM 10-Q
TABLE OF CONTENTS
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| PART I. FINANCIAL INFORMATION | Page No. |
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| PART II. OTHER INFORMATION | |
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Plantronics®, Poly®, Simply Smarter Communications® , and the propeller design are trademarks or registered trademarks of Plantronics, Inc. All other trademarks are the property of their respective owners.
DECT™ is a trademark of ETSI registered for the benefit of its members in France and other jurisdictions.
The Bluetooth name and the Bluetooth® trademarks are owned by Bluetooth SIG, Inc. and are used by Plantronics, Inc. under license. All other trademarks are the property of their respective owners.
Part I -- FINANCIAL INFORMATION
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, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-lookingamended (the “Exchange Act”). These statements may generally be identified by the use of such words as "expect," "anticipate," "believe," “could,” "expect,"estimate," "intend," “may,” "plan,"predict," "potential,"project," "shall,"or "will," “would,” or variations of such words and similar expressions or the negative of these terms.are based on current expectations and entail various risks and uncertainties. Specific forward-looking statements and the associated risks and uncertainties contained within this Form 10-Q include, but are not limited to: (i) our beliefs with respect to statements regarding:the length and severity of the COVID-19 (coronavirus) outbreak, and its impact across our businesses, our operations and global supply chain, including (a) our expectations the virus has caused and will continue to cause an increase in customer and partner demand for our product lines, including increased demand in collaboration endpoints, and our ability to design new product offerings to meet the change in demand due to a global hybrid work environment, (b) risks related to increased freight and other costs associated with expediting shipment and delivery of high-demand products to key markets in order to meet customer demand, (c) our inability to source component parts from key suppliers in sufficient quantities necessary to meet the high demand for certain product lines, including our Enterprise Headsets and continued uncertainty and potential impact on future quarters if sourcing constraints continue and/or price volatility occurs,which could continue to negatively affect our profitability and/or market share, (d) expectations related to our voice product lines, as well as our services attachment rate for such products, which have been, and may continue to be, negatively impacted as companies have delayed returning their workforces to offices in many countries due to the continued impact of COVID-19, (e) expectations related to our ability to fulfill the backlog generated by supply constraints, to timely supply the number of products to fulfill current and future customer demand, including expectations that our manufacturing facility in Tijuana, Mexico will continue production at the capacity necessary to meet such demand, (f) the impact of the virus on our distribution partners, resellers, end-user customers and our production facilities, including our ability to obtain alternative sources of supply if our production facility or other suppliers are impacted by future shut-downs, (g) the impact if global or regional economic conditions deteriorate further, on our customers and/or partners, including increased demand for pricing accommodations, delayed payments, delayed deployment plans, insolvency or other issues which may increase credit losses, (h) risks related to restrictions or delays in global return to worksites as a result of COVID-19, which continues to impact our employees and our customers worldwide, which has negatively impacted our voice product lines for the quarter, and restricted customer engagement; and (i) the complexity of the forecast analysis and the design and operation of internal controls; and (ii) our belief that we can manufacture or supply products in a timely manner to satisfy perishable demand; (iii) expectations related to our customers’ purchasing decisions and our ability to pivot quickly enough and/or match product production to demand, particularly given long lead times and the difficulty of forecasting unit volumes and acquiring the component parts and materials to meet demand without having excess inventory or incurring cancellation charges; (iv) risks associated with significant and/or abrupt changes in product demand which increases the complexity of management’s evaluation of potential excess or obsolete inventory; (v) risks associated with the bankruptcy or financial weakness of distributors or key customers, or the bankruptcy of or reduction in capacity of our key suppliers; (vi) risks associated with the potential interruption in the supply of sole-sourced critical components, our ability to move to a dual-source model, and the continuity of component supply at costs consistent with our plans, which has negatively impacted us in the quarter, and may continue to impact, our ability to timely supply product to meet our customer demand; (vii) expectations related to our services segment revenues, particularly as we introduce new generation, less complex, product solutions, or as companies shift from on premises to work from home options for their workforce, which may result in decreased demand for our professional, installation and/or managed service offerings; (viii) expectations that our current cash on hand, additional cash generated from operations, together with sources of cash through our credit facility, either alone or in combination with our election to suspend our dividend payments, will meet our liquidity needs during and following the unknown duration and impact of the COVID-19 pandemic; (ix) expectations relating to our ability to generate sufficient cash flow from operations to meet our debt covenants, and timely repay all principal and interest amounts drawn under our credit facility as they become due; (x) risks associated with our channel partners’ sales reporting, product inventories and product sell through since we sell a significant amount of products to channel partners who maintain their own inventory of our products; (xi) our efforts to execute to drive sales and sustainable profitable revenue growth; (ii)growth, to improve our profitability and cash flow, and accelerate debt reduction and de-levering; (xii) our expectations for new productproducts launches, the timing of their releases and their expected impact on future growth and on our existing products; (iii)(xiii) our expectations to avoid business disruption due to potential global health issues (iv)belief that our expectationsPartner Program and/or our product management and personal device services, including Poly Lens and/or Poly+, will drive growth and profitability for synergies in the quarterboth us and additional anticipated cost savings; (v) our expectations related topartners through the sale of our gaming product, lineservices and further optimizationsolutions; (xiv) risks associated with forecasting sales and procurement demands, which are inherently difficult, particularly with continuing uncertainty in regional and global economic conditions; (xv) uncertainties attributable to currency fluctuations, including fluctuations in foreign exchange rates and/or new or greater tariffs
on our Enterprise business, simplifying business processes and reducing working capital; (vii)products; (xvi) our expectations for operating cash flowregarding our ability to control costs, streamline operations and debt; (viii)successfully implement our various cost-reduction activities and realize anticipated cost savings under such cost-reduction initiatives; (xvii) expectations relating to our Q-4quarterly and full Fiscal Year 2020annual earnings guidance; (ix) estimatesguidance, particularly as economic uncertainty, including, without limitation, uncertainty related to the continued impact of COVID-19, the macro-economic and political climate and other external factors, puts further pressure on management judgments used to develop forward looking financial guidance and other prospective financial information; (xviii) expectations related to GAAP and non-GAAP financial results for the fourth quarter and full Fiscal Year 2020,2021, including net revenues, purchase accounting adjustments, adjusted EBITDA, tax rates, intangibles amortization, and diluted weighted average shares outstanding and diluted EPS; (x) expectations related to our customers’ purchasing decisions and our ability to match product production to demand; (xi)(xix) our expectations of the impact of the acquisition of Polycom as it relates to our strategic vision and additional market and strategic partnership opportunities for our combined hardware, software and services offerings; (xii)(xx) our beliefs regarding the UC&C market, market dynamics and opportunities, and customer and partner behavior as well as our position in the market; (xiii)market, including risks associated with the potential failure of our UC&C solutions to be adopted with the breadth and speed we anticipate; (xxi) our belief that the increased adoption of certain technologies and our open architecture approach has and will continue to increase demand for our solutions; (xiv)(xxii) expectations related to the micro and macro-economic conditions in our domestic and international markets and their impact on our future business; (xv)(xxiii) our forecasts and expectations regarding liquidity, capital resources and results of operations along with our intentions concerning the repayment of our debt obligations and our ability to draw funds on our credit facility as needed; (xvi) our forecastsforecast and estimates with respect to tax matters, including expectations with respect to utilizing our deferred tax assets; (xvii)(xxiv) our expectations related to building strategic alliances and key partnerships with providers of collaboration tools and platforms to drive revenue growth and market share; and (xxv) our expectations regarding pending and potential future litigation, in addition to other matters discussed in this Quarterly Report on Form 10-Q that are not purely historical data. Such forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. Among the factorsFactors that could cause actual results and events to differ materially from those contemplated are:
Regarding the Polycom acquisition: (i) we may be unablesuch forward-looking statements are included, but not limited to, integrate Polycom's business within our own in a timely and cost-efficient manner or do so without adversely impacting operations, including new product launches; (ii) expected synergies or operating efficiencies may fail to materialize in whole or part or may not occur within expected time-frames; (iii) the acquisition and our subsequent integration efforts may adversely impact relationships with customers, suppliers and strategic partners and their operating results and businesses generally (including the diversion of management time on transaction-related issues); (iv) we may be unable to retain and hire key personnel; (v) our increased leverage as a result of the transaction is substantially greater than prior to the acquisition which may pose risks, including reduced flexibility in how we use our cash and to make changes in our operations in response to business or economic conditions, increased borrowing costs, as well as penalties or costs should we fail to comply with terms of the financial agreements such as debt ratios and financial and operation performance targets; (vi) negative effects on the market price of our common stock as a result of the transaction, particularly in light of the issuance of our stock in the transaction; (vii) our financial reporting including those resulting from the adoption of new accounting pronouncements and associated system implementations in the context of the transaction, our ability to forecast financial results of the combined company and that we may be unable to successfully integrate our reporting system causing an adverse impact to our ability to make timely and accurate filings with the SEC and other domestic and foreign governmental agencies; (viii) the potential impact of the transaction on our future tax rate and payments based on our global entity consolidation efforts and our ability to quickly and cost effectively integrate foreign operations; (ix) the challenges of integrating the supply chains of the two companies; (x) the challenges of sales execution across different product lines; (xi) our expectations regarding the potential that our due diligence did not uncover risks and potential liabilities of Polycom;
the nature and extent of competition we face, particularly subsequent to the acquisition of Polycom as it relates to our ability to adapt to new competitors and changing markets;
the impact of product transitions underway which are replacing or upgrading nearly every major product in our product portfolio;
the impact of customer brand preferences on Consumer and Enterprise market demands;
the impact of our adoption of a new corporate branding identity, including any confusion or harm to our reputation resulting therefrom;
the impact of ongoing integration, restructuring and disaggregation activities on our operations, including on employees, distributors, VAR's, suppliers and customers from the Polycom acquisition;
our ability to realize and achieve positive financial results projected to arise in the our key markets from UC&C adoption could be adversely affected by a variety of factors including the following: (i) as UC&C becomes more widely adopted, the risk that competitors will offer solutions that will effectively commoditize our products which, in turn, will reduce the sales prices for those products; (ii) our plans are dependent upon adoption of our UC&C solution by major platform providers and any proprietary solutions of competitors, and our influence over such providers and the marketing in general with respect to the functionality of their platforms or their product offerings, their rate of deployment, and their willingness to integrate their platforms and product offerings with our solutions is limited; (iii) delays or limitations on our ability to timely introduce solutions that are cost effective, feature-rich, stable, and attractive to our customers within forecasted development budgets; (iv) our successful implementation and execution of new and different processes involving the design, development, and manufacturing of complex electronic systems composed of hardware, firmware, and software that works seamlessly and continuously in a wide variety of environments and with multiple devices; (v) failure of UC&C solutions generally, or our solutions in particular, to be adopted with the breadth and speed we anticipate; (vi) our sales model and expertise must successfully evolve to support complex integration of hardware, software, and services with UC&C infrastructure consistent with changing customer purchasing expectations; (vii) as UC&C becomes more widely adopted we anticipate that competition for market share will increase, particularly given that some competitors may have superior technical and economic resources; (viii) sales cycles for UC&C deployments are longer and becoming more complex; (ix) our inability to timely and cost-effectively adapt to changing business requirements may impact our profitability in this market and our overall margins; and (x) our failure to expand our technical support capabilities to support the complex and proprietary platforms in which our UC&C products are and will be integrated;
risks associated with our channel partners’ sales reporting, product inventories and product sell through since we sell a significant amount of products to channel partners who maintain their own inventory of our products;
failure to match production to demand given long lead times and the difficulty of forecasting unit volumes and acquiring the component parts and materials to meet demand without having excess inventory or incurring cancellation charges;
risks associated with forecasting sales and procurement demands, which are inherently difficult, particularly with continuing uncertainty in regional and global economic conditions as well as currency fluctuations, and there can be no assurance that expectations of incoming orders over the balance of the current quarter will materialize;
volatility in prices and availability of components from our suppliers, including our manufacturers located in APAC, have in the past and could in the future negatively affect our profitability and/or market share;
fluctuations in foreign exchange rates;
new or greater tariffs on our products;
the bankruptcy or financial weakness of distributors or key customers, or the bankruptcy of or reduction in capacity of our key suppliers;
additional risk factors including: interruption in the supply of sole-sourced critical components, continuity of component supply at costs consistent with our plans, and the inherent risks of our substantial foreign operations;
seasonality in one or more of our product categories;
the potential impact to our results of operations from tax rulings and interpretations;
risks related to our forecasts and expectations regarding liquidity, capital resources and results of operations along with our intentions concerning the repayment of our debt obligations and our ability to draw funds on our credit facility as needed;
potential fluctuations in our cash provided by operating activities;
risks associated with our anticipated range of capital expenditures for the remainder of Fiscal Year 2020;
the sufficiency of our cash, cash equivalents, and cash from operations to sustain future operations and discretionary cash requirements;
our expenses and expenditures, including research, development and engineering as well selling, general and administrative;
changes in tax laws that could increase our future tax rate and payments related to unrecognized tax benefits and/or reduce our deferred tax assets;
risks related to our forecasts and estimates with respect to tax matters, including expectations with respect to utilizing our deferred tax assets;
if we are unable to generate sufficient amount of income, a substantial valuation allowance to reduce the deferred tax assets may be required;
our ability to pay future stockholder dividends or repurchase stock;
our beliefs concerning interest rates and foreign currency exchange rates, our exposure to changes in each, and the benefits and risks of our hedging activities;
the risks of global health issues impacting supply chain, distribution, product availability, sales execution and/or other business disruption to our business;
risks related to adverse results in pending litigation or other regulatory proceedings; and
those risks and uncertainties discussed in this Quarterly Report on Form 10-Q; in Part I, "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended March 31, 2019,28, 2020, filed with the Securities and Exchange Commission (“SEC”("SEC") on May 17, 2019;June 8, 2020; and other documents we have filed with the SEC.
We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
OVERVIEW
WePlantronics, Inc. (“Poly,” “Company,” “we,” “our,” or “us”) builds premium audio and video products that are engineered to connect people with incredible clarity, are easy to use, and work seamlessly with any conferencing platform. Poly combines legendary audio expertise and powerful video and conferencing capabilities to create professional tools that help our customers look and sound their best, wherever they are, however they want to connect, and whatever platform they use. Our headsets, video and audio conferencing, desk phones, analytics software and services are used worldwide and are a leading global designer, manufacturer, and marketer of integrated communications and collaboration solutions that span headsets, open Session Initiation Protocol ("SIP") desktop phones, audio and video conferencing, cloud management and analytics software solutions, and services. choice for "work from anywhere" environments.
Our major product categories are Enterprise Headsets, which includes cordedVideo, Voice, and cordlessServices. Headsets include wired and wireless communication headsets; Consumer Headsets, whichVoice includes Bluetoothopen Session Initiation Protocol (“SIP”) and corded products for mobile device applications, personal computer and gaming; and Voicenative ecosystem desktop phones as well as conference room phones; and Video includes video conferencing solutions which includes open SIP desktop phones, conference room phones, and video endpoints, includingperipherals, such as cameras, speakers, and microphones. AllPoly provides a complete portfolio of products and usage scenarios that are themselves supported by a comprehensive Service organization to meet the needs of the most demanding and largest enterprise customers. Our broad portfolio of Services include video interoperability, hardware and software support for our solutionsdevices, as well as professional, hosted, and managed services that are grounded in our deep expertise aimed at giving our customers the confidence, flexibility and edge needed to command the conversation.
Our products are designed to work seamlessly with all the best video and audio conferencing services for what's known in a wide range ofthe industry as Unified Communications & Collaboration ("UC&C"), Unified Communication as a Service ("UCaaS"), and Video as a Service ("VaaS"), and/or Device as a Service ("DaaS") environments. Our RealPresence collaboration solutions range from infrastructurecloud management and analytics software gives IT the tools needed to endpointsmanage devices with remote troubleshooting, updates, and allow people to connectinventory control and collaborate globally, naturally, and seamlessly. In addition, we offer comprehensive support services including supportinteractive mapping for our solutions and hardware devices, as well as professional, hosted, and managed services. There are significant synergies across our communication categories, and we continue to operate under a single operating segment.faster return on investment ("ROI").
We sell our Enterprise products through a high-touch sales team and a well-developed global network of distributors and channel partners, including value-added resellers, integrators, direct marketing resellers, and service providers and resellers. We sell our Consumer productsas well as through both traditional and online consumer electronics retailers, consumer product retailers, office supply distributors, wireless carriers, catalog and mail order companies, and mass merchants.e-commerce channels. We have well-established distribution channels in the Americas, Europe, Middle East, Africa, and Asia Pacific where use of our products is widespread.
Impact of COVID-19 on Our consolidated financial results asBusiness
Total Net Revenues (in millions) Operating Income (Loss) (in millions)
ComparedShelter-in-place mandates have led to the third quarter of Fiscal Year 2019, total net revenues decreased (23.4)%a massive increase in remote work. As a result, we continued to $384.5 million; the decrease in total net revenues primarily was driven byexperience elevated demand for certain Enterprise Headsets and Video devices and a decline in Enterprise Headset,demand for our Voice products and associated services, as companies continued to shift from in-office to work-from-home arrangements for many of their office workers. The acceleration in customer and partner demand for these products to support hybrid work environments, remote learning, and telemedicine opportunities, have led to increased sales and operating income.
However, the impact of COVID-19 is fluid and uncertain, and it has caused, and may continue to cause, various negative effects as we continue to experience periodic constraints in our supply chain, specifically the sourcing of certain components and raw materials, and increased logistics costs and other adverse effects on our gross margins to meet the high customer demand for specific Headsets and Video product revenues reflecting sales integration and channel consolidation issues, Microsoft Skype to Teams transition, and trade issues in China that led to our reducing channel inventories by reducing sales into our distributors. Additionally, our Consumer Headset product revenues also declined driven by portfolio optimization and a decrease in our gaming products due to an unusually high comparison resulting from the launch of Battle Royale genre games in fiscal year 2019.
products. As a result, the impact of purchase accounting,COVID-19 to date has had mixed effects on our results of operations, and may continue to have such effects.
In responding to this pandemic, employee safety continues to be a totalcritical concern to the Company and we have taken measures to protect our employees globally by adherence to public safety and shelter in place directives, physical distancing protocols within offices and manufacturing facilities, providing personal protective equipment, including face masks and hand sanitizers, conducting routine sanitation of $7.1 millionfacilities, requiring health monitoring before entry into Company facilities and restricting the number of deferred revenuevisitors to our sites. The safety protocols implemented globally meet or exceed current regulations, however we continue to monitor employees’ safety and evolving regulatory requirements. Although our manufacturing facility remains open and certain office employees may utilize our offices when necessary, the majority of all non-factory employees continue to work from home, using headsets and other Company-issued equipment.
The full extent and duration of the impact of the COVID-19 pandemic on our business continues to be uncertain and difficult to predict and will depend on many factors outside of our control, including the extent and duration of the pandemic, mutations of the virus, the development and availability of effective treatments, including the availability of vaccines for our global workforce, mandates of protective public safety measures, and the impact of the pandemic on the global economy, global supply chains, and demand for our products. It is not possible at this time to foresee whether the outbreak of COVID-19 or other events beyond our control will be effectively contained, nor can we estimate the entirety of the impact that otherwise wouldCOVID-19 or such other pandemics or natural or man-made disaster will have been recognized inon the third quarter ofglobal economy, our business, customers, suppliers or other business partners. As such, impacts from such events to the Company are highly uncertain and the Company will continue to assess the impact from such events on our financial statements.
Third Quarter Fiscal Year 2020 was excluded from third quarter revenue of $384.5 million; the amount of deferred revenue excluded from the third quarter of Fiscal Year 2019 was $28.9 million.2021 Highlights
We reported an operating loss of $76.6 millionTotal net revenues for the third quarter of Fiscal Year 2021 were $484.7 million, an increase of $100.2 million or 26.1%, compared to the same quarter in Fiscal Year 2020, primarily driven by increased net sales in our Enterprise Headset and Video revenues partially offset by decreases in Consumer Headset and Voice revenues. Refer to further discussion on total net revenues in the Results of Operations below.
For the quarter ended December 26, 2020, our backlog increased from the previous quarter as channel-buying patterns anticipate high demand and product shortages. We also saw an operating loss of $24.7 millionincrease in channel inventory in certain key markets consistent with the demand increases. Although backlog has increased, lead-times and product availability continue to improve.
Product gross margins for the third quarter of Fiscal Year 2019. The decline2021 increased from 30.4% to 43.7%, primarily driven by a decrease in our results from operations primarily is due to declining revenues discussed above, lower gross margins due to lower production levelsintangible asset amortization expense and restructuring and other related charges associated with our consumer business.
Our strategic initiatives are focused primarily on driving sustainable profitable revenue growth through our end-to-end portfoliothe non-recurrence of audio and video endpoints, including headsets, desktop phones, conference room phones, and video collaboration solutions. The Acquisition of Polycom has positioned us as a global leaderConsumer inventory-related reserves taken in communications and collaboration endpoints, has allowed us to target the faster-growing market categories, such as the Huddle Room for video collaboration, and is allowing us to capture additional opportunities through data analytics and insight services across a broad range of communications endpoints. Our ability to provide comprehensive solutions to communications challenges in the marketplace distinguishes us from our competitors and better positions us with our channel partners, customers and strategic alliance partners, which we believe will drive sustainable profitable revenue growth.
Within the enterprise market, we anticipate that the key driver of growth over the next few years will be the continued adoption of UC&C solutions. We believe enterprises are increasing their adoption of UC&C systems to reduce costs, improve collaboration, and migrate to more capable and flexible technology. We expect that the growth of UC&C solutions will increase overall headset, video endpoint and voice product adoption in enterprise environments.
Revenues from our Consumer Headsets are seasonal and typically strongest in our thirdlast year's comparative fiscal quarter, which includes the holiday shopping season. Other factors that directly impact performance in thepartially offset by COVID-19 related incremental manufacturing and logistics costs and Video product category include product life cycles (including the introduction and pace of adoption of new technology), market acceptance of new product introductions, consumer preferences and the competitive retail environment, changes in consumer confidence and other macroeconomic factors. In addition, the timing or non-recurrence of retailer product placements can cause volatility in quarter-to-quarter results.transitions.
In addition to enabling us to provide comprehensive solutions to drive growth over the long-term, the Acquisition also is allowing us to reevaluate our business, focus resources and efforts on our enterprise strategic initiatives, and to continue to drive operational efficiencies. One of the outcomes of this process led to our announcement in the first quarter of Fiscal Year 2020 that we had begun considering strategic alternatives for our consumer headset products. As we continued to explore strategic initiatives, we concurrently worked to optimized our Consumer Product portfolio. As a result, inDuring the third quarter of Fiscal Year 2020, this optimization2021, we announced our new Poly Sync Family, a new line of smart, USB and Bluetooth speakerphones, designed to enable today’s need to work resultedfrom anywhere.These new products were available beginning early in charges of $10.4 million related to inventory reservescalendar year 2021 and supplier liabilities for excess and obsolete inventory. In addition, we recognized $5.4did not have a material impact on current quarter revenues.
We repurchased $12.0 million of restructuring and other charges related to our consumer product portfolio optimization efforts.
Additionally, our consolidation efforts have led to material integration-related cost and expense savings. The majority of these savings are being realized in our operations group where efficiencies in our manufacturing operations and supply chain have helped to reduce our time to market. Simultaneously, we have begun to announce and release a number of new and refreshed product offerings in supportthe outstanding principal of our end-to-end strategic initiatives. We executed on our channel inventory reduction program announced in the second quarter of Fiscal Year 2020, and reduced our channel inventories by approximately $60 million5.50% senior notes due 2023 during the third quarter of Fiscal Year 2020.2021 resulting in an immaterial gain on the extinguishment of debt.
We remain cautious about the macroeconomic environment, based on uncertainty around trade and fiscal policy in the U.S. and internationally and broader economic uncertainty in many parts
RESULTS OF OPERATIONS
We group our operations into two reportable segments: Products and Services. Our Products segment consists of Headsets, Voice, and Video product categories and our Services segment consists of support, professional, managed, and cloud services and solutions.
NET REVENUES
The following graphs displaytable sets forth net revenues by product categoryreportable segment for the three and nine months ended December 31, 201926, 2020 and 2018:
Net Revenues(in millions)
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| | Three Months Ended | | | | | | Nine Months Ended | | | | |
| (in thousands, except percentages) | | December 26, 2020 | | December 28, 2019 | | Change | | December 26, 2020 | | December 28, 2019 | | Change |
| Net revenues | | | | | | | | | | | | | | | | |
| Products | | $ | 420,711 | | | $ | 316,633 | | | $ | 104,078 | | | 32.9 | % | | $ | 1,059,846 | | | $ | 1,094,515 | | | $ | (34,669) | | | (3.2) | % |
| Services | | 63,974 | | | 67,838 | | | (3,864) | | | (5.7) | % | | 191,529 | | | 199,432 | | | (7,903) | | | (4.0) | % |
| Total net revenues | | $ | 484,685 | | | $ | 384,471 | | | $ | 100,214 | | | 26.1 | % | | $ | 1,251,375 | | | $ | 1,293,947 | | | $ | (42,572) | | | (3.3) | % |
Revenue by Product Category (percent)
Products
Net Revenues*(in millions)
Revenue by Product Category* (percent)
* Year to date netNet products revenues for Voice, Video, and Services in FY19 include only six months activity as the Acquisition closed on July 2, 2018.
Total net revenues decreasedincreased in the three months ended December 31, 2019 compared to the prior year period, primarily due to declines in Enterprise Headset, Voice, and Video product revenues reflecting sales integration and channel consolidation issues, Microsoft Skype to Teams transition, and trade issues in China that led to our reducing channel inventories by reducing sales into our distributors. Additionally, our Consumer Headset product revenues also declined driven by portfolio optimization and a decrease in our gaming products due to an unusually high comparison resulting from the launch of Battle Royale genre games in fiscal year 2019. These decreases were partially offset by an increase in Service revenue attributable to a decline in deferred revenue excluded due to purchase accounting.
Total net revenues increased in the nine months ended December 31, 201926, 2020 compared to the prior year period, primarily due to the Acquisition. This increasefollowing:
•Enterprise Headset and Video net revenues were driven by the COVID-19 shift toward "work from anywhere" and the need for office workers to be able to effectively communicate and collaborate regardless of location. Although we continue to experience periodic supply constraints on certain headsets and new video products, we were able to more than double unit shipments in each category year over year. Video demand was partially offsetalso driven by remote learning, telemedicine, and the continued ramp of our new video portfolio.
•Partially offsetting these increases were declines in our Consumer headsetVoice product revenues largely driven by our Gaming and Mono product lines;as a result of the COVID-19 shift in demand toward "work from home" products, as well as declines in the our Consumer Headsets portfolio primarily due to our decision to discontinue certain low-margin mono and stereo products and the sale of our gaming headset assets in the fiscal fourth quarter of FY20.
Net products revenues decreased in the nine months ended December 26, 2020 compared to the prior year period, primarily due to the following:
•Voice product revenues declined as a result of the COVID-19 shift in demand toward "work from anywhere" products.
•Consumer Headsets declined significantly year over year primarily due to our decision to discontinue certain low-margin mono and stereo products and the sale of our gaming headset assets in the fiscal fourth quarter of FY20.
•Partially offsetting the declines in Voice and Consumer, we saw growth in Enterprise headset productHeadset and Video net revenues driven by declinesthe COVID-19 shift toward "work from home" and the need for office workers to be able to effectively communicate and collaborate regardless of location. Although we continue to experience periodic supply constraints on certain headsets and new video products, we were able to ship a record number of headsets and video units during the period. Video demand was also driven by remote learning, telemedicine, and the continued ramp of our new video portfolio.
Services
Net services revenues decreased slightly in our non-UC&C Enterprise headsetthe three and nine months ended December 26, 2020 due to the Video product revenues,mix shift from legacy Platform and Telepresence to recently launched Studio video bars, which wereare less complex, easier to install and operate, and carry optional service contracts. The decrease was partially offset by growth in our UC&C Enterprise headset product revenues.
the impact of the deferred revenue fair value adjustment resulting from the Polycom Acquisition (the "Acquisition").
Geographic Information
The following table sets forth net revenues by Regiongeographic region for the three and nine months ended December 26, 2020 and December 28, 2019:
(percent)
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| | Three Months Ended | | | | | | Nine Months Ended | | | | |
| (in thousands, except percentages) | | December 26, 2020 | | December 28, 2019 | | Change | | December 26, 2020 | | December 28, 2019 | | Change |
| Net revenues | | | | | | | | | | | | | | | | |
| U.S. | | $ | 193,413 | | | $ | 175,856 | | | $ | 17,557 | | | 10.0 | % | | $ | 545,472 | | | $ | 613,810 | | | $ | (68,338) | | | (11.1) | % |
| | | | | | | | | | | | | | | | |
| Europe and Africa | | 181,429 | | | 105,931 | | | 75,498 | | | 71.3 | % | | 405,933 | | | 351,883 | | | 54,050 | | | 15.4 | % |
| Asia Pacific | | 76,823 | | | 73,630 | | | 3,193 | | | 4.3 | % | | 212,657 | | | 235,931 | | | (23,274) | | | (9.9) | % |
| Americas, excluding U.S. | | 33,020 | | | 29,054 | | | 3,966 | | | 13.7 | % | | 87,313 | | | 92,323 | | | (5,010) | | | (5.4) | % |
| Total international net revenues | | 291,272 | | | 208,615 | | | 82,657 | | | 39.6 | % | | 705,903 | | | 680,137 | | | 25,766 | | | 3.8 | % |
| Total net revenues | | $ | 484,685 | | | $ | 384,471 | | | $ | 100,214 | | | 26.1 | % | | $ | 1,251,375 | | | $ | 1,293,947 | | | $ | (42,572) | | | (3.3) | % |
Geographic Information (in millions) Revenue by Region (percent)
Compared to the same prior year period, U.S. net revenues for the three months ended December 31, 2019 decreased26, 2020 increased primarily due to declinesincreased net sales in our Enterprise headsetHeadset and Voice productVideo revenues reflecting sales integration and channel consolidation issues, Microsoft Skype to Teams transition, and trade issues in China that led to our reducing channel inventories by reducing sales into our distributors. Additionally, our Consumer Headset product revenues also declined driven by portfolio optimization and a decrease in our gaming products due to an unusually high comparison resulting from the launch of Battle Royale genre games in fiscal year 2019. These decreases were partially offset by an increasedecreases in Service revenue attributable to a decline in the amount of deferred revenue excluded due to purchase accounting. Video product revenues increased compared to the prior year period.Consumer Headset and Voice revenues.
Compared to the same prior year period, U.S. net revenues for the nine months ended December 31, 2019 increased26, 2020 decreased primarily due to declines in our Voice Video, and Service product categories introduced asrevenues, which was a result of the Acquisition. This increase was partially offset by continued declinesCOVID-19 shift in our non-UC&C Enterprise headsetdemand toward "work from home" products. Our Consumer Headset product revenues as well as declines in our Consumer headset product revenues which largely weredeclined driven by our Gaming and Stereo product lines.decision to eliminate lower margin consumer products from our portfolio, including the Fiscal Year 2020 sale of gaming headset assets. These declines were partially offset by growth in UC&Cour Video product revenues as new products ramp and an increase in sales of our Enterprise headset product revenues.Headset products.
International
International net revenues, notably in Europe and Africa, for the three months ended December 31, 2019 decreased from the same prior year period primarily due to declines in Enterprise, Voice, and Video product revenues, as well as declines in our Consumer headset product revenues driven by our Gaming and Stereo product lines. These declines were partially offset by an increase in Service revenue attributable to a decline in the amount of deferred revenue excluded due to purchase accounting.
International net revenues for the nine months ended December 31, 201926, 2020 increased from the same prior year period primarily due to the Acquisition as well as growthan increase in our UC&C Enterprise headsetHeadset and Video product revenues.revenues due to a shift to "work from anywhere", telemedicine, and remote learning. These increases were partially offset by declines in our non-UC&C Enterprise headset product revenues as well as declinesa decline in Consumer headsetHeadset and Voice product revenues, which largely were driven by our Gaming and Mono product lines.revenues.
During the three months ended December 31, 2019,26, 2020, changes in foreign exchangeexchange rates negativelyfavorably impacted net revenues by $3.6$8.4 million, net of the effects of hedging, compared to a $2.2$3.6 million unfavorable impact on revenue in the prior year period.
During the nine months ended December 31, 2019,26, 2020, changes in foreign exchange rates negativelyfavorably impacted net revenues by $11.2$5.8 million, net of the effects of hedging, compared to a $3.4$11.2 million favorableunfavorable impact onon revenue in the prior year period.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues consists primarily of direct and contract manufacturing costs, warranty,amortization of acquired technology, freight, depreciation, duties,warranty, charges for excess and obsolete inventory, depreciation, duties, royalties, and overhead expenses.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | | | Nine Months Ended | | | | | | | | | | |
| (in thousands, except percentages) | | December 26, 2020 | | December 28, 2019 | | Change | | December 26, 2020 | | December 28, 2019 | | Change | | | | | | |
| Products: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net revenues | | $ | 420,711 | | | $ | 316,633 | | | $ | 104,078 | | | 32.9 | % | | $ | 1,059,846 | | | $ | 1,094,515 | | | $ | (34,669) | | | (3.2) | % | | | | | | | | |
| Cost of revenues | | 236,842 | | | 220,469 | | | 16,373 | | | 7.4 | % | | 622,718 | | | 658,408 | | | (35,690) | | | (5.4) | % | | | | | | | | |
| Gross profit | | $ | 183,869 | | | $ | 96,164 | | | $ | 87,705 | | | 91.2 | % | | $ | 437,128 | | | $ | 436,107 | | | $ | 1,021 | | | 0.2 | % | | | | | | | | |
| Gross profit % | | 43.7 | % | | 30.4 | % | | | | | | 41.2 | % | | 39.8 | % | | | | | | | | | | | | |
| Services: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net revenues | | $ | 63,974 | | | $ | 67,838 | | | $ | (3,864) | | | (5.7) | % | | $ | 191,529 | | | $ | 199,432 | | | $ | (7,903) | | | (4.0) | % | | | | | | | | |
| Cost of revenues | | 21,186 | | | 20,156 | | | 1,030 | | | 5.1 | % | | 64,921 | | | 72,976 | | | (8,055) | | | (11.0) | % | | | | | | | | |
| Gross profit | | $ | 42,788 | | | $ | 47,682 | | | $ | (4,894) | | | (10.3) | % | | $ | 126,608 | | | $ | 126,456 | | | $ | 152 | | | 0.1 | % | | | | | | | | |
| Gross profit % | | 66.9 | % | | 70.3 | % | | | | | | 66.1 | % | | 63.4 | % | | | | | | | | | | | | |
| Total: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net revenues | | $ | 484,685 | | | $ | 384,471 | | | $ | 100,214 | | | 26.1 | % | | $ | 1,251,375 | | | $ | 1,293,947 | | | $ | (42,572) | | | (3.3) | % | | | | | | | | |
| Cost of revenues | | 258,028 | | | 240,625 | | | 17,403 | | | 7.2 | % | | 687,639 | | | 731,384 | | | (43,745) | | | (6.0) | % | | | | | | | | |
| Gross profit | | $ | 226,657 | | | $ | 143,846 | | | $ | 82,811 | | | 57.6 | % | | $ | 563,736 | | | $ | 562,563 | | | $ | 1,173 | | | 0.2 | % | | | | | | | | |
| Gross profit % | | 46.8 | % | | 37.4 | % | | | | | | 45.0 | % | | 43.5 | % | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | Nine Months Ended | | |
| | | December 31, | | Increase | | December 31, | | Increase |
| (in thousands, except percentages) | | 2019 | | 2018 | | (Decrease) | | 2019 | | 2018 | | (Decrease) |
| Total net revenues | | $ | 384,471 |
| | $ | 501,669 |
| | $ | (117,198 | ) | | (23.4 | )% | | $ | 1,293,947 |
| | $ | 1,206,047 |
| | $ | 87,900 |
| | 7.3 | % |
| Cost of revenues | | 240,625 |
| | 286,532 |
| | (45,907 | ) | | (16.0 | )% | | 731,384 |
| | 728,438 |
| | 2,946 |
| | 0.4 | % |
| Gross profit | | $ | 143,846 |
| | $ | 215,137 |
| | $ | (71,291 | ) | | (33.1 | )% | | $ | 562,563 |
| | $ | 477,609 |
| | $ | 84,954 |
| | 17.8 | % |
| Gross profit % | | 37.4 | % | | 42.9 | % | |
|
| | | | 43.5 | % | | 39.6 | % | | | | |
Products
Compared to the prior year period, gross profit as a percentage of net revenues increased in the three and nine months ended December 26, 2020, primarily due to a decrease in intangible asset amortization expense resulting from the long-lived asset impairment of existing technology related to our Voice products in the fourth quarter of Fiscal Year 2020, the non-recurrence of inventory-related reserves taken during the third quarter of Fiscal Year 2020 in connection with the optimization of our Consumer product portfolio, and a favorable product mix.Partially offsetting these favorable items was COVID-19 related incremental manufacturing and logistics costs and Video product transitions.
Given the significant variances in gross profit percentages between our higher and lower margin products, gross profit percentages may be impacted by variations in product mix and other factors, including production levels, pricing and promotions, distribution channels, and return rates.
Services
Compared to the same prior year period, the gross profit as a percentage of net revenues decreased in the three months ended December 31, 2019,26, 2020, primarily due to fixed cost items spread over lower net revenues and inventory-related reserves taken duringpartially offset by the current quarter in connection with the optimization of our Consumer product portfolio. Partially offsetting these unfavorable items was a decrease in the Acquisition-related deferred revenue fair value adjustment resulting from the Acquisition and material cost reductions as a result of in-sourcing of certain products.adjustment.
Compared to the same prior year period, the gross profit as a percentage of net revenues increased in the nine months ended December 31, 2019,26, 2020, primarily due to athe decrease in the Acquisition-related deferred revenue fair value adjustment when compared to prior year and a non-recurring inventory fair value adjustment in the prior year, bothlower fixed cost base.
There are significant variances in gross profit percentages between our higher and lower margin products, including Voice, Video, and Service products acquired through the Acquisition; therefore, small variations in product mix, which can be difficult to predict, can have a significant impact on gross profit as a percentage of net revenues. Gross profit percentages also may vary based on other factors, including production levels, distribution channels and return rates.
OPERATING EXPENSES
Operating expenses consist primarily of research, development and engineering; selling, general and administrative; gain, net of litigation settlements, and restructuring and other related charges, all of which are summarized in the table below for the three and nine months ended December 31,26, 2020 and December 28, 2019 and 2018, respectively:were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | Nine Months Ended | | | | | | | | | | |
| (in thousands, except percentages) | | December 26, 2020 | | December 28, 2019 | | Change | | December 26, 2020 | | December 28, 2019 | | Change | | | | | | | | | | | | |
| Research, development, and engineering | | $ | 54,150 | | | $ | 53,769 | | | $ | 381 | | | 0.7 | % | | $ | 156,327 | | | $ | 170,708 | | | $ | (14,381) | | | (8.4) | % | | | | | | | | | | | | | | | | |
| Selling, general and administrative | | 129,641 | | | 144,978 | | | (15,337) | | | (10.6) | % | | 361,892 | | | 457,004 | | | (95,112) | | | (20.8) | % | | | | | | | | | | | | | | | | |
| (Gain) loss, net from litigation settlements | | — | | | — | | | — | | | — | % | | 17,561 | | | (1,162) | | | 18,723 | | | 1,611.3 | % | | | | | | | | | | | | | | | | |
| Restructuring and other related charges | | 13,977 | | | 21,724 | | | (7,747) | | | (35.7) | % | | 49,477 | | | 47,096 | | | 2,381 | | | 5.1 | % | | | | | | | | | | | | | | | | |
| Total Operating Expenses | | $ | 197,768 | | | $ | 220,471 | | | $ | (22,703) | | | (10.3) | % | | $ | 585,257 | | | $ | 673,646 | | | $ | (88,389) | | | (13.1) | % | | | | | | | | | | | | | | | | |
| % of net revenues | | 40.8 | % | | 57.3 | % | | | | | | 46.8 | % | | 52.1 | % | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | Nine Months Ended | | | |
| | | December 31, | | Increase | | December 31, | | Increase | |
| (in thousands, except percentages) | | 2019 | | 2018 | | (Decrease) | | 2019 | | 2018 | | (Decrease) | |
| Research, development, and engineering | | $ | 53,769 |
| | $ | 59,661 |
| | $ | (5,892 | ) | | (10 | )% | | $ | 170,708 |
| | $ | 140,409 |
| | $ | 30,299 |
| | 22 | % | |
| Selling, general and administrative | | 144,978 |
| | 168,053 |
| | (23,075 | ) | | (14 | )% | | 457,004 |
| | 406,553 |
| | 50,451 |
| | 12 | % | |
| Gain, net of litigation settlements | | — |
| | — |
| | — |
| | — | % | | (1,162 | ) | | (30 | ) | | (1,132 | ) | | (3,773 | )% | |
| Restructuring and other related charges | | 21,724 |
| | 12,130 |
| | 9,594 |
| | 79 | % | | 47,096 |
| | 20,711 |
| | 26,385 |
| | 127 | % | |
| Total Operating Expenses | | $ | 220,471 |
| | $ | 239,844 |
| | $ | (19,373 | ) | | (8 | )% | | $ | 673,646 |
| | $ | 567,643 |
| | $ | 106,003 |
| | 19 | % | |
| % of net revenues | | 57.3 | % | | 47.8 | % | |
| | | | 52.1 | % | | 47.1 | % | | | | | |
Our Research, development, and engineering expenses decreased during the nine months ended December 26, 2020 when compared to the prior year period primarily due to lower compensation expense driven by reduction in headcount, cost control efforts, and decreased expenses due to COVID-19 restrictions.
Selling, general and administrative expenses decreased during the three months ended December 31, 201926, 2020 when compared to the prior year period primarily due to lower compensation expense driven by reduced headcount, cost control efforts, and decreased travel expenses due to COVID-19 restrictions. The decreases were partially offset by higher incentive compensation when compared to the prior year period. Selling, general and administrative expenses decreased during the nine months ended December 26, 2020 when compared to the prior year period primarily due to integration related expenses that did not occur in the current period, lower compensation expense, driven by reduced variable compensationheadcount and cost reductions from our restructuring actions initiated in prior periods. Research, development, and engineeringlower sales commissions, decreased expenses increased in the nine months ended December 31, 2019 primarily due to the inclusion of Polycom operating expenses after the Acquisition.
Our Selling, generalCOVID-19 restrictions, and administrative expenses decreased during the three months ended December 31, 2019other cost control efforts. The decreases were partially offset by higher incentive compensation when compared to the prior year period primarily due to lower compensation expense, driven by reduced variable compensation, cost reductions from our restructuring actions initiated in prior periods, and Acquisition-related costs that did not recur in the current period. Selling, general and administrative expenses increased in
During the nine months ended December 31, 2019, primarily due26, 2020 we recorded litigation charges for settlements that occurred during the period. See Note 7, Commitments and Contingencies, of the accompanying notes to the inclusion of Polycom operating expenses after the Acquisition.condensed consolidated financial statements for further information regarding on-going litigation.
Compared to the prior year period, restructuring and other related charges increaseddecreased in the three and nine months ended December 31, 2019,26, 2020 primarily related to severance due to headcount related actions initiated in the prior year period. Compared to the prior year period, restructuring and other related charges increased in the nine months ended December 26, 2020, primarily due toto new restructuring actions initiated during the period to streamlinereduce expenses and optimize our global workforcecost structure and achieve planned synergies. align with projected revenue levels. These actions consisted of headcount reductions and office closures. For more information regarding restructuring activities, see Note 10,9, Restructuring and Other Related Charges, of the accompanying notes to condensed consolidated financial statements.
INTEREST EXPENSE
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | Nine Months Ended | | | | |
| | | December 31, | | (Increase) | | December 31, | | (Increase) |
| (in thousands, except percentages) | | 2019 |
| 2018 | | Decrease | | 2019 | | 2018 | | Decrease |
| Interest expense | | $ | (22,533 | ) | | $ | (25,032 | ) | | $ | 2,499 |
| | 10.0 | % | | $ | (70,262 | ) | | $ | (56,252 | ) | | $ | (14,010 | ) | | (24.9 | )% |
| % of net revenues | | (5.9 | )% | | (5.0 | )% | | | | | | (5.4 | )% | | (4.7 | )% | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | Nine Months Ended | | | | | |
| (in thousands, except percentages) | | December 26, 2020 | | December 28, 2019 | | Change | | December 26, 2020 | | December 28, 2019 | | Change | |
| Interest expense | | $ | (18,417) | | | $ | (22,533) | | | $ | 4,116 | | | 18.3 | % | | $ | (58,182) | | | $ | (70,262) | | | $ | 12,080 | | | 17.2 | % | |
| % of net revenues | | (3.8) | % | | (5.9) | % | | | | | | (4.6) | % | | (5.4) | % | | | | | |
Interest expense decreased for the three and nine months ended December 31, 201926, 2020 primarily due to a lower outstanding balance on the term loan facility, the gains recognized on the repurchase of outstanding debt, and lower interest rates. Interest expense increased for the nine months ended December 31, 2019 primarily due to interest incurred on our Credit Facility Agreement entered into in connection with the Acquisition. See Note 9,8, Debt, of the accompanying notes to condensed consolidated financial statements.
OTHER NON-OPERATING INCOME, NET
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | Nine Months Ended | | | | | |
| | | December 31, | | Increase | | December 31, | | Increase | |
| (in thousands, except percentages) | | 2019 | | 2018 | | (Decrease) | | 2019 | | 2018 | | (Decrease) | |
| Other non-operating income, net | | $ | 967 |
| | $ | 125 |
| | $ | 842 |
| | 673.6 | % | | $ | 675 |
| | $ | 3,731 |
| | $ | (3,056 | ) | | (81.9 | )% | |
| % of net revenues | | 0.3 | % | | — | % | | | | | | 0.1 | % | | 0.3 | % | | | | | |
Other non-operating income, net for the three and nine months ended December 31,26, 2020 and December 28, 2019 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | Nine Months Ended | | | | | |
| (in thousands, except percentages) | | December 26, 2020 | | December 28, 2019 | | Change | | December 26, 2020 | | December 28, 2019 | | Change | |
| Other non-operating income, net | | $ | 2,596 | | | $ | 967 | | | $ | 1,629 | | | 168.5 | % | | $ | 4,188 | | | $ | 675 | | | $ | 3,513 | | | 520.4 | % | |
| % of net revenues | | 0.5 | % | | 0.3 | % | | | | | | 0.3 | % | | 0.1 | % | | | | | |
Other non-operating income, net for the three and nine months ended December 26, 2020 increased primarily due to immaterial net foreign currency gains and immaterial unrealized gains on the deferred compensation portfolio during the current period compared to immaterial unrealized gains on the deferred compensation portfolio compared toand immaterial unrealized losses on the deferred compensation portfolionet foreign currency gains in the prior period.
Other non-operating income, net for the nine months ended December 31, 2019 decreased primarily due to lower interest income as our investment portfolios were liquidated during the First Quarter of Fiscal Year 2019 to facilitate the Acquisition and lower net foreign currency gains compared to the prior period.
INCOME TAX EXPENSE (BENEFIT)BENEFIT
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | | | Nine Months Ended | | | | | |
| (in thousands except percentages) | | December 26, 2020 | | December 28, 2019 | | Change | | December 26, 2020 | | December 28, 2019 | | Change | |
| Income (loss) before income taxes | | $ | 13,068 | | | $ | (98,191) | | | $ | 111,259 | | | 113.3 | % | | $ | (75,515) | | | $ | (180,670) | | | $ | 105,155 | | | 58.2 | % | |
| Income tax benefit | | (7,045) | | | (19,708) | | | 12,663 | | | 64.3 | % | | (7,208) | | | (31,406) | | | 24,198 | | | 77.0 | % | |
| Net income (loss) | | $ | 20,113 | | | $ | (78,483) | | | $ | 98,596 | | | 125.6 | % | | $ | (68,307) | | | $ | (149,264) | | | $ | 80,957 | | | 54.2 | % | |
| Effective tax rate | | (53.9) | % | | 20.1 | % | | | | | | 9.6 | % | | 17.4 | % | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | | | Nine Months Ended | | | | | |
| | | December 31, | | (Increase) | | December 31, | | (Increase) | |
| (in thousands except percentages) | | 2019 |
| 2018 | | Decrease | | 2019 | | 2018 | | Decrease | |
| Loss before income taxes | | $ | (98,191 | ) | | $ | (49,614 | ) | | $ | (48,577 | ) | | (97.9 | )% | | $ | (180,670 | ) | | $ | (142,555 | ) | | $ | (38,115 | ) | | (26.7 | )% | |
| Income tax benefit | | (19,708 | ) | | (7,880 | ) | | (11,828 | ) | | (150.1 | )% | | (31,406 | ) | | (28,584 | ) | | (2,822 | ) | | (9.9 | )% | |
| Net loss | | $ | (78,483 | ) | | $ | (41,734 | ) | | $ | (36,749 | ) | | (88.1 | )% | | $ | (149,264 | ) | | $ | (113,971 | ) | | $ | (35,293 | ) | | (31.0 | )% | |
| Effective tax rate | | (20.1 | )% | | (15.9 | )% | |
|
| |
| | (17.4 | )% | | (20.1 | )% | | | | | |
The Company and its subsidiaries are subject to taxation in the U.S. and in various foreign and state jurisdictions. Our income tax expense or benefit is determined using an estimate of our annual effective tax rate and adjusted for discrete items that are taken into account in the relevant period. The effective tax rates for the three months ended December 31,26, 2020 and December 28, 2019 and 2018 were (20.1)(53.9)% and (15.9)%20.1%, respectively. The effective tax rates for the nine months ended December 31,26, 2020 and December 28, 2019 were 9.6% and 2018 were (17.4)% and (20.1)%17.4%, respectively.
The annualchange in our effective tax ratesrate for the period three and nine months ended December 31, 2019 and 2018 varied from26, 2020 relative to the prior year is primarily due to recently enacted statutory tax rate of 21% primarily due to our jurisdictional mix of income, state taxes, U.S. taxation of foreign earnings, and R&D credits. The increase in Netherlands, resulting in a benefit from a revaluation of net deferred tax assets from internal intangible property restructuring between our annual effectivewholly-owned subsidiaries.
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax rateassets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the two-year period ended March 28, 2020 and Fiscal Year 2021 forecasted results in the U.S. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. On the basis of this evaluation, as of December 26, 2020, a valuation allowance against U.S. federal and state deferred tax assets continues to be maintained for the three months ended December 31, 2019 relative to prior year primarily is due to a favorable shift in jurisdictional losses, lower state taxes as a proportion of losses and incremental benefit for R&D credits. The decrease in our annual effective tax rate for the nine months ended December 31, 2019 relative to prior year primarily is due to a favorable shift in jurisdictional losses, lower state taxes as a proportion of losses and incremental benefit for R&D credits.26, 2020.
During the nine months ended December 31, 2019, we recognized a discrete $11.6 million tax benefit related to an intra-entity transfer of an intangible asset that will have a deferred future benefit, for which we established a deferred tax asset ("DTA").
On June 7, 2019, a Ninth Circuit panel reversed the United States Tax Court’s holding in Altera Corp. v. Commissioner and upheld the portion of the Treasury regulations issued under IRC Section 482 requiring related-party participants in a cost sharing arrangement to share stock-based compensation costs. The US Court of Appeals Ninth Circuit has denied the taxpayer’s request for an en banc rehearing, and the taxpayer now has until February 10, 2020 to file a petition of certiorari with the US Supreme Court. We have considered the issue and have recorded a $8.6 million discrete tax charge resulting from the cost sharing of prior stock-based compensation, partially offset by a reduction to the 2017 Tax Cuts and Jobs Act toll charge accrued in prior periods. We will continue to monitor developments related to the case and the potential impact on its consolidated financial statements.
As of December 31, 2019,26, 2020, we had approximately $29.5$97.3 million in DTAs.non-US net deferred tax assets ("DTAs") after valuation allowance. A significant portion of our DTAs relate to interest expense in the US that is subject to a limitation on deductibility based on income.internal intangible property restructuring between wholly-owned subsidiaries. At this time, based on evidence currently available, we consider it more likely than not that we will have sufficient taxable income in the future that will allow us to realize our DTAs; however, failure to generate sufficient future taxable income could result in some or all DTAs not being utilized in the future. If we are unable to generate sufficient future taxable income, a substantial valuation allowance to reduce our DTAs may be required.
FINANCIAL CONDITION
FINANCIAL CONDITION |
| | |
Operating Cash Flow (in millions)
| Investing Cash Flow(in millions)
| Financing Cash Flow (in millions)
|
| | |
We use cash provided by operating activities as our primary source of liquidity. We expect that cash provided by operating activities will fluctuate in future periods as a result of a number of factors, including fluctuations in our revenues, the timing of compensation-related payments, such as our annual bonus/variable compensation plan, integration costs related to the Acquisition, interest payments on our long-term debt, product shipments during the quarter, accounts receivable collections, inventory and supply chain management, and the timing and amount of tax and other payments.
Operating Activities
Compared to the same period last year, net cash provided by operating activities during the nine months ended December 31, 2019 decreased primarily due to increased inventory resulting from new product introductions and in-sourcing of manufacturing, cash paid for interest payments on long-term debt, and cash paid for restructuring and integration activities. The decrease was partially offset by higher cash collections from customers as a result of increased revenue when compared to the nine months ended December 31, 2018.
Investing Activities
Net cash used for investing activities during the nine months ended December 31, 2019 primarily was used for the purchase of property, plant and equipment and was partially offset by proceeds from the sale of real property.
We estimate total capital expenditures for Fiscal Year 2020 will be approximately $25 million to $35 million. We expect capital expenditures for the remainder of Fiscal Year 2020 to consist primarily of new information technology investments, capital investment in our manufacturing capabilities, including tooling for new products, and facilities upgrades.
Financing Activities
Net cash used for financing activities during the nine months ended December 31, 2019, primarily was used for early repayment of long-term debt, dividend payments on our common stock, and taxes paid on behalf of employees related to net share settlements of vested employee equity awards. The uses of cash were partially offset by proceeds from issuance of common stock from our Employee Stock Purchase Plan ("ESPP").
Liquidity and Capital Resources
Our primary sources of liquidityThe following tables present selected financial information and statistics as of December 31, 2019, consisted of cash, cash equivalents,26, 2020 and short-term investments, cash we expect to generate from operations,March 28, 2020 and a $100 million revolving credit facility. At December 31, 2019, we had working capital of $202.3 million, including $172.1 million of cash, cash equivalents, and short-term investments, compared with working capital of $252.9 million, including $215.8 million of cash, cash equivalents, and short-term investments at March 31, 2019. The decrease in working capital at December 31, 2019 compared to March 31, 2019 resulted fromfor the net decrease in cash and cash equivalents, which were reduced by integration-related payments, decreased revenues and cash collections, and the early repayment of long-term debt in the second quarterfirst nine months of Fiscal Year 2020.Years 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | |
| | December 26, 2020 | | March 28, 2020 |
| Cash, cash equivalents, and short-term investments | | $ | 245,345 | | | $ | 225,720 | |
| Property, plant and equipment, net | | $ | 143,489 | | | $ | 165,858 | |
| Long-term debt, net of issuance costs | | $ | 1,576,998 | | | $ | 1,621,694 | |
| Working capital | | $ | 247,045 | | | $ | 209,203 | |
| | | | | | | | | | | | | | |
| | Nine Months Ended |
| | December 26, 2020 | | December 28, 2019 |
| Cash provided by operating activities | | $ | 71,149 | | | $ | 16,355 | |
| Cash used for investing activities | | $ | (14,580) | | | $ | (15,637) | |
| Cash used for financing activities | | $ | (44,442) | | | $ | (45,962) | |
| | | | |
Our cash and cash equivalents as of December 31, 201926, 2020 consisted of bank deposits with third party financial institutions. We monitor bank balances in our operating accounts and adjust the balances as appropriate. Cash balances are held throughout the world, including substantial amounts held outside of the U.S. As of December 31, 2019,26, 2020, of our $172.1$245.3 million of cash, cash equivalents, and short-term investments, $37.4$141.2 million was held domestically while $134.7$104.1 million was held by foreign subsidiaries, and approximately 53%71% was based in USD-denominated instruments. Our remaining investments were composed of Mutual Funds.
During Fiscal Yearthe nine months ended December 26, 2020, cash generated by operating activities of $71.1 million was a result of $68.3 million of net loss, non-cash adjustments to net loss of $172.0 million and a decrease in the net change in operating assets and liabilities of $32.6 million. Cash used in investing activities of $(14.6) million during the nine months ended December 26, 2020 consisted primarily of cash used to acquire property, plant and equipment of $(16.8) million and partially offset by proceeds from assets held for sales of $1.9 million. Cash used in financing activities of $(44.4) million during the nine months ended December 26, 2020 consisted primarily of $47.0 million repayment of long-term debt and $3.2 million for taxes paid on behalf of employees related to net share settlements of vested employee equity awards. The uses of cash were partially offset by $5.7 million of proceeds from issuance of common stock from our Employee Stock Purchase Plan ("ESPP").
During the nine months ended December 28, 2019, cash generated by operating activities of $16.4 million was a result of $(149.3) million of net loss, non-cash adjustments to net loss of $195.2 million and a decrease in the net change in operating assets and liabilities of $(29.6) million. Cash used in investing activities of $(15.6) million during the nine months ended December 28, 2019 consisted primarily of cash used to acquire property, plant and equipment of $(17.0) million partially offset by proceeds from the sale of real property of $2.1 million. Cash used in financing activities of $(46.0) million during the nine months ended December 28, 2019 consisted primarily of early repayment of long-term debt of $(25.0) million, payment of the quarterly dividend on our common stock of $(17.9) million, and taxes paid on behalf of employees related to net share settlements of vested employee equity awards of $(9.7) million. The uses of cash were partially offset by proceeds from issuance of common stock from our Employee Stock Purchase Plan ("ESPP") of $6.6 million.
Debt
In July 2018, in connection with the Acquisition, we entered into a Credit Agreement (the "Credit Agreement") with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto (the “Credit Agreement”). The Credit Agreement replaced our prior revolving credit facility in its entirety. The Credit Agreement provides for (i) a revolving credit facility with an initial maximum aggregate amount available of $100 million that matures in July 2023 and (ii) a $1.275 billion term loan facility that matures in July 2025. On July 2, 2018, the Company borrowed the full amount available under the term loan facility of $1.245 billion, net of approximately $30 million of discounts and issuance costs. Borrowings under the Credit Agreement bear interest due on a monthly basis at a variable rate equal to (i) LIBOR plus a specified margin, or (ii) the base rate (which is the highest of (a) the prime rate publicly announced from time to time by Wells Fargo Bank, National Association, (b) the federal funds rate plus 0.50% or (c) the sum of 1% plus one-month LIBOR) plus a specified margin.
The Credit Agreement contains various restrictions and covenants, some of which become more stringent over time, including requirements that we maintain certain financial ratios at prescribed levels and restrictions on the ability of us and certain of our subsidiaries to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, consummate acquisitions, make investments and pay dividends and other distributions. We believe that through the results of our cost reduction actions and debt paydowns that we will be able to continue to meet our debt covenants. If our cost reduction actions are not sufficient to generate adequate cash to pay down our debt, we may not be able to meet the required covenants which could lead to the Company being in default of the Credit Agreement. During the third quarter of fiscal year 2020, the maximum secured net leverage ratio allowed inFiscal Year 2021, we did not repurchase any of our covenants is 3:25 to 1.00. The covenant calculation provides for a number of allowable adjustments to EBITDA, including synergy cost savings and integration costs.outstanding principal. As of December 31, 2019, our secured net leverage ratio was 2.72 to 1.00. See Note 9, Debt, in26, 2020, we had $1.1 billion of the accompanying notesterm loan outstanding.
On February 20, 2020, we entered into an Amendment No. 2 to the condensed consolidatedCredit Agreement (the “Amendment”) in order to relax certain financial statements.covenants on the revolving line of credit. The financial covenants under the Credit Agreement are for the benefit of the revolving credit lenders only and do not apply to any other debt of the Company. As of December 26, 2020, the
Company has five outstanding letters of credit on the revolving credit facility for a total of $1.4 million and had $98.6 million available under the revolving line of credit. As of December 26, 2020, the Company was in compliance with the financial covenants.
On July 30, 2018, we entered into a 4-year amortizing interest rate swap agreement with Bank of America, NA.N.A. The swap has an initial notional amount of $831 million and matures on July 31, 2022. The purpose of this swap is to hedge against changes in cash flows (interest payments) attributable to fluctuations inDuring the contractually specified LIBORnine months ended December 26, 2020, the Company reclassified into interest expense $10.3 million and recorded a $13.1 million unrealized loss on its interest rate associated with our credit facility agreement. The swap involves the receipt of floating-rate amounts for fixed interest rate payments over the life of the agreement. We havederivative designated this interest rate swap as a cash flow hedge. The derivative is valued based on prevailing LIBOR rate curves on the date of measurement. We also evaluate counterparty credit risk when we calculate the fair value of the swap. For additional details, see Note 14, Derivatives, of the accompanying notes to condensed consolidated financial statements.
During Fiscal Year 2016, we obtained $488.4 million from debt financing, net of issuance costs. The debt matures on May 31, 2023 and bears interest at aan annual rate of 5.50% per annum, payable semi-annually. During the third quarter of Fiscal Year 2021 we repurchased $12.0 million of our outstanding principal and recorded an immaterial gain on May 15the extinguishment of debt. As of December 26, 2020, we had $477.3 million of debt outstanding.
We may at any time and November 15 of each year. Seefrom time to time, depending on market conditions and prices, continue to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
Further information regarding the Company’s debt issuances and related hedging activity can be found in Note 98, Debt, inand Note 13, Derivatives, of the accompanying notes to the condensed consolidated financial statements.
Capital Return Program
From time to time, our Board of Directors ("Board") authorizes programs under which we may repurchase shares of our common stock in the open market or through privately negotiated transactions, including accelerated stock repurchase agreements.
On November 28, 2018, the Board approved a 1 million share repurchase program expanding our capacity to repurchase shares to approximately 1.7 million shares. During the first three quarters of Fiscal Year 2020,2021, we did not repurchase any shares of our common stock. As of December 31, 2019,26, 2020, there remained 1,369,014 shares authorized for repurchase under the existing stock repurchase program. See Note 1211, Common Stock Repurchases, inof the accompanying notes to the condensed consolidated financial statements.
Our liquidity, capital resources, and results of operations in any period could be affected by repurchases of our common stock, the payment of cash dividends, the exercise of outstanding stock options, restricted stock grants under stock plans, and the issuance of common stock under our ESPP. The debt we assumed for the Acquisition negatively affected our liquidity and leverage ratios. To reduce our debt leverage ratios, we expect to prioritize the repayment of the debt under the Credit Agreement.
Additionally, the Acquisition impacted our cash conversion cycle due to Polycom's use of third-party partner financing and early payment discounts to drive down cash collection cycles.
We also receive cash from the exercise of outstanding stock options under our stock plan and the issuance of shares under our ESPP. However, the resulting increase in the number of outstanding shares from these equity grants and issuances could affect our earnings per share. We cannot predict the timing or amount of proceeds from the sale or exercise of these securities or whether they will be exercised, forfeited, canceled, or expire.
On February 4, 2020, we announced that the Audit Committee of our Board declared a cash dividend of $0.15 per share, payable on March 10, 2020 to stockholders of record at the close of business on February 20, 2020.
We believe that our current cash and cash equivalents, short-term investments, cash provided by operations, and the availability of additional funds under the Credit Agreement, as amended from time to time, will be sufficient to fund our operations for at leastone year from the next 12 months; however,date of issuance of these financial statements. However, any projections of future financial needs and sources of working capital are subject to uncertainty.uncertainty on our financial results. Readers are cautioned to review the risks, uncertainties, and assumptions set forth in this Quarterly Report on Form 10-Q, including the section entitled "Certain Forward-Looking Information" and the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019,28, 2020, filed with the SEC on May 17, 2019,June 8, 2020, and other periodic filings with the SEC, any of which could affect our estimates for future financial needs and sources of working capital.
OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides us with financing and liquidity support, market risk, or credit risk support.
Consigned Inventory
A substantial portion of the raw materials, components, and subassemblies used in our products are provided by our suppliers on a consignment basis. These consigned inventories are not recorded on our consolidated balance sheet until we take title to the raw materials, components, and subassemblies, which occurs when they are consumed in the production process. Prior to consumption in the production process, our suppliers bear the risk of loss and retain title to the consigned inventory. The terms of the agreements allow us to return parts in excess of maximum order quantities to the suppliers at the supplier’s expense. Returns for other reasons are negotiated with the suppliers on a case-by-case basis and to date have been immaterial. If our suppliers were to discontinue financing consigned inventory, it would require us to make cash outlays and we could incur expenses which, if material, could negatively affect our business and financial results. As of December 31, 2019,26, 2020, and March 31, 2019,28, 2020, we had off-balance sheet consigned inventories of $40.1$45.3 million and $47.1$21.7 million, respectively.
Unconditional Purchase Obligations
We use several contract manufacturers to manufacture raw materials, components, and subassemblies for our products. We provide these contract manufacturers withproducts through our supply of demand information that typically covers periods up to 13 weeks, and theyweeks. The contract manufacturers use this information to acquire components and build products. We also obtain individual components for our products from a wide variety of individual suppliers. Consistent with industry practice, we acquire components throughsuppliers using a combination of purchase orders, supplier contracts, including annual minimum purchase obligations, and open orders based on projected demand information. As of December 31, 2019,26, 2020, we had outstanding off-balance sheet third-party manufacturing, component purchase, and other general and administrative commitments of $308.5$501.1 million, including the off-balance sheet consigned inventories of $40.1 million discussed above, which we expect to consume in the normal course of business.$45.3 million.
Except as described above, there have been no material changes in our contractual obligations as described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019.28, 2020.
CRITICAL ACCOUNTING ESTIMATES
For a complete description of what we believe to be the critical accounting estimates used in the preparation of our condensed consolidated financial statements, refer to our Annual Report on Form 10-K for the fiscal year ended March 31, 2019,28, 2020, filed with the SEC on May 17, 2019.June 8, 2020. There have been no material changes to our critical accounting estimates during the nine months ended December 31, 2019.26, 2020.
Recent Accounting Pronouncements
For more information regarding the Recent Accounting Pronouncements that may impact us, see Note 2, Recent Accounting Pronouncements, of the accompanying notes to the condensed consolidated financial statements.
Financial Statements (Unaudited)
PLANTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
| | | | December 31,
2019 | | March 31,
2019 | | December 26, 2020 | | March 28,
2020 |
| ASSETS | | | | ASSETS | | | |
| Current assets: | | | | Current assets: | | | |
| Cash and cash equivalents | $ | 156,821 |
| | $ | 202,509 |
| Cash and cash equivalents | $ | 230,065 | | | $ | 213,879 | |
| Short-term investments | 15,317 |
| | 13,332 |
| Short-term investments | 15,280 | | | 11,841 | |
| Accounts receivable, net | 246,318 |
| | 337,671 |
| Accounts receivable, net | 315,477 | | | 246,835 | |
| Inventory, net | 215,038 |
| | 177,146 |
| Inventory, net | 190,468 | | | 164,527 | |
| Other current assets | 54,533 |
| | 50,488 |
| Other current assets | 62,996 | | | 47,946 | |
| Total current assets | 688,027 |
| | 781,146 |
| Total current assets | 814,286 | | | 685,028 | |
| | Property, plant, and equipment, net | 177,482 |
| | 204,826 |
| Property, plant, and equipment, net | 143,489 | | | 165,858 | |
| Goodwill | 1,279,897 |
| | 1,278,380 |
| Goodwill | 796,216 | | | 796,216 | |
| Purchased intangibles, net | 688,258 |
| | 825,675 |
| Purchased intangibles, net | 372,047 | | | 466,915 | |
| Deferred tax assets | 34,647 |
| | 5,567 |
| Deferred tax assets | 98,386 | | | 82,496 | |
| Other assets | 62,556 |
| | 20,941 |
| Other assets | 54,298 | | | 60,661 | |
| Total assets | $ | 2,930,867 |
| | $ | 3,116,535 |
| Total assets | $ | 2,278,722 | | | $ | 2,257,174 | |
| | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | |
| |
| LIABILITIES AND STOCKHOLDERS' DEFICIT | | LIABILITIES AND STOCKHOLDERS' DEFICIT | | | |
| Current liabilities: | |
| | |
| Current liabilities: | | | |
| Accounts payable | $ | 122,314 |
| | $ | 129,514 |
| Accounts payable | $ | 165,958 | | | $ | 102,159 | |
| Accrued liabilities | 363,394 |
| | 398,715 |
| Accrued liabilities | 401,283 | | | 373,666 | |
| Total current liabilities | 485,708 |
| | 528,229 |
| Total current liabilities | 567,241 | | | 475,825 | |
| Long term debt, net of issuance costs | 1,620,354 |
| | 1,640,801 |
| Long term debt, net of issuance costs | 1,576,998 | | | 1,621,694 | |
| | Long-term income taxes payable | 98,386 |
| | 83,121 |
| Long-term income taxes payable | 90,980 | | | 98,319 | |
| | Other long-term liabilities | 138,342 |
| | 142,697 |
| Other long-term liabilities | 156,524 | | | 144,152 | |
| Total liabilities | 2,342,790 |
| | 2,394,848 |
| Total liabilities | 2,391,743 | | | 2,339,990 | |
| Commitments and contingencies (Note 8) |
|
| |
|
| |
| Stockholders' equity: | |
| | |
| |
| Commitments and contingencies (Note 7) | | Commitments and contingencies (Note 7) | 0 | | 0 |
| Stockholders' deficit: | | Stockholders' deficit: | | | |
| Common stock | 891 |
| | 884 |
| Common stock | 907 | | | 896 | |
| Additional paid-in capital | 1,479,880 |
| | 1,431,607 |
| Additional paid-in capital | 1,538,160 | | | 1,501,340 | |
| Accumulated other comprehensive loss | (5,425 | ) | | (475 | ) | Accumulated other comprehensive loss | (9,121) | | | (13,582) | |
| Retained earnings | (23,926 | ) | | 143,344 |
| |
| Accumulated deficit | | Accumulated deficit | (776,208) | | | (707,904) | |
| Total stockholders' equity before treasury stock | 1,451,420 |
| | 1,575,360 |
| Total stockholders' equity before treasury stock | 753,738 | | | 780,750 | |
| Less: Treasury stock, at cost | (863,343 | ) | | (853,673 | ) | Less: Treasury stock, at cost | (866,759) | | | (863,566) | |
| Total stockholders' equity | 588,077 |
| | 721,687 |
| |
| Total liabilities and stockholders' equity | $ | 2,930,867 |
| | $ | 3,116,535 |
| |
| Total stockholders' deficit | | Total stockholders' deficit | (113,021) | | | (82,816) | |
| Total liabilities and stockholders' deficit | | Total liabilities and stockholders' deficit | $ | 2,278,722 | | | $ | 2,257,174 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| | December 26, 2020 | | December 28, 2019 | | December 26, 2020 | | December 28, 2019 |
| Net revenues | | | | | | | |
| Net product revenues | $ | 420,711 | | | $ | 316,633 | | | $ | 1,059,846 | | | $ | 1,094,515 | |
| Net service revenues | 63,974 | | | 67,838 | | | 191,529 | | | 199,432 | |
| Total net revenues | 484,685 | | | 384,471 | | | 1,251,375 | | | 1,293,947 | |
| Cost of revenues | | | | | | | |
| Cost of product revenues | 236,842 | | | 220,469 | | | 622,718 | | | 658,408 | |
| Cost of service revenues | 21,186 | | | 20,156 | | | 64,921 | | | 72,976 | |
| Total cost of revenues | 258,028 | | | 240,625 | | | 687,639 | | | 731,384 | |
| Gross profit | 226,657 | | | 143,846 | | | 563,736 | | | 562,563 | |
| Operating expenses: | | | | | | | |
| Research, development, and engineering | 54,150 | | | 53,769 | | | 156,327 | | | 170,708 | |
| Selling, general, and administrative | 129,641 | | | 144,978 | | | 361,892 | | | 457,004 | |
| (Gain) loss, net from litigation settlements | 0 | | | 0 | | | 17,561 | | | (1,162) | |
| Restructuring and other related charges | 13,977 | | | 21,724 | | | 49,477 | | | 47,096 | |
| Total operating expenses | 197,768 | | | 220,471 | | | 585,257 | | | 673,646 | |
| Operating income (loss) | 28,889 | | | (76,625) | | | (21,521) | | | (111,083) | |
| Interest expense | (18,417) | | | (22,533) | | | (58,182) | | | (70,262) | |
| Other non-operating income, net | 2,596 | | | 967 | | | 4,188 | | | 675 | |
| Income (loss) before income taxes | 13,068 | | | (98,191) | | | (75,515) | | | (180,670) | |
| Income tax benefit | (7,045) | | | (19,708) | | | (7,208) | | | (31,406) | |
| Net income (loss) | $ | 20,113 | | | $ | (78,483) | | | $ | (68,307) | | | $ | (149,264) | |
| | | | | | | |
| Earnings (loss) per common share: | | | | | | | |
| Basic | $ | 0.49 | | | $ | (1.97) | | | $ | (1.67) | | | $ | (3.78) | |
| Diluted | $ | 0.48 | | | $ | (1.97) | | | $ | (1.67) | | | $ | (3.78) | |
| | | | | | | |
| Shares used in computing earnings (loss) per common share: | | | | | | | |
| Basic | 41,252 | | | 39,784 | | | 40,894 | | | 39,535 | |
| Diluted | 42,184 | | | 39,784 | | | 40,894 | | | 39,535 | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Nine Months Ended
December 31, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Net revenues | | | | | | | |
| Net product revenues | $ | 316,633 |
| | $ | 445,441 |
| | $ | 1,094,515 |
| | $ | 1,102,012 |
|
| Net service revenues | 67,838 |
| | 56,228 |
| | 199,432 |
| | 104,035 |
|
| Total net revenues | 384,471 |
| | 501,669 |
| | 1,293,947 |
| | 1,206,047 |
|
| Cost of revenues | | | | | | | |
| Cost of product revenues | 220,469 |
| | 259,673 |
| | 658,408 |
| | 676,616 |
|
| Cost of service revenues | 20,156 |
| | 26,859 |
| | 72,976 |
| | 51,822 |
|
| Total cost of revenues | 240,625 |
| | 286,532 |
| | 731,384 |
| | 728,438 |
|
| Gross profit | 143,846 |
| | 215,137 |
| | 562,563 |
| | 477,609 |
|
| Operating expenses: | | | | | | | |
| Research, development, and engineering | 53,769 |
| | 59,661 |
| | 170,708 |
| | 140,409 |
|
| Selling, general, and administrative | 144,978 |
| | 168,053 |
| | 457,004 |
| | 406,553 |
|
| Gain, net from litigation settlements | — |
| | — |
| | (1,162 | ) | | (30 | ) |
| Restructuring and other related charges | 21,724 |
| | 12,130 |
| | 47,096 |
| | 20,711 |
|
| Total operating expenses | 220,471 |
| | 239,844 |
| | 673,646 |
| | 567,643 |
|
| Operating loss | (76,625 | ) | | (24,707 | ) | | (111,083 | ) | | (90,034 | ) |
| Interest expense | (22,533 | ) | | (25,032 | ) | | (70,262 | ) | | (56,252 | ) |
| Other non-operating income, net | 967 |
| | 125 |
| | 675 |
| | 3,731 |
|
| Loss before income taxes | (98,191 | ) | | (49,614 | ) | | (180,670 | ) | | (142,555 | ) |
| Income tax benefit | (19,708 | ) | | (7,880 | ) | | (31,406 | ) | | (28,584 | ) |
| Net loss | $ | (78,483 | ) | | $ | (41,734 | ) | | $ | (149,264 | ) | | $ | (113,971 | ) |
| | | | | | | | |
| Loss per common share: | | | | | | | |
| Basic | $ | (1.97 | ) | | $ | (1.06 | ) | | $ | (3.78 | ) | | $ | (3.08 | ) |
| Diluted | $ | (1.97 | ) | | $ | (1.06 | ) | | $ | (3.78 | ) | | $ | (3.08 | ) |
| | | | | | | | |
| Shares used in computing loss per common share: | | | | | | | |
| Basic | 39,784 |
| | 39,314 |
| | 39,535 |
| | 37,063 |
|
| Diluted | 39,784 |
| | 39,314 |
| | 39,535 |
| | 37,063 |
|
| | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| December 26, 2020 | | December 28, 2019 | | December 26, 2020 | | December 28, 2019 |
| Net income (loss) | $ | 20,113 | | | $ | (78,483) | | | $ | (68,307) | | | $ | (149,264) | |
| Other comprehensive income (loss): | | | | | | | |
| Foreign currency translation adjustments | 0 | | | 0 | | | 0 | | | (219) | |
| Unrealized gains (losses) on cash flow hedges: | | | | | | | |
| Unrealized cash flow hedge gains (losses) arising during the period | (3,754) | | | (1,420) | | | (8,339) | | | (5,755) | |
| Net (gains) losses reclassified into income for revenue hedges | 1,054 | | | (225) | | | 1,797 | | | (3,152) | |
| Net (gains) losses reclassified into income for cost of revenue hedges | 0 | | | (46) | | | 0 | | | (212) | |
| Net (gains) losses reclassified into income for interest rate swaps | 3,039 | | | 1,565 | | | 10,290 | | | 3,162 | |
| Net unrealized gains (losses) on cash flow hedges | 339 | | | (126) | | | 3,748 | | | (5,957) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Aggregate income tax benefit (expense) of the above items | 599 | | | 81 | | | 1,122 | | | 1,228 | |
| Other comprehensive income (loss) | 938 | | | (45) | | | 4,870 | | | (4,948) | |
| Comprehensive income (loss) | $ | 21,051 | | | $ | (78,528) | | | $ | (63,437) | | | $ | (154,212) | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Nine Months Ended
December 31, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Net loss | $ | (78,483 | ) | | $ | (41,734 | ) | | $ | (149,264 | ) | | $ | (113,971 | ) |
| Other comprehensive income (loss): | | | | | | | |
| Foreign currency translation adjustments | — |
| | 115 |
| | (219 | ) | | (1,700 | ) |
| Unrealized gains (losses) on cash flow hedges: | | | | | | | |
| Unrealized cash flow hedge gains (losses) arising during the period | (1,420 | ) | | (5,622 | ) | | (5,755 | ) | | (853 | ) |
| Net (gains) losses reclassified into income for revenue hedges | (225 | ) | | (1,488 | ) | | (3,152 | ) | | (2,637 | ) |
| Net (gains) losses reclassified into income for cost of revenue hedges | (46 | ) | | 6 |
| | (212 | ) | | (73 | ) |
| Net (gains) losses reclassified into income for interest rate swaps | 1,565 |
| | 1,029 |
| | 3,162 |
| | 2,006 |
|
| Net unrealized gains (losses) on cash flow hedges | (126 | ) | | (6,075 | ) | | (5,957 | ) | | (1,557 | ) |
| Unrealized gains (losses) on investments: | | | | | | | |
| Unrealized holding gains (losses) during the period | — |
| | — |
| | — |
| | 198 |
|
| | | | | | | | |
| Aggregate income tax benefit of the above items | 81 |
| | 1,324 |
| | 1,228 |
| | 1,222 |
|
| Other comprehensive loss | (45 | ) | | (4,636 | ) | | (4,948 | ) | | (1,837 | ) |
| Comprehensive loss | $ | (78,528 | ) | | $ | (46,370 | ) | | $ | (154,212 | ) | | $ | (115,808 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | Nine Months Ended | | | | | | | | | | |
| | December 31, | | Nine Months Ended |
| | 2019 | | 2018 | | December 26, 2020 | | December 28, 2019 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | CASH FLOWS FROM OPERATING ACTIVITIES | | | |
| Net loss | $ | (149,264 | ) | | $ | (113,971 | ) | Net loss | $ | (68,307) | | | $ | (149,264) | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | Adjustments to reconcile net loss to net cash provided by operating activities: | |
| Depreciation and amortization | 172,630 |
| | 142,763 |
| Depreciation and amortization | 124,881 | | | 172,630 | |
| Amortization of debt issuance costs | 4,062 |
| | 3,188 |
| Amortization of debt issuance costs | 3,962 | | | 4,062 | |
| Stock-based compensation | 41,499 |
| | 30,709 |
| Stock-based compensation | 31,104 | | | 41,499 | |
| Deferred income taxes | (66,171 | ) | | (39,987 | ) | Deferred income taxes | (15,373) | | | (62,436) | |
| Provision for excess and obsolete inventories | 19,076 |
| | 4,881 |
| Provision for excess and obsolete inventories | 12,767 | | | 19,076 | |
| Restructuring and related charges | 47,096 |
| | 20,711 |
| |
| Restructuring and other related charges | | Restructuring and other related charges | 49,477 | | | 47,096 | |
| Cash payments for restructuring charges | (29,885 | ) | | (11,222 | ) | Cash payments for restructuring charges | (28,794) | | | (29,885) | |
| Other operating activities | 3,201 |
| | 9,070 |
| Other operating activities | (6,000) | | | 3,201 | |
| Changes in assets and liabilities, net of acquisition: | | | |
| Changes in assets and liabilities, net of acquisition: | | |
| Accounts receivable, net | 34,634 |
| | (35,938 | ) | Accounts receivable, net | (71,439) | | | 34,634 | |
| Inventory, net | (49,320 | ) | | 11,018 |
| Inventory, net | (39,941) | | | (49,320) | |
| Current and other assets | 24,142 |
| | 30,456 |
| Current and other assets | (15,246) | | | 24,142 | |
| Accounts payable | (10,690 | ) | | 16,519 |
| Accounts payable | 62,454 | | | (10,690) | |
| Accrued liabilities | (46,906 | ) | | 72,677 |
| Accrued liabilities | 47,529 | | | (46,906) | |
| Income taxes | 22,251 |
| | (21,631 | ) | Income taxes | (15,925) | | | 18,516 | |
| Cash provided by operating activities | 16,355 |
| | 119,243 |
| Cash provided by operating activities | 71,149 | | | 16,355 | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | |
| Proceeds from sales of investments | 177 |
| | 125,799 |
| Proceeds from sales of investments | 667 | | | 177 | |
| Proceeds from maturities of investments | — |
| | 131,017 |
| |
| | Purchase of investments | (972 | ) | | (698 | ) | Purchase of investments | (394) | | | (972) | |
| Cash paid for acquisition, net of cash acquired | — |
| | (1,642,241 | ) | |
| | Capital expenditures | (16,984 | ) | | (16,148 | ) | Capital expenditures | (16,753) | | | (16,984) | |
| Proceeds from sale of property and equipment | 2,142 |
| | — |
| Proceeds from sale of property and equipment | 1,900 | | | 2,142 | |
| Cash used for investing activities | (15,637 | ) | | (1,402,271 | ) | Cash used for investing activities | (14,580) | | | (15,637) | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | |
| Repurchase of common stock | — |
| | (4,780 | ) | |
| | Employees' tax withheld and paid for restricted stock and restricted stock units | (9,669 | ) | | (13,863 | ) | Employees' tax withheld and paid for restricted stock and restricted stock units | (3,193) | | | (9,669) | |
| Proceeds from issuances under stock-based compensation plans | 6,617 |
| | 14,925 |
| Proceeds from issuances under stock-based compensation plans | 5,731 | | | 6,617 | |
| Proceeds from debt issuance, net | — |
| | 1,244,713 |
| |
| Proceeds from revolving line of credit | | Proceeds from revolving line of credit | 50,000 | | | 0 | |
| Repayments of revolving line of credit | | Repayments of revolving line of credit | (50,000) | | | 0 | |
| | Payment of cash dividends | (17,910 | ) | | (16,953 | ) | Payment of cash dividends | 0 | | | (17,910) | |
| Repayments of long-term debt | (25,000 | ) | | — |
| Repayments of long-term debt | (46,980) | | | (25,000) | |
| Cash (used for) by financing activities | (45,962 | ) | | 1,224,042 |
| |
| | Cash used for financing activities | | Cash used for financing activities | (44,442) | | | (45,962) | |
| Effect of exchange rate changes on cash and cash equivalents | (444 | ) | | (3,519 | ) | Effect of exchange rate changes on cash and cash equivalents | 4,059 | | | (444) | |
| Net decrease in cash and cash equivalents | (45,688 | ) | | (62,505 | ) | |
| Net increase (decrease) in cash and cash equivalents | | Net increase (decrease) in cash and cash equivalents | 16,186 | | | (45,688) | |
| Cash and cash equivalents at beginning of period | 202,509 |
| | 390,661 |
| Cash and cash equivalents at beginning of period | 213,879 | | | 202,509 | |
| Cash and cash equivalents at end of period | $ | 156,821 |
| | $ | 328,156 |
| Cash and cash equivalents at end of period | $ | 230,065 | | | $ | 156,821 | |
| SUPPLEMENTAL DISCLOSURES | | | | SUPPLEMENTAL DISCLOSURES | | | |
| Cash paid for income taxes | $ | 9,853 |
| | $ | 30,902 |
| Cash paid for income taxes | $ | 20,484 | | | $ | 9,853 | |
| Cash paid for interest | $ | 68,039 |
| | $ | 54,386 |
| Cash paid for interest | $ | 63,869 | | | $ | 68,039 | |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) / EQUITY
(in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 26, 2020 |
| | Common Stock | | Additional Paid-In | | Accumulated Other Comprehensive | | Accumulated | | Treasury | | Total Stockholders' |
| | Shares | | Amount | | Capital | | Loss | | Deficit | | Stock | | Deficit |
| Balances at September 26, 2020 | 41,246 | | | $ | 907 | | | $ | 1,526,677 | | | $ | (9,650) | | | $ | (796,324) | | | $ | (866,615) | | | $ | (145,005) | |
| Net Income | — | | | — | | | — | | | — | | | 20,113 | | | — | | | 20,113 | |
| | | | | | | | | | | | | |
| Net unrealized gains (losses) on cash flow hedges, net of tax | — | | | — | | | — | | | 938 | | | — | | | — | | | 938 | |
| | | | | | | | | | | | | |
| Proceeds from issuances under stock-based compensation plans | 19 | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Stock-based compensation | — | | | — | | | 11,486 | | | — | | | — | | | — | | | 11,486 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Employees' tax withheld and paid for restricted stock and restricted stock units | (6) | | | — | | | — | | | — | | | — | | | (144) | | | (144) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Other equity changes | — | | | — | | | (3) | | | (409) | | | 3 | | | — | | | (409) | |
| Balances at December 26, 2020 | 41,259 | | | $ | 907 | | | $ | 1,538,160 | | | $ | (9,121) | | | $ | (776,208) | | | $ | (866,759) | | | $ | (113,021) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 28, 2019 |
| | Common Stock | | Additional Paid-In | | Accumulated Other Comprehensive | | Retained Earnings (Accumulated | | Treasury | | Total Stockholders' |
| | Shares | | Amount | | Capital | | Loss | | Deficit) | | Stock | | Equity |
| Balances at September 28, 2019 | 39,917 | | | $ | 890 | | | $ | 1,465,978 | | | $ | (5,351) | | | $ | 60,545 | | | $ | (862,955) | | | $ | 659,107 | |
| Net Income | — | | | — | | | — | | | — | | | (78,483) | | | — | | | (78,483) | |
| | | | | | | | | | | | | |
| Net unrealized gains (losses) on cash flow hedges, net of tax | — | | | — | | | — | | | (74) | | | — | | | — | | | (74) | |
| | | | | | | | | | | | | |
| Proceeds from issuances under stock-based compensation plans | 28 | | | 1 | | | — | | | — | | | — | | | — | | | 1 | |
| Repurchase of restricted common stock | (3) | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | |
| Cash dividends | — | | | — | | | — | | | — | | | (5,988) | | | — | | | (5,988) | |
| Stock-based compensation | — | | | — | | | 13,902 | | | — | | | — | | | — | | | 13,902 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Employees' tax withheld and paid for restricted stock and restricted stock units | (13) | | | — | | | — | | | — | | | — | | | (388) | | | (388) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Balances at December 28, 2019 | 39,929 | | | $ | 891 | | | $ | 1,479,880 | | | $ | (5,425) | | | $ | (23,926) | | | $ | (863,343) | | | $ | 588,077 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended December 26, 2020 |
| | Common Stock | | Additional Paid-In | | Accumulated Other Comprehensive | | Accumulated | | Treasury | | Total Stockholders' |
| | Shares | | Amount | | Capital | | Loss | | Deficit | | Stock | | Deficit |
| Balances at March 28, 2020 | 40,406 | | | $ | 896 | | | $ | 1,501,340 | | | $ | (13,582) | | | $ | (707,904) | | | $ | (863,566) | | | $ | (82,816) | |
| Net loss | — | | | — | | | — | | | — | | | (68,307) | | | — | | | (68,307) | |
| | | | | | | | | | | | | |
| Net unrealized gains (losses) on cash flow hedges, net of tax | — | | | — | | | — | | | 4,870 | | | — | | | — | | | 4,870 | |
| | | | | | | | | | | | | |
| Proceeds from issuances under stock-based compensation plans | 667 | | | 6 | | | — | | | — | | | — | | | — | | | 6 | |
| Repurchase of restricted common stock | (10) | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Stock-based compensation | — | | | — | | | 31,104 | | | — | | | — | | | — | | | 31,104 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Employees' tax withheld and paid for restricted stock and restricted stock units | (261) | | | — | | | — | | | — | | | — | | | (3,193) | | | (3,193) | |
| | | | | | | | | | | | | |
| Proceeds from ESPP | 457 | | | 5 | | | 5,719 | | | — | | | — | | | — | | | 5,724 | |
| | | | | | | | | | | | | |
| Other equity changes | — | | | — | | | (3) | | | (409) | | | 3 | | | — | | | (409) | |
| Balances at December 26, 2020 | 41,259 | | | $ | 907 | | | $ | 1,538,160 | | | $ | (9,121) | | | $ | (776,208) | | | $ | (866,759) | | | $ | (113,021) | |
| | | | | | | | | | | | | | | | | Nine Months Ended December 28, 2019 |
| | Three Months Ended December 31, 2019 | | Common Stock | | Additional Paid-In | | Accumulated Other Comprehensive | | Retained Earnings (Accumulated | | Treasury | | Total Stockholders' |
| | Common Stock | | Additional Paid-In | | Accumulated Other Comprehensive | | Retained | | Treasury | | Total Stockholders' | | Shares | | Amount | | Capital | | Loss | | Deficit) | | Stock | | Equity |
| Balances at March 30, 2019 | | Balances at March 30, 2019 | 39,518 | | | $ | 884 | | | $ | 1,431,607 | | | $ | (475) | | | $ | 143,344 | | | $ | (853,673) | | | $ | 721,687 | |
| Net Income | | Net Income | — | | | — | | | — | | | — | | | (149,264) | | | — | | | (149,264) | |
| Foreign currency translation adjustments | | Foreign currency translation adjustments | — | | | — | | | — | | | (219) | | | — | | | — | | | (219) | |
| Net unrealized gains (losses) on cash flow hedges, net of tax | | Net unrealized gains (losses) on cash flow hedges, net of tax | — | | | — | | | — | | | (4,731) | | | — | | | — | | | (4,731) | |
| | Shares | | Amount | | Capital | | Loss | | Earnings | | Stock | | Equity | |
| Balances at September 30, 2019 | 39,917 |
| | $ | 890 |
| | $ | 1,465,978 |
| | $ | (5,351 | ) | | $ | 60,545 |
| | $ | (862,955 | ) | | $ | 659,107 |
| |
| Net loss | — |
| | — |
| | — |
| | — |
| | (78,483 | ) | | — |
| | (78,483 | ) | |
| Net unrealized gains (losses) on cash flow hedges, net of tax | — |
| | — |
| | — |
| | (74 | ) | | — |
| | — |
| | (74 | ) | |
| Proceeds from issuances under stock-based compensation plans | 28 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| Proceeds from issuances under stock-based compensation plans | 400 | | | 5 | | | 751 | | | — | | | — | | | — | | | 756 | |
| Repurchase of restricted common stock | (3 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Repurchase of restricted common stock | (32) | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Cash dividends | — |
| | — |
| | — |
| | — |
| | (5,988 | ) | | — |
| | (5,988 | ) | Cash dividends | — | | | — | | | — | | | — | | | (17,910) | | | — | | | (17,910) | |
| Stock-based compensation | — |
| | — |
| | 13,902 |
| | — |
| | — |
| | — |
| | 13,902 |
| Stock-based compensation | — | | | — | | | 41,499 | | | — | | | — | | | — | | | 41,499 | |
| | Employees' tax withheld and paid for restricted stock and restricted stock units | (13 | ) | | — |
| | — |
| | — |
| | — |
| | (388 | ) | | (388 | ) | Employees' tax withheld and paid for restricted stock and restricted stock units | (225) | | | — | | | — | | | — | | | — | | | (9,670) | | | (9,670) | |
| Balances at December 31, 2019 | 39,929 |
| | $ | 891 |
| | $ | 1,479,880 |
| | $ | (5,425 | ) | | $ | (23,926 | ) | | $ | (863,343 | ) | | $ | 588,077 |
| |
| | Proceeds from ESPP | | Proceeds from ESPP | 268 | | | 2 | | | 6,023 | | | — | | | — | | | — | | | 6,025 | |
| Impact of new accounting standards adoption | | Impact of new accounting standards adoption | — | | | — | | | — | | | — | | | (89) | | | — | | | (89) | |
| Other equity changes | | Other equity changes | — | | | — | | | — | | | — | | | (7) | | | — | | | (7) | |
| Balances at December 28, 2019 | | Balances at December 28, 2019 | 39,929 | | | $ | 891 | | | $ | 1,479,880 | | | $ | (5,425) | | | $ | (23,926) | | | $ | (863,343) | | | $ | 588,077 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2018 |
| | Common Stock | | Additional Paid-In | | Accumulated Other Comprehensive | | Retained | | Treasury | | Total Stockholders' |
| | Shares | | Amount | | Capital | | Income | | Earnings | | Stock | | Equity |
| Balances at September 30, 2018 | 39,807 |
| | $ | 884 |
| | $ | 1,404,713 |
| | $ | 5,668 |
| | $ | 218,564 |
| | $ | (839,769 | ) | | $ | 790,060 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | (41,734 | ) | | — |
| | (41,734 | ) |
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | 113 |
| | — |
| | — |
| | 113 |
|
| Net unrealized gains (losses) on cash flow hedges, net of tax | — |
| | — |
| | — |
| | (4,750 | ) | | — |
| | — |
| | (4,750 | ) |
| Proceeds from issuances under stock-based compensation plans | 17 |
| | — |
| | 52 |
| | — |
| | — |
| | — |
| | 52 |
|
| Repurchase of restricted common stock | (8 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Cash dividends | — |
| | — |
| | — |
| | — |
| | (5,969 | ) | | — |
| | (5,969 | ) |
| Stock-based compensation | — |
| | — |
| | 11,718 |
| | — |
| | — |
| | — |
| | 11,718 |
|
| Repurchase of common stock | (128 | ) | | — |
| | — |
| | — |
| | — |
| | (4,780 | ) | | (4,780 | ) |
| Employees' tax withheld and paid for restricted stock and restricted stock units | (11 | ) | | — |
| | — |
| | — |
| | — |
| | (522 | ) | | (522 | ) |
| Deferred tax adjustment | — |
| | — |
| | 30 |
| | — |
| | — |
| | — |
| | 30 |
|
| Balances at December 31, 2018 | 39,677 |
| | $ | 884 |
| | $ | 1,416,513 |
| | $ | 1,031 |
| | $ | 170,861 |
| | $ | (845,071 | ) | | $ | 744,218 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended December 31, 2019 |
| | Common Stock | | Additional Paid-In | | Accumulated Other Comprehensive | | Retained | | Treasury | | Total Stockholders' |
| | Shares | | Amount | | Capital | | Loss | | Earnings | | Stock | | Equity |
| Balances at March 31, 2019 | 39,518 |
| | $ | 884 |
| | $ | 1,431,607 |
| | $ | (475 | ) | | $ | 143,344 |
| | $ | (853,673 | ) | | $ | 721,687 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | (149,264 | ) | | — |
| | (149,264 | ) |
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | (219 | ) | | — |
| | — |
| | (219 | ) |
| Net unrealized gains (losses) on cash flow hedges, net of tax | — |
| | — |
| | — |
| | (4,731 | ) | | — |
| | — |
| | (4,731 | ) |
| Proceeds from issuances under stock-based compensation plans | 400 |
| | 5 |
| | 751 |
| | — |
| | — |
| | — |
| | 756 |
|
| Repurchase of restricted common stock | (32 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Cash dividends | — |
| | — |
| | — |
| | — |
| | (17,910 | ) | | — |
| | (17,910 | ) |
| Stock-based compensation | — |
| | — |
| | 41,499 |
| | — |
| | — |
| | — |
| | 41,499 |
|
| Employees' tax withheld and paid for restricted stock and restricted stock units | (225 | ) | | — |
| | — |
| | — |
| | — |
| | (9,670 | ) | | (9,670 | ) |
| Proceeds from ESPP | 268 |
| | 2 |
| | 6,023 |
| | — |
| | — |
| | — |
| | 6,025 |
|
| Impact of new accounting standards adoption | — |
| | — |
| | — |
| | — |
| | (89 | ) | | — |
| | (89 | ) |
| Other equity changes | — |
| | — |
| | — |
| | — |
| | (7 | ) | | — |
| | (7 | ) |
| Balances at December 31, 2019 | 39,929 |
| | $ | 891 |
| | $ | 1,479,880 |
| | $ | (5,425 | ) | | $ | (23,926 | ) | | $ | (863,343 | ) | | $ | 588,077 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended December 31, 2018 |
| | Common Stock | | Additional Paid-In | | Accumulated Other Comprehensive | | Retained | | Treasury | | Total Stockholders' |
| | Shares | | Amount | | Capital | | Income | | Earnings | | Stock | | Equity |
| Balances at March 31, 2018 | 33,251 |
| | $ | 816 |
| | $ | 876,645 |
| | $ | 2,870 |
| | $ | 299,066 |
| | $ | (826,427 | ) | | $ | 352,970 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | (113,971 | ) | | — |
| | (113,971 | ) |
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | (1,702 | ) | | — |
| | — |
| | (1,702 | ) |
| Net unrealized gains (losses) on cash flow hedges, net of tax | — |
| | — |
| | — |
| | (13 | ) | | — |
| | — |
| | (13 | ) |
| Proceeds from issuances under stock-based compensation plans | 412 |
| | 3 |
| | 11,929 |
| | — |
| | — |
| | — |
| | 11,932 |
|
| Repurchase of restricted common stock | (70 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Issuance of common stock for acquisition | 6,352 |
| | 64 |
| | 494,201 |
| | — |
| | — |
| | — |
| | 494,265 |
|
| Cash dividends | — |
| | — |
| | — |
| | — |
| | (16,952 | ) | | — |
| | (16,952 | ) |
| Stock-based compensation | — |
| | — |
| | 30,708 |
| | — |
| | — |
| | — |
| | 30,708 |
|
| Repurchase of common stock | (128 | ) | | — |
| | — |
| | — |
| | — |
| | (4,780 | ) | | (4,780 | ) |
| Employees' tax withheld and paid for restricted stock and restricted stock units | (202 | ) | | — |
| | — |
| | — |
| | — |
| | (13,864 | ) | | (13,864 | ) |
| Deferred tax adjustment | — |
| | — |
| | 39 |
| | — |
| | — |
| | — |
| | 39 |
|
| Proceeds from ESPP | 62 |
| | 1 |
| | 2,991 |
| | — |
| | — |
| | — |
| | 2,992 |
|
| Impact of new accounting standards adoption | — |
| | — |
| | — |
| | (124 | ) | | 2,718 |
| | — |
| | 2,594 |
|
| Balances at December 31, 2018 | 39,677 |
| | $ | 884 |
| | $ | 1,416,513 |
| | $ | 1,031 |
| | $ | 170,861 |
| | $ | (845,071 | ) | | $ | 744,218 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
PLANTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of management, with the exception of the adoption of ASC 842, Leases as discussed below, the accompanying unaudited condensed consolidated financial statements ("financial statements") of Plantronics, Inc. ("the Company") have been prepared on a basis materially consistent with the Company's March 31, 201928, 2020 audited consolidated financial statements and include all adjustments, consisting of normal recurring adjustments, necessary to fairly state the information set forth herein. Certain information and footnote disclosures normally included in financial statements prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to interim financial information and in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. The financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2019,28, 2020, which was filed with the SEC on May 17, 2019.June 8, 2020. The results of operations for the interim period ended December 31, 201926, 2020 are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.
The financial results of Polycom have been included in the Company's consolidated financial statements from the date of acquisition on July 2, 2018, see Note 3,
Acquisition for details.
The financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
The Company’s fiscal year ends on the Saturday closest to the last day of March. The Company’s current fiscal year ends on April 3, 2021 and consists of 53 weeks. The Company's prior fiscal years endyear ended on March 28, 2020 and March 30, 2019, respectively, and both consistconsisted of 52 weeks. The Company’s results of operations for the three and nine months ended December 28, 201926, 2020 and December 29, 201828, 2019 both contain 13 weeks. For purposes of presentation,and 39 weeks, respectively.
Risks and uncertainties
As described in the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 2020, which was filed with the SEC on June 8, 2020, the Company has indicatedis subject to a greater degree of uncertainty than normal in making the judgments and estimates needed to apply its significant accounting yearpolicies as ending on March 31a result of the COVID-19 pandemic. The Company continues to assess various accounting estimates and its interim quarterly periodsother matters in context to the unknown future impacts of COVID-19 using information that is reasonably available as endingof the issuance date of the condensed consolidated financial statements. The severity of the impact of the COVID-19 pandemic on the applicable calendar month end.
See Note 2, Recent Accounting Pronouncements, for details regarding recognitionCompany's business will depend on a number of a lease liabilityfactors, including, but not limited to, the duration and corresponding right-of-use ("ROU") asset on the balance sheetseverity of the Company'spandemic and the extent and severity of the impact on its customers and suppliers, all of which are uncertain and cannot be predicted. As of the date of issuance of these condensed consolidated financial statements, pursuantthe extent to which the adoptionpandemic may materially impact the Company's financial condition, liquidity, or results of Topic 842, operations is uncertain.
Reclassifications
Leases
accounting guidanceRevenue in the first and second quarter of Fiscal Year 2020.
Foreign Operations and Currency Translation
Duringfiscal year 2021 from a certain product has been reclassified from the quarter ended June 30, 2019,Voice product category into the Video product category as a result of a changemanagement decision to the Company's operating structure, the Company determined the functional currency ofre-align its China subsidiary is now the U.S. Dollar (“USD"). Assets and liabilities denominated in currencies other than USD, are re-measured at the period-end rates for monetary assets and liabilities and at historical rates for non-monetary assets and liabilities. Revenues and expenses are re-measured at average monthly rates, which approximate actual rates. Currency transaction gains and losses are recognized in other non-operating income and (expense), net.
Reclassifications
Certain prior year amounts have been reclassified for consistency with current year presentation. Each of the reclassifications was immaterial andproduct categories.This reclassification had no effect on the Company'sCompany’s results of operations.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Recently Issued Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued guidance regarding the measurement of credit losses on financial instruments, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. The guidance is effective for the Company's fiscal year ending March 31, 2021 with early adoption permitted beginning in the first quarter of Fiscal Year 2020. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements and related disclosures.
Recently Adopted Pronouncement
In FebruaryJune 2016, the FASBFinancial Accounting Standards Board ("FASB") issued guidanceAccounting Standard Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. The Company adopted the new standard effective March 29, 2020, using a modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings to be recognized on the recognition and measurementdate of leases (“ASC 842”). Under the new guidance lessees are required to recognize a lease liability and a corresponding right-of-use (“ROU”) asset on the balance sheet for virtually all leases, essentially eliminating off-balance sheet financing. On March 31, 2019, the Company adopted ASC 842 using the modified retrospective approach and recognized $57.3 million in ROU assets within Other assets and $68.5 million in lease liabilities, of which $25.7 million and $42.8 million were included within Accrued liabilities and Other long-term liabilities, respectively, on its condensed consolidated balance sheet. The initial ROU assets recognized were adjusted for accrued rent and facility-related restructuring liabilities as of the adoption date.with prior periods not restated. The adoption of ASC 842 did not have a materialhad an immaterial impact on the Company's condensed consolidated statement of operations.
Under the modified retrospective approach, prior comparativeCompany’s financial information was not retrospectively adjusted. The Company elected the package of practical expedients which allows it to carry forward its historical lease evaluation and classification. In addition, the Company elected to exclude leases with terms of one year or less from its balance sheet and separately account for lease and non-lease components.
The Company’s lease portfolio consists primarily of real estate facilities under operating leases. The Company determines if an arrangement is or contains a lease at inception. ROU assets and lease liabilities are recognized at commencement based on the present value of the future minimum lease payments over the lease term. The Company applies its incremental borrowing rate in determining the present value of the future minimum lease payments, as most of its leases do not provide an implicit rate. Certain of the Company’s lease agreements include options to extend or renew the lease terms. Such options are excluded from the minimum lease obligation unless they are reasonably certain to be exercised. Operating lease expense is recognized on a straight-line basis over the lease term.
3. ACQUISITION
Polycom Acquisition
On July 2, 2018, the Company completed the acquisition of Polycom based upon the terms and conditions contained in the Purchase Agreement dated March 28, 2018 (the "Acquisition"). The Company believes the Acquisition will better position, Plantronics with its channel partners, customers, and strategic alliance partners by allowing the Company to pursue additional opportunities across the UC&C category in both hardware end points and services.
At the closing of the Acquisition, Plantronics acquired Polycom for approximately $2.2 billion with the total consideration consisting of (1) 6.4 million shares of the Company's common stock (the "Stock Consideration") valued at approximately $0.5 billion and (2) approximately $1.7 billion in cash net of cash acquired (the "Cash Consideration"), resulting in Triangle Private Holdings II, LLC ("Triangle"), Polycom’s sole shareholder, owning approximately 16.0% of the Company's issued and outstanding common stock immediately following the Acquisition. The consideration paid at closing is subject to a working capital, tax and other adjustments. The Acquisition was accounted for as a business combination and the Company has included the financial results of Polycom in its condensed consolidated financial statements since the date of Acquisition.
During the quarter ended June 30, 2019, the Company finalized its allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed. Since the Acquisition, the Company has recorded measurement period adjustments to reflect facts and circumstances in existence as of the Acquisition date. These adjustments included deferred tax and tax liabilities of $45.2 million, a working capital adjustment of $8.0 million, and various other immaterial adjustments of $1.4 million, resulting in a decrease to goodwill of approximately $54.6 million.
The allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the Acquisition date is as follows:
|
| | | | |
| (in thousands) | | July 2, 2018 |
| ASSETS | | |
| Cash and cash equivalents | | $ | 80,139 |
|
| Trade receivables, net | | 165,798 |
|
| Inventories | | 109,074 |
|
| Prepaid expenses and other current assets | | 68,558 |
|
| Property and equipment, net | | 79,497 |
|
| Intangible assets | | 985,400 |
|
| Other assets | | 27,237 |
|
| Total assets acquired | | $ | 1,515,703 |
|
| | | |
| LIABILITIES | | |
| Accounts payable | | $ | 80,653 |
|
| Accrued payroll and related liabilities | | 44,538 |
|
| Accrued expenses | | 147,167 |
|
| Income tax payable | | 27,044 |
|
| Deferred revenue | | 115,061 |
|
| Deferred income taxes | | 94,618 |
|
| Other liabilities | | 54,394 |
|
| Total liabilities assumed | | $ | 563,475 |
|
| | | |
| Total identifiable net assets acquired | | 952,228 |
|
| Goodwill | | 1,264,417 |
|
| Total Purchase Price | | $ | 2,216,645 |
|
The estimate of fair value and purchase price allocation were based on information available at the time of closing the Acquisition. The Acquisition has resulted in $1,264 million of goodwill, which represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed.
The following table shows the fair value of the separately identifiable intangible assets at the time of Acquisition and the period over which each intangible asset will be amortized:
|
| | | | | | |
| (in thousands, except for remaining life) | | Fair Value | | Weighted Remaining Life of Intangibles |
| Existing technology | | $ | 538,600 |
| | 4.95 |
| Customer relationships | | 245,100 |
| | 5.46 |
| Trade name/Trademarks | | 115,600 |
| | 9.00 |
| Backlog | | 28,100 |
| | 0.25 |
| Total amortizable intangible assets acquired | | $ | 927,400 |
| | 5.45 |
| In-process R&D | | 58,000 |
| | |
| Total acquired intangible assets | | $ | 985,400 |
| | |
Existing technology relates to products for voice, video and platform products. The Company valued the developed technology using the discounted cash flow method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by the developed technology less charges representing the contribution of other assets to those cash flows. The economic useful life was determined based on the technology cycle related to each developed technology, as well as the cash flows over the forecast period.
Customer relationships represent the fair value of future projected revenue that will be derived from sales of products to customers of Polycom existing prior to the Acquisition. Customer relationships were valued using the discounted cash flow method as described above and the distributor method under the income approach. Under the distributor method, the economic profits generated by a distributor are deemed to be attributable to the customer relationships. The economic useful life was determined based on historical customer turnover rates.
Order backlog was valued separately from customer relationships using the discounted cash flow method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by order backlog less costs to fulfill. The economic useful life was determined based on the period over which the order backlog is expected to be fulfilled.
Trade name/trademarks relate to the “Polycom” trade name and related trademarks. The fair value was determined by applying the profit allocation method under the income approach. This valuation method estimates the value of an asset by the profit saved because the company owns the asset. The economic useful life was determined based on the expected life of the trade name and trademarks and the cash flows anticipated over the forecasted periods.
The fair value of in-process R&D was determined using the discounted cash flow method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by in-process technology, less charges representing the contribution of other assets to those cash flows.
The Company believes the amounts of purchased intangible assets recorded above represent the fair values of and approximate the amounts a market participant would pay for, these intangible assets as of the date of the Acquisition.
Goodwill primarily is attributable to the assembled workforce, market expansion, and anticipated synergies and economies of scale expected from the integration of the Polycom business. The synergies include certain cost savings, operating efficiencies, and other strategic benefits projected to be achieved. Goodwill is not expected to be deductible for tax purposes.
The following unaudited pro forma financial information presents combined results of operations for each of the periods presented, as if Polycom had been acquired as of the beginning of fiscal year 2018. The unaudited pro forma information includes adjustments to amortization for intangible assets acquired, the purchase accounting effect on deferred revenue assumed and inventory acquired, restructuring charges related to the Acquisition, and transaction and integration costs. For the nine months ended December 31, 2018, non-recurring pro forma adjustments directly attributable to the Polycom Acquisition included (i) the purchase accounting effect of deferred revenue assumed of $19.3 million, and (ii) the purchase accounting effect of amortization expense of purchase intangible assets of $46.4 million.or cash flows.
The unaudited pro forma information presented below is for informational purposes only and is not necessarily indicative of the Company's consolidated results of operations of the combined business had the Acquisition actually occurred at the beginning of fiscal year 2019 or of the results of its future operations of the combined business.
|
| | | | |
| | | Pro Forma (unaudited) |
| | | Nine Months Ended December 31, |
| (in thousands) | | 2018 |
| Total net revenues | | $ | 1,465,841 |
|
| Operating loss | | (125,395 | ) |
| Net loss | | $ | (152,712 | ) |
4.3. CASH, CASH EQUIVALENTS, AND INVESTMENTS
The following tables summarize the Company’s cash, cash equivalents, and trading securities’ amortizedinvestments’ adjusted cost, gross unrealized gains, gross unrealized losses, and fair value by significant investment category recorded as cash and cash equivalents, and short-term or long-term investments as of December 31, 201926, 2020 and March 31, 201928, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 26, 2020 | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value | | Cash & Cash Equivalents | | Short-term investments
(due in 1 year or less) | | |
| Cash | | $ | 205,058 | | | $ | — | | | $ | — | | | $ | 205,058 | | | $ | 205,058 | | | $ | — | | | |
| Level 1: | | | | | | | | | | | | | | |
| Mutual Funds | | 13,957 | | | 1,360 | | | (37) | | | 15,280 | | | 0 | | | 15,280 | | | |
| | | | | | | | | | | | | | |
| Money Market Funds | | 25,007 | | | 0 | | | 0 | | | 25,007 | | | 25,007 | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Total cash, cash equivalents
and investments measured at fair value | | $ | 244,022 | | | $ | 1,360 | | | $ | (37) | | | $ | 245,345 | | | $ | 230,065 | | | $ | 15,280 | | | |
| | | December 31, 2019 | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value | | Cash & Cash Equivalents | | Short-term investments (due in 1 year or less) | |
| March 28, 2020 | | March 28, 2020 | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value | | Cash & Cash Equivalents | | Short-term investments (due in 1 year or less) | |
| Cash | | $ | 156,821 |
| | $ | — |
| | $ | — |
| | $ | 156,821 |
| | $ | 156,821 |
| | $ | — |
| Cash | | $ | 213,879 | | | $ | — | | | $ | — | | | $ | 213,879 | | | $ | 213,879 | | | $ | — | | |
| Level 1: | | | | | | | | | | | | | Level 1: | | |
| Mutual Funds | | 14,643 |
| | 745 |
| | (71 | ) | | 15,317 |
| | — |
| | 15,317 |
| Mutual Funds | | 12,938 | | | 31 | | | (1,128) | | | 11,841 | | | 0 | | | 11,841 | | |
| | | | | | | | | | | | | | |
| | Total cash, cash equivalents
and investments measured at fair value | | $ | 171,464 |
| | $ | 745 |
| | $ | (71 | ) | | $ | 172,138 |
| | $ | 156,821 |
| | $ | 15,317 |
| Total cash, cash equivalents
and investments measured at fair value | | $ | 226,817 | | | $ | 31 | | | $ | (1,128) | | | $ | 225,720 | | | $ | 213,879 | | | $ | 11,841 | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value | | Cash & Cash Equivalents | | Short-term investments (due in 1 year or less) |
| Cash | | $ | 202,509 |
| | $ | — |
| | $ | — |
| | $ | 202,509 |
| | $ | 202,509 |
| | $ | — |
|
| Level 1: | | | | | | | | | | | | |
| Mutual Funds | | 13,420 |
| | 197 |
| | (285 | ) | | 13,332 |
| | — |
| | 13,332 |
|
| | | | | | | | | | | | | |
Total cash, cash equivalents
and investments measured at fair value | | $ | 215,929 |
| | $ | 197 |
| | $ | (285 | ) | | $ | 215,841 |
| | $ | 202,509 |
| | $ | 13,332 |
|
As of December 31, 2019,26, 2020, and March 31, 2019,28, 2020, all of the Company's investments are classified as trading securities and are reported at fair value, with unrealized gains and losses included in current period earnings. For more information regarding the Company's deferred compensation plan, see Note 5,4, Deferred Compensation.
The Company did not0t incur any material realized or unrealized gains or losses in the three months ended December 26, 2020, and December 28, 2019. The Company recognized an immaterial realized gain and an unrealized gain of $2.5 million during the nine months ended December 31, 2019, and 2018.26, 2020. The Company did 0t incur any material realized or unrealized gains or losses in the nine months ended December 28, 2019.
There were no transfers between fair value measurement levels during the three and nine months ended December 31, 2019,26, 2020, and 2018.December 28, 2019.
All financial assets and liabilities are recognized or disclosed at fair value in the financial statements or the accompanying notes thereto.statements. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1
The Company's Level 1 financial assets consist of Mutual Funds and Money Market Funds. The fair value of Level 1 financial instruments is measured based on the quoted market price of identical securities.
Level 2
The Company's Level 2 financial assets and liabilities consist of derivative foreign currency contracts, an interest rate swap, a term loan facility, and 5.50% Senior Notes. The fair value of the Level 2 derivative foreign currency contracts and interest rate swap isare determined using pricing models that use observable market inputs. For more information regarding the Company's derivative assets and liabilities, see Note 14,13, Derivatives. The fair value of the Level 2 long-term debt5.50% Senior Notes and term loan facility are determined based on inputs that were observable in the market, including the trading price of the notes when available. For more information regarding the Company's 5.50% Senior Notes and term loan facility, see Note 9,8, Debt.
Level 3
The Company's revolving credit facility falls under the Level 3 hierarchy. The fair value of the Level 3 revolving credit facility is determined based on inputs that were unobservable in the market. For more information regarding the Company's debt, refer to Note 9,8, Debt.
5.4. DEFERRED COMPENSATION
As of December 31, 2019,26, 2020, the Company held investments in mutual funds with a fair value totaling $15.3 million, all of which related to debt and equity securities that are held in rabbi trusts under non-qualified deferred compensation plans. The totaltotal related deferred compensation liability was $15.9$15.3 million at December 31, 2019. 26, 2020. As of March 31, 2019,28, 2020, the Company held investments in mutual funds with a fair value totaling $13.3 million.$11.8 million, all of which related to debt and equity securities that are held in a rabbi trust under non-qualified deferred compensation plans. The total related deferred compensation liability at March 31, 201928, 2020 was $13.5$11.7 million.
The securities are classified as trading securities and are recorded on the condensed consolidated balance sheets under "short-term investments". The liability is recorded on the condensed consolidated balance sheets under "other long-term liabilities" and "accrued liabilities".
6.5. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Accounts receivable, net:
| | | | | | | | | | | | | | | |
| (in thousands) | | December 26, 2020 | | March 28, 2020 | |
| Accounts receivable | | $ | 402,285 | | | $ | 350,642 | | |
| | | | | |
| Provisions for promotions, rebates, and other | | (81,802) | | | (101,666) | | |
| Provisions for doubtful accounts and sales allowances | | (5,006) | | | (2,141) | | |
| Accounts receivable, net | | $ | 315,477 | | | $ | 246,835 | | |
|
| | | | | | | | |
| | | December 31, | | March 31, |
| (in thousands) | | 2019 | | 2019 |
| Accounts receivable | | $ | 345,516 |
| | $ | 393,415 |
|
| Provisions for promotions, rebates, and other | | (96,363 | ) | | (50,789 | ) |
| Provisions for doubtful accounts and sales allowances | | (2,835 | ) | | (4,956 | ) |
| Accounts receivable, net | | $ | 246,318 |
| | $ | 337,671 |
|
The Company maintains a provision for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company regularly performs credit evaluations of its customers’ financial conditions and considers factors such as historical experience, credit quality, age of the accounts receivable balances, geographic or country-specific risks, and economic conditions that may affect a customer’s ability to pay, including any reasonable and supportable forecasts of the future.
For the period ended December 26, 2020, our assessment considered business and market disruptions caused by COVID-19 and estimates of credit and collectability trends. The continued volatility in market conditions and evolving shifts in credit trends are difficult to predict, causing variability and volatility that may impact our allowance for credit losses in future periods.
As a result of the Acquisition, the Company assumed a financing agreement with an unrelated third-party financing company (the "Financing Agreement") whereby the Company offers distributors and resellers direct or indirect financing on their purchases of Polycom's products and services. In return, the Company agrees to pay the financing company a fee based on a pre-defined percentage of the transaction amount financed. In certain instances, these financing arrangements result in a transfer of the Company's receivables, without recourse, to the financing company. If the transaction meets the applicable criteria under Topic 860 and is accounted for as a sale of financial assets, the related accounts receivable is excluded from the balance sheet upon receipt of the third-party financing company's payment remittance. In certain legal jurisdictions, the arrangements that involve maintenance services or products bundled with maintenance at one price do not qualify as a sale of financial assets in accordance with the authoritative guidance. Accordingly, accounts receivable related to these arrangements are accounted for as a secured borrowing in accordance with Topic 860, and the Company records a liability for any cash received, while maintaining the associated accounts receivable balance until the distributor or reseller remits payment to the third-party financing company.
During the quarter ended December 31,26, 2020, total transactions entered pursuant to the terms of the Financing Agreement were approximately $21.8 million all of which related to the transfer of the financial assets outside of the United States. During the quarter ended December 28, 2019, total transactions entered pursuant to the terms of the Financing Agreement were approximately $36.0 million, of which $26.2 million was related to the transfer of the financial asset.assets outside of the United States. The financing of these receivables accelerated the collection of cash and reduced the Company's credit exposure. Included in "Accounts receivables, net" in the Company's condensed consolidated balance sheetsheets as of December 31, 201926, 2020 and March 28, 2020 was approximately $24.3$11.8 million and $22.5 million, respectively due from the financing company, of which $14.3$11.8 million and $16.5 million, respectively was related to accounts receivable transferred.transferred outside of the United States. Total fees incurred pursuant to the Financing Agreement were immaterial for the quarterquarters ended December 31,26, 2020 and December 28, 2019. These fees are recorded as a reduction to revenue on the Company's condensed consolidated statementstatements of operations.
Inventory, net:
| | | | | | | | | | | | | | |
| (in thousands) | | December 26, 2020 | | March 28, 2020 |
| Raw materials | | $ | 95,195 | | | $ | 97,371 | |
| Work in process | | 9,392 | | | 459 | |
| Finished goods | | 85,881 | | | 66,697 | |
| Inventory, net | | $ | 190,468 | | | $ | 164,527 | |
|
| | | | | | | | |
| | | December 31, |
| March 31, |
| (in thousands) | | 2019 |
| 2019 |
| Raw materials | | $ | 112,635 |
| | $ | 34,054 |
|
| Work in process | | 610 |
| | 274 |
|
| Finished goods | | 101,793 |
| | 142,818 |
|
| Inventory, net | | $ | 215,038 |
| | $ | 177,146 |
|
Accrued Liabilities:
| | | | | | | | | | | | | | | |
| (in thousands) | | December 26, 2020 | | March 28, 2020 | |
| Short term deferred revenue | | $ | 146,887 | | | $ | 144,040 | | |
| Employee compensation and benefits | | 88,142 | | | 48,153 | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Accrued other | | 166,254 | | | 181,473 | | |
| Accrued liabilities | | $ | 401,283 | | | $ | 373,666 | | |
|
| | | | | | | | |
| | | December 31, | | March 31, |
| (in thousands) | | 2019 | | 2019 |
| Short term deferred revenue | | $ | 139,825 |
| | $ | 133,200 |
|
| Employee compensation and benefits | | 57,314 |
| | 68,882 |
|
| Operating lease liabilities, current | | 21,074 |
| | — |
|
| Income tax payable | | 17,465 |
| | 5,692 |
|
| Provision for returns | | 18,336 |
| | 24,632 |
|
| Marketing incentives liabilities | | 10,059 |
| | 25,369 |
|
| Discounts reserve | | — |
| | 46,894 |
|
| Accrued interest | | 7,711 |
| | 10,425 |
|
| Warranty obligation | | 12,982 |
| | 15,736 |
|
| VAT/Sales tax payable | | 6,818 |
| | 11,804 |
|
| Derivative liabilities | | 8,995 |
| | 3,275 |
|
| Accrued other | | 62,815 |
| | 52,806 |
|
| Accrued liabilities | | $ | 363,394 |
| | $ | 398,715 |
|
The Company's warranty obligation is included as a component of accrued liabilities on the condensed consolidated balance sheets. Changes in the warranty obligation during the nine months ended December 31,26, 2020 and December 28, 2019 and 2018 were as follows:
| | | | | | | | | | | | | | |
| | Nine Months Ended |
| (in thousands) | | December 26, 2020 | | December 28, 2019 |
| Warranty obligation at beginning of period | | $ | 15,261 | | | $ | 17,984 | |
| | | | |
| Warranty provision related to products shipped | | 17,092 | | | 14,235 | |
| Deductions for warranty claims processed | | (12,736) | | | (16,015) | |
| Adjustments related to preexisting warranties | | (4,097) | | | (590) | |
Warranty obligation at end of period(1) | | $ | 15,520 | | | $ | 15,614 | |
|
| | | | | | | | |
| | | Nine Months Ended
December 31, |
| (in thousands) | | 2019 | | 2018 |
| Warranty obligation at beginning of period | | $ | 17,984 |
| | $ | 9,604 |
|
Polycom warranty obligation(1) | | — |
| | 9,095 |
|
| Warranty provision related to products shipped | | 14,235 |
| | 13,533 |
|
| Deductions for warranty claims processed | | (16,015 | ) | | (14,930 | ) |
| Adjustments related to preexisting warranties | | (590 | ) | | (274 | ) |
Warranty obligation at end of period(1) | | $ | 15,614 |
| | $ | 17,028 |
|
(1) Includes both short-term and long-term portion
6. GOODWILL AND PURCHASED INTANGIBLE ASSETS
Goodwill
The changes in the prior table shows only the short-term portion included in accrued liabilities oncarrying amount of goodwill allocated to the Company's condensed consolidated balance sheet. The long-term portionreporting segments for the periods ended December 26, 2020 and March 28, 2020 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Poly Reportable Segment | | Products Reportable Segment | | Services Reportable Segment | | Total Consolidated |
| Balance as of March 30, 2019 | | $ | 1,278,380 | | | $ | 0 | | | $ | 0 | | | $ | 1,278,380 | |
Adjustments(1) | | 1,517 | | | | | | | 1,517 | |
| Impairment prior to re-segmentation | | (323,088) | | | 0 | | | 0 | | | (323,088) | |
| Allocation due to re-segmentation | | (956,809) | | | 789,561 | | | 167,248 | | | 0 | |
| Impairment after re-segmentation | | 0 | | | (160,593) | | | 0 | | | (160,593) | |
| Balance as of March 28, 2020 | | $ | 0 | | | $ | 628,968 | | | $ | 167,248 | | | $ | 796,216 | |
| Balance as of December 26, 2020 | | $ | 0 | | | $ | 628,968 | | | $ | 167,248 | | | $ | 796,216 | |
(1) Represents measurement period adjustments.
During the fourth quarter of Fiscal Year 2020, the Company experienced a sustained decrease in its stock price and determined that it was more likely than not that the carrying value of the Company's reporting units exceeded their fair value. Additionally, during the fourth quarter of Fiscal Year 2020, the Company made key changes to its executive management, which ultimately resulted in a change to the composition of its reportable segments and consequently a change from 1 to 4 reporting units – Headsets, Voice, Video, and Services. These changes resulted in an impairment charge of $483.7 million in the fourth quarter of Fiscal Year 2020.
Other Intangible Assets
As of December 26, 2020, and March 28, 2020, the carrying value of other intangibles, is included in other long-term liabilities.as follows:
Operating Leases:
|
| | | | | | | | | | |
| | | Balance Sheet | | December 31, | | March 31, |
| (in thousands) | | Classification | | 2019 | | 2019 |
| ASSETS | | | | | | |
Operating right-of-use assets(1) | | Other assets | | $ | 42,109 |
| | $ | — |
|
| LIABILITIES | | | | | | |
Operating lease liabilities, current(2) | | Accrued liabilities | | $ | 21,074 |
| | $ | — |
|
| Operating lease liabilities, long-term | | Other liabilities | | $ | 36,194 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of | | December 26, 2020 | | March 28, 2020 | | |
| (in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Remaining Useful Life |
| Amortizing Assets | | | | | | | | | | | | | | |
| Existing technology | | $ | 427,123 | | | $ | (260,833) | | | $ | 166,290 | | | $ | 427,123 | | | $ | (208,848) | | | $ | 218,275 | | | 2.6 years |
| Customer relationships | | 240,024 | | | (117,756) | | | 122,268 | | | 240,024 | | | (84,506) | | | 155,518 | | | 3.4 years |
| Trade name/Trademarks | | 115,600 | | | (32,111) | | | 83,489 | | | 115,600 | | | (22,478) | | | 93,122 | | | 6.5 years |
| Total intangible assets | | $ | 782,747 | | | $ | (410,700) | | | $ | 372,047 | | | $ | 782,747 | | | $ | (315,832) | | | $ | 466,915 | | | 3.7 years |
(1)
During the three and nine months ended December 31, 2019,26, 2020, the Company made $8.8recognized $30.7 million and $19.2$94.5 million, respectively, in payments for operating leases included within cash provided by operating activities in its condensed consolidated statements of cash flows.
(2)amortization expense. During the three and nine months ended December 31, 2019, the Company recognized $4.7 million and $13.9 million, respectively, in operating lease expense, net of $1.4 million and $4.2 million, respectively, in sublease income within its condensed consolidated statement of operations.
| |
7. | GOODWILL AND PURCHASED INTANGIBLE ASSETS |
The carrying value of goodwill and other intangibles, excluding fully amortized intangible assets as of December 31, 2019, is set forth in the following table:
|
| | | | | | | | | | | | | | | | | | |
| As of | | December 31, 2019 | | March 31, 2019 | | |
| (in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization | | Weighted Average Remaining Useful Life |
| Amortizing Assets | | | | | | | | | | |
| Existing technology | | $ | 596,757 |
| | $ | (177,829 | ) | | $ | 566,881 |
| | $ | (86,301 | ) | | 3.5 years |
| Customer relationships | | 245,437 |
| | (72,440 | ) | | 245,481 |
| | (36,245 | ) | | 4.1 years |
| Trade name/Trademarks | | 115,600 |
| | (19,267 | ) | | 115,600 |
| | (9,633 | ) | | 7.5 years |
| Non-amortizing assets | | | | | | | | | | |
| In-process R&D | | — |
| | — |
| | 29,892 |
| | — |
| | N/A |
| Total intangible assets | | $ | 957,794 |
| | $ | (269,536 | ) | | $ | 957,854 |
| | $ | (132,179 | ) | | 4.2 years |
| | | | | | | | | | | |
| Goodwill | | $ | 1,279,897 |
| | $ | — |
| | $ | 1,278,380 |
| | $ | — |
| | N/A |
For the three and nine months ended December 31,28, 2019 the Company recognized $46.1 million and $137.4 million, respectively, in amortization expense. For the three and nine months ended December 31, 2018, the Company recognized $42.8 million and $113.8 million, respectively, in amortization expense.
As
As of December 31, 201926, 2020, expected amortization expense for other intangible assets for each of the next five years and thereafter is as follows:
| | | | | | | | |
| in thousands | | Amount |
| 2021 (remaining three months) | | $ | 30,434 | |
| 2022 | | 113,858 | |
| 2023 | | 111,232 | |
| 2024 | | 65,936 | |
| 2025 | | 21,688 | |
| Thereafter | | 28,899 | |
| | $ | 372,047 | |
|
| | | | |
| in thousands | | Amount |
| 2020 (remaining three months) | | $ | 46,296 |
|
| 2021 | | 180,343 |
|
| 2022 | | 166,060 |
|
| 2023 | | 162,352 |
|
| 2024 | | 80,940 |
|
| Thereafter | | 52,267 |
|
| | | $ | 688,258 |
|
8.7. COMMITMENTS AND CONTINGENCIES
Future Minimum Rental Payments
Future minimum lease payments under non-cancelable operating leases as of December 31, 201926, 2020 were as follows:
| | | (in thousands) | | Operating Leases(1) | (in thousands) | | Operating Leases(1) |
| 2020 (remaining three months) | | $ | 6,153 |
| |
| 2021 | | 23,233 |
| |
| 2021 (remaining three months) | | 2021 (remaining three months) | | $ | 6,394 | |
| 2022 | | 19,961 |
| 2022 | | 23,052 | |
| 2023 | | 7,613 |
| 2023 | | 9,265 | |
| 2024 | | 2,724 |
| 2024 | | 7,238 | |
| 2025 | | 2025 | | 5,627 | |
| Thereafter | | 1,102 |
| Thereafter | | 16,274 | |
| Total lease payments | | $ | 60,786 |
| Total lease payments | | $ | 67,850 | |
Less: Imputed interest(2) | | (3,518 | ) | Less: Imputed interest(2) | | (7,503) | |
| Present value of lease liabilities | | $ | 57,268 |
| Present value of lease liabilities | | $ | 60,347 | |
(1) The weighted average remaining lease term was 2.84.3 years as of December 31, 2019.26, 2020.
(2) The weighted average discount rate was 4.7%4.8% as of December 31, 2019.26, 2020.
Unconditional Purchase Obligations
The Company purchases materials and services from a variety of suppliers and manufacturers. During the normal course of business and to manage manufacturing operations and general and administrative activities, the Company may enter into firm, non-cancelable, and unconditional purchase obligations for which amounts are not recorded on the consolidated balance sheets. As of December 31, 2019,26, 2020, the Company had outstanding off-balance sheet third-party manufacturing, component purchase, and other general and administrative commitments of $308.5$501.1 million.
Other Guarantees and Obligations
In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, purchasers of assets or subsidiaries and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company's breach of agreements or representations and warranties made by the Company, services to be provided by the Company, intellectual property infringement claims made by third parties or, with respect to the sale of assets of a subsidiary, matters related to the Company's conduct of business and tax matters prior to the sale. From time to time, the Company indemnifies customers against combinations of loss, expense, or liability arising from various triggering events relating to the sale and use of its products and services.
In addition, the Company also provides indemnification to customers against claims related to undiscovered liabilities, additional product liability, or environmental obligations. The Company has also entered into indemnification agreements with its directors, officers and certain other personnel that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers of the Company or certain of its affiliated entities. The Company maintains director and officer liability insurance, which may cover certain liabilities arising from its obligation to indemnify its directors, officers and certain other personnel in certain circumstances. It is not possible to determine the aggregate maximum potential loss under these agreements due to the limited history of prior claims and the unique facts and circumstances involved in each particular claim. Such indemnification obligations might not be subject to maximum loss clauses. Historically, the Company has not incurred material costs as a result of obligations under these agreements and it has not accrued any liabilities related to such indemnification obligations in the condensed consolidated financial statements.
Claims and Litigation
On October 12, 2012, GN Netcom, Inc. (“GN”) filed a complaint against the Company in the United States District Court for the District of Delaware (“Court”), alleging violations of Sections 1 and 2 of the Sherman Act, Section 3 of the Clayton Act, and tortious interference with business relations in connection with the Company’s distribution of corded and wireless headsets. The case was assigned to Judge Leonard P. Stark. GN sought injunctive relief, total damages in an unspecified amount, plus attorneys’ fees and costs, as well as unspecified legal and equitable relief. GN generally alleged that the Company’s alleged exclusive dealing arrangements with certain distributors stifled competition in the relevant market. In July 2016, the Court issued a sanctions order against Plantronics in the amount of approximately $4.9 million for allegations of spoliation of evidence. The case was tried to a jury in October 2017, resulting in a verdict in favor of the Company. GN filed a motion for new trial in November 2017, and that motion was denied by the Court in January 2018. The Company filed a motion for attorneys’ fees in November 2017, and that motion was denied by the Court in January 2018. The Company also filed a motion for certain recoverable costs, and the parties stipulated to an amount of approximately $0.2 million which GN paid the Company. On February 12, 2018, GN filed a notice of intent to appeal both the denial of the new trial motion and the Court’s July 2016 spoliation order. The appellate court heard argument on the matter on December 11, 2018 and its decision was rendered on July 10, 2019. The Court denied GN’s request for default judgment but granted a new trial to include certain excluded testimony of one witness. The retrial is set to begin on May 28, 2020.
On September 13, 2018, Mr. Phil Shin filed on behalf of himself and others similarly situated, a purported Class Action Complaint in the United States District Court of the Northern District of California alleging violations of various federal and state consumer protection laws in addition to unfair competition and fraud claims in connection with the Company’s BackBeat FIT headphones. The Company disputes the allegations and filed a motion to dismiss the Complaint in November 2018. Plaintiff filed a First Amended Complaint on December 14, 2018. The matter has now been resolved and the settlement is pending court approval. On May 24, 2019, Plaintiff filed an unopposed Motion for Preliminary Approval of Class Action Settlement. On June 17, 2019, the Court denied preliminary approval on the basis that the scope of the release was overly broad. On August 12, 2019, the settlement has received preliminary approval from the court. An amended unopposed Motion for Preliminary Approval has been agreed on by Parties and was filed on July 31, 2019. The Court granted Preliminary Approval on August 13, 2019. The Final Fairness Hearing occurred on December 20, 2019. Final approval from the Court is was obtained on January 31, 2020.
On January 23, 2018, FullView, Inc. filed a complaint in the United States District Court of the Northern District of California against Polycom, Inc. alleging infringement of two patents and thereafter filed a similar complaint in connection with the same patents in Canada. Polycom thereafter filed an inter partes reexamination ("IPR") of one of the patents, which was then appealed to Federal Circuit Court.Court and denied. Litigation in both matters in the United States and Canada, respectively, had beenwere stayed pending the results of that appeal. Polycom also filed an inter partes review (“IPR”)IPR of the second patent on January 31, 2019.and the U.S. Patent Trial and Appeal Board (“PTAB”) denied institution of the IPR petition. FullView had also initiated arbitration proceedings under a terminated license agreement with Polycom alleging that Polycom had failed to pay certain royalties due under that agreement. An arbitration hearing occurred on December 10, 2018, and theThe arbitration panel awarded an immaterial amount to FullView. On April 29, 2019 the Federal Circuit rendered its opinion affirming the Patent TrialFullView filed a First and Appeal Board (“PTAB”) opinion regarding the inter partesSecond Amended Complaint and Polycom filed a motion to dismiss. reexamination. On July 10, 2019, the PTAB denied institutionThe Court granted Polycom's partial motion to dismiss without prejudice and invalidated one of the IPR ofpatents in suit. Litigation on the second patent. FullView filed its First Amended Complaint on November 27, 2019. The Company Answered and filed a Motion to Dismiss and Strike Plaintiff’s Fraudulent Concealment and Tolling Allegations on December 11, 2019.remaining patent is ongoing.
On June 21, 2018, directPacket Research Inc. filed a complaint alleging patent infringement by Polycom in the United States District Court for the Eastern District of Virginia, Norfolk Division. Polycom filed a motion to change venue which was denied in October 2018. Polycom filed aThe Court granted Polycom’s Motion to Transfer Venue Pursuant to a Valid and Enforceable Forum Selection Clause to change venue to the Northern District of California. On July 3, 2019 the Court granted the Motion to Transfer Venue to Northern District of California. PetitionsPolycom filed petitions for Inter Partes Review (“IPR”) of the asserted patents which were filedgranted by Polycom on June 24, 2019.the PTAB. The U.S. Patent Trial and Appeal Board granted institution of proceedings on all three patents on January 13, 2020. On January 16, 2020, the District Court matter is stayed the case pending resolution of the IPRs. Oral argument was heard on the IPRs on October 20, 2020.On January 11, 2021, the PTAB issued final written decisions invalidating two of the asserted patents. The remaining claims of the third patent were unasserted against the Company.
On November 15, 2019, Felice Bassuk, individually and on behalf of others similarly situated, filed a complaint against Plantronics, its CEO Joseph Burton, its CFO Charles Boynton and its former CFO Pamela Strayer alleging various securities law violations. Plaintiffs filed the amended complaint on June 5, 2020 and the Company’s Motion to Dismiss the Amended Complaint was filed on August 7, 2020. Plaintiffs filed their Opposition on October 2, 2020 and Plantronics replied on November 16, 2020.The Company disputeshearing on the allegations. OnMotion to Dismiss scheduled to occur on January 31, 202013, 2021 was vacated and the Court terminated three plaintiff movants' motion to be appointed as lead plaintiff and requested additional briefing from two movants for authority for appointing two separate movants as joint lead plaintiffs due February 11, 2020.parties are awaiting the judge’s ruling.
On December 17, 2019, Cisco Systems, Inc. filed a First Amended Complaint for Trade Secret Misappropriation against Plantronics, Inc. and certain individuals which amends a previously filed complaint against certain other individuals. The Company disputes the allegations. On January 27, 2020, Plantronics, Thomas Puorro, and Wilson Chung filed individual Motions to Dismiss. On January 27, 2020, Jedd WilliamsThe Company filed a Motion to Compel ArbitrationDismiss. The Court granted the Motion to Dismiss with leave to amend as to Defendants He, Chung and StayWilliams, granted the case or, in the Alternative, to Dismiss. Plantronics joined in Mr. William's Motion to Compel Arbitration on January 28, 2020.
for Defendant Williams and granted in part and denied in part the Motion to Dismiss by Defendants Puorro and Poly. Cisco filed an Amended Complaint and the Defendants have moved to dismiss or strike portions of the Amended Complaint.The Court granted in part and denied in part the Motion to Dismiss.On September 10, 2020, the Company filed a Motion for Protective Order and a Motion to Strike and Challenge the Sufficiency of Cisco’s Trade Secret Disclosure. On December 21, 2020, the Court granted in part and denied in part such Motions.On December 30, 2020, Cisco filed a motion for leave to file a Motion for Reconsideration. On January 24,11, 2021 the Company filed its opposition. Discovery continues. The Court issued its Case Management and Pretrial order setting a settlement conference which is scheduled currently for April 1, 2021.
On July 22, 2020, Castlemorton Wireless, LLC filed a Complaint alleging patent infringement byKoss Corporation sued Plantronics and Polycom in the United States District Court for the Western District of Texas, Waco Division.division alleging patent infringement with respect to four Koss patents. The Company disputesanswered the allegations.Complaint on October 1, 2020 disputing the claims.On December 18, 2020, the Company filed a Motion to Transfer. Discovery is in process.
In addition to the specific matters discussed above, the Company is involved in various legal proceedings and investigations arising in the normal course of conducting business. Where applicable, in relation to the on-going matters described above, the Company has accrued an amount that reflects the aggregate liability deemed probable and estimable, but this amount is not
material to the Company's financial condition, results of operations, or cash flows. The Company is not able to estimate an amount or range of any reasonably possible loss, including in excess of any amount accrued, because of the preliminary nature of many of these proceedings, the difficulty in ascertaining the applicable facts relating to many of these proceedings, the variable treatment of claims made in many of these proceedings, and the difficulty of predicting the settlement value of many of these proceedings. However, based upon the Company's historical experience, the resolution of these proceedings is not expected to have a material effect on the Company's financial condition, results of operations or cash flows. The Company may incur substantial legal fees, which are expensed as incurred, in defending against these legal proceedings.
9.8. DEBT
The estimated fair value and carrying value of the Company's outstanding debt as of December 31, 201926, 2020 and March 31, 201928, 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 26, 2020 | | March 28, 2020 |
| (in thousands) | Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
| 5.50% Senior Notes | $ | 482,578 | | | $ | 477,320 | | | $ | 359,140 | | | $ | 495,409 | |
| Term loan facility | $ | 1,093,784 | | | $ | 1,099,678 | | | $ | 852,942 | | | $ | 1,126,285 | |
|
| | | | | | | | | | | | | | | |
| | December 31, 2019 | | March 31, 2019 |
| (in thousands) | Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
| 5.50% Senior Notes | $ | 492,030 |
| | $ | 495,046 |
| | $ | 503,410 |
| | $ | 493,959 |
|
| Term loan facility | $ | 1,123,876 |
| | $ | 1,125,308 |
| | $ | 1,152,044 |
| | $ | 1,146,842 |
|
As of December 31, 2019,26, 2020, and March 31, 2019,28, 2020, the net unamortized discount, premium and debt issuance costs on the Company's outstanding debt were $26.5$20.5 million and $31.0$25.1 million, respectively.
5.50% Senior Notes
In May 2015, the Company issued $500.0 million aggregate principal amount of 5.50% senior notes (the “5.50% Senior Notes”). The 5.50% Senior Notes mature on May 31, 2023, and bear interest at a rate of 5.50% per annum, payable semi-annually on May 15 and November 15, commencing on November 15, 2015. The Company received net proceeds of $488.4 million from the issuance of the 5.50% Senior Notes, net of issuance costs of $11.6 million which are being amortized to interest expense over the term of the 5.50% Senior Notes using the effective interest method. A portion of the proceeds was used to repay all then-outstanding amounts under the Company's revolving line of credit agreement with Wells Fargo Bank and the remaining proceeds were used primarily for share repurchases.
The fair value of the 5.50% Senior Notes was determined based on inputs that were observable in the market, including the trading price of the 5.50% Senior Notes when available (Level 2).
The Company may redeem all or a part of the 5.50% Senior Notes, upon not less than 30 or more than a 60-day notice; however, the applicable redemption price will be determined as follows:
|
| | | | | | | |
| Redemption Period Requiring Payment of: | | Redemption Up To 35% Using Cash Proceeds From An Equity Offering(3):
|
| Make-Whole(1)
| | Premium(2)
| | Date | | Specified Price |
5.50% Senior Notes | Prior to May 15, 2018 | | On or after May 15, 2018 | | Prior to May 15, 2018 | | 105.500% |
(1) Ifis the Company redeems the notes prior to the applicable date, the redemption price is principal plus a make-whole premium equal to the present value of the remaining scheduled interest payments as described in the applicable indenture, together with accrued and unpaid interest.
(2) If the Company redeems the notes on or after the applicable date, the price is principal plus a premium which declines over time as specified in the applicable indenture, together with accrued and unpaid interest.
(3) If the Company redeems the notes prior to the applicable date with net cash proceeds of one or more equity offerings, the price is equal to the amount specified above, together with accrued and unpaid interest, subject to a maximum redemption of 35% of the aggregate principal amount of the respective note being redeemed.
In addition, upon the occurrence of certain change of control triggering events, the Company may be required to repurchase the 5.50% Senior Notes, at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. The 5.50% Senior Notes contain restrictive covenants that, among other things, limit the Company's ability to create certain liens and enter into sale and leasebacklease-back transactions; create, assume, incur, or guarantee additional indebtedness of its subsidiaries without such subsidiary guaranteeing the 5.50% Senior Notes on an unsecured unsubordinated basis; and consolidate or merge with, or convey, transfer or lease all or substantially all of the assets of the Company and its subsidiaries, to another person.During the three months ended December 26, 2020, the Company repurchased $12.0 million aggregate principal amount of the 5.50% Senior Notes. The Company recorded an immaterial gain on the repurchase, which is included in interest expense of the Company's condensed consolidated statements of operations.
Credit Facility Agreement
In connection with the Polycom Acquisition of Polycomcompleted on July 2, 2018, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto (the “Credit Agreement”). The Credit Agreement replaced the Company’s prior revolving credit facility in its entirety. The Credit Agreement provides for (i) a revolving credit facility with an initial maximum aggregate amount of availability of $100 million that matures in July 2023 and (ii) a $1.275 billion term loan facility priced at LIBOR plus 250bps due in quarterly principal installments commencing on the last business day of March, June, September and December beginning with the first full fiscal quarter ending after the Closing Date for the aggregate principal amount funded on the Closing Date multiplied by 0.25% (subject to prepayments outlined in the Credit Agreement) and all remaining outstanding principal due at maturity in July 2025. The Company borrowed the full
amount available under the term loan facility of $1.245 billion, net of approximately $30 million of discounts and issuance costs which are being amortized to interest expense over the term of the agreement using the straight-line method which approximates the effective interest method for this debt. The proceeds from the initial borrowing under the Credit Agreement were used to finance the Acquisition, to refinance certain debt of Polycom, and to pay related fees, commissions and transaction costs. The Company has additional borrowing capacity under the Credit Agreement through the revolving credit facility which could be used to provide ongoing working capital and capital for other general corporate purposes of the Company and its subsidiaries. The Company’s obligations under the Credit Agreement are currently guaranteed by Polycom and will from time to time be guaranteed by, subject to certain exceptions, any domestic subsidiaries that may become material in the future. Subject to certain exceptions, the Credit Agreement is secured by first-priority perfected liens and security interests in substantially all of the personal property of the Company and each subsidiary guarantor and will from time to time also be secured by certain material real property that the Company or any subsidiary guarantor may acquire. Borrowings under the Credit Agreement bear interest due on a quarterly basis at a variable rate equal to (i) LIBOR plus a specified margin, or (ii) the base rate (which is the highest of (a) the prime rate publicly announced from time to time by Wells Fargo Bank, National Association, (b) the federal funds rate plus 0.50% or (c) the sum of 1% plus one-month LIBOR) plus a specified margin. The Company must also pay (i) an unused commitment fee ranging from 0.200% to 0.300% per annum of the average daily unused portion of the aggregate revolving credit commitments under the Credit Agreement, and (ii) a per annum fee equal to (a) for each performance standby letter of credit outstanding under the Credit Agreement with respect to non-financial contractual obligations, 50% of the applicable margin over LIBOR under the revolving credit facility in effect from time to time multiplied by the daily amount available to be drawn under such letter of credit, and (b) for each other letter of credit outstanding under the Credit Agreement, the applicable margin over LIBOR under the revolving credit facility in effect from time to time multiplied by the daily amount available to be drawn forunder such letter of credit.
TheOn February 20, 2020, the Company entered into an Amendment No. 2 to Credit Agreement contains various restrictions(the “Amendment”) by and covenants, including requirements thatamong the Company, maintain certainthe financial ratios at prescribed levelsinstitutions party thereto as lenders and restrictionsWells Fargo Bank, National Association, as administrative agent (in such capacity, the “Agent”). The Amendment amended the Credit Agreement, as previously amended to (i) increase the maximum Secured Net Leverage Ratio (as defined in the Credit Agreement) permitted under the Credit Agreement to 3.75 to 1.00 through December 26, 2020 and 3.00 to 1.00 thereafter and (ii) decrease the minimum Interest Coverage Ratio (as defined in the Credit Agreement) required under the Credit Agreement to 2.25 to 1.00 through December 26, 2020 and 2.75 to 1.00 thereafter.
Additionally, the Amendment modified the calculation of the Secured Net Leverage Ratio and the Interest Coverage Ratio solely for purposes of compliance with Sections 7.11(a) and 7.11(b) of the Credit Agreement to (i) calculate the Secured Net Leverage Ratio net of the aggregate amount of unrestricted cash and Cash Equivalents (as defined in the Credit Agreement) on the abilitybalance sheet of the Company and its Restricted Subsidiaries (as defined in the Credit Agreement) as of the date of calculation up to an amount equal to $150,000,000 and (ii) solely for purposes of any fiscal quarter ending from December 29, 2019 through December 26, 2020, increase the cap on Expected Cost Savings (as defined in the Credit Agreement) in determining Consolidated EBITDA (as defined in the Credit Agreement) to the greater of (A) 20% of Consolidated EBITDA for such Measurement Period (as defined in the Credit Agreement) (calculated before giving effect to any such Expected Cost Savings to be added back pursuant to clause (a)(ix) of the definition of Consolidated EBITDA) and (B)(x) for the period from December 29, 2019 through March 28, 2020, $121,000,000, (y) for the period from March 29, 2020 through June 27, 2020, $107,000,000 and (z) for the period from June 28, 2020 through December 26, 2020, $88,000,000.
The financial covenants under the Credit Agreement described above are for the benefit of the revolving credit lenders only and do not apply to any other debt of the Company. The Credit Agreement also contains various other restrictions and covenants, some of which have become more stringent over time, including restrictions on our, and certain of itsour subsidiaries, ability to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, consummate acquisitions, make investments and pay dividends and other distributions. The Credit Agreement includesCompany has the followingunilateral ability to terminate the revolving line of credit such that the financial covenants applicable to the revolving credit facility only: (i) a maximum secured net leverage ratio (defined as, with certain adjustments and exclusions, the ratio of the Company’s consolidated secured indebtedness as of the end of the relevant fiscal quarter to consolidated net income before interest, taxes, depreciation, amortization, non-cash charges and certain other items (“EBITDA”) for the period of four fiscal quarters then ended) of 3.50 to 1.00 as of the last day of any fiscal quarter ending during the period from December 29, 2018 through June 29, 2019; 3.25 to 1.00 as of the last day of any fiscal quarter ending during the period from June 30, 2019 through March 28, 2020; 3.00 to 1.00 as of the last day of any fiscal quarter ending during the period from March 29, 2020 through April 3, 2021; and 2.75 to 1.00 as of the last day of any fiscal quarter ending on or after April 4, 2021; and (ii) a minimum interest coverage ratio (defined as, with certain adjustments, the ratio of the Company’s EBITDA to the Company’s consolidated interest expense to the extent paid or payable in cash) of 2.75 to 1.00 as of the last day of any fiscal quarter ending on or after December 29, 2018.Thedescribed above are no longer applicable. The Credit Agreement also contains customary events of default. If an event of default under the Credit Agreement occurs and is continuing, then the lenders may declare any outstanding obligations under the Credit Agreement to be immediately due and payable; provided, however, that the occurrence of an event of default as a result of a breach of a financial covenant under the Credit Agreement does not constitute a default or event of default with respect to any term facility under the Credit Agreement unless and until the required revolving lenders shall have terminated their revolving commitments and declared all amounts outstanding under the revolving credit facility to be due and payable. In addition, if the Company, any subsidiary guarantor or, with certain exceptions, any other subsidiary becomes the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency or similar law, then any outstanding obligations under the Credit Agreement will automatically become immediately due and payable. Loans outstanding under the Credit Agreement will bear interest at a rate of 2.00% per annum in excess of the otherwise applicable rate (i) while a payment or bankruptcy event of default exists or (ii) upon the lenders’ request, during the continuance of any other event of default. As of December 31, 2019,26, 2020, the Company was in compliance with itsthe financial covenants.
The Company may prepay the loans and terminate the commitments under the Credit Facility Agreement at any time but will incur a 1% prepayment penalty if it refinances within 6 monthswithout penalty. Additionally, the Company is subject to mandatory debt repayments five business days after the filing of entering into thisits financial statements for any annual period in which the Company generates excess cash as defined by the Credit Agreement. In accordance with the terms of the Credit Agreement, the Company did not generate excess cash during Fiscal Year 2020 and therefore is not required to make any debt repayments in Fiscal Year 2021. During the three months ended December 31, 2019,26, 2020, the Company did not prepay any aggregate principal amount of the term loan facility and did not incur any prepayment penalties. As of December 31, 2019,26, 2020, the CompanyCompany has five outstanding5 outstanding letters of credit on the revolving credit facility for a total of $1.0$1.4 million. The fair value of the term loan facility was determined based on inputs that were observable in the market (Level 2).
10.9. RESTRUCTURING AND OTHER RELATED CHARGES
Summary of Restructuring Plans
Fiscal Year 20202021 restructuring plansplan
During the nine months ended December 31, 2019,26, 2020, the Company committed to additional actions to reduce expenses and right size its overall cost structure to better align with projected revenue levels as well as reorganize its executive management to align to its new Chief Executive Officer’s management structure. The costs incurred to date under this plan include severance benefits related to headcount reductions in the Company's global workforce and facility related charges due to closure or consolidation of leased offices.
Fiscal Year 2020 restructuring plans
During the Fiscal Year 2020, the Company committed to additional actions to rationalize post-Acquisition operations and costs.costs to align the Company's cost structure to current revenue expectations. The costs incurred to date under these plans comprised ofinclude severance benefits andrelated to headcount reductions in the Company's global workforce, facility related charges due to consolidation of the Company's leased offices, asset impairments associated with legal entity rationalization and consumer product portfolio optimization efforts.efforts, and other costs associated with legal entity rationalization.
Fiscal Year 2019 restructuring plans
During the Fiscal Year 2019, the Company initiated post-Acquisition restructuring plans to realign the Company's cost structure, including streamlining the global workforce, consolidation of certain distribution centers in North America, and reduction of redundant legal entities, in order to take advantage of operational efficiencies following the Acquisition. The costs incurred to date under these plans have primarily comprised of severance benefits from reduction in force actions, facilities related actions initiated by management, and legal entity rationalization.
The following table summarizes the restructuring and other related charges recognized in the Company's condensed consolidated statements of operations:
| | | | Three Months Ended December 31, | | Nine Months Ended
December 31, | | Three Months Ended | | Nine Months Ended |
| (in thousands) | 2019 | | 2018 | | 2019 | | 2018 | (in thousands) | December 26, 2020 | | December 28, 2019 | | December 26, 2020 | | December 28, 2019 |
| Severance | $ | 11,708 |
| | $ | 7,185 |
| | $ | 25,480 |
| | $ | 15,726 |
| Severance | $ | 3,969 | | | $ | 11,708 | | | $ | 27,161 | | | $ | 25,480 | |
| Facility | 2,147 |
| | 1,892 |
| | 2,147 |
| | 1,932 |
| Facility | 1,658 | | | 2,147 | | | 3,300 | | | 2,147 | |
Other (1) | 932 |
| | 3,053 |
| | 7,798 |
| | 3,053 |
| Other (1) | 1,107 | | | 932 | | | 3,416 | | | 7,798 | |
| Non-cash asset impairment | 6,937 |
| | — |
| | 11,671 |
| | — |
| |
Non-cash charges (2) | | Non-cash charges (2) | 7,243 | | | 6,937 | | | 15,600 | | | 11,671 | |
| Total restructuring and other related charges | $ | 21,724 |
| | $ | 12,130 |
| | $ | 47,096 |
| | $ | 20,711 |
| Total restructuring and other related charges | $ | 13,977 | | | $ | 21,724 | | | $ | 49,477 | | | $ | 47,096 | |
(1) Other costs primarily represent associated legal and advisory services.
(2) Non-cash charges primarily represent asset impairments due to the closure or consolidation of facilities.
The Company's restructuring liabilities as of December 31, 201926, 2020 is as follows (amounts in thousands):
| | | | | | | | | | | | | | |
| As of March 28, 2020 | Accruals (1) | Cash Payments | As of December 26, 2020 |
| FY 2021 Plans | | | | |
| Severance | $ | 0 | | $ | 27,838 | | $ | (18,170) | | $ | 9,668 | |
| Facility | 0 | | 1,055 | | (59) | | 996 | |
| Other | 0 | | 3,415 | | (2,177) | | 1,238 | |
| Total FY2021 Plans | $ | 0 | | $ | 32,308 | | $ | (20,406) | | $ | 11,902 | |
| FY 2020 Plans | | | | |
| Severance | $ | 7,475 | | $ | (1,216) | | $ | (4,906) | | $ | 1,353 | |
| Facility | 2,501 | | 2,245 | | (1,388) | | 3,358 | |
| Other | 1,621 | | 0 | | (1,621) | | 0 | |
| Total FY2020 Plans | $ | 11,597 | | $ | 1,029 | | $ | (7,915) | | $ | 4,711 | |
| FY 2019 Plans | | | | |
| Severance | $ | 147 | | $ | 539 | | $ | (356) | | $ | 330 | |
| Facility | 0 | | 0 | | 0 | | 0 | |
| Other | 117 | | 0 | | (117) | | 0 | |
| Total FY2019 Plans | $ | 264 | | $ | 539 | | $ | (473) | | $ | 330 | |
| Severance | $ | 7,622 | | $ | 27,161 | | $ | (23,432) | | $ | 11,351 | |
| Facility | 2,501 | | 3,300 | | (1,447) | | 4,354 | |
| Other | 1,738 | | 3,415 | | (3,915) | | 1,238 | |
| Grand Total | $ | 11,861 | | $ | 33,876 | | $ | (28,794) | | $ | 16,943 | |
|
| | | | | | | | | | | | | | | | | | |
| | As of March 31, 2019 | Adoption of ASC 842 (1) | Accruals | Cash Payments | Adjustments | As of December 31, 2019 |
| FY 2019 Plans | | | | | | |
| Severance | $ | 5,889 |
| $ | — |
| $ | — |
| $ | (5,720 | ) | $ | 154 |
| $ | 323 |
|
| Facility | 7,376 |
| (7,376 | ) | — |
| — |
| — |
| — |
|
| Other | 10 |
| — |
| — |
| — |
| 107 |
| 117 |
|
| Total FY2019 Plans | $ | 13,275 |
| $ | (7,376 | ) | $ | — |
| $ | (5,720 | ) | $ | 261 |
| $ | 440 |
|
| FY 2020 Plans | | | | | | |
| Severance | $ | — |
| $ | — |
| $ | 26,250 |
| $ | (16,566 | ) | $ | (924 | ) | $ | 8,760 |
|
| Facility | — |
| — |
| 2,147 |
| (77 | ) | — |
| 2,070 |
|
| Other | — |
| — |
| 7,450 |
| (7,521 | ) | 242 |
| 171 |
|
| Total FY2020 Plans | $ | — |
| $ | — |
| $ | 35,847 |
| $ | (24,164 | ) | $ | (682 | ) | $ | 11,001 |
|
| Severance | $ | 5,889 |
| $ | — |
| $ | 26,250 |
| $ | (22,286 | ) | $ | (770 | ) | $ | 9,083 |
|
| Facility | 7,376 |
| (7,376 | ) | 2,147 |
| (77 | ) | — |
| 2,070 |
|
| Other | 10 |
| — |
| 7,450 |
| (7,521 | ) | 349 |
| 288 |
|
| Grand Total | $ | 13,275 |
| $ | (7,376 | ) | $ | 35,847 |
| $ | (29,884 | ) | $ | (421 | ) | $ | 11,441 |
|
(1) Includes adjustments to facilities-related liabilities upon adoption of ASC 842.
11.10. STOCK-BASED COMPENSATION
Stock-based Compensation
The Company recognizes the grant-date fair value of stock-based compensation as compensation expense using the straight-line attribution approach over the service period for which the stock-based compensation is expected to vest. The following table summarizes the amount of stock-based compensation included in the condensed consolidated statements of operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| (in thousands) | | December 26, 2020 | | December 28, 2019 | | December 26, 2020 | | December 28, 2019 |
| Cost of revenues | | $ | 799 | | | $ | 1,019 | | | $ | 2,374 | | | $ | 2,994 | |
| | | | | | | | |
| Research, development, and engineering | | 3,441 | | | 4,584 | | | 10,740 | | | 12,516 | |
| Selling, general, and administrative | | 7,246 | | | 8,299 | | | 17,995 | | | 25,989 | |
| Stock-based compensation included in operating expenses | | 10,687 | | | 12,883 | | | 28,735 | | | 38,505 | |
| Total stock-based compensation | | 11,486 | | | 13,902 | | | 31,109 | | | 41,499 | |
| Income tax expense (benefit) | | 1,373 | | | (2,798) | | | (6,798) | | | (5,941) | |
| Total stock-based compensation, net of tax | | $ | 12,859 | | | $ | 11,104 | | | $ | 24,311 | | | $ | 35,558 | |
|
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, | | Nine Months Ended
December 31, | |
| (in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | |
| Cost of revenues | | $ | 1,019 |
| | $ | 1,067 |
| | $ | 2,994 |
| | $ | 3,103 |
| |
| | | | | | | | | | |
| Research, development, and engineering | | 4,584 |
| | 2,887 |
| | 12,516 |
| | 7,877 |
| |
| Selling, general, and administrative | | 8,299 |
| | 7,765 |
| | 25,989 |
| | 19,729 |
| |
| Stock-based compensation included in operating expenses | | 12,883 |
| | 10,652 |
| | 38,505 |
| | 27,606 |
| |
| Total stock-based compensation | | 13,902 |
| | 11,719 |
| | 41,499 |
| | 30,709 |
| |
| Income tax benefit | | (2,798 | ) | | (1,624 | ) | | (5,941 | ) | | (7,605 | ) | |
| Total stock-based compensation, net of tax | | $ | 11,104 |
| | $ | 10,095 |
| | $ | 35,558 |
| | $ | 23,104 |
| |
Long Term Incentive Plan
Prior to the Acquisition of Polycom, certain Polycom employees were granted incentive rights under the Polycom, Inc. 2016 Long-Term Incentive Plan (“2016 LTIP”). As of the date of Acquisition, Plantronics assumed the role of payer to participants of the 2016 LTIP through its payroll but is indemnified by Triangle for obligations under the 2016 LTIP. The Acquisition accelerated vesting under the 2016 LTIP at 75% of awards held by participants in service as of that date and triggered an initial amount due to such participants. The cash purchase price of the Acquisition was reduced by this initial obligation. The remaining 25% of awards vested upon the one-year anniversary of the Acquisition and was paid in the second quarter of Fiscal Year 2020. Future distributions to its parents of cash made available to Triangle from the release of escrow amounts or the sale of shares issued in the transaction would trigger further compensation due to incentive rights holders under the plan. The Company is indemnified for any obligations in excess of the reduction to purchase price. Any future payments above the initial obligation under the 2016 LTIP require Triangle to fund the Company in order to pay participants for any amount in excess of the purchase price reduction.
12.11. COMMON STOCK REPURCHASES
From time to time, the Company's Board of Directors (the "Board") has authorized programs under which the Company may repurchase shares of its common stock, depending on market conditions, in the open market or through privately negotiated transactions. Repurchased shares are held as treasury stock until they are retired or re-issued. On November 28, 2018, the Board approved a 1 million share repurchase program expanding its capacity to repurchase shares to approximately 1.7 million shares. As of December 31, 2019,26, 2020, there remained 1,369,014 shares authorized for repurchase under the existing stock repurchase.
Repurchasesrepurchase program approved by the Company pursuant to Board-authorized programs are shown in the following table:Board.
|
| | | | | | | | |
| | | Nine Months Ended
December 31, |
| (in thousands, except $ per share data) | | 2019 | | 2018 |
| Shares of common stock repurchased in the open market | | — |
| | 127,970 |
| Value of common stock repurchased in the open market | | $ | — |
| | $ | 4,780 |
|
| Average price per share | | $ | — |
| | $ | 37.35 |
|
| | | | | |
| Value of shares withheld in satisfaction of employee tax obligations | | $ | 9,669 |
| | $ | 13,863 |
|
The total value of shares withheld in satisfaction of employee tax obligations on the vesting of equity awards for the three months ended December 26, 2020 and December 28, 2019 were $0.1 million and $0.4 million, respectively. The amounts withheld were equivalent to the employees' minimum statutory tax withholding requirements and are reflected as a financing activity within the Company's condensed consolidated statements of cash flows. These share withholdings have the
same effect as share repurchases by the Company as they reduce the number of shares that would have otherwise been issued in connection with the vesting of shares subject to the restricted stock grants.
13.12. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive income ("AOCI"), net of immaterial tax effects, are as follows:
| | | (in thousands) | (in thousands) | | December 31, 2019 | | March 31, 2019 | (in thousands) | | December 26, 2020 | | March 28, 2020 |
Accumulated unrealized loss on cash flow hedges (1) | Accumulated unrealized loss on cash flow hedges (1) | | $ | (10,040 | ) | | $ | (5,310 | ) | Accumulated unrealized loss on cash flow hedges (1) | | $ | (13,328) | | | $ | (18,197) | |
| Accumulated foreign currency translation adjustments | Accumulated foreign currency translation adjustments | | 4,615 |
| | 4,835 |
| Accumulated foreign currency translation adjustments | | 4,207 | | | 4,615 | |
| | Accumulated other comprehensive loss | Accumulated other comprehensive loss | | $ | (5,425 | ) | | $ | (475 | ) | Accumulated other comprehensive loss | | $ | (9,121) | | | $ | (13,582) | |
(1)Refer to Note 14,13, Derivatives, which discloses the nature of the Company's derivative assets and liabilities as of December 31, 201926, 2020 and March 31, 2019.28, 2020.
14.13. DERIVATIVES
Foreign Currency Derivatives
The Company's foreign currency derivatives consist primarily of foreign currency forward exchange contracts and option contracts. The Company does not purchase derivative financial instruments for speculative trading purposes. The derivatives expose the Company to credit risk to the extent the counterparties may be unable to meet the terms of the derivative instrument. The Company's maximum exposure to loss that it would incur due to credit risk if parties to derivative contracts failed completely to perform according to the terms of the contracts was equal to the carrying value of the Company's derivative assets as of December 31, 2019.26, 2020 and March 28, 2020. The Company seeks to mitigate such risk by limiting its counterparties to large financial institutions. In addition, the Company monitors the potential risk of loss with any one counterparty resulting from this type of credit risk on an ongoing basis.
The Company enters into master netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions. A master netting arrangement may allow each counterparty to net settle amounts owed between the Company and the counterparty as a result of multiple, separate derivative transactions. As of December 31, 2019,26, 2020, the Company had International Swaps and Derivatives Association ("ISDA") agreements with 4 applicable banks and financial institutions which contained netting provisions. PlantronicsThe Company has elected to present the fair value of derivative assets and liabilities onwithin the Company's condensed consolidated balance sheet on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. For each counterparty, if netted, the Company would offset the asset and liability balances of all derivatives at the end of the reporting period. Derivatives not subject to master netting agreements are not eligible for net presentation. As of December 31, 2019,26, 2020, and March 31, 2019,28, 2020, no cash collateral had been received or pledged related to these derivative instruments.
The gross fair value of the Company's outstanding derivative contracts at the end of each period was as follows:
|
| | | | | | | | |
| (in thousands) | | December 31, 2019 | | March 31, 2019 |
Derivative Assets(1) | | | | |
| Non-designated hedges | | $ | 63 |
| | $ | 327 |
|
| Cash flow hedges | | 537 |
| | 2,856 |
|
| Total derivative assets | | $ | 600 |
| | $ | 3,183 |
|
| | | | | |
Derivative Liabilities(2) | | | | |
| Non-designated hedges | | $ | 1,187 |
| | $ | 39 |
|
| Cash flow hedges | | 1,645 |
| | 843 |
|
| Interest rate swap | | 12,855 |
| | 8,594 |
|
| Accrued interest | | 584 |
| | 7 |
|
| Total derivative liabilities | | $ | 16,271 |
| | $ | 9,483 |
|
| | | | | | | | | | | | | | |
| (in thousands) | | December 26, 2020 | | March 28, 2020 |
Derivative Assets(1) | | | | |
| Non-designated hedges | | $ | 120 | | | $ | 266 | |
| Cash flow hedges | | 381 | | | 3,283 | |
| | | | |
| Total derivative assets | | $ | 501 | | | $ | 3,549 | |
| | | | |
Derivative Liabilities(2) | | | | |
| Non-designated hedges | | $ | 2,147 | | | $ | 668 | |
| Cash flow hedges | | 5,440 | | | 811 | |
| Interest rate swap | | 13,145 | | | 21,411 | |
| Accrued interest | | 869 | | | 631 | |
| Total derivative liabilities | | $ | 21,601 | | | $ | 23,521 | |
(1) Short-term derivative assets are recorded in "other current assets" and long-term derivative assets are recorded in "deferred tax and other assets". As of December 31, 2019,26, 2020, the portion of derivative assets classified as long-term was immaterial.
(2) Short-term derivative liabilities are recorded in "accrued liabilities" and long-term derivative liabilities are recorded in "other long-term liabilities". As of December 31, 2019,26, 2020, the portion of derivative liabilities classified as long-term was immaterial.$4.0 million.
Non-Designated Hedges
As of December 31, 2019,26, 2020, the Company had foreign currency forward contracts denominated in Euros ("EUR"), and British Pound Sterling ("GBP"), and Australian Dollars ("AUD"). The Company does not elect to obtain hedge accounting for these forward contracts. These forward contracts hedge against a portion of the Company’s foreign currency-denominated cash balances, receivables, and payables. The following table summarizes the notional value of the Company’s outstanding foreign exchange currency contracts and approximate U.S. Dollar ("USD") equivalent at December 31, 2019:26, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Local Currency | | USD Equivalent | | Position | | Maturity |
| EUR | € | 90,960 | | | $ | 110,906 | | | Sell EUR | | 1 month |
| GBP | £ | 11,700 | | | $ | 15,799 | | | Sell GBP | | 1 month |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | |
| (in thousands) | Local Currency | | USD Equivalent | | Position | | Maturity |
| EUR | € | 54,600 |
| | $ | 61,123 |
| | Sell EUR | | 1 month |
| GBP | £ | 22,700 |
| | $ | 29,752 |
| | Sell GBP | | 1 month |
| AUD | A$ | 4,400 |
| | $ | 3,073 |
| | Sell AUD | | 1 month |
Effect of Non-Designated Derivative Contracts on the Condensed Consolidated Statements of Operations
The effect of non-designated derivative contracts recognized in other non-operating income and (expense), net in the condensed consolidated statements of operations was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | | |
| (in thousands) | | December 26, 2020 | | December 28, 2019 | | December 26, 2020 | | December 28, 2019 | | | | | | | | |
| Gain (loss) on foreign exchange contracts | | $ | (4,440) | | | $ | (2,508) | | | $ | (7,173) | | | $ | 813 | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, | | Nine Months Ended
December 31, |
| (in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
| Gain (loss) on foreign exchange contracts | | $ | (2,508 | ) | | $ | 1,784 |
| | $ | 813 |
| | $ | 6,826 |
|
Cash Flow Hedges
Costless Collars
The Company hedges a portion of the forecasted EUR and GBP denominated revenues with costless collars. On a monthly basis, the Company enters into option contracts with a six to eleven-montheleven-month term. Collar contracts are scheduled to mature at the beginning of each fiscal quarter, at which time the instruments convert to forward contracts. The Company also enters into cash flow forwards withwith a three-monththree-month term. Once the hedged revenues are recognized, the forward contracts become non-designated hedges to protect the resulting foreign monetary asset position for the Company.
The notional value of the Company's outstanding EUR and GBP option and forward contracts at the end of each period was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | December 31, 201926, 2020 | | March 31, 201928, 2020 |
| | EUR | | GBP | | EUR | | GBP |
| Option contracts | | €120.568.0 | | £40.613.0 | | €76.867.0 | | £25.818.4 |
| Forward contracts | | €33.762.3 | | £13.512.4 | | €55.450.2 | | £18.018.5 |
The Company will reclassify all amounts accumulated in other comprehensive income into earnings within the next twelve months.
Cross-currency Swaps
The Company hedges a portion of the forecasted Mexican Peso (“MXN”) denominated expenditures with a cross-currency swap. As of December 31, 2019,26, 2020, and March 31, 2019,28, 2020, the Company had foreign currency swap contracts of approximately MXN 10.6389.0 million and MXN 149.70.0 million, respectively.
The following table summarizes the notional value of the Company's outstanding MXN currency swaps and approximate USD Equivalent at December 31, 2019:26, 2020:
|
| | | | | | | | |
| | Local Currency | USD Equivalent | Position | Maturity |
| | (in thousands) | (in thousands) | | |
| MX$ | $ | 10,580 |
| $ | 533 |
| Buy MXN | Monthly over 1 month |
| | | | | | | | | | | | | | | | | | | | | | | |
| Local Currency | | USD Equivalent | | Position | | Maturity |
| (in thousands) | | (in thousands) | | | | |
| MXN | $ | 389,008 | | | $ | 19,009 | | | Buy MXN | | Monthly over twelve months |
Interest Rate Swap
On July 30, 2018, the Company entered into a 4-year amortizing interest rate swap agreement with Bank of America, NA.N.A. The swap has an initial notional amount of $831 million and matures on July 31, 2022. The swap involves the receipt of floating-rate interest payments for fixed interest rate payments at a rate of 2.78% over the life of the agreement. The Company has designated this interest rate swap as a cash flow hedge. The purpose of this swap is to hedge against changes in cash flows (interest payments) attributable to fluctuations in the Company's variable rate debt. The derivative is valued based on prevailing LIBOR rate curves on the date of measurement. The Company also evaluates counterparty credit risk when it calculates the fair value of the swap. The effective portion of changes in the fair value of the derivative is recorded to other comprehensive income (loss) on the accompanying balance sheets and reclassified into interest expense over the life of the underlying debt as interest on the Company's floating rate debt is accrued. The Company reviews the effectiveness of this instrument on a quarterly basis, recognize current period hedge ineffectiveness immediately in earnings and will discontinue hedge accounting if the Company no longer considers hedging to be highly effective. This hedge was fully effective at inception on July 30, 2018 and as of the nine months ended December 31, 2019.26, 2020. During the nine months ended December 31, 2019,26, 2020, the Company reclassified into interest expense $3.2$10.3 million of the $12.9and had a $13.1 million unrealized loss on its interest rate swap derivative designateddesignated as a cash flow hedge.
Effect of Designated Derivative Contracts on AOCI and Condensed Consolidated Statements of Operations
The following table presents the pre-tax effects of derivative instruments designated as cash flow hedges on accumulated other comprehensive income and the condensed consolidated statements of operations for the three and nine months ended December 31, 201926, 2020 and 2018:December 28, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| (in thousands) | | December 26, 2020 | | December 28, 2019 | | December 26, 2020 | | December 28, 2019 |
| Gain (loss) included in AOCI as of beginning of period | | $ | (16,747) | | | $ | (13,311) | | | $ | (20,156) | | | $ | (7,480) | |
| | | | | | | | |
| Amount of gain (loss) recognized in other comprehensive income (“OCI”) (effective portion) | | (3,754) | | | (1,420) | | | (8,339) | | | (5,755) | |
| | | | | | | | |
| Amount of (gain) loss reclassified from OCI into net revenues (effective portion) | | 1,054 | | | (225) | | | 1,797 | | | (3,152) | |
| Amount of (gain) loss reclassified from OCI into cost of revenues (effective portion) | | 0 | | | (46) | | | 0 | | | (212) | |
| Amount of (gain) loss reclassified from OCI into interest expense (effective portion) | | 3,039 | | | 1,565 | | | 10,290 | | | 3,162 | |
| Total amount of (gain) loss reclassified from AOCI to income (loss) (effective portion) | | 4,093 | | | 1,294 | | | 12,087 | | | (202) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Gain (loss) included in AOCI as of end of period | | $ | (16,408) | | | $ | (13,437) | | | $ | (16,408) | | | $ | (13,437) | |
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, | Nine Months Ended
December 31, |
| (in thousands) | | 2019 | | 2018 | 2019 | | 2018 |
| Gain (loss) included in AOCI as of beginning of period | | $ | (13,311 | ) | | $ | 2,825 |
| $ | (7,480 | ) | | $ | (1,693 | ) |
| | | | | | | | |
| Amount of gain (loss) recognized in other comprehensive income (“OCI”) (effective portion) | | (1,420 | ) | | (5,622 | ) | (5,755 | ) | | (853 | ) |
| | | | | | | | |
| Amount of (gain) loss reclassified from OCI into net revenues (effective portion) | | (225 | ) | | (1,488 | ) | (3,152 | ) | | (2,637 | ) |
| Amount of (gain) loss reclassified from OCI into cost of revenues (effective portion) | | (46 | ) | | 6 |
| (212 | ) | | (73 | ) |
| Amount of (gain) loss reclassified from OCI into interest expense (effective portion) | | 1,565 |
| | 1,029 |
| 3,162 |
| | 2,006 |
|
| Total amount of (gain) loss reclassified from AOCI to income (loss) (effective portion) | | 1,294 |
| | (453 | ) | (202 | ) | | (704 | ) |
| | | | | | | | |
| Gain (loss) included in AOCI as of end of period | | $ | (13,437 | ) | | $ | (3,250 | ) | $ | (13,437 | ) | | $ | (3,250 | ) |
For the period presented prior to the first quarter of fiscal year 2020, the ineffective and excluded portion of the realized and unrealized gain or loss was included in other non-operating income (expense). As a result of adopting ASU 2017-12, beginning in the first quarter of fiscal year 2020, the excluded portion of such amounts is included in the same line item in which the underlying transactions affect earnings and the ineffective portion of the realized and unrealized gains or losses on derivatives is included as a component of accumulated other comprehensive income. During the three and nine months ended December 31,26, 2020 and December 28, 2019, the Company did not have an ineffective portion of its cash flow hedges. During the three and nine months ended December 31, 2018, the Company recognized an immaterial loss on the ineffective portion of its cash flow hedges.
15.14. INCOME TAXES
The Company and its subsidiaries are subject to taxation in the U.S. and in various foreign and state jurisdictions. The Company's tax benefit is determined using an estimate of its annual effective tax rate and adjusted for discrete items that are taken into account in the relevant period. The effective tax rates for the three months ended December 31,26, 2020 and December 28, 2019 and 2018 were (20.1)(53.9)% and (15.9)%20.1%, respectively. The effective tax rates for the nine months ended December 31,26, 2020 and December 28, 2019 were 9.6% and 2018 were (17.4)% and (20.1)%,17.4%. respectively.
ForThe change in our effective tax rate for the three and nine months ended December 31, 2019,26, 2020 relative to the Company recognized a discrete $11.6 million net tax benefit relatedprior year is primarily due to an intra-entity transfer of an intangible asset that will have a deferred future benefit, which increased our nine month effectiverecently enacted statutory tax rate by 6.4%.
On June 7, 2019, a Ninth Circuit panel reversed the United States Tax Court’s holdingincrease in Altera Corp. v. Commissioner and upheld the portion of the Treasury regulations issued under IRC Section 482 requiring related-party participantsNetherlands, resulting in a cost sharing arrangement to share stock-based compensation costs. Asbenefit from a result, the Company recorded a $8.6 million discreterevaluation of net deferred tax charge resultingassets from the cost sharing of prior stock-based compensation, partially offset by a reduction to the 2017 Tax Cuts and Jobs Act toll charge accrued in prior periods, which reducedinternal intangible property restructuring between our nine month effective tax rate by 4.8%.wholly-owned subsidiaries.
As of December 31, 2019,26, 2020, the Company had approximately $29.5$97.3 million in non-US net deferred tax assets ("DTAs"). after valuation allowance, and continued to maintain a full valuation allowance against its U.S. federal and state deferred tax assets. A significant portion of the Company's DTAs relate to interest expense in the US that is subject to a limitation on deductibility based on income.internal intangible property restructuring between wholly-owned subsidiaries. At this time, based on evidence currently available, the Company considers it more likely than not that it will have sufficient taxable income in the future that will allow the Company to realize the DTAs; however, failure to generate sufficient taxable income could result in some or all DTAs not being utilized in the future. If the Company is unable to generate sufficient future taxable income, a substantial valuation allowance to reduce the Company's DTAs may be required.
The Company's provision for income taxes also included excess tax benefits associated with employee equity plans of $0.1 million and $0.3 million, which reduced our effective tax rate by 0.1 percentage points and 0.7 percentage points, for the three months ended December 31, 2019, and 2018, respectively. The Company's provision for income taxes also included excess tax benefits associated with employee equity plans of ($2.8 million) and $3.3 million, which reduced the Company's effective tax rate by 1.6 percentage points and increased it by 2.3 percentage points, for the nine months ended December 31, 2019, and 2018, respectively.
The Company is subject to the examination of its income tax returns by the Internal Revenue Service and other tax authorities. Significant judgment is required in evaluating our uncertain tax positions and determining the Company's provision for income taxes. During the quarter the Company concluded its Fiscal Year 2016 federal income tax examination by the Internal Revenue Service, the impact was immaterial. As of December 31, 2019,26, 2020, the Company had a total gross unrecognized tax benefits of $36.3$29.1 million compared with $25.5$36.3 million as of December 31, 2018.28, 2019. The increasereduction in gross unrecognized tax benefits is predominantly dueprimarily attributed to a $9.2 million increaseexamination closure and settlement by the IRS relating to our 2017 Fiscal Year income tax return related to reversal of the United States Tax Court’s holding in Altera Corp. v. Commissioner that upheld the first quarter fromportion of the Treasury regulations issued under IRC Section 482 requiring related-party participants in a cost sharing of priorarrangement to share stock-based compensation.compensation costs. If recognized, the gross unrecognized tax benefits would reduce the effective tax rate in the period of recognition.
16.
15. COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per share is calculated by dividing net income (loss) associated with common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share assumes the issuance of additional shares of common stock by the Company upon exercise of all outstanding stock options and vesting of restricted stock, if the effect is dilutive, in accordance with the treasury stock method or two-class method (whichever is more dilutive).
The following table sets forth the computation of basic lossand diluted earnings (loss) per common share for the three and nine months ended December 31, 2019,26, 2020, and 2018:December 28, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| (in thousands, except per share data) | | December 26, 2020 | | December 28, 2019 | | December 26, 2020 | | December 28, 2019 |
| Basic earnings (loss) per common share: | | | | | | | | |
| Numerator: | | | | | | | | |
| Net income (loss) | | $ | 20,113 | | | $ | (78,483) | | | $ | (68,307) | | | $ | (149,264) | |
| | | | | | | | |
| Denominator: | | | | | | | | |
| Weighted average common shares, basic | | 41,252 | | | 39,784 | | | 40,894 | | | 39,535 | |
| Dilutive effect of employee equity incentive plans | | 932 | | | 0 | | | 0 | | | 0 | |
| Weighted average common shares-diluted | | 42,184 | | | 39,784 | | | 40,894 | | | 39,535 | |
| | | | | | | | |
| Basic earnings (loss) per common share | | $ | 0.49 | | | $ | (1.97) | | | $ | (1.67) | | | $ | (3.78) | |
| Diluted earnings (loss) per common share | | $ | 0.48 | | | $ | (1.97) | | | $ | (1.67) | | | $ | (3.78) | |
| | | | | | | | |
| Potentially dilutive securities excluded from diluted earnings (loss) per common share because their effect is anti-dilutive | | 988 | | | 1,470 | | | 1,248 | | | 834 | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, | | Nine Months Ended
December 31, |
| (in thousands, except per share data) | | 2019 | | 2018 | | 2019 | | 2018 |
| Basic loss per common share: | | | | | | | | |
| Numerator: | | | | | | | | |
| Net loss | | $ | (78,483 | ) | | $ | (41,734 | ) | | $ | (149,264 | ) | | $ | (113,971 | ) |
| | | | | | | | | |
| Denominator: | | | | | | | | |
| Weighted average common shares, basic | | 39,784 |
| | 39,314 |
| | 39,535 |
| | 37,063 |
|
| Dilutive effect of employee equity incentive plans | | — |
| | — |
| | — |
| | — |
|
| Weighted average common shares-diluted | | 39,784 |
| | 39,314 |
| | 39,535 |
| | 37,063 |
|
| | | | | | | | | |
| Basic loss per common share | | $ | (1.97 | ) | | $ | (1.06 | ) | | $ | (3.78 | ) | | $ | (3.08 | ) |
| Diluted loss per common share | | $ | (1.97 | ) | | $ | (1.06 | ) | | $ | (3.78 | ) | | $ | (3.08 | ) |
| | | | | | | | | |
| Potentially dilutive securities excluded from diluted loss per common share because their effect is anti-dilutive | | 1,470 |
| | 952 |
| | 834 |
| | 456 |
|
17.16. REVENUE AND MAJOR CUSTOMERS
The Company designs, manufactures,builds, and markets collaboration solutions which combine legendary audio expertise and sells headsets for business and consumer applications. After the Acquisition, it also markets and sells voice,powerful video and content sharing UC&C solutions.
With respectconferencing capabilities to headsets, the Company makes products for use in officescreate endpoints that power meaningful human connections and contact centers, with mobile devices, cordless phones,provide solutions that make life easier when they work together and with computers and gaming consoles. Major headsetour partner's services.
The Company’s major product categories are Headsets, Video, Voice, and Services. Headsets include Enterprise Headsets, whichwired and wireless communication headsets; Voice includes cordedopen Session Initiation Protocol (“SIP”) and cordless communication headsets, audio processors,native ecosystem desktop phones as well as conference room phones; Video includes video conferencing solutions and telephone systems;peripherals, such as cameras, speakers, and Consumer Headsets, which includes Bluetoothmicrophones. The broad portfolio of Services include video interoperability, hardware and corded productssupport for mobileour solutions and hardware devices, as well as professional, hosted, and managed services that are grounded in our deep expertise aimed at helping customers achieve their goals for collaboration. The Company's cloud management and analytics software enables IT administrators to configure and update firmware, monitor device applications, personal computer,usage, troubleshoot, and gaming headsets. The Voice,gain a deep understanding of user behavior. All of the Company's solutions are designed to integrate seamlessly with the platform and services of our customers choice in a wide range of Unified Communications & Collaboration ("UC&C"), Unified Communication as a Service ("UCaaS"), and Video and Content Sharing Solutions include products like group series video and immersive telepresence systems, desktop voice and video devices, and universal collaboration servers.as a Service ("VaaS") environments.
Product revenue is largely comprised of sales of hardware devices, peripherals, and platform software licenses used in communication and collaboration in offices and contact centers, with mobile devices, cordless phones, and with computers and gaming consoles.computers. Services revenue primarily includes support on hardware devices, professional, hosted and managed services, and solutions to the Company's customers. Revenue in the first and second quarter of fiscal year 2021 from a certain product has been reclassified from the Voice product category into the Video product category as a result of a management decision to re-align its product categories.
The following table disaggregates revenues by major product category for the three and nine months ended December 31, 201926, 2020 and 2018:December 28, 2019:
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, | | Nine Months Ended
December 31, |
| (in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
| Net revenues from unaffiliated customers: | | | | | | | | |
| Enterprise Headsets | | $ | 126,155 |
| | $ | 173,479 |
| | $ | 464,172 |
| | $ | 511,099 |
|
| Consumer Headsets | | 41,125 |
| | 69,665 |
| | 128,050 |
| | 181,385 |
|
| Voice* | | 79,494 |
| | 116,700 |
| | 281,794 |
| | 238,009 |
|
| Video* | | 69,859 |
| | 85,597 |
| | 220,499 |
| | 171,519 |
|
| Services* | | 67,838 |
| | 56,228 |
| | 199,432 |
| | 104,035 |
|
| Total net revenues | | $ | 384,471 |
|
| $ | 501,669 |
| | $ | 1,293,947 |
|
| $ | 1,206,047 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| (in thousands) | | December 26, 2020 | | December 28, 2019 | | December 26, 2020 | | December 28, 2019 |
| Net revenues from unaffiliated customers: | | | | | | | | |
Headsets1 | | 240,908 | | | 167,280 | | | 618,498 | | | 592,222 | |
Voice2 | | 67,076 | | | 79,494 | | | 156,682 | | | 281,794 | |
Video2 | | 112,727 | | | 69,859 | | | 284,666 | | | 220,499 | |
Services2 | | 63,974 | | | 67,838 | | | 191,529 | | | 199,432 | |
| Total net revenues | | $ | 484,685 | | | $ | 384,471 | | | $ | 1,251,375 | | | $ | 1,293,947 | |
*1 As announced on February 4, 2020, the Company entered into a definitive agreement with Nacon S.A. and closed the transaction on March 19, 2020, completing the sale of the Company's Consumer Gaming assets for a net amount that is not material to the Company's condensed consolidated financial statements. The remaining consumer headsets are included in the Company's Enterprise products and all prior periods have been reclassified to conform to current presentation.
2Categories were introduced with the acquisition of Polycom on July 2, 2018, and amounts are presented net of purchase accounting adjustments. Refer to Note 3, Acquisition,
For reporting purposes, revenue is attributed to each geographic region based on the location of the customer. Other than the U.S., no country accounted for 10% or more of the Company's net revenues for the three and nine months ended December 31, 201926, 2020 and 2018.December 28, 2019. The following table presents net revenues by geography:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | | |
| (in thousands) | | December 26, 2020 | | December 28, 2019 | | December 26, 2020 | | December 28, 2019 | | | | | | | | |
| Products | | | | | | | | | | | | | | | | |
| Net revenues from unaffiliated customers: | | | | | | | | | | | | | | | | |
| U.S. | | $ | 169,812 | | | $ | 149,652 | | | $ | 473,633 | | | $ | 536,368 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Europe and Africa | | 164,896 | | | 88,356 | | | 357,389 | | | 301,134 | | | | | | | | | |
| Asia Pacific | | 57,481 | | | 54,920 | | | 155,460 | | | 180,993 | | | | | | | | | |
| Americas, excluding U.S. | | 28,522 | | | 23,705 | | | 73,364 | | | 76,020 | | | | | | | | | |
| Total international net revenues | | 250,899 | | | 166,981 | | | 586,213 | | | 558,147 | | | | | | | | | |
| Product net revenues | | $ | 420,711 | | | $ | 316,633 | | | $ | 1,059,846 | | | $ | 1,094,515 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Services | | | | | | | | | | | | | | | | |
| Net revenues from unaffiliated customers: | | | | | | | | | | | | | | | | |
| U.S. | | $ | 23,601 | | | $ | 26,204 | | | $ | 71,839 | | | $ | 77,442 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Europe and Africa | | 16,533 | | | 17,575 | | | 48,545 | | | 50,749 | | | | | | | | | |
| Asia Pacific | | 19,342 | | | 18,710 | | | 57,196 | | | 54,938 | | | | | | | | | |
| Americas, excluding U.S. | | 4,498 | | | 5,349 | | | 13,949 | | | 16,303 | | | | | | | | | |
| Total international net revenues | | 40,373 | | | 41,634 | | | 119,690 | | | 121,990 | | | | | | | | | |
| Service net revenues | | $ | 63,974 | | | $ | 67,838 | | | $ | 191,529 | | | $ | 199,432 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Total net revenues | | $ | 484,685 | | | $ | 384,471 | | | $ | 1,251,375 | | | $ | 1,293,947 | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, | | Nine Months Ended
December 31, |
| (in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
| Net revenues from unaffiliated customers: | | | | | | | | |
| U.S. | | $ | 175,856 |
| | $ | 223,111 |
| | $ | 613,810 |
| | $ | 570,726 |
|
| | | | | | | | | |
| Europe and Africa | | 105,931 |
| | 146,388 |
| | 351,883 |
| | 338,935 |
|
| Asia Pacific | | 73,630 |
| | 90,162 |
| | 235,931 |
| | 204,504 |
|
| Americas, excluding U.S. | | 29,054 |
| | 42,008 |
| | 92,323 |
| | 91,882 |
|
| Total international net revenues | | 208,615 |
| | 278,558 |
| | 680,137 |
|
| 635,321 |
|
| Total net revenues | | $ | 384,471 |
| | $ | 501,669 |
| | $ | 1,293,947 |
|
| $ | 1,206,047 |
|
NaN customers, Ingram Micro Group and ScanSource, accounted for 19.1% and 17.1%, respectively, of net revenues for the three months ended December 26, 2020. Ingram Micro Group and ScanSource, accounted for 12.6% and 10.5%, respectively, of net revenues for the nine months ended December 26, 2020. NaN customers, ScanSource and Ingram Micro Group, accounted for 19.2% and 12.7%, respectively, of net revenues for the three months ended December 31, 2019.28, 2019, respectively. ScanSource and Ingram Micro Group accounted for 19.5% and 15.7%, respectively, of net revenue for the nine months ended December 31,28, 2019.
NaN customers, ScanSource and Ingram Micro Group, accounted for 16.4% and 11.5% of net revenues for the three months ended December 31, 2018, respectively. NaN customers, ScanSource and Ingram Micro Group, accounted for 15.0% and 10.9% of net revenues for the nine months ended December 31, 2018, respectively.
NaN customers, ScanSource, Ingram Micro Group and Synnex GroupScanSource accounted for 24.8%, 14.7%,21.5% and 12.3%19.6%, respectively, of total net accounts receivable at December 31, 2019. 26, 2020. NaN customers, Ingram Micro Group, ScanSource, and D&H Distributors,Synnex Group, accounted for 21.3%22.2%, 19.2%17.3%, and 10.9%15.6%, respectively, of total net accounts receivable at March 31, 2019.28, 2020.
Revenue is recognized when obligations under the terms of a contract with the Company's customer are satisfied; generally, this occurs with the transfer of control of its products or services. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. The majority of the Company's business relates to physical product shipments, for which revenue is generally recognized once title and risk of loss of the product are transferred to the customer. The Company believes that transfer of title and risk of loss best represent the moment at which the customer’s ability to direct the use of and obtain substantially all the benefits of an asset have been achieved. The Company has elected to account for shipping and handling as fulfillment cost and recognize the related costs when control over products have transferred to the customer as an expense in Cost of Revenues.
The Company's service revenue is recognized either over-time or at a point-in-time depending on the nature of the offering. Revenues associated with non-cancelable maintenance and support contracts comprise approximately 90% of the Company's overall service revenue and are recognized ratably over the contract term, which typically ranges between one and three years. The Company believes this recognition period faithfully depicts the pattern of transfer of control for maintenance and support as the services are a series of distinct services available and delivered daily over the term. For certain products, support is provided free of charge without the purchase of a separate maintenance contract. If the support is determined to rise to the level of a performance obligation, the Company allocates a portion of the transaction price to the implied support obligation and recognizes service revenue over the estimated implied support period which can range between one month to several years, depending on the circumstances. Revenues associated with Professional Services are recognized when the Company has objectively determined that the obligation has been satisfied, which is usually upon customer acceptance.
The Company's contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. The Company allocates the transaction price of a contract, to each identified performance obligation based on stand-alone selling price (“SSP”). The Company determines if variable consideration is associated with one or many, but not all of the performance obligations and allocates accordingly. Judgment is also required to determine the SSP for each distinct performance obligation. The Company derives SSP for its performance obligations through a stratification methodology and considers a few characteristics including consideration related to different service types, customer and geography characteristics. In instances where SSP is not directly observable, such as when the Company does not sell the product or service separately, the Company determines the SSP using information that may include market conditions and other observable inputs.
On occasion, the Company will fulfill only part of a purchase order due to lack of current availability for one or more items requested on an order. Its practice is to ship what is on hand, with the remaining goods shipped once the product is in stock which isstock. Shipment generally occurs less than one year from the date of the order. Depending on the terms of the contract or operationally, undelivered or backordered items may be canceled by either party at their discretion.
As of December 31, 2019,26, 2020, the Company's deferred revenue balance was $202.7 million.$216.4 million. As of March 31, 2019,28, 2020, the Company's deferred revenue balance was $193.9$208.5 million. During the three months ended December 31, 2019,26, 2020, the Company recognized $50.7$50.9 million in revenues that were reflected in deferred revenue at the beginning of the period.
The table below represents aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) as of December 31, 2019:26, 2020:
| | | | | | | | | | | | | | | | | | | | |
| | December 26, 2020 |
| (in millions) | | Current | | Noncurrent | | Total |
| Performance obligations | | $ | 147.8 | | | $ | 69.5 | | | $ | 217.3 | |
|
| | | | | | | | | | | | |
| | | December 31, 2019 |
| (in millions) | | Current | | Noncurrent | | Total |
| Performance obligations | | $ | 145.9 |
| | $ | 62.8 |
| | $ | 208.7 |
|
Upon establishment of creditworthiness, the Company may extend credit terms to its customers which typically ranges between 30 and 90 days from the date of invoice depending on geographic region and type of customer. The Company typically bills upon product hardware shipment, at time of software activation, upon the start of service entitlement, or upon completion of services. Revenue may beis not generally recognized in advance of billings.billings. The balance of contract assets as of December 31, 201926, 2020 was $2.6$6.3 million. As of March 28, 2020, the Company's contract assets balance was $3.7 million. None of the Company's contracts are deemed to have significant financing components.
Sales, value add, and other taxes collected concurrent with revenue producing activities are excluded from revenue.
Commercial distributors and retailers represent the Company's largest sources of net revenues. Sales through its distribution and retail channels are made primarily under agreements allowing for rights of return and include various sales incentive programs, such as back end rebates, discounts, marketing development funds, price protection, and other sales incentives. The Company has an established sales history for these arrangements and the Company records the estimated reserves at the inception of the contract as a reflection of the reduced transaction price. Customer sales returns are estimated based on historical data, relevant current data, and the monitoring of inventory build-up in the distribution channel. Revenue reserves represent a reasonable estimation made by management and are subject to significant judgment. Estimated reserves may differ from actual returns or incentives provided, due to unforeseen customer return or claim patterns or changes in circumstances. For certain customer contracts which have historically demonstrated variability, the Company has considered the likelihood of being under-reserved and has considered a constraint accordingly. Provisions for Sales Returns are presented within accrued liabilities in the Company's condensed consolidated balance sheets. Provisions for promotions, rebates, and other sales incentives are presented as a reduction of accounts receivable unless there is no identifiable right offset, in which case they are presented within accrued liabilities on its condensed consolidated balance sheets. See Note 6,5, Details of Certain Balance Sheet Accounts above for additional details.
For certain arrangements, the Company pays commissions, bonuses and taxes associated with obtaining the contracts. The Company capitalizes such costs if they are deemed to be incremental and recoverable. The Company has elected to use the practical expedient to record the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. Determining the amortization period of costs related to obtaining a contract involves judgment. Capitalized commissions and related expenses, on hardware sales and services recognized at a point in time generally have an amortization period of less than one year. Maintenance-related performance obligations generally have an amortization period greater than one year when considering renewals. Capitalized commissions are amortized to Sales and Marketing Expense on a straight-line basis. The capitalized amount of incremental and recoverable costs of obtaining contracts with an amortization period of greater than one year are $6.8$4.8 million as of December 31, 2019.26, 2020. Amortization of capitalized contract costs for the three and nine months ended December 31,26, 2020 was immaterial and $1.6 million, respectively.
17. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
The Company's Chief Executive Officer is identified as its Chief Operating Decision Maker ("CODM"). The CODM has organized the Company, manages resource allocations and measures performance among its 2 operating segments — Products and Services.
The Products segment includes the Company's Headsets, Voice and Video product lines. The Services segment includes maintenance support on hardware devices as well as professional, managed and cloud services and solutions. In managing the 2 operating segments the CODM uses information about their revenue and gross margin after adjustments to exclude certain non-cash transactions and activities that are not reflective of the Company's ongoing or core operations as further described below. The CODM does not review asset information by segment.
Purchase accounting amortization: Represents the amortization of purchased intangible assets recorded in connection with the Acquisition of Polycom.
Deferred revenue purchase accounting: Represents the impact of fair value purchase accounting adjustments related to deferred revenue recorded in connection with the Acquisition of Polycom. The Company's deferred revenue primarily relates to Service revenue associated with non-cancelable maintenance support on hardware devices which are typically billed in advance and recognized ratably over the contract term as those services are delivered. This adjustment represents the amount of additional revenue that would have been recognized during the period absent the write-down to fair value required under purchase accounting guidelines.
Consumer optimization: Represents charges related to inventory reserves and supplier liabilities for excess and obsolete inventory incurred in connection with the Company's strategic action to optimize its Consumer product portfolio.
Integration and rebranding costs: Represents charges incurred in connection with the Acquisition and integration of Polycom such as system implementations, legal and accounting fees.
Stock compensation expense: Represents the non-cash expense associated with the Company's issuance of common stock and share-based awards to employees and non-employee directors.
The following table presents segments results for revenue and gross margin, as reviewed by the CODM, and their reconciliation to the Company's condensed consolidated GAAP results:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | |
| (in thousands) | | December 26, 2020 | | December 28, 2019 | | December 26, 2020 | | December 28, 2019 | | | |
| Segment revenues as reviewed by CODM | | | | | | | | | | | |
| Products | | $ | 420,976 | | | $ | 317,058 | | | $ | 1,060,733 | | | $ | 1,096,037 | | | | |
| Services | | 66,998 | | | 74,544 | | | 203,250 | | | 225,725 | | | | |
| Total segment revenues as reviewed by CODM | | $ | 487,974 | | | $ | 391,602 | | | $ | 1,263,983 | | | $ | 1,321,762 | | | | |
| | | | | | | | | | | |
| Segment gross profit as reviewed by CODM | | | | | | | | | | | |
| Products | | $ | 201,392 | | | $ | 138,909 | | | $ | 492,262 | | | $ | 543,706 | | | | |
| Services | | 45,812 | | | 54,421 | | | 138,329 | | | 152,785 | | | | |
| Total segment gross profit as reviewed by CODM | | $ | 247,204 | | | $ | 193,330 | | | $ | 630,591 | | | $ | 696,491 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | |
| (in thousands) | | December 26, 2020 | | December 28, 2019 | | December 26, 2020 | | December 28, 2019 | | | |
| Total segment revenues as reviewed by CODM | | $ | 487,974 | | | $ | 391,602 | | | $ | 1,263,983 | | | $ | 1,321,762 | | | | |
| Deferred revenue purchase accounting | | (3,289) | | | (7,131) | | | (12,608) | | | (27,815) | | | | |
| Consolidated GAAP net revenues | | $ | 484,685 | | | $ | 384,471 | | | $ | 1,251,375 | | | $ | 1,293,947 | | | | |
| | | | | | | | | | | |
Total segment gross profit as reviewed by CODM (1) | | $ | 247,204 | | | $ | 193,330 | | | $ | 630,591 | | | $ | 696,491 | | | | |
| Purchase accounting amortization | | (16,459) | | | (30,819) | | | (51,873) | | | (91,535) | | | | |
| Deferred revenue purchase accounting | | (3,289) | | | (7,131) | | | (12,608) | | | (27,815) | | | | |
| Consumer optimization | | 0 | | | (10,415) | | | 0 | | | (10,415) | | | | |
| Integration and rebranding costs | | 0 | | | (100) | | | 0 | | | (1,169) | | | | |
| Stock-based compensation | | (799) | | | (1,019) | | | (2,374) | | | (2,994) | | | | |
| Consolidated GAAP gross profit | | $ | 226,657 | | | $ | 143,846 | | | $ | 563,736 | | | $ | 562,563 | | | | |
(1) Includes depreciation expense of $3.7 million and $4.0 million for the three months ended December 26, 2020 and December 28, 2019, was immaterial.respectively. Includes depreciation expense of $10.7 million and $11.3 million for the nine months ended December 26, 2020 and December 28, 2019, respectively.
18. SUBSEQUENT EVENTS
DividendsNone.
On February 4, 2020, the Company announced that the Audit Committee had declared and approved the payment
Income Taxes
During the fiscal month January 2020, the Company transferred certain intangible assets among its wholly-owned subsidiaries to align the Company's structure to its evolving operations. The transfer will result in a step-up in tax basis of intellectual property rights and a substantial correlated increase in deferred tax assets.
Divestiture of Gaming product portfolio
On February 4, 2020, the Company announced that it signed a definitive agreement to sell our Consumer Gaming product portfolio. The transaction, which is expected to close in March of this year, is immaterial to our condensed consolidated financial statements.
Quantitative and Qualitative Disclosures About Market Risk
The discussion of our exposure to market risk related to changes in interest rates and foreign currency exchange rates 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 discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019,28, 2020, filed with the SEC on May 17, 2019,June 8, 2020, which could materially affect our business, financial position, or future results of operations.
Except as described below, there have been no material changes in our market risk as described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019.28, 2020.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily to our floating-rate interest payments under our $1.275 billion term loan facility. In connection with the Acquisition, we entered into a Credit Agreement with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto (the “Credit Agreement”). Borrowings under the Credit Agreement bear interest at a variable rate equal to (i) LIBOR plus a specified margin, or (ii) the base rate (which is the highest of (a) the prime rate publicly announced from time to time by Wells Fargo Bank, National Association, (b) the federal funds rate plus 0.50% or (c) the sum of 1% plus one-month LIBOR plus a specified margin.
On July 30, 2018, we entered into a 4-year amortizing interest rate swap agreement with Bank of America, NAN.A. as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates on the $1.275 billion term loan facility. As a matter of policy, we only enter into transactions that we believe will be highly effective at offsetting the underlying risk, and we do not use derivatives for trading or speculative purposes. Our objective is to mitigate the impact of interest expense fluctuations on our profitability related to interest rate changes by minimizing movements in future debt payments with this interest rate swap.
The swap has an initial notional amount of $831 million and matures on July 31, 2022. The swap involves the receipt of floating-rate interest payments for fixed interest rate payments over the life of the agreement. We have designated this interest rate swap as a cash flow hedge, the effective portion of changes in the fair value of the derivative is recorded to other comprehensive income (loss) on the accompanying balance sheets and reclassified into interest expense over the life of the agreement. We will review the effectiveness of this instrument on a quarterly basis, recognize current period hedge ineffectiveness immediately in earnings and will discontinue hedge accounting if we no longer consider hedging to be highly effective. For additional details, refer to Note 14,13, Derivatives, of the accompanying notes to condensed consolidated financial statements. During the nine months ended December 31, 2019,26, 2020, we made payments of approximately $2.6approximately $10.1 million on our interest rate swap and recognized $3.2$10.3 million within interest expense on the condensed consolidated statement of operations. As of December 31, 2019,26, 2020, we had an immaterial amount of$0.9 million of interest accrued within accrued liabilities on the condensed consolidated balance sheet. We had an unrealized pre-tax loss of approximately $12.9$13.1 million recorded within accumulated other comprehensive income (loss) as of December 31, 2019.26, 2020. A hypothetical 10% increase or decrease on market interest rates related to our outstanding term loan facility could result in a corresponding increase or decrease in annual interest expense of approximately $0.9$0.1 million.
Interest rates were relatively unchangedlower in the three and nine months ended December 31, 201926, 2020 compared to the same period in the prior year. In the three and nine months ended December 31,26, 2020 and December 28, 2019 and 2018 we generated interest income of $0.1$0.0 million and $0.3$0.2 million and $0.1 million and $0.6 million, and $2.2 million, respectively.
FOREIGN CURRENCY EXCHANGE RATE RISK
We are a net receiver of currencies other than the USD. Accordingly, changes in exchange rates, and in particular a strengthening of the USD, could negatively affect our net revenues and gross margins as expressed in USD. There is a risk that we will have to adjust local currency product pricing due to competitive pressures if there is significant volatility in foreign currency exchange rates.
The primary currency fluctuations to which we are exposed are the Euro ("EUR"), British Pound Sterling ("GBP"), Australian Dollar ("AUD"), Canadian Dollar ("CAD"), Mexican Peso ("MXN"), and the Chinese Renminbi ("RMB"). We use a hedging strategy to diminish, and make more predictable, the effect of currency fluctuations. All of our hedging activities are entered into with large financial institutions, which we periodically evaluate for credit risks. We hedge our balance sheet exposure by hedging EUR GBP, and AUDGBP denominated cash, accounts receivable, and accounts payable balances, and our economic exposure by hedging a portion of anticipated EUR and GBP denominated sales and our MXN denominated expenditures. We can provide no assurance that our strategy will be successful in the future or that exchange rate fluctuations will not materially adversely affect our business. We do not hold or issue derivative financial instruments for speculative trading purposes.
The impact of changes in foreign currency rates recognized in other income and (expense), net was immaterial in both the three and nine months ended December 31, 201926, 2020 and 2018.December 28, 2019. Although we hedge a portion of our foreign currency exchange exposure, the weakening of certain foreign currencies, particularly the EUR and GBP in comparison to the USD, could result in material foreign exchange losses in future periods.
Non-designated Hedges
We hedge our EUR GBP, and AUDGBP denominated cash, accounts receivable, and accounts payable balances by entering into foreign exchange forward contracts. The table below presents the impact on the foreign exchange gain (loss) of a hypothetical 10% appreciation and a 10% depreciation of the USD against the forward currency contracts as of December 31, 201926, 2020 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Currency - forward contracts | Position | | USD Value of Net Foreign Exchange Contracts | | Foreign Exchange Gain From 10% Appreciation of USD | | Foreign Exchange Loss From 10% Depreciation of USD |
| EUR | Sell EUR | | $ | 110.9 | | | $ | 11.1 | | | $ | (11.1) | |
| GBP | Sell GBP | | $ | 15.8 | | | $ | 1.6 | | | $ | (1.6) | |
| | | | | | | |
| | | | | | | |
Collectively, our swap contracts hedge against a portion of our forecasted MXN denominated expenditures. As of December 26, 2020, we had cross-currency swap contracts with notional amounts of approximately MXN 389.0 million.
The table below presents the impact on the valuation of our cross-currency swap contracts of a hypothetical 10% appreciation and a 10% depreciation of the USD as of December, 26, 2020 (in millions):
| | | | | | | | | | | | | | | | | | | | |
| Currency - cross-currency swap contracts | | USD Value of Cross-Currency Swap Contracts | | Foreign Exchange (Loss) From 10% Appreciation of USD | | Foreign Exchange Gain From 10% Depreciation of USD |
| Position: Buy MXN | | $ | 19.0 | | | $ | (1.9) | | | $ | 1.9 | |
|
| | | | | | | | | | | | | |
| Currency - forward contracts | Position | | USD Value of Net Foreign Exchange Contracts | | Foreign Exchange Gain From 10% Appreciation of USD | | Foreign Exchange Loss From 10% Depreciation of USD |
| EUR | Sell EUR | | $ | 61.1 |
| | $ | 6.1 |
| | $ | (6.1 | ) |
| GBP | Sell GBP | | $ | 29.8 |
| | $ | 3.0 |
| | $ | (3.0 | ) |
| AUD | Sell AUD | | $ | 3.1 |
| | $ | 0.3 |
| | $ | (0.3 | ) |
Cash Flow Hedges
In the nine months ended December 31, 2019,26, 2020, approximately 50% of our net revenues were derived from sales outside of the U.S. and denominated primarily in EUR and GBP.
As of December 31, 2019,26, 2020, we had foreign currency put and call option contracts with notional amounts of approximately €120.5€68.0 million and £40.6£13.0 million denominated in EUR and GBP, respectively. Collectively, our option contracts hedge against a portion of our forecasted foreign currency denominated sales. If the USD is subjected to either a 10% appreciation or 10% depreciation versus these net exposed currency positions, we could realize a gain of $9.7$4.0 million or incur a loss of $9.6 million, respectively.
$11.3 million, respectively.
The table below presents the impact on the Black-Scholes valuation of our currency option contracts of a hypothetical 10% appreciation and a 10% depreciation of the USD against the indicated open option contract type for cash flow hedges as of December 31, 2019 (in millions):
|
| | | | | | | | | | | | |
| Currency - option contracts | | USD Value of Net Foreign Exchange Contracts | | Foreign Exchange Gain From 10% Appreciation of USD | | Foreign Exchange Loss From 10% Depreciation of USD |
| Call options | | $ | 197.2 |
| | $ | 1.0 |
| | $ | (6.4 | ) |
| Put options | | $ | 182.6 |
| | $ | 9.5 |
| | $ | (4.1 | ) |
| Forwards | | $ | 55.2 |
| | $ | 5.5 |
| | $ | (5.5 | ) |
Collectively, our swap contracts hedge against a portion of our forecasted MXN denominated expenditures. As of December 31, 2019, we had cross-currency swap contracts with notional amounts of approximately MXN 10.6 million.
The table below presents the impact on the valuation of our cross-currency swap contracts of a hypothetical 10% appreciation and a 10% depreciation of the USD as of December 31, 201926, 2020 (in millions):
| | | | | | | | | | | | | | | | | | | | |
| Currency - option contracts | | USD Value of Net Foreign Exchange Contracts | | Foreign Exchange Gain From 10% Appreciation of USD | | Foreign Exchange Loss From 10% Depreciation of USD |
| Call options | | $ | 101.5 | | | $ | 2.0 | | | $ | (7.5) | |
| Put options | | $ | 94.0 | | | $ | 3.7 | | | $ | (0.3) | |
| Forwards | | $ | 89.5 | | | $ | 9.2 | | | $ | (9.2) | |
|
| | | | | | | | | |
| Currency - cross-currency swap contracts | USD Value of Cross-Currency Swap Contracts | Foreign Exchange (Loss) From 10% Appreciation of USD | Foreign Exchange Gain From 10% Depreciation of USD |
| Position: Buy MXN | $ | 0.5 |
| $ | (0.1 | ) | $ | 0.1 |
|
Controls and Procedures
| |
(a) | Evaluation of 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, the effectiveness of 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 are effective as of the end of the period covered by this report to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
| |
(b) | (b)Changes in internal control over financial reporting |
On July 2, 2018, the Company completed its acquisition of Polycom. The Company is in the process of integrating the historical control over financial reporting of Polycom with the consolidated Company. In addition, the Company implemented controls related to the adoption of ASU 2016-05,
Leases
(Topic 842) and the related financial statement reporting.
There have been no other changes in the Company’s internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
PART II -- OTHER INFORMATION
LEGAL PROCEEDINGS
We are presently engaged in various legal actions arising in the normal course of business. We believe that it is unlikely that any of these actions will have a material adverse impact on our operating results; however, because of the inherent uncertainties of litigation, the outcome of any of these actions could be unfavorable and could have a material adverse effect on our financial condition, results of operations or cash flows. For additional information about our material legal proceedings, please see Note 87, Commitments and Contingencies, of the accompanying notes to the condensed consolidated financial statements.
RISK FACTORS
You should carefully consider the risk factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019,28, 2020, filed with the SEC on May 17, 2019June 8, 2020 (the "Form 10-K"), each of which could materially affect our business, financial position, or future results of operations. Except as described below, there have been no material changes to the risk factors included in the Form 10-K.
The Company has credit agreements with debt covenants which must be adhered to.
The Credit Agreement contains certain covenants, some of which become more stringent over time. If cost reduction actions are not sufficient to generate adequate cash to pay down debt, the Company may not be able to meet the required covenants which could lead to the Company being in default of the Credit Agreement.
The Company has significant deferred tax assets the utilization of which depends on future taxable income.
If the Company is unable to generate sufficient future taxable income, a substantial valuation allowance to reduce its deferred tax assets may be required.
The risks described here and in the Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial position, or future results of operations.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents information with respect to repurchases of our common stock made by us during the third quarter of fiscal year 2020:2021:
|
| | | | | | | | | | |
| | Total Number of Shares Purchased 1 | | Average Price Paid per Share 2 | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 3 | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs 3 |
| September 29, 2019 to October 26, 2019 | 1,134 |
| | N/A | | — |
| | 1,369,014 |
|
| October 27, 2019 to November 23, 2019 | 3,504 |
| | N/A | | — |
| | 1,369,014 |
|
| November 24, 2019 to December 28, 2019 | 8,206 |
| | N/A | | — |
| | 1,369,014 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Total Number of Shares Purchased 1 | | Average Price Paid per Share 2 | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 1 | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs 3 |
| September 27, 2020 to October 24, 2020 | 433 | | 4 | N/A | | — | | | 1,369,014 | |
| October 25, 2020 to November 21, 2020 | 3,279 | | 4 | N/A | | — | | | 1,369,014 | |
| November 22, 2020 to December 26, 2020 | 2,502 | | 4 | N/A | | — | | | 1,369,014 | |
|
| | | | |
| 1 |
| RepresentsOn November 28, 2018, our Board of Directors approved a 1 million shares repurchase program expanding our capacity to repurchase shares to approximately 1.7 million shares. We may repurchase shares from time to time in
open market transactions or through privately negotiated transactions. There is no expiration date associated with the repurchase activity. |
| |
| 2 | | "Average Price Paid per Share" reflects open market repurchases of our common stock only. |
| |
| 3 | | These shares reflect the available shares authorized for repurchase under the expanded program approved by the Board on November 28, 2018. |
| |
| 4 | | Represents only shares that were tendered to us in satisfaction of employee tax withholding obligations upon the vesting of restricted stock issued pursuant to equity awardsgrants under our 2003 Stock Plan. |
| |
2 |
| "Average Price Paid per Share" reflects open market repurchases of common stock only. |
| |
3 |
| On November 28, 2018, our Board of Directors approved a 1 million share repurchase program expanding our capacity to repurchase shares under a previously approved share repurchase program to approximately 1.7 million shares. Although we may repurchase shares from time to time in open market transactions or through privately negotiated transactions, we did not repurchase any shares of our common stock under the repurchase program during the third quarter of fiscal year 2020. There is no expiration date associated with the repurchase activity under the existing repurchase program.plans. |
MINE SAFETY DISCLOSURES
Not applicable.
OTHER INFORMATION
None.
EXHIBITS
We have filed the following documents as Exhibits to this Form 10-Q:
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| Exhibit Number | | | | Incorporation by Reference | | Filed Herewith |
| Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | |
| | | | | | | | | | | | |
Exhibit Number31.1 | | | | Incorporation by Reference | | Filed Herewith |
| Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | |
| | | | | | | | | | | | |
10.1 | | | | | | | | | | | | X |
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10.2 | | | | | | | | | | | | X |
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10.3 | | | | | | | | | | | | X |
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31.1 | | | | | | | | | | | | X |
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| 31.2 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 32.1 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101.INS | | XBRL Instance Document - the XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101.DEF | | Inline XBRL Taxonomy Definition Linkbase Document | | | | | | | | | | X |
| | | | | | | | | | | | |
| 104 | | Cover Page Interactive Data File, (formatted as Inline XBRL and contained in Exhibit 101) | | | | | | | | | | X |
Plantronics, Inc.
FORM 10-Q
CROSS REFERENCE TABLE
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| PART I. FINANCIAL INFORMATION | | | |
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| PART II. OTHER INFORMATION | | | |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | PLANTRONICS, INC. |
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| Date: | February 5, 20204, 2021 | By: | /s/ Charles D. Boynton |
| | Name: | Charles D. Boynton |
| | Title: | Executive Vice President and Chief Financial Officer |
