The following discussion and analysis is intended to help you understand our results of operations and financial condition. It is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements. Please see the sections entitled "Certain Forward Looking Information" and "Risk Factors" above for discussions of the uncertainties, risks, and assumptions associated with these statements. Our fiscal year-end financial reporting periods end on the Saturday closest to
March 31st. Fiscal years 2014, 2013, and 2012 each had 52 weeks and ended on March 29, 2014, March 30, 2013, and March 31, 2012, respectively. For purposes of presentation, we have indicated our accounting fiscal year as ending on March 31. OVERVIEW We are a leading designer, manufacturer, and marketer of lightweight communications headsets, telephone headset systems, other communication endpoints, and accessories for the worldwide business and consumer markets under the Plantronics brand. In addition, under our Clarity brand we manufacture and market specialty telephone products, such as telephones for the hearing impaired, and other related products for people with special communication needs. Our priorities during fiscal year 2014 were to deliver profitable growth in Unified Communications("UC") and all other areas of our business, extend our brand, expand our consumer reach, scale for growth, and optimize our culture. To execute on the first two priorities, our operating plan for the fiscal year included significant new investments in our global sales force and research and development capabilities, which have largely occurred. To expand our consumer reach, our fiscal year 2014 product development roadmap included the launches of new products targeted toward the fastest-growing segments of the consumer headset market, such as the stereo headset market, as well as development efforts for additional new consumer products to be launched in fiscal year 2015 and beyond. We made major capital investments in our infrastructure to scale for growth with a new manufacturing facility in Tijuana, Mexicoand a reimplementation of our global ERP system. We also invested in our workspaces around the world to enable Smarter Working and promote innovation, productivity and employee well-being. Net revenues increased to $818.6 millionin fiscal year 2014, growing 7.4% over the prior year. UC product revenues increased, growing by 26.7% over the prior year to $165.8 million. We believe our innovation and breakthroughs in contextual intelligence and other product features and enhancements spurred this growth. Our increased investments in research and development versus a year ago yielded increased functionality for UC endpoints and successful launches of new consumer products in key markets. We also continued to invest in our global sales force in order to bring these and other products to the marketplace. Despite macroeconomic headwinds in some of our key markets, we achieved strong financial results, delivering $112.4 millionin net income, representing approximately 14% of our net revenues. We believe UC represents our key long-term driver of revenue and profit growth, and it continues to be our primary focus area. Business communications are being transformed from voice-centric systems supported by traditional PBX infrastructure to communication systems that are fully integrated with voice, video, and data and are supported by feature-rich UC software. With this transformation, the requirement for a traditional headset used only for voice communications continues to evolve into a device that delivers contextual intelligence, providing the ability to reach people using the mode of communication that is most effective, on the device that is most convenient, and with control over when and how they can be reached. Our portfolio of UC solutions combines hardware with advanced sensor technology and capitalizes on contextual intelligence, addressing the needs of the constantly changing business environments and evolving work styles to make connecting easier and by sharing presence information to convey user availability and other contextual information. We believe UC systems will become more commonly adopted by enterprises to reduce costs and improve collaboration, and we believe our solutions with Simply Smarter Communicationsฎ technology will be an important part of the UC environment. The contact center is the most mature market in which we participate, and we expect this market to grow slowly over the long-term. Given the migration to UC by corporations globally, we also expect the market for headsets for non-UC enterprise applications to grow very slowly, if at all. We believe the growth of UC will increase overall headset adoption in enterprise environments and we therefore expect most of the growth in Office and Contact Center ("OCC") over the next five years to come from headsets designed for UC. 27
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In fiscal year 2014, we built on the traction gained during fiscal year 2013 in our Bluetooth product portfolio, which included Voyager Legend and Marque in the mono Bluetooth category, and BackBeat GO 2 in the stereo Bluetooth category. These products led a strong performance across our Mobile Bluetooth portfolio in the year, allowing us to participate fully in market opportunities around the world. We believe we gained share in both stereo and mono Bluetooth categories during fiscal year 2014 and we anticipate that our planned investments in these categories will help position us to maintain or grow share as opportunities in these markets continue to expand. Integral to our core research and development in fiscal year 2014 were investments in firmware and software engineering to enhance the broad compatibility of our products in the enterprise systems with which they will be deployed, and development of value-added software applications for business users. We believe these investments in software development will help us to differentiate our products and maintain long-term gross margins within our business model. We continue to strengthen our strategic partnerships with
Unified Communicationsplatform suppliers to maintain compatibility of our products with all major platforms as UC usage becomes an essential part of a the enterprise communications landscape. Looking forward to fiscal year 2015, we continue to believe that UC is a key long-term driver of revenue and profit growth. We remain cautious about the macroeconomic environment but note the general improvement in the worldwide economy. We will continue to invest prudently in our long-term growth opportunities. We will continue focusing on innovative product development through our core research and development efforts. We will also continue to grow our sales force and increase marketing and other customer service and support as we expand key strategic partnerships to market our UC products. We believe we have an excellent position in the market and a well-deserved reputation for quality and service that we will continually strive to earn through ongoing investment and strong execution.
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, the consolidated statements of operations data. The financial information and the ensuing discussion should be read in conjunction with the accompanying consolidated financial statements and notes thereto.
(in thousands) Fiscal Year Ended March 31, 2014 2013 2012 Net revenues
$ 818,607100.0 % $ 762,226100.0 % $ 713,368100.0 % Cost of revenues 391,979 47.9 % 359,045 47.1 % 329,017 46.1 % Gross profit 426,628 52.1 % 403,181 52.9 % 384,351 53.9 % Operating expenses: Research, development and engineering 84,781 10.4 % 80,373 10.5 % 69,664 9.8 % Selling, general and administrative 201,176 24.6 % 182,445 23.9 % 173,334 24.3 % Restructuring and other related charges 547 0.1 % 2,266 0.3 % - - % Total operating expenses 286,504 35.0 % 265,084 34.8 % 242,998 34.1 % Operating income 140,124 17.1 % 138,097 18.1 % 141,353 19.8 % Interest and other income (expense), net 1,015 0.1 % 328 - % 1,249 0.2 % Income before income taxes 141,139 17.2 % 138,425 18.2 % 142,602 20.0 % Income tax expense 28,722 3.5 % 32,023 4.2 % 33,566 4.7 % Net income $ 112,41713.7 % $ 106,40214.0 % $ 109,03615.3 % 28
Table of Contents Net Revenues Fiscal Year Ended Fiscal Year Ended March 31, March 31, March 31, March 31, (in thousands) 2014 2013 Change 2013 2012 Change Net revenues: OCC
$ 588,265 $ 549,301 $ 38,9647.1 % $ 549,301 $ 531,709 $ 17,5923.3 % Mobile 186,206 163,460 22,746 13.9 % 163,460 131,825 31,635 24.0 % Gaming and Computer Audio 29,674 30,747 (1,073 ) (3.5 )% 30,747 31,855 (1,108 ) (3.5 )% Clarity 14,462 18,718 (4,256 ) (22.7 )% 18,718 17,979 739 4.1 % Total net revenues $ 818,607 $ 762,226 $ 56,3817.4 % $ 762,226 $ 713,368 $ 48,8586.8 % OCC products represent our largest source of revenues, while Mobile products represent our largest unit volumes. Net revenues may vary due to seasonality, the timing of new product introductions and discontinuation of existing products, discounts and other incentives, and channel mix. Net revenues derived from sales of consumer goods into the retail channel typically account for a seasonal increase in net revenues in the third quarter of our fiscal year. Our net revenues increased in fiscal year 2014 compared to fiscal year 2013 driven by growth in OCC revenues, which was mainly attributable to growth in demand for UC products, although our core OCC business also grew slightly. We also enjoyed substantial growth in Mobile product revenues as a result of our stronger portfolio of Mobile products, which drove strong double-digit growth in the Americas. A weaker U.S. Dollar ("USD") compared to the Euro ("EUR") and British Pound Sterling ("GBP") increased net revenues by approximately $2.3 millionin fiscal year 2014 compared to fiscal year 2013, net of the effects of hedging. Our net revenues increased in fiscal year 2013 compared to fiscal year 2012 driven by growth in Mobile product revenues as a result of our stronger portfolio of Mobile products and increased demand attributable to hands-free laws enacted in the People's Republic of China(PRC) during the fiscal year. OCC product revenues also increased, primarily as a result of growth in demand for UC. Unfavorable foreign exchange fluctuations in the EUR and GBP reduced net revenues by approximately $6.1 millionin fiscal year 2013 compared to fiscal year 2012, net of the effects of hedging.
Fiscal Year Ended Fiscal Year Ended
March 31, 2013 March 31, 2012 Change Net revenues: United States
$ 475,278 $ 436,447 $ 38,8318.9% $ 436,447 $ 406,233 $ 30,2147.4% As a percentage of net revenues 58.1 % 57.3 % 57.3 % 56.9 % Europe and Africa 195,385 181,439 13,946 7.7% 181,439 177,157 4,282 2.4% Asia Pacific 94,455 92,193 2,262 2.5% 92,193 78,853 13,340 16.9% Americas, excluding United States 53,489 52,147 1,342 2.6% 52,147 51,125 1,022 2.0% Total international net revenues 343,329 325,779 17,550 5.4% 325,779 307,135 18,644 6.1% As a percentage of net revenues 41.9 % 42.7 % 42.7 % 43.1 %
Total net revenues
As a percentage of total net revenues, U.S. net revenues increased slightly in fiscal year 2014 compared to fiscal year 2013, with international revenues, as a percentage of total net revenues, correspondingly decreasing. The increase in absolute dollars in U.S. net revenues resulted in roughly equal measure from increased OCC net revenues due to continued growth in demand for UC and increased Mobile revenues as a result of an improved product portfolio. The increase in absolute dollars in international revenues was also due almost entirely to increased OCC net revenues due to continued growth in demand for UC. A weaker US Dollar compared to the EUR and GBP resulted in increased international net revenues of approximately
$2.3 millionin fiscal year 2014 compared to fiscal year 2013, net of the effects of hedging. 29
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As a percentage of total net revenues, U.S. net revenues remained flat in fiscal year 2013 compared to fiscal year 2012. As a percentage of total net revenues, international net revenues also remained flat in fiscal year 2013 compared to fiscal year 2012. The increase in absolute dollars in U.S. net revenues resulted from increased OCC net revenues due to continued growth in demand for UC. The increase in absolute dollars in international revenues was due primarily to increased Mobile net revenues, driven mainly by increased demand attributable to hands-free laws enacted in the PRC during the fiscal year and to a lesser extent, the benefit of a stronger portfolio, especially in
Europeand Africa. International revenues were reduced by approximately $6.1 millionin fiscal year 2013 compared to fiscal year 2012, due to unfavorable foreign exchange fluctuations in the EUR and GBP, net of the effects of hedging.
Cost of Revenues and Gross Profit
Cost of revenues consists primarily of direct manufacturing and contract manufacturer costs, warranty expense, freight expense, depreciation, duty expense, reserves for excess and obsolete inventory, royalties, and an allocation of overhead expenses, including facilities, IT, and human resources costs.
Fiscal Year Ended Fiscal Year Ended
March 31, 2013 March 31, 2012 Change Net revenues
$ 818,607 $ 762,226 $ 56,3817.4 % $ 762,226 $ 713,368 $ 48,8586.8 % Cost of revenues 391,979 359,045 32,934 9.2 % 359,045 329,017 30,028 9.1 % Gross profit $ 426,628 $ 403,181 $ 23,4475.8 % $ 403,181 $ 384,351 $ 18,8304.9 % Gross profit % 52.1 % 52.9 % 52.9 % 53.9 % The increase in gross profit in fiscal year 2014 compared to fiscal year 2013 was due primarily to the increase in net revenues. As a percentage of net revenues, gross profit decreased primarily from our UC revenues growing faster than our overall OCC revenues. UC products carry lower margins than our other OCC products. Secondarily, revenues from Mobile products, which carry lower margins than our weighted average margin, grew faster than our overall revenues. The increase in gross profit in fiscal year 2013 compared to fiscal year 2012 was due primarily to the increase in net revenues. As a percentage of net revenues, gross profit decreased primarily from the effect of product mix being weighted more heavily to Mobile products, resulting from demand attributable to hands-free laws enacted in the PRC during the fiscal year and to a lesser extent, from the effect of a stronger U.S. dollar. There are significant variances in gross profit percentages between our higher and lower margin products; therefore, small variations in product mix, which can be difficult to predict, can have a significant impact on gross profit. In addition, if we do not accurately anticipate changes in demand, we have in the past, and may in the future, incur significant costs associated with writing off excess and obsolete inventory or incur charges for adverse purchase commitments. Gross profit may also vary based on distribution channel, return rates, and other factors.
Research, Development, and Engineering
Research, development, and engineering costs are expensed as incurred and consist primarily of compensation costs, outside services, including legal fees associated with protecting our intellectual property, expensed materials, depreciation, and an allocation of overhead expenses, including facilities, IT, and human resources costs. Fiscal Year Ended Fiscal Year Ended
March 31, 2013 March 31, 2012 Change Research, development and engineering
$ 84,781 $ 80,373 $ 4,4085.5 % $ 80,373 $ 69,664 $ 10,70915.4 % % of total net revenues 10.4 % 10.5 % 10.5 % 9.8 % 30
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The increase in research, development and engineering expenses in fiscal year 2014 compared to fiscal year 2013 was due primarily to
$4.0 millionin headcount-related costs, including increased salary expense, and performance-based compensation, including an increase to equity-based compensation resulting from restricted stock grants made after May 2013which vest over three years, compared to restricted stock granted prior to May 2013which vests over four years. The increase in research, development and engineering expenses in fiscal year 2013 compared to fiscal year 2012 was due primarily to $9.1 millionin headcount-related costs, including increased salary expense, higher levels of performance-based compensation related to stronger achievement against targets and, to a lesser extent, various other support costs related to higher headcount.
Selling, General, and Administrative
Selling, general, and administrative expense consists primarily of compensation costs, marketing costs, travel expenses, professional service fees, and allocations of overhead expenses, including IT, facilities, and human resources costs. Fiscal Year Ended Fiscal Year Ended
March 31, 2013 March 31, 2012 Change Selling, general and administrative
$ 201,176 $ 182,445 $ 18,73110.3 % $ 182,445 $ 173,334 $ 9,1115.3 % % of total net revenues 24.6 % 23.9 % 23.9 % 24.3 % The increase in selling, general and administrative expenses in fiscal year 2014 compared to fiscal year 2013 was due primarily to $12.7 millionin higher costs resulting from increased headcount, mainly resulting from our investment in Plantronics'global sales presence, and from higher performance-based compensation, including sales commissions, reflecting higher net revenues and higher overall achievement against targets. We also made investments in marketing programs of $4.6 million, including product launch activities and brand awareness campaigns. The increase in selling, general and administrative expenses in fiscal year 2013 compared to fiscal year 2012 was due primarily to $9.3 millionin higher compensation costs resulting from increased headcount, mainly resulting from our investment in Plantronics'global sales presence, and from higher performance-based compensation, including sales commissions, reflecting higher net revenues and higher overall achievement against targets. We also made investments in marketing programs of $3.7 million, including product launch activities and brand awareness campaigns.
Restructuring and Other Related Charges
Fiscal Year Ended Fiscal Year Ended (in thousands) March 31, 2014 March 31, 2013 Change March 31, 2013 March 31, 2012 Change Restructuring and other related charges
$ 547 $ 2,266 $ (1,719 )(75.9 )% $ 2,266$ - $ 2,266100.0 % % of total net revenues 0.1 % 0.3 % 0.3 % - % We initiated a restructuring plan during the third quarter of fiscal year 2013. Under the plan, we eliminated certain positions in the U.S., Mexico, China, and Europe, and transitioned some of these positions to lower cost locations. We also vacated a portion of a leased facility at our corporate headquarters in the first quarter of fiscal year 2014. We incurred total pre-tax charges of approximately $2.8 millionin connection with this plan. Going forward, savings from this plan will allow us to increase investments in areas that we believe will improve our business growth, particularly sales and marketing, by $4.0 millionannually. The pre-tax charges incurred during fiscal year 2013 included $1.9 millionfor severance and related benefits and an immaterial amount of accelerated amortization expense on leasehold improvement assets with no alternative future use. We recorded an immaterial amount for lease termination costs and the remaining accelerated depreciation on leasehold improvements when we exited the facility in the first quarter of fiscal year 2014. The plan was substantially complete by the end of the first quarter of fiscal year 2014. 31
Table of Contents Income Tax Expense Fiscal Year Ended Fiscal Year Ended (in thousands) March 31, 2014 March 31, 2013 Change March 31, 2013 March 31, 2012 Change Income before income taxes
$ 141,139 $ 138,425 $ 2,7142.0 % $ 138,425 $ 142,602 $ (4,177 )(2.9 )% Income tax expense 28,722 32,023 (3,301 ) (10.3 )% 32,023 33,566 (1,543 ) (4.6 )% Net income $ 112,417 $ 106,402 $ 6,0155.7 % $ 106,402 $ 109,036 $ (2,634 )(2.4 )% Effective tax rate 20.4 % 23.1 % 23.1 % 23.5 % In comparison to fiscal year 2013, the decrease in the effective tax rate for fiscal year 2014 was due primarily to changes in Mexican tax law that resulted in the reversal of a valuation allowance, a deduction for qualifying domestic production activities, and the generation of a foreign tax credit carryover, offset by a decrease in the benefit from the U.S. federal research tax credit. The U.S. federal research tax credit expired December 31, 2013and was therefore only available for three quarters in our fiscal year 2014, compared to fiscal year 2013, which included a full five quarters of benefit. Five quarters of benefit was recorded in fiscal year 2013 due to the timing of the retroactive reinstatement of the U.S. federal research tax credit. On January 2, 2013, the American Taxpayer Relief Act of 2012, which included a provision that retroactively extended the federal tax research credit to January 1, 2012for two years, was signed into law. We recognized an approximate $1.8 milliondiscrete tax benefit in the fourth quarter of fiscal year 2013 for the previously expired period from January 1, 2012to December 31, 2012. In comparison to fiscal year 2012, the decrease in the effective tax rate for fiscal year 2013, as described above, was due primarily to the increased benefit from the U.S. federal research tax credit in fiscal 2013 offset by a smaller proportion of income earned in foreign jurisdictions that is taxed at lower rates. Our effective tax rate for fiscal years 2014, 2013, and 2012 differs from the statutory rate due to the impact of foreign operations taxed at different statutory rates, income tax credits, state taxes, and other factors. Our future tax rate could be impacted by a shift in the mix of domestic and foreign income, tax treaties with foreign jurisdictions, changes in tax laws in the U.S. or internationally, or a change in estimate of future taxable income, which could result in a valuation allowance being required. We had $12.6 millionof unrecognized tax benefits as of March 31, 2014compared to $11.1 millionand $11.1 millionas of March 31, 2013and 2012, respectively. The unrecognized tax benefits as of the end of fiscal year 2014 would favorably impact the effective tax rate in future periods, if recognized. It is our continuing practice to recognize interest and/or penalties related to income tax matters in income tax expense. As of March 31, 2014, we had approximately $1.7 millionof accrued interest related to uncertain tax positions, compared to $2.0 millionand $1.7 millionas of March 31, 2013and 2012, respectively. No penalties have been accrued. The liability for uncertain tax positions may be reduced for liabilities that are settled with taxing authorities or on which the statute of limitations could expire without assessment from tax authorities. Currently, we cannot reasonably estimate the amount of reductions, if any, during the next twelve months. We and our subsidiaries are subject to taxation in various foreign and state jurisdictions, including the U.S. We are currently under examination by the Internal Revenue Service for our 2010 tax year. The California Franchise Tax Board completed its examination of our 2007 and 2008 tax years. We received a Notice of Proposed Assessment and responded by filing a protest letter. The amount of the proposed assessment is not material. Foreign income tax matters for material tax jurisdictions have been concluded for tax years prior to fiscal year 2007, except the United Kingdomfor which tax matters have been concluded for tax years prior to fiscal year 2013. 32
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The following table summarizes our cash flows from operating, investing, and financing activities for each of the past three fiscal years:
(in thousands) Fiscal Year Ended March 31, Change
Total cash provided by (used for): 2014 2013 2012
2014 vs. 2013 2013 vs. 2012 Operating activities
$ 141,491 $ 125,501 $ 140,448 $ 15,990 $ (14,947 )Investing activities (57,971 ) (58,928 ) (9,415 ) 957 (49,513 ) Financing activities (80,534 ) (46,463 ) (198,261 ) (34,071 ) 151,798 Effect of exchange rate changes on cash and cash equivalents 942 (669 ) (810 ) 1,611 141 Net increase (decrease) in cash and cash equivalents $ 3,928 $ 19,441 $ (68,038 )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 product shipments during the quarter, accounts receivable collections, inventory and supply chain management, and the timing and amount of tax and other payments.
Net cash provided by operating activities during the year ended
An increase in net income
An increase in non-cash adjustments to net income, primarily stock-based
compensation and reserve requirements for excess and obsolete inventories
A decrease in inventories resulting from higher shipments during the
period as compared to the same period in the prior year, which was driven
by increased sales, coupled with the depletion of last time buy inventories.
These increases were partially offset by a decrease in accounts payable resulting primarily from the timing of payments in fiscal year 2014 compared to fiscal year 2013.
Net cash provided by operating activities during the year ended
A decrease in net income
An increase in current accounts receivable related to higher net revenues
in the fourth quarter of fiscal year 2013 compared with the same prior year quarter
An increase in inventories related primarily to last-time buys from one of
our primary chip suppliers
These decreases were partially offset by an increase in accrued liabilities resulting primarily from higher accruals for performance-based compensation in fiscal year 2013 due to higher achievement against targets than in fiscal year 2012. Investing Activities Net cash used for investing activities during the year ended
March 31, 2014decreased from the year ended March 31, 2013due to a decrease in net cash used for purchases of investments, partially offset by an increase in capital expenditures related primarily to the purchase of a new manufacturing facility in Tijuana, Mexicoand costs incurred to commence implementation of a new enterprise resource planning ("ERP") system.
Net cash used for investing activities during the year ended
An increase in purchases of short- and long-term investments
An increase in capital expenditures related primarily to the purchase of a
new manufacturing facility in
Tijuana, Mexicoand costs incurred to commence implementation of a new ERP system
The acquisition of all the equity interests in
a product and design company specializing in wireless wearable products
and miniaturization technology 33
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We anticipate our capital expenditures in fiscal year 2015 to range from
$25.0 millionto $30.0 million, related to costs associated with the purchase and related construction of a new Smarter Working office at our European headquarters site in the Netherlandsas well as costs associated with building and leasehold improvements at our U.S. headquarters and our facility in Mexico. In addition, we will continue to incur costs related to the implementation of a new ERP system, which we expect to place in service in the first quarter of our fiscal year 2015, and other IT-related expenditures. The remainder of the anticipated capital expenditures for fiscal year 2015 consists primarily of capital investment in our manufacturing capabilities, including tooling for new products. We will continue to evaluate new business opportunities and new markets; as a result, our future growth within the existing business or new opportunities and markets may dictate the need for additional facilities and capital expenditures to support that growth.
Net cash used for financing activities during the year ended
An increase in the level of common stock repurchases
A net decrease in proceeds from issuances of stock under equity plans
This increase was partially offset by a decrease in repayments on our revolving line of credit, which we paid off in full in the fourth quarter of fiscal year 2013. Net cash used for financing activities during the year ended
March 31, 2013decreased from the year ended March 31, 2012due to a decrease in the level of common stock repurchases, driven by our participation in accelerated share repurchase ("ASR") agreements in fiscal year 2012 that did not recur in fiscal year 2013. This decrease was partially offset by the following:
An increase in net cash used to repay all outstanding amounts due under
our revolving line of credit
A decrease in proceeds from employees' exercise of stock options
An increase in cash dividend payments, resulting from the doubling of our
per share cash dividend amounts over prior years
April 29, 2014, we announced that our Audit Committee had declared a cash dividend of $0.15per share of our common stock, payable on June 10, 2014to stockholders of record at the close of business on May 20, 2014. This represents a 50% increase of the per share cash dividend amount in comparison to historical levels. We expect to continue paying a quarterly dividend of $0.15per share of our common stock; however, the actual declaration of dividends and the establishment of record and payment dates are subject to final determination by the Audit Committee of the Board each quarter after its review of our financial performance and financial position.
Liquidity and Capital Resources
Our primary discretionary cash uses have historically been for repurchases of our common stock. At
March 31, 2014, we had working capital of $458.7 million, including $335.4 millionof cash, cash equivalents, and short-term investments, compared to working capital of $463.0 million, including $345.4 millionof cash, cash equivalents, and short-term investments at March 31, 2013. The decrease in working capital at March 31, 2014compared to March 31, 2013results from the decrease in inventory due primarily to a higher inventory turns as well as a decrease in short-term investments due to a shift to increased purchases of long-term investments during the fiscal year ended March 31, 2014. Our cash and cash equivalents as of March 31, 2014consist of Mutual Funds and 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 March 31, 2014, of our $335.4 millionof cash, cash equivalents, and short-term investments, $17.3 millionis held domestically while $318.2 millionis held by foreign subsidiaries. The costs to repatriate our foreign earnings to the U.S. would likely be material; however, our intent is to permanently reinvest our earnings from foreign operations, and our current plans do not require us to repatriate them to fund our U.S. operations as we generate sufficient domestic operating cash flow and have access to external funding under our current revolving line of credit.
Our investments are intended to establish a high-quality portfolio that preserves principal and meets liquidity needs. As of
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From time to time, our Board authorizes programs under which we may repurchase shares of our common stock, depending on market conditions, in the open market or through privately negotiated transactions, including ASR agreements. The following table summarizes our repurchase of common stock as part of these publicly announced repurchase programs as well as share withheld in satisfaction of employee tax withholding obligations upon the vesting of restricted stock granted under our stock plans: (in millions except share data) Fiscal Year Ended March 31, 2014 2013 2012 Repurchase of common stock: Shares 1,949,407 751,706 8,027,287 Cost
$ 85.7 $ 23.9 $ 273.8Employees' tax withheld and paid for restricted stock and restricted stock units: Shares 138,022 93,206 74,732 Cost $ 6.2 $ 3.0 $ 2.6As of March 31, 2014, there were a total of 932,500 remaining shares authorized for repurchase, all of which are under our program approved by the Board of Directors on February 20, 2014. Refer to Note 10, Common Stock Repurchases, of our Notes to Consolidated Financial Statements in this Form 10-K for more information regarding our stock repurchase programs. We had no retirements of treasury stock in fiscal year 2014. On January 2, 2013and December 28, 2011we retired 5,398,376 and 5,000,000 shares of treasury stock, respectively, which were returned to the status of authorized but unissued shares. These were non-cash equity transactions under which the cost of the reacquired shares was recorded as a reduction to both retained earnings and treasury stock. In May 2011, we entered into a Credit Agreement with Wells Fargo Bank, National Association("the Bank"), as most recently amended in January 2014to extend its term to May 2017(as amended, "the Credit Agreement"). The Credit Agreement provides for a $100.0 millionunsecured revolving line of credit ("the line of credit") to augment our financial flexibility and, if requested by us, the Bank may increase its commitment thereunder by up to $100.0 million, for a total facility of up to $200.0 million. Any outstanding principal, together with accrued and unpaid interest, is due on the amended maturity date of May 9, 2017and our obligations under the Credit Agreement are guaranteed by our domestic subsidiaries, subject to certain exceptions. As of March 31, 2014, we had no outstanding borrowings under the line of credit. Loans under the Credit Agreement bear interest at our election (1) at the Bank's announced prime rate less 1.50% per annum, (2) at a daily one month LIBORrate plus 1.10% per annum, or (3) at an adjusted LIBORrate, for a term of one, three or six months, plus 1.10% per annum. The line of credit requires us to comply with the following two financial covenant ratios, in each case at each fiscal quarter end and determined on a rolling four-quarter basis: Maximum ratio of funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA")
Minimum EBITDA coverage ratio, which is calculated as interest payments
divided by EBITDA
We were in compliance with these financial covenant ratios as of
In addition, we and our subsidiaries are required to maintain, on a consolidated basis, unrestricted cash, cash equivalents, and marketable securities plus availability under the Credit Agreement at the end of each fiscal quarter of at least
$200.0 million. The line of credit contains affirmative covenants, including covenants regarding the payment of taxes and other liabilities, maintenance of insurance, reporting requirements, and compliance with applicable laws and regulations. The line of credit also contains negative covenants, among other things, limiting our ability to incur debt, make capital expenditures, grant liens, make acquisitions, and make investments. The events of default under the line of credit include payment defaults, cross defaults with certain other indebtedness, breaches of covenants, judgment defaults, and bankruptcy and insolvency events involving us or any of our subsidiaries. As of March 31, 2014, we were in compliance with all covenants under the line of credit. Our liquidity, capital resources, and results of operations in any period could be affected by repurchases of our common stock, the exercise of outstanding stock options, restricted stock grants under stock plans, and the issuance of common stock under our employee stock purchase plan ("ESPP"). We receive cash from the exercise of outstanding stock options 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, or expire unexercised. 35
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Based on past performance and current expectations, 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 will be sufficient to support business operations, capital expenditures, contractual obligations, and other liquidity requirements associated with our operations for at least the next twelve months. However, any projections of future financial needs and sources of working capital are subject to uncertainty.
See "CertainForward-Looking Information" and "Risk Factors" in this Annual Report on Form 10-K for factors that 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. 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 the Company 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
March 31, 2014and 2013, we had off-balance sheet consigned inventories of $40.0 millionand $31.3 million, respectively.
The following table summarizes our future contractual obligations as of
Payments Due by Period Less than 1 More than 5 (in thousands) Total year 1-3 years 4-5 years years Operating leases
$ 7,585 $ 3,193 $ 2,483 $ 1,069$ 840 Unconditional purchase obligations 163,868 163,586 282 - -
Total contractual cash obligations
We lease certain facilities under operating leases expiring through our fiscal year 2023. Certain of these leases provide for renewal options for periods ranging from one to three years and in the normal course of business, we exercise the renewal options.
Unconditional Purchase Obligations
We utilize several contract manufacturers to manufacture raw materials, components, and subassemblies for our products. We provide these contract manufacturers with demand information that typically covers periods up to 13 weeks, and they 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 through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. As of
March 31, 2014, we had outstanding off-balance sheet third-party manufacturing commitments and component purchase commitments of $163.9 million, all of which we expect to consume in the normal course of business. Unrecognized Tax Benefits
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CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in
the United States of America("U.S. GAAP"). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, future expectations and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On an ongoing basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with U.S. GAAP. Because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. Our significant accounting policies are discussed in Note 2, Significant Accounting Policies, of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K. We believe the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective, or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. We have reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.
Revenue Recognition and Related Allowances
Product Warranty Obligations
Revenue Recognition and Related Allowances
We sell substantially all of our products to end users through distributors, retailers, carriers, and original equipment manufacturers ("OEMs"). Commercial distributors and retailers represent our largest sources of net revenues. Sales through our distribution and retail channels are made primarily under agreements allowing for rights of return and include various sales incentive programs, such as rebates, advertising, price protection, and other sales incentives. We have an established sales history for these arrangements and we record the estimated reserves and allowances at the time the related revenue is recognized. Customer sales returns are estimated based on historical data, relevant current data, and the monitoring of inventory build-up in the distribution channel. The primary factors affecting our reserve for estimated customer sales returns include the general timing of historical returns and estimated return rates. The allowance for sales incentive programs is based on historical experience and contractual terms in the form of payments or sell-through credits. Future market conditions and product transitions may require us to take actions to increase customer incentive offerings, possibly resulting in an incremental reduction of revenue at the time the incentive is offered. Additionally, certain incentive programs require us to estimate, based on historical experience, the specific terms and conditions of the incentive and the estimated number of customers that will actually redeem the incentive. We have not made any material changes in the accounting methodology we use to measure sales return reserves or incentive allowances during the past three fiscal years. Substantially all credits associated with these activities are processed within the following fiscal year, and therefore, do not require subjective long-term estimates; however, if actual results are not consistent with the assumptions and estimates used, we may be exposed to losses or gains that could be material. If we increased our estimate as of
March 31, 2014by a hypothetical 10%, our sales returns reserve and sales incentive allowance would have increased by approximately $0.6 millionand $1.5 million, respectively. Net of the estimated value of the inventory that would be returned, this would have decreased gross profit and net income by approximately $2.0 millionand $1.6 million, respectively. When a sales arrangement contains multiple elements, such as hardware and software products and/or services, we allocate revenue to each element based on relative selling prices. The selling price for a deliverable is based on its vendor specific objective evidence ("VSOE"), if available, third party evidence ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available. In multiple element arrangements where more-than-incidental software deliverables are included, we allocate revenue to each separate unit of accounting for each of the non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. Revenue recognized for the software portion of multiple element arrangements was less than 1% of total net revenues for the years ended March 31, 2014and 2013. As of March 31, 2014and 2013, total deferred revenue related to the software portion of multiple-element arrangements was $3.0 millionand $3.1 million, respectively. 37
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Inventories are valued at the lower of cost or market. The Company writes down inventories that have become obsolete or are in excess of anticipated demand or net realizable value. Our estimate of write downs for excess and obsolete inventory is based on a detailed analysis of on-hand inventory and purchase commitments in excess of forecasted demand. Our products require long-lead time parts available from a limited number of vendors and, occasionally, last-time buys of raw materials for products with long lifecycles. The effects of demand variability, long-lead times, and last-time buys have historically contributed to inventory write-downs. Our demand forecast considers projected future shipments, market conditions, inventory on hand, purchase commitments, product development plans and product life cycle, inventory on consignment, and other competitive factors. Refer to "Off Balance Sheet Arrangements" in this Annual Report on Form 10-K for additional details regarding consigned inventories. We have not made any material changes in the accounting methodology we use to estimate our inventory write-downs or adverse purchase commitments during the past three fiscal years. If the demand or market conditions for our products are less favorable than forecasted or if unforeseen technological changes negatively impact the utility of our inventory, we may be required to record additional inventory write-downs or adverse purchase commitments, which would negatively affect our results of operations in the period the write-downs or adverse purchase commitments were recorded. If we increased our inventory reserve and adverse purchase commitment reserve estimates as of
March 31, 2014by a hypothetical 10%, the reserves and cost of revenues would have each increased by approximately $0.7 millionand our net income would have been reduced by approximately $0.6 million.
Product Warranty Obligations
The Company records a liability for the estimated costs of warranties at the time the related revenue is recognized. Factors that affect the warranty obligation include product failure rates, estimated return rates, material usage, and service related costs incurred in correcting product failures. If actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. If we increased our warranty obligation estimate as of
March 31, 2014by a hypothetical 10%, our obligation and the associated cost of revenues would have each increased by approximately $0.8 millionand our net income would have been reduced by approximately $0.6 million. Income Taxes We are subject to income taxes in the U.S. and foreign jurisdictions and our income tax returns are periodically audited by domestic and foreign tax authorities. These audits may include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years may be subject to audit by various tax authorities. In evaluating the exposures associated with our various tax filing positions, we record a liability for such exposures. A number of years may elapse before a particular matter for which we have established a liability is audited and fully resolved or clarified. We recognize the impact of an uncertain income tax position on income tax expense at the largest amount that is more-likely-than-not to be sustained. An unrecognized tax benefit will not be recognized unless it has a greater than 50% likelihood of being sustained. We adjust our tax liability for unrecognized tax benefits in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position, or when more information becomes available. We recognize interest and penalties related to income tax matters as part of our provision for income taxes. Our liability for unrecognized tax benefits contains uncertainties because management is required to make assumptions and apply judgment to estimate the exposures associated with our various filing positions. Our effective income tax rate is also affected by changes in tax law, the level of earnings and the results of tax audits. Our provision for income taxes does not include provisions for U.S. income taxes and foreign withholding taxes associated with the repatriation of undistributed earnings of certain foreign operations that we intend to reinvest indefinitely in the foreign operations. If these earnings were distributed to the U.S. in the form of dividends or otherwise, we would be subject to additional U.S. income taxes, subject to an adjustment for foreign tax credits, and foreign withholding taxes. Our current plans do not require repatriation of earnings from foreign operations to fund the U.S. operations because we generate sufficient domestic operating cash flow and have access to external funding under our line of credit. As a result, we do not expect a material impact on our business or financial flexibility with respect to undistributed earnings of our foreign operations.
Although we believe that our judgments and estimates are reasonable, actual results could differ and we may be exposed to losses or gains that could be material.
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To the extent we prevail in matters for which a liability has been established, or are required to pay amounts in excess of our established liability, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would generally require use of our cash and may result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would be recognized as a reduction in our effective income tax rate in the period of resolution.
RECENT ACCOUNTING PRONOUNCEMENTS
Recently Issued Pronouncements
July 2013, the Financial Accounting Standards Board("FASB") issued additional guidance regarding the presentation of unrecognized tax benefits. The guidance requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset if a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is available. This guidance is effective for fiscal years and interim periods beginning after December 15, 2013. The adoption is not expected to have a material impact on our results of operations or financial position.