UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 28, 2015April 2, 2016
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to _____________
Commission file number: 1-12696
Plantronics, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 77-0207692 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
| 345 Encinal Street, Santa Cruz, California | 95060 | |
| (Address of principal executive offices) | (Zip Code) | |
(831) 426-5858
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| COMMON STOCK, $0.01 PAR VALUE | NEW YORK STOCK EXCHANGE | |
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes S No £
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes £ No S
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 S No £
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes S No £
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. £
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).
Large Accelerated Filer S | Accelerated Filer £ |
Non-accelerated Filer £ (Do not check if a smaller reporting company) | Smaller Reporting Company £ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes £ No S
The aggregate market value of the common stock held by non-affiliates of the Registrant, based upon the closing price of $48.56$51.16 for shares of the Registrant's common stock on September 26, 2014,25, 2015, the last trading day of the Registrant’s most recently completed second fiscal quarter as reported by the New York Stock Exchange, was approximately $2,065,319,200.$1,704,421,100. In calculating such aggregate market value, shares of common stock owned of record or beneficially by officers, directors, and persons known to the Registrant to own more than five percent of the Registrant's voting securities as of September 26, 201425, 2015 (other than such persons of whom the Registrant became aware only through the filing of a Schedule 13G filed with the Securities and Exchange Commission) were excluded because such persons may be deemed to be affiliates. This determination of affiliate status is for purposes of this calculation only and is not conclusive.
As of May 14, 2015, 39,164,45412, 2016, 33,227,110 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 20152016 Annual Meeting of Stockholders to be held on or about July 30, 2015August 4, 2016 are incorporated by reference into Part III of this Form 10-K. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended March 28, 2015.April 2, 2016.
Plantronics, Inc.
FORM 10-K
For the Year Ended March 31, 20152016
TABLE OF CONTENTS
| Part I. | Page | ||
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| Item 1A. | |||
| Item 1B. | |||
| Item 2. | |||
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| Item 4. | |||
| Part II. | |||
| Item 5. | |||
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| Item 7. | |||
| Item 7A. | |||
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| Item 9. | |||
| Item 9A. | |||
| Item 9B. | |||
| Part III. | |||
| Item 10. | |||
| Item 11. | |||
| Item 12. | |||
| Item 13. | |||
| Item 14. | |||
| Part IV. | |||
| Item 15. | |||
Plantronics®, Clarity®, and Simply Smarter Communications® are trademarks or registered trademarks of Plantronics, Inc.
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
This Form 10-K is filed with respect to our fiscal year 2015.2016. Each of our fiscal years ends on the Saturday closest to the last day of March. Fiscal year 20152016 had 53 weeks and ended on April 2, 2016, fiscal years 2015 and 2014 each had 52 weeks and ended on March 28, 2015,, fiscal year 2014 ended on and March 29, 2014,, and fiscal year 2013 ended on March 30, 2013. Fiscal years 2015, 2014, and 2013 each consisted of 52 weeks. respectively. For purposes of consistent presentation, we have indicated in this report that each fiscal year ended "March 31" of the given year, even though the actual fiscal year end may have been on a different date.
CERTAIN FORWARD-LOOKING INFORMATION
This Form 10-K 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 (the “Exchange Act”). These statements may generally be identified by the use of such words as "expect," "anticipate," "believe," "intend," "predict," "project," or "will," or variations of such words and similar expressions are based on current expectations and entail various risks and uncertainties. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of a number of factors, including, but not limited to, the factors discussed in the subsection entitled "Risk Factors" in Item 1A of this Form 10-K. This Form 10-K should be read in conjunction with these risk factors. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.otherwise, except as required by applicable law.
ITEM 1. BUSINESS
COMPANY BACKGROUND
Plantronics, Inc. (“Plantronics,” “Company,” “we,” “our,” or “us”) is a leading global designer, manufacturer, and marketer of lightweight communications headsets, telephone headset systems, other communication endpoints, and accessories for the business and consumer markets under the Plantronics brand. We operate our business as one segment.
Our headsets are communications tools providing a hands-free connection to communication or entertainment devices, while also allowing freedom of movement for our users. We use a variety of technologies to develop high quality products that meet the needs of our customers, whether for communications or personal entertainment. Our headsets are widely used for applications such as Unified Communications (“UC”), in contact centers, in the office and in the home, with mobile phonesdevices and Internet telephony, for gaming, and for other specialty applications. Our major product categories include Enterprise, which includes corded and cordless communication headsets, audio processors, and telephone systems; and Consumer, which includes Bluetooth® and corded products for mobile phonedevice applications, personal computer ("PC") and gaming headsets, and specialty products marketed for hearing impaired individuals. Our products are sold under the Plantronics andindividuals (through our Clarity brands.brand).
We ship our products to approximately 80 countries through a network of distributors, retailers, wireless carriers, original equipment manufacturers (“OEMs”), and telephony and other service providers. We have well-developed distribution channels in North America, Europe, and in some parts of the Asia Pacific region where use of our products is widespread. Our distribution channels in other geographic regions are less mature, and while we primarily serve the Enterprise markets in those regions, we continue to expand into mobile, gaming and computer audio, and specialty telephone categories in those regions and other international locations. While not always the case, revenues from our Consumer category are typically seasonal, with the December quarter (our third fiscal quarter) typically being the strongest.
Plantronics was founded and incorporated in 1961 and most recently became a public company in 1994. Plantronics is incorporated in the State of Delaware and is listed on the New York Stock Exchange ("NYSE") under the ticker symbol "PLT".
Our principal executive offices are located at 345 Encinal Street, Santa Cruz, California, 95060. Our telephone number is (831) 426-5858. Our Company website is www.plantronics.com.
In the Investor Relations section of our website, we provide access free of charge, directly or through a link on our website, shortly after they are electronically filed with or furnished to the Securities and Exchange Commission, to the following filings: our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. In addition, documents regarding our corporate governance and the charters of the standing committees of our Board of Directors are also accessible in the Investor Relations section of our website.
MARKET INFORMATION
General Industry Background
Plantronics operates predominantly in the electronics industry and focuses on the design, manufacture, and distribution of headsets for business and consumer applications, and other specialty products for the hearing impaired. We develop enhanced communication products for offices and contact centers, mobile anddevices, cordless phones, and computers and gaming consoles. We offer our products under two brands – Plantronics and Clarity.
The proliferation of voice communications applications across much of people's daily lives make communications headsets a key driver of efficiency, ergonomic comfort, and safety for our users. The increased adoption of new and existing technologies, such as UC, Bluetooth,, Voice over Internet Protocol ("VoIP"), Digital Signal Processing ("DSP"), and Digital Enhanced Cordless Telecommunications (“DECT™”), each of which is described below, has contributed to increased demand for our headsets and audio solutions:
UC is the integration of voice, data, and video-based communications systems enhanced with software applications and IP networks. It may include the integration of devices and media associated with a variety of business workflows and applications, including e-mail, instant messaging, presence, audio, video conferencing, and unified messaging. UC seeks to provide seamless connectivity and user experience for enterprise workers regardless of their location and environment, improving overall business efficiency and providing more effective collaboration among an increasingly distributed workforce.
Bluetooth wireless technology is a short-range communications protocol intended to replace the cables connecting portable and/or fixed devices while maintaining high levels of security. The key features of Bluetooth technology are ubiquity, low power, and low cost. The Bluetooth specification defines a uniform structure for a wide range of devices to connect and communicate with each other. Bluetooth standard has achieved global acceptance such that any Bluetooth enabled device, almost anywhere in the world, can connect to other Bluetooth enabled devices in proximity.
VoIP is a technology that allows a person to communicate using a broadband Internet connection instead of a regular (or analog) telephone line. VoIP converts the voice signal into a digital signal that travels over the Internet or other packet-switched networks and then converts it back at the other end so that the caller can speak to anyone with another VoIP connection or a regular (or analog) phone line.
DSP is a technology that delivers acoustic protection and optimal sound quality through noise reduction, echo cancellation, and other algorithms to improve both transmit and receive quality.
DECT is a wireless communications technology that optimizes audio quality, lowers interference with other wireless devices, and is digitally encrypted for heightened call security.
Solutions
UC solutions continue to represent our primary focus area. Our portfolio of solutions, which combines hardware with highly innovative sensor technology and software functionality, provides 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. For example, the advanced sensor technology in our UC solutions can detect a user's presence, including proximity to the user's PC and whether the headset is being worn, and can share this information with others to make them aware of the user's presence and availability. Using this same technology, our solutions can automatically pause audio applications during an incoming call, change the default audio selection to the user's headset, and then answer the call; all of this is achieved without manual intervention. Finally, our solutions allow users to transition calls seamlessly between PCs, smartphones, tablets, and desk phones, without interruption in the conversation or loss in audio quality. We believe we are early in the UC solutions market adoption cycle and that UC systems will become more commonly adopted by enterprises to reduce costs and improve collaboration. We believe our solutions will be an important part of the UC environment through the offering of contextual intelligence.
Our products enhance communications by providing the following benefits:
Sensor technology that allows calls to be answered automatically when the user attaches the headset, switches the audio from the headset to the mobile phonedevice when the user removes the headset and, with some softphone applications, updates the user's presence
Smarter Working capability through seamless communications and high quality audio across a mobile device, desk phone, and PC, thereby allowing users to communicate more flexibly from a wide array of physical locations and be more productive when away from a traditional office environment
A convenient means for connecting between various applications and voice networks, whether between land lines and mobile phones,devices, or between PC-based communications and other networks
Better sound quality that provides clearer conversations on both ends of a call through a variety of features and technologies, including noise-canceling microphones, DSP, and more
Wireless freedom, allowing people to take and make calls as they move freely without cords or cables around their office or home, or easily from public to private space when privacy is required
Multi-tasking benefits that allow people to use computers and mobile devices, including smartphones or other devices, while talking hands-free
UC integration of telephony, mobile technologies, cloud-based communications, and PC applications, and by providing greater privacy than traditional speakerphones
Generating analytics related to headset usage, communications quality and other similar data our customers desire
Compliance with hands-free legislation and enhanced roadway safety by allowing users to have both hands free to drive while talking on a mobile phone
Voice command and control that allow people to take advantage of voice dialing and/or other voice-based features to make communications and the human/electronic interface more natural and convenient
Product Categories
Our products are designed to meet the needs of offices (ranging from enterprise to home offices), contact centers, mobile devices (such as mobile phones, smartphones, and smartphones)tablets), computer and gaming, residential, and other specialty applications. These applications are increasingly overlapping as work styles and lifestyles change, and people use devices for multiple functions such as communication, music, and video entertainment. We serve these markets through our product categories listed below.
Enterprise
The Enterprise market comprises our largest revenue stream and we believe it also represents our largest revenue and profit growth opportunity. We offer a broad range of communications headsets, including high-end, ergonomically designed headsets, audio processors, and telephone systems. Our end-users consist of enterprise employees and small office, home office, and remote workers. Growth in this category comes from the following three main factors:
Increasing deployment of UC solutions
Robust job market
Growing awareness of the benefits of using headsets, including the benefits of wireless solutions
The contact center category is the most mature in which we participate, and we expect this category to grow slowly over the long-term. We expect that contactContact centers will alsohave begun to adopt UC to help improve productivity and reduce costs. We expect this trend to continue. We develop audio endpoints tailored specifically to UC, and as UC adoption continues to increase, we expect to continue to lead in new product performance by creating solutions that combine hardware and software for an improved customer experience.
Consumer
We believe the mobile headset category will continue to grow as individuals use the technology for both communications and entertainment. The use of headsets designed for mobile phonesdevices represents a high volume opportunity and is our second largest revenue stream. The use of mono headsets typically used with mobile phonesdevices has slowedexperienced a sharp decline over the past year, while the use of stereo Bluetooth technology has increased as individuals want to remain wireless without compromising on stereo sound quality. Our mono and stereo Bluetooth mobile headsets merge technological innovations with style, because we believe that style has become as important as functionality in shaping consumers' purchasing decisions in the wearable technology space. While growth in the mono mobile headset market has slowed and continues to mature, we believe future growth will be driven primarily by demand for stereo Bluetooth technology.
Gaming and computer audio headsets, whether used for interactive on-line or console gaming, or switching between music and phone calls for multi-functional devices, represent an emerging opportunity for us. As devices providing these users' needs converge, our headsets need to be compatible with PCs, mobile phones, tablets, gaming consoles, and various combinations of these. We believe our product development roadmaps address the convergence brought about by these needs and we are currently investing in this area to enable future growth.
FOREIGN OPERATIONS
In fiscal years 20152016, 20142015, and 20132014, net revenues outside the U.S. accounted for approximately 44%, 42%44%, and 43%42%, respectively, of our total net revenues. Revenues derived from foreign sales are generally subject to additional risks, such as fluctuations in exchange rates, increased tariffs, the imposition of other trade restrictions or barriers, the impact of adverse global economic conditions, and potential currency restrictions. In fiscal year 20152016, international revenues were reduced by approximately $4.7$27 million, net of the effects of hedging, due to unfavorable foreign exchange fluctuations in the other foreign currencies in which we sell.
We continue to engage in hedging activities to limit our transaction and economic exposures, and to mitigate our exchange rate risks. We manage our economic exposure by hedging a portion of our anticipated Euro ("EUR") and British Pound Sterling ("GBP") denominated sales and our Mexican Peso ("MXN") denominated expenditures, which together constitute the most significant portion of our currency exposure. In addition, we manage our balance sheet exposure by hedging EUR, GBP, and Australian Dollar ("AUD"), and Canadian Dollar ("CAD") denominated cash, accounts receivable, and accounts payable balances. Excess foreign currencies not required for local operations are converted into U.S. Dollars ("USD"). While our existing hedges cover a certain amount of exposure for fiscal year 2016,2017, long-term strengthening of the USD relative to the currencies of other countries in which we sell may have a material adverse impact on our financial results. In addition, while our existing hedges cover a certain amount of exposure for our fiscal year 2016, our results may be adversely impacted by future changes in foreign currency exchange rates relative to original hedging contracts generally secured up12 to 1224 months prior. See further discussion on our business risks associated with foreign operations under the risk titled, "We are exposed to fluctuations in foreign currency exchange rates, which may adversely affect our revenues, gross profit, and profitability" within Item 1A Risk Factors in this Form 10-K.
Further information regarding our foreign operations, as required by Item 101(d) of Regulation S-K, can be found in Note 1718, Geographic Information, of our Notes to Consolidated Financial Statements in this Form 10-K.
COMPETITION
The market for our products is very competitive and some of our competitors have greater financial resources than us,we do, as well as more substantial production, marketing, engineering and other capabilities to develop, manufacture, market, and sell their products.
One of our primary competitors is GN Netcom, a subsidiary of GN Store Nord A/S., a Danish telecommunications conglomerate that competes with us in the office, contact center, and mobile categories and, on a limited scale, in the gaming and computer audio categories. In addition, Motorola, Samsung, LG, and BoseLG are significant competitors in the consumer mono Bluetooth headset category. Sennheiser Communications, Logitech, VXI, and regional companies are competitors in the computer, office, and contact center categories, while Beats, Skullcandy, and LG are competitors in the stereo Bluetooth Stereo headset category. In addition, Turtle Beach, Skullcandy, and Razer are competitors in the gaming category.
We believe the principal factors to be successful and competitive in each of the markets we serve are as follows:
Alliances and integration/compatibility with major UC vendors
Superior global customer service, support, and warranty terms
Effective and efficient global distribution channels that allow us to market and sell our solutions
We believe that our products and strategy enable us to compete based on these factors.
RESEARCH AND DEVELOPMENT
The success of our new product introductions is dependent on a number of factors, including appropriate new product selection, timely completion and introduction, cost-effective manufacturing, quality, acceptance of new technologies, and general market acceptance. See further discussion regarding our business risks associated with our manufacturers under the risk titled, "Our business will be materially adversely affected if we are unable to develop, manufacture, and market new products in response to changing customer requirements and new technologies" within Item 1A Risk Factors in this Form 10-K.
During fiscal years 2016, 2015,, 2014, and 2013,2014, we incurred approximately $90.4 million, $91.6 million, $84.8and $84.8 million,, and $80.4 million, respectively, in research, development, and engineering expenses. Historically, we have conducted most of our research, development, and engineering with an in-house staff and the limited use of contractors. Key locations for our research, development, and engineering staff are in the U.S., Mexico, China, the Netherlands, and the United Kingdom.
During fiscal year 2016, we developed and introduced innovative products that enabled us to better address changing customer demands and emerging trends. Our goal is to bring the right products to customers at the right time and have best-in-class development processes.
In fiscal year 2017, we will continue to focus our core research and development efforts on UC, which will require incremental investments in firmware and software engineering to enhance the broad compatibility of our products with the enterprise systems into which they will be deployed and to develop value-added software applications for business users. In addition, in fiscal year 2017 we are launching new peripheral "as-a-service" offerings which we anticipate will complement our existing suite of product offerings as we move toward a hybrid business model of hardware, software, and services.
The products we are developing require significant technological knowledge and speed to market. Separately or together, this technological knowledge and our intellectual property gives us a competitive advantage. We continually strive to improve the efficiency of our development processes through, among other things, strategic architecting, common platforms, and increased use of software and test tools.
SALES AND DISTRIBUTION
We maintain a worldwide sales force to provide ongoing customer support and service globally. To support our customers' needs, we have a well-established, multi-level distribution network in North America, Europe, and in some parts of the Asia Pacific region where use of our products is widespread. Our distribution channels in other regions are less mature, and while we primarily serve the Enterprise market in those regions, we are expanding into the Consumer market in those locations.
Our global commercial distributors includesales channel includes technology and electronics distributors, and national and regional resellers. The resellers typically offer a wide variety of products from multiple vendors to both other resellers and end users. Our commercial distribution channel generally maintains an inventory of our products. Our distribution of specialty products includes distributors, retail, government programs, and health care professionals.
Our retail channel consists of both traditional and online consumer electronics retailers, consumer product retailers, office supply distributors, wireless carriers, catalog and mail order companies, and mass merchants. Our headsets are sold through retailers to corporate customers, small businesses, and to individuals who use them for a variety of personal and professional purposes. Revenues from this channel are seasonal, with our third fiscal quarter typically being the strongest quarter due to holiday seasonality.
We have a diverse group of customers located throughout the world. Our principal channel partners are distributors, retailers, and carriers. Our commercial distributors and retailers represent our first and second largest sales channels in terms of net revenues, respectively. No customer accounted for more than 10% of our consolidated net revenues in fiscal years 2016, 2015, 2014, or 2013.2014.
Our distributors, resellers, system integrators, e-commerce partners, telephony and computer equipment providers resell our commercial headsets and end point products. Wireless carriers, retailers, and e-commerce partners also sell our consumer headsets as Plantronics-branded products and in some cases, in their private label packaging. Carriers purchase headset products from us for use by their own agents and in some cases, also offer headsets to their customers.
We also make direct sales as a General Services Administration (“GSA”) contractor to certain government agencies in the U.S. These sales did not comprise a significant portion of our net revenues in fiscal years 2016, 2015, 2014, or 2013.
2014. In addition, certain distributors are authorized resellers under a GSA schedule price list and sell our products to government customers pursuant to that agreement.
We have also established strong UC alliances with leading providers of UC software solutions, and these alliances enhance the sales and distribution of our products to large enterprises deploying UC solutions. In some cases, these partners also resell our solutions to customers as part of a broader communications solution.
Our products may also be purchased directly from our website at www.plantronics.com.
We continue to evaluate our logistics processes and implement new strategies to further reduce our transportation costs and improve lead-times to customers. Currently, we have distribution centers in the following locations:
Tijuana, Mexico, which provides logistics services for products destined for customers in the U.S., Canada, Asia Pacific, Middle East, and Latin America regions
Prague, Czech Republic, which provides logistics services for products shipped to customers in our Europe and Africa regions
Suzhou, China, which provides logistics services for products shipped to customers in Mainland China
Melbourne, Australia, which provides logistics services for products shipped to the retail channel in Australia and New Zealand
Sao Paulo, Brazil, which provides logistics services for products shipped to customers in Brazil
Tokyo, Japan, which provides logistics services for products shipped to customers in Japan
With respect to the above locations, we use third party warehouses in the Czech Republic, Australia, Brazil, and Japan. We operate all other warehouse facilities.facilities in Mexico and China.
BACKLOG
Our backlog of unfilled orders was $24.3$23.4 million and $26.6$24.3 million at March 31, 20152016 and 2014,2015, respectively. We include all purchase orders scheduled for future delivery in backlog. We have a “book and ship” business model whereby we fulfill the majority of orders within 48 hours of receipt of the order. As a result, our net revenues in any fiscal year depend primarily on orders booked and shipped in that year. In addition, our backlog is occasionally subject to cancellation or rescheduling by the customer on short notice with little or no penalty. Therefore, there is a lack of meaningful correlation between backlog at the end of a fiscal year and the following fiscal year's net revenues. Similarly, there is a lack of meaningful correlation between year-over-year changes in backlog as compared with year-over-year changes in net revenues. As a result, we do not believe that backlog information is material to an understanding of our overall business.
MANUFACTURING AND SOURCES OF MATERIALS
Our manufacturing operations consist primarily of assembly and testing, both of which are performed in our manufacturing facility in Tijuana, Mexico. We outsource the manufacturing of our Bluetooth products to third party manufacturers in China. We also outsource the manufacturing of a limited number of our other products to third parties, typically in China and other countries in Asia. For a further discussion of the business risks associated with our manufacturers see the risk titled, “We have significant foreign manufacturing operations and rely on third party manufacturers located outside the U.S., and a significant amount of our revenues are generated internationally, which subjects our business to risks of international operations” within Item 1A Risk Factors in this Annual Report on Form 10-K.
We purchase the components for our products primarily from suppliers in Asia, Mexico, the U.S., and Europe, including proprietary semi-custom integrated circuits, amplifier boards, and other electrical components. The majority of the components and sub-assemblies used in our manufacturing operations are obtained, or are reasonably available, from dual-source suppliers, although we do have a number of sole-source suppliers.
We procure materials to meet forecasted customer requirements. Special products and certain large orders are quoted for delivery after receipt of orders at specific lead times. We maintain minimum levels of finished goods based on estimated market demand, in addition to inventories of raw materials, work in process, sub-assemblies, and components. In addition, a substantial portion of the raw materials, components, and sub-assemblies used in our products are provided by our suppliers on a consignment basis. Refer to “Off Balance Sheet Arrangements”, within Item 7 Management's Discussion and Analysis, in this Annual Report on Form 10-K for additional details regarding consigned inventories. We write-down inventory items determined to be either excess or obsolete to their net realizable value.
ENVIRONMENTAL MATTERS
We are subject to various federal, state, local, and foreign environmental laws and regulations, including those governing the use, discharge, and disposal of hazardous substances in the ordinary course of our manufacturing process. We believe that our current manufacturing and other operations comply in all material respects with applicable environmental laws and regulations. We are required to comply and we believe are currently in compliance with the European Union (“EU”) and other Directives on the Restrictions of the use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”) and on Waste Electrical and Electronic Equipment (“WEEE”) requirements. Additionally, we believe we are compliant with the RoHS initiatives in China and Korea; however, it is possible that future environmental legislation may be enacted or current environmental legislation may be interpreted to create an environmental liability with respect to our facilities, operations, or products. See further discussion of our business risks associated with environmental legislation under the risk titled, "We are subject to environmental laws and regulations that expose us to a number of risks and could result in significant liabilities and costs" within Item 1A Risk Factors of this Form 10-K.
INTELLECTUAL PROPERTY
We maintain a program of seeking patent protection for our technologies when we believe it is commercially appropriate. As of March 31, 2015,2016, we had approximately 700775 worldwide patents in force, expiring between calendar years 20152016 and 2039.2040.
We intend to continue seeking patents on our inventions when commercially appropriate. Our success will depend in part on our ability to obtain patents and preserve other intellectual property rights covering the design and operation of our products. See further discussion of our business risks associated with our intellectual property under the risk titled, "Our intellectual property rights could be infringed on by others, and we may infringe on the intellectual property rights of others resulting in claims or lawsuits. Even if we prevail, claims and lawsuits are costly and time consuming to pursue or defend and may divert management's time from our business" within Item 1A Risk Factors of this Form 10-K.
We own trademark registrations in the U.S. and a number of other countries with respect to the Plantronics and Clarity trademarks, as well as the names of many of our products and product features. We currently have pending U.S. and foreign trademark applications in connection with certain new products and product features and may seek copyright protection where we believe it is applicable. We own a number of domain name registrations and intend to seek more as appropriate. We also attempt to protect our trade secrets and other proprietary information through comprehensive security measures, including agreements with customers and suppliers, and proprietary information agreements with employees and consultants. See further discussion of our business risks associated with intellectual property under the risk titled "Our intellectual property rights could be infringed on by others, and we may infringe on the intellectual property rights of others resulting in claims or lawsuits. Even if we prevail, claims and lawsuits are costly and time consuming to pursue or defend and may divert management’s time from our business."
EMPLOYEES
On March 31, 20152016, we employed approximately 3,3973,398 people worldwide, including approximately 2,2482,326 employees at our manufacturing facility in Tijuana, Mexico. To our knowledge, no employees are currently covered by collective bargaining agreements.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth in the table below is certain information regarding the executive team of Plantronics:
| NAME | AGE | POSITION | ||
Ken Kannappan * | President and Chief Executive Officer | |||
| Joe Burton * | 51 | Executive Vice President and Chief Commercial Officer | ||
| Pamela Strayer * | Senior Vice President and Chief Financial Officer | |||
| Alejandro Bustamante | Senior Vice President, Worldwide Operations | |||
Don Houston * | Senior Vice President, Sales | |||
| Marilyn Mersereau | ||||
| Senior Vice President and | ||||
| InaMarie Johnson | 52 | Senior Vice President and | ||
| Jamie van den Bergh | 60 | President of Clarity | ||
* Executive is also considered an Executive Officer as defined under Regulation S-K Item 401(b).
Mr. Kannappan joined Plantronics in 1995 as Vice President of Sales and was promoted to various positions prior to being named President and Chief Operating Officer in 1998. In 1999, he was promoted to Chief Executive Officer and has been a member of our Board of Directors since that date. Prior to joining Plantronics, Mr. Kannappan served as Senior Vice President of Investment Banking for Kidder, Peabody & Co. Incorporated. Mr. Kannappan currently serves as Chairman of the Board of Directors at Mattson Technology, Inc., a supplier of advanced process equipment for the semiconductor industry and is a member of the Board of Directors of Integrated Device Technology, Inc., a developer of system-level optimization solutions. Mr. Kannappan formerly served as a member of the Board of Directors at Mattson Technology, Inc. (“Mattson”), a supplier of advanced process equipment for the semiconductor industry, from 1998 until May 2016 when Mattson was acquired by a private equity firm. Mr. Kannappan also served two terms as Chair of the board at Mattson during his board service. Mr. Kannappan has a Bachelor of Arts degree in Economics from Yale University and a Master of Business Administration from Stanford University.
Mr. Burton joined Plantronics in 2011 as Senior Vice President of Engineering and Development and Chief Technology Officer. To reflect added responsibilities, in 2012, Mr. Burton's title was changed to Senior Vice President of Technology, Development & Strategy and Chief Technology Officer. In 2014 he became Executive Vice President Products, Technology & Strategy and Chief Technology Officer, and in 2015 he became Executive Vice President and Chief Commercial Officer. Prior to joining Plantronics, Mr. Burton held various executive management, engineering leadership, strategy, and architecture-level positions. From 2010 to 2011, Mr. Burton was employed by Polycom, Inc., a global provider of unified communications solutions for telepresence, video, and voice, most recently as Executive Vice President, Chief Strategy and Technology Officer and, for a period of time, as General Manager, Service Provider concurrently with his technology leadership role. From 2001 to 2010, Mr. Burton was employed by Cisco Systems, Inc., a global provider of networking equipment, and served in various roles with increasing responsibility including Vice President and Chief Technology Officer for Unified Communications and Vice President, SaaS Platform Engineering, Collaboration Software Group. He holds a Bachelor of Science degree in Computer Information Systems from Excelsior College (formerly Regents College) and attended the Stanford Executive Program.
Ms. Strayer joined Plantronics in 2012 as Senior Vice President and Chief Financial Officer. She is responsible for all aspects of the Company's financial management, in addition to managing the information technology, legal, and investor relations organizations. Prior to joining Plantronics, from 2005 to 2012, Ms. Strayer held senior financial management roles at Autodesk, Inc., a world leading software design and services company. Most recently, Ms. Strayer served as Autodesk's Vice President of Finance, Corporate Controller, and Principal Accounting Officer. Prior to Autodesk, Ms. Strayer held senior finance positions at Epiphany, Inc., a developer of customer relationship management software and Informix Software, Inc., a developer of database software for computers. She also worked in audit services at KPMG, LLP. Ms. Strayer holds a bachelor's degree in Business Administration from The Ohio State University and is a California licensed Certified Public Accountant.
Mr. Burton joined Plantronics in 2011 as Senior Vice President of Engineering and Development and Chief Technology Officer. To reflect added responsibilities, in 2012, Mr. Burton's title was changed to Senior Vice President of Technology, Development & Strategy and Chief Technology Officer and in 2014 he became Executive Vice President Products, Technology & Strategy and Chief Technology Officer. Prior to joining Plantronics, Mr. Burton held various executive management, engineering leadership, strategy, and architecture-level positions. From 2010 to 2011, Mr. Burton was employed by Polycom, Inc., a global provider of unified communications solutions for telepresence, video and voice, most recently as Executive Vice President, Chief Strategy and Technology Officer and, for a period of time, as General Manager, Service Provider concurrently with his technology leadership role. From 2001 to 2010, Mr. Burton was employed by Cisco Systems, Inc., a global provider of networking equipment, and served in various roles with increasing responsibility including Vice President and Chief Technology Officer for Unified Communications and Vice President, SaaS Platform Engineering, Collaboration Software Group. He holds a Bachelor of Science degree in Computer Information Systems from Excelsior College (formerly Regents College) and attended the Stanford Executive Program.
Mr. Houston joined Plantronics in 1996 as Vice President of Sales and was promoted to Senior Vice President of Sales in 1998. Previously, Mr. Houston served as Vice President of Worldwide Sales for Proxima Corporation, a designer, developer, manufacturer, and marketer of multi-media projection products, held various management positions at Calcomp, Inc., a computer peripherals manufacturer for the CAD and graphic market, and held various sales and marketing management positions with IBM Corporation. Mr. Houston holds a Bachelor of Science degree in Business/Marketing from the University of Arizona.
Ms. Mersereau joined Plantronics in 2012 as Senior Vice President, Marketing and Chief Marketing Officer. Prior to joining Plantronics, Ms. Mersereau served as Chief Marketing Officer and Senior Vice President of C3 Energy LLC, a provider of smart grid analytics SaaS solutions, from 2011 to 2012. From 2002 to 2011, Ms. Mersereau served in various roles of increasing responsibility at Cisco Systems, Inc., a global provider of networking equipment, including Senior Vice President of Corporate Marketing. Previously, Ms. Mersereau served in various senior marketing roles at IBM Corporation, Coca-Cola Corporation, The Wendy's Company, and Burger King International. Ms. Mersereau holds a Bachelor of Arts degree from the University of Western Ontario.
Mr. van den Bergh joined Plantronics in 2007 as Director of EuropeMarketing and Africa since 2014.was promoted in 2008 to Vice President of Sales and Marketing and in 2015 to President of Clarity, where he oversees all aspects of Clarity's daily operations, product development and sales and marketing activities. Prior to joining Plantronics, Mr. Vanhoutte served as Corporatevan den Bergh held Director and Vice President of Marketing at Sony Ericsson Mobile Communications and as Vice President of Strategic Market Development at Ericsson's Personal Communications Division. Previously, he served as Senior Vice President of Products, Marketing and Sales at MCI WorldCom's International Division in London and held various management positions at Dell Computer CorporationMotorola and Nokia Data, which was merged into Fujitsu-ICL Systems Inc.Giant International. Mr. Vanhouttevan den Bergh holds a Bachelor degree in Applied Economics and EngineeringLaw from the University of Leuven, Belgium.Canterbury and a Postgraduate Business Diploma from the University of Bradford.
Executive officers serve at the discretion of the Board of Directors. There are no family relationships between any of the directors and executive officers of Plantronics.
ITEM 1A. RISK FACTORS
You should carefully consider the following risk factors in connection with any investment in our stock. Our stock price will reflect the performance of our business relative to, among other things, our competition, expectations of securities analysts or investors, and general economic market and industry conditions. Our business, financial condition, and results of operations could be materially adversely affected if any of the following risks occur. Accordingly, the trading price of our stock could decline, and investors could lose all or part of their investment.
Adverse or uncertain economic conditions may materially adversely affect us.
Our operations and financial performance are dependent on the global economy. Uncertainty regarding future economic conditions makes it challenging to forecast operating results, make business decisions, and identify risks that may affect our business, sources and uses of cash, financial condition, and results of operations. Economic concerns, such as uncertain or inconsistent global or regional economic growth, stagnation or contraction, including the pace of economic growth in the United States in comparison to other geographic and economic regions, pressure on economic growth in Europe, uncertain growth prospects in the Asia Pacific region, as well as anxiety regarding geopolitical conflicts and their short and long-term economic impact, increase the uncertainty and unpredictability for our business as consumers, businesses and businessesgovernment agencies periodically and often unpredictably postpone or forego spending. A global economic downturn or continued erratic or declining business or governmental spending or hiring may reduce sales of our products, increase sales cycles, slow adoption of new technologies, increase price competition, and cause customers and suppliers to default on their financial obligations.
Replacement cycles of our Enterprise products are adversely impacted by lower voluntary employee turnover as new headset demand is typically created when employees feel confident enough to change employers or transition to new positions. While domestic voluntary turnover has improved in recent quarters,fiscal periods it remains below historical norms and certain market sectors are actually contracting. Moreover, slow and inconsistent international business hiring has perpetuated employee reluctance to change jobs, limitslimiting opportunities for unemployed workers to reenter the workforce and, consequently, impedes salesimpeding headset sales.
Additionally, although the nature and extent of our headsets.
Additionally, our customers and suppliers suffer from their own financial and economic challenges. If global or regional economic conditions deteriorate, whether in general or particular market segments, one or more customers or suppliers may demand pricing accommodations, delay payments or shipments or become insolvent. It is impossible to reliably determine if and to what extent customers and suppliers may suffer, whether we will be required to adjust our prices or the amount we pay for materials and components or face collection issues with customers or if customer or supplier bankruptcies will occur.
We are exposed to differences and frequent fluctuations in foreign currency exchange rates, which may adversely affect our revenues, gross profit, and profitability.
Fluctuations in foreign currency exchange rates impact our revenues and profitability because we report our financial statements in USD, whereas a significant portion of our sales are transacted in other currencies, particularly the Euro and the British Pound Sterling ("GBP"). Furthermore, fluctuations in foreign currency rates impact our global pricing strategy, resultingwhich may result in our lowering or raising selling prices in one or more currencies in order to avoid disparity with USD prices and to respond to currency-driven competitive pricing actions. For example, the strengthening of the USD against numerous worldwide currencies that accelerated in the final months of the third quarter ofduring fiscal year 2015 and the continued strength of the USD throughout the fourth fiscal quarter hasyear 2016 negatively impacted our sales, pricing, margins, market share and operations overall. Should the dollar remain strong against foreign currencies, principally the Euro and the GBP, we may be compelled to raise prices for our customers in the affected regions. Price increases may be unacceptable to our customers who could seek to replace our products with lesserlower priced alternatives in which case our sales and market share may be adversely impacted. Otherwise, if we reduce prices to stay competitive in the affected regions our profitability may be harmed. We experienced $5.4 million in net foreign currency losses inIn fiscal year 2015.2016, international revenues were reduced by approximately $27 million, net of the effects of hedging, due to unfavorable foreign exchange fluctuations in the other foreign currencies in which we sell.
Large or frequent fluctuations in foreign currency rates, coupled with the ease of identifying global price differences for our products via the Internet, increases pricing pressure as well as the likelihood of additional unauthorized third party “grey market” salesresellers in varying countries takingwho take advantage of price disparities, thereby undermining our premium brand image, established sales channels, and operations.support and operations infrastructure. We also have significant manufacturing operations in Mexico and fluctuations in the Mexican Peso exchange rate can impact our gross profit and profitability. Additionally, the majority of our suppliers are located internationally, principally in Asia. Accordingly, volatileVolatile or sustained increases or decreases in exchange rates of Asian currencies may result in increased costs or reductions in the number of suppliers qualified to meet our standards.
Although we hedge currency exchange rates exposures we deem material, changes in exchange rates may nonetheless still have a negative impact on our financial results. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation, decisions and actions of central banks and political developments.
We hedge a portion of our Euro and GBP forecasted revenue exposures for the future, typically over 12-month periods. In addition, we hedge a portion of our Mexican Peso forecasted cost of revenues and we havemaintain foreign currency forward contracts denominated in Euros, GBP, and Australian Dollars that hedge against a portion of our foreign-currency denominated assets and liabilities. Our foreign currency hedging contracts reduce, but do not eliminate, the impact of currency exchange rate movements, particularly if the fluctuations are significant or sustained, and we do not execute hedging contracts in all currencies in which we conduct business. There is no assurance that our hedging strategies will be effective. Additionally, even if our hedging techniques are successful in the periods during which the rates are hedged, our future revenues, gross profit, and profitability may be negatively affected both at current rates and by adverse fluctuations in currencies against the USD. For instance, because our hedging instruments cover a period of up to 24 months, we anticipate that the hedging conducted in fiscal year 2016 will deliver little benefit to offset the stronger U.S. Dollar against major currencies in fiscal year 2017. See Item 7A for further quantitative information regarding potential foreign currency fluctuations.
Our operating results are difficult to predict, and fluctuations may cause volatility in the trading price of our common stock.
Given the nature of the markets in which we compete, our revenues and profitability vary from quarter to quarter and are difficult to predict for many reasons, including the following:
•variations in the volume and timing of orders received during each quarter;
the timing of customers' sales promotions and campaigns;
the timing of large customer deployments of UC infrastructure;
the timing of new product introductions by us and our competitors and phase outobsolescence or discontinuance of existing products;
competition, including pricing pressure, promotions and campaigns by us, our competitors or our customers;
failure to timely introduce new products within projected costs;
changes in technology and desired product features, including whether those changes occur in the manneranticipated manners and timeframe we anticipate;timeframes;
general economic conditions in the U.S. and in our international markets, including foreign currency fluctuations;
seasonality;
customer cancellations and rescheduling;
fluctuations in costs for components;raw materials and components costs;
shifts in product, geographic or channel mix; and
investments in and the costs associated with new product development and strategic initiatives.
Fluctuations in our operating results, including the failure to meet our expectations or the expectations of financial analysts, may cause volatility, including material decreases, in the trading price of our common stock.
The success of our business depends heavily on our ability to effectively market our UC products, and our business could be materially adversely affected if markets do not develop as we expectexpected or we are unable to compete successfully.
Our Enterprise products represent our largest source of revenue, and we regard the market for headsets designed for UC as our greatest long-term opportunity in the Enterprise market. We believe the implementation of UC technologies by large enterprises will be a significant long-term driver of UC headset adoption, and, as a result, a key long-term driver of our revenue and profit growth. Accordingly, we continue to invest in the development of new products and enhance existing products to be more appealing in functionality and design for the UC office market; however, there is no guarantee significant UC growth will occur, when it might occur, or that we will successfully take advantage of any growth thatit if it does occur.
Our ability to realize and achieve positive financial results from UC adoption could be adversely affected by a number of factors, including the following:
As UC becomes more widely adopted, competitors may offer solutions that will effectively commoditize our headsets, increases, which, in turn, may assert pressure on us to reduce the prices of one or more of our headset products.
The market success of major platform providers and strategic partners such as Microsoft Corporation, Cisco Systems, Inc., Avaya, Inc., Alcatel-Lucent, and Huawei, and our influence over such providers with respect to the functionality of their platforms and product offerings, their rate of deployment, and their willingness to integrate their platforms and product offerings with our solutions, is limited. For example, Microsoft’s Lync solution has become a large part of the UC marketplace and the decision by Microsoft to transition from Lync to Skype for Business isin early fiscal year 2016 proved to be a more significant market transition in the marketthan anticipated and may causecaused end customers to modify or pause their deployment schemes or schedules while assessingthey assessed the implications of Microsoft’s decision.
Failure to timely introduce solutions that are cost effective, feature-rich, stable, and attractive to our customers within forecasted development budgets.
Failure to successfully implement and execute 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.
Failure of UC solutions generally, or our solutions in particular, to be adopted with the breadth and speed that we currently anticipate. For example, concerns about data privacy and the security of information and data stored over the Internet and wireless security in general, each of which is further enabled by UC solutions, including our products, have caused entities in various markets to reassess thedata protection compliance and security safeguards of UC devices.
Failure of our sales model and expertise to support complex integration of hardware and software with UC infrastructure consistent with changing customer purchasing expectations.
If new or evolving sales models such as our Software-as-a-Service, Device-as-a-Service offering in which we provide headsets to UC end customersor Soundscaping offerings provided on a subscription basis through channel partners are successful, they may have a long-term positive effect on our operations; however differences in revenue-recognition treatment may cause short-term revenue declines or increase expenditures for operational, administrative and technical support that may adversely impact our operations or negatively reflect on our overall growth.
Increased competition for market share, particularly given that some competitors have superior technical and economic resources enabling them to take greater advantage of UC market opportunities.
Sales cycles for more complex UC deployments are longer as compared to our traditional Enterprise products.
Our inability to timely and cost-effectively adapt to changes and future requirements of UC may impact our profitability in this market and our overall margins.
Failure to expand our technical support capabilities to support the complex and proprietary platforms in which our UC products are and will be integrated as well as increases in our support expenditures over time.
If our investments in, and strategic focus on, UC doesdo not generate incremental revenue, our business, financial condition, and results of operations could be materially adversely affected.
If we fail to accurately forecast demand we may under or overestimate production requirements resulting in lost business or write offs of excess inventory which may materially harm our business, reputation and results of operations.
Our industry is characterized by rapid technological changes, evolving industry standards, frequent new product introductions, short-term customer commitments, and changes in demand. Production levels are forecasted based on anticipated and historic product demand and we often place orders with suppliers for materials and components as well as finished products with our suppliers 13 weeks or more in advance of projected orders from our customers.customer orders. Actual demand depends on many factors and may vary significantly from our forecasts. We will lose opportunities to increase revenues and profits and may incur increased costs and penalties, including expedited shipping fees and late delivery penalties, if we underestimate customer demand.
Conversely, overestimating demand could result in higher inventories of raw materials, components, and sub-assemblies ("materials and components") and finished products, which may later require us to write off all or a material portion of our inventories. We routinely review inventory for usage potential, including fulfillment of customer warranty obligations and spare part requirements, and we write down to the lower of cost or market value the excess and obsolete inventory, which may adversely affect our results of operations.
For instance, periodically, we or our competitors announce new products, capabilities, or technologies that replace or shorten the life cycles of legacy products or cause customers to defer or stop purchasing legacy products until new products become available. Additionally, new product announcements may incite customers to increase purchases of successful legacy products as part of a last-time buy strategy, thereby increasing sales in the short-term while decreasing future sales byand delaying new product adoption. These risks increase the difficulty of accurately forecasting demand for discontinued and new products. Accordingly, during any transition to new products, we may experience inventory obsolescence and loss of revenue and associated gross profit.
If any of the above occur, our business, financial condition and results of operations could be materially harmed.
If our suppliers and sub-suppliers cannot timely deliver sufficient quantities of quality materials and components and finished products, our ability to fulfill customer demand may be adversely impacted and our growth, business, reputation and financial condition may be materially adversely effected.
Our growth and ability to meet customer demand depends in part on our ability to timely obtain sufficient quantities of materials and components as well as finished products of acceptable quality at acceptable prices. We buy materials and components from a variety of suppliers and assemble them into finished products. In addition, certain of our products and key portions of our products lines are manufactured for us by third party original design and contract manufacturers ("ODMs") who obtain materials and sub-components from a long and often complex chain of sub-suppliers. The cost, quality, and availability of the services, materials and components and finished products these ODMs and third parties supply are essential to our success.
Our reliance on these ODMs and third parties therefore involves significant risks, including the following:
We rely on suppliers for critical aspects of our business. For instance, we obtain a majority of our Bluetooth products from GoerTek, Inc. Suppliers such as GoerTek may choose to discontinue supplying materials and components or finished products to us for a variety of reasons, which may (i) be difficult, time-consuming, or costly to replace, (ii) force us to redesign or end-of-life certain products, (iii) delay manufacturing or render us unable to meet customer demand, or (iv) require us to make large last-time buys in excess of our short-term needs, holding materials and components or finished products in inventory for extended periods of time. Consequently, ifIf one or more suppliers is unable or unwilling to meet our demand, delivery, or price requirements, our business and operating results could be materially adversely affected.
Although we preferendeavor to use standard materials and components in our products whenever feasible, the lack of viable alternative sources or the high development costs associated with existing and emerging wireless and other technologies may require us to work with a single source for silicon chips, chip-sets, or other materials and components in one or more products. Moreover, lead times are particularly long for silicon-based components incorporating radio frequency and digital signal processing technologies and such materials and components make up an increasingly larger portion of our product costs. Additionally, many consumer product orders have shorter lead times than component lead times, makingwhich may make it increasingly necessary for us or our suppliers to carry more inventory in anticipation of orders, which may not materialize.
A substantial portion of the materials and components used in our products are provided by our suppliers on consignment. As such, we do not take title to the materials and components until they are consumed in the production process. Prior to consumption, title and risk of loss remains with the suppliers. Our supply agreements generally allow us to return parts in excess of maximum order quantities at the suppliers’ expense. Returns for other reasons are negotiated with suppliers on a case-by-case basis and to date have been immaterial. If we are required or choose to purchase all or a material portion of the consigned materials and components or if a material number of our suppliers refuse to accept orders on consignment, we could incur material unanticipated expenses, including write-downs for excess and obsolete inventory.inventory and result in inventory turn rate declines.
Rapid increases in production levels to meet product demand, whether or not forecasted, could result in shipment delays, higher costs for materials and components, increased expenditures for freight to expedite delivery of required materials, late delivery penalties, and higher overtime costs and other expenses, which could negatively impact our revenues, reduce profit margins, and harm relationships with affected customers. For instance, beginning in the first quarter of fiscal year 2015, sales of our BackBeat Fit have beenwere constrained by limited sub-component supply availability. If we are unablesimilar constraints were to occur in existing or future product lines, our ability to meet demand and our corresponding ability to sell affected products may be materially reduced. Moreover, our failure to timely deliver desirable products like the BackBeat Fit when requested,to meet demand may harm relationships with our customers may be harmed.customers. Further, if production is increased rapidly, manufacturing yields may decrease, which may also reduce our revenues or margins.
Any of the foregoing could materially and adversely affect our business, financial condition, and results of operations.
Prices of certain raw materials, components, semiconductors, and sub-assemblies may rise depending upon global market conditions which may adversely affect our margins.
We have experienced and expect to continue to experience volatility in prices from our suppliers, particularly in light of the price fluctuations offor oil, gold, copper, and other materials and components in the U.S. and around the world, which could negatively affect our profitability or market share. If we are unable to pass cost increases on to our customers or achieve operating efficiencies that offset any increases, our business, financial condition, and results of operations may be materially and adversely affected.
We have strong competitors and expect to face additional competition in the future. If we are unable to compete effectively, our results of operations may be adversely affected.
All of the markets in which we sell our products are intensely competitive and market leadership may change as a result of new product introductions and pricing. We face pressure on our selling prices, sales terms and conditions, and in connection with product performance and functionality. Also, aggressive industry pricing practices may result in decreasing margins.
One of our primary competitors is GN Netcom, a subsidiary of GN Store Nord A/S (“GN”), a Danish telecommunications conglomerate with whom we compete in the office, contact center,Enterprise and mobile categories. We also compete with consumer electronics companies that manufacture and sell mobile phones, tablets, or computer peripheral equipment. Many of our competitors are larger, offer broader product lines, may integrate their products with communications headset devices and adapters manufactured by them or others, offer products incompatible with our headsets, and have substantially greater financial, marketing, and other resources.
Competitors in audio devices vary by product line. Our most competitive product line is headsets for cell phones where we compete with GN's Jabra brand, Motorola, Samsung, and LG, among many others. Many of these competitors have substantially greater resources than us, and each has an established market position. For sales of our Enterprise products, including UC, our largest competitors areinclude GN, Sennheiser Communications, Logitech, and VXI. For our Consumer products, our primary competitors areinclude Sennheiser, Logitech, Beats, LG, Jaybird, Motorola, Samsung and Bose. In the gaming category of our Consumer products market, our primary competitors are Turtle Beach, Skullcandy, and Razer.
We face additional competition from companies, principally located in or originating from the Asia Pacific region, which offer very low cost headset products, including products modeled on, direct copies of, or counterfeits of our products. Furthermore, online marketplaces make it easier for disreputable and fraudulent sellers to introduce their copies or counterfeit products into the stream of commerce by commingling legitimate products with copies and counterfeits; thereby making it extremely difficult to track and remove copies and counterfeits. The introduction of low cost alternatives, copies and counterfeits has resulted in and will continue to cause market pricing pressure, customer dissatisfaction and harm to our reputation and brand name. If market prices are substantially reduced by new or existing participants in the headset categories, our business, financial condition, or results of operations could be materially and adversely affected.
If we do not distinguish our products, particularly our Consumer products, through distinctive, technologically advanced features and design, as well as continue to build and strengthen our brand recognition, our products may become commoditized and our business could be harmed. In addition, failure to effectively market our products to customers could lead to lower and more volatile revenue and earnings, excess inventory, and the inability to recover associated development costs, any of which could also have a material adverse effect on our business, financial condition, results of operations, and cash flows.
The markets for our Consumer products are volatile and our ability to compete successfully in one or more of these categories is subject to many risks.
The global market for mono Bluetooth headsets is shrinking or flat,shrunk significantly in 2015, which iswas at least partially attributable to the integration of Bluetooth systems into automobiles. The market for stereo Bluetooth headsets continues to grow rapidly, although it remains dominated by lifestyle brands. Our market share has been and is significantly larger in the mono market than in the stereo market and it remains unclear whetherthus far we will be ablehave been unable to sufficiently increase share in the stereo market to continue growingoffset decreases in the overallmono Bluetooth market forand although we expect stereo Bluetooth headsets.product sales to increase, the future of this market remains unclear.
Reductions in the number of suppliers participating in the Bluetooth market has reduced our sourcing options and may in the future increase our costs at a time when our ability to offset higher costs with product price increases is limited.
Difficulties retaining or obtaining shelf space and maintaining a robust and compelling eCommerce presence for our Consumer products in our sales channel, particularly with large "brick and mortar" retailers and Internet "etailers" as the market for mono Bluetooth headsets contracts or remains flat.contracts.
Relying on a dwindling number of retail customers that have significant market share in the shrinking mono Bluetooth category increases our exposure to pricing pressure, unexpected changes in demand and may result in unanticipated fluctuations in our revenues and margins.
The varying pace and scale of economic activity in many regions of the world creates demand uncertainty and unpredictability for our Consumer products.
The need to rapidly and frequently adopt new technology to keep pace with changing market trends. In particular, we anticipate a trend towards more integrated solutions that combine audio, video, and software functionality that we expect will shorten product lifecycles.
Our ability to maintain insight into, and quickly respond to, sudden changes in laws or regulations.
We cannot guarantee we will continue to repurchase our common stock pursuant to stock repurchase programs or that we will declare future dividend payments at historic rates or at all. The repurchase of our common stock and the payment of dividends may require us to borrow against our Credit Agreement or incur indebtedness and may not achieve our objectives.
In March 2015, we announced a new corporate return of capital policy with the goal of increasing the return of cash to stockholders to approximately 60% of free cash flow, defined as total operating cash flow less capital expenditures. We intend to achieve this goal primarily through stock repurchases and quarterly dividends. In conjunction with the March 2015 announcement regarding our new return of capital policy, we increased our then-existing stock repurchase program from one million shares to four million shares and approved another stock repurchase program in January 2016 for an additional one million shares. Moreover, our Board of Directors has consistently declared quarterly dividends over the years.
Any determination to pay cash dividends at recent rates or at all, or authorization or continuance of any share repurchase programs is contingent on a variety of factors, including our financial condition, results of operations, business requirements, and our Board of Directors' continuing determination that such dividends or share repurchases are in the best interests of our stockholders and in compliance with all applicable laws and agreements. Accordingly, there is no assurance that we will continue to repurchase stock at recent historical levels or at all, or that our stock repurchase programs or dividend declarations will have a beneficial impact on our stock price.
As of March 31, 2016, we had $500 million in 5.50% senior unsecured notes outstanding and the ability to draw up to $100.0 million against a revolving line of credit agreement with Wells Fargo Bank, National Association, although at March 31, 2016, we had no amounts outstanding under the credit facility. Risks relating to our long-term indebtedness include:
Requiring us to dedicate a portion of our cash flow from operations to payments on our currently existing or future indebtedness, thereby reducing the availability of cash flow to fund working capital, capital expenditures, acquisitions, investments and other general corporate purposes;
Limiting our flexibility in planning for, or reacting to, changes in our business and the markets in which we operate including, without limitation, restricting our ability and the ability of our subsidiaries to incur indebtednessliens or enter into certain types of transactions such as sale and lease-back transactions; and
Limiting our ability to support our repurchases, dividendsborrow additional funds or to borrow funds at rates or on other activities. Weterms we find acceptable.
Periodically, we have previously drawn funds and have increased the frequency and amount of draws under our Credit Agreementexisting credit facilities in connection with our corporate return of capital policy and generally from time to time.for other purposes. Amounts drawn under the Credit Agreementour outstanding credit agreement are subject to interest charges. Moreover, the Credit Agreementcredit agreement contains affirmative and negative covenants with which we must comply.comply in addition to those covenants in our senior unsecured notes. These restrictions apply regardless of whether any loans under the credit agreement are outstanding and could adversely impact how we operate our business, our operating results, and dividend declarations, which, in turn, may negatively impact our stock price. During the fourth quarter of fiscal year 2016, we breached the funded debt to EBITDA ratio covenant of our credit agreement for which we subsequently obtained a waiver from Wells Fargo in the first quarter of fiscal year 2017. Although we have amended the credit agreement to reduce the risk of future violations of the covenant, we cannot be sure we will not breach this or any other covenant in the future or that Wells Fargo will not seek to enforce any or all remedies against us for any same or similar breach.
In addition, asif we borrow additional funds under the Credit Agreement,credit agreement, we may be required to increase the borrowing limit under the Credit Agreementcredit agreement or seek additional sources of borrowing. Given current credit and debt markets, there is no assurance that if we were to seek additional credit or debt, it would be available when needed or if it is available, the cost or terms and conditions would be acceptable.
Were any of the foregoing risks to occur, we may be unable to pay any indebtedness, including interest, when due, and may be required to curtail activities to comply with our obligations under the senior unsecured notes. Additionally, changes by any rating agency to our credit rating may negatively impact the value and liquidity of both our debt and equity securities, as well as the potential costs associated with a refinancing of our debt. The rating agencies measure us by our performance against certain financial metrics. If we do not meet these metrics there is a risk the rating agencies may downgrade our rating. Under certain circumstances, if our credit ratings are downgraded or other negative action is taken, our ability to obtain additional financing in the future could be diminished and could affect the terms of any such financing. If any of those things occur, our financial condition and results of operations may be adversely affected.
Our corporate tax rate may increase or we may incur additional income tax liabilities, which could adversely impact our cash flow, financial condition and results of operations.
We have significant operations in various tax jurisdictions throughout the world, and a substantial portion of our taxable income has historically been generated in jurisdictions outside of the U.S. Currently, some of our operations are taxed at rates substantially lower than U.S. tax rates. If our income in these lower tax jurisdictions were no longer to qualify for these lower tax rates, the applicable tax laws were rescinded or changed, or the mix of our earnings shifts from lower rate jurisdictions to higher rate jurisdictions, our operating results could be materially adversely affected. In addition, variousFurthermore, the repatriation of non-U.S. earnings for which we have not previously provided U.S. taxes could result in higher effective tax rates for us and subject us to significant additional U.S. income tax liabilities.
Various governmental tax authorities have recently increased their scrutiny of tax strategies employed by corporations and individuals. In addition, the Organization for Economic Cooperation and Development issued guidelines and proposals during fiscal year 2016 that may change how our tax obligations are determined in many of the countries in which we do business. If U.S. or other foreign tax authorities change applicable tax laws or successfully challenge the manner in which our profits are currently recognized, our overall taxes could increase, and our business, cash flow, financial condition, and results of operations could be materially adversely affected.
We are also subject to examination by the Internal Revenue Service ("IRS") and other tax authorities, including state revenue agencies and foreign governments. In July 2012, the IRS commenced an examination of our 2010 tax year. While we regularly assess the likelihood of favorable or unfavorable outcomes resulting from examinations by the IRS and other tax authorities to determine the adequacy of our provision for income taxes, there can be no assurance that the actual outcome resulting from these examinations will not materially adversely affect our financial condition and results of operations.
Our business will be materially adversely affected if we are unable to develop, manufacture, and market new products in response to changing customer requirements and new technologies.
The technology used in our products is evolving more rapidly now than in the past and we anticipate this trend will continue. Historically, new products primarily offered stylistic changes and quality improvements rather than significant new technologies. Our increasing reliance and focus on the UC market has resulted in a growing number of our products that integrate complex, state-of-the-art technology, increasing the risks associated with new product ramp-up, including product performance and defects in the early stages of production. For example, in the fourth quarter of fiscal year 2015, we announced the recall of a newly launched product, the Encore Pro, that failed to meet our quality standards. The recall negatively impacted revenues in the fourth quarter of fiscal year 2015 and the first quarter of fiscal year 2016.
Office phones have begun to incorporate Bluetooth functionality, which has opened the market to consumer Bluetooth headsets and reduced the demand for our traditional office telephony headsets and adapters, which has resultedresulting in lost revenue and lower margins. Additionally, with the advent of more and different types of mobile devices the need for traditional desk phones with a distinct headset is decreasing, and may limit the sale of both corded and cordless headsets in the future. Moreover, the increasing adoption of wireless headsets has also resulted in increased development costs associated with the introduction of new wireless standards and more frequent changes in those standards and capabilities as compared to wired technologies. If sales and margins on our traditional corded products decline and we are unable to successfully design, develop, and market alternatives at historically comparable margins, our revenue and profits may decrease.
In addition, innovative technologies such as UC have moved the platform for certain of our products from our customers' closed proprietary systems to open platforms such as the PC, smart phonessmartphones and tablets. In turn, these devices have become more open as a result of technologies such as cloud computing and trends toward more open source software code development. As a result, the risk that current and potential competitors could enter our markets and commoditize our products by offering similar products has increased.
The success of our products depends on several factors, including our ability to:
Anticipate technology and market trends
Develop innovative new products and enhancements on a timely basis
Distinguish our products from those of our competitors
Create industrial designs that appeal to our customers and end-users
Manufacture and deliver high-quality products that are simple to operate in sufficient volumes and acceptable margins
Price our products competitively
Hire and retain qualified personnel in the highly competitive field of software development
Provide timely, effective and accurate technical product support to our customers
Leverage new and existing channel partners effectively
If we are unable to develop, manufacture, market, and introduce enhanced or new products in a timely manner in response to changing market conditions or customer requirements, including changing fashion trends and styles, our business, financial condition, and results of operations will be materially adversely affected.
We have significant foreign manufacturing operations and rely on third party manufacturers located outside the U.S., and a significant amount of our revenues are generated internationally, which subjects our business to risks of international operations.
We own and operate a manufacturing facility in Tijuana, Mexico. We also have suppliers, contact manufacturers, and other vendors throughout Asia and generate a significant amount of our revenues from foreign customers.
Our international operations and sales expose us to various risks including, among others:
Fluctuations in foreign currency exchange rates
Cultural differences in the conduct of business
Greater difficulty in accounts receivable collection and longer collection periods
The impact of recessionary, volatile or adverse global economic conditions
Reduced protection for intellectual property rights protections in some countries
Changes in regulatory requirements
The implementation or expansion of trade restrictions, sanctions or other penalties against one or more countries, its citizens or industries
Tariffs, taxes and other trade barriers, particularly in developing nations such as Brazil, India, and others
Political conditions, health epidemics, civil unrest, or criminal activities within each countrycountries in which we operate
The management, operation, and expenses associated with an enterprise spread over various countries
The burden and administrative costs of complying with a wide variety of foreign laws and regulations
Currency restrictions
Compliance with anti-bribery laws, including the United States Foreign Corrupt Practices Act and the United Kingdom's Bribery Act
The above-listed and other inherent risks of international operations could materially and adversely affect regional economic activity and business operations in general, which in turn may harm our business, financial condition, and results of operations.
We sell our products through various distribution channels that can be volatile, and failure to establish and maintain successful relationships with our channel partners could materially adversely affect our business, financial condition, or results of operations. In addition, customer bankruptcies or financial difficulties may impact our business.
We sell substantially all of our products through distributors, retailers, OEMs, and telephony service providers. Effectively managing these relationships and avoiding channel conflicts is challenging. Our existing relationships with these parties are generally not exclusive and can be terminated by us or them without cause on short notice. These customers also sell or may sell products offered by our competitors. To the extent our competitors offer more favorable terms or more compelling products, theyour customers may not recommend, de-emphasize, or discontinue carrying our products. Moreover, our OEMs may elect to manufacture their own products that are similar to ours.those we offer. Additionally, it is becoming easier for small online sellers to enter the market unburdened with physical locations, employees and support personnel which can force our larger traditional brick and mortar resellers to reduce their selling prices and inprices. In turn, our traditional resellers may demand lower selling prices from us.us, reduce their sales support needed to maintain our premium brand image, discontinue carrying our products and other similar adverse actions. The inability to establish or maintain successful relationships with distributors, OEMs, retailers, and telephony service providers or to expand our distribution channels and sales models could materially adversely affect our business, financial condition, or results of operations.
Furthermore, many customers with whom we conduct business have substantial buying power or have strategic importance to our product marketing objectives. Many use their buying power or strategic importance to mandate onerous terms and conditions in our business arrangements with them including unfavorable payment terms, fees and penalties for early, late and inaccurate shipments, generous return rights, most favored pricing, and mandatory marketing and promotional fees. These terms are often non-negotiable and are frequently broad, ambiguous and inconsistent across customers making compliance complex and subject to interpretation. If our compliance with these or similar future provisions are incorrect or inadequate, we could be liable for breach of contract damages or our reputation with one or more key customers could be materially adversely harmed, either of which could have an adverse effect on our financial condition or results of operations.
Also, in order to provide us with greater insight into the characteristics and control overmotivations of our distribution channels as well as the needs of our end customers, to better incentivize our sales partners and promote our products to end customers, we implementedhave begun regional implementation of an authorization program in whichas well as a back end rebate program. Under the authorization program, distributors and resellers are asked to enter into agreements or supplement existing agreements in connection with the sale of all or a portion of our products. OurThe back end rebate program ties payment of post-sale discounts to distributor program compliance obligations. These programs are new and our partners may deem the programthem difficult, time-consuming or disruptive, or the terms of the programprograms or our agreements unacceptable.
Additionally, we have implemented an electronic minimum advertised pricing policy applicable to a number of new and future products as well as certain legacy products. The policy allows us to limit and reject orders from resellers who fail to promote and maintain the premium image of our brand and products by advertising online prices for covered products below prices we establish and periodically adjust. Enforcement of the policy may result in lost sales and harm our business relationships and reputation, potentially materially, with one or more customers or resellers.
If the number and quality of our distributors and resellers declines, our business, financial condition, and results of operations could be materially, adversely affected.
The increased use of software in our products or as standalone applications could impact the way we recognize revenue which, if material or done incorrectly, could adversely affect our financial results.
We are increasingly incorporating advanced software features and functionalities into our products, offering firmware and software fixes, updates, and upgrades electronically over the Internet and developing standalone software applications.Internet based software-as-a-service offerings that provide additional value that complements our headsets. As the nature and extent of software integration in our products increases or if sales of standalone software applications or services become material, the way we report revenue related to our products and services could be significantly affected. For example, we are increasingly required to evaluate whether our revenue transactions include multiple deliverables and, as such, whether the revenue generated by each transaction should be recognized upon delivery, over a period of time or apportioned and recognized based on a combination of the two in light of all the facts and circumstances related to each transaction. Moreover, the software and services revenue recognition rules are complex and dynamic.
If we fail to accurately apply these complex rules and policies, particularly to new and unique products or services offerings, we may incorrectly report revenues in one or more reporting periods. If this were to occur and the error was material, we may be required to restate our financial statements, which could materially and adversely impact our results for the affected periods, cause our stock price to decline, and result in securities class actions or other similar litigation.
Investment in new business strategies and acquisitions are disruptive and may present risks to our current and future business operations.
We have invested, and in the future will continue to invest, in new business strategies and acquisitions. Such endeavors and acquisitions will involve significant risks and uncertainties which may include:
Distraction of management from current operations;
Greater than expected liabilities and expenses;
Inadequate return on capital;
Insufficient sales and marketing expertise requiring costly and time-consuming development and training of internal sales and marketing personnel as well as new and existing distribution channels;
Prohibitive or ineffective intellectual property rights or protections;
Unknown market expectations regarding pricing, branding and operational and logistical levels of support;
Uncertain tax, legal and other regulatory compliance obligations and consequences;
New and complex data collection, maintenance, privacy and security requirements; and
Other unidentified issues not discovered in our investigations and evaluations.
We have announced and are exploring new service offerings including software-as-a-service, device-as-a-service and Soundscaping. Although, elements of each of these services are founded on intellectual property or one or more areas in which we believe we have expertise, they remain complex undertakings different in material respects from our historical hardware design, development and sales model. For example, although software-as-a-service has become a familiar business model generally, recurring revenue subscription services are new to us and involve unique development, accounting and support requirements. Moreover, device-as-a-service and Soundscaping are not nearly as well accepted or understood generally. Device-as-a-service in particular involves significant up-front costs, limited product recovery options and may require significant sales and marketing educational campaigns both internally and throughout our distribution channels. Furthermore, each of these services remain in the early stages of development and require significant additional time, effort and costs to develop before their likelihood of market success can be determined with any degree of certainty.
Additionally, in order to support or further our new services offerings, we may decide to make investments or acquisitions, including through joint ventures. Depending on the investments, we may have limited or no management or operational control in the companies in which we invest or the acquisition may prove difficult to integrate into our existing operations or otherwise unsuccessful. Further, we may issue shares of our common stock in these transactions, which could result in dilution to our stockholders.
If we fail to anticipate the time, effort and cost to develop and maintain new business strategies and acquisitions, we do not timely meet market expectations for commercial availability, our service and support proves unreliable, or we are unable to offer these services at acceptable profit margins, our existing and future business, financial condition, and results of operations could be materially, adversely affected.
Our intellectual property rights could be infringed on by others, and we may infringe on the intellectual property rights of others resulting in claims or lawsuits. Even if we prevail, claims and lawsuits are costly and time consuming to pursue or defend and may divert management's time from our business.
Our success depends in part on our ability to protect our copyrights, patents, trademarks, trade dress, trade secrets, and other intellectual property, including our rights to certain domain names. We rely primarily on a combination of nondisclosure agreements and other contractual provisions as well as patent, trademark, trade secret, and copyright laws to protect our proprietary rights. Effective trademark, patent, copyright, and trade secret protection and enforcement of our intellectual property rights may not be available in every country in which our products and media properties are distributed to customers. The process of seeking intellectual property protection can be lengthy, expensive, and uncertain. Patents may not be issued in response to our applications, and any patents that may be issued may be invalidated, circumvented, or challenged by others. If we are required to enforce our intellectual property or other proprietary rights through litigation, the costs and diversion of management's attention could be substantial. Furthermore, we may be countersued by an actual or alleged infringer if we attempt to enforce our intellectual property rights, which may materially increase our costs, divert management attention, and result in injunctive or financial damages being awarded against us. In addition, the existing patents, copyright registrations, trademarks, trade secrets and domain names may not provide us competitive advantages or be adequate to safeguard and maintain our proprietary rights. If it is not feasible or possible to obtain, enforce, or protect our intellectual property rights, our business, financial condition, and results of operations could be materially, adversely affected.
Patents, copyrights, trademarks, and trade secrets are owned by individuals or entities that may make claims or commence litigation based on allegations of infringement or other violations of intellectual property rights. These claims or allegations may relate to intellectual property that we develop or the intellectual propertythat is incorporated in the materials or components provided by one or more suppliers. As we have grown, the intellectual property rights claims against us and our suppliers have increased. There has also beenincreased along with a general trend of increasing intellectual property infringement claims against corporations that make and sell products.all corporations. Our products, technologies and the components and materials contained in our products may be subject to certain third-party claims and, regardless of the merits of the claim, intellectual property claims are often time-consuming and expensive to litigate, settle, or otherwise resolve. In addition, to the extent claims against us or our suppliers are successful, we may have to pay substantial monetary damages or discontinue the manufacture and distribution of products that are found to be in violation of another party's rights. We also may have to obtain, or renew on less favorable terms, licenses to manufacture and distribute our products or materials or components included in those products, which may significantly increase our operating expenses. In addition,Moreover, many of our agreements with our distributors and resellers require us to indemnify them for certain third-party intellectual property infringement claims. Discharging our indemnity obligations may involve time-consuming and expensive litigation and result in substantial settlements or damages awards, our products being enjoined, and the loss of a distribution channel or retail partner, any of which may have a material adverse impact on our operating results.
We must comply with various regulatory requirements, and changes in or new regulatory requirements may adversely impact our gross margins, reduce our ability to generate revenues if we are unable to comply, or decrease demand for our products if the actual or perceived quality of our products are negatively impacted.
Our products must meet requirements set by regulatory authorities in each jurisdiction in which we sell them. For example, certain of our Enterprise products must meet local phone system standards. Certain of our wireless products must work within existing permitted radio frequency ranges. Moreover, competition for limited radio frequency bandwidth as a result of an increasing use of wireless products increases the risk of interference or diminished product performance. In particular, the release of a third party wireless deviceFor instance, in the U.S. that operatesthe increase in the number of products operating in the unlicensed 903-928 megahertz radio frequency range using significantly higher power than our wireless products and those of many other users of the unlicensed frequency range may cause our wireless products to experience interference which, if material, may harm our reputation and adversely affect our sales.
As regulations and local laws change and competition increases, we may need to modify our products to address those changes. Regulatory restrictions and competition may increase the costs to design, manufacture, and sell our products, resulting in a decrease in our margins or a decrease in demand for our products if we attempt to pass along the costs. Compliance with regulatory restrictions and bandwidth limitations may impact the actual or perceived technical quality and capabilities of our products, reducing their marketability. In addition, if the products we supply to various jurisdictions fail to comply with the applicable local or regional regulations, if our customers or merchants providetransfer products into unauthorized jurisdictions or our products interfere with the proper operation of other devices, we or consumers purchasing our products may be responsible for the damages that our products cause; thereby causing us to alter the performance of our products, pay substantial monetary damages or penalties, cause harm to our reputation, or cause us to suffer other adverse consequences.
Moreover, new regulations may negatively adversely affect our ability to procure or manufacture our products. For instance, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission ("SEC") adopted disclosure requirements regarding theour use of certain minerals, known as conflict minerals, which are minedin our products and the suppliers who provide those minerals, particularly from and around the Democratic Republic of Congo, and adjoining countries, as well as procedures regarding a manufacturer's efforts to identify and prevent the sourcing of such minerals and metals produced from those minerals. Additional reporting obligations are being considered by the European Union. The U.S. requirements and any additional European requirements could affect the sourcing and availability of metals used in the manufacture of a number of parts contained in our products. For example, these disclosure requirements may decrease the number of suppliers capable of supplying our needs for certain metals or we may be unable to conclusively verify the origins of all metals used in our products. We may suffer financial and reputational harm if customers require, and we are unable to deliver, certification that our products are conflict free. Regardless, we continue to incur costs associated with compliance, including time-consuming and costly efforts to determine the source of minerals used in our products.
We are exposedregularly subject to potential lawsuits alleging defects in our productsa wide variety of litigation including commercial and otheremployment litigation as well as claims related to alleged defects in the design and use of our products.
We are regularly subject to a wide variety of litigation including claims, lawsuits, and other similar proceedings involving our business practices and products including claims and disputes regarding product liability, labor and employment, and commercial matters. The number and significance of these claims and disputes have increased as our company has grown larger, our business has expanded in scope and geographic reach, and our products and services have increased in complexity.
For instance, the sales of our products expose us to the risk of product liability claims, including those alleging hearing loss claims. Although product-related claims are asserted against us periodically, to date none of the claims have materially affected our business, financial condition, or results of operations. Nevertheless, there is no guarantee that future claims will not materially negatively impact our business or result in substantial damages, or both.
loss. Additionally, our mobile headsets are used with mobile telephones and there has been public controversy over whether the radio frequency emissions from mobile phones are harmful to users of mobile phones. We are unaware of any conclusive proof of any health hazard from the use of mobile phones, butLikewise, research in this area continues and if it establishes a health hazard from the use of mobile phones or public controversy grows even in the absence of conclusive research findings, the likelihood of litigation against us may increase. Likewise, should researchcould establish a link between radio frequency emissions and corded or wireless headsets or should we could become a party to litigation claiming such a link and public concern in this area grows, demand for our corded or wireless headsets could be reduced creating a material adverse effect on our financial results.
link. There is also continuing public controversy over the use of mobile phones by operators of motor vehicles. While we believe our products enhance driver safety by permitting a motor vehicle operator to generally keep both hands free to operate the vehicle, there is no certainty that this is the case,vehicles and we may be subject to allegations that use of a mobile phone and headset contributed to a motor vehicle accident.
In addition, we have been sued by employees regarding our employment practices and business partners regarding contractual rights and obligations. We have also been sued by a competitor, GN Netcom, Inc., regarding alleged violations of certain laws regulating competition and business practices which lawsuit is more specifically described in Part I, Item 3 under the caption "Legal Proceedings" and Part II, Item 8, Note 8 under the caption "Commitments and Contingencies" of this Annual Report on Form 10-K.
Frequently, the outcome and impact of any claims, lawsuits, and other similar proceedings cannot be predicted with certainty. Moreover, regardless of the outcome such proceedings can have an adverse impact on us because of significant legal costs, diversion of management resources, and other factors. Determining reserves for our pending litigation is a complex, fact-intensive process that is subject to judgment calls. It is possible that a resolution of one or more such proceedings could require us to make substantial payments to satisfy judgments, penalties or to settle claims or proceedings, any of which could harm our business. These proceedings could also result in reputational harm, sanctions, consent decrees, or orders preventing us from offering certain products, or services, or requiring a change in our business practices in costly ways. Any of these consequences could materially harm our business.
We maintain product liability insurance and general liability insurance in amounts we believe sufficient to cover reasonably anticipated claims, including some of those described above; however, the coverage provided under the policies could be inapplicable or insufficient to cover the full amount of any one or more claims. Therefore, successful product liabilityConsequently, claims brought against us, whether or not successful, could have a material adverse effect upon our business, financial condition, and results of operations.
Our stock price may be volatile and the value of an investment in our stock could be diminished.
The market price for our common stock has been affected and may continue to be affected by a number of factors, including:
Uncertain global and regional economic and geopolitical conditions, including slow or stagnant growth, inflationary pressures, political or military unrest
Failure to meet our forecasts or the expectations and forecasts of securities analysts
Changes in our guidance or announced forecasts that may or may not be consistent with the expectations of analysts or investors
Quarterly variations in our or our competitors' results of operations and changes in market share
The announcement of new products, product enhancements, or partnerships by us or our competitors
Our ability to develop, introduce, ship, and support new products and product enhancements and manage product transitions and recalls, if any
Repurchases of our common shares under our repurchase plans or public announcement of our intention not to repurchase our common shares
Our decision to declare dividends or increase or decrease dividends over historical rates
The loss of services of one or more of our executive officers or other key employees
Changes in earnings estimates, recommendations, or ratings by securities analysts or a reduction in the number of analysts following our stock
Developments in our industry, including new or increased enforcement of existing governmental regulations related to our products and new or revised communications standards
Concentrated ownership of our common stock by a limited number of institutional investors that may limit liquidity for investors interested in acquiring or selling positions in our common stock, particularly substantial positions
Sales of substantial numbers of shares of our common stock in the public market by us, our officers or directors, or unaffiliated third parties, including institutional investors
General economic, political, and market conditions, including market volatility
Litigation brought by or against us
Other factors unrelated to our operating performance or the operating performance of our competitors
Our business could be materially adversely affected if we lose the benefit of the services of key personnel or if we fail to attract talented new personnel.
Our success depends to a large extent upon the services of a limited number of executive officers and other key employees. The unanticipated loss of the services of one or more of our executive officers or key employees could have a material adverse effect upon our business, financial condition, and results of operations. We also believe that our future success will depend in large part upon our ability to attract and retain additional highly skilled technical, management, sales, and marketing personnel. Competition for such personnel is intense. We may not be successful in attracting and retaining such personnel, and our failure to do so could have a material adverse effect on our business, operating results, or financial condition.
We are subject to environmental laws and regulations that expose us to a number of risks and could result in significant liabilities and costs.
There are multiple regulatory initiatives in several jurisdictions regarding the removal of certain potential environmentally sensitive materials from our products to comply with Restrictions of the use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”) and on Waste Electrical and Electronic Equipment (“WEEE”). If it is determined that our products do not comply with RoHs or WEEE, or additional new or existing environmental laws or regulations in the U.S., Europe, or other jurisdictions are enacted or amended, we may be required to modify some or all of our products or replace one or more components in those products, which, if such modifications are possible, may be time-consuming, expensive to implement or decrease end-user demand, particularly if we increase prices to offset higher costs. If any of the foregoing were to happen, our ability to sell one or more of our products may be limited or prohibited causing a material negative effect on our financial results.
We are subject to various federal, state, local, and foreign environmental laws and regulations, including those governing the use, discharge, and disposal of hazardous substances in the ordinary course of our manufacturing process. It is possible that future environmental legislation may be enacted or current environmental legislation may be interpreted in any given country in a manner that creates environmental liability with respect to our facilities, operations, or products. We may also be required to implement new or modify existing policies, processes and procedures as they relate to the use and disposal of our products. To the extent any new or modified policies, processes or procedures are difficult, time-consuming or costly to implement or we incur claims for environmental matters exceeding reserves or insurance for environmental liability, our operating results could be negatively impacted.
We have $16.1$15.8 million of goodwill and other intangible assets recorded on our balance sheet. If the carrying value of our goodwill were to exceed its implied fair value, or if the carrying value of intangible assets were not recoverable, an impairment loss may be recognized, which would adversely affect our financial results.
As a result of past acquisitions we have $16.1$15.8 million of goodwill and other intangible assets on our consolidated balance sheet as of March 31, 2015.2016. It is impossible at this time to determine if any future impairment charge could occur or, if it does, whether such charge related to these assets would be material. If such a charge is necessary, it may have a material adverse effect our financial results.
If we are unable to protect our information systems against service interruption, misappropriation of data or breaches of security, our operations could be disrupted, our reputation may be damaged, and we may be financially liable for damages.
We rely on networks, information systems, and other technology (“information systems”), including the Internet and third-party hosted services, to support a variety of business activities, including procurement, manufacturing, sales, distribution, invoicing, and collections. We use information systems to process and report financial information internally and to comply with regulatory reporting. In addition, we depend on information systems for communications with our suppliers, distributors, and customers. Consequently, our business may be impacted by system shutdowns or service disruptions during routine operations, such as system upgrades or user errors, as well as network or hardware failures, malicious software, hackers, natural disasters, communications interruptions, or other events (collectively, "network incidents"). Our computer systems have been, and will likely continue to be, subject to network incidents. While, to date, we have not experienced a network incident resulting in material impairment to our operations, nor have we experienced material intentional or inadvertent disclosure of our data or information or the information or data of our customers or vendors, future network incidents could result in unintended disruption of our operations or disclosure of sensitive information or assets. Furthermore, we may experience targeted attacks and although we continue to invest in personnel, technologies, and training to prepare for and reduce the adverse consequences of such attacks, these investments are expensive and do not guarantee that such attacks will be unsuccessful, either completely or partially.
If our information systems are disrupted or shutdown and we fail to timely and effectively resolve the issues, we could experience delays in reporting our financial results and we may lose revenue and profits. Misuse, leakage, or falsification of information could result in a violation of data privacy laws and regulations, damage our reputation, and have a negative impact on net operating results. In addition, we may suffer financial damage and damage to our reputation because of loss or misappropriation of our confidential information or assets, or those of our partners, customers, or suppliers. We could also be required to expend significant effort and incur financial costs to remedy security breaches or to repair or replace networks and information systems.
War, terrorism, public health issues, natural disasters, or other business interruptions could disrupt supply, delivery, or demand of products, which could negatively affect our operations and performance.
War, terrorism, public health issues, natural disasters, or other business interruptions, whether in the U.S. or abroad, have caused or could cause damage or disruption to international commerce by creating economic and political uncertainties that may have a strong negative impact on the global economy, us, and our suppliers or customers. Our major business operations and those of many of our vendors and their sub-suppliers (collectively, "Suppliers") are subject to interruption by disasters, including, without limitation, earthquakes, floods, and volcanic eruptions or other natural or manmade disasters, fire, power shortages, terrorist attacks and other hostile acts, public health issues, flu or similar epidemics or pandemics, and other events beyond our control and the control of our Suppliers.
Our corporate headquarters, information technology, manufacturing, certain research and development activities, and other critical business operations are located near major seismic faults or flood zones. While we are partially insured for earthquake-related losses or floods, our operating results and financial condition could be materially affected in the event of a major earthquake or other natural or manmade disaster.
Should any of the events above arise we could be negatively impacted by the need for more stringent employee travel restrictions, limitations in the availability of freight services, governmental actions limiting the movement of products between various regions, delays in production, and disruptions in the operations of our Suppliers. Our operating results and financial condition could be adversely affected by these events.
Provisions in our charter documents and Delaware law or a decision by our Board of Directors in the future may delay or prevent a third party from acquiring us, which could decrease the value of our stock.
Our Board of Directors has the authority to issue preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting and conversion rights, of those shares without any further vote or action by the stockholders. The issuance of our preferred stock could have the effect of making it more difficult for a third party to acquire us. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which could also have the effect of delaying or preventing our acquisition by a third party. Further, certain provisions of our Certificate of Incorporation and bylaws could delay or make more difficult a merger, tender offer or proxy contest, which could adversely affect the market price of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive offices are located in Santa Cruz, California. Our facilities are located throughout the Americas, Europe, and Asia. The table below lists the major facilities owned or leased as of March 31, 20152016:
| Location | Square Footage | Lease/Own | Primary Use |
| Santa Cruz, California | 163,328 | Own | Sales & Marketing, Engineering, Administration, Light Assembly |
| Santa Cruz, California | 20,325 | Lease | Light Assembly, Sales, Engineering, Administration |
| Tijuana, Mexico | 792,304 | Own | Engineering, Assembly, Administration, Logistic and Distribution Center, Design Center, Call Center, and TAC. |
| San Diego, California | 23,368 | Lease | Industrial and Office Space |
| Chattanooga, Tennessee | 10,125 | Own | Light Assembly, Sales and Marketing, Engineering, Administration, and TAC (Technical Assistance Center) |
| Hoofddorp, Netherlands | 16,640 | Lease | Administrative and TAC |
| Suzhou, China | 42,012 | Lease | Sales, Administration, Design Center, Quality, TAC |
| Wootton Bassett, UK | 21,824 | Own | Main Building Sales, Engineering, Administration |
| Wootton Bassett, UK | 15,970 | Own | Currently leased to a third party |
ITEM 3. LEGAL PROCEEDINGS
On October 12, 2012, GN Netcom, Inc. sued Plantronics, Inc. in the U.S. District Court for the District of Delaware, case number 1:12cv01318, alleging violations of the Sherman Act, the Clayton Act, and Delaware common law. In its complaint, GN specifically alleges four causes of action: Monopolization, Attempted Monopolization, Concerted Action in Restraint of Trade, and Tortious Interference with Business Relations. GN claims that Plantronics dominates the market for headsets sold into contact centers in the United States and that a critical channel for sales of headsets to contact centers is through a limited network of specialized independent distributors (“SIDs”). GN asserts that Plantronics attracts SIDs through Plantronics Only Distributor Agreements and the use of these agreements is allegedly illegal. Plantronics denies each of the allegations in the complaint and is vigorously defending itself. See Note 8, Commitments and Contingencies, of our Notes to Consolidated Financial Statements in this Form 10-K.
During the quarter ended December 26, 2015, GN Netcom (“GN”) and Plantronics commenced the briefing on a motion for sanctions against Plantronics for spoliation of evidence. The briefing was concluded in early January. A court date for a hearing on the motion for sanctions is scheduled for May 18, 2016. There exists a reasonable possibility of the court issuing a sanction; however, we believe the low end of the possible range of losses is zero and the upper end of the range is immaterial. In the event we were to incur other, non-monetary sanctions for spoliation of evidence, it may have an adverse impact on the substantive case brought against us on October 12, 2012. However, we are unable to estimate a loss or range of losses that could possibly result from the substantive case should non-monetary sanctions be brought against us.
In addition, we are presently engaged in various legal actions arising in the normal course of business. We believe 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.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
Our common stock is publicly traded on the New York Stock Exchange ("NYSE") under the symbol “PLT”. The following table sets forth the low and high sales prices as reported on the NYSE for each period indicated:
| Low | High | Low | High | |||||||||||
| Fiscal Year 2016 | ||||||||||||||
| First Quarter | $ | 52.32 | $ | 58.09 | ||||||||||
| Second Quarter | $ | 51.15 | $ | 58.08 | ||||||||||
| Third Quarter | $ | 47.81 | $ | 54.93 | ||||||||||
| Fourth Quarter | $ | 32.55 | $ | 48.54 | ||||||||||
| Fiscal Year 2015 | ||||||||||||||
| First Quarter | $ | 41.57 | $ | 47.88 | $ | 41.57 | $ | 47.88 | ||||||
| Second Quarter | $ | 46.12 | $ | 51.00 | $ | 46.12 | $ | 51.00 | ||||||
| Third Quarter | $ | 43.27 | $ | 53.84 | $ | 43.27 | $ | 53.84 | ||||||
| Fourth Quarter | $ | 45.83 | $ | 55.45 | $ | 45.83 | $ | 55.45 | ||||||
| Fiscal Year 2014 | ||||||||||||||
| First Quarter | $ | 41.52 | $ | 47.00 | ||||||||||
| Second Quarter | $ | 42.94 | $ | 48.03 | ||||||||||
| Third Quarter | $ | 42.09 | $ | 49.56 | ||||||||||
| Fourth Quarter | $ | 41.41 | $ | 46.48 | ||||||||||
As of April 24, 2015,May 12, 2016, there were approximately 4448 holders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of beneficial owners, we are unable to estimate the total number of beneficial owners, but we believe it is significantly higher than the number of record holders. On March 27, 2015,April 1, 2016, the last trading day of fiscal year 2015,2016, the last sale reported on the NYSE for our common stock was $53.95$39.36 per share.
Cash Dividends
Quarterly dividends paid per share in fiscal years 20152016 and 20142015 were $0.15, and $0.10, respectively, resulting in total payments of $25.7$21.1 million and $17.425.7 million, respectively. On April 27, 2015May 3, 2016, the Audit Committee approved the payment of a dividend of $0.15 per share on June 10, 20152016 to holders of record on May 20, 20152016. We expect to continue paying a quarterly dividend of $0.15 per 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 of Directors each quarter after its review of our financial performance and financial position.
Share Repurchase Programs
The following table presents a month-to-month summary of the stock purchase activity in the fourth quarter of fiscal year 20152016:
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 | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs 6 | |||||||||
| December 28, 2014 to January 24, 2015 | 37,450 | 3 | $ | 52.05 | 36,000 | 300,210 | ||||||
| January 25, 2015 to February 21, 2015 | 270,821 | 4 | $ | 47.80 | 267,335 | 1,032,875 | ||||||
| February 22, 2015 to March 28, 2015 | 1,323,007 | 5 | $ | 53.60 | 1,321,823 | 2,711,052 | ||||||
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 | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs 6 | |||||||||
| December 27, 2015 to January 23, 2016 | 2,483 | 3 | $ | — | — | 37,868 | ||||||
| January 24, 2016 to February 20, 2016 | 174,885 | 4 | $ | 34.73 | 172,583 | 865,285 | ||||||
| February 21, 2016 to April 2, 2016 | 232,699 | 5 | $ | 37.29 | 231,274 | 634,011 | ||||||
1 | On | |
2 | "Average Price Paid per Share" reflects only our open market repurchases of common stock. | |
3 | Represents only shares that were tendered to us in satisfaction of employee tax withholding obligations upon the vesting of restricted stock grants under our stock plans. | |
4 | Includes 2,302 shares that were tendered to us in satisfaction of employee tax withholding obligations upon the vesting of restricted stock grants under our stock plans. | |
5 | Includes 1,425 shares that were tendered to us in satisfaction of employee tax withholding obligations upon the vesting of restricted stock grants under our stock plans. | |
6 | These shares reflect the available shares authorized for repurchase under the | |
Refer to Note 11,12, Common Stock Repurchases, of our Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for more information regarding our stock repurchase programs.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and notes thereto included in Item 8 of this Form 10-K in order to fully understand factors that may affect the comparability of the information presented below. Fiscal year 2016 consisted of 53 weeks. All other fiscal years presented consisted of 52 weeks.
| Fiscal Year Ended March 31, | Fiscal Year Ended March 31, | |||||||||||||||||||||||||||||||||||||
20151 | 2014 | 20132 | 2012 | 20113 | 2012 | 20133 | 2014 | 20152 | 20161 | |||||||||||||||||||||||||||||
| ($ in thousands, except per share data) | ||||||||||||||||||||||||||||||||||||||
| STATEMENT OF OPERATIONS DATA: | ||||||||||||||||||||||||||||||||||||||
| Net revenues | $ | 865,010 | $ | 818,607 | $ | 762,226 | $ | 713,368 | $ | 683,602 | $ | 713,368 | $ | 762,226 | $ | 818,607 | $ | 865,010 | $ | 856,907 | ||||||||||||||||||
| Operating income | $ | 149,085 | $ | 140,124 | $ | 138,097 | $ | 141,353 | $ | 140,712 | $ | 141,353 | $ | 138,097 | $ | 140,124 | $ | 149,085 | $ | 108,041 | ||||||||||||||||||
| Operating margin | 17.2 | % | 17.1 | % | 18.1 | % | 19.8 | % | 20.6 | % | 19.8 | % | 18.1 | % | 17.1 | % | 17.2 | % | 12.6 | % | ||||||||||||||||||
| Income before taxes | $ | 145,251 | $ | 141,139 | $ | 138,425 | $ | 142,602 | $ | 140,656 | $ | 142,602 | $ | 138,425 | $ | 141,139 | $ | 145,251 | $ | 82,176 | ||||||||||||||||||
| Net income | $ | 112,301 | $ | 112,417 | $ | 106,402 | $ | 109,036 | $ | 109,243 | $ | 109,036 | $ | 106,402 | $ | 112,417 | $ | 112,301 | $ | 68,392 | ||||||||||||||||||
| Basic earnings per share | $ | 2.69 | $ | 2.65 | $ | 2.55 | $ | 2.48 | $ | 2.29 | $ | 2.48 | $ | 2.55 | $ | 2.65 | $ | 2.69 | $ | 2.00 | ||||||||||||||||||
| Diluted earnings per share | $ | 2.63 | $ | 2.59 | $ | 2.49 | $ | 2.41 | $ | 2.21 | $ | 2.41 | $ | 2.49 | $ | 2.59 | $ | 2.63 | $ | 1.96 | ||||||||||||||||||
| Cash dividends declared per common share | $ | 0.60 | $ | 0.40 | $ | 0.40 | $ | 0.20 | $ | 0.20 | $ | 0.20 | $ | 0.40 | $ | 0.40 | $ | 0.60 | $ | 0.60 | ||||||||||||||||||
| Shares used in basic per share calculations | 41,723 | 42,452 | 41,748 | 44,023 | 47,713 | 44,023 | 41,748 | 42,452 | 41,723 | 34,127 | ||||||||||||||||||||||||||||
| Shares used in diluted per share calculations | 42,643 | 43,364 | 42,738 | 45,265 | 49,344 | 45,265 | 42,738 | 43,364 | 42,643 | 34,938 | ||||||||||||||||||||||||||||
| BALANCE SHEET DATA: | ||||||||||||||||||||||||||||||||||||||
| Cash, cash equivalents, and short-term investments | $ | 374,709 | $ | 335,421 | $ | 345,357 | $ | 334,512 | $ | 429,956 | $ | 334,512 | $ | 345,357 | $ | 335,421 | $ | 374,709 | $ | 395,317 | ||||||||||||||||||
| Total assets | $ | 876,042 | $ | 811,815 | $ | 764,605 | $ | 672,470 | $ | 744,647 | $ | 672,470 | $ | 764,605 | $ | 811,815 | $ | 876,042 | $ | 933,437 | ||||||||||||||||||
| Long-term debt, net of issuance costs | $ | — | $ | — | $ | — | $ | — | $ | 489,609 | ||||||||||||||||||||||||||||
| Revolving line of credit | $ | 34,500 | $ | — | $ | — | $ | 37,000 | $ | — | $ | 37,000 | $ | — | $ | — | $ | 34,500 | $ | — | ||||||||||||||||||
| Other long-term obligations | $ | 19,323 | $ | 15,544 | $ | 12,930 | $ | 13,360 | $ | 12,667 | $ | 13,360 | $ | 12,930 | $ | 15,544 | $ | 19,323 | $ | 22,262 | ||||||||||||||||||
| Total stockholders' equity | $ | 727,397 | $ | 698,664 | $ | 646,447 | $ | 527,244 | $ | 634,852 | $ | 527,244 | $ | 646,447 | $ | 698,664 | $ | 727,397 | $ | 312,399 | ||||||||||||||||||
| OTHER DATA: | ||||||||||||||||||||||||||||||||||||||
| Cash provided by operating activities | $ | 154,438 | $ | 141,491 | $ | 125,501 | $ | 140,448 | $ | 158,232 | $ | 140,448 | $ | 125,501 | $ | 141,491 | $ | 154,438 | $ | 146,869 | ||||||||||||||||||
1 | We initiated a restructuring plan during the third quarter of fiscal year 2016. Under the plan, we reduced costs by eliminating certain positions in the US, Mexico, China, and Europe. The pre-tax charges of $16.2 million incurred during fiscal year 2016 were incurred for severance and related benefits. During fiscal year 2016, we recognized gains from litigation of $1.2 million, due primarily to a payment by a competitor to dismiss litigation involving the alleged infringement of a patent assigned to us. |
2 | During fiscal year 2015, we recognized a gain of $6.5 million upon payment by a competitor to dismiss litigation involving the alleged infringement of a patent assigned to us. In addition, we recognized a gain of $2.2 million related to the resolution of an insurance coverage dispute with one of its insurance carriers. |
| We initiated a restructuring plan during the third quarter of fiscal year 2013. Under the plan, we reallocated costs by eliminating certain positions in the US, Mexico, China, and Europe, and transitioned some of these positions to lower cost locations. As part of this plan, we also vacated a portion of a leased facility at our corporate headquarters in the first quarter of fiscal year 2014. The pre-tax charges incurred during fiscal year 2013 included $1.9 million for severance and related benefits and an immaterial amount of accelerated amortization on leasehold assets with no alternative future use. We incurred an immaterial amount of lease termination costs when we exited the facility in the first quarter of fiscal year 2014. The restructuring plan was substantially complete at the end of the first quarter of fiscal year 2014. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to help you understand our results of operations and financial condition. It is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements. Please see the sections entitled "Certain Forward Looking Information" and "Risk Factors" above for discussions of the uncertainties, risks, and assumptions associated with these statements. Our fiscal year-end financial reporting periods end on the Saturday closest to March 31st. Fiscal year 2016 had 53 weeks and ended on April 2, 2016, fiscal years 2015, and 2014, and 2013 each had 52 weeks and ended on March 28, 2015, and March 29, 2014, and March 30, 2013, 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, we manufacture and market specialty telephone products under our Clarity brand, such as telephones for the hearing impaired, and other related products for people with special communication needs. Our major product categories are Enterprise, which includes headsets optimized for Unified Communications (“UC”), other corded and cordless communication headsets, audio processors, and telephone systems; and Consumer, which includes Bluetooth®Bluetooth and corded products for mobile phonedevice applications, personal computer ("PC") and gaming headsets, and specialty products marketed for hearing impaired individuals.
Operating profit decreased 27.5% to $108.0 million, due primarily to restructuring charges taken during fiscal year 2016, the fluctuations in foreign currency exchange rates, and the impact of a non-recurring, favorable litigation settlement in fiscal year 2015. The adverse fluctuations in foreign currency exchange rates negatively impacted our net revenues but favorably impacted our operating profit grew 6.4%expenses, although to $149.1 million.a lesser degree, for a net unfavorable impact of $11 million to our operating profit. These items were partially offset by a reduction in variable compensation expense due to lower profitability. We delivered $112.3$68.4 million in net income, representing approximately 13%8.0% of our net revenues. UC product revenues, which we believe represent our key long-term growth driver, increased 18.4% over the prior year to $196.2 million.
Revenues from our Consumer products channel are seasonal and beyond, includingtypically strongest in our third fiscal quarter, which includes the majority of the holiday shopping season. Additionally, other factors directly impact our Consumer product category performance, such as consumer preferences, changes in consumer confidence and other macroeconomic factors, product life-cycles (including the introduction and pace of adoption of new technology), and the competitive retail environment. Our Consumer business continues to be impacted by a refresh ofdecline in sales volumes in our PC and Entertainment product line plannedmono Bluetooth products as the market for these products contracts. The unit volumes in our stereo Bluetooth category increased slightly when compared to the coming year. We have followed our business customer into the mobile world with the goal of becoming the indispensable interface users turn to for connected experiences throughout their day. Duringprior fiscal year, 2015 we gained share in the mono Bluetooth category and achieved strong growth in the stereo Bluetooth category. In fiscal year 2015, we were presented with four International Forum (iF) product design awards for both Enterprise and Consumerdriven primarily by our newer generation of products. We anticipate that these newer products and two Consumer Electronics Show (CES) innovation awards. We anticipate thatother planned investments in the Consumer category will help positionallow us to maintain or grow market share as opportunitiesbetter compete in these consumer product categories as they continue to expand.
Due to slower than anticipated growth of UC revenues, combined with the best companynegative impact of a strengthening dollar, and a sharp decrease in the U.S. mono Bluetooth market, our fiscal year 2016 revenues declined year over year, causing us to workmake some necessary changes to reduce our cost structure. During the third quarter of fiscal year 2016 we initiated a restructuring plan to better align expenses to our revenue and gross margin profile and position us for improved operating performance. Under that plan, we reduced costs through voluntary and involuntary elimination of certain positions throughout the organization in the U.S., Mexico, for the fifth consecutive year.China, and Europe. The restructuring actions have resulted in pre-tax charges of approximately $16.2 million in our fiscal year 2016.
Looking forward to fiscal year 2016,2017, UC will continuecontinues to be our primary focus area. With the vast majority of the UC opportunity still ahead of us, we believe we are in the beginning stage of a potentially long period of growth. We believe UC represents our key long-term driver of revenue and profit growth, as we anticipate UC systems will become more commonly adopted by enterprises to reduce costs and improve collaboration. We believe growth of UC will increase overall headset adoption in enterprise environments, and we expect solutions featuring our Simply Smarter Communications® technology will be an important partmost of the UC landscape. Whilegrowth in our Enterprise product category over the next five years to come from headsets designed for UC.
In addition, in fiscal year 2017 we are expecting to launch new peripheral "as-a-service" offerings which we anticipate will complement our existing suite of product offerings as we move toward a hybrid business model of hardware, software, and services. We believe these enhanced offerings will allow us to expand the reach of our solutions portfolio and scale for growth. Our aim is to simplify our customers' experience and drive a baseline of experiences across our portfolio. During our fiscal year 2017, we will strive to transform data into actionable insights for our customers through software solutions that will offer reporting on asset management, usage, and conversation/acoustic health. In order to achieve these objectives, we will redefine our sales and marketing relationships and harmonize goals across these organizations to ensure we are working toward the same shared vision and go-to-market strategy.
We remain cautious about the macroeconomic environment, based on uncertainty around fiscal policy in the U.S., as well as broader economic uncertainty in many parts of Europe and Asia Pacific, which makes it difficult for us to gauge what impact the economy may have on our future business, and the fact that the UC opportunity has not matured as quickly as we initially anticipated, we will continue investing prudently in our long-term growth opportunities.anticipated. We will continue focusing onto monitor our expenditures and prioritize expenditures that further our strategic long-term growth opportunities such as innovative product development throughin our core research and development efforts.efforts, including the use of software and services as part of our portfolio. UC will also remain the central focus of our sales force, marketing group, and other customer service and support teams as we continue expandinginvesting in key strategic alliances and integrations with major UC vendors to market our UC products. We believe we have an excellent position in the Enterprise and Consumer markets and a well-deserved reputation for quality and service that we will continually strive to earn through ongoing investment and strong execution.vendors.
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.
Net Revenues
| Fiscal Year Ended | Fiscal Year Ended | Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | March 31, 2015 | March 31, 2014 | Change | March 31, 2014 | March 31, 2013 | Change | March 31, 2014 | March 31, 2015 | Change | March 31, 2015 | March 31, 2016 | Change | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Enterprise | $ | 619,284 | $ | 588,265 | $ | 31,019 | 5.3 | % | $ | 588,265 | $ | 549,301 | $ | 38,964 | 7.1 | % | $ | 588,265 | $ | 619,284 | $ | 31,019 | 5.3 | % | $ | 619,284 | $ | 626,666 | $ | 7,382 | 1.2 | % | ||||||||||||||||||||||||||||
| Consumer | 245,726 | 230,342 | 15,384 | 6.7 | % | 230,342 | 212,925 | 17,417 | 8.2 | % | 230,342 | 245,726 | 15,384 | 6.7 | % | 245,726 | 230,241 | (15,485 | ) | (6.3 | )% | |||||||||||||||||||||||||||||||||||||||
| Total net revenues | $ | 865,010 | $ | 818,607 | $ | 46,403 | 5.7 | % | $ | 818,607 | $ | 762,226 | $ | 56,381 | 7.4 | % | $ | 818,607 | $ | 865,010 | $ | 46,403 | 5.7 | % | $ | 865,010 | $ | 856,907 | $ | (8,103 | ) | (0.9 | )% | |||||||||||||||||||||||||||
Enterprise products represent our largest source of revenues, while Consumer 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 products into the retail channel typically account for a seasonal increase in net revenues in the third quarter of our fiscal year.
Our net revenues decreased in fiscal year 2016 compared to fiscal year 2015 due largely to a decline in Consumer revenues, which was mainly attributable to the shrinking mono Bluetooth market. This decline was partially offset by slight growth in our Enterprise revenues driven by an increase in demand for UC products resulting from continued adoption of UC voice solutions in the marketplace, partially offset by a slight decline in Core Enterprise (non-UC products).
A stronger U.S. Dollar ("USD") compared to the other foreign currencies in which we sell decreased net revenues by approximately $27 million, net of the effects of hedging, in fiscal year 2016 compared to fiscal year 2015. We generate approximately 44% of our revenues from international sales; therefore, the impact of currency movements on our net revenues can be significant. In fiscal year 2017, our revenues may continue to be affected by uncertainty surrounding exchange rate fluctuations as well as the global economy and consumer spending.
Our net revenues increased in fiscal year 2015 compared to fiscal year 2014 due largely to growth in Enterprise revenues, which was mainly attributable to growth in demand for UC products driven by continued adoption of UC voice solutions in the marketplace. Growth in our net revenues from Consumer products was the result of continued success in the market of key products such as our Voyager Legend mono Bluetooth headset and our Backbeat GO2 and BackBeat FIT stereo Bluetooth headsets. In addition, we successfully introduced Voyager Edge and Backbeat PRO during our fiscal year 2015, driving incremental sales. Partly offsetting these increases were reductions in revenue from our PC and Entertainment product line as our portfolio awaitswas awaiting a refresh which began in the coming year.fiscal year 2016. A stronger U.S. Dollar ("USD") compared to the other foreign currencies in which we sell decreased net revenues by approximately $4.7$5 million, net of the effects of hedging, in fiscal year 2015 compared to fiscal year 2014. We generate approximately 40% of our revenues from international sales; therefore, the impact of currency movements on our net revenues can be significant. In fiscal year 2016, our revenues may be materially affected by the high level of uncertainty surrounding exchange rate fluctuations as well as the global economy and consumer spending. We continually work to offset currency movements through hedging strategies designed to minimize the volatility of results and dampen large fluctuations. However, significant and sustained currency moves cannot be managed by hedges alone.
Geographic Information
| Fiscal Year Ended | Fiscal Year Ended | Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | March 31, 2015 | March 31, 2014 | Change | March 31, 2014 | March 31, 2013 | Change | March 31, 2014 | March 31, 2015 | Change | March 31, 2015 | March 31, 2016 | Change | ||||||||||||||||||||||||||||||||||||||||||||
| Net revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 487,607 | $ | 475,278 | $ | 12,329 | 2.6% | $ | 475,278 | $ | 436,447 | $ | 38,831 | 8.9% | $ | 475,278 | $ | 487,607 | $ | 12,329 | 2.6% | $ | 487,607 | $ | 482,622 | $ | (4,985 | ) | (1.0)% | |||||||||||||||||||||||||||
| As a percentage of net revenues | 56.4 | % | 58.1 | % | 58.1 | % | 57.3 | % | 58.1 | % | 56.4 | % | 56.4 | % | 56.3 | % | ||||||||||||||||||||||||||||||||||||||||
| Europe and Africa | 213,702 | 195,385 | 18,317 | 9.4% | 195,385 | 181,439 | 13,946 | 7.7% | 195,385 | 213,702 | 18,317 | 9.4% | 213,702 | 217,633 | 3,931 | 1.8% | ||||||||||||||||||||||||||||||||||||||||
| Asia Pacific | 104,829 | 94,455 | 10,374 | 11.0% | 94,455 | 92,193 | 2,262 | 2.5% | 94,455 | 104,829 | 10,374 | 11.0% | 104,829 | 105,687 | 858 | 0.8% | ||||||||||||||||||||||||||||||||||||||||
| Americas, excluding United States | 58,872 | 53,489 | 5,383 | 10.1% | 53,489 | 52,147 | 1,342 | 2.6% | 53,489 | 58,872 | 5,383 | 10.1% | 58,872 | 50,965 | (7,907 | ) | (13.4)% | |||||||||||||||||||||||||||||||||||||||
| Total international net revenues | 377,403 | 343,329 | 34,074 | 9.9% | 343,329 | 325,779 | 17,550 | 5.4% | 343,329 | 377,403 | 34,074 | 9.9% | 377,403 | 374,285 | (3,118 | ) | (0.8)% | |||||||||||||||||||||||||||||||||||||||
| As a percentage of net revenues | 43.6 | % | 41.9 | % | 41.9 | % | 42.7 | % | 41.9 | % | 43.6 | % | 43.6 | % | 43.7 | % | ||||||||||||||||||||||||||||||||||||||||
| Total net revenues | $ | 865,010 | $ | 818,607 | $ | 46,403 | 5.7% | $ | 818,607 | $ | 762,226 | $ | 56,381 | 7.4% | $ | 818,607 | $ | 865,010 | 46,403 | 5.7% | $ | 865,010 | $ | 856,907 | $ | (8,103 | ) | (0.9)% | ||||||||||||||||||||||||||||
As a percentage of total net revenues, U.S. net revenues decreased slightly compared with international revenues in fiscal year 2016 compared to fiscal year 2015. The decrease in absolute dollars in U.S. net revenues was driven primarily by weaker Consumer revenues primarily as a result of the declining mono Bluetooth market, which was partially offset by increased Enterprise net revenues due to continued growth in demand for UC. The decrease in absolute dollars in international revenues was due primarily to decreased Core Enterprise net revenues, partially offset by higher UC and Consumer revenues. International revenues were reduced by approximately $27 million, net of the effects of hedging, in fiscal year 2016 compared to fiscal year 2015, due to unfavorable foreign exchange fluctuations in the other foreign currencies in which we sell.
As a percentage of total net revenues, U.S. net revenues decreased slightly compared with international revenues in fiscal year 2015 compared to fiscal year 2014, with international revenues, as a percentage of total net revenues, correspondingly increasing.2014. The increase in absolute dollars in U.S. net revenues was driven primarily by increased Enterprise net revenues due to continued growth in demand for UC and stronger Consumer revenues as a result of a refreshed and enhanced next generation product portfolio. The increase in absolute dollars in international revenues was also due primarily to increased Enterprise net revenues due toreflecting continued growth in demand for UC with higher Consumer revenues contributingproducts and, to a lesser extent.extent, higher Consumer revenues. International revenues were reduced by approximately $4.7$5 million, net of the effects of hedging, in fiscal year 2015 compared to fiscal year 2014, due to unfavorable foreign exchange fluctuations in the other foreign currencies in which we sell.
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 | Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | March 31, 2015 | March 31, 2014 | Change | March 31, 2014 | March 31, 2013 | Change | March 31, 2014 | March 31, 2015 | Change | March 31, 2015 | March 31, 2016 | Change | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net revenues | $ | 865,010 | $ | 818,607 | $ | 46,403 | 5.7 | % | $ | 818,607 | $ | 762,226 | $ | 56,381 | 7.4 | % | $ | 818,607 | $ | 865,010 | $ | 46,403 | 5.7 | % | $ | 865,010 | $ | 856,907 | $ | (8,103 | ) | (0.9 | )% | |||||||||||||||||||||||||||
| Cost of revenues | 403,391 | 391,979 | 11,412 | 2.9 | % | 391,979 | 359,045 | 32,934 | 9.2 | % | 391,979 | 403,391 | 11,412 | 2.9 | % | 403,391 | 422,233 | 18,842 | 4.7 | % | ||||||||||||||||||||||||||||||||||||||||
| Gross profit | $ | 461,619 | $ | 426,628 | $ | 34,991 | 8.2 | % | $ | 426,628 | $ | 403,181 | $ | 23,447 | 5.8 | % | $ | 426,628 | $ | 461,619 | $ | 34,991 | 8.2 | % | $ | 461,619 | $ | 434,674 | $ | (26,945 | ) | (5.8 | )% | |||||||||||||||||||||||||||
| Gross profit % | 53.4 | % | 52.1 | % | 52.1 | % | 52.9 | % | 52.1 | % | 53.4 | % | 53.4 | % | 50.7 | % | ||||||||||||||||||||||||||||||||||||||||||||
Compared to the prior year, gross profit as a percentage of revenues decreased in fiscal year 2016 due primarily to the weakening of foreign currencies relative to the USD, which negatively impacted margins on our international product sales. Gross profit was further negatively impacted by a lower mix of Core Enterprise sales, which carry higher margins than our UC and Consumer categories.
Compared to the prior year, gross profit as a percentage of revenues increased in fiscal year 2015 due primarily to reductions in product costs and higher revenues from next-generation mobile products carrying better margins. These favorable impacts were offset in part by the following: (i) a shift in product mix from Enterprise to Consumer; (ii) within Enterprise, the continued ramp in UC, which carries lower margins than our non-UC Enterprise products; and (iii) non-recurrence of a favorable adjustment made in fiscal year 2014 to correct an immaterial error related to our warranty and sales returns reserves. Refer to further discussion of this prior year adjustment in Note 6, Details of Certain Balance Sheet Accounts, of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
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. 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 | Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | March 31, 2015 | March 31, 2014 | Change | March 31, 2014 | March 31, 2013 | Change | March 31, 2014 | March 31, 2015 | Change | March 31, 2015 | March 31, 2016 | Change | ||||||||||||||||||||||||||||||||||||||||||||||||
| Research, development and engineering | $ | 91,627 | $ | 84,781 | $ | 6,846 | 8.1 | % | $ | 84,781 | $ | 80,373 | $ | 4,408 | 5.5 | % | $ | 84,781 | $ | 91,627 | $ | 6,846 | 8.1 | % | $ | 91,627 | $ | 90,408 | $ | (1,219 | ) | (1.3 | )% | |||||||||||||||||||||||||||
| % of total net revenues | 10.6 | % | 10.4 | % | 10.4 | % | 10.5 | % | 10.4 | % | 10.6 | % | 10.6 | % | 10.6 | % | ||||||||||||||||||||||||||||||||||||||||||||
The decrease in research, development, and engineering expenses in fiscal year 2016 compared to fiscal year 2015 was due primarily to a reduction in variable compensation associated with lower profitability and a favorable impact due to foreign currency fluctuations. These items were partially offset by higher equity-based compensation expense resulting from restricted stock grants made after May 2013, which vest over three years, compared to restricted stock grants made prior to May 2013, which vest over four years.
The increase in research, development, and engineering expenses in fiscal year 2015 compared to fiscal year 2014 was due primarily to $4.7 million in headcount-related costs, including increased salary expense, and performance-based compensation, includingand an increase to equity-based compensation resulting from the shorter vesting schedule of restricted stock grants made after May 2013 which vest over three years, compared to restricted stock grants made prior to May 2013, which vest over four years.2013.
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 | Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | March 31, 2015 | March 31, 2014 | Change | March 31, 2014 | March 31, 2013 | Change | March 31, 2014 | March 31, 2015 | Change | March 31, 2015 | March 31, 2016 | Change | ||||||||||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | $ | 229,569 | $ | 201,176 | $ | 28,393 | 14.1 | % | $ | 201,176 | $ | 182,445 | $ | 18,731 | 10.3 | % | $ | 201,176 | $ | 229,569 | $ | 28,393 | 14.1 | % | $ | 229,569 | $ | 221,299 | $ | (8,270 | ) | (3.6 | )% | |||||||||||||||||||||||||||
| % of total net revenues | 26.5 | % | 24.6 | % | 24.6 | % | 23.9 | % | 24.6 | % | 26.5 | % | 26.5 | % | 25.8 | % | ||||||||||||||||||||||||||||||||||||||||||||
The decrease in selling, general, and administrative expenses in fiscal year 2016 compared to fiscal year 2015 was due primarily to a reduction in variable compensation expense associated with lower profitability, a favorable impact due to foreign currency fluctuations, and reduced legal, IT, and outside services expenses. These decreases were partially offset by higher equity-based compensation expense resulting from the shorter vesting schedule of restricted stock grants made after May 2013 compared to restricted stock grants made prior to May 2013, and an increase in bad debt expense related to RadioShack's bankruptcy proceedings.
The increase in selling, general, and administrative expenses in fiscal year 2015 compared to fiscal year 2014 was due primarily to $13.5 million in higher headcount-related costs resulting from higher performance-based compensation reflecting higher net revenues and higher overall achievement against targets, including an increase to equity-based compensation resulting from the shorter vesting schedule of restricted stock grants made after May 2013 compared to restricted stock grants made prior to May 2013. We also experienced an increase of $3.3 million in depreciation related to capital investments made in the past year and $7.1 million in higher legal expenses, driven mainly by ongoing litigation.
Gain from Litigation Settlements
During the fiscal year ended March 31, 2016 we recognized gains of approximately $1.2 million, net of immaterial legal contingency fees, within operating income. These gains were primarily the result of net receipts of $0.8 million from a competitor to dismiss litigation involving the alleged infringement of a patent assigned to us as well as miscellaneous immaterial settlements with other parties.
During the fiscal year ended March 31, 2015 we recognized gains of approximately $8.7 million, net of immaterial legal contingency fees, within operating income. These gains were the result of net receipts of $6.5 million from a competitor to dismiss litigation involving the alleged infringement of a patent assigned to us and $2.2 million related to the resolution of an insurance coverage dispute with one of our insurance carriers. There were no such gains for the fiscal year ended March 31, 2014.
Restructuring and Other Related Charges
| Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||||||||||||||||
| (in thousands) | March 31, 2014 | March 31, 2015 | Change | March 31, 2015 | March 31, 2016 | Change | ||||||||||||||||||||||||
| Restructuring and other related charges | $ | 547 | $ | — | $ | (547 | ) | 100.0 | % | $ | — | $ | 16,160 | $ | 16,160 | 100.0 | % | |||||||||||||
| % of net revenues | 0.1 | % | — | % | — | % | 1.9 | % | ||||||||||||||||||||||
In the third quarter of fiscal year 2016 we initiated a restructuring plan intended to streamline and focus our efforts in order to more closely align our cost structure with our projected future revenue streams, which will better position us for improved operating performance and profitability. This measure was taken as a part of a broader effort to optimize the organization around our long-term strategic initiatives while adjusting for current macroeconomic business conditions and involved the reduction of approximately 125 positions. These staff reductions were substantially complete by the end of fiscal year 2016.
In connection with this plan, we have recorded pre-tax charges of approximately $16.2 million, consisting of severance and related benefits. These charges were offset by a reduction in our fiscal year 2016 stock-based compensation expense of $1.5 million attributable to stock award forfeitures resulting from the restructuring action. Projected annual saving from this plan are in the range of approximately $15 to $16 million and will enable us to reduce our cost structure to better support our long-term profitability targets and maintain our competitiveness. See Note 11, Restructuring and Other Related Charges, of our Notes to Consolidated Financial Statements in this Form 10-K for further information on restructuring costs.
Interest Expense
Interest expense of $25.1 million for fiscal year 2016, was primarily related to the 5.50% Senior Notes and included $1.2 million in amortization of debt issuance costs. Interest expense for fiscal years 2015 and 2014 was immaterial and did not include such costs.
Income Tax Expense
| Fiscal Year Ended | Fiscal Year Ended | Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | March 31, 2015 | March 31, 2014 | Change | March 31, 2014 | March 31, 2013 | Change | March 31, 2014 | March 31, 2015 | Change | March 31, 2015 | March 31, 2016 | Change | ||||||||||||||||||||||||||||||||||||||||||||||||
| Income before income taxes | $ | 145,251 | $ | 141,139 | $ | 4,112 | 2.9 | % | $ | 141,139 | $ | 138,425 | $ | 2,714 | 2.0 | % | $ | 141,139 | $ | 145,251 | $ | 4,112 | 2.9 | % | $ | 145,251 | $ | 82,176 | $ | (63,075 | ) | (43.4 | )% | |||||||||||||||||||||||||||
| Income tax expense | 32,950 | 28,722 | 4,228 | 14.7 | % | 28,722 | 32,023 | (3,301 | ) | (10.3 | )% | 28,722 | 32,950 | 4,228 | 14.7 | % | 32,950 | 13,784 | (19,166 | ) | (58.2 | )% | ||||||||||||||||||||||||||||||||||||||
| Net income | $ | 112,301 | $ | 112,417 | $ | (116 | ) | (0.1 | )% | $ | 112,417 | $ | 106,402 | $ | 6,015 | 5.7 | % | $ | 112,417 | $ | 112,301 | $ | (116 | ) | (0.1 | )% | $ | 112,301 | $ | 68,392 | $ | (43,909 | ) | (39.1 | )% | |||||||||||||||||||||||||
| Effective tax rate | 22.7 | % | 20.4 | % | 20.4 | % | 23.1 | % | 20.4 | % | 22.7 | % | 22.7 | % | 16.8 | % | ||||||||||||||||||||||||||||||||||||||||||||
The effective tax rate for fiscal year 2016 is lower than that in the previous year due primarily to domestic interest expense on new debt and tax benefits associated with the unwind of prior cost-sharing of stock based compensation for the engineering function. A retroactive and permanent reinstatement of the federal research credit was signed into law on December 18, 2015. As such, our effective tax rate for fiscal year 2016 includes the benefit of one quarter of credits for fiscal year 2015 plus the tax benefit for the fiscal year 2016 tax credit.
The effective tax rate for fiscal year 2015 is higher than the previous year due primarily to the absence of several one-time, discrete items that benefited the tax rate in the previous year, such as the generation of a foreign tax credit carryover, changes in Mexican tax law that resulted in the reversal of a valuation allowance, and a deduction for qualifying domestic production activities. These factors were offset by a higher proportion of income earned in foreign jurisdictions that is taxed at lower rates and by an increase in the benefit from the U.S. federal research tax credit. Our fiscal year 2015 included four quarters of benefit from the U.S. federal research tax credit because the credit expired on December 31, 2014 but was retroactively reinstated in January 2015. In contrast, during our fiscal year 2014, the credit was only available for three quarters as the credit expired December 31, 2013 and was not renewed.
Our effective tax rate for fiscal years 2016, 2015, 2014, and 20132014 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 $12.8$12.7 million of unrecognized tax benefits as of March 31, 20152016 compared to $12.6$12.8 million and $11.1$12.6 million as of March 31, 20142015 and 2013,2014, respectively. The unrecognized tax benefits as of the end of fiscal year 20152016 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, 2015,2016, we had approximately $1.8$1.6 million of accrued interest related to uncertain tax positions, compared to $1.71.8 million and $2.0$1.7 million as of March 31, 20142015 and 2013,2014, 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.
FINANCIAL CONDITION
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 | Fiscal Year Ended March 31, | Change | ||||||||||||||||||||||||||||||||||||
| Total cash provided by (used for): | 2015 | 2014 | 2013 | 2015 vs. 2014 | 2014 vs. 2013 | 2014 | 2015 | 2016 | 2014 vs. 2015 | 2015 vs. 2016 | ||||||||||||||||||||||||||||||
| Operating activities | $ | 154,438 | $ | 141,491 | $ | 125,501 | $ | 12,947 | $ | 15,990 | $ | 141,491 | $ | 154,438 | $ | 146,869 | $ | 12,947 | $ | (7,569 | ) | |||||||||||||||||||
| Investing activities | (21,566 | ) | (57,971 | ) | (58,928 | ) | 36,405 | 957 | (57,971 | ) | (21,566 | ) | (131,600 | ) | 36,405 | (110,034 | ) | |||||||||||||||||||||||
| Financing activities | (85,218 | ) | (80,534 | ) | (46,463 | ) | (4,684 | ) | (34,071 | ) | (80,534 | ) | (85,218 | ) | (56,697 | ) | (4,684 | ) | 28,521 | |||||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (3,508 | ) | 942 | (669 | ) | (4,450 | ) | 1,611 | 942 | (3,508 | ) | (156 | ) | (4,450 | ) | 3,352 | ||||||||||||||||||||||||
| Net increase in cash and cash equivalents | $ | 44,146 | $ | 3,928 | $ | 19,441 | ||||||||||||||||||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | $ | 3,928 | $ | 44,146 | $ | (41,584 | ) | |||||||||||||||||||||||||||||||||
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.
Operating Activities
Net cash provided by operating activities during the year ended March 31, 2016 decreased from the prior year due primarily to lower net income after adjusting for non-cash items - predominantly the remeasurement of our non-designated hedge instruments, stock-based compensation, non-cash restructuring charges, and depreciation/amortization. These items were partially offset by a decrease in accounts receivable, and an increase in accounts payable both driven by a shorter cash conversion cycle.
Net cash provided by operating activities during the year ended March 31, 2015 increased from the prior year due primarily to higher net income after adjusting for non-cash items, predominantly stock-based compensation and depreciation, a decrease in accounts receivable, and an increase in accounts payable both due to improved working capital management. These items were partially offset by increase in current assets related to participant deferrals as part of our deferred compensation plan. Please refer to Note 5, Deferred Compensation of our Notes to Consolidated Financial Statements in this Form 10-K for more information regarding our deferred compensation plan.
Investing Activities
Net cash provided by operatingused for investing activities during the year ended March 31, 20142016 increased from the prior year ended March 31, 2015 due to higher net income after adjusting for non-cash items, primarily stock-based compensation and reserve requirements for excess and obsolete inventories, and a decrease in inventories resulting from higher shipments during the period as compared to the same periodan increase in the prior year, which was driven by increased sales, coupled with the depletionnet purchases of last time buy inventories. These increases were partially offset by a decreaseinvestments and an increase in accounts payable resulting primarily from the timing of payments in fiscal year 2014 compared to fiscal year 2013.capital expenditures.
Net cash used for investing activities during the year ended March 31, 2015 decreased from the year ended March 31, 2014 due to a decrease in capital expenditures and an increase in the net cash received from sales of investments. Cash used for investing activities for the year ended March 31, 2015 does not include approximately $2.1 million of capital expenditures as the corresponding accruals were included within accounts payable at March 31, 2015 and therefore did not have an impact on cash flows for the period.
We anticipate our capital expenditures in fiscal year 20162017 to be approximately $30.0$25.0 million to $35.0$30.0 million, related to costs associated with the purchase and related construction of a new smarter working office for our European headquarters in the Netherlands as well as costs associated with building and leasehold improvements at our U.S. headquarters, the implementation of a manufacturing execution system at our facility in Mexico, and other IT-related expenditures. The remainder of the anticipated capital expenditures for fiscal year 20162017 consist 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.
Financing Activities
Net cash used for financing activities during the year ended March 31, 2016 decreased from the year ended March 31, 2015 primarily driven by net proceeds received from issuance of the 5.50% Senior Notes partially offset by an increase in the level of common stock repurchases.
Net cash used for financing activities during the year ended March 31, 2015 increased from the year ended March 31, 2014 due to an increase in the level of common stock repurchases and an increase in our quarterly dividend beginning in the first quarter of our fiscal year 2015. These items were partially offset by an increase in proceeds from our revolving line of credit.
On April 27, 2015,May 3, 2016, we announced that our Audit Committee of the Board of Directors ("the Audit Committee") had declared a cash dividend of $0.15 per share of our common stock, payable on June 10, 20152016 to stockholders of record at the close of business on May 20, 2015.2016. We expect to continue paying a quarterly dividend of $0.15 per 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 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 and dividend payments. At March 31, 20152016, we had working capital of $487.8 million, including $395.3 million of cash, cash equivalents, and short-term investments, compared to working capital of $507.8 million, including $374.7 million of cash, cash equivalents, and short-term investments compared to working capital of $458.7 million, including $335.4 million of cash, cash equivalents, and short-term investments at March 31, 20142015. The increasedecrease in working capital at March 31, 20152016 compared to March 31, 20142015 results from the decrease in accounts receivable and increase in accounts payable both due primarily to improved working capital management.
Our cash and cash equivalents as of March 31, 20152016 consist of bank deposits with third party financial institutions, Commercial Paper, and Commercial Paper.Corporate Bonds. 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, 20152016, of our $374.7395.3 million of cash, cash equivalents, and short-term investments, $16.3$40.9 million is held domestically while $358.4$354.4 million is held by foreign subsidiaries, approximately 90% of which were based in U.S. dollar-denominated holdings. The costs to repatriate our foreign earnings to the U.S. would likely be material; however, our intent is to indefinitely 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 March 31, 20152016, our investments are composed of Mutual Funds, US Treasury Notes, Government Agency Securities, Commercial Paper, Corporate Bonds, and Corporate Bonds.Certificates of Deposits ("CDs").
From time to time, our Board of Directors ("the 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 accelerated stock repurchase agreements. The following table summarizes our repurchase of common stock as part of these publicly announced repurchase programs as well as shares 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, | Fiscal Year Ended March 31, | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2014 | 2015 | 2016 | |||||||||||||||||
| Repurchase of common stock: | ||||||||||||||||||||||
| Shares | 2,221,448 | 1,949,407 | 751,706 | 1,949,407 | 2,221,448 | 9,077,223 | ||||||||||||||||
| Cost | $ | 112.9 | $ | 85.7 | $ | 23.9 | $ | 85.7 | $ | 112.9 | $ | 497.4 | ||||||||||
| Employees' tax withheld and paid for restricted stock and restricted stock units: | ||||||||||||||||||||||
| Shares | 164,387 | 138,022 | 93,206 | 138,022 | 164,387 | 200,642 | ||||||||||||||||
| Cost | $ | 7.6 | $ | 6.2 | $ | 3.0 | $ | 6.2 | $ | 7.6 | $ | 11.1 | ||||||||||
As of March 31, 20152016, there remained a total of 2,711,052634,011 shares authorized for repurchase under the stock repurchase program approved by the Board on March 4, 2015.January 29, 2016. Refer to Note 1112, 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 2015. On January 2, 2013, we retired 5,398,376 shares of treasury stock 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 earningsyears 2016, 2015, and treasury stock.2014.
In May 2011,2015, we entered into aan Amended and Restated Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association ("the Bank"(the “Bank”),. The Credit Agreement amended and restated our prior credit agreement, dated as most recently amended in March 2015 (as amended, "theof May 2011. The Credit Agreement") to increase our outstanding $100Agreement provides for a $100.0 million unsecured revolving credit facility ("the line of credit") by an additional $100 million, for a total facility of $200 million. Any outstanding principal, together with accrued and unpaid interest, is due on the amended maturity date of May 9, 2018 andto augment our financial flexibility. Our obligations under the Credit Agreement are required to be guaranteed by ourthe Company’s domestic subsidiaries, subject to certain exceptions.
In May 2016, we executed a First Amendment to Amended and Restated Credit Agreement and Limited Waiver (the “Amended Credit Agreement”). The Amended Credit Agreement extends the term of the Credit Agreement by one year to May 9, 2019, and waives a default under the Credit Agreement in effect as of March 31, 2016 in which our debt to EBITDA ratio minimally exceeded the previously agreed upon ratio of 3:1. The breach of the covenant was primarily a result of our restructuring activities in the third and fourth quarters of fiscal year 2016.
Revolving loans under the Amended Credit Agreement will bear interest, at our election, at (i) the Bank’s announced prime rate less 1.20% per annum or (ii) a daily one-month LIBOR rate plus 1.40% per annum. Principal, together with all accrued and unpaid interest, on the revolving loans is due and payable on May 9, 2019. The Company is also obligated to pay a commitment fee of 0.37% per annum on the average daily unused amount of the revolving line of credit, which fee shall be payable quarterly in arrears. The Company may prepay the loans and terminate the commitments under the Amended Credit Agreement at any time, without premium or penalty, subject to the reimbursement of certain costs. As of March 31, 2015 we2016 the Company had $34.5 million inno 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 LIBOR rate plus 1.10% per annum, or (3) at an adjusted LIBOR rate, 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:
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 Amended Credit Agreement at the end of each fiscal quarter of at least $200.0$300.0 million. The lineAmended Credit Agreement contains customary events 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,default that include, 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, crosscovenant defaults, cross-defaults with certain other indebtedness, breaches of covenants, judgment defaults, and bankruptcy and insolvency events involving us or anydefaults, and judgment defaults. The occurrence of an event of default could result in the acceleration of the obligations under the Amended Credit Agreement. As of March 31, 2016, we were in breach of our subsidiaries. As of March 31, 2015, we weredebt to EBITDA ratio covenant but in compliance with all other ratios and covenants underby a substantial margin.
On May 2, 2016, we received a waiver from the linelender for noncompliance with the minimum EBITDA covenant at March 31, 2016. Pursuant to the terms of credit.the waiver and amendment to the Credit Agreement, the $16.2 million of restructuring charges recorded in our fiscal year 2016 will be excluded from the lender’s rolling four-quarter EBITDA calculation. This exclusion of restructuring charges does not automatically extend to any such future charges, should they be incurred.
This breach is not considered to be a cross-default on our 5.50% Senior Notes and as such has no impact on the amount or timing of amounts payable related to these debt instruments.
Our liquidity, capital resources, and results of operations in any period could be affected by repurchases of our common stock, dividend payments,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 employee stock purchase plan ("ESPP").ESPP. We receive cash from the exercise of outstanding stock options under our stock plan and the issuance of shares under our ESPP; however,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 unexercised.will expire.
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, 20152016 and 20142015, we had off-balance sheet consigned inventories of $33.4$41.1 million and $40.0$33.4 million, respectively.
The following table summarizes our future contractual obligations as of March 31, 20152016 and the effect that such obligations are expected to have on our liquidity and cash flows in future periods:
| Payments Due by Period | Payments Due by Period | |||||||||||||||||||||||||||||||||||||||
| (in thousands) | Total | Less than 1 year | 1-3 years | 4-5 years | More than 5 years | Total | Less than 1 year | 1-3 years | 4-5 years | More than 5 years | ||||||||||||||||||||||||||||||
| Revolving line of credit | $ | 34,500 | $ | — | $ | — | $ | 34,500 | $ | — | ||||||||||||||||||||||||||||||
| Operating leases | $ | 8,009 | $ | 2,236 | $ | 2,151 | $ | 1,487 | $ | 2,135 | $ | 9,227 | $ | 2,416 | $ | 2,801 | $ | 2,155 | $ | 1,855 | ||||||||||||||||||||
| Unconditional purchase obligations | 123,022 | 121,481 | 1,541 | — | — | 150,930 | 145,276 | 5,654 | — | — | ||||||||||||||||||||||||||||||
| Long term debt (5.50% Senior Notes) | $ | 707,455 | $ | 27,500 | $ | 55,000 | $ | 55,000 | $ | 569,955 | ||||||||||||||||||||||||||||||
| Total contractual cash obligations | $ | 165,531 | $ | 123,717 | $ | 3,692 | $ | 35,987 | $ | 2,135 | $ | 867,612 | $ | 175,192 | $ | 63,455 | $ | 57,155 | $ | 571,810 | ||||||||||||||||||||