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EX-32.1 - EXHIBIT 32.1 - PLANTRONICS INC /CA/ex321fy18.htm
EX-31.2 - EXHIBIT 31.2 - PLANTRONICS INC /CA/ex312fy18.htm
EX-31.1 - EXHIBIT 31.1 - PLANTRONICS INC /CA/ex311fy18.htm
EX-23 - EXHIBIT 23 - PLANTRONICS INC /CA/ex23fy18.htm
EX-21 - EXHIBIT 21 - PLANTRONICS INC /CA/ex21fy18.htm
 
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 31, 2018
 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 x 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 x



Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨
 
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 x 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 x
Accelerated Filer ¨
 
 
Non-accelerated Filer ¨ (Do not check if a smaller reporting company)
Smaller Reporting Company ¨
 
 
 
Emerging Growth Company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ¨ No x
 
The aggregate market value of the common stock held by non-affiliates of the Registrant, based upon the closing price of $44.22 for shares of the Registrant's common stock on September 29, 2017, the last trading day of the Registrant’s most recently completed second fiscal quarter as reported by the New York Stock Exchange, was approximately $1,459,034,920.  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 29, 2017 (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 7, 2018, 49,290,493 shares of common stock were outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 2018 Annual Meeting of Stockholders 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 31, 2018.

 




pltlogopra52.jpg
Plantronics, Inc.
FORM 10-K
For the Year Ended March 31, 2018

TABLE OF CONTENTS
 
Part I.
 
 
Page
Item 1.
 
Item 1A.
 
Item 1B.
 
Item 2.
 
Item 3.
 
Item 4.
 
Part II.
 
 
 
Item 5.
 
Item 6.
 
Item 7.
 
Item 7A.
 
Item 8.
 
Item 9.
 
Item 9A.
 
Item 9B.
 
Part III.
 
 
 
Item 10.
 
Item 11.
 
Item 12.
 
Item 13.
 
Item 14.
 
Part IV.
 
 
 
Item 15.
 
 
Plantronics®, 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 2018. Each of our fiscal years end on the Saturday closest to the last day of March.  Fiscal years 2018 and 2017 each had 52 weeks and ended on March 31, 2018 and April 1, 2017, respectively. Fiscal Year 2016 had 53 weeks and ended on April 2, 2016. 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 was 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," "estimate," "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, 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, audio solutions, 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 that provide a hands-free connection to communication or entertainment devices and freedom of movement for our users.  We use a variety of technologies to develop high quality products that meet our customers needs for communications or personal entertainment.  Our headsets are widely used with applications such as Unified Communications & Collaboration ("UC&C"), in contact centers, offices and homes, with mobile devices and Internet Protocol (IP) telephony, for gaming, and for other specialty applications.  Our major product categories are Enterprise, which includes corded and cordless communication headsets, audio processors, and telephone systems; and Consumer, which includes Bluetooth and corded products for mobile device applications, personal computer ("PC") and gaming headsets. We also offered specialty products marketed for hearing impaired individuals under our Clarity brand, which was included in our Consumer product category until the divestiture of Clarity on July 1, 2017. 

We ship our products to approximately 80 countries through a network of distributors, retailers, resellers, wireless carriers, original equipment manufacturers (“OEMs”), and telephony and other service providers.  We have well-developed distribution channels in North America, Europe, and 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 other categories in those regions and other international locations.  While not always the case, revenues from our Consumer category are typically seasonal, with the third fiscal quarter typically being the strongest due to the holiday shopping season.

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, investor.plantronics.com, we provide free access 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. This access is provided directly or through a link on our website, shortly after these documents are electronically filed with, or furnished to, the Securities and Exchange Commission. In addition, documents regarding our corporate governance, code of conduct, and the charters of the standing committees of our Board of Directors are also accessible in the Investor Relations section of our website.


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MARKET INFORMATION
 
General Industry Background
 
Plantronics operates predominantly in the electronics industry and focuses on the design, manufacture, and distribution of audio solutions for business and consumer applications.  We develop enhanced communication products for offices, contact centers, mobile devices, cordless phones, computers and gaming consoles.  We offer our products under one brand – Plantronics.

The proliferation of voice communications applications across people's daily lives makes 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&C, 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 demand for our headsets and other audio solutions in new and evolving markets:

UC&C includes the categories of Unified Communications ("UC") (IP telephony, instant messaging, presence, unified messaging) as well as Team collaboration (persistent chat and team workspaces, integrated UC, application integrations) and Meetings (integrated audio, video and web conferencing).  UC&C seeks to provide seamless connectivity and user experience for enterprise workers regardless of their location and environment, improve overall business efficiency and provide 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 which improve transmission quality.

DECT is a wireless communications technology that optimizes audio quality, lowers interference with other wireless devices, and digitally encrypts communication for heightened call security.

Solutions
 
UC&C solutions continue to represent our primary area of focus. 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 people can be reached. In addition we have recognized the importance of supporting remote and mobile work styles that are more prevalent in UC&C environments and the trend toward open plan offices which causes unique noise challenges for office-based work styles. We have invested in a full portfolio of solutions to manage noise including specially tuned noise-canceling microphones to minimize transmission of background noise on calls and headsets that feature active noise-canceling technology to reduce distractions in open plan environments. Finally, our solutions allow users to transition calls seamlessly between PCs, smartphones, tablets, and desk phones, without interrupting the conversation or reducing the audio quality. We believe we are still early in the UC&C solutions market adoption cycle and that UC&C 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&C environment through the offering of contextual intelligence, a full portfolio of products designed according to quantitatively researched global work styles, and a unique software-as-a-service solution that allows customers to manage Plantronics audio device assets as well as track UC&C adoption down to the endpoint level.

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Our products enhance communications by providing the following benefits:

Sensor technology that allows calls to be answered automatically when the user wears the headset, switches the audio from the headset to a mobile device 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 with a single audio endpoint which allows users to communicate from a wide array of physical locations and increases productivity when away from a traditional office environment
 
A convenient means for connecting various applications and voice networks, whether between land lines and mobile 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 be on calls without cords or cables and to easily switch from public to private spaces

Multi-tasking benefits that allow people to use computers and mobile devices, including smartphones or other devices, while talking hands-free

UC&C integration of telephony, mobile technologies, cloud-based communications, and PC applications, while providing privacy greater than traditional speakerphones

Generating analytics our customers desire

Compliance with hands-free legislation and enhanced roadway safety by allowing users to drive while talking on a mobile phone

Voice command and control that allows users to take advantage of voice dialing and/or other voice-based features which make communications and the human/electronic interface more natural and convenient

Product Categories

Our audio solutions are designed to meet the needs of offices (ranging from enterprise to remote working), contact centers, mobile devices (such as mobile phones, smartphones, and tablets), computer and gaming, residential, and other applications.  Our customers' needs 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 our customers' needs through our product categories listed below.
 
Enterprise
 
The Enterprise market comprises our largest revenue stream and we believe it also represents our largest growth opportunity. We offer a broad range of audio communications solutions which include high-end, ergonomically designed headsets, audio processors, and other contact center systems.  Our end-users comprise enterprise employees and small office, home office, and remote workers.  Growth in this market comes from the following three main factors:

Increasing deployment of UC&C solutions

Robust job market

Growing awareness of the benefits of using headsets and the benefits of wireless solutions

Contact centers are some of our most mature customers and, although they are adopting UC&C to help improve productivity and reduce costs, we expect contact center demand to grow slowly over the long-term.   As UC&C adoption continues to increase, we expect to continue leading in new product performance by creating solutions that combine hardware and software for an improved customer experience.
 

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Consumer
 
The consumer market for communications headsets is currently going through a transition. Large brands are dominating this space in several ways: high growth is being seen in music-first brands that also allow communications, as well as headsets or ear buds that are bundled with smart phones. Our strategy is to focus on consumer categories where audio quality and communications is important to the customer.  The use of mono mobile headsets has experienced a notable decline in recent years, 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 headsets merge technological innovations with style, because we believe style shapes consumers' purchasing decisions within the wearable technology space. A key focus in our stereo Bluetooth headsets is "noise-canceling" solutions which are increasingly popular and strengthen our relevance in premium immersive technology experiences. We are taking a disciplined approach in the consumer market by routinely refreshing our product offerings and being more selective in our product placement.

We believe future growth opportunities exist in gaming headsets where audio quality and communications are highly valued by customers. The current popularity of multi-player console games is driving secular growth in this space. We believe we are gaining solid traction in the console gaming space and have become a credible player in this category of the consumer market. Gaming headsets, whether used for interactive on-line or console gaming, or switching between music and phone calls for multi-functional devices, represent an opportunity in a distinct user market. As these users' needs converge, our headsets need to be compatible with PCs, mobile phones, tablets, gaming consoles, and various combinations of these devices.  
 
FOREIGN OPERATIONS
 
In Fiscal Years 2016, 2017, and 2018, net revenues outside the U.S. accounted for approximately 44%, 45%, and 49%, 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 2018, consolidated net revenues were favorably impacted by fluctuations in exchange rates resulting in an increase of approximate $9 million (net of the effects of hedging).

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, 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 2019, 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, our results may be adversely impacted by future changes in foreign currency exchange rates relative to original hedging contracts generally secured 12 to 24 months prior. See further discussion on our business risks associated with foreign operations under the risk titled, "We are exposed to differences and frequent 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 18, Geographic Information, of our Notes to Consolidated Financial Statements in this Form 10-K.

COMPETITION
 
The market for our products is competitive and some of our competitors have greater financial resources than 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 in the Enterprise market is GN Audio, a subsidiary of the GN Group, a Danish telecommunications conglomerate that competes with us in the Enterprise and Consumer markets and, to a lesser extent, in the gaming category.  Other competitors in the Enterprise market include Sennheiser Communications, Logitech and regional companies who offer products for the computer, office and/or contact center. In addition, Apple, Bose, Logitech, LG, Motorola and Samsung are significant competitors in the consumer headset category. In addition, Turtle Beach, Logitech, and Razer are competitors in the gaming category.

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We believe the principal factors to be successful and competitive in each of the markets we serve are as follows:

Understanding emerging trends and new communication technologies, such as UC&C, and our ability to react quickly to opportunities as they arise

Alliances and integration/compatibility with major UC&C vendors

Ability to design, manufacture, and sell products that deliver on performance, style, comfort, features, sound quality, simplicity, price, and reliability

Ability to create and monetize software solutions from headset analytics that allow businesses to improve IT and employee performance through insights derived from the analytics

Brand name recognition and reputation

Superior global customer service, support, and warranty terms

Effective and efficient global distribution channels

We believe our products and strategy enable us to compete effectively based on these factors.

RESEARCH AND DEVELOPMENT
 
The success of our new products is dependent on a number of factors, including appropriate new product selection, timely completion and introduction, cost-effective manufacturing, quality and durability, 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, integrate 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, 2017, and 2018, we incurred approximately $90.4 million, $88.3 million, and $84.2 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 a limited use of contractors.  Key locations for our research, development, and engineering staff are in the U.S., Mexico, China, and the United Kingdom. 

During Fiscal Year 2018, 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 utilizing best-in-class development processes.
 
The products we are developing require significant technological knowledge and the ability to rapidly develop the products in intensely competitive and transforming markets. We believe our deep technological knowledge and intellectual property gives us a competitive advantage. We furthermore 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 global customer support and service.  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 we primarily serve the Enterprise market in those regions.

Our global commercial sales channel includes technology and electronics distributors, and national and regional resellers.  Our resellers typically offer a wide variety of products from multiple vendors to other resellers as well as 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 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.

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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.  One customer, Ingram Micro Group, accounted for 10.9% of consolidated net revenues in each of Fiscal Years 2018 and 2017.  No customer accounted for more than 10% of our consolidated net revenues in Fiscal Year 2016.

Our distributors, resellers, system integrators, managed service providers, 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. Carriers purchase headset products from us for use by their own customer service representatives and in some cases, also offer headsets to their customers.    

We have also established strong UC&C alliances with leading providers of UC&C software solutions, and these alliances enhance the sales and distribution of our products to large enterprises deploying UC&C 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

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, and Japan. We also operate warehouse facilities in Mexico and China.

BACKLOG
 
Our backlog of unfilled orders was $18.6 million and $26.4 million at March 31, 2017 and 2018, respectively.  We include all purchase orders scheduled for future delivery in backlog.  We have a “book and ship” business model whereby we fulfill most orders within 48 hours of receipt. 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, testing and packaging, which are performed in our 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 manufacturing, assembly and packaging operations in Mexico and rely on third party manufacturers located outside of U.S., and a significant amount of our revenues are generated internationally, each of which subjects our business to risks of international operations" within Item 1A Risk Factors in this Annual Report on Form 10-K.


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We purchase the components for our products primarily from suppliers in Asia, Mexico, and U.S., including proprietary custom integrated circuits, electrical and mechanical components, and sub-assemblies.  A 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 time.  We maintain a minimum level 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 and Contractual Obligations”, 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 obtain patent protection for our technologies when we believe it is commercially appropriate.  As of March 31, 2018, we had approximately 800 worldwide utility and design patents in force, expiring between calendar years 2018 and 2042.

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 in a number of other countries with respect to the Plantronics 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."

POLYCOM ACQUISITION

On March 28, 2018, we announced a definitive Stock Purchase Agreement (the “Purchase Agreement”) with Triangle Private Holdings II, LLC (“Triangle”) and Polycom, Inc. (“Polycom”) a privately-held company, pursuant to which, subject to the satisfaction or waiver of certain conditions set forth therein, we will purchase from Triangle all of the issued and outstanding shares of capital stock of Polycom (the “Polycom Transaction”).
 
We believe this acquisition will enhance the Plantronics position with our channel partners, customers, and strategic alliance partners by allowing us to pursue additional opportunities across the UC&C market in both hardware end points and services. The addition of Polycom’s product and services portfolio, is expected to enable us to accelerate our strategic vision of becoming

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a global leader in communications and collaboration experiences. We believe this acquisition will position us to capture additional opportunities through data analytics and insight services across a broad portfolio of communications endpoints.

EMPLOYEES
 
On March 31, 2018, we employed approximately 4,003 employees worldwide, including approximately 2,905 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
Joe Burton
 
53
 
President and Chief Executive Officer
Pamela Strayer
 
49
 
Senior Vice President and Chief Financial Officer
Mary Huser
 
54
 
Senior Vice President, General Counsel and Corporate Secretary
Jeff Loebbaka
 
56
 
Senior Vice President, Global Sales
Shantanu Sarkar
 
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Senior Vice President, Enterprise Line of Business
    
Mr. Burton joined Plantronics in 2011 as Senior Vice President of Engineering and Development and Chief Technology Officer and was promoted to various positions including Executive Vice President and Chief Commercial Officer before being named President and Chief Executive Officer and appointed to our Board of Directors in 2016. 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 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.
 
Ms. Huser joined Plantronics in March 2017 as Senior Vice President, General Counsel and Corporate Secretary. Prior to joining Plantronics, Ms. Huser served as Vice President, Deputy General Counsel at BlackBerry, a mobile-native security software and services company, and General Counsel of its Technology Solutions division from 2013 to 2014 and again during 2016 until she joined Plantronics. Before BlackBerry, during 2015, Ms. Huser was Senior Vice President, Legal for McKesson Corporation, a global healthcare supply chain, retail pharmacy, specialty care and information technology company. Prior to that time, she was a partner, office managing partner and practice group leader at Bingham McCutchen LLP, an international law firm, from 1988 to 2007 and again from 2010 to 2013. Ms. Huser also served as Vice President, Deputy General Counsel of eBay, Inc., an online global commerce leader, from 2008 to 2010. Ms. Huser graduated from the University of Wisconsin - Madison, with a Bachelor of Business Administration, Accounting and Marketing and holds a Juris Doctorate from Stanford Law School.

Mr. Loebbaka joined Plantronics in October 2017 as Senior Vice President, Global Sales. Prior to joining Plantronics, from March 2016 to June 2017, Mr. Loebbaka served as Chief Commercial Officer at Spruce Finance, Inc., a consumer finance company. Before Spruce Finance, he served as Senior Vice President, Global Sales, Marketing and Service, at Enphase Energy, an energy management and solutions technology company, from 2010 to 2015. Previously, he held roles of ever increasing responsibility in sales and marketing at Seagate Technology, PLC, an industry leading company focused on core elements of data storage in the enterprise and consumer markets, including Senior Vice President of Europe, Middle East and Africa and earlier as a Senior Vice President of Global Channel Sales and Corporate Marketing. Mr. Loebbaka has also held General Manager and other senior sales

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and marketing management roles at Adaptec, a computer storage products company, Brunswick Corporation, a leading global designer, manufacturer and marketer of recreation products company, and Apple, Inc., a multinational technology company. Mr. Loebbaka holds an MBA from The Kellogg School of Management at Northwestern University and a Bachelor of Science degree in Mechanical Engineering from the University of Illinois at Urbana-Champaign.

Mr. Sarkar joined Plantronics in 2011 as Vice President, Software and Firmware and was promoted through ever increasing roles and responsibilities to his current role as Senior Vice President, Enterprise Line of Business. Before joining Plantronics, Mr. Sarkar led the Advanced Technology, Strategy and Corporate Development Team at Polycom in 2011 and worked at Cisco for 14 years leading engineering teams, strategy, worldwide UC standards engagement, mergers and acquisitions, advanced technology for collaboration, and product development in the Cisco Voice Technology Group. Mr. Sarkar holds a M.S. in Computer Science from The Ohio State University and a Bachelor of Science degree in Computer Science from the Indian Institute of Technology, Kharagpur, India.

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.
 

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ITEM 1A.  RISK FACTORS

You should carefully consider the following risk factors, which are not exhaustive, 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 global and regional 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 global and regional economic conditions may materially adversely affect us.
Our operations and financial performance are dependent on the global and regional economies as well as industry specific trends and events. Uncertainty regarding future economic conditions and the markets into which we sell makes it challenging both in the near and long-term 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 actual or potential geopolitical conflicts and their short and long-term economic impact, increase the uncertainty and unpredictability for our business as consumers, businesses and governmental agencies periodically and often unpredictably postpone or forego spending. A global economic downturn, changes in the industries to which we sell our products, or 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.
Additionally, to the extent governments implement general or specific reductions in spending, demand for our products by those governmental agencies subject to the measures and by customers who derive all or a portion of their revenues from these agencies, may decline. Similarly, to the extent uncertainty regarding public debt limits or governmental budgets hinder spending by retail consumers, businesses or governmental agencies, sales of our products may be materially harmed or delayed.
Additionally, our customers suffer from their own financial and economic challenges. If global or regional economic conditions deteriorate, whether in general or in specific markets, customers may demand pricing accommodations, delay payments or become insolvent. It is impossible to reliably determine if and to what extent customers may suffer, whether we will be required to adjust our prices or face collection issues with customers or if customer bankruptcies will occur.
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;
shifts in the particular types of products ordered and the geographic locations of the customers placing orders;
the timing of customers' sales promotions and campaigns;
the timing of large customer deployments, including UC&C infrastructure;
the timing and market acceptance of new product introductions by us and our competitors and obsolescence 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 and reduce costs as production increases;
changes in technology and desired product features, including whether those changes occur as and when anticipated;
general economic conditions in the U.S. and our international markets, including foreign currency fluctuations;
seasonality, particularly as related to our retail channels during the winter holiday season;
customer cancellations and rescheduling;
fluctuations in raw materials and components costs;
investments in and the costs associated with strategic initiatives; and
changes in accounting rules or their interpretation.

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.

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The failure to successfully finance and close the Polycom acquisition and thereafter integrate their business and operations in the expected time frame may adversely affect our business and financial results or the business and financial result of the combined company.

We believe the acquisition of Polycom will result in certain benefits, including acceleration and expansion of our market opportunities, creation of a broad portfolio of communications and collaboration endpoints, significant expansion of services offerings, immediate financial accretion, and significant operational efficiencies and cost synergies. However, our ability to realize these anticipated benefits depends on closing of the acquisition and thereafter the successful integration of the businesses and financing of debt obligations. The combined company may fail to realize the anticipated benefits of the acquisition for a variety of reasons, including the following:
we may be unable to integrate Polycom's business within our own in a timely and cost-efficient manner or do so without adversely impacting operations, including new product launches;
expected synergies or operating efficiencies may fail to materialize in whole or part or may not occur within expected time-frames;
the acquisition may adversely impact ours or Polycom's relationships with respective customers, suppliers and strategic partners and their operating results and businesses generally (including the diversion of management time on transaction-related issues);
each company may be unable to retain and hire all or a portion of their respective key personnel;
legal and regulatory enforcement matters that are pending at Polycom may adversely impact the results of the combined company;
financing that we obtain to consummate the acquisition is not on anticipated terms or is not available at all, which is magnified by the absence of a financing condition for the transaction;
our increased leverage as a result of the transaction will be substantially greater than prior to the acquisition which may pose risks, including reduced flexibility to make changes in our operations in response to business or economic conditions, increased borrowing costs, as well as penalties or costs should we fail to comply with terms of the financial agreements such as debt ratios and financial and operation performance targets;
negative effects on the market price of our common stock as a result of the transaction, particularly in light of the issuance of our stock in the transaction;
our financial reporting including those resulting from the adoption of new accounting pronouncements and associated system implementations in the context of the transaction, our ability to forecast financial results of the combined company and that we may be unable to successfully integrate our reporting system causing an adverse impact to our ability to make timely and accurate filings with the SEC and other domestic and foreign governmental agencies;
the potential impact of the transaction on our future tax rate and payments based on the consolidation global entity and our ability to quickly integrate foreign operations;
the challenges of integrating the supply chains of the two companies; and
the potential that our due diligence did not uncover risks and potential liabilities of Polycom.

The actual integration may result in additional and unforeseen expenses or delays. If we are unable to successfully integrate Polycom's business and operations in a timely manner, the anticipated benefits of the acquisition may not be fully realized, or at all, or may take longer to realize than anticipated. Should any of the foregoing or other currently unanticipated risks arise, our business and results of operations may be materially adversely impacted.
Further, if the closing of the transaction is materially delayed beyond our expectations or if we are unable to close the transaction at all, our business may be adversely affected. We have incurred and will continue to incur significant transaction expenses in connection with the acquisition regardless of whether the transaction is completed. Furthermore, we may experience negative reactions from the financial markets, including negative impacts on our stock price, or negative reactions from our customers, suppliers or other business partners, should the acquisition not be completed.

The success of our business depends heavily on our ability to effectively market our Enterprise products, and our business could be materially adversely affected if markets do not develop as expected or we are unable to compete successfully.
Our Enterprise products represent our largest source of revenue, and we regard the market for products designed for UC&C as our greatest long-term opportunity in the Enterprise market. We believe the implementation of UC&C technologies by large enterprises will be a significant long-term driver of UC&C product 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&C office market; however, there is no guarantee significant UC&C growth will occur, when it might occur, or that we will successfully take advantage of it if it does occur.
Our ability to realize and achieve positive financial results from Enterprise product sales, and UC&C sales in particular, could be adversely affected by a number of factors, including the following:

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As UC&C becomes more widely adopted, competitors may offer solutions that effectively commoditize our products, which, in turn, may pressure us to reduce the prices of one or more of our products.
The market success of major platform providers and strategic partners such as Microsoft Corporation, Cisco Systems, Inc., Avaya, Inc., Genesys, Amazon, 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 decision to transition from Lync to Skype for Business in early Fiscal Year 2016 proved to be a significant market transition that caused end customers to pause their deployment schemes or schedules while they assessed the implications of Microsoft’s decision.
Failure to timely introduce solutions that are cost effective, feature-rich, stable, durable, and attractive to 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&C solutions generally, or our solutions in particular, to be adopted with the breadth and speed we 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&C solutions, including our products, have caused entities in various markets to reassess the data protection compliance and security safeguards of our devices.
Failure of our sales model and expertise to support complex integration of hardware and software with UC&C infrastructure consistent with changing customer expectations.
Increased competition for market share, particularly given that some competitors have superior technical and economic resources enabling them to take greater advantage of market opportunities.
Sales cycles for more complex UC&C deployments are longer as compared to our traditional Enterprise products.
Our inability to timely and cost-effectively adapt to changes and future business requirements 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 products are and will be integrated as well as increases in our support expenditures over time.

If our investments in, and strategic focus on, Enterprise products and UC&C products, in particular, do 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, decreasing product life cycles, and changes in demand. Production levels are generally forecasted based on non-binding customer forecasts and historic product demand and we often place orders with suppliers for materials, components and sub-assemblies (“materials and components”) as well as finished products 13 weeks or more in advance of projected customer orders. Actual customer demand depends on many factors and may vary significantly from 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 may result in higher inventories of 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 materially 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 and delaying new product adoption. These risks increase the difficulty of accurately forecasting demand for discontinued and new products as well as the likelihood of inventory obsolescence, 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.

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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 affected.
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 long and often complex chains 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, including conflicting demands from their other customers, availability and price.
The accelerating pace of technological advancement by our suppliers frequently makes it more difficult to continue to procure essential components like integrated circuits for those of our products already in the market. Any failure to obtain key components to meet customer demand may (i) require us to obtain a replacement supply of satisfactory quality which may be difficult, time-consuming, or costly, (ii) force us to redesign or end-of-life certain products, (iii) delay manufacturing, (iv) require us to make large last-time buys based on speculative long-term forecasts in excess of our short-term needs, holding materials and components or finished products in inventory for extended periods of time, or (v) being unable to meet customer demand.
The lack of viable alternative sources of materials and components 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 orders for consumer products have shorter lead times than component lead times, making it 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, or risk of loss of, these materials and components until they are consumed in the production process. 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 are generally 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, our inventory turn rate may decline or we could incur material unanticipated expenses, including write-downs for excess and obsolete inventory.
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, any of which could materially negatively impact our revenues, reduce profit margins, and harm relationships with affected customers. If 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 to meet demand may harm relationships with our customers. Further, if production is increased rapidly, manufacturing yields may decrease, which may also reduce our revenues or margins.

Any of the foregoing could cause us to be able to timely meet customer demand and thereby materially and adversely affect our business, financial condition, and results of operations.

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Prices of certain raw materials and components 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 price fluctuations for 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 from existing and new market participants 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 and technology introductions, new market participants 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 decrease margins. For a further description of our competitors and the markets in which we compete, see Item 1, Business, in this Form 10-K.
Many of our competitors are larger, offer broader product lines, may integrate their products with communications devices and adapters manufactured by them or others, offer products incompatible with our products, have established market positions, and have substantially greater financial, marketing, and other resources.
We also face competition from companies, principally located in or originating from the Asia Pacific region, which offer low cost products, including products modeled on, direct copies of, or counterfeits of our products. 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 product prices are substantially reduced by new or existing market participants, our business, financial condition, or results of operations could be materially and adversely affected.
Moreover, if we do not distinguish our products, through distinctive, technologically advanced features and design, as well as continue to build and strengthen our brand recognition, our products may become commoditized.  In addition, failure to effectively market our products could lead to lower and more volatile revenue and earnings, excess inventory, and the inability to recover associated development costs, any of which could 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.
Competition in the markets for our Consumer products, which consist primarily of Bluetooth headsets, gaming, entertainment and computer audio headsets, is intense and presents significant manufacturing, marketing and operational risks and uncertainties. The risks include the following:
The global market for mono Bluetooth continues to decrease. The market for stereo Bluetooth headsets continues to grow, although it remains dominated by lifestyle brands. Our market share has been and is significantly larger in the mono Bluetooth than stereo Bluetooth market and thus far we have been unable to sufficiently increase share in the stereo Bluetooth market to offset decreases in the mono Bluetooth market.
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.
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 further shorten product lifecycles.


Failure to compete successfully in the Consumer business markets may have an adverse effect on our business, results of operations, and financial condition.

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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 and purchase a majority of our component parts from our supply chain in USD, whereas a significant portion of our sales are transacted in other currencies, particularly the Euro and the British Pound Sterling ("GBP"). If the USD strengthens further, it could further harm our financial condition and operating results in the future. Furthermore, fluctuations in foreign currency rates impact our global pricing strategy, which may result in our lowering or raising selling prices in one or more currencies to minimize disparities with USD prices and to respond to currency-driven competitive pricing actions. Should the dollar remain strong or strengthen further against foreign currencies, principally the Euro and the GBP, we may be compelled to raise prices for customers in the affected regions. Price increases may be unacceptable to our customers who could choose to replace our products with less costly alternatives in which case our sales and market share will be adversely impacted. If we reduce prices to stay competitive in the affected regions, our profitability may be harmed.
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 and allows unauthorized third party “grey market” resellers to take advantage of price disparities, thereby undermining our premium brand image, established sales channels, and 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, and volatile or sustained increases or decreases in exchange rates between the U.S. Dollar and 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 maintain foreign currency forward contracts denominated in Euros, GBP, Australian and Canadian 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. See Item 7A for further quantitative information regarding potential foreign currency fluctuations.
In May 2015 we issued $500.0 million of 5.50% senior unsecured notes and entered into an Amended and Restated $100.0 million revolving line of credit facility. Issuance of the notes and any draws against the credit facility may adversely affect our future financial condition and financial results.
As of March 31, 2018, 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. Additionally, in connection with our proposed acquisition of Polycom, we estimate we will incur approximately $690 million in net debt including replacement of our existing line of credit agreement with a secured credit agreement. 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 liens or enter into certain types of transactions such as sale and lease-back transactions;
Limiting our ability to borrow additional funds or to borrow funds at rates or on other terms we find acceptable; and
Our inability to repay or refinance the then-outstanding principal balance of the Notes on maturity or to repay or refinance other future indebtedness.

Periodically, we have drawn funds under our existing credit facilities in connection with our corporate return of capital policy and for other purposes which are subject to interest charges. Moreover, the credit agreement contains, and future debt instruments are expected to contain, affirmative and negative covenants with which we must comply in addition to those covenants in our 5.50% senior unsecured notes. These covenants do or will apply regardless of whether any loans under the credit agreement or any successor credit agreement are outstanding and could adversely impact how we operate our business, our ability to take advantage of strategic opportunities, our operating results, and ability to pay dividends or repurchase our common stock, which, in turn, may negatively impact our stock price.

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In addition, if we borrow additional funds under our existing credit agreement or any successor agreement, we may be required to increase the borrowing limit 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.
If any of the foregoing risks 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 or other debt obligations. 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. 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.
We cannot guarantee we will continue to repurchase our common stock pursuant to stock repurchase programs or that we will pay dividends 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.
We have a history of recurring stock repurchase programs and payment of quarterly dividends. Any determination to continue 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. Furthermore, while any debt repayment obligations remain outstanding in connection with our acquisition of Polycom our ability to return capital to stockholders through stock repurchases, dividend declarations or otherwise may be limited in whole or in part.
Additionally, any future stock repurchases and dividend declarations may require us to draw against available funds under our credit agreement or incur additional indebtedness, any of which may obligate us to pay interest, require payment of other expenses, and may not be available to us or available on terms we deem acceptable. 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.
We operate in multiple tax jurisdictions globally and 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. Should there be changes in foreign tax laws that seek to impose withholding taxes on the repatriation of cash or increase foreign tax rates on overseas earnings our operating results could be materially adversely affected.
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. 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.


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Changes in applicable tax regulations and resolutions of tax disputes could negatively affect our financial results.

The Company is subject to taxation in the U.S. and numerous foreign jurisdictions. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The changes included in the Tax Act are broad and complex. As rule making bodies and new legislation is enacted to interpret the Tax Act, these changes may adjust the estimates provided in this report. The changes may possibly be material, due to, among other things, the Treasury Department’s promulgation of regulations and guidance that interpret the Tax Act, corrective technical legislative amendments that may change the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the company has utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries.

In addition, it is uncertain how each country where we do business may react to the Tax Act. Moreover, the evolving global tax landscape accompanying the adoption and guidance associated with the Base Erosion and Profit Shifting reporting requirements (“BEPS") recommended by the G8, G20 and Organization for Economic Cooperation and Development ("OECD") may require us to make adjustments to our financial results. As these and other tax laws and related regulations change, our financial results could be materially impacted. Given the unpredictability of these possible changes, it is difficult to assess whether the overall effect of these potential tax changes would be positive or negative for our earnings and cash flow, but such changes could adversely impact our financial results.

Our business will be materially adversely affected if we are unable to develop, manufacture, integrate and market new products in response to changing customer requirements and new technologies.

The technology used in our products is evolving more rapidly 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&C 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 design, integration of third party intellectual property with our own or other third party applications, performance compliance with product specifications, and defects in the early stages of production.
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, resulting in lost revenue and lower margins. Additionally, the advent of more and different types of mobile devices has decreased the need for traditional desk phones with a distinct headset and may limit sales of both corded and cordless headsets in the future. Moreover, the increasing adoption of wireless technologies has resulted in increased development costs associated with new and evolving wireless standards. If sales and margins on our traditional corded products decline and we are unable to successfully design, develop, and market alternatives at comparable margins, our revenue and profits may decrease.
In addition, innovative technologies have moved the platform for certain of our products from our customers' closed proprietary systems to open platforms such as the PC, smart phones 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.
Moreover, the potential for new and emerging technologies to disrupt one or more of our material market categories continues to grow. We cannot assure that we will successfully anticipate or respond to new and emerging challenges in a timely or competitive basis or at all which could significantly harm our business and financial results.
The success of our products depends on several factors, including our ability to:

Anticipate technology and market trends;
Develop innovative new products and service offerings and enhance existing offerings on a timely basis;
Distinguish our products and services from those of our competitors;
Create industrial designs that appeal to our customers and end-users;
Create and monetize software solutions that allow businesses to improve IT and employee performance;
Manufacture and deliver high-quality products that are simple to operate in sufficient volumes and acceptable margins;
Offer and timely deliver services that are intuitive to use and provide the information and data customers desire;
Price our products and services 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; or
Leverage new and existing channel partners effectively.


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If we are unable to develop, manufacture, market, integrate and introduce enhanced or new products and services in a timely manner in response to changing market conditions or customer requirements, including new and disruptive technologies and changing fashion trends and styles, our business, financial condition, and results of operations will be materially adversely affected.
Our new and evolving service offerings, including Software-as-a-Service (SaaS), are strategically important to our future growth and profitability and our business may be harmed or our revenues and profitability materially hurt if we fail to successfully bring new offerings to market.
Our future growth and profitability are tied to our ability to successfully bring to market new and innovative services offerings like our SaaS subscription services. We are investing significant time, resources and money into our SaaS offerings with no expectation that they will provide material revenue in the near term and without any assurance they will succeed. Moreover, we expect that as we continue to explore, develop and refine new offerings they will continue to evolve, may not generate sufficient interest by end customers, may create channel conflicts with our existing hardware distribution partners, and we may be unable to compete effectively, generate significant revenues or achieve or maintain acceptable levels of profitability.
Additionally, our experience with cloud services offerings is limited. We are also substantively reliant on third party service providers for significant aspects of our offerings and over whom we have little or no market power regarding pricing, support, service levels and compliance. If we do not successfully execute our cloud strategy or anticipate the needs of our customers, our credibility as a cloud services provider could be questioned and our prospects for future revenue growth and profitability may never materialize.
Moreover, if our new and evolving business models offerings achieve market acceptance, differences in revenue recognition treatment may cause short-term revenue declines or increase expenditures for operational, administrative and technical support.

Accordingly, if we fail to successfully launch, manage and maintain our new and evolving services offerings future revenue growth and profitability may be limited our business significantly harmed.
We have significant manufacturing, assembly and packaging operations in Mexico and rely on third party manufacturers located outside of U.S., and a significant amount of our revenues are generated internationally, each of which subjects our business to risks of international operations.
We own and operate a manufacturing facility in Tijuana, Mexico, which is responsible for assembly of a significant portion of our Enterprise products from materials and components sourced from various suppliers in Asia and North America, and other suppliers. Additionally, our Tijuana facility is primarily responsible for the packaging and final processing of most of our Consumer products after manufacturing and assembly by third parties, many of which are located in Asia. Also, we 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;
Impact of recessionary, volatile or adverse global economic conditions;
Reduced intellectual property rights protections in some countries;
Different and changing regulatory requirements;
Implementation or expansion of trade restrictions, sanctions or other penalties against one or more countries, its citizens or industries;
Unstable or uncertain political and economic situations such as the United Kingdom’s decision to leave the European Union;
Tariffs, taxes and other trade barriers, including recent actions in the United States, China as well as historical regulations in developing nations such as Brazil, India, and others;
Political conditions, health epidemics, civil unrest, or criminal activities within countries in which we operate;
Management, operation, and expenses associated with an enterprise spread over various countries;
Burden and administrative costs of complying with a wide variety of foreign laws and regulations;
Currency restrictions; and
Compliance with anti-bribery laws, including the United States Foreign Corrupt Practices Act and the United Kingdom's Bribery Act.

Additionally, proposals to impose tariffs, border taxes, and other actions related to the importation of goods from Mexico as well as renegotiate the North American Free Trade Agreement with Mexico and Canada which have been suggested by the United States Government. Considering the nature and extent of our operations in Tijuana, our revenues and results of operations may be materially and adversely impacted should any legislation or executive actions take effect that limit or increase the cost of importing our products. Alternatively, if we deem it necessary to alter all or a portion of our domestic and international activities in response to such legislation or executive actions, our capital and operating costs may increase, possibly substantially.

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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 conditions, and results of operations.
Historically, we have sold our products through various distribution channels that can be volatile. As we expand our offerings to include more services, the nature and type of our distribution networks needed to effectively sell them are likely to diverge from our historical hardware channels. Any 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.
Historically, we have sold substantially all of our hardware 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, our customers may not recommend, de-emphasize, or discontinue carrying our products. Moreover, our OEMs may elect to manufacture their own products similar to 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. In turn, our traditional resellers may demand lower selling prices from us, more cooperative and marketing incentives, reduce their sales support needed to maintain our premium brand image, discontinue carrying our products and other similar adverse actions. As we begin to expand our offerings to include services, many of our historical channel partners may be unwilling or unable to market our services forcing us to establish new or different relationships. Further, increased competition among resellers may cause some of our resellers and partners to experience financial difficulties or force them to shut down, decreasing our channels to market. The inability to establish or maintain successful relationships with distributors, OEMs, retailers, and telephony service providers or to maintain quality distribution channels and sales models could materially adversely affect our business, financial condition, or results of operations.
Also, periodically we implement new incentive programs or modify existing programs to focus our sales channels or improve go-to-market efficiencies or we choose to end existing programs. The success or failure of these initiatives can vary and programs initially successful can prove less so over time or have unintended consequences, particularly if our partners deem them difficult, time-consuming or disruptive, or the terms of the programs or our agreements are unacceptable.
Moreover, we have an extensive global distribution network of distribution partners making it difficult to identify and enforce contractual breaches and violations of law including, without limitation, import and export violations, extraterritorial or “grey market” sales, sales to unauthorized, unqualified and disreputable resellers, copyright and trademark violations and other similar activities. The advent of global Internet-based commerce and sharp decreases in the cost to quickly ship products internationally has exacerbated the problem, increasing the likelihood of commoditization of our products and harming our premier image with reputable resellers and end user customers.
If we are unable to establish and maintain relationships with quality distributors and resellers for our existing and new offerings, our business, financial condition, and results of operations could be materially, adversely affected.
We have a number of large customers with substantial market power whose ability to demand pricing and promotion concessions as well as other unfavorable terms makes sales forecasting difficult and harms our profitability.
Our customer mix is changing, and certain retailers, OEMs, and wireless carriers are more significant.  In particular, we have several large customers whose order patterns are difficult to predict. Offers and promotions by these customers may result in significant fluctuations in their purchasing activities over time, which may increase the volatility of our revenues.  If we are unable to correctly anticipate the quantities and timing of their purchase requirements, our revenues may be adversely affected, or we may be left holding large volumes of inventory that cannot be sold to other customers.
Furthermore, many customers with whom we conduct business are quite large with substantial buying power or who have strategic importance to our product marketing objectives. Many use their buying power or strategic importance to mandate onerous terms and conditions to conduct business including unfavorable payment terms, late and inaccurate shipping fees and penalties, 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.

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The increased use of software in our products 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 and developing Internet based software-as-a-service offerings that provide additional value that complements our products. 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. 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, 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.
As we focus on growth opportunities, we are divesting or discontinuing non-strategic product categories and pursuing strategic acquisitions and investments, which could have an adverse impact on our business.

We continue to review our product portfolio and address our non-strategic product categories and products through various options including divestiture and cessation of operations like the sale of our Clarity division in 2017. If we are unable to effect sales on favorable terms or if realignment is more costly or distracting than we expect or has a negative effect on our organization, employees and retention, then our business and operating results may be adversely affected. Discontinuing products with service components may also cause us to continue to incur expenses to maintain services within the product life cycle or to adversely affect our customer and consumer relationships and brand. Divestitures may also involve warranties, indemnification or covenants that could restrict our business or result in litigation, additional expenses or liabilities. In addition, discontinuing product categories, even categories that we consider non-strategic, reduces the size and diversification of our business and causes us to be more dependent on a smaller number of product categories.

As we attempt to grow our business in strategic product categories and emerging market geographies, we will continue to consider growth through acquisitions or investments like the March 2018 announcement of our acquisition of Polycom as well as joint ventures. We will evaluate acquisition opportunities that could provide us with additional product or service offerings or with additional industry expertise, assets and capabilities. 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;
Certain structures such as joint ventures may limit management or operational control because of the nature of their organizational structures;
Difficulties integrating acquired operations, products, technology, internal controls, personnel and management teams;
Dilutive issuances of our equity securities and incurrence of debt;
Litigation;
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.

Moreover, any acquisitions may not be successful in achieving our desired strategic, product, financial or other objectives or expectations, which would also cause our business to suffer. Acquisitions can also lead to large non-cash charges that can have an adverse effect on our results of operations as a result of write-offs for items such as future impairments of intangible assets and goodwill or the recording of stock-based compensation.

Our new service offerings require significant upfront investments and may not be successful.


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We have announced or are exploring new service offerings including SaaS and Soundscaping. These services are complex undertakings different in material respects from our historical hardware design, development and sales model. For example, while SaaS has become a familiar business model generally, recurring revenue subscription services are new to us and involve unique development, accounting and support. Moreover, these services remain in the early stages of development and will require significant time, effort and costs to develop before we can determine their likelihood of market success.

We do not expect significant contributions from these services in the near term. However, if we fail to anticipate the time, effort and cost to develop and maintain new business strategies, we do not timely meet market expectations for commercial availability, our service and support proves unreliable, or we are unable to offer new 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 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 that may be issued may be invalidated, circumvented, or challenged by others. If we are required to enforce our intellectual property 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, existing patents, copyright registrations, trademarks, trade secrets and domain names may not provide competitive advantages or be adequate to safeguard and maintain our 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 third parties 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 that is incorporated in the materials or components provided by one or more suppliers. As we have grown, intellectual property rights claims against us and our suppliers have increased. There has also been a general trend of increasing intellectual property infringement claims against corporations that make and sell products. 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. Many of our agreements with our distributors and resellers require us to indemnify them for certain third-party intellectual property infringement claims. 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. 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.

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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 existing and new 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. For instance, in the U.S. the 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, new regulations are enacted, and competition increases, we may need to modify our products to address those changes, increasing the costs to design, manufacture, and sell our products, and thereby decreasing our margins or demand for our products if we attempt to pass along the costs. Regulations may also negatively adversely affect our ability to procure or manufacture raw materials and components necessary for our products. 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 transfer 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 other adverse consequences.
We are regularly subject to a wide variety of litigation including commercial and employment 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 product liability claims, labor and employment claims, and commercial disputes. The number and significance of these disputes and inquiries have increased as we have 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, including hearing loss claims. 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. Likewise, research could establish a link between radio frequency emissions and corded or wireless products or we could become a party to litigation claiming such a link.
There is also continuing public controversy over the use of mobile phones by operators of motor vehicles and we may be subject to allegations that use of a mobile phone in combination with a 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 II, Item 8, Note 8 (Commitments and Contingencies) of this Annual Report on Form 10-K. Should GN's appeal be successful, in whole or in part, we could be required to incur additional litigation fees and expenses, be subject to material damages and penalties and management's attention could be diverted, all of which could materially harm our results of operations.
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 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. 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, general liability and other forms of 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. Consequently, claims brought against us, whether or not successful, could have a material adverse effect upon our business, financial condition, and results of operations.

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Our business could be materially adversely affected if we lose the benefit of the services of key personnel or if we fail to attract, motivate and retain 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 loss of the services of one or more of our executive officers or key employees, whether or not anticipated, 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, motivate and retain highly skilled technical, management, sales, and marketing personnel. Competition for such personnel is intense and the salary, benefits and other costs to employ the right personnel may make it difficult to achieve our financial goals. Consequently, we may not be successful in attracting, motivating 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 domestic or international environmental laws or regulations 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 $15.5 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 $15.5 million of goodwill and other intangible assets on our consolidated balance sheet as of March 31, 2018.  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.
Regulation and unauthorized disclosure of customer, end-user, business partner and employee data could materially harm our business and subject us to significant reputational, legal and operational liabilities.

We are subject to an innumerable and ever-increasing number of global laws relating to the collection, use, retention, security, and transfer of personally information about our customers, end-users of our products, business partners and employees globally. Data protection laws may be interpreted and applied inconsistently from country to country and often impose requirements that are inconsistent with one another. In many cases, these laws apply not only to third-party transactions, but also to transfers of information internally and by and between us and other parties with whom we have commercial relations. These laws continue to develop in ways we cannot predict and may materially increase our cost of doing business, particularly as we expand the nature and types of products and services we offer including, without limitation, our software-as-a-service and Soundscaping subscription services.

Regulatory scrutiny of privacy, data protection, use of data and data collection is increasing on a global basis. Complying with these varying requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business and violations of privacy-related laws can result in significant damages, fines and penalties.  For instance, in Europe, the General Data Protection Regulation (“GDPR”) was adopted in 2016 and will become fully effective on May 25, 2018. We have also self-certified to the U.S.-EU Privacy Shield developed by the U.S. Department of Commerce and the European Commission to provide U.S. companies with a valid data transfer mechanism under EU law to permit the transfer of personal data from the European Union to the United States.


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The GDPR may affect our ability to reach current and prospective customers, to respond to both enterprise and individual customer requests under the laws (such as individual rights of access, correction, and deletion of their personal information), and to implement our business models cost effectively. The U.S.-EU Privacy Shield is subject to annual review, has faced challenges in European courts, and may be challenged, suspended or invalidated.

Complying with the GDPR or other laws, regulations, or other obligations relating to privacy, data protection, or information security have caused and will continue to cause us to incur substantial operational costs and may require us to periodically modify our data handling practices. Moreover, compliance may impact demand for our offerings and force us to bear the burden of more onerous obligations in our contracts. Non-compliance could result in proceedings against us by governmental entities or others, could result in substantial fines or other liability, and may otherwise adversely impact our business, financial condition and operating results.

In addition, compliance with these laws may restrict our ability to provide services our customers, business partners and employees find valuable. A determination that there have been violations of privacy laws relating to our practices could expose us to significant damage awards, fines and other penalties that could, individually or in the aggregate, materially harm our business and subject us to reputational, legal and operational liabilities.

We post on our websites our privacy policies and practices concerning the collection, use and disclosure of personal data. Any failure, or perceived failure, by us to comply with our posted policies or with any regulatory requirements or orders or other domestic or international privacy or consumer protection-related laws and regulations could result in proceedings or actions against us by governmental entities or others (e.g., class action litigation), subject us to significant penalties and negative publicity, require us to change our business practices, increase our costs and adversely affect our business. Data collection, privacy and security have become the subject of increasing public concern. If customers or end users were to reduce their use of our products and services as a result of these concerns, our business could be harmed. As noted above, we are also subject to the possibility of security breaches, which themselves may result in a violation of these laws.

If we are unable to protect our information systems against service interruption, internal and external 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 our software-as-a-service, human resources, 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 expend resources for 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 loss or misappropriation of our confidential information or assets, or those of our partners, customers, or suppliers which could cause financial damage and damage to our reputation. 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.
Additionally, regardless of the security measures we may employ, our systems and data remain vulnerable to theft, loss and destruction, fraud, unintentional disclosure, errors and similar disruptive activities from current and former employees. Although we have controls in place intended to discourage and detect these types of problems in accordance with industry standards, no system of controls is perfect and issues are likely to arise. If the problems are material, our reputation may be damaged, we may be exposed to litigation, and our sales may be harmed.
We maintain insurance intended to provide coverage for certain claims related to our information systems and practices including some of the risks discussed above. However, coverage under the policies is not exhaustive and exclusions may apply that limit their applicability or the amount of coverage may be insufficient to cover any one or more claims. As a result, were we to experience any of the risks above, our business and financial results could be adversely impacted.

24


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.
Our stock price could become more volatile and your investment could lose value. 

All of the factors discussed in this section could affect our stock price. The timing of announcements in the public market regarding new products, product enhancements or technological advances by our competitors or us and any announcements by us of acquisitions, major transactions, or management changes could also affect our stock price. Our stock price is subject to speculation by analysts and in the press, changes in recommendations or earnings estimates by financial analysts, changes in investors’ or analysts’ valuation measures for our stock, changes in or announcements regarding our forecasts and guidance, our credit ratings, market trends unrelated to our performance, and sales of our common stock by us, our officers or directors or unaffiliated third party investors, particularly considering the concentrated ownership of our common stock, that may limit the ability for investors to acquire or sell meaningful quantities of our stock or cause speculation as to the acquisition or sale of our stock. A significant drop in our stock price could also expose us to the risk of securities class action lawsuits, which could result in substantial costs and divert management’s attention and resources, which could adversely affect our business.

ITEM 1B.  UNRESOLVED STAFF COMMENTS
 
None.
 

25


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, 2018:
Location
Square Footage
Lease/Own
Primary Use
Santa Cruz, California
163,328
Own
Sales & Marketing, Engineering, Administration
Santa Cruz, California
20,325
Lease
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
Currently leased to a third party.
Hoofddorp, Netherlands
57,985
Own
Executive Briefing Center, Sales, Marketing, Administration, and TAC
Suzhou, China
42,012
Lease
Sales, Administration, Design Center, Quality, TAC
Wootton Bassett, UK
21,824
Own
Main Building Sales, Engineering, Administration, IT
Wootton Bassett, UK
15,970
Own
Currently leased to a third party


ITEM 3.  LEGAL PROCEEDINGS

We are presently engaged in various legal actions arising in the normal course of business. We believe that it is unlikely that any of these actions will have a material adverse impact on our operating results; however, because of the inherent uncertainties of litigation, the outcome of any of these actions could be unfavorable and could have a material adverse effect on our financial condition, results of operations or cash flows. For additional information about our material legal proceedings, please see Note 8, Commitments and Contingencies, of the accompanying notes to the consolidated financial statements.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

26


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
Fiscal Year 2018
 
 
 

First Quarter
$
51.45

 
$
58.27

Second Quarter
$
41.28

 
$
54.85

Third Quarter
$
44.18

 
$
53.62

Fourth Quarter
$
51.16

 
$
61.86

Fiscal Year 2017
 
 
 

First Quarter
$
37.28

 
$
45.40

Second Quarter
$
42.47

 
$
52.33

Third Quarter
$
45.77

 
$
55.65

Fourth Quarter
$
52.60

 
$
57.47


As of May 7, 2018, there were approximately 37 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 29, 2018, the last trading day of Fiscal Year 2018, the last sale reported on the NYSE for our common stock was $60.37 per share.

Cash Dividends
 
Quarterly dividends paid per share in Fiscal Years 2017 and 2018 were $0.15, resulting in total payments of $20.0 million in both years. On May 1, 2018, the Audit Committee approved the payment of a dividend of $0.15 per share on June 8, 2018 to holders of record on May 18, 2018.  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.


27


Share Repurchase Programs
 
The following table presents a month-to-month summary of the stock purchase activity in the fourth quarter of Fiscal Year 2018:

 
Total Number of Shares Purchased 1
 
Average Price Paid per Share 2
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs 5
December 31, 2017 to January 27, 2018
2,126

3 
$
50.50

 
645

 
730,105

January 28, 2018 to February 24, 2018
1,327

4 
N/A
 

 
730,105

February 25, 2018 to March 31, 2018
1,624

4 
N/A
 

 
730,105


1 

On July 27, 2017, the Board of Directors authorized a program to repurchase 1,000,000 shares of our common stock.
 
 
2 

"Average Price Paid per Share" reflects only our open market repurchases of common stock.
 
 
3 

Includes 1,481 shares that were tendered to us in satisfaction of employee tax withholding obligations upon the vesting of restricted stock granted under our stock plans.
 
 
4 

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.
 
 
5 

These shares reflect the available shares authorized for repurchase under the July 27, 2017 program.

Refer to Note 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.



28


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,
 
2014
 
20151
 
20162
 
2017
 
2018
 
 
 
 
 
 
 
 
 
 
STATEMENT OF OPERATIONS DATA:
 
 
 
 
 
 
 
 
 
Net revenues
$
818,607

 
$
865,010

 
$
856,907

 
$
881,176

 
$
856,903

Operating income
$
140,124

 
$
149,085

 
$
108,041

 
$
125,076

 
$
123,501

Operating margin
17.1
%

17.2
%

12.6
%

14.2
%
 
14.4
%
Income before taxes
$
141,139

 
$
145,251

 
$
82,176

 
$
101,665

 
$
100,227

Net income
$
112,417

 
$
112,301

 
$
68,392

 
$
82,599

 
$
(869
)
Basic earnings per share
$
2.65

 
$
2.69

 
$
2.00

 
$
2.56

 
$
(0.03
)
Diluted earnings per share
$
2.59

 
$
2.63

 
$
1.96

 
$
2.51

 
$
(0.03
)
Cash dividends declared per common share
$
0.40

 
$
0.60

 
$
0.60

 
$
0.60

 
$
0.60

Shares used in basic per share calculations
42,452

 
41,723

 
34,127

 
32,279

 
32,345

Shares used in diluted per share calculations
43,364

 
42,643

 
34,938

 
32,963

 
32,345

BALANCE SHEET DATA:
 

 
 

 
 

 
 

 
 
Cash, cash equivalents, and short-term investments
$
335,421

 
$
374,709

 
$
395,317

 
$
480,149

 
$
659,974

Total assets
$
811,815

 
$
876,042

 
$
933,437

 
$
1,017,159

 
$
1,076,887

Long-term debt, net of issuance costs
$

 
$

 
$
489,609

 
$
491,059

 
$
492,509

Revolving line of credit
$

 
$
34,500

 
$

 
$

 
$

Other long-term obligations
$
15,544

 
$
19,323

 
$
23,994

 
$
26,774

 
$
105,894

Total stockholders' equity
$
698,664

 
$
727,397

 
$
312,399

 
$
382,156

 
$
352,970

OTHER DATA:
 

 
 

 
 
 
 
 
 

Cash provided by operating activities3
$
146,150

 
$
157,958

 
$
150,409

 
$
139,387

 
$
121,148


1 
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.

2 
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.

3 
Beginning Fiscal Year 2018, the Company adopted the FASB's new guidance, Improvements to Employee Share-Based Payment Accounting, which changes among other things, how the tax effects of share-based awards are recognized. This new guidance also eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the consolidated statements of cash flows. The Company adopted this provision retrospectively by reclassifying excess tax benefits from financing activities to operating activities in the consolidated statement of cash flows for all prior periods presented.







29


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 Years 2018 and 2017 each had 52 weeks and ended on March 31, 2018, and April 1, 2017, respectively. Fiscal Year 2016 had 53 weeks and ended on April 2, 2016.  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.  Until July 1, 2017, we manufactured and marketed 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 & Collaboration (“UC&C”), other corded and cordless communication headsets, audio processors, and telephone systems; and Consumer, which includes Bluetooth and corded products for mobile device applications, personal computer ("PC"), and gaming headsets.

Net Revenues (in millions)
Operating Income (in millions)
chart-6ac0501bb3cf5506ae8a02.jpg chart-eed582a3d44d5b0abf6a02.jpg

Compared to the prior fiscal year, net revenues decreased 2.8% to $856.9 million. The decrease in net revenues was primarily driven by lower revenues within our Consumer product category, which declined by 18.0% or $45.4 million from the prior fiscal year. Revenues within our Enterprise product category increased by 3.4% or $21.1 million from the prior fiscal year.

Operating profit decreased 1.3% from the prior year to $123.5 million or 14.4% of net revenues, primarily driven by recognition of third-party fees related to the Polycom Transaction and restructuring actions taken during Fiscal Year 2018 which were partially offset by the recognition of the GN Netcom litigation charge in 2017 and lower compensation expenses in Fiscal Year 2018.


On March 28, 2018, we entered into the Purchase Agreement to acquire Polycom for $2.0 billion. The Polycom transaction has been unanimously approved by the boards of directors of both companies, is subject to regulatory approvals and other customary closing conditions, and is expected to close by the end of the third calendar quarter of 2018. We believe this acquisition will better position Plantronics with our channel partners, customers, and strategic alliance partners by allowing us to pursue additional opportunities across the UC&C market in both hardware end points and services. The addition of Polycom’s product and services portfolio, is expected to enable us to accelerate our strategic vision of becoming a global leader in communications and collaboration experiences. We believe this acquisition will position us to capture additional opportunities through data analytics and insight services across a broad portfolio of communications endpoints.


30



Notwithstanding the Polycom Transaction, our primary focus for long-term growth opportunities, strategic initiatives, and the majority of our revenue and profits remain in our Enterprise business. Within the market for Enterprise products, we anticipate the key driver of growth over the next few years will be UC&C audio solutions.  We believe enterprises are increasing adoption of UC&C systems to reduce costs, improve collaboration, and migrate technology from obsolete legacy systems.  We expect growth of UC&C will increase overall headset adoption in enterprise environments, and we believe most of the growth in our Enterprise product category over the next three years will come from headsets designed for UC&C. As such, UC&C remains the central focus of our sales, marketing, and support functions, and we will continue investing in key strategic alliances and integrations with major UC&C vendors. We continue to invest in new ideas and technology to create additional growth opportunities, such as Plantronics Manager and Plantronics Manager Pro, our software-as-a-service ("SaaS") data insights offering introduced in Fiscal Year 2017, and Habitat Soundscaping, our intelligent acoustic management solution which launched in July 2017. While we anticipate these investments will prove beneficial in the long term, we do not expect their contributions to be material in the near term.

Revenues from our Consumer products channel are seasonal and typically 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, product life cycles (including the introduction and pace of adoption of new technology), such as the market acceptance of new product introductions, consumer preferences and the competitive retail environment, changes in consumer confidence and other macroeconomic factors. While sales in the mono mobile headset market continues to decline, we believe future growth opportunities exist in gaming and stereo Bluetooth-headsets.

We remain cautious about the macroeconomic environment, based on uncertainty around trade and fiscal policy in the U.S. and broader economic uncertainty in many parts of Europe and Asia Pacific, which makes it difficult for us to gauge the economic impacts on our future business. We will continue to monitor our expenditures and prioritize expenditures that further our strategic long-term growth opportunities.

31


RESULTS OF OPERATIONS

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. The following graphs display net revenues by product category for Fiscal Years 2016, 2017, and 2018:

Net Revenues (in millions)
chart-b9fcaedf2623584c8dea02.jpg




Revenue by Product Category (percent)
chart-42bee0e1ed0053e094fa02.jpgchart-5514737b24495508856a02.jpgchart-08477c7949df56ac940a02.jpg
Net revenues decreased in Fiscal Year 2018 compared to the prior fiscal year primarily due to lower revenues within our Consumer product category which was partially offset by increases in our Enterprise product revenues driven by UC&C revenues. Fiscal Year 2018 net revenues were also favorably impacted by fluctuations in exchange rates which resulted in an increase of approximately $9 million in net revenues (net of the effects of hedging).

Net revenues increased in Fiscal Year 2017 compared to the prior fiscal year primarily due to higher revenues within our Consumer product category which was driven by the launch of new and updated products. Net revenues within our Enterprise product category slightly increased, driven by solid growth in our UC&C product category which was partially offset by a decline in our Core Enterprise product category. The impact to net revenues resulting from changes in foreign exchange rates was not material in Fiscal Year 2017.





32


The following graphs display net revenues by domestic and international split, as well as by percentage of total net revenue by major geographic region:


Geographic Information (in millions)
chart-2443d28b37ef54fc997a02.jpg



Revenue by Region (percent)
chart-7ba1eac4692d51d092aa02.jpgchart-3fecd18f7f4950ea815a02.jpgchart-17127426602152b795aa02.jpg

As a percentage of total net revenues, U.S. net revenues decreased in Fiscal Year 2018 from Fiscal Year 2017 due to a decline in sales of our Consumer and Core Enterprise products which were partially offset by increased sales of our UC&C products. International net revenues for Fiscal Year 2018 increased from the prior fiscal year due to increased sales of our UC&C products and the favorable impact of fluctuations in foreign exchange rates which were partially offset by lower sales of our Consumer products.

As a percentage of total net revenues, U.S. net revenues decreased slightly in Fiscal Year 2017 from Fiscal Year 2016 due to a decline in sales of our Core Enterprise products which was partially offset by increased sales of our UC&C products. International net revenues for Fiscal Year 2017 increased from the prior fiscal year due to increased sales of our UC&C products and Consumer products which were partially offset by lower sales in our Core Enterprise category.


33



Cost of Revenues and Gross Profit
 
Cost of revenues consists primarily of direct manufacturing and contract manufacturer costs, warranty costs, freight duties, excess and obsolete inventory costs, royalties, and overhead expenses.
 
 
Fiscal Year Ended
 
 
 
 
 
Fiscal Year Ended
 
 
 
 
(in thousands, except percentages)
 
March 31, 2016
 
March 31, 2017
 
Change
 
March 31, 2017
 
March 31, 2018
 
Change
Net revenues
 
$
856,907

 
$
881,176

 
$
24,269

 
2.8%
 
$
881,176

 
$
856,903

 
$
(24,273
)
 
(2.8)%
Cost of revenues
 
422,233

 
439,806

 
$
17,573

 
4.2%
 
439,806

 
417,788

 
$
(22,018
)
 
(5.0)%
Gross profit
 
$
434,674

 
$
441,370

 
$
6,696

 
1.5%
 
$
441,370

 
$
439,115

 
$
(2,255
)
 
(0.5)%
Gross profit %
 
50.7
%
 
50.1
%
 

 
 
 
50.1
%
 
51.2
%
 

 
 

Compared to the prior fiscal year, profit as a percentage of net revenues increased in Fiscal Year 2018 primarily due to product cost reductions, the strengthening of foreign currencies relative to the USD which favorably impacted margins on our international product sales, and a favorable product mix shift away from our Consumer product category which carries lower margins.

Compared to the prior fiscal year, gross profit as a percentage of revenues decreased in Fiscal Year 2017 primarily due to a product mix shift from Enterprise to Consumer, the latter of which carries lower margins. In addition, within Enterprise there was a product mix shift from Core Enterprise to UC&C, the latter of which carries lower margins. These decreases were partially offset by reductions in the cost of materials.

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, overhead expenses.
 
 
Fiscal Year Ended
 
 
 
 
 
Fiscal Year Ended
 
 
 
 
(in thousands, except percentages)
 
March 31, 2016
 
March 31, 2017
 
Change
 
March 31, 2017
 
March 31, 2018
 
Change
Research, development and engineering
 
$
90,408

 
$
88,318

 
$
(2,090
)
 
(2.3)%
 
$
88,318

 
$
84,193

 
$
(4,125
)
 
(4.7)%
% of total net revenues
 
10.6%
 
10.0%
 

 
 
 
10.0%
 
9.8%
 

 
 

The decrease in research, development, and engineering expenses in Fiscal Year 2018 compared to Fiscal Year 2017 was primarily due to lower compensation expenses, driven by reduced funding of our variable compensation plans and cost reductions from our restructuring actions initiated in current and prior fiscal periods.
 
The decrease in research, development, and engineering expenses in Fiscal Year 2017 compared to Fiscal Year 2016 was due primarily to cost reductions in the current year resulting from the restructuring action initiated at the end of our third quarter of fiscal year 2016, partially offset by an increase in funding for our variable compensation plans resulting from better achievement against corporate goals than in the prior fiscal year.


34


Selling, General, and Administrative
 
Selling, general, and administrative expense consists primarily of compensation costs, marketing costs, travel expenses, professional service fees, and overhead expenses.
 
 
Fiscal Year Ended
 
 
 
 
 
Fiscal Year Ended
 
 
 
 
(in thousands, except percentages)
 
March 31, 2016
 
March 31, 2017
 
Change
 
March 31, 2017
 
March 31, 2018
 
Change
Selling, general and administrative
 
$
221,299

 
$
223,830

 
$
2,531

 
1.1%
 
$
223,830

 
$
229,390

 
$
5,560

 
2.5%
% of total net revenues
 
25.8
%
 
25.4
%
 


 
 
 
25.4
%
 
26.8
%
 


 
 

The increase in selling, general, and administrative expenses in Fiscal Year 2018 compared to Fiscal Year 2017 was primarily due to the recognition of third-party fees related to the Polycom Transaction and increases in legal fees related to our litigation with GN Netcom. These increases were partially offset by lower compensation expenses driven by reduced funding of our variable compensation plans, executive transition costs recognized in prior period as well as cost savings from cost control initiatives and prior period restructuring actions. For more information on the litigation with GN Netcom, refer to Note 8, Commitments and Contingencies, of the accompanying notes to consolidated financial statements.

The increase in selling, general, and administrative expenses in Fiscal Year 2017 compared to Fiscal Year 2016 was due primarily to an increase in funding for our variable compensation plans resulting from better achievement against corporate targets, partially offset by cost reductions achieved through the prior fiscal year restructuring action. In addition, Fiscal Year 2017 included executive transition costs that were not incurred in the prior fiscal year.

(Gain) Loss from Litigation Settlements
 
 
Fiscal Year Ended
 
 
 
 
 
Fiscal Year Ended
 
 
(in thousands, except percentages)
 
March 31, 2016
 
March 31, 2017
 
Change
 
March 31, 2017
 
March 31, 2018
 
Change
(Gain) loss, net from litigation settlements
 
$
(1,234
)
 
$
4,255

 
$
5,489

 
(444.8)%
 
$
4,255

 
$
(420
)
 
$
(4,675
)
 
(109.9)%
% of net revenues
 
0.1
%
 
0.5
%
 
 
 
 
 
0.5
%
 
%
 
 
 
 

During Fiscal Year 2018 we recognized immaterial gains from litigation. During Fiscal Year 2017 we recorded a $4.9 million litigation charge related to discovery sanctions ordered by the court in the GN Netcom litigation, compared to net gains in the prior fiscal year. This charge was partially offset by immaterial gains from unrelated matters. For more information regarding on-going litigation, refer to Note 8, Commitments and Contingencies, of the accompanying notes to consolidated financial statements.

Restructuring and Other Related Charges
 
 
Fiscal Year Ended
 
 
 
 
 
Fiscal Year Ended
 
 
 
 
(in thousands, except percentages)
 
March 31, 2016
 
March 31, 2017
 
Change
 
March 31, 2017
 
March 31, 2018
 
Change
Restructuring and other related charges
 
$
16,160

 
$
(109
)
 
$
(16,269
)
 
(100.7)%
 
$
(109
)
 
$
2,451

 
$
2,560

 
2,348.6%
% of net revenues
 
1.9
%
 
 %
 
 
 
 
 
 %
 
0.3
%
 
 
 
 

During Fiscal Year 2018 restructuring and other related charges (credits) increased, due to additional restructuring actions taken during the first quarter of Fiscal Year 2018 as part of our ongoing efforts to reduce costs and focus on improving profitability. These restructuring actions included a reduction-in-workforce, charges to terminate a lease before the end of its contractual term and a loss on the sale of our Clarity division. For more information regarding these restructuring activities, refer to Note 10, Restructuring and other related charges (credits), of the accompanying notes to consolidated financial statements.
 

35


During Fiscal Year 2017 we recorded a net favorable adjustment resulting from changes to the estimates related to our restructuring actions recorded in Fiscal Year 2016. The favorable adjustment was partially offset by additional restructuring charges of approximately $1.3 million related to an action in fourth quarter of Fiscal Year 2017. The restructuring action taken in the fourth quarter of Fiscal Year 2017, while immaterial to consolidated results, was initiated to reduce the cost of our design and manufacturing processes, specifically in our Consumer product lines, as part of a broader strategic effort to improve our cost structure and consolidated profitability in subsequent Fiscal Years.

Interest Expense

Interest expense of $29.3 million and $29.2 million for Fiscal Years 2018 and 2017, respectively, was primarily related to the 5.50% Senior Notes and included $1.5 million in amortization of debt issuance costs for both Fiscal Years.

Other Non-Operating Income and (Expense), Net
 
 
Fiscal Year Ended
 
 
 
 
 
Fiscal Year Ended
 
 
(in thousands, except percentages)
 
March 31, 2016
 
March 31, 2017
 
Change
 
March 31, 2017
 
March 31, 2018
 
Change
Other non-operating income and (expense), net
 
$
(716
)
 
$
5,819

 
$
6,535

 
912.7%
 
$
5,819

 
$
6,023

 
$
204

 
3.5%
% of net revenues
 
0.1
%
 
0.7
%
 
 
 
 
 
0.7
%
 
0.7
%
 
 
 
 

During Fiscal Year 2018 other non-operating income and (expense), net increased slightly primarily due to favorable changes in foreign currency exchange rates and an increase in interest income from higher average yields on our investment portfolio which were mostly offset by a loss of $1.2 million on the sale of our long term investments.

During Fiscal Year 2017 other non-operating income and (expense), net increased primarily due to a net foreign currency gain of $1.0 million compared to a $2.3 million net foreign currency loss in Fiscal Year 2016 on more volatile foreign currency exchange rate fluctuations, driving a favorable increase in fiscal year 2017 of $3.3 million. In addition, interest income increased by $1.7 million compared to Fiscal Year 2016 due to slightly higher interest rates on a higher average investment portfolio. Finally, unrealized holding gains on investments underlying our deferred compensation plan increased by $1.0 million, driven by higher market values on the related investments in Fiscal Year 2017 as compared to Fiscal Year 2016. This had no impact to our consolidated net income because an equal and offsetting compensation expense attributable to the net increase in the value of the securities underling the deferred compensation plan is recorded as part of operating income.

Income Tax Expense
 
 
Fiscal Year Ended
 
 
 
Fiscal Year Ended
 
 
(in thousands, except percentages)
 
March 31, 2016
 
March 31, 2017
 
Change
 
March 31, 2017
 
March 31, 2018
 
Change
Income before income taxes
 
$
82,176

 
$
101,665

 
$
19,489

 
23.7%
 
$
101,665

 
$
100,227

 
$
(1,438
)
 
(1.4)%
Income tax expense
 
$
13,784

 
$
19,066

 
$
5,282

 
38.3%
 
$
19,066

 
$
101,096

 
$
82,030

 
430.2%
Net income
 
$
68,392

 
$
82,599

 
$
14,207

 
20.8%
 
$
82,599

 
$
(869
)
 
$
(83,468
)
 
(101.1)%
Effective tax rate
 
16.8
%
 
18.8
%
 


 
 
 
18.8
%
 
100.9
%
 


 
 

The effective tax rate for Fiscal Year 2018 was higher than that in the previous year due primarily to the passage of the Tax Cuts and Jobs Act (H.R. 1) ("the Tax Act") on December 22, 2017.  The Tax Act includes several changes to existing tax law, including, among other things, a permanent reduction in the corporate income tax rate from 35% to 21% and applying new taxes on certain foreign source earnings. In addition, we were subject to a one-time deemed repatriation of accumulated foreign subsidiary unremitted earnings (hereafter, the "toll charge"), which the Company expects to pay over an eight-year period as permitted under the Tax Act. The Company recorded a $79.7 million toll charge as part of income tax expense in the year ended March 31, 2018. For more information regarding the Tax Act and Income Tax Expense activities, refer to Note 16, Income Taxes, of the accompanying notes to consolidated financial statements.
 
The effective tax rate for Fiscal Year 2017 is higher than in the previous year due primarily to unwinding prior cost-sharing of stock based compensation for the engineering function, which impacted Fiscal Year 2016 but not Fiscal Year 2017.  Our Fiscal Year 2016 tax provision reflected a $2.9 million tax benefit resulting from a U.S. Tax Court opinion involving an independent

36


third party, issued on December 28, 2015. Based on the findings of the U.S. Tax Court, we issued a reimbursement to our foreign subsidiaries for the share-based compensation element of certain intercompany charges made in prior periods.  The increase in our tax rate in Fiscal Year 2017 over Fiscal Year 2016, resulting from the one-time reimbursement of costs, was partially offset by shift in the Company's geographic mix of income from higher tax jurisdictions to lower tax jurisdictions. 

Our effective tax rate for Fiscal years 2016, 2017, and 2018 differs from the statutory rate due to the impact of foreign operations taxed at different statutory rates, income tax credits, state taxes, the Tax Act 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.

FINANCIAL CONDITION

Operating Cash Flow (in millions)
Investing Cash Flow (in millions)
Financing Cash Flow (in millions)
chart-636656c329cb5bb8835a02.jpg chart-b4dc1ff19e4e515bb6ea02.jpg chart-69ddf8f418a25a29a69.jpg

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

Compared to Fiscal Year 2017, net cash provided by operating activities during Fiscal Year 2018 decreased primarily as a result of lower net income after adjusting for non-cash items and higher payouts in the first quarter of Fiscal Year 2018 related to Fiscal Year 2017 variable compensation than payouts during the prior year period, due to better achievements against corporate targets in Fiscal Year 2017.
  
Compared to Fiscal Year 2016, net cash provided by operating activities during Fiscal Year 2017 decreased from a reduced level of customer collections at the end of Fiscal Year 2017 and a higher level of inventory purchases for items not yet sold as of year-end. These decreases were partially offset by higher net income after adjusting for non-cash items, resulting primarily from higher net income, lower cash payments for restructuring activity, and lower cash payments related to our variable compensation plans than the prior fiscal year.

Investing Activities
 
Net cash used for investing activities during Fiscal Year 2018 decreased from the prior fiscal year due to an increase in proceeds from the sales and maturities of debt securities, net of new investment purchases. This increase was partially offset by lower capital expenditures.

Net cash used for investing activities during Fiscal Year 2017 decreased from the prior fiscal year due primarily to a significant increase in proceeds from the sales and maturities of debt securities, net of new purchases. In addition, we had a lower level of capital expenditures due to finalizing the outlay early in the year for our new facility in the Netherlands and a new manufacturing execution system in our Tijuana, Mexico facility, both of which drove higher capital expenditures throughout Fiscal Year 2016.

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.

37



Financing Activities 
 
Net cash used for financing activities during Fiscal Year 2018 increased from the prior fiscal year primarily due to an increase in cash used for common stock repurchases driven by a lower average stock price which was partially offset by higher net proceeds from stock-based compensation plans.

Net cash used for financing activities during Fiscal Year 2017 decreased from the prior fiscal year primarily due to significantly fewer common stock repurchases due to the non-recurrence of debt proceeds in Fiscal Year 2017 and a higher average stock price throughout Fiscal Year 2017; in addition, we repaid amounts due under our revolving line of credit in the prior fiscal year, compared to no activity in Fiscal Year 2017. These decreases in the use of cash for financing activities were partially offset by the non-recurrence of debt-related proceeds in Fiscal Year 2017 as described above, compared to a significant net inflow from our debt financing in the prior fiscal year.

On May 1, 2018, we announced that our Audit Committee of the Board of Directors ("the Audit Committee") declared a $0.15 cash dividend per share of common stock, payable on June 8, 2018 to stockholders of record at the close of business on May 18, 2018.  We expect to continue paying a quarterly dividend of $0.15 per share of 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, 2018, we had working capital of $774.2 million, including $660.0 million of cash, cash equivalents, and short-term investments, compared to working capital of $581.8 million, including $480.1 million of cash, cash equivalents, and short-term investments at March 31, 2017.  The increase in working capital at March 31, 2018 compared to March 31, 2017 resulted from the net increase in cash and cash equivalents, short-term investments, and accounts receivable, all due primarily to improved management of working capital. These increases were partially offset by working capital decreases resulting from a net increase in both accounts payable and accrued liabilities due to payment timing and better achievement against targets for our Fiscal Year 2018 variable compensation plan, respectively.

On March 28, 2018, we entered into the Purchase Agreement for the acquisition of Polycom at a purchase price of $2.0 billion, of which we expect approximately $1.6 billion will be paid in cash and the remaining $0.4 million will be paid in the form of shares of common stock of the Company representing a 19.1% equity interest in the Company before giving effect to the issuance (approximately 16.0% after giving effect to the issuance). The Purchase Agreement also contains a working capital adjustment. The Company has obtained $1.4 billion in committed debt financing consisting of a secured term loan facility and a secured revolving credit facility from Wells Fargo Bank, National Association and Wells Fargo Securities, LLC. This new committed debt financing combined with cash on hand, will enable the Company to consummate the Polycom Transaction. The Polycom Transaction is not subject to a financing condition. The Purchase Agreement includes representations, warranties and covenants of the respective parties. Completion of the transactions contemplated by the Purchase Agreement is subject to common closing conditions for transactions of this type including, among others: (1) the expiration or termination of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (2) regulatory approval in certain specified jurisdictions, including antitrust regulatory approval in Germany and Russia, and (3) the binding of a representations and warranties insurance policy. The Polycom Transaction does not require approval by the stockholders of the Company. The Purchase Agreement also contains certain termination rights for each of the parties if any of the conditions to closing have not been satisfied or if the Polycom Transaction has not been consummated on or prior to September 28, 2018. In addition, the Purchase Agreement provides for indemnification rights in favor of the Company including with respect to certain specified liabilities, including those relating to certain legal and regulatory enforcement matters. We will recognize all contingent transaction fees upon successful completion of the Polycom Transaction.

Prior to Fiscal Year 2018, we did not recognize a deferred tax liability related to unremitted foreign subsidiary earnings because our plans did not require us to repatriate earnings from foreign operations to fund our U.S. operations. The enactment of the Tax Act in the U.S. on December 22, 2017, introduced, among other things, applying new taxes on certain foreign source earnings and imposed the toll charge. We recorded a $79.7 million toll charge as part of income tax expense in the year ended March 31, 2018, which we expect to pay over an eight-year period as permitted under the Tax Act. We expect to fund payment of the toll charge by repatriating a portion of our foreign earnings and as such, we recorded a deferred tax liability of $5 million related to state income taxes and foreign withholding taxes that will become due as we repatriate foreign earnings. For additional details, refer to Note 16, Income Taxes, of the accompanying notes to consolidated financial statements.

38



Our cash and cash equivalents as of March 31, 2018 consist of bank deposits with third party financial institutions and Commercial Paper. 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, 2018, of our $660.0 million of cash, cash equivalents, and short-term investments, $116.5 million is held domestically while 543.5 million is held by foreign subsidiaries, approximately 82% of which were based in U.S. dollar-denominated holdings. Our investments are intended to establish a high-quality portfolio that preserves principal and meets liquidity needs.  As of March 31, 2018, our investments are composed of Mutual Funds, US Treasury Notes, Government Agency Securities, Commercial Paper, Corporate Bonds, and 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. As of March 31, 2018, there remained a total of 730,105 shares authorized for repurchase under the stock repurchase program approved by the Board on July 27, 2017. Refer to Note 12, Common Stock Repurchases, of the accompanying 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 Years 2016, 2017 and 2018.

In May 2015, we entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (the “Bank”). The Credit Agreement amended and restated our prior credit agreement, dated as of May 2011. The Credit Agreement provides for a $100.0 million unsecured revolving credit facility to augment our financial flexibility. Our obligations under the Credit Agreement are required to be guaranteed by the Company’s domestic subsidiaries, subject to certain exceptions. The Credit Agreement was amended again in May 2016 and April 2017, as discussed below.

In May 2016, we executed a First Amendment to Amended and Restated Credit Agreement and Limited Waiver (the “Amendment”). The Amendment extended the term of the Credit Agreement by one year to May 9, 2019, and waived a default under the Credit Agreement in effect as of March 31, 2016 in which our debt to earnings before interest, tax, depreciation, and amortization ("EBITDA") ratio minimally exceeded the previously agreed upon ratio of 3:1. The covenant breach resulted primarily from our restructuring activities in the third and fourth quarters of Fiscal Year 2016. On May 2, 2016, we received a waiver from the lender for noncompliance with the minimum EBITDA covenant at March 31, 2016. Pursuant to the terms of the waiver and amendment to the Credit Agreement, the $16.2 million of restructuring charges recorded in our Fiscal Year 2016 was excluded from the lender’s rolling four-quarter EBITDA calculation.  This breach was not considered to be a cross-default on our 5.50% Senior Notes and as such, had no impact on the amount or timing of the related amounts payable.

In April 2017, we executed a Second Amendment to Amended and Restated Credit Agreement (the "Amended Credit Agreement"). The Amended Credit Agreement redefined the term, "EBIDTA", to the original definition as it existed before the wavier we received last year, as described above, extended the term of the Credit Agreement by one year to May 9, 2020, and amended certain of the covenants, which are defined below.

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, 2020. 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, 2018, the Company had no outstanding borrowings under the line of credit. The line of credit requires us to comply with the following covenant ratios at each fiscal quarter end and determined on a rolling four-quarter basis:

maximum ratio of funded debt to earnings before interest, taxes, depreciation, and amortization ("EBITDA") of 3.25:1; and
minimum EBITDA coverage ratio, which is calculated as interest payments divided by EBITDA.

In addition, we and our subsidiaries are required to maintain unrestricted cash, cash equivalents and marketable securities plus availability under the Amended Credit Agreement at the end of each fiscal quarter of at least $300.0 million. The Amended Credit Agreement contains customary events of default that include, among other things, payment defaults, covenant defaults, cross-defaults with certain other indebtedness, bankruptcy and insolvency defaults, and judgment defaults. The occurrence of an event of default could result in the acceleration of the obligations under the Amended Credit Agreement. The Company intends to replace the Amended Credit Agreement with a secured revolving credit facility included in the committed debt financing for the Polycom Transaction.


39


During the year ended March 31, 2016, we obtained $488.4 million from debt financing, net of issuance costs. The debt matures on May 31, 2023, and bears interest at a rate of 5.50% per annum, payable semi-annually on May 15 and November 15 of each year. A portion of the proceeds was used to repay all then-outstanding amounts under our revolving line of credit agreement with Wells Fargo Bank and the remaining proceeds were used primarily for share repurchases. Although under certain circumstances the Company is obligated to provide security for the unsecured notes, we do not expect that obligation to be triggered by the Polycom Transaction.

Our liquidity, capital resources, and results of operations in any period could be affected by repurchases of our common stock, the payment of cash dividends, the exercise of outstanding stock options, restricted stock grants under stock plans, and the issuance of common stock under our ESPP.  We expect the Polycom Transaction to affect our liquidity and leverage ratios as we finalize the committed debt financing with Wells Fargo and other key terms of the transaction noted above. Therefore, we plan to return our liquidity and leverage ratios to pre-acquisition levels, through the curtailment of open market common stock repurchases. We receive cash from the exercise of outstanding stock options under our stock plan and the issuance of shares under our ESPP. However, the resulting increase in the number of outstanding shares from these equity grants and issuances could affect our earnings per share. We cannot predict the timing or amount of proceeds from the sale or exercise of these securities or whether they will be exercised, forfeited, canceled, or will expire. 

We believe that our current cash and cash equivalents, short-term investments, cash provided by operations, and the availability of additional funds under the Amended Credit Agreement will be sufficient to fund operations for at least the next 12 months; however, any projections of future financial needs and sources of working capital are subject to uncertainty.  Readers are cautioned to review the risks, uncertainties, and assumptions set forth in this Annual Report on Form 10-K, including the sections entitled “Certain Forward-Looking Information” and “Risk Factors” for factors that could affect our estimates for future financial needs and sources of working capital.

OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
 
We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides us with financing and liquidity support, market risk, or credit risk support.

A substantial portion of the raw materials, components, and subassemblies used in our products are provided by our suppliers on a consignment basis. These consigned inventories are not recorded on our consolidated balance sheet until we take title to the raw materials, components, and subassemblies, which occurs when they are consumed in the production process. Prior to consumption in the production process, our suppliers bear the risk of loss and retain title to the consigned inventory. The terms of the agreements allow the Company to return parts in excess of maximum order quantities to the suppliers at the supplier’s expense. Returns for other reasons are negotiated with the suppliers on a case-by-case basis and to date have been immaterial. If our suppliers were to discontinue financing consigned inventory, it would require us to make cash outlays and we could incur expenses which, if material, could negatively affect our business and financial results. As of March 31, 2017 and 2018, we had off-balance sheet consigned inventories of $52.3 million and $48.8 million, respectively.
 
The following table summarizes our future contractual obligations as of March 31, 2018 and the effect that such obligations are expected to have on our liquidity and cash flows in future periods:
 
 
Payments Due by Period
(in thousands)
 
Total
 
Less than 1 year
 
1-3 years
 
4-5 years
 
More than 5 years
Operating leases
 
$
9,970

 
$
2,556

 
$
3,965

 
$
2,145

 
$
1,304

Unconditional purchase obligations
 
$
189,995

 
$
180,861

 
$
9,134

 
$

 
$

Long term debt (5.50% Senior Notes)
 
$
652,455

 
$
27,500

 
$
55,000

 
$
55,000

 
$
514,955

Toll charge
 
$
79,725

 
$
6,378

 
$
12,756

 
$
12,756

 
$
47,835

Total contractual cash obligations
 
$
932,145

 
$
217,295

 
$
80,855

 
$
69,901

 
$
564,094


Operating Leases

We lease certain facilities under operating leases expiring through our Fiscal Year 2026. Certain of these leases provide for renewal options for periods ranging from one to three years and in the normal course of business, we may exercise the renewal options.


40


Unconditional Purchase Obligations

We use several contract manufacturers to manufacture raw materials, components, and subassemblies for our products. We provide these contract manufacturers with demand information that typically covers periods up to 13 weeks, and they use this information to acquire components and build products. We also obtain individual components for our products from a wide variety of individual suppliers. Consistent with industry practice, we acquire components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. As of March 31, 2018, we had outstanding off-balance sheet third-party manufacturing commitments and component purchase commitments of $190.0 million, all of which we expect to consume in the normal course of business.

Toll Charge

During the year ended March 31, 2018, our short and long-term tax obligations increased due to introduction of the Tax Act which required the payment of the toll charge. As permitted under the Tax Act, we expect to pay the toll charge obligation over an 8-year period. For additional details regarding the Tax Act and the toll charge, refer to Note 16, Income Taxes, in the accompanying notes to the consolidated financial statements.

Unrecognized Tax Benefits

As of March 31, 2018, long-term income taxes payable reported on our consolidated balance sheet included unrecognized tax benefits and related interest of $12.6 million and $1.4 million, respectively.  We are unable to reliably estimate the timing of future payments related to unrecognized tax benefits and they are not included in the contractual obligations table above.  We do not anticipate any material cash payments associated with our unrecognized tax benefits to be made within the next twelve months.

CRITICAL ACCOUNTING ESTIMATES
 
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, future expectations and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On an ongoing basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with U.S. GAAP. Because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 2, Significant Accounting Policies, of the notes to consolidated financial statements in this Annual Report on Form 10-K. We believe the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective, or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. We have reviewed these critical accounting estimates and related disclosures with the Audit Committee.

Revenue Recognition and Related Allowances
Inventory Valuation
Product Warranty Obligations
Income Taxes

Revenue Recognition and Related Allowances
 
We sell substantially all of our products to end users through distributors, retailers, and carriers. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is reasonably assured. For most of the Company’s product sales, these criteria are met at either the time the product is shipped or the customer has received the product. Commercial distributors and retailers represent our largest sources of net revenues. Sales through our distribution and retail channels are made primarily under agreements allowing for rights of return and include various sales incentive programs, such as back end rebates, discounts, marketing development funds, price protection, and other sales incentives. We have an established sales history for these arrangements and we record the estimated reserves and allowances at the time the related revenue is recognized. Customer sales returns are estimated based on historical data, relevant current data, and the monitoring of inventory build-up in the distribution channel.


41


The primary factors affecting our reserve for estimated customer sales returns include the general timing of historical returns and estimated return rates which we group by similar characteristics. With the exception of marketing development funds, the allowance for sales incentive programs is based on contractual terms and historical experience in the form of payments or sell-through credits redeemed by our customers. The allowance for marketing development funds is based on contractual terms or program guidelines, as applicable. Future market conditions or a changes to partner incentives may lead us to increase customer incentive offerings, possibly resulting in an incremental reduction of revenue.

We have not made any material changes in the accounting methodology we use to measure sales return reserves or incentive allowances during the past three fiscal years. Substantially all credits associated with these activities are processed within the following fiscal period, and therefore, do not require subjective long-term estimates; however, if actual results are not consistent with the assumptions and estimates used, we may be exposed to losses or gains that could be material. If we increased our estimate as of March 31, 2018 by a hypothetical 10%, our sales returns reserve and sales incentive allowance would have increased by approximately $1.0 million and $4.4 million, respectively. Net of the estimated value of the inventory that would be returned, this would have decreased gross profit and net income by approximately $5.3 million and $4.7 million, respectively.

When a sales arrangement contains multiple elements, such as hardware and software products and/or services, we allocate revenue to each element based on relative selling prices. The selling price for a deliverable is based on its vendor specific objective evidence ("VSOE"), if available, third party evidence ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE are available. In multiple element arrangements where more-than-incidental software deliverables are included, we allocate revenue to each separate unit of accounting for each of the non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. Revenue recognized for the software portion of multiple element arrangements was less than 1% of total net revenues for the years ended March 31, 2017 and 2018. As of March 31, 2017 and 2018, total deferred revenue related to the software portion of multiple-element arrangements was $1.9 million and $2.3 million, respectively.

Inventory Valuation

Inventories are valued at the lower of cost or net realizable value.  The Company writes down inventories that have become obsolete or are in excess of anticipated demand or net realizable value. Our estimate of write downs for excess and obsolete inventory is based on a detailed analysis of on-hand inventory and purchase commitments in excess of forecasted demand. Our products require long-lead time parts available from a limited number of vendors and, occasionally, last-time buys of raw materials for products with long lifecycles. The effects of demand variability, long-lead times, and last-time buys have historically contributed to inventory write-downs.  Our demand forecast considers projected future shipments, market conditions, inventory on hand, purchase commitments, product development plans and product life cycle, inventory on consignment, and other competitive factors.  Refer to "Off Balance Sheet Arrangements" in this Annual Report on Form 10-K for additional details regarding consigned inventories.

We have not made any material changes in the accounting methodology we use to estimate our inventory write-downs or adverse purchase commitments during the past three fiscal years. If the demand or market conditions for our products are less favorable than forecasted or if unforeseen technological changes negatively impact the utility of our inventory, we may be required to record additional inventory write-downs or adverse purchase commitments, which would negatively affect our results of operations in the period the write-downs or adverse purchase commitments were recorded. If we increased our inventory reserve and adverse purchase commitment reserve estimates as of March 31, 2018 by a hypothetical 10%, the reserves and cost of revenues would have each increased by approximately $0.5 million and our net income would have been reduced by approximately $0.4 million.

Product Warranty Obligations

The Company records a liability for the estimated costs of warranties at the time the related revenue is recognized. Factors that affect the warranty obligation include historical and projected product failure rates, estimated return rates, material usage, service related costs incurred in correcting product failure claims, and knowledge of specific product failures that are outside of the Company’s typical experience. If actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. If we increased our warranty obligation estimate as of March 31, 2018 by a hypothetical 10%, our obligation and the associated cost of revenues would have each increased by approximately $0.8 million and our net income would have been reduced by approximately $0.6 million.


42


Income Taxes

We are subject to income taxes in the U.S. and foreign jurisdictions and our income tax returns are periodically audited by domestic and foreign tax authorities. These audits may include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years may be subject to audit by various tax authorities. In evaluating the exposures associated with our various tax filing positions, we record a liability for such exposures. A number of years may elapse before a particular matter for which we have established a liability is audited and fully resolved or clarified.

To the extent we prevail in matters for which a liability has been established, or are required to pay amounts in excess of our established liability, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would generally require use of our cash and may result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would be recognized as a reduction in our effective income tax rate in the period of resolution.

We recognize the impact of an uncertain income tax position on income tax expense at the largest amount that is more-likely-than-not to be sustained.  An unrecognized tax benefit will not be recognized unless it has a greater than 50% likelihood of being sustained. We adjust our tax liability for unrecognized tax benefits in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position, or when more information becomes available. Our liability for unrecognized tax benefits contains uncertainties because management is required to make assumptions and apply judgment to estimate the exposures associated with our various filing positions.

On December 22, 2017, the Tax Act was passed in the United States.  The Tax Act includes several changes to existing tax law, including, among other things, a permanent reduction in the corporate income tax rate from 35% to 21% and applying new taxes on certain foreign source earnings. In addition, we were subject to a one-time toll charge which the Company expects to pay over an eight-year period as permitted under the Tax Act.

The provisional estimate for the toll charge will be finalized when the Company completes its substantive review of unremitted foreign earnings through examination of statutory filings and tax returns of the Company's foreign subsidiaries and fiscal branches that span a 30-year period. The Company must also analyze the impact of foreign exchange rates and inflation on the historical information to support foreign tax credits available to offset the toll charge. In addition, the Company's estimate of the toll charge obligation may change due to legislative technical corrections, the IRS' promulgation of regulations to interpret the Tax Act, and changes in accounting standards for income taxes or related interpretations in response to the Tax Act. This review and finalization of the toll charge provisional estimate will be completed within a twelve month measurement period from the date of enactment.

RECENT ACCOUNTING PRONOUNCEMENTS

For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Note 3, “Recent Accounting Pronouncements,” of the Notes to Consolidated Financial Statements.



43


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The following discusses our exposure to market risk related to changes in interest rates and foreign currency exchange rates.  This discussion contains forward-looking statements that are subject to risks and uncertainties.  Actual results could vary materially as a result of a number of factors, including those set forth in Item 1A, Risk Factors.
 
INTEREST RATE AND MARKET RISK
 
As of March 31, 2017 and 2018, we reported the following balances in cash and cash equivalents, short-term investments, and long-term investments:
 
 
March 31,
(in millions)
 
2017
 
2018
Cash and cash equivalents
 
$
302.0

 
$
390.7

Short-term investments
 
$
178.2

 
$
269.3

Long-term investments
 
$
127.2

 
$


As of March 31, 2018, our investments were composed of Mutual Funds, US Treasury Notes, Government Agency Securities, Commercial Paper, Corporate Bonds, and Certificates of Deposits ("CDs").

Our investment policy and strategy are focused on preservation of capital and supporting our liquidity requirements. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. Our investment policy limits the amount of credit exposure to any one issuer and requires investments to be high credit quality, primarily rated A or A2 and above, with the objective of minimizing the potential risk of principal loss. All highly liquid investments with initial maturities of three months or less at the date of purchase are classified as cash equivalents. We classify our investments as either short-term or long-term based on each instrument's underlying effective maturity date. All short-term investments have effective maturities less than 12 months, while all long-term investments have effective maturities greater than 12 months or we do not currently have the ability to liquidate the investments. We may sell our investments prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or for duration management. During the year ended March, 31, 2018, we sold our long-term investments and recognized a loss on sale of approximately $1.2 million. No material realized or unrealized net gains or losses were recognized during the year ended March 31, 2017.

Interest rates were relatively unchanged during Fiscal Year 2018 compared to the prior fiscal year. During Fiscal Year 2018, we generated approximately $3.8 million of interest income from our portfolio of cash equivalents and investments, compared to $3.5 million in Fiscal Year 2017. During Fiscal Years 2017 and 2018, we did not incur a significant amount of interest expense due to outstanding balances under our revolving line of credit. The 5.50% Senior Notes are at a fixed interest rate and we have not elected the fair value option for these instruments; accordingly we are not exposed to any economic interest rate risk related to this indebtedness; however, the fair value of this instrument fluctuates as market interest rates change. The increase in interest expense caused by a 10 basis point increase in the interest rates of our variable-rate revolving line of credit indebtedness would not be significant. A hypothetical 10 basis points increase or decrease on market interest rates related to our investment portfolio would have an immaterial impact on our results of operations.

FOREIGN CURRENCY EXCHANGE RATE RISK

We are a net receiver of currencies other than the U.S. dollar ("USD").  Accordingly, changes in exchange rates, and in particular a strengthening of the USD, could negatively affect our net revenues and gross margins as expressed in U.S. dollars.  There is a risk that we will have to adjust local currency product pricing due to competitive pressures if there is significant volatility in foreign currency exchange rates.

The primary currency fluctuations to which we are exposed are the Euro ("EUR"), British Pound Sterling ("GBP"), Australian Dollar ("AUD"), Canadian Dollar ("CAD"), Mexican Peso ("MXN"), and the Chinese Renminbi ("RMB"). We use a hedging strategy to diminish, and make more predictable, the effect of currency fluctuations. All of our hedging activities are entered into with large financial institutions, which we periodically evaluate for credit risks. We hedge our balance sheet exposure by hedging EUR, GBP, AUD, and CAD denominated cash, accounts receivable, and accounts payable balances, and our economic exposure by hedging a portion of anticipated EUR and GBP denominated sales and our MXN denominated expenditures. We can provide no assurance that our strategy will be successful in the future and that exchange rate fluctuations will not materially adversely affect our business. We do not hold or issue derivative financial instruments for speculative trading purposes.


44


We experienced $0.5 million in net foreign currency gains in the year ended March 31, 2018. Although we hedge a portion of our foreign currency exchange exposure, the weakening of certain foreign currencies, particularly the EUR and GBP in comparison to the USD, could result in material foreign exchange losses in future periods.

Non-designated Hedges

We hedge our EUR, GBP, AUD, and CAD denominated cash, accounts receivable, and accounts payable balances by entering into foreign exchange forward contracts. The table below presents the impact on the foreign exchange gain (loss) of a hypothetical 10% appreciation and a 10% depreciation of the USD against the forward currency contracts as of March 31, 2018 (in millions):
Currency - forward contracts
Position
 
USD Value of Net Foreign Exchange Contracts
 
Foreign Exchange Gain From 10% Appreciation of USD
 
Foreign Exchange (Loss) From 10% Depreciation of USD
EUR
Sell EUR
 
$
39.6

 
$
4.0

 
$
(4.0
)
GBP
Sell GBP
 
$
15.3

 
$
1.5

 
$
(1.5
)
AUD
Sell AUD
 
$
10.5

 
$
1.0

 
$
(1.0
)
CAD
Sell CAD
 
$
1.9

 
$
0.2

 
$
(0.2
)
 
Cash Flow Hedges
 
Costless Collars

The Company hedges a portion of the forecasted EUR and GBP denominated revenues with costless collars. On a monthly basis, the Company enters into option contracts with a 6 to 12 month term.  Collar contracts are scheduled to mature at the beginning of each fiscal quarter, at which time the instruments convert to forward contracts. The Company also enters into cash flow forwards with a three month term. Once the hedged revenues are recognized, the forward contracts become non-designated hedges to protect the resulting foreign monetary asset position for the Company.

Approximately 44%, 45%, and 49% of net revenues in Fiscal Years 2016, 2017, and 2018, respectively, were derived from sales outside of the U.S., which were denominated primarily in EUR and GBP in each of the fiscal years.

As of March 31, 2018, we had foreign currency put and call option contracts with notional amounts of approximately €77.8 million and £23.7 million denominated in EUR and GBP, respectively. If the USD is subjected to either a 10% appreciation or 10% depreciation versus these net exposed currency positions, we could realize a gain of $8.1 million or incur a loss of $9.6 million, respectively. As of March 31, 2017, we also had foreign currency put and call option contracts with notional amounts of approximately €73.5 million and £23.9 million, denominated in EUR and GBP, respectively. Collectively, our option contracts hedge against a portion of our forecasted foreign currency denominated sales.

The table below presents the impact on the valuation of our currency option contracts of a hypothetical 10% appreciation and a 10% depreciation of the USD against the indicated option contract type for cash flow hedges as of March 31, 2018 (in millions):
Currency - option contracts
 
USD Value of Net Foreign Exchange Contracts
 
Foreign Exchange Gain From 10% Appreciation of USD
 
Foreign Exchange (Loss) From 10% Depreciation of USD
Call options
 
$
130.2

 
$
4.5

 
$
(9.2
)
Put options
 
$
120.7

 
$
3.6

 
$
(0.4
)
Forwards
 
$
25.6

 
$
2.6

 
$
(2.6
)

Collectively, our swap contracts hedge against a portion of our forecasted MXN denominated expenditures. As of March 31, 2018, we had cross currency swap contracts with notional amounts of approximately MXN 31.8 million.

The table below presents the impact on the valuation of our cross-currency swap contracts of a hypothetical 10% appreciation and a 10% depreciation of the USD as of March 31, 2018 (in millions):
Currency - cross-currency swap contracts
 
USD Value of Cross-Currency Swap Contracts
 
Foreign Exchange (Loss) From 10% Appreciation of USD
 
Foreign Exchange Gain From 10% Depreciation of USD
Position: Buy MXN
 
$
1.6

 
$
(0.2
)
 
$
0.2


45


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Plantronics, Inc.:

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Plantronics, Inc. and its subsidiaries (“the Company”) as of March 31, 2018 and April 1, 2017, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended March 31, 2018, including the related notes and financial statement schedules listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of March 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2018 and April 1, 2017, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

46



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



/s/ PricewaterhouseCoopers LLP


San Jose, California
May 9, 2018

We have served as the Company’s auditor since 1988.  
 

47


PLANTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 
 
March 31,
 
2017
 
2018
ASSETS
 
 
 

Current assets:
 
 
 

Cash and cash equivalents
$
301,970

 
$
390,661

Short-term investments
178,179

 
269,313

Accounts receivable, net
141,177

 
152,888

Inventory, net
55,456

 
68,276

Other current assets
22,195

 
18,588

Total current assets
698,977

 
899,726

Long-term investments
127,176

 

Property, plant, and equipment, net
150,307

 
142,129

Goodwill and purchased intangibles, net
15,577

 
15,498

Deferred tax and other assets
25,122

 
19,534

Total assets
$
1,017,159

 
$
1,076,887

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
42,885

 
$
45,417

Accrued liabilities
74,285

 
80,097

Total current liabilities
117,170

 
125,514

Long term debt, net of issuance costs
491,059

 
492,509

Long-term income taxes payable
11,729

 
87,328

Other long-term liabilities
15,045

 
18,566

Total liabilities
635,003

 
723,917

Commitments and contingencies (Note 8)


 


Stockholders' equity:
 

 
 

Preferred stock, $0.01 par value per share; 1,000 shares authorized, no shares outstanding

 

Common stock, $0.01 par value per share; 100,000 shares authorized, 48,088 shares and 49,278 shares issued at 2017 and 2018, respectively
804

 
816

Additional paid-in capital
818,777

 
876,645

Accumulated other comprehensive income
4,694

 
2,870

Retained earnings
319,931

 
299,066

Total stockholders' equity before treasury stock
1,144,206

 
1,179,397

Less: Treasury stock (common: 14,672 shares and 16,027 shares at 2017 and 2018, respectively) at cost
(762,050
)
 
(826,427
)
Total stockholders' equity
382,156

 
352,970

Total liabilities and stockholders' equity
$
1,017,159

 
$
1,076,887


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


48


PLANTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
 
Fiscal Year Ended March 31,
 
2016
 
2017
 
2018
Net revenues
$
856,907

 
$
881,176

 
$
856,903

Cost of revenues
422,233

 
439,806

 
417,788

Gross profit
434,674

 
441,370

 
439,115

Operating expenses:
 
 
 
 
 
Research, development, and engineering
90,408

 
88,318

 
84,193

Selling, general, and administrative
221,299

 
223,830

 
229,390

(Gain) loss, net from litigation settlements
(1,234
)
 
4,255

 
(420
)
Restructuring and other related charges (credits)
16,160

 
(109
)
 
2,451

Total operating expenses
326,633

 
316,294

 
315,614

Operating income
108,041

 
125,076

 
123,501

Interest expense
(25,149
)
 
(29,230
)
 
(29,297
)
Other non-operating income and (expense), net
(716
)
 
5,819

 
6,023

Income before income taxes
82,176

 
101,665

 
100,227

Income tax expense
13,784

 
19,066

 
101,096

Net income
$
68,392

 
$
82,599

 
$
(869
)
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 
Basic
$
2.00

 
$
2.56

 
$
(0.03
)
Diluted
$
1.96

 
$
2.51

 
$
(0.03
)
 
 
 
 
 
 
Shares used in computing earnings per common share:
 
 
 
 
 
Basic
34,127

 
32,279

 
32,345

Diluted
34,938

 
32,963

 
32,345

 
 
 
 
 
 
Cash dividends declared per common share
$
0.60

 
$
0.60

 
$
0.60


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

49


PLANTRONICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

 
 
Fiscal Year Ended March 31,
 
 
2016
 
2017
 
2018
Net income
 
$
68,392

 
$
82,599

 
$
(869
)
Other comprehensive income (loss):
 
 
 
 
 
 
Foreign currency translation adjustments
 
376

 
(311
)
 
257

Unrealized gains (losses) on cash flow hedges:
 
 
 
 
 
 
Unrealized cash flow hedge gains (losses) arising during the year
 
(3,786
)
 
3,095

 
(6,741
)
Net (gains) losses reclassified into net revenues for revenue hedges (effective portion)
 
(7,826
)
 
(4,111
)
 
4,715

Net (gains) losses reclassified into cost of revenues for cost of revenues hedges (effective portion)
 
4,801

 
2,663

 
(208
)
Net unrealized gains (losses) on cash flow hedges
 
$
(6,811
)
 
$
1,647

 
$
(2,234
)
Unrealized gains (losses) on investments:
 
 
 
 
 
 
Unrealized holding gains (losses) during the year
 
(67
)
 
(516
)
 
48

 
 
 
 
 
 
 
Aggregate income tax benefit (expense) of the above items
 
141

 
115

 
105

Other comprehensive income (loss)
 
(6,361
)
 
935

 
(1,824
)
Comprehensive income (loss)
 
$
62,031

 
$
83,534

 
$
(2,693
)




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


50

PLANTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)



 
Fiscal Year Ended March 31,
 
2016
 
2017
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

 
 

Net income
$
68,392

 
$
82,599

 
$
(869
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
20,142

 
20,977

 
21,178

Amortization of debt issuance costs
1,208

 
1,450

 
1,450

Stock-based compensation
33,265

 
33,539

 
33,959

Deferred income taxes
(8,291
)
 
(657
)
 
7,464

Provision for excess and obsolete inventories
2,430

 
1,960

 
3,456

Restructuring charges
16,160

 
(109
)
 
2,451

Cash payments for restructuring charges
(10,385
)
 
(4,001
)
 
(2,942
)
Other operating activities
7,680

 
2,948

 
(305
)
Changes in assets and liabilities:
 
 
 
 
 
Accounts receivable
8,445

 
(13,894
)
 
(12,238
)
Inventory
1,357

 
(3,791
)
 
(13,309
)
Current and other assets
(605
)
 
1,386

 
(2,480
)
Accounts payable
5,407

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