UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended July 3, 2021
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ________to _________
Commission File Number: 001-12696
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address of principal executive offices)
(Zip Code)
(831 ) 420-3002
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
1
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 26, 2021, 42,321,794 shares of the registrant's common stock were outstanding.
2
PLANTRONICS, INC.
FORM 10-Q
TABLE OF CONTENTS
| Page | ||||||||
| PART I | FINANCIAL INFORMATION | |||||||
| PART II | OTHER INFORMATION | |||||||
Plantronics, Poly, the Propeller design, the Poly logo, and Polycom are trademarks of Plantronics, Inc.
All other trademarks are the property of their respective owners.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLANTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
| July 3, 2021 | April 3, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Short-term investments | |||||||||||
| Accounts receivable, net | |||||||||||
| Inventory, net | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Non-current assets | |||||||||||
| Property, plant, and equipment, net | |||||||||||
| Purchased intangibles, net | |||||||||||
| Goodwill | |||||||||||
| Deferred tax assets | |||||||||||
| Other non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Current portion of long-term debt | |||||||||||
| Total current liabilities | |||||||||||
| Non-current liabilities | |||||||||||
| Long-term debt, net | |||||||||||
| Long-term income taxes payable | |||||||||||
| Other non-current liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 7) | |||||||||||
| Stockholders' deficit | |||||||||||
| Common stock | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive income (loss) | ( | ||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders' equity before treasury stock | |||||||||||
| Less: Treasury stock, at cost | ( | ( | |||||||||
| Total stockholders' deficit | ( | ( | |||||||||
| Total liabilities and stockholders' deficit | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
| Three Months Ended | |||||||||||
| July 3, 2021 | June 27, 2020 | ||||||||||
| Net revenues | |||||||||||
| Net product revenues | $ | $ | |||||||||
| Net service revenues | |||||||||||
| Total net revenues | |||||||||||
| Cost of revenues | |||||||||||
| Cost of product revenues | |||||||||||
| Cost of service revenues | |||||||||||
| Total cost of revenues | |||||||||||
| Gross profit | |||||||||||
| Operating expenses | |||||||||||
| Research, development, and engineering | |||||||||||
| Selling, general, and administrative | |||||||||||
| Loss, net from litigation settlements | |||||||||||
| Restructuring and other related charges | |||||||||||
| Total operating expenses | |||||||||||
| Operating loss | ( | ( | |||||||||
| Interest expense | |||||||||||
| Other non-operating income, net | ( | ( | |||||||||
| Loss before income taxes | ( | ( | |||||||||
| Income tax benefit | ( | ( | |||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Per share data | |||||||||||
| Basic and diluted loss per common share | $ | ( | $ | ( | |||||||
| Basic and diluted shares used in computing loss per common share | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(Unaudited)
| Three Months Ended | |||||||||||
| July 3, 2021 | June 27, 2020 | ||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Other comprehensive income, before tax | |||||||||||
| Unrealized gains on cash flow hedges | |||||||||||
| Unrealized cash flow hedge gains (losses) | ( | ||||||||||
| Net losses (gains) reclassified into net revenues | ( | ||||||||||
| Net gains reclassified into cost of revenues | ( | ||||||||||
| Net losses reclassified into interest expense | |||||||||||
| Net unrealized gains on cash flow hedges | |||||||||||
| Income tax (expense) benefit in other comprehensive income | ( | ||||||||||
| Other comprehensive income | |||||||||||
| Comprehensive loss | $ | ( | $ | ( | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| Three Months Ended | |||||||||||
| July 3, 2021 | June 27, 2020 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash provided by operating activities | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Stock-based compensation | |||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Provision for excess and obsolete inventories | |||||||||||
| Restructuring and other related charges | |||||||||||
| Cash payments for restructuring charges | ( | ( | |||||||||
| Other operating activities | ( | ( | |||||||||
| Changes in assets and liabilities | |||||||||||
| Accounts receivable, net | ( | ||||||||||
| Inventory, net | ( | ||||||||||
| Current and other assets | |||||||||||
| Accounts payable | |||||||||||
| Accrued liabilities | ( | ||||||||||
| Income taxes | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities | |||||||||||
| Purchases of short-term investments | ( | ( | |||||||||
| Capital expenditures | ( | ( | |||||||||
| Proceeds from sale of property and equipment | |||||||||||
| Other investing activities | ( | ||||||||||
| Cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities | |||||||||||
| Employees' tax withheld and paid for restricted stock and restricted stock units | ( | ( | |||||||||
| Proceeds from issuances under stock-based compensation plans | |||||||||||
| Proceeds from revolving line of credit | |||||||||||
| Repayments of revolving line of credit | ( | ||||||||||
| Repayments of long-term debt | ( | ||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash and cash equivalents and restricted cash | |||||||||||
| Net (decrease) increase in cash and cash equivalents and restricted cash | ( | ||||||||||
| Cash and cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash and cash equivalents and restricted cash at end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows:
| (in thousands) | July 3, 2021 | April 3, 2021 | |||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | $ | $ | |||||||||
8
PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(in thousands)
(Unaudited)
| Three Months Ended July 3, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Treasury Stock | Total Stockholders' Deficit | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balances at April 3, 2021 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Net unrealized gains on cash flow hedges, net of tax | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Proceeds from issuances under stock-based compensation plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Employees' tax withheld and paid for restricted stock and restricted stock units | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||
| Balances at July 3, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||
| Three Months Ended June 27, 2020 | |||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Treasury Stock | Total Stockholders' Deficit | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balances at March 28, 2020 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Net unrealized gains on cash flow hedges, net of tax | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Proceeds from issuances under stock-based compensation plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Repurchase of restricted common stock | ( | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Employees' tax withheld and paid for restricted stock and restricted stock units | ( | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Balances at June 27, 2020 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
PLANTRONICS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BACKGROUND AND BASIS OF PRESENTATION
Plantronics, Inc. (“Poly,” the “Company”) is a leading global communications company that designs, manufactures, and markets integrated communications and collaboration solutions that span headsets, open Session Initiation Protocol ("SIP") and native ecosystem desktop phones, conference room phones, video conferencing solutions and peripherals, including cameras, speakers, and microphones, cloud management and analytics software solutions, and services. The Company has two operating and reportable segments, Products and Services, and offers its products under the 
, Plantronics and Polycom brands.
, Plantronics and Polycom brands.Founded in 1961, the Company is incorporated in the state of Delaware under the name Plantronics, Inc. and in March 2019, the Company changed the name under which it markets itself to Poly. The Company is listed on the New York Stock Exchange ("NYSE") under the ticker symbol "POLY."
Risks and uncertainties
The Company is subject to a greater degree of uncertainty than normal in making the judgments and estimates needed to apply its significant accounting policies due to the ongoing COVID-19 pandemic. The Company has assessed accounting estimates and other matters, including those using prospective financial information, using information that is reasonably available as of the issuance date of the consolidated financial statements. The accounting estimates and other matters the Company has assessed included, but were not limited to, impairment of goodwill and other long-lived assets, provisions for doubtful accounts, valuation allowances for deferred tax assets, inventory and related reserves, and revenue recognition and related reserves. The Company may make changes to these estimates and judgments, which could result in material impacts to the consolidated financial statements in future periods. The extent and duration of the impact of the COVID-19 pandemic on the Company's business is highly uncertain and difficult to predict. The Company relies on contract manufacturers and sourcing of materials from the Asia Pacific region, as well as its owned manufacturing facility in Mexico. The Company has experienced disruptions in both its own supply chain as well as those of its contract manufacturers as a result of COVID-19 and, as this virus has impacted various regions differently, the Company may in the future experience further business operation disruptions. Such disruptions have had, and may continue to have, a material impact on the Company's ability to fulfill customer orders and adversely affect the ability to meet customer demands as companies utilize work-from-home and hybrid work models. Additionally, if a significant number of the Company's workforce employed in any of these manufacturing facilities or in the Company's offices were to contract the virus, the Company may experience delays or the inability to develop, produce and deliver the Company's products on a timely basis. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that it could cause a local and/or global economic recession.
10
The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on its customers and suppliers, all of which are uncertain and cannot be predicted. The Company's future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, including potential write-offs due to financial weakness and/or bankruptcy of its customers, supply chain disruptions and uncertain demand, and the impact of any initiatives or programs that the Company may undertake to address financial and operational challenges faced by its customers and suppliers.
As of the issuance date of these condensed consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact the Company's financial condition, liquidity, or results of operations is uncertain.
Reclassifications
Certain prior year amounts have been reclassified for consistency with current year presentation. Each of the reclassifications was immaterial and had no effect on the Company's results of operations or cash flows.
2. RECENT ACCOUNTING PRONOUNCEMENTS
3. CASH AND CASH EQUIVALENTS, RESTRICTED CASH, AND SHORT-TERM INVESTMENTS
The following tables summarize the Company’s cash and cash equivalents, restricted cash, and short-term investments amortized cost, gross unrealized gains, gross unrealized losses, and fair value on a recurring basis by significant investment category recorded as of July 3, 2021 and April 3, 2021 (in thousands):
| July 3, 2021 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Cash & Cash Equivalents | Short-term investments | ||||||||||||||||||||||||||||||||
| Cash | $ | $ | — | $ | — | $ | $ | $ | — | |||||||||||||||||||||||||||||
| Level 1: | ||||||||||||||||||||||||||||||||||||||
| Mutual funds | ( | |||||||||||||||||||||||||||||||||||||
| Money market funds | — | |||||||||||||||||||||||||||||||||||||
| Total cash, cash equivalents and short-term investments measured at fair value | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||
| April 3, 2021 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Cash & Cash Equivalents | Restricted Cash | Short-Term Investments | ||||||||||||||||||||||||||||||||||
| Cash | $ | $ | — | $ | — | $ | $ | $ | — | $ | — | ||||||||||||||||||||||||||||||
Restricted cash(1) | |||||||||||||||||||||||||||||||||||||||||
| Level 1: | |||||||||||||||||||||||||||||||||||||||||
| Mutual funds | ( | ||||||||||||||||||||||||||||||||||||||||
| Money market funds | |||||||||||||||||||||||||||||||||||||||||
| Total cash, cash equivalents, restricted cash and short-term investments measured at fair value | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||
(1) Restricted cash represents the cash held in trust and restricted for use to redeem the 5.50% Senior Notes. Refer to Note 8, Debt.
11
4. DEFERRED COMPENSATION
As of July 3, 2021, the Company held investments in mutual funds with a fair value totaling $16.0 million, all of which related to debt and equity securities that are held in a rabbi trust under non-qualified deferred compensation plans. The total related deferred compensation liability was $16.0 million at July 3, 2021. As of April 3, 2021, the Company held investments in mutual funds with a fair value totaling $14.6 million, all of which related to debt and equity securities that are held in a rabbi trust under non-qualified deferred compensation plans. The total related deferred compensation liability at April 3, 2021 was $14.6 million.
The investments are classified as trading securities and are recorded in short-term investments in the condensed consolidated balance sheets. The liability is recorded in accrued liabilities and other non-current liabilities in the condensed consolidated balance sheets.
5. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Accounts receivable, net:
| (in thousands) | July 3, 2021 | April 3, 2021 | ||||||||||||
| Accounts receivable | $ | $ | ||||||||||||
| Provisions for promotions, rebates, and other | ( | ( | ||||||||||||
| Provisions for doubtful accounts and sales allowances | ( | ( | ||||||||||||
| Accounts receivable, net | $ | $ | ||||||||||||
The Company maintains a provision for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company regularly performs credit evaluations of its customers’ financial conditions and considers factors such as historical experience, credit quality, age of the accounts receivable balances, geographic or country-specific risks, and economic conditions that may affect a customer’s ability to pay.
Inventory, net:
| (in thousands) | July 3, 2021 | April 3, 2021 | ||||||||||||
| Raw materials | $ | $ | ||||||||||||
| Work in process | ||||||||||||||
| Finished goods | ||||||||||||||
| Inventory, net | $ | $ | ||||||||||||
| (in thousands) | July 3, 2021 | April 3, 2021 | ||||||||||||
| Short-term deferred revenue | $ | $ | ||||||||||||
| Employee compensation and benefits | ||||||||||||||
| Operating lease liabilities, current | ||||||||||||||
| Provision for returns | ||||||||||||||
| Accrued other | ||||||||||||||
| Accrued liabilities | $ | $ | ||||||||||||
12
The Company's warranty obligation is recorded in accrued liabilities in the condensed consolidated balance sheets. Changes in the warranty obligation during the three months ended July 3, 2021 and June 27, 2020 were as follows:
| Three Months Ended | ||||||||||||||
| (in thousands) | July 3, 2021 | June 27, 2020 | ||||||||||||
| Warranty obligation at beginning of period | $ | $ | ||||||||||||
| Warranty provision related to products shipped | ||||||||||||||
| Deductions for warranty claims processed | ( | ( | ||||||||||||
| Adjustments related to preexisting warranties | ( | |||||||||||||
| Warranty obligation at end of period | $ | $ | ||||||||||||
6. PURCHASED INTANGIBLE ASSETS
As of July 3, 2021 and April 3, 2021, the carrying value of purchased intangibles, excluding fully amortized assets and goodwill, is as follows:
| July 3, 2021 | April 3, 2021 | |||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Remaining Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||||||||||
| Amortizing Assets | ||||||||||||||||||||||||||||||||||||||||||||
| Existing technology | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Customer relationships | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Trade name/Trademarks | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
During the three months ended July 3, 2021 and June 27, 2020, the Company recognized amortization expense of $30.4 million and $32.4 million, respectively.
Expected amortization expense attributable to purchased intangibles for each of the next five years and thereafter as of July 3, 2021 is as follows:
| (in thousands) | Amount | |||||||
| 2022 (remaining nine months) | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| $ | ||||||||
13
7. COMMITMENTS AND CONTINGENCIES
Future Minimum Lease Payments
Future minimum lease payments under non-cancelable operating leases as of July 3, 2021 were as follows:
| (in thousands) | Operating Leases(1) | |||||||
| 2022 (remaining nine months) | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| Total lease payments | $ | |||||||
Less: Imputed interest(2) | ( | |||||||
| Present value of lease liabilities | $ | |||||||
(1) The weighted average remaining lease term was 4.8 years as of July 3, 2021.
(2) The weighted average discount rate was 4.7 % as of July 3, 2021.
Unconditional Purchase Obligations
The Company purchases materials and services from a variety of suppliers and manufacturers. During the normal course of business and to manage manufacturing operations, the Company may enter into firm, non-cancelable, and unconditional purchase obligations for inventory, including electronic components, such as semiconductor chips, in addition to service, capital expenditure, and general and administrative activities, for which amounts are not recorded on the condensed consolidated balance sheets. As of July 3, 2021, the Company had outstanding off-balance sheet third-party manufacturing, component purchase, and other general and administrative commitments of $599.5 million.
Other Guarantees and Obligations
In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, purchasers of assets or subsidiaries and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company's breach of agreements or representations and warranties made by the Company, services to be provided by the Company, intellectual property infringement claims made by third parties or, with respect to the sale of assets of a subsidiary, matters related to the Company's conduct of business and tax matters prior to the sale. From time to time, the Company indemnifies customers against combinations of loss, expense, or liability arising from various triggering events relating to the sale and use of its products and services.
In addition, the Company also provides indemnification to customers against claims related to undiscovered liabilities, additional product liability, or environmental obligations. The Company has also entered into indemnification agreements with its directors, officers, and certain other personnel that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers of the Company or certain of its affiliated entities. The Company maintains director and officer liability insurance, which may cover certain liabilities arising from its obligation to indemnify its directors, officers, and certain other personnel in certain circumstances. It is not possible to determine the aggregate maximum potential loss under these agreements due to the limited history of prior claims and the unique facts and circumstances involved in each particular claim. Such indemnification obligations might not be subject to maximum loss clauses. Historically, the Company has not incurred material costs as a result of obligations under these agreements and it has not accrued any liabilities related to such indemnification obligations in the condensed consolidated financial statements.
14
Claims and Litigation
On January 23, 2018, FullView, Inc. filed a complaint in the United States District Court of the Northern District of California against Polycom, Inc. alleging infringement of two patents and thereafter filed a similar complaint in connection with the same patents in Canada. Polycom thereafter filed an inter partes reexamination ("IPR") of one of the patents, which was then appealed to Federal Circuit Court and denied. Litigation in both matters in the United States and Canada, respectively, were stayed pending the results of that appeal. Polycom also filed an IPR of the second patent and the U.S. Patent Trial and Appeal Board (“PTAB”) denied institution of the IPR petition. FullView had also initiated arbitration proceedings under a terminated license agreement with Polycom alleging that Polycom had failed to pay certain royalties due under that agreement. The arbitration panel awarded an immaterial amount to FullView. FullView filed a First and Second Amended Complaint and Polycom filed a motion to dismiss. The Court granted Polycom's partial motion to dismiss without prejudice and invalidated one of the patents in suit. Litigation on the remaining patent is ongoing.
On June 21, 2018, directPacket Research Inc. filed a complaint alleging patent infringement by Polycom, Inc. in the United States District Court for the Eastern District of Virginia, Norfolk Division. The Court granted Polycom’s Motion to Transfer Venue to the Northern District of California. Polycom filed petitions for Inter Partes Review of the asserted patents which were granted by the PTAB. The District Court matter was stayed pending resolution of the IPRs. Oral argument was heard on the IPRs on October 20, 2020. On January 11, 2021, the PTAB issued final written decisions invalidating two of the asserted patents. The remaining claims of the third patent were unasserted against the Company. On February 12, 2021, directPacket filed a notice of appeal to the United States Court of Appeals for the Federal Circuit with respect to the PTAB’s final written decision regarding the ’588 patent. On March 15, 2021, Polycom filed a notice of appeal to the United States Court of Appeals for the Federal Circuit with respect to the PTAB’s final written decision regarding the ’978 patent. Both parties have filed their respective appellate briefs and litigation is ongoing.
On November 15, 2019, Felice Bassuk, individually and on behalf of others similarly situated, filed a complaint against the Company, its former CEO, Joseph Burton, its CFO, Charles Boynton, and its former CFO, Pamela Strayer, alleging various securities law violations. The Company disputes the allegations. The Court appointed lead plaintiff and lead counsel and renamed the action “In re Plantronics, Inc. Securities Litigation” on February 13, 2020. Plaintiffs filed the amended complaint on June 5, 2020 and the Company’s Motion to Dismiss the Amended Complaint on August 7, 2020. Plaintiffs filed their opposition on October 2, 2020 and the Company replied on November 16, 2020. The hearing scheduled for January 13, 2021 was vacated and on March 29, 2021, the Court issued its order granting the Company’s motion to dismiss, but allowing the Plaintiffs leave to amend their complaint. On April 13, 2021, pursuant to the parties’ mutual agreement, the Court issued its order granting a stipulation and scheduling order which provides the plaintiffs until June 15, 2021 (subsequently extended to June 22, 2021) to consider whether or not to file a second amended complaint, and if filed, allowing defendants until August 16, 2021 to file a motion to dismiss, with plaintiffs’ opposition to such motion due on or before September 30, 2021, and with defendants’ reply to be filed on or before November 1, 2021. The Plaintiff filed an amended complaint on June 22, 2021 and the Company expects to file its Motion to Dismiss by the applicable deadline.
On December 17, 2019, Cisco Systems, Inc. filed a First Amended Complaint for Trade Secret Misappropriation against Plantronics, Inc. and certain individuals which amends a previously filed complaint against certain other individuals. The Company disputes the allegations. The Company filed a Motion to Dismiss and the Court granted the such Motion with leave to amend as to defendants He, Chung and Williams, granted the Motion to Compel Arbitration for defendant Williams and granted in part and denied in part the Motion to Dismiss by defendants Puorro and the Company. Cisco filed an Amended Complaint and the defendants moved to dismiss or strike portions of the Amended Complaint. The Court granted in part and denied in part the Motion to Dismiss. On September 10, 2020, the Company filed a Motion for Protective Order and a Motion to Strike and Challenge the Sufficiency of Cisco’s Trade Secret Disclosure. On December 21, 2020, the Court granted in part and denied in part such Motions. On December 30, 2020, Cisco filed a motion for leave to file a Motion for Reconsideration. On January 11, 2021 the Company filed its opposition. The Court issued its Case Management and Pretrial order setting a settlement conference which occurred on April 1, 2021. During such mediation conference, the parties agreed to stay the District Court case for 30 days to pursue settlement of pending claims. This 30 day period has run, and the parties were unable to reach settlement. The litigation is ongoing and discovery continues.
15
On July 22, 2020, Koss Corporation filed a complaint alleging patent infringement by the Company and Polycom, Inc. in the United States District Court for the Western District of Texas, Waco Division. The Company answered the Complaint on October 1, 2020 disputing the claims. On December 18, 2020, the Company filed a Motion to Transfer Venue to the Northern District of California, which remains pending. On January 29, 2021, the plaintiff amended its infringement contentions to add new accused products. On February 12, 2021, the plaintiff filed its opposition to the Motion to Transfer. Claim construction exchanges have begun, and a claim construction hearing was scheduled for April 22, 2021. Trial is scheduled for April 18, 2022. On May 20, 2021, the judge granted the Company’s Motion to Transfer Venue to the Northern District of California. Discovery continues.
In addition to the specific matters discussed above, the Company is involved in various legal proceedings and investigations arising in the normal course of conducting business. Where applicable, in relation to the matters described above, the Company has accrued an amount that reflects the aggregate liability deemed probable and estimable, but this amount is not material to the Company's financial condition, results of operations, or cash flows. The Company is not able to estimate an amount or range of any reasonably possible loss, including in excess of any amount accrued, because of the preliminary nature of many of these proceedings, the difficulty in ascertaining the applicable facts relating to many of these proceedings, the variable treatment of claims made in many of these proceedings, and the difficulty of predicting the settlement value of many of these proceedings.
However, based upon the Company's historical experience, the resolution of these proceedings is not expected to have a material effect on the Company's financial condition, results of operations or cash flows. The Company may incur substantial legal fees, which are expensed as incurred, in defending against these legal proceedings.
8. DEBT
The carrying value and estimated fair value measured on a recurring basis of the Company's outstanding debt as of July 3, 2021 and April 3, 2021 was as follows:
| July 3, 2021 | April 3, 2021 | ||||||||||||||||||||||
| (in thousands) | Fair Value | Carrying Value | Fair Value | Carrying Value | |||||||||||||||||||
| 4.75% Senior Notes | $ | $ | $ | $ | |||||||||||||||||||
| 5.50% Senior Notes | |||||||||||||||||||||||
| Term loan facility | |||||||||||||||||||||||
As of July 3, 2021 and April 3, 2021, the net unamortized discount, premium, and debt issuance costs on the Company's outstanding debt were $19.7 million and $22.6 million, respectively.
On March 4, 2021, the Company issued $500.0 million aggregate principal amount of 4.75 % Senior Notes. The 4.75 % Senior Notes mature on March 1, 2029 and bear interest at a rate of 4.75 % per annum, payable semi-annually on March 1 and September 1 of each year, commencing on September 1, 2021. The Company received proceeds of $493.9 million from issuance of the 4.75 % Senior Notes, net of issuance costs of $6.1 million, which are presented in the condensed consolidated balance sheets as a reduction to the outstanding amount payable and are being amortized to interest expense using the straight-line method, which approximates the effective interest method for this debt, over the term of the 4.75 % Senior Notes. A portion of the proceeds was used to repay the outstanding principal of the 5.50 % Senior Notes on May 17, 2021.
The fair value of the 4.75 % Senior Notes was determined based on inputs that were observable in the market, including the trading price of the 4.75 % Senior Notes, when available (Level 2).
16
The Company may redeem all or part of the 4.75 % Senior Notes, upon not less than a 15 -day or more than a 60 -day notice, however, the applicable redemption price will be determined as follows:
| Redemption Period Requiring Payment of: | Redemption Up To 40% Using Cash Proceeds From An Equity Offering (3) | ||||||||||||||||||||||
Make-Whole (1) | Premium (2) | Date | Specific Price | ||||||||||||||||||||
| 4.75% Senior Notes | Prior to March 1, 2024 | On or after March 1, 2024 | Prior to March 1, 2024 | ||||||||||||||||||||
(1) If the Company redeems the notes prior to the applicable date, the price is principal plus a make-whole premium, which means, the greater of (i) 1.0% of the principal or (ii) the excess of the present value of the redemption price at March 1, 2024 plus interest through March 1, 2024 over the principal amount.
(2) If the Company redeems the notes on or after the applicable date, the price is principal plus a premium which declines over time, as specified in the applicable indenture, together with accrued and unpaid interest.
In addition, upon the occurrence of certain change of control triggering events, the Company may be required to repurchase the 4.75 % Senior Notes, at a price equal to 101 % of their principal amount, plus accrued and unpaid interest to the date of repurchase. The 4.75 % Senior Notes contain restrictive covenants that, among other things, limit the ability of the Company and its restricted subsidiaries to incur or guarantee additional indebtedness, make certain investments and other restricted payments, transfer and sell assets, create liens, enter into transactions with affiliates, and engage in mergers, consolidations, or sales of assets.
In May 2015, the Company issued $500.0 million aggregate principal amount of 5.50 % Senior Notes. The 5.50 % Senior Notes mature on May 31, 2023, and bear interest at a rate of 5.50 % per annum, payable semi-annually on May 15 and November 15 of each year, commencing on November 15, 2015. The Company received net proceeds of $488.4 million from issuance of the 5.50 % Senior Notes, net of issuance costs of $11.6 million, which are being amortized to interest expense over the term of the 5.50 % Senior Notes using the straight-line method, which approximates the effective interest method for this debt. A portion of the proceeds was used to repay all then-outstanding amounts under the Company's revolving line of credit agreement with Wells Fargo Bank and the remaining proceeds were used primarily for share repurchases.
The fair value of the 5.50 % Senior Notes was determined based on inputs that were observable in the market, including the trading price of the 5.50 % Senior Notes when available (Level 2).
On May 17, 2021, the Company used a portion of the proceeds from the 4.75 % Senior Notes to redeem the outstanding principal and accrued interest of the 5.50 % Senior Notes of $493.9 million.
Term Loan Facility
In connection with the acquisition of Polycom completed on July 2, 2018, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto (the “Credit Agreement”). The Credit Agreement replaced the Company’s prior revolving credit facility in its entirety. The Credit Agreement provides for (i) a revolving credit facility with an initial maximum aggregate amount of availability of $100 million that matures in July 2023 and (ii) a $1.275 billion term loan facility priced at LIBOR plus 2.50% due in quarterly principal installments commencing on the last business day of March, June, September and December beginning with the first full fiscal quarter ending after the closing date under the Credit Agreement for the aggregate principal amount funded on the closing date under the Credit Agreement multiplied by 0.25 % (subject to prepayments outlined in the Credit Agreement) and all remaining outstanding principal due at maturity in July 2025. The Company has paid the full amount of term debt principal due prior to maturity. The Company borrowed the full amount available under the term loan facility of $1.245 billion, net of approximately $30 million of discounts and issuance costs which are being amortized to interest expense over the term of the Credit Agreement using the straight-line method which approximates the effective interest method for this debt. The proceeds from the initial borrowing under the Credit Agreement were used to finance the acquisition of Polycom, to refinance certain debt of Polycom, and to pay related fees, commissions and transaction costs. The Company has additional borrowing capacity under the Credit Agreement through the revolving credit facility, which could be used to provide ongoing working capital and capital for other general corporate
17
purposes of the Company and its subsidiaries. The Company’s obligations under the Credit Agreement are currently guaranteed by Polycom and will from time to time be guaranteed by, subject to certain exceptions, any domestic subsidiaries that may become material in the future. Subject to certain exceptions, the Credit Agreement is secured by first-priority perfected lien on, and security interests in, substantially all of the personal property of the Company and each subsidiary guarantor and will from time to time also be secured by certain material real property that the Company or any subsidiary guarantor may acquire. Borrowings under the Credit Agreement bear interest due on a quarterly basis at a variable rate equal to (i) LIBOR plus a specified margin, or (ii) the base rate (which is the highest of (a) the prime rate publicly announced from time to time by Wells Fargo Bank, National Association, (b) the federal funds rate plus 0.50 % or (c) the sum of 1 % plus one-month LIBOR) plus a specified margin. The Company must also pay (i) an unused commitment fee ranging from 0.200 % to 0.300 % per annum of the average daily unused portion of the aggregate revolving credit commitments under the Credit Agreement, and (ii) a per annum fee equal to (a) for each performance standby letter of credit outstanding under the Credit Agreement with respect to non-financial contractual obligations, 50 % of the applicable margin over LIBOR under the revolving credit facility in effect from time to time multiplied by the daily amount available to be drawn under such letter of credit, and (b) for each other letter of credit outstanding under the Credit Agreement, the applicable margin over LIBOR under the revolving credit facility in effect from time to time multiplied by the daily amount available to be drawn under such letter of credit.
On February 20, 2020, the Company entered into an Amendment No. 2 to Credit Agreement (the “Amendment”) by and among the Company, the financial institutions party thereto as lenders and Wells Fargo Bank, National Association, as administrative agent. The Amendment amended the Credit Agreement, as previously amended to (i) increase the maximum Secured Net Leverage Ratio (as defined in the Credit Agreement) permitted under the Credit Agreement to 3.75 to 1.00 through December 26, 2020 and 3.00 to 1.00 thereafter and (ii) decrease the minimum Interest Coverage Ratio (as defined in the Credit Agreement) required under the Credit Agreement to 2.25 to 1.00 through December 26, 2020 and 2.75 to 1.00 thereafter.
Additionally, the Amendment modified the calculation of the Secured Net Leverage Ratio and the Interest Coverage Ratio solely for purposes of compliance with Sections 7.11(a) and 7.11(b) of the Credit Agreement to (i) calculate the Secured Net Leverage Ratio net of the aggregate amount of unrestricted Cash and Cash Equivalents (as defined in the Credit Agreement) on the condensed consolidated balance sheets of the Company and its Restricted Subsidiaries (as defined in the Credit Agreement) as of the date of calculation up to an amount equal to $150,000,000 and (ii) solely for purposes of any fiscal quarter ending from December 29, 2019 through December 26, 2020, increase the cap on Expected Cost Savings (as defined in the Credit Agreement) in determining Consolidated EBITDA (as defined in the Credit Agreement) to the greater of (A) 20 % of Consolidated EBITDA for such Measurement Period (as defined in the Credit Agreement) (calculated before giving effect to any such Expected Cost Savings to be added back pursuant to clause (a)(ix) of the definition of Consolidated EBITDA) and (B)(x) for the period from December 29, 2019 through March 28, 2020, $121,000,000 , (y) for the period from March 29, 2020 through June 27, 2020, $107,000,000 and (z) for the period from June 28, 2020 through December 26, 2020, $88,000,000 .
The financial covenants under the Credit Agreement described above are for the benefit of the revolving credit lenders only and do not apply to any other debt of the Company. The Credit Agreement also contains various other restrictions and covenants, some of which have become more stringent over time, including restrictions on our, and certain of our subsidiaries, ability to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, consummate acquisitions, make investments and pay dividends and other distributions. The Company has the unilateral ability to terminate the revolving line of credit such that the financial covenants described above are no longer applicable. The Credit Agreement also contains customary events of default. If an event of default under the Credit Agreement occurs and is continuing, then the lenders may declare any outstanding obligations under the Credit Agreement to be immediately due and payable; provided, however, that the occurrence of an event of default as a result of a breach of a financial covenant under the Credit Agreement does not constitute a default or event of default with respect to any term facility under the Credit Agreement unless and until the required revolving lenders shall have terminated their revolving commitments and declared all amounts outstanding under the revolving credit facility to be due and payable. In addition, if the Company, any subsidiary guarantor or, with certain exceptions, any other subsidiary becomes the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency or similar law, then any outstanding obligations under the Credit Agreement will automatically become immediately due and payable. Loans outstanding under the Credit Agreement will bear interest at a rate of 2.00 % per annum in excess of the otherwise applicable rate (i) while a payment or bankruptcy event of default exists or (ii) upon the lenders’ request, during the continuance of any other event of default. As of July 3, 2021, the Company was in compliance with all financial covenants.
18
9. RESTRUCTURING AND OTHER RELATED CHARGES
Summary of Restructuring Plans
Fiscal Year 2022 restructuring plan
During the three months ended July 3, 2021, the Company committed to actions to reduce expenses to enable strategic investments in revenue growth. The costs incurred to date under this plan include severance benefits related to headcount reductions in the Company's global workforce and facility related charges due to the closure or consolidation of offices.
Fiscal Year 2021 restructuring plan
During Fiscal Year 2021, the Company committed to additional actions to reduce expenses and align its overall cost structure to better align with projected revenue levels as well as reorganize its executive management to align to its new Chief Executive Officer's management structure. The costs incurred to date under this plan include severance benefits related to headcount reductions in the Company's global workforce and facility related charges due to the closure or consolidation of leased offices.
Legacy restructuring plans
In connection with the Polycom acquisition, in Fiscal Years 2019 and 2020 the Company initiated actions to rationalize post-acquisition operations and realign its cost structure. These actions included streamlining the global workforce, closure or consolidation of leased offices and distribution centers, consumer product portfolio optimization efforts, and legal entity rationalization.
The following table summarizes the restructuring and other related charges recognized in the Company's condensed consolidated statements of operations:
| Three Months Ended | |||||||||||
| (in thousands) | July 3, 2021 | June 27, 2020 | |||||||||
| Severance | $ | $ | |||||||||
| Facility | ( | ||||||||||
Other (1) | |||||||||||
| Total cash charges | |||||||||||
Non-cash charges (2) | |||||||||||
| Total restructuring and other related charges | $ | $ | |||||||||
(1) Other costs primarily represent associated legal and advisory services.
(2) Non-cash charges primarily represent accelerated depreciation due to the closure or consolidation of facilities.
19
The Company's restructuring liabilities as of July 3, 2021 is as follows:
| (in thousands) | As of April 3, 2021 | Accruals (1) | Cash Payments | As of July 3, 2021 | ||||||||||
| FY 2022 Plan | ||||||||||||||
| Severance | $ | $ | $ | ( | $ | |||||||||
| Facility | ||||||||||||||
| Other | ( | |||||||||||||
| Total FY 2022 Plan | $ | $ | $ | ( | $ | |||||||||
| FY 2021 Plans | ||||||||||||||
| Severance | $ | $ | ( | $ | ( | $ | ||||||||
| Facility | ( | |||||||||||||
| Other | ( | |||||||||||||
| Total FY 2021 Plans | $ | $ | ( | $ | ( | $ | ||||||||
| Legacy Plans | ||||||||||||||
| Severance | $ | $ | ( | $ | ( | $ | ||||||||
| Facility | ( | ( | ||||||||||||
| Other | ||||||||||||||
| Total Legacy Plans | $ | $ | ( | $ | ( | $ | ||||||||
| Severance | $ | $ | $ | ( | $ | |||||||||
| Facility | ( | ( | ||||||||||||
| Other | ( | |||||||||||||
| Grand Total | $ | $ | $ | ( | $ | |||||||||
(1) Excludes non-cash charges of $6.0 million recorded in restructuring and other related charges on the Company's condensed consolidated statements of operations for the three months ended July 3, 2021.
10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss), net of tax, were as follows:
| (in thousands) | July 3, 2021 | April 3, 2021 | |||||||||||||||
| Accumulated unrealized loss on cash flow hedges | $ | ( | $ | ( | |||||||||||||
| Accumulated foreign currency translation adjustments | |||||||||||||||||
| Accumulated other comprehensive income (loss) | $ | $ | ( | ||||||||||||||
11. DERIVATIVES
Foreign Currency Derivatives
The Company's foreign currency derivatives consist primarily of foreign currency forward and option contracts. The Company does not purchase derivative financial instruments for speculative trading purposes. The derivatives expose the Company to credit risk to the extent the counterparties may be unable to meet the terms of the derivative instrument. The Company's maximum exposure to loss as a result of credit risk was equal to the carrying value of the Company's derivative assets as of July 3, 2021 and April 3, 2021. The Company seeks to mitigate such risk by limiting its counterparties to large financial institutions. In addition, the Company monitors the potential risk of loss with any one counterparty resulting from this type of credit risk on an ongoing basis.
20
The Company enters into master netting arrangements with counterparties to mitigate credit risk in derivative transactions, when possible. A master netting arrangement may allow each counterparty to net settle amounts owed between the Company and the counterparty as a result of multiple, separate derivative transactions. As of July 3, 2021, the Company had International Swaps and Derivatives Association ("ISDA") agreements with five applicable banks and financial institutions which contained netting provisions. The Company has elected to present the fair value of derivative assets and liabilities within the Company's condensed consolidated balance sheets on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. Derivatives not subject to master netting agreements are not eligible for net presentation. As of July 3, 2021 and April 3, 2021, no cash collateral had been received or pledged related to these derivative instruments.
The Company's derivative instruments are measured using Level 2 fair value inputs. The gross fair value of the Company's outstanding derivative contracts measured on a recurring basis at the end of each period was as follows:
| (in thousands) | July 3, 2021 | April 3, 2021 | ||||||||||||
Derivative assets(1) | ||||||||||||||
| Non-designated hedges | $ | $ | ||||||||||||
| Cash flow hedges | ||||||||||||||
| Interest rate swap | ||||||||||||||
| Total derivative assets | $ | $ | ||||||||||||
Derivative liabilities(2) | ||||||||||||||
| Non-designated hedges | $ | $ | ||||||||||||
| Cash flow hedges | ||||||||||||||
| Interest rate swap | ||||||||||||||
| Accrued interest | ||||||||||||||
| Total derivative liabilities | $ | $ | ||||||||||||
(1) Short-term derivative assets are recorded in other current assets and long-term derivative assets are recorded in other non-current assets on the condensed consolidated balance sheets. As of July 3, 2021, the portion of derivative assets classified as long-term was $2.7 million.
Non-Designated Hedges
As of July 3, 2021, the Company had foreign currency forward contracts denominated in Euro ("EUR") and Great Britain Pound Sterling ("GBP"). The Company does not elect to obtain hedge accounting for these forward contracts. These forward contracts hedge against a portion of the Company’s foreign currency-denominated cash balances, accounts receivables, and accounts payables. The following table summarizes the notional value of the Company’s outstanding foreign exchange currency contracts and approximate USD equivalent at July 3, 2021:
| (in thousands) | Local Currency | USD Equivalent | Position | Maturity | |||||||||||||||||||
| EUR | € | $ | |||||||||||||||||||||
| GBP | £ | $ | |||||||||||||||||||||
Effect of Non-Designated Derivative Contracts on the Condensed Consolidated Statements of Operations
The effect of non-designated derivative contracts on results of operations recognized in other non-operating income, net in the condensed consolidated statements of operations was as follows:
| Three Months Ended | ||||||||||||||
| (in thousands) | July 3, 2021 | June 27, 2020 | ||||||||||||
| Loss on foreign exchange contracts | $ | ( | $ | ( | ||||||||||
21
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 to twelve-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-mon th term. Once the hedged revenues are recognized, the forward contracts become non-designated hedges to protect the resulting foreign monetary asset position for the Company.
The notional value of the Company's outstanding EUR and GBP option and forward contracts at the end of each period was as follows:
| July 3, 2021 | April 3, 2021 | |||||||||||||||||||||||||
| (in millions) | EUR | GBP | EUR | GBP | ||||||||||||||||||||||
| Option contracts | € | £ | € | £ | ||||||||||||||||||||||
| Forward contracts | € | £ | € | £ | ||||||||||||||||||||||
The Company will reclassify all related amounts in accumulated other comprehensive income into earnings within the next twelve months.
Cross-currency Swaps
The Company hedges a portion of the forecasted Mexican Peso (“MXN”) denominated expenditures with a cross-currency swap. As of July 3, 2021, and April 3, 2021, the Company had foreign currency swap contracts of approximately MXN 369.9 million and MXN 564.3 million, respectively.
The following table summarizes the notional value of the Company's outstanding MXN currency swaps and approximate USD Equivalent at July 3, 2021:
| (in thousands) | Local Currency | USD Equivalent | Position | Maturity | |||||||||||||||||||
| MXN | $ | $ | Buy MXN | Monthly over a twelve month period | |||||||||||||||||||
The Company will reclassify all related amounts in accumulated other comprehensive income into earnings within the next twelve months.
Interest Rate Swap
On June 15, 2021, the Company entered into a three-year amortizing interest rate swap agreement with Bank of America, N.A. The swap has an initial notional amount of $680 million and matures on July 31, 2024. The swap involves the receipt of floating-rate interest payments for fixed interest rate payments at a rate of 0.39 % over the life of the agreement. Additionally, on July 30, 2018, the Company entered into a four-year amortizing interest rate swap agreement with Bank of America, N.A. The swap has an initial notional amount of $831 million and matures on July 31, 2022. The swap involves the receipt of floating-rate interest payments for fixed interest rate payments at a rate of 2.78 % over the life of the agreement.
The Company has designated the interest rate swaps as cash flow hedges. The purpose of the swaps is to hedge against changes in cash flows (interest payments) attributable to fluctuations in the Company's variable rate debt. The swaps are valued based on prevailing LIBOR rate curves on the date of measurement. The Company also evaluates counterparty credit risk when it calculates the fair value of the swaps. Changes in the fair value of the interest rate swaps are recorded to other comprehensive income and reclassified to interest expense over the life of the underlying debt as interest is accrued. During the three months ended July 3, 2021, the Company reclassified into interest expense $3.1 million and had a $5.7 million unrealized loss on its interest rate swap derivatives designated as cash flow hedges.
The Company will reclassify approximately $8.0 million in accumulated other comprehensive income into earnings within the next twelve months.
22
Effect of Designated Derivative Contracts on Accumulated Other Comprehensive Income (Loss) and Condensed Consolidated Statements of Operations
The following table presents the pre-tax effects of derivative instruments designated as cash flow hedges on accumulated other comprehensive income and the condensed consolidated statements of operations for the three months ended July 3, 2021 and June 27, 2020:
| Three Months Ended | ||||||||||||||
| (in thousands) | July 3, 2021 | June 27, 2020 | ||||||||||||
| Loss included in accumulated other comprehensive income (loss), as of beginning of period | $ | ( | $ | ( | ||||||||||
| Gain (loss) recognized in other comprehensive income (loss) | ( | |||||||||||||
| Amount of (gain)/loss reclassified from accumulated other comprehensive income (loss) into net revenues | ( | |||||||||||||
| Amount of loss reclassified from accumulated other comprehensive income (loss) into cost of revenues | ( | |||||||||||||
| Amount of gain reclassified from accumulated other comprehensive income (loss) into interest expense | ||||||||||||||
| Total amount of gain reclassified from accumulated other comprehensive income (loss) to the condensed consolidated statements of operations | ||||||||||||||
| Loss included in accumulated other comprehensive income (loss), as of end of period | $ | ( | $ | ( | ||||||||||
12. INCOME TAXES
The Company and its subsidiaries are subject to taxation in the U.S. and in various foreign and state jurisdictions. The Company's income tax benefit is determined using an estimate of its annual effective tax rate and adjusted for discrete items that are taken into account in the relevant period. The effective tax rates for the three months ended July 3, 2021 and June 27, 2020 were 10.4 % and 4.1 %, respectively.
Income tax benefit was $(4.3 ) million and $(3.2 ) million for the three months ended July 3, 2021 and June 27, 2020, respectively. The provision for income taxes for the three months ended July 3, 2021 consisted primarily of federal, state, and foreign income taxes. For the three months ended July 3, 2021 and June 27, 2020, the income tax benefit differed from the U.S. federal statutory rate primarily due the valuation allowance on the U.S. federal and state deferred tax assets.
As of July 3, 2021, the Company continued to maintain a full valuation allowance against its U.S. federal and state deferred tax assets ("DTAs.") A significant portion of the Company's DTAs relate to internal intangible property restructuring between wholly-owned subsidiaries. At this time, based on evidence currently available, the Company considers it more likely than not that it will have sufficient taxable income in the future that will allow the Company to realize the DTAs; however, failure to generate sufficient future taxable income could result in some or all DTAs not being utilized in the future. If the Company is unable to generate sufficient future taxable income, a substantial valuation allowance to reduce the Company's DTAs may be required.
23
13. COMPUTATION OF LOSS PER COMMON SHARE
Basic loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted loss per share assumes the issuance of additional shares of common stock by the Company upon exercise of all outstanding stock options and vesting of restricted stock, if the effect is dilutive, in accordance with the treasury stock method. The potentially dilutive effect of outstanding stock options and restricted stock has been excluded from the computation of diluted loss per share in all periods presented, as their effect is anti-dilutive.
The following table sets forth the computation of basic and diluted loss per common share for the three months ended July 3, 2021 and June 27, 2020:
| Three Months Ended | ||||||||||||||
| (in thousands, except per share data) | July 3, 2021 | June 27, 2020 | ||||||||||||
| Numerator: | ||||||||||||||
| Net loss | $ | ( | $ | ( | ||||||||||
| Denominator: | ||||||||||||||
| Weighted-average common shares outstanding | ||||||||||||||
| Basic and diluted loss per common share | $ | ( | $ | ( | ||||||||||
| Potentially dilutive securities excluded from diluted loss per common share because their effect is anti-dilutive | ||||||||||||||
14. REVENUE AND MAJOR CUSTOMERS
The Company designs, builds, and markets collaboration solutions which combine legendary audio expertise and powerful video and conferencing capabilities to create endpoints that power meaningful human connections and provide solutions that make life easier when they work together and with our partner's services.
The Company’s major product categories are Headsets, Video, Voice, and Services. Headsets include wired and wireless communication headsets; Voice includes open SIP and native ecosystem desktop phones as well as conference room phones; Video includes video conferencing solutions and peripherals, such as cameras, speakers, and microphones. The broad portfolio of Services include video interoperability, hardware and support for our solutions and hardware devices, as well as professional, hosted, and managed services that are grounded in our deep expertise aimed at helping customers achieve their goals for collaboration. The Company's cloud management and analytics software enables IT administrators to configure and update firmware, monitor device usage, troubleshoot, and gain a deep understanding of user behavior. All of the Company's solutions are designed to integrate seamlessly with the platform and services of our customers choice in a wide range of Unified Communications & Collaboration ("UC&C"), Unified Communication as a Service ("UCaaS"), and Video as a Service ("VaaS") environments. The Company's RealPresence collaboration solutions range from infrastructure to endpoints and allow people to connect and collaborate globally, naturally, and seamlessly.
Product revenue is largely comprised of sales of hardware devices, peripherals, and platform software licenses used in communication and collaboration in offices and contact centers, with mobile devices, cordless phones, and computers. Services revenue primarily includes support on hardware devices, professional, hosted and managed services, and solutions to the Company's customers.
24
| Three Months Ended | ||||||||||||||
| (in thousands) | July 3, 2021 | June 27, 2020 | ||||||||||||
| Net revenues | ||||||||||||||
| Headsets | ||||||||||||||
| Voice | ||||||||||||||
| Video | ||||||||||||||
| Services | ||||||||||||||
| Total net revenues | $ | $ | ||||||||||||
For reporting purposes, revenue is attributed to each geographic region based on the location of the customer. Other than the U.S., no country accounted for 10% or more of the Company's total net revenues for the three months ended July 3, 2021 and June 27, 2020.
The following table presents total net revenues by geography:
| Three Months Ended | ||||||||||||||
| (in thousands) | July 3, 2021 | June 27, 2020 | ||||||||||||
| Net product revenues | ||||||||||||||
| U.S. | $ | $ | ||||||||||||
| Europe, Middle East, and Africa | ||||||||||||||
| Asia Pacific | ||||||||||||||
| Americas, excluding U.S. | ||||||||||||||
| Total international net product revenues | ||||||||||||||
| Total net product revenues | $ | $ | ||||||||||||
| Net service revenues | ||||||||||||||
| U.S. | $ | $ | ||||||||||||
| Europe, Middle East, and Africa | ||||||||||||||
| Asia Pacific | ||||||||||||||
| Americas, excluding U.S. | ||||||||||||||
| Total international net service revenues | ||||||||||||||
| Total net service revenues | $ | $ | ||||||||||||
| Total net revenues | $ | $ | ||||||||||||
Deferred revenue is primarily comprised of non-cancelable maintenance support performance obligations on hardware devices which are typically billed in advance and recognized ratably over the contract term as the services are delivered. As of July 3, 2021, the Company's deferred revenue balance was $207.6 million. As of April 3, 2021, the Company's deferred revenue balance was $213.8 million. During the three months ended July 3, 2021, the Company recognized $47.6 million in total net revenues that were recorded in deferred revenue at the beginning of the period.
The table below represents aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) as of July 3, 2021:
| July 3, 2021 | ||||||||||||||||||||
| (in millions) | Current | Noncurrent | Total | |||||||||||||||||
| Unsatisfied (or partially unsatisfied) performance obligations | $ | $ | $ | |||||||||||||||||
Sales, value add, and other taxes collected concurrently with revenue producing activities are excluded from revenue.
25
The Company's indirect channel model includes both a two-tiered distribution structure, where the Company sells to distributors that subsequently sell to resellers, and a one-tiered structure where the Company sells directly to resellers. For these arrangements, transfer of control begins at the time access to the Company's services is made available to the end customer and entitlements have been contractually established, provided all other criteria for revenue recognition are met.
Commercial distributors and retailers represent the Company's largest sources of net revenues. Sales through its distribution and retail channels are made primarily under agreements allowing for rights of return and include various sales incentive programs, such as back end rebates, discounts, marketing development funds, price protection, and other sales incentives. The Company has an established sales history for these arrangements and the Company records the estimated reserves at the inception of the contract as a reflection of the reduced transaction price. Customer sales returns are estimated based on historical data, relevant current data, and the monitoring of inventory build-up in the distribution channel. Revenue reserves represent a reasonable estimation made by management and are subject to significant judgment. Estimated reserves may differ from actual returns or incentives provided, due to unforeseen customer return or claim patterns or changes in circumstances. For certain customer contracts which have historically demonstrated variability, the Company has considered the likelihood of being under-reserved and has considered a constraint accordingly. Provisions for sales returns are presented within accrued liabilities in the Company's condensed consolidated balance sheets. Provisions for promotions, rebates, and other sales incentives are presented as a reduction of accounts receivable unless there is no identifiable right offset, in which case they are presented within accrued liabilities on its condensed consolidated balance sheets. See Note 5, Details of Certain Balance Sheet Accounts, for additional details.
For certain arrangements, the Company pays commissions, bonuses and taxes associated with obtaining the contracts. The Company capitalizes such costs if they are deemed to be incremental and recoverable. The Company has elected to use the practical expedient to record the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. Determining the amortization period of costs related to obtaining a contract involves judgment. Capitalized commissions and related expenses on hardware sales and services recognized at a point in time generally have an amortization period of less than one year. Maintenance-related performance obligations generally have an amortization period greater than one year when considering renewals. Capitalized commissions are amortized to selling, general, and administrative expense on a straight-line basis. The capitalized amount of incremental and recoverable costs of obtaining contracts with a related amortization period greater than one year are was not material as of and for the three months ended July 3, 2021.
15. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
The Company's Chief Executive Officer is identified as its Chief Operating Decision Maker ("CODM"). The CODM has organized the Company, manages resource allocations and measures performance among its two operating segments: Products and Services.
The Products reportable segment includes the Company's Headsets, Voice and Video product lines. The Services reportable segment includes maintenance support on hardware devices as well as professional, managed and cloud services and solutions.
In managing the two operating segments the CODM uses information about their revenue and gross margin after adjustments to exclude certain non-cash transactions and activities that are not reflective of the Company's ongoing or core operations as further described below. The CODM does not review asset information by segment.
Purchase accounting amortization: Represents the amortization of purchased intangible assets recorded in connection with the acquisition of Polycom.
Deferred revenue purchase accounting: Represents the impact of fair value purchase accounting adjustments related to deferred revenue recorded in connection with the Acquisition of Polycom. The Company's deferred revenue primarily relates to service revenue associated with non-cancelable maintenance support on hardware devices which are typically billed in advance and recognized ratably over the contract term as those services are delivered. This adjustment represents the amount of additional revenue that would have been recognized during the period absent the write-down to fair value required under purchase accounting guidelines.
Stock compensation expense: Represents the non-cash expense associated with the Company's issuance of common stock and stock-based awards to employees and non-employee directors.
26
The following table presents segments results for revenue and gross margin, as reviewed by the CODM, and their reconciliation to the Company's condensed consolidated GAAP results:
| Three Months Ended | ||||||||||||||
| (in thousands) | July 3, 2021 | June 27, 2020 | ||||||||||||
| Segment revenues, as reviewed by CODM | ||||||||||||||
| Products | $ | $ | ||||||||||||
| Services | ||||||||||||||
| Total segment revenues, as reviewed by CODM | $ | $ | ||||||||||||
| Segment gross profit, as reviewed by CODM | ||||||||||||||
| Products | $ | $ | ||||||||||||
| Services | ||||||||||||||
| Total segment gross profit, as reviewed by CODM | $ | $ | ||||||||||||
| Three Months Ended | ||||||||||||||
| (in thousands) | July 3, 2021 | June 27, 2020 | ||||||||||||
| Total segment revenues, as reviewed by CODM | $ | $ | ||||||||||||
| Deferred revenue purchase accounting | ( | ( | ||||||||||||
| GAAP net revenues | $ | $ | ||||||||||||
Total segment gross profit, as reviewed by CODM (1) | $ | $ | ||||||||||||
| Purchase accounting amortization | ( | ( | ||||||||||||
| Deferred revenue purchase accounting | ( | ( | ||||||||||||
| Stock-based compensation | ( | ( | ||||||||||||
| GAAP gross profit | $ | $ | ||||||||||||
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements relating to our intentions, beliefs, projections, outlook, analyses or current expectations that are subject to many risks and uncertainties. Such forward-looking statements and the associated risks and uncertainties include, but are not limited to: (i) our beliefs with respect to the length and severity of the COVID-19 (coronavirus) outbreak, and its impact across our businesses, our operations and global supply chain, including (a) our expectations that the virus has caused, and will continue to cause, a shift to a hybrid work environment and that the elevated demand we have experienced in certain product lines, including our Enterprise Headsets and Video devices, will continue over the long term, (b) our belief that we will continue to experience increased customer and partner demand in collaboration endpoints, and that we will be able to design new product offerings to meet the change in demand due to a global hybrid work environment, (c) our expectations related to our Voice product lines, as well as our services attachment rate for such products, which have been, and may continue to be, negatively impacted as companies have delayed returning their workforces to offices in many countries due to the continued impact of COVID-19; and (d) the impact of the virus on our distribution partners, resellers, end-user customers and our production facilities, including our ability to obtain alternative sources of supply if our production facility or other suppliers are impacted by future shutdowns; (ii) our expectations related to global supply chain disruptions, including our belief that shortages of key components, including semiconductor chips, have impacted companies worldwide both within and outside of our industry, and that we will continue to experience a shortage of adequate component supply, including integrated circuits and manufacturing capacity, long lead times for raw materials and components, increased costs, increased purchase commitments and a delay in our ability to fulfill orders, which has had, and may continue to have, an adverse impact on our business and operating results; (iii) expectations related to our ability to fulfill the backlog generated by supply constraints and to timely supply the number of products to fulfill current and future customer demand; (iv) risks associated with our dependence on manufacturing operations conducted in our own facility in Tijuana, Mexico and through contract manufacturers, original design manufacturers, and suppliers to manufacture our products, to timely obtain sufficient quantities of materials, as well as finished products of acceptable quality, at acceptable prices, and in the quantities necessary for us to meet critical schedules for the delivery of our own products and services and fulfill our anticipated customer demand; (v) risks associated with our ability to secure critical components from sole source suppliers or identify alternative suppliers and/or buy component parts on the open market or completed goods in quantities sufficient to meet our requirements on a timely basis, affecting our ability to deliver products and services to our customers; (vi) our belief that consolidations of suppliers has occurred, and may continue to occur, which may negatively impact our ability to access certain parts and may result in higher prices which will impact our gross margins; (vii) risks related to increased cost of goods sold, including increased freight and other costs associated with expediting shipment and delivery of high-demand products to key markets in order to meet customer demand; (viii) continued uncertainty and potential impact on future quarters if sourcing constraints continue and/or price volatility occurs, which could continue to negatively affect our profitability and/or market share; (ix) the impact if global or regional economic conditions deteriorate further, on our customers and/or partners, including increased demand for pricing accommodations, delayed payments, delayed deployment plans, insolvency or other issues which may increase credit losses; (x) risks related to restrictions or delays in global return to worksites as a result of COVID-19, which continues to impact our employees and our customers worldwide, which has negatively impacted our voice product lines, and restricted customer engagement; (xi) expectations related to our ability to supply products in a timely manner to satisfy perishable demand; (xii) expectations related to our customers’ purchasing decisions and our ability to pivot quickly enough and/or match product production to demand, particularly given long lead times and the difficulty of forecasting unit volumes and acquiring the component parts and materials to meet demand without having excess inventory or incurring cancellation charges; (xiii) risks associated with significant and/or abrupt changes in product demand which increases the complexity of management’s evaluation of potential excess or obsolete inventory; (xiv) risks associated with the bankruptcy or financial weakness of distributors or key customers, or the bankruptcy of or reduction in capacity of our key suppliers; (xv) expectations related to our Services segment revenues, particularly as we introduce new generation, less complex, product solutions, or as companies shift from on premises to work from home options for their workforce, which have resulted and may continue to result in decreased demand for our professional, installation and/or managed service offerings; (xvii) expectations that our current cash on hand, additional cash generated from operations, together with sources of cash through our credit facility, either alone or in combination with our election to suspend our dividend payments, will meet our liquidity needs; (xviii) expectations relating to our ability to generate sufficient cash flow from operations to meet our debt covenants, and timely repay all principal and interest amounts drawn under our credit facility as they become due; (xix) risks associated with our channel partners’ sales reporting, product inventories and product sell through since we sell a significant amount of products to channel partners who maintain their own inventory of our products; (xx) expectations related to our efforts to drive sales and sustainable profitable revenue growth, to improve our profitability and cash flow, and accelerate debt reduction and de-levering; (xxi) our expectations regarding growth objectives related to our strategic initiatives designed to expand our
28
product and service offerings, including our expectations related to building strategic alliances and key partnerships with providers of collaboration tools and platforms to drive revenue growth and market share, our expectations for new products launches, the timing of their releases and their expected impact on future growth and on our existing products, and our belief that our product management and personal device services, including Poly Lens and/or Poly+, will drive growth and profitability for both us and our partners through the sale of our product, services and solutions; (xxii) risks associated with forecasting sales and procurement demands, which are inherently difficult, particularly with continuing uncertainty in regional and global economic conditions; (xxv) our expectations regarding our ability to control costs, streamline operations and successfully implement our various cost-reduction activities and realize anticipated cost savings under such cost-reduction initiatives; (xxvi) expectations relating to our earnings guidance, particularly as economic uncertainty, including, without limitation, uncertainty related to the continued impact of COVID-19, the current constraints in our ability to source key components for our products, continued uncertainty in the macro-economic climate and other external factors, puts further pressure on management judgments used to develop forward-looking financial guidance and other prospective financial information; (xxvii) expectations related to GAAP and non-GAAP financial results for the second quarter and full Fiscal Year 2022, including net revenues, adjusted EBITDA, tax rates, intangibles amortization, diluted weighted average shares outstanding and diluted EPS; (xxviii) our beliefs regarding the UC&C market, market dynamics and opportunities, and customer and partner behavior as well as our position in the market, including risks associated with the potential failure of our UC&C solutions to be adopted with the breadth and speed we anticipate; (xxix) uncertainties attributable to currency fluctuations, including fluctuations in foreign exchange rates and/or new or greater tariffs on our products; (xxx) our belief that the increased adoption of certain technologies and our open architecture approach has and will continue to increase demand for our solutions; (xxxi) expectations related to the micro and macro-economic conditions in our domestic and international markets and their impact on our future business; (xxxii) our forecast and estimates with respect to tax matters, including expectations with respect to utilizing our deferred tax assets; and (xxxiii) our expectations regarding pending and potential future litigation, in addition to other matters discussed in this Annual Report on Form 10-K that are not purely historical data. Such forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. Factors that could cause actual results and events to differ materially from such forward-looking statements are included, but not limited to, those discussed in this Quarterly Report on Form 10-Q; in Part I, "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended April 3, 2021, filed with the Securities and Exchange Commission ("SEC") on May 18, 2021; and other documents we have filed with the SEC. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
OVERVIEW
Plantronics, Inc. (“Poly,” “Company,” “we,” “our,” or “us”) is a leading global communications technology company that designs, manufactures, and markets integrated communications and collaboration solutions for professionals. We offer premium audio and video products designed to work in an era where work is no longer a place and enterprise work forces are increasingly distributed. Our products and services are designed and engineered to connect people with high fidelity and incredible clarity. They are professional-grade, easy to use, and work seamlessly with major video- and audio-conferencing platforms.
Our major product categories are Headsets, Video, Voice, and Services. Headsets include wired and wireless communication headsets; Voice includes open Session Initiation Protocol ("SIP") and native ecosystem desktop phones, as well as conference room phones; Video includes conferencing solutions and peripherals, such as cameras, speakers, and microphones. All of our solutions are designed to integrate seamlessly with the platform and services of our customers’ choice in a wide range of Unified Communications & Collaboration (“UC&C”), Unified Communication as a Service (“UCaaS”), and Video as a Service (“VaaS”) environments.
Additionally, our cloud management and analytics software enables Information Technology ("IT") administrators to configure and update firmware, monitor device usage, troubleshoot, and gain a deep understanding of user behavior. We offer a broad portfolio of services including video interoperability, support for our solutions and hardware devices, as well as professional, hosted, and managed services that are grounded in our deep expertise aimed at helping our customers achieve their goals for collaboration.
We sell our products through a well-developed global network of distributors and channel partners, including value-added resellers, integrators, direct marketing resellers, and service providers, as well as through both traditional and online retailers, office supply distributors, and e-commerce channels. We have well-established distribution channels in the Americas, Europe, Middle East, Africa, and Asia Pacific, where use of our products is widespread.
29
Our fiscal year ends on the Saturday closest to the last day of March. The year ended April 2, 2022 ("Fiscal Year 2022") has 52 weeks, while the year ended April 3, 2021 ("Fiscal Year 2021") had 53 weeks. The three months ended July 3, 2021 ("first quarter Fiscal Year 2022") and June 27, 2020 ("first quarter Fiscal Year 2021") each had 13 weeks.
Impact of the Current Environment and COVID-19 on Our Business
COVID-19 has continued to spread globally and continues to add uncertainty and influence global economic activity, the global supply chain, and financial markets. The impact of the pandemic on our operations has varied by local conditions, government mandates, and business limitations, including travel bans, remote work, and other restrictions.
Shelter-in-place mandates led to a massive increase in remote work. As a result, during Fiscal Year 2021 we experienced elevated demand for certain enterprise Headsets and Video devices and a decline in demand for our Voice products and associated Services, as companies continued to shift from in-office to work-from-home arrangements for many of their office workers. The acceleration in customer and partner demand for these products to support remote work environments, remote learning, and telemedicine opportunities led to increased sales and operating income. During the fourth quarter of Fiscal Year 2021 and continuing in the first quarter of Fiscal Year 2022, we experienced elevated demand for certain Video and Voice devices as companies began to shift from work-from-home arrangements to hybrid work models.
However, the impact of COVID-19 is fluid and uncertain, and it has caused, and may continue to cause, various negative effects as we continue to experience periodic constraints in our supply chain, specifically the sourcing of certain components and raw materials, and increased logistics costs and suffer other adverse effects on our gross margins to meet customer demand for specific Headsets and Video products. As a result, the impact of COVID-19 to date has had mixed effects on our results of operations and we expect supply chain constraints to limit our ability to meet demand in the short-term.
We have experienced and continue to monitor limited supply and longer lead times for certain key components, such as semiconductor chips, necessary to complete production and meet customer demand, including fulfillment of our backlog. In particular, we are experiencing long lead times for global semiconductor chips and other key components. We do not manufacture these component parts and currently purchase certain parts, including semiconductor chips and sub-assemblies that require semiconductor chips, from single or limited sources. Additionally, constrained supply has resulted in increased prices for certain components, including semiconductor chips, on the spot market, increased transportation costs, inefficiencies at our owned manufacturing facility in Tijuana, Mexico, and inability to fulfill backlog for certain products timely. We continue to monitor our supply chain and are taking action against limited supply and increasing lead times, including increased spot market purchases, outreach to critical suppliers, and entering into contractual obligations to secure supply. These factors, among others, are affecting and are expected to continue to affect total net revenue and gross margin rates. We are unable to estimate the extent and the period over which these conditions will exist.
In responding to this pandemic, employee safety continues to be a critical concern for Poly and we have taken measures to protect our employees globally by adherence to public safety and shelter in place directives, physical distancing protocols within offices and manufacturing facilities, providing personal protective equipment, including face masks and hand sanitizers, conducting routine sanitation of facilities, requiring health monitoring before entry into Poly facilities and restricting the number of visitors to our sites. The safety protocols implemented globally meet or exceed current regulations, however we continue to monitor employees’ safety and evolving regulatory requirements. Although our manufacturing facility remains open and certain office employees may utilize our offices when necessary, the majority of all non-factory employees continue to work from home, using headsets and other Poly-issued equipment. We provided COVID-19 vaccines to our employees and their immediate families, as well as other workers, at our manufacturing facility on a voluntary basis free of charge.
The full extent and duration of the impact of the COVID-19 pandemic on our business continues to be uncertain and difficult to predict and will depend on many factors outside of our control, including the extent and duration of the pandemic, mutations, and variants of the virus, the development and availability of effective treatments, including the availability of vaccines for our global workforce, mandates of protective public safety measures, and the impact of the pandemic on the global economy, global supply chains, and demand for our products. It is not possible at this time to foresee whether the outbreak of COVID-19 or other events beyond our control will be effectively contained, nor can we estimate the entirety of the impact that COVID-19 or such other pandemics or natural or man-made disaster will have on the global economy, our business, customers, suppliers, or other business partners. As such, impacts from such events on Poly are highly uncertain and we will continue to assess the impact from such events on our condensed consolidated financial statements.
30
First Quarter Fiscal Year 2022 Highlights
Total net revenues for the first quarter of Fiscal Year 2022 were $431.2 million, an increase of $75.5 million or 21.2%, compared to the first quarter of Fiscal Year 2021, primarily driven by increased sales in our Video and Voice product categories.
Product gross margin rate for the first quarter of Fiscal Year 2022 decreased from 39.4% in the first quarter of Fiscal Year 2021 to 36.6%, primarily driven by increased component, transportation, and manufacturing costs, as well as unfavorable product mix.
We redeemed the outstanding principal and accrued interest on the 5.50% Senior Notes of $493.9 million during the first quarter of Fiscal Year 2022. On June 15, 2021, we entered into a three-year amortizing interest rate swap agreement as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates on our $1.275 billion term loan facility.
During the first quarter of Fiscal Year 2022, we announced the Voyager Focus 2 headset, a next generation USB and Bluetooth headset, designed with Poly's next generation Acoustic Fence Technology and Advanced Digital Hybrid Active Noise Cancellation. This product was available during the first quarter of Fiscal Year 2022 and did not have a material impact on total net revenues.
RESULTS OF OPERATIONS
The Company’s reportable segments are Products and Services. Our Products reportable segment includes the Headsets, Voice, and Video product lines. Our Services reportable segment includes maintenance support on hardware devices as well as, professional, managed and cloud services and solutions.
Total Net Revenues
The following table sets forth total net revenues by reportable segment for the first quarter of Fiscal Years 2022 and 2021:
| Three Months Ended | ||||||||||||||||||||||||||
| (in thousands, except percentages) | July 3, 2021 | June 27, 2020 | Change | |||||||||||||||||||||||
| Products | $ | 371,203 | $ | 291,458 | $ | 79,745 | 27.4 | % | ||||||||||||||||||
| Services | 59,969 | 64,262 | (4,293) | (6.7) | % | |||||||||||||||||||||
| Total net revenues | $ | 431,172 | $ | 355,720 | $ | 75,452 | 21.2 | % | ||||||||||||||||||
Products
Total product net revenues increased in the first quarter of Fiscal Year 2022 compared to the first quarter of Fiscal Year 2021, primarily due to the following:
•Video product category net revenues increased, driven by the shift to hybrid work arrangements and the need for office workers to be able to effectively communicate and collaborate regardless of location, as well as remote learning, telemedicine, and the continued ramp of our new video portfolio.
•Voice product category net revenues also increased as companies returned or made plans to return to the office.
Services
Total services net revenues decreased in the first quarter of Fiscal Year 2022 compared to the first quarter of Fiscal Year 2021, primarily due to the Video product mix shift from legacy Platform and Telepresence to recently launched Studio video bars, which are less complex, easier to install and operate, and carry optional service contracts. The decrease was partially offset by the impact of the deferred revenue fair value adjustment resulting from the Polycom acquisition.
31
Geographic Region
The following table sets forth total net revenues by geographic region for the first quarter of Fiscal Years 2022 and 2021:
| Three Months Ended | ||||||||||||||||||||||||||
| (in thousands, except percentages) | July 3, 2021 | June 27, 2020 | Change | |||||||||||||||||||||||
| United States | $ | 198,728 | $ | 168,281 | $ | 30,447 | 18.1 | % | ||||||||||||||||||
| International net revenues: | ||||||||||||||||||||||||||
| Europe, Middle East, and Africa | 126,121 | 94,106 | 32,015 | 34.0 | % | |||||||||||||||||||||
| Asia Pacific | 76,758 | 64,264 | 12,494 | 19.4 | % | |||||||||||||||||||||
| Americas, excluding United States | 29,565 | 29,069 | 496 | 1.7 | % | |||||||||||||||||||||
| Total international net revenues | 232,444 | 187,439 | 45,005 | 24.0 | % | |||||||||||||||||||||
| Total net revenues | $ | 431,172 | $ | 355,720 | $ | 75,452 | 21.2 | % | ||||||||||||||||||
United States (U.S.)
U.S. total net revenues increased in the first quarter of Fiscal Year 2022 compared to the first quarter of Fiscal Year 2021, primarily due to increased net sales in the Video and Voice product categories, partially offset by decreased net sales in Headsets. U.S. Services total net revenues were materially unchanged during the first quarter of Fiscal Year 2022 compared to the first quarter of Fiscal Year 2021.
International
International total net revenues increased in the first quarter of Fiscal Year 2022 compared to the first quarter of Fiscal Year 2021, primarily due to increased sales in the Video, Headset, and Voice product categories, partially offset by decreased net sales in Services.
During the first quarter of Fiscal Year 2022, changes in foreign exchange rates favorably impacted total net revenues by $9.6 million, net of the effects of hedging, compared to a $2.5 million unfavorable impact on revenue in the first quarter of fiscal year 2021.
32
Cost of Revenues and Gross Profit
Cost of revenues consists primarily of direct and contract manufacturing costs, amortization of acquired technology, freight, warranty, charges for excess and obsolete inventory, depreciation, duties, royalties, and overhead expenses.
| Three Months Ended | |||||||||||||||||||||||||||||
| (in thousands, except percentages) | July 3, 2021 | June 27, 2020 | Change | ||||||||||||||||||||||||||
| Products: | |||||||||||||||||||||||||||||
| Net revenues | $ | 371,203 | $ | 291,458 | $ | 79,745 | 27.4 | % | |||||||||||||||||||||
| Cost of revenues | 235,196 | 176,615 | 58,581 | 33.2 | % | ||||||||||||||||||||||||
| Gross profit | $ | 136,007 | $ | 114,843 | $ | 21,164 | 18.4 | % | |||||||||||||||||||||
| Gross profit % | 36.6 | % | 39.4 | % | |||||||||||||||||||||||||
| Services: | |||||||||||||||||||||||||||||
| Net revenues | $ | 59,969 | $ | 64,262 | $ | (4,293) | (6.7) | % | |||||||||||||||||||||
| Cost of revenues | 20,787 | 22,773 | (1,986) | (8.7) | % | ||||||||||||||||||||||||
| Gross profit | $ | 39,182 | $ | 41,489 | $ | (2,307) | (5.6) | % | |||||||||||||||||||||
| Gross profit % | 65.3 | % | 64.6 | % | |||||||||||||||||||||||||
| Total: | |||||||||||||||||||||||||||||
| Net revenues | $ | 431,172 | $ | 355,720 | $ | 75,452 | 21.2 | % | |||||||||||||||||||||
| Cost of revenues | 255,983 | 199,388 | 56,595 | 28.4 | % | ||||||||||||||||||||||||
| Gross profit | $ | 175,189 | $ | 156,332 | $ | 18,857 | 12.1 | % | |||||||||||||||||||||
| Gross profit % | 40.6 | % | 43.9 | % | |||||||||||||||||||||||||
Products
Gross profit as a percentage of total product net revenues decreased in the first quarter of Fiscal Year 2022 as compared to the first quarter of Fiscal Year 2021, primarily driven by increased component, transportation, and manufacturing costs, as well as unfavorable product mix. The increase in component costs was primarily driven by increased spot market purchases of certain key components, such as semiconductor chips, due to global supply shortages. Transportation costs increased as a result of high global demand and limited capacity of air freight carriers and increased air freight usage to mitigate longer component lead times to meet our commitments to customers. Additionally, the supply shortages and increased lead times resulted in inefficiencies at our manufacturing facility. These declines were partially offset by the non-recurrence of a one-time provision for inventory excess and obsolescence recorded during the first quarter of Fiscal Year 2021.
Services
Compared to the first quarter of Fiscal Year 2021, gross profit as a percentage of total services net revenues increased in the first quarter of Fiscal Year 2022, primarily due to the decrease in the acquisition-related deferred revenue fair value adjustment.
33
Operating Expenses
Operating expenses for the first quarter of Fiscal Years 2022 and 2021 were as follows:
| Three Months Ended | ||||||||||||||||||||||||||
| (in thousands, except percentages) | July 3, 2021 | June 27, 2020 | Change | |||||||||||||||||||||||
| Research, development, and engineering | $ | 45,466 | $ | 50,029 | $ | (4,563) | (9.1) | % | ||||||||||||||||||
| % of total net revenues | 10.5 | % | 14.1 | % | ||||||||||||||||||||||
| Selling, general and administrative | 120,734 | 116,644 | 4,090 | 3.5 | % | |||||||||||||||||||||
| % of total net revenues | 28.0 | % | 32.8 | % | ||||||||||||||||||||||
| Loss, net from litigation settlements | — | 17,561 | (17,561) | 100.0 | % | |||||||||||||||||||||
| % of total net revenues | — | % | 4.9 | % | ||||||||||||||||||||||
| Restructuring and other related charges | 28,972 | 29,330 | (358) | (1.2) | % | |||||||||||||||||||||
| % of total net revenues | 6.7 | % | 8.2 | % | ||||||||||||||||||||||
| Total Operating Expenses | $ | 195,172 | $ | 213,564 | $ | (18,392) | (8.6) | % | ||||||||||||||||||
| % of total net revenues | 45.3 | % | 60.0 | % | ||||||||||||||||||||||
Research, Development, and Engineering
Research, development, and engineering costs are expensed as incurred and consist primarily of compensation costs, outside services, expensed materials, and overhead expenses.
Research, development, and engineering expenses decreased during the first quarter of Fiscal Year 2022 compared to the first quarter of Fiscal Year 2021, primarily due to lower compensation expense due to reduction in headcount, cost control efforts, lower incentive compensation, and decreased travel expenses due to COVID-19 restrictions.
Selling, General, and Administrative
Selling, general, and administrative costs are expensed as incurred and consist primarily of compensation costs, marketing costs, travel expenses, professional service fees, and overhead expenses.
Selling, general and administrative expenses increased during the first quarter of Fiscal Year 2022 compared to the first quarter of Fiscal Year 2021, primarily due to higher sales commissions due to increased sales and higher advertising and promotional activity. The increases were partially offset by lower compensation expense due to reduced headcount, decreased travel expenses due to COVID-19 restrictions, and other cost control efforts.
Loss, net from Litigation Settlements
Loss, net from litigation settlements decreased during the first quarter of Fiscal Year 2022 compared to the first quarter of Fiscal Year 2021 due to the recording of one-time litigation charges for settlements during the prior period.
Restructuring and Other Related Charges
Restructuring and other related charges was materially unchanged during the first quarter of Fiscal Year 2022 compared to the first quarter of Fiscal Year 2021. During the first quarter of Fiscal Years 2022 and 2021 we recorded restructuring and other related charges to reduce expenses and optimize our cost structure. These actions consisted of headcount reductions and office closures.
34
Interest Expense
Interest expense for the first quarter of Fiscal Years 2022 and 2021 was as follows:
| Three Months Ended | |||||||||||||||||||||||||||||
| (in thousands, except percentages) | July 3, 2021 | June 27, 2020 | Change | ||||||||||||||||||||||||||
| Interest expense | $ | 21,782 | $ | 21,184 | $ | 598 | (2.8) | % | |||||||||||||||||||||
| % of total net revenues | 5.1 | % | 6.0 | % | |||||||||||||||||||||||||
Interest expense increased during the first quarter of Fiscal Year 2022 compared to the first quarter of Fiscal Year 2021, primarily due to amortization of the remaining debt issuance costs related to the 2023 Senior Notes, which were redeemed during the first quarter of Fiscal Year 2022, and interest expense related to the 2029 Senior Notes which were issued in the fourth quarter of Fiscal Year 2021, partially offset by lower interest expense related to the 2023 Senior Notes and lower outstanding principal balance on the term loan facility.
Other Non-Operating Income, Net
Other non-operating income, net for the first quarter of Fiscal Years 2022 and 2021 was as follows:
| Three Months Ended | |||||||||||||||||||||||||||||
| (in thousands, except percentages) | July 3, 2021 | June 27, 2020 | Change | ||||||||||||||||||||||||||
| Other non-operating income, net | $ | (692) | $ | (224) | $ | (468) | 208.9 | % | |||||||||||||||||||||
| % of total net revenues | (0.2) | % | (0.1) | % | |||||||||||||||||||||||||
Other non-operating income, net increased during the first quarter of Fiscal Year 2022 compared to the first quarter of Fiscal Year 2021 primarily due to lower losses on non-designated foreign currency forward derivatives.
Income Tax Benefit
| Three Months Ended | |||||||||||||||||||||||||||||
| (in thousands except percentages) | July 3, 2021 | June 27, 2020 | Change | ||||||||||||||||||||||||||
| Income (loss) before income taxes | $ | (41,073) | $ | (78,192) | $ | 37,119 | 47.5 | % | |||||||||||||||||||||
| Income tax benefit | (4,262) | (3,177) | (1,085) | (34.2) | % | ||||||||||||||||||||||||
| Net income (loss) | $ | (36,811) | $ | (75,015) | $ | 38,204 | 50.9 | % | |||||||||||||||||||||
| Effective tax rate | 10.4 | % | 4.1 | % | |||||||||||||||||||||||||
The Company and its subsidiaries are subject to taxation in the U.S. and in various foreign and state jurisdictions. The Company's income tax benefit is determined using an estimate of its annual effective tax rate and adjusted for discrete items that are taken into account in the relevant period. The effective tax rates for the first quarter of Fiscal Years 2022 and 2021 were 10.4% and 4.1%, respectively.
Income tax benefit was $(4.3) million and $(3.2) million for the first quarter of Fiscal Years 2022 and 2021, respectively. The provision for income taxes for the three months ended July 3, 2021 consisted primarily of federal, state, and foreign income taxes. For the first quarter of Fiscal Year 2022, the income tax benefit differed from the U.S. federal statutory rate primarily due the valuation allowance on the U.S. federal and state deferred tax assets that continues to be maintained as of July 3, 2021.
A significant portion of the Company's deferred tax assets ("DTAs") relate to internal intangible property restructuring between wholly-owned subsidiaries. At this time, based on evidence currently available, the Company considers it more likely than not that it will have sufficient taxable income in the future that will allow the Company to realize the DTAs; however, failure to generate sufficient future taxable income could result in some or all DTAs not being utilized in the future. If the Company is unable to generate sufficient future taxable income, a substantial valuation allowance to reduce the Company's DTAs may be required.
35
FINANCIAL CONDITION
Liquidity and Capital Resources
The following tables present selected financial information and statistics as of July 3, 2021 and April 3, 2021 and for the first quarter of Fiscal Years 2022 and 2021 (in thousands):
| July 3, 2021 | April 3, 2021 | |||||||||||||
| Cash, cash equivalents, and short-term investments | $ | 212,714 | $ | 217,119 | ||||||||||
| Property, plant, and equipment, net | 131,294 | 140,875 | ||||||||||||
| Current portion of long-term debt | — | 478,807 | ||||||||||||
| Long-term debt, net | 1,497,119 | 1,496,064 | ||||||||||||
| Working capital | 207,890 | 213,975 | ||||||||||||
| Three Months Ended | ||||||||||||||
| July 3, 2021 | June 27, 2020 | |||||||||||||
| Cash provided by operating activities | $ | 849 | $ | 41,722 | ||||||||||
| Cash used in investing activities | (10,456) | (3,645) | ||||||||||||
| Cash used in financing activities | (490,905) | (2,734) | ||||||||||||
Our cash and cash equivalents as of July 3, 2021 consisted of bank deposits with third-party financial institutions. As of July 3, 2021, of our $212.7 million of cash, cash equivalents, and short-term investments, $105.5 million was held domestically while $107.2 million was held by foreign subsidiaries, and approximately 70% was based in USD-denominated instruments. As of July 3, 2021, our short-term investments were composed of mutual funds. An additional source of liquidity is $98.6 million of availability from our revolving credit facility, net of outstanding letters of credit.
Historically, 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, including the current quarter as a result of a number of factors, including fluctuations in our revenues, the timing of compensation-related payments, such as our annual bonus/variable compensation plan, interest payments on our long-term debt, product shipments, accounts receivable collections, inventory and supply chain management, and the timing and amount of tax and other payments.
During the first quarter of Fiscal Year 2022, cash provided by operating activities of $0.8 million was a result of non-cash adjustments to net loss of $66.3 million, partially offset by $(36.8) million of net loss and a decrease in the net change in operating assets and liabilities of $(28.7) million. Cash used in investing activities of ($10.4) million consisted primarily of capital expenditures of ($6.1) million and other investing activities of ($4.0) million. Cash used in financing activities consisted primarily of ($480.7) million of repayments of long-term debt and $($10.2) million of employees' tax withheld and paid for restricted stock and restricted stock units.
Capital Expenditures
We anticipate our capital expenditures in Fiscal Year 2022 will be approximately $35 million to $45 million, relating primarily to costs associated in our manufacturing capabilities, including tooling for new products, new information technology investments, and facilities upgrades. 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.
Debt
In July 2018, in connection with the Polycom acquisition, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto and borrowed the full amount available under the term loan facility of $1.245 billion, net of approximately $30 million of discounts and issuance costs. During the first quarter of Fiscal Year 2022, we did not repurchase any of our outstanding principal. As of July 3, 2021, we had $1.0 billion of principal outstanding.
36
On February 20, 2020, the Company entered into an Amendment in order to relax certain financial covenants on the revolving line of credit. The financial covenants under the Credit Agreement are for the benefit of the revolving credit lenders only and do not apply to any other debt of the Company. As of July 3, 2021, the Company has five outstanding letters of credit on the revolving credit facility for a total of $1.4 million and had $98.6 million available under the revolving line of credit. As of July 3, 2021, the Company was in compliance with the financial covenants.
On July 30, 2018, the Company entered into a 4-year amortizing interest rate swap agreement with Bank of America, N.A. The swap has an initial notional amount of $831 million and matures on July 31, 2022. On June 15, 2021, the Company entered into a three-year amortizing interest rate swap agreement with Bank of America, N.A. The swap has an initial notional amount of $680 million and matures on July 31, 2024. During the three months ended July 3, 2021, the Company reclassified into interest expense $3.1 million and recorded a $5.7 million unrealized loss on its interest rate swap derivative designated as a cash flow hedge.
On March 4, 2021, the Company issued $500.0 million aggregate principal amount of 4.75% Senior Notes. The 4.75% Senior Notes mature on March 1, 2029 and bear interest at a rate of 4.75% per annum, payable semi-annually on March 1 and September 1 of each year, commencing on September 1, 2021. A portion of the proceeds from the 4.75% Senior Notes was used to redeem the outstanding principal and accrued interest on the 5.50% Senior Notes of $493.9 million. As of July 3, 2021, $500 million of principal was outstanding.
During the first quarter of Fiscal Year 2022, we redeemed the outstanding principal and accrued interest on the 5.50% Senior Notes of $493.9 million.
We may at any time and from time to time, depending on market conditions and prices, continue to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions, or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. In addition, our liquidity, capital resources, and results of operations in any period could be affected by repurchases of our common stock, the payment in the future of cash dividends if the Board determines to reinstate the dividend program, the exercise of outstanding stock options, restricted stock grants under stock plans, and the issuance of common stock under the ESPP. The acquisition of Polycom affected our liquidity and leverage ratios and we are working to reduce our debt leverage ratios by prioritizing the repayment of the debt obtained to finance such acquisition. 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.
Further information regarding the Company’s debt issuances and related hedging activity can be found in Note 8, Debt, and Note 11, Derivatives, of the accompanying notes to the condensed consolidated financial statements within “Part I. Item 1. Financial Statements” of this Quarterly Report on Form 10-Q.
Common Stock Repurchases
From time to time, our Board authorizes programs under which we may repurchase shares of our common stock in the open market or through privately negotiated transactions, including accelerated stock repurchase agreements. On November 28, 2018, the Board approved a 1 million share repurchase program expanding our capacity to repurchase shares to approximately 1.7 million shares. During the first quarter of Fiscal Year 2022, we did not repurchase any shares of our common stock. As of July 3, 2021, there remained 1,369,014 shares authorized for repurchase under the existing stock repurchase program.
We believe that our current cash and cash equivalents, short-term investments, cash provided by operations, and availability of additional funds under the Credit Agreement, as amended from time to time, will be sufficient to fund our operations for one year from the date of issuance of these financial statements. However, any projections of future financial needs and sources of working capital are subject to uncertainty on our financial results. Readers are cautioned to review the risks, uncertainties, and assumptions set forth in this Quarterly Report on Form 10-Q, including the section entitled "Certain Forward-Looking Information" and the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended April 3, 2021, filed with the SEC on May 18, 2021, and other periodic filings with the SEC, any of which could affect our estimates for future financial needs and sources of working capital.
37
OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides us with financing and liquidity support, market risk, or credit risk support.
Consigned Inventory
A substantial portion of the raw materials, components, and subassemblies used in our products are provided by our suppliers on a consignment basis. These consigned inventories are not recorded on our condensed consolidated balance sheets 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 agreements allow us to return parts in excess of maximum order quantities to the suppliers at the supplier’s expense. Returns for other reasons are negotiated with the suppliers on a case-by-case basis and to date have been immaterial. If our suppliers were to discontinue financing consigned inventory, it would require us to make cash outlays and we could incur expenses which, if material, could negatively affect our business and financial results. As of July 3, 2021 and April 3, 2021, we had off-balance sheet consigned inventories of $53.6 million and $57.3 million, respectively.
Unconditional Purchase Obligations
We use several contract manufacturers to manufacture raw materials, components, and subassemblies for our products through our supply and demand information that typically covers periods up to 52 weeks. The contract manufacturers use this information to acquire components and build products. We also obtain individual components for our products from a wide variety of individual suppliers using a combination of purchase orders, supplier contracts, including annual minimum purchase obligations, and open orders based on projected demand information. As of July 3, 2021, we had outstanding off-balance sheet third-party manufacturing, component purchase, and other general and administrative commitments of $599.5 million, including the off-balance sheet consigned inventories of $53.6 million. We expect to consume unconditional purchase obligations in the normal course of business, net of an immaterial purchase commitments reserve. In certain instances, these agreements allow us the option to cancel, reschedule, and adjust our requirements based on our business needs in partnering with our suppliers given the current environment.
Except as described above, there have been no material changes in our contractual obligations as described in our Annual Report on Form 10-K for the fiscal year ended April 3, 2021.
CRITICAL ACCOUNTING ESTIMATES
For a complete description of what we believe to be the critical accounting estimates used in the preparation of our condensed consolidated financial statements, refer to our Annual Report on Form 10-K for the fiscal year ended April 3, 2021. There have been no material changes to our critical accounting estimates during the first quarter of Fiscal Year 2022.
Recent Accounting Pronouncements
Recent accounting pronouncements issued by the Financial Accounting Standards Board ("FASB") did not and are not expected to have a material impact on the Company's financial position, results of operations, or cash flows.
38
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The discussion of our exposure to market risk related to changes in interest rates and foreign currency exchange rates contains forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors, including those discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended April 3, 2021, which could materially affect our business, financial position, or future results of operations.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily to our floating-rate interest payments under our $1.275 billion term loan facility. Borrowings under the Credit Agreement bear interest at a variable rate equal to (i) LIBOR plus a specified margin, or (ii) the base rate (which is the highest of (a) the prime rate publicly announced from time to time by Wells Fargo Bank, National Association, (b) the federal funds rate plus 0.50% or (c) the sum of 1% plus one-month LIBOR plus a specified margin.
On July 30, 2018, we entered into a four-year amortizing interest rate swap agreement, and on June 15, 2021, we entered into a three-year amortizing interest rate swap agreement, both with Bank of America, N.A., as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates on the $1.275 billion term loan facility. As a matter of policy, we only enter into transactions that we believe will be highly effective at offsetting the underlying risk and we do not use derivatives for trading or speculative purposes. Our objective is to mitigate the impact of interest expense fluctuations on our profitability related to interest rate changes by minimizing movements in future debt payments with this interest rate swap.
The first swap has an initial notional amount of $831 million and mature on July 31, 2022. The second swap has an initial notional amount of $680 million and matures on July 31, 2024. The swaps involve the receipt of floating-rate interest payments for fixed interest rate payments over the life of the agreement. We have designated these interest rate swaps as cash flow hedges. Changes in the fair value of the derivatives are recorded to other comprehensive income on the condensed consolidated statements of comprehensive loss and are reclassified to interest expense over the life of the agreements. For additional details, refer to Note 11, Derivatives, of the accompanying notes to the condensed consolidated financial statements within “Part I. Item 1. Financial Statements” of this Quarterly Report on Form 10-Q. During the three months ended July 3, 2021, we made payments of approximately $3.1 million on our interest rate swaps and recognized $3.1 million within interest expense on the condensed consolidated statement of operations. As of July 3, 2021, we had $0.1 million of interest accrued within accrued liabilities on the condensed consolidated balance sheet. A hypothetical 10% increase or decrease on market interest rates could result in a corresponding increase or decrease in annual interest expense of approximately $0.1 million.
Interest rates were lower in the three months ended July 3, 2021 compared to the same period in the prior year. In the three months ended July 3, 2021 and June 27, 2020 we generated interest income of $0.2 million and $0.0 million, respectively.
FOREIGN CURRENCY EXCHANGE RATE RISK
We are a net receiver of currencies other than the United States Dollar ("USD.") Accordingly, changes in exchange rates, and in particular a strengthening of the USD, could negatively affect our total net revenues and gross margins, as expressed in USD. There is a risk that we will have to adjust local currency product pricing due to competitive pressures if there is significant volatility in foreign currency exchange rates.
The primary currency fluctuations to which we are exposed are the Euro ("EUR"), Great Britain Pound Sterling ("GBP"), and Mexican Peso ("MXN"). 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 and GBP 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. While our existing hedges cover a certain amount of exposure for the upcoming fiscal year, 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.
39
The impact of changes in foreign currency rates recognized in other non-operating income, net was immaterial in the first quarter of Fiscal Year 2022. 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 and GBP 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 July 3, 2021 (in millions):
| Currency - forward contracts | Position | USD Notional 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 | $ | 42.7 | $ | 4.3 | $ | (4.3) | ||||||||||||||||
| GBP | Sell GBP | 13.1 | 1.3 | (1.3) | |||||||||||||||||||
Cash Flow Hedges
In the three months ended July 3, 2021, approximately 54% of our total net revenues were derived from sales outside of the U.S. and denominated primarily in EUR and GBP.
As of July 3, 2021, we had foreign currency put and call option contracts with notional amounts of approximately €100.3 million and £20.9 million denominated in EUR and GBP, respectively. Collectively, our option contracts hedge against a portion of our forecasted foreign currency denominated sales. If the USD is subjected to either a 10% appreciation or 10% depreciation versus these net exposed currency positions, we could realize a gain of $10.5 million or incur a loss of $7.9 million, respectively.
The table below presents the impact on the Black-Scholes valuation of our currency option contracts of a hypothetical 10% appreciation and a 10% depreciation of the USD against the indicated option contract type for cash flow hedges as of July 3, 2021 (in millions):
| Derivative | USD Notional Value of Net Foreign Exchange Contracts | Foreign Exchange Gain From 10% Appreciation of USD | Foreign Exchange (Loss) From 10% Depreciation of USD | |||||||||||||||||
| Call options | $ | 155.5 | $ | 0.4 | $ | (7.4) | ||||||||||||||
| Put options | 143.8 | 9.6 | (0.9) | |||||||||||||||||
| Forwards | 122.1 | 12.1 | (12.1) | |||||||||||||||||
Collectively, our swap contracts hedge against a portion of our forecasted MXN denominated expenditures. As of July 3, 2021, we had cross-currency swap contracts with notional amounts of approximately MXN 369.9 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 July 3, 2021 (in millions):
| Derivative | USD Notional 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 | $ | 17.8 | $ | (1.8) | $ | 1.8 | ||||||||||||||
Except as described above, there have been no material changes in our market risk as described in our Annual Report on Form 10-K for the fiscal year ended April 3, 2021.
40
ITEM 4. CONTROLS AND PROCEDURES
(a)Evaluation of disclosure controls and procedures
Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b)Changes in internal control over financial reporting
There have been no changes in the Company’s internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. 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 7, Commitments and Contingencies, of the accompanying notes to the condensed consolidated financial statements within “Part I. Item 1. Financial Statements” of this Quarterly Report on Form 10-Q..
ITEM 1A. RISK FACTORS
You should carefully consider the risk factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended April 3, 2021 ("Form 10-K"), each of which could materially affect our business, financial position, or future results of operations.
The risks described within this Quarterly Report on Form 10-Q and in the Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial position, or future results of operations.
41
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the first quarter of Fiscal Year 2022, we did not repurchase any shares of our common stock. As of July 3, 2021, there remained 1,369,014 shares authorized for repurchase under the existing stock repurchase program. The following table presents information with respect to shares that were tendered to us in satisfaction of employee tax withholding obligations upon the vesting of restricted stock grants under our stock plans:
Total Number of Shares Purchased (4) | Average Price Paid per Share (2) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (3) | ||||||||||||||||||||
| April 4, 2021 to May 1, 2021 | — | N/A | — | 1,369,014 | |||||||||||||||||||
| May 2, 2021 to May 29, 2021 | 308,359 | N/A | — | 1,369,014 | |||||||||||||||||||
| May 30, 2021 to July 3, 2021 | 8,219 | N/A | — | 1,369,014 | |||||||||||||||||||
| (1) | On November 28, 2018, our Board of Directors approved a 1 million shares repurchase program expanding our capacity to repurchase shares to approximately 1.7 million shares. We may repurchase shares from time to time in open market transactions or through privately negotiated transactions. There is no expiration date associated with the repurchase activity. | ||||
| (2) | "Average Price Paid per Share" reflects open market repurchases of common stock only. | ||||
| (3) | These shares reflect the available shares authorized for repurchase under the expanded program approved by the Board on November 28, 2018. | ||||
| (4) | Represents only shares that were tendered to us in satisfaction of employee tax withholding obligations upon the vesting of restricted stock grants under our stock plans. | ||||
42
ITEM 6. EXHIBITS
We have filed the following documents as Exhibits to this Quarterly Report on Form 10-Q:
EXHIBITS INDEX
| Exhibit Number | Incorporation by Reference | Filed Herewith | ||||||||||||||||||||||||||||||||||||
| Exhibit Description | Form | File No. | Exhibit | Filing Date | ||||||||||||||||||||||||||||||||||
| 10.1** | X | |||||||||||||||||||||||||||||||||||||
| 10.2* | X | |||||||||||||||||||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||||||||||||||||||||
| 31.2 | X | |||||||||||||||||||||||||||||||||||||
| 32.1 | X | |||||||||||||||||||||||||||||||||||||
| 101.INS | XBRL Instance Document - the XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | X | ||||||||||||||||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Definition Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File, (formatted as Inline XBRL and contained in Exhibit 101) | X | ||||||||||||||||||||||||||||||||||||
| * | Indicates a management contract or compensatory plan, contract or arrangement in which any Director or any Executive Officer participates. | |||||||||||||||||||||||||||||||||||||
| ** | Confidential treatment has been granted with respect to certain portions of this Exhibit. | |||||||||||||||||||||||||||||||||||||
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| PLANTRONICS, INC. | |||||||||||
| Date: | July 30, 2021 | By: | /s/ Charles D. Boynton | ||||||||
| Name: | Charles D. Boynton | ||||||||||
| Title: | Executive Vice President and Chief Financial Officer | ||||||||||
44