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PLANTRONICS INC /CA/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge) 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 ("Securities Act") and
Section 21E of the Securities Exchange Act of 1934 ("Exchange
Act"). Forward-looking statements may generally be identified by the use of such
words as "expect," "anticipate," "believe," "intend," "plan," "potential,"
"will," "shall" or variations of such words and similar expressions, or the
negative of these terms. Specific forward-looking statements contained within
this Form 10-Q include statements regarding (i) the Unified Communications
("UC") markets, (ii) our long-term strategy to invest in UC, (iii) the future of
UC technologies, including the effect on headset adoption and use, the effects
on enterprises that adopt UC and our expectation concerning our revenue
opportunity from UC, (iv) the Mobile Bluetooth market and the stereo and mono
product categories, (v) our position in the Mobile Bluetooth market and the
effect of our new products on our position in that market, (vi) our research and
development strategy, including our investments in firmware and software
engineering and value-added software applications, as well as our strategic
partnerships, (vii) the Plantronics Developer Connection, (viii) our
expectations regarding our sales force and customer service operations, (ix) the
maintenance of our reputation in the industry, (x) our expenses, including
research, development and engineering expenses and selling, general and
administrative expenses, (xi) our future tax rate, (xii) our anticipated capital
expenditures for the remainder of fiscal year 2013 and the sufficiency of our
cash, cash equivalents and cash from operations, (xiii) our planned investment
of and need for our foreign cash and our ability to repatriate that cash, (xiv)
our ability to draw funds on our credit facility as needed, and (xv) the outcome
and effect of legal proceedings, as well as other statements regarding our
future operations, financial condition and prospects and business
strategies. 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
the section entitled "Risk Factors" herein and other documents filed with the
Securities and Exchange Commission ("SEC"), including our Annual Report on Form
10-K for the fiscal year ended March 31, 2012. 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
We are a leading designer, manufacturer, and marketer of lightweight
communications headsets, telephone headset systems, and accessories for the
worldwide business and consumer markets under the Plantronics brand. In
addition, we manufacture and market, under our Clarity brand, specialty
telephone products, such as telephones for the hearing impaired, and other
related products for people with special communication needs.
We ship a broad range of products to approximately 60 countries through a
worldwide network of distributors, retailers, wireless carriers, original
equipment manufacturers ("OEMs"), and telephony service providers. We have
well-developed distribution channels in North America, Europe, Australia, New
Zealand, and other parts of Asia Pacific where use of our products is
widespread. Our distribution channels in other regions of the world are less
mature and, while we primarily serve the contact center markets in those
regions, we continue to expand into the office, mobile and entertainment,
digital audio and specialty telephone markets.
We believe Unified Communications ("UC") represents the key long-term driver of
our revenue and profit growth, and it continues to be our primary area of focus.
UC is the integration of voice and video based communications systems enhanced
with software applications and Internet Protocol ("IP") networks. Business
communications are being transformed from voice-centric systems supported by
traditional PBX infrastructure to communication systems that are fully
integrated with voice, video, and data and are supported by feature rich UC
software. With this transformation, the requirement for a traditional headset
used only for voice communications continues to evolve into the need for a
device that delivers contextual intelligence, providing the ability to reach
others using the mode of communication that is most effective, on the device
that is most convenient, and with control over when and how the user can be
reached. Our portfolio of UC solutions combines hardware with advanced sensor
technology and capitalizes on contextual intelligence, addressing the needs of
the constantly changing business environments and evolving work styles to make
connecting easier and by sharing presence information to convey user
availability and other contextual information. We believe UC systems will become
more commonly adopted by enterprises to reduce costs and improve collaboration,
and we believe our solutions with Simply Smarter CommunicationsTM technology
will be an important part of the UC environment.
The contact center, which includes UC, is our most mature market, and we expect
this market to grow slowly over the long-term. We believe the growth of UC will
increase overall headset adoption in enterprise environments and we therefore
expect most of the growth in Office and Contact Center ("OCC") over the next
five years to come from headsets designed for UC.
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The Mobile Bluetooth market is heavily impacted by economic conditions and
consumer confidence, and while the retail market in the U.S. has been slowing,
international markets have been growing, particularly in emerging market
countries. Overall, we expect this category to show modest growth over the long
term. Within the overall market, the stereo product category shows significant
growth, while the mono category is slowing or declining. Our new product
launches and recent planned investments help position us to maintain share in
the Mobile Bluetooth market.
Integral to our core research and development have been investments in firmware
and software engineering to enhance the broad compatibility of our products in
the enterprise systems with which they will be deployed, and development of
value-added software applications for business users has been the focus of our
core research and development efforts. We believe these investments in software
development will help us to differentiate our products and sustain strong
long-term gross margins. We continue to strengthen our strategic partnerships
with UC platform suppliers to ensure that our products are compatible with all
major platforms as UC usage becomes an essential part of the enterprise
communications landscape.
We remain cautious about the macroeconomic environment, based on greater than
usual uncertainty around fiscal policy in the U.S., as well as broader economic
uncertainty in many parts of Europe and Asia Pacific, which makes it difficult
for us to gauge what impact the economy may have on our future business. We will
continue to monitor our expenditures and prioritize expenditures that further
our strategic long-term growth opportunities such as innovative product
development in our core research and development efforts, including the use of
software and services as part of our portfolio. In furtherance of our commitment
to UC, in May 2012, we announced the Plantronics Developer Connection (the
"PDC"), which provides a software developer kit allowing registered developers
access to a rich set of tools and providing a forum to interact, share ideas and
develop innovative applications. We believe the PDC is a valuable resource for
application developers to leverage the contextual intelligence built into our
headsets, ultimately providing a broad array of capabilities such as user
authentication, customer information retrieval based on incoming mobile calls,
and connecting a user's physical actions in the real world to the virtual world.
We will also continue to grow and develop our sales force and increase marketing
and other customer service and support as we expand key strategic partnerships
to market our UC products. We believe we have an excellent position in the UC
market and a well-deserved reputation for quality and service that we expect to
maintain through ongoing investment and strong execution.
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, the condensed
consolidated statements of operations data, which is derived from the
accompanying unaudited condensed consolidated financial statements. The
financial information and ensuing discussion should be read in conjunction with
the accompanying unaudited condensed consolidated financial statements and notes
thereto.
Three Months Ended December 31, Nine Months Ended December 31,
(in thousands, except
percentages) 2012 2011 2012 2011
Net revenues $ 197,402 100.0 % $ 183,236 100.0 % $ 558,047 100% $ 535,784 100.0 %
Cost of revenues 95,238 48.2 % 87,024 47.5 % 260,959 46.8% 246,548 46.0 %
Gross profit 102,164 51.8 % 96,212 52.5 % 297,088 53.2% 289,236 54.0 %
Operating expenses:
Research, development and
engineering 20,248 10.3 % 16,829 9.2 % 59,525 10.7% 51,386 9.6 %
Selling, general and
administrative 45,442 23.0 % 41,976 22.9 % 134,476 24.1% 128,510 24.0 %
Restructuring and other
related charges 1,868 0.9 % - - % 1,868 0.3% - - %
Total operating expenses 67,558 34.2 % 58,805 32.1 %
195,869 35.1% 179,896 33.6 %
Operating income 34,606 17.5 % 37,407 20.4 % 101,219 18.1% 109,340 20.4 %
Interest and other
income, net 177 0.1 % 406 0.2 % 464 0.1% 989 0.2 %
Income before income
taxes 34,783 17.6 % 37,813 20.6 % 101,683 18.2% 110,329 20.6 %
Income tax expense 6,577 3.3 % 6,915 3.8 % 23,990 4.3% 25,179 4.7 %
Net income $ 28,206 14.3 % $ 30,898 16.9 % $ 77,693 13.9% $ 85,150 15.9 %
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NET REVENUES
Three Months Ended Nine Months Ended
December 31, Increase December 31, Increase
(in thousands, except
percentages) 2012 2011 (Decrease) 2012 2011 (Decrease)
Net revenues from
unaffiliated customers:
Office and Contact Center $ 139,449 $ 133,335 $ 6,114 4.6 % $ 406,601 $ 400,729 $ 5,872 1.5%
Mobile 44,138 36,024 8,114 22.5 % 113,600 96,529 17,071 17.7%
Gaming and Computer Audio 9,024 9,209 (185 ) (2.0 )% 23,610 24,985 (1,375 ) (5.5)%
Clarity 4,791 4,668 123 2.6 % 14,236 13,541 695 5.1%
Total net revenues $ 197,402 $ 183,236 $ 14,166 7.7 % $ 558,047 $ 535,784 $ 22,263 4.2%
OCC products include UC products and represent our largest source of revenues,
while Mobile products represent our largest unit volumes. Net revenues may vary
due to seasonality, the timing of new product introductions and discontinuation
of existing products, discounts and other incentives, and channel mix. Net
revenues derived from sales into the retail channel typically account for a
seasonal increase in our total net revenues in the third quarter of our fiscal
year.
Net revenues increased in the third quarter of fiscal year 2013 over the same
period a year ago as a result of higher Mobile revenues driven by a stronger
product portfolio that was well received in the retail market, as well as from
higher OCC revenues driven by growth in UC, partly offset by an overall decrease
in revenue from core OCC products.
Net revenues increased in the nine months ended December 31, 2012 over the same
period a year ago resulting primarily from higher Mobile revenues due to a
stronger product portfolio that was well received in the retail market. UC
revenues have continued to grow, mostly offset by declines in revenue from core
OCC products. We believe that overall OCC product sales have been adversely
impacted by weak economic conditions in international markets.
Geographical Information
Three Months Ended Nine Months Ended
December 31, Increase December 31, Increase
(in thousands, except
percentages) 2012 2011 (Decrease) 2012 2011 (Decrease)
Net revenues from
unaffiliated
customers:
U.S. $ 111,847 $ 99,070 $ 12,777 12.9 % $ 323,438 $ 300,557 $ 22,881 7.6 %
As a percentage of
net revenues 56.7 % 54.1 % 58.0 % 56.1 %
Europe and Africa 51,095 49,825 1,270 2.5 % 131,622 134,349 (2,727 ) (2.0 )%
Asia Pacific 20,637 20,399 238 1.2 % 64,055 61,863 2,192 3.5 %
Americas, excluding
U.S. 13,823 13,942 (119 ) (0.9 )% 38,932 39,015 (83 ) (0.2 )%
Total international
net revenues 85,555 84,166 1,389 1.7 % 234,609 235,227 (618 ) (0.3 )%
As a percentage of
net revenues 43.3 % 45.9 % 42.0 % 43.9 %
Total net revenues $ 197,402 $ 183,236 $ 14,166 7.7 % $ 558,047 $ 535,784 $ 22,263 4.2 %
Prior to the first quarter of fiscal year 2013, net revenues from the Middle
East were included in Europe and Africa ("E&A"), formerly referred to as Europe,
Middle East and Africa ("EMEA"). In the three and nine months ended December 31,
2012, net revenues from the Middle East were included in Asia Pacific ("APAC")
and prior period net revenues have been reclassified to conform to the current
period presentation.
U.S. net revenues increased in the three and nine months ended December 31,
2012, as compared to the same periods in the prior year, with healthy growth in
both OCC and Mobile product revenues, the latter of which included market share
gains in mono Bluetooth.
In the three months ended December 31, 2012, international net revenues
increased due to double-digit year-on-year growth in Mobile revenues in the E&A
and APAC regions driven by a stronger product portfolio. These increases were
partly offset by the decline in OCC revenues.
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In the nine months ended December 31, 2012, international net revenues decreased
due to declining revenues from OCC products in the E&A and APAC regions
resulting primarily from macroeconomic factors, particularly in the E&A region.
These decreases were partly offset by strong growth in revenues from Mobile
products.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues consists primarily of direct manufacturing and contract
manufacturer costs, warranty expense, freight expense, depreciation, duty
expense, reserves for excess and obsolete inventory, royalties, and an
allocation of overhead expenses, including IT and facilities costs.
Three Months Ended Nine Months Ended
December 31, Increase December 31, Increase
(in thousands, except
percentages) 2012 2011 (Decrease) 2012 2011 (Decrease)
Net revenues $ 197,402 $ 183,236 $ 14,166 7.7 % $ 558,047 $ 535,784 $ 22,263 4.2 %
Cost of revenues 95,238 87,024 8,214 9.4 % 260,959 246,548 14,411 5.8 %
Gross profit $ 102,164 $ 96,212 $ 5,952 6.2 % $ 297,088 $ 289,236 $ 7,852 2.7 %
Gross profit % 51.8 % 52.5 % 53.2 % 54.0 %
As a percentage of net revenues, gross profit decreased in the three and nine
months ended December 31, 2012 compared to the same periods a year ago due
primarily to an unfavorable product mix with a lower proportion of overall
revenue in OCC products and a stronger USD primarily against the Euro. In the
three months ended December 31, 2012 compared to the same period a year ago, the
decrease from unfavorable product mix was partly offset by lower materials and
procurement costs and lower excess and obsolete inventory. In the nine months
ended December 31, 2012 compared to the same period a year ago, these
unfavorable effects were partly offset by lower warranty requirements and lower
excess and obsolete inventory.
There are significant variances in gross profit percentages between our higher
and lower margin products; therefore, small variations in product mix, which can
be difficult to predict, can have a significant impact on gross profit. In
addition, if we do not accurately anticipate changes in demand, we have in the
past, and may in the future, incur significant costs associated with writing off
excess and obsolete inventory or incur charges for adverse purchase
commitments. Gross profit may also vary based on distribution channel, return
rates, and other factors.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering costs are expensed as incurred and consist
primarily of compensation costs, outside services, including legal fees
associated with protecting our intellectual property, expensed materials, travel
expenses, depreciation, and an allocation of overhead expenses, including
facilities, IT, human resources, and legal costs.
Three Months Ended Nine Months Ended
December 31, Increase December 31, Increase
(in thousands, except
percentages) 2012 2011 (Decrease) 2012 2011 (Decrease)
Research, development
and engineering $ 20,248 $ 16,829 $ 3,419 20.3 % $ 59,525 $ 51,386 $ 8,139 15.8 %
% of net revenues 10.3 % 9.2 % 10.7 % 9.6 %
During the three and nine months ended December 31, 2012, research, development
and engineering expenses increased as compared to the same periods a year ago
due primarily to an increase in our investment in software development and other
capabilities related to UC product development. This investment consisted
primarily of engineering headcount resulting in increased compensation expenses
of $2.6 million and $5.9 million for the three and nine months ended December
31, 2012, respectively, and higher project expenses associated with the
development of new products.
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SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses consist primarily of compensation
costs, marketing costs, travel expenses, litigation and professional service
fees, and allocations of overhead expenses, including IT, facilities, legal
costs, and human resources.
Three Months Ended Nine Months Ended
December 31, Increase December 31, Increase
(in thousands, except
percentages) 2012 2011 (Decrease) 2012 2011 (Decrease)
Selling, general and
administrative $ 45,442 $ 41,976 $ 3,466 8.3 % $ 134,476 $ 128,510 $ 5,966 4.6 %
% of net revenues 23.0 % 22.9 % 24.1 % 24.0 %
In the three and nine months ended December 31, 2012, compared to the same
periods a year ago, selling, general and administrative expenses increased,
primarily as a result of increased compensation expense of $3.2 million and $6.9
million, respectively, mainly due to increased investment in our sales force and
marketing organizations to support the UC opportunity and growth in emerging
markets.
RESTRUCTURING AND OTHER RELATED CHARGES
Three Months Ended Nine Months Ended
December 31, Increase December 31, Increase
(in thousands, except
percentages) 2012 2011 (Decrease) 2012 2011 (Decrease)
Restructuring and
other related charges $ 1,868 $ - $ 1,868 100 % $ 1,868 $ - $ 1,868 100 %
% of net revenues 0.9 % - % 0.3 % - %
We initiated a restructuring plan during the third quarter of fiscal year 2013.
Under the plan, we reallocated costs by eliminating certain positions in the
U.S., Mexico, China, and Europe, and transitioned some of these positions to
lower cost locations. We also plan to vacate a portion of a leased facility at
our corporate headquarters. Savings from this plan will allow us to increase
investments in areas that we believe will improve our business growth,
particularly sales and marketing, by $4.0 million annually. We expect to incur
pre-tax charges of approximately $3.4 million, consisting of $1.9 million for
severance and related benefits during the third quarter of fiscal year 2013,
$0.5 million in accelerated depreciation expense to be recorded during the
fourth quarter of fiscal year 2013 through the first quarter of fiscal year 2014
on leasehold improvement assets with no alternative future use, and $1.0 million
for lease termination costs to be recorded when we exit the facility in the
first quarter of fiscal year 2014. We anticipate that the plan will be
substantially complete by the end of the first quarter of fiscal year 2014.
INTEREST AND OTHER INCOME, NET
Three Months Ended Nine Months Ended
December 31, Increase December 31, Increase
(in thousands except
percentages) 2012 2011 (Decrease) 2012 2011 (Decrease)
Interest and other
income, net $ 177 $ 406 $ (229 ) (56.4 )% $ 464 $ 989 (525 ) (53.1 )%
% of net revenues 0.1 % 0.2 % 0.1 % 0.2 %
In the three months ended December 31, 2012, compared to the same period a year
ago, interest and other income, net decreased due primarily to lower foreign
exchange gains from fluctuations in the USD against the Great Britain Pound and
the Euro.
In the nine months ended December 31, 2012, compared to the same period a year
ago, interest and other income, net decreased due primarily to higher cumulative
interest expense on our revolving line of credit in the nine months ended
December 31, 2012.
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INCOME TAX EXPENSE
Three Months Ended Nine Months Ended
December 31, Increase December 31, Increase
(in thousands except
percentages) 2012 2011 (Decrease) 2012 2011 (Decrease)
Income before income
taxes $ 34,783 $ 37,813 $ (3,030 ) (8.0 )% $ 101,683 $ 110,329 $ (8,646 ) (7.8 )%
Income tax expense 6,577 6,915 (338 ) (4.9 )% 23,990 25,179 (1,189 ) (4.7 )%
Net income $ 28,206 $ 30,898 $ (2,692 ) (8.7 )% $ 77,693 $ 85,150 $ (7,457 ) (8.8 )%
Effective tax rate 18.9 % 18.3 % 23.6 % 22.8 %
The higher effective tax rate for the three and nine months ended December 31,
2012 is due primarily to the expiration of the federal tax research credit in
December 2011 and a smaller proportion of income earned in foreign jurisdictions
which are taxed at lower rates, offset in part by the release of larger tax
reserves than in the prior year period, which in both cases resulted from the
expiration of certain statutes of limitations. Our effective tax rates differ
from the statutory rate due to the impact of foreign operations taxed at
different statutory rates, tax credits, state taxes and other factors. Our
future tax rates could be impacted by a shift in the mix of domestic and foreign
income, tax treaties with foreign jurisdictions, changes in tax laws in the U.S.
or internationally, or a change in estimates of future taxable income which
could result in a valuation allowance being required.
We and our subsidiaries are subject to taxation in various foreign and state
jurisdictions including the U.S. We are under examination by the Internal
Revenue Service for our 2010 tax year and the California Franchise Tax Board for
our 2007 and 2008 tax years. Foreign income tax matters for material tax
jurisdictions have been concluded for tax years prior to fiscal year 2006,
except the United Kingdom for which tax matters have been concluded for tax
years prior to fiscal year 2011.
On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law
which includes a provision that retroactively extends the federal tax research
credit to January 1, 2012 for two years. When we recognize the benefit of the
retroactive reinstatement in the fourth quarter of fiscal year 2013, we will
report a discrete tax benefit of approximately $2.0 million for the previously
expired period from January 1, 2012 to December 31, 2012.
FINANCIAL CONDITION
The table below provides a summary of our condensed consolidated cash flow
information for the periods presented:
Nine Months Ended
December 31, Increase
(in thousands) 2012 2011 (Decrease)
Net cash provided by operating activities $ 93,254 $ 87,471 $ 5,783
Net cash used for investing activities (63,623 ) (6,129 ) (57,494 )
Net cash used for financing activities (42,209 ) (179,224 ) 137,015
Effect of exchange rate changes on cash and cash
equivalents (101 ) (1,428 ) 1,327
Net decrease in cash and cash equivalents $ (12,679 ) $ (99,310 ) $ 86,631
Operating Activities
Net cash provided by operating activities is net income adjusted for certain
non-cash items and changes in assets and liabilities, net of effect of
acquisition in the current fiscal year.
Net cash provided by operating activities for the nine months ended December 31,
2012 compared to the same period in the prior year was $93.3 million, an
increase of approximately $5.8 million, due to changes in operating assets and
liabilities and adjustments for non-cash items, partly offset by lower net
income. Adjustments for non-cash items were higher due primarily to changes in
deferred income taxes, a decrease in excess tax benefits from stock based
compensation, and higher depreciation and amortization due primarily to
accelerated depreciation associated with exiting a manufacturing facility in
Mexico, partly offset by lower reserve requirements for excess and obsolete
inventories as a result of improved inventory planning. In the third quarter of
fiscal year 2013, our days sales outstanding ("DSO") improved over the same
period in the prior year from 54 days to 51 days. This decrease in DSO was
driven by significant collections late in the quarter, coupled with an increase
in revenues when compared to the same quarter in the prior year.
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Changes in operating assets and liabilities for the nine months ended December
31, 2012 compared to the same period in the prior year included the following:
• Accounts payable increased due primarily to the timing of payments.
• Accrued liabilities increased due primarily to the timing of payments of
performance-based compensation. In the prior year, one-half of the accrued
performance-based compensation was paid in the third quarter whereas, this
year, the entire accrued performance-based compensation will be paid in
the first quarter of fiscal year 2014.
• Inventories increased due primarily to last time buys from one of our
primary chip suppliers.
• Accrued income taxes decreased due to timing of payments to tax
authorities and the release of a tax liability from the expiration of
certain statutes of limitations that was larger than the comparable
release in the prior year period.
We expect that we will continue to generate cash from our operating activities
during the remainder of fiscal year 2013 and beyond.
Investing Activities
Net cash used for investing activities increased by $57.4 million for the nine
months ended December 31, 2012 compared to the same period in the prior year due
to a $24.1 million decrease from net sales and maturities of short-term
investments, $17.1 million increase from net purchases of long-term investments,
$14.3 million increase in capital expenditures related primarily to the purchase
of a new manufacturing facility in Tijuana, Mexico, building improvements, IT
projects and tooling, and $1.9 million increase in acquisition costs.
For the remainder of fiscal year 2013, we expect to spend approximately $13.0
million in capital expenditures, consisting primarily of building improvements
and additional capital expenditures related to the construction at the Tijuana
manufacturing facility, IT related expenditures and tooling for new products. We
will continue to evaluate new business opportunities and new markets; as a
result, future growth within our existing business or new opportunities and
markets may require expenditures for additional facilities and other capital
expenditures to support that growth.
Financing Activities
Net cash used for financing activities decreased by $137.0 million for the nine
months ended December 31, 2012 compared to the same period in the prior year due
to a $220.5 million decrease in the level of common stock repurchases, offset by
$56.5 million higher net repayments against our revolving line of credit, $16.5
million lower proceeds from the exercise of stock options, $5.9 million in
higher cash dividend payments, and $4.2 million in lower excess tax benefits
from stock-based compensation.
Liquidity and Capital Resources
Our primary discretionary cash requirements have historically been for
repurchases of our common stock and to fund stockholder dividends. At
December 31, 2012, we had working capital of $438.7 million, including $328.9
million of cash, cash equivalents and short-term investments, compared with
working capital of $438.0 million, including $334.5 million of cash, cash
equivalents and short-term investments at March 31, 2012.
Our cash and cash equivalents as of December 31, 2012 consisted of U.S. Treasury
Bills, Commercial Paper and bank deposits with third party financial
institutions. We monitor bank balances in our operating accounts and adjust the
balances as appropriate. Cash balances are held throughout the world, including
substantial amounts held outside of the U.S. As of December 31, 2012, of our
$328.9 million of cash, cash equivalents and short-term investments, $14.6
million is held domestically while $314.3 million is held by foreign
subsidiaries. The costs to repatriate our foreign earnings to the U.S. would be
material; however, our intent is to permanently reinvest our earnings from
foreign operations and our current plans do not require us to repatriate our
earnings from foreign operations to fund our U.S. operations because we generate
sufficient domestic operating cash flow and have access to external funding
under our revolving line of credit.
Our short and long-term investments are intended to establish a high-quality
portfolio that preserves principal and meets liquidity needs. As of December 31,
2012, our investments were composed of U.S. Treasury Bills, Government Agency
Securities, Commercial Paper, Corporate Bonds, and Certificates of Deposit
("CDs").
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From time to time, our Board of Directors ("Board") has authorized plans under
which we may repurchase shares of our common stock, depending on market
conditions, in the open market or through privately negotiated transactions.
During the first nine months of fiscal year 2013, we repurchased 743,818 shares
of our common stock in the open market as part of these publicly announced
repurchase programs. The total cost of these repurchases was $23.6 million, with
an average price of $31.76 per share. In addition, we withheld 88,247 shares
with a total value of $2.8 million in satisfaction of employee tax withholding
obligations upon the vesting of restricted stock granted under our stock plans.
There were no privately negotiated stock repurchase transactions during the nine
months ended December 31, 2012.
As of December 31, 2012, there remained 889,795 shares authorized for repurchase
under the stock repurchase program approved by the Board on August 6, 2012. For
more information regarding our stock repurchase programs, refer to Note 9,
Common Stock Repurchases, of the accompanying Notes to Condensed Consolidated
Financial Statements (Unaudited) in this Quarterly Report on Form 10-Q.
In May 2011, we entered into a credit agreement with Wells Fargo Bank, National
Association ("Bank"), as most recently amended in August 2012 to extend its term
to May 2015 (as amended, the "Credit Agreement"). The Credit Agreement provides
for a $100.0 million unsecured revolving line of credit (the "line of credit")
to augment our financial flexibility and, if requested by us, the Bank may
increase its commitment thereunder by up to $100.0 million, for a total facility
of up to $200.0 million. Any outstanding principal, together with accrued and
unpaid interest, is due on the amended maturity date, May 9, 2015, and our
obligations under the Credit Agreement are guaranteed by our domestic
subsidiaries, subject to certain exceptions. As of December 31, 2012, we had
outstanding borrowings of $20.0 million under the line of credit. Loans under
the Credit Agreement bear interest at our election (1) at the Bank's announced
prime rate less 1.50% per annum, (2) at a daily one month LIBOR rate plus 1.10%
per annum or (3) at an adjusted LIBOR rate, for a term of one, three or six
months, plus 1.10% per annum. The line of credit requires us to comply with the
following two financial covenant ratios, in each case at each fiscal quarter end
and determined on a rolling four-quarter basis:
• maximum ratio of funded debt to earnings before interest, taxes,
depreciation and amortization ("EBIDTA"); and,
• minimum EBIDTA coverage ratio, which is calculated as interest payments
divided by EBIDTA.
As of December 31, 2012, we were in compliance with these ratios by a
substantial margin.
In addition, we and our subsidiaries are required to maintain, on a consolidated
basis, unrestricted cash, cash equivalents and marketable securities plus
availability under the Credit Agreement at the end of each fiscal quarter of at
least $200.0 million. The line of credit contains affirmative covenants
including covenants regarding the payment of taxes and other liabilities,
maintenance of insurance, reporting requirements and compliance with applicable
laws and regulations. The credit facility also contains negative covenants,
among other things, limiting our ability to incur debt, make capital
expenditures, grant liens, make acquisitions and make investments. The events of
default under the line of credit include payment defaults, cross defaults with
certain other indebtedness, breaches of covenants, judgment defaults and
bankruptcy and insolvency events involving us or any of our subsidiaries. As of
December 31, 2012, we were in compliance with all covenants under the line of
credit.
Our liquidity, capital resources, and results of operations in any period could
be affected by repurchases of our common stock, the exercise of outstanding
stock options, restricted stock grants under stock plans and the issuance of
common stock under our ESPP. We receive cash from the exercise of outstanding
stock options and the issuance of shares under our ESPP. However, the resulting
increase in the number of outstanding shares from these equity grants and
issuances could affect our earnings per share. We cannot predict the timing or
amount of proceeds from the sale or exercise of these securities or whether they
will be exercised, forfeited, canceled or will expire.
We believe that our current cash and cash equivalents, short-term investments,
cash provided by operations and the availability of additional funds under the
Credit Agreement will be sufficient to fund operations for at least the next
twelve months; however, any projections of future financial needs and sources of
working capital are subject to uncertainty. See "Certain Forward-Looking
Information" and "Risk Factors" in this Quarterly Report on Form 10-Q for
factors that could affect our estimates for future financial needs and sources
of working capital.
30--------------------------------------------------------------------------------
Table of Contents
CONTRACTUAL OBLIGATIONS
As of December 31, 2012, we had $9.0 million in unconditional purchase
obligations with remaining terms exceeding one year related to an ongoing IT
project we expect to complete in the first quarter of fiscal year 2015. In
addition, our unrecognized tax benefits and related interest were $10.4 million
and $1.9 million, respectively, as of December 31, 2012. We are unable to
reliably estimate the timing of future payments related to unrecognized tax
benefits; however, long-term income taxes payable on our condensed consolidated
balance sheets includes these unrecognized tax benefits. We do not anticipate
making any material cash payments associated with our unrecognized tax benefits
within the next 12 months.
CRITICAL ACCOUNTING ESTIMATES
For a complete description of what we believe to be the critical accounting
estimates used in the preparation of our condensed consolidated financial
statements, refer to our Annual Report on Form 10-K for the fiscal year ended
March 31, 2012, filed with the Securities and Exchange Commission ("SEC") on May
25, 2012. There have been no changes to our critical accounting estimates during
the nine months ended December 31, 2012.
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