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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. 23-------------------------------------------------------------------------------- Table of Contents 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 % 24-------------------------------------------------------------------------------- Table of Contents 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. 25-------------------------------------------------------------------------------- Table of Contents 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. 26-------------------------------------------------------------------------------- Table of Contents 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. 27-------------------------------------------------------------------------------- Table of Contents 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. 28-------------------------------------------------------------------------------- Table of Contents 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"). 29-------------------------------------------------------------------------------- Table of Contents 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. |