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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 "anticipate," "believe," "could," "expect," "intend," "may," "plan," "potential," "shall," "will," "would," 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, but are not limited to, statements regarding (i) our expectations for new product launches and new Consumer product development efforts in fiscal year 2015 and beyond, (ii) the Unified Communications ("UC") markets and our position in these markets, (iii) our belief that our innovation and breakthroughs in contextual intelligence for and other product features and enhancements in UC has spurred the growth in the Enterprise market and UC product revenues, (iv) our long-term strategy to invest in UC and the relationship of added functionality to successful product launches, (v) the future of UC technologies, including the transition of businesses to UC-supported systems, the effect on headset adoption and use, the effects on enterprises that adopt UC and our expectations concerning our revenue opportunity and profit growth, (vi) our belief that our technology capitalizes on the needs of enterprise users in changing business environments and evolving work styles and that our solutions will be an important part of future enterprise UC environments, (vii) our expectations regarding the slow long-term growth of the traditional office and contact center category and the impact of UC on the growth of enterprise headset adoption overall, (viii) the Mobile Bluetooth market and the stereo and mono product categories, (ix) our position in the Mobile Bluetooth market and the effect of our new products on our position in that market, (x) our research and development strategy, including our investments in software development, (xi) our expectations regarding our sales force and customer service operations, (xii) the maintenance of our reputation in the industry, (xiii) our expenses, including research, development and engineering expenses and selling, general and administrative expenses, (xiv) our future tax rate and payments related to unrecognized tax benefits, (xv) our anticipated capital expenditures for the remainder of fiscal year 2015 and the sufficiency of our cash, cash equivalents, and cash from operations to sustain future operations and discretionary cash requirements, (xvi) our planned investment of and need for our foreign cash and our ability to repatriate that cash, (xvii) our ability to draw funds on our credit facility as needed, (xviii) future fluctuations in our cash provided by operating activities, and (xix) 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 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 March 31, 2014, filed with the Securities and Exchange Commission ("SEC") on May 16, 2014; and other documents 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 We are a leading designer, manufacturer, and marketer of lightweight communications headsets, telephone headset systems, other communication endpoints, and accessories for the worldwide business and consumer markets under the Plantronics brand. In addition, under our Clarity brand we manufacture and market specialty telephone products, such as telephones for the hearing impaired, and other related products for people with special communication needs. We ship our products to approximately 70 countries through a network of distributors, retailers, wireless carriers, original equipment manufacturers ("OEMs"), and telephony service providers. We have well-developed distribution channels in North America, Europe, and in some parts of the Asia Pacific region where use of our products is widespread. Our distribution channels in other geographic regions are less mature, and while we primarily serve contact centers in those regions, we continue to expand into the office, mobile, gaming and computer audio, and specialty telephone markets in those regions and other international locations. Beginning in the first quarter of our fiscal year 2015, our major product categories were revised to include "Enterprise" (formerly Office and Contact Center), which includes Unified Communications ("UC"), corded and cordless communication headsets, audio processors, and telephone systems; and "Consumer" (formerly Mobile, Gaming and Computer Audio, and Clarity), which includes Bluetooth and corded products for mobile phone applications, personal computer ("PC") and gaming headsets, and specialty products marketed for hearing impaired individuals. Prior period net revenues have been reclassified to conform to this presentation. While not always the case, revenues from our Consumer products channel are typically seasonal, with the December quarter (our third fiscal quarter) typically being the strongest. 19-------------------------------------------------------------------------------- Table of Contents Total net revenues increased to $215.8 million in the second quarter of our fiscal year 2015, growing 11.3% over the second quarter of the prior year. UC product revenues also increased, growing by 30% over the prior-year quarter to $47.8 million; we believe our innovation and breakthroughs in contextual intelligence and other product features and enhancements spurred this growth. Our increased investments in research and development as compared to the same period in the prior year yielded increased functionality for UC endpoints and successful launches of new consumer products in key markets. We also continued to invest in our global sales force in order to bring these and other products to the marketplace. We believe UC represents our key long-term driver of revenue and profit growth, and it continues to be our primary focus area. Business communications are transforming 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 a need for a device that delivers contextual intelligence, providing the ability to reach people using the mode of communication that is most effective, on the device that is most convenient, and with control over when and how they can be reached. Our portfolio of UC solutions combines hardware with advanced sensor technology and capitalizes on contextual intelligence, addressing the needs of 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 Communications® technology will be an important part of the UC environment. The contact center category is the most mature in which we participate, and we expect this category to grow slowly over the long-term. Given the migration to UC by corporations globally, we expect the market for headsets for non-UC enterprise applications to grow very slowly, if at all. While we experienced year on year growth of approximately 6% in net revenues from non-UC Enterprise products in the three months ended September 30, 2014, over the full six-month period ending September 30, 2014 net revenues from non-UC Enterprise products were roughly equal to the same period a year ago. We believe the growth of UC will increase overall headset adoption in enterprise environments and we expect most of the growth in our Enterprise product category over the next five years to come from headsets designed for UC. Our Consumer products include headsets for mobile communications and entertainment as well as gaming headsets for the console and personal computer categories. In the second quarter of fiscal year 2015, our Consumer product portfolio benefited from continuing strong performance of the Voyager Edge and Voyager Legend in the mono Bluetooth category, and initial sales of BackBeat Go 2 and BackBeat Fit in the stereo Bluetooth category have been promising. These products contributed to the strong performance of our Mobile communications portfolio in the quarter, allowing us to participate fully in market opportunities around the world. We anticipate that our planned investments in these categories will help position us to maintain market share as opportunities in these markets continue to expand. 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. We believe these investments in software development will help us differentiate our products and maintain long-term gross margins within our business model. We continue to strengthen our strategic partnerships with UC platform suppliers to maintain compatibility of our products with all major platforms as UC usage becomes an essential part of the enterprise communications landscape. Looking forward, we remain cautious about the macroeconomic environment but note the general improvement in the worldwide economy. We will continue to invest prudently in long-term growth opportunities and we will continue to focus on innovative product development through our core research and development efforts. We will also continue to grow 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 market and a well-deserved reputation for quality and service that we will continually strive to earn through ongoing investment and strong execution. 20 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS NET REVENUES Three Months Ended Six Months Ended September 30, Increase September 30, Increase (in thousands, except percentages) 2014 2013 (Decrease) 2014 2013 (Decrease) Net revenues from unaffiliated customers: Enterprise $ 156,680 $ 139,945 $ 16,735 12.0 % $ 309,033 $ 291,128 $ 17,905 6.2 % Consumer 59,125 54,035 5,090 9.4 % 123,434 105,670 17,764 16.8 % Total net revenues $ 215,805 $ 193,980 $ 21,825 11.3 % $ 432,467 $ 396,798 $ 35,669 9.0 % Enterprise products represent our largest source of revenues, while Consumer products represent our largest unit volumes. Net revenues may vary due to seasonality, the timing of new product introductions and discontinuation of existing products, discounts and other incentives, and channel mix. Net revenues derived from sales into the Consumer products retail channel typically account for a seasonal increase in net revenues in the third quarter of our fiscal year. Net revenues increased in the second quarter of fiscal year 2015 over the same period a year ago due primarily to higher revenues within our Enterprise product category, led by 30% year-on-year growth in UC product sales driven by continued adoption of Unified Communications solutions in the marketplace. Revenues from traditional office and contact center products also increased 6% driven by strength in our popular Supra Plus and CS models. In addition, Consumer revenues increased by more than 9%, driven by enhancements to our product portfolio during the year such as BackBeat Fit in our stereo Bluetooth category and Voyager Edge in our mono Bluetooth category. Net revenues increased in the six months ended September 30, 2014 over the same period a year ago driven in equal measure by Enterprise and Consumer revenues. Within Enterprise, growth in UC product sales due to continued adoption of Unified Communications solutions in the marketplace accounted for the increase. Within Consumer, the growth resulted from continued strength in Mobile revenues driven by enhancements to our product portfolio that have been well-received in the retail market. Geographic Information Three Months Ended Six Months Ended September 30, Increase September 30, Increase (in thousands, except percentages) 2014 2013 (Decrease) 2014 2013 (Decrease) Net revenues from unaffiliated customers: U.S. $ 123,697 $ 115,795 $ 7,902 6.8% $ 248,164 $ 237,113 $ 11,051 4.7% As a percentage of net revenues 57.3 % 59.7 % 57.4 % 59.8 % Europe and Africa 49,558 43,094 6,464 15.0% 100,820 87,479 13,341 15.3% Asia Pacific 28,264 23,280 4,984 21.4% 55,233 47,160 8,073 17.1% Americas, excluding U.S. 14,286 11,811 2,475 21.0% 28,250 25,046 3,204 12.8% Total international net revenues 92,108 78,185 13,923 17.8% 184,303 159,685 24,618 15.4% As a percentage of net revenues 42.7 % 40.3 % 42.6 % 40.2 % Total net revenues $ 215,805 $ 193,980 $ 21,825 11.3% $ 432,467 $ 396,798 $ 35,669 9.0% Compared to the same period in the prior year, U.S. net revenues increased in the three months ended September 30, 2014 due to growth in Enterprise product revenue, driven by strength in both UC revenues due to the continued adoption of Unified Communications in the marketplace, and in traditional office and contact center revenues, driven by strength in our Supra Plus corded and CS wireless products. International net revenues increased in the three months ended September 30, 2014 mainly due to growth in Enterprise revenues, which was driven both by strength in UC and traditional office and contact center product sales. Consumer revenue in international markets also increased, driven largely by strength in our APAC region within the Mobile Bluetooth category. In the six months ended September 30, 2014, U.S. net revenues grew mainly as the result of growth in the Consumer category, due to enhancements to our product portfolio. Enterprise net revenue in the U.S. also increased, with growth in UC being partly offset by a decline in traditional office and contact center revenues. International net revenues increased due primarily to growth in our Enterprise category driven mainly by growth in UC due to continued adoption of Unified Communications solutions, but also due to modest growth in our traditional office and contact center products. Consumer net revenues also grew internationally with the majority of the increase coming in Bluetooth Mobile products. 21 --------------------------------------------------------------------------------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, charge for excess and obsolete inventory, royalties, and an allocation of overhead expenses, including facilities, IT, and human resources. Three Months Ended Six Months Ended September 30, Increase September 30, Increase (in thousands, except percentages) 2014 2013 (Decrease) 2014 2013 (Decrease) Net revenues $ 215,805 $ 193,980 $ 21,825 11.3 % $ 432,467 $ 396,798 $ 35,669 9.0 % Cost of revenues 97,978 94,366 3,612 3.8 % 199,930 191,552 8,378 4.4 % Gross profit $ 117,827 $ 99,614 $ 18,213 18.3 % $ 232,537 $ 205,246 $ 27,291 13.3 % Gross profit % 54.6 % 51.4 % 53.8 % 51.7 % As a percentage of net revenues, gross profit increased in the three and six months ended September 30, 2014, compared to the same periods prior year due primarily to the positive effects of lower product costs both as a result of lower component costs and as the result of spreading our fixed manufacturing costs over a larger revenue base versus a year ago. We also had positive margin effects from lower charges for excess and obsolete inventory, and from the effect of revenue mix containing a higher proportion of traditional office and contact center products, which carry higher margins on average than Consumer products. There are significant variances in gross profit percentages between our higher and lower margin products; therefore, small variations in product mix, which can be difficult to predict, can have a significant impact on gross profit. Gross profit may also vary based on distribution channel, return rates, and other factors. RESEARCH, DEVELOPMENT, AND ENGINEERING Research, development, and engineering costs are expensed as incurred and consist primarily of compensation costs, outside services, including legal fees associated with protecting our intellectual property, expensed materials, travel expenses, depreciation, and an allocation of overhead expenses, including facilities, IT, and human resources. Three Months Ended Six Months Ended September 30, Increase September 30, Increase (in thousands, except percentages) 2014 2013 (Decrease) 2014 2013 (Decrease) Research, development, and engineering $ 23,769 $ 20,447 $ 3,322 16.2 % $ 46,289 $ 41,310 $ 4,979 12.1 % % of net revenues 11.0 % 10.5 % 10.7 % 10.4 % During the three and six months ended September 30, 2014, research, development, and engineering expenses increased compared to the same periods prior year 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 and other employee-related expenses. 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 facilities, IT, and human resources. Three Months Ended Six Months Ended September 30, Increase September 30, Increase (in thousands, except percentages) 2014 2013 (Decrease) 2014 2013 (Decrease) Selling, general, and administrative $ 60,350 $ 48,507 $ 11,843 24.4 % $ 116,779 $ 96,604 $ 20,175 20.9 % % of net revenues 28.0 % 25.0 % 27.0 % 24.3 % Compared to the same period a year ago, selling, general, and administrative expenses increased in the three months ended September 30, 2014 due primarily to increased headcount and employee-related expenses of $5.2 million related mainly to increased investment in our sales and marketing organizations to support the UC opportunity and other growth opportunities. We also experienced an increase of $3.2 million in litigation expenses, and $1.5 million higher depreciation and facilities expense related to capital investments made in the past year. 22 -------------------------------------------------------------------------------- During the six month period ended September 30, 2014 compared to the same period a year ago, selling, general, and administrative expenses increased due primarily to increased headcount and employee-related expenses of $9.3 million related mainly to increased investment in our sales and marketing organizations to support the UC opportunity and other growth opportunities. We also experienced an increase of $4.2 million in litigation expenses, $2.1 million higher depreciation and facilities expense related to capital investments made in the past year, and $1.1 million from increased marketing program expense. INCOME TAX EXPENSE Three Months Ended Six Months Ended September 30, Increase September 30, Increase (in thousands except percentages) 2014 2013 (Decrease) 2014 2013 (Decrease) Income before income taxes $ 37,173 $ 31,195 $ 5,978 19.2 % $ 75,954 $ 66,658 $ 9,296 13.9 % Income tax expense 9,752 8,057 1,695 21.0 % 19,861 16,567 3,294 19.9 % Net income $ 27,421 $ 23,138 $ 4,283 18.5 % $ 56,093 $ 50,091 $ 6,002 12.0 % Effective tax rate 26.2 % 25.8 % 26.1 % 24.9 % Our effective tax rate for the three and six months ended September 30, 2014 was 26.2% and 26.1%, respectively, compared to 25.8% and 24.9%, respectively, in the same prior year period. The higher effective tax rate for the three and six months ended September 30, 2014 compared to the same period in the prior year is due primarily to the expiration of the United States ("U.S.") federal tax research credit in December 2013. The effective tax rate for the six months ended September 30, 2014 was also affected by the release of larger tax reserves from the expiration of certain statutes of limitations in the prior year period. We and our subsidiaries are subject to taxation in the U.S. and in various foreign and state jurisdictions. We are currently under examination by the Internal Revenue Service for our 2010 tax year. The California Franchise Tax Board completed its examination of our 2007 and 2008 tax years. We received a Notice of Proposed Assessment and responded by filing a protest letter. The amount of the proposed assessment is not material. Foreign income tax matters for material tax jurisdictions have been concluded for tax years prior to fiscal year 2011, except in the United Kingdom where tax matters have been concluded for tax years prior to fiscal year 2013. FINANCIAL CONDITION The table below provides a summary of our condensed consolidated cash flow information for the periods presented: Six Months Ended September 30, (in thousands) 2014 2013 Change Net cash provided by operating activities $ 72,031 $ 57,606 $ 14,425 Net cash used for investing activities (10,568 ) (23,467 ) 12,899 Net cash used for financing activities (24,880 ) (17,724 ) (7,156 ) Effect of exchange rate changes on cash and cash equivalents (1,058 ) 789 (1,847 ) Net increase in cash and cash equivalents $ 35,525 $ 17,204 $ 18,321 Our primary source of liquidity is cash provided by operating activities. We expect that cash provided by operating activities will fluctuate in future periods as a result of a number of factors, including fluctuations in our revenues and operating expenses, the timing of product shipments during the quarter, accounts receivable collections, inventory and supply chain management, and the timing and amount of tax and other payments. Operating Activities Net cash provided by operating activities during the six months ended September 30, 2014 increased from the same prior year period primarily due to a net increase in accounts payable and accrued liabilities which was driven by the timing of payments made during the second quarter compared to the same prior year period. This increase was partially offset by a net increase in accounts receivable due primarily to higher shipments during the first half of our fiscal year 2015 compared to the same prior year period. 23-------------------------------------------------------------------------------- Table of Contents Investing Activities Net cash used for investing activities during the six months ended September 30, 2014 decreased from the same prior year period due primarily to lower capital expenditures. We estimate total capital expenditures for fiscal 2015 of approximately $30 million related to costs associated with the enhancement of our U.S. and European headquarters, the build-out of our new Mexican facility, and investment of manufacturing capabilities including tooling for new products. We will continue to evaluate new business opportunities and new markets; as a result, our future growth within the existing business or new opportunities and markets may dictate the need for additional facilities and capital expenditures to support that growth. Financing Activities Net cash used for financing activities during the six months ended September 30, 2014 increased from the same prior year period. This increase was driven by higher dividend payments and lower proceeds from stock issuances under stock-based compensation plans, partially offset by lower stock repurchases. On October 28, 2014, we announced that our Audit Committee of the Board ("the Audit Committee") had declared a cash dividend of $0.15 per share, payable on December 10, 2014 to stockholders of record at the close of business on November 20, 2014. We expect to continue paying a quarterly dividend of $0.15 per share; however, the actual declaration of dividends and the establishment of record and payment dates are subject to final determination by the Audit Committee each quarter after its review of our financial performance and financial position. Liquidity and Capital Resources Our primary discretionary cash requirements have historically been for repurchases of our common stock and to fund stockholder dividends. At September 30, 2014, we had working capital of $497.1 million, including $358.5 million of cash, cash equivalents and short-term investments, compared with working capital of $458.7 million, including $335.4 million of cash, cash equivalents and short-term investments at March 31, 2014. Our cash and cash equivalents as of September 30, 2014 consisted of bank deposits with third party financial institutions and Commercial Paper. We monitor bank balances in our operating accounts and adjust the balances as appropriate. Cash balances are held throughout the world, including substantial amounts held outside of the U.S. As of September 30, 2014, of our $358.5 million of cash, cash equivalents and short-term investments, $26.3 million was held domestically while $332.2 million was 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 September 30, 2014, our investments were composed of Mutual Funds, Government Agency Securities, Commercial Paper, and Corporate Bonds. From time to time, our 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 six months of fiscal year 2015, we repurchased 419,041 shares of our common stock in the open market as part of these publicly announced repurchase programs. The total cost of these repurchases was $18.9 million, with an average price of $45.14 per share. In addition, we withheld 137,690 shares with a total value of $6.2 million in satisfaction of employee tax withholding obligations upon the vesting of restricted stock granted under our stock plans. As of September 30, 2014, there remained 513,459 shares authorized for repurchase under the stock repurchase program approved by the Board on February 20, 2014. For more information regarding our stock repurchase programs, refer to Note 8, Common Stock Repurchases, of the accompanying notes to condensed consolidated financial statements (unaudited) in this Quarterly Report on Form 10-Q. 24-------------------------------------------------------------------------------- Table of Contents In May 2011, we entered into a credit agreement with Wells Fargo Bank, National Association ("the Bank"), as most recently amended in January 2014 to extend its term to May 2017 (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, 2017, and our obligations under the Credit Agreement are guaranteed by our domestic subsidiaries, subject to certain exceptions. As of September 30, 2014, the Company had no outstanding borrowings under the line of credit. Loans under the Credit Agreement bear interest at our election (1) at the Bank's announced prime rate less 1.50% per annum, (2) at a daily one month LIBOR rate plus 1.10% per annum or (3) at an adjusted LIBOR rate, for a term of one, three or six months, plus 1.10% per annum. The line of credit requires us to comply with the following two financial covenant ratios, in each case at each fiscal quarter end and determined on a rolling four-quarter basis: • maximum ratio of funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"); and, • minimum EBITDA coverage ratio, which is calculated as interest payments divided by EBITDA. 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 September 30, 2014, we were in compliance with all ratios and covenants by a substantial margin. Our liquidity, capital resources, and results of operations in any period could be affected by repurchases of our common stock, the payment of cash dividends, the exercise of outstanding stock options, restricted stock grants under stock plans, and the issuance of common stock under our ESPP. We receive cash from the exercise of outstanding stock options under our stock plan and the issuance of shares under our ESPP. However, the resulting increase in the number of outstanding shares from these equity grants and issuances could affect our earnings per share. We cannot predict the timing or amount of proceeds from the sale or exercise of these securities or whether they will be exercised, forfeited, canceled, or will expire. We believe that our current cash and cash equivalents, short-term investments, cash provided by operations, and the availability of additional funds under the Credit Agreement will be sufficient to fund operations for at least the next 12 months; however, any projections of future financial needs and sources of working capital are subject to uncertainty. Readers are cautioned to review the risks, uncertainties, and assumptions set forth in this 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 March 31, 2014, filed with the SEC on May 15, 2014, and other periodic filings with the SEC, any of which could affect our estimates for future financial needs and sources of working capital. OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides us with financing and liquidity support, market risk, or credit risk support. A substantial portion of the raw materials, components, and subassemblies used in our products are provided by our suppliers on a consignment basis. These consigned inventories are not recorded on our consolidated balance sheet until we take title to the raw materials, components, and subassemblies, which occurs when they are consumed in the production process. Prior to consumption in the production process, our suppliers bear the risk of loss and retain title to the consigned inventory. The terms of the agreements allow the Company to return parts in excess of maximum order quantities to the suppliers at the supplier's expense. Returns for other reasons are negotiated with the suppliers on a case-by-case basis and to date have been immaterial. If our suppliers were to discontinue financing consigned inventory, it would require us to make cash outlays and we could incur expenses which, if material, could negatively affect our business and financial results. As of September 30, 2014 and March 31, 2014, we had off-balance sheet consigned inventories of $54.5 million and $40.0 million, respectively. 25-------------------------------------------------------------------------------- Table of Contents Unconditional Purchase Obligations We utilize several contract manufacturers to manufacture raw materials, components, and subassemblies for our products. We provide these contract manufacturers with demand information that typically covers periods up to 13 weeks, and they use this information to acquire components and build products. We also obtain individual components for our products from a wide variety of individual suppliers. Consistent with industry practice, we acquire components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. As of September 30, 2014, we had outstanding off-balance sheet third-party manufacturing, component purchase, and other general and administrative commitments of $163.9 million. 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, 2014, filed with the SEC on May 16, 2014. There have been no changes to our critical accounting estimates during the six months ended September 30, 2014. Recent Accounting Pronouncements In May 2014, the FASB issued additional guidance to clarify the principles used to recognize revenue for all entities. This guidance will be effective for us in the first quarter of our fiscal year ending March 31, 2018. We are currently evaluating the impact, if any, the adoption of this guidance will have on our financial position, results of operations, and cash flows. |