form10q.htm


 
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q
(Mark One)
S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 2007

OR

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to _________

Commission file number 1-12696

Plantronics, Inc.
(Exact name of registrant as specified in its charter)

Delaware
77-0207692
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)

345 Encinal Street
Santa Cruz, California   95060
(Address of principal executive offices)
(Zip Code)

(831) 426-5858
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S  No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer S
Accelerated filer £
Non accelerated filer £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £  No S.

As of October 27, 2007, 48,593,627 shares of common stock were outstanding.
 


 
 
Plantronics, Inc.
FORM 10-Q
TABLE OF CONTENTS
 
PART I - FINANCIAL INFORMATION
Page No.
   
Item 1. Financial Statements (Unaudited):
 
   
3
   
4
   
5
   
6
   
16
   
31
   
33
   
PART II - OTHER INFORMATION
 
   
34
   
34
   
48
   
48
   
49
   
50


 
Part I -- FINANCIAL INFORMATION
 
Item 1. Financial Statements.
PLANTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)

   
March 31,
2007
   
September 30,
2007
 
   
 
   
 
 
ASSETS
 
 
       
Current assets:
 
 
       
Cash and cash equivalents
  $
94,131
    $
86,379
 
Short-term investments
   
9,234
     
53,515
 
        Total cash, cash equivalents, and short-term investments
   
103,365
     
139,894
 
Accounts receivable, net
   
113,758
     
128,705
 
Inventory
   
126,605
     
133,516
 
Deferred income taxes
   
12,659
     
12,987
 
Other current assets
   
18,474
     
14,025
 
Total current assets
   
374,861
     
429,127
 
Property, plant and equipment, net
   
97,259
     
99,524
 
Intangibles, net
   
100,120
     
95,524
 
Goodwill
   
72,825
     
72,825
 
Other assets
   
6,239
     
6,055
 
Total assets
  $
651,304
    $
703,055
 
                 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
  $
49,956
    $
51,471
 
Accrued liabilities
   
54,025
     
63,491
 
Income taxes payable
   
12,476
     
-
 
Total current liabilities
   
116,457
     
114,962
 
Deferred tax liability
   
37,344
     
33,660
 
Long-term income taxes payable
   
-
     
15,299
 
Other long-term liabilities
   
696
     
685
 
Total liabilities
   
154,497
     
164,606
 
                 
Stockholders' equity:
               
Common stock
   
666
     
670
 
Additional paid-in capital
   
340,661
     
356,005
 
Accumulated other comprehensive income
   
2,666
     
1,376
 
Retained earnings
   
550,165
     
576,834
 
     
894,158
     
934,885
 
Less:  treasury stock, at cost
    (397,351 )     (396,436 )
Total stockholders' equity
   
496,807
     
538,449
 
Total liabilities and stockholders' equity
  $
651,304
    $
703,055
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


PLANTRONICS, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
 
   
Three Months Ended
September 30,
   
Six Months Ended
September 30,
 
   
2006
   
2007
   
2006
   
2007
 
Net revenues
  $
194,934
    $
208,224
    $
390,003
    $
414,719
 
Cost of revenues
   
118,039
     
123,768
     
237,509
     
246,717
 
Gross profit
   
76,895
     
84,456
     
152,494
     
168,002
 
Operating expenses:
                               
Research, development and engineering
   
16,938
     
19,208
     
35,597
     
38,696
 
Selling, general and administrative
   
43,934
     
45,941
     
88,387
     
92,052
 
Gain on sale of land
   
-
     
-
      (2,637 )    
-
 
Total operating expenses
   
60,872
     
65,149
     
121,347
     
130,748
 
Operating income
   
16,023
     
19,307
     
31,147
     
37,254
 
Interest and other income, net
   
267
     
1,793
     
1,252
     
3,127
 
Income before income taxes
   
16,290
     
21,100
     
32,399
     
40,381
 
Income tax expense
   
3,765
     
4,578
     
7,583
     
8,884
 
Net income
  $
12,525
    $
16,522
    $
24,816
    $
31,497
 
                                 
Net income per share - basic
  $
0.27
    $
0.34
    $
0.53
    $
0.66
 
                                 
Shares used in basic per share calculations
   
47,203
     
48,115
     
47,180
     
47,975
 
                                 
Net income per share - diluted
  $
0.26
    $
0.34
    $
0.52
    $
0.64
 
                                 
Shares used in diluted per share calculations
   
47,626
     
49,310
     
47,934
     
48,963
 
                                 
Cash dividends declared per common share
  $
0.05
    $
0.05
    $
0.10
    $
0.10
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


PLANTRONICS, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
   
Six Months Ended
September 30,
 
   
2006
   
2007
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
   
 
 
Net income
  $
24,816
    $
31,497
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
14,423
     
13,974
 
Stock-based compensation
   
8,376
     
7,862
 
Provision for doubtful accounts
   
442
     
370
 
Provision for excess and obsolete inventories
   
8,080
     
8,404
 
Deferred income taxes
    (2,829 )     (5,769 )
Income tax benefit associated with stock option exercises
   
163
     
473
 
Excess tax benefit from stock-based compensation
    (256 )     (1,291 )
(Gain) loss on disposal of property, plant, and equipment, net
    (2,608 )    
7
 
Impairment of intangible asset
   
-
     
517
 
                 
Changes in assets and liabilities:
               
Accounts receivable
    (1,081 )     (16,044 )
Inventory
    (41,490 )     (15,316 )
Other assets
   
1065
     
211
 
Accounts payable
   
1,807
     
1,515
 
Accrued liabilities
   
4,156
     
7,201
 
Income taxes payable
   
443
     
7,936
 
Cash provided by operating activities
   
15,507
     
41,547
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from sales of short-term investments
   
172,784
     
168,415
 
Purchase of short-term investments
    (173,820 )     (212,265 )
Proceeds from the sale of land
   
2,667
     
-
 
Restricted cash held in escrow
    (2,667 )    
-
 
Capital expenditures and other assets
    (15,679 )     (11,893 )
Cash used for investing activities
    (16,715 )     (55,743 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Purchase of treasury stock
    (4,021 )    
-
 
Proceeds from sale of treasury stock
   
2,404
     
2,625
 
Proceeds from issuance of common stock
   
797
     
5,927
 
Repayment of line of credit
    (12,023 )    
-
 
Payment of cash dividends
    (4,751 )     (4,828 )
Excess tax benefit from stock-based compensation
   
256
     
1,291
 
Cash (used for) provided by financing activities
    (17,338 )    
5,015
 
Effect of exchange rate changes on cash and cash equivalents
   
856
     
1,429
 
Net decrease in cash and cash equivalents
    (17,690 )     (7,752 )
Cash and cash equivalents at beginning of period
   
68,703
     
94,131
 
Cash and cash equivalents at end of period
  $
51,013
    $
86,379
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
PLANTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Unaudited)
 
1. BASIS OF PRESENTATION
 
In the opinion of management, the accompanying unaudited condensed consolidated financial statements (“financial statements”) of Plantronics, Inc. (“Plantronics” or the “Company”) and its wholly owned subsidiaries, have been prepared on a consistent basis with the March 31, 2007 audited consolidated financial statements and include all adjustments, consisting of normal recurring adjustments, necessary to fairly state the information set forth herein.  The financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission (“SEC”); and, therefore, omit certain information and footnote disclosures necessary to present the statements in accordance with accounting principles generally accepted in the United States of America.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007, which was filed with the SEC on May 29, 2007.  The results of operations for the interim period ended September 30, 2007 are not indicative of the results to be expected for the entire fiscal year or any future period.
 
The Company has two reportable segments, Audio Communications Group (“ACG”) and Audio Entertainment Group (“AEG”). All intercompany balances and transactions have been eliminated.   Management allocates resources to and assesses the performance of each operating segment using several metrics including information about segment revenues, gross profit, operating income (loss) before interest and other income, net and income tax expense, and certain product line information.

The Company’s fiscal year ends on the Saturday closest to the last day of March.  The Company’s current and prior fiscal years consist of 52 weeks and each fiscal quarter consists of 13 weeks.  The current fiscal year ends on March 29, 2008 and the prior fiscal year ended on March 31, 2007.    The Company’s interim periods for the second quarters of fiscal 2007 and 2008 ended on September 30, 2006 and September 29 2007, respectively.  For purposes of presentation, the Company has indicated its accounting year as ending on March 31 and its interim quarterly periods as ending on the applicable month end.
 
Certain financial statement reclassifications have been made to the prior period amounts to conform to the current year presentation. The Company reclassified certain expenses in the AEG segment within cost of revenues which had previously been classified as selling, general and administrative expenses, to conform to the ACG presentation.  As a result of this change, the Company’s previously reported amount for gross profit for the three and six months ended September 30, 2006 was reduced by $491,000 and $867,000, respectively.
 
2. RECENT ACCOUNTING PRONOUNCEMENTS
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 is effective for the Company beginning on April 1, 2008. The Company is currently evaluating the impact of adopting the provisions of SFAS No. 157 on its consolidated financial statements.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 also amends certain provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”). SFAS No. 159 is effective for the Company beginning on April 1, 2008. The Company is currently evaluating the impact of adopting SFAS No. 159 on its consolidated financial statements.

 
In June 2007, the FASB ratified the Emerging Issues Task Force (“EITF”) Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities”. EITF Issue No. 07-3 requires non-refundable advance payments for goods and services to be used in future research and development activities to be recorded as an asset and expensing the payments when the research and development activities are performed. EITF Issue No. 07-3 applies prospectively for new contractual arrangements entered into in fiscal years beginning after December 15, 2007. The adoption of EITF Issue No. 07-3 is not expected to have a significant impact on the Company's consolidated financial statements or financial position.
 
3. DETAILS OF CERTAIN BALANCE SHEET COMPONENTS
 
(in thousands)
 
March 31,
2007
   
September 30,
2007
 
 
 
 
 
Inventory, net:
 
 
   
 
 
Raw materials
  $
57,406
    $
42,635
 
Work in process
   
6,268
     
3,874
 
Finished goods
   
62,931
     
87,007
 
                 
 
  $
126,605
    $
133,516
 
 
               
Accrued liabilities:
               
Employee compensation and benefits
  $
20,574
    $
22,499
 
Warranty accrual
   
7,240
     
9,881
 
Accrued advertising and sales and marketing
   
5,104
     
6,544
 
Accrued other
   
21,107
     
24,567
 
                 
 
  $
54,025
    $
63,491
 

Changes in the warranty obligation, which are included as a component of accrued liabilities on the condensed consolidated balance sheets, are as follows (in thousands):
Warranty obligation at March 31, 2007
  $
7,240
 
Warranty provision relating to products shipped during the year
   
12,272
 
Deductions for warranty claims processed
    (9,631 )
Warranty obligation at September 30, 2007
  $
9,881
 
 
 
4. GOODWILL AND PURCHASED INTANGIBLE ASSETS
 
The following table presents changes in the carrying value of acquired intangible assets (in thousands):

   
March 31, 2007
   
September 30, 2007
   
   
Gross
Amount
   
Accumulated
Amortization
   
Net
Amount
   
Gross
Amount
   
Accumulated
Amortization
   
Net
Amount
 
Useful
Life
   
 
   
 
   
 
   
 
               
Technology
  $
30,960
    $ (9,431 )   $
21,529
    $
30,160
    $ (11,549 )   $
18,611
 
 6-10 years
In-process technology
   
996
      (996 )    
-
     
996
      (996 )    
-
 
 Immediate
State contracts
   
1,300
      (975 )    
325
     
1,300
      (1,068 )    
232
 
 7 years
Patents
   
1,420
      (876 )    
544
     
1,420
      (978 )    
442
 
 7 years
Customer relationships
   
18,133
      (4,108 )    
14,025
     
18,133
      (5,208 )    
12,925
 
 3-8 years
Trademarks
   
300
      (225 )    
75
     
300
      (246 )    
54
 
 7 years
Trade name - inMotion
   
5,000
      (1,016 )    
3,984
     
5,000
      (1,328 )    
3,672
 
 8 years
Trade name - Altec Lansing
   
59,100
     
-
     
59,100
     
59,100
     
-
     
59,100
 
 Indefinite
OEM relationships
   
700
      (162 )    
538
     
700
      (212 )    
488
 
 7 years
Non-compete agreements
   
200
      (200 )    
-
     
200
      (200 )    
-
 
 5 years
                                                   
Total
  $
118,109
    $ (17,989 )   $
100,120
    $
117,309
    $ (21,785 )   $
95,524
 
 
 
The aggregate amortization expense relating to purchased intangible assets for the three and six months ended September 30, 2006 was $2.1 million and $4.1 million, respectively and $2.0 million and $4.1 million for the three and six months ended September 30, 2007, respectively.  The estimated future amortization expense of purchased intangible assets as of  September 30, 2007 is as follows (in thousands):

Fiscal Year Ending March 31,
     
Remainder of 2008
  $
4,014
 
2009
   
7,872
 
2010
   
7,411
 
2011
   
7,368
 
2012
   
4,787
 
Thereafter
   
4,972
 
Total estimated amortization expense
  $
36,424
 
 
Goodwill as of March 31, 2007 and September 30, 2007 was $72.8 million.

During the three months ended September 30, 2007, the Company made a decision to terminate the Professional Audio product line in order to focus on its core product categories.  As a result of this triggering event, the Company reviewed the recoverability of the Professional Audio asset grouping including the related technology intangible asset.  Other than disposing of the remaining inventory, the Company expects no further cash flows from the Professional Audio product line.   The Company determined that the intangible asset had no remaining value and wrote off the remaining carrying value of $0.5 million.

The Company reviews goodwill and purchased intangible assets with indefinite lives for impairment annually during the fourth quarter of the fiscal year or more frequently if events or circumstances indicate that an impairment loss may have occurred.  In the fourth quarter of fiscal 2007, the Company completed the annual impairment test of goodwill and the Altec Lansing trade name, which indicated that there was no impairment. Except for the decision to discontinue the Professional Audio product line, there were also no other events or changes in circumstances during the six months ended September 30, 2007, which triggered an impairment review.  If AEG’s performance further deteriorates, an impairment review may be triggered for goodwill and purchased intangible assets with indefinite lives prior to the next annual review in the fourth quarter of fiscal 2008.  An impairment review may also be triggered for the remaining intangible assets.  It is not possible to determine whether, if an impairment review is required, an impairment charge would result or if such charge would be material. 

 
5. STOCK-BASED COMPENSATION
 
The following table summarizes the amount of stock-based compensation expense recorded under SFAS No. 123(R) included in the condensed consolidated statements of operations:

   
Three Months Ended
September 30,
   
Six Months Ended
September 30,
 
(in thousands)
 
2006
   
2007
   
2006
   
2007
 
   
 
         
 
       
Cost of revenues
  $
692
    $
612
    $
1,480
    $
1,253
 
                                 
Research, development and engineering
   
881
     
855
     
1,908
     
1,783
 
Selling, general and administrative
   
2,367
     
2,282
     
4,988
     
4,826
 
Stock-based compensation expense included in operating expenses
   
3,248
     
3,137
     
6,896
     
6,609
 
                                 
Total stock-based compensation
   
3,940
     
3,749
     
8,376
     
7,862
 
Income tax benefit
    (1,284 )     (1,313 )     (2,729 )     (2,622 )
Total stock-based compensation, net of tax
  $
2,656
    $
2,436
    $
5,647
    $
5,240
 

Stock Options

The following is a summary of the Company’s stock option activity during the six months ended September 30, 2007:

 
 
Options Outstanding
 
 
 
Number of
Shares
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual Life
   
Aggregate
Intrinsic
Value
 
 
 
(in thousands)
   
 
   
(in years)
   
(in thousands)
 
Outstanding at March 31, 2007
   
9,033
    $
26.17
             
Options granted
   
151
    $
25.22
             
Options exercised
    (347 )   $
17.07
             
Options forfeited or expired
    (490 )   $
34.80
             
Outstanding at September 30, 2007
   
8,347
    $
26.02
     
4.44
    $
42,391
 
Vested and expected to vest at September 30, 2007
   
8,021
    $
26.11
     
4.38
    $
40,591
 
Exercisable at September 30, 2007
   
6,061
    $
26.96
     
3.92
    $
29,398
 

The total intrinsic value of options exercised during the six months ended September 30, 2006 and 2007 was $0.7 million and $3.5 million, respectively.

Compensation expense recognized for stock options during the three and six months ended September 30, 2006 was $3.2 million and $6.9 million, respectively, and $3.0 million and $6.2 million for the three and six months ended September 30, 2007, respectively.  As of September 30, 2007, total unrecognized compensation cost related to unvested stock options was $19.3 million which is expected to be recognized over a weighted average period of 2.6 years.


Restricted Stock

The following is a summary of the Company’s restricted stock activity during the six months ended September 30, 2007:

   
Number of
Shares
   
Weighted
Average
Grant Date
Fair Value
 
 
 
(in thousands)
   
 
 
Non-vested at March 31, 2007
   
287
    $
27.09
 
Granted
   
25
    $
25.24
 
Vested
    (20 )   $
29.13
 
Forfeited
    (19 )   $
28.20
 
Non-vested at September 30, 2007
   
273
    $
26.69
 
 
Compensation expense recognized for restricted stock awards for the three and six months ended September 30, 2006 was $0.5 million and $1.0 million, respectively, and $0.5 million and $1.1 million for the three and six months ended September 30, 2007, respectively.  As of September 30, 2007, total unrecognized compensation cost related to non-vested restricted stock awards was $6.2 million, which is expected to be recognized over a weighted average period of 3.3 years.  The total fair value of restricted stock awards vested during the six months ended September 30, 2007 was $0.6 million.

Employee Stock Purchase Plan (“ESPP”)

Compensation expense recognized for the ESPP for the three and six months ended September 30, 2006 was $0.3 million and $0.5 million, respectively, and $0.2 million and $0.5 million for the three and six months ended September 30, 2007, respectively.  As of September 30, 2007, there was $0.4 million of unrecognized compensation cost related to the ESPP that is expected to be fully recognized during the next two fiscal quarters.

Valuation Assumptions

The Company estimates the fair value of stock options and ESPP shares using a Black-Scholes option valuation model.  The fair value of each option grant is estimated on the date of grant using the straight-line attribution approach with the following weighted average assumptions:

   
Three Months Ended
September 30,
   
Six Months Ended
September 30,
 
Employee Stock Options
 
2006
   
2007
   
2006
   
2007
 
Expected volatility
    43.4 %     38.3 %     41.9 %     37.1 %
Risk-free interest rate
    4.9 %     4.5 %     5.0 %     4.6 %
Expected dividends
    1.3 %     0.7 %     1.1 %     0.8 %
Expected life (in years)
   
4.2
     
4.4
     
4.2
     
4.4
 
Weighted-average grant date fair value
  $
6.87
    $
9.75
    $
8.27
    $
8.82
 
                                 
   
Three Months Ended
September 30,
   
Six Months Ended
September 30,
 
ESPP
 
2006
   
2007
   
2006
   
2007
 
Expected volatility
    52.8 %     32.1 %     52.8 %     32.1 %
Risk-free interest rate
    5.2 %     5.1 %     5.2 %     5.1 %
Expected dividends
    1.3 %     0.7 %     1.3 %     0.7 %
Expected life (in years)
   
0.5
     
0.5
     
0.5
     
0.5
 
Weighted-average grant date fair value
  $
4.60
    $
6.72
    $
4.60
    $
6.72
 
 

6. COMPREHENSIVE INCOME

The components of comprehensive income for the three and six months ended September 30, 2006 and 2007 are as follows (in thousands):

   
Three Months Ended
   
Six Months Ended
 
   
September 30,
   
September 30,
 
(in thousands)
 
2006
   
2007
   
2006
   
2007
 
Net income
  $
12,525
    $
16,522
    $
24,816
    $
31,497
 
Unrealized gain (loss) on cash flow hedges, net of tax
   
1,416
      (2,120 )     (2,244 )     (2,278 )
Foreign currency translation gain
   
68
     
590
     
1,316
     
988
 
Comprehensive income
  $
14,009
    $
14,992
    $
23,888
    $
30,207
 

 
7. FOREIGN CURRENCY TRANSACTIONS
 
Non-Designated Hedges
 
As of September 30, 2007, the Company had foreign currency forward contracts of €20.7 million and ₤5.8 million denominated in Euros and Great British Pounds, respectively.  These forward contracts hedge against a portion of the Company’s foreign currency denominated receivables, payables and cash balances.

The following table summarizes the Company’s outstanding foreign exchange currency contracts, and approximate U.S. dollar equivalent, at September 30, 2007 (local currency and dollar amounts in thousands):

 
 
Local
Currency
   
USD
Equivalent
   
Position
 
Maturity
EUR
   
20,700
    $
29,491
   
Sell Euro
 
1 month
GBP
   
5,800
    $
11,830
   
Sell GBP
 
1 month
 
Foreign currency transactions, net of the effect of hedging activity on forward contracts, resulted in a net gain of approximately zero and $0.8 million in the three and six months ended September 30, 2006, respectively, and $0.8 million and $1.2 million in the three and six months ended September 30, 2007, respectively.

Cash Flow Hedges
 
As of September 30, 2007, the Company had foreign currency put and call option contracts of €50.1 million and £17.5 million. As of March 31, 2007, the Company had foreign currency put and call option contracts of €57.0 million and £16.3 million.  Collectively, the Company’s option contracts are collars to hedge against a portion of its forecasted foreign denominated sales.
 
In the three and six months ended September 30, 2007, realized losses of $0.8 million and $1.1 million on cash flow hedges were recognized in net revenues in the condensed consolidated statements of operations compared to $0.3 million and $0.4 million in the same periods a year ago.  The Company expects to recognize the entire amount of $3.7 million of net losses accumulated in other comprehensive income in net revenues during the next 12 months if spot exchange rates remain reasonably consistent with current rates.

 
8. INCOME TAXES
 
The effective tax rate for the three and six months ended September 30, 2007 was 21.7% and 22.0% compared to 23.1% and 23.4% for the same periods a year ago. The effective tax rate is lower than the previous year due to a decline in U.S. income, primarily due to the losses of AEG. The effective tax rate differs from the statutory rate due to the impact of foreign operations taxed at different statutory rates, income tax credits, state taxes, and other factors. The future quarterly tax rate could be impacted by a shift in the mix of domestic and foreign income; tax treaties with foreign jurisdictions; changes in tax laws in the United States or internationally; or a change in estimates of future taxable income which results in a valuation allowance being required.
 
On April 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN 48”).  Under FIN 48, the impact of an uncertain income tax position on income tax expense must be recognized at the largest amount that is more-likely-than-not to be sustained. An uncertain income tax position will not be recognized unless it has a greater than 50% likelihood of being sustained.  There were no material adjustments as a result of the adoption of FIN 48. At the adoption date, the Company had $13.5 million of unrecognized tax benefits, $10.9 million of which would affect our income tax expense if recognized. The remaining balance of the unrecognized tax benefits of $2.6 million would be an adjustment to goodwill.  As of September 30, 2007, the Company had $15.3 million of unrecognized tax benefits. The Company expects resolution of some uncertain tax positions within the next 12 months.  Favorable resolution of these uncertainties would result in a significant benefit to income tax expense.
 
The Company's continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of September 30, 2007, the Company had approximately $1.4 million of accrued interest related to uncertain tax positions, including $0.2 million and $0.4 million recorded during the three and six months ended September 30, 2007, respectively.
 
We file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. We are no longer subject to U.S. federal and state income tax examinations by tax authorities for years prior to 2003. Foreign income tax matters for most foreign jurisdictions have been concluded for years through 2001.
 
9. COMPUTATION OF EARNINGS PER COMMON SHARE
 
Basic net income per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period, less common stock subject to repurchase.  Diluted net income per share is computed by dividing the net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period.  Potentially dilutive common shares include shares issuable upon the exercise of outstanding  stock options, the vesting of restricted stock awards and from withholdings associated with the Company’s employee stock purchase plan, which are reflected in diluted earnings per share by application of the treasury stock method.  Under the treasury stock method, the amount that the employee must pay for exercising stock options, the amount of stock-based compensation cost for future services that the Company has not yet recognized, and the amount of tax benefit that would be recorded in additional paid-in capital upon exercise are assumed to be used to repurchase shares.
 
 
The following table sets forth the computation of basic and diluted earnings per share:

   
Three Months Ended
September 30,
   
Six Months Ended
September 30,
 
(in thousands, except per share data)
 
2006
   
2007
   
2006
   
2007
 
   
 
   
 
   
 
   
 
 
Net income
  $
12,525
    $
16,522
    $
24,816
    $
31,497
 
                                 
Weighted average shares-basic
   
47,203
     
48,115
     
47,180
     
47,975
 
Dilutive effect of employee equity incentive plans
   
423
     
1,195
     
754
     
988
 
Weighted average shares-diluted
   
47,626
     
49,310
     
47,934
     
48,963
 
                                 
Earnings per share-basic
  $
0.27
    $
0.34
    $
0.53
    $
0.66
 
                                 
Earnings per share-diluted
  $
0.26
    $
0.34
    $
0.52
    $
0.64
 
                                 
Potentially dilutive securities excluded from earnings per diluted share because their effect is anti-dilutive
   
6,594
     
3,089
     
5,214
     
4,841
 
 
10. SEGMENT INFORMATION
 
In the second quarter of fiscal 2008, the Company transitioned the responsibility and management of the Altec-branded headsets from the AEG segment to the ACG segment, and as a result, effective July 1, 2007, the revenue and resulting gross profit from the Altec-branded headsets are now included in the ACG reporting segment within the Gaming and Computer Audio category.  Because AEG has not historically tracked costs and expenses by product line below material cost, prior period segment financial data has not been restated as it is impracticable to determine product line information down to the gross margin or operating income level for periods prior to the second quarter of fiscal 2008.  Because ACG does not track product line information below gross profit, it is impracticable to determine product line information down to the operating income level.  Net revenues and gross profit for ACG and AEG for the three and six months ended September 30, 2007 under the old basis of segment reporting would have been: 
 
   
Three Months Ended
   
Six Months Ended
 
(in thousands)
 
September 30, 2007
 
   
 
   
 
 
Net revenues
           
             
Audio Communications Group
  $
179,325
    $
364,897
 
Audio Entertainment Group
   
28,899
     
49,822
 
Consolidated net revenues
  $
208,224
    $
414,719
 
                 
Gross profit (loss)
               
                 
Audio Communications Group
  $
84,279
    $
170,055
 
Audio Entertainment Group
   
177
      (2,053 )
Consolidated gross profit
  $
84,456
    $
168,002
 
 
 
Audio Communications Group
 
ACG designs, manufactures, markets and sells headsets for business and consumer applications, and other specialty products for the hearing impaired.  With respect to headsets, it makes products for use in offices and contact centers, with mobile and cordless phones, and with computers and gaming consoles. The following table presents net revenues by product group within ACG:
 
   
Three Months Ended
   
Six Months Ended
 
   
September 30,
   
September 30,
 
(in thousands)
 
2006
   
2007
   
2006
   
2007
 
   
 
   
 
   
 
   
 
 
Net revenues from unaffiliated customers:
 
 
   
 
   
 
   
 
 
Office and Contact Center
  $
115,813
    $
131,357
    $
230,080
    $
263,562
 
Mobile
   
33,199
     
35,859
     
69,005
     
77,097
 
Gaming and Computer Audio
   
7,727
     
8,277
     
15,016
     
14,762
 
Other Specialty Products
   
6,295
     
5,554
     
12,669
     
11,198
 
Total segment net revenues
  $
163,034
    $
181,047
    $
326,770
    $
366,619
 
 
Audio Entertainment Group
 
AEG is engaged in the design, manufacture, sales and marketing of audio solutions and related technologies.  Major product categories include “Docking  Audio”, which is defined as all speakers, whether AC or battery-powered, that work with portable digital players such as iPod and other MP3 players and “PC Audio”, which is defined as speaker systems used for computers and other multi-media application systems.  “Other” includes  headphones and home audio systems.  Currently, all the revenues in AEG are derived from sales of Altec Lansing products.  The following table presents net revenues by product group within AEG:

   
Three Months Ended
September 30,
   
Six Months Ended
September 30,
 
(in thousands)
 
2006
   
2007
   
2006
   
2007
 
                         
Net revenues from unaffiliated customers:
                       
Docking Audio
  $
15,562
    $
13,615
    $
32,992
    $
23,906
 
PC Audio
   
13,866
     
12,627
     
25,718
     
21,075
 
Other
   
2,472
     
935
     
4,523
     
3,119
 
Total segment net revenues
  $
31,900
    $
27,177
    $
63,233
    $
48,100
 
 
 
Segment Financial Data
 
Financial data for each reportable segment for the three and six months ended September 30, 2006 and 2007 is as follows:
 
   
Three Months Ended
September 30,
   
Six Months Ended
September 30,
 
(in thousands)
 
2006
   
2007
   
2006
   
2007
 
   
 
   
 
   
 
   
 
 
Net revenues
                       
Audio Communications Group
  $
163,034
    $
181,047
    $
326,770
    $
366,619
 
Audio Entertainment Group
   
31,900
     
27,177
     
63,233
     
48,100
 
Consolidated net revenues
  $
194,934
    $
208,224
    $
390,003
    $
414,719
 
                                 
Gross profit (loss)
                               
Audio Communications Group
  $
71,506
    $
84,884
    $
141,579
    $
170,660
 
Audio Entertainment Group
   
5,389
      (428 )    
10,915
      (2,658 )
Consolidated gross profit
  $
76,895
    $
84,456
    $
152,494
    $
168,002
 
                                 
Operating income(loss)
                               
Audio Communications Group
  $
20,764
    $
29,670
    $
41,580
    $
58,656
 
Audio Entertainment Group
    (4,741 )     (10,363 )     (10,433 )     (21,402 )
Consolidated operating income
  $
16,023
    $
19,307
    $
31,147
    $
37,254
 
 
No customer accounted for 10% or more of total net revenue for the three and six months ended September 30, 2006 or 2007, nor did any one customer account for 10% or more of accounts receivable at March 31, 2007 or September 30, 2007.
 
15

 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

CERTAIN FORWARD-LOOKING INFORMATION:
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”).   Forward-looking statements may generally be identified by the use of such words as “expect,” “anticipate,” “believe,” “intend,” “plan,” “will,” or “shall” and similar expressions, or the negative of these terms.  Specific forward-looking statements contained within this Form 10-Q include, statements containing our expectations regarding (i) increasing penetration of our products into the office markets, (ii) upgrading our customers with compelling new products, (iii) growing our Bluetooth market share while improving profitability, and (iv) executing our turnaround plans for Altec Lansing, in addition to other statements regarding our future operations, financial condition and prospects and business strategies. These 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. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.  Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward looking statements.
 
OVERVIEW
 
We are a leading worldwide designer, manufacturer, marketer and seller of lightweight communications headsets, telephone headset systems, and accessories for the business and consumer markets under the Plantronics brand.  We are also a leading manufacturer and seller of high quality computer and home entertainment sound systems, docking audio products, and a line of headphones for personal digital media under our Altec Lansing brand.  In addition, we manufacture and sell, 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 over 70 countries through a worldwide network of distributors, retailers, wireless carriers, telephony service providers, and original equipment manufacturers (“OEMs”)..  We have well-developed distribution channels in North America, Europe, Australia and New Zealand, 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 are expanding into the office, mobile and entertainment, digital audio, and specialty telephone markets in additional international locations.
 
Our net revenue increased from $194.9 million in the second quarter of fiscal 2007 to $208.2 million in the second quarter of fiscal 2008 as a result of increased demand for wireless products, with net revenues from office wireless products up 28% and net revenues from mobile Bluetooth products up 17% from a year ago.  Our net income increased from $12.5 million in the second quarter of fiscal 2007 to $16.5 million in the second quarter of fiscal 2008.  In the second quarter of fiscal 2008, our results of operations were favorably affected by reduced product costs, improved manufacturing effectiveness, and continued growth of office wireless products.  Although we continued to experience losses in our Audio Entertainment Group (“AEG”) business, there was sequential growth in net revenues and reduced operating losses.  We are taking action to improve the profitability of this business by strengthening the management team, conducting extensive consumer research and developing significant new products to refresh the product line by the December quarter of next fiscal year.  The AEG new product development efforts largely met our internal milestones in the second quarter of fiscal 2008.   Failure to continue to meet our internal milestones could result in a delay of our turnaround plans and the potential impairment of AEG goodwill and intangible assets.
 
We have integrated our sales force and realigned account coverage to better serve our customers.  In the second quarter of fiscal 2008, we transitioned the responsibility and management of the Altec-branded headsets from the AEG segment to the Audio Communication Group (“ACG”) segment, and as a result, the Altec-branded headsets’ results of operations are now included in the ACG reporting segment.
 
 
For the remainder of fiscal 2008, our key initiatives, which are explained below, are designed to increase revenues and profits.
 
 
·
Increase penetration in the office markets. Growing the office markets, through the introduction of compelling, easy to use, wireless products and demand generation campaigns will continue to be our top priority.  Home office workers are a growing category, and in ACG, we began shipping the Calisto Pro hands-free home phone system which includes a multi-function Bluetooth headset.
 
 
·
Upgrade existing customers with compelling new products.  While increasing penetration in the office market is our top priority, a closely related priority is to convert corded headset users to wireless headsets, as well as to upgrade existing wireless headset users to our new CS70N which we began shipping in fiscal 2008.  The CS70N features premium audio performance, sleek and comfortable styling, and a noise-cancelling microphone.
 
 
·
Grow our Bluetooth market share while improving profitability.  We believe a significant opportunity to increase our Bluetooth market share is being created by the convergence of music and communications in the cell phone industry.  Our Bluetooth product portfolio is competitive and we believe our existing and next generation products are innovative and being well received.  In the second quarter of fiscal 2008, we began shipping the previously announced Voyager 520, 815, and 855 headsets.  The Voyager 520 is a follow-on to the successful Voyager 510, the Voyager 815 is designed to seal out noise and includes our proprietary AudioIQ technology to improve call quality on both sides of the call, and the Voyager 855 easily converts from a mono headset to stereo listening with a detachable cable.  In addition, we are focused on reducing the cost of our Bluetooth products.  We will continue to implement our supply chain optimization and re-engineering initiatives that are designed to increase inventory turns, improve forecast accuracy and reduce excess and obsolete inventory.  We have plans to increase the utilization of our China plant, improve direct labor productivity and reduce logistics costs. We will continue to increase the use of common design platforms from which we can produce multiple generations of products.
 
 
·
Focus on the turnaround plan for Altec Lansing.  Development of a competitive portfolio of next generation products with lower manufacturing costs and higher margins are the key priority over the next 15 months.  We also plan to take advantage of the industrial design capabilities that exist within the ACG segment to make these next generation products more appealing to buyers.  We are working to control costs in AEG and exploring ways to make this business more efficient.
 
 
RESULTS OF OPERATIONS
 
The following tables set forth, for the period indicated, the condensed consolidated statements of operations data and data by segment.  The financial information and the ensuing discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto.
 
Consolidated

(in thousands)
 
Three Months Ended September 30,
   
Six Months Ended September 30,
 
   
2006
   
2007
   
2006
   
2007
 
                                                 
Net revenues
  $
194,934
      100.0 %   $
208,224
      100.0 %   $
390,003
      100.0 %   $
414,719
      100.0 %
Cost of revenues
   
118,039
      60.6 %    
123,768
      59.4 %    
237,509
      60.9 %    
246,717
      59.5 %
Gross profit
   
76,895
      39.4 %    
84,456
      40.6 %    
152,494
      39.1 %    
168,002
      40.5 %
                                                                 
Operating expense:
                                                               
Research, development and engineering
   
16,938
      8.7 %    
19,208
      9.2 %    
35,597
      9.1 %    
38,696
      9.3 %
Selling, general and administrative
   
43,934
      22.5 %    
45,941
      22.1 %    
88,387
      22.7 %    
92,052
      22.2 %
Gain on sale of land
   
-
      0.0 %    
-
      0.0 %     (2,637 )     (0.7 )%    
-
      0.0 %
Total operating expenses
   
60,872
      31.2 %    
65,149
      31.3 %    
121,347
      31.1 %    
130,748
      31.5 %
Operating income
   
16,023
      8.2 %    
19,307
      9.3 %    
31,147
      8.0 %    
37,254
      9.0 %
Interest and other income (expense), net
   
267
      0.1 %    
1,793
      0.8 %    
1,252
      0.3 %    
3,127
      0.7 %
Income before income taxes
   
16,290
      8.3 %    
21,100
      10.1 %    
32,399
      8.3 %    
40,381
      9.7 %
Income tax expense
   
3,765
      1.9 %    
4,578
      2.2 %    
7,583
      1.9 %    
8,884
      2.1 %
Net income
  $
12,525
      6.4 %   $
16,522
      7.9 %   $
24,816
      6.4 %   $
31,497
      7.6 %
 
Audio Communications Group

(in thousands)
 
Three Months Ended September 30,
   
Six Months Ended September 30,
 
   
2006
   
2007
   
2006
   
2007
 
                                                 
Net revenues
  $
163,034
      100.0 %   $
181,047
      100.0 %   $
326,770
      100.0 %   $
366,619
      100.0 %
Cost of revenues
   
91,528
      56.1 %    
96,163
      53.1 %    
185,191
      56.7 %    
195,959
      53.4 %
Gross profit
   
71,506
      43.9 %    
84,884
      46.9 %    
141,579
      43.3 %    
170,660
      46.6 %
                                                                 
Operating expense:
                                                               
Research, development and engineering
   
14,543
      8.9 %    
16,194
      8.9 %    
30,560
      9.4 %    
32,978
      9.0 %
Selling, general and administrative
   
36,199
      22.3 %    
39,020
      21.6 %    
72,076
      22.0 %    
79,026
      21.6 %
Gain on sale of land
   
-
      0.0 %    
-
      0.0 %     (2,637 )     (0.8 )%    
-
      0.0 %
Total operating expenses
   
50,742
      31.2 %    
55,214
      30.5 %    
99,999
      30.6 %    
112,004
      30.6 %
Operating income
  $
20,764
      12.7 %   $
29,670
      16.4 %   $
41,580
      12.7 %   $
58,656
      16.0 %
 
 
Audio Entertainment Group

(in thousands)
 
Three Months Ended September 30,
   
Six Months Ended September 30,
 
   
2006
   
2007
   
2006
   
2007
 
                                                 
Net revenues
  $
31,900
      100.0 %   $
27,177
      100.0 %   $
63,233
      100.0 %   $
48,100
      100.0 %
Cost of revenues
   
26,511
      83.1 %    
27,605
      101.6 %    
52,318
      82.7 %    
50,758
      105.5 %
Gross profit (loss)
   
5,389
      16.9 %     (428 )     (1.6 )%    
10,915
      17.3 %     (2,658 )     (5.5 )%
                                                                 
Operating expense:
                                                               
Research, development and engineering
   
2,395
      7.5 %    
3,014
      11.1 %    
5,037
      8.0 %    
5,718
      11.9 %
Selling, general and administrative
   
7,735
      24.3 %    
6,921
      25.4 %    
16,311
      25.8 %    
13,026
      27.1 %
Total operating expenses
   
10,130
      31.8 %    
9,935
      36.5 %    
21,348
      33.8 %    
18,744
      39.0 %
Operating loss
  $ (4,741 )     (14.9 )%   $ (10,363 )     (38.1 )%   $ (10,433 )     (16.5 )%   $ (21,402 )     (44.5 )%
 
NET REVENUES
 
Audio Communications Group
 
   
Three Months Ended
September 30,
   
Increase
   
Six Months Ended
September 30,
   
Increase
 
(in thousands)
 
2006
   
2007
   
(Decrease)
   
2006
   
2007
   
(Decrease)
 
   
 
   
 
               
 
   
 
             
Net revenues from unaffiliated customers:
 
 
   
 
               
 
   
 
             
Office and Contact Center
  $
115,813
    $
131,357
    $
15,544
      13.4 %   $
230,080
    $
263,562
    $
33,482
      14.6 %
Mobile
   
33,199
     
35,859
     
2,660
      8.0 %    
69,005
     
77,097
     
8,092
      11.7 %
Gaming and Computer Audio
   
7,727
     
8,277
     
550
      7.1 %    
15,016
     
14,762
      (254 )     (1.7 )%
Other Specialty Products
   
6,295
     
5,554
      (741 )     (11.8 )%    
12,669
     
11,198
      (1,471 )     (11.6 )%
Total segment net revenues
  $
163,034
    $
181,047
    $
18,013
      11.0 %   $
326,770
    $
366,619
    $
39,849
      12.2 %
&