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Section 1: 10-Q (10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to _________

Commission File Number: 001-12696

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 No.)

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

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

Securities registered pursuant to Section 12(b) of the Act
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
PLT
New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

As of July 23, 2020, 40,743,644 shares of the registrant's common stock were outstanding.

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Plantronics, Inc.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Plantronics®, Poly®, Simply Smarter Communications® , and the propeller design are trademarks or registered trademarks of Plantronics, Inc. All other trademarks are the property of their respective owners.

DECT™ is a trademark of ETSI registered for the benefit of its members in France and other jurisdictions.
The Bluetooth name and the Bluetooth® trademarks are owned by Bluetooth SIG, Inc. and are used by Plantronics, Inc. under license. All other trademarks are the property of their respective owners.

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Table of Contents

Part I -- FINANCIAL INFORMATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

CERTAIN FORWARD-LOOKING INFORMATION:

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These statements may generally be identified by the use of such words as "expect," "anticipate," "believe," "estimate," "intend," "predict," "project," or "will," or variations of such words and similar expressions are based on current expectations and entail various risks and uncertainties.  Specific forward-looking statements and the associated risks and uncertainties contained within this Form 10-Q include, but are not limited to: (i) our beliefs with respect to the length and severity of the COVID-19 (coronavirus) outbreak, and its impact across our businesses, our operations and global supply chain, including (a) our inability to source component parts from key suppliers in sufficient quantities necessary to meet the high demand for certain product lines, including our Enterprise Headsets, which negatively impacted our sales during the quarter; and continued uncertainty and potential impact on future quarters if these sourcing constraints continue and/or price volatility occurs, which could continue to negatively affect our profitability and/or market share, (b) our expectations that the virus has caused and will continue to cause, an increase in customer and partner demand, including increased demand in collaboration endpoints due to a global, work from home workforce, (c) expectations related to our voice product lines, as well as our services attachment rate for such products, which have been, and may continue to be, negatively impacted as companies have delayed returning their workforces to offices in many countries due to uncertainties related to the continued impact of COVID-19; (d) expectations related to our ability to fulfill the backlog generated by supply constraints during the quarter, to timely supply the number of products to fulfill current and future customer demand, including expectations that our manufacturing facility in Tijuana, Mexico will continue production at the capacity necessary to meet such demand, (e) the impact of the virus on our distribution partners, resellers, end-user customers and our production facilities, including our ability to obtain alternative sources of supply if our production facility or other suppliers are impacted by future shut downs, (f) the impact if global or regional economic conditions deteriorate further, on our customers and/or partners, including increased demand for pricing accommodations, delayed payments, delayed deployment plans, insolvency or other issues which may increase credit losses, and (g) risks related to restrictions or delays in global return to worksites as a result of COVID-19, which continues to impact our employees worldwide and our customers, which has negatively impacted our voice product lines for the quarter, and restricted customer engagement; and (h) the complexity of the forecast analysis and the design and operation of internal controls; and (ii) our belief that we can manufacture or supply products in a timely manner to satisfy perishable demand; (iii) expectations related to our customers’ purchasing decisions and our ability to match product production to demand, particularly given long lead times and the difficulty of forecasting unit volumes and acquiring the component parts and materials to meet demand without having excess inventory or incurring cancellation charges; (iv) risks associated with significant and abrupt changes in product demand which increases the complexity of management’s evaluation of potential excess or obsolete inventory; (v) risks associated with the bankruptcy or financial weakness of distributors or key customers, or the bankruptcy of or reduction in capacity of our key suppliers; (vi) risks associated with the potential interruption in the supply of sole-sourced critical components, our ability to move to a dual-source model, and the continuity of component supply at costs consistent with our plans, which has negatively impacted in the quarter and may continue to impact our ability to timely supply product to meet our customer demand; (vii) expectations related to our services segment revenues, particularly as we introduce new generation, less complex, product solutions, or as companies shift from on premises to work from home options for their workforce, which may result in decreased demand for our professional, installation and/or managed service offerings; (viii) expectations that our current cash on hand, additional cash generated from operations, together with sources of cash through our credit facility, either alone or in combination with our election to suspend our dividend payments, will meet our liquidity needs during and following the unknown duration and impact of the COVID-19 pandemic; (ix) expectations relating to our ability to generate sufficient cash flow from operations to meet our debt covenants and timely repay all principal and interest amounts drawn under our credit facility as they become due; (x) risks associated with our channel partners’ sales reporting, product inventories and product sell through since we sell a significant amount of products to channel partners who maintain their own inventory of our products; (xi) our efforts to execute to drive sales and sustainable profitable revenue growth; (xii) our expectations for new products launches, the timing of their releases and their expected impact on future growth and on our existing products; (xiii) our belief that our new Partner Program will drive growth and profitability for both us and our partners through the sale of our product, services and solutions; (xiv) risks associated with forecasting sales and procurement demands, which are inherently difficult, particularly with continuing uncertainty in regional and global economic conditions; (xv) uncertainties attributable to currency fluctuations, including fluctuations in foreign exchange rates and/or new or greater tariffs on our products; (xvi) our expectations regarding our ability to control costs, streamline operations and successfully implement our various cost-reduction activities and realize anticipated cost savings under such cost-reduction initiatives; (xvii) expectations relating to our quarterly and annual earnings guidance, particularly as economic uncertainty, including, without limitation, uncertainty related to the continued impact of COVID-19, the macro-economic and political climate and other external factors, puts further pressure on management judgments used to develop forward looking financial guidance and other prospective financial information; (xviii) expectations related to GAAP and non-GAAP financial results for the first

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quarter and full Fiscal Year 2021, including net revenues, adjusted EBITDA, tax rates, intangibles amortization, diluted weighted average shares outstanding and diluted EPS; (xix) our expectations of the impact of the acquisition of Polycom as it relates to our strategic vision and additional market and strategic partnership opportunities for our combined hardware, software and services offerings; (xx) our beliefs regarding the UC&C market, market dynamics and opportunities, and customer and partner behavior as well as our position in the market, including risks associated with the potential failure of our UC&C solutions to be adopted with the breadth and speed we anticipate; (xxi) our belief that the increased adoption of certain technologies and our open architecture approach has and will continue to increase demand for our solutions; (xxii) expectations related to the micro and macro-economic conditions in our domestic and international markets and their impact on our future business; (xxiii) our forecast and estimates with respect to tax matters, including expectations with respect to utilizing our deferred tax assets; (xxiv) our expectations related to building strategic alliances and key partnerships with providers of collaboration tools and platforms to drive revenue growth and market share; and (xxv) our expectations regarding pending and potential future litigation, in addition to other matters discussed in this Quarterly Report on Form 10-Q that are not purely historical data. Such forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. Factors that could cause actual results and events to differ materially from such forward-looking statements are included, but not limited to, those discussed in this Quarterly Report on Form 10-Q; in Part I, "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended March 28, 2020, filed with the Securities and Exchange Commission ("SEC") on June 8, 2020; and other documents we have filed with the SEC. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
  




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OVERVIEW

Plantronics, Inc. (“Poly,” “Company,” “we,” “our,” or “us”) is a leading global communications company that designs, manufactures, and markets integrated communications and collaboration solutions. Poly combines legendary audio expertise and powerful video and conferencing capabilities to overcome the distractions, complexity and distance that make communication in and out of the workplace challenging. Our major product categories are Headsets, which includes wired and wireless communication headsets; Voice, Video, and Content Sharing Solutions, which includes open Session Initiation Protocol (“SIP”) and native ecosystem desktop phones, conference room phones, and video conferencing solutions and peripherals, including cameras, speakers, and microphones. All of our solutions are designed to integrate seamlessly with the platform and services of our customers choice in a wide range of Unified Communications & Collaboration ("UC&C"), Unified Communication as a Service ("UCaaS"), and Video as a Service ("VaaS") environments. Our cloud management and analytics software enables IT administrators to configure and update firmware, monitor device usage, troubleshoot, and gain a deep understanding of user behavior. In addition, we have a broad portfolio of Services including video interoperability, support for our solutions and hardware devices, as well as professional, hosted, and managed services that are grounded in our deep expertise aimed at helping customers achieve their goals for collaboration.

COVID-19 Update

The novel strain of COVID-19 (“COVID-19”) has continued to spread globally, including within the United States, and has caused government authorities and businesses to implement numerous measures to try to contain the virus, such as quarantines, shelter in place orders, and shutdowns. The COVID-19 pandemic has continued to challenge the stability of global economic activity as well as the global supply chain and financial markets.

We experienced high demand for certain Enterprise Headsets and video cameras to support work from home mandates. In addition, as companies shifted from on premises to work from home options for their workforce, we saw a decline in demand for our Voice and platform and telepresence Video product lines. Also, as a result of COVID-19, we encountered disruptions in our supply chain, specifically sourcing components and raw materials to meet our high customer demand for specific Headsets.

Employee safety is a critical concern to the Company and measures taken to protect them in each of our locations globally include adherence to public safety and shelter in place directives, physical distancing protocols within offices and manufacturing facilities, routine sanitation of facilities, and health monitoring before entry into Company facilities. Even so, our operations were directly impacted by a shutdown of our Tijuana manufacturing facility for approximately two weeks. During that time, we worked with local health authorities’ recommendations to implement enhanced safety measures in that facility. The changes to our operations meet or exceed current regulations, however we continue to monitor employees’ safety and evolving requirements. Additional alterations may be required, adding complexity to predict with certainty the impact of the pandemic on our operations.

The full extent and duration of the impact of the COVID-19 pandemic on our business continues to be uncertain and difficult to predict and will depend on factors outside our control, including the extent and duration of the pandemic, the development and availability of effective treatments and vaccines, mandates of protective public safety measures, and the impact of the pandemic on the global economy, global supply chains, and demand for the our products. However, at the current time we believes that our existing balances of cash, cash equivalents and short-term investments, along with other liquidity sources will be sufficient to satisfy its working capital needs, capital asset purchases, debt repayments and other liquidity requirements associated with our existing operations.


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Quarterly Highlights

Total Net Revenues (in millions)                
404780201_chart-71160e769bba5345b49.jpg

Compared to the first quarter of Fiscal Year 2020, total net revenues decreased 20.6% to $355.7 million; the decrease was primarily driven by a decline in Voice and Headset product revenues. Refer to further discussion on total net revenues in the Results of Operations below.

As a result of the purchase accounting related to the Polycom Acquisition ("Acquisition"), a total of $5.1 million of deferred revenue that otherwise would have been recognized in the first quarter of Fiscal Year 2021 was excluded from first quarter revenue of $355.7 million; the amount of deferred revenue excluded from the first quarter of Fiscal Year 2020 was $12.2 million.



Operating Income (Loss) (in millions)
404780201_chart-a69c670817d8bb28787.jpg


We reported an operating loss of $57.2 million for the first quarter of Fiscal Year 2021 and an operating loss of $28.8 million for the first quarter of Fiscal Year 2020. The decline in our results from operations primarily is due to lower gross margins due to lower production levels, restructuring and other related charges, and legal settlements partially offset by lower operating expenses. Refer to further discussion in the Results of Operations below.


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RESULTS OF OPERATIONS

We group our operations into two reportable segments: Products and Services. Our Products segment consists of Headsets, Voice, and Video product categories and our Services segment consists of support, professional, managed, and cloud services and solutions.

The following graphs display net revenues by segment for the three months ended June 27, 2020 and June 29, 2019:

Net Revenues (in millions)                 
404780201_chart-20b67681dc485e20ba8.jpg
Revenue by Segment (percent)

404780201_chart-87979ffa2c0f5d3cbbb.jpg404780201_chart-9f127ac73f2b5f97919.jpg
Products

Net revenues decreased in the three months ended June 27, 2020 compared to the prior year period, primarily due to the Voice and Headsets product category. Declines in Voice product revenues are a result of COVID-19 shift in demand toward "work from home" products. Declines in Headset product revenues were driven by our decision to eliminate lower margin consumer products from our portfolio, including the Fiscal Year 2020 sale of gaming headset assets, and focus on higher margin consumer products. In addition, we experienced a decline in our contact center headsets due to: (1) an overall decline in the global contact center market as product demand shifts more to UC&C products, (2) product transitions, and (3) sales integration and channel consolidation issues. These decreases were partially offset by growth in our Video product category as new products ramp.


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Services

Net revenues decreased slightly in the three months ended June 27, 2020 in our Support Services category due to the Video product mix shift from legacy Platform and Telepresence to recently launched Studio products which are lower complexity products with optional service contracts. The decrease was mostly offset by the impact of the deferred revenue fair value adjustment resulting from the Polycom Acquisition.

Geographic Information (in millions)                Revenue by Region (percent)
404780201_chart-ae6f0b2786f9515dbb9.jpg404780201_chart-a80d811549015f3c9df.jpg404780201_chart-98842e1963db5f4fba6.jpg



Compared to the same prior year period, U.S. net revenues for the three months ended June 27, 2020 decreased primarily due to supply shortages for UC&C Headsets and declines in our Voice and Consumer headset product revenues. Declines in Voice product revenues are a result of COVID-19 shift in demand toward "work from home" products. Our Consumer Headset product revenues declined driven by our decision to eliminate lower margin consumer products from our portfolio, including the Fiscal Year 2020 sale of gaming headset assets, and focus on higher margin consumer products.

Similarly, international net revenues for the three months ended June 27, 2020 decreased from the same prior year period primarily due to declines in Headset product revenues (both Enterprise and Consumer Headsets), and Voice product revenues. These declines were partially offset by an increase in our Video product revenues.

During the three months ended June 27, 2020, changes in foreign exchange rates unfavorably impacted net revenues by $2.5 million, net of the effects of hedging, compared to a $3.9 million unfavorable impact on revenue in the prior year period.



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COST OF REVENUES AND GROSS PROFIT

Cost of revenues consists primarily of direct and contract manufacturing costs, amortization of acquired technology, freight, warranty, charges for excess and obsolete inventory, depreciation, duties, royalties, and overhead expenses. 
 
 
Three Months Ended
 
 
 
 
 
(in thousands, except percentages)
 
June 27, 2020
 
June 29, 2019
 
Change
 
Products:
 
 
 
 
 
 
 
 
 
Net revenues
 
$
291,458

 
$
382,745

 
$
(91,287
)
 
(23.9
)%
 
Cost of revenues
 
176,615

 
208,616

 
(32,001
)
 
(15.3
)%
 
Gross profit
 
$
114,843

 
$
174,129

 
$
(59,286
)
 
(34.0
)%
 
Gross profit %
 
39.4
%
 
45.5
%
 

 
 
 
Services:
 
 
 
 
 
 
 
 
 
Net revenues
 
$
64,262

 
$
65,022

 
$
(760
)
 
(1.2
)%
 
Cost of revenues
 
22,773

 
26,505

 
(3,732
)
 
(14.1
)%
 
Gross profit
 
$
41,489

 
$
38,517

 
$
2,972

 
7.7
 %
 
Gross profit %
 
64.6
%
 
59.2
%
 
 
 
 
 
Total:
 
 
 
 
 
 
 
 
 
Net revenues
 
$
355,720

 
$
447,767

 
$
(92,047
)
 
(20.6
)%
 
Cost of revenues
 
199,388

 
235,121

 
(35,733
)
 
(15.2
)%
 
Gross profit
 
$
156,332

 
$
212,646

 
$
(56,314
)
 
(26.5
)%
 
Gross profit %
 
43.9
%
 
47.5
%
 
 
 
 
 

Products

Compared to the prior year period, gross profit as a percentage of net revenues decreased in the three months ended June 27, 2020, primarily due to COVID-19 related incremental manufacturing costs, fixed cost items spread over lower net revenues, and inventory-related reserves taken during the current quarter. Partially offsetting these unfavorable items was a decrease in intangible asset amortization expense resulting from long-lived asset impairment of existing technology related to our Voice products in the fourth quarter of Fiscal Year 2020 and favorable product mix.

Given the significant variances in gross profit percentages between our higher and lower margin products, gross profit percentages may be impacted by variations in product mix and other factors, including production levels, distribution channels, and return rates.

Services

Compared to the prior year period, the gross profit as a percentage of net revenues increased primarily due to the decrease in the Polycom acquisition-related deferred revenue fair value adjustment and a lower fixed cost base.




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OPERATING EXPENSES

Operating expenses for the three months ended June 27, 2020 and June 29, 2019 were as follows:
 
 
Three Months Ended
 
 
 
(in thousands, except percentages)
 
June 27, 2020
 
June 29, 2019
 
Change
 
Research, development, and engineering
 
$
50,029

 
$
59,524

 
$
(9,495
)
 
(16.0
)%
 
Selling, general and administrative
 
116,644

 
163,608

 
(46,964
)
 
(28.7
)%
 
(Gain) loss, net from litigation settlements
 
17,561

 
(1,162
)
 
18,723

 
1,611.3
 %
 
Restructuring and other related charges
 
29,330

 
19,525

 
9,805

 
50.2
 %
 
Total Operating Expenses
 
$
213,564

 
$
241,495

 
$
(27,931
)
 
(11.6
)%
 
% of net revenues
 
60.0
%
 
53.9
%
 

 
 
 

Research, development, and engineering expenses decreased during the three months ended June 27, 2020 when compared to the prior year period primarily due to lower compensation expense driven by reduction in headcount, decreased expenses due to COVID-19 restrictions, and cost control efforts.

Selling, general and administrative expenses decreased during the three months ended June 27, 2020 when compared to the prior year period primarily due to integration related expenses that did not occur in the current period, lower compensation expense, driven by reduced headcount and lower sales commissions, decreased expenses due to COVID-19 restrictions, and cost control efforts.

During the three months ended June 27, 2020 we recorded litigation charges for settlements that occurred during the quarter. See Note 7, Commitments and Contingencies, of the accompanying notes to condensed consolidated financial statements for further information regarding on-going litigation.

Compared to the prior year period, restructuring and other related charges increased in the three months ended June 27, 2020, primarily due to restructuring actions initiated during the period to reduce expenses and optimize our cost structure and align with projected revenue levels. These actions consisted of headcount reductions and office closures. For more information regarding restructuring activities, see Note 9, Restructuring and Other Related Charges, of the accompanying notes to condensed consolidated financial statements.

INTEREST EXPENSE

Interest expense for the three months ended June 27, 2020 and June 29, 2019 was as follows:
 
 
Three Months Ended
 
 
 
(in thousands, except percentages)
 
June 27, 2020
 
June 29, 2019
 
Change
 
Interest expense
 
$
(21,184
)
 
$
(23,932
)
 
$
2,748

 
11.5
%
 
% of net revenues
 
(6.0
)%
 
(5.3
)%
 
 
 
 
 

Interest expense decreased for the three months ended June 27, 2020 primarily due to lower outstanding balance on the term loan facility and lower interest rates. See Note 8, Debt, of the accompanying notes to condensed consolidated financial statements.


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OTHER NON-OPERATING INCOME, NET

Other non-operating income, net for the three months ended June 27, 2020 and June 29, 2019 was as follows:
 
 
Three Months Ended
 
 
 
(in thousands, except percentages)
 
June 27, 2020
 
June 29, 2019
 
Change
 
Other non-operating income, net
 
$
224

 
$
333

 
$
(109
)
 
(32.7
)%
 
% of net revenues
 
0.1
%
 
0.1
%
 
 
 
 
 

Other non-operating income, net for the three months ended June 27, 2020 decreased primarily due to immaterial net foreign currency losses partially offset by immaterial unrealized gains on the deferred compensation portfolio during the current period compared to immaterial net foreign currency gains in the prior period.


INCOME TAX BENEFIT
 
 
Three Months Ended
 
 
 
 
 
(in thousands except percentages)
 
June 27, 2020
 
June 29, 2019
 
Change
 
Loss before income taxes
 
$
(78,192
)
 
$
(52,448
)
 
$
(25,744
)
 
(49.1
)%
 
Income tax benefit
 
(3,177
)
 
(7,577
)
 
4,400

 
58.1
 %
 
Net loss
 
$
(75,015
)
 
$
(44,871
)
 
$
(30,144
)
 
(67.2
)%
 
Effective tax rate
 
4.1
%
 
14.4
%
 


 

 

The Company and its subsidiaries are subject to taxation in the U.S. and in various foreign and state jurisdictions. Our income tax expense or benefit is determined using an estimate of our annual effective tax rate and adjusted for discrete items that are taken into account in the relevant period. The effective tax rates for the three months ended June 27, 2020 and June 29, 2019 were 4.1% and 14.4%, respectively.

The change in our effective tax rate for the three months ended June 27, 2020 relative to prior year primarily is due to increase in pre-tax losses and benefit from internal intangible property restructuring between our wholly-owned subsidiaries to align the IP structure to our evolving operations resulting in a deferred tax benefit due to the difference in book and tax basis.
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the two-year period ended March 28, 2020 and Fiscal Year 2021 forecasted results in the U.S. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. On the basis of this evaluation, as of June 27, 2020, a valuation allowance against U.S. federal and state deferred tax assets continues to be maintained for the three months ended June 27, 2020.

As of June 27, 2020, we had approximately $89.5 million in non-US net deferred tax assets ("DTAs") after valuation allowance. A significant portion of our DTAs relate to internal intangible property restructuring between wholly-owned subsidiaries. At this time, based on evidence currently available, we consider it more likely than not that we will have sufficient taxable income in the future that will allow us to realize our DTAs; however, failure to generate sufficient future taxable income could result in some or all DTAs not being utilized in the future. If we are unable to generate sufficient future taxable income, a substantial valuation allowance to reduce our DTAs may be required.


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FINANCIAL CONDITION

Liquidity and Capital Resources

The following tables present selected financial information and statistics as of June 27, 2020 and March 28, 2020 and for the first three months of Fiscal Years 2021 and 2020 (in thousands):

 
 
June 27, 2020
 
March 28, 2020
Cash, cash equivalents, and short-term investments
 
$
262,932

 
$
225,720

Property, plant and equipment, net
 
$
159,539

 
$
165,858

Long-term debt, net of issuance costs
 
$
1,623,034

 
$
1,621,694

Working capital
 
$
183,487

 
$
209,203


 
 
Three months ended
 
 
June 27, 2020
 
June 29, 2019
Cash provided by operating activities
 
$
41,722

 
$
8,349

Cash used for investing activities
 
$
(3,645
)
 
$
(4,988
)
Cash used for financing activities
 
$
(2,734
)
 
$
(13,972
)

Our cash and cash equivalents as of June 27, 2020 consisted of 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 June 27, 2020, of our $262.9 million of cash, cash equivalents, and short-term investments, $141.8 million was held domestically while $121.1 million was held by foreign subsidiaries, and approximately 80% was based in USD-denominated instruments. Our remaining investments were composed of Mutual Funds.

During the three months ended June 27, 2020, cash generated by operating activities of $41.7 million was a result of $75.0 million of net loss, non-cash adjustments to net loss of $67.4 million and an increase in the net change in operating assets and liabilities of $49.3 million. Cash used in investing activities of $3.7 million during the three months ended June 27, 2020 consisted primarily of cash used to acquire property, plant and equipment of $5.4 million partially offset by proceeds from the sale of assets held for sale of $1.9 million. Cash used in financing activities of $2.7 million during the three months ended June 27, 2020 consisted primarily of taxes paid on behalf of employees related to net share settlements of vested employee equity awards.

During the three months ended June 29, 2019, cash generated by operating activities of $8.3 million was a result of $44.9 million of net loss, non-cash adjustments to net loss of $49.2 million and an increase in the net change in operating assets and liabilities of $4.1 million. Cash used in investing activities of $5.0 million during the three months ended June 29, 2019 consisted primarily of cash used to acquire property, plant and equipment of $4.5 million. Cash used in financing activities of $14.0 million during the three months ended June 29, 2019 consisted primarily of taxes paid on behalf of employees related to net share settlements of vested employee equity awards and payment of the quarterly dividend on our common stock.

Debt

In July 2018, in connection with the Acquisition, we entered into a Credit Agreement (the "Credit Agreement") with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto and borrowed the full amount available under the term loan facility of $1.245 billion, net of approximately $30 million of discounts and issuance costs. As of June 27, 2020, we had $1.127 billion of the term loan outstanding.

On February 20, 2020, the Company entered into an Amendment No. 2 to the Credit Agreement (the “Amendment”) in order to relax certain financial covenants on the revolving line of credit. The financial covenants under the Credit Agreement are for the benefit of the revolving credit lenders only and do not apply to any other debt of the Company. As of June 27, 2020, the Company has five outstanding letters of credit on the revolving credit facility for a total of $1.0 million and had $99 million available under the revolving line of credit. As of June 27, 2020, the Company was in compliance with the financial covenants.


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On July 30, 2018, we entered into a 4-year amortizing interest rate swap agreement with Bank of America, NA. The swap has an initial notional amount of $831 million and matures on July 31, 2022. During the three months ended June 27, 2020, the Company reclassified into interest expense $3.7 million and had a $19.1 million unrealized loss on its interest rate swap derivative designated as a cash flow hedge.

During Fiscal Year 2016, we obtained $488.4 million from debt financing, net of issuance costs. The debt matures on May 31, 2023 and bears interest at an annual rate of 5.50%. As of June 27, 2020, we had $495.8 million of debt outstanding.

We may at any time and from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

Further information regarding the Company’s debt issuances and related hedging activity can be found in Note 8, Debt and Note 13, Derivatives, of the accompanying notes to condensed consolidated financial statements.

Capital Return Program

On November 28, 2018, the Board approved a 1 million share repurchase program expanding our capacity to repurchase shares to approximately 1.7 million shares. During the first quarter of Fiscal Year 2021, we did not repurchase any shares of our common stock. As of June 27, 2020, there remained 1,369,014 shares authorized for repurchase under the existing stock repurchase program. See Note 11, Common Stock Repurchases, of the accompanying notes to condensed consolidated financial statements.

We believe that our current cash and cash equivalents, short-term investments, cash provided by operations, and availability of additional funds under the Credit Agreement, as amended from time to time, will be sufficient to fund our operations. However, any projections of future financial needs and sources of working capital are subject to uncertainty on our financial results. Readers are cautioned to review the risks, uncertainties, and assumptions set forth in this Quarterly Report on Form 10-Q, including the section entitled "Certain Forward-Looking Information" and the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended March 28, 2020, filed with the SEC on June 8, 2020, 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.

Consigned Inventory

A substantial portion of the raw materials, components, and subassemblies used in our products are provided by our suppliers on a consignment basis. These consigned inventories are not recorded on our 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 agreements allow us to return parts in excess of maximum order quantities to the suppliers at the supplier’s expense. Returns for other reasons are negotiated with the suppliers on a case-by-case basis and to date have been immaterial. If our suppliers were to discontinue financing consigned inventory, it would require us to make cash outlays and we could incur expenses which, if material, could negatively affect our business and financial results. As of June 27, 2020, and March 28, 2020, we had off-balance sheet consigned inventories of $34.1 million and $21.7 million, respectively.

Unconditional Purchase Obligations

We use several contract manufacturers to manufacture raw materials, components, and subassemblies for our products through our supply of demand information that typically covers periods up to 13 weeks. The contract manufacturers use this information to acquire components and build products. We also obtain individual components for our products from a wide variety of individual suppliers using a combination of purchase orders, supplier contracts, and open orders based on projected demand information. As of June 27, 2020, we had outstanding off-balance sheet third-party manufacturing, component purchase, and other general and administrative commitments of $390.4 million, including the off-balance sheet consigned inventories of $34.1 million.


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Except as described above, there have been no material changes in our contractual obligations as described in our Annual Report on Form 10-K for the fiscal year ended March 28, 2020.

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 28, 2020, filed with the SEC on June 8, 2020. There have been no material changes to our critical accounting estimates during the three months ended June 27, 2020.

Recent Accounting Pronouncements

For more information regarding the Recent Accounting Pronouncements that may impact us, see Note 2, Recent Accounting Pronouncements, of the accompanying notes to the condensed consolidated financial statements.

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Table of Contents

Financial Statements (Unaudited)
PLANTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
 
June 27,
2020
 
March 28,
2020
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
249,766

 
$
213,879

Short-term investments
13,166

 
11,841

Accounts receivable, net
208,688

 
246,835

Inventory, net
177,633

 
164,527

Other current assets
46,145

 
47,946

Total current assets
695,398

 
685,028

Property, plant, and equipment, net
159,539

 
165,858

Goodwill
796,216

 
796,216

Purchased intangibles, net
434,481

 
466,915

Deferred tax assets
89,804

 
82,496

Other assets
53,444

 
60,661

Total assets
$
2,228,882

 
$
2,257,174

 
 
 
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
115,166

 
$
102,159

Accrued liabilities
396,745

 
373,666

Total current liabilities
511,911

 
475,825

Long term debt, net of issuance costs
1,623,034

 
1,621,694

Long-term income taxes payable
98,949

 
98,319

Other long-term liabilities
144,699

 
144,152

Total liabilities
2,378,593

 
2,339,990

Commitments and contingencies (Note 7)


 


Stockholders' deficit:
 

 
 

Common stock
901

 
896

Additional paid-in capital
1,510,695

 
1,501,340

Accumulated other comprehensive loss
(12,083
)
 
(13,582
)
Accumulated deficit
(782,919
)
 
(707,904
)
Total stockholders' equity before treasury stock
716,594

 
780,750

Less:  Treasury stock, at cost
(866,305
)
 
(863,566
)
Total stockholders' deficit
(149,711
)
 
(82,816
)
Total liabilities and stockholders' deficit
$
2,228,882

 
$
2,257,174


The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)

 
Three Months Ended
 
 
June 27, 2020
 
June 29, 2019
 
Net revenues
 
 
 
 
Net product revenues
$
291,458

 
$
382,745

 
Net service revenues
64,262

 
65,022

 
Total net revenues
355,720

 
447,767

 
Cost of revenues
 
 
 
 
Cost of product revenues
176,615

 
208,616

 
Cost of service revenues
22,773

 
26,505

 
Total cost of revenues
199,388

 
235,121

 
Gross profit
156,332

 
212,646

 
Operating expenses:
 
 
 
 
Research, development, and engineering
50,029

 
59,524

 
Selling, general, and administrative
116,644

 
163,608

 
(Gain) loss, net from litigation settlements
17,561

 
(1,162
)
 
Restructuring and other related charges
29,330

 
19,525

 
Total operating expenses
213,564

 
241,495

 
Operating loss
(57,232
)
 
(28,849
)
 
Interest expense
(21,184
)
 
(23,932
)
 
Other non-operating income, net
224

 
333

 
Loss before income taxes
(78,192
)
 
(52,448
)
 
Income tax benefit
(3,177
)
 
(7,577
)
 
Net loss
$
(75,015
)
 
$
(44,871
)
 
 
 
 
 
 
Loss per common share:
 
 
 
 
Basic
$
(1.85
)
 
$
(1.14
)
 
Diluted
$
(1.85
)
 
$
(1.14
)
 
 
 
 
 
 
Shares used in computing loss per common share:
 
 
 
 
Basic
40,460

 
39,239

 
Diluted
40,460

 
39,239

 
 
 
 
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.





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PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
 
Three Months Ended
 
 
June 27, 2020
 
June 29, 2019
 
Net loss
$
(75,015
)
 
$
(44,871
)
 
Other comprehensive income (loss):
 
 
 
 
Foreign currency translation adjustments

 
(219
)
 
Unrealized gains (losses) on cash flow hedges:
 
 
 
 
Unrealized cash flow hedge gains (losses) arising during the period
(1,579
)
 
(6,704
)
 
Net (gains) losses reclassified into income for revenue hedges
(909
)
 
(1,359
)
 
Net (gains) losses reclassified into income for cost of revenue hedges

 
(104
)
 
Net (gains) losses reclassified into income for interest rate swaps
3,723

 
652

 
Net unrealized gains (losses) on cash flow hedges
1,235

 
(7,515
)
 
 
 
 
 
 
Aggregate income tax benefit of the above items
264

 
1,581

 
Other comprehensive income (loss)
1,499

 
(6,153
)
 
Comprehensive loss
$
(73,516
)
 
$
(51,024
)
 

The accompanying notes are an integral part of these condensed consolidated financial statements.





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Table of Contents


PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
Three Months Ended
 
June 27, 2020
 
June 29, 2019
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$
(75,015
)
 
$
(44,871
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
43,400

 
57,698

Amortization of debt issuance costs
1,340

 
1,361

Stock-based compensation
9,355

 
12,904

Deferred income taxes
(7,169
)
 
(29,410
)
Provision for excess and obsolete inventories
6,082

 
2,769

Restructuring and related charges
29,330

 
19,525

Cash payments for restructuring charges
(13,085
)
 
(17,658
)
Other operating activities
(1,851
)
 
1,965

Changes in assets and liabilities, net of acquisition:
 
 
 

Accounts receivable, net
37,914

 
21,445

Inventory, net
(16,008
)
 
(42,309
)
Current and other assets
3,483

 
15,498

Accounts payable
12,321

 
36,392

Accrued liabilities
11,236

 
(44,793
)
Income taxes
389

 
17,833

Cash provided by operating activities
41,722

 
8,349

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 

Proceeds from sales of investments

 
170

Purchase of investments
(108
)
 
(651
)
Capital expenditures
(5,437
)
 
(4,507
)
Proceeds from sale of property and equipment
1,900

 

Cash used for investing activities
(3,645
)
 
(4,988
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 

Employees' tax withheld and paid for restricted stock and restricted stock units
(2,739
)
 
(8,621
)
Proceeds from issuances under stock-based compensation plans
5

 
589

Proceeds from revolving line of credit
50,000

 

Repayments of revolving line of credit
(50,000
)
 

Payment of cash dividends

 
(5,940
)
Cash used for financing activities
(2,734
)
 
(13,972
)
Effect of exchange rate changes on cash and cash equivalents
544

 
6

Net increase (decrease) in cash and cash equivalents
35,887

 
(10,605
)
Cash and cash equivalents at beginning of period
213,879

 
202,509

Cash and cash equivalents at end of period
$
249,766

 
$
191,904

SUPPLEMENTAL DISCLOSURES
 
 
 
Cash paid for income taxes
$
2,585

 
$
2,755

Cash paid for interest
$
26,227

 
$
29,203


The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents


PLANTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) / EQUITY
(in thousands)
(Unaudited)

 
Three Months Ended June 27, 2020
 
Common Stock
 
Additional Paid-In
 
Accumulated Other Comprehensive
 
Retained
 
Treasury
 
Total Stockholders'
 
Shares
 
Amount
 
Capital
 
Loss
 
Earnings
 
Stock
 
Deficit
Balances at March 28, 2020
40,406

 
$
896

 
$
1,501,340

 
$
(13,582
)
 
$
(707,904
)
 
$
(863,566
)
 
$
(82,816
)
Net loss

 

 

 

 
(75,015
)
 

 
(75,015
)
Net unrealized gains (losses) on cash flow hedges, net of tax

 

 

 
1,499

 

 

 
1,499

Proceeds from issuances under stock-based compensation plans
519

 
5

 

 

 

 

 
5

Repurchase of restricted common stock
(10
)
 

 

 

 

 

 

Stock-based compensation

 

 
9,355

 

 

 

 
9,355

Employees' tax withheld and paid for restricted stock and restricted stock units
(233
)
 

 

 

 

 
(2,739
)
 
(2,739
)
Balances at June 27, 2020
40,682

 
$
901

 
$
1,510,695

 
$
(12,083
)
 
$
(782,919
)
 
$
(866,305
)
 
$
(149,711
)

 
Three Months Ended June 29, 2019
 
Common Stock
 
Additional Paid-In
 
Accumulated Other Comprehensive
 
Retained
 
Treasury
 
Total Stockholders'
 
Shares
 
Amount
 
Capital
 
Income
 
Earnings
 
Stock
 
Equity
Balances at March 30, 2019
39,518

 
$
884

 
$
1,431,608

 
$
(475
)
 
$
143,344

 
$
(853,674
)
 
$
721,687

Net loss

 

 

 

 
(44,871
)
 

 
(44,871
)
Foreign currency translation adjustments

 

 

 
(219
)
 

 

 
(219
)
Net unrealized gains (losses) on cash flow hedges, net of tax

 

 

 
(5,934
)
 

 

 
(5,934
)
Proceeds from issuances under stock-based compensation plans
271

 
3

 
586

 

 

 

 
589

Repurchase of restricted common stock
(20
)
 

 

 

 

 

 

Cash dividends

 

 

 

 
(5,940
)
 

 
(5,940
)
Stock-based compensation

 

 
12,904

 

 

 

 
12,904

Employees' tax withheld and paid for restricted stock and restricted stock units
(191
)
 

 

 

 

 
(8,622
)
 
(8,622
)
Impact of new accounting standards adoption

 

 

 

 
(89
)
 

 
(89
)
Other equity changes

 

 

 

 
(7
)
 

 
(7
)
Balances at June 29, 2019
39,578

 
$
887

 
$
1,445,098

 
$
(6,628
)
 
$
92,437

 
$
(862,296
)
 
$
669,498


The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

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. ("the Company") have been prepared on a basis materially consistent with the Company's March 28, 2020 audited consolidated financial statements and include all adjustments, consisting of normal recurring adjustments, necessary to fairly state the information set forth herein. Certain information and footnote disclosures normally included in financial statements prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to interim financial information and in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. The 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 28, 2020, which was filed with the SEC on June 8, 2020. The results of operations for the interim period ended June 27, 2020 are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.

The financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

The Company’s fiscal year ends on the Saturday closest to the last day of March. The Company’s current and prior fiscal years end on March 27, 2021 and March 28, 2020, respectively, and both consist of 52 weeks. The Company’s results of operations for the three months ended June 27, 2020 and June 29, 2019 both contain 13 weeks.

Risks and uncertainties

As described in the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 2020, which was filed with the SEC on June 8, 2020, the Company is subject to a greater degree of uncertainty than normal in making the judgments and estimates needed to apply its significant accounting policies as a result of the COVID-19 pandemic. The Company continues to assess various accounting estimates and other matters in context to the unknown future impacts of COVID-19 using information that is reasonably available as of the issuance date of the condensed consolidated financial statements. The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on its customers and suppliers, all of which are uncertain and cannot be predicted. As of the date of issuance of these condensed consolidated financial statements, the extent to which the pandemic may materially impact the Company's financial condition, liquidity, or results of operations is uncertain.

Reclassifications

Certain prior year amounts have been reclassified for consistency with current year presentation. Each of the reclassifications was immaterial and had no effect on the Company's results of operations.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Pronouncement

In June 2016, the Financial Accounting Standards Board ("FASB") issued guidance regarding the measurement of credit losses on financial instruments, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. The Company adopted the new standard effective March 29, 2020, using a modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings to be recognized on the date of adoption with prior periods not restated. The adoption had an immaterial impact on the Company’s financial position, results of operations or cash flows.


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3. CASH, CASH EQUIVALENTS, AND INVESTMENTS

The following tables summarize the Company’s cash, cash equivalents, and investments’ adjusted cost, gross unrealized gains, gross unrealized losses, and fair value by significant investment category recorded as cash and cash equivalents, and short-term investments as of June 27, 2020 and March 28, 2020 (in thousands):
June 27, 2020
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash & Cash Equivalents
 
Short-term investments
 (due in 1 year or less)
Cash
 
$
199,763

 
$

 
$

 
$
199,763

 
$
199,763

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
Mutual Funds
 
13,081

 
360

 
(275
)
 
13,166

 

 
13,166

Money Market Funds
 
50,003

 

 

 
50,003

 
50,003

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total cash, cash equivalents
and investments measured at fair value
 
$
262,847

 
$
360

 
$
(275
)
 
$
262,932

 
$
249,766

 
$
13,166

March 28, 2020
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash & Cash Equivalents
 
Short-term investments (due in 1 year or less)
Cash
 
$
213,879

 
$

 
$

 
$
213,879

 
$
213,879

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
Mutual Funds
 
12,938

 
31

 
(1,128
)
 
11,841

 

 
11,841

 
 
 
 
 
 
 
 
 
 
 
 
 
Total cash, cash equivalents
and investments measured at fair value
 
$
226,817

 
$
31

 
$
(1,128
)
 
$
225,720

 
$
213,879

 
$
11,841



As of June 27, 2020, and March 28, 2020, all of the Company's investments are classified as trading securities and are reported at fair value, with unrealized gains and losses included in current period earnings. For more information regarding the Company's deferred compensation plan, see Note 4, Deferred Compensation.

The Company did not incur any material realized or unrealized gains or losses in the three months ended June 27, 2020, and June 29, 2019.

There were no transfers between fair value measurement levels during the three months ended June 27, 2020, and June 29, 2019.

All financial assets and liabilities are recognized or disclosed at fair value in the financial statements. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1
The Company's Level 1 financial assets consist of Mutual Funds. The fair value of Level 1 financial instruments is measured based on the quoted market price of identical securities.

Level 2
The Company's Level 2 financial assets and liabilities consist of derivative foreign currency contracts, an interest rate swap, a term loan facility, and 5.50% Senior Notes. The fair value of the Level 2 derivative foreign currency contracts and interest rate swap are determined using pricing models that use observable market inputs. For more information regarding the Company's derivative assets and liabilities, see Note 13, Derivatives. The fair value of the Level 2 5.50% Senior Notes and term loan facility are determined based on inputs that were observable in the market, including the trading price of the notes when available. For more information regarding the Company's 5.50% Senior Notes and term loan facility, see Note 8, Debt.


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Level 3
The Company's revolving credit facility falls under the Level 3 hierarchy. The fair value of the Level 3 revolving credit facility is determined based on inputs that were unobservable in the market. For more information regarding the Company's debt, refer to Note 8, Debt.

4.  DEFERRED COMPENSATION

As of June 27, 2020, the Company held investments in mutual funds with a fair value totaling $13.2 million, all of which related to debt and equity securities that are held in rabbi trusts under non-qualified deferred compensation plans. The total related deferred compensation liability was $13.1 million at June 27, 2020. As of March 28, 2020, the Company held investments in mutual funds with a fair value totaling $11.8 million, all of which related to debt and equity securities that are held in a rabbi trust under non-qualified deferred compensation plans. The total related deferred compensation liability at March 28, 2020 was $11.7 million.

The securities are classified as trading securities and are recorded on the condensed consolidated balance sheets under "short-term investments". The liability is recorded on the condensed consolidated balance sheets under "other long-term liabilities" and "accrued liabilities".

5. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS

Accounts receivable, net:
(in thousands)
 
June 27, 2020
 
March 28, 2020
Accounts receivable
 
$
297,260

 
$
350,642

Provisions for promotions, rebates, and other
 
(86,308
)
 
(101,666
)
Provisions for doubtful accounts and sales allowances
 
(2,264
)
 
(2,141
)
Accounts receivable, net
 
$
208,688

 
$
246,835



The Company maintains a provision for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company regularly performs credit evaluations of its customers’ financial conditions and considers factors such as historical experience, credit quality, age of the accounts receivable balances, geographic or country-specific risks, and economic conditions that may affect a customer’s ability to pay, including any reasonable and supportable forecasts of the future. 

For the three months ended June 27, 2020, our assessment considered business and market disruptions caused by COVID-19 and estimates of credit and collectability trends. The continued volatility in market conditions and evolving shifts in credit trends are difficult to predict, causing variability and volatility that may impact our allowance for credit losses in future periods.

As a result of the Polycom Acquisition (the "Acquisition"), the Company assumed a financing agreement with an unrelated third-party financing company (the "Financing Agreement") whereby the Company offers distributors and resellers direct or indirect financing on their purchases of Polycom's products and services. In return, the Company agrees to pay the financing company a fee based on a pre-defined percentage of the transaction amount financed. In certain instances, these financing arrangements result in a transfer of the Company's receivables, without recourse, to the financing company. If the transaction meets the applicable criteria under Topic 860 and is accounted for as a sale of financial assets, the related accounts receivable is excluded from the balance sheet upon receipt of the third-party financing company's payment remittance. In certain legal jurisdictions, the arrangements that involve maintenance services or products bundled with maintenance at one price do not qualify as a sale of financial assets in accordance with the authoritative guidance. Accordingly, accounts receivable related to these arrangements are accounted for as a secured borrowing in accordance with Topic 860, and the Company records a liability for any cash received, while maintaining the associated accounts receivable balance until the distributor or reseller remits payment to the third-party financing company.

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During the quarter ended June 27, 2020, total transactions entered pursuant to the terms of the Financing Agreement were approximately $31.4 million, of which $23.6 million was related to the transfer of the financial asset. During the quarter ended June 29, 2019, total transactions entered pursuant to the terms of the Financing Agreement were approximately $59.1 million, of which $27.3 million was related to the transfer of the financial assets. The financing of these receivables accelerated the collection of cash and reduced the Company's credit exposure. Included in "Accounts receivables, net" in the Company's condensed consolidated balance sheet as of June 27, 2020 and March 28, 2020 was approximately $13.6 million and $22.5 million, respectively due from the financing company, of which $11.1 million and $16.5 million, respectively was related to accounts receivable transferred. Total fees incurred pursuant to the Financing Agreement were immaterial for the quarters ended June 27, 2020 and June 29, 2019. These fees are recorded as a reduction to revenue on the Company's condensed consolidated statement of operations.

Inventory, net:
(in thousands)
 
June 27, 2020
 
March 28, 2020
Raw materials
 
$
92,764

 
$
97,371

Work in process
 
265

 
459

Finished goods
 
84,604

 
66,697

Inventory, net
 
$
177,633

 
$
164,527



Accrued Liabilities:
(in thousands)
 
June 27, 2020
 
March 28, 2020
Short term deferred revenue
 
$
141,722

 
$
144,040

Employee compensation and benefits
 
53,933

 
48,153

Estimated losses - legal and other
 
26,310

 
9,290

Operating lease liabilities, current
 
22,666

 
22,517

Provision for returns
 
20,749

 
20,146

Income tax payable
 
20,748

 
20,725

Warranty obligation
 
17,394

 
12,772

Derivative liabilities
 
12,834

 
12,840

VAT/Sales tax payable
 
10,442

 
9,673

Accrued interest
 
8,062

 
14,617

Marketing incentives liabilities
 
6,309

 
9,708

Accrued other
 
55,576

 
49,185

Accrued liabilities
 
$
396,745

 
$
373,666



The Company's warranty obligation is included as a component of accrued liabilities on the condensed consolidated balance sheets. Changes in the warranty obligation during the three months ended June 27, 2020 and June 29, 2019 were as follows:
 
 
Three Months Ended
(in thousands)
 
June 27, 2020
 
June 29, 2019
Warranty obligation at beginning of period
 
$
15,261

 
$
17,984

Warranty provision related to products shipped
 
9,428

 
4,837

Deductions for warranty claims processed
 
(4,269
)
 
(5,001
)
Adjustments related to preexisting warranties
 
(533
)
 
(1,036
)
Warranty obligation at end of period(1)
 
$
19,887

 
$
16,784


(1) Includes both short-term and long-term portion of warranty obligation; the prior table shows only the short-term portion included in accrued liabilities on the Company's condensed consolidated balance sheet. The long-term portion is included in other long-term liabilities.




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Table of Contents

6.
GOODWILL AND PURCHASED INTANGIBLE ASSETS

Goodwill

The changes in the carrying amount of goodwill allocated to the Company's reporting segments for the periods ended June 27, 2020 and March 28, 2020 are as follows:
(in thousands)
 
Poly Reportable Segment
 
Products Reportable Segment
 
Services Reportable Segment
 
Total Consolidated
Balance as of March 30, 2019
 
$
1,278,380

 
$

 
$

 
$
1,278,380

Adjustments(1)
 
1,517

 
 
 
 
 
1,517

Impairment prior to re-segmentation
 
(323,088
)
 

 

 
(323,088
)
Allocation due to re-segmentation
 
(956,809
)
 
789,561

 
167,248

 

Impairment after re-segmentation
 

 
(160,593
)
 
 
 
(160,593
)
Balance as of March 28, 2020
 
$

 
$
628,968

 
$
167,248

 
$
796,216

Balance as of June 27, 2020
 
$

 
$
628,968

 
$
167,248

 
$
796,216

(1) Represents measurement period adjustments.

During the fourth quarter of Fiscal Year 2020, the Company experienced a sustained decrease in its stock price and determined that it was more likely than not that the carrying value of the Company's reporting units exceeded their fair value. Additionally, during the fourth quarter of Fiscal Year 2020, the Company made key changes to its executive management, which ultimately resulted in a change to the composition of its reportable segments and consequently a change from one to four reporting units – Headsets, Voice, Video, and Services. These changes resulted in an impairment charge of $483.7 million in the fourth quarter of Fiscal Year 2020.

Other Intangible Assets

As of June 27, 2020, and March 28, 2020, the carrying value of other intangibles, is as follows:
As of
 
June 27, 2020
 
March 28, 2020
 
 
(in thousands)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Weighted Average Remaining Useful Life
Amortizing Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Existing technology
 
$
427,123

 
$
(227,087
)
 
$
200,036

 
$
427,123

 
$
(208,848
)
 
$