| PLANTRONICS INC /CA/ Item 1A Risk Factors |
| Investors or potential investors in our stock should carefully consider the risks described below |
| Our stock price will reflect the performance of our business relative to, among other things, our competition, expectations of securities analysts or investors, and general economic market conditions and industry conditions |
| One should carefully consider the following factors in connection with any investment in our stock |
| Our business, financial condition and results of operations could be materially adversely affected if any of the following risks occur |
| Should any or all of the following risks materialize, the trading price of our stock could decline, and investors could lose all or part of their investment |
| Our operating results are difficult to predict and fluctuations may cause volatility in the trading price of our common stock |
| Given the nature of the markets in which we compete, our revenues and profitability are difficult to predict for many reasons, including the following: • Our operating results are highly dependent on the volume and timing of orders received during the quarter, which are difficult to forecast |
| Customers generally order on an as-needed basis, and we typically do not obtain firm, long-term purchase commitments from our customers |
| As a result, our revenues in any quarter depend primarily on orders booked and shipped in that quarter; • We must incur a large portion of our costs in advance of sales orders because we must plan research and production, order components and enter into development, sales and marketing, and other operating commitments prior to obtaining firm commitments from our customers |
| In the event we have inadequate inventory to meet the demand for particular products we may miss significant revenue opportunities or may incur significant expenses such as air freight, expediting shipments, and other negative variances in our manufacturing processes as we attempt to make up for the shortfall |
| The foregoing difficulties are exacerbated in periods such as the present when a significant portion of our revenue is derived from new products and the difficulties of forecasting appropriate volumes of production are even more tenuous; • Our Audio Communications Group profitability depends, in part, on the mix of our Business-to-Business (“B2B”) and Business-to- Consumer (“B2C”) as well as our product mix |
| Our prices and gross margins are generally lower for sales to B2C customers compared to sales to our B2B customers |
| Our prices and gross margins can vary significantly by product line as well as within product lines |
| The size and timing of opportunities in this market are difficult to predict; • A significant portion of our annual retail sales for our Audio Entertainment Group generally occur in the third fiscal quarter, thereby increasing the difficulty of predicting revenues and profitability from quarter to quarter and in managing inventory levels; • Fluctuations in currency exchange rates impact our revenues and profitability because we report our financial statements in US dollars, whereas a significant portion of our sales to customers are transacted in other currencies, particularly the Euro |
| Furthermore, fluctuations in foreign currencies impact our global pricing strategy resulting in our lowering or raising selling prices in a currency in order to avoid disparity with US dollar prices and to respond to currency-driven competitive pricing actions; and • Because we have significant manufacturing operations in Mexico and China, fluctuations in currency exchange rates in those two countries can impact our gross profit and profitability |
| Fluctuations in our operating results may cause volatility in the trading price of our common stock |
| For example, in the second and fourth quarters of fiscal year 2006, our operating results did not meet our 22 - Plantronics _________________________________________________________________ [74]Table of Contents part i targets nor the market’s expectations, which had a significant adverse effect on the trading price of our common stock |
| If we do not match production to demand, we may lose business or our gross margins could be materially adversely affected |
| Our industry is characterized by rapid technological change, frequent new product introductions, short-term customer commitments and rapid changes in demand |
| We determine production levels based on our forecasts of demand for our products |
| Actual demand for our products depends on many factors, which make it difficult to forecast |
| We have experienced differences between our actual and our forecasted demand in the past and expect differences to arise in the future |
| Significant unanticipated fluctuations in demand and the global trend towards consignment of products could cause the following operating problems, among others: • If forecasted demand does not develop, we could have excess inventory and excess capacity |
| Over-forecast of demand could result in higher inventories of finished products, components and subassemblies |
| If we were unable to sell these inventories, we would have to write off some or all of our inventories of excess products and unusable components and subassemblies |
| Excess manufacturing capacity could lead to higher production costs and lower margins; • If demand increases beyond that forecasted, we would have to rapidly increase production |
| We currently depend on suppliers to provide additional volumes of components and sub-assemblies, and we are experiencing greater dependence on single source suppliers |
| Therefore, we might not be able to increase production rapidly enough to meet unexpected demand |
| This could cause us to fail to meet customer expectations |
| There could be short-term losses of sales while we are trying to increase production |
| If customers turn to our competitors to meet their needs, there could be a long-term impact on our revenues and profitability; • Rapid increases in production levels to meet unanticipated demand could result in higher costs for components and sub-assemblies, increased expenditures for freight to expedite delivery of required materials, and higher overtime costs and other expenses |
| These higher expenditures could lower our profit margins |
| Further, if production is increased rapidly, there may be decreased manufacturing yields, which may also lower our margins; • The introduction of Bluetooth and other wireless headsets presents many significant manufacturing, marketing and other operational risks and uncertainties, including developing and marketing these wireless headset products; unforeseen delays or difficulties in introducing and achieving volume production of such products, as occurred in our second and third quarter of fiscal 2006; our dependence on third parties to supply key components, many of which have long lead times; and our ability to forecast demand for this new product category for which relevant data is incomplete or unavailable |
| We may have longer lead times with certain suppliers than commitments from some of our customers |
| If we are unable to deliver product on time to meet the market window of our retail customers, we will lose opportunities to increase revenues and profits |
| We may also be unable to sell these finished goods, which would result in excess or obsolete inventory; and • Increasing production beyond planned capacity involves increasing tooling, test equipment and hiring and training additional staff |
| Lead times to increase tooling and test equipment are typically several months, or more |
| Once such additional capacity is in place, we incur increased depreciation and the resulting overhead |
| Should we fail to ramp production once capacity is in place, we would not be able to absorb this incremental overhead, and this could lead to lower gross margins |
| AR 2006 - 23 _________________________________________________________________ [75]Table of Contents Any of the foregoing problems could materially and adversely affect our business, financial condition and results of operations |
| Our business will be materially adversely affected if we are not able to develop, manufacture and market new products in response to changing customer requirements and new technologies |
| The market for our products is characterized by rapidly changing technology, evolving industry standards, short product life cycles and frequent new product introductions |
| As a result, we must continually introduce new products and technologies and enhance existing products in order to remain competitive |
| The technology used in our products is evolving more rapidly now than it has historically, and we anticipate that this trend may accelerate |
| Historically, the technology used in lightweight communications headsets and speakers has evolved slowly |
| New products have primarily offered stylistic changes and quality improvements rather than significant new technologies |
| Our increasing reliance and focus on the B2C market has resulted in a growing portion of our products incorporating new technologies, experiencing shorter lifecycles and a need to offer deeper product lines |
| We believe this is particularly true for our newer emerging technology products especially in the speaker, mobile, computer, residential and certain parts of the office markets |
| In particular, we anticipate a trend towards more integrated solutions that combine audio, video, and software functionality, while currently our focus is limited to audio products |
| We are also experiencing a trend away from corded headsets to cordless products |
| In general, our corded headsets have had higher gross margins than our cordless products |
| In addition, we expect that office phones will begin to incorporate Bluetooth functionality, which would open the market to consumer Bluetooth headsets and reduce the demand for our traditional office telephony headsets and adapters as well as impacting potential revenues from our own wireless headset systems, resulting in lost revenue and lower margins |
| The success of our products depends on several factors, including our ability to: • Anticipate technology and market trends; • Develop innovative new products and enhancements on a timely basis; • Distinguish our products from those of our competitors; • Manufacture and deliver high-quality products in sufficient volumes; and • Price our products competitively |
| If we are unable to develop, manufacture, market and introduce enhanced or new products in a timely manner in response to changing market conditions or customer requirements, including changing fashion trends and styles, it will materially adversely affect our business, financial condition and results of operations |
| Furthermore, as we develop new generations of products more quickly, we expect that the pace of product obsolescence will increase concurrently |
| The disposition of inventories of excess or obsolete products may result in reductions to our operating margins and materially adversely affect our earnings and results of operations |
| The failure of our suppliers to provide quality components or services in a timely manner could adversely affect our results |
| Our growth and ability to meet customer demands depend in part on our ability to obtain timely deliveries of raw materials, components, sub-assemblies and products from our suppliers |
| We buy raw materials, components and sub-assemblies from a variety of suppliers and assemble them into finished products |
| We also have certain of our products manufactured for us by third party suppliers |
| The cost, 24 - Plantronics _________________________________________________________________ [76]Table of Contents part i quality, and availability of such goods are essential to the successful production and sale of our products |
| Obtaining raw materials, components, sub-assemblies and finished products entails various risks, including the following: • We obtain certain raw materials, sub-assemblies, components and products from single suppliers and alternate sources for these items are not readily available |
| To date, we have not experienced any significant interruptions in the supply of these raw materials, sub-assemblies, components and products |
| Adverse economic conditions could lead to a higher risk of failure of our suppliers to remain in business or to be able to purchase the raw materials, subcomponents and parts required by them to produce and provide to us the parts we need |
| An interruption in supply from any of our single source suppliers in the future would materially adversely affect our business, financial condition and results of operations |
| • Prices of raw materials, components and sub-assemblies may rise |
| If this occurs and we are not able to pass these increases on to our customers or to achieve operating efficiencies that would offset the increases, it would have a material adverse effect on our business, financial condition and results of operations |
| • Due to the lead times required to obtain certain raw materials, sub-assemblies, components and products from certain foreign suppliers, we may not be able to react quickly to changes in demand, potentially resulting in either excess inventories of such goods or shortages of the raw materials, sub-assemblies, components and products |
| Lead times are particularly long on silicon-based components incorporating radio frequency and digital signal processing technologies and such components are an increasingly important part of our product costs |
| Failure in the future to match the timing of purchases of raw materials, sub-assemblies, components and products to demand could increase our inventories and/or decrease our revenues, consequently materially adversely affecting our business, financial condition and results of operations |
| • Most of our suppliers are not obligated to continue to provide us with raw materials, components and sub-assemblies |
| Rather, we buy most raw materials, components and subassemblies on a purchase order basis |
| If our suppliers experience increased demand or shortages, it could affect deliveries to us |
| In turn, this would affect our ability to manufacture and sell products that are dependent on those raw materials, components and subassemblies |
| For example, during the first quarter of fiscal 2005, we had lower shipments to one of our key wireless OEM carrier partners, which resulted from a constraint in supply of a new part for a custom product |
| Such shortages would materially adversely affect our business, financial condition and results of operations |
| • Although we generally use standard raw materials, parts and components for our products, the high development costs associated with emerging wireless technologies permits us to work with only a single source of silicon chip-sets on any particular new product |
| We, or our chosen supplier of chip-sets, may experience challenges in designing, developing and manufacturing components in these new technologies which could affect our ability to meet market schedules |
| Due to our dependence on single suppliers for certain chip sets, we could experience higher prices, a delay in development of the chip-set, and/or the inability to meet our customer demand for these new products |
| Our business, operating results and financial condition could therefore be materially adversely affected as a result of these factors |
| may have an adverse effect on our business and financial condition |
| There are inherent risks associated with the acquisition of Altec Lansing that could materially adversely affect our business, financial condition and results of operations |
| The risks faced in connection with this acquisition include among others: • Cultural differences in the conduct of the business; • Difficulties in integration of the operations, technologies, and products of Altec Lansing; • Diversion of management’s attention from normal daily operations of the core business; • Difficulties in integrating the transactions and business information systems of Altec Lansing; • The potential loss of key employees of Altec Lansing and Plantronics; • Competition may increase in Altec Lansing’s markets more than expected; and • Altec Lansing’s product sales and new product development may not evolve as anticipated |
| Mergers and acquisitions, particularly those of high-technology companies, are inherently risky, and no assurance can be given that this or any future acquisitions will be successful and will not materially adversely affect our business, operating results or financial condition |
| We must also manage any acquisition-related growth effectively |
| Failure to manage growth effectively and successfully integrate this or any future acquisitions made by us could materially harm our business and operating results |
| If the anticipated future results of operations of the combined Altec Lansing and Plantronics’ businesses do not materialize as expected, goodwill and other intangible assets which were recorded as a result of the acquisition could become impaired and could result in write-offs which would negatively impact our operating results |
| We depend on original design manufacturers and contract manufacturers who may not have adequate capacity to fulfill our needs or may not meet our quality and delivery objectives |
| Original design manufacturers and contract manufacturers produce key portions of our product lines for us |
| Our reliance on them involves significant risks, including reduced control over quality and logistics management, the potential lack of adequate capacity and loss of services |
| Financial instability of our manufacturers or contractors could result in our having to find new suppliers, which could increase our costs and delay our product deliveries |
| These manufacturers and contractors may also choose to discontinue building our products for a variety of reasons |
| Consequently, we may experience delays in the timeliness, quality and adequacy of product deliveries, any of which could harm our business and operating results |
| Demand for iPod products, which are produced by Apple Computer, Inc, affects demand for certain portable products |
| Certain of our portable products under our Altec Lansing brand was developed for use with Apple Computer, Inc |
| ’s (“Apple”) iPod products |
| We have a non-exclusive right to use the Apple interface with certain of our portable products, and we are required to pay Apple a royalty for this right |
| The risks faced in conjunction with our Apple related products include, among others: • If supply or demand for iPod products decreases, demand for certain of our portable products could be negatively affected |
| MP3 integration with cell phones could take significant market share from Apple’s iPod products; • If Apple does not renew or cancels our licensing agreement, our products may not be compatible with iPods, resulting in loss of revenues and excess inventories which would negatively impact our financial results; 26 - Plantronics _________________________________________________________________ [78]Table of Contents part i • If Apple changes its iPod product design more frequently than we update certain of our portable products, certain of our products may not be compatible with the changed design |
| Moreover, if Apple makes style changes to its products more frequently than we update certain of our portable products, consumers may not like the look of our products with the iPod |
| Both of these factors could result in decreased demand for our products and excess inventories could result which would negatively impact our financial results; and • Apple has recently introduced its own line of iPod speaker products, which compete with certain of our Altec Lansing-branded speaker products |
| As the manufacturer of the iPod, Apple has unique advantages with regard to product changes or introductions that we do not possess, which could negatively impact our ability to compete effectively against Apple’s speaker products |
| Moreover, certain consumers may prefer to buy Apple’s iPod speakers rather than other vendors’ speakers because Apple is the manufacturer |
| As a result, this could lead to decreased demand for our products and excess inventories could result which would negatively impact our financial results |
| We sell our products through various channels of distribution that can be volatile and failure to establish successful relationships with our channel partners could materially adversely affect our business, financial condition or results of operations |
| We sell substantially all of our products through distributors, retailers, OEM customers and telephony service providers |
| Our existing relationships with these parties are not exclusive and can be terminated by either party without cause |
| Our channel partners also sell or can potentially sell products offered by our competitors |
| To the extent that our competitors offer our channel partners more favorable terms, such partners may decline to carry, de-emphasize or discontinue carrying our products |
| Further, such partners may not recommend, or continue to recommend, our products |
| In the future, our OEM customers or potential OEM customers may elect to manufacture their own products, similar to those we currently sell to them |
| The inability to establish or maintain successful relationships with distributors, OEM customers, retailers and telephony service providers or to expand our distribution channels could materially adversely affect our business, financial condition or results of operations |
| As a result of the growth of our B2C business, our customer mix is changing and certain retailers, OEM customers and wireless carriers are becoming significant |
| This greater reliance on certain large customers could increase the volatility of our revenues and earnings |
| In particular, we have several large customers whose order patterns are difficult to predict |
| Offers and promotions by these customers may result in significant fluctuations of their purchasing activities over time |
| If we are unable to anticipate the purchase requirements of these customers, our quarterly revenues may be adversely affected and/or we may be exposed to large volumes of inventory that cannot be immediately resold to other customers |
| The success of our business depends heavily on our ability to effectively market our products, and our business could be materially adversely affected if markets do not develop as we expect |
| We compete in the B2B market for the sale of our office and contact center products |
| We believe that our greatest long-term opportunity for profit growth in the Audio Communications Group is in the office market, and our foremost strategic objective for this segment is to increase headset adoption |
| To this end, we are investing in creating new products that are more appealing in functionality and design as well as investing in a national advertising campaign to increase awareness and interest |
| If these investments do not generate incremental revenue, our business could be materially affected |
| We are also experiencing a more aggressive and competitive environment with respect to price in our B2B markets, which puts pressure on profitability and could result in a loss of market share if we do not respond effectively |
| AR 2006 - 27 _________________________________________________________________ [79]Table of Contents We also compete in the B2C market for the sale of our mobile, computer audio, gaming, Altec Lansing and Clarity products |
| We believe that consumer marketing is highly relevant in the B2C market, which is dominated by large brands that have significant consumer mindshare |
| We are investing in marketing initiatives to raise awareness and consideration of the Plantronics brand |
| We believe this will help increase preference for Plantronics and promote headset adoption overall |
| The B2C market is characterized by relatively rapid product obsolescence and we are at risk if we do not have the right products at the right time to meet consumer needs |
| In addition, some of our competitors have significant brand recognition and we are experiencing more competition in pricing actions, which can result in significant losses and excess inventory |
| If we are unable to stimulate growth in our B2B and B2C markets, if our costs to stimulate demand do not generate incremental profit, or if we experience significant price competition, our business, financial condition, results of operations and cash flows could suffer |
| In addition, failure to effectively market our products to customers in these markets could lead to lower and more volatile revenue and earnings, excess inventory and the inability to recover the associated development costs, any of which could also have a material adverse effect on our business, financial condition, results of operations and cash flows |
| Headset markets are also subject to general economic conditions and if there is a slowing of national or international economic growth, these markets may not materialize to the levels we require to achieve our anticipated financial results, which could in turn materially adversely affect the market price of our stock |
| In particular, we may accept returns from our retailers of products that have failed to sell as expected and, in some instances, such products may be returned to our inventory |
| Should product returns vary significantly from our estimate, then our estimated returns, which net against revenue, may need to be revised |
| We have significant intangible assets recorded on our balance sheet |
| If the carrying value of our intangible assets is not recoverable, an impairment loss must be recognized, which would adversely affect our financial results |
| As a result of the acquisition of Altec Lansing and Octiv in fiscal 2006, we have significant intangible assets recorded on our balance sheet |
| Certain events or changes in circumstances would require us to assess the recoverability of the carrying amount of our intangible assets |
| We had no impairment losses recorded in financial results in fiscal 2006 |
| We will continue to evaluate the recoverability of the carrying amount of our intangible assets, and we may incur substantial impairment charges, which could adversely affect our financial results |
| Our failure to effectively manage growth could harm our business |
| We have rapidly and significantly expanded the number and types of products we sell, and we will endeavor to further expand our product portfolio |
| We must continually introduce new products and technologies, enhance existing products in order to remain competitive, and effectively stimulate customer demand for new products and upgraded versions of our existing products |
| This expansion of our products places a significant strain on our management, operations and engineering resources |
| Specifically, the areas that are strained most by our growth include the following: • new product launch |
| With the growth of our product portfolio, we experience increased complexity in coordinating product development, manufacturing, and shipping |
| As this complexity increases, it places a strain on our ability to accurately coordinate the commercial launch of our products with adequate supply to meet anticipated customer demand and effective marketing to stimulate demand and market acceptance |
| If we are unable to scale and improve our product launch coordination, we could frustrate our customers and lose retail shelf space and product sales |
| 28 - Plantronics _________________________________________________________________ [80]Table of Contents part i • forecasting, planning and supply chain logistics |
| With the growth of our product portfolio, we also experience increased complexity in forecasting customer demand and in planning for production, and transportation and logistics management |
| If we are unable to scale and improve our forecasting, planning and logistics management, we could frustrate our customers, lose product sales or accumulate excess inventory |
| • support processes |
| To manage the growth of our operations, we will need to continue to improve our transaction processing, operational and financial systems, and procedures and controls to effectively manage the increased complexity |
| If we are unable to scale and improve these areas, the consequences could include: delays in shipment of product, degradation in levels of customer support, lost sales, decreased cash flows, and increased inventory |
| These difficulties could harm or limit our ability to expand |
| We have strong competitors and expect to face additional competition in the future |
| If we are unable to compete effectively, our results of operations may be adversely affected |
| Certain of our markets are intensely competitive |
| They are characterized by a trend of declining average selling prices, continual performance enhancements and new features, as well as rapid adoption of technological and product advancements by competitors in our retail market |
| Also, aggressive industry pricing practices have resulted in downward pressure on margins from both our primary competitors as well as from less established brands |
| Competitors in audio devices vary by product line |
| In the PC speaker business, competitors include Logitech and Creative Labs |
| In the PC and office and contact center markets, a significant competitor is Senheiser Communications |
| In the PC and console headset, telephony and microphone business, our primary competitor is Logitech |
| In the Audio Entertainment speaker business, competitors include Harmon Kardon, Bose, Logitech, Cyber Acoustics and Creative Labs |
| Since our entry into the mobile phone headset business, we have been competing against mobile phone and accessory companies such as Jabra, Motorola, Nokia, and Sony-Ericsson, some of whom have substantially greater resources than we have, and each of whom has established market positions in this business |
| Currently, our single largest competitor is GN Netcom, a subsidiary of GN Great Nordic Ltd, a Danish telecommunications conglomerate |
| We are currently experiencing more price competition from GN Netcom in the B2B markets than in the past |
| Motorola is a significant competitor in the consumer headset market, primarily in the mobile Bluetooth market, and has a brand name that is very well known and supported with significant marketing investments |
| Motorola also benefits from the ability to bundle other offerings with their headsets |
| We are also experiencing additional competition from other consumer electronics companies that currently manufacture and sell mobile phones or computer peripheral equipment |
| These competitors generally are larger, offer broader product lines, bundle or integrate with other products communications headset tops and bases manufactured by them or others, offer products containing bases that are incompatible with our headset tops and have substantially greater financial, marketing and other resources than we do |
| Our product markets are intensely competitive and market leadership changes frequently as a result of new products, designs and pricing |
| We also expect to face additional competition from companies, principally located in the Far East, which offer very low cost headset products, including products that are modeled on, or are direct copies of our products |
| These new competitors are likely to offer very low cost products, which may result in pricing pressure in the market |
| If market prices are substantially reduced by such new entrants into the headset market, our business, financial condition or results of operations could be materially adversely affected |
| Further, we expect to continue to experience increased competitive pressures in our retail business, particularly in the terms and conditions that our competitors offer to our customers, which may be more AR 2006 - 29 _________________________________________________________________ [81]Table of Contents favorable than our terms |
| For example, some of our competitors are beginning to offer to consign products rather than sell them directly to their customers |
| In order to compete effectively, we are offering similar terms to select customers within our Audio Communications products space |
| Offering more products on a consignment basis could potentially delay the timing of our revenue recognition, increase inventory balances as well as require changes in our systems to track inventory and point of sale |
| If we do not continue to distinguish our products, particularly our retail products, through distinctive, technologically advanced features, and design, as well as continue to build and strengthen our brand recognition, our business could be harmed |
| If we do not otherwise compete effectively, demand for our products could decline, our gross margins could decrease, we could lose market share, and our revenues and earnings could decline |
| While we believe we comply with environmental laws and regulations, we are still exposed to potential risks associated with environmental regulations |
| We are actively working to gain an understanding of the complete requirements concerning the removal of certain potential environmentally sensitive materials from our products to comply with the European Union Directives on Restrictions on certain Hazardous Substances on electrical and electronic equipment (“ROHS”) and on Waste Electrical and Electronic Equipment (“WEEE”) |
| Some of our customers are requesting that we implement these new compliance standards sooner than the legislation would require |
| While we believe that we will have the resources and ability to fully meet our customers’ requests, and spirit of the ROHS and WEEE directives, if unusual occurrences arise or if we are wrong in our assessment of what it will take to fully comply, there is a risk that we will not be able to meet the aggressive schedule set by our customers or comply with the legislation as passed by the EU member states |
| We are subject to various federal, state, local and foreign environmental laws and regulations, including those governing the use, discharge and disposal of hazardous substances in the ordinary course of our manufacturing process |
| We believe that our current manufacturing operations comply in all material respects with applicable environmental laws and regulations |
| We have included reserves for environmental remediation in our financial statements related to one of our discontinued businesses as well as for ground and soil contamination at our corporate headquarters in Santa Cruz, California, based upon management’s assessment of exposure and the advice of outside environmental consultants |
| We believe that these reserves will be sufficient to remediate the effects of the contamination found in accordance with the requirements of federal, state and local authorities who have jurisdiction over these sites |
| While no claims have been asserted against us in connection with these matters, there can be no assurance that such claims will not be asserted in the future or that any resulting liability will not exceed the amount of the adjusted reserve |
| Although we believe that our current manufacturing operations comply in all material respects with applicable environmental laws and regulations, it is possible that future environmental legislation may be enacted or current environmental legislation may be interpreted to create environmental liability with respect to our other facilities, operations, or products |
| To the extent that we incur claims for environmental matters exceeding reserves or insurance for environmental liability, our operating results could be negatively impacted |
| Our products are subject to various regulatory requirements, and changes in such regulatory requirements may adversely impact our gross margins as we comply with such changes or reduce our ability to generate revenues if we are unable to comply |
| Our products must meet the requirements set by regulatory authorities in the numerous jurisdictions in which we sell them |
| As regulations and local laws change, we must modify our products to address those changes |
| Regulatory restrictions may increase the costs to design and manufacture our products, resulting in a decrease in our margins or a decrease in demand for our products if the costs are passed along |
| 30 - Plantronics _________________________________________________________________ [82]Table of Contents part i Compliance with regulatory restrictions may impact the technical quality and capabilities of our products reducing their marketability |
| Our stock price may be volatile and the value of your investment in Plantronics stock could be diminished |
| The market price for our common stock may continue to be affected by a number of factors, including: • Uncertain economic conditions and the decline in investor confidence in the market place; • Changes in our published forecasts of future results of operations; • Quarterly variations in our or our competitors’ results of operations and changes in market share; • The announcement of new products or product enhancements by us or our competitors; • The loss of services of one or more of our executive officers or other key employees; • Changes in earnings estimates or recommendations by securities analysts; • Developments in our industry; • Sales of substantial numbers of shares of our common stock in the public market; • Integration of the Altec Lansing business or market reaction to future acquisitions; • General market conditions; and • Other factors unrelated to our operating performance or the operating performance of our competitors |
| In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many technology companies in particular, and that have often been unrelated to the operating performance of these companies |
| Such factors and fluctuations, as well as general economic, political and market conditions, such as recessions, could materially adversely affect the market price of our common stock |
| Our corporate tax rate may increase, which could adversely impact our cash flow, financial condition and results of operations |
| We have significant operations in various tax jurisdictions throughout the world and a substantial portion of our taxable income historically has been generated in these jurisdictions |
| Currently, some of our operations are taxed at rates substantially lower than US tax rates |
| If our income in these lower tax jurisdictions were no longer to qualify for these lower tax rates, if the applicable tax laws were rescinded or changed, or if the mix of our earnings shifts from lower rate jurisdictions to higher rate jurisdictions, our operating results could be materially adversely affected |
| Altec Lansing’s historical tax rates are higher than those of Plantronics’ pre-acquisition tax rates and will negatively impact our corporate tax rate for the combined entity |
| While we are looking at opportunities to reduce our combined tax rate, there is no assurance that our tax planning strategies will be successful |
| In addition, many of these strategies will require a period of time to implement |
| Moreover, if US or other foreign tax authorities were to change applicable foreign tax laws or successfully challenge the manner in which our profits are currently recognized, our overall taxes could increase, and our business, cash flow, financial condition and results of operations could be materially adversely affected |
| Changes in stock option accounting rules will adversely impact our operating results and may adversely impact our stock price and our ability to compete for employees |
| We have previously measured compensation expense for our employee stock compensation plans under the intrinsic value method of accounting prescribed by APB Opinion Nodtta 25, “Accounting for Stock Issued to Employees” (“APB 25”) |
| In December 2004, the Financial Accounting Standards Board AR 2006 - 31 _________________________________________________________________ [83]Table of Contents (“FASB”) issued SFAS Nodtta 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS Nodtta 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and supersedes APB 25 |
| SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first annual period after June 15, 2005, with early adoption encouraged |
| On March 29, 2005, the SEC issued SAB 107, which provides the SEC Staff’s views regarding interactions between FAS 123R and certain SEC rules and regulations, and provides interpretations of the valuation of share-based payments for public companies |
| We have completed an assessment of the impact of the adoption of SFAS 123R and SAB 107 and have determined the fair value method to measure compensation expense, the appropriate assumptions to include in the fair value model, and the transition method to use upon adoption |
| The Board of Directors approved our conclusions during the fourth quarter of fiscal 2006 and we will implement the policy change in fiscal 2007 |
| We expect the impact of the adoption of SFAS 123R to have a material adverse effect on our results of operations |
| We have significant foreign operations, and there are inherent risks in operating abroad |
| During our fourth quarter of fiscal year 2006, approximately 32prca of our net revenues was derived from customers outside the United States |
| In addition, we conduct the majority of our Audio Communications Group headset assembly operations in our manufacturing facility located in Tijuana, Mexico, and we obtain most of the components and subassemblies used in our products from various foreign suppliers |
| We have just completed construction of a factory and design center in Suzhou, China and are also purchasing a growing number of turnkey products directly from Asia |
| If we are unable to effectively transition outsourced production into our new Suzhou facility, we may be unable to meet demand for these products, and our margins on these products may decrease |
| There are risks in operating the Suzhou factory and expanding our competency in a rapidly evolving economy because, among other reasons, we may be unable to attract sufficient qualified personnel, intellectual property rights may not be enforced as we expect, power may not be available as contemplated or the like |
| Should any of these risks occur, we may be unable to maximize the output from the facility and our financial results may decrease from our anticipated levels |
| Further, the majority of our Audio Entertainment products are manufactured either in our Dongguan, China, manufacturing plant or manufactured by foreign vendors, primarily in China |
| The inherent risks of international operations, either in Mexico or in Asia, could materially adversely affect our business, financial condition and results of operations |
| The types of risks faced in connection with international operations and sales include, among others: • cultural differences in the conduct of business; • fluctuations in foreign exchange rates, particularly with the re-valuation of the Chinese Yuan; • greater difficulty in accounts receivable collection and longer collection periods; • impact of recessions in economies outside of the United States; • reduced protection for intellectual property rights in some countries; • unexpected changes in regulatory requirements; • tariffs and other trade barriers; • political conditions in each country; • management and operation of an enterprise spread over various countries; and • the burden and administrative costs of complying with a wide variety of foreign laws |
| 32 - Plantronics _________________________________________________________________ [84]Table of Contents part i War, terrorism, public health issues or other business interruptions could disrupt supply, delivery or demand of products, which could negatively affect our operations and performance |
| War, terrorism, public health issues or other business interruptions whether in the United States or abroad, have caused or could cause damage or disruption to international commerce by creating economic and political uncertainties that may have a strong negative impact on the global economy, our company, and the our suppliers or customers |
| Our major business operations are subject to interruption by earthquake, flood or other natural disasters, fire, power shortages, terrorist attacks, and other hostile acts, public health issues, and other events beyond its control |
| Our corporate headquarters, information technology, certain research and development activities, and other critical business operations, are located near major seismic faults |
| While the we are partially insured for earthquake-related losses, our operating results and financial condition could be materially affected in the event of a major earthquake or other natural or manmade disaster |
| Although it is impossible to predict the occurrences or consequences or any events, such as described above, such events could significantly disrupt our operations |
| In addition, should major public health issues, including pandemics, arise, we could be negatively impacted by the need for more stringent employee travel restrictions, limitations in the availability of freight services, governmental actions limiting the movement of products between various regions, delays in production ramps of new products, and disruptions in the operations of our manufacturing vendors and component suppliers |
| Our operating results and financial condition could be adversely affected by these events |
| We have intellectual property rights that could be infringed by others and we are potentially at risk of infringement of the intellectual property rights of others |
| Our success will depend in part on our ability to protect our copyrights, patents, trademarks, trade dress, trade secrets, and other intellectual property, including our rights to certain domain names |
| We rely primarily on a combination of nondisclosure agreements and other contractual provisions as well as patent, trademark, trade secret, and copyright laws to protect our proprietary rights |
| Effective trademark, patent, copyright, and trade secret protection may not be available in every country in which our products and media properties are distributed to customers |
| We currently hold 137 United States patents and additional foreign patents and will continue to seek patents on our inventions when we believe it to be appropriate |
| The process of seeking intellectual property protection can be lengthy and expensive |
| Intellectual property may not be issued in response to our applications, and intellectual property that is issued may be invalidated, circumvented or challenged by others |
| If we are required to enforce our intellectual property or other proprietary rights through litigation, the costs and diversion of management’s attention could be substantial |
| In addition, the rights granted under any intellectual property may not provide us competitive advantages or be adequate to safeguard and maintain our proprietary rights |
| Moreover, the laws of certain countries do not protect our proprietary rights to the same extent as do the laws of the United States |
| If we do not enforce and protect our intellectual property rights, it could materially adversely affect our business, financial condition and results of operations |
| We are exposed to potential lawsuits alleging defects in our products and/or other claims related to the use of our products |
| The use of our products exposes us to the risk of product liability and hearing loss claims |
| These claims have in the past been, and are currently being, asserted against us |
| None of the previously resolved claims have materially affected our business, financial condition or results of operations, nor do we believe that any of the pending claims will have such an effect |
| Although we maintain product liability insurance, the coverage provided under our policies could be unavailable or insufficient to cover the full amount of any such claim |
| Therefore, successful product liability or hearing loss claims brought against us could have a material adverse effect upon our business, financial condition and results of operations |
| AR 2006 - 33 _________________________________________________________________ [85]Table of Contents Our mobile headsets are used with mobile telephones |
| There has been continuing public controversy over whether the radio frequency emissions from mobile telephones are harmful to users of mobile phones |
| We believe that there is no conclusive proof of any health hazard from the use of mobile telephones but that research in this area is incomplete |
| We have tested our headsets through independent laboratories and have found that use of our corded headsets reduces radio frequency emissions at the user’s head to virtually zero |
| Our Bluetooth and other wireless headsets emit significantly less powerful radio frequency emissions than mobile phones |
| However, if research establishes a health hazard from the use of mobile telephones or public controversy grows even in the absence of conclusive research findings, there could be an adverse impact on the demand for mobile phones, which reduces demand for headset products |
| Likewise, should research establish a link between radio frequency emissions and wireless headsets and public concern in this area grows, demand for our wireless headsets could be reduced creating a material adverse effect on our financial results |
| There is also continuing and increasing public controversy over the use of mobile telephones by operators of motor vehicles |
| While we believe that our products enhance driver safety by permitting a motor vehicle operator to generally be able to keep both hands free to operate the vehicle, there is no certainty that this is the case and we may be subject to claims arising from allegations that use of a mobile telephone and headset contributed to a motor vehicle accident |
| We maintain product liability insurance and general liability insurance that we believe would cover any such claims |
| However, the coverage provided under our policies could be unavailable or insufficient to cover the full amount of any such claim |
| Therefore, successful product liability claims brought against us could have a material adverse effect upon our business, financial condition and results of operations |
| Our business could be materially adversely affected if we lose the benefit of the services of key personnel |
| Our success depends to a large extent upon the services of a limited number of executive officers and other key employees |
| The unanticipated loss of the services of one or more of our executive officers or key employees could have a material adverse effect upon our business, financial condition and results of operations |
| We also believe that our future success will depend in large part upon our ability to attract and retain additional highly skilled technical, management, sales and marketing personnel |
| Competition for such personnel is intense |
| We may not be successful in attracting and retaining such personnel, and our failure to do so could have a material adverse effect on our business, operating results or financial condition |
| The adoption of voice-activated software may cause profits from our contact center products to decline |
| We are seeing a proliferation of speech-activated and voice interactive software in the market place |
| We have been re-assessing long-term growth prospects for the contact center market given the growth rate and the advancement of these new voice recognition-based technologies |
| Businesses that first embraced these technologies to resolve labor shortages at the peak of the last economic up cycle are now increasing spending on these technologies in order to reduce costs |
| We may experience a decline in our sales to the contact center market if businesses increase their adoption of speech-activated and voice interactive software as an alternative to customer service agents |
| Such adoption could cause a net reduction in contact center agents, and our revenues in this market could decline |
| A significant portion of our profits comes from the contact center market, and a decline in demand in that market could materially adversely affect our results |
| While we believe that this market may grow in future periods, this growth could be slow or revenues from this market could be flat or decline |
| Deterioration in general economic conditions could result in a reduction in the establishment of new 34 - Plantronics _________________________________________________________________ [86]Table of Contents part i contact centers and in capital investments to expand or upgrade existing centers, which could negatively affect our business |
| Because of our reliance on the contact center market, we will be affected more by changes in the rate of contact center establishment and expansion and the communications products used by contact center agents than would a company serving a broader market |
| Any decrease in the demand for contact centers and related headset products could cause a decrease in the demand for our products, which would materially adversely affect our business, financial condition and results of operations |
| While we believe we currently have adequate internal control over financial reporting, we are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price |
| Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404), beginning with our Annual Report on Form 10-K for the fiscal year ended March 31, 2005, our management is required to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal controls over financial reporting |
| We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements |
| On August 18, 2005, we acquired Altec Lansing Technologies, Inc |
| Our management is required to complete an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission for this recently acquired business in the fiscal year following the acquisition |
| We intend to disclose all material changes resulting from the acquisition of Altec Lansing within or prior to the time of our first annual assessment of internal control over financial reporting that is required to include this business or are reasonably likely to materially affect, our internal control over financial reporting |
| Because we have not completed our review of the controls of Altec Lansing, we may have risk associated with controls at this business |
| We have and will continue to incur significant expenses and management resources for Section 404 compliance on an ongoing basis, and anticipate significant expenditures associated with Section 404 compliance for the Altec Lansing acquisition |
| In the event that our chief executive officer, chief financial officer or independent registered public accounting firm determine in the future that our internal control over financial reporting is not effective as defined under Section 404, investor perceptions may be adversely affected and could cause a decline in the market price of our stock |
| Provisions in our charter documents and Delaware law and our adoption of a stockholder rights plan may delay or prevent a third party from acquiring us, which could decrease the value of our stock |
| Our board of directors has the authority to issue preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting and conversion rights, of those shares without any further vote or action by the stockholders |
| The issuance of our preferred stock could have the effect of making it more difficult for a third party to acquire us |
| In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which could also have the effect of delaying or preventing our acquisition by a third party |
| Further, certain provisions of our Certificate of Incorporation and bylaws could delay or make more difficult a merger, tender offer or proxy contest, which could adversely affect the market price of our common stock |
| In 2002, our board of directors adopted a stockholder rights plan, pursuant to which we distributed one right for each outstanding share of common stock held by stockholders of record as of April 12, 2002 |
| Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our board of directors, the plan could make it more difficult for a third AR 2006 - 35 _________________________________________________________________ [87]Table of Contents party to acquire us, or a significant percentage of our outstanding capital stock, without first negotiating with our board of directors regarding such acquisition |