PLANTRONICS, INC. The following discussion and analysis is intended to help you understand our results of operations and financial condition. It is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and related notes thereto included within "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. A discussion regarding our financial condition and results of operations for Fiscal Year 2022 compared to Fiscal Year 2021 is presented below under "Results of Operations." Discussions regarding our financial condition and results of operations for Fiscal Year 2021 compared to Fiscal Year 2020 have been omitted from this Annual Report on Form 10-K, but can be found in our Annual Report on Fiscal Year 2021 Form 10-K, filed with theSEC onMay 18, 2021 , which is available free of charge on theSEC's website at sec.gov and on our website at www.poly.com. This discussion contains forward-looking statements. Please see the sections entitled "Certain Forward-Looking Information" and "Risk Factors" in Part I of this Annual Report on Form 10-K for discussions of the uncertainties, risks, and assumptions associated with these statements. Our fiscal year ends on the Saturday closest to the last day of March. The years endedApril 2, 2022 ("Fiscal Year 2022"),April 3, 2021 ("Fiscal Year 2021"), andMarch 28, 2020 ("Fiscal Year 2020") had 52, 53, and 52 weeks, respectfully. OVERVIEW Poly is a leading global communications technology company that designs, manufactures, and markets integrated communications and collaboration solutions for professionals. Our major product categories are Headsets, Video, Voice, and Services. OnMarch 25, 2022 , the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with HP Inc. ("HP") andPrism Subsidiary Corp. ("Merger Sub"), a wholly-owned subsidiary of HP, providing for Poly's acquisition in an all-cash transaction for$40 per share by way of a merger of Merger Sub with and into Poly (the "Merger"), with Poly continuing as a wholly-owned subsidiary of HP. The Merger is expected to occur, subject to Poly stockholder approval, required regulatory clearances and the satisfaction of other customary closing conditions, in calendar year 2022.
Impact of the Current Environment, Supply Chain Disruptions, and COVID-19 on Our Business
We have experienced and continue to monitor limited supply and longer lead times for certain key components, such as semiconductor chips, necessary to complete production and meet customer demand, including fulfillment of our backlog. We do not manufacture these component parts and currently purchase certain parts, including semiconductor chips and sub-assemblies that require semiconductor chips, from single or limited sources. Additionally, constrained supply has resulted in price inflation for certain components, including semiconductor chips, increased spot market prices and purchases, increased transportation costs, inefficiencies at our owned manufacturing facility inTijuana, Mexico , and inability to fulfill backlog for certain products timely. We continue to monitor our supply chain and are taking action against limited supply and increasing lead times, including increased spot market purchases, outreach to critical suppliers, and entering into contractual obligations that provide for increased costs, and multi-year commitments, to secure supply. For certain of our products, our additional supply increases our exposure to risks associated with significant and/or abrupt changes in product demand, which could result in potential excess of obsolete inventory. Additionally, to the extent we pass through increased costs to our customers, this may result in reduced demand. These factors, among others, are affecting and are expected to continue to affect total net revenue and gross margin rates. In addition, COVID-19 has continued to spread globally and continues to add uncertainty and influence global economic activity, the global supply chain, and financial markets. The impact of the pandemic on our operations has varied by local conditions, government mandates, and business limitations, including travel bans, remote work, and other restrictions. The COVID-19 pandemic led to a massive increase in remote work. As a result, during Fiscal Year 2020 we experienced elevated demand for certain enterprise Headsets and Video devices and a decline in demand for our Voice products and associated Services, as companies shifted from in-office to work-from-home arrangements for many of their office workers. Beginning in the fourth quarter of Fiscal Year 2021 and continuing throughout Fiscal Year 2022, we experienced elevated 49
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However, the impact of COVID-19 is fluid and uncertain, and it has caused, and may continue to cause, various negative effects as we continue to experience constraints in our supply chain, specifically the sourcing of certain components and raw materials, and increased logistics costs to meet customer demand, which, in turn, adversely impacts our gross margins. As a result, the impact of COVID-19 to date has had mixed effects on our results of 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 many factors outside of our control, including the extent and duration of the pandemic, mutations, and variants of the virus, the development and availability of effective treatments, including the availability of vaccines for our global workforce, mandates of protective public safety measures, and the impact of the pandemic on the global economy, global supply chains, and demand for our products. It is not possible at this time to foresee whether or when the outbreak of COVID-19 or other events beyond our control will be effectively contained, nor can we estimate the entirety of the impact that COVID-19 or such other pandemics or natural or man-made disaster will have on the global economy, our business, customers, suppliers, or other business partners. As such, impacts from such events on Poly are highly uncertain and we will continue to assess the impact from such events on our consolidated financial statements. In responding to this pandemic, employee safety continues to be a critical concern for Poly and we have taken measures to protect our employees globally by adherence to public safety and shelter in place directives, physical distancing protocols within offices and manufacturing facilities, providing personal protective equipment, including face masks and hand sanitizers, conducting routine sanitation of facilities, requiring health monitoring before entry into Poly facilities and restricting the number of visitors to our sites. The safety protocols implemented globally meet or exceed current regulations; however, we continue to monitor employees' safety and evolving regulatory requirements. Although our manufacturing facility remains open and certain office employees may utilize our offices when necessary, the majority of all non-factory employees continue to work from home, using headsets and other Poly-issued equipment. We provided COVID-19 vaccines to our employees and their immediate families, as well as other workers, at our manufacturing facility on a voluntary basis free of charge. Fiscal Year 2022 Highlights
Total net revenues for Fiscal Year 2022 were
Product gross margin for Fiscal Year 2022 decreased from 41.3% in the prior year to 37.0%, primarily driven by increased component costs, unfavorable product mix, and increased transportation costs. InMay 2021 , we redeemed the outstanding principal and accrued interest on the 5.50% Senior Notes of$493.9 million . InJune 2021 , the Company entered into a three-year amortizing interest rate swap agreement withBank of America, N.A . The swap has an initial notional amount of$680 million and matures onJuly 31, 2024 . Refer to further discussion in Note 8, Debt, and Note 13, Derivatives, of the accompanying notes to the consolidated financial statements included within "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. During Fiscal Year 2022, we introduced our partnership with Appspace, a leading provider of workspace experience software, to deliver dynamic digital signage on Poly video OS devices to enhance the Return to Office experience for employees and visitors. The digital signage was available on Poly Studio X Series (includingPoly Studio X30, X50, X70) and G7500 video conference devices with an Appspace subscription. We also announced the updated Poly Room Solutions for Microsoft Teams Rooms on Windows. The new lineup of Poly Studio Kits offers premium audio and video for focus, small, medium, and large rooms, and feature Poly's Director AI technology. We additionally introduced a number of next generation Voyager headsets. These products and offerings were available during the Fiscal Year 2022 and did not have a material impact on total net revenues. 50 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS The Company's reportable segments are Products and Services. Our Products reportable segment includes the Headsets, Voice, and Video product lines. Our Services reportable segment includes maintenance support on hardware devices, as well as professional, managed, and cloud services and solutions.
Total Net Revenues
The following table sets forth total net revenues by reportable segment for Fiscal Years 2022, 2021, and 2020:
(in thousands, except percentages) April 2, 2022 Change April 3, 2021 Change March 28, 2020 Net revenues Products$ 1,455,785 (1.0) %$ 1,470,826 2.7 %$ 1,432,736 Services 225,359 (12.2) % 256,781 (2.8) % 264,254 Total net revenues$ 1,681,144 (2.7) %$ 1,727,607 1.8 %$ 1,696,990 Products
Total product net revenues decreased in Fiscal Year 2022 compared to the prior fiscal year primarily due to the following:
•Headsets product category net revenues decreased primarily due to constrained supply of certain components, such as semiconductor chips. •Partially offset by increased Video and Voice product category net revenues driven by elevated demand for certain devices as companies began to shift from work-from-home arrangements to hybrid work models.
Services
Total services net revenues decreased in Fiscal Year 2022 compared to the prior fiscal year primarily due to the continued Video product mix shift from legacy Platform and Telepresence to Studio video bars, which are less complex, easier to install and operate, and carry optional service contracts.
The following table sets forth total net revenues by geographic region for Fiscal Years 2022, 2021, and 2020:
(in thousands, except percentages) April 2, 2022 Change April 3, 2021 Change March 28, 2020 United States$ 774,964 4.2 %$ 743,870 (8.2) %$ 810,669 Europe, Middle East, and Africa 515,372 (10.7) % 576,855 23.9 % 465,621 Asia Pacific 277,258 (3.0) % 285,755 (3.2) % 295,336 Americas, excluding U.S. 113,550 (6.3) % 121,127 (3.4) % 125,364 Total international net revenues 906,180 (7.9) % 983,737 11.0 % 886,321 Total net revenues$ 1,681,144 (2.7) %$ 1,727,607 1.8 %$ 1,696,990 United StatesU.S. total net revenues increased in Fiscal Year 2022 as compared to the prior fiscal year primarily due to increased net sales in the Video and Voice product categories, partially offset by decreased net sales in the Services category.U.S. Headsets total net revenues were materially unchanged in Fiscal Year 2022 compared to the prior fiscal year.
International
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International total net revenues decreased in Fiscal Year 2022 as compared to the prior fiscal year primarily due to decreased net sales in the Headsets and Services product categories, partially offset by increased net sales in the Video product category. International Voice total net revenues were materially unchanged in Fiscal Year 2022 compared to the prior fiscal year. Fiscal Year 2022 total net revenues were also favorably impacted by fluctuations in exchange rates which resulted in an increase of approximately$11.9 million , net of the effects of hedging.
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. (in thousands, except percentages) April 2, 2022 Change April 3, 2021 Change March 28, 2020 Products Net revenues $ 1,455,785 (1.0) % $ 1,470,826 2.7 % $ 1,432,736 Cost of revenues 917,511 6.3 % 863,529 (17.7) % 1,049,826 Gross profit $ 538,274 (11.4) % $ 607,297 58.6 % $ 382,910 Gross profit % 37.0 % 41.3 % 26.7 % Services Net revenues $ 225,359 (12.2) % $ 256,781 (2.8) % $ 264,254 Cost of revenues 77,540 (11.4) % 87,527 (7.8) % 94,929 Gross profit $ 147,819 (12.7) % $ 169,254 - % $ 169,325 Gross profit % 65.6 % 65.9 % 64.1 % Total Net revenues $ 1,681,144 (2.7) % $ 1,727,607 1.8 % $ 1,696,990 Cost of revenues 995,051 4.6 % 951,056 (16.9) % 1,144,755 Gross profit $ 686,093 (11.6) % $ 776,551 40.6 % $ 552,235 Gross profit % 40.8 % 44.9 % 32.5 % Products Gross profit as a percentage of total product net revenues decreased in Fiscal Year 2022 as compared to the prior fiscal year, primarily due to increased component costs, unfavorable product mix, and increased transportation costs. The increase in component costs was primarily driven by increased spot market purchases of certain key components, such as semiconductor chips, due to global supply shortages. Transportation costs increased as a result of high global demand and limited capacity of air freight carriers and increased air freight usage to mitigate longer component lead times to meet our commitments to customers.
Services
Gross profit as a percentage of total services net revenues was materially unchanged in Fiscal Year 2022 as compared to the prior fiscal year.
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Operating Expenses
Operating expenses for Fiscal Years 2022, 2021, and 2020 were as follows:
(in thousands, except percentages) April 2, 2022 Change April 3, 2021 Change March 28, 2020 Research, development and $ 183,553 (12.3) % $ 209,290 (4.1) % $ 218,277
engineering
% of total net revenues 10.9 % 12.1 % 12.9 % Selling, general, and 499,839 2.3 % 488,378 (18.0) % 595,463 administrative % of total net revenues 29.7 % 28.3 % 35.1 % Impairment of goodwill and - - % - (100.0) % 489,094 long-lived assets % of total net revenues - % - % 28.8 % Loss (gain), net from litigation - 100.0 % 17,561 (2,535.6) % (721) settlements % of total net revenues - % 1.0 % - % Restructuring and other related 34,937 (28.3) % 48,704 (10.1) % 54,177 charges % of total net revenues 2.1 % 2.8 % 3.2 % Total operating expenses $ 718,329 (6.0) % $ 763,933 (43.7) % $ 1,356,290 % of total net revenues 42.7 % 44.2 % 79.9 %
Research, Development, and Engineering
Research, development, and engineering costs are expensed as incurred and consist primarily of compensation costs, outside services, expensed materials, and overhead expenses.
The decrease in research, development, and engineering expenses in Fiscal Year 2022 compared to the prior fiscal year was primarily due to lower compensation expense driven by reduction in headcount, cost control efforts, and lower incentive compensation.
Selling, General, and Administrative
Selling, general, and administrative costs are expensed as incurred and consist primarily of compensation costs, marketing costs, travel expenses, professional service fees, and overhead expenses. The increase in selling, general, and administrative expenses in Fiscal Year 2022 compared to the prior fiscal year was primarily due to increased marketing activity and travel expenses, partially offset by lower incentive compensation.
Loss (gain), net from Litigation Settlements
During Fiscal Year 2021, we recorded litigation charges for settlements that occurred during the period with no similar activity recorded during Fiscal Year 2022. Refer to Note 7, Commitments and Contingencies, of the accompanying Notes to the Consolidated Financial Statements included within "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Restructuring and Other Related Charges
During Fiscal Year 2022 and 2021, we recorded restructuring and other related
charges to further reduce expenses and optimize our cost structure. These
actions consisted of headcount reductions and office closures. Refer to Note 9,
Restructuring and Other Related Charges, of the accompanying notes to the
consolidated financial statements included within "Item 8. Financial Statements
and Supplementary Data" of this Annual Report on Form 10-K.
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Interest Expense
(in thousands, except
percentages) April 2, 2022 Change April 3, 2021 Change March 28, 2020
Interest expense $ 69,711 (15.6) % $ 82,606 (10.8) % $ 92,640
% of total net revenues 4.1 % 4.8 % 5.5 %
The decrease in interest expense in Fiscal Year 2022 compared to the prior
fiscal year was primarily due to lower interest expense related to the 2023
Senior Notes and lower outstanding principal balance on the term loan facility,
partially offset by the amortization of the remaining debt issuance costs
related to the 2023 Senior Notes, which were redeemed during the first quarter
of Fiscal Year 2022, and interest expense related to the 2029 Senior Notes,
which were issued in the fourth quarter of Fiscal Year 2021. Refer to Note 8,
Debt, of the accompanying notes to the consolidated financial statements
included within "Item 8. Financial Statements and Supplementary Data" of this
Annual Report on Form 10-K.
Other Non-Operating Expense (Income), Net
(in thousands, except percentages) April 2, 2022 Change April 3, 2021 Change March 28, 2020 Other non-operating expense (income), net$ 291 105.7 %$ (5,108) (4,460.7) %$ (112) % of total net revenues - % (0.3) % - %
During Fiscal Year 2022, other non-operating expense (income), net increase primarily due to lower unrealized gains on the deferred compensation asset portfolio and net foreign currency losses during the period compared to the prior year.
Income Tax Benefit (in thousands, except percentages) April 2, 2022 Change April 3, 2021 Change March 28, 2020 Loss before income taxes$ (102,238) (57.6) %$ (64,880) 92.8 %$ (896,583) Income tax benefit (120,155) (1,491.7) % (7,549) 89.1 % (69,401) Net income (loss)$ 17,917 131.3 %$ (57,331) 93.1 %$ (827,182) Effective tax rate 117.5 % 11.6 % 7.7 %
The Company and its subsidiaries are subject to taxation in the
InSeptember 2021 , we transferred certain non-Americas intellectual property ("IP") rights between our wholly-owned subsidiaries ("IP transfer") to align with our evolving business operations, resulting in the derecognition of a deferred tax asset ("DTA") of$91.1 million and the recognition of a new DTA of$204.5 million , which represents the book and tax basis difference in the IP and was based on the fair value of the IP, in the respective subsidiaries. This results in a net discrete deferred tax benefit of$113.4 million . The impact of the IP transfer to net cash flows on the consolidated statements of cash flows during Fiscal Year 2022 was not material. Management has concluded that an impairment for local statutory and tax reporting to the aforementioned IP is likely however any impairment loss would be deductible for local tax purposes. As such, a DTA related to net operating loss carryforward of$48.0 million was recognized based on the expected impairment which was offset by a corresponding decrease in the DTA related to the intangible asset by the same amount as ofApril 2, 2022 . Because the IP intangible asset is the result of an intercompany transfer, there is no intangible asset recognized in the consolidated balance sheets. Accordingly, the aforementioned IP impairment hast no net impact our consolidated statements of operations, balance sheet, or cash flows. Valuation allowances are established when necessary to reduce DTA's to the amounts that are more-likely-than-not expected to be realized. Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing DTA's. Valuation allowances are established when necessary to reduce DTA's to the amounts that are more-likely-than-not to be realized. On the basis of this evaluation, as ofApril 2, 2022 , a valuation allowance against ourU.S. federal and state DTA's continues to be maintained. 54 -------------------------------------------------------------------------------- Table of Contents As ofApril 2, 2022 , we had approximately$215.0 million in non-U.S. net DTA's after valuation allowance. A significant portion of our DTA's relate to internal intellectual property restructuring between wholly owned subsidiaries and net operating losses. 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 DTA's.
The amount of the DTA's considered realizable, however, could be adjusted if estimates of future taxable income increase or decrease, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence, such as our future projections.
Our effective tax rate for Fiscal Years 2022, 2021, and 2020 differs from the statutory rate due to the impact of foreign operations taxed at different statutory rates, transfer of certain non-Americas IP, the goodwill impairment charge, income tax credits, state taxes, and other factors. Our future tax rate could be impacted by a shift in the mix of domestic and foreign income, tax treaties with foreign jurisdictions, changes in tax laws in theU.S. or internationally, or a change in estimate of future taxable income, which could result in a valuation allowance being required. 55 -------------------------------------------------------------------------------- Table of Contents FINANCIAL CONDITION
Liquidity and Capital Resources
The following tables present selected financial information and statistics as ofApril 2, 2022 andApril 3, 2021 and for Fiscal Year 2022 and Fiscal Year 2021 (in thousands): (in thousands) April 2, 2022 April 3, 2021 Cash and cash equivalents and short-term investments 183,703 217,119 Property, plant, and equipment, net 127,021 140,875 Current portion of long-term debt - 478,807 Long-term debt, net of issuance costs 1,500,283 1,496,064 Working capital 271,691 213,975 Fiscal Year Ended April 2, 2022 April 3, 2021 Cash (used in) provided by operating activities (7,769) 145,180 Cash used in investing activities (33,808) (18,877) Cash (used in) provided by financing activities (481,970) 353,319 Our cash and cash equivalents as ofApril 2, 2022 consist of bank deposits and money market funds with third-party financial institutions. As ofApril 2, 2022 , of our$183.7 million of cash and cash equivalents and short-term investments,$94.4 million was held domestically, while$89.4 million was held by foreign subsidiaries, and approximately 68% was based in USD-denominated instruments. As ofApril 2, 2022 , our short-term investments were composed of mutual funds. An additional source of liquidity is$97.5 million of availability from our revolving credit facility, net of outstanding letters of credit. Historically, we use cash provided by operating activities as our primary source of liquidity. We expect that cash provided by operating activities will fluctuate in future periods as a result of a number of factors, including fluctuations in our revenues, the timing of compensation-related payments, such as our annual bonus/variable compensation plan, interest payments on our long-term debt, product shipments, accounts receivable collections, inventory and supply chain management, and the timing and amount of tax and other payments. During Fiscal Year 2022, cash used in operating activities of$(7.8) million was a result of$(121.6) million of cash used in net working capital, partially offset by$17.9 million of net income and$96.0 million in net non-cash charges. Cash used in investing activities of$(33.8) million consisted primarily of capital expenditures of$(29.7) million and other investing activities of$(6.0) million . Cash used in financing activities of$(482.0) million consisted primarily of$(480.7) million of repayments of long-term debt and$(13.1) million of employees' tax withheld and paid for restricted stock and restricted stock units, partially offset by$11.8 million of proceeds from stock-based compensation plans. During Fiscal Year 2021, cash provided by operating activities of$145.2 million was a result of$(57.3) million of net loss, non-cash adjustments to net loss of$226.0 million and a decrease in the net change in operating assets and liabilities of$(23.5) million . Cash used in investing activities of$(18.9) million during Fiscal Year 2021 consisted primarily of capital expenditures of$(22.7) million , partially offset by proceeds from sale of investments of$2.5 million and proceeds from sale of property, plant, and equipment of$1.9 million . Cash provided by financing activities of$353.3 million during Fiscal Year 2021 consisted primarily of proceeds from debt issuance, net of issuance costs of$493.9 million and$12.3 million of proceeds from issuances under stock-based compensation plans. This was partially offset by$(147.0) million repayments of long-term debt and$(5.9) million for employees' tax withheld and paid for restricted stock and restricted stock units. 56
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Capital Expenditures
We anticipate our current cash and cash flows from operating activities will be sufficient to fund our capital expenditures in Fiscal Year 2023, relating primarily to investments in our manufacturing capabilities, including tooling for new products, new IT investments, and facilities upgrades. We will continue to evaluate new business opportunities and new markets. As a result, our future growth within the existing business or new opportunities and markets may dictate the need for additional facilities and capital expenditures to support that growth.
Debt
InJuly 2018 , in connection with the Polycom acquisition, the Company entered into a Credit Agreement withWells 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. During Fiscal Year 2022, we did not prepay any of our outstanding principal. As ofApril 2, 2022 , we had$1.0 billion of principal outstanding. InDecember 2021 , the Company entered into an Amendment to the Credit Agreement 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 ofApril 2, 2022 , the Company has four outstanding letters of credit on the revolving credit facility for a total of$2.5 million and had$97.5 million available under the revolving credit facility. As ofApril 2, 2022 , the Company was in compliance with the financial covenants. InJuly 2018 , the Company entered into a 4-year amortizing interest rate swap agreement withBank of America, N.A . The swap has an initial notional amount of$831 million and matures onJuly 31, 2022 . InJune 2021 , the Company entered into a three-year amortizing interest rate swap agreement withBank of America, N.A . The swap has an initial notional amount of$680 million and matures onJuly 31, 2024 . During Fiscal Year 2022, the Company reclassified into interest expense$9.5 million and recorded a$24.2 million unrealized gain on its interest rate swaps derivatives designated as a cash flow hedge. InMarch 2021 , the Company issued$500.0 million aggregate principal amount of 4.75% Senior Notes. The 4.75% Senior Notes mature onMarch 1, 2029 , and bear interest at a rate of 4.75% per annum, payable semi-annually onMarch 1 andSeptember 1 of each year. A portion of the proceeds from the 4.75% Senior Notes was used to redeem the outstanding principal and accrued interest on the 5.50% Senior Notes of$493.9 million inMay 2021 . As ofApril 2, 2022 ,$500 million of principal was outstanding. Our ability to make scheduled payments or to refinance our obligations with respect to the Senior Notes and our other indebtedness under our Credit Agreement will depend on our financial and operating performance, which, in turn, is subject to prevailing economic and industry conditions and other factors, including the availability of financing in the banking and capital markets, beyond our control. In addition, any refinancing of our indebtedness may be at higher interest rates, particularly in the current environment of rising interest rates, and may require us to comply with more onerous covenants, which could further restrict our operations. We may at any time and from time to time, depending on market conditions and prices, continue 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. Under the terms of the Merger Agreement, from the date of the Merger Agreement to the termination or consummation of the Merger, we are restricted in our ability to drawdown or incur additional indebtedness, under certain conditions, without the prior written consent of HP. See further discussion of our business risks associated with the Merger under the risk factor titled "While the Merger is pending, we are subject to business uncertainties and contractual restrictions that could harm our financial condition, operating results, and business" within "Item 1A. Risk Factors" in this Annual Report on Form 10-K. 57 -------------------------------------------------------------------------------- Table of Contents In addition, our liquidity, capital resources, and results of operations in any period could be affected by repurchases of our common stock, the payment in the future of cash dividends if the Board determines to reinstate the dividend program, the exercise of outstanding stock options, restricted stock grants under stock plans, and the issuance of common stock under the Employee Stock Purchase Program ("ESPP"). The Acquisition of Polycom affected our liquidity and leverage ratios, and we are reducing our debt leverage ratios by prioritizing the repayment of the debt obtained to finance such Acquisition. We receive cash from the exercise of outstanding stock options under our stock plan and the issuance of shares under our ESPP. However, the resulting increase in the number of outstanding shares from these equity grants and issuances could affect our earnings per share. We cannot predict the timing or amount of proceeds from the sale or exercise of these securities or whether they will be exercised, forfeited, canceled, or will expire.
For further information regarding our debt issuances and related hedging activity refer to Note 8, Debt, and Note 13, Derivatives, of the accompanying notes to the consolidated financial statements included within "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Dividends
The Company did not declare or pay cash dividends during Fiscal Years 2022 or 2021.
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 for one year from the issuance of these consolidated financial statements; however, any projections of future financial needs and sources of working capital are subject to uncertainty, particularly in light of the uncertainty resulting from the impact of COVID-19 on our financial results. Readers are cautioned to review the risks, uncertainties, and assumptions set forth in this Annual Report on Form 10-K, including the sections entitled "Part I. Certain Forward-Looking Information" and "Part I. Item 1A. Risk Factors" for factors that could affect our estimates for future financial needs and sources of working capital. Contractual Obligations The following table summarizes our future contractual obligations as ofApril 2, 2022 and the effect that such obligations are expected to have on our liquidity and cash flows in future periods: Payments Due by Period Less than 1 More than 5 (in thousands) Total year 1-3 years 4-5 years years Operating leases$ 63,096 $
15,185
617,798 583,801 33,596 401 -
Long-term debt (1) 1,683,063 23,750 47,500 1,064,313 547,500
Toll charge 53,655 6,312 27,617 19,726 -
Total contractual obligations $ 2,417,612 $ 629,048 $ 139,407 $ 1,090,855 $ 558,302 (1) Includes future interest on outstanding debt.
Operating Leases
We lease certain facilities under operating leases expiring through the year endedApril 3, 2027 . Certain of these leases provide for renewal options for periods ranging from one to five years and in the normal course of business. We may exercise the renewal options. In addition to the net minimum lease payments noted above, we are contractually obligated to pay certain operating expenses during the term of the lease such as maintenance, taxes and insurance.
Unconditional Purchase Obligations
We use several contract manufacturers to manufacture raw materials, components,
and subassemblies for our products through our supply and demand information
that can cover periods up to 78 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, including annual minimum
purchase obligations, and open orders based on projected demand information.
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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 sheets 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 April 2, 2022 , our unconditional purchase obligations were primarily
comprised of third-party manufacturing and component purchase commitments,
including $51.8 million of consigned inventories. We expect to consume
unconditional purchase obligations in the normal course of business, net of an
immaterial purchase commitments reserve. In certain instances, these agreements
allow us the option to cancel, reschedule, and adjust our requirements based on
our business needs in partnering with our suppliers given the current
environment.
Toll Charge
As ofApril 2, 2022 , our obligation associated with the deemed repatriation toll charge is$53.7 million , which we are paying over an eight year period in installments. For additional details regarding the Tax Cuts and Jobs Act and the toll charge, refer to Note 15, Income Taxes, of the accompanying notes to the consolidated financial statements included within "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Unrecognized Tax Benefits
As ofApril 2, 2022 , short-term and long-term income taxes payable reported on our consolidated balance sheet included unrecognized tax benefits and related interest of$14.4 million and$3.7 million , respectively. We are unable to reliably estimate the timing of unrecognized tax benefits, as such, they are not included in the contractual obligations table above. The reduction of$2.5 million of unrecognized tax benefits during the fourth quarter of Fiscal Year 2022 is primarily attributable to the lapse of applicable statute of limitations. 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.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles inthe United States of America ("U.S. GAAP"). In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, future expectations and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On an ongoing basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance withU.S. GAAP. Because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. Our significant accounting policies are discussed in Note 2, Significant Accounting Policies, of the accompanying notes to the consolidated financial statements included within "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. We believe the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective, or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. We have reviewed these critical accounting estimates and related disclosures with the Audit Committee. •Revenue Recognition and Related Allowances •Inventory Valuation •Income Taxes •Goodwill, Purchased Intangibles, and Impairment 59 -------------------------------------------------------------------------------- Table of Contents Revenue Recognition and Related Allowances Our revenue consists of hardware, software, and services. Revenue is recognized when control for these offerings is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for products and services. Our contracts with customers may include promises to provide multiple deliverables. Determining whether the offerings and services are considered distinct performance obligations that should be accounted for separately or as one combined performance obligation may require significant judgment. Judgment is required to determine the level of integration and interdependency between certain professional services and the related hardware and software. This determination influences whether the services are distinct and accounted for separately as a performance obligation. Service revenue primarily includes maintenance support on hardware devices and is recognized ratably over the contract term as those services are delivered. Product, software, and certain other services are satisfied at a point in time when control is transferred or as the services are delivered to the customer. Our indirect channel model includes both a two-tiered distribution structure, where we sell to distributors that subsequently sell to resellers, and a one-tiered structure where we sell directly to resellers. For these arrangements, transfer of control begins at the time access to our services is made available to our customer and entitlements have been contractually established, provided all other criteria for revenue recognition are met. Judgment is required to determine whether our distributors and resellers have the ability to honor their commitment to pay, regardless of whether they collect payment from their customers. If market conditions change significantly, including increased uncertainty of our channel partners liquidity as a result of COVID-19, it could change our assessment, causing a material change in the amount of revenue that we report in a particular period. Sales through our distribution and retail channels are made primarily under agreements allowing for rights of return in limited circumstances, such as stock rotation, non-conforming products, and instances where the Company provides its approval. Certain agreements with retail customers may permit rights of return for additional reasons, such as customer satisfaction, in accordance with the terms of the particular contract. Our agreements typically provide for various sales incentive programs, such as back-end rebates, discounts, marketing development funds, price protection, and other sales incentives. We have an established sales history for these arrangements and we record the estimated reserves and allowances at the time the related revenue is recognized. Customer sales returns are estimated based on historical data, relevant current data, and the monitoring of inventory in the distribution channel. The partner incentives reduce revenue in the current period and are intended to drive hardware sell through. Depending on how the payments are made and whether we have right to offset, the reserves associated with the partner incentive programs are recorded on the consolidated balance sheet as either contra Accounts Receivable or Accounts Payable. For more details about revenue recognition see Note 17, Revenue and Major Customers, and the Risk Factors: "Failure to adequately service and support our product offerings, or a decline in demand for our service offerings, could harm our results of operations," and "The increased use of software in our products could impact the way we recognize revenue which could adversely impact our financial results" included within "Item 8. Financial Statements and Supplementary Data" and "Part I. Item 1A. Risk Factors" of this Annual Report on Form 10-K, respectively.
Inventory Valuation
Inventories are valued at the lower of cost or net realizable value. The Company
holds inventory for both its products and services businesses. The Company
writes down inventories that have become obsolete or are in excess of
anticipated demand or net realizable value. Our estimate of write downs for
excess and obsolete inventory is based on a detailed analysis of on hand
inventory and purchase commitments in excess of forecasted demand. Our products
require long-lead time parts available from a subset of vendors and,
occasionally, last-time buys of raw materials for products with long lifecycles.
The effects of demand variability, long-lead times, and last-time buys have
historically contributed to inventory write-downs. Our demand forecast considers
historical sales, sales price, projected future shipments, market conditions,
inventory on hand, purchase commitments, product development plans and product
life cycle, inventory on consignment, and other competitive factors. Significant
and abrupt changes in product demand increases the complexity of management's
evaluation of potential excess or obsolete inventory. During Fiscal Year 2022,
the global supply chain constraints resulting from the COVID-19 pandemic was an
incremental variable in assessing our risk profile with respect to demand
changes. Refer to "Contractual Obligations" for additional details regarding
consigned inventories.
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We have not made any material changes in the accounting methodology we use to
estimate our inventory write-downs or adverse purchase commitments during the
periods presented. If the demand or market conditions for our products are less
favorable than forecasted, including any market shifts or product demand due to
the COVID-19 pandemic, or if unforeseen technological changes negatively impact
the utility of our inventory, we may be required to record additional inventory
write-downs or adverse purchase commitments, which would negatively affect our
results of operations in the period the write-downs or adverse purchase
commitments were recorded. For more details about purchased inventory valuation
and inventory reserves see Note 5, Details of Certain Balance Sheet Accounts and
the Risk Factors: "The success of our new products depends on several factors
which, if not achieved, could adversely impact our financial results," and
"Product obsolescence or discontinuance and excess inventory can negatively
affect our results of operations" included within "Item 8. Financial Statements
and Supplementary Data" and "Part I. Item 1A. Risk Factors" of this Annual
Report on Form 10-K, respectively.
Income Taxes
We are subject to income taxes in theU.S. and various foreign jurisdictions and our income tax returns are periodically audited by domestic and foreign tax authorities. These audits may include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any one-time, multiple tax years may be subject to audit by various tax authorities. In evaluating the exposures associated with our various tax filing positions, we record a liability for such exposures. A number of years may elapse before a particular matter for which we have established a liability is audited and fully resolved or clarified. To the extent we prevail in matters for which a liability has been established, or are required to pay amounts in excess of our established liability, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would generally require use of our cash and may result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement may be recognized as a reduction in our effective income tax rate in the period of resolution. We recognize the impact of an uncertain income tax position on income tax expense at the largest amount that is more-likely-than-not to be sustained. An unrecognized tax benefit will not be recognized unless it has a greater than 50% likelihood of being sustained. We adjust our tax liability for unrecognized tax benefits in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position, or when more information becomes available. Our liability for unrecognized tax benefits contains uncertainties because management is required to make assumptions and apply judgment to estimate the exposures associated with our various filing positions. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more-likely-than-not to be realized. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income, and ongoing tax planning strategies in assessing the need for a valuation allowance. For more details about income taxes see Note 15, Income Taxes, and the Risk Factor: "We operate in multiple tax jurisdictions globally. Our corporate tax rate may increase or we may incur additional tax liabilities, and/or changes in applicable tax regulations and resolutions of tax disputes could negatively impact our cash flow, financial condition, and results of operations" included within "Item 8. Financial Statements and Supplementary Data" and "Part I. Item 1A. Risk Factors" of this Annual Report on Form 10-K, respectively.
Goodwill has been measured as the excess of the cost of an acquisition over the amount assigned to tangible and identifiable intangible assets acquired, less liabilities assumed. At least annually, in the fourth quarter of each fiscal year, or more frequently if indicators of impairment exist, management performs a review to determine if the carrying value of goodwill is impaired. The identification and measurement of goodwill impairment involves the estimation of fair value at the Company's reporting unit level. The Company determines its reporting units by assessing whether discrete financial information is available and if segment management regularly reviews the results of that component. 61 -------------------------------------------------------------------------------- Table of Contents The Company performs an initial assessment of qualitative factors to determine whether the existence of events and circumstances leads to a determination that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of relevant events and circumstances, the Company determines that it is more-likely-than-not that the fair value of the reporting unit exceeds its carrying value and there is no indication of impairment, no further testing is performed. However, if the Company concludes otherwise, a quantitative impairment test must be performed by estimating the fair value of the reporting unit and comparing it with its carrying value, including goodwill. If the carrying amount of a reporting unit is greater than its estimated fair value, goodwill is written down by the excess amount, limited to the total amount of goodwill allocated to that reporting unit. The fair value of the Company's reporting units is estimated using a discounted cash flow model (income approach), which utilizes Level 3 inputs. The income approach includes assumptions for, among others, forecasted revenue, operating income, and discount rates, all of which require significant judgment by management. These assumptions also consider the current industry environment and outlook, and the resulting impact on the Company's expectations for the performance of its business. Intangible assets other than goodwill are carried at cost and amortized over their estimated useful lives. The Company reviews identifiable finite-lived intangible assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying value of the related asset group may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated undiscounted cash flows resulting from use of the asset group and its ultimate disposition. Measurement of any impairment loss is based on the amount by which the carrying value of the asset group exceeds its fair value. The fair value of an asset group is estimated using a discounted cash flow model (income approach), which utilizes Level 3 inputs. The income approach includes assumptions for, among others, forecasted revenue, operating income, and discount rates, all of which require significant judgment by management. For more details about impairment of goodwill and other intangible assets see Note 6,Goodwill and Purchased Asset Intangibles, and the Risk Factor: "Critical accounting estimates involve the use of judgements and if actual results vary from our estimates or assumptions underlying such estimates, our financial results could be negatively affected" included within "Item 8. Financial Statements and Supplementary Data" and "Part I. Item 1A. Risk Factors" of this Annual Report on Form 10-K, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements issued by the FASB are not expected to have a material impact on the Company's financial position, results of operations, or cash flows. For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our Consolidated Financial Statements, see Note 3, Recent Accounting Pronouncements, of the accompanying Notes to the Consolidated Financial Statements included within "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
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