United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 201830, 2019
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____to ___________ to _______
Commission file number 0-31983
GARMIN LTD.
(Exact name of Company as specified in its charter)
Switzerland (State or other jurisdiction of incorporation or organization) | 98-0229227 (I.R.S. Employer identification no.) |
Mühlentalstrasse 2 8200 Schaffhausen Switzerland (Address of principal executive offices) | N/A (Zip Code) |
Company'sCompany’s telephone number, including area code: +41 52 630 1600
Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [✓]☑ NO [ ]☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES [✓ ]☑ NO [ ]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [✓]☑ Accelerated Filer [ ]☐ Non-accelerated Filer [ ]☐ (Do not check if a smaller reporting company) Smaller reporting company [ ]☐ Emerging growth company [ ]☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. YES [ ]☐ NO [ ]☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [ ]☐ NO [✓]☑
Number of shares outstanding of the registrant’s common shares as of April 30, 201829, 2019
CHF 0.10 par value: 198,077,418 (including treasury shares)
Garmin Ltd.
Form 10-Q
Quarter Ended March 31, 201830, 2019
Table of Contents
Part I - Financial Information
Item I - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except per share information)
March 31, 2018 | December 30, 2017 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 898,981 | $ | 891,488 | ||||
Marketable securities | 167,745 | 161,687 | ||||||
Accounts receivable, net | 409,704 | 590,882 | ||||||
Inventories, net | 547,412 | 517,644 | ||||||
Deferred costs | 29,327 | 30,525 | ||||||
Prepaid expenses and other current assets | 138,114 | 153,912 | ||||||
Total current assets | 2,191,283 | 2,346,138 | ||||||
Property and equipment, net | 604,813 | 595,684 | ||||||
Restricted cash | 279 | 271 | ||||||
Marketable securities | 1,309,185 | 1,260,033 | ||||||
Deferred income taxes | 199,090 | 195,981 | ||||||
Noncurrent deferred costs | 32,428 | 33,029 | ||||||
Intangible assets, net | 421,006 | 409,801 | ||||||
Other assets | 97,138 | 107,352 | ||||||
Total assets | $ | 4,855,222 | $ | 4,948,289 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 136,132 | $ | 169,640 | ||||
Salaries and benefits payable | 90,137 | 102,802 | ||||||
Accrued warranty costs | 35,422 | 36,827 | ||||||
Accrued sales program costs | 56,266 | 93,250 | ||||||
Deferred revenue | 98,660 | 103,140 | ||||||
Accrued royalty costs | 17,445 | 32,204 | ||||||
Accrued advertising expense | 16,007 | 30,987 | ||||||
Other accrued expenses | 69,949 | 93,652 | ||||||
Income taxes payable | 37,825 | 33,638 | ||||||
Dividend payable | — | 95,975 | ||||||
Total current liabilities | 557,843 | 792,115 | ||||||
Deferred income taxes | 74,714 | 76,612 | ||||||
Noncurrent income taxes | 140,368 | 138,295 | ||||||
Noncurrent deferred revenue | 83,222 | 87,060 | ||||||
Other liabilities | 1,882 | 1,788 | ||||||
Stockholders' equity: | ||||||||
Shares, CHF 0.10 par value, 198,077 shares authorized and issued; | ||||||||
188,521 shares outstanding at March 31, 2018; | ||||||||
and 188,189 shares outstanding at December 30, 2017; | 17,979 | 17,979 | ||||||
Additional paid-in capital | 1,818,532 | 1,828,386 | ||||||
Treasury stock | (450,160 | ) | (468,818 | ) | ||||
Retained earnings | 2,546,400 | 2,418,444 | ||||||
Accumulated other comprehensive income | 64,442 | 56,428 | ||||||
Total stockholders’ equity | 3,997,193 | 3,852,419 | ||||||
Total liabilities and stockholders' equity | $ | 4,855,222 | $ | 4,948,289 |
March 30, | December 29, | |||||
2019 | 2018 | |||||
Assets | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 1,115,951 | $ | 1,201,732 | ||
Marketable securities | 197,385 | 182,989 | ||||
Accounts receivable, net | 453,069 | 569,833 | ||||
Inventories | 598,387 | 561,840 | ||||
Deferred costs | 27,567 | 28,462 | ||||
Prepaid expenses and other current assets | 119,778 | 120,512 | ||||
Total current assets | 2,512,137 | 2,665,368 | ||||
Property and equipment, net | 672,299 | 663,527 | ||||
Operating lease right-of-use assets | 54,978 | — | ||||
Restricted cash | 148 | 73 | ||||
Marketable securities | 1,337,771 | 1,330,123 | ||||
Deferred income taxes | 170,935 | 176,959 | ||||
Noncurrent deferred costs | 28,428 | 29,473 | ||||
Intangible assets, net | 411,162 | 417,080 | ||||
Other assets | 92,287 | 100,255 | ||||
Total assets | $ | 5,280,145 | $ | 5,382,858 | ||
Liabilities and Stockholders’ Equity | ||||||
Current liabilities: | ||||||
Accounts payable | $ | 170,474 | $ | 204,985 | ||
Salaries and benefits payable | 95,881 | 113,087 | ||||
Accrued warranty costs | 35,042 | 38,276 | ||||
Accrued sales program costs | 54,597 | 90,388 | ||||
Deferred revenue | 93,653 | 96,372 | ||||
Accrued royalty costs | 16,768 | 24,646 | ||||
Accrued advertising expense | 18,263 | 31,657 | ||||
Other accrued expenses | 81,919 | 69,777 | ||||
Income taxes payable | 55,929 | 51,642 | ||||
Dividend payable | — | 200,483 | ||||
Total current liabilities | 622,526 | 921,313 | ||||
Deferred income taxes | 98,959 | 92,944 | ||||
Noncurrent income taxes | 127,339 | 127,211 | ||||
Noncurrent deferred revenue | 72,531 | 76,566 | ||||
Noncurrent operating lease liabilities | 43,277 | — | ||||
Other liabilities | 227 | 1,850 | ||||
Stockholders’ equity: | ||||||
Shares, CHF 0.10 par value, 198,077 shares authorized and issued; 189,847 shares outstanding at March 30, 2019; and 189,461 shares outstanding at December 29, 2018; | 17,979 | 17,979 | ||||
Additional paid-in capital | 1,810,196 | 1,823,638 | ||||
Treasury stock | (381,815 | ) | (397,692 | ) | ||
Retained earnings | 2,850,588 | 2,710,619 | ||||
Accumulated other comprehensive income | 18,338 | 8,430 | ||||
Total stockholders’ equity | 4,315,286 | 4,162,974 | ||||
Total liabilities and stockholders’ equity | $ | 5,280,145 | $ | 5,382,858 |
See accompanying notes.
3
Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share information)
13-Weeks Ended | ||||||||||||||
13-Weeks Ended | March 30, | March 31, | ||||||||||||
March 31, 2018 | April 1, 2017 | 2019 | 2018 | |||||||||||
Net sales | $ | 710,872 | $ | 641,510 | $ | 766,050 | $ | 710,872 | ||||||
Cost of goods sold | 284,337 | 268,704 | 314,352 | 284,337 | ||||||||||
Gross profit | 426,535 | 372,806 | 451,698 | 426,535 | ||||||||||
Advertising expense | 25,311 | 31,525 | 27,615 | 25,311 | ||||||||||
Selling, general and administrative expense | 117,065 | 102,051 | 126,781 | 117,065 | ||||||||||
Research and development expense | 141,957 | 122,202 | 145,919 | 141,957 | ||||||||||
Total operating expense | 284,333 | 255,778 | 300,315 | 284,333 | ||||||||||
Operating income | 142,202 | 117,028 | 151,383 | 142,202 | ||||||||||
Other income (expense): | ||||||||||||||
Other income: | ||||||||||||||
Interest income | 10,227 | 8,444 | 13,704 | 10,227 | ||||||||||
Foreign currency gains (losses) | 816 | (37,497 | ) | |||||||||||
Foreign currency gains | 314 | 816 | ||||||||||||
Other income | 735 | 400 | 864 | 735 | ||||||||||
Total other income (expense) | 11,778 | (28,653 | ) | |||||||||||
Total other income | 14,882 | 11,778 | ||||||||||||
Income before income taxes | 153,980 | 88,375 | 166,265 | 153,980 | ||||||||||
Income tax provision (benefit) | 24,606 | (150,029 | ) | |||||||||||
Income tax provision | 26,092 | 24,606 | ||||||||||||
Net income | $ | 129,374 | $ | 238,404 | $ | 140,173 | $ | 129,374 | ||||||
Net income per share: | ||||||||||||||
Basic | $ | 0.69 | $ | 1.27 | $ | 0.74 | $ | 0.69 | ||||||
Diluted | $ | 0.68 | $ | 1.26 | $ | 0.74 | $ | 0.68 | ||||||
Weighted average common | ||||||||||||||
shares outstanding: | ||||||||||||||
Weighted average common shares outstanding: | ||||||||||||||
Basic | 188,322 | 188,333 | 189,601 | 188,322 | ||||||||||
Diluted | 189,292 | 189,031 | 190,599 | 189,292 |
See accompanying notes.
4
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
13-Weeks Ended | ||||||
March 30, | March 31, | |||||
2019 | 2018 | |||||
Net income | $ | 140,173 | $ | 129,374 | ||
Foreign currency translation adjustment | (9,235 | ) | 23,500 | |||
Change in fair value of available-for-sale marketable securities, net of deferred taxes | 19,143 | (15,034 | ) | |||
Comprehensive income | $ | 150,081 | $ | 137,840 |
13-Weeks Ended | ||||||||
March 31, 2018 | April 1, 2017 | |||||||
Net income | $ | 129,374 | $ | 238,404 | ||||
Foreign currency translation adjustment | 23,500 | 62,614 | ||||||
Change in fair value of available-for-sale marketable securities, net of deferred taxes | (15,034 | ) | 6,901 | |||||
Comprehensive income | $ | 137,840 | $ | 307,919 |
See accompanying notes.
5
Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(In thousands)
Accumulated | ||||||||||||||||||
Additional | Other | |||||||||||||||||
Common | Paid-In | Treasury | Retained | Comprehensive | ||||||||||||||
Stock | Capital | Stock | Earnings | Income (Loss) | Total | |||||||||||||
Balance at December 30, 2017 | $ | 17,979 | $ | 1,828,386 | $ | (468,818 | ) | $ | 2,418,444 | $ | 56,428 | $ | 3,852,419 | |||||
Net income | — | — | — | 129,374 | — | 129,374 | ||||||||||||
Translation adjustment | — | — | — | — | 23,500 | 23,500 | ||||||||||||
Adjustment related to unrealized gains (losses) on available-for-sale securities net of income tax effects of $2,416 | — | — | — | — | (15,034 | ) | (15,034 | ) | ||||||||||
Comprehensive income | 137,840 | |||||||||||||||||
Dividends declared | — | — | — | (170 | ) | — | (170 | ) | ||||||||||
Issuance of treasury stock related to equity awards | — | (23,294 | ) | 25,220 | — | — | 1,926 | |||||||||||
Stock compensation | — | 13,440 | — | — | — | 13,440 | ||||||||||||
Purchase of treasury stock related to equity awards | — | — | (6,562 | ) | — | — | (6,562 | ) | ||||||||||
Reclassification under ASU 2016-06 | — | — | — | (1,700 | ) | — | (1,700 | ) | ||||||||||
Reclassification under ASU 2018-02 | — | — | — | 452 | (452 | ) | — | |||||||||||
Balance at March 31, 2018 | $ | 17,979 | $ | 1,818,532 | $ | (450,160 | ) | $ | 2,546,400 | $ | 64,442 | $ | 3,997,193 |
Accumulated | ||||||||||||||||||
Additional | Other | |||||||||||||||||
Common | Paid-In | Treasury | Retained | Comprehensive | ||||||||||||||
Stock | Capital | Stock | Earnings | Income (Loss) | Total | |||||||||||||
Balance at December 29, 2018 | $ | 17,979 | $ | 1,823,638 | $ | (397,692 | ) | $ | 2,710,619 | $ | 8,430 | 4,162,974 | ||||||
Net income | — | — | — | 140,173 | — | 140,173 | ||||||||||||
Translation adjustment | — | — | — | — | (9,235 | ) | (9,235 | ) | ||||||||||
Adjustment related to unrealized gains (losses) on available-for-sale securities net of income tax effects of $2,905 | — | — | — | — | 19,143 | 19,143 | ||||||||||||
Comprehensive income | 150,081 | |||||||||||||||||
Dividends declared | — | — | — | (204 | ) | — | (204 | ) | ||||||||||
Issuance of treasury stock related to equity awards | — | (28,571 | ) | 28,571 | — | — | — | |||||||||||
Stock compensation | — | 15,129 | — | — | — | 15,129 | ||||||||||||
Purchase of treasury stock related to equity awards | — | — | (12,694 | ) | — | — | (12,694 | ) | ||||||||||
Balance at March 30, 2019 | $ | 17,979 | $ | 1,810,196 | $ | (381,815 | ) | $ | 2,850,588 | $ | 18,338 | $ | 4,315,286 |
See accompanying notes.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
13-Weeks Ended | ||||||
March 30, | March 31, | |||||
2019 | 2018 | |||||
Operating activities: | ||||||
Net income | $ | 140,173 | $ | 129,374 | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Depreciation | 16,832 | 16,014 | ||||
Amortization | 7,179 | 7,132 | ||||
Loss (gain) on sale or disposal of property and equipment | 227 | (15 | ) | |||
Provision for doubtful accounts | 408 | 57 | ||||
Provision for obsolete and slow moving inventories | 7,579 | 3,959 | ||||
Unrealized foreign currency loss (gain) | 3,124 | (517 | ) | |||
Deferred income taxes | 9,105 | 416 | ||||
Stock compensation expense | 15,129 | 13,440 | ||||
Realized losses on marketable securities | 60 | 196 | ||||
Changes in operating assets and liabilities, net of acquisitions: | ||||||
Accounts receivable | 112,488 | 187,693 | ||||
Inventories | (46,646 | ) | (26,455 | ) | ||
Other current and non-current assets | 2,930 | 9,037 | ||||
Accounts payable | (32,786 | ) | (36,708 | ) | ||
Other current and non-current liabilities | (76,030 | ) | (99,935 | ) | ||
Deferred revenue | (6,744 | ) | (8,368 | ) | ||
Deferred costs | 1,938 | 1,807 | ||||
Income taxes payable | 9,616 | 17,063 | ||||
Net cash provided by operating activities | 164,582 | 214,190 | ||||
Investing activities: | ||||||
Purchases of property and equipment | (30,094 | ) | (26,336 | ) | ||
Proceeds from sale of property and equipment | 47 | 121 | ||||
Purchase of intangible assets | (413 | ) | (1,622 | ) | ||
Purchase of marketable securities | (83,068 | ) | (140,623 | ) | ||
Redemption of marketable securities | 80,907 | 65,253 | ||||
Acquisitions, net of cash acquired | — | (9,417 | ) | |||
Net cash used in investing activities | (32,621 | ) | (112,624 | ) | ||
Financing activities: | ||||||
Dividends | (200,687 | ) | (96,146 | ) | ||
Proceeds from issuance of treasury stock related to equity awards | — | 1,926 | ||||
Purchase of treasury stock related to equity awards | (12,694 | ) | (6,562 | ) | ||
Net cash used in financing activities | $ | (213,381 | ) | $ | (100,782 | ) |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (4,286 | ) | 6,717 | |||
Net (decrease) increase in cash, cash equivalents, and restricted cash | (85,706 | ) | 7,501 | |||
Cash, cash equivalents, and restricted cash at beginning of period | 1,201,805 | 891,759 | ||||
Cash, cash equivalents, and restricted cash at end of period | $ | 1,116,099 | $ | 899,260 |
13-Weeks Ended | ||||||||
March 31, 2018 | April 1, 2017 | |||||||
Operating activities: | ||||||||
Net income | $ | 129,374 | $ | 238,404 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 16,014 | 14,658 | ||||||
Amortization | 7,132 | 7,070 | ||||||
(Gain) loss on sale or disposal of property and equipment | (15 | ) | 8 | |||||
Provision for doubtful accounts | 57 | (294 | ) | |||||
Provision for obsolete and slow moving inventories | 3,959 | 7,193 | ||||||
Unrealized foreign currency (gain) loss | (517 | ) | 42,571 | |||||
Deferred income taxes | 416 | (171,432 | ) | |||||
Stock compensation expense | 13,440 | 8,206 | ||||||
Realized losses on marketable securities | 196 | 291 | ||||||
Changes in operating assets and liabilities, net of acquisitions: | ||||||||
Accounts receivable | 187,693 | 135,253 | ||||||
Inventories | (26,455 | ) | (41,398 | ) | ||||
Other current and non-current assets | 9,037 | 7,534 | ||||||
Accounts payable | (36,708 | ) | (44,180 | ) | ||||
Other current and non-current liabilities | (99,935 | ) | (81,038 | ) | ||||
Deferred revenue | (8,368 | ) | (12,041 | ) | ||||
Deferred costs | 1,807 | 2,647 | ||||||
Income taxes payable | 17,063 | 6,943 | ||||||
Net cash provided by operating activities | 214,190 | 120,395 | ||||||
Investing activities: | ||||||||
Purchases of property and equipment | (26,336 | ) | (25,538 | ) | ||||
Proceeds from sale of property and equipment | 121 | 7 | ||||||
Purchase of intangible assets | (1,622 | ) | (1,222 | ) | ||||
Purchase of marketable securities | (140,623 | ) | (96,049 | ) | ||||
Redemption of marketable securities | 65,253 | 109,526 | ||||||
Acquisitions, net of cash acquired | (9,417 | ) | — | |||||
Net cash used in investing activities | (112,624 | ) | (13,276 | ) | ||||
Financing activities: | ||||||||
Dividends | (96,146 | ) | (96,028 | ) | ||||
Proceeds from issuance of treasury stock related to equity awards | 1,926 | — | ||||||
Purchase of treasury stock related to equity awards | (6,562 | ) | (3,452 | ) | ||||
Purchase of treasury stock under share repurchase plan | — | (27,873 | ) | |||||
Net cash used in financing activities | (100,782 | ) | (127,353 | ) | ||||
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 6,717 | 6,932 | ||||||
Net increase (decrease) in cash, cash equivalents, and restricted cash | 7,501 | (13,302 | ) | |||||
Cash, cash equivalents, and restricted cash at beginning of period | 891,759 | 846,996 | ||||||
Cash, cash equivalents, and restricted cash at end of period | $ | 899,260 | $ | 833,694 |
See accompanying notes.
6
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 201830, 2019
(In thousands, except per share information)
1. | Accounting Policies |
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Additionally, the condensed consolidated financial statements should be read in conjunction with Item 2 of Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations, included in this Form 10-Q. Operating results for the 13-week period ended March 31, 201830, 2019 are not necessarily indicative of the results that may be expected for the year ending December 29, 2018.28, 2019.
The condensed consolidated balance sheet at December 30, 201729, 2018 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 30, 2017.29, 2018.
The Company’s fiscal year is based on a 52-53 week period ending on the last Saturday of the calendar year. Therefore, the financial results of certain 53-week fiscal years, and the associated 14-week quarters, will not be exactly comparable to the prior and subsequent 52-week fiscal years and the associated 13-week quarters. The quarters ended March 30, 2019 and March 31, 2018 and April 1, 2017 both contain operating results for 13 weeks.
As previously announced and discussed below within the “Recently Adopted Accounting Standards” section of this footnote,effective in the 13-week period ended March 31, 2018, we adopted the requirements of Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the full retrospective method. All amounts and disclosures set forth in this Form 10-Q reflect these changes. Further, as a result of the adoption of certain other accounting standards described below, effective in the 13-week period ended March 31, 2018, certain amounts in prior periods have been reclassified to conform to the current period presentation.
Recently Adopted Accounting Standards
Revenue from Contracts with CustomersLeases
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes previous revenue recognition guidance. The FASB issued several updates amending or relating to ASU 2014-09 (collectively, the “new revenue standard”). The Company has adopted the new revenue standard effective in the 13-week period ending March 31, 2018 using the full retrospective method, which requires the Company to restate each prior reporting period presented in future financial statement issuances. The impacts of the new revenue standard relate to our accounting for certain arrangements within the auto segment.
A portion of the Company’s auto segment contracts have historically been accounted for under Accounting Standards Codification (ASC) Topic 985-605 Software-Revenue Recognition (Topic 985-605). Under Topic 985-605, the Company deferred revenue and associated costs of all elements of multiple-element software arrangements if vendor-specific objective evidence of fair value (VSOE) could not be established for an undelivered element (e.g. map updates). In applying the new revenue standard to certain contracts that include both software licenses and map updates, we will recognize the portion of revenue and costs related to the software license at the time of delivery rather than ratably over the map update period.
Additionally, for certain multiple-element arrangements within the Company’s auto segment, the Company’s policy has been to allocate consideration to traffic services and recognize the revenue and associated cost of royalties ratably over the estimated life of the underlying product. Under the new revenue standard, we will recognize revenue and associated costs of royalties related to certain traffic services at the time of hardware and/or software delivery. Specifically, the new revenue standard emphasizes the timing of the Company’s performance, and upon delivery of the navigation device and/or software, the Company has fully performed its obligation with respect to the design and production of the product to receive and interpret the broadcast traffic signal for the benefit of the end user.
The changes in accounting policy described above collectively result in reductions to deferred costs (asset) and deferred revenue (liability) balances, and accelerate the recognition of revenues and deferred costs in the auto segment going forward.
Summarized financial information depicting the impact of the new revenue standard is presented below. The Company’s historical net cash flows provided by or used in operating, investing, and financing activities are not impacted by adoption of the new revenue standard.
13-Weeks Ended April 1, 2017 | ||||||||||||
As reported | Restated(1) | Impact | ||||||||||
Net sales | $ | 638,546 | $ | 641,510 | $ | 2,964 | ||||||
Gross profit | 372,123 | 372,806 | 683 | |||||||||
Operating income | 116,345 | 117,028 | 683 | |||||||||
Income tax (benefit) | (150,120 | ) | (150,029 | ) | 91 | |||||||
Net income | $ | 237,812 | $ | 238,404 | $ | 592 | ||||||
Diluted net income per share | $ | 1.26 | $ | 1.26 | $ | — |
December 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
As reported | Restated(2) | Impact | As reported | Restated(2) | Impact | |||||||||||||||||||
Current assets: | ||||||||||||||||||||||||
Deferred costs | $ | 48,312 | $ | 30,525 | $ | (17,787 | ) | $ | 47,395 | $ | 34,665 | $ | (12,730 | ) | ||||||||||
Total current assets | 2,363,925 | 2,346,138 | (17,787 | ) | 2,263,016 | 2,250,286 | (12,730 | ) | ||||||||||||||||
Deferred income taxes | 199,343 | 195,981 | (3,361 | ) | 110,293 | 107,655 | (2,638 | ) | ||||||||||||||||
Noncurrent deferred costs | 73,851 | 33,029 | (40,822 | ) | 56,151 | 30,934 | (25,217 | ) | ||||||||||||||||
Total assets | $ | 5,010,260 | $ | 4,948,289 | $ | (61,971 | ) | $ | 4,525,133 | $ | 4,484,549 | $ | (40,584 | ) | ||||||||||
Current liabilities: | ||||||||||||||||||||||||
Deferred revenue | 139,681 | 103,140 | (36,541 | ) | 146,564 | 118,496 | (28,068 | ) | ||||||||||||||||
Total current liabilities | 828,656 | 792,115 | (36,541 | ) | 782,735 | 754,667 | (28,068 | ) | ||||||||||||||||
Deferred income taxes | 75,215 | 76,612 | 1,396 | 61,220 | 62,617 | 1,397 | ||||||||||||||||||
Non-current deferred revenue | 163,840 | 87,060 | (76,780 | ) | 140,407 | 91,238 | (49,169 | ) | ||||||||||||||||
Retained earnings | 2,368,874 | 2,418,444 | 49,570 | 2,056,702 | 2,092,221 | 35,519 | ||||||||||||||||||
Accumulated other comprehensive income | 56,045 | 56,428 | 382 | (36,761 | ) | (37,024 | ) | (263 | ) | |||||||||||||||
Total stockholders' equity | 3,802,466 | 3,852,419 | 49,954 | 3,418,003 | 3,453,259 | 35,256 | ||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 5,010,260 | $ | 4,948,289 | $ | (61,971 | ) | $ | 4,525,133 | $ | 4,484,549 | $ | (40,584 | ) |
8
52-Weeks Ended December 30, 2017 | 53-Weeks Ended December 31, 2016 | |||||||||||||||||||||||
As reported | Restated(2) | Impact | As reported | Restated(2) | Impact | |||||||||||||||||||
Net sales | $ | 3,087,004 | $ | 3,121,560 | $ | 34,556 | $ | 3,018,665 | $ | 3,045,797 | $ | 27,132 | ||||||||||||
Gross profit | 1,783,164 | 1,797,941 | 14,777 | 1,679,570 | 1,688,525 | 8,955 | ||||||||||||||||||
Operating income | 668,860 | 683,637 | 14,777 | 623,909 | 632,864 | 8,955 | ||||||||||||||||||
Income tax (benefit) provision | (12,661 | ) | (11,936 | ) | 725 | 118,856 | 120,901 | 2,045 | ||||||||||||||||
Net income | $ | 694,955 | $ | 709,007 | $ | 14,052 | $ | 510,814 | $ | 517,724 | $ | 6,910 | ||||||||||||
Diluted net income per share | $ | 3.68 | $ | 3.76 | $ | 0.08 | $ | 2.70 | $ | 2.73 | $ | 0.03 |
Financial Instruments – Recognition, Measurement, Presentation, and Disclosure
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities2016-02, Leases (Topic 842) (“ASU 2016-01”2016-02”). The standard addresses certain aspects of, which sets out the principles for the recognition, measurement, presentation and disclosure of financial instruments.leases for both lessees and lessors. The FASB subsequently issued Accounting Standards Update No. 2018-10 and Accounting Standards Update No. 2018-11 in July 2018, which provide clarifications and improvements to ASU 2016-02 (collectively, the “new lease standard”). Accounting Standards Update No. 2018-11 also provides the optional transition method which allows companies to apply the new lease standard at the adoption date instead of at the earliest comparative period presented. The new lease standard requires lessees to present a right-of-use asset and a corresponding lease liability on the balance sheet.
The Company has adopted the new lease standard effective inas of the 13-week period ending March 31, 2018.beginning of the 2019 fiscal year using the optional transition method. The adoptionCompany did not have a cumulative effect adjustment to retained earnings as a result of adopting the new lease standard and does not expect the new lease standard to have a material impact on the Company’s financial position or results of operations.
Statement of Cash Flows
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The standard addresses eight specific cash flow issues with the objective of reducing diversity in practice. In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling changes in the total amounts within the statement of cash flows. The Company has adopted the new standards effective in the 13-week period ending March 31, 2018. The adoption of ASU 2016-15 did not have a material impact to the Company’sCompany's consolidated statements of cash flows. The amendments of ASU 2016-18 were applied using a retrospective transition method, resulting in immaterial changes to the presentation of the Company’s statements of cash flows.
The total of cash and cash equivalents and restricted cash balances presented on the condensed consolidated balance sheet reconciles to the total cash, cash equivalents, and restricted cash shown in the condensedincome or consolidated statements of cash flows.
Income Taxes
In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory (“ASU 2016-16”), which requires recognition of the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.flows in future periods. The Company has adoptedelected the new standard effective beginning inpackage of transitional practical expedients upon adoption which, among other provisions, allowed the 13-week period ending March 31, 2018, which resulted in a reclassification of $1,700 of certain prepaid tax balances in a cumulative effectCompany to retained earnings as of the date of adoption.
Income Statementcarry forward historical lease classification. See Note 12 – Reporting Comprehensive IncomeLeases for additional information regarding leases.
In February 2018, the FASB issued Accounting Standards Update No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), which allows for stranded tax effects in accumulated other comprehensive income resulting from the U.S. Tax Cuts and Jobs Act to be reclassified to retained earnings. The Company has elected to early adopt the new standard effective in the 13-week period ending March 31, 2018, resulting in reclassification of approximately $450 from accumulated other comprehensive income into retained earnings. The tax effects that were reclassified only relate to amounts resulting from the U.S. Tax Cuts and Jobs Act.
Significant Accounting Policies
For a description of the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements, refer to Note 2, “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017.29, 2018. Other than the policiespolicy discussed below, there were no material changes to the Company’s significant accounting policies during the 13-week period ended March 31, 2018.
Revenue Recognition
The Company recognizes revenue upon the transfer of control of promised products or services to the customer in an amount that depicts the consideration the Company expects to be entitled to for the related products or services. For the large majority of the Company’s sales, transfer of control occurs once product has shipped and title and risk of loss have transferred to the customer. The Company offers certain tangible products with ongoing services promised over a period of time, typically the useful life of the related tangible product. When we have identified such services as both capable of being distinct and separately identifiable from the related tangible product, the associated revenue allocated to such services is recognized over time. The Company generally does not offer specified or unspecified upgrade rights to its customers in connection with software sales.30, 2019.
For products that include tangible hardware that contains software essential to the tangible product’s functionality and ongoing services identified as separately identifiable performance obligations, the Company allocates revenue to all performance obligations based on their relative standalone selling prices (“SSP”), with the amounts allocated to ongoing services deferred and recognized over a period of time. These ongoing services primarily consist of the Company’s contractual promises to provide personal navigation device (PND) users with lifetime map updates (LMU) and server-based traffic services. In addition, we provide map update services (map care) over a contractual period in certain hardware and software contracts with original equipment manufacturers (OEMs). The Company has determined that directly observable prices do not exist for LMU, map care, or server-based traffic, as stand-alone and unbundled unit sales do not occur on more than a limited basis. Therefore, the Company uses the expected cost plus a margin as the primary indicator to calculate relative SSP of the LMU, map care, and traffic performance obligations. The revenue and associated costs allocated to the LMU, map care, and/or the server-based traffic service are deferred and recognized ratably over the estimated life of the products of approximately 3 years for PNDs, or the contractual map care period in OEM contracts of 3-10 years as we believe our efforts as it relates to providing these services are spread evenly throughout the performance period. In addition to the products listed above, the Company has offered certain other products with ongoing performance obligations including mobile applications, incremental navigation and/or communication service subscriptions, aviation database subscriptions, and extended warranties that are individually immaterial.
The Company records revenue net of sales tax and variable consideration such as trade discounts and customer returns. Payment is due typically within 90 days or less of shipment of product, or upon the grant of a given software license (as applicable). The Company records estimated reductions to revenue in the form of variable consideration for customer sales programs, returns and incentive offerings including rebates, price protection (product discounts offered to retailers to assist in clearing older products from their inventories in advance of new product releases), promotions and other volume-based incentives. The reductions to revenue are based on estimates and judgments using historical experience and expectation of future conditions. Changes in these estimates could negatively affect the Company’s operating results. These incentives are reviewed periodically and, with the exceptions of price protection and certain other promotions, typically accrued for on a percentage of sales basis.
Deferred Revenues andPreproduction Costs Related to Long-Term Supply Arrangements
Deferred revenue consists primarily of the transaction price allocatedPreproduction design and development costs related to performance obligations thatlong-term supply arrangements are recognized over a period of time basisexpensed as discussed in theRevenue Recognition portion of this footnote. Billings associated with such items are typically completed upon the transfer of control of promised products or services toincurred, and classified as Research and development, unless the customer and recorded to accounts receivable until payment is received. Deferredhas provided a contractual guarantee for reimbursement of such costs. Contractually reimbursable costs primarily refer to the royalties incurred by the Company associated with the aforementioned unsatisfied performance obligations, which are amortized over the same period as the revenue is recognized. The Company typically pays the associated royalties either monthly or quarterly in arrears, on a per item shipped or installed basis.
The Company applies a practical expedient, as permitted within ASC 340, to expensecapitalized as incurred in the incremental costsCondensed Consolidated Balance Sheets within Prepaid expenses and other current assets if reimbursement is expected to obtain a contract when the amortization period of the asset that would have otherwise been recognized isbe received within one year, or less.within Other assets if expected to be received beyond one year. Such capitalized costs were approximately $5 million as of March 30, 2019, and there were no such capitalized costs as of December 29, 2018.
Shipping and Handling Costs
Shipping and handling activities are typically performed before the customer obtains control of the good, and the related costs are therefore expensed as incurred. Shipping and handling costs are included in cost of goods sold in the accompanying condensed consolidated financial statements.
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2. | Inventories |
The components of inventories consist of the following:
March 31, 2018 | December 30, 2017 | |||||||
Raw materials | $ | 190,213 | $ | 179,659 | ||||
Work-in-process | 84,431 | 75,754 | ||||||
Finished goods | 272,768 | 262,231 | ||||||
Inventory, net of reserves | $ | 547,412 | $ | 517,644 |
March 30, | December 29, | |||||
2019 | 2018 | |||||
Raw materials | $ | 213,380 | $ | 205,696 | ||
Work-in-process | 103,204 | 96,564 | ||||
Finished goods | 281,803 | 259,580 | ||||
Inventories | $ | 598,387 | $ | 561,840 |
3. | Earnings Per Share |
The following table sets forth the computation of basic and diluted net income per share:
13-Weeks Ended | ||||||
March 30, | March 31, | |||||
2019 | 2018 | |||||
Numerator: | ||||||
Numerator for basic and diluted net income per share - net income | $ | 140,173 | $ | 129,374 | ||
Denominator: | ||||||
Denominator for basic net income per share – weighted-average common shares | 189,601 | 188,322 | ||||
Effect of dilutive securities – stock options, stock appreciation rights and restricted stock units | 998 | 970 | ||||
Denominator for diluted net income per share – adjusted weighted-average common shares | 190,599 | 189,292 | ||||
Basic net income per share | $ | 0.74 | $ | 0.69 | ||
Diluted net income per share | $ | 0.74 | $ | 0.68 |
13-Weeks Ended | ||||||||
March 31, 2018 | April 1, 2017 | |||||||
Numerator: | ||||||||
Numerator for basic and diluted net income per share - net income | $ | 129,374 | $ | 238,404 | ||||
Denominator: | ||||||||
Denominator for basic net income per share – weighted-average common shares | 188,322 | 188,333 | ||||||
Effect of dilutive securities – | ||||||||
stock options, stock appreciation rights and restricted stock units | 970 | 698 | ||||||
Denominator for diluted net income per share – adjusted weighted-average common shares | 189,292 | 189,031 | ||||||
Basic net income per share | $ | 0.69 | $ | 1.27 | ||||
Diluted net income per share | $ | 0.68 | $ | 1.26 |
There were 0 and 2,593no anti-dilutive stock options, stock appreciation rights and restricted stock units (collectively “equity awards”) outstanding during the 13-week periods ended March 30, 2019 and March 31, 2018 and April 1, 2017, respectively.2018.
There were 332386 and 150332 net shares issued as a result of exercises and releases of equity awards for the 13-week periods ended March 30, 2019 and March 31, 2018, and April 1, 2017, respectively.
4. | Segment Information |
The Company has identified five reportable segments – auto, aviation, fitness, marine, and outdoor. The Company’s Chief Executive Officer has been identified as the Chief Operating Decision Maker (CODM), who uses operating income as the measure of profit or loss to assess segment performance and allocate resources. Operating income represents net sales less costs of goods sold and operating expenses. Net sales are directly attributed to each segment. Most costs of goods sold and the majority of operating expenses are also directly attributed to each segment, while certain other costs of goods sold and operating expenses are allocated to the segments in a manner appropriate to the specific facts and circumstances of the expenses being allocated.
In the first quarter of fiscal 2019, the methodology used to allocate certain selling, general, and administrative expenses to the segments was refined, endeavoring to provide the Company’s CODM with a more meaningful representation of segment profit or loss in light of the evolution of its segments. The Company’s composition of operating segments and reportable segments did not change. Prior year amounts are presented here as they were originally reported, as it is not practicable to accurately restate prior period activity in accordance with the refined allocation methodology. For comparative purposes, we estimate operating income for the 13-weeks ended March 31, 2018 would have been approximately $4 million less for the aviation segment, approximately $4 million more for the marine segment, and not significantly different for the outdoor, fitness, and fitness. auto segments.
Net sales (“revenue”), gross profit, and operating income for each of the Company’s reportable segments are presented below.
Reportable Segments | ||||||||||||||||||||||||
Outdoor | Fitness | Marine | Auto | Aviation | Total | |||||||||||||||||||
13-Weeks Ended March 31, 2018 | ||||||||||||||||||||||||
Net sales | $ | 144,258 | $ | 166,035 | $ | 113,554 | $ | 141,312 | $ | 145,713 | $ | 710,872 | ||||||||||||
Gross profit | 93,285 | 96,601 | 66,683 | 61,012 | 108,954 | 426,535 | ||||||||||||||||||
Operating income | 43,822 | 33,374 | 13,131 | 3,468 | 48,407 | 142,202 | ||||||||||||||||||
13-Weeks Ended April 1, 2017 | ||||||||||||||||||||||||
Net sales | $ | 115,875 | $ | 137,831 | $ | 104,445 | $ | 160,488 | $ | 122,871 | $ | 641,510 | ||||||||||||
Gross profit | 73,469 | 77,741 | 59,747 | 70,616 | 91,233 | 372,806 | ||||||||||||||||||
Operating income | 34,451 | 18,472 | 18,145 | 7,352 | 38,608 | 117,028 |
Reportable Segments | ||||||||||||||||||
Outdoor | Fitness | Marine | Auto | Aviation | Total | |||||||||||||
13-Weeks Ended March 30, 2019 | ||||||||||||||||||
Net sales | $ | 154,051 | $ | 180,256 | $ | 133,968 | $ | 126,999 | $ | 170,776 | $ | 766,050 | ||||||
Gross profit | 97,488 | 90,835 | 78,055 | 57,337 | 127,983 | 451,698 | ||||||||||||
Operating income | 41,953 | 18,126 | 25,473 | 8,213 | 57,618 | 151,383 | ||||||||||||
13-Weeks Ended March 31, 2018 | ||||||||||||||||||
Net sales | $ | 144,258 | $ | 166,035 | $ | 113,554 | $ | 141,312 | $ | 145,713 | $ | 710,872 | ||||||
Gross profit | 93,285 | 96,601 | 66,683 | 61,012 | 108,954 | 426,535 | ||||||||||||
Operating income | 43,822 | 33,374 | 13,131 | 3,468 | 48,407 | 142,202 |
Allocation of certain research and development expenses, and selling, general, and administrative expenses are made to each segment on a percent of revenue basis.
Net sales to external customers and property and equipment, net by geographic region arewere as follows as of and for the 13-week periods ended March 30, 2019 and March 31, 2018 and April 1, 2017.2018. Note that APAC includes Asia Pacific and Australian Continent and EMEA includes Europe, the Middle East and Africa:
13-Weeks Ended | ||||||
March 30, | March 31, | |||||
2019 | 2018 | |||||
Americas | $ | 379,456 | $ | 345,975 | ||
EMEA | 260,021 | 245,912 | ||||
APAC | 126,573 | 118,985 | ||||
Net sales to external customers | $ | 766,050 | $ | 710,872 |
Americas | APAC | EMEA | Total | |||||||||||||
March 31, 2018 | ||||||||||||||||
Net sales to external customers | $ | 345,975 | $ | 118,985 | $ | 245,912 | $ | 710,872 | ||||||||
Property and equipment, net | $ | 388,531 | $ | 176,245 | $ | 40,037 | $ | 604,813 | ||||||||
April 1, 2017 | ||||||||||||||||
Net sales to external customers | $ | 324,630 | $ | 91,545 | $ | 225,335 | $ | 641,510 | ||||||||
Property and equipment, net | $ | 312,630 | $ | 152,804 | $ | 38,406 | $ | 503,840 |
Net property and equipment by geographic region as of March 30, 2019 and March 31, 2018 are presented below.
Americas | APAC | EMEA | Total | |||||||||
March 30, 2019 | ||||||||||||
Property and equipment, net | $ | 413,632 | $ | 212,933 | $ | 45,734 | $ | 672,299 | ||||
March 31, 2018 | ||||||||||||
Property and equipment, net | $ | 388,531 | $ | 176,245 | $ | 40,037 | $ | 604,813 |
5. | Warranty Reserves |
The Company’s products sold are generally covered by a standard warranty for periods ranging from one to three years. The Company’s estimate of costs to service its warranty obligations are based on historical experience and expectationmanagement’s expectations and judgments of future conditions, and are recorded as a liability on the balance sheet. The following reconciliation provides an illustration of changes in the aggregate warranty reserve.
13-Weeks Ended | ||||||
March 30, | March 31, | |||||
2019 | 2018 | |||||
Balance - beginning of period | $ | 38,276 | $ | 36,827 | ||
Accrual for products sold during the period(1) | 10,849 | 10,012 | ||||
Expenditures | (14,083 | ) | (11,417 | ) | ||
Balance - end of period | $ | 35,042 | $ | 35,422 |
(1) | Changes in cost estimates related to pre-existing warranties are not material and aggregated with accruals for new warranty contracts in the ‘accrual for products sold during the period’ line. |
13-Weeks Ended | ||||||||
March 31, 2018 | April 1, 2017 | |||||||
Balance - beginning of period | $ | 36,827 | $ | 37,233 | ||||
Accrual for products sold during the period | 10,012 | 8,200 | ||||||
Expenditures | (11,417 | ) | (11,006 | ) | ||||
Balance - end of period | $ | 35,422 | $ | 34,427 |
6. | Commitments and Contingencies |
Commitments
The Company is party to certain commitments, which include purchases of raw materials, advertising expenditures, and other indirect purchases in connection with conducting our business. The aggregate amount of purchase orders and other commitments open as of March 31, 201830, 2019 was approximately $325,200.$435,100. We cannot determine the aggregate amount of such purchase orders that represent contractual obligations because purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current needs and are typically fulfilled within short periods of time.
Contingencies
In the normal course of business, the Company and its subsidiaries are parties to various legal claims, investigations and complaints, including matters alleging patent infringement and other intellectual property claims. The Company evaluates, on a quarterly and annual basis, developments in legal proceedings, investigations, claims, and other loss contingencies that could affect any required accrual or disclosure or estimate of reasonably possible loss or range of loss. An estimated loss from a loss contingency is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. If a range of loss is estimated, and some amount within that range appears to be a better estimate than any other amount within that range, then that amount is accrued. If no amount within the range can be identified as a better estimate than any other amount, the Company accrues the minimum amount in the range.
If an outcome unfavorable to the Company is determined to be probable, but the amount of loss cannot be reasonably estimated or is determined to be reasonably possible, but not probable, we disclose the nature of the contingency and an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made. The Company’s aggregate range of reasonably possible losses includes (1) matters where a liability has been accrued and there is a reasonably possible loss in excess of the amount accrued for that liability, and (2) matters where a loss is believed to be reasonably possible, but not probable, and a liability therefore has not been accrued. This aggregate range only represents the Company’s estimate of reasonably possible losses and does not represent the Company’s maximum loss exposure. The assessment regarding whether a loss is probable or reasonably possible, and whether the loss or a range of loss is estimable, often involves a series of complex judgments about future events. In assessing the probability of an outcome in a lawsuit, claim or assessment that could be unfavorable to the Company, we consider the following factors, among others: a) the nature of the litigation, claim, or assessment; b) the progress of the case; c) the opinions or views of legal counsel and other advisers; d) our experience in similar cases; e) the experience of other entities in similar cases; and f) how we intend to respond to the lawsuit, claim, or assessment. Costs incurred in defending lawsuits, claims or assessments are expensed as incurred.
Management of the Company currently does not believe it is reasonably possible that the Company may have incurred a material loss, or a material loss in excess of recorded accruals, with respect to loss contingencies in the aggregate, for the fiscal quarter ended March 31, 2018.30, 2019. The results of legal proceedings, investigations and claims, however, cannot be predicted with certainty. An adverse resolution of one or more of such matters in excess of management’s expectations could have a material adverse effect in the particular quarter or fiscal year in which a loss is recorded, but based on information currently known, the Company does not believe it is likely that losses from such matters would have a material adverse effect on the Company’s business or its consolidated financial position, results of operations or cash flows.
The Company settled or resolved certain matters during the 13-week period ended March 30, 2019 that did not individually or in the aggregate have a material impact on the Company’s business or its consolidated financial position, results of operations or cash flows.
7. Income Taxes
The Company recorded anincome tax expense of $26,092 in the 13-week period ended March 30, 2019, compared to income tax expense of $24,606 in the 13-week period ended March 31, 2018, compared to an income tax benefit of $150,029 in the 13-week period ended April 1, 2017, which included a $168,755 income tax benefit due to the revaluation of certain Switzerland deferred tax assets.2018. The effective tax rate was 15.7% in the first quarter of 2019, compared to 16.0% in the first quarter of 2018, compared to (169.8%) in the first quarter of 2017. Excluding the effect of the $168,755 revaluation of deferred tax assets in first quarter of 2017, the first quarter of 2018 effective tax rate decreased by 520 basis points primarily due to the reduction of the U.S. corporate tax rate and the net release of uncertain tax position reserves.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law in the United States. Due to the complexities of the new tax legislation, the Securities and Exchange Commission has issued Staff Accounting Bulletin No. 118 (“SAB 118”) which allows for the recognition of provisional amounts during a measurement period. The Company recorded a provisional re-measurement of its deferred tax assets and liabilities in the fourth quarter of 2017. Income tax expense recorded in the first quarter of 2018 includes the impact of the new tax legislation as currently interpreted by the Company. The Company will continue to assess the impact of the new tax legislation, as well as any related future regulations and rules, and will record any additional impacts as identified during the measurement period, if necessary. The Company does not expect any such potential adjustments in the future periods will materially impact the Company’s financial condition or result of operations.2018.
8. Marketable Securities
The Financial Accounting Standards Board (“FASB”) ASC topic entitled Fair Value Measurements and Disclosures defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The accounting guidance classifies the inputs used to measure fair value into the following hierarchy:
Level1 | Unadjusted quoted prices in active markets for the identical asset or liability |
Level 2 | Observable inputs for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability |
Level3 | Unobservable inputs for the asset or liability |
The Company endeavors to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Valuation is based on prices obtained from an independent pricing vendor using both market and income approaches. The primary inputs to the valuation include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, and credit spreads.
The method described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Available-for-sale securities measured at fair value on a recurring basis are summarized below:
Fair Value Measurements as of March 30, 2019 | ||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||
U.S. Treasury securities | $ | 22,229 | $ | — | $ | 22,229 | $ | — | ||||
Agency securities | 63,714 | — | 63,714 | — | ||||||||
Mortgage-backed securities | 131,973 | — | 131,973 | — | ||||||||
Corporate securities | 1,019,083 | — | 1,019,083 | — | ||||||||
Municipal securities | 171,551 | — | 171,551 | — | ||||||||
Other | 126,606 | — | 126,606 | — | ||||||||
Total | $ | 1,535,156 | $ | — | $ | 1,535,156 | $ | — |
Fair Value Measurements as of March 31, 2018 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
U.S. Treasury securities | $ | 29,058 | $ | — | $ | 29,058 | $ | — | ||||||||
Agency securities | 41,744 | — | 41,744 | — | ||||||||||||
Mortgage-backed securities | 158,839 | — | 158,839 | — | ||||||||||||
Corporate securities | 892,848 | — | 892,848 | — | ||||||||||||
Municipal securities | 185,586 | — | 185,586 | — | ||||||||||||
Other | 168,855 | — | 168,855 | — | ||||||||||||
Total | $ | 1,476,930 | $ | — | $ | 1,476,930 | $ | — |
Fair Value Measurements as | ||||||||||||||||
of December 30, 2017 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
U.S. Treasury securities | $ | 19,337 | $ | — | $ | 19,337 | $ | — | ||||||||
Agency securities | 43,361 | — | 43,361 | — | ||||||||||||
Mortgage-backed securities | 174,615 | — | 174,615 | — | ||||||||||||
Corporate securities | 816,793 | — | 816,793 | — | ||||||||||||
Municipal securities | 186,105 | — | 186,105 | — | ||||||||||||
Other | 181,509 | — | 181,509 | — | ||||||||||||
Total | $ | 1,421,720 | $ | — | $ | 1,421,720 | $ | — |
Fair Value Measurements as of December 29, 2018 | ||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||
U.S. Treasury securities | $ | 22,128 | $ | — | $ | 22,128 | $ | — | ||||
Agency securities | 59,116 | — | 59,116 | — | ||||||||
Mortgage-backed securities | 135,865 | — | 135,865 | — | ||||||||
Corporate securities | 980,524 | — | 980,524 | — | ||||||||
Municipal securities | 173,137 | — | 173,137 | — | ||||||||
Other | 142,342 | — | 142,342 | — | ||||||||
Total | $ | 1,513,112 | $ | — | $ | 1,513,112 | $ | — |
Marketable securities classified as available-for-sale securities are summarized below:
Available-For-Sale Securities as of March 30, 2019 | ||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||
U.S. Treasury securities | $ | 22,448 | $ | — | $ | (219 | ) | $ | 22,229 | |||
Agency securities | 64,178 | 72 | (535 | ) | 63,715 | |||||||
Mortgage-backed securities | 136,763 | 2 | (4,793 | ) | 131,972 | |||||||
Corporate securities | 1,031,431 | 2,013 | (14,361 | ) | 1,019,083 | |||||||
Municipal securities | 172,399 | 287 | (1,135 | ) | 171,551 | |||||||
Other | 128,353 | 0 | (1,747 | ) | 126,606 | |||||||
Total | $ | 1,555,572 | $ | 2,374 | $ | (22,790 | ) | $ | 1,535,156 |
Available-For-Sale Securities as of March 31, 2018 | ||||||||||||||||||||||||||||
Available-For-Sale Securities as of December 29, 2018 | ||||||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||
U.S. Treasury securities | $ | 29,439 | $ | — | $ | (381 | ) | $ | 29,058 | $ | 22,485 | $ | — | $ | (357 | ) | $ | 22,128 | ||||||||||
Agency securities | 42,901 | — | (1,156 | ) | 41,745 | 60,088 | 28 | (1,000 | ) | 59,116 | ||||||||||||||||||
Mortgage-backed securities | 166,458 | 6 | (7,625 | ) | 158,839 | 142,176 | 1 | (6,312 | ) | 135,865 | ||||||||||||||||||
Corporate securities | 919,920 | 45 | (27,117 | ) | 892,848 | 1,010,590 | 33 | (30,099 | ) | 980,524 | ||||||||||||||||||
Municipal securities | 188,728 | 14 | (3,157 | ) | 185,585 | 175,630 | 73 | (2,566 | ) | 173,137 | ||||||||||||||||||
Other | 171,641 | 1 | (2,787 | ) | 168,855 | 144,606 | 0 | (2,264 | ) | 142,342 | ||||||||||||||||||
Total | $ | 1,519,087 | $ | 66 | $ | (42,223 | ) | $ | 1,476,930 | $ | 1,555,575 | $ | 135 | $ | (42,598 | ) | $ | 1,513,112 |
Available-For-Sale Securities as of December 30, 2017 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
U.S. Treasury securities | $ | 19,591 | $ | — | $ | (254 | ) | $ | 19,337 | |||||||
Agency securities | 44,191 | 1 | (831 | ) | 43,361 | |||||||||||
Mortgage-backed securities | 180,470 | 13 | (5,868 | ) | 174,615 | |||||||||||
Corporate securities | 830,447 | 136 | (13,790 | ) | 816,793 | |||||||||||
Municipal securities | 187,999 | 110 | (2,004 | ) | 186,105 | |||||||||||
Other | 183,730 | 2 | (2,223 | ) | 181,509 | |||||||||||
Total | $ | 1,446,428 | $ | 262 | $ | (24,970 | ) | $ | 1,421,720 |
The Company’s investment policy targets low risk investments with the objective of minimizing the potential risk of principal loss. The fair value of our securities varies from period to period due to changes in interest rates, in the performance of the underlying collateral and in the credit performance of the underlying issuer, among other factors. The Company does not intend to sell the securities that have an unrealized loss shown in the table above, and it is not more likely than not that the Company will be required to sell a security before recovery of its amortized costs basis, which may be maturity.
The Company recognizes the credit component of other-than-temporary impairments of debt securities in “Other Income” and the noncredit component in “Other comprehensive income (loss)” for those securities that we do not intend to sell and for which it is not more likely than not that we will be required to sell before recovery. During fiscal 20172018 and the 13-week period ended March 31, 2018,30, 2019, the Company did not record any material impairment charges on its outstanding securities.
The amortized cost and fair value of the securities at an unrealized loss position atas of March 31, 201830, 2019 were $1,466,270$1,223,105 and $1,424,047$1,200,315, respectively. Approximately 82%73% of securities in our portfolio were at an unrealized loss position atas of March 31, 2018.30, 2019. We have the ability to hold these securities until maturity or their value is recovered. We do not consider these unrealized losses to be other than temporary credit losses because there has been no material deterioration in credit quality and no change in the cash flows of the underlying securities. We do not intend to sell the securities and it is not more likely than not that we will be required to sell the securities; therefore, no material impairment has been recorded in the accompanying condensed consolidated statement of income.
The cost of securities sold is based on the specific identification method.
The following tables display additional information regarding gross unrealized losses and fair value by major security type for available-for-sale securities in an unrealized loss position as of March 31, 201830, 2019 and December 30, 2017.29, 2018.
As of March 31, 2018 | ||||||||||||||||
Less than 12 Consecutive Months | 12 Consecutive Months or Longer | |||||||||||||||
Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | |||||||||||||
U.S. Treasury securities | $ | (202 | ) | $ | 19,748 | $ | (179 | ) | $ | 6,319 | ||||||
Agency securities | (243 | ) | 16,022 | (913 | ) | 25,723 | ||||||||||
Mortgage-backed securities | (711 | ) | 17,631 | (6,914 | ) | 140,289 | ||||||||||
Corporate securities | (11,562 | ) | 538,556 | (15,555 | ) | 341,137 | ||||||||||
Municipal securities | (1,786 | ) | 139,591 | (1,371 | ) | 40,649 | ||||||||||
Other | (2,784 | ) | 136,448 | (3 | ) | 1,934 | ||||||||||
Total | $ | (17,288 | ) | $ | 867,996 | $ | (24,935 | ) | $ | 556,051 |
As of March 30, 2019 | ||||||||||||
Less than 12 Consecutive Months | 12 Consecutive Months or Longer | |||||||||||
Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | |||||||||
U.S. Treasury securities | $ | (1 | ) | $ | 3,988 | $ | (218 | ) | $ | 18,241 | ||
Agency securities | (1 | ) | 2,257 | (534 | ) | 38,985 | ||||||
Mortgage-backed securities | (1 | ) | 301 | (4,792 | ) | 131,521 | ||||||
Corporate securities | (172 | ) | 65,937 | (14,189 | ) | 700,387 | ||||||
Municipal securities | (19 | ) | 11,415 | (1,116 | ) | 120,394 | ||||||
Other | (1 | ) | 1,177 | (1,746 | ) | 105,712 | ||||||
Total | $ | (195 | ) | $ | 85,075 | $ | (22,595 | ) | $ | 1,115,240 |
As of December 30, 2017 | ||||||||||||||||
Less than 12 Consecutive Months | 12 Consecutive Months or Longer | |||||||||||||||
Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | |||||||||||||
U.S. Treasury securities | $ | (111 | ) | $ | 12,966 | $ | (143 | ) | $ | 6,371 | ||||||
Agency securities | (168 | ) | 16,097 | (663 | ) | 25,972 | ||||||||||
Mortgage-backed securities | (503 | ) | 19,628 | (5,365 | ) | 153,835 | ||||||||||
Corporate securities | (4,562 | ) | 439,174 | (9,228 | ) | 347,052 | ||||||||||
Municipal securities | (1,027 | ) | 125,819 | (977 | ) | 38,167 | ||||||||||
Other | (2,219 | ) | 136,147 | (4 | ) | 2,579 | ||||||||||
Total | $ | (8,590 | ) | $ | 749,831 | $ | (16,380 | ) | $ | 573,976 |
As of December 29, 2018 | ||||||||||||
Less than 12 Consecutive Months | 12 Consecutive Months or Longer | |||||||||||
Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | |||||||||
U.S. Treasury securities | $ | (3 | ) | $ | 3,975 | $ | (354 | ) | $ | 18,153 | ||
Agency securities | (5 | ) | 4,656 | (995 | ) | 40,508 | ||||||
Mortgage-backed securities | (1 | ) | 361 | (6,311 | ) | 135,323 | ||||||
Corporate securities | (4,028 | ) | 323,633 | (26,071 | ) | 640,439 | ||||||
Municipal securities | (454 | ) | 38,371 | (2,112 | ) | 118,362 | ||||||
Other | (102 | ) | 8,015 | (2,162 | ) | 114,120 | ||||||
Total | $ | (4,593 | ) | $ | 379,011 | $ | (38,005 | ) | $ | 1,066,905 |
The amortized cost and fair value of marketable securities at March 31, 2018,30, 2019, by maturity, are shown below.
Amortized Cost | Fair Value | |||||
Due in one year or less | $ | 198,020 | $ | 197,385 | ||
Due after one year through five years | 1,262,371 | 1,247,012 | ||||
Due after five years through ten years | 95,181 | 90,759 | ||||
$ | 1,555,572 | $ | 1,535,156 |
Amortized Cost | Fair Value | |||||||
Due in one year or less | $ | 168,370 | $ | 167,745 | ||||
Due after one year through five years | 1,175,500 | 1,143,859 | ||||||
Due after five years through ten years | 160,650 | 151,195 | ||||||
Due after ten years | 14,567 | 14,131 | ||||||
$ | 1,519,087 | $ | 1,476,930 |
9. Accumulated Other Comprehensive Income
The following provides required disclosure of changes in accumulated other comprehensive income (AOCI) balances by component for the 13-week period ended March 31, 2018:30, 2019:
13-Weeks Ended March 31, 2018 | ||||||||||||
Foreign Currency Translation Adjustment | Net unrealized gains (losses) on available-for- sale securities | Total | ||||||||||
Beginning Balance | $ | 79,292 | $ | (22,864 | ) | $ | 56,428 | |||||
Other comprehensive income before reclassification, net of income tax benefit of $2,416 | 23,500 | (14,856 | ) | 8,644 | ||||||||
Amounts reclassified from accumulated other comprehensive income | — | (178 | ) | (178 | ) | |||||||
Net current-period other comprehensive income | 23,500 | (15,034 | ) | 8,466 | ||||||||
Reclassification of tax effects due to adoption of ASU 2018-02 | — | (452 | ) | (452 | ) | |||||||
Ending Balance | $ | 102,792 | $ | (38,350 | ) | $ | 64,442 |
13-Weeks Ended March 30, 2019 | |||||||||
Foreign Currency Translation Adjustment | Net unrealized gains (losses) on available-for-sale securities | Total | |||||||
Beginning Balance | $ | 47,327 | $ | (38,897 | ) | $ | 8,430 | ||
Other comprehensive income before reclassification, net of income tax benefit of $2,905 | (9,234 | ) | 19,100 | 9,866 | |||||
Amounts reclassified from accumulated other comprehensive income | — | 42 | 42 | ||||||
Net current-period other comprehensive income | (9,234 | ) | 19,142 | 9,908 | |||||
Ending Balance | $ | 38,093 | $ | (19,755 | ) | $ | 18,338 |
The following provides required disclosure of reporting reclassifications out of AOCI for the 13-week period ended March 31, 2018:30, 2019:
13-Weeks Ended March 31, 2018 | ||||||
Details About Accumulated Other Comprehensive Income Components | Amount Reclassified from Accumulated Other Comprehensive Income | Affected Line Item in the Statement Where Net Income is Presented | ||||
Unrealized gains (losses) on available-for-sale securities | $ | (193 | ) | Other income (expense) | ||
371 | Income tax benefit (provision) | |||||
$ | 178 | Net of tax |
13-Weeks Ended March 30, 2019 | ||||
Details About Accumulated Other Comprehensive Income Components | Amount Reclassified from Accumulated Other Comprehensive Income | Affected Line Item in the Statement Where Net Income is Presented | ||
Unrealized gains (losses) on available-for-sale securities | $ | (60 | ) | Other income (expense) |
18 | Income tax benefit (provision) | |||
$ | (42 | ) | Net of tax |
10. Revenue
In order to further depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors, we disaggregate revenue (or “net sales”) by geographic region, major product category, geographic region, and pattern of recognition.
The Company has identified six major product categories – aviation, marine, outdoor, fitness, auto PND, and auto OEM. Note 4 – Segment Information contains disaggregated revenue information of the aviation, marine, outdoor and fitness major product categories, and auto OEM comprised 37% and 33% of the auto segment revenue presented in Note 4 for the 13-weeks ended March 31, 2018, and April 1, 2017, respectively. Auto PND comprised of 63% and 67% of the auto segment revenue presented in Note 4 for the 13-weeks ended March 31, 2018 and April 1, 2017, respectively. Disaggregated revenue by geographic region (Americas, APAC, and EMEA) is also presented in Note 4.4 – Segment Information. The Company has identified six major product categories – auto PND, auto OEM, aviation, fitness, marine, and outdoor. Note 4 contains disaggregated revenue information of the aviation, fitness, marine, and outdoor major product categories. Auto segment revenue presented in Note 4 is comprised of the auto PND and auto OEM major product categories, as depicted below.
Auto Revenue by Major Product Category | ||||||
13-Weeks Ended | ||||||
March 30, | March 31, | |||||
2019 | 2018 | |||||
Auto PND | 59% | 63% | ||||
Auto OEM | 41% | 37% |
A large majority of the Company’s sales are recognized on a point in time basis, usually once the product is shipped and title and risk of loss have transferred to the customer. Sales recognized over a period of time are primarily within the auto segment and relate to performance obligations that are satisfied over the life of the product or contractual service period. Revenue disaggregated by the timing of transfer of the goods or services is presented in the table below:
13-Weeks Ended | ||||||
March 30, | March 31, | |||||
2019 | 2018 | |||||
Point in time | $ | 724,177 | $ | 671,263 | ||
Over time | 41,873 | 39,609 | ||||
Net sales | $ | 766,050 | $ | 710,872 |
13-Weeks Ended | ||||||||
March 31, 2018 | April 1, 2017 | |||||||
Point in time | $ | 671,263 | $ | 599,745 | ||||
Over time | 39,609 | 41,765 | ||||||
Net sales | $ | 710,872 | $ | 641,510 |
Transaction price and costs associated with the Company’s unsatisfied performance obligations are reflected as deferred revenue and deferred costs, respectively, on the Company’s Condensed Consolidated Balance Sheets.consolidated balance sheets. Such amounts are recognized ratably over the applicable service period or estimated useful life. Changes in deferred revenue and costs during the 13-weeks ended13-week period ending March 31, 201830, 2019 are presented below:
13-Weeks Ended | ||||||||||||||||
March 30, | ||||||||||||||||
13-Weeks Ended | 2019 | |||||||||||||||
March 31, 2018 | Deferred Revenue(1) | Deferred Costs(2) | ||||||||||||||
Deferred Revenue(1) | Deferred Costs(2) | |||||||||||||||
Balance, beginning of period | $ | 190,200 | $ | 63,554 | $ | 172,938 | $ | 57,935 | ||||||||
Deferrals in period | 31,291 | 7,840 | 35,119 | 6,923 | ||||||||||||
Recognition of deferrals in period | (39,609 | ) | (9,639 | ) | (41,873 | ) | (8,863 | ) | ||||||||
Balance, end of period | $ | 181,882 | $ | 61,755 | $ | 166,184 | $ | 55,995 |
(1) Deferred revenue is comprised of both Deferred revenue and Noncurrent deferred revenue per the Condensed Consolidated Balance Sheets |
(2)Deferred costs are comprised of both Deferred costs and Noncurrent deferred costs per the Condensed Consolidated Balance Sheets |
Of the $39,609$41,873 of deferred revenue recognized in the 13-weeks ended March 31, 2018, $32,51530, 2019, $31,161 was deferred as of the beginning of the period.
Approximately two-thirds of the $181,882$166,184 of deferred revenue at the end of the period, March 31, 2018,30, 2019, is recognized ratably over a period of three years or less.
11. Leases
The Company leases certain real estate properties, vehicles, and equipment in various countries around the world. Leased properties are typically used for office space, distribution, and retail. The Company’s leases are classified as operating leases with remaining terms of 1 to 34 years, some of which include an option to extend or renew. If the exercise of an option to extend or renew is determined to be reasonably certain, the associated right-of-use asset and lease liability reflects the extended period and payments. For all real estate leases, any non-lease components, including common area maintenance, have been separated from lease components and excluded from the associated right-of-use asset and lease liability calculations. For all equipment and vehicle leases, an accounting policy election has been made to not separate lease and non-lease components.
Leases with an initial term of 12 months or less (“short-term leases”) are not recognized on the Company’s Condensed Consolidated Balance Sheets as a right-of-use asset or lease liability.
The following table represents lease costs recognized in the Company’s Condensed Consolidated Statements of Income for the 13-weeks ended March 30, 2019. Lease costs are included in Selling, general and administrative expense and Research and development expense on the Company’s Condensed Consolidated Statements of Income.
13-Weeks Ended | |||
March 30, | |||
2019 | |||
Operating lease cost(1) | $ | 5,642 |
(1) | Operating lease cost includes short-term lease costs and variable lease costs, which were not material in the period. |
The following table represents the components of leases that are recognized on the Company’s Condensed Consolidated Balance Sheets as of March 30, 2019.
March 30, | |||
2019 | |||
Operating lease right-of-use assets | $ | 54,978 | |
Other accrued expenses | $ | 13,095 | |
Noncurrent operating lease liabilities | 43,277 | ||
Total lease liabilities | $ | 56,372 | |
Weighted average remaining lease term | 5.5 years | ||
Weighted average discount rate | 4.0% |
The following table represents the maturity of lease liabilities.
Fiscal Year | Lease payments | |||
2019, excluding the 13-weeks ended March 30, 2019 | $ | 12,260 | ||
2020 | 13,727 | |||
2021 | 10,360 | |||
2022 | 7,058 | |||
2023 | 6,742 | |||
Thereafter | 13,725 | |||
Total | $ | 63,872 | ||
Less: imputed interest | (7,500 | ) | ||
Presentvalue of lease liabilities | $ | 56,372 |
The following table presents supplemental cash flow and noncash information related to leases.
13-Weeks Ended | |||
March 30, | |||
2019 | |||
Cash paid for amounts included in the measurement of operating lease liabilities(2) | $ | 4,412 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 2,859 |
(2) | Included in Net cash provided by operating activities on the Company’s Condensed Consolidated Statements of Cash Flows. |
12. Recently Issued Accounting Pronouncements Not Yet Adopted
Leases
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to present a right-of-use asset and a corresponding lease liability on the balance sheet. Lessor accounting is substantially unchanged compared to the current accounting guidance. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new standard on its consolidated financial statements. The Company does not plan to early adopt the new standard, and therefore will adopt in the Company’s fiscal year ending December 28, 2019.
Receivables – Nonrefundable Fees and Other Costs
In March 2017, the FASB issued Accounting Standards Update No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Topic 310-20): Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”), which shortens the amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. Callable debt securities held at a discount continue to be amortized to maturity. ASU 2017-08 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new standard on its consolidated financial statements.
Financial Instruments – Credit Losses
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 provides new guidance on assessment of expected credit losses of certain financial instruments. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new standard on its consolidated financial statements.
13. Subsequent Events
On April 1, 2019, the Company acquired the shares of Tacx Onroerend en Roerend Goed B.V., a privately-held Dutch company, that designs and manufacturers indoor bike trainers, tools and accessories, as well as indoor training software and applications. This acquisition was not material.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The discussion set forth below, as well as other portions of this Quarterly Report, contains statements concerning potential future events. Such forward-looking statements are based upon assumptions by management, as of the date of this Quarterly Report, including assumptions about risks and uncertainties faced by the Company. Readers can identify these forward-looking statements by their use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. If any of the Company’s assumptions prove incorrect or should unanticipated circumstances arise, actual results could materially differ from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or combination of factors including, but not limited to, those factors identified in the Company’s Annual Report on Form 10-K for the year ended December 30, 2017.29, 2018. This report has been filed with the Securities and Exchange Commission (the "SEC"“SEC” or the "Commission"“Commission”) in Washington, D.C. and can be obtained by contacting the SEC'sSEC’s public reference operations or obtaining it through the SEC'sSEC’s website at http://www.sec.gov. Readers are strongly encouraged to consider those factors when evaluating any forward-looking statement concerning the Company. The Company will not update any forward-looking statements in this Quarterly Report to reflect future events or developments.
The information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included in this Form 10-Q and the audited financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 30, 2017.29, 2018.
The Company is a leading worldwide provider of navigation, communications and information devices, most of which are enabled by Global Positioning System, or GPS, technology. We operate in five reportable segments, which serve the outdoor, fitness, marine, auto and aviation markets. The Company’s segments offer consumer products through its network of subsidiary distributors and independent dealers and distributors.distributors, and also maintains relationships with many original equipment manufacturers (OEMs). However, the nature of products and types of customers for the five segments may vary significantly. As such, the segments are managed separately.
The Company adopted the new accounting standard for revenue recognition, as discussed in Note 1 – Accounting Policies of the Notes to Condensed Consolidated Financial Statements, effective beginning with the Company’s first quarter of 2018. Adoption of the new revenue recognition standard was applied using the full retrospective method, and information for prior periods within Results of Operations have been restated accordingly.
Results of Operations
The following table sets forth the Company’s results of operations as a percent of net sales during the periods shown (the table may not foot due to rounding):
13-Weeks Ended | ||||||||
March 31, 2018 | April 1, 2017 | |||||||
Net sales | 100 | % | 100 | % | ||||
Cost of goods sold | 40 | % | 42 | % | ||||
Gross profit | 60 | % | 58 | % | ||||
Advertising expense | 4 | % | 5 | % | ||||
Selling, general and administrative expense | 16 | % | 16 | % | ||||
Research and development expense | 20 | % | 19 | % | ||||
Total operating expense | 40 | % | 40 | % | ||||
Operating income | 20 | % | 18 | % | ||||
Other income (expense) | 2 | % | (4 | %) | ||||
Income before income taxes | 22 | % | 14 | % | ||||
Income tax provision (benefit) | 3 | % | (23 | %) | ||||
Net income | 18 | % | 37 | % |
13-Weeks Ended | ||||||
March 30, 2019 | March 31, 2018 | |||||
Net sales | 100% | 100% | ||||
Cost of goods sold | 41% | 40% | ||||
Gross profit | 59% | 60% | ||||
Advertising expense | 4% | 4% | ||||
Selling, general and administrative expense | 17% | 16% | ||||
Research and development expense | 19% | 20% | ||||
Total operating expense | 39% | 40% | ||||
Operating income | 20% | 20% | ||||
Other income | 2% | 2% | ||||
Income before income taxes | 22% | 22% | ||||
Income tax provision | 3% | 3% | ||||
Net income | 18% | 18% |
Allocation of certain research and development expenses, and selling, general, and administrative expenses are made to each segment on a percent of revenue basis. The segment table located in Note 4 to the Condensed Consolidated Financial Statements sets forth the Company’s results of operations (in thousands) including net sales, gross profit, and operating income for each of the Company’s five segments during the periods shown. For each line item in the table, the total of the outdoor, fitness, marine, auto, and aviation segments'segments’ amounts equals the amount in the condensed consolidated statements of income included in Item 1.
ComparisonAs indicated in Note 4 to the Condensed Consolidated Financial Statements, the methodology used to allocate certain selling, general, and administrative expenses was refined in the first quarter of 2019. The amounts presented below for the 13-weeks ended March 31, 2018 are presented here as they were originally reported.
Comparison of 13-Weeks ended March 30, 2019 and April 1, 2017March 31, 2018
(Amounts included in the following discussion are stated in thousands unless otherwise indicated)
Net Sales
13-weeks ended March 31, 2018 | 13-weeks ended April 1, 2017 | Year over Year | 13-Weeks Ended March 30, 2019 | 13-Weeks Ended March 31, 2018 | Year over Year | ||||||||||||||||||||||||||||||||||||||
Net Sales | % of Revenues | Net Sales | % of Revenues | $ Change | % Change | Net Sales | % of Revenue | Net Sales | % of Revenue | $ Change | % Change | ||||||||||||||||||||||||||||||||
Outdoor | $ | 144,258 | 20 | % | $ | 115,875 | 18 | % | $ | 28,383 | 24 | % | $ | 154,051 | 20% | $ | 144,258 | 20% | $ | 9,793 | 7% | ||||||||||||||||||||||
Fitness | 166,035 | 23 | % | 137,831 | 22 | % | 28,204 | 20 | % | 180,256 | 24% | 166,035 | 23% | 14,221 | 9% | ||||||||||||||||||||||||||||
Marine | 113,554 | 16 | % | 104,445 | 16 | % | 9,109 | 9 | % | 133,968 | 17% | 113,554 | 16% | 20,414 | 18% | ||||||||||||||||||||||||||||
Auto | 141,312 | 20 | % | 160,488 | 25 | % | (19,176 | ) | -12 | % | 126,999 | 17% | 141,312 | 20% | (14,313 | ) | (10% | ) | |||||||||||||||||||||||||
Aviation | 145,713 | 21 | % | 122,871 | 19 | % | 22,842 | 19 | % | 170,776 | 22% | 145,713 | 21% | 25,063 | 17% | ||||||||||||||||||||||||||||
Total | $ | 710,872 | 100 | % | $ | 641,510 | 100 | % | $ | 69,362 | 11 | % | $ | 766,050 | 100% | $ | 710,872 | 100% | $ | 55,178 | 8% |
Net sales increased 11%8% for the 13-week period ended March 31, 201830, 2019 when compared to the year-ago quarter. The outdoor, aviation,fitness, marine, and fitnessaviation segments collectively increased by 18%12%, contributing 80%83% of total revenue. Fitness was the largest portion of our revenue mix at 24% in the first quarter of 2019 compared to 23% in the first quarter of 2018 compared to 22%2018.
Total unit sales in the first quarter of 2017. Auto revenue represented the largest portion2019 increased to 3,182 when compared to total unit sales of our revenue mix in the first quarter of 2017 at 25% and declined to 20%2,956 in the first quarter of 2018.
Total unitOutdoor, fitness, marine, and aviation segment revenue increased 7%, 9%, 18%, and 17%, respectively, when compared to the year-ago quarter. The outdoor and fitness segment revenue increases were primarily driven by strong sales decreased to 2,956 in the firstwearables. The current quarter of 2018 from 3,099marine segment revenue increase was primarily driven by sales growth in the same period of 2017.
chartplotters and sonar products. The aviation segment revenue increase was driven by sales growth across most product lines in both OEM and aftermarket categories. Auto segment revenue decreased 12%10% from the year-ago quarter, primarily due to the ongoing PND market contraction. The current quarter marine increase of 9% was primarily driven by sales of the newly acquired Navionics business. Fitness segment revenues increased 20% from the year-ago quarter, primarily driven by advanced wearables and newly introduced products. Revenues in the outdoor segment increased 24% from the year-ago quarter primarily driven by significant growth in the wearable category. Aviation revenues increased 19% when compared to the year-ago quarter, driven by strong sales across most product lines.
Cost of Goods Sold
13-weeks ended March 31, 2018 | 13-weeks ended April 1, 2017 | Year over Year | ||||||||||||||||||||||
Cost of Goods | % of Revenues | Cost of Goods | % of Revenues | $ Change | % Change | |||||||||||||||||||
Outdoor | $ | 50,973 | 35 | % | $ | 42,406 | 37 | % | $ | 8,567 | 20 | % | ||||||||||||
Fitness | 69,434 | 42 | % | 60,090 | 44 | % | 9,344 | 16 | % | |||||||||||||||
Marine | 46,871 | 41 | % | 44,698 | 43 | % | 2,173 | 5 | % | |||||||||||||||
Auto | 80,300 | 57 | % | 89,872 | 56 | % | (9,572 | ) | -11 | % | ||||||||||||||
Aviation | 36,759 | 25 | % | 31,638 | 26 | % | 5,121 | 16 | % | |||||||||||||||
Total | $ | 284,337 | 40 | % | $ | 268,704 | 42 | % | $ | 15,633 | 6 | % |
Cost of goods sold increased 6% in absolute dollars compared to the prior year quarter. The increase in revenues outpaced the increase in cost of goods sold, which resulted in a 190 basis point decrease in cost of goods sold as a percent of revenues compared to the year-ago quarter.
In the auto segment, the decline in cost of goods sold was largely consistent with the segment revenue declines. In the marine segment, the decrease in cost of goods sold as a percent of revenue primarily resulted from the impact of Navionics sales on product mix. In the outdoor and fitness segments, the decreases in cost of goods sold as a percent of revenue resulted from a shift in product mix toward higher margin products. The aviation segment increase in cost of goods was largely consistent with the increase in sales.
Gross Profit
13-weeks ended March 31, 2018 | 13-weeks ended April 1, 2017 | Year over Year | 13-Weeks Ended March 30, 2019 | 13-Weeks Ended March 31, 2018 | Year over Year | ||||||||||||||||||||||||||||||||||||||
Gross Profit | % of Revenues | Gross Profit | % of Revenues | $ Change | % Change | Gross Profit | % of Revenue | Gross Profit | % of Revenue | $ Change | % Change | ||||||||||||||||||||||||||||||||
Outdoor | $ | 93,285 | 65 | % | $ | 73,469 | 63 | % | $ | 19,816 | 27 | % | $ | 97,488 | 63% | $ | 93,285 | 65% | $ | 4,203 | 5% | ||||||||||||||||||||||
Fitness | 96,601 | 58 | % | 77,741 | 56 | % | 18,860 | 24 | % | 90,835 | 50% | 96,601 | 58% | (5,766 | ) | (6% | ) | ||||||||||||||||||||||||||
Marine | 66,683 | 59 | % | 59,747 | 57 | % | 6,936 | 12 | % | 78,055 | 58% | 66,683 | 59% | 11,372 | 17% | ||||||||||||||||||||||||||||
Auto | 61,012 | 43 | % | 70,616 | 44 | % | (9,604 | ) | -14 | % | 57,337 | 45% | 61,012 | 43% | (3,675 | ) | (6% | ) | |||||||||||||||||||||||||
Aviation | 108,954 | 75 | % | 91,233 | 74 | % | 17,721 | 19 | % | 127,983 | 75% | 108,954 | 75% | 19,029 | 17% | ||||||||||||||||||||||||||||
Total | $ | 426,535 | 60 | % | $ | 372,806 | 58 | % | $ | 53,729 | 14 | % | $ | 451,698 | 59% | $ | 426,535 | 60% | $ | 25,163 | 6% |
Gross profit dollars in the first quarter of 20182019 increased 14%6% primarily due to growth in net sales while gross margin increased 190decreased 100 basis points compared to the first quarter of 2017.year-ago quarter. Gross margin remained relatively flat across the auto and aviation segments, while gross margin in the outdoor and fitness segments decreased compared to the year-ago quarter. Gross margin increased in the auto segment and was relatively flat in the aviation and marine segments increasedwhen compared to the year-ago quarter.
The auto segment gross margin increase was primarily dueattributable to product mix within those segments, as discussed above.mix. The fitness segment gross margin decrease was primarily attributable to lower average selling prices and product mix. The outdoor segment gross margin decrease was primarily attributable to product mix.
Advertising Expense
13-weeks ended March 31, 2018 | 13-weeks ended April 1, 2017 | 13-Weeks Ended March 30, 2019 | 13-Weeks Ended March 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
Advertising | Advertising | Year over Year | Advertising | Advertising | Year over Year | ||||||||||||||||||||||||||||||||||||||
Expense | % of Revenues | Expense | % of Revenues | $ Change | % Change | Expense | % of Revenue | Expense | % of Revenue | $ Change | % Change | ||||||||||||||||||||||||||||||||
Outdoor | $ | 5,800 | 4 | % | $ | 5,002 | 4 | % | $ | 798 | 16 | % | $ | 7,171 | 5% | $ | 5,800 | 4% | $ | 1,371 | 24% | ||||||||||||||||||||||
Fitness | 9,685 | 6 | % | 13,926 | 10 | % | (4,241 | ) | -30 | % | 9,989 | 6% | 9,685 | 6% | 304 | 3% | |||||||||||||||||||||||||||
Marine | 5,285 | 5 | % | 5,622 | 5 | % | (337 | ) | -6 | % | 6,331 | 5% | 5,285 | 5% | 1,046 | 20% | |||||||||||||||||||||||||||
Auto | 3,230 | 2 | % | 5,478 | 3 | % | (2,248 | ) | -41 | % | 2,902 | 2% | 3,230 | 2% | (328 | ) | (10% | ) | |||||||||||||||||||||||||
Aviation | 1,311 | 1 | % | 1,497 | 1 | % | (186 | ) | -12 | % | 1,222 | 1% | 1,311 | 1% | (89 | ) | (7% | ) | |||||||||||||||||||||||||
Total | $ | 25,311 | 4 | % | $ | 31,525 | 5 | % | $ | (6,214 | ) | -20 | % | $ | 27,615 | 4% | $ | 25,311 | 4% | $ | 2,304 | 9% |
Advertising expense decreased 20% in absolute dollars compared to the year-ago quarter. The overall decrease in absolute dollars was driven primarily by decreased cooperative advertising associated with customer mix and fitness media, partially offset by an increase in outdoor media.
Selling, General and Administrative Expense
13-weeks ended March 31, 2018 | 13-weeks ended April 1, 2017 | |||||||||||||||||||||||
Selling, General & | Selling, General & | Year over Year | ||||||||||||||||||||||
Admin. Expenses | % of Revenues | Admin. Expenses | % of Revenues | $ Change | % Change | |||||||||||||||||||
Outdoor | $ | 26,056 | 18 | % | $ | 20,669 | 18 | % | $ | 5,387 | 26 | % | ||||||||||||
Fitness | 31,295 | 19 | % | 26,550 | 19 | % | 4,745 | 18 | % | |||||||||||||||
Marine | 28,453 | 25 | % | 21,538 | 21 | % | 6,915 | 32 | % | |||||||||||||||
Auto | 22,059 | 16 | % | 26,604 | 17 | % | (4,545 | ) | -17 | % | ||||||||||||||
Aviation | 9,202 | 6 | % | 6,690 | 5 | % | 2,512 | 38 | % | |||||||||||||||
Total | $ | 117,065 | 16 | % | $ | 102,051 | 16 | % | $ | 15,014 | 15 | % |
Selling, general and administrative expense increased 15%9% in absolute dollars and was relatively flat as a percent of revenuesrevenue compared to the year-ago quarter. The total absolute dollar increase was primarily attributable to increased media advertising in the outdoor segment and increased cooperative advertising in the fitness and marine segments.
Selling, General and Administrative Expense
13-Weeks Ended March 30, 2019 | 13-Weeks Ended March 31, 2018 | ||||||||||||||||||
Selling, General & | Selling, General & | Year over Year | |||||||||||||||||
Admin. Expenses | % of Revenue | Admin. Expenses | % of Revenue | $ Change | % Change | ||||||||||||||
Outdoor | $ | 28,302 | 18% | $ | 26,056 | 18% | $ | 2,246 | 9% | ||||||||||
Fitness | 37,573 | 21% | 31,295 | 19% | 6,278 | 20% | |||||||||||||
Marine | 25,983 | 19% | 28,453 | 25% | (2,470 | ) | (9%) | ||||||||||||
Auto | 19,295 | 15% | 22,059 | 16% | (2,764 | ) | (13%) | ||||||||||||
Aviation | 15,628 | 9% | 9,202 | 6% | 6,426 | 70% | |||||||||||||
Total | $ | 126,781 | 17% | $ | 117,065 | 16% | $ | 9,716 | 8% |
Selling, general and administrative expense increased 8% in absolute dollars and was relatively flat as a percent of revenue compared to the year-ago quarter. The absolute dollar increase in the first quarter of 2019 was primarily attributable to personnel costs and legal related costs.
As noted above and in Note 4 to the Condensed Consolidated Financial Statements, the Company refined its methodology to allocate certain selling, general and administrative expenses fromin the beginning of the 2019 fiscal year. The prior year acquisitions inamounts are presented here as originally reported. For comparative purposes, we estimate selling, general and administrative expenses for the first quarter of 2018. All segments, except2018 would have been approximately $4 million more for the aviation segment, approximately $4 million less for the marine were relatively flatsegment, and not significantly different for the outdoor, fitness, and auto segments. Selling, general and administrative expenses as a percent of revenues. Therevenue also decreased in marine segment increase as a percentdue to leverage of revenues wasoperating costs and increased in fitness primarily due to expenses resulting from prior year acquisitions in the first quarter of 2018.legal related costs.
Considering the refined allocation methodology noted above, we estimate selling, general and administrative expenses for the 52-weeks ended December 29, 2018 would have been approximately $18 million more for the aviation segment, approximately $11 million less for the marine segment, approximately $7 million less for the outdoor segment, and not significantly different for the fitness and auto segments.
Research and Development Expense
13-weeks ended March 31, 2018 | 13-weeks ended April 1, 2017 | 13-Weeks Ended March 30, 2019 | 13-Weeks Ended March 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
Research & | Research & | Year over Year | Research & | Research & | Year over Year | ||||||||||||||||||||||||||||||||||||||
Development | % of Revenues | Development | % of Revenues | $ Change | % Change | Development | % of Revenue | Development | % of Revenue | $ Change | % Change | ||||||||||||||||||||||||||||||||
Outdoor | $ | 17,607 | 12 | % | $ | 13,347 | 12 | % | $ | 4,260 | 32 | % | $ | 20,062 | 13% | $ | 17,607 | 12% | $ | 2,455 | 14% | ||||||||||||||||||||||
Fitness | 22,247 | 13 | % | 18,793 | 14 | % | 3,454 | 18 | % | 25,147 | 14% | 22,247 | 13% | 2,900 | 13% | ||||||||||||||||||||||||||||
Marine | 19,814 | 17 | % | 14,442 | 14 | % | 5,372 | 37 | % | 20,268 | 15% | 19,814 | 17% | 454 | 2% | ||||||||||||||||||||||||||||
Auto | 32,255 | 23 | % | 31,182 | 19 | % | 1,073 | 3 | % | 26,927 | 21% | 32,255 | 23% | (5,328 | ) | (17% | ) | ||||||||||||||||||||||||||
Aviation | 50,034 | 34 | % | 44,438 | 36 | % | 5,596 | 13 | % | 53,515 | 31% | 50,034 | 34% | 3,481 | 7% | ||||||||||||||||||||||||||||
Total | $ | 141,957 | 20 | % | $ | 122,202 | 19 | % | $ | 19,755 | 16 | % | $ | 145,919 | 19% | $ | 141,957 | 20% | $ | 3,962 | 3% |
Research and development expense increased 16% primarily due to engineering personnel costs related to our wearable product offerings, aviation, and expenses resulting from prior year acquisitions within the marine segment. In3% in absolute dollars research and development costs increased $19.8 million when compared with the year-ago quarter and increaseddecreased 90 basis points as a percent of revenue.revenue compared to the year-ago quarter. This increase in absolute dollars was primarily due to higher engineering personnel costs related to wearable and aviation product offerings. Our research and development spending is focused on product development, improving existing software capabilities, and exploring new categories.
Operating Income
13-weeks ended March 31, 2018 | 13-weeks ended April 1, 2017 | Year over Year | 13-Weeks Ended March 30, 2019 | 13-Weeks Ended March 31, 2018 | Year over Year | ||||||||||||||||||||||||||||||||||||||||||||
Operating Income | % of Revenues | Operating Income | % of Revenues | $ Change | % Change | Operating Income | % of Revenue | Operating Income | % of Revenue | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||
Outdoor | $ | 43,822 | 30 | % | $ | 34,451 | 30 | % | $ | 9,371 | 27 | % | $ | 41,953 | 27 | % | $ | 43,822 | 30 | % | $ | (1,869 | ) | (4 | %) | ||||||||||||||||||||||||
Fitness | 33,374 | 20 | % | 18,472 | 13 | % | 14,902 | 81 | % | 18,126 | 10 | % | 33,374 | 20 | % | (15,248 | ) | (46 | %) | ||||||||||||||||||||||||||||||
Marine | 13,131 | 12 | % | 18,145 | 17 | % | (5,014 | ) | -28 | % | 25,473 | 19 | % | 13,131 | 12 | % | 12,342 | 94 | % | ||||||||||||||||||||||||||||||
Auto | 3,468 | 2 | % | 7,352 | 5 | % | (3,884 | ) | -53 | % | 8,213 | 6 | % | 3,468 | 2 | % | 4,745 | 137 | % | ||||||||||||||||||||||||||||||
Aviation | 48,407 | 33 | % | 38,608 | 31 | % | 9,799 | 25 | % | 57,618 | 34 | % | 48,407 | 33 | % | 9,211 | 19 | % | |||||||||||||||||||||||||||||||
Total | $ | 142,202 | 20 | % | $ | 117,028 | 18 | % | $ | 25,174 | 22 | % | $ | 151,383 | 20 | % | $ | 142,202 | 20 | % | $ | 9,181 | 6 | % |
Operating income increased 22%6% in absolute dollars and increased 180 basis pointswas relatively flat as a percent of revenue when compared to the firstyear-ago quarter. In the current quarter, of 2017. Thethe growth in operating income on anin absolute dollars was primarily attributable to revenue and gross profit dollar and percent of revenue basis resulted from revenue growth, and an increase in gross margin percent, whilepartially offset by increased operating expenses, as a percent of revenue remained relatively flat, as discussed aboveabove.
Other Income (Expense)
13-weeks ended | 13-weeks ended | 13-Weeks Ended | 13-Weeks Ended | |||||||||||||
March 31, 2018 | April 1, 2017 | March 30, 2019 | March 31, 2018 | |||||||||||||
Interest income | $ | 10,227 | $ | 8,444 | $ | 13,704 | $ | 10,227 | ||||||||
Foreign currency gains (losses) | 816 | (37,497 | ) | |||||||||||||
Foreign currency gains | 314 | 816 | ||||||||||||||
Other | 735 | 400 | 864 | 735 | ||||||||||||
Total | $ | 11,778 | $ | (28,653 | ) | $ | 14,882 | $ | 11,778 |
The average return on cash and investments, including interest and capital gains/losses, during the first quarter of 20182019 was 1.7%2.0% compared to 1.4%1.7% during the same quarter of 2017. Interest income increased2018, primarily due to slightly higher yields on fixed-income securities.
Foreign currency gains and losses for the Company are typically driven by movements in the Taiwan Dollar, Euro, and British Pound Sterling in relation to the U.S. Dollar. The Taiwan Dollar is the functional currency of Garmin Corporation, the U.S. Dollar is the functional currency of Garmin (Europe) Ltd., and the Euro is the functional currency of most of our other European subsidiaries, although some transactions and balances are denominated in British Pounds. The majority of the Company’s consolidated foreign currency gain or loss is typically driven by the significant cash and marketable securities, receivables and payables held in a currency other than the functional currency at a given legal entity. Due to the relative size of the entities using a functional currency other than the Taiwan Dollar, Euro, and British Pound Sterling, currency fluctuations related to these entities are not expected to have a material impact on the Company’s financial statements.
The $0.3 million currency gain recognized in the first quarter of 2019 was primarily due to the strengthening of the U.S. Dollar against Taiwan Dollar and weakening against the British Pound Sterling, offset by the U.S. Dollar strengthening against the Euro, within the 13-weeks ended March 30, 2019. During this period, the U.S. Dollar strengthened 0.9% against the Taiwan Dollar and weakened 2.6% against the British Pound Sterling, resulting in gains of $5.8 million and $1.2 million, respectively, while the U.S. Dollar strengthened 1.9% against the Euro, resulting in a loss of $7.8 million. The remaining net currency gain of $1.1 million was related to the timing of transactions and impacts of other currencies, each of which was individually immaterial.
The $0.8 million currency gain recognized in the first quarter of 2018 was primarily due to the weakening of the U.S. Dollar against the Taiwan Dollar, Euro, and British Pound Sterling within the 13-weeks ended March 31, 2018. During this period, the U.S. Dollar weakened 2.7% against the Euro and 3.7% against the British Pound Sterling, resulting in gains of $8.8 million and $2.0 million, respectively, while the U.S. Dollar weakened 2.0% against the Taiwan Dollar, resulting in a loss of $12.7 million. The remaining net currency gain of $2.7 million was related to the timing of transactions and impacts of other currencies, and timingeach of transactions.which was individually immaterial.
The $37.5 million currency loss recognized in the first quarter of 2017 was primarily due to the weakening of the U.S. Dollar against the Taiwan Dollar, Euro, and British Pound Sterling within the 13-weeks ended April 1, 2017. During this period, the U.S. Dollar weakened 7.1% against the Taiwan Dollar, resulting in a loss of $42.9 million, while the U.S. Dollar weakened 1.3% against the Euro and 1.7% against the British Pound Sterling, resulting in gains of $2.7 million and $0.8 million, respectively. The remaining net currency gain of $1.9 million was related to other currencies and timing of transactions.
Income Tax Provision
The Company recorded anincome tax expense of $26.1 million in the 13-week period ended March 30, 2019, compared to income tax expense of $24.6 million in the 13-week period ended March 31, 2018, compared to income tax benefit of $150.0 million in the 13-week period ended April 1, 2017, which included a $168.8 million income tax benefit due to the revaluation of certain Switzerland deferred tax assets.2018. The effective tax rate was 15.7% in the first quarter of 2019, compared to 16.0% in the first quarter of 2018, compared to (169.8%) in the first quarter of 2017. Excluding the effect of the $168.8 million revaluation of deferred tax assets in the first quarter of 2017, the first quarter of 2018 effective tax rate decreased by 520 basis points primarily due to the reduction of the U.S. corporate tax rate, as a result of U.S. tax reform passed in December 2017, and the net release of uncertain tax position reserves.2018.
Net Income
As a result of the above, net income for the 13-weeks ended March 31, 201830, 2019 was $129.4$140.2 million compared to $238.4$129.4 million for the 13-week period ended April 1, 2017, a decreaseMarch 31, 2018, an increase of $109$10.8 million.
Liquidity and Capital Resources
As of March 31, 2018,30, 2019, we had $2,375.9 millionapproximately $2.7 billion of cash and cash equivalents and marketable securities. We primarily use cash flow from operations, and expect that future cash requirements may be used, to fund our capital expenditures, support our working capital requirements, pay dividends, and fund strategic acquisitions, and fund share repurchases.acquisitions. We believe that our existing cash balances and cash flow from operations will be sufficient to meet our long-term projected capital expenditures, working capital and other cash requirements.
It is management’s goal to invest the on-hand cash in accordance with the investment policy, which has been approved by the Board of Directors of each applicable Garmin entity holding the cash. The investment policy’s primary purpose is to preserve capital, maintain an acceptable degree of liquidity, and maximize yield within the constraint of low credit risk. Garmin’s average interest rate returns on cash and investments during the first quarter 2018of 2019 and 20172018 were approximately 1.7%2.0% and 1.5%1.7%, respectively. The fair value of our securities varies from period to period due to changes in interest rates, in the performance of the underlying collateral and in the credit performance of the underlying issuer, among other factors. See Note 8 for additional information regarding marketable securities.
Operating Activities
13-Weeks Ended | 13-Weeks Ended | |||||||||||||||
March 31, | April 1, | March 30, | March 31, | |||||||||||||
(In thousands) | 2018 | 2017 | 2019 | 2018 | ||||||||||||
Net cash provided by operating activities | $ | 214,190 | $ | 120,395 | $ | 164,582 | $ | 214,190 |
The $93.8$49.6 million increasedecrease in cash provided by operating activities in the first quarter of 20182019 compared to the first quarter of 20172018 was primarily due to the increasedecrease in cash provided by working capital of $57.4$67.9 million (which included an increasea decrease of $52.8$74.9 million in net receipts of accounts receivable, and a decreasean increase of $11.7$16.6 million in cash paid for inventory)inventory, partially offset by $23.6 million net cash provided by changes in accounts payable and other activities) and income taxes payable of $10.1$7.4 million. Additionally,These decreases were partially offset by the year over year decreaseincrease in net income of $109.0$10.8 million was offset byand other non-cash adjustments to net income of $135.3 million, including an income tax benefit of $168.8 million recognized in the first quarter of 2017 related to the revaluation of certain Switzerland deferred tax assets.$14.9 million.
Investing Activities
13-Weeks Ended | 13-Weeks Ended | |||||||||||||||
March 31, | April 1, | March 30, | March 31, | |||||||||||||
(In thousands) | 2018 | 2017 | 2019 | 2018 | ||||||||||||
Net cash used in investing activities | $ | (112,624 | ) | $ | (13,276 | ) | $ | (32,621 | ) | $ | (112,624 | ) |
The $99.3$80.0 million increasedecrease in cash used in investing activities induring the first quarter of 20182019 compared to the first quarter of 20172018 was primarily due to increaseddecreased net purchases of marketable securities of $88.8M$73.2 million and cash payments for acquisitions of $9.4 million.million, partially offset by $2.6 million net cash used in other activities.
Financing Activities
13-Weeks Ended | ||||||||
March 30, | March 31, | |||||||
(In thousands) | 2019 | 2018 | ||||||
Net cash used in financing activities | $ | (213,381 | ) | $ | (100,782 | ) |
13-Weeks Ended | ||||||||
March 31, | April 1, | |||||||
(In thousands) | 2018 | 2017 | ||||||
Net cash used in financing activities | $ | (100,782 | ) | $ | (127,353 | ) |
The $26.6$112.6 million decreaseincrease in cash used in financing activities induring the first quarter of 20182019 compared to the first quarter of 20172018 was primarily due to decreased purchasesan increase in dividend payments of treasury stock under our share repurchase authorization$104.5 million associated with the timing of $27.9M.dividend payments that resulted in two dividend payments in the first quarter of 2019 compared to one dividend payment in the first quarter of 2018.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
General
Garmin’s discussion and analysis of its financial condition and results of operations are based upon Garmin’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The presentation of these financial statements requires Garmin to make estimates and judgments that affect the reported amounts of assets, liabilities, revenuesrevenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, Garmin evaluates its estimates, including those related to customer sales programs and incentives, product returns, bad debts, inventories, investments, intangible assets, income taxes, warranty obligations, contingencies, customer sales programs and contingenciesincentives, product returns, relative standalone selling prices, and litigation.progress toward completion of performance obligations in certain contracts with customers. Garmin bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
For a description of the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements, refer to Note 2, “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in Part II, Item 8 and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017.29, 2018. There were no material changes to the Company’s critical accounting policies and estimates in the 13-week period ended March 31, 2018,30, 2019, other than those discussed in Note 1, “Significant Accounting“Accounting Policies”.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There are numerous market risks that can affect our future business, financial condition and results of operations. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part II, “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2017.29, 2018. There have been no material changes during the 13-week period ended March 31, 201830, 2019 in the risks described in our Annual Report on Form 10-K related to market sensitivity, inflation, foreign currency exchange rate risk and interest rate risk.
Item 4. Controls and Procedures
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(a) Evaluation of disclosure controls and procedures.The Company maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to management in a timely fashion. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. As of March 31, 2018,30, 2019, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of March 31, 201830, 2019 that our disclosure controls and procedures were effective such that the information relating to the Company, required to be disclosed in our Securities and Exchange Commission ("SEC"(“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company'sCompany’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b)Changes in internal control over financial reporting. There has been no change in the Company’s internal controls over financial reporting that occurred during the Company’s fiscal quarter ended March 31, 201830, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The following information supplements and amends the discussion set forth under Part I, Item 3 "Legal Proceedings" in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017.
PulseOn Oy v. Garmin (Europe) Ltd.
On February 21, 2018, PulseOn Oy filed an application with the Court of Appeal in England seeking leave to appeal the judgment of the Patent Court issued on January 18, 2018, holding that no accused Garmin products infringed either of the Registered Community Designs asserted by PulseOn Oy. Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.
In the normal course of business, the Company and its subsidiaries are parties to various legal claims, actions, and complaints, including matters involving patent infringement, other intellectual property, product liability, customer claims and various other risks. It is not possible to predict with certainty whether or not the Company and its subsidiaries will ultimately be successful in any of these legal matters, or if not, what the impact might be. However, the Company’s management does not expect that the results in any of these legal proceedings will have a material adverse effect on the Company’s results of operations, financial position or cash flows. For additional information, see Note 6 – Commitments and Contingencies in the above Condensed Consolidated Financial Statements and Part I, “Item 3. Legal Proceedings” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018.
There are many risks and uncertainties that can affect our future business, financial performance or share price. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2017.29, 2018. There have been no material changes during the 13-week period ended March 31, 201830, 2019 in the risks described in our Annual Report on Form 10-K. These risks, however, are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Items (a) and (b) are not applicable.Not applicable
(c) Issuer Purchases of Equity Securities
The Board of Directors approved a share repurchase program on February 13, 2015, authorizing the Company to purchase up to $300 million of its common shares as market and business conditions warrant. In December 2016, the Board of Directors authorized an extension through December 31, 2017 to purchase remaining common shares. On December 31, 2017, the share repurchase authorization expired with no additional shares having been repurchased during the first quarter of 2018.
Item 3. | Defaults Upon Senior Securities |
None
Item 4. | Mine Safety Disclosures |
Not applicable
Item 5. | Other Information |
Not applicable
Item 6. |
Exhibit 31.1 | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a). |
Exhibit 31.2 | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a). |
Exhibit 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Exhibit 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Exhibit 101.INS | XBRL Instance Document | |
Exhibit 101.SCH | XBRL Taxonomy Extension Schema | |
Exhibit 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
Exhibit 101.LAB | XBRL Taxonomy Extension Label Linkbase | |
Exhibit 101.PRE | XBRL Taxonomy Extension Presentation Linkbase
| |
Exhibit 101.DEF | XBRL Taxonomy Extension Definition Linkbase |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GARMIN LTD. | ||
By | /s/ Douglas G. Boessen | |
Douglas G. Boessen | ||
Chief Financial Officer | ||
(Principal Financial Officer and Principal Accounting Officer) | ||
Dated: May 1, 2019 |
Dated: May 2, 201829
Exhibit No. | Description |
Exhibit 31.1 | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a). |
Exhibit 31.2 | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a). |
Exhibit 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Exhibit 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Exhibit 101.INS | XBRL Instance Document | |
Exhibit 101.SCH | XBRL Taxonomy Extension Schema | |
Exhibit 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
Exhibit 101.LAB | XBRL Taxonomy Extension Label Linkbase | |
Exhibit 101.PRE | XBRL Taxonomy Extension Presentation Linkbase
| |
Exhibit 101.DEF | XBRL Taxonomy Extension Definition Linkbase |