filings.toolsItem 8. Financial Statements and Supplementary Data
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Item 8. Financial Statements and Supplementary Data
CONSOLIDATED FINANCIAL STATEMENTS
Garmin Ltd. and Subsidiaries
Years Ended December 28, 2019, December 29, 2018, and December 30, 2017
Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Garmin Ltd. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Garmin Ltd. and Subsidiaries (the Company) as of December 28, 2019 and December 29, 2018, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 28, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 28, 2019 and December 29, 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 28, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 28, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 19, 2020, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Goodwill
Description of the Matter
The Company assigns goodwill acquired in business combinations to its reporting units as of each acquisition date. At December 28, 2019, the Company’s goodwill balance related to the auto personal navigation device (“auto PND”) reporting unit was approximately $80 million. As discussed in Note 2 of the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level. The auto PND market has declined in recent years as competing technologies have emerged and market saturation has occurred. This has resulted in periods of lower revenues and profits for the Company’s auto PND reporting unit. Considering these qualitative factors, management performed a step one quantitative impairment test of the auto PND reporting unit in the fourth quarter of 2019. Considering the uncertainty of future operating results and/or market conditions deteriorating faster or more drastically than the forecasts utilized in management’s estimation of fair value, the Company disclosed some or all of the approximately $80 million of goodwill associated with the auto PND reporting unit is at risk of future impairment.
Auditing management’s annual goodwill impairment test for the auto PND reporting unit was complex and highly judgmental due to the significant estimation required in determining the fair value of the reporting unit. In particular, the fair value estimate was sensitive to significant assumptions such as the discount rate, projected future revenues, projected future operating margins, and terminal growth rates which are affected by expectations about future market or economic conditions.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s auto PND goodwill impairment review process. For example, we tested controls over management's review of the significant assumptions (e.g., discount rate, projected revenue growth rates, projected operating margins, terminal growth rates) used to develop the prospective financial information (PFI) for the quantitative analysis. We also tested management's controls to validate that the data used in the valuation was complete and accurate.
To test the estimated fair value of the Company’s auto PND reporting unit, we performed audit procedures that included, among others, assessing the methodology and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis. We included valuation specialists on our team to review the Company’s model, method, and the more sensitive assumptions such as the discount rate and terminal growth assumptions. We compared the significant assumptions used by management to current industry and economic trends, changes to the Company’s business model, forecasts used in the Company’s annual operating plans and other relevant factors. We assessed the historical accuracy of management’s forecast estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the auto PND reporting unit that would result from changes in the assumptions. We reconciled the fair value of the reporting unit to its carrying amount, testing the Company’s determination of the assets and liabilities used within the reporting unit that are the basis for the carrying amount. In addition, we tested management’s reconciliation of the fair value of the reporting units to the market capitalization of the Company.
Measurement of Reserve for Unrecognized Income Tax Benefits
Description of the Matter
The Company accounts for uncertainty in income taxes in accordance with the FASB ASC 740 topic, Income Taxes. The Company operates in a multinational tax environment and is subject to tax laws, regulations and guidelines for intercompany transactions that have transfer pricing subjectivity. For those uncertain tax positions that qualify for recognition, the Company uses significant judgment to measure the largest amount of benefit that is more likely than not to be realized upon ultimate settlement. As discussed in Note 6 to the consolidated financial statements, the Company’s balance of gross unrecognized income tax benefits was $101 million at December 28, 2019, primarily related to transfer pricing positions.
Auditing management’s measurement of these material tax positions is complex and involved especially subjective and complex judgements. The assessment process involves both significant judgment and estimation because the pricing of the intercompany transactions is based on pricing analyses that may produce a number of different outcomes or ranges of outcomes (e.g., the price that would be charged in an arm’s-length transaction). Each transfer pricing tax position carries unique facts and circumstances that must be evaluated, and ultimate resolution will be dependent on uncontrollable factors, such as the interpretation of laws and regulations; new case law; the willingness of the income tax authority to settle the issue, including the timing thereof; and other factors.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls that address the risks of material misstatement relating to the measurement and valuation of the uncertain tax position reserves related to transfer pricing from intercompany transactions. For example, we tested controls over management’s review of inputs and calculations of these uncertain tax positions, which included management’s evaluation of the ranges of outcomes and pricing conclusions reached within the transfer pricing studies.
Our audit procedures included, among others, involving our tax professionals to test the Company’s measurement of tax positions related to transfer pricing used in intercompany transactions to assess the appropriateness of the ranges of outcomes utilized and the pricing conclusions reached within the transfer pricing studies conducted by the Company. For example, we compared the transfer pricing methodology utilized by management to alternative methodologies and industry benchmarks. We also verified our understanding of the relevant facts by reading the Company’s correspondence with the relevant tax authorities and any third-party advice obtained by the Company. In addition, we used our knowledge of international and local income tax laws, as well as historical settlement activity from income tax authorities, to evaluate the appropriateness of the Company’s measurement of uncertain tax positions related to transfer pricing used in these intercompany transactions.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1990.
Kansas City, Missouri
February 19, 2020
| Garmin Ltd. And Subsidiaries | ||||||||
|---|---|---|---|---|---|---|---|---|
| Consolidated Balance Sheets | ||||||||
| (In thousands, except per share information) | ||||||||
| December 28, 2019 | December 29, 2018 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,027,567 | $ | 1,201,732 | ||||
| Marketable securities (Note 3) | 376,463 | 182,989 | ||||||
| Accounts receivable, less allowance for doubtful accounts of $6,754 in 2019 and $5,487 in 2018 | 706,763 | 569,833 | ||||||
| Inventories | 752,908 | 561,840 | ||||||
| Deferred costs | 25,105 | 28,462 | ||||||
| Prepaid expenses and other current assets | 169,044 | 120,512 | ||||||
| Total current assets | 3,057,850 | 2,665,368 | ||||||
| Property and equipment, net | ||||||||
| Land and improvements | 132,951 | 131,689 | ||||||
| Building and improvements | 576,703 | 539,177 | ||||||
| Office furniture and equipment | 306,694 | 264,818 | ||||||
| Manufacturing equipment | 192,741 | 162,077 | ||||||
| Engineering equipment | 170,021 | 154,742 | ||||||
| Vehicles | 26,887 | 20,991 | ||||||
| 1,405,997 | 1,273,494 | |||||||
| Accumulated depreciation | (677,076 | ) | (609,967 | ) | ||||
| 728,921 | 663,527 | |||||||
| Operating lease right-of-use assets (Note 14) | 63,589 | — | ||||||
| Restricted cash (Note 4) | 71 | 73 | ||||||
| Marketable securities (Note 3) | 1,205,475 | 1,330,123 | ||||||
| Deferred income taxes (Note 6) | 268,518 | 176,959 | ||||||
| Noncurrent deferred costs | 23,493 | 29,473 | ||||||
| Intangible assets, net | 659,629 | 417,080 | ||||||
| Other assets | 159,253 | 100,255 | ||||||
| Total assets | $ | 6,166,799 | $ | 5,382,858 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 240,831 | $ | 204,985 | ||||
| Salaries and benefits payable | 128,426 | 113,087 | ||||||
| Accrued warranty costs | 39,758 | 38,276 | ||||||
| Accrued sales program costs | 112,578 | 90,388 | ||||||
| Deferred revenue | 94,562 | 96,372 | ||||||
| Accrued royalty costs | 15,401 | 24,646 | ||||||
| Accrued advertising expense | 35,142 | 31,657 | ||||||
| Other accrued expenses | 95,060 | 69,777 | ||||||
| Income taxes payable | 56,913 | 51,642 | ||||||
| Dividend payable | 217,262 | 200,483 | ||||||
| Total current liabilities | 1,035,933 | 921,313 | ||||||
| Deferred income taxes (Note 6) | 114,754 | 92,944 | ||||||
| Noncurrent income taxes | 105,771 | 127,211 | ||||||
| Noncurrent deferred revenue | 67,329 | 76,566 | ||||||
| Noncurrent operating lease liabilities | 49,238 | — | ||||||
| Other liabilities | 278 | 1,850 | ||||||
| Stockholders’ equity: | ||||||||
| Shares, CHF 0.10 par value, 198,077 shares authorized and issued, 190,686 shares outstanding at December 28, 2019; and 189,461 shares outstanding at December 29, 2018; (Notes 9, 10, and 11): | 17,979 | 17,979 | ||||||
| Additional paid-in capital | 1,835,622 | 1,823,638 | ||||||
| Treasury stock | (345,040 | ) | (397,692 | ) | ||||
| Retained earnings | 3,229,061 | 2,710,619 | ||||||
| Accumulated other comprehensive income | 55,874 | 8,430 | ||||||
| Total stockholders’ equity | 4,793,496 | 4,162,974 | ||||||
| Total liabilities and stockholders’ equity | $ | 6,166,799 | $ | 5,382,858 | ||||
| See accompanying notes. |
| Garmin Ltd. And Subsidiaries | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Consolidated Statements of Income | ||||||||||||
| (In thousands, except per share information) | ||||||||||||
| Fiscal Year Ended | ||||||||||||
| December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||||||
| Net sales | $ | 3,757,505 | $ | 3,347,444 | $ | 3,121,560 | ||||||
| Cost of goods sold | 1,523,529 | 1,367,725 | 1,323,619 | |||||||||
| Gross profit | 2,233,976 | 1,979,719 | 1,797,941 | |||||||||
| Advertising expense | 164,456 | 155,394 | 164,693 | |||||||||
| Selling, general and administrative expenses | 518,568 | 478,177 | 437,977 | |||||||||
| Research and development expense | 605,366 | 567,805 | 511,634 | |||||||||
| 1,288,390 | 1,201,376 | 1,114,304 | ||||||||||
| Operating income | 945,586 | 778,343 | 683,637 | |||||||||
| Other income (expense): | ||||||||||||
| Interest income | 52,817 | 47,147 | 36,925 | |||||||||
| Foreign currency losses | (16,799 | ) | (7,616 | ) | (22,579 | ) | ||||||
| Other income (expense) | 5,618 | 5,373 | (912 | ) | ||||||||
| 41,636 | 44,904 | 13,434 | ||||||||||
| Income before income taxes | 987,222 | 823,247 | 697,071 | |||||||||
| Income tax provision (benefit): (Note 6) | ||||||||||||
| Current | 123,073 | 93,424 | 79,234 | |||||||||
| Deferred | (88,337 | ) | 35,743 | (91,170 | ) | |||||||
| 34,736 | 129,167 | (11,936 | ) | |||||||||
| Net income | $ | 952,486 | $ | 694,080 | $ | 709,007 | ||||||
| Basic net income per share (Note 10) | $ | 5.01 | $ | 3.68 | $ | 3.77 | ||||||
| Diluted net income per share (Note 10) | $ | 4.99 | $ | 3.66 | $ | 3.76 | ||||||
| See accompanying notes. |
| Garmin Ltd. And Subsidiaries | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Consolidated Statements of Comprehensive Income | ||||||||||||
| (In thousands) | ||||||||||||
| Fiscal Year Ended | ||||||||||||
| December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||||||
| Net income | $ | 952,486 | $ | 694,080 | $ | 709,007 | ||||||
| Foreign currency translation adjustment | 7,962 | (31,965 | ) | 88,965 | ||||||||
| Change in fair value of available-for-sale marketable securities, net of deferred taxes | 39,482 | (15,581 | ) | 4,486 | ||||||||
| Comprehensive income | $ | 999,930 | $ | 646,534 | $ | 802,458 | ||||||
| See accompanying notes. |
| Garmin Ltd. And Subsidiaries | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Consolidated Statements of Stockholders' Equity | ||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||||
| Balance at December 31, 2016 | $ | 17,979 | $ | 1,836,047 | $ | (455,964 | ) | $ | 2,092,220 | $ | (37,023 | ) | $ | 3,453,259 | ||||||||||
| Net income | — | — | — | 709,007 | — | 709,007 | ||||||||||||||||||
| Translation adjustment | — | — | — | — | 88,965 | 88,965 | ||||||||||||||||||
| Adjustment related to unrealized gains (losses) on available-for-sale securities net of income tax effects of $493 | — | — | — | — | 4,486 | 4,486 | ||||||||||||||||||
| Comprehensive income | 802,458 | |||||||||||||||||||||||
| Dividends declared ($2.04 per share) | — | — | — | (382,783 | ) | — | (382,783 | ) | ||||||||||||||||
| Issuance of treasury stock related to equity awards | — | (52,581 | ) | 74,442 | — | — | 21,861 | |||||||||||||||||
| Stock compensation | — | 44,735 | — | — | — | 44,735 | ||||||||||||||||||
| Purchase of treasury stock related to equity awards | — | 185 | (12,773 | ) | — | — | (12,588 | ) | ||||||||||||||||
| Purchase of treasury stock under share repurchase plan | — | — | (74,523 | ) | — | — | (74,523 | ) | ||||||||||||||||
| Balance at December 30, 2017 | $ | 17,979 | $ | 1,828,386 | $ | (468,818 | ) | $ | 2,418,444 | $ | 56,428 | $ | 3,852,419 | |||||||||||
| Net income | — | — | — | 694,080 | — | 694,080 | ||||||||||||||||||
| Translation adjustment | — | — | — | — | (31,965 | ) | (31,965 | ) | ||||||||||||||||
| Adjustment related to unrealized gains (losses) on available-for-sale securities net of income tax effects of $2,174 | — | — | — | — | (15,581 | ) | (15,581 | ) | ||||||||||||||||
| Comprehensive income | 646,534 | |||||||||||||||||||||||
| Dividends declared ($2.12 per share) | — | — | — | (400,657 | ) | — | (400,657 | ) | ||||||||||||||||
| Issuance of treasury stock related to equity awards | — | (61,139 | ) | 87,781 | — | — | 26,642 | |||||||||||||||||
| Stock compensation | — | 56,391 | — | — | — | 56,391 | ||||||||||||||||||
| Purchase of treasury stock related to equity awards | — | — | (16,655 | ) | — | — | (16,655 | ) | ||||||||||||||||
| Reclassification under ASU 2016-16 | — | — | — | (1,700 | ) | — | (1,700 | ) | ||||||||||||||||
| Reclassification under ASU 2018-02 | — | — | — | 452 | (452 | ) | — | |||||||||||||||||
| Balance at December 29, 2018 | $ | 17,979 | $ | 1,823,638 | $ | (397,692 | ) | $ | 2,710,619 | $ | 8,430 | $ | 4,162,974 | |||||||||||
| Net income | — | — | — | 952,486 | — | 952,486 | ||||||||||||||||||
| Translation adjustment | — | — | — | — | 7,962 | 7,962 | ||||||||||||||||||
| Adjustment related to unrealized gains (losses) on available-for-sale securities net of income tax effects of $5,982 | — | — | — | — | 39,482 | 39,482 | ||||||||||||||||||
| Comprehensive income | 999,930 | |||||||||||||||||||||||
| Dividends declared ($2.28 per share) | — | — | — | (434,044 | ) | — | (434,044 | ) | ||||||||||||||||
| Issuance of treasury stock related to equity awards | — | (51,416 | ) | 78,538 | — | — | 27,122 | |||||||||||||||||
| Stock compensation | — | 63,400 | — | — | — | 63,400 | ||||||||||||||||||
| Purchase of treasury stock related to equity awards | — | — | (25,886 | ) | — | — | (25,886 | ) | ||||||||||||||||
| Balance at December 28, 2019 | $ | 17,979 | $ | 1,835,622 | $ | (345,040 | ) | $ | 3,229,061 | $ | 55,874 | $ | 4,793,496 | |||||||||||
| See accompanying notes. |
| Garmin Ltd. And Subsidiaries | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Consolidated Statements of Cash Flows | ||||||||||||
| (In thousands) | ||||||||||||
| Fiscal Year Ended | ||||||||||||
| December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||||||
| Operating Activities: | ||||||||||||
| Net income | $ | 952,486 | $ | 694,080 | $ | 709,007 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation | 71,921 | 64,798 | 59,895 | |||||||||
| Amortization | 34,254 | 31,396 | 26,357 | |||||||||
| Gain on sale of property and equipment | (233 | ) | (479 | ) | (230 | ) | ||||||
| Unrealized foreign currency losses | 18,663 | 13,790 | 21,681 | |||||||||
| Deferred income taxes | (88,358 | ) | 38,978 | (90,000 | ) | |||||||
| Stock compensation expense | 63,400 | 56,391 | 44,735 | |||||||||
| Realized (gains) losses on marketable securities | (799 | ) | 827 | 991 | ||||||||
| Changes in operating assets and liabilities, net of acquisitions: | ||||||||||||
| Accounts receivable, net of allowance for doubtful accounts | (123,401 | ) | 7,290 | (39,067 | ) | |||||||
| Inventories | (170,169 | ) | (57,737 | ) | (7,504 | ) | ||||||
| Other current and non-current assets | (86,073 | ) | 7,358 | (21,608 | ) | |||||||
| Accounts payable | 26,192 | 40,628 | (17,240 | ) | ||||||||
| Other current and non-current liabilities | 36,660 | (1,323 | ) | 5,627 | ||||||||
| Deferred revenue | (11,032 | ) | (17,208 | ) | (20,754 | ) | ||||||
| Deferred costs | 9,335 | 5,611 | 2,395 | |||||||||
| Income taxes payable | (34,297 | ) | 35,120 | (13,443 | ) | |||||||
| Net cash provided by operating activities | 698,549 | 919,520 | 660,842 | |||||||||
| Investing activities: | ||||||||||||
| Purchases of property and equipment | (118,031 | ) | (155,755 | ) | (139,696 | ) | ||||||
| Proceeds from sale of property and equipment | 529 | 1,600 | 361 | |||||||||
| Purchase of intangible assets | (2,377 | ) | (4,600 | ) | (12,232 | ) | ||||||
| Purchase of marketable securities | (789,352 | ) | (403,181 | ) | (587,656 | ) | ||||||
| Redemption of marketable securities | 758,774 | 283,603 | 635,311 | |||||||||
| Acquisitions, net of cash acquired | (300,289 | ) | (29,170 | ) | (90,471 | ) | ||||||
| Net cash used in investing activities | (450,746 | ) | (307,503 | ) | (194,383 | ) | ||||||
| Financing activities: | ||||||||||||
| Dividends | (417,264 | ) | (296,148 | ) | (382,976 | ) | ||||||
| Proceeds from issuance of treasury stock related to equity awards | 27,122 | 26,642 | 21,860 | |||||||||
| Purchase of treasury stock related to equity awards | (25,886 | ) | (16,655 | ) | (12,773 | ) | ||||||
| Purchase of treasury stock under share repurchase plan | — | — | (74,523 | ) | ||||||||
| Net cash used in financing activities | (416,028 | ) | (286,161 | ) | (448,412 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (5,942 | ) | (15,810 | ) | 26,716 | |||||||
| Net (decrease) increase in cash, cash equivalents, and restricted cash | (174,167 | ) | 310,046 | 44,763 | ||||||||
| Cash, cash equivalents, and restricted cash at beginning of year | 1,201,805 | 891,759 | 846,996 | |||||||||
| Cash, cash equivalents, and restricted cash at end of year | $ | 1,027,638 | $ | 1,201,805 | $ | 891,759 | ||||||
| See accompanying notes. |
| Garmin Ltd. And Subsidiaries | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Consolidated Statements of Cash Flows (continued) | ||||||||||||
| (In thousands) | ||||||||||||
| Fiscal Year Ended | ||||||||||||
| December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||||||
| Supplemental disclosures of cash flow information | ||||||||||||
| Cash paid during the year for income taxes | $ | 160,286 | $ | 67,592 | $ | 106,146 | ||||||
| Cash received during the year from income tax refunds | $ | 6,063 | $ | 6,122 | $ | 3,806 | ||||||
| Supplemental disclosure of non-cash investing and financing activities | ||||||||||||
| Increase (decrease) in accrued capital expenditures related to purchases of property and equipment | $ | 2,821 | $ | (14,647 | ) | $ | 13,864 | |||||
| Change in marketable securities related to unrealized appreciation (depreciation) | $ | 45,464 | $ | (17,755 | ) | $ | 4,979 | |||||
| Fair value of assets acquired | $ | 354,631 | $ | 31,920 | $ | 128,190 | ||||||
| Liabilities assumed | (25,507 | ) | (2,273 | ) | (29,587 | ) | ||||||
| Less: cash acquired | (28,835 | ) | (477 | ) | (8,132 | ) | ||||||
| Cash paid for acquisitions, net of cash acquired | $ | 300,289 | $ | 29,170 | $ | 90,471 |
See accompanying notes.
GARMIN LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share information)
December 28, 2019 and December 29, 2018
- Description of the Business
Garmin Ltd. and subsidiaries (together, the “Company”) design, develop, manufacture, market, and distribute a diverse family of hand-held, wrist-based, portable, and fixed-mount Global Positioning System (GPS)-enabled products and other navigation, communications, information and sensor-based products. Garmin Corporation (GC) is primarily responsible for the manufacturing and distribution of the Company’s products to the Company’s subsidiaries and, to a lesser extent, new product development and sales and marketing of the Company’s products in Asia and the Far East. Garmin International, Inc. (GII) is primarily responsible for sales and marketing of the Company’s products in the Americas region and for most of the Company’s research and new product development. GII also manufactures most of the Company’s products in the aviation segment. Garmin (Europe) Ltd. (GEL) is responsible for sales and marketing of the Company’s products in Europe, the Middle East and Africa (EMEA). Many of GEL’s sales are to other Company-owned distributors in the EMEA region.
- Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The accompanying consolidated financial statements reflect the accounts of Garmin Ltd. and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to current period presentation.
As previously announced and discussed below within the “Recently Adopted Accounting Standards” section of this footnote, effective beginning in the 2018 fiscal year, 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-K reflect these changes. Further, as a result of the adoption of certain other accounting standards described below, effective beginning in the 2018 fiscal year, certain amounts in prior periods have been reclassified to conform to the current period presentation.
Fiscal Year
The Company’s fiscal year is based on a 52-53-week period ending on the last Saturday of the calendar year. Due to the fact that there are not exactly 52 weeks in a calendar year, and there is slightly more than one additional day per year (not including the effects of leap year) in each calendar year as compared to a 52-week fiscal year, the Company will have a fiscal year comprising 53 weeks in certain fiscal years, as determined by when the last Saturday of the calendar year occurs.
In those resulting fiscal years that have 53 weeks, the Company will record an extra week of sales, costs, and related financial activity. Therefore, the financial results of those 53-week fiscal years, and the associated 14-week fourth quarters, will not be entirely comparable to the prior and subsequent 52-week fiscal years and the associated 13-week quarters. Fiscal years 2019, 2018, and 2017 each included 52 weeks.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Foreign Currency
Many Garmin Ltd. subsidiaries utilize currencies other than the United States Dollar (USD) as their functional currency. As required by the Foreign Currency Matters topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), the financial statements of these subsidiaries for all periods presented have been translated into USD, the functional currency of Garmin Ltd., and the reporting currency herein, for purposes of consolidation at rates prevailing during the year for sales, costs, and expenses and at end-of-year rates for all assets and liabilities. The effect of this translation is recorded in a separate component of stockholders’ equity. Cumulative currency translation adjustments of $55,289 and $47,327 as of December 28, 2019 and December 29, 2018, respectively, have been included in accumulated other comprehensive income in the accompanying consolidated balance sheets.
Transactions in foreign currencies are recorded at the approximate rate of exchange at the transaction date. Assets and liabilities resulting from these transactions are translated at the rate of exchange in effect at the balance sheet date. 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. Net foreign currency losses recorded in results of operations were $16,799, $7,616, and $22,579, for the years ended December 28, 2019, December 29, 2018, and December 30, 2017, respectively. The loss in fiscal 2019 was primarily due to the USD strengthening against the Euro and weakening against the Taiwan Dollar, which was partially offset by the USD weakening against the British Pound Sterling. The loss in fiscal 2018 was due primarily to the USD strengthening against the Euro and British Pound Sterling, offset by the USD strengthening against the Taiwan Dollar. The loss in fiscal 2017 was due primarily to the USD weakening against the Taiwan Dollar, which was partially offset by the USD weakening against the Euro and British Pound Sterling.
Earnings Per Share
Basic earnings per share amounts are computed based on the weighted-average number of common shares outstanding. For purposes of diluted earnings per share, the number of shares that would be issued from the exercise of dilutive share-based compensation awards has been reduced by the number of shares which could have been purchased from the proceeds of the exercise or release at the average market price of the Company’s stock during the period the awards were outstanding. See Note 10 of the Notes to Consolidated Financial Statements.
Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents include cash on hand, operating accounts, money market funds, deposits readily convertible to known amounts of cash, and securities with maturities of three months or less when purchased. The carrying amount of cash and cash equivalents approximates fair value, given the short maturity of those instruments. Restricted cash is reported separately from cash and cash equivalents on the consolidated balance sheets. See Note 4 of the Notes to Consolidated Financial Statements for additional information on restricted cash.
The total of cash and cash equivalents and restricted cash balances presented on the Consolidated Balance Sheet reconciles to the total cash, cash equivalents, and restricted cash shown in the Consolidated Statements of Cash Flows.
Trade Accounts Receivable
The Company sells its products to retailers, wholesalers, and other customers and extends credit based on its evaluation of the customer’s financial condition. Potential losses on receivables are dependent on each individual customer’s financial condition. The Company carries its trade accounts receivable at net realizable value. Typically, its accounts receivable are collected within 80 days and do not bear interest. The Company monitors its exposure to losses on receivables and maintains allowances for potential losses or adjustments. The Company determines these allowances by (1) evaluating the aging of its receivables and (2) reviewing its high-risk customers. Past due receivable balances are written off when internal collection efforts have been unsuccessful in collecting the amount due. The Company maintains trade credit insurance to provide security against large losses.
Concentration of Credit Risk
The Company grants credit to certain customers who meet the Company’s pre-established credit requirements. Generally, the Company does not require security when trade credit is granted to customers. Credit losses are provided for in the Company’s consolidated financial statements and typically have been within management’s expectations. Certain customers are allowed extended terms consistent with normal industry practice. Most of these extended terms can be classified as either relating to seasonal sales variations or to the timing of new product releases by the Company.
The Company’s top ten customers have contributed between 21% and 24% of net sales annually since 2017. None of the Company’s customers accounted for more than or equal to 10% of consolidated net sales in the years ended December 28, 2019, December 29, 2018, and December 30, 2017, respectively.
Inventories
Inventories are stated at the lower of cost or market with cost being determined on a first-in, first-out (FIFO) basis. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Inventories consisted of the following:
| December 28, 2019 | December 29, 2018 | |||||||
|---|---|---|---|---|---|---|---|---|
| Raw materials | $ | 260,070 | $ | 205,696 | ||||
| Work-in-process | 133,157 | 96,564 | ||||||
| Finished goods | 359,681 | 259,580 | ||||||
| Inventories | $ | 752,908 | $ | 561,840 |
Property and Equipment
Property and equipment are recorded at cost and typically depreciated using the straight-line method over the following estimated useful lives:
| Buildings and improvements | 39-50 | |
|---|---|---|
| Office furniture and equipment | 3-5 | |
| Manufacturing and engineering equipment | 5-10 | |
| Vehicles | 5 |
As required by the Property, Plant and Equipment topic of the FASB ASC (ASC Topic 360), the Company reviews property and equipment assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be fully recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. That assessment is based on the carrying amount of the asset at the date it is tested for recoverability. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. The Company did not recognize any material long-lived asset impairment charges in the fiscal years of 2019, 2018, or 2017.
Intangible Assets
At December 28, 2019, and December 29, 2018, the Company had patents, customer related intangibles and other identifiable finite-lived intangible assets recorded at a cost of $432,296 and $330,532, respectively. Identifiable, finite-lived intangible assets are amortized over their estimated useful lives on a straight-line basis typically over three to ten years. Accumulated amortization was $239,776 and $214,469 at December 28, 2019 and December 29, 2018, respectively. Amortization expense on these intangible assets was $26,225, $21,796, and $20,863 for the years ended December 28, 2019, December 29, 2018, and December 30, 2017, respectively. In the next five years, the amortization expense is estimated to be $25,654, $22,000, $19,290, $18,127, and $16,880, respectively. The Company also reviews finite-lived intangible assets for impairment in accordance with ASC Topic 360, as described above, whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be fully recoverable.
The Company’s excess purchase cost over fair value of net assets acquired (goodwill) was $467,108 at December 28, 2019, and $301,017 at December 29, 2018.
| December 28, 2019 | December 29, 2018 | |||||||
|---|---|---|---|---|---|---|---|---|
| Goodwill balance at beginning of year | $ | 301,017 | $ | 286,982 | ||||
| Acquisitions | 171,773 | 16,768 | ||||||
| Finalization of purchase price allocations, impairment charges, and effect of foreign currency translation | (5,682 | ) | (2,733 | ) | ||||
| Goodwill balance at end of year | $ | 467,108 | $ | 301,017 |
The Intangibles – Goodwill and Other topic of the FASB ASC (ASC Topic 350) requires that goodwill and intangible assets with indefinite useful lives should not be amortized but rather be assessed for impairment at least annually or sooner whenever events or changes in circumstances indicate that they may be impaired. The Company performs its annual impairment assessments of goodwill and indefinite-lived intangible assets, if any, in the fourth quarter of each year, as of the Company’s fiscal year end date. ASC Topic 350 allows management to first perform a qualitative assessment by assessing the qualitative factors of relevant events and circumstances at the reporting unit level to determine if it is necessary to perform the quantitative goodwill impairment test. If factors indicate that it is more likely than not that the fair value of the reporting unit is less than the carrying amount, then the quantitative test will be performed. If the fair value of the reporting unit is less than the carrying amount, then a goodwill impairment charge will be recognized in the amount by which carrying amount exceeds fair value, limited to the total amount of goodwill allocated to that reporting unit. See the Recently Adopted Accounting Standards section below regarding the Company’s early adoption of ASU 2017-04.
Each of the Company’s operating segments (auto PND, auto OEM, aviation, fitness, marine, and outdoor) represents a distinct reporting unit. The auto PND market has declined in recent years as competing technologies have emerged and market saturation has occurred. This has resulted in periods of lower revenues and profits for the Company’s auto PND reporting unit. Considering these qualitative factors, management performed a quantitative impairment test of the auto PND reporting unit in the fourth quarter of 2019 and determined that the fair value of the reporting unit was substantially in excess of its carrying amount. However, considering the uncertainty of future operating results and/or market conditions deteriorating faster or more drastically than the forecasts utilized in management’s estimation of fair value, management believes some or all of the approximately $80 million of goodwill associated with the Company’s auto PND reporting unit is at risk of future impairment.
Management also performed a quantitative impairment test of the Auto OEM reporting unit in the fourth quarter of 2019 and concluded that the fair value of the reporting unit was less than its carrying amount. As a result, the Company recorded an impairment charge of approximately $3 million, which was the total goodwill balance associated with the auto OEM reporting unit. The impairment charge was not material to the Company’s Consolidated Financial Statements.
Management concluded that no other reporting units are currently at risk of impairment, and the Company did not recognize any material goodwill or intangible asset impairment charges in fiscal years 2019, 2018, or 2017.
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 newly signed leases, the right-of-use asset and lease liability is recognized on lease commencement date. Variable lease costs, such as adjustments to payments based on consumer price indices, are excluded in the recognition of right-of-use assets and lease liabilities. 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 Consolidated Balance Sheets as a right-of-use asset or lease liability.
Dividends
Under Swiss corporate law, dividends must be approved by shareholders at the general meeting of the Company’s shareholders.
On June 7, 2019, the shareholders approved a dividend of $2.28 per share (of which, $1.14 was paid in the Company’s 2019 fiscal year) payable in four equal installments on dates determined by the Board of Directors. The dates determined by the Board were as follows:
| Dividend Date | Record Date | $s per share | ||||
|---|---|---|---|---|---|---|
| June 28, 2019 | June 17, 2019 | $ | 0.57 | |||
| September 30, 2019 | September 16, 2019 | $ | 0.57 | |||
| December 31, 2019 | December 16, 2019 | $ | 0.57 | |||
| March 31, 2020 | March 16, 2020 | $ | 0.57 |
The Company paid dividends in 2019 in the amount of $417,264, which included four dividend distributions in the fiscal year. Both the dividends paid and the remaining dividend payable were reported as a reduction of retained earnings.
On June 8, 2018, the shareholders approved a dividend of $2.12 per share (of which, $1.06 was paid in the Company’s 2018 fiscal year) payable in four equal installments on dates determined by the Board of Directors. The dates determined by the Board were as follows:
| Dividend Date | Record Date | $s per share | ||||
|---|---|---|---|---|---|---|
| June 29, 2018 | June 18, 2018 | $ | 0.53 | |||
| September 28, 2018 | September 14, 2018 | $ | 0.53 | |||
| December 31, 2018 | December 14, 2018 | $ | 0.53 | |||
| March 29, 2019 | March 15, 2019 | $ | 0.53 |
The Company paid dividends in 2018 in the amount of $296,148, which included three dividend distributions in the fiscal year. Both the dividends paid and the remaining dividend payable were reported as a reduction of retained earnings.
On June 9, 2017, the shareholders approved a dividend of $2.04 per share (of which, $1.53 was paid in the Company’s 2017 fiscal year) payable in four equal installments on dates determined by the Board of Directors. The dates determined by the Board were as follows:
| Dividend Date | Record Date | $s per share | ||||
|---|---|---|---|---|---|---|
| June 30, 2017 | June 19, 2017 | $ | 0.51 | |||
| September 29, 2017 | September 15, 2017 | $ | 0.51 | |||
| December 29, 2017 | December 15, 2017 | $ | 0.51 | |||
| March 30, 2018 | March 15, 2018 | $ | 0.51 |
The Company paid dividends in 2017 in the amount of $382,976, which included four dividend distributions in the fiscal year. Both the dividends paid and the remaining dividend payable were reported as a reduction of retained earnings.
Approximately $61,129 of retained earnings was indefinitely restricted from distribution to stockholders pursuant to the laws of Taiwan as of December 28, 2019 and December 29, 2018.
Marketable Securities
Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date.
All of the Company’s marketable securities were considered available-for-sale at December 28, 2019. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported in Accumulated other comprehensive income on the Company’s Consolidated Balance Sheets. At December 28, 2019, cumulative unrealized gains of $585 were reported in accumulated other comprehensive income, net of related taxes. At December 29, 2018, cumulative unrealized net losses of $38,897 were reported in accumulated other comprehensive income, net of related taxes.
Investments are reviewed periodically to determine if they have suffered an impairment of value that is considered other-than-temporary. The Company recognizes the credit component of other-than-temporary impairments of debt securities within Other income (expense) on the Company’s Consolidated Statements of Income and the noncredit component within Accumulated other comprehensive income on the Company’s Consolidated Balance Sheets.
Testing for impairment of investments requires significant management judgment. The identification of potentially impaired investments, the determination of their fair value, and the assessment of whether any decline in value is other than temporary are the key judgment elements. The discovery of new information and the passage of time can significantly change these judgments. Revisions of impairment judgments are made when new information becomes known, and any resulting impairment adjustments are made at that time. The economic environment and volatility of securities markets increase the difficulty of determining fair value and assessing investment impairment.
The amortized cost of debt securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization and realized gains/losses are recorded within Interest income and Other income (expense), respectively, on the Company’s Consolidated Statements of Income. The cost of securities sold is based on the specific identification method.
Investments are discussed in detail in Note 3 of the Notes to Consolidated Financial Statements.
Income Taxes
The Company accounts for income taxes using the liability method in accordance with the FASB ASC 740 topic Income Taxes. The liability method provides that deferred tax assets and liabilities are recorded based on the difference between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes as measured based on the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The Company accounts for uncertainty in income taxes in accordance with the FASB ASC 740 topic Income Taxes. The Company recognizes liabilities based on our estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves not to be required, the reversal of the liabilities results in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary. If the Company’s estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.
Income taxes are discussed in detail in Note 6 of the Notes to Consolidated Financial Statements.
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 such services have been identified 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.
The Company allocates revenue to all performance obligations associated with tangible products containing separately identifiable ongoing services based on the respective performance obligations’ 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 map updates 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 map updates, 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 map updates, map care, and traffic performance obligations. The revenue and associated costs allocated to map updates, 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 estimated map care period in OEM contracts of 3-10 years as we believe our efforts related 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 communication service subscriptions, aviation database subscriptions, and extended warranties that are recognized over the contractual service period (typically 1-3 years).
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. Cooperative advertising incentives payable to dealers and distributors are recorded as reductions of revenue unless we obtain proof of a distinct advertising service, in which case we record the incentive as advertising expense. 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 and Costs
At December 28, 2019 and December 29, 2018, the Company had deferred revenues totaling $161,891 and $172,938, respectively, and related deferred costs totaling $48,598 and $57,935, respectively.
Deferred revenue consists primarily of the transaction price allocated to performance obligations that are recognized over a period of time basis as discussed in the Revenue Recognition portion of this footnote. Billings associated with such items are typically completed upon the transfer of control of promised products or services to the customer and recorded to accounts receivable until payment is received. Deferred 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 expense as incurred the incremental costs to obtain a contract when the amortization period of the asset that would have otherwise been recognized is one year or less.
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 consolidated financial statements.
Product Warranty
The Company accrues for estimated future warranty costs at the time products are sold. The Company’s standard warranty obligation to retail partners generally provides for a right of return of any product for a full refund in the event that such product is not merchantable, is damaged, or is defective. The Company’s historical experience is that these types of warranty obligations are generally fulfilled within 5 months from time of sale. The Company’s standard warranty obligation to its end-users provides for a period of one to two years from date of shipment while certain aviation, marine, and auto OEM products have a warranty period of two years or more from the date of installation. The Company’s estimates of costs to service its warranty obligations are based on historical experience and management’s expectations and judgments of future conditions. To the extent the Company experiences increased warranty claim activity or increased costs associated with servicing those claims, its warranty accrual will increase, which may result in decreased gross profit. The following reconciliation provides an illustration of changes in the aggregate warranty accrual:
| Fiscal Year Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||||||
| Balance - beginning of period | $ | 38,276 | $ | 36,827 | $ | 37,233 | ||||||
| Accrual for products sold (1) | 58,092 | 59,374 | 56,360 | |||||||||
| Expenditures | (56,610 | ) | (57,925 | ) | (56,766 | ) | ||||||
| Balance - end of period | $ | 39,758 | $ | 38,276 | $ | 36,827 | ||||||
| (1) Changes in cost estimates related to pre-existing warranties were not material and aggregated with accruals for new warranty contracts in the ‘accrual for products sold during the period’ line. | ||||||||||||
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense amounted to approximately $164,456, $155,394, and $164,693 for the years ended December 28, 2019, December 29, 2018, and December 30, 2017, respectively.
Research and Development
A majority of the Company’s research and development is performed in the United States. Research and development costs, which are typically expensed as incurred, amounted to approximately $605,366, $567,805, and $511,634 for the years ended December 28, 2019, December 29, 2018, and December 30, 2017, respectively.
Preproduction Costs Related to Long-Term Supply Arrangements
Preproduction design and development costs related to long-term supply arrangements are expensed as incurred, and classified as Research and development, unless the customer has provided a contractual guarantee for reimbursement of such costs. Contractually reimbursable costs are capitalized as incurred in the Consolidated Balance Sheets within Prepaid expenses and other current assets if reimbursement is expected to be received within one year, or within Other assets if expected to be received beyond one year. Such capitalized costs were approximately $24,267 as of December 28, 2019, and there were no such capitalized costs as of December 29, 2018.
Customer Service and Technical Support
Customer service and technical support costs are included as selling, general and administrative expenses in the accompanying Consolidated Statements of Income. Customer service and technical support costs include costs associated with performing order processing, answering customer inquiries by telephone and through websites, e-mail and other electronic means, and providing free technical support assistance to customers. The technical support is typically provided within one year after the associated revenue is recognized. The related cost of providing this free support is not material.
Software Development Costs
The FASB ASC topic entitled Software requires companies to expense software development costs as they incur them until technological feasibility has been established, at which time those costs are capitalized until the product is available for general release to customers. The Company’s capitalized software development costs are not significant, as the time elapsed from working model to release is typically short. As required by the Research and Development topic of the FASB ASC, costs incurred to enhance our existing products or after the general release of the service using the product are expensed in the period they are incurred and included in research and development costs in the accompanying consolidated statements of income.
Accounting for Stock-Based Compensation
The Company currently sponsors four stock-based employee compensation plans. The FASB ASC topic entitled Compensation – Stock Compensation requires the measurement and recognition of compensation expenses for all share-based payment awards made to employees and directors, including employee stock options and restricted stock, based on estimated fair values.
Accounting guidance requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as stock-based compensation expense over the requisite service period in the Company’s consolidated financial statements.
As stock-based compensation expenses recognized in the accompanying consolidated statements of income are based on awards ultimately expected to vest, they have been reduced for estimated forfeitures. Accounting guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience and management’s estimates.
Excess tax benefits or deficiencies from stock-based compensation are recognized in the income tax provision and are not estimated in the effective tax rate, rather, are recorded as discrete tax items in the period they occur. Excess income tax benefits from stock-based compensation arrangements are classified as a cash flow from operations.
Stock compensation plans are discussed in detail in Note 9 of the Notes to Consolidated Financial Statements.
Recently Adopted Accounting Standards
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. 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 adopted the new lease standard as of the beginning of the 2019 fiscal year using the optional transition method. The Company 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 Consolidated Statements of Income or Consolidated Statements of Cash Flows in future periods. The Company elected the package of transitional practical expedients upon adoption which, among other provisions, allowed the Company to carry forward historical lease classification. See Note 14 – Leases for additional information regarding leases.
Intangible – Goodwill and Other
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangible – Goodwill and Other (Topic 350): Simplify the Test for Goodwill Impairment (“ASU 2017-04”) which simplifies the accounting for goodwill impairment. ASU 2017-04 removes “step two” of the goodwill impairment test, such that a goodwill impairment charge will now be the amount by which a reporting unit’s carrying value exceeds its fair value. ASU 2017-04 should be applied prospectively and is effective for fiscal years, or any goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for any impairment tests performed after January 1, 2017. The Company early adopted ASU 2017-04 in the fourth quarter of the year ended December 28, 2019. The adoption did not have a material impact on the Company’s Consolidated Financial Statements.
Revenue from Contracts with Customers
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 adopted the new revenue standard in the 2018 fiscal year using the full retrospective method, which requires the Company to restate each prior reporting period presented in future financial statement issuances. The impacts of adopting the new revenue standard relate to our accounting for certain arrangements within the auto segment.
A portion of the Company’s auto segment contracts had 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 now 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 had 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 recognize revenue and associated costs of royalties related to certain broadcast 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 revenue 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 were not impacted by adoption of the new revenue standard.
| December 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As reported | Restated (1) | Impact | As reported | Restated (1) | 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 | (3,362 | ) | 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 | 1,397 | 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 | 383 | (36,761 | ) | (37,024 | ) | (263 | ) | |||||||||||||||
| Total stockholders’ equity | 3,802,466 | 3,852,419 | 49,953 | 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 | ) |
| 52-Weeks Ended December 30, 2017 | 53-Weeks Ended December 31, 2016 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As reported | Restated (1) | Impact | As reported | Restated (1) | 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 |
| (1) | The Restated results above were presented in our fiscal year 2018 Annual Report on Form 10-K filed with the SEC on February 20, 2019, in connection with the Company’s adoption of ASC Topic 606 in fiscal year 2018 using the full retrospective method. |
|---|
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 Liabilities (“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The Company has adopted the new standard effective beginning in the 2018 fiscal year. The adoption did not 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 beginning in the 2018 fiscal year. The adoption of ASU 2016-15 did not have a material impact to the Company’s 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.
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. The Company has adopted the new standard effective beginning in the 2018 fiscal year, which resulted in a reclassification of approximately $1,700 of certain prepaid tax balances in a cumulative effect to retained earnings as of the date of adoption.
Income Statement – Reporting Comprehensive Income
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 beginning in the 2018 fiscal year, resulting in reclassification of approximately $452 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.
- Marketable Securities
The 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:
| Level 1 | Unadjusted quoted prices in active markets for identical assets 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 |
| Level 3 | 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 December 28, 2019 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| U.S. Treasury securities | $ | 15,179 | $ | — | $ | 15,179 | $ | — | ||||||||
| Agency securities | 64,675 | — | 64,675 | — | ||||||||||||
| Mortgage-backed securities | 254,022 | — | 254,022 | — | ||||||||||||
| Corporate securities | 985,650 | — | 985,650 | — | ||||||||||||
| Municipal securities | 164,755 | — | 164,755 | — | ||||||||||||
| Other | 97,657 | — | 97,657 | — | ||||||||||||
| Total | $ | 1,581,938 | $ | — | $ | 1,581,938 | $ | — |
| 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 December 28, 2019 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| U.S. Treasury securities | $ | 15,204 | $ | 5 | $ | (30 | ) | $ | 15,179 | |||||||
| Agency securities | 64,582 | 120 | (27 | ) | 64,675 | |||||||||||
| Mortgage-backed securities | 256,417 | 90 | (2,485 | ) | 254,022 | |||||||||||
| Corporate securities | 980,590 | 8,806 | (3,746 | ) | 985,650 | |||||||||||
| Municipal securities | 163,898 | 1,092 | (235 | ) | 164,755 | |||||||||||
| Other | 98,246 | 111 | (700 | ) | 97,657 | |||||||||||
| Total | $ | 1,578,937 | $ | 10,224 | $ | (7,223 | ) | $ | 1,581,938 |
| Available-For-Sale Securities as of December 29, 2018 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| U.S. Treasury securities | $ | 22,485 | $ | — | $ | (357 | ) | $ | 22,128 | |||||||
| Agency securities | 60,088 | 28 | (1,000 | ) | 59,116 | |||||||||||
| Mortgage-backed securities | 142,176 | 1 | (6,312 | ) | 135,865 | |||||||||||
| Corporate securities | 1,010,590 | 33 | (30,099 | ) | 980,524 | |||||||||||
| Municipal securities | 175,630 | 73 | (2,566 | ) | 173,137 | |||||||||||
| Other | 144,606 | 0 | (2,264 | ) | 142,342 | |||||||||||
| Total | $ | 1,555,575 | $ | 135 | $ | (42,598 | ) | $ | 1,513,112 |
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 cost basis, which may be maturity.
The Company recognizes the credit component of other-than-temporary impairments of debt securities within Other income (expense) on the Company’s Consolidated Statements of Income and the noncredit component within Accumulated other comprehensive income on the Company’s Consolidated Balance Sheets. During 2019 and 2018, 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 at December 28, 2019 were $611,732 and $604,509 respectively. Approximately 42% of securities in our portfolio were at an unrealized loss position at December 28, 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 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 December 28, 2019 and December 29, 2018.
| As of December 28, 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 | $ | — | $ | — | $ | (30 | ) | $ | 13,087 | |||||||
| Agency securities | (16 | ) | 20,808 | (11 | ) | 20,812 | ||||||||||
| Mortgage-backed securities | (745 | ) | 79,007 | (1,740 | ) | 86,392 | ||||||||||
| Corporate securities | (1,585 | ) | 183,691 | (2,161 | ) | 100,926 | ||||||||||
| Municipal securities | (218 | ) | 34,165 | (17 | ) | 9,522 | ||||||||||
| Other | (410 | ) | 34,540 | (290 | ) | 21,559 | ||||||||||
| Total | $ | (2,974 | ) | $ | 352,211 | $ | (4,249 | ) | $ | 252,298 |
| 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 December 28, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
| Amortized Cost | Fair Value | |||||||
|---|---|---|---|---|---|---|---|---|
| Due in one year or less | $ | 376,222 | $ | 376,463 | ||||
| Due after one year through five years | 1,043,626 | 1,047,849 | ||||||
| Due after five years through ten years | 155,415 | 154,045 | ||||||
| Due after ten years | 3,674 | 3,581 | ||||||
| $ | 1,578,937 | $ | 1,581,938 |
- Commitments and Contingencies
Commitments
The Company is party to certain commitments, which include purchases of raw materials, capital expenditures, advertising, and other indirect purchases in connection with conducting our business. The aggregate amount of purchase orders and other commitments open as of December 28, 2019 was approximately $586,300. 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 generally based on our current needs and typically fulfilled by our suppliers, contract manufacturers, and logistics providers within short periods of time.
Certain cash balances are held as collateral in relation to bank guarantees. The total amount of restricted cash was $71 and $73 on December 28, 2019 and December 29, 2018, respectively.
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 year ended December 28, 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 legal matters during the fiscal years ended December 28, 2019, December 29, 2018, and December 30, 2017 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.
- Employee Benefit Plans
GII and the Company’s other U.S.-based subsidiaries sponsor a defined contribution employee retirement plan under which their employees may contribute up to 50% of their annual compensation subject to Internal Revenue Code maximum limitations and to which the subsidiaries contribute a specified percentage of each participant’s annual compensation up to certain limits as defined in the retirement plan. During the years ended December 28, 2019, December 29, 2018, and December 30, 2017, expense related to this and other defined contribution plans of $55,456, $52,232, and $43,826, respectively, was recorded within the Company’s Consolidated Statements of Income.
Certain of the Company’s non-U.S. subsidiaries sponsor or participate in local defined benefit pension plans for which contributions are calculated by formulas that consider final pensionable salaries. The obligations, contributions, and associated expense of such plans for the years ended December 28, 2019, December 29, 2018, and December 30, 2017 were not material.
- Income Taxes
The Company’s income tax provision (benefit) consists of the following:
| Fiscal Year Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||||||
| Federal: | ||||||||||||
| Current | $ | 32,874 | $ | 26,784 | $ | 31,343 | ||||||
| Deferred | 20,388 | 13,249 | 50,724 | |||||||||
| $ | 53,262 | $ | 40,033 | $ | 82,067 | |||||||
| State: | ||||||||||||
| Current | $ | 12,605 | $ | 13,015 | $ | 4,203 | ||||||
| Deferred | 831 | (1,599 | ) | 11,684 | ||||||||
| $ | 13,436 | $ | 11,416 | $ | 15,887 | |||||||
| Foreign: | ||||||||||||
| Current | $ | 77,594 | $ | 53,625 | $ | 43,688 | ||||||
| Deferred | (109,556 | ) | 24,093 | (153,578 | ) | |||||||
| $ | (31,962 | ) | $ | 77,718 | $ | (109,890 | ) | |||||
| Total | $ | 34,736 | $ | 129,167 | $ | (11,936 | ) |
The income tax provision differs from the amount computed by applying the U.S. statutory federal income tax rate to income before taxes. The sources and tax effects of the differences, including the impact of establishing tax contingency accruals, are as follows:
| Fiscal Year Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||||||
| Federal income tax expense at U.S. statutory rate | $ | 207,317 | $ | 172,882 | $ | 243,975 | ||||||
| State income tax expense, net of federal tax effect | 7,827 | 5,339 | 5,977 | |||||||||
| Foreign-Derived Intangible Income Deduction | (4,966 | ) | (4,666 | ) | — | |||||||
| Foreign tax rate differential | (57,302 | ) | (38,563 | ) | (106,763 | ) | ||||||
| Other foreign taxes less incentives and credits | 6,360 | (12,841 | ) | (4,646 | ) | |||||||
| Withholding Tax | 32,162 | 33,306 | 14,632 | |||||||||
| Net Change in Uncertain Tax Positions | (17,259 | ) | (13,728 | ) | 5,363 | |||||||
| Federal Domestic Production Activities Deduction | — | — | (3,895 | ) | ||||||||
| Federal Research and Development Credit | (19,338 | ) | (16,562 | ) | (10,851 | ) | ||||||
| Share Based Compensation | (6,169 | ) | (2,747 | ) | 19,916 | |||||||
| Switzerland Corporate Tax Election | — | — | (180,034 | ) | ||||||||
| Switzerland Deferred Tax Assets | (117,989 | ) | — | — | ||||||||
| Other, net | 4,093 | 6,747 | 4,390 | |||||||||
| Income tax expense (benefit) | $ | 34,736 | $ | 129,167 | $ | (11,936 | ) |
The Company recorded income tax expense of $34,736 in the year ended December 28, 2019, which included an income tax benefit of $117,989 related to the revaluation and step-up of certain Switzerland tax assets as a result of the October 2019 enactment of Switzerland federal and Schaffhausen cantonal tax reform and related transitional measures. The Company recorded an income tax benefit of $11,936 in the year ended December 30, 2017, which included an income tax benefit of $180,034 primarily related to the revaluation of certain Switzerland deferred tax assets resulting from the Company’s election in the first quarter of 2017 to align certain Switzerland corporate tax positions with international tax initiatives.
The Company’s statutory federal income tax rate in Switzerland, the Company's place of incorporation since the Redomestication, is 7.83%. If the Company reconciled taxes at the Swiss holding company federal statutory tax rate to the reported income tax expense for 2019 as presented above, the amounts related to tax at the statutory rate would be approximately $130,000 lower, or $77,000, and the foreign tax rate differential would be adjusted by a similar amount to approximately $73,000. For 2018, the amounts related to tax at the statutory rate would be approximately $108,000 lower, or $65,000, and the foreign tax rate differential would be adjusted by a similar amount to approximately $65,000. For 2017, the amount related to tax at the statutory rate would be approximately $186,000 lower, or $53,600, and the foreign tax differential would be reduced by a similar amount to approximately $77,000. All other amounts would remain substantially unchanged.
The Company’s income before income taxes attributable to non-U.S. operations was $606,711, $532,657, and $461,436, for the years ended December 28, 2019, December 29, 2018, and December 30, 2017, respectively.
Income taxes of $35,982, $36,800, and $45,534 at December 28, 2019, December 29, 2018, and December 30, 2017, respectively, have not been accrued by the Company for the unremitted earnings of several of its foreign subsidiaries because such earnings are intended to be reinvested in the subsidiaries indefinitely.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:
| December 28, 2019 | December 29, 2018 | |||||||
|---|---|---|---|---|---|---|---|---|
| Deferred tax assets: | ||||||||
| Product warranty accruals | $ | 2,652 | $ | 2,468 | ||||
| Allowance for doubtful accounts | 3,981 | 3,964 | ||||||
| Inventory reserves | 7,187 | 6,023 | ||||||
| Sales program allowances | 1,185 | 1,657 | ||||||
| Reserve for sales returns | 1,732 | 1,368 | ||||||
| Accrued vacation | 9,079 | 8,179 | ||||||
| Other accruals | 4,320 | 3,083 | ||||||
| Share based compensation | 7,501 | 6,744 | ||||||
| Tax credit carryforwards | 11,164 | 9,697 | ||||||
| Intangible assets | 250,313 | 147,674 | ||||||
| Net operating losses | 1,981 | 3,580 | ||||||
| Benefit related to uncertain tax positions | 6,095 | 5,852 | ||||||
| Operating leases | 12,711 | 253 | ||||||
| Other | 1,755 | 4,543 | ||||||
| Valuation allowance related to loss carryforward and tax credits | (4,562 | ) | (4,568 | ) | ||||
| $ | 317,094 | $ | 200,517 | |||||
| Deferred tax liabilities: | ||||||||
| Fixed assets | 33,754 | 17,543 | ||||||
| Operating leases | 12,473 | — | ||||||
| Prepaid expenses | 1,849 | 2,257 | ||||||
| Book basis in excess of tax basis for acquired entities | 22,488 | 14,068 | ||||||
| Withholding tax | 91,966 | 79,660 | ||||||
| Other | 800 | 2,974 | ||||||
| 163,330 | 116,502 | |||||||
| Net deferred tax assets | $ | 153,764 | $ | 84,015 |
Deferred tax assets related to intangible assets increased as of December 28, 2019 as compared to December 29, 2018 by $102,639 primarily related to the revaluation and step-up of certain Switzerland tax assets as a result of the enactment of Switzerland federal and Schaffhausen cantonal tax reform and related transitional measures.
At December 28, 2019, the Company had $11,164 of tax credit carryover compared to $9,697 at December 29, 2018. At December 28, 2019, the Company had a deferred tax asset of $1,981 related to the future tax benefit of net operating loss (NOL) carryforwards of $7,895. Included in the NOL carryforwards is $880 that relates to Finland and expires in varying amounts between 2025 and 2028, $607 that relates to the Netherlands and expires in 2026, and $6,408 that relates to various other jurisdictions and has no expiration date. The Company has recorded a valuation allowance for a portion of its deferred tax asset relating to various tax attributes that it does not believe are more likely than not to be realized. In the future, if the Company determines, based on existence of sufficient evidence, that it should realize more or less of its deferred tax assets, an adjustment to the valuation allowance will be made in the period such a determination is made.
The total amount of gross unrecognized tax benefits, primarily related to transfer pricing, as of December 28, 2019 was $101,251. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for years ended December 28, 2019, December 29, 2018, and December 30, 2017 is as follows:
| December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance beginning of year | $ | 118,287 | $ | 130,798 | $ | 115,090 | ||||||
| Additions based on tax positions related to prior years | 398 | 1,138 | 8,564 | |||||||||
| Reductions based on tax positions related to prior years | (6,556 | ) | (5,340 | ) | (983 | ) | ||||||
| Additions based on tax positions related to current period | 13,806 | 19,368 | 26,295 | |||||||||
| Reductions related to settlements with tax authorities | (218 | ) | (527 | ) | — | |||||||
| Expiration of statute of limitations | (24,466 | ) | (27,150 | ) | (18,168 | ) | ||||||
| Balance at end of year | $ | 101,251 | $ | 118,287 | $ | 130,798 |
Accounting guidance requires unrecognized tax benefits to be classified as noncurrent liabilities, except for the portion that is expected to be paid within one year of the balance sheet date. The balance of net unrecognized benefits of $92,056, $114,682, and $127,306 are required to be classified as noncurrent at December 28, 2019, December 29, 2018, and December 30, 2017, respectively. The balance of net unrecognized tax benefits of $5,816 is classified as a current liability at December 28, 2019. None of the unrecognized tax benefits were classified as current liabilities for the years ending December 29, 2018 or December 30, 2017. The net unrecognized tax benefits, if recognized, would reduce the effective tax rate. None of the unrecognized tax benefits are due to uncertainty in the timing of deductibility.
Interest and penalties, if any, accrued on the unrecognized tax benefits are reflected in income tax expense. At December 28, 2019, December 29, 2018, and December 30, 2017, the Company had accrued approximately $7,636, $6,613, and $5,605, respectively, for interest. The interest component of the reserve increased income tax expense for the years ending December 28, 2019, December 29, 2018, and December 30, 2017, by $1,023, $1,008, and $1,704, respectively. The Company did not have material amounts accrued for penalties for the years ending December 28, 2019, December 29, 2018, and December 30, 2017.
The Company files income tax returns in Switzerland, U.S. federal jurisdiction, as well as various states, local, and foreign jurisdictions. In its major tax jurisdictions, Switzerland, Taiwan, United Kingdom, and U.S. federal and various states, the Company is no longer subject to income tax examinations by tax authorities, with few exceptions, for years prior to 2015, 2014, 2017, and 2016, respectively.
The Company recognized a reduction of income tax expense of $26,158, $27,106, and $17,918 in fiscal years ended December 28, 2019, December 29, 2018, and December 30, 2017, respectively, to reflect the expiration of statutes of limitations and releases due to audit settlement in various jurisdictions.
The Company believes that it is reasonably possible that approximately $25,000 to $40,000 of its reserves for certain unrecognized tax benefits will decrease within the next 12 months as the result of the expiration of statutes of limitations. This potential decrease in unrecognized tax benefits would impact the Company’s effective tax rate within the next 12 months.
- Fair Value of Financial Instruments
As required by the Financial Instruments topic of the FASB ASC, the following summarizes required information about the fair value of certain financial instruments for which it is currently practicable to estimate such value. None of the financial instruments are held or issued for trading purposes. The carrying amounts and fair values of the Company’s financial instruments are as follows:
| December 28, 2019 | December 29, 2018 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
| Cash and cash equivalents | $ | 1,027,567 | $ | 1,027,567 | $ | 1,201,732 | $ | 1,201,732 | ||||||||
| Restricted cash | $ | 71 | $ | 71 | $ | 73 | $ | 73 | ||||||||
| Marketable securities | $ | 1,581,938 | $ | 1,581,938 | $ | 1,513,112 | $ | 1,513,112 |
For certain of the Company’s financial instruments, including accounts receivable, loan receivable, accounts payable and other accrued liabilities, the carrying amounts approximate fair value due to their short maturities.
- Segment Information
The Company has identified five reportable segments – auto, aviation, fitness, marine, and outdoor. There are two operating segments (auto PND and auto OEM) that are not reported separately but aggregated within the auto reportable segment. Each operating segment is individually reviewed and evaluated by the Chief Operating Decision Maker (CODM), who allocates resources and assesses performance of each segment individually.
The products of the Company’s reportable segments are sold through the Company’s network of independent dealers and distributors as well as through OEMs. However, the nature of products and types of customers for the five reportable segments vary. All of the Company’s segments include portable global positioning system (GPS) receivers and accessories sold to retail outlets. These products are produced primarily by the Company’s subsidiary in Taiwan. The Company’s aviation products include portable and panel mount avionics for Visual Flight Rules and Instrument Flight Rules navigation and are sold primarily to aviation dealers and certain aircraft manufacturers.
The Company’s Chief Executive Officer, who has been identified as the CODM, uses operating income as the measure of profit or loss, combined with other measures, 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. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. There are no inter-segment sales or transfers.
The Company’s reportable segments share many common resources, infrastructures and assets in the normal course of business. Thus, the Company does not report accounts receivable, inventories, property and equipment, intangible assets, or capital expenditures by segment to the CODM.
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 52-weeks ended December 29, 2018 would have been approximately $18 million less for the aviation segment, approximately $11 million more for the marine segment, approximately $7 million more for the outdoor segment, and not significantly different for the auto and fitness segments. We estimate operating income for the 52-weeks ended December 30, 2017 would have been approximately $14 million less for the aviation segment, approximately $8 million less for the fitness segment, approximately $8 million more for the marine segment, and approximately $7 million more for each of the outdoor and auto segments.
Net sales (“revenue”), gross profit, and operating income for each of the Company’s reportable segments are presented below.
| Reportable Segments | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fitness | Outdoor | Aviation | Auto | Marine | Total | |||||||||||||||||||
| 52-Weeks Ended December 28, 2019 | ||||||||||||||||||||||||
| Net sales | $ | 1,047,527 | $ | 917,567 | $ | 735,458 | $ | 548,103 | $ | 508,850 | $ | 3,757,505 | ||||||||||||
| Gross profit | 532,604 | 598,443 | 543,385 | 256,595 | 302,949 | 2,233,976 | ||||||||||||||||||
| Operating income | 191,858 | 334,041 | 252,943 | 56,868 | 109,876 | 945,586 | ||||||||||||||||||
| 52-Weeks Ended December 29, 2018 | ||||||||||||||||||||||||
| Net sales | $ | 858,329 | $ | 809,883 | $ | 603,459 | $ | 634,213 | $ | 441,560 | $ | 3,347,444 | ||||||||||||
| Gross profit | 471,764 | 528,254 | 450,152 | 270,793 | 258,756 | 1,979,719 | ||||||||||||||||||
| Operating income | 181,745 | 290,510 | 204,746 | 37,998 | 63,344 | 778,343 | ||||||||||||||||||
| 52-Weeks Ended December 30, 2017 | ||||||||||||||||||||||||
| Net sales | $ | 762,194 | $ | 698,867 | $ | 501,359 | $ | 785,139 | $ | 374,001 | $ | 3,121,560 | ||||||||||||
| Gross profit | 422,636 | 448,410 | 371,605 | 342,698 | 212,592 | 1,797,941 | ||||||||||||||||||
| Operating income | 146,765 | 249,867 | 153,933 | 82,744 | 50,328 | 683,637 |
Net sales, property and equipment, and net assets by geographic area are as shown below for the years ended December 28, 2019, December 29, 2018, and December 30, 2017. Note that APAC includes Asia Pacific and Australian Continent, and EMEA includes Europe, the Middle East and Africa.
| Americas | EMEA | APAC | Total | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 28, 2019 | ||||||||||||||||
| Net sales to external customers (1) | $ | 1,817,770 | $ | 1,350,533 | $ | 589,202 | $ | 3,757,505 | ||||||||
| Property and equipment, net | 435,503 | 65,323 | 228,095 | 728,921 | ||||||||||||
| Net assets (2) | 3,074,155 | 714,602 | 1,004,739 | 4,793,496 | ||||||||||||
| December 29, 2018 | ||||||||||||||||
| Net sales to external customers (1) | $ | 1,596,716 | $ | 1,204,969 | $ | 545,759 | $ | 3,347,444 | ||||||||
| Property and equipment, net | 408,992 | 45,571 | 208,964 | 663,527 | ||||||||||||
| Net assets (2) | 2,726,196 | 441,506 | 995,272 | 4,162,974 | ||||||||||||
| December 30, 2017 | ||||||||||||||||
| Net sales to external customers (1) | $ | 1,504,194 | $ | 1,172,538 | $ | 444,828 | $ | 3,121,560 | ||||||||
| Property and equipment, net | 381,974 | 40,318 | 173,392 | 595,684 | ||||||||||||
| Net assets (2) | 2,375,522 | 493,999 | 982,898 | 3,852,419 | ||||||||||||
| (1) The U.S. is the only country which constitutes greater than 10% of net sales to external customers. | ||||||||||||||||
| (2) Americas and APAC net assets are primarily held in the United States and Taiwan, respectively. |
- Stock Compensation Plans
Accounting for Stock-Based Compensation
The various Company stock compensation plans are summarized below. For all stock compensation plans, the Company’s policy is to issue treasury shares for option/stock appreciation right (SAR) exercises, restricted stock unit (RSU) releases and employee stock purchase plan (ESPP) purchases.
2011 Non-employee Directors’ Equity Incentive Plan
In June 2011, the stockholders adopted an equity incentive plan for non-employee directors (the “2011 Directors Plan”) providing for grants of stock options, SARs, RSUs and/or performance shares, pursuant to which up to 122,592 shares were available for issuance. The term of each award cannot exceed ten years. Awards are subject to a minimum one-year vesting period. In 2019, 2018, and 2017, 8,016, 10,376, and 10,432 RSUs were granted under this plan.
2005 Equity Incentive Plan
In June 2005, the shareholders adopted an equity incentive plan (the “2005 Plan”) providing for grants of incentive and nonqualified stock options, SARs, RSUs and/or performance shares to employees of the Company and its subsidiaries, pursuant to which up to 10,000,000 common shares were available for issuance. In 2013, the shareholders approved an additional 3,000,000 shares to the plan, making the total shares authorized under the plan 13,000,000. Option and SAR grants vest evenly over a period of five years or as otherwise determined by the Board of Directors or the Compensation Committee and generally expire ten years from the date of grant, if not exercised. RSUs granted prior to December 10, 2012 vested evenly over a period of five years, while RSUs granted on and after that date vested or are vesting evenly over a period of three years. In addition to time-based vesting requirements, the vesting of certain RSU grants is also contingent upon the Company’s achievement of certain financial performance goals. During 2019, 2018, and 2017, 786,346, 1,040,001, and 1,044,045 RSUs were granted under the 2005 Plan. No SARs were granted under the 2005 Plan in 2019, 2018, or 2017.
2000 Equity Incentive Plan
In October 2000, the shareholders adopted an equity incentive plan (the “2000 Plan”) providing for grants of incentive and nonqualified stock options, SARs, RSUs and/or performance shares to employees of the Company and its subsidiaries, pursuant to which up to 7,000,000 common shares were available for issuance. The stock options and SARs vest evenly over a period of five years or as otherwise determined by the Board of Directors or the Compensation Committee and generally expire ten years from the date of grant, if not exercised. The Company did not grant any stock awards from the 2000 Plan in 2019, 2018, or 2017.
2000 Non-employee Directors’ Option Plan
In October 2000, the stockholders adopted a stock option plan for non-employee directors (the “2000 Directors Plan”) providing for grants of options for up to 100,000 common shares. In 2009, the stockholders approved an additional 150,000 shares to the plan, making the total shares authorized under the plan 250,000. The term of each award is ten years. All awards vest evenly over a three-year period. Following the June 2011 approval of the 2011 Directors Plan, the Company will no longer issue options to purchase shares under this plan.
Stock-Based Compensation Activity
A summary of the Company’s stock-based compensation activity and related information under the 2011 Directors Plan, the 2005 Plan, the 2000 Plan and the 2000 Directors Plan for the years ended December 28, 2019, December 29, 2018, and December 30, 2017 is provided below:
| Stock Options and SARs | ||||||||
|---|---|---|---|---|---|---|---|---|
| Weighted-Average Exercise Price | Number of Shares | |||||||
| (In Thousands) | ||||||||
| Outstanding at December 31, 2016 | $ | 74.48 | 2,737 | |||||
| Granted | — | |||||||
| Exercised | $ | 50.15 | (397 | ) | ||||
| Forfeited/Expired | $ | 84.57 | (1,948 | ) | ||||
| Outstanding at December 30, 2017 | $ | 48.94 | 392 | |||||
| Granted | — | |||||||
| Exercised | $ | 48.16 | (304 | ) | ||||
| Forfeited/Expired | $ | 83.01 | (2 | ) | ||||
| Outstanding at December 29, 2018 | $ | 50.92 | 86 | |||||
| Granted | — | |||||||
| Exercised | $ | 49.07 | (20 | ) | ||||
| Forfeited/Expired | — | |||||||
| Outstanding at December 28, 2019 | $ | 51.46 | 66 | |||||
| Exercisable at December 28, 2019 | $ | 51.46 | 66 | |||||
| Expected to vest after December 28, 2019 | — |
| Stock Options and SARs as of December 28, 2019 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Exercise Price | Awards Outstanding | Remaining Life (Years) | Awards Exercisable | |||||||||
| (In Thousands) | (In Thousands) | |||||||||||
| $18.00 - $40.00 | — | — | — | |||||||||
| $40.01 - $60.00 | 66 | 4.67 | 66 | |||||||||
| $60.01 - $80.00 | — | — | — | |||||||||
| $80.01 - $100.00 | — | — | — | |||||||||
| $100.01 - $120.00 | — | — | — | |||||||||
| $120.01 - $140.00 | — | — | — | |||||||||
| 66 | 4.67 | 66 |
| Restricted Stock Units | ||||||||
|---|---|---|---|---|---|---|---|---|
| Weighted-Average Grant Date Fair Value | Number of Shares | |||||||
| (In Thousands) | ||||||||
| Outstanding at December 31, 2016 | $ | 38.94 | 1,824 | |||||
| Granted | $ | 51.71 | 1,055 | |||||
| Released/Vested | $ | 39.31 | (763 | ) | ||||
| Cancelled | $ | 40.40 | (54 | ) | ||||
| Outstanding at December 30, 2017 | $ | 45.30 | 2,062 | |||||
| Granted | $ | 58.66 | 1,050 | |||||
| Released/Vested | $ | 42.55 | (961 | ) | ||||
| Cancelled | $ | 47.91 | (52 | ) | ||||
| Outstanding at December 29, 2018 | $ | 53.17 | 2,099 | |||||
| Granted | $ | 85.93 | 794 | |||||
| Released/Vested | $ | 50.02 | (1,053 | ) | ||||
| Cancelled | $ | 58.62 | (61 | ) | ||||
| Outstanding at December 28, 2019 | $ | 69.47 | 1,779 |
The weighted-average remaining contract life for stock options and SARs outstanding and exercisable at December 28, 2019 were 4.67 years. The weighted-average remaining contract life of restricted stock units at December 28, 2019 was 1.19 years.
The total fair value of awards vested during 2019, 2018, and 2017, was $52,780, $41,092, and $30,280, respectively. The aggregate intrinsic values of options and SARs outstanding and exercisable at December 28, 2019 were $3,122. The aggregate intrinsic values of options and SARs exercised during 2019, 2018, and 2017 were $952, $4,452, and $3,742, respectively. The aggregate intrinsic value of RSUs outstanding at December 28, 2019 was $175,269. The aggregate intrinsic values of RSUs released during 2019, 2018, and 2017 were $103,702, $60,361, and $45,424, respectively. Aggregate intrinsic value of options and SARs represents the applicable number of awards multiplied by the positive difference between the exercise price and the Company’s closing stock price on the last trading day of the relevant fiscal period. Aggregate intrinsic value of RSUs represents the applicable number of awards multiplied by the Company’s closing stock price on the last trading day of the relevant fiscal period. The Company’s closing stock price was $98.52 on December 28, 2019 (based on the closing stock price on December 27, 2019). As of December 28, 2019, there was $80,613 of total unrecognized compensation cost related to unvested share-based compensation awards granted to employees under the stock compensation plans. That cost is expected to be recognized over the weighted average remaining vesting period.
Employee Stock Purchase Plan
The shareholders have adopted an ESPP. Up to 8,000,000 shares of common stock have been reserved for the ESPP. Shares will be offered to employees at a price equal to the lesser of 85% of the fair market value of the stock on the date of purchase or 85% of the fair market value on the first day of the ESPP period. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. During 2019, 2018, and 2017, 451,625, 463,066, and 489,267 shares, respectively, were purchased under the plan for a total purchase price of $27,048, $23,709, and $20,996, respectively. During 2019, 2018, and 2017, the purchases were issued from treasury shares. At December 28, 2019, approximately 2,055,655 shares were available for future issuance.
- Earnings Per Share
The following table sets forth the computation of basic and diluted net income per share:
| Fiscal Year Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||||||
| Numerator: | ||||||||||||
| Numerator for basic and diluted net income per share - net income | $ | 952,486 | $ | 694,080 | $ | 709,007 | ||||||
| Denominator: | ||||||||||||
| Denominator for basic net income per share – weighted-average common shares | 189,931 | 188,635 | 187,828 | |||||||||
| Effect of dilutive securities – employee stock options and stock appreciation rights | 968 | 1,099 | 904 | |||||||||
| Denominator for diluted net income per share – adjusted weighted-average common shares | 190,899 | 189,734 | 188,732 | |||||||||
| Basic net income per share | $ | 5.01 | $ | 3.68 | $ | 3.77 | ||||||
| Diluted net income per share | $ | 4.99 | $ | 3.66 | $ | 3.76 |
There were 297,995 and 1,175,728 outstanding stock options, stock appreciation rights, and restricted stock units (collectively “equity awards”) excluded from the computation of diluted earnings per share for the 2019 and 2017 fiscal years, respectively, because the effect would have been anti-dilutive. There were no equity awards excluded from the computation of diluted earnings per share for the 2018 fiscal year because the effect would have been anti-dilutive.
- Share Repurchase Plan
On February 13, 2015, the Board of Directors approved a share repurchase program authorizing the Company to purchase up to $300,000 of its common shares through December 31, 2016. In December 2016, the Board of Directors authorized an extension through December 31, 2017 to purchase remaining common shares. Under the plan, the Company repurchased 0 shares in fiscal 2019 and fiscal 2018, and repurchased 1,474,092 shares using cash of $74,523 in fiscal 2017.
- Accumulated Other Comprehensive Income
The following provides required disclosure of changes in accumulated other comprehensive income (AOCI) balances by component for the year ended December 28, 2019:
| Foreign Currency Translation Adjustment | Net unrealized gains (losses) on available-for-sale securities | Total | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance - beginning of period | $ | 47,327 | $ | (38,897 | ) | $ | 8,430 | |||||
| Other comprehensive income before reclassification, net of income tax expense of $5,982 | 7,962 | 40,228 | 48,190 | |||||||||
| Amounts reclassified from accumulated other comprehensive income | — | (746 | ) | (746 | ) | |||||||
| Net current-period other comprehensive income | 7,962 | 39,482 | 47,444 | |||||||||
| Balance - end of period | $ | 55,289 | $ | 585 | $ | 55,874 |
The following provides required disclosure of reporting reclassifications out of AOCI for the year ended December 28, 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 | $ | 799 | Other income (expense) | |||
| (53 | ) | Income tax benefit (provision) | ||||
| $ | 746 | Net of tax |
- 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, and pattern of recognition.
Disaggregated revenue by geographic region (Americas, APAC, and EMEA) is presented in Note 8 – Segment Information. The Company has identified six major product categories – auto PND, and auto OEM, aviation, fitness, marine, and outdoor. Note 8 also contains disaggregated revenue information of the aviation, fitness, marine, and outdoor major product categories. Auto segment revenue presented in Note 8 is comprised of the auto PND and auto OEM major product categories as depicted below.
| Auto Revenue by Major Product Category | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fiscal Year Ended | ||||||||||||
| December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||||||
| Auto PND | 67 | % | 67 | % | 69 | % | ||||||
| Auto OEM | 33 | % | 33 | % | 31 | % |
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:
| Fiscal Year Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||||||
| Point in time | $ | 3,577,715 | $ | 3,176,949 | $ | 2,954,945 | ||||||
| Over time | 179,790 | 170,495 | 166,615 | |||||||||
| Net sales | $ | 3,757,505 | $ | 3,347,444 | $ | 3,121,560 |
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 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 52-week periods ending December 28, 2019 and December 29, 2018, are presented below:
| Fiscal Year Ended | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 28, 2019 | December 29, 2018 | |||||||||||||||
| Deferred Revenue (1) | Deferred Costs (2) | Deferred Revenue (1) | Deferred Costs (2) | |||||||||||||
| Balance, beginning of period | $ | 172,938 | $ | 57,935 | $ | 190,200 | $ | 63,554 | ||||||||
| Deferrals in period | 168,743 | 25,751 | 153,233 | 36,297 | ||||||||||||
| Recognition of deferrals in period | (179,790 | ) | (35,088 | ) | (170,495 | ) | (41,916 | ) | ||||||||
| Balance, end of period | $ | 161,891 | $ | 48,598 | $ | 172,938 | $ | 57,935 | ||||||||
| (1) Deferred revenue is comprised of both Deferred revenue and Noncurrent deferred revenue per the Consolidated Balance Sheets | ||||||||||||||||
| (2) Deferred costs are comprised of both Deferred costs and Noncurrent deferred costs per the Consolidated Balance Sheets |
Of the $179,790 of deferred revenue recognized in the 52-weeks ended December 28, 2019, $95,009 was deferred as of the beginning of the period. Of the $170,495 of deferred revenue recognized in the 52-weeks ended December 29, 2018, $105,924 was deferred as of the beginning of the period.
Of the $161,891 and $172,938 of deferred revenue at the end of the periods, December 28, 2019 and December 29, 2018, respectively, approximately two-thirds is recognized ratably over a period of three years or less.
14. Leases
The following table represents lease costs recognized in the Company’s Consolidated Statements of Income for the 52-weeks ended December 28, 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.
| Fiscal Year Ended | ||||
|---|---|---|---|---|
| December 28, 2019 | ||||
| Operating lease cost (1) | $ | 25,238 | ||
| (1) Operating lease cost includes short-term lease costs and variable lease costs, which were not material in the period presented. | ||||
Prior to the adoption of the new lease standard, lease expense for the years ended December 29, 2018 and December 30, 2017 were $21,096 and $18,915, respectively.
The following table represents the components of leases that are recognized on the Company’s Consolidated Balance Sheets as of December 28, 2019.
| December 28, 2019 | ||||
|---|---|---|---|---|
| Operating lease right-of-use assets | $ | 63,589 | ||
| Other accrued expenses | $ | 14,762 | ||
| Noncurrent operating lease liabilities | 49,238 | |||
| Total lease liabilities | $ | 64,000 | ||
| Weighted average remaining lease term | 5.7 years | |||
| Weighted average discount rate | 4.1 | % |
The following table represents the maturity of lease liabilities.
| Year | Amount | |||
|---|---|---|---|---|
| 2020 | $ | 17,626 | ||
| 2021 | 14,565 | |||
| 2022 | 10,683 | |||
| 2023 | 9,768 | |||
| 2024 | 7,258 | |||
| Thereafter | 13,264 | |||
| Total | 73,164 | |||
| Less: imputed interest | (9,164 | ) | ||
| Present value of lease liabilities | 64,000 |
As of December 28, 2019, the Company has entered into leases that have not yet commenced with future lease payments of $23,966, the majority of which relates to a manufacturing facility lease in Poland. These leases will commence in fiscal year 2020 with lease terms ranging from 5 to 10 years.
As of December 29, 2018, prior to the Company’s adoption of Topic 842, future minimum lease payments were as follows:
| Year | Amount | |||
|---|---|---|---|---|
| 2019 | $ | 17,170 | ||
| 2020 | 13,961 | |||
| 2021 | 10,559 | |||
| 2022 | 7,290 | |||
| 2023 | 6,947 | |||
| Thereafter | 13,910 | |||
| Total | $ | 69,837 |
The following table presents supplemental cash flow and noncash information related to leases.
| Fiscal Year Ended | ||||
|---|---|---|---|---|
| December 28, 2019 | ||||
| Cash paid for amounts included in the measurement of operating lease liabilities(2) | $ | 18,636 | ||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 18,248 | ||
| (2) Included in Net cash provided by operating activities on the Company's Statements of Cash Flows |
- Selected Quarterly Information (Unaudited)
| 52-Weeks Ended December 28, 2019 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Quarter Ending | ||||||||||||||||
| March 30 | June 29 | September 28 | December 28 | |||||||||||||
| Net sales | $ | 766,050 | $ | 954,840 | $ | 934,383 | $ | 1,102,233 | ||||||||
| Gross profit | 451,698 | 575,365 | 567,458 | 639,456 | ||||||||||||
| Net income | 140,173 | 223,656 | 227,866 | 360,792 | ||||||||||||
| Basic net income per share | $ | 0.74 | $ | 1.18 | $ | 1.20 | $ | 1.90 | ||||||||
| Diluted net income per share | $ | 0.74 | $ | 1.17 | $ | 1.19 | $ | 1.89 |
| 52-Weeks Ended December 29, 2018 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Quarter Ending | ||||||||||||||||
| March 31 | June 30 | September 29 | December 29 | |||||||||||||
| Net sales | $ | 710,872 | $ | 894,452 | $ | 810,011 | $ | 932,108 | ||||||||
| Gross profit | 426,535 | 523,270 | 480,747 | 549,166 | ||||||||||||
| Net income | 129,374 | 190,342 | 184,214 | 190,150 | ||||||||||||
| Basic net income per share | $ | 0.69 | $ | 1.01 | $ | 0.98 | $ | 1.01 | ||||||||
| Diluted net income per share | $ | 0.68 | $ | 1.00 | $ | 0.97 | $ | 1.00 |
The above quarterly financial data is unaudited, but in the opinion of management, all adjustments necessary for a fair presentation of the selected data for these interim periods presented have been included. These results are not necessarily indicative of future quarterly results, and the table may not foot due to rounding.
- Recently Issued Accounting Pronouncements
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 does not expect the new standard to have a material impact on its Consolidated Financial Statements.
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 does not expect the new standard to have a material impact on its Consolidated Financial Statements.
- Subsequent Events
In February 2020, the Company initiated a transaction, including a multi-year intercompany license agreement, between wholly-owned subsidiaries to migrate ownership of certain intellectual property from Switzerland to the United States. The expected impact of this subsequent event was considered when determining the carrying value associated with the revaluation and step-up of certain Switzerland tax assets, which was recorded by the Company in fiscal 2019 as a result of the enactment of Switzerland federal and Schaffhausen cantonal tax reform.
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