NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per
share information)
December 29, 2018 and December 30,
2017
1. 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.
2. 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.
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 2018 and 2017 included 52 weeks
while fiscal 2016 included 53 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 $47,327 and $79,292 as of December 29, 2018 and December 30, 2017, 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 $7,616, $22,579, and $31,651 for the years ended December 29, 2018, December 30, 2017, and December 31, 2016,
respectively. 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. The loss in fiscal
2016 was due primarily to the USD weakening against the Taiwan Dollar and the USD strengthening 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.
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 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 2016. None of the Company’s customers
accounted for more than or equal to 10% of consolidated net sales in the years ended December 29, 2018, December 30, 2017, and
December 31, 2016, 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 29, 2018
|
|
|
December 30, 2017
|
|
Raw materials
|
|
$
|
205,696
|
|
|
$
|
179,659
|
|
Work-in-process
|
|
|
96,564
|
|
|
|
75,754
|
|
Finished goods
|
|
|
259,580
|
|
|
|
262,231
|
|
Inventories
|
|
$
|
561,840
|
|
|
$
|
517,644
|
|
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, 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.
Intangible Assets
At December 29, 2018,
and December 30, 2017, the Company had patents, customer related intangibles and other identifiable finite-lived intangible assets
recorded at a cost of $330,532 and $316,705, 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 $214,469 and $193,886
at December 29, 2018 and December 30, 2017, respectively. Amortization expense on these intangible assets was $21,796, $20,863,
and $14,319 for the years ended December 29, 2018, December 30, 2017, and December 31, 2016, respectively. In the next five years,
the amortization expense is estimated to be $17,107, $15,125, $11,674, $9,390, and $8,452, respectively.
The Company’s
excess purchase cost over fair value of net assets acquired (goodwill) was $301,017 at December 29, 2018, and $286,982 at December
30, 2017.
|
|
December 29, 2018
|
|
|
December 30, 2017
|
|
Goodwill balance at beginning of year
|
|
$
|
286,982
|
|
|
$
|
224,553
|
|
Acquisitions
|
|
|
16,768
|
|
|
|
58,332
|
|
Finalization of purchase price allocations and effect of foreign currency translation
|
|
|
(2,733
|
)
|
|
|
4,097
|
|
Goodwill balance at end of year
|
|
$
|
301,017
|
|
|
$
|
286,982
|
|
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 tested for impairment at least annually or sooner whenever events or changes
in circumstances indicate that they may be impaired. The Company performs its annual goodwill and intangible asset impairment tests
in the fourth quarter of each year. ASC Topic 350 allows management to first perform a qualitative assessment (“step zero”)
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 (“step one”). 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 step one assessment will be performed.
If the fair value of the reporting unit is less than the carrying amount in step one, then goodwill impairment will be recognized,
and the charge is determined through the “step two” analysis.
Each of the Company’s
operating segments (auto PND, auto OEM, aviation, marine, outdoor, and fitness) 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 step one quantitative goodwill impairment assessment of the auto PND reporting unit in the fourth quarter
of 2018. Management determined that the fair value of the reporting unit was substantially in excess of its carrying amount, and
a step two analysis was therefore not performed. 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 concluded that no other reporting units are currently at risk of impairment.
The Company did not
recognize any material goodwill or intangible asset impairment charges in 2018, 2017, or 2016.
Dividends
Under Swiss corporate
law, dividends must be approved by shareholders at the general meeting of the Company’s shareholders.
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.
On June 10, 2016, the
shareholders approved a dividend of $2.04 per share (of which, $1.53 was paid in the Company’s 2016 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, 2016
|
|
June 16, 2016
|
|
$
|
0.51
|
|
September 30, 2016
|
|
September 15, 2016
|
|
$
|
0.51
|
|
December 30, 2016
|
|
December 14, 2016
|
|
$
|
0.51
|
|
March 31, 2017
|
|
March 15, 2017
|
|
$
|
0.51
|
|
The Company paid dividends
in 2016 in the amount of $481,452, which included five 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
and $304,674 of retained earnings was indefinitely restricted from distribution to stockholders pursuant to the laws of Taiwan
at December 29, 2018 and December 30, 2017, respectively.
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 29, 2018. Available-for-sale securities are stated at fair
value, with the unrealized gains and losses, net of tax, reported in other comprehensive income. At December 29, 2018 and December
30, 2017, cumulative unrealized net losses of $38,897 and $22,864, respectively, 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. If investments
are determined to be impaired, a loss is recognized at the date of determination.
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 is included in interest
income from investments. Realized gains and losses, and credit declines in value judged to be other-than-temporary are included
in other 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 would result 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 we have identified such services as both capable of being distinct and separately identifiable from the
related tangible product, the associated revenue allocated to such services is recognized over time. The Company generally
does not offer specified or unspecified upgrade rights to its customers in connection with software sales.
For products that
include tangible hardware that contains software essential to the tangible product’s functionality and ongoing services
identified as separately identifiable performance obligations, the Company allocates revenue to all performance obligations based
on their relative standalone selling prices (“SSP”), with the amounts allocated to ongoing services deferred and recognized
over a period of time. These ongoing services primarily consist of the Company’s contractual promises to provide personal
navigation device (PND) users with lifetime map updates (LMU) and server-based traffic services. In addition, we provide map update
services (map care) over a contractual period in certain hardware and software contracts with original equipment manufacturers
(OEMs). The Company has determined that directly observable prices do not exist for LMU, map care, or server-based traffic, as
stand-alone and unbundled unit sales do not occur on more than a limited basis. Therefore, the Company uses the expected cost
plus a margin as the primary indicator to calculate relative SSP of the LMU, map care, and traffic performance obligations. The
revenue and associated costs allocated to the LMU, map care, and/or the server-based traffic service are deferred and recognized
ratably over the estimated life of the products of approximately 3 years for PNDs, or the 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/or communication service subscriptions, aviation database subscriptions,
and extended warranties that are individually immaterial.
The Company records
revenue net of sales tax and variable consideration such as trade discounts and customer returns. Payment is due typically
within 90 days or less of shipment of product, or upon the grant of a given software license (as applicable). The Company records
estimated reductions to revenue in the form of variable consideration for customer sales programs, returns, and incentive offerings
including rebates, price protection (product discounts offered to retailers to assist in clearing older products from their inventories
in advance of new product releases), promotions, and other volume-based incentives. 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 29, 2018
and December 30, 2017, the Company had deferred revenues totaling $172,938 and $190,200, respectively, and related deferred costs
totaling $57,935 and $63,554, 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,
resulting in decreased gross profit. The following reconciliation provides an illustration of changes in the aggregate
warranty accrual:
|
|
Fiscal Year Ended
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Balance - beginning of period
|
|
$
|
36,827
|
|
|
$
|
37,233
|
|
|
$
|
30,449
|
|
Accrual for products sold
(1)
|
|
|
59,374
|
|
|
|
56,360
|
|
|
|
61,578
|
|
Expenditures
|
|
|
(57,925
|
)
|
|
|
(56,766
|
)
|
|
|
(54,794
|
)
|
Balance - end of period
|
|
$
|
38,276
|
|
|
$
|
36,827
|
|
|
$
|
37,233
|
|
|
(1)
|
Changes in cost estimates related to pre-existing warranties are not material
and aggregated with accruals for new warranty contracts in the ‘accrual for products sold’ line.
|
Advertising Costs
The Company expenses
advertising costs as incurred. Advertising expense amounted to approximately $155,394, $164,693, and $177,143 for the years ended
December 29, 2018, December 30, 2017, and December 31, 2016, 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 $567,805, $511,634, and $467,960 for the years ended December 29, 2018, December 30, 2017, and December
31, 2016, respectively.
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.
In March 2016, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-09, Compensation—Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended
to simplify the accounting for share-based payment awards. The Company adopted ASU 2016-09 on a prospective basis during the quarter
ended April 1, 2017. ASU 2016-09 requires excess tax benefits or deficiencies from stock-based compensation to be recognized in
the income tax provision. The Company previously recorded these amounts to additional paid-in capital. Additionally, under ASU
2016-09, excess tax benefits and deficiencies are not estimated in the effective tax rate, rather, they are recorded as discrete
tax items in the period in which they occur. Excess income tax benefits from stock-based compensation arrangements are classified
as a cash flow from operations under ASU 2016-09, rather than as a cash flow from financing activities.
Stock compensation
plans are discussed in detail in Note 9 of the Notes to Consolidated Financial Statements.
Recently Adopted Accounting Standards
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 has adopted the new revenue standard effective beginning 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 have historically been accounted for under Accounting Standards Codification (ASC) Topic 985-605 Software-Revenue
Recognition (Topic 985-605). Under Topic 985-605, the Company deferred revenue and associated costs of all elements of multiple-element
software arrangements if vendor-specific objective evidence of fair value (VSOE) could not be established for an undelivered element
(e.g. map updates). In applying the new revenue standard to certain contracts that include both software licenses and map updates,
we 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 are 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 presented above are restated under
ASC Topic 606. Amounts related to the income tax effect of the new standard that were previously disclosed as the anticipated
adoption impact in Note 2, Summary of Significant Accounting Policies, in the notes to the consolidated financial statements of
our fiscal 2017 Annual Report on Form 10-K filed with the SEC on February 21, 2018 have been revised in this Note by immaterial
amounts in connection with our adoption of ASC Topic 606.
|
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.
3. 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 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
|
|
|
$
|
—
|
|
|
|
Fair Value Measurements as
of December 30, 2017
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
U.S. Treasury securities
|
|
$
|
19,337
|
|
|
$
|
—
|
|
|
$
|
19,337
|
|
|
$
|
—
|
|
Agency securities
|
|
|
43,361
|
|
|
|
—
|
|
|
|
43,361
|
|
|
|
—
|
|
Mortgage-backed securities
|
|
|
174,615
|
|
|
|
—
|
|
|
|
174,615
|
|
|
|
—
|
|
Corporate securities
|
|
|
816,793
|
|
|
|
—
|
|
|
|
816,793
|
|
|
|
—
|
|
Municipal securities
|
|
|
186,105
|
|
|
|
—
|
|
|
|
186,105
|
|
|
|
—
|
|
Other
|
|
|
181,509
|
|
|
|
—
|
|
|
|
181,509
|
|
|
|
—
|
|
Total
|
|
$
|
1,421,720
|
|
|
$
|
—
|
|
|
$
|
1,421,720
|
|
|
$
|
—
|
|
Marketable securities
classified as available-for-sale securities are summarized below:
|
|
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
|
|
|
|
Available-For-Sale Securities as
of December 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
|
Gross Unrealized Gains
|
|
|
|
Gross Unrealized Losses
|
|
|
|
Fair Value
|
|
U.S. Treasury securities
|
|
$
|
19,591
|
|
|
$
|
—
|
|
|
$
|
(254
|
)
|
|
$
|
19,337
|
|
Agency securities
|
|
|
44,191
|
|
|
|
1
|
|
|
|
(831
|
)
|
|
|
43,361
|
|
Mortgage-backed securities
|
|
|
180,470
|
|
|
|
13
|
|
|
|
(5,868
|
)
|
|
|
174,615
|
|
Corporate securities
|
|
|
830,447
|
|
|
|
136
|
|
|
|
(13,790
|
)
|
|
|
816,793
|
|
Municipal securities
|
|
|
187,999
|
|
|
|
110
|
|
|
|
(2,004
|
)
|
|
|
186,105
|
|
Other
|
|
|
183,730
|
|
|
|
2
|
|
|
|
(2,223
|
)
|
|
|
181,509
|
|
Total
|
|
$
|
1,446,428
|
|
|
$
|
262
|
|
|
$
|
(24,970
|
)
|
|
$
|
1,421,720
|
|
The Company’s
investment policy targets low risk investments with the objective of minimizing the potential risk of principal loss. The fair
value of our securities varies from period to period due to changes in interest rates, in the performance of the underlying collateral
and in the credit performance of the underlying issuer, among other factors. The Company does not intend to sell the securities
that have an unrealized loss shown in the table above, and it is not more likely than not that the Company will be required to
sell a security before recovery of its amortized cost basis, which may be maturity.
The Company recognizes
the credit component of other-than-temporary impairments of debt securities in “Other Income” and the noncredit component
in “Other comprehensive income” for those securities that we do not intend to sell and for which it is not more likely
than not that we will be required to sell before recovery. During 2018 and 2017, 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 29, 2018 were $1,488,514 and $1,445,916 respectively.
Approximately 86% of securities in our portfolio were at an unrealized loss position at December 29, 2018. 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 29, 2018 and December 30, 2017.
|
|
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
|
|
|
|
As of December 30, 2017
|
|
|
|
Less than 12 Consecutive Months
|
|
|
12 Consecutive Months or Longer
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized Losses
|
|
|
Fair Value
|
|
|
Gross Unrealized Losses
|
|
|
Fair Value
|
|
U.S. Treasury securities
|
|
$
|
(111
|
)
|
|
$
|
12,966
|
|
|
$
|
(143
|
)
|
|
$
|
6,371
|
|
Agency securities
|
|
|
(168
|
)
|
|
|
16,097
|
|
|
|
(663
|
)
|
|
|
25,972
|
|
Mortgage-backed securities
|
|
|
(503
|
)
|
|
|
19,628
|
|
|
|
(5,365
|
)
|
|
|
153,835
|
|
Corporate securities
|
|
|
(4,562
|
)
|
|
|
439,174
|
|
|
|
(9,228
|
)
|
|
|
347,052
|
|
Municipal securities
|
|
|
(1,027
|
)
|
|
|
125,819
|
|
|
|
(977
|
)
|
|
|
38,167
|
|
Other
|
|
|
(2,219
|
)
|
|
|
136,147
|
|
|
|
(4
|
)
|
|
|
2,579
|
|
Total
|
|
$
|
(8,590
|
)
|
|
$
|
749,831
|
|
|
$
|
(16,380
|
)
|
|
$
|
573,976
|
|
The amortized cost
and fair value of marketable securities at December 29, 2018, 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
|
|
$
|
183,894
|
|
|
$
|
182,989
|
|
Due after one year through five years
|
|
|
1,261,083
|
|
|
|
1,227,551
|
|
Due after five years through ten years
|
|
|
110,598
|
|
|
|
102,572
|
|
|
|
$
|
1,555,575
|
|
|
$
|
1,513,112
|
|
4. Commitments and Contingencies
Commitments
Rental expense related
to real estate, equipment, and vehicles amounted to $21,096, $18,915, and $19,657 for the years ended December 29, 2018, December
30, 2017, and December 31, 2016, respectively. The Company recognizes rental expense on a straight-line basis over the lease term.
Future minimum rental
payments are 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
|
|
Certain cash balances
are held as collateral in relation to bank guarantees. The total amount of restricted cash was $73 and $271 at December 29,
2018 and December 30, 2017, respectively.
The Company is party
to certain commitments, which include purchases of raw materials, advertising expenditures, and other indirect purchases in connection
with conducting our business. The aggregate amount of purchase orders and other commitments open as of December 29, 2018 was approximately
$354,553. We cannot determine the aggregate amount of such purchase orders that represent contractual obligations because purchase
orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current needs
and are fulfilled by our suppliers, contract manufacturers, and logistics providers within short periods of time.
Contingencies
In the normal course
of business, the Company and its subsidiaries are parties to various legal claims, investigations and complaints, including matters
alleging patent infringement and other intellectual property claims. The Company evaluates, on a quarterly and annual basis, developments
in legal proceedings, investigations, claims, and other loss contingencies that could affect any required accrual or disclosure
or estimate of reasonably possible loss or range of loss. An estimated loss from a loss contingency is accrued by a charge to income
if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably
estimated. If a range of loss is estimated, and some amount within that range appears to be a better estimate than any other amount
within that range, then that amount is accrued. If no amount within the range can be identified as a better estimate than any other
amount, the Company accrues the minimum amount in the range.
If an outcome unfavorable
to the Company is determined to be probable, but the amount of loss cannot be reasonably estimated or is determined to be reasonably
possible, but not probable, we disclose the nature of the contingency and an estimate of the possible loss or range of loss or
a statement that such an estimate cannot be made. The Company’s aggregate range of reasonably possible losses includes (1)
matters where a liability has been accrued and there is a reasonably possible loss in excess of the amount accrued for that liability,
and (2) matters where a loss is believed to be reasonably possible, but not probable, and a liability therefore has not been accrued.
This aggregate range only represents the Company’s estimate of reasonably possible losses and does not represent the Company’s
maximum loss exposure. The assessment regarding whether a loss is probable or reasonably possible, and whether the loss or a range
of loss is estimable, often involves a series of complex judgments about future events. In assessing the probability of an outcome
in a lawsuit, claim or assessment that could be unfavorable to the Company, we consider the following factors, among others: a)
the nature of the litigation, claim, or assessment; b) the progress of the case; c) the opinions or views of legal counsel and
other advisers; d) our experience in similar cases; e) the experience of other entities in similar cases; and f) how we intend
to respond to the lawsuit, claim, or assessment. Costs incurred in defending lawsuits, claims or assessments are expensed as incurred.
Management of the Company
currently does not believe it is reasonably possible that the Company may have incurred a material loss, or a material loss in
excess of recorded accruals, with respect to loss contingencies in the aggregate, for the fiscal year ended December 29, 2018.
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 29, 2018, December 30, 2017, and December 31, 2016 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.
5. 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 29, 2018, December 30, 2017, and December 31, 2016, expense related to this and other defined contribution
plans of $52,232, $43,826, and $40,844, respectively, was charged to operations.
Certain of the Company’s
foreign subsidiaries participate in local defined benefit pension plans. Contributions are calculated by formulas that consider
final pensionable salaries. Neither obligations nor contributions for the years ended December 29, 2018, December 30, 2017, and
December 31, 2016 were significant.
6. Income Taxes
The Company’s
income tax provision (benefit) consists of the following:
|
|
|
Fiscal Year Ended
|
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
$
|
26,784
|
|
|
$
|
31,343
|
|
|
$
|
66,627
|
|
Deferred
|
|
|
|
13,249
|
|
|
|
50,724
|
|
|
|
4,522
|
|
|
|
|
$
|
40,033
|
|
|
$
|
82,067
|
|
|
$
|
71,149
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
$
|
13,015
|
|
|
$
|
4,203
|
|
|
$
|
8,809
|
|
Deferred
|
|
|
|
(1,599
|
)
|
|
|
11,684
|
|
|
|
(3,933
|
)
|
|
|
|
$
|
11,416
|
|
|
$
|
15,887
|
|
|
$
|
4,876
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
$
|
53,625
|
|
|
$
|
43,688
|
|
|
$
|
42,406
|
|
Deferred
|
|
|
|
24,093
|
|
|
|
(153,578
|
)
|
|
|
2,470
|
|
|
|
|
$
|
77,718
|
|
|
$
|
(109,890
|
)
|
|
$
|
44,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
129,167
|
|
|
$
|
(11,936
|
)
|
|
$
|
120,901
|
|
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 29,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Federal income tax expense at U.S. statutory rate
|
|
$
|
172,882
|
|
|
$
|
243,975
|
|
|
$
|
223,519
|
|
State income tax expense, net of federal tax effect
|
|
|
5,339
|
|
|
|
5,977
|
|
|
|
2,749
|
|
Foreign-Derived Intangible Income Deduction
|
|
|
(4,666
|
)
|
|
|
—
|
|
|
|
—
|
|
Foreign tax rate differential
|
|
|
(38,563
|
)
|
|
|
(106,763
|
)
|
|
|
(113,078
|
)
|
Other foreign taxes less incentives and credits
|
|
|
(12,841
|
)
|
|
|
(4,646
|
)
|
|
|
(16,593
|
)
|
Withholding Tax
|
|
|
33,306
|
|
|
|
14,632
|
|
|
|
17,447
|
|
Net Change in Uncertain Tax Positions
|
|
|
(13,728
|
)
|
|
|
5,363
|
|
|
|
17,328
|
|
Federal Domestic Production Activities Deduction
|
|
|
—
|
|
|
|
(3,895
|
)
|
|
|
(5,528
|
)
|
Federal Research and Development Credit
|
|
|
(16,562
|
)
|
|
|
(10,851
|
)
|
|
|
(8,548
|
)
|
Switzerland Corporate Tax Election
|
|
|
—
|
|
|
|
(180,034
|
)
|
|
|
—
|
|
Share Based Compensation
|
|
|
(2,747
|
)
|
|
|
19,916
|
|
|
|
—
|
|
Other, net
|
|
|
6,747
|
|
|
|
4,390
|
|
|
|
3,605
|
|
Income tax expense (benefit)
|
|
$
|
129,167
|
|
|
$
|
(11,936
|
)
|
|
$
|
120,901
|
|
The Company recorded
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, effective June
27, 2010, is 7.83%. If the Company reconciled taxes at the Swiss holding company federal statutory tax rate to the reported income
tax for 2018 as presented above, 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 amounts related
to tax at the statutory rate would be approximately $186,000 lower, or $53,600, and the foreign tax rate differential would be
adjusted by a similar amount to approximately $77,000. For 2016, the amount related to tax at the statutory rate would be approximately
$171,000 lower, or $49,000, and the foreign tax differential would be reduced by a similar amount to approximately $55,000. All
other amounts would remain substantially unchanged.
The Company’s
income before income taxes attributable to non-U.S. operations was $532,657, $461,436, and $453,729, for the years ended December
29, 2018, December 30, 2017, and December 31, 2016, respectively.
Income taxes of $36,800,
$45,534, and $45,291 at December 29, 2018, December 30, 2017, and December 31, 2016, 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 29,
|
|
|
December 30,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Product warranty accruals
|
|
$
|
2,468
|
|
|
$
|
2,202
|
|
Allowance for doubtful accounts
|
|
|
3,964
|
|
|
|
5,129
|
|
Inventory reserves
|
|
|
6,023
|
|
|
|
6,920
|
|
Sales program allowances
|
|
|
1,657
|
|
|
|
910
|
|
Reserve for sales returns
|
|
|
1,368
|
|
|
|
816
|
|
Accrued vacation
|
|
|
8,179
|
|
|
|
7,121
|
|
Other accruals
|
|
|
3,336
|
|
|
|
3,601
|
|
Share based compensation
|
|
|
6,744
|
|
|
|
6,261
|
|
Tax credit carryforwards
|
|
|
9,697
|
|
|
|
8,413
|
|
Amortization
|
|
|
147,674
|
|
|
|
165,162
|
|
Net operating losses
|
|
|
3,580
|
|
|
|
8,799
|
|
Benefit related to uncertain tax positions
|
|
|
5,852
|
|
|
|
5,383
|
|
Other
|
|
|
4,543
|
|
|
|
3,677
|
|
Valuation allowance related to loss carryforward and tax credits
|
|
|
(4,568
|
)
|
|
|
(7,267
|
)
|
|
|
$
|
200,517
|
|
|
$
|
217,127
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
17,543
|
|
|
|
11,674
|
|
Prepaid Expenses
|
|
|
2,257
|
|
|
|
3,147
|
|
Book basis in excess of tax basis for acquired entities
|
|
|
14,068
|
|
|
|
17,364
|
|
Withholding tax
|
|
|
79,660
|
|
|
|
60,555
|
|
Other
|
|
|
2,974
|
|
|
|
5,018
|
|
|
|
|
116,502
|
|
|
|
97,758
|
|
Net deferred tax assets
|
|
$
|
84,015
|
|
|
$
|
119,369
|
|
At December 29, 2018,
the Company had $9,697 of tax credit carryover compared to $8,413 at December 30, 2017.
At December 29, 2018,
the Company had a deferred tax asset of $3,580 related to the future tax benefit on net operating loss (NOL) carryforwards of $15,604.
Included in the NOL carryforwards is $1,437 that relates to Finland and expires in varying amounts between 2025 and 2028, $1,889
that relates to various United States state jurisdictions and expires in varying amounts between 2022 and 2037, $1,353 that relates
to the Netherlands and expires in 2026, and $10,925 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.
On December 22, 2017,
the Tax Cuts and Jobs Act was enacted into law in the United States. Due to the complexities of the new tax legislation, the SEC
issued Staff Accounting Bulletin No. 118 (“SAB 118”) which allowed for the recognition of provisional amounts during
a measurement period. The Company recorded a provisional remeasurement of its deferred tax assets and liabilities in the fourth
quarter of 2017. The Company filed its U.S. federal and state income tax returns during the third and fourth quarters of 2018,
which did not result in adjustments of its provisional remeasurement of deferred tax assets and liabilities.
The total amount of
gross unrecognized tax benefits as of December 29, 2018 was $118,287. A reconciliation of the beginning and ending amount of gross
unrecognized tax benefits for years ended December 29, 2018, December 30, 2017, and December 31, 2016 is as follows:
|
|
December 29,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Balance beginning of year
|
|
$
|
130,798
|
|
|
$
|
115,090
|
|
|
$
|
97,904
|
|
Additions based on tax positions related to prior years
|
|
|
1,138
|
|
|
|
8,564
|
|
|
|
489
|
|
Reductions based on tax positions related to prior years
|
|
|
(5,340
|
)
|
|
|
(983
|
)
|
|
|
(940
|
)
|
Additions based on tax positions related to current period
|
|
|
19,368
|
|
|
|
26,295
|
|
|
|
28,859
|
|
Reductions related to settlements with tax authorities
|
|
|
(527
|
)
|
|
|
—
|
|
|
|
(134
|
)
|
Expiration of statute of limitations
|
|
|
(27,150
|
)
|
|
|
(18,168
|
)
|
|
|
(11,088
|
)
|
Balance at end of year
|
|
$
|
118,287
|
|
|
$
|
130,798
|
|
|
$
|
115,090
|
|
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 entire balance of net unrecognized benefits of $114,682, $127,306 and $109,667 are
required to be classified as noncurrent at December 29, 2018, December 30, 2017, and December 31, 2016, respectively. 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 29, 2018, December 30, 2017,
and December 31, 2016, the Company had accrued approximately $6,613, $5,605, and $3,901, respectively, for interest. The interest
component of the reserve increased income tax expense for the years ending December 29, 2018, December 30, 2017, and December 31,
2016, by $1,008, $1,704, and $1,422 respectively. The Company did not have significant amounts accrued for penalties for the years
ending December 29, 2018, December 30, 2017, and December 31, 2016.
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 2014, 2013, 2016, and 2015, respectively.
The Company recognized
a reduction of income tax expense of $27,106, $17,918, and $11,151 in fiscal years ended December 29, 2018, December 30, 2017, and
December 31, 2016, 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 $20,000 to $25,000 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.
7. 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 29, 2018
|
|
|
December 30, 2017
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Cash and cash equivalents
|
|
$
|
1,201,732
|
|
|
$
|
1,201,732
|
|
|
$
|
891,488
|
|
|
$
|
891,488
|
|
Restricted cash
|
|
$
|
73
|
|
|
$
|
73
|
|
|
$
|
271
|
|
|
$
|
271
|
|
Marketable securities
|
|
$
|
1,513,112
|
|
|
$
|
1,513,112
|
|
|
$
|
1,421,720
|
|
|
$
|
1,421,720
|
|
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.
8. Segment Information
The Company has
identified five reportable segments – auto, aviation, marine, outdoor and fitness. 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.
All of the Company’s
reportable segments offer products 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. The Company’s marine,
auto, outdoor, and fitness segments include portable global positioning system (GPS) receivers and accessories sold primarily to
retail outlets. These products are produced primarily by the Company’s subsidiary in Taiwan. The Company’s aviation
products are 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 has been identified as the CODM. The CODM uses operating income as the measure of profit or loss to assess
segment performance and allocate resources. Operating income represents net sales less costs of goods sold and operating expenses.
Net sales are directly attributed to each segment. Most costs of goods sold and the majority of operating expenses are also directly
attributed to each segment, while certain other costs of goods sold and operating expenses are allocated to the segments in a manner
appropriate to the specific facts and circumstances of the expenses being allocated. 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.
Net sales (“revenue”),
gross profit, and operating income for each of the Company’s reportable segments are presented below.
|
|
Reportable Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52-Weeks Ended December 29, 2018
|
|
Outdoor
|
|
|
Fitness
|
|
|
Marine
|
|
|
Auto
|
|
|
Aviation
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
809,883
|
|
|
$
|
858,329
|
|
|
$
|
441,560
|
|
|
$
|
634,213
|
|
|
$
|
603,459
|
|
|
$
|
3,347,444
|
|
Gross profit
|
|
|
528,254
|
|
|
|
471,764
|
|
|
|
258,756
|
|
|
|
270,793
|
|
|
|
450,152
|
|
|
|
1,979,719
|
|
Operating income
|
|
|
290,510
|
|
|
|
181,745
|
|
|
|
63,344
|
|
|
|
37,998
|
|
|
|
204,746
|
|
|
|
778,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52-Weeks Ended December 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
698,867
|
|
|
$
|
762,194
|
|
|
$
|
374,001
|
|
|
$
|
785,139
|
|
|
$
|
501,359
|
|
|
$
|
3,1221,560
|
|
Gross profit
|
|
|
448,410
|
|
|
|
422,636
|
|
|
|
212,592
|
|
|
|
342,698
|
|
|
|
371,605
|
|
|
|
1,797,941
|
|
Operating income
|
|
|
249,867
|
|
|
|
146,765
|
|
|
|
50,328
|
|
|
|
82,744
|
|
|
|
153,933
|
|
|
|
683,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53-Weeks Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
546,326
|
|
|
$
|
818,486
|
|
|
$
|
331,947
|
|
|
$
|
909,690
|
|
|
$
|
439,348
|
|
|
$
|
3,045,797
|
|
Gross profit
|
|
|
340,504
|
|
|
|
437,205
|
|
|
|
183,709
|
|
|
|
397,702
|
|
|
|
329,405
|
|
|
|
1,688,525
|
|
Operating income
|
|
|
184,035
|
|
|
|
160,596
|
|
|
|
52,167
|
|
|
|
111,302
|
|
|
|
124,764
|
|
|
|
632,864
|
|
Net sales, property
and equipment, and net assets by geographic area are as shown below for the years ended December 29, 2018, December 30, 2017, and
December 31, 2016. Note that APAC includes Asia Pacific and Australian Continent, and EMEA includes Europe, the Middle East and
Africa.
|
|
Americas
|
|
|
APAC
|
|
|
EMEA
|
|
|
Total
|
|
December 29, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
(1)
|
|
$
|
1,596,716
|
|
|
$
|
545,759
|
|
|
$
|
1,204,969
|
|
|
$
|
3,347,444
|
|
Property and equipment, net
|
|
|
408,992
|
|
|
|
208,964
|
|
|
|
45,571
|
|
|
|
663,527
|
|
Net assets
(2)
|
|
|
2,726,196
|
|
|
|
995,272
|
|
|
|
441,506
|
|
|
|
4,162,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
(1)
|
|
$
|
1,504,194
|
|
|
$
|
444,828
|
|
|
$
|
1,172,538
|
|
|
$
|
3,121,560
|
|
Property and equipment, net
|
|
|
381,974
|
|
|
|
173,392
|
|
|
|
40,318
|
|
|
|
595,684
|
|
Net assets
(2)
|
|
|
2,375,522
|
|
|
|
982,898
|
|
|
|
493,999
|
|
|
|
3,852,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
(1)
|
|
$
|
1,538,550
|
|
|
$
|
386,411
|
|
|
$
|
1,120,836
|
|
|
$
|
3,045,797
|
|
Property and equipment, net
|
|
|
300,158
|
|
|
|
144,470
|
|
|
|
38,250
|
|
|
|
482,878
|
|
Net assets
(2)
|
|
|
2,188,417
|
|
|
|
933,999
|
|
|
|
330,844
|
|
|
|
3,453,260
|
|
|
(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.
|
9. 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 may vest over a minimum two-year period. In 2018, 2017, and 2016, 10,376, 10,432, and
12,984 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 2018, 2017, and 2016,
1,040,001, 1,044,045, and 1,228,427 RSUs were granted under the 2005 Plan. No SARs were granted under the 2005 Plan in 2018, 2017,
and 2016.
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 2018, 2017, or 2016.
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 29, 2018, December 30, 2017, and December 31, 2016 is provided below:
|
|
Stock Options and SARs
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Exercise Price
|
|
|
Number of Shares
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 26, 2015
|
|
$
|
66.80
|
|
|
|
4,061
|
|
Granted
|
|
|
|
|
|
|
—
|
|
Exercised
|
|
$
|
50.77
|
|
|
|
(716
|
)
|
Forfeited/Expired
|
|
$
|
51.12
|
|
|
|
(608
|
)
|
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
|
|
Exercisable at December 29, 2018
|
|
$
|
50.74
|
|
|
|
76
|
|
Expected to vest after December 29, 2018
|
|
$
|
52.44
|
|
|
|
10
|
|
Stock Options and SARs as of December 29, 2018
|
|
Exercise
|
|
|
Awards
|
|
|
Remaining
|
|
|
Awards
|
|
Price
|
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Exercisable
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
$18.00 - $40.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
$40.01 - $60.00
|
|
|
|
86
|
|
|
|
5.51
|
|
|
|
76
|
|
$60.01 - $80.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
$80.01 - $100.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
$100.01 - $120.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
$120.01 - $140.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
86
|
|
|
|
5.51
|
|
|
|
76
|
|
|
|
|
Restricted Stock Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
Grant Date Fair Value
|
|
|
Number of Shares
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 26, 2015
|
|
|
$
|
39.45
|
|
|
|
1,657
|
|
Granted
|
|
|
$
|
40.59
|
|
|
|
1,241
|
|
Released/Vested
|
|
|
$
|
38.96
|
|
|
|
(565
|
)
|
Cancelled
|
|
|
$
|
44.57
|
|
|
|
(509
|
)
|
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
|
|
The weighted-average
remaining contract life for stock options and SARs outstanding and exercisable at December 29, 2018 was 5.51 and 5.45 years, respectively.
The weighted-average remaining contract life of restricted stock units at December 29, 2018 was 1.21 years.
The total fair value
of awards vested during 2018, 2017, and 2016 was $41,092, $30,280, and $22,429, respectively. The aggregate intrinsic values of
options and SARs outstanding and exercisable at December 29, 2018 were $1,018 and $920, respectively. The aggregate intrinsic values
of options and SARs exercised during 2018, 2017, and 2016 were $4,452, $3,742, and $1,632, respectively. The aggregate intrinsic
value of RSUs outstanding at December 29, 2018 was $131,876. The aggregate intrinsic values of RSUs released during 2018, 2017,
and 2016 were $60,361, $45,424, and $27,386, 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 $62.82 on December 29, 2018. As of December 29, 2018, there was $72,912 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 6,000,000 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 2018, 2017, and 2016, 463,066, 489,267, and 541,018 shares, respectively, were purchased
under the plan for a total purchase price of $23,709, $20,996, and $18,157, respectively. During 2018, 2017, and 2016, the purchases
were issued from treasury shares. At December 29, 2018, approximately 507,301 shares were available for future issuance.
10. Earnings Per Share
The following table
sets forth the computation of basic and diluted net income per share:
|
|
Fiscal Year Ended
|
|
|
|
December 29,
2018
|
|
|
December 30,
2017
|
|
|
December 31,
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted net income per share - net income
|
|
$
|
694,080
|
|
|
$
|
709,007
|
|
|
$
|
517,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per share – weighted-average common shares
|
|
|
188,635
|
|
|
|
187,828
|
|
|
|
188,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities – employee stock options and stock appreciation rights
|
|
|
1,099
|
|
|
|
904
|
|
|
|
525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per share – adjusted weighted-average common shares
|
|
|
189,734
|
|
|
|
188,732
|
|
|
|
189,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
3.68
|
|
|
$
|
3.77
|
|
|
$
|
2.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
3.66
|
|
|
$
|
3.76
|
|
|
$
|
2.73
|
|
There were no outstanding
stock options, stock appreciation rights, and restricted stock units (collectively “equity awards”) excluded from the
computation of diluted earnings per share for the 2018 fiscal year because the effect would have been anti-dilutive. There were
1,175,728 and 3,547,738 equity awards excluded from the computation of diluted earnings per share for the 2017 and 2016 fiscal
years, respectively, because the effect would have been anti-dilutive.
11. 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 2018, 1,474,092 shares using cash of
$74,523 in fiscal 2017, and 2,152,716 shares using cash of $93,233 in fiscal 2016.
12. 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
29, 2018:
|
|
Foreign Currency Translation Adjustment
|
|
|
Net unrealized gains (losses) on available-for-sale securities
|
|
|
Total
|
|
Balance - beginning of period
|
|
$
|
79,292
|
|
|
$
|
(22,864
|
)
|
|
$
|
56,428
|
|
Other comprehensive income before reclassification, net of income tax expense of $2,174
|
|
|
(31,965
|
)
|
|
|
(16,283
|
)
|
|
|
(48,248
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
—
|
|
|
|
702
|
|
|
|
702
|
|
Net current-period other comprehensive income
|
|
|
(31,965
|
)
|
|
|
(15,581
|
)
|
|
|
(47,546
|
)
|
Reclassification of tax effects due to adoption of ASU 2018-02
|
|
|
—
|
|
|
|
(452
|
)
|
|
|
(452
|
)
|
Balance - end of period
|
|
$
|
47,327
|
|
|
$
|
(38,897
|
)
|
|
$
|
8,430
|
|
The following provides
required disclosure of reporting reclassifications out of AOCI for the year ended December 29, 2018:
52-Weeks Ended Dec 29, 2018
|
Details about Accumulated Other Comprehensive Income Components
|
|
Amount Reclassified from Accumulated Other Comprehensive Income
|
|
|
Affected Line Item in the Statement Where Net Income is Presented
|
|
|
|
|
|
|
|
Unrealized gains (losses) on available-for-sale securities
|
|
$
|
(827
|
)
|
|
Other income (expense)
|
|
|
|
125
|
|
|
Income tax benefit (provision)
|
|
|
$
|
(702
|
)
|
|
Net of tax
|
13. 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 – aviation, marine, outdoor, fitness, auto PND, and auto OEM. Note 8 also contains disaggregated
revenue information of the aviation, marine, outdoor, and fitness 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 29,
2018
|
|
|
December 30,
2017
|
|
|
December 31,
2016
|
|
Auto PND
|
|
|
67
|
%
|
|
|
69
|
%
|
|
|
76
|
%
|
Auto OEM
|
|
|
33
|
%
|
|
|
31
|
%
|
|
|
24
|
%
|
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 29,
2018
|
|
|
December 30,
2017
|
|
|
December 31,
2016
|
|
Point in time
|
|
$
|
3,176,949
|
|
|
$
|
2,954,945
|
|
|
$
|
2,864,501
|
|
Over time
|
|
|
170,495
|
|
|
|
166,615
|
|
|
|
181,296
|
|
Net sales
|
|
$
|
3,347,444
|
|
|
$
|
3,121,560
|
|
|
$
|
3,045,797
|
|
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 29, 2018 and
December 30, 2017, are presented below:
|
|
|
Fiscal Year Ended
|
|
|
|
|
December 29,
2018
|
|
|
December 30,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Revenue
(1)
|
|
|
Deferred Costs
(2)
|
|
|
Deferred Revenue
(1)
|
|
|
Deferred Costs
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
$
|
190,200
|
|
|
$
|
63,554
|
|
|
$
|
209,735
|
|
|
$
|
65,599
|
|
Deferrals in period
|
|
|
|
153,233
|
|
|
|
36,297
|
|
|
|
147,080
|
|
|
|
39,053
|
|
Recognition of deferrals in period
|
|
|
|
(170,495
|
)
|
|
|
(41,916
|
)
|
|
|
(166,615
|
)
|
|
|
(41,098
|
)
|
Balance, end of period
|
|
|
$
|
172,938
|
|
|
$
|
57,935
|
|
|
$
|
190,200
|
|
|
$
|
63,554
|
|
(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 $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 $166,615 of deferred revenue recognized in the 52-weeks ended December 30, 2017, $114,787 was deferred as of the beginning
of the period.
Of the $172,938 and
$190,200 of deferred revenue at the end of the periods, December 29, 2018, and December 30, 2017, respectively, approximately two-thirds
is recognized ratably over a period of three years or less.
14. Selected Quarterly Information (Unaudited)
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52-Weeks Ended December 30, 2017
|
|
|
|
Quarter Ending
|
|
|
|
April 1
|
|
|
July 1
|
|
|
September 30
|
|
|
December 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
641,510
|
|
|
$
|
831,486
|
|
|
$
|
751,244
|
|
|
$
|
897,319
|
|
Gross profit
|
|
|
372,806
|
|
|
|
484,130
|
|
|
|
437,523
|
|
|
|
503,482
|
|
Net income
|
|
|
238,404
|
|
|
|
176,979
|
|
|
|
151,074
|
|
|
|
142,550
|
|
Basic net income per share
|
|
$
|
1.27
|
|
|
$
|
0.94
|
|
|
$
|
0.81
|
|
|
$
|
0.76
|
|
Diluted net income per share
|
|
$
|
1.26
|
|
|
$
|
0.94
|
|
|
$
|
0.80
|
|
|
$
|
0.75
|
|
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.
15. Recently Issued Accounting Pronouncements
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. Lessor accounting is substantially unchanged compared to the current accounting guidance.
Additional footnote disclosures related to leases will also be required. The new lease standard is effective for fiscal years,
and interim periods within those years, beginning after December 15, 2018.
The Company has adopted
the new lease standard as of the beginning of its 2019 fiscal year (the Company’s “adoption date”) using the
optional transition method. The Company elected the package of transitional practical expedients upon adoption which, among other
provisions, allows the Company to carry forward historical lease classification. The Company also made an accounting policy election
to not recognize a right-of-use asset and lease liability for short term leases with an original term of 12 months or less. Expense
associated with short term leases will continue to be recognized in the consolidated statements of income on a straight-line basis
over the term of the lease.
Adoption of the standard
resulted in the recognition of a right-of-use asset and a lease liability for operating leases of approximately $60 million each
on the Company’s consolidated balance sheet as of the adoption date, as the Company’s leases are primarily classified
as operating leases. The Company 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. Prior periods of the consolidated financial statements are unchanged
due to our election to apply the optional transition method. In conjunction with adopting the new lease standard, the Company has
implemented changes to accounting policies, processes, systems, and internal controls to enable financial reporting under the new
standard.
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 2 of the
goodwill impairment test, such that a goodwill impairment 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 is currently evaluating the impact of adopting the new standard 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 is currently evaluating the impact of
adopting the new standard on its consolidated financial statements.
16. Subsequent Events
On February 12, 2019,
Garmin Ltd. announced the signing of a purchase agreement to acquire Tacx, a privately-held Dutch company, that designs and manufacturers
indoor bike trainers, tools and accessories, as well as indoor training software and applications. The acquisition is not expected
to be material. The completion of the acquisition is subject to customary regulatory approvals and closing conditions.